Document 2537558

-2(the “Initial Confidential Affidavit” and, together with the Initial Schmidt Affidavit, the
“Initial Affidavits”).
4.
Accompanying the swearing of this Affidavit is a second affidavit I have sworn on the
same date (the “Concurrent Confidential Affidavit”), and two affidavits of Tim Lisevich
of BMO Capital Markets, also sworn on the same date, one of which is confidential
(the “BMO Confidential Affidavit”) and one of which is not (the “BMO Affidavit”)
5.
In part, my Concurrent Confidential Affidavit: (i) contains confidential, commercially
sensitive and confidential information concerning the value of Laricina’s assets;
(ii) comments on the letter by TD Securities Inc. dated March 26, 2015 (the “TB Letter”)
addressed to CPPIB Credit Investments Inc. (the “Noteholder”) which was submitted to
the Court as an exhibit to the confidential affidavit sworn on March 26, 2015 by
Carol Benish, a legal assistant at Blake, Cassels & Graydon LLP (the “Benish Affidavit”);
and (iii) contains confidential information about the proposed Key Employee Retention
Program for certain of Laricina’s employees (the “KERP”).
6
The BMO Confidential Affidavit
(i)
contains commercially sensitive and confidential
information concerning the value of Laricina’s assets; and (ii) comments on the TD Letter
which is the subject of the Benish Affidavit.
7.
The BMO Affidavit contains details of Laricina’s plan to raise necessary capital to repay
the balance of its indebtedness to the Noteholder (the “Capital Repayment Process”),
which plan has been prepared by BMO Capital Markets with the input of Laricina and its
legal counsel and after extensive consultation with the PricewaterHouse Coopers inc. (the
“Monitor”) and with the Noteholder and its advisors.
8.
The confidential information contained in my Concurrent Confidential Affidavit and the
BMO Confidential Affidavit should not be disclosed to ensure that such information does
not impact Laricina’s Capital Repayment Process or its employees’ privacy rights.
Accordingly, Laricina respectfully requests that my Concurrent Confidential Affidavit and
the BMO Confidential Affidavit, including the exhibits attached thereto, be sealed on the
court file until further order, pending completion by Laricina Of its Capital Repayment
Process.
LEGAL_CAL: 11830024.10
-39.
This Affidavit is sworn in support of an Application by Laricina for relief under the
Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36, as amended (the “CCAA”)
as set forth in Laricina’s application accompanying this Affidavit.
10.
Capitalized terms not specifically defmed in this Affidavit have the meanings set forth in
Exhibit “1” hereto.
INTRODUCTION
11.
As reported to the Court in the Initial Schmidt Affidavit, the Company has become
insolvent as a result of an acceleration and demand for repayment dated March 16, 2015
on behalf of the Noteholder of approximately $163.4 million, in respect of $150,000,000
principal amount of 11.5% Senior Secured Notes issued on March 20,2014, having a fouryear term, and maturing March 20,201$ (the “Notes”). The Notes are governed by a trust
indenture dated March 20,2014 (the “Indenture”).
12.
The evidence contained in my Initial Affidavits, this Affidavit, my Concurrent Confidential
Affidavit, the BMO Affidavit and the BMO Confidential Affidavit establishes the
following:
(a)
Laricina has substantial equity and its properties have substantial value;
(b)
The Nôteholder has ample security coverage for the balance of Laricina’s
indebtedness under the Notes;
(c)
From the initial cash payment of $20,000,000, or anticipated further cash payment
up to $69,000,000 and payments from future receivables of approximately
$14,100,000, it is anticipated that the principal indebtedness to the Noteholder may
be reduced to less than $60,000,000 (see paragraph 46);
(d)
There is no cash leakage from Laricina and it is being operated and its cash flows
are being monitored under the watchful eye of the Court’s appointed Monitor;
(e)
Laricina is in the process ofresponsibly hibernating the Saleski Pilot, winding down
its operations and minimizing cash expenditures in order to conserve cash while
properly caring for and preserving its properties;
LEGAL_CAL;1 1830024.10
-4(f)
Once the $aleski Pilot is hibernated the cash burn will be modest;
(g)
It is Laricina’s shareholders, not the Noteholder, who are effectively bearing the
cost of the CCAA proceedings; and
(h)
A Claim/Counterclaim Process (as defined below) is required to determine
Laricina’s Counterclaim against the Canadian Pension Plan Investment Board
(“CPPIB”) and the Noteholder and any net balance payable to the Noteholder.
13.
Laricina is intent on pursuing the best course available in the circumstances to preserve
and maximize value for all of its stakeholders.
Since the Initial Order, Laricina’s
management and advisors have worked diligently and in good faith on numerous matters
to accomplish its restructuring including, without limitation, the following:
(a)
Managing Laricina’s operations including staff reductions and preparations for
hibernation of the Saleski project;
(b)
Consulting with the Monitor and stakeholders including the Noteholder, the
Shareholders Group (as defined below) and OSUM Oil Sands Corp. (“OSUM”);
(c)
Finalizing Laricina’s cash flow forecast through to December 31, 2015 (the “Cash
Flow Forecast”), which is attached to this Affidavit as Exhibit “2”;
(d)
Identif’ing critical suppliers and those requiring payment in the immediate term;
(e)
Developing a KERP to stem the loss of key employees needed to safely and
efficiently hibernate the Saleski project and continue to wind down Laricina’s
operations and preserve and maintain its properties;
(f
Addressing Laficina’s obligation to pay employee retention payments;
(g)
Determining the additional cash amount it will apply for authority and direction to
pay to the Noteholder (“Second Cash Repayment”);
(h)
Retaining special litigation counsel, Clarke Hunter, Q.C. of Norton Rose Fulbright
LLP, to litigate Laricina’s Counterclaim against the Noteholder and CPPIB and
generally represent Laricina in a Claim/Counterclaim Process (as defmed below)
LEGAL_CAL:1 t830024,1O
-5-
that is needed for determination of Laricina’s Counterclaim and any net balance
payable to the Noteholder;
(i)
Developing a Capital Repayment Process for Laricina to raise the capital required
to repay any net balance payable to the Noteholder;
(j)
Preparing for the “comeback” hearing on April 22, 2015, including application
materials; and
(k)
Preparing and meeting with Laricina’s Board of Directors (the “Board”) to obtaIn
Board direction for the foregoing.
II.
CONSULTATION
14.
Laricina and its advisors have consulted extensively with the Monitor and the Noteholder
and its advisors, and more recently have started consultation with counsel to the recently
organized Shareholders Group (as defined below).
15.
Laricina has also had ongoing consultation with OSUM concerning timing for hibernation
of Saleski. It is common ground that the Saleski Pilot should be hibernated in the current
economic climate.
The main point of discussion with OSUM is the timing of that
hibernation.
16.
Although the Noteholder and Shareholders Group’s respective positions are divergent,
consultation with each of them has been helpful to Laricina’s efforts to develop a balanced
approach with fair regard to the interests of both stakeholders.
17.
In part, the initial Order requires Laricina to consult with the Noteholder before:
(a)
Laricina finalizes its cash flow forecast; (par. 13)
(b)
Laricina pays (with Monitor’s approval) pre-filing debts of critical suppliers (not to
exceed $2 million); (par. 6(c))
(c)
Laricina applies for its KERP; (par. 40)
(d)
Laricina fmalizes the amount of the Second Cash Repayment; (par. 11) and
LEGAL CAL:1 1830024.10
-6-
(e)
Laricina finalizes and applies (at the come-back hearing) for approval of its
proposed Capital Repayment Process. (par. 17)
18.
Laricina’ s general approach has been as follows. In consultation and with the assistance
of its advisors, Laricina first conceived, analyzed and developed a working draft, outline
or presentation of each matter involved (e.g. Cash flow Forecast, KERP, calculation of
Second Cash Repayment, Capital Repayment Process) and supporting information.
Laricina and/or its advisors then met with the Noteholder and/or its advisors to present,
discuss and receive input regarding the subject draft, outline or presentation. Often the
Noteholder or its advisors had questions or wanted further supportmg mformation
Information requested was provided which sometimes led to further questions and
information requests which were answered. In some cases, the Noteholder or its advisors
sent counter proposals. Such counter proposals were carefully considered and responded
to.
19.
The first in-person consultation with the Noteholder’s advisors took place on April 8, 2015
and concerned the cash flow forecast. Laricina had proposed to meet the day before but
the Noteholder’s advisors were not available until April 8. The cash flow forecast was
fmalized by Laricma after consultation with the Momtor and the Noteholder’s advisors
20.
Similarly, Laricina management and/or its advisors consulted with the Monitor and the
Noteholder’s advisors regarding critical suppliers before any payments to them, and all
such payments to date have been made with the concurrence of the Monitor and without
objection by the Noteholder or its advisors. The same is true for employee retention
payments. There have been no employee severance payments since the CCAA proceedings
were commenced.
21.
Laricina’s proposed KERP was developed in consultation with the Monitor and then
presented to the Noteholder and its advisors for their input. They asked questions and
sought additional information which Laricina answered and provided. So far as I am
aware, to date the Noteholder and its advisors have not confirmed either support for or
objection to the KERP. It is my understanding that the Monitor supports the KERP.
LEGAL_CAL:118300241O
-722.
The two matters requiring the most time and effort for consideration, analysis, development
and consultation were the Capital Repayment Process and related determination of the
Second Cash Repayment. The two are interrelated and required Laricina to project its
operations to the end of 2015 and take into account cash flow projections, the KERP, the
Noteholder’s costs and all other professional costs.
All of the foregoing were
interconnected and had to be taken into account. Laricina and its advisors developed a
working draft presentation regarding the Capital Repayment Process and the Second Cash
Repayment in consultation with the Monitor. Laricina and its advisors then arranged and
attended an “all hands” without prejudice meeting with the Monitor, the Noteholder and
its advisors on April 13 to discuss in detail a presentation on these matters and receive input
from the Noteholder and its advisors. Written copies of the presentation were provided to
the Noteholder and its advisors at the meeting. There were several questions and requests
for information by the Noteholder and its advisors and the questions were answered and
information requested was provided to them following the meeting.
23
Consultation, negotiation, questions and information exchange took place through the
entire week The Noteholder’s advisors provided a without prejudice counter proposal
regarding the Capital Repayment Process and Second Cash Repayment The Noteholder’s
counter proposal was carefully considered by Lancma and its advisors
24.
Laricina’s restructuring advisors, BMO Capital Markets (Glenn Sauntry and Mark Caiger)
were tasked with negotiating and attempting to reach a consensus between Laricina and the
Noteholder regarding the Capital Repayment Process and Second Cash Repayment. I am
advised by Glenn Sauntry and Mark Caiger that the advisor to the Noteholder with whom
they negotiated was Barry Goldberg of Canaccord Genuity Group Inc. They advise that
negotiations and discussions continued all week between them and Barry Goldberg. They
advise that they were optimistic that a consensus would be reached but learned regrettably
on Friday, April 17, that the parties were not able to reach consensus on the Capital
Repayment Process and Second Cash Repayment.
25.
A great deal of time and effort was spent by Laricina management and its advisors in
preparing for and consulting with the Noteholder and its advisors including meetings,
telephone conversations, exchanges of information, answering inquiries and negotiations.
LEGAL_CAL:1 1830024,10
-8Although consultation with the Noteholder did not culminate in a consensus, it was helpful
in understanding the Noteholder’ s concerns at a granular level. Also, Laricina significantly
modified what it planned to do regarding the subjects referenced in paragraphs 1$ to 24
above, having regard to input received in consultation with the Noteholder and/or its
advisors. However, the Noteholder is not Laricina’s only stakeholder and having fair
regard to the interests of other stakeholders, including the shareholders, Laricina was
unable to reach a consensus with the Noteholder on all matters.
26.
In the course of developing Laricina’s plan for repayment ofthe balance of its indebtedness
to the Noteholder, Laricina and its advisors determined that it would provide Laricina with
more flexibility in considering alternatives to raise capital by issuance of securities from
Laricina’s treasury if CPP Investment Board (USRE II) Inc. (the “CPPIB Equity Holder”)
were to waive its pre-emptive right to acquire a pro rata portion of any securities which
Laricina might issue from treasury. CPPIB and the Noteholder have taken the position that
the equity value of Laricina’s common shares is nil. Although Laricina vehemently
disagrees and the evidence clearly indicates that equity has substantial value, since CPPffi
and the Noteholder are apparently of the view that there is no equity value, they presumably
would not support CPPIB Equity Holder purchasing any further shares from treasury.
27.
Accordingly, by letter dated April 16, 2015 by Laricina’s counsel to counsel for CPPIB,
the Noteholder and CPPIB Equity Holder, Laricina requested that CPPffl Equity Holder
waive its pre-emptive right in connection with any issuance of treasury securities
undertaken by Laricina as part of its plan under the CCAA or otherwise in connection with
the repayment of its indebtedness to the Noteholder. Attached as Exhibit “3” is a copy of
Laricina’s letter of April 16, 2015 to counsel for CPPIB, the Noteholder and CPPIB Equity
Holder.
28.
At the time of swearing of this Affidavit, I am advised by Laricina’s counsel that to the
best of their knowledge they have received no response to their letter dated April 16,2015.
29
This consultation process between Lancma, the Noteholder and their respective advisors
addressed all ofthe matters on which the Court directed them to consult under the terms of
the Initial Order. The parties have not as of the date of the swearing of this Affidavit
LEGAL_CALl 1830024.10
-9-
reached agreement on all matters that are the subject of the consultation directed by the
Court.
III.
CLAIM I COUNTERCLAIM PROCESS
30.
A claim process is needed for determination of the net amount payable to the Noteholder.
The due date and balance payable will depend upon the outcome of Laricina’s intended
claim against CPPIB and the Noteholder (the “Counterclaim”) as summarized below in
paragraphs 31 to 36. The Counterclaim not only impacts the net balance that may be
payable to the Noteholder but also any marketing process and timing as explained below.
31.
The Noteholder’ s acceleration, demand, and attempt to enforce its security are all based on
Laricina’s non-compliance with production and related covenants. Laricina could and
would have complied with those covenants had it continued with the Expenditure Plan set
out in the Indenture (the “Expenditure Plan”) as it existed before the expenditures set out
thereunder were reduced after consultation with CPPIB.
