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Management'sDiscussionandAnalysis2017YearEndReportGibsonEnergyInc.
12017Management'sDiscussionandAnalysisContentsBUSINESSOVERVIEWANDSTRATEGY2SELECTEDFINANCIALINFORMATION32017REVIEW4PROJECTDEVELOPMENTSANDMARKETOUTLOOK5RESULTSOFCONTINUINGOPERATIONS_7INFRASTRUCTURE_8LOGISTICS10WHOLESALE12OTHER14EXPENSES_15RESULTSOFDISCONTINUEDOPERATIONS_18SUMMARYOFQUARTERLYRESULTS20LIQUIDITYANDCAPITALRESOURCES24LiquiditySources_24Capitalexpenditures25Capitalstructure_26Dividends27Distributablecashflow27Contractualobligationsandcontingencies29OFF-BALANCESHEETARRANGEMENTS30RELATEDPARTYTRANSACTIONS30OUTSTANDINGSHAREDATA30QUANTITATIVEANDQUALITATIVEDISCLOSURESABOUTMARKETRISK_30ACCOUNTINGPOLICIES32DISCLOSURECONTROLS&PROCEDURES36RISKFACTORS36FORWARD-LOOKINGINFORMATION39NON-GAAPFINANCIALMEASURES_40GibsonEnergyInc.
22017Management'sDiscussionandAnalysisThefollowingManagement'sDiscussionandAnalysis("MD&A")waspreparedandapprovedbytheBoardofDirectors(the"Board")ofGibsonEnergyInc.
("we","our","us",its","GibsonEnergy","Gibson"orthe"Company")asofMarch5,2018andshouldbereadinconjunctionwiththeauditedconsolidatedfinancialstatementsandrelatednotesoftheCompanyfortheyearsendedDecember31,2017and2016,whichwerepreparedunderInternationalFinancialReportingStandards("IFRS")assetoutintheHandbookoftheCanadianInstituteofCharteredProfessionalAccountantsandasissuedbytheInternationalAccountingStandardsBoard("IASB"),alsoreferredtoasGAAP.
AmountsarestatedinthousandsofCanadiandollarsunlessotherwisenoted.
AdditionalinformationaboutGibson,includingtheAnnualInformationFormfortheyearendedDecember31,2017("AIF")isavailableonSEDARatwww.
sedar.
comandonourwebsiteatwww.
gibsonenergy.
com.
ThisMD&Acontainsforward-lookinginformationandnon-GAAPmeasuresandreadersarecautionedthatthisMD&AshouldbereadinconjunctionwiththeCompany'sdisclosureunder"Forward-LookingInformation"and"Non-GAAPFinancialMeasures"includedattheendofthisMD&A.
BUSINESSOVERVIEWANDSTRATEGYGibsonisanoilinfrastructurecompanywithourprincipalbusinessesconsistingofthestorage,blending,processing,andgatheringofcrudeoilandrefinedproducts.
HeadquarteredinCalgary,Alberta,ouroperationsarefocusedaroundourcoreterminalassetslocatedatHardisty,Alberta(the"HardistyTerminal"or"Hardisty")andEdmonton,Alberta(the"EdmontonTerminal"or"Edmonton"),andalsoincludetheMooseJawFacilityandinjectionsstationsinthePermianbasininTexasandtheSouthCentralOilProvince("SCOOP")andtheSoonerTrend,AnadarkoBasin,Canadian,andKingfisherCounties("STACK")basinsinOklahoma.
OurstrategyandstrengthsThekeyattributesofourstrategyare:anoilinfrastructurefocus,withtheInfrastructuresegmentexpectedtocompriseapproximately85%ofsegmentprofitbytheendof2019,includingtheterminalsandpipelinesrepresentingapproximately75%oftotalsegmentprofit;targeting10%distributablecashflowpersharegrowththroughaimingtoinvest$150millionto$200millioningrowthcapitalperyear;andofferingasecure,growingdividendthatisunderpinnedbylong-termcontractswithinvestmentgradecounterpartiesatitsterminalassets,withtotalCompanycashflowsexpectedtobecomprisedofapproximately85%take-or-pay,stablefee-basedstructures,inclusiveofinternaltake-or-pay,bytheendof2019.
Inordertobesuccessfulinourstrategywewill:leverageourcompetitivepositionatourterminalstocontinuetosecureasignificantproportionofnewtankagebusiness.
ThroughofferingthemostconnectivitytoinboundandoutboundpipelinesatHardisty,aswellasexclusiveaccesstotheonlyunittrainrailfacilityatHardisty,wehavebuiltapositionthatprovidesusacompetitiveadvantagetoserviceourcustomers.
Weintendtoharvestadditionalopportunitieswithinourterminalstoprovideincrementalconnectivityandotherservicestoexistingterminalcustomers;seekcomplementarygrowththroughourbasinstrategy,focusingontheoilsands,VikingandDuvernaybasinsinCanada,andthePermianandSCOOP/STACKbasinsintheU.
S.
Withinthesebasins,wewillleverageourcoreterminalsandinjectionstationstoadvantageusincompetingforgatheringpipelineandrelatedinfrastructureopportunities;pursuehighqualitycashflowstounderpinourdividendandfundgrowthcapitaltomaintainover80%ofourcashflowsfromtake-or-pay,stablefee-basedcontracts;maintainastrongbalancesheetandfinancialpositionthroughtargetingaleverageratioof3.
0x–3.
5xandapayoutratioof70%–80%ofdistributablecashflow.
Weanticipatebeingfullyfundedforourgrowthcapitalthroughtheendof2019throughproceedsfromnon-coreassetdispositions,andwillsubsequentlyseektofundgrowthcapitalwithamaximumof50%-60%debt.
Wealsotargetaninvestmentgradecreditratingtodecreaseourfundingcostsandincreaseouraccesstocapital;remainhighlyskilledinbuildingandoperatingourinfrastructurewhileaggressivelymanagingcoststomaintainandimproveoperatingmargins.
Wewillbecustomer-focusedandwillfosterlong-termrelationshipswithourcustomersinordertobetterunderstandtheirinfrastructurerequirementsandbemoreresponsiveinprovidingthebestsolutionsforthem;andGibsonEnergyInc.
32017Management'sDiscussionandAnalysiscontinueourfirmcommitmenttobealeaderinenvironment,health,andsafety.
Ourexperiencedleadershipteamhasaprovenhistoryofsuccessfuloperationsandastrongindustryreputation.
SELECTEDFINANCIALINFORMATIONThreemonthsendedDecember31YearendedDecember3120172016320172016320153ContinuingoperationsRevenue1,766,887$1,414,187$6,100,839$4,594,181$5,405,311Segmentprofit85,22787,634310,236263,646377,416Netloss91,787)(50,597)(115,715)(178,167)(295,374)Basicanddilutedlosspershare.
0.
64)(0.
36)(0.
81)(1.
31)(2.
35)AdjustedEBITDA1,282,27183,927277,635244,092344,591Distributablecashflow1,248,46542,725165,031101,940200,990Dividendsdeclared.
47,25746,772188,470181,994161,002Cashflowfromoperatingactivities45,31444,152204,970175,482399,117Growthcapitalexpenditures.
59,045$34,769$157,123$202,984$343,766Combinedoperations1CombinedAdjustedEBITDA1,2.
82,27197,219291,272278,106386,284Distributablecashflow1,265,170$47,614$183,594$131,644$226,297ConsolidatedbalancesheetsAsatDecember31201720162015Totalassets2,964,434$3,261,347$3,282,986Totalnon-currentliabilities.
1,498,900$1,639,045$1,606,425LastTwelveMonths-AsatDecember31201720162015Debtratios4Totalandseniordebtleverageratio.
4.
04.
43.
2Interestcoverageratio.
3.
73.
04.
61Seedefinitionofnon-GAAPmeasuresonpages20to23and39to40.
CombinedAdjustedEBITDAandCombineddistributablecashflow,representstheaggregatedresultsofbothcontinuinganddiscontinuedoperations.
2Seepages21to22and28forareconciliationofAdjustedEBITDAtosegmentprofitanddistributablecashflowtocashflowfromoperations,respectively.
3Comparativeperiodinformationhasbeenrestatedtoreflecttheimpactofdiscontinuedoperations.
Referto"subsequentevents"fordetails.
4Seeratiodiscussiononpage21and26formoreinformationontheratiocalculationwhichincludescalculationofProformaAdjustedEBITDAforcovenantcalculations.
GibsonEnergyInc.
42017Management'sDiscussionandAnalysis2017REVIEWFinancialhighlightsoSegmentprofitfortheInfrastructuresegmentincreasedby19%to$237millionfortheyearendedDecember31,2017comparedto$200millionfortheyearendedDecember31,2016primarilyasaresultoftheadditionaltankcapacityandassociatedtake-or-pay,stablefee-basedcontractsaddedduringthefirstquarterof2017andthefourthquarterof2016.
oSegmentprofitfromcontinuingoperationsincreasedby17%to$310millionfortheyearendedDecember31,2017comparedto$264millionfortheyearendedDecember31,2016primarilyduetohighersegmentprofitfromtheInfrastructuresegment.
oDistributablecashflowfromcombinedoperationsincreasedby39%to$184millionfortheyearendedDecember31,2017,comparedto$132millionfortheyearendedDecember31,2016.
oAdjustedEBITDAfromcontinuingoperationsincreasedby14%to$278millionfortheyearendedDecember31,2017comparedto$244millionfortheyearendedDecember31,2016duetohighersegmentprofitsacrossallbusinesssegments.
oNetlossfromcontinuingoperationsdecreasedby35%to$116millionfortheyearendedDecember31,2017comparedtoanetlossof$178millionfortheyearendedDecember31,2016.
oInthefourthquarterof2017and2016,theCompanydeclaredadividendof$0.
33and$0.
33percommonshare,respectively.
TotaldividendsdeclaredfortheyearsendedDecember31,2017and2016,were$188millionand$182millionrespectivelyor$1.
32percommonshare.
CapitalexpenditurehighlightsoDuringtheyearendedDecember31,2017,theCompanyincurredtotalgrowthcapitalexpendituresof$157millionofwhich$147millionwasprimarilyattributabletotheInfrastructuresegmentfornewtanksandrelatedinfrastructureattheHardistyandEdmontonTerminals.
Total2017growthcapitalexpenditureswerebelowourmostrecentguidanceof$170millionmainlyduetocapitalcostssavingsattheEdmontonTerminalexpansionandthetimingofthespendrelatedtootherInfrastructuregrowthprojects.
oOnSeptember11,2017,theCompanyannouncedthesanctionoftheconstructionof1.
1millionbarrelsofnewtankageatitsHardistyTerminalofwhich600,000barrelsisunderpinnedbyalong-term,take-or-pay,stablefee-basedcontractwithaseniorinvestmentgradeoilsandscustomerand500,000barrelsforoperationalpurposes.
Thetwo300,000barreltanksandone500,000barreltankareexpectedtobeplacedintoserviceinthethirdquarterof2019andwillincreasethetotalcapacityoftheterminaltoapproximately10.
1millionbarrels.
Dispositionofnon-corebusinessesoDuring2017,theCompanyclosedthesaleofitsIndustrialPropanesegment.
Thefinalsalepriceafterworkingcapitaladjustmentswas$433millionresultinginrecognitionofapost-taxgainonsaleof$151million.
oOnAugust1,2017,theCompanyannounceditsintentiontodivestitsU.
S.
EnvironmentalServicesbusiness.
Creditfacilityandlong-termdebtupdatesoEffectiveMarch7,2017,theCompanyamendeditsunsecuredrevolvingcreditfacility("RevolvingCreditFacility")whereby,amongotherrevisions,themaximumconsolidatedseniordebtleverageratioandthemaximumconsolidatedtotaldebtleverageratiowererevisedto4.
85to1.
0forthe2017fiscalyear,4.
25to1.
0forthe2018fiscalyearand4.
0to1.
0thereafter.
Furthermore,thematuritydateofourRevolvingCreditFacilitywasextendedfromAugust2020toMarch2022.
oOnNovember30,2017,theCompanyamendedtheRevolvingCreditFacilityfrom$500.
0millionto$560.
0million.
oDuringtheyear,theCompanyissued$600million5.
25%SeniorUnsecuredNotesdueJuly15,2024atfacevalueplusaccruedinterest(the"NewNotes").
UsingthenetproceedsoftheNewNotesalongwiththeproceedsfromthesaleofIndustrialPropanebusiness,theCompanyfullyrepaidtheUS$550million6.
75%Notes(the"US$Notes")and$250millionGibsonEnergyInc.
52017Management'sDiscussionandAnalysis7.
00%Notes(the"C$Notes")(collectivelythe"RetiredNotes").
TherefinancinghasstrengthenedtheCompany'sbalancesheetbyreducingitslong-termindebtedness,decreaseditsannualinterestcostsandextendeditsdebtmaturityprofile.
OrganizationalchangesoOnJune5,2017,theCompanyannouncedtheappointmentofSteveSpauldingastheCompany'sPresidentandChiefExecutiveOfficer,effectiveJune19,2017,atwhichtimeMr.
SpauldingalsobecameamemberofGibson'sBoardofDirectors.
oDuring2017,theCompanyinitiatedacorporatereorganizationwhichresultedintheeliminationofcertainpositionsincludingcertainexecutiveandmanagementpositions.
TheCompanyincurredone-timereorganizationandexecutivecostsof$19million.
SUBSEQUENTEVENTSDividendoOnMarch5,2018,theBoarddeclaredaquarterlydividendof$0.
33percommonshareforthethreemonthsendedMarch31,2018onitsoutstandingcommonshares.
ThedividendispayableonApril17,2018toshareholdersofrecordatthecloseofbusinessonMarch30,2018.
Strategyandsaleofnon-corebusinessesoOnJanuary3,2018theCompanyinitiatedthestart-upprocessrelatedtothecommissioningofthetwonew400,000barrelcrudeoilstoragetanksandrelatedpipelineconnectioninfrastructureattheEdmontonTerminal.
oOnJanuary30,2018,theCompanyannounceditsnewcorporatestrategyandplansforthesaleofseveralnon-corebusinesses,includingNGLWholesale,CanadianTruckTransportation,non-coreCanadianEnvironmentalServicesandnon-coreU.
S.
InjectionStationsandTruckTransportationassets.
TheCompanyexpectstoplaceallthenon-corebusinessestobedisposedintothemarketbytheendof2018,withatargetofconcludingthenon-coredivestitureprocessbymid-2019.
Aggregateproceedsfromthesaleofnon-corebusinessesareconservativelyexpectedtorangebetween$275millionand$375millionandareexpectedtobereinvestedintothecoreinfrastructurebusinessthroughfundingfuturegrowthcapitalexpenditures.
oOnFebruary21,2018,theCompanyannouncedthesanctionofthe$50millionVikingPipelineProject.
ThisprojectwillextendthereachoftheexistingProvostPipelinetosupportdevelopmentbyseveralregionalproducers.
oSubsequenttotheyearend,theCompanyhascontinuedtoprogressitsU.
S.
EnvironmentalServicesbusinesssaleprocessandistargetingtocompletethedivestitureduringthefirsthalfof2018.
PROJECTDEVELOPMENTSANDMARKETOUTLOOKMajorgrowthprojectsTheCompanycontinuestoprogresstowardsthecompletionofmajorgrowthprojectswithinitsInfrastructuresegment,primarilyrelatedtotheconstructionoftankageandpipelineconnections.
OnSeptember11,2017,theCompanyannouncedthesanctionoftheconstructionofnew1.
1millionbarrelsofcrudeoilstoragecapacityandrelatedpipelineconnectioninfrastructureattheCompany'sHardistyTerminal.
Thetwo300,000barreltanksandone500,000barreltankareexpectedtobeplacedintoserviceinthethirdquarterof2019.
Thetwo300,000barreltanksareunderpinnedbyalong-term,take-or-pay,stablefee-basedcontractwithasenior,investmentgrade,oilsandscustomerandthe500,000barreltankisbeingconstructedforoperationalpurposes.
OnFebruary21,2018,theCompanyannouncedthesanctionofthe$50millionVikingPipelineProject.
ConsistentwithGibson'sintentiontoexpanditspipelinegatheringnetworkintheVikingBasinbyleveragingexistingstorage,optimizationcapabilitiesandaccesstoegresspipelinesatitsHardistyTerminal,theVikingPipelineProjectwillextendthereachoftheexistingProvostPipelinetosupportdevelopmentbyseveralregionalproducers.
The120-kmpipelinewillhaveaninitialcapacityof13,300bbl/d,withthepotentialtoexpandtoanestimated25,000bbl/dinthefuture.
TheVikingPipelineProjectisexpectedtobeinserviceinQ12019,andisunderpinnedbyshippersthroughtake-or-paycommitmentswithanareaofdedication.
GibsonEnergyInc.
62017Management'sDiscussionandAnalysisInadditiontotheprojectsdiscussed,wecontinuetomakeprogresswithcommercialdevelopmentopportunitiesatbothHardistyandEdmontonthat,withsuccess,willenableustoaddadditionalstorageandconnectioninfrastructureforourcustomers.
MarketoutlookGibsonregularlyevaluatesitslong-rangestrategicplaninordertoassesstheimplicationsofemergingindustrytrends.
TheseindustrytrendshavetheabilitytoaffectGibson'sbusinessandprospectsovertheshort-term("twoyearsorless")andthemediumtolong-term("twotofiveyears").
Thereareanumberoffactorsthataffectourcustomers'viewsofmarketaccessovertheshortandmediumterm,particularlyintheWesternCanadianSedimentaryBasin(the"WCSB").
Theseviews,inadditiontocommodityprices,influencetheirwillingnesstoincreasecapitalexpenditureprogramsthatultimatelyincreaseactivityandproductionvolumes,whichcreateopportunitiesforourterminalsatHardistyandEdmonton,aswellasourservicesthatsupportthoseassets:oIntheshort-term,crudeoilpricing,locationandqualitydisconnects,combinedwiththeexistingshortageofpipelinetakeawaycapacityfromtheWCSB,necessitatedemandforterminalservicesandincreaseuseofcrudebyrailasasolutionforexportmarketaccess.
TheCompanybelievesthatincreasedrelianceonstorageduringperiodsoflimitedegress,especiallyduringpipelineupsets,mayleadcustomerstoconsiderincreasingtheiravailablestorageandwillbesupportiveofrecontractingtherailfacilityatHardisty.
oEnbridgeInc.
'sproposedreplacementofitsLine3pipelinewillhelpthegrowingsupplyofCanadiancrudeoilgainaccesstothelargestrefiningmarketsintheU.
S.
andEasternCanada.
ThereplacementofLine3,whichreceivedCanadianGovernmentapprovalinDecember2016,andisawaitingfinalapprovalfromthestateofMinnesota,couldprovideincrementalcapacitybylate2019.
TheHardistyTerminalisconnectedtodelivertothisexpansionandLine3comingintoserviceshouldprovideincreasedopportunitiesfortheCompany'sterminalservicesatHardisty;oThereceiptofCanadianfederalapprovalfortheTransMountainExpansionpipelineandU.
S.
federalandstateapprovalfortheKeystoneXLpipelinehasadvancedtwoinitiativesthatshouldhelpthegrowingsupplyofCanadiancrudeoilgarnerimprovedmarketaccess,althoughadditionalregulatorychallengesremainforboththeseprojects.
ThestartingpointforthepipelineswouldbeadjacenttotheCompany'sHardisty(KeystoneXL)andEdmonton(TransMountainExpansion)terminalswhichcouldprovideincreasedopportunitiesfortheCompany'sterminallingservices;oGlobalheavyoildemandandpricesmayexperiencetransitoryvolatilityassociatedwiththeInternationalMarineOrganization's(IMO)AnnexVIregulationwhichwillreducethemaximumsulphurcontentofmarinefuelsfrom3.
5%to0.
5%beginningJanuary1,2020.
Tomaintaincompliance,marineshippersmusteitherinstallsulphurscrubbersorswitchtolowersulphurfuelssuchasdieselorLNG.
Thischangemaypotentiallyimpactrefinerydemandforaperiodoftime,andthusdecreasepricesforthehighsulfurcrudeoilstypicalofCanada'soilsands;andoOverthemediumtolong-term,asmarketaccessbecomesmorecertainandtechnologydevelopmentandcostreductionscontinuetodecreasesupplycosts,thesupplyofCanadianheavycrudeoilfromtheoilsandsshouldstarttogrowmorerapidlyasadditionaloilsandsprojectsaresanctionedandbroughtonstream,resultinginincreaseddemandforterminalservicesanddiluentintheWCSB.
