U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 40-F/A
(Amendment No. 1)
(Check One) |
| o | | Registration statement pursuant to Section 12 of the Securities Exchange Act of 1934 |
or |
| x | | Registration statement pursuant to Section 12 of the Securities Exchange Act of 1934 |
For the fiscal year ended December 31, 2008
Commission file number 333-148909
(Exact name of registrant as specified in its charter)
Canada (Province or other jurisdiction of incorporation or organization) | 1311 (Primary Standard Industrial Classification Code Number (if applicable)) | Not applicable (I.R.S. Employer Identification Number (if Applicable)) |
2100, 555-4th Avenue S.W., Calgary, Alberta, Canada T2P 4H2
(403) 249-9425
(Address and Telephone Number of Registrant’s Principal Executive Offices)
CT Corporation System, 111 8th Avenue, New York, NY 10011
(212) 894-8940
(Name, Address (Including Zip Code) and Telephone Number
(Including Area Code) of Agent For Service in the United States)
Securities registered or to be registered pursuant to Section 12(b) of the Act. None
Securities registered or to be registered pursuant to Section 12(g) of the Act None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. Debt Securities
60; & #160;
For annual reports, indicate by check mark the information filed with this Form:
o Annual Information Form | x Audited Annual Financial Statements |
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 195,929,526
Indicate by check mark whether the registrant by filing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934 (the “Exchange Act”). If “Yes” is marked, indicate the file number assigned to the registrant in connection with such rule.
Yes o No x
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files.
EXHIBIT INDEX
| | |
| 99.1 | | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14 of the Securities Exchange Act of 1934 |
| 99.2 | | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14 of the Securities Exchange Act of 1934 |
| 99.3 | | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 |
| 99.4 | | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 |
| 99.5 | | Consent of PricewaterhouseCoopers LLP |
| 99.6 | | Consent of McDaniel & Associates Consultants Ltd. |
FORM 40-F/A
Explanatory Note
This Amendment No. 1 (the “Amendment”) to the Annual Report on Form 40-F (the “Original Filing”) of OPTI Canada Inc. (the “Company”) for the fiscal year ended December 31, 2008 is being filed for the purpose of filing audited financial statements of the Company for the year ended December 31, 2008, including the auditors’ report with respect thereto, that reflect changes resulting from the revision of previously filed audited financial statements included in the Original Filing. In addition, the Company is including in this Amendment its revised Management’s Discussion and Analysis and is revising and restating its US GAAP reconciliation note in its financial statements as at December 31, 2008 and 2007 and for the years then ended.
The Amendment reflects the retroactive application of the change in accounting policy under Canadian GAAP as described in note 2(p)(iii) to financial statements filed June 3, 2009 on this Form 40-F/A. This application impacts the previously reported differences between Canadian GAAP and US GAAP as at December 31, 2008 and 2007 and for the years then ended and therefore the US GAAP reconciliation has been revised accordingly. Furthermore, as a result of performing a detailed review of capitalized costs that no longer qualify for capitalization upon the retroactive application of CICA handbook section 3064, the Company has restated certain previously reported differences between Canadian GAAP and US GAAP. Specifically, OPTI has determined that for US GAAP purposes, the Company’s petroleum and natural gas assets should be considered substantially complete and ready for its intended use effective July 1, 2008, which is consistent with the “commencement of operations” date under Canadian GAAP. Previously, OPTI had used a date for US GAAP purposes of January 1, 2007.
The impact of this restatement with respect to the US GAAP reconciliation is described more fully in note 14 of the financial statements filed on form 40-F/A with the U.S. Securities and Exchange Commission.
Other than as expressly set forth above, this Amendment to the original filing does not, and does not purport to, update or restate the information in any Item of the Original Filing or reflect any events that have occurred after the Original Filing was filed. The filing of this Amendment shall not be deemed an admission that the Original Filing, when made, included any known, untrue statement of material fact or knowingly omitted to state a material fact necessary to make a statement not misleading.
Principal Documents
The following documents have been filed as part of this Amendment No. 1 to the Annual Report on Form 40-F, beginning on the following page:
(a) Revised Management’s Discussion and Analysis for the fiscal year ended December 31, 2008; and
(b) Revised and Restated Consolidated Financial Statements for the fiscal year ended December 31, 2008 (Note 15 to the Consolidated Financial Statements relates to United States Accounting Principles and Reporting (U.S. GAAP)).