32.
CPPIB strongly encouraged Laricina to reduce expenditures and conserve capital. Laricina
advised CPPJB and the Noteholder that by doing so, Laricina would be at risk of not
meeting its production and related covenants. Laricina was induced by CPPffl to reduce
capital, operating and general and administrative expenditures and thereby breach its
production and related covenants based and in reliance on CPPIB’s representations: (1) that
Laricina should focus on reduction of expenditures and capital conservation and not
concern itself with any consequent non-compliance with these covenants; and (ii) that
CPPIB would work with Lancma to amend the Indenture to change the Expenditure Plan
and the Bitumen Production Forecast to provide for reduction in expenditures and
conservation of capital and to make the covenants consistent therewith (i.e. so there would
be no default).
33.
CPPIB then reneged on executing the amendment to the Indenture that had been negotiated
to address the production and related covenants and changes to the Expenditure Plan and
Bitumen Production Forecast on December 24, 2014 and just before the December 31,
2014 deadline for compliance with the production covenant attempted to coerce Laricina
to enter into an oppressive forbearance agreement.
LEGAL_CAL:I 1830024.10
When Laricina rejected the
-10-
forbearance, CPPIB continued to assert Laricina’s default under the production and related
covenants and ultimately caused the Noteholder to accelerate, demand and take other steps
to enforce payment of the entire principal amount outstanding pursuant to the Notes,
together with interest at the higher 13.5% Default Rate under the Indenture (“Default
Interest”), plus an Acceleration Payment Amount of about $9,700,000, all based on
Laricina’ s default under the very covenants CPPffi had induced Laricina to breach. CPPIB
now presses to have Laricina’s assets marketed and sold in an expedited marketing process
at a time when the market is illiquid and unlikely to achieve the best value for stakeholders.
It does so in spite of clear evidence that the Noteholder has ample security coverage and
there is substantial value in the equity.
34.
It is Laricina’ s position that the conduct of CPPIB and the Noteholder in their dealings with
Laricina including the conduct summarized in paragraphs 31 to 33 above: (a) constitutes a
breach of the Noteholder’s duty of good faith performance of its contractual rights and
obligations under the Indenture and the negotiation of the terms of the amendment to the
Indenture; (b) interfered with Laricina’s contractual relations (under the Indenture) with
the Noteholder, (c) mduced Lancma’s breach of the production and related covenants, and
(d) estops the Noteholder from asserting the breaches, acceleratmg, demandmg or
enforcing payment based on Laricina’s default under the very covenants CPPffi had
induced Lancma to breach, or claiming the Acceleration Payment Amount or Default
Interest.
35.
Based on the foregoing, Laricina denies that the Noteholder is entitled to accelerate,
demand or enforce payment of the principal balance or payment of the Acceleration
Payment Amount or Default Interest.
36.
The Noteholder’s purported acceleration and demand, and its application to place Laricina
in receivership, necessitated Laricina’s commencement of CCAA proceedings and
Laricina will also seek judgment for and set off or credit against any indebtedness to the
Noteholder, of all costs Laricina has incurred and will incur in the CCAA proceedings.
37.
Promptly, following the “comeback” hearing scheduled for April 22, 2015, Laricina
intends
LEGAL_CAL:11830024.lO
to
apply
for
an
order
establishing
an
expedited
claim
process
—11
—
(the “Claim/Counterclaim Process”) for determination by the Court of Laricina’s
Counterclaim and the net amount payable to the Noteholder.
3$.
If Lañcina’ s Counterclaim is successful then the Noteholder was not entitled to accelerate,
demand or seek to enforce payment of Laricina’ s indebtedness under the Notes.
39.
Laricina’s management and Board are strongly of the view that the current market is
ilhquid and marketing Lancina’s properties m the current market is unlikely to realize the
best value for stakeholders.
40.
The timing for completion of the Claim/Counterclaim Process is important. Only upon
determination of the Counterclaim by the Court will it be known what net balance (if any)
is payable to the Noteholder and whether it is actually due. Also, if a net amount is due to
the Noteholder, the quantum may impact whether only some or all of Laricina’s properties
need to be sold to retire the balance due to the Noteholder. Also, if the Noteholder were to
credit bid, the amount of the net balance payable to it is needed to establish the amount of
its credit bid.
41.
If contrary to Laricina’s request its properties are to be marketed in the current illiquid
market before determination of its Counterclaim, Laricina would also have (and would
seek to clearly preserve its right to pursue) as part of its Counterclaim, the additional
damages it will mcur if its properties are sold at a discount to the value Lancma could
obtain for them if not compelled to sell them in the current illiquid market.
42.
In developing the Capital Repayment Process and timeline, Laricina did not know and
therefore did not consider how long the Claim/COunterclaim Process will take.
Accordingly, the timeline for the Capital Repayment Process should be adjusted if
necessary, to ensure there is sufficient time to complete the Claim/Counterclaim Process
before the deadline for binding bids in the Capital Repayment Process.
43.
Since the Initial Order, Laricina has paid the Noteholder $20,000,000 and (subject to its
rights of appeal) will pay it the Second Cash Repayment amount if directed to do so by the
Court at the “comeback” hearing scheduled for April 22, 2015. Laricina respectfully
requests that the Court expressly declare and direct that: (a) all payments made by Laricina
to the Noteholder pursuant to any order(s) made in the CCAA proceedings are entirely
LEGAL_CALl 1830024.10
-12without prejudice to Laricina’s Counterclaim; and (b) before Laricina makes any further
payments to the Noteholder, the Noteholder and CPPIB shall jointly and severally
undertake to Laricina and the Court that, if the Court’s determination of Laricina’s
Counterclaim m the Claim/Counterclaim Process results m a net credit balance bemg owed
to Laricina by the Noteholder or CPPIB, then they shall promptly pay that credit balance
to Laricina.
1V.
REPAYMENT OF PRINCIPAL TO NOTEHOLDER
44.
Laricina consulted with its professional advisors, and with the Monitor, the Noteholder and
its advisors, and has developed a multi-pronged Capital Repayment Process to repay the
indebtedness under the Notes. The detailed Capital Repayment Process is set out in Exhibit
1 to the BMO Affidavit and provides for: (a) a Second Cash Repayment to the Noteholder
in the amount of at least $44,000,000 to be applied to pay down principal indebtedness; (b)
the market solicitation imtiative set out therein, and (c) payment of certam future
receivables to the Noteholder once received.
Second Cash Repayment to the Notehotder
45.
Immediately following the hearing of Laricina’s stay application and granting ofthe Initial
Order, Laricina and its professional advisor, BMO Capital Markets, in consultation with
the Noteholder and with the Momtor, initiated an analysis of the Company’s cash position
The starting point for the analysis was the cash on hand as of March 31, 2015, which was
$140.1 million. Of this amount, and as directed by the Court in paragraph 11 of the initial
Order, Laricina made an initial cash repayment against the principal outstanding under the
Notes by wire transferto the Noteholder of $20,000,000 on April 1, 2015.
46
Attached as Exhibit “4” is a schedule outlmmg the prmciples Lancma followed to calculate
the amount of cash available to pay the Noteholder as the Second Cash Repayment. The
balance ofcash on hand following the initial cash repayment to the Noteholder was $120.1
million, from which amount following the consultation process Laricina proposes that the
Second Cash Repayment amount of at least $44,000,000 be applied to the principal
indebtedness owing to the Noteholder under the Notes and not to the Acceleration Payment
Amount or to Default Interest (as such terms are defmed in the Indenture) which are
LEGAL_CALl 1830024.10
-
13
-
claimed by the Noteholder but which are not acknowledged as properly due or payable by
Laricina. If CIBC will release $5 million of its cash collateral (and based on discussions,
I am advised by Laricina’ s counsel that they had with CIBC’ s counsel, it appears that CIBC
may do so and reduce the operating line accordingly), then the Second Cash Repayment
amount may increase to $49,000,000. if the Noteholder would prefer to defer payment of
interest and costs until the conclusion of the Capital Repayment Process, then the Second
Cash Repayment amount may be increased to $69,000,000. Accordingly, the range for the
Second Cash Repayment amount is $44,000,000 to $69,000,000. With the $20,000,000
alrtady paid, this will constitute a reduction of the principal indebtedness by up to
$89,000,000 within one month of commencement of the CCAA proceedings, leaving a
principal balance of only $73,400,000 which may be reduced by about $14,100,000 in
future receivables. As such, from cash repayments alone, Laricina anticipates that the
principal balance payable to the Noteholder may be reduced to below $60,000,000. The
Noteholder will continue to have ample security coverage over Laricina’s valuable
properties..
Contingent Receipts
47.
As part of the Capital Repayment Process, Laricina has several outstanding anticipated
receivables that it will distribute to the Noteholder, when they are received
(the “Future Receipts”), as further repayments of the principal amount owing to the
Noteholder pursuant to the Notes. These Future Receipts have a total anticipated value of
approximately $14,100,000, comprised of the following amounts:
(a)
$7,900,000 plus interest, from the Alberta Government in connection with an urban
development sub-region claim that Laricina has due to the unilateral cancellation
of certain Laricina leases by the Alberta Government for a planned municipal
expansion in Fort McMurray. Payment of this amount could be as early as May
2015;
(b)
Approximately $2,600,000 of receivables owed by OSUM, which amount is
expected to increase to $3,600,000 by December 2015. This amount includes
$600,000 for production engineering work that went unbilled from 2010 to 2014
(and is subject to dispute and audit by OSUM) and $2,000,000 (which may increase
LEGAL_CAL:1 1830024.10
-14to $3,000,000) for $aleski Phase 1 engineering work (relating to the commercial
expansion at Saleski). OSUM is either disputing or has not responded to these
claims, so timing of payment is uncertain; and
(c)
$2,600,000 in proceeds from an interim payment relating to an insurance claim
arising from a bitumen excursion incident at the Germain CDP precipitated by
TransCanada PipeLines Woodenhouse pipeline outage.
Full settlement is a
minimum of 1 to 2 months away for this claim.
48.
Laricina is actively pursuing collection of all of these Future Receipts.
Capital Repayment Process
49.
Laricina expects that after the Second Cash Repayment and distribution of Future Receipts
to the Noteholder when received, the balance of principal owing on the Notes may be less
than $60,000,000. To repay this amount and any interest and costs that may be payable,
Laricina needs sufficient time to restructure and reposition its Market Solicitation Process
that is ongOing because the status of its assets and the investment opportunities in respect
thereof are now substantially different than they were prior to the shutting in and
mothballing of Laricina’s facilities as further set out below.
50.
Laricina and the broader market have experienced substantial changes since the start of
Lañcina’s Market Solicitation Process. When the Market Solicitation Process began in
November 2014, Lancina had two operatmg facilities, the Saleski Pilot and the Germam
CDP. The Salesld Pilot had confirmed commerciality of the Prospect while the Germain
CDP was in the process of confinning commerciality. Both were in the pre-commercial
development stage with near-term milestones and significant capital needs to carry through
to commercial development With the precipitous drop m oil pnces, the shuttmg-m and
mothballing of Laricina’s assets toward a hibernation scenario and the current CCAA
restructuring process, Laricina’s operating profile has changed significantly.
The
Company now presents a well-positioned commercial development opportunity, with low
carrymg costs and properly suspended operations that will maintam their capabilities until
such time that active operations are re-started. It has substantial land positions with
significant reserves and resources, substantial data from the $alesld Pilot and Gennain
LEGAL_CAL:1 1830024,10
-
15
-
CDP, significant regulatory and engineering milestones already achieved, and significant
tax attributes. Laricina’s approach to the marketing process must be adjusted to reflect
these changes and selling points.
51.
Laricina’ s Capital Repayment Process will consider a broader range of transactions
compared to the Market Solicitation Process. Specifically, Laricina will consider, inter
alia, the following:
(a)
sale of one or both of the Saleski Prospect and Germain Prospect, potentially to
different parties;
(b)
new money investment; and,
(c)
sale of other assets including the Chip Lake road, other oil sands leases, tax
attributes, surplus equipment, Germain CDP facilities and the Saleski Pilot
facilities.
52.
To effectively market Laricina in the current circumstances, critical investor/purchaser
considerations must be addressed, and the marketing materials must reflect both Laricina’s
new strategy and operating profile. In this regard, Laricina has taken, or is taking, the
following steps:
(a)
Preparing updated Cash Flow forecasts, in consultation with Monitor and the
Noteholder, to reflect the hibernation scenario and cash conservation initiatives,
which will assist potential investors/purchasers in assessing operating costs over
the next few years;
(b)
Documenting results and procedures taken to properly hibernate Laricina’s assets
and its operations as well as a care and maintenance strategy. This will allow
potential investors/purchasers to review them from fmancial, engineering, health
and safety, environmental, and regulatory perspectives, and satisfy themselves that
the value and potential of the assets is being preserved;
(c)
Populating the data room with additional information on actions taken in
connection with the hibernation activities of the Germain CDP and Saleski Pilot to
permit potential investors/purchasers to confirm:
LEGAL_CAL:1 183002410
-16(i)
preservation of all intellectual property, learnings, and know-how
developed to date;
(ii)
that residual liabilities from staff severed and terminated contracts have
been addressed;
(lii)
completion of production operations at Saleski to provide updated C wells
cycle performance reconfirming commerciality;
(iv)
completion and interpretation of 4 D seismic at the Saleski Pilot that will be
available by the end of June, 2015; and,
(v)
(d)
any other legal, financial and regulatory considerations going forward; and
preparing more detailed analysis of the optimal tax strategy to assist potential
investors/purchasers in assessing the value of the tax pools, which represent a
greater proportion of the overall transaction value in the current environment.
53.
Laricina will prepare marketing materials that represent a broad range of alternative
transaction structures and opportunities, and will target the materials presented to specific
investors/purchasers. The marketing materials will frame the opportunity, identify a clear
execution path, anticipate key issues and have the relevant analysis and data available, and
explain the process Once potential mvestors/purchasers are identified, Lancma mtends to
perform a hands-on presentation of the opportunities, with a tailored approach to suit each
investor/purchaser.
54.
Laricina expects that the Capital Repayment Process, the detail of which is set out in the
BMO Affidavit, will require approximately six months to execute. Once a transaction or
transactions has/have been identified and selected under the Capital Repayment Process,
the selected transaction(s) would be subject to additional time for receipt of any applicable
regulatory approvals and closing.