TherecentrecoveryofoilpricesisexpectedtofacilitateimprovedprojecteconomicsforGibson'sproducercustomers.
Takentogetherwithimprovingcostefficienciesandincreasingoptimismregardingmarketaccesssolutions,thesefactorshaveresultedinmodestincreasesincapitalprogramsbeingannouncedbyanumberofNorthAmericanproducers.
However,giventheuncertaintyofoilpricesintheshorttomediumterm,producersappeartobetakingameasuredapproachtowardscapitalspendingincreases,whichmaylimitthepaceofproductiongrowthcomparedtopastcycles.
Ascrudeoilsupplyanddemandfundamentalsrebalance,theCompanyanticipatesaslowreturntoactivityandproductiongrowthlevels,acontinueddemandformidstreamassetsandincreasingdemandforstorage.
PricefluctuationsbetweencrudeoiltypescancreateincrementalmarginopportunitiesinmultipleareasoftheCompany'soperations.
CrudepricedifferentialshaverecentlywidenedinthefaceoffirmingofbenchmarkcrudeoilpricesandtheCompanyremainsattentivetoopportunitiesasthistrendcontinuestoevolve.
Overthemediumtolong-termtheCompanyexpectsnewtechnologyforoilsandsandconventionaldevelopmenttobedeployedwithintheindustrywhichshouldimproveproducers'coststructures,andfurtherenhancetheviabilityandresilienceofthespecificbasinsinwhichGibsonhasstrategicallychosentooperate,resultinginincreaseddemandforGibson'sservices.
GibsonEnergyInc.
72017Management'sDiscussionandAnalysisRESULTSOFCONTINUINGOPERATIONSTheCompany'sseniormanagementevaluatessegmentperformancebasedonavarietyofmeasuresdependingontheparticularsegmentbeingevaluated,includingprofit,volumes,operatingexpenses,profitperbarrelandreplacementcapitalrequirements.
TheCompanydefinessegmentprofitasrevenueslesscostofsales(excludingdepreciation,amortizationandimpairmentexpense)andoperatingexpenses.
Revenuespresentedbysegmentinthetablebelowincludeinter-segmentrevenue,asthisisconsideredmoreindicativeofthelevelofeachsegment'sactivity.
Profitbysegmentsexcludesdepreciation,amortization,accretion,impairmentcharges,stockbasedcompensationandcorporateexpenses,asseniormanagementlooksateachperiod'searningsbeforecorporateexpensesandnon-cashitems,suchasdepreciation,amortization,accretion,impairmentchargesandstockbasedcompensation,asoneoftheCompany'simportantmeasuresofsegmentperformance.
ThefollowingisadiscussionoftheCompany'ssegmentedresultsofoperationsforthethreemonthsandyearsendedDecember31,2017and2016andthefollowingtablesetsforthrevenueandprofitbysegmentforthoseperiods:ThreemonthsendedDecember31YearendedDecember312017201620172016SegmentrevenueInfrastructure.
84,024$83,458$343,003$298,150Logistics.
135,752132,790526,345512,935Wholesale1,714,2501,322,3545,817,2524,187,508Other.
4,0671,65816,72911,291Totalsegmentrevenue1,938,0931,540,2606,703,3295,009,884Revenue–inter-segmental.
171,206)(126,073)(602,490)(415,703)Totalrevenue–external.
1,766,8871,414,1876,100,8394,594,181Segmentprofit(loss)Infrastructure.
55,89756,271236,795200,307Logistics.
10,65314,68542,67139,576Wholesale18,65817,20430,58524,408Other.
19(526)185(645)Totalsegmentprofit85,22787,634310,236263,646Generalandadministrative.
22,3168,48251,20435,018Depreciationandimpairment.
66,31654,185192,302175,346Amortizationandimpairment.
10,6487,82037,42569,062Impairmentofgoodwill.
69,41428,64769,414130,052Stockbasedcompensation9,1517,17222,05624,876Debtextinguishmentcosts.
2,630)-60,492-Foreignexchangeloss(gain)2,53416,165(18,136)(21,617)NetInterestexpense17,41423,31777,36285,526Lossbeforeincometax109,936)(58,154)(181,883)(234,617)Incometaxrecovery.
18,149)(7,557)(66,168)(56,450)Netlossfromcontinuingoperations.
91,787)$(50,597)$(115,715)$(178,167)Theexclusionofdepreciation,amortizationandimpairmentexpensecouldbeviewedaslimitingtheusefulnessofsegmentprofitasaperformancemeasurebecauseitdoesnottakeintoaccount,incurrentperiods,theimpliedreductioninvalueoftheCompany'scapitalassets(suchas,tanks,pipelines,plantandequipment,rollingstockanddisposalwells)causedbyuse,agingandwearandtear.
Repairandmaintenanceexpendituresthatdonotextendtheusefullife,improvetheefficiencyorexpandtheoperatingcapacityoftheCompany'scapitalassetsarechargedtooperatingexpenseasincurred.
TheCompany'ssegmentanalysisinvolvesanelementofjudgmentrelatingtotheallocationsbetweensegments.
Inter-segmentsales,costofsalesandoperatingexpensesareeliminatedonconsolidation.
Transactionsbetweensegmentsandwithinsegmentsarevaluedatprevailingmarketrates.
TheCompanybelievesthattheestimateswithrespecttotheseallocationsandratesarereasonable.
GibsonEnergyInc.
82017Management'sDiscussionandAnalysisINFRASTRUCTURETheInfrastructuresegmentiscomprisedofanetworkofoilinfrastructureassetsthatincludeoilterminals,railloadingandunloadingfacilities,injectionstations,gatheringpipelinesandprocessingfacilitiesthatcollect,storeandprocessoilandotherliquidhydrocarbonproductionandrelatedproductsbeforeeventualdistributiontoend-usemarkets.
TheprimaryfacilitieswithinthissegmentincludetheterminalslocatedatHardistyandEdmonton,whicharetheprincipalhubsforaggregatingandexportingoilandrefinedproductsoutoftheWCSB;gatheringpipelines,whichareconnectedtotheHardistyTerminalandtooneofourProcessingRecoveryandDisposal("PRD")locations;injectionstations,whicharelocatedthroughouttheU.
S.
;acrudeoilprocessingfacilityinMooseJaw,Saskatchewan(the"MooseJawFacility")andPRDTerminalslocatedthroughoutWesternCanadaandtheNorthernU.
S.
OurPRDbusinessisdependentuponthedrillingactivityintheWCSB,BakkenandNorthernU.
S.
Asaresult,thePRDbusinessisimpactedbyseasonalityduetoroadbansaspartofspringbreak-up.
ThefollowingtablessetforththeoperatingresultsfromtheCompany'sInfrastructuresegmentforthethreemonthsandyearsendedDecember31,2017and2016:ThreemonthsendedDecember31YearendedDecember31Volumes(barrelsinthousands)2017201620172016TerminalsandfacilitiesHardistyTerminal.
70,42456,802259,953211,699EdmontonTerminal5,3585,42120,83516,922MooseJawFacility1,4831,6285,5245,180PRDTerminals.
3,6793,20114,35810,904InjectionStations2,2596,41917,23832,310Totalterminalsandfacilities.
83,20373,471317,908277,015ThreemonthsendedDecember31YearendedDecember312017201620172016RevenueHardistyTerminals.
47,693$48,368$198,926$175,436EdmontonTerminals12,94413,13252,11942,205MooseJawfacility9,8449,97639,39138,062PRDTerminals13,01310,74449,21635,847InjectionStations.
5301,2383,3516,600Revenue84,02483,458343,003298,150Operatingexpensesandother.
28,12727,187106,20897,843Segmentprofit55,897$56,271$236,795$200,307OperationalperformanceInthethreemonthsandyearendedDecember31,2017comparedtothethreemonthsandyearendedDecember31,2016:HardistyTerminalvolumesincreasedby24%and23%,respectively.
Theincreaseinbothcomparativeperiodswaslargelydrivenbytheimpactofthenewtankscommissionedinthefourthquarterof2016,theadditionofanewtake-or-pay,stablefee-basedcustomer,anincreaseinacustomer'scontracttankagevolumes,andtheadditionofinfrastructureconnectionsduring2017whichprovidedforhigherthroughputvolumesfromcertaincustomers.
TheincreaseintheyearoveryearcomparativeperiodwasalsodrivenbytheoperationalimpactoftheFortMcMurrayforestfirewhichreducedvolumesdeliveredtoourcustomersinthesecondquarterof2016.
GibsonEnergyInc.
92017Management'sDiscussionandAnalysisEdmontonTerminalvolumeswerelargelyconsistentwiththepriorperiodandincreasedby23%,respectively.
TheyearoveryearincreasewasmainlyduetothecommissioningofnewtanksandcommoninfrastructureattheEdmontonTerminal,completedinthefourthquarterof2016,additionalvolumesreceivedfromtheCompany'sWholesalesegmentandduetotheoperationalimpactoftheFortMcMurrayforestfirewhichreducedavailablevolumesinthesecondquarterof2016.
MooseJawFacilityvolumesdecreasedby9%andincreasedby7%,respectively.
Thequarteroverquarterdecreasewasprimarilyduetotheimpactofthebuild-upofhigherasphaltinventorylevelsonaperiodoverperiodbasis.
Theyearoveryearincreasewasprimarilyduetotheimpactofasubstantiallylongerplantturnaroundtimeduringthesecondquarterof2016comparedtothecurrentperiod,aswellastheoverallincreaseindemandforcertainrefinedproducts.
Thiswaspartiallyoffsetbytheimpactoflowerprocessingactivityinthefirstquarterof2017asaresultofanaccumulationofinventorylevelsinthefourthquarterof2016.
PRDTerminalvolumesincreasedby15%and32%,respectively.
TheincreaseinbothcomparativeperiodswasmainlyduetohigherdrillingactivitylevelsintheCompany'sWCSBserviceareas,particularlyintheSaskatchewanVikingandtheAlbertaMontney,primarilydrivenbythesustainedrecoveryofcrudeprices.
InjectionStationvolumesdecreasedby65%and47%,respectively.
ThedecreaseinbothcomparativeperiodswasmainlyduetoadecreaseinactivitywithamajorcustomerinNorthDakotaandSouthTexasandthestrategicdecisiontorealigntheinjectionstationsservicetowardsamorediversifiedcustomerbaseasdiscussedbelowwithinLogistics-U.
SCrudeandOtherProductssection.
FinancialperformanceInthethreemonthsandyearendedDecember31,2017comparedtothethreemonthsandyearendedDecember31,2016:RevenueattheHardistyTerminalwaslargelyconsistentwiththepriorperiodandincreasedby$23.
5million,respectively.
Revenueremainedflatquarteroverquarterwiththeadditionalrevenueearnedwiththenewinfrastructureassetsasnotedunderoperationalperformancebeingoffsetbya$4.
6millionone-timerevenueadjustmentrelatedtotheHardistyTerminal.
Theyearoveryearincreasewaslargelydrivenbyadditionalrevenuefromthenewtankscommissionedinthefourthquarterof2016providingmorecustomerswithdedicatedtankusagepursuanttotake-or-pay,stablefee-basedarrangementsnotdependentonvolumes.
Theincreaseinrevenueswasalsodrivenbytheadditionofanewtake-or-pay,stablefee-basedcustomer,anincreaseinacontractcustomer'stankageusageandtheadditionofthenewcommoninfrastructureconnections.
RevenueattheEdmontonTerminalwasconsistentwiththepriorperiodandincreasedby$9.
9million,respectively.
TheyearoveryearincreasewasprimarilyduetotheimpactoftherevenuerelatedtothecommissioningofthenewtanksandrelatedcommonInfrastructureattheEdmontonTerminalandtheimpactofadditionaltake-or-pay,stablefee-basedarrangementsandassociatedvolumesrelatedtothenewtankattheEdmontonWestTerminalthatwascommissionedinthefourthquarterof2016.
PRDTerminalrevenueincreasedby$2.
3millionand$13.
4million,respectivelymainlyasaresultofimprovedoperationalperformanceasdiscussedunderoperationalperformance.
MooseJawFacilityrevenuewasconsistentwiththepriorperiodandincreasedby$1.
3million,respectively.
Theincreaseintheyearoveryearcomparativeperiodswasprimarilyduetohigherprocessingvolumesasaresultoftheshorterturnaroundtimein2017.
Injectionstationrevenuedecreasedby$0.
7millionand$3.
2million,respectivelyprimarilyrelatedtolowervolumesaspreviouslydiscussed.
Segmentprofitwaslargelyconsistentwiththepriorperiodandincreasedby$36.
5million,respectively.
ThequarteroverquarterchangewasflatprimarilyduetoconsistentrevenuesfromtheHardistyandEdmontonTerminals,andinjectionstations,aswellashigheroperatingcosts,associatedwiththeexpansionoftheterminals,andtherecognitionof$2.
3millionforfutureenvironmentalremediationcosts.
TherevenueandsegmentprofitdecreasewaspartiallyoffsetbyincreaseinrevenuesandsegmentprofitfromthePRDTerminals.
TheyearoveryearincreasewasprimarilyduetotheincreasedrevenuesfromtheHardisty,Edmonton,andPRDTerminals.
Therevenueincreasewaspartiallyoffsetbyreductionsinrevenuesfrominjectionstations,andhigheroperatingcosts,associatedwiththeexpansionoftheterminals,andrecognitionofcertainenvironmentalremediationcosts.
GibsonEnergyInc.
102017Management'sDiscussionandAnalysisCapitalexpendituresBelowisthesummaryofInfrastructurecapitalexpendituresfortheyearsendedDecember31,2017and2016:YearendedDecember3120172016Growthcapital146,739$183,561Replacementcapital17,436$13,110ThereductioningrowthcapitalexpendituresfortheyearendedDecember31,2017comparedtotheyearendedDecember31,2016primarilyrelatestoareductionintheamountofconstructiontowardsadditionaltanksandrelatedinfrastructureattheHardistyandEdmontonTerminalsin2017duetothehighvolumeoftankandrelatedinfrastructurecompletionsinthefourthquarterof2016attheHardistyTerminal,theEdmontonTerminalandtheMooseJawFacility.
Replacementcapitalincludespurchasesthatreplaceexistingassetsasnecessarytomaintaincurrentservicelevelsorreplaceassetsthatnolongerhaveausefuleconomiclife.
Theyearoveryearchangewasprimarilyduetonon-recurringmechanicalandrepairprojectscompletedattheMooseJawFacility,aswellasmaintenanceactivitiescompletedattheCompany'sPRDandHardistyTerminals.
LOGISTICSTheLogisticssegmentincludesasuiteoflogisticalwellsiteservicesthatenableoilandliquidsproductiontoaccessfixedmidstreaminfrastructure.
ThissegmentprovidestrucktransportationandrelatedservicesthatallowtheCompanytoserviceitscustomers'needsseveraltimesbetweenthewellheadandtheendmarket,andincludesprovidinghaulingservicesforcrude,condensate,propane,butane,asphalt,methanol,sulphur,petroleumcoke,gypsum,emulsion,wastewateranddrillingfluidsformanyofNorthAmerica'sleadingoilandgasproducers.
Additionally,theCompanyalsoprovidesseveralancillaryservicestoproductioncompanies.
Generally,thesegment'ssecondquarterresultsareimpactedbyroadbansandotherrestrictionswhichimpactoverallactivitylevelsintheWCSBandtheNorthernU.
S.
,and,therefore,negativelyimpactthebusiness.
Also,forcertainservicesandgeographicalregions,theactivityisgenerallythelowestinthewintermonthswhendaylighthoursareshorter.
ThefollowingtablessetforthoperatingresultsfromtheCompany'sLogisticssegmentforthethreemonthsandyearsendedDecember31,2017and2016:ThreemonthsendedDecember31YearendedDecember31Volumes(barrelsinthousands)2017201620172016Canadiancrudeandotherproducts.
11,97112,03446,81544,955U.
S.
crudeandotherproducts.
6,4318,22926,84836,629Total.
18,40220,26373,66381,584ThreemonthsendedDecember31YearendedDecember312017201620172016RevenueCanadiancrudeandotherproducthauling47,100$50,582$195,218$180,636U.
S.
crudeandotherproducthauling.
14,64321,82166,888101,054Waterhaulinganddisposal.
33,59626,882129,264106,298Otherproductsandservices40,41333,505134,975124,947Totalrevenue.
135,752132,790526,345512,935Costofsales99,89696,383386,243372,309Operatingexpensesandother.
25,20321,72297,431101,050Segmentprofit10,653$14,685$42,671$39,576GibsonEnergyInc.
112017Management'sDiscussionandAnalysisOperationalperformanceInthethreemonthsandyearendedDecember31,2017comparedtothethreemonthsandyearendedDecember31,2016:Canadiancrudeandotherproducthaulingbarrelswerelargelyconsistentandincreasedby4%,respectively.
TheconsistentquarteroverquarterresultswereprimarilyduetoconsistentlevelsofhaulingactivityintheFortMcMurrayandNorthernAlbertaregionsattributabletocomparableactivityindrillingandoilsandsproductionaswellaschangeinthehaulingproductmixperiodoverperiod.
TheyearoveryearincreasewasprimarilyduetohigherlevelsofhaulingactivityintheFortMcMurrayandtheNorthernAlbertaregionsattributabletotheincreaseindrillingactivityandoilsandsproductionactivity,coupledwiththeincreaseinpetroleumcoke,andliquefiedpetroleumgashauledpartiallyoffsetbylowergypsum,sulphurandroadasphaltvolumes.
U.
S.
crudeandotherproductsvolumedecreasedby22%and27%,respectively.
ThedecreaseinbothcomparativeperiodswasprimarilyattributabletothedeclineinbusinesswithLogistics'largestU.
S.
truckingcustomertriggeredbytheterminationoftheinjectionstationaccessagreementinNovember2017.
Truckingvolumewithothercustomersaregraduallyincreasing,howevernotsufficientlyyettoovercometheoveralleffectofthedeclinewiththelargecustomer.
Toalesserdegree,2017volumeswerealsoaffectedbyastrategicdecisiontoexittheUticaBasininthefourthquarterof2016duetouneconomichaulingmarginsintheregion.
FinancialperformanceInthethreemonthsandyearendedDecember31,2017comparedtothethreemonthsandyearendedDecember31,2016:Canadiancrudeandotherproductrevenuedecreasedby7%andincreasedby8%,respectively.
Thedecreaseinquarteroverquarterresultswasprimarilyduetoconsistentvolumeshauled,withlowerhaulingratesforcrudeandLPGmix.
Theyearoveryearperiodincreasewasprimarilyduetohigherhaulingratesforpetroleumcoke,sulphur,propaneandgypsumandhighervolumeshauledasnotedunderoperationalperformance.
U.
S.
crudeandotherrevenuedecreasedby33%and34%,respectively.
Thedecreaseinbothcomparativeperiodswasprimarilydrivenbylowervolumesasnotedabove,theCompany'sexitfromtheUticabasinandduetochangeinbusinessfocustowardsamoreaggressivebidstrategywithnewcustomers.
Waterhaulinganddisposalrevenueincreasedby25%and22%,respectively.
TheincreaseinbothcomparativeperiodswasprimarilydrivenbytheimpactofthecontinuedincreaseinproductionrelatedvolumesintheMidContinent(Arkoma,SCOOPandSTACKregions),BakkenandNorthernAlberta.
Otherproductsandservicesrevenueincreasedby21%and8%,respectively.
ThequarteroverquarterincreasewasprimarilydrivenbyhigheractivityintheBakken,GulfofMexico,Rockies,HaynesvilleandEagleFordregions,andtherealizationofhigherserviceratesincertainareas.
TheyearoveryearperiodincreasewasprimarilydrivenbyhigheractivityintheBakken,Rockies,HaynesvilleandEagleFordregions,andtherealizationofhigherrateswithinthelasttwoquarters,offsetbylostservicedaysrelatedtoTropicalStormCindyandHurricaneHarveyandIrma.
Segmentprofitdecreasedby27%andincreasedby8%,respectively.
Thequarteroverquarterdecreasewas,primarilyduetolowermarginsearnedonCanadianandU.
S.
crudehauling,drivenbyloweroverallvolumeshauledduetoincreasedcompetitionwithintheCompany'sserviceareasandhigheroperatingexpensesintheU.
