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International SeawaysANNUAL REPORT 2018 IN THIS REPORT 1 Management’s Discussion & Analysis 45 Consolidated Financial Statements Management’s Discussion and Analysis 2018 Year End Report Management’s Discussion and Analysis 2018 Year End Report Contents BUSINESS OVERVIEW _____________________________________________________________________ 2 SELECTED FINANCIAL MEASURES ____________________________________________________________ 3 2018 REVIEW ____________________________________________________________________________ 4 PROJECT DEVELOPMENTS AND MARKET OUTLOOK _____________________________________________ 6 RESULTS OF CONTINUING OPERATIONS _______________________________________________________ 7 BUSINESS OVERVIEW INFRASTRUCTURE _______________________________________________________________________________ 8 LOGISTICS ____________________________________________________________________________________ 11 WHOLESALE __________________________________________________________________________________ 12 EXPENSES ______________________________________________________________________________ 14 RESULTS OF DISCONTINUED OPERATIONS ____________________________________________________ 16 SUMMARY OF QUARTERLY RESULTS ________________________________________________________ 20 LIQUIDITY AND CAPITAL RESOURCES ________________________________________________________ 23 Liquidity Sources _______________________________________________________________________________ 23 Capital expenditures and acquisitions ______________________________________________________________ 25 Capital structure _______________________________________________________________________________ 26 Dividends ____________________________________________________________________________________ 27 Distributable cash flow _________________________________________________________________________ 27 Contractual obligations and contingencies __________________________________________________________ 30 OFF-BALANCE SHEET ARRANGEMENTS ______________________________________________________ 30 OUTSTANDING SHARE DATA ______________________________________________________________ 30 opportunities; QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ____________________________ 31 pursue high quality cash flows to underpin our dividend and fund growth capital; ACCOUNTING POLICIES ___________________________________________________________________ 32 DISCLOSURE CONTROLS & PROCEDURES _____________________________________________________ 36 RISK FACTORS __________________________________________________________________________ 37 funding costs and increase our access to capital; FORWARD-LOOKING INFORMATION ________________________________________________________ 41 NON-GAAP FINANCIAL MEASURES __________________________________________________________ 42 maintain a strong balance sheet and financial position through targeting a debt leverage ratio of 3.0x – 3.5x and a payout ratio of 70% – 80% of distributable cash flow 1. We anticipate being fully funded for our growth capital through the end of 2019 through internally generated cash flows and proceeds from non-core asset dispositions and will subsequently seek to fund growth capital with a maximum of 50% - 60% debt. We also target an investment grade credit rating to decrease our remain highly skilled in building and operating our infrastructure while aggressively managing costs to maintain and improve operating margins. We will be customer-focused and will foster long-term relationships with our customers in order to better understand their infrastructure requirements and be more responsive in providing the best solutions for them; and continue our firm commitment to be a leader in environment, health, and safety. Our experienced leadership team has a proven history of successful operations and a strong industry reputation. The following Management’s Discussion and Analysis (“MD&A”) was prepared and approved by the Board of Directors (the “Board”) of Gibson Energy Inc. (“we”, “our”, “us”, its”, “Gibson Energy”, “Gibson” or the “Company”) as of March 4, 2019 and should be read in conjunction with the audited consolidated financial statements and related notes of the Company for the years ended December 31, 2018 and 2017, 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”), also referred to as GAAP. Amounts are stated in thousands of Canadian dollars except per share data, unless otherwise noted. Additional information about Gibson, including the Annual Information Form for the year ended December 31, 2018 (“AIF”) is available on SEDAR at www.sedar.com and on our website at www.gibsonenergy.com. 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. Gibson is a Canadian-based oil infrastructure company with its principal businesses consisting of the storage, optimization, processing, and gathering of crude oil and refined products. Headquartered in Calgary, Alberta, the Company’s operations are focused around its core terminal assets located at Hardisty and Edmonton, Alberta, and also include the Moose Jaw Facility and an infrastructure position in the United States (U.S.). Our strategy and strengths The key attributes of our strategy are: an oil infrastructure focus, with the Infrastructure segment targeting to comprise approximately 85% of segment profit and the terminals and pipelines representing approximately 75% of total segment profit; targeting 10% distributable cash flow per share growth 1; and offering a secure, growing dividend that is underpinned by long-term contracts with investment grade counterparties at its terminal assets, with total Company cash flows expected to be comprised of approximately 85% take-or-pay, stable fee- based structures, inclusive of internal take-or-pay. In order to be successful in our strategy we will: leverage our competitive position at our terminals to continue to secure a significant proportion of new tankage business. Through offering the most connectivity to inbound and outbound pipelines at Hardisty, as well as exclusive access to the only unit train rail facility at Hardisty, we have built a position that provides us a competitive advantage to service our customers. We intend to harvest additional opportunities within our terminals to provide incremental connectivity and other services to existing terminal customers; seek complementary growth through our basin strategy, focusing on the oil sands, Viking and Duvernay basins in Canada, and the Permian and SCOOP / STACK basins in the U.S. Within these basins, we will leverage our core terminals and growing infrastructure position in the U.S. to advantage us in competing for gathering pipeline and related infrastructure 1 See definition of non-GAAP measures on page 28 and 42. Gibson Energy Inc. 2 Management’s Discussion and Analysis Gibson Energy Inc. 1 Management’s Discussion and Analysis Gibson Energy 2 Management’s Discussion and Analysis Contents BUSINESS OVERVIEW _____________________________________________________________________ 2 SELECTED FINANCIAL MEASURES ____________________________________________________________ 3 2018 REVIEW ____________________________________________________________________________ 4 PROJECT DEVELOPMENTS AND MARKET OUTLOOK _____________________________________________ 6 RESULTS OF CONTINUING OPERATIONS _______________________________________________________ 7 INFRASTRUCTURE _______________________________________________________________________________ 8 LOGISTICS ____________________________________________________________________________________ 11 WHOLESALE __________________________________________________________________________________ 12 EXPENSES ______________________________________________________________________________ 14 RESULTS OF DISCONTINUED OPERATIONS ____________________________________________________ 16 SUMMARY OF QUARTERLY RESULTS ________________________________________________________ 20 LIQUIDITY AND CAPITAL RESOURCES ________________________________________________________ 23 Liquidity Sources _______________________________________________________________________________ 23 Capital expenditures and acquisitions ______________________________________________________________ 25 Capital structure _______________________________________________________________________________ 26 Dividends ____________________________________________________________________________________ 27 Distributable cash flow _________________________________________________________________________ 27 Contractual obligations and contingencies __________________________________________________________ 30 OFF-BALANCE SHEET ARRANGEMENTS ______________________________________________________ 30 OUTSTANDING SHARE DATA ______________________________________________________________ 30 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ____________________________ 31 ACCOUNTING POLICIES ___________________________________________________________________ 32 DISCLOSURE CONTROLS & PROCEDURES _____________________________________________________ 36 RISK FACTORS __________________________________________________________________________ 37 FORWARD-LOOKING INFORMATION ________________________________________________________ 41 NON-GAAP FINANCIAL MEASURES __________________________________________________________ 42 Gibson Energy Inc. 1 Management’s Discussion and Analysis The following Management’s Discussion and Analysis (“MD&A”) was prepared and approved by the Board of Directors (the “Board”) of Gibson Energy Inc. (“we”, “our”, “us”, its”, “Gibson Energy”, “Gibson” or the “Company”) as of March 4, 2019 and should be read in conjunction with the audited consolidated financial statements and related notes of the Company for the years ended December 31, 2018 and 2017, 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”), also referred to as GAAP. Amounts are stated in thousands of Canadian dollars except per share data, unless otherwise noted. Additional information about Gibson, including the Annual Information Form for the year ended December 31, 2018 (“AIF”) is available on SEDAR at www.sedar.com and on our website at www.gibsonenergy.com. 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. BUSINESS OVERVIEW Gibson is a Canadian-based oil infrastructure company with its principal businesses consisting of the storage, optimization, processing, and gathering of crude oil and refined products. Headquartered in Calgary, Alberta, the Company’s operations are focused around its core terminal assets located at Hardisty and Edmonton, Alberta, and also include the Moose Jaw Facility and an infrastructure position in the United States (U.S.). Our strategy and strengths The key attributes of our strategy are: an oil infrastructure focus, with the Infrastructure segment targeting to comprise approximately 85% of segment profit and the terminals and pipelines representing approximately 75% of total segment profit; targeting 10% distributable cash flow per share growth 1; and offering a secure, growing dividend that is underpinned by long-term contracts with investment grade counterparties at its terminal assets, with total Company cash flows expected to be comprised of approximately 85% take-or-pay, stable fee- based structures, inclusive of internal take-or-pay. In order to be successful in our strategy we will: leverage our competitive position at our terminals to continue to secure a significant proportion of new tankage business. Through offering the most connectivity to inbound and outbound pipelines at Hardisty, as well as exclusive access to the only unit train rail facility at Hardisty, we have built a position that provides us a competitive advantage to service our customers. We intend to harvest additional opportunities within our terminals to provide incremental connectivity and other services to existing terminal customers; seek complementary growth through our basin strategy, focusing on the oil sands, Viking and Duvernay basins in Canada, and the Permian and SCOOP / STACK basins in the U.S. Within these basins, we will leverage our core terminals and growing infrastructure position in the U.S. to advantage us in competing for gathering pipeline and related infrastructure opportunities; pursue high quality cash flows to underpin our dividend and fund growth capital; maintain a strong balance sheet and financial position through targeting a debt leverage ratio of 3.0x – 3.5x and a payout ratio of 70% – 80% of distributable cash flow 1. We anticipate being fully funded for our growth capital through the end of 2019 through internally generated cash flows and proceeds from non-core asset dispositions and will subsequently seek to fund growth capital with a maximum of 50% - 60% debt. We also target an investment grade credit rating to decrease our funding costs and increase our access to capital; remain highly skilled in building and operating our infrastructure while aggressively managing costs to maintain and improve operating margins. We will be customer-focused and will foster long-term relationships with our customers in order to better understand their infrastructure requirements and be more responsive in providing the best solutions for them; and continue our firm commitment to be a leader in environment, health, and safety. Our experienced leadership team has a proven history of successful operations and a strong industry reputation. 1 See definition of non-GAAP measures on page 28 and 42. Gibson Energy Gibson Energy Inc. 2 Management’s Discussion and Analysis Management’s Discussion and Analysis 3 SELECTED FINANCIAL MEASURES Continuing operations 2 Segment profit 4 ...................................................... Adjusted EBITDA 3,4 ................................................. Cash flow from operating activities 4 ...................... Distributable cash flow 3,4,6 ..................................... Growth capital expenditures 4 ................................ Combined operations 2 Combined Adjusted EBITDA 2,3,4 .............................. Distributable cash flow 3,4,6 ..................................... Three months ended December 31 20171 2018 Years ended December 31 2018 20171 $ 153,569 134,001 262,044 78,190 81,745 $ $ 71,387 68,475 37,371 50,181 56,271 $ $ 487,087 457,315 527,086 259,126 221,198 $ $ 261,758 229,201 175,272 160,479 151,154 $ $ 140,479 $ 84,123 $ 82,271 $ 73,556 $ 282,517 $ 180,493 $ 490,083 $ 291,272 Debt and dividend payout ratios 2,5 Debt leverage ratio ............................................................ Interest coverage ratio ........................................................ Combined dividend payout ratio 6 ...................................... Last Twelve Months - As at December 31 2017 2018 2.3 6.7 67% 4.0 3.7 104% Revenue 4 ........................................................................... Net income (loss) 4 ............................................................. Basic income (loss) per share 4 ........................................... Diluted income (loss) per share 4 ....................................... Dividends declared ............................................................. Total assets ....................................................................... Total non-current liabilities ................................................ For the years ended December 31 $ 2018 6,846,589 81,125 0.57 0.56 $ 190,326 $ 20171 5,659,646 (66,326) (0.47) (0.47) $ 188,470 $ 20161 4,221,712 (19,854) (0.15) (0.15) $ 181,994 2018 $ 2,809,576 $ 1,461,685 As at December 31 20171 $ 2,964,434 $ 1,498,900 20161 $ 3,261,347 $ 1,639,045 1. 2. 3. 4. 5. 6. The current period results include the impacts from the adoption of new accounting standards as discussed on page 34. Comparative information has not been restated and, therefore, may not be comparable. See definition of non-GAAP measures on pages 20 to 21 and 42. Combined Adjusted EBITDA and Combined distributable cash flow, represents the aggregated results of both continuing and discontinued operations. See pages 21 to 22 and 28 to 29 for a reconciliation of Adjusted EBITDA to segment profit and distributable cash flow to cash flow from operations, respectively. Comparative period information has been represented to reflect the impact of discontinued operations. Refer to page 27 and 34 for more information on the ratio calculation and impact of new accounting standards adoption on the covenant calculations. The distributable cash flow calculation was revised during 2018 and comparative information has been restated, refer to page 29 for details. Management’s Discussion and Analysis Gibson Energy Inc. 3 Management’s Discussion and Analysis Gibson Energy 4 2018 REVIEW Financial highlights o o o o o o o o o o o Segment profit for the Infrastructure segment of $283 million increased by $48 million, for the year ended December 31, 2018 compared to $235 million, for the year ended December 31, 2017 primarily due to additional tankage brought into service at the beginning of 2018 under take-or-pay, stable fee-based contracts. Segment profit for the Wholesale segment of $211 million increased by $180 million, for the year ended December 31, 2018 compared to $31 million, for the year ended December 31, 2017 due to higher margins earned from the refined product and the crude marketing businesses, and the impact of the adoption of IFRS 16 – Leases (“IFRS 16”) resulting in higher segment profit by $8.8 million and $40.1 million in the three months and year ended December 31, 2018, as noted in the “Accounting Policies” section. Segment profit from continuing operations of $487 million increased by $225 million, for the year ended December 31, 2018 compared to $262 million, for the year ended December 31, 2017 driven by stronger performance from Infrastructure and Wholesale. Adjusted EBITDA from continuing operations of $457 million increased by $228 million, for the year ended December 31, 2018 compared to $229 million, for the year ended December 31, 2017 due to higher segment profits from the Infrastructure and Wholesale business segments. As at December 31, 2018, the debt to EBITDA leverage ratio was 2.3 on a trailing twelve-month basis. Distributable cash flow from combined operations of $283 million increased by $103 million, for the year ended December 31, 2018 compared to $180 million, for the year ended December 31, 2017. Distributable cash flow from combined operations during the year ended December 31, 2018 resulted in a payout ratio of approximately 67%. Net income from continuing operations of $81 million increased by $147 million, for the year ended December 31, 2018 compared to a net loss of $66 million, for the year ended December 31, 2017. In the fourth quarter of 2018 and 2017, the Company declared a dividend of $0.33 per common share, respectively. Total dividends declared for the years ended December 31, 2018 and 2017 were $190 million and $188 million, respectively or $1.32 per common share. Capital projects highlights During the year ended December 31, 2018, the Company incurred total growth capital expenditures, including acquisitions, of $302 million on construction of new tanks and related infrastructure at the Hardisty and Edmonton Terminals, the Viking Pipeline project (“Viking Pipeline”) and the extension of the Pyote gathering system. On January 3, 2018 the Company placed into service a total of 800,000 barrels of crude oil storage tank capacity and related pipeline connection infrastructure at the Edmonton Terminal which are underpinned by long-term take or pay contracts. On February 21, 2018, the Company announced the sanction of the $50 million Viking Pipeline. On August 8, 2018, the Company announced an additional $200 to $250 million of growth capital opportunities, consisting Sanction of 1.0 million barrels of new tankage at the Hardisty Terminal related to the second phase of development at the Top of the Hill portion of the Hardisty Terminal underpinned by long-term take or pay contracts; The acceleration of the U.S. strategy through investments made in and around its existing Pyote gathering system; of the following: and The expansion of the Moose Jaw Facility. o On October 15, 2018, the Company announced the sanction of an additional 1.0 million barrels of new tankage at the Hardisty Terminal, underpinned by a long-term contract with an investment grade, senior oil sands customer. Gibson Energy Inc. 4 Management’s Discussion and Analysis SELECTED FINANCIAL MEASURES Three months ended December 31 Years ended December 31 2018 20171 2018 20171 Continuing operations 2 Segment profit 4 ...................................................... $ 153,569 $ 71,387 $ 487,087 $ 261,758 Adjusted EBITDA 3,4 ................................................. Cash flow from operating activities 4 ...................... Distributable cash flow 3,4,6 ..................................... 134,001 262,044 78,190 68,475 37,371 50,181 56,271 457,315 527,086 259,126 229,201 175,272 160,479 151,154 Growth capital expenditures 4 ................................ $ 81,745 $ $ 221,198 $ Combined operations 2 Combined Adjusted EBITDA 2,3,4 .............................. $ 140,479 $ 82,271 $ 490,083 $ 291,272 Distributable cash flow 3,4,6 ..................................... $ 84,123 $ 73,556 $ 282,517 $ 180,493 Debt and dividend payout ratios 2,5 Debt leverage ratio ............................................................ Interest coverage ratio ........................................................ Combined dividend payout ratio 6 ...................................... Last Twelve Months - As at December 31 2018 2.3 6.7 67% 2018 2017 4.0 3.7 104% 20171 Revenue 4 ........................................................................... $ 6,846,589 $ 5,659,646 $ 4,221,712 Net income (loss) 4 ............................................................. Basic income (loss) per share 4 ........................................... Diluted income (loss) per share 4 ....................................... 81,125 0.57 0.56 (66,326) (0.47) (0.47) Dividends declared ............................................................. $ 190,326 $ 188,470 $ 181,994 20161 (19,854) (0.15) (0.15) For the years ended December 31 Total assets ....................................................................... Total non-current liabilities ................................................ $ 2,809,576 $ 1,461,685 $ 2,964,434 $ 1,498,900 $ 3,261,347 $ 1,639,045 2018 As at December 31 20171 20161 The current period results include the impacts from the adoption of new accounting standards as discussed on page 34. Comparative information has not been restated and, therefore, may not be comparable. See definition of non-GAAP measures on pages 20 to 21 and 42. Combined Adjusted EBITDA and Combined distributable cash flow, represents the aggregated results of both continuing and discontinued operations. See pages 21 to 22 and 28 to 29 for a reconciliation of Adjusted EBITDA to segment profit and distributable cash flow to cash flow from Comparative period information has been represented to reflect the impact of discontinued operations. Refer to page 27 and 34 for more information on the ratio calculation and impact of new accounting standards adoption on the covenant 1. 2. 3. 4. 5. 6. operations, respectively. calculations. The distributable cash flow calculation was revised during 2018 and comparative information has been restated, refer to page 29 for details. Gibson Energy Inc. 3 Management’s Discussion and Analysis 2018 REVIEW Financial highlights o o o o o o o Segment profit for the Infrastructure segment of $283 million increased by $48 million, for the year ended December 31, 2018 compared to $235 million, for the year ended December 31, 2017 primarily due to additional tankage brought into service at the beginning of 2018 under take-or-pay, stable fee-based contracts. Segment profit for the Wholesale segment of $211 million increased by $180 million, for the year ended December 31, 2018 compared to $31 million, for the year ended December 31, 2017 due to higher margins earned from the refined product and the crude marketing businesses, and the impact of the adoption of IFRS 16 – Leases (“IFRS 16”) resulting in higher segment profit by $8.8 million and $40.1 million in the three months and year ended December 31, 2018, as noted in the “Accounting Policies” section. Segment profit from continuing operations of $487 million increased by $225 million, for the year ended December 31, 2018 compared to $262 million, for the year ended December 31, 2017 driven by stronger performance from Infrastructure and Wholesale. Adjusted EBITDA from continuing operations of $457 million increased by $228 million, for the year ended December 31, 2018 compared to $229 million, for the year ended December 31, 2017 due to higher segment profits from the Infrastructure and Wholesale business segments. As at December 31, 2018, the debt to EBITDA leverage ratio was 2.3 on a trailing twelve-month basis. Distributable cash flow from combined operations of $283 million increased by $103 million, for the year ended December 31, 2018 compared to $180 million, for the year ended December 31, 2017. Distributable cash flow from combined operations during the year ended December 31, 2018 resulted in a payout ratio of approximately 67%. Net income from continuing operations of $81 million increased by $147 million, for the year ended December 31, 2018 compared to a net loss of $66 million, for the year ended December 31, 2017. In the fourth quarter of 2018 and 2017, the Company declared a dividend of $0.33 per common share, respectively. Total dividends declared for the years ended December 31, 2018 and 2017 were $190 million and $188 million, respectively or $1.32 per common share. Capital projects highlights o o o o During the year ended December 31, 2018, the Company incurred total growth capital expenditures, including acquisitions, of $302 million on construction of new tanks and related infrastructure at the Hardisty and Edmonton Terminals, the Viking Pipeline project (“Viking Pipeline”) and the extension of the Pyote gathering system. On January 3, 2018 the Company placed into service a total of 800,000 barrels of crude oil storage tank capacity and related pipeline connection infrastructure at the Edmonton Terminal which are underpinned by long-term take or pay contracts. On February 21, 2018, the Company announced the sanction of the $50 million Viking Pipeline. On August 8, 2018, the Company announced an additional $200 to $250 million of growth capital opportunities, consisting of the following: Sanction of 1.0 million barrels of new tankage at the Hardisty Terminal related to the second phase of development at the Top of the Hill portion of the Hardisty Terminal underpinned by long-term take or pay contracts; The acceleration of the U.S. strategy through investments made in and around its existing Pyote gathering system; and The expansion of the Moose Jaw Facility. o On October 15, 2018, the Company announced the sanction of an additional 1.0 million barrels of new tankage at the Hardisty Terminal, underpinned by a long-term contract with an investment grade, senior oil sands customer. Gibson Energy Gibson Energy Inc. 4 Management’s Discussion and Analysis Management’s Discussion and Analysis 5 o On December 4, 2018, the Company announced the approval of the 2019 growth capital expenditure budget in the range of $200 million to $250 million with an additional $30 to $35 million allocated to replacement capital expenditures. o On December 16, 2018, the Viking Pipeline went into service. Disposition of non-core businesses o o o o o o On January 30, 2018, the Company announced its new corporate strategy and plans for the sale of its non-core businesses, including Wholesale Propane, Canadian Truck Transportation, non-core Environmental Services North (“ESN”) and non- core U.S. Injection Stations and Truck Transportation assets. On May 3, 2018, the Company completed the sale of its U.S. Environmental Services business for gross proceeds of $123 million (US$96 million). On November 26, 2018, the Company announced the sale of its Wholesale Propane and ESN businesses for aggregate proceeds of approximately $100 million, prior to closing adjustments. On December 3, 2018, the Company completed the sale of its Wholesale Propane business. The Company continues to progress on the divestiture of its Canadian Truck Transportation business with a target of concluding the divestiture process by mid-2019. Aggregate proceeds from the sale of non-core businesses have been and are expected to be reinvested into the core infrastructure business through funding future growth capital expenditures. Capital Structure o o On April 11, 2018 the Company extended the maturity date of its unsecured revolving credit facility (“Revolving Credit Facility”) from March 2022 to March 2023, and among other revisions, the maximum consolidated senior debt leverage ratio and the maximum consolidated total debt leverage ratio were revised to 4.85 to 1.0 until the end of the 2018 fiscal year, 4.50 to 1.0 for the 2019 fiscal year and 4.0 to 1.0 thereafter. On August 30, 2018 S&P Global ratings raised its long-term issuer credit and senior unsecured debt ratings on the Company to “BB+” from “BB”. Accounting standards o As disclosed in note 4 of the 2018 consolidated financial statements, the Company has adopted certain new accounting standards as at January 1, 2018. These standards have been applied retrospectively using the modified retrospective approach, which does not require restatement of prior period financial information and applies the standard prospectively effective January 1, 2018. Accordingly, comparative information, including non-GAAP measures, included herein are not restated for the impact of these standards. Where the impact was material, the amounts have been quantified for comparative analysis purposes in the respective sections of this document. Refer to “Accounting Policies” section for further details. SUBSEQUENT EVENTS Disposition of non-core business On February 28, 2019, the Company completed the sale of its non-core ESN business. o Dividend o On March 4, 2019, the Board declared a quarterly dividend of $0.33 per common share for the first quarter on its outstanding common shares. The dividend is payable on April 17, 2019 to shareholders of record at the close of business on March 29, 2019. PROJECT DEVELOPMENTS AND MARKET OUTLOOK Major growth projects The Company continues to progress several major growth projects within its Infrastructure segment, including advancing the construction of 3.1 million barrels of tankage at Hardisty and completing the Viking Pipeline during the year. All major growth projects currently under construction are expected to be completed within or ahead of initial timelines. The following represents key activities with respect to major growth projects over 2018: o o o o o o On January 3, 2018, the Company placed into service 800,000 barrels of crude oil storage tanks and related pipeline connection infrastructure at the Edmonton Terminal; On February 21, 2018, the Company announced the sanction of the $50 million Viking Pipeline, which went into services on December 16, 2018; On August 8, 2018, the Company secured an additional $200 to $250 million of growth capital opportunities, consisting of the sanction of 1.0 million barrels of new tankage at the Hardisty Terminal, underpinned by long-term take or pay contracts and expected to be placed in service in the fourth quarter of 2019, the acceleration of the U.S. strategy through the extension of the Pyote gathering system and the expansion of the Moose Jaw Facility; On October 15, 2018, the Company announced the sanction of 1.0 million barrels of new tankage at the Hardisty Terminal, underpinned by a long-term contract with an investment grade, senior oil sands customer. The construction of two new 500,000 barrel tanks represents the third phase of development at the Top of the Hill portion of the Hardisty Terminal, and will leverage certain infrastructure built as part of the prior phases. The third phase is expected to be in service in the first quarter of 2020. In aggregate the three phases currently under construction will add seven new tanks, representing an incremental 3.1 million barrels of storage, an approximately 35% expansion of the Hardisty Terminal; The expansion of the Hardisty Unit Rail Facility, which is expected to be placed in service in the first quarter of 2019, while the expansion of the Moose Jaw Facility is expected to be placed into service during the second quarter of 2019; and Subsequent to the end of the quarter, the Company successfully placed the first phase of development at the Top of the Hill portion of the Hardisty Terminal into service ahead of schedule with capital costs in-line with budget. With the three tanks from first phase at the Top of the Hill adding an incremental 1.1 million barrels of storage, Gibson’s Hardisty Terminal has reached an aggregate storage capacity of 10 million barrels. In addition to the sanctioned major growth projects currently under construction and discussed above, the Company continues to advance numerous commercial development opportunities at its Hardisty and Edmonton Terminals, outside its Terminals within Canada and around its Permian position in the U.S. The ability to reach long-term commercial agreements on these opportunities, and underpin the sanction of the construction of additional infrastructure for the Company’s existing and potential customers, would help increase the Infrastructure Segment’s revenues and segment profit in the future. Management’s Discussion and Analysis Gibson Energy Inc. 5 Management’s Discussion and Analysis Gibson Energy 6 Gibson Energy Inc. 6 Management’s Discussion and Analysis o On December 4, 2018, the Company announced the approval of the 2019 growth capital expenditure budget in the range of $200 million to $250 million with an additional $30 to $35 million allocated to replacement capital expenditures. PROJECT DEVELOPMENTS AND MARKET OUTLOOK Major growth projects The Company continues to progress several major growth projects within its Infrastructure segment, including advancing the construction of 3.1 million barrels of tankage at Hardisty and completing the Viking Pipeline during the year. All major growth projects currently under construction are expected to be completed within or ahead of initial timelines. The following represents key activities with respect to major growth projects over 2018: o o o o o o On January 3, 2018, the Company placed into service 800,000 barrels of crude oil storage tanks and related pipeline connection infrastructure at the Edmonton Terminal; On February 21, 2018, the Company announced the sanction of the $50 million Viking Pipeline, which went into services on December 16, 2018; On August 8, 2018, the Company secured an additional $200 to $250 million of growth capital opportunities, consisting of the sanction of 1.0 million barrels of new tankage at the Hardisty Terminal, underpinned by long-term take or pay contracts and expected to be placed in service in the fourth quarter of 2019, the acceleration of the U.S. strategy through the extension of the Pyote gathering system and the expansion of the Moose Jaw Facility; On October 15, 2018, the Company announced the sanction of 1.0 million barrels of new tankage at the Hardisty Terminal, underpinned by a long-term contract with an investment grade, senior oil sands customer. The construction of two new 500,000 barrel tanks represents the third phase of development at the Top of the Hill portion of the Hardisty Terminal, and will leverage certain infrastructure built as part of the prior phases. The third phase is expected to be in service in the first quarter of 2020. In aggregate the three phases currently under construction will add seven new tanks, representing an incremental 3.1 million barrels of storage, an approximately 35% expansion of the Hardisty Terminal; The expansion of the Hardisty Unit Rail Facility, which is expected to be placed in service in the first quarter of 2019, while the expansion of the Moose Jaw Facility is expected to be placed into service during the second quarter of 2019; and Subsequent to the end of the quarter, the Company successfully placed the first phase of development at the Top of the Hill portion of the Hardisty Terminal into service ahead of schedule with capital costs in-line with budget. With the three tanks from first phase at the Top of the Hill adding an incremental 1.1 million barrels of storage, Gibson’s Hardisty Terminal has reached an aggregate storage capacity of 10 million barrels. In addition to the sanctioned major growth projects currently under construction and discussed above, the Company continues to advance numerous commercial development opportunities at its Hardisty and Edmonton Terminals, outside its Terminals within Canada and around its Permian position in the U.S. The ability to reach long-term commercial agreements on these opportunities, and underpin the sanction of the construction of additional infrastructure for the Company’s existing and potential customers, would help increase the Infrastructure Segment’s revenues and segment profit in the future. o On December 16, 2018, the Viking Pipeline went into service. Disposition of non-core businesses On January 30, 2018, the Company announced its new corporate strategy and plans for the sale of its non-core businesses, including Wholesale Propane, Canadian Truck Transportation, non-core Environmental Services North (“ESN”) and non- core U.S. Injection Stations and Truck Transportation assets. On May 3, 2018, the Company completed the sale of its U.S. Environmental Services business for gross proceeds of $123 million (US$96 million). On November 26, 2018, the Company announced the sale of its Wholesale Propane and ESN businesses for aggregate proceeds of approximately $100 million, prior to closing adjustments. On December 3, 2018, the Company completed the sale of its Wholesale Propane business. The Company continues to progress on the divestiture of its Canadian Truck Transportation business with a target of concluding the divestiture process by mid-2019. Aggregate proceeds from the sale of non-core businesses have been and are expected to be reinvested into the core infrastructure business through funding future growth capital expenditures. On April 11, 2018 the Company extended the maturity date of its unsecured revolving credit facility (“Revolving Credit Facility”) from March 2022 to March 2023, and among other revisions, the maximum consolidated senior debt leverage ratio and the maximum consolidated total debt leverage ratio were revised to 4.85 to 1.0 until the end of the 2018 fiscal year, 4.50 to 1.0 for the 2019 fiscal year and 4.0 to 1.0 thereafter. On August 30, 2018 S&P Global ratings raised its long-term issuer credit and senior unsecured debt ratings on the Company Capital Structure to “BB+” from “BB”. Accounting standards As disclosed in note 4 of the 2018 consolidated financial statements, the Company has adopted certain new accounting standards as at January 1, 2018. These standards have been applied retrospectively using the modified retrospective approach, which does not require restatement of prior period financial information and applies the standard prospectively effective January 1, 2018. Accordingly, comparative information, including non-GAAP measures, included herein are not restated for the impact of these standards. Where the impact was material, the amounts have been quantified for comparative analysis purposes in the respective sections of this document. Refer to “Accounting Policies” section for further details. SUBSEQUENT EVENTS Disposition of non-core business Dividend on March 29, 2019. On February 28, 2019, the Company completed the sale of its non-core ESN business. On March 4, 2019, the Board declared a quarterly dividend of $0.33 per common share for the first quarter on its outstanding common shares. The dividend is payable on April 17, 2019 to shareholders of record at the close of business o o o o o o o o o o o Gibson Energy Inc. 5 Management’s Discussion and Analysis Gibson Energy Inc. 6 Management’s Discussion and Analysis 7 Management’s Discussion and Analysis Gibson Energy Market outlook Gibson regularly evaluates its long-range strategic plan in order to assess the implications of emerging industry trends. These industry trends have the ability to affect Gibson’s business and prospects over the short-term (generally less than two years) and the medium to long-term (generally two to five years). There are a number of factors that affect customers’ views of market access over the short and medium term, particularly in the Western Canadian Sedimentary Basin (the “WCSB”). These views, in addition to commodity prices, impact capital expenditure programs and ultimately the growth in production that creates a meaningful portion of opportunities at the Hardisty and Edmonton terminals, as well as services that support those assets: o o In the short-term, crude oil pricing, location and quality disconnects, combined with the existing shortage of pipeline takeaway capacity from the WCSB, increase demand for terminal services as well as the use of crude by rail as a solution for market access. The Company believes that increased reliance on storage during periods of limited egress, especially during pipeline upsets or to facilitate crude by rail, may lead customers to consider increasing their available storage. Wider differentials improve margins at the Moose Jaw Facility, and, in conjunction with increased price fluctuations, typically provide increased opportunities within the Crude Wholesale business. There are currently three large pipeline projects at various stages of development and/or regulatory approval that have the potential to impact the Company over the short, medium and long-term. Over the long-term, the Company would expect to benefit from incremental egress from Enbridge’s Line 3 pipeline, TC Pipeline’s Keystone XL project and the Government of Canada’s Trans Mountain Expansion, as it would encourage additional oil sands development. This increase in production in the WCSB would lead to further demand for tankage at the Company’s Hardisty and Edmonton Terminals, which are either connected or in close proximity to the respective starting points of these pipeline projects. There is a risk that these projects may be substantially delayed or cancelled. The recent stabilization in global oil price and improving cost efficiencies has resulted in improved project economics for many of Gibson’s producer customers. In addition, the Government of Alberta’s recently mandated oil production curtailments have improved Canadian oil price differentials relative to global benchmarks and increased pricing for crude oil in Western Canada. These factors have been supportive of the cash flows of Gibson’s producer customers and have helped improve their financial position, including the ability to fund growth capital programs. Assuming a continued supportive global macro environment for oil prices, Gibson anticipates additional greenfield and brownfield project sanctions from its oil sands customers pending resolution of existing pipeline egress concerns. In the short term, the Company expects investment in heavy oil production in Alberta to be modest as long as the Government of Alberta’s mandated oil production curtailments are in place. Price fluctuations between crude oil types can create incremental margin opportunities in multiple areas of the Company’s operations. Crude price differentials remain volatile and the Company remains attentive to potential opportunities. RESULTS OF CONTINUING 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 replacement capital requirements. The Company defines segment profit as revenues less cost of sales (excluding depreciation, amortization and impairment 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, as one of the Company’s important measures of segment performance. Management’s Discussion and Analysis Gibson Energy Inc. 7 Management’s Discussion and Analysis Gibson Energy 8 The following is a discussion of the Company’s segmented results of operations for the three months and years ended December 31, 2018 and 2017 and the following table sets forth revenue and profit by segment for those periods: Three months ended December 31 Years ended December 31 20181 20171 20181 20171 Segment revenue Infrastructure .................................................................................... $ $ 391,627 $ Logistics ............................................................................................. Wholesale ......................................................................................... Total segment revenue ..................................................................... 95,531 13,151 1,366,269 1,474,951 $ 82,690 16,609 1,714,250 1,813,549 48,520 7,142,713 7,582,860 Revenue – inter-segmental ............................................................... (160,346) (163,104) (736,271) Total revenue – external ................................................................... 1,314,605 1,650,445 6,846,589 Segment profit (loss) Infrastructure .................................................................................... Logistics ............................................................................................. Wholesale ......................................................................................... Total segment profit ......................................................................... General and administrative ............................................................... Depreciation and impairment ........................................................... Right-of-use asset depreciation ........................................................ Amortization and impairment ........................................................... Impairment of goodwill ..................................................................... Stock based compensation ............................................................... Debt extinguishment costs................................................................ Loss on net assets held for sale ......................................................... Foreign exchange loss (gain) ............................................................. Net interest expense ......................................................................... Income (loss) before income tax ....................................................... Income tax expense (recovery) ......................................................... 71,712 383 81,474 153,569 8,597 25,265 10,359 3,146 8,050 - - 4,974 (1,732) 17,669 77,241 29,966 47,275 55,737 (3,008) 18,658 71,387 22,975 24,589 2,898 69,414 8,492 (2,630) - - 2,534 17,341 (74,226) (18,375) 283,489 (7,513) 211,111 487,087 32,155 143,160 43,184 10,870 20,479 19,124 - 4,974 2,314 74,089 136,738 55,613 336,901 74,705 5,817,252 6,228,858 (569,212) 5,659,646 235,276 (4,103) 30,585 261,758 50,016 100,837 23,340 69,414 23,244 60,492 - - (18,136) 77,081 (124,530) (58,204) (66,326) Net income (loss) from continuing operations ................................. $ $ (55,851) $ 81,125 $ 1. The current period results include the impacts from the adoption of new accounting standards as discussed on page 34. Comparative information has not been restated and, therefore, may not be comparable throughout the discussion on continuing operations. In addition, Comparative period segment information was represented to reflect the results of continuing operations separately from discontinued operations (see note 8 of the consolidated financial statements). The exclusion of depreciation, amortization and impairment 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, tanks, pipelines, plant and equipment, rolling stock 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 Company’s capital assets 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. INFRASTRUCTURE The Infrastructure segment is comprised of a network of oil infrastructure assets that include oil terminals, rail loading and unloading facilities, injection stations, gathering pipelines, a crude oil processing facility and procession, recovery, and disposal (“PRD”) terminals. The primary facilities within this segment include the terminals located at Hardisty and Edmonton, which are the principal hubs for aggregating and exporting oil and refined products out of the WCSB; gathering pipelines, which are connected to the Hardisty Terminal; an infrastructure position located in the U.S, a crude oil processing facility in Moose Jaw, Saskatchewan. The Moose Jaw Facility is impacted by maintenance turnarounds typically occurring within the spring period. PRD business is dependent upon the drilling activity in various areas of operations and as a result, the PRD business is impacted by seasonality due to road bans as part of spring break-up. Gibson Energy Inc. 8 Management’s Discussion and Analysis Market outlook Gibson regularly evaluates its long-range strategic plan in order to assess the implications of emerging industry trends. These industry trends have the ability to affect Gibson’s business and prospects over the short-term (generally less than two years) and the medium to long-term (generally two to five years). There are a number of factors that affect customers’ views of market access over the short and medium term, particularly in the Western Canadian Sedimentary Basin (the “WCSB”). These views, in addition to commodity prices, impact capital expenditure programs and ultimately the growth in production that creates a meaningful portion of opportunities at the Hardisty and Edmonton terminals, as well as services that support those assets: o o In the short-term, crude oil pricing, location and quality disconnects, combined with the existing shortage of pipeline takeaway capacity from the WCSB, increase demand for terminal services as well as the use of crude by rail as a solution for market access. The Company believes that increased reliance on storage during periods of limited egress, especially during pipeline upsets or to facilitate crude by rail, may lead customers to consider increasing their available storage. Wider differentials improve margins at the Moose Jaw Facility, and, in conjunction with increased price fluctuations, typically provide increased opportunities within the Crude Wholesale business. There are currently three large pipeline projects at various stages of development and/or regulatory approval that have the potential to impact the Company over the short, medium and long-term. Over the long-term, the Company would expect to benefit from incremental egress from Enbridge’s Line 3 pipeline, TC Pipeline’s Keystone XL project and the Government of Canada’s Trans Mountain Expansion, as it would encourage additional oil sands development. This increase in production in the WCSB would lead to further demand for tankage at the Company’s Hardisty and Edmonton Terminals, which are either connected or in close proximity to the respective starting points of these pipeline projects. There is a risk that these projects may be substantially delayed or cancelled. The recent stabilization in global oil price and improving cost efficiencies has resulted in improved project economics for many of Gibson’s producer customers. In addition, the Government of Alberta’s recently mandated oil production curtailments have improved Canadian oil price differentials relative to global benchmarks and increased pricing for crude oil in Western Canada. These factors have been supportive of the cash flows of Gibson’s producer customers and have helped improve their financial position, including the ability to fund growth capital programs. Assuming a continued supportive global macro environment for oil prices, Gibson anticipates additional greenfield and brownfield project sanctions from its oil sands customers pending resolution of existing pipeline egress concerns. In the short term, the Company expects investment in heavy oil production in Alberta to be modest as long as the Government of Alberta’s mandated oil production curtailments are in place. Price fluctuations between crude oil types can create incremental margin opportunities in multiple areas of the Company’s operations. Crude price differentials remain volatile and the Company remains attentive to potential opportunities. RESULTS OF CONTINUING 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 replacement capital requirements. The Company defines segment profit as revenues less cost of sales (excluding depreciation, amortization and impairment 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, as one of the Company’s important measures of segment performance. Gibson Energy Inc. 7 Management’s Discussion and Analysis The following is a discussion of the Company’s segmented results of operations for the three months and years ended December 31, 2018 and 2017 and the following table sets forth revenue and profit by segment for those periods: Three months ended December 31 Years ended December 31 20181 20171 20181 20171 Segment revenue Infrastructure .................................................................................... Logistics ............................................................................................. Wholesale ......................................................................................... Total segment revenue ..................................................................... Revenue – inter-segmental ............................................................... Total revenue – external ................................................................... Segment profit (loss) Infrastructure .................................................................................... Logistics ............................................................................................. Wholesale ......................................................................................... Total segment profit ......................................................................... General and administrative ............................................................... Depreciation and impairment ........................................................... Right-of-use asset depreciation ........................................................ Amortization and impairment ........................................................... Impairment of goodwill ..................................................................... Stock based compensation ............................................................... Debt extinguishment costs................................................................ Loss on net assets held for sale ......................................................... Foreign exchange loss (gain) ............................................................. Net interest expense ......................................................................... Income (loss) before income tax ....................................................... Income tax expense (recovery) ......................................................... Net income (loss) from continuing operations ................................. $ 95,531 13,151 1,366,269 1,474,951 (160,346) 1,314,605 $ 82,690 16,609 1,714,250 1,813,549 (163,104) 1,650,445 $ $ 391,627 48,520 7,142,713 7,582,860 (736,271) 6,846,589 336,901 74,705 5,817,252 6,228,858 (569,212) 5,659,646 71,712 383 81,474 153,569 8,597 25,265 10,359 3,146 - 8,050 - 4,974 (1,732) 17,669 77,241 29,966 47,275 $ 55,737 (3,008) 18,658 71,387 22,975 24,589 - 2,898 69,414 8,492 (2,630) - 2,534 17,341 (74,226) (18,375) (55,851) $ $ 283,489 (7,513) 211,111 487,087 32,155 143,160 43,184 10,870 20,479 19,124 - 4,974 2,314 74,089 136,738 55,613 81,125 $ 235,276 (4,103) 30,585 261,758 50,016 100,837 - 23,340 69,414 23,244 60,492 - (18,136) 77,081 (124,530) (58,204) (66,326) 1. The current period results include the impacts from the adoption of new accounting standards as discussed on page 34. Comparative information has not been restated and, therefore, may not be comparable throughout the discussion on continuing operations. In addition, Comparative period segment information was represented to reflect the results of continuing operations separately from discontinued operations (see note 8 of the consolidated financial statements). The exclusion of depreciation, amortization and impairment 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, tanks, pipelines, plant and equipment, rolling stock 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 Company’s capital assets 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. INFRASTRUCTURE The Infrastructure segment is comprised of a network of oil infrastructure assets that include oil terminals, rail loading and unloading facilities, injection stations, gathering pipelines, a crude oil processing facility and procession, recovery, and disposal (“PRD”) terminals. The primary facilities within this segment include the terminals located at Hardisty and Edmonton, which are the principal hubs for aggregating and exporting oil and refined products out of the WCSB; gathering pipelines, which are connected to the Hardisty Terminal; an infrastructure position located in the U.S, a crude oil processing facility in Moose Jaw, Saskatchewan. The Moose Jaw Facility is impacted by maintenance turnarounds typically occurring within the spring period. PRD business is dependent upon the drilling activity in various areas of operations and as a result, the PRD business is impacted by seasonality due to road bans as part of spring break-up. Gibson Energy Gibson Energy Inc. 8 Management’s Discussion and Analysis Management’s Discussion and Analysis 9 The following tables set forth the operating results from the Company’s Infrastructure segment for the three months and years ended December 31, 2018 and 2017: Financial performance Three months ended December 31 Volumes (barrels in thousands) Terminals and facilities Hardisty Terminal .................................................................... Edmonton Terminal ................................................................ Moose Jaw Facility .................................................................. PRD Terminals ......................................................................... Injection Stations .................................................................... Total terminals and facilities ................................................... 20181 80,084 11,761 1,551 5,144 2,553 101,093 20171 70,424 5,358 1,483 3,453 2,259 82,977 Years ended December 31 20181 20171 310,909 35,420 5,741 16,282 8,970 377,322 259,953 20,835 5,524 13,301 17,238 316,851 Three months ended December 31 Years ended December 31 20181 20171 20181 20171 Revenue Hardisty Terminal .................................................................... Edmonton Terminal ................................................................. Moose Jaw Facility ................................................................... PRD Terminals ......................................................................... Injection Stations ..................................................................... Revenue ...................................................................................... Operating expenses and other .................................................... Segment profit ............................................................................ $ 53,804 18,954 9,845 11,737 1,191 95,531 23,819 $ 71,712 $ 47,693 12,944 9,844 11,679 530 82,690 26,953 $ 55,737 $ 217,253 84,052 39,379 46,421 4,522 391,627 108,138 $ 283,489 $ 198,926 52,119 39,391 43,114 3,351 336,901 101,625 $ 235,276 1. The current period results include the impacts from the adoption of new accounting standards as discussed on pages 34. Comparative information has not been restated and, therefore, may not be comparable throughout the discussion on continuing operations. In addition, Comparative period segment information was represented to reflect the results of continuing operations separately from discontinued operations (see note 8 of the consolidated financial statements). Operational performance In the three months and year ended December 31, 2018 compared to the three months and year ended December 31, 2017: Hardisty Terminal volumes increased 14% and 20%, respectively. The increase in both comparative periods was largely driven by the addition of infrastructure connections which provided for higher throughput volumes primarily from certain customers with additional volumes from an oil sands project with dedicated tankage underpinned by long-term take or pay contracts, higher customer’s contract tankage volumes, increased traffic from the Hardisty Unit Rail Facility (“HURC”) and higher trucked volumes. Edmonton Terminal volumes increased by 120% and 70%, respectively. The increase in both comparative periods was mainly due to the commissioning of two new tanks and common infrastructure at the Edmonton Terminal in January of 2018. Terminal and the Viking Pipeline in the current period. Moose Jaw Facility volumes increased by 5% and 4%, respectively. The increase was primarily due to a higher throughput efficiency to support higher refined product volumes and a shorter turnaround period in the current year. PRD Terminal volumes increased by 49% and 22%, respectively. The increase was mainly due to higher facility activity levels in the Company’s WCSB service areas, particularly in the Alberta Montney. Injection Station volumes increased by 13% and decreased by 48%, respectively. The quarter over quarter increase was due to additional activity created by favorable locational pricing differential opportunities in the Permian basin. The decrease in the year ended comparative period was due to the termination of the exclusive injection station access contract with a major customer in November 2017. In the three months and year ended December 31, 2018 compared to the three months and year ended December 31, 2017: Revenue at the Hardisty Terminal increased by $6.1 million and $18.3 million, respectively, which was largely driven by the increase in volumes as discussed above. Revenue at the Edmonton Terminal increased by $6.0 million and $31.9 million, respectively. The increase was primarily due to the commissioning of the two new tanks and related common infrastructure in Q1 2018 which are supported by take-or-pay, stable fee- based arrangements and the receipt of additional revenue related to a contractual amendment regarding a future capital commitment. Additionally, the increase in revenue was supported by the commissioning of the Heartland sulfur facility in the current PRD Terminal revenues were consistent and increased by $3.3 million, respectively. The increase was mainly due to higher facility activity levels in the Company’s WCSB service areas, particularly in the Alberta Montney, as well as higher revenues from recovered period. oil. There was no material change in the revenue for the Moose Jaw Facility in both periods. Injection Station revenues increased by $0.7 million and $1.2 million, respectively. These increases were mainly due to locational pricing differential opportunities and new rental service arrangements. Segment profit increased by $16.0 million and $48.2 million, respectively. As described above, the increase was primarily due to the increased revenues from the Hardisty and Edmonton Terminals. The quarter over quarter increase was also supported by lower operating costs due to the focus on cost reduction and recovery initiatives. The year ended comparative period increase was also impacted by higher salaries and benefit costs relating to the addition of rail loading operators, and higher environmental remediation costs. Capital expenditures Below is the summary of Infrastructure capital expenditures for the years ended December 31, 2018 and 2017: Growth capital ............................................................................................................................. 219,213 $ 146,739 Replacement capital .................................................................................................................... Acquisitions .................................................................................................................................. 17,547 80,844 $ $ 17,436 - $ $ $ Years ended December 31 2018 2017 The increase in growth capital expenditures for the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily relate to an increase in project development activities specific to additional tanks and related infrastructure at the Hardisty 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 and was consistent year over year. Acquisitions include an agreement to acquire, develop and operate a pipeline gathering network adjacent to the existing Pyote system in the U.S, of which the purchase price is payable in two installments, with U.S.$25 million paid on August 8, 2018 and U.S.$30 million payable by August 8, 2019. In addition, Acquisitions also include the Company’s purchase of the remaining interests in the Plato Pipeline. Gibson Energy Inc. 10 Management’s Discussion and Analysis Gibson Energy Inc. 9 Management’s Discussion and Analysis Gibson Energy 10 Management’s Discussion and Analysis The following tables set forth the operating results from the Company’s Infrastructure segment for the three months and years ended Financial performance In the three months and year ended December 31, 2018 compared to the three months and year ended December 31, 2017: Revenue at the Hardisty Terminal increased by $6.1 million and $18.3 million, respectively, which was largely driven by the increase in volumes as discussed above. Revenue at the Edmonton Terminal increased by $6.0 million and $31.9 million, respectively. The increase was primarily due to the commissioning of the two new tanks and related common infrastructure in Q1 2018 which are supported by take-or-pay, stable fee- based arrangements and the receipt of additional revenue related to a contractual amendment regarding a future capital commitment. Additionally, the increase in revenue was supported by the commissioning of the Heartland sulfur facility in the current period. PRD Terminal revenues were consistent and increased by $3.3 million, respectively. The increase was mainly due to higher facility activity levels in the Company’s WCSB service areas, particularly in the Alberta Montney, as well as higher revenues from recovered oil. There was no material change in the revenue for the Moose Jaw Facility in both periods. Injection Station revenues increased by $0.7 million and $1.2 million, respectively. These increases were mainly due to locational pricing differential opportunities and new rental service arrangements. Segment profit increased by $16.0 million and $48.2 million, respectively. As described above, the increase was primarily due to the increased revenues from the Hardisty and Edmonton Terminals. The quarter over quarter increase was also supported by lower operating costs due to the focus on cost reduction and recovery initiatives. The year ended comparative period increase was also impacted by higher salaries and benefit costs relating to the addition of rail loading operators, and higher environmental remediation costs. Capital expenditures Below is the summary of Infrastructure capital expenditures for the years ended December 31, 2018 and 2017: Growth capital ............................................................................................................................. Replacement capital .................................................................................................................... Acquisitions .................................................................................................................................. $ $ $ Years ended December 31 2018 219,213 17,547 80,844 2017 $ 146,739 17,436 $ - $ The increase in growth capital expenditures for the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily relate to an increase in project development activities specific to additional tanks and related infrastructure at the Hardisty Terminal and the Viking Pipeline in the current period. 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 and was consistent year over year. Acquisitions include an agreement to acquire, develop and operate a pipeline gathering network adjacent to the existing Pyote system in the U.S, of which the purchase price is payable in two installments, with U.S.$25 million paid on August 8, 2018 and U.S.$30 million payable by August 8, 2019. In addition, Acquisitions also include the Company’s purchase of the remaining interests in the Plato Pipeline. December 31, 2018 and 2017: Three months ended December 31 Volumes (barrels in thousands) Terminals and facilities Hardisty Terminal .................................................................... Edmonton Terminal ................................................................ Moose Jaw Facility .................................................................. PRD Terminals ......................................................................... Injection Stations .................................................................... Total terminals and facilities ................................................... 20181 80,084 11,761 1,551 5,144 2,553 101,093 Three months ended December 31 Years ended December 31 20181 20171 20181 20171 20171 70,424 5,358 1,483 3,453 2,259 82,977 12,944 9,844 11,679 530 82,690 26,953 Years ended December 31 20181 20171 310,909 35,420 5,741 16,282 8,970 377,322 259,953 20,835 5,524 13,301 17,238 316,851 39,379 46,421 4,522 391,627 108,138 $ 198,926 52,119 39,391 43,114 3,351 336,901 101,625 $ 235,276 Revenue Hardisty Terminal .................................................................... $ 53,804 $ 47,693 Edmonton Terminal ................................................................. 18,954 $ 217,253 84,052 Moose Jaw Facility ................................................................... PRD Terminals ......................................................................... Injection Stations ..................................................................... Revenue ...................................................................................... Operating expenses and other .................................................... 9,845 11,737 1,191 95,531 23,819 Segment profit ............................................................................ $ 71,712 $ 55,737 $ 283,489 1. The current period results include the impacts from the adoption of new accounting standards as discussed on pages 34. Comparative information has not been restated and, therefore, may not be comparable throughout the discussion on continuing operations. In addition, Comparative period segment information was represented to reflect the results of continuing operations separately from discontinued operations (see note 8 of the consolidated financial statements). Operational performance In the three months and year ended December 31, 2018 compared to the three months and year ended December 31, 2017: Hardisty Terminal volumes increased 14% and 20%, respectively. The increase in both comparative periods was largely driven by the addition of infrastructure connections which provided for higher throughput volumes primarily from certain customers with additional volumes from an oil sands project with dedicated tankage underpinned by long-term take or pay contracts, higher customer’s contract tankage volumes, increased traffic from the Hardisty Unit Rail Facility (“HURC”) and higher trucked volumes. Edmonton Terminal volumes increased by 120% and 70%, respectively. The increase in both comparative periods was mainly due to the commissioning of two new tanks and common infrastructure at the Edmonton Terminal in January of 2018. Moose Jaw Facility volumes increased by 5% and 4%, respectively. The increase was primarily due to a higher throughput efficiency to support higher refined product volumes and a shorter turnaround period in the current year. PRD Terminal volumes increased by 49% and 22%, respectively. The increase was mainly due to higher facility activity levels in the Company’s WCSB service areas, particularly in the Alberta Montney. Injection Station volumes increased by 13% and decreased by 48%, respectively. The quarter over quarter increase was due to additional activity created by favorable locational pricing differential opportunities in the Permian basin. The decrease in the year ended comparative period was due to the termination of the exclusive injection station access contract with a major customer in November 2017. Gibson Energy Inc. 9 Management’s Discussion and Analysis Gibson Energy Inc. 10 Management’s Discussion and Analysis 11 Management’s Discussion and Analysis Gibson Energy LOGISTICS WHOLESALE The Logistics segment represents the Company’s U.S Truck Transportation business due to the Canadian Truck Transportation business being classified as a discontinued operation during 2018. This segment provides truck transportation services in the Permian and SCOOP/STACK basins in the U.S. that enable oil production to access fixed midstream infrastructure. The following tables set forth operating results from the Company’s Logistics segment for the three months and years ended December 31, 2018 and 2017: Volumes (barrels in thousands) Crude and other products ........................................................... Three months ended December 31 20181 2,778 20171 6,431 Years ended December 31 20181 16,074 20171 26,848 Three months ended December 31 Years ended December 31 20181 20171 20181 20171 over period. Revenue ...................................................................................... Cost of sales ................................................................................ Operating expenses and other .................................................... Segment profit (loss) ................................................................... $ 13,151 8,698 4,070 383 $ $ 16,609 12,480 7,137 (3,008) $ $ 48,520 33,155 22,878 (7,513) $ $ 74,705 53,896 24,912 (4,103) $ 1. The current period results include the impacts from the adoption of new accounting standards as discussed on pages 34. Comparative information has not been restated and, therefore, may not be comparable throughout the discussion on continuing operations. In addition, Comparative period segment information was represented to reflect the results of continuing operations separately from discontinued operations (see note 8 of the consolidated financial statements). Operational performance In the three months and year ended December 31, 2018 compared to the three months and year ended December 31, 2017: Crude and other product hauling barrels decreased by 57% and 40%, respectively. The decrease was primarily attributable to the limited availability of drivers as a result of significant competition for drivers and the decline in business with Logistics’ largest U.S. trucking customer triggered by the termination of the exclusive injection station access contract in November 2017. Trucking volumes with other customers are increasing due to the acceleration of the Company’s U.S. strategy in the Permian, however are not yet sufficient to overcome the overall effect of the decline with the former largest customer. Financial performance In the three months and year ended December 31, 2018 compared to the three month and year ended December 31, 2017: Crude and other revenue decreased by 21% and 35%, respectively. The decrease was primarily driven by lower volumes as discussed above. Segment profit increased by $3.4 million and decreased by $3.4 million, respectively. The quarter over quarter increase was mainly due to the reduction in overhead costs to align with the current fleet size and reduced repair and maintenance costs. The year over year decrease was mainly due to the decline in the U.S. crude hauling profit as a result of one-time expenses such as severance, relocation, and office move costs and the loss in volumes as discussed above, partially offset by lower operating expenses in the latter half of 2018. Management’s Discussion and Analysis Gibson Energy Inc. 11 Management’s Discussion and Analysis Gibson Energy 12 The Wholesale segment involves the purchasing, selling, storing and optimizing of hydrocarbon products as part of supplying the Moose Jaw Facility and marketing its refined products as well as helping to drive volumes through the Company’s key infrastructure assets. The hydrocarbon products would include crude oil, NGLs, road asphalt, roofing flux, frac oils, light and heavy straight run distillates, CVGO and an oil-based mud product. The Wholesale segment’s opportunities are typically location, quality or time-based. The Wholesale segment sources the majority of its hydrocarbon products from Western Canada and markets those products throughout Canada and the U.S. The Wholesale segment is exposed to commodity price fluctuations arising between the time contracted volumes are purchased and the time they are sold, as well as being exposed to pricing differentials between different geographic markets and/or hydrocarbon qualities. These risks are managed by purchasing and selling products at prices based on the same or similar indices or benchmarks, and through physical and financial contracts that include energy-related forward contracts, swaps, futures, options and other hedging instruments. Fair values of these derivative contracts fluctuate depending on the commodity prices and can impact the segment profits in the form of realized or unrealized gains and losses, often offset by physical inventories, that can change significantly period Canadian road asphalt activity, related to refined products, 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. Demand for propane and other NGLs is also highest in the colder months of the year. Western Taxes Intermediate (“WTI”) average price ($USD/bbl) ...... Western Canadian Select (“WCS”) average differential ($USD/bbl) . Average foreign exchange rates ($CAD/$USD) ................................. Propane average price ($USD/U.S. gallon) ....................................... Butane average price ($USD/U.S. gallon) .......................................... Three months ended December 31 Years ended December 31 2018 $58.81 39.43 1.32 0.66 0.75 2017 $55.40 12.26 1.27 0.95 1.05 2018 $64.777 26.311 1.300 0.777 0.933 2017 $50.95 11.98 1.30 0.73 0.91 The following tables set forth operating results from the Company’s Wholesale segment for the three months and years ended December 31, 2018 and 2017: Volumes (barrels in thousands) Crude and diluent .......................................................................... Propane and other NGL ................................................................. Refined products ............................................................................ Total ............................................................................................... Revenue Propane and other NGL ............................................................. Refined products ....................................................................... Total revenue ................................................................................. Cost of sales ................................................................................... Operating expenses and other ....................................................... Three months ended December 31 Years ended December 31 20181 32,155 2,855 1,132 36,142 20171 29,936 3,524 1,031 34,491 20181 124,440 9,985 4,427 138,852 20171 114,466 11,154 4,000 129,620 Three months ended December 31 Years ended December 31 20181 20171 20181 20171 138,293 112,700 1,366,269 1,274,250 10,545 81,474 195,913 95,741 1,714,250 1,689,472 6,120 18,658 530,155 451,045 7,142,713 6,901,885 29,717 551,854 358,387 5,817,252 5,761,215 25,452 30,585 Crude and diluent ...................................................................... $ 1,115,276 $ 1,422,596 $ 6,161,513 $ 4,907,011 Segment profit (loss) ...................................................................... $ $ $ 211,111 $ 1. The current period results include the impacts from the adoption of new accounting standards as discussed on page 34. Comparative information has not been restated and, therefore, may not be comparable throughout the discussion on continuing operations. Gibson Energy Inc. 12 Management’s Discussion and Analysis LOGISTICS WHOLESALE The Wholesale segment involves the purchasing, selling, storing and optimizing of hydrocarbon products as part of supplying the Moose Jaw Facility and marketing its refined products as well as helping to drive volumes through the Company’s key infrastructure assets. The hydrocarbon products would include crude oil, NGLs, road asphalt, roofing flux, frac oils, light and heavy straight run distillates, CVGO and an oil-based mud product. The Wholesale segment’s opportunities are typically location, quality or time-based. The Wholesale segment sources the majority of its hydrocarbon products from Western Canada and markets those products throughout Canada and the U.S. The Wholesale segment is exposed to commodity price fluctuations arising between the time contracted volumes are purchased and the time they are sold, as well as being exposed to pricing differentials between different geographic markets and/or hydrocarbon qualities. These risks are managed by purchasing and selling products at prices based on the same or similar indices or benchmarks, and through physical and financial contracts that include energy-related forward contracts, swaps, futures, options and other hedging instruments. Fair values of these derivative contracts fluctuate depending on the commodity prices and can impact the segment profits in the form of realized or unrealized gains and losses, often offset by physical inventories, that can change significantly period over period. Canadian road asphalt activity, related to refined products, 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. Demand for propane and other NGLs is also highest in the colder months of the year. Western Taxes Intermediate (“WTI”) average price ($USD/bbl) ...... Western Canadian Select (“WCS”) average differential ($USD/bbl) . Average foreign exchange rates ($CAD/$USD) ................................. Propane average price ($USD/U.S. gallon) ....................................... Butane average price ($USD/U.S. gallon) .......................................... Three months ended December 31 2018 $58.81 39.43 1.32 0.66 0.75 2017 $55.40 12.26 1.27 0.95 1.05 Years ended December 31 2018 $64.777 26.311 1.300 0.777 0.933 2017 $50.95 11.98 1.30 0.73 0.91 The following tables set forth operating results from the Company’s Wholesale segment for the three months and years ended December 31, 2018 and 2017: Volumes (barrels in thousands) Crude and diluent .......................................................................... Propane and other NGL ................................................................. Refined products ............................................................................ Total ............................................................................................... Three months ended December 31 Years ended December 31 20181 32,155 2,855 1,132 36,142 20171 29,936 3,524 1,031 34,491 20181 124,440 9,985 4,427 138,852 20171 114,466 11,154 4,000 129,620 Three months ended December 31 20181 Years ended December 31 20171 20181 20171 Revenue Crude and diluent ...................................................................... Propane and other NGL ............................................................. Refined products ....................................................................... Total revenue ................................................................................. Cost of sales ................................................................................... Operating expenses and other ....................................................... Segment profit (loss) ...................................................................... $ 1,115,276 138,293 112,700 1,366,269 1,274,250 10,545 81,474 $ $ 1,422,596 195,913 95,741 1,714,250 1,689,472 6,120 18,658 $ $ 6,161,513 530,155 451,045 7,142,713 6,901,885 29,717 211,111 $ $ 4,907,011 551,854 358,387 5,817,252 5,761,215 25,452 30,585 $ 1. The current period results include the impacts from the adoption of new accounting standards as discussed on page 34. Comparative information has not been restated and, therefore, may not be comparable throughout the discussion on continuing operations. The Logistics segment represents the Company’s U.S Truck Transportation business due to the Canadian Truck Transportation business being classified as a discontinued operation during 2018. This segment provides truck transportation services in the Permian and SCOOP/STACK basins in the U.S. that enable oil production to access fixed midstream infrastructure. The following tables set forth operating results from the Company’s Logistics segment for the three months and years ended December 31, 2018 and 2017: Volumes (barrels in thousands) Crude and other products ........................................................... Three months ended December 31 20181 2,778 20171 6,431 Years ended December 31 20181 16,074 20171 26,848 Three months ended December 31 Years ended December 31 20181 20171 20181 20171 Revenue ...................................................................................... $ 13,151 $ 16,609 $ 48,520 $ 74,705 Cost of sales ................................................................................ Operating expenses and other .................................................... 12,480 7,137 33,155 22,878 53,896 24,912 Segment profit (loss) ................................................................... $ $ (3,008) $ (7,513) $ (4,103) 8,698 4,070 383 1. The current period results include the impacts from the adoption of new accounting standards as discussed on pages 34. Comparative information has not been restated and, therefore, may not be comparable throughout the discussion on continuing operations. In addition, Comparative period segment information was represented to reflect the results of continuing operations separately from discontinued operations (see note 8 of the consolidated financial statements). Operational performance In the three months and year ended December 31, 2018 compared to the three months and year ended December 31, 2017: Crude and other product hauling barrels decreased by 57% and 40%, respectively. The decrease was primarily attributable to the limited availability of drivers as a result of significant competition for drivers and the decline in business with Logistics’ largest U.S. trucking customer triggered by the termination of the exclusive injection station access contract in November 2017. Trucking volumes with other customers are increasing due to the acceleration of the Company’s U.S. strategy in the Permian, however are not yet sufficient to overcome the overall effect of the decline with the former largest customer. Financial performance above. half of 2018. In the three months and year ended December 31, 2018 compared to the three month and year ended December 31, 2017: Crude and other revenue decreased by 21% and 35%, respectively. The decrease was primarily driven by lower volumes as discussed Segment profit increased by $3.4 million and decreased by $3.4 million, respectively. The quarter over quarter increase was mainly due to the reduction in overhead costs to align with the current fleet size and reduced repair and maintenance costs. The year over year decrease was mainly due to the decline in the U.S. crude hauling profit as a result of one-time expenses such as severance, relocation, and office move costs and the loss in volumes as discussed above, partially offset by lower operating expenses in the latter Gibson Energy Inc. 11 Management’s Discussion and Analysis Gibson Energy Inc. 12 Management’s Discussion and Analysis 13 Management’s Discussion and Analysis Gibson Energy Operational performance In the three months and year ended December 31, 2018 compared to the three months and year ended December 31, 2017: Sales volumes for refined products increased by 10% and 11%, respectively. The increase was primarily due to higher available volumes from the Moose Jaw Facility driven by higher efficiencies which supported increased sales volumes for drilling fluids and roofing flux. Sales volumes for drilling fluids have increased principally as a result of increased U.S. drilling activity, and the ability of the Company to gain market share in the Permian and Niobrara-Denver Julesburg basins, while the increase in sales volumes for roofing flux is supported by the Company’s ability to gain market share within the roofing flux market due to the closure of certain competing refineries in the U.S and the Company’s continued efforts to access new markets to maximize profitability. Sales volumes for crude and diluent increased by 7% and 9%, respectively. The increase was mainly due to additional opportunities to bring volumes into the Company’s integrated assets, primarily attributable to the addition of new storage tanks and common infrastructure added in 2018. Sales volumes for propane and other NGLs decreased by 19% and 10%, respectively primarily due to the sale of the Wholesale Propane business during 2018 and lower condensate sales in the current quarter, with the year over year results also being impacted by the constraint of rail service in the market place in the first quarter on 2018. EXPENSES General and administrative (“G&A”), excluding depreciation and amortization Three months ended December 31 Years ended December 31 2018 2017 2018 2017 General and administrative ............................................................... $ 8,597 $ 22,975 $ 32,155 $ 50,016 The quarter over quarter decrease was primarily due to the recognition of non-recurring reorganization and executive related costs incurred in the comparative period and lower head office lease costs due to the adoption of IFRS 16. The year over year comparative period decrease was due to lower payroll costs due to the continuing impact of our headcount rationalization efforts from the fourth quarter of 2017 and lower head office lease costs due to the adoption of IFRS 16. The lease cost reduction was related to the adoption of IFRS 16, as noted in the “Accounting Policies” section, which resulted in $2.0 million and $6.2 million reduction in expenses in the three months and year ended December 31, 2018, respectively. Depreciation and impairment Three months ended December 31 Years ended December 31 2018 2017 2018 2017 Financial performance Depreciation and impairment .......................................................... $ 25,265 $ 24,589 $ 143,160 $ 100,837 In the three months and year ended December 31, 2018 compared to the three months and year ended December 31, 2017: Revenue for refined products increased by 18% and 26%, respectively. The increase was primarily due to higher volumes sold for drilling fluids and roofing asphalt as discussed above as well as higher average crude oil prices which supported the increase in prices for these products. Right-of-use asset depreciation The increase in both periods was primarily due to impact of impairment related to assets held for sale and depreciation on asset additions in the current periods, partially offset by asset dispositions. Revenue for crude and diluent decreased by 22% and increased by 26%, respectively. The quarter over quarter decrease was largely due to lower realized pricing in the current quarter, partially offset by the increase in volumes in the current period as discussed above. The year over year increase was largely due to higher average prices and the increase in volumes in the current period as discussed above. Right-of-use depreciation ................................................................. $ 10,359 $ - $ 43,184 $ - Three months ended December 31 Years ended December 31 2018 2017 2018 2017 Revenue for propane and other NGLs decreased by 29% and 4% respectively mainly due to lower volumes as discussed above, with the quarter over quarter period also being impacted by lower prices. The increase in both periods relates to right of use depreciation which represents the impact of the adoption of IFRS 16 as noted in the “Accounting Policies” section. The right-of-use assets are depreciated over the lease term. Segment profit increased significantly in both periods. The increase was attributable to higher refined product margins driven by a greater proportion of higher margin product sales and by the differentials which supported lower cost of sales in the current periods. The increase was also driven by higher crude margins due to crude pricing spreads and locational as well as blend quality differentials. Additionally, the increase was due to lower rail car lease expenses of $8.8 million and $40.1 million in the three months and year ended December 31, 2018, respectively, as a result of the adoption of IFRS 16 as discussed under “Accounting Policies” section. These increases were offset by lower margins earned on propane and other NGLs due to the sale of the Wholesale Propane business during the fourth quarter of 2018 and regional pricing constraints at certain distribution hubs. Management’s Discussion and Analysis Gibson Energy Inc. 13 Management’s Discussion and Analysis Gibson Energy 14 Amortization and impairment Three months ended December 31 Years ended December 31 2018 2017 2018 2017 Amortization and impairment ........................................................... $ 3,146 $ 2,898 $ 10,870 $ 23,340 The decrease in the year ended comparative period was driven by the impact of certain intangible assets becoming fully amortized in prior year periods. No impairment related to intangibles was recorded in 2018. Goodwill impairment Three months ended December 31 Years ended December 31 2018 2017 2018 2017 Goodwill impairment ....................................................................... $ - $ 69,414 $ 20,479 $ 69,414 Gibson Energy Inc. 14 Management’s Discussion and Analysis Operational performance In the three months and year ended December 31, 2018 compared to the three months and year ended December 31, 2017: Sales volumes for refined products increased by 10% and 11%, respectively. The increase was primarily due to higher available volumes from the Moose Jaw Facility driven by higher efficiencies which supported increased sales volumes for drilling fluids and roofing flux. Sales volumes for drilling fluids have increased principally as a result of increased U.S. drilling activity, and the ability of the Company to gain market share in the Permian and Niobrara-Denver Julesburg basins, while the increase in sales volumes for roofing flux is supported by the Company’s ability to gain market share within the roofing flux market due to the closure of certain competing refineries in the U.S and the Company’s continued efforts to access new markets to maximize profitability. Sales volumes for crude and diluent increased by 7% and 9%, respectively. The increase was mainly due to additional opportunities to bring volumes into the Company’s integrated assets, primarily attributable to the addition of new storage tanks and common infrastructure added in 2018. Sales volumes for propane and other NGLs decreased by 19% and 10%, respectively primarily due to the sale of the Wholesale Propane business during 2018 and lower condensate sales in the current quarter, with the year over year results also being impacted by the constraint of rail service in the market place in the first quarter on 2018. EXPENSES General and administrative (“G&A”), excluding depreciation and amortization Three months ended December 31 2018 2017 Years ended December 31 2018 2017 General and administrative ............................................................... $ 8,597 $ 22,975 $ 32,155 $ 50,016 The quarter over quarter decrease was primarily due to the recognition of non-recurring reorganization and executive related costs incurred in the comparative period and lower head office lease costs due to the adoption of IFRS 16. The year over year comparative period decrease was due to lower payroll costs due to the continuing impact of our headcount rationalization efforts from the fourth quarter of 2017 and lower head office lease costs due to the adoption of IFRS 16. The lease cost reduction was related to the adoption of IFRS 16, as noted in the “Accounting Policies” section, which resulted in $2.0 million and $6.2 million reduction in expenses in the three months and year ended December 31, 2018, respectively. Depreciation and impairment Three months ended December 31 2018 2017 Years ended December 31 2018 2017 Financial performance Depreciation and impairment .......................................................... $ 25,265 $ 24,589 $ 143,160 $ 100,837 In the three months and year ended December 31, 2018 compared to the three months and year ended December 31, 2017: Revenue for refined products increased by 18% and 26%, respectively. The increase was primarily due to higher volumes sold for drilling fluids and roofing asphalt as discussed above as well as higher average crude oil prices which supported the increase in prices The increase in both periods was primarily due to impact of impairment related to assets held for sale and depreciation on asset additions in the current periods, partially offset by asset dispositions. Right-of-use asset depreciation Right-of-use depreciation ................................................................. $ 10,359 $ - $ 43,184 $ - Three months ended December 31 2018 2017 Years ended December 31 2018 2017 Revenue for propane and other NGLs decreased by 29% and 4% respectively mainly due to lower volumes as discussed above, with the quarter over quarter period also being impacted by lower prices. The increase in both periods relates to right of use depreciation which represents the impact of the adoption of IFRS 16 as noted in the “Accounting Policies” section. The right-of-use assets are depreciated over the lease term. Amortization and impairment Three months ended December 31 2018 2017 Years ended December 31 2018 2017 Amortization and impairment ........................................................... $ 3,146 $ 2,898 $ 10,870 $ 23,340 The decrease in the year ended comparative period was driven by the impact of certain intangible assets becoming fully amortized in prior year periods. No impairment related to intangibles was recorded in 2018. Goodwill impairment Three months ended December 31 2018 2017 Years ended December 31 2018 2017 Goodwill impairment ....................................................................... $ - $ 69,414 $ 20,479 $ 69,414 for these products. discussed above. Revenue for crude and diluent decreased by 22% and increased by 26%, respectively. The quarter over quarter decrease was largely due to lower realized pricing in the current quarter, partially offset by the increase in volumes in the current period as discussed above. The year over year increase was largely due to higher average prices and the increase in volumes in the current period as Segment profit increased significantly in both periods. The increase was attributable to higher refined product margins driven by a greater proportion of higher margin product sales and by the differentials which supported lower cost of sales in the current periods. The increase was also driven by higher crude margins due to crude pricing spreads and locational as well as blend quality differentials. Additionally, the increase was due to lower rail car lease expenses of $8.8 million and $40.1 million in the three months and year ended December 31, 2018, respectively, as a result of the adoption of IFRS 16 as discussed under “Accounting Policies” section. These increases were offset by lower margins earned on propane and other NGLs due to the sale of the Wholesale Propane business during the fourth quarter of 2018 and regional pricing constraints at certain distribution hubs. Gibson Energy Inc. 13 Management’s Discussion and Analysis Gibson Energy Inc. 14 Management’s Discussion and Analysis 15 Management’s Discussion and Analysis Gibson Energy In the year ended December 31, 2018, the impairment charge relates to the assets held for sale. In the three months and year ended December 31, 2017, the Company recorded goodwill impairment charges of $69.4 million related to the U.S. Truck Transportation and the U.S. Wholesale business. Net interest expense Stock based compensation Three months ended December 31 2018 2017 Years ended December 31 2018 2017 Stock based compensation ............................................................... $ 8,050 $ 8,492 $ 19,124 $ 23,244 The quarter over quarter decrease was primarily due to lower restricted share unit (“RSU”) expenses in the current quarter partially offset by the recognition of a mark to market loss of $2.4 million compared to a mark to market gain of $0.7 million related to equity swaps in the comparative period. The year ended comparative period decrease was primarily driven by lower RSU expense in the current year and the impact of the recognition of a mark to market gain of $0.9 million compared to a mark to market expense of $1.2 million related to equity swaps in the comparative year. Debt extinguishment costs During the year ended December 31, 2017 the Company incurred debt extinguishment costs related to the repayment of $211.1 million principal amount of 7.00% Senior Unsecured Notes (the “C$ Notes”) and U.S.$338.8 million principal amount of 6.75% Senior Unsecured Notes (the “US$ Notes”) (collectively the “Retired Notes”) of $60.5 million. Loss on net assets held for sale During the three months and year ended December 31, 2018 the Company completed the sale of its Wholesale Propane business for gross proceeds of $42.8 million resulting in recognition of a loss on sale of $5.0 million (see note 8 in the consolidated financial statements). Foreign exchange (gains) loss not affecting segment profit Three months ended December 31 2018 2017 Years ended December 31 2018 2017 RESULTS OF DISCONTINUED OPERATIONS Unrealized foreign exchange loss (gain) on the movement in exchange rates on U.S. dollar Revolving Credit Facility and long- term debt ...................................................................................... Realized foreign exchange gain on settlement of U.S. dollar Revolving Credit Facility and long-term debt ................................................ Corporate foreign exchange (gain) loss ............................................ Total foreign exchange (gain) loss ..................................................... $ - $ 15,803 $ 4,403 $ (3,564) Canadian Truck Transportation business - (1,723) $ (1,723) (12,514) (755) $ 2,534 - (2,089) $ 2,314 (15,224) 652 $ (18,136) During the three months ended December 31, 2018, the gain recorded is primarily driven by the net favorable movements in exchange rates on the translation of corporate foreign exchange and during the year ended December 31, 2018, the gains and losses were primarily driven by the favorable and unfavorable movements in exchange rates on the translation of the Company’s U.S dollar denominated Revolving Credit Facility and long-term debt and corporate foreign exchange gain. During the three months and year ended December 31, 2017, the gains and losses were primarily driven by the favorable and unfavorable movements in exchange rates on the translation of the Company’s U.S dollar denominated Revolving Credit Facility and long-term debt. Three months ended December 31 Years ended December 31 2018 2017 2018 2017 Net interest expense ......................................................................... $ 17,669 $ 17,341 $ 74,089 $ 77,081 The quarter over quarter net interest expense increased due to higher finance lease interest costs of $1.4 million due to IFRS 16 adoption as noted in the “Accounting Policies” section, partially offset by lower interest expense related to long-term debt and higher capitalized interest amounts related to our long-term capital projects. The year ended comparative period net interest expense decrease was due to lower interest expense related to long-term debt and higher capitalized interest amounts related to our long- term capital projects, partially offset by finance lease interest costs of $6.5 million due to IFRS 16 adoption and by higher interest costs related to the Revolving Credit Facility. Income taxes Three months ended December 31 Years ended December 31 2018 2017 2018 2017 Current income tax expense (recovery) ........................................... Deferred income tax expense (recovery) .......................................... $ 22,396 7,570 $ (14,791) $ 60,178 (3,584) (4,565) Total income tax expense (recovery) ................................................ $ 29,966 $ (18,375) $ 55,613 $ (35,702) (22,502) $ (58,204) Total Income tax expense from continuing operations was $30.0 million and $55.6 million for the three months and year ended December 31, 2018 compared to an income tax recovery $18.4 million and $58.2 million, respectively for the three months and year ended December 31, 2017. The main driver for the increase in the total income tax expense for both comparative periods was the impact of higher taxable income. Furthermore, the year ended comparative period deferred income tax recovery decreased primarily due to the impact of realized and unrealized amounts relating to the net capital gains arising from foreign exchange movements, including repayments, on the Company’s U.S. dollar denominated long-term debt in the prior period. During the year ended December 31, 2018, the Company completed the assessment of various disposal groups that met the criteria under IFRS 5 – Non-Current Assets Held for Sale and Discontinued Operations (“IFRS 5”) as held for sale and/or discontinued operations (refer to note 8 in the 2018 consolidated financial statements). During 2018, the Canadian Truck Transportation business met the criterion for discontinued operation and held for sale. This business was historically reported under the Logistic segment. The Canadian Truck Transportation business includes a suite of logistical wellsite services that enable oil and liquids production to access fixed midstream infrastructure. This segment provides truck transportation and related services that allow the Company to service its customers’ needs between the wellhead and the end market and includes providing hauling services for crude, condensate, propane, butane, asphalt, methanol, sulfur, petroleum coke, emulsion, waste water and drilling fluids for many of Canada’s leading oil and gas producers. For certain services and geographical regions, the activity is generally the lowest in the winter months when daylight hours are shorter. Management’s Discussion and Analysis Gibson Energy Inc. 15 Management’s Discussion and Analysis Gibson Energy 16 Gibson Energy Inc. 16 Management’s Discussion and Analysis In the year ended December 31, 2018, the impairment charge relates to the assets held for sale. In the three months and year ended Net interest expense December 31, 2017, the Company recorded goodwill impairment charges of $69.4 million related to the U.S. Truck Transportation Three months ended December 31 2018 2017 Years ended December 31 2018 2017 offset by the recognition of a mark to market loss of $2.4 million compared to a mark to market gain of $0.7 million related to equity Income taxes swaps in the comparative period. The year ended comparative period decrease was primarily driven by lower RSU expense in the current year and the impact of the recognition of a mark to market gain of $0.9 million compared to a mark to market expense of Three months ended December 31 2018 2017 Years ended December 31 2018 2017 Net interest expense ......................................................................... $ 17,669 $ 17,341 $ 74,089 $ 77,081 The quarter over quarter net interest expense increased due to higher finance lease interest costs of $1.4 million due to IFRS 16 adoption as noted in the “Accounting Policies” section, partially offset by lower interest expense related to long-term debt and higher capitalized interest amounts related to our long-term capital projects. The year ended comparative period net interest expense decrease was due to lower interest expense related to long-term debt and higher capitalized interest amounts related to our long- term capital projects, partially offset by finance lease interest costs of $6.5 million due to IFRS 16 adoption and by higher interest costs related to the Revolving Credit Facility. Current income tax expense (recovery) ........................................... Deferred income tax expense (recovery) .......................................... Total income tax expense (recovery) ................................................ $ 22,396 7,570 $ 29,966 $ (14,791) (3,584) $ (18,375) $ 60,178 (4,565) $ 55,613 $ (35,702) (22,502) $ (58,204) Total Income tax expense from continuing operations was $30.0 million and $55.6 million for the three months and year ended December 31, 2018 compared to an income tax recovery $18.4 million and $58.2 million, respectively for the three months and year ended December 31, 2017. The main driver for the increase in the total income tax expense for both comparative periods was the impact of higher taxable income. Furthermore, the year ended comparative period deferred income tax recovery decreased primarily due to the impact of realized and unrealized amounts relating to the net capital gains arising from foreign exchange movements, including repayments, on the Company’s U.S. dollar denominated long-term debt in the prior period. RESULTS OF DISCONTINUED OPERATIONS During the year ended December 31, 2018, the Company completed the assessment of various disposal groups that met the criteria under IFRS 5 – Non-Current Assets Held for Sale and Discontinued Operations (“IFRS 5”) as held for sale and/or discontinued operations (refer to note 8 in the 2018 consolidated financial statements). Canadian Truck Transportation business During 2018, the Canadian Truck Transportation business met the criterion for discontinued operation and held for sale. This business was historically reported under the Logistic segment. The Canadian Truck Transportation business includes a suite of logistical wellsite services that enable oil and liquids production to access fixed midstream infrastructure. This segment provides truck transportation and related services that allow the Company to service its customers’ needs between the wellhead and the end market and includes providing hauling services for crude, condensate, propane, butane, asphalt, methanol, sulfur, petroleum coke, emulsion, waste water and drilling fluids for many of Canada’s leading oil and gas producers. For certain services and geographical regions, the activity is generally the lowest in the winter months when daylight hours are shorter. and the U.S. Wholesale business. Stock based compensation Stock based compensation ............................................................... $ 8,050 $ 8,492 $ 19,124 $ 23,244 Three months ended December 31 Years ended December 31 2018 2017 2018 2017 The quarter over quarter decrease was primarily due to lower restricted share unit (“RSU”) expenses in the current quarter partially $1.2 million related to equity swaps in the comparative year. Debt extinguishment costs During the year ended December 31, 2017 the Company incurred debt extinguishment costs related to the repayment of $211.1 million principal amount of 7.00% Senior Unsecured Notes (the “C$ Notes”) and U.S.$338.8 million principal amount of 6.75% Senior Unsecured Notes (the “US$ Notes”) (collectively the “Retired Notes”) of $60.5 million. Loss on net assets held for sale During the three months and year ended December 31, 2018 the Company completed the sale of its Wholesale Propane business for gross proceeds of $42.8 million resulting in recognition of a loss on sale of $5.0 million (see note 8 in the consolidated financial statements). Foreign exchange (gains) loss not affecting segment profit Three months ended December 31 Years ended December 31 2018 2017 2018 2017 Unrealized foreign exchange loss (gain) on the movement in exchange rates on U.S. dollar Revolving Credit Facility and long- term debt ...................................................................................... $ - $ 15,803 $ 4,403 $ (3,564) Realized foreign exchange gain on settlement of U.S. dollar Revolving Credit Facility and long-term debt ................................................ Corporate foreign exchange (gain) loss ............................................ - (1,723) (12,514) (755) - (2,089) (15,224) 652 Total foreign exchange (gain) loss ..................................................... $ (1,723) $ 2,534 $ 2,314 $ (18,136) During the three months ended December 31, 2018, the gain recorded is primarily driven by the net favorable movements in exchange rates on the translation of corporate foreign exchange and during the year ended December 31, 2018, the gains and losses were primarily driven by the favorable and unfavorable movements in exchange rates on the translation of the Company’s U.S dollar denominated Revolving Credit Facility and long-term debt and corporate foreign exchange gain. During the three months and year ended December 31, 2017, the gains and losses were primarily driven by the favorable and unfavorable movements in exchange rates on the translation of the Company’s U.S dollar denominated Revolving Credit Facility and long-term debt. Gibson Energy Inc. 15 Management’s Discussion and Analysis Gibson Energy Inc. 16 Management’s Discussion and Analysis 17 Management’s Discussion and Analysis Gibson Energy The following tables set forth operating results from the discontinued operations of Canadian Truck Transportation for the three months and year ended December 31, 2018 and 2017: Volumes (barrels in thousands) Crude and other products ................................................................... Three months ended December 31 20181 11,887 20171 11,971 Years ended December 31 20181 45,031 20171 46,815 Three months ended December 31 Years ended December 31 20181 20171 20181 20171 Revenue Water hauling and disposal ....................................................... $ $ 26,890 $ Revenue ............................................................................................ Cost of sales ...................................................................................... Segment profit .................................................................................. Depreciation, amortization, and impairment.................................... Goodwill impairment ........................................................................ Finance costs and other income, net ................................................ Loss before taxes .............................................................................. Income tax (recovery) expense ......................................................... Net income from discontinued operations, after tax ........................ $ 56,505 50,027 6,478 30,734 19,988 92 (44,336) (12,310) $ (32,026) $ 57,860 51,780 6,080 5,138 - - 942 249 693 $ $ 217,408 193,909 23,499 44,215 19,988 295 (40,999) (11,412) (29,587) $ $ 236,340 212,937 23,403 22,321 - - 1,082 287 795 $ 1. The current period results include the impacts from the adoption of new accounting standards as discussed on pages 34. Comparative information has not been restated and, therefore, may not be comparable throughout the discussion on continuing operations. In addition, Comparative period segment information was represented to reflect the results of continuing operations separately from discontinued operations (see note 8 of the consolidated financial statements). Operational performance In the three months and year ended December 31, 2018 compared to the three months and year ended December 31, 2017: The Company derecognized the U.S. Environmental Services segment effective May 3, 2018. Accordingly, results for year ended December 31, 2018 represent the activity for the period January 1, 2018 to May 2, 2018. Crude and other product hauling barrels were consistent and decreased by 4%, respectively. The year ended comparative decrease in Liquid Petroleum Gas (“LPG”) mix and crude volumes hauled was partially offset by higher sulfur and propane volumes in the year. Financial performance In the three months and year ended December 31, 2018 compared to the three months and year ended December 31, 2017: Crude and other product revenue decreased by 2% and 8%, respectively. The quarter over quarter decrease was primarily due to lower hauling rates related to LPG mix, propane and sulfur. The year ended comparative period decrease was primarily due to lower volumes as discussed above and lower hauling rates for LPG mix and sulfur, partially offset by higher hauling rates for asphalt. Segment profit increased by 7% and was consistent, respectively. The quarter over quarter increase was mainly due to lower direct costs largely due to the continuation of the reduction in payroll related costs associated with overall headcount reductions. U.S. Environmental Services business On May 3, 2018, the Company completed the sale of its U.S. Environmental Services business for adjusted gross proceeds of $123.3 million (US$96 million). The U.S. Environmental Services business included 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 industrial lift, exploration support services and accommodation facilities to the oil and gas industry. The U.S Environmental Services business was reported historically within Company’s Infrastructure, Logistics and Other reportable segments. Operating results related to the segment have been included in net income from discontinued operations in the consolidated statements of operations. Comparative period balances of the consolidated statements of operations and cash flows have been restated. The following tables set forth operating results from discontinued operations of the U.S. Environmental Services business for the three months and years ended December 31, 2018 and 2017: Segment profit .................................................................................. - 7,716 9,207 25,131 Other products and services ..................................................... Total revenue .................................................................................... Cost of sales ...................................................................................... Depreciation, amortization and impairment .................................... Finance costs and (other income), net .............................................. (Loss) income before taxes ............................................................... Income tax (recovery) provision ....................................................... Net (loss) income from discontinued operations, after tax .............. After tax (loss) gain on sale 2, 3 .......................................................... Three months ended December 31 Years ended December 31 2018 2 2017 1 2018 2 2017 1 - - - - - - - - - (816) (816) 39,501 66,391 58,675 44,301 67 (36,652) (23) (36,629) - 42,207 51,074 93,281 84,074 3,493 278 5,436 1,448 3,988 95,522 99,510 $ 101,448 135,386 236,834 211,703 83,289 277 (58,435) (8,251) (50,184) - (Loss) gain on discontinued operations, after tax ............................. $ $ (36,629) $ $ (50,184) The current period results include the impacts from the adoption of new accounting standards as discussed on page 34. Comparative information has not been restated and, therefore, may not be comparable throughout the discussion on discontinued operations. In addition, Comparative period segment information was represented to reflect the results of continuing operations separately from discontinued operations (see note 8 of the 2018 consolidated financial statements). 1. 2. 3. December 31, 2018. Industrial Propane business statements). Income taxes The cash proceeds of $123.3 million and transaction costs of $13.6 million (including certain payments to employees), have been presented within investing activities from discontinued operations on the Company’s consolidated statements of cash flows. Operational and financial performance In the three months and year ended December 31, 2018 compared to the three months and year ended December 31, 2017: Revenue decreased by $66.4 million and $143.6 million, respectively, and segment profit decreased by $7.7 million and $15.9 million, respectively. The decrease in both comparative periods is a result of the current period being shorter than the prior period due to the sale of the business effective May 3, 2018. There was no contribution to results from this business during the three months ended During Q1 2017, the Company sold its Industrial Propane business for proceeds of $433.1 million resulting in the recognition of a post-tax gain on sale of $150.6 million. Accordingly, the results for the three months and year ended December 31, 2017 represent activity for the period between January 1, 2017 and February 28, 2017. During this period the Company had total revenues of $58.3 million, segment profit of $13.6 million, and net income after tax of $159.9 million (see note 8 in the 2018 consolidated financial Including the tax impact of gains on discontinued operations, net income tax was a recovery of $8.7 million and an expense of $6.1 million for the three months and year ended December 31, 2018 compared to an expense of $0.2 million and $22.6 million for the three months and year ended December 31, 2017, as disclosed in note 22 in the 2018 consolidated financial statements. The quarter over quarter change in current income tax recovery was due to the inclusion of Canadian Truck Transportation in discontinued operations while the year ended comparative period decrease in income tax expense was due to the recognition of tax on the gain on sale of the Industrial Propane business in 2017. The year ended comparative period increase in deferred tax expense was due Gibson Energy Inc. 18 Management’s Discussion and Analysis Gibson Energy Inc. 17 Management’s Discussion and Analysis Gibson Energy 18 Management’s Discussion and Analysis The following tables set forth operating results from the discontinued operations of Canadian Truck Transportation for the three months and year ended December 31, 2018 and 2017: Volumes (barrels in thousands) Crude and other products ................................................................... Three months ended December 31 20181 11,887 20171 11,971 Years ended December 31 20181 45,031 20171 46,815 Three months ended December 31 Years ended December 31 20181 20171 20181 20171 Revenue ............................................................................................ $ 56,505 $ 57,860 $ 217,408 $ 236,340 Cost of sales ...................................................................................... 50,027 51,780 193,909 212,937 Segment profit .................................................................................. 6,478 6,080 23,499 23,403 Depreciation, amortization, and impairment.................................... Goodwill impairment ........................................................................ Finance costs and other income, net ................................................ Loss before taxes .............................................................................. Income tax (recovery) expense ......................................................... 30,734 19,988 92 (44,336) (12,310) 5,138 - - 942 249 693 44,215 19,988 295 (40,999) (11,412) 22,321 - - 1,082 287 795 Net income from discontinued operations, after tax ........................ $ (32,026) $ $ (29,587) $ 1. The current period results include the impacts from the adoption of new accounting standards as discussed on pages 34. Comparative information has not been restated and, therefore, may not be comparable throughout the discussion on continuing operations. In addition, Comparative period segment information was represented to reflect the results of continuing operations separately from discontinued operations (see note 8 of the consolidated financial statements). In the three months and year ended December 31, 2018 compared to the three months and year ended December 31, 2017: Crude and other product hauling barrels were consistent and decreased by 4%, respectively. The year ended comparative decrease in Liquid Petroleum Gas (“LPG”) mix and crude volumes hauled was partially offset by higher sulfur and propane volumes in the year. Operational performance Financial performance In the three months and year ended December 31, 2018 compared to the three months and year ended December 31, 2017: Crude and other product revenue decreased by 2% and 8%, respectively. The quarter over quarter decrease was primarily due to lower hauling rates related to LPG mix, propane and sulfur. The year ended comparative period decrease was primarily due to lower volumes as discussed above and lower hauling rates for LPG mix and sulfur, partially offset by higher hauling rates for asphalt. Segment profit increased by 7% and was consistent, respectively. The quarter over quarter increase was mainly due to lower direct costs largely due to the continuation of the reduction in payroll related costs associated with overall headcount reductions. U.S. Environmental Services business million (US$96 million). On May 3, 2018, the Company completed the sale of its U.S. Environmental Services business for adjusted gross proceeds of $123.3 The U.S. Environmental Services business included 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 industrial lift, exploration support services and accommodation facilities to the oil and gas industry. The U.S Environmental Services business was reported historically within Company’s Infrastructure, Logistics and Other reportable segments. Operating results related to the segment have been included in net income from discontinued operations in the consolidated statements of operations. Comparative period balances of the consolidated statements of operations and cash flows have been restated. Gibson Energy Inc. 17 Management’s Discussion and Analysis The following tables set forth operating results from discontinued operations of the U.S. Environmental Services business for the three months and years ended December 31, 2018 and 2017: Three months ended December 31 Years ended December 31 2018 2 2017 1 2018 2 2017 1 Revenue Water hauling and disposal ....................................................... Other products and services ..................................................... Total revenue .................................................................................... Cost of sales ...................................................................................... Segment profit .................................................................................. Depreciation, amortization and impairment .................................... Finance costs and (other income), net .............................................. (Loss) income before taxes ............................................................... Income tax (recovery) provision ....................................................... Net (loss) income from discontinued operations, after tax .............. After tax (loss) gain on sale 2, 3 .......................................................... (Loss) gain on discontinued operations, after tax ............................. $ - - - - - - - - - - (816) (816) $ $ 26,890 39,501 66,391 58,675 7,716 44,301 67 (36,652) (23) (36,629) - (36,629) $ $ 42,207 51,074 93,281 84,074 9,207 3,493 278 5,436 1,448 3,988 95,522 99,510 $ $ 101,448 135,386 236,834 211,703 25,131 83,289 277 (58,435) (8,251) (50,184) - (50,184) $ 1. 2. 3. The current period results include the impacts from the adoption of new accounting standards as discussed on page 34. Comparative information has not been restated and, therefore, may not be comparable throughout the discussion on discontinued operations. In addition, Comparative period segment information was represented to reflect the results of continuing operations separately from discontinued operations (see note 8 of the 2018 consolidated financial statements). The Company derecognized the U.S. Environmental Services segment effective May 3, 2018. Accordingly, results for year ended December 31, 2018 represent the activity for the period January 1, 2018 to May 2, 2018. The cash proceeds of $123.3 million and transaction costs of $13.6 million (including certain payments to employees), have been presented within investing activities from discontinued operations on the Company’s consolidated statements of cash flows. Operational and financial performance In the three months and year ended December 31, 2018 compared to the three months and year ended December 31, 2017: Revenue decreased by $66.4 million and $143.6 million, respectively, and segment profit decreased by $7.7 million and $15.9 million, respectively. The decrease in both comparative periods is a result of the current period being shorter than the prior period due to the sale of the business effective May 3, 2018. There was no contribution to results from this business during the three months ended December 31, 2018. Industrial Propane business During Q1 2017, the Company sold its Industrial Propane business for proceeds of $433.1 million resulting in the recognition of a post-tax gain on sale of $150.6 million. Accordingly, the results for the three months and year ended December 31, 2017 represent activity for the period between January 1, 2017 and February 28, 2017. During this period the Company had total revenues of $58.3 million, segment profit of $13.6 million, and net income after tax of $159.9 million (see note 8 in the 2018 consolidated financial statements). Income taxes Including the tax impact of gains on discontinued operations, net income tax was a recovery of $8.7 million and an expense of $6.1 million for the three months and year ended December 31, 2018 compared to an expense of $0.2 million and $22.6 million for the three months and year ended December 31, 2017, as disclosed in note 22 in the 2018 consolidated financial statements. The quarter over quarter change in current income tax recovery was due to the inclusion of Canadian Truck Transportation in discontinued operations while the year ended comparative period decrease in income tax expense was due to the recognition of tax on the gain on sale of the Industrial Propane business in 2017. The year ended comparative period increase in deferred tax expense was due Gibson Energy Gibson Energy Inc. 18 Management’s Discussion and Analysis Management’s Discussion and Analysis 19 primarily due to the utilization of tax assets to offset the gain on the sale of the business. SUMMARY OF QUARTERLY RESULTS Cash flow summary – Discontinued operations The following table sets forth a summary of the Company’s quarterly results for each of the last eight quarters: The following table summarizes the sources and uses of funds for the years ended December 31, 2018 and 2017 from discontinued operations: Q4 Q2 Q1 Q4 Q2 Q1 20181 Q3 20171 Q3 Years ended December 31 2018 20171,2 Statement of cash flows Cash flows (used in) provided by: Operating activities .................................................................................................................................. Investing activities .................................................................................................................................... Financing activities ................................................................................................................................... $ 36,652 $ 107,777 22,107 416,016 $ (3,056) $ - Revenue .................................... $1,314,605 $2,130,022 $ 1,716,612 $1,685,350 $1,650,445 $1,293,863 $1,366,823 $1,348,515 Net income (loss) ....................... Adjusted EBITDA (2) ................... 47,275 134,001 6,822 140,448 15,242 11,785 96,113 86,753 (55,851) 68,475 (5,410) 42,762 (2,195) 52,525 (2,870) 65,439 Basic ...................................... $ 0.33 $ 0.05 $ 0.11 $ 0.08 $ (0.40) $ (0.04) $ (0.01) $ (0.02) Diluted .................................. $ 0.32 $ 0.05 $ 0.11 $ 0.08 $ (0.40) $ (0.04) $ (0.01) $ (0.02) 1. 2. The Company derecognized the U.S. Environmental Services business effective May 3, 2018. Accordingly, cash flow related to this business for the year ended December 31, 2018 represent the activity for the period January 1, 2018 to May 2, 2018. Additionally, results for the three months and years ended December 31, 2017 and 2018 include cash flows related to Canadian Truck Transportation business. The 2018 amounts relate to the activity up to the date of the sale of the U.S. Environmental Services business while the 2017 amounts relate to the activity up to the sale of the Industrial Propane business. Cash provided by operating activities Cash provided by operating activities in the year ended December 31, 2018 was $36.7 million compared to cash provided by operating activities of $22.1 million year ended December 31, 2017. The change was primarily due to the timing of discontinued operations classification and completion of the sale of businesses as noted above. Additionally, the change in working capital requirements related to the sale of the U.S. Environmental Services business and the Industrial Propane business were driven by the fact that the Company is no longer required to fund working capital post the sale of those businesses. Cash provided by investing activities Cash provided by investing activities was $107.8 million for the year ended December 31, 2018, compared to cash provided by investing activities of $416.0 million in the year ended December 31, 2017. The change was primarily due to the cash proceeds received on the sale of the U.S. Environmental Services during 2018 and the sale of Industrial Propane business during 2017. Cash used in financing activities Cash used in financing activities was $3.1 million in the year ended December 31, 2018, compared to $nil in the year ended December 31, 2017. The increase was primarily due to the adoption of IFRS 16, as noted in the “Accounting Policies” section, which requires the recognition of net lease payments under financing activities. Continuing operations Earnings (loss) per share Discontinued operations Earnings (loss) per share Combined operations Earnings (loss) per share Revenue .................................... $ 49,643 $ 47,922 $ 66,222 $ 120,137 $ 116,442 $ 110,331 $ 113,373 $159,343 Net (loss) income ....................... Adjusted EBITDA (2) ................... (31,210) 6,478 (4,470) 6,177 122,693 5,386 (17,090) 14,727 (30,696) 13,796 (6,233) 12,946 (3,328) 13,862 150,718 21,467 Basic ..................................... Diluted .................................. $ (0.22) $ (0.22) $ (0.03) $ 0.85 $ (0.12) $ (0.21) $ (0.04) $ (0.03) $ 1.06 $ (0.03) $ 0.83 $ (0.12) $ (0.21) $ (0.04) $ (0.03) $ 1.04 Revenue (1,3) ............................... $1,364,248 $2,177,944 $1,782,834 $1,805,487 $1,766,887 $1,404,194 $1,480,196 $1,507,858 Net income (loss) ....................... Adjusted EBITDA (2) ................... 16,065 140,479 2,352 146,625 137,935 101,499 (5,305) 101,480 (86,547) 82,271 (11,643) 55,708 (5,523) 147,848 66,387 86,906 Basic ...................................... $ 0.11 $ 0.02 $ 0.96 $ (0.04) $ (0.61) $ (0.08) $ (0.04) $ 1.04 Diluted ................................... $ 0.10 $ 0.02 $ 0.94 $ (0.04) $ (0.61) $ (0.08) $ (0.04) $ 1.02 1. 2. Comparative period information was represented to reflect the results of continuing operations separately from discontinued operations (see note 8 of the 2018 consolidated financial statements). Furthermore, the 2018 period results include the impacts from the adoption of new accounting standards as discussed on page 34. Comparative information has not been restated and, therefore, may not be comparable. 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 long-term assets and asset write-downs. 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 unusual, non-recurring or non-operating in nature. Combined Adjusted EBITDA includes results from continuing and discontinued operations, while Adjusted EBITDA from continuing operations only includes results from continuing operations. 3. Revenue from combined operations represents the aggregated results of both continuing and discontinued operations and is not a measure recognized under IFRS and does not have standardized meanings prescribed by IFRS. The Company presents Combined Adjusted EBITDA, and Adjusted EBITDA from continuing operations and discontinued operations because it 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. Combined Adjusted EBITDA and Adjusted EBITDA from continuing and discontinued operations have limitations as analytical tools, 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: Gibson Energy Inc. 20 Management’s Discussion and Analysis Gibson Energy Inc. 19 Management’s Discussion and Analysis Gibson Energy 20 Management’s Discussion and Analysis primarily due to the utilization of tax assets to offset the gain on the sale of the business. SUMMARY OF QUARTERLY RESULTS Cash flow summary – Discontinued operations operations: The following table summarizes the sources and uses of funds for the years ended December 31, 2018 and 2017 from discontinued The following table sets forth a summary of the Company’s quarterly results for each of the last eight quarters: Q4 20181 Q3 Q2 Q1 Q4 20171 Q3 Q2 Q1 Statement of cash flows Cash flows (used in) provided by: Operating activities .................................................................................................................................. $ 36,652 $ Investing activities .................................................................................................................................... 107,777 22,107 416,016 Financing activities ................................................................................................................................... $ (3,056) $ - Years ended December 31 2018 20171,2 1. 2. The Company derecognized the U.S. Environmental Services business effective May 3, 2018. Accordingly, cash flow related to this business for the year ended December 31, 2018 represent the activity for the period January 1, 2018 to May 2, 2018. Additionally, results for the three months and years ended December 31, 2017 and 2018 include cash flows related to Canadian Truck Transportation business. The 2018 amounts relate to the activity up to the date of the sale of the U.S. Environmental Services business while the 2017 amounts relate to the activity up to the sale of the Industrial Propane business. Cash provided by operating activities Cash provided by operating activities in the year ended December 31, 2018 was $36.7 million compared to cash provided by operating activities of $22.1 million year ended December 31, 2017. The change was primarily due to the timing of discontinued operations classification and completion of the sale of businesses as noted above. Additionally, the change in working capital requirements related to the sale of the U.S. Environmental Services business and the Industrial Propane business were driven by the fact that the Company is no longer required to fund working capital post the sale of those businesses. Cash provided by investing activities was $107.8 million for the year ended December 31, 2018, compared to cash provided by investing activities of $416.0 million in the year ended December 31, 2017. The change was primarily due to the cash proceeds received on the sale of the U.S. Environmental Services during 2018 and the sale of Industrial Propane business during 2017. Cash provided by investing activities Cash used in financing activities Cash used in financing activities was $3.1 million in the year ended December 31, 2018, compared to $nil in the year ended December 31, 2017. The increase was primarily due to the adoption of IFRS 16, as noted in the “Accounting Policies” section, which requires the recognition of net lease payments under financing activities. Gibson Energy Inc. 19 Management’s Discussion and Analysis Continuing operations Revenue .................................... $1,314,605 Net income (loss) ....................... 47,275 Adjusted EBITDA (2) ................... 134,001 Earnings (loss) per share Basic ...................................... Diluted .................................. $ 0.33 $ 0.32 Discontinued operations Revenue .................................... Net (loss) income ....................... Adjusted EBITDA (2) ................... Earnings (loss) per share Basic ..................................... Diluted .................................. $ 49,643 (31,210) 6,478 $ (0.22) $ (0.22) Combined operations Revenue (1,3) ............................... $1,364,248 16,065 Net income (loss) ....................... Adjusted EBITDA (2) ................... 140,479 Earnings (loss) per share Basic ...................................... Diluted ................................... $ 0.11 $ 0.10 $2,130,022 $ 1,716,612 $1,685,350 15,242 11,785 86,753 96,113 6,822 140,448 $1,650,445 (55,851) 68,475 $1,293,863 (5,410) 42,762 $1,366,823 $1,348,515 (2,870) 65,439 (2,195) 52,525 $ 0.05 $ 0.05 $ 0.11 $ 0.11 $ 0.08 $ (0.40) $ (0.04) $ (0.01) $ (0.02) $ 0.08 $ (0.40) $ (0.04) $ (0.01) $ (0.02) $ 47,922 (4,470) 6,177 $ 66,222 $ 120,137 $ 116,442 $ 110,331 $ 113,373 (3,328) 13,862 (17,090) 14,727 (30,696) 13,796 122,693 5,386 (6,233) 12,946 $159,343 150,718 21,467 $ (0.03) $ (0.03) $ 0.85 $ 0.83 $ (0.12) $ (0.21) $ (0.04) $ (0.03) $ 1.06 $ (0.12) $ (0.21) $ (0.04) $ (0.03) $ 1.04 $2,177,944 $1,782,834 $1,805,487 (5,305) 101,480 137,935 101,499 2,352 146,625 $1,766,887 (86,547) 82,271 $1,404,194 (11,643) 55,708 $1,480,196 $1,507,858 147,848 (5,523) 66,387 86,906 $ 0.02 $ 0.96 $ 0.02 $ 0.94 $ (0.04) $ (0.61) $ (0.04) $ 1.04 $ (0.61) $ (0.08) $ (0.04) $ 1.02 $ (0.04) $ (0.08) 1. 2. Comparative period information was represented to reflect the results of continuing operations separately from discontinued operations (see note 8 of the 2018 consolidated financial statements). Furthermore, the 2018 period results include the impacts from the adoption of new accounting standards as discussed on page 34. Comparative information has not been restated and, therefore, may not be comparable. 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 long-term assets and asset write-downs. 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 unusual, non-recurring or non-operating in nature. Combined Adjusted EBITDA includes results from continuing and discontinued operations, while Adjusted EBITDA from continuing operations only includes results from continuing operations. 3. Revenue from combined operations represents the aggregated results of both continuing and discontinued operations and is not a measure recognized under IFRS and does not have standardized meanings prescribed by IFRS. The Company presents Combined Adjusted EBITDA, and Adjusted EBITDA from continuing operations and discontinued operations because it 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. Combined Adjusted EBITDA and Adjusted EBITDA from continuing and discontinued operations have limitations as analytical tools, 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: Gibson Energy Gibson Energy Inc. 20 Management’s Discussion and Analysis Management’s Discussion and Analysis 21 - Adjusted EBITDA and Combined Adjusted EBITDA: - - - - - excludes certain income tax payments that may represent a reduction in cash available to the Company; includes the impact from the adoption of IFRS 16 effective January 1, 2018 without restating the prior periods as noted in the “Accounting Policies” section; does not reflect the Company’s cash expenditures, or future requirements for capital expenditures or contractual commitments; Continuing operations 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 Debentures, and Notes and Retired Notes (as defined herein) and the Revolving Credit Facility (as defined herein). - Although depreciation, amortization and impairment are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and Adjusted EBITDA does not reflect any cash requirements for such replacements; and - Other companies in the industry may calculate Combined Adjusted EBITDA and Adjusted EBITDA differently than the Company does, limiting its usefulness as a comparative measure. Because of these limitations, Combined Adjusted EBITDA and Adjusted EBITDA should not considered to be 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 Combined Adjusted EBITDA and Adjusted EBITDA only as supplemental measures. The following tables reconciles segment profit to Adjusted EBITDA for continuing operations, discontinued operations and combined operations for each of the last eight quarters and for the twelve months ended December 31, 2018 and 2017: Continuing operations Segment profit ......................................................................... Interest income ........................................................................ Foreign exchange gain (loss) – corporate ................................ General and administrative ..................................................... Net unrealized (gain) loss from financial instruments (1) .......... Adjusted EBITDA ...................................................................... Discontinued operations Segment profit and adjusted EBITDA ....................................... Combined operations Segment profit ......................................................................... Interest income ........................................................................ Foreign exchange gain (loss) – corporate ................................ General and administrative ..................................................... Net unrealized (gain)loss from financial instruments (1) .......... Combined Adjusted EBITDA ..................................................... December 31, 2018 Three months ended (restated3) September 30, 2018 June 30, 2018 March 31, 2018 $ 153,569 $ 142,227 $ 95,802 $ 95,489 294 170 (8,468) (732) $ 134,001 $ 140,448 $ 96,113 $ 86,753 346 1,732 (8,597) (13,049) 485 (2,357) (6,804) 8,987 368 2,542 (8,286) 3,597 Twelve months ended (restated3) December 31, 2018 $ 487,087 1,493 2,087 (32,155) (1,197) $ 457,315 $ 6,478 $ 6,177 $ 5,386 $ 14,727 $ 32,768 $ 160,047 $ 148,404 $ 101,188 $ 110,216 294 170 (8,468) (732) 346 1,732 (8,597) (13,049) 485 (2,357) (6,804) 8,987 368 2,542 (8,286) 3,597 $ 140,479 $ 146,625 $ 101,499 $ 101,480 $ 519,855 1,493 2,087 (32,155) (1,197) $ 490,083 Management’s Discussion and Analysis Gibson Energy Inc. 21 Management’s Discussion and Analysis Gibson Energy 22 Three months ended (restated3) Twelve months ended (restated3) December 31, September 30, 2017 2017 June 30, 2017 March 31, December 31, 2017 2017 Segment profit ......................................................................... $ 71,431 $ 51,265 $ 60,170 $ 78,936 $ 261,802 Interest income ........................................................................ Foreign exchange gain (loss) – corporate ................................ General and administrative ..................................................... Net unrealized loss (gain) from financial instruments (1) .......... Restructuring, severance and other costs (2) ............................ 500 755 (22,316) 19 18,086 320 (1,031) (6,428) (1,364) - 299 152 (13,155) 4,059 1,000 665 (528) (9,305) (4,329) - 1,784 (652) (51,204) (1,615) 19,086 Adjusted EBITDA ...................................................................... $ 68,475 $ 42,762 $ 52,525 $ 65,439 $ 229,201 Discontinued operations Combined operations Segment profit and adjusted EBITDA ....................................... $ 13,796 $ 12,946 $ 13,862 $ 21,467 $ 62,071 Segment profit ......................................................................... $ 85,227 $ 64,211 $ 74,032 $ 100,403 $ 323,873 Interest income ........................................................................ Foreign exchange gain (loss) – corporate ................................ General and administrative ..................................................... Net unrealized loss (gain) from financial instruments (1) .......... Restructuring, severance and other costs (2) ............................ 500 755 (22,316) 19 18,086 320 (1,031) (6,428) (1,364) - 299 152 (13,155) 4,059 1,000 665 (528) (9,305) (4,329) - 1,784 (652) (51,204) (1,615) 19,086 Combined Adjusted EBITDA ..................................................... $ 82,271 $ 55,708 $ 66,387 $ 86,906 $ 291,272 1. 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. Represents the restructuring and severance costs incurred related to a headcount rationalization review, and executive payroll related costs. Comparative periods were restated to reflect the results of continuing operations separately from discontinued operations. Furthermore, the 2018 period results include the impacts from the adoption of new accounting standards as discussed on page 34. Comparative information has not been restated and, therefore, may 2. 3. not be comparable. The results of Adjusted EBITDA are driven primarily by segment profit for the respective reportable segments as well as the adjustments discussed above in the tables. For more details on the specific factors driving the periodic movements in segment profit, refer to the results of continuing and discontinued operations included in this MD&A. The following identifies the key drivers in segment profitability over the last eight quarters: Infrastructure – The Infrastructure segment has progressively commissioned new storage capacity and related infrastructure, with 800,000 barrels of additional capacity and related take-or-pay and stable fee-based cash flows added in 2018. This increase in capacity was primarily driven by the sustained demand for crude terminalling and storage services combined with the effective operation, including cost management, of its current Hardisty and Edmonton Terminals and has provided for the increase in segment profits. Logistics – The Logistics segment provides logistical services that enable crude production to access fixed midstream infrastructure in the U.S. The segment’s results have been impacted by the decline in volumes due to the loss of an exclusive customer coupled with continued competition and availability of drivers within the Company’s service areas, and the impact of one-time expenses such as severance, relocation, and office move costs which has inhibited the ability of the Company to deliver consistent results in this segment. Wholesale – The Wholesale segment earns margins by capturing; quality, locational or time-based arbitrage opportunities related to the purchasing; selling, storing, and optimization of hydrocarbon products, including crude oil and refined products. Accordingly, this segment has been impacted by commodity price fluctuations in the pricing differentials between different geographic markets and product grades, most notably related to crude oil and NGLs. These fluctuations have been managed by purchasing and selling products through physical and financial contracts that include energy-related derivatives which have both supported and reduced segment Gibson Energy Inc. 22 Management’s Discussion and Analysis - - - - - - Adjusted EBITDA and Combined Adjusted EBITDA: excludes certain income tax payments that may represent a reduction in cash available to the Company; includes the impact from the adoption of IFRS 16 effective January 1, 2018 without restating the prior periods as noted in the “Accounting Policies” section; commitments; does not reflect the Company’s cash expenditures, or future requirements for capital expenditures or contractual 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 Debentures, and Notes and Retired Notes (as defined herein) and the Revolving Credit Facility (as defined herein). - Although depreciation, amortization and impairment are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and Adjusted EBITDA does not reflect any cash requirements for such replacements; and - Other companies in the industry may calculate Combined Adjusted EBITDA and Adjusted EBITDA differently than the Company does, limiting its usefulness as a comparative measure. Because of these limitations, Combined Adjusted EBITDA and Adjusted EBITDA should not considered to be 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 Combined Adjusted EBITDA and Adjusted EBITDA only as supplemental measures. The following tables reconciles segment profit to Adjusted EBITDA for continuing operations, discontinued operations and combined operations for each of the last eight quarters and for the twelve months ended December 31, 2018 and 2017: Three months ended (restated3) December 31, September 30, 2018 2018 June 30, 2018 March 31, December 31, 2018 2018 Twelve months ended (restated3) Continuing operations Segment profit ......................................................................... $ 153,569 $ 142,227 $ 95,802 $ 95,489 $ 487,087 Interest income ........................................................................ Foreign exchange gain (loss) – corporate ................................ General and administrative ..................................................... Net unrealized (gain) loss from financial instruments (1) .......... 346 1,732 (8,597) (13,049) 368 2,542 (8,286) 3,597 485 (2,357) (6,804) 8,987 294 170 (8,468) (732) 1,493 2,087 (32,155) (1,197) Adjusted EBITDA ...................................................................... $ 134,001 $ 140,448 $ 96,113 $ 86,753 $ 457,315 Discontinued operations Combined operations Segment profit and adjusted EBITDA ....................................... $ 6,478 $ 6,177 $ 5,386 $ 14,727 $ 32,768 Segment profit ......................................................................... $ 160,047 $ 148,404 $ 101,188 $ 110,216 $ 519,855 Interest income ........................................................................ Foreign exchange gain (loss) – corporate ................................ General and administrative ..................................................... Net unrealized (gain)loss from financial instruments (1) .......... 346 1,732 (8,597) (13,049) 368 2,542 (8,286) 3,597 485 (2,357) (6,804) 8,987 294 170 (8,468) (732) 1,493 2,087 (32,155) (1,197) Combined Adjusted EBITDA ..................................................... $ 140,479 $ 146,625 $ 101,499 $ 101,480 $ 490,083 Gibson Energy Inc. 21 Management’s Discussion and Analysis Continuing operations Segment profit ......................................................................... Interest income ........................................................................ Foreign exchange gain (loss) – corporate ................................ General and administrative ..................................................... Net unrealized loss (gain) from financial instruments (1) .......... Restructuring, severance and other costs (2) ............................ Adjusted EBITDA ...................................................................... Discontinued operations Segment profit and adjusted EBITDA ....................................... Combined operations Segment profit ......................................................................... Interest income ........................................................................ Foreign exchange gain (loss) – corporate ................................ General and administrative ..................................................... Net unrealized loss (gain) from financial instruments (1) .......... Restructuring, severance and other costs (2) ............................ Combined Adjusted EBITDA ..................................................... Three months ended (restated3) Twelve months ended (restated3) December 31, 2017 September 30, 2017 June 30, 2017 March 31, 2017 December 31, 2017 $ 71,431 $ 51,265 $ 60,170 299 152 (13,155) 4,059 1,000 320 (1,031) (6,428) (1,364) - $ 68,475 $ 42,762 $ 52,525 $ 65,439 $ 78,936 665 (528) (9,305) (4,329) - 500 755 (22,316) 19 18,086 $ 261,802 1,784 (652) (51,204) (1,615) 19,086 $ 229,201 $ 13,796 $ 12,946 $ 13,862 $ 21,467 $ 62,071 $ 85,227 500 755 (22,316) 19 18,086 $ 100,403 665 (528) (9,305) (4,329) - $ 82,271 $ 55,708 $ 66,387 $ 86,906 $ 64,211 $ 74,032 299 152 (13,155) 4,059 1,000 320 (1,031) (6,428) (1,364) - $ 323,873 1,784 (652) (51,204) (1,615) 19,086 $ 291,272 1. 2. 3. 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. Represents the restructuring and severance costs incurred related to a headcount rationalization review, and executive payroll related costs. Comparative periods were restated to reflect the results of continuing operations separately from discontinued operations. Furthermore, the 2018 period results include the impacts from the adoption of new accounting standards as discussed on page 34. Comparative information has not been restated and, therefore, may not be comparable. The results of Adjusted EBITDA are driven primarily by segment profit for the respective reportable segments as well as the adjustments discussed above in the tables. For more details on the specific factors driving the periodic movements in segment profit, refer to the results of continuing and discontinued operations included in this MD&A. The following identifies the key drivers in segment profitability over the last eight quarters: Infrastructure – The Infrastructure segment has progressively commissioned new storage capacity and related infrastructure, with 800,000 barrels of additional capacity and related take-or-pay and stable fee-based cash flows added in 2018. This increase in capacity was primarily driven by the sustained demand for crude terminalling and storage services combined with the effective operation, including cost management, of its current Hardisty and Edmonton Terminals and has provided for the increase in segment profits. Logistics – The Logistics segment provides logistical services that enable crude production to access fixed midstream infrastructure in the U.S. The segment’s results have been impacted by the decline in volumes due to the loss of an exclusive customer coupled with continued competition and availability of drivers within the Company’s service areas, and the impact of one-time expenses such as severance, relocation, and office move costs which has inhibited the ability of the Company to deliver consistent results in this segment. Wholesale – The Wholesale segment earns margins by capturing; quality, locational or time-based arbitrage opportunities related to the purchasing; selling, storing, and optimization of hydrocarbon products, including crude oil and refined products. Accordingly, this segment has been impacted by commodity price fluctuations in the pricing differentials between different geographic markets and product grades, most notably related to crude oil and NGLs. These fluctuations have been managed by purchasing and selling products through physical and financial contracts that include energy-related derivatives which have both supported and reduced segment Gibson Energy Gibson Energy Inc. 22 Management’s Discussion and Analysis Management’s Discussion and Analysis 23 profits from quarter to quarter in the form of realized or unrealized gains and losses. The three months and year-end 2018 results also include the impacts of lower rail car lease expenses as a result of the adoption of IFRS 16 as noted in the “Accounting Policies” section. Company’s disclosure under “Forward-Looking Information” included at the end of this MD&A. Cash flow summary – Continuing operations Discontinued operations – The results for discontinued operations include results from both the Canadian Truck Transportation and the U.S Environmental Services businesses. The Canadian Truck Transportation business earns margins by providing transportation and related services which includes providing hauling services for crude, condensate, sulfur, waste water and drilling fluids for many of the Western Canadian Sedimentary Basin leading oil and gas producers. The U.S. Environmental Services business earns margins by providing environmental and production services, such as emulsion hauling and treating, water hauling and disposal services and oilfield waste management services to the oil and gas industry. Accordingly, results have been impacted by the reduction and volatility in crude oil and other related commodity prices which has reduced production and exploration activities thus lowering available demand from these producers. However, the more recent gradual increase in the price of crude oil which has translated into slowly increasing activity and production coupled with the availability of other commodity hauling, such as sulphur, as well as the recovery of demand for the Company’s U.S. Environmental Service business as activity levels strengthened over the last year has provided support for the segment’s earnings. Adjusted EBITDA for continuing, discontinued, and combined operations is presented in the table above 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 and Debentures), 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 because it believes such measure is frequently used by securities analysts, investors and other interested parties as measures of financial performance. Adjusted EBITDA, as presented herein, is not a recognized measure 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 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 long-term assets and asset write-downs. 