Cenovus Energy
Annual Report 2012

Plain-text annual report

c e n o v u s e n e r g y 2 0 1 2 a n n u a l r e p o r t c e n o v u s . c o m c e n o v u s e n e r g y 2 0 1 2 a n n u a l r e p o r t c e n o v u s . c o m We are on track with our strategy. We are on track with our business plan. and we have the bright minds to deliver on our commitments. 2012 a nnua l rep ort Table of contents 2 4 8 evolving our culture our purpose, promise and values motivating our teams to go furtHer message from our president & chief executive officer developing our assets our integrated approach 10 cHarting our course our strategy Looking back on the year 12 advancing our top-Quality resources 16 driving value tHrougH eXecution 20 applying new ideas and new approacHes 24 building momentum message from our Board chair 26 operating HigHligHts 27 financial HigHligHts 28 management’s discussion and analysis 72 consolidated financial statements 79 notes to consolidated financial statements 118 supplemental information 124 additional reserves and oil and gas information 129 advisory 133 corporate and sHareHolder information FORWA RD-LOOKING INF ORMATION This annual report contains forward-looking information about our strategy, milestones, goals, targets and future expectations. This forward-looking information is based on certain factors and assumptions and is subject to risks and uncertainties, some of which are specific to cenovus and others that apply to the industry generally. For details about these factors, assumptions, risks and uncertainties, please refer to the advisory. all estimated timelines are subject to regulatory and/or partner approval. readers are cautioned not to place undue reliance on forward-looking information as our actual results may differ materially from those expressed or implied. For an overview of our approach to risk management, see “risk management” in our management’s Discussion and analysis for the year ended December 31, 2012 (“mD&a”). NON-GAAP MEASuRES This annual report contains references to certain financial measures which do not have a standardized meaning as prescribed by gaap. a description of each non-gaap measure, including a definition and reconciliation with gaap measures, is included in our mD&a. OIL AND GAS INFORMATION This annual report contains information about our reserves and our bitumen resources. For additional information about our reserves, contingent and prospective resources, see “oil and gas reserves and resources” in our mD&a and “additional reserves and oil and gas Information” in this annual report. Who we are We are a canadian integrated oil company. our goal is to increase total shareholder return, while applying fresh, progressive thinking to safely and responsibly unlock energy resources the world needs. We are focused on delivering predictable, reliable performance. our achievements are a direct result of the energy of our people. That energy is the momentum that’s carrying us forward. Why investing in Cenovus makes sense • We have industry-leading oil sands assets. These great assets support decades of oil growth. • We have a track record of strong operational results. This has allowed us to be a leader in steam-assisted gravity drainage, or sagD. • We have a manufacturing approach to oil development. This approach supports our industry-leading cost metrics and capital efficiencies. • We are focused on innovation. This means we’re continually improving our performance. • We have an integrated approach. This improves the stability of our overall cash flow despite the variability in commodity prices. • We have financial strength. This provides the flexibility to pursue our growth plans and support a strong and sustainable dividend. EVO LV IN g O UR cU LtU RE OUR PURPOSE, PRO MIS E AN D VAL UE S How we do our work at Cenovus is as important as what we do. Our passion drives us to grow responsibly and live up to our commitments. Our purpose, our promise and our values are more than just words on a page. They speak to the pride we all have in the work we do and in the way we do it. They speak to the importance of that work to world progress. Most importantly of all, they speak to the kind of company we are. The kind of company we want to be. They guide us in how we do our work today and as we grow. Our purpose (why wE ExISt) Our values (hOw wE bEhAVE) We inspire bright minds to help fuel world progress. Our promise (whAt wE DO) We work collectively to unlock challenging oil resources in a way that makes Canadians proud. Rigorous We’re smart about the way we develop our resources. We are safety-focused. We manage our business as a whole to get the best results. We understand that executional excellence requires a diversity of talents and perspectives. We can be counted on to do what we say. We are pragmatic and strive to keep things simple. We are responsible and thoughtful in what we do. 2 CENOVUS ENERGY 2012 ANNUAL RE PO RT / OUR PURPOSE , PROMISE AND VAL UES Respectful We trust each other to do the right thing. Ready We have the courage to embrace fresh thinking and new ideas. Our ExEcutivE tEam Left to right Ivor r uste Executive Vice-President & Chief Financial Officer Kerry Dyte Executive Vice-President, General Counsel & Corporate Secretary Haywar D walls Executive Vice-President, Organization & Workplace Development We conduct our business with respect, recognizing that respect requires both candour and caring. We collaborate with each other. We make the communities where we live and work better because we are there. We build strong relationships with our stakeholders and business partners. We relentlessly look for ways to reduce the impacts of our activities on the environment. Our innovation today creates the Cenovus of tomorrow. We leverage our decades of operating experience by applying new thinking to our work in a practical, yet creative way. By being ready to continuously improve. By being open-minded problem-solvers. By being decisive and ready for change. Harb Ir C HHI na Executive Vice-President, Oil Sands b rI an Ferguson President & Chief Executive Officer Jo H n b rann an Executive Vice-President & Chief Operating Officer sH e I l a M C In tos H Executive Vice-President, Environment & Corporate Affairs Don s wystun Executive Vice-President, Refining, Marketing, Transportation & Development Cenovus energy 2 012 ann ual rePort / OU R P URP OSE , PROMI S E A ND VA LU E S 3 M OT I VAT IN G O UR T E AMS TO GO FURT H ER mE ssag E fr O m O ur Pr E si d E nt & chiEf ExEcuti vE Offic Er Attuned to our strategy, culture and people, our leaders inspire great results. Leadership is the propelling force behind any successful business. buIlDIng MoMentuM CreatIng value The concept of momentum is a fitting theme for this year’s annual report to shareholders. We’ve been steadily building momentum over our three years as an independent company and I can say with confidence that in 2012 we hit our stride in delivering predictable, reliable performance, and fostering a culture of excellence. We are on track with our strategy. We are on track with our business plan. And, thanks to the smart, dedicated people who work at Cenovus, we once again had strong results. Our strategy is as simple as it is effective: To create long-term value for you, our shareholders, through the development of our vast oil sands resources, our execution excellence, our ability to innovate and our financial strength. Our integrated approach, which enables us to capture the full value chain from production to high-quality end products like transportation fuels, relies on our entire asset mix: • Oil sands for growth • Conventional oil for near-term cash flow and diversification of our revenue stream • Natural gas for the fuel we use at our oil sands and refining facilities, and for the cash flow it provides to help fund our capital spending programs • Refining to help reduce the impact of commodity price fluctuations We are focused on continually building our net asset value (NAV) and paying a strong dividend. Our goal is to double our NAV between 2010 and the end of 2015. We established a baseline illustrative NAV of $28 per share in December 2009 and it has since grown every year. Despite weaker oil and natural gas prices in 2012, we grew NAV to $40 per share at year end, a 43 percent increase in our first three years of operation. Our growth plan is anchored by the responsible development of our vast oil sands resource base, which includes some of the best in-situ oil sands reservoirs in the industry. We are currently using the most advanced technology to drill into these reservoirs to extract the oil – and are relentless in our pursuit to find even better ways to operate. To improve 4 Cenovus energy 2012 annual re Port / MESSAG E FROM OUR PRESIDENT & C HIE F E XECUTIVE OF FICER our performance. To minimize our environmental impact. To reduce costs. To ensure we work safely. That’s because, at Cenovus, how we do our work is just as important as what we do. To help us define our culture, we formalized a set of statements this past year that outline why we exist as a company (our purpose), what we do (our promise) and how we behave (our values). These statements, which you may have already seen on page 2, were rolled out to staff at a company-wide forum in November and will guide us as we continue to grow. They were developed with input from the senior leaders of our company and reflect both the fundamental importance of energy in our lives as well as what we believe in as a company. DelIverIng qualIty results We do our utmost to live up to the responsibility that goes with being a developer of one of Canada’s most valuable resources. We are proud of how we are developing this resource and stand behind our actions. It starts with executing with excellence, which is integral to everything we do at Cenovus. On the oil sands side, our teams worked hard through the year to move the value of our resources forward, continuing to develop them responsibly, on time and at industry-leading costs. At the end of 2012, our oil sands operations had the capacity to produce nearly 110,000 barrels of oil per day net. Our strategic objective is to have, by late 2015, capacity in excess of 600,000 barrels of oil per day net of current design capacity. Construction of the next three expansion phases at the site is also moving forward. We’re on track to reach 310,000 barrels of oil per day gross as we continue to see tremendous value from this reservoir. As we bring on each new SAGD phase, we are ramping up quickly, using accelerated start-up techniques and enhancing processes where we can. These contribute to increased project returns and to the building of our NAV. In the future, we will continue to look for ways to bring expansion phases on even more efficiently. But that’s not all we’re doing to sustain momentum in our business. In 2012, we made excellent progress in developing our emerging oil sands projects. OIL SANDS PRODUCTION (before royalties) 89,736 66,533 59,045 12 5, 000 100 ,000 75,00 0 d / s l b b 50, 000 44,423 25, 00 0 0 200 9 20 10 20 11 2012 to Cenovus of producing or regulator- approved projects. This will give Cenovus a broad portfolio of investment opportunities and lock in low-risk growth for more than the next decade. 125000 75000 100000 At Christina Lake, average production nearly tripled in 2012 compared with 2011 to about 32,000 barrels of oil per day net as we continued to bring on additional expansion phases ahead of schedule. We are encouraged by the overall well productivity at Christina Lake and are seeing steam- assisted gravity drainage (SAGD) well recovery rates that are among the highest in the industry. With optimization and the addition of another four planned phases, three of which are already under construction, we believe Christina Lake has the potential to produce 300,000 barrels of oil per day gross. 25000 50000 Our Foster Creek operation also continued to demonstrate exceptional performance, with production averaging about 97 percent 0 In May, we received regulatory approval for Narrows Lake – a significant achievement as we move forward with our plan to build NAV. Narrows Lake has a total expected gross capacity of 130,000 barrels of oil per day, with production from the first phase of 45,000 barrels of oil per day expected to start in 2017. Ground work for the initial phase began last fall. I am pleased to report that the project will be one of the world’s first commercial applications of an innovative solvent aided process using butane. We are excited about this technology, which has the potential to significantly improve bitumen recovery while continuing to reduce environmental impacts. We plan to continue to build on this momentum by putting additional projects through the regulatory process. The next two oil sands projects awaiting regulatory approval are Telephone Lake and Grand Rapids – both 100 percent owned by Cenovus. We believe that ultimately Cenovus energy 201 2 ann ual re Port / MESSAGE F ROM OU R PRESIDENT & C HIE F E X EC UT I V E OF FI C ER 5 I am extremely proud to work with the men and women who make up Cenovus. I thank them for the spirit, enthusiasm and energy they have for this company.” Telephone Lake can support more than 300,000 barrels of oil per day of production capacity and Grand Rapids 180,000 barrels of oil per day of production capacity. We also continued to develop the potential in our conventional oil operations. At Pelican Lake, heavy oil production volumes have started to increase as a result of the expansion of our polymer flood program, increasing 10 percent from 2011. However, the project has experienced some challenges. On a more positive note, as our oil production increases, especially from our oil sands assets, we are seeing notable benefits from our integration strategy. Having a strategy that includes both producing and oil refining operations helps to protect Cenovus from price volatility in the heavy crude oil market. Lower prices for Canadian heavy crude oil decrease our operating cash flow from oil sands production. At the same time, they benefit our refining operating cash flow because it costs less for markets if transportation options don’t keep pace with growing volumes. In addition to limiting sales points for Canadian oil, this restricted market access drives down the price of Canadian oil relative to U.S. and global prices. To address these issues, we are taking a portfolio approach to give us a variety of alternatives. We are supporting new pipelines to the U.S. Gulf Coast and Canadian east and west coasts, which open up access to international markets. We are increasing the amount of light and medium oil we ship by rail. And we are entering into hedging arrangements and long-term sales contracts. Through actions such as these as well as the formation of a task force internally, we are working to ensure market access and manage our exposure to price differentials. We weren’t able to achieve production increases as quickly as anticipated as we needed to temporarily reduce reservoir pressure in order to safely drill the infill wells. A new area of opportunity is our emerging tight oil assets in southern Alberta, predominantly our fee land area. We chose to focus capital investment on these conventional oil assets rather than on natural gas and are encouraged by the early results. All in all, I am extremely pleased with the progress we are making in responsibly growing our production, although an area that we haven’t done as well in is safety. Despite the many safety programs we have in place, the number of incidents increased in 2012. That’s a huge concern to me, the Executive Team and our Board. We will be increasing our efforts on safety awareness to make sure that safety is top of mind in everything we do for everyone who works at Cenovus. the feedstock our refineries need to create products such as gasoline and jet fuel. Our expansion of the heavy oil processing capacity at the Wood River Refinery is providing additional integration since we’re able to process more heavy oil at the same time as we’re growing our oil production. The expansion effectively doubled our heavy oil processing capacity at Wood River. In 2012, perhaps more than ever, our refining investments paid off, generating nearly $1.3 billion in operating cash flow and providing significant ongoing support for our company’s oil growth plans. Operating cash flow from our refineries would have been even stronger if planned major turnarounds at the Borger and Wood River refineries hadn’t gone longer than expected. As our industry and Cenovus continue to grow production, we expect producers may encounter problems getting oil to various Our strong financial position, healthy balance sheet and integration strategy give us the flexibility to withstand volatility while continuing to invest for future growth and maintaining our focus on creating long-term shareholder value. Certainly our operating and financial results confirm that Cenovus is on the right track. Already in our short history, we have delivered three exceptional years. They are evidence of a company that is consistently executing its strategy to deliver predictable, reliable performance. In 2012, I’m pleased that we outperformed the S&P/TSX Energy Index by about two percentage points, although we underperformed relative to the broader market, lagging behind the S&P/TSX composite Index by approximately six percentage points. Since the company’s formation in late 2009, we have delivered total shareholder return of 35 percent, 6 Cenovus energy 2012 annual rePort / MESSAGE FROM OU R PRESIDEN T & CHIEF E XECU TIVE OF FICE R outperforming the S&P/TSX Energy Index and the S&P/TSX Composite Index by approximately 10 and six percentage points respectively. This outperformance of both the energy and broader market index in total shareholder return recognizes that we are building the underlying value of the company – as measured by NAV. It also demonstrates we are providing a strong and growing income stream to our shareholders by way of a dividend. While I am pleased with our progress, I am focused on our future. Success is determined over many years, not just three. So, as good as our performance has been we know we must keep up the momentum by delivering even better performance year over year. Plans For 2013 We plan to keep our focus on these five areas: execution excellence: Safety will be a top priority in 2013. Our strong track record of operating efficiently and responsibly while keeping costs low shows we know what it takes to execute our production goals. We must continue to aim for excellence, growing our oil production significantly in 2013, primarily at Christina Lake. Some of our operating costs have crept upwards this past year, so we will remain focused on cost control across our organization by finding ways to work smarter. value creation: We need to keep moving the value of our resources forward. Thanks to our strong balance sheet and cash flow, we plan to maintain capital investment in 2013 at about $3.4 billion. Most of the investment will be made to advance reputation and communication: As we grow our business, it’s important that we have strong relationships with the communities where we live and work. We will continue to take an active role through media and stakeholder tours in contributing to public understanding about our business. Through our national advertising campaign, we will also continue to do our part to raise Canadians’ understanding of why we are so proud of our energy industry. Healthy organization: We will have an even greater focus on our culture in 2013. We will reinforce it through meaningful actions taken by our leaders and in conversations with our employees, and ensure it is central to developing our people and enhancing our technical and leadership competencies. HIgHlIgHts oF our PerForManCe In 2012 We grew average oil sands production to about 90,000 barrels of oil per day, up 35 percent over 2011. We generated record cash flow of $3.6 billion, due to increased oil production and higher operating cash flow from our refining business. We increased our proved reserves by 12 percent and our economic bitumen best estimate contingent resources by 17 percent in 2012 compared with 2011. Our strong cash flow, combined with our disciplined capital management, allowed us to fund our growth plans while providing a dividend of $0.88 per share – part of our commitment to our shareholders. existing and new oil sands assets and will also go towards our conventional oil assets. Our integrated business plan was a key contributor to our financial success in 2012. Moving forward, we need to do a better job of ensuring the benefits of our integration are understood, so we realize even more value for you, our shareholders. Innovation: At Cenovus, we firmly believe in doing things better. We take pride in our ability to implement new ideas and new approaches. We have already seen the benefits from a number of initiatives we’ve implemented, ranging from small incremental improvements to new technologies – technologies that improve our operational performance and reduce our environmental impact. We will continue to invest in innovation in 2013 by advancing the work on the 140 technology development projects we have underway. It is my belief that a company’s long-term success is dependent on three things: having highly talented, passionate and motivated people, having a strong culture, and having a high-quality asset base. At Cenovus, we have all three. You will see evidence of that in the stories in this report. I am extremely proud to work with the men and women who make up Cenovus. I thank them for the spirit, enthusiasm and energy they have for this company. I would also like to thank our Board of Directors for their insightful guidance and advice. Together, we are ready to take Cenovus to the next level. I am truly excited about the great opportunities ahead of us. br Ian C . F erguson President & Chief Executive Officer Cenovus energy 2 012 ann ual rePort / MESSAGE FROM O UR P RESIDE NT & C HIEF E X EC U TI VE O FFI C ER 7 DE V ELOPING O UR ASSE TS Our int Egrat E d a PP r Oach Our growth plan is anchored by the responsible development of our vast oil sands resource base. Our integrated approach provides the foundation for years of energy development. It includes an industry-leading portfolio of oil sands assets, two high-quality refineries, a strong balance sheet, and conventional oil and low-cost natural gas operations that generate substantial operating cash flow. In the oil sands, we have two producing projects, Foster Creek and Christina Lake, which we are continuing to expand. Our next project is Narrows Lake, where we expect to begin construction in the third quarter of 2013. These three projects are operated by Cenovus in partnership with ConocoPhillips. We also have two emerging projects, Grand Rapids and Telephone Lake, in the pilot stage, both of which are 100 percent owned by us. None of our oil sands projects are mined. We use specialized techniques to drill and pump the oil to the surface. While the bulk of our future growth is anticipated to be in the oil sands, we also expect significant near-term growth from our other oil assets. We produce heavy oil from our 100 percent owned Pelican Lake operation. We also produce light and medium oil from our tight oil plays in southern Alberta and Saskatchewan. Another important oil project is our enhanced oil recovery operation in Weyburn, Saskatchewan. As an integrated company, our strong portfolio of oil growth assets is complemented by great refining assets. We have ownership in two refineries in the United States as part of a business arrangement with Phillips 66. Cenovus has a 50 percent interest in the Wood River (Illinois) and Borger (Texas) refineries, which Phillips 66 operates. Our integrated approach provides stability to our overall cash flow stream, especially in times of volatile commodity prices. In addition, our low-cost natural gas assets in southern Alberta provide strong cash flow to help fund our oil growth, and offset the cost of the natural gas we consume within our oil sands and refining operations. 8 Cenovus energy 2012 annual rePort / OUR INTEGRATED APPROACH The oil sands – why they’re important to Canada Energy is as essential to our lives as the food we eat and the water we drink. It heats our homes. It creates electricity. It takes us to work. It delivers our food to the grocery store. And fossil fuels, specifically, are also a building block for the plastic, synthetic and petrochemical products we use as part of our daily routines, like smart phones, computers, furniture and many more. Global energy demand will increase by a third between 2010 and 2035, according to the International Energy Agency (IEA), an autonomous organization that works to ensure reliable, affordable and clean energy for its 28 member countries. Given this growing demand, all energy sources will play a significant role in meeting world needs. That includes Canada’s oil. Canada has the world’s third largest oil reserves: 174 billion barrels of oil, 97 percent of which are in the oil sands. Today, about half the oil from the oil sands is accessed by drilling. But, every year, the amount of oil developed that way is expected to rise. However, it wasn’t that long ago that drilling in the oil sands was thought to be impossible because most of the oil is embedded deep underground in sand. Through determination and persistence, some ingenious Canadians figured out that the oil could be separated and liquefied by injecting steam into the well. In Canada, we’re fortunate to have enough oil to take us into the next century and beyond. In addition to supporting our way of life, the oil from the oil sands generates hundreds of thousands of jobs, and contributes billions of dollars in tax revenue and investment in our economy across Canada every year. GLO bAL PRI MARy EN ERGy DEMAND Oil sands help supply global energy needs. t n e l a v i u q e l i o s e n n o t n o i l l i B 20 15 10 5 0 19 90 2010 2020 2030 2035 OTH ER RE NE WABLE S NUCLE A R COAL B IOE NERG Y* H YDRO NATURAL GAS OIL *Includes traditional and modern biomass uses Source: IEA 2012 The oil sands – how we’re developing them responsibly With tremendous accuracy, we drill two horizontal wells, one directly above the other, deep under the ground. We inject steam into the top well to liquefy the oil and separate it from the sand as much as 450 metres below the surface. With the help of gravity, the oil then flows into the bottom well where it’s pumped to the surface. This is all done with as little disruption to the land as possible. That’s steam-assisted gravity drainage technology, or SAGD as it’s called. In fact, 80 percent of the oil in the oil sands is buried so deep, it can only be accessed by drilling. About 20 percent of the oil in the oil sands is close to the surface and can be mined. While drilling in the oil sands is still very much in its early stages, we’ve made some huge advancements to the technology in just a few short years – advancements that have improved both our operational and environmental performance. We spend a significant amount of time learning about our oil sands reservoirs; each is unique and has different characteristics. We also test new ways to improve SAGD technologies and reduce our environmental footprint. It’s challenging work, but we are persistent in our determination to continue to build and operate our projects efficiently and improve our performance. We’re tackling these challenges every day so we can be even better at what we do. usIng salty water wHerever we Can Most of the water we use to generate the steam we inject underground is saline water. Saline water, because it’s salty, can’t be used for human or animal consumption, or for watering plants. We get this water from deep underground and recycle it over and over again in our production process. Less than five percent of the water we use in our oil sands operations is fresh. The fresh water comes from underground aquifers not from lakes or rivers. strIvIng For a low steaM to oIl ratIo Part of the work that goes into developing our projects is identifying ways to make the steam to oil ratio (SOR) as low as possible. SOR measures the amount of steam used to produce a barrel of oil from the oil sands. A low SOR is a reflection of the approach used to develop the resource, the efficiency with which we run our facilities and the quality of the reservoir. Our combined SOR at Christina Lake and Foster Creek in 2012 was 2.1, among the lowest in the industry. A low SOR is not only good for the environment but it’s also good for the bottom line because we burn less natural gas and use less water. Cenovus energy 2 012 ann ual rePort / O UR INTEGRAT ED A PP ROACH 9 C HARTIN G O UR CO U RS E O ur st rat E gy We have the resource base, the financial strength and the integrated approach that position us well today and for the long term. Our strategy We create long-term value for our shareholders through the development of our vast oil sands resources, our execution excellence, our ability to innovate and our financial strength. We are focused on continually building our net asset value (NAV) and paying a strong and sustainable dividend. While our oil sands resources are the dominant asset in our portfolio, they don’t stand alone. Our integrated approach, which enables us to capture the full value chain from production to high-quality end products like transportation fuels, relies on our entire asset mix: Due to the long-term nature of our oil sands projects, and the phased approach we take to develop those projects, our business plan looks out 10 years. It’s reviewed regularly to ensure we’re able to anticipate and create change when needed, so we’re able to be resilient and deliver predictable, reliable results. • Oil sands for growth • Conventional oil for near-term cash flow and diversification of our revenue stream • Natural gas for the fuel we use at our oil sands and refining facilities, and for the cash flow it provides to help fund our capital spending programs • Refining to help reduce the impact of commodity price fluctuations We measure our progress by our ability to deliver on the commitments and milestones we set each year and, longer term, by our ability to: • Meet our 2021 target of producing about 500,000 barrels of oil per day net to Cenovus • Continually grow our NAV over the long term, with an interim target of achieving a NAV of $56 per share by the end of 2015 • Maintain a solid balance sheet and pay a strong and sustainable dividend 10 Cenovus energy 2012 annual rePort / OUR STRATEGy Our milestones It’s important to us that you know our operational milestones and can track our progress as we build our business over many years. our 2012 MIlestones – we Met eaCH one Grow reserves and contingent resources Drill 400 to 500 stratigraphic test wells and assess results Achieve first production at Christina Lake phase D Anticipate regulatory approval for Narrows Lake project and partner approval for phase A – start construction Achieve production growth response from the Pelican Lake expansion Pursue additional conventional oil growth opportunities Connect Shaunavon and bakken central facilities to pipeline to support tight oil production growth in the area Implement at least one new commercial technology Demonstrate stable and reliable coker and refinery expansion (CORE) operation at the Wood River Refinery Develop tailored business unit environmental performance strategies Advance value creation from Telephone Lake asset our 2013 MIlestones Grow reserves and contingent resources Increase rail takeaway capacity for oil to Drill 350 to 400 gross stratigraphic test wells and assess results Submit regulatory application for Foster Creek phase J expansion Submit regulatory application for Christina Lake phase H expansion Provide updates on Grand Rapids and Telephone Lake pilot projects Achieve first production at Christina Lake approximately 10,000 bbls/d Progress preliminary work and initiate facility construction at Narrows Lake phase A Anticipate regulatory approval for Grand Rapids in the fourth quarter Evaluate debottlenecking opportunities at the Wood River Refinery Continue to evaluate light oil opportunities phase E in the third quarter Leverage supply chain management to improve operating costs Cenovus energy 2 012 ann ual rePort / OU R ST RAT E Gy 11 ADVANCING O U R TOP-qUALITy RESO URCES l OO king back O n th E y E ar We’re excited about developing energy for generations to come. Our commitment to develop it safely, responsibly and efficiently is what sparks our innovative spirit. We rose to the challenge by developing a totally new process for SAGD. It’s called dewatering.” – robert baIllargeon “This could be the start of a new generation of solvent-based recovery options to enhance the SAGD process, and that’s exciting. – MIKe Plettell Unlocking potential at Telephone Lake Robert Baillargeon, who’s part of a team responsible for our new venture activities, is enthusiastic about the future of our Telephone Lake asset. Robert describes this emerging project as having a unique reservoir with huge potential, anticipating production capacity of more than 300,000 barrels of oil per day. What’s unique about the reservoir is that, unlike any of our other oil sands assets, there’s a layer of water that sits above the oil deep below the surface. In order for Telephone Lake to be as efficient as our other oil sands projects, we needed to figure out how to remove that layer of water before we produce oil using steam-assisted gravity drainage (SAGD) technology. “We rose to the challenge by developing a totally new process for SAGD. It’s called dewatering and, based on the early results of testing we did in 2012, it’s all working as expected, so we’re off to a good start,” says Robert. By removing the water we expect SAGD to work more efficiently in this reservoir, allowing us to reduce the steam to oil ratio (SOR) and operating costs for the project. SOR is the amount of steam it takes to produce a barrel of oil. To learn more about the dewatering process, including what we do with the water we remove, visit cenovus.com. Excitement builds for Narrows Lake As a company, we’re excited about our Narrows Lake oil sands project because it’s the first we’ll have built from the ground up in over a decade. The approved project, which is our third in the oil sands, will be developed in three phases and is anticipated to have a gross production capacity of 130,000 barrels of oil per day, playing a significant part in our growth plans. Site preparation is underway and we expect to complete the first phase in 2017. It will be the first time butane is used as a solvent with steam on a commercial scale. Until now, we’ve used only steam to liquefy the oil to the point where it can be pumped to the surface. “This could be the start of a new generation of solvent-based recovery options to enhance the SAGD process, and that’s exciting,” says Mike Plettell, a development planner on the project. The official term for adding a solvent is solvent aided process, or SAP. In this case, it involves injecting both steam and butane, a naturally- occurring natural gas liquid. The butane dissolves into the oil making it thinner and allowing it to flow more freely to the producing well. Using a solvent like butane in our SAGD process reduces the amount of steam we use to recover each barrel of oil. Based on results of testing at Christina Lake, SAP has the potential to decrease the SOR and improve the oil production rate by as much as 30 percent when compared with SAGD alone. 12 Cenovus energy 2012 annual rePort / LOOKI NG bACK ON THE yE AR Christina Lake phase D adds to production The completion of phase D, three months ahead of schedule, increased total gross production capacity at Christina Lake, pictured here, to 98,000 barrels of oil per day. With the addition of another four planned phases, Christina Lake has the potential to produce as much as 300,000 barrels of oil per day gross with optimization. Cenovus energy 2 012 ann ual reP ort / LOO KING bACK O N T H E y E A R 13 sHIF tIng gears Being flexible in business means being able to adapt and thrive in times of change. Some of our teams from our conventional oil and natural gas properties have proven to be very capable of doing just that. With our growth strategy focused on oil, and because of stronger oil prices relative to natural gas, the teams safely and successfully transitioned from producing natural gas to producing more oil in 2012 compared to 2011. Our ability to shift gears is, in part, why we exceeded production targets for oil in Alberta. And we still produced 594 million cubic feet per day of natural gas, continuing to provide significant ongoing financial support for our oil growth plans. “Being able to shift our focus while maintaining our strong team coordination and attention to safety were key to our success. I’m so proud of everyone involved,” says Dan Schiller, Senior Vice-President, Conventional Oil & Natural Gas. FInanCIal strengtH ContInues to suPPort grow tH We have high-quality assets, a strong growth plan and the right people to execute on our strategy. Part of executing our strategy is about maintaining our solid financial position to help support our growth. In 2012, we increased the capacity of our commercial paper program, extended the term of our committed credit facility and issued US$1.25 billion of senior unsecured notes at attractive long-term rates. “These steps further improved our liquidity and financial strength to carry out our future plans,” says Shane Cooke, Assistant Treasurer. sPenDIng loCally HelPs us Meet labour neeDs anD ContrIbutes to tHe loCal eConoMy Many of our operations are located in remote and rural areas of Alberta and Saskatchewan. Hiring local businesses and sourcing local contract services, including Aboriginal businesses, is a key part of how 14 Cenovus energy 201 2 annual rePort / LOOKI NG bACK ON THE yE AR Part of executing our strategy is about maintaining our solid financial position to help support our growth. we do business. In 2012, we spent over $1 billion doing business with local and Aboriginal companies in our operating areas, doubling our spend since 2010. “Not only does this help us with our growth plans, it also benefits the communities where we operate,” says Troy Schwab, who is responsible for business development in our local communities. “By taking this approach we know there will be a number of qualified companies that understand our business and have as much interest in our success as their own.” HearIng FroM our staKeHolDers Our commitment to doing right by the environment and the communities where we live and work is something we take very seriously. We seek feedback from those living in our operating areas and from large urban centres across Canada on a regular basis. We do that through focus groups, and telephone and online surveys. The 2012 telephone survey that we commissioned in our Alberta and Saskatchewan operating areas indicates that we are demonstrating that commitment: • 93 percent of respondents said Cenovus works hard to minimize its impact on the environment • 95 percent said Cenovus provides benefits to their community • 95 percent said Cenovus conducts business in an honest, ethical manner “Knowing what’s important to people when it comes to oil development helps us get better at what we do,” says Sandra Barker, a manager on our Communications team. Cenovus energy 2 012 ann ual rePort / LOO KING bACK O N TH E yE AR 15 DR IV IN G VA LU E T HROUGH E XE CU TIO N l OO king back O n th E y E ar Executing with excellence is integral to everything we do. It’s what motivates our teams to consistently deliver great results. It’s a great time to be in the refining business. Our integration strategy is really paying off for Cenovus overall.” – Peter lanDry “When you look at our daily production plot, you’ll see a steady line ... To me, that’s excellent performance. – ranDy Penny Our integration strategy generates strong performance Not only do we produce oil in the oil sands, we also own 50 percent of two U.S. refineries. Phillips 66 owns the other half and is the operator. Our ownership in these refineries means we can capture the full value chain from oil production through to refined products. Once the oil is out of the ground, it has to go through a number of steps – blending, transporting, upgrading, refining – all the way to finished products such as gasoline, diesel and jet fuel. From a pricing perspective, the value of a barrel of heavy crude oil is significantly less than the value of a comparable amount of gasoline or jet fuel. “It’s a great time to be in the refining business. Our integration strategy is really paying off for Cenovus overall,” says Peter Landry, who works as a business planner on our refining team. Having both upstream and downstream operations helps protect us from price variability in the heavy crude oil market. Being involved in various steps of the value chain helps our bottom line by allowing us to capture value from the production of oil through to the output of finished products like transportation fuels. Essentially, we shift from being a producer of heavy crude oil to being a producer of high-value finished products. Operations excellence drives Foster Creek’s production results When Randy Penny, our Vice-President of Foster Creek Operations, talks about operating performance at Foster Creek over the last year, he uses a production graph to make his point. Randy says the facility’s success is largely due to a program we call Operations Excellence, which has introduced systems and techniques aimed at helping us continuously improve our performance. “When you look at our daily production plot, you’ll see a steady line with no significant day-to-day variations. That’s what you want to see because it means we’re delivering consistent production,” says Randy. “To me, that’s excellent performance.” Foster Creek production averaged approximately 116,000 barrels of oil per day gross in 2012. In fact, we exceeded nameplate capacity, which is 120,000 barrels of oil per day gross, for six months of the year. This means we produced more oil per day than we had anticipated at this stage of the project. 16 Cenovus energy 2012 annual rePort / LOOKI NG bACK ON THE yE AR Our Wood River and Borger refineries Strategically located in the mid-continent of the United States, these refineries are able to process heavy oil, which has helped generate strong operating cash flow. Cenovus energy 2 012 ann ual rePort / LOO KING bACK O N T H E y E A R 17 “It’s everyone’s responsibility on site to be safe by looking after ourselves and one another.” – sHelDon JaCKson lIvIng uP to our CoMMItMent to MaKIng CoMMunItIes better For Liz Swift, who works on one of our environment teams, giving back to her community is more than just giving money to a charity. And she should know. Every year, Liz gives time and money to a cause that’s close to her heart. “Several of my family members have been affected by multiple sclerosis (MS) and a large part of my effort is dedicated to helping end MS,” says Liz. “It’s great to work for a company that encourages employees to volunteer. Not only does MS get some of my time, I’m also able to submit my volunteer hours to receive a company grant that goes to MS.” Liz is one of 1,194 employees who, in total, donated over $1.7 million to 864 charities through our employee giving programs, one of which is called Thanks & Giving. That amount was matched dollar for dollar by Cenovus, making a combined total of approximately $3.5 million for 2012. She’s also one of our many employees who volunteered at 64 company-sponsored events. Cenovus also contributed more than $10 million to more than 435 charities. As an Imagine Canada Caring Company we give one percent of our pre-tax profits to charitable or non-profit organizations. It’s all part of our commitment to making communities where we live and work stronger and better off as a result of us being there. Dow Jones Sustainability Index (DJSI) North America for the third year in a row. In Canada, we were listed as one of the 2012 Best 50 Corporate Citizens by Corporate Knights magazine, included on the 2012 Carbon Disclosure Leadership Index for the third time and recognized as one of the most trusted and respected brands by Canadian Business magazine. “Making it on these lists tells me that others believe we’re walking the talk,” says Craig Stenhouse, who leads our Corporate Responsibility team. walKIng tHe talK gets us reCognIzeD The Dow Jones Sustainability World Index is an exclusive list of the world’s best corporate citizens and we’re on it. We were the only Canadian oil and gas company to make the 2012-2013 index and one of just 11 Canadian companies. We were also named to the tHInKIng saFe MarKs Four years oF no lost-tIMe InCIDents at PelICan laKe When a contractor was disconnecting a process line at Pelican Lake he noticed two others enter the area who weren’t wearing all the required safety gear for the work 18 Cenovus energy 2012 annual rePort / LOOKI NG bACK ON THE yE AR being done. He immediately stopped the work and ensured they exited to a safe area before continuing his work. contacted our Weyburn facility ahead of time to lessen any impact the move would have on our business. “It’s everyone’s responsibility on site to be safe by looking after ourselves and one another,” says Sheldon Jackson, an operator who saw what happened. “The fact that the work was stopped to address a potential safety risk, tells me we’re living up to our safety commitments.” This is just one example of how the Pelican Lake team has achieved four years of no lost-time safety incidents and of the importance Cenovus places on safety. How MovIng a HerD oF Cattle strengtHeneD a relatIonsHIP Moving a herd of cattle from one pasture to another using a municipal roadway takes more than just a few people on horseback. That’s why a local landowner made sure he “When I got the notice from our landowner, I sent a note to all our staff to make sure everyone knew and would exercise caution when coming across the herd on the road,” says Arron Rush, an operator at the facility. “The landowner let us know how pleased he was with the respect and cooperation he received from us. It made me feel great knowing that doing the right thing goes a long way.” We want community members to know they can expect respect in everything we do. Our Expect Respect program, launched in 2012, also addresses concerns often associated with oil and gas operations such as noise and dust. It’s one of the ways we demonstrate to our neighbours that we’re operating responsibly. on tHe Move Several years of hard work by hundreds of people from across the company made it possible for more than 2,500 employees to move into four buildings in 2012, including our head office move to THE BOW, with minimal disruption to their daily work. “Feedback from employees was that the move was seamless – they simply packed their old office at the end of one week and showed up on Monday to their new office ready to work,” says Denise Froese, Vice-President, Administrative Services. “Our success in this transition is a reflection of the tireless efforts of so many people and the strength of teamwork and collaboration to execute a strong plan.” C enovus energy 2 012 ann ual rePort / LOO KING bACK ON T HE yE A R 19 A P PLy IN G NEW I DE AS AN D NEW AP PROACH ES l OO king back O n th E y E ar While we’re proud of our work in the oil sands, we’re committed to finding new and better ways to develop this energy resource. To be a part of this exciting project early on in my career with a company that believes in doing the right thing is so rewarding.” – CanDICe Paton “It was great being part of a team that took an idea from whiteboard to reality. – DustIn JaCK Thinking outside the box leads to environmental benefits What does the automotive industry have in common with the oil sands? If you’re thinking gasoline, that’s true. But there’s also a technology commonly used in the automobile and other industries that we’ve tailored for our own needs. Empowered to always improve, a team of our engineers looked outside our industry for ways to reduce our emissions beyond what’s required by the regulators. The team introduced a technology called flue gas recirculation that recycles exhaust from steam generators used in the steam-assisted gravity drainage (SAGD) process, just like exhaust is recycled in our cars. “We’re the first in the oil sands to use this technology in the SAGD process and the results we’re seeing are cutting emissions significantly,” says Candice Paton, one of our technology development engineers. “To be a part of this exciting project early on in my career with a company that believes in doing the right thing is so rewarding.” The technology reduces the amount of nitrogen oxides emitted into the air during the combustion of fuel and gas. In the oil sands we use natural gas in our steam generators. By using a tube to take exhaust from the steam generator, we can recycle the exhaust back into the burner. The exhaust helps cool the burner flame, reducing nitrogen oxide emissions going into the air. Early results show these emissions from the boiler are down to 20 parts per million (ppm) from 40 ppm – a 50 percent reduction. The pilot project is in operation on one boiler at Christina Lake and is expected to be in operation on additional boilers for the next expansion phase. From the whiteboard to reality: a game-changing innovation Imagine using a helicopter to place a drilling rig in a remote area. That’s what we’ve started doing in the oil sands to drill stratigraphic test wells that provide information about what’s underground. “Heli-portable drilling rigs have been used for decades in the hard-rock mining industry,” says Dustin Jack, one of our drilling technologists. “Our team believed it could also work in the oil sands to solve our challenge of finding a way to drill year-round while reducing our environmental footprint.” After two years of development and testing we put our SkyStratTM drilling rig into action, drilling a total of 15 wells in 2012. Using this rig eliminates the need for road infrastructure because the rig and crew are transported by helicopter, reducing the amount of land we use. Where we use our SkyStratTM drilling rig we expect to achieve up to a 50 percent reduction in our surface footprint compared with traditional stratigraphic test well drilling methods. “It was great being part of a team that took an idea from whiteboard to reality,” says Dustin. “And it’s great to work for a company whose direct supervisors and senior leaders give us the support we need to be innovative and be able to execute on our ideas.” Our SkyStratTM drilling rig is also expected to reduce the amount of water we use for drilling operations by up to 50 percent. 20 Cenovus energy 2012 annual rePort / LOOKI NG bACK ON THE yE AR Foster Creek, an industry first Foster Creek, pictured here, is recognized as being the first commercial SAGD project in Alberta. We’ve introduced a number of innovations at this project, including our Wedge WellTM technology which has increased production by 10 to 15 percent. Visit cenovus.com for more information. Cenovus energy 2 012 ann ual rePort / LOO KING bACK O N T H E y E A R 21 FoCusIng on teCHnology brIngs rewarDs We received double honours at New Technology Magazine’s Technology Star Awards. Our blowdown boiler technology was selected as the best health, safety and environment technology for its innovative approach to water recycling. And, our accelerated start-up with steam technology was selected as runner-up for best production technology. “The blowdown boiler is a great example of how innovation and efficiency can help us limit our environmental impact,” says Susan Sun, who’s a water treatment engineer. The blowdown boiler technology has been implemented at Foster Creek and Christina Lake. The enhanced steam generation process allows us to recycle more water and use less natural gas while creating steam for SAGD projects. We expect to introduce this technology at future oil sands projects. Accelerated start-up, the technology we commercialized in 2012, involves injecting steam down both the injector and producer wells in a controlled manner, to accelerate the interaction between the wells and increase mobility of the oil in the reservoir. This is one of the reasons why Christina Lake was able to achieve first production on phase D earlier than expected. “Our accelerated start-up with steam dilation is one way we’re getting oil out of the ground faster,” says Maliha Zaman, one of our reservoir engineers. CollaboratIon Is Key to early start-uP at CHrIstIna laKe PHase D When our phase D expansion at Christina Lake began producing oil three months ahead of schedule, our operations superintendent, Darren Matvichuk, summed up the achievement in one word: collaboration. “Our employees came together as a team to achieve this milestone. Collaboration is what strengthens our ability to execute,” says 22 Cenovus energy 2012 annual rePort / LOOKI NG bACK ON THE yE AR “We’re always looking to challenge the status quo and improve the way we work.” – Darren MatvICHuK Darren. “We’re always looking to challenge the status quo and improve the way we work. In this case we clarified roles and responsibilities, streamlined our processes, and integrated our planning and scheduling.” and implement practical solutions to environmental challenges,” says Brian Ferguson, our President & Chief Executive Officer. “As a company, we believe in continuously improving, and we are excited to be a charter member.” “I’m inspired by how passionate people are about their communities,” says Dave Hassan, who leads the environment technology investment team and was one of the contest judges. “It’s wonderful to see such strong community spirit.” Co sIa: DrawIng uPon tHe best anD brIgHtest Cenovus was one of the Canadian oil sands producers who in early 2012 joined together to form Canada’s Oil Sands Innovation Alliance (COSIA). This new organization is focused on accelerating oil sands environmental performance through innovation and collaboration. “COSIA is drawing upon the best minds within the industry to develop CoMMunIty sPIrIt sHInIng brIgHtly There’s something special about every community. That’s why we launched the Great Communities contest, to celebrate the spirit that lives within the communities where we live and work. We asked residents to tell us why their communities are great in 50 words or less. In total there were 124 entries. Each of the 12 community residents who submitted winning entries received a $5,000 donation from Cenovus to give to their favourite local charity. Cenovus energy 2 012 ann ual rePort / LOO KING bACK O N T H E y E A R 23 b U I L DIN G M OM EN T UM mE ssag E fr O m O ur bOard chai r The theme of Cenovus’s 2012 annual report is building momentum, driving forward. From an operating perspective the company is certainly growing assets and asset value. From a governance perspective the question is whether that momentum can be expected to deliver desirable results. Because the company is “driving,” in a responsible manner, toward goals valued by shareholders, your Board believes the answer to be an unequivocal “yes.” Cenovus began independent life in December 2009 with a large inventory of high quality, well understood assets. Since then the company has increased oil reserves and resources each year, increased oil production and sales volumes each year and accelerated schedules for many of its projects based on achieved results. Supported by its comprehensive stratigraphic test well program, Cenovus continues to convert its bitumen prospective resources to contingent resources and then to reserves, and ultimately to production. Downstream integration has paid off with increased cash flow for investment when realized crude prices have been low. Good financial performance supported dividend increases. So, there is no question that momentum is building. What about direction? An initial dividend and a dividend policy were announced after the company began independent operations. The 2012 dividend increase and the recently announced first quarter 2013 increase were consistent with that policy. A growth plan was laid out in early 2010. Subsequent operating results combined with independent third-party estimates of bitumen initially-in- place and economic contingent resources provided the basis for converting it to an achievable 10-year business plan. The disclosed increase in targeted bitumen production is consistent with that plan. Management adopted net asset value as a performance measure with a target of doubling it by the end of 2015. We believe all of these actions are aimed at goals valued by investors and demonstrate that Cenovus is doing what it said it would do. All of this progress has been accomplished in a responsible manner, consistent with Cenovus’s stated values. The company’s financial structure is designed to support growth and absorb significant downside commodity price shock. Downstream integration has mitigated some of the crude oil price risk. The company continues to invest in energy and environmental technology to improve performance and reduce its environmental footprint. Cenovus published its first corporate responsibility report in 2010. The report is based on the company’s Corporate Responsibility 24 Cenovus energy 2012 annual rePort / MESSAGE FROM OU R b OAR D CHAIR Policy and provides a baseline against which performance may be measured. Cenovus has been recognized in each year as a leader in emissions reporting and has been on the Dow Jones Sustainability Index North America for three years, being named to the World Index in 2012. For these and the many other reasons, described in the company’s public documents, your Board believes that Cenovus is definitely building momentum toward goals that will serve investors and all other stakeholders well. Respectfully submitted on behalf of the Board. MICH ael a . gr an DI n Board Chair Cenovus energy 2 012 ann ual rePort / MESSAGE F ROM O U R bOARD CH AI R 25 O PER AT ING HI G H LIGHTS B e f o r e r o y a l t i e s Production Crude Oil and Natural Gas Liquids (bbls/d) Oil Sands – Heavy Oil Foster Creek Christina Lake Total Pelican Lake Conventional Liquids Heavy Oil Light and Medium Oil Natural Gas Liquids Total Crude Oil and Natural Gas Liquids (bbls/d) Natural Gas (MMcf/d) Refinery Operations (1) Crude Oil Capacity (Mbbls/d) Crude Oil Runs (Mbbls/d) Crude Utilization (%) Proved Reserves (2) Total Reserves (MMBOE) Year-end Bitumen Reserves (MMbbls) Total Production Replacement (%) Recycle Ratio (3) Proved Finding & Development Costs ($/BOE) (4) Reserve Life Index (years) 2012 2011 % Change 57,833 31,903 89,736 22,552 112,288 16,015 36,071 1,029 165,403 594 452 412 91 2,175 1,717 345 3.2 9.04 23 54,868 11,665 66,533 20,424 86,957 15,657 30,524 1,101 134,239 656 452 401 89 1,945 1,455 422 5.3 5.95 22 5 173 35 10 29 2 18 (7) 23 (9) – 3 2 12 18 (18) (40) 52 5 (1) Represents 100% of the Wood River and Borger refinery operations. (2) Natural gas is converted using a 6:1 oil equivalent. See the Advisory section. (3) Recycle ratio is calculated by dividing netback (before hedging and general and administrative costs) by Proved Finding and Development Costs (excluding changes in future development costs). (4) Finding and Development Costs presented do not include changes in future development costs. Finding and Development Costs calculated with changes in future development costs for proved reserves and for proved plus probable reserves, are disclosed in the Advisory. 