Gibson Energy Annual Report 2015

Plain-text annual report

Rising to the Challenge Annual Report 2015 Our Business Gibsons is a midstream energy company with operations in some of the most hydrocarbon-rich basins in North America. For over 60 years, Gibsons has provided market access to leading oil and gas companies in Western Canada. By diversifying our service offerings and expanding geographically, we continue to meet our customers’ needs in key hydrocarbon producing regions throughout North America. Our unparalleled service level is what sets us apart from our competitors and we strive to provide hands-on service between the producer and end-user. Gibsons’ diversified service offering includes terminals, storage, blending, processing, marketing and distri- bution of crude oil, condensate, natural gas liquids and refined products. We also provide emulsion treating, water disposal and oilfield waste management services. Our integrated operations allow us to participate in the full midstream energy value chain. We transport millions of barrels of energy products each year by pipeline, truck and rail through our strategically located terminals in Hardisty and Edmonton, Alberta, Canada, our small Canadian terminals and our injection stations in the United States. Annual General Meeting Information Wednesday, May 4, 2016, at 11:00 a.m. (Mountain Time) The Metropolitan Conference Centre 333 - 4 Ave SW, Calgary, Alberta Forward-Looking Statements This annual report contains forward-looking statements. Please refer to the caution on forward-looking information on the inside back cover. Table of Contents 1 3 8 40 41 2015 Results and Highlights President & CEO’s Message Management’s Discussion and Analysis Independent Auditor’s Report Consolidated Financial Statements for the Year Ended December 31, 2015 46 Notes to the Consolidated Financial Statements IBC Corporate Information Our 2015 Highlights Financial Achieved record Terminal and Pipelines Segment Profit of $143 million, a 23% increase over 2014. Delivered Adjusted EBITDA for the year of $386 million. Executed growth capital expenditures of $346 million, primarily for the expansion of terminal storage and pipeline connectivity. Declared total dividends of $161.0 million, or $1.28 per share, in the year, representing an 8% increase in total dividends over 2014. Ended the year with $83 million of cash on the balance sheet, $465 million of availability under our $500 million revolving credit facility and a senior debt leverage ratio of 3.2 to 1.0. Operations Successfully commissioned two new tanks at the Hardisty Terminal, resulting in a 900,000 barrel, or 18%, increase in capacity. Commissioned our connectivity enhancement project related to the twinning of the Cold Lake pipeline connection to the Hardisty Terminal. Completed the connectivity enhancement project at the Hardisty Terminal related to the twinning of the Athabasca pipeline system. Commenced construction on an additional 1.8 million barrels of storage capacity at Gibsons’ Hardisty Terminal to support our customers’ growth plans. Completed the integrations of two industrial propane companies, which were acquired in 2014. Health, Safety, Security and Environment Conducted 103 formal Safety Stand Down events throughout the year, engaging senior management and front line staff to discuss ways we can continue to strengthen our health and safety commitment and improve our overall safety performance. Expanded a unique One on One interview process which allows direct conversation between management and their employees regarding HSS&E matters and continues to provide valuable insight for both management and employees involved in the process. Completed 34 internal HSS&E Management System Assessments across our operating units. Continued our focus on emergency response planning and training with 180 emergency scenario drills. Introduced a company-wide Learning Management System which allows for improved employee training tracking and transparency across all functions of the organization. Gibsons | 1 Our Commitment to Creating Long-term Value Trailing Twelve Month Adjusted EBITDA ($ Millions) 500 400 300 200 100 0 0.35 0.30 0.25 0.20 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2011 2012 2013 2014 2015 Quarterly Dividend ($/share) Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2011 2012 2013 2014 2015 Q1 2016 Growth Capital ($ Millions) 2009 2010 2011 2012 2013 2014 2015 0 100 200 300 400 Hardisty Storage Capacity (Millions of Barrels) 2009 2010 2011 2012 2013 2014 2015 0 1 2 3 4 5 6 7 $386MM Adjusted EBITDA in 2015 $161MM Total Dividends Declared in 2015 ($1.28/share) $346MM Growth Capital Expenditures in 2015 6.0MMbbl Storage Capacity at Gibsons’ Hardisty Terminal, Growing to 8.9 MMbbl Message from Stewart Hanlon Stewart Hanlon President & CEO 2015 was a year of highs and lows marked by an oversup- connectivity enhancement projects which serve to connect plied energy market and massive declines in oil prices which our Hardisty Terminal to both the Cold Lake and Athabasca heralded a dramatic slowdown in activity in the energy Pipeline twinning projects. And, we have “shovels in the industry across North America. Without question, it has been ground” for an additional 2.9 million barrels of crude oil a period of uncertainty, volatility and challenge throughout storage at Hardisty that are scheduled to come into service in the global energy industry. 2016 and 2017. These conditions affected Gibsons as well. But, at the same At our Edmonton facility, we progressed the construction of a time, this year confirmed the strength and resiliency of 300,000 barrel tank and an expansion of the rail loading rack. our business. We emerged from 2015 strong and stable, The project is on-track and will contribute to our 2016 cash largely due to our commitment to sound business practices: flow mid-way through the year. maintaining a solid balance sheet, delivering a sustainable dividend, focusing on our long-term strategy and ensuring a In 2015, we also capitalized on opportunity. conservative approach to capital allocation. We acquired two small companies to enhance our logistics In this environment, the toughest I’ve seen in my twenty-five years with the company, Gibsons delivered. We achieved annual adjusted EBITDA of $386 million—a decrease of only 15% from our record 2014 results. capabilities. Littlehawk Enterprises, a Western Canadian business that specializes in hydro excavation, pressure testing and water hauling for the construction and energy industries, and T&R Transport, a crude and water hauling business that services the Bakken and Three Forks plays. We also benefited from a slowdown in construction activities Both acquisitions complement, and are vertically integrated in Alberta as we progressed on our 2015 capital program, with, our existing services. with expenditures primarily directed toward growing our infra- structure at our Hardisty and Edmonton terminals in Alberta. Disciplined Capital Allocation In 2015, we supported our customers’ oil volume growth by committing to long-term storage contracts. We also success- fully commissioned two new tanks on the east side of our Hardisty Terminal, resulting in a capacity increase of 900,000 barrels. We saw the successful completion of our We also saw the successful completion of our new Edmonton facility that was built to consolidate and optimize our Canadian trucking operations. The facility brings the business closer to our fleet operations, while minimizing waste and reducing costs. Longer-term, the move allows Gibsons to use the valuable strategic land vacated by the trucking group for future tank construction at our Edmonton terminal. Gibsons | 3 “As an integrated midstream company, we are well-positioned to weather oil price volatility through the long-term infrastructure contracts on our terminal assets.” Protecting our Balance Sheet and Ensuring Dividend Sustainability Clearly, when the price of oil drops as dramatically as it has, it’s necessary to look at things differently and to take action accordingly. In 2014, we made adjustments and continued to do so throughout 2015. We progressed the rebalancing of our portfolio towards fee-based infrastructure; we realigned our cost structures; and we took a disciplined and flexible approach to capital allocation. As an integrated midstream company, we are well-positioned to weather oil price volatility through the long-term infra- structure contracts on our terminal assets. Our 2015 capital growth program, focused on our terminals and pipelines business, is largely backed by long-term, take-or-pay con- tracts that average 10 years or more with large and strong customers. This shields an ever-growing proportion of our cash flow from fluctuations in oil prices, providing increased predictability and stability for our shareholders and increased support for our dividend. Making Communities Stronger We take pride in knowing that our community contri- butions serve community needs, harness our employees’ interests and align with our business goals. In 2015, we invested in our communities through the following efforts: Supporting the new Moose Jaw Hospital with state- of-the-art medical equipment. We donated $500,000 toward specialized x-ray equipment to diagnose and evaluate many conditions. Investing in a wide range of emergency service programs in our operating communities. Contributing over $320,000 (employee donations plus Gibsons’ match) to organizations, like the United Way and St. Jude’s Hospital, through our employee giving program. Partnering with business, government and Texas A&M University to support the Produced Water Irrigation Project in Texas. Gibsons provided water storage for this unique cotton-growing project that uses recycled produced water from oil and natural gas activity in the Delaware Basin to irrigate a cotton crop. 4 | Gibsons Gibsons’ annual truck-pull event kicks off our 2015 employee giving campaign We also looked at the impact of the changing environment through our customers’ eyes. That perspective evolved into a doubling-down of our commitment to outstanding customer service and operational excellence. Now, more than ever, we need to ensure that we react quickly to changing market conditions and customer needs, while working efficiently and collaboratively as one strong team to solve our customer’s challenges. To do this, we must continue to adjust our cost structures to ensure that our services remain cost-competitive. Most importantly, we must continue to operate safely and responsibly. To give credit, where credit is due, our success would not be possible without the efforts of our people—the women and men who work with our customers every day to provide innovative midstream solutions. They have risen to the challenge this year and I would like to thank them for that. Their efforts helped us end 2015 with solid financial results and a strong position for the future. I would also like to thank our Board of Directors. Their guidance and governance have been invaluable over the past year. Our Strategic Priorities Strive for leadership in HSS&E and operational performance Provide a leading integrated portfolio of services Be responsive and adaptable to a continuously changing business environment But to emerge from this cycle as a more valuable company also requires a commitment to execute on our long-term strategy: to provide midstream solutions that capitalize on growth trends in North American oil and liquids production. Be a superb business partner by providing innovative, cost-effective solutions for all of our stakeholders Focused on Our Long-term Strategy In 2015, we had several senior executives announce their retirements. Rodney Bantle, Senior Vice President of Truck Transportation decided to retire after 20 years of service and Warren Osatiuk, Senior Vice President of Refining announced his retirement after 15 years with Gibsons. I want to thank them for their dedication and leadership. And last, but by no means least, after 23 years with Gibsons, Don Fowlis, Chief Financial Officer will retire in 2016. Don is one of the longest-serving members of our senior management team and his leadership has played a major role in shaping our company into what it is today. I wish them all well and look forward to working with the newest member of our senior executive team, Sean Brown, who joined Gibsons as Chief Financial Officer early in 2016. Ensure our workforce is highly engaged and customer solution focused Be a socially responsible organization that is valued by the communities in which we do business Endeavor to be an outstanding investment for our shareholders Gibsons | 5 Looking ahead to 2016 and 2017, we see strong growth in We believe in the value of our North American footprint. our Terminals and Pipelines segment where we will direct the We remain competitive, and healthy, in those basins where majority of our capital at a range of $200 and $300 million activity levels are currently depressed, but where we expect each year. For 2016, the $200 million low-end in growth cap- to see a rebound in shale production when we see improve- ital spending primarily represents projects currently underway ment in crude oil pricing. To that end, we continue to review within our Terminals and Pipelines segment, the majority of and address costs to ensure that we are well-positioned to be which are underpinned by long-term take-or-pay contracts. successful this year and for years to come. The $300 million high-end incorporates an additional $100 million for projects that are either currently being negotiated or are under consideration. We expect to have greater visibility to the remaining, uncommitted capital spending as we progress through 2016. “We remain confident in the near, and medium term, that oil sands production will continue to grow given the resiliency of our customers’ project development plans and their financial strength.” 2015 was a tough year for our customers and we expect 2016 may be even tougher. While we are cautious and conservative about conditions over the near term, we remain positive about the prospects for our business. Our consis- tent financial strength, sound management and diversified business mix have enabled us to deliver value to both our customers and shareholders, and we believe that they will continue to do so well into the future. For investors looking to 2016 and beyond, there are many reasons why Gibsons represents a compelling investment: we continue to strengthen the quality of our cashflows; we have a strong balance sheet and liquidity to fund our growth capital program; and we offer an attractive and sustainable total shareholder return. My thanks go out to all investors who continue to support our efforts. We’ve been in the midstream business for more than six decades. And while we’ve seen cycles in our industry before, it’s difficult to predict how this pricing cycle will evolve. We do know that conditions will improve at some point in the future. I’m proud of what we’ve accomplished in 2015, and I am These projects are underpinned by highly visible production confident that the steps we have taken will enable us to rise to from specific oil sands projects that are currently under de- the challenges and position us for an exciting future. velopment or in a production ramp-up phase. Despite today’s challenging oil price environment, our key oil sands customers take a long-term view on oil prices due to the nature of their reserve profile, and we remain confident in the near, and medium term, that oil sands production will continue to grow given the resiliency of our customers’ project development plans and their financial strength. In the interim, they are Stewart Hanlon President & CEO realizing material operating and capital cost efficiencies in the current deflationary environment, just as we are at Gibsons. 6 | Gibsons LEGEND Gibsons’ locations Major Oil Export Pipelines Selected Oil Gathering Pipelines Major North American Oil Plays Our Strategic Footprint Gibsons’ strategic footprint spans some of the most hydrocarbon-rich basins in North America. Our diversified business model serves customers across Western Canada and in the oil-rich regions of the United States. Our significant presence in these key basins provides our customers with flexible midstream solutions while giving us a competitive advantage. Gibsons | 7 Gibson Energy Inc. TSX: GEI 2015 Year End Report Management’s Discussion and Analysis The following Management’s Discussion and Analysis (“MD&A”) was prepared and approved by the Company’s Board of Directors as of March 1, 2016 and should be read in conjunction with the audited consolidated financial statements and related notes of Gibson Energy Inc. (“Gibsons” or the “Company”) for the years ended December 31, 2015 and 2014, which were prepared under International Financial Reporting Standards (“IFRS”) as set out in the Handbook of the Canadian Institute of Chartered Professional Accountants and as issued by the International Accounting Standards Board (IASB). Amounts are stated in Canadian dollars unless otherwise noted. This MD&A contains forward-looking statements and non-GAAP measures and readers are cautioned that this MD&A should be read in conjunction with the Company’s disclosure under “Forward-Looking Statements” and “Non-GAAP Financial Measures” included at the end of this MD&A. Non-GAAP measures contained in this MD&A include EBITDA, Adjusted EBITDA, Pro Forma Adjusted EBITDA, and distributable cash flow. EXECUTIVE OVERVIEW Gibsons is a large independent integrated service provider to the oil and gas industry with operations across major producing regions throughout North America. Gibsons is engaged in the movement, storage, blending, processing, marketing and distribution of crude oil, condensate, natural gas liquids (“NGLs”), water, oilfield waste, and refined products. The Company transports energy products by utilizing its integrated network of terminals, pipelines, storage tanks, and trucks located throughout western Canada and through its significant truck transportation and injection station network in the United States. The Company also provides emulsion treating, water disposal and oilfield waste management services through its network of processing, recovery and disposal facilities in Canada and the United States and is the second largest industrial propane distribution company in Canada. The Company’s integrated operations allow it to participate across the full midstream energy value chain, from the hydrocarbon producing regions in Canada and the United States, through the Company’s strategically located terminals in Hardisty and Edmonton, Alberta and injection stations and terminals in the United States, to the end user or refineries of North America. Gibsons has provided market access to leading oil and gas industry participants in western Canada for over 60 years. The Company has grown by diversifying its service offerings to meet customers’ needs and by expanding geographically to provide its service offerings to key hydrocarbon producing regions throughout the United States. The Company’s integrated segments can be broken down as follows: (1) Terminals and Pipelines, (2) Environmental Services, (3) Truck Transportation, (4) Propane and NGL Marketing and Distribution, (5) Processing and Wellsite Fluids and (6) Marketing. The Company believes its competitive advantage is driven by its geographic presence in the majority of hydrocarbon-rich basins in North America, its footholds in strategic market hubs, its ability to capture value throughout the midstream energy value chain, its diversified, integrated, synergistic service offerings, its ability to source and successfully execute internal growth projects, its proven track record of sourcing, executing and successfully integrating business acquisitions, its leading health, safety, security and environment record, its experienced management team with a proven history of successful operations and strong industry reputation and its conservative risk management policies. The Company is continuously focused on improving its operations across all segments by utilizing the Company’s integrated asset base to capture inter segment synergies and to expand the Company’s network of assets, and to increase the Company’s margins by providing additional value added services along the midstream energy value chain. 1 8 Gibson Energy Inc. TSX: GEI Highlights 2015 Year End Report The key highlights for the year ended December 31, 2015 were as follows: • Despite challenging industry conditions, overall segment profit only decreased by 14% to $418.8 million in the year ended December 31, 2015 compared to $487.1 million in the year ended December 31, 2014; • • Segment profit for the Terminal and Pipelines segment increased by 23% in the year ended December 31, 2015, compared to the year ended December 31, 2014; Pro Forma Adjusted EBITDA for the year ended December 31, 2015 was $389.9 million, down 15% from the year ended December 31, 2014; • Adjusted EBITDA for the year ended December 31, 2015 decreased by 15% to $386.3 million compared to $453.1 million in the year ended December 31, 2014; • Revenue decreased by 35% in the year ended December 31, 2015 compared to the year ended December 31, 2014. The decrease was primarily driven by lower product revenue as a result of lower commodity prices and also lower service revenues that exhibited a reduction of 20% in the year ended December 31, 2015; • During the year ended December 31, 2015, management reduced costs within the Company resulting in lower overall headcount of approximately 15%, after adjusting for the impact of acquisitions. Management is committed to cost control and will continue to proactively work to align costs in light of overall economic conditions; • The Company declared a dividend of $0.32 per common share in the fourth quarter of 2015. Total dividends declared were $161.0 million in the year ended December 31, 2015, representing an 8% increase over the $148.6 million declared in the year ended December 31, 2014; • On August 6, 2015, the Company suspended, until further notice, Gibsons’ Dividend Reinvestment Plan (“DRIP”) and Stock Dividend Program (“SDP”) as the Company believes that the continuation of these programs would result in unwarranted dilution of its shareholders; • For the year ended December 31, 2015, distributable cash flow was $219.5 million resulting in a gross dividend payout ratio of 73% and a net dividend payout ratio of 64% based on declared dividends paid in cash; • Capital expenditures were $392.6 million for the year ended December 31, 2015, of which $345.8 million related to growth capital. Growth capital expenditures are primarily related to the construction of tankage and pipeline connections at the Company’s facilities, in particular at the Hardisty and Edmonton terminals. At December 31, 2015, the Company had capital expenditures totaling $290.6 million included in work in progress; • In February and March 2015, the Company successfully commissioned two new tanks on the east side of the Hardisty Terminal resulting in a 900,000 barrel increase in capacity. In addition, the Company successfully commissioned its connectivity enhancement project related to the twinning of the Cold Lake pipeline connection to the Hardisty Terminal; • On April 13, 2015, the Company announced its intention to construct 900,000 barrels of additional crude oil storage capacity at the Hardisty Terminal, comprised of a 400,000 barrel storage tank and a 500,000 barrel storage tank, that are expected to be commissioned in mid-2017; • On April 27, 2015, the Company announced that it will build and operate an additional 900,000 barrels of storage capacity at Gibsons’ Hardisty West Terminal. The expansion is intended to support Suncor Energy’s (“Suncor”) growth plans. The Hardisty West Terminal was developed in 2011 as a joint venture with Suncor involving the construction of four storage tanks totaling 1.2 million barrels. The terminal is an important part of Suncor’s logistics infrastructure that is designed to facilitate the transportation of its crude oil production and manage the quality of its proprietary commodity streams. The expansion of the Hardisty West Terminal will support growth in Suncor’s oil sands operations and increase total storage capacity at the Hardisty West Terminal by 75% to 2.1 million barrels. The new storage capacity is expected to be in-service by the third quarter of 2017; 2 9 Gibson Energy Inc. TSX: GEI 2015 Year End Report • On July 1, 2015, the Company acquired all of the issued and outstanding ownership interests of Ross Eriksmoen, Inc., GWCC, LLC, and Frontier Ventures, LLC (collectively doing business as “T&R Transport”) for approximately $34.9 million. T&R transports water and oil field waste and provides related transportation services to customers in the oil, gas, and petrochemical industry throughout the Bakken region in North Dakota; • On December 1, 2015, the Company successfully commissioned its connectivity enhancement project related to the twinning of the Athabasca pipeline connection to the Hardisty Terminal; and On March 1, 2016, the Board declared a quarterly dividend of $0.33 per common share for the three months ended March 31, 2016 on its outstanding common shares. The dividend is payable on April 15, 2016 to shareholders of record at the close of business on March 31, 2016. Trends affecting the Company’s business Gibsons periodically evaluates its long-range strategic plan in order to assess the implications of emerging industry trends, including organic growth and potential acquisition opportunities, in the energy midstream sector. Some of the key industry trends that will affect Gibson’s business and prospects over the short-term (2 years or less) and the medium to long-term (two to five years) are: • Increased oil production in North America over the last number of years has increased demand for many facets of the midstream energy value chain including storage, transportation, distribution, processing, refining and environmental and production services, all of which are activities the Company participates in. However, the recent decline in crude oil prices has caused many North American oil producers, who form a significant part of Gibsons’ customer base, to lower their near term capital spending plans. This is expected to negatively impact North American production over the short-term. Over the medium to long-term, as crude oil supply and demand rebalances and crude oil prices realign with global cost structures, the Company anticipates a return to increased activity and production levels and a continued demand for midstream value chain assets; • Over the medium to long-term, the growing supply of Canadian heavy crude oil from the oil sands will result in an increasing demand for diluent in the Western Canada Sedimentary Basin (the “WCSB”). This should result in increased movements of diluent through the Edmonton and Alberta heartland area, pipeline and terminal infrastructure and may generate increased opportunities for Gibsons’ services; • Crude oil pricing, location and quality disconnects, combined with a shortage of pipeline takeaway capacity from the WCSB, have created demand for crude by rail as a solution for export market access. While the recent decline in crude oil prices has negatively impacted the economics of this transportation alternative, the Company expects that if oil prices rise or export pipeline access becomes a barrier to reach markets, opportunities for the Company to increase its service offering to include more crude oil rail movements will arise; • The Keystone XL and Energy East pipeline projects are crucial initiatives that should help provide the growing supply of Canadian crude oil access to the large refining markets in the United States, Eastern Canada and other foreign markets. The recent denial of presidential permit to Keystone XL by the U.S. Department of State in November, 2015, as well as continued delays to the approval of Energy East, the starting point for both pipelines which would be adjacent to the Company’s Hardisty Terminal, defers the prospects of increased opportunities for the Company’s terminalling services that are anticipated from these projects, but brings to fore the likelihood of an increased usage of the Company’s crude oil rail transportation infrastructure, in the near term; • Enbridge’s expansion of its Line 67 that went into operation in July 2015 and the replacement of its Line 3 will help the growing supply of Canadian crude oil gain access to the largest refining markets in the United States and Eastern Canada. The replacement of Line 3, if approved, could provide incremental capacity by 2018. Gibsons’ Hardisty Terminal is connected to deliver to both of these pipelines and these expansions should provide increased opportunities for the Company’s terminalling services at Hardisty; • When completed, Enbridge’s twinning of the southern section of its Athabasca pipeline which should provide for incremental volumes into the Gibson Hardisty terminal and increased opportunities for the Company’s terminalling services at Hardisty; • Price fluctuations between crude oil types can create incremental margin opportunities in multiple areas of the Company’s operations. While current price differentials have compressed in response to the recent decline in benchmark crude oil prices, the Company remains attentive to opportunities as this trend continues to evolve; • The growing supply of propane, butane and other natural gas liquids in North America related to higher liquids rich natural gas development has resulted in declining propane and butane prices in North America. This may result in increased volumes and potential margin improvement related to the Propane and NGL Marketing and Distribution segment; 3 10 Gibson Energy Inc. TSX: GEI 2015 Year End Report • The recent reduction in the value of the Canadian dollar relative to the U.S. dollar highlights added foreign currency volatility which could result in both positive and negative impacts for the Company. A weakening Canadian dollar should result in increased profit contributions from the Company’s U.S. business. In addition, it could result in increased revenues and cost of sales for the Company’s Canadian operations that transact in U.S. dollars. Furthermore, a weakening Canadian dollar will result in an increase in foreign exchange losses with respect to the Company’s U.S. dollar denominated debt and an increase in foreign exchange gains with respect to the Company’s U.S. denominated assets; • The lifting of the U.S. crude oil export ban in December, 2015, may further advance demand for the utilization of midstream assets to enable an increasing volume of crude oil to access tidewater export locations. Gibsons’ U.S. presence and extensive footprint offer an important growth platform and that should prove advantageous to the Company’s North America-wide core midstream infrastructure development plan; • The weak oil price and capital market conditions are expected to adversely impact many energy industry participants in North America, some of which are either customers or competitors. In the ensuing period, the Company anticipates increasing credit risk within certain segments of its customer base. Offsetting this, the Company expects a moderation in valuation expectations for midstream asset and corporate transactions; • Over the medium to long-term the Company expects new technology for drilling and well completion methodology to be deployed towards conventional and unconventional production within the industry which should further enhance the viability and resilience of the specific basins Gibsons has strategically chosen to operate in; and • Over the medium to long-term, the Company expects that increased oil and natural gas production in North America should also translate to a significant increase in produced water and other oilfield waste. This increase in oilfield waste, together with increased regulatory scrutiny, should increase demand for the Company’s Environmental Services solutions. The Company believes the collective impact of these trends and developments, many of which are beyond the Company’s control, will result in an increasingly volatile business environment and a crude oil market that is subject to more frequent short-term swings in market prices and grade differentials and shifts in market structure. Over the short-term, the Company anticipates that lower crude oil prices may create a challenging environment for some of the Company’s services, however, over the medium to long-term the Company believes that both the demand for its growing portfolio of high quality infrastructure assets, and the value proposition of its integrated midstream solutions, should remain strong. 4 11 Gibson Energy Inc. TSX: GEI Capital expenditures 2015 Year End Report The following table summarizes growth capital and upgrade and replacement capital (in thousands): 2015 Growth capital .............................................................................................................................. $ 345,791 Upgrade and replacement capital .................................................................................................. 46,775 $ 392,566 2014 $ 352,487 59,035 $ 411,522 Total expenditures for growth and upgrade and replacement capital were $392.6 million and $411.5 million in the year ended December 31, 2015 and 2014, respectively. In the year ended December 31, 2015 and 2014, $376.5 million and $391.2 million, respectively, were included as additions to property, plant and equipment and $16.1 million and $20.3 million, respectively, were included as additions to intangible assets. Year ended December 31, Growth capital The following table summarizes the Company’s growth capital by segment (in thousands): 2015 Terminals and Pipelines(1) ............................................................................................................ $ 243,057 Environmental Services(2) ............................................................................................................ 45,935 Truck Transportation(3) ................................................................................................................ 27,755 Propane and NGL Marketing and Distribution (4) ........................................................................ 2,032 Processing and Wellsite Fluids(5) ................................................................................................. 18,471 Other (6) ........................................................................................................................................ 8,541 Total............................................................................................................................................. $ 345,791 2014 $ 220,916 68,430 22,164 12,131 13,979 14,867 352,487 $ Year ended December 31, (1) Expenditures in the year ended December 31, 2015 and 2014 relate to a number of construction and expansion projects including the construction of additional tanks and related infrastructure at the Hardisty and Edmonton terminals. Expenditures in the year ended December 31, 2015 also include the purchase of small terminals in the United States. Expenditures in the year ended December 31, 2014 includes the related infrastructure to connect the unit rail facility to the Hardisty Terminal. (2) Expenditures in the year ended December 31, 2015 and 2014 relate to the expansion of existing and construction of new emulsion and waste treatment and salt water disposal facilities in both Canada and the United States and also the addition of equipment and rolling stock. (3) Expenditures in the year ended December 31, 2015 and 2014 largely represent the costs for constructing a new office and maintenance facility in Edmonton, Alberta, including the purchase of land in the Edmonton area. (4) Expenditures in the year ended December 31, 2015 mainly represent the addition of tanks and generators in key market areas. Expenditures in the year ended December 31, 2014 mainly represent the addition of trucks, tanks and generators in key market areas and the expansion of rail infrastructure at a Company facility. (5) Expenditures in the year ended December 31, 2015 largely relate to increasing truck and rail capabilities at the facility in Moose Jaw. Expenditures in the year ended December 31, 2014 largely relates to increasing throughput capacity and rail capabilities at the facility in Moose Jaw. (6) Expenditures in the year ended December 31, 2015 mainly relate to costs associated with the Company’s information and operational systems. Expenditures in the year ended December 31, 2014 mainly includes the purchase of land in Strathcona County in Alberta’s Industrial Heartland as well as equipment and software related to information and operational systems. Upgrade and replacement capital Upgrade and replacement capital includes improvement projects that extend the physical life of an asset, while replacement capital includes purchases that replace existing assets as necessary to maintain current service levels or replace assets that no longer have a useful economic life. Upgrade and replacement capital decreased 21% in the year ended December 31, 2015 compared to the year ended December 31, 2014 primarily due to a reduction in spending relating to the replacement of the truck and trailer fleet within the Truck Transportation segment. 5 12 Gibson Energy Inc. TSX: GEI Acquisitions 2015 Year End Report On February 1, 2015, the Company acquired all of the issued and outstanding shares of Littlehawk Enterprises Ltd. (“Littlehawk”) for approximately $11.5 million. Littlehawk operates hydrovac units and specializes in hydro excavation, pressure testing and water hauling for the construction and energy industries. These services can be internalized by the Company and also offered as complimentary services to the Company’s environmental services offerings. On July 1, 2015, the Company acquired all of the issued and outstanding ownership interests of T&R Transport for approximately $34.9 million. T&R Transport transports water and oil field waste and provides related transportation services to customers in the oil, gas, and petrochemical industry throughout the Bakken region in North Dakota. These services complete an integrated business model centered around the Company’s new Bakken Process Recovery Disposal and Landfill commissioned in the fourth quarter of 2014. Seasonality The Company believes that seasonality does not have a material impact on its combined operations and segments. However, certain of the Company’s individual segments are impacted by seasonality. Generally, the Company’s second quarter results are impacted by road bans and other restrictions which impact overall activity levels in the WCSB and the northern United States, and therefore negatively impact the Company’s trucking, propane and wellsite fluids businesses in Canada and certain operations within Environmental Services in Canada and the United States. Within the Company’s Processing and Wellsite Fluids segment, certain products are impacted by seasonality. Canadian road asphalt activity is affected by the impact of weather conditions on road construction. Road asphalt demand peaks during the summer months when most of the road construction activity in Canada takes place. In the off peak demand months for road asphalt, the demand for roofing flux continues. Demand for wellsite fluids is dependent on overall well drilling and completion activities, with activity normally the busiest in the winter months. As a result, the Company’s Processing and Wellsite Fluids segment’s sales of road asphalt peak in the summer and sales of wellsite fluids peak in the winter. The Company’s Propane and NGL Marketing and Distribution segment is characterized by a high degree of seasonality driven by the impact of weather on the need for heating and the amount of propane required to produce power for oil and gas related applications. Therefore, volumes are low during the summer months relative to the winter months. Operating profits are also considerably lower during the summer months. Most of the annual segment profit is earned from October to March each year. Within the Company’s Environmental Services segment, certain services and geographical regions are impacted by seasonality including the impact of weather and daylight hours. Due to exposure to weather, activity is generally the lowest in the winter months and shorter daylight hours during the winter months also result in lower overall service activity. SELECTED ANNUAL FINANCIAL MEASURES Year ended December 31, 2015 2014 2013 Revenue ....................................................................................................... Net income (loss) ........................................................................................ $ 5,591,982 (in thousands except per share amounts) $ 8,573,529 91,941 $ 6,940,669 103,816 (280,656) Earnings (loss) per share Basic ........................................................................................................... Diluted........................................................................................................ $ (2.23) (2.23) $ 0.74 0.73 $ 0.86 0.84 Dividends declared per common share ........................................................ $ 1.28 $ 1.20 $ 1.10 Total assets ................................................................................................... Total non-current liabilities .......................................................................... 2015 $ 3,282,986 1,606,425 As at December 31, 2014 $ 3,573,029 1,507,876 2013 $ 3,049,382 1,058,582 6 13 Gibson Energy Inc. TSX: GEI 2015 Year End Report SEGMENTED RESULTS OF OPERATIONS The Company’s senior management evaluates segment performance based on a variety of measures depending on the particular segment being evaluated, including profit, volumes, operating expenses, profit per barrel and upgrade and replacement capital requirements. The Company defines segment profit as revenues less cost of sales (excluding depreciation and amortization expense) and operating expenses. Revenues presented by segment in the table below include inter-segment revenue, as this is considered more indicative of the level of each segment’s activity. Profit by segments excludes depreciation, amortization, accretion, impairment charges, stock based compensation and corporate expenses, as senior management looks at each period’s earnings before corporate expenses and non-cash items such as depreciation, amortization and stock based compensation, as one of the Company’s important measures of segment performance. The following is a discussion of the Company’s segmented results of operations for the year ended December 31, 2015 and 2014 and the following table sets forth revenue and profit by segment for those periods: Year ended December 31, 2015 (in thousands) 2014 Segment revenue Terminals and Pipelines ............................................................................................................... $ 184,179 Environmental Services ................................................................................................................ 334,449 445,969 Truck Transportation .................................................................................................................... 924,111 Propane and NGL Marketing and Distribution ............................................................................. 395,787 Processing and Wellsite Fluids ..................................................................................................... Marketing ...................................................................................................................................... 4,330,978 Total segment revenue .................................................................................................................. 6,615,473 Revenue—inter-segmental ............................................................................................................ (1,023,491) Total revenue—external ................................................................................................................ 5,591,982 Segment profit Terminals and Pipelines ................................................................................................................ Environmental Services ................................................................................................................ Truck Transportation .................................................................................................................... Propane and NGL Marketing and Distribution ............................................................................. Processing and Wellsite Fluids ..................................................................................................... Marketing ...................................................................................................................................... Total segment profit ...................................................................................................................... General and administrative ........................................................................................................... Depreciation .................................................................................................................................. Amortization ................................................................................................................................. Impairment of goodwill ................................................................................................................ Stock based compensation ............................................................................................................ Foreign exchange loss ................................................................................................................... Net interest expense ...................................................................................................................... Income (loss) before income tax ................................................................................................... Income tax provision (recovery) ................................................................................................... 142,796 57,257 52,034 94,192 37,207 35,271 418,757 39,569 195,438 87,554 175,959 20,379 108,180 79,022 (287,344) (6,688) $ 157,969 431,153 557,735 1,352,741 667,793 7,005,045 10,172,436 (1,598,907) 8,573,529 116,524 100,273 83,178 70,271 51,675 65,180 487,101 37,385 154,934 54,991 - 13,977 31,519 66,766 127,529 35,588 91,941 Net income (loss) .......................................................................................................................... $ (280,656) $ The exclusion of depreciation and amortization expense could be viewed as limiting the usefulness of segment profit as a performance measure because it does not take into account in current periods the implied reduction in value of the Company’s capital assets (such as rolling stock, tanks, pipelines, plant and equipment and disposal wells) caused by use, aging and wear and tear. Repair and maintenance expenditures that do not extend the useful life, improve the efficiency or expand the operating capacity of the asset are charged to operating expense as incurred. The Company’s segment analysis involves an element of judgment relating to the allocations between segments. Inter-segment sales, cost of sales and operating expenses are eliminated on consolidation. Transactions between segments and within segments are valued at prevailing market rates. The Company believes that the estimates with respect to these allocations and rates are reasonable. 7 14 Gibson Energy Inc. TSX: GEI Terminals and Pipelines 2015 Year End Report The following tables set forth the operating results from the Company’s Terminals and Pipelines segment: Volumes (barrels in thousands) Terminals Year ended December 31, 2015 2014 Hardisty Terminal ..................................................................................................................... Edmonton Terminal ................................................................................................................... Injection stations ....................................................................................................................... Total terminals .............................................................................................................................. 208,292 14,510 40,511 263,313 184,519 16,822 47,154 248,495 Year ended December 31, 2015 (in thousands) 2014 Revenues ....................................................................................................................................... $ 184,179 Operating expenses and other ....................................................................................................... 41,383 Segment profit............................................................................................................................... $ 142,796 $ 157,969 41,445 $ 116,524 Volumes, revenues and cost of sales. Hardisty Terminal volumes increased by 13% in the year ended December 31, 2015 compared to the year ended December 31, 2014, as a result of increased throughput volumes from customers with dedicated tank usage partially offset by lower volumes to the crude oil unit train loading facility located close to the Hardisty Terminal. Revenue at the Hardisty Terminal increased by $29.4 million in the year ended December 31, 2015 compared to the year ended December 31, 2014. The increase was largely driven by the increase in revenue from customers with dedicated tank usage that are subject to fixed fee arrangements and additional revenue from the commissioning of the connectivity enhancement projects related to the twinning of the Cold Lake and Athabasca pipeline connections to the Hardisty Terminal. Also, the increase in revenue was due to the additional revenue from the Company’s share of a full year of operations at the crude oil unit train rail loading facility compared to a half year of operations in 2014, with these customers being subject to minimum volume charges. The increase in revenue and volumes from customers with dedicated tank usage that are subject to fixed monthly rental fees, primarily relate to the impact of the four new tanks at the east side of the Hardisty Terminal that were commissioned in the fourth quarter of 2014 and the first quarter of 2015. Edmonton Terminal volumes decreased by 14% in the year ended December 31, 2015 compared to the year ended December 31, 2014 mainly due to a decrease in diesel receipt volumes through the terminal from a customer that is subject to minimum volume charges, and the impact of tanks temporarily being taken out of service to facilitate the current expansion of the facility that is expected to be completed in late 2016. Revenue decreased by $1.4 million in the year ended December 31, 2015 compared to the year ended December 31, 2014 primarily due to the impact of the tanks being temporarily being taken out of service as revenue on other volumes remained relatively stable as they are subject to minimum volume charges. Injection station volumes decreased by 14% in the year ended December 31, 2015 compared to the year ended December 31, 2014 due to a decrease in activity with a major customer. As a result, revenue decreased by $0.4 million in the year ended December 31, 2015 compared to the year ended December 31, 2014. Operating expenses and other. Overall operating expenses and other was consistent in the year ended December 31, 2015 compared to the year ended December 31, 2014. Segment profit. Segment profit in the year ended December 31, 2015 increased by $26.3 million, or 23%, compared to the year ended December 31, 2014. The increase was primarily due to the impact of the crude oil unit train rail loading facility and the additional revenues from the commissioning of four new dedicated tanks in late 2014 and early 2015 and also new pipeline connections completed during the year. 8 15 Gibson Energy Inc. TSX: GEI Environmental Services 2015 Year End Report The following tables set forth operating results from the Company’s Environmental Services segment: Year ended December 31, 2015 (in thousands) 2014 Revenues Environmental services and fluid handling ............................................................................... $ 261,820 39,087 Production services ................................................................................................................... 33,542 Other services ........................................................................................................................... 334,449 Total revenues ............................................................................................................................... Cost of sales .................................................................................................................................. 214,286 Operating expenses and other ....................................................................................................... 62,906 Segment profit............................................................................................................................... $ 57,257 $ 312,806 66,344 52,003 431,153 256,990 73,890 $ 100,273 Revenues and cost of sales. Environmental services and fluid handling revenues decreased by 16% in the year ended December 31, 2015 compared to the year ended December 31, 2014. The decrease was primarily driven by the reduction in oilfield drilling and completion activity in the United States and Canada resulting in a reduction in the fluid handling services business in the United States and a decrease in volumes processed at the Canadian environmental processing facilities, partially offset by additional revenues from the acquisition of T&R Transport. Production services revenue decreased by 41% in the year ended December 31, 2015 as compared to the year ended December 31, 2014. The decrease was primarily due to the impact of lower overall activity in the Bakken and Eagleford regions of the United States. Other services revenue decreased by 35% in the year ended December 31, 2015 as compared to the year ended December 31, 2014. The decrease was primarily due to a reduction in exploration support services revenue that was due to a reduction in overall seismic activity compared to the prior year. The overall decrease in revenue was partially offset by the favorable impact of the change in foreign exchange rates on translating revenue denominated in U.S. dollars from the Company’s United States operations. Cost of sales decreased by 17% in the year ended December 31, 2015 as compared to the year ended December 31, 2014. The decrease was primarily due to the decline in total revenue of 22% in the year, with margins showing a slight decline due to the impact of lower rates. The decrease in cost of sales was partially offset by the unfavorable impact of translating costs denominated in U.S. dollars. Operating expenses and other. Operating costs decreased by $10.9 million in the year ended December 31, 2015 as compared to the year ended December 31, 2014, mainly due to a decrease in payroll related and administrative costs, and a lower bad debt provision of $1.2 million compared to the prior year. These declines were partially offset by additional operating expenses from the T&R Transport acquisition and the unfavorable impact of translating operating costs denominated in U.S. dollars. Segment profit. Segment profit decreased by $43.0 million in the year ended December 31, 2015 as compared to the year ended December 31, 2014, largely due to the impact of the decline in revenue, offset in part by a decrease in overall operating expenses. 9 16 Gibson Energy Inc. TSX: GEI Truck Transportation 2015 Year End Report The following tables set forth the operating results from the Company’s Truck Transportation segment: Volumes (barrels in thousands) 2015 Barrels hauled ................................................................................................................................ 111,525 2014 131,998 Year ended December 31, Year ended December 31, 2015 (in thousands) 2014 Revenues ........................................................................................................................................ $ 445,969 Cost of sales ................................................................................................................................... 293,839 152,130 100,096 52,034 Operating expenses and other ........................................................................................................ Segment profit................................................................................................................................ $ $ 557,735 376,685 181,050 97,872 83,178 $ Volumes, revenues and cost of sales. For the year ended December 31, 2015, barrels hauled decreased by 16% compared to the year ended December 31, 2014. The decrease was mainly due to the impact of lower crude oil prices resulting in lower production and drilling activity in the Company’s service areas. However, this was partially offset by strong demand for sulphur hauling during the year. Revenue decreased by 20% in the year ended December 31, 2015 as compared to the year ended December 31, 2014 due mainly to the impact of the lower overall volume, but also the impact of lower hauling rates in certain of the Company areas. Cost of sales is primarily comprised of payments to owner-operators and lease operators. Cost of sales decreased by 22% in the year ended December 31, 2015 compared to the year ended December 31, 2014 due to the overall decrease in volumes and overall activity levels. Operating expenses and other. Overall operating expenses increased by $2.2 million, or 2%, in the year ended December 31, 2015 compared to the year ended December 31, 2014, mainly due to the additional costs from the acquisition of Littlehawk, increased owner-operator operational costs in the U.S. operations and the unfavorable impact of translating operating costs denominated in U.S. dollars, partially offset by lower payroll related costs. Segment profit. Segment profit decreased by $31.1 million, or 37%, in the year ended December 31, 2015 compared to the year ended December 31, 2014, primarily due to lower hauling activity and an increase in operating costs. 10 17 Gibson Energy Inc. TSX: GEI 2015 Year End Report Propane and NGL Marketing and Distribution The following tables set forth operating results from the Company’s Propane and NGL Marketing and Distribution segment: Volumes Sales volumes—Industrial (litres in thousands) Oil and gas .................................................................................................................................. Commercial ................................................................................................................................ Automotive ................................................................................................................................. Residential .................................................................................................................................. Other ........................................................................................................................................... Year ended December 31, 2015 2014 248,970 157,926 21,166 41,184 40,002 509,248 250,173 126,448 20,786 39,292 34,899 471,598 Sales volumes—wholesale (barrels in thousands) Propane ....................................................................................................................................... 3,807 3,129 Other NGLs Butane ..................................................................................................................................... Condensate .............................................................................................................................. U.S. division ............................................................................................................................ Revenues Industrial 4,650 3,168 5,131 12,949 2,986 3,864 3,220 10,070 Year ended December 31, 2015 (in thousands) 2014 Propane................................................................................................................................... Other ...................................................................................................................................... Total industrial ........................................................................................................................... Wholesale Propane................................................................................................................................... Other NGLs ............................................................................................................................ Total wholesale .......................................................................................................................... Total revenues ............................................................................................................................... Cost of sales .................................................................................................................................. Operating expenses and other ........................................................................................................ Segment profit ............................................................................................................................... $ 157,099 29,820 186,919 $ 248,776 29,721 278,497 117,182 620,010 737,192 924,111 745,093 84,826 94,192 228,771 845,473 1,074,244 1,352,741 1,206,361 76,109 70,271 $ $ Volumes, revenues and cost of sales. Industrial volumes increased by 8% in the year ended December 31, 2015 compared to the year ended December 31, 2014 as a result of higher commercial, automotive, residential, and other volumes which were created by an increase in volumes from the Cal-Gas Inc. (‘Cal-Gas’) and Stittco Energy Limited (‘Stittco’) acquisitions completed during the prior year. However, despite the increase, overall volumes were negatively impacted by warmer weather in Western Canada, earlier spring break up in the year and lower overall oilpatch activity. Despite the increase in volumes, industrial propane revenues decreased by 37% in the year ended December 31, 2015 as compared to the year ended December 31, 2014, as a result of the significant decline in overall rack price of propane. Other revenue relates to equipment sales, service labour and rental and delivery charges. Other revenue was consistent in the year ended December 31, 2015 compared to the year ended December 31, 2014. Wholesale propane volumes increased by 22% in the year ended December 31, 2015 compared to the year ended December 31, 2014. The increase in volumes was largely driven by higher propane demand by certain customers and also the positive contribution due to the Company’s expansion of its rail car fleet. Wholesale propane revenues decreased by 49% in the year ended December 31, 2015 compared to the year ended December 31, 2014 due to lower propane prices during the year. Other NGLs volumes increased by 29% in the year ended December 31, 2015 as compared to the year ended December 31, 2014, primarily as a result of higher demand from internal and external customers and also the positive impact of having access to a larger 11 18 Gibson Energy Inc. TSX: GEI 2015 Year End Report rail car fleet. Despite the increase in volumes, other NGLs revenues decreased by 27% in the year ended December 31, 2015 as compared to the year ended December 31, 2014 due to lower commodity prices. Cost of sales decreased 38% in the year ended December 31, 2015 compared to the year ended December 31, 2014 primarily driven by the impact of lower price levels. Operating expenses and other. Overall operating expenses increased by $8.7 million, or 11%, in the year ended December 31, 2015 compared to the year ended December 31, 2014, primarily due to the full year impact of the operating costs from the Cal-Gas and Stittco acquisitions in the current year compared to a partial period in the prior year. Segment profit. The Propane and NGL Marketing and Distribution segment profit increased in the year ended December 31, 2015 by $23.9 million, or 34%, compared to the year ended December 31, 2014 largely as a result of higher wholesale propane and NGL margins and the full year impact of the Cal-Gas and Stittco acquisitions that occurred during the prior year. Processing and Wellsite Fluids The following tables set forth operating results from the Company’s Processing and Wellsite Fluids segment: Volumes (barrels in thousands) Roofing flux .................................................................................................................................. Road asphalt .................................................................................................................................. Frac oils (Gibson Clear and light straight run distillate) ............................................................... Distillate (D822) ........................................................................................................................... Tops .............................................................................................................................................. Other ............................................................................................................................................. Total sales volumes ....................................................................................................................... 2015 1,702 540 282 591 1,871 253 5,239 2014 1,830 470 539 754 2,117 222 5,932 Year ended December 31, Year ended December 31, 2015 (in thousands) 2014 Revenues Road asphalt and roofing flux ................................................................................................... Frac oils (Gibson Clear and light straight run distillate) ........................................................... Distillate (D822) ........................................................................................................................ Tops ........................................................................................................................................... Other .......................................................................................................................................... Total revenues ............................................................................................................................... Cost of sales .................................................................................................................................. Operating expenses and other ........................................................................................................ Segment profit ............................................................................................................................... $ $ 185,830 26,892 57,285 100,697 25,083 395,787 342,571 16,009 37,207 $ $ 247,423 77,897 110,914 192,512 39,047 667,793 594,331 21,787 51,675 Volumes, revenue and cost of sales. Sales volumes for road asphalt increased by 15% in the year ended December 31, 2015 compared to the year ended December 31, 2014, due to a strong paving season as a result of favorable activity levels and good weather in Western Canada and increased demand in the Northern United States. Sales volumes for roofing flux decreased by 7% in the year ended December 31, 2015 compared to the year ended December 31, 2014 due to a decrease in customer demand and also an increase in road asphalt volumes. Road asphalt and roofing flux revenue decreased by 25% in the year ended December 31, 2015 compared to year ended December 31, 2014 mainly due to the impact of lower crude oil prices. Frac oils volumes decreased 48% in the year ended December 31, 2015 compared to the year ended December 31, 2014 largely due to an overall decrease in customer demand from lower drilling activity in the Company’s markets. As a result of lower volumes and selling prices, frac oils revenue decreased by 65% in the year ended December 31, 2015 compared to the year ended December 31, 2014. Sales volumes for distillate decreased 22% in the year ended December 31, 2015 compared to the year ended December 31, 2014 due to lower customer demand as a result of lower drilling activity in the Company’s markets. As a result of lower volumes and selling prices, distillate revenue decreased by 48% in the quarter ended December 31, 2015, compared to the year ended December 31, 2014. 12 19 Gibson Energy Inc. TSX: GEI 2015 Year End Report Tops volumes decreased 12% in the year ended December 31, 2015 as compared to the year ended December 31, 2014 due to lower opening inventories at the start of the year and the impact of more production of Combined Vacuum Gas Oil (“CVGO”). Tops revenues decreased by 48% in the year ended December 31, 2015 compared to the year ended December 31, 2014 due to lower volumes and the decline in crude oil prices. Other volumes include the sale of CVGO, oil based mud product (“OBM”) and solvents. Other volumes increased by 14% in the year ended December 31, 2015 as compared to the year ended December 31, 2014, largely driven by new sales of the Company’s CVGO. Other revenue decreased by 36% in the year ended December 31, 2015 as compared to the year ended December 31, 2014 due to the decrease in selling prices. The overall cost per barrel for the suite of products sold by the Processing and Wellsite Fluids segment decreased by 35% due to the decrease in crude oil costs. Overall margins decreased by $20.2 million, or 28%, in the year ended December 31, 2015 as compared to the year ended December 31, 2014. The decrease was largely due to decreased margins for frac oils, distillate, tops, and OBM offset in part by higher overall margins for road asphalt and roofing flux. Operating expenses and other. Operating expenses and other decreased by $5.8 million, or 27%, in the year ended December 31, 2015 as compared to the year ended December 31, 2014. Operating expenses and other decreased mainly due to an incremental foreign exchange gain of $4.2 million on realizing U.S. dollar denominated revenue in the year compared to the prior year and also the impact of lower salaries and benefit costs. Segment profit. The Processing and Wellsite Fluids segment profit decreased in the year ended December 31, 2015 by $14.5 million, or 28%, as compared to the year ended December 31, 2014, primarily due to decreased overall margins for frac oils, distillate, tops, offset in part by higher overall margins for asphalt and roofing flux and lower operating costs. Marketing The following tables set forth the operating results from the Company’s Marketing segment: Volumes (barrels in thousands) Sales Volumes Year ended December 31, 2015 2014 Crude and diluent ...................................................................................................................... 112,824 120,676 Year ended December 31, 2014 (in thousands) 2014 Revenues ..................................................................................................................................... $ 4,330,978 4,289,086 Cost of sales ................................................................................................................................. Operating expenses and other ...................................................................................................... 6,621 Segment profit ............................................................................................................................ 35,271 $ $ 7,005,045 6,931,758 8,107 65,180 $ The following tables set forth the monthly average NYMEX benchmark price of West Texas Intermediate crude oil (U.S.$): Calendar Period 2014 January ................................................................................................................................................................. February ............................................................................................................................................................... March ................................................................................................................................................................... April ..................................................................................................................................................................... May ...................................................................................................................................................................... June ...................................................................................................................................................................... July ....................................................................................................................................................................... August .................................................................................................................................................................. September ............................................................................................................................................................ October ................................................................................................................................................................ November ............................................................................................................................................................ December ............................................................................................................................................................. $ 94.86 100.68 100.51 102.03 101.79 105.15 102.39 96.08 93.03 84.34 75.81 59.29 13 20 Gibson Energy Inc. TSX: GEI 2015 Year End Report 2015 January ................................................................................................................................................................. February ............................................................................................................................................................... March ................................................................................................................................................................... April ..................................................................................................................................................................... May ...................................................................................................................................................................... June ...................................................................................................................................................................... July ....................................................................................................................................................................... August .................................................................................................................................................................. September ............................................................................................................................................................ October ................................................................................................................................................................ November ............................................................................................................................................................ December ............................................................................................................................................................. Average for the year ended December 31, 2015 .................................................................................................. Average for the year ended December 31, 2014 .................................................................................................. $ 47.33 50.72 47.85 54.63 59.37 59.83 50.93 42.89 45.47 46.29 42.92 37.33 48.80 92.99 Volumes, revenues and cost of sales. Sales volumes for crude and diluent decreased by 7% in the year ended December 31, 2015 due to a decrease in buy/sell transactions in the current year. Revenue decreased by 38% in the year ended December 31, 2015 compared to the year ended December 31, 2014 due to lower crude oil prices and lower volumes, offset in part by the revenue impact of buy/sell transactions that are recorded on a net basis and tighter crude oil price differentials. Cost of sales decreased by 38% in the year ended December 31, 2015 compared to the year ended December 31, 2014 mainly due to the reduction in crude oil prices. Operating expenses and other. Operating expenses decreased by $1.5 million, or 18%, in the year ended December 31, 2015 compared to the year ended December 31, 2014 primarily due to lower payroll related costs. Segment profit. The Marketing segment profit decreased by $29.9 million, or 46%, in the year ended December 31, 2015 as compared to the year ended December 31, 2014. In addition to the impact of a strong first quarter in 2014, the year ended December 31, 2015 was negatively impacted by the decrease in crude oil prices, the impact of tightening crude oil price differentials during the year, supply disruptions as a result of wildfires in Northern Alberta in the second quarter of 2015 and the decline in the demand for crude by rail, partially offset by a decrease in operating costs. General and administrative and other, excluding depreciation and amortization General and administrative expense (“G&A”) is comprised of costs incurred for executive services, commercial development, accounting, finance, treasury, legal, human resources, investor relations and communications that are incurred at a corporate level and are not related to a specific segment. G&A expense was $39.6 million in the year ended December 31, 2015, compared to $37.4 million in the year ended December 31, 2014. The increase in the year ended December 31, 2015 was largely driven by the incurrence of severance costs of $2.9 million in the year and a loss on equity financial instruments of $5.4 million. These equity financial instruments were entered into in the first quarter of 2015 to help manage the exposures relating to the Company’s stock based compensation programs. These were partially offset by an increase in other income and also lower general G&A costs of $1.3 million, with the decline partly due to lower salary and benefit costs and despite the inclusion of commercial development costs in G&A for the first time in 2015 and also higher rent costs due to expansion of head office space. Depreciation Depreciation expense was $195.4 million in the year ended December 31, 2015 compared to $154.9 million in the year ended December 31, 2014. The increase was largely due to the additional depreciation related to the increase in the Company’s assets resulting from the completion of capital projects and the completion of the Cal-Gas and Stittco acquisitions in 2014 as well as the Littlehawk and T&R Transport acquisitions that were completed in 2015. In addition, included in depreciation expense in the year ended December 31, 2015 are impairment charges related to the Company’s property, plant and equipment of $13.5 million. These impairment charges largely related to assets within the Company’s Environmental Services segment. 14 21 Gibson Energy Inc. TSX: GEI Amortization 2015 Year End Report Amortization expense was $87.6 million in the year ended December 31, 2015 compared to $55.0 million in the year ended December 31, 2014. The increase was largely due to the additional amortization related to the completion of the Cal-Gas and Stittco acquisitions in 2014 as well as the Littlehawk and T&R Transport acquisitions that were completed in 2015. In addition, included in amortization expense in the year ended December 31, 2015 is additional amortization of $30.5 million relating to a revision in the useful lives of certain intangible assets within the Company’s Environmental Services segment. Impairment of goodwill In the year ended December 31, 2015, a goodwill impairment loss within the Environmental Services segment of $176.0 million was recorded. During the fourth quarter of 2015, the Company completed its annual impairment review and compared the calculated recoverable value of each segment to the carrying value to determine if there was any goodwill impairment. As a result of this process, it was determined that the recoverable value of the Environmental Services segment was less than the carrying value and therefore an impairment loss was recorded. No impairment of goodwill existed in any other segment. There was no impairment of goodwill recorded in the year ended December 31, 2014. Stock based compensation Stock based compensation expense was $20.4 million in the year ended December 31, 2015, respectively, compared to $13.9 million in the year ended December 31, 2014, respectively. The increase was primarily due to the additional non-cash expense from the granting of stock awards in the year ended December 31, 2015, due in part to the cumulative impact of the conversion of the long- term incentive plan from a cash plan to an equity based plan over the last two years. Foreign exchange loss not affecting segment profit In the year ended December 31, 2015 and 2014, the Company recorded a foreign exchange loss of $108.2 million and $31.5 million, respectively. The gains and losses recorded are primarily driven by the movement in exchange rates on the translation of the Company’s U.S. dollar denominated long-term debt and related financial instruments. In the year ended December 31, 2015 and 2014, a loss of $123.1 million and $52.0 million, respectively, was recorded due to the unfavorable movement in exchange rates on the translation of Company’s U.S. dollar denominated long-term debt. In the year ended December 31, 2015 and 2014, the loss was partially offset by a gain of $10.0 million and $16.6 million, respectively, related to the change in mark-to-market value of U.S. dollar denominated forward contracts and options used to mitigate the currency risk associated with the Company’s U.S. dollar denominated long-term debt. In the first quarter of 2015, the Company settled its forward contracts and options used to mitigate the currency risk associated with the Company’s U.S. dollar denominated long-term debt and as a result, received net cash of $36.6 million on the settlement of U.S. dollar forward contracts for a notional amount of U.S.