S.
primarilyrelatedtohigherrepairsandmaintenanceandpayrollrelatedcostsinthecurrentquarter.
Canadianoperationswerealsonegativelyimpactedbylowermarginsoncrude,LPGmix,gypsum,andasphaltpartiallyoffsetbyhighermarginsrelatedtopropane,andsulphur.
TheyearoveryearincreasewasprimarilyduetohighermarginsearnedonU.
S.
otherproductsandservices,drivenbyhigherdrillingactivityandhigherservicerates.
Canadianoperationswerepositivelyimpactedbyhighermarginsearnedonsulphur,andpetroleumcoke,partiallyoffsetbylowermarginsoncrude,gypsum,andasphalt.
Additionally,U.
S.
crudehaulingmarginsdeclinedduetoincreasedcompetitionwithintheCompany'sserviceareasaswellasincreaseddrivercosts.
Theyearoveryearincreasewasalsosupportedbyloweroperatingcostsinthecurrentperiodlargelyduetothecontinuationofthereductioninpayrollrelatedcostsassociatedwithoverallheadcountreductions.
GibsonEnergyInc.
122017Management'sDiscussionandAnalysisCapitalexpendituresBelowisthesummaryofLogisticscapitalexpendituresfortheyearsendedDecember31,2017and2016:YearendedDecember3120172016Growthcapital6,043$5,860Replacementcapital7,799$9,634GrowthcapitalexpendituresfortheyearendedDecember31,2017,remainconsistentwiththepriorcomparativeperiodswithapproximately96%oftheexpendituresin2017relatingtoU.
S.
EnvironmentalServicesassetpurchases.
GrowthcapitalexpendituresfortheyearendedDecember31,2016alsoincludeexpendituresrelatedtothecompletionofthenewEdmontontruckterminal.
Replacementcapitaldecreased$1.
8millionfortheyearendedDecember31,2017comparedtotheyearendedDecember31,2016,primarilyduetodecreaseinspendingrelatedtothereplacementofon-boardcomputersoftwarefortheCanadiantruckfleetaswellasvarioustruckandtrailerreplacementsrelatedtotheCanadianandU.
S.
Logisticsbusinesses.
WHOLESALETheWholesalesegmentincludesthepurchasing,selling,storingandoptimizationofhydrocarbonproducts,includingcrudeoil,NGLs,roadasphalt,roofingflux,fracoils,lightandheavystraightrundistillates,combinedvacuumgasoil("CVGO"),andanoilbasedmud("OBM")product.
Thissegmentearnsmarginsbyprovidingaggregationservicestoproducersand/orbycapturingquality,locationalortime-basedarbitrageopportunities.
ThissegmentalsocontributestotheCompany'soverallmarginsbydrivingvolumestoourInfrastructureandLogisticssegment.
TheWholesalesegmentisexposedtocommoditypricefluctuationsarisingbetweenthetimecontractedvolumesarepurchasedandthetimetheyaresold,aswellasbeingexposedtopricingdifferentialsbetweendifferentgeographicmarketsand/orhydrocarbonqualities.
Theserisksaremanagedbypurchasingandsellingproductsatpricesbasedonthesameorsimilarindicesorbenchmarks,andthroughphysicalandfinancialcontractsthatincludeenergy-relatedforwardcontracts,swaps,futures,optionsandotherhedginginstruments.
Fairvaluesofthesederivativecontractsfluctuatedependingonthecommoditypricesandcanimpactthesegmentprofitsintheformofrealizedorunrealizedgainsandlosses,oftenoffsetbyphysicalinventories,thatcanchangesignificantlyperiodoverperiod.
Canadianroadasphaltactivity,relatedtoRefinedProducts,isaffectedbytheimpactofweatherconditionsonroadconstruction.
RoadasphaltdemandpeaksduringthesummermonthswhenmostoftheroadconstructionactivityinCanadatakesplace.
Intheoff-peakdemandmonthsforroadasphalt,thedemandforroofingfluxcontinues.
Demandforwellsitefluidsisdependentonoverallwelldrillingandcompletionactivities,withactivitynormallythebusiestinthewintermonths.
DemandforpropaneandotherNGLsisalsohighestinthecoldermonthsoftheyear.
ThreemonthsendedDecember31YearendedDecember312017201620172016WTIaverageprice($USD/bbl)55.
40$49.
29$50.
955$43.
30WCSdifferential12.
2614.
3211.
98813.
80AverageforeignexchangeratesU.
S.
dollartoCanadiandollar.
1.
271.
331.
3001.
32Propaneaverageprice($USD/U.
S.
gallon)0.
950.
620.
7330.
46Butaneaverageprice($USD/U.
S.
gallon)1.
050.
790.
9110.
63GibsonEnergyInc.
132017Management'sDiscussionandAnalysisThefollowingtablessetforthoperatingresultsfromtheCompany'sWholesalesegmentforthethreemonthsandyearsendedDecember31,2017and2016:ThreemonthsendedDecember31YearendedDecember31Volumes(barrelsinthousands)2017201620172016Crudeanddiluent29,93627,162114,466101,377PropaneandotherNGL3,5243,55111,15411,632Refinedproducts.
1,0318434,0003,58534,49131,556129,620116,594ThreemonthsendedDecember31YearendedDecember312017201620172016RevenueCrudeanddiluent.
1,422,596$1,073,052$4,907,011$3,464,847PropaneandotherNGL.
195,913179,420551,854454,307Refinedproducts.
95,74169,882358,387268,354Totalrevenue.
1,714,2501,322,3545,817,2524,187,508Costofsales1,689,4721,297,5015,761,2154,135,937Operatingexpensesandother.
6,1207,64925,45227,163Segmentprofit18,658$17,204$30,585$24,408OperationalperformanceInthethreemonthsandyearendedDecember31,2017comparedtothethreemonthsandyearendedDecember31,2016:Salesvolumesforcrudeanddiluentincreasedby10%and13%,respectively.
TheincreaseinbothcomparativeperiodswasmainlyduetoadditionalopportunitiestobringvolumesintotheCompany'sintegratedassets,primarilyattributabletotheadditionofnewstoragetanksandcommoninfrastructureaddedinQ42016andQ12017.
Additionally,theimpactofthe2016FortMcMurrayfiresreducedavailablevolumesintheyearoveryearcomparativeperiod.
SalesvolumesforpropaneandotherNGLswereconsistentanddecreased4%,respectively.
Theconsistentquarteroverquartervolumeswasprimarilyduetostrongerdemandforpropane,whichwasoffsetbylowerthroughputduetotightersupplyconditionsforbutaneandcondensateinthecurrentperiod.
Theyearoveryeardecreasewasprimarilyduetotightersupplyconditionsforbutaneandcondensate,whichwassubstantiallyoffsetbyhigherdemandforpropane.
Volumesforrefinedproductsincreasedby22%and12%,respectively.
Theincreaseinbothcomparativeperiodswasprimarilyduetohighercurrentperioddemandfordrillingfluids,principallyasaresultofincreasedWCSBandU.
S.
drillingactivity,theabilityoftheCompanytogainmarketshareinthePermianandNiobrara-DJbasinsandbyhigherthirdpartyCVGOvolumesinthecurrentperiod.
FinancialperformanceInthethreemonthsandyearendedDecember31,2017comparedtothethreemonthsandyearendedDecember31,2016:Revenueforcrudeanddiluentincreasedby33%and42%,respectively.
Theincreaseinbothcomparativeperiodswaslargelyduetohigheraveragecrudeoilprices,andtheincreaseinvolumesinthecurrentquarterandyearoveryearperiods,partiallyoffsetbylessfavorableforeignexchangerates.
RevenueforpropaneandotherNGLsincreasedby9%and21%,respectively.
Theincreaseinbothcomparativeperiodswasmainlyduetohigherpropaneandbutaneprices.
GibsonEnergyInc.
142017Management'sDiscussionandAnalysisRevenueforRefinedProductsincreasedby37%and34%,respectively.
Theincreaseinbothcomparativeperiodswasprimarilyduetohighervolumessoldfordrillingfluids,asphalt,andCVGOaswellashigheraveragecrudeoilpriceswhichsupportedtheincreaseinpricesfortheseproducts.
Segmentprofitincreased8%byand25%,respectively.
Thequarteroverquarterincreasewasmainlyduetomorefavorablelighttoheavycrudepricingspreads,higherrefinedproductmarginsfromincreasedsalesofhighermarginproducts,lowerrailcarandstoragecostsduetothereductionintherailfleet,andloweroperatingexpensesduetolowerpayrollrelatedcosts.
Theseincreaseswerepartiallyoffsetbyhigherlossesfromfinancialinstrumentsduringthecurrentquarterandlowermarginsearnedonpropaneandbutanevolumesduetoregionalpricingconstraintsatacertainnumberofdistributionhubs.
Theyearoveryearincreasewasmainlyduetolowerrailcarandstoragecostsrelatedtothereductionintherailfleet,higherrefinedproductmarginsfromincreasedsalesofhighermarginproducts,lowercomparativelossesonfinancialinstrumentsinthecurrentyear,andbyloweroperatingexpensesduetolowerpayrollrelatedcosts.
TheseincreaseswerepartiallyoffsetbylowercrudeanddiluentmarginsinthecurrentyearresultingfromcompressedlighttoheavypricingspreadswhichwereimpactedfromtheextendedSyncrudeoutageduringtheyear,andbylowermarginsearnedonpropaneandbutanevolumesduetoregionalpricingconstraintsatacertainnumberofdistributionhubs.
CapitalexpendituresBelowisthesummaryofWholesalecapitalexpendituresfortheyearsendedDecember31,2017and2016:YearendedDecember3120172016Growthcapital1,042$11,423Replacementcapital86$55ExpendituresintheyearendedDecember31,2016representthecostofadditionalline-fillvolumespurchasedasaresultofanon-recurringchangeinthearrangementfortheHardistyTerminalandtheEdmontonTerminalwhereintheCompanyassumedsingleshipperstatus.
OTHERTheOthersegmentincludestheprovisionofotherservicestotheoilandgasindustryincludingexplorationsupportservices("ESS")andaccommodationservices.
ThefollowingtablessetforththeoperatingresultsfromtheCompany'sOthersegmentforthethreemonthsandyearsendedDecember31,2017and2016:ThreemonthsendedDecember31YearendedDecember312017201620172016Revenue4,067$1,658$16,729$11,291Costofsales4,1521,89616,35711,322Operatingexpensesandother.
104)288187614Segmentprofit(loss)19$(526)$185$(645)OperationalandfinancialperformanceInthethreemonthsandyearendedDecember31,2017comparedtothethreemonthsandyearendedDecember31,2016:Revenueincreasedby145%and48%,respectively.
TheincreaseinbothcomparativeperiodswasmainlyduetoanoverallincreaseinESSbusinessactivitycomparedtopriorperiods.
GibsonEnergyInc.
152017Management'sDiscussionandAnalysisSegmentprofitincreasedby$0.
5millionand$0.
8million,respectively.
Theincreaseinbothcomparativeperiodswasprimarilydrivenbytheincreaseinrevenueandloweroperatingandothercosts,partiallyoffsetbyhighercostsofsales,reflectingtheimpactofhigherdirectlabourandmaterialscosts.
EXPENSESGeneralandadministrative("G&A")andother,excludingdepreciationandamortizationThreemonthsendedDecember31YearendedDecember312017201620172016Generalandadministrative.
22,316$8,482$51,204$35,018Thequarteroverquarterincreasewasprimarilyduetotherecognitionofnon-recurringreorganizationandexecutivepayrollrelatedcostsof$18.
0million(Q4-2016–severancecostof$4.
3million),lowermarktomarketunrealizedgainof$0.
7million(Q4-2016–gainof$1.
5million)relatedtoequityfinancialinstrumentsandhighergeneralcorporateoverheadallocations.
Theyearoveryearincreasewasprimarilyduetonon-recurringreorganizationandexecutivepayrollrelatedcostsof$19.
0million(2016–severancecostof$10.
0million),marktomarketunrealizedlossof$1.
2million(2016–gainof$3.
6million)relatedtoequityfinancialinstrumentsandhighergeneralcorporateoverheadallocations.
DepreciationandimpairmentThreemonthsendedDecember31YearendedDecember312017201620172016Depreciationandimpairment66,316$54,185$192,302$175,346Theincreaseinbothcomparativeperiodswasprimarilyduetotherecognitionofimpairmentcharges($29.
2million–2017;$10.
6million–2016),depreciationonassetadditionsinthecurrentperiod,partiallyoffsetbytheimpactofassetdisposals.
Theimpairmentlossrecordedin2017relatestoassetswithintheU.
S.
EnvironmentalServicesbusinesswhichisincludedwithintheCompany'sInfrastructure,LogisticsandOtherreportablesegments.
AmortizationandimpairmentThreemonthsendedDecember31YearendedDecember312017201620172016Amortizationandimpairment.
10,618$7,820$37,425$69,062TheincreaseinthethreemonthsendedDecember31,2017,waslargelyduetotherecognitionofimpairmentlossesof$5.
9millionrelatedtotheU.
S.
EnvironmentalServicesbusinesswhichisincludedwithintheLogisticsreportablesegment.
,partiallyoffsetbytheimpactofacertainintangibleassetsbecomingfullyamortizedintheprioryearperiod,andanimpairmentexpenseof$1.
6millionrecognizedduringtheyearendedDecember31,2016.
ThedecreaseintheyearendedDecember31,2017,waslargelyduetotheimpactofacertainnumberintangibleassetsbecomingfullyamortizedinprioryearperiods,andanimpairmentexpenseof$1.
6millionrecognizedduringtheyearendedDecember31,2016,partiallyoffsetbytherecognitionofimpairmentlossof$5.
9millionasdiscussedearlier.
GibsonEnergyInc.
162017Management'sDiscussionandAnalysisImpairmentofgoodwillThreemonthsendedDecember31YearendedDecember312017201620172016Impairmentofgoodwill.
69,414$28,647$69,414$130,052InthethreemonthsandyearendedDecember31,2017,theCompanyrecordedgoodwillimpairmentchargeswithintheCompany'sU.
S.
TruckingandTransportationandU.
S.
Wholesalebusinesssegmentsof$41.
2millionand$28.
2million,respectively.
Therespectiveimpairmentchargeswereidentifiedaspartofmanagement'sannualgoodwillimpairmenttestcompletedduringthefourthquarter.
AsatDecember31,2017,theentireamountofgoodwillrelatedtotheU.
S.
TruckingandTransportationandU.
S.
Wholesalebusinesssegmentshasbeenwrittenoff.
IntheyearendedDecember31,2016,theCompanyrecordedgoodwillimpairmentchargeswithintheCompany'sU.
S.
EnvironmentalServicesandRefinedProductsbusinesssegmentsof$101.
4millionand$28.
6million,respectively.
Therespectiveimpairmentchargeswereidentifiedaspartofmanagement'sannualgoodwillimpairmenttestcompletedduringthefourthquarter.
AsatDecember31,2016,theentireamountofgoodwillrelatedtotheU.
S.
EnvironmentalServicesandRefinedProductsbusinesssegmentshasbeenwrittenoff.
StockbasedcompensationThreemonthsendedDecember31YearendedDecember312017201620172016Stockbasedcompensation9,151$7,172$22,056$24,876Thequarteroverquarterincreasewasprimarilydrivenbytheimpactofhigherdeferredshareunitandoptiongrants,andhigherrestrictedshareunitsexpenseinthecurrentperiodprimarilyrelatedtopro-ratavestingforseverancepackagesof$3.
3million,partiallyoffsetbyhigherperformanceshareunitexpenseintheprioryearquarter.
Theyearoveryeardecreasewasprimarilydrivenbytheimpactofforfeituresofperformanceshareunitsinthecurrentyear,partiallyoffsetbyhigheramountofdeferredshareunitgrants,higherRSUexpenseprimarilyrelatedtopro-ratavestingforseverancepackages,andhigheroptionexpense.
DebtextinguishmentcostsThreemonthsendedDecember31YearendedDecember312017201620172016$250.
0million7.
0%Notes-redemptionpremium.
12,838-US$550.
0million6.
75%Notes-redemptionpremium231-33,133-$250.
0million7.
0%Notes–unamortizedcost.
4,321-US$550.
0million6.
75%Notes–unamortizedcost7,982-US$550.
0million6.
75%Notes–realizedforeignexchange(gain)lossonfinancialinstruments2,861)-2,218-Totaldebtextinguishmentcosts.
2,630)$-$60,492-Asnotedinthefinancialhighlightssection,theCompanyrepaiditsC$NotesandUS$Notesduringtheyearwhichresultedinrecordingdebtextinguishmentcostsof$60.
5includingrealizedforeignexchangelossrelatedtofinancialinstrumentsof$2.
2million.
GibsonEnergyInc.
172017Management'sDiscussionandAnalysisForeignexchange(gains)lossnotaffectingsegmentprofitThreemonthsendedDecember31YearendedDecember312017201620172016Unrealizedforeignexchangeloss(gain)onthemovementinexchangeratesonU.
S.
dollarRevolvingCreditFacilityandlong-termdebt.
15,803$17,050$(3,564)$(22,715)Realizedforeignexchange(gain)onsettlementofU.
S.
dollarlong-termdebt.
12,514)-(15,224)-Corporateforeignexchange(gain)loss.
755)(885)6521,098Totalforeignexchangeloss(gain)2,534$16,165$(18,136)$(21,617)AtDecember31,2017,thegainsandlossesrecordedareprimarilydrivenbythefavorableandunfavorablemovementsinexchangeratesonthetranslationoftheCompany'sU.
S.
dollardenominatedRevolvingCreditFacilityandsettlementofU.
Sdollardenominatedlong-termdebtandcorporateforeignexchange,whileatDecember31,2016,thegainsandlosseswereprimarilydrivenbythe(favorable)andunfavorablemovementsinexchangeratesonthetranslationoftheCompany'sU.
Sdollardenominatedlong-termdebtandcorporateforeignexchange.
Accordingly,inthethreemonthsendedDecember31,2017andDecember31,2016,theCompanyrecordedanetforeignexchangelossof$2.
5millionand$16.
2million,respectively,andintheyearsendedDecember31,2017andDecember31,2016,theCompanyrecordedarealizedgainof$18.
1millionand$21.
7million,respectively.
NetinterestexpenseThreemonthsendedDecember31YearendedDecember312017201620172016Netinterestexpense.
17,414$23,317$77,362$85,526ThedecreaseforbothcomparativeperiodswasprimarilyduetotherepaymentoftheCompany'sC$NotesandUS$Notes,partiallyoffsetbyhigherinterestcostsrelatedtotheRevolvingCreditFacilitydrawinthecurrentperiodandlowercapitalizedinterestamountsrelatedtoourlong-termcapitalprojectscompletedduringtheperiod.
IncometaxesThreemonthsendedDecember31YearendedDecember312017201620172016Currentincometax(recovery)expense.
14,148)$11,460$(33,946)$11,789Deferredincometaxrecovery4,001)(19,017)(32,222)(68,239)Totaltaxrecovery18,149)$(7,557)$(66,168)$(56,450)Incometaxrecoveryfromcontinuingoperationswas$18.
1millionand$66.
2millionforthethreemonthsandyearendedDecember31,2017comparedtoanincometaxrecoveryof$7.
6millionand$56.
5millionforthethreemonthsandyearendedDecember31,2016.
Theeffectivetaxratewas16.
5%and36.
4%duringthethreemonthsandyearendedDecember31,2017comparedto13.
0%and24.
1%forthethreemonthsandyearendedDecember31,2016.
ThemaindriverforthequarteroverquarterincometaxrecoveryandthechangeintheeffectivetaxratewastheimpactofunrealizedamountsrelatingtonetcapitallossesarisingfromforeignexchangemovementsontheCompany'sU.
S.
dollardenominatedlong-termdebt.
ThemaindriverfortheyearendedDecember31,2017incometaxrecoveryandthechangeintheeffectiveratewastheimpactofrealizedandunrealizedamountsrelatingtothenetcapitalgainsarisingfromforeignexchangemovements,includingrepayments,ontheCompany'sU.
S.
dollardenominatedlong-termdebt.
GibsonEnergyInc.
182017Management'sDiscussionandAnalysisRESULTSOFDISCONTINUEDOPERATIONSIndustrialPropaneAsnotedinthefinancialhighlightsectionabove,during2017theCompanycompletedtheclosingofthesaleofitsIndustrialPropaneBusinessforafinalsalepriceof$433.