26 Cenovus energy 2012 annual rePort / OPERATING HIG HLIGHTS FI NA NC IAL H I GH LIGHTS $ M i l l i o n s , e x c e p t p e r s h a r e a n d o t h e r a m o u n t s a s n o t e d Gross Sales Revenues Cash Flow (1) Per Share – Diluted Operating Earnings (1) Per Share – Diluted Net Earnings Per Share – Diluted Capital Investment Net Acquisition and Divestiture Activity Net Capital Investment Dividends Per Common Share Dividend Yield (%) (2) Debt to Capitalization (%) (1) Debt to Adjusted EBITDA (times) (1) (1) Non-GAAP measures as referenced in the Advisory section. (2) Based on TSX closing share price at year end. 2012 17,229 16,842 3,643 4.80 866 1.14 993 1.31 3,368 38 3,406 0.88 2.6 32 1.1 2011 % Change 6 7 11 (30) (33) 24 30 10 16,185 15,696 3,276 4.32 1,239 1.64 1,478 1.95 2,723 (102) 2,621 0.80 2.4 27 1.0 “We had another strong year in 2012, achieving the milestones we set for ourselves. We added significant new reserves and resources, increased our oil production, enhanced net asset value and generated record cash flow. We remain committed to delivering a growing total shareholder return and have again increased our dividend by 10 percent.” – brIan Ferguson, PresIDent & CHIeF exeCutIve oFFICer Cenovus energy 2 012 ann ual rePort / FINAN C I AL HI G HL I G HTS 27 M A NAGE MENT ’S DISCUSSION AN D AN ALYSI S OVERVIE W OF CE NOVUS.... .... .... ... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....... 29 Q UARTE RLY RE SULTS.......................... ...................... ......... ...................... 53 2012 OPERAT ING AND FIN AN C IAL HI G H L I G HTS.. . . . . . . . . . . . . . . . . . . . . . . . ......... 31 O IL AND G AS R ESERVES AND R ESO URCE S.......................................... 54 OPERATING RESULTS... .... .... .... .... .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ... ..... .33 LIQ UI DI TY AND CAPI TAL RESO URC ES.... ......... ....................... .............. 56 COMMODIT Y PRICES UND E RLYIN G O UR FI N A N C I AL R E S ULTS.. ... .....34 RI SK MAN AGE MENT.......................... ...................... ......... ....................... 60 F IN A N C IAL RE S U LTS............ .. ... ... .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....... 36 REPORTABL E SEGMENTS..... .. ... ... .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. ...... 41 CR ITI CAL ACCO UNTIN G JUD GME NTS , ESTI MATES AN D ACCO UNTI NG PO LI CI E S... ....................... ......... ......... 65 . . . . O IL . S A N DS .. . . . . . . .. .. .. ... . ..... ... ... .. ... ... .. ... ... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ........ 42 CO N VE NT I ON A L.. . .. . ... .. ... ... .. ... ... .. ... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ........ 46 R E F I NI N G.AND. MARK ET IN G.. ... .. .. ..... ... ..... ... ..... ... ... . . . . . . . . . . . . . . ...... .. 49 COR PO RATE .AND. EL IMI NAT IONS... ... ... .. ... ... .. ... ... .. ... .. . . . . . . . . . . ....... 50 CON TROL ENV IRO NMEN T........................ ......... ....................... .............. 69 TRANS PAR ENC Y AN D COR PO RATE RES PO N SI B I LI TY.. ........................ 69 O UTLO O K........................................... ...................... ......... ....................... 70 For the Year Ended December 31, 2012 This.Management’s.Discussion.and.Analysis.(“MD&A”).for.Cenovus.Energy.Inc.. (“we”,.“our”,.“Cenovus”,.or.the.“Company”).dated.February.13,.2013,.should.be.read.in. conjunction.with.our.December.31,.2012.audited.Consolidated.Financial.Statements. and.accompanying.notes.(“Consolidated.Financial.Statements”)..This.MD&A. contains.forward-looking.information.about.our.current.expectations,.estimates,. projections.and.assumptions..See.the.Advisory.for.information.on.the.risk.factors. that.could.cause.actual.results.to.differ.materially.and.the.assumptions.underlying. our.forward-looking.information..Cenovus.Management.prepared.the.MD&A,.while. the.Audit.Committee.of.the.Cenovus.Board.of.Directors.(the.“Board”).reviewed.and. recommended.its.approval.by.the.Board..Additional.information.about.Cenovus,. including.our.quarterly.and.annual.reports.and.the.Annual.Information.Form.(“AIF”). and.Form.40-F,.is.available.on.SEDAR.at.www.sedar.com,.EDGAR.at.www.sec.gov.and. on.our.website.at.www.cenovus.com.. Basis of Presentation This.MD&A.and.the.Consolidated.Financial.Statements.and.comparative.information. have.been.prepared.in.Canadian.dollars,.except.where.another.currency.has.been. indicated.and.have.been.prepared.in.accordance.with.International.Financial. Reporting.Standards.(“IFRS”.or.“GAAP”).as.issued.by.the.International.Accounting. Standards.Board..Production.volumes.are.presented.on.a.before.royalties.basis. Non-GAAP Measures Certain.financial.measures.in.this.document.do.not.have.a.standardized.meaning.as. prescribed.by.IFRS,.such.as.operating.cash.flow,.cash.flow,.operating.earnings,.free.cash. flow,.debt,.capitalization.and.adjusted.EBITDA,.and.therefore.are.considered.non-GAAP. measures..These.measures.may.not.be.comparable.to.similar.measures.presented.by. other.issuers..These.measures.have.been.described.and.presented.in.order.to.provide. shareholders.and.potential.investors.with.additional.measures.for.analyzing.our.ability. to.generate.funds.to.finance.our.operations.and.information.regarding.our.liquidity.. The.additional.information.should.not.be.considered.in.isolation.or.as.a.substitute. for.measures.prepared.in.accordance.with.IFRS..The.definition.and.reconciliation.of. each.non-GAAP.measure.is.presented.in.the.Operating.Results,.Financial.Results.and. Liquidity.and.Capital.Resources.sections.of.this.MD&A. 28 CENOVUS ENERGY 2012 ANNUAL RE PO RT / MANAG EM ENT ’S DISCUSSIO N AN D A NALYSIS OVE RVIEW OF CENOVUS We.are.a.Canadian,.integrated.oil.company.headquartered.in.Calgary,. Alberta,.with.our.shares.trading.on.the.Toronto.and.New.York.stock. exchanges..On.December.31,.2012,.we.had.a.market.capitalization. of.approximately.$25.billion..We.are.in.the.business.of.developing,. producing.and.marketing.crude.oil,.natural.gas.liquids.(“NGLs”).and. natural.gas.in.Canada.with.refining.operations.in.the.United.States. (“U.S.”)..Our.total.2012.average.crude.oil.and.NGLs.production.was.in. excess.of.165,000.barrels.per.day,.our.average.natural.gas.production. was.in.excess.of.590.MMcf.per.day.and.our.refinery.operations. produced.approximately.433,000.barrels.per.day.of.refined.product.. Our.reportable.segments.are:.Oil.Sands,.Conventional,.Refining.and. Marketing.and.Corporate.and.Eliminations.. OUR STRATEGY Our.strategy.is.to.create.long-term.value.for.our.shareholders.through. the.development.of.our.vast.oil.sands.resources,.our.execution. excellence,.our.ability.to.innovate.and.our.financial.strength..We.are. focused.on.continually.building.our.net.asset.value.and.paying.a.strong. and.sustainable.dividend. Our.integrated.approach,.which.enables.us.to.capture.the.full.value. chain.from.production.to.high-quality.end.products.like.transportation. fuels,.relies.on.our.entire.asset.mix: ) d / s l b b M ( •. Oil.Sands.for.growth; •. •. .Conventional.crude.oil.for.near-term.cash.flow.and.diversification.of. revenue.stream; .Natural.gas.for.the.fuel.we.use.at.our.oil.sands.and.refining.facilities,. and.for.the.cash.flow.it.provides.to.help.fund.our.capital.spending. programs;.and •. Refining.to.help.reduce.the.impact.of.commodity.price.fluctuations. To.achieve.our.expected.production.targets,.we.anticipate.our.total. annual.capital.investment.to.average.between.$3.0.and.$3.5.billion.for. the.next.decade..This.capital.investment.is.expected.to.be.primarily. internally.funded.through.cash.flow.generated.from.our.crude.oil,. natural.gas.and.refining.operations.as.well.as.prudent.use.of.our.balance. sheet.capacity..We.continue.to.focus.on.executing.our.10-year.business. plan.in.a.predictable.and.reliable.way,.leveraging.the.strong.foundation. we.have.built.to.date.. 500 40 0 30 0 200 10 0 0 Oil Production We.plan.to.increase.our.net.oil.sands.bitumen.production.to. 400,000.barrels.per.day.and.our.net.crude.oil.production,.including. our.conventional.oil.operations,.to.approximately.500,000.barrels. per.day.by.the.end.of.2021..We.are.focusing.on.the.development. of.our.substantial.crude.oil.resources.predominantly.from.Foster. Creek,.Christina.Lake,.Pelican.Lake,.Narrows.Lake.and.our.tight.oil. opportunities.in.Alberta.and.Saskatchewan..Our.future.opportunities. are.currently.based.on.the.development.of.the.land.positions.that. we.hold.in.the.oil.sands.in.northern.Alberta.and.we.plan.to.continue. assessing.our.emerging.resource.base.by.drilling.approximately.. 350-450.gross.stratigraphic.test.wells.each.year.for.the.next.five.years. TO TAL OI L PRO DUC TI ON (MBB LS /D) NE T TO C ENOVUS 2010 2012 2015F ( 1) 2021F (1) (1). Expected.gross.production.capacity. CEN OV US EN ERGY 2012 ANNUAL RE PORT / MA NAGEM ENT ’S DISCU SSION AND AN ALYSIS 29 OiL SANDS Our.operations.include.the.following.steam-assisted.gravity.drainage.(“SAGD”).oil.sands.projects.in.northern.Alberta: . . . . . . . . . . . . . . . Existing Projects. . Foster.Creek. . Christina.Lake. . Narrows.Lake. Emerging Plays . Grand.Rapids.. . Telephone.Lake. .. . Ownership interest (percen t) . 50 50 50 . 2012 Net Production Volumes (b b ls /d ) . 57,833 31,903 – 100 100 – – Current. Expected Gross. Production. Capacity. (bbls/d) 310,000 300,000 130,000 180,000 300,000 Foster.Creek,.Christina.Lake.and.Narrows.Lake.are.operated.by.Cenovus. and.located.in.the.Athabasca.Region.of.northeast.Alberta..In.addition. to.current.production,.expansion.work.is.underway.at.phases.F,.G.and. H.at.Foster.Creek.with.added.production.capacity.expected.in.2014.. In.the.third.quarter.of.2013,.Christina.Lake.is.anticipating.production. from.phase.E..For.our.Narrows.Lake.property,.we.received.regulatory. approval.in.May.2012.for.phases.A,.B.and.C,.and.final.partner.approval. in.December.2012.for.phase.A..Site.preparation.is.underway.and.we. anticipate.first.production.in.2017.. Two.of.our.emerging.projects.are.Grand.Rapids.and.Telephone.Lake.. At.our.Grand.Rapids.property,.located.within.the.Greater.Pelican. CONVENTiONAL Region,.a.SAGD.pilot.project.is.underway..In.December.2011,.we.filed. a.joint.application.and.Environmental.Impact.Assessment.(“EIA”).for.a. commercial.SAGD.operation..We.anticipate.regulatory.approval.in.the. fourth.quarter.of.2013..Our.Telephone.Lake.property.is.located.within. the.Borealis.Region..In.December.2011,.we.submitted.a.revised.joint. application.and.EIA.due.to.an.increase.in.the.project.development.area. which.we.anticipate.receiving.regulatory.approval.in.2014. Also.located.within.the.Athabasca.Region.is.our.wholly.owned.Pelican.Lake. property..Pelican.Lake.produces.heavy.oil.using.polymer.flood.technology. and.has.expected.production.capacity.of.55,000.barrels.per.day. Our.crude.oil.and.NGLs.production.from.our.Conventional.business.segment.continues.to.generate.predictable.near-term.cash.flows,.which.. enables.further.development.of.our.Oil.Sands.assets.and.provides.diversification.to.our.revenue.stream..Our.natural.gas.production.acts.as.an. economic.hedge.for.the.natural.gas.required.as.a.fuel.source.at.both.our.upstream.and.refining.operations.and.provides.cash.flows.to.help.fund.our. growth.opportunities. For the Year Ended Decem b er 3 1, 2 012 ($ m il l ions). Operating.Cash.Flow. Capital.Investment. Operating Cash Flow in Excess of Related Capital Investment.. Crude Oil and NGLs 962 805 157 . Natural Gas 482 43 439 We.have.established.conventional.crude.oil.and.natural.gas.producing.assets.and.developing.tight.oil.assets..In.Saskatchewan,.we.also.inject.carbon. dioxide.to.enhance.oil.recovery.at.our.Weyburn.operations.. Refining and Marketing Our.operations.include.refineries.located.in.Illinois.and.Texas.that.are.jointly.owned.with.and.operated.by.Phillips.66,.an.unrelated.U.S..public.company: . . . . . . . . . Wood.River.(1). Borger. Ownership 2012 Nameplate. Capacity (Mb bls/d) 306 146 interest (percen t) 50 50 . . . . (1). Effective.January.1,.2013,.Wood.River.has.a.nameplate.capacity.of.311,000.barrels.per.day. Our.refining.operations.allow.us.to.capture.the.value.from.crude.oil. production.through.to.refined.products.such.as.diesel,.gasoline.and.jet. fuel.to.mitigate.volatility.associated.with.North.American.commodity. price.movements..This.segment.also.includes.the.marketing.of.third. party.purchases.and.sales.of.product,.undertaken.to.provide.operational. flexibility.for.transportation.commitments,.product.quality,.delivery.points. and.customer.diversification.. 30 CENOVUS ENERGY 2012 ANNUAL RE PO RT / MANAG EM ENT ’S DISCUSSIO N AN D A NALYSIS Refining and Marketing (continued ) ($ mil lions). Operating.Cash.Flow. Capital.Investment. Operating Cash Flow in Excess of Related Capital Investment . . . . . . . . 2012 1,267 118 1,149 Technology and Environment Dividend Technology.development.plays.a.key.role.in.improving.the.amount. of.bitumen.we.can.access.and.extract.from.the.ground,.potentially. reducing.costs.and.building.on.our.history.of.excellent.project. execution..The.Cenovus.culture.fosters.new.ideas.and.new.approaches. and.has.a.track.record.of.developing.innovative.solutions.that.unlock. previously.inaccessible.resources..Environmental.considerations. are.embedded.into.our.business.with.the.objective.of.reducing.our. environmental.impact..We.are.advancing.technologies.with.the.goal.of. reducing.the.amount.of.water,.natural.gas.and.electricity.consumed.in. our.operations.and.minimizing.surface.land.disturbance.. Our.disciplined.approach.to.capital.allocation.includes.continuing. to.pay.a.strong.and.sustainable.dividend.as.part.of.delivering.total. shareholder.return. Net Asset Value We.measure.our.success.in.a.number.of.ways.with.a.key.measure.being. growth.in.net.asset.value..Our.operational.and.financial.performance. in.2012.and.consistent.production.growth.has.increased.our.net.asset. value..We.continue.to.be.on.track.to.reach.our.goal.of.doubling.our. December.2009.net.asset.value.by.the.end.of.2015. 2 0 12 OPERATI NG A ND FINA NCIAL HIGHLIG HTS In.2012,.we.delivered.solid.performance.and.achieved.or.exceeded.the. milestones.we.set.out.for.the.year..We.completed.our.planned.capital. programs,.met.or.exceeded.our.production.targets.and.increased.our. net.asset.value. OPERATIONAL RESULTS Crude.oil.production.from.our.Oil.Sands.segment.averaged.112,288.barrels. per.day,.an.increase.of.29.percent,.primarily.due.to.increased.production. at.Christina.Lake.and.Foster.Creek..Christina.Lake.phase.D,.our.9th.SAGD. expansion.phase.to.come.online,.came.on.production.ahead.of.schedule. in.late.July,.2012.and.below.budgeted.cost..This.was.the.result.of.effective. use.of.our.Nisku.module.yard,.faster.ramp-up.of.production.from. improved.start-up.techniques.and.production.commencing.in.a.higher. quality.area.of.the.reservoir..Christina.Lake.set.a.new.single.day.gross. production.high.of.almost.94,000.barrels.per.day.in.2012.and.has.exceeded. gross.nameplate.capacity.of.98,000.barrels.per.day.in.early.2013. TO TAL CRUD E OIL AN D N GL S P RO DUC TI ON VOLU MES Within.our.Conventional.segment,.crude.oil.and.NGLs.production. averaged.53,115.barrels.per.day,.an.increase.of.12.percent,.as.a.result. of.our.successful.drilling.programs..Alberta.production.increased. 10.percent.to.an.average.of.30,357.barrels.per.day.and.Saskatchewan. production.increased.15.percent.to.an.average.of.22,758.barrels.per.day. Our.proved.bitumen.reserves.increased.18.percent.to.over.1.7.billion. barrels.and.our.economic.bitumen.best.estimate.contingent.resources. increased.17.percent.to.9.6.billion.barrels,.demonstrating.our.strong. resource.base..Additional.information.about.our.resources.is.included.in. the.Oil.and.Gas.Reserves.and.Resources.section.of.this.MD&A.. Our.refining.operations.produced.approximately.433,000.barrels.per. day.of.refined.products,.an.increase.of.about.14,000.barrels.per.day.. The.increase.resulted.from.greater.heavy.crude.oil.processing.capability. as.a.result.of.a.full.year.of.operations.from.the.Coker.and.Refinery. Expansion.(“CORE”).project.at.the.Wood.River.Refinery.which.was. completed.in.the.fourth.quarter.of.2011..Refining.operations.processed. an.average.of.412,000.(2011.–.401,000).barrels.per.day.of.crude.oil,. including.198,000.barrels.per.day.of.heavy.crude.oil,.despite.planned. turnarounds.at.both.refineries.in.the.fourth.quarter.of.2012.. 129,187 134,239 ) d / s l b b ( 18 0,0 00 160 ,00 0 14 0,00 0 120 ,0 00 10 0,0 00 80,0 00 60,0 00 40 ,000 20,0 00 0 165,403 Other.significant.operational.results.in.2012,.as.compared.to.. 2011,.include: •. •. •. .Christina.Lake.production.averaging.31,903.barrels.per.day,.more.than. doubling,.due.to.the.start-up.of.phases.C.and.D.in.the.third.quarters. of.2011.and.2012,.respectively; .Foster.Creek.production.averaging.57,833.barrels.per.day,.an.increase. of.five.percent.due.to.plant.optimization; .Pelican.Lake.production.averaging.22,552.barrels.per.day,.an.. increase.of.10.percent.as.a.result.of.our.infill.drilling.and.polymer. flood.programs;. 2010 2011 2012 CEN OV US EN ERGY 2012 AN NUAL R EPORT / MAN AGE MEN T ’S DISC USSIO N AND A NA LYS IS 31 •. •. •. •. .Natural.gas.production.declining.nine.percent.to.an.average.of.594. MMcf.per.day,.primarily.due.to.expected.natural.declines.and.the. divestiture.of.a.non-core.property.early.in.the.first.quarter.of.2012; .Receiving.regulatory.approval.for.phases.A,.B.and.C,.and.partner. approval.for.phase.A.of.our.Narrows.Lake.project; .Completing.planned.refinery.turnarounds.at.both.Borger.and.Wood. River;.and Cash Flow Cash.flow.of.$3,643.million,.increasing.$367.million.or.11.percent,. primarily.due.to.higher.operating.cash.flow,.partially.offset.by:. •. .An.increase.in.current.income.tax,.excluding.tax.on.divestitures,.of. $168.million.mainly.due.to.$68.million.of.withholding.tax.on.a.U.S.. dividend,.higher.U.S..income.tax.and.improved.operating.cash.flow. from.our.Canadian.operations;.and .Accessing.new.markets.for.our.crude.oil.through.pipeline.to.the.west. coast.and.rail.to.the.east.coast.and.U.S. •. .An.increase.in.our.general.and.administrative.expenses.due.to.higher. staffing.and.office.support.costs.in-line.with.our.growth.. FINANCIAL RESULTS Throughout.2012,.our.financial.results.benefited.from.strong.crude. oil.production.and.continued.high.refining.margins,.despite.declines. in.crude.oil,.NGLs.and.natural.gas.prices..Total.operating.cash.flow. reached.$4.4.billion.(an.increase.of.15.percent).and.cash.flow.was.. $3.6.billion.(an.increase.of.11.percent)..Operating.earnings.were. $866.million.(a.decrease.of.30.percent).primarily.due.to.a.goodwill. impairment.in.the.fourth.quarter.related.to.our.Suffield.area.within.. our.Conventional.segment..Net.earnings.declined.33.percent.to.. $993.million,.primarily.resulting.from.non-cash.items.related.to. decreases.in.gains.recorded.on.unrealized.risk.management.activities. and.divestitures..We.completed.a.US$1.25.billion.public.offering.of. senior.unsecured.notes.in.August.and.paid.annual.dividends.of.. $0.88.per.share.(2011.–.$0.80.per.share).. Other.financial.highlights.for.2012,.as.compared.to.2011,.include: CASH FLOW PER SHARE – DI LUTE D ) e r a h s / $ ( 6.0 0 5.00 4.0 0 3.0 0 2 .00 1.0 0 0.0 0 4.80 4.32 3.20 2010 2011 2012 Revenues Revenues.of.$16,842.million,.increasing.$1,146.million.or.seven.percent.as. a.result.of:. •. •. •. .Crude.oil.and.NGLs.sales.volumes.increasing.25.percent; .Refining.and.Marketing.revenues.rising.$731.million.due.primarily.to. higher.refinery.output.and.refined.product.prices;.and .A.decrease.in.crude.oil.and.NGLs.royalties.by.20.percent.primarily. due.to.an.increase.in.capital.investment.. Partially.offsetting.these.increases.in.revenues.were: •. •. .Our.crude.oil.and.NGLs.average.sales.prices.(excluding.financial. hedging).decreasing.10.percent;.and .Natural.gas.revenues.decreasing.$344.million.due.to.declining. production.and.lower.average.sales.prices. Operating Cash Flow Operating Earnings Operating.earnings.of.$866.million,.decreasing.$373.million.or.. 30.percent.primarily.due.to.the.following.non-cash.items: •. .Goodwill.impairment.of.$393.million.in.our.Conventional.segment.at. Suffield,.resulting.primarily.from.declining.future.cash.flows.due.to. lower.natural.gas.and.crude.oil.prices.and.increased.operating.costs.. We.have.also.had.minimal.levels.of.capital.spending.for.natural.gas. such.that.production.has.exceeded.reserve.replacement.in.the.area.. With.lower.future.cash.flows.and.decreasing.volumes,.the.carrying. amount.of.the.goodwill.which.arose.in.2002,.exceeded.its.fair.value; •. .Increased.depreciation,.depletion.and.amortization.(“DD&A”).as.a. result.of.higher.production.and.higher.DD&A.rates;.and •. .Increased.exploration.expense. Higher.cash.flow.partially.offset.the.decreases.in.operating.earnings.as. discussed.above.. Operating.cash.flow.of.$4,436.million,.increasing.$574.million.or.15. percent.due.to: Net Earnings •. •. .Upstream.operating.cash.flow.of.$3,169.million,.an.improvement.of. $288.million,.due.to.higher.crude.oil.and.NGLs.volumes,.partially. offset.by.lower.realized.crude.oil.and.natural.gas.prices.and.lower. natural.gas.volumes;.and .Operating.cash.flow.of.$1,267.million.from.our.Refining.and. Marketing.segment.increasing.$286.million.on.improved.refinery. output,.feedstock.costs.and.crack.spreads,.partially.offset.by.higher. operating.costs.for.planned.turnarounds.. Net.earnings.of.$993.million,.decreasing.$485.million.or.33.percent,.as. decreases.in.operating.earnings.discussed.above,.decreases.in.unrealized. risk.management.gains,.after.tax.and.a.gain.on.divestiture.in.2011.were. partially.offset.by.higher.unrealized.foreign.exchange.gains. Capital Investment Capital.investment.of.$3,368.million,.increasing.$645.million.or.. 24.percent.primarily.due.to.expansion.of.our.Oil.Sands.operations. and.the.development.of.tight.oil.opportunities.in.our.Conventional. segment,.partially.offset.by.reduced.capital.spending.in.Refining.and. Marketing.with.the.completion.of.the.CORE.project.in.2011.. 32 CENOVUS ENERGY 2012 ANNUAL RE PO RT / MANAG EM ENT ’S DISCUSSIO N AN D A NALYSIS OP ER ATI NG R ESULTS . . CRUDE OIL PRODUCTION VOLUMES . (barrels per d ay). Oil Sands. . Foster.Creek. . Christina.Lake. . Pelican.Lake. Conventional. . Heavy.Oil. . Light.&.Medium.Oil. . NGLs.(1). . . . . . . . . . . . . . . . 2012 . 57,833 31,903 22,552 . 16,015 36,071 1,029 165,403 2012. vs. 2011 . 5%. 173%. 10%. . 2%. 18%. -7%. 23%. . 2011. . 54,868. 11,665. 20,424. . 15,657. 30,524. 1,101. 134,239. 2011. vs..2010. . 7%. 48%. -11%. . -6%. 4%. -6%. 4%. 2010 . 51,147 7,898 22,966 . 16,659 29,346 1,171 129,187 (1). NGLs.include.condensate.volumes. In.2012,.our.crude.oil.and.NGLs.production.increased.23.percent.due. to.the.start-up.of.Christina.Lake.phases.C.and.D.in.the.third.quarters. of.2011.and.2012.respectively,.improved.well.performance.and.plant. optimization.at.Foster.Creek.and.rising.production.at.Pelican.Lake.from. our.infill.drilling.and.polymer.flood.program..Our.successful.drilling. program.in.Alberta.and.drilling,.completions.and.facilities.work.in. Saskatchewan,.also.contributed.to.higher.production.. . . NATURAL GAS PRODUCTION VOLUMES . ( M M c f p e r day). Conventional. Oil.Sands. . . . . . . . . . 2012 561 33 594 2012. vs. 2011 -9%. -11%. -9%. . 2011. 619. 37. 656. 2011. vs..2010. -11%. -14%.. -11%. 2010 694 43 737 In.2012,.our.natural.gas.production.declined.nine.percent..In.the.low. price.environment,.we.have.chosen.to.restrict.natural.gas.capital. spending.for.the.past.several.years..Declines.were.also.a.result.of.the. divestiture.of.our.Boyer.property.in.early.2012,.partially.offset.by.the. absence.of.weather.related.production.issues.that.were.encountered.in. 2011..Excluding.the.impact.of.the.first.quarter.divestiture,.our.natural.gas. production.would.have.decreased.six.percent. OPERATING NETBACKS . . . . . .. . . . .. . . Price.(1). Royalties. Transportation.and.Blending.(1). Operating.Expenses. Production.and.Mineral.Taxes. Netback Excluding Realized Risk Management. . Realized.Risk.Management.Gains.(Losses). Netback Including Realized Risk Management. 2012. 2011. 2010 Crude Oil & NGLs ($/ bbl) 65.79 6.29 2.65 13.90 0.56 42.39 1.39 43.78 Natural. Gas. ($/ Mc f ) 2.42. 0.03. 0.10. 1.10. 0.01. 1.18. 1.14. 2.32. Crude.Oil. &.NGLs. ($ /bb l) 72.84. 9.84. 2.76. 13.47. 0.56. 46.21. (2.79). 43.42. Natural. Gas. ($/ Mc f ) 3.65. 0.06. 0.15. 1.10. 0.04. 2.30. 0.87. 3.17. Crude.Oil. &.NGLs. ($ /bb l) 62.96. 9.33. 1.88. 11.74. 0.62. 39.39. (0.36). 39.03. Natural. Gas ( $/Mc f ) 4.09 0.07 0.17 0.95 0.02 2.88 1.07 3.95 (1). .Heavy.crude.oil.is.mixed.with.purchased.condensate..The.crude.oil.and.NGLs.price.and.transportation.and.blending.costs.exclude.the.impact.of.condensate.purchases.of.$26.72.per.barrel.. (2011.–.$24.91.per.barrel;.2010.–.$20.36.per.barrel). In.2012,.our.average.netback.for.crude.oil.and.NGLs,.excluding.realized. risk.management.gains.and.losses,.decreased.by.$3.82.per.barrel.from. 2011..Sales.prices.were.lower.in.2012,.consistent.with.lower.benchmark. prices.and.decreased.sales.prices.for.Christina.Lake.due.to.the.Christina. Dilbit.Blend.(“CDB”).differential.to.Western.Canadian.Select.(“WCS”).. In.addition,.higher.operating.costs.as.a.result.of.workover.activities,. workforce.and.repairs.and.maintenance.costs.also.decreased.our. average.netback..This.decrease.was.offset.by.a.reduction.in.royalties. primarily.due.to.increased.capital.investment. Our.average.netback.for.natural.gas,.excluding.realized.risk.management. gains.and.losses,.decreased.$1.12.per.Mcf.in.2012.predominantly.as.a. result.of.lower.sales.prices.as.compared.to.2011. CEN OV US EN ERGY 2012 ANNUAL RE PORT / MA NAGEM ENT ’S DISCU SSION AND AN ALYSIS 33 REFINING (1) . . . . Crude.Oil.Runs.(Mbbls/d). Refined.Product (Mbbls/d). Crude.Utilization (percent). (1). Represents.100.percent.of.the.Wood.River.and.Borger.refinery.operations. . . . . . . 2012 412 433 91 2012. vs. 2011 3%. 3%. 2%. . 2011. 401. .419. 89. 2011. vs..2010. 4%. 3%. 3%. 2010 386 405 86 Crude.oil.runs.and.refined.product.improved.three.percent.as.a.result.of.a. full.year.of.operations.after.completion.of.the.CORE.project.at.the.Wood. River.Refinery..Improvements.were.partially.offset.by.longer.than.expected. planned.turnarounds.at.both.refineries.in.the.fourth.quarter.of.2012.. Further.information.on.the.changes.in.our.production.volumes.and. items.included.in.our.operating.netbacks.can.be.found.in.the.Reportable. Segments.section.of.this.MD&A..Further.information.on.our.risk. management.strategy.can.be.found.in.the.Risk.Management.section.of.this. MD&A.and.in.the.notes.to.the.Consolidated.Financial.Statements.. COM M ODIT Y PRICES UNDERLYIN G O UR FI NANCIAL RESULTS Key.performance.drivers.for.our.financial.results.include.commodity. prices,.price.differentials,.refining.crack.spreads.as.well.as.the.. U.S./Canadian.dollar.exchange.rate..The.following.table.shows.. selected.market.benchmark.prices.and.the.U.S./Canadian.dollar.average. exchange.rates.to.assist.in.understanding.our.financial.results. . . SELECTED BENCHMARK PRICES AND ExCHANGE RATES (1) .. Crude Oil Prices (US$/bbl). Brent.Futures.. . Average. . End.of.period. WTI. .. . Average. . End.of.period.. Average.Differential.Brent-WTI. WCS... . Average. . End.of.period.. Average.Differential.WTI-WCS. Condensate.(C5.@.Edmonton).Average. Average.Differential.. . WTI-Condensate.Premium. Refining Margin 3-2-1 Average Crack Spreads (2).(U S $/ bb l ). . Chicago.. . Midwest.Combined.(“Group.3”). Natural Gas Average Prices. . AECO ($/GJ). . NYMEX (US$/MMBtu). . Basis.Differential.NYMEX-AECO.(U S $/ MMBtu). U.S./Canadian Dollar Exchange Rate. . Average. . . . . . . . . . . . . . . . . .. . . .. . . . .. . . . . . . . . . . . . . . . . . . . . . . . . Q4 2012 . . 110.13 111.11 . 88.23 91.82 21.90 . 70.12 59.16 18.11 98.14 . (9.91) . 28.18 28.49 . 2.90 3.40 0.31 . 1.009 2012. . . 111.68. 111.11. . 94.15. 91.82. 17.53. . 73.12. 59.16. 21.03. 100.88. . (6.73). . 27.76 . 28.56 . . 2.28. 2.79. 0.38. . 1.001. 2011. .. . 110.91. 107.38. . 95.11. 98.83. 15.80. . 77.96. 84.37. 17.15. 105.34. . (10.23). . 24.55. 25.26. . 3.48. 4.04. 0.31. . 1.012. 2010 . 80.34 94.75 79.61 91.38 0.73 65.38 72.87 14.23 81.91 . (2.30) 9.33 9.48 . 3.91 4.39 0.40 . 0.971 (1).. .These.benchmark.prices.do.not.reflect.our.realized.sales.prices..For.our.average.realized.sales.prices.and.realized.risk.management.results,.refer.to.the.Operating.Netbacks.table.in.the.Operating. Results.section.of.this.MD&A. (2). .The.3-2-1.crack.spread.is.an.indicator.of.the.refining.margin.generated.by.converting.three.barrels.of.crude.oil.into.two.barrels.of.regular.unleaded.gasoline.and.one.barrel.of.ultra-low.sulphur. diesel.using.current.month.WTI.based.crude.oil.feedstock.prices.and.a.last.in,.first.out.accounting.basis.(“LIFO”). Crude Oil Benchmarks The.Brent.benchmark.is.representative.of.global.crude.oil.prices.and.is. also.a.better.indicator.than.WTI.of.changes.in.inland.refined.product. prices,.which.are.tied.to.global.markets..In.2012,.the.average.price.of. Brent.crude.oil.was.roughly.the.same.as.in.2011,.averaging.near.US$112. per.barrel,.as.the.effects.of.weak.demand.growth,.was.offset.by.supply. outages.caused.by.operational.and.geopolitical.problems..Demand. weakness.was.the.result.of.weak.European.and.North.American. economies,.as.governments.addressed.fiscal.imbalances.and.slowing. Chinese.growth,.as.authorities.tried.to.reduce.the.inflated.value.of. products.within.the.Chinese.economy. 34 CENOVUS ENERGY 2012 ANNUAL RE PO RT / MANAG EM ENT ’S DISCUSSIO N AN D A NALYSIS WTI.is.an.important.benchmark.for.Canadian.crude.oil.since.it.reflects. inland.North.American.crude.oil.prices.and.its.Canadian.dollar. equivalent.is.the.basis.for.determining.royalties.for.a.number.of.our. crude.oil.properties..WTI.has.been.trading.at.a.significant.discount.to. Brent.prices.for.the.past.two.years.as.inland.supply.growth.has.strained. the.capacity.of.takeaway.transportation.from.inland.markets..These. discounts.widened.somewhat.in.2012.as.additional.transportation. capacity.provided.by.reversing.the.Seaway.pipeline.to.flow.out.of.the. U.S..Midwest,.was.more.than.offset.by.growth.in.inland.supply.. WCS.is.blended.heavy.oil.which.consists.of.both.conventional.heavy.oil. and.unconventional.diluted.bitumen..This.blended.heavy.oil.is.traded. at.a.discount.to.the.light.oil.benchmark.WTI..The.WTI-WCS.average. differential.widened.in.2012,.primarily.due.to.greater.transportation. congestion.out.of.the.Western.Canadian.Sedimentary.Basin.(“WCSB”),. despite.increased.supply.outages.and.availability.of.rail.capacity. ) l e r r a b r e p s r a l l o d . S . U e g a r e v A ( 1 30 1 20 1 10 1 00 90 80 70 60 5 0 4 0 Q 1 Q 2 Q3 Q 4 Q 1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2 010 2011 2012 2013 FORWARD PRICES AT DECEMBER 31, 2012 BRENT C5 @ EDMO NTO N W T I W CS Blending.condensate.with.bitumen.and.heavy.oil.enables.our. production.to.be.transported..Our.blending.ratios.range.from.10.percent. to.33.percent..The.WTI-Condensate.differential.is.the.Edmonton. benchmark.price.of.condensate.relative.to.the.price.of.WTI..The. differentials.for.WTI-WCS.and.WTI-Condensate.are.independent.of.one. another.and.tend.not.to.move.in.tandem..Condensate.differentials.at. Edmonton.weakened.in.2012.by.US$3.50.per.barrel.due.largely.to.the. continued.strong.growth.in.North.American.condensate.supply,.mostly. from.the.Eagleford.basin.in.Texas,.offset.partially.by.increased.costs.of. transport.to.the.Edmonton.market.. Refining 3-2-1 Crack Spread Benchmarks Average.2012.crack.spreads.in.the.U.S..inland.Chicago.and.Group.3.markets.increased.from.strong.2011.levels.due.to.increased.North.American.crude. oil.discounts.and.global.refinery.closures. ) l e r r a b r e p s r a l l o d . S . U e g a r e v A ( 40 35 30 25 20 15 10 5 0 Q1 Q2 Q3 Q4 Q1 Q2 Q 3 Q4 Q1 Q 2 Q 3 Q 4 Q 1 Q 2 Q3 Q4 2010 2011 2012 2013 FORWARD PRICES AT DECEMBER 31, 2 012 GROUP 3 CHICAGO Benchmark.crack.spreads.are.a.simplified.view.of.the.market.based.on. LIFO.and.reflect.the.current.month.WTI.price.as.the.crude.oil.feedstock. price..Our.realized.crack.spreads.are.affected.by.many.other.factors. such.as.the.variety.of.feedstock.crude.oil.inputs,.refinery.configuration. and.product.output,.and.feedstock.costs.based.on.first.in,.first.out. accounting.basis.. CEN OV US EN ERGY 2012 AN NUAL R EPORT / MAN AGE MEN T ’S DISC USSIO N A ND ANALYSI S 35 Other Benchmarks Average.natural.gas.prices.in.2012.fell.sharply.from.2011.levels.due.to. one.of.the.warmest.winters.on.record.coupled.with.continued.strong. growth.in.North.American.supply.despite.a.falling.rig.count... In.order.to.create.sufficient.demand.to.offset.these.imbalances,.gas. prices.fell.sufficiently.to.induce.fuel.switching.away.from.coal-fired. power.generation.to.gas-fired.power.generation.. A.decrease.in.the.value.of.the.Canadian.dollar.compared.to.the.U.S.. dollar.has.a.positive.impact.on.our.revenues.as.the.sales.prices.of.our. crude.oil.and.refined.products.are.determined.by.reference.to.U.S.. benchmarks..Similarly,.our.refining.results.are.in.U.S..dollars.and.therefore. a.weakened.Canadian.dollar.increases.our.reported.results,.although. a.weaker.Canadian.dollar.also.increases.our.current.period’s.reported. refining.capital.investment..During.2012,.the.Canadian.dollar.weakened. slightly.relative.to.the.U.S..dollar,.but.remained.close.to.parity. FINA N C IAL RESU LTS SELECTED CONSOLIDATED FINANCIAL RESULTS The.following.key.performance.indicators.are.discussed.in.more.detail.within.this.section:. OPERATING CAS H FLOW, C AS H FLOW, OP ER ATIN G E AR N IN GS AND NE T E ARN IN GS ) s n o i l l i m $ ( 5 ,0 00 4,5 00 4 ,00 0 3,5 00 3,00 0 2 ,50 0 2 ,0 00 1,5 00 1,00 0 50 0 0 OP ERATING CASH FLOW CASH FLOW OPERAT ING E ARNIN GS NE T E ARNIN GS . . . ($ mil lions, except per share am oun ts) Revenues. Operating Cash Flow (1). Cash Flow (1). . per.Share.–.Diluted.. Operating Earnings (1). . per.Share.–.Diluted. Net Earnings . . per.Share.–.Basic. . per.Share.–.Diluted. Total Assets. Total Long-Term Financial Liabilities . Capital Investment (2). Cash Dividends . . per.Share.. 2010 2 0 11 2 0 12 . . . . . . . . . . . . . . 2012 16,842 4,436 3,643 4.80 866 1.14 993 1.31 1.31 24,216 6,128 3,368 665 0.88 2012. vs. 2011 7%. 15%. 11%. 11%. -30%. -30%. -33%. -33%. -33%. 9%. 13%. 24%. 10%. 10%. . 2011. 15,696. 3,862. 3,276. 4.32. 1,239. 1.64. 1,478. 1.96. 1.95. 22,194. 5,411. 2,723. 603. 0.80. 2011. vs..2010. 24%. 30%. 36%. 35%. 55%. 55%. 37%. 36%. 36%. 12%. -4%. 29%. 0%. 0%. 2010 12,641 2,981 2,412 3.20 799 1.06 1,081 1.44 1.43 19,840 5,618 2,115 601 0.80 (1). Non-GAAP.Measure.and.defined.in.this.MD&A. (2). Includes.expenditures.on.property,.plant.and.equipment.(“PP&E”).and.exploration.and.evaluation.(“E&E”).assets. 36 CENOVUS ENERGY 2012 ANNUAL RE PO RT / MANAG EM ENT ’S DISCUSSIO N AN D A NALYSIS REVENUE VARIANCE ($ mil lions). Revenues, Comparative Year. Increase.(Decrease).due.to:. . Oil.Sands.. . Conventional. . Refining.and.Marketing. . Corporate.and.Eliminations. Revenues, End of Year . . . . . . . . . 2012 vs. 2011. 15,696. . 866. (227). 731. (224). 16,842. 2011.vs..2010 12,641 584 9 2,397 65 15,696 Oil.Sands.revenues.increased.29.percent.primarily.due.to.increased. crude.oil.and.condensate.volumes,.partially.offset.by.decreased.average. crude.oil.prices..Conventional.revenues.decreased.by.11.percent.as. crude.oil.and.NGLs.production.increases.were.offset.by.lower.crude.oil. prices.and.lower.natural.gas.production.and.prices..Revenues.generated. by.the.Refining.and.Marketing.segment.rose.by.seven.percent.as.a.result. of.increased.refined.product.output.and.higher.refined.product.prices,. despite.reduced.output.levels.during.planned.turnarounds..Higher. revenues.from.third.party.sales.undertaken.by.the.marketing.group.to. provide.operational.flexibility.also.increased.revenues..Corporate.and. Eliminations.revenues.relate.to.sales.and.operating.revenues.between. segments.and.are.recorded.at.transfer.prices.based.on.current.market. prices..Further.information.regarding.our.revenues.can.be.found.in.the. Reportable.Segments.section.of.this.MD&A. OPERATING CASH FLOW Operating.cash.flow.is.a.non-GAAP.measure.that.is.used.to.provide.a.consistent.measure.of.the.cash.generating.performance.of.our.assets.for.comparability. of.our.underlying.financial.performance.between.years..Operating.cash.flow.is.defined.as.revenues.less.purchased.product,.transportation.and.blending,. operating.expenses.and.production.and.mineral.taxes.plus.realized.gains.less.losses.on.risk.management.activities..Operating.cash.flow.excludes.unrealized. gains.and.losses.on.risk.management.activities,.which.are.included.in.the.Corporate.and.Eliminations.segment. ( $ m il li o n s ). Revenues (1). (Add.Back).Deduct:. . Purchased.Product.(1). . Transportation.and.Blending. . Operating.Expenses.(1). . Production.and.Mineral.Taxes. . Realized.Gain.on.Risk.Management.Activities.(1). Operating Cash Flow. 2012. 17,125. . 9,506. 1,798. 1,684. 37. (336). 4,436. 2011. 15,755. . 9,149. 1,369. 1,407. 36. (68). 3,862. 2010 12,765 7,674 1,065 1,289 34 (278) 2,981 (1). Excludes.any.revenues,.purchased.product.and.operating.expenses.included.in.the.Corporate.and.Eliminations.segment..See.the.notes.to.the.Consolidated.Financial.Statements.for.details.. OPERATING C AS H FLOW BY SE G MEN T O PERATIN G CASH FLOW BY UPSTR E AM PRO DUC T ) s n o i l l i m $ ( 2 ,00 0 1,5 00 1,0 00 50 0 0 1,774 1,131 1,613 1,716 1,268 981 1,453 1,267 76 ) s n o i l l i m $ ( 3,0 00 2 ,500 2 ,00 0 1,500 1,0 00 500 0 1,805 1,084 2,647 2,091 777 513 2010 2011 2012 2010 2011 2012 OIL SANDS CONVENTIONAL REFINING AND MARKETING CRUDE OIL AN D NGLs NATURAL G AS CEN OV US EN ERGY 2012 AN NUAL R EPORT / MAN AGE MEN T ’S DISC USSIO N AND A NA LYS IS 37 Operating Cash Flow Variance for the Year Ended December 31, 2012 compared to December 31, 2011 Overall,.operating.cash.flow.increased.$574.million.or.15.percent. as.operating.cash.flow.from.crude.oil.and.NGLs.and.Refining.and. Marketing.increased.27.percent.and.29.percent,.respectively.. The.increase.in.operating.cash.flow.from.crude.oil.and.NGLs.was.. driven.by.increased.production.volumes,.partially.offset.by.lower. average.crude.oil.sales.prices.and.higher.operating.costs..Operating.. cash.flow.from.natural.gas.declined.$264.million.(34.percent),.as.a. result.of.lower.average.sales.prices.combined.with.reduced.production. volumes.from.expected.natural.declines.and.the.divestiture.of.a. non-core.natural.gas.property.in.the.first.quarter.of.2012..Refining. and.Marketing.operating.cash.flow.rose.on.improved.refinery.output,. feedstock.costs.and.crack.spreads,.partially.offset.by.higher.operating. costs.for.planned.turnarounds.. . Additional.details.explaining.the.changes.in.operating.cash.flow.can.be. found.in.the.Reportable.Segments.section.of.this.MD&A. CASH FLOW ) s n o i l l i m $ ( 5,000 4,500 4,000 3,500 3,000 2 ,500 2 ,000 1,500 1,000 500 0 556 286 3,862 (264) 4,436 (4) Year Ended December 31, 2011 Crude Oil and NGLs Natural Gas Refining and Marketing Other Year Ended December 31, 2012 INCRE A SE DECRE A SE Cash.flow.is.a.non-GAAP.measure.commonly.used.in.the.oil.and.gas.industry.to.assist.in.measuring.a.company’s.ability.to.finance.its.capital.programs. and.meet.its.financial.obligations..Cash.flow.is.defined.as.cash.from.operating.activities.excluding.net.change.in.other.assets.and.liabilities.and.net. change.in.non-cash.working.capital.. ( $ mi l l i on s ). Cash From Operating Activities. (Add.Back).Deduct:. . Net.Change.in.Other.Assets.and.Liabilities. . Net.Change.in.Non-Cash.Working.Capital. Cash Flow. 2012. 3,420. . (113). (110). 3,643. 2011. 3,273. . (82). 79. 3,276. 2010 2,591 . (55) 234 2,412 Cash Flow Variance for the Year Ended December 31, 2012 compared to December 31, 2011 In.2012,.our.cash.flow.increased.$367.million.or.11.percent.primarily.due.to: •. .A.25.percent.increase.in.our.crude.oil.and.NGLs.sales.volumes; •. .An.increase.in.operating.cash.flow.from.Refining.and.Marketing.of. $286.million.due.to.improved.refinery.output,.feedstock.costs.and. crack.spreads,.partially.offset.by.higher.operating.costs.for.planned. turnarounds;. •. •. .Realized.risk.management.gains.before.tax,.excluding.Refining.and. Marketing,.of.$332.million.compared.to.gains.of.$82.million.in.2011;. and .A.decrease.in.royalties.of.$102.million.primarily.as.a.result.of. increased.capital.investment.at.Foster.Creek.and.Pelican.Lake..In. 2011,.inclusion.of.the.Foster.Creek.expansion.phases.F,.G.and.H. capital.investment.was.approved.as.part.of.the.Foster.Creek.royalty. calculation,.resulting.in.a.$65.million.reduction.in.royalties.in.2011.. 38 CENOVUS ENERGY 2012 ANNUAL RE PO RT / MANAG EM ENT ’S DISCUSSIO N AN D A NALYSIS 897 (272) (80) 102 (171) 250 286 3,643 (219) 3,276 (426) ) s n o i l l i m $ ( 4,50 0 4,00 0 3,5 00 3, 000 2 ,50 0 2 ,0 00 1 ,50 0 1 ,00 0 50 0 0 Year Ended December 31, 2011 Crude Oil and NGLs Price Crude Oil and NGLs Volumes Natural Gas Price Natural Gas Volumes Royalties Oil Sands and Conventional Operating Expenses Refining and Marketing Operating Cash Flow I N CR E AS E D ECR E ASE Other Year Ended December 31, 2012 Realized Risk Management, Excluding Refining and Marketing Before Tax The.increases.in.our.cash.flow.for.2012.were.partially.offset.by: •. •. •. .A.10.percent.decrease.in.the.average.realized.sales.price.of.crude.oil. and.NGLs.to.$65.79.per.barrel; .A.34.percent.decrease.in.the.average.natural.gas.sales.price.to.. $2.42.per.Mcf; .An.increase.in.operating.expenses.of.$171.million,.primarily.from. increased.crude.oil.production.at.all.of.our.upstream.properties.with. crude.oil.per.barrel.operating.costs.increasing.three.percent.to.$13.99. per.barrel; OPERATING EARNINGS •. .Increase.in.other.expenditures.of.$219.million,.primarily.related.to. a.$168.million.increase.in.current.income.tax.due.to.$68.million. of.withholding.tax.on.a.U.S..dividend,.higher.U.S..income.tax.and. higher.Canadian.tax.due.to.improved.operating.cash.flow.from.our. Canadian.operations;.and •. .A.nine.percent.decline.in.natural.gas.production,.primarily.as.a. result.of.expected.natural.declines.and.the.divestiture.of.a.non-core. property.early.in.the.first.quarter.of.2012.. Operating.earnings.is.a.non-GAAP.measure.that.is.used.to.provide.a.consistent.measure.of.the.comparability.of.our.underlying.financial. performance.between.periods.by.removing.non-operating.items..Operating.earnings.is.defined.as.net.earnings.excluding.the.after-tax.gain.(loss).on. discontinuance,.after-tax.gain.on.bargain.purchase,.after-tax.effect.of.unrealized.risk.management.gains.(losses).on.derivative.instruments,.after-tax. gains.(losses).on.non-operating.foreign.exchange,.after-tax.effect.of.gains.(losses).on.divestiture.of.assets.and.the.effect.of.changes.in.statutory. income.tax.rates.. ($ mil lions). Net Earnings. (Add.Back).Deduct:. . Unrealized.Risk.Management.Gains.(Losses),.after-tax.(1). . Non-Operating.Unrealized.Foreign.Exchange.Gains.(Losses),.after-tax.(2). . Gain.(Loss).on.Divestiture.of.Assets,.after-tax. . Gain.(Loss).on.Bargain.Purchase,.after-tax. Operating Earnings . 2012. 993. . 43. 84. –. –. 866. 2011. 1,478. . 134. 14. 91. –. 1,239. 2010 1,081 . 34 153 83 12 .799 (1). The.unrealized.risk.management.gains.(losses),.after-tax.include.the.reversal.of.unrealized.gains.(losses).recognized.in.prior.periods. (2). .After-tax.unrealized.foreign.exchange.gains.(losses).on.translation.of.U.S..dollar.denominated.notes.issued.from.Canada.and.the.Partnership.Contribution.Receivable,.after-tax.foreign.exchange. gains.(losses).on.settlement.of.intercompany.transactions.and.deferred.income.tax.on.foreign.exchange.recognized.for.tax.purposes.only.related.to.U.S..dollar.intercompany.debt. Operating.earnings.of.$866.million,.decreased.$373.million.or.30.percent.primarily.due.to.a.goodwill.impairment,.increased.DD&A.and.exploration. expense,.partially.offset.by.higher.cash.flow.as.discussed.above. CEN OV US EN ERGY 2012 AN NUAL R EPORT / MAN AGE MEN T ’S DISC USSIO N A ND ANALYSI S 39 NET EARNINGS VARIANCE ($ mil lions). Net Earnings, Comparative Year. Increase.(Decrease).due.to:. . Operating.Cash.Flow. . Corporate.and.Eliminations:. . . . . . Depreciation,.Depletion.and.Amortization. . Goodwill.Impairment. . Exploration.Expense. . Net Earnings, End of Year. . Unrealized.Risk.Management.Gains.(Losses),.after-tax. . Unrealized.Foreign.Exchange.Gains.(Losses). . Gain.(Loss).on.Divestiture.of.Assets. . Expenses.(1). Income.Taxes,.Excluding.Income.Taxes.on.Unrealized.Risk.Management.Gains.(Losses). . . . . . . . . . . . . . . 2012 vs. 2011. 1,478. . 574. . (91). 28. (107). (52). (290). (393). (68). (86). 993. 2011.vs..2010 1,081 881 100 (27) (9) (86) 7 – 3 (472) 1,478 (1). Includes.general.and.administrative,.finance.costs,.interest.income,.realized.foreign.exchange.(gains).losses,.other.(income).loss,.net.and.Corporate.and.Eliminations.operating.expenses. Year.over.year,.our.net.earnings.decreased.$485.million.or.33.percent,. primarily.as.a.result.of.a.goodwill.impairment.and.the.absence.of. gains.recorded.on.divestitures.of.assets.in.2012..Significant.factors.that. impacted.our.net.earnings.for.the.year.include: •. •. •. •. .Goodwill.impairment.of.$393.million.on.the.carrying.amount.of. the.Suffield.cash.generating.unit.(“CGU”).within.our.Conventional. segment,.resulting.primarily.from.declining.future.natural.gas.and. crude.oil.prices.and.increased.operating.costs..In.addition,.we. had.minimal.levels.of.capital.spending.for.natural.gas.such.that. production.has.exceeded.reserve.replacement.in.the.area; .An.increase.of.$290.million.in.DD&A.expense.due.to.higher.crude.oil. production,.increased.DD&A.rates.due.to.higher.future.development. costs.associated.with.total.proved.reserves.and.increased. depreciable.costs.in.Refining.and.Marketing,.partially.offset.by. decreased.natural.gas.production; •. .No.gains.recorded.on.divestitures.of.assets.during.2012.as.compared. to.a.gain.of.$107.million.in.2011; NET CAPITAL INVESTMENT ( $ mi l l i on s ). Oil.Sands. Conventional. Refining.and.Marketing. Corporate.and.Eliminations. Capital Investment. . Acquisitions.(2). . Divestitures. Net Capital Investment (1). .Unrealized.risk.management.gains,.after-tax,.of.$43.million,.compared. to.gains.of.$134.million.in.2011; .Income.tax.expense,.excluding.the.impact.of.unrealized.risk. management.gains.and.losses,.increasing.to.$769.million,.compared. to.$683.million.in.2011; •. An.increase.in.exploration.expense.of.$68.million;.and •. .An.increase.of.$57.million.for.general.and.administrative.expenses. primarily.due.to.higher.staffing.and.office.support.costs. Partially.offset.by: •. Increased.operating.cash.flow.as.discussed.previously;.and •. .Unrealized.foreign.exchange.gains.of.$70.million.compared.to.a. gain.of.$42.million.in.2011,.consistent.with.the.strengthening.of.the. Canadian.dollar.exchange.rate.at.December.31,.2012.resulting.from. the.translation.of.our.U.S..dollar.long-term.debt.and.Partnership. Contribution.Receivable. 2012. 2,211. 848. 118. 191. 3,368. 114. (76). 3,406. 2011. 1,415. 788. 393. 127. 2,723. 71. (173). 2,621. 2010 857 526 656 76 2,115 86 (307) 1,894 (1). Includes.expenditures.on.PP&E.and.E&E.. (2). Asset.acquisition.included.the.assumption.of.a.decommissioning.liability.of.$33.million. Oil.Sands.capital.investment.increased.primarily.due.to.higher.spending. at.Foster.Creek.on.module.assembly.and.facility.construction.for. phase.F,.piling.work,.steel.fabrication,.module.assembly.and.major. equipment.procurement.for.phase.G.and.design.engineering.for.phase. H..In.addition,.Foster.Creek.also.incurred.main.facility.and.infrastructure. spending..At.Christina.Lake,.the.increase.in.capital.investment.included. drilling.of.SAGD.well.pairs.related.to.facility.ramp-up,.phase.E.facility. construction,.as.well.as.phase.F.site.preparation,.engineering.and.major. equipment.fabrication..Pelican.Lake.capital.investment.included.infill. drilling.for.expansion.of.the.polymer.flood,.facility.expansion,.pipeline. construction.and.maintenance.capital..Capital.investment.in.2012. included.the.drilling.of.473.gross.stratigraphic.test.wells,.down.from.the. 40 CENOVUS ENERGY 2012 ANNUAL RE PO RT / MANAG EM ENT ’S DISCUSSIO N AN D A NALYSIS 480.gross.wells.drilled.during.2011..The.results.of.these.stratigraphic.test. wells.will.be.used.to.support.the.expansion.and.development.of.our. Oil.Sands.projects. Conventional.capital.investment.in.2012.was.centered.on.the. development.of.our.crude.oil.properties.including.drilling,.completion. and.major.facilities.work.in.Saskatchewan.as.well.as.drilling.completion. and.tie-in.in.Alberta.focused.on.tight.oil.opportunities.. Our.capital.investment.in.the.Refining.and.Marketing.segment. declined.significantly.with.the.completion.of.the.CORE.project.in.the. fourth.quarter.of.2011..Capital.expenditures.in.2012.were.focused.on. maintenance.and.projects.improving.refinery.reliability..Our.2012.capital. investment.was.reduced.by.Illinois.state.tax.credits.of.$14.million.related. to.capital.expenditures.in.prior.periods.at.the.Wood.River.Refinery. Included.in.our.capital.investment.is.spending.on.technology. development..Our.teams.look.for.ways.to.either.improve.existing. technology.or.pursue.new.technology.in.an.effort.to.enhance.the. recovery.techniques.we.use.to.access.crude.oil.and.natural.gas... One.of.our.ongoing.objectives.is.to.advance.technologies.that. increase.production.while.minimizing.the.use.of.water,.natural.gas,. electricity.and.land..This.philosophy.is.evidenced.through.the.use.of. our.Wedge.WellTM.technology.at.Foster.Creek.and.Christina.Lake,.the. use.of.enhanced.start-up.techniques.at.Christina.Lake.phase.C.and. the.development.of.our.SkyStratTM.drilling.rig.used.for.the.drilling.of. stratigraphic.wells.in.remote.areas. Capital.investment.in.our.Corporate.and.Eliminations.segment.was.for. information.technology.and.tenant.improvements.to.new.office.space. Further.information.regarding.our.capital.investment.can.be.found.in. the.Reportable.Segments.section.of.this.MD&A. Acquisitions and Divestitures The.acquisitions.were.primarily.for.oil.sands.properties.adjacent.to. our.Telephone.Lake.and.Narrows.Lake.properties.as.well.as.producing. conventional.crude.oil.properties.in.Alberta.and.Saskatchewan.located. adjacent.to.existing.production..Divestitures.in.2012.were.mainly.related. to.the.sale.of.our.Boyer.natural.gas.property,.located.in.northern. Alberta,.in.the.first.quarter. CAPITAL INVESTMENT DECISIONS Our.disciplined.approach.to.capital.allocation.includes.prioritizing.our.uses.of.cash.flow.in.the.following.manner: •. .First,.to.committed.capital,.which.is.the.capital.spending.required.for.continued.progress.on.approved.expansions.at.our.multi-phase.projects,.and. capital.for.our.existing.business.operations; •. .Second,.to.paying.a.meaningful.dividend.as.part.of.providing.strong.total.shareholder.return;.and. •. .Third,.for.growth.capital,.which.is.the.capital.spending.for.projects.beyond.our.committed.capital.projects. This.capital.allocation.process.includes.evaluating.all.opportunities.using.specific.rigorous.criteria.as.well.as.achieving.our.objectives.of.maintaining.a. prudent.and.flexible.capital.structure.and.strong.balance.sheet.metrics,.which.allow.us.to.be.financially.resilient.in.times.of.lower.cash.flow. ($ mil lions). Cash.Flow. Capital.Investment.(Committed.and.Growth). Free.Cash.Flow.(1). Dividends.Paid. . . . (1). Free.Cash.Flow.is.a.non-GAAP.measure.defined.as.cash.flow.less.capital.investment. Over.the.next.decade,.we.expect.to.increase.our.net.crude.oil. production.to.approximately.500,000.barrels.per.day..In.order.to.meet. these.project.targets,.we.anticipate.capital.expenditures.to.average. between.$3.0.and.$3.5.billion.a.year..While.internally.generated.cash. flow.from.our.crude.oil,.natural.gas.and.refining.operations.is.expected. to.fund.a.significant.portion.of.our.cash.requirements,.a.portion.may.be. required.to.be.funded.through.financing.activities.and.management.of. RE P ORTAB LE SE GMENTS 2012. 3,643. 3,368. 275. 665. (390). 2011. 3,276. 2,723. 553. 603. (50). 2010 2,412 2,115 297 601 .(304) our.asset.portfolio..In.August.2012,.we.completed.a.public.debt.offering. for.the.principal.amount.of.US$1.25.billion..As.at.December.31,.2012,.we. have.cash.and.cash.equivalents.of.approximately.$1.2.billion.to.fund. future.capital.investment..Refer.to.the.Liquidity.and.Capital.Resources. section.of.this.MD&A.for.further.discussion.of.our.financial.metrics.. Our.reportable.segments.are.as.follows: Oil Sands,.includes.the.development.and.production.of.Cenovus’s. bitumen.assets.at.Foster.Creek,.Christina.Lake.and.Narrows.Lake.as. well.as.heavy.oil.assets.at.Pelican.Lake..This.segment.also.includes. the.Athabasca.natural.gas.assets.and.projects.in.the.early.stages.of. development.such.as.Grand.Rapids.and.Telephone.Lake..Certain.of. the.Company’s.operated.oil.sands.properties,.notably.Foster.Creek,. Christina.Lake.and.Narrows.Lake,.are.jointly.owned.with.ConocoPhillips,. an.unrelated.U.S..public.company. CEN OV US EN ERGY 2012 AN NUAL R EPORT / MAN AGE MEN T ’S DISC USSIO N A ND ANALYSI S 41 Conventional,.which.includes.the.development.and.production. of.conventional.crude.oil,.NGLs.and.natural.gas.in.Alberta.and. Saskatchewan,.including.the.carbon.dioxide.enhanced.oil.recovery. project.at.Weyburn.and.emerging.tight.oil.opportunities.. Refining and Marketing,.which.is.focused.on.the.refining.of.crude. oil.products.into.petroleum.and.chemical.products.at.two.refineries. located.in.the.U.S..The.refineries.are.jointly.owned.with.and.operated. by.Phillips.66..This.segment.also.markets.Cenovus’s.crude.oil.and.natural. gas,.as.well.as.third-party.purchases.and.sales.of.product.that.provide. operational.flexibility.for.transportation.commitments,.product.type,. delivery.points.and.customer.diversification. Corporate and Eliminations,.which.primarily.includes.unrealized.gains. and.losses.recorded.on.derivative.financial.instruments,.gains.and.losses. on.divestiture.of.assets,.as.well.as.other.Cenovus-wide.costs.for.general. and.administrative.and.financing.activities..As.financial.instruments. are.settled,.the.realized.gains.and.losses.are.recorded.in.the.operating. segment.to.which.the.derivative.instrument.relates..Eliminations.relate. to.sales.and.operating.revenues.and.purchased.product.between. segments.recorded.at.transfer.prices.based.on.current.market.prices.and. to.unrealized.intersegment.profits.in.inventory. REVENUE BY REPORTABLE SEGMENT ($ mil lions). Oil.Sands. Conventional. Refining.and.Marketing. Corporate.and.Eliminations. . . . 2012. 3,873. 1,896. 11,356. (283). 16,842. 2011. 3,007. 2,123. 10,625. (59). 15,696. 2010 2,423 2,114 8,228 (124) 12,641 O iL SANDS In.northeast.Alberta,.we.are.a.50.percent.partner.in.the.Foster.Creek,. Christina.Lake.and.Narrows.Lake.oil.sands.projects.and.we.also.produce. heavy.oil.from.our.wholly.owned.Pelican.Lake.operations..We.have. several.new.resource.plays.in.the.early.stages.of.assessment,.including. Grand.Rapids.and.Telephone.Lake..The.Oil.Sands.segment.also.includes. the.Athabasca.natural.gas.property.from.which.a.portion.of.the.natural. gas.production.is.used.as.fuel.at.the.adjacent.Foster.Creek.operations.. •. •. .Foster.Creek.demonstrating.excellent.operating.performance.in.2012,. exceeding.nameplate.capacity.of.120,000.gross.barrels.per.day.for.. six.months.of.the.year; .Expansion.work.at.phases.F,.G.and.H.at.Foster.Creek.is.progressing. with.added.production.capacity.from.phase.F.expected.in.the.. third.quarter.of.2014;.and Significant.factors.that.impacted.our.Oil.Sands.segment.in.2012.include: •. .Early.completion.of.phase.D.at.Christina.Lake.with.production. starting.up.in.the.third.quarter.of.2012; OIL SANDS – CRUDE OIL Financial Results ( $ mi l li o n s ). Gross Sales. . Less:.Royalties. Revenues. Expenses. . Transportation.and.Blending. . Operating. . Operating Cash Flow. . Capital.Investment. Operating Cash Flow in Excess (Deficient) of Related Capital Investment. (Gains).Losses.on.Risk.Management. •. .Receiving.regulatory.approval.for.Narrows.Lake.phases.A,.B.and.C,. and.partner.approval.for.phase.A. 2012. 4,037. 215. 3,822. . 1,651. 548. (62). 1,685. 2,203. (518). 2011. 3,217. 282. 2,935. . 1,229. 409. 87. 1,210. 1,401. (191). . 2010 2,610 276 2,334 934 339 14 1,047 850 197 Capital.expenditures.in.excess.of.operating.cash.flow.for.the.Oil.Sands.segment.are.funded.through.operating.cash.flow.generated.by.our. conventional.and.refining.operations. 42 CENOVUS ENERGY 2012 ANNUAL RE PO RT / MANAG EM ENT ’S DISCUSSIO N AN D A NALYSIS Revenues PRiCiNG In.2012,.our.average.crude.oil.sales.price.was.$60.84.per.barrel,.an.. 11.percent.decrease.from.2011,.generally.consistent.with.the.decrease.in. the.WCS.benchmark.price.. In.2012,.with.the.introduction.of.a.new.crude.stream.to.the.market,. CDB,.approximately.74.percent.