$250.0 million and U.S dollar options for a notional amount of U.S.$250.0 million. Net interest expense Net interest expense was $79.0 million in the year ended December 31, 2015, compared to $66.7 million in the year ended December 31, 2014. The increase was primarily due to an increase in interest charges as a result of the increase in outstanding debt balance following the issuance of incremental debt of $300.0 million and U.S.$50.0 million in June 2014. The increase was also related to the unfavorable foreign exchange impact which increased the U.S. denominated interest when expressed in Canadian dollars. Income tax provision (recovery) Income tax recovery was $6.7 million in the year ended December 31, 2015 compared to an income tax provision of $35.6 million in the year ended December 31, 2014. The effective tax rate was 2.3% during the year ended December 31, 2015 compared to 27.9% in the year ended December 31, 2014. The main reasons for the income tax recovery and the change in the effective rate was the loss before income tax in the current year period of $287.3 million compared to income before tax of $127.5 million in the prior year and also the increase in the impact of non-deductible amounts relating to the impairment of goodwill as well as net capital losses relating to foreign exchange movements on the Company’s U.S. dollar denominated long-term debt. In addition, as a result of the increase in the Alberta corporate tax rate, the income tax amount in the year ended December 31, 2015 includes a $6.8 million charge relating to the impact of the higher tax rate on the valuation of the Company’s net deferred tax liabilities. In order to lessen the future impact of the increase in the Alberta corporate tax rate, the Company elected in its 2014 tax returns to settle the provincial 15 22 Gibson Energy Inc. TSX: GEI 2015 Year End Report portion of an existing partnership deferral that would have been taxed in 2015 and 2016, resulting in an additional $11.0 million in income tax being paid during the year ended December 31, 2015. In addition, income tax expense in the year ended December 31, 2015 includes approximately $4.6 million of additional current tax expense relating to the net realized gain on the settlement of the U.S. dollar forward contracts and U.S dollar options in the first quarter of 2015. Fourth Quarter Results Three months ended December 31, 2015 (in thousands) 2014 $ $ 49,353 81,710 97,496 237,473 83,340 938,186 1,487,558 (211,335) 1,276,223 44,087 115,185 144,097 383,265 162,253 1,502,860 2,351,747 (375,282) 1,976,465 40,378 11,400 10,912 30,504 7,044 11,860 112,098 10,790 57,437 44,168 175,959 5,662 23,186 19,406 (224,510) (12,290) $ (212,220) $ 34,020 28,097 22,743 15,524 14,807 14,332 129,523 10,984 44,632 13,706 - 3,827 15,269 19,273 21,832 8,426 13,406 Segment revenue Terminals and Pipelines ............................................................................................................... Environmental Services ............................................................................................................... Truck Transportation ................................................................................................................... Propane and NGL Marketing and Distribution ............................................................................ Processing and Wellsite Fluids .................................................................................................... Marketing ..................................................................................................................................... Total segment revenue ................................................................................................................. Revenue – inter-segmental ........................................................................................................... Total revenue – external .............................................................................................................. Segment profit Terminals and Pipelines ............................................................................................................... Environmental Services ............................................................................................................... Truck Transportation ................................................................................................................... Propane and NGL Marketing and Distribution ............................................................................ Processing and Wellsite Fluids .................................................................................................... Marketing ..................................................................................................................................... Total segment profit ..................................................................................................................... General and administrative .......................................................................................................... Depreciation ................................................................................................................................. Amortization ................................................................................................................................ Impairment of goodwill ............................................................................................................... Stock based compensation ........................................................................................................... Foreign exchange loss .................................................................................................................. Net interest expense ..................................................................................................................... Income (loss) before income tax .................................................................................................. Income tax provision (recovery) .................................................................................................. Net income (loss) ........................................................................................................................ 16 23 Gibson Energy Inc. TSX: GEI 2015 Year End Report Segment revenue decreased by $700.2 million in the three months ended December 31, 2015 compared to the three months ended December 31, 2014. Changes in segment revenue were as follows: • Terminals and Pipelines revenue increased in the three months ended December 31, 2015 by $5.3 million compared to the three months ended December 31, 2014. The increase was largely driven by increased revenue at the Hardisty Terminal due to an increase in revenue from customers with dedicated tank usage that are subject to minimum fixed fee arrangements and additional revenue from the commissioning of the connectivity enhancement projects related to the twinning of the Cold Lake and Athabasca pipeline connections to the Hardisty Terminal; • Environmental Services revenue decreased by $33.5 million in the three months ended December 31, 2015 as compared to the year ended December 31, 2014 mainly due to the reduction in oilfield drilling and completion activity in the United States and Canada that resulted in lower volumes at the Company’s Canadian environmental services facilities and a decrease in the U.S. fluid disposal and production services business, partially offset by the favorable foreign exchange impact of translating revenue denominated in U.S. dollars from the Company’s United States operations; • Truck Transportation revenue decreased by $16.6 million mainly as a result of the impact of lower crude oil prices resulting in lower production and drilling activity in the Company’s service areas. As a result of this reduction in volumes and also in rates, revenue decreased, which was partially offset by the favorable foreign exchange impact of translating revenue denominated in U.S. dollars from the Company’s United States operations; • Propane and NGL Marketing and Distribution revenue decreased by $145.8 million due to the impact of lower prices for propane and other NGL products, and also lower overall industrial propane volumes. Lower volumes for propane were generally related to warmer weather patterns over the quarter in 2015 which reduced overall demand; • Processing and Wellsite Fluids revenue decreased by $78.9 million due to a decrease in demand for products which was largely driven by lower customer demand as a result of lower drilling activity in the Company’s markets. The decline was also driven by the impact of lower crude oil prices; and • Marketing revenue decreased by $564.7 million which was driven by the impact of lower crude oil prices and volumes. Segment profit decreased by $17.4 million, or 13%, in the three months ended December 31, 2015 compared to the three months ended December 31, 2014. The changes in segment profit were as follows: • Terminals and Pipelines segment profit increased by $6.4 million, largely due to increased revenues at the Hardisty terminal from the commissioning of four new dedicated tanks in late 2014 and early 2015 and pipeline connections during the year and also lower operating costs; • Environmental Services segment profit decreased $16.7 million largely as a result of the decline in revenues partially offset by lower operating expenses; • Truck Transportation segment profit decreased by $11.8 million due to the decline in revenues partially offset by lower operating expenses; • Propane and NGL Marketing and Distribution segment profit increased by $15.0 million due mainly to increased margins within the Wholesale and NGL Marketing and Distribution business as a result of higher overall volumes that was driven in part by access to a larger rail car fleet in 2015. The increase was also driven by a reduction in operating expenses and in particular lower payroll related costs. These positive impacts to segment profit were partially offset by the impact of lower industrial propane volumes; • Processing and Wellsite Fluids segment profit decreased by $7.8 million, primarily as a result of lower margins on frac oils, distillate and OBM products in the quarter, partially offset by higher tops and asphalt margins; and • Marketing segment profit decreased by $2.5 million mainly due to the impact of both lower volumes and crude oil prices on margins. Net loss was $212.2 million in the three months ended December 31, 2015 compared to net income of $13.4 million in the three months ended December 31, 2014. Net income declined to a net loss due mainly to lower segment profit and the impact of higher depreciation and amortization, impairment and stock based compensation costs and also an increase in foreign exchange losses, partially offset by the recovery of income taxes. 17 24 Gibson Energy Inc. TSX: GEI 2015 Year End Report SUMMARY OF QUARTERLY RESULTS The following table sets forth a summary of the Company’s quarterly results for each of the last eight quarters: Three months ended (in thousands) Revenues ........................ Net income (loss)............ EBITDA(1) ...................... Adjusted EBITDA(2) ...... Earnings (loss) per share Basic ........................... Diluted ........................ December 31 September 30 June 30 March 31 December 31 September 30 June 30 March 31 2015 2014 $1,276,223 (212,220) (103,464) 100,961 $1,348,990 $1,574,427 $1,392,342 (20,500) 64,652 114,573 (41,195) 39,224 95,107 (6,741) 74,816 75,643 $1,976,465 13,406 100,001 119,302 $2,360,007 $2,126,365 $2,110,692 46,155 125,981 136,945 8,542 89,272 114,134 23,838 89,798 82,684 (1.69) (1.69) (0.33) (0.33) (0.05) (0.05) (0.16) (0.16) 0.10 0.10 0.07 0.07 0.19 0.19 0.38 0.37 (1) EBITDA is not a measure recognized under IFRS and does not have standardized meanings prescribed by IFRS. EBITDA consists of net income (loss) before interest expense, income taxes, depreciation, and amortization. (2) Adjusted EBITDA is defined as net income (loss) before interest expense, income taxes, depreciation, amortization, other non- cash expenses and charges deducted in determining consolidated net income (loss), including movement in the unrealized gains and losses on the Company’s financial instruments, stock based compensation expense, impairment of goodwill and intangible assets, and asset writedowns. It also removes the impact of foreign exchange movements in the Company’s U.S. dollar denominated long-term debt, debt extinguishment expenses and adjustments that are considered non-recurring in nature. The Company presents EBITDA because it considers it to be an important supplemental measure of the Company’s performance and believes this measure is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in industries with similar capital structures. EBITDA has limitations as an analytical tool, and readers should not consider this item in isolation, or as a substitute for an analysis of the Company’s results as reported under IFRS. Some of these limitations are: - EBITDA: - - - - excludes certain income tax payments that may represent a reduction in cash available to the Company; does not reflect the Company’s cash expenditures, or future requirements, for capital expenditures or contractual commitments; does not reflect changes in, or cash requirements for, the Company’s working capital needs; and does not reflect the significant interest expense, or the cash requirements necessary to service interest payments on the Company’s debt, including the Senior Unsecured Notes and the Revolving Credit Facility; - Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and EBITDA does not reflect any cash requirements for such replacements; and - Other companies in the industry may calculate EBITDA differently than the Company does, limiting its usefulness as a comparative measure. 18 25 Gibson Energy Inc. TSX: GEI 2015 Year End Report Because of these limitations, EBITDA should not be considered as a measure of discretionary cash available to the Company to invest in the growth of the Company’s business. The Company compensates for these limitations by relying primarily on the Company’s IFRS results and using EBITDA only supplementally. The following table reconciles consolidated net income (loss) to EBITDA: Three months ended (in thousands) Net income (loss) ......... Depreciation and amortization ................. Interest expense(1) ......... Income tax expense (recovery) ..................... EBITDA ....................... 2015 December 31 September 30 June 30 March 31 December 31 September 30 June 30 March 31 2014 $(212,220) $ (41,195) $ (6,741) $ (20,500) $ 13,406 $ 8,542 $ 23,838 $ 46,155 101,605 19,441 61,010 19,471 62,007 20,206 58,370 20,462 58,338 19,831 53,510 18,774 49,264 15,331 48,813 13,662 (12,290) $(103,464) (62) $ 39,224 (656) $ 74,816 6,320 $ 64,652 8,426 $ 100,001 8,446 $ 89,272 1,365 $ 89,798 17,351 $ 125,981 (1) Interest expense includes the impact of the change in net unrealized gains or losses attributable to movement in the mark-to- market valuation of financial instruments relating to interest expense. Adjusted EBITDA and Pro Forma Adjusted EBITDA are presented in the table below because the Company believes it facilitates investors’ use of operating performance comparisons from period to period and company to company by backing out potential differences caused by variations in capital structures (affecting relative interest expense and foreign exchange differences on the Company’s long-term debt), the book amortization of intangibles (affecting relative amortization expense) and the age and book value of property, plant and equipment (affecting relative depreciation expense). The Company also presents Adjusted EBITDA and Pro Forma Adjusted EBITDA because it believes it is frequently used by securities analysts, investors and other interested parties as a measure of financial performance. Adjusted EBITDA and Pro Forma Adjusted EBITDA as presented herein are not recognized measures under IFRS and should not be considered as an alternative to operating income or net income as measures of operating results or an alternative to cash flows as measures of liquidity. Adjusted EBITDA differs from the term EBITDA as it is commonly used. Adjusted EBITDA is defined as consolidated net income (loss) before interest expense, income taxes, depreciation, amortization, other non-cash expenses and charges deducted in determining consolidated net income (loss), including movement in the unrealized gains and losses on the Company’s financial instruments, stock based compensation expense, impairment of goodwill and intangible assets, and asset writedowns. It also removes the impact of foreign exchange movements in the Company’s U.S. dollar denominated long-term debt, debt extinguishment expenses and other adjustments that are considered non-recurring in nature. Pro Forma Adjusted EBITDA differs from the term Adjusted EBITDA in that it also includes the pro forma effect of acquisitions that took place in each fiscal year as if the acquisitions took place at the beginning of the fiscal year in which such acquisition occurred. Pro Forma Adjusted EBITDA is also used in calculating the Company’s covenant compliance under the Company’s debt agreements. The Company’s calculation of Adjusted EBITDA and Pro Forma Adjusted EBITDA may not be comparable to such calculations used by other companies. In calculating Pro Forma Adjusted EBITDA, the Company makes certain adjustments that are based on assumptions and estimates that may prove to have been inaccurate. In addition, in evaluating Adjusted EBITDA and Pro Forma Adjusted EBITDA, readers should be aware that in the future the Company may incur expenses similar to those eliminated in the presentation herein. 19 26 Gibson Energy Inc. TSX: GEI 2015 Year End Report The following tables reconcile EBITDA to Adjusted EBITDA for each of the last eight quarters and Pro Forma Adjusted EBITDA for the year ended December 31, 2015 and 2014: Three months ended December 31, 2015 September 30, 2015 June 30, 2015 March 31, 2015 EBITDA ...................................................................................... $ (103,464) $ 39,224 Unrealized foreign exchange loss (gain) on long-term debt(1) ..... 50,600 Net unrealized loss (gain) from financial instruments(2) .............. 82 Stock based compensation(3) ....................................................... 5,135 Impairment of goodwill (4) .......................................................... - Acquisition related costs (5) ......................................................... 66 Adjusted EBITDA ...................................................................... $ 100,961 $ 95,107 Pro forma impact of acquisitions (6) ............................................ Pro Forma Adjusted EBITDA ..................................................... 24,530 (1,726) 5,662 175,959 - (in thousands) $ 74,816 (11,495) 7,206 5,116 - - $ 75,643 $ 64,652 59,510 (14,066) 4,466 - 11 $ 114,573 EBITDA ...................................................................................... Unrealized foreign exchange loss (gain) on long-term debt (1) .... Net unrealized loss (gain) from financial instruments (2) ............. Stock based compensation (3) ...................................................... Acquisition related costs (5) ......................................................... Adjusted EBITDA ...................................................................... Pro forma impact of acquisitions (6) ............................................ Pro Forma Adjusted EBITDA ..................................................... Three months ended December 31, 2014 September 30, 2014 June 30, 2014 March 31, 2014 $ 100,001 21,615 (6,141) 3,827 - $ 119,302 $ (in thousands) 89,272 $ 89,798 $ 125,981 20,850 (19,725) 29,260 (13,014) 9,064 (8,361) 3,128 3,380 3,642 - 167 321 $ 114,134 $ 82,684 $ 136,945 Year ended December 31, 2015 $ 75,228 123,145 (8,504) 20,379 175,959 77 $ 386,284 3,611 $ 389,895 Year ended December 31, 2014 $ $ $ 405,052 52,000 (18,452) 13,977 488 453,065 5,129 458,194 (1) Non-cash adjustment representing the unrealized foreign exchange loss (gain) on long-term debt, as a result of the movement in exchange rates in the periods. (2) Reflects the exclusion of the movement in the mark-to-market valuation of financial instruments used in risk management activities. The Company uses crude oil and NGL priced futures, options and swaps to manage the exposure to commodities price movements and foreign currency forward contracts and options to manage foreign exchange risks, although the Company does not formally designate these financial instruments as hedges for accounting purposes. Accordingly, the unrealized gains or losses on these financial instruments are recorded directly to the income statement. Management believes that this adjustment better correlates the effect of risk management activities to the underlying operating activities to which they relate. (3) Represents the non-cash stock based compensation relating to the Company’s equity incentive plan. (4) Represents the non-cash impairment of goodwill charge recorded in the three months ended December 31, 2015. (5) Represents transaction fees that were expensed in connection with acquisitions made by the Company. (6) Reflects the pro forma impact of acquisitions on the Company’s Adjusted EBITDA as if the acquisitions that took place in the twelve months period occurred on January 1 of each twelve month period. The pro forma impact of acquisitions is calculated on the same basis as Adjusted EBITDA. 20 27 Gibson Energy Inc. TSX: GEI 2015 Year End Report LIQUIDITY AND CAPITAL RESOURCES The Company’s primary liquidity and capital resource needs are to fund ongoing capital expenditures, growth opportunities and acquisitions and to fund its targeted dividend level. In addition, the Company must service its debt, including interest payments and finance working capital needs. The Company relies on its cash flow from operations, debt and equity financings and borrowings under the Company’s Revolving Credit Facility for liquidity. The Company’s operating cash flow has historically been affected by the overall profitability of sales within the Company’s segments, the Company’s ability to invoice and collect from customers in a timely manner and the Company’s ability to efficiently implement the Company’s growth strategy and manage costs. The Company’s cash, cash equivalents and cash flow from operations have historically been sufficient to meet the Company’s working capital, capital expenditure and debt servicing requirements. The following table summarizes the Company’s sources and uses of funds for the year ended December 31, 2015 and 2014: Year ended December 31, 2015 (in thousands) 2014 Statement of Cash Flows Cash flows provided by (used in): Operating activities ................................................................................................................... $ 458,067 Investing activities .................................................................................................................... Financing activities ................................................................................................................... (372,628) (141,862) $ 336,228 (495,015) 188,199 Cash provided by operating activities The primary drivers of cash flow from operating activities are the collection of amounts related to sales of products such as crude oil, propane, NGLs, asphalt and other products and fees for services provided associated with the Company’s Truck Transportation, Terminals and Pipelines and Environmental Services segments. Offsetting these collections are payments for purchases of crude oil and other products and other expenses. Other expenses primarily consist of owner-operator and lease-operator payments for the provision of contract trucking services, field operating expenses and G&A expenses. Historically, the Marketing and the Processing and Wellsite Fluids segments have been the most variable with respect to generating cash flows due to the impact of crude oil price levels and the volatility that price changes and crude oil grade basis changes have on the cash flows and working capital requirements of these segments. Cash provided by operations in the year ended December 31, 2015 was $458.1 million compared to $336.2 million in the year ended December 31, 2014. The increase was due to a decline in working capital that resulted in a generation of $74.3 million in cash in the year ended December 31, 2015 compared to a use of cash to fund working capital of $105.3 million in the year ended December 31, 2014. This increase was offset in part by the decline in segment profit. Cash used in investing activities Cash used in investing activities consists primarily of capital expenditures and business acquisitions. Cash used in investing activities was $372.6 million in the year ended December 31, 2015, compared to $495.0 million in the year ended December 31, 2014. Cash used in investing activities largely relates to capital expenditures and acquisitions. For a summary of capital expenditures and acquisitions, see “Acquisitions and Capital expenditures” included in this MD&A. Cash provided by (used in) financing activities Cash used in financing activities was $141.8 million in the year ended December 31, 2015 compared to cash provided by financing activities of $188.2 million in the year ended December 31, 2014. The change was primarily due to the net proceeds from a debt issuance totaling $300.0 million and U.S.$50 million completed in June 2014. The change was also due to the payment of net interest and cash dividends of $84.1 million and $129.0 million in the year ended December 31, 2015 compared to net interest and cash dividends of $62.1 million and $108.2 million in the year ended December 31, 2014, partially offset by the net proceeds on the settlement of financial instruments of $36.6 million, and the net proceeds from credit facilities of $35.0 million. The increase in dividends paid was driven by the $0.02 per share increase effective in the first quarter of 2015 resulting in a $13.1 million increase in cash dividend paid and also the impact of the suspension of the DRIP during the year resulting in a $7.7 million increase in cash dividend paid. 21 28 Gibson Energy Inc. TSX: GEI 2015 Year End Report Liquidity sources, requirements and contractual cash requirements and commitments The Company believes that cash on hand, together with cash from operations and borrowings under the Revolving Credit Facility, will be adequate to meet its working capital needs, upgrade and replacement capital expenditures, currently sanctioned growth capital projects, debt service, targeted dividend level and other cash requirements for at least the next twelve months. The Company had unrestricted cash of $82.8 million and $432.3 million available under the Revolving Credit Facility as at December 31, 2015. The Company’s ability to make interest payments on the Company’s indebtedness, to pay targeted dividends and to fund the Company’s other liquidity requirements will depend on the Company’s ability to generate cash in the future. In the three months ended December 31, 2015, the Company declared a dividend of $0.32 per share for a total dividend of $40.4 million, of which the entire amount was paid in cash on January 15, 2016. The declaration of dividends is considered on a quarterly basis and is at the sole discretion of the Board and will be determined on the basis of earnings, financial requirements for operations and a solvency calculation. Capital expenditures amounted to $392.6 million in the year ended December 31, 2015. As previously announced, the Company has approved a 2016 growth capital expenditure budget ranging between $200.0 million and $300.0 million and an additional $50.0 million allocated to upgrade and replacement capital expenditures. While the Company anticipates that these planned capital expenditures will occur, certain projects are subject to general economic, financial, competitive, legislative, regulatory and other factors, some of which are beyond the Company’s control. In addition to anticipated capital expenditures, the Company may engage in strategic acquisitions and additional capital expenditures as opportunities arise that benefit the Company’s existing operations by expanding the Company’s reach in existing markets or by providing platforms by which to enter new markets. Any such acquisition or capital expenditure could be material and could have a material effect on the Company’s liquidity, cash flows and capital commitments and resources. Any future acquisitions, capital expenditures or other similar transactions may require additional capital and there can be no assurance that such capital will be available to the Company on acceptable terms, or at all. As of December 31, 2015, the Company had total outstanding Senior Unsecured Notes, excluding debt discount and the issuance costs, of U.S.$550.0 million bearing fixed interest of 6.75% per annum due July 15, 2021, $250.0 million bearing fixed interest of 7.00% per annum due July 15, 2020 and $300.0 million bearing fixed interest of 5.375% per annum due July 15, 2022 (collectively the “Notes”). Interest is payable semi-annually on January 15 and July 15 of each year the Notes are outstanding. The Notes agreements contain certain redemption options whereby the Company can redeem all or part of the Notes subject to certain premiums if such prepayment occurs prior to the dates specified in the agreements. In addition, the Note holders have the right to require the Company to redeem the Notes or a portion thereof, at the redemption prices set forth in the agreements in the event of change in control or in the event certain asset sale proceeds are not re-invested in the time and manner specified in the agreements. The Revolving Credit Facility of $500.0 million, the proceeds of which are available to provide financing for working capital and other general corporate purposes, has an accordion feature whereby the Company can increase the Revolving Credit Facility to $750.0 million subject to obtaining incremental lender commitments. The Revolving Credit Facility has an extendible term of five years, expiring on August 15, 2020. The Revolving Credit Facility provides sub-facilities for letters of credit, swingline loans and borrowings in Canadian dollars and U.S. dollars. Borrowings under the Revolving Credit Facility bear interest at a rate equal to Canadian Prime Rate or U.S. Base Rate or U.S. LIBOR or Canadian Bankers Acceptance Rate as the case may be plus an applicable margin. The applicable margin for borrowings under the Revolving Credit Facility is subject to step up and step down based on the Company’s total debt leverage ratio. In addition, the Company must pay a standby fee on the unused portion of the Revolving Credit Facility and customary letter of credit fees equal to the applicable margins determined in a manner similar to the interest. In addition, the Company has three bilateral demand letter of credit facilities totaling $150.0 million. At December 31, 2015, the Company had $35.0 million drawn under the Revolving Credit Facility, had no restricted cash, and had issued letters of credit totaling $32.6 million. The terms of the Company’s Revolving Credit Facility require the Company to maintain certain covenants including a consolidated senior debt leverage ratio of no greater than 4.0 to 1.0 until June 30, 2017 and 3.5 to 1.0 thereafter, a consolidated total debt leverage ratio of no greater than 4.0 to 1.0 and an interest coverage ratio of no less than 2.5 to 1.0. The consolidated senior debt ratio represents the ratio of all senior debt obligations to Pro Forma Adjusted EBITDA. The consolidated total debt ratio represents the ratio of total debt, letters of credit and capitalized leases to Pro Forma Adjusted EBITDA. The consolidated interest coverage ratio represents the ratio of Pro Forma Adjusted EBITDA to consolidated cash interest expense. As at December 31, 2015, the Company was in compliance with the financial ratios with the senior debt leverage ratio at 3.2 to 1.0, total debt leverage ratio at 3.2 to 1.0, 22 29 Gibson Energy Inc. TSX: GEI 2015 Year End Report and the interest coverage ratio at 4.6 to 1.0. If the Company fails to comply with the financial covenants, the lenders may declare an event of default. An event of default resulting from a breach of a financial covenant may result, at the option of lenders holding a majority of the loans, in an acceleration of repayment of the principal and interest outstanding and a termination of the Revolving Credit Facility. Subsequent to year end, the Company reached an agreement with its bank syndicate to amend its $500M revolving credit facility maturing in August 2020. These amendments included an increase to the maximum consolidated senior and total debt leverage ratio covenants from 4.0:1.0 to 4.85:1.0 until December 31, 2017, with such threshold decreasing to 4.25:1.0 for the period beginning January 1, 2018 and ending on March 31, 2018, and decreasing thereafter to 4.0:1.0 for total debt and 3.5:1.0 for senior debt. The Notes and the Revolving Credit Facility contain non-financial covenants that restrict, subject to certain thresholds, some of the Company’s activities, including the Company’s ability to dispose of assets, incur additional debt, pay dividends, create liens, make investments and engage in specified transactions with affiliates. The Notes and the Revolving Credit Facility also contain customary events of default, including defaults based on events of bankruptcy and insolvency, non-payment of principal, interest or fees when due, breach of covenants, change in control and material inaccuracy of representations and warranties, subject to specified grace periods. As of December 31, 2015, the Company was in compliance with all of its covenants under the Notes and the Revolving Credit Facility. Contingencies The Company is currently undergoing various tax related audits. While the final outcome of such audits cannot be predicted with certainty, the Company believes that the resolution of these audits will not have a material impact on the Company’s consolidated financial position or results of operations. The Company is subject to various regulatory and statutory requirements relating to the protection of the environment. These requirements, in addition to the contractual agreements and management decisions, result in the recognition of estimated decommissioning obligations and environmental remediation. Estimates of decommissioning obligations and environmental remediation costs can change significantly based on such factors as operating experience and changes in legislation and regulations. The Company is involved in various legal actions which have occurred in the ordinary course of business. The Company is of the opinion that losses, if any, arising from such legal actions would not have a material impact on the Company’s consolidated financial position or results of operations. Contractual obligations The following table presents, at December 31, 2015, the Company’s obligations and commitments to make future payments under contracts and contingent commitments: Payments due by period (in thousands) Long-term debt(1) ............................................................. $ 1,311,200 Interest payments on long-term debt(1) ............................. 662,815 Operating lease and other commitments(2) ....................... 287,442 Total contractual obligations ............................................ $2,261,457 Total $ Less than 1 year - 85,006 78,790 $ 163,796 1-3 years $ - 170,012 127,885 $ 297,897 3-5 years $ 250,000 170,012 67,916 $ 487,928 More than 5 years $1,061,200 237,785 12,851 $ 1,311,836 (1) The exchange rate used to translate the U.S. dollar obligations on the Company’s long-term debt and interest payments is the rate as of December 31, 2015 of U.S.$0.7225 to $1.00. (2) Operating lease and other commitments relate to an office lease for the Company’s Calgary head office, rail tank cars, vehicles, field buildings, various equipment leases and terminal services arrangements. As at December 31, 2015, the Company has identified and approved a capital expenditure budget, excluding acquisitions, of $264.7 million that the Company expects to undertake over the next 12 to 24 months. In addition, the Company had accrued liabilities for obligations with respect to the Company’s defined benefit plans of $5.2 million and provisions associated with site restoration on the retirement of assets and environmental costs of $155.3 million but the timing of such payments is uncertain due to the estimates used to calculate these amounts and the long-term nature of these balances. The Company also has commitments relating to its risk management contracts which are discussed further in “Quantitative and Qualitative Disclosures about Market Risks”. 23 30 Gibson Energy Inc. TSX: GEI 2015 Year End Report OFF-BALANCE SHEET ARRANGEMENTS The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on the Company’s financial condition, revenues or expenses, results of operations, liquidity, capital expenditure or capital expenses that are material to investors. RELATED PARTY TRANSACTIONS On August 11, 2011, the Company formed a partnership (the “Plato Partnership”) to jointly construct and own a pipeline and emulsion treating, water disposal and oilfield waste management facilities in the Plato area of Saskatchewan. The Plato Partnership commenced operations in 2012. The Company’s interest in the Plato Partnership is 50%. A member of the Company’s Board is also a director of the other party with the 50% interest in the Plato Partnership. At December 31, 2015 and 2014, the Company’s proportionate share of property, plant and equipment was $9.4 million and $10.2 million, respectively. The impact of the Company’s share of the other financial position and results of the Plato Partnership is not material to the Company’s consolidated financial statements. The related party transactions noted above have been measured at agreed upon market based terms. OUTSTANDING SHARE DATA The Company is authorized to issue an unlimited number of common shares and an unlimited number of preferred shares. As at December 31, 2015, there were 126.1 million common shares outstanding and no preferred shares outstanding. In addition, under the Company’s equity incentive plan, there were an aggregate of 1.8 million restricted share units, performance share units and deferred share units outstanding and 3.3 million stock options outstanding as at December 31, 2015. At December 31, 2015, awards available to grant under the equity incentive plan were approximately 7.5 million. As at February 29, 2016, 126.2 million common shares, 1.8 million restricted share units, performance share units and deferred share units and 3.3 million stock options were outstanding. DIVIDENDS The Company is currently paying quarterly dividends to holders of common shares. The payment of dividends is not guaranteed, and the amount and timing of any dividends payable by Gibsons’ will be at the discretion of the Board and will be established on the basis of Gibson's earnings, financial requirements for operations, the satisfaction of a solvency calculation and the terms of the Company’s debt agreements. In addition, in connection with Company’s dividend policy, after each fiscal year end the Board will formally review the annual dividend amount. 