55.
Laricina has prepared the Capital Repayment Process with assistance from BMO Capital
Markets and Laricina’s legal counsel, and has consulted with the Monitor and the
Noteholder and its advisors to obtain their input. In Laricina management’s view, the
timetable that BMO Capital Markets projects to run the Capital Repayment Process is
LEGAL_CAL: 11830024.10
-17reasonable and a shorter, more expedited timetable would not be reasonable. In fact,
Laricina’s Board is of the view, based on the experience of its individual members, that the
current market for Western Canadian oil sands assets is very weak and recovery to a more
robust market will take some time. Moreover, the runway for marketing oil sands assets is
typically significantly longer than for other oil and gas properties both in terms of
identifring prospects with sufficient financial capacity for oil sands development and for
completion of due diligence by prospective purchasers on the properties.
56.
BMO Capital Market’s report regarding:
(a)
The initial market solicitation process and the factors that disrupted that process;
(b)
The proposed form, structure and timing of the Capital Repayment Process;
(c)
An assessment of how the length of the Capital Repayment Process compares to
other processes; and
(d)
An assessment, from a fmancial point of view, of the impact of the process on
Laricina’ s estate;
is attached as Exhibit “5” The facts disclosed in the report concermng Lancma and its
assets are correct and Lancma agrees with the views expressed therem
Cash Burn is Minimal Following Saleski Shut-In
57.
Following the shut-in and mothballing of operations at Saleski (the “Saleski Shut-In”),
Laricina anticipates that the costs of operating the Company and maintaining its assets will
be approximately $7 million per year (before payment of interest due to the Noteholder).
58.
Attached as Exhibit “2” is Laricina’s Cash Flow Forecast through to December 31, 2015.
Based on my knowledge ofthe financial position of Laricina and based on the assumptions
set out in the Cash Flow Forecast, I believe that they are fair and reasonable.
59.
Laricina’s management prepared the Cash Flow Forecast in consultation with the Monitor,
whose comments have been addressed and incorporated in the Cash Flow Forecast.
LEGAL CAL:1 1830024.10
-
60.
1$
-
I believe, based on the Cash Flow forecast, that the Company will be able to meet its postfiling obligations in the ordinary course.
V.
KEY EMPLOYEE RETENTION PLAN
61.
Laricina proposes a KERP for certain Laricina employees (the “Key Employees”), the
details of which and the subject employees are set out in my Concurrent Confidential
Affidavit. The following outlines Laricina’s need for a KERP.
StaffReductions to Date Necessitate a KERP
62.
Laricina’s staff has been reduced by approximately 50% since the beginning
of 2015.
Laricina staff is effectively down to its key employees. Moreover, given the present
uncertainty regarding the receipt of common law severance under CCAA, Laricina has
recently had two key employees and one important field operator resign, and I understand
that three important field employees may tender resignations in the coming weeks. Such
field employees are critical as SAGD operations require
2tid
to
4th
class steam tickets to
meet regulatory requirements, a highly limited and in-demand skill set.
63.
I believe that all of Laricina’s stakeholders are best served by the Company’s existing staff
undertaking the Capital Repayment Process and $alesld Shut-In. The current employees
have, the required skills to cost-effectively and safely execute the restructuring of the
business and the wind-down of operations in accordance with environmental requirements
and best industry practice. Without the retention of the Key Employees, Laricina’s ability
to undertake the Salesld Shut-In and Capital Repayment Process would be seriously
compromised.
Accordingly, Laricina seeks an order authorizing it to pay the Key
Employees in accordance with the KERP.
Laricina ‘s field Staffis Requiredfor the Sateski Shut-In
64.
Laricina’s field staff have expertise and the necessary professional designations required
to execute the Salesid Shut-In. Replacement contractor premiums can vary from 10 to 30%
over existing employee wage rates, thereby making it uneconomic to be forced to hire such
replacements. Moreover, using replacement contractors would impact productivity, costs
and timeframes due to training time and lack of familiarity with the facility. Additionally,
LEGAL_CAL:118300241O
-19safety and environmental risks would increase with loss of knowledgeable staff and use of
replacement contractors given the replacement contractors’ inexperience with the facility.
Laricina’s Office Staff and Management are Requiredfor Day-to-Day Operation and Capital
Repayment Process
65.
Laricina’s office staff is currently stretched to meet the demands placed on them. In
addition to terminations to date, voluntary resignations are beginning to impact the
remaining employees’ capacity and the Company’s available corporate knowledge.
Replacement contractor premiums for office staff average approximately 40% over
existing employee wages and range from 10 to 100%.
66.
There are four members of management (the “Executives”, which term does not include
the CEO or the Chief Operating Officer) who possess unique professional skills and
intimate knowledge of, and have experience with, Laricina’s business and operations. The
loss of the Executives, who not only direct and oversee much of the Company’s day-to
day activities, but who can also step in to complete work, would significantly impair the
ability to complete the work required to restructure the Company and wind down
operations within the timeframe and the projected budget contemplated, and in accordance
with good oilfield practices. The Capital Repayment Process and Saleski Shut-In require
the Executives’ guidance and leadership, their assistance with formulatmg and executing
same, and the benefit of pertment contacts m the marketplace The Executives’ continued
employment will therefore improve the likelthood of the Capital Repayment Process and
$aleslu Shut-In bemg successful and within projected timelmes and budget for completion
KERP Design
67.
In late 2014, in anticipation of beginning the winding-down of its operations and the shutin and mothballing of its facilities, Laricina established a companywide severance program
with the input of legal advice, and in January of 2015 obtained unanimous Board approval
of the program, including approval of CPPffi’s representative on the Board at such time.
The severance program was then communicated to all employees to provide them
confidence that they would be treated fairly and reasonably. Laricina has applied the
severance program consistently to all employees terminated pre-fihing.
LEGAL_CALl 1830024.10
-20
6$.
-
With the inability to pay reasonable common law severance under these CCAA
proceedings, a KERP is a needed tool to retain staff during the restructuring. Over the last
two months approximately 50% ofthe former staff terminated has found new employment.
There are a number of in-situ projects nearing start-up in Alberta and Saskatchewan and
numerous positions are available to the Saleski operational team. As a result, I am satisfied
that the KERP is necessary to retain the Key Employees.
69.
I am advised by Laricina’s counsel that, to be effective, a KERP should offer a meaningful
retention payment to the Key Employees. The proposed KERP payment averages 19.3%
of the annual salary for each Key Employee.
Laricina’s existing staff are certainly
considering new positions given the uncertainty associated with these CCAA proceedings
and given that they are in effect working themselves out of ajob. In light of staffreductions
by more than 50% to date and recent additional resignations, all current positions are key
to completing the wind down of the business and completing the shut-in and mothballing
of Laricina’s facilities, and are at risk.
70.
Accordingly, all remaining staff (excluding the CEO and the Chief Operating Officer) are
included as Key Employees under the KERP. Expected KERP payments based on this
framework will total $2,321,062 to 84 individuals. If approved by the Court, KERP
payments will be payable at the earlier of: (a) involuntary termination; and (b) the end of
CCAA process.
Payments receivable under the KERP are forfeited upon voluntary
termination or termmation with cause
71.
I believe that each of the Key Employees is vital to the Saleski Shut-In, the Capital
Repayment Process, and the restructuring, and is necessary for maximizing the value that
will be realized from these activities for the Laricina’s stakeholders.
72.
My Concurrent Confidential Affidavit includes a copy of the KERP, including the position
descriptions of the Key Employees and other sensitive information. The disclosure of the
information contained in my Concurrent Confidential Affidavit would be harmful to the
privacy interests of the Key Employees. Therefore, Laricina respectfully request that my
Concurrent Confidential Affidavit be sealed on the Court file.
LEGAL_CAL: 11830024.10
-2171
The proposed Order which Laricina seeks on April 22 contemplates a charge
(the “KERP Charge”) up to the maximum amount of $2,321,062 as security for payment
of amounts owing by Laricina to the Key Employees under the KERP. The proposed Order
contemplates that the KERP Charge shall rank first in priority after the Administration
Charge (as such term is defmed in paragraph 32 of the Initial Order) and any security
interests, trusts, liens, charges and encumbrances, claims of secured creditors, statutory or
otherwise in favour of any person. Laricina believes that the KERP Charge is fair and
reasonable in the circumstances.
74.
I am advised by the Monitor that it supports the KERP and the KERP Charge.
VI.
LARICINA’S 2013 RETENTION BONUS PROGRAM
75.
Laricina established, and the Board approved, a retention bonus plan in November of 2013
(the “2013 Retention Plan”) pursuant to which eligible employees would receive, after
remaining employed with the Company for a certain time, a retention payment in cash on
the earlier of the termination of their employment without cause by Laricina or
May 20, 2015. Currently remaining employees are entitled to such payments totaling
approximately $1,300,000. The nature of these payments has been reviewed by legal
counsel to the Company and by legal counsel to the Momtor and such payments are
considered to be wages payable in the ordinary course The Momtor has reviewed and
confirmed that these retention payments are properly payable and that advice and the
details ofthe 2013 Retention Plan have been provided to and discussed with the Noteholder
and its advisors.
76.
The Noteholder has approved such payments to five employees who were terminated prior
to the granting of the Initial Order but who did not receive payment of their retention
amounts given the timmg of the CCAA filing
77.
Laricina will be seeking the approval and authorization of the Court in the proposed Order
to pay the amounts payable under the 2013 Retention Plan to employees as set forth in this
section of my Affidavit.
LEGAL_CAL:! 1830024.10
-22
-
VII.
LARICINA’S RESERVES AND VALUATION
78.
My Concurrent Confidential Affidavit and the BMO Confidential Affidavit both comment
on value and the TD Letter which was submitted to the Court as an exhibit to the
confidential Benish Affidavit.
Basal Water Wells at the Germain CD?
79.
At paragraph 32 of the Affidavit of Syed Mustafa Humayun sworn on March 25, 2015
(the “Hurnayun Affidavit”), Mr. Humayun describes the operational issues encountered
at the Germain CDP regarding the impermeable mudstone layer between the producer and
injector wells. He states that “This failure called into question the basic viability of the
Germain CDP, Laricina’s ability to properly assess the complex geology of the Projects
and successfully operate its assets, and the business model itself (recognizing the
significant incremental experimental expenditures required to assess the potential viability
of Laricina’s resource base).”
80.
The nature of drilling the basal water wells at the Germain CDP was experimental. The
purpose was to test the effect of various parameters on well performance, inclusive of well
placement, with the goal of optimizing operations during the commercial development
phase. The experimental nature ofthe Germain CDP was well-understood by Laricina and
the members of the Board, which mcluded CPPTB’s representative nominee on the Board
It was also known to the Noteholder and CPPIB mcludmg Mr Humayun that it was
experimental and might not work
That is why it was excluded from calculation of
production for the production covenant at the time the Bitumen Production Forecast was
being set. Mr. Humayun’s assertion to the effect that the failure of basal water well
experiment undermines the viability of the Gennain CDP and Laricina’s business model is
not rational or credible. The theory being tested by Laricina was that, by drilling the
producing wells in the basal water, injectivity and start-up times would be enhanced
because the basal water allows more rapid start-up and better communication between the
injector and the producer wells. However, once production was initiated from the well
pairs at the Germain CDP, it became clear that the well placement was incorrect in this
area due to the presence of the mudstone layer between the producer and injector wells.
This was merely a failure of the well placement Laricina was testing. It was not an
LEGAL_CAL:1 183002410
-
23
-
indication that the entire Germain CDP or the Germain Prospect are not viable. In fact,
with proper well placement, the presence of the mudstone layer may ultimately enhance
recovery from the Germain Prospect, sincç it will prevent bitumen from falling past the
producer well. This is precisely the type of learning that the Germain CDP was designed
to achieve.
81.
After the issue with the mudstone layer became apparent, Laricina continued operations in
the remaining well pairs that were placed above the mudstone layer and fully in the bitumen
interval. By doing this, Laricina demonstrated that the wells in the bitumen above the
mudstone layer could successfully ramp-up to achieve coinmercially viable rates.
Additionally, Laricina recognized that maintaining operations was critical for the Market
Solicitation Process that was ongoing for two reasons. first, obtaining data regarding the
initial production ramp-up data demonstrated that commercial production was possible at
economic rates and affirmed the value of the Germain Prospect. Second, by continuing
operations, the reservoir remained hot, which meant that a potential buyer would not have
to incur substantial costs to re-perform the start-up and steaming procedures. These steps
reflected the exercise of careful and prudent business judgment by the management team
and the Board, and were done with the full knowledge of CPPffl, through its representative
on the Board, and the Noteholder and CPPffi through Laricina’s consultation with Mr.
Humayun.
Vifi
SHAREHOLDER GROUP
82.
A number of Laricina’s significant shareholders have recently organized themselves as a
shareholder group (the “Shareholder Group”) with the intent to make submissions in this
CCAA proceeding. By letter dated April 8, 2015, Goodmans LLP notified Laricina’s
advisors that it had been retained by the Shareholder Group. Attached as Exhibit “6” to
this Affidavit is a copy of that letter. The letter from counsel for the Shareholder Group
expresses their view that CPPIB’s actions are an attempt to take away value from the
Company and its stakeholders.
LEGAL_CAL:1 1830024.10
-24IX.
STAY EXTENSION
83.
Since the granting of the Initial Order, Laricina has taken significant steps to advance these
proceedings for the benefit of all stakeholders, including, but not limited to:
(a)
cooperating with the Monitor to facilitate its monitoring of Laricina’s business and
operations;
(b)
assisting the Monitor in its review of security interests in Laricina’ s property;
(c)
consulting with the Monitor and with the Noteholder with respect to the Capital
Repayment Process, Laricina’s Cash Flow Forecast, Laricina’s payment of pre
filing debts of critical suppliers, Laricina’s KERP, Laricina’s payment of employee
2013 Retention Plan amounts, and calculation of the Second Cash Repayment
amount to be paid to the Noteholder;
(d)
communicating with various stakeholder groups, including suppliers, creditors,
lenders, shareholders, employees and others;
84.
(e)
managing Laricina’ s staff and operations; and
(f)
continuing to pay its suppliers in the ordinary course.