(2011.–.12.percent).of.our.Christina.Lake. production.was.sold.as.CDB.which.sells.at.a.discount.to.WCS..As.the. year.progressed,.the.discount.from.WCS.decreased.as.CDB.became. more.widely.accepted.as.a.crude.stream..The.remaining.Christina.Lake. production.is.being.sold.as.part.of.the.WCS.stream.and.is.subject.to.a. quality.equalization.charge.. PRODUCTiON ) s n o i l l i m $ ( 4,500 4,0 00 3,500 3,0 00 2 ,500 2 ,00 0 1,500 1,0 00 500 0 413 3,822 701 67 2,935 (294) Year Ended December 31, 2011 Price(1) Volume Royalties Condensate(1) Year Ended December 31, 2012 INCRE ASE DECRE ASE In.2012,.the.substantial.increase.in.production.at.Christina.Lake.resulted. from.the.start-up.of.phase.C.in.the.third.quarter.of.2011.and.phase.D. coming.on.production.in.late.July.2012,.three.months.ahead.of.schedule.. Foster.Creek.production.increased.due.to.improved.well.performance. and.plant.optimization..In.2012,.both.Christina.Lake.and.Foster.Creek. achieved.new.single.day.production.highs.of.93,936.and.130,580.gross. barrels.per.day,.respectively..Pelican.Lake.production.rose.steadily. (1). .Revenues.include.the.value.of.condensate.sold.as.heavy.oil.blend..Condensate.costs.are. recorded.in.transportation.and.blending.expense..The.crude.oil.price.excludes.the.impact.of. condensate.purchases. with.production.averaging.10.percent.higher.than.2011..The.increases.at. Pelican.Lake.resulted.from.infill.wells.being.brought.on.production.in. 2012..In.addition,.2011.production.was.curtailed.due.to.a.scheduled.plant. turnaround.and.wild.fires. . . . Cr u d e O i l ( b arrel s p er d ay). Foster.Creek. Christina.Lake. . . Pelican.Lake. . . . . . . . . 2012 57,833 31,903 89,736 22,552 112,288 2012. vs. 2011 5%. 173%. 35%. 10%. 29%. . 2011. 54,868. 11,665. 66,533. 20,424. 86,957. 2011. vs..2010. 7%. 48%. 13%. -11%. 6%. . 2010 51,147 7,898 59,045 22,966 82,011 . . . . . . . ROYALTiES Royalty.calculations.for.our.Oil.Sands.projects.differ.between.properties. and.are.based.on.government.prescribed.pre.and.post-payout.royalty. rates.which.are.determined.by.the.Canadian.dollar.equivalent.WTI. benchmark.price..Royalties.at.Christina.Lake.are.based.on.a.pre-payout,. monthly.calculation.using.the.pre-payout.royalty.rate.applied.to.the.net. revenue.from.the.project,.which.is.impacted.by.volumes.and.realized. prices..Foster.Creek.and.Pelican.Lake.royalties.are.based.on.a.post-payout,. annualized.calculation.using.the.post-payout.royalty.rate.applied.to.a.net. profit.from.the.project.which.is.impacted.by.volumes,.realized.prices.as. well.as.allowed.operating.and.capital.costs. Royalties.decreased.$67.million.during.2012,.primarily.due.to.increased. capital.investment.at.Foster.Creek.and.Pelican.Lake,.partially.offset.by. increased.production.at.all.three.Oil.Sands.assets.and.a.$65.million. decrease.in.2011.royalties.upon.receiving.approval.for.the.inclusion.of. Foster.Creek.expansion.phases.F,.G.and.H.capital.investment.as.part.of.our. Foster.Creek.royalty.calculation..The.effective.royalty.rates.for.2012.were. 11.8.percent.at.Foster.Creek.(2011.–.16.8.percent),.6.2.percent.at.Christina. Lake.(2011.–.5.2.percent).and.5.0.percent.at.Pelican.Lake.(2011.–.11.5.percent). Expenses TRANSPORTATiON AND BLENDiNG The.heavy.oil.and.bitumen.produced.by.Cenovus.requires.the.blending. of.condensate.to.reduce.its.viscosity.in.order.to.transport.the.product. to.market..Transportation.and.blending.costs.rose.$422.million.or. 34.percent.in.2012..The.majority.of.the.cost.increase,.$413.million,.stems. from.additional.condensate.volumes.required.to.blend.as.a.result.of. higher.production.at.Christina.Lake.and.Foster.Creek..This.was.partially. offset.by.lower.transportation.charges.on.the.Trans.Mountain.pipeline. system.under.our.long-term.commitment.for.firm.service,.which. commenced.in.February.2012. OPERATiNG Our.operating.costs.for.2012.were.primarily.for.workforce,.workover. activities,.repairs.and.maintenance,.chemical.usage.and.fuel.costs.at. Foster.Creek.and.Christina.Lake..In.total,.operating.costs.increased. $139.million.in.2012.mainly.due.to.higher.staffing.levels,.fuel. consumption,.chemicals.and.fluid.and.waste.handling.and.trucking.costs. associated.with.the.start-up.of.Christina.Lake.phases.C.and.D.which. increased.gross.production.capacity.by.80,000.barrels.per.day..Overall,. on.a.per.barrel.basis,.operating.costs.were.$13.33.(2011.–.$13.27)..On.a. per.barrel.basis,.Christina.Lake.operating.costs.decreased.36.percent.to. $12.95.per.barrel.due.to.the.increase.in.production..Foster.Creek.operating. CEN OV US EN ERGY 2012 ANNUAL RE PORT / MA NAGEM ENT ’S DISCU SSION AND AN ALYSIS 4 3 costs.increased.$0.65.per.barrel.to.$11.99.per.barrel.due.to.increased. workforce.costs,.higher.waste.handling,.trucking.and.workover.activity.. Operating.costs.increased.$2.22.per.barrel.at.Pelican.Lake.primarily.as.the. result.of.additional.workover.activities,.workforce.and.increased.polymer. consumption.as.a.result.of.the.expansion.of.the.polymer.flood. RiSk MANAGEMENT Risk.management.activities.resulted.in.realized.gains.of.$62.million. (2011.–.losses.of.$87.million),.consistent.with.our.2012.contract.prices. exceeding.average.benchmark.prices.in.2012. OIL SANDS – NATURAL GAS Oil.Sands.also.includes.our.100.percent.owned.natural.gas.operation. in.Athabasca.and.other.minor.natural.gas.properties..Our.natural.gas. production.decreased.to.33.MMcf.per.day.in.2012.(2011.–.37.MMcf.per.day). as.the.result.of.anticipated.natural.declines,.partially.offset.by.a.reduction. in.the.use.of.our.natural.gas.production.at.our.Foster.Creek.operation.due. to.deliverability.issues.in.the.first.quarter.of.2012.and.reduced.volumes.in. the.fourth.quarter.as.a.result.of.lower.natural.gas.prices. Reduced.natural.gas.production.in.combination.with.lower.prices.resulted. in.operating.cash.flow.declining.to.$31.million.for.2012.(2011.–.$52.million). . OIL SANDS – CAPITAL INVESTMENT ($ mil lions). Foster.Creek. Christina.Lake. . . Pelican.Lake. Narrows.Lake. Telephone.Lake.. Grand.Rapids. Other.(1). Capital Investment (2). (1). Includes.new.resource.plays.and.Athabasca.natural.gas. (2). Includes.expenditures.on.PP&E.and.E&E.assets. 2012. 735. 579. 1,314. 518. 44. 138. 65. 132. 2,211. 2011. 429. 472. 901. 317. 19. 61. 31. 86. 1,415. 2010 277 346 623 104 10 27 59 34 857 Oil.Sands.capital.investment.in.2012.has.been.primarily.focused. on.the.development.of.the.expansion.phases.at.Foster.Creek.and. Christina.Lake,.facility.expansion.and.infill.drilling.activities.related.to. our.Pelican.Lake.polymer.flood,.drilling.of.stratigraphic.test.wells.to. support.the.development.of.our.Oil.Sands.projects.and.commencing. operation.of.our.dewatering.pilot.at.Telephone.Lake.in.the.fourth. quarter..In.addition,.capital.investment.increased.at.Narrows.Lake.as.site. preparation.commenced.for.phase.A..Construction.of.the.phase.A.plant. is.scheduled.to.start.in.the.third.quarter.of.2013.. Foster Creek Foster.Creek.capital.investment.increased.in.2012.compared.to.2011. primarily.as.a.result.of.higher.phase.F.spending.on.module.assembly.and. facility.construction,.phase.G.spending.on.piling.work,.steel.fabrication,. module.assembly.and.major.equipment.procurement.and.phase.H. design.engineering..Capital.includes.the.drilling.of.141.gross.stratigraphic. test.wells.in.2012.(2011.–.118.wells).and.higher.spending.on.the.main. facility.and.infrastructure..First.production.at.phase.F.is.expected.in.the. third.quarter.of.2014.increasing.production.capacity.by.45,000.gross. barrels.per.day. Christina Lake Christina.Lake.capital.investment.increased.in.2012.compared.to.2011. primarily.due.to.drilling.of.SAGD.well.pairs.related.to.facility.ramp-up,. phase.E.facility.construction,.phase.F.site.preparation,.engineering. and.major.equipment.fabrication.and.phase.G.design.engineering,.in. addition.to.maintenance.capital..Capital.investment.also.included.the. drilling.of.stratigraphic.test.wells.(2012.–.29.gross.wells;.2011.–.63.gross. wells)..The.increases.in.capital.investment.were.partially.offset.by.the. completion.of.phases.C.and.D.construction.in.the.second.quarters.of. 2011.and.2012,.respectively. Pelican Lake Pelican.Lake.capital.investment.in.2012.was.primarily.related.to.infill. drilling.to.progress.the.polymer.flood,.facilities.expansions,.pipeline. construction.and.maintenance.capital..Facilities.spending.focused.on. expanding.fluid.handling.capacity.at.Pelican.Lake.through.additions.and. upgrades.to.our.crude.oil.treating.units.and.emulsion.pipelines.. Telephone Lake At.Telephone.Lake.capital.investment.was.primarily.related.to.drilling,. infrastructure,.fuel.storage.and.facility.construction.related.to.the. dewatering.pilot.which.started.up.in.the.fourth.quarter.of.2012.. 44 CENOVUS ENERGY 2012 ANNUAL RE PO RT / MANAG EM ENT ’S DISCUSSIO N AN D A NALYSIS . Gross Production Wells Drilled (1) . . Foster.Creek. Christina.Lake. . . Pelican.Lake. Grand.Rapids. Other. . . . . 2012. 28. 32. 60. 76. 1. –. 137. 2011. 21. 19. 40. 31. –. 3. 74. 2010 37 32 69 12 1 – 82 (1). Includes.wells.drilled.using.our.Wedge.WellTM.technology. FUTURE CAPITAL INVESTMENT Expansion.work.at.phases.F,.G.and.H.at.Foster.Creek.is.proceeding.as. planned.with.additional.production.capacity.from.phase.F.expected. in.the.third.quarter.of.2014..Progress.is.also.being.made.for.phase.G.on. module.assembly.and.facility.construction.and.on.phase.H.engineering. and.procurement.is.continuing.with.piling.work.and.module.assembly,. scheduled.to.start.in.2013..We.anticipate.submitting.an.application.to. regulators.in.2013.for.an.additional.expansion,.phase.J.. Production.from.phase.E.at.Christina.Lake.is.anticipated.in.the.third. quarter.of.2013,.a.few.months.earlier.than.originally.planned..In.the. fourth.quarter.of.2012,.we.received.regulatory.approval.to.add. cogeneration.facilities.at.Christina.Lake.and.to.increase.expected.total. gross.production.capacity.by.10,000.barrels.per.day.at.each.of.phases.F. and.G..Expansion.work.on.these.phases.is.continuing.in.2013.with. module.assembly,.facility.construction.and.procurement.for.phase.F.and. detailed.engineering.for.phase.G. In.2012,.Narrows.Lake.received.regulatory.approval.for.phases.A,.B.and. C,.and.partner.approval.for.phase.A..Site.preparation.is.underway,.with. construction.of.the.phase.A.plant.scheduled.to.start.in.the.third.quarter. of.2013..The.first.phase.of.the.project.is.anticipated.to.have.production. capacity.of.45,000.gross.barrels.per.day,.with.first.oil.expected.in. 2017..Capital.investment.in.the.project.is.forecasted.to.be.between. $140.million.and.$160.million.in.2013.. Additional.capital.of.approximately.$270.to.$300.million.is.expected.to. be.invested.in.the.emerging.SAGD.projects.including.Grand.Rapids.and. Telephone.Lake.in.2013..We.anticipate.regulatory.approval.for.Grand. GROSS STRATiGRAPhiC TEST WELLS DRiLLED Rapids.by.the.end.of.2013..Steam.injection.started.on.the.second.pilot. well.pair.during.the.third.quarter.of.2012,.with.first.production.expected. early.in.2013..At.Telephone.Lake,.we.are.advancing.the.regulatory. application.for.the.project.and.continuing.with.operation.of.the. dewatering.pilot..We.anticipate.receiving.regulatory.approval.in.2014. Stratigraphic Test Wells Consistent.with.our.strategy.to.unlock.the.value.of.our.resource. base,.we.completed.another.large.stratigraphic.test.well.program.in. the.first.quarter.of.2012..The.stratigraphic.test.wells.drilled.at.Foster. Creek,.Christina.Lake.and.Narrows.Lake.are.to.support.the.expansion. phases,.while.the.other.stratigraphic.test.wells.have.been.drilled.to. continue.to.gather.data.on.the.quality.of.our.projects.and.to.support. regulatory.applications.for.project.approval..To.minimize.the.impact.on. local.infrastructure,.the.drilling.of.stratigraphic.test.wells.is.primarily. completed.during.the.winter.months,.which.typically.occurs.between. the.end.of.the.fourth.quarter.and.the.end.of.the.first.quarter..In.2012. we.developed.the.SkyStratTM.drilling.rig,.which.uses.a.helicopter.and.an. experimental.lightweight.drilling.rig.to.allow.stratigraphic.well.drilling. to.be.completed.in.remote.exploratory.drilling.locations.year-round. Our.2012.stratigraphic.test.well.program.provided.the.primary.basis.for. the.1.4.billion.barrel.increase.to.our.economic.bitumen.best.estimate. contingent.resources.as.results.from.the.program.caused.prospective. resources.to.be.reclassified.as.contingent.resources..Additional. information.about.our.resources,.including.definitions.and.year.end. results,.is.included.in.the.Oil.and.Gas.Reserves.and.Resources.section.of. this.MD&A. . . . . Foster.Creek. Christina.Lake. . . Pelican.Lake. Narrows.Lake. Grand.Rapids. Telephone.Lake. Borealis. Other. . . . 2012. 141. 29. 170. 5. 42. 62. 29. 59. 106. 473. 2011. 118. 63. 181. 57. 47. 59. 40. 44. 52. 480. 2010 82 24 106 – 39 71 26 – 17 259 CEN OV US EN ERGY 2012 ANNUAL RE PORT / MA NAGEM ENT ’S DISCU SSION AND AN ALYSIS 4 5 CO NVENT iONAL Our.Conventional.operations.include.the.development.and.production. of.crude.oil.and.NGLs.and.natural.gas.in.Alberta.and.Saskatchewan.. The.Conventional.properties.in.Alberta.comprise.predictable.cash.flow. producing.crude.oil.and.natural.gas.assets.and.developing.tight.oil. assets..In.Saskatchewan,.our.Conventional.properties.are.predominantly. crude.oil.producing.properties,.most.notably.the.carbon.dioxide. enhanced.oil.recovery.project.in.Weyburn..The.established.assets.in.. this.segment.are.strategically.important.for.their.long.life.reserves,. stable.operations.and.diversity.of.crude.oil.products.produced..The. reliability.of.these.properties.to.deliver.consistent.production.and. operating.cash.flow.is.important.to.the.funding.of.our.future.crude. oil.growth..We.plan.to.continue.to.assess.the.potential.of.new.crude. oil.projects.within.our.existing.properties,.as.well.as.new.regions,. especially.tight.oil.opportunities. Significant.factors.that.impacted.our.Conventional.segment.in.2012.include:. •. •. •. •. .Alberta.crude.oil.and.NGLs.production.averaging.30,357.barrels.per. day,.increasing.10.percent.primarily.due.to.successful.tight.oil.drilling. programs.and.fewer.weather.and.access.issues.than.in.2011; .Completing.the.construction.and.commissioning.of.batteries.in.both. the.Bakken.and.Lower.Shaunavon.areas,.including.all.supporting. infrastructure,.to.support.production.in.the.respective.areas; .Bakken.and.Lower.Shaunavon.crude.oil.and.NGLs.production.averaging. 6,480.barrels.per.day,.a.79.percent.increase.due.to.ongoing.drilling;.and .Generating.operating.cash.flow.in.excess.of.capital.investment.from. our.Conventional.natural.gas.assets.of.$439.million,.a.decrease.of. 30.percent.from.2011..In.the.low.price.environment,.we.have.chosen. to.restrict.natural.gas.capital.spending.for.the.past.several.years. CONVENTIONAL – CRUDE OIL AND NGLS Financial Results ($ mil lions). Gross Sales. . Less:.Royalties. Revenues. Expenses. . Transportation.and.Blending. . Operating. . Production.and.Mineral.Taxes. . Operating Cash Flow. . Capital.Investment. Operating Cash Flow in Excess of Related Capital Investment. (Gains).Losses.on.Risk.Management. Revenues PRiCiNG Our.average.crude.oil.and.NGLs.sales.price.in.2012.decreased. six.percent.to.$76.25.per.barrel,.consistent.with.the.change.in.crude.. oil.benchmark.prices.and.associated.differentials. PRODUCTiON Our.crude.oil.and.NGLs.production.increased.12.percent.in.2012.as.a. result.of.successful.drilling.completion.and.tie-in.programs..Production. in.Alberta.increased.10.percent.to.an.average.of.30,357.barrels.per.day. and.production.in.Saskatchewan.increased.15.percent.to.an.average.of. 22,758.barrels.per.day.. ) s n o i l l i m $ ( 1,6 00 1,4 00 1,200 1,0 00 800 60 0 40 0 200 0 2012. 1,559. 166. 1,393. . 126. 294. 34. (23). 962. 805. 157. 2011. 1,492. 193. 1,299. . 104. 244. 27. 43. 881. 686. 195. 2010 1,229 153 1,076 . 86 199 28 5 758 363 395 163 27 4 1,393 1,299 (100) Year Ended December 31, 2011 Price(1) Volume Royalties Condensate(1) Year Ended December 31, 2012 INCRE ASE DECRE ASE (1). .Revenues.include.the.value.of.condensate.sold.as.heavy.oil.blend..Condensate.costs.are. recorded.in.transportation.and.blending.expense..The.crude.oil.and.NGLs.price.excludes.the. impact.of.condensate.purchases. 46 CENOVUS ENERGY 2012 ANNUAL RE PO RT / MANAG EM ENT ’S DISCUSSIO N AN D A NALYSIS PRODUCTiON (CONTiNUED) . . . (barrels per d ay) Heavy Oil. . Alberta. Light and Medium Oil. . Alberta. . Saskatchewan. NGLs . . . . . . . . . . . 2012 . 16,015 . 13,378 22,693 1,029 53,115 2012. vs. 2011 . 2%. . 24%. 15%. -7%. 12%. . 2011. . 15,657. . 10,763. 19,761. 1,101. 47,282. 2011. vs..2010. . -6%. . -1%. 7%. -6%. 0%. 2010 . . 16,659 10,854 18,492 1,171 47,176 ROYALTiES OPERATiNG Royalties.decreased.$27.million.largely.due.to.lower.royalties.in. Weyburn.primarily.as.a.result.of.lower.realized.crude.oil.prices..The. effective.crude.oil.royalty.rate.in.2012.for.the.Conventional.segment. was.11.8.percent.(2011.–.14.2.percent)..Most.of.our.crude.oil.and.NGLs. production.in.the.Conventional.segment.is.located.on.fee.land.which. results.in.mineral.tax.recorded.within.production.and.mineral.taxes. Expenses TRANSPORTATiON AND BLENDiNG Transportation.and.blending.costs.increased.$22.million.in.2012... The.overall.cost.of.condensate.used.in.blending.increased.$4.million.as. slightly.lower.prices.only.partially.offset.increased.usage.in.our.heavy. oil.operations..Transportation.costs.increased.$18.million.due.to.higher. produced.volumes,.an.increase.of.trucking.expenses.attributable.to. the.clean.oil.sold.out.of.Shaunavon.prior.to.the.construction.of.the. pipeline.connected.battery,.a.higher.proportion.of.our.volumes.being. subject.to.spot.pipeline.tolls.and.increased.costs.associated.with. accessing.new.markets,.such.as.transporting.our.growing.light.and. medium.crude.oil.production.by.rail. Operating.costs.are.predominantly.comprised.of.workover.activities,. electricity,.repairs.and.maintenance.and.workforce..Operating.costs. increased.$50.million.in.2012.primarily.due.to.a.combination.of.fluid. waste.handling.and.trucking.costs,.additional.workover.activities,.. repairs.and.maintenance.in.connection.with.single.well.batteries.and. higher.workforce.costs..These.increases.reflect.the.shift.in.strategic. focus.from.natural.gas.to.crude.oil.which.has.resulted.in.higher.crude. oil.production. RiSk MANAGEMENT Risk.management.activities.in.2012.resulted.in.realized.gains.of.. $23.million.(2011.–.loss.of.$43.million),.consistent.with.our.contract. prices.exceeding.the.average.benchmark.prices. OPERATiNG CASh FLOW iN ExCESS OF CAPiTAL iNVESTMENT Operating.cash.flow.from.crude.oil.and.NGLs.in.excess.of.capital. investment.decreased.by.$38.million.in.2012.as.the.$81.million.increase. in.operating.cash.flow.was.more.than.offset.by.the.$119.million.increase. in.capital.investment.which.was.focused.on.drilling,.completions.and. facilities.work.in.Alberta.and.Saskatchewan. CONVENTIONAL – NATURAL GAS Financial Results ($ mil lions). Gross Sales. . Less:.Royalties. Revenues. Expenses. . Transportation.and.Blending. . Operating. . Production.and.Mineral.Taxes. . Gains.on.Risk.Management. Operating Cash Flow. . Capital.Investment. Operating Cash Flow in Excess of Related Capital Investment. 2012. 496. 6. 490. . 19. 215. 3.9 (229). 482. 43. 439. 2011. 825. 12. 813. . 34. 240. .6 (195). 725. 102. 623. 2010 1,042 17 1,025 . 44 231 (263) 1,007 163 844 CEN OV US EN ERGY 2012 AN NUAL R EPORT / MAN AGE MEN T ’S DISC USSIO N A ND ANALYSI S 47 Revenues PRiCiNG Our.average.natural.gas.sales.price.in.2012.decreased.to.$2.42.per.Mcf. compared.to.$3.65.per.Mcf.in.2011,.consistent.with.the.decline.in.the. benchmark.AECO.price. PRODUCTiON Our.Conventional.natural.gas.production.decreased.nine.percent.to. 561.MMcf.per.day,.primarily.due.to.expected.natural.declines..Further. production.decreases.stemmed.from.the.divestiture.of.a.non-core. property.early.in.the.first.quarter.of.2012,.which.reduced.production.by.. 21.MMcf.per.day..Excluding.the.impact.of.the.Boyer.divestiture,.our. natural.gas.production.would.have.been.six.percent.lower.than.in.2011.. . 813 ) s n o i l l i m $ ( 900 800 700 600 50 0 40 0 300 200 10 0 0 Year Ended December 31, 2011 Price Volume Royalties Year Ended December 31, 2012 IN CR E ASE DECRE ASE CONVENTIONAL – CAPITAL INVESTMENT (1) ($ mil lions). Crude.Oil.and.NGLs. Natural.Gas. . . . (1). Includes.expenditures.on.PP&E.and.E&E.assets. ROYALTiES Royalties.decreased.$6.million.in.2012.due.to.lower.volumes.in. combination.with.lower.prices..The.average.royalty.rate.in.2012.was. 1.3.percent.(2011.–.1.5.percent)..Most.of.our.natural.gas.production.in.. the.Conventional.segment.is.located.on.fee.land.where.we.hold.. mineral.rights.which.results.in.mineral.tax.recorded.within.production. and.mineral.taxes. Expenses TRANSPORTATiON Transportation.costs.decreased.$15.million.due.to.lower.. production.volumes. OPERATiNG Our.operating.expenses.are.composed.largely.of.property.taxes.and. lease.costs,.repairs.and.maintenance.and.workforce..Operating.expenses. decreased.$25.million.in.2012..The.reduction.in.natural.gas.activity.and. the.disposition.of.the.Boyer.property.early.in.2012.resulted.in.lower. repairs.and.maintenance.and.workover.activity.costs.. Risk.management.activities.resulted.in.realized.gains.in.2012.of.. $229.million.(2011.–.gains.of.$195.million).consistent.with.our.2012. contract.prices.exceeding.the.2012.average.benchmark.price. OPERATiNG CASh FLOW iN ExCESS OF CAPiTAL iNVESTMENT Operating.cash.flow.from.natural.gas.in.excess.of.capital.investment. decreased.$184.million.primarily.due.to.lower.operating.cash.flow. partially.offset.by.a.$59.million.reduction.in.capital.investment. 2012. 805. 43. 848. 2011. 686. 102. 788. 2010 363 163 526 (254) 6 490 (75) RiSk MANAGEMENT Capital.investments.in.our.Conventional.segment.focused.on.crude.oil. opportunities..Capital.was.invested.in.our.tight.oil.drilling.programs.in. Saskatchewan.and.southeast.Alberta..In.addition,.drilling.and.facilities. work.continued.in.Weyburn..Spending.on.natural.gas.activities.was. reduced.in.response.to.low.natural.gas.prices. Crude.oil.and.NGLs.wells.drilled.reflect.the.continued.development. of.our.Conventional.properties..Well.recompletions.are.mostly.related. to.low-risk.Alberta.coal.bed.methane.development.that.continues.to. deliver.acceptable.rates.of.return. Conventional Drilling Activity (net wel ls, unless otherwise sta ted). Crude.Oil.and.NGLs.. Natural.Gas. Recompletions. Gross.Stratigraphic.Test.Wells. 2012. 276. –. 977. 14. 2011. 325. 65. 1,122. 11. 2010 .180 495 1,194 9 Subsequent.to.December.31,.2012,.Management.decided.to.divest.its. Lower.Shaunavon.and.certain.of.its.Bakken.properties.in.Saskatchewan.. The.public.sales.process.is.expected.to.be.launched.in.late.February. 2013..The.land.base.associated.with.these.properties.is.relatively.small. and.does.not.offer.sufficient.scalability.to.be.material.to.Cenovus’s. overall.asset.portfolio..Operating.results.from.these.properties.are. included.in.the.Conventional.segment. 48 CENOVUS ENERGY 2012 ANNUAL RE PO RT / MANAG EM ENT ’S DISCUSSIO N AN D A NALYSIS REF iN iNG AND MAR kET i NG We.are.a.50.percent.partner.in.the.Wood.River.and.Borger.refineries. which.are.located.in.the.U.S..Our.Refining.and.Marketing.segment. allows.us.to.capture.the.value.from.crude.oil.production.through.to. refined.products.such.as.diesel,.gasoline.and.jet.fuel..Our.integrated. strategy.provides.a.natural.economic.hedge.against.reduced.crude.. oil.prices.by.providing.lower.feedstock.prices.to.our.refineries... The.Refining.and.Marketing.segment’s.results.are.affected.by.changes.. in.the.U.S./Canadian.dollar.exchange.rate. Significant.factors.related.to.our.Refining.and.Marketing.segment.in. 2012.include: •. .Increased.total.heavy.crude.oil.processing.capacity.to.between. 235,000.to.255,000.barrels.per.day.(dependent.on.the.quality. of.heavy.crude.oil.that.is.economically.available).as.a.result.of.a. full.year.of.operations.from.the.CORE.project.at.the.Wood.River. Refinery,.enhancing.our.ability.to.further.integrate.our.growing. bitumen.production; •. .Our.refineries.processing.412,000.barrels.per.day.of.crude.oil,. including.198,000.barrels.per.day.of.heavy.crude.oil,.resulting.in. 433,000.barrels.per.day.of.refined.product.output;.and •. .Strong.refining.margins,.resulting.from.higher.crack.spreads.and. discounted.crude.oil.feedstock.costs. . . REFINERY OPERATIONS (1) . Crude Oil Capacity (M bb l s /d). Crude Oil Runs (M bb l s /d ). . Heavy.Oil. . Light/Medium. Crude Utilization (p ercen t). Refined Products (M bb l s /d). . Gasoline. . Distillate. . Other. (1). Represents.100.percent.of.the.Wood.River.and.Borger.refinery.operations. Refining.operations.in.2012.reflect.the.start-up.of.the.CORE.project. in.the.fourth.quarter.of.2011,.which.has.increased.heavy.crude.oil.runs. and.refined.product.output..On.a.100.percent.basis,.our.refineries. had.a.capacity.of.approximately.452,000.barrels.per.day.of.crude.oil. and.45,000.barrels.per.day.of.NGLs,.including.processing.capability. to.refine.up.to.235,000.to.255,000.barrels.per.day.of.blended.heavy. crude.oil..The.ability.to.refine.heavy.crudes.demonstrates.our.ability.to. economically.integrate.our.heavy.oil.production.. Our.crude.utilization.represents.the.percentage.of.crude.oil,.heavy.and. other,.that.is.processed.in.our.refineries.relative.to.the.total.capacity.. The.amount.of.heavy.crude.oils.processed,.such.as.WCS.and.CDB,.is. dependent.on.the.quality.of.available.crude.oils.with.the.total.crude. FINANCIAL RESULTS ($ mil lions). Revenues. . Purchased.Product. Gross Margin. Expenses. . Operating. . Operating Cash Flow. . Capital.Investment. Operating Cash Flow in Excess (Deficient) of Capital Investment. (Gain).Loss.on.Risk.Management. 2012. 452. 412. 198. 214. 91. 433. 216. 138. 79. 2011. 452. 401. 126. 275. 89. 419. 207. 132. 80. 2010 452 386 104 282 86 405 204 124 77 input.slate.being.optimized.to.maximize.economic.benefit..The.. amount.of.heavy.crude.processed.increased.by.72,000.barrels.per.day,.. a.57.percent.increase. Clean.product.yield.is.the.percentage.output.of.high.value.product. from.every.barrel.of.inputs.going.into.our.refineries..Our.clean.product. yield.has.increased.as.a.result.of.the.start-up.of.the.CORE.project.which. increased.our.processing.capacity.of.blended.heavy.crude.oil..Total. refined.product.output.increased.by.three.percent.over.2011.with.the. proportion.of.gasoline,.distillate.and.other.refined.products.remaining. relatively.the.same. 2012. 11,356. 9,506. 1,850. . 587. (4). 1,267. 118. 1,149. 2011. 10,625. 9,149. 1,476. . 481. 14. 981. 393. 588. 2010 8,228 7,674 554 488 (10) 76 656 (580) CEN OV US EN ERGY 2012 AN NUAL R EPORT / MAN AGE MEN T ’S DISC USSIO N A ND ANALYSI S 49 Gross Margin The.gross.margin.for.the.Refining.and.Marketing.segment.increased. $374.million.in.2012.primarily.due.to.improved.refined.product.output. from.higher.clean.product.yield.at.Wood.River,.higher.refined.products. prices.and.lower.feedstock.costs.from.processing.more.discounted. heavy.crude.oil.as.a.result.of.a.full.year.of.operations.after.completion. of.the.CORE.project.. Operating Total.operating.costs.consist.mainly.of.labour,.maintenance,.utilities.and. supplies..Operating.costs.for.2012.increased.$106.million.due.to.higher. labour.and.maintenance.expenses,.consistent.with.higher.utilization,.as. well.as.costs.related.to.turnaround.activities.at.both.refineries.in.the. fourth.quarter..While.there.is.an.increase.in.utility.usage.at.the.Wood. River.Refinery.subsequent.to.the.CORE.project.start-up,.utilities.costs. have.declined.at.both.refineries.due.to.significantly.lower.prices.for.fuel. gas.and.electricity.. Operating Cash Flow Operating.cash.flow.from.the.Refining.and.Marketing.segment.increased. $286.million.to.$1,267.million.in.2012.as.a.result.of.improved.refinery. output,.feedstock.costs.and.crack.spreads,.partially.offset.by.higher. operating.costs.for.planned.turnarounds.. REFINING AND MARKETING – CAPITAL INVESTMENT ($ mil lions). Wood.River.Refinery. Borger.Refinery. Marketing. . . . 2012. 54. 64. –. 118. 2011. 346. 45. 2. 393. 2010 568 87 1 656 Our.capital.investment.in.the.Refining.and.Marketing.segment.declined.significantly.with.the.completion.of.the.CORE.project.in.the.fourth.quarter. of.2011..Capital.expenditures.in.2012.were.focused.on.maintenance.and.projects.improving.refinery.reliability..Our.2012.capital.investment.was. reduced.by.Illinois.state.tax.credits.of.$14.million.related.to.capital.expenditures.in.prior.periods.at.the.Wood.River.Refinery. COR PORATE AND EL iM iNAT i ONS The.Corporate.and.Eliminations.segment.includes.intersegment. eliminations.relating.to.transactions.that.have.been.recorded.at. transfer.prices.based.on.current.market.prices,.as.well.as.unrealized. intersegment.profits.in.inventory..The.gains.and.losses.on.risk. management.represent.the.unrealized.mark-to-market.gains.and.losses. related.to.derivative.financial.instruments.used.to.mitigate.fluctuations. in.commodity.prices.and.unrealized.mark-to-market.gains.and.losses. on.the.long-term.power.purchase.contract..The.unrealized.gains.on. risk.management.were.$57.million.for.the.year.ended.December.31,. 2012.(December.31,.2011.–.gains.of.$180.million)..The.Corporate.and. Eliminations.segment.also.includes.Cenovus-wide.costs.for.general.and. administrative.and.financing.activities. GENERAL AND ADMINISTRATIVE AND FINANCING COSTS ($ mil lions). General.and.Administrative. Finance.Costs. Interest.Income. Foreign.Exchange.(Gain).Loss,.net. (Gain).Loss.on.Divestiture.of.Assets. Other.(Income).Loss,.net. . . . 2012. 352. 455. (109). (20). –. (5). 673. 2011. 295. 447. (124). 26. (107). 4. 541. 2010 246 498 (144) (51) (116) (13) 420 Expenses GENERAL AND ADMiNiSTRATiVE General.and.administrative.expenses.increased.$57.million.in.2012. primarily.due.to.the.recruiting.of.new.employees.to.fill.positions. created.by.our.growth,.which.resulted.in.additional.staffing.and. office.support.costs,.including.training.and.development,.information. technology.and.office.space.. FiNANCE COSTS Finance.costs.include.interest.expense.on.our.long-term.debt,.short-term. borrowings.and.U.S..dollar.denominated.Partnership.Contribution.Payable,. as.well.as.the.unwinding.of.the.discount.on.decommissioning.liabilities.. In.2012,.finance.costs.were.$8.million.higher.than.2011.due.to.the.issuance. of.US$1.25.billion.of.senior.unsecured.notes.on.August.17,.2012,.offset. by.lower.interest.incurred.on.the.Partnership.Contribution.Payable.as. the.balance.continues.to.be.repaid..The.weighted.average.interest.rate. on.outstanding.debt,.excluding.the.U.S..dollar.denominated.Partnership. Contribution.Payable,.for.2012.was.5.3.percent.(2011.–.5.5.percent). 50 CENOVUS ENERGY 2012 ANNUAL RE PO RT / MANAG EM ENT ’S DISCUSSIO N AN D A NALYSIS iNTEREST iNCOME FOREiGN ExChANGE Interest.income.primarily.includes.interest.earned.on.our.U.S..dollar. denominated.Partnership.Contribution.Receivable.as.well.as.short- term.investments..Interest.income.in.2012.decreased.by.$15.million,. consistent.with.lower.interest.earned.on.the.Partnership.Contribution. Receivable.as.the.balance.continues.to.be.collected.. For.2012,.we.recognized.net.foreign.exchange.gains.of.$20.million.. (2011.–.losses.$26.million).which.includes.unrealized.gains.of. $70.million.(2011.–.unrealized.gains.of.$42.million).and.realized.losses. of.$50.million.(2011.–.realized.losses.$68.million)..The.majority.of. unrealized.gains.are.due.to.translation.of.our.U.S..dollar.denominated. debt.as.a.result.of.a.stronger.Canadian.dollar.at.December.31,.2012.. DD&A ($ mil lions). Oil.Sands. Conventional. Refining.and.Marketing. Corporate.and.Eliminations. . . . 2012. 482. 905. 146. 52. 1,585. 2011. 347. 778. 130. 40. 1,295. 2010 375 799 96 32 1,302 Oil.Sands.DD&A.for.2012.increased.$135.million.due.to.higher.sales. volumes.at.Foster.Creek,.Christina.Lake.and.Pelican.Lake.as.well. as.increased.DD&A.rates.due.to.higher.future.development.costs. associated.with.total.proved.reserves. During.2012,.$68.million.of.capitalized.E&E.costs,.related.primarily.to. the.Roncott.asset,.a.small.exploration.acreage.within.the.Conventional. segment,.were.deemed.not.to.be.commercially.viable.and.technically. feasible,.and.were.recognized.as.exploration.expense. DD&A.in.the.Conventional.segment.increased.$127.million.in.2012. due.to.higher.crude.oil.sales.volumes.and.increased.DD&A.rates.due. to.higher.future.development.costs.associated.with.proved.reserves,. partially.offset.by.reduced.natural.gas.sales.volumes. Refining.and.Marketing.DD&A.increased.$16.million.in.2012.as.the.capital. costs.of.the.CORE.project.are.now.subject.to.depreciation. Corporate.and.Eliminations.DD&A.includes.provisions.in.respect.of. corporate.assets,.such.as.computer.equipment,.office.furniture.and. leasehold.improvements. ExPLORATION ExPENSE Costs.incurred.after.the.legal.right.to.explore.has.been.obtained. and.before.technical.feasibility.and.commercial.viability.has.been. established.are.capitalized.as.E&E.assets..If.a.field,.project.or.area.is. determined.to.no.longer.be.technically.feasible.or.commercially.viable. and.we.decide.not.to.continue.the.E&E.activity,.the.unrecoverable.costs. are.charged.to.exploration.expense.. GOODWILL IMPAIRMENT For.the.purpose.of.impairment.testing,.goodwill,.which.arose.on.the. acquisition.of.exploration.and.production.assets,.is.allocated.to.the. CGU.to.which.it.relates..At.December.31,.2012,.Cenovus.determined. that.the.carrying.amount.of.the.Suffield.CGU,.including.the.allocated. goodwill,.exceeded.its.fair.value.less.costs.to.sell.resulting.in.an. impairment.loss.of.$393.million..The.full.amount.of.the.impairment.was. attributed.to.goodwill..This.goodwill.arose.in.2002.upon.the.formation. of.the.predecessor.corporation..The.impairment.resulted.primarily.due. to.a.decline.in.natural.gas.and.crude.oil.prices.and.increased.operating. costs..In.addition,.we.have.had.minimal.levels.of.capital.spending.for. natural.gas.such.that.production.has.exceeded.reserve.replacement.in. the.area..With.the.lower.future.cash.flows.and.decreasing.volumes,.the. carrying.amount.of.the.goodwill,.which.is.not.subject.to.depreciation,. depletion.and.amortization,.exceeded.its.fair.value. INCOME TAx ExPENSE ($ mil lions). Current.Tax.. . Canada. . U.S.. Total.Current.Tax. Deferred.Tax.. . . . 2012. . 188. 121. 309. 474. 783. 2011. . 150. 4. 154. 575. 729. 2010 . 82 – 82 141 223 CEN OV US EN ERGY 2012 ANNUAL RE PORT / MA NAGEM ENT ’S DISCU SSION AN D A NALYSI S 51 In.2012,.current.taxes.were.higher.due.to.increased.cash.flow.from. upstream.operations.taxed.at.Canadian.rates,.additional.U.S..income. tax.from.our.refining.operations.and.$68.million.of.withholding.tax.on. the.payment.of.a.U.S..dividend..We.did.not.have.U.S..federal.taxable. income.as.we.had.sufficient.deductions.for.2012..U.S..current.tax. expense.is.much.higher.than.2011.because.of.higher.state.income.tax,. where.certain.loss.deductions.are.deferred.to.future.years.for.state.tax. purposes..The.decrease.in.deferred.tax.is.due.to.lower.unrealized.risk. management.gains,.the.reversal.of.certain.taxable.timing.differences,. partially.offset.by.an.increase.in.income.from.our.refining.operations. The.following.table.reconciles.income.taxes.calculated.at.the.Canadian.statutory.rate.with.the.recorded.income.taxes: ($ mil lions, except percent am oun ts). Earnings Before Income Tax. Canadian Statutory Rate. Expected Income Tax. Effect.of.Taxes.Resulting.From:. . Foreign.Tax.Rate.Differential. . Non-deductible.Stock-based.Compensation. . Multi-jurisdictional.Financing. . . Non-taxable.Capital.Gains. . Recognition.of.Capital.Losses. . Adjustments.Arising.From.Prior.Year.Tax.Filings. . Withholding.Tax.on.Foreign.Dividends. . Goodwill.Impairment. . Other. Total Tax. Effective Tax Rate. Foreign.Exchange.Gains.(Losses).not.Included.in.Net.Earnings. 2012. 1,776. 25.2%. 448. . 146. 10. (27). 14. (7). (22). 33. 68. 99. 21. 783. 44.1%. 2011. 2,207. 26.7%. 589. . 82. 18. (50). (9). (8). 26. 31. –. –. 50. 729. 33.0%. 2010 1,304 28.2% 368 . (22) 34 (93) 28 (13) (107) 26 – – 2 223 17.1% The.Canadian.statutory.tax.rate.decreased.to.25.2.percent.as.a.result.of.tax. legislation.enacted.in.2007..The.U.S..statutory.tax.rate.has.increased.to.. 38.5.percent.as.a.result.of.the.allocation.of.taxable.income.to.U.S..states. Permanent.differences.include: •. Withholding.tax.on.foreign.dividends; The.increase.in.our.effective.tax.rate.in.2012.is.primarily.due.to.a. significant.increase.in.the.proportion.of.income.in.the.higher.tax.rate. U.S..jurisdiction.relative.to.the.lower.tax.rate.Canadian.jurisdiction,. the.impairment.of.goodwill,.U.S..withholding.tax.on.the.payment.of.a. dividend.in.2012.and.lower.benefits.of.multi-jurisdictional.financing. Our.effective.tax.rate.in.any.year.is.a.function.of.the.relationship. between.total.tax.expense.and.the.amount.of.earnings.before.income. taxes.for.the.year..The.effective.tax.rate.differs.from.the.statutory.tax. rate.as.it.takes.permanent.differences.into.consideration,.adjustments. for.changes.in.tax.rates.and.other.tax.legislation,.variation.in.the. estimate.of.reserves.and.differences.between.the.provision.and.the. actual.amounts.subsequently.reported.on.the.tax.returns.. •. Goodwill.impairment; •. The.non-taxable.portion.of.Canadian.capital.gains.and.losses; •. Multi-jurisdictional.financing; •. Non-deductible.stock-based.compensation; •. Recognition.of.net.capital.losses;.and. •. Taxable.foreign.exchange.gains.not.included.in.net.earnings. Our.effective.tax.rate.also.reflects.the.application.of.the.relevant. statutory.tax.rates.to.income.from.Canadian.and.U.S..sources..The. effective.rate.for.2012.is.higher.than.2011.due.to.a.change.in.the. weighting.of.income.between.our.U.S..and.Canadian.operations. Tax.interpretations,.regulations.and.legislation.in.the.various. jurisdictions.in.which.Cenovus.and.its.subsidiaries.operate.are.subject. to.change..We.believe.that.our.provision.for.taxes.is.adequate. 52 CENOVUS ENERGY 2012 ANNUAL RE PO RT / MANAG EM ENT ’S DISCUSSIO N AN D A NALYSIS QUA RT ER LY RESULTS . . . ($ mil lions, except p er share am o unts ). Production Volumes. . Crude.Oil.and.NGLs (b b l s/d). . Natural.Gas.(M Mc f/d ). Revenues. Operating Cash Flow (1). Cash Flow (1). . per.Share.–.Diluted. Operating Earnings (Loss) (1). . per.Share.–.Diluted. Net Earnings (Loss). . per.Share.–.Basic. . per.Share.–.Diluted. Capital Investment (2). Cash Dividends. . per.Share. Q4 2012 . 177,646 566 3,724 963 697 0.92 (189) (0.25) (118) (0.16) (0.16) 978 167 0.22 Q3 2012 . 171,350 577 4,340 1,310 1,117 1.47 432 0.57 289 0.38 0.38 830 166 0.22 Q2 2012 . 155,566 596 4,214 1,078 925 1.22 283 0.37 396 0.52 0.52 660 166 0.22 Q1. 2012. . 156,850. 636. 4,564. 1,085. 904. 1.19. 340. 0.45. 426. 0.56. 0.56. 900. 166. 0.22. Q4. 2011. . 144,273. 660. 4,329. 1,019. 851. 1.12. 332. 0.44. 266. 0.35. 0.35. 903. 151. 0.20. Q3. 2011. . 133,496. 656. 3,858. 945. 793. 1.05. 303. 0.40. 510. 0.68. 0.67. 631. 150. 0.20. Q2. 2011. . 121,762. 654. 4,009. 1,064. 939. 1.24. 395. 0.52. 655. 0.87. 0.86. 476. 151. 0.20. Q1. 2011. . 137,355. 652. 3,500. 834. 693. 0.91. 209. 0.28. 47. 0.06. 0.06. 713. 151. 0.20. Q4. 2010 129,593 688 3,363 815 645 0.85 147 0.19 78 0.10 0.10 701 151 0.20 (1).. Non-GAAP.measures.defined.in.the.Financial.Results.section.of.this.MD&A. (2). Includes.expenditures.on.PP&E.and.E&E.assets. FOURTH QUARTER 2012 RESULTS OF OPERATIONS Partially.offset.by: In.the.fourth.quarter,.our.financial.results.were.negatively.impacted. by.lower.crude.oil.and.natural.gas.prices,.with.significant.decreases.in. crude.oil.benchmark.prices.in.the.month.of.December..The.average. WTI-WCS.differential.in.December.was.US$30.37.per.barrel.as.compared. to.US$11.72.per.barrel.for.the.same.period.last.year..The.fourth.quarter. was.also.impacted.by.a.$393.million.goodwill.impairment.charge,. resulting.primarily.from.the.decline.in.future.natural.gas.and.crude.oil. prices.and.increased.operating.costs.at.our.Suffield.property.within.our. Conventional.segment..In.addition,.low.refinery.utilization.as.a.result.of. planned.turnaround.activities,.negatively.impacted.our.financial.results. Realized.price.decreases.were.partially.offset.by.crude.oil.and.NGLs. production.increases.of.23.percent,.with.the.most.significant.increase.at. Christina.Lake.mainly.due.to.phase.C.reaching.full.production.capacity. in.the.second.quarter.of.2012.and.the.start.of.production.at.phase. D.in.the.third.quarter.of.2012..In.2012,.we.achieved.a.new.single.day. production.high.of.93,936.gross.barrels.at.Christina.Lake..At.Narrows. Lake.we.received.final.partner.approval.for.the.first.phase. Natural.gas.production.in.the.fourth.quarter.of.2012.was.566.MMcf.per. day,.a.decrease.of.14.percent.from.2011,.mainly.due.to.expected.declines. in.production.from.limited.capital.investment. FOURTH QUARTER 2012 FINANCIAL RESULTS Operating Cash Flow Operating.cash.flow.decreased.$56.million.in.the.fourth.quarter.of.2012,. as.compared.to.the.same.period.in.2011,.primarily.due.to: •. •. .A.decrease.of.$116.million.in.Refining.and.Marketing.operating.cash. flow.due.to.lower.refinery.utilization.during.planned.turnarounds.and. higher.operating.costs.related.to.those.activities;.and .A.25.percent.decrease.in.our.average.sales.price.of.crude.oil. and.NGLs.to.$60.13.per.barrel,.caused.mainly.by.the.increase.in. benchmark.price.differentials. •. •. .Crude.oil.and.NGLs.sales.volumes.increasing.31.percent,.primarily. resulting.from.an.increase.in.production.volumes.at.Christina.Lake; .Realized.risk.management.gains.before.tax,.excluding.Refining.and. Marketing,.of.$102.million.compared.to.gains.of.$29.million.in.2011;. and •. .A.decrease.in.crude.oil.and.NGLs.royalties.of.48.percent.due.mainly. to.an.increase.in.capital.investments. Cash Flow Our.cash.flow.decreased.$154.million.in.the.fourth.quarter.of.2012. primarily.due.to.decreases.in.operating.cash.flow.as.discussed.above;. and •. .An.increase.in.current.tax.expense,.excluding.tax.on.divestitures,.of. $74.million.in.the.fourth.quarter.of.2012.primarily.due.to.withholding. tax.on.U.S..dividends. Operating Earnings Our.operating.earnings.decreased.$521.million.in.the.fourth.quarter.of. 2012.primarily.due.to:. •. .Goodwill.impairment.of.$393.million.in.our.Conventional.segment,. resulting.primarily.from.declining.future.natural.gas.and.crude.oil. prices.and.increased.operating.costs..In.addition,.we.had.minimal. levels.of.capital.spending.for.natural.gas.such.that.production.has. exceeded.reserve.replacement.in.the.area..With.the.lower.future. cash.flows.and.decreasing.volumes,.the.carrying.amount.of.the. goodwill.exceeded.its.fair.value; •. Decreased.cash.flow.as.discussed.above;.and •. Increased.DD&A.as.a.result.of.higher.production.and.higher.DD&A.rates.. CEN OV US EN ERGY 2012 ANNUAL RE PORT / MA NAGEM ENT ’S DISCU SSION AND AN ALYSIS 53 Partially.offset.by: •. Unrealized.foreign.exchange.losses.in.2012.as.compared.to.gains.in.2011. •. .A.decrease.in.deferred.income.tax,.excluding.deferred.tax.on.gains. and.losses.on.unrealized.risk.management,.non-operating.foreign. exchange.and.divestitures.of.$20.million. Partially.offset.by: •. .Unrealized.risk.management.gains,.after-tax,.of.$87.million.as. compared.to.losses.of.$180.million.in.the.fourth.quarter.of.2011. Net Earnings Capital Investment In.the.fourth.quarter.of.2012,.our.net.earnings.decreased.$384.million.. The.factors.discussed.above.that.decreased.our.operating.earnings.also. impacted.net.earnings.in.addition.to: •. .No.divestitures.in.2012.as.compared.to.an.after-tax.gain.on. divestiture.of.$89.million.in.the.same.period.in.2011;.and Capital.investment.in.the.fourth.quarter.of.2012.was.$978.million,.an. increase.of.$75.million.from.the.same.period.in.2011..The.fourth.quarter. was.busy.with.construction.on.three.phases.at.Foster.Creek,.two.phases. at.Christina.Lake.and.our.drilling.and.completions.programs.across.the. other.areas. OI L AN D GAS RESE RVES AND RESO URC ES As.a.Canadian.issuer,.we.are.subject.to.the.reporting.requirements.of. Canadian.securities.regulatory.authorities,.including.the.reporting.of. our.reserves.in.accordance.with.National.Instrument.51-101,.Standards of Disclosure for Oil and Gas Activities.(“NI.51-101”). Our.reserves.are.primarily.located.in.Alberta.and.Saskatchewan,.Canada.. We.retained.two.independent.qualified.reserves.evaluators.(“IQREs”),. McDaniel.&.Associates.Consultants.Ltd..(“McDaniel”).and.GLJ.Petroleum. Consultants.Ltd..(“GLJ”),.to.evaluate.and.prepare.reports.on.100.percent. of.our.bitumen,.heavy.oil,.light.and.medium.oil,.NGLs,.natural.gas.and. CBM.reserves..McDaniel.also.evaluated.100.percent.of.our.bitumen. contingent.and.prospective.resources.. The.Reserves.Committee.of.the.Board,.composed.of.independent. directors,.annually.reviews.the.qualifications.and.selection.of.the. IQREs,.the.procedures.relating.to.the.disclosure.of.information.with. respect.to.crude.oil.and.natural.gas.activities.and.the.procedures.for. providing.information.to.the.IQREs..The.Reserves.Committee.meets. independently.with.Management.and.with.each.IQRE.to.determine. whether.any.restrictions.affect.the.ability.of.the.IQRE.to.report.on. the.reserves.data.without.reservation,.to.review.the.reserves.data.and. the.report.of.the.IQRE.thereon,.and.to.provide.a.recommendation.on. approval.of.the.reserves.and.resources.disclosure.to.the.Board. Highlights.in.2012.include: •. .Proved.bitumen.reserves.increased.approximately.18.percent.and. proved.plus.probable.reserves.increased.approximately.23.percent;. . •. . •. .Regulatory.approval.for.phases.A,.B.and.C,.and.partner.approval. for.phase.A.of.the.Narrows.Lake.project.added.proved.reserves.of. 222.million.barrels.and.proved.plus.probable.reserves.of.. 359.million.barrels,.transitioning.contingent.resources.to.. proved.reserves; .Christina.Lake.added.proved.reserves.of.41.million.barrels.while. proved.plus.probable.reserves.increased.by.42.million.barrels.. Increases.at.Christina.Lake.were.a.result.of.increasing.well.density. through.most.of.the.project.area.and.improving.steam.to.oil.. ratio.performance; . •. .Foster.Creek.added.proved.reserves.of.32.million.barrels.and. proved.plus.probable.reserves.of.80.million.barrels..Increases.at. Foster.Creek.were.a.result.of.improved.recovery.due.to.improving. steam.to.oil.ratio.performance.and.more.efficient.drainage.of. bitumen.in.the.steam.chamber; •. •. •. •. •. .Heavy.oil.proved.reserves.increased.approximately.five.percent.and. proved.plus.probable.reserves.increased.approximately.two.percent.. These.increases.were.a.result.of.expanding.polymer.flood.areas.and. the.successful.performance.of.those.flood.areas.at.Pelican.Lake;. .Light.and.medium.crude.oil.and.NGLs.proved.reserves.remained. unchanged.and.proved.plus.probable.reserves.increased.by. approximately.three.percent,.as.a.result.of.expanding.waterflood.and. carbon.dioxide.flood.areas.at.Weyburn; .Natural.gas.proved.reserves.declined.approximately.21.percent.and. proved.plus.probable.reserves.declined.approximately.19.percent. as.reduced.extensions.and.technical.revisions.from.lower.capital. investment.did.not.offset.production.and.dispositions..Also.included. in.the.decline,.is.a.loss.of.58.Bcf.of.gas.reserves.due.to.lower. gas.prices.in.the.forecast.causing.some.gas.reserves.to.become. uneconomic.to.produce; .Economic.bitumen.best.estimate.contingent.resources.increased.. 1.4.billion.barrels.or.approximately.17.percent..This.increase.is.a.result. of.our.significant.stratigraphic.test.well.drilling.program.successfully. converting.prospective.resources.to.contingent.resources,.the. recognition.of.SAGD.feasibility.in.the.Wabiskaw.formation.adjacent. to.Foster.Creek.and.the.recognition.of.contingent.resources.on.the. acquired.land.near.Telephone.Lake;.and .Bitumen.best.estimate.prospective.resources.declined.1.5.billion. barrels.or.approximately.15.percent,.as.a.result.of.the.reclassification. of.prospective.resources.to.contingent.resources.resulting.from. stratigraphic.test.well.drilling.and.the.sterilization.of.lands.through. approval.of.the.Lower.Athabasca.Regional.Plan.(“LARP”). The.reserves.and.resources.data.that.follows.is.presented.as.at. December.31,.2012.using.McDaniel’s.January.1,.2013.forecast.prices. and.costs.and.comparative.information.as.at.December.31,.2011.using. McDaniel’s.January.1,.2012.forecast.prices.and.costs..We.hold.significant. fee.title.rights.which.generate.production.for.Cenovus.from.third. parties.leasing.those.lands..The.before.royalty.volumes,.as.follows,.do. not.include.reserves.associated.with.this.production.. 54 CENOVUS ENERGY 2012 ANNUAL RE PO RT / MANAG EM ENT ’S DISCUSSIO N AN D A NALYSIS RESERVES AS AT DECEMBER 31 . . . . . . . Before Royal ties. Proved. Probable. Proved plus Probable. . Bitumen. (MMbb ls) 2012. 1,717. 676. 2,393. 2011. 1,455. 490. 1,945. . Heavy.Oil. (MMbb ls) 2012. 184. 105. 289. 2011. 175. 109. 284. Light.&.Medium. Oil.&.NGLs. (MMbb ls) 2012. 115. 56. 171. 2011. 115. 51 166. Natural.Gas. &.CBM. (Bc f ) 2012. 955. 338. 1,293. 2011 1,203 391 1,594 . . . . RECONCILIATION OF PROVED RESERVES . . Before Royal ties December.31,.2011. . Extensions.and.Improved.Recovery. . Discoveries. . Technical.Revisions. . Economic.Factors. . Acquisitions. . Dispositions. . Production. December 31, 2012. Year.Over.Year.Change.. . . . . . . . RECONCILIATION OF PROBABLE RESERVES . . B e fo re R oyal ties December.31,.2011. . Extensions.and.Improved.Recovery. . Discoveries. . Technical.Revisions. . Economic.Factors. . Acquisitions. . Dispositions. . Production. December 31, 2012. Year.Over.Year.Change.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ECONOMIC CONTINGENT AND PROSPECTIVE RESOURCES AS AT DECEMBER 31 . (bil lions of bar rel s, b efo re royal ties). Economic Contingent Resources (1). . Low.Estimate. . Best.Estimate. . High.Estimate. Prospective Resources (1)(2). . Low.Estimate. . Best.Estimate. . High.Estimate. . Bitumen. (MMbb ls) Heavy.Oil. (MMbb ls ) . Light.&.Medium. Oil.&.NGLs. (MMb bls) Natural.Gas. &.CBM (Bc f ) 1,455 265 – 30 – – – (33) 1,717 262 18% 175 17 – 6 – – – (14) 184 9 5% 115 13 – (2) – 1 – (12) 115 – 0% 1,203 29 – 51 (58) 1 (59) (212) 955 (248) (21%) . Bitumen. (MMbb ls) Heavy.Oil. (MMbb ls ) . Light.&.Medium. Oil.&.NGLs. (MMb bls) Natural.Gas. &.CBM (Bc f ) 490 140 – 46 – – – – 676 186 38% 109 11 – (15) – – – – 105 (4) (4%) . . . . . . . . . 51 5 – – – – – – 56 5 10% 2012. 7.1. 9.6. 12.8. 5.0. 8.5. 14.8. 391 8 – (30) (4) – (27) – 338 (53) (14%) 2011 6.0 8.2 10.8 5.7 10.0 17.9 Bitumen (1). .See.Oil.and.Gas.Information.in.the.Advisory.for.definitions.of.contingent.resources,.economic.contingent.resources,.prospective.resources.and.low,.best.and.high.estimates..There.is.no.certainty. that.it.will.be.commercially.viable.to.produce.any.portion.of.the.contingent.resources.. (2). .There.is.no.certainty.that.any.portion.of.the.prospective.resources.will.be.discovered..If.discovered,.there.is.no.certainty.that.it.will.be.commercially.viable.to.produce.any.portion.of.the. resources..Prospective.resources.are.not.screened.for.economic.viability. CEN OV US EN ERGY 2012 ANNUAL RE PORT / MA NAGEM ENT ’S DISCU SSION AN D A NALYSI S 55 Contingent.and.prospective.resources.are.estimated.using.volumetric. calculations.of.the.in-place.quantities,.combined.with.performance. from.analog.reservoirs..Existing.SAGD.projects.that.are.producing.from. the.McMurray-Wabiskaw.formations.are.used.as.performance.analogs. at.Foster.Creek.and.Christina.Lake..Other.regional.analogs.are.used.for. contingent.and.prospective.resources.estimation.in.the.Cretaceous. Grand.Rapids.formation.at.the.Grand.Rapids.property.in.the.Pelican. Lake.Region,.in.the.McMurray.formation.at.the.Telephone.Lake.property. in.the.Borealis.Region.and.in.the.Clearwater.formation.in.the.Foster. Creek.Region.. Contingencies.which.must.be.overcome.to.enable.the.reclassification.of. contingent.resources.as.reserves.can.be.categorized.as.economic,.non- technical.and.technical..The.Canadian.Oil.and.Gas.Evaluation.Handbook. identifies.non-technical.contingencies.as.legal,.environmental,. political.and.regulatory.matters.or.a.lack.of.markets..Technical. contingencies.include.available.infrastructure.and.project.justification.. The.outstanding.contingencies.applicable.to.our.disclosed.contingent. resources.do.not.include.economic.contingencies..Our.bitumen. contingent.resources.are.located.in.four.general.regions:.Foster.Creek,. Christina.Lake,.Borealis.and.Greater.Pelican. At.Foster.Creek.and.Christina.Lake.we.have.economic.contingent. resources.located.outside.the.currently.approved.development.project. areas..Regulatory.approval.of.development.project.area.expansion.is. necessary.to.enable.the.reclassification.of.these.economic.contingent. resources.as.reserves..The.rate.at.which.we.submit.applications.for. development.area.expansion.is.dependent.on.the.rate.of.development. drilling,.which.ties.to.an.orderly.development.plan.that.maximizes. utilization.of.steam.generation.facilities.and.ultimately.optimizes. production,.capital.utilization.and.value. In.the.Borealis.Region.we.have.submitted.an.application.for.a. development.project.at.the.Telephone.Lake.property.which,.if. LIQUI DI TY AN D CAP ITAL RESO URC ES approved,.would.enable.the.reclassification.of.certain.economic. contingent.resources.in.the.area.to.reserves..Other.areas.in.the.Borealis. Region.require.additional.results.from.delineation.drilling.and.seismic. activity.in.order.to.submit.regulatory.applications.for.development. projects..Stratigraphic.test.well.drilling.and.seismic.activity.is.continuing. in.these.areas.to.bring.them.to.project.readiness..Currently,.sufficient. pipeline.capacity.is.also.considered.a.contingency. In.the.Greater.Pelican.Region.we.submitted.an.application.in.the.fourth. quarter.of.2011.for.development.project.approval.at.the.Grand.Rapids. property..Provided.all.regulatory.requirements.are.met,.we.anticipate. receiving.regulatory.approval.in.2013..Pilot.project.work.is.underway.to. examine.optimal.development.strategies. We.are.systematically.progressing.our.bitumen.prospective.resources. to.contingent.resources.and.then.to.reserves,.and.ultimately.to. production..For.example,.approval.of.the.Narrows.Lake.project.resulted. in.the.movement.of.some.contingent.resources.to.proved.and.probable. reserves..Similarly,.the.stratigraphic.test.well.program.in.the.Borealis. Region.moved.some.prospective.resources.to.contingent.resources.. The.overall.reduction.to.prospective.resources.is.the.expected. outcome.of.a.successful.stratigraphic.test.well.program,.which.converts. undiscovered.resources.to.discovered.resources. Analysis.of.core.data.in.the.steamed.portions.of.the.reservoir.has. revealed.that.the.efficiency.of.the.SAGD.process.in.extracting.bitumen. from.the.reservoir.is.greater.than.previously.anticipated..We.expect. to.continue.to.improve.overall.recovery.from.our.bitumen.assets.as. technology.develops. Information.with.respect.to.pricing.as.well.as.additional.reserves. and.other.oil.and.gas.information,.including.the.material.risks.and. uncertainties.associated.with.reserves.and.resource.estimates,.is. contained.in.our.AIF.for.the.year.ended.December.31,.2012. ($ mil lions). Net Cash From (Used In). . Operating.Activities. Investing.Activities. . Net Cash Provided before Financing Activities. . . Increase in Cash and Cash Equivalents. Financing.Activities. Foreign.Exchange.Gains.(Losses).on.Cash.and.Cash.Equivalents.Held.in.Foreign.Currency. 2012. . 3,420. (3,336). 84. 592. (11). 665. 2011. . 3,273. (2,530). 743. (558). 10. 195. 2010 . 2,591 (1,793) 798 (631) (22) 145 . 56 CENOVUS ENERGY 2012 ANNUAL RE PO RT / MANAG EM ENT ’S DISCUSSIO N AN D A NALYSIS OPERATING ACTIVITIES Cash.from.operating.activities.was.$147.million.higher.in.2012.mainly. due.to.the.$367.million.increase.in.cash.flow,.partially.offset.by.the. net.change.in.non-cash.working.capital..Cash.flow.is.discussed.in.the. Financial.Results.section.of.this.MD&A..Cash.from.operating.activities.is. also.impacted.by.the.net.change.in.other.assets.and.liabilities. Excluding.risk.management.assets.and.liabilities.and.assets.and.liabilities. held.for.sale,.we.had.working.capital.of.$1,043.million.at.December.31,. 2012.compared.to.$283.million.at.December.31,.2011..We.anticipate.that. we.will.continue.to.meet.our.payment.obligations.as.they.come.due. INVESTING ACTIVITIES Cash.used.for.investing.activities.in.2012.was.$806.million.higher.than. 2011..The.increase.is.primarily.due.to.higher.capital.expenditures.of. $3.4.billion.in.2012..Capital.expenditures.are.further.discussed.under. Net.Capital.Investment.within.the.Financial.Results.section.and.Capital. Investment.within.the.Reportable.Segments.section.of.this.MD&A. FINANCING ACTIVITIES Our.disciplined.approach.to.capital.investment.decisions.means.that. we.prioritize.our.use.of.cash.flow.first.to.committed.capital.investment,. then.to.paying.a.meaningful.dividend.and.finally.to.growth.capital..In. 2012,.we.paid.a.dividend.of.$0.88.per.share.(2011.–.$0.80.per.share).. Total.dividend.payments.in.2012.were.$665.million.(2011.–.$603.million).. The.declaration.of.dividends.is.at.the.sole.discretion.of.the.Board.and. is.considered.quarterly.. Cash.from.financing.activities.in.2012.increased.$1.15.billion.as.a.result.of. the.issuance.of.US$1.25.billion.of.senior.unsecured.notes.on.August.17,.2012,. offset.by.increased.dividends.paid.and.the.repayment.of.short-term. borrowings.throughout.the.year. Our.long-term.debt.was.$4,679.million.at.December.31,.2012.with.no. payments.of.principal.due.until.September.2014.(US$800.million)..We. had.cash.and.cash.equivalents.of.$1,160.million.at.December.31,.2012.. Long-term.debt.and.cash.and.cash.equivalents.increased.with.the. issuance.of.senior.unsecured.notes.in.2012.. U.S. Senior Unsecured Notes On.August.17,.2012,.we.completed.a.public.offering.in.the.U.S..of.senior. unsecured.notes.in.the.aggregate.principal.amount.of.US$1.25.billion. under.our.U.S..base.shelf.prospectus..We.issued.US$500.million.of. senior.unsecured.notes.with.a.coupon.rate.of.3.00.percent.due.. August.15,.2022.(10.year).and.US$750.million.of.senior.unsecured.notes. with.a.coupon.rate.of.4.45.percent.due.September.15,.2042.(30.year).. The.net.proceeds.will.be.used.for.general.corporate.purposes,.including. repayment.of.commercial.paper.indebtedness. AVAILABLE SOURCES OF LIQUIDITY ( $ m il li o n s ). Cash.and.Cash.Equivalents. Committed.Credit.Facility. Canadian.Base.Shelf.Prospectus.