24 31 Gibson Energy Inc. TSX: GEI DISTRIBUTABLE CASH FLOW 2015 Year End Report Distributable cash flow is not a standard measure under IFRS and, therefore, may not be comparable to similar measures reported by other entities. Distributable cash flow is used to assess the level of cash flow generated from ongoing operations and to evaluate the adequacy of internally generated cash flow to fund dividends. Changes in non-cash working capital are excluded from the determination of distributable cash flow because they are primarily the result of fluctuations in product inventories or other temporary changes. Upgrade and replacement capital expenditures are deducted from distributable cash flow as they are ongoing recurring expenditures. The following is a reconciliation of distributable cash flow to its most closely related IFRS measure, cash flow from operating activities. Cash flow from operating activities ..................................................................................... Adjustments: Changes in non-cash working capital ............................................................................... Upgrade and replacement capital ..................................................................................... Cash interest expense, including capitalized interest ........................................................ Current income tax(1) ........................................................................................................ Distributable cash flow ........................................................................................................ Year ended December 31 2015 (in thousands) 2014 $ 458,067 $ 336,228 (74,293) (46,775) (84,965) (32,503) $ 219,531 105,291 (59,035) (68,708) (48,549) $ 265,227 Dividends declared to shareholders ..................................................................................... $ 161,002 $ 148,573 (1) 2015 - Excludes the $11.0 million payment to settle the provincial portion of the partnership deferral for 2015 and 2016 and approximately $4.6 million of additional current tax expense relating to the net realized gain on the settlement of the U.S. dollar forward contracts and U.S dollar options in the first quarter of 2015. Dividends declared in the year ended December 31, 2015 were $161.0 million, of which $140.3 million was paid in cash and the balance was settled with the issuance of common shares under the Company’s DRIP and SDP. In the year ended December 31, 2015, dividends declared represented 73% of the distributable cash flow generated or, distributable cash flow was 1.4 times dividends declared. On a net basis after consideration of the DRIP and SDP, declared dividends paid in cash represented 64% of the distributable cash flow generated, or distributable cash flow was 1.6 times dividends paid in cash. On August 6, 2015, the Company suspended, until further notice, its DRIP and SDP. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is involved in various commodity related marketing activities that are intended to enhance the Company’s operations and increase profitability. These activities often create exposure to price risk between the time contracted volumes are purchased and sold and to foreign exchange risk when contracts are in different currencies (Canadian dollar versus U.S. dollar). The Company is also exposed to various market risks, including volatility in (i) crude oil, refined products, natural gas and NGL prices, (ii) interest rates, (iii) currency exchange rates and (iv) equity prices. The Company utilizes various derivative instruments from time to time to manage commodity price, interest rate and currency exchange rate exposure and, in certain circumstances, to realize incremental margin during volatile market conditions. The Company’s commodity trading and risk management policies and procedures are designed to establish and manage to an approved level of Value at Risk. The Company has a Risk Management Committee that has direct responsibility and authority for the Company’s risk policies and the Company’s trading controls and procedures and certain aspects of corporate risk management. The Company’s approved strategies are intended to mitigate risks that are inherent in the Company’s core businesses of aggregating and marketing and distribution. To hedge the risks discussed above the Company engages in risk management activities that the Company categorizes by the risks the Company is hedging and by the physical product that is creating the risk. The following discussion addresses each category of risk. Commodity Price Risk. The Company hedges its exposure to price fluctuations with respect to crude oil, refined products, natural gas and NGLs, and expected purchases and sales of these commodities (relating primarily to crude oil, roofing flux, propane sales and purchases of natural gasoline). The derivative instruments utilized consist primarily of futures and option contracts traded on the NYMEX, ICE and over-the-counter transactions, including swap and option contracts entered into with financial institutions and other energy companies. The Company’s policy is to transact only in commodity derivative products for which the Company 25 32 Gibson Energy Inc. TSX: GEI 2015 Year End Report physically transacts, and to structure the Company’s hedging activities so that price fluctuations for those products do not materially affect the net cash the Company ultimately receives from its commodity related marketing activities. Although the Company seeks to maintain a position that is substantially balanced within the Company’s various commodity purchase and sales activities, the Company may experience net unbalanced positions as a result of production, transportation and delivery variances as well as logistical issues associated with inclement weather conditions. The intent of the Company’s risk management strategy is to hedge the Company’s margin. However, the Company has not designated nor attempted to qualify for hedge accounting. Thus, changes in the fair values of all of the Company’s derivatives are recognized in earnings, and result in greater potential for earnings volatility. The fair value of futures contracts is based on quoted market prices obtained from the Chicago Mercantile Exchange. The fair value of swaps and option contracts is estimated based on quoted prices from various sources such as independent reporting services, industry publications and brokers. These quotes are compared to the contract price of the swap, which approximates the gain or loss that would have been realized if the contracts had been closed out at the period end. For positions where independent quotations are not available, an estimate is provided, or the prevailing market price at which the positions could be liquidated is used. No such positions existed as at December 31, 2015 and December 31, 2014. All derivative positions offset existing or anticipated physical exposures. Price-risk sensitivities were calculated by assuming 15% volatility in crude oil and NGL related prices, regardless of term or historical relationships between the contractual price of the instruments and the underlying commodity price. In the event of an increase or decrease in prices, the fair value of the Company’s derivative portfolio would typically increase or decrease, offsetting changes in the Company’s physical positions. A 15% favorable change would increase the Company’s net income by $6.8 million and $5.6 million as of December 31, 2015 and 2014, respectively. A 15% unfavorable change would decrease the Company’s net income by $6.1 million and $5.6 million as of December 31, 2015 and 2014, respectively. However, these changes may be offset by the use of one or more risk management strategies. Interest rate risks. Following the Notes offering, the Company’s long-term debt accrues interest at fixed interest rates and accordingly, changes in market interest rates do not expose the Company to future interest cash outflow variability. Under the Revolving Credit Facility, the Company is subject to interest rate risk, as borrowings bear interest at a rate equal to, at the Company’s option, either U.S. LIBOR, U.S. Base Rate, Canadian Prime Rate or Canadian Bankers’ Acceptance rate, plus an applicable margin based on the Company’s total leverage ratio. As at December 31, 2015, the Company had $35.0 million drawn under the Revolving Credit Facility and accordingly is subject to the interest rate cash flow risk associated with these amounts. A 1% favorable and unfavorable change in interest rates in relation to the amounts drawn at December 31, 2015 would impact net income by $0.3 million. Currency exchange risks. The Company’s monetary assets and liabilities in foreign currencies are translated at the period-end rate. Exchange differences arising from this translation are recorded in the Company’s statement of operations. In addition, currency exposures can arise from revenues and purchase transactions denominated in foreign currencies. Generally, transactional currency exposures are naturally hedged (i.e., revenues and expenses are approximately matched), but where appropriate, are covered using forward exchange contracts. All of the foreign currency forward exchange contracts entered into by the Company, although effective hedges from an economic perspective, have not been designated as hedges for accounting purposes, and therefore any gains and losses on such forward exchange contracts impact the Company’s earnings. A 5% unfavorable change in the value of the Canadian dollar relative to the U.S. dollar would affect the fair value of the Company’s outstanding forward currency contracts and options and would decrease the Company’s net income by $1.2 million and $3.2 million as at December 31, 2015 and 2014, respectively. A 5% favorable change would increase the Company’s net income by $1.2 million and $3.2 million as at December 31, 2015 and 2014, respectively. The Company expects to continue to enter into financial derivatives, primarily forward contracts, to reduce foreign exchange volatility. Additionally, currency exposure occurs on a portion of the principal of the Company’s long-term debt and the related interest payments, as they are denominated in U.S. dollars. As at December 31, 2015, the Company had outstanding U.S. dollar denominated debt of U.S.$550.0 million. As a result of the settlement of U.S. forward and options contracts in the first quarter of 2015 the Company had no foreign currency contracts outstanding relating to its long-term debt at December 31, 2015. A 5% unfavorable change in the value of the Canadian dollar relative to the U.S. dollar would impact both the carrying value of the Company’s long-term debt and any related foreign currency contracts and would decrease the Company’s net income by $33.1 and $10.7 million as at December 31, 2015 and 2014 respectively. A corresponding favorable change would increase the Company’s net income by $33.1 and $10.7 million as at December 31, 2015 and 2014, respectively. 26 33 Gibson Energy Inc. TSX: GEI 2015 Year End Report With respect to the related interest payments on the U.S. dollar denominated long-term debt, to date the Company has not entered into any foreign currency hedges as the Company believes that it will generate enough U.S. dollar cash inflows to pay these interest payments when due and/or hedge the incremental exposure using derivative instruments. Based on the interest rate in effect at December 31, 2015, a 5% unfavorable change in the value of the Canadian dollar relative to the U.S. dollar as of December 31, 2015 would increase the Company’s annual interest expense by $2.6 million. A 5% favorable change in the value of the Canadian dollar relative to the U.S. dollar as of December 31, 2015 would decrease the Company’s annual interest expense by $2.6 million. Equity price risk: The Company has equity price and dilution exposure to shares that it issues under its stock based compensation programs. Gibsons uses equity derivatives to manage volatility derived from its stock based compensation programs. On January 2, 2015, the Company entered into derivative share swap contracts to manage the risks relating to its stock based compensation programs. These contracts will mature at the prevailing share prices in accordance with the specific maturities of each contract over a three year period. As at December 31, 2015, the Company estimates that a 10% increase in the Company’s share price would have resulted in a $0.6 million increase in the Company’s net income. A corresponding decrease in the Company’s share price would decrease the Company’s net income by $0.6 million. Such contracts did not exist in 2014. ACCOUNTING POLICIES Critical accounting policies and estimates The preparation of consolidated financial statements in conformity with IFRS requires management to make estimates and assumptions. Predicting future events is inherently an imprecise activity and, as such, requires the use of judgment. Actual results may vary from estimates in amounts that may be material to the financial statements. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the Company’s consolidated financial statements. The Company’s critical accounting policies and estimates are as follows: Fair value of assets and liabilities acquired in a business combination. In conjunction with each business combination, the Company must allocate the cost of the acquired entity to the assets and liabilities assumed based on their estimated fair values at the date of acquisition. Determining the fair value of assets and liabilities acquired, as well as intangible assets that relate to such items as customer relationships, brands, contracts, and industry expertise involves professional judgment and is ultimately based on acquisition models and management’s assessment of the value of the assets acquired and, to the extent available, third party assessments. Uncertainties associated with these estimates include changes in production volumes, changes in commodity prices, fluctuations in capacity or product slates, economic obsolescence factors in the area and potential future sources of cash flow. During the measurement period, the allocation of purchase price of the acquired entity may be adjusted when the initial accounting for business combination is recorded based on provisional amounts. Although the resolution of these uncertainties has not historically had a material impact on the Company’s results of operations or financial condition, the actual amounts may vary significantly from estimated amounts. Any excess of the cost of acquisition over the net fair value of the identifiable assets acquired is recognized as goodwill. Recoverability of asset carrying values. The Company carries out impairment reviews in respect of goodwill at least annually or if indicators of impairment exist. The Company also assesses during each reporting period whether there have been any events or changes in circumstances that indicate that property, plant and equipment, inventories and other intangible assets may be impaired and an impairment review is carried out whenever such an assessment indicates that the carrying amount may not be recoverable. Such indicators include changes in the Company’s business plans, changes in activity levels, and an increase in the discount rate, the intention of “holding” versus “selling” and evidence of physical damage. For the purposes of impairment testing, assets are grouped at the lowest levels for which there are separately identifiable cash flows. Where impairment exists, the asset is written down to its recoverable amount, which is the higher of the fair value less costs to sell and value in use. Impairments are recognized immediately in the consolidated statement of operations. The assessment for impairment entails comparing the carrying value of the asset or cash-generating unit with its recoverable amount, that is, the higher of fair value less costs to sell and value in use. Value in use is usually determined on the basis of discounted estimated future net cash flows. However, the determination as to whether and how much an asset is impaired involves management estimates on highly uncertain matters such as the outlook for global or regional market supply-and-demand conditions, future commodity prices, the effects of inflation on operating expenses and discount rates. Income tax. Income tax expense represents the sum of the income tax currently payable and deferred income tax. Interest and penalties relating to income tax are also included in income tax expense. Deferred income tax is provided for using the liability method of accounting. Deferred income tax assets and liabilities are determined based on differences between the financial reporting 27 34 Gibson Energy Inc. TSX: GEI 2015 Year End Report and income tax basis of assets and liabilities. These differences are then measured using enacted or substantially enacted income tax rates and laws that will be in effect when these differences are expected to reverse. The effect of a change in income tax rates on deferred tax assets and liabilities is recognized in income in the period that the change occurs. The computation of the Company’s income tax expense involves the interpretation of applicable tax laws and regulations in many jurisdictions. The resolution of tax positions taken by the Company can take significant time to complete and in some cases it is difficult to predict the ultimate outcome. In addition, the Company has carry-forward tax losses in certain taxing jurisdictions that are available to offset against future taxable profit. However, deferred income tax assets are recognized only to the extent that it is probable that taxable profit will be available against which the unused tax losses can be utilized. Management judgement is exercised in assessing whether this is the case. To the extent that actual outcomes differ from management’s estimates, income tax charges or credits may arise in future periods. Financial instruments. In situations where the Company is required to mark financial instruments to market, the estimates of gains or losses at a particular period-end do not reflect the end results of particular transactions, and will most likely not reflect the actual gain or loss at the conclusion of the underlying transactions. The Company reflects the fair value estimates for financial instruments based on valuation information from third parties. The calculation of the fair value of certain of these financial instruments is based on proprietary models and assumptions of third parties because such instruments are not quoted on an active market. Additionally, estimates of fair value for such financial instruments may vary among different models due to a difference in assumptions applied, such as the estimate of prevailing market prices, volatility, correlations and other factors, and may not be reflective of the price at which they can be settled due to the lack of a liquid market. Although the resolution of these uncertainties has not historically had a material impact on the Company’s results of operations or financial condition, the actual amounts may vary significantly from estimated amounts. Provisions and accrued liabilities. The Company uses estimates to record liabilities for obligations associated with site restoration on the retirement of assets and environmental costs, taxes, potential legal claims, and other accruals and liabilities. Liabilities for site restoration on the retirement of assets are recognized when the Company has an obligation to restore the site, and when a reliable estimate of that liability can be made. An obligation may also crystallize during the period of operation of a facility through a change in legislation or through a decision to terminate operations. The amount recognized is the present value of the estimated future expenditure determined in accordance with local conditions and requirements. The present value is determined by discounting the expenditures expected to be required to settle the obligation using a risk-free discount rate. Estimated future expenditure is based on all known facts at the time and current expected plans for decommissioning. Among the many uncertainties that may impact the estimates are changes in laws and regulations, public expectations, prices and changes in technology. A corresponding item of property, plant and equipment of an amount equivalent to the provision is also recorded. This is subsequently depreciated as part of the asset. Other than the unwinding discount on the provision, any change in the present value of the estimated expenditure is reflected as an adjustment to the provision and the corresponding item of property, plant and equipment. Liabilities for environmental costs are recognized when a clean-up is probable and the associated costs can be reliably estimated. Generally, the timing of recognition of these provisions coincides with the completion of a feasibility study or a commitment to a formal plan of action. The amount recognized is the best estimate of the expenditure required. Where the liability will not be settled for a number of years, the amount recognized is the present value of the estimated future expenditure. Estimated future expenditure is based on all known facts at the time and an assessment of the ultimate outcome. A number of factors affect the cost of environmental remediation, including the determination of the extent of contamination, the length of time remediation may require, the complexity of environmental regulations and the advancement of remediation technology. Other provisions and accrued liabilities are recognized in the period when it becomes probable that there will be a future outflow of funds resulting from past operations or events and the amount of cash outflow can be reliably estimated. The timing of recognition and quantification of the liability require the application of judgment to existing facts and circumstances, which can be subject to change. Since the actual cash outflows can take place many years in the future, the carrying amounts of provisions and liabilities are reviewed regularly and adjusted to take account of changing facts and circumstances. A change in estimate of a recognized provision or accrued liability would result in a charge or credit to net income in the period in which the change occurs. 28 35 Gibson Energy Inc. TSX: GEI 2015 Year End Report Amended standards adopted by the Company The Company adopted the following new and revised standards, along with any consequential amendments. These changes were made in accordance with applicable transitional provisions. • The annual improvements process addresses issues in the 2010-2012 and 2011-2013 reporting cycles including changes to IFRS 13, Fair value measurements, IFRS 8, Operating segments and IAS 24, Related party transactions. These improvements are effective for annual periods beginning on or after July 1, 2014. The impact of adopting these improvements did not have a material impact on the consolidated financial statements. • IAS 19, Employee benefits (“IAS 19”), has been amended to clarify the application of requirements to plans that require employees or third parties to contribute toward the cost of the benefits. The amendment to IAS 19 is effective for annual periods beginning on or after July 1, 2014. The impact of adopting this amendment did not have a material impact on the consolidated financial statements. New standards and interpretations issued but not yet adopted • The annual improvements process addresses issues in the 2012-2014 reporting cycles including changes to IFRS 5, Non-current assets held for sale and discontinued operations, IFRS 7, Financial instruments: Disclosures, IAS 19, Employee benefits, and IAS 34, Interim financial reporting. These improvements are effective for periods beginning on or after January 1, 2016. The adoption of these improvements will not have a material impact on the consolidated financial statements. • • IFRS 10, Consolidated financial statements (“IFRS 10”), and IAS 28, Investments in associates and joint ventures (“IAS 28”), has been amended to address an inconsistency between IFRS 10 and IAS 28 in regards to a sale or contribution of assets between an investor and its associate or joint venture. The main consequence of the amendments is that a full gain or loss is recognized when the transaction involves a business combination, and whereas a partial gain is recognized when the transaction involves the assets that do not constitute a business. Additionally, the amendments clarify the exception from preparing consolidated financial statements, the consolidation requirements for subsidiaries which act as an extension of an investment entity, and the requirements for equity accounting for investments in associates and joint ventures. The amendments to IFRS 10 and IAS 28 are effective for annual periods beginning on or after January 1, 2016. The adoption of these amendments will not have a material impact on the consolidated financial statements. IFRS 15, Revenue from contracts with customers (“IFRS 15”), has been issued as a new standard on revenue recognition and will supersede IAS 18, Revenue, IAS 11, Construction Contracts and related interpretations. IFRS 15 is effective for annual periods beginning on or after January 1, 2018. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements. • The International Accounting Standards Board (“IASB”) completed the final element of its comprehensive publication of IFRS 9 Financial Instruments in July 2014. The package of improvements introduced by IFRS 9 includes a logical model for classification and measurement, a single, forward-looking ‘expected loss’ impairment model and a substantially-reformed approach to hedge accounting. The IASB has previously published versions of IFRS 9 that introduced new classification and measurement requirements (in 2009 and 2010) and a new hedge accounting model (in 2013). The July 2014 publication represents the final version of the Standard, replaces earlier versions of IFRS 9 and completes the IASB’s project to replace IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 is effective for annual periods beginning on or after 1 January 2018. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements. • • IAS 1, Presentation of financial statements (“IAS 1”), has been amended to clarify the guidance on materiality and aggregation, the presentation of subtotals, the structure of financial statements and the disclosure of accounting policies. The amendment to IAS 1 is effective for annual periods beginning on or after January 1, 2016. The Company is currently evaluating the impact of adopting these amendments on its consolidated financial statements. The adoption of this amendment will not have a material impact on the consolidated financial statements. IFRS 16, Leases (“IFRS 16”), has been issued as a new standard on leases and will supersede IAS 17. IFRS 16 is effective for annual periods beginning on or after January 1, 2019. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements. 29 36 Gibson Energy Inc. TSX: GEI 2015 Year End Report DISCLOSURE CONTROLS & PROCEDURES As part of the requirements mandated by the Canadian securities regulatory authorities under National Instrument 52-109- Certification of Disclosure in Issuers' Annual and Interim Filings ("NI 52-109"), the Company’s Chief Executive Officer ("CEO") and the Chief Financial Officer ("CFO") have evaluated the design and operation of the Company's disclosure controls and procedures ("DC&P"), as such term is defined in NI 52-109, as at December 31, 2015. The CEO and CFO are also responsible for establishing and maintaining internal controls over financial reporting, ("ICFR"), as such term is defined in NI 52-109. In making its assessment, management used the Committee of Sponsoring Organizations of the Treadway Commission framework in Internal Control – Integrated Framework (2013) to evaluate the design and effectiveness of internal control over financial reporting. These controls are designed to provide reasonable assurance regarding the reliability of the Company’s financial reporting and compliance with IFRS. The Company’s CEO and CFO have evaluated, or caused to be evaluated under their supervision, the design and operational effectiveness of such controls as at December 31, 2015. Based on the evaluation of the design and operating effectiveness of the Company’s DC&P and ICFR, the CEO and the CFO concluded that Gibson's DC&P and ICFR were effective as at December 31, 2015. There have been no changes in ICFR that occurred during the period beginning January 1, 2015 and ended on December 31, 2015 that has materially affected or is reasonably likely to materially affect Gibson’s ICFR. FORWARD-LOOKING STATEMENTS Certain statements contained in this MD&A constitute forward-looking statements. These statements relate to future events or the Company’s future performance. All statements other than statements of historical fact are forward-looking statements. The use of any of the words ‘‘anticipate’’, ‘‘plan’’, ‘‘contemplate’’, ‘‘continue’’, ‘‘estimate’’, ‘‘expect’’, ‘‘intend’’, ‘‘propose’’, ‘‘might’’, ‘‘may’’, ‘‘will’’, ‘‘shall’’, ‘‘project’’, ‘‘should’’, ‘‘could’’, ‘‘would’’, ‘‘believe’’, ‘‘predict’’, ‘‘forecast’’, ‘‘pursue’’, ‘‘potential’’ and ‘‘capable’’ and similar expressions are intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. No assurance can be given that these expectations will prove to be correct and such forward- looking statements included in this MD&A should not be unduly relied upon. These statements speak only as of the date of this MD&A. In particular, this MD&A contains forward-looking statements pertaining to the following: • • • • • • • • • • • • the addition or disposition of assets and changes in the services to be offered by the Company; the Company's investment in new equipment, technology, facilities and personnel; the Company's growth strategy to expand in existing and new markets; the availability of sufficient liquidity for planned growth; new technology and drilling methodology being deployed towards conventional and unconventional production within the Company's operating areas; uncertainty and volatility relating to crude prices and price differentials between crude oil streams and blending agents; increased crude oil production and exploration activity on shore in North America, including from the Canadian oil sands; the expansion of midstream infrastructure in North America to handle increased production and expansion of capacity in the U.S. refining complex to handle heavier crude oil from the WCSB; the effect of competition in regions of North America and its impact on downward pricing pressure and regional crude oil price differentials among crude oil grades and locations; the effect of market volatility on the Company's marketing revenues and activities; the Company's ability to pay down and retire indebtedness; the Company's plans for additional strategic acquisitions, capital expenditures or other similar transaction, including the costs thereof; in-service dates for new storage capacity being constructed by the Company; the Company's planned hedging activities; the Company's projections of commodity purchase and sales activities; the Company's projections of currency and interest rate fluctuations; the Company’s projections of dividends; and the Company's dividend policy. • • • • • • With respect to forward-looking statements contained in this MD&A, assumptions have been made regarding, among other things: • • • future growth in world-wide demand for crude oil and petroleum products; crude oil prices; no material defaults by the counterparties to agreements with the Company; 30 37 Gibson Energy Inc. TSX: GEI 2015 Year End Report • • • • • • • • • the Company's ability to obtain qualified personnel, owner-operators, lease operators and equipment in a timely and cost- efficient manner; the regulatory framework governing taxes and environmental matters in the jurisdictions in which the Company conducts and will conduct its business; changes in credit ratings applicable to the Company; operating costs; future capital expenditures to be made by the Company; the Company's ability to obtain financing for its capital programs on acceptable terms; the Company's future debt levels; the impact of increasing competition on the Company; and the impact of future changes in accounting policies on the Company’s consolidated financial statements. In addition, this MD&A may contain forward-looking statements and forward-looking information attributed to third party industry sources. The Company does not undertake any obligations to publicly update or revise any forward-looking statements except as required by securities law. Actual results could differ materially from those anticipated in these forward-looking statements as a result of numerous risks and uncertainties including, but not limited to, the risks and uncertainties described in “Forward-Looking Statements” and “Risk Factors” included in the Company’s Annual Information Form dated March 1, 2016 as filed on SEDAR at www.sedar.com and available on Gibsons website at www.gibsons.com. NON-GAAP FINANCIAL MEASURES This MD&A refers to certain financial measures that are not determined in accordance with IFRS. EBITDA, Adjusted EBITDA, Pro Forma Adjusted EBITDA and distributable cash flow are not measures recognized under IFRS and do not have standardized meanings prescribed by IFRS. Management considers these to be important supplemental measures of the Company’s performance and believes these measures are frequently used by securities analysts, investors and other interested parties in the evaluation of companies in industries with similar capital structures. See ‘‘Summary of Quarterly Results” for a reconciliation of EBITDA to net income (loss), the IFRS measure most directly comparable to EBITDA, and for a reconciliation of Adjusted EBITDA and Pro Forma Adjusted EBITDA to EBITDA. Distributable cash flow is used to assess the level of cash flow generated from ongoing operations and to evaluate the adequacy of internally generated cash flow to fund dividends. See ‘‘Distributable Cash Flow” for a reconciliation of distributable cash flow to cash flow from operations, the IFRS measure most directly comparable to distributable cash flow. Readers are encouraged to evaluate each adjustment and the reasons the Company considers it appropriate for supplemental analysis. Readers are cautioned, however, that these measures should not be construed as an alternative to net income (loss) determined in accordance with IFRS as an indication of the Company’s performance. 31 38 Gibson Energy Inc. Consolidated Financial Statements For the years ended December 31, 2015 and 2014 (in thousands of Canadian dollars) 39 March 1, 2016 Independent Auditor’s Report To the Shareholder of Gibson Energy Inc. We have audited the accompanying consolidated financial statements of Gibson Energy Inc. which comprise the consolidated balance sheets as at December 31, 2015 and December 31, 2014 and the consolidated statements of operations, comprehensive income, changes in equity and cash flows for the years then ended, 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, 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. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence 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 entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting 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. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Gibson Energy Inc. as at December 31, 2015 and December 31, 2014 and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards. Chartered Professional Accountants PricewaterhouseCoopers LLP 111 5th Avenue SW, Suite 3100, Calgary, Alberta, Canada T2P5L3 T: 403 509 7500, F: 403 781 1825, www.pwc.com/ca “PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership. Gibson Energy Inc. Consolidated Balance Sheet (tabular amounts in thousands of Canadian dollars) Assets Current assets December 31, 2015 2014 Cash and cash equivalents ................................................................................................ Trade and other receivables (note 6) ................................................................................. Inventories (note 7) ........................................................................................................... Income taxes receivable .................................................................................................... Prepaid expenses and other assets ..................................................................................... Net investment in finance leases (note 8) .......................................................................... Total current assets ............................................................................................................ $ 82,775 370,313 107,593 16,130 18,124 1,045 595,980 Non-current assets Property, plant and equipment (note 9) ............................................................................. Long-term prepaid expenses and other assets (note 10) .................................................... Net investment in finance leases (note 8) .......................................................................... Deferred income tax assets (note 11) ................................................................................ Intangible assets (note 12) ................................................................................................. Goodwill (note 13) ............................................................................................................ Total non-current assets .................................................................................................... Total assets .............................................................................................................................. Liabilities Current liabilities Credit facilities (note 14)................................................................................................... Trade payables and accrued charges (note 15) .................................................................. Dividends payable (note 18) ............................................................................................. Deferred revenue ............................................................................................................... Income taxes payable ........................................................................................................ Total current liabilities ...................................................................................................... Non-current liabilities Long-term debt (note 14) .................................................................................................. Provisions (note 16) .......................................................................................................... Other long-term liabilities (note 17) .................................................................................. Deferred income tax liabilities (note 11) ........................................................................... Total non-current liabilities ............................................................................................... Total liabilities .................................................................................................................. Equity Share capital (note 18) ...................................................................................................... Contributed surplus ........................................................................................................... Accumulated other comprehensive income....................................................................... Deficit................................................................................................................................ Total equity ....................................................................................................................... Total liabilities and equity ..................................................................................................... Commitments and contingencies (note 19) See accompanying notes to the consolidated financial statements 1,771,117 4,564 93,389 1,596 145,433 670,907 2,687,006 $ 3,282,986 35,000 418,732 40,363 7,690 7,775 509,560 1,291,423 155,343 13,975 145,684 1,606,425 2,115,985 Approved by the Board of Directors: (signed) “James M. Estey” James M. Estey Director (signed) “ Marshall L. McRae” Marshall L. McRae Director 41 1 1,672,323 34,959 224,866 (765,147) 1,167,001 $ 3,282,986 1,634,001 23,841 93,011 (323,673) 1,427,180 $ 3,573,029 $ 131,911 641,283 154,937 12,100 24,366 908 965,505 1,494,569 39,778 94,387 3,532 191,537 783,721 2,607,524 $ 3,573,029 - 581,463 37,346 19,042 122 637,973 1,165,368 136,347 14,810 191,351 1,507,876 2,145,849 Gibson Energy Inc. Consolidated Statement of Operations (tabular amounts in thousands of Canadian dollars, except per share amounts) Year ended December 31, 2015 2014 Revenue (note 20) ...................................................................................................................... Cost of sales (notes 7, 21, 22 and 28) ......................................................................................... Gross profit ................................................................................................................................ $ 5,591,982 5,461,519 130,463 $ 8,573,529 8,299,403 274,126 General and administrative expenses (notes 21 and 22) ............................................................. Impairment of goodwill (note 13) .............................................................................................. Other operating income (note 23) .............................................................................................. Income (loss) from operating activities................................................................................... Interest expense ......................................................................................................................... Interest income ........................................................................................................................... Foreign exchange loss on long-term debt (note 14) ................................................................... Income (loss) before income taxes ........................................................................................... Income tax provision (recovery) (note 11) ................................................................................. Net income (loss) ....................................................................................................................... 