1millionresultinginrecognitionofapost-taxgainonsaleof$150.
6million(seenote8intheconsolidatedfinancialstatements).
TheIndustrialPropanebusinessprimarilyconsistedofretailpropanesupplywithafocusonoilandgascustomersinWesternCanada.
ThissegmentoperatedundertheCanwestandStittcobrandsandsoldpropaneandrelatedequipmenttooilandgas,commercialandotherend-usercustomers.
Thissegmentwascharacterizedbyahighdegreeofseasonalitydrivenbytheimpactofweatherontheneedforheatingandtheamountofpropanerequiredtoproducepowerforoilandgasrelatedapplications.
Therefore,volumesarelowduringthesummermonthsrelativetothewintermonths.
Operatingprofitsarealsoconsiderablylowerduringthesummermonths.
MostoftheannualsegmentprofitisearnedfromOctobertoMarcheachyear.
ThefollowingtablessetforthoperatingresultsfromdiscontinuedoperationsoftheIndustrialPropanesegmentforthethreemonthsandyearendedDecember31,2017and2016:ThreemonthsendedDecember31YearendedDecember31Volumes(litresinthousands)201712016201712016Oilfield.
52,45141,578173,829Commercial.
51,37146,850143,210Other.
32,33122,723105,901-136,153111,151422,940ThreemonthsendedDecember31YearendedDecember31201712016201712016RevenuePropane.
52,807$52,953$141,557Other.
7,4985,34326,353Totalrevenue.
60,30558,296167,910Costofsales30,37444,67869,608Otheroperatingloss(income)16,639(19)63,936Segmentprofit13,29213,63734,366Depreciationandamortization3,784-18,572Gainonsale25,240-176,826-Lossbeforetaxes5,2409,508190,46315,794Incometax(recovery)provision4,282)30,613(2,659)Netincomefromdiscontinuedoperations,aftertax.
5,240$13,790$159,850$18,4531.
TheCompanyderecognizedtheIndustrialPropanesegmenteffectiveMarch1,2017.
Accordingly,resultsforyearendedDecember31,2017representtheactivityfortheperiodJanuary1,2017toFebruary28,2017.
2.
Thecashproceedsof$433.
1millionandtransactioncostspaidof$9.
8millionhavebeenpresentedwithininvestingactivitiesfromdiscontinuedoperationsontheCompany'sconsolidatedstatementofcashflows.
OperationalandfinancialperformanceIndustrialpropanevolumesdecreasedby100%and74%respectively.
ThedecreaseinbothcomparativeperiodswereduetothetimingofthesaleonMarch1,2017,andlackofresultsinthethreemonthperiodandthereportingoftwomonthsintheyearoveryeardateperiodversusfullthreeandyearoveryearamountsinthepriorperiods.
Revenuedecreasedby100%and65%,respectively.
ThedecreaseinbothcomparativeperiodswasduetothetimingofthesaleonMarch1,2017,andthelackofresultsinthethreemonthperiodandthereportingoftwomonthsintheyearoveryearperiodversusthefullthreeandyearoveryearamountsinthepriorperiods.
GibsonEnergyInc.
192017Management'sDiscussionandAnalysisSegmentprofitdecreasedby100%and60%,respectively,forthereasonsdiscussedabove.
Additionally,theyearoveryearresultsforthetwomonthsendedFebruary28,2017werepositivelyimpactedbycolderweatherpatternsandhigheractivitylevelsrelatedtodrillingandconstructionactivity.
ThefollowingtablesummarizesthesourcesandusesoffundsfortheyearsendedDecember31,2017and2016fromdiscontinuedoperations:YearendedDecember3120172016StatementofcashflowsCashflows(usedin)providedby:Operatingactivities.
7,591)$32,084Investingactivities.
423,156(3,507)Financingactivities.
1.
TheCompanyderecognizedtheIndustrialPropanesegmenteffectiveMarch1,2017.
Accordingly,resultsforthreemonthsendedDecember31,2017doesnotincludeanycashflowsfromIndustrialPropanebusinessandresultsfortheyearendedDecember31,2017representtheactivityfortheperiodJanuary1,2017toFebruary28,2017.
Cash(usedin)providedbyoperatingactivitiesCashusedinoperatingactivitiesintheyearendedDecember31,2017was$7.
6millioncomparedtocashprovidedbyoperatingactivitiesof$32.
1millionintheyearendedDecember31,2016.
ThedecreaseintheyearendedDecember31,2017wasprimarilyduetothereportingoftwomonthsinthecurrentperiodversusthefullyearoveryearamountsinthepriorperiod,changeinworkingcapitalrequirementsdrivenbythefactthattheCompanyisnolongerrequiredtofundworkingcapitalaswellasworkingcapitaladjustmentsrelatedtothesaleofthebusiness.
Cash(usedin)providedbyinvestingactivitiesCashprovidedbyinvestingactivitieswas$423.
2millionfortheyearendedDecember31,2017,comparedtocashusedininvestingactivitiesof$3.
5millionintheyearendedDecember31,2016.
TheyearoveryearincreaseincashprovidedbyinvestingactivitieswasprimarilyduetothecashproceedsreceivedonthesaleoftheIndustrialPropanebusiness,netofthetransactioncostspaid.
Cashprovidedby(usedin)financingactivitiesTherewasnocashprovidedby(usedin)financingactivitiesrelatedtodiscontinuedoperations.
IncometaxesIncometaxfromdiscontinuedoperationswasaprovisionof$30.
6millionfortheyearendedDecember31,2017comparedtoincometaxrecoveryof$2.
7millionfortheyearendedDecember31,2016,asdisclosedinnote8oftheconsolidatedfinancialstatements.
Theeffectivetaxratewas16.
1%duringtheyearendedDecember31,2017comparedtonegative16.
8%fortheyearendedDecember31,2016.
ThemaindriverfortheincometaxprovisionandthechangeintheeffectiveratewastheimpactofthegainonthesaleoftheIndustrialPropanebusinessandthefactthattheCompanyisnolongerentitledtoincomeorlossesofthebusinesseffectiveMarch1,2017.
GibsonEnergyInc.
202017Management'sDiscussionandAnalysisSUMMARYOFQUARTERLYRESULTSThefollowingtablesetsforthasummaryoftheCompany'squarterlyresultsforeachofthelasteightquarters:20172016Q4Q3Q2Q1Q4Q3Q2Q1ContinuingoperationsRevenue1,766,887$1,404,194$1,480,196$1,449,562$1,414,187$1,178,741$1,095,026$906,227Net(loss)income91,787)(8,497)(5,523)(9,908)(50,597)(30,777)(132,368)35,575AdjustedEBITDA(2)82,27155,70866,38773,26983,92760,69141,55357,921Earnings(loss)pershareBasic0.
64)$(0.
06)$(0.
04)$(0.
07)$(0.
37)$(0.
22)$(1.
01)$0.
28Diluted0.
64)$(0.
06)$(0.
04)$(0.
07)$(0.
37)$(0.
22)$(1.
01)$0.
28DiscontinuedoperationsRevenue58,296$60,222$27,188$27,472$52,817Netincome(loss)5,240(3,146)-157,75613,790(2,093)(1,778)8,534AdjustedEBITDA(2)13,63713,2921,8722,72816,122Earnings(loss)pershareBasic0.
03$(0.
02)$-$1.
11$0.
09$(0.
01)$(0.
01)$0.
07Diluted0.
03$(0.
02)$-$1.
09$0.
09$(0.
01)$(0.
01)$0.
06CombinedoperationsRevenue(1)1,766,887$1,404,194$1,480,196$1,507,858$1,474,409$1,205,929$1,122,498$959,044Netincome(loss)86,547)(11,643)(5,523)147,848(36,807)(32,870)(134,146)44,109AdjustedEBITDA(2)82,27155,70866,38786,90697,21962,56344,28174,043Earnings(loss)pershareBasic0.
61)$(0.
08)$(0.
04)$1.
04$(0.
28)$(0.
23)$(1.
02)$0.
35Diluted.
0.
61)$(0.
08)$(0.
04)$1.
02$(0.
28)$(0.
23)$(1.
02)$0.
34(1)RevenuefromcombinedoperationsrepresentstheaggregatedresultsofbothcontinuinganddiscontinuedoperationsandisnotameasurerecognizedunderIFRSanddoesnothavestandardizedmeaningsprescribedbyIFRS.
(2)AdjustedEBITDAisdefinedasnetincome(loss)beforeinterestexpense,incometaxes,depreciation,amortization,othernon-cashexpensesandchargesdeductedindeterminingconsolidatednetincome(loss),includingmovementintheunrealizedgainsandlossesontheCompany'sfinancialinstruments,stockbasedcompensationexpense,impairmentoflong-termassetsandassetwrite-downs.
ItalsoremovestheimpactofforeignexchangemovementsintheCompany'sU.
S.
dollardenominatedlong-termdebt,debtextinguishmentexpensesandadjustmentsthatareconsideredunusual,non-recurringornon-operatinginnature.
CombinedAdjustedEBITDAincludesresultsfromcontinuinganddiscontinuedoperations,whileAdjustedEBITDAfromcontinuingoperationsonlyincludesresultsfromcontinuingoperations.
TheCompanypresentsCombinedAdjustedEBITDA,andAdjustedEBITDAfromcontinuingoperationsanddiscontinuedoperationsbecauseitconsidersthesetobeimportantsupplementalmeasuresoftheCompany'sperformanceandbelievesthesemeasuresarefrequentlyusedbysecuritiesanalysts,investorsandotherinterestedpartiesintheevaluationofcompaniesinindustrieswithsimilarcapitalstructures.
CombinedAdjustedEBITDAandAdjustedEBITDAhavelimitationsasanalyticaltools,andreadersshouldnotconsiderthisiteminisolation,orasasubstituteforananalysisoftheCompany'sresultsasreportedunderIFRS.
Someoftheselimitationsare:-AdjustedEBITDAandCombinedAdjustedEBITDA:-excludescertainincometaxpaymentsthatmayrepresentareductionincashavailabletotheCompany;-doesnotreflecttheCompany'scashexpenditures,orfuturerequirementsforcapitalexpendituresorcontractualcommitments;-doesnotreflectchangesin,orcashrequirementsfor,theCompany'sworkingcapitalneeds;andGibsonEnergyInc.
212017Management'sDiscussionandAnalysis-doesnotreflectthesignificantinterestexpense,orthecashrequirementsnecessarytoserviceinterestpaymentsontheCompany'sdebt,includingtheDebentures,NotesandNewNotes(asdefinedherein)andtheRevolvingCreditFacility(asdefinedherein);-Althoughdepreciation,amortizationandimpairmentarenon-cashcharges,theassetsbeingdepreciatedandamortizedwilloftenhavetobereplacedinthefutureandAdjustedEBITDAdoesnotreflectanycashrequirementsforsuchreplacements;and-OthercompaniesintheindustrymaycalculateCombinedAdjustedEBITDAandAdjustedEBITDAdifferentlythantheCompanydoes,limitingitsusefulnessasacomparativemeasure.
Becauseoftheselimitations,CombinedAdjustedEBITDAandAdjustedEBITDAshouldnotbeconsideredtobeameasureofdiscretionarycashavailabletotheCompanytoinvestinthegrowthoftheCompany'sbusiness.
TheCompanycompensatesfortheselimitationsbyrelyingprimarilyontheCompany'sIFRSresultsandusingCombinedAdjustedEBITDAandAdjustedEBITDAonlyassupplementalmeasures.
ThefollowingtablesreconcilessegmentprofittoCombinedAdjustedEBITDAandAdjustedEBITDAforcontinuingoperations,discontinuedoperationsandcombinedoperationsforeachofthelasteightquartersandProFormaAdjustedEBITDAfortheyearsendedDecember31,2017and2016:ThreemonthsendedTwelvemonthsendedDecember31,2017September30,2017June30,2017March31,December31,20172017ContinuingoperationsSegmentprofit85,227$64,211$74,032$86,766$310,236Interestincome.
5003202996651,784Foreignexchangegain(loss)-corporate755(1,031)152(528)(652)Generalandadministrative22,316)(6,428)(13,155)(9,305)(51,204)Netunrealized(gain)lossfromfinancialinstruments(1)19(1,364)4,059(4,329)(1,615)Restructuring,severanceandothercosts(2)18,086-1,000-19,086AdjustedEBITDA82,271$55,708$66,387$73,269$277,635DiscontinuedoperationsSegmentprofitandadjustedEBITDA.
13,637$13,637CombinedoperationsSegmentprofit85,227$64,211$74,032$100,403$323,873Interestincome.
5003202996651,784Foreignexchangegain(loss)-corporate755(1,031)152(528)(652)Generalandadministrative22,316)(6,428)(13,155)(9,305)(51,204)Netunrealized(gain)lossfromfinancialinstruments(1)19(1,364)4,059(4,329)(1,615)Restructuring,severanceandothercosts(2)18,086-1,000-19,086CombinedAdjustedEBITDA.
82,271$55,708$66,387$86,906$291,272Proformaimpactofdivestitures(3)13,637)CombinedProFormaAdjustedEBITDA277,635GibsonEnergyInc.
222017Management'sDiscussionandAnalysisThreemonthsendedTwelvemonthsendedDecember31,2016September30,2016June30,2016March31,2016December31,2016ContinuingoperationsSegmentprofit87,634$64,636$47,629$63,747$263,646Interestincome.
1443844411241,093Foreignexchangeloss(gain)-corporate885(270)(911)(802)(1,098)Generalandadministrative.
8,482)(6,372)(8,142)(12,022)(35,018)Netunrealizedloss(gain)fromfinancialinstruments(1)602)2,3132,5361,1785,425Severanceandothercosts(2)4,348--5,69610,044AdjustedEBITDA83,927$60,691$41,553$57,921$244,092DiscontinuedoperationsSegmentprofit13,292$1,872$2,728$16,474$34,366Netunrealized(gain)lossfromfinancialinstruments(2)352)(352)AdjustedEBITDA13,292$1,872$2,728$16,122$34,014CombinedoperationsSegmentprofit100,926$66,508$50,357$80,221$298,012Interestincome.
1443844411241,093Foreignexchangeloss(gain)-corporate885(270)(911)(802)(1,098)Generalandadministrative.
8,482)(6,372)(8,142)(12,022)(35,018)Netunrealizedloss(gain)fromfinancialinstruments(1)602)2,3132,5368265,073Severanceandothercosts(2)4,348--5,69610,044CombinedAdjustedEBITDA.
97,219$62,563$44,281$74,043$278,106Proformaimpactofacquisitionsanddivestitures(3)CombinedProFormaAdjustedEBITDA278,1061.
Reflectstheexclusionofthemovementinthemark-to-marketvaluationoffinancialinstrumentsusedinriskmanagementactivities.
TheCompanyusescrudeoilandNGLpricedfutures,optionsandswapstomanagetheexposuretocommoditiespricemovementsandforeigncurrencyforwardcontractsandoptionstomanageforeignexchangerisks,althoughtheCompanydoesnotformallydesignatethesefinancialinstrumentsashedgesforaccountingpurposes.
Accordingly,theunrealizedgainsorlossesonthesefinancialinstrumentsarerecordeddirectlytotheincomestatement.
Managementbelievesthatthisadjustmentbettercorrelatestheeffectofriskmanagementactivitiestotheunderlyingoperatingactivitiestowhichtheyrelate.
2.
Representstherestructuringandseverancecostsincurredrelatedtoaheadcountrationalizationreview,andexecutivepayrollrelatedcosts.
3.
ReflectstheproformaimpactofacquisitionsordivestituresontheCompany'sAdjustedEBITDAasiftheacquisitionsordivestituresthattookplaceinthetwelve-monthperiodoccurredonJanuary1ofeachtwelvemonthperiod.
TheproformaimpactofacquisitionsordivestituresiscalculatedonthesamebasisasAdjustedEBITDA.
TheresultsofAdjustedEBITDAaredrivenbysegmentprofitfortherespectivereportablesegmentsaswellastheadjustmentsdiscussedaboveinthetables.
Formoredetailsonthespecificfactorsdrivingtheperiodicmovementsinsegmentprofit,refertotheresultsofcontinuinganddiscontinuedoperationsincludedinthisMD&A.
Thefollowingidentifiesthekeydriversinsegmentprofitabilityoverthelasteightquarters:Infrastructure–TheInfrastructuresegmenthasprogressivelycommissionednewstoragecapacityandrelatedinfrastructure,mostnotablyin2016,whenatotalof3.
4millionbarrelsofadditionalcapacityandrelatedtake-or-payandstablefee-basedcashflowswereadded.
Thisincreaseincapacitywasprimarilydrivenbythesustaineddemandforcrudeterminallingandstorageservicescombinedwiththeeffectiveoperation,includingcostmanagement,ofitscurrentHardistyandEdmontonfacilitiesandhasprovidedforthegradualincreaseinsegmentprofits.
Logistics–TheLogisticssegmentprovidestransportationandrelatedserviceswhichincludesprovidinghaulingservicesforcrude,condensate,sulfur,wastewateranddrillingfluidsformanyofNorthAmerica'sleadingoilandgasproducers.
Accordingly,thesegment'sresultshavebeenimpactedbythereductionincrudeoilpricesandotherrelatedcommoditypriceswhichhasreducedproductionandexplorationactivitiesthusloweringavailabledemandfromtheseproducers.
Additionally,increasedcompetition,specifictothesegment'sU.
S.
operatingareas,hasimpactedtheabilityoftheCompanytodeliverconsistentresultsinthissegment.
GibsonEnergyInc.
232017Management'sDiscussionandAnalysisHowever,themorerecentgradualincreaseinthepriceofcrudeoilwhichhastranslatedintoslowlyincreasingactivityandproductioncoupledwiththeavailabilityofothercommodityhauling,suchassulphur,aswellastherecoveryofdemandfortheCompany'sU.
S.
EnvironmentalServicebusinessasactivitylevelsstrengthenedoverthelastyearhasprovidedsupportforthesegment'searning.
Wholesale–TheWholesalesegmentearnsmarginsbycapturingquality,locationalortime-basedarbitrageopportunitiesrelatedtothepurchasing,selling,storingandoptimizationofhydrocarbonproducts,includingcrudeoilandrefinedproducts.
Accordingly,thissegmenthasexperiencedcommoditypricefluctuationsincludinginthepricingdifferentialsbetweendifferentgeographicmarketsandproductgrades,mostnotablyrelatedtocrudeoilandotherNGL.
Theseriskshavebeenmanagedbypurchasingandsellingproductsthroughphysicalandfinancialcontractsthatincludeenergy-relatedderivativeswhichhavebothsupportedandreducedsegmentprofitsfromquartertoquarterintheformofrealizedorunrealizedgainsandlosses.
AdjustedEBITDAandProFormaAdjustedEBITDAforcontinuing,discontinued,andcombinedoperationsarepresentedinthetableabovebecausetheCompanybelievesitfacilitatesinvestors'useofoperatingperformancecomparisonsfromperiodtoperiodandcompanytocompanybybackingoutpotentialdifferencescausedbyvariationsincapitalstructures(affectingrelativeinterestexpenseandforeignexchangedifferencesontheCompany'slong-termdebtandDebentures),thebookamortizationofintangibles(affectingrelativeamortizationexpense)andtheageandbookvalueofproperty,plantandequipment(affectingrelativedepreciationexpense).
TheCompanyalsopresentsAdjustedEBITDAandProFormaAdjustedEBITDAbecauseitbelievessuchmeasuresarefrequentlyusedbysecuritiesanalysts,investorsandotherinterestedpartiesasmeasuresoffinancialperformance.
AdjustedEBITDAandProFormaAdjustedEBITDA,aspresentedherein,arenotrecognizedmeasuresunderIFRSandshouldnotbeconsideredasanalternativetooperatingincomeornetincomeasmeasuresofoperatingresultsoranalternativetocashflowsasmeasuresofliquidity.
AdjustedEBITDAisdefinedasconsolidatednetincome(loss)beforeinterestexpense,incometaxes,depreciation,amortization,othernon-cashexpensesandchargesdeductedindeterminingconsolidatednetincome(loss),includingmovementintheunrealizedgainsandlossesontheCompany'sfinancialinstruments,stockbasedcompensationexpense,impairmentoflong-termassetsandassetwrite-downs.
ItalsoremovestheimpactofforeignexchangemovementsintheCompany'sU.
S.
dollardenominatedlong-termdebt,debtextinguishmentexpensesandotheradjustmentsthatareconsideredunusual,non-recurringornon-operatinginnature.