(1). U.S..Base.Shelf.Prospectus.(1). (1). Availability.is.subject.to.market.conditions. Amount. 1,160. 3,000. 1,500. US$ 750. . Term . Not.applicable . November.2016 June.2014 . July.2014 . As.at.December.31,.2012,.we.are.in.compliance.with.all.of.the.terms.of.our.debt.agreements. Committed Credit Facility Canadian Base Shelf Prospectus In.September.2012,.we.renegotiated.our.existing.$3.0.billion.committed. credit.facility,.extending.the.maturity.date.to.November.30,.2016.and. reducing.both.the.standby.fees.to.maintain.the.facility.as.well.as.the. cost.of.future.borrowings..We.also.have.a.commercial.paper.program. which,.together.with.the.committed.credit.facility,.is.used.to.manage. our.short-term.cash.requirements..We.reserve.capacity.under.our. committed.credit.facility.for.amounts.of.commercial.paper.outstanding.. As.of.December.31,.2012,.no.amounts.were.drawn.on.our.committed. credit.facility.and.there.was.no.commercial.paper.outstanding. On.May.24,.2012,.we.filed.a.Canadian.base.shelf.prospectus.for. unsecured.medium-term.notes.in.the.amount.of.$1.5.billion..The. Canadian.shelf.prospectus.allows.for.the.issuance.of.medium-term. notes.in.Canadian.dollars.or.other.foreign.currencies.from.time.to.time. in.one.or.more.offerings.with.availability.subject.to.market.conditions.. Terms.of.the.notes,.including,.but.not.limited.to,.the.principal.amount,. interest.at.either.fixed.or.floating.rates.and.maturity.dates.will.be. determined.at.the.date.of.issue..As.at.December.31,.2012,.no.medium- term.notes.have.been.issued.under.this.Canadian.shelf.prospectus... The.Canadian.shelf.prospectus.expires.in.June.2014. CEN OV US EN ERGY 2012 ANNUAL RE PORT / MA NAGEM ENT ’S DISCU SSION AN D A NALYSI S 57 U.S. Base Shelf Prospectus On.June.6,.2012,.we.filed.a.U.S..base.shelf.prospectus.for.senior. unsecured.notes.in.the.amount.of.US$2.0.billion..The.U.S..shelf. prospectus.allows.for.the.issuance.of.debt.securities.in.U.S..dollars.or. other.foreign.currencies.from.time.to.time.in.one.or.more.offerings. with.availability.subject.to.market.conditions..Terms.of.the.notes,. including,.but.not.limited.to,.the.principal.amount,.interest.at.either. fixed.or.floating.rates.and.maturity.dates.will.be.determined.at.the. date.of.issue..As.at.December.31,.2012,.US$750.million.remains.available. under.our.U.S..base.shelf.prospectus..The.U.S..base.shelf.prospectus. expires.in.July.2014.. FINANCIAL METRICS We.monitor.our.capital.structure.and.financing.requirements.using,. among.other.things,.non-GAAP.financial.metrics.consisting.of.Debt.. to.Capitalization.and.Debt.to.Adjusted.EBITDA..We.define.our.non- GAAP.measure.of.Debt.as.short-term.borrowings.and.the.current.and. long-term.portions.of.long-term.debt.excluding.any.amounts.with. respect.to.the.Partnership.Contribution.Payable.or.Receivable..We. define.Capitalization.as.Debt.plus.Shareholders’.Equity..We.define. Adjusted.EBITDA.as.earnings.before.finance.costs,.interest.income,. income.tax.expense,.DD&A,.goodwill.impairment,.exploration.expense,. unrealized.gain.(loss).on.risk.management,.foreign.exchange.gains. (losses),.gain.(loss).on.divestiture.of.assets.and.other.income.(loss),.net.. These.metrics.are.used.to.steward.our.overall.debt.position.and.as. measures.of.our.overall.financial.strength.. . . . . . . Debt.to.Capitalization. Debt.to.Adjusted.EBITDA ( tim es). Debt.to.Capitalization.is.calculated.as.follows:. As a t December 31, . Debt.. Shareholders’.Equity. Capitalization. Debt to Capitalization. The.following.is.a.reconciliation.of.Adjusted.EBITDA.and.the.calculation.of.Debt.to.Adjusted.EBITDA: Finance.Costs. Interest.Income. Income.Tax.Expense. As a t D e cem b er 3 1 , . Debt.. Net Earnings. Add.(Deduct):. . . . . DD&A. . Goodwill.Impairment. . Exploration.Expense. . Unrealized.Gain.on.Risk.Management. Foreign.Exchange.(Gain).Loss,.net. . . (Gain).Loss.on.Divestiture.of.Assets. . Other.(Income).Loss,.net. Adjusted EBITDA . Debt to Adjusted EBITDA. . 2012. 32%. 1.1x. 2012. 4,679. 9,806. 14,485. 32%. 2012. 4,679. 993. . 455. (109). 783. 1,585. 393. 68. (57). (20). –. (5). 4,086. 1.1x. . 2011. 27%. 1.0x. 2011. 3,527. 9,406. 12,933. 27%. 2011. 3,527. 1,478. . 447. (124). 729. 1,295. –. –. (180). 26. (107). 4. 3,568. 1.0x. . 2010 29% 1.3x. 2010 3,432 8,395 11,827 29% 2010 3,432 1,081 . 498 (144) 223 1,302 – – (46) (51) (116) (13) 2,734 1.3x We.continue.to.have.long-term.targets.for.a.Debt.to.Capitalization. ratio.of.between.30.to.40.percent.and.a.Debt.to.Adjusted.EBITDA. of.between.1.0.to.2.0.times..At.December.31,.2012,.our.Debt.to. Capitalization.and.Debt.to.Adjusted.EBITDA.metrics.were.near.the.low. end.of.our.target.ranges.. Our.debt.levels.at.December.31,.2012.were.higher.than.at.December.31,. 2011.as.a.result.of.the.public.offering.in.the.U.S..of.senior.unsecured. notes.in.the.third.quarter.of.2012..Additional.information.regarding.. our.financial.metrics.and.capital.structure.can.be.found.in.the.notes.to. the.Consolidated.Financial.Statements. OUTSTANDING SHARE DATA AND STOCK-BASED COMPENSATION PLANS Cenovus.is.authorized.to.issue.an.unlimited.number.of.common.shares,. an.unlimited.number.of.first.preferred.shares.and.an.unlimited.number. of.second.preferred.shares..At.December.31,.2012,.no.preferred.shares. were.outstanding. 58 CENOVUS ENERGY 2012 ANNUAL RE PO RT / MANAG EM ENT ’S DISCUSSIO N AN D A NALYSIS As.part.of.our.long-term.incentive.program,.Cenovus.has.an.employee. Stock.Option.Plan.that.provides.employees.with.the.opportunity.to. exercise.an.option.to.purchase.common.shares.of.Cenovus..Options. issued.by.Cenovus.prior.to.February.24,.2011,.have.associated.tandem. stock.appreciation.rights.(“TSARs”).and.options.issued.after.February.24,. 2011.have.associated.net.settlement.rights.(“NSRs”).. In.addition.to.its.Stock.Option.Plan,.Cenovus.has.a.Performance.Share. Unit.(“PSU”).Plan.and.two.Deferred.Share.Unit.(“DSU”).Plans..PSUs.are. whole.share.units.which.entitle.the.holder.to.receive.upon.vesting. either.a.Cenovus.common.share.or.a.cash.payment.equal.to.the.value. of.a.Cenovus.common.share..DSUs.vest.immediately.and.are.equivalent. in.value.to.a.Cenovus.common.share.on.the.date.of.redemption. Our.stock.options.are.measured.at.fair.value.using.the.Black-Scholes- Merton.valuation.model.and.other.stock-based.compensation.plans. are.measured.at.fair.value.based.on.the.market.value.of.our.common. shares..The.fair.value.of.our.TSARs,.PSUs.and.DSUs.are.measured.at. each.reporting.date.and.therefore.are.sensitive.to.fluctuations.in.our. common.share.price..The.fair.value.of.NSRs.is.determined.at.the.date.of. grant.and.is.not.re-measured.at.each.reporting.date..As.NSRs.become. a.higher.proportion.of.our.long-term.incentive.grants,.our.long-term. incentive.costs.will.become.less.sensitive.to.common.share.price. fluctuations..The.weighted.average.remaining.contractual.life.of.the. TSARs,.NSR’s.and.PSU’s.are.1.42,.5.85.and.1.24.years,.respectively... See.the.notes.to.the.Consolidated.Financial.Statements.for.details.of. our.stock-based.compensation.plans. Total Outstanding Common Shares and Stock-Based Compensation Plans (thousands of units). Common Shares. Stock Options. . NSRs. . TSARs. . Cenovus.Replacement.TSARs. . Encana.Replacement.TSARs. Other Stock-Based Compensation Plans. . PSUs. . DSUs. . . . . . . . . December 31, 2012 755,843 . . . . 15,074 11,251 5,229 7,722 5,258 1,084 CONTRACTUAL OBLIGATIONS AND COMMITMENTS The.below.contractual.obligations.have.been.grouped.as.operating,.investing.and.financing,.relating.to.the.type.of.cash.outflow.that.will.arise: . . . 2013. ($ mil lions). . Operating. . Pipeline.Transportation.(1). 145. 109. . Operating.Leases.(Building.Leases). 81. . Product.Purchases. 32. . Other.Long-term.Commitments. Interest.on.Long-term.Debt. . 254. Interest.on.Partnership.Contribution.Payable. 100. . 721. Total Operating. . Investing. . Capital.Commitments.(2). 320. . Other.Long-term.Commitments. 1. 85. . Decommissioning.Liabilities. 406. Total Investing. Financing. . –. . Long-term.Debt. 386. . Partnership.Contribution.Payable. 386. Total Financing. Total Payments (3). 1,513. 50. . 471. . Partnership.Contribution.Receivable. Fixed.Price.Product.Sales. 2014. . 209. 106. 18. 25. 252. 76. 686. . 54. –. 142. 196. . 796. 410. 1,206. 2,088. 52. 471. Expected.Payment.Date 2016. . 403. 110. 6. 7. 216. 25. 767. . 53. –. 128. 181. . –. 462. 462. 1,410. 55. 471. 2017. . 675. 104. –. 6. 216. 2. 1,003. . 6. –. 137. 143. . –. 120. 120. 1,266. 3. 118. 2015. . 378. 112. 18. 18. 216. 51. 793. . 61. –. 125. 186. . –. 435. 435. 1,414. 54. 471. 2018+. . 8,130. 1,602. –. 10. 3,120. –. 12,862. . 2. –. 6,248. 6,250. . 3,930. –. 3,930. 23,042. –. –. Total 9,940 2,143 123 98 4,274 254 16,832 496 1 6,865 7,362 4,726 1,813 6,539 30,733 214 2,002 (1).. Certain.transportation.commitments.included.are.subject.to.regulatory.approval. (2)..Includes.commitments.related.to.joint.operations. (3)..Contracts.on.behalf.of.the.FCCL.Partnership.(“FCCL”).and.WRB.Refining.LP.(“WRB”).are.reflected.at.our.50.percent.interest. CEN OV US EN ERGY 2012 ANNUAL RE PORT / MA NAGEM ENT ’S DISCU SSION AND AN ALYSIS 59 Cenovus.has.entered.into.various.commitments.in.the.normal.course.of. operations.primarily.related.to.demand.charges.on.firm.transportation. agreements.(which.include.amounts.for.projects.awaiting.regulatory. approval),.debt,.future.building.leases,.marketing.agreements.and.capital. commitments..In.addition,.we.have.commitments.related.to.our.risk. management.program.and.an.obligation.to.fund.our.defined.benefit. pension.and.other.post-employment.benefit.plans..For.further.information. please.see.the.notes.to.the.Consolidated.Financial.Statements. As.at.December.31,.2012,.Cenovus.remained.a.party.to.long-term,. fixed.price,.physical.contracts.for.natural.gas.with.a.current.delivery. of.approximately.33.MMcf.per.day,.with.varying.terms.and.volumes. through.2017..The.total.volume.to.be.delivered.within.the.terms.of. these.contracts.is.49.Bcf.of.natural.gas.at.a.weighted.average.price.of. $4.38.per.Mcf. In.the.normal.course.of.business,.we.also.lease.office.space.for. personnel.who.support.field.operations.and.for.corporate.purposes. LEGAL PROCEEDINGS We.are.involved.in.a.limited.number.of.legal.claims.associated.with.the. normal.course.of.operations.and.we.believe.we.have.made.adequate. provisions.for.such.claims..There.are.no.individually.or.collectively. significant.claims. RISK M AN AGEMENT The.Canadian.Institute.of.Chartered.Accountants.issued.new.guidance. in.2012,.which.suggested.that.corporate.reporting.would.be.enhanced. with.further.disclosures.of.how.companies.approach.and.mitigate.risks. generally..Cenovus.is.exposed.to.a.number.of.risks.through.the.pursuit. of.our.strategic.objectives..Some.of.these.risks.impact.the.oil.and. gas.industry.as.a.whole.and.others.that.are.unique.to.our.operations.. Actively.managing.these.risks.improves.our.ability.to.effectively.execute. our.business.strategy..We.manage.risk.within.our.risk.appetite.ultimately. determined.by.Management.and.confirmed.by.the.Board.. RISK GOVERNANCE Through.our.Enterprise.Risk.Management.(“ERM”).program,.we.have. established.a.systematic.process.for.identifying,.measuring,.prioritizing. and.managing.risk.across.Cenovus.. The.ERM.Policy,.approved.by.our.Board,.outlines.our.risk.management. principles.and.expectations.as.well.as.the.roles.and.responsibilities.of.all. staff..Building.on.the.ERM.Policy,.we.have.established.Risk.Management. Practices,.a.Risk.Management.Framework.and.Risk.Assessment.Tools..Our. Risk.Management.Framework.contains.the.key.attributes.recommended. by.the.International.Standards.Organization.(“ISO”).in.their.ISO 31000 – Risk Management Principles and Guidelines..The.results.of.our.ERM. program.are.documented.in.an.Annual.Risk.Report.presented.to.the. Board.as.well.as.through.quarterly.updates.. . ERM POLICY RISK MANAGEMENT PRACTICES RISK MANAGEMENT FRAMEWORK RISK ASSESSMENT TOOLS RISK MATRIX IMPACT & PROBABILITY ASSESSMENTS RISK ASSESSMENT WORKSHEET RISK GLOSSARY RISK TREATMENT STRATEGIES RISK ASSESSMENT All.risks.are.assessed.for.their.potential.impact.on.the.achievement. of.Cenovus’s.strategic.objectives.as.well.as.their.likelihood.of. occurring..Risks.are.analyzed.through.the.use.of.a.Risk.Matrix.and.other. standardized.assessment.tools.. Using.the.Risk.Matrix,.each.risk.is.classified.on.a.continuum.ranging. from.“Marginal”.to.“Catastrophic”.based.on.the.potential.impact.and. likelihood.of.occurrence..Risks.are.first.evaluated.on.an.inherent.basis,. without.considering.the.presence.of.controls.or.mitigating.measures.. Risks.are.then.re-evaluated.based.on.their.residual.risk.ranking,. reflecting.the.risk.that.remains.after.mitigation.and.control.measures. are.considered.. Management.determines.if.additional.risk.treatment.is.required. based.on.the.residual.risk.ranking.and.there.are.prescribed.actions.for. elevating.these.exposures.to.the.right.decision.makers.. RISK MANAGEMENT ROLES AND RESPONSIBILITIES The.roles.and.responsibilities.of.the.various.participants.of.our.ERM. Program.are: Board: •. .Oversees.the.implementation.of.the.ERM.program.by.Management. and.provides.oversight.for.risk.management.activities;.and •. .The.Audit.Committee.of.the.Board.reviews.our.Risk.Management. Framework.and.related.processes.on.an.annual.basis.to.ensure. processes.remain.current.and.relevant. Senior Management: •. .Confirms.our.corporate.risk.appetite.with.the.Board..The.executive.team. is.interviewed.annually.and.collaborative.workshops.are.held.with.SVP’s. and.VP’s.to.support.the.development.of.the.Annual.Risk.Report.. The.Financial.&.Enterprise.Risk.Team.reports.to.the.Executive.Vice. President.&.Chief.Financial.Officer.and.is.responsible.for.managing.our. ERM.program.and.the.related.risk.reporting.. 60 CENOVUS ENERGY 2012 ANNUAL RE PO RT / MANAG EM ENT ’S DISCUSSIO N AN D A NALYSIS PRINCIPAL AND STRATEGIC RISKS Cenovus’s.operations,.financial.condition.and.in.some.cases.our. reputation,.may.be.impacted.by.principal.and.strategic.risks..Cenovus. defines.principal.risks.as.those.risks.that.when.measured.in.terms. of.likelihood.and.impact,.may.adversely.affect.the.achievement.of. our.strategic.or.major.business.objectives..Strategic.risk.is.the.risk.of. loss.resulting.from.the.inability.to.adequately.plan.or.implement.an. appropriate.business.strategy,.or.to.adapt.to.changes.in.the.external. business,.political.or.regulatory.environment. Principal.and.strategic.risks.are.categorized.into: •. Financial.risks,.which.includes.commodity.price.risk.and.liquidity.risk; •. .Operational.risks.such.as.risks.related.to.safety,.the.environment,. transportation.restrictions,.project.execution.and.reserves. replacement;.and •. .Regulatory.risks.from.the.regulatory.approval.process.and.changes.to. or.introduction.of.environmental.regulations. A.description.of.the.risk.factors.and.uncertainties.affecting.Cenovus. can.be.found.in.the.Advisory.and.a.full.discussion.of.the.material.risk. factors.affecting.Cenovus.can.be.found.in.our.AIF.for.the.year.ended. December.31,.2012. The.following.is.a.discussion.of.how.some.of.the.material.principal.and. strategic.risks.impact.our.business: Financial Risk Financial.risk.is.the.risk.of.loss.or.lost.opportunity.resulting.from. financial.management.and.market.conditions..From.time.to.time,. Management.may.enter.into.contracts.to.mitigate.risk.associated.with. fluctuations.in.commodity.prices,.interest.rates.and.foreign.exchange. rates..We.have.the.flexibility.to.partially.mitigate.our.exposure.to. interest.rate.changes.by.maintaining.a.mix.of.fixed.and.floating.rate. debt..Credit.is.managed.through.our.Board.approved.credit.policy. COMMODiTY PRiCE RiSk Fluctuations.in.future.commodity.prices.create.volatility.in.our.financial. performance..Commodity.prices.are.impacted.by.a.number.of.factors. including.global.and.regional.supply.and.demand,.transportation. constraints.and.alternative.fuels,.all.of.which.are.beyond.our.control. and.can.result.in.a.high.degree.of.price.volatility.. Changes.in.future.commodity.prices.will.affect.the.revenue.generated. by.the.sale.of.our.crude.oil,.NGLs,.natural.gas.production.from.our.Oil. Sands.and.Conventional.segments.and.sale.of.refined.products.from. our.refining.operations..Our.financial.performance.is.also.affected.by. price.differentials.since.our.upstream.production.differs.in.quality.and. location.from.underlying.benchmark.commodity.prices.quoted.on. financial.exchanges. We.anticipate.commodity.prices.and.refining.margins.will.continue.to. be.volatile.over.the.next.few.years..If.crude.oil.and.natural.gas.prices. decline.significantly.and.remained.at.low.levels.for.an.extended.period. of.time,.the.carrying.value.of.our.assets.may.be.subject.to.impairment,. future.capital.programs.could.be.delayed.or.cancelled.and.production. could.be.curtailed,.among.other.impacts..However,.lower.commodity. prices.would.reduce.the.cost.of.natural.gas.and.crude.oil.feedstock. used.in.our.refining.operations.. We.manage.our.commodity.price.exposure.through.a.combination. of.activities.including.integration,.financial.hedges.and.physical. contracts..Our.business.model.partially.mitigates.our.exposure.to.light/ heavy.differentials.and.refinery.margins.through.our.upstream.and. downstream.integration..In.addition,.our.natural.gas.production.acts.as. an.economic.hedge.for.the.natural.gas.required.as.a.fuel.source.at.both. our.upstream.and.refining.operations. We.further.reduce.our.exposure.to.commodity.price.risk.through.the. use.of.various.financial.instruments.and.select.physical.contracts..These. transactions.protect.a.portion.of.the.budgeted.cash.flow.and.ensure. funds.are.available.for.capital.projects..These.activities.are.reviewed. and.approved.by.the.Risk.Management.Committee.which.is.comprised. of.the.President.&.Chief.Executive.Officer,.Executive.Vice.President.&. Chief.Financial.Officer.and.one.other.EVP..These.activities.are.governed. through.our.Market.Risk.Mitigation.Policy,.which.contains.prescribed. hedging.protocols.and.limits..We.have.partially.mitigated.our.exposure. to.the.following: •. •. •. .Crude.oil.commodity.price.risk.on.our.crude.oil.sales.with.fixed.price. commodity.swaps; .Natural.gas.commodity.price.risk.on.our.natural.gas.sales.with.fixed. price.swaps; .Widening.location.or.quality.differentials.for.crude.oil.and.natural. gas.with.fixed.price.differential.and.basis.swaps;.and •. Electricity.consumption.costs.through.a.derivative.power.contract. CEN OV US EN ERGY 2012 ANNUAL RE PORT / MA NAGEM ENT ’S DISCU SSION AND AN ALYSIS 61 The.details.of.these.financial.instruments.as.at.December.31,.2012.are.disclosed.in.the.notes.to.the.Consolidated.Financial.Statements..The.financial. impact.is.summarized.below: . Financial Impact of Risk Management Activities . . ($ mil lions). Crude.Oil.and.NGLs. Natural.Gas. Refining. Power. Gains.(Losses).on.Risk.Management. Income.Tax.Expense. Gains.(Losses).on.Risk.Management,.after-tax. 2012. Realized Unrealized 247 (176) 1 (15) 57 14 43 81 247 7 1 336 86 250 Total. 328. 71. 8. (14). 393. 100. 293. 2011 Realized. Unrealized. 106. 38. 7. 29. 180. 46. 134. (135). 210. (14). 7. 68. 17. 51. Total (29) 248 (7) 36 248 63 185 In.2012,.our.strategy.to.manage.commodity.price.risk.resulted.in.realized. gains.on.both.crude.oil.and.natural.gas.financial.instruments.as.contract. benchmark.commodity.prices.settled.below.our.contract.prices... We.recognized.unrealized.gains.on.our.crude.oil.financial.instruments. as.a.result.of.the.decrease.in.forward.commodity.prices.and.the. widening.of.light/heavy.differentials.at.the.end.of.2012.compared.to. our.contract.prices..Natural.gas.financial.instruments.incurred.unrealized. losses.as.a.result.of.increasing.forward.natural.gas.commodity.prices.. Details.of.contract.volumes.and.prices.can.be.found.in.the.notes.to.the. Consolidated.Financial.Statements. For.our.risk.management.activities,.we.take.an.integrated.view.of.our. exposure.across.the.upstream.and.refining.businesses..We.recognize. that.on.an.integrated.basis,.we.have.a.long.position.in.refined.products. which.has.become.more.strongly.correlated.to.Brent.crude.rather.than. WTI..To.better.align.our.corporate.risk.management.program.with. this.exposure,.we.converted.all.existing.2013.WTI.crude.oil.financial. instruments.to.Brent.pricing.during.2012..In.addition,.17,000.barrels.per. day.were.executed.through.financial.instruments.at.fixed.Brent.pricing,. resulting.in.a.total.of.37,000.barrels.per.day.locked.into.a.weighted. average.Brent.price.of.US$111.32.per.barrel. Commodity Price Sensitivities – Risk Management Positions The.following.table.summarizes.the.sensitivities.of.the.fair.value.of.our. risk.management.positions.to.fluctuations.in.commodity.prices.with.all. other.variables.held.constant..Management.believes.the.price.fluctuations. identified.in.the.table.below.are.a.reasonable.measure.of.volatility.. Fluctuations.in.commodity.prices.could.have.resulted.in.unrealized.gains. (losses).for.the.year.impacting.earnings.before.income.tax.on.open.risk. management.positions.as.at.December.31,.2012.as.follows: Commodity Crude.Oil.Commodity.Price. Crude.Oil.Differential.Price. Natural.Gas.Commodity.Price. Natural.Gas.Basis.Price. Power.Commodity.Price. LiQUiDiTY RiSk Sensitivity Range ± US$10.per.bbl.Applied.to.Brent.&.WTI.Hedges. ± US$5.per.bbl.Applied.to.Differential.Hedges.tied.to.Production. ± $1.per.mcf.Applied.to.NYMEX.Natural.Gas.Hedges. ± $0.10.per.mcf.Applied.to.Natural.Gas.Basis.Hedges. ± $25.per.MWHr.Applied.to.Power.Hedge. increase (156) 111 (55) 1 19 Decrease 156 (111) 55 (1) (19) Liquidity.risk.is.the.risk.we.will.not.be.able.to.meet.all.our.financial. obligations.as.they.come.due..Liquidity.risk.also.includes.the.risk.of.not. being.able.to.liquidate.assets.in.a.timely.manner.at.a.reasonable.price.. In.depressed.economic.times.or.due.to.unforeseen.events,.Cenovus’s. liquidity.risk.could.become.heightened..If.we.were.unable.to.meet.our. financial.obligations.as.they.became.due.this.would.have.a.material. adverse.effect.on.our.financial.condition,.results.of.operations,.cash. flows.and.reputation.. We.manage.our.liquidity.risk.through.the.active.management.of.cash. and.debt.by.ensuring.that.we.have.access.to.multiple.sources.of.capital. including.cash.and.cash.equivalents,.cash.from.operating.activities,. undrawn.credit.facilities,.commercial.paper.and.availability.under.our.shelf. prospectuses..At.December.31,.2012,.we.had.cash.and.cash.equivalents. of.$1.2.billion,.no.amounts.were.drawn.on.our.committed.credit.facility. and.no.commercial.paper.was.outstanding..In.addition,.we.had.$1.5.billion. in.unused.capacity.under.our.Canadian.base.shelf.prospectus.and. US$750.million.in.unused.capacity.under.our.U.S..base.shelf.prospectus,.. the.availability.of.which.are.dependent.on.market.conditions.. We.believe.that.our.current.liquidity.position.is.sufficient.to.protect.us. in.the.near-term.from.unforeseen.economic.events.that.could.create. further.volatility.in.cash.flow. 62 CENOVUS ENERGY 2012 ANNUAL RE PO RT / MANAG EM ENT ’S DISCUSSIO N AN D A NALYSIS Operational Risk CAPiTAL PROjECT ExECUTiON AND OPERATiNG RiSk Operational.risk.is.the.risk.of.loss.or.lost.opportunity.resulting.from. operating.and.capital.activities.that.could.impact.the.achievement.of. our.objectives. SAFETY RiSk Crude.oil.and.natural.gas.development,.production.and.refining.are,. by.their.nature,.high.risk.activities.that.may.cause.personal.injury.. The.inability.to.operate.safely.has.the.potential.to.have.a.material. adverse.impact.on.Cenovus’s.reputation,.financial.condition,.results.of. operations.and.cash.flow.. We.are.committed.to.safety.in.our.operations..We.take.an.active.role. with.our.refining.partner.in.ensuring.safety.is.the.first.priority..Our. safety.policies.and.standards.comply.with.government.regulations.and. industry.standards..To.partially.mitigate.safety.risk,.we.have.a.system. of.standards,.practices.and.procedures.called.the.Cenovus.Operations. Management.System.to.identify,.assess.and.control.safety,.security.and. environmental.risk.across.our.operations..In.order.to.ensure.we.engage. contractors.who.share.the.same.commitment.to.safety,.Cenovus.uses.a. third.party.online.safety.prequalification.system.and.safety.performance. data.management.tool..Prevention.of.occupational.diseases.and. illnesses.is.also.an.integral.part.of.our.health.and.safety.focus..We.take. a.risk-based.approach.to.systematically.identify,.evaluate,.and.manage. health.hazards.of.all.workers.at.our.sites.. The.Safety,.Environment.and.Responsibility.Committee.of.our.Board. reviews.and.recommends.policies.for.approval.by.our.Board.and. oversees.compliance.with.government.laws.and.regulations.. TRANSPORTATiON RESTRiCTiONS Our.ability.to.efficiently.access.end.markets.may.be.affected.by. insufficient.transportation.capacity.for.our.production..Transportation. restrictions.can.negatively.impact.financial.performance.by.way.of. higher.transportation.costs,.wider.price.differentials,.lower.realized. prices.at.specific.locations.or.for.specific.grades.and,.in.extreme. situations,.production.curtailment..While.this.risk.may.impact.our. natural.gas.production,.it.has.the.greatest.potential.to.impact.our. crude.oil.production,.which.could.negatively.affect.our.financial. position,.results.of.operations.and.cash.flows.within.our.Oil.Sands.and. Conventional.segments.. To.help.mitigate.these.risks,.we.employ.a.diversified.sales.strategy. which.includes.sales.at.multiple.market.hubs.to.a.variety.of. creditworthy.counterparties.utilizing.multiple.transportation.options..In. addition,.we.support.and.are.prepared.to.commit.to.new.and.expanding. transportation.infrastructure.with.access.to.additional.markets.for.our. production,.including.cargo.and.railcar.transportation.methods.. We.anticipate.transportation.constraints.will.continue.in.the.near. term..The.Keystone.XL.project.and.the.Northern.Gateway.Pipeline. project,.if.approved,.will.benefit.heavy.oil.producers..The.Keystone.XL. project.will.connect.Alberta’s.oil.sands.with.refineries.in.the.U.S..Gulf. Coast..The.Northern.Gateway.pipeline.project.in.its.current.form.will. connect.Alberta’s.oil.sands.to.the.western.Canada.coast,.allowing.for. transportation.to.new.markets,.such.as.Asia..Other.industry.options.are. being.developed.and.we.are.actively.participating.in.those.developments.. There.are.risks.associated.with.the.execution.and.operations.of.our. upstream.and.refining.projects..Over.the.next.10.years,.we.will.be.required. to.concurrently.manage.multiple.projects..Successful.project.execution. will.be.highly.dependent.upon.the.weather,.price.escalations.and. availability.of.skilled.labour,.key.components.or.other.scarce.resources,. any.of.which.could.have.a.material.adverse.effect.on.Cenovus. We.are.also.mindful.of.the.need.to.maintain.financial.resiliency... Our.capital.programs.are.scalable.in.most.cases,.and.if.necessary,.there. are.areas.where.we.could.defer.spending.in.response.to.reduced.cash. flows.from.operations.or.liquidity.challenges..When.making.operating. and.investing.decisions,.capital.allocation.is.focused.on.strategic.fit,. mitigation.of.risk.and.optimization.of.project.returns..Our.capital. approval.process.requires.projects.to.be.presented.on.a.fully.risked. basis.which.considers.potential.construction,.commercial,.operational. and/or.regulatory.risk.exposures.. Operational.risks.affect.our.ability.to.continue.operations.in.the. ordinary.course.of.business..Our.operations.are.subject.to.risks.generally. affecting.the.oil.and.gas.and.refining.industries..Our.operational.risks. include,.but.are.not.limited.to.safety.considerations,.environmental. challenges,.transportation.capacity.and.interruptions,.uncertainty.of. reserves.and.resources.estimates,.phased.growth.execution.of.oil.sands. projects.and.partner.risks..We.attempt.to.partially.mitigate.operational. risks.by.maintaining.a.comprehensive.insurance.program.in.respect.of. our.assets.and.operations. RESERVES REPLACEMENT RiSk If.we.fail.to.acquire,.develop.or.find.additional.crude.oil.and.natural. gas.reserves,.our.reserves.and.production.will.decline.materially.from. their.current.levels..Our.financial.position,.results.of.operations.and. cash.flows.are.highly.dependent.upon.successfully.producing.current. reserves.and.acquiring,.discovering.or.developing.additional.reserves. To.mitigate.the.risk.associated.with.replacing.reserves,.we.evaluate. projects.on.a.fully.risked.basis.including.geological.risk.and.engineering. risk..In.addition,.our.asset.teams.undertake.a.project.look-back.process,. whereby.each.asset.team.undertakes.a.thorough.review.of.its.previous. capital.program.to.identify.key.learnings,.which.often.include.technical. and.operational.issues.that.impacted.the.project’s.results..Mitigation. plans.are.developed.for.the.issues.that.had.a.negative.impact.on.results. and.are.incorporated.into.the.current.year’s.plan..On.an.annual.basis,. look-back.results.are.analyzed.in.relation.to.our.capital.program,.with. the.results.and.identified.learnings.shared.across.our.company. To.date.our.ability.to.find,.acquire.and.develop.additional.crude.oil. and.natural.gas.reserves.has.been.in.line.with.our.10.year.strategic.plan.. See.the.Oil.and.Gas.Reserves.and.Resources.section.of.this.MD&A. for.further.details.of.our.proved.and.probable.reserves.and.economic. bitumen.contingent.and.prospective.resources.at.December.31,.2012.. CEN OV US EN ERGY 2012 ANNUAL RE PORT / MA NAGEM ENT ’S DISCU SSION AN D A NALYSI S 63 ENViRONMENTAL RiSk Developing.and.operating.our.projects.is.subject.to.hazards.of.recovering,. transporting.and.processing.hydrocarbons.which.can.cause.damage.to. the.environment..We.take.our.responsibility.for.the.environment.very. seriously..To.manage.these.risks,.we.strive.to.use,.recycle.and.dispose. of.water.safely,.manage.air.emissions,.limit.our.physical.footprint.and. minimize.our.impact.on.habitat,.including.wildlife..Working.with.our. stakeholders,.we.identify.the.unique.needs.of.the.different.areas.where. we.operate..Employees,.contractors.and.third-party.service.providers. receive.the.appropriate.training.they.need.to.comply.with.regulations. and.be.responsible.environmental.stewards..Our.environmental.impact.is. measured.using.the.Cenovus.Operations.Management.System.to.monitor,. manage.and.accurately.report.our.activities. The.Safety,.Environment.and.Responsibility.Committee.of.our.Board. reviews.and.recommends.policies.pertaining.to.corporate.responsibility,. including.the.environment,.and.oversees.compliance.with.government. laws.and.regulations..Monitoring.and.reporting.programs.for. environmental,.health.and.safety.performance.in.day-to-day.operations,. as.well.as.inspections.and.assessments,.have.been.designed.to.provide. assurance.that.environmental.and.regulatory.standards.are.met.. Contingency.plans.have.been.put.in.place.for.a.timely.response.to.an. environmental.event.and.remediation/reclamation.programs.have.been. put.in.place.and.utilized.to.restore.the.environment. Regulatory Risk Regulatory.risk.is.the.risk.of.loss.or.lost.opportunity.resulting.from.the. introduction.of,.or.changes.in,.regulatory.requirements.or.the.failure.to. secure.regulatory.approval.for.a.crude.oil.or.natural.gas.development. project..The.implementation.of.new.regulations.or.the.modification.of. existing.regulations.could.impact.our.existing.and.planned.projects.as. well.as.impose.a.cost.of.compliance,.adversely.impacting.our.financial. condition,.results.of.operations.and.cash.flows.. ENViRONMENTAL REGULATiON RiSk The.complexities.of.changes.in.environmental.regulation.make.it. difficult.to.predict.the.potential.future.impact.to.Cenovus..We. anticipate.that.future.capital.expenditures.and.operating.expenses. could.continue.to.increase.as.a.result.of.the.implementation.of.new. environmental.regulations..However,.we.expect.that.the.cost.of.meeting. new.environmental.and.climate.change.regulations.will.not.be.so.high. as.to.cause.a.material.disadvantage.to.our.competitive.position..Non- compliance.with.environmental.regulations.could.also.have.an.adverse. impact.on.Cenovus’s.reputation.. Further.discussion.on.specific.areas.that.currently.have,.and.are. reasonably.likely.to.have,.an.impact.on.Cenovus’s.operations.is.below.. Water Use Impacts To.operate.our.SAGD.facilities.we.rely.on.water,.which.is.obtained. under.licenses.from.Alberta.Environment.and.Sustainable.Resource. Development..Currently,.we.are.not.required.to.pay.for.the.water. we.use.under.these.licenses..If.a.change.to.the.requirements.under. these.licenses.reduces.the.amount.of.water.available.for.our.use,.our. production.could.decline.or.operating.costs.could.increase,.both.of. which.may.have.a.material.adverse.effect.on.our.business.and.financial. performance..There.can.be.no.assurance.that.the.licenses.to.withdraw. water.will.not.be.rescinded.or.that.additional.conditions.will.not.be. added.to.these.licenses..There.can.be.no.assurance.that.we.will.not. have.to.pay.a.fee.for.the.use.of.water.in.the.future.or.that.any.such.fees. will.be.reasonable..In.addition,.the.expansion.of.our.projects.rely.on. securing.licenses.for.additional.water.withdrawal,.and.there.can.be.no. assurance.that.these.licenses.will.be.granted.on.terms.favourable.to.us. or.at.all,.or.that.such.additional.water.will.in.fact.be.available.to.divert. under.such.licenses..While.we.currently.re-use.a.percentage.of.the. water.which.we.withdraw.under.license,.there.are.no.guarantees.that. our.operations.will.continue.to.efficiently.use.water. Greenhouse Gases & Air Pollutants Various.federal,.provincial.and.state.governments.have.announced. intentions.to.regulate.greenhouse.gas.(“GHG”).emissions.and.other.air. pollutants..A.number.of.legislative.and.regulatory.measures.to.address. GHG.emission.reductions.are.in.various.phases.of.review,.discussion.or. implementation.in.Canada.and.the.U.S.. If.comprehensive.GHG.regulation.is.enacted.in.any.jurisdiction.in.which. we.operate,.adverse.impacts.to.our.business.may.include,.among.other. things,.increased.compliance.costs,.loss.of.markets,.permitting.delays,. substantial.costs.to.generate.or.purchase.emission.credits.or.allowances,. all.of.which.may.increase.operating.costs.and.reduce.demand.for.crude. oil,.natural.gas.and.certain.refined.products..Beyond.existing.legal. requirements,.the.extent.and.magnitude.of.any.adverse.impacts.of.any. of.these.additional.programs.cannot.be.reliably.or.accurately.estimated. at.this.time.because.specific.legislative.and.regulatory.requirements.have. not.been.finalized.and.uncertainty.exists.with.respect.to.the.additional. measures.being.considered.and.the.time.frames.for.compliance.. Our.approach.to.emissions.management.is.demonstrated.by.our. industry.leadership.focusing.on.energy.efficiency,.developing.oil.sands. technology.to.reduce.GHG.emissions.and.carbon.dioxide.sequestration.. Cenovus.was.recognized.for.leadership.in.GHG.emissions.reporting. by.being.included.in.the.2012.Carbon.Disclosure.Leadership.Index.for. Canada..We.incorporate.the.potential.costs.of.carbon,.ranging.from. $15-$65.per.tonne.of.CO2,.into.future.planning.which.guides.the.capital. allocation.process..We.intend.to.continue.using.scenario.planning. to.anticipate.the.future.impact.of.regulations,.reduce.our.emissions. intensity.and.improve.our.energy.efficiency. Land Use, Habitat and Biodiversity Alberta’s.Land-Use.Framework.has.been.implemented.under.the.Alberta. Land.Stewardship.Act.(“ALSA”).which.sets.out.the.Government.of. Alberta’s.approach.to.managing.Alberta’s.land.and.natural.resources. to.achieve.long-term.economic,.environmental.and.social.goals..In. 64 CENOVUS ENERGY 2012 ANNUAL RE PO RT / MANAG EM ENT ’S DISCUSSIO N AN D A NALYSIS some.cases,.ALSA.amends.or.extinguishes.previously.issued.consents. such.as.regulatory.permits,.licenses,.approvals.and.authorizations.in. order.to.achieve.or.maintain.an.objective.or.policy.resulting.from.the. implementation.of.a.regional.plan..On.August.22,.2012,.the.Government. of.Alberta.approved.its.LARP,.which.was.issued.under.the.ALSA,.and. came.into.effect.on.September.1,.2012. The.LARP.identifies.management.frameworks.for.air,.land.and. water.that.will.incorporate.cumulative.limits.and.triggers.as.well.as. identifying.areas.related.to.conservation,.tourism.and.recreation.. Some.of.our.Oil.Sands.tenures.may.be.cancelled,.subject.to. compensation.negotiations.with.the.Government.of.Alberta..Access. to.some.parts.of.our.current.resource.properties.may.be.restricted. limiting.the.pace.of.development.due.to.environmental.limits.and. thresholds..The.areas.identified.have.no.direct.impact.on.our.strategic. plan,.on.our.current.operations.at.Foster.Creek.and.Christina.Lake,.or. any.of.our.filed.applications.. C RIT I C AL ACCOUNTING J UDGMENTS , ESTIMATES AND ACCOUN TING P OLICIES We.are.required.to.make.judgments,.estimates.and.assumptions.in.the. application.of.accounting.policies.that.could.have.a.significant.impact. on.our.financial.results..Actual.results.may.differ.from.those.estimates. and.those.differences.may.be.material..The.estimates.and.assumptions. used.are.subject.to.updates.based.on.experience.and.the.application. of.new.information..Our.critical.accounting.policies.and.estimates.are. reviewed.annually.by.the.Audit.Committee.of.the.Board..Further.details. on.the.basis.of.presentation.and.our.significant.accounting.policies.can. be.found.in.the.notes.to.the.Consolidated.Financial.Statements. cash.flows.from.other.assets.or.groups.of.assets..The.classification.of. assets.and.allocation.of.corporate.assets.into.CGUs.requires.significant. judgment.and.interpretations..Factors.considered.in.the.classification. include.the.integration.between.assets,.shared.infrastructures,.the. existence.of.common.sales.points,.geography,.geologic.structure.and. the.manner.in.which.Management.monitors.and.makes.decisions.about. its.operations..The.recoverability.of.the.Cenovus’s.upstream,.refining. and.corporate.assets.are.assessed.at.the.CGU.level.and.therefore.could. have.a.significant.impact.on.impairment.losses. CRITICAL ACCOUNTING JUDGMENTS IN APPLYING ACCOUNTING POLICIES Critical.judgments.are.those.judgments.made.by.Management.in.the. process.of.applying.accounting.policies.that.have.the.most.significant. effect.on.the.amounts.recognized.in.Cenovus’s.Consolidated.. Financial.Statements. Exploration and Evaluation Assets The.application.of.Cenovus’s.accounting.policy.for.exploration.and. evaluation.expenditures.requires.judgment.in.determining.whether.it. is.likely.that.future.economic.benefit.exists.when.activities.have.not. reached.a.stage.where.technical.feasibility.and.commercial.viability.can. be.reasonably.determined..Factors.such.as.drilling.results,.future.capital. programs,.future.operating.costs.as.well.as.estimated.economically. recoverable.reserves.are.considered..If.it.is.determined.that.an.E&E.asset. is.no.longer.technically.feasible.or.commercially.viable.or.Management. decides.not.to.continue.the.exploration.and.evaluation.activity,.the. unrecoverable.costs.are.charged.to.exploration.expense.. Identification of CGUs Cenovus’s.upstream.and.refining.assets.are.grouped.into.CGUs..CGUs. are.defined.as.the.lowest.level.of.integrated.assets.for.which.there. are.separately.identifiable.cash.flows.that.are.largely.independent.of. KEY SOURCES OF ESTIMATION UNCERTAINTY Critical.accounting.estimates.are.those.estimates.that.require. Management.to.make.particularly.subjective.or.complex.judgments. about.matters.that.are.inherently.uncertain..Estimates.and.underlying. assumptions.are.reviewed.on.an.ongoing.basis.and.any.revisions. to.accounting.estimates.are.recognized.in.the.period.in.which.the. estimates.are.revised..The.following.are.the.key.assumptions.about.the. future.and.other.key.sources.of.estimation.at.the.end.of.the.reporting. period.that.changes.to.could.result.in.a.material.adjustment.to.the. carrying.amount.of.assets.and.liabilities.within.the.next.financial.year. Reserves There.are.a.number.of.inherent.uncertainties.associated.with.estimating. reserves..Reserve.estimates.are.dependent.upon.variables.including.the. recoverable.quantities.of.hydrocarbons,.the.cost.of.the.development. of.the.required.infrastructure.to.recover.the.hydrocarbons,.production. costs,.estimated.selling.price.of.the.hydrocarbons.produced,.royalty. payments.and.taxes..Changes.in.these.variables.could.significantly. impact.the.reserve.estimates.which.would.have.a.significant.impact. on.the.impairment.test.and.depreciation,.depletion.and.amortization. expense.of.Cenovus’s.crude.oil.and.natural.gas.assets..Cenovus’s. crude.oil.and.natural.gas.reserves.are.evaluated.and.reported.to.us.by. independent.qualified.reserves.evaluators. CEN OV US EN ERGY 2012 AN NUAL R EPORT / MAN AGE MEN T ’S DISC USSIO N AND A NA LYS IS 65 Impairment of Assets Property,.plant.and.equipment,.E&E.assets.and.goodwill.are.assessed. for.impairment.at.least.annually.and.when.circumstances.suggest.that. the.carrying.amount.may.exceed.the.recoverable.amount..Assets.are. tested.for.impairment.at.the.CGU.level..These.calculations.require. the.use.of.estimates.and.assumptions.and.are.subject.to.change.as. new.information.becomes.available..For.the.Company’s.upstream. assets,.these.estimates.include.future.commodity.prices,.expected. production.volumes,.quantity.of.reserves.and.discount.rates.as.well. as.future.development.and.operating.costs..Recoverable.amounts.for. the.Company’s.refining.assets.utilizes.assumptions.such.as.refinery. throughput,.future.commodity.prices,.operating.costs,.transportation. capacity.and.supply.and.demand.conditions..Changes.in.assumptions. used.in.determining.the.recoverable.amount.could.affect.the.carrying. value.of.the.related.assets.. For.impairment.testing.purposes,.goodwill.has.been.allocated.to.each. of.the.CGUs.to.which.it.relates. At.December.31,.2012,.the.recoverable.amounts.of.Cenovus’s.upstream. CGUs.were.determined.based.on.fair.value.less.costs.to.sell..Key. assumptions.in.the.determination.of.cash.flows.from.reserves.include. reserves.as.estimated.by.Cenovus’s.independent.qualified.reserves. evaluators,.crude.oil.and.natural.gas.prices.and.the.discount.rate. OiL AND NATURAL GAS PRiCES The.future.prices.used.to.determine.cash.flows.from.oil.and.gas.reserves.are.as.follows: . . . . . . . . . . . .. WTI (US$/barrel). AECO ($ / M c f ). . . . 2013. 92.50. 3.35. . . . 2014. 92.50. 3.85. . . . 2015. 93.60. 4.35. . . . 2016. 95.50. 4.70. . Average.Annual. Percent. . Change.to. . 2024 2017. 2% 97.40. 3% 5.10. DiSCOUNT RATE Evaluations.of.discounted.future.cash.flow.generally.use,.as.a.starting. point,.the.discount.rate.of.10.percent.which.is.an.industry.standard. rate.used.by.independent.qualified.reserve.evaluators.in.preparing. their.reserve.reports..Based.on.the.individual.characteristics.of.the. asset,.other.economic.and.operating.factors.are.also.considered. which.may.increase.or.decrease.the.implied.discount.rate..Changes. in.the.economic.conditions.could.significantly.change.the.estimated. recoverable.amount.. Decommissioning Costs Provisions.are.recognized.for.the.future.decommissioning.and. restoration.of.Cenovus’s.upstream.crude.oil.and.natural.gas.assets.and. refining.assets.at.the.end.of.their.economic.lives..Assumptions.have. been.made.to.estimate.the.future.liability.based.on.past.experience.and. current.economic.factors.which.Management.believes.are.reasonable.. However,.the.actual.cost.of.decommissioning.is.uncertain.and.cost. estimates.may.change.in.response.to.numerous.factors.including. changes.in.legal.requirements,.technological.advances,.inflation.and. the.timing.of.expected.decommissioning.and.restoration..In.addition,. Management.determines.the.appropriate.discount.rate.at.the.end.of. each.reporting.period..This.discount.rate,.which.is.credit.adjusted,. is.used.to.determine.the.present.value.of.the.estimated.future.cash. outflows.required.to.settle.the.obligation.and.may.change.in.response. to.numerous.market.factors..During.the.year.ended.December.31,. 2012,.the.decommissioning.liability.increased.$417.million.as.a. result.of.changes.in.the.discount.rate,.the.timing.of.settlement.and. the.estimated.costs.that.will.arise.on.settlement..Details.on.the. assumptions.used.in.determining.decommissioning.liabilities.can.be. found.in.the.notes.to.the.Consolidated.Financial.Statements.. Income Tax Provisions Tax.regulations.and.legislation.and.the.interpretations.thereof.in.the. various.jurisdictions.in.which.Cenovus.operates.are.subject.to.change.. As.a.result,.there.are.usually.a.number.of.tax.matters.under.review... As.such,.income.taxes.are.subject.to.measurement.uncertainty.. Deferred.income.tax.assets.are.recognized.to.the.extent.that.it.is. probable.that.the.deductible.temporary.differences.will.be.recoverable. in.future.periods..The.recoverability.assessment.involves.a.significant. amount.of.estimation.including.an.evaluation.of.when.the.temporary. differences.will.reverse,.an.analysis.of.the.amount.of.future.taxable. earnings,.the.availability.of.cash.flow.to.offset.the.tax.assets.when. the.reversal.occurs.and.the.application.of.tax.laws..There.are.some. transactions.for.which.the.ultimate.tax.determination.is.uncertain.. To.the.extent.that.assumptions.used.in.the.recoverability.assessment. change,.there.may.be.a.significant.impact.on.the.Consolidated.Financial. Statements.of.future.periods. 66 CENOVUS ENERGY 2012 ANNUAL RE PO RT / MANAG EM ENT ’S DISCUSSIO N AN D A NALYSIS CHANGES IN ACCOUNTING POLICIES AND FUTURE ACCOUNTING PRONOUNCEMENTS During.the.year.ended.December.31,.2012,.Cenovus.did.not.adopt.any. new.accounting.policies.. The.following.summarizes.the.future.accounting.pronouncements.that. will.impact.Cenovus..We.will.adopt.each.of.the.following.accounting. pronouncements.on.the.effective.date..Unless.otherwise.stated.below,. the.impact.of.the.initial.application.of.the.standards.listed.was.not. known.or.reasonably.estimable.at.the.time.of.authorization.of.the. Consolidated.Financial.Statements. Joint Arrangements, Consolidation, Associates and Disclosures In.May.2011,.the.International.Accounting.Standards.Board.(“IASB”). issued.the.following.new.and.amended.standards: •. •. .IFRS.10,.“Consolidated Financial Statements”.(“IFRS.10”).replaces.. IAS.27,.“Consolidated and Separate Financial Statements”.(“IAS.27”). and.Standing.Interpretations.Committee.(“SIC”).12,.“Consolidation – Special Purpose Entities”..IFRS.10.revises.the.definition.of.control.to. include.three.elements:.(1).power.over.an.investee,.(2).exposure.to. variable.returns.from.its.involvement.with.the.investee.and.(3).the. ability.to.use.its.power.to.affect.returns.from.the.investee..IFRS.10. provides.guidance.on.participating.and.protective.rights.and.also. addresses.the.notion.of.“de.facto”.control..It.also.includes.guidance. related.to.an.investor.with.decision.making.rights.to.determine.if.it.is. acting.as.a.principal.or.agent.. .IFRS.11,.“Joint Arrangements”.(“IFRS.11”).replaces.IAS.31,.“Interest in Joint Ventures”.(“IAS.31”).and.SIC.13,.“Jointly Controlled Entities – Non-Monetary Contributions by Venturers”..Under.IFRS.11,.a.joint. arrangement.is.classified.as.either.a.“joint.operation”.or.a.“joint. venture”.depending.on.the.rights.and.obligations.of.the.parties.to. the.arrangement..Under.a.joint.operation,.parties.have.rights.to. the.assets.and.obligations.for.the.liabilities.of.the.arrangement.and. account.for.their.share.of.assets,.liabilities,.revenues.and.expenses.. Under.a.joint.venture,.parties.have.the.rights.to.the.net.assets.of.the. arrangement.and.account.for.the.arrangement.as.an.investment.using. the.equity.method. •. .IFRS.12,.“Disclosure of Interest in Other Entities”.(“IFRS.12”).replaces. the.disclosure.requirements.previously.included.in.IAS.27,.IAS.31.and. IAS.28,.“Investments in Associates”..It.sets.out.the.extensive.disclosure. requirements.relating.to.an.entity’s.interests.in.subsidiaries,.joint. arrangements,.associates.and.unconsolidated.structured.entities. •. .IAS.27,.“Separate Financial Statements”.has.been.amended.to. conform.to.the.changes.made.in.IFRS.10,.but.retains.the.current. guidance.for.separate.financial.statements. •. .IAS.28,.“Investments in Associates and Joint Ventures”.has.been. amended.to.conform.to.the.changes.made.in.IFRS.10.and.IFRS.11. The.above.standards.are.effective.for.annual.periods.beginning.on.or. after.January.1,.2013.and.must.be.adopted.concurrently..It.is.anticipated. that.the.application.of.these.five.standards.will.not.have.a.significant. impact.on.the.Consolidated.Financial.Statements. Cenovus.performed.a.comprehensive.review.of.its.interest.in.other. entities.and.identified.two.individually.significant.interests,.FCCL. and.WRB,.for.which.it.shares.joint.control..Cenovus.reviewed.these. joint.arrangements.considering.their.structure,.the.legal.forms.of.any. separate.vehicles,.the.contractual.terms.of.the.arrangements.and.other. facts.and.circumstances..The.application.of.Cenovus’s.accounting.policy. under.IFRS.11.requires.judgment.in.determining.the.classification.of.its. joint.arrangements..It.was.determined.that.Cenovus.has.rights.to.the. assets.and.obligations.for.the.liabilities.of.FCCL.and.WRB..As.a.result,. these.joint.arrangements.will.be.classified.as.joint.operations.under.. IFRS.11.and.Cenovus’s.share.of.the.assets,.liabilities,.revenues.and. expenses.will.be.recognized.in.the.Consolidated.Financial.Statements. In.determining.the.classification.of.its.joint.arrangements.under.IFRS.11,. Cenovus.considered.the.following: •. •. •. •. .The.intention.of.the.transaction.creating.FCCL.and.WRB.was.to.form. an.integrated.North.American.heavy.oil.business..The.integrated. business.was.structured,.initially.on.a.tax.neutral.basis,.through.two. partnerships.due.to.the.assets.residing.in.different.tax.jurisdictions.. Partnerships.are.“flow-through”.entities.which.have.a.limited.life. .The.Partnership.agreements.require.the.partners.(Cenovus.and. ConocoPhillips.or.Phillips.66).to.make.contributions.if.funds.are. insufficient.to.meet.the.obligations.or.liabilities.of.the.partnership.. The.past.and.future.development.of.FCCL.and.WRB.is.dependent.on. funding.from.the.partners.by.way.of.partnership.notes.payable.and. loans..The.partnerships.do.not.have.any.third.party.borrowings. .FCCL.operates.like.most.typical.western.Canadian.working.interest. relationships.where.the.operating.partner.takes.product.on.behalf.of. the.participants..WRB.has.a.very.similar.structure.modified.only.to. account.for.the.operating.environment.of.the.refining.business.. .Cenovus.and.Phillips.66,.through.wholly-owned.subsidiaries,.provide. marketing.services,.purchase.necessary.feedstock.and.arrange.for. transportation.and.storage.on.the.partners’.behalf.as.the.agreements. prohibit.the.partnerships.from.undertaking.these.roles.themselves.. In.addition,.the.partnerships.do.not.have.employees.and.as.such.are. not.capable.of.performing.these.roles. •. .In.each.arrangement,.output.is.taken.by.one.of.the.partners,.indicating. that.the.partners.have.rights.to.the.economic.benefits.of.the.assets. and.the.obligation.for.funding.the.liabilities.of.the.arrangements.. CEN OV US EN ERGY 2012 AN NUAL R EPORT / MAN AGE MEN T ’S DISC USSIO N AND A NA LYS IS 67 Employee Benefits In.June.2011,.the.IASB.amended.IAS.19,.“Employee Benefits”.(“IAS.19”).. The.amendments.require.the.recognition.of.changes.in.defined.benefit. obligations.and.fair.value.of.plan.assets.when.they.occur,.eliminating. the.‘corridor.approach’,.and.accelerates.the.recognition.of.past.service. costs..In.order.for.the.net.defined.benefit.liability.or.asset.to.reflect.the. full.value.of.the.plan.deficit.or.surplus,.all.actuarial.gains.and.losses.are. to.be.recognized.immediately.through.Other.Comprehensive.Income. (“OCI”)..In.addition,.entities.will.be.required.to.calculate.net.interest.on. the.net.defined.benefit.liability.or.asset.using.the.same.discount.rate. used.to.measure.the.defined.benefit.obligation..The.amendments.also. enhance.financial.statement.disclosures.. The.amendments.to.IAS.19.require.retrospective.application..Based.on. Cenovus’s.preliminary.assessment,.when.the.amendments.are.applied. for.the.first.time.for.the.year.ending.December.31,.2013,.net.earnings. for.the.year.ended.December.31,.2012.would.increase.$1.million.and. other.comprehensive.income.after.tax.would.decrease.by.$3.million. (2011.–.$nil.and.decrease.$12.million,.respectively)..Shareholders’.equity. as.at.December.31,.2012.would.decrease.$24.million.(January.1,.2012.–. decrease.$22.million).with.corresponding.adjustments.being.recognized. in.other.liabilities.and.deferred.income.tax.liability. Fair Value Measurement In.May.2011,.the.IASB.issued.IFRS.13,.“Fair Value Measurement”.. (“IFRS.13”).which.provides.a.consistent.and.less.complex.definition.of. fair.value,.establishes.a.single.source.for.determining.fair.value.and. introduces.consistent.requirements.for.disclosures.related.to.fair.value. measurement..IFRS.13.is.effective.for.annual.periods.beginning.on.or. after.January.1,.2013.and.applies.prospectively.from.the.beginning.of. the.annual.period.in.which.the.standard.is.adopted..Early.adoption.is. permitted..IFRS.13.will.not.have.a.significant.impact.on.the.Consolidated. Financial.Statements. Financial Instruments The.IASB.intends.to.replace.IAS.39,.“Financial Instruments: Recognition and Measurement”.(“IAS.39”).with.IFRS.9,.“Financial Instruments”.. (“IFRS.9”)..IFRS.9.will.be.published.in.three.phases,.of.which.the.first. phase.has.been.published.. The.first.phase.addresses.the.accounting.for.financial.assets.and. financial.liabilities..The.second.phase.will.address.the.impairment.of. financial.instruments.and.the.third.phase.will.address.hedge.accounting. For.financial.assets,.IFRS.9.uses.a.single.approach.to.determine.whether. a.financial.asset.is.measured.at.amortized.cost.or.fair.value.and.replaces. the.multiple.rules.in.IAS.39..The.approach.in.IFRS.9.is.based.on.how.an. entity.manages.its.financial.instruments.in.the.context.of.its.business. model.and.the.contractual.cash.flow.characteristics.of.the.financial. assets..The.new.standard.also.requires.a.single.impairment.method.. to.be.used,.replacing.the.multiple.impairment.methods.in.IAS.39... For.financial.liabilities,.although.the.classification.criteria.for.financial. liabilities.will.not.change.under.IFRS.9,.the.approach.to.the.fair.value. option.for.financial.liabilities.may.require.different.accounting.for. changes.to.the.fair.value.of.a.financial.liability.as.a.result.of.changes.. to.an.entity’s.own.credit.risk.. IFRS.9.is.effective.for.annual.periods.beginning.on.or.after.January.1,. 2015.with.different.transitional.arrangements.depending.on.the.date. of.initial.application..Cenovus.is.currently.evaluating.the.impact.of. adopting.IFRS.9.on.its.Consolidated.Financial.Statements. Presentation of Items of Other Comprehensive Income In.June.2011,.the.IASB.issued.an.amendment.to.IAS.1,.“Presentation of Financial Statements”.(“IAS.1”).requiring.companies.to.group.items. presented.within.Other.Comprehensive.Income.based.on.whether.they. may.be.subsequently.reclassified.to.profit.or.loss..This.amendment.to. IAS.1.is.effective.for.annual.periods.beginning.on.or.after.July.1,.2012. with.full.retrospective.application..Early.adoption.is.permitted..The. adoption.of.this.amendment.will.not.have.a.significant.impact.on.the. Consolidated.Financial.Statements. Offsetting Financial Assets and Financial Liabilities In.December.2011,.the.IASB.issued.the.following.amended.standards: •. •. .IFRS.7,.“Financial Instruments: Disclosures”.(“IFRS.7”),.has.been. amended.to.provide.more.extensive.quantitative.disclosures.for. financial.instruments.that.are.offset.in.the.statement.of.financial. position.or.that.are.subject.to.enforceable.master.netting.or.. similar.arrangements. .IAS.32,.“Financial Instruments: Presentation”.(“IAS.32”),.has.been. amended.to.clarify.the.requirements.for.offsetting.financial.assets. and.liabilities..The.amendments.clarify.that.the.right.to.offset.must. be.available.on.the.current.date.and.cannot.be.contingent.on.a. future.event. The.amendments.to.IFRS.7.are.effective.for.annual.periods.beginning. on.or.after.January.1,.2013.and.the.amendments.to.IAS.32.are.effective. for.annual.periods.beginning.on.or.after.January.1,.2014,.both.requiring. retrospective.application..It.is.anticipated.that.IFRS.7.and.IAS.32.will.not. have.significant.impacts.on.the.Consolidated.Financial.Statements.. 68 CENOVUS ENERGY 2012 ANNUAL RE PO RT / MANAG EM ENT ’S DISCUSSIO N AN D A NALYSIS CO NT ROL ENVIRONMENT Management,.including.our.President.&.Chief.Executive.Officer.and. Executive.Vice-President.&.Chief.Financial.Officer,.has.assessed.the.design. and.effectiveness.of.internal.control.over.financial.reporting.(“ICFR”).and. disclosure.controls.and.procedures.(“DC&P”).as.at.December.31,.2012.. Based.on.their.evaluation,.Management.has.concluded.that.both.ICFR. and.DC&P.were.effective.as.at.December.31,.2012. The.effectiveness.of.our.ICFR.was.audited.by.PricewaterhouseCoopers. LLP,.an.independent.firm.of.chartered.accountants,.as.stated.in.their. Independent.Auditor’s.Report,.which.is.included.in.our.audited. Consolidated.Financial.Statements.for.the.year.ended.December.31,.2012. There.have.been.no.changes.to.ICFR.during.the.year.ended.December.31,. 2012.that.have.materially.affected,.or.are.reasonably.likely.to.materially. affect,.ICFR. Internal.control.systems,.no.matter.how.well.designed,.have.inherent. limitations..Therefore,.even.those.systems.determined.to.be.effective.can. provide.only.reasonable.assurance.with.respect.to.financial.statement. preparation.and.presentation..Also,.projections.of.any.evaluation.of. effectiveness.to.future.periods.are.subject.to.the.risk.that.controls.may. become.inadequate.because.of.changes.in.conditions,.or.that.the.degree. of.compliance.with.the.policies.or.procedures.may.deteriorate. T RAN S PARENC Y AND CORP ORATE RESPON SIB ILITY We.are.committed.to.operating.in.a.responsible.manner.and.to. integrating.our.corporate.responsibility.principles.into.the.way.we. conduct.our.business..We.recognize.the.importance.of.reporting.to. stakeholders.in.a.transparent.and.accountable.manner..We.disclose. not.only.the.information.we.are.required.to.disclose.by.legislation.or. regulatory.authorities,.but.also.information.that.more.broadly.describes. our.activities,.policies,.opportunities.and.risks.. Our.Corporate.Responsibility.