71,702 175,959 (22,026) (95,172) 79,580 (558) 113,150 (287,344) (6,688) 56,245 - (11,845) 229,726 67,598 (832) 35,431 127,529 35,588 $ (280,656) $ 91,941 Earnings (loss) per share (note 24) Basic .................................................................................................................................... Diluted ................................................................................................................................. $ $ (2.23) (2.23) $ $ 0.74 0.73 See accompanying notes to the consolidated financial statements 2 42 Gibson Energy Inc. Consolidated Statement of Comprehensive Income (Loss) (tabular amounts in thousands of Canadian dollars) Year ended December 31, 2015 2014 Net income (loss) ....................................................................................................................... $ (280,656) $ 91,941 Other comprehensive income (loss) ........................................................................................ Items that may be reclassified subsequently to statement of operations Exchange differences on translating foreign operations ...................................................... 131,855 59,132 Items that will not be reclassified to statement of operations Remeasurements of post-employment benefit obligation, net of tax .................................. Other comprehensive income, net of tax ................................................................................ Comprehensive income (loss) .................................................................................................. 184 132,039 $ (148,617) (521) 58,611 $ 150,552 See accompanying notes to the consolidated financial statements 3 43 Gibson Energy Inc. Consolidated Statement of Changes in Equity (tabular amounts in thousands of Canadian dollars) Share capital (note 18) Balance – January 1, 2014 ............................... $ 1,585,145 Contributed surplus $ 16,130 Accumulated other comprehensive income $ 33,879 Total Equity $ (266,520) $ 1,368,634 Deficit Net income ......................................................... Other comprehensive income, net of tax ............ Comprehensive income ...................................... Employee share options: Stock based compensation ......................... Proceeds from exercise of stock options ... Reclassification of contributed surplus on exercise of stock option and other stock awards .................................................... Issuance of common shares in connection with the dividend reinvestment and stock dividend programs ......................................................... Dividends on common shares ($1.20 per - - - - - - - 59,132 59,132 91,941 (521) 91,420 - 5,942 13,977 - 6,266 (6,266) 36,648 - - - - - - - - - 91,941 58,611 150,552 13,977 5,942 - 36,648 common share)................................................ - Balance – December 31, 2014 .......................... $ 1,634,001 - $ 23,841 - $ 93,011 (148,573) (148,573) $ (323,673) $ 1,427,180 Net loss .............................................................. Other comprehensive income, net of tax ............ Comprehensive income (loss) ............................ Employee share options: Stock based compensation .......................... Proceeds from exercise of stock options ..... Reclassification of contributed surplus on exercise of stock option and other stock awards ...................................................... Issuance of common shares in connection with the dividend reinvestment and stock dividend programs........................................................... - - - - 105 - - - 20,379 - 9,261 (9,261) - 131,855 131,855 (280,656) 184 (280,472) (280,656) 132,039 (148,617) - - - - - - - - - 20,379 105 - 28,956 (161,002) (161,002) Dividends on common shares ($1.28 per - common share) ................................................... Balance – December 31, 2015 .......................... $ 1,672,323 28,956 - - $ 34,959 $ 224,866 $ (765,147) $ 1,167,001 See accompanying notes to the consolidated financial statements 4 44 Gibson Energy Inc. Consolidated Statement of Cash Flows (tabular amounts in thousands of Canadian dollars) Cash provided by (used in) Operating activities Income (loss) from operating activities .................................................................................. Items not affecting cash Depreciation of property, plant and equipment (notes 9 and 21) ....................................... Amortization of intangible assets (notes 12 and 21) ........................................................... Impairment of goodwill (note 13) ...................................................................................... Stock based compensation (note 22) .................................................................................. Gain on sale of property, plant and equipment (note 23) ................................................... Other ................................................................................................................................... Net (gain) loss on fair value movement of financial instruments (note 28)....................... Changes in items of working capital Trade and other receivables ................................................................................................ Inventories .......................................................................................................................... Other current assets ............................................................................................................ Trade payables and accrued charges .................................................................................. Deferred revenue ................................................................................................................ Income taxes paid, net ........................................................................................................... Net cash provided by operating activities ................................................................................... Investing activities Purchase of property, plant and equipment ............................................................................ Purchase of intangible assets .................................................................................................. Acquisitions, net of cash acquired (note 5) ............................................................................ Proceeds on sale of assets ...................................................................................................... Net cash used in investing activities............................................................................................ Financing activities Payment of shareholder dividends ......................................................................................... Proceeds from dividend reinvestment plans (note 18) ........................................................... Interest paid ............................................................................................................................ Interest received ..................................................................................................................... Proceeds from exercise of stock options ................................................................................ Proceeds from long-term debt, net of debt discount and premium (note 14) ......................... Payment of debt issue and financing costs ............................................................................. Proceeds from credit facilities ................................................................................................ Repayment of credit facilities ................................................................................................ Repayment of finance lease liabilities ................................................................................... Net proceeds on settlement of derivative financial instruments (note 28) ............................................................................................................................ Net cash provided by (used in) financing activities .................................................................... Year ended December 31, 2015 2014 $ (95,172) $ 229,726 195,438 87,554 175,959 20,379 (2,515) 640 1,491 297,699 52,000 6,948 (226,809) (11,382) (44,163) 458,067 (328,647) (10,728) (39,772) 6,519 (372,628) (157,985) 28,956 (84,665) 556 105 - - 163,257 (128,257) (411) 36,582 (141,862) 154,934 54,991 - 13,977 (2,717) (7,509) (1,883) 4,819 10,252 3,127 (63,264) 15,764 (75,989) 336,228 (354,682) (19,123) (128,440) 7,230 (495,015) (144,832) 36,648 (62,058) 850 5,942 358,595 (7,072) 463,601 (463,494) (563) 582 188,199 Effect of exchange rate on cash and cash equivalents ............................................................ 7,287 5,317 Net increase (decrease) in cash and cash equivalents ............................................................ (49,136) 34,729 Cash and cash equivalents – beginning of year ...................................................................... Cash and cash equivalents – end of year ................................................................................. 131,911 $ 82,775 97,182 $ 131,911 See accompanying notes to the consolidated financial statements 5 45 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) 1 General Information Gibson Energy Inc. (“Gibsons” or the “Company”) was incorporated pursuant to the Business Corporations Act (Alberta). The Company’s common shares are traded on the Toronto Stock Exchange under the symbol “GEI”. Gibsons is engaged in the movement, storage, blending, processing and marketing and distribution of crude oil, condensate, natural gas liquids, water, oilfield waste and refined products. The Company also provides emulsion treating, water disposal, oil-field waste management services and propane distribution. The Company is incorporated and domiciled in Canada. The address of the Company’s principal place of business is 1700, 440 Second Avenue S.W., Calgary, Alberta, Canada. 2 Basis of preparation These consolidated financial statements have been prepared in compliance with International Financial Reporting Standards (“IFRS”) as set out in the Handbook of the Canadian Institute of Chartered Professional Accountants and as issued by the International Accounting Standards Board (“IASB”). These consolidated financial statements were approved for issuance by the Company’s board of directors (“Board”) on March 1, 2016. These consolidated financial statements are presented in Canadian dollars, the Company’s functional currency, and all values are rounded to the nearest thousands of dollars, except where indicated otherwise. All references to $ are to Canadian dollars and references to U.S.$ are to United States dollars. 3 Summary of significant accounting policies The significant accounting policies applied in the preparation of these consolidated ﬁnancial statements are set out below. These policies have been consistently applied to all the years presented. Basis of measurement These consolidated financial statements have been prepared under the historical cost convention except for certain items that are recorded at fair value as required by the respective accounting standards. Basis of consolidation These consolidated financial statements include the results of the Company and its subsidiaries together with its interest in joint operations. Subsidiaries are all entities over which the Company has control. The Company controls an entity when the Company is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Company and continue to be consolidated until the date control ceases. All intercompany transactions, balances, income and expenses are eliminated on consolidation. Joint arrangements are classiﬁed as either joint operations or joint ventures depending on the contractual rights and obligations of each investor. The Company has assessed the nature of its joint arrangements and determined them to be joint operations and accordingly, the Company has recognized its proportionate share of revenues, expenses, assets and liabilities relating to these joint operations. 6 46 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Foreign currency translation The financial statements for each of the Company’s subsidiaries and joint operations are prepared using their functional currency. The functional currency is the currency of the primary economic environment in which an entity operates. The presentation and functional currency of the parent company is Canadian dollars. Assets and liabilities of foreign operations are translated into Canadian dollars at the market rates prevailing at the balance sheet date. Operating results are translated at the average rates for the period. Exchange differences arising on the consolidation of the net assets of foreign operations are recorded in other comprehensive income (loss). Foreign currency transactions are translated into the functional currency using exchange rates prevailing at the transaction date. Foreign exchange gains and losses resulting from the settlement of foreign currency transactions and from the translation at period end exchange rates of monetary assets and liabilities denominated in currencies other than an entity’s functional currency are recognized in the statement of operations. Business combinations and goodwill Business combinations are accounted for using the acquisition method of accounting. The cost of an acquisition is measured as the cash paid and the fair value of other assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange. For acquisitions achieved in stages, previously held equity interests in the acquired company are remeasured at the acquisition date fair value and the resulting gain or loss is recognized in the statement of operations. Direct costs incurred by the Company in connection with an acquisition, such as finder’s fees, advisors, legal, accounting, valuation and other professional or consulting fees, are expensed as general and administrative expenses when incurred. The acquired identifiable assets, liabilities and contingent liabilities are measured at their fair values at the date of acquisition. Any excess of the cost of acquisition plus the amount of any non-controlling interest in the acquiree, and the acquisition date fair value of the acquirer’s previously held equity interest, if any, over the net fair value of the identifiable assets, liabilities and contingent liabilities acquired is recognized as goodwill. Any deficiency of the cost of acquisition below the fair values of the identifiable net assets acquired is credited to the statement of operations in the period of acquisition. Any contingent consideration to be transferred by the Company is recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration that are deemed to be an asset or liability are recognised in the statement of operations. Contingent consideration that is classified as equity is not re-measured, and its subsequent settlement is accounted for within equity. At the acquisition date, any goodwill acquired is allocated to each of the operating segments expected to benefit from the combination’s synergies. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Intangible assets An intangible asset acquired as part of a business combination is measured at fair value at the date of acquisition and is recognized separately from goodwill if the asset is separable or arises from contractual or other legal rights and its fair value can be measured reliably. Intangible assets acquired separately from a business are carried initially at cost. The initial cost is the aggregate amount paid and the fair value of any other consideration given to acquire the asset. Intangible assets with a finite life are amortized on a straight-line basis over their expected useful lives as follows: Brands ........................................................................................................................................................................ 2 – 10 years Customer relationships ............................................................................................................................................... 1 – 12 years Long-term customer contracts .................................................................................................................................... 6 – 10 years Non-compete agreements ........................................................................................................................................... 2 – 10 years Technology .................................................................................................................................................................. 3 – 5 years Software ....................................................................................................................................................................... 3 – 7 years License and permits ........................................................................................................................................................... 3 years The expected useful lives and method of amortization of intangible assets are reviewed on an annual basis and, if necessary, changes in expected useful life are accounted for prospectively. 7 47 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) The carrying value of intangible assets is reviewed for impairment whenever events or changes in circumstances indicate carrying value may not be recoverable. Property, plant and equipment Property, plant and equipment is stated at cost, less accumulated depreciation and accumulated impairment losses. The initial cost of an asset comprises its purchase price or construction cost, any costs directly attributable to bringing the asset into operation, the initial estimate of any decommissioning obligation, if any, and, for qualifying assets, borrowing costs. The purchase price or construction cost is the aggregate amount paid and the fair value of any other consideration given to acquire the asset. Expenditure on major maintenance refits or repairs comprises the cost of replacement assets or parts of assets, inspection costs and overhaul costs. Where an asset or part of an asset that was separately depreciated is replaced and it is probable that future economic benefits associated with the item will flow to the Company, the expenditure is capitalized and the carrying amount of the replaced asset is derecognized. Inspection costs associated with major maintenance programs are capitalized and amortized over the period to the next inspection. All other maintenance costs are expensed as incurred. Depreciation is charged so as to write off the cost of assets, other than assets that are work in progress, using the straight-line method over their expected useful lives. The useful lives of the Company’s property, plant and equipment are as follows: Buildings .................................................................................................................................................................. 10 – 20 years Equipment .................................................................................................................................................................. 3 – 20 years Rolling stock .............................................................................................................................................................. 5 – 23 years Pipelines ..................................................................................................................................................................... 8 – 20 years Tanks ........................................................................................................................................................................ 20 – 33 years Plant ........................................................................................................................................................................... 7 – 25 years Disposal wells .......................................................................................................................................................... 15 – 25 years The expected useful lives, method of depreciation and residual values of property, plant and equipment are reviewed on an annual basis and, if necessary, changes are accounted for prospectively. The carrying value of property, plant and equipment is reviewed for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the statement of operations in the period the item is derecognized. Impairments The Company carries out impairment reviews in respect of goodwill at least annually or if indicators of possible impairment exist. The Company also assesses during each reporting period whether there have been any events or changes in circumstances that indicate that property, plant and equipment and intangible assets may be impaired and an impairment review is carried out whenever such an assessment indicates that the carrying amount may not be recoverable. Such indicators include, but are not limited to changes in the Company’s business plans, changes in commodity prices leading to lower activity levels, an increase in the discount rate and evidence of physical damage. For the purposes of impairment testing, assets are grouped at the lowest levels for which there are separately identifiable cash inflows. Where impairment exists, the asset is written down to its recoverable amount, which is the higher of the fair value less costs of disposal and its value in use. Impairments are recognized immediately in the statement of operations. The assessment for impairment entails comparing the carrying value of the asset or cash-generating unit with its recoverable amount, that is, the higher of fair value less costs of disposal and value in use. Value in use is usually determined on the basis 8 48 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) of discounted estimated future net cash flows. In determining fair value less costs of disposal, recent market transactions are taken into account, if available. In the absence of such transactions, an appropriate valuation model is used. An impairment loss in respect of goodwill is not reversible in the future. In respect of other assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been previously recognized. Non-derivative financial instruments – recognition and measurement Financial assets Financial assets include cash and cash equivalents and trade and other receivables. The Company determines the classification of its financial assets at initial recognition. Financial assets are recognized initially at fair value, normally being the transaction price plus directly attributable transaction costs. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are carried at amortized cost using the effective interest method if the time value of money is significant. Gains and losses are recognized in the statement of operations when the loans and receivables are derecognized or impaired, as well as through the use of the effective interest method. This category of financial assets includes cash and cash equivalents and trade and other receivables. A provision for impairment of trade receivables is established when there is objective evidence that the Company may not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization, and default or delinquency in payments (more than 30 days past the due date) are considered indicators that the trade receivable may be impaired. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognized in the statement of operations. When a trade receivable is uncollectible, it is written off against the allowance account for trade receivables. Cash and cash equivalents comprise cash on hand and short-term deposit, highly liquid investments that are readily convertible to known amounts of cash which are subject to insignificant risk of changes in value and maturity of three months or less from the date of acquisition. Financial liabilities Financial liabilities classified as other liabilities include amounts borrowed under credit facilities, trade payables and accrued charges, dividends payable and long-term debt. The Company determines the classification of its financial liabilities at initial recognition. All financial liabilities are initially recognized at fair value. For interest-bearing loans and borrowings this is the fair value of the proceeds received net of issue costs associated with the borrowing. After initial recognition, financial liabilities are subsequently measured at amortized cost using the effective interest method. Amortized cost is calculated by taking into account any issue costs, and any discount or premium on settlement. Gains and losses arising on the repurchase, settlement or cancellation of liabilities are recognized in statement of operations. Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously. Derivative financial instruments Derivative financial instruments, used periodically by the Company to manage exposure to market risks relating to commodity prices, interest rates, share based compensation and foreign currency exchange rates, are not designated as hedges. They are recorded at fair value and recorded on the Company’s balance sheet as either an asset, when the fair value is positive, or a liability, when the fair value is negative. Changes in fair value are recorded immediately in the statement of operations. 9 49 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Inventories Inventories are carried at the lower of cost and net realizable value, with cost determined using a weighted average cost method. Net realizable value is the estimated selling price less applicable selling expenses. If carrying value exceeds net realizable amount, a write down is recognized. The write down may be reversed in a subsequent period if the circumstances which caused it no longer exist. Leases - lessee A finance lease is a lease that transfers substantially all the risks and rewards of ownership of an asset to the lessee. Assets acquired under finance leases are recorded in the balance sheet as property, plant and equipment at the lower of their fair value and the present value of the minimum lease payments and depreciated over the shorter of their estimated useful life or their lease terms. The corresponding rental obligations are included in other long-term liabilities as finance lease liabilities. Interest incurred on finance leases is charged to the statement of operations on an accrual basis. All other leases are operating leases, and the rental of these is charged to the statement of operations as incurred over the lease term. Leases - lessor Contractual arrangements that transfer substantially all the risks and benefits of ownership of property to the lessee are recorded as a net investment in a finance lease. The present value of minimum lease receivable under such arrangements are recorded as an investment in finance lease and the finance income is recognized in a manner that produces a consistent rate of return on the investment in the finance lease and is included in revenue. Operating lease income is recognized in the statement of operations as it is earned over the lease term. Provisions and contingencies Provisions are recognized when the Company has a present obligation, legal or constructive, as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where appropriate, the future cash flow estimates are adjusted to reflect risks specific to the liability. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money. Where discounting is used, the increase in the provision due to the passage of time is recognized within finance costs. A contingent liability is disclosed where the existence of an obligation will only be confirmed by future events or where the amount of the obligation cannot be measured reliably and outflow of cash is less than remote. Contingent assets are not recognized, but are disclosed when an inflow of economic benefits is probable. Decommissioning Liabilities for site restoration on the retirement of assets are recognized when the Company has an obligation to restore the site, and when a reliable estimate of that liability can be made. An obligation may also crystallize during the period of operation of a facility through a change in legislation or through a decision to terminate operations. The amount recognized is the present value of the estimated future expenditure determined in accordance with local conditions and requirements. The present value is determined by discounting the expenditures expected to be required to settle the obligation using a risk-free discount rate. Actual expenditures incurred are charged against the accumulated liability. A corresponding item of property, plant and equipment of an amount equivalent to the provision is also created. 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 statement of operations. Other than the unwinding of the discount on the provision, any change in the present value of the estimated expenditure is reflected as an adjustment to the provision and the corresponding item of property, plant and equipment. 10 50 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Environmental liabilities Environmental liabilities are recognized when a remediation is probable and the associated costs can be reliably estimated. Generally, the timing of recognition of these provisions coincides with the completion of a feasibility study or a commitment to a formal plan of action. The amount recognized is the best estimate of the expenditure required. Where the liability will not be settled for a number of years, the amount recognized is the present value of the estimated future expenditure using a risk- free discount rate. Employee benefits Defined benefit pension plan The liability recognised in the balance sheet in respect of deﬁned beneﬁt plans is the present value of the deﬁned beneﬁt obligation at the end of the reporting period less the fair value of plan assets. The deﬁned beneﬁt obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the deﬁned beneﬁt obligation is determined by discounting the estimated future cash outﬂows using interest rates of high-quality corporate bonds that are denominated in the currency in which the beneﬁts will be paid, and that have terms to maturity approximating to the terms of the related pension obligation. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to equity in other comprehensive income in the period in which they arise. Past-service costs or credits are recognised immediately in statement of operations. Defined contribution pension plans The Company’s defined contribution plans are funded as specified in the plans and the pension expense is recorded as the benefits are earned by employees and funded by the Company. Share-based payments The Company’s equity incentive plan allows for the granting of stock options, restricted share units with time based vesting (RSUs) and performance share units (PSUs) with performance based vesting conditions and deferred share units (DSUs) that vest on the date such employee redeems the DSUs after their cessation of employment with the Company. The fair value of grants made under the employee share award plan is measured at the date of grant of the award. The resulting cost, as adjusted for the expected and actual level of vesting of the awards, is expensed over the period in which the awards vest. At each balance sheet date before vesting, the cumulative expense is calculated, representing the extent to which the vesting period has expired and management’s best estimate of the number of equity instruments that will ultimately vest. The movement in the cumulative expense since the previous balance sheet date is recognized in the statement of operations with a corresponding impact to contributed surplus. The fair value of RSUs, PSUs and DSUs are equal to the Company five days weighted average share price at the date of grant. The fair value of options is measured by using the Black-Scholes model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable and it requires the input of highly subjective assumptions. Expected volatility of the stock is based on a combination of the historical stock price of the Company and also of comparable companies in the industry. The expected term of options represents the period of time that options granted are expected to be outstanding. The risk-free rate is based on the Government of Canada’s Canadian Bond Yields with a remaining term equal to the expected life of the options used in the Black-Scholes valuation model. 11 51 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Termination benefit The Company recognizes termination benefits as an expense when it is demonstrably committed to either terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal, or providing benefits as a result of an offer made to encourage voluntary termination. Income taxes Income tax expense represents the sum of the income tax currently payable and deferred income tax. Interest and penalties relating to income tax are also included in income tax expense. The income tax currently payable is based on the taxable income for the period. Taxable income differs from net income as reported in the statement of operations because it excludes items of income or expense that are taxable or deductible in other periods and it further excludes items that are never taxable or deductible. The Company’s liability for current income tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred income tax is provided for using the liability method of accounting. Deferred income tax assets and liabilities are determined based on differences between the financial reporting and income tax basis of assets and liabilities. These differences are then measured using enacted or substantially enacted income tax rates and laws that will be in effect when these differences are expected to reverse. The effect of a change in income tax rates on deferred tax assets and liabilities is recognized in income in the period that the change occurs. Deferred income tax assets are recognized for tax loss carry-forwards to the extent that the realization of the related tax benefit through future taxable profits is probable. Revenue recognition Product revenues associated with the sales of crude oil, diluent, natural gas liquids, road asphalt, roofing flux, wellsite fluids and distillate owned by the Company are recognized when the risk of ownership passes to the customer and physical delivery occurs, the price is fixed and collection is reasonably assured. Sales terms are generally FOB shipping point, in which case the sales are recorded at the time of shipment, because this is when title and risk of loss are transferred. All payments received before delivery are recorded as deferred revenue and are recognized as revenue when delivery occurs, assuming all other criteria are met. Freight costs billed to customers are recorded as a component of revenue. Revenues from buy/sell transactions whereby the Company effectively is acting as an agent are recorded on a net basis. Revenue associated with the provision of services such as transportation, terminalling and environmental services are recognized when the services are provided, the price is fixed and collection is reasonably assured. Revenue from pipeline tariffs and fees are based on volumes and rates as the pipeline is being used. Long-term take-or-pay contracts, under which shippers are obligated to pay fixed amounts ratably over the contract period regardless of volumes shipped, may contain make-up rights. Make-up rights are earned by shippers when minimum volume commitments are not utilized during the period but under certain circumstances can be used to offset overages in future periods, subject to expiry periods. The Company recognizes revenues associated with make-up rights at the earlier of when the make-up volume is shipped, the make-up right expires or when it is determined that the likelihood that the shipper will utilize the make-up right is remote. Revenue from pipeline tariffs and fees are based on volumes and rates as the pipeline is being used. Revenue from equipment rentals and non-refundable propane tank fees are recorded in deferred revenue and are recognized in revenue on a straight line basis over the rental period, typically one year. Excise taxes are reported gross within sales and other operating revenues and taxes other than income taxes, while other sales and value-added taxes are recorded net in operating expenses. Cost of sales Cost of sales includes the cost of finished goods inventory (including depreciation, amortization and impairment charges), processing costs, costs related to transportation, inventory write downs and reversals, and gains and losses on derivative financial instruments relating to commodities. Interest Interest income and expense is recognized in the statement of operations using the effective interest method. 12 52 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Borrowing costs General and specific borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. All other borrowing costs are recognized in the statement of operations in the period in which they are incurred. Share capital Common and preferred shares are classified as equity. Incremental costs directly attributable to the issuance of shares are recognized as a deduction from equity. Per share amounts Basic per share amounts are calculated using the weighted average number of shares outstanding during the year. Diluted per share amounts are calculated giving effect to the potential dilution that would occur if stock options and other equity awards were exercised or converted into common shares. Dividends Dividends on common shares are recognized in the period in which the dividends are approved by the Board. Segmental reporting The Company determines its reportable segments based on the nature of its operations, which is consistent with how the business is managed and results are reported to the chief operating decision maker. Each operating segment also uses a measure of profit and loss that represents segment profit. The chief operating decision maker, who is responsible for resource allocation and assessing performance of the operating segments, has been identified as the President and Chief Executive Officer. Critical accounting estimates and judgements The preparation of ﬁnancial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Company’s accounting policies. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Critical accounting estimates and assumptions The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as well as the disclosure of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual outcomes could differ from those estimates. The estimates and assumptions that have a signiﬁcant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next ﬁnancial year are addressed below. Fair value of assets and liabilities acquired in a business combination In conjunction with each business combination, the Company must allocate the cost of the acquired entity to the assets and liabilities assumed based on their estimated fair values at the date of acquisition. Determining the fair value of assets and liabilities acquired, as well as intangible assets that relate to such items as customer relationships, brands and contracts involves professional judgment and is ultimately based on acquisition models and management’s assessment of the value of the assets and liabilities acquired and, to the extent available, third party assessments. Uncertainties associated with these estimates include changes in production volumes, changes in commodity prices, fluctuations in capacity or product slates, economic obsolescence factors in the area and potential future sources of cash flow. During the measurement period, the fair value of assets acquired and liabilities assumed may be adjusted when the initial accounting for business combination is recorded based on provisional amounts. Although the resolution of these uncertainties has not historically had a material impact on the Company’s results of operations or financial condition, the actual amounts may vary significantly from estimated amounts. Any excess of the cost of acquisition over the net fair value of the identifiable assets acquired is recognized as goodwill. 13 53 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Impairment assessment of non-financial assets The Company tests annually whether goodwill of an operating segment has suffered any impairment, in accordance with the Company’s accounting policy. The recoverable amounts of the operating segments are determined based on fair value less costs of disposal calculations which require the use of estimates. The Company also assesses at least annually whether there have been any events or changes in circumstances that indicate that property, plant and equipment and other intangible assets may be impaired and an impairment review is carried out whenever such an assessment indicates that the carrying amount may not be recoverable. In the impairment analysis of the Company’s assets, some of the key assumptions used in estimating future cash flows include revenue growth, future commodity prices, expected margin, expected sales volumes, cost structures and the outlook of market supply and demand conditions appropriate to the local circumstances and macro-economic environment. These assumptions and estimates are uncertain and are subject to change as new information becomes available. Changes in economic conditions can also affect the rate used to discount future cash flow estimates. Income taxes The Company is subject to income taxes in Canada and the United States of America. Tax provisions are recognized when it is considered probable that there will be a future outflow of funds to a taxing authority. In such cases, provision is made for the amount that is expected to be settled, where this can be reasonably estimated. This requires management to make some assumptions as to the ultimate outcome, which can change over time depending on facts and circumstances. A change in estimate of the likelihood of a future outflow and/or in the expected amount to be settled would be recognized in statement of operations in the period in which the change occurs. Fair value of derivatives ﬁnancial instruments The Company reflects the fair value of derivative financial instruments based on valuation information from third parties. The calculation of the fair value of certain of these instruments is based on proprietary models and assumptions of third parties because such instruments are not quoted on an active market. Additionally, estimates of fair value may vary among different models due to a difference in assumptions applied, such as the estimate of prevailing market prices, volatility, correlations and other factors, and may not be reflective of the price at which they can be settled due to the lack of a liquid market. As a result of changes in key assumptions, the actual amounts may vary significantly from estimated amounts. Provisions Accruals for decommissioning and environmental remediation are recorded when it is considered probable and the costs can be reasonably estimated. A number of factors affect the cost of environmental remediation, including the determination of the extent of contamination, the length of time remediation may require, the complexity of environmental regulations and the advancement of technology. Considering these factors, the Company has estimated the costs of remediation, which are likely to be incurred in future years. The Company believes the provisions made for environmental matters are adequate, however it is reasonably possible that actual costs may differ from the estimated accrual, if the selected methods of remediation do not adequately reduce the contaminates and if further remedial action is required. The Company uses third-party environmental evaluators, where possible, to obtain the estimates of decommissioning and environmental provision. Critical judgements in applying the Company’s accounting policies Identification of cash-generating unit (“CGU”) For the purposes of impairment testing, assets are grouped at the lowest levels of integrated assets that generate identifiable cash inflows that are largely independent of the cash inflows of other assets or groups of assets, termed as a CGU. The allocation of assets into a CGU requires significant judgment and interpretations with respect to the integration between assets, the existence of active markets, similar exposure to market risks, shared infrastructures and the way in which management monitors the operations. 14 54 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Investment in finance leases In determining whether certain of the Company’s long-term tank storage arrangements are, or contain, a lease, the Company must use judgement in assessing whether the fulfilment of the arrangement is dependent on the use of a specific asset and the arrangement conveys the right to use the assets. For those arrangements considered to be a lease, further judgement is required to determine whether substantially all of the significant risks and rewards of ownership are transferred to the customer or remain with the Company, to appropriately account for the arrangement as a finance or operating lease. These judgements can be significant as to how the Company classifies amounts related to the arrangements as property, plant and equipment or net investment in finance lease on the balance sheet. The Company has determined, based on the terms and conditions of these arrangements, that the substantial risks and rewards to the ownership of certain storage tanks have been transferred to the customer, and accordingly, these storage tanks have been recognized as an investment in finance lease. Current and deferred taxation The computation of the Company’s income tax expense involves the interpretation of applicable tax laws and regulations in many jurisdictions. The resolution of tax positions taken by the Company can take significant time to complete and in some cases it is difficult to predict the ultimate outcome. In addition, the Company has carry-forward tax losses in certain taxing jurisdictions that are available to offset against future taxable profit. This involves an assessment of when those deferred tax assets are likely to be realized, and a judgment as to whether or not there will be sufficient taxable profits available to offset the tax assets when they do reverse. This requires assumptions regarding future profitability and is therefore inherently uncertain. To the extent assumptions regarding future profitability change, there can be an increase or decrease in the amounts recognized in respect of deferred tax assets as well as in the amounts recognized in statement of operations in the period in which the change occurs. However, deferred income tax assets are recognized only to the extent that it is probable that taxable profit will be available against which the unused tax losses can be utilized. To the extent that actual outcomes differ from management’s estimates, income tax charges or credits may arise in future periods. 4 Changes in accounting policies and disclosures New and amended standards adopted by the Company The Company adopted the following new and revised standards, along with any consequential amendments. These changes were made in accordance with applicable transitional provisions. • The annual improvements process addresses issues in the 2010-2012 and 2011-2013 reporting cycles including changes to IFRS 13, Fair value measurements, IFRS 8, Operating segments and IAS 24, Related party transactions. These improvements are effective for annual periods beginning on or after July 1, 2014. The impact of adopting these improvements did not have a material impact on the consolidated financial statements. • IAS 19, Employee benefits (“IAS 19”), has been amended to clarify the application of requirements to plans that require employees or third parties to contribute toward the cost of the benefits. The amendment to IAS 19 is effective for annual periods beginning on or after July 1, 2014. The impact of adopting this amendment did not have a material impact on the consolidated financial statements. 15 55 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) New standards and interpretations issued but not yet adopted The following provides information requiring new standards and interpretations that have been issued but not yet adopted by the Company: • The annual improvements process addresses issues in the 2012-2014 reporting cycles including changes to IFRS 5, Non- current assets held for sale and discontinued operations, IFRS 7, Financial instruments: Disclosures, IAS 19, Employee benefits, and IAS 34, Interim financial reporting. These improvements are effective for periods beginning on or after January 1, 2016. The adoption of these improvements will not have a material impact on the consolidated financial statements. • IAS 1, Presentation of financial statements (“IAS 1”), has been amended to clarify the guidance on materiality and aggregation, the presentation of subtotals, the structure of financial statements and the disclosure of accounting policies. The amendment to IAS 1 is effective for annual periods beginning on or after January 1, 2016. The adoption of this amendment will not have a material impact on the consolidated financial statements. • The IASB completed the final element of its comprehensive publication of IFRS 9 Financial Instruments in July 2014. The package of improvements introduced by IFRS 9 includes a logical model for classification and measurement, a single, forward-looking ‘expected loss’ impairment model and a substantially-reformed approach to hedge accounting. The IASB has previously published versions of IFRS 9 that introduced new classification and measurement requirements (in 2009 and 2010) and a new hedge accounting model (in 2013). The July 2014 publication represents the final version of the Standard, replaces earlier versions of IFRS 9 and completes the IASB’s project to replace IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 is effective for annual periods beginning on or after 1 January 2018. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements. • • • IFRS 10, Consolidated financial statements (“IFRS 10”), and IAS 28, Investments in associates and joint ventures (“IAS 28”), has been amended to address an inconsistency between IFRS 10 and IAS 28 in regards to a sale or contribution of assets between an investor and its associate or joint venture. The main consequence of the amendments is that a full gain or loss is recognized when the transaction involves a business combination, and whereas a partial gain is recognized when the transaction involves the assets that do not constitute a business. Additionally, the amendments clarify the exception from preparing consolidated financial statements, the consolidation requirements for subsidiaries which act as an extension of an investment entity, and the requirements for equity accounting for investments in associates and joint ventures. The amendments to IFRS 10 and IAS 28 are effective for annual periods beginning on or after January 1, 2016. The adoption of these amendments will not have a material impact on the consolidated financial statements. IFRS 15, Revenue from contracts with customers (“IFRS 15”), has been issued as a new standard on revenue recognition and will supersede IAS 18, Revenue, IAS 11, Construction Contracts and related interpretations. IFRS 15 is effective for annual periods beginning on or after January 1, 2018. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements. IFRS 16, Leases (“IFRS 16”), has been issued as a new standard on leases and will supersede IAS 17. IFRS 16 is effective for annual periods beginning on or after January 1, 2019. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements. 16 56 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) 5 Business combinations The Company completed the following business combinations in 2015: Littlehawk Enterprises Ltd (“Littlehawk”) On February 1, 2015, the Company acquired all of the issued and outstanding common shares of Littlehawk for total cash consideration of $11.5 million. Littlehawk is a private Canadian company which operates hydrovac units that specialize in hydro excavation, pressure testing and water hauling for the construction and energy industries. The following table summarizes the fair value of assets acquired and liabilities assumed at the acquisition date: Fair Value Trade and other receivables .................................................................................................................................. $ Inventories............................................................................................................................................................. Prepaid and other assets ........................................................................................................................................ Property, plant and equipment .............................................................................................................................. Goodwill(1) ........................................................................................................................................................... Intangible assets (2) ................................................................................................................................................ Other long-term assets .......................................................................................................................................... Trade payables and accrued charges ..................................................................................................................... Deferred income tax liabilities .............................................................................................................................. Net assets acquired ................................................................................................................................................ $ 1,784 128 57 8,123 1,533 1,754 48 (505) (1,391) 11,531 The total consideration includes contingent consideration of $0.6 million that the Company has recorded as it expects that the specified targets will be achieved. (1) The goodwill arising on the acquisition is not deductible for tax purposes. (2) Consists of customer relationships of $0.2 million and non-compete agreements of $1.6 million. The goodwill arising from the acquisition is attributable to the expected synergies with the Company’s existing Truck Transportation segment. The goodwill for this acquisition is allocated to the Truck Transportation segment. The fair value of trade receivables is $1.8 million, which approximates their gross contractual amount. Ross Eriksmoen, Inc, GWCC, LLC, Frontier Ventures, LLC (collectively doing business as “T&R Transport”) On July 1, 2015, the Company acquired all of the issued and outstanding ownership interests of T&R Transport for total cash consideration of $34.9 million. T&R transports water and oil field waste and provides related transportation services to customers in the oil, gas, and petrochemical industry throughout the Bakken region of North Dakota. The following table summarizes the fair value of assets acquired and liabilities assumed at the acquisition date: Fair Value Trade and other receivables .................................................................................................................................. $ Inventories............................................................................................................................................................. Prepaid and other assets ........................................................................................................................................ Property, plant and equipment .............................................................................................................................. Goodwill(1) ........................................................................................................................................................... Intangible assets (2) ................................................................................................................................................ Trade payables and accrued charges .................................................................................................................... Net assets acquired ................................................................................................................................................ $ 8,501 619 67 22,578 6,226 3,133 (6,197) 34,927 The total consideration includes contingent consideration of $6.2 million that the Company has recorded as it expects that the specified targets will be achieved. (1) The goodwill arising on the acquisition is deductible for tax purposes. (2) Consists of customer relationships of $1.3 million and non-compete agreements of $1.8 million. The goodwill arising from the acquisition is attributable to the expected synergies with the Company’s existing Environmental Services segment. The goodwill for this acquisition is allocated to the Environmental Services segment. 17 57 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) The fair value of trade receivables is $8.5 million, which approximates their gross contractual amount. Additional Information If the Littlehawk and T&R Transport acquisitions had occurred on January 1, 2015, the Company estimates that it would have reported combined revenue of $5,621.9 million and net loss before income taxes of $286.1 million for the year ended December 31, 2015. From the date that each acquisition was completed to December 31, 2015, the acquisitions contributed revenue of $23.7 million and net loss before income taxes of $0.4 million. The Company completed the following business combinations in 2014: Cal-Gas Inc. (“Cal-Gas”) On August 1, 2014, the Company acquired all of the issued and outstanding common shares of Cal-Gas for total cash consideration of $96.4 million, including final closing adjustments. Cal-Gas is a provider of propane and related equipment, service and delivery to commercial, industrial and residential customers in Western Canada and Northwestern Ontario. The following table summarizes the fair value of assets acquired and liabilities assumed at the acquisition date: Trade and other receivables .............................................................................................................................. Inventories......................................................................................................................................................... Prepaid and other assets .................................................................................................................................... Property, plant and equipment .......................................................................................................................... Goodwill(1) ....................................................................................................................................................... Intangible assets (2) ............................................................................................................................................ Other long-term assets ...................................................................................................................................... Trade payables and accrued charges ................................................................................................................. Deferred revenue ............................................................................................................................................... Provisions .......................................................................................................................................................... Deferred income tax liabilities .......................................................................................................................... Net assets acquired ............................................................................................................................................ Fair Value $ $ 11,314 1,457 331 64,401 29,152 7,534 105 (10,957) (442) (90) (6,420) 96,385 (3) The goodwill arising on the acquisition is not deductible for tax purposes. (4) Consists of customer relationships of $5.1 million and non-compete agreements of $2.4 million. Acquisition-related costs of $0.3 million have been charged to general and administrative expenses in the consolidated statement of operations for the year ended December 31, 2014. The goodwill arising from the acquisition is attributable to the expected synergies with the Company’s existing propane operations within the Propane and NGL Marketing and Distribution segment. The goodwill for this acquisition is allocated to the Propane and NGL Marketing and Distribution segment. The fair value of trade receivables is $11.3 million, which approximates its gross contractual amount. 18 58 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Stittco Energy Limited (“Stittco”) On April 1, 2014, the Company acquired all of the issued and outstanding common shares of Stittco for total cash consideration of $32.1 million including final closing adjustments. Stittco is a provider of propane and related equipment, service and delivery to commercial, industrial and residential customers in northern Manitoba and the Northwest Territories. The following table summarizes the fair value of assets acquired and liabilities assumed at the acquisition date: Trade and other receivables .............................................................................................................................. Inventories......................................................................................................................................................... Prepaid and other assets .................................................................................................................................... Property, plant and equipment .......................................................................................................................... Goodwill(1) ....................................................................................................................................................... Intangible assets (2) ............................................................................................................................................ Trade payables and accrued charges ................................................................................................................. Income taxes payable ........................................................................................................................................ Other liabilities .................................................................................................................................................. Provisions .......................................................................................................................................................... Deferred income tax liabilities .......................................................................................................................... Net assets acquired ............................................................................................................................................ Fair Value $ $ 12,818 4,922 253 15,653 4,837 5,660 (4,068) (1,270) (2,007) (734) (4,009) 32,055 (1) The goodwill arising on the acquisition is not deductible for tax purposes. (2) Consists of customer relationships of $5.4 million, and non-compete agreements of $0.3 million. Acquisition-related costs of $0.2 million have been charged to general and administrative expenses in the consolidated statement of operations for the year ended December 31, 2014. The goodwill arising from the acquisition is attributable to the expected synergies with the Company’s existing propane operations within the Propane and NGL Marketing and Distribution segment. The goodwill for this acquisition is allocated to the Propane and NGL Marketing and Distribution segment. The fair value of trade receivables is $12.8 million, which approximates its gross contractual amount. 6 Trade and other receivables Trade receivables ............................................................................................................ Allowance for doubtful accounts .................................................................................... Trade receivables - net .................................................................................................... Risk management assets (note 28) .................................................................................. Deposits held as collateral ............................................................................................... Broker accounts receivable ............................................................................................. Indirect taxes receivable .................................................................................................. Other ............................................................................................................................... December 31, 2015 $ $ 353,485 (1,950) 351,535 8,415 43 1,561 5,579 3,180 370,313 $ $ 2014 599,546 (4,678) 594,868 18,702 898 4,554 15,377 6,884 641,283 19 59 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Allowance for doubtful accounts Year ended December 31, 2015 2014 Opening balance .............................................................................................................. Additional allowances ..................................................................................................... Receivables written off as uncollectible .......................................................................... Recoveries ....................................................................................................................... Effect of changes in foreign exchange rates .................................................................... Closing balance ............................................................................................................... $ $ 4,678 35 (2,953) (31) 221 1,950 $ $ 4,092 1,708 (1,191) (73) 142 4,678 7 Inventories Crude oil.......................................................................................................................... Diluent ............................................................................................................................ Asphalt ............................................................................................................................ Natural gas liquids .......................................................................................................... Wellsite fluids and distillate ............................................................................................ Spare parts and other ....................................................................................................... December 31, 2015 2014 $ 46,876 1,244 10,928 22,238 8,856 17,451 $ 107,593 $ 68,883 2,889 15,922 41,230 11,727 14,286 $ 154,937 The cost of the inventory sold included in cost of sales was $4,351.6 million and $7,149.1 million for the year ended December 31, 2015 and 2014, respectively. 8 Net investment in finance leases The following summarizes the Company’s net investment in arrangements whereby the Company has entered into fixed term contractual arrangements to allow customers to have dedicated use of certain tanks owned by the Company. These arrangements are accounted for as finance leases: Total minimum lease payments receivable ..................................................................... Residual value ................................................................................................................. Unearned income ............................................................................................................ Less: current portion ....................................................................................................... Net investment in finance lease : non-current portion..................................................... December 31, 2015 2014 $ 329,806 35,858 (271,230) 94,434 1,045 93,389 $ $ 353,392 35,858 (293,955) 95,295 908 94,387 $ The minimum lease receivables are expected to be as follows: 2016 .................................................................................................................................................................... 2017 .................................................................................................................................................................... 2018 .................................................................................................................................................................... 2019 .................................................................................................................................................................... 2020 .................................................................................................................................................................... 2021 and later ...................................................................................................................................................... $ 23,548 23,548 23,548 23,548 23,548 212,066 20 60 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) 9 Property, plant and equipment Land & Buildings Pipelines and Connections Tanks Rolling Stock Plant, Equipment & Disposal wells Cost: At January 1, 2015 ...................... $ 159,631 $ 137,434 $ 430,153 $ 454,493 $ 668,425 26,671 Additions .................................... (2,197) Disposals ..................................... Acquisitions through business 2,144 (13,676) 57,372 (177) 7,964 (1,506) 4,222 - Work in Progress Total $200,400 $ 2,050,536 376,479 (17,556) 278,106 - combinations (note 5) .............. Reclassifications ......................... Change in decommissioning provision (note 16) .................. Effect of movements in 5,741 29,772 - 23,818 - 47,532 6,773 - 18,187 99,659 - (200,781) 30,701 - - 2,705 5,740 - 9,180 - 17,625 exchange rates ......................... 23,186 At December 31, 2015 ................ $ 207,519 $ 168,179 $ 542,750 $ 491,946 $ 843,111 42,212 5,917 2,130 - Accumulated depreciation and impairment: At January 1, 2015 ...................... $ 25,599 $ Depreciation ................................ Impairment ................................. Disposals ..................................... Effect of movements in 5,773 385 (324) exchange rates ......................... 508 At December 31, 2015 ................ $ 31,941 $ 52,652 $ 78,211 $ 184,624 $ 214,881 82,066 9,996 12,045 - (1,450) - 60,952 1,034 (11,531) 23,187 - (247) - 18,098 62,648 $ 101,156 $ 251,585 $ 325,640 16,506 5 12,857 86,302 $290,582 $ 2,544,087 $ $ - $ 555,967 181,974 - 13,464 - (13,552) - - 35,117 - $ 772,970 Carrying amounts: At January 1, 2015 ...................... $ 134,032 $ 84,782 105,531 At December 31, 2015 ................ 175,578 $ 351,942 $ 269,869 $ 453,544 517,470 240,361 441,594 $200,400 $ 1,494,569 1,771,117 290,582 21 61 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Land & Buildings Pipelines and Connections Tanks Rolling Stock Plant, Equipment & Disposal wells Cost: At January 1, 2014 ...................... $ 113,292 $ 128,360 $ 266,947 $ 400,671 $ 524,655 50,454 Additions .................................... (2,050) Disposals ..................................... Acquisitions through business 38,438 (11,670) 25,535 (22) 9,155 (798) 3,971 - Work in Progress Total $ 86,464 $ 1,520,389 391,270 (14,540) 263,717 - combinations (note 5) .............. 13,150 - 53,879 8,016 5,009 - 80,054 Transfer to net investment in finance leases ........................... Reclassifications ......................... Change in decommissioning provision (note 16) .................. Effect of movements in - 6,510 - 517 (2,026) 85,557 - 2,967 - 54,629 - (150,180) (2,026) - - 4,586 16,225 - 23,828 - 44,639 exchange rates ......................... 11,900 At December 31, 2014 ................ $ 159,631 $ 137,434 $ 430,153 $ 454,493 $ 668,425 16,071 1,166 1,214 - Accumulated depreciation and impairment: At January 1, 2014 ...................... $ 20,706 $ 43,579 $ 58,377 $ 132,214 $ 145,657 66,754 Depreciation ................................ (1,252) Disposals ..................................... Effect of movements in 19,494 (244) 54,781 (8,605) 4,832 (22) 9,073 - 399 30,750 $200,400 $ 2,050,536 $ - $ 400,533 154,934 - (10,123) - exchange rates ......................... 83 - 584 6,234 3,722 - 10,623 At December 31, 2014 ................ $ 25,599 $ 52,652 $ 78,211 $ 184,624 $ 214,881 $ - $ 555,967 Carrying amounts: At January 1, 2014 ...................... $ 92,586 $ 84,781 84,782 At December 31, 2014 ................ 134,032 $ 208,570 $ 268,457 $ 378,998 453,544 351,942 269,869 $ 86,464 $ 1,119,856 1,494,569 200,400 Additions to property, plant and equipment includes capitalization of interest of $12.2 million and $7.2 million for the year ended December 31, 2015 and 2014, respectively. Property, plant and equipment are reviewed for impairment whenever events or conditions indicate that their net carrying amount may not be recoverable. As a result of the continued general market downturn in 2015, the Company recorded an impairment loss of $13.5 million that was recorded as additional depreciation. Of the impairment loss recorded, $12.8 million related to assets within the Environmental Services segment and $0.7 million related to assets within the Truck Transportation segment. 10 Long-term prepaid expenses and other assets Risk management assets (note 28) ............................................................................ Long-term prepaid expenses ..................................................................................... Defined benefit pension plan assets .......................................................................... Other assets ............................................................................................................... December 31, 2015 - 1,189 1,084 2,291 4,564 2014 34,855 1,381 989 2,553 39,778 $ $ $ $ 22 62 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) 11 Income tax The major components of income tax are as follows: Current tax provision Current tax on income for the year .......................................................................... Adjustments in respect of prior years ...................................................................... Total current tax provision ................................................................................... Deferred tax recovery .............................................................................................. Origination and reversal of temporary differences .................................................. Total deferred tax recovery .................................................................................. Income tax provision (recovery) .............................................................................. $ $ 39,904 8,195 48,099 (48,892) (5,895) (54,787) (6,688) Year ended December 31, 2015 2014 $ $ 48,274 275 48,549 (12,886) (75) (12,961) 35,588 The income tax provision (recovery) differs from the amounts which would be obtained by applying the Canadian statutory income tax rate to income before income taxes. These differences result from the following items: Year ended December 31, 2015 2014 Income (loss) before income taxes .......................................................................... Statutory income tax rate ......................................................................................... Computed income tax provision .............................................................................. Increase (decrease) in income tax resulting from: $ (287,344) 26.13% (75,083) Foreign exchange loss on long-term debt, net .................................................. Foreign exchange loss, other ............................................................................ Non-deductible expenses .................................................................................. Stock based compensation ................................................................................ Non-taxable dividends ...................................................................................... Rate differential on foreign taxes ..................................................................... Goodwill impairment ........................................................................................ Impact of corporate rate changes ...................................................................... Other, including revisions in previous tax estimates and rate reductions ......... Effective income tax rate ......................................................................................... Current ..................................................................................................................... Deferred ................................................................................................................... 14,622 15,227 1,015 5,325 (13,863) (8,237) 45,978 6,825 1,503 (6,688) 2.3% 48,099 (54,787) (6,688) $ $ $ 127,529 25.3% 32,265 4,646 4,704 484 3,533 (12,014) 2,173 - - (203) $ 35,588 27.9% 48,549 (12,961) $ 35,588 The increase in the statutory rate was due to higher provincial income tax rates in Canada in the current year. 23 63 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) The analysis of deferred tax assets and deferred tax liabilities is as follows: Deferred tax assets: Deferred tax asset to be settled after more than 12 months ................................... Deferred tax asset to be settled within 12 months ................................................. $ December 31, 2015 896 700 1,596 $ 2014 1,532 2,000 3,532 Deferred tax liabilities: Deferred tax liability to be settled after more than 12 months ............................... Deferred tax liability to be settled within 12 months ............................................. Deferred tax liabilities, net............................................................................................ The gross movement on the deferred income tax account is as follows: Opening balance ........................................................................................................... Effect of changes in foreign exchange rates ................................................................. Recognized through business combinations (note 5) .................................................... Income statement recovery ........................................................................................... Tax charge (credit) relating to components of other comprehensive income .............. Closing balance ............................................................................................................. 124,284 21,400 145,684 $ 144,088 172,851 18,500 191,351 $ 187,819 Year ended December 31, 2015 $ 187,819 9,600 1,391 (54,787) 65 $ 144,088 2014 $ 185,918 4,609 10,429 (12,961) (176) $ 187,819 The movement in the significant components of deferred income tax assets and liabilities during the year, without taking into consideration the offsetting balances within the same tax jurisdiction, is as follows: Deferred tax assets At January 1, 2014 ........................................ Credited (charged) to the statement of operations ............................................... Credited to other comprehensive income ..... Effect of changes in foreign exchange rates . At December 31, 2014 .................................. Credited (charged) to the statement of operations ............................................... Charged to other comprehensive income ...... Effect of changes in foreign exchange rates . At December 31, 2015 .................................. Non-capital losses carried forward Asset retirement obligations Retirement benefits obligations Other Total $ 21,493 $ 12,511 $ 1,480 $ 21,042 $ 56,526 (5,062) - 1,686 $ 18,117 10,449 - 1,577 $ 30,143 1,006 - 380 $ 13,897 3,093 - 420 $ 17,410 (213) 176 - $ 1,443 34 (65) - $ 1,412 (9,350) - 1,531 $ 13,223 5,785 - (4,689) $ 14,319 (13,619) 176 3,597 $ 46,680 19,361 (65) (2,692) $ 63,284 24 64 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Deferred tax liabilities At January 1, 2014 ...................................... Credited (charged) to the statement of operations ............................................. Business combinations ................................ Effect of changes in foreign exchange rates At December 31, 2014 ................................ Credited (charged) to the statement of operations ............................................. Business combinations ................................ Effect of changes in foreign exchange rates At December 31, 2015 ................................ Income tax losses carry forward Timing of Partnership Income Property, Plant and Equipment Accounting and tax basis differences Other Total $ 47,468 $ 156,049 $ 38,927 $ - $ 242,444 (14,606) - - $ 32,862 (1,412) 10,429 5,934 $ 171,000 (20,729) - - $ 12,133 274 1,391 6,064 $ 178,729 (11,285) - 1,272 $ 28,914 (13,958) - 844 $ 15,800 723 - 1,000 $ 1,723 (26,580) 10,429 8,206 $ 234,499 (1,013) - - 710 (35,426) 1,391 6,908 $ 207,372 $ At December 31, 2015 and 2014, the Company had losses available to offset income for tax purposes of $79.8 million and $48.8 million, respectively. At December 31, 2015, the Company has $1.6 million and $78.2 million of the losses available in Canada and the United States, respectively that expire as follows: December 31, 2031 ............................................................................................................................................. December 31, 2032 ............................................................................................................................................. December 31, 2033 ............................................................................................................................................. December 31, 2034 ............................................................................................................................................. December 31, 2035 ............................................................................................................................................. $ 39,895 14,719 - 1,332 23,874 $ 79,820 No income tax liability has been recognized in respect of temporary differences associated with investments in subsidiaries. As no income 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. 25 65 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) 12 Intangible assets Brands Customer relationships Long-term customer contracts Non-compete License and Permits agreements Technology Software Total - Cost: At January 1, 2015 ........ $ 51,330 $ 258,716 $ 37,380 $ 26,554 $ 2,667 $ 47,539 $ 3,716 $ 427,902 16,087 - Additions ....................... Acquisitions through business combinations (note 5) ........................ Effect of movements in 40,275 exchange rates ............. At December 31, 2015 .. $ 53,240 $ 288,880 $ 43,706 $ 31,601 $ 2,873 $ 64,417 $ 4,434 $ 489,151 16,087 28,745 1,910 1,579 3,468 1,419 6,326 4,887 206 791 718 - - - - - - - - - Accumulated amortization and impairment: At January 1, 2015 ........ $ 39,451 $ 136,796 $ 19,702 $ 20,923 $ 2,371 $ 14,452 $ 2,670 $ 236,365 87,554 Amortization ................. Effect of movements in 19,799 exchange rates ............. At December 31, 2015 .. $ 48,076 $ 214,069 $ 26,510 $ 25,225 $ 2,873 $ 22,534 $ 4,431 $ 343,718 12,220 65,053 1,903 1,385 2,917 7,755 3,178 3,630 1,151 6,722 326 176 327 610 Carrying amounts: At January 1, 2015 ........ $ 11,879 $ 121,920 $ 17,678 $ 5,164 At December 31, 2015 .. 74,811 17,196 5,631 6,376 $ 296 $ 33,087 $ 1,046 $ 191,537 145,433 41,883 3 - Brands Customer relationships Long-term customer contracts Non-compete License and Permits agreements Technology Software Total - Cost: At January 1, 2014 ........ $ 50,465 $ 235,096 $ 34,653 $ 23,368 $ 2,579 $ 27,911 $ 3,448 $ 377,520 20,252 - Additions ....................... Acquisitions through business combinations (note 5) ........................ Effect of movements in 16,936 exchange rates ............. At December 31, 2014 .. $ 51,330 $ 258,716 $ 37,380 $ 26,554 $ 2,667 $ 47,539 $ 3,716 $ 427,902 10,602 12,264 13,194 19,498 2,592 2,727 865 594 130 754 268 88 - - - - - - - - Accumulated amortization: At January 1, 2014 ........ $ 28,142 $ 101,478 $ 14,801 $ 17,468 $ 1,980 $ 9,944 $ 1,312 $ 175,125 54,991 Amortization ................. Effect of movements in 6,249 exchange rates ............. At December 31, 2014 .. $ 39,451 $ 136,796 $ 19,702 $ 20,923 $ 2,371 $ 14,452 $ 2,670 $ 236,365 31,637 10,617 2,894 4,547 1,129 3,772 3,681 1,184 (39) 561 340 692 174 51 Carrying amounts: At January 1, 2014 ........ $ 22,323 $ 133,618 $ 19,852 $ 11,879 At December 31, 2014 .. 121,920 17,678 5,900 5,631 $ 26 66 599 $ 17,967 $ 2,136 $ 202,395 191,537 296 33,087 1,046 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) During the year ended December 31, 2015 the Company revised the useful lives for certain intangible assets within the Environmental Services segment. The net change on the current financial year was an increase to amortization expense of $30.5 million. Assuming the assets are held until the end of their estimated useful lives, amortization in future years in relation to these assets will be decreased by $13.7 million in 2016. 13 Goodwill The changes in the carrying amount of goodwill are as follows: Year ended December 31, 2015 2014 Balance as at January 1 ....................................................................................................... Additions through business combinations (note 5) ............................................................. Impairment ......................................................................................................................... Effect of changes in foreign exchange rates ........................................................................ Balance as at December 31 ................................................................................................. $ 783,721 7,759 (175,959) 55,386 $ 670,907 $ 726,148 33,989 - 23,584 $ 783,721 Goodwill is monitored for impairment by management at the operating segment level. The following is a summary of goodwill allocated to each operating segment: Terminals and Pipelines ...................................................................................................... Environmental Services ...................................................................................................... Truck Transportation .......................................................................................................... Propane and NGL Marketing and Distribution ................................................................... Processing and Wellsite Fluids ........................................................................................... Marketing ............................................................................................................................ December 31, 2015 2014 $ 200,464 111,860 57,908 139,456 117,664 43,555 $ 670,907 $ 200,120 234,731 54,474 133,177 117,664 43,555 $ 783,721 The goodwill recorded on the balance sheet represents the excess of the cost of acquisitions over the fair value of identifiable assets, liabilities and contingent liabilities acquired. Of the balance as at December 31, 2015 and 2014, $432.7 million, net of impairment, relates to goodwill recognized on the acquisition of the Company on December 12, 2008. Of the remaining balance, $145.8 million represents additional goodwill recorded on acquisitions completed and $92.4 million relates to the effect of changes in foreign exchange rates recorded by the Company since December 12, 2008. The recoverable amount of goodwill is determined based on a fair value less costs of disposal calculation. This calculation involves comparing the fair value of each operating segment to its carrying value, including goodwill. To calculate a fair value, management uses an earning’s multiple approach. In calculating earnings, the Company uses Board approved budgets to determine earnings before interest, taxes, depreciation and amortization (“EBITDA”) by operating segment. To determine fair value, an implied forward multiple was applied to each operating segment’s budgeted EBITDA less corporate expenses. The implied multiple was calculated by utilizing multiples of comparable public companies by operating segment. In calculating fair value for each operating segment, the Company used an implied average forward multiples that ranged from 8.1 to 11.1. The fair value of each of operating segment was categorized as Level 2 fair value based on the observables inputs. On November 30, 2015, the Company carried out its annual impairment test with respect to goodwill. For all operating segments, except for Environmental Services, the fair value less costs of disposal was greater than the operating segments carrying value, including goodwill. The Company determined that the goodwill in the Environmental Services segment was impaired by $176.0 million. The impairment within this segment was due to the continued impact of lower crude oil prices resulting in a lower customer demand in the Environmental Services segment. Key assumptions used in the determination of the recoverable amount include utilizing Board approved budgeted EBITDA for the operating segment and the application of an implied forward multiple of 8.3. These assumptions represent management’s assessment of future trends in the environmental services industry and were based on historical data from both external and internal sources. 27 67 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) 14 Loans and Borrowings Revolving Credit Facility The Company has established an unsecured revolving credit facility of up to $500.0 million (the “Revolving Credit Facility”), with a maturity date of August 15, 2020, the proceeds of which are available to provide financing for working capital and other general corporate purposes. In addition, during the year ended December 31, 2015, the Company established three bilateral demand letter of credit facilities totaling $150.0 million. The Revolving Credit Facility provides sub–facilities for letters of credit, swingline loans and borrowings in Canadian dollars and U.S. dollars. Borrowings under the Revolving Credit Facility bear interest at a rate equal to Canadian Prime Rate or U.S. Base Rate or LIBOR or Canadian Bankers Acceptance Rate as the case may be plus an applicable margin. The applicable margin for borrowings under the Revolving Credit Facility is subject to step up and step down based on the Company’s total debt leverage ratio. In addition, the Company must pay a standby fee on the unused portion of the Revolving Credit Facility and customary letter of credit fees equal to the applicable margins based on the Company’s total debt leverage ratio. The Revolving Credit Facility contains certain covenants including financial covenants requiring the Company to maintain ratios of maximum senior debt leverage ratio of 4.0 to 1.0 until June 30, 2017 and 3.5 to 1.0 thereafter, maximum total debt leverage ratio of 4.0 to 1.0 and minimum interest coverage ratio of 2.5 to 1.0. As at December 31, 2015, the Company was in compliance with all covenants under the Revolving Credit Facility. The Company has $35.0 million drawn against the Revolving Credit Facility as at December 31, 2015. The Company had issued letters of credit totalling $32.6 million and $57.5 million as at December 31, 2015 and December 31, 2014, respectively. Long-term debt December 31, 2015 2014 U.S.$550.0 million 6.75% Notes due July 15, 2021 ......................................................... $250.0 million 7.00% Notes due July 15, 2020 ................................................................ $300.0 million 5.375% Notes due July 15, 2022 .............................................................. Unamortized issue discount and debt issue costs .............................................................. Long-term debt: non-current portion ................................................................................ $ 761,200 250,000 300,000 (19,777) $ 1,291,423 $ 638,055 250,000 300,000 (22,687) $ 1,165,368 On June 28, 2013, the Company issued U.S.$500.0 million 6.75% Senior Unsecured Notes due July 15, 2021 at an issue price of 98.476% and $250.0 million 7.00% Senior Unsecured Notes due July 15, 2020 at an issue price of 98.633%. On June 12, 2014, the Company issued U.S.$50.0 million 6.75% Senior Unsecured Notes due July 15, 2021 at an issue price of 108% under its existing indenture and issued $300.0 million 5.375% Senior Unsecured Notes due July 15, 2022 at an issue price of par (collectively, the “Notes”). Interest is payable semi–annually on January 15 and July 15 of each year the Notes are outstanding. The Notes agreements contain certain redemption options whereby the Company can redeem all or part of the Notes at prices set forth in the respective indebtedness from proceeds of an equity offering or on the dates specified in the respective indebtedness. In addition, the Notes holders have the right to require the Company to redeem the Notes at the redemption prices set forth in the respective indebtedness in the event of change in control or in the event certain asset sale proceeds are not re- invested in the time and manner specified in the respective indebtedness. The Company’s long-term debt contains non-financial covenants and customary events of default clauses. As of December 31, 2015 and December 31, 2014, the Company was in compliance with all of its covenants. As at December 31, 2015 and December 31, 2014, the fair value of long-term debt based on period end trading prices on the secondary market (Level 2) was $1,235.6 million and $1,193.6 million, respectively. 28 68 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Foreign exchange loss on long-term debt As a result of the movement in foreign exchange rates, the Company recorded foreign exchange losses, net, on long-term debt as follows: Year ended December 31, 2015 2014 Foreign exchange loss on movement in exchanges rates on U.S. dollar long-term debt .... Gain on financial instruments relating to long-term debt (note 28) .................................... Foreign exchange loss on long-term debt ............................................................................. $ 123,145 (9,995) $ 113,150 $ $ 52,000 (16,569) 35,431 15 Trade payables and accrued charges Trade payables and accrued charges include the following items: Trade payables .................................................................................................................... Accrued compensation charges ........................................................................................... Indirect taxes payable ........................................................................................................ Risk management liabilities (note 28) ................................................................................ Broker accounts payable ..................................................................................................... Defined benefit plan obligations ......................................................................................... Interest payable ................................................................................................................... Due to Hunting plc (note 19) .............................................................................................. Other ................................................................................................................................... December 31, 2015 2014 $ 322,347 18,409 3,164 5,479 - 465 39,251 8,585 21,032 $ 418,732 $ 445,670 43,988 3,157 18,135 183 493 36,892 8,999 23,946 $ 581,463 29 69 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) 16 Provisions The aggregate carrying amounts of the obligation associated with decommissioning and site restoration on the retirement of assets and environmental costs are as follows: Year ended December 31, 2015 Opening balance ............................................................................................................... Settlements........................................................................................................................ Assumed in a business combination (note 5) .................................................................... Additions .......................................................................................................................... Change in estimated future cash flows ............................................................................. Change in discount rate .................................................................................................... Unwinding of discount ..................................................................................................... Effect of changes in foreign exchange rates ..................................................................... Closing balance ................................................................................................................. $ 136,347 (4,247) - 6,774 2,240 8,611 3,251 2,367 $ 155,343 2014 $ 91,424 (4,462) 824 4,152 14,584 25,903 2,898 1,024 $ 136,347 The Company currently estimates the total undiscounted future value amount, including an inflation factor of 2.0%, of estimated cash flows to settle the future liability for asset retirement and remediation obligations to be approximately $277.9 million and $265.7 million at December 31, 2015 and 2014, respectively. In order to determine the current provision related to these future values, the estimated future values were discounted using an average risk-free rate of 2.1% and 2.3% at December 31, 2015 and 2014, respectively. The provision is expected to be settled up to 40 years into the future. A one percent increase in the risk-free rate would decrease the provision by $34.6 million, with a corresponding adjustment to property, plant and equipment. A one percent decrease in the risk-free rate would increase the provision by $34.6 million, with a corresponding adjustment to property, plant and equipment. 17 Other long-term liabilities Defined benefit plan obligations ......................................................................................... Risk management liabilities (note 28) ................................................................................. Other post-retirement benefits obligations .......................................................................... Other ................................................................................................................................... December 31, 2015 $ $ 1,530 3,824 4,072 4,549 13,975 $ $ 2014 2,142 8,269 3,797 602 14,810 18 Share capital Authorized The Company is authorized to issue an unlimited number of common shares and preferred shares. Holders of common shares are entitled to one vote per common share at meetings of shareholders of the Company, to receive dividends if, as and when declared by the Board and to receive pro rata the remaining property and assets of the Company upon its dissolution, liquidation or winding-up, subject to the rights of shares having priority over the common shares. The preferred shares are issuable in series and have such rights, restrictions, conditions and limitations as the Board may from time to time determine. The preferred shares shall rank senior to the common shares with respect to the payment of dividends or distribution of assets or return of capital of the Company in the event of a dissolution, liquidation or winding up of the Company. There were no issued and outstanding preferred shares as at December 31, 2015 or 2014. 30 70 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Common Shares - Issued and outstanding The following table below sets forth the issued and outstanding common shares for the years ended December 31, 2015 and 2014. Common Shares Number of Common Shares Balance as at January 1, 2014 ................................................................................................ 122,200,192 580,145 Issuance of common shares in connection with the exercise of stock options ....................... Issuance of common shares in connection with other equity awards ..................................... 436,783 Issuance of common shares in connection with the dividend reinvestment and stock 1,271,425 dividend programs .......................................................................................................... Transfer from contributed surplus on issue of equity awards ................................................ - Balance as at December 31, 2014 .......................................................................................... 124,488,545 12,162 Issuance of common shares in connection with the exercise of stock options ....................... Issuance of common shares in connection with other equity awards ..................................... 412,054 Issuance of common shares in connection with the dividend reinvestment and stock Amount $ 1,585,145 5,942 - 36,648 6,266 $ 1,634,001 105 - 1,222,805 dividend programs .......................................................................................................... Transfer from contributed surplus on issue of equity awards ................................................ - Balance as at December 31, 2015 .......................................................................................... 126,135,566 28,956 9,261 $ 1,672,323 A dividend of $0.32 per share, declared on November 3, 2015, was paid on January 15, 2016. 19 Commitments and contingencies Commitments Operating lease obligations primarily relate to office leases, rail cars, vehicles, field buildings, various equipment and terminal services arrangements. The minimum payments required under these commitments, net of sub-lease income, are as follows: 2016 ................................................................................................................................................................ 2017 ................................................................................................................................................................ 2018 ................................................................................................................................................................ 2019 ................................................................................................................................................................ 2020 ................................................................................................................................................................ 2021 and later .................................................................................................................................................. $ 78,790 68,165 59,720 46,435 21,481 12,851 $ 287,442 Expenses related to operating leases, net of sublease income, were $65.8 million and $39.6 million for the year ended December 31, 2015 and 2014, respectively. With respect to capital expenditures, at December 31, 2015, the Company had an estimated amount of $264.7 million remaining to be spent that relates to projects approved at that date. Contingencies The Company is currently undergoing income tax related and excise tax audits. While the final outcome of such audits cannot be predicted with certainty, it is the opinion of management that the resolution of these audits will not have a material impact on the Company’s consolidated financial position or results of operations. At December 31, 2015 and 2014 the Company recorded $8.6 million in both income tax receivable and trade payables and accrued charges whereby the Company paid tax assessments relative to certain of these audits that were funded by Hunting plc who owned the Company prior to December 12, 2008. The Company has assumed that the remaining assessment amounts paid in connection with these audits will be refunded to the Company and although the timing is uncertain, will be settled within a year. 31 71 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) The Company is subject to various regulatory and statutory requirements relating to the protection of the environment. These requirements, in addition to the contractual agreements and management decisions, result in the recognition of estimated decommissioning provisions. Estimates of decommissioning costs can change significantly based on such factors as operating experience and changes in legislation and regulations. The Company is involved in various legal actions, which have occurred in the ordinary course of business. Management is of the opinion that losses, if any, arising from such legal actions would not have a material impact on the Company’s consolidated financial position or results of operations. 20 Revenue Products .......................................................................................................................... Services ........................................................................................................................... 21 Depreciation, amortization, and impairment Depreciation of property, plant and equipment ............................................................... Amortization of intangible assets .................................................................................... Year ended December 31, 2015 2014 $ 4,734,340 857,642 $ 5,591,982 $ 7,507,013 1,066,516 $ 8,573,529 Year ended December 31, 2015 2014 $ $ $ 195,438 87,554 282,992 $ $ $ 154,934 54,991 209,925 Depreciation and impairment of property, plant and equipment and amortization of intangible assets have been expensed as follows: Cost of sales .................................................................................................................... General and administrative ............................................................................................. 22 Employee salaries and benefits Salaries and wages .......................................................................................................... Post-employment benefits ............................................................................................... Share based compensation .............................................................................................. Termination benefits ....................................................................................................... Year ended December 31, 2015 2014 $ $ 276,008 6,984 282,992 $ $ 205,043 4,882 209,925 Year ended December 31, 2015 2014 $ $ 295,149 8,254 20,379 2,904 326,686 $ $ 292,188 6,394 13,977 1,365 313,924 32 72 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Employee salaries and benefits have been expensed as follows: Cost of sales .................................................................................................................... General and administrative ............................................................................................. 23 Other operating income Gain on sale of property, plant and equipment ............................................................... Other income .................................................................................................................. Foreign exchange gain .................................................................................................... Year ended December 31, 2015 2014 $ $ 287,835 38,851 326,686 $ $ 280,730 33,194 313,924 Year ended December 31, 2015 $ $ 2,515 4,770 14,741 22,026 $ $ 2014 2,717 - 9,128 11,845 24 Per share amounts The following table shows the number of shares used in the calculation of earnings per share: Year ended December 31, 2015 2014 Weighted average common shares outstanding - Basic .................................................. Dilutive effect of: 125,652,815 123,591,547 Stock options and other awards ............................................................................... Weighted average common shares – Diluted .................................................................. - 125,652,815 2,004,643 125,596,190 The dilutive effect of 2.0 million stock options and other awards for the year ended December 31, 2015 has not been included in the determination of the weighted average number of common shares outstanding as the inclusion would be anti-dilutive to the net loss per share. 25 Related party transactions Joint operations On August 11, 2011, the Company formed a partnership to jointly construct and own pipeline and emulsion treating, water disposal and oilfield waste management facilities in the Plato area of Saskatchewan. The partnership commenced operations in 2012. The Company’s interest in the partnership is 50%. A member of the Company’s Board is also a director of the other party with the 50% interest in the partnership. At December 31, 2015 and 2014, the Company’s proportionate share of property, plant and equipment was $9.4 million and $10.2 million, respectively. The impact of the Company’s share of the other financial position and results of the partnership is not material to the Company’s consolidated financial statements. 33 73 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Compensation of key management Key management includes the Company’s directors, executive officers, business unit leaders and other non-business unit senior vice presidents. Compensation awarded to key management was: Salaries and short-term employee benefits ..................................................................... Post-employment benefits .............................................................................................. Share based compensation .............................................................................................. 26 Post-retirement benefits Defined benefit plans Year ended December 31, 2015 4,571 1,123 6,262 11,956 $ $ 2014 7,597 1,068 4,639 13,304 $ $ The Company maintains a funded defined benefit pension plan that is funded based upon the advice of independent actuaries. The Company is required to file an actuarial valuation of the defined benefit pension plans with the provincial regulator every three years, with the most recent actuarial valuation filing as at December 31, 2013. Based on the actuarial valuations as at December 31, 2015 and 2014, the status of the defined benefit plans was as follows: Accrued benefit obligation Year ended December 31, 2015 Accrued benefit obligation, beginning of year ........................................................................... $ Current service cost............................................................................................................. Interest cost ......................................................................................................................... Benefits paid ....................................................................................................................... Actuarial loss (gain) ............................................................................................................ Other ................................................................................................................................... Accrued benefit obligation, end of year ..................................................................................... $ 16,342 216 608 (571) (167) 12 16,440 $ $ Plan assets Year ended December 31, 2015 Fair value of pension plan assets, beginning of year .................................................................. $ Interest on plan assets ......................................................................................................... Actual contributions ............................................................................................................ Actual benefits paid ............................................................................................................ Actuarial gain ...................................................................................................................... Fair value of pension plan assets, end of year ............................................................................ $ 14,696 513 809 (571) 82 15,529 $ $ 2014 15,187 212 674 (518) 773 14 16,342 2014 12,939 536 1,211 (518) 528 14,696 34 74 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Accrued benefit liability Year ended December 31, 2015 2014 Accrued benefit obligation ......................................................................................................... $ (16,440) 15,529 Fair value of plan assets ............................................................................................................. (911) Accrued benefit liability ............................................................................................................. $ $ $ (16,342) 14,696 (1,646) The significant weighted average actuarial assumptions adopted in measuring the Company’s defined benefit plan obligation are as follows: Discount rate ..................................................................................................................................... Rate of compensation increase .......................................................................................................... 4.0% 3.0% Year ended December 31, 2015 2014 4.0% 4.0% The assumed discount rate has an effect on the amounts reported for the defined benefit plan obligations. A one-percentage point change in the discount rate would have the following impact: One % point increase One % point decrease Increase/(decrease) in defined benefit plans obligations ................................................................... $ 2,381 $ 2,381 Defined contribution pension plan The Company operates defined contribution plans whereby, in some cases, contributions made by participants are matched by the Company up to specified annual limits and in other cases, contributions are fully funded by the Company. The total expense recorded for the defined contribution pension plans was $7.1 million and $6.2 million for the year ended December 31, 2015 and 2014, respectively. 27 Share based compensation The Company has established an equity incentive plan which permits the award of stock options, RSUs, PSUs’ and DSUs for executives, directors, employees and consultants of the Company. Stock options provide the holder with the right to exercise an option to purchase a common share upon vesting at a price determined on the date of grant. RSUs give the holder the right to receive, upon vesting, either a common share or a cash payment, subject to consent of the Board, or its equivalent in fully paid common shares equal to the fair market value of the Company’s common shares at the date of such payment. The RSUs granted in 2015 and 2014 were expected to be settled by delivery of common shares and accordingly, were considered an equity–settled award for accounting purposes. Stock options and RSUs granted generally vest equally each year over a three year period. RSUs granted with specific performance criteria are designated as PSUs. PSU’s vest at the end of the three year period and granting depends on the achievement of certain performance criteria. DSUs are similar to RSUs except that DSUs may not be redeemed until the holder ceases to hold all offices, employment and directorships. At December 31, 2015, awards available to grant under the equity incentive plan totalled approximately 7.5 million. 35 75 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) A summary of stock options activity is as follows: Balance at January 1, 2014....................................................................................................... Granted ............................................................................................................................. Exercised ........................................................................................................................... Forfeited ............................................................................................................................ Balance at December 31, 2014 ................................................................................................. Granted ............................................................................................................................. Exercised ........................................................................................................................... Forfeited ............................................................................................................................ Balance at December 31, 2015 ................................................................................................. Vested and exercisable at December 31, 2015 ......................................................................... Vested and exercisable at December 31, 2014 ......................................................................... Number of Shares 1,928,985 1,159,259 (580,145) (22,884) 2,485,215 852,192 (12,162) (8,077) 3,317,168 1,557,276 847,530 Weighted- Average Exercise Price (in dollars) 16.22 28.72 10.24 25.94 $ 23.33 25.00 8.64 26.44 $ 23.81 $ 20.53 $ 15.03 Additional information regarding stock options outstanding as of December 31, 2015 is as follows: Outstanding Weighted Average Remaining Contractual Life (Years) 3.0 6.2 3.4 4.4 4.5 5.3 5.2 5.6 4.9 $ Exercise Price (in dollars) 8.64 17.06 20.67 22.37 24.44 25.61 28.24 34.44 Number Outstanding 524,970 38,608 33,681 57,981 21,930 1,456,424 1,100,727 82,847 3,317,168 Number Outstanding 524,970 26,247 30,053 57,981 16,082 468,017 385,543 48,383 1,557,276 A summary of RSUs, PSUs and DSUs activity is set forth below: Balance at January 1, 2014 ................................................................ Granted ....................................................................................... Issued for common shares .......................................................... Forfeited ..................................................................................... Issued for cash ............................................................................ Balance at December 31, 2014 .......................................................... Granted ....................................................................................... Issued for common shares .......................................................... Forfeited ..................................................................................... Issued for cash ............................................................................ Balance at December 31, 2015 .......................................................... Vested, Balance at December 31, 2015 ............................................. Vested, Balance at December 31, 2014 ............................................. RSUs 727,611 270,308 (429,526) (22,012) (1,628) 544,753 345,508 (241,299) (38,547) (264) 610,151 106,240 110,652 Exercisable Weighted-Average Remaining Contractual Life (Years) 3.0 6.0 3.4 4.4 4.5 4.3 5.3 5.6 4.1 Number of Shares PSUs 223,160 438,590 (7,257) (24,542) (992) 628,959 555,383 (106,254) (50,042) (204) 1,027,842 - - $ Exercise Price (in dollars) 8.64 17.06 20.67 22.37 24.44 25.61 28.24 34.44 DSUs 95,021 52,955 - (1,190) - 146,786 108,665 (64,501) - - 190,950 167,406 146,786 Stock based compensation expense was $20.4 million and $14.0 million for the years ended December 31, 2015 and 2014, respectively, and is included in general and administrative expenses. 36 76 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) The fair value of the options granted was estimated at $2.42 and $2.46 per option for the year ended December 31, 2015 and 2014, respectively. The fair value of options was calculated by using the Black-Scholes model with the following weighted average assumptions: Expected dividend rate ......................................................................................................... Expected volatility ............................................................................................................... Risk-free interest rate ........................................................................................................... Expected life of option (years) ............................................................................................. Year ended December 31, 2015 5.2% 24.2% 0.5% 3.0 2014 4.3% 19.5% 1.2% 3.0 The fair value of RSUs, PSUs and DSUs was determined using the five days weighted average stock price prior to the date of grant. 