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 unusual, non- recurring or non-operating in nature. The Company’s calculation of Adjusted EBITDA may not be comparable to such calculations used by other companies. In addition, in evaluating Adjusted EBITDA, readers should be aware that in the future the Company may incur expenses similar to those eliminated in the presentation herein. LIQUIDITY AND CAPITAL RESOURCES Liquidity Sources The Company’s primary liquidity and capital resource needs are to fund ongoing capital expenditures, growth opportunities, and its dividend. In addition, the Company must service its debt, including interest payments, and finance working capital needs. The Company’s short-term and long-term liquidity needs are met through cash flow from operations, its revolving credit facility, and debt and equity financings. As at December 31, 2018, the Company had a positive working capital position, with an available cash balance of $95.3 million, and the ability to utilize borrowings under the Revolving Credit Facility. Also, the anticipated proceeds from the sale of the Canadian Truck Transportation and non-core ESN businesses are expected to reduce debt and lower net debt to Adjusted EBITDA ratios which will allow the Company to fund its ongoing capital expenditures, debt service requirements, dividend payments, and working capital needs. Accordingly, over the short-term the Company expects to maintain sufficient liquidity sources to fund its ongoing capital expenditures, debt service requirements, dividend payments and working capital needs. Over the medium to long term, the Company’s ability to generate meaningful contributions from cash from operations combined with the Company’s extended maturity profile and low interest cost of the Company’s debt, will provide support for the Company’s funding of liquidity requirements. While the Company remains confident in its ability to execute these divestitures, there are no assurances that the timing, the amount of proceeds from the sale of non-core businesses and the execution of planned capital programs will occur as planned. Please refer The Company’s operating cash flow is generally impacted by the overall profitability 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 The following table summarizes the Company’s sources and uses of funds for the years ended December 31, 2018 and 2017 from Years ended December 31 20181 20171 growth strategy and manage costs. continuing operations: Statement of cash flows Cash flows provided by (used in): Operating activities .................................................................................................................................. $ 527,086 $ 175,272 Investing activities .................................................................................................................................... (214,502) (160,196) Financing activities ................................................................................................................................... $ (392,197) $ (477,933) 1. The current period results include the impacts from the adoption of new accounting standards as discussed on page 34. Comparative information has not been restated and, therefore, may not be comparable. Cash provided by operating activities Cash provided by operating activities was $527.1 million in the year ended December 31, 2018, compared to cash provided by operating activities of $175.3 million in the year ended December 31, 2017. The increase was primarily due to higher segment profit related to the Infrastructure and Wholesale segments (refer to the respective section in “Results of Continuing Operations” for more details). Additionally, cash from operating activities increased by $49.8 million during the year ended December 31, 2018, due to the adoption of IFRS 16 whereby the lease payments are classified as financing activities as noted in the “Accounting Policies” section. Furthermore, the increase was supported by cash generated by the working capital of $50.2 million in the current year compared to cash used to fund working capital of $27.3 million in the prior year, primarily driven by higher inventory purchases in the prior period. Cash provided by operating activities and working capital requirements for the Wholesale segment are strongly influenced by the amount of inventory purchased and subsequently held in storage, as well as by the commodity prices at which inventory is bought and sold. Commodity prices and inventory demand fluctuate over the course of the year in relation to general market forces and seasonal demand for certain products like propane, and, accordingly, working capital requirements related to inventory also fluctuate with changes in commodity prices and demand. The primary drivers of working capital requirements are the collection of amounts related to sales of products such as crude oil, NGLs, asphalt and other products and fees for services associated with the Company’s Logistics and Infrastructure segments. Offsetting these collections are payments for purchases of crude oil and other products, primarily within the Wholesale segment, and other expenses. Historically, the Wholesale segment has been the most variable with respect to generating cash flows and working capital 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 this segment. Working capital is also influenced by the timing of certain financing activities related to the Revolver Credit Facility, interest payments on long-term debt, as well as payments of dividends and leases as discussed below under cash used in financing activities. Cash used in investing activities Cash used in investing activities was $214.5 million in the year ended December 31, 2018, compared to $160.2 million in the year ended December 31, 2017 and consists primarily of capital expenditures and acquisitions . For a summary of capital expenditures including acquisitions, see “Capital expenditures” discussion throughout this MD&A. Gibson Energy Inc. 24 Management’s Discussion and Analysis Gibson Energy Inc. 23 Management’s Discussion and Analysis Gibson Energy 24 Management’s Discussion and Analysis profits from quarter to quarter in the form of realized or unrealized gains and losses. The three months and year-end 2018 results Company’s disclosure under “Forward-Looking Information” included at the end of this MD&A. also include the impacts of lower rail car lease expenses as a result of the adoption of IFRS 16 as noted in the “Accounting Policies” Cash flow summary – Continuing operations section. The Company’s operating cash flow is generally impacted by the overall profitability 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 following table summarizes the Company’s sources and uses of funds for the years ended December 31, 2018 and 2017 from continuing operations: Years ended December 31 20181 20171 Statement of cash flows Cash flows provided by (used in): Operating activities .................................................................................................................................. Investing activities .................................................................................................................................... Financing activities ................................................................................................................................... $ 527,086 $ (214,502) 175,272 (160,196) $ (392,197) $ (477,933) 1. The current period results include the impacts from the adoption of new accounting standards as discussed on page 34. Comparative information has not been restated and, therefore, may not be comparable. parties as measures of financial performance. Adjusted EBITDA, as presented herein, is not a recognized measure under IFRS and Cash provided by operating activities Cash provided by operating activities was $527.1 million in the year ended December 31, 2018, compared to cash provided by operating activities of $175.3 million in the year ended December 31, 2017. The increase was primarily due to higher segment profit related to the Infrastructure and Wholesale segments (refer to the respective section in “Results of Continuing Operations” for more details). Additionally, cash from operating activities increased by $49.8 million during the year ended December 31, 2018, due to the adoption of IFRS 16 whereby the lease payments are classified as financing activities as noted in the “Accounting Policies” section. Furthermore, the increase was supported by cash generated by the working capital of $50.2 million in the current year compared to cash used to fund working capital of $27.3 million in the prior year, primarily driven by higher inventory purchases in the prior period. Cash provided by operating activities and working capital requirements for the Wholesale segment are strongly influenced by the amount of inventory purchased and subsequently held in storage, as well as by the commodity prices at which inventory is bought and sold. Commodity prices and inventory demand fluctuate over the course of the year in relation to general market forces and seasonal demand for certain products like propane, and, accordingly, working capital requirements related to inventory also fluctuate with changes in commodity prices and demand. The primary drivers of working capital requirements are the collection of amounts related to sales of products such as crude oil, NGLs, asphalt and other products and fees for services associated with the Company’s Logistics and Infrastructure segments. Offsetting these collections are payments for purchases of crude oil and other products, primarily within the Wholesale segment, and other expenses. Historically, the Wholesale segment has been the most variable with respect to generating cash flows and working capital 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 this segment. Working capital is also influenced by the timing of certain financing activities related to the Revolver Credit Facility, interest payments on long-term debt, as well as payments of dividends and leases as discussed below under cash used in financing activities. Transportation and non-core ESN businesses are expected to reduce debt and lower net debt to Adjusted EBITDA ratios which will Cash used in investing activities Cash used in investing activities was $214.5 million in the year ended December 31, 2018, compared to $160.2 million in the year ended December 31, 2017 and consists primarily of capital expenditures and acquisitions . For a summary of capital expenditures including acquisitions, see “Capital expenditures” discussion throughout this MD&A. Discontinued operations – The results for discontinued operations include results from both the Canadian Truck Transportation and the U.S Environmental Services businesses. The Canadian Truck Transportation business earns margins by providing transportation and related services which includes providing hauling services for crude, condensate, sulfur, waste water and drilling fluids for many of the Western Canadian Sedimentary Basin leading oil and gas producers. The U.S. Environmental Services business earns margins by providing environmental and production services, such as emulsion hauling and treating, water hauling and disposal services and oilfield waste management services to the oil and gas industry. Accordingly, results have been impacted by the reduction and volatility in crude oil and other related commodity prices which has reduced production and exploration activities thus lowering available demand from these producers. However, the more recent gradual increase in the price of crude oil which has translated into slowly increasing activity and production coupled with the availability of other commodity hauling, such as sulphur, as well as the recovery of demand for the Company’s U.S. Environmental Service business as activity levels strengthened over the last year has provided support for the segment’s earnings. Adjusted EBITDA for continuing, discontinued, and combined operations is presented in the table above 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 and Debentures), 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 because it believes such measure is frequently used by securities analysts, investors and other interested 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 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 long-term assets and asset write-downs. 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 unusual, non- recurring or non-operating in nature. The Company’s calculation of Adjusted EBITDA may not be comparable to such calculations used by other companies. In addition, in evaluating Adjusted EBITDA, readers should be aware that in the future the Company may incur expenses similar to those eliminated in the presentation herein. LIQUIDITY AND CAPITAL RESOURCES Liquidity Sources The Company’s primary liquidity and capital resource needs are to fund ongoing capital expenditures, growth opportunities, and its dividend. In addition, the Company must service its debt, including interest payments, and finance working capital needs. The Company’s short-term and long-term liquidity needs are met through cash flow from operations, its revolving credit facility, and debt and equity financings. As at December 31, 2018, the Company had a positive working capital position, with an available cash balance of $95.3 million, and the ability to utilize borrowings under the Revolving Credit Facility. Also, the anticipated proceeds from the sale of the Canadian Truck allow the Company to fund its ongoing capital expenditures, debt service requirements, dividend payments, and working capital needs. Accordingly, over the short-term the Company expects to maintain sufficient liquidity sources to fund its ongoing capital expenditures, debt service requirements, dividend payments and working capital needs. Over the medium to long term, the Company’s ability to generate meaningful contributions from cash from operations combined with the Company’s extended maturity profile and low interest cost of the Company’s debt, will provide support for the Company’s funding of liquidity requirements. While the Company remains confident in its ability to execute these divestitures, there are no assurances that the timing, the amount of proceeds from the sale of non-core businesses and the execution of planned capital programs will occur as planned. Please refer Gibson Energy Inc. 23 Management’s Discussion and Analysis Gibson Energy Inc. 24 Management’s Discussion and Analysis 25 Management’s Discussion and Analysis Gibson Energy Cash used in financing activities Capital structure Cash used in financing activities was $392.2 million in year ended December 31, 2018 compared to cash used in financing activities of $477.9 million in the year ended December 31, 2017. The decrease was primarily due to lower net interest costs of $68.9 million in the year ended December 31, 2018 compared $87.2 million in the year ended December 31, 2017, finance lease payments of $49.8 million that are classified as financing activities due to the adoption of IFRS 16 effective January 1, 2018 (as noted in the “Accounting Policies” section), and a net repayment on Revolving Credit Facility of $84.7 million in the year ended December 31, 2018 compared to a net repayment on the Company’s borrowings of $203.4 million in the year ended December 31, 2017. Dividend payments were fairly consistent year over year. Capital expenditures and acquisitions The following table summarizes growth and replacement capital expenditures for the years ended December 31, 2018 and 2017: Growth capital (1) ....................................................................................................................................... Replacement capital (2) .............................................................................................................................. Acquisitions (3) ........................................................................................................................................... Total .......................................................................................................................................................... $ $ Years ended December 31 2018 221,198 25,225 80,844 327,267 2017 $ 151,154 20,901 - $ 172,055 1. Growth capital expenditures in the year ended December 31, 2018 include Corporate and discontinued operations expenditures of $0.8 million $3.8 million compared to $3.3 million and $6.0 million in the years ended December 31, 2017, respectively. These expenditures mainly relate to growth capital expenditure costs associated with the Company’s information and operational systems. The remainder of the growth capital expenditures have been discussed in continuing operations earlier in the MD&A. 2. Replacement capital expenditures in the years ended December 31, 2018 include Corporate and discontinued operations of $3.1 million and $1.6 million compared to $2.8 million and $7.3 million in the years ended December 31, 2017, respectively. These expenditures mainly relate to replacement costs associated with the Company’s information and operational systems. The remainder of the replacement capital expenditures have been discussed in continuing operations earlier in the MD&A. 3. Acquisitions include the purchase of a pipeline gathering network within the U.S. Infrastructure business and the purchase of the remaining interests in the Plato Pipeline. 2019 Planned capital expenditures On December 4, 2018, the Company announced the approval of the 2019 growth capital expenditure budget in the range of $200 million to $250 million and an additional $30 to $35 million allocated to replacement capital expenditures. While the Company anticipates that these planned capital expenditures will occur, certain capital projects are subject to general economic, financial, competitive, legislative, regulatory and other factors, some of which are beyond the Company’s control and could impact the Company’s ability to complete such activities as planned. Management’s Discussion and Analysis Gibson Energy Inc. 25 Management’s Discussion and Analysis Gibson Energy 26 As at December 31, December 31, 2018 2017 Revolving Credit Facility .......................................................................................................................... $ 150,000 $ 230,180 $300 million 5.375% Notes due July 15, 2022 ......................................................................................... $600 million 5.25% Notes due July 15, 2024 ........................................................................................... Unamortized issue discount and debt issue costs ................................................................................... $100 million Debentures 5.25% due July 15, 2021 (liability component) (1) ............................................ Lease liability ........................................................................................................................................... Total debt outstanding ............................................................................................................................ Cash and cash equivalents ....................................................................................................................... Net debt .................................................................................................................................................. Total share capital (including Debentures – equity component) ............................................................ 300,000 600,000 (10,422) 89,765 109,071 1,238,414 (95,301) 1,143,113 1,962,169 300,000 600,000 (12,061) 89,765 - 1,207,884 (32,138) 1,175,746 1,939,126 Total capital ............................................................................................................................................. $ 3,105,282 $ 3,114,872 1. The Debentures are included in the above total capital calculation in accordance with the Company’s view of its capital structure which includes shareholders’ equity, long-term debt, the Debentures, the Revolving Credit Facility, lease liabilities and working capital. The Debentures and associated interest payments are excluded from the definition of net debt included in the consolidated senior and total debt covenant ratios as well as the consolidated interest coverage covenant ratio. Notes During 2017, the Company completed a tender offer on its Retired Notes and also issued the $600 million 5.25% Notes. The indentures governing the terms of the $600 million 5.25% Notes and the $300 million 5.375% notes (collectively “Notes”) including the supplemental indenture thereto, contain certain redemption options whereby the Company can redeem all or part of the Notes at prices set forth in the applicable Indenture from proceeds of an equity offering or on the dates specified in the Indentures. In addition, the holders of Notes 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 a change in control or in the event certain asset sale proceeds are not re-invested in the time and manner specified in the applicable Indenture. Debentures On June 2, 2016, the Company issued $100.0 million aggregate principal amount of debentures (the “Debentures”) at a price of $1,000 per Debenture for net proceeds of approximately $96.3 million, including debt issuance costs of $3.7 million. The Debentures, issued at par, bear interest at a rate of 5.25% per annum, payable semi-annually on January 15 and July 15 in each year commencing January 15, 2017, mature on July 15, 2021, and may be redeemed, in certain circumstances, on or after July 15, 2019. The Debentures are convertible at the holder's option into common shares at any time prior to the earlier of July 15, 2021 and the business day immediately preceding the date fixed for redemption by the Company at a conversion price of $21.65 per common share, being a ratio of approximately 46.1894 common shares per $1,000 principal amount of the Debenture. The Debentures are subordinated to the Company's senior indebtedness. Credit facility The Revolving Credit Facility, available to provide financing for working capital, fund capital expenditures and other general corporate purposes, has an extendible term of five years, expiring on March 31, 2023. The Revolving Credit Facility permits 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 standby fees 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. The Company had $150.0 million drawn on its $560.0 million Revolving Credit Facility as of December 31, 2018 and had issued letters of credit totaling $70.9 million under its bilateral demand letter of credit facilities as at December 31, 2018. Gibson Energy Inc. 26 Management’s Discussion and Analysis Cash used in financing activities Capital structure As at December 31, 2018 December 31, 2017 Revolving Credit Facility .......................................................................................................................... $300 million 5.375% Notes due July 15, 2022 ......................................................................................... $600 million 5.25% Notes due July 15, 2024 ........................................................................................... Unamortized issue discount and debt issue costs ................................................................................... $100 million Debentures 5.25% due July 15, 2021 (liability component) (1) ............................................ Lease liability ........................................................................................................................................... Total debt outstanding ............................................................................................................................ Cash and cash equivalents ....................................................................................................................... Net debt .................................................................................................................................................. Total share capital (including Debentures – equity component) ............................................................ Total capital ............................................................................................................................................. $ 150,000 300,000 600,000 (10,422) 89,765 109,071 1,238,414 (95,301) 1,143,113 1,962,169 $ 3,105,282 $ 230,180 300,000 600,000 (12,061) 89,765 - 1,207,884 (32,138) 1,175,746 1,939,126 $ 3,114,872 1. The Debentures are included in the above total capital calculation in accordance with the Company’s view of its capital structure which includes shareholders’ equity, long-term debt, the Debentures, the Revolving Credit Facility, lease liabilities and working capital. The Debentures and associated interest payments are excluded from the definition of net debt included in the consolidated senior and total debt covenant ratios as well as the consolidated interest coverage covenant ratio. Notes During 2017, the Company completed a tender offer on its Retired Notes and also issued the $600 million 5.25% Notes. The indentures governing the terms of the $600 million 5.25% Notes and the $300 million 5.375% notes (collectively “Notes”) including the supplemental indenture thereto, contain certain redemption options whereby the Company can redeem all or part of the Notes at prices set forth in the applicable Indenture from proceeds of an equity offering or on the dates specified in the Indentures. In addition, the holders of Notes 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 a change in control or in the event certain asset sale proceeds are not re-invested in the time and manner specified in the applicable Indenture. Debentures On June 2, 2016, the Company issued $100.0 million aggregate principal amount of debentures (the “Debentures”) at a price of $1,000 per Debenture for net proceeds of approximately $96.3 million, including debt issuance costs of $3.7 million. The Debentures, issued at par, bear interest at a rate of 5.25% per annum, payable semi-annually on January 15 and July 15 in each year commencing January 15, 2017, mature on July 15, 2021, and may be redeemed, in certain circumstances, on or after July 15, 2019. The Debentures are convertible at the holder's option into common shares at any time prior to the earlier of July 15, 2021 and the business day immediately preceding the date fixed for redemption by the Company at a conversion price of $21.65 per common share, being a ratio of approximately 46.1894 common shares per $1,000 principal amount of the Debenture. The Debentures are subordinated to the Company's senior indebtedness. Credit facility The Revolving Credit Facility, available to provide financing for working capital, fund capital expenditures and other general corporate purposes, has an extendible term of five years, expiring on March 31, 2023. The Revolving Credit Facility permits 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 standby fees 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. The Company had $150.0 million drawn on its $560.0 million Revolving Credit Facility as of December 31, 2018 and had issued letters of credit totaling $70.9 million under its bilateral demand letter of credit facilities as at December 31, 2018. Cash used in financing activities was $392.2 million in year ended December 31, 2018 compared to cash used in financing activities of $477.9 million in the year ended December 31, 2017. The decrease was primarily due to lower net interest costs of $68.9 million in the year ended December 31, 2018 compared $87.2 million in the year ended December 31, 2017, finance lease payments of $49.8 million that are classified as financing activities due to the adoption of IFRS 16 effective January 1, 2018 (as noted in the “Accounting Policies” section), and a net repayment on Revolving Credit Facility of $84.7 million in the year ended December 31, 2018 compared to a net repayment on the Company’s borrowings of $203.4 million in the year ended December 31, 2017. Dividend payments were fairly consistent year over year. Capital expenditures and acquisitions The following table summarizes growth and replacement capital expenditures for the years ended December 31, 2018 and 2017: Growth capital (1) ....................................................................................................................................... $ 221,198 $ 151,154 Replacement capital (2) .............................................................................................................................. Acquisitions (3) ........................................................................................................................................... 25,225 80,844 20,901 - Total .......................................................................................................................................................... $ 327,267 $ 172,055 Years ended December 31 2018 2017 1. Growth capital expenditures in the year ended December 31, 2018 include Corporate and discontinued operations expenditures of $0.8 million $3.8 million compared to $3.3 million and $6.0 million in the years ended December 31, 2017, respectively. These expenditures mainly relate to growth capital expenditure costs associated with the Company’s information and operational systems. The remainder of the growth capital expenditures have been discussed in continuing operations earlier in the MD&A. 2. Replacement capital expenditures in the years ended December 31, 2018 include Corporate and discontinued operations of $3.1 million and $1.6 million compared to $2.8 million and $7.3 million in the years ended December 31, 2017, respectively. These expenditures mainly relate to replacement costs associated with the Company’s information and operational systems. The remainder of the replacement capital expenditures have been discussed in continuing operations earlier in 3. Acquisitions include the purchase of a pipeline gathering network within the U.S. Infrastructure business and the purchase of the remaining interests in the Plato the MD&A. Pipeline. 2019 Planned capital expenditures On December 4, 2018, the Company announced the approval of the 2019 growth capital expenditure budget in the range of $200 million to $250 million and an additional $30 to $35 million allocated to replacement capital expenditures. While the Company anticipates that these planned capital expenditures will occur, certain capital projects are subject to general economic, financial, competitive, legislative, regulatory and other factors, some of which are beyond the Company’s control and could impact the Company’s ability to complete such activities as planned. Gibson Energy Inc. 25 Management’s Discussion and Analysis Gibson Energy Inc. 26 Management’s Discussion and Analysis 27 Management’s Discussion and Analysis Gibson Energy The Revolving Credit Facility contains certain covenants, including financial covenants requiring the Company to maintain ratios of maximum consolidated senior and total debt leverage as well as to maintain a minimum interest coverage ratio. Effective March 31, 2018, the Company amended certain covenants related to its Revolving Credit Facility including, amongst other revisions, revising the maximum consolidated senior and the maximum consolidated total debt leverage ratios to 4.85 to 1.0 for the 2018 fiscal year, 4.5 to 1.0 for 2019 fiscal year and 4.0 to 1.0 thereafter. Furthermore, the maturity date of the Revolving Credit Facility was extended from March 2022 to March 2023. In addition, the Company is also required to maintain a minimum 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 Adjusted EBITDA. The consolidated total debt ratio represents the ratio of total debt to Adjusted EBITDA. The consolidated interest coverage ratio represents the ratio of Adjusted EBITDA to consolidated cash interest expense. As at December 31, 2018, the Company was in compliance with the financial ratios with the senior debt leverage ratio at 2.3 to 1.0, total debt leverage ratio at 2.3 to 1.0, and the interest coverage ratio at 6.7 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. Both the leverage ratio and interest coverage ratio are based on calculations using adjusted EBITDA calculated in accordance with the Company’s debt agreements. See “Accounting Policies” section for discussion on adoption of new accounting standard which did not have a material impact on the covenants calculations. 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, 2018, the Company was in compliance with all of its covenants under the Notes and the Revolving Credit Facility. Dividends The Company is currently paying quarterly dividends to holders of common shares. The amount and timing of any future dividends payable by Gibson will be at the discretion of the Board and to be established on the basis of, among other things, 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. During the year ended December 31, 2018, the Board declares dividends of $1.32 per share. Distributable cash flow 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 from continuing and combined operations is used to assess the level of cash flow generated and to evaluate the adequacy of internally generated cash flow to fund dividends and is frequently used by securities analysts, investors and other interested parties. 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. Replacement capital expenditures are deducted from distributable cash flow as there is an ongoing requirement to incur these types of expenditures. Lease payments are also deducted for the period starting January 1, 2018 due to the adoption of IFRS 16 as noted in the “Accounting Policies” section. The Company may deduct or include additional items in its calculation of distributable cash flow. These items would generally, but not necessarily, be items of an unusual, non-recurring, or non-operating in nature. In 2017, the Company reflected non-recurring items relating to severance costs in distributable cash flow to approximate the internally generated cash flow available to the Company within its normal operating cycle. The Company has provided the distributable cash flow from combined operations on a trailing twelve-month basis to reflect the total cash flow available to fund dividends which includes cash available from discontinued operations. Management’s Discussion and Analysis Gibson Energy Inc. 27 Management’s Discussion and Analysis Gibson Energy 28 The following is a reconciliation of distributable cash flow from combined operations to its most closely related IFRS measure, cash flow from operating activities for the years ended December 31, 2018 and 2017 and three months ended December 31, 2018 and 2017. Continuing operations Adjustments: Years ended December 31 2018 2017 (restated)1 $ 175,272 27,325 (21,011) (73,939) - 34,016 19,086 2017 (restated)1 $ 197,379 52,147 (28,291) (73,939) - 3,608 19,086 10,503 Cash flow from operating activities .................................................................... $ 527,086 Changes in non-cash working capital .............................................................. Replacement capital ........................................................................................ Cash interest expense, including capitalized interest ..................................... Lease payments (2) ........................................................................................... Current income tax .......................................................................................... Other charges (3) .............................................................................................. (64,298) (25,225) (68,474) (49,785) (60,178) - Distributable cash flow from continuing operations .......................................... $ 259,126 $ 160,749 Years ended December 31 2018 Combined operations Adjustments: Combined cash flow from operating activities ................................................... $ 563,738 Combined changes in non-cash working capital ............................................. Combined replacement capital ....................................................................... Cash interest expense, including capitalized interest ..................................... Lease payments (2) ........................................................................................... Current income tax .......................................................................................... Other charges (3) .............................................................................................. Working capital adjustment (4) ........................................................................ (69,489) (26,800) (68,474) (52,870) (63,588) - - Distributable cash flow from combined operations ........................................... $ 282,517 $ 180,493 Dividends declared to shareholders ........................................................................ $ 190,326 $ 188,470 Cash flow from operating activities .................................................................... $ 262,044 $ 37,371 Continuing operations Adjustments: Changes in non-cash working capital .............................................................. Replacement capital ........................................................................................ Cash interest expense, including capitalized interest ..................................... Lease payments (2) ........................................................................................... Current income tax .......................................................................................... Other charges (3) .............................................................................................. Quarter ended December 31 2018 2017 (restated)1 (123,954) (9,604) (16,713) (11,187) (22,396) - 7,070 (9,097) (17,398) - 14,149 18,086 Distributable cash flow from continuing operations .......................................... $ 78,190 $ 50,181 Gibson Energy Inc. 28 Management’s Discussion and Analysis The Revolving Credit Facility contains certain covenants, including financial covenants requiring the Company to maintain ratios of maximum consolidated senior and total debt leverage as well as to maintain a minimum interest coverage ratio. Effective March 31, 2018, the Company amended certain covenants related to its Revolving Credit Facility including, amongst other revisions, revising the maximum consolidated senior and the maximum consolidated total debt leverage ratios to 4.85 to 1.0 for the 2018 fiscal year, 4.5 to 1.0 for 2019 fiscal year and 4.0 to 1.0 thereafter. Furthermore, the maturity date of the Revolving Credit Facility was extended from March 2022 to March 2023. In addition, the Company is also required to maintain a minimum 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 Adjusted EBITDA. The consolidated total debt ratio represents the ratio of total debt to Adjusted EBITDA. The consolidated interest coverage ratio represents the ratio of Adjusted EBITDA to consolidated cash interest expense. As at December 31, 2018, the Company was in compliance with the financial ratios with the senior debt leverage ratio at 2.3 to 1.0, total debt leverage ratio at 2.3 to 1.0, and the interest coverage ratio at 6.7 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. Both the leverage ratio and interest coverage ratio are based on calculations using adjusted EBITDA calculated in accordance with the Company’s debt agreements. See “Accounting Policies” section for discussion on adoption of new accounting standard which did not have a material impact on the covenants calculations. 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, 2018, the Company was in compliance with all of its covenants under the Notes and the Revolving Credit Facility. Dividends The Company is currently paying quarterly dividends to holders of common shares. The amount and timing of any future dividends payable by Gibson will be at the discretion of the Board and to be established on the basis of, among other things, 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. During the year ended December 31, 2018, the Board declares dividends of $1.32 per share. Distributable cash flow 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 from continuing and combined operations is used to assess the level of cash flow generated and to evaluate the adequacy of internally generated cash flow to fund dividends and is frequently used by securities analysts, investors and other interested parties. 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. Replacement capital expenditures are deducted from distributable cash flow as there is an ongoing requirement to incur these types of expenditures. Lease payments are also deducted for the period starting January 1, 2018 due to the adoption of IFRS 16 as noted in the “Accounting Policies” section. The Company may deduct or include additional items in its calculation of distributable cash flow. These items would generally, but not necessarily, be items of an unusual, non-recurring, or non-operating in nature. In 2017, the Company reflected non-recurring items relating to severance costs in distributable cash flow to approximate the internally generated cash flow available to the Company within its normal operating cycle. The Company has provided the distributable cash flow from combined operations on a trailing twelve-month basis to reflect the total cash flow available to fund dividends which includes cash available from discontinued operations. Gibson Energy Inc. 27 Management’s Discussion and Analysis The following is a reconciliation of distributable cash flow from combined operations to its most closely related IFRS measure, cash flow from operating activities for the years ended December 31, 2018 and 2017 and three months ended December 31, 2018 and 2017. Continuing operations Cash flow from operating activities .................................................................... Adjustments: Changes in non-cash working capital .............................................................. Replacement capital ........................................................................................ Cash interest expense, including capitalized interest ..................................... Lease payments (2) ........................................................................................... Current income tax .......................................................................................... Other charges (3) .............................................................................................. Distributable cash flow from continuing operations .......................................... Years ended December 31 2018 $ 527,086 (64,298) (25,225) (68,474) (49,785) (60,178) - $ 259,126 2017 (restated)1 $ 175,272 27,325 (21,011) (73,939) - 34,016 19,086 $ 160,749 Combined operations Combined cash flow from operating activities ................................................... Adjustments: Combined changes in non-cash working capital ............................................. Combined replacement capital ....................................................................... Cash interest expense, including capitalized interest ..................................... Lease payments (2) ........................................................................................... Current income tax .......................................................................................... Other charges (3) .............................................................................................. Working capital adjustment (4) ........................................................................ Distributable cash flow from combined operations ........................................... Years ended December 31 2018 $ 563,738 (69,489) (26,800) (68,474) (52,870) (63,588) - - $ 282,517 2017 (restated)1 $ 197,379 52,147 (28,291) (73,939) - 3,608 19,086 10,503 $ 180,493 Dividends declared to shareholders ........................................................................ $ 190,326 $ 188,470 Continuing operations Cash flow from operating activities .................................................................... Adjustments: Changes in non-cash working capital .............................................................. Replacement capital ........................................................................................ Cash interest expense, including capitalized interest ..................................... Lease payments (2) ........................................................................................... Current income tax .......................................................................................... Other charges (3) .............................................................................................. Distributable cash flow from continuing operations .......................................... Quarter ended December 31 2018 $ 262,044 2017 (restated)1 $ 37,371 (123,954) (9,604) (16,713) (11,187) (22,396) - $ 78,190 7,070 (9,097) (17,398) - 14,149 18,086 $ 50,181 Gibson Energy Gibson Energy Inc. 28 Management’s Discussion and Analysis Management’s Discussion and Analysis 29 Combined operations Combined cash flow from operating activities ............................................................ Adjustments: Combined changes in non-cash working capital ...................................................... Combined replacement capital ................................................................................ Cash interest expense, including capitalized interest .............................................. Lease payments (2) .................................................................................................... Current income tax ................................................................................................... Other charges (3) ....................................................................................................... Working capital adjustment (4) ................................................................................. Distributable cash flow from combined operations .................................................... Quarter ended December 31 2018 $ 272,337 (127,628) (9,676) (16,713) (11,588) (22,609) - - $ 84,123 2017 (restated)1 45,312 $ 13,564 (10,660) (17,398) - 14,149 18,086 10,503 $ 73,556 Dividends declared to shareholders ............................................................................ $ 47,704 $ 47,257 1. During the third quarter of 2018, the Company revised its distributable cash flow calculations whereby income taxes were adjusted to include the impact of current income tax expense (recovery), instead of cash taxes paid (refunds). In management’s view the revised calculation provides a more representative measure of distributable cash flow to the users of the MD&A. 2. Due to the adoption of IFRS 16, lease payments are shown within cash flow from financing activity effective January 1, 2018. Therefore, distributable cash flow has been adjusted to deduct lease payments for the period starting January 1, 2018 to make the calculations consistent with the prior periods. 3. 4. Represents restructuring, severance and executive payroll related costs incurred during the respective periods. Contingencies Represents a one-time adjustment related to working capital at the close of Industrial Propane segment sale whereby $10.5 million cash balance was required to be left in the businesses prior to close and was repaid back to the Company as part of the sale proceeds. Absent this requirement, the cash flow from operations would have been higher and cash flow from investing activity would be lower by the same amount. Dividends declared in the twelve months ended December 31, 2018 were $190.3 million, of which the entire amount was paid in cash. In the twelve months ended December 31, 2018, dividends declared represented 67% of the combined distributable cash flow generated. Management’s Discussion and Analysis Gibson Energy Inc. 29 Management’s Discussion and Analysis Gibson Energy 30 Contractual obligations and contingencies contracts and contingent commitments: The following table presents, at December 31, 2018, the Company’s obligations and commitments to make future payments under Long-term debt ....................................................................... $ 900,000 $ $ $ 300,000 $ 600,000 Convertible debentures .......................................................... Interest payments on long-term debt and Debentures .......... Credit facilities ........................................................................ Lease liabilities and other commitments ................................ Payments due by period Less than 1 year 1-3 years 3-5 years More than 5 years - - - - - - 52,875 103,330 39,824 40,151 100,000 71,734 150,000 19,476 - - 18,375 26,373 Total 100,000 246,314 150,000 125,824 Total contractual obligations .................................................. $ 1,522,138 $ 92,699 $ 143,481 $ 641,210 $ 644,748 1. 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, 2018, the Company had previously identified and approved capital expenditure commitments of $290 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 $16.4 million and provisions associated with site restoration on the retirement of assets and environmental costs of $162.8 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”. The Company is involved in various claims and actions arising in the course of operations and is subject to various legal actions and exposures. Although the outcome of these claims is uncertain, the Company does not expect these matters to have a material adverse effect on the Company’s financial position, cash flows or operational results. If an unfavorable outcome were to occur, there exists the possibility of a material adverse impact on the Company’s consolidated net income or loss in the period in which the outcome is determined. Accruals for litigation, claims and assessments are recognized if the Company determines that the loss is probable and the amount can be reasonably estimated. The Company believes it has made adequate provision for such legal claims. While fully supportable in the Company’s view, some of these positions, if challenged may not be fully sustained on review. 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. OFF-BALANCE SHEET ARRANGEMENTS The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial performance or financial condition. 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, 2018, there were 144.6 million common shares outstanding and no preferred shares outstanding. In addition, under the Company’s equity incentive plan, there were an aggregate of 2.0 million restricted share units, performance share units and deferred share units outstanding and 2.3 million stock options outstanding as at December 31, 2018. At December 31, 2018, awards available to grant under the equity incentive plan were approximately 10.1 million. As at March 1, 2019, 144.6 million common shares, 2.0 million restricted share units, performance share units and deferred share units and 2.3 million stock options were outstanding. Gibson Energy Inc. 30 Management’s Discussion and Analysis Contractual obligations and contingencies The following table presents, at December 31, 2018, the Company’s obligations and commitments to make future payments under contracts and contingent commitments: $ $ More than 5 years 600,000 - 18,375 - 26,373 644,748 Total Long-term debt ....................................................................... $ 900,000 100,000 Convertible debentures .......................................................... Interest payments on long-term debt and Debentures .......... 246,314 150,000 Credit facilities ........................................................................ Lease liabilities and other commitments ................................ 125,824 Total contractual obligations .................................................. $ 1,522,138 Payments due by period $ Less than 1 year - - 52,875 - 39,824 $ 92,699 $ 1-3 years - - 103,330 - 40,151 $ 143,481 3-5 years $ 300,000 100,000 71,734 150,000 19,476 $ 641,210 Quarter ended December 31 2018 Combined operations Adjustments: Combined cash flow from operating activities ............................................................ $ 272,337 Combined changes in non-cash working capital ...................................................... (127,628) Combined replacement capital ................................................................................ Cash interest expense, including capitalized interest .............................................. Lease payments (2) .................................................................................................... Current income tax ................................................................................................... Other charges (3) ....................................................................................................... Working capital adjustment (4) ................................................................................. (9,676) (16,713) (11,588) (22,609) - - 2017 (restated)1 $ 45,312 13,564 (10,660) (17,398) - 14,149 18,086 10,503 Distributable cash flow from combined operations .................................................... $ 84,123 $ 73,556 Dividends declared to shareholders ............................................................................ $ 47,704 $ 47,257 1. During the third quarter of 2018, the Company revised its distributable cash flow calculations whereby income taxes were adjusted to include the impact of current income tax expense (recovery), instead of cash taxes paid (refunds). In management’s view the revised calculation provides a more representative measure of distributable cash flow to the users of the MD&A. 2. Due to the adoption of IFRS 16, lease payments are shown within cash flow from financing activity effective January 1, 2018. Therefore, distributable cash flow has been adjusted to deduct lease payments for the period starting January 1, 2018 to make the calculations consistent with the prior periods. 3. 4. generated. Represents a one-time adjustment related to working capital at the close of Industrial Propane segment sale whereby $10.5 million cash balance was required to be left in the businesses prior to close and was repaid back to the Company as part of the sale proceeds. Absent this requirement, the cash flow from operations would have been higher and cash flow from investing activity would be lower by the same amount. Dividends declared in the twelve months ended December 31, 2018 were $190.3 million, of which the entire amount was paid in cash. In the twelve months ended December 31, 2018, dividends declared represented 67% of the combined distributable cash flow Gibson Energy Inc. 29 Management’s Discussion and Analysis Represents restructuring, severance and executive payroll related costs incurred during the respective periods. Contingencies 1. 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, 2018, the Company had previously identified and approved capital expenditure commitments of $290 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 $16.4 million and provisions associated with site restoration on the retirement of assets and environmental costs of $162.8 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”. The Company is involved in various claims and actions arising in the course of operations and is subject to various legal actions and exposures. Although the outcome of these claims is uncertain, the Company does not expect these matters to have a material adverse effect on the Company’s financial position, cash flows or operational results. If an unfavorable outcome were to occur, there exists the possibility of a material adverse impact on the Company’s consolidated net income or loss in the period in which the outcome is determined. Accruals for litigation, claims and assessments are recognized if the Company determines that the loss is probable and the amount can be reasonably estimated. The Company believes it has made adequate provision for such legal claims. While fully supportable in the Company’s view, some of these positions, if challenged may not be fully sustained on review. 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. OFF-BALANCE SHEET ARRANGEMENTS The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial performance or financial condition. 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, 2018, there were 144.6 million common shares outstanding and no preferred shares outstanding. In addition, under the Company’s equity incentive plan, there were an aggregate of 2.0 million restricted share units, performance share units and deferred share units outstanding and 2.3 million stock options outstanding as at December 31, 2018. At December 31, 2018, awards available to grant under the equity incentive plan were approximately 10.1 million. As at March 1, 2019, 144.6 million common shares, 2.0 million restricted share units, performance share units and deferred share units and 2.3 million stock options were outstanding. Gibson Energy Inc. 30 Management’s Discussion and Analysis 31 Management’s Discussion and Analysis Gibson Energy 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, currency exchange rate, and equity price 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 Commodity Risk Management Committee that has direct responsibility and authority for the Company’s risk policies and the Company’s trading controls and procedures. Additionally, certain aspects of corporate risk management are handled within the Risk Management Group. The Company’s approved strategies are intended to mitigate risks that are inherent in the Company’s core businesses of aggregating, 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, differentials 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 New York Mercantile Exchange, the Intercontinental Exchange 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 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, 2018 and December 31, 2017. All derivative positions offset existing or anticipated physical exposures. Price-risk sensitivities were calculated by assuming 15% volatility in crude oil, differentials 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 $7.3 million and $6.2 million as of December 31, 2018 and 2017, respectively. A 15% unfavorable change would decrease the Company’s net income by $7.3 million and $6.2 million as of December 31, 2018 and 2017, respectively. However, these changes may be offset by the use of one or more risk management strategies. Interest rate risk. The Company’s long-term debt, excluding the Revolving Credit Facility, accrues interest at fixed interest rates and accordingly, changes in market interest rates do not expose the Company to future interest cash outflow variability. At December 31, 2018, the Company had $150.0 million drawn under the Revolving Credit Facility which is subject to interest rate risk, as borrowings bear interest at a rate equal to, at the Company’s option, either the Canadian Prime Rate, U.S. LIBOR, U.S. Base Rate or Canadian Bankers’ Acceptance Rate, plus an applicable margin based on the Company’s total leverage ratio. At current balances and rates the interest rate risk is not significant. 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 Management’s Discussion and Analysis Gibson Energy Inc. 31 Management’s Discussion and Analysis Gibson Energy 32 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 $1.9 million and $3.4 million as at December 31, 2018 and 2017, respectively. A 5% favorable change would increase the Company’s net income by $1.9 million and $3.4 million as at December 31, 2018 and 2017, respectively. The Company expects to continue to enter into financial derivatives, primarily forward contracts, to reduce foreign exchange volatility. As at December 31, 2018, the Company had $nil U.S. dollar denominated debt as part of its draw on its Revolving Credit Facility. Due to the repayment of US$ Notes in 2017 and repayment of U.S dollar Revolving Credit Facility in 2018, the Company has no debt in foreign currency and as such the currency risk is minimal. Equity price risk. The Company has equity price and dilution exposure to shares that it issues under its stock based compensation programs. Gibson uses equity derivatives to manage volatility derived from 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, 2018 and 2017, the Company estimates that a 10% increase in the Company’s share price would have resulted in an increase in the Company’s income of $2.0 million and $1.9 million, respectively. A corresponding decrease in the Company’s share price would decrease the Company’s net income by $2.0 million and $1.9 million, respectively. ACCOUNTING POLICIES Critical accounting 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. 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: 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, 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 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. Gibson Energy Inc. 32 Management’s Discussion and Analysis 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, currency exchange rate, and equity price 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 Commodity Risk Management Committee that has direct responsibility and authority for the Company’s risk policies and the Company’s trading controls and procedures. Additionally, certain aspects of corporate risk management are handled within the Risk Management Group. The Company’s approved strategies are intended to mitigate risks that are inherent in the Company’s core businesses of aggregating, 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, differentials 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 New York Mercantile Exchange, the Intercontinental Exchange 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 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, 2018 and December 31, 2017. All derivative positions offset existing or anticipated physical exposures. Price-risk sensitivities were calculated by assuming 15% volatility in crude oil, differentials 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 $7.3 million and $6.2 million as of December 31, 2018 and 2017, respectively. A 15% unfavorable change would decrease the Company’s net income by $7.3 million and $6.2 million as of December 31, 2018 and 2017, respectively. However, these changes may be offset by the use of one or more risk management strategies. Interest rate risk. The Company’s long-term debt, excluding the Revolving Credit Facility, accrues interest at fixed interest rates and accordingly, changes in market interest rates do not expose the Company to future interest cash outflow variability. At December 31, 2018, the Company had $150.0 million drawn under the Revolving Credit Facility which is subject to interest rate risk, as borrowings bear interest at a rate equal to, at the Company’s option, either the Canadian Prime Rate, U.S. LIBOR, U.S. Base Rate or Canadian Bankers’ Acceptance Rate, plus an applicable margin based on the Company’s total leverage ratio. At current balances and rates the interest rate risk is not significant. 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 Gibson Energy Inc. 31 Management’s Discussion and Analysis 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 $1.9 million and $3.4 million as at December 31, 2018 and 2017, respectively. A 5% favorable change would increase the Company’s net income by $1.9 million and $3.4 million as at December 31, 2018 and 2017, respectively. The Company expects to continue to enter into financial derivatives, primarily forward contracts, to reduce foreign exchange volatility. As at December 31, 2018, the Company had $nil U.S. dollar denominated debt as part of its draw on its Revolving Credit Facility. Due to the repayment of US$ Notes in 2017 and repayment of U.S dollar Revolving Credit Facility in 2018, the Company has no debt in foreign currency and as such the currency risk is minimal. Equity price risk. The Company has equity price and dilution exposure to shares that it issues under its stock based compensation programs. Gibson uses equity derivatives to manage volatility derived from 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, 2018 and 2017, the Company estimates that a 10% increase in the Company’s share price would have resulted in an increase in the Company’s income of $2.0 million and $1.9 million, respectively. A corresponding decrease in the Company’s share price would decrease the Company’s net income by $2.0 million and $1.9 million, respectively. ACCOUNTING POLICIES Critical accounting 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. 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: 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, 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 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. Gibson Energy Gibson Energy Inc. 32 Management’s Discussion and Analysis Management’s Discussion and Analysis 33 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. 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. Assets held for sale and discontinued operations. As at December 31, 2018, the Company considered certain businesses and assets as held-for-sale and discontinued operations (refer to note 8 in the consolidated financial statements). In making these determinations, the Company used significant judgment in evaluating whether a sale was considered highly probable and considered the progress of negotiations specific to significant terms of the sales, including the structure of the transaction and if the buyer has substantially completed their due diligence review. For these businesses and assets these conditions were all met during the year ended December 31, 2018. The Company also used significant judgment in evaluating whether a disposal group represented a major line of business or geographical area of operations to be reported within discontinued operations, considering if the disposal group is a component of an entity and its materiality in relation to the reportable segment. These criteria were met for certain disposal groups. Critical accounting estimates and judgements from adoption of new accounting standards Critical judgements in determining lease terms The Company uses hindsight in determining the lease term where a contract contains options to extend or terminate the lease. In determining the lease term, management considers all facts and circumstances that create an economic incentive to exercise an extension option, or not exercise a termination option. The assessment is reviewed upon a trigger by a significant event or a significant change in circumstances. Management’s Discussion and Analysis Gibson Energy Inc. 33 Management’s Discussion and Analysis Gibson Energy 34 Impairment provision for financial assets The impairment provisions for financial assets are based on assumptions related to the risk of default and expected loss. The Company uses judgement in making these assumptions and selecting the inputs to the impairment calculation, based on the Company’s history, existing market conditions as well as forward looking estimates at the end of each reporting period. Estimation uncertainty arising from variable lease payments Certain leases contain variable payment terms that are linked to the Company’s owner operator costs within our Logistics segment. Judgment is applied in determination of whether the owner operator arrangement contain variable payment terms. All owner operator costs that are dependent upon the activity levels are classified as variable payments and all such costs are accounted for as a single lease component and charged to the consolidated statements of operations as incurred. Initial adoption of accounting policies 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. • IFRS 2 – Share-based payments (“IFRS 2”), has been amended to address (i) certain issues related to the accounting for cash settled awards, and (ii) the accounting for equity settled awards that include a “net settlement” feature in respect of employee withholding taxes. IFRS 2 is effective for annual periods beginning on or after January 1, 2018. The Company has determined that the adoption of this interpretation did not have a material impact on its consolidated financial statements. • IFRIC 22 – Foreign currency transactions and advance consideration (“IFRIC 22”), provides guidance on how to determine the date of the transaction when an entity either pays or receives consideration in advance for foreign currency- denominated contracts. IFRIC 22 is effective for annual periods beginning on or after January 1, 2018. The Company has determined that the adoption of this interpretation did not have a material impact on its consolidated financial statements. • IAS 28 – Investments in associates and joint ventures (“IAS 28”), has been amended to clarify that an entity applies IFRS 9, including its impairment requirements, to long-term interests in associate or joint venture to which the equity method is not applied. The amendment to IAS 28 is effective for years beginning on or after January 1, 2018. The Company has determined that the adoption of this interpretation did not have a material impact on its consolidated financial statements. • The annual improvements process addresses issues in the 2014-2016 reporting cycles include changes to IFRS 1 – First time adoption of IFRS, IFRS 7 – Financial instruments: Disclosures, IAS 19 – Employee benefits, IFRS 10 – Consolidated financial statements and IAS 28 – Investment in associates and joint ventures. This improvement is effective for periods beginning on or after January 1, 2018. The adoption of these improvements did not have a material impact on the consolidated financial statements. Adoption of IFRS 16, IFRS 15, “Revenue from Contracts with Customers” (“IFRS 15”) and IFRS 9, “Financial Instruments” (“IFRS 9”) As disclosed in the 2018 consolidated financial statements, the Company has evaluated the impact of IFRS 9, IFRS 15, and IFRS 16 and adopted all three standards as at January 1, 2018. The Company has taken pro-active measures to review the impacts of the adoption of these standards on our debt covenants including certain amendments to our covenants which provides an option to adjust for the impact of these standards or to provide a grandfathering approach. Currently the Company includes the lease liability in the total debt balance and uses the new accounting standards as a basis to calculate the covenants. Accordingly, the impact of adoption is not considered material on the Company’s debt covenant calculations. On January 1, 2018, the Company’s policies and business practices were updated to reflect the changes required by the adoption of these new standards (refer to note 3 and 4 in the 2018 consolidated financial statements for the updated policies). IFRS 16 is effective for years beginning on or after January 1, 2019, however the Company has adopted IFRS 16 effective January 1, 2018, concurrent with the adoption date of IFRS 9, and IFRS 15. These standards have been applied retrospectively using the modified retrospective approach. The modified retrospective approach does not require restatement of prior period financial information as Gibson Energy Inc. 34 Management’s Discussion and Analysis The computation of the Company’s income tax expense involves the interpretation of applicable tax laws and regulations in many Impairment provision for financial assets The impairment provisions for financial assets are based on assumptions related to the risk of default and expected loss. The Company uses judgement in making these assumptions and selecting the inputs to the impairment calculation, based on the Company’s history, existing market conditions as well as forward looking estimates at the end of each reporting period. Estimation uncertainty arising from variable lease payments Certain leases contain variable payment terms that are linked to the Company’s owner operator costs within our Logistics segment. Judgment is applied in determination of whether the owner operator arrangement contain variable payment terms. All owner operator costs that are dependent upon the activity levels are classified as variable payments and all such costs are accounted for as a single lease component and charged to the consolidated statements of operations as incurred. Initial adoption of accounting policies 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. • • • • IFRS 2 – Share-based payments (“IFRS 2”), has been amended to address (i) certain issues related to the accounting for cash settled awards, and (ii) the accounting for equity settled awards that include a “net settlement” feature in respect of employee withholding taxes. IFRS 2 is effective for annual periods beginning on or after January 1, 2018. The Company has determined that the adoption of this interpretation did not have a material impact on its consolidated financial statements. IFRIC 22 – Foreign currency transactions and advance consideration (“IFRIC 22”), provides guidance on how to determine the date of the transaction when an entity either pays or receives consideration in advance for foreign currency- denominated contracts. IFRIC 22 is effective for annual periods beginning on or after January 1, 2018. The Company has determined that the adoption of this interpretation did not have a material impact on its consolidated financial statements. IAS 28 – Investments in associates and joint ventures (“IAS 28”), has been amended to clarify that an entity applies IFRS 9, including its impairment requirements, to long-term interests in associate or joint venture to which the equity method is not applied. The amendment to IAS 28 is effective for years beginning on or after January 1, 2018. The Company has determined that the adoption of this interpretation did not have a material impact on its consolidated financial statements. The annual improvements process addresses issues in the 2014-2016 reporting cycles include changes to IFRS 1 – First time adoption of IFRS, IFRS 7 – Financial instruments: Disclosures, IAS 19 – Employee benefits, IFRS 10 – Consolidated financial statements and IAS 28 – Investment in associates and joint ventures. This improvement is effective for periods beginning on or after January 1, 2018. The adoption of these improvements did not have a material impact on the consolidated financial statements. Adoption of IFRS 16, IFRS 15, “Revenue from Contracts with Customers” (“IFRS 15”) and IFRS 9, “Financial Instruments” (“IFRS 9”) As disclosed in the 2018 consolidated financial statements, the Company has evaluated the impact of IFRS 9, IFRS 15, and IFRS 16 and adopted all three standards as at January 1, 2018. The Company has taken pro-active measures to review the impacts of the adoption of these standards on our debt covenants including certain amendments to our covenants which provides an option to adjust for the impact of these standards or to provide a grandfathering approach. Currently the Company includes the lease liability in the total debt balance and uses the new accounting standards as a basis to calculate the covenants. Accordingly, the impact of adoption is not considered material on the Company’s debt covenant calculations. On January 1, 2018, the Company’s policies and business practices were updated to reflect the changes required by the adoption of these new standards (refer to note 3 and 4 in the 2018 consolidated financial statements for the updated policies). IFRS 16 is effective for years beginning on or after January 1, 2019, however the Company has adopted IFRS 16 effective January 1, 2018, concurrent with the adoption date of IFRS 9, and IFRS 15. These standards have been applied retrospectively using the modified retrospective approach. The modified retrospective approach does not require restatement of prior period financial information as 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. 