ProFormaAdjustedEBITDAdiffersfromAdjustedEBITDAinthatitalsoincludestheproformaeffectofacquisitionsanddivestituresthattookplaceineachfiscalyearasiftheacquisitionsanddivestiturestookplaceatthebeginningofthefiscalyearinwhichsuchacquisitionordivestitureoccurred.
ProFormaAdjustedEBITDAisalsousedincalculatingtheCompany'scovenantcomplianceundertheCompany'sdebtagreements.
TheCompany'scalculationofAdjustedEBITDAandProFormaAdjustedEBITDAmaynotbecomparabletosuchcalculationsusedbyothercompanies.
IncalculatingProFormaAdjustedEBITDA,theCompanymakescertainadjustmentsthatarebasedonassumptionsandestimatesthatmayprovetohavebeeninaccurate.
Inaddition,inevaluatingAdjustedEBITDAandProFormaAdjustedEBITDA,readersshouldbeawarethatinthefuturetheCompanymayincurexpensessimilartothoseeliminatedinthepresentationherein.
GibsonEnergyInc.
242017Management'sDiscussionandAnalysisLIQUIDITYANDCAPITALRESOURCESLiquiditySourcesTheCompany'sprimaryliquidityandcapitalresourceneedsaretofundongoingcapitalexpenditures,growthopportunities,anditsdividend.
Inaddition,theCompanymustserviceitsdebt,includinginterestpayments,andfinanceworkingcapitalneeds.
TheCompany'sshort-termandlong-termliquidityneedsaremetthroughcashflowfromoperations,debtandequityfinancings,borrowingsundertheRevolvingCreditFacilityandproceedsfromthesaleofassets,asrequired.
During2017,asdiscussedinDiscontinuedOperations,theCompanysolditsIndustrialPropanebusinessfornetcashproceedsof$433.
1millionandutilizedtheproceedstorepayaportionofitslong-termdebt.
Additionally,during2017theCompanyrefinancedaportionofitslong-termdebtinordertoreduceitsinterestcostsandincreaseitsdebtmaturityprofile.
AsatDecember31,2017,theCompanyhadapositiveworkingcapitalposition,withanavailablecashbalanceof$32.
1million,andtheabilitytoutilizeborrowingsundertheRevolvingCreditFacility.
Also,theanticipatedproceedsfromthesaleofnon-corebusinessesareexpectedtoreducedebtresultinginlowernetdebttoAdjustedEBITDAratioswhichwillallowtheCompanytofunditsongoingcapitalexpenditures,debtservicerequirements,dividendpayments,andworkingcapitalneeds.
Accordingly,overtheshort-termtheCompanyexpectstomaintainsufficientliquiditysourcestofunditsongoingcapitalexpenditures,debtservicerequirements,dividendpaymentsandworkingcapitalneeds.
Overthemediumtolongterm,theproceedsfromthesaleofnon-corebusinessesareexpectedtoreducedebtresultinginlowernetdebttoAdjustedEBITDAratios.
CombinedwiththeextendedmaturityandlowerinterestcostsprofileoftheCompany'sdebt,thiswillprovidesupportfortheCompany'sfundingofliquidityrequirementsonalong-termbasis.
WhiletheCompanyremainsconfidentinitsabilitytoexecutethesedivestitures,therearenoassurancesthatthetiming,theamountofproceedsfromthesaleofnon-corebusinessesandtheexecutionofplannedcapitalprogramswilloccurasplanned.
PleasereferCompany'sdisclosureunder"Forward-LookingInformation"includedattheendofthisMD&A.
Cashflowsummary-ContinuingoperationsTheCompany'soperatingcashflowisgenerallyimpactedbytheoverallprofitabilitywithintheCompany'ssegments,theCompany'sabilitytoinvoiceandcollectfromcustomersinatimelymannerandtheCompany'sabilitytoefficientlyimplementtheCompany'sgrowthstrategyandmanagecosts.
Belowisthesummaryofchangesinthecashflowfromcontinuinganddiscontinuedoperations:ThefollowingtablesummarizestheCompany'ssourcesandusesoffundsfortheyearsendedDecember31,2017and2016fromcontinuingoperations:YearendedDecember3120172016StatementofcashflowsCashflowsprovidedby(usedin):Operatingactivities.
204,970$175,482Investingactivities.
167,336)(243,193)Financingactivities.
477,933)$17,556CashprovidedbyoperatingactivitiesTheyearoveryearincreasewasprimarilyduetohighersegmentprofitrelatedtotheInfrastructure,LogisticsandWholesalesegments(refertotherespectivesectionin"ResultsofContinuingOperations"formoredetails),aswellasfromchangesinworkingcapitalneedsthatresultedincashusedtofundworkingcapitalof$43.
1millionintheyearendedDecember31,2017comparedtocashusedtofundworkingcapitalof$47.
1millionintheyearendedDecember31,2016.
Thechangeinworkingcapitalrequirementswaslargelydrivenbythechangeininventoryandaccountspayableamounts.
CashprovidedbyoperatingactivitiesandworkingcapitalrequirementsfortheWholesalesegmentisstronglyinfluencedbytheamountofinventorypurchasedandsubsequentlyheldinstorage,aswellasbythecommoditypricesatwhichinventoryisboughtandsold.
Commoditypricesandinventorydemandfluctuateoverthecourseoftheyearinrelationtogeneralmarketforcesandseasonaldemandforcertainproductslikepropane,and,accordingly,workingcapitalrequirementsrelatedtoinventoryalsofluctuatewithchangesincommoditypricesanddemand.
TheprimarydriversofworkingcapitalrequirementsarethecollectionofamountsGibsonEnergyInc.
252017Management'sDiscussionandAnalysisrelatedtosalesofproductssuchascrudeoil,propane,NGLs,asphaltandotherproductsandfeesforservicesassociatedwiththeCompany'sLogisticsandInfrastructuresegments.
Offsettingthesecollectionsarepaymentsforpurchasesofcrudeoilandotherproducts,primarilywithintheWholesalesegment,andotherexpenses.
Historically,theWholesalesegmenthasbeenthemostvariablewithrespecttogeneratingcashflowsandworkingcapitalduetotheimpactofcrudeoilpricelevelsandthevolatilitythatpricechangesandcrudeoilgradebasischangeshaveonthecashflowsandworkingcapitalrequirementsofthissegment.
Workingcapitalisalsoinfluencedbythetimingofcertainfinancingactivitiesrelatedtothecreditfacility,interestpaymentsondebt,aswellaspaymentsofdividendsasdiscussedbelowundercashusedinfinancingactivities.
CashusedininvestingactivitiesCashusedininvestingactivitiesconsistsprimarilyofcapitalexpenditures.
Cashusedininvestingactivitieswas$167.
3millionintheyearendedDecember31,2017,comparedto$243.
2millionintheyearendedDecember31,2016.
Cashusedininvestingactivitieslargelyrelatestocapitalexpenditureswhichcontinuedtoprogresstowardscompletionover2017.
Forasummaryofcapitalexpendituresfortherespectivesegments,see"Capitalexpenditures"includedthroughoutthisMD&A.
Cashprovidedby(usedin)financingactivitiesCashusedinfinancingactivitieswas$477.
9millionintheyearendedDecember31,2017comparedtocashprovidedbyfinancingactivitiesof$17.
6millionintheyearendedDecember31,2016.
Thechangewasduetothenetrepaymentofdebtandfinancingcostsof$433.
6million,paymentofnetinterestof$87.
2millionandpaymentofdividendsof$188.
0millioninthecurrentyear,comparedtothenetaggregatedproceedsfromtheissuanceofcommonsharesanddebenturesof$316.
3million,paymentofnetinterestof$89.
0millionanddividendsof$175.
6millionintheyearendedDecember31,2016.
Inaddition,intheyearendedDecember31,2017,theCompanyreceivednetproceedsfromcreditfacilitiesof$230.
2millioncomparedtonetpaymentstocreditfacilitiesof$35.
0millionintheyearendedDecember31,2016.
CapitalexpendituresThefollowingtablesummarizesgrowthandreplacementcapitalexpendituresfortheyearsendedDecember31,2017and2016:YearendedDecember3120172016Growthcapital(1)157,123$202,984Replacementcapital(2)28,18124,841Total.
185,304$227,825(1)GrowthcapitalexpendituresintheyearsendedDecember31,2017and2016includeOtherandCorporateexpendituresof$3.
3millionand$2.
1million,respectively.
TheseexpendituresmainlyrelatetogrowthcapitalexpenditurecostsassociatedwiththeCompany'sinformationandoperationalsystems.
TheremainderofthegrowthcapitalexpenditureshavebeendiscussedincontinuinganddiscontinuedoperationsearlierinthisMD&A.
(2)ReplacementcapitalexpendituresintheyearsendedDecember31,2017and2016includeOtherandCorporateexpendituresof$2.
9millionand$2.
0million,respectively.
TheseexpendituresmainlyrelatetoreplacementcostsassociatedwiththeCompany'sinformationandoperationalsystems.
TheremainderofthereplacementcapitalexpenditureshavebeendiscussedincontinuinganddiscontinuedoperationsearlierinthisMD&A.
PlannedcapitalexpendituresAspreviouslyannounced,theCompanyhasapproveda2018growthcapitalexpenditurebudgetrangingfrom$165.
0millionto$205.
0millionandanadditional$20.
0millionto$35.
0millionallocatedtoreplacementcapitalexpenditures.
WhiletheCompanyanticipatesthattheseplannedcapitalexpenditureswilloccur,certaincapitalprojectsaresubjecttogeneraleconomic,financial,competitive,legislative,regulatoryandotherfactors,someofwhicharebeyondtheCompany'scontrolandcouldimpacttheCompany'sabilitytocompletesuchactivitiesasplanned.
GibsonEnergyInc.
262017Management'sDiscussionandAnalysisCapitalstructureAsatDecember31,2017December31,2016NotesRevolvingCreditFacility.
230,180$-$250million–December31,20167.
00%NotesdueJuly15,2020250,000US$550million6.
75%NotesdueJuly15,2021(1)738,485$300million5.
375%NotesdueJuly15,2022300,000300,000$600million5.
25%NotesdueJuly15,2024600,000-Unamortizedissuediscountanddebtissuecosts12,061)(16,646)$100millionDebentures5.
25%dueJuly15,2021(liabilitycomponent)89,76589,765Totaldebtoutstanding.
1,207,8841,361,604Cashandcashequivalents.
32,138)(60,159)Netdebt(2)1,175,7461,301,445Totalsharecapital(includingDebentures–equitycomponent)1,939,1261,919,267Totalcapital.
3,114,872$3,220,712(1)TheDebenturesareincludedintheabovetotalcapitalcalculationinaccordancewiththeCompany'sviewofitscapitalstructurewhichincludesshareholders'equity,long-termdebt,theDebentures,theRevolvingCreditFacilityandworkingcapital.
TheDebenturesandassociatedinterestpaymentsareexcludedfromthedefinitionofnetdebtincludedintheconsolidatedseniorandtotaldebtcovenantratiosaswellastheconsolidatedinterestcoveragecovenantratio.
NotesDuring2017,theCompanycompletedatenderofferonitsRetiredNotesandalsoissuedtheNewNotes.
Theindenturesgoverningthetermsofthe$300million5.
375%notes("Notes")andNewNotesincludingthesupplementalindenturethereto,containcertainredemptionoptionswherebytheCompanycanredeemallorpartoftheNotesandNewNotesatpricessetforthintheapplicableIndenturefromproceedsofanequityofferingoronthedatesspecifiedintheIndentures.
Inaddition,theholdersofNotesandNewNoteshavetherighttorequiretheCompanytoredeemtheNotesandNewNotesattheredemptionpricessetforthintherespectiveindebtednessintheeventofachangeincontrolorintheeventcertainassetsaleproceedsarenotre-investedinthetimeandmannerspecifiedintheapplicableIndenture.
DebenturesOnJune2,2016,theCompanyissued$100.
0millionaggregateprincipalamountofdebentures(the"Debentures")atapriceof$1,000perDebenturefornetproceedsofapproximately$96.
3million,includingdebtissuancecostsof$3.
7million.
TheDebentures,issuedatpar,bearinterestatarateof5.
25%perannum,payablesemi-annuallyonJanuary15andJuly15ineachyearcommencingJanuary15,2017,matureonJuly15,2021,andmayberedeemed,incertaincircumstances,onorafterJuly15,2019.
TheDebenturesareconvertibleattheholder'soptionintocommonsharesatanytimepriortotheearlierofJuly15,2021andthebusinessdayimmediatelyprecedingthedatefixedforredemptionbytheCompanyataconversionpriceof$21.
65percommonshare,beingaratioofapproximately46.
1894commonsharesper$1,000principalamountoftheDebenture.
TheDebenturesaresubordinatedtotheCompany'sseniorindebtedness.
CreditfacilityTheRevolvingCreditFacility,proceedsofwhichareavailabletoprovidefinancingforworkingcapital,fundcapitalexpendituresandothergeneralcorporatepurposes,hasanaccordionfeaturewherebytheCompanycanincreasetheRevolvingCreditFacilityto$750.
0million,subjecttoobtainingincrementallendercommitments.
TheRevolvingCreditFacilityhasanextendibletermoffiveyears,expiringonMarch7,2022.
TheRevolvingCreditFacilitypermitslettersofcredit,swinglineloansandborrowingsinCanadiandollarsandU.
S.
dollars.
BorrowingsundertheRevolvingCreditFacilitybearinterestatarateequaltoCanadianPrimeRateorU.
S.
BaseRateorU.
S.
LIBORorCanadianBankersAcceptanceRate,asthecasemaybe,plusanapplicablemargin.
TheapplicablemarginforborrowingsundertheRevolvingCreditFacilityissubjecttostepupandstepdownbasedontheCompany'stotaldebtleverageratio.
Inaddition,theCompanymustpaystandbyfeesontheunusedportionoftheRevolvingCreditFacilityandcustomaryletterofcreditfeesequaltotheapplicablemarginsdeterminedinamannersimilartotheinterest.
Inaddition,theCompanyhasthreebilateraldemandletterofcreditfacilitiestotaling$150.
0million.
TheCompanyhad$230.
2milliondrawnonits$560.
0millionRevolvingCreditGibsonEnergyInc.
272017Management'sDiscussionandAnalysisFacilityasofDecember31,2017,andhadissuedlettersofcredittotaling$68.
9millionunderitsbilateraldemandletterofcreditfacilitiesasatDecember31,2017.
TheRevolvingCreditFacilitycontainscertaincovenants,includingfinancialcovenantsrequiringtheCompanytomaintainratiosofmaximumconsolidatedseniorandtotaldebtleverageaswellastomaintainaminimuminterestcoverageratio.
EffectiveMarch7,2017,theCompanyamendedcertaincovenantsrelatedtoitsRevolvingCreditFacilityincluding,amongstotherrevisions,revisingthemaximumconsolidatedseniorandthemaximumconsolidatedtotaldebtleverageratiosto4.
85to1.
0forthe2017fiscalyear,4.
25to1.
0for2018fiscalyearand4.
0to1.
0thereafter.
Furthermore,thematuritydateofourRevolvingCreditFacilitywasextendedfromAugust2020toMarch2022.
OnNovember30,2017,theCompanyamendedtheRevolvingCreditFacilityfrom$500.
0millionto$560.
0million.
Inaddition,theCompanyisalsorequiredtomaintainaminimuminterestcoverageratioofnolessthan2.
5to1.
0.
TheconsolidatedseniordebtratiorepresentstheratioofallseniordebtobligationstoProFormaAdjustedEBITDA.
TheconsolidatedtotaldebtratiorepresentstheratiooftotaldebttoProFormaAdjustedEBITDA.
TheconsolidatedinterestcoverageratiorepresentstheratioofProFormaAdjustedEBITDAtoconsolidatedcashinterestexpense.
AsatDecember31,2017,theCompanywasincompliancewiththefinancialratioswiththeseniordebtleverageratioat4.
0to1.
0,totaldebtleverageratioat4.
0to1.
0,andtheinterestcoverageratioat3.
7to1.
0.
IftheCompanyfailstocomplywiththefinancialcovenants,thelendersmaydeclareaneventofdefault.
Aneventofdefaultresultingfromabreachofafinancialcovenantmayresult,attheoptionoflendersholdingamajorityoftheloans,inanaccelerationofrepaymentoftheprincipalandinterestoutstandingandaterminationoftheRevolvingCreditFacility.
TheNotes,NewNotesandtheRevolvingCreditFacilitycontainnon-financialcovenantsthatrestrict,subjecttocertainthresholds,someoftheCompany'sactivities,includingtheCompany'sabilitytodisposeofassets,incuradditionaldebt,paydividends,createliens,makeinvestmentsandengageinspecifiedtransactionswithaffiliates.
TheNotes,NewNotesandtheRevolvingCreditFacilityalsocontaincustomaryeventsofdefault,includingdefaultsbasedoneventsofbankruptcyandinsolvency,non-paymentofprincipal,interestorfeeswhendue,breachofcovenants,changeincontrolandmaterialinaccuracyofrepresentationsandwarranties,subjecttospecifiedgraceperiods.
AsofDecember31,2017,theCompanywasincompliancewithallofitscovenantsundertheNotes,NewNotesandtheRevolvingCreditFacility.
DividendsTheCompanyiscurrentlypayingquarterlydividendstoholdersofcommonshares.
TheamountandtimingofanyfuturedividendspayablebyGibsonwillbeatthediscretionoftheBoardandtobeestablishedonthebasisof,amongotherthings,GibsonEnergy'searnings,financialrequirementsforoperations,thesatisfactionofasolvencycalculationandthetermsoftheCompany'sdebtagreements.
Inaddition,inconnectionwithCompany'sdividendpolicy,aftereachfiscalyearendtheBoardwillformallyreviewtheannualdividendamount.
InthethreemonthsendedDecember31,2017,theCompanydeclaredadividendof$0.
33pershareforatotaldividendof$47.
3million,ofwhichtheentireamountwaspaidincashonJanuary17,2018.
DistributablecashflowDistributablecashflowisnotastandardmeasureunderIFRSand,therefore,maynotbecomparabletosimilarmeasuresreportedbyotherentities.
Distributablecashflowfromcontinuingandcombinedoperationsisusedtoassessthelevelofcashflowgeneratedandtoevaluatetheadequacyofinternallygeneratedcashflowtofunddividendsandisfrequentlyusedbysecuritiesanalysts,investorsandotherinterestedparties.
Changesinnon-cashworkingcapitalareexcludedfromthedeterminationofdistributablecashflowbecausetheyareprimarilytheresultoffluctuationsinproductinventoriesorothertemporarychanges.
Replacementcapitalexpendituresaredeductedfromdistributablecashflowasthereisanongoingrequirementtoincurthesetypesofexpenditures.
TheCompanymaydeductorincludeadditionalitemsinitscalculationofdistributablecashflow;theseitemswouldgenerally,butnotnecessarily,beitemsofanunusual,non-recurring,ornon-operatingnature.
TheCompanyhascurrentlyreflectednon-recurringitemsrelatingtoseverancecostsandincometaxespaidindistributablecashflowtoapproximatetheinternallygeneratedcashflowavailabletotheCompanywithinitsnormaloperatingcycle.
TheCompanyhasprovidedthedistributablecashflowfromcombinedoperationsonatrailingtwelve-monthbasistoreflectthetotalcashflowavailabletofunddividendswhichincludescashavailablefromdiscontinuedoperations.
GibsonEnergyInc.
282017Management'sDiscussionandAnalysisThefollowingisareconciliationofdistributablecashflowfromcombinedoperationstoitsmostcloselyrelatedIFRSmeasure,cashflowfromoperatingactivitiesfortheyearsendedDecember31,2017,2016and2015.
YearendedDecember31Continuingoperations201720162015Cashflowfromoperatingactivities204,970$175,482$399,117Adjustments:Changesinnon-cashworkingcapital43,11732,491(92,458)Replacementcapital28,182)(24,841)(39,130)Cashinterestexpense,includingcapitalizedinterest.
73,960)(91,236)(84,965)Restructuring,severanceandothercosts(1)19,08610,0442,830Incometaxes(2)15,596Distributablecashflowfromcontinuingoperations165,031$101,940$200,990YearendedDecember31Combinedoperations201720162015Combinedcashflowfromoperatingactivities197,381$207,566$458,067Adjustments:Combinedchangesinnon-cashworkingcapital52,67334,333(118,456)Combinedreplacementcapital28,291)(29,063)(46,775)Cashinterestexpense,includingcapitalizedinterest.