Laricina has acted and is acting diligently and in good faith in all of its dealings with the
Monitor, the Noteholder, the Shareholder Group and their respective advisors. A rigorous
consultation has taken place and if the Court so directs, the Noteholder will be repaid up to
$89,000,000 of the principal amount of the Notes since the granting of the Initial Order (as
explained in paragraph 46 above).
A Cash Flow Forecast has been developed in
consultation with the Monitor, the Noteholder and its advisors which demonstrates that
only modest operating costs will be incurred on a monthly basis following the Saleski Shut
In. The BMO Confidential Affidavit contains evidence of value that demonstrates that the
Noteholder has ample security coverage remaining on indebtedness under the Notes. The
time requested to accommodate the Capital Repayment Process is reasonable. I believe
that the stay extension and other relief requested in this “come back” application are
reasonable and likely to yield a more favourable and fair outcome for stakeholders than
would receivership or bankruptcy.
LEGAL_CAL:1 183002410
25
-
An extension of the Stay Period to September 30, 2015 will enable Laricina to carry out
85.
the proposed Capital Repayment Process through the deadline for binding bids. I believe
that without the benefit of CCAA protection including extension of the general stay, there
will be a significant erosion of the value of the Company’s assets to the detriment of all
stakeholders.
86.
I believe it is appropriate in the circumstances and in the best interests of the Company and
all stakeholders that extension of the Stay Period and other relief requested by Laricina be
granted.
SWORN BEFORE ME at the City of Calgary, in the
Provh6e of Alberta, this 18 day of April, 2015
I
‘t/\
—n
Cmmissione1 Oaths in and for the Province of Alberta
KELSEY C. ARMSTRONG
Barrister & Solicitor
LEGAL_CAL 11830024.10
Tabi
THIS IS EXHIBIT “1”
reftrred to in the Affidavit of
Glen C. Schmidt
Sworn before
18 day of April, 2015
OATHS IN AND
PROVINCE
OF ALBERTA
KELSEY C. ARMSTRONG
Barrister & Solicitor
LEGAL_CAL:1 1841860.1
EXHIBIT 1- LIST OF DEFINED TERMS AND PHRASES
Defmed Term/Phrase
Definition
Location of Definition
1. “2013 Retention Plan”
A retention bonus plan established
by Laricina and approved by the
Board in November of 2013
pursuant to which eligible
employees would receive, after
remaining employed with the
Company for a certain time, a
retention payment in cash on the
earlier of the termination of their
employment without cause by
Laricina or May 20, 2015.
Paragraph 75 of the
Comeback Affidavit
2. “Acceleration Payment
Amount”
With respect to the acceleration of
any Notes in accordance with
Section 8.02, (i) if the Acceleration
Date occurs at any time prior to
March 20, 2016, 6% of the
principal amount of the Notes
outstanding on the Acceleration
Date, (ii) if the Acceleration Date
occurs at any time on or after
March 20, 2016 but prior to March
20, 2017, 4% of the principal
amount of the Notes outstanding on
the Acceleration Date, and (lii) if
the Acceleration Date occurs at any
time on or after March 20, 2017,
2% of the principal amount of the
Notes outstanding on the
Acceleration Date.
Section 1.01 of the
Indenture
3. “Administration
Charge”
The charge granted to the Monitor,
counsel to the Monitor, BMO
Capital Markets, independent
counsel to the Applicant’s Board of
Directors, and the Applicant’s
counsel, as security for the
professional fees and
disbursements incurred both before
and after the granting of the Initial
Order
Paragraph 32 of the
Initial Order
LEGAL_CAL: 11838996.2
-2-
Defined Term/Phrase
Definition
Location of Definition
4. “Benish Affidavit”
The Confidential Affidavit of Carol
Benish sworn March 26, 2015
Paragraph 5 of the
Comeback Affidavit;
Paragraph 4 of the
Concurrent Confidential
Affidavit
5. “Bitumen Production
Forecast”
Laricina’s production forecast
setting out the quarterly average
daily bitumen production
(comprised of certain of the
Germain Assets plus certain of the
Salesid Assets), attached as
Schedule 2 to the Indenture
Section 1.01 of the
Indenture
6. “Board”
The board of directors of Laricina
Paragraph 13(k) of the
Comeback Affidavit
7. “BMO”
BMO Capital Markets, one of
Laricina’s professional advisors in
the CCAA proceedings
Paragraph 3 of the
Concurrent Confidential
Affidavit
8. “BMO Affidavit”
The non-confidential affidavit
sworn by a representative of BMO
Capital Markets, which
accompanied the filing of the
Comeback Affidavit
Paragraph 4 of the
Comeback Affidavit;
Paragraph 3 of the
Concurrent Confidential
Affidavit; Paragraph 2
of the BMO
Confidential Affidavit
9. “BMO Affidavits”
Collectively, the BMO Affidavit
and the BMO Confidential
Affidavit
Paragraph 3 of the
Concurrent Confidential
Affidavit
10. “BMO Confidential
Affidavit”
The confidential affidavit sworn by
a representative of BMO Capital
Markets, which accompanied the
filing of the Comeback Affidavit
Paragraph 4 of the
Comeback Affidavit;
Paragraph 3 of the
Concurrent Confidential
Affidavit
11. “BMO Report”
The document titled “BMO
Valuation Perspectives” dated
March 24, 2015, attached as an
exhibit to the Initial Confidential
Affidavit
Paragraph 11 (a) of the
Concurrent Confidential
Affidavit; Paragraphs
of the BMO
Confidential Affidavit
LEGAL CAL: 11838996.2
-3-
Defined Term[Phrase
Definition
Location of Defmition
12. “BMO Response”
The document entitled “BMO
Capital Markets Review of TD
Securities Letter to CPPIB Credit
Investments Inc. dated March 26,
2015”, attached to the BMO
Confidential Affidavit
Paragraph 7 of the
Concurrent Confidential
Affidavit
13. “BMO Valuation”
The document detailing BMO’s
value estimates for Laricina,
attached to the BMO Confidential
Affidavit.
Paragraph 7 of the
Concurrent Confidential
Affidavit
14. “Capital Repayment
Process”
The plan to raise necessary capital
to repay the balance of its
indebtedness to the Noteholder
Paragraph 7 of the
Comeback Affidavit
15. “Cash Flow Forecast”
Lañcina’s cash flow forecast
through to December 31, 2015,
attached as Exhibit “2” to the
Comeback Affidavit
Paragraph 13(c) of the
Comeback Affidavit
16. “Cash Flow
Projections”
The cash flow projections attached
to the Initial Schmidt Affidavit as
Exhibit “40”
Paragraph 15 of the
Concurrent Confidential
Affidavit
17. “CCAA”
The Companies’ Creditors
Arrangement Act, R.S.C. 1985, c.
C-36, as amended
Paragraph 9 of the
Comeback Affidavit
18. “CEO”
Glen C. Schmidt, President and
Chief Executive Officer of Laricina
Paragraph 1 of the
Comeback Affidavit;
Paragraph 1 of the
Concurrent Confidential
Affidavit
19. “Claim/Counterclaim
Process”
An expedited claim process for
determination by the Court of the
Counterclaim and the net amount
payable to the Noteholder as a
result of any damages that have
been incurred by Lañcina.
Paragraph 37 of the
Comeback Affidavit
20. “Concurrent
Confidential Affidavit”
The confidential affidavit sworn by
Glen C. Schmidt on April 19, 2015
concurrently with the Comeback
Affidavit.
Paragraph 4 of the
Comeback Affidavit
.
LEGAL_CAL: 11838996.2
-4-
-
Defined Term/Phrase
Defmthon
Location of Definition
21. “Comeback Affidavit”
This non-confidential Affidavit
sworn by Glen C. Schmidt on April
19, 2015, as used in the Concurrent
Confidential Affidavit
Paragraph 3 of the
Concurrent Confidential
Affidavit; Paragraph 2
of the BMO
Confidential Affidavit
22. “Comeback Affidavits”
Collectively, the Comeback
Affidavit and the Concurrent
Confidential Affidavit
Paragraph 3 of the BMO
Confidential Affidavit
23. “Counterclaim”
Laricina’s intended claim against
CPPIB and the Noteholder
Paragraph 30 of the
Comeback Affidavit
24. “CPPIB”
Canada Pension Plan Investment
Board
Paragraph 12(h) of the
Comeback Affidavit
25. “CPPIB Equity Holder”
CPP Investment Board (USRE II)
Inc., a wholly-owned subsidiary of
Canada Pension Plan Investment
Board; the largest shareholder of
Laricina
Paragraph 26 of the
Comeback Affidavit;
Paragraph 11(c) of the
Concurrent Confidential
Affidavit
26. “Default Interest”
Interest payable at the Default Rate
of 13.5%, as defined under section
1.01 of the Indenture
Paragraph 33 of the
Comeback Affidavit
27. “Executives”
The four management members
included in the KERP, which does
not include the CEO or the Chief
Operating Officer
Paragraph 66 of the
Comeback Affidavit
28. “EV”
Enterprise value
Paragraph 5 of the
BMO Confidential
Affidavit
29. “Expenditure Plan”
The expenditure plan set out in the
Indenture
Paragraph 31 of the
Comeback Affidavit
30. “February 2015
Forecast”
The February 2015 forecast
provided to the Noteholder
Paragraph 18 of the
Concurrent Confidential
Affidavit
31. “Future Receipts”
Outstanding anticipated receivables
owed or owing to Laricina that
Laricina will distribute to CPPffi
when they are received
Paragraph 47 of the
Comeback Affidavit
32. “Germain CDP”
Laricina’s commercial
demonstration project at the
Germain Prospect
Paragraph 8 of the
Initial Schmidt Affidavit
LEGAL_CAL:1 1838996.2
-5-
Defined Term/Phrase
Definition
Location of Definition.
33. “Germain Prospect”
The Germain property located in
northeastern Alberta, in townships
83 through $5, Ranges 21 through
23, W4M, approximately 130 km
southwest of Fort McMurray,
Alberta
Paragraph 7 of the
Initial Schmidt Affidavit
34. “GLJ Report”
The report of GLJ Petroleum
Consultants Ltd., Laricina’s
independent qualified reserves
evaluators and reservoir engineers,
as at December 31, 2014 for
Laricina’s Germain (Grand Rapids
Formation), Germain (Winterburn
Formation), Saleski (Grosmont
Formation), Burnt Lakes, Conn
Creek, Poplar Creek and Portage
properties, and as at December 31,
2013 for Laricina’s Thombury,
Thombury West, House River,
Germain (Wabiskaw Formation)
and Boiler Rapids properties
Paragraph 6 of the
Initial Schmidt Affidavit
35. “Humayun Affidavit”
The Affidavit of Syed Mustafa
Humayun sworn on March 25,
2015
Paragraph 79 of the
Comeback Affidavit;
Paragraph 16 of the
Concurrent Confidential
Affidavit
36. “Indenture”
The trust indenture dated March 20,
2014 that governs the Notes
Paragraph 11 of the
Comeback Affidavit
37. “Initial Affidavits”
Collectively, the Initial
Confidential Affidavit and the
Initial Schmidt Affidavit
Paragraph 3 of the
Comeback Affidavit
3$. “Initial Confidential
Affidavit”
The confidential affidavit sworn on
March 24, 2015 by Glen C.
Schmidt
Paragraph 3 of the
Comeback Affidavit
39. “Initial Schmidt
Affidavit”
The affidavit sworn on March 24,
2015 by Glen C. Schmidt
Paragraph 3 of the
Comeback Affidavit
40. “KERP”
The proposed key employee
retention plan for certain of
Laricina’s employees
ParagraphS of the
Comeback Affidavit;
Paragraph 4 of the
Concurrent Comeback
Affidavit
LEGAL_CAL:i 1838996.2
-6-
Defined Term/Phrase
Definition
Location of Defimhon
41. “KERP Charge”
A charge against Laricina’s current
assets up to the maximum amount
of $2,321,062 as security for
payment of amounts owing by
Laricina to the Key Employees
under the KERP
Paragraph 73 of the
Comeback Affidavit
42. “Key Employees”
Certain Laricina employees to
which the KERP will apply
Paragraph 61 of the
Comeback Affidavit
43. “Laricina” or the
“Company”
Laricina Energy Ltd.
Paragraph 1 of the
Comeback Affidavit;
Paragraph 1 of the
Concurrent Confidential
Affidavit
44. “Market Solicitation
Process”
Laricina’s ongoing market
solicitation process
Paragraph 60 of the
Initial Schmidt Affidavit
45. “McDaniel”
McDaniel & Associates
Consultants Ltd.
Paragraph 11(c) of the
Concurrent Confidential
Affidavit
46. “Monitor”
PricewaterhouseCoopers Inc.,
appointed as the Monitor for these
CCAA proceedings under the
Initial Order dated March 30, 2015
Paragraph 7 of the
Comeback Affidavit
47. “Noteholder”
CPPIB Credit Investments Inc.,
which owns all of the Notes
ParagraphS of the
Comeback Affidavit;
Paragraph 4 of the
Concurrent Confidential
Affidavit
4$. “Notes”
The 11.5% Senior Secured Notes
having a four-year term, and
maturing March 20, 201$ with a
principal amount of $150,000,000
Paragraph 11 of the
Comeback Affidavit
49. “OSIJM”
OSUM Oil Sands Corp.
Paragraph 13(b) of the
Comeback Affidavit
50. “Salesld Pilot”
Laricina’s pilot project at the
Saleski Prospect
Paragraph $ of the
Initial Schmidt Affidavit
LEGAL_CAL: 11838996.2
-7-
Defined Term/Phrase
Definition
Location of Deflnipiin
51. “Saleski Prospect”
The Saleski property located in
northeastern Alberta, in the
Townships 84, Ranges 19 through
20, W4M, approximately 100
kilometers southwest of Fort
McMurray, Alberta
Paragraph 7 of the
Initial Schmidt Affidavit
52. “Saleski Shut-In”
The process to shut-in and mothball
the Salesid Pilot
Paragraph 57 of the
Comeback Affidavit
53. “Second Cash
Repayment”
The cash available for repayment to
the Noteholder immediately
following the hearing of Laricina’s
stay extension application on April
22, 2015,
Paragraph 13(g) of the
Comeback Affidavit
54. “Shareholder Group”
A number of Laricina’s significant
shareholders that are organizing as
a group to have their views and
concerns heard during the CCAA
proceeding.