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. Assets held for sale and discontinued operations. As at December 31, 2018, the Company considered certain businesses and assets as held-for-sale and discontinued operations (refer to note 8 in the consolidated financial statements). In making these determinations, the Company used significant judgment in evaluating whether a sale was considered highly probable and considered the progress of negotiations specific to significant terms of the sales, including the structure of the transaction and if the buyer has substantially completed their due diligence review. For these businesses and assets these conditions were all met during the year ended December 31, 2018. The Company also used significant judgment in evaluating whether a disposal group represented a major line of business or geographical area of operations to be reported within discontinued operations, considering if the disposal group is a component of an entity and its materiality in relation to the reportable segment. These criteria were met for certain disposal groups. Critical accounting estimates and judgements from adoption of new accounting standards Critical judgements in determining lease terms The Company uses hindsight in determining the lease term where a contract contains options to extend or terminate the lease. In determining the lease term, management considers all facts and circumstances that create an economic incentive to exercise an extension option, or not exercise a termination option. The assessment is reviewed upon a trigger by a significant event or a significant change in circumstances. Gibson Energy Inc. 33 Management’s Discussion and Analysis Gibson Energy Inc. 34 Management’s Discussion and Analysis 35 Management’s Discussion and Analysis Gibson Energy it recognizes the cumulative effect as an adjustment to opening retained earnings and applies the standard prospectively. Accordingly, comparative information in the Company’s consolidated balance sheets, statements of operations, and statements of cash flows is not restated. (ii) Revenue recognition For the three months and year ended December 31, 2018, the following is a summary of material impacts on the results from continuing and discontinued operations: In previous reporting periods, wholesale product revenues associated with the sales of roofing flux products owned by the Company were recognized at the time of shipment when the risk of ownership and loss are passed to the customer. Under IFRS 15, where the revenue contract provides a right to invoice prior to the physical delivery of the product, the Company will defer such revenues and recognize a contract liability, until such time when the product has been physically delivered and the transfer of control has occurred. - - Segment profit from continuing operations increased by $11.2 million and $49.7 million, respectively, segment profit from discontinued operations increased by $0.4 million and $3.1 million, respectively, and G&A expenses decreased by $2.0 million and $8.2 million, respectively with a total increase of $11.6 million and $52.8 million, respectively in combined Adjusted EBITDA. (iii) Leases This was substantially offset by the additional depreciation charge on the right-of use-assets and interest expense for the lease liabilities. In addition, the impacts of IFRS 9, 15 and 16, including the new accounting policies adopted as at January 1, 2018 on the balance sheet are as follows: New standards and interpretations issued but not yet adopted: Accounts receivable ....................................................... Inventories ...................................................................... Trade payables and accrued charges ............................. Right-of-use asset ........................................................... Contract liabilities ........................................................... Deferred revenue ........................................................... Lease liability – current portion ...................................... Lease liability – non-current portion .............................. Retained deficit (earnings) ............................................. Total ............................................................................... As reported as at December 31, 2017 $ 494,901 169,957 (500,662) - - (7,013) - - 1,251,416 $ 1,408,599 Adjustments Footnote $ 484 4,765 3,329 170,548 (12,676) 7,013 (43,490) (129,344) (629) $ - (i) (ii) (ii & iii) (iii) (ii) (ii) (iii) (iii) (i & ii) Restated balance as at January 1, 2018 $ 495,385 174,722 (497,333) 170,548 (12,676) - (43,490) (129,344) 1,250,787 $ 1,408,599 Footnotes (i) Financial instruments The Company carries the following categories of financial assets subject to IFRS 9’s expected credit losses model: Trade receivables Net investments in finance leases The Company has revised its impairment methodology under IFRS 9 for the above noted classes of assets and applied the simplified approach on all trade receivables which requires the use of the lifetime expected loss provisions for expected credit losses. For lease receivables, the Company used the general approach which requires the recognition of twelve-month expected loss provisions for expected credit losses on lease receivables subject to credit risk as at January 1, 2018. Where such lease receivables have had a significant increase in credit risk since initial recognition but no objective evidence of impairment, lifetime expected loss provisions are used with interest calculated on the gross carrying amount of the receivable balance. Where objective evidence of impairment exists, interest is calculated on the carrying amount, net of the impairment. At December 31, 2018, there were no material changes to the credit risk on lease receivables. There was no impact to the classification of the Company’s financial assets from the adoption of IFRS 9. On adoption of IFRS 16, the Company has recognised lease liabilities in relation to all lease arrangements measured at the present value of the remaining lease payments from commitments disclosed as at December 31, 2017, adjusted by commitments in relation to arrangements not containing leases, short-term and low-value leases, discounted using the Company’s incremental borrowing rate as of January 1, 2018. The associated right-of-use assets were measured at the amount equal to the lease liability on January 1, 2018, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognised in the statement of financial position immediately before the date of transition, with no impact on retained earnings. • The annual improvements IAS 19 – Employee benefits (“IAS 19”), has been amended to (i) require current service cost and net interest for the period after the re-measurement to be determined using the assumptions used for the re-measurement, and (ii) clarify the effect of a plan amendment, curtailment or settlement on the requirements regarding the asset ceiling. The amendment to IAS 19 is effective for the years beginning on or after January 1, 2019. The Company is currently assessing the impact of this amendment. • IFRS 3 – Business Combinations (“IFRS 3”), has been amended to revise the definition of a business to include an input and a substantive process that together significantly contribute to the ability to create outputs. The amendment to IFRS 3 is effective for the years beginning on or after January 1, 2020. The Company is currently assessing the impact of this • IAS 1 – Presentation of financial statements (“IAS 1”) and IAS 8 – Accounting policies, changes in accounting estimates and errors (“IAS 8”), have been amended to (i) use a consistent definition of materiality throughout IFRSs and the Conceptual Framework for Financial Reporting; (ii) clarify the explanation of the definition of material; and iii) incorporate guidance in IAS 1 regarding immaterial information. The amendments to IAS 1 and IAS 8 are effective for the years beginning on or after amendment. January 1, 2020. 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, 2018. 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, 2018. 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 DC&P and ICFR were effective as at December 31, 2018. There have been no changes in ICFR that occurred during the period beginning January 1, 2018 and ended on December 31, 2018 that has materially affected or is reasonably likely to materially affect Gibson ICFR. Gibson Energy Inc. 36 Management’s Discussion and Analysis Gibson Energy Inc. 35 Management’s Discussion and Analysis Gibson Energy 36 Management’s Discussion and Analysis it recognizes the cumulative effect as an adjustment to opening retained earnings and applies the standard prospectively. Accordingly, (ii) Revenue recognition comparative information in the Company’s consolidated balance sheets, statements of operations, and statements of cash flows is not restated. continuing and discontinued operations: For the three months and year ended December 31, 2018, the following is a summary of material impacts on the results from In previous reporting periods, wholesale product revenues associated with the sales of roofing flux products owned by the Company were recognized at the time of shipment when the risk of ownership and loss are passed to the customer. Under IFRS 15, where the revenue contract provides a right to invoice prior to the physical delivery of the product, the Company will defer such revenues and recognize a contract liability, until such time when the product has been physically delivered and the transfer of control has occurred. (iii) Leases On adoption of IFRS 16, the Company has recognised lease liabilities in relation to all lease arrangements measured at the present value of the remaining lease payments from commitments disclosed as at December 31, 2017, adjusted by commitments in relation to arrangements not containing leases, short-term and low-value leases, discounted using the Company’s incremental borrowing rate as of January 1, 2018. The associated right-of-use assets were measured at the amount equal to the lease liability on January 1, 2018, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognised in the statement of financial position immediately before the date of transition, with no impact on retained earnings. New standards and interpretations issued but not yet adopted: • • • The annual improvements IAS 19 – Employee benefits (“IAS 19”), has been amended to (i) require current service cost and net interest for the period after the re-measurement to be determined using the assumptions used for the re-measurement, and (ii) clarify the effect of a plan amendment, curtailment or settlement on the requirements regarding the asset ceiling. The amendment to IAS 19 is effective for the years beginning on or after January 1, 2019. The Company is currently assessing the impact of this amendment. IFRS 3 – Business Combinations (“IFRS 3”), has been amended to revise the definition of a business to include an input and a substantive process that together significantly contribute to the ability to create outputs. The amendment to IFRS 3 is effective for the years beginning on or after January 1, 2020. The Company is currently assessing the impact of this amendment. IAS 1 – Presentation of financial statements (“IAS 1”) and IAS 8 – Accounting policies, changes in accounting estimates and errors (“IAS 8”), have been amended to (i) use a consistent definition of materiality throughout IFRSs and the Conceptual Framework for Financial Reporting; (ii) clarify the explanation of the definition of material; and iii) incorporate guidance in IAS 1 regarding immaterial information. The amendments to IAS 1 and IAS 8 are effective for the years beginning on or after January 1, 2020. 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, 2018. 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, 2018. 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 DC&P and ICFR were effective as at December 31, 2018. There have been no changes in ICFR that occurred during the period beginning January 1, 2018 and ended on December 31, 2018 that has materially affected or is reasonably likely to materially affect Gibson ICFR. - Segment profit from continuing operations increased by $11.2 million and $49.7 million, respectively, segment profit from discontinued operations increased by $0.4 million and $3.1 million, respectively, and G&A expenses decreased by $2.0 million and $8.2 million, respectively with a total increase of $11.6 million and $52.8 million, respectively in combined - This was substantially offset by the additional depreciation charge on the right-of use-assets and interest expense for the In addition, the impacts of IFRS 9, 15 and 16, including the new accounting policies adopted as at January 1, 2018 on the balance Adjusted EBITDA. lease liabilities. sheet are as follows: 31, 2017 Adjustments Footnote Accounts receivable ....................................................... Inventories ...................................................................... Trade payables and accrued charges ............................. Right-of-use asset ........................................................... Contract liabilities ........................................................... Deferred revenue ........................................................... (7,013) Lease liability – current portion ...................................... Lease liability – non-current portion .............................. Retained deficit (earnings) ............................................. Total ............................................................................... 1,251,416 $ 1,408,599 $ 484 4,765 3,329 170,548 (12,676) 7,013 (43,490) (129,344) (629) $ - (ii & iii) (i) (ii) (iii) (ii) (ii) (iii) (iii) (i & ii) As reported as at December $ 494,901 169,957 (500,662) - - - - Restated balance as at January 1, 2018 $ 495,385 174,722 (497,333) 170,548 (12,676) - (43,490) (129,344) 1,250,787 $ 1,408,599 Footnotes (i) Financial instruments Trade receivables Net investments in finance leases The Company carries the following categories of financial assets subject to IFRS 9’s expected credit losses model: The Company has revised its impairment methodology under IFRS 9 for the above noted classes of assets and applied the simplified approach on all trade receivables which requires the use of the lifetime expected loss provisions for expected credit losses. For lease receivables, the Company used the general approach which requires the recognition of twelve-month expected loss provisions for expected credit losses on lease receivables subject to credit risk as at January 1, 2018. Where such lease receivables have had a significant increase in credit risk since initial recognition but no objective evidence of impairment, lifetime expected loss provisions are used with interest calculated on the gross carrying amount of the receivable balance. Where objective evidence of impairment exists, interest is calculated on the carrying amount, net of the impairment. At December 31, 2018, there were no material changes to the credit risk on lease receivables. There was no impact to the classification of the Company’s financial assets from the adoption of IFRS 9. Gibson Energy Inc. 35 Management’s Discussion and Analysis Gibson Energy Inc. 36 Management’s Discussion and Analysis 37 Management’s Discussion and Analysis Gibson Energy RISK FACTORS Shareholders and prospective investors should carefully consider the risk factors noted below before investing in Gibson securities, as each of these risks may negatively affect the trading price of Gibson securities, the amount of dividends paid to shareholders and the ability of Gibson to fund its debt obligations, including debt obligations under its outstanding Debentures and any other debt securities that Gibson may issue from time to time. For a further discussion of the risks identified in this MD&A, other risks and trends that could affect Gibson performance and the steps that Gibson takes to mitigate these risks, readers are referred to Gibson AIF, which is available on SEDAR at www.sedar.com. Reputation Hazards and Operational Risks The Company’s operations are subject to the many hazards inherent in the transportation, storage, processing, treating and distribution of crude oil, NGLs and petroleum products, including: explosions, fires and accidents, including road and rail accidents; damage to the Company’s tanker trucks, pipelines, storage tanks, terminals and related equipment; ruptures, leaks or releases of crude oil or petroleum products into the environment; acts of terrorism or vandalism; and other accident or hazards that may occur at or during transport to, or from, commercial or industrial sites. If any of these events were to occur, the Company could suffer substantial losses because of the resulting impact on the Company’s reputation, personal injury or loss of life, severe damage to and destruction of property, equipment, information technology systems, related data and control systems, environmental damage, which may include polluting water, land or air, resulting in curtailment or suspension of the related operations. Mechanical malfunctions, faulty measurement or other errors may also result in significant costs or lost revenues. Market and Commodity Price Risk The Company’s business includes activities related to product storage, terminalling and hub services. These activities expose the Company to certain risks including that the Company may experience volatility in revenue and impairments related to the book value of stored product, due to the fluctuations in commodity prices. Primarily, the Company enters into contracts to purchase and sell crude oil, NGLs and refined products at floating market prices. The prices of the products that are marketed by the Company are subject to volatility as a result of factors such as seasonal demand changes, extreme weather conditions, market inventory levels, general economic conditions, changes in crude oil markets and other factors. The Company manages its risk exposure by balancing purchases and sales to lock-in margins; however, the Company may not be successful in balancing its purchases and sales. Also, in certain situations, a producer or supplier could fail to deliver contracted volumes or could deliver in excess of contracted volumes or a purchaser could purchase less than contracted volumes. Any of these actions could cause the Company’s purchases and sales to be unbalanced. While the Company attempts to balance its purchases and sales, if its purchases and sales are unbalanced, the Company will face increased exposure to commodity price risks and could have increased volatility in its operating income and cash flow. Notwithstanding the Company’s management of price and quality risk, marketing margins for commodities can vary and have varied significantly from period to period. This variability could have an adverse effect on the results of the Company. Since crude oil margins can be earned by capturing spreads between different qualities of crude oil, the Company’s crude oil marketing business is subject to volatility in price differentials between crude oil streams and blending agents. Due to this volatility, the Company’s margins and profitability can vary significantly. The Company expects that commodity prices will continue to fluctuate significantly in the future. The Company utilizes financial derivative instruments as part of its overall risk management strategy to assist in managing the exposure to commodity prices, as well as interest rates and foreign exchange risks. For example, as NGL and refined product prices are somewhat related to the price of crude oil, crude oil financial contracts are one of the more common price risk management strategies that the Company uses. Also, with respect to crude oil, the Company manages its exposure using WTI based futures, options and swaps. These strategies are subject to basis risk between the prices of crude oil streams, WTI, NGL and refined product values and, therefore, may not fully offset future price movements. Furthermore, there is no guarantee that these strategies and other efforts to manage marketing and inventory risks will generate profits or mitigate all the market and inventory risk associated with these activities. If the Company utilizes price risk management strategies, the Company may forego the benefits that may otherwise be experienced if commodity prices were to increase. In addition, any non-compliance with the Company’s trading policies could result in significantly adverse financial effects. To the extent that the Company engages in these kinds of Management’s Discussion and Analysis Gibson Energy Inc. 37 Management’s Discussion and Analysis Gibson Energy 38 activities, the Company is also subject to credit risks associated with counterparties with whom the Company has contracts. The Company does not trade financial instruments for speculative purposes. The Company relies on its reputation to build and maintain positive relationships with its stakeholders, to recruit and retain staff, and to be a credible, trusted company. Reputational risk is the potential for negative impacts that could result from the deterioration of the Company’s reputation with key stakeholders. The potential for harming the Company’s corporate reputation exists in every business decision and public interaction, which in turn can negatively impact the Company’s business and its securities. Reputational risk cannot be managed in isolation from other forms of risk. Credit, market, operational, insurance, liquidity, regulatory, environmental and legal risks must all be managed effectively to safeguard the Company’s reputation. Negative impacts from a compromised reputation could include revenue loss, reduction in customer base and diminution of share price. Decommissioning, Abandonment and Reclamation Costs The Company is responsible for compliance with all applicable laws and regulations regarding the decommissioning, abandonment and reclamation of the Company’s facilities and pipelines at the end of their economic life, the costs of which may be substantial. It is not possible to predict these costs with certainty since they will be a function of regulatory requirements at the time of decommissioning, abandonment and reclamation. The Company may, in the future, be required by applicable laws or regulations to establish and fund one or more decommissioning, abandonment and reclamation reserve funds to provide for payment of future decommissioning, abandonment and reclamation costs, which could decrease funds available to the Company to execute its business plan and service its debt obligations. In addition, such reserves, if established, may not be sufficient to satisfy such future decommissioning, abandonment and reclamation costs and the Company will be responsible for the payment of the balance of such costs. Legislative and Regulatory Changes The Company’s industry is highly regulated. There can be no guarantee that laws and other government programs relating to the oil and gas industry, the energy services industry and the transportation industry will not be changed in a manner which directly and adversely affects the Company’s business. There can also be no assurance that the laws, regulations or rules governing the Company’s customers will not be changed in a manner which adversely affects the Company’s customers and, therefore, the Company’s business. In addition, the Company’s pipelines and facilities are potentially subject to common carrier and common processor applications and to rate setting by regulatory authorities in the event agreement on fees or tariffs cannot be reached with producers. To the extent that producers believe processing fees or tariffs with respect to pipelines and facilities are too high, they may seek rate relief through regulatory means. If regulations were passed lowering or capping the Company’s rates and tariffs, the Company’s results of operations and cash flows could be adversely affected. Petroleum products that the Company stores and transports are sold by the Company’s customers for consumption into the public market. Various federal, provincial, state and local agencies have the authority to prescribe specific product quality specifications for commodities sold into the public market. Changes in product quality specifications or blending requirements could reduce the Company’s throughput volume, require the Company to incur additional handling costs or require capital expenditures. For instance, different product specifications for different markets impact the fungibility of the products in the Company’s system and could require the construction of additional storage. If the Company is unable to recover these costs through increased revenues, the Company’s cash flows could be adversely affected. In addition, changes in the quality of the products the Company receives on its petroleum products pipeline system could reduce or eliminate the Company’s ability to blend products. The Company’s cross-border activities are subject to additional regulation, including import and export licenses, tariffs, Canadian and U.S. customs and tax issues and toxic substance certifications. Such regulations include the Short Supply Controls of the Export Administration Act, the United States-Mexico-Canada Agreement, the Toxic Substances Control Act and the Canadian Environmental Protection Act, 1999. Violations of these licensing, tariff and tax reporting requirements could result in the imposition of significant administrative, civil and criminal penalties. In addition, local, consumption and income tax laws relating to the Company may be changed in a manner which adversely affects the Company. Gibson Energy Inc. 38 Management’s Discussion and Analysis RISK FACTORS Shareholders and prospective investors should carefully consider the risk factors noted below before investing in Gibson securities, as each of these risks may negatively affect the trading price of Gibson securities, the amount of dividends paid to shareholders and the ability of Gibson to fund its debt obligations, including debt obligations under its outstanding Debentures and any other debt securities that Gibson may issue from time to time. For a further discussion of the risks identified in this MD&A, other risks and trends that could affect Gibson performance and the steps that Gibson takes to mitigate these risks, readers are referred to Gibson AIF, which is available on SEDAR at www.sedar.com. Hazards and Operational Risks The Company’s operations are subject to the many hazards inherent in the transportation, storage, processing, treating and distribution of crude oil, NGLs and petroleum products, including: explosions, fires and accidents, including road and rail accidents; damage to the Company’s tanker trucks, pipelines, storage tanks, terminals and related equipment; ruptures, leaks or releases of crude oil or petroleum products into the environment; acts of terrorism or vandalism; and other accident or hazards that may occur at or during transport to, or from, commercial or industrial sites. If any of these events were to occur, the Company could suffer substantial losses because of the resulting impact on the Company’s reputation, personal injury or loss of life, severe damage to and destruction of property, equipment, information technology systems, related data and control systems, environmental damage, which may include polluting water, land or air, resulting in curtailment or suspension of the related operations. Mechanical malfunctions, faulty measurement or other errors may also result in significant costs or lost revenues. Market and Commodity Price Risk The Company’s business includes activities related to product storage, terminalling and hub services. These activities expose the Company to certain risks including that the Company may experience volatility in revenue and impairments related to the book value of stored product, due to the fluctuations in commodity prices. Primarily, the Company enters into contracts to purchase and sell crude oil, NGLs and refined products at floating market prices. The prices of the products that are marketed by the Company are subject to volatility as a result of factors such as seasonal demand changes, extreme weather conditions, market inventory levels, general economic conditions, changes in crude oil markets and other factors. The Company manages its risk exposure by balancing purchases and sales to lock-in margins; however, the Company may not be successful in balancing its purchases and sales. Also, in certain situations, a producer or supplier could fail to deliver contracted volumes or could deliver in excess of contracted volumes or a purchaser could purchase less than contracted volumes. Any of these actions could cause the Company’s purchases and sales to be unbalanced. While the Company attempts to balance its purchases and sales, if its purchases and sales are unbalanced, the Company will face increased exposure to commodity price risks and could have increased volatility in its operating income and cash flow. Notwithstanding the Company’s management of price and quality risk, marketing margins for commodities can vary and have varied significantly from period to period. This variability could have an adverse effect on the results of the Company. Since crude oil margins can be earned by capturing spreads between different qualities of crude oil, the Company’s crude oil marketing business is subject to volatility in price differentials between crude oil streams and blending agents. Due to this volatility, the Company’s margins and profitability can vary significantly. The Company expects that commodity prices will continue to fluctuate significantly in the future. The Company utilizes financial derivative instruments as part of its overall risk management strategy to assist in managing the exposure to commodity prices, as well as interest rates and foreign exchange risks. For example, as NGL and refined product prices are somewhat related to the price of crude oil, crude oil financial contracts are one of the more common price risk management strategies that the Company uses. Also, with respect to crude oil, the Company manages its exposure using WTI based futures, options and swaps. These strategies are subject to basis risk between the prices of crude oil streams, WTI, NGL and refined product values and, therefore, may not fully offset future price movements. Furthermore, there is no guarantee that these strategies and other efforts to manage marketing and inventory risks will generate profits or mitigate all the market and inventory risk associated with these activities. If the Company utilizes price risk management strategies, the Company may forego the benefits that may otherwise be experienced if commodity prices were to increase. In addition, any non-compliance with the Company’s trading policies could result in significantly adverse financial effects. To the extent that the Company engages in these kinds of Gibson Energy Inc. 37 Management’s Discussion and Analysis activities, the Company is also subject to credit risks associated with counterparties with whom the Company has contracts. The Company does not trade financial instruments for speculative purposes. Reputation The Company relies on its reputation to build and maintain positive relationships with its stakeholders, to recruit and retain staff, and to be a credible, trusted company. Reputational risk is the potential for negative impacts that could result from the deterioration of the Company’s reputation with key stakeholders. The potential for harming the Company’s corporate reputation exists in every business decision and public interaction, which in turn can negatively impact the Company’s business and its securities. Reputational risk cannot be managed in isolation from other forms of risk. Credit, market, operational, insurance, liquidity, regulatory, environmental and legal risks must all be managed effectively to safeguard the Company’s reputation. Negative impacts from a compromised reputation could include revenue loss, reduction in customer base and diminution of share price. Decommissioning, Abandonment and Reclamation Costs The Company is responsible for compliance with all applicable laws and regulations regarding the decommissioning, abandonment and reclamation of the Company’s facilities and pipelines at the end of their economic life, the costs of which may be substantial. It is not possible to predict these costs with certainty since they will be a function of regulatory requirements at the time of decommissioning, abandonment and reclamation. The Company may, in the future, be required by applicable laws or regulations to establish and fund one or more decommissioning, abandonment and reclamation reserve funds to provide for payment of future decommissioning, abandonment and reclamation costs, which could decrease funds available to the Company to execute its business plan and service its debt obligations. In addition, such reserves, if established, may not be sufficient to satisfy such future decommissioning, abandonment and reclamation costs and the Company will be responsible for the payment of the balance of such costs. Legislative and Regulatory Changes The Company’s industry is highly regulated. There can be no guarantee that laws and other government programs relating to the oil and gas industry, the energy services industry and the transportation industry will not be changed in a manner which directly and adversely affects the Company’s business. There can also be no assurance that the laws, regulations or rules governing the Company’s customers will not be changed in a manner which adversely affects the Company’s customers and, therefore, the Company’s business. In addition, the Company’s pipelines and facilities are potentially subject to common carrier and common processor applications and to rate setting by regulatory authorities in the event agreement on fees or tariffs cannot be reached with producers. To the extent that producers believe processing fees or tariffs with respect to pipelines and facilities are too high, they may seek rate relief through regulatory means. If regulations were passed lowering or capping the Company’s rates and tariffs, the Company’s results of operations and cash flows could be adversely affected. Petroleum products that the Company stores and transports are sold by the Company’s customers for consumption into the public market. Various federal, provincial, state and local agencies have the authority to prescribe specific product quality specifications for commodities sold into the public market. Changes in product quality specifications or blending requirements could reduce the Company’s throughput volume, require the Company to incur additional handling costs or require capital expenditures. For instance, different product specifications for different markets impact the fungibility of the products in the Company’s system and could require the construction of additional storage. If the Company is unable to recover these costs through increased revenues, the Company’s cash flows could be adversely affected. In addition, changes in the quality of the products the Company receives on its petroleum products pipeline system could reduce or eliminate the Company’s ability to blend products. The Company’s cross-border activities are subject to additional regulation, including import and export licenses, tariffs, Canadian and U.S. customs and tax issues and toxic substance certifications. Such regulations include the Short Supply Controls of the Export Administration Act, the United States-Mexico-Canada Agreement, the Toxic Substances Control Act and the Canadian Environmental Protection Act, 1999. Violations of these licensing, tariff and tax reporting requirements could result in the imposition of significant administrative, civil and criminal penalties. In addition, local, consumption and income tax laws relating to the Company may be changed in a manner which adversely affects the Company. Gibson Energy Gibson Energy Inc. 38 Management’s Discussion and Analysis Management’s Discussion and Analysis 39 Capital Project Delivery and Success The Company has a number of organic growth projects that require the expenditure of significant amounts of capital. Many of these projects involve numerous regulatory, environmental, commercial, weather-related, political and legal uncertainties that will be beyond the Company’s control. As these projects are undertaken, required regulatory and other approvals may not be obtained, may be delayed or may be obtained with conditions that materially alter the expected return associated with the underlying projects. Moreover, the Company will incur financing costs during the planning and construction phases of its growth projects, but the operating cash flow the Company expects these projects to generate will not materialize until after the projects are completed. These projects may be completed behind schedule or in excess of budgeted cost. For example, the Company must compete with other companies for the materials and construction services required to complete these projects, and competition for these materials or services could result in significant delays and/or cost overruns. Any such cost overruns, or unanticipated delays in the completion or commercial development of these projects, could reduce the Company’s liquidity. The Company may construct facilities or other assets in anticipation of market demand that dissipates during the intervening period between project conception and delivery to market or never materializes. As a result of these uncertainties, the anticipated benefits associated with the Company’s capital projects may not be lower than expected. Regulatory Approvals The Company’s operations require it to obtain approvals from various regulatory authorities and there are no guarantees that it will be able to obtain all necessary licenses, permits and other approvals that may be required to conduct its business. In addition, obtaining certain approvals from regulatory authorities can involve, among other things, stakeholder and Aboriginal consultation, environmental impact assessments and public hearings. Regulatory approvals obtained may be subject to the satisfaction of certain conditions, including, but not limited to: security deposit obligations; ongoing regulatory oversight of projects; mitigating or avoiding project impacts; habitat assessments; and other commitments or obligations. Failure to obtain applicable regulatory approvals or satisfy any of the conditions thereto on a timely basis on satisfactory terms could result in delays, abandonment or restructuring of projects and increased costs. Environmental and Health and Safety Regulations Each of the Company’s segments is subject to the risk of incurring substantial costs and liabilities under environmental and health and safety laws and regulations. These costs and liabilities arise under increasingly stringent environmental and health and safety laws, including regulations and governmental enforcement policies and legislation, and as a result of third party claims for damages to property or persons arising from the Company’s operations. Environmental laws and regulations impose, among other things, restrictions, liabilities and obligations in connection with the generation, handling, storage, transportation, treatment and disposal of hazardous substances and waste and in connection with spills, releases and emissions of various substances into the environment. Environmental laws and regulations also require that pipelines, facilities and other properties associated with the Company’s operations be constructed, operated, maintained, abandoned and reclaimed to the satisfaction of applicable regulatory authorities. Health and safety laws and regulations impose, among other things, requirements designed to ensure the protection of workers and to limit the exposure of persons to certain hazardous substances. In addition, certain types of projects may be required to submit and obtain approval of environmental impact assessments, to obtain and maintain environmental permits and approvals and to implement mitigative measures prior to the implementation of such projects. Failure to comply with environmental and health and safety laws and regulations, including related permits and approvals, may result in assessment of administrative, civil and criminal penalties, the issuance of regulatory or judicial orders, the imposition of remedial obligations such as clean-up and site restoration requirements, the payment of deposits, liens, the amendment, suspension or revocation of permits and approvals and the potential issuance of injunctions to limit or cease operations. If the Company were unable to recover these costs through increased revenues, the Company’s ability to meet its financial obligations could be adversely affected. Some of the Company’s facilities have been used for many years to transport, distribute or store petroleum products. Over time the Company’s operations, or operations by the Company’s predecessors or third parties not under the Company’s control, may have resulted in the disposal or release of hydrocarbons or wastes at or from these properties upon which the facilities are situated or along over pipeline rights-of-way. In addition, some of the Company’s facilities are located on or near current or former refining and Management’s Discussion and Analysis Gibson Energy Inc. 39 Management’s Discussion and Analysis Gibson Energy 40 terminal sites, and there is a risk that contamination is present on those sites. The Company may be subject to strict joint and several liability under a number of these environmental laws and regulations for such disposal and releases of hydrocarbons or wastes or the existence of contamination, even in circumstances where such activities or conditions were caused by third parties not under the Company’s control or were otherwise lawful at the time they occurred. Further, the transportation of hazardous materials and/or other substances in the Company’s pipelines or by truck or rail may result in environmental damage, including accidental releases that may cause death or injuries to humans, damage to third parties and natural resources, and/or result in federal and/or provincial civil and/or criminal penalties that could be material to the Company’s results of operations and cash flow. The Company engages in operations which handle hazardous materials. As a result of these and other activities, the segment is subject to a variety of federal, state, local and foreign laws and regulations relating to the generation, transport, use handling, storage, treatment and exposure to and disposal of these materials, including record keeping, reporting and registration requirements. The Company has incurred and expects to continue to incur expenditures to maintain compliance with environmental laws and regulations. Moreover, some or all of the environmental laws and regulations to which the Company is subject could become more stringent or be more stringently enforced in the future. Its failure to comply with applicable environmental laws and regulations and permit requirements could result in civil or criminal fines or penalties or enforcement actions, including regulatory or judicial orders enjoining or curtailing operations or requiring corrective measures or remedial actions. Certain environmental laws, including the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) and comparable state laws in the U.S., impose joint and several liability, without regard to fault or legality of the operations, on certain categories of persons, including current and prior owners or operators of a facility where there is a release or threatened release of hazardous substances, transporters of hazardous substances and entities that arranged for disposal of the hazardous substances at the site. Under CERCLA, these “responsible persons” may be held jointly and severally liable for the costs of cleaning up the hazardous substances, as well as for damages to natural resources and for the costs of certain health studies, relocation expenses and other response costs. CERCLA generally exempts “petroleum” from the definition of hazardous substance; however, in the course of the Company’s operations, the Company has accepted, handled, transported and/or generated materials that are considered “hazardous substances.” Further, hazardous substances or hazardous wastes may have been released at properties owned or leased by the Company now or in the past, or at other locations where these substances or wastes were taken for treatment or disposal. Given the nature of the Company’s environmental services business, it has incurred, and will in the future periodically incur, liabilities under CERCLA or other environmental cleanup laws, at its current or former facilities, adjacent or nearby third party facilities, or offsite disposal locations. There can be no assurance that the costs associated with future cleanup activities that the Company may be required to conduct or finance will not be material. Additionally, the Company may become liable to third parties for damages, including personal injury and property damage, resulting from the disposal or release of hazardous substances into the environment. Failure to comply with environmental regulations could have an adverse impact on the Company’s reputation. There is also risk that the Company could face litigation initiated by third parties relating to climate change or other environmental regulations. Demand for Crude Oil and Petroleum Products Any sustained decrease in demand for crude oil and petroleum products in the markets the Company serves could result in a significant reduction in the volume of products and services that the Company provides and thereby could significantly reduce cash flow and revenues. Factors that could lead to a decrease in market demand include: lower demand by consumers for refined products, including asphalt and wellsite fluids, as a result of recession or other adverse economic conditions or due to high prices caused by an increase in the market price of crude oil, which is subject to wide fluctuations in response to changes in global and regional supply over which the Company has no control; an increase in fuel economy, whether as a result of a shift by consumers to more fuel-efficient vehicles, technological advances by manufacturers, governmental or regulatory actions or otherwise; provincial, state and federal legislation either already in place or under development requiring the inclusion of ethanol and use of biodiesel which may negatively affect the overall demand for crude oil products; Gibson Energy Inc. 40 Management’s Discussion and Analysis Capital Project Delivery and Success The Company has a number of organic growth projects that require the expenditure of significant amounts of capital. Many of these projects involve numerous regulatory, environmental, commercial, weather-related, political and legal uncertainties that will be beyond the Company’s control. As these projects are undertaken, required regulatory and other approvals may not be obtained, may be delayed or may be obtained with conditions that materially alter the expected return associated with the underlying projects. Moreover, the Company will incur financing costs during the planning and construction phases of its growth projects, but the operating cash flow the Company expects these projects to generate will not materialize until after the projects are completed. These projects may be completed behind schedule or in excess of budgeted cost. For example, the Company must compete with other companies for the materials and construction services required to complete these projects, and competition for these materials or services could result in significant delays and/or cost overruns. Any such cost overruns, or unanticipated delays in the completion or commercial development of these projects, could reduce the Company’s liquidity. The Company may construct facilities or other assets in anticipation of market demand that dissipates during the intervening period between project conception and delivery to market or never materializes. As a result of these uncertainties, the anticipated benefits associated with the Company’s capital projects may not be lower than expected. Regulatory Approvals terminal sites, and there is a risk that contamination is present on those sites. The Company may be subject to strict joint and several liability under a number of these environmental laws and regulations for such disposal and releases of hydrocarbons or wastes or the existence of contamination, even in circumstances where such activities or conditions were caused by third parties not under the Company’s control or were otherwise lawful at the time they occurred. Further, the transportation of hazardous materials and/or other substances in the Company’s pipelines or by truck or rail may result in environmental damage, including accidental releases that may cause death or injuries to humans, damage to third parties and natural resources, and/or result in federal and/or provincial civil and/or criminal penalties that could be material to the Company’s results of operations and cash flow. The Company engages in operations which handle hazardous materials. As a result of these and other activities, the segment is subject to a variety of federal, state, local and foreign laws and regulations relating to the generation, transport, use handling, storage, treatment and exposure to and disposal of these materials, including record keeping, reporting and registration requirements. The Company has incurred and expects to continue to incur expenditures to maintain compliance with environmental laws and regulations. Moreover, some or all of the environmental laws and regulations to which the Company is subject could become more stringent or be more stringently enforced in the future. Its failure to comply with applicable environmental laws and regulations and permit requirements could result in civil or criminal fines or penalties or enforcement actions, including regulatory or judicial orders enjoining or curtailing operations or requiring corrective measures or remedial actions. The Company’s operations require it to obtain approvals from various regulatory authorities and there are no guarantees that it will be able to obtain all necessary licenses, permits and other approvals that may be required to conduct its business. In addition, obtaining certain approvals from regulatory authorities can involve, among other things, stakeholder and Aboriginal consultation, environmental impact assessments and public hearings. Regulatory approvals obtained may be subject to the satisfaction of certain conditions, including, but not limited to: security deposit obligations; ongoing regulatory oversight of projects; mitigating or avoiding project impacts; habitat assessments; and other commitments or obligations. Failure to obtain applicable regulatory approvals or satisfy any of the conditions thereto on a timely basis on satisfactory terms could result in delays, abandonment or restructuring of Certain environmental laws, including the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) and comparable state laws in the U.S., impose joint and several liability, without regard to fault or legality of the operations, on certain categories of persons, including current and prior owners or operators of a facility where there is a release or threatened release of hazardous substances, transporters of hazardous substances and entities that arranged for disposal of the hazardous substances at the site. Under CERCLA, these “responsible persons” may be held jointly and severally liable for the costs of cleaning up the hazardous substances, as well as for damages to natural resources and for the costs of certain health studies, relocation expenses and other response costs. CERCLA generally exempts “petroleum” from the definition of hazardous substance; however, in the course of the Company’s operations, the Company has accepted, handled, transported and/or generated materials that are considered “hazardous substances.” Further, hazardous substances or hazardous wastes may have been released at properties owned or leased by the Company now or in the past, or at other locations where these substances or wastes were taken for treatment or disposal. Given the nature of the Company’s environmental services business, it has incurred, and will in the future periodically incur, liabilities under CERCLA or other environmental cleanup laws, at its current or former facilities, adjacent or nearby third party facilities, or offsite disposal locations. There can be no assurance that the costs associated with future cleanup activities that the Company may be required to conduct or finance will not be material. Additionally, the Company may become liable to third parties for damages, including personal injury and property damage, resulting from the disposal or release of hazardous substances into the environment. Failure to comply with environmental regulations could have an adverse impact on the Company’s reputation. There is also risk that the Company could face litigation initiated by third parties relating to climate change or other environmental regulations. and obtain approval of environmental impact assessments, to obtain and maintain environmental permits and approvals and to Demand for Crude Oil and Petroleum Products implement mitigative measures prior to the implementation of such projects. Any sustained decrease in demand for crude oil and petroleum products in the markets the Company serves could result in a significant reduction in the volume of products and services that the Company provides and thereby could significantly reduce cash flow and revenues. Factors that could lead to a decrease in market demand include: lower demand by consumers for refined products, including asphalt and wellsite fluids, as a result of recession or other adverse economic conditions or due to high prices caused by an increase in the market price of crude oil, which is subject to wide fluctuations in response to changes in global and regional supply over which the Company has no control; an increase in fuel economy, whether as a result of a shift by consumers to more fuel-efficient vehicles, technological advances by manufacturers, governmental or regulatory actions or otherwise; provincial, state and federal legislation either already in place or under development requiring the inclusion of ethanol and use of biodiesel which may negatively affect the overall demand for crude oil products; projects and increased costs. Environmental and Health and Safety Regulations Each of the Company’s segments is subject to the risk of incurring substantial costs and liabilities under environmental and health and safety laws and regulations. These costs and liabilities arise under increasingly stringent environmental and health and safety laws, including regulations and governmental enforcement policies and legislation, and as a result of third party claims for damages to property or persons arising from the Company’s operations. Environmental laws and regulations impose, among other things, restrictions, liabilities and obligations in connection with the generation, handling, storage, transportation, treatment and disposal of hazardous substances and waste and in connection with spills, releases and emissions of various substances into the environment. Environmental laws and regulations also require that pipelines, facilities and other properties associated with the Company’s operations be constructed, operated, maintained, abandoned and reclaimed to the satisfaction of applicable regulatory authorities. Health and safety laws and regulations impose, among other things, requirements designed to ensure the protection of workers and to limit the exposure of persons to certain hazardous substances. In addition, certain types of projects may be required to submit Failure to comply with environmental and health and safety laws and regulations, including related permits and approvals, may result in assessment of administrative, civil and criminal penalties, the issuance of regulatory or judicial orders, the imposition of remedial obligations such as clean-up and site restoration requirements, the payment of deposits, liens, the amendment, suspension or revocation of permits and approvals and the potential issuance of injunctions to limit or cease operations. If the Company were unable to recover these costs through increased revenues, the Company’s ability to meet its financial obligations could be adversely affected. Some of the Company’s facilities have been used for many years to transport, distribute or store petroleum products. Over time the Company’s operations, or operations by the Company’s predecessors or third parties not under the Company’s control, may have resulted in the disposal or release of hydrocarbons or wastes at or from these properties upon which the facilities are situated or along over pipeline rights-of-way. In addition, some of the Company’s facilities are located on or near current or former refining and Gibson Energy Inc. 39 Management’s Discussion and Analysis Gibson Energy Inc. 40 Management’s Discussion and Analysis 41 Management’s Discussion and Analysis Gibson Energy lower demand by the oil and gas drilling industry for products such as drilling mud additives and for wellsite fluids as a result of legislation regulating hydraulic fracturing currently being considered by the U.S. Congress, a number of U.S. states and the Province of Quebec; technological advances in the production and longevity of fuel cells and solar, electric and battery-powered engines; and fluctuations in demand for crude oil, such as those caused by refinery downtime or shutdowns. The Company cannot predict and does not have control over the impact of future economic and political conditions on the energy and petrochemical industries, which, in turn, could affect the demand for crude oil and petroleum products. As a result of decreased demand, the Company may experience a decrease in the Company’s margins and profitability. FORWARD-LOOKING INFORMATION Certain statements contained in this MD&A constitute forward-looking information, as such term is defined under applicable Canadian securities laws (“forward-looking information”). These statements relate to future events or the Company’s future performance. All statements other than statements of historical fact are forward-looking information. The use of any of the words ‘‘anticipate’’, ‘‘plan’’, ‘‘contemplate’’, ‘‘continue’’, “aim”, “target”, “must”, “commit”, ‘‘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 information. 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 information. No assurance can be given that these expectations will prove to be correct and such forward-looking information 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 information pertaining to the following: • • • • • • • • • • • • • • • • • • • • • • • the realization of perceived benefits and ability to close the sale of assets and businesses as per the Company’s plans; the timing, the amount of proceeds from sale of non-core businesses, the closing thereof, along with the execution of planned capital programs; achieving the targets including but not limited to segment profits, payout ratio and leverage ratio as discussed under the strategy section; the addition or disposition of assets and changes in the services to be offered by the Company; the Company’s projections relating to target segment profit, distributable cash flow, distributable cash flow per share, and total cash flow; the Company’s projections relating to target leverage and payout ratios; the Company's investment in new equipment, technology, facilities and personnel; the Company's growth strategy to expand in existing and new markets including the anticipated benefits from the Company’s basin strategy; 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 transactions, including the costs thereof; in-service dates for new storage capacity and new projects 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 with respect to the adoption and implementation of new accounting standards and policies; Management’s Discussion and Analysis Gibson Energy Inc. 41 Management’s Discussion and Analysis Gibson Energy 42 • • • • • • • • • • • • • • • • • • the realization of anticipated benefits from the implementation of cost saving measures; the Company’s projections of dividends; and the Company's dividend policy. With respect to forward-looking information 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; manner; 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 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 future debt levels; the impact of increasing competition on the Company; the Company's ability to obtain financing for its capital programs on acceptable terms; the impact of future changes in accounting policies on the Company’s consolidated financial statements; the Company’s ability to successfully implement the plans and programs disclosed in the Company’s new strategy; the Company’s ability to divest of its non-core businesses on acceptable terms, and the timing therefore; and the Company’s ability to transition to a focused oil infrastructure growth company. In addition, this MD&A may contain forward-looking information attributed to third party industry sources. The Company does not undertake any obligations to publicly update or revise any forward-looking information except as required by applicable Canadian securities laws. Actual results could differ materially from those anticipated in forward-looking information as a result of numerous risks and uncertainties including, but not limited to, the risks and uncertainties described in “Forward-Looking Information” and “Risk Factors” included in the Company’s Annual Information Form dated March 4, 2019 as filed on SEDAR at www.sedar.com and available on the Gibson website at www.gibsonenergy.com. NON-GAAP FINANCIAL MEASURES This MD&A refers to certain financial measures that are not determined in accordance with IFRS. Combined Revenue, Combined Segment Profit, Adjusted EBITDA from continuing operations and discontinued operations, Adjusted EBITDA from combined operations, Pro Forma Adjusted EBITDA from continuing operations, Pro Forma Adjusted EBITDA from discontinued operations and combined operations, distributable cash flow from continued and combined operations are not measures recognized under IFRS and do not have standardized meanings prescribed by IFRS and, therefore, may not be comparable to similar measures reported by other entities. 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 “Results of Continuing Operations” and “Results of Discontinued Operations”” for a reconciliation of Segment Profit to net income (loss), the IFRS measure most directly comparable to Segment Profit. See “Summary of Quarterly Results” for a reconciliation of Adjusted EBITDA from continuing, discontinued, and combined operations to Segment Profit from continuing, discontinued and combined operations. Distributable cash flow from continuing and combined operations 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. Gibson Energy Inc. 42 Management’s Discussion and Analysis • • • the realization of anticipated benefits from the implementation of cost saving measures; the Company’s projections of dividends; and the Company's dividend policy. With respect to forward-looking information 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; 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; the impact of future changes in accounting policies on the Company’s consolidated financial statements; the Company’s ability to successfully implement the plans and programs disclosed in the Company’s new strategy; the Company’s ability to divest of its non-core businesses on acceptable terms, and the timing therefore; and the Company’s ability to transition to a focused oil infrastructure growth company. In addition, this MD&A may contain forward-looking information attributed to third party industry sources. The Company does not undertake any obligations to publicly update or revise any forward-looking information except as required by applicable Canadian securities laws. Actual results could differ materially from those anticipated in forward-looking information as a result of numerous risks and uncertainties including, but not limited to, the risks and uncertainties described in “Forward-Looking Information” and “Risk Factors” included in the Company’s Annual Information Form dated March 4, 2019 as filed on SEDAR at www.sedar.com and available on the Gibson website at www.gibsonenergy.com. the addition or disposition of assets and changes in the services to be offered by the Company; the Company’s projections relating to target segment profit, distributable cash flow, distributable cash flow per share, and total NON-GAAP FINANCIAL MEASURES This MD&A refers to certain financial measures that are not determined in accordance with IFRS. Combined Revenue, Combined Segment Profit, Adjusted EBITDA from continuing operations and discontinued operations, Adjusted EBITDA from combined operations, Pro Forma Adjusted EBITDA from continuing operations, Pro Forma Adjusted EBITDA from discontinued operations and combined operations, distributable cash flow from continued and combined operations are not measures recognized under IFRS and do not have standardized meanings prescribed by IFRS and, therefore, may not be comparable to similar measures reported by other entities. 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 “Results of Continuing Operations” and “Results of Discontinued Operations”” for a reconciliation of Segment Profit to net income (loss), the IFRS measure most directly comparable to Segment Profit. See “Summary of Quarterly Results” for a reconciliation of Adjusted EBITDA from continuing, discontinued, and combined operations to Segment Profit from continuing, discontinued and combined operations. Distributable cash flow from continuing and combined operations 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. lower demand by the oil and gas drilling industry for products such as drilling mud additives and for wellsite fluids as a result of legislation regulating hydraulic fracturing currently being considered by the U.S. Congress, a number of U.S. states and the Province of Quebec; technological advances in the production and longevity of fuel cells and solar, electric and battery-powered engines; and fluctuations in demand for crude oil, such as those caused by refinery downtime or shutdowns. The Company cannot predict and does not have control over the impact of future economic and political conditions on the energy and petrochemical industries, which, in turn, could affect the demand for crude oil and petroleum products. As a result of decreased demand, the Company may experience a decrease in the Company’s margins and profitability. FORWARD-LOOKING INFORMATION Certain statements contained in this MD&A constitute forward-looking information, as such term is defined under applicable Canadian securities laws (“forward-looking information”). These statements relate to future events or the Company’s future performance. All statements other than statements of historical fact are forward-looking information. The use of any of the words ‘‘anticipate’’, ‘‘plan’’, ‘‘contemplate’’, ‘‘continue’’, “aim”, “target”, “must”, “commit”, ‘‘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 information. 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 information. No assurance can be given that these expectations will prove to be correct and such forward-looking information 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 information pertaining to the following: the realization of perceived benefits and ability to close the sale of assets and businesses as per the Company’s plans; the timing, the amount of proceeds from sale of non-core businesses, the closing thereof, along with the execution of planned achieving the targets including but not limited to segment profits, payout ratio and leverage ratio as discussed under the strategy capital programs; section; cash flow; the Company’s projections relating to target leverage and payout ratios; the Company's investment in new equipment, technology, facilities and personnel; the Company's growth strategy to expand in existing and new markets including the anticipated benefits from the Company’s basin strategy; the availability of sufficient liquidity for planned growth; Company's operating areas; new technology and drilling methodology being deployed towards conventional and unconventional production within the 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 transactions, including the costs thereof; in-service dates for new storage capacity and new projects 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 with respect to the adoption and implementation of new accounting standards and policies; Gibson Energy Inc. 41 Management’s Discussion and Analysis • • • • • • • • • • • • • • • • • • • • • • • Gibson Energy Inc. 42 Management’s Discussion and Analysis 43 Management’s Discussion and Analysis Gibson Energy This page intentionally left blank Consolidated Financial Statements For the years ended December 31, 2018 and 2017 Consolidated Financial Statements For the years ended December 31, 2018 and 2017 Independent auditor’s report To the Shareholders of Gibson Energy Inc. Our opinion In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of Gibson Energy Inc. and its subsidiaries (together, the Company) as at December 31, 2018 and 2017, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards (IFRS). What we have audited The Company's consolidated financial statements comprise: the consolidated balance sheets as at December 31, 2018 and 2017; the consolidated statements of operations for the years then ended; the consolidated statements of comprehensive income (loss) for the years then ended; whether due to fraud or error. the consolidated statements of changes in equity for the years then ended; the consolidated statements of cash flows for the years then ended; and the notes to the consolidated financial statements, which include a summary of significant accounting policies. Basis for opinion We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada. We have fulfilled our other ethical responsibilities in accordance with these requirements. Other information Management is responsible for the other information. The other information comprises the Management's Discussion and Analysis and the information, other than the consolidated financial statements and our auditor's report thereon, included in the annual report. PricewaterhouseCoopers LLP 111 5th Avenue SW, Suite 3100, East Tower, Calgary, Alberta, Canada T2P 5L3 T: +1 403 509 7500, F: +1 403 781 1825, www.pwc.com/ca “PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership. Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of management and those charged with governance for the consolidated financial statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, In preparing the consolidated financial statements, management is responsible for assessing the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company’s financial reporting process. Auditor’s responsibilities for the audit of the consolidated financial statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Independent auditor’s report To the Shareholders of Gibson Energy Inc. Our opinion accounting policies. Basis for opinion opinion. Independence Other information In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of Gibson Energy Inc. and its subsidiaries (together, the Company) as at December 31, 2018 and 2017, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards (IFRS). What we have audited The Company's consolidated financial statements comprise: the consolidated balance sheets as at December 31, 2018 and 2017; the consolidated statements of operations for the years then ended; the consolidated statements of comprehensive income (loss) for the years then ended; the consolidated statements of changes in equity for the years then ended; the consolidated statements of cash flows for the years then ended; and the notes to the consolidated financial statements, which include a summary of significant We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada. We have fulfilled our other ethical responsibilities in accordance with these requirements. Management is responsible for the other information. The other information comprises the Management's Discussion and Analysis and the information, other than the consolidated financial statements and our auditor's report thereon, included in the annual report. PricewaterhouseCoopers LLP 111 5th Avenue SW, Suite 3100, East Tower, Calgary, Alberta, Canada T2P 5L3 T: +1 403 509 7500, F: +1 403 781 1825, www.pwc.com/ca “PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership. Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of management and those charged with governance for the consolidated financial statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS, 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. In preparing the consolidated financial statements, management is responsible for assessing the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company’s financial reporting process. Auditor’s responsibilities for the audit of the consolidated financial statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit 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 Company’s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Company to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. The engagement partner on the audit resulting in this independent auditor’s report is Khurram Asghar. Chartered Professional Accountants Calgary, Alberta March 4, 2019 Gibson Energy Inc. Consolidated Balance Sheets (tabular amounts in thousands of Canadian dollars, except per share amounts) Assets Current assets Cash and cash equivalents .............................................................................................. $ 95,301 $ Trade and other receivables (note 5) ............................................................................... 95959595,30195 283,816 As at December 31, 2018 2017 Inventories (note 6) .......................................................................................................... Income taxes receivable ................................................................................................... Prepaid and other assets .................................................................................................. Net investment in finance leases (note 7) ....................................................................... Assets held for sale (note 8) ............................................................................................. Total current assets .......................................................................................................... Non-current assets Property, plant and equipment (note 10) ........................................................................ Right-of-use assets (note 11) ........................................................................................... Long-term prepaid and other assets (note 12) ................................................................ Net investment in finance leases (note 7) ....................................................................... Deferred income tax assets (note 22) .............................................................................. Intangible assets (note 13) ............................................................................................... Goodwill (note 14) ........................................................................................................... Total non-current assets .................................................................................................. 2,122,618 Total assets ............................................................................................................................. $ 2,809,576 2,236,107 $ 2,964,434 Liabilities Current liabilities Trade payables and accrued charges (note 18) ............................................................... $ 365,410 $ 500,662 Income taxes payables ..................................................................................................... Dividends payable (note 21) ............................................................................................ Deferred revenue ............................................................................................................. Contract liabilities (note 4) ............................................................................................... Lease liabilities – current portion (note 16) ..................................................................... Liabilities related to assets held for sale (note 8) ............................................................ Total current liabilities ..................................................................................................... Non-current liabilities Lease liabilities – non-current portion (note 16).............................................................. Convertible debentures (note 17) .................................................................................... Provisions (note 19) ......................................................................................................... Other long-term liabilities (note 20) ................................................................................ Deferred income tax liabilities (note 22).......................................................................... Long-term debt (note 15) ................................................................................................. 1,039,578 1,118,119 Total non-current liabilities .............................................................................................. 1,461,685 1,498,900 Total liabilities .................................................................................................................. $ 2,051,346 $ 2,053,832 Equity Share capital (note 21) ..................................................................................................... 1,955,146 Contributed surplus ......................................................................................................... Accumulated other comprehensive income .................................................................... Convertible debentures (note 17) .................................................................................... Deficit ............................................................................................................................... Total equity ...................................................................................................................... 44,461 41,650 7,023 (1,290,050) 758,230 1,932,103 48,706 174,186 7,023 (1,251,416) 910,602 Total liabilities and equity ...................................................................................................... $ 2,809,576 $ 2,964,434 Commitments and contingencies (note 31) See accompanying notes to the consolidated financial statements Approved by the Board of Directors: (signed) “James M. Estey” James M. Estey (Director) (signed) “Marshall L. McRae” Marshall L. McRae (Director) 1 1,424,211 1,619,688 85,629 - 11,618 1,156 209,438 686,958 99,180 4,803 154,206 35,874 41,996 362,348 66,083 47,704 - 15,451 36,200 58,813 589,661 72,871 92,466 162,811 16,319 77,640 32,138 494,901 169,957 11,102 18,401 1,828 728,327 7,364 118,020 75,221 33,849 381,965 47,257 7,013 554,932 89,919 183,527 6,512 100,823 - - - - - - - Obtain an understanding of internal control relevant to the audit 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 Company’s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Company to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. The engagement partner on the audit resulting in this independent auditor’s report is Khurram Asghar. Chartered Professional Accountants Calgary, Alberta March 4, 2019 Gibson Energy Inc. Consolidated Balance Sheets (tabular amounts in thousands of Canadian dollars, except per share amounts) As at December 31, 2018 2017 Assets Current assets Cash and cash equivalents .............................................................................................. Trade and other receivables (note 5) ............................................................................... Inventories (note 6) .......................................................................................................... Income taxes receivable ................................................................................................... Prepaid and other assets .................................................................................................. Net investment in finance leases (note 7) ....................................................................... Assets held for sale (note 8) ............................................................................................. Total current assets .......................................................................................................... $ 95,301 283,816 95959595,30195 85,629 - 11,618 1,156 209,438 686,958 Non-current assets Property, plant and equipment (note 10) ........................................................................ Right-of-use assets (note 11) ........................................................................................... Long-term prepaid and other assets (note 12) ................................................................ Net investment in finance leases (note 7) ....................................................................... Deferred income tax assets (note 22) .............................................................................. Intangible assets (note 13) ............................................................................................... Goodwill (note 14) ........................................................................................................... Total non-current assets .................................................................................................. Total assets ............................................................................................................................. Liabilities Current liabilities Trade payables and accrued charges (note 18) ............................................................... Income taxes payables ..................................................................................................... Dividends payable (note 21) ............................................................................................ Deferred revenue ............................................................................................................. Contract liabilities (note 4) ............................................................................................... Lease liabilities – current portion (note 16) ..................................................................... Liabilities related to assets held for sale (note 8) ............................................................ Total current liabilities ..................................................................................................... Non-current liabilities Long-term debt (note 15) ................................................................................................. Lease liabilities – non-current portion (note 16).............................................................. Convertible debentures (note 17) .................................................................................... Provisions (note 19) ......................................................................................................... Other long-term liabilities (note 20) ................................................................................ Deferred income tax liabilities (note 22).......................................................................... Total non-current liabilities .............................................................................................. Total liabilities .................................................................................................................. Equity Share capital (note 21) ..................................................................................................... Contributed surplus ......................................................................................................... Accumulated other comprehensive income .................................................................... Convertible debentures (note 17) .................................................................................... Deficit ............................................................................................................................... Total equity ...................................................................................................................... Total liabilities and equity ...................................................................................................... Commitments and contingencies (note 31) See accompanying notes to the consolidated financial statements 1,424,211 99,180 4,803 154,206 35,874 41,996 362,348 2,122,618 $ 2,809,576 $ 365,410 66,083 47,704 - 15,451 36,200 58,813 589,661 1,039,578 72,871 92,466 162,811 16,319 77,640 1,461,685 $ 2,051,346 1,955,146 44,461 41,650 7,023 (1,290,050) 758,230 $ 2,809,576 $ 32,138 494,901 169,957 11,102 18,401 1,828 - 728,327 1,619,688 - 7,364 118,020 75,221 33,849 381,965 2,236,107 $ 2,964,434 $ 500,662 - 47,257 7,013 - - - 554,932 1,118,119 - 89,919 183,527 6,512 100,823 1,498,900 $ 2,053,832 1,932,103 48,706 174,186 7,023 (1,251,416) 910,602 $ 2,964,434 Approved by the Board of Directors: (signed) “James M. Estey” James M. Estey (Director) (signed) “Marshall L. McRae” Marshall L. McRae (Director) Gibson Energy 1 49 Consolidated Financial Statements Gibson Energy Inc. Consolidated Statements of Operations Gibson Energy Inc. Consolidated Statements of Comprehensive Income (Loss) (tabular amounts in thousands of Canadian dollars, except per share amounts) (tabular amounts in thousands of Canadian dollars, except per share amounts) Continuing operations Year ended December 31, 2018 2017 (note 8) Revenue (note 23) ...................................................................................................................... Cost of sales (notes 24 and 25) .................................................................................................. Gross profit .......................................................................................................................... $ 6,846,589 6,543,958 302,631 $ 5,659,646 5,512,256 147,390 General and administrative expenses (notes 24 and 25) ........................................................... Impairment of goodwill (note 14) .............................................................................................. Other operating income (note 26) ............................................................................................. Operating income (loss) ....................................................................................................... 69,013 20,479 (2,091) 215,230 85,144 69,414 (1,423) (5,745) Finance costs, net (note 15) ....................................................................................................... Income (loss) before income taxes ....................................................................................... Income tax expense (recovery) (note 22) .................................................................................. Net income (loss) from continuing operations ..................................................................... Net income from discontinued operations, after tax (note 8) ................................................... Net income .......................................................................................................................... 78,492 136,738 55,613 81,125 69,923 $ 151,048 $ 118,785 (124,530) (58,204) (66,326) 110,461 $ 44,135 $ Earnings/(loss) per share (note 27) Year ended December 31, 2018 2017 (note 8) Net income................................................................................................................................. $ 151,048 $ 44,135 Other comprehensive loss ......................................................................................................... Items that may be reclassified subsequently to statement of operations Exchange differences on translating foreign operations – continuing operations ............. Other comprehensive income from discontinued operations ............................................ Reclassification of foreign currency translation gain on disposal of foreign operations 12,518 5,373 (19,684) - (note 8) ................................................................................................................................ (143,601) (7,219) Items that will not be reclassified to statement of operations Remeasurements of post-employment benefit obligation, net of tax ($2.9 million) ......... (6,826) Other comprehensive loss, net of tax ....................................................................................... (132,536) (6) (26,909) Comprehensive income ............................................................................................................. $ 18,512 $ 17,226 See accompanying notes to the consolidated financial statements Basic earnings (loss) per share from continuing operations ............................................... Basic earnings per share from discontinued operations ..................................................... 0.48 Basic earnings per share...................................................................................................... $ 1.05 Diluted earnings (loss) per share from continuing operations............................................ $ 0.56 Diluted earnings per share from discontinued operations ................................................. 0.46 Diluted earnings per share .................................................................................................. $ 1.02 $ (0.47) 0.78 $ 0.31 $ (0.47) 0.76 $ 0.29 $ 0.57 See accompanying notes to the consolidated financial statements Consolidated Financial Statements 2 50 Gibson Energy 3 Gibson Energy Inc. Consolidated Statements of Operations Gibson Energy Inc. Consolidated Statements of Comprehensive Income (Loss) (tabular amounts in thousands of Canadian dollars, except per share amounts) (tabular amounts in thousands of Canadian dollars, except per share amounts) Year ended December 31, 2018 2017 (note 8) Continuing operations Revenue (note 23) ...................................................................................................................... $ 6,846,589 $ 5,659,646 Cost of sales (notes 24 and 25) .................................................................................................. Gross profit .......................................................................................................................... 6,543,958 302,631 5,512,256 147,390 General and administrative expenses (notes 24 and 25) ........................................................... Impairment of goodwill (note 14) .............................................................................................. Other operating income (note 26) ............................................................................................. Operating income (loss) ....................................................................................................... Finance costs, net (note 15) ....................................................................................................... Income (loss) before income taxes ....................................................................................... Income tax expense (recovery) (note 22) .................................................................................. Net income (loss) from continuing operations ..................................................................... $ Net income from discontinued operations, after tax (note 8) ................................................... 69,013 20,479 (2,091) 215,230 78,492 136,738 55,613 81,125 69,923 85,144 69,414 (1,423) (5,745) 118,785 (124,530) (58,204) $ (66,326) 110,461 Net income .......................................................................................................................... $ 151,048 $ 44,135 Earnings/(loss) per share (note 27) Basic earnings (loss) per share from continuing operations ............................................... $ 0.57 $ (0.47) Basic earnings per share from discontinued operations ..................................................... 0.48 0.78 Basic earnings per share...................................................................................................... $ 1.05 $ 0.31 Diluted earnings (loss) per share from continuing operations............................................ $ 0.56 $ (0.47) Diluted earnings per share from discontinued operations ................................................. 0.46 0.76 Diluted earnings per share .................................................................................................. $ 1.02 $ 0.29 See accompanying notes to the consolidated financial statements Year ended December 31, 2018 2017 (note 8) Net income................................................................................................................................. $ 151,048 $ 44,135 Other comprehensive loss ......................................................................................................... Items that may be reclassified subsequently to statement of operations Exchange differences on translating foreign operations – continuing operations ............. Other comprehensive income from discontinued operations ............................................ Reclassification of foreign currency translation gain on disposal of foreign operations (note 8) ................................................................................................................................ Items that will not be reclassified to statement of operations 12,518 5,373 (19,684) - (143,601) (7,219) Remeasurements of post-employment benefit obligation, net of tax ($2.9 million) ......... Other comprehensive loss, net of tax ....................................................................................... Comprehensive income ............................................................................................................. (6,826) (132,536) $ 18,512 (6) (26,909) 17,226 $ See accompanying notes to the consolidated financial statements 2 Gibson Energy 3 51 Consolidated Financial Statements Gibson Energy Inc. Consolidated Statements of Changes in Equity (tabular amounts in thousands of Canadian dollars, except per share amounts) Gibson Energy Inc. Consolidated Statements of Cash Flows (tabular amounts in thousands of Canadian dollars, except where noted) Share capital (note 21) Contributed surplus Accumulated other comprehensive income (loss) Convertible debentures Deficit Total Equity Balance – January 1, 2017 ....................$1,909,032 $ 46,899 $ 201,089 $ 7,151 $ (1,107,075) $1,057,096 Net income ........................................... Other comprehensive loss, net of tax ... Comprehensive (loss) income ............... Share based compensation ................ Convertibles debentures – tax ........... Proceeds from exercise of stock options ............................................... Reclassification of contributed surplus on issuance of awards under equity incentive plan .......... Dividends on common shares ($0.33 - - - - - 2,822 - - - 22,056 - - 20,249 (20,249) - (26,903) (26,903) - - - - per common share) ............................ - Balance – December 31, 2017 ..............$ 1,932,103 - $ 48,706 - $ 174,186 - - - - (128) - - - $ 7,023 44,135 (6) 44,129 - - - - 44,135 (26,909) 17,226 22,056 (128) 2,822 - (188,470) $ (1,251,416) (188,470) $ 910,602 Balance – January 1, 2018 ................... $ 1,932,103 $ 48,706 $ 174,186 $ 7,023 $ (1,251,416) $ 910,602 Impact of change in accounting policy (note 4) ................................................. - - - - 629 629 Restated balance – January 1, 2018 .... 1,932,103 48,706 174,186 7,023 (1,250,787) 911,231 - - 151,048 151,048 Proceeds from (repayment of) credit facilities, net ............................................................ (84,657) Net income ........................................... Reclassification of foreign currency translation gain on disposal of foreign operations (note 8) ............................... Other comprehensive income, net of tax ......................................................... Comprehensive (loss) income ............... Share based compensation ................ Proceeds from exercise of stock options ............................................... Reclassification of contributed surplus on issuance of awards under equity incentive plan .......... Dividends on common shares ($0.33 - - - - - 1,056 - - - - 17,742 - 21,987 (21,987) per common share) ............................ - Balance – December 31, 2018 ..............$ 1,955,146 - $ 44,461 - $ 41,650 See accompanying notes to the consolidated financial statements (143,601) 11,065 (132,536) - - - - - - - - - - $ 7,023 - (143,601) - 151,048 - - - 11,065 18,512 17,742 1,056 - (190,311) $ (1,290,050) (190,311) $ 758,230 financing activities Year ended December 31, 2018 Cash flows from operating activities Net income (loss) from continuing operations ....................................................................... $ 81,125 $ (66,326) Adjustments for non-cash items (note 33) ........................................................................ 381,663 Changes in items of working capital (note 33) ................................................................... 50,222 Income taxes received, net (note 33) ................................................................................. 14,076 Cash provided by operating activities from continuing operations ........................................ Cash provided by operating activities from discontinued operations (note 8) ....................... Net cash provided by operating activities ............................................................................. Cash flows from investing activities Purchase of property, plant and equipment ...................................................................... Acquisitions, net of cash acquired (note 9) ........................................................................ Purchase of intangible assets ............................................................................................. Proceeds from net assets held for sale, net (note 8) .......................................................... Proceeds on sale of assets .................................................................................................. Cash used in investing activities from continuing operations .................................................. Cash provided by investing activities from discontinued operations (note 8) ........................ Net cash (used in) provided by investing activities ............................................................... Cash flows from financing activities Payment of shareholder dividends ..................................................................................... Interest paid, net ................................................................................................................ Proceeds from exercise of stock options ............................................................................ Finance lease payments (note 16) ...................................................................................... Proceeds from issuance of long-term debt, net of cost ..................................................... Repayment of long-term debt, net of cost ........................................................................ Settlement of financial instruments not affecting operating activities (note 15) .............. Cash used in financing activities from continuing operations ................................................ Cash used in financing activities from discontinued operations (note 8) ............................... Net cash used in financing activities ...................................................................................... Net increase (decrease) in cash and cash equivalents .......................................................... Effect of exchange rate on cash and cash equivalents ............................................................ Cash and cash equivalents – beginning of year ...................................................................... 527,086 36,652 563,738 (224,440) (41,656) (4,051) 41,811 13,834 (214,502) 107,777 (106,725) (189,880) (68,924) 1,056 (49,792) - - - (392,197) (3,056) (395,253) 61,760 1,403 32,138 Cash and cash equivalents – end of year ............................................................................... $ 95,301 $ See accompanying notes to the consolidated financial statements See note 33 for supplemental disclosures and reconciliation of movements of financial liabilities to cash flows arising from 2017 (note 8) 268,923 (27,325) - 175,272 22,107 197,379 (157,555) (5,735) 3,094 (160,196) 416,016 255,820 (187,985) (87,177) 2,822 - - - - 590,452 (1,024,007) 230,180 (2,218) (477,933) (477,933) (24,734) (3,287) 60,159 32,138 Consolidated Financial Statements 4 52 Gibson Energy 5 Gibson Energy Inc. Consolidated Statements of Changes in Equity (tabular amounts in thousands of Canadian dollars, except per share amounts) Gibson Energy Inc. Consolidated Statements of Cash Flows (tabular amounts in thousands of Canadian dollars, except where noted) Year ended December 31, 2018 2017 (note 8) Cash flows from operating activities Net income (loss) from continuing operations ....................................................................... Adjustments for non-cash items (note 33) ........................................................................ Changes in items of working capital (note 33) ................................................................... Income taxes received, net (note 33) ................................................................................. Cash provided by operating activities from continuing operations ........................................ Cash provided by operating activities from discontinued operations (note 8) ....................... Net cash provided by operating activities ............................................................................. Cash flows from investing activities Purchase of property, plant and equipment ...................................................................... Acquisitions, net of cash acquired (note 9) ........................................................................ Purchase of intangible assets ............................................................................................. Proceeds from net assets held for sale, net (note 8) .......................................................... Proceeds on sale of assets .................................................................................................. Cash used in investing activities from continuing operations .................................................. Cash provided by investing activities from discontinued operations (note 8) ........................ Net cash (used in) provided by investing activities ............................................................... Cash flows from financing activities Payment of shareholder dividends ..................................................................................... Interest paid, net ................................................................................................................ Proceeds from exercise of stock options ............................................................................ Finance lease payments (note 16) ...................................................................................... Proceeds from issuance of long-term debt, net of cost ..................................................... Repayment of long-term debt, net of cost ........................................................................ Proceeds from (repayment of) credit facilities, net ............................................................ Settlement of financial instruments not affecting operating activities (note 15) .............. Cash used in financing activities from continuing operations ................................................ Cash used in financing activities from discontinued operations (note 8) ............................... Net cash used in financing activities ...................................................................................... Net increase (decrease) in cash and cash equivalents .......................................................... Effect of exchange rate on cash and cash equivalents ............................................................ Cash and cash equivalents – beginning of year ...................................................................... Cash and cash equivalents – end of year ............................................................................... See accompanying notes to the consolidated financial statements $ $ 81,125 381,663 50,222 14,076 (66,326) 268,923 (27,325) - 175,272 22,107 197,379 (157,555) - (5,735) - 3,094 (160,196) 416,016 255,820 (187,985) (87,177) 2,822 - 590,452 (1,024,007) 230,180 (2,218) (477,933) - (477,933) (24,734) (3,287) 60,159 32,138 $ 527,086 36,652 563,738 (224,440) (41,656) (4,051) 41,811 13,834 (214,502) 107,777 (106,725) (189,880) (68,924) 1,056 (49,792) - - (84,657) - (392,197) (3,056) (395,253) 61,760 1,403 32,138 95,301 $ Balance – December 31, 2018 ..............$ 1,955,146 $ 44,461 $ 41,650 $ 7,023 $ (1,290,050) $ 758,230 (190,311) (190,311) See note 33 for supplemental disclosures and reconciliation of movements of financial liabilities to cash flows arising from financing activities Gibson Energy 5 53 Consolidated Financial Statements Share capital (note 21) Contributed comprehensive surplus income (loss) Convertible debentures Deficit Total Equity Accumulated other Balance – January 1, 2017 ....................$1,909,032 $ 46,899 $ 201,089 $ 7,151 $ (1,107,075) $1,057,096 (26,903) (26,903) 22,056 44,135 (6) 44,129 Net income ........................................... Other comprehensive loss, net of tax ... Comprehensive (loss) income ............... Share based compensation ................ Convertibles debentures – tax ........... Proceeds from exercise of stock options ............................................... 2,822 Reclassification of contributed surplus on issuance of awards under equity incentive plan .......... 20,249 (20,249) Dividends on common shares ($0.33 per common share) ............................ Balance – December 31, 2017 ..............$ 1,932,103 $ 48,706 $ 174,186 $ 7,023 $ (1,251,416) $ 910,602 (188,470) (188,470) Balance – January 1, 2018 ................... $ 1,932,103 $ 48,706 $ 174,186 $ 7,023 $ (1,251,416) $ 910,602 Impact of change in accounting policy (note 4) ................................................. - - - 629 629 Restated balance – January 1, 2018 .... 1,932,103 48,706 174,186 7,023 (1,250,787) 911,231 - - 151,048 151,048 - - - - - - - - - - (128) - - - - - - - - - - - - - 44,135 (26,909) 17,226 22,056 (128) 2,822 - (143,601) 11,065 18,512 17,742 1,056 - - - - - - - - - - Net income ........................................... Reclassification of foreign currency translation gain on disposal of foreign operations (note 8) ............................... Other comprehensive income, net of tax ......................................................... Comprehensive (loss) income ............... Share based compensation ................ Proceeds from exercise of stock options ............................................... 1,056 Reclassification of contributed surplus on issuance of awards under equity incentive plan .......... 21,987 (21,987) Dividends on common shares ($0.33 per common share) ............................ See accompanying notes to the consolidated financial statements (143,601) 11,065 (132,536) 17,742 - 151,048 - - - - - - - - - - - - - - - - - - - - - - - - - 4 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) 1 Description of the business and segmented disclosure Gibson Energy Inc. (“Gibson Energy” or the “Company”) was incorporated pursuant to the Business Corporations Act (Alberta) on April 11, 2011. The Company is incorporated in Alberta and domiciled in Canada. The address of the Company’s principal place of business is 1700, 440 Second Avenue S.W., Calgary, Alberta, Canada. The Company’s common shares are traded on the Toronto Stock Exchange under the symbol “GEI”. The Company had the following principal subsidiaries as at December 31, 2018: Name Gibson Energy Inc. Gibson Energy ULC Gibson (U.S.) Acquisitionco Corp. Nature of entity Ultimate Parent Company Moose Jaw Refinery ULC Holding Company Holding Company Gibson Energy Trucking Ltd. Gibson Energy Partnership Name Nature of business Crude oil processing Transportation Wholesale, transportation and storage The Company’s reportable segments are: (1) Infrastructure, which includes a network of oil infrastructure assets that include oil terminals, rail loading and unloading facilities, injection stations, gathering pipelines, a crude oil processing facility, and procession, recovery, and disposal (“PRD”) terminals. The primary facilities within this segment include the terminals located at Hardisty and Edmonton, which are the principal hubs for aggregating and exporting oil and refined products out of the Western Canadian Sedimantary Basin; gathering pipelines, which are connected to the Hardisty Terminal; an infrastructure position located in the United States (“U.S.); and a crude oil processing facility in Moose Jaw, Saskatchewan (the “Moose Jaw Facility”). The Moose Jaw Facility is impacted by maintenance turnarounds typically occurring within the spring period. The PRD business is dependent upon the drilling activity in various areas of operations and as a result, the PRD business is impacted by seasonality due to road bans as part of spring break-up. (2) Logistics, which represents the U.S. Truck Transportation business due to Canadian Truck Transportation being classified as a discontinued operation during the third quarter of 2018. This segment provides truck transportation services that allow the Company to service its customers’ needs between the wellhead and the end market and includes providing hauling services for crude for many of North America’s leading oil and gas producers. (3) Wholesale, which involves the purchasing, selling, storing and optimization of hydrocarbon products, including crude oil, natural gas liquids, road asphalt, roofing flux, frac oils, light and heavy straight run distillates, combined vacuum gas oil, and an oil-based mud product as part of supplying the Moose Jaw Facility, marketing it refined products and helping to drive volumes through the Company’s key infrastructure assets. This segment earns margins by providing aggregation services to producers and/or by capturing locational, quality or time-based opportunities. The Wholesale segment sources the majority of its hydrocarbon products from Western Canada and markets those products throughout U.S. and Canada. Canadian road asphalt activity, related to refined products, 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. Demand for propane and other natural gas liquids is also highest in the colder months of the year. This reporting structure provides a direct connection between the Company’s operations, the services it provides to customers and the ongoing strategic direction of the Company. These reportable 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. The Company has aggregated certain operating segments into the above noted reportable segments through examination of the Company's performance which is based on the similarity of the goods and services provided and economic characteristics exhibited by these operating segments. Accounting policies used for segment reporting are consistent with the accounting policies used for the preparation of the Company’s consolidated financial statements. Inter-segmental transactions are eliminated upon consolidation and the Company does not recognize margins on inter-segmental transactions. Consolidated Financial Statements 6 54 Gibson Energy 7 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Year ended December 31, 2018 1 Statement of operations Revenue External ......................................... Inter-segmental ............................ External and inter-segmental ....... Infrastructure Logistics Wholesale Total $ 259,865 $ $ 6,555,792 $ 6,846,589 131,762 391,627 30,932 17,588 48,520 586,921 7,142,713 736,271 7,582,860 Segment profit (loss) ......................... $ 283,489 $ (7,513) $ 211,111 $ 487,087 Corporate & other reconciling items Depreciation and impairment of property, plant and equipment ..................................................................................... 143,160 Depreciation of right-of-use assets .................................................................................................................................... Amortization and impairment of intangible assets ............................................................................................................ Impairment of goodwill (note 14) ...................................................................................................................................... General and administrative ................................................................................................................................................ Share based compensation ................................................................................................................................................ Corporate foreign exchange gain ....................................................................................................................................... Interest expense, net ......................................................................................................................................................... Foreign exchange loss on long-term debt .......................................................................................................................... Loss on sale of net assets held for sale (note 8) .................................................................................................................. Net income from continuing operations before income tax .............................................................................................. Income tax expense (note 22) ............................................................................................................................................. Net income from continuing operations ............................................................................................................................ Net income from discontinued operations, after tax (note 8) ............................................................................................ Net income from operations .............................................................................................................................................. 43,184 10,870 20,479 32,155 19,124 (2,089) 74,089 4,403 4,974 136,738 55,613 81,125 69,923 $ 151,048 Year ended December 31, 2017 1,2 Statement of operations Revenue External ......................................... Inter-segmental ............................. External and inter-segmental ........ Infrastructure Logistics Wholesale Total $ 205,561 $ 66,137 $ 5,387,948 $ 5,659,646 131,340 336,901 8,568 74,705 429,304 5,817,252 569,212 6,228,858 Segment profit (loss) ......................... $ 235,276 $ (4,103) $ 30,585 $ 261,758 Corporate & other reconciling items Depreciation and impairment of property, plant and equipment ..................................................................................... Amortization and impairment of intangible assets ............................................................................................................ Impairment of goodwill (note 14) ...................................................................................................................................... General and administrative ................................................................................................................................................ Share based compensation ................................................................................................................................................ Corporate foreign exchange loss ........................................................................................................................................ Interest expense, net ......................................................................................................................................................... Debt extinguishment costs, net ......................................................................................................................................... Foreign exchange gain on long-term debt ......................................................................................................................... Net loss from continuing operations before income tax .................................................................................................... Income tax recovery (note 22) ........................................................................................................................................... Net loss from continuing operations .................................................................................................................................. Net income from discontinued operations, after tax (note 8) ........................................................................................... Net income from operations .............................................................................................................................................. 100,837 23,340 69,414 50,016 23,244 652 77,081 60,492 (18,788) (124,530) (58,204) (66,326) 110,461 $ 44,135 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) 1 Description of the business and segmented disclosure Gibson Energy Inc. (“Gibson Energy” or the “Company”) was incorporated pursuant to the Business Corporations Act (Alberta) on April 11, 2011. The Company is incorporated in Alberta and domiciled in Canada. The address of the Company’s principal place of business is 1700, 440 Second Avenue S.W., Calgary, Alberta, Canada. The Company’s common shares are traded on the Toronto Stock Exchange under the symbol “GEI”. The Company had the following principal subsidiaries as at December 31, 2018: Name Gibson Energy Inc. Gibson Energy ULC Nature of entity Name Ultimate Parent Company Moose Jaw Refinery ULC Nature of business Crude oil processing Holding Company Gibson Energy Trucking Ltd. Transportation storage The Company’s reportable segments are: (1) Infrastructure, which includes a network of oil infrastructure assets that include oil terminals, rail loading and unloading facilities, injection stations, gathering pipelines, a crude oil processing facility, and procession, recovery, and disposal (“PRD”) terminals. The primary facilities within this segment include the terminals located at Hardisty and Edmonton, which are the principal hubs for aggregating and exporting oil and refined products out of the Western Canadian Sedimantary Basin; gathering pipelines, which are connected to the Hardisty Terminal; an infrastructure position located in the United States (“U.S.); and a crude oil processing facility in Moose Jaw, Saskatchewan (the “Moose Jaw Facility”). The Moose Jaw Facility is impacted by maintenance turnarounds typically occurring within the spring period. The PRD business is dependent upon the drilling activity in various areas of operations and as a result, the PRD business is impacted by seasonality due to road bans as part of spring break-up. (2) Logistics, which represents the U.S. Truck Transportation business due to Canadian Truck Transportation being classified as a discontinued operation during the third quarter of 2018. This segment provides truck transportation services that allow the Company to service its customers’ needs between the wellhead and the end market and includes providing hauling services for crude for many of North America’s leading oil and gas producers. (3) Wholesale, which involves the purchasing, selling, storing and optimization of hydrocarbon products, including crude oil, natural gas liquids, road asphalt, roofing flux, frac oils, light and heavy straight run distillates, combined vacuum gas oil, and an oil-based mud product as part of supplying the Moose Jaw Facility, marketing it refined products and helping to drive volumes through the Company’s key infrastructure assets. This segment earns margins by providing aggregation services to producers and/or by capturing locational, quality or time-based opportunities. The Wholesale segment sources the majority of its hydrocarbon products from Western Canada and markets those products throughout U.S. and Canada. Canadian road asphalt activity, related to refined products, 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. Demand for propane and other natural gas liquids is also highest in the colder months of the year. the ongoing strategic direction of the Company. This reporting structure provides a direct connection between the Company’s operations, the services it provides to customers and These reportable 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. The Company has aggregated certain operating segments into the above noted reportable segments through examination of the Company's performance which is based on the similarity of the goods and services provided and economic characteristics exhibited by these operating segments. Accounting policies used for segment reporting are consistent with the accounting policies used for the preparation of the Company’s consolidated financial statements. Inter-segmental transactions are eliminated upon consolidation and the Company does not recognize margins on inter-segmental transactions. Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Year ended December 31, 2018 1 Statement of operations Revenue External ......................................... Inter-segmental ............................ External and inter-segmental ....... Infrastructure Logistics Wholesale Total $ 259,865 131,762 391,627 $ 30,932 17,588 48,520 $ 6,555,792 586,921 7,142,713 $ 6,846,589 736,271 7,582,860 Segment profit (loss) ......................... $ 283,489 $ (7,513) $ 211,111 $ 487,087 Gibson (U.S.) Acquisitionco Corp. Holding Company Gibson Energy Partnership Wholesale, transportation and Corporate & other reconciling items Depreciation and impairment of property, plant and equipment ..................................................................................... Depreciation of right-of-use assets .................................................................................................................................... Amortization and impairment of intangible assets ............................................................................................................ Impairment of goodwill (note 14) ...................................................................................................................................... General and administrative ................................................................................................................................................ Share based compensation ................................................................................................................................................ Corporate foreign exchange gain ....................................................................................................................................... Interest expense, net ......................................................................................................................................................... Foreign exchange loss on long-term debt .......................................................................................................................... Loss on sale of net assets held for sale (note 8) .................................................................................................................. Net income from continuing operations before income tax .............................................................................................. Income tax expense (note 22) ............................................................................................................................................. Net income from continuing operations ............................................................................................................................ Net income from discontinued operations, after tax (note 8) ............................................................................................ Net income from operations .............................................................................................................................................. 143,160 43,184 10,870 20,479 32,155 19,124 (2,089) 74,089 4,403 4,974 136,738 55,613 81,125 69,923 $ 151,048 Year ended December 31, 2017 1,2 Statement of operations Revenue External ......................................... Inter-segmental ............................. External and inter-segmental ........ Infrastructure Logistics Wholesale Total $ 205,561 131,340 336,901 $ 66,137 8,568 74,705 $ 5,387,948 429,304 5,817,252 $ 5,659,646 569,212 6,228,858 Segment profit (loss) ......................... $ 235,276 $ (4,103) $ 30,585 $ 261,758 Corporate & other reconciling items Depreciation and impairment of property, plant and equipment ..................................................................................... Amortization and impairment of intangible assets ............................................................................................................ Impairment of goodwill (note 14) ...................................................................................................................................... General and administrative ................................................................................................................................................ Share based compensation ................................................................................................................................................ Corporate foreign exchange loss ........................................................................................................................................ Interest expense, net ......................................................................................................................................................... Debt extinguishment costs, net ......................................................................................................................................... Foreign exchange gain on long-term debt ......................................................................................................................... Net loss from continuing operations before income tax .................................................................................................... Income tax recovery (note 22) ........................................................................................................................................... Net loss from continuing operations .................................................................................................................................. Net income from discontinued operations, after tax (note 8) ........................................................................................... Net income from operations .............................................................................................................................................. 100,837 23,340 69,414 50,016 23,244 652 77,081 60,492 (18,788) (124,530) (58,204) (66,326) 110,461 44,135 $ 6 Gibson Energy 7 55 Consolidated Financial Statements These consolidated financial statements include the results of the Company and its subsidiaries together with its interest in joint 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 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. consolidation. operations. 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 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 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) 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 by reportable segments are as follows: Basis of consolidation Infrastructure ............................................................................ Logistics ..................................................................................... Wholesale ................................................................................. Corporate .................................................................................. Total ......................................................................................... Twelve months ended December 31 2018 2017 2 Property, plant and equipment $ 265,751 4,497 650 1,423 $ 272,321 Intangible Assets $ 20,241 - - 2,493 $ 22,734 Property, plant and equipment $ 161,326 493 1,093 2,932 $ 165,844 Intangible Assets $ $ 2,849 114 35 3,213 6,211 1. Due to the adoption of new accounting standards effective January 1, 2018 as discussed in note 4, the comparative information has not been restated and, therefore, the results may not be comparable. 2. Comparative period segment information was restated to reflect the results of continuing operations separately from discontinued operations. See note 8 for further details. Geographic Data Based on the location of the end user, approximately 21% and 20% of revenue was from customers in the U.S. for the year ended December 31, 2018 and 2017, respectively. The Company’s non-current assets, excluding investment in finance leases and deferred tax assets, are primarily concentrated in Canada with 5% and 12% in the U.S. at December 31, 2018 and 2017, respectively. (loss). 2 Basis of preparation and statement of compliance 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”). recognized in the consolidated statements of operations. Business combinations and goodwill Certain reclassifications of prior year amounts have been made to conform to the current year presentation and current information presented are not comparable due to the adoption of new IFRS as discussed in note 4 and the presentation of continuing operations separately from discontinued operations as discussed in note 8. 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 US$ are to U.S. dollars. These consolidated financial statements were approved for issuance by the Company’s board of directors (“Board”) on March 4, 2019. 3 Significant accounting policies The significant accounting policies applied in the preparation of these consolidated financial statements are set out below. The policies discussed in note 3 and 4 have been consistently applied to the applicable years presented. Basis of measurement 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 consolidated statements 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 consolidated statements 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 consolidated statements of operations. Contingent consideration that is classified as equity is not re-measured, and its subsequent settlement is accounted for within equity. These consolidated financial statements have been prepared under the historical cost convention except for certain items that are recorded at fair value on a recurring basis as required by the respective accounting standards. 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. Consolidated Financial Statements 8 56 Gibson Energy 9 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) 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 by reportable segments are as follows: Basis of consolidation Twelve months ended December 31 2018 Property, plant and equipment Intangible Assets 2017 2 Property, plant and equipment Intangible Assets Infrastructure ............................................................................ Logistics ..................................................................................... Wholesale ................................................................................. Corporate .................................................................................. Total ......................................................................................... $ 265,751 $ 20,241 $ 161,326 $ 2,849 4,497 650 1,423 - - 2,493 493 1,093 2,932 $ 272,321 $ 22,734 $ 165,844 $ 114 35 3,213 6,211 1. Due to the adoption of new accounting standards effective January 1, 2018 as discussed in note 4, the comparative information has not been restated and, therefore, the results may not be comparable. 2. Comparative period segment information was restated to reflect the results of continuing operations separately from discontinued operations. See note 8 for further details. Geographic Data December 31, 2018 and 2017, respectively. Based on the location of the end user, approximately 21% and 20% of revenue was from customers in the U.S. for the year ended The Company’s non-current assets, excluding investment in finance leases and deferred tax assets, are primarily concentrated in Canada with 5% and 12% in the U.S. at December 31, 2018 and 2017, respectively. 2 Basis of preparation and statement of compliance 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”). Certain reclassifications of prior year amounts have been made to conform to the current year presentation and current information presented are not comparable due to the adoption of new IFRS as discussed in note 4 and the presentation of continuing operations separately from discontinued operations as discussed in note 8. 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 US$ are to U.S. dollars. These consolidated financial statements were approved for issuance by the Company’s board of directors (“Board”) on March 4, 2019. 3 Significant accounting policies Basis of measurement The significant accounting policies applied in the preparation of these consolidated financial statements are set out below. The policies discussed in note 3 and 4 have been consistently applied to the applicable years presented. 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. 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 consolidated statements 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 consolidated statements 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 consolidated statements 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 consolidated statements of operations. Contingent consideration that is classified as equity is not re-measured, and its subsequent settlement is accounted for within equity. These consolidated financial statements have been prepared under the historical cost convention except for certain items that are recorded at fair value on a recurring basis as required by the respective accounting standards. 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. 8 Gibson Energy 9 57 Consolidated Financial Statements Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Intangible assets Impairments Intangible assets are stated at cost, less accumulated amortization and accumulated impairment losses. 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: Customer relationships .............................................................................................................................................. 1 – 12 years Long-term customer contracts ................................................................................................................................... 6 – 10 years Technology, software and license ................................................................................................................................ 3 – 7 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. appropriate valuation model is used. 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 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 triggering event which indicates a change in the recoverable amount. If there is a trigger that impairment loss recognized in the prior periods for an asset other than goodwill may no longer exist or may have decreased, the 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. Property, plant and equipment is stated at cost, less accumulated depreciation and accumulated impairment losses. Assets held for sale and discontinued operations 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 and connections .......................................................................................................................................... 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. 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 consolidated statements of operations in the period the item is derecognized. Consolidated Financial Statements 10 58 Gibson Energy 11 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, economic performance of the assets, 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 (FVLCD) and its value in use (VIU). Impairments are recognized immediately in the consolidated statements 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 FVLCD and VIU. VIU is usually determined on the basis of discounted estimated future net cash flows. In determining FVLCD, recent market transactions are taken into account, if available. In the absence of such transactions, an Non-current assets are classified as held for sale if their carrying amounts will be recovered through a sale transaction rather than through continuing use. This condition is met when the sale is highly probable and the asset is available for immediate sale in its present condition. Non-current assets and disposal groups are classified and presented as discontinued operations if the assets or disposal groups are disposed of or classified as held for sale and: the assets or disposal groups are a major line of business or geographical area of operations; the assets or disposal groups are part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations; or the assets or disposal groups are a subsidiary acquired solely for the purpose of resale. - - - The assets or disposal groups that meet these criteria are measured at the lower of the carrying amount and FVLCD with impairments recognized in the consolidated statements of operations, except for deferred tax assets that are recognized for tax loss carry-forwards to the extent that the realization of the related tax benefit through future taxable profits is probable. An impairment loss is recognized for any initial or subsequent write-down of the asset (or disposal group) to fair value less costs to dispose. Non-current assets held for sale are presented separately in current assets and liabilities within the consolidated balance sheet. Assets held for sale are not depreciated, depleted or amortized. The comparative period consolidated balance sheet is not restated. The results of discontinued operations are shown separately in the consolidated statements of operations and cash flows and comparative figures are restated. Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Intangible assets 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, economic performance of the assets, 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 (FVLCD) and its value in use (VIU). Impairments are recognized immediately in the consolidated statements 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 FVLCD and VIU. VIU is usually determined on the basis of discounted estimated future net cash flows. In determining FVLCD, 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 triggering event which indicates a change in the recoverable amount. If there is a trigger that impairment loss recognized in the prior periods for an asset other than goodwill may no longer exist or may have decreased, the 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. Property, plant and equipment is stated at cost, less accumulated depreciation and accumulated impairment losses. Assets held for sale and discontinued operations Non-current assets are classified as held for sale if their carrying amounts will be recovered through a sale transaction rather than through continuing use. This condition is met when the sale is highly probable and the asset is available for immediate sale in its present condition. 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 - Non-current assets and disposal groups are classified and presented as discontinued operations if the assets or disposal groups are disposed of or classified as held for sale and: - - the assets or disposal groups are a major line of business or geographical area of operations; the assets or disposal groups are part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations; or the assets or disposal groups are a subsidiary acquired solely for the purpose of resale. The assets or disposal groups that meet these criteria are measured at the lower of the carrying amount and FVLCD with impairments recognized in the consolidated statements of operations, except for deferred tax assets that are recognized for tax loss carry-forwards to the extent that the realization of the related tax benefit through future taxable profits is probable. An impairment loss is recognized for any initial or subsequent write-down of the asset (or disposal group) to fair value less costs to dispose. Non-current assets held for sale are presented separately in current assets and liabilities within the consolidated balance sheet. Assets held for sale are not depreciated, depleted or amortized. The comparative period consolidated balance sheet is not restated. The results of discontinued operations are shown separately in the consolidated statements of operations and cash flows and comparative figures are restated. 10 Gibson Energy 11 59 Consolidated Financial Statements Intangible assets are stated at cost, less accumulated amortization and accumulated impairment losses. 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: Customer relationships .............................................................................................................................................. 1 – 12 years Long-term customer contracts ................................................................................................................................... 6 – 10 years Technology, software and license ................................................................................................................................ 3 – 7 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. 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 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. 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 and connections .......................................................................................................................................... 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. 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 consolidated statements of operations in the period the item is derecognized. Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Inventories Past-service costs or credits are recognised immediately in the consolidated statements of operations. 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. 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 statements 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. 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 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 (loss) in the period in which they arise. Consolidated Financial Statements 12 60 Gibson Energy 13 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Defined contribution pension plans are earned by employees and funded by the Company. Share-based payments The Company’s defined contribution plans are funded as specified in the plans and the pension expense is recorded as the benefits 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 consolidated statements of operations with a corresponding impact to contributed surplus. The fair value of RSUs, PSUs and DSUs is equal to the Company’s five day 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. 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. Termination benefit 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 included in interest 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 consolidated statements 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. Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Inventories Past-service costs or credits are recognised immediately in the consolidated statements of operations. Inventories are carried at the lower of cost and net realizable value, with cost determined using a weighted average cost method. Defined contribution pension plans 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 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 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 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 consolidated statements of operations with a corresponding impact to contributed surplus. The fair value of RSUs, PSUs and DSUs is equal to the Company’s five day 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. 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 included in interest 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 consolidated statements 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. 12 Gibson Energy 13 61 Consolidated Financial Statements exist. Provisions and contingencies 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 statements 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. 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. Environmental liabilities Employee benefits Defined benefit pension plan The liability recognised 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 (loss) in the period in which they arise. Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Cost of sales Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Provisions 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. 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 consolidated statements of operations in the period in which they are incurred. 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. 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. 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 the higher of VIU and FVLCD calculations that require the use of estimates. The Company also assesses 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. 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 determined necessary, to obtain the estimates of the decommissioning and environmental provision. Critical judgements in applying the Company’s accounting policies Assets held for sale and discontinued operations As at December 31, 2018, the Company considered certain businesses and assets as held-for-sale and discontinued operations (refer to note 8, Assets and liabilities held for sale). In making these determinations, the Company used significant judgment in evaluating whether a sale was considered highly probable and considered the progress of negotiations specific to significant terms of the sales, including the structure of the transaction and if the buyer has substantially completed their due diligence review. For these businesses and assets these conditions were all met during the year ended December 31, 2018. The Company also used significant judgment in evaluating whether a disposal group represented a major line of business or geographical area of operations to be reported within discontinued operations, considering if the disposal group is a component of an entity and its materiality in relation to the reportable segment. These criterias were met for certain disposal groups. 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. 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 if the arrangement conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Where such rights do not exist, the arrangement is considered a service contract. For those arrangements considered to be a lease, further judgement is required to determine whether if 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 consolidated statements 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 Consolidated Financial Statements 14 62 Gibson Energy 15 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) 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 determined necessary, to obtain the estimates of the decommissioning and environmental provision. Critical judgements in applying the Company’s accounting policies Assets held for sale and discontinued operations As at December 31, 2018, the Company considered certain businesses and assets as held-for-sale and discontinued operations (refer to note 8, Assets and liabilities held for sale). In making these determinations, the Company used significant judgment in evaluating whether a sale was considered highly probable and considered the progress of negotiations specific to significant terms of the sales, including the structure of the transaction and if the buyer has substantially completed their due diligence review. For these businesses and assets these conditions were all met during the year ended December 31, 2018. The Company also used significant judgment in evaluating whether a disposal group represented a major line of business or geographical area of operations to be reported within discontinued operations, considering if the disposal group is a component of an entity and its materiality in relation to the reportable segment. These criterias were met for certain disposal groups. 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. 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 if the arrangement conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Where such rights do not exist, the arrangement is considered a service contract. For those arrangements considered to be a lease, further judgement is required to determine whether if 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 consolidated statements 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 14 Gibson Energy 15 63 Consolidated Financial Statements Cost of sales relating to commodities. Borrowing costs Per share amounts 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 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 consolidated statements of operations in the period in which they are incurred. 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. 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. 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 the higher of VIU and FVLCD calculations that require the use of estimates. The Company also assesses 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. Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) 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 A. Adoption of new accounting standards IFRS 16 – Leases (“IFRS 16”) is effective for years beginning on or after January 1, 2019, however the Company has elected to adopt IFRS 16 effective January 1, 2018, concurrent with the adoption date of IFRS 9 – Financial Instruments (“IFRS 9”), and IFRS 15 – Revenue from Contracts with Customers (“IFRS 15”). These standards have been applied using the modified retrospective approach. The modified retrospective approach does not require restatement of prior period financial information as it recognizes the cumulative effect as an adjustment to opening retained earnings and applies the standard prospectively. Accordingly, comparative information in the Company’s consolidated balance sheets, consolidated statements of operations, consolidated statements of comprehensive income, consolidated statements of changes in equity and consolidated cash flow statements are not restated. Changes in significant accounting policies from adoption of new accounting standards Policies applicable for the year ending December 31, 2017 Policies effective January 1, 2018 Revenue Recognition Product revenues associated with the sales of products such as 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 freight on board (“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 Revenue is measured based on the consideration specified in a contract with a customer and excludes amounts collected on behalf of third parties. The Company recognizes revenue when it transfers control of a product or service to a customer, at a point in time or over time. The Company does not have contracts where the period between the transfer of the promised goods or services to the customer and payments by the customer exceeds one year. As such, no adjustments are made to the transaction prices for the time value of money. Revenue generated through the provision of services charged through long-term fixed-fee contracts related to midstream infrastructure assets and includes a fixed and/or take or pay portion for the use of the midstream infrastructure and a variable portion related to the servicing of volume throughput. The Company accounts for individual services separately if they are distinct, indicated by the fact that they are separately identifiable from other services provided and the customer can benefit from these distinct services. The stand-alone prices on services are determined by the rates listed within the individual contracts related to the service. The Company recognizes revenue over time as services are provided on a monthly basis, consistent with when the services are billed and paid. 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 breakage rights. Breakage amounts 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 breakage at the earlier of when the breakage volume is shipped, the rights expires or when it is determined that the likelihood that the shipper will utilize the right is remote. Policies applicable for the year ending December 31, Policies effective January 1, 2018 2017 shipper will utilize the make-up right is remote. Revenue from Revenues generated from provision of transportation and related pipeline tariffs and fees are based on volumes and rates as services such as hauling services for crude, waste water and drilling the pipeline is being used. Revenue from equipment rentals fluids for many of North America’s leading oil and gas producers are and non-refundable propane tank fees are recorded in typically short-term in accordance with a customer’s current deferred revenue and are recognized in revenue on a straight hauling requirements. The Company accounts for individual hauling line basis over the rental period, typically one year. services separately if they are distinct, indicated by the fact that 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. they are separately identifiable from other hauling services provided and the customer can benefit from these distinct services. The stand-alone prices on services are determined by the rates listed by the Company and are predetermined based on the volume of products serviced. The Company recognizes revenue over time as hauling and transportation services are provided and control of the service transfers to the customer, consistent with when the services are billed and paid. Revenues generated through the purchasing, selling, storing and blending of hydrocarbon products, including crude oil, NGLs, road asphalt, roofing flux, frac oils, light and heavy straight run distillates, combined vacuum gas oil, and an oil based mud product, as well as by providing aggregation services to producers and/by capturing quality, locational or time-based arbitrage opportunities are typically short to long term in accordance with a customer’s current product demands which are generally grouped as spot sales where no commitment exists prior to the day of the transaction, term sales where a commitment exists over a period of time for negotiated sales, and evergreen sales where contracts are automatically renewed on a month to month basis. The Company accounts for individual product sales separately if they are distinct, indicated by the fact that they are separately identifiable from other enforceable rights and obligations and the customer can benefit from these distinct services. The stand-alone prices on product sales are determined by the rates listed within market indexes and benchmarks and usually include quality or transportation adjustments. The Company recognizes revenue at a point in time as products are delivered and control of the product has transferred to the customer, consistent with when the products are billed and paid. All payments received before delivery are recorded as a contract liability and are recognized as revenue when delivery occurs, assuming all other criteria are met. Revenues from buy/sell transactions which are monetary transactions containing commercial substance is recognized on a gross-basis as separate performance obligation. Revenues from buy/sell transactions of non-monetary exchanges of similar products, which lack commercial substance, are recognized on a net basis. 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. Consolidated Financial Statements 16 64 Gibson Energy 17 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) charges or credits may arise in future periods. 4 Changes in accounting policies and disclosures A. Adoption of new accounting standards which the unused tax losses can be utilized. To the extent that actual outcomes differ from management’s estimates, income tax IFRS 16 – Leases (“IFRS 16”) is effective for years beginning on or after January 1, 2019, however the Company has elected to adopt IFRS 16 effective January 1, 2018, concurrent with the adoption date of IFRS 9 – Financial Instruments (“IFRS 9”), and IFRS 15 – Revenue from Contracts with Customers (“IFRS 15”). These standards have been applied using the modified retrospective approach. The modified retrospective approach does not require restatement of prior period financial information as it recognizes the cumulative effect as an adjustment to opening retained earnings and applies the standard prospectively. Accordingly, comparative information in the Company’s consolidated balance sheets, consolidated statements of operations, consolidated statements of comprehensive income, consolidated statements of changes in equity and consolidated cash flow statements are not restated. Changes in significant accounting policies from adoption of new accounting standards Policies applicable for the year ending December 31, Policies effective January 1, 2018 2017 Revenue Recognition Product revenues associated with the sales of products such Revenue is measured based on the consideration specified in a as crude oil, diluent, natural gas liquids, road asphalt, roofing contract with a customer and excludes amounts collected on behalf flux, wellsite fluids and distillate owned by the Company are of third parties. The Company recognizes revenue when it transfers recognized when the risk of ownership passes to the control of a product or service to a customer, at a point in time or customer and physical delivery occurs, the price is fixed and over time. The Company does not have contracts where the period collection is reasonably assured. Sales terms are generally between the transfer of the promised goods or services to the freight on board (“FOB”) shipping point, in which case the customer and payments by the customer exceeds one year. As such, sales are recorded at the time of shipment, because this is no adjustments are made to the transaction prices for the time when title and risk of loss are transferred. All payments value of money. 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 generated through the provision of services charged through long-term fixed-fee contracts related to midstream infrastructure assets and includes a fixed and/or take or pay portion for the use of the midstream infrastructure and a variable portion related to the servicing of volume throughput. The Company accounts for individual services separately if they are distinct, Revenue associated with the provision of services such as indicated by the fact that they are separately identifiable from other transportation, terminalling and environmental services are services provided and the customer can benefit from these distinct recognized when the services are provided, the price is fixed services. The stand-alone prices on services are determined by the and collection is reasonably assured. Revenue from pipeline rates listed within the individual contracts related to the service. tariffs and fees are based on volumes and rates as the The Company recognizes revenue over time as services are provided pipeline is being used. Long-term take-or-pay contracts, on a monthly basis, consistent with when the services are billed and under which shippers are obligated to pay fixed amounts paid. Long-term take-or-pay contracts, under which shippers are ratably over the contract period regardless of volumes obligated to pay fixed amounts ratably over the contract period shipped, may contain make-up rights. Make-up rights are regardless of volumes shipped, may contain breakage rights. earned by shippers when minimum volume commitments are Breakage amounts are earned by shippers when minimum volume not utilized during the period but under certain commitments are not utilized during the period but under certain circumstances can be used to offset overages in future circumstances can be used to offset overages in future periods, periods, subject to expiry periods. The Company recognizes subject to expiry periods. The Company recognizes revenues revenues associated with make-up rights at the earlier of associated with breakage at the earlier of when the breakage when the make-up volume is shipped, the make-up right volume is shipped, the rights expires or when it is determined that expires or when it is determined that the likelihood that the the likelihood that the shipper will utilize the right is remote. Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Policies applicable for the year ending December 31, 2017 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. Policies effective January 1, 2018 Revenues generated from provision of transportation and related services such as hauling services for crude, waste water and drilling fluids for many of North America’s leading oil and gas producers are typically short-term in accordance with a customer’s current hauling requirements. The Company accounts for individual hauling services separately if they are distinct, indicated by the fact that they are separately identifiable from other hauling services provided and the customer can benefit from these distinct services. The stand-alone prices on services are determined by the rates listed by the Company and are predetermined based on the volume of products serviced. The Company recognizes revenue over time as hauling and transportation services are provided and control of the service transfers to the customer, consistent with when the services are billed and paid. Revenues generated through the purchasing, selling, storing and blending of hydrocarbon products, including crude oil, NGLs, road asphalt, roofing flux, frac oils, light and heavy straight run distillates, combined vacuum gas oil, and an oil based mud product, as well as by providing aggregation services to producers and/by capturing quality, locational or time-based arbitrage opportunities are typically short to long term in accordance with a customer’s current product demands which are generally grouped as spot sales where no commitment exists prior to the day of the transaction, term sales where a commitment exists over a period of time for negotiated sales, and evergreen sales where contracts are automatically renewed on a month to month basis. The Company accounts for individual product sales separately if they are distinct, indicated by the fact that they are separately identifiable from other enforceable rights and obligations and the customer can benefit from these distinct services. The stand-alone prices on product sales are determined by the rates indexes and benchmarks and usually transportation adjustments. The Company recognizes revenue at a point in time as products are delivered and control of the product has transferred to the customer, consistent with when the products are billed and paid. All payments received before delivery are recorded as a contract liability and are recognized as revenue when delivery occurs, assuming all other criteria are met. Revenues from buy/sell transactions which are monetary containing commercial substance is recognized on a gross-basis as separate performance obligation. Revenues from buy/sell transactions of non-monetary exchanges of similar products, which lack commercial substance, are recognized on a net basis. listed within market include quality or transactions 16 Gibson Energy 17 65 Consolidated Financial Statements 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. Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Policies applicable for the year ending December 31, 2017 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. Interest incurred on finance leases is charged to the consolidated statements of operations on an accrual basis. liabilities as finance lease All other leases are operating leases, and the rental of these is charged to the consolidated statements of operations as incurred over the lease term. Policies effective January 1, 2018 Policies applicable for the year ending as at December Policies effective January 1, 2018 Lessee All leases are accounted for as finance leases. Finance leases are recognized as a right-of-use asset and corresponding liability at the date of which the leased asset is available for use by the Company. Each lease payment is allocated between the liability and finance cost. The finance cost is charged to the consolidated statements of operations over the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The right-of-use asset is depreciated over the shorter of the asset’s useful life and the lease term on a straight-line basis. The Company uses a single discount rate for a portfolio of leases with reasonably similar characteristics. Lease payments on short term leases with lease terms of less than twelve months or leases on which the underlying asset is of low value are accounted for as expenses in the consolidated statements of operations. Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of fixed payments (including in-substance fixed payments), less any lease incentives receivable, variable lease payments that are based on an index or a rate, amounts expected to be payable by the lessee under residual value guarantees, the exercise price of a purchase option if the lessee is reasonably certain to exercise that option, and payments of penalties for terminating the lease, if the lease term reflects the lessee exercising that option. These lease payments are discounted using the Company’s incremental borrowing rate where the rate implicit in the lease is not readily determinable. Right-of-use assets are measured at cost comprising of the amount of the initial measurement of lease liability, any lease payments made at or before the commencement date, any initial direct costs, and restoration costs. Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) 31, 2017 Financial assets Non-derivative financial instruments – recognition and measurement 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 consolidated statements 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. 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. A provision for impairment of trade receivables is For trade receivables, the simplified approach is applied to the established when there is objective evidence that the Company’s respective business units, which requires the use of Company may not be able to collect all amounts due the lifetime expected loss provisions for expected credit losses. according to the original terms of the receivables. Significant To measure the expected credit losses, trade receivables are financial difficulties of the debtor, probability that the debtor grouped based on shared credit risk characteristics and the days will enter bankruptcy or financial reorganization, and default past due. The carrying amount of the asset is reduced through or delinquency in payments (more than 30 days past the due the use of an allowance account, and the amount of the loss is date) are considered indicators that the trade receivable recognized in the consolidated statements of operations. When may be impaired. The amount of the provision is the a trade receivable is uncollectible, it is written off against the difference between the asset’s carrying amount and the allowance account for trade receivables. For lease receivables, present value of estimated future cash flows, discounted at the general approach is applied which requires the recognition the original effective interest rate. The carrying amount of of twelve-month expected loss provisions for expected credit the asset is reduced through the use of an allowance losses on lease receivables that have low credit risk at January 1, account, and the amount of the loss is recognized in the 2018. Where such lease receivables have had a significant consolidated statements of operations. When a trade increase in credit risk since initial recognition but no objective receivable is uncollectible, it is written off against the evidence of impairment, lifetime expected loss provision is used allowance account for trade receivables. with interest calculated on the gross carrying amount of the asset. Where objective evidence of impairment exists, interest is calculated on the carrying amount net of the impairment. Financial liabilities classified as other liabilities include amounts borrowed under credit facilities, trade payables and accrued charges, dividends payable, long-term debt and the convertible debentures. 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 the consolidated statements 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. Lessor Leases in contractual arrangements which transfer substantially all the risks and benefits of ownership of property to the lessee are accounted for as finance leases, while all other leases are accounted for as operating leases. Financial liabilities Finance leases 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 consolidated statements of operations as it is earned over the lease term. Consolidated Financial Statements 18 66 Gibson Energy 19 2017 Leases Lessee Lessor A finance lease is a lease that transfers substantially all the All leases are accounted for as finance leases. Finance leases are risks and rewards of ownership of an asset to the lessee. recognized as a right-of-use asset and corresponding liability at the Assets acquired under finance leases are recorded in the date of which the leased asset is available for use by the Company. balance sheet as property, plant and equipment at the lower Each lease payment is allocated between the liability and finance of their fair value and the present value of the minimum lease cost. The finance cost is charged to the consolidated statements of payments and depreciated over the shorter of their operations over the lease term so as to produce a constant periodic estimated useful life or their lease terms. The corresponding rental obligations are included in other long-term liabilities as finance lease liabilities. Interest rate of interest on the remaining balance of the liability for each period. The right-of-use asset is depreciated over the shorter of the asset’s useful life and the lease term on a straight-line basis. incurred on finance leases is charged to the consolidated The Company uses a single discount rate for a portfolio of leases statements of operations on an accrual basis. All other leases are operating leases, and the rental of these is charged to the consolidated statements of operations as incurred over the lease term. with reasonably similar characteristics. Lease payments on short term leases with lease terms of less than twelve months or leases on which the underlying asset is of low value are accounted for as expenses in the consolidated statements of operations. Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of fixed payments (including in-substance fixed payments), less any lease incentives receivable, variable lease payments that are based on an index or a rate, amounts expected to be payable by the lessee under residual value guarantees, the exercise price of a purchase option if the lessee is reasonably certain to exercise that option, and payments of penalties for terminating the lease, if the lease term reflects the lessee exercising that option. These lease payments are discounted using the Company’s incremental borrowing rate where the rate implicit in the lease is not readily determinable. Right-of-use assets are measured at cost comprising of the amount of the initial measurement of lease liability, any lease payments made at or before the commencement date, any initial direct costs, and restoration costs. accounted for as finance leases, while all other leases are accounted for as operating leases. Finance leases 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 consolidated statements of operations as it is earned over the lease term. Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Policies applicable for the year ending December 31, Policies effective January 1, 2018 Policies applicable for the year ending as at December 31, 2017 Policies effective January 1, 2018 Non-derivative financial instruments – recognition and measurement Lessee 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 consolidated statements 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. 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. for impairment of trade receivables is A provision 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 consolidated statements of operations. When a trade receivable is uncollectible, it is written off against the allowance account for trade receivables. For trade receivables, the simplified approach is applied to the Company’s respective business units, which requires the use of the lifetime expected loss provisions for expected credit losses. To measure the expected credit losses, trade receivables are grouped based on shared credit risk characteristics and the days past due. 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 consolidated statements of operations. When a trade receivable is uncollectible, it is written off against the allowance account for trade receivables. For lease receivables, the general approach is applied which requires the recognition of twelve-month expected loss provisions for expected credit losses on lease receivables that have low credit risk at January 1, 2018. Where such lease receivables have had a significant increase in credit risk since initial recognition but no objective evidence of impairment, lifetime expected loss provision is used with interest calculated on the gross carrying amount of the asset. Where objective evidence of impairment exists, interest is calculated on the carrying amount net of the impairment. Leases in contractual arrangements which transfer substantially all the risks and benefits of ownership of property to the lessee are Financial liabilities Financial liabilities classified as other liabilities include amounts borrowed under credit facilities, trade payables and accrued charges, dividends payable, long-term debt and the convertible debentures. 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 the consolidated statements 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. 18 Gibson Energy 19 67 Consolidated Financial Statements Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Policies applicable for the year ending as at December 31, 2017 Policies effective January 1, 2018 Compound financial instruments Compound financial instruments are separated into liability and equity components. The liability component is recognized initially at the fair value of a similar liability that does not have an equity conversion option and the equity component is recognized as the difference between the fair value of the compound financial instrument as a whole and the fair value of the liability component net of any deferred taxes. Any transaction costs are allocated to the liability and equity components in proportion to their initial carrying amounts. Subsequent to initial recognition, the liability component of the compound financial instrument is measured at amortized cost and is accreted to the original principal balance using the effective interest method. The equity component is not remeasured subsequent to initial recognition. The equity component and the accreted liability component are reclassified to share capital upon conversion and any balance in the equity component of the compound financial instrument that remains after the settlement of the liability is transferred to contributed surplus. Derivative financial instruments – recognition and measurement 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 consolidated statements of operations. The impacts of the adoption of IFRS 9, 15 and 16, as at January 1, 2018 are as follows: Consolidated balance sheet adjustments As reported as at December 31, 2017 $ 494,901 169,957 (500,662) - - (7,013) - - 1,251,416 $ 1,408,599 Adjustments Footnote $ 484 4,765 3,329 170,548 (12,676) 7,013 (43,490) (129,344) (629) $ - (i) (ii) (ii & iii) (iii) (ii) (ii) (iii) (iii) (i & ii) Restated balance as at January 1, 2018 $ 495,385 174,722 (497,333) 170,548 (12,676) - (43,490) (129,344) 1,250,787 $ 1,408,599 Trade and other receivables ...................................................... Inventories ................................................................................. Trade payables and accrued charges ......................................... Right-of-use assets ..................................................................... Contract liabilities ...................................................................... Deferred revenue ....................................................................... Lease liabilities – current portion ............................................... Lease liabilities – non-current portion ....................................... Retained deficit (earnings) ......................................................... Total .......................................................................................... Footnotes (i) Financial instruments The Company carries the following categories of financial assets subject to expected credit losses model under IFRS 9: Trade receivables Net investments in finance leases The Company has revised its impairment methodology under IFRS 9 for the above noted classes of assets and applied the simplified approach on all trade receivables which requires the use of the lifetime expected loss provisions for expected credit losses. For lease receivables, the Company used the general approach which requires the recognition of twelve-month expected loss provisions for expected credit losses on lease receivables subject to credit risk as at January 1, 2018. Where such lease receivables have had a significant increase in credit risk since initial recognition but no objective evidence of impairment, lifetime expected loss provisions are used with interest calculated on the gross carrying amount of the receivable balance. Where objective evidence of impairment exists, interest is calculated on the carrying amount, net of the impairment. At December 31, 2018, there were no material changes to the credit risk on lease receivables. There was no impact to the classification of the Company’s financial assets from the adoption of IFRS 9. In previous reporting periods, wholesale product revenues associated with the sales of roofing flux products owned by the Company were recognized at the time of shipment when the risk of ownership and loss are passed to the customer. Under IFRS 15, where the revenue contract provides a right to invoice prior to the physical delivery of the product, the Company will recognize a contract liability, until such time when the product has been physically delivered and the transfer of control has occurred. (ii) Revenue recognition (iii) Leases On adoption of IFRS 16, the Company has recognised lease liabilities in relation to all lease arrangements measured at the present value of the remaining lease payments from commitments disclosed as at December 31, 2017, adjusted by commitments in relation to arrangements not containing leases (service agreements), short-term and low-value leases, and discounted using the Company’s incremental borrowing rate of 5% as of January 1, 2018: Operating lease commitments, disclosed as at December 31, 2017 .............................. Contracts re-assessed as service agreements ................................................................. Net lease liabilities commitments ................................................................................... Discounted ...................................................................................................................... Lease liabilities as at January 1, 2018 .............................................................................. $ $ 223,723 (21,537) 202,186 (29,352) 172,834 The associated right-of-use assets were measured at the amount equal to the lease liability on January 1, 2018, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognised in the statement of financial position immediately before the date of transition, with no impact on retained earnings. There was no impact to lessor accounting from the adoption of IFRS 16. B. Critical accounting estimates and judgements from adoption of new accounting standards Critical judgements in determining lease terms The Company uses hindsight in determining the lease term where a contract contains options to extend or terminate the lease. In determining the lease term, management considers all facts and circumstances that create an economic incentive to exercise an extension option, or not exercise a termination option. The assessment is reviewed upon a trigger by a significant event or a significant change in circumstances. Impairment provision for financial assets The impairment provisions for financial assets are based on assumptions related to the risk of default and expected loss. The Company uses judgement in making these assumptions and selecting the inputs to the impairment calculation, based on the Company’s history, existing market conditions as well as forward looking estimates at the end of each reporting period. Consolidated Financial Statements 20 68 Gibson Energy 21 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) receivables, the Company used the general approach which requires the recognition of twelve-month expected loss provisions for expected credit losses on lease receivables subject to credit risk as at January 1, 2018. Where such lease receivables have had a significant increase in credit risk since initial recognition but no objective evidence of impairment, lifetime expected loss provisions are used with interest calculated on the gross carrying amount of the receivable balance. Where objective evidence of impairment exists, interest is calculated on the carrying amount, net of the impairment. At December 31, 2018, there were no material changes to the credit risk on lease receivables. There was no impact to the classification of the Company’s financial assets from the adoption of IFRS 9. (ii) Revenue recognition In previous reporting periods, wholesale product revenues associated with the sales of roofing flux products owned by the Company were recognized at the time of shipment when the risk of ownership and loss are passed to the customer. Under IFRS 15, where the revenue contract provides a right to invoice prior to the physical delivery of the product, the Company will recognize a contract liability, until such time when the product has been physically delivered and the transfer of control has occurred. Derivative financial instruments – recognition and measurement (iii) Leases On adoption of IFRS 16, the Company has recognised lease liabilities in relation to all lease arrangements measured at the present value of the remaining lease payments from commitments disclosed as at December 31, 2017, adjusted by commitments in relation to arrangements not containing leases (service agreements), short-term and low-value leases, and discounted using the Company’s incremental borrowing rate of 5% as of January 1, 2018: Operating lease commitments, disclosed as at December 31, 2017 .............................. Contracts re-assessed as service agreements ................................................................. Net lease liabilities commitments ................................................................................... Discounted ...................................................................................................................... Lease liabilities as at January 1, 2018 .............................................................................. $ $ 223,723 (21,537) 202,186 (29,352) 172,834 The associated right-of-use assets were measured at the amount equal to the lease liability on January 1, 2018, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognised in the statement of financial position immediately before the date of transition, with no impact on retained earnings. There was no impact to lessor accounting from the adoption of IFRS 16. B. Critical accounting estimates and judgements from adoption of new accounting standards Critical judgements in determining lease terms The Company uses hindsight in determining the lease term where a contract contains options to extend or terminate the lease. In determining the lease term, management considers all facts and circumstances that create an economic incentive to exercise an extension option, or not exercise a termination option. The assessment is reviewed upon a trigger by a significant event or a significant change in circumstances. Impairment provision for financial assets The impairment provisions for financial assets are based on assumptions related to the risk of default and expected loss. The Company uses judgement in making these assumptions and selecting the inputs to the impairment calculation, based on the Company’s history, existing market conditions as well as forward looking estimates at the end of each reporting period. 20 Gibson Energy 21 69 Consolidated Financial Statements Policies applicable for the year ending as at December Policies effective January 1, 2018 31, 2017 Compound financial instruments Compound financial instruments are separated into liability and equity components. The liability component is recognized initially at the fair value of a similar liability that does not have an equity conversion option and the equity component is recognized as the difference between the fair value of the compound financial instrument as a whole and the fair value of the liability component net of any deferred taxes. Any transaction costs are allocated to the liability and equity components in proportion to their initial carrying amounts. Subsequent to initial recognition, the liability component of the compound financial instrument is measured at amortized cost and is accreted to the original principal balance using the effective interest method. The equity component is not remeasured subsequent to initial recognition. The equity component and the accreted liability component are reclassified to share capital upon conversion and any balance in the equity component of the compound financial instrument that remains after the settlement of the liability is transferred to contributed surplus. 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 consolidated statements of operations. The impacts of the adoption of IFRS 9, 15 and 16, as at January 1, 2018 are as follows: Consolidated balance sheet adjustments 31, 2017 Adjustments Footnote Trade and other receivables ...................................................... Inventories ................................................................................. Trade payables and accrued charges ......................................... Right-of-use assets ..................................................................... Contract liabilities ...................................................................... Deferred revenue ....................................................................... (7,013) Lease liabilities – current portion ............................................... Lease liabilities – non-current portion ....................................... Retained deficit (earnings) ......................................................... Total .......................................................................................... 1,251,416 $ 1,408,599 $ 484 4,765 3,329 170,548 (12,676) 7,013 (43,490) (129,344) (629) $ - (ii & iii) (i) (ii) (iii) (ii) (ii) (iii) (iii) (i & ii) As reported as at December $ 494,901 169,957 (500,662) - - - - Restated balance as at January 1, 2018 $ 495,385 174,722 (497,333) 170,548 (12,676) - (43,490) (129,344) 1,250,787 $ 1,408,599 Footnotes (i) Financial instruments Trade receivables Net investments in finance leases The Company carries the following categories of financial assets subject to expected credit losses model under IFRS 9: The Company has revised its impairment methodology under IFRS 9 for the above noted classes of assets and applied the simplified approach on all trade receivables which requires the use of the lifetime expected loss provisions for expected credit losses. For lease Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Estimation uncertainty arising from variable lease payments Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) 5 Trade and other receivables Certain leases contain variable payment terms that are linked to the Company’s owner operator costs within our Logistics segment. Judgment is applied in determination of whether the owner operator arrangement contain variable payment terms. All owner operator costs that are dependent upon the activity levels are classified as variable payments and all such costs are accounted for as a single lease component and charged to the consolidated statements of operations as incurred. C. New interpretations and amended standards adopted by the Company The Company adopted the following new interpretations and revised standards, along with any consequential amendments. These changes were made in accordance with applicable transitional provisions. IFRS 2 – Share-based payments (“IFRS 2”), has been amended to address (i) certain issues related to the accounting for cash settled awards, and (ii) the accounting for equity settled awards that include a “net settlement” feature in respect of employee withholding taxes. IFRS 2 is effective for annual periods beginning on or after January 1, 2018. The adoption of this interpretation did not have a material impact on its consolidated financial statements. IFRIC 22 – Foreign currency transactions and advance consideration (“IFRIC 22”), provides guidance on how to determine the date of the transaction when an entity either pays or receives consideration in advance for foreign currency-denominated contracts. IFRIC 22 is effective for annual periods beginning on or after January 1, 2018. The adoption of this interpretation did not have a material impact on its consolidated financial statements. IAS 28 – Investments in associates and joint ventures (“IAS 28”), has been amended to clarify that an entity applies IFRS 9, including its impairment requirements, to long-term interests in associate or joint venture to which the equity method is not applied. The amendment to IAS 28 is effective for years beginning on or after January 1, 2018. The Company has determined that the adoption of this interpretation did not have a material impact on its consolidated financial statements. The annual improvements process addresses issues in the 2014-2016 reporting cycles include changes to IFRS 1 – First time adoption of IFRS, IFRS 7 – Financial instruments: Disclosures, IAS 19 – Employee benefits, IFRS 10 – Consolidated financial statements and IAS 28 – Investment in associates and joint ventures. This improvement is effective for periods beginning on or after January 1, 2018. The adoption of these improvements did not have a material impact on the consolidated financial statements. D. New standards and interpretations issued but not yet adopted The following accounting interpretations and standards were issued during the year: IAS 19 – Employee benefits (“IAS 19”), has been amended to (i) require current service cost and net interest for the period after the re-measurement to be determined using the assumptions used for the re-measurement, and (ii) clarify the effect of a plan amendment, curtailment or settlement on the requirements regarding the asset ceiling. The amendment to IAS 19 is effective for the years beginning on or after January 1, 2019. The Company is currently assessing the impact of this amendment. IFRS 3 – Business Combinations (“IFRS 3”), has been amended to revise the definition of a business to include an input and a substantive process that together significantly contribute to the ability to create outputs. The amendment to IFRS 3 is effective for the years beginning on or after January 1, 2020. The Company is currently assessing the impact of this amendment. IAS 1 – Presentation of financial statements (“IAS 1”) and IAS 8 – Accounting policies, changes in accounting estimates and errors (“IAS 8”), have been amended to (i) use a consistent definition of materiality throughout IFRSs and the Conceptual Framework for Financial Reporting; (ii) clarify the explanation of the definition of material; and iii) incorporate guidance in IAS 1 regarding immaterial information. The amendments to IAS 1 and IAS 8 are effective for the years beginning on or after January 1, 2020. The Company is currently assessing the impact of this amendment. Trade receivables .............................................................................................................. $ 271,799 $ 480,084 Allowance for doubtful accounts ...................................................................................... Trade receivables, net ....................................................................................................... Risk management assets (note 30) ................................................................................... Broker accounts receivable ............................................................................................... Indirect taxes receivable ................................................................................................... Other ................................................................................................................................. Allowance for doubtful accounts Opening balance ............................................................................................................... $ (931) $ (1,124) Impact of change in accounting policy (note 4)................................................................ 484 - Additional allowances ....................................................................................................... Receivables written off as uncollectible ........................................................................... Effect of changes in foreign exchange rates ..................................................................... Closing balance ................................................................................................................. $ $ 6 Inventories Crude oil and diluent ...................................................................................................... $ 23,412 $ Asphalt ............................................................................................................................ Natural gas liquids .......................................................................................................... Wellsite fluids and distillate ............................................................................................ Spare parts and other ..................................................................................................... The cost of the inventory sold included in cost of sales was $5,656 million and $4,777 million for the year ended December 31, 2018 and 2017, respectively. December 31, 2018 2017 (133) 271,666 5,683 4,194 989 1,284 (931) 479,153 6,032 4,441 2,712 2,563 $ 283,816 $ 494,901 Year ended December 31, 2018 2017 (7,360) 7,624 50 (133) 17,450 30,599 14,168 - December 31, 2018 (2,238) 2,394 37 (931) 2017 79,223 19,817 44,087 13,150 13,680 $ 85,629 $ 169,957 Consolidated Financial Statements 22 70 Gibson Energy 23 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Estimation uncertainty arising from variable lease payments Certain leases contain variable payment terms that are linked to the Company’s owner operator costs within our Logistics segment. Judgment is applied in determination of whether the owner operator arrangement contain variable payment terms. All owner operator costs that are dependent upon the activity levels are classified as variable payments and all such costs are accounted for as a single lease component and charged to the consolidated statements of operations as incurred. C. New interpretations and amended standards adopted by the Company The Company adopted the following new interpretations and revised standards, along with any consequential amendments. These changes were made in accordance with applicable transitional provisions. IFRS 2 – Share-based payments (“IFRS 2”), has been amended to address (i) certain issues related to the accounting for cash settled awards, and (ii) the accounting for equity settled awards that include a “net settlement” feature in respect of employee withholding taxes. IFRS 2 is effective for annual periods beginning on or after January 1, 2018. The adoption of this interpretation did not have a material impact on its consolidated financial statements. IFRIC 22 – Foreign currency transactions and advance consideration (“IFRIC 22”), provides guidance on how to determine the date of the transaction when an entity either pays or receives consideration in advance for foreign currency-denominated contracts. IFRIC 22 is effective for annual periods beginning on or after January 1, 2018. The adoption of this interpretation did not have a material impact on its consolidated financial statements. IAS 28 – Investments in associates and joint ventures (“IAS 28”), has been amended to clarify that an entity applies IFRS 9, including its impairment requirements, to long-term interests in associate or joint venture to which the equity method is not applied. The amendment to IAS 28 is effective for years beginning on or after January 1, 2018. The Company has determined that the adoption of this interpretation did not have a material impact on its consolidated financial statements. The annual improvements process addresses issues in the 2014-2016 reporting cycles include changes to IFRS 1 – First time adoption of IFRS, IFRS 7 – Financial instruments: Disclosures, IAS 19 – Employee benefits, IFRS 10 – Consolidated financial statements and IAS 28 – Investment in associates and joint ventures. This improvement is effective for periods beginning on or after January 1, 2018. The adoption of these improvements did not have a material impact on the consolidated financial statements. D. New standards and interpretations issued but not yet adopted The following accounting interpretations and standards were issued during the year: IAS 19 – Employee benefits (“IAS 19”), has been amended to (i) require current service cost and net interest for the period after the re-measurement to be determined using the assumptions used for the re-measurement, and (ii) clarify the effect of a plan amendment, curtailment or settlement on the requirements regarding the asset ceiling. The amendment to IAS 19 is effective for the years beginning on or after January 1, 2019. The Company is currently assessing the impact of this amendment. IFRS 3 – Business Combinations (“IFRS 3”), has been amended to revise the definition of a business to include an input and a substantive process that together significantly contribute to the ability to create outputs. The amendment to IFRS 3 is effective for the years beginning on or after January 1, 2020. The Company is currently assessing the impact of this amendment. IAS 1 – Presentation of financial statements (“IAS 1”) and IAS 8 – Accounting policies, changes in accounting estimates and errors (“IAS 8”), have been amended to (i) use a consistent definition of materiality throughout IFRSs and the Conceptual Framework for Financial Reporting; (ii) clarify the explanation of the definition of material; and iii) incorporate guidance in IAS 1 regarding immaterial information. The amendments to IAS 1 and IAS 8 are effective for the years beginning on or after January 1, 2020. The Company is currently assessing the impact of this amendment. Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) 5 Trade and other receivables Trade receivables .............................................................................................................. Allowance for doubtful accounts ...................................................................................... Trade receivables, net ....................................................................................................... Risk management assets (note 30) ................................................................................... Broker accounts receivable ............................................................................................... Indirect taxes receivable ................................................................................................... Other ................................................................................................................................. Allowance for doubtful accounts December 31, 2018 $ 271,799 (133) 271,666 5,683 4,194 989 1,284 283,816 $ $ $ 2017 480,084 (931) 479,153 6,032 4,441 2,712 2,563 494,901 Year ended December 31, 2018 2017 Opening balance ............................................................................................................... Impact of change in accounting policy (note 4)................................................................ Additional allowances ....................................................................................................... Receivables written off as uncollectible ........................................................................... Effect of changes in foreign exchange rates ..................................................................... Closing balance ................................................................................................................. $ (931) 484 (7,360) 7,624 50 (133) $ 6 Inventories $ (1,124) - (2,238) 2,394 37 (931) $ Crude oil and diluent ...................................................................................................... Asphalt ............................................................................................................................ Natural gas liquids .......................................................................................................... Wellsite fluids and distillate ............................................................................................ Spare parts and other ..................................................................................................... December 31, 2018 2017 $ 23,412 17,450 30,599 14,168 - 85,629 $ $ 79,223 19,817 44,087 13,150 13,680 $ 169,957 The cost of the inventory sold included in cost of sales was $5,656 million and $4,777 million for the year ended December 31, 2018 and 2017, respectively. 22 Gibson Energy 23 71 Consolidated Financial Statements Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) 7 Net investment in finance leases 8 Assets and liabilities held for sale, discontinued operations and disposals 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: During the year ended December 31, 2018, the Company completed the assessment of various disposal groups that met the criteria under IFRS 5 – Non-Current Assets Held for Sale and Discontinued Operations (“IFRS 5”) as held for sale and/or discontinued operations. Noted below is a brief description of each disposal group. Total minimum lease payments receivable .................................................................... Residual value ................................................................................................................. Unearned income ........................................................................................................... Less: current portion ....................................................................................................... Net investment in finance lease: non-current portion ................................................... December 31, 2018 2017 $ 595,672 57,073 (497,383) 155,362 1,156 $ 154,206 $ 360,107 44,944 (285,203) 119,848 1,828 $ 118,020 The minimum lease receivables are expected to be as follows: 2019 ................................................................................................................................................................................ 2020 ................................................................................................................................................................................ 2021 ................................................................................................................................................................................ 2022 ................................................................................................................................................................................ 2023 ................................................................................................................................................................................ 2024 and later ................................................................................................................................................................. $ 36,334 36,563 36,799 35,161 32,777 $ 418,038 The following tables set forth the description of disposal groups classified as held for sale as at December 31, 2018: Disposal Group Canadian Truck U.S. Logistics and Non-Core Environmental Services Transportation (“TT Canada”) Infrastructure disposal group North (“ESN”) business business disposal groups. Met the high probability criteria of the sale of the business, including the active marketing of the Valuation of net Lower of carrying amount and FVLCD Fair value less cost of Market based model which is considered level 2 valuation Held for sale classification assets disposal (FVLCD) determination Discontinued operations determination Refer to “TT Canada” section This disposal group provides This business provides processing, below. truck transportation services in recovery and disposal services the U.S. and also includes a from a network of midstream Represent a separate major network of midstream infrastructure assets located line of business and classified infrastructure assets which are throughout Western Canada, as discontinued operations. included within the Company’s which are included within the Logistics and Infrastructure’s Company’s Infrastructure reportable segments. reportable segments. Does not represent a separate Does not represent a separate major line of business or geographical area of operations. major line of business or geographical area of operations. Assets and liabilities held for sale for all disposal groups as discussed above comprises of the following: Trade and other receivables ......................................................................................... $ 37,403 Inventories .................................................................................................................... Property, plant and equipment (note 10) ..................................................................... Right-of-use assets (note 11) ........................................................................................ Other assets and prepaids ............................................................................................ Total assets held for sale ............................................................................................... $ 209,438 As at December 31, 2018 2,053 159,540 9,401 1,041 Assets Liabilities Trade payables and accrued charges ............................................................................ Lease liability (note 16) ................................................................................................. Provisions (note 19) ...................................................................................................... Deferred income tax liability ......................................................................................... $ 20,778 8,965 21,641 7,429 Total liabilities held for sale .......................................................................................... $ 58,813 Consolidated Financial Statements 24 72 Gibson Energy 25 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) 7 Net investment in finance leases 8 Assets and liabilities held for sale, discontinued operations and disposals 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: During the year ended December 31, 2018, the Company completed the assessment of various disposal groups that met the criteria under IFRS 5 – Non-Current Assets Held for Sale and Discontinued Operations (“IFRS 5”) as held for sale and/or discontinued operations. Noted below is a brief description of each disposal group. The following tables set forth the description of disposal groups classified as held for sale as at December 31, 2018: Total minimum lease payments receivable .................................................................... $ 595,672 $ 360,107 Disposal Group Residual value ................................................................................................................. Unearned income ........................................................................................................... Less: current portion ....................................................................................................... Net investment in finance lease: non-current portion ................................................... $ 154,206 $ 118,020 The minimum lease receivables are expected to be as follows: 2019 ................................................................................................................................................................................ $ 36,334 2020 ................................................................................................................................................................................ 2021 ................................................................................................................................................................................ 2022 ................................................................................................................................................................................ 2023 ................................................................................................................................................................................ 36,563 36,799 35,161 32,777 2024 and later ................................................................................................................................................................. $ 418,038 Held for sale classification Valuation of net assets Fair value less cost of disposal (FVLCD) determination Discontinued operations determination Canadian Truck Transportation (“TT Canada”) business Met the high probability criteria of the sale of the business, including the active marketing of the disposal groups. U.S. Logistics and Infrastructure disposal group Non-Core Environmental Services North (“ESN”) business Lower of carrying amount and FVLCD Market based model which is considered level 2 valuation Refer to “TT Canada” section below. Represent a separate major line of business and classified as discontinued operations. This disposal group provides truck transportation services in the U.S. and also includes a network of midstream infrastructure assets which are included within the Company’s Logistics and Infrastructure’s reportable segments. This business provides processing, recovery and disposal services from a network of midstream infrastructure assets located throughout Western Canada, which are included within the Company’s Infrastructure reportable segments. Does not represent a separate major line of business or geographical area of operations. Does not represent a separate major line of business or geographical area of operations. December 31, 2018 2017 57,073 (497,383) 155,362 1,156 44,944 (285,203) 119,848 1,828 Assets and liabilities held for sale for all disposal groups as discussed above comprises of the following: Assets Trade and other receivables ......................................................................................... Inventories .................................................................................................................... Property, plant and equipment (note 10) ..................................................................... Right-of-use assets (note 11) ........................................................................................ Other assets and prepaids ............................................................................................ Total assets held for sale ............................................................................................... As at December 31, 2018 $ 37,403 2,053 159,540 9,401 1,041 $ 209,438 Liabilities Trade payables and accrued charges ............................................................................ Lease liability (note 16) ................................................................................................. Provisions (note 19) ...................................................................................................... Deferred income tax liability ......................................................................................... Total liabilities held for sale .......................................................................................... $ 20,778 8,965 21,641 7,429 $ 58,813 24 Gibson Energy 25 73 Consolidated Financial Statements Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) During the year ended December 31, 2018, the Company recorded impairment charges of $117.5 million relating to the disposal groups that are classified as held for sale or have been sold. U.S. Environmental Services business TT Canada During the year ended December 31, 2018, the Company met the criteria under IFRS 5 for its TT Canada business to be classified as discontinued operations. The TT Canada business provides hauling services for crude and other products for oil and gas producers and was reported historically within the Company’s Logistics reportable segment. Operating results related to these segments have been included in net income from discontinued operations in the consolidated statements of operations. Comparative period balances of the consolidated statements of operations and cash flows have been restated. The following tables set forth the operating results from discontinued operations for the year ended December 31, 2018 and 2017: Revenue – External and inter-segmental ................................................................ Revenue – Inter-segmental ..................................................................................... Revenue – External .................................................................................................. Cost of sales ............................................................................................................. Gross loss ................................................................................................................. Impairment of goodwill (note 14) ........................................................................... Finance cost and other (income), net ..................................................................... (Loss) income before income taxes ......................................................................... Income tax provision – current ............................................................................... Income tax recovery – deferred .............................................................................. Net (loss) income from discontinued operations, after tax .................................... Year ended December 31, 2018 2017 $ 217,408 (26,765) 190,643 212,635 (21,992) 19,988 (981) (40,999) 3,410 (14,822) $ (29,587) $ 236,340 (31,981) 204,359 205,117 (758) - (1,840) 1,082 1,797 (1,510) $ 795 During the year ended December 31, 2018, the Company met the criteria under IFRS 5 for its U.S. Environmental Services business to be classified as discontinued operations. This business was sold on May 3, 2018 for adjusted gross proceeds of $123.3 million (U.S.$96 million) which resulted in recognition of an after-tax gain as follows: Sale price ................................................................................................................................... $ 123,619 Sale price adjustments .............................................................................................................. Total cash consideration ........................................................................................................... Cash and cash equivalents .................................................................................................. 1,127 Trade and other receivables ............................................................................................... Inventories .......................................................................................................................... Prepaid and other assets .................................................................................................... Property, plant and equipment (note 10) ........................................................................... Right-of-use asset (note 11) ................................................................................................ Intangible assets ................................................................................................................. Deferred income tax asset .................................................................................................. Other non-current assets .................................................................................................... Trade payables and accrued charges .................................................................................. Other current liabilities ....................................................................................................... Lease liabilities (note 16) .................................................................................................... Provisions ............................................................................................................................ Net assets disposed ................................................................................................................... Costs to sell ............................................................................................................................... Loss on sale before income taxes and reclassification of foreign currency translation gain .... Reclassification of foreign currency translation gain on disposal of foreign operations .......... Income tax provision – deferred ............................................................................................... (278) 123,341 50,225 12,756 1,999 85,245 19,679 1,261 22,945 247 (16,478) (2,431) (19,217) (17,309) 140,049 (13,634) (30,342) 141,933 16,069 After-tax gain on sale ................................................................................................................ $ 95,522 The U.S. Environmental Services business included 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 industrial lift, exploration support services and accommodation facilities. It was reported historically within Company’s Infrastructure, Logistics and Other reportable segments. Comparative period balances of the consolidated statements of operations and cash flows have been restated. The following tables set forth the operating results from discontinued operations for the year ended December 31, 2018 and 2017: Revenue ................................................................................................................... Cost of sales ............................................................................................................. Gross profit (loss) .................................................................................................... Finance cost and other (income), net ..................................................................... Income (loss) before income taxes ......................................................................... Income tax recovery – current ................................................................................ Income tax provision (recovery) – deferred ............................................................ Net income (loss) from discontinued operations, after tax .................................... After-tax gain on sale .............................................................................................. Year ended December 31, 2018 2017 $ 93,281 $ 236,834 86,481 6,800 1,364 5,436 - 1,448 3,988 95,522 296,516 (59,682) (1,247) (58,435) (41) (8,210) (50,184) - Gain (loss) from discontinued operations, after tax ............................................... $ 99,510 $ (50,184) Consolidated Financial Statements 26 74 Gibson Energy 27 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) groups that are classified as held for sale or have been sold. TT Canada During the year ended December 31, 2018, the Company recorded impairment charges of $117.5 million relating to the disposal U.S. Environmental Services business Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) During the year ended December 31, 2018, the Company met the criteria under IFRS 5 for its U.S. Environmental Services business to be classified as discontinued operations. This business was sold on May 3, 2018 for adjusted gross proceeds of $123.3 million (U.S.$96 million) which resulted in recognition of an after-tax gain as follows: During the year ended December 31, 2018, the Company met the criteria under IFRS 5 for its TT Canada business to be classified as discontinued operations. The TT Canada business provides hauling services for crude and other products for oil and gas producers and was reported historically within the Company’s Logistics reportable segment. Operating results related to these segments have been included in net income from discontinued operations in the consolidated statements of operations. Comparative period balances of the consolidated statements of operations and cash flows have been restated. The following tables set forth the operating results from discontinued operations for the year ended December 31, 2018 and 2017: Revenue – External and inter-segmental ................................................................ $ 217,408 $ 236,340 Revenue – Inter-segmental ..................................................................................... Revenue – External .................................................................................................. Cost of sales ............................................................................................................. Gross loss ................................................................................................................. Impairment of goodwill (note 14) ........................................................................... Finance cost and other (income), net ..................................................................... (Loss) income before income taxes ......................................................................... Income tax provision – current ............................................................................... Income tax recovery – deferred .............................................................................. Net (loss) income from discontinued operations, after tax .................................... $ (29,587) Year ended December 31, 2018 2017 (26,765) 190,643 212,635 (21,992) 19,988 (981) (40,999) 3,410 (14,822) (31,981) 204,359 205,117 (758) - (1,840) 1,082 1,797 (1,510) $ 795 Sale price ................................................................................................................................... $ 123,619 Sale price adjustments .............................................................................................................. (278) 123,341 Total cash consideration ........................................................................................................... Cash and cash equivalents .................................................................................................. 1,127 50,225 Trade and other receivables ............................................................................................... 12,756 Inventories .......................................................................................................................... 1,999 Prepaid and other assets .................................................................................................... 85,245 Property, plant and equipment (note 10) ........................................................................... 19,679 Right-of-use asset (note 11) ................................................................................................ 1,261 Intangible assets ................................................................................................................. 22,945 Deferred income tax asset .................................................................................................. Other non-current assets .................................................................................................... 247 (16,478) Trade payables and accrued charges .................................................................................. (2,431) Other current liabilities ....................................................................................................... (19,217) Lease liabilities (note 16) .................................................................................................... (17,309) Provisions ............................................................................................................................ 140,049 Net assets disposed ................................................................................................................... (13,634) Costs to sell ............................................................................................................................... Loss on sale before income taxes and reclassification of foreign currency translation gain .... (30,342) Reclassification of foreign currency translation gain on disposal of foreign operations .......... 141,933 16,069 Income tax provision – deferred ............................................................................................... $ 95,522 After-tax gain on sale ................................................................................................................ The U.S. Environmental Services business included 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 industrial lift, exploration support services and accommodation facilities. It was reported historically within Company’s Infrastructure, Logistics and Other reportable segments. Comparative period balances of the consolidated statements of operations and cash flows have been restated. The following tables set forth the operating results from discontinued operations for the year ended December 31, 2018 and 2017: Revenue ................................................................................................................... Cost of sales ............................................................................................................. Gross profit (loss) .................................................................................................... Finance cost and other (income), net ..................................................................... Income (loss) before income taxes ......................................................................... Income tax recovery – current ................................................................................ Income tax provision (recovery) – deferred ............................................................ Net income (loss) from discontinued operations, after tax .................................... After-tax gain on sale .............................................................................................. Gain (loss) from discontinued operations, after tax ............................................... Year ended December 31, 2018 $ 93,281 86,481 6,800 1,364 5,436 - 1,448 3,988 95,522 $ 99,510 2017 $ 236,834 296,516 (59,682) (1,247) (58,435) (41) (8,210) (50,184) - $ (50,184) 26 Gibson Energy 27 75 Consolidated Financial Statements Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Wholesale Propane business During the year ended December 31, 2018, the Company met the criteria under IFRS 5 for its Wholesale Propane business to be classified as held for sale. The Wholesale Propane business was engaged in the purchasing, selling, storing and blending of propane products and was reported historically within the Company’s Canadian and U.S. Wholesale operating segments. The business did not represent a major line of business or geographical operations, therefore the results for the period up to the sale has been included within continuing operations. On December 3, 2018, the Company completed the sale of the Wholesale Propane business for gross proceeds of $42.8 million, subject to purchase price adjustments, which resulted in recognition of a loss of $5.0 million included within other operating income in the consolidated statements of operations. Major net assets disposed consists of inventory of $13.0 million, property, plant and equipment of $10.6 million, right-of-use assets of $18.2 million, deferred income taxes of $8.1 million, goodwill of $13.4 million and finance lease liabilities of $16.2 million. Industrial Propane During the first quarter of 2017, the Company sold its Industrial Propane segment for cash proceeds of $433.1 million as disclosed in note 8 of the Company’s annual consolidated financial statements for the year ended December 31, 2017. The following tables set forth operating results from discontinued operations: Revenue ....................................................................................................................................... Cost of sales ................................................................................................................................. Gross profit .................................................................................................................................. Other operating income ............................................................................................................... Income before income taxes ........................................................................................................ Income tax provision – current .................................................................................................... Income tax provision – deferred ................................................................................................. Net income from discontinued operations, after tax ................................................................... After-tax gain on sale ................................................................................................................... Gain from discontinued operations, after tax .............................................................................. Year ended December 31, 2017 1 $ 58,296 44,678 13,618 (19) 13,637 4,161 275 9,201 150,649 $ 159,850 1. The Company derecognized the Industrial Propane segment effective March 1, 2017, accordingly, results for year ended December 31, 2017 represent the activity for the period January 1, 2017 to February 28, 2017. exchange rates ........................ 201 486 8,554 6,649 9 Business combination On August 8, 2018, the Company acquired certain assets comprising of pipeline and gathering system for total consideration of $72 million (U.S.$55 million). The purchase price is payable in two installments, with U.S.$25 million paid on August 8, 2018 and U.S.$30 million payable by August 8, 2019. Acquisition costs of $0.1 million were incurred and charged to general and administrative expenses during the year ended December 31, 2018. The following table summarizes the fair value of assets acquired and liabilities assumed at the acquisition date: Fair value Property, Plant and Equipment ....................................................................................................... Intangible assets (1) .......................................................................................................................... Provisions ........................................................................................................................................ Goodwill (2) ....................................................................................................................................... Net assets acquired ......................................................................................................................... $ 20,038 19,594 (444) 32,656 $ 71,844 (1) Consists of customer relationships attributed to a long-term customer contract. (2) The goodwill arising on this acquisition is expected to be deductible for income tax purposes. Consolidated Financial Statements 28 76 Gibson Energy 29 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) The goodwill arising from the acquisition was attributable to the expected synergies with the Company’s existing Pyote gathering system in the U.S. The goodwill for this acquisition was allocated to the Infrastructure reporting segment. Land & Pipelines and Buildings Connections Tanks Rolling Equipment & Stock Disposal wells Work in Progress Total Plant, At January 1, 2018 ...................... $ 189,090 $ 225,679 $ 642,137 $ 411,694 $ 937,378 $ 185,739 $ 2,591,717 2,296 (1,477) 3,194 (3,112) 8,348 (72,897) 13,074 (37,307) 224,816 257,508 (114,793) Reclassifications.......................... 3,419 59,696 (149,101) 5,780 - 19,097 53,722 - 32,264 1,761 8,898 - (36,389) - - - - - - - 941 3,386 - 10 Property, plant and equipment Cost: Additions .................................... Disposals ..................................... Acquisitions through business combinations (note 9) ............. Change in decommissioning provision (note 19) .................. Reclassed to net investment in finance leases (note 7) ............ Effect of movements in Transferred to held for sale and exchange rates ........................ 1,067 1,058 1,124 11,493 9,406 17 24,165 disposals (note 8) .................... (102,998) (7,868) (41,104) (293,869) (318,416) (4,565) (768,820) At December 31, 2018 ................ $ 91,397 $ 299,229 $ 607,012 $ 64,769 $ 668,158 $ 256,906 $ 1,987,471 At January 1, 2018 ...................... $ 37,865 $ $ 121,173 $ 286,181 $ 444,618 $ - $ 972,029 Accumulated depreciation and impairment: Depreciation ............................... Impairment ................................. Disposals ..................................... Effect of movements in 5,494 9,261 (1,702) Transferred to held for sale and 82,192 10,485 2,000 (1) 4 23,083 8,082 16,186 31,707 53,640 25,115 (1,290) (59,976) (33,358) disposals (note 8) .................... (32,040) (4,239) (20,933) (238,320) (217,857) (513,389) At December 31, 2018 ................ $ 19,079 $ 90,441 $ 130,601 $ 44,332 $ 278,807 $ - $ 563,260 Carrying amounts: At January 1, 2018 ...................... $ 151,225 $ 143,487 $ 520,964 $ 125,513 $ 492,760 $ 185,739 $ 1,619,688 At December 31, 2018 ................ $ 72,318 $ 208,788 $ 476,411 $ 20,437 $ 389,351 $ 256,906 $ 1,424,211 - - - - - - - - - 20,038 - 14,045 (36,389) 108,888 76,165 (96,327) 15,894 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Wholesale Propane business During the year ended December 31, 2018, the Company met the criteria under IFRS 5 for its Wholesale Propane business to be products and was reported historically within the Company’s Canadian and U.S. Wholesale operating segments. The business did not represent a major line of business or geographical operations, therefore the results for the period up to the sale has been included within continuing operations. On December 3, 2018, the Company completed the sale of the Wholesale Propane business for gross proceeds of $42.8 million, subject to purchase price adjustments, which resulted in recognition of a loss of $5.0 million included within other operating income in the consolidated statements of operations. Major net assets disposed consists of inventory of $13.0 million, property, plant and equipment of $10.6 million, right-of-use assets of $18.2 million, deferred income taxes of $8.1 million, goodwill of $13.4 million and finance lease liabilities of $16.2 million. Industrial Propane During the first quarter of 2017, the Company sold its Industrial Propane segment for cash proceeds of $433.1 million as disclosed in note 8 of the Company’s annual consolidated financial statements for the year ended December 31, 2017. The following tables set forth operating results from discontinued operations: Revenue ....................................................................................................................................... $ 58,296 Cost of sales ................................................................................................................................. Gross profit .................................................................................................................................. Other operating income ............................................................................................................... Income before income taxes ........................................................................................................ Income tax provision – current .................................................................................................... Income tax provision – deferred ................................................................................................. Net income from discontinued operations, after tax ................................................................... After-tax gain on sale ................................................................................................................... Year ended December 31, 2017 1 44,678 13,618 (19) 13,637 4,161 275 9,201 150,649 Gain from discontinued operations, after tax .............................................................................. $ 159,850 1. The Company derecognized the Industrial Propane segment effective March 1, 2017, accordingly, results for year ended December 31, 2017 represent the activity for the period January 1, 2017 to February 28, 2017. 9 Business combination On August 8, 2018, the Company acquired certain assets comprising of pipeline and gathering system for total consideration of $72 million (U.S.$55 million). The purchase price is payable in two installments, with U.S.$25 million paid on August 8, 2018 and U.S.$30 million payable by August 8, 2019. Acquisition costs of $0.1 million were incurred and charged to general and administrative expenses during the year ended December 31, 2018. The following table summarizes the fair value of assets acquired and liabilities assumed at the acquisition date: Fair value Property, Plant and Equipment ....................................................................................................... $ 20,038 Intangible assets (1) .......................................................................................................................... Provisions ........................................................................................................................................ Goodwill (2) ....................................................................................................................................... 19,594 (444) 32,656 Net assets acquired ......................................................................................................................... $ 71,844 (1) Consists of customer relationships attributed to a long-term customer contract. (2) The goodwill arising on this acquisition is expected to be deductible for income tax purposes. classified as held for sale. The Wholesale Propane business was engaged in the purchasing, selling, storing and blending of propane 10 Property, plant and equipment Land & Buildings Pipelines and Connections Tanks Rolling Stock Plant, Equipment & Disposal wells Work in Progress Total Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) The goodwill arising from the acquisition was attributable to the expected synergies with the Company’s existing Pyote gathering system in the U.S. The goodwill for this acquisition was allocated to the Infrastructure reporting segment. Cost: At January 1, 2018 ...................... $ 189,090 $ 225,679 5,780 Additions .................................... - Disposals ..................................... Acquisitions through business 2,296 (1,477) $ 642,137 $ 411,694 $ 937,378 13,074 (37,307) 8,348 (72,897) 3,194 (3,112) $ 185,739 $ 2,591,717 257,508 (114,793) 224,816 - combinations (note 9) ............. Reclassifications.......................... Change in decommissioning provision (note 19) .................. Reclassed to net investment in finance leases (note 7) ............ Effect of movements in exchange rates ........................ Transferred to held for sale and disposals (note 8) .................... - 3,419 19,097 53,722 - 32,264 - - 1,761 8,898 - (36,389) - - - - 941 59,696 - (149,101) 3,386 - - - 20,038 - 14,045 (36,389) 1,067 1,058 1,124 11,493 9,406 17 24,165 (7,868) At December 31, 2018 ................ $ 91,397 $ 299,229 (102,998) (41,104) (318,416) $ 607,012 $ 64,769 $ 668,158 (293,869) Accumulated depreciation and impairment: At January 1, 2018 ...................... $ 37,865 $ Depreciation ............................... Impairment ................................. Disposals ..................................... Effect of movements in 5,494 9,261 (1,702) 82,192 10,485 2,000 (1) $ 121,173 $ 286,181 $ 444,618 53,640 25,115 (33,358) 16,186 31,707 (59,976) 23,083 8,082 (1,290) (4,565) (768,820) $ 256,906 $ 1,987,471 $ - $ 972,029 108,888 - 76,165 - (96,327) - 201 4 486 8,554 6,649 - 15,894 At December 31, 2018 ................ $ 19,079 $ (32,040) (4,239) 90,441 (20,933) (217,857) $ 130,601 $ 44,332 $ 278,807 (238,320) $ - (513,389) - $ 563,260 exchange rates ........................ Transferred to held for sale and disposals (note 8) .................... Carrying amounts: At January 1, 2018 ...................... $ 151,225 $ 143,487 At December 31, 2018 ................ $ 520,964 $ 125,513 $ 492,760 $ 72,318 $ 208,788 $ 476,411 $ 20,437 $ 389,351 $ 185,739 $ 1,619,688 $ 256,906 $ 1,424,211 28 Gibson Energy 29 77 Consolidated Financial Statements Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) 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, 2017 ...................... $ 188,380 $ 209,454 5,177 Additions .................................... - Disposals ..................................... Change in decommissioning 2,204 (4,640) $ 608,344 $ 457,871 $ 920,843 16,696 (11,283) 4,317 (34,475) 7,579 (1,523) Work in Progress Total $ 104,868 $ 2,489,760 178,849 (51,921) 142,876 - 11 Right-of-use assets Cost: provision (note 19) .................. Reclassifications.......................... Effect of movements in - 5,080 2,151 8,897 3,956 24,805 - - 4,606 23,058 - (61,840) 10,713 - exchange rates ........................ - At December 31, 2017 ................ $ 189,090 $ 225,679 (1,934) Accumulated depreciation and impairment: At January 1, 2017 ...................... $ 31,778 $ Depreciation ............................... Impairment ................................ Disposals ..................................... Effect of movements in 6,663 - (287) exchange rates ........................ (289) At December 31, 2017 ................ $ 37,865 $ 73,052 9,140 - - - 82,192 (1,024) (16,542) $ 642,137 $ 411,694 $ 937,378 (16,019) $ 96,609 $ 275,002 $ 370,025 78,328 17,089 (11,143) 42,511 12,143 (32,554) 26,428 - (1,408) (456) (9,681) $121,173 $ 286,181 $ 444,618 (10,921) (165) (35,684) $ 185,739 $ 2,591,717 $ $ - $ 846,466 163,070 - 29,232 - (45,392) - - (21,347) - $ 972,029 Carrying amounts: At January 1, 2017 ...................... $ 156,602 $ 136,402 At December 31, 2017 ................ $ 151,225 $ 143,487 $ 511,735 $ 182,869 $ 550,818 $ 520,964 $ 125,513 $ 492,760 $ 104,868 $1,643,294 $ 185,739 $1,619,688 Additions to property, plant and equipment include capitalization of interest of $8.4 million and $4.7 million for the year ended December 31, 2018 and 2017, respectively. Property, plant and equipment are reviewed for impairment whenever events or conditions indicate that their net carrying amount may not be recoverable. During the year ended December 31, 2018, the Company recorded an impairment loss of $76.2 million, of which $74.7 million relates to assets held for sale relating to assets in the TT Canada business, Wholesale Propane business, non-core ESN business, Injection Stations, which are included within the Logistics and Infrastructure reportable segments (note 8), and $1.5 million included within the cost of sales in the statements of operations related to the U.S. Truck and Transportation business included within the Logistics reportable segment. Key assumptions used in the determination of the recoverable amounts include reference to management’s assessment of the expected proceeds to be received upon sale, as well as the depreciable replacement cost values where applicable. During the year ended December 31, 2017, the Company recorded an impairment loss of $29.2 million. The impairment loss related to assets within the U.S. Environmental Services business which was included within the Company's discontinued operations in cost of sales (note 8). Amounts in relation to tanks are under operating lease arrangements. Consolidated Financial Statements 30 78 Gibson Energy 31 Additions and adjustments ................. Disposals .............................................. Effects of movements in exchange rates .................................................... Transferred to held for sale and Accumulated depreciation: Depreciation ........................................ Disposals .............................................. Effects of movements in exchange rates .................................................... Transferred to held for sale and Buildings Rail cars Surface leases Other Total At January 1, 2018 (note 4) ................. $ 57,706 $ 87,458 $ 19,522 $ 5,862 $ 170,548 4,232 (224) 588 12,529 - - 619 (683) 493 2,126 - 269 19,506 (907) 1,350 disposals (note 8) ................................ (8,744) (19,101) (18,027) (3,922) (49,794) At December 31, 2018 ......................... $ 53,558 $ 80,886 $ 1,924 $ 4,335 $ 140,703 At January 1, 2018 (note 4) ................. $ - $ - $ - $ - $ 8,705 (81) 32,858 805 1,679 - (32) 50 - 11 - 44,047 (113) 111 - 50 disposals (note 8) ................................ (1,051) (909) (436) (126) (2,522) At December 31, 2018 ......................... $ 7,623 $ 31,949 $ 348 $ 1,603 $ 41,523 Carrying amounts: At January 1, 2018 ............................... At December 31, 2018 ......................... $ 57,706 $ 45,935 $ 87,458 $ 19,522 $ 5,862 $ 170,548 $ 48,937 $ 1,576 $ 2,732 $ 99,180 12 Long-term prepaid and other assets Long-term prepaid ............................................................................................................... $ Risk management assets (note 30) ...................................................................................... Defined benefit pension plan assets .................................................................................... Other assets ......................................................................................................................... U.S. tax receivable ............................................................................................................... December 31, 2018 348 - 530 89 3,836 4,803 $ 2017 835 1,367 635 1,008 3,519 7,364 $ $ Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) 11 Right-of-use assets Cost: At January 1, 2017 ...................... $ 188,380 $ 209,454 $ 608,344 $ 457,871 $ 920,843 $ 104,868 $ 2,489,760 Cost: Buildings Rail cars Surface leases Other Total At January 1, 2018 (note 4) ................. Additions and adjustments ................. Disposals .............................................. Effects of movements in exchange rates .................................................... Transferred to held for sale and disposals (note 8) ................................ $ 57,706 4,232 (224) $ 87,458 $ 19,522 619 (683) 12,529 - $ 5,862 $ 170,548 19,506 (907) 2,126 - 588 - 493 269 1,350 (8,744) (19,101) (18,027) (3,922) (49,794) At December 31, 2018 ......................... $ 53,558 $ 80,886 $ 1,924 $ 4,335 $ 140,703 Accumulated depreciation: At January 1, 2018 (note 4) ................. Depreciation ........................................ Disposals .............................................. Effects of movements in exchange rates .................................................... Transferred to held for sale and disposals (note 8) ................................ $ - 8,705 (81) $ - $ - 32,858 805 - (32) $ - 1,679 - $ 50 - 11 (1,051) (909) (436) 50 (126) - 44,047 (113) 111 (2,522) At December 31, 2018 ......................... $ 7,623 $ 31,949 $ 348 $ 1,603 $ 41,523 Carrying amounts: At January 1, 2018 ............................... At December 31, 2018 ......................... 12 Long-term prepaid and other assets $ 57,706 $ 45,935 $ 87,458 $ 19,522 $ 48,937 $ 1,576 $ 5,862 $ 2,732 $ 170,548 $ 99,180 Long-term prepaid ............................................................................................................... Risk management assets (note 30) ...................................................................................... Defined benefit pension plan assets .................................................................................... Other assets ......................................................................................................................... U.S. tax receivable ............................................................................................................... December 31, 2018 $ $ 348 - 530 89 3,836 4,803 2017 835 1,367 635 1,008 3,519 7,364 $ $ Land & Pipelines and Buildings Connections Tanks Rolling Stock Work in Progress Total Plant, Equipment & Disposal wells Additions .................................... Disposals ..................................... Change in decommissioning 2,204 (4,640) provision (note 19) .................. - Reclassifications.......................... 5,080 Effect of movements in 5,177 - 2,151 8,897 7,579 (1,523) 4,317 (34,475) 16,696 (11,283) 142,876 3,956 24,805 - - 4,606 23,058 (61,840) 178,849 (51,921) 10,713 - exchange rates ........................ (1,934) - (1,024) (16,019) (16,542) (165) (35,684) At December 31, 2017 ................ $ 189,090 $ 225,679 $ 642,137 $ 411,694 $ 937,378 $ 185,739 $ 2,591,717 Accumulated depreciation and impairment: Depreciation ............................... Impairment ................................ Disposals ..................................... Effect of movements in At January 1, 2017 ...................... $ 31,778 $ 73,052 $ 96,609 $ 275,002 $ 370,025 $ - $ 846,466 6,663 - (287) 9,140 26,428 42,511 12,143 78,328 17,089 - (1,408) (32,554) (11,143) - - - 163,070 29,232 (45,392) (21,347) exchange rates ........................ (289) (456) (10,921) (9,681) At December 31, 2017 ................ $ 37,865 $ 82,192 $121,173 $ 286,181 $ 444,618 $ - $ 972,029 - - - - - - Carrying amounts: At January 1, 2017 ...................... $ 156,602 $ 136,402 $ 511,735 $ 182,869 $ 550,818 $ 104,868 $1,643,294 At December 31, 2017 ................ $ 151,225 $ 143,487 $ 520,964 $ 125,513 $ 492,760 $ 185,739 $1,619,688 Additions to property, plant and equipment include capitalization of interest of $8.4 million and $4.7 million for the year ended December 31, 2018 and 2017, respectively. Property, plant and equipment are reviewed for impairment whenever events or conditions indicate that their net carrying amount may not be recoverable. During the year ended December 31, 2018, the Company recorded an impairment loss of $76.2 million, of which $74.7 million relates to assets held for sale relating to assets in the TT Canada business, Wholesale Propane business, non-core ESN business, Injection Stations, which are included within the Logistics and Infrastructure reportable segments (note 8), and $1.5 million included within the cost of sales in the statements of operations related to the U.S. Truck and Transportation business included within the Logistics reportable segment. Key assumptions used in the determination of the recoverable amounts include reference to management’s assessment of the expected proceeds to be received upon sale, as well as the depreciable replacement cost values where applicable. of sales (note 8). During the year ended December 31, 2017, the Company recorded an impairment loss of $29.2 million. The impairment loss related to assets within the U.S. Environmental Services business which was included within the Company's discontinued operations in cost Amounts in relation to tanks are under operating lease arrangements. 30 Gibson Energy 31 79 Consolidated Financial Statements Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) 13 Intangible assets Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Brands Customer relationships Long-term customer contracts Non-compete agreements Technology and Software Total Customer Brands relationships Non-compete Technology agreements and Software Total Long-term customer contracts - - Cost: At January 1, 2018 ................ $ 45,512 $ 252,879 - Additions ............................... Disposals ............................... - Acquisitions through business combinations (note 9)................................ Effect of movements in exchange rates .................... Transferred to held for sale (159,552) and disposals (note 8) ......... At December 31, 2018 .......... $ 34,837 $ 99,431 (11,051) 6,104 376 - - Accumulated amortization and impairment: At January 1, 2018 ................ $ 44,472 $ 250,560 1,118 Amortization ......................... - Impairment (note 8) ............. Disposals ............................... - Effect of movements in exchange rates .................... Transferred to held for sale (159,640) and disposals (note 8) ......... At December 31, 2018 .......... $ 34,825 $ 98,206 727 273 - (11,030) 6,168 383 $ 39,971 - - $ 24,598 - - $ 83,833 3,271 (134) $ 446,793 3,271 (134) 19,594 - - 19,594 4,060 124 593 11,257 - $ 63,625 (4,324) $ 20,398 (12,921) $ 74,642 (187,848) $ 292,933 $ 39,971 508 - - $ 24,551 47 - - $ 53,390 10,334 2,057 (125) $ 412,944 12,734 2,330 (125) 3,195 124 (229) 9,641 - $ 43,674 (4,324) $ 20,398 (11,593) $ 53,834 (186,587) $ 250,937 Cost: Effect of movements in Accumulated amortization and impairment: Effect of movements in Carrying amounts: At January 1, 2017 ................... $ 46,288 $ 264,587 $ 42,539 $ 25,290 $ 78,052 $ 456,756 Additions .................................. - - - - 6,575 6,575 exchange rates ....................... (776) (11,708) (2,568) (692) (794) (16,538) At December 31, 2017 ............. $ 45,512 $ 252,879 $ 39,971 $ 24,598 $ 83,833 $ 446,793 At January 1, 2017 ................... $ 44,155 $ 250,665 $ 29,634 $ 24,037 $ 42,179 $ 390,670 Amortization ............................ 1,090 Impairment (note 8) ................ - 5,095 5,947 12,188 - 1,202 - 11,902 - 31,477 5,947 exchange rates ....................... (773) (11,147) (1,851) (688) (691) (15,150) At December 31, 2017 ............. $ 44,472 $ 250,560 $ 39,971 $ 24,551 $ 53,390 $ 412,944 At January 1, 2017 ................... $ 2,133 $ 13,922 $ 12,905 $ 1,253 $ 35,873 $ 66,086 At December 31, 2017 ............. $ 1,040 $ 2,319 $ - $ 47 $ 30,443 $ 33,849 Intangible assets are reviewed for impairment whenever events or conditions indicate that their net carrying amount may not be recoverable. During the year ended December 31, 2018 and December 31, 2017, the Company recorded an impairment loss of $2.3 million and $5.9 million, respectively, that was included in the statement of operations within discontinued operations (note 8). Opening balance .......................................................................................................................... $ 381,965 $ 454,489 Acquisitions through business combinations (note 9) ................................................................. 32,656 - Impairments ................................................................................................................................ Transfers to assets held for sale (note 8) ..................................................................................... Effect of changes in foreign exchange rates ................................................................................ (20,479) (33,342) 1,548 (69,414) - (3,110) Closing balance ............................................................................................................................ $ 362,348 $ 381,965 Year ended December 31, 2018 2017 $ 33,849 $ 41,996 14 Goodwill The changes in the carrying amount of goodwill are as follows: Carrying amounts: At January 1, 2018 ................ $ 1,040 $ 2,319 At December 31, 2018 .......... $ 47 $ 30,443 $ 20,808 $ 12 $ 1,225 $ 19,951 $ - $ - Consolidated Financial Statements 32 80 Gibson Energy 33 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) 13 Intangible assets At January 1, 2018 ................ $ 45,512 $ 252,879 $ 39,971 $ 24,598 $ 83,833 $ 446,793 Customer Brands relationships Non-compete Technology agreements and Software Long-term customer contracts Total 3,271 (134) 3,271 (134) - - - 19,594 - 19,594 exchange rates .................... 376 6,104 4,060 124 593 11,257 and disposals (note 8) ......... (11,051) (159,552) - (4,324) (12,921) (187,848) At December 31, 2018 .......... $ 34,837 $ 99,431 $ 63,625 $ 20,398 $ 74,642 $ 292,933 Cost: Additions ............................... Disposals ............................... Acquisitions through business combinations (note 9)................................ Effect of movements in Transferred to held for sale Accumulated amortization and impairment: Amortization ......................... Impairment (note 8) ............. Disposals ............................... Effect of movements in exchange rates .................... Transferred to held for sale - - - 727 273 - 383 - - - - - At January 1, 2018 ................ $ 44,472 $ 250,560 $ 39,971 $ 24,551 $ 53,390 $ 412,944 1,118 508 47 - - 10,334 2,057 (125) 12,734 2,330 (125) 6,168 3,195 124 (229) 9,641 and disposals (note 8) ......... (11,030) (159,640) (4,324) (11,593) (186,587) At December 31, 2018 .......... $ 34,825 $ 98,206 $ 43,674 $ 20,398 $ 53,834 $ 250,937 Carrying amounts: At January 1, 2018 ................ $ 1,040 $ 2,319 $ - $ 47 $ 30,443 $ 33,849 At December 31, 2018 .......... $ 12 $ 1,225 $ 19,951 $ - $ 20,808 $ 41,996 - - - - - Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Brands Customer relationships Long-term customer contracts Non-compete agreements Technology and Software Total Cost: At January 1, 2017 ................... $ 46,288 $ 264,587 Additions .................................. - Effect of movements in (11,708) exchange rates ....................... At December 31, 2017 ............. $ 45,512 $ 252,879 (776) - Accumulated amortization and impairment: At January 1, 2017 ................... $ 44,155 $ 250,665 5,095 Amortization ............................ Impairment (note 8) ................ 5,947 Effect of movements in (11,147) exchange rates ....................... At December 31, 2017 ............. $ 44,472 $ 250,560 1,090 - (773) $ 42,539 - $ 25,290 - $ 78,052 6,575 $ 456,756 6,575 (2,568) $ 39,971 (692) $ 24,598 (794) $ 83,833 (16,538) $ 446,793 $ 29,634 12,188 - $ 24,037 1,202 - $ 42,179 11,902 - $ 390,670 31,477 5,947 (1,851) $ 39,971 (688) $ 24,551 (691) $ 53,390 (15,150) $ 412,944 Carrying amounts: At January 1, 2017 ................... $ 2,133 $ 13,922 $ 12,905 At December 31, 2017 ............. $ 1,040 $ 2,319 $ - $ 1,253 $ 35,873 $ 47 $ 30,443 $ 66,086 $ 33,849 Intangible assets are reviewed for impairment whenever events or conditions indicate that their net carrying amount may not be recoverable. During the year ended December 31, 2018 and December 31, 2017, the Company recorded an impairment loss of $2.3 million and $5.9 million, respectively, that was included in the statement of operations within discontinued operations (note 8). 14 Goodwill The changes in the carrying amount of goodwill are as follows: Year ended December 31, 2018 2017 Opening balance .......................................................................................................................... Acquisitions through business combinations (note 9) ................................................................. Impairments ................................................................................................................................ Transfers to assets held for sale (note 8) ..................................................................................... Effect of changes in foreign exchange rates ................................................................................ Closing balance ............................................................................................................................ $ 381,965 32,656 (20,479) (33,342) 1,548 $ 362,348 $ 454,489 - (69,414) - (3,110) $ 381,965 32 Gibson Energy 33 81 Consolidated Financial Statements Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Goodwill is monitored for impairment by management at the operating segment level. The following is a summary of goodwill allocated to each operating segment: performance as well as expected developments in the respective markets and in the overall macro-economic environment. The calculation of the recoverable amount using the discounted cash flow approach was based on the following key assumptions: Terminals, Pipelines and Injection Stations .............................................................................. Moose Jaw Facility .................................................................................................................... TT Canada ................................................................................................................................. Canadian Wholesale Marketing ................................................................................................ December 31, 2018 2017 $ 229,776 89,017 - 43,555 362,348 $ $ 197,538 89,017 19,988 75,422 $ 381,965 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, 2018, $325.6 million, net of impairment, relates to goodwill recognized on the acquisition of the Company on December 12, 2008. On March 31, 2018, the Company reviewed impairment indicators and determined that based on a review of the performance of the business during the period, impairment indicators existed in the Injection Stations operating segment. Accordingly, the Company performed an impairment test by comparing the FVLCD to the carrying value, including goodwill. As a result, it was determined that goodwill in this segment was impaired by $2.0 million (note 8). On September 30, 2018, the Company reviewed impairment indicators and determined that based on a review of the anticipated sale transaction, impairment indicators existed in the Wholesale Propane business disposal group within the Canadian Wholesale Marketing segment. Accordingly, the Company performed an impairment test by comparing the FVLCD to the carrying value, including goodwill. As a result, it was determined that goodwill in this segment was impaired by $18.5 million (note 8). On November 30, 2018, the Company carried out its annual impairment test with respect to goodwill. For all operating segments within continuing operations, the recoverable amount was greater than the carrying value, including goodwill. For discontinued operations, management also performed its annual impairment test with respect to goodwill and as a result, an impairment of $20.0 million within the TT Canada business was recorded. Key assumptions used in 2018 impairment test To calculate the recoverable amount, management uses the higher of the FVLCD and VIU. The recoverable amount was determined using either a discounted cash flow approach, an earnings multiple approach, or market based approach. The Company references Board approved budgets and cash flow forecasts, trailing twelve-month (TTM) earnings before interest, taxes, depreciation and amortization and impairment (EBITDA), implied multiples and appropriate discount rates in the valuation calculations. The implied multiple is calculated by utilizing multiples of comparable public companies 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 is 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 to 11, and for businesses that are classified as held for sale the Company referenced management’s assessment of the expected proceeds to be received upon sale (note 8). The fair value of each operating segment was categorized as Level 2 fair value based on the observables inputs. Key assumptions used in 2017 impairment test On November 30, 2017, the Company carried out its annual impairment test with respect to goodwill. For all operating segments, other than the U.S. Truck and Transportation and U.S. Wholesale Marketing, the recoverable amount was greater than the carrying value, including goodwill. The carrying amount of the U.S. Truck and Transportation was determined to be higher than its recoverable amount of $46.0 million which resulted in recording an impairment write down of $41.2 million. The carrying amount of the U.S. Wholesale Marketing operating segment was determined to be higher than its recoverable amount of $16.9 million which resulted in recording an impairment write down of $28.2 million. The recoverable amount was determined by discounting the future cash flows generated from continued use of the operating segments. The model calculated the present value of the estimated future earnings of the above stated operating segments. Estimating future earnings requires judgement, considering past and actual U.S. Truck and Transportation U.S. Wholesale Canadian Wholesale Marketing Marketing Discount rate ................................................................... Terminal value growth rate ............................................. 12.1% 2.0% 12.9% 2.0% 12.9% 2.0% (i) Cash flows were projected based on past experience, actual operating results and the five-year business plan. The range of the five-year average cash flow projections for these operating segments was between $1.0 million and $19.3 million. (ii) The terminal value growth rate is based on management's best estimate of the long-term growth rate for after the forecast period, considering historic performance and future economic forecasts. (iii) Each operating segment discount rate reflects their individual size, risk profile and circumstance and is based on past experience and industry average weighted average cost of capital. The fair value of calculations are categorized as Level 3 fair value based on the unobservable inputs. 15 Loans and Borrowings Revolving Credit Facility During the year ended December 31, 2018, the Company amended the unsecured revolving credit facility of $560.0 million (the “Revolving Credit Facility”), to extend the maturity date of the facility to March 31, 2023 and amend certain financial covenants as noted below. In addition, the Company has three demand letter of credit facilities totaling $150.0 million. The Revolving Credit Facility permits 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 standby fees 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. Under the terms of Revolving Credit Facility, the Company is required to adhere to certain financial and maintenance covenants including maintaining maximum consolidated senior and maximum consolidated total debt leverage ratios of 4.85 to 1.0 for the 2018 fiscal year, 4.5 to 1.0 for the 2019 fiscal year and 4.0 to 1.0 thereafter. In addition, the Company is also required to maintain a minimum interest coverage ratio of no less than 2.5 to 1.0. As at December 31, 2018 and December 31, 2017, the Company was in compliance with all covenants under the Revolving Credit Facility. The Company had $150.0 million ($150.0 million; U.S.$nil) and $230.2 million ($105.0 million; U.S.$100.0 million) drawn on its Revolving Credit Facility as of December 31, 2018 and December 31, 2017, respectively, and had issued letters of credit totaling $70.9 million and $68.9 million under its bilateral demand letter of credit facilities as at December 31, 2018 and December 31, 2017, respectively. Consolidated Financial Statements 34 82 Gibson Energy 35 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Goodwill is monitored for impairment by management at the operating segment level. The following is a summary of goodwill allocated to each operating segment: performance as well as expected developments in the respective markets and in the overall macro-economic environment. The calculation of the recoverable amount using the discounted cash flow approach was based on the following key assumptions: Terminals, Pipelines and Injection Stations .............................................................................. $ 229,776 $ 197,538 Moose Jaw Facility .................................................................................................................... TT Canada ................................................................................................................................. Canadian Wholesale Marketing ................................................................................................ December 31, 2018 2017 89,017 - 43,555 89,017 19,988 75,422 $ 362,348 $ 381,965 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, 2018, $325.6 million, net of impairment, relates to goodwill recognized on the acquisition of the Company on December 12, 2008. On March 31, 2018, the Company reviewed impairment indicators and determined that based on a review of the performance of the business during the period, impairment indicators existed in the Injection Stations operating segment. Accordingly, the Company performed an impairment test by comparing the FVLCD to the carrying value, including goodwill. As a result, it was determined that goodwill in this segment was impaired by $2.0 million (note 8). On September 30, 2018, the Company reviewed impairment indicators and determined that based on a review of the anticipated sale transaction, impairment indicators existed in the Wholesale Propane business disposal group within the Canadian Wholesale Marketing segment. Accordingly, the Company performed an impairment test by comparing the FVLCD to the carrying value, including goodwill. As a result, it was determined that goodwill in this segment was impaired by $18.5 million (note 8). On November 30, 2018, the Company carried out its annual impairment test with respect to goodwill. For all operating segments within continuing operations, the recoverable amount was greater than the carrying value, including goodwill. For discontinued operations, management also performed its annual impairment test with respect to goodwill and as a result, an impairment of $20.0 million within the TT Canada business was recorded. Key assumptions used in 2018 impairment test To calculate the recoverable amount, management uses the higher of the FVLCD and VIU. The recoverable amount was determined using either a discounted cash flow approach, an earnings multiple approach, or market based approach. The Company references Board approved budgets and cash flow forecasts, trailing twelve-month (TTM) earnings before interest, taxes, depreciation and amortization and impairment (EBITDA), implied multiples and appropriate discount rates in the valuation calculations. The implied multiple is calculated by utilizing multiples of comparable public companies 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 is 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 to 11, and for businesses that are classified as held for sale the Company referenced management’s assessment of the expected proceeds to be received upon sale (note 8). The fair value of each operating segment was categorized as Level 2 fair value based on the observables inputs. Key assumptions used in 2017 impairment test On November 30, 2017, the Company carried out its annual impairment test with respect to goodwill. For all operating segments, other than the U.S. Truck and Transportation and U.S. Wholesale Marketing, the recoverable amount was greater than the carrying value, including goodwill. The carrying amount of the U.S. Truck and Transportation was determined to be higher than its recoverable amount of $46.0 million which resulted in recording an impairment write down of $41.2 million. The carrying amount of the U.S. Wholesale Marketing operating segment was determined to be higher than its recoverable amount of $16.9 million which resulted in recording an impairment write down of $28.2 million. The recoverable amount was determined by discounting the future cash flows generated from continued use of the operating segments. The model calculated the present value of the estimated future earnings of the above stated operating segments. Estimating future earnings requires judgement, considering past and actual U.S. Truck and Transportation U.S. Wholesale Marketing Canadian Wholesale Marketing Discount rate ................................................................... Terminal value growth rate ............................................. 12.1% 2.0% 12.9% 2.0% 12.9% 2.0% Cash flows were projected based on past experience, actual operating results and the five-year business plan. The range of the (i) five-year average cash flow projections for these operating segments was between $1.0 million and $19.3 million. The terminal value growth rate is based on management's best estimate of the long-term growth rate for after the forecast (ii) period, considering historic performance and future economic forecasts. Each operating segment discount rate reflects their individual size, risk profile and circumstance and is based on past (iii) experience and industry average weighted average cost of capital. The fair value of calculations are categorized as Level 3 fair value based on the unobservable inputs. 15 Loans and Borrowings Revolving Credit Facility During the year ended December 31, 2018, the Company amended the unsecured revolving credit facility of $560.0 million (the “Revolving Credit Facility”), to extend the maturity date of the facility to March 31, 2023 and amend certain financial covenants as noted below. In addition, the Company has three demand letter of credit facilities totaling $150.0 million. The Revolving Credit Facility permits 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 standby fees 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. Under the terms of Revolving Credit Facility, the Company is required to adhere to certain financial and maintenance covenants including maintaining maximum consolidated senior and maximum consolidated total debt leverage ratios of 4.85 to 1.0 for the 2018 fiscal year, 4.5 to 1.0 for the 2019 fiscal year and 4.0 to 1.0 thereafter. In addition, the Company is also required to maintain a minimum interest coverage ratio of no less than 2.5 to 1.0. As at December 31, 2018 and December 31, 2017, the Company was in compliance with all covenants under the Revolving Credit Facility. The Company had $150.0 million ($150.0 million; U.S.$nil) and $230.2 million ($105.0 million; U.S.$100.0 million) drawn on its Revolving Credit Facility as of December 31, 2018 and December 31, 2017, respectively, and had issued letters of credit totaling $70.9 million and $68.9 million under its bilateral demand letter of credit facilities as at December 31, 2018 and December 31, 2017, respectively. 34 Gibson Energy 35 83 Consolidated Financial Statements Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Long-term debt Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) 16 Lease Liabilities December 31, 2018 2017 Revolving credit facility, due March 31, 2023 ........................................................................ $300 million 5.375% Notes due July 15, 2022 ........................................................................ $600 million 5.25% Notes due July 15, 2024 .......................................................................... Unamortized issue discount and debt issue costs ................................................................. Long-term debt ...................................................................................................................... $ 150,000 300,000 600,000 (10,422) $ 1,039,578 $ 230,180 300,000 600,000 (12,061) $ 1,118,119 The Notes agreements contain certain redemption options whereby the Company can redeem all or part of the Notes, at prices set forth in the agreements, from proceeds of an equity offering or on the dates specified in the agreement. In addition, the Notes holders have the right to require the Company to redeem the Notes at the redemption prices set forth in the agreement in the event of a change in control or in the event certain asset sale proceeds are not re-invested in the time and manner specified in the agreement. The Company’s long-term debt contains non-financial covenants and customary events of default clauses. As of December 31, 2018 and December 31, 2017, the Company was in compliance with all of its covenants. The components of finance costs are as follows: December 31, 2018 2017 Interest expense, net of capitalized interest ........................................................................... Interest expense, finance lease (note 16) ................................................................................ Interest income ......................................................................................................................... Foreign exchange loss (gain) on long-term debt ..................................................................... Debt extinguishment costs ....................................................................................................... Total finance cost, net .............................................................................................................. $ 69,674 5,907 (1,492) 4,403 - 78,492 $ $ 78,863 - (1,782) (18,788) 60,492 $ 118,785 Opening balance (note 4) .............................................................................................................. $ Additions ....................................................................................................................................... Disposals ........................................................................................................................................ Interest expense ............................................................................................................................ Interest expense from discontinued operations (note 8) ............................................................. Lease payments ............................................................................................................................. Effect of movements in exchange rates ........................................................................................ Transferred to held for sale and disposals (note 8)....................................................................... Ending balance ............................................................................................................................. Less: current portion ..................................................................................................................... Ending balance – non-current portion .......................................................................................... $ Year ended December 31, 2018 172,834 19,506 (834) 5,907 616 (52,848) 8,309 (44,419) 109,071 36,200 72,871 Year ended December 31, 2018 1 Variable lease payments .............................................................................................................. $ 176,328 Short-term and low-value leases.................................................................................................. 6,737 Total ............................................................................................................................................. $ 183,065 1. Variable lease payments, short-term and low-value leases on discontinued operations of $152 million for the year ended December 31, 2018 are included in the above amounts. The Company incurs lease payments related to rail cars, head office facilities, vehicles and equipment, and surface leases. Leases are entered into and exited in coordination with specific business requirements which includes the assessment of the appropriate durations for the related leased assets. The Company has recognised lease liabilities in relation to all lease arrangements measured at the present value of the remaining lease payments from commitments disclosed as at December 31, 2018 at an incremental Short-term leases are leases with a lease term of twelve months or less while low-value assets comprised of information technology and miscellaneous equipment. Such items are charged to cost of sales and general and administrative expenses in the consolidated borrowing rate of 5.0%. statements of operations. 17 Convertible debentures Liability Component Equity Component Balance as at January 1, 2017 .............................................................................................. $ 87,312 $ 7,151 Accretion of issue costs ....................................................................................................... Deferred taxes ..................................................................................................................... Balance as at December 31, 2017 ....................................................................................... Accretion of issue costs........................................................................................................ Balance as at December 31, 2018 ....................................................................................... 2,607 - 89,919 $ - 2,547 (128) 7,023 - 92,466 $ 7,023 $ $ At December 31, 2018, the Company has an aggregate of $100.0 million principal amount of unsecured subordinated convertible debentures (“the Debentures”) outstanding. The Debentures issued at par, bear interest at a rate of 5.25% per annum, payable semi- annually on July 15 and January 15 in each year commencing January 15, 2017, will mature on July 15, 2021, and may be redeemed, in certain circumstances, on or after July 15, 2019. The Debentures are convertible at the holder's option into common shares at any Consolidated Financial Statements 36 84 Gibson Energy 37 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Long-term debt Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) 16 Lease Liabilities December 31, 2018 2017 Revolving credit facility, due March 31, 2023 ........................................................................ $ 150,000 $ 230,180 $300 million 5.375% Notes due July 15, 2022 ........................................................................ $600 million 5.25% Notes due July 15, 2024 .......................................................................... Unamortized issue discount and debt issue costs ................................................................. 300,000 600,000 (10,422) 300,000 600,000 (12,061) Long-term debt ...................................................................................................................... $ 1,039,578 $ 1,118,119 The Notes agreements contain certain redemption options whereby the Company can redeem all or part of the Notes, at prices set forth in the agreements, from proceeds of an equity offering or on the dates specified in the agreement. In addition, the Notes holders have the right to require the Company to redeem the Notes at the redemption prices set forth in the agreement in the event of a change in control or in the event certain asset sale proceeds are not re-invested in the time and manner specified in the agreement. The Company’s long-term debt contains non-financial covenants and customary events of default clauses. As of December 31, 2018 and December 31, 2017, the Company was in compliance with all of its covenants. The components of finance costs are as follows: December 31, 2018 2017 Interest expense, net of capitalized interest ........................................................................... $ 69,674 $ 78,863 Interest expense, finance lease (note 16) ................................................................................ 5,907 - Interest income ......................................................................................................................... (1,492) Foreign exchange loss (gain) on long-term debt ..................................................................... 4,403 Debt extinguishment costs ....................................................................................................... - (1,782) (18,788) 60,492 Total finance cost, net .............................................................................................................. $ 78,492 $ 118,785 Opening balance (note 4) .............................................................................................................. Additions ....................................................................................................................................... Disposals ........................................................................................................................................ Interest expense ............................................................................................................................ Interest expense from discontinued operations (note 8) ............................................................. Lease payments ............................................................................................................................. Effect of movements in exchange rates ........................................................................................ Transferred to held for sale and disposals (note 8)....................................................................... Ending balance ............................................................................................................................. Less: current portion ..................................................................................................................... Ending balance – non-current portion .......................................................................................... Year ended December 31, 2018 $ $ 172,834 19,506 (834) 5,907 616 (52,848) 8,309 (44,419) 109,071 36,200 72,871 Year ended December 31, 2018 1 Variable lease payments .............................................................................................................. Short-term and low-value leases.................................................................................................. Total ............................................................................................................................................. $ 176,328 6,737 $ 183,065 1. Variable lease payments, short-term and low-value leases on discontinued operations of $152 million for the year ended December 31, 2018 are included in the above amounts. The Company incurs lease payments related to rail cars, head office facilities, vehicles and equipment, and surface leases. Leases are entered into and exited in coordination with specific business requirements which includes the assessment of the appropriate durations for the related leased assets. The Company has recognised lease liabilities in relation to all lease arrangements measured at the present value of the remaining lease payments from commitments disclosed as at December 31, 2018 at an incremental borrowing rate of 5.0%. Short-term leases are leases with a lease term of twelve months or less while low-value assets comprised of information technology and miscellaneous equipment. Such items are charged to cost of sales and general and administrative expenses in the consolidated statements of operations. 17 Convertible debentures Liability Component Equity Component Balance as at January 1, 2017 .............................................................................................. Accretion of issue costs ....................................................................................................... Deferred taxes ..................................................................................................................... Balance as at December 31, 2017 ....................................................................................... Accretion of issue costs........................................................................................................ Balance as at December 31, 2018 ....................................................................................... $ $ $ 87,312 2,607 - 89,919 2,547 92,466 $ 7,151 - (128) 7,023 - 7,023 $ $ 36 Gibson Energy 37 85 Consolidated Financial Statements At December 31, 2018, the Company has an aggregate of $100.0 million principal amount of unsecured subordinated convertible debentures (“the Debentures”) outstanding. The Debentures issued at par, bear interest at a rate of 5.25% per annum, payable semi- annually on July 15 and January 15 in each year commencing January 15, 2017, will mature on July 15, 2021, and may be redeemed, in certain circumstances, on or after July 15, 2019. The Debentures are convertible at the holder's option into common shares at any Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) time prior to the earlier of the Maturity Date and the business day immediately preceding the date fixed for redemption by the Company at a conversion price of $21.65 per Share (the "Conversion Price"), being a ratio of approximately 46.1894 Shares per $1,000 principal amount of Debentures. The Debentures are subordinated to the Company's senior indebtedness. 20 Other long-term liabilities The Debentures are treated as a compound financial instrument and have been classified as a liability, net of issue costs and net of the fair value of the conversion feature at the date of issue, which has been classified as shareholders’ equity. The liability component will accrete up to the principal balance at maturity. The accretion of the liability component and interest payable are expensed in the statements of operations. The fair value of the conversion feature was determined at the time of issuance as the difference between the principal value of the Debentures and the discounted cash flows assuming a 7.8% rate which was the estimated rate for debt with similar terms with no conversion feature. If the Debentures are converted into common shares, a portion of the value of the conversion feature under shareholders’ equity and the liability component will be reclassified to shareholders’ equity along with the conversion price. 21 Share capital Authorized Defined benefit plan obligations (note 28) ............................................................................... $ Risk management liabilities (note 30)....................................................................................... Other post-retirement benefits obligations (note 28) .............................................................. December 31, 2018 967 154 2017 1,262 492 4,758 6,512 $ $ 15,198 $ 16,319 18 Trade payables and accrued charges Trade payables and accrued charges include the following items: Trade payables .......................................................................................................................... Accrued compensation charges ................................................................................................ Accrued payment obligation (note 8 & 9) ................................................................................ Indirect taxes payable .............................................................................................................. Risk management liabilities (note 30) ...................................................................................... Defined benefit plan obligations .............................................................................................. Interest payable ........................................................................................................................ Insurance payable ..................................................................................................................... Other ......................................................................................................................................... 19 Provisions December 31, 2018 2017 $ 246,799 20,146 39,156 1,840 7,715 253 24,590 6,266 18,645 $ 365,410 $ 413,745 30,523 - 3,122 11,276 286 25,607 7,114 8,989 $ 500,662 The aggregate carrying amounts of the obligation associated with decommissioning and site restoration on the retirement of assets and environmental costs are as follows: Opening balance ........................................................................................................................ Settlements ............................................................................................................................... Additions ................................................................................................................................... Acquisitions through business combinations (note 9) ............................................................. Change in discount rate ............................................................................................................. Unwinding of discount .............................................................................................................. Transfer to liabilities held for sale (note 8) ............................................................................... Effect of changes in foreign exchange rates .............................................................................. Closing balance .......................................................................................................................... Year ended December 31, 2018 2017 $ 183,527 (2,577) 8,038 444 7,477 3,916 (38,950) 936 $ 162,811 $ 171,038 (3,146) 3,656 - 9,607 3,912 - (1,540) $ 183,527 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 $342.8 million and $327.2 million at December 31, 2018 and 2017, 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 2.2% and 2.2% at December 31, 2018 and 2017, respectively. The provision is expected to be settled to 39 years into the future. A one percent increase or decrease in the risk- free rate would decrease or increase the provision by $46.7 million, respectively, with a corresponding adjustment to property, plant and equipment. 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, 2018 or 2017. Common Shares – Issued and outstanding The following table below sets forth the issued and outstanding common shares for the years ended December 31, 2018 and 2017. Common Shares Number of Common Shares Balance as at January 1, 2017 ......................................................................................................... 141,733,032 $ 1,909,032 Issuance in connection with the exercise of stock options ............................................................ Issuance in connection with other equity awards .......................................................................... 323,625 1,147,731 Reclassification of contributed surplus on issuance of awards under equity incentive plans ........ Balance as at December 31, 2017 ................................................................................................... 143,204,388 $ 1,932,103 Issuance in connection with the exercise of stock options............................................................. Issuance in connection with other equity awards .......................................................................... Reclassification of contributed surplus on issuance of awards under equity incentive plans ........ - - 104,897 1,249,505 Balance as at December 31, 2018 ................................................................................................... 144,558,790 $ 1,955,146 A dividend of $0.33 per share, declared on November 8, 2018, was paid on January 17, 2019. For the year ended December 31, 2018 the Company declared total dividends of $1.32 per common share. Amount 2,822 20,249 1,056 21,987 - - Consolidated Financial Statements 38 86 Gibson Energy 39 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) time prior to the earlier of the Maturity Date and the business day immediately preceding the date fixed for redemption by the 20 Other long-term liabilities Company at a conversion price of $21.65 per Share (the "Conversion Price"), being a ratio of approximately 46.1894 Shares per $1,000 principal amount of Debentures. The Debentures are subordinated to the Company's senior indebtedness. Defined benefit plan obligations (note 28) ............................................................................... Risk management liabilities (note 30)....................................................................................... Other post-retirement benefits obligations (note 28) .............................................................. 21 Share capital Authorized December 31, 2018 $ 967 154 15,198 $ 16,319 $ $ 2017 1,262 492 4,758 6,512 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, 2018 or 2017. Common Shares – Issued and outstanding The following table below sets forth the issued and outstanding common shares for the years ended December 31, 2018 and 2017. Balance as at January 1, 2017 ......................................................................................................... Issuance in connection with the exercise of stock options ............................................................ Issuance in connection with other equity awards .......................................................................... Reclassification of contributed surplus on issuance of awards under equity incentive plans ........ Balance as at December 31, 2017 ................................................................................................... Issuance in connection with the exercise of stock options............................................................. Issuance in connection with other equity awards .......................................................................... Reclassification of contributed surplus on issuance of awards under equity incentive plans ........ Balance as at December 31, 2018 ................................................................................................... Common Shares Number of Common Shares 141,733,032 323,625 1,147,731 - 143,204,388 104,897 1,249,505 - 144,558,790 Amount $ 1,909,032 2,822 - 20,249 $ 1,932,103 1,056 - 21,987 $ 1,955,146 A dividend of $0.33 per share, declared on November 8, 2018, was paid on January 17, 2019. For the year ended December 31, 2018 the Company declared total dividends of $1.32 per common share. The Debentures are treated as a compound financial instrument and have been classified as a liability, net of issue costs and net of the fair value of the conversion feature at the date of issue, which has been classified as shareholders’ equity. The liability component will accrete up to the principal balance at maturity. The accretion of the liability component and interest payable are expensed in the statements of operations. The fair value of the conversion feature was determined at the time of issuance as the difference between the principal value of the Debentures and the discounted cash flows assuming a 7.8% rate which was the estimated rate for debt with similar terms with no conversion feature. If the Debentures are converted into common shares, a portion of the value of the conversion feature under shareholders’ equity and the liability component will be reclassified to shareholders’ equity along with the conversion price. 18 Trade payables and accrued charges Trade payables and accrued charges include the following items: Trade payables .......................................................................................................................... $ 246,799 $ 413,745 Accrued compensation charges ................................................................................................ Accrued payment obligation (note 8 & 9) ................................................................................ Indirect taxes payable .............................................................................................................. Risk management liabilities (note 30) ...................................................................................... Defined benefit plan obligations .............................................................................................. Interest payable ........................................................................................................................ Insurance payable ..................................................................................................................... Other ......................................................................................................................................... 19 Provisions December 31, 2018 2017 20,146 39,156 1,840 7,715 253 24,590 6,266 18,645 30,523 - 3,122 11,276 286 25,607 7,114 8,989 $ 365,410 $ 500,662 The aggregate carrying amounts of the obligation associated with decommissioning and site restoration on the retirement of assets and environmental costs are as follows: Opening balance ........................................................................................................................ $ 183,527 $ 171,038 Settlements ............................................................................................................................... Additions ................................................................................................................................... Acquisitions through business combinations (note 9) ............................................................. Change in discount rate ............................................................................................................. Unwinding of discount .............................................................................................................. Transfer to liabilities held for sale (note 8) ............................................................................... Effect of changes in foreign exchange rates .............................................................................. Closing balance .......................................................................................................................... $ 162,811 Year ended December 31, 2018 2017 (2,577) 8,038 444 7,477 3,916 (38,950) 936 (3,146) 3,656 9,607 3,912 - - (1,540) $ 183,527 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 $342.8 million and $327.2 million at December 31, 2018 and 2017, 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 2.2% and 2.2% at December 31, 2018 and 2017, respectively. The provision is expected to be settled to 39 years into the future. A one percent increase or decrease in the risk- free rate would decrease or increase the provision by $46.7 million, respectively, with a corresponding adjustment to property, plant and equipment. 38 Gibson Energy 39 87 Consolidated Financial Statements Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) 22 Income tax The major components of income tax are as follows: Year ended December 31, 2018 Current tax expense (recovery) ........................................................................................ Adjustments and true-ups in respect of prior years ......................................................... Current tax expense – discontinued operations (note 8) ................................................. Total current tax provision (recovery) ............................................................................ Deferred tax recovery....................................................................................................... Origination and reversal of temporary differences .......................................................... Deferred tax expense (recovery) – discontinued operations (note 8) ............................. Total deferred tax recovery ............................................................................................. Net income tax expense (recovery) ................................................................................ $ $ 64,303 (4,125) 3,410 63,588 (10,593) 6,028 2,695 (1,870) 61,718 2017 (30,721) (4,981) 32,094 (3,608) (25,048) 2,546 (9,445) (31,947) (35,555) $ $ The income tax recovery differs from the amounts which would be obtained by applying the Canadian statutory income tax rate to income (loss) before income taxes. These differences result from the following items: Income (loss) before income taxes, continuing operations ............................................ Income before income taxes, discontinued operations .................................................. Income before income taxes ........................................................................................... Statutory income tax rate ............................................................................................... Computed income tax expense ........................................................................................ Changes in income tax expense (recovery) resulting from: Recognition of previously unrecognized capital losses, net .................................... Foreign exchange gain, other ................................................................................... Non-taxable portion of the loss (gain) on sale of net assets held for sale (note 8) .. Share based compensation ...................................................................................... Rate differential on foreign taxes ............................................................................ Goodwill impairment ................................................................................................ Impact of corporate rate changes in U.S. ................................................................. Adjustments and true ups in respect of prior years ................................................. Other ......................................................................................................................... Year ended December 31, 2018 2017 $ 136,738 $ 76,028 212,766 26.99% 57,426 - (38,834) 24,996 4,789 702 10,388 - 1,904 347 61,718 $ $ (124,530) 133,110 8,580 26.96% 2,313 (19,975) (2,520) (26,177) 5,627 (18,039) - 32,758 (4,981) (4,561) (35,555) Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Effective income tax rate – continuing operations ......................................................... Effective income tax rate – discontinued operations ....................................................... 40.7 % 8.0 % 46.7% 17.0% Year ended December 31, 2018 2017 $ 60,178 3,410 $ (35,702) 32,094 $ 63,588 $ (3,608) Current tax, from continuing operations ......................................................................... Current tax, from discontinued operations ...................................................................... Deferred tax, from continuing operations ....................................................................... $ (4,565) $ (22,502) Deferred tax, from discontinued operations .................................................................... 2,695 (9,445) $ (1,870) $ (31,947) Total current and deferred, from continuing operations ................................................. Total current and deferred, from discontinued operations ............................................. $ 55,613 $ 6,105 $ (58,204) $ 22,649 The analysis of deferred tax assets and deferred tax liabilities is as follows: Deferred tax assets: Deferred tax liabilities: Deferred tax asset to be settled after more than 12 months ................................... $ Deferred tax asset to be settled within 12 months ................................................... 33,274 2,600 $ 70,021 5,200 $ 35,874 $ 75,221 Deferred tax liability to be settled after more than 12 months ................................ $ 77,440 $ 99,823 Deferred tax liability to be settled within 12 months ............................................... 200 1,000 $ 77,640 $ 100,823 Deferred tax liabilities, net ............................................................................................... $ 41,766 $ 25,602 The gross movement on the deferred income tax account is as follows: Opening balance .................................................................................................................. $ $ Effect of changes in foreign exchange rates ........................................................................ Transfers to assets held for sale (note 8) ............................................................................ Income statement recovery ................................................................................................ Tax credit relating to components of other comprehensive income .................................. Closing balance .................................................................................................................... $ $ 25,602 Year ended December 31, 2018 25,602 (4,164) 25,108 (1,870) (2,910) 41,766 2017 55,185 2,388 - (31,947) (24) Consolidated Financial Statements 40 88 Gibson Energy 41 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) 22 Income tax The major components of income tax are as follows: Year ended December 31, 2018 2017 Current tax expense (recovery) ........................................................................................ $ $ (30,721) Adjustments and true-ups in respect of prior years ......................................................... Current tax expense – discontinued operations (note 8) ................................................. Total current tax provision (recovery) ............................................................................ Deferred tax recovery....................................................................................................... Origination and reversal of temporary differences .......................................................... Deferred tax expense (recovery) – discontinued operations (note 8) ............................. Total deferred tax recovery ............................................................................................. 64,303 (4,125) 3,410 63,588 (10,593) 6,028 2,695 (1,870) Net income tax expense (recovery) ................................................................................ $ 61,718 $ The income tax recovery differs from the amounts which would be obtained by applying the Canadian statutory income tax rate to income (loss) before income taxes. These differences result from the following items: Year ended December 31, 2018 2017 Income (loss) before income taxes, continuing operations ............................................ $ 136,738 $ (124,530) Income before income taxes, discontinued operations .................................................. Income before income taxes ........................................................................................... Statutory income tax rate ............................................................................................... Computed income tax expense ........................................................................................ Changes in income tax expense (recovery) resulting from: Recognition of previously unrecognized capital losses, net .................................... Foreign exchange gain, other ................................................................................... Non-taxable portion of the loss (gain) on sale of net assets held for sale (note 8) .. Share based compensation ...................................................................................... Rate differential on foreign taxes ............................................................................ Goodwill impairment ................................................................................................ Impact of corporate rate changes in U.S. ................................................................. Adjustments and true ups in respect of prior years ................................................. Other ......................................................................................................................... 76,028 212,766 26.99% 57,426 - (38,834) 24,996 4,789 702 10,388 - 1,904 347 (4,981) 32,094 (3,608) (25,048) 2,546 (9,445) (31,947) (35,555) 133,110 8,580 26.96% 2,313 (19,975) (2,520) (26,177) 5,627 (18,039) - 32,758 (4,981) (4,561) Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Effective income tax rate – continuing operations ......................................................... Effective income tax rate – discontinued operations ....................................................... 40.7 % 8.0 % 46.7% 17.0% Year ended December 31, 2018 2017 Current tax, from continuing operations ......................................................................... Current tax, from discontinued operations ...................................................................... $ 60,178 3,410 $ 63,588 $ (35,702) 32,094 $ (3,608) Deferred tax, from continuing operations ....................................................................... Deferred tax, from discontinued operations .................................................................... $ (4,565) 2,695 $ (1,870) $ (22,502) (9,445) $ (31,947) Total current and deferred, from continuing operations ................................................. Total current and deferred, from discontinued operations ............................................. $ 55,613 $ 6,105 $ (58,204) $ 22,649 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 ................................................... Deferred tax liabilities: Deferred tax liability to be settled after more than 12 months ................................ Deferred tax liability to be settled within 12 months ............................................... $ 33,274 2,600 $ 35,874 $ 77,440 200 $ 77,640 $ 70,021 5,200 $ 75,221 $ 99,823 1,000 $ 100,823 Deferred tax liabilities, net ............................................................................................... $ 41,766 $ 25,602 The gross movement on the deferred income tax account is as follows: $ 61,718 $ (35,555) Opening balance .................................................................................................................. Effect of changes in foreign exchange rates ........................................................................ Transfers to assets held for sale (note 8) ............................................................................ Income statement recovery ................................................................................................ Tax credit relating to components of other comprehensive income .................................. Closing balance .................................................................................................................... Year ended December 31, 2018 25,602 (4,164) 25,108 (1,870) (2,910) 41,766 $ $ 2017 55,185 2,388 - (31,947) (24) 25,602 $ $ 40 Gibson Energy 41 89 Consolidated Financial Statements Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) 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: 23 Revenue Deferred tax assets At January 1, 2017 .................................................. (Charged) credited to the statement of operations ......................................................................... Charged to other comprehensive income .............. Effect of changes in foreign exchange rates ........... At January 1, 2018 .................................................. (Charged) credited to the statement of operations ......................................................................... Charged to other comprehensive income .............. Transfers from assets held for sale (note 8) ........... Effect of changes in foreign exchange rates ........... At December 31, 2018 ............................................ Non-capital losses carried forward Asset retirement obligations Retirement benefit obligations Goodwill, Intangibles, and other Total $ 62,599 $ 20,279 $ 1,369 $ 29,453 $113,700 (15,402) - (2,108) $ 45,089 (15,692) 820 - (299) $ 20,800 3,618 137 24 - $ 1,530 (152) 5,107 - (826) $ 33,734 6,205 (9,338) 24 (3,233) $101,153 (6,021) - (9,175) 1,750 $ 21,972 - (3,509) 67 $ 20,976 2,910 - - $ 4,288 - (23,913) 2,890 $ 18,916 2,910 (36,597) 4,707 $ 66,152 Deferred tax liabilities At January 1, 2017 ..................................................................... Credited to the statement of operations .................................. Effect of changes in foreign exchange rates .............................. At January 1, 2018 ..................................................................... Credited to the statement of operations .................................. Transfers to assets held for sale (note 8) .................................. Effect of changes in foreign exchange rates .............................. At December 31, 2018 ............................................................... Income tax losses carry forward Right-of-use asset, Property, Plant and Equipment $ (151,559) 23,305 1,499 $ (126,755) 7,891 11,489 (543) $ (107,918) Goodwill, Intangibles, and other Total Infrastructure Logistics Wholesale Total $ 17,980 (654) $ (17,326) $ (168,885) 41,285 845 - $ (126,755) - 7,891 11,489 - - (543) - $ (107,918) $ At December 31, 2018 and 2017, the Company had losses available to offset income for tax purposes of $89.8 million and $174.9 million, respectively. At December 31, 2018, the Company has $89.8 million of the losses available mainly in the U.S. that expire as follows: December 31, 2035 ........................................................................................................................................................ December 31, 2036 ........................................................................................................................................................ December 31, 2037 ........................................................................................................................................................ December 31, 2038 ........................................................................................................................................................ 19,245 64,568 5,450 537 $ 89,800 No income tax liability has been recognized in respect of temporary differences associated with investments in subsidiaries, except for as disclosed in note 8 for assets held for sale, as the Company can control the timing of the reversal of the temporary difference and the reversal is not probable in the foreseeable future. Consolidated Financial Statements 42 90 Gibson Energy 43 Year ended December 31, 2018 20171 Revenue from contracts with customers recognized at a point in time (2017 – Products) .... $ 6,559,568 $ 5,395,472 Revenue from contracts with customers recognized over time (2017 – Services) ................. Total revenue from contracts with customers ...................... ………………………………………………. Total revenue from lease arrangements ............................... ………………………………………………. 164,221 6,723,789 122,800 264,174 5,659,646 - $ 6,846,589 $ 5,659,646 1. Due to the adoption of IFRS 15 effective January 1, 2018 as discussed in note 4, the comparative information has not been restated and, therefore, the results may not be comparable. During the year ended December 31, 2018, the Company recognized $12.7 million of revenues which were included in the contract liability balance at the beginning of the period. Year ended December 31, 2018 Canada External Service Revenue Terminals storage and throughput/pipeline transportation and services ..................................... Rail services ............................................................. PRD and other services ........................................... External Product Revenue Crude and diluent ................................................... Propane and other NGL .......................................... Refined products ..................................................... $ 80,510 $ - $ - $ 80,510 28,105 17,409 - - 2,899 4,616,627 368,006 224,882 - - 28,105 20,308 4,616,627 368,006 224,882 6,675 Other ....................................................................... 6,675 Total revenue – Canada ............................................. $ 132,699 $ - $ 5,212,414 $ 5,345,113 U.S. External Service Revenue External Product Revenue Hauling and transportation and other services .... $ 4,366 $ 30,932 $ - $ 35,298 Crude and diluent ................................................. Propane and other NGL ........................................ Refined products .................................................. - - 727,750 392,492 223,136 727,750 392,492 223,136 Total revenue – U.S. .................................................. $ 4,366 $ 30,932 $ 1,343,378 $ 1,378,676 Total revenue from contract with customers ............ $ 137,065 $ 30,932 $ 6,555,792 $ 6,723,789 - - - - - - - - - - - Deferred tax assets Non-capital losses carried forward Asset retirement obligations Retirement benefit obligations Goodwill, Intangibles, and other Total At January 1, 2017 .................................................. $ 62,599 $ 20,279 $ 1,369 $ 29,453 $113,700 (Charged) credited to the statement of operations ......................................................................... (15,402) Charged to other comprehensive income .............. Effect of changes in foreign exchange rates ........... - (2,108) 820 - (299) 137 24 - 5,107 - (826) (9,338) 24 (3,233) At January 1, 2018 .................................................. $ 45,089 $ 20,800 $ 1,530 $ 33,734 $101,153 (Charged) credited to the statement of operations (15,692) 3,618 (152) 6,205 (6,021) ......................................................................... Charged to other comprehensive income .............. Transfers from assets held for sale (note 8) ........... Effect of changes in foreign exchange rates ........... - (9,175) 1,750 (3,509) - 67 2,910 - - - (23,913) 2,890 2,910 (36,597) 4,707 At December 31, 2018 ............................................ $ 21,972 $ 20,976 $ 4,288 $ 18,916 $ 66,152 Right-of-use asset, Property, Plant and Equipment Goodwill, Intangibles, and other Deferred tax liabilities At January 1, 2017 ..................................................................... $ (151,559) $ (17,326) $ (168,885) At January 1, 2018 ..................................................................... $ (126,755) $ - $ (126,755) Credited to the statement of operations .................................. Effect of changes in foreign exchange rates .............................. Credited to the statement of operations .................................. Transfers to assets held for sale (note 8) .................................. Effect of changes in foreign exchange rates .............................. 23,305 1,499 7,891 11,489 (543) 17,980 (654) - - - At December 31, 2018 ............................................................... $ (107,918) $ - $ (107,918) Total 41,285 845 7,891 11,489 (543) Income tax losses carry forward follows: At December 31, 2018 and 2017, the Company had losses available to offset income for tax purposes of $89.8 million and $174.9 million, respectively. At December 31, 2018, the Company has $89.8 million of the losses available mainly in the U.S. that expire as December 31, 2035 ........................................................................................................................................................ December 31, 2036 ........................................................................................................................................................ December 31, 2037 ........................................................................................................................................................ December 31, 2038 ........................................................................................................................................................ 19,245 64,568 5,450 537 $ 89,800 No income tax liability has been recognized in respect of temporary differences associated with investments in subsidiaries, except for as disclosed in note 8 for assets held for sale, as the Company can control the timing of the reversal of the temporary difference and the reversal is not probable in the foreseeable future. Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) The movement in the significant components of deferred income tax assets and liabilities during the year, without taking into 23 Revenue consideration the offsetting balances within the same tax jurisdiction, is as follows: Revenue from contracts with customers recognized at a point in time (2017 – Products) .... Revenue from contracts with customers recognized over time (2017 – Services) ................. Total revenue from contracts with customers ...................... ………………………………………………. Total revenue from lease arrangements ............................... ………………………………………………. Year ended December 31, 2018 20171 $ 6,559,568 164,221 6,723,789 122,800 $ 6,846,589 $ 5,395,472 264,174 5,659,646 - $ 5,659,646 1. Due to the adoption of IFRS 15 effective January 1, 2018 as discussed in note 4, the comparative information has not been restated and, therefore, the results may not be comparable. During the year ended December 31, 2018, the Company recognized $12.7 million of revenues which were included in the contract liability balance at the beginning of the period. Year ended December 31, 2018 Infrastructure Logistics Wholesale Total Canada External Service Revenue Terminals storage and throughput/pipeline transportation and services ..................................... Rail services ............................................................. PRD and other services ........................................... External Product Revenue $ 80,510 28,105 17,409 $ - - - $ - - 2,899 Crude and diluent ................................................... Propane and other NGL .......................................... Refined products ..................................................... Other ....................................................................... Total revenue – Canada ............................................. - - - 6,675 - - - - $ 132,699 $ - U.S. External Service Revenue $ 80,510 28,105 20,308 4,616,627 368,006 224,882 6,675 4,616,627 368,006 224,882 - $ 5,212,414 $ 5,345,113 Hauling and transportation and other services .... $ 4,366 $ 30,932 $ - $ 35,298 External Product Revenue Crude and diluent ................................................. Propane and other NGL ........................................ Refined products .................................................. Total revenue – U.S. .................................................. Total revenue from contract with customers ............ - - - - - - $ 30,932 727,750 392,492 223,136 727,750 392,492 223,136 $ 4,366 $ 137,065 $ 30,932 $ 6,555,792 $ 6,723,789 $ 1,343,378 $ 1,378,676 42 Gibson Energy 43 91 Consolidated Financial Statements Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) 24 Depreciation, amortization and impairment Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Compensation of key management Depreciation and impairment of property, plant and equipment (note 10) ........................ Depreciation of right-of-use asset (note 11) ........................................................................ Amortization and impairment of intangible assets (note 13)............................................... Year ended December 31, 2018 2017 $ 143,160 43,184 10,870 197,214 $ $ 100,837 - 23,340 124,177 $ Depreciation and impairment of property, plant and equipment, right-of-use asset and amortization and impairment of intangible assets have been expensed as follows: Cost of sales .......................................................................................................................... General and administrative .................................................................................................. 25 Employee salaries and benefits Salaries and wages ................................................................................................................ Post-employment benefits ................................................................................................... Share based compensation .................................................................................................. Termination benefits and restructuring costs ...................................................................... Employee salaries and benefits have been expensed as follows: Cost of sales .......................................................................................................................... General and administrative .................................................................................................. Year ended December 31, 2018 2017 $ $ 179,986 17,228 197,214 $ $ 112,308 11,869 124,177 Year ended December 31, 2018 2017 $ $ 98,037 4,910 19,124 2,608 124,679 $ $ 103,728 4,972 23,244 16,786 148,730 Year ended December 31, 2018 2017 $ $ 86,825 37,854 124,679 $ $ 108,464 40,266 148,730 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 .................................................................................................. Termination costs ................................................................................................................. 26 Other operating income Sublease income ................................................................................................................. $ (3,670) $ - Loss on sale of net assets held for sale (note 8) .................................................................. Other income ...................................................................................................................... 4,974 (3,395) (2,091) $ $ - (1,423) (1,423) 27 Per share amounts The following table shows the number of shares used in the calculation of earnings per share for continuing operations: Year ended December 31, 2018 6,047 311 6,886 62 2017 5,852 1,094 8,191 3,967 $ 13,306 $ 19,104 Year ended December 31, 2018 2017 Year ended December 31, 2018 2017 Weighted average common shares outstanding – Basic ...................................................... 143,970,969 142,500,793 Dilutive effect of: Stock options and other awards .................................................................................... Weighted average common shares – Diluted ...................................................................... 2,506,591 146,477,560 - 142,500,793 The dilutive effect of 2.5 million stock options and other awards, and the potential common stock that would be issued upon the conversion of the Debentures for the year ended December 31, 2018 have been included in the determination of the weighted average number of common shares outstanding for continuing and discontinued operations. The impact of 1.1 million stock options have not been included in the determination of weighted average number of common shares outstanding as the inclusion would be anti-dilutive to the net income from continuing and discontinued operations per share. The dilutive effect of 3.0 million stock options and other awards, and the potential common stock that would be issued upon the conversion of the Debentures for the year ended December 31, 2017 have 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 from continuing operations per share. The dilutive effect of 3.0 million stock options and other awards, and the potential common stock that would be issued upon the conversion of the Debentures for the year ended December 31, 2017 have been included in the determination of the weighted average number of common shares outstanding for discontinued operations per share. Consolidated Financial Statements 44 92 Gibson Energy 45 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) 24 Depreciation, amortization and impairment 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: Depreciation and impairment of property, plant and equipment (note 10) ........................ Depreciation of right-of-use asset (note 11) ........................................................................ $ 143,160 43,184 Amortization and impairment of intangible assets (note 13)............................................... 10,870 $ 100,837 - 23,340 $ 197,214 $ 124,177 Salaries and short-term employee benefits ......................................................................... Post-employment benefits ................................................................................................... Share based compensation .................................................................................................. Termination costs ................................................................................................................. Depreciation and impairment of property, plant and equipment, right-of-use asset and amortization and impairment of intangible assets have been expensed as follows: 26 Other operating income Cost of sales .......................................................................................................................... General and administrative .................................................................................................. 25 Employee salaries and benefits Sublease income ................................................................................................................. Loss on sale of net assets held for sale (note 8) .................................................................. Other income ...................................................................................................................... 27 Per share amounts Year ended December 31, 2018 $ $ 6,047 311 6,886 62 13,306 $ $ 2017 5,852 1,094 8,191 3,967 19,104 Year ended December 31, 2018 2017 $ (3,670) 4,974 (3,395) (2,091) $ $ - - (1,423) (1,423) $ Salaries and wages ................................................................................................................ $ $ 103,728 Post-employment benefits ................................................................................................... Share based compensation .................................................................................................. Termination benefits and restructuring costs ...................................................................... Employee salaries and benefits have been expensed as follows: Cost of sales .......................................................................................................................... $ General and administrative .................................................................................................. The following table shows the number of shares used in the calculation of earnings per share for continuing operations: Year ended December 31, 2018 2017 Weighted average common shares outstanding – Basic ...................................................... Dilutive effect of: Stock options and other awards .................................................................................... Weighted average common shares – Diluted ...................................................................... 143,970,969 142,500,793 2,506,591 146,477,560 - 142,500,793 The dilutive effect of 2.5 million stock options and other awards, and the potential common stock that would be issued upon the conversion of the Debentures for the year ended December 31, 2018 have been included in the determination of the weighted average number of common shares outstanding for continuing and discontinued operations. The impact of 1.1 million stock options have not been included in the determination of weighted average number of common shares outstanding as the inclusion would be anti-dilutive to the net income from continuing and discontinued operations per share. The dilutive effect of 3.0 million stock options and other awards, and the potential common stock that would be issued upon the conversion of the Debentures for the year ended December 31, 2017 have 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 from continuing operations per share. The dilutive effect of 3.0 million stock options and other awards, and the potential common stock that would be issued upon the conversion of the Debentures for the year ended December 31, 2017 have been included in the determination of the weighted average number of common shares outstanding for discontinued operations per share. Year ended December 31, 2018 2017 Year ended December 31, 2018 2017 $ $ 179,986 17,228 197,214 $ 112,308 11,869 124,177 $ Year ended December 31, 2018 2017 98,037 4,910 19,124 2,608 4,972 23,244 16,786 $ 124,679 $ 148,730 Year ended December 31, 2018 2017 86,825 37,854 $ 124,679 $ $ 108,464 40,266 148,730 44 Gibson Energy 45 93 Consolidated Financial Statements Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) 28 Post-retirement benefits Defined benefit plans The Company maintains a funded defined benefit pension plan and an unfunded defined benefit other post-retirement benefits plan (“OPRB”). The Company’s defined benefit pension plans are funded based upon the advice of independent actuaries. The Company is required to file an actuarial valuation of the defined benefit pension plan with the provincial regulator every three years, with the most recent actuarial valuation filing as at December 31, 2016. Based on the actuarial valuations as at December 31, 2018 and 2017, the status of the defined benefit plans was as follows: Accrued benefit obligation Year ended December 31, 2018 2017 Pension OPRB Pension OPRB Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) The significant weighted average actuarial assumptions adopted in measuring the Company’s defined benefit plan obligation are as follows: Year ended December 31, 2018 2017 Discount rate ......................................................................................................................................... Rate of compensation increase ............................................................................................................ 3.75% 3.0% 3.50% 3.0% 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 One % point increase decrease Increase/(decrease) in defined benefit plans obligations .................................................................. $ (4,286) $ 5,458 Accrued benefit obligation, beginning of year ......................................................... Current service cost ........................................................................................... Interest cost ....................................................................................................... Benefits paid ...................................................................................................... Actuarial loss (gain) ........................................................................................... Other .................................................................................................................. Accrued benefit obligation, end of year ................................................................... $ 16,317 $ 4,758 62 1,350 528 235 (655) (445) (633) 9,300 (952) - $ 14,667 $ 15,198 $ 16,869 $ 4,612 146 53 - 584 - (1,886) - 693 4 - $ 16,317 $ 4,758 Defined contribution pension plan respectively. 29 Share based compensation 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 $4.2 million and $4.7 million for the year ended December 31, 2018 and 2017, Plan assets Year ended December 31, 2018 2017 Pension OPRB Pension OPRB Fair value of pension plan assets, beginning of year ................................................ Interest on plan assets ....................................................................................... Actual contributions .......................................................................................... Actual benefits paid ........................................................................................... Actuarial gain (loss) ........................................................................................... Other .................................................................................................................. Fair value of pension plan assets, end of year .......................................................... $ 15,404 $ - 484 - 871 445 (655) (445) (1,068) - (1,589) - $ 13,447 $ - $ 16,126 528 613 (2,466) 603 - $ 15,404 $ - - - - - - $ - Accrued benefit liability Year ended December 31, 2018 2017 Pension OPRB Pension OPRB Accrued benefit obligation ....................................................................................... $ (14,667) $ (15,198) 13,447 Fair value of plan assets ............................................................................................ - $ (1,220) $ (15,198) Accrued benefit liability ............................................................................................ $ (16,317) $ (4,758) 15,404 - (913) $ (4,758) $ 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 2018 and 2017 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, 2018, awards available to grant under the equity incentive plan totalled approximately 10.1 million. Consolidated Financial Statements 46 94 Gibson Energy 47 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) 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 ............................................................................................................ 3.75% 3.0% Year ended December 31, 2018 2017 3.50% 3.0% 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 .................................................................. $ (4,286) $ 5,458 Accrued benefit obligation, beginning of year ......................................................... $ 16,317 $ 4,758 $ 16,869 $ 4,612 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 $4.2 million and $4.7 million for the year ended December 31, 2018 and 2017, respectively. 29 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 2018 and 2017 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, 2018, awards available to grant under the equity incentive plan totalled approximately 10.1 million. Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) 28 Post-retirement benefits Defined benefit plans (“OPRB”). The Company maintains a funded defined benefit pension plan and an unfunded defined benefit other post-retirement benefits plan The Company’s defined benefit pension plans are funded based upon the advice of independent actuaries. The Company is required to file an actuarial valuation of the defined benefit pension plan with the provincial regulator every three years, with the most recent actuarial valuation filing as at December 31, 2016. Based on the actuarial valuations as at December 31, 2018 and 2017, the status of the defined benefit plans was as follows: Accrued benefit obligation Year ended December 31, 2018 2017 Pension OPRB Pension OPRB Current service cost ........................................................................................... 62 1,350 Interest cost ....................................................................................................... 528 235 Benefits paid ...................................................................................................... (655) (445) (1,886) Actuarial loss (gain) ........................................................................................... (633) 9,300 Other .................................................................................................................. (952) - 53 584 693 4 146 - - - - Accrued benefit obligation, end of year ................................................................... $ 14,667 $ 15,198 $ 16,317 $ 4,758 Year ended December 31, 2018 2017 Pension OPRB Pension OPRB Fair value of pension plan assets, beginning of year ................................................ $ 15,404 $ - $ 16,126 Interest on plan assets ....................................................................................... Actual contributions .......................................................................................... Actual benefits paid ........................................................................................... Actuarial gain (loss) ........................................................................................... Other .................................................................................................................. 484 - 871 445 (655) (445) (1,068) - (1,589) - (2,466) 528 613 603 - $ - - - - - - Fair value of pension plan assets, end of year .......................................................... $ 13,447 $ - $ 15,404 $ - Plan assets Accrued benefit liability Year ended December 31, 2018 2017 Pension OPRB Pension OPRB Accrued benefit obligation ....................................................................................... $ (14,667) $ (15,198) $ (16,317) $ (4,758) Fair value of plan assets ............................................................................................ 13,447 - 15,404 - Accrued benefit liability ............................................................................................ $ (1,220) $ (15,198) $ (913) $ (4,758) 46 Gibson Energy 47 95 Consolidated Financial Statements Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) A summary of stock option activity is as follows: Number of Shares Weighted-Average Exercise Price (in dollars) Balance at January 1, 2017 ............................................................................................ Granted ................................................................................................................... Exercised ................................................................................................................. Forfeited ................................................................................................................. Balance at December 31, 2017 ...................................................................................... Granted ................................................................................................................... Exercised ................................................................................................................. Forfeited ................................................................................................................. Balance at December 31, 2018 ...................................................................................... Vested and exercisable at December 31, 2018 ............................................................. Vested and exercisable at December 31, 2017 ............................................................. 3,067,865 1,191,571 (323,625) (639,096) 3,296,715 126,939 (104,897) (1,035,140) 2,283,617 1,520,569 2,046,485 $ $ $ $ $ 24.24 17.48 8.72 26.45 22.89 16.70 10.07 26.77 21.39 23.40 25.89 Additional information regarding stock options outstanding as of December 31, 2018 is as follows: Outstanding Weighted Average Remaining Contractual Life (Years) 4.2 3.6 0.5 2.4 3.2 1.4 2.2 2.8 3.1 Number Outstanding 116,157 1,186,292 30,123 32,791 295,122 216,550 392,034 14,548 2,283,617 $ Exercise Price (in dollars) 16.70 17.41 22.03 23.83 25.32 25.99 28.54 35.51 A summary of RSUs, PSUs and DSUs activity is set forth below: Exercisable Weighted-Average Remaining Contractual Life (Years) 4.2 3.6 0.5 2.4 3.2 1.4 2.2 2.8 2.8 Number Outstanding 116,157 423,244 30,123 32,791 295,122 216,550 392,034 14,548 1,520,569 $ Exercise Price (in dollars) 16.70 17.45 22.03 23.83 25.32 25.99 28.54 35.51 Balance at January 1, 2017 ........................................................................... Granted ................................................................................................. Issued for common shares .................................................................... Forfeited ................................................................................................ Balance at December 31, 2017 ..................................................................... Granted ................................................................................................. Issued for common shares .................................................................... Forfeited ................................................................................................ Balance at December 31, 2018 ..................................................................... Vested, Balance at December 31, 2018........................................................ Vested, Balance at December 31, 2017........................................................ RSUs 1,112,791 876,261 (830,803) (220,948) 937,301 692,210 (641,811) (220,145) 767,555 - 24,492 Number of Shares PSUs 1,530,320 535,921 (295,283) (740,123) 1,030,835 617,802 (381,536) (519,716) 747,385 - - DSUs 196,582 330,756 (21,646) - 505,692 237,895 (226,148) (1,091) 516,348 516,348 505,692 Share based compensation expense was $17.7 million and $22.1 million for the years ended December 31, 2018 and 2017, respectively, and is included in general and administrative expenses. 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 $1.99 and $2.36 per option for the year ended December 31, 2018 and 2017. 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) .................................................................................................. The fair value of RSUs, PSUs and DSUs was determined using the five days weighted average stock price prior to the date of grant. Year ended December 31, Year ended December 31, 2018 7.9% 31.7% 1.9% 3.0 2017 7.7% 35.3% 1.1% 3.0 30 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, amounts borrowed under the credit facilities, dividends payable, Debentures and long- term debt. Cash and cash equivalents, trade and other receivables, trade payables and accrued charges and dividends payable are recorded at amortized cost which approximates fair value due to the short term nature of these instruments. Long-term debt including credit facility are recorded at amortized cost using the effective interest method of amortization. As at December 31, 2018, the carrying amount of long-term debt was $1,050.0 million less debt discount and issue costs of $10.4 million and the fair value of long-term debt based on period end trading prices on the secondary market (Level 2) was $1,038.6 million. As at December 31, 2017, the carrying amount of long-term debt was $1,130.2 million less debt discount and issue costs of $12.1 million and the fair value of long-term debt based on period end trading prices on the secondary market (Level 2) was $1,144.1 million. The Debentures liability component is recorded at amortized cost using the effective interest method of amortization. As at December 31, 2018, the total carrying amount of the debentures liability and equity components was $100.0 million less debt discount and issue costs of $2.5 million, less deferred taxes relating to the equity component of $2.8 million. The fair value of the Debentures based on period end trading prices on the secondary market (Level 2) was $98.1 million (December 31, 2017 – $105.0 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, 2018 December 31, 2017 Trade and other receivables Trade payable and accrued charges Trade and other receivables Trade payable and accrued charges Gross amounts ................................................................... $ 139,239 $ 112,059 $ 530,965 $ 433,272 Amount offset ................................................................... (90,573) (90,573) (340,589) (340,589) Net amount included in the consolidated financial statements....................................................... $ 48,666 $ 21,486 $ 190,376 $ 92,683 Consolidated Financial Statements 48 96 Gibson Energy 49 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) A summary of stock option activity is as follows: Number of Shares Weighted-Average Exercise Price (in dollars) Balance at January 1, 2017 ............................................................................................ Granted ................................................................................................................... Exercised ................................................................................................................. Forfeited ................................................................................................................. Balance at December 31, 2017 ...................................................................................... Granted ................................................................................................................... Exercised ................................................................................................................. Forfeited ................................................................................................................. Balance at December 31, 2018 ...................................................................................... Vested and exercisable at December 31, 2018 ............................................................. Vested and exercisable at December 31, 2017 ............................................................. 3,067,865 1,191,571 (323,625) (639,096) 3,296,715 126,939 (104,897) (1,035,140) 2,283,617 1,520,569 2,046,485 $ $ $ $ $ 24.24 17.48 8.72 26.45 22.89 16.70 10.07 26.77 21.39 23.40 25.89 Additional information regarding stock options outstanding as of December 31, 2018 is as follows: Outstanding Weighted Average Remaining Contractual Life (Years) Exercise Price (in dollars) $ 16.70 17.41 22.03 23.83 25.32 25.99 28.54 35.51 4.2 3.6 0.5 2.4 3.2 1.4 2.2 2.8 3.1 Number Outstanding 116,157 1,186,292 30,123 32,791 295,122 216,550 392,034 14,548 2,283,617 A summary of RSUs, PSUs and DSUs activity is set forth below: Exercisable Weighted-Average Remaining Contractual Life (Years) Exercise Price (in dollars) $ 16.70 17.45 22.03 23.83 25.32 25.99 28.54 35.51 4.2 3.6 0.5 2.4 3.2 1.4 2.2 2.8 2.8 Number Outstanding 116,157 423,244 30,123 32,791 295,122 216,550 392,034 14,548 1,520,569 Balance at January 1, 2017 ........................................................................... 1,112,791 Granted ................................................................................................. Issued for common shares .................................................................... Forfeited ................................................................................................ Balance at December 31, 2017 ..................................................................... Granted ................................................................................................. Issued for common shares .................................................................... Forfeited ................................................................................................ Balance at December 31, 2018 ..................................................................... Vested, Balance at December 31, 2018........................................................ Vested, Balance at December 31, 2017........................................................ RSUs 876,261 (830,803) (220,948) 937,301 692,210 (641,811) (220,145) 767,555 - 24,492 Number of Shares PSUs 1,530,320 535,921 (295,283) (740,123) 1,030,835 617,802 (381,536) (519,716) 747,385 - - DSUs 196,582 330,756 (21,646) - 505,692 237,895 (226,148) (1,091) 516,348 516,348 505,692 Share based compensation expense was $17.7 million and $22.1 million for the years ended December 31, 2018 and 2017, respectively, and is included in general and administrative expenses. 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 $1.99 and $2.36 per option for the year ended December 31, 2018 and 2017. 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, 2018 7.9% 31.7% 1.9% 3.0 Year ended December 31, 2017 7.7% 35.3% 1.1% 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. 30 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, amounts borrowed under the credit facilities, dividends payable, Debentures and long- term debt. Cash and cash equivalents, trade and other receivables, trade payables and accrued charges and dividends payable are recorded at amortized cost which approximates fair value due to the short term nature of these instruments. Long-term debt including credit facility are recorded at amortized cost using the effective interest method of amortization. As at December 31, 2018, the carrying amount of long-term debt was $1,050.0 million less debt discount and issue costs of $10.4 million and the fair value of long-term debt based on period end trading prices on the secondary market (Level 2) was $1,038.6 million. As at December 31, 2017, the carrying amount of long-term debt was $1,130.2 million less debt discount and issue costs of $12.1 million and the fair value of long-term debt based on period end trading prices on the secondary market (Level 2) was $1,144.1 million. The Debentures liability component is recorded at amortized cost using the effective interest method of amortization. As at December 31, 2018, the total carrying amount of the debentures liability and equity components was $100.0 million less debt discount and issue costs of $2.5 million, less deferred taxes relating to the equity component of $2.8 million. The fair value of the Debentures based on period end trading prices on the secondary market (Level 2) was $98.1 million (December 31, 2017 – $105.0 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, 2018 December 31, 2017 Trade and other receivables Trade payable and accrued charges Trade and other receivables Trade payable and accrued charges Gross amounts ................................................................... Amount offset ................................................................... Net amount included in the consolidated $ 139,239 (90,573) $ 112,059 (90,573) $ 530,965 (340,589) $ 433,272 (340,589) financial statements....................................................... $ 48,666 $ 21,486 $ 190,376 $ 92,683 48 Gibson Energy 49 97 Consolidated Financial Statements 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: December 31, 2018 December 31, 2017 Assets Liabilities Assets Liabilities Commodity futures ............................................................... $ 1,937 2,565 Commodity swaps ................................................................. 677 Equity swaps .......................................................................... 504 Foreign currency forwards .................................................... Total ....................................................................................... $ 5,683 Less non-current portion: $ 616 2,887 2,915 1,451 $ 7,869 $ $ Commodity futures ........................................................ Commodity swaps .......................................................... Equity swaps ................................................................... Foreign currency forwards ............................................. Current portion...................................................................... $ - - - - - 5,683 $ - - 154 - 154 7,715 $ 384 4,808 324 1,883 7,399 384 567 294 122 1,367 6,032 $ 6,257 2,214 3,297 - $ 11,768 215 - 277 - 492 $ 11,276 The fair value of financial instruments is 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. During the year ended December 31, 2018, the Company entered into certain WTI differential futures to manage the exposure to price risks associated with the purchases of crude oil feedstock. (ii) Currency financial instruments Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) The value of the Company’s derivative financial instruments is 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 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 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, 2018 was: Assets from financial instrument contracts Commodity futures .................................................................. $ 1,937 $ 1,937 $ $ Commodity swaps .................................................................... Equity swaps ............................................................................. Foreign currency forwards ....................................................... 2,565 677 504 677 - - Total assets ............................................................................... $ 5,683 $ 2,614 $ 3,069 $ Total Level 1 Level 2 Level 3 Liabilities from financial instrument contracts Commodity futures .................................................................. $ 616 $ 561 $ $ Commodity swaps .................................................................... Equity swaps ............................................................................. Foreign currency forwards ....................................................... 2,887 2,915 1,451 2,915 - - Total liabilities .......................................................................... $ 7,869 $ 3,476 $ 4,393 $ 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. There were no contracts entered into during the year ended December 31, 2018. During the year ended December 31, 2017, the Company entered into U.S. dollar forward contracts to buy U.S. dollars on a notional amount of US$480.0 million at a weighted average rate of $1.33 for US$1.00 which settled on March 22, 2017 and on October 5, 2017. The overall value of the U.S. dollar forward contracts settlement was $2.2 million loss during the year ended December 31, 2017. The fair value of financial instrument contracts by fair value hierarchy at December 31, 2017 was: Assets from financial instrument contracts Commodity futures .................................................................. $ 384 $ 384 $ $ Commodity swaps .................................................................... Equity swaps ............................................................................. Foreign currency forwards ....................................................... 4,808 324 1,883 324 - - 4,808 1,883 Total assets ............................................................................... $ 7,399 $ 708 $ 6,691 $ Total Level 1 Level 2 Level 3 (iii) Equity price financial instruments During 2018, the Company had equity swaps of 1.5 million notional amount common shares at an average price of $20.18 per share (2017 – $20.18 per share) for settlement over a two year period. The Company entered into these equity swap contracts to help manage equity price and dilution exposure to shares that it issues under its share based compensation programs. During the year ended December 31, 2018 the Company recognized an unrealized gain of $0.9 million (2017 – unrealized loss of $1.2 million). Liabilities from financial instrument contracts Commodity futures .................................................................. $ 6,257 $ 6,257 $ $ Commodity swaps .................................................................... Equity swaps ............................................................................. 2,214 3,297 - 3,297 2,214 Total liabilities .......................................................................... $ 11,768 $ 9,554 $ 2,214 $ 2,565 - - 504 55 2,887 - 1,451 - - - - - - - - - - - - - - - - - - - - - - - Consolidated Financial Statements 50 98 Gibson Energy 51 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 ............................................................... $ 1,937 $ 616 $ $ Commodity swaps ................................................................. Equity swaps .......................................................................... Foreign currency forwards .................................................... 2,565 677 504 Total ....................................................................................... $ 5,683 $ 7,869 $ $ 11,768 Less non-current portion: Commodity futures ........................................................ Commodity swaps .......................................................... Equity swaps ................................................................... Foreign currency forwards ............................................. December 31, 2018 December 31, 2017 Assets Liabilities Assets Liabilities 2,887 2,915 1,451 - - - 154 154 - - - - - 384 4,808 324 1,883 7,399 384 567 294 122 1,367 6,032 6,257 2,214 3,297 - - - 215 277 492 Current portion...................................................................... $ 5,683 $ 7,715 $ $ 11,276 The fair value of financial instruments is 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. During the year ended December 31, 2018, the Company entered into certain WTI differential futures to manage the exposure to price risks associated with the purchases of crude oil feedstock. (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. There were no contracts entered into during the year ended December 31, 2018. During the year ended December 31, 2017, the Company entered into U.S. dollar forward contracts to buy U.S. dollars on a notional amount of US$480.0 million at a weighted average rate of $1.33 for US$1.00 which settled on March 22, 2017 and on October 5, 2017. The overall value of the U.S. dollar forward contracts settlement was $2.2 million loss during the year ended December 31, 2017. (iii) Equity price financial instruments During 2018, the Company had equity swaps of 1.5 million notional amount common shares at an average price of $20.18 per share (2017 – $20.18 per share) for settlement over a two year period. The Company entered into these equity swap contracts to help manage equity price and dilution exposure to shares that it issues under its share based compensation programs. During the year ended December 31, 2018 the Company recognized an unrealized gain of $0.9 million (2017 – unrealized loss of $1.2 million). Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) The value of the Company’s derivative financial instruments is 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 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 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, 2018 was: Total Level 1 Level 2 Level 3 Assets from financial instrument contracts Commodity futures .................................................................. Commodity swaps .................................................................... Equity swaps ............................................................................. Foreign currency forwards ....................................................... Total assets ............................................................................... $ 1,937 2,565 677 504 $ 5,683 $ 1,937 - 677 - $ 2,614 $ - 2,565 - 504 $ 3,069 Liabilities from financial instrument contracts Commodity futures .................................................................. Commodity swaps .................................................................... Equity swaps ............................................................................. Foreign currency forwards ....................................................... Total liabilities .......................................................................... $ 616 2,887 2,915 1,451 $ 7,869 $ 561 - 2,915 - $ 3,476 $ 55 2,887 - 1,451 $ 4,393 $ $ $ $ - - - - - - - - - - The fair value of financial instrument contracts by fair value hierarchy at December 31, 2017 was: Total Level 1 Level 2 Level 3 Assets from financial instrument contracts Commodity futures .................................................................. Commodity swaps .................................................................... Equity swaps ............................................................................. Foreign currency forwards ....................................................... Total assets ............................................................................... $ 384 4,808 324 1,883 $ 7,399 $ $ 384 - 324 - 708 $ - 4,808 - 1,883 $ 6,691 Liabilities from financial instrument contracts Commodity futures .................................................................. Commodity swaps .................................................................... Equity swaps ............................................................................. Total liabilities .......................................................................... $ 6,257 2,214 3,297 $ 11,768 $ 6,257 - 3,297 $ 9,554 $ - 2,214 - $ 2,214 $ $ $ $ - - - - - - - - - 50 Gibson Energy 51 99 Consolidated Financial Statements Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) The impact of the movement in the fair value of financial instruments has been expensed in the consolidated statements of operations as follows: c) Commodity price risk Year ended December 31, 2018 2017 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 Cost of sales gain ...................................................................................................................... Share based compensation gain (loss)...................................................................................... $ 1,197 923 $ 2,120 $ $ 2,803 (1,188) 1,615 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 and risk management functions are responsible for implementing the policies and providing a centralised service to the Company for identifying, evaluating and monitoring financial risks. d) Credit risk 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 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 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. on trade receivables. 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: U.S. Dollar Forwards Favorable 5% change ............................................................................................................. Unfavorable 5% change ......................................................................................................... $ 1,928 (1,928) $ 3,419 (3,419) The movement is a result of a change in the fair value of U.S. dollar forward contracts and options. The impact of translating the net assets of the Company’s U.S operations into Canadian dollars is excluded from this sensitivity analysis. December 31, 2018 2017 b) Interest rate risk e) Equity price 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, 2018, the Company has insignificant exposure to changes to market interest rates that relate to the $150.0 million (2017 – $230.2 million) drawn on the Company’s credit facility. Consolidated Financial Statements 52 100 Gibson Energy 53 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’ 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 .......................................................................................................... 7,275 (7,275) $ 6,224 (6,224) December 31, 2018 2017 At December 31, 2018, impairment from expected credit losses under the simplified approach was $0.1 million (note 5) including the impact of IFRS 9 adoption (note 4). At December 31, 2018, approximately 7% of net trade receivables were 30 days past the due date but not considered impaired (December 31, 2017 – 2%). 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. 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 ........................................................................................................ $ 1,998 Unfavorable 10% change .................................................................................................... (1,998) $ 1,930 (1,930) December 31, 2018 2017 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) operations as follows: Year ended December 31, 2018 2017 $ 1,197 923 $ 2,120 $ $ 2,803 (1,188) 1,615 Cost of sales gain ...................................................................................................................... Share based compensation gain (loss)...................................................................................... 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 and risk management functions are 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. 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: 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, 2018, the Company has insignificant exposure to changes to market interest rates that relate to the $150.0 million (2017 – $230.2 million) drawn on the Company’s credit facility. The impact of the movement in the fair value of financial instruments has been expensed in the consolidated statements of c) Commodity price risk Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) 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 .......................................................................................................... 7,275 (7,275) $ 6,224 (6,224) December 31, 2018 2017 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. At December 31, 2018, impairment from expected credit losses under the simplified approach was $0.1 million (note 5) including the impact of IFRS 9 adoption (note 4). At December 31, 2018, approximately 7% of net trade receivables were 30 days past the due date but not considered impaired (December 31, 2017 – 2%). The maximum exposure to credit risk related to trade receivables is their carrying value as disclosed in these financial statements. U.S. Dollar Forwards Favorable 5% change ............................................................................................................. $ Unfavorable 5% change ......................................................................................................... 1,928 (1,928) $ 3,419 (3,419) The movement is a result of a change in the fair value of U.S. dollar forward contracts and options. December 31, 2018 2017 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 impact of translating the net assets of the Company’s U.S operations into Canadian dollars is excluded from this sensitivity 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 .................................................................................................... $ 1,998 (1,998) $ 1,930 (1,930) December 31, 2018 2017 52 Gibson Energy 53 101 Consolidated Financial Statements Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) f) Liquidity risk 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 and cash equivalents and the Revolving Credit Facility are available and are expected to be available to satisfy the Company’s short and long-term requirements. The Company has a Revolving Credit Facility of $560.0 million and three bilateral demand letter of credit facilities totaling $150.0 million. At December 31, 2018, $150.0 million was drawn against the Revolving Credit Facility and the Company had outstanding issued letters of credit of $70.9 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, 2018 and December 31, 2017, the Company was in compliance with these covenants. Set out below is a maturity analyses of certain of the Company’s financial contractual obligations as at December 31, 2018. The maturity dates are the contractual maturities of the obligations and the amounts are the contractual undiscounted cash flows. 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, lease liabilities, and the Debentures), less cash and cash equivalents. Total capital is calculated as net debt plus share capital as shown in the consolidated balance sheet. December 31, 2018 2017 Total financial liability borrowings .......................................................................................... $ 1,148,649 Debentures (liability component) (1) ....................................................................................... 89,765 $ 1,118,119 89,765 Less: cash and cash equivalents .............................................................................................. Net debt .................................................................................................................................. Total share capital (including Debentures – equity component) ........................................... (95,301) 1,143,113 1,962,169 (32,138) 1,175,746 1,939,126 Total capital ............................................................................................................................ $ 3,105,282 $ 3,114,872 (1) The Debentures are included in the above total capital calculation in accordance with the Company’s view of its capital structure which includes shareholders’ equity, long-term debt, the Debentures, the Revolving Credit Facility, and working capital. The Debentures and associated interest payments are excluded from the definition of net debt included in the consolidated senior and total debt covenant ratios, as well as the consolidated interest coverage covenant ratio. On demand or within one year Between one and five years After five years Total Credit Facility and the bilateral demand letter of credit facilities are sufficient to service this debt and support ongoing operations. If the Company is in a net debt position, the Company will assess whether the projected cash flow and availability under the Revolving Trade payables and accrued charges (excluding derivative financial instruments and accrued interest)...................... Dividend payable .................................................................... Long-term debt ....................................................................... Credit facilities ........................................................................ Debentures (debt and equity component) ............................. Interest on long-term debt and Debentures .......................... Commodity futures ................................................................. Commodity swaps................................................................... Equity swap ............................................................................. Foreign currency forwards ...................................................... Lease liabilities ........................................................................ Capital management $ 333,105 47,704 - - - 52,875 616 2,887 2,761 1,451 39,824 $ 481,223 $ - - 300,000 150,000 100,000 175,064 - - 154 - 59,627 $ 784,845 $ - - 600,000 - - 18,375 - - - - 26,373 $ 644,748 $ 333,105 47,704 900,000 150,000 100,000 246,314 616 2,887 2,915 1,451 125,824 $ 1,910,816 31 Commitments and contingencies Commitments 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: 2019 .................................................................................................................................................................... $ 48,624 2020 .................................................................................................................................................................... 2021 .................................................................................................................................................................... 2022 .................................................................................................................................................................... 2023 .................................................................................................................................................................... 2024 and later ..................................................................................................................................................... 27,160 18,265 13,069 10,613 32,251 $ 149,982 With respect to capital expenditures, at December 31, 2018, the Company had an estimated amount of $290.0 million remaining to be spent that relates to projects approved at that date. 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 capital requirements as well as potential acquisitions. Contingencies 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 Debentures, the Revolving Credit Facility, lease liabilities 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. The Company is involved in various claims and actions arising in the course of operations and is subject to various legal actions and exposures. Although the outcome of these claims are uncertain, the Company does not expect these matters to have a material adverse effect on the Company’s financial position, cash flows or operational results. If an unfavorable outcome were to occur, there exists the possibility of a material adverse impact on the Company’s consolidated net income or loss in the period in which the outcome is determined. Accruals for litigation, claims and assessments are recognized if the Company determines that the loss is probable and the amount can be reasonably estimated. The Company believes it has made adequate provision for such legal claims. While fully supportable in the Company’s view, some of these positions, if challenged may not be fully sustained on review. 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 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 Consolidated Financial Statements 54 102 Gibson Energy 55 Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) f) Liquidity risk 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 and cash equivalents and the Revolving Credit Facility are available and are expected to be available to satisfy the Company’s short and long-term requirements. The Company has a Revolving Credit Facility of $560.0 million and three bilateral demand letter of credit facilities totaling $150.0 million. At December 31, 2018, $150.0 million was drawn against the Revolving Credit Facility and the Company had outstanding issued letters of credit of $70.9 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, 2018 and December 31, 2017, the Company was in compliance with these covenants. Set out below is a maturity analyses of certain of the Company’s financial contractual obligations as at December 31, 2018. The maturity dates are the contractual maturities of the obligations and the amounts are the contractual undiscounted cash flows. 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, lease liabilities, and the Debentures), less cash and cash equivalents. Total capital is calculated as net debt plus share capital as shown in the consolidated balance sheet. December 31, 2018 2017 Total financial liability borrowings .......................................................................................... Debentures (liability component) (1) ....................................................................................... Less: cash and cash equivalents .............................................................................................. Net debt .................................................................................................................................. Total share capital (including Debentures – equity component) ........................................... Total capital ............................................................................................................................ $ 1,148,649 89,765 (95,301) 1,143,113 1,962,169 $ 3,105,282 $ 1,118,119 89,765 (32,138) 1,175,746 1,939,126 $ 3,114,872 (1) The Debentures are included in the above total capital calculation in accordance with the Company’s view of its capital structure which includes shareholders’ equity, long-term debt, the Debentures, the Revolving Credit Facility, and working capital. The Debentures and associated interest payments are excluded from the definition of net debt included in the consolidated senior and total debt covenant ratios, as well as the consolidated interest coverage covenant ratio. On demand or within one Between one After year and five years five years Total 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. Trade payables and accrued charges (excluding derivative financial instruments and accrued interest)...................... $ 333,105 $ $ $ 333,105 Dividend payable .................................................................... 47,704 31 Commitments and contingencies Commitments 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: 2019 .................................................................................................................................................................... 2020 .................................................................................................................................................................... 2021 .................................................................................................................................................................... 2022 .................................................................................................................................................................... 2023 .................................................................................................................................................................... 2024 and later ..................................................................................................................................................... $ 48,624 27,160 18,265 13,069 10,613 32,251 $ 149,982 With respect to capital expenditures, at December 31, 2018, the Company had an estimated amount of $290.0 million remaining to be spent that relates to projects approved at that date. 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 capital requirements as well as potential Contingencies 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 Debentures, the Revolving Credit Facility, lease liabilities 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. The Company is involved in various claims and actions arising in the course of operations and is subject to various legal actions and exposures. Although the outcome of these claims are uncertain, the Company does not expect these matters to have a material adverse effect on the Company’s financial position, cash flows or operational results. If an unfavorable outcome were to occur, there exists the possibility of a material adverse impact on the Company’s consolidated net income or loss in the period in which the outcome is determined. Accruals for litigation, claims and assessments are recognized if the Company determines that the loss is probable and the amount can be reasonably estimated. The Company believes it has made adequate provision for such legal claims. While fully supportable in the Company’s view, some of these positions, if challenged may not be fully sustained on review. 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 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 54 Gibson Energy 55 103 Consolidated Financial Statements Long-term debt ....................................................................... Credit facilities ........................................................................ Debentures (debt and equity component) ............................. Interest on long-term debt and Debentures .......................... Commodity futures ................................................................. Commodity swaps................................................................... Equity swap ............................................................................. Foreign currency forwards ...................................................... Lease liabilities ........................................................................ - - - 52,875 616 2,887 2,761 1,451 39,824 300,000 150,000 100,000 175,064 600,000 18,375 - - - - - 154 - - - - - - - - 47,704 900,000 150,000 100,000 246,314 616 2,887 2,915 1,451 $ 481,223 $ 784,845 $ 644,748 $ 1,910,816 59,627 26,373 125,824 Capital management acquisitions. Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) remediation costs can change significantly based on such factors such as operating experience and changes in legislation and regulations. 32 Subsequent Events On March 4, 2019, the Company announced that the Board declared a quarterly dividend of $0.33 per common share for the first quarter on its outstanding common shares. The common share dividend is payable on April 17, 2019 to shareholders of record at the close of business on March 29, 2019. On February 28, 2019, the Company completed the sale of its non-core ESN business for gross proceeds of $51.8 million, subject to closing adjustments. 33 Supplemental cash flow information Year ended December 31, 2018 2017 (note 8) Cash flow from operating activities Net income (loss) from continuing operations ..................................................................... Adjustments for non-cash items: Finance costs, net ............................................................................................................. Income tax expense (recovery) ........................................................................................ Depreciation and impairment of property, plant and equipment ................................... Depreciation of right-of-use asset .................................................................................... Amortization and impairment of intangible assets .......................................................... Impairment of goodwill .................................................................................................... Share based compensation .............................................................................................. Loss (gain) on sale of property, plant and equipment ..................................................... Other ................................................................................................................................ Net gain on fair value movement of financial instruments .............................................. Subtotal of adjustments ......................................................................................................... Changes in items of working capital: Trade and other receivables ............................................................................................ Inventories ...................................................................................................................... Other current assets ........................................................................................................ Trade payables and accrued charges .............................................................................. Deferred revenue ............................................................................................................. Contract liabilities (note 4) ............................................................................................... Subtotal of changes in items of working capital ................................................................... Income taxes received, net ................................................................................................... Cash provided by operating activities from continuing operations ........................................... Cash provided by operating activities from discontinued operations (note 8) ........................... Net cash provided by operating activities ................................................................................... $ 81,125 $ (66,326) 78,492 55,613 143,160 43,184 10,870 20,479 19,124 1,700 10,238 (1,197) 381,663 118,785 (58,204) 100,837 - 23,340 69,414 23,244 (2,813) (4,065) (1,615) 268,923 134,586 53,101 2,726 (148,633) - 8,442 50,222 14,076 $ 527,086 36,652 $ 563,738 (43,404) (26,862) (2,619) 48,331 (2,771) - (27,325) - $ 175,272 22,107 $ 197,379 Consolidated Financial Statements 56 104 Gibson Energy y t i u q E s e i t i l i b a i L l a i c n a n i F t s e r e t n I t e N s u l p r u S d e t u b i r t n o C d n a l a t i p a c e r a h S e l b a y a p d n e d i v i D e s a e L s e i t i l i b a i L t b e d m r e t - g n o L ) 7 9 1 , 2 9 3 ( ) 7 2 3 , 0 9 1 ( ) 4 2 9 , 8 6 ( 6 5 0 , 1 7 4 4 ) 2 9 7 , 9 4 ( ) 7 5 6 , 4 8 ( l a t o T ) 4 2 9 , 8 6 ( ) 0 8 8 , 9 8 1 ( 6 5 0 , 1 ) 2 9 7 , 9 4 ( ) 7 5 6 , 4 8 ( ) 6 5 0 , 3 ( - - - - - d e n i a t e R s g n i n r a e ) t i c i f e D ( ) 7 2 3 , 0 9 1 ( - - - - ) 4 2 9 , 8 6 ( 6 5 0 , 1 - - - - - - - - - 7 4 4 - - - ) 2 9 7 , 9 4 ( ) 6 5 0 , 3 ( - - - - ) 7 5 6 , 4 8 ( . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . y t i l i c a f t i d e r c f o t n e m y a p e R . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . s d n e d i v i d r e d l o h e r a h s f o t n e m y a P . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . t e n , d i a p t s e r e t n I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . s n o i t p o e r a h s f o e s i c r e x e m o r f s d e e c o r P . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . s t n e m y a p e s a e l e c n a n i F 8 1 0 2 g n i u n i t n o c m o r f s e i t i v i t c a g n i c n a n i f y b d e d i v o r p ) n i d e s u ( h s a C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . s n o i t a r e p o . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . s n o i t a r e p o d e u n i t n o c s i d m o r f s e i t i v i t c a g n i c n a n i f y b n i d e s u h s a C ) 3 5 2 , 5 9 3 ( ) 7 2 3 , 0 9 1 ( ) 4 2 9 , 8 6 ( 6 5 0 , 1 7 4 4 ) 8 4 8 , 2 5 ( ) 7 5 6 , 4 8 ( . . . . . . . . . . . . . . . . s e i t i v i t c a g n i c n a n i f y b d e d i v o r p ) n i d e s u ( h s a c t e N s e i t i v i t c a g n i c n a n i f m o r f g n i s i r a s w o l f h s a c o t s e i t i l i b a i l l a i c n a n i f f o s t n e m e v o m f o n o i t a i l i c n o c e R ) d e t o n e r e h w t p e c x e , s r a l l o d n a i d a n a C f o s d n a s u o h t n i s t n u o m a r a l u b a t ( s t n e m e t a t S l a i c n a n i F d e t a d i l o s n o C o t s e t o N . c n I y g r e n E n o s b i G 7 5 l a t o T ) 4 2 9 8 6 ( , ) 0 8 8 9 8 1 ( , 6 5 0 1 , ) 2 9 7 9 4 ( , ) 7 5 6 4 8 ( , - - - - i d e n a t e R i s g n n r a e ) t i c i f e D ( ) 7 2 3 0 9 1 ( , - - - ) 4 2 9 8 6 ( , - - - 6 5 0 1 , ) 7 9 1 2 9 3 ( , ) 7 2 3 0 9 1 ( , ) 4 2 9 8 6 ( , 6 5 0 1 , ) 6 5 0 3 ( , - - - ) 3 5 2 5 9 3 ( , ) 7 2 3 0 9 1 ( , ) 4 2 9 8 6 ( , 6 5 0 1 , Gibson Energy Inc. Notes to Consolidated Financial Statements (tabular amounts in thousands of Canadian dollars, except where noted) regulations. 32 Subsequent Events close of business on March 29, 2019. closing adjustments. 33 Supplemental cash flow information remediation costs can change significantly based on such factors such as operating experience and changes in legislation and On March 4, 2019, the Company announced that the Board declared a quarterly dividend of $0.33 per common share for the first quarter on its outstanding common shares. The common share dividend is payable on April 17, 2019 to shareholders of record at the On February 28, 2019, the Company completed the sale of its non-core ESN business for gross proceeds of $51.8 million, subject to Cash flow from operating activities Adjustments for non-cash items: Net income (loss) from continuing operations ..................................................................... $ 81,125 $ (66,326) Finance costs, net ............................................................................................................. Income tax expense (recovery) ........................................................................................ Depreciation and impairment of property, plant and equipment ................................... Depreciation of right-of-use asset .................................................................................... Amortization and impairment of intangible assets .......................................................... Impairment of goodwill .................................................................................................... Share based compensation .............................................................................................. Loss (gain) on sale of property, plant and equipment ..................................................... Other ................................................................................................................................ Net gain on fair value movement of financial instruments .............................................. Changes in items of working capital: Trade and other receivables ............................................................................................ Inventories ...................................................................................................................... Other current assets ........................................................................................................ Trade payables and accrued charges .............................................................................. Deferred revenue ............................................................................................................. Contract liabilities (note 4) ............................................................................................... Subtotal of changes in items of working capital ................................................................... Income taxes received, net ................................................................................................... Subtotal of adjustments ......................................................................................................... 381,663 268,923 Year ended December 31, 2018 2017 (note 8) 78,492 55,613 143,160 43,184 10,870 20,479 19,124 1,700 10,238 (1,197) 134,586 53,101 2,726 (148,633) - 8,442 50,222 14,076 118,785 (58,204) 100,837 - 23,340 69,414 23,244 (2,813) (4,065) (1,615) (43,404) (26,862) (2,619) 48,331 (2,771) (27,325) - - Cash provided by operating activities from continuing operations ........................................... $ 527,086 $ 175,272 Cash provided by operating activities from discontinued operations (note 8) ........................... 36,652 22,107 Net cash provided by operating activities ................................................................................... $ 563,738 $ 197,379 s t n e m e t a t S l i a i c n a n F d e t a d i l o s n o C o t s e t o N . c n I y g r e n E n o s b G i ) d e t o n e r e h w t p e c x e , s r a l l i o d n a d a n a C f o s d n a s u o h t n i s t n u o m a r a u b a t ( l y t i u q E s e i t i l i b a i L l a i c n a n i F t s e r e t n I t e N l s u p r u S d e t u b i r t n o C d n a l a t i p a c e r a h S l e b a y a p d n e d i v i D e s a e L s e i t i l i b a i L t b e d m r e t - g n o L s e i t i v i t c a g n i c n a n i f m o r f g n i s i r a s w o l f h s a c o t s e i t i l i b a i l l a i c n a n i f f o s t n e m e v o m f o n o i t a i l i c n o c e R - - - - 7 4 4 7 4 4 - 7 4 4 7 5 - - - ) 2 9 7 9 4 ( , - - - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . s d n e d i v i d r e d o h e r a h s l f o t n e m y a P 8 1 0 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . t e n , i d a p t s e r e t n I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . s n o i t p o e r a h s f o e s i c r e x e m o r f s d e e c o r P . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . s t n e m y a p e s a e l e c n a n F i ) 7 5 6 4 8 ( , . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . y t i l i c a f t i d e r c f o t n e m y a p e R ) 2 9 7 9 4 ( , ) 7 5 6 4 8 ( , i g n u n i t n o c m o r f s e i t i v i t c a g n i c n a n i f y b d e d i v o r p ) n i d e s u ( h s a C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . s n o i t a r e p o . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ) 6 5 0 3 ( , - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . s n o i t a r e p o d e u n i t n o c s i d m o r f s e i t i v i t c a g n i c n a n i f y b n i d e s u h s a C ) 8 4 8 2 5 ( , ) 7 5 6 4 8 ( , . . . . . . . . . . . . . . . . s e i t i v i t c a g n i c n a n i f y b d e d i v o r p ) n i d e s u ( h s a c t e N 56 Gibson Energy 105 Consolidated Financial Statements l a t o T 2 2 8 2 , ) 7 7 1 7 8 ( , ) 5 8 9 7 8 1 ( , , 2 5 4 0 9 5 , 0 8 1 0 3 2 ) 8 1 2 2 ( , , ) 7 0 0 4 2 0 1 ( , - - - - - i d e n a t e R i s g n n r a e ) t i c i f e D ( ) 0 7 4 8 8 1 ( , - - - - - y t i u q E - ) 7 7 1 7 8 ( , t s e r e t n I t e N - - - - - - 2 2 8 2 , l a t i p a c e r a h S d n a l s u p r u S d e t u b i r t n o C s e i t i l i b a i l - - - - - - ) 8 1 2 2 ( , - - - - - - 5 8 4 s t n u o c c A l e b a v i e c e r l e b a y a p d n e d i v i D s e i t i l i b a i L l a i c n a n i F d e u r c c a s e g r a h c s t n u o c c A l d n a e b a y a p t b e d m r e t - g n o L - - - - - - 6 5 2 , 6 9 1 0 9 5 - - - - , 0 8 1 0 3 2 , ) 7 0 0 4 2 0 1 ( , . . . . . . . . . . . . . . . . . . . . s d n e d i v i d r e d o h e r a h s l f o t n e m y a P . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d a p t s e r e t n i I . . . . . . . . . . . s n o i t p o e r a h s f o e s i c r e x e m o r f s d e e c o r P t b e d f o t e n , t b e d m r e t - g n o l m o r f s d e e c o r P . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i m u m e r p d n a t n u o c s i d . . . . . . . s t s o c f o t e n , t b e d m r e t - g n o l f o t n e m y a p e R . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . y t i l i c a f t i d e r c m o r f s d e e c o r P e v i t a v i r e d f o t n e m e l t t e s n o s d e e c o r p t e N . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . s t n e m u r t s n i l a i c n a n i f 7 1 0 2 t A g n i c n a n i f y b d e d i v o r p ) n i d e s u ( h s a c t e N , ) 3 3 9 7 7 4 ( $ ) 0 7 4 8 8 1 ( , $ ) 7 7 1 7 8 ( , $ 2 2 8 2 , $ ) 8 1 2 2 ( , $ 5 8 4 $ 6 5 2 $ ) 1 3 6 3 0 2 ( , $ . . . . . . . . . . . . . s n o i t a r e p o g n u n i t n o c m o r f i s e i t i v i t c a 8 5 / ) s t e s s a ( s e v i t a v i r e D ) d e t o n e r e h w s t n e m e t a t S l i a i c n a n F d e t a d i l o s n o C o t s e t o N . c n I y g r e n E n o s b G i t p e c x e , s r a l l i o d n a d a n a C f o s d n a s u o h t n i s t n u o m a r a u b a t ( l Consolidated Financial Statements 106 Gibson Energy This page intentionally left blank This page intentionally left blank Management Steve Spaulding President & Chief Executive Officer Sean Brown SVP & Chief Financial Officer Sean Wilson SVP & Chief Administrative Officer Mike Lindsay SVP, Operations & Engineering Directors James M. Estey Chair of the Board Douglas P. Bloom James J. Cleary John L. Festival Susan C. Jones Marshall L. McRae Mary Ellen Peters Steven R. Spaulding CORPORATE INFORMATION Head Office 1700, 440–2nd Ave SW Calgary, AB Canada T2P 5E9 Phone: (403) 206-4000 Fax: (403) 206-4001 Website: www.gibsonenergy.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 Mark Chyc-Cies Vice President, Strategy, Planning & Investor Relations Phone: (403) 776-3146 Email: investor.relations@gibsonenergy.com Media Inquiries Phone: (403) 476-6334 Email: communications@gibsonenergy.com Gibson Energy Inc. 1700, 440 - 2 Avenue SW Calgary, AB T2P 5E9 (403) 206-4000 gibsonenergy.com
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