73,960)(91,236)(84,965)Restructuring,severanceandothercosts(1)19,08610,0442,830Workingcapitaladjustment(2)10,503--Incometaxes(3)6,202-15,596Distributablecashflowfromcombinedoperations183,594$131,644$226,297Dividendsdeclaredtoshareholders188,470$181,994$161,002QuarterendedDecember31Continuingoperations20172016Cashflowfromoperatingactivities45,314$44,152Adjustments:Changesinnon-cashworkingcapital13,12525,372Replacementcapital10,660)(7,670)Cashinterestexpense,includingcapitalizedinterest.
17,400)(23,477)Restructuring,severanceandothercosts(1)18,0864,348Distributablecashflowfromcontinuingoperations48,465$42,725GibsonEnergyInc.
292017Management'sDiscussionandAnalysisQuarterendedDecember31Combinedoperations20172016Combinedcashflowfromoperatingactivities45,314$54,888Adjustments:Combinedchangesinnon-cashworkingcapital13,12520,243Combinedreplacementcapital10,660)(8,388)Cashinterestexpense,includingcapitalizedinterest.
17,400)(23,477)Restructuring,severanceandothercosts(1)18,0864,348Workingcapitaladjustment(2)10,503-Incometaxes(3)6,202-Distributablecashflowfromcombinedoperations65,170$47,614Dividendsdeclaredtoshareholders47,257$46,772(1)Representsrestructuring,severanceandexecutivepayrollrelatedcostsincurredduringtherespectiveperiods.
(2)Representsaone-timeadjustmentrelatedtoworkingcapitalatthecloseofIndustrialPropanesegmentsalewhereby$10.
5millioncashbalancewasrequiredtobeleftinthebusinessespriortocloseandwasrepaidbacktotheCompanyaspartofthesaleproceeds.
Absentthisrequirement,thecashflowfromoperationswouldhavebeenhigherandcashflowfrominvestingactivitywouldbelowerbythesameamount.
(3)During2017,theCompanypaidnet$6.
2millionasone-timecashtaxonthegainonsaleoftheIndustrialPropanebusiness,netoftherealizedtaxlossesrelatedtotherepaymentoftheU.
S.
$Notes.
The2015amountrepresents$11.
0millionacceleratedpaymenttosettletheprovincialportionofthepartnershipdeferralfor2015and2016andapproximately$4.
6millionofadditionalcurrenttaxexpenserelatingtothenetrealizedgainonthesettlementoftheU.
S.
dollarforwardcontractsandU.
S.
dollaroptionsinthefirstquarterof2015.
DividendsdeclaredintheyearendedDecember31,2017were$188.
5million,ofwhichtheentireamountwaspaidincash.
IntheyearendedDecember31,2017,dividendsdeclaredrepresented103%ofthecombineddistributablecashflowgenerated.
ContractualobligationsandcontingenciesThefollowingtablepresents,atDecember31,2017,theCompany'sobligationsandcommitmentstomakefuturepaymentsundercontractsandcontingentcommitments:PaymentsduebyperiodTotalLessthan1year1-3years3-5yearsMorethan5yearsLong-termdebt900,000300,000$600,000Convertibledebentures100,000--100,000-Interestpaymentsonlong-termdebtandDebentures299,18952,875105,75090,68949,875Creditfacilities230,180--230,180-Operatingleaseandothercommitments(1)223,72362,59877,14029,80154,184Totalcontractualobligations1,753,092$115,473$182,890$750,670$704,059(1)OperatingleaseandothercommitmentsrelatetoanofficeleasefortheCompany'sCalgaryheadoffice,railtankcars,vehicles,fieldbuildings,variousequipmentleasesandterminalservicesarrangements.
AsatDecember31,2017,theCompanyhaspreviouslyidentifiedandapprovedcapitalexpenditurecommitmentsof$175.
9millionthattheCompanyexpectstoundertakeoverthenext12to24months.
Inaddition,theCompanyhadaccruedliabilitiesforobligationswithrespecttotheCompany'sdefinedbenefitplansof$6.
1millionandprovisionsassociatedwithsiterestorationontheretirementofassetsandenvironmentalcostsof$183.
5millionbutthetimingofsuchpaymentsisuncertainduetotheestimatesusedtocalculatetheseamountsandthelong-termnatureofthesebalances.
TheCompanyalsohascommitmentsrelatingtoitsriskmanagementcontractswhicharediscussedfurtherin"QuantitativeandQualitativeDisclosuresaboutMarketRisks".
GibsonEnergyInc.
302017Management'sDiscussionandAnalysisContingenciesTheCompanyisinvolvedinvariousclaimsandactionsarisinginthecourseofoperationsandissubjecttovariouslegalactionsandexposures.
Althoughtheoutcomeoftheseclaimsisuncertain,theCompanydoesnotexpectthesematterstohaveamaterialadverseeffectontheCompany'sfinancialposition,cashflowsoroperationalresults.
Ifanunfavorableoutcomeweretooccur,thereexiststhepossibilityofamaterialadverseimpactontheCompany'sconsolidatednetincomeorlossintheperiodinwhichtheoutcomeisdetermined.
Accrualsforlitigation,claimsandassessmentsarerecognizediftheCompanydeterminesthatthelossisprobableandtheamountcanbereasonablyestimated.
TheCompanybelievesithasmadeadequateprovisionforsuchlegalclaims.
WhilefullysupportableintheCompany'sview,someofthesepositions,ifchallengedmaynotbefullysustainedonreview.
TheCompanyissubjecttovariousregulatoryandstatutoryrequirementsrelatingtotheprotectionoftheenvironment.
Theserequirements,inadditiontothecontractualagreementsandmanagementdecisions,resultintherecognitionofestimateddecommissioningobligationsandenvironmentalremediation.
Estimatesofdecommissioningobligationsandenvironmentalremediationcostscanchangesignificantlybasedonsuchfactorsasoperatingexperienceandchangesinlegislationandregulations.
OFF-BALANCESHEETARRANGEMENTSTheCompanydoesnothaveanyoff-balancesheetarrangementsthathaveorarereasonablylikelytohaveacurrentorfutureeffectontheCompany'sfinancialperformanceorfinancialcondition.
RELATEDPARTYTRANSACTIONSOnAugust11,2011,theCompanyformedapartnership(the"PlatoPartnership")tojointlyconstructandownapipelineandemulsiontreating,waterdisposalandoilfieldwastemanagementfacilitiesinthePlatoareaofSaskatchewan.
ThePlatoPartnershipcommencedoperationsin2012.
TheCompany'sinterestinthePlatoPartnershipis50%.
AmemberoftheCompany'sBoardisalsoadirectoroftheotherpartywiththe50%interestinthePlatoPartnership.
AtDecember31,2017and2016,theCompany'sproportionateshareofproperty,plantandequipmentinthePlatoPartnershipwas$11.
3millionand$8.
9million,respectively.
TheimpactoftheCompany'sshareoftheotherfinancialpositionandresultsofthePlatoPartnershipisnotmaterialtotheCompany'sconsolidatedfinancialstatements.
Therelatedpartytransactionsnotedabovehavebeenmeasuredatagreeduponterms.
OUTSTANDINGSHAREDATATheCompanyisauthorizedtoissueanunlimitednumberofcommonsharesandanunlimitednumberofpreferredshares.
AsatDecember31,2017,therewere143.
2millioncommonsharesoutstandingandnopreferredsharesoutstanding.
Inaddition,undertheCompany'sequityincentiveplan,therewereanaggregateof2.
5millionrestrictedshareunits,performanceshareunitsanddeferredshareunitsoutstandingand3.
3millionstockoptionsoutstandingasatDecember31,2017.
AtDecember31,2017,awardsavailabletograntundertheequityincentiveplanwereapproximately8.
5million.
AsatMarch2,2018,143.
2millioncommonshares,2.
5millionrestrictedshareunits,performanceshareunitsanddeferredshareunitsand3.
2millionstockoptionswereoutstanding.
QUANTITATIVEANDQUALITATIVEDISCLOSURESABOUTMARKETRISKTheCompanyisinvolvedinvariouscommodityrelatedmarketingactivitiesthatareintendedtoenhancetheCompany'soperationsandincreaseprofitability.
Theseactivitiesoftencreateexposuretopriceriskbetweenthetimecontractedvolumesarepurchasedandsoldandtoforeignexchangeriskwhencontractsareindifferentcurrencies(CanadiandollarversusU.
S.
dollar).
TheCompanyisalsoexposedtovariousmarketrisks,includingvolatilityin(i)crudeoil,refinedproducts,naturalgasandNGLprices,(ii)interestrates,(iii)currencyexchangeratesand(iv)equityprices.
TheCompanyutilizesvariousderivativeinstrumentsfromtimetotimetomanagecommodityprice,interestrate,currencyexchangerate,andequitypriceexposureand,incertaincircumstances,torealizeincrementalmarginduringvolatilemarketconditions.
TheCompany'scommoditytradingandriskmanagementpoliciesandproceduresaredesignedtoestablishandmanagetoanapprovedlevelofvalueatrisk.
TheCompanyhasaCommodityRiskManagementCommitteethathasdirectresponsibilityandauthorityfortheCompany'sriskpoliciesandtheCompany'stradingcontrolsandprocedures.
Additionally,certainaspectsofcorporateriskmanagementarehandledwithintheRiskManagementGroup.
TheCompany'sapprovedstrategiesareintendedtomitigaterisksthatareinherentintheCompany'scorebusinessesofaggregating,GibsonEnergyInc.
312017Management'sDiscussionandAnalysismarketinganddistribution.
TohedgetherisksdiscussedabovetheCompanyengagesinriskmanagementactivitiesthattheCompanycategorizesbytheriskstheCompanyishedgingandbythephysicalproductthatiscreatingtherisk.
Thefollowingdiscussionaddresseseachcategoryofrisk.
CommodityPriceRisk.
TheCompanyhedgesitsexposuretopricefluctuationswithrespecttocrudeoil,refinedproducts,naturalgasandNGLs,andexpectedpurchasesandsalesofthesecommodities(relatingprimarilytocrudeoil,roofingflux,propanesalesandpurchasesofnaturalgasoline).
ThederivativeinstrumentsutilizedconsistprimarilyoffuturesandoptioncontractstradedontheNewYorkMercantileExchange,theIntercontinentalExchangeandover-the-countertransactions,includingswapandoptioncontractsenteredintowithfinancialinstitutionsandotherenergycompanies.
TheCompany'spolicyistotransactonlyincommodityderivativeproductsforwhichtheCompanyphysicallytransacts,andtostructuretheCompany'shedgingactivitiessothatpricefluctuationsforthoseproductsdonotmateriallyaffectthenetcashtheCompanyultimatelyreceivesfromitscommodityrelatedmarketingactivities.
AlthoughtheCompanyseekstomaintainapositionthatissubstantiallybalancedwithintheCompany'svariouscommoditypurchaseandsalesactivities,theCompanymayexperiencenetunbalancedpositionsasaresultofproduction,transportationanddeliveryvariancesaswellaslogisticalissuesassociatedwithinclementweatherconditions.
TheintentoftheCompany'sriskmanagementstrategyistohedgetheCompany'smargin.
However,theCompanyhasnotdesignatednorattemptedtoqualifyforhedgeaccounting.
Thus,changesinthefairvaluesofalloftheCompany'sderivativesarerecognizedinearningsandresultingreaterpotentialforearningsvolatility.
ThefairvalueoffuturescontractsisbasedonquotedmarketpricesobtainedfromtheChicagoMercantileExchange.
Thefairvalueofswapsandoptioncontractsisestimatedbasedonquotedpricesfromvarioussources,suchasindependentreportingservices,industrypublicationsandbrokers.
Thesequotesarecomparedtothecontractpriceoftheswap,whichapproximatesthegainorlossthatwouldhavebeenrealizedifthecontractshadbeenclosedoutattheperiodend.
Forpositionswhereindependentquotationsarenotavailable,anestimateisprovided,ortheprevailingmarketpriceatwhichthepositionscouldbeliquidatedisused.
NosuchpositionsexistedasatDecember31,2017andDecember31,2016.
Allderivativepositionsoffsetexistingoranticipatedphysicalexposures.
Price-risksensitivitieswerecalculatedbyassuming15%volatilityincrudeoilandNGLrelatedprices,regardlessoftermorhistoricalrelationshipsbetweenthecontractualpriceoftheinstrumentsandtheunderlyingcommodityprice.
Intheeventofanincreaseordecreaseinprices,thefairvalueoftheCompany'sderivativeportfoliowouldtypicallyincreaseordecrease,offsettingchangesintheCompany'sphysicalpositions.
A15%favorablechangewouldincreasetheCompany'snetincomeby$6.
2millionand$9.
7millionasofDecember31,2017and2016,respectively.
A15%unfavorablechangewoulddecreasetheCompany'snetincomeby$6.
2millionand$10.
1millionasofDecember31,2017and2016,respectively.
However,thesechangesmaybeoffsetbytheuseofoneormoreriskmanagementstrategies.
Interestraterisk.
TheCompany'slong-termdebtaccruesinterestatfixedinterestratesandaccordingly,changesinmarketinterestratesdonotexposetheCompanytofutureinterestcashoutflowvariability.
UndertheRevolvingCreditFacility,theCompanyissubjecttointerestraterisk,asborrowingsbearinterestatarateequalto,attheCompany'soption,eithertheCanadianPrimeRate,U.
S.
LIBOR,U.
S.
BaseRateorCanadianBankers'AcceptanceRate,plusanapplicablemarginbasedontheCompany'stotalleverageratio.
AtDecember31,2017,theCompanyhad$230.
2milliondrawnundertheRevolvingCreditFacilityand5%favorableandunfavorablechangeininterestratesinrelationtotheamountsdrawnatDecember31,2017wouldhaveimpactednetincomeby$0.
3million.
AsatDecember31,2016,theCompanyhad$nildrawnundertheRevolvingCreditFacilityand,accordingly,wasnotsubjecttotheinterestratecashflowriskassociatedwiththeseamounts.
Currencyexchangerisks.
TheCompany'smonetaryassetsandliabilitiesinforeigncurrenciesaretranslatedattheperiod-endrate.
ExchangedifferencesarisingfromthistranslationarerecordedintheCompany'sstatementofoperations.
Inaddition,currencyexposurescanarisefromrevenuesandpurchasetransactionsdenominatedinforeigncurrencies.
Generally,transactionalcurrencyexposuresarenaturallyhedged(i.
e.
,revenuesandexpensesareapproximatelymatched),but,whereappropriate,arecoveredusingforwardexchangecontracts.
AlloftheforeigncurrencyforwardexchangecontractsenteredintobytheCompany,althougheffectivehedgesfromaneconomicperspective,havenotbeendesignatedashedgesforaccountingpurposes,andthereforeanygainsandlossesonsuchforwardexchangecontractsimpacttheCompany'searnings.
A5%unfavorablechangeinthevalueoftheCanadiandollarrelativetotheU.
S.
dollarwouldaffectthefairvalueoftheCompany'soutstandingforwardcurrencycontractsandoptionsandwoulddecreasetheCompany'snetincomeby$3.
4millionand$1.
9millionasatDecember31,2017and2016,respectively.
A5%favorablechangewouldincreasetheCompany'snetincomeby$3.
4millionand$1.
8millionasatDecember31,2017and2016,GibsonEnergyInc.
322017Management'sDiscussionandAnalysisrespectively.
TheCompanyexpectstocontinuetoenterintofinancialderivatives,primarilyforwardcontracts,toreduceforeignexchangevolatility.
AsatDecember31,2017,theCompanyhad$100.
0millionU.
S.
dollardenominateddebtaspartofitsdrawonitsRevolvingCreditFacility.
TheCompanydidnothaveanyforeigncurrencyhedgesinplaceinrelationtoitsuseoftheRevolvingCreditFacility.
TheCompany,asresultofrepaymentofitsU.
S.
dollardenominateddebtasdescribedundertheNotessection,enteredintoforwardcontractsforthesettlementofitsU.
S.
dollarforwardcontractstobuyU.
S.
dollarsonanotionalamountofUS$120.
0millionataweightedaveragerateof$1.
26forUS$1.
00onOctober30,2017.
AsaresultofthesettlementofUS$NotesandthedrawofU.
SdollaramountsonitsRevolvingCreditFacilitytheCompany'sexposuretoforeigncurrencyexchangeriskrelatedtoitslong-termdebthasbeenreduced.
Accordingly,a5%unfavorablechangeinthevalueoftheCanadiandollarrelativetotheU.
S.
dollarwouldimpactboththecarryingvalueoftheCompany'slong-termdebtandwoulddecreasetheCompany'snetincomeby$5.
4millionand$31.
9millionasatDecember31,2017and2016,respectively.
AcorrespondingfavorablechangewouldincreasetheCompany'snetincomeby$5.
4millionand$31.
9millionasatDecember31,2017and2016,respectively.
WithrespecttotherelatedinterestpaymentsontheU.
S.
dollardenominateddebt,todate,theCompanyhasnotenteredintoanyforeigncurrencyhedgesand,therefore,theCompanyisexposedtotheassociatedforeigncurrencyexchangerisk.
BasedontheinterestrateineffectatDecember31,2017,a5%unfavorablechangeinthevalueoftheCanadiandollarrelativetotheU.
S.
dollarasofDecember31,2017wouldincreasetheCompany'sannualinterestexpenseby$0.
2million.
A5%favorablechangeinthevalueoftheCanadiandollarrelativetotheU.
S.
dollarasofDecember31,2017woulddecreasetheCompany'sannualinterestexpenseby$0.
2million.
TheCompanymonitorsitsexposuretoforeigncurrencies,includingassociatedinterestpayments,and,whereoptimal,willconsiderminimizingexposureusingappropriatehedgingstrategies.
Equitypricerisk.
TheCompanyhasequitypriceanddilutionexposuretosharesthatitissuesunderitsstockbasedcompensationprograms.
Gibsonusesequityderivativestomanagevolatilityderivedfromitsstockbasedcompensationprograms.
Thesecontractswillmatureattheprevailingsharepricesinaccordancewiththespecificmaturitiesofeachcontractoverathree-yearperiod.
AsatDecember31,2017and2016,theCompanyestimatesthata10%increaseintheCompany'ssharepricewouldhaveresultedinanincreaseintheCompany'sincomeof$1.
9millionand$1.
7million,respectively.
AcorrespondingdecreaseintheCompany'ssharepricewoulddecreasetheCompany'snetincomeby$1.
9millionand$1.
7million,respectively.
ACCOUNTINGPOLICIESCriticalaccountingpoliciesandestimatesThepreparationofconsolidatedfinancialstatementsinconformitywithIFRSrequiresmanagementtomakeestimatesandassumptions.
Predictingfutureeventsisinherentlyanimpreciseactivityand,assuch,requirestheuseofjudgment.
Actualresultsmayvaryfromestimatesinamountsthatmaybematerial.
Anaccountingpolicyisdeemedtobecriticalifitrequiresanaccountingestimatetobemadebasedonassumptionsaboutmattersthatarehighlyuncertainatthetimetheestimateismade,andifdifferentestimatesthatreasonablycouldhavebeenused,orchangesintheaccountingestimatesthatarereasonablylikelytooccurperiodically,couldmateriallyimpacttheCompany'sconsolidatedfinancialstatements.
TheCompany'scriticalaccountingpoliciesandestimatesareasfollows:Recoverabilityofassetcarryingvalues.
TheCompanycarriesoutimpairmentreviewsinrespectofgoodwillatleastannuallyorifindicatorsofimpairmentexist.
TheCompanyalsoassessesduringeachreportingperiodwhethertherehavebeenanyeventsorchangesincircumstancesthatindicatethatproperty,plantandequipment,inventoriesandotherintangibleassetsmaybeimpairedandanimpairmentreviewiscarriedoutwheneversuchanassessmentindicatesthatthecarryingamountmaynotberecoverable.
SuchindicatorsincludechangesintheCompany'sbusinessplans,changesinactivitylevels,anincreaseinthediscountrate,theintentionof"holding"versus"selling"andevidenceofphysicaldamage.
Forthepurposesofimpairmenttesting,assetsaregroupedatthelowestlevelsforwhichthereareseparatelyidentifiablecashflows.
Whereimpairmentexists,theassetiswrittendowntoitsrecoverableamount,whichisthehigherofthefairvaluelesscoststosellandvalueinuse.