MANAGEMENT’S DISCUSSION AND ANALYSIS
For the year ended
December 31, 2008
Revised (Retroactive change in accounting policy)
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis (MD&A) dated February 24, 2009 should be read in conjunction with the audited financial statements for the year ended December 31, 2008. OPTI Canada Inc. (OPTI) is filing this revised MD&A and its 2008 revised financial statements to reflect the adoption of CICA Handbook section 3064 "Goodwill and Intangible Assets". The effects of that standard on the previously filed MD&A and financial statements are as outlined in Note 2 to the revised financial statements. The restatements would have been required at the 2009 year end and these filings are to comply with regulatory requirements.
FORWARD-LOOKING INFORMATION
The MD&A is a review of our financial condition and results of operations. Our financial statements are prepared based upon Canadian Generally Accepted Accounting Principles (GAAP) and all amounts are in Canadian dollars unless specified otherwise. Certain statements contained herein are forward-looking statements, including, but not limited to, statements relating to: the expected production performance of the Long Lake Project; OPTI Canada Inc.'s (OPTI) other business prospects, expansion plans and strategies; the cost, development and operation of the Long Lake Project and OPTI's relationship with Nexen Inc. (Nexen); OPTI's financial outlook respecting the estimate of the netback for Phase 1 of the Project; OPTI's anticipated financial condition and liquidity over the next 12 to 24 months; and our estimated future tax liability. Forward-looking information typically contains statements with words such as “intends,” "anticipate," "estimate," "expect," "potential," "could," “plan” or similar words suggesting future outcomes. Readers are cautioned not to place undue reliance on forward-looking information because it is possible that expectations, predictions, forecasts, projections and other forms of forward-looking information will not be achieved by OPTI. By its nature, forward-looking information involves numerous assumptions, inherent risks and uncertainties. A change in any one of these factors could cause actual events or results to differ materially from those projected in the forward-looking information. Although OPTI believes that the expectations reflected in such forward-looking statements are reasonable, OPTI can give no assurance that such expectations will prove to be correct. Forward-looking statements are based on current expectations, estimates and projections that involve a number of risks and uncertainties which could cause actual results to differ materially from those anticipated by OPTI and described in the forward-looking statements or information. The forward-looking statements are based on a number of assumptions which may prove to be incorrect. In addition to other assumptions identified herein, OPTI has made assumptions regarding, among other things: market costs and other variables affecting operating costs of the Project; the ability of the Long Lake Project joint venture partners to obtain equipment, services and supplies, including labour, in a timely and cost-effective manner; the availability and costs of financing; oil prices and market price for the Premium Sweet Crude (PSC™) output of the OrCrude™ Upgrader; foreign currency exchange rates and hedging risks; government regulations and royalty regimes; and the degree of risk that governmental approvals may be delayed or withheld. Other specific assumptions and key risks and uncertainties are described elsewhere in this document and in OPTI's other filings with Canadian securities authorities.
Readers should be aware that the list of assumptions, risks and uncertainties set forth herein are not exhaustive. Readers should refer to OPTI's current Annual Information Form (AIF), which is available at www.sedar.com, for a detailed discussion of these assumptions, risks and uncertainties. The forward-looking statements or information contained in this document are made as of the date hereof and OPTI undertakes no obligation to update publicly or revise any forward-looking statements or information, whether as a result of new information, future events or otherwise, unless so required by applicable laws or regulatory policies.
Reserve and Resource Estimates: The estimates of resources and of economically recoverable bitumen reserves contained herein are forward-looking statements. The estimates are based upon a number of factors and assumptions made as of the date on which the reserve and resource estimates were determined, such as geological and engineering estimates which have inherent uncertainties, the assumed effects of regulation by government agencies and estimates of future commodity prices and operating costs, all of which may vary considerably from actual results. All such estimates are, to some degree, uncertain and classifications of reserves are only attempts to define the degree of uncertainty involved. The estimates contained herein with respect to reserves and resources that may be developed and produced in the future have been based upon volumetric calculations and upon analogy to similar types of reserves and resources, rather than upon actual production history. Estimates based on these methods generally are less reliable than those based on actual production history. Subsequent evaluation of the same reserves and resources based upon production history will result in variations, which may be material, in the estimated reserves and resources.
Additional information relating to our Company, including our AIF, can be found at www.sedar.com.