(“CR”).policy.continues.to.drive.our. commitments,.strategy.and.reporting,.and.enables.alignment.with.our. business.objectives.and.processes..Our.future.CR.reporting.activities. will.be.guided.by.this.policy.and.will.focus.on.improving.performance. by.continuing.to.track,.measure.and.monitor.our.CR.performance. indicators..This.policy.is.available.on.our.website.at.www.cenovus.com. Our.CR.policy.focuses.on.six.commitment.areas:.(i).Leadership;.. (ii).Corporate.Governance.and.Business.Practices;.(iii).People;.. (iv).Environmental.Performance;.(v).Stakeholder.and.Aboriginal. Engagement.and.(vi).Community.Involvement.and.Investment..We. will.continue.to.externally.report.on.our.performance.in.these.areas. through.our.annual.CR.report.. The.CR.policy.emphasizes.our.commitment.to.protect.the.health. and.safety.of.all.individuals.affected.by.our.activities,.including.our. workforce.and.the.communities.where.we.operate..We.will.not. compromise.the.health.and.safety.of.any.individual.in.the.conduct. of.our.activities..We.will.strive.to.provide.a.safe.and.healthy.work. environment.and.we.expect.our.workers.to.comply.with.the.health. and.safety.practices.established.for.their.protection..Additionally,.the. CR.policy.includes.reference.to.emergency.response.management,. investment.in.efficiency.projects,.new.technologies.and.research.and. support.of.the.principles.of.the.Universal.Declaration.of.Human.Rights. As.our.CR.reporting.process.matures,.indicators.will.be.developed.and. integrated.in.our.CR.reporting.that.better.reflect.Cenovus’s.operations. and.challenges..Our.online.presence.will.be.expanded.through.the. corporate.responsibility.section.of.our.website..Our.Corporate. Responsibility.Report.can.be.found.on.our.website.at.www.cenovus.com.. This.report.was.aligned.with.the.Global.Reporting.Initiative.guidelines. and.the.standards.set.by.the.Canadian.Association.of.Petroleum. Producers.in.its.Responsible.Canadian.Energy.program. In.September.2012,.we.were.named.to.the.Dow.Jones.Sustainability. World.Index.(“DJSI.World”).for.the.first.time.and.to.the.Dow.Jones. Sustainability.North.America.Index.for.the.third.year.in.a.row..We.were. the.only.Canadian.integrated.oil.and.gas.company.listed.to.the.DJSI. World.in.2012..DJSI.World.recognizes.the.top.10.percent.of.the.2,500. largest.companies.in.the.Dow.Jones.Global.Total.Stock.Market.Index. that.lead.the.field.in.terms.of.corporate.responsibility.performance..In. October.2012,.for.the.third.year.in.a.row,.Cenovus.was.recognized.for. leadership.in.GHG.emissions.reporting.by.being.included.in.the.2012. Carbon.Disclosure.Leadership.Index.for.Canada..In.January.2013,.we. were.named.for.the.first.time.to.the.Corporate.Knights.Global.100.list. for.2013,.which.recognizes.the.world’s.most.sustainable.corporations. CEN OV US EN ERGY 2012 AN NUAL R EPORT / MAN AGE MEN T ’S DISC USSIO N A ND ANALYSI S 69 OUT LO OK We.continue.to.move.forward.on.our.10.year.strategic.plan.targeting. net.oil.sands.bitumen.production.of.approximately.400,000.barrels.per. day.and.total.net.oil.production.of.approximately.500,000.barrels.per. day.by.the.end.of.2021..To.achieve.our.development.plans,.additional. expansions.are.planned.at.Foster.Creek,.Christina.Lake.and.Narrows. Lake,.as.well.as.new.projects.at.Grand.Rapids.and.Telephone.Lake..We. will.continue.the.development.of.our.oil.sands.resources.in.multiple. phases.using.a.low.cost.manufacturing-like.approach.enabled.by. technology,.innovation.and.continued.respect.for.the.health.and.safety. of.our.employees.with.an.emphasis.on.environmental.performance.and. meaningful.dialogue.with.our.stakeholders. COMMODITY PRICES UNDERLYING OUR FINANCIAL RESULTS Our.crude.oil.pricing.outlook.is.influenced.by.the.following:. •. •. •. •. •. .The.general.outlook.for.crude.oil.prices.will.continue.to.be.tied.. to.global.economic.growth.and.production.interruptions... Short-term.prices.are.likely.to.remain.volatile.and.be.impacted.. by.market.expectations; .Brent-WTI.differentials.are.expected.to.narrow.over.the.first.half. of.2013.as.new.pipeline.capacity.is.added.to.move.crude.oil.from. Cushing.to.U.S..Gulf.Coast.markets; .WCS.prices.should.weaken.relative.to.U.S..Gulf.Coast.pricing.as. inland.crude.oil.supply.continues.to.grow.at.a.faster.pace.than. rail.and.pipeline.takeaway.capacity..Although.all.WCSB.crude.oil. should.show.downward.price.pressure,.heavy.grades.should.perform. somewhat.better.in.the.latter.half.of.2013.once.new.coking.capacity. is.added.in.the.U.S..Midwest;. . .Refining.crack.margins.are.projected.to.soften.in.2013.when.new. pipeline.capacity.out.of.Cushing.should.cause.WTI.crude.oil. discounts.to.moderate..Refiners.processing.WCSB.crude.oil.should. continue.to.see.strong.margins;.and .Natural.gas.prices.should.continue.to.firm,.provided.weather.remains. near.historic.norms,.as.supply.growth.moderates.with.reduced. activity.and.demand.growth.continues.due.to.still.very.competitive. North.American.gas.pricing. ) l e r r a b r e p s r a l l o d . S . U e g a r e v A ( 13 0 120 11 0 10 0 90 80 70 60 50 40 Q4 20 12 Q1 20 13 Q2 2013 Q3 2013 Q 4 2013 FORWARD PRICES AT DECEMBER 31 , 20 12 BRENT C5 @ EDMONTON W TI WCS While.we.expect.to.see.volatility.in.crude.prices.we.mitigate.our. exposure.to.light/heavy.price.differentials.through.the.following: •. •. •. •. .Integration.–.having.heavy.oil.refining.capacity.able.to.process. Canadian.heavy.crudes..From.a.value.perspective,.our.refining. business.is.able.to.capture.value.from.both.the.WTI-WCS.differential. for.Canadian.crude.and.the.Brent-WTI.differential.from.the.sale.of. refined.products.which.are.closely.tied.to.Brent.pricing; .Financial.hedge.transactions.–.protecting.our.upstream.crude.prices. from.downside.risk.by.entering.into.financial.transactions.that.fix.the. WTI-WCS.differential; .Marketing.arrangements.–.protecting.our.upstream.crude.prices. by.entering.into.physical.supply.transactions.with.fixed.price. components.directly.with.refiners;.and. .Transportation.commitments.–.supporting.transportation.projects. that.move.crude.oil.from.our.production.areas.to.consuming.markets. and.also.to.tidewater.markets. 70 CENOVUS ENERGY 2012 ANNUAL RE PO RT / MANAG EM ENT ’S DISCUSSIO N AN D A NALYSIS Protection Against Canadian Congestion Other Key Challenges ) y a d / s l b b M ( 240 200 160 120 80 40 0 Transportation commitments Managed price exposure • hedging contracts • marketing arrangements Integrated volumes • heavy oil processing capacity 2011 2012 2013F (1) BLENDED BITUMEN BLENDED CONVENTIONA L HE AVY (1). Expected.gross.production.capacity KEY PRIORITIES FOR 2013 Market Access We.are.focused.on.near.and.mid-term.strategies.to.broaden.market. access.for.Canadian.oil..This.will.allow.us.to.build.on.our.successful. marketing.and.transportation.strategy.and.broaden.the.portfolio.of. market.opportunities.for.our.growing.production..This.will.include. increasing.our.rail.shipping.capacity.for.oil.to.approximately.10,000. barrels.per.day,.committing.to.industry.transportation.projects.as.well. as.new.and.expanded.market.development.initiatives.for.our.crude.oil. Attacking Cost Structures We.have.a.track.record.of.cost.efficiency..To.continue.to.meet.our. business.plan,.we.must.ensure.that,.over.the.long.term,.we.maintain. an.efficient.and.sustainable.cost.structure.and.take.advantage.of.our. business.model..For.example,.we.have.a.number.of.opportunities.to. improve.our.cost.efficiency.by.further.leveraging.our.supply.chain. management.to.improve.capital.and.operating.costs. We.will.need.to.effectively.manage.our.business.to.support.our. development.plans.including.timely.regulatory.and.partner.approvals,. environmental.regulations.and.competitive.pressures.within.our. industry..Additional.details.regarding.the.impact.of.these.factors.on.our. financial.results.are.discussed.in.the.Risk.Management.section.of.this. MD&A..We.also.direct.our.shareholders.to.review.the.guidance.for.2013. that.we.published.on.our.website,.www.cenovus.com,.in.connection. with.our.December.2012.news.release. CAPITAL ALLOCATION IN THE FUTURE We.will.continue.to.develop.our.strategy.with.respect.to.capital. investment.and.returns.to.shareholders..We.believe.that.strong. operational.performance.will.translate.into.solid.financial.performance.. Future.cash.flow.will.continue.to.be.allocated.using.a.disciplined. approached,.focusing.on.the.following.priorities: •. •. •. .First,.to.committed.capital,.which.is.the.capital.spending.required. for.continued.progress.on.approved.expansions.at.our.multi-phase. projects,.and.capital.for.our.existing.business.operations; .Second.to.paying.a.meaningful.dividend.as.part.of.providing.strong. total.shareholder.return;.and .Third.for.growth.capital,.which.is.the.capital.spending.for.projects. beyond.our.committed.capital.projects. This.capital.allocation.process.includes.evaluating.all.opportunities. using.specific.rigorous.criteria.as.well.as.achieving.our.objectives.of. maintaining.a.prudent.and.flexible.capital.structure.and.strong.balance. sheet.metrics.which.allow.us.to.be.financially.resilient.in.times.of.. lower.cash.flow.. Future.dividends.are.at.the.sole.discretion.of.the.Board.and.. considered.quarterly. CEN OV US EN ERGY 2012 ANNUAL RE PORT / MA NAGEM ENT ’S DISCU SSION AND AN ALYSIS 7 1 CON SOLIDATED F I NA NCIAL STATEMENTS R EPORT OF M A NAGEM ENT MANAGEMENT’S RESPONSIBILITY FOR THE CONSOLIDATED FINANCIAL STATEMENTS The.accompanying.Consolidated.Financial.Statements.of.Cenovus. Energy.Inc..are.the.responsibility.of.Management..The.Consolidated. Financial.Statements.have.been.prepared.by.Management.in.Canadian. dollars.in.accordance.with.International.Financial.Reporting.Standards. as.issued.by.the.International.Accounting.Standards.Board.and.include. certain.estimates.that.reflect.Management’s.best.judgments.. The.Board.of.Directors.has.approved.the.information.contained.in.the. Consolidated.Financial.Statements..The.Board.of.Directors.fulfills.its. responsibility.regarding.the.financial.statements.mainly.through.its.. Audit.Committee.which.is.made.up.of.three.independent.directors... The.Audit.Committee.has.a.written.mandate.that.complies.with.the. current.requirements.of.Canadian.securities.legislation.and.the.United. States.Sarbanes-Oxley Act of 2002.and.voluntarily.complies,.in.principle,. with.the.Audit.Committee.guidelines.of.the.New.York.Stock.Exchange.. The.Audit.Committee.meets.with.Management.and.the.independent. auditors.on.at.least.a.quarterly.basis.to.review.and.approve.interim. Consolidated.Financial.Statements.and.Management’s.Discussion.and. Analysis.prior.to.their.public.release.as.well.as.annually.to.review.the. annual.Consolidated.Financial.Statements.and.Management’s.Discussion. and.Analysis.and.recommend.their.approval.to.the.Board.of.Directors. MANAGEMENT’S ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL REPORTING Management.is.also.responsible.for.establishing.and.maintaining. adequate.internal.control.over.financial.reporting..The.internal.control. system.was.designed.to.provide.reasonable.assurance.to.Management. regarding.the.preparation.and.presentation.of.the.Consolidated. Financial.Statements. Internal.control.systems,.no.matter.how.well.designed,.have.inherent. limitations..Therefore,.even.those.systems.determined.to.be.effective. can.provide.only.reasonable.assurance.with.respect.to.financial. statement.preparation.and.presentation..Also,.projections.of.any. evaluation.of.effectiveness.to.future.periods.are.subject.to.the.risk.that. controls.may.become.inadequate.because.of.changes.in.conditions,.or. that.the.degree.of.compliance.with.the.policies.or.procedures.. may.deteriorate. Management.has.assessed.the.design.and.effectiveness.of.internal. control.over.financial.reporting.as.at.December.31,.2012..In.making. its.assessment,.Management.has.used.the.Committee.of.Sponsoring. Organizations.of.the.Treadway.Commission.(“COSO”).framework.in. Internal.Control.–.Integrated.Framework.to.evaluate.the.design.and. effectiveness.of.internal.control.over.financial.reporting..Based.on. our.evaluation,.Management.has.concluded.that.internal.control.over. financial.reporting.was.effective.as.at.December.31,.2012. PricewaterhouseCoopers.LLP,.an.independent.firm.of.Chartered. Accountants,.was.appointed.to.audit.and.provide.independent.opinions. on.both.the.Consolidated.Financial.Statements.and.internal.control. over.financial.reporting.as.at.December.31,.2012,.as.stated.in.their. Auditor’s.Report.dated.February.13,.2013..PricewaterhouseCoopers.LLP. has.provided.such.opinions. BR iAN C . F ERGUSON President.&. Chief.Executive.Officer. Cenovus.Energy.Inc.. February.13,.2013. iVO R M. RUSTE Executive.Vice-President.& Chief.Financial.Officer Cenovus.Energy.Inc. 72 CENOVUS ENERGY 2012 ANNUAL RE PO RT / CONSOLIDATED FINANCIAL STATEMEN TS I N DE P ENDENT A UDI TOR’S R EPORT TO THE SHAREHOLDERS OF CENOVUS ENERGY INC. We.have.completed.an.integrated.audit.of.Cenovus.Energy.Inc.’s.2012.and.2011.Consolidated.Financial.Statements.and.its.internal.control.over. financial.reporting.as.at.December.31,.2012.and.an.audit.of.its.2010.Consolidated.Financial.Statements..Our.opinions,.based.on.our.audits,.are. presented.below. REPORT ON THE CONSOLIDATED FINANCIAL STATEMENTS We.have.audited.the.accompanying.Consolidated.Financial.Statements. of.Cenovus.Energy.Inc.,.which.comprise.the.Consolidated.Balance. Sheets.as.at.December.31,.2012.and.December.31,.2011.and.the. Consolidated.Statements.of.Earnings.and.Comprehensive.Income,. Shareholders’.Equity.and.Cash.Flows.for.each.of.the.three.years.in.the. period.ended.December.31,.2012,.and.the.related.notes,.which.. comprise.a.summary.of.significant.accounting.policies.and.other. explanatory.information. MANAGEMENT’S RESPONSIBILITY FOR THE CONSOLIDATED FINANCIAL STATEMENTS Management.is.responsible.for.the.preparation.and.fair.presentation. of.these.Consolidated.Financial.Statements.in.accordance.with. International.Financial.Reporting.Standards.as.issued.by.the. International.Accounting.Standards.Board.and.for.such.internal.control. as.management.determines.is.necessary.to.enable.the.preparation. of.consolidated.financial.statements.that.are.free.from.material. misstatement,.whether.due.to.fraud.or.error. AUDITOR’S RESPONSIBILITY Our.responsibility.is.to.express.an.opinion.on.these.Consolidated. Financial.Statements.based.on.our.audits..We.conducted.our.audits. in.accordance.with.Canadian.generally.accepted.auditing.standards. and.the.standards.of.the.Public.Company.Accounting.Oversight.Board. (United.States)..Those.standards.require.that.we.plan.and.perform.an. audit.to.obtain.reasonable.assurance.about.whether.the.consolidated. financial.statements.are.free.from.material.misstatement..Canadian. generally.accepted.auditing.standards.require.that.we.comply.with. ethical.requirements. An.audit.involves.performing.procedures.to.obtain.audit.evidence,.on. a.test.basis,.about.the.amounts.and.disclosures.in.the.consolidated. financial.statements..The.procedures.selected.depend.on.the. auditor’s.judgment,.including.the.assessment.of.the.risks.of.material. misstatement.of.the.consolidated.financial.statements,.whether.due.to. fraud.or.error..In.making.those.risk.assessments,.the.auditor.considers. internal.control.relevant.to.the.company’s.preparation.and.fair. presentation.of.the.consolidated.financial.statements.in.order.to.design. audit.procedures.that.are.appropriate.in.the.circumstances..An.audit. also.includes.evaluating.the.appropriateness.of.accounting.principles. and.policies.used.and.the.reasonableness.of.accounting.estimates.made. by.management,.as.well.as.evaluating.the.overall.presentation.of.the. consolidated.financial.statements. We.believe.that.the.audit.evidence.we.have.obtained.in.our.audits.is. sufficient.and.appropriate.to.provide.a.basis.for.our.audit.opinion.on. the.Consolidated.Financial.Statements. OPINION In.our.opinion,.the.Consolidated.Financial.Statements.present.fairly,.in. all.material.respects,.the.financial.position.of.Cenovus.Energy.Inc..as.at. December.31,.2012.and.December.31,.2011.and.its.financial.performance. and.cash.flows.for.each.of.the.three.years.in.the.period.ended. December.31,.2012.in.accordance.with.International.Financial.Reporting. Standards.as.issued.by.the.International.Accounting.Standards.Board. REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING We.have.also.audited.Cenovus.Energy.Inc.’s.internal.control.over. financial.reporting.as.at.December.31,.2012,.based.on.criteria.established. in.Internal.Control.–.Integrated.Framework,.issued.by.the.Committee.of. Sponsoring.Organizations.of.the.Treadway.Commission.(“COSO”).. MANAGEMENT’S RESPONSIBILITY FOR INTERNAL CONTROL OVER FINANCIAL REPORTING Management.is.responsible.for.maintaining.effective.internal.control. over.financial.reporting.and.for.its.assessment.of.the.effectiveness.of. internal.control.over.financial.reporting.included.in.the.accompanying. Report.of.Management. AUDITOR’S RESPONSIBILITY Our.responsibility.is.to.express.an.opinion.on.the.Company’s.internal. control.over.financial.reporting.based.on.our.audit..We.conducted.our. audit.of.internal.control.over.financial.reporting.in.accordance.with.the. standards.of.the.Public.Company.Accounting.Oversight.Board.(United. States)..Those.standards.require.that.we.plan.and.perform.the.audit.to. obtain.reasonable.assurance.about.whether.effective.internal.control. over.financial.reporting.was.maintained.in.all.material.respects. An.audit.of.internal.control.over.financial.reporting.includes.obtaining. an.understanding.of.internal.control.over.financial.reporting,.assessing. the.risk.that.a.material.weakness.exists,.testing.and.evaluating.the. design.and.operating.effectiveness.of.internal.control,.based.on.the. assessed.risk,.and.performing.such.other.procedures.as.we.consider. necessary.in.the.circumstances. We.believe.that.our.audit.provides.a.reasonable.basis.for.our.audit. opinion.on.the.Company’s.internal.control.over.financial.reporting.. CEN OV US EN ERGY 2012 AN NUAL R EPORT / CO NSOLIDATED FINA NCIA L STATE MENTS 73 DEFINITION OF INTERNAL CONTROL OVER FINANCIAL REPORTING A.company’s.internal.control.over.financial.reporting.is.a.process. designed.to.provide.reasonable.assurance.regarding.the.reliability.of. financial.reporting.and.the.preparation.of.financial.statements.for. external.purposes.in.accordance.with.generally.accepted.accounting. principles..A.company’s.internal.control.over.financial.reporting.includes. those.policies.and.procedures.that:.(i).pertain.to.the.maintenance. of.records.that,.in.reasonable.detail,.accurately.and.fairly.reflect.the. transactions.and.dispositions.of.the.assets.of.the.company;.(ii).provide. reasonable.assurance.that.transactions.are.recorded.as.necessary.to. permit.preparation.of.financial.statements.in.accordance.with.generally. accepted.accounting.principles,.and.that.receipts.and.expenditures.of. the.company.are.being.made.only.in.accordance.with.authorizations.of. management.and.directors.of.the.company;.and.(iii).provide.reasonable. assurance.regarding.prevention.or.timely.detection.of.unauthorized. acquisition,.use,.or.disposition.of.the.company’s.assets.that.could.have. a.material.effect.on.the.financial.statements. INHERENT LIMITATIONS Because.of.its.inherent.limitations,.internal.control.over.financial. reporting.may.not.prevent.or.detect.misstatements..Also,.projections.of. any.evaluation.of.effectiveness.to.future.periods.are.subject.to.the.risk. that.controls.may.become.inadequate.because.of.changes.in.conditions. or.that.the.degree.of.compliance.with.the.policies.or.procedures.. may.deteriorate. OPINION In.our.opinion,.Cenovus.Energy.Inc..maintained,.in.all.material.respects,. effective.internal.control.over.financial.reporting.as.at.December.31,. 2012.based.on.criteria.established.in.Internal.Control.–.Integrated. Framework,.issued.by.COSO. PR iCEWATER h O USE CO OPE RS L LP Chartered.Accountants Calgary,.Alberta,.Canada February.13,.2013 74 CENOVUS ENERGY 2012 ANNUAL RE PO RT / CONSOLIDATED FINANCIAL STATEMEN TS CON SOLIDATED STATEMENTS OF E ARN INGS AND CO MPREHENSIV E INCOME . (Gain).Loss.on.Risk.Management.. For the year s end ed Dece m ber 3 1,. ($ mil lions, except p er share am o unts ). Revenues. . Gross.Sales. . Less:.Royalties. . . Expenses. . Purchased.Product. . Transportation.and.Blending. . Operating. . Production.and.Mineral.Taxes. . . Depreciation,.Depletion.and.Amortization. . Goodwill.Impairment. . Exploration.Expense. . General.and.Administrative. . . . . . Other.(Income).Loss,.net.. Earnings Before Income Tax. . Income.Tax.Expense. Net Earnings. Other Comprehensive Income (Loss), Net of Tax. Foreign.Currency.Translation.Adjustment. . Comprehensive Income. Finance.Costs. Interest.Income. Foreign.Exchange.(Gain).Loss,.net. (Gain).Loss.on.Divestiture.of.Assets.. Net Earnings per Common Share. . Basic. . Diluted. See.accompanying.Notes.to.Consolidated.Financial.Statements. Notes. 1. . . . 1. . . . . 31. 16. 19. 15. . 5. 6. 7. 17. . . 8. . . . . 9. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012. . 17,229. 387. 16,842. . 9,223. 1,798. 1,682. 37. (393). 1,585. 393. 68. 352. 455. (109) (20). –. (5). 1,776. 783. 993. . (24). 969 . $ 1.31. $ 1.31. . . . . . . . . . . . . . . . . . . . . . . . . . . 2011. 2010 . . . . . . . . . . . . . . . . . . . . . . 16,185. 489. 15,696. 9,090. 1,369. 1,406. 36. (248). 1,295. –. –. 295. 447. (124). 26. (107). 4. 2,207. 729. 1,478. 48. 1,526. $..1.96. $..1.95. 13,090 449 12,641 7,551 1,065 1,286 34 (324) 1,302 – 3 246 498 (144) (51) (116) (13) 1,304 223 1,081 71 1,152 $..1.44 $..1.43 CEN OV US EN ERGY 2012 AN NUAL R EPORT / CO NSOLIDATED FINA NCIA L STATE MENTS 75 CON SOL IDAT ED BAL ANCE SH EETS . Cash.and.Cash.Equivalents. . Accounts.Receivable.and.Accrued.Revenues. . Current.Portion.of.Partnership.Contribution.Receivable. . . Risk.Management. . Assets.Held.for.Sale. Inventories. As a t December 31, ($ mil lions). Assets. Current Assets. . . . . . .. Current Assets. . Exploration.and.Evaluation.Assets. . Property,.Plant.and.Equipment,.net. . Partnership.Contribution.Receivable. . Risk.Management. . . Other.Assets. . Goodwill. Total Assets. Income.Tax.Receivable. . Accounts.Payable.and.Accrued.Liabilities. . . Current.Portion.of.Partnership.Contribution.Payable. . Risk.Management. . Liabilities.Related.to.Assets.Held.for.Sale. Income.Tax.Payable. Liabilities and Shareholders’ Equity . . Current Liabilities. .. . . . . Current Liabilities. . Long-Term.Debt. . Partnership.Contribution.Payable. . Risk.Management. . Decommissioning.Liabilities. . Other.Liabilities. . Deferred.Income.Taxes. Total Liabilities. . Shareholders’.Equity. Total Liabilities and Shareholders’ Equity. . Commitments.and.Contingencies. . . . . . Notes. . . 10. 11. 12. 13. 31. 14. . 1,.15. 1,.16. 12. 31. . 18. 1,.19. . . . 20. . 12. 31. 14. . 21. 12. 31. 22. 23. 8. . . . . 33. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012. . . 1,160. 1,464. 384. 1,288. 283. –. 4,579. 1,285. 16,152. 1,398. 5. –. 58 . 739. 24,216. 2,650. 217. 386. 17. –. 3,270. 4,679. 1,426. 1. 2,315. 151. 2,568. 14,410. 9,806. 24,216. 2011 495 1,405 372 1,291 232 116 3,911 880 14,324 1,822 52 29 44 1,132 22,194 2,579 329 372 54 54 3,388 3,527 1,853 14 1,777 128 2,101 12,788 9,406 22,194 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . See.accompanying.Notes.to.Consolidated.Financial.Statements. Approved.by.the.Board.of.Directors Mi Ch AEL A . G RAND iN Director. Cenovus.Energy.Inc.. . . CO LiN TAYLO R Director Cenovus.Energy.Inc. 76 CENOVUS ENERGY 2012 ANNUAL RE PO RT / CONSOLIDATED FINANCIAL STATEMEN TS CON SOLIDATED STATEMENTS OF SHAREHOLDERS’ EQ UITY . . . ($ mil lions). Balance as at January 1, 2010. Net.Earnings. Other.Comprehensive.Income.(Loss). Total.Comprehensive.Income.for.the.Year.. Common.Shares.Issued.Under.Option.Plans. Dividends.on.Common.Shares.. Balance as at December 31, 2010. Net.Earnings. Other.Comprehensive.Income.(Loss). Total.Comprehensive.Income.for.the.Year.. Common.Shares.Issued.Under.Option.Plans. Stock-Based.Compensation.Expense. Dividends.on.Common.Shares. Balance as at December 31, 2011. Net.Earnings. Other.Comprehensive.Income.(Loss). Total.Comprehensive.Income.for.the.Year.. Common.Shares.Issued.Under.Option.Plans. Stock-Based.Compensation.Expense. Dividends.on.Common.Shares. Balance as at December 31, 2012. (1).Accumulated.Other.Comprehensive.Income. See.accompanying.Notes.to.Consolidated.Financial.Statements. . . . . . . . . . . . . . . . . . . . . . . . Share.Capital. (Note.25). 3,681. –. –. –. 35. –. 3,716. –. –. –. 64. –. –. 3,780. –. –. –. 49. –. –. 3,829 ..Paid.in.Surplus. (Note.25). 4,083. –. –. –. –. –. 4,083. –. –. –. –. 24. –. 4,107. –. –. –. –. 47. –. 4,154 Retained Earnings. 45. 1,081. –. 1,081. –. (601). 525. 1,478. –. 1,478. –. –. (603). 1,400. 993. –. 993. –. –. (665). 1,728 .AOCI.(1). –. –. 71. 71. –. –. 71. –. 48. 48. –. –. –. 119. –. (24). (24). –. –. –. 95 Total 7,809 1,081 71 1,152 35 (601) 8,395 1,478 48 1,526 64 24 (603) 9,406 993 (24) 969 49 47 (665) 9,806 CEN OV US EN ERGY 2012 AN NUAL R EPORT / CO NSOLIDATED FINA NCIA L STATE MENTS 7 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012. . 993. 1,585. 393. 68. 474. –. (57). (70). –. 86. 171. 3,643. (113). (110). 3,420. . . (654). (2,795). 76. –. (13). 50. (3,336). . 84. . 3. –. 1,219. 37. (665). (2). 592. . (11). 665. 495. 1,160. . 2011. . 1,478. 1,295. –. –. 575. 13. (180). (42). (107). 75. 169. 3,276. (82). 79. 3,273. . . (527). (2,265). 173. (13). (28). 130. (2,530). . 743. . (9). –. –. 48. (603). 6. (558). . 10. 195. 300. 495. . 2010. . 1,081 1,302 – – 141 – (46) (69) (116) 75 44 2,412 (55) 234 2,591 . (350) (1,851) 309 – 4 95 (1,793) 798 . – (58) – 28 (601) – (631) (22) 145 155 300 . CON SOL IDAT ED STATEMENTS OF C AS H FLOWS . For the years ended Decem b er 3 1, ($ mil lions). Operating Activities. . Net.Earnings.. . Depreciation,.Depletion.and.Amortization. . Goodwill.Impairment. . Exploration.Expense. . Deferred.Income.Taxes. . Cash.Tax.on.Divestiture.of.Assets. . Unrealized.(Gain).Loss.on.Risk.Management. . Unrealized.Foreign.Exchange.(Gain).Loss. . (Gain).Loss.on.Divestiture.of.Assets.. . Unwinding.of.Discount.on.Decommissioning.Liabilities. . Other. . . . Net.Change.in.Other.Assets.and.Liabilities. . Net.Change.in.Non-Cash.Working.Capital. Cash From Operating Activities. . Investing Activities. . Capital.Expenditures.–.Exploration.and.Evaluation.Assets. . Capital.Expenditures.–.Property,.Plant.and.Equipment. . Proceeds.From.Divestiture.of.Assets. . Cash.Tax.on.Divestiture.of.Assets. . Net.Change.in.Investments.and.Other.. . Net.Change.in.Non-Cash.Working.Capital. Cash (Used in) Investing Activities. . Net Cash Provided (Used) before Financing Activities. . . . . .Notes. . . . . . 8. . 31. 7. 17. 5,.22. . . . . . . . 15. 16. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Issuance.of.Long-Term.Debt. Financing Activities. . . Net.Issuance.(Repayment).of.Short-Term.Borrowings. . . Net.Issuance.(Repayment).of.Revolving.Long-Term.Debt. . . . . Proceeds.on.Issuance.of.Common.Shares. . . Dividends.Paid.on.Common.Shares. . . Other. . Cash From (Used in) Financing Activities. . . . Foreign Exchange Gain (Loss) on Cash and Cash Equivalents Held in Foreign Currency . Increase (Decrease) in Cash and Cash Equivalents. . Cash and Cash Equivalents, Beginning of Year. . Cash and Cash Equivalents, End of Year. . . . . . 9. . . . . . . . . Supplementary.Cash.Flow.Information. . See.accompanying.Notes.to.Consolidated.Financial.Statements. 32. . 78 CENOVUS ENERGY 2012 ANNUAL RE PO RT / CONSOLIDATED FINANCIAL STATEMEN TS NOT ES TO CONSOLIDATED FI NA NC IAL STATEMENTS Al l amounts in $ m il l io ns, unl ess otherw ise ind ica ted For the year end ed Decemb er 3 1, 2 012 1. DE SCR IP TIO N OF B USINESS AND SEG MEN TED DISCLOS URES Cenovus.Energy.Inc.,.and.its.subsidiaries,.(together.“Cenovus”.or.the. “Company”).are.in.the.business.of.the.development,.production.and. marketing.of.crude.oil,.natural.gas.and.natural.gas.liquids.(“NGLs”).in. Canada.with.refining.operations.in.the.United.States.(“U.S.”). Cenovus.began.independent.operations.on.December.1,.2009,.as.a. result.of.the.plan.of.arrangement.(“Arrangement”).involving.Encana. Corporation.(“Encana”).whereby.Encana.was.split.into.two.independent. energy.companies,.one.a.natural.gas.company,.Encana,.and.the.other. an.oil.company,.Cenovus..In.connection.with.the.Arrangement,.Encana. common.shareholders.received.one.share.in.each.of.the.new.Encana. and.Cenovus.in.exchange.for.each.Encana.share.held. Cenovus.was.incorporated.under.the.Canada Business Corporations Act and.its.shares.are.publicly.traded.on.the.Toronto.(“TSX”).and.New. York.(“NYSE”).stock.exchanges..The.executive.and.registered.office. is.located.at.2600,.500.Centre.Street.S.E.,.Calgary,.Alberta,.Canada,. T2G.1A6..Information.on.the.Company’s.basis.of.presentation.for.these. Consolidated.Financial.Statements.is.found.in.Note.2.. The.Company’s.reportable.segments.are.as.follows: •. Oil Sands,.includes.the.development.and.production.of.Cenovus’s. bitumen.assets.at.Foster.Creek,.Christina.Lake.and.Narrows.Lake.as. well.as.heavy.oil.assets.at.Pelican.Lake..This.segment.also.includes. the.Athabasca.natural.gas.assets.and.projects.in.the.early.stages.of. development.such.as.Grand.Rapids.and.Telephone.Lake..Certain. of.the.Company’s.operated.oil.sands.properties,.notably.Foster. Creek,.Christina.Lake.and.Narrows.Lake,.are.jointly.owned.with. ConocoPhillips,.an.unrelated.U.S..public.company.. •. •. •. Conventional,.which.includes.the.development.and.production. of.conventional.crude.oil,.NGLs.and.natural.gas.in.Alberta.and. Saskatchewan,.including.the.carbon.dioxide.enhanced.oil.recovery. project.at.Weyburn.and.emerging.tight.oil.opportunities.. Refining and Marketing,.which.is.focused.on.the.refining.of.crude. oil.products.into.petroleum.and.chemical.products.at.two.refineries. located.in.the.U.S..The.refineries.are.jointly.owned.with.and.operated. by.Phillips.66,.an.unrelated.U.S..public.company..This.segment.also. markets.Cenovus’s.crude.oil.and.natural.gas,.as.well.as.third-party. purchases.and.sales.of.product.that.provide.operational.flexibility. for.transportation.commitments,.product.type,.delivery.points.and. customer.diversification.. Corporate and Eliminations,.which.primarily.includes.unrealized.. gains.and.losses.recorded.on.derivative.financial.instruments,.gains. and.losses.on.divestiture.of.assets,.as.well.as.other.Cenovus-wide. costs.for.general.and.administrative.and.financing.activities..As. financial.instruments.are.settled,.the.realized.gains.and.losses. are.recorded.in.the.operating.segment.to.which.the.derivative. instrument.relates..Eliminations.relate.to.sales.and.operating. revenues.and.purchased.product.between.segments,.recorded.at. transfer.prices.based.on.current.market.prices,.and.to.unrealized. intersegment.profits.in.inventory.. The.tabular.financial.information.which.follows.presents.the.segmented. information.first.by.segment,.then.by.product.and.geographic.location.. CEN OV US EN ERGY 2012 ANNUAL RE PORT / N OTES TO CO NSOLIDATED FINA NCI AL STAT EMENTS 7 9 A) RESULTS OF OPERATIONS – SEGMENT AND OPERATIONAL INFORMATION . . . . . . . . (Gain).Loss.on.Risk.Management. . For the years ended Decem b er 3 1,. Revenues. . Gross.Sales. . Less:.Royalties. . . Expenses. . Purchased.Product. . Transportation.and.Blending. . Operating. . Production.and.Mineral.Taxes. . Operating Cash Flow. . Depreciation,.Depletion.and.Amortization. . Goodwill.Impairment. . Exploration.Expense. Segment Income (Loss). . . . For the years ended Decem b er 3 1,. Revenues. . Gross.Sales. . Less:.Royalties. . . Expenses. . Purchased.Product. . Transportation.and.Blending. . Operating. . Production.and.Mineral.Taxes. . . . Depreciation,.Depletion.and.Amortization. . Goodwill.Impairment. . Exploration.Expense. Segment Income (Loss). . General.and.Administrative. . . . . . Other.(Income).Loss,.net. . Earnings Before Income Tax. . Income.Tax.Expense. Net Earnings. Finance.Costs. Interest.Income. Foreign.Exchange.(Gain).Loss,.net. (Gain).Loss.on.Divestiture.of.Assets. (Gain).Loss.on.Risk.Management. . . . . . Oil.Sands. 2011. . 3,291. 284. 3,007. . –. 1,231. 438. –. 70. 1,268. 347. –. –. 921. 2010. . 2,702. 279. 2,423. . –. 935. 367. –. (10). 1,131. 375. –. 3. 753. 2012. . 4,088. 215. 3,873. . –. 1,653. 584. –. (80). 1,716. 482. –. –. 1,234. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Conventional. 2011. . 2,328. 205. 2,123. . –. 138. 488. 36. (152). 1,613. 778. –. –. 835. 2010. . 2,284. 170. 2,114. . –. 130. 434. 34. (258). 1,774. 799. –. –. 975. 2012. . 2,068. 172. 1,896. . –. 145. 513. 37. (252). 1,453. 905. 393. 68. 87. . Corporate.and.Eliminations. 2010. ..2011. 2012. . . . (124). (59). (283). –. –. –. (124). (59). (283). . . . (123). (59). (283). –. –. –. (3). (1). (2). –. –. –. (46). (180). (57). 48. 181. 59. 32. 40. 52. –. –. –. –. –. –. 141. 7. 16. 246. 295. 352. 498. 447. 455. (144). (124). (109). (51). 26. (20). (116). (107). –. 4. (5). (13). 420. 541. 673. . . . . . . . . . Refining.and.Marketing 2011. . 10,625. –. 10,625. . 9,149. –. 481. –. 14. 981. 130. –. –. 851. 2010 . 8,228 – 8,228 . 7,674 – 488 – (10) 76 96 – – (20) 2012. . 11,356. –. 11,356. . 9,506. –. 587. –. (4). 1,267. 146. –. –. 1,121. . Consolidated 2011. . 16,185. 489. 15,696. . 9,090. 1,369. 1,406. 36. (248). 4,043. 1,295. –. –. 2,748. 295. 447. (124). 26. (107). 4. 541. 2,207. 729. 1,478. . 2010 . 13,090 449 12,641 . 7,551 1,065 1,286 34 (324) 3,029 1,302 – 3 1,724 246 498 (144) (51) (116) (13) 420 1,304 223 1,081 2012. . 17,229. 387. 16,842. . 9,223. 1,798. 1,682. 37. (393). 4,495. 1,585. 393. 68. 2,449. 352. 455. (109). (20). –. (5). 673. 1,776. 783. 993. 80 CENOVUS ENERGY 2012 ANNUAL RE PO RT / NOTES TO CONSOLIDATED FINA NCIA L STATEMEN TS 2012. . 4,037. 215. 3,822. . 1,651. 548. –. (62). 1,685. . . . . . . . . . . . (Gain).Loss.on.Risk.Management. (Gain).Loss.on.Risk.Management. B) FINANCIAL RESULTS BY UPSTREAM PRODUCT . . For the year s end ed Dece m ber 3 1,. Revenues. . Gross.Sales. . Less:.Royalties. . . Expenses. . Transportation.and.Blending. . Operating. . Production.and.Mineral.Taxes. . Operating Cash Flow. . . . For the year s end ed Dece m ber 3 1,. Revenues. . Gross.Sales. . Less:.Royalties. . . Expenses. . Transportation.and.Blending. . Operating. . Production.and.Mineral.Taxes. . Operating Cash Flow. . . . For the year s end ed Dece m ber 3 1,. Revenues. . Gross.Sales. . Less:.Royalties. . . Expenses. . Transportation.and.Blending. . Operating. . Production.and.Mineral.Taxes. . Operating Cash Flow. . . . For the year s end ed Dece m ber 3 1,. Revenues. . Gross.Sales. . Less:.Royalties. . . Expenses. . Transportation.and.Blending. . Operating. . Production.and.Mineral.Taxes. . Operating Cash Flow. (Gain).Loss.on.Risk.Management. (Gain).Loss.on.Risk.Management. . . . . . . . . . . . . 2012. . 40. –. 40. . 2. 25. –. (18) 31. 2012. . 11. –. 11. . –. 11. –. –. –. 2012. . 4,088. 215. 3,873. . 1,653. 584. –. (80). 1,716. . Oil.Sands. 2011. . 3,217. 282. 2,935. . 1,229. 409. –. 87. 1,210. . Oil.Sands. 2011. . 63. 2. 61. . 2. 24. –. (17). 52. . Oil.Sands. 2011. . 11. –. 11. . –. 5. –. –. 6. . Oil.Sands. 2011. . 3,291. 284. 3,007. . 1,231. 438. –. 70. 1,268. 2010. . 2,610. 276. 2,334 . 934. 339. –. 14. 1,047. 2010. . 78. 1. 77. . 1. 23. –. (24). 77. 2010. . 14. 2. 12. . –. 5. –. –. 7. 2010. . 2,702. 279. 2,423. . 935. 367. –. (10). 1,131. Crude.Oil.and.NGLs. Conventional. 2011. . 1,492. 193. 1,299. . 104. 244. 27. 43. 881. 2010. . 1,229. 153. 1,076. . 86. 199. 28. 5. 758. 2012. . 1,559. 166. 1,393. . 126. 294. 34. (23). 962. Natural.Gas. Conventional. 2011. . 825. 12. 813. . 34. 240. 9. (195). 725. Other. Conventional. 2011. . 11. –. 11. . –. 4. –. –. 7. 2010. . 1,042. 17. 1,025. . 44. 231. 6. (263) 1,007. 2010. . 13. –. 13. . –. 4. –. –. 9. Total.Upstream. Conventional. 2011. 2010. 2,328. 205. 2,123. . 138. 488. 36. (152). 1,613. 2,284. 170. 2,114. . 130. 434. 34. (258). 1,774. 2012. . 496. 6. 490. . 19. 215. 3. (229). 482. 2012. . 13. –. 13. . –. 4. –. –. 9. 2012. . 2,068. 172. 1,896. . 145 513. 37. (252). 1,453. 2012. . 5,596. 381. 5,215. . 1,777. 842. 34. (85). 2,647. 2012. . 536. 6. 530. . 21. 240. 3. (247). 513. 2012. . 24. –. 24. . –. 15. –. –. 9. 2012. 6,156. 387. 5,769. . 1,798. 1,097. 37. (332). 3,169. Total 2011. . 4,709. 475. 4,234. . 1,333. 653. 27. 130. 2,091. Total 2011. . 888. 14. 874. . 36. 264. 9. (212). 777. Total 2011. . 22. –. 22. . –. 9. –. –. 13. Total 2011. 5,619. 489. 5,130. . 1,369. 926. 36. (82). 2,881. 2010 . 3,839 429 3,410 . 1,020 538 28 19 1,805 2010 . 1,120 18 1,102 . 45 254 6 (287) 1,084 2010 . . 27 2 25 – 9 – – 16 2010 4,986 449 4,537 . 1,065 801 34 (268) 2,905 CEN OV US EN ERGY 2012 AN NUAL R EPORT / NOTES TO CO NSOLIDATED FINA NCI AL STAT EMENTS 8 1 . . . C) GEOGRAPHIC INFORMATION . For the years ended Decem b er 3 1,. Revenues. . Gross.Sales. . Less:.Royalties. . . Expenses. . Purchased.Product. . Transportation.and.Blending. . Operating. . Production.and.Mineral.Taxes. . . . Depreciation,.Depletion.and.Amortization. . Goodwill.Impairment. . Exploration.Expense. Segment Income (Loss). (Gain).Loss.on.Risk.Management. . . 2012. . 8,069. 387. 7,682. . 1,884. 1,798. 1,118. 37. (385). 3,230. 1,439. 393. 68. 1,330. Canada.. 2011. . 7,513. 489. 7,024. . 1,867. 1,369. 947. 36. (255). 3,060. 1,165. –. –. 1,895. 2010. . 6,466. 449. 6,017. . 1,456. 1,065. 814. 34. (322). 2,970. 1,216. –. 3. 1,751. United.States. 2011. . 8,672. –. 8,672. . 7,223. –. 459. –. 7. 983. 130. –. –. 853. 2010. . 6,624. –. 6,624. . 6,095. –. 472. –. (2). 59. 86. –. –. (27). 2012. . 9,160. –. 9,160. . 7,339. –. 564. –. (8). 1,265. 146. –. –. 1,119. Consolidated 2011. . 16,185. 489. 15,696. . 9,090. 1,369. 1,406. 36. (248). 4,043. 1,295. –. –. 2,748. 2010 . 13,090 449 12,641 . 7,551 1,065 1,286 34 (324) 3,029 1,302 – 3 1,724 2012. . 17,229. .....387. 16,842. . 9,223. 1,798. 1,682. . 37. (393). . 4,495. 1,585. 393. 68. 2,449. The.Oil.Sands.and.Conventional.segments.operate.in.Canada..Both.of. Cenovus’s.refining.facilities.are.located.and.carry.on.business.in.the. U.S..The.marketing.of.Cenovus’s.crude.oil.and.natural.gas.produced.in. Canada,.as.well.as.the.third.party.purchases.and.sales.of.product,.is. undertaken.in.Canada..Physical.product.sales.that.settle.in.the.U.S..are. considered.to.be.export.sales.undertaken.by.a.Canadian.business..The. Corporate.and.Eliminations.segment.is.attributed.to.Canada,.with.the. exception.of.the.unrealized.risk.management.gains.and.losses,.. which.have.been.attributed.to.the.country.in.which.the.transacting. entity.resides. Export Sales Sales.of.crude.oil,.natural.gas.and.NGLs.produced.or.purchased.in.. Canada.that.have.been.delivered.to.customers.outside.of.Canada.were. $671.million.(2011.–.$700.million;.2010.–.$646.million). D) ExPLORATION AND EVALUATION ASSETS, PROPERTY, PLANT AND EQUIPMENT, GOODWILL AND TOTAL ASSETS . . By Segment . . . . As a t December 31,. Oil.Sands. Conventional. Refining.and.Marketing. Corporate.and.Eliminations. Consolidated. . . . As a t December 31,. Oil.Sands. Conventional. Refining.and.Marketing. Corporate.and.Eliminations. Consolidated. . . . Exploration.and. Evaluation.Assets. 2011. 741. 139. –. –. 880. 2012. 1,110. 175. –. –. 1,285. Property,.Plant.and. Equipment 2012. 7,764. 4,929. 3,088. 371. 16,152. 2011 6,224 4,668 3,200 232 14,324 Goodwill. Total.Assets 2012. 739. –. –. –. 739. 2011. 739. 393. – –. 1,132. 2012. 11,972. 5,304. 5,018. 1,922. 24,216. 2011 10,524 5,566 4,927 1,177 22,194 82 CENOVUS ENERGY 2012 ANNUAL RE PO RT / NOTES TO CONSOLIDATED FINA NCIA L STATEMEN TS . . . . By Geographic Region . . As a t Decemb er 3 1,. Canada.. United.States. Consolidated. . . . As a t Decemb er 3 1,. Canada.. United.States. Consolidated. E) CAPITAL ExPENDITURES . Fo r t h e ye ar s end ed Dece m ber 3 1,. Capital . . Oil.Sands. . Conventional.. . Refining.and.Marketing. . Corporate.. . . Acquisition Capital. . Oil.Sands.(2). . Conventional.. . Refining.and.Marketing. . Corporate. Total (1). . . . . Exploration.and. Evaluation.Assets. 2011. 880. –. 880. 2012. 1,285. –. 1,285. Property,.Plant.and. Equipment 2012. 13,065. 3,087. 16,152. 2011 11,124 3,200 14,324 Goodwill. Total.Assets 2012. 739. –. 739. 2011. 1,132. –. 1,132. 2012. 19,744. 4,472. 24,216. 2011 17,536 4,658 22,194 2012. . 2,211. 848. 118. 191. 3,368. . 69. 45. –. –. 3,482. ...2011. . 1,415. 788. 393. 127. 2,723. . 44. 25. –. 2. 2,794. 2010 857 526 656 76 2,115 . . 23 25 38 – 2,201 (1). Includes.expenditures.on.property,.plant.and.equipment.and.exploration.&.evaluation.assets.. (2)..2012.asset.acquisition.included.the.assumption.of.a.decommissioning.liability.of.$33.million. Major Customers In.connection.with.the.marketing.and.sale.of.Cenovus’s.own.and. purchased.crude.oil,.natural.gas.and.refined.products.for.the.year.ended. December.31,.2012,.Cenovus.had.three.customers.(2011.–.two;.2010.–. two).which.individually.accounted.for.more.than.10.percent.of.its. consolidated.gross.sales..Sales.to.these.customers,.recognized.as.major. international.energy.companies.with.investment.grade.credit.ratings,. were.approximately.$3,928.million,.$3,300.million.and.$2,839.million,. respectively.(2011.–.$7,324.million.and.$2,683.million;.2010.–.$5,376.million. and.$2,295.million).. 2 . BASIS OF PR EPAR ATION AND STATEMEN T OF CO MPLIAN CE In.these.Consolidated.Financial.Statements,.unless.otherwise.indicated,. all.dollars.are.expressed.in.Canadian.dollars..All.references.to.C$.or.$. are.to.Canadian.dollars.and.references.to.US$.are.to.U.S..dollars. These.Consolidated.Financial.Statements.have.been.prepared.on.a. historical.cost.basis,.except.as.detailed.in.the.Company’s.accounting. policies.disclosed.in.Note.3.. These.Consolidated.Financial.Statements.have.been.prepared.in. accordance.with.International.Financial.Reporting.Standards.(“IFRS”). as.issued.by.the.International.Accounting.Standards.Board.(“IASB”).and. interpretations.of.the.International.Financial.Reporting.Interpretations. Committee.(“IFRIC”)..These.Consolidated.Financial.Statements.have. been.prepared.in.compliance.with.IFRS. These.Consolidated.Financial.Statements.of.Cenovus.were.approved.by. the.Board.of.Directors.on.February.13,.2013. . . . . . . CEN OV US EN ERGY 2012 AN NUAL R EPORT / NOTES TO CO NSOLIDATED FINA NCIA L STATE MENTS 83 3. S UM MARY OF SIGNIFICANT ACCO UNTIN G POLICIES A) PRINCIPLES OF CONSOLIDATION D) REVENUE AND INTEREST INCOME RECOGNITION The.Consolidated.Financial.Statements.include.the.accounts.of. Cenovus.and.its.subsidiaries..Subsidiaries.are.entities.over.which.the. Company.has.the.power.to.govern.the.financial.and.operating.policies.. Subsidiaries.are.consolidated.from.the.date.of.acquisition.of.control. and.continue.to.be.consolidated.until.the.date.that.there.is.a.loss.. of.control..All.intercompany.transactions,.balances.and.unrealized.. gains.and.losses.from.intercompany.transactions.are.eliminated.. on.consolidation. Investments.in.jointly.controlled.partnerships.and.unincorporated.joint. operations.carry.on.certain.of.Cenovus’s.development,.production. and.crude.oil.refining.businesses.and.are.accounted.for.using.the. proportionate.consolidation.method,.whereby.Cenovus’s.proportionate. share.of.revenues,.expenses,.assets.and.liabilities.are.included.in.the. consolidated.accounts.. B) SEGMENT REPORTING Management.has.determined.the.operating.segments.based.on. information.regularly.reviewed.for.the.purposes.of.decision.making,. allocating.resources.and.assessing.performance.by.Cenovus’s.chief. operating.decision.makers..The.Company.evaluates.the.financial. performance.of.its.operating.segments.primarily.based.on.operating. cash.flow. C) FOREIGN CURRENCY TRANSLATION Functional and Presentation Currency The.Company’s.presentation.currency.is.Canadian.dollars..The.accounts. of.the.Company’s.foreign.operations.that.have.a.functional.currency. different.from.the.Company’s.presentation.currency.are.translated.into. the.Company’s.presentation.currency.at.period.end.exchange.rates.for. assets.and.liabilities.and.at.the.average.rate.over.the.period.for.revenues. and.expenses..Translation.gains.and.losses.relating.to.the.foreign. operations.are.recognized.in.other.comprehensive.income.(“OCI”).as. cumulative.translation.adjustments. When.the.Company.disposes.of.an.entire.interest.in.a.foreign.operation. or.loses.control,.joint.control,.or.significant.influence.over.a.foreign. operation,.the.foreign.currency.gains.or.losses.accumulated.in.OCI. related.to.the.foreign.operation.are.recognized.in.net.earnings..When. the.Company.disposes.of.part.of.an.interest.in.a.foreign.operation. which.continues.to.be.a.subsidiary,.a.proportionate.amount.of.gains.and. losses.accumulated.in.OCI.is.allocated.between.controlling.and.non- controlling.interests. Transactions and Balances Transactions.in.foreign.currencies.are.translated.to.the.respective. functional.currencies.at.exchange.rates.in.effect.at.the.dates.of.the. transactions..Monetary.assets.and.liabilities.of.Cenovus.that.are. denominated.in.foreign.currencies.are.translated.into.its.functional. currency.at.the.rates.of.exchange.in.effect.at.the.period.end.date..Any. gains.or.losses.are.recorded.in.the.Consolidated.Statements.of.Earnings. and.Comprehensive.Income. Sales of Product Revenues.associated.with.the.sales.of.Cenovus’s.crude.oil,.natural.gas,. NGLs.and.petroleum.and.refined.products.are.recognized.when.the. significant.risks.and.rewards.of.ownership.have.been.transferred.to.the. customer,.the.sales.price.and.costs.can.be.measured.reliably.and.it.is. probable.that.the.economic.benefits.will.flow.to.the.Company..This. is.generally.met.when.title.passes.from.the.Company.to.its.customer.. Revenues.from.crude.oil.and.natural.gas.production.represent.the. Company’s.share,.net.of.royalty.payments.to.governments.and.other. mineral.interest.owners. Purchases.and.sales.of.products.that.are.entered.into.in.contemplation. of.each.other.with.the.same.counterparty.are.recorded.on.a.net.basis.. Revenues.associated.with.the.services.provided.as.agent.are.recorded.as. the.services.are.provided.. Interest Income Interest.income.is.recognized.as.the.interest.accrues.using.the.effective. interest.method.. E) TRANSPORTATION AND BLENDING The.costs.associated.with.the.transportation.of.crude.oil,.natural.gas. and.NGLs,.including.the.cost.of.diluent.used.in.blending,.are.recognized. when.the.product.is.sold. F) PRODUCTION AND MINERAL TAxES Costs.paid.to.non-mineral.interest.owners.based.on.production.of. crude.oil,.natural.gas.and.NGLs.are.recognized.when.the.product.is.sold. G) ExPLORATION ExPENSE Costs.incurred.prior.to.obtaining.the.legal.right.to.explore.(pre- exploration.costs).are.expensed.in.the.period.in.which.they.are.incurred. as.exploration.expense.. Costs.incurred.after.the.legal.right.to.explore.is.obtained,.are. initially.capitalized..If.it.is.determined.that.the.field/project/area.is. not.technically.feasible.or.commercially.viable.or.if.the.Company. decides.not.to.continue.the.exploration.and.evaluation.activity,.the. unrecoverable.accumulated.costs.are.expensed.as.exploration.expense. H) EMPLOYEE BENEFIT PLANS The.Company.provides.employees.with.a.pension.plan.that.includes. either.a.defined.contribution.or.defined.benefit.component,.and.other. post-employment.benefit.plans.(“OPEB”).. Accruals.for.obligations.under.the.employee.defined.benefit.pension. plan.and.the.related.costs.are.recorded.net.of.plan.assets. The.cost.of.the.defined.benefit.pension.plan.and.other.post- employment.benefits.is.actuarially.determined.using.the.projected.unit. credit.method.based.on.length.of.service.and.reflects.Management’s. best.estimate.of.expected.plan.investment.performance,.salary. escalation,.retirement.ages.of.employees.and.expected.future.health. care.costs.. 84 CENOVUS ENERGY 2012 ANNUAL RE PO RT / NOTES TO CONSOLIDATED FINA NCIA L STATEMEN TS Pension.expense.for.the.defined.benefit.pension.plan.includes.the.cost. of.pension.benefits.earned.during.the.current.year,.the.interest.cost.on. pension.obligations,.the.expected.return.on.pension.plan.assets,.the. amortization.of.adjustments.arising.from.pension.plan.amendments. and.the.amortization.of.the.excess.of.the.net.actuarial.gain.or.loss.over. 10.percent.of.the.greater.of.the.benefit.obligation.and.the.fair.value. of.plan.assets..Amortization.is.calculated.on.a.straight-line.basis.over. a.period.covering.the.non-vested.expected.average.remaining.service. lives.of.employees.and.recognized.immediately.for.vested.benefits. covered.by.the.plans. Pension.expense.for.the.defined.contribution.pension.is.recorded.as.the. benefits.are.earned.. I) INCOME TAxES Income.taxes.comprise.current.and.deferred.taxes..Current.and.deferred. income.taxes.are.provided.for.on.a.non-discounted.basis.at.amounts. expected.to.be.paid.using.the.tax.rates.and.laws.that.have.been.enacted. or.substantively.enacted.at.the.Consolidated.Balance.Sheet.date. Cenovus.follows.the.liability.method.of.accounting.for.income.taxes,. where.deferred.income.taxes.are.recorded.for.the.effect.of.any. temporary.difference.between.the.accounting.and.income.tax.basis.of. an.asset.or.liability,.using.the.substantively.enacted.income.tax.rates. expected.to.apply.when.the.assets.are.realized.or.liabilities.are.settled.. Deferred.income.tax.balances.are.adjusted.to.reflect.changes.in.income. tax.rates.that.are.substantively.enacted.with.the.adjustment.being. recognized.in.net.earnings.in.the.period.that.the.change.occurs,.except. when.it.relates.to.items.charged.or.credited.directly.to.equity.or.OCI,.in. which.case.the.deferred.income.tax.is.also.recorded.in.equity.or.. OCI,.respectively. Deferred.income.tax.is.provided.on.temporary.differences.arising.from. investments.in.subsidiaries.except.in.the.case.where.the.timing.of.the. reversal.of.the.temporary.difference.is.controlled.by.the.Company. and.it.is.probable.that.the.temporary.difference.will.not.reverse.in.the. foreseeable.future.. Deferred.income.tax.assets.are.recognized.only.to.the.extent.that.it.is. probable.that.future.taxable.profit.will.be.available.against.which.the. temporary.differences.can.be.utilized. Deferred.income.tax.assets.and.liabilities.are.only.offset.where.they. arise.within.the.same.entity.and.tax.jurisdiction.. Deferred.income.tax.assets.and.liabilities.are.presented.as.non-current. J) NET EARNINGS PER SHARE AMOUNTS Basic.net.earnings.per.common.share.is.computed.by.dividing. net.earnings.by.the.weighted.average.number.of.common.shares. outstanding.during.the.period..Diluted.net.earnings.per.share.is. calculated.giving.effect.to.the.potential.dilution.that.would.occur. if.stock.options.or.other.contracts.to.issue.common.shares.were. exercised.or.converted.to.common.shares..The.treasury.stock.method. is.used.to.determine.the.dilutive.effect.of.stock.options.and.other. dilutive.instruments..The.treasury.stock.method.assumes.that.proceeds. received.from.the.exercise.of.in-the-money.stock.options.are.used. to.repurchase.common.shares.at.the.average.market.price..For.those. contracts.that.may.be.settled.in.cash.or.in.shares.at.the.holder’s.option,. the.more.dilutive.of.cash.settlement.and.share.settlement.is.used.in. calculating.diluted.earnings.per.share. K) CASH AND CASH EQUIVALENTS Cash.and.cash.equivalents.include.short-term.investments,.such.as. money.market.deposits.or.similar.type.instruments,.with.a.maturity.of. three.months.or.less. L) INVENTORIES Product.inventories.are.valued.at.the.lower.of.cost.and.net.realizable. value.on.a.first-in,.first-out.or.weighted.average.cost.basis..The.cost.of. inventory.includes.all.costs.incurred.in.the.normal.course.of.business.to. bring.each.product.to.its.present.location.and.condition..Net.realizable. value.is.the.estimated.selling.price.in.the.ordinary.course.of.business. less.any.expected.selling.costs..If.the.carrying.amount.exceeds.net. realizable.value,.a.write-down.is.recognized..The.write-down.may.be. reversed.in.a.subsequent.period.if.the.circumstances.which.caused.it.no. longer.exist. M) ASSETS (DISPOSAL GROUP) HELD FOR SALE Non-current.assets.or.disposal.groups.are.classified.as.held.for.sale. when.their.carrying.amount.will.be.principally.recovered.through.a.sales. transaction.rather.than.through.continued.use.and.a.sales.transaction. is.highly.probable..Assets.held.for.sale.are.recorded.at.the.lower.of. carrying.value.and.fair.value.less.cost.to.sell. N) ExPLORATION AND EVALUATION (“E&E”) ASSETS Costs.incurred.after.the.legal.right.to.explore.an.area.has.been. obtained.and.before.technical.feasibility.and.commercial.viability.of. the.area.have.been.established.are.capitalized.as.E&E.assets..These. costs.include.license.acquisition,.geological.and.geophysical,.drilling,. sampling,.decommissioning.and.other.directly.attributable.internal. costs..E&E.assets.are.not.depreciated.and.are.carried.forward.until. technical.feasibility.and.commercial.viability.of.the.field/project/area. is.established.or.the.assets.are.determined.to.be.impaired.. Once.technical.feasibility.and.commercial.viability.have.been. established.for.a.field/project/area,.the.carrying.value.of.the.E&E. assets.associated.with.that.field/area/project.is.tested.for.impairment.. The.carrying.value,.net.of.any.impairment.loss,.is.then.reclassified.as. property,.plant.and.equipment.. E&E.costs.are.subject.to.regular.technical,.commercial.and.management. review.to.confirm.the.continued.intent.to.develop.the.resources..If.a. field/project/area.is.determined.to.no.longer.be.technically.feasible. or.commercially.viable,.and.Management.decides.not.to.continue.the. exploration.and.evaluation.activity,.the.unrecoverable.costs.are.charged. to.exploration.expense.in.the.period.in.which.the.determination.occurs. Any.gains.or.losses.from.the.divestiture.of.E&E.assets.are.recognized.in. net.earnings. O) PROPERTY, PLANT AND EQUIPMENT Development and Production Assets Development.and.production.assets.are.stated.at.cost.less.accumulated. depreciation,.depletion,.amortization.and.net.impairment.losses.. Development.and.production.assets.are.capitalized.on.an.area-by- area.basis.and.include.all.costs.associated.with.the.development. and.production.of.the.crude.oil.and.natural.gas.properties,.as.well. as.any.E&E.expenditures.incurred.in.finding.commercial.reserves.of. crude.oil.or.natural.gas.transferred.from.E&E.assets..Capitalized.costs. CEN OV US EN ERGY 2012 ANNUAL RE PORT / N OTES TO CO NSOLIDATED FINA NCIA L STAT EMENTS 85 include.internal.costs,.decommissioning.liabilities,.and,.for.qualifying. assets,.borrowing.costs.directly.associated.with.the.acquisition.of,.the. exploration.for,.and.the.development.of.crude.oil.and.natural.. gas.reserves.. Costs.accumulated.within.each.area.are.depleted.using.the.unit-of- production.method.based.on.estimated.proved.reserves.determined. using.estimated.future.prices.and.costs..For.the.purpose.of.this. calculation,.natural.gas.is.converted.to.oil.on.an.energy.equivalent. basis..Costs.subject.to.depletion.include.estimated.future.costs.to.be. incurred.in.developing.proved.reserves.. Exchanges.of.development.and.production.assets.are.measured.at. fair.value.unless.the.transaction.lacks.commercial.substance.or.the. fair.value.of.neither.the.asset.received,.nor.the.asset.given.up,.can.be. reliably.measured..When.fair.value.is.not.used,.the.carrying.amount.of. the.asset.given.up.is.used.as.the.cost.of.the.asset.acquired.. Expenditures.related.to.renewals.or.betterments.that.improve. the.productive.capacity.or.extend.the.life.of.an.asset.are.capitalized.. Maintenance.and.repairs.are.expensed.as.incurred..Land.is.. not.depreciated. Any.gains.or.losses.from.the.divestiture.of.development.and.production. assets.are.recognized.in.net.earnings. Other Upstream Assets Other.upstream.assets.include.pipelines.and.information.technology.assets. used.to.support.the.upstream.business..These.assets.are.depreciated.on.a. straight-line.basis.over.their.useful.lives.of.three.to.35.years.. Refining Assets The.refining.assets.are.stated.at.cost.less.accumulated.depreciation.and. net.impairment.losses.. The.initial.acquisition.costs.of.refining.property,.plant.and.equipment. are.capitalized.when.incurred..Costs.include.the.cost.of.constructing. or.otherwise.acquiring.the.equipment.or.facilities,.the.cost.of.installing. the.asset.and.making.it.ready.for.its.intended.use,.the.associated. decommissioning.costs.and,.for.qualifying.assets,.borrowing.costs.. Routine.maintenance.and.repair.costs.are.expensed.in.the.period.in. which.they.are.incurred.. Capitalized.costs.are.not.subject.to.depreciation.until.the.asset.is. available.for.use,.after.which.they.are.depreciated.on.a.straight-line. basis.over.the.estimated.service.life.of.each.component.of.the.refinery.. The.major.components.are.depreciated.as.follows:. . . . . Land.Improvements.and.Buildings. 25.to.40.years . Office.Equipment.and.Vehicles. 3.to.20.years . Refining.Equipment. 5.to.35.years which.range.from.three.to.25.years..The.residual.value,.method.of. amortization.and.the.useful.lives.of.the.assets.are.reviewed.annually. and.adjusted,.if.appropriate..Assets.under.construction.are.not.subject. to.depreciation.until.they.are.available.for.use..Expenditures.related. to.renewals.or.betterments.that.improve.the.productive.capacity.or. extend.the.life.of.an.asset.are.capitalized..Maintenance.and.repairs.are. expensed.as.incurred..Land.is.not.depreciated. P) IMPAIRMENT Non-Financial Assets Property,.plant.and.equipment.and.E&E.assets.are.assessed.for. impairment.at.least.annually.or.when.facts.and.circumstances.suggest. that.the.carrying.amount.may.exceed.its.recoverable.amount..The. recoverable.amount.is.determined.as.the.greater.of.an.asset’s.or.. cash-generating.unit’s.(“CGU”).value-in-use.(“VIU”).and.fair.value.less. costs.to.sell.