Impairmentsarerecognizedimmediatelyintheconsolidatedstatementofoperations.
Theassessmentforimpairmententailscomparingthecarryingvalueoftheassetorcash-generatingunitwithitsrecoverableamount;thatis,thehigheroffairvaluelesscoststosellandvalueinuse.
Valueinuseisusuallydeterminedonthebasisofdiscountedestimatedfuturenetcashflows.
However,thedeterminationastowhetherandhowmuchanassetisimpairedinvolvesmanagementGibsonEnergyInc.
332017Management'sDiscussionandAnalysisestimatesonhighlyuncertainmatters,suchastheoutlookforglobalorregionalmarketsupply-and-demandconditions,futurecommodityprices,theeffectsofinflationonoperatingexpensesanddiscountrates.
Incometax.
Incometaxexpenserepresentsthesumoftheincometaxcurrentlypayableanddeferredincometax.
Interestandpenaltiesrelatingtoincometaxarealsoincludedinincometaxexpense.
Deferredincometaxisprovidedforusingtheliabilitymethodofaccounting.
Deferredincometaxassetsandliabilitiesaredeterminedbasedondifferencesbetweenthefinancialreportingandincometaxbasisofassetsandliabilities.
Thesedifferencesarethenmeasuredusingenactedorsubstantiallyenactedincometaxratesandlawsthatwillbeineffectwhenthesedifferencesareexpectedtoreverse.
Theeffectofachangeinincometaxratesondeferredtaxassetsandliabilitiesisrecognizedinincomeintheperiodthatthechangeoccurs.
ThecomputationoftheCompany'sincometaxexpenseinvolvestheinterpretationofapplicabletaxlawsandregulationsinmanyjurisdictions.
TheresolutionoftaxpositionstakenbytheCompanycantakesignificanttimetocompleteandinsomecasesitisdifficulttopredicttheultimateoutcome.
Inaddition,theCompanyhascarry-forwardtaxlossesincertaintaxingjurisdictionsthatareavailabletooffsetagainstfuturetaxableprofit.
However,deferredincometaxassetsarerecognizedonlytotheextentthatitisprobablethattaxableprofitwillbeavailableagainstwhichtheunusedtaxlossescanbeutilized.
Managementjudgementisexercisedinassessingwhetherthisisthecase.
Totheextentthatactualoutcomesdifferfrommanagement'sestimates,incometaxchargesorcreditsmayariseinfutureperiods.
Financialinstruments.
InsituationswheretheCompanyisrequiredtomarkfinancialinstrumentstomarket,theestimatesofgainsorlossesataparticularperiod-enddonotreflecttheendresultsofparticulartransactions,andwillmostlikelynotreflecttheactualgainorlossattheconclusionoftheunderlyingtransactions.
TheCompanyreflectsthefairvalueestimatesforfinancialinstrumentsbasedonvaluationinformationfromthirdparties.
Thecalculationofthefairvalueofcertainofthesefinancialinstrumentsisbasedonproprietarymodelsandassumptionsofthirdpartiesbecausesuchinstrumentsarenotquotedonanactivemarket.
Additionally,estimatesoffairvalueforsuchfinancialinstrumentsmayvaryamongdifferentmodelsduetoadifferenceinassumptionsapplied,suchastheestimateofprevailingmarketprices,volatility,correlationsandotherfactors,andmaynotbereflectiveofthepriceatwhichtheycanbesettledduetothelackofaliquidmarket.
AlthoughtheresolutionoftheseuncertaintieshasnothistoricallyhadamaterialimpactontheCompany'sresultsofoperationsorfinancialcondition,theactualamountsmayvarysignificantlyfromestimatedamounts.
Provisionsandaccruedliabilities.
TheCompanyusesestimatestorecordliabilitiesforobligationsassociatedwithsiterestorationontheretirementofassetsandenvironmentalcosts,taxes,potentiallegalclaimsandotheraccrualsandliabilities.
LiabilitiesforsiterestorationontheretirementofassetsarerecognizedwhentheCompanyhasanobligationtorestorethesiteandwhenareliableestimateofthatliabilitycanbemade.
Anobligationmayalsocrystallizeduringtheperiodofoperationofafacilitythroughachangeinlegislationorthroughadecisiontoterminateoperations.
Theamountrecognizedisthepresentvalueoftheestimatedfutureexpendituredeterminedinaccordancewithlocalconditionsandrequirements.
Thepresentvalueisdeterminedbydiscountingtheexpendituresexpectedtoberequiredtosettletheobligationusingarisk-freediscountrate.
Estimatedfutureexpenditureisbasedonallknownfactsatthetimeandcurrentexpectedplansfordecommissioning.
Amongthemanyuncertaintiesthatmayimpacttheestimatesarechangesinlawsandregulations,publicexpectations,pricesandchangesintechnology.
Acorrespondingitemofproperty,plantandequipmentofanamountequivalenttotheprovisionisalsorecorded.
Thisissubsequentlydepreciatedaspartoftheasset.
Otherthantheunwindingdiscountontheprovision,anychangeinthepresentvalueoftheestimatedexpenditureisreflectedasanadjustmenttotheprovisionandthecorrespondingitemofproperty,plantandequipment.
Liabilitiesforenvironmentalcostsarerecognizedwhenaclean-upisprobableandtheassociatedcostscanbereliablyestimated.
Generally,thetimingofrecognitionoftheseprovisionscoincideswiththecompletionofafeasibilitystudyoracommitmenttoaformalplanofaction.
Theamountrecognizedisthebestestimateoftheexpenditurerequired.
Wheretheliabilitywillnotbesettledforanumberofyears,theamountrecognizedisthepresentvalueoftheestimatedfutureexpenditure.
Estimatedfutureexpenditureisbasedonallknownfactsatthetimeandanassessmentoftheultimateoutcome.
Anumberoffactorsaffectthecostofenvironmentalremediation,includingthedeterminationoftheextentofcontamination,thelengthoftimeremediationmayrequire,thecomplexityofenvironmentalregulationsandtheadvancementofremediationtechnology.
Otherprovisionsandaccruedliabilitiesarerecognizedintheperiodwhenitbecomesprobablethattherewillbeafutureoutflowoffundsresultingfrompastoperationsoreventsandtheamountofcashoutflowcanbereliablyestimated.
Thetimingofrecognitionandquantificationoftheliabilityrequiretheapplicationofjudgmenttoexistingfactsandcircumstances,whichcanbesubjecttochange.
Sincetheactualcashoutflowscantakeplacemanyyearsinthefuture,thecarryingamountsofprovisionsandliabilitiesarereviewedregularlyandadjustedtotakeaccountofchangingfactsandcircumstances.
AchangeinestimateofarecognizedprovisionGibsonEnergyInc.
342017Management'sDiscussionandAnalysisoraccruedliabilitywouldresultinachargeorcredittonetincomeintheperiodinwhichthechangeoccurs.
InitialadoptionofaccountingpoliciesNewandamendedstandardsadoptedbytheCompany:TheCompanyadoptedthefollowingnewandrevisedstandards,alongwithanyconsequentialamendments.
Thesechangesweremadeinaccordancewithapplicabletransitionalprovisions.
Theannualimprovementsprocessaddressesissuesinthe2014-2016reportingcyclesincludechangestoIFRS12-Disclosureofinterestsinotherentities.
ThisimprovementiseffectiveforperiodsbeginningonorafterJanuary1,2017.
Theadoptionoftheseimprovementsdidnothaveamaterialimpactontheconsolidatedfinancialstatements.
IAS12–Incometaxes("IAS12"),hasbeenamendedtoclarify(i)therequirementsforrecognizingdeferredtaxassetsonunrealizedlosses;(ii)deferredtaxwhereanassetismeasuredatafairvaluebelowtheasset'staxbase,and(iii)certainotheraspectsofaccountingfordeferredtaxassets.
TheamendmenttoIAS12iseffectiveforyearsbeginningonorafterJanuary1,2017.
Theadoptionofthisamendmentdidnothaveamaterialimpactontheconsolidatedfinancialstatements.
IAS7–Statementofcashflows("IAS7"),hasbeenamendedtorequiredisclosuresaboutchangesinliabilitiesarisingfromfinancingactivities,includingbothchangesarisingfromcash-flowsandnon-cashchanges.
TheamendmenttoIAS7iseffectiveforyearsbeginningonorafterJanuary1,2017.
AdditionaldisclosureshavebeenincludedintheCompany's2017consolidatedfinancialstatements(note31).
Newstandardsandinterpretationsissuedbutnotyetadopted:Thefollowingaccountinginterpretationsandstandardswereissuedduringtheyear:Theannualimprovementsprocessaddressesissuesinthe2015-2017reportingcyclesandincludechangestoIFRS3–Businesscombinations,IFRS11–Jointarrangements,IAS12–Incometaxes,andIAS23–Borrowingcosts.
TheseimprovementsareeffectiveforperiodsbeginningonorafterJanuary1,2019.
TheCompanyhasnotcurrentlyassessedtheimpactofadoptingtheseinterpretationsonitsconsolidatedfinancialstatements.
IAS28–Interestsinassociatesandjointventures("IAS28"),hasbeenamendedtoclarifythatanentityappliesIFRS9,includingitsimpairmentrequirements,tolong-terminterestsinassociateorjointventuretowhichtheequitymethodisnotapplied.
TheamendmenttoIAS28iseffectiveforyearsbeginningonorafterJanuary1,2018.
TheCompanyhasdeterminedthattheadoptionofthisinterpretationwillnothaveamaterialimpactonitsconsolidatedfinancialstatements.
IFRS17–Insurancecontracts("IFRS17"),hasbeenissuedtoclarifyrecognitionandmeasurementaccountingprincipleswithrespecttoinsurancecontracts.
TheissuanceofIFRS17iseffectiveforyearsbeginningonorafterJanuary1,2021.
TheCompanyhasnotcurrentlyassessedtheimpactofadoptingthisinterpretationonitsconsolidatedfinancialstatements.
IFRIC23–Uncertaintyoverincometaxtreatments("IFRIC23"),hasbeenamendedtoclarifyhowtherecognitionandmeasurementrequirementsofIAS12,IncomeTaxes,areappliedwherethereisuncertaintyoverincometaxtreatments.
TheamendmenttoIFRIC23iseffectiveforyearsbeginningonorafterJanuary1,2019.
TheCompanyhasnotcurrentlyassessedtheimpactofadoptingthisinterpretationonitsconsolidatedfinancialstatements.
UpdateonIFRS16,"Leases"("IFRS16"),IFRS15,"RevenuefromContractswithCustomers"("IFRS15")andIFRS9,"FinancialInstruments"("IFRS9")adoptionAsdisclosedinthe2017year-endConsolidatedFinancialStatements,theCompanyhasevaluatedtheimpactofIFRS16,IFRS15,andIFRS9.
IFRS16iseffectiveforyearsbeginningonorafterJanuary1,2019,howevertheearlyadoptionofIFRS16ispermittedifIFRS15hasbeenadopted.
TheCompanyhaschosentoearlyadoptIFRS16effectiveJanuary1,2018,concurrentwiththeadoptiondateofIFRS15.
Thesestandardsmaybeappliedretrospectivelyorusingamodifiedretrospectiveapproach.
Themodifiedretrospectiveapproachdoesnotrequirerestatementofpriorperiodfinancialinformationasitrecognizesthecumulativeeffectasanadjustmenttoopeningretainedearningsandappliesthestandardprospectively.
TheCompanyhasoptedtousethemodifiedretrospectiveapproachinitsadoptionofIFRS15,IFRS16andIFRS9.
GibsonEnergyInc.
352017Management'sDiscussionandAnalysisForIFRS15andIFRS16,theCompanyhascompletedalltechnicalpositionpapersrelatedtoallcontractsandarrangementsunderthescopeofthesestandards.
TheCompanyhastakenpro-activemeasurestoreviewtheimpactsoftheadoptionofthesestandardsonourdebtcovenantsincludingcertainamendmentstoourcovenantswhichprovidesanoptiontoadjustfortheimpactofthesestandardsortoprovideagrandfatheringapproach.
Atthisstage,theimpactofadoptionisnotconsideredmaterialontheCompany'sdebtcovenantcalculations.
OnJanuary1,2018,theCompany'spoliciesandbusinesspracticeshavebeenupdatedtoreflectthechangesrequiredbytheadoptionofthesenewstandards.
NotedbelowisthesummaryofmaterialimpactsofIFRS15,IFRS16andIFRS9forperiodbeginningJanuary1,2018:IFRS15(i)AccountingforcontractliabilitiesPriortotheadoptionofIFRS15,wholesaleproductrevenuesassociatedwiththesalesofroofingfluxproductsownedbytheCompanywererecognizedatthetimeofshipmentwhentheriskofownershipandlossarepassedtothecustomer.
UnderIFRS15,whereinthecontractprovidesarighttoinvoicepriortothephysicaldeliveryoftheproduct,theCompanywilldeferrecognitionofsuchrevenuesandrecognizeacontractliability,untilsuchtimewhentheproducthasbeenphysicallydeliveredandthetransferofcontrolhasoccurred.
Adoptionofthestandardwillnothaveanymaterialimpactsonthetotalasset,liabilitiesorretainedearningsoftheCompanyasatJanuary1,2018.
(ii)Accountingforbuy-selltransactionsPriortotheadoptionofIFRS15,buy/selltransactionsinvolvingcrudeandNGLproductswherebytheCompanyeffectivelyisactingasanagentarerecordedonanetbasis.
UnderIFRS15,revenuesfrombuy/selltransactionswhicharemonetarytransactionscontainingcommercialsubstancearerecognizedonagross-basisasseparateperformanceobligations.
Revenuesfrombuy/selltransactionsofnon-monetaryexchangesofsimilarproducts,whichlackcommercialsubstance,arerecognizedonanetbasis.
(iii)DisclosuresUnderthepreviousrevenuestandard,disclosurerequirementswerespecifictothesignificantcategoriesofrevenuearisingfromthesaleofgoods,renderingofservices,interest,royalties,anddividends.
UnderIFRS15,theCompanywillberequiredtodiscloserequirementsonthedisaggregationofrevenue,contractbalances,performanceobligations,assetsrecognizedtoobtainorfulfilacontract,aswellassignificantjudgmentsintheapplicationofIFRS15.
TheCompanyanticipatesprovidingmorerobustrevenuedisclosureunderIFRS15withrespecttothedisaggregationofrevenueandanticipatestheinclusionofdisclosurerelatedtothenature,amount,timing,ofrevenuesrelatedtoeachsegment.
IFRS16OnadoptionofIFRS16,theCompanywillrecognizeleaseliabilitiesinrelationtoleasesundertheprinciplesofthenewstandard.
Theseliabilitieswillbemeasuredatthepresentvalueoftheremainingleasepayments,discountedusingtheCompany'sincrementalborrowingrateasofJanuary1,2018.
Theassociatedrights-of-use(ROU)assetswillbemeasuredattheamountequaltotheleaseliabilityonJanuary1,2018withnoimpactonretainedearnings.
Oninitialadoption,theCompanywillusethefollowingpracticalexpedientspermittedbythestandard:Theuseofasinglediscountratetoaportfolioofleaseswithreasonablysimilarcharacteristics;TheaccountingofleaseswitharemainingleasetermoflessthantwelvemonthsasatJanuary1,2018asshort-termleases;Theaccountingofleasepaymentsasexpensesonleasesforwhichtheunderlyingassetisoflowdollarvalue;Theuseofhindsightindeterminingtheleasetermwherethecontractcontainsoptionstoextendorterminatethelease.
AdoptionofthestandardwillresultintherecognitionofadditionalROUassetsandleaseliabilitiesforleasesofapproximately$173millionasatJanuary1,2018.
GibsonEnergyInc.
362017Management'sDiscussionandAnalysisIFRS9TheCompanyhascompletedtheworkrelatedtotheimplementationoftheexpectedcreditlossmodel.
Specifically,theCompanyhasconcludedthatitwillhavetwotypesoffinancialassetssubjecttotherequirementsoftheexpectedcreditlossesmodelwhicharetradereceivablesandnetinvestmentsinfinanceleases.
TheCompanyhasupdateditsimpairmentmethodologyunderIFRS9foreachoftheseclassesofassetsandhaveappliedthesimplifiedapproachtoprovidingforexpectedcreditlossesprescribedbyIFRS9,whichrequirestheuseofthelifetimeexpectedlossprovisionforalltradereceivables.
TheCompanydoesnotexpectanymaterialimpactonitsaccountsreceivablesandnetinvestmentsinfinanceleasesbalancesuponadoption.
DISCLOSURECONTROLS&PROCEDURESAspartoftherequirementsmandatedbytheCanadiansecuritiesregulatoryauthoritiesunderNationalInstrument52-109-CertificationofDisclosureinIssuers'AnnualandInterimFilings("NI52-109"),theCompany'sChiefExecutiveOfficer("CEO")andtheChiefFinancialOfficer("CFO")haveevaluatedthedesignandoperationoftheCompany'sdisclosurecontrolsandprocedures("DC&P"),assuchtermisdefinedinNI52-109,asatDecember31,2016.
TheCEOandCFOarealsoresponsibleforestablishingandmaintaininginternalcontrolsoverfinancialreporting,("ICFR"),assuchtermisdefinedinNI52-109.
Inmakingitsassessment,managementusedtheCommitteeofSponsoringOrganizationsoftheTreadwayCommissionframeworkinInternalControl–IntegratedFramework(2013)toevaluatethedesignandeffectivenessofinternalcontroloverfinancialreporting.
ThesecontrolsaredesignedtoprovidereasonableassuranceregardingthereliabilityoftheCompany'sfinancialreportingandcompliancewithIFRS.
TheCompany'sCEOandCFOhaveevaluated,orcausedtobeevaluatedundertheirsupervision,thedesignandoperationaleffectivenessofsuchcontrolsasatDecember31,2017.
BasedontheevaluationofthedesignandoperatingeffectivenessoftheCompany'sDC&PandICFR,theCEOandtheCFOconcludedthatGibsonDC&PandICFRwereeffectiveasatDecember31,2017.
TherehavebeennochangesinICFRthatoccurredduringtheperiodbeginningJanuary1,2017andendedonDecember31,2017thathasmateriallyaffectedorisreasonablylikelytomateriallyaffectGibsonICFR.
RISKFACTORSShareholdersandprospectiveinvestorsshouldcarefullyconsidertheriskfactorsnotedbelowbeforeinvestinginGibsonsecurities,aseachoftheserisksmaynegativelyaffectthetradingpriceofGibsonsecurities,theamountofdividendspaidtoshareholdersandtheabilityofGibsontofunditsdebtobligations,includingdebtobligationsunderitsoutstandingDebenturesandanyotherdebtsecuritiesthatGibsonmayissuefromtimetotime.
ForafurtherdiscussionoftherisksidentifiedinthisMD&A,otherrisksandtrendsthatcouldaffectGibsonperformanceandthestepsthatGibsontakestomitigatetheserisks,readersarereferredtoGibsonAIF,whichisavailableonSEDARatwww.
sedar.
com.
OperationalRisksOperationalrisksinclude:tankandpipelineleaks;thebreakdownorfailureofequipmentrelatedto,pipelinesandfacilities,informationsystemsorprocesses;thecompromiseofinformationandcontrolsystems;spillsattruckterminalsandterminalhubs;spillsassociatedwiththeloadingandunloadingofharmfulsubstancesontorailcarsandtrucks;failuretomaintainadequatesuppliesofspareparts;operatorerror;labourdisputes;disputeswithinterconnectedfacilitiesandcarriers;operationaldisruptionsorapportionmentonthird-partysystemsorrefinerieswhichmaypreventthefullutilizationofGibsonfacilitiesandpipelines;andcatastrophiceventsincludingbutnotlimitedtonaturaldisasters,fires,floods,explosions,trainderailments,earthquakes,actsofterroristsandsaboteurs,andothersimilarevents,manyofwhicharebeyondtheCompany'scontrol.
Gibsonmayalsobeexposedfromtimetotime,toadditionaloperationalrisksnotstatedintheimmediatelyprecedingsentences.
TheoccurrenceorcontinuanceofanyoftheseeventscouldincreasethecostofoperatingGibsonassetsorreducerevenue,therebyimpactingearnings.
Additionally,Gibsonfacilitiesandpipelinesarereliantonelectricalpowerfortheiroperations.