FINANCIAL SUMMARY
| In millions | | Years ended December 31 | |
| | | 2008 (as revised) | | | 2007 (as revised) | | | 2006 (as revised) | |
| Earnings (loss) | | $ | (477 | )(1) | | $ | 151 | | | $ | (35 | ) |
Total oil sands expenditures (2) | | | 706 | | | | 961 | | | | 1,056 | |
Working capital (deficiency) (3) | | | (25 | ) | | | 271 | | | | 554 | |
| Shareholders’ equity | | $ | 1,471 | | | $ | 1,951 | | | $ | 1,418 | |
| Common shares outstanding (basic) | | | 195.9 | (4) | | | 195.4 | | | | 172.7 | |
Notes:
(1) Includes $369 million pre-tax asset impairment provision related to working interest sale to Nexen.
(2) Capital expenditures related to Phase 1 and future phase development. Capitalized interest and non-cash additions or charges are excluded.
(3) Includes current portion of interest reserve account where applicable and amounts due in June 2009 in relation to our $150 million revolving debt facility. This $150 million facility was repaid and cancelled in January 2009.
(4) Common shares outstanding at the end of 2008 after giving effect to the exercise of common share options would be approximately 203 million common shares.
OVERVIEW
OPTI Canada Inc. is a Calgary, Alberta-based company focused on developing major oil sands projects in Canada using our proprietary OrCrude™ process. Our first project, Phase 1 of the Long Lake Project (the Project), consists of 72,000 barrels per day of SAGD (steam assisted gravity drainage) bitumen production integrated with an upgrading facility. The Upgrader uses the OrCrude™ process combined with commercially available hydrocracking and gasification. Through gasification, this configuration substantially reduces the exposure to and the need to purchase natural gas. On a 100 percent basis, the Project is expected to produce 58,500 bbl/d of products, primarily 39 degree API Premium Sweet Crude (PSC™) with low sulphur content, making it a highly desirable refinery feedstock. Due to its premium characteristics, we expect PSCTM to sell at a price similar to West Texas Intermediate (WTI) crude oil. The Project is being operated in a joint venture with Nexen Inc.
PROJECT STATUS
First production of PSC™ from the Long Lake Project was achieved in January 2009. Preparation is underway to transition gasifier feed from vacuum residue to asphaltenes, the final step in Upgrader commissioning. Synthesis gas from the Upgrader has been used in SAGD operations, decreasing operating costs by reducing the requirement for purchased third-party natural gas. During the initial operating period, we expect periods of downtime but anticipate that the stability of operations will continue to improve. The Upgrader is currently gasifying but not producing PSC™ due to issues with water supply and treating but is expected to resume production in the near future. Essentially all of the PSC™ produced to date has been used as diluent.
During the final commissioning phase, prior to the operation of the solvent deasphalting and thermal cracking units, there is a high percentage of diluent that feeds the Upgrader and continues to the hydrocracker, forming part of the PSC™ stream. We have produced over 20,000 bbl/d (gross) of on-spec PSC™, with between 10,000 and 12,000 bbl/d (gross) of this representing upgraded bitumen. The remainder represents diluent processed through the Upgrader. The percentage of diluent in the Upgrader feed will decrease as bitumen production increases.
We expect Upgrader capacity during ramp-up will be capable of processing all of the forecasted SAGD volumes and we expect the Project to reach full capacity of approximately 58,500 bbl/d of PSC™ and other products in 12 to 18 months.
The reservoir continues to perform as expected given the amount of steam we have injected. However, SAGD ramp-up has been affected by a variety of surface issues that have limited the amount of steam we have been able to inject into the reservoir over the past few months due to power disruptions, extreme cold weather, and water temperature and treating issues. Since steam injection rates directly impact bitumen production rates, and the ability to generate steam is currently limited, bitumen production is lower than previously expected. Solutions are being developed to place more heat into the front end of the steaming process to supplement the heat returns from the reservoir. Given steaming constraints, allocation of steam was necessary and accordingly only 32 of 81 well pairs are presently in production mode. January bitumen production averaged approximately 13,000 bbl/d (gross). As steam capacity increases, the remaining wells will be brought on-stream.
ADVANCING FUTURE PHASES
Our capital program for 2009 includes funds allocated to advance detailed engineering on the SAGD and Upgrader facilities for Phase 2 of the Project and also includes funds for additional core hole drilling to further delineate our nearer-term development leases.
Regulatory approval for Phases 2 and 3 of SAGD development at Long Lake (Long Lake South) was received in February 2009. Phase 2 sanctioning will depend on multiple factors including initial performance of Phase 1, receiving regulatory approval for Phase 2 SAGD operations, receiving clarity on proposed climate change regulations, developing cost estimates and an improved economic environment. We therefore do not expect to consider sanctioning Phase 2 until mid-2010 at the earliest.