Paragraph $2 of the
Comeback Affidavit
55. “Sproule”
Sproule Associates Ltd.
Paragraph 11(c) of the
Concurrent Confidential
Affidavit
56. “TD”
TD Securities Inc.
Paragraph 4 of the
Concurrent Confidential
Affidavit
57. “TD Letter”
The letter dated March 26, 2015
from TD to CPPffi, attached as the
exhibit to the Benish Affidavit
Paragraph 5 of the
Comeback Affidavit;
Paragraph 4 of the
Concurrent Confidential
Affidavit
.
LEGAL_CAL:1 1838996.2
Tab2
THIS IS EXHIBIT “2”
reftrred to in the Affidavit of
Glen C. Schmidt
Sworn before methis 18 day of April, 2015
NOTAkY PUBLlC/COM1ISSIONER FOR
OATHS IN AND FOR THE PROVINCE
OF ALBERTA
KELSEY C. ARM$Th.ONQ
Barrister & Solicitor
LEGAL CAL:1 1841860.1
Laridna Energy Ltd.
Cash Flaw ForecastApril 1310 Dec31
CADS in 000’s
Receipts:
Operating
Other
Total receipts
Disbursements:
Royalties & Resource Surcharges
Operating Costa
Capital Expenditures
G&A
leek 1
18-Jul-IS
Week II
25-Jul-15
Week
08-Aug-IS
15-Aug-is
184
22-Aug-15
956
ci, 211
29-Aug-15
80
Week 21
05-Sep-15
01-Aug-is
tVeeir 13
930
148
251
331
00
996
956
(1,430)
(212)
(292)
(212)
(554)
(885)
-
(421)
(3,347)
(4,879)
(1,204)
33234
-
(3,924)
(84)
(395)
(650)
(1.204)
-
(210)
(50)
(3.974)
(725)
(1,315)
(6,820)
38,720
45,540
46,855
(6,820)
40.035
(308)
38.412
-
(590)
(1,520)
(90)
(300)
(456)
-
184
(533)
-
930
(1,111)
-
80
(310)
-
-
239
387
(1,063)
-
996
(203)
(1,043)
(98)
(1,140)
-
(600)
-
(320)
(1,316)
(1,300)
(1,620)
-
(1,065)
(89)
(251)
(771)
(1,067)
(173)
(944)
75
41259
(6.820)
34.439
(1,315)
38,720
38-Week CF SUMMARY
30,412
(3,974)
34,439
45,232
(6,820)
(2)
(349)
(72)
(751)
11-Jul-IS
854
waW55WU.i,isea.Wn k 12
06-Jun-15
13-Jun45
20-Jun-15
27-Jun-is
04-Jul-iS
218
W08es_____5VUIWau,
16-May-15
23-May45
30-May-IS
1,123
295
09-May-15
277
854
Week 1
OZ-May-15
522
306
525
Week 2
Z5-Apr-15
Week I
18-Apr-15
Note
80
-
295
990
1,123
137
-
1,775
277
80
-
413
343
522
-
-
366
446
-
-
492
1,482
(496)
-
(591)
137
(708)
(6)
-
-
(21)
(3,669)
1,775
411
(454)
41
121
-
(658)
210
165
375
343
1
2
(37)
(571)
75
(778)
-
(670)
(1,195)
-
(4,402)
-
(3,359)
-
(664)
-
(387)
-
(430)
(6)
(1,173)
(442)
-
(679)
(1,201)
(98)
(769)
48207
(6,820)
41,307
-
(650)
(4,009)
49,827
(6,820)
43.007
40,247
(212)
40.035
47,067
(6,820)
50.771
(6,820)
50,696
(6,820)
(1,140)
40,247
43.951
(944)
43.007
(1,620)
41,387
43.876
75
43.951
-
(823)
(1,209)
-
(679)
56,682
(6,820)
49.862
(1,209)
48,653
(768)
43.876
51.464
(6.820)
44.644
57.361
(6,820)
50.541
(679)
49.062
48,653
(4,009)
44,644
55,473
(6,820)
-
(187)
(6)
(991)
(140)
-
57,922
(6,820)
51,102
(560)
50,541
-
(402)
(684)
(3,019)
-
(909)
-
(463)
(195)
(1.559)
(877)
57.772
-
(792)
(519)
(1,023)
(109)
-
(21)
(108)
(937)
4
5
-
(21)
(522)
(226)
(732)
(467)
(6)
(633)
(732)
(321)
(227)
6
7
tl,704)
(4,569)
(7,452)
Financing tees and interest
Total disbursements
(5,970)
(900)
(44,000)
(45,931)
(917)
(45,556)
(780)
(4,218)
618
(3,807)
(1,157)
(1,863)
(1,495)
(1,520)
(1.364)
Net change in rash from operations
(98)
(560)
(45,556)
(700)
(6,670)
(1,726)
(5.532)
(98)
(077)
(184)
(1,705)
Restructuring Fees
Totainetcbangeinrashflow
112,690
(725)
(107)
8
Opening rash
-
9
67.134
(6,820)
60,314
64,592
(6,820)
(6,820)
105.870
65,469
(6,820)
118,223
(6,820)
10
50,649
111,403
(1,559)
58,756
65,576
(6,026)
119,927
(6,820)
(45,555)
60.314
57,77Z
(6,670)
51,102
(5,532)
105,870
50,756
(107)
58,649
113.107
(1.705)
111,403
lms: Restricted cash
AdJustedopeningrashbaiance
Netchangeincashflow
Closlngrash
18/04/2015,6:43 PM
Larfcina Energy Ltd.
CanhFlowFnrecastAprlll3toDec3l
12 Sep 15
Week ZZ
19 Sep 15
tV,-, k 23
ZN Sep 15
Week 24
03 Oct15
Week 26
CAD$ In ODDs
335
-
827
-
176
424
247
297
335
827
-
-
Operating
297
Recelptsi
Other
Total receIpts
-
(654)
Week 33
05 Dec 15
Week 34
Weelc 29
ZN Nov15
31 Oct15
Week 32
Week 26
21 Nov15
24-Oct 15
Week 31
Week 27
14-Nov 15
17 Oct15
Week 3(1
Week 26
07 Nov15
10 Oct15
-
(610)
-
(87)
(20)
-
181
366
184
-
1Z Dee 15
Week 31
1.264
19 Dec 15
Week 36
164
26 Dec15
Week 37
164
31 Dec-15
Week 38
-
-
t1,129)
-
-
(474)
-
Total
16,686
2,480
19,166
-
(30,746)
(1536)
(16,245)
(55,225)
(103,753)
-
(917)
(1,391)
-
(1,220)
(91)
(152)
-
164
-
-
164
-
(53)
-
(100)
-
1,264
-
-
-
-
(73)
-
(148)
(262)
(155)
-
(235)
(220)
-
(220)
(84,587)
104
-
(1,227)
(3,310)
(4,156)
18.397
1,111
19,508
25,217
(6,820)
-
(1,056)
(3,971)
-
1,111
141
(228)
1.111
141
(12,058)
(96.645)
(138)
(358)
(138)
425
-
(4)
(1,227)
104
25,574
30,063
(6,820)
(763)
(1.819)
(763)
(4,734)
25,470
29,637
(6,820)
119,927
(6,820)
113.107
(6,820)
18,754
29,641
(6,820)
24.509
(6,820)
17,689
(6,820)
18.650
22,821
26.328
(6,820)
19.588
30.204
(6,820)
23.386
(109)
184
184
199
369
369
199
865
865
-
700
262
262
-
-
-
199
-
-
700
-
563
(302)
(119)
199
-
-
-
(97)
-
-
(98)
-
-
(874)
-
(509)
-
(4)
(266)
-
(205)
(882)
(1,081)
-
(168)
(311)
-
(207)
(112)
-
(80)
18
(682)
-
(173)
(231)
-
-
(1,275)
-
-
(1,700)
(2,975)
(1,866)
(2,975)
(1.830)
(763)
(1,644)
(1,486)
(112)
31.285
(6,820)
(96,645)
16,462
(358)
18,397
(1,227)
16.46Z
104
18.754
(1,819)
17,689
(4,734)
18,650
23,243
141
23,384
(4)
22,817
22,817
425
23.243
-
(75)
(07)
31,397
(6,820)
-
31,454
(6,820)
(1,039)
(148)
(1,187)
24,634
(63)
(3.038)
37,735
36.548
(6,820)
29,728
24,465
(1,644)
22,821
(57)
24,577
24,577
(112)
24,465
(650)
(2,056)
-
(337)
-
(1,530)
-
(1,084)
-
-
(96)
(1,180)
fl,158)
(18)
-
-
-
-
(1,155)
-
Dlsburoementul
Raynities & Resource Sarcbarges
Operating ConS
Capital Expenditures
-
(444)
(845)
(1,599)
(1,302)
(845)
G&A
Financing fees and Interest
Total dIsbursements
Netchangelnceshfromoperations
(173)
(1.474)
38,580
(6,820)
30,915
(2,056)
27.672
34,492
(6,820)
(1,187)
29.728
27,672
(3,038)
24,634
(6,820)
31,760
(845)
30.915
=
Restaucturlng Fees
Totalnetchangelnesshflow
33,234
Openlogrash
Less: Resc-lctedcash
Adjustedopenlngceshbalance
(1,474)
31,760
48,054
(6,820)-
Netchangelncashflow
Cloologcash
18/04/2015, 6:43 PM
38-Week CF SUMMARY
Lancina Energy Ltd.
Management of Laricina Energy Ltd. have prepared this forecasted cash flow statement based on probable and hypothetical assumptions detailed in the notes below.
Cash Flow Forecast April13 to Dec31
General Note:
6
5
4
3
2
1
Payments relate to quarterly cash interest payments on the CPPIB note at 13.5% and forecasted principal repayments.
General and Administrative cost forecasts are based on historical payments for salaries & benefits for office staff, rent and other miscellaneous costs.
Capital expenditures consist of planned capital projects for Saleski Pilot and Saleski Phase 1.
Operating cost forecasts are based on historical operating costs which include costs related to salaries and wages, camps, facilities, utilities, and regulatory.
The Company is currently in a royalty receivable position with the Government of Alberta. Royalties are based on prior month’s production which vary based on
actual volumes and prices.
Included in ‘Other’ is GIC investment income, interest earned on high-interest savings accounts (deposited on the 1st day of each month), and net GST recoveries from
prior month’s sales and purchases.
Monthly receipts include prior month’s Salesid production, receipts related to Chip Lake road usage and recoveries of joint venture working interest Management has
estimated future receipts based on forecasted pricing and production volumes. The Company does not have any risk management contracts in place to hedge market
prices.
The forecast has been prepared solely for the Company’s CCAA filing to determine liquidity requirements. Since the projections are based on assumptions regarding
future events, actual results will vary from the information presented, and the variations may be material. Consequently, readers are cautioned that it may not be
appropriate for other purposes.
7
Restructuring costs consist of professional fees incurred due to the CCAA filing.
Note:
8
Opening cash consists of cash in bank less outstanding cheques as at April 13,2015.
Restricted cash represents amounts owing to the CIBC Line of Credit
9
10
18/04/2015, 6:43 PM
38-Week CF NOTES
THIS IS EXHIBIT “3”
referred to in the Affidavit of
Glen C. Schmidt
Sworn before me this 1$ day of April, 2015
IR FOR
OATHS IN AND FOR THE PROVINCE
OF ALBERTA
KELSEY C. ARMSTRONG
Barrister & Solicitor
LEGAL_CALl 1841860.1
Osler, Hoskin & Harcourt CL?
Suite 2500, TransCanada Tower
450— 1” Street S.W.
Calgary, Alberta, Canada ‘12P 5H1
403260.7000 MAIN
403.260.7024 FACSIMILE
Cay
A
1
A. Robert Anderson, Q.C.
‘ni c
1 1
Direct Dial: 403.260-7004
‘
Our matter no. 1151294
Toronto
[email protected]
Montré
New York
VIA E-MAIL
Torys LLP
525 gth Avenue s,w•, 46th floor
Eighth Avenue Place East
Calgary, AB T2P 1G1
Attention: Tony DeMarinis
—
Blake, Cassels & Graydon LLP
—
nd
street s.w.
Suite 3500, Bankers Hall East Tower
Calgary, AB T2P 438
Attention: Kelly Bourassa
Dear Sir/Madame:
Re:
Subscription Agreement dated June 30, 2010 (the “Subscription Agreement”)
between CPP Investment Board (USRE II) Inc. (“CPPIB USRE”) and
Laricina Energy Ltd. (“Laricina
We appreciate that you are counsel for CPP1B Credit Investments Inc. (“CPPJB Credit”)
in connection with the outstanding 11.5% Senior Secured Notes issued by Lancma.
We understand that you also are counsel for CPPffl USRE and its and CPPIB Credit’s
parent, Canada Pension Plan Investment Board. We are writing to you in your capacity as
counsel for all three ofthose clients.
Further to the.Initial Court Order dated March 30, 2015 providing protection to Laricina
under the Companies’ Creditors Arrangement Act (Canada) (the “CCAA”) and further to
Laricina’s and its advisors’ ongoing consultation with CPPffl Credit and its advisors, we
are preparing for the comeback application before the Court on April 22, 2015, at which
time we will be asking the Court for a further Order under the CCAA to approve, among
other things, Laricina’s plan (“Plan”) for repayment of the balance of its indebtedness to
CPPIB Credit.
Pursuant to the terms ofthe Subscription Agreement, CPPtB USRE has a pre-emptive right
entitling it, for so long as it owns greater than 10% of the issued and outstanding common
shares of Lancma on a non-diluted basis, to participate in any issuance of treasury
securities up to CPPIB USRE’s pro rata ownership interest immediately prior to any such
issuance. Laricina’s Plan could involve the issuance of treasury securities and Laricina
would obviously have more flexibility in considering alternatives under its Plan if
CPPffl U$RE were to waive its pre-emptive right. In light of the position taken by your
clients that the equity value of Lancma’s common shares is nil, on behalf of Lancma we
ask you to confirm on behalf of your clients that CPPIB USRE will waive the subject pre
emptive right in connection with any issuance of treasury securities undertaken by Laricina
LEGAL_CAL:t 183914L2
1151294
osler.com
OsIER
Page2
as part of its Plan under the CCAA or otherwise m connection with the repayment of its
indebtedness to CPPIB Credit
Receiving CPPffi USRE’ s waiver before Apnl 22,2015 will assist in planning the Lancina
p.