(“FVLCTS”)..VIU.is.estimated.as.the.discounted.present. value.of.the.future.cash.flows.expected.to.arise.from.the.continuing.. use.of.a.CGU.or.asset.. The.impairment.test.is.performed.at.the.CGU.for.development.and. production.assets.and.other.upstream.assets..E&E.assets.are.allocated. to.a.related.CGU.containing.development.and.production.assets.for.the. purposes.of.testing.for.impairment..Corporate.assets.are.allocated.to. the.CGUs.to.which.they.contribute.to.the.future.cash.flows..For.refining. assets,.the.impairment.test.is.performed.at.each.refinery.independently.. Impairment.losses.on.PP&E.are.recognized.in.the.Consolidated. Statements.of.Earnings.and.Comprehensive.Income.as.additional. depreciation,.depletion.and.amortization.and.are.separately.disclosed.. An.impairment.of.E&E.assets.is.recognized.as.exploration.expense.in.the. Consolidated.Statements.of.Earnings.and.Comprehensive.Income.. Goodwill.is.assessed.for.impairment.at.least.annually..To.assess. impairment,.the.recoverable.amount.of.the.CGU.to.which.the.goodwill. relates.is.compared.to.the.carrying.amount..If.the.recoverable.amount. of.the.CGU.is.less.than.the.carrying.amount,.an.impairment.loss.is. recognized..An.impairment.loss.is.allocated.first.to.reduce.the.carrying. amount.of.any.goodwill.allocated.to.the.CGU.and.then.to.reduce.the. carrying.amounts.of.the.other.assets.in.the.CGU..Goodwill.impairments. are.not.reversed. Impairment.losses.recognized.in.prior.periods,.other.than.goodwill. impairments,.are.assessed.at.each.reporting.date.for.any.indicators.that. the.impairment.losses.may.no.longer.exist.or.may.have.decreased..In. the.event.that.an.impairment.loss.reverses,.the.carrying.amount.of.the. asset.is.increased.to.the.revised.estimate.of.its.recoverable.amount,. but.only.to.the.extent.that.the.carrying.amount.does.not.exceed.the. amount.that.would.have.been.determined.had.no.impairment.loss.been. recognized.on.the.asset.in.prior.periods..The.amount.of.the.reversal.is. recognized.in.net.earnings. The.residual.value,.method.of.amortization.and.the.useful.life.of.each. component.are.reviewed.annually.and.adjusted.if.appropriate.. Financial Assets Other Assets Costs.associated.with.office.furniture,.fixtures,.leasehold.improvements,. information.technology.and.aircraft.are.carried.at.cost.and.depreciated. on.a.straight-line.basis.over.the.estimated.service.lives.of.the.assets,. At.each.reporting.date,.the.Company.assesses.whether.there.are.. any.indicators.that.its.financial.assets.are.impaired..An.impairment.loss. is.only.recognized.if.there.is.objective.evidence.of.impairment,.. the.loss.event.has.an.impact.on.future.cash.flow.and.the.loss.can.be. reliably.estimated. 86 CENOVUS ENERGY 2012 ANNUAL RE PO RT / NOTES TO CONSOLIDATED FINA NCIA L STATEMEN TS Evidence.of.impairment.may.include.default.or.delinquency.by.a. debtor.or.indicators.that.the.debtor.may.enter.bankruptcy..For.equity. securities,.a.significant.or.prolonged.decline.in.the.fair.value.of.the. security.below.cost.is.evidence.that.the.assets.are.impaired. An.impairment.loss.on.a.financial.asset.carried.at.amortized.cost.is. calculated.as.the.difference.between.the.amortized.cost.and.the. present.value.of.the.future.cash.flows.discounted.at.the.asset’s.original. effective.interest.rate..The.carrying.amount.of.the.asset.is.reduced. through.the.use.of.an.allowance.account..Impairment.losses.on.financial. assets.carried.at.amortized.cost.are.reversed.through.net.earnings.in. subsequent.periods.if.the.amount.of.the.loss.decreases. Q) BORROWING COSTS Borrowing.costs.are.recognized.as.an.expense.in.the.period.in.which. they.are.incurred.unless.there.is.a.qualifying.asset..Borrowing.costs. directly.associated.with.the.acquisition,.construction.or.production.of. a.qualifying.asset.are.capitalized.when.a.substantial.period.of.time.is. required.to.make.the.asset.ready.for.its.intended.use..Capitalization.of. borrowing.costs.ceases.when.the.asset.is.in.the.location.and.condition. necessary.for.its.intended.use. R) GOVERNMENT GRANTS Government.grants.are.recognized.at.fair.value.when.there.is.reasonable. assurance.that.the.grants.will.be.received.and.the.Company.will.comply. with.the.conditions.of.the.grant..Grants.related.to.assets.are.recorded. as.a.reduction.of.the.asset’s.carrying.value.and.are.depreciated.over. the.useful.life.of.the.asset..Grants.related.to.income.are.treated.as.a. reduction.of.the.related.expense.in.the.Consolidated.Statements.of. Earnings.and.Comprehensive.Income.. S) LEASES Leases.in.which.substantially.all.of.the.risks.and.rewards.of.ownership. are.retained.by.the.lessor.are.classified.as.operating.leases..Operating. lease.payments.are.recognized.as.an.expense.on.a.straight-line.basis. over.the.lease.term. Leases.where.the.Company.assumes.substantially.all.the.risks.and. rewards.of.ownership.are.classified.as.finance.leases.within.property,. plant.and.equipment. T) BUSINESS COMBINATIONS AND GOODWILL Business.combinations.are.accounted.for.using.the.acquisition.method. of.accounting.in.which.the.identifiable.assets.acquired,.liabilities. assumed.and.any.non-controlling.interest.are.recognized.and.measured. at.their.fair.value.at.the.date.of.acquisition..Any.excess.of.the.purchase. price.plus.any.non-controlling.interest.over.the.fair.value.of.the. net.assets.acquired.is.recognized.as.goodwill..Any.deficiency.of.the. purchase.price.over.the.fair.value.of.the.net.assets.acquired.is.credited. to.net.earnings. At.acquisition,.goodwill.is.allocated.to.each.of.the.CGUs.to.which. it.relates..Subsequent.measurement.of.goodwill.is.at.cost.less.any. accumulated.impairment.losses. U) PROVISIONS General A.provision.is.recognized.if,.as.a.result.of.a.past.event,.the.Company. has.a.present.obligation,.legal.or.constructive,.that.can.be.estimated. reliably,.and.it.is.more.likely.than.not.that.an.outflow.of.economic. benefits.will.be.required.to.settle.the.obligation..Where.applicable,. provisions.are.determined.by.discounting.the.expected.future.cash. flows.at.a.pre-tax.credit-adjusted.rate.that.reflects.the.current.market. assessments.of.the.time.value.of.money.and.the.risks.specific.to.the. liability..The.increase.in.the.provision.due.to.the.passage.of.time.is. recognized.as.a.finance.cost.in.the.Consolidated.Statements.of.Earnings. and.Comprehensive.Income. Decommissioning Liabilities Decommissioning.liabilities.include.those.legal.or.constructive. obligations.where.the.Company.will.be.required.to.retire.tangible. long-lived.assets.such.as.producing.well.sites,.crude.oil.and.natural.gas. processing.facilities.and.refining.facilities..The.amount.recognized.is.the. present.value.of.estimated.future.expenditures.required.to.settle.the. obligation.using.a.credit-adjusted.risk-free.rate..A.corresponding.asset. equal.to.the.initial.estimate.of.the.liability.is.capitalized.as.part.of.the. cost.of.the.related.long-lived.asset..Changes.in.the.estimated.liability. resulting.from.revisions.to.expected.timing.or.future.decommissioning. costs.are.recognized.as.a.change.in.the.decommissioning.liability.and. the.related.long-lived.asset..The.amount.capitalized.in.property,.plant. and.equipment.is.depreciated.over.the.useful.life.of.the.related.asset.. Increases.in.the.decommissioning.liabilities.resulting.from.the.passage. of.time.are.recognized.as.a.finance.cost.in.the.Consolidated.Statements. of.Earnings.and.Comprehensive.Income.. Actual.expenditures.incurred.are.charged.against.the.accumulated.liability. V) SHARE CAPITAL Common.shares.are.classified.as.equity..Transaction.costs.directly. attributable.to.the.issue.of.common.shares.are.recognized.as.a. deduction.from.equity,.net.of.any.income.taxes. W) DIVIDENDS Dividends.are.accrued.when.declared.by.the.Board.of.Directors. x) STOCK-BASED COMPENSATION Cenovus.has.a.number.of.cash.and.stock-based.compensation.plans. which.include.stock.options.with.associated.tandem.stock.appreciation. rights,.stock.options.with.associated.net.settlement.rights,.performance. share.units.and.deferred.share.units.. Tandem Stock Appreciation Rights Stock.options.with.associated.tandem.stock.appreciation.rights. (“TSARs”).are.accounted.for.as.liability.instruments.which.are.measured. at.fair.value.at.each.period.end.using.the.Black-Scholes-Merton. valuation.model..The.fair.value.is.recognized.as.compensation.costs. over.the.vesting.period..When.options.are.settled.for.cash,.the.liability. is.reduced.by.the.cash.settlement.paid..When.options.are.settled.for. common.shares,.the.cash.consideration.received.by.the.Company. and.the.previously.recorded.liability.associated.with.the.option.are. recorded.as.share.capital. CEN OV US EN ERGY 2012 ANNUAL RE PORT / N OTES TO CO NSOL IDATED FINA NCIA L STAT EMENTS 8 7 Net Settlement Rights Stock.options.with.associated.net.settlement.rights.(“NSRs”).are. accounted.for.as.equity.instruments.which.are.measured.at.fair.value. on.the.grant.date.using.the.Black-Scholes-Merton.valuation.model.and. are.not.revalued.at.each.reporting.date..The.fair.value.is.recognized. as.compensation.costs.over.the.vesting.period.of.the.options,.with. a.corresponding.increase.recorded.as.paid.in.surplus.in.Shareholders’. Equity..On.exercise,.the.cash.consideration.received.by.the.Company. and.the.associated.paid.in.surplus.are.recorded.as.share.capital.. Performance and Deferred Share Units Performance.share.units.(“PSUs”).and.deferred.share.units.(“DSUs”).are. accounted.for.as.liability.instruments.and.are.measured.at.fair.value. based.on.the.market.value.of.Cenovus’s.common.shares.at.each.period. end..The.fair.value.is.recognized.as.compensation.costs.over.the.vesting. period..Fluctuations.in.the.fair.values.are.recognized.as.compensation. costs.in.the.period.they.occur.. Y) FINANCIAL INSTRUMENTS Financial.instruments.are.recognized.when.the.Company.becomes.a. party.to.the.contractual.provisions.of.the.instrument..Financial.assets. and.liabilities.are.not.offset.unless.the.Company.has.the.legal.right. to.offset.and.intends.to.settle.on.a.net.basis.or.settle.the.asset.and. liability.simultaneously..A.financial.asset.is.derecognized.when.the. rights.to.receive.cash.flows.from.the.asset.have.expired.or.have.been. transferred.and.the.Company.has.transferred.substantially.all.the.risks. and.rewards.of.ownership..A.financial.liability.is.derecognized.when. the.obligation.is.discharged,.cancelled.or.expired..When.an.existing. financial.liability.is.replaced.by.another.from.the.same.counterparty. with.substantially.different.terms,.or.the.terms.of.an.existing.liability. are.substantially.modified,.this.exchange.or.modification.is.treated. as.a.derecognition.of.the.original.liability.and.the.recognition.of.a. new.liability..The.difference.in.the.carrying.amounts.of.the.liabilities. is.recognized.in.the.Consolidated.Statements.of.Earnings.and. Comprehensive.Income. Financial.instruments.are.classified.as.either.“fair.value.through.profit. and.loss”,.“loans.and.receivables”,.“held-to-maturity.investments”,. “available.for.sale.financial.assets”.or.“financial.liabilities.measured. at.amortized.cost”..The.Company.determines.the.classification.of. its.financial.assets.at.initial.recognition..Financial.instruments.are. initially.measured.at.fair.value.except.in.the.case.of.“financial.liabilities. measured.at.amortized.cost”.which.are.initially.measured.at.fair.value. net.of.directly.attributable.transaction.costs. The.Company’s.consolidated.financial.assets.include.cash.and.cash. equivalents,.accounts.receivable.and.accrued.revenues,.partner.loans. receivable,.the.Partnership.Contribution.Receivable,.risk.management. assets.and.long-term.receivables..The.Company’s.financial.liabilities. include.accounts.payable.and.accrued.liabilities,.partner.loans.payable,. the.Partnership.Contribution.Payable,.derivative.financial.instruments,. short-term.borrowings.and.long-term.debt. Fair Value through Profit or Loss Financial.assets.and.financial.liabilities.at.“fair.value.through.profit. or.loss”.are.either.“held-for-trading”.or.have.been.“designated.at.fair. value.through.profit.or.loss”..In.both.cases.the.financial.assets.and. financial.liabilities.are.measured.at.fair.value.with.changes.in.fair.value. recognized.in.net.earnings.. Risk.management.assets.and.liabilities.are.derivative.financial.instruments. classified.as.“held-for-trading”.unless.designated.for.hedge.accounting.. Derivative.instruments.that.do.not.qualify.as.hedges,.or.are.not. designated.as.hedges,.are.recorded.using.mark-to-market.accounting. whereby.instruments.are.recorded.in.the.Consolidated.Balance.Sheets. as.either.an.asset.or.liability.with.changes.in.fair.value.recognized.in.net. earnings.as.a.(gain).loss.on.risk.management..The.estimated.fair.value.of. all.derivative.instruments.is.based.on.quoted.market.prices.or,.in.their. absence,.third-party.market.indications.and.forecasts. Derivative.financial.instruments.are.used.to.manage.economic.exposure. to.market.risks.relating.to.commodity.prices,.foreign.currency.exchange. rates.and.interest.rates..Derivative.financial.instruments.are.not.used. for.speculative.purposes..Policies.and.procedures.are.in.place.with. respect.to.required.documentation.and.approvals.for.the.use.of. derivative.financial.instruments..Where.specific.financial.instruments.are. executed,.the.Company.assesses,.both.at.the.time.of.purchase.and.on. an.ongoing.basis,.whether.the.financial.instrument.used.in.the.particular. transaction.is.effective.in.offsetting.changes.in.fair.values.or.cash.flows. of.the.transaction. Loans and Receivables “Loans.and.receivables”.are.financial.assets.with.fixed.or.determinable. payments.that.are.not.quoted.in.an.active.market..After.initial. measurement,.these.assets.are.measured.at.amortized.cost.at.the. settlement.date.using.the.effective.interest.method.of.amortization.. “Loans.and.receivables”.comprise.cash.and.cash.equivalents,.accounts. receivable.and.accrued.revenue,.partner.loans.receivable,.the. Partnership.Contribution.Receivable.and.long-term.receivables..Gains. and.losses.on.“loans.and.receivables”.are.recognized.in.net.earnings. when.the.“loans.and.receivables”.are.derecognized.or.impaired.. Held to Maturity Investments “Held-to-maturity.investments”.are.measured.at.amortized.cost.using. the.effective.interest.method.of.amortization. Available for Sale Financial Assets “Available.for.sale.financial.assets”.are.measured.at.fair.value,.with. changes.in.the.fair.value.recognized.in.OCI..When.an.active.market.is. non-existent,.fair.value.is.determined.using.valuation.techniques..When. fair.value.cannot.be.reliably.measured,.such.assets.are.carried.at.cost.. Financial Liabilities Measured at Amortized Cost These.financial.liabilities.are.measured.at.amortized.cost.at.the. settlement.date.using.the.effective.interest.method.of.amortization.. Financial.liabilities.measured.at.amortized.cost.comprise.accounts. payable.and.accrued.liabilities,.partner.loans.payable,.the.Partnership. Contribution.Payable,.short-term.borrowings.and.long-term.debt..Long- term.debt.transaction.costs,.premiums.and.discounts.are.capitalized. within.long-term.debt.or.as.a.prepayment.and.amortized.using.the. effective.interest.method. 88 CENOVUS ENERGY 2012 ANNUAL RE PO RT / NOTES TO CONSOLIDATED FINA NCIA L STATEMEN TS Z) RECLASSIFICATION Certain.information.provided.for.prior.years.has.been.reclassified.to. conform.to.the.presentation.adopted.in.2012. AA) RECENT ACCOUNTING PRONOUNCEMENTS New and Amended Standards Adopted The.Company.did.not.adopt.any.new.standards,.amendments.or. interpretations.effective.during.the.year.ended.December.31,.2012. New Standards and Interpretations not Yet Adopted A.number.of.new.standards,.amendments.to.standards.and. interpretations.are.effective.for.annual.periods.beginning.after.January.1,. 2012,.and.have.not.been.applied.in.preparing.the.Consolidated.Financial. Statements.for.the.year.ended.December.31,.2012..The.standards.and. interpretations.applicable.to.the.Company.are.as.follows.and.will.be. adopted.on.their.respective.effective.date: jOiNT ARRANGEMENTS, CONSOLiDATiON, ASSOCiATES AND DiSCLOSURES In.May.2011,.the.IASB.issued.the.following.new.and.amended.standards: •. •. .IFRS.10,.“Consolidated Financial Statements”.(“IFRS.10”).replaces.IAS. 27,.“Consolidated and Separate Financial Statements”.(“IAS.27”).and. Standing.Interpretations.Committee.(“SIC”).12,.“Consolidation – Special Purpose Entities”..IFRS.10.revises.the.definition.of.control.to. include.three.elements:.(1).power.over.an.investee;.(2).exposure.to. variable.returns.from.its.involvement.with.the.investee.and.(3).the. ability.to.use.its.power.to.affect.returns.from.the.investee..IFRS.10. provides.guidance.on.participating.and.protective.rights.and.also. addresses.the.notion.of.“de.facto”.control..It.also.includes.guidance. related.to.an.investor.with.decision.making.rights.to.determine.if.it.is. acting.as.a.principal.or.agent.. .IFRS.11,.“Joint Arrangements”.(“IFRS.11”).replaces.IAS.31,.“Interest in Joint Ventures”.(“IAS.31”).and.SIC.13,.“Jointly Controlled Entities – Non-Monetary Contributions by Venturers”..Under.IFRS.11,.a.joint. arrangement.is.classified.as.either.a.“joint.operation”.or.a.“joint. venture”.depending.on.the.rights.and.obligations.of.the.parties.to. the.arrangement..Under.a.joint.operation,.parties.have.rights.to. the.assets.and.obligations.for.the.liabilities.of.the.arrangement.and. account.for.their.share.of.assets,.liabilities,.revenues.and.expenses.. Under.a.joint.venture,.parties.have.the.rights.to.the.net.assets.of.the. arrangement.and.account.for.the.arrangement.as.an.investment.using. the.equity.method. •. .IFRS.12,.“Disclosure of Interest in Other Entities”.(“IFRS.12”).replaces. the.disclosure.requirements.previously.included.in.IAS.27,.IAS.31,.and. IAS.28,.“Investments in Associates”..It.sets.out.the.extensive.disclosure. requirements.relating.to.an.entity’s.interests.in.subsidiaries,.joint. arrangements,.associates.and.unconsolidated.structured.entities. •. .IAS.27,.“Separate Financial Statements”.has.been.amended.to. conform.to.the.changes.made.in.IFRS.10,.but.retains.the.current. guidance.for.separate.financial.statements. •. .IAS.28,.“Investments in Associates and Joint Ventures”.has.been. amended.to.conform.to.the.changes.made.in.IFRS.10.and.IFRS.11. The.above.standards.are.effective.for.annual.periods.beginning.on.or. after.January.1,.2013.and.must.be.adopted.concurrently..It.is.anticipated. that.the.application.of.these.five.standards.will.not.have.a.significant. impact.on.the.Consolidated.Financial.Statements. Cenovus.performed.a.comprehensive.review.of.its.interests.in.other. entities.and.identified.two.individually.significant.interests,.FCCL. Partnership.(“FCCL”).and.WRB.Refining.LP.(“WRB”),.for.which.it.shares. joint.control..Cenovus.reviewed.these.joint.arrangements.considering. their.structure,.the.legal.forms.of.any.separate.vehicles,.the.contractual. terms.of.the.arrangements.and.other.facts.and.circumstances..The. application.of.the.Company’s.accounting.policy.under.IFRS.11.requires. judgment.in.determining.the.classification.of.its.joint.arrangements.. It.was.determined.that.Cenovus.has.the.rights.to.the.assets.and. obligations.for.the.liabilities.of.FCCL.and.WRB..As.a.result,.these.joint. arrangements.will.be.classified.as.joint.operations.under.IFRS.11.and.the. Company’s.share.of.the.assets,.liabilities,.revenues.and.expenses.will.be. recognized.in.the.Consolidated.Financial.Statements. In.determining.the.classification.of.its.joint.arrangements.under.IFRS.11,. the.Company.considered.the.following: •. •. •. •. .The.intention.of.the.transaction.creating.FCCL.and.WRB.was.to.form. an.integrated.North.American.heavy.oil.business..The.integrated. business.was.structured,.initially.on.a.tax.neutral.basis,.through.two. partnerships.due.to.the.assets.residing.in.different.tax.jurisdictions.. Partnerships.are.“flow-through”.entities.which.have.a.limited.life. .The.partnership.agreements.require.the.partners.(Cenovus.and. ConocoPhillips.or.Phillips.66.or.respective.subsidiaries).to.make. contributions.if.funds.are.insufficient.to.meet.the.obligations.or. liabilities.of.the.partnership..The.past.and.future.development.of. FCCL.and.WRB.is.dependent.on.funding.from.the.partners.by.way.of. partnership.notes.payable.and.loans..The.partnerships.do.not.have. any.third.party.borrowings. .FCCL.operates.like.most.typical.western.Canadian.working.interest. relationships.where.the.operating.partner.takes.product.on.behalf.of. the.participants..WRB.has.a.very.similar.structure.modified.only.to. account.for.the.operating.environment.of.the.refining.business.. .Cenovus.and.Phillips.66,.either.directly.or.through.wholly-owned. subsidiaries,.provide.marketing.services,.purchase.necessary. feedstock,.and.arrange.for.transportation.and.storage.on.the. partners’.behalf.as.the.agreements.prohibit.the.partnerships.from. undertaking.these.roles.themselves..In.addition,.the.partnerships.. do.not.have.employees.and.as.such.are.not.capable.of.performing. these.roles. .•. .In.each.arrangement,.output.is.taken.by.one.of.the.partners,. indicating.that.the.partners.have.rights.to.the.economic.benefits.. of.the.assets.and.the.obligation.for.funding.the.liabilities.of.. the.arrangements. EMPLOYEE BENEFiTS In.June.2011,.the.IASB.amended.IAS.19,.“Employee Benefits”.(“IAS.19”).. The.amendments.require.the.recognition.of.changes.in.defined.benefit. obligations.and.fair.value.of.plan.assets.when.they.occur,.eliminating. the.“corridor.approach”,.and.accelerates.the.recognition.of.past.service. CEN OV US EN ERGY 2012 ANNUAL RE PORT / N OTES TO CO NSOLIDATED FINA NCI AL STATE MENTS 89 costs..In.order.for.the.net.defined.benefit.liability.or.asset.to.reflect.the. full.value.of.the.plan.deficit.or.surplus,.all.actuarial.gains.and.losses.are. to.be.recognized.immediately.through.OCI..In.addition,.entities.will.be. required.to.calculate.net.interest.on.the.net.defined.benefit.liability.or. asset.using.the.same.discount.rate.used.to.measure.the.defined.benefit. obligation..The.amendments.also.enhance.financial.statement.disclosures.. The.amendments.to.IAS.19.require.retrospective.application..Based.on. Cenovus’s.preliminary.assessment,.when.the.amendments.are.applied. for.the.first.time.for.the.year.ending.December.31,.2013,.net.earnings. for.the.year.ended.December.31,.2012.would.increase.by.$1.million.and. other.comprehensive.income.after.tax.would.decrease.by.$3.million. (2011.–.$nil.and.decrease.$12.million,.respectively)..Shareholders’.equity. as.at.December.31,.2012.would.decrease.by.$24.million.(January.1,.2012.–. decrease.$22.million).with.corresponding.adjustments,.being.recognized. in.other.liabilities.and.deferred.income.taxes. FAiR VALUE MEASUREMENT In.May.2011,.the.IASB.issued.IFRS.13,.“Fair Value Measurement”.. (“IFRS.13”).which.provides.a.consistent.and.less.complex.definition.of. fair.value,.establishes.a.single.source.for.determining.fair.value.and. introduces.consistent.requirements.for.disclosures.related.to.fair.value. measurement..IFRS.13.is.effective.for.annual.periods.beginning.on.or. after.January.1,.2013.and.applies.prospectively.from.the.beginning.of. the.annual.period.in.which.the.standard.is.adopted..Early.adoption.is. permitted..IFRS.13.will.not.have.a.significant.impact.on.the.Consolidated. Financial.Statements. FiNANCiAL iNSTRUMENTS The.IASB.intends.to.replace.IAS.39,.“Financial Instruments: Recognition and Measurement”.(“IAS.39”).with.IFRS.9,.“Financial Instruments”.. (“IFRS.9”)..IFRS.9.will.be.published.in.three.phases,.of.which.the.first. phase.has.been.published.. The.first.phase.addresses.accounting.for.financial.assets.and.financial. liabilities..The.second.phase.will.address.impairment.of.financial. instruments.and.the.third.phase.will.address.hedge.accounting. For.financial.assets,.IFRS.9.uses.a.single.approach.to.determine.whether.a. financial.asset.is.measured.at.amortized.cost.or.fair.value.and.replaces.the. multiple.rules.in.IAS.39..The.approach.in.IFRS.9.is.based.on.how.an.entity. manages.its.financial.instruments.in.the.context.of.its.business.model.and. the.contractual.cash.flow.characteristics.of.the.financial.assets..The.new. standard.also.requires.a.single.impairment.method.to.be.used,.replacing. the.multiple.impairment.methods.in.IAS.39..Although.the.classification. criteria.for.financial.liabilities.will.not.change.under.IFRS.9,.the.approach. to.the.fair.value.option.for.financial.liabilities.may.require.different. accounting.for.changes.to.the.fair.value.of.a.financial.liability.as.a.result. of.changes.to.an.entity’s.own.credit.risk.. IFRS.9.is.effective.for.annual.periods.beginning.on.or.after.January.1,. 2015.with.different.transitional.arrangements.depending.on.the.date.of. initial.application..The.Company.is.currently.evaluating.the.impact.of. adopting.IFRS.9.on.its.Consolidated.Financial.Statements. PRESENTATiON OF iTEMS OF OThER COMPREhENSiVE iNCOME In.June.2011,.the.IASB.issued.an.amendment.to.IAS.1,.“Presentation of Financial Statements”.(“IAS.1”).requiring.companies.to.group.items. presented.within.OCI.based.on.whether.they.may.be.subsequently. reclassified.to.profit.or.loss..This.amendment.to.IAS.1.is.effective.for. annual.periods.beginning.on.or.after.July.1,.2012.with.full.retrospective. application..Early.adoption.is.permitted..The.adoption.of.this. amendment.will.not.have.a.significant.impact.on.the.Consolidated. Financial.Statements. OFFSETTiNG FiNANCiAL ASSETS AND FiNANCiAL LiABiLiTiES In.December.2011,.the.IASB.issued.the.following.amended.standards: •. •. .IFRS.7,.“Financial Instruments: Disclosures”.(“IFRS.7”),.has.been. amended.to.provide.more.extensive.quantitative.disclosures.for. financial.instruments.that.are.offset.in.the.Consolidated.Balance. Sheets.or.that.are.subject.to.enforceable.master.netting.or.. similar.arrangements. .IAS.32,.“Financial Instruments: Presentation”.(“IAS.32”),.has.been. amended.to.clarify.the.requirements.for.offsetting.financial.assets. and.liabilities..The.amendments.clarify.that.the.right.to.offset.must. be.available.on.the.current.date.and.cannot.be.contingent.on.a. future.event. The.amendments.to.IFRS.7.are.effective.for.annual.periods.beginning. on.or.after.January.1,.2013.and.the.amendments.to.IAS.32.are.effective. for.annual.periods.beginning.on.or.after.January.1,.2014,.both.requiring. retrospective.application..It.is.anticipated.that.IFRS.7.and.IAS.32.will.not. have.significant.impacts.on.the.Consolidated.Financial.Statements.. 4. CRITICAL ACCOUNTING JUDGMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY The.timely.preparation.of.the.Consolidated.Financial.Statements.in. accordance.with.IFRS.requires.that.Management.make.estimates.and. assumptions.and.use.judgment.regarding.the.reported.amounts.of. assets.and.liabilities.and.disclosures.of.contingent.assets.and.liabilities. at.the.date.of.the.Consolidated.Financial.Statements.and.the.reported. amounts.of.revenues.and.expenses.during.the.period..Such.estimates. primarily.relate.to.unsettled.transactions.and.events.as.of.the.date. of.the.Consolidated.Financial.Statements..The.estimated.fair.value. of.financial.assets.and.liabilities,.by.their.very.nature,.are.subject.to. measurement.uncertainty..Accordingly,.actual.results.may.differ.from. estimated.amounts.as.future.confirming.events.occur.. A) CRITICAL JUDGMENTS IN APPLYING ACCOUNTING POLICIES Critical.judgments.are.those.judgments.made.by.Management.in.the. process.of.applying.accounting.policies.that.have.the.most.significant. effect.on.the.amounts.recognized.in.the.Company’s.Consolidated. Financial.Statements. Exploration and Evaluation Assets The.application.of.the.Company’s.accounting.policy.for.exploration. and.evaluation.expenditures.requires.judgment.in.determining.whether. it.is.likely.that.future.economic.benefit.exists.when.activities.have.not. reached.a.stage.where.technical.feasibility.and.commercial.viability.can. 90 CENOVUS ENERGY 2012 ANNUAL RE PO RT / NOTES TO CONSOLIDATED FINA NCIA L STATEMEN TS be.reasonably.determined..Factors.such.as.drilling.results,.future.capital. programs,.future.operating.costs.as.well.as.estimated.economically. recoverable.reserves.are.considered..If.it.is.determined.that.an.E&E.asset. is.no.longer.technically.feasible.or.commercially.viable.or.Management. decides.not.to.continue.the.exploration.and.evaluation.activity,.the. unrecoverable.costs.are.charged.to.exploration.expense.. Identification of CGUs The.Company’s.upstream.and.refining.assets.are.grouped.into.CGUs.. CGUs.are.defined.as.the.lowest.level.of.integrated.assets.for.which. there.are.separately.identifiable.cash.flows.that.are.largely.independent. of.cash.flows.from.other.assets.or.groups.of.assets..The.classification.of. assets.and.allocation.of.corporate.assets.into.CGUs.requires.significant. judgment.and.interpretations..Factors.considered.in.the.classification. include.the.integration.between.assets,.shared.infrastructures,.the. existence.of.common.sales.points,.geography,.geologic.structure.and. the.manner.in.which.Management.monitors.and.makes.decisions.about. its.operations..The.recoverability.of.the.Company’s.upstream,.refining. and.corporate.assets.are.assessed.at.the.CGU.level.and.therefore.could. have.a.significant.impact.on.impairment.losses. B) KEY SOURCES OF ESTIMATION UNCERTAINTY Critical.accounting.estimates.are.those.estimates.that.require. Management.to.make.particularly.subjective.or.complex.judgments. about.matters.that.are.inherently.uncertain..Estimates.and.underlying. assumptions.are.reviewed.on.an.ongoing.basis.and.any.revisions. to.accounting.estimates.are.recognized.in.the.period.in.which.the. estimates.are.revised..The.following.are.the.key.assumptions.about.the. future.and.other.key.sources.of.estimation.at.the.end.of.the.reporting. period.that.changes.to.could.result.in.a.material.adjustment.to.the. carrying.amount.of.assets.and.liabilities.within.the.next.financial.year. Reserves There.are.a.number.of.inherent.uncertainties.associated.with.estimating. reserves..Reserve.estimates.are.dependent.upon.variables.including.the. recoverable.quantities.of.hydrocarbons,.the.cost.of.the.development. of.the.required.infrastructure.to.recover.the.hydrocarbons,.production. costs,.estimated.selling.price.of.the.hydrocarbons.produced,.royalty. payments.and.taxes..Changes.in.these.variables.could.significantly. impact.the.reserves.estimates.which.would.have.a.significant.impact. on.the.impairment.test.and.depreciation,.depletion.and.amortization. expense.of.the.Company’s.crude.oil.and.natural.gas.assets..The. Company’s.crude.oil.and.natural.gas.reserves.are.evaluated.and.reported. to.the.Company.by.independent.qualified.reserves.evaluators. Impairment of Assets Property,.plant.and.equipment,.E&E.assets.and.goodwill.are.assessed. for.impairment.at.least.annually.and.when.circumstances.suggest.that. the.carrying.amount.may.exceed.the.recoverable.amount..Assets.are. tested.for.impairment.at.the.CGU.level..These.calculations.require. the.use.of.estimates.and.assumptions.and.are.subject.to.change.as. new.information.becomes.available..For.the.Company’s.upstream. assets,.these.estimates.include.future.commodity.prices,.expected. production.volumes,.quantity.of.reserves.and.discount.rates.as.well. as.future.development.and.operating.costs..Recoverable.amounts.for. the.Company’s.refining.assets.utilizes.assumptions.such.as.refinery. throughput,.future.commodity.prices,.operating.costs,.transportation. capacity.and.supply.and.demand.conditions..Changes.in.assumptions. used.in.determining.the.recoverable.amount.could.affect.the.carrying. value.of.the.related.assets.. For.impairment.testing.purposes,.goodwill.has.been.allocated.to.each. of.the.CGUs.to.which.it.relates. At.December.31,.2012,.the.recoverable.amounts.of.Cenovus’s.upstream. CGUs.were.determined.based.on.fair.value.less.costs.to.sell..Key. assumptions.in.the.determination.of.cash.flows.from.reserves.include. reserves.as.estimated.by.Cenovus’s.independent.qualified.reserves. evaluators,.crude.oil.and.natural.gas.prices.and.the.discount.rate. OiL AND NATURAL GAS PRiCES The.future.prices.used.to.determine.cash.flows.from.crude.oil.and.natural.gas.reserves.are.as.follows: . . . . . . . . .. WTI.(US$/barrel). AECO.($/Mcf). DiSCOUNT RATE . . 2013. 92.50. 3.35. . . 2014. 92.50. 3.85. . . 2015. 93.60. 4.35. Decommissioning Costs . . 2016. 95.50. 4.70. . Average.Annual. %.Change.to. . 2024 2017. 2% 97.40. 3% 5.10. Evaluations.of.discounted.future.cash.flows.are.initiated.using.the. discount.rate.of.10.percent.which.is.an.industry.standard.rate.used. by.independent.qualified.reserve.evaluators.in.preparing.their.reserve. reports..Based.on.the.individual.characteristics.of.the.asset,.other. economic.and.operating.factors.are.also.considered.which.may.increase. or.decrease.the.implied.discount.rate..Changes.in.the.economic. conditions.could.significantly.change.the.estimated.recoverable.amount.. Provisions.are.recognized.for.the.future.decommissioning.and. restoration.of.the.Company’s.upstream.crude.oil.and.natural.gas.assets. and.refining.assets.at.the.end.of.their.economic.lives..Assumptions.have. been.made.to.estimate.the.future.liability.based.on.past.experience.and. current.economic.factors.which.Management.believes.are.reasonable.. However,.the.actual.cost.of.decommissioning.is.uncertain.and.cost. estimates.may.change.in.response.to.numerous.factors.including. CEN OV US EN ERGY 2012 ANNUAL RE PORT / N OTES TO CO NSOLIDATED FINA NCI AL STATE MENTS 91 changes.in.legal.requirements,.technological.advances,.inflation.and. the.timing.of.expected.decommissioning.and.restoration..In.addition,. Management.determines.the.appropriate.discount.rate.at.the.end.of. each.reporting.period..This.discount.rate,.which.is.credit.adjusted,. is.used.to.determine.the.present.value.of.the.estimated.future.cash. outflows.required.to.settle.the.obligation.and.may.change.in.response. to.numerous.market.factors.. Income Tax Provisions Tax.regulations.and.legislation.and.the.interpretations.thereof.in.the. various.jurisdictions.in.which.Cenovus.operates.are.subject.to.change.. As.a.result,.there.are.usually.a.number.of.tax.matters.under.review..As. such,.income.taxes.are.subject.to.measurement.uncertainty.. 5. FI N AN CE COSTS For the ye ar s e n d e d D e cem b er 3 1,. Interest.Expense.–.Short-Term.Borrowings.and.Long-Term.Debt. Interest.Expense.–.Partnership.Contribution.Payable.(Note.12). Unwinding.of.Discount.on.Decommissioning.Liabilities. Other. . . . 6. IN T ERE ST IN COME For the years ended Decem b er 3 1,. Interest.Income.–.Partnership.Contribution.Receivable.(Note.12). Other. . . . 7. FO RE IG N E xCH ANGE (GAI N) LOSS , NET For the years ended Decem b er 3 1,. Unrealized.Foreign.Exchange.(Gain).Loss.on.translation.of:. . U.S..Dollar.Debt.Issued.from.Canada. . U.S..Dollar.Partnership.Contribution.Receivable.Issued.from.Canada. . Other. Unrealized.Foreign.Exchange.(Gain).Loss. Realized.Foreign.Exchange.(Gain).Loss. . . . 8. IN COME TA x ES The.provision.for.income.taxes.is.as.follows:. For the years ended Decem b er 3 1,. Current.Tax. . Canada. . United.States.(1). Total.Current.Tax. Deferred.Tax. . . . (1). Includes.$68.million.of.withholding.tax.on.a.U.S..dividend.in.2012.. 92 CENOVUS ENERGY 2012 ANNUAL RE PO RT / NOTES TO CONSOLIDATED FINA NCIA L STATEMEN TS Deferred.income.tax.assets.are.recognized.to.the.extent.that.it.is. probable.that.the.deductible.temporary.differences.will.be.recoverable. in.future.periods..The.recoverability.assessment.involves.a.significant. amount.of.estimation.including.an.evaluation.of.when.the.temporary. differences.will.reverse,.an.analysis.of.the.amount.of.future.taxable. earnings,.the.availability.of.cash.flow.to.offset.the.tax.assets.when. the.reversal.occurs.and.the.application.of.tax.laws..There.are.some. transactions.for.which.the.ultimate.tax.determination.is.uncertain.. To.the.extent.that.assumptions.used.in.the.recoverability.assessment. change,.there.may.be.a.significant.impact.on.the.Consolidated.Financial. Statements.of.future.periods. 2012. 230. 118. 86. 21. 455. 2012. (102). (7). (109). 2012. . (69). (15). 14. (70). 50. (20). 2012. . 188. 121. 309. 474. 783. 2011. 213. 138. 75. 21. 447. 2011. (120). (4). (124). 2011. . 78. (107). (13). (42). 68. 26. 2011. . 150. 4. 154. 575. 729. .....2010 227 165 75 31 498 2010 (144) – (144) 2010 . (182) 91 22 (69) 18 (51) 2010 . 82 – 82 141 223 The.following.table.reconciles.income.taxes.calculated.at.the.Canadian.statutory.rate.with.the.recorded.income.taxes:................................ For the year s end ed Dece m ber 3 1, . Earnings Before Income Tax. . Canadian.Statutory.Rate. Expected Income Tax. . Effect.of.Taxes.Resulting.from:. . Foreign.Tax.Rate.Differential. . . . . . . . . . Total Tax. Effective Tax Rate. . . Non-Deductible.Stock-Based.Compensation. . Multi-Jurisdictional.Financing. . . Non-Taxable.Capital.(Gains).Losses. . Recognition.of.Capital.Losses. . Adjustments.Arising.from.Prior.Year.Tax.Filings. . Withholding.Tax.on.Foreign.Dividend. . Goodwill.Impairment. . Other. Foreign.Exchange.Gains.(Losses).Not.Included.in.Net.Earnings. 2012. 1,776. 25.2%. 448. . 146. 10. (27). 14. (7). (22). 33. 68. 99. 21. 783. 44.1%. 2011. 2,207. 26.7%. .589........... . 82. 18. (50). (9). (8). 26. 31. –. –. 50. 729. 33.0%. 2010 1,304 28.2% 368 . (22) 34 (93) 28 (13) (107) 26 – – 2 223 ..17.1% The.Canadian.statutory.tax.rate.decreased.to.25.2.percent.in.2012.from.26.7.percent.in.2011.and.28.2.percent.in.2010.as.a.result.of.tax.legislation. enacted.in.2007..The.U.S..statutory.tax.rate.has.increased.to.38.5.percent.in.2012.from.37.5.percent.in.2011.and.2010.as.a.result.of.the.allocation.of. taxable.income.to.U.S..states. The.analysis.of.deferred.income.tax.liabilities.and.deferred.income.tax.assets.is.as.follows: As a t Decemb er 3 1,. Deferred Income Tax Liabilities. . Deferred.Tax.Liabilities.to.be.Settled.Within.12.Months.. . Deferred.Tax.Liabilities.to.be.Settled.After.More.Than.12.Months. Net Deferred Income Tax Liability. . . . . 2012. . 140. 2,428. 2,568. 2011 117 1,984 2,101 For.the.purposes.of.the.above.table,.deferred.income.tax.liabilities.are.shown.net.of.offsetting.deferred.income.tax.assets.where.these.occur.in.the. same.entity.and.jurisdiction..The.deferred.income.tax.liabilities.to.be.settled.within.12.months.represents.Management’s.estimate.of.the.timing.of. the.reversal.of.temporary.differences.and.does.not.correlate.to.the.current.income.tax.expense.of.the.subsequent.year. The.movement.in.deferred.income.tax.liabilities.and.assets,.without.taking.into.consideration.the.offsetting.of.balances.within.the.same.tax. jurisdiction,.is.as.follows:. . . . . . . Deferred Income Tax Liab il ities. As.at.January.1,.2010. . Charged/(Credited).to.Earnings. . Charged/(Credited).to.Held.for.Sale. . Charged/(Credited).to.OCI. As.at.December.31,.2010. . Charged/(Credited).to.Earnings. . Charged/(Credited).to.OCI. As.at.December.31,.2011. . Charged/(Credited).to.Earnings. . Charged/(Credited).to.OCI. As at December 31, 2012. Property. Plant.and. Equipment. 1,678. 83. 2. ..(112). 1,651. 725. 18. 2,394. 418. (17). 2,795 Timing.of. Partnership. Items. 9. 116. –. –. 125. 38. –. 163. (104). –. 59 Net.Foreign. Exchange. Risk. Gains. Management. 17. 38. –. –. 55. 16. –. 71. 2. –. 73 61. 66. –. –. 127. (15). –. 112. (85). –. 27 . Other. –. 54. –. 1. 55. 75. 2. 132. (32). (1). 99 Total 1,765 357 2 (111) 2,013 839 20 2,872 199 (18) 3,053 CEN OV US EN ERGY 2012 ANNUAL RE PORT / N OTES TO CO NSOLIDATED FINA NCIA L STAT EMENTS 93 . . . Deferred Income Tax Asse ts. As.at.January.1,.2010. . Charged/(Credited).to.Earnings. . Charged/(Credited).to.OCI. As.at.December.31,.2010. . Charged/(Credited).to.Earnings.. . Charged/(Credited).to.OCI. As.at.December.31,.2011. . Charged/(Credited).to.Earnings.. . Charged/(Credited).to.OCI. As at December 31, 2012 Net Deferred Income Tax Liab il ities. Net.Deferred.Income.Tax.Liabilities.as.at.January.1,.2010. . Charged/(Credited).to.Earnings.. . Charged/(Credited).to.Held.for.Sale. . Charged/(Credited).to.OCI. Net.Deferred.Income.Tax.Liabilities.as.at.December.31,.2010. . Charged/(Credited).to.Earnings. . Charged/(Credited).to.OCI. Net.Deferred.Income.Tax.Liabilities.as.at.December.31,.2011. . Charged/(Credited).to.Earnings. . Charged/(Credited).to.OCI. Net Deferred Income Tax Liabilities as at December 31, 2012 The.allocation.of.deferred.income.tax.expense.is.comprised.of: A s a t De cem be r 3 1 ,. Credited/(Charged).to.Net.Deferred.Income.Tax.Liabilities. Credited/(Charged).to.Liabilities.Related.to.Assets.Held.for.Sale. Deferred Income Tax Expense. . . . . . . . . . . . . . . . . . . . . . . Unused.Tax. Risk. Losses. Management. (33). (12). –. (45). 29. –. (16). 11. –. (5) (242). (47). 8. (281). (270). (13). (564). 244. 11. (309) . . . . . . . . . . . Other. (9). (161). –. (170). (21). –. (191). 20. –. (171) . . . . . . . . . . . 2012. 474. –. 474. 2011. 577. (2). 575. Total (284) (220) 8 (496) (262) (13) (771) 275 11 (485) Total 1,481 137 2 (103) 1,517 577 7 2,101 474 (7) 2,568 2010 137 4 141 No.tax.liability.has.been.recognized.in.respect.of.temporary.differences.associated.with.investments.in.subsidiaries..As.no.taxes.are.expected.to. be.paid.in.respect.of.these.differences.related.to.Canadian.subsidiaries,.the.amounts.have.not.been.determined..There.are.no.taxable.temporary. differences.associated.with.investments.in.non-Canadian.subsidiaries. The.approximate.amounts.of.tax.pools.available.are.as.follows: A s a t De cem be r 3 1 ,. Canada. United.States. . . . . . . . 2012. 4,895. 1,607. 6,502. 2011 4,471 2,740 7,211 At.December.31,.2012,.the.above.tax.pools.included.$13.million.(2011.–. $78.million;.2010.–.$236.million).of.Canadian.non-capital.losses.and.. $791.million.(2011.–.$1,479.million;.2010.–.$607.million).of.U.S..federal. net.operating.losses..These.losses.expire.no.earlier.than.2029.. which.are.available.for.carry.forward.to.reduce.future.capital.gains... Of.these.losses,.$406.million.are.unrecognized.as.a.deferred.income. tax.asset.at.December.31,.2012.(2011.–.$286.million;.2010.–.$415.million).. Recognition.is.dependent.on.the.level.of.future.capital.gains. Also.included.in.the.December.31,.2012.tax.pools.are.Canadian.net.capital. losses.totaling.$512.million.(2011.–.$759.million;.2010.–.$983.million). 94 CENOVUS ENERGY 2012 ANNUAL RE PO RT / NOTES TO CONSOLIDATED FINA NCIA L STATEMEN TS 9. P ER SHARE A MOUNTS A) NET EARNINGS PER SHARE For the year s end ed Dece m ber 3 1, ($ m il l io ns, exce pt ea rn ings pe r s hare). Net.Earnings.–.Basic.and.Diluted. Weighted.Average.Number.of.Shares.–.Basic.. Dilutive.Effect.of.Cenovus.TSARs. Dilutive.Effect.of.NSRs. Weighted.Average.Number.of.Shares.–.Diluted. Basic.Earnings.per.share.. Diluted.Earnings.per.share. B) DIVIDENDS PER SHARE 2012. 993. 755.6. 2.9. –. 758.5. $ 1.31. $ 1.31. 2011. 1,478. 754.0. 3.7. –. 757.7. $.1.96. $.1.95. 2010 1,081 751.9 2.1 – 754.0 $. 1.44 $. 1.43 The.dividends.paid.in.2012.were.$665.million.or.$0.88.per.share,.(2011.–.$603.million,.$0.80.per.share;.2010.–.$601.million,.$0.80.per.share)... The.Cenovus.Board.of.Directors.declared.a.first.quarter.2013.dividend.of.$0.242.per.share,.payable.on.March.28,.2013,.to.common.shareholders.. of.record.as.of.March.15,.2013... 10 . C AS H AND CASH EQUIVALEN TS A s a t D ece mb er 3 1,. Cash.. Short-Term.Investments. . . . . 11. ACCOUNTS RECEIVAB LE AND ACCRUED REV ENUES As a t Decemb er 3 1,. Accruals.. Trade.. Joint.Operations.with.Partners. Prepaids.and.Deposits. Interest. Other. . . . . . . . . . . . . . . . 2012. 339. 821. 1,160. 2012. 965. 232. 30. 45. 23. 169. 1,464. 2011 232 263 495 2011 801 251 30 34 28 261 1,405 12 . PARTNERSH IP CONTR IBUTION RECEI VABLE AND PAYABLE Cenovus.has.two.significant.joint.operations,.FCCL.and.WRB.(Note.29).. Through.its.interests.in.these.joint.operations,.Cenovus’s.Consolidated. Balance.Sheets.include.a.Partnership.Contribution.Receivable.and. Payable.which.arose.when.Cenovus.became.a.50.percent.partner.of. an.integrated.North.American.oil.business...The.integrated.business. consists.of.an.upstream.entity,.FCCL,.and.a.refining.entity,.WRB... On.formation.of.the.upstream.entity.Cenovus.contributed.assets,. primarily.Foster.Creek.and.Christina.Lake.properties,.with.a.fair.. value.of.US$7.5.billion.and.a.note.receivable.of.an.equal.amount.was. contributed.by.the.partner.(“Partnership.Contribution.Receivable”)... For.the.refining.entity,.the.partner.contributed.its.Wood.River.and. Borger.refineries,.located.in.Illinois.and.Texas,.respectively,.for.a.fair. value.of.US$7.5.billion.and.Cenovus.contributed.a.note.payable.of.an. equal.amount.(“Partnership.Contribution.Payable”). PARTNERSHIP CONTRIBUTION RECEIVABLE This.note.receivable.is.denominated.in.US$.and.bears.interest.at.a.rate. of.5.3.percent.per.annum..Equal.payments.of.principal.and.interest.are. payable.quarterly,.with.final.payment.due.January.2,.2017..The.current. and.long-term.Partnership.Contribution.Receivable.shown.in.the. Consolidated.Balance.Sheets.represent.Cenovus’s.50.percent.share.of. this.promissory.note,.net.of.receipts.to.date. CEN OV US EN ERGY 2012 ANNUAL RE PORT / N OTES TO CO NSOL IDATED FINA NCI AL STAT EMENTS 95 Mandatory Receipts – Partnership Contribution Receivable .. . . US$. . C$.equivalent. 2013. 386. 384. 2014. 407. 405. 2015. 429. 427. 2016. 452. 450. 2017. 117. 116. Thereafter. –. –. Total 1,791 1,782 PARTNERSHIP CONTRIBUTION PAYABLE This.note.payable.is.denominated.in.US$.and.bears.interest.at.a.rate.of. 6.0.percent.per.annum..Equal.payments.of.principal.and.interest.are. payable.quarterly,.with.final.payment.due.January.2,.2017..The.current. Mandatory Payments – Partnership Contribution Payable and.long-term.Partnership.Contribution.Payable.amounts.shown.in.the. Consolidated.Balance.Sheets.represent.Cenovus’s.50.percent.share.of. this.promissory.note,.net.of.payments.to.date. .. . . US$. . C$.equivalent. 2013. 388. 386. 2014. 412. 410. 2015. 437. 435. 2016. 464. 462. 2017. 121. 119. Thereafter. –. –. 13. IN VE NTORIES As a t December 31,. Product . . Refining.and.Marketing. . Oil.Sands. . Conventional. Parts and Supplies. . . . . . . . . . 2012. . 1,056. 202. 1. 29. 1,288. Total 1,822 1,812 2011 1,079 186 1 25 1,291 During.the.year.ended.December.31,.2012,.approximately.$12,378.million.of.produced.and.purchased.inventory.was.recognized.as.an.expense.. (2011.–.$11,576.million;.2010.–.$9,692.million)..Inventory.costs.include.purchased.product,.the.cost.of.condensate.blended.with.heavy.oil.and.related. operating.costs.. 14. A SSE TS AN D L IAB ILITIES H EL D FOR SALE As a t D e cem b er 3 1 ,. Assets Held for Sale . . Property,.Plant.and.Equipment. Liabilities Related to Assets Held for Sale. . Decommissioning.Liabilities. . Deferred.Income.Taxes. . . . . . . . . . . 2012. . –. . –. –. –. 2011 116 54 – 54 Non-Core Natural Gas Assets At.December.31,.2011,.the.Company.classified.certain.non-core.natural. gas.assets.located.in.Northern.Alberta.as.assets.held.for.sale..The.assets. were.recorded.at.the.lesser.of.fair.value.less.costs.to.sell.and.their. carrying.amount..This.resulted.in.an.impairment.loss.of.approximately. $2.million.which.has.been.recorded.as.additional.depreciation,. depletion.and.amortization.in.the.Consolidated.Statements.of.Earnings. and.Comprehensive.Income..These.assets.and.the.related.liabilities.were. reported.in.the.Conventional.segment.. In.January.2012,.the.Company.completed.the.sale.of.these.natural.gas. assets.to.an.unrelated.third.party.for.net.proceeds.of.$64.million.. 96 CENOVUS ENERGY 2012 ANNUAL RE PO RT / NOTES TO CONSOLIDATED FINA NCIA L STATEMEN TS 15. E xPLOR ATION AND EVAL UATION ASSETS . . . COST. As.at.December.31,.2010. . Additions.. . Transfers.to.Property,.Plant.and.Equipment.(Note.16). . Divestitures. . Change.in.Decommissioning.Liabilities. As.at.December.31,.2011. . Additions.(1). . Transfers.to.Property,.Plant.and.Equipment.(Note.16). . Exploration.Expense. . Divestitures. . Change.in.Decommissioning.Liabilities. As at December 31, 2012. (1).2012.asset.acquisition.included.the.assumption.of.a.decommissioning.liability.of.$33.million. E&E.assets.consist.of.the.Company’s.evaluation.projects.which.are. pending.the.determination.of.technical.feasibility.and.commercial. viability..All.of.the.Company’s.E&E.assets.are.located.within.Canada.. Additions.to.E&E.assets.for.the.year.ended.December.31,.2012.include. $37.million.of.internal.costs.directly.related.to.the.evaluation.of.these. projects.(year.ended.December.31,.2011.–.$15.million). For.the.year.ended.December.31,.2012,.$218.million.of.E&E.assets.were. transferred.to.property,.plant.and.equipment.–.development.and. production.assets,.following.the.determination.of.technical.feasibility. and.commercial.viability.of.the.projects.(year.ended.December.31,.2011. –.$356.million).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . E&E 713 527 (356) (3) (1) 880 687 (218) (68) (11) 15 1,285 IMPAIRMENT The.impairment.of.E&E.assets.and.any.subsequent.reversal.of.such. impairment.losses.are.recognized.in.exploration.expense.in.the. Consolidated.Statements.of.Earnings.and.Comprehensive.Income.. For.the.year.ended.December.31,.2012,.$68.million.of.previously. capitalized.E&E.costs.related.primarily.to.the.Roncott.assets.within. the.Conventional.segment.were.deemed.not.to.be.technically.feasible. and.commercially.viable.and.were.recognized.as.exploration.expense.. There.were.no.impairment.losses.for.the.years.ended.December.31,. 2011.and.2010. CEN OV US EN ERGY 2012 ANNUAL RE PORT / N OTES TO CO NSOLIDATED FINA NCI AL STAT EMENTS 97 16 . P ROP ERT Y, PL ANT AND EQUIP M E N T, N ET . . . . . . . . . . . . COST. As.at.December.31,.2010. . Additions.. . Transfers.from.E&E.Assets.(Note.15). . Transfers.and.Reclassifications. . Change.in.Decommissioning.Liabilities... . Exchange.Rate.Movements. . Divestitures. As.at.December.31,.2011. . Additions.. . Transfers.from.E&E.Assets.(Note.15). . Transfers.and.Reclassifications. . Change.in.Decommissioning.Liabilities... . Exchange.Rate.Movements. . Divestitures. As at December 31, 2012. Impairment.Losses. ACCUMULATED DEPRECiATiON, DEPLETiON AND AMORTiZATiON As.at.December.31,.2010. . Depreciation.and.Depletion.Expense. . Transfers.and.Reclassifications. . . Exchange.Rate.Movements. As.at.December.31,.2011. . Depreciation.and.Depletion.Expense. . Transfers.and.Reclassifications. . . Exchange.Rate.Movements. As at December 31, 2012. Impairment.Losses. . . . . . . . . . . . CARRYiNG VALUE. As.at.December.31,.2010. As.at.December.31,.2011. As at December 31, 2012. . . . . (1).Includes.office.furniture,.fixtures,.leasehold.improvements,.information.technology.and.aircraft. . . Upstream.Assets . . Development. &.Production.. . Other. Upstream. Refining Equipment. Other.(1). Total . . . . . . . . . . . . . . . . 21,720. 1,704. 356. (326). 403. 1. –. 23,858. 2,442. 218. –. 484. 1. –. 27,003 12,121. 1,108. (211). 2. 1. 13,021. 1,368. –. –. 1. 14,390 . 9,599. 10,837. 12,613 153. 41. –. –. –. –. –. 194. 44. –. –. –. –. –. 238 124. 15. –. –. –. 139. 19. –. –. –. 158 29. 55. 80 2,950. 391. –. (5). 10. 79. –. 3,425. 118. –. (55). (16). (73). –. 3,399 97. 85. (5). 45. 3. 225. 146. (55). –. (5). 311 2,853. 3,200. 3,088 450. 131. –. (2). 1. –. (4). 576. 191. –. –. –. –. –. 767 304.. 40. –. –. –. 344. 52. –. –. –. 396 146. 232. 371 25,273 2,267 356 (333) 414 80 (4) 28,053 2,795 218 (55) 468 (72) – 31,407 12,646 1,248 (216) 47 4 13,729 1,585 (55) – (4) 15,255 12,627 14,324 16,152 Additions.to.development.and.production.assets.include.internal.costs. directly.related.to.the.development,.construction.and.production.of. crude.oil.and.natural.gas.properties.of.$161.million.(2011.–.$125.million).. All.of.the.Company’s.development.and.production.assets.are.located. within.Canada..Costs.classified.as.general.and.administrative.expenses. have.not.been.capitalized.as.part.of.capital.expenditures..No.borrowing. costs.have.been.capitalized.in.2012.(2011.–.$nil). Property,.plant.and.equipment.include.the.following.amounts.in.respect. of.assets.not.available.for.use.which.are.not.subject.to.depreciation. until.put.into.use:. As a t December 31,. Development.and.Production. Refining.Equipment. Other. . . . . . . . . 2012. 38. 13. 11. 62. 2011 52 125 112 289 98 CENOVUS ENERGY 2012 ANNUAL RE PO RT / NOTES TO CONSOLIDATED FINA NCIA L STATEMEN TS IMPAIRMENT The.impairment.of.property,.plant.and.equipment.and.any.subsequent.reversal.of.such.impairment.losses.are.recognized.in.depreciation,.depletion. and.amortization.in.the.Consolidated.Statements.of.Earnings.and.Comprehensive.Income.. Depreciation,.depletion.and.amortization.expense.includes.impairment.losses.as.follows: For the year s end ed Dece m ber 3 1,. Development.and.Production. Refining.Equipment. . . . 2012. –. –. –. 2011. 2. 45. 47. 2010 – 14 14 There.were.no.impairments.or.impairment.reversals.of.property,.plant. and.equipment.in.2012..The.impairment.losses.for.the.year.ended. December.31,.2011.were.related.to.a.catalytic.cracking.unit.at.the.Wood. River.Refinery,.which.will.not.be.used.in.future.operations,.and.an. impairment.on.non-core.natural.gas.assets.that.were.reclassified.as. held.for.sale.(Note.14)..The.natural.gas.assets.reside.in.the.Conventional. segment..The.2010.impairment.loss.related.to.a.processing.unit.at.the. Borger.Refinery.which.was.determined.to.be.a.redundant.asset.. 17. D I VESTI TURE S In.January.2012,.the.Company.completed.the.sale.of.non-core.natural. gas.assets.located.in.Northern.Alberta..A.loss.of.$2.million.was. recorded.on.the.sale..These.assets.and.the.related.liabilities.were. reported.in.the.Conventional.segment. In.2011,.the.Company.disposed.of.non-core.crude.oil.and.natural.gas. properties.and.marine.terminal.facilities.recognizing.an.after-tax.gain.of. $91.million.in.the.Statement.of.Earnings.and.Comprehensive.Income..In. 2010,.an.after-tax.gain.of.$116.million.was.recognized.on.the.disposition. of.non-core.crude.oil.and.natural.gas.properties.and.corporate.assets. 18 . OTH ER ASSETS As a t Decemb er 3 1,. Long-Term.Receivables. Prepaids. Other. . . . 19. GO ODWI LL As a t Decemb er 3 1,. Carrying.Value,.Beginning.of.Year. . Carrying.Value,.End.of.Year. Impairment. . . . . . . . . 2012. 22. 8.8 28. 58. 2012. 1,132. (393). 739. 2011 18 18 44 2011 1,132 – 1,132 There.were.no.additions.to.goodwill.during.2012.or.2011.. IMPAIRMENT TEST FOR CASH-GENERATING UNITS CONTAINING GOODWILL For.the.purpose.of.impairment.testing,.goodwill.is.allocated.to.the.CGU.to.which.it.relates..All.of.the.Company’s.goodwill.arose.on.the.acquisition. of.exploration.and.production.assets..The.carrying.amount.of.goodwill.allocated.to.the.Company’s.exploration.and.production.CGUs.was.as.follows:. As a t Decemb er 3 1,. Suffield.. Foster.Creek. Northern.Alberta. . . . . . . . . 2012. –. 242. 497. 739. 2011 393 242 497 1,132 CEN OV US EN ERGY 2012 ANNUAL RE PORT / N OTES TO CO NSOLIDATED FINA NCI AL STAT EMENTS 99 At.December.31,.2012,.the.Company.determined.that.the.carrying. amount.of.the.Suffield.CGU.exceeded.its.fair.value.less.costs.to.sell. and.the.full.amount.of.the.impairment.was.attributed.to.goodwill.. This.goodwill.arose.in.2002.upon.the.formation.of.the.predecessor. corporation..An.impairment.loss.of.$393.million.was.recorded.as. goodwill.impairment.on.the.Consolidated.Statement.of.Earnings.and. Comprehensive.Income..The.Suffield.property.resides.on.the.Canadian. Forces.Base.in.southeast.Alberta.and.the.operating.results.are.included. in.the.Conventional.segment..Future.cash.flows.for.the.area.have. declined.due.to.lower.natural.gas.and.crude.oil.prices.and.increased. operating.costs..In.addition,.minimal.levels.of.capital.spending.for. natural.gas.resulted.in.production.exceeding.reserve.replacement.in.the. area..With.lower.future.cash.flows.and.decreasing.volumes,.the.carrying. amount.of.the.goodwill.exceeded.its.fair.value. The.recoverable.amount.was.determined.using.fair.value.less.costs.to. sell..A.calculation.based.on.discounted.after-tax.cash.flows.of.proved. and.probable.reserves.using.forecast.prices.and.costs.as.estimated.by. Cenovus’s.independent.qualified.reserves.evaluators.was.completed. (Note.4)..To.assess.reasonableness,.an.evaluation.of.fair.value.based.on. comparable.asset.transactions.was.also.completed. There.was.no.impairment.of.goodwill.in.2011.or.2010. SENSITIVITIES Changes.to.the.assumed.discount.rate.or.forward.price.estimates.independently.would.have.the.following.impact.on.the.impairment.. of.the.Suffield.CGU: . . . . . . . . . . . . Impairment.of.Goodwill. Impairment.of.PP&E. 20. ACCOUNTS PAYAB LE AND ACC R UED LI ABILITIES As a t December 31,. Accruals. Trade.. Employee.Long-Term.Incentives. Interest. Other. . . . 21. LON G-T E RM D EBT As a t December 31,. Revolving.Term.Debt.(1). U.S..Dollar.Denominated.Unsecured.Notes. Total.Debt.Principal. Debt.Discounts.and.Transaction.Costs. . . . . . One.Percent. . . Increase.in.the. . Discount.Rate. –. . . 50 Five.Percent. Decrease.in.the. Forward.Price. Estimates – 100 . . . . . . . . A. B. C. D. . 2012. 1,510. 676. 196. 82. 186. 2,650. 2012. –. 4,726. 4,726. (47). 4,679. 2011 1,193 789 209 72 316 2,579 2011 – 3,559 3,559 (32) 3,527 (1). Revolving.term.debt.may.include.bankers’.acceptances,.LIBOR.loans,.prime.rate.loans.and.U.S..base.rate.loans.. The.weighted.average.interest.rate.on.outstanding.debt.for.the.year.ended.December.31,.2012.was.5.3.percent.(2011.–.5.5.percent,.2010.–.5.8.percent).. A) REVOLVING TERM DEBT At.December.31,.2012,.Cenovus.had.in.place.a.committed.credit.facility. in.the.amount.of.$3.0.billion.or.the.equivalent.amount.in.U.S..dollars.. The.committed.credit.facility.was.renegotiated.in.September.2012. to.slightly.reduce.both.the.standby.fees.required.to.maintain.the. facility.as.well.as.the.cost.of.future.borrowings..The.maturity.date.was. extended.to.November.30,.2016.and.is.extendable.from.time.to.time,. for.a.period.of.up.to.four.years.at.the.option.of.Cenovus.and.upon. agreement.from.the.lenders..Borrowings.are.available.by.way.of.Bankers’. Acceptances,.LIBOR.based.loans,.prime.rate.loans.or.U.S..base.rate. loans..At.December.31,.2012,.there.were.no.amounts.drawn.on.Cenovus’s. committed.bank.credit.facility.(2011.–.$nil). 100 CENOVUS ENERGY 2012 ANNUAL RE PO RT / NOTES TO CONSOLIDATED FINA NCIA L STATEMEN TS B) UNSECURED NOTES Unsecured.notes.are.comprised.of.the.following: . . . As a t Decemb er 3 1,. 4.50%.due.September.15,.2014.. 5.70%.due.October.15,.2019. 3.00%.due.August.15,.2022. 6.75%.due.November.15,.2039. 4.45%.due.September.15,.2042. . . . US$ Principal Amount. 800 1,300 500 1,400 750 4,750 2012. 796. 1,293. 498. 1,393. 746. 4,726. 2011 814 1,322 – 1,423 – 3,559 Cenovus.has.in.place.a.Canadian.base.shelf.prospectus.for.unsecured. medium-term.notes.in.the.amount.of.