28 Financial instruments Non-Derivative financial instruments Non-derivative financial instruments comprise cash and cash equivalents, trade and other receivables, net investment in finance lease, trade payables and accrued charges, amount borrowed under the credit facilities, dividends payable, and long-term debt. Cash and cash equivalents, trade and other receivables, trade payables and accrued charges, dividends payable and amount borrowed under the credit facilities are recorded at amortized cost which approximates fair value due to the short term nature of these instruments. Long-term debt is recorded at amortized cost using the effective interest method of amortization. As at December 31, 2015, the carrying amount of long-term debt was $1,311.1 million less debt discount and issue costs of $19.8 million and the fair value of long-term debt based on period end trading prices on the secondary market (Level 2) was $1,235.6 million. As at December 31, 2014, the carrying amount of long-term debt was $1,188.1 million less debt discount and issue costs of $22.7 million and the fair value of long-term debt based on period end trading prices on the secondary market (Level 2) was $1,193.6 million. Financial assets and liabilities are only offset if the Company has the current legal right to offset and intends to settle on a net basis or settle the asset and liability simultaneously. The following table provides a summary of the Company’s offsetting trade and other receivables and trade payables and accrued charges: December 31, 2015 December 31, 2014 Trade and other receivables Trade payable and accrued charges Trade and other receivables Trade payable and accrued charges Gross amounts ........................................................ $ 268,602 (169,351) Amount offset ......................................................... Net amount included in the consolidated $ 228,022 (169,351) $ 430,794 (316,703) $ 417,337 (316,703) financial statements ............................................. $ 99,251 $ 58,671 $ 114,091 $ 100,634 37 77 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Derivative financial instruments (recurring fair value measurements) The following is a summary of the Company’s risk management contracts outstanding: Commodity futures ................................................................ $ Commodity swaps ................................................................. Commodity options ............................................................... Equity swaps .......................................................................... Foreign currency forwards ..................................................... Foreign currency options ....................................................... Total ....................................................................................... $ Less non-current portion: Equity swaps ................................................................... Foreign currency forward contracts ................................ Foreign currency options ................................................ Current portion ...................................................................... $ December 31, 2015 December 31, 2014 Assets Liabilities Assets Liabilities 1,105 6,545 765 - - - 8,415 - - - - 8,415 $ $ $ 337 3,165 13 5,390 398 - 9,303 3,824 - - 3,824 5,479 $ 4,850 13,847 - $ 490 16,928 - 34,860 - $ 53,557 717 8,269 $ 26,404 - 34,855 - 34,855 $ 18,702 - - 8,269 8,269 $ 18,135 The fair value of financial instruments are classified as a non-current asset (long-term prepaid expense and other assets) or liability (other long-term liabilities) if the remaining maturity is more than 12 months and, as a current asset or liability, if the maturity is less than 12 months. (i) Commodity financial instruments Futures, options and swaps The Company enters into futures, options and swap contracts to manage the price risk associated with sales, purchases and inventories of crude oil, natural gas liquids and petroleum products. (ii) Currency financial instruments The Company enters into forward and options contracts to buy and sell U.S. dollars in exchange for Canadian dollars to fix the exchange rate on its estimated future net cash inflows denominated in U.S. dollars and long-term borrowings denominated in U.S. dollars. At December 31, 2014, the Company had U.S. dollar forward contracts to buy U.S. dollars on a notional amount of U.S.$250.0 million at a weighted average rate of $1.0242 for U.S.$1.00 expiring on September 15, 2017 and the Company had also sold U.S. dollar options at a strike price of $1.295 for U.S.$1.00 on a notional amount of U.S.$250.0 million. During the year ended December 31, 2015, the Company received cash of $53.3 million on the settlement of U.S. dollar forward contracts for a notional amount of U.S.$250.0 million. Additionally, the Company paid cash of $16.7 million to settle U.S dollar options for a notional amount of U.S. $250.0 million. At December 31, 2015, the Company had no forward and options contracts to buy and sell U.S. dollars in exchange for Canadian dollars to fix the exchange rate on its long- term borrowings denominated in U.S. dollars. 38 78 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) (iii) Equity price financial instruments During the year ended December 31, 2015, the Company entered into equity swap contracts to help manage equity price and dilution exposure to shares that it issues under its stock based compensation programs. At December 31, 2015, the Company had entered into equity swaps on a total of 550,000 notional common shares, at an initial price of $23.65 per share for settlement over a three year period. The value of the Company’s derivative finance instruments are determined using inputs that are either readily available in public markets or are quoted by counterparties to these contracts. In situations where the Company obtains inputs via quotes from its counterparties, these quotes are verified for reasonableness via similar quotes from another source for each date for which financial statements are presented. The Company has consistently applied these valuation techniques in all periods presented and the Company believes it has obtained the most accurate information available for the types of financial instrument contracts held. The Company has categorized the inputs for these contracts as Level 1, defined as observable inputs such as quoted prices in active markets; Level 2 defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; or Level 3 defined as unobservable inputs in which little or no market data exists therefore requiring an entity to develop its own assumptions. The Company used the following techniques to value financial instruments categorized in Level 2: • The fair value of commodity options and swaps is calculated as the present value of the estimated future cash flows based on the difference between contract price and commodity price forecast. • The fair value of foreign currency options and forward contracts is determined using the forward exchange rates at the measurement date, with the resulting value discounted back to present values. The fair value of financial instrument contracts by fair value hierarchy at December 31, 2015 was: Total Level 1 Level 2 Level 3 Assets from financial instrument contracts Commodity futures ........................................................... Commodity swaps ............................................................ Commodity options .......................................................... Total assets ....................................................................... $ 1,105 6,545 765 $ 8,415 $ 1,105 - - $ 1,105 $ - 6,545 765 $ 7,310 Liabilities from financial instrument contracts Commodity futures ........................................................... Commodity swaps ............................................................ Commodity options .......................................................... Equity swaps ..................................................................... Foreign currency forwards................................................ Total liabilities .................................................................. $ 337 3,165 13 5,390 398 $ 9,303 $ 337 - - 5,390 - $ 5,727 $ - 3,165 13 - 398 $ 3,576 $ $ $ $ - - - - - - - - - 39 79 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) The fair value of financial instrument contracts by fair value hierarchy at December 31, 2014 was: Total Level 1 Level 2 Level 3 Assets from financial instrument contracts Commodity futures ........................................................... Commodity swaps ............................................................ Foreign currency forwards................................................ Foreign currency options .................................................. Total assets ....................................................................... $ 4,850 13,847 34,860 - $ 53,557 $ 4,850 - - - $ 4,850 $ - 13,847 34,860 - $ 48,707 Liabilities from financial instrument contracts Commodity futures ........................................................... Commodity swaps ............................................................ Foreign currency forwards................................................ Foreign currency options .................................................. Total liabilities .................................................................. $ 490 16,928 717 8,269 $ 26,404 $ $ 490 - - - 490 $ - 16,928 717 8,269 $ 25,914 $ $ $ $ - - - - - - - - - - The impact of the movement in the fair value of financial instruments has been expensed in the consolidated statement of operations as follows: Cost of sales ....................................................................................................................... General and administrative ................................................................................................ Foreign exchange gain on long-term debt (note 14) ........................................................... Year ended December 31, 2015 2014 $ $ (3,899) 5,390 (9,995) (8,504) $ (1,883) - (16,569) $ (18,452) Financial Risk Management The Company’s activities expose it to certain financial risks, including foreign exchange risk, interest rate risk, commodity price risk, credit risk and liquidity risk. The Company’s risk management strategy seeks to reduce potential adverse effects on its financial performance. As a part of its strategy, both primary and derivative financial instruments are used to hedge its risk exposures. There are clearly defined objectives and principles for managing financial risk, with policies, parameters and procedures covering the specific areas of funding, banking relationships, interest rate exposures and cash management. The Company’s treasury function is responsible for implementing the policies and providing a centralised service to the Company for identifying, evaluating and monitoring financial risks. a) Foreign currency exchange risk Foreign exchange risks arise from future transactions and cash flows and from recognized monetary assets and liabilities that are not denominated in the functional currency of the Company’s operations. The exposure to exchange rate movements in significant future transactions and cash flows is managed by using foreign currency forward contracts and options. These financial instruments have not been designated in a hedge relationship. No speculative positions are entered into by the Company. 40 80 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Foreign currency exchange rate sensitivity If the Canadian dollar strengthened or weakened by 5% relative to the U.S. dollar and all other variables, in particular interest rates remain constant, the impact on net income and equity would be as follows: December 31, 2015 2014 U.S. Dollar Forwards and Options Favorable 5% change ................................................................................................... Unfavorable 5% change ............................................................................................... $ 1,180 (1,180) $ 3,223 (3,223) U.S. Dollar long-term debt Forwards and the related Options Favorable 5% change ................................................................................................... Unfavorable 5% change ............................................................................................... $ - - $ 10,694 (10,694) The movement is a result of a change in the fair value of U.S. dollar forward contracts and options. The sensitivity relating to the Company’s long-term debt includes the change in the carrying value of the Company’s U.S. dollar denominated long-term debt, the U.S. dollar forward contracts on the principal and the related U.S. dollar call options. The impact of translating the net assets of the Company’s U.S operations into Canadian dollars is excluded from this sensitivity analysis. b) Interest rate risk Interest rate risk is the risk that the fair value of a financial instrument will be affected by changes in market interest rates. At December 31, 2015, the Company has exposure to changes to market interest rates that relate to the $35.0 million drawn on the Company’s credit facility as at December 31, 2015. A 1% increase or decrease in interest rates in relation to the amounts drawn at December 31, 2015 would impact net income by $0.3 million, when annualized, and assuming a consistent balance over the duration of the year. c) Commodity price risk The Company is exposed to changes in the price of crude oil, NGLs, oil related products and electricity commodities, which are monitored regularly. Crude oil and NGL priced futures, options and swaps are used to manage the exposure to these commodities’ price movements. These financial instruments are not designated as hedges. Based on the Company’s risk management policies, all of the financial instruments are employed in connection with an underlying asset/liability and/or forecasted transaction and are not entered into with the objective of speculating on commodity prices. The following table summarizes the impact to net income and equity due to a change in fair value of the Company’s derivative positions because of fluctuations in commodity prices leaving all other variables constant, in particular foreign currency rates. The Company believes that a 15% volatility in crude oil and NGL related prices is a reasonable assumption. Crude oil and NGL related prices Favorable 15% change ................................................................................................ Unfavorable 15% change ............................................................................................ $ 6,747 (6,092) $ 5,634 (5,634) December 31, 2015 2014 d) Credit risk The Company’s credit risk arises from its outstanding trade receivables, including receivables from customers who have entered into fixed term contractual arrangements to have dedicated use of certain of the Company’s tanks. A significant portion of the Company’s trade receivables are due from entities in the oil and gas industry. Concentration of credit risk is mitigated by having a broad customer base and by dealing with credit-worthy counterparties in accordance with established credit approval practices. The Company actively monitors the financial strength of its customers and in select cases has tightened credit terms to minimize the risk of default on trade receivables. 41 81 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) At December 31, 2015 and 2014, approximately 3% and 6%, respectively, of net trade receivables are past due but not considered to be impaired. The Company considers trade receivables as past due when they are 30 days past the due date. The maximum exposure to credit risk related to trade receivables is their carrying value as disclosed in these financial statements. The Company establishes guidelines for customer credit limits and terms. The Company review includes financial statements and external ratings when available. The Company does not usually require collateral in respect of trade and other receivables. The Company provides adequate provisions for expected losses from the credit risks associated with trade receivables. The provision is based on an individual account-by-account analysis and prior credit history. The Company is exposed to credit risk associated with possible non-performance by financial instrument counterparties. The Company does not generally require collateral from its counterparties but believes the risk of non-performance is low. The counterparties are generally major financial institutions or commodity brokers with investment grade credit ratings as determined by recognized credit rating agencies. The Company’s cash equivalents are placed in time deposits with investment grade international banks and financial institutions. e) Equity price risk The Company is exposed to changes in the Company’s share price with respect to equity swap contracts. If the Company’s share price increased or decreased by 10%, the impact on net income and equity would be as follows: Equity Swaps Favorable 10% change ........................................................................................... Unfavorable 10% change ....................................................................................... $ f) Liquidity risk December 31, 2015 558 (558) 2014 - - $ Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. This risk relates to the Company’s ability to generate or obtain sufficient cash or cash equivalents to satisfy these financial obligations as they become due. The Company’s process for managing liquidity risk includes preparing and monitoring capital and operating budgets, coordinating and authorizing project expenditures and authorization of contractual agreements. The Company may seek additional financing based on the results of these processes. The budgets are updated with forecasts when required and as conditions change. Cash on hand and the Revolving Credit Facility are available to satisfy the Company's requirements over the next 12 months, and are expected to be available to satisfy the Company’s long term requirements. The Company has a Revolving Credit Facility of $500.0 million and three bilateral demand letter of credit facilities totaling $150.0 million. At December 31, 2015, $35.0 million was drawn against the Revolving Credit Facility and the Company had outstanding issued letters of credit of $32.6 million. The terms of the Notes and Revolving Credit Facility require the Company to comply with certain covenants. If the Company fails to comply with these covenants the lenders may declare an event of default. At December 31, 2015 and December 31, 2014, the Company was in compliance with these covenants. 42 82 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Set out below is maturity analyses of certain of the Company’s financial contractual obligations as at December 31, 2015. The maturity dates are the contractual maturities of the obligations and the amounts are the contractual undiscounted cash flows. On demand or within one year Between one and five years After five years Total Trade payables and accrued charges, excluding derivative financial instruments and accrued interest .................................................................. Dividend payable ....................................................... Credit facilities ........................................................... Long-term debt ........................................................... Interest on long-term debt .......................................... Commodity futures .................................................... Commodity swaps ...................................................... Commodity options .................................................... Equity swap ................................................................ Foreign currency forwards ......................................... Capital management $ 374,002 40,363 - - 85,006 337 3,165 13 1,566 398 $ 504,850 $ - - 35,000 250,000 340,024 - - - 3,824 - $ 628,848 $ - - - 1,061,200 237,785 - - - - - $1,298,985 $ 374,002 40,363 35,000 1,311,200 662,815 337 3,165 13 5,390 398 $ 2,432,683 The Company's objectives when managing its capital structure are to maintain financial flexibility so as to preserve the Company’s ability to meet its financial obligations and to finance internally generated growth as well as potential acquisitions. The Company manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. The Company considers its capital structure to include shareholders' equity, long-term debt, the Revolving Credit Facility and working capital. To maintain or adjust the capital structure, the Company may draw on its revolving credit facility, issue notes or issue equity and/or adjust its operating costs and/or capital spending to manage its current and projected debt levels. Financing decisions are made by management and the Board based on forecasts of the expected timing and level of capital and operating expenditure required to meet the Company’s commitments and development plans. Factors considered when determining whether to issue new debt or to seek equity financing include the amount of financing required, the availability of financial resources, the terms on which financing is available and consideration of the balance between shareholder value creation and prudent financial risk management. Net debt is calculated as total borrowings (including ‘current and non-current borrowings’ as shown in the consolidated balance sheet), less cash and cash equivalents. Total capital is calculated as net debt plus share capital as shown in the consolidated balance sheet. December 31, 2015 2014 Total financial liability borrowings ................................................................................. $ 1,291,423 (82,775) Less: cash and cash equivalents ...................................................................................... 1,208,648 Net debt ........................................................................................................................... 1,672,323 Total share capital ........................................................................................................... Total capital ................................................................................................................... $ 2,880,971 $ 1,165,368 (131,911) 1,033,457 1,634,001 $ 2,667,458 If the Company is in a net debt position, the Company will assess whether the projected cash flow and availability under the Revolving Credit Facility and the bilateral demand letter of credit facilities are sufficient to service this debt and support ongoing operations. 43 83 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) 29 Segmental information The Company has defined its operations into the following operating segments: (i) Terminals and Pipelines, (ii) Environmental Services, (iii) Truck Transportation, (iv) Propane and NGL Marketing and Distribution, (v) Processing and Wellsite Fluids and (vi) Marketing. Terminals and Pipelines include fee-based storage and terminalling services and tariff-based pipeline services for crude oil, condensate and refined products. The Company owns and operates major storage terminals located at Edmonton and Hardisty, which are the principal hubs for aggregating and exporting oil and refined products out of the Western Canadian Sedimentary Basin; pipelines, which are connected to the Hardisty Terminal; and injection stations, which are located in the United States. Environmental Services includes the provision of environmental and production services, such as emulsion hauling and treating, water hauling and disposal services and oilfield waste management, as well as exploration support services and accommodation facilities to the oil and gas industry. Truck Transportation includes provision of hauling services for crude oil, condensate, propane, butane, asphalt, sulfur, petroleum coke, gypsum, emulsion, waste water and drilling fluids, as well as hydrovac services for customers in Western Canada and the United States. Propane and NGL Marketing and Distribution includes an industrial propane distribution operation and a wholesale business that includes wholesale propane distribution and an NGL marketing business. The industrial operation sells propane to oil and gas, commercial and residential customers, while the wholesale operations sell to larger customers who are not usually the end users of the product. Processing and Wellsite Fluids includes the processing of crude oil and marketing of a variety of products, including road asphalt, roofing flux, frac oils, light and heavy straight run distillates, combined vacuum gas oil, oil based mud product and tops. Marketing includes, purchasing, selling, storing and blending of crude oil and condensate, providing aggregation services to producers and earning margins through aggregation and/or capturing quality, locational or time-based arbitrage opportunities. These operating segments of the Company have been derived because they are the segments: (a) that engage in business activities from which revenues are earned and expenses are incurred; (b) whose operating results are regularly reviewed by the Company’s chief operating decision maker to make decisions about resources to be allocated to each segment and assess its performance; and (c) for which discrete financial information is available. No operating segments were aggregated to arrive at the reportable segments. Inter-segmental transactions are eliminated upon consolidation. No margins are recognized on inter-segmental transactions. Accounting policies used for segment reporting are consistent with the accounting policies used for the preparation of the Company’s consolidated financial statements. 44 84 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Terminals & Pipelines Year ended December 31, 2015 Statement of operations Revenue - external ................ $ 133,349 Revenue - inter-segmental .... 50,830 Revenue - external and inter- segmental ........................ 184,179 Environmental Services Truck Transportation Propane & NGL Marketing & Distribution Processing & Wellsite Fluids Marketing Total $ 307,243 27,206 $ 391,671 $ 799,391 $ 294,366 $ 3,665,962 $ 5,591,982 1,023,491 101,421 124,720 665,016 54,298 334,449 445,969 924,111 395,787 4,330,978 6,615,473 Segment profit ...................... $ 142,796 $ 57,257 $ 52,034 $ 94,192 $ 37,207 $ 35,271 $ 418,757 Corporate & other reconciling balances Depreciation of property, plant and equipment .............................................................................................................. Amortization of intangible assets ................................................................................................................................... Impairment of goodwill ................................................................................................................................................. General and administrative ............................................................................................................................................ Stock based compensation ............................................................................................................................................. Corporate foreign exchange gain ................................................................................................................................... Interest expense.............................................................................................................................................................. Interest income ............................................................................................................................................................... Foreign exchange loss on long-term debt ...................................................................................................................... Net loss before income tax ............................................................................................................................................. Income tax recovery ....................................................................................................................................................... Net loss ......................................................................................................................................................................... $ 195,438 87,554 175,959 39,569 20,379 (4,970) 79,580 (558) 113,150 (287,344) (6,688) (280,656) Terminals & Pipelines Year ended December 31, 2014 Statement of operations Revenue - external ............... $ 97,100 Revenue - inter-segmental .... 60,869 Revenue - external and inter- segmental ....................... 157,969 Environmental Services Truck Transportation Propane & NGL Marketing & Distribution Processing & Wellsite Fluids Marketing Total $ 368,910 62,243 $ 495,090 $1,190,636 $ 474,771 $ 5,947,022 $ 8,573,529 1,598,907 193,022 1,058,023 162,105 62,645 431,153 557,735 1,352,741 667,793 7,005,045 10,172,436 Segment profit ...................... $ 116,524 $ 100,273 $ 83,178 $ 70,271 $ 51,675 $ 65,180 $ 487,101 Corporate & other reconciling balances Depreciation of property, plant and equipment .............................................................................................................. Amortization of intangible assets ................................................................................................................................... General and administrative ............................................................................................................................................ Stock based compensation ............................................................................................................................................. Corporate foreign exchange gain ................................................................................................................................... Interest expense.............................................................................................................................................................. Interest income ............................................................................................................................................................... Foreign exchange loss on long-term debt ...................................................................................................................... Net income before taxes................................................................................................................................................. Income tax provision ..................................................................................................................................................... Net income .................................................................................................................................................................... $ 154,934 54,991 37,385 13,977 (3,912) 67,598 (832) 35,431 127,529 35,588 91,941 45 85 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) The breakdown of additions to property, plant and equipment and intangible assets, including through business combinations, by operating segment are as follows: Terminals and Pipelines ..................................................... Environmental Services ..................................................... Truck Transportation ......................................................... Propane & NGL Marketing & Distribution ....................... Processing & Wellsite Fluids ............................................. Corporate & other ............................................................. 2015 Property, plant and equipment $ 247,893 76,904 45,396 9,744 23,996 3,247 $ 407,180 December 31 2014 Intangible Assets $ 2,426 3,868 5,210 30 - 9,440 $ 20,974 Property, plant and equipment $ 224,401 76,761 42,469 98,060 20,065 9,568 $ 471,324 Intangible Assets $ 1,971 1,281 3,670 14,251 77 12,196 $ 33,446 Geographic Data Based on the location of the end user, approximately 19% and 18% of revenue was from customers in the United States for the year ended December 31, 2015 and 2014, respectively. The Company’s non-current assets, excluding investment in finance leases and deferred tax assets, are primarily concentrated in Canada with 22% and 27% in the United States at December 31, 2015 and 2014, respectively. 30 Subsequent Events Subsequent to year end, the Company reached an agreement with its bank syndicate to amend its $500M revolving credit facility maturing in August 2020. These amendments included an increase to the maximum consolidated senior and total debt leverage ratio covenants from 4.0:1.0 to 4.85:1.0 until December 31, 2017, with such threshold decreasing to 4.25:1.0 for the period beginning January 1, 2018 and ending on March 31, 2018, and decreasing thereafter to 4.0:1.0 for total debt and 3.5:1.0 for senior debt. On March 1, 2016, the Company announced that the Board declared a quarterly dividend of $0.33 per common share for the quarter ending March 31, 2016 on its outstanding common shares. The common share dividend is payable on April 15, 2016 to shareholders of record at the close of business on March 31, 2016. 46 86 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) 31 Principal subsidiaries The Company had the following subsidiaries as at December 31, 2015: Name A&A Tank Truck Co. B.E.G. Liquid Mud Services Corp. Cal-Gas Inc. Canwest Propane Partnership Canwest Propane ULC Charles Houston Inc. Chief Hauling Contractors ULC Frontier Ventures LLC GEP ULC Gibson (U.S) Acquisition Corp. Gibson (U.S) Finco Corp. Gibson (U.S) Holdco Corp. Gibson Energy (US) Inc. Gibson Energy Inc. Gibson Energy Infrastructure, LLC Gibson Energy Corp. Gibson Energy Marketing, LLC Gibson Energy Partnership Gibson Energy Sask Ltd. Gibson Energy ULC Gibson Energy LLC Gibson Energy ULC Pension Plan Gibson Finance Ltd. Gibson Gas Liquids Partnership (Alberta) Gibson Gas Liquids ULC Gibson GCC Inc. Gibson Offshore Services, LLC Gibson Omni Parent Inc. Griswold Management, Inc. GWCC, LLC Industrial Lift Truck & Equipment Co, Inc. Keeton Services, Inc. Link Petroleum Inc. Link Petroleum Services Ltd. Littlehawk Enterprises Ltd. Moose Jaw Refinery Partnership Moose Jaw Refinery ULC OMNI Energy Seismic Services, LLC OMNI Energy Services Corp. OMNI Energy Transportation Corp. OMNI Labor Corp. Country of incorporation and place of business USA USA Canada Canada Canada USA Canada USA Canada USA USA USA USA Canada USA USA USA Canada Canada Canada USA Canada Canada Canada Canada Canada USA USA USA USA USA USA USA Canada Canada Canada Canada USA USA USA USA 47 87 Nature of business Transportation and Waste Disposal Oil & Gas Support Services Industrial propane Industrial propane Industrial propane Oil & Gas Support Services Transportation Services Oil & Gas Support Services Transportation and Storage Holding Company Holding Company Holding Company Wholesale petroleum products Holding Company Holding Company Holding Company Wholesale petroleum products Transportation and Storage Transportation and Storage Holding Company Transportation Pension Fund Holding Company Wholesale propane Wholesale propane Inactive Oil & Gas Support Services Holding Company Inactive Oil & Gas Support Services Oil & Gas Support Services Oil & Gas Support Services Wholesale propane Inactive Oil & Gas Support Services Fluids and refining Fluids and refining Oil & Gas Seismic Services Oil & Gas Support Services Oil & Gas Support Services Inactive Proportion of ordinary shares owned by the Company 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Name OMNI Properties Corp. Plato Services Partnership Preheat, Inc. Rig Tools, Inc. Ross Eriksmoen Inc. Stittco Energy Ltd. Stittco Utilities Man Ltd. Stittco Utilities NWT Ltd. Taylor Transfer Services, LLC TPG Leasing, LLC TPG Transport, LLC Trussco, Inc. WISCO Inc. Country of incorporation and place of business USA Canada USA USA USA Canada Canada Canada USA USA USA USA USA Nature of business Inactive Waste Disposal Services Oil & Gas Support Services Oil & Gas Support Services Oil & Gas Support Services Industrial propane Industrial propane Industrial propane Transportation Rental and Leasing Transportation Oil & Gas Support Services Oil & Gas Support Services Proportion of ordinary shares owned by the Company 100% 50% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 48 88 Corporate Information HEAD OFFICE 1700, 440–2nd Ave SW Calgary, AB Canada T2P 5E9 Phone: (403) 206-4000 Fax: (403) 206-4001 Website: www.gibsons.com AUDITORS PricewaterhouseCoopers LLP BANKERS Royal Bank of Canada JPMorgan Chase Bank, N.A. LEGAL COUNSEL Bennett Jones LLP TRUSTEE, REGISTRAR & TRANSFER AGENT Computershare Trust Company of Canada Calgary, Alberta STOCK EXCHANGE Toronto Stock Exchange Trading Symbol: GEI INVESTOR RELATIONS & MEDIA Tammi Price Vice President, Investor Relations & Corporate Development Phone: (403) 206-4212 Email: tprice@gibsons.com Cam Deller Manager, Investor Relations Phone: (403) 776-3041 Email: cam.deller@gibsons.com Amanda Condie Manager, Communications Phone: (403) 776-3189 Email: amanda.condie@gibsons.com MANAGEMENT A. Stewart Hanlon President & Chief Executive Officer Sean M. Brown Chief Financial Officer Brian J. Recatto President U.S. Operations Douglas P. Wilkins Chief Commercial Officer Richard M. Wise Chief Operating Officer Rodney J. Bantle Senior Vice President, Truck Transportation Stephen L. Bart Senior Vice President, Terminals & Pipelines Sean W. Duffee Senior Vice President, Marketing & Commercial Development Donald A. Fowlis Senior Vice President, Finance Warren Osatiuk Senior Vice President, Refining Samuel van Aken Senior Vice President, Propane Marketing & Distribution DIRECTORS James M. Estey Chair of the Board James J. Cleary A. Stewart Hanlon Donald R. Ingram Marshall L. McRae Mary Ellen Peters Clayton H. Woitas FORWARD-LOOKING STATEMENTS Certain statements contained in this annual report constitute forward-looking information and statements (collectively “forward-looking statements”). These statements relate to future events or the Company’s future performance. All statements other than statements of historical fact are forward-looking statements. The use of any of the words “anticipate”, “plan”, “contem- plate”, “continue”, “estimate”, “expect”, “in- tend”, “propose”, “might”, “may”, “will”, “shall”, “project”, “should”, “could”, “would”, “believe”, “predict”, “forecast”, “pursue”, “potential” and “capable” and similar expressions are intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. No assurance can be given that these expectations will prove to be correct and such forward-looking statements included in this annual report should not be unduly relied upon. These statements speak only as of the date of this annual report. With respect to forward-looking statements contained in this annual report, assumptions have been made regarding, among other things: future growth in worldwide demand for crude oil and petroleum products; crude oil prices; no material defaults by the counterparties to agreements with the Company; the Company’s ability to obtain qualified personnel, owner-operators, lease operators and equipment in a timely and cost-efficient manner; the regulatory framework governing taxes and environmental matters in the jurisdictions in which the Company conducts and will conduct its business; operating costs; future capital expenditures to be made by the Company; the Company’s ability to obtain financing for its capital programs on acceptable terms; the Company’s future debt levels; the impact of increasing competition on the Company; the impact of future changes in accounting policies on the Company’s consolidated financial statements. Actual results could differ materially from those anticipated in these forward-looking statements as a result of numerous risks and uncertainties including, but not limited to, the risks described in “Risk Factors” and “Forward-Looking Statements” included in the Company’s AIF dated March 1, 2016 as filed on SEDAR at www.sedar.com. www.gibsons.com TSX: GEI 1700, 440 - 2nd Ave. SW Calgary, AB, Canada, T2P 5E9 Phone: (403) 206-4000 Fax: (403) 206-4001

Continue reading text version or see original annual report in PDF format above