Yours truly
A. Robert Anderson
RAL:as
cc:
MustafitHumayun, CP?IB
Adam Vigna, CPPIB
John Eamon, Blake, Cassets & Graydon LLP
Glenn Sauntry, BMO Capital Markets
Mark Caiger, BMO Capital Markets
Barry Goldberg, CanaccordGenulry
Glen Schmidt, Laricina Energy LuL
Josef Kruger, Borden Ladner Gervais LLP
Clinton Roberts, PricewaterhouseCoopers LLP
LEGAL_CAL:1 18391482
1151294
THIS IS EXHIBIT “4”
reftrred to in the Affidavit of
Glen C. Schmidt
Sworn
me this 18 day of April, 2015
NOTARY
FOR
OATHS IN AND
TRE PROVINCE
OF ALBERTA
KEL3y c. ARMsTRoiç
Barrister & Soljcftor
LEGAL_CAL: I 1841860.1
Principles for Calculation of Second Cash Repayment
1. To determine the amount of additional cash Laricina could distribute to the Noteholder,
the following principles were established:
Saleski Shut-In
The shut-in of the Saleski Pilot Project must be funded. However, there are a number
of considerations in relation to that process:
ii.
•
Laricina expects to shut-in the Saleski Pilot in September 2015,
•
Laricina and its co-owner (OSUM) in the Saleski Pilot have not yet formally
agreed on the shut-in date;
•
Until Saleski is shut-in, there is valuable data being collected in relation to the
performance of the Saleski wells;
•
There are specific steps to be taken to preserve the equipment and comply
with environmental, health, safety and regulatory obligations;
•
The operating costs and overhead of the business (excluding any KERP,
Critical Supplier payments, interest or cost reimbursement to the Noteholder
and Laricina process costs) is approximately $26 million until December 31,
2015 (assumed end date of the CCAA process for the purposes of this
analysis);
•
In this forecast, following the shut-in of Saleski and associated staffing
reductions, by September 2015, the operating costs and overhead will have
been reduced to approximately $700,000 per month; and
•
Larcina’s management believes that these costs would be incurred by a
prudent owner whether or not Laricina was in a CCAA process.
Critical Suppliers
In order to execute on the foregoing, critical suppliers may need to be paid. $2.0
million has been reserved for this purpose.
iii.
KERP
A KERP is required to retain the staff critical to operate Saleski and conduct the
shut-in in a share and appropriate matter and to execute the Capital Repayment
Process and restructuring.
iv.
LEGAL_CAL;1 1841914.1
Certain Future Receipts Can Be Distributed When Received
1
v.
vi.
LEGAL_CAL:11841914.I
•
Amounts that Laricina believes are due from the Government of Alberta,
OSUM and pursuant to an insurance claim can be distributed when
received.
a
These potential future receipts total $14.1 million though some of the
amount is disputed by a counterparty so the amount to be received and
timing is not known with certainty.
•
Furthermore, Laricina is seeking a reduction of its credit facility with CIBC
with the goal of having CIBC release $5 million of cash collateral which
can also be distributed.
The Noteholder has claims for interest and reasonable expenses pursuant to existing
agreements with Laricina that must be reserved for if they are to be paid
•
The Noteholder has advised Laricina that $650,000 per month in
expenses should be reserved.
a
Laricina proposes, during the pendency of this process to pay up to
$7.1 million of the Noteholder expenses with any excess deferred
until final resolution of the Noteholder claim and Laricina’s
Counterclaim.
•
This cap is set purely for cash management purposes (since Laricina
has no means to manage amount incurred or claimed) and would be
without prejudice to either party’s rights under the existing
agreements and without prejudice to Laricina’s Counterclaim.
a
Furthermore, if the Noteholder is of the view that $7.1 million is
insufficient, Laricina may not object to reserving a larger number
from the Second Cash Repayment for such purposes provided the
Noteholder establishes that the amount is reasonable.
a
Laricina has also reserved $12.4 million for the payment of interest
to the Noteholder through to December 31, 2015 including interest
that has accrued since February 28, 2015.
A liquidity reserve is required
a
Laricina’s projected cash flows to December 31, 2015 consist of
$19.2 million of receipts and $115.8 million of projected
disbursements (including interest, proposed debt repayment and
both the Noteholder’s and Company’s restructuring costs).
•
A not insignificant portion of the Company’s cash flows come from
parties with whom there are some disputes on amounts owning.
2
vii.
viii.
LEGAL_CAL:11841914.1
•
The nature of Laricina’s disbursements are such that there is a
greater risk of expenses being higher than projected (due to
equipment failures, delays or other unanticipated costs).
•
Laricina has reserved $7 million as a liquidity reserve.
The Company needs sufficient time to run a process to repay the Noteholder in full in
cash.
•
Following the Binding Bid Deadline, the winning bidder(s) will be
selected, followed by confirmatory due diligence and negotiation of
final agreements, approvals, and closing.
•
If the Binding Bid Deadline is mid-September, 2015, the Company
estimates that there should be sufficient time to close the successful
transaction(s), repay any balance owing to the Noteholder and
conclude any claims process and plan of arrangement for other
claims by December 31, 2015.
See attached schedule.
3
In
$ millions
Cash on hand as of March 31, 2015
Less:
payment made to Noteholder
Less: amount pledged to CIBC for letter of credit line
Unrestricted cash
Less: amounts required to fund Laricina during CCAA process:
Funds’ required to 31-Dec-15 assuming Saleski shut down on 30-Sep-15
Critical supplier reserve
KERP
Noteholder payments
Interest to 31-Dec-15
Process costs to 31-Dec-15 including amount incurred pre-filing
Laricina restructuring costs
Liquidity reserve
Proposed repayment to Noteholder
$140.1
(20.0)
(15.0)
$105.1
(25.2)
(2.0)
(2.3)
(12.4)
(7.1)
(5.0)
(7.0)
44.2
Residual Noteholder principal2
98.2
Future distributions to Noteholder
UDSR
OSUM
Insurance Claim
Reduced pledge on line of credit
Residual Noteholder principal after future distributions
(7.9)
(3.6)
(2.6)
(5.0)
79.1
‘Net operating loss, G&A and capex, excluding critical supplier reserve, KERP and Noteholder payments.
Excludes disputed amount of $9.7 million for acceleration and prepayment penalty of Noteholder debt.
2
LEGAL_CAL:1 1841915.1
I 151294
Tab5
THIS IS EXHIBIT “5”
reftrred to in the Affidavit of
Glen C. Schmidt
Sworn before me this 18 day of April, 2015
NOT.
MMISSIONER FOR
OATHS IN AND F(iR THE PROVINCE
OF ALBERTA
KELSEY C. ARMSTRONG
Barrister & Solicitor
LEGAL_CALl 1841860.1
April 18, 2015
BMO Capital Markets Advice on Capital
Repayment Process
Introduction
1. In conjunction with Laricina Energy Ltd’s (“Laricina”) proceedings under the Companies’
Creditors ArrangementAct, BMO Nesbitt Burns Inc. f”BMO Capital Markets”) provide its views
and advice on a process to generate executable transaction alternatives that will raise sufficient
capital to repay Canada Pension Plan Investment Board (“CPPIB”) all amounts due to them as
determined in the Claims Process (the “CPPIB Amount”) in cash (the “Capital Repayment
Process”).
2. This report will review:
i.
The initial market solicitation process and the factors that disrupted that process;
ii.
The proposed form, structure and timing of the Capital Repayment Process;
iii.
An assessment of how the length of the Capital Repayment Process compares to other
processes;
iv.
An assessment, from a financial point of view, of the impact of the process on Laricina’s
estate.
Credentials of BMO Capital Markets
3.
BMO Capital Markets is one of North America’s largest investment banking firms, with
operations in all facets of corporate and government finance, mergers and acquisitions,
restructurings, equity and fixed income sales and trading, investment research and investment
management. BMO Capital Markets has been a financial advisor in a significant number of
transactions throughout North America involving public and private companies in various
industry sectors and has extensive experience in preparing fairness opinions.
4.
BMO Capital Markets is one of Canada’s leading mergers and acquisitions advisory firms having
advised on 254 transactions announced since 2010 involving Canadian targets or sellers with a
combined value of $155 billion.
5.
BMO Capital Markets has a global investment banking operation specialized in the oil and gas
sector with over 120 energy investment banking professionals located in key markets such as
Calgary, Houston, London, and Beijing. BMO Capital Markets is a top oil & gas sector advisor in
Canada and has broad experience across asset types and stage of development. Over the past 5
years, BMO Capital Market has advised on 42 completed mergers and acquisitions transactions
in the oil & gas sector in Canada representing approximately $45 billion of transaction value.
BMO Capital Markets has advised on some of Canada’s most prominent oil sands related
1
April 18, 2015
transactions, including CNOOC’s $18 billion acquisition of Nexen and US$2 billion acquisition of
OPTI, the creation of British Petroleum’s $5 billion oil sands joint venture with Husky Energy,
and the $700 million Initial Public Offering of MEG Energy.
Independence
6.
BMO Capital Markets is independent from Laricina.
7.
Laricina and BMO Capital Markets have entered into a number of agreements whereby BMO
Capital Markets has agreed to provide various advisory and capital raising services. The scope of
services includes capital raising assistance, advisory services relating to the corporate sale of
Laricina or the sale of some or all of its assets, and advisory services relating to the design and
implementation of a recapitalization transaction. A monthly work fee is payable to BMO Capital
Markets; additional contingent fees are payable upon the successful closing of certain
transactions or upon the delivery of a Fairness Opinion, if requested.
Executive Summary
8. The Initial Process commenced on November 2014 and was focused on the near-term
development potential of Saleski and Germain. At the time, our view was that the
characteristics of these assets could reasonably support an investor undertaking near-term
capital spending projects, which would involve years of significant negative cash flows prior to
harvesting years of positive cash flows.
9.
During both the preparation phase for the Initial Process and during the marketing outreach, the
WTI oil price fell and was volatile. As a result, the company had to completely revise its strategy
and operating profile, and the decision was made to idle and properly mothball the Germain and
Saleski operations to preserve the value and capabilities of the facilities and to reduce costs to a
minimum to conserve cash. The prospect of completing a transaction decreased as the oil price
volatility increased.
10 Periods of high oil price volatility are typically associated with low M&A transaction volumes in
the oil &gas sector. In a period of heightened volatility, one of the key considerations for
investors with respect to growth opportunities is the ongoing cost to preserve a future capital
spending opportunity.
U. The purpose of the Capital Repayment Process is to generate sufficient cash to repay CPPIB
what it is owed in full. The process will be conducted to permit a broad range of transaction
alternatives, considered by a broad range of potential investors. The process needs to be flexible
enough and of sufficient duration to allow for parallel initiatives to conclude at the same time
12 In order to effectively market the company and/or its assets, Laricina needs to significantly re
position its marketing and due diligence materials to reflect its new operating profile and the
expected form of counterparty interest. In this regard, additional forecasting, analysis, and
documentation are required
2
April 18, 2015
13. We expect that the Capital Repayment Process would be completed over a 16-week timeframe,
following 4 weeks of preparation. If the Order were issued on April 22, 2014, binding bids would
be due September 9, 2015. The selection of the winning bid(s) would be followed by
confirmatory due diligence, negotiation of final agreements, approvals, and closing.
14. The timelines observed in precedent public oil & gas investor solicitation processes are not
inconsistent with the proposed Capital Repayment Marketing Process.
15. Assuming the Saleski shut-in process would have continued if Laricina were not in CCAA then it
appears the potential financial impact on the estate of Laricina (in terms of extraordinary
consumption of cash resources) is expected to be modest
The Initial Market Solicitation Process and Factors That Disrupted That
Process
16. The Initial Market Solicitation Process commenced in November 2014 and contemplated an
acquisition of or investment in the Company or an acquisition or partial acquisition of one or
both of the Germain or Saleski assets.
Initial Market Solicitation Process Acquire Laricrna for the Opportunity to
Undertake Large-Scale “Ready-To-Go” DevelopmentProjects
17. The Saleski Pilot Project and the Germain Commercial Demonstration Project were both
operating and the Market Solicitation Process was designed to market the opportunity to major
projects that were well advanced through pre-development and engineering work:
Saleski
—
The Saleski Pilot’s operating capacity was 1,800 barrels per day of production
(“bbl/d”) on a gross basis (the sum of production attributable to Laricina and its
co-owners’ interest combined) and the December 2014 target production was
600 bbl/d (gross);
• Engineering work for the Phase 1 development was expected to be 90%
complete by now. This $315 million development project was intended to
produce 10,700 gross bbl/d (i.e. 3.9 million barrels of oil per year) with the first
oil production expected in the third quarter of 2017.
Germain
• The Germain Commercial Demonstration Project’s operating capacity was 3,500
bbl/d and the December 2014 target production was 1,000 bbl/d;
• Regulatory approval for a $1 2 billion, 150,000 bbl/d (i e 54 8 million barrels of
oil per year) project was expected in the first quarter of 2015 with the project
expected to be designed and constructed through to 2019.
3
April 18, 2015
18. In our view at the time, the features that would make the Laricina investment opportunity
attractive were:
i.
It is no longer feasible, in any material way, to explore for oil sands reserves and
resources in Alberta through the purchase of leases from the Crown and subsequently
engage in exploration activities because substantially all highly prospective acreage has
already been leased under long terms. As a result, any strategy to materially increase oil
sands development inventory necessarily entails purchasing leases, and associated
reserves and resources, from a third party that owns leases, such as Laricina.
ii.
The reservoir characteristics at each of Saleski and Germain had been demonstrated
through the Saleski Pilot Project and Germain Commercial Demonstration Project,
respectively, allowing for more confident near-term capital spending on the initial
commercial projects at each asset;
iii.
The reservoir quality of each of Saleski and Germain, as represented by the “steam to oil
ratio” (a measure of the amount of steam that would need to be injected to produce a
barrel of oil), was estimated by GU Petroleum Consultants to be at a level we
considered to be competitive with other oil sands growth projects;
iv.