$1.5.billion..The.Canadian.shelf. prospectus.allows.for.the.issuance.of.medium-term.notes.in.Canadian. dollars.or.other.foreign.currencies,.from.time.to.time,.in.one.or.more. offerings..The.terms.of.the.notes,.including,.but.not.limited.to,.the. principal.amount,.interest.at.either.fixed.or.floating.rates.and.maturity. dates,.will.be.determined.at.the.date.of.issue..As.at.December.31,.2012,. no.medium-term.notes.have.been.issued.under.this.Canadian.shelf. prospectus..The.Canadian.shelf.prospectus.expires.in.June.2014.. Cenovus.has.in.place.a.U.S..base.shelf.prospectus.for.unsecured.notes. in.the.amount.of.US$2.0.billion..The.U.S..shelf.prospectus.allows.for.the. issuance.of.debt.securities.in.U.S..dollars.or.other.foreign.currencies,. from.time.to.time,.in.one.or.more.offerings..The.terms.of.the.notes,. including,.but.not.limited.to,.the.principal.amount,.interest.at.either. fixed.or.floating.rates.and.maturity.dates,.will.be.determined.at.the.date. of.issue..As.at.December.31,.2012,.US$750.million.remains.under.this.U.S.. base.shelf.prospectus..The.U.S..shelf.prospectus.expires.in.July.2014. On.August.17,.2012,.Cenovus.completed.a.public.offering.in.the.U.S.. of.senior.unsecured.notes.of.US$500.million,.with.a.coupon.rate.of. 3.00.percent,.due.August.15,.2022.and.US$750.million.of.senior.unsecured. notes.with.a.coupon.rate.of.4.45.percent.due.September.15,.2042,.for.an. aggregate.principal.amount.of.US$1.25.billion..The.net.proceeds.will.be. used.for.general.corporate.purposes,.including.repayment.of.commercial. paper.indebtedness.. As.at.December.31,.2012,.the.Company.is.in.compliance.with.all.of.the. terms.of.its.debt.agreements. C) MANDATORY DEBT PAYMENTS . . . . . . 2013. . 2014. . 2015. . 2016. . 2017. . Thereafter. . . . US$.Principal. Amount. –. 800. –. –. –. 3,950. 4,750. C$.Principal. Amount. –. –. –. –. –. –. –. Total C$ Equivalent – 796 – – – 3,930 4,726 D) DEBT DISCOUNTS AND TRANSACTION COSTS Long-term.debt.transaction.costs.and.discounts.associated.with.the.unsecured.notes.are.recorded.within.long-term.debt.and.are.amortized.using. the.effective.interest.rate.method..Transaction.costs.associated.with.the.revolving.term.debt.are.recorded.as.a.prepayment.and.are.being.amortized. over.the.remaining.term.of.the.committed.credit.facility..During.2012,.additional.transaction.costs.of.$19.million.were.recorded.(2011.–.$3.million).. CEN OV US EN ERGY 2012 AN NUAL R EPORT / NOTES TO CO NSOLIDATED FINA NCIA L STATE MENTS 101 22 . DE COM MISSIO NING L IABIL IT I ES The.decommissioning.provision.represents.the.present.value.of.the.expected.future.costs.associated.with.the.retirement.of.upstream.crude.oil.and. natural.gas.assets.and.refining.facilities..The.aggregate.carrying.amount.of.the.obligation.is.as.follows: As a t December 31,. Decommissioning.Liabilities,.Beginning.of.Year. . Liabilities.Incurred. . Liabilities.Settled. . Transfers.and.Reclassifications. . Change.in.Estimated.Future.Cash.Flows. . Change.in.Discount.Rate. . Unwinding.of.Discount.on.Decommissioning.Liabilities. . Decommissioning.Liabilities,.End.of.Year. Foreign.Currency.Translation. . . . . . . . . . . 2012. 1,777. 99. (66). 3. 144. 273. 86. (1). 2,315. 2011 1,399 49 (56) (55) 146 218 75 1 1,777 The.undiscounted.amount.of.estimated.cash.flows.required.to.settle. the.obligation.is.$6,865.million.(2011.–.$6,541.million),.which.has.been. discounted.using.a.credit-adjusted.risk-free.rate.of.4.2.percent.. (2011.–.4.8.percent)..Most.of.these.obligations.are.not.expected.to. be.paid.for.several.years,.or.decades,.and.will.be.funded.from.general. resources.at.that.time..Revisions.in.estimated.cash.flows.resulted.from. accelerated.timing.of.forecast.abandonment.and.reclamation.spending. and.higher.cost.estimates. SENSITIVITIES Changes.to.the.credit-adjusted.risk-free.rate.or.the.inflation.rate.would.have.the.following.impact.on.the.decommissioning.liabilities: . . . . ... . ... . As a t December 31,. One.Percent.Increase. One.Percent.Decrease. 23. OT H ER LIABI LITIES As a t December 31,. Deferred.Revenue. Employee.Long-Term.Incentives. Pension.and.Other.Post-Employment.Benefits.(Note.24). Other. . . . 2012. 2011 Credit-Adjusted. ... Risk-Free Rate inflation Rate. 572. (418). (408) 565 Credit-Adjusted. Risk-Free.Rate. (367). ...494. Inflation.Rate 504 (379) . . . . . 2012. 31. 64. 28. 28. 151. 2011 35 55 16 22 128 24. PE N S ION S A ND OTH ER POST-E MPLOYMENT BENEFITS The.Company.provides.employees.with.a.pension.that.includes.either. a.defined.contribution.or.defined.benefit.component.and.other.post- employment.benefit.plans.(“OPEB”)..Most.of.the.employees.participate. in.the.defined.contribution.pension..Starting.in.2012,.employees.who. meet.certain.criteria.are.eligible.to.elect.to.convert.from.the.current. defined.contribution.pension.to.a.defined.benefit.pension. The.Company.is.required.to.file.an.actuarial.valuation.of.its.registered. defined.benefit.pension.plan.with.the.provincial.regulator.at.least.every. three.years..The.most.recently.filed.valuation.was.dated.June.30,.2012. and.the.next.required.actuarial.valuation.will.be.as.at.December.31,.2014. The.defined.benefit.pension.provides.pension.benefits.at.retirement. based.on.years.of.service.and.final.average.earnings..Future.enrollment. is.limited.to.eligible.employees.who.meet.certain.criteria..The.defined. benefit.pension.is.funded.according.to.the.federal.and.provincial. government.pension.legislation,.where.applicable..Contributions.. are.made.to.trust.funds.administered.by.an.independent.trustee... The.Company’s.contributions.to.the.defined.benefit.pension.plans.are. based.on.the.results.of.the.actuarial.valuation.and.direction.by.the. Human.Resources.and.Compensation.Committee.of.the.Board.. The.Company’s.OPEB.provides.retired.employees.with.life.insurance. benefits,.health.care.and.dental.benefits.until.age.65..These.benefits.are. funded.on.an.as.required.basis. 102 CENOVUS ENERGY 2012 ANNUAL RE PO RT / NOTES TO CONSOLIDATED FINA NCIA L STATEMEN TS A) DEFINED BENEFIT AND OPEB PLAN OBLIGATION AND FUNDED STATUS Information.related.to.defined.benefit.pension.and.OPEB.plans,.based.on.actuarial.estimations,.is.as.follows: . . . As a t Decemb er 3 1,. Defined Benefit Obligation. Defined.Benefit.Obligation,.Beginning.of.Year. . Current.Service.Costs. Interest.Costs. . . Benefits.Paid. . Plan.Participant.Contributions. . Actuarial.(Gains).Losses. . Plan.Conversion. Defined.Benefit.Obligation,.End.of.Year. Plan Assets. Fair.Value.of.Plan.Assets,.Beginning.of.Year. . Expected.Return.on.Plan.Assets. . Employer.Contributions. . Plan.Participant.Contributions. . Actuarial.Gains.(Losses). . Benefits.Paid. . Asset.Transfer.from.Plan.Conversion. Fair.Value.of.Plan.Assets,.End.of.Year. Funded.Status.–.Plan.Assets.(Less).than.Benefit.Obligation. Unamortized.Net.Actuarial.(Gain).Loss.not.Recognized. Pension and Other Post-Employment Benefit (Liability). Pension.Benefits. 2011. . 68. 3. 3. (1). –. 11. –. 84. . 59. 3. 4. –. (4). (1). –. 61. (23). 22. (1). 2012. . 84. 10. 4. (2). 1. 7. 30. 134. . 61. 4. 22. 1. –. (2). 12. 98. (36). 26. (10). The.pension.and.other.post-employment.benefit.liability.is.included.in.other.liabilities.on.the.Consolidated.Balance.Sheets.. B) PENSION AND OTHER POST-EMPLOYMENT BENEFIT COSTS Pension.and.other.post-employment.benefit.costs.are.as.follows: . . . Fo r t h e ye ar s end ed Dece m ber 3 1,. Current.Service.Cost. Interest.Cost. Expected.Return.on.Plan.Assets. Actuarial.Gains.(Losses). Past.Service.Cost.(1). Defined.Benefit.Plan.Cost. Defined.Contribution.Plan.Cost. Total.Plan.Cost. Pension.Benefits. 2011. 3. 4. (4). 1. –. 4. 22. 26. 2010. 3. 3. (3). –. –. 3. 18. 21. 2012. 10. 4. (4). 3. 18. 31. 25. 56. 2012. 3. 1. –. –. –. 4. –. 4. OPEB 2011 . 14 2 1 – – 2 – 19 . – – – – – – – – (19) 4 (15) 2010 1 1 – – – 2 – 2 2012. . 19. 2. 1. –. –. (2). –. 20. . –. –. –. –. –. –. –. –. (20). 2. (18). OPEB 2011. 2. 1. –. –. –. 3. –. 3. (1)..Past.service.costs.for.eligible.employees.who.were.given.a.one-time.option.to.convert.from.the.defined.contribution.pension.to.defined.benefit.pension.retrospectively.to.the.later.of.the.date.they. would.have.been.eligible.to.enroll.in.the.defined.benefit.pension.or.November.30,.2009..Past.service.costs.were.fully.vested.and.recorded.immediately. Pension.costs.are.recorded.in.operating.and.general.and.administrative.expenses,.and.PP&E.and.E&E.assets,.corresponding.to.where.the.associated. salaries.and.wages.of.the.employees.rendering.the.service.are.recorded. CEN OV US EN ERGY 2012 AN NUAL R EPORT / NOTES TO CO NSOLIDATED FINA NCI AL STAT EMENTS 10 3 C) ACTUARIAL ASSUMPTIONS The.principal.weighted.average.actuarial.assumptions.used.to.determine.benefit.obligations.and.expenses.are.as.follows: . . . . Benefit Obligation at December 31. . Discount.Rate. . Rate.of.Compensation.Increase. Benefit Expense for the Year. . Discount.Rate. . Expected.Return.on.Plan.Assets. . Rate.of.Compensation.Increase. Pension.Benefits. 2011. . 4.25%. 3.99%. . 5.25%. 5.59%. 4.05%. 2010. . 5.25%. 4.05%. . 6.00% 5.59%. 4.05%. 2012. . 4.00%. 4.39%. . 4.25%. 5.54%. 3.99%. 2012. . 4.00%. 5.77%. . 4.25%. N/A. 5.77%. OPEB 2011. . 4.25%. 5.77%. . 5.25%. N/A. 5.65%. 2010 5.25% 5.65% . . 6.00% N/A 5.77% The.discount.rates.are.determined.with.reference.to.market.yields. on.high.quality.corporate.debt.instruments.of.similar.duration.to.the. benefit.obligations.at.the.end.of.the.reporting.period.. The.expected.average.remaining.service.period.of.the.active.employees. covered.by.the.defined.benefit.pension.and.OPEB.plans.are.seven.and. 11.years,.respectively.. The.expected.rate.of.return.on.plan.assets.is.based.on.historical.. and.projected.rates.of.return.for.each.asset.class.in.the.plan.. investment.portfolio.. Assumed.health.care.cost.trend.rates.are.as.follows: . . . Health.Care.Cost.Trend.for.Next.Year. Rate.that.the.Trend.Rate.Gradually.Trends.to. Year.that.the.Trend.Rate.Reaches.the.Rate.Which.it.is.Expected.to.Remain.At. 2012. 8%. 5%. 2021. 2011. 10%. 5%. 2022. 2010 10% 5% 2021 Assumed.health.care.cost.trend.rates.have.an.effect.on.the.amounts.reported.for.the.OPEB.plans..A.one.percentage.point.change.in.assumed.health. care.cost.trend.rates.would.have.the.following.effects: . . . Effect.on.Service.and.Interest.Cost. Effect.on.Pension.and.Other.Post-Employment.Benefit.Liability. One Percentage Point increase – 1 . . One Percentage Point Decrease – (1) D) PLAN ASSETS AND INVESTMENT OBJECTIVES The.objective.of.the.asset.allocation.is.to.manage.the.funded.status. of.the.plan.at.an.appropriate.level.of.risk,.giving.consideration.to.the. security.of.the.assets.and.the.potential.volatility.of.market.returns.and. the.resulting.effect.on.both.contribution.requirements.and.pension. expense..The.long-term.return.is.expected.to.achieve.or.exceed.the. return.from.a.composite.benchmark.comprised.of.passive.investments. in.appropriate.market.indices..The.asset.allocation.structure.is.subject. to.diversification.requirements.and.constraints.which.reduce.risk.by. limiting.exposure.to.individual.equity.investment.and.credit.. rating.categories. The.actual.return.on.the.plan.assets.for.the.year.ended.December.31,. 2012.was.$3.million.(2011.–.$nil). The.Company’s.weighted.average.pension.plan.asset.allocation,.based. on.market.values.as.at.December.31,.2012.and.2011,.are.as.follows:. . . . . . . Equity.Securities. Debt.Securities. Real.Estate.and.Other. Total.. Target.Allocation. . 65-70%. ........... 30%. 0-5%. 100%. Percentage.of.Plan.Assets 2011 60% 33% 7% 100% 2012. 63%. 30%. 7%. 100%. Equity.securities.do.not.include.any.direct.investments.in.Cenovus.shares.. The.expected.contributions.for.the.year.ended.December.31,.2013.is.$15.million.for.the.defined.benefit.pension.plan.and.$nil.for.the.OPEB. 104 CENOVUS ENERGY 2012 ANNUAL RE PO RT / NOTES TO CONSOLIDATED FINA NCIA L STATEMEN TS E) DEFINED BENEFIT PLAN AND OPEB ExPERIENCE ADJUSTMENTS Experience.adjustments.as.a.percentage.of.total.plan.assets.and.liabilities.are.as.follows: As a t Decemb er 3 1,. Defined Benefit. . Experience.Adjustments.Arising.on.Plan.Liabilities. . Experience.Adjustments.Arising.on.Plan.Assets. OPEB . . Experience.Adjustments.Arising.on.Plan.Liabilities. 2 5. S H A R E CAP ITAL A) AUTHORIZED 2012. . 2%. 0%. . 3%. 2011. . (1%). 7%. . 2%. 2010 . 3% (2%) 2% Cenovus.is.authorized.to.issue.an.unlimited.number.of.common.shares,.an.unlimited.number.of.first.preferred.shares.and.an.unlimited.number.of. second.preferred.shares..The.first.and.second.preferred.shares.may.be.issued.in.one.or.more.series.with.rights.and.conditions.to.be.determined.by.the. Company’s.Board.of.Directors.prior.to.issuance.and.subject.to.the.Company’s.articles. . . . . . . B) ISSUED AND OUTSTANDING . . . As a t Decemb er 3 1,. . Outstanding,.Beginning.of.Year. Common.Shares.Issued.under.Stock.Option.Plans. Outstanding,.End.of.Year. 2012. 2011 Number of. Common Shares. (thous an ds ). . . Amount. Number.of. Common.Shares. (thous ands). 754,499 1,344 755,843 3,780. 49. 3,829. 752,675. 1,824. 754,499. Amount 3,716 64 3,780 There.were.no.preferred.shares.outstanding.as.at.December.31,.2012. (2011.–.nil).. shares..At.the.discretion.of.the.Company,.the.additional.common.shares. may.be.issued.from.treasury.or.purchased.on.the.market.. At.December.31,.2012,.there.were.28.million.(2011.–.30.million).common. shares.available.for.future.issuance.under.stock.option.plans.. C) PAID IN SURPLUS The.Company.has.a.dividend.reinvestment.plan.(“DRIP”)..Under.the. DRIP,.holders.of.common.shares.may.reinvest.all.or.a.portion.of.the. cash.dividends.payable.on.their.common.shares.in.additional.common. Cenovus’s.paid.in.surplus.reflects.the.Company’s.retained.earnings.prior. to.the.split.of.Encana.under.the.Arrangement.into.two.independent. energy.companies,.Encana.and.Cenovus..In.addition,.paid.in.surplus. includes.compensation.expense.related.to.the.Company’s.NSRs. discussed.in.Note.26.A. . . . . . . As.at.December.31,.2010. Stock-Based.Compensation.Expense. As.at.December.31,.2011. Stock-Based.Compensation.Expense. As.at.December.31,.2012. Pre-Arrangement Stock-Based. Earnings Compensation –. 24. 24. 47. 71 4,083. –. 4,083. –. 4,083 Total 4,083 24 4,107 47 4,154 2 6. STO CK- BASE D COMPENSATION PL AN S A) EMPLOYEE STOCK OPTION PLAN Cenovus.has.an.Employee.Stock.Option.Plan.that.provides.employees. with.the.opportunity.to.exercise.an.option.to.purchase.common.shares. of.the.Company..Option.exercise.prices.approximate.the.market.price. for.the.common.shares.on.the.date.the.options.were.issued..Options. granted.are.exercisable.at.30.percent.of.the.number.granted.after.one. year,.an.additional.30.percent.of.the.number.granted.after.two.years. and.are.fully.exercisable.after.three.years..Options.granted.prior.to. February.17,.2010.expire.after.five.years.while.options.granted.on.or. after.February.17,.2010.expire.after.seven.years.. Options.issued.by.the.Company.under.the.Employee.Stock.Option.Plan. prior.to.February.24,.2011.have.associated.tandem.stock.appreciation. rights..In.lieu.of.exercising.the.options,.the.tandem.stock.appreciation. rights.give.the.option.holder.the.right.to.receive.a.cash.payment.equal. to.the.excess.of.the.market.price.of.Cenovus’s.common.shares.at.the. time.of.exercise.over.the.exercise.price.of.the.option. CEN OV US EN ERGY 2012 ANNUAL RE PORT / N OTES TO CO NSOLIDATED FINA NCI AL STATE MENTS 10 5 Options.issued.by.the.Company.on.or.after.February.24,.2011.have. associated.net.settlement.rights..The.net.settlement.rights,.in.lieu.of. exercising.the.option,.give.the.option.holder.the.right.to.receive.the. number.of.common.shares.that.could.be.acquired.with.the.excess.value. of.the.market.price.of.Cenovus’s.common.shares.at.the.time.of.exercise. over.the.exercise.price.of.the.option.. The.tandem.stock.appreciation.rights.and.net.settlement.rights.vest.and. expire.under.the.same.terms.and.conditions.as.the.underlying.options.. For.the.purpose.of.this.financial.statement.note,.options.with.associated. tandem.stock.appreciation.rights.are.referred.to.as.“TSARs”.and.options. with.associated.net.settlement.rights.are.referred.to.as.“NSRs”.. In.addition,.certain.of.the.TSARs.are.performance.based.(“Performance. TSARs”)..The.Performance.TSARs.vest.and.expire.under.the.same.terms. and.service.conditions.as.the.underlying.option,.and.have.an.additional. vesting.requirement.whereby.vesting.is.subject.to.achievement.of. prescribed.performance.relative.to.pre-determined.key.measures.. Performance.TSARs.that.do.not.vest.when.eligible.are.forfeited. . . . . . . . . . . . . As a t December 31, 2012. Encana.Replacement.TSARs.held.. . by.Cenovus.Employees. Cenovus.Replacement.TSARs.held.. . by.Encana.Employees. TSARs. TSARs. NSRs.. . . . . issued. Prior.to.Arrangement. Prior.to.Arrangement. Prior.to.February.17,.2010. On.or.After.February.17,.2010. On.or.After.February.24,.2011. In.accordance.with.the.Arrangement.described.in.Note.1,.each.Cenovus. and.Encana.employee.exchanged.their.original.Encana.TSAR.for.one. Cenovus.Replacement.TSAR.and.one.Encana.Replacement.TSAR..The. terms.and.conditions.of.the.Cenovus.and.Encana.Replacement.TSARs. are.similar.to.the.terms.and.conditions.of.the.original.Encana.TSAR.. The.original.exercise.price.of.the.Encana.TSAR.was.apportioned.to. the.Cenovus.and.Encana.Replacement.TSARs.based.on.the.one.day. volume.weighted.average.trading.price.of.Cenovus’s.common.share. price.relative.to.that.of.Encana’s.common.share.price.on.the.TSX.on. December.2,.2009..Cenovus.TSARs.and.Cenovus.Replacement.TSARs. are.measured.against.the.Cenovus.common.share.price.while.Encana. Replacement.TSARs.are.measured.against.the.Encana.common.share. price..The.Cenovus.Replacement.TSARs.have.similar.vesting.provisions. as.outlined.above.for.the.Employee.Stock.Option.Plan..The.original. Encana.Performance.TSARs.were.also.exchanged.under.the.same.terms. as.the.original.Encana.TSARs. . . . . . . . Term (Yea rs ) Weighted. Average Remaining Contractual ..Life.(Yea rs ). . Weighted. Average Exercise Price.($). 5 5 5 7 7 0.66 0.70 0.72 4.20 5.85 32.66 29.29 29.28 26.71 37.52 Closing. Share Units. Price.($). Outstanding 19.66 33.29 33.29 33.29 33.29 7,722 5,229 6,225 5,026 15,074 Unless.otherwise.indicated,.all.references.to.TSARs.collectively.refer.to.both.the.Cenovus.issued.TSARs.and.Cenovus.Replacement.TSARs.. NSRs The.weighted.average.unit.fair.value.of.NSRs.granted.during.the.year.ended.December.31,.2012.was.$7.62.before.considering.forfeitures,.which.are. considered.in.determining.total.cost.for.the.period..The.fair.value.of.each.NSR.was.estimated.on.its.grant.date.using.the.Black-Scholes-Merton. valuation.model.with.weighted.average.assumptions.as.follows:. Risk-Free.Interest.Rate. Expected.Dividend.Yield. Expected.Volatility.(1). Expected.Life.(Years). (1).Expected.volatility.has.been.based.on.historical.share.volatility.of.the.Company.and.comparable.industry.peers. The.following.tables.summarize.information.related.to.the.NSRs.as.at.December.31,.2012: . . . . . . . . . As a t December 31, 2012 (tho usand s of units). Outstanding,.Beginning.of.Year. . Granted. . Exercised.for.Common.Shares. . Outstanding,.End.of.Year. Exercisable,.End.of.Year. Forfeited. . . . . . . . . . . . . . . . 1.37% 2.31% 28.62% 4.55 . . . NSRs 5,809 9,665 (5) (395) 15,074 1,700 Weighted. Average. Exercise. Price ($) 36.95 37.87 33.99 37.56 37.52 36.98 For.options.exercised.during.the.year,.the.weighted.average.market.price.of.Cenovus’s.common.shares.at.the.date.of.exercise.was.$35.28. 106 CENOVUS ENERGY 2012 ANNUAL RE PO RT / NOTES TO CONSOLIDATED FINA NCIA L STATEMEN TS . . . . . . . . . . . . . . . As a t Decemb er 3 1, 2 012. Range of Exe rcise P rice ($ ). 30.00.to.39.99. . . . . . . . . . . . . . . . As a t Decemb er 3 1, 2 012. Range of Exe rcise P rice ($ ). 30.00.to.39.99. Outstanding.NSRs. (thous an ds of units). Weighted. . . Average Remaining. Contractual Life (years) 5.85 . NSRs 15,074 Weighted. Average. Exercise. Price ($) 37.52 Exercisable.NSRs. (thousands of units). . NSRs 1,700 Weighted. Average. Exercise. Price ($) 36.98 . . . TSARs Held by Cenovus Employees The.Company.has.recorded.a.liability.of.$64.million.at.December.31,.2012.(December.31,.2011.–.$90.million).in.the.Consolidated.Balance.Sheets. based.on.the.fair.value.of.each.TSAR.held.by.Cenovus.employees..Fair.value.was.estimated.at.the.period.end.date.using.the.Black-Scholes-Merton. valuation.model.with.weighted.average.assumptions.as.follows: Risk-Free.Interest.Rate. Expected.Dividend.Yield. Expected.Volatility.(1). Cenovus’s.Common.Share.Price. . . . . (1).Expected.volatility.has.been.based.on.historical.share.volatility.of.the.Company.and.comparable.industry.peers. The.intrinsic.value.of.vested.TSARs.held.by.Cenovus.employees.at.December.31,.2012.was.$45.million.(2011.–.$43.million). The.following.tables.summarize.information.related.to.the.TSARs.held.by.Cenovus.employees.as.at.December.31,.2012: . . . . . . . . . A s a t D ece mb er 3 1, 2 012 (t hous ands of units). Outstanding,.Beginning.of.Year. . Granted. . Exercised.for.Cash.Payment. . Exercised.as.Options.for.Common.Shares. . . Expired. Outstanding,.End.of.Year. Exercisable,.End.of.Year. Forfeited. . . . . . . . . . . . . . . . . . . . . . . . . . . . TSARs 9,391. –. (937). (683). (134). (11). 7,626 5,369 . . Performance TSARs 5,530. –. (1,057). (641). (207). –. 3,625 3,625 . . . . . . Total 14,921 – (1,994) (1,324) (341) (11) 11,251 8,994 1.28% 2.58% 27.80% $ 33.29 Weighted. Average. Exercise. Price.($) 28.12 – 28.52 27.77 26.77 30.85 28.13 28.46 For.options.exercised.during.the.year,.the.weighted.average.market.price.of.Cenovus’s.common.shares.at.the.date.of.exercise.was.$36.73. . . . . . . . . . . . . . . . As a t Decemb er 3 1, 2 012. Range of Exe rcise P rice ($ ). 20.00.to.29.99. 30.00.to.39.99. 40.00.to.49.99. . . . Outstanding.TSARs. (thous an ds of un its ) . . . . . . . . . . . . . . . . Performance TSARs 2,143. 1,482. –. 3,625 TSARs 6,269. 1,294. 63. 7,626 . . . Total 8,412 2,776 63 11,251 Weighted. Average. Remaining. Contractual Life (Years) 2.88 0.48 0.45 2.27 . Weighted. Average. Exercise. Price.($) 26.38 33.10 43.29 28.13 CEN OV US EN ERGY 2012 ANNUAL RE PORT / N OTES TO CO NSOL IDATED FINA NCI AL STAT EMENTS 107 . . . . . . . . . . . . As a t December 31, 2012. Range of Exercise Price ($). 20.00.to.29.99. 30.00.to.39.99. 40.00.to.49.99. . . . Exercisable.TSARs. (thous an ds of un its ) . . . . . . . . . . . TSARs 4,132. 1,174. 63. 5,369 . . Performance TSARs 2,143. 1,482. –. 3,625 . . Total 6,275 2,656 63 8,994 Weighted. Average. Exercise. Price.($) 26.35 33.11 43.29 28.46 . . . . . . . . The.closing.price.of.Cenovus.common.shares.on.the.TSX.as.at.December.31,.2012.was.$33.29. Encana Replacement TSARs Held by Cenovus Employees Cenovus.is.required.to.reimburse.Encana.in.respect.of.cash.payments. made.by.Encana.to.Cenovus.employees.when.a.Cenovus.employee. exercises.an.Encana.Replacement.TSAR.for.cash..No.further.Encana. Replacement.TSARs.will.be.granted.to.Cenovus.employees. The.Company.has.recorded.a.liability.of.$1.million.at.December.31,.2012. (2011.–.$1.million).in.the.Consolidated.Balance.Sheets.based.on.the.fair. value.of.each.Encana.Replacement.TSAR.held.by.Cenovus.employees.. Fair.value.was.estimated.at.the.period.end.date.using.the.Black-Scholes- Merton.valuation.model.with.weighted.average.assumptions.as.follows: Risk-Free.Interest.Rate. Expected.Dividend.Yield. Expected.Volatility.(1). Encana’s.Common.Share.Price. . . . . . . . . 1.21% 3.86% 30.40% $ 19.66 (1).Expected.volatility.has.been.based.on.the.historical.volatility.of.Encana’s.publicly.traded.shares. The.intrinsic.value.of.vested.Encana.Replacement.TSARs.held.by.Cenovus.employees.at.December.31,.2012.was.$nil.(2011.–.$nil).. The.following.tables.summarize.information.related.to.the.Encana.Replacement.TSARs.held.by.Cenovus.employees.as.at.December.31,.2012: . . . . . . . . . As a t December 31, 2012 (tho usand s of units). Outstanding,.Beginning.of.Year. . Exercised.for.Cash.Payment. . Exercised.as.Options.for.Encana.Common.Shares. . . Expired. Outstanding,.End.of.Year. Exercisable,.End.of.Year. Forfeited. . . . . . . . . . . . . . . . As a t December 31, 2012. Range of Exe rcise Price ($). 20.00.to.29.99. 30.00.to.39.99. 40.00.to.49.99. 50.00.to.59.99. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TSARs 4,281. –. –. (112). (1,008). 3,161 3,161 . . Performance TSARs 6,130. –. –. (333). (1,236). 4,561 4,561 . . Total 10,411 – – (445) (2,244) 7,722 7,722 Outstanding.&.Exercisable.TSARs. (thous an ds of un its ) . . . . . . . Performance TSARs 2,510. 2,051. –. –. 4,561 TSARs 1,564. 1,465. 130. 2. 3,161 . . . Total 4,074 3,516 130 2 7,722 Weighted. Average. Remaining. Contractual Life (Yea rs ) 1.12 0.15 0.48 0.39 0.66 Weighted. Average. Exercise. Price.($) 31.97 – – 31.04 29.79 32.66 32.66 . Weighted. Average. Exercise. Price.($) 29.02 36.41 44.85 50.39 32.66 The.closing.price.of.Encana.common.shares.on.the.TSX.as.at.December.31,.2012.was.$19.66. 108 CENOVUS ENERGY 2012 ANNUAL RE PO RT / NOTES TO CONSOLIDATED FINA NCIA L STATEMEN TS Cenovus Replacement TSARs Held by Encana Employees Encana.is.required.to.reimburse.Cenovus.in.respect.of.cash.payments. made.by.Cenovus.to.Encana.employees.when.these.employees.exercise. a.Cenovus.Replacement.TSAR.for.cash..No.compensation.expense.is. recognized.and.no.further.Cenovus.Replacement.TSARs.will.be.granted. to.Encana.employees. The.Company.has.recorded.a.liability.of.$35.million.at.December.31,. 2012.(2011.–.$83.million).in.the.Consolidated.Balance.Sheets.based. on.the.fair.value.of.each.Cenovus.Replacement.TSAR.held.by.Encana. employees,.with.an.offsetting.account.receivable.from.Encana..Fair. value.was.estimated.at.the.period.end.date.using.the.Black-Scholes- Merton.valuation.model.with.weighted.average.assumptions.as.follows: Risk-Free.Interest.Rate. Expected.Dividend.Yield. Expected.Volatility.(1). Cenovus’s.Common.Share.Price. . . . . . . . . 1.21% 2.58% 27.80% $ 33.29 (1).Expected.volatility.has.been.based.on.historical.share.volatility.of.the.Company.and.comparable.industry.peers. The.intrinsic.value.of.vested.Cenovus.Replacement.TSARs.held.by.Encana.employees.at.December.31,.2012.was.$22.million.(2011.–.$32.million). The.following.tables.summarize.the.information.related.to.the.Cenovus.Replacement.TSARs.held.by.Encana.employees.as.at.December.31,.2012: . . . . . . . . . A s a t D ece mb er 3 1, 2 012 (t hous ands of units). Outstanding,.Beginning.of.Year. . Exercised.for.Cash.Payment. . Exercised.as.Options.for.Common.Shares. . . Expired. Outstanding,.End.of.Year. Exercisable,.End.of.Year. Forfeited. . . . . . . . . . . . . . . . . . . . . . . . . . TSARs 3,935. (1,788). (8). (84). (30). 2,025 2,025 . . Performance TSARs 5,751. (2,189). (12). (314). (32). 3,204 3,204 . . Total 9,686 (3,977) (20) (398) (62) 5,229 5,229 Weighted. Average. Exercise. Price.($) 28.96 28.69 26.64 27.67 27.67 29.29 29.29 For.options.exercised.during.the.year,.the.weighted.average.market.price.of.Cenovus’s.common.shares.at.the.date.of.exercise.was.$36.72. . . . . . . . . . . . . . . . A s a t D ece mb er 3 1, 2 012. R a n ge o f E xe rcise P rice ($ ). 20.00.to.29.99. 30.00.to.39.99. 40.00.to.49.99. . . . Outstanding.&.Exercisable.TSARs. (thous an ds of un its ) . . . . . . . . . . . . . . . . Performance TSARs 1,899. 1,305. –. 3,204 TSARs 1,087. 886. 52. 2,025 . . . Total 2,986 2,191 52 5,229 Weighted. Average. Remaining. Contractual Life (Years) 1.12 0.14 0.44 0.70 . Weighted. Average. Exercise. Price.($) 26.27 33.08 42.70 29.29 The.closing.price.of.Cenovus.common.shares.on.the.TSX.as.at.December.31,.2012.was.$33.29. B) PERFORMANCE SHARE UNITS Cenovus.has.granted.Performance.Share.Units.(“PSUs”).to.certain. employees.under.its.Performance.Share.Unit.Plan.for.Employees..PSUs. are.whole.share.units.and.entitle.employees.to.receive,.upon.vesting,. either.a.common.share.of.Cenovus.or.a.cash.payment.equal.to.the. value.of.a.Cenovus.common.share..For.a.portion.of.PSUs,.the.number. of.PSUs.eligible.for.payment.is.determined.over.three.years.based.on. the.units.granted.multiplied.by.30.percent.after.year.one,.30.percent. after.year.two.and.40.percent.after.year.three..All.PSUs.are.eligible.to. vest.based.on.the.Company.achieving.key.pre-determined.performance. measures..PSUs.vest.after.three.years.. The.Company.has.recorded.a.liability.of.$124.million.at.December.31,. 2012.(2011.–.$55.million).in.the.Consolidated.Balance.Sheets.for.PSUs. based.on.the.market.value.of.the.Cenovus.common.shares.at.December.31,. 2012..The.intrinsic.value.of.vested.PSUs.was.$nil.at.December.31,.2012. and.2011.as.PSUs.are.paid.out.upon.vesting.. CEN OV US EN ERGY 2012 ANNUAL RE PORT / N OTES TO CO NSOLIDATED FINA NC IAL STATE MENTS 109 The.following.table.summarizes.the.information.related.to.the.PSUs.held.by.Cenovus.employees.as.at.December.31,.2012: (thousands of unit s). Outstanding,.Beginning.of.Year. . Granted. . Cancelled. . Units.in.Lieu.of.Dividends. Outstanding,.End.of.Year. C) DEFERRED SHARE UNITS Under.two.Deferred.Share.Unit.Plans,.Cenovus.directors,.officers. and.employees.may.receive.Deferred.Share.Units.(“DSUs”),.which.are. equivalent.in.value.to.a.common.share.of.the.Company..Employees. have.the.option.to.convert.either.zero,.25.or.50.percent.of.their. annual.bonus.award.into.DSUs..DSUs.vest.immediately,.are.redeemed. in.accordance.with.the.terms.of.the.agreement.and.expire.on. . . . . . . . . . . . PSUs 2,623 2,704 (183) 114 5,258 December.15.of.the.calendar.year.following.the.year.of.cessation.of. directorship.or.employment. The.Company.has.recorded.a.liability.of.$36.million.at.December.31,. 2012.(2011.–.$35.million).in.the.Consolidated.Balance.Sheets.for.DSUs. based.on.the.market.value.of.the.Cenovus.common.shares.at.December. 31,.2012..The.intrinsic.value.of.vested.DSUs.equals.the.carrying.value.as. DSUs.vest.at.the.time.of.grant.. The.following.table.summarizes.the.information.related.to.the.DSUs.held.by.Cenovus.directors,.officers.and.employees.as.at.December.31,.2012: (thousands of unit s). Outstanding,.Beginning.of.Year. . Granted.to.Directors. . Granted.from.Annual.Bonus.Awards. . Units.in.Lieu.of.Dividends. . Exercised. Outstanding,.End.of.Year. . . . . . . . . . . . . . D) TOTAL STOCK-BASED COMPENSATION ExPENSE (RECOVERY) The.following.table.summarizes.the.stock-based.compensation.expense.(recovery).recorded.for.all.plans.within.operating.and.general.and. administrative.expenses.on.the.Consolidated.Statements.of.Earnings.and.Comprehensive.Income: For the years ended Decem b er 3 1,. NSRs.. TSARs.Held.by.Cenovus.Employees. Encana.Replacement.TSARs.Held.by.Cenovus.Employees. PSUs.. DSUs.. Total Stock-Based Compensation Expense (Recovery). 27. EMPLOYEE SAL ARIES AND BE N EFI T E xPENSES For the years ended Decem b er 3 1,. Salaries,.Bonuses.and.Other.Short-Term.Employee.Benefits. Defined.Contribution.Pension.Plan. Defined.Benefit.Pension.Plan.and.OPEB.. Stock-Based.Compensation.(Note.26). . . . 2012. 27. (1). –. 46. 3. 75. 2012. 441. 14. 20. 75. 550. 2011. 16. 24. (8). 27. 4. 63. 2011. 399. 13. 4. 63. 479. DSUs 1,042 64 22 30 (74) 1,084 2010 – 45 (20) 13 9 47 2010 348 11 (1) 47 405 110 CENOVUS ENERGY 2012 ANNUAL RE PO RT / NOTES TO CONSOLIDATED FINA NCIA L STATEMEN TS 2 8. R EL ATED PARTY TRANSACTION S KEY MANAGEMENT COMPENSATION Key.management.includes.Directors.(executive.and.non-executive),.Executive.Officers,.Senior.Vice-Presidents.and.Vice-Presidents..The.compensation. paid.or.payable.to.key.management.is.as.follows: For the year s end ed Dece m ber 3 1,. Salaries,.Director.Fees.and.Short-Term.Benefits. Post-Employment.Benefits. Other.Long-Term.Benefits. Stock-Based.Compensation. Total . 2012. 27. 7. –. 35. 69. 2011. 25. 3. –. 35. 63. 2010 22 2 – 37 61 Post-employment.benefits.represent.the.present.value.of.future.pension.benefits.earned.during.the.year..Stock-based.compensation.includes.the. costs.recognized.during.the.year.associated.with.stock.options,.NSRs,.TSARs,.PSUs.and.DSUs.. 2 9. I N TE REST I N J OINT OPERATION S On.January.2,.2007,.Cenovus.became.a.50.percent.partner.in.an. integrated.North.American.heavy.oil.business..The.integrated.business.is. structured.through.two.joint.arrangements..The.upstream.entity,.FCCL. Partnership,.is.involved.in.the.development.and.production.of.crude. oil.and.is.jointly.controlled.with.ConocoPhillips..The.refining.entity,. WRB.Refining.LP,.includes.two.refineries.in.the.U.S..and.focuses.on.the. refining.of.crude.oil.into.petroleum.and.chemical.products..WRB.is. jointly.controlled.with.Phillips.66. Cenovus.recognizes.its.share.of.the.assets,.liabilities,.revenues.and. expenses.(proportionately.consolidates).of.these.joint.operations.. with.the.results.of.operations.included.in.the.Oil.Sands.and.Refining. and.Marketing.segments,.respectively..Cenovus’s.Consolidated.. Financial.Statements.include.the.following.amounts.related.to.these. joint.arrangements:. . . . Sta tements o f E arnings Fo r the year s end ed Dece mber 31 , Revenues. Expenses. . Purchased.Product. . Operating,.Transportation.and.Blending.. . Operating Cash Flow.. . Depreciation,.Depletion.and.Amortization. . Other.Expenses.(Income). Net Earnings (Loss). . and.Realized.Gain/Loss.on.Risk.Management. FCCL.Partnership.(1). 2011. 2,364. . –. 1,397. 967. 205. (136). 898. 2010. 1,829. . –. 1,074. 755. 210. 20. 525. 2012. 3,132. . –. 1,944. 1,188. 303. 1. 884. WRB.Refining.LP.(1) 2011. 8,672. . 7,223. 2010 6,624 . 6,095 473. 976. 130. (4). 850. 462 67 86 13 (32) 2012. 9,160. . 7,339. 552. 1,269. 135. 4. 1,130. (1).FCCL.Partnership.and.WRB.Refining.LP.are.not.separate.tax.paying.entities..Income.taxes.related.to.the.Partnerships’.income.are.the.responsibility.of.their.respective.Partners. . . . As a t Decemb er 3 1,. Cash.and.Cash.Equivalents. Other.Current.Assets. Long-Term.Assets. Current.Liabilities. Long-Term.Liabilities. FCCL.Partnership. 2011. 145. 792. 6,864. 317. 83. 2012. 388. 761. 7,599. 350. 137. WRB.Refining.LP 2011 2012. 166 172. 1,236 1,111. 3,188 3,087. 759 566. 73 58. CEN OV US EN ERGY 2012 ANNUAL RE PORT / N OTES TO CO NSOL IDATED FINA NC IAL STATE MENTS 111 Capital.commitments.through.jointly.controlled.entities.are.as.follows:. As a t December 31, 2012. Capital.Commitments.(1). 1.Year.. 268. 2.Years. 34. 3.Years. 44. 4.Years. 40. 5.Years. 2. Thereafter. 1. (1).Contracts.undertaken.on.behalf.of.the.FCCL.Partnership.and.WRB.Refining.LP.are.reflected.at.Cenovus’s.50.percent.interest. As a t December 31, 2011. Capital.Commitments.(1). 1.Year.. 179. 2.Years. 58. 3.Years. 11. 4.Years. 2. 5.Years. 3. Thereafter. –. (1).Contracts.undertaken.on.behalf.of.the.FCCL.Partnership.and.WRB.Refining.LP.are.reflected.at.Cenovus’s.50.percent.interest. Total 389 Total 253 There.are.no.contingent.liabilities.related.to.the.Company’s.interest.in.jointly.controlled.entities,.nor.contingent.liabilities.of.the.jointly.controlled. entities.themselves. Cenovus.monitors.its.capital.structure.and.financing.requirements.using,. among.other.things,.non-GAAP.financial.metrics.consisting.of.Debt.to. Capitalization.and.Debt.to.Adjusted.Earnings.Before.Interest,.Taxes,. Depreciation.and.Amortization.(“Adjusted.EBITDA”)..These.metrics. are.used.to.steward.Cenovus’s.overall.debt.position.as.measures.of. Cenovus’s.overall.financial.strength.. Cenovus.continues.to.target.a.Debt.to.Capitalization.ratio.of.between. 30.and.40.percent.over.the.long-term.. 30. C A PITAL ST RUCTURE Cenovus’s.capital.structure.objectives.and.targets.have.remained. unchanged.from.previous.periods..Cenovus’s.capital.structure.consists. of.Shareholders’.Equity.plus.Debt..Debt.is.defined.as.short-term. borrowings.and.the.current.and.long-term.portions.of.long-term.debt. excluding.any.amounts.with.respect.to.the.Partnership.Contribution. Payable.or.Receivable..Cenovus’s.objectives.when.managing.its.capital. structure.are.to.maintain.financial.flexibility,.preserve.access.to.capital. markets,.ensure.its.ability.to.finance.internally.generated.growth.and. to.fund.potential.acquisitions.while.maintaining.the.ability.to.meet.the. Company’s.financial.obligations.as.they.come.due.. A s a t De cem be r 3 1 ,. Long-Term.Debt. Shareholders’.Equity. Capitalization. Debt to Capitalization. Cenovus.continues.to.target.a.Debt.to.Adjusted.EBITDA.of.between.1.0.and.2.0.times.over.the.long-term.. Finance.Costs. Interest.Income. Income.Tax.Expense. A s a t De cem be r 3 1 ,. Debt.. Net.Earnings. Add.(Deduct):. . . . . Depreciation,.Depletion.and.Amortization. . Goodwill.Impairment. . Exploration.Expense. . Unrealized.(Gain).Loss.on.Risk.Management. . . . Other.(Income).Loss,.net. Adjusted.EBITDA.. Foreign.Exchange.(Gain).Loss,.net. (Gain).Loss.on.Divestiture.of.Assets. Debt to Adjusted EBITDA. . . . 2012. 4,679. 993. . 455. (109). 783. 1,585. 393. 68. (57). (20). –. (5). 4,086. 1.1x. 2012. 4,679. 9,806. 14,485. 32%. 2011. 3,527. 1,478. . 447. (124). 729. 1,295. –. –. (180). 26. (107). 4. 3,568. 1.0x. 2011 3,527 9,406 12,933 27% 2010 3,432 1,081 . 498 (144) 223 1,302 – – (46) (51) (116) (13) 2,734 1.3x It.is.Cenovus’s.intention.to.maintain.investment.grade.credit.ratings. to.help.ensure.it.has.continuous.access.to.capital.and.the.financial. flexibility.to.fund.its.capital.programs,.meet.its.financial.obligations. and.finance.potential.acquisitions..Cenovus.will.maintain.a.high.level.of. capital.discipline.and.manage.its.capital.structure.to.ensure.sufficient. liquidity.through.all.stages.of.the.economic.cycle..To.manage.its. capital.structure,.Cenovus.may.adjust.capital.and.operating.spending,. adjust.dividends.paid.to.shareholders,.purchase.shares.for.cancellation. pursuant.to.normal.course.issuer.bids,.issue.new.shares,.issue.new.debt,. draw.down.on.its.credit.facilities.or.repay.existing.debt.. At.December.31,.2012,.Cenovus.is.in.compliance.with.all.of.the.terms.of. its.debt.agreements.. 112 CENOVUS ENERGY 2012 ANNUAL RE PO RT / NOTES TO CONSOLIDATED FINA NCIA L STATEMEN TS 31. F I NANCIAL INSTRUM ENTS AND RISK MANAG EM EN T Cenovus’s.consolidated.financial.assets.and.financial.liabilities.consist.of. cash.and.cash.equivalents,.accounts.receivable.and.accrued.revenues,. accounts.payable.and.accrued.liabilities,.Partnership.Contribution. Receivable.and.Payable,.partner.loans,.risk.management.assets.and. liabilities,.long-term.receivables,.short-term.borrowings.and.long-term. debt..Risk.management.assets.and.liabilities.arise.from.the.use.of. derivative.financial.instruments.. A) FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES The.fair.values.of.cash.and.cash.equivalents,.accounts.receivable.and. accrued.revenues,.accounts.payable.and.accrued.liabilities,.and.. short-term.borrowings.approximate.their.carrying.amount.due.to.the. short-term.maturity.of.those.instruments. The.fair.values.of.the.Partnership.Contribution.Receivable.and. Partnership.Contribution.Payable,.partner.loans.and.long-term. receivables.approximate.their.carrying.amount.due.to.the.specific.non- tradeable.nature.of.these.instruments. Risk.management.assets.and.liabilities.are.recorded.at.their.estimated. fair.value.based.on.mark-to-market.accounting,.using.quoted.market. prices.or,.in.their.absence,.third-party.market.indications.and.forecasts. Long-term.debt.is.carried.at.amortized.cost..The.estimated.fair.values. of.long-term.borrowings.have.been.determined.based.on.prices. sourced.from.market.data..As.at.December.31,.2012,.the.carrying.value. of.Cenovus’s.long-term.debt.accounted.for.using.amortized.cost.was. $4,679.million.and.the.fair.value.was.$5,582.million.(December.31,.2011. carrying.value.–.$3,527.million,.fair.value.–.$4,316.million). B) RISK MANAGEMENT ASSETS AND LIABILITIES Under.the.terms.of.the.Arrangement,.risk.management.positions.at. November.30,.2009.were.allocated.to.Cenovus.based.upon.Cenovus’s. proportion.of.the.related.volumes.covered.by.the.contracts..To.effect. the.allocation,.Cenovus.entered.into.a.contract.with.Encana.with.the. same.terms.and.conditions.as.between.Encana.and.the.third.parties.to. the.existing.contracts..All.positions.entered.into.after.the.Arrangement. have.been.negotiated.between.Cenovus.and.third.parties.. Net Risk Management Position . . A s a t D ece mb er 3 1,. Risk Management Assets. . Current.Asset. . Long-Term.Asset. . Risk Management Liabilities. . Current.Liability. . Long-Term.Liability. . Net Risk Management Asset (Liability). . . . . . . Summary of Unrealized Risk Management Positions . . As a t Decemb er 3 1,. Commodity Prices. . Crude.Oil. . Natural.Gas. . Power. Total Fair Value. . . . . . . . . . . 2012. . 283. 5. 288. . 17. 1. 18. 270. 2012. Risk Management. Liability . 16 1 1 18 Asset . 221 66 1 288 Net. . 205. 65. –. 270. 2011 Risk.Management Liability. . 65. 3. –. 68. Asset. . 22. 247. 15. 284. Net Fair Value Methodologies Used to Calculate Unrealized Risk Management Positions As a t Decemb er 3 1,. Prices.Actively.Quoted.(Level.1). Prices.Sourced.from.Observable.Data.or.Market.Corroboration.(Level.2). Total.Fair.Value. . . . . 2012. 120. 150. 270. 2011 232 52 284 54 14 68 216 Net (43) 244 15 216 2011 226 (10) 216 Prices.actively.quoted.refers.to.the.fair.value.of.contracts.valued.using.quoted.prices.in.an.active.market..Prices.sourced.from.observable.data.or. market.corroboration.refers.to.the.fair.value.of.contracts.valued.in.part.using.active.quotes.and.in.part.using.observable,.market-corroborated.data. CEN OV US EN ERGY 2012 ANNUAL RE PORT / N OTES TO CO NSOL IDATED FINA NCI AL STAT EMENTS 113 . 23 33 145 5 (1) 205 . . 66 (1) 65 . – 2010 . (17) 289 10 (4) 278 . (92) 152 (8) (6) 46 324 Net Fair Value of Commodity Price Positions at December 31, 2012 . As a t December 31, 2012. . Crude Oil Contracts. . . Fixed.Price.Contracts. . Brent.Fixed.Price.(1). . . . Brent.Fixed.Price.(1). . . . WCS.Differential.(2). . . . WCS.Differential.(2). . . . Other.Financial.Positions.(3). . . . Crude.Oil.Fair.Value.Position. . Natural Gas Contracts. . . . . . . . . Natural.Gas.Fair.Value.Position. . Power Purchase Contracts. . . Power.Fair.Value.Position. Fixed.Price.Contracts. . NYMEX.Fixed.Price. . Other.Fixed.Price.Contracts.(4). . . . . . . . . . . . . . . . . Notional Volumes . . 18,500.bbls/d. ..18,500.bbls/d. 49,200.bbls/d. 9,400.bbls/d. . . . . 166.MMcf/d. . . . . Term . . 2013. 2013. 2013. 2014. . . . . 2013. . . . . (1).. Brent.fixed.price.positions.consist.of.both.Brent.fixed.price.swaps.and.WTI.swaps.converted.to.Brent. (2). Cenovus.has.entered.into.fixed.price.swaps.to.protect.against.widening.light/heavy.price.differentials.for.heavy.crudes. (3)..Other.financial.positions.are.part.of.ongoing.operations.to.market.the.Company’s.production. (4)..Cenovus.has.entered.into.other.fixed.price.contracts.to.protect.against.widening.price.differentials.between.production.areas.and.various.sales.points. Earnings Impact of Realized and Unrealized Gains (Losses) on Risk Management Positions Average Price Fair Value . .US$110.36/bbl. ..$111.72/bbl. US$(20.74)/bbl. US$(20.13)/bbl. . . . . US$4.64/Mcf. . . . . . For the years ended Dece mb er 3 1,. Realized Gain (Loss) (1). . Crude.Oil. . Natural.Gas. . Refining. . Power. . . Unrealized Gain (Loss) (2). . Crude.Oil. . Natural.Gas. . Refining. . Power. . . Gain (Loss) on Risk Management.. . 2012. . 81. 247. 7. 1. 336. . 247. (176). 1. (15). 57. 393. 2011. . (135). 210. (14). 7. 68. . 106. 38. 7. 29. 180. 248. (1).Realized.gains.and.losses.on.risk.management.are.recorded.in.the.operating.segment.to.which.the.derivative.instrument.relates. (2).Unrealized.gains.and.losses.on.risk.management.are.recorded.in.the.Corporate.and.Eliminations.segment.. Reconciliation of Unrealized Risk Management Positions from January 1 to December 31, 2012 . . . . . . . . . . . . Fair.Value.of.Contracts,.Beginning.of.Year. . Change.in.Fair.Value.of.Contracts.in.Place.at.Beginning.of.Year.. . . . Unrealized.Foreign.Exchange.Gain.(Loss).on.U.S..Dollar.Contracts.. . . . Fair.Value.of.Contracts,.End.of.Year. Fair.Value.of.Contracts.Realized.During.the.Year. . and.Contracts.Entered.into.During.the.Year. . . . . . . . . . . . . . .2012. . Fair Value 216. 393 (3) (336) 270 Total. Unrealized Gain (Loss) . 2011. Total. Unrealized. Gain.(Loss). . 2010 Total. Unrealized. Gain.(Loss) . 393. –. (336). 57. 248. –. (68). 180. 324 – (278) 46 114 CENOVUS ENERGY 2012 ANNUAL RE PO RT / NOTES TO CONSOLIDATED FINA NCIA L STATEMEN TS Commodity Price Sensitivities – Risk Management Positions The.following.table.summarizes.the.sensitivity.of.the.fair.value.of. Cenovus’s.risk.management.positions.to.fluctuations.in.commodity. prices,.with.all.other.variables.held.constant..Management.believes. the.price.fluctuations.identified.in.the.table.below.are.a.reasonable. measure.of.volatility..The.impact.of.fluctuating.commodity.prices.on. the.Company’s.open.risk.management.positions.as.at.December.31.could. have.resulted.in.unrealized.gains.(losses).impacting.earnings.before. income.tax.for.the.year.ended.December.31.as.follows: RiSk MANAGEMENT POSiTiONS iN PLACE AS AT DECEMBER 31, 2012 Commodity Crude.Oil.Commodity.Price. Crude.Oil.Differential.Price. Natural.Gas.Commodity.Price. Natural.Gas.Basis.Price. Power.Commodity.Price. Sensitivity Range ± US$10.per.bbl.Applied.to.Brent.&.WTI.Hedges. ± US$5.per.bbl.Applied.to.Differential.Hedges.tied.to.Production. ± $1.per.mcf.Applied.to.NYMEX.Natural.Gas.Hedges. ± $0.10.per.mcf.Applied.to.Natural.Gas.Basis.Hedges. ± $25.per.MWHr.Applied.to.Power.Hedge. RiSk MANAGEMENT POSiTiONS iN PLACE AS AT DECEMBER 31, 2011 Commodity. Crude.Oil.Commodity.Price. Crude.Oil.Differential.Price. Natural.Gas.Commodity.Price. Natural.Gas.Basis.Price. Power.Commodity.Price. Sensitivity.Range. ± US$10.per.bbl.Applied.to.WTI.Hedges. ± US$5.per.bbl.Applied.to.Differential.Hedges.tied.to.Production. ± $1.per.mcf.Applied.to.NYMEX.and.AECO.Hedges. ± $0.10.per.mcf.Applied.to.Natural.Gas.Basis.Hedges. ± $25.per.MWHr.Applied.to.Power.Hedge. increase (156) 111 (55) 1 19 Increase. (214). 67. (160). 2. 19. Decrease 156 (111) 55 (1) (19) Decrease 214 (67) 160 (2) (19) C) RISKS ASSOCIATED WITH FINANCIAL ASSETS AND LIABILITIES Commodity Price Risk Commodity.price.risk.arises.from.the.effect.that.fluctuations.of.future. commodity.prices.may.have.on.the.fair.value.or.future.cash.flows. of.financial.assets.and.liabilities..To.partially.mitigate.exposure.to. commodity.price.risk,.the.Company.has.entered.into.various.financial. derivative.instruments..The.use.of.these.derivative.instruments.is. governed.under.formal.policies.and.is.subject.to.limits.established.by. the.Board.of.Directors..The.Company’s.policy.is.not.to.use.derivative. instruments.for.speculative.purposes. Crude Oil –.The.Company.has.used.fixed.price.swaps.to.partially. mitigate.its.exposure.to.the.commodity.price.risk.on.its.crude.oil.sales. and.condensate.supply.used.for.blending..Cenovus.has.entered.into.a. limited.number.of.swaps.and.futures.to.help.protect.against.widening. light/heavy.crude.oil.price.differentials. Natural Gas.–.To.partially.mitigate.the.natural.gas.commodity.price.risk,. the.Company.has.entered.into.swaps,.which.fix.the.NYMEX.price..To. help.protect.against.widening.natural.gas.price.differentials.in.various. production.areas,.Cenovus.has.entered.into.a.limited.number.of.swaps. to.manage.the.price.differentials.between.these.production.areas.and. various.sales.points. Power.–.The.Company.has.in.place.a.Canadian.dollar.denominated. derivative.contract,.which.commenced.January.1,.2007.for.a.period.of.11. years,.to.manage.a.portion.of.its.electricity.consumption.costs. Credit Risk Credit.risk.arises.from.the.potential.that.the.Company.may.incur. a.loss.if.a.counterparty.to.a.financial.instrument.fails.to.meet.its. obligation.in.accordance.with.agreed.terms..This.credit.risk.exposure.is. mitigated.through.the.use.of.Board-approved.credit.policies.governing. the.Company’s.credit.portfolio.and.with.credit.practices.that.limit. transactions.according.to.counterparties’.credit.quality..Agreements. are.entered.into.with.major.financial.institutions.with.investment.grade. credit.ratings.and.with.large.commercial.counterparties,.most.of.which. have.investment.grade.credit.ratings..A.substantial.portion.of.Cenovus’s. accounts.receivable.are.with.customers.in.the.oil.and.gas.industry.and. are.subject.to.normal.industry.credit.risks..At.December.31,.2012.and.2011,. substantially.all.of.the.Company’s.accounts.receivable.were.current.. As.at.December.31,.2012,.87.percent.(2011.–.92.percent).of.Cenovus’s. accounts.receivable.and.financial.derivative.credit.exposures.are.with. investment.grade.counterparties. At.December.31,.2012,.Cenovus.had.two.counterparties.(2011.–.two. counterparties).whose.net.settlement.position.individually.account.for. more.than.10.percent.of.the.fair.value.of.the.outstanding.in-the-money. net.financial.and.physical.contracts.by.counterparty..The.maximum. credit.risk.exposure.associated.with.accounts.receivable.and.accrued. revenues,.risk.management.assets,.Partnership.Contribution.Receivable,. partner.loans.receivable,.and.long-term.receivables.is.the.total.carrying. value..The.majority.of.this.credit.risk.resides.with.A.rated.or.higher. counterparties..Cenovus’s.exposure.to.its.counterparties.is.acceptable. and.within.Credit.Policy.tolerances. Liquidity Risk Liquidity.risk.is.the.risk.that.Cenovus.will.not.be.able.to.meet.all.of.its. financial.obligations.as.they.become.due..Liquidity.risk.also.includes. the.risk.of.not.being.able.to.liquidate.assets.in.a.timely.manner.at.a. reasonable.price..Cenovus.manages.its.liquidity.risk.through.the.active. management.of.cash.and.debt.and.by.maintaining.appropriate.access. to.credit..As.disclosed.in.Note.30,.over.the.long.term,.Cenovus.targets. a.Debt.to.Capitalization.ratio.between.30.and.40.percent.and.a.Debt.to. Adjusted.EBITDA.of.between.1.0.to.2.0.times.to.manage.the.Company’s. overall.debt.position..It.is.Cenovus’s.intention.to.maintain.investment. grade.credit.ratings.on.its.senior.unsecured.debt.. CEN OV US EN ERGY 2012 AN NUAL R EPORT / NOTES TO CO NSOLIDATED FINA NCI AL STAT EMENTS 115 Cenovus.manages.its.liquidity.risk.by.ensuring.that.it.has.access.to. multiple.sources.of.capital.including:.cash.and.cash.equivalents,.cash. from.operating.activities,.undrawn.credit.facilities,.commercial.paper.and. availability.under.its.shelf.prospectuses..At.December.31,.2012,.Cenovus.had. $3.0.billion.available.on.its.committed.credit.facility..In.addition,.Cenovus. had.in.place.a.Canadian.debt.shelf.prospectus.for.$1.5.billion.and.unused. capacity.of.US$750.million.under.a.U.S..debt.shelf.prospectus,.. the.availability.of.which.are.dependent.on.market.conditions. Undiscounted.cash.outflows.relating.to.financial.liabilities.are: 2012. . Accounts.Payable.and.Accrued.Liabilities........... Risk.Management.Liabilities. Long-Term.Debt.(1). Partnership.Contribution.Payable.(1). Other.(1). (1).Principal.and.interest,.including.current.portion. 2011. . Accounts.Payable.and.Accrued.Liabilities........... Risk.Management.Liabilities. Long-Term.Debt.(1). Partnership.Contribution.Payable.(1). Other.(1). (1).Principal.and.interest,.including.current.portion. . Less.than.1.Year. 2,650. . 17. . 254. . 486. . –. . . Less.than.1.Year. 2,579. . 54. . 208. . 497. . 3. . 1-3.Years. –. 1. 1,263. 972. 9. 1-3.Years. –. 14. 1,230. 994. 10. 4-5.Years. –. –. 432. 609. 4. 4-5.Years. –. –. 343. 994. 3. Thereafter. –. –. 7,051. –. 4. Thereafter. –. –. 5,182. 125. 4. Total 2,650 18 9,000 2,067 17 Total 2,579 68 6,963 2,610 20 Foreign Exchange Risk Foreign.exchange.risk.arises.from.changes.in.foreign.exchange.rates.that. may.affect.the.fair.value.or.future.cash.flows.of.Cenovus’s.financial. assets.or.liabilities..As.Cenovus.operates.in.North.America,.fluctuations. in.the.exchange.rate.between.the.U.S./Canadian.dollars.can.have.a. significant.effect.on.reported.results.. As.disclosed.in.Note.7,.Cenovus’s.foreign.exchange.(gain).loss.primarily. includes.unrealized.foreign.exchange.gains.and.losses.on.the.translation. of.the.U.S..dollar.debt.issued.from.Canada.and.the.translation.of.the. U.S..dollar.Partnership.Contribution.Receivable.issued.from.Canada..At. December.31,.2012,.Cenovus.had.US$4,750.million.in.U.S..dollar.debt. issued.from.Canada.(2011.–.US$3,500.million;.2010.–.US$3,500.million). and.US$1,791.million.related.to.the.U.S..dollar.Partnership.Contribution. Receivable.(2011.–.US$2,157.million;.2010.–.US$2,505.million)..A.$0.01. change.in.the.U.S..to.Canadian.dollar.exchange.rate.would.have.resulted. in.a.$30.million.change.in.foreign.exchange.(gain).loss.at.December.31,. 2012.(2011.–.$13.million;.2010.–.$10.million). Interest Rate Risk Interest.rate.risk.arises.from.changes.in.market.interest.rates.that.may. affect.earnings,.cash.flows.and.valuations..Cenovus.has.the.flexibility.to. partially.mitigate.its.exposure.to.interest.rate.changes.by.maintaining.a. mix.of.both.fixed.and.floating.rate.debt. At.December.31,.2012,.the.increase.or.decrease.in.net.earnings.for.a.one. percentage.point.change.in.interest.rates.on.floating.rate.debt.amounts. to.$nil.(2011.–.$nil;.2010.–.$nil)..This.assumes.the.amount.of.fixed.and. floating.debt.remains.unchanged.from.the.respective.balance.sheet.dates.. 32 . SUP PLE ME NTARY C ASH FLOW I N FO RMATION For the years ended Decem b er 3 1,. Interest.Paid. Interest.Received. Income.Taxes.Paid.. 2012. 342. 113. 304. 2011. 357. 128. –. 2010 423 148 62 116 CENOVUS ENERGY 2012 ANNUAL RE PO RT / NOTES TO CONSOLIDATED FINA NCIA L STATEMEN TS 33. COMMITMENTS AND CONTIN GENCIES A) COMMITMENTS As.part.of.normal.operations,.the.Company.has.committed.to.certain.amounts.over.the.next.five.years.and.thereafter.as.follows: 2012. . Pipeline.Transportation.(1). Operating.Leases.(Building.Leases). Product.Purchases. Capital.Commitments.(2). Other.Long-Term.Commitments. Total.Payments.(3). Fixed.Price.Product.Sales. 1.Year. 145. 109. 81. 320. 33. 688. 50. 2.Years. 209. 106. 18. 54. 25. 412. 52. 3.Years. 378. 112. 18. 61. 18. 587. 54. 4.Years. 403. 110. 6. 53. 7. 579. 55. (1). Certain.transportation.commitments.included.are.subject.to.regulatory.approval. (2). Includes.those.commitments.related.to.jointly.controlled.entities. (3). Contracts.undertaken.on.behalf.of.the.FCCL.Partnership.and.WRB.Refining.LP.are.reflected.at.Cenovus’s.50.percent.interest. 2011. . Pipeline.Transportation.(1). Operating.Leases.(Building.Leases). Product.Purchases. Capital.Commitments.(2). Other.Long-Term.Commitments. Total.Payments.(3). Fixed.Price.Product.Sales. 1.Year. 143. 71. 19. 366. 5. 604. 52. 2.Years. 137. 93. 18. 98. 4. 350. 54. 3.Years. 187. 85. 19. 40. 1. 332. 56. 4.Years. 311. 80. 19. 23. 1. 434. 57. (1). Certain.transportation.commitments.included.are.subject.to.regulatory.approval. (2). Includes.those.commitments.related.to.jointly.controlled.entities. (3). .Contracts.undertaken.on.behalf.of.the.FCCL.Partnership.and.WRB.Refining.LP.are.reflected.at.Cenovus’s.50.percent.interest. 5.Years. 675. 104. –. 6. 6. 791. 3. 5.Years. 347. 80. 6. 22. –. 455. 60. Thereafter. 8,130. 1,602. –. 2. 10. 9,744. –. Thereafter. 2,754. 1,491. –. 20. 1. 4,266. 3. Total 9,940 2,143 123 496 99 12,801 214 Total 3,879 1,900 81 569 12 6,441 282 At.December.31,.2012,.there.were.outstanding.letters.of.credit. aggregating.$36.million.issued.as.security.for.performance.under.certain. contracts.(2011.–.$17.million). In.addition.to.the.above,.Cenovus’s.commitments.related.to.its.risk. management.program.are.disclosed.in.Note.31. B) CONTINGENCIES Legal Proceedings Cenovus.is.involved.in.a.limited.number.of.legal.claims.associated. with.the.normal.course.of.operations..Cenovus.believes.it.has.made. adequate.provisions.for.such.legal.claims..There.are.no.individually.or. collectively.significant.claims.. Decommissioning Liabilities Cenovus.is.responsible.for.the.retirement.of.long-lived.assets.at.. the.end.of.their.useful.lives..Cenovus.has.recognized.a.liability.of.. $2,315.million,.based.on.current.legislation.and.estimated.costs,. related.to.its.crude.oil.and.natural.gas.properties,.refining.facilities.and. midstream.facilities..Actual.costs.may.differ.from.those.estimated.due. to.changes.in.legislation.and.changes.in.costs. Income Tax Matters The.tax.regulations.and.legislation.and.interpretations.thereof.in. the.various.jurisdictions.in.which.Cenovus.operates.are.continually. changing..As.a.result,.there.are.usually.a.number.of.tax.matters.under. review..Management.believes.that.the.provision.for.taxes.is.adequate. 34. SUB SEQUENT EVENT Subsequent.to.December.31,.2012,.Management.decided.to.divest.its. Lower.Shaunavon.and.certain.of.its.Bakken.properties.in.Saskatchewan.. The.public.sales.process.is.expected.to.be.launched.in.late.February. 2013..The.land.base.associated.with.these.properties.is.relatively.small. and.does.not.offer.sufficient.scalability.to.be.material.to.Cenovus’s. overall.asset.portfolio..Operating.results.from.these.properties.are. included.in.the.Conventional.segment. CEN OV US EN ERGY 2012 AN NUAL R EPORT / NOTES TO CO NSOLIDATED FINA NCI AL STAT EMENTS 117 SU P P LE MENTAL INFOR MATIO N ( UNAUD ITED ) FINANCIAL STATISTICS . . . ($ mil lions, except per share am o unts ). Gross.Sales. Less:.Royalties. Revenues. OPERATiNG CASh FLOW Crude.Oil.and.Natural.Gas.Liquids. . Foster.Creek.. . Christina.Lake. . Pelican.Lake. . Conventional. Natural.Gas. Other.Upstream.Operations. . Refining.and.Marketing. Operating Cash Flow (1). CASh FLOW iNFORMATiON. Cash.from.Operating.Activities. Deduct.(Add.back):. . Net.change.in.other.assets.and.liabilities. . Net.change.in.non-cash.working.capital.. Cash Flow (2). . Per.share.–.Basic. –.Diluted. . Operating Earnings (3) . . Per.share.–.Diluted. Net Earnings. . Per.share.–.Basic. . Effective Tax Rates using. . Net.Earnings. . Operating.Earnings,.excluding.divestitures. . Canadian.Statutory.Rate. . U.S..Statutory.Rate. Foreign Exchange Rates (US $ p er C$ 1). . Average. . Period.end. –.Diluted. . . . . Year . 17,229.. 387.. 16,842 . .Q4.. .3,802.. .78.. .3,724.. 2012 . .Q3.. .4,462.. .122.. .4,340.. .Q2. .4,279.. .65.. .4,214.. .Q1.. .4,686.. .122.. .4,564.. .Year.. .16,185.. .489.. .15,696.. .Q4.. .4,480.. .151.. .4,329.. 2011. .Q3.. .3,989.. .131.. .Q2.. .4,085.. .76.. .3,858.. .4,009.. .Q1. .3,631.. .131. .3,500. . 924.. 343.. 418.. 962.. 513.. 9 . 3,169.. 1,267 . 4,436 . . 3,420.. . (113). (110). 3,643.. 4.82 . 4.80 . .866.. 1.14 . 993 . 1.31 . 1.31 . . 44.1%. 47.0%. 25.2%. 38.5%. . 1.001 . 1.005 . . .246.. .118.. .98.. .240.. .134.. .5.. .841.. .122.. .963.. . .758.. . .(42). .103.. .697.. .0.92.. .0.92.. .(189). .(0.25). .(118). .(0.16). .(0.16). . . . . . . .1.009.. .1.005.. . .227.. .93.. .108.. .227.. .126.. .2.. .783.. .527.. .1,310.. . .1,029.. . .(19). .(69). .1,117.. .1.48.. .1.47.. .432.. .0.57.. .289.. .0.38.. .0.38.. . .. .. .. . . . .223.. .70.. .85.. .228.. .121.. .–.. .727.. .351.. .1,078.. . .968.. . .(20). .63.. .925.. .1.22.. .1.22.. .283.. .0.37.. .396.. .0.52.. .0.52.. . . . . . . .1.005.. .0.990.. .0.981.. .1.017.. . .228.. .62.. .127.. .267.. .132.. .2.. .818.. .267.. .1,085.. . .665.. . .(32). .(207). .904.. .1.20.. .1.19.. .340.. .0.45.. .426.. .0.56.. .0.56.. . . . . . . .0.999.. .1.001.. . .780.. .125.. .305.. .881.. .777.. .13.. .2,881.. .981.. .3,862.. . .3,273.. . .