Afailureordisruptionwithinthelocalorregionalelectricalpowersupplyordistributionortransmissionsystemscouldsignificantlyaffectongoingoperations.
Inaddition,asignificantincreaseinthecostofpowerorfuelcouldhaveamateriallynegativeeffectonthelevelofprofitrealizedincaseswheretherelevantcontractsdonotprovideforrecoveryofsuchcosts.
GibsonEnergyInc.
372017Management'sDiscussionandAnalysisMarketandCommodityPriceRiskTheCompanyentersintocontractstopurchaseandsellcrudeoil,NGLs,andrefinedproducts.
Mostofthesecontractsarepricedatfloatingmarketprices.
Althoughthemajorityofthesecontractsareback-to-back,theseactivitiescouldexposetheCompanytomarketrisksresultingfrommovementsincommodityprice,margin,andcurrencyexchangeratedifferentialsbetweenthetimingofpurchasesandsubsequentsales.
ThepricesoftheproductsthattheCompanymarketsaresubjecttofluctuationsasaresultofsuchfactorsasseasonaldemandchanges,changesincommoditymarkets,andotherfactors.
Inmanycircumstances,purchaseandsalecontractsarenotperfectlymatched,astheyareenteredintoatdifferenttimesandfordifferentvalues.
Furthermore,theCompanynormallyhasalongpositioninpropane,NGLs,crudeoil,andrefinedproductsthattheCompanymarkets,andmaystoretheseproductsinordertomeetseasonaldemandandtakeadvantageofseasonalpricingdifferentials,therebyresultingininventoryrisk.
Becausecrudeoilmarginsareearnedbycapturingspreadsbetweendifferentqualitiesofcrudeoil,theCompany'scrudeoilmarketingbusinessissubjecttovolatilityinpricedifferentialsbetweencrudeoilstreamsandblendingagents.
Asaresult,marginsandprofitabilitycanvarysignificantlyfromperiodtoperiodasaresultofthisvolatility.
Weexpectthatcommoditypriceswillcontinuetofluctuatesignificantlyinthefuture.
TheCompanymanagesthiscommodityriskinanumberofways,includingtheuseoffinancialcontractsandbyoffsettingsomephysicalandfinancialcontractsintermsofvolumes,timingofperformanceanddeliveryobligations.
Forexample,asNGLandrefinedproductpricesaresomewhatrelatedtothepriceofcrudeoil,crudeoilfinancialcontractsareoneofthemorecommonpriceriskmanagementstrategiesthattheCompanyuses.
Also,withrespecttocrudeoil,theCompanymanagesitsexposureusingWestTexasIntermediate("WTI")basedfutures,optionsandswaps.
Thesestrategiesaresubjecttobasisriskbetweenthepricesofcrudeoilstreams,WTI,NGLandrefinedproductvaluesand,therefore,maynotfullyoffsetfuturepricemovements.
Furthermore,thereisnoguaranteethatthesestrategiesandothereffortstomanagemarketingandinventoryriskswillgenerateprofitsormitigateallthemarketandinventoryriskassociatedwiththeseactivities.
IftheCompanyutilizespriceriskmanagementstrategies,theCompanymayforegothebenefitsthatmayotherwisebeexperiencedifcommoditypricesweretoincrease.
Inaddition,anynon-compliancewiththeCompany'stradingpoliciescouldresultinsignificantlyadversefinancialeffects.
TotheextentthattheCompanyengagesinthesekindsofactivities,theCompanyisalsosubjecttocreditrisksassociatedwithcounterpartieswithwhomtheCompanyhascontracts.
Additionally,theCompanypurchasesfromproducersandothercustomersasubstantialamountofcrudeoilandcondensate,propaneandNGLsforresaletothirdparties,includingothermarketersandend-users.
However,theCompanymaynotbesuccessfulinbalancingitspurchasesandsales.
Aproducerorsuppliercouldfailtodelivercontractedvolumesorcoulddeliverinexcessofcontractedvolumes,orapurchasercouldpurchaselessthancontractedvolumes.
AnyoftheseactionscouldcausetheCompany'spurchasesandsalestobeunbalanced.
WhiletheCompanyattemptstobalanceitspurchasesandsales,ifitspurchasesandsalesareunbalanced,theCompanywillfaceincreasedexposuretocommoditypricerisksandcouldhaveincreasedvolatilityinitsoperatingincomeandcashflow.
ReputationGibsonreliesonitsreputationtobuildandmaintainpositiverelationshipswithitsstakeholders,torecruitandretainstaff,andtobeacredible,trustedcompany.
ReputationalriskisthepotentialfornegativeimpactsthatcouldresultfromthedeteriorationofGibsonreputationwithkeystakeholders.
ThepotentialforharmingtheCompany'scorporatereputationexistsineverybusinessdecisionandpublicinteraction,whichinturncannegativelyimpacttheCompany'sbusinessanditssecurities.
Reputationalriskcannotbemanagedinisolationfromotherformsofrisk.
Credit,market,operational,insurance,liquidity,regulatory,environmentalandlegalrisksmustallbemanagedeffectivelytosafeguardtheCompany'sreputation.
Negativeimpactsfromacompromisedreputationcouldincluderevenueloss,reductionincustomerbaseanddiminutionofshareprice.
Decommissioning,AbandonmentandReclamationCostsTheCompanyisresponsibleforcompliancewithallapplicablelawsandregulationsregardingthedecommissioning,abandonmentandreclamationoftheCompany'sfacilitiesandpipelinesattheendoftheireconomiclife,thecostsofwhichmaybesubstantial.
Itisnotpossibletopredictthesecostswithcertaintysincetheywillbeafunctionofregulatoryrequirementsatthetimeofdecommissioning,abandonmentandreclamation.
TheCompanymay,inthefuture,berequiredbyapplicablelawsorregulationstoestablishandfundoneormoredecommissioning,abandonmentandreclamationreservefundstoprovideforpaymentoffutureGibsonEnergyInc.
382017Management'sDiscussionandAnalysisdecommissioning,abandonmentandreclamationcosts,whichcoulddecreasefundsavailabletotheCompanytoexecuteitsbusinessplanandserviceitsdebtobligations.
Inaddition,suchreserves,ifestablished,maynotbesufficienttosatisfysuchfuturedecommissioning,abandonmentandreclamationcostsandtheCompanywillberesponsibleforthepaymentofthebalanceofsuchcosts.
LegislativeandRegulatoryChangesTheCompany'sindustryishighlyregulated.
Therecanbenoguaranteethatlawsandothergovernmentprogramsrelatingtotheoilandgasindustry,theenergyservicesindustryandthetransportationindustrywillnotbechangedinamannerwhichdirectlyandadverselyaffectstheCompany'sbusiness.
Therecanalsobenoassurancethatthelaws,regulationsorrulesgoverningtheCompany'scustomerswillnotbechangedinamannerwhichadverselyaffectstheCompany'scustomersand,therefore,theCompany'sbusiness.
Inaddition,theCompany'spipelinesandfacilitiesarepotentiallysubjecttocommoncarrierandcommonprocessorapplicationsandtoratesettingbyregulatoryauthoritiesintheeventagreementonfeesortariffscannotbereachedwithproducers.
Totheextentthatproducersbelieveprocessingfeesortariffswithrespecttopipelinesandfacilitiesaretoohigh,theymayseekratereliefthroughregulatorymeans.
IfregulationswerepassedloweringorcappingtheCompany'sratesandtariffs,theCompany'sresultsofoperationsandcashflowscouldbeadverselyaffected.
PetroleumproductsthattheCompanystoresandtransportsaresoldbytheCompany'scustomersforconsumptionintothepublicmarket.
Variousfederal,provincial,stateandlocalagencieshavetheauthoritytoprescribespecificproductqualityspecificationsforcommoditiessoldintothepublicmarket.
ChangesinproductqualityspecificationsorblendingrequirementscouldreducetheCompany'sthroughputvolume,requiretheCompanytoincuradditionalhandlingcostsorrequirecapitalexpenditures.
Forinstance,differentproductspecificationsfordifferentmarketsimpactthefungibilityoftheproductsintheCompany'ssystemandcouldrequiretheconstructionofadditionalstorage.
IftheCompanyisunabletorecoverthesecoststhroughincreasedrevenues,theCompany'scashflowscouldbeadverselyaffected.
Inaddition,changesinthequalityoftheproductstheCompanyreceivesonitspetroleumproductspipelinesystemcouldreduceoreliminatetheCompany'sabilitytoblendproducts.
TheCompany'scross-borderactivitiesaresubjecttoadditionalregulation,includingimportandexportlicenses,tariffs,CanadianandU.
S.
customsandtaxissuesandtoxicsubstancecertifications.
SuchregulationsincludetheShortSupplyControlsoftheExportAdministrationAct,theNorthAmericanFreeTradeAgreement,theToxicSubstancesControlActandtheCanadianEnvironmentalProtectionAct,1999.
Violationsoftheselicensing,tariffandtaxreportingrequirementscouldresultintheimpositionofsignificantadministrative,civilandcriminalpenalties.
Inaddition,local,consumptionandincometaxlawsrelatingtotheCompanymaybechangedinamannerwhichadverselyaffectstheCompany.
PossibleFailuretoRealizeAnticipatedBenefitsofCorporateStrategyGibsonevaluatesthevaluepropositionforexpansionprojects,newacquisitionsordivestituresonanongoingbasis.
Planningandinvestmentanalysisishighlydependentonaccurateforecastingassumptionsandtotheextentthattheseassumptionsdonotmaterialize,financialperformancemaybelowerormorevolatilethanexpected.
Volatilityintheeconomy,changeincostestimates,projectscopingandriskassessmentcouldresultinalossinprofitsforGibson.
Largescaledispositionsinparticularmayinvolvesignificantpricingandde-integrationrisk.
Divestituresrequiresthededicationofmanagementeffort,timeandresourceswhichmaydivertmanagement'sfocusandresourcesfromotherstrategicopportunitiesandfromoperationalmattersduringsuchtime.
Thedivestitureprocessmayresultinthelossofkeyemployeesandthedisruptionofongoingbusiness,customerandemployeerelationshipsthatmayadverselyaffectGibson.
ProposedPipelineUncertaintyTheCanadianfederalgovernmentapprovedKinderMorganCanadaInc'sproposedexpansionoftheTransMountainPipelinein2016andTransCanadaCorp'sKeystoneXLpipelineprojectreceivedfederalapprovalintheU.
S.
in2017.
However,thefutureofbothprojectsremainsuncertain,asbothfaceongoinglegal,regulatoryandstakeholderhurdles.
Ifoneorbothoftheseprojectsfailedtomoveforward,suchfailurecouldnegativelyimpacttheCompany'sfutureterminallingservicesopportunities.
Similarly,Enbridge'sGibsonEnergyInc.
392017Management'sDiscussionandAnalysisLine3replacementprojectreceivedCanadianFederalapprovalin2016,butcontinuestofacelegal,regulatoryandstakeholderhurdlesintheU.
S.
andCanada.
IfthisprojectfailedtomoveforwardsuchfailurecouldnegativelyimpacttheCompany'sopportunitiesforadditionalterminalservicesattheHardistyTerminal.
EnvironmentalRegulationandClimateChange(NTD:ReviewAIFlanguagetoensureconsistency)Gibsonissubjecttoarangeoflaws,regulationsandrequirementsimposedbyvariouslevelsofgovernmentandregulatorybodiesinthejurisdictionsinwhichitoperates.
WhiletheselegalcontrolsandregulationsaffectalldimensionsofGibsonactivities,including,butnotlimitedto,theoperationofpipelinesandfacilities,constructionactivities,emergencyresponse,operationalsafetyandenvironmentalprocedures,Gibsondoesnotbelievethattheyimpactitsoperationsinamannermateriallydifferentfromothercomparablebusinessesoperatinginthosejurisdictions.
Greenhousegases,mainlycarbondioxideandmethane,arecomponentsoftherawnaturalgasprocessedandhandledatGibsonfacilities.
OperationsatGibsonfacilities,includingthecombustionoffossilfuelsinengines,heatersandboilers,releasecarbondioxide,methaneandotherminorgreenhousegases.
Assuch,Gibsonissubjecttovariousgreenhousegasreportingandreductionprograms.
Gibsonusesanengineeringconsultingfirmtocompileinventoriesofgreenhousegasemissionsandreportstheseinventoriesinaccordancewithfederalandprovincialprograms.
Secondpartyauditsorverificationsofinventoriesareconductedforfacilitiesthatarerequiredtomeetregulatorytargets.
FORWARD-LOOKINGINFORMATIONCertainstatementscontainedinthisMD&Aconstituteforward-lookinginformation,assuchtermisdefinedunderapplicableCanadiansecuritieslaws("forward-lookinginformation").
ThesestatementsrelatetofutureeventsortheCompany'sfutureperformance.
Allstatementsotherthanstatementsofhistoricalfactareforward-lookinginformation.
Theuseofanyofthewords''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''andsimilarexpressionsareintendedtoidentifyforward-lookinginformation.
Thesestatementsinvolveknownandunknownrisks,uncertaintiesandotherfactorsthatmaycauseactualresultsoreventstodiffermateriallyfromthoseanticipatedinsuchforward-lookinginformation.
Noassurancecanbegiventhattheseexpectationswillprovetobecorrectandsuchforward-lookinginformationincludedinthisMD&Ashouldnotbeundulyreliedupon.
ThesestatementsspeakonlyasofthedateofthisMD&A.
Inparticular,thisMD&Acontainsforward-lookinginformationpertainingtothefollowing:realizationofanticipatedbenefitsfromreorganizationandheadcountrationalizationefforts;realizationofperceivedbenefitsandabilitytoclosethesaleofassetsandbusinessesasperourplans;timing,theamountofproceedsfromsaleofnon-corebusinessesalongwiththeexecutionofplannedcapitalprogramsasdiscussedunderthestrategysection;achievingthetargetsincludingbutnotlimitedtosegmentprofits,payoutratioandleverageratioasdiscussedunderthestrategysection;theadditionordispositionofassetsandchangesintheservicestobeofferedbytheCompany;TheCompany'sprojectionsrelatingtotargetsegmentprofit,distributablecashflow,distributablecashflowpershare,andtotalcashflow;TheCompany'sprojectionsrelatingtotargetleverageandpayoutratios;theCompany'sinvestmentinnewequipment,technology,facilitiesandpersonnel;theCompany'sgrowthstrategytoexpandinexistingandnewmarketsincludingtheanticipatedbenefitsfromtheCompany'sbasinstrategy;theavailabilityofsufficientliquidityforplannedgrowth;newtechnologyanddrillingmethodologybeingdeployedtowardsconventionalandunconventionalproductionwithintheCompany'soperatingareas;uncertaintyandvolatilityrelatingtocrudepricesandpricedifferentialsbetweencrudeoilstreamsandblendingagents;increasedcrudeoilproductionandexplorationactivityonshoreinNorthAmerica,includingfromtheCanadianoilsands;theexpansionofmidstreaminfrastructureinNorthAmericatohandleincreasedproductionandexpansionofcapacityintheU.
S.
refiningcomplextohandleheaviercrudeoilfromtheWCSB;GibsonEnergyInc.
402017Management'sDiscussionandAnalysistheeffectofcompetitioninregionsofNorthAmericaanditsimpactondownwardpricingpressureandregionalcrudeoilpricedifferentialsamongcrudeoilgradesandlocations;theeffectofmarketvolatilityontheCompany'smarketingrevenuesandactivities;theCompany'sabilitytopaydownandretireindebtedness;theCompany'splansforadditionalstrategicacquisitions,capitalexpendituresorothersimilartransactions,includingthecoststhereof;in-servicedatesfornewstoragecapacitybeingconstructedbytheCompany;theCompany'splannedhedgingactivities;theCompany'sprojectionsofcommoditypurchaseandsalesactivities;theCompany'sprojectionsofcurrencyandinterestratefluctuations;therealizationofanticipatedbenefitsfromtheimplementationofcostsavingmeasures;theCompany'sprojectionsofdividends;andtheCompany'sdividendpolicy.
Withrespecttoforward-lookinginformationcontainedinthisMD&A,assumptionshavebeenmaderegarding,amongotherthings:futuregrowthinworld-widedemandforcrudeoilandpetroleumproducts;crudeoilprices;nomaterialdefaultsbythecounterpartiestoagreementswiththeCompany;theCompany'sabilitytoobtainqualifiedpersonnel,owner-operators,leaseoperatorsandequipmentinatimelyandcost-efficientmanner;theregulatoryframeworkgoverningtaxesandenvironmentalmattersinthejurisdictionsinwhichtheCompanyconductsandwillconductitsbusiness;changesincreditratingsapplicabletotheCompany;operatingcosts;futurecapitalexpenditurestobemadebytheCompany;theCompany'sabilitytoobtainfinancingforitscapitalprogramsonacceptableterms;theCompany'sfuturedebtlevels;theimpactofincreasingcompetitionontheCompany;theimpactoffuturechangesinaccountingpoliciesontheCompany'sconsolidatedfinancialstatements;theCompany'sabilitytosuccessfullyimplementtheplansandprogramsdisclosedintheCompany'snewstrategy;theCompany'sabilitytodivestofitsU.
S.
EnvironmentalServicesbusinessandothernon-corebusinessesonacceptableterms,andthetimingtherefore;andtheCompany'sabilitytotransitiontoafocusedoilinfrastructuregrowthcompany.
Inaddition,thisMD&Amaycontainforward-lookinginformationattributedtothirdpartyindustrysources.
TheCompanydoesnotundertakeanyobligationstopubliclyupdateorreviseanyforward-lookinginformationexceptasrequiredbyapplicableCanadiansecuritieslaws.
Actualresultscoulddiffermateriallyfromthoseanticipatedinforward-lookinginformationasaresultofnumerousrisksanduncertaintiesincluding,butnotlimitedto,therisksanduncertaintiesdescribedin"Forward-LookingInformation"and"RiskFactors"includedintheCompany'sAnnualInformationFormdatedMarch5,2018asfiledonSEDARatwww.
sedar.
comandavailableontheGibsonwebsiteatwww.
gibsonenergy.
com.
NON-GAAPFINANCIALMEASURESThisMD&AreferstocertainfinancialmeasuresthatarenotdeterminedinaccordancewithIFRS.
CombinedRevenue,CombinedSegmentProfit,AdjustedEBITDAfromcontinuingoperations,AdjustedEBITDAfromdiscontinuedoperations,AdjustedEBITDAfromcombinedoperations,ProFormaAdjustedEBITDAfromcontinuingoperations,ProFormaAdjustedEBITDAfromdiscontinuedoperations,ProFormaAdjustedEBITDAfromcombinedoperations,distributablecashflowfromcontinuedoperationsanddistributablecashflowfromcombinedoperationsarenotmeasuresrecognizedunderIFRSanddonothavestandardizedmeaningsprescribedbyIFRSand,therefore,maynotbecomparabletosimilarmeasuresreportedbyotherentities.
ManagementconsidersthesetobeimportantsupplementalmeasuresoftheCompany'sperformanceandbelievesthesemeasuresarefrequentlyusedbysecuritiesanalysts,investorsandotherinterestedpartiesintheevaluationofcompaniesinindustrieswithsimilarcapitalstructures.
See"ResultsofContinuingOperations"and"ResultsofDiscontinuedOperations""forareconciliationofSegmentProfittonetincome(loss),theIFRSmeasuremostdirectlycomparabletoSegmentProfit.
See"SummaryofQuarterlyResults"forareconciliationofGibsonEnergyInc.
412017Management'sDiscussionandAnalysisAdjustedEBITDAfromcontinuing,discontinued,andcombinedoperationsandProFormaAdjustedEBITDAfromcontinuing,discontinuedandcombinedoperationstoSegmentProfitfromcontinuing,discontinuedandcombinedoperations.
Distributablecashflowfromcontinuingandcombinedoperationsisusedtoassessthelevelofcashflowgeneratedfromongoingoperationsandtoevaluatetheadequacyofinternallygeneratedcashflowtofunddividends.
See''DistributableCashFlow"forareconciliationofdistributablecashflowtocashflowfromoperations,theIFRSmeasuremostdirectlycomparabletodistributablecashflow.
ReadersareencouragedtoevaluateeachadjustmentandthereasonstheCompanyconsidersitappropriateforsupplementalanalysis.
Readersarecautioned,however,thatthesemeasuresshouldnotbeconstruedasanalternativetonetincome(loss)determinedinaccordancewithIFRSasanindicationoftheCompany'sperformance.