The large size of the company’s asset base was concentrated within a relatively small
above-ground area, permitting a scaled, multi-phase development approach that had
the potential to reduce per-unit development costs; and
v.
Certain other companies owned similar assets in the area and had the potential ability
to extract synergies by combining the Saleski and/or Germain developments with their
own local area project developments.
19. With this investment thesis, an investor would be undertaking a project that would require
significant capital investment and have negative cash flows for a number of years. In the pre
development phase, Laricina was spending, including interest, approximately $8 million per
month.
20. Because these large capital projects require significant up-front capital expenditures and nearterm negative cash flows during the “ramp-up” phase, which are supported by many years of oil
revenue, the oil price outlook is fundamental for investors to assess value.
Oil Price Conditions Deteriorate Rapidly Disrupting the Initial Market
Solicitation Process
-
21. During the summer of 2014, the West Texas Intermediate benchmark oil price (“WTI”) had
gradually drifted downward from US$100 per barrel in the March to June timeframe to
approximately US$75 per barrel by November.
22. Laricina’s advisors sent information memorandum and confidentiality agreements out in mid
November 2014.
4
April 18, 2015
23. Within 30 days of the commencement of the Initial Market Solicitation Process, the WTI price
declined by 27% to US$54 per barrel.
24. By February 23, 2015, Laricina’s advisors were communicating a March 10, 2015 due date for
initial requests for proposals while WTI was at US$49 per barrel. Other than for a period during
the financial crisis when oil prices dipped and rebounded, this price level had not been seen in
morethanlOyears.
25. Within approximately 60 days of the commencement of the Initial Market Solicitation Process:
i.
The timing of all of the material operational and investment initiatives upon which the
M&A process was designed were obviously going to be delayed until there would be
more clarity on commodity prices;
ii.
The Company had to completely revise its strategy and operating profile. We
understand that in consultation with CPPIB, the decision was made to idle and properly
mothball the Germain and Saleski operations to preserve the value and capabilities of
the facilities and reduce operating costs to a minimum to conserve cash;
iii.
As of February 20, 2015, a plan has been put into place which reduced what would have
been in the current commodity price environment a cash consumption rate of $92
million per year to less than $4 million per year (before payment of CPPIB interest) and
87%1 of the original work force will be laid off by the end of 2015 (of which ..50%2 has
already occurred as of March 19, 2015); and
iv.
The prospects of completing a transaction decreased as oil price volatility increased.
Oil Price Volatility Interferes with Upstream Oil & Gas M&A Activity
26. Periods of high oil price volatility are associated with periods of low liquidity in the oil and gas
merger and acquisition (“M&A”) market.
27. In these periods of high volatility, potential investors:
i.
Become more internally focused;
ii.
Become more reluctant to commit resources (money and people) to growth
opportunities because of uncertainty around the commodity price environment;
iii.
Cite balance sheet concerns and lack of clarity over the future price of oil as impacting
their thinking with respect to the opportunity; and
1Source: Laricina management
Source: Laricina management
2
5
April 18, 2015
iv.
Were essentially forced, In the case of Laricina, to assess the investment opportunity as
a moving target due to the high volatility in the oil price.
28. The cause of the current oil price shock relates to the combination of strong non-OPEC supply
growth and the determination by OPEC to defend its market share by refusing to cut supply to
rebalance the market.
29. As can be seen in upper chart below, the volatility in the WTI oil price (as measured on a tolling
30-day basis) goes through temporary periods of high volatility that often occur in connection
with discrete market events (e.g. Gulf War, Iraq War, 2008-2009 Financial Crisis and the current
OPEC defense of market share).3
30. The lower chart shows the corresponding dips in M&A activity as reported by IHS Herold for
announced Canadian upstream transactions including both asset and corporate deals.4
Normal Range of Voletll#y
——
Median Vutatility
120
100
3
80
60
.
a.
40
20
90
80
70
60
50
40
30
20
10
z
0
Normal Range of Transactions (Since 1995)
— — —
Median Number of Transactions
(Since 1995)
—
Numbet of Transactions per Quarter
31. Though spot oil prices remain at depressed levels, the volatility has subsided to an average of
52% since March 1, 2015 compared to 65% in February 2015g. Market participants (industry and
investors) have had time to digest the implications of the rapid change in oil prices.
32. It is our view that prospective investors who were seeking to capitalize on lower valuations as
the oil price outlook softened over the summer of 2014 and who recoiled during the extreme
volatility in the winter are now better-positioned to re-examine opportunities.
Source: Bloomberg for 30-day volatility based on WTI spot prices. WTI real price is calculated as the spot price
multiplied by the cumulative annual U.S. CPI to date. Normal range is defined as one standard deviation away from
the mean for the data set.
IHS Herold for announced Canadian upstream transactions including both asset and corporate deals.
Normal range is defined as one standard deviation away from the mean for the data set.
Source: Bloomberg for 30-day volatility based on WTI spot prices.
6
April 18, 2015
33 There is more consensus around where oil prices will be in the near term. Industry participants
are reducing costs and adjusting their capital spending plans and market valuations have
adjusted Industry costs have also been adjusted downward in a material way.
34. In this lower oil price environment where there remains significant uncertainty as to how long
current oil price conditions may persist, one of the key considerations for investors looking at
opportunities will be whether the investment consumes significant cash to hold (i.e. “cost-tocarry”) until market conditions recover.
The form and Structure of the Capital Repayment Process
35 The purpose of the Capital Repayment Process (the “Process Purpose”) is to generate
executable transaction alternatives that will raise sufficient capital to repay CPPIB the CPPIB
Amount in cash.
36. Parties who wish to have their proposals considered shall be expected to participate in this
process as conducted by Laricina and its advisors.
37. Laricina remains a company with:
A substantial land position with significant reserves and resources
•. In addition to Saleski and Germain, Laricina owns:
o
A 100 percent working interest in 53,771 net hectares of oil sands leases
referred to as Boiler Rapids, Burnt Lakes, Conn Creek, House River, Germain
Winterburn and Wabiskaw, Poplar Creek, Portage, Thornbury and
Thornbury West;5
Rt,imn VnInm,
Saleski (Gmsmont)
Germain (Grand Rapids)
Subotai
Growth Properties
Boiler Rapids (McMurmy & Wabiskaw)
Burnt Lakes (Grosmont)
Conn Creek (McMurray)
House Rivet (McMu,ray)
Germain (Wintethum & Wabiskaw)
Poplar Creek (McMu,ray)
Portage (Grand Rapids)
Thombury (McMurray)
Thombury West (McMurray)
Subtotal
Total
Working
Interest
(%)
60%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Land
Total Net Area
(hectares)
10,291
15,616
25,907
5,120
16,619
8,192
12,800
2,046
1,824
2,304
1,792
3,072
53,771
79,678
Reserves
2P
(mmbbl)
100
389
489
—
—
—
—
—
—
62
—
195
93
—
—
—
—
—
—
—
—
489
Pfnr,, Thy in°L MDV
Best Eat. Cont Resource
Economic Sub-Economic
(mmbbl)
(mmbbi)
1,491
933
2,424
-.
58
37
58
504
2,928
—
450
Reserves
2P
($mm)
$69
$226
$295
—
—
Cont. Resource
Best Eat.
($mm)
$2,917
$2,610
$5,527
-
—
—
$427
—
—
—
—
—
—
—
433
91
—
—
—
—
—
—
—
974
974
—
$295
—
$36
—
—
$463
$5,990
-
-
Note: Columns may not add due to rounding
6
Reserves and resources figures represent Laricina working interest before royalties as per the GU Report for
Germain Grand Rapids, Saleski Grosmont, Germain Winterburn, Burnt Lakes, Conn Creek, Poplar Creek, Portage
effective December 31, 2014, all other Laricina assets effective December 31, 2013; and all amounts are in
Canadian dollars
7
April 12, 2015
o
A 40 percent ownership interest and operatorship of a 76 km road which
generates annual gross margin of $1.0 to 1.5 million, that Laricina purchased
in December 2015 for $15 million and invested an incremental $23.5 million
to upgrade the road and bridges; and
ii.
Substantial data from the pilot/commercial development projects which reduces
execution risk
• Has value to analogous reservoirs owned by competing companies
iii.
Significant regulatory and engineering milestones already achieved; and
iv
Significant tax attributes (estimated at $1 3 billion as of December 31, 2014)
38. However, the Company’s main operations are no longer comprised of two projects in a
development stage with near term milestones and significant capital needs, but instead a wellpositioned, low cost-to-carry development opportunity with an operating profile restructured
for the current oil price environment:
i.
Assets will be idle and properly mothballed to maintain their capabilities;
ii.
Headcount will be reduced to a minimum; and
iii.
Operations projected to consume less than $4 million per year on average, excluding
Laricina’s general and administrative expenses which are assumed not to be borne by a
potential purchaser.
39. The process will be conducted to permit a broad range of transaction alternatives to be
considered by a broad range of potential investors.
40. Transaction types that will be considered as part of a new marketing process, with all
transaction types being evaluated in parallel, include the following:
a.
Sale of one or both of Saleski and Germain in a mothballed state (with the Capital
Repayment Process timeline Laricina expects the Saleski shutdown to have been
completed prior to closing);
b. Sale of other oil sands assets outside of Saleski or Germain;
c.
Sale of the Chip Lake Road interest;
d. Sale of above-ground infrastructure (some or al[of Germain facilities, Saleski facilities,
etc.); and
e.
‘New money’ investment (equity, debt, etc.) in Laricina
41. In the process, optimization of the company’s tax attributes will also be an important
consideration
8
April 18, 2015
42. One of the critical process design considerations is that in order to:
i.
allow the Board to fulfill their duties and responsibilities;
ii.
permit other stakeholders to understand the trade-offs between different transaction
alternatives; and
iii.
meet an objective of running the initiatives in parallel so that they are executable under
one process
The Capital Repayment Process will need to be flexible enough and of sufficient duration to
enable Laricina and its advisors to have the parallel initiatives concluded at a common point in
time. At this point the important choices can be made to select the best alternative to achieve
the Process Purpose in a manner that is in the best interest of the corporation.
Steps to Prepare to Market Laricina on a Shut-In Basis
43. In order to effectively market the company and/or its assets, Laricina needs to significantly re
position its marketing materials and due diligence materials to reflects its new operating profile
and the expected form of interest that would be forthcoming from counterparties in the context
of the current market environment.
44. In addition to a revised description of Saleski and Germain, all of the company’s other material
assets and transaction considerations related thereto need to be adequately analyzed and
described.
45. In the Capital Repayment Process, we expect that counterparties will focus their evaluation
efforts on the following areas, as applicable:
i.
Identifying those asset types and specific assets that are of particular interest;
ii.
Confirming that operations have been safely shut-down and that the development
potential of the assets has been adequately preserved with regard to financial,
engineering, health and safety, environmental, and regulatory considerations;
iii.
Confirming the existence and size of any contingent liabilities arising from the shut
down process or prior operations;
iv.
Confirming the existence and size of any contingent assets including Laricina’s legal
claims (CNRL, Osum, etc.);
v.
Confirming that the carrying costs to preserve the opportunity are low, quantifying
them and evaluating risk in the estimates;
vi.
Confirming status and value of the regulatory milestones achieved by the company over
the past decade;
9
April 18, 2015
vii.
Assessing the size and quality of the company’s tax pools and reviewing tax
considerations;
viii.
Confirming the cash flow generation forecasts for the company’s Chip Lake Road;
ix.
Determining the salvage value or “avoided cost” value of the company’s above ground
infrastructure and procedures, costs and risks associated with a future re-start; and
x.
Determining the form of desired investment: e.g. asset purchase, corporate purchase,
equity investment, debt investment, etc.
46. New critical investor/purchaser considerations must be addressed through additional
forecasting, analysis and documentation.
Critical Investor
Considerations
Required Laricina preparation
•
Laricina is preparing an updated forecast to reflect
idling and cash conservation initiatives
•
The Company is documenting procedures taken (or in
the case of Saleski, to be taken) to idle the operations
and the care and maintenance strategy
•
This will enable investors to review them from a
financial, engineering, health and safety,
environmental and regulatory perspective, and satisfy
themselves that the value and potential of the assets
is being preserved
‘
Laricina will populate the data room with additional
information on actions taken in connection with the
idling to permit buyers to confirm:
o
Residual liabilities from staff severed or contracts
terminated have been addressed
o
Any other legal, financial and regulatory
considerations going forward
10
April 18, 2015
•
More detailed analyses of the optimal tax strategy will
need to be prepared in the current environment, the
substantial tax attributes represent a greater
proportion of the overall transaction value
—
47. Given the amount of work and considering the other process and operational demands on the
remaining Laricina staff, we expect this preparation process to take approximately 4 weeks.
16-Week Capital Repayment Marketing Process
48. The following description outlines how we currently expect the marketing component of the
Capital Repayment Process would be conducted. Within the overall timeframe provided for this
process, changes may be required to accommodate reasonable needs of counterparties.
49. Once preparations have been completed, Laricina and its advisors would launch the marketing
process that has been designed to be executed from initial contact to final binding offers in a 16week timeframe.
50. The first step in the process involves the delivery of marketing materials and form of
confidentiality agreement to each target counterparty. We will identify counterparties for each
of the transaction alternatives and seek to directly review with them the alternatives, the
investment highlights, the information they need about the process and the data with which
they will be provided and test initial interest. Negotiation of non-disclosure agreement terms
will occur in this time period. We have allowed three weeks for this process to occur.
51. After successful negotiation, interested counterparties would execute confidentiality
agreements, which would allow for access to comprehensive due diligence materials contained
in the virtual data room, and submit non-binding proposals. We expect to provide
counterparties with four weeks to review the various transaction alternatives, identify one or
more alternatives that may be of interest to them and develop a preliminary view of value for
each of the alternatives they wish to consider. Parties will be permitted to submit non-binding
expressions of interest for any or all alternatives identified by Laricina and any others they
identify on their own. It is our experience that even if complete information is made available to
counterparties at this stage of the process, they will not devote significant effort and resources
to detailed due diligence until they have a better understanding of both their own level of
interest and whether what they are prepared to pay is sufficient to get them “short-listed”
thereby giving them more confidence that the initiative is worth their time.