(82). .79.. .3,276.. .4.34.. .4.32.. .1,239.. .1.64.. .1,478.. .1.96.. .1.95.. . 33.0%. 34.5%. 26.7%. 37.5%. . .1.012.. .0.983.. . .213.. .61.. .69.. .246.. .188.. .4.. .781.. .238.. .1,019.. . .952.. . .(20). .121.. .851.. .1.13.. .1.12.. .332.. .0.44.. .266.. .0.35.. .0.35.. . . . . . . .0.978.. .0.983.. . .194.. .19.. .83.. .209.. .200.. .2.. .707.. .238.. .945.. . .921.. . .(17). .145.. .793.. .1.05.. .1.05.. .303.. .0.40.. .510.. .0.68.. .0.67.. . . . . . . .1.020.. .0.963.. . .222.. .23.. .76.. .218.. .197.. .3.. .739.. .325.. .1,064.. . .769.. . .(16). .(154). .939.. .1.25.. .1.24.. .395.. .0.52.. .655.. .0.87.. .0.86.. . . . . . . .1.033.. .1.037.. . .151. .22.. .77. .208. .192. .4.. .654 .180. .834. . .631. . .(29) .(33) .693. .0.92. .0.91. .209. .0.28. .47. .0.06. .0.06. . . . . .1.015. .1.029. (1). .Operating.Cash.Flow.is.a.non-GAAP.measure.defined.as.revenue.less.purchased.product,.transportation.and.blending,.operating.expenses.and.production.and.mineral.taxes.plus.realized.gains.less. losses.on.risk.management.activities.. . . . . . . . . . (2). .Cash.Flow.is.a.non-GAAP.measure.defined.as.Cash.from.Operating.Activities.excluding.net.change.in.other.assets.and.liabilities.and.net.change.in.non-cash.working.capital,.both.of.which.are. defined.on.the.Consolidated.Statement.of.Cash.Flows... . . . . . . . . (3). .Operating.Earnings.is.a.non-GAAP.measure.defined.as.Net.Earnings.excluding.after-tax.gain.(loss).on.discontinuance,.after-tax.gain.on.bargain.purchase,.after-tax.effect.of.unrealized.risk. management.gains.(losses).on.derivative.instruments,.after-tax.unrealized.foreign.exchange.gains.(losses).on.translation.of.U.S..dollar.denominated.notes.issued.from.Canada.and.the.Partnership. Contribution.Receivable,.after-tax.foreign.exchange.gains.(losses).on.settlement.of.intercompany.transactions,.after-tax.gains.(losses).on.divestiture.of.assets,.deferred.income.tax.on.foreign. exchange.recognized.for.tax.purposes.only.related.to.U.S..dollar.intercompany.debt.and.the.effect.of.changes.in.statutory.income.tax.rates.. . . . . . . . . . . . . . . 118 CENOVUS ENERGY 2012 ANNUAL RE PO RT / SUPPL EMENTAL INFORM ATIO N ( UN AUDITED ) FINANCIAL STATISTICS (continued ) . . . . FiNANCiAL METRiCS (NON-GAAP MEASURES). Debt.to.Capitalization.(4),.(5). Debt.to.Adjusted.EBITDA.(5),.(6). Return.on.Capital.Employed.(7). Return.on.Common.Equity.(8). Year . . 32%. 1.1x. 9%. 10%. (4)..Capitalization.is.a.non-GAAP.measure.defined.as.Debt.plus.Shareholders’.Equity.. . 2012 . .Q3.. . . . . . . .Q2. . . . . . .Q4.. . . . . . . (5). Debt.includes.the.Company’s.short-term.borrowings.plus.long-term.debt,.including.the.current.portion.of.long-term.debt.. .Q1.. . . . . . . . .Year.. . 27%. 1.0x. 13%. 17%. . . .Q4.. . . . . . . . 2011. .Q3.. . . . . . . . Q1. . .Q2.. . . . . . (6). .Adjusted.EBITDA.is.a.non-GAAP.measure.defined.as.adjusted.earnings.before.interest.income,.finance.costs,.income.taxes,.DD&A,.exploration.expense,.unrealized.gains.(losses).on.risk.management,. foreign.exchange.gains.(losses),.gains.(losses).on.divestiture.of.assets.and.other.income.(loss),.calculated.on.a.trailing.twelve-month.basis... . (7)..Calculated,.on.a.trailing.twelve-month.basis,.as.net.earnings.before.after-tax.interest.divided.by.average.Shareholders’.Equity.plus.average.Debt.. . . . . (8). Calculated,.on.a.trailing.twelve-month.basis,.as.net.earnings.divided.by.average.Shareholders’.Equity. . . . . . . COMMON ShARE iNFORMATiON . Common Shares Outstanding (m il l ions) . . Period.end. . Average.–.Basic. . Average.–.Diluted. Price Range ($ p er share). . TSX.–.C$. . High. . . Low. . . . Close. . NYSE.-.US$. . High. . . Low. . . . Close. Dividends Paid ($ p er share) . Share Volume Traded (m il l ions ). . NET CAPiTAL iNVESTMENT ($ mil lions). Capital Investment. . Oil.Sands. . . . . . . . Conventional.. . Refining.and.Marketing. . Corporate. Capital.Investment. Acquisitions.(1).. Divestitures. Net.Acquisition.and.Divestiture.Activity.. Net.Capital.Investment. . Foster.Creek.. . Christina.Lake. . Total. . Pelican.Lake. . Other.Oil.Sands. . . 2012 . Q1.. .Q3.. Year . . . . 755.6.. 755.8.. 755.8 . .755.1.. .755.7.. 755.6 . .759.5.. .758.0.. 758.5 . . . . . . . .39.64.. .36.25.. 39.64.. .33.24.. .30.37.. 30.09 . .35.90.. .34.31.. 33.29.. . . . .39.81.. .37.31.. 39.81 . .32.45.. .30.20.. 28.83.. 33.54.. .35.94.. .34.85.. $ 0.88 . .$.0.22.. .$.0.22.. .$. 0.22.. .$.0.22.. .177.4.. .152.6.. 664.3 . .Q2. . 755.7.. .755.7.. .757.9.. . . .36.68.. .30.09.. .32.37.. . .37.26.. .28.83.. .31.80.. .Q4.. . .755.8.. .755.8.. .758.3.. . . .35.69.. .31.82.. .33.29.. . .36.11.. .31.74.. .33.54.. .192.6.. .141.7.. Q1. . 753.9. .753.2.. .758.1 . . .Q2.. . .754.1.. .754.1.. .758.0.. . . .38.98.. .31.73.. .36.40.. . .Q4.. . .754.5.. .754.4.. .757.1.. . . .37.11.. .28.85.. .33.83.. . .37.35.. .27.15.. .33.20.. 2011. .Q3.. .Year.. . . .754.3.. .754.5.. .754.3.. .754.0.. .757.8.. .757.7.. . . . . .38.90 .38.38.. .38.98.. .31.15. .29.87.. .28.85.. .38.30. .32.27.. .33.83.. . . . .40.73.. .40.06. .40.61.. .40.73.. .31.11. .32.48.. .29.02.. .27.15.. .33.20.. .39.38. .37.66.. .30.71.. $.0.80.. .$.0.20.. .$.0.20.. .$.0.20.. .$.0.20 .204.7.. .239.8.. .873.7.. .215.9.. .213.3.. Year . . . 735 . .579.. 1,314 . 518.. .379.. 2,211.. 848 . 118 . 191 . 3,368.. 114.. (76). 38.. 3,406.. .Q4.. . . .208.. .167.. .375.. .147.. .83.. .605.. .257.. .58.. .58.. .978.. .70.. .(11). .59.. .1,037.. 2012 . .Q3.. . . .199.. .147.. .346.. .128.. .42.. .516.. .231.. .38.. .45.. .830.. .8.. .–.. .8.. .838.. .Q2............Q1.. . . .169.. .138.. .307.. .104.. .43.. .454.. .129.. .24.. .53.. .660.. .28.. .1.. .29.. .689.. . . .159.. .127.. .286.. .139.. .211.. .636.. .231.. .(2). .35.. .900.. .8.. .(66). .(58). .842.. . . . .Year.. . . .429.. .472.. .901.. .317.. .197.. .1,415.. .788.. .393.. .127.. .2,723.. 71.. .(173). .(102). .2,621.. . . . .Q4.. . . .139.. .126.. .265.. .132.. .68.. .465.. .330.. .73.. .35.. .903.. .49.. .(164). .(115). .788.. . . . 2011. .Q3.. . . .110.. .117.. .227.. .70.. .9.. .306.. .193.. .101.. .31.. .631.. .1.. .–.. .1.. .632.. . . . .Q2.. . . .77.. .121.. .198.. .31.. .11.. .240.. .89.. .117.. .30.. .476.. .2.. .(5). .(3). .473.. .Q1. . . .103. .108. .211. .84. .109. .404.. .176. .102. .31.. .713. .19. .(4) .15. .728. . . . CEN OV US EN ERGY 2012 AN NUAL R EPORT / SUP PLEMENTA L INFO RMATION ( U NAU DIT ED ) 119 (1).. 2012.asset.acquisition.included.the.assumption.of.a.decommissioning.liability.of.$33.million.. . . . . . . . . . . . . . . . . . . . . . . . . . . . OPERATING STATISTICS – BEFORE ROYALTIES . . . UPSTREAM PRODUCTiON VOLUMES . Crude Oil and Natural Gas Liquids (b b l s/d) . . Oil.Sands.–.Heavy.Oil. . . Foster.Creek. . Christina.Lake. . . Total.. . . Pelican.Lake. . . . . Conventional.Liquids. . . . Total.Crude.Oil.and.Natural.Gas.Liquids. Natural Gas (MM c f/d). . . Total.Natural.Gas. . Heavy.Oil. . Light.and.Medium.Oil.. . Natural.Gas.Liquids.(1).. . Oil.Sands. . Conventional.(2).. 2012 . .Q3.. . . .Q2. . . .Q4.. . . Year . . . Q1.. . . 57,833.. .59,059.. .63,245.. .51,740.. .57,214.. 31,903 . .41,808.. .32,380.. .28,577.. .24,733.. 89,736...100,867.. .95,625.. .80,317.. .81,947.. 22,552.. .23,507.. .23,539.. .22,410.. .20,730.. 112,288 .124,374.. .119,164...102,727...102,677.. . 16,015 . .16,243.. .15,492.. .15,703.. .16,624.. .36,411.. 36,071 . .36,034.. .35,695.. .36,149.. .1,138.. .987.. 1,029 . 165,403 ..177,646...171,350...155,566...156,850.. . .41.. .595.. .636.. . 33 . 561 . 594 . . .27.. .550.. .577.. . .30.. .536.. .566.. . .33.. .563.. .596.. .999.. .995.. . . . . 2011. .Q3.. . . .7,880.. .19,531.. .10,067.. .Q2.. . . .Q4.. . . .Year.. . . .Q1. . . .54,868.. .55,045.. .56,322.. .50,373.. .57,744. .9,084. .11,665.. .66,533.. .74,576...66,389.. .58,253...66,828. .20,424...20,558.. .20,363.. .19,427.. .21,360. .86,957.. .95,134.. .86,752.. .77,680.. .88,188. . . .15,512.. .15,305.. .15,378.. .16,447. 15,657.. .30,524.. .32,530.. .30,399.. .27,617.. .31,539. .1,181.. .1,040.. .134,239...144,273...133,496.. .121,762.. .137,355. . .32. .620. .652. . .38.. .622.. .660.. . .37.. 619.. .656.. . .39.. .617.. .656.. . .37.. .617.. .654.. .1,087.. .1,097.. .1,101.. . . . . . . . . . . . .Q2. Q1.. .Year.. .Q4.. . . . 2011. .Q3.. . . .Q2.. .Q1. 4.6%. 7.2%. 4.2%. . 21.4%. 6.8%. 1.7%. 0.4%. 13.9%. 7.0%. 4.5%. . 23.3%. 8.3%. 1.7%. 2.5%. .Q2. . .452.. .451.. 100%. .473.. . Q1.. . .452.. .445.. 98%. .465.. . 16.8%. 5.2%. 11.5%. . 21.7%. 20.6%. 5.7%. 4.7%. 12.7%. 9.1%. . . 23.9%. 24.1%. 24.8%. 9.0%. 8.1%. 8.3%. 1.4%. 1.8%. 1.7%. 1.5%. 1.9%. 1.7%. 3.3%. 21.2% 4.8% 6.3%. 13.9% 9.7%. . . 23.6%. 24.3% 7.6% 8.5%. 1.3% 2.3%. 2.3% 1.2%. .Year.. . .452.. .401.. 89%. .419.. . .Q4.. . .452.. .424.. 94%. .442.. . 2011. .Q3.. . .452.. .413.. 91%. .426.. . .Q2.. . .452.. .406.. 90%. .422.. .Q1. . .452. .362. 80% .383. . (1). Natural.gas.liquids.include.condensate.volumes.. . . . . (2). In.Q1.2012,.a.non-core.natural.gas.property.was.divested,.decreasing.2012.production.approximately.3%.. . . . . . . . . AVERAGE ROYALTY RATES. (e xcl u di n g i m pa c t o f rea l ize d gain ( lo s s ) o n ri s k m an a ge me nt). Oil Sands. Foster.Creek.. . . Christina.Lake. . Pelican.Lake. Conventional. . Weyburn. . Other. . Natural.Gas.Liquids. Natural Gas. . . REFiNiNG . . Refinery Operations (1). . Crude.oil.capacity (Mbbl s /d ). . Crude.oil.runs ( M b b ls /d ). . Crude.utilization. . Refined.products.(Mbbls /d ). . . Year . . 11.8%. 6.2%. 5.0%. . 20.7%. 7.2%. 2.0%. 1.2%. . Year . . 452.. 412 . 91%. 433.. (1). Represents.100%.of.the.Wood.River.and.Borger.refinery.operations.. . . . 2012 . .Q3.. . 19.1%. 5.3%. 6.6%. . 19.8%. 6.6%. 2.5%. 0.8%. 2012 . .Q3.. . .452.. .442.. 98%. .463.. .Q4.. . 8.0%. 5.7%. 4.5%. . 17.9%. 7.1%. 2.3%. 0.9%. . .Q4.. . .452.. .311.. 69%. .330.. . 12 0 CENOVUS ENERGY 2012 ANNUAL RE PO RT / SUPPL EMENTAL INFORM ATIO N ( UN AUDITED ) O PERAT I NG STATISTI CS – BEFO RE ROYALTIES (contin ued ) . . SELECTED AVERAGE BENChMARk PRiCES . Crude Oil Prices (U S $/b b l ). . Brent.Futures.. . West.Texas.Intermediate.(“WTI”). . Average.Differential.Brent.Futures.–.WTI. . Western.Canadian.Select.(“WCS”). . Differential.–.WTI-WCS. . Condensate.–.(C5.@.Edmonton). . Differential.–.WTI-Condensate.(premium)/discount. Refining Margins 3-2-1 Crack Spreads (2) (U S $/ bb l ). . Chicago. . Midwest.Combined.(Group.3). Natural Gas Prices. . AECO ($/GJ ). . NYMEX (US $ /MMB tu). . Differential.–.NYMEX/AECO (U S $/ MMBtu). 2012 . .Q3.. . .Q4.. . .Q2. . .110.13.. .109.42.. .108.76.. .92.20.. .88.23.. .17.22.. .21.90.. .70.48.. .70.12.. .21.72.. .18.11.. .96.12.. .98.14.. .(3.92). .(9.91). . . .35.64.. .28.18.. .35.99.. .28.49.. . . .2.08.. .2.90.. .2.81.. .3.40.. .0.61.. .0.31.. Q1.. . .118.45.. .93.35.. .103.03.. .15.42.. .15.41.. .81.61.. .70.48.. .21.42.. .22.87.. .110.16.. .99.32.. .(7.13). .(5.97). . . .19.00.. .28.20.. .21.50.. .28.28.. . . .2.39.. .1.74.. .2.74.. .2.22.. .0.21.. .0.39.. Year . . 111.68 . 94.15 . 17.53 . 73.12 . .21.03 . 100.88 . (6.73). . 27.76.. 28.56 . . 2.28 . 2.79 . 0.38.. 2011. .Q3.. . .Q2.. . .Q4.. . .Year.. . .Q1. . .110.91.. .109.02.. .112.09.. .116.99.. .105.52. .89.54.. .102.34.. .94.60. .95.11.. .94.06.. .10.92. .14.65.. .22.55.. .14.96.. .15.80.. .71.74. .84.70.. .71.92.. .83.58.. .77.96.. .22.86. .17.64.. .17.62.. .10.48.. .17.15.. .98.90.. .112.33.. .105.34.. .108.74.. .101.48.. .(4.30) .(9.99). .(11.94). .(10.23). .(14.68). . . . . .16.62. .29.00.. .33.35.. .19.23.. .19.04. .27.19.. .34.04.. .20.75.. . . . . .3.58. .3.54.. .3.53.. .3.29.. .4.11.. .4.31.. .4.19.. .3.55.. .0.29. .0.42.. .0.34.. .0.17.. . .24.55.. .25.26.. . .3.48.. .4.04.. .0.31.. (2). .3-2-1.Crack.Spread.is.an.indicator.of.the.refining.margin.generated.by.converting.three.barrels.of.crude.oil.into.two.barrels.of.regular.unleaded.gasoline.and.one.barrel.of.ultra-low.sulphur.diesel,. and.reflect.the.current.month.WTI.price.as.the.crude.oil.feedstock.price.. CEN OV US EN ERGY 2012 AN NUAL R EPORT / SUP PLEMENTA L INFO RMATION ( U NAU DIT ED ) 121 OPERATING STATISTICS – BEFORE ROYALTIES (continued ) . . . PER-UNiT RESULTS. ($, excluding impac t of real ize d gain (loss) on risk manage me nt). Heavy Oil – Foster Creek ($ /b bl ) (3). . Price.. . Royalties. . Transportation.and.blending.. . Operating. . Netback... Heavy Oil – Christina Lake.($ /b b l ) (3). . Price. . Royalties. . Transportation.and.blending.. . Operating. . Netback... Heavy Oil – Pelican Lake.($ /b bl ) (3). . Price.. . Royalties. . Transportation.and.blending.. . Operating. . Netback... Heavy Oil – Oil Sands ( $/ bb l ) (3). . Price.. . Royalties. . Transportation.and.blending.. . Operating. . Netback.. Heavy Oil – Conventional ($ /b b l ) (3). . Price. . Royalties. . Transportation.and.blending.. . Operating.. . Production.and.mineral.taxes... . Netback... Total Heavy Oil.($/bbl) (3). . Price. . Royalties. . Transportation.and.blending.. . Operating.. . Production.and.mineral.taxes... . Netback... Light and Medium Oil ($/bb l ). . Price... . Royalties. . Transportation.and.blending.. . Operating.. . Production.and.mineral.taxes... . Netback... Year . . .64.55 .7.36.. .2.41 . .11.99.. 42.79 . . 47.73.. .2.72 . 3.79 . 12.95.. .28.27 . . 69.23 . 3.34 . 2.15 . 17.08.. 46.66.. . .60.84 . 5.22 . 2.74.. 13.33 . 39.55.. . 70.53 . .10.06 . 2.17 . .15.21.. .0.24 . 42.85 . . 62.05.. 5.83 . 2.67.. 13.56 . 0.03 . .39.96.. . 78.99 . 8.09.. 2.65.. 15.51 . 2.44.. .50.30.. Q1.. .Q2. .63.83.. .2.85.. .1.91.. .12.49.. .46.58.. . .44.57.. .2.90.. .4.12.. .12.52.. .25.03.. . .66.42.. .2.68.. .3.54.. .17.71.. .42.49.. . .59.00.. .2.83.. .2.87.. .13.61.. .39.69.. . .Q4.. . .59.93.. .4.55.. .2.91.. .11.26.. .41.21.. . .43.37.. .2.32.. .3.00.. .11.42.. .26.63.. . .64.37.. .2.82.. .1.23.. .17.20.. .43.12.. . .55.11.. .3.47.. .2.63.. .12.41.. .36.60.. . . 2012 . .Q3.. . .70.71.. .63.95.. .9.54.. .11.79.. .2.38.. .2.38.. .12.85.. .11.50.. .45.94.. .38.28.. . . .52.58.. .52.91.. .3.37. .2.61.. .4.51.. .4.00.. .15.33.. .13.59.. .29.37.. .32.71.. . . .78.50.. .66.75.. .3.37.. .4.34.. .2.88.. .1.09.. .16.05.. .17.47.. .56.20.. .43.85.. . . .68.36.. .61.71.. .6.66.. .7.85.. .2.99.. .2.52.. .14.18.. .13.29.. .44.53.. .38.05.. . . .67.70.. .80.64.. .64.73.. .68.04.. .13.06.. .9.36.. .8.81.. .8.68.. .1.81.. .2.26.. .2.31.. .2.34.. .17.57.. .15.07.. .16.48.. .11.68.. .0.25.. .0.14.. .0.27.. .0.31.. .40.76.. .48.06.. .40.17.. .41.72.. . . . .60.13.. .70.08.. .62.45.. .56.22.. .7.56.. .3.68.. .7.96.. .4.07.. .2.82.. .2.79.. .2.50.. .2.60.. .14.65.. .13.80.. .13.66.. .12.33.. .0.02.. .0.03.. .0.03.. .0.04.. .45.03.. .39.83.. .38.30.. .37.18.. . . . . .88.45.. .76.16.. .76.06.. .75.27.. .9.94.. .7.98.. .7.53.. .6.92.. .2.83.. .3.02.. .2.36.. .2.39.. .15.36.. .14.76.. .16.27.. .15.63.. .2.57.. .2.35.. .2.51.. .2.34.. .57.75.. .47.55.. .48.06.. .47.82.. . . 2011. .Q3.. .62.68.. .12.38.. .2.73.. .11.11.. .36.46.. . .54.52.. .2.87.. .4.54.. .23.01.. .24.10.. . .66.76.. .8.23.. .1.87.. .14.31.. .42.35.. . .62.93.. .10.46.. .2.68.. .13.02.. .36.77.. . .67.96.. .11.33.. .1.80.. .12.40.. .0.17.. .42.26.. . .63.69.. .10.59.. .2.55.. .12.93.. .0.03.. .37.59.. . .79.57.. .10.74.. .1.90.. .14.37.. .2.40.. .50.16.. . .Q2.. .Q1. .72.23.. .2.30.. .2.82.. .11.57.. .55.54.. . .67.06.. .3.98.. .3.51.. .23.41.. .36.16.. . .78.26.. .7.40.. .2.02.. .13.40.. .55.44.. . .73.02.. .3.65.. .2.71.. .13.27.. .53.39.. . .78.47.. .10.98.. .0.91.. .13.66.. .0.22.. .52.70.. . .73.98.. .4.93.. .2.40.. .13.34.. .0.04.. .53.27.. . .94.30.. .12.82.. .2.22.. .12.96.. .2.77.. .63.53.. .59.50.. .11.92. .3.41. .11.40. .32.77. . .54.67. .2.44.. .3.69. .19.09. .29.45. . .64.66. .8.63. .2.44. .15.35. .38.24. . .60.35. .10.08. .3.18. .13.23. .33.86. . .69.17. .9.04. .1.05. .12.78. .0.51. .45.79. . .61.80. .9.91. .2.83. .13.16. .0.08. .35.82. . .77.39. .10.58. .1.92. .14.86. .1.32. .48.71. .Year.. .Q4.. .67.38.. .10.82.. .3.04.. .11.34.. .42.18.. . .61.86.. .3.03.. .3.53.. .20.20.. .35.10.. . .73.07.. .7.91.. .4.14.. .14.86.. .46.16.. . .67.99.. .9.17.. .3.36.. .13.27.. .42.19.. . .74.17.. .10.75.. .1.27.. .13.77.. .0.32.. .48.06.. . .68.98.. .9.42.. .3.02.. .13.35.. .0.05.. .43.14.. . .75.96.. .15.81.. .3.20.. .11.31.. .45.64.. . .66.69.. .2.97.. .2.98.. .17.96.. .42.78.. . .88.67.. .6.98.. .12.19.. .16.49.. .53.01.. . .76.39.. .11.72.. .4.75.. .13.54.. .46.38.. . .81.49.. .11.85.. .1.34.. .16.34.. .0.34.. .51.62.. . .77.16.. .11.74.. .4.23.. .13.96.. .0.05.. .47.18.. . .85.40.. .90.90.. .12.12.. .11.54.. .1.99.. .2.00.. .15.12.. .14.38.. .2.63.. .2.27.. .59.04.. .55.21.. (3). .The.2012.heavy.oil.price.and.transportation.and.blending.costs.exclude.the.costs.of.condensate.purchases.which.is.blended.with.the.heavy.oil.as.follows:..Foster.Creek.–.$41.85/bbl;.Christina.Lake. –.$45.83/bbl;.Pelican.Lake.–.$15.55/bbl;.Heavy.Oil.–.Oil.Sands.–.$37.45/bbl;.Heavy.Oil.–.Conventional.–.$13.35/bbl.and.Total.Heavy.Oil.–.$34.44/bbl.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 2 CENOVUS ENERGY 2012 ANNUAL RE PO RT / SUPPL EMENTAL INFORM ATIO N ( UN AUDITED ) OPERATING STATISTICS – BEFORE ROYALTIES (contin ued ) . . . PER-UNiT RESULTS. ($, excluding im p ac t of real ize d gain (loss) on risk m anagem ent). Total Crude Oil ($ /b b l ). . Price... . Royalties. . Transportation.and.blending.. . Operating.. . Production.and.mineral.taxes... . Netback... Natural Gas Liquids ($ /b b l ). . Price... . Royalties. . Netback.. Total Liquids ($ /b b l ). . Price... . Royalties. . Transportation.and.blending.. . Operating.. . Production.and.mineral.taxes.. . Netback.. Total Natural Gas.($ /Mc f ) . . Price.. . Royalties.. . Transportation.and.blending.. . Operating.. . Production.and.mineral.taxes.. . Netback... Total.($/B OE) (2). . Price... . Royalties. . Transportation.and.blending.. . Operating.(1). . Production.and.mineral.taxes.. . Netback... . 2012 . .Q3.. .Q4.. . . .65.37.. .60.10.. .7.87.. .4.65.. .2.47.. .2.55.. .14.22.. .13.00.. .0.53.. .0.54.. .40.28.. .39.36.. . . .61.53.. .65.89.. .1.55.. .1.52.. .59.98.. .64.37.. . . .65.35.. .60.13.. .7.83.. .4.64.. .2.45.. .2.54.. .14.14.. .12.93.. .0.53.. .0.54.. .39.48.. .40.40.. . .2.30.. .0.02.. .0.08.. .1.08.. .0.02.. .1.10.. . .46.61.. .5.02.. .1.74.. .11.35.. .0.38.. .28.12.. . .2.97.. .0.02.. .0.10.. .1.29.. .(0.01). .1.57.. . .45.50.. .3.08.. .1.86.. .11.12.. .0.33.. .29.11.. .Q2. . .63.91.. .4.69.. .2.84.. .14.03.. .0.58.. .41.77.. . .65.52.. .1.13.. .64.39.. . .63.92.. .4.67.. .2.82.. .13.93.. .0.57.. .41.93.. . .1.92.. .0.01.. .0.08.. .0.98.. .0.02.. .0.83.. . .43.25.. .2.84.. .1.90.. .10.75.. .0.40.. .27.36.. Q1.. . .74.22.. .8.10.. .2.83.. .14.81.. .0.59.. .47.89.. . .83.36.. .1.45.. .81.91.. . .74.28.. .8.05.. .2.81.. .14.71.. .0.59.. .48.12.. . .2.50.. .0.06.. .0.13.. .1.08.. .0.02.. .1.21.. . .50.84.. .5.00.. .2.00.. .11.46.. .0.40.. .31.98.. Year . . 65.76 . 6.32 . 2.66 . 13.99 . 0.56.. 42.23 . . 69.54 . 1.42 . 68.12 . . 65.79 . 6.29 . 2.65 . 13.90 . 0.56 . 42.39 . . 2.42.. 0.03 . 0.10 . 1.10 . 0.01 . 1.18 . . 46.60 . 4.00.. 1.88 . 11.18 . 0.38 . 29.16 . . 2011. .Q3.. . .67.37.. .10.62.. .2.40.. .13.26.. .0.58.. .40.51.. . .74.38.. .1.06.. .73.32.. . .67.43.. .10.55.. .2.38.. .13.16.. .0.57.. .40.77.. . .3.72.. .0.05.. .0.15.. .0.99.. .0.03.. .2.50.. . .46.97.. .5.91.. .1.70.. .9.88.. .0.39.. .29.09.. . .Q1. . .65.32. .10.06. .2.63. .13.54. .0.36. .38.73. . .70.67. .0.93. .69.74. . .65.37. .9.98. .2.60. .13.43. .0.36. .39.00. . .3.82. .0.08. .0.17. .1.19. .0.06. .2.32. . .46.83. .5.85. .1.92. .10.68. .0.36. .28.02. .Q2.. . .78.71.. .6.77.. .2.35.. .13.25.. .0.67.. .55.67.. . .80.32.. .1.87.. .78.45.. . .78.72.. .6.72.. .2.33.. .13.13.. .0.67.. .55.87.. . .3.71.. .0.04.. .0.14.. .0.98.. .0.05.. .2.50.. . .51.81.. .3.64.. .1.61.. .9.69.. .0.49.. .36.38.. .Year.. . . .76.84.. .1.34.. .75.50.. . .Q4.. . .72.80.. .80.49.. .11.83.. .9.92.. .3.69.. .2.78.. .14.24.. .13.59.. .0.67.. .0.57.. .45.94.. .50.06.. . .82.26.. .1.51.. .80.75.. . .72.84.. .80.50.. .11.75.. .9.84.. .3.66.. .2.76.. .14.13.. .13.47.. .0.67.. .0.56.. .50.29.. .46.21.. . . .3.35.. .3.65.. .0.06.. .0.06.. .0.14.. .0.15.. .1.22.. .1.10.. .0.01.. .0.04.. .1.92.. .2.30.. . . .53.48.. .49.75.. .6.65.. 5.55.. .2.39.. .1.91.. .11.09.. .10.35.. .0.40.. .0.41.. .32.95.. .31.53.. (1). 2012.operating.costs.include.costs.related.to.long-term.incentives.of.$0.16/BOE.(2011.–.$0.17/BOE).. . . . . . . . . . . . . . . iMPACT OF REALiZED GAiN (LOSS) ON RiSk MANAGEMENT. Liquids ($/bb l ). Natural.Gas.($ /Mc f ). Total.($/B OE) (2). 1.39 . 1.14 . 3.42 . .3.35.. .0.89.. .4.05.. .2.02.. .1.24.. .3.98.. .1.64.. .1.39.. .4.27.. .(1.67). .1.03.. .1.44.. .(2.79). .0.87.. .0.86.. .(3.15). .1.10.. .1.22.. .0.75.. .0.76.. .2.49.. .(6.44). .0.74.. .(1.25). .(2.67) .0.89 .0.83. (2). .Natural.gas.volumes.have.been.converted.to.barrels.of.oil.equivalent.(BOE).on.the.basis.of.one.barrel.(bbl).to.six.thousand.cubic.feet.(Mcf)..BOE.may.be.misleading,.particularly.if.used.in.isolation.. A.conversion.ratio.of.one.bbl.to.six.Mcf.is.based.on.an.energy.equivalency.conversion.method.primarily.applicable.at.the.burner.tip.and.does.not.represent.value.equivalency.at.the.wellhead.. . . . . . . . . . . . . . . CEN OV US EN ERGY 2012 AN NUAL R EPORT / SUP PLEMENTA L INFO RMATION ( U NAU DIT ED ) 123 AD DI T IONAL RESERVES AND OI L AN D GAS INFORMATION For.information.in.relation.to.the.presentation.of.our.reserves.data.and. other.oil.and.gas.information,.see.“Oil.and.Gas.Reserves.and.Resources”. in.our.MD&A..We.hold.significant.fee.title.rights.which.generate. production.for.our.account.from.third.parties.leasing.those.lands... The.Before.Royalty.volumes.presented.do.not.include.reserves. associated.with.this.royalty.interest.production..The.After.Royalty. volumes.presented.include.our.royalty.interest.reserves.. For.definitions.of.terms.used.in.our.oil.and.gas.disclosure,.please.refer. to.the.Advisory. Classifications.of.reserves.as.proved.or.probable.are.only.attempts. to.define.the.degree.of.certainty.associated.with.the.estimates.. There.are.numerous.uncertainties.inherent.in.estimating.quantities.of. bitumen,.oil.and.natural.gas.reserves. it should not be assumed that the estimates of future net revenues presented in the tables below represent the fair market value of the reserves. There.is.no.assurance. that.the.forecast.prices.and.costs.assumptions.will.be.attained.and. variances.could.be.material..For.additional.information.on.our.pricing. assumptions,.reserves.data.and.other.oil.and.gas.information,.readers. should.review.“Reserves.Data.and.Other.Oil.and.Gas.Information”,.“Risk. Factors.–.Uncertainty.of.Reserves.and.Future.Net.Revenue.Estimates”. and.“Risk.Factors.–.Uncertainty.of.Contingent.and.Prospective.Resource. Estimates”,.each.within.our.Annual.Information.Form.for.the.year.ended. December.31,.2012,.available.on.our.website.at.www.cenovus.com. SUMMARY OF COMPANY INTEREST OIL AND GAS RESERVES AT DECEMBER 31, 2012 ( Fore cas t P ri ce s a n d Co st s ) . . . . Before Royalties(1) . . Reserves.Category. Proved Reserves. . Developed.Producing. . Developed.Non-Producing. . Undeveloped. Total Proved Reserves. Probable.Reserves. Total Proved plus Probable Reserves. (1). Does.not.include.Royalty.Interest.Reserves. . . . . After Royalties(2) . . Reserves.Category. Proved Reserves . Developed.Producing. . Developed.Non-Producing. . Undeveloped. Total Proved Reserves. Probable.Reserves. Total Proved plus Probable Reserves. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bitumen. (MMb bls ). . 172. 13. 1,532. 1,717. 676. 2,393. Heavy.Oil. (MMbb ls). . Light.&.Medium. Oil.&.NGLs. (MMbb ls). Natural.Gas. &.CBM. (Bc f ) 121. 1. 62. 184. 105. 289. 84. 9. 22. 115. 56. 171. 917 32 6 955 338 1,293 . Bitumen. (MMb bls ). Heavy.Oil. (MMbb ls). . Light.&.Medium. Oil.&.NGLs. (MMbb ls). Natural.Gas. &.CBM. (Bc f ) 134. 10. 1,149. 1,293. 499. 1,792. 102. 1. 51. 154. 79. 233. 73. 7. 18. 98. 46. 144. 930 31 6 967 324 1,291 (2). Includes.Royalty.Interest.Reserves.. 12 4 CENOVUS ENERGY 2012 ANNUAL RE PO RT / ADDITIONAL RESERVES AND OIL AND GAS INFORMATION 4. –. –. 4. 2. 6. 20%. . 8,149. 401. 4,313. 12,863. 3,055. 15,918. 43 – – 43 13 56 Unit.Value. Discounted.at. 10%.(1) $/BOE . 22.62 24.90 10.50 13.99 11.25 13.21 20% 6,658 306 2,993 9,957 2,218 12,175 . . . . Royalty Interest . . Reserves.Category. Proved Reserves. . Developed.Producing. . Developed.Non-Producing. . Undeveloped. Total Proved Reserves. Probable.Reserves. Total Proved plus Probable Reserves. . . . . . . . . . . . . . . . . . . –. –. –. –. –. –. 1. –. –. 1. 1. 2. . Bitumen. (MMb bls ). Heavy.Oil. (MMbb ls). . Light.&.Medium. Oil.&.NGLs. (MMbbls). Natural.Gas. &.CBM. (Bc f ) SUMMARY OF NET PRESENT VALUE OF FUTURE NET REVENUE AT DECEMBER 31, 2012 (Forecast Prices and Co sts ) . . . . Before Income Taxes. . . Reserves.Category. Proved Reserves. . Developed.Producing. . Developed.Non-Producing. . Undeveloped. Total Proved Reserves. Probable.Reserves. Total Proved plus Probable Reserves. (1). Unit.values.have.been.calculated.using.Company.Interest.After.Royalties.reserves. After Income Taxes(1) . . Discounted.at.%/year ($ mil lions ). 15%. 10%. . . 9,155. 10,485. 480. 592. 7,301. 12,798. 16,936. 23,875. 4,598. 7,635. 21,534. 31,510. 5%. . 12,313. 762. 24,053. 37,128. 14,385. 51,513. 0%. . 14,927. 1,048. 50,592. 66,567. 31,347. 97,914. . . . Reserves.Category. Proved Reserves. . Developed.Producing. . Developed.Non-Producing. . Undeveloped. Total Proved Reserves. Probable.Reserves. Total Proved plus Probable Reserves. . . . . . . . . 0%. . 11,990. 788. 37,993. 50,771. 23,465. 74,236. 15%. Discounted.at.%/year ($ mil lion s ) 10%. 5%. . . 8,510. 9,951. 447. 574. 9,342. 17,835. 18,299. 28,360. 5,623. 10,675. 23,922. 39,035. 7,457. 364. 5,219. 13,040. 3,362. 16,402. (1). .Values.are.calculated.by.considering.existing.tax.pools.and.tax.circumstances.for.Cenovus.and.its.subsidiaries.in.the.consolidated.evaluation.of.Cenovus’s.oil.and.gas.properties,.and.take.into. account.current.federal.tax.regulations..Values.do.not.represent.an.estimate.of.the.value.at.the.business.entity.level,.which.may.be.significantly.different..For.information.at.the.business.entity. level,.please.see.our.Consolidated.Financial.Statements.and.Management’s.Discussion.and.Analysis.for.the.year.ended.December.31,.2012.. The estimates of future net revenue do not represent fair market value. CEN OV US EN ERGY 2012 AN NUAL R EPORT / ADDITIONAL RESERVES AND OIL AND GAS INFORMATION 125 RESERVES RECONCILIATION The.following.tables.provide.a.reconciliation.of.our.Company.Interest.Before.Royalties.reserves.for.bitumen,.heavy.oil,.light.and.medium.oil.and. NGLs,.and.natural.gas.for.the.year.ended.December.31,.2012,.presented.using.forecast.prices.and.costs..All.reserves.are.located.in.Canada. COMPANY INTEREST BEFORE ROYALTIES RESERVES RECONCILIATION BY PRINCIPAL PRODUCT TYPE AND RESERVES CATEGORY (Forecast Prices and Costs) . . . Proved . . . . . . December 31, 2011. . Extensions.and.Improved.Recovery. . Discoveries. . Technical.Revisions. . Economic.Factors. . Acquisitions. . Dispositions. . Production(1). December 31, 2012. . . . Probable . . . . . . December 31, 2011. . Extensions.and.Improved.Recovery. . Discoveries. . Technical.Revisions. . Economic.Factors. . Acquisitions. . Dispositions. . Production(1). December 31, 2012. . . . . . . Proved plus Probable . . . December 31, 2011. . Extensions.and.Improved.Recovery. . Discoveries. . Technical.Revisions. . Economic.Factors. . Acquisitions. . Dispositions. . Production(1). December 31, 2012. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bitumen. (MMb bls ). 1,455. 265. –. 30. –. –. –. (33). 1,717. . Bitumen. (MMb bls ). 490. 140. –. 46. –. –. –. –. 676. . Bitumen. (MMb bls ). 1,945. 405. –. 76. –. –. –. (33). 2,393. Heavy.Oil. (MMbb ls). 175. 17. –. 6. –. –. –. (14). 184. . Light.&.Medium. Oil.&.NGLs. (MMbb ls). 115. 13. –. (2). –. 1. –. (12). 115. Heavy.Oil. (MMbb ls). 109. 11. –. (15). –. –. –. –. 105. . Light.&.Medium. Oil.&.NGLs. (MMbb ls). 51. 5. –. –. –. –. –. –. 56. Heavy.Oil. (MMbb ls). 284. 28. –. (9). –. –. –. (14). 289. . Light.&.Medium. Oil.&.NGLs. (MMbb ls). 166. 18. –. (2). –. 1. –. (12). 171. Natural.Gas. &.CBM. (Bc f ) 1,203 29 – 51 (58) 1 (59) (212) 955 Natural.Gas. &.CBM. (Bc f ) 391 8 – (30) (4) – (27) – 338 Natural.Gas. &.CBM. (Bc f ) 1,594 37 – 21 (62) 1 (86) (212) 1,293 (1). .Production.used.for.the.reserves.reconciliation.differs.from.publicly.reported.production..In.accordance.with.NI.51-101,.Company.Interest.Before.Royalties.production.used.for.the.reserves. reconciliation.above.includes.our.share.of.gas.volumes.provided.to.the.FCCL.partnership.for.steam.generation,.but.does.not.include.Royalty.Interest.Production. 12 6 CENOVUS ENERGY 2012 ANNUAL RE PO RT / ADDITIONAL RESERVES AND OIL AND GAS INFORMATION . . Bitumen Economic Contingent and Prospective Resources . Company.Interest.Before.Royalties,.Billions.of.barrels. Economic.Contingent.Resources(1). . Low.Estimate. . Best.Estimate. . High.Estimate. Prospective.Resources(2). . Low.Estimate. . Best.Estimate. . High.Estimate. 2012. December 31,. December.31,. 2011 . . . . . . . . 7.1. 9.6. 12.8. 6.0 8.2 10.8 5.0. 8.5. 14.8. 5.7 10.0 17.9 (1). There.is.no.certainty.that.it.will.be.commercially.viable.to.produce.any.portion.of.the.contingent.resources.. (2). .There.is.no.certainty.that.any.portion.of.the.prospective.resources.will.be.discovered..If.discovered,.there.is.no.certainty.that.it.will.be.commercially.viable.to.produce.any.portion.of.the. prospective.resources..Prospective.resources.are.not.screened.for.economic.viability. ExPLORATION AND DEVELOPMENT ACTIVITY The.following.tables.summarize.our.gross.participation.and.net.interest.in.wells.drilled.for.the.periods.indicated: Exploration Wells Drilled . . . . . . . . . 2012: . Oil.Sands. Conventional. Total.Canada. 2011: . Oil.Sands. Conventional. Total.Canada. 2010: . Oil.Sands. Conventional. Total.Canada. Development Wells Drilled . . . . . . . . . 2012: . Oil.Sands. Conventional. Total.Canada. 2011: . Oil.Sands. Conventional. Total.Canada. 2010: . Oil.Sands. Conventional. Total.Canada. . Oil. . Gas. Gross. . ..–. ..8. ..8. . ..–. 24. 24. . ..–. 26. 26. ...Net. . –. 7. 7. . ..–. 22. 22. . ..–. 26. 26. Gross. . –. –. –. . ..–. ..–. ..–. . ..–. ..–. ..–. .Net. . –. –. –. . ..–. ..–. ..–. . ..–. ..–. ..–. . Oil. . Gas. Gross. . 137. ..273. ..410. . 71. 312. 383. . 82. 160. 242. ...Net. . 107. 268. 375. . 51. 303. 354. . 47. 154. 201. Gross. . –. –. –. . 3. 66. 69. . –. 499. 499. .Net. . –. –. –. . 3. 65. 68. . –. 495. 495. Dry.&. Abandoned. Net. . –. –. –. . ..–. ..2. ..2. . ..–. ..1. ..1. Gross. . –. –. –. . ..–. ..2. ..2. . ..–. ..1. ..1. Dry.&. Abandoned. Net. . –. 1. 1. . –. 4. 4. . –. –. –. Gross. . –. 1. 1. . –. 4. 4. . –. –. –. Total.Working. Interest. .Gross. . –. 8. 8. . ..–. 26. 26. . ..–. 27. 27. Net. . –. 7. 7. . ..–. 24. 24. . ..–.. 27. 27. Royalty. ....Gross. . –. 20. 20. . .–. 40. 40. . ........–. ......21. ......21. Total Gross. .Net –. 28. 28. –. 66. 66. ......–. 48. 48. – 7 7 ..– 24 24 ..– 27 27 Total.Working. Interest. .Gross. . 137. 274. 411. . 74. 382. 456. . 82. 659. 741. Net. . 107. 269. 376. . 54. 372. 426. . 47. 649. 696. Royalty. ....Gross. Total Gross. .Net 57. 129. 186. . 87. 156. 243. . 8. 204. 212. 194. 403. 597. 161. 538. 699. 90. 863. 953. 107 269 376 54 372 426 47 649 696 CEN OV US EN ERGY 2012 AN NUAL R EPORT / ADDITIONAL RESERVES AND OIL AND GAS INFORMATION 127 During.the.year.ended.December.31,.2012,.Oil.Sands.drilled.473.gross. stratigraphic.test.wells.(317.net.wells).and.Conventional.drilled.14.gross. stratigraphic.test.wells.(14.net.wells).. During.the.year.ended.December.31,.2012,.Oil.Sands.drilled.116.gross. service.wells.(112.net.wells).and.Conventional.drilled.22.gross.service. wells.(16.net.wells).. Interest in Material Properties The.following.table.summarizes.our.landholdings.at.December.31,.2012: For.all.types.of.wells.except.stratigraphic.test.wells,.the.calculation. of.the.number.of.wells.is.based.on.the.number.of.surface.locations.. For.stratigraphic.test.wells,.the.calculation.is.based.on.the.number.of. bottomhole.locations.. Landholdings. (thousands of acres). Alberta:. . Oil.Sands. . –.Crown(3). . . Conventional. . –.Fee(4). . . –.Crown(3). . . –.Freehold(5). . Total.Alberta. Saskatchewan:. . Conventional. . –.Fee(4). . . –.Crown(3). . . –.Freehold(5). . Total.Saskatchewan. Manitoba:. . Conventional.–.Fee(4). Total.Manitoba. Total.. Developed. ..Gross. . . 582. . 1,931. 1,011. 71. 3,595. . . 78. 71. 14. 163. . 4. 4. 3,762. ..Net. . . 487. . 1,931. 910. 60. 3,388. . . 78. 57. 9. 144. . 4. 4. 3,536. Undeveloped(1). Gross. . . 2,256. . 442. 311. 18. 3,027. . . 427. 291. 11. 729. . 262. 262. 4,018. ..Net. . . 1,792. . 442. 261. 16. 2,511. . . 427. 273. 7. 707. . 262. 262. 3,480. Total(2) Gross. . . 2,838. . 2,373. 1,322. 89. 6,622. . . 505. 362. 25. 892. . 266. 266. 7,780. ..Net 2,279 2,373 1,171 76 5,899 505 330 16 851 266 266 7,016 (1). Undeveloped.includes.land.that.has.not.yet.been.drilled,.as.well.as.land.with.wells.that.have.never.produced.hydrocarbons.or.that.do.not.currently.allow.for.the.production.of.hydrocarbons. (2). This.table.excludes.approximately.2.4.million.gross.acres.under.lease.or.sublease,.reserving.to.us,.royalties.or.other.interests. (3). Crown/Federal.lands.are.those.lands.owned.by.the.federal.or.provincial.government.or.the.First.Nations,.in.which.we.have.purchased.a.working.interest.lease. (4). .Fee.lands.are.those.lands.in.which.we.have.a.fee.simple.interest.in.the.mineral.rights.and.have.either:.(i).not.leased.out.all.of.the.mineral.zones;.or.(ii).retained.a.working.interest..The.current.fee. lands.summary.includes.all.freehold.titles.owned.by.us.that.have.one.or.more.zones.that.remain.unleased.or.available.for.development. (5). Freehold.lands.are.those.lands.owned.by.individuals.(other.than.a.government.or.Cenovus).in.which.Cenovus.holds.a.working.interest.lease. 12 8 CENOVUS ENERGY 2012 ANNUAL RE PO RT / ADDITIONAL RESERVES AND OIL AND GAS INFORMATION ADV ISO RY FINANCIAL INFORMATION Basis of Presentation.Financial.information.in.our.Annual.Report.is.in. Canadian.dollars,.except.where.another.currency.has.been.indicated. and.has.been.prepared.in.accordance.with.International.Financial. Reporting.Standards.(“IFRS”.or.“GAAP”).as.issued.by.the.International. Accounting.Standards.Board..Production.volumes.are.presented.on.a. before.royalties.basis. Non-GAAP Measures.Certain.financial.measures.in.our.Annual.Report. do.not.have.a.standardized.meaning.as.prescribed.by.IFRS,.such.as. operating.cash.flow,.cash.flow,.operating.earnings,.free.cash.flow,.debt,. capitalization.and.adjusted.EBITDA,.and.therefore.are.considered. non-GAAP.measures..These.measures.may.not.be.comparable.to. similar.measures.presented.by.other.issuers..These.measures.have.been. described.and.presented.in.order.to.provide.shareholders.and.potential. investors.with.additional.measures.for.analyzing.our.ability.to.generate. funds.to.finance.our.operations.and.information.regarding.our.liquidity.. The.additional.information.should.not.be.considered.in.isolation.or. as.a.substitute.for.measures.prepared.in.accordance.with.IFRS..The. definition.and.reconciliation.of.each.non-GAAP.measure.is.presented. in.the.Operating.Results,.Financial.Results.and.Liquidity.and.Capital. Resources.sections.in.our.MD&A. FORWARD-LOOKING INFORMATION This.document.contains.certain.forward-looking.statements.and. other.information.(collectively.“forward-looking.information”).about. our.current.expectations,.estimates.and.projections,.made.in.light.of. our.experience.and.perception.of.historical.trends..Forward-looking. information.in.this.document.is.identified.by.words.such.as.“anticipate”,. “believe”,.“expect”,.“plan”,.“forecast”.or.“F”,.“target”,.“project”,.“could”,. “focus”,.“vision”,.“goal”,.“proposed”,.“scheduled”,.“outlook”,.“potential”,. “may”.or.similar.expressions.and.includes.suggestions.of.future. outcomes,.including.statements.about.our.growth.strategy.and.related. schedules,.projected.future.value.or.net.asset.value,.forecast.operating. and.financial.results,.planned.capital.expenditures,.expected.future. production,.including.the.timing,.stability.or.growth.thereof,.expected. future.refining.capacity,.anticipated.finding.and.development.costs,. expected.reserves.and.contingent.and.prospective.resources.estimates,. potential.dividends.and.dividend.growth.strategy,.anticipated.timelines. for.future.regulatory,.partner.or.internal.approvals,.future.impact.of. regulatory.measures,.forecasted.commodity.prices,.future.use.and. development.of.technology.and.projected.increasing.shareholder.value.. Readers.are.cautioned.not.to.place.undue.reliance.on.forward-looking. information.as.our.actual.results.may.differ.materially.from.those. expressed.or.implied. Developing.forward-looking.information.involves.reliance.on.a.number. of.assumptions.and.consideration.of.certain.risks.and.uncertainties,. some.of.which.are.specific.to.Cenovus.and.others.that.apply.to.the. industry.generally.. The.factors.or.assumptions.on.which.the.forward-looking.information. is.based.include:.assumptions.inherent.in.our.current.guidance,.available. at.www.cenovus.com;.our.projected.capital.investment.levels,.the. flexibility.of.our.capital.spending.plans.and.the.associated.source.of. funding;.estimates.of.quantities.of.oil,.bitumen,.natural.gas.and.liquids. from.properties.and.other.sources.not.currently.classified.as.proved;. our.ability.to.obtain.necessary.regulatory.and.partner.approvals;.the. successful.and.timely.implementation.of.capital.projects.or.stages. thereof;.our.ability.to.generate.sufficient.cash.flow.from.operations. to.meet.our.current.and.future.obligations;.and.other.risks.and. uncertainties.described.from.time.to.time.in.the.filings.we.make.with. securities.regulatory.authorities.. The.assumptions.on.which.our.2013.guidance.is.based.include:.Brent. US$100.00/bbl,.WTI.of.US$91.00/bbl;.Western.Canada.Select.of. US$63.00/bbl;.NYMEX.of.US$4.00/MMBtu;.AECO.of.$3.40/GJ;.Chicago. 3-2-1.crack.spread.of.US$20.00/bbl;.exchange.rate.of.$1.00.US$/C$;.and. an.average.diluted.number.of.shares.outstanding.of.approximately.766. million..The.assumptions.on.which.our.forecasts.for.the.period.2014.to. 2021.are.based.on.include:.WTI.of.US$90.00-US$105.00/bbl;.Western. Canada.Select.of.US$75.00-US$85.00/bbl;.NYMEX.of.US$5.25-US$6.00/ MMBtu;.AECO.of.$4.50-$5.25/GJ;.Chicago.3-2-1.crack.spread.of.US$9.00;. exchange.rate.of.$1.00-$1.07.US$/C$;.and.an.average.diluted.number.of. shares.outstanding.of.approximately.769.million.. The.risk.factors.and.uncertainties.that.could.cause.our.actual.results. to.differ.materially,.include:.volatility.of.and.assumptions.regarding. oil.and.gas.prices;.the.effectiveness.of.our.risk.management.program,. including.the.impact.of.derivative.financial.instruments.and.the.success. of.our.hedging.strategies;.the.accuracy.of.cost.estimates;.fluctuations.in. commodity.prices,.currency.and.interest.rates;.fluctuations.in.product. supply.and.demand;.market.competition,.including.from.alternative. energy.sources;.risks.inherent.in.our.marketing.operations,.including. credit.risks;.maintaining.desirable.ratios.of.debt.to.adjusted.EBITDA.as. well.as.debt.to.capitalization;.our.ability.to.access.various.sources.of. debt.and.equity.capital;.accuracy.of.our.reserves,.resources.and.future. production.estimates;.our.ability.to.replace.and.expand.oil.and.gas. reserves;.our.ability.to.maintain.our.relationship.with.our.partners.and. to.successfully.manage.and.operate.our.integrated.heavy.oil.business;. reliability.of.our.assets;.potential.disruption.or.unexpected.technical. CEN OV US EN ERGY 2012 ANNUAL RE PO RT / ADV ISORY 129 Reserves terminology: Reserves.are.estimated.remaining.quantities.anticipated.to.be. recoverable.from.known.accumulations,.from.a.given.date.forward,. based.on.analysis.of.drilling,.geological,.geophysical.and.engineering. data,.the.use.of.established.technology.and.specified.economic. conditions..Reserves.are.classified.according.to.the.degree.of.certainty. associated.with.the.estimates: Proved reserves are.those.reserves.that.can.be.estimated.with.a. high.degree.of.certainty.to.be.recoverable..It.is.likely.that.the.actual. remaining.quantities.recovered.will.exceed.the.estimated.proved. reserves. Probable reserves are.those.additional.reserves.that.are.less.certain. to.be.recovered.than.proved.reserves..It.is.equally.likely.that.the. actual.remaining.quantities.recovered.will.be.greater.or.less.than.the. sum.of.the.estimated.proved.plus.probable.reserves. . .Each.of.the.reserves.categories.above.may.be.divided.into.developed. and.undeveloped.categories: Developed reserves.are.those.reserves.that.are.expected.to.be. recovered.from.existing.wells.and.installed.facilities.or,.if.facilities. have.not.been.installed,.that.would.involve.a.low.expenditure.(e.g.. when.compared.to.the.cost.of.drilling.a.well).to.put.the.reserves.on. production..The.developed.category.may.be.subdivided.as.follows: . . . . . . Developed producing reserves.are.those.reserves.that.are. expected.to.be.recovered.from.completion.intervals.open. at.the.time.of.the.estimate..These.reserves.may.be.currently. producing.or,.if.shut-in,.they.must.have.previously.been.on. production,.and.the.date.of.resumption.of.production.must.be. known.with.reasonable.certainty.. Developed non-producing reserves.are.those.reserves.that. either.have.not.been.on.production,.or.have.previously.been. on.production,.but.are.shut-in,.and.the.date.of.resumption.of. production.is.unknown. Undeveloped reserves.are.those.reserves.expected.to.be. recovered.from.known.accumulations.where.a.significant. expenditure.(e.g..similar.to.the.cost.of.drilling.a.well).is.required. to.render.them.capable.of.production..They.must.fully.meet.the. requirements.of.the.reserves.classification.(proved,.probable).to. which.they.are.assigned.. Royalty Interest Reserves means.those.reserves.related.to.our.royalty. entitlement.on.lands.to.which.we.hold.fee.title.and.which.have.been. leased.to.third.parties,.plus.any.reserves.related.to.other.royalty. interests,.such.as.overriding.royalties,.to.which.we.are.entitled. Royalty Interest Production.means.the.production.related.to.our. royalty.entitlement.on.lands.to.which.we.hold.fee.title.and.which. have.been.leased.to.third.parties,.plus.any.production.related.to.other. royalty.interests,.such.as.overriding.royalties,.to.which.we.are.entitled. difficulties.in.developing.new.products.and.manufacturing.processes;. refining.and.marketing.margins;.potential.failure.of.new.products. to.achieve.acceptance.in.the.market;.unexpected.cost.increases.or. technical.difficulties.in.constructing.or.modifying.manufacturing.or. refining.facilities;.unexpected.difficulties.in.producing,.transporting. or.refining.of.crude.oil.into.petroleum.and.chemical.products;.risks. associated.with.technology.and.its.application.to.our.business;.the. timing.and.the.costs.of.well.and.pipeline.construction;.our.ability.to. secure.adequate.product.transportation;.changes.in.the.regulatory. framework.in.any.of.the.locations.in.which.we.operate,.including. changes.to.the.regulatory.approval.process.and.land-use.designations,. royalty,.tax,.environmental,.greenhouse.gas,.carbon.and.other.laws. or.regulations,.or.changes.to.the.interpretation.of.such.laws.and. regulations,.as.adopted.or.proposed,.the.impact.thereof.and.the. costs.associated.with.compliance;.the.expected.impact.and.timing.of. various.accounting.pronouncements,.rule.changes.and.standards.on.our. business,.our.financial.results.and.our.consolidated.financial.statements;. changes.in.the.general.economic,.market.and.business.conditions;.the. political.and.economic.conditions.in.the.countries.in.which.we.operate;. the.occurrence.of.unexpected.events.such.as.war,.terrorist.threats.and. the.instability.resulting.therefrom;.and.risks.associated.with.existing.and. potential.future.lawsuits.and.regulatory.actions.against.us. Readers.are.cautioned.that.the.foregoing.lists.are.not.exhaustive.and. are.made.as.at.the.date.hereof..For.a.full.discussion.of.our.material.risk. factors,.see.“Risk.Factors”.in.our.Annual.Information.Form.for.the.year. ended.December.31,.2012.(see.Additional.Information). OIL AND GAS INFORMATION Terminology The.estimates.of.reserves.and.resources.data.and.related. information.were.prepared.effective.December.31,.2012.by.independent. qualified.reserves.evaluators.(“IQREs”).and.are.presented.using.McDaniel. &.Associates.Consultants.Ltd..(“McDaniel”).January.1,.2013.price.forecast.. We.hold.significant.fee.title.rights.which.generate.production.for.our. account.from.third.parties.leasing.those.lands.. For.additional.information.about.our.reserves,.resources.and.other.oil.and. gas.information,.see.“Reserves.Data.and.Other.Oil.and.Gas.Information”. in.our.Annual.Information.Form.for.the.year.ended.December.31,.2012.. (see.Additional.Information)..The.following.definitions.are.applicable.to. our.oil.and.gas.disclosure.in.our.Annual.Report: After Royalties.means.volumes.after.deduction.of.royalties.and. includes.Royalty.Interests. Before Royalties means.volumes.before.deduction.of.royalties.and. excludes.Royalty.Interests. Company Interest.means,.in.relation.to.production,.reserves,.resources. and.property,.the.interest.(operating.or.non-operating).held.by.us. Gross.means:.(a).in.relation.to.wells,.the.total.number.of.wells.in.which. we.have.an.interest;.and.(b).in.relation.to.properties,.the.total.area.of. properties.in.which.we.have.an.interest.. Net.means:.(a).in.relation.to.wells,.the.number.of.wells.obtained.by. aggregating.our.working.interest.in.each.of.our.gross.wells;.and.(b).in. relation.to.our.interest.in.a.property,.the.total.area.in.which.we.have.. an.interest.multiplied.by.the.working.interest.owned.by.us. 130 CENOVUS ENERGY 2012 ANNUAL RE PO RT / ADVI SORY Resources terminology: Contingent resources are.those.quantities.of.bitumen.estimated,.as.of. a.given.date,.to.be.potentially.recoverable.from.known.accumulations. using.established.technology.or.technology.under.development,.but. which.are.not.currently.considered.to.be.commercially.recoverable.due. to.one.or.more.contingencies..Contingencies.may.include.such.factors. as.economic,.legal,.environmental,.political.and.regulatory.matters.or.a. lack.of.markets..It.is.also.appropriate.to.classify.as.contingent.resources. the.estimated.discovered.recoverable.quantities.associated.with.a. project.in.the.early.evaluation.stage..Contingent.resources.are.further. classified.in.accordance.with.the.level.of.certainty.associated.with.the. estimates.and.may.be.sub-classified.based.on.project.maturity.and/ or.characterized.by.their.economic.status..The.McDaniel.estimates. of.contingent.resources.have.not.been.adjusted.for.risk.based.on.the. chance.of.development.. Economic contingent resources are.those.contingent.resources.that. are.currently.economically.recoverable.based.on.specific.forecasts.of. commodity.prices.and.costs.. The.economic.contingent.resources.were.estimated.for.individual. projects.and.then.aggregated.for.disclosure.purposes..The.high.and. low.estimate.volumes.are.arithmetic.sums.of.multiple.estimates. which.statistical.principles.indicate.may.be.misleading.as.to.volumes. that.may.actually.be.recovered..Because.the.results.are.aggregated. for.disclosure,.the.low.estimate.results.disclosed.may.have.a.higher. probability.than.the.estimates.for.the.individual.projects,.and.the. high.estimate.results.disclosed.may.have.a.lower.probability.than.the. estimates.for.individual.projects. Prospective resources.are.those.quantities.of.bitumen.petroleum. estimated,.as.of.a.given.date,.to.be.potentially.recoverable.from. undiscovered.accumulations.by.application.of.future.development. projects..Prospective.resources.have.both.an.associated.chance.of. discovery.and.a.chance.of.development..Prospective.resources.are. further.subdivided.in.accordance.with.the.level.of.certainty.associated. with.recoverable.estimates.assuming.their.discovery.and.development. and.may.be.subclassified.based.on.project.maturity..The.estimate.of. prospective.resources.has.not.been.adjusted.for.risk.based.on.the. chance.of.discovery.or.the.chance.of.development. Best estimate.is.considered.to.be.the.best.estimate.of.the.quantity.of. resources.that.will.actually.be.recovered..It.is.equally.likely.that.the. actual.remaining.quantities.recovered.will.be.greater.or.less.than.the. best.estimate..Those.resources.that.fall.within.the.best.estimate.have.a. 50.percent.probability.that.the.actual.quantities.recovered.will.equal.or. exceed.the.estimate. Low estimate.is.considered.to.be.a.conservative.estimate.of.the. quantity.of.resources.that.will.actually.be.recovered..It.is.likely.that.the. actual.remaining.quantities.recovered.will.exceed.the.low.estimate.. Those.resources.included.in.the.low.estimate.range.have.the.highest. degree.of.certainty.–.a.90.percent.probability.–.that.the.actual. quantities.recovered.will.equal.or.exceed.the.estimate.. High estimate.is.considered.to.be.an.optimistic.estimate.of.the.quantity. of.resources.that.will.actually.be.recovered..It.is.unlikely.that.the.actual. remaining.quantities.of.resources.recovered.will.meet.or.exceed.the. high.estimate..Those.resources.included.in.the.high.estimate.range.have. a.lower.degree.of.certainty,.a.10.percent.probability,.that.the.actual. quantities.recovered.will.equal.or.exceed.the.estimate. Barrels of Oil Equivalent.Certain.natural.gas.volumes.have.been. converted.to.barrels.of.oil.equivalent.(BOE).on.the.basis.of.six.Mcf. to.one.bbl..BOE.may.be.misleading,.particularly.if.used.in.isolation..A. conversion.ratio.of.one.bbl.to.six.Mcf.is.based.on.an.energy.equivalency. conversion.method.primarily.applicable.at.the.burner.tip.and.does.not. represent.value.equivalency.at.the.wellhead. Finding and Development Costs.Finding.and.development.costs. disclosed.in.our.Annual.Report.do.not.include.the.change.in.estimated. future.development.costs..Cenovus.uses.finding.and.development.costs. without.changes.in.estimated.future.development.costs.as.an.indicator. of.relative.performance.to.be.consistent.with.the.methodology. accepted.within.the.oil.and.gas.industry. Finding.and.development.costs.for.proved reserves,.excluding.the. effects.of.acquisitions.and.dispositions.but.including.the.change.in. estimated.future.development.costs.were.$25.48/BOE.for.the.year. ended.December.31,.2012,.$13.99/BOE.for.the.year.ended.December.31,. 2011.and.averaged.$16.35/BOE.for.the.three.years.ended.December.31,. 2012..Finding.and.development.costs.for.proved plus probable reserves,. excluding.the.effects.of.acquisitions.and.dispositions.but.including. the.change.in.estimated.future.development.costs.were.$20.04/ BOE.for.the.year.ended.December.31,.2012,.$10.69/BOE.for.the.year. ended.December.31,.2011.and.averaged.$14.27/BOE.for.the.three.years. ended.December.31,.2012..These.finding.and.development.costs.were. calculated.by.dividing.the.sum.of.exploration.costs,.development.costs. and.changes.in.future.development.costs.in.the.particular.period.by. the.reserves.additions.(the.sum.of.extensions.and.improved.recovery,. discoveries,.technical.revisions.and.economic.factors).in.that.period.. The.aggregate.of.the.exploration.and.development.costs.incurred.in. a.particular.period.and.the.change.during.that.period.in.estimated. future.development.costs.generally.will.not.reflect.total.finding.and. development.costs.related.to.reserves.additions.for.that.period. For.additional.information.about.our.finding.and.development.costs,. capital.investment.and.reserves.additions,.see.our.February.14,.2013. news.release.available.on.our.website.at.www.cenovus.com. Net Asset Value.With.respect.to.the.particular.year.being.valued,.the.net. asset.value.(NAV).disclosed.herein.is.based.on.the.number.of.issued.and. outstanding.Cenovus.shares.as.at.December.31.as.reported.in.our.Annual. Information.Form.and.Form.40-F,.plus.the.total.dilutive.effect.of.Cenovus. shares.related.to.stock.option.programs.or.other.contracts.as.disclosed. in.the.“Per.Share.Amounts”.note.to.our.annual.Consolidated.Financial. Statements..We.calculate.NAV.as.an.average.of.(i).our.average.trading.price. for.the.month.of.December,.(ii).an.average.of.net.asset.values.published. by.external.analysts.in.December.following.the.announcement.of.our. budget.forecast,.and.(iii).an.average.of.two.net.asset.values.based.primarily. on.discounted.cash.flows.of.independently.evaluated.reserves,.resources. and.refining.data.and.using.internal.corporate.costs,.with.one.based.on. constant.prices.and.costs.and.one.based.on.forecast.prices.and.costs. CEN OV US EN ERGY 2012 ANNUAL RE PO RT / ADV ISORY 131 ABBREVIATIONS ADDITIONAL INFORMATION For.convenience,.references.in.this.document.to.the.“Company”,. “Cenovus”,.“we”,.“us”,.“our”.and.“its”.may,.where.applicable,.refer.only.to. or.include.any.relevant.direct.and.indirect.subsidiary.corporations.and. partnerships.(“subsidiaries”).of.Cenovus,.and.the.assets,.activities.and. initiatives.of.such.subsidiaries. Additional.information.relating.to.Cenovus,.including.our.Annual. Information.Form./.Form.40-F.for.the.year.ended.December.31,.2012,.is. available.on.SEDAR.at.www.sedar.com,.EDGAR.at.www.sec.gov.and.on. our.website.at.www.cenovus.com. The.following.is.a.summary.of.the.abbreviations.that.have.. been.used.in.this.document: TM..... Trademark.of.Cenovus.Energy.Inc. Oil and Natural Gas Liquids bbl. barrel bbls/d. barrels.per.day Mbbls/d. thousand.barrels.per.day MMbbls. million.barrels NGLs. natural.gas.liquids BOE. barrel.of.oil.equivalent BOE/d. barrel.of.oil.equivalent.per.day WTI. WCS. West.Texas.Intermediate Western.Canadian.Select Natural Gas Mcf. thousand.cubic.feet MMcf. million.cubic.feet Bcf. billion.cubic.feet MMBtu. million.British.thermal.units GJ. Gigajoule CBM. Coal.Bed.Methane 132 CENOVUS ENERGY 2012 ANNUAL RE PO RT / ADVI SORY COR POR ATE INFOR MATION SHAREHOLDER INFORMATION ExECUTIVE OFFICERS BOARD OF DIRECTORS ANNUAL MEETING Brian C. Ferguson President.&.Chief.Executive.Officer Michael A. Grandin(3)(7) Chair,.Calgary,.Alberta John K. Brannan Executive.Vice-President.. &.Chief.Operating.Officer Harbir S. Chhina Executive.Vice-President,.. Oil.Sands Kerry D. Dyte Executive.Vice-President,.General. Counsel.&.Corporate.Secretary Sheila M. McIntosh Executive.Vice-President,.. Environment.&.Corporate.Affairs Ivor M. Ruste Executive.Vice-President.. &.Chief.Financial.Officer Donald T. Swystun Executive.Vice-President,.. Refining,.Marketing,. Transportation.&.Development Hayward J. Walls Executive.Vice-President,. Organization.&.Workplace. Development CENOVUS HEAD OFFICE Cenovus.Energy.Inc. 500.Centre.Street.SE PO.Box.766 Calgary,.Alberta,.Canada T2P.0M5 Phone:.403.766.2000 cenovus.com Ralph S. Cunningham(2)(3)(5) Houston,.Texas Patrick D. Daniel(1)(2)(3) Calgary,.Alberta Ian W. Delaney(2)(3)(5) Toronto,.Ontario Brian C. Ferguson(6) Calgary,.Alberta Valerie A.A. Nielsen(1)(3)(4) Calgary,.Alberta Charles M. Rampacek(3)(4)(5) Dallas,.Texas Colin Taylor(1)(2)(3) Toronto,.Ontario Wayne G. Thomson(3)(4)(5) Calgary,.Alberta (1). Member.of.the.Audit.Committee. (2)...Member.of.the.Human.Resources.and. Compensation.Committee. (3)...Member.of.the.Nominating.and. Corporate.Governance.Committee. (4)...Member.of.the.Reserves.Committee. (5)...Member.of.the.Safety,.Environment.and. Responsibility.Committee. (6)...As.an.officer.and.a.non-independent. director,.Mr..Ferguson.is.not.a.member.of. any.Board.Committees. Shareholders.are.invited.to. attend.the.annual.meeting.to.be. held.on.Wednesday,.April.24,.2013. at.2.p.m..(Calgary.time).at.The. Westin.Calgary,.Grand.Ballroom,. 320.–.4.Avenue.SW,.Calgary,. Alberta,.Canada. Please.see.our.management.proxy. circular.available.on.our.website,. cenovus.com,.for.additional. information. TRANSFER AGENTS & REGISTRAR Computershare Investor Services Inc. 9th.Floor,.100.University.Avenue Toronto,.ON..M5J.2Y1 www.investorcentre.com/ cenovus NYSE CORPORATE GOVERNANCE STANDARDS As.a.Canadian.company.listed.on. the.NYSE,.we.are.not.required. to.comply.with.most.of.the. NYSE.corporate.governance. standards.and.instead.may. comply.with.Canadian.corporate. governance.requirements..We.are,. however,.required.to.disclose.the. significant.differences.between. our.corporate.governance. practices.and.those.required.to. be.followed.by.U.S..domestic. companies.under.the.NYSE. corporate.governance.standards.. Except.as.summarized.on.our. website,.cenovus.com,.we.are. in.compliance.with.the.NYSE. corporate.governance.standards. in.all.significant.respects. Shareholder.inquiries.by.phone. 1.866.332.8898.(North.America,. English.&.French).or.1.514.982.8717. (outside.North.America). INVESTOR RELATIONS Please.visit.the.Invest in us section.of.cenovus.com.for. investor.information. SHAREHOLDER ACCOUNT MATTERS For.information.regarding.your. shareholdings.or.to.change. your.address,.transfer.shares,. eliminate.duplicate.mailings,. direct.deposit.of.dividends,.etc.,. please.contact.Computershare. Investor.Services.Inc. Investor inquiries should be directed to: 403.766.7711 investor.relations@cenovus.com Media inquiries should be directed to: 403.766.7751 media.relations@cenovus.com (7)...Ex-officio.non-voting.member.of.all. other.Board.Committees. STOCK ExCHANGES Cenovus.common.shares.trade.on. the.Toronto.Stock.Exchange.(TSX). and.the.New.York.Stock.Exchange. (NYSE).under.the.symbol.CVE. ANNUAL INFORMATION FORM / FORM 40-F Our.Annual.Information.Form.is. filed.with.the.Canadian.Securities. Administrators.in.Canada.on. SEDAR.at.www.sedar.com.and. with.the.US.Securities.and. Exchange.Commission.under.the. Multi-Jurisdictional.Disclosure. System.as.an.Annual.Report.on. Form.40-F.on.EDGAR.at.. www.sec.gov. CENOVUS ENERGY 2012 ANNUAL REPORT / CORPORATE AND SHAREHOLDER INFORMATION 133 Cenovus Energy is a Canadian integrated oil company. We are committed to applying fresh, progressive thinking to safely and responsibly unlock energy resources the world needs. our operations include oil sands projects in northern alberta, which use specialized methods to drill and pump the oil to the surface. as well, we have established natural gas and oil production in alberta and saskatchewan. We also have 50 percent ownership in two u.s. refineries. cenovus.com t witter .com/cenovus facebook .com/cenovus youtube .com/cenovusenergy linkedin.com/company/cenovus -energy 500 Centre Street SE PO Box 766 Calgary, Alberta T2P 0M5 c e n o v u s e n e r g y 2 0 1 2 a n n u a l r e p o r t c e n o v u s . c o m Printed in Canada 

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