52. Once non-binding expressions of interest have been received, Laricina and the advisors will
review the proposals, request clarifications where appropriate and the advisors will recommend
which proposals will be short-listed for the second phase. Any stakeholder consultation (as
appropriate) will also occur during the one week period expected to be required for this part of
the process.
11
April 18, 2015
53. We expect to provide short-listed parties with approximately 8 weeks to conduct and complete
their due diligence (including any due diligence required for financing sources), mark-up
transaction documents that will have been provided to them by Laricina’s counsel and submit a
binding offer by the binding bid deadline (the “Binding Bid Deadline”).
54 The Binding Bid Deadline would be no later than September 15, 2015 This date would not be
changed without prior consent of both the Monitor and CPPIB or, alternatively, by further order
of the Court.
55. After receipt of binding proposals, the winner bidder(s) will be selected, followed by
confirmatory due diligence and negotiation of final agreements, approvals, and closing.
Assessment of the Length of the Capital Repayment Marketing Process in
Comparison to Other Public Oil & Gas Processes
56. BMO Capital Markets is of the view that the 16-Week Capital Repayment Process is the
recommended process to follow to achieve the Process Purpose.
57. We have been asked to include data from other relevant processes to assist the Court in
considering the reasonableness of the time allotted for the Capital Repayment Process.
Public Investor Solicitation Processes Marketed by TD Securities are of
Comparable Length
58. We reviewed sale processes for oil and gas companies where TD Securities served as the
financial advisor to the company engaged in a sale process for select assets, a strategic review
processor a joint venture partner solicitation process. The list below includes processes
launched since 2011 based on information that is publicly available The eleven (11) processes
below have communicated either the bid deadline or the date of the transaction closing in their
respective public disclosure or marketing materials.
59. We also reviewed sale processes for oil and gas companies where other investment dealers
served as financial advisor to the company engaged in a sale process for select assets, a strategic
review process or a joint venture partner solicitation process. The list below includes processes
launched since 2014 based on information that is publicly available. Each of the seven (7)
processes below resulted in a completed transaction pursuant to the sale process.
60. We compare these processes to the proposed 16-week Capital Repayment Process on two
metrics:
I.
Measure the time from the estimated date of outreach to investors (“Process
Commencement”) until the initial non-binding bid deadline (which is often publicly
known); and
12
April 18, 2015
ii.
Measure the time from the estimated date of outreach to investors until the transaction
closing date (because the non-binding bid deadline is not frequently known publicly).
For comparable assets and process complexity, we would therefore expect the observed
time period for other transactions to be longer than the Capital Repayment Process
which is 16-Weeks to the outside date for the Binding Bid Deadline)
Public Oil & Gas Investor Solicitation Processes Marketed by TD Securities since 2011
From Process Commencement
Process Dates
Event
Seller
OPTI Canada
Shell
SllverBlrch
Oilsands Quest
Bonavista
Pengràwth
Enerplus
PetroBakken
Whitecap
Talisman
I it
Initiation of strategic review process
Sought Joint venture partner
Initiation of strategic review process
Initiation of solicitation process
Sale process for assets located in BC, AB, SK
Sale process for heavy oil assets
Sale process for non-core assets In 5K and AB
Sale process for light oil assets In SE SK and MB
Sale process for assets In SK
Sale process for Central Foothills asset
ess for oil assets in SK and MB
Process
Commencement
Bid Deadline
(date)
(date)
31-Mat-Il
30-Jun-il
30-Jun-il
I 1-Jan-i 2
03-Jan-13
22-Feb-13
25-Mar-13
31-Mar-13
17-Sep-13
24-Apr-14
n.a.
30-Sep-il
na.
08-Mar-I 2
13-Feb-13
12-Apr-13
01-May-13
01-May-13
31-Oct-13
28-May-14
23-Jul-14
Transaction
Closing
(date)
28-Nov-il
na.
04-Apr-12
12-Oct-12
01-Apr-13
na.
01-Aug-13
na.
Bid Deadline
Trsns:ctlon
(days)
(days)
na.
242
na.
279
275
88
n.a.
129
n.a.
n.a.
68
92
n.a,
57
41
49
37
31
44
Note
1
2
3
4
5
6
7
8
9
10
111
See “Appendix A” for notes.
Public Oil & Gas Investor Solicitation Processes Marketed by Other Investment Dealers since 2014
Process Dates
From Process Commencement
Seller
Beccalieu
Apache
Exoro
Arriva
T. Bird
Suncor
EOG
Event
Initiation of strategic review process
Sale process for assets in Noel, Wapiti and Ojay
Initiation of strategic review process
initiation of strategic review process
Initiation of strategic review process
Sale process for Cardium assets
Sale process for Canadian assets
Average
Minimum! Maximum
Capltai Repayment Process
Process
Commencement
(date)
19-Feb-14
03-Mar-14
24-Apr-14
13-May-14
15-May-14
25-Jun-14
22-Sfp-14
Bid Deadline
Transaction
Closing
Bid Deadline
(date)
(date)
(days)
na.
15-Apr-14
10-Jun-14
15-Jun-14
18-Jun-14
19-Aug-14
22-Oct-14
-
23-Jul-14
30-Apr-14
20-Nov-14
09-Sep-14
13-Aug-14
30-Sep-14
28-Nov-14
Transaction
Closing
(days)
na.
43
47
33
34
55
30
154
58
210
119
90
97
67
4U
14
30155
581210
112
49
See “Appendix A” for notes.
61. The timelines observed in precedent public oil & gas investor solicitation processes are not
inconsistent with the proposed Capital Repayment Marketing Process.
Assessment of the financial Impact of the Process on Laricina’s Estate
62. As at March 31, 2014, Laricina had $140.1 million of cash. If the Company obtains a $5 million
reduction in the CIBC credit facility and a release of $5 million of cash collateral then $10 million
will remain as collateral for CIBC to secure the facility including existing letters of credit.
13
Note
12
13
14
15
16
17
lB
April 18, 2015
63. Of the remaining $130.1 million, we understand that depending upon the preferences of CPPIB,
up to $88.7 million (68%) of that amount could be made available as a partial repayment of
principal (of which $20 million has already been paid) assuming CPPIB elects to have Laricina
defer payment of interest and its costs to the end of the Capital Repayment Process We
understand that a further $14 million could potentially be collected during the process raising
the repayment to CPPIB to as much as $102.8 million prior to considering any proceeds from the
Capital Repayment Process We understand that the principal amount due to CPPIB prior to the
commencement of the process was $162.4 million.
64. Of the remaining $41.4 million, we understand approximately $29.5 million will fund ordinary
course operating expenditures until December 31, 2015 (including a KERP which would likely
have been a higher retention/severance program if Laricina were not in CCAA and only includes
partial payments to certain vendors who would otherwise have been paid in full) We
understand that these operating cash flow amounts until December 31, 2015 are not materially
sensitive to who owns the asset or the type of process Laricina is in during this timeframe (after
Saleski is shut in, operating costs are projected to fall to approximately $700,000 per month.
65. The remaining approximately $12 million (approximately 8.5% of the original total) consists of
$5 million allotted for process costs and $7 million for contingencies.
66. Based on the foregoing and assuming the shut-in process would have continued if Laricina were
not in CCAA then it appears the potential financial impact on the estate (in terms of
extraordinary consumption of cash resources) is expected to be modest
14
April 18, 2015
Appendix A
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
1$.
OPTI Canada Date Sources: Process Commencement (Source: Affidavit of Joseph Bradford sworn on July
12, 2011, page 14, item 78), Transaction Closing (Source: OPTI Canada press release dated November 28,
2011).
Shell Date Sources: Process Commencement (Source: ID marketing brochure, page 1), Bid Deadline
(Source: TD marketing brochure, page 2).
SilverBirch Date Sources: Process Commencement (Source: Management Information Circular dated
February 28, 2012, page 26, paragraphs 4 & 6), Transaction Closing (Source: SilverBirch press release
dated April 4, 2012).
Ollsands Quest Date Sources: Process Commencement (Source: Court order dated January 11, 2012, page
1), Bid Deadline (Source: Court order dated January 11, 2012, Schedule “A”, page 2), Transaction Closing
(Source: Cenovus press release dated October 2, 2012).
Bonavista Date Sources: Process Commencement (Source: PLS Inc.), Bid Deadline (Source: TD marketing
brochure, page 16), Transaction Closing (Source: TD Securities “Recent Transactions” web page).
Pengrowth Date Sources: Process Commencement (Source: PLS Inc.), Bid Deadline (Source: TD marketing
brochure, page 1).
Enerplus Date Sources: Process Commencement (Source: PLS Inc.), Bid Deadline (Source: “Current
Mandates” on TD website), Transaction Closing (Source: TD Securities “Recent Transactions” web page).
PetroBakken (Lightstream) Date Sources: Process Commencement (Source: TD marketing brochure, page
1), Bid Deadline (Source: TD marketing brochure, page 9).
Whitecap Date Sources: Process Commencement (Source: PLS Inc.), Bid Deadline (Source: TD marketing
brochure, page 2).
Talisman Date Sources: Process Commencement (Source: PLS Inc.), Bid Deadline (Source: TD marketing
brochure, page 22), Transaction Closing (Source: TD Securities “Recent Transactions” web page).
Lightstream Date Sources: Process Commencement (Source: PLS Inc.), Bid Deadline (Source: TD marketing
brochure, page 1), Transaction Closing (Source:Lightstream press release dated September 2, 2014,
Crescent Point press release dated September 30, 2014).
Baccalieu Date Source: Process Commencement (Source: FirstEnergy marketing brochure, page 1),
Transaction Closing (Source: Borden Ladner Gervais LLP web page).
Apache Date Source: Process Commencement (Source: PLS Inc.), Bid Deadline (Source: Scotia marketing
brochure, page 5), Transaction Closing (Source: Apache press release dated March 31, 2014).
Exoro Date Source: Process Commencement (Source: FirstEnergy marketing brochure, page 1), Bid
Deadline (Source: FirstEnergy marketing brochure, page 1), Transaction Closing (Source: Elkwater press
release dated March 31, 2014).
Arriva Date Source: Process Commencement (Source: PLS Inc.), Bid Deadline (Source: Peters & Co.
marketing brochure, page 14), Transaction Closing (Source: Petrus press release dated September 9,
2014).
T. Bird Date Source: Process Commencement (Source: PLS Inc.), Bid Deadline (Source: Peters & Co.
marketing brochure, page 13), Transaction Closing (Source: Crescent Point Q2 2014 MD&A, page 22).
Suncor Date Source: Process Commencement (Source: PLS Inc.), Bid Deadline (Source: Macquarie
marketing brochure, page 10), Transaction Closing (Source: Tamarack Valley press release dated
September 30, 2014).
EOG Date Source: Process Commencement (Source: PLS Inc.), Bid Deadline (Source: J.P. Morgan
marketing brochure, page 4), Transaction Closing (Source: EOG press release dated December 8, 2014).
15
THIS IS EXHIBIT “6”
referred to in the Affidavit of
Glen C. Schmidt
Sworn befor1me this 1$ day of April, 2015
1/i
NO7’ARY PUBLICK
ThJISSIONER FOR
OATHS IN AND FOR TUE PROVINCE
OF ALBERTA
KSEY C. ARMSTRONG
Barrister & Solicitor
LEGAL_CAL;1 1841860.1
Banisters & SoNcitors
Goodnians
Bay Adelaide Centre
Telephone: 416.979.2211
Facsimile: 416.979,1234
goodmans.ca
Direct Line: 416.597,4285
rchadwickgoodmans.ca
April 8, 2015
VIA EMAIL
Osler, Hosldn & Harcourt LLP
4SO4 Street SW, Suite 2500
Calgary, AB T2P 5H1
Attention: A. Robert Anderson, Q.C.
BMO Capital Markets
100 King Street West, 5th Floor
Toronto, ON M5X 1H3
Attention: Glenn Sauntry and Mark Caiger
Dear Sirs:
Re:
Earldna Energy Ltd. (“Laricina” or the “Company”)
We havç been retained to represent an ad hoc group of Laricina shareholders, who hold a
significant amount of the Company’s common equity. We expect additional common equity
holders will participate in our ad hoc committee as we move forward to find solutions with the
Company. The act hoc committee shares the Company’s goal, as referenced in its CCAA
materials, of using all available time and opportunity to ensure that the Company develops and
implements the best solutions and transactions possible for the benefit of the Company and its
stakeholders.
We have reviewed the Company’s CCAA materials and would like to meet with you to discuss
the Company’s specific plans to preserve the going concern value of Laricina’ s business and
property for the benefit of its stakeholders. We are very concerned by the actions of CPPIB as
lender, which we believe are an attempt to take away value from the Company and its
stakeholdeis We will want to fl.illy undeistand all the facts and dncumstances with lespect to
matters related to CPPIB as lender and its actions to date.
We would also like to discuss and understand the Company’s pians with respect to the Capital
Process referenced in paragraph 17 of the Initial Order dated March 30, 2015. Given the
requirement under the Initial Order for the Company to file an application to approve its
proposed Capital Process at the same time as it files its application to extend the Initial Stay
Period, which expires on April 24, 2015, we would like to commence discussions with you as
Goodman
Page 2
soon as possible and aie available to do so We would want any Capital Piocess to be acceptable
to us and we want to enswe theie is the necessaly time to ieview and discuss the Capital Process
prior to any Court attendance. We do not believe that there is urgency to have the matter heard
on April 24, 2015, but we will consider the timing once we have had an opportunity to review
and discuss matteis with the Company and its advisois
The pathes who form the ad hoc committee aie o;gamzed and sophisticated institutional
inyesto;s and we look forward to woiking with the Company and its advisois to develop and
implement the best solutions for the Company and its stakeholders, and to ensuring that the
Company and the Monitor, and their respective advisors, are aware of and have the benefit of the
views of this significant stakeholder group as the Company develops and takes its next steps.
We believe that the Company has a number of options to consider and we look forward to
hearing from you as soon as possible.
Yours very truly,
Good
nsLLP
Robert 3 Chadwi-
cc
Brendan O’Neill (Goodmans)
Clinton Roberts PricewaterhouseCoopers, Inc.)
Josef Kiugei (BLG)