COMPLETION OF ASSET SALE AND DEBT FACILITY AMENDMENT
On January 27, 2009, OPTI announced that we had completed the sale of a 15 percent working interest in our joint venture assets to our partner Nexen for $735 million. Effective January 1, 2009 , OPTI has a 35 percent working interest in all joint venture assets, including Phase 1 of the Project, all future phase reserves and resources, and future phases of development.
As a result of the asset sale, our revolving debt facilities were amended on January 27, 2009. Significant changes include:
| | • | $150 million revolving credit facility was repaid and cancelled; |
| | • | $500 million revolving credit facility was reduced to $350 million, a total of approximately $400 million was repaid through February 17, 2009, and applicable interest rates were increased by approximately 2 to 4 percent depending on our debt ratings; |
| | • | First lien to earnings before interest, tax, depreciation and amortization (EBITDA) covenant commences in the third quarter of 2009 with a maximum ratio 2.5:1 as defined in Note 10 to the audited financial statements for the year ended December 31, 2008 (previously the first quarter of 2009 and a ratio of 3.5:1); |
| | • | Debt to capitalization ratio was increased to 70 percent from 65 percent, also as defined in Note 10 to the audited financial statements for the year ended December 31, 2008; and |
| | • | The Canadian measurement of our U.S.-dollar-denominated debt was changed from a period-end exchange rate to an average rate for the preceding quarter. |
CORPORATE UPDATE
OPTI’s management team is transitioning as a result of the asset sale to Nexen. David Halford, Chief Financial Officer, Mary Bulmer, VP Human Resources and Corporate Services, and Peter Duda, VP Operations will be leaving to pursue other business opportunities. They will remain with OPTI for various periods to continue to facilitate the transition.
Travis Beatty has been appointed Vice President, Finance and Chief Financial Officer of OPTI effective March 1, 2009. Mr. Beatty joined OPTI in 2002 as Controller and since then has also held the roles of Treasurer and Director, Planning. Mr. Beatty is a Chartered Accountant and a Chartered Financial Analyst, and holds a B.Comm from the University of Calgary.
Al Smith has been appointed Vice President, Marketing effective March 1, 2009. Mr. Smith joined OPTI in 2006 as Director, Marketing. Mr. Smith is a professional engineer in Alberta and is a member of both APEGGA and APEGBC. He holds a B.A.Sc. in Chemical Engineering from the University of Waterloo.
Going forward, OPTI’s senior management team will consist of: Sid Dykstra, President and Chief Executive Officer; Travis Beatty, VP Finance and CFO; Joe Bradford, VP Legal and Administration and Corporate Secretary; Bill King, VP Development; and Al Smith, VP Marketing.
RESERVES AND RESOURCES
OPTI has a significant presence in the Athabasca oil sands, with a 35 percent interest in over 385 sections of land on three leases: Long Lake, Leismer and Cottonwood. We believe our existing lands will support approximately 360,000 bbl/d of PSCTM production (126,000 bbl/d net to OPTI) from six phases including Long Lake Phase 1. Based on reserve and resource estimates, we believe there is potential for three phases at Long Lake, two phases at Leismer and one at Cottonwood. With a limited delineation program in the 2007/2008 winter drilling season, total reserve and resource volumes did not change significantly.
McDaniel & Associates (McDaniel), our reserves and resources evaluator, has prepared a report evaluating the bitumen reserves and synthetic oil reserves of the Long Lake leases effective December 31, 2008. Due to the advanced nature of our Long Lake Phase 2 project, previously recognized Contingent Resources are now booked as probable and possible reserves.
For 2008, McDaniel has also recognized probable and possible reserves associated with lands outside the Phase 2 initial development area to include certain lands pertaining to Phase 3 development. This is due, in part, to the inclusion of Phase 3 lands in the Long Lake South Environmental Impact Assessment, requisite levels of delineation being met on the Phase 3 lands, as well as McDaniels’ confidence in the development of these lands now that Phase 1 is commercial.
The McDaniel evaluation of our lands recognizes the impact of upgrading on the resources. Most of the raw bitumen will be upgraded and sold as PSC™ and butane, and is shown as synthetic crude oil or butane reserves. Bitumen was sold prior to Upgrader start-up, is planned to be sold during periods of Upgrader downtime, and is shown as bitumen reserves.
The following table shows OPTI’s 50 percent working interest in the raw bitumen reserves and the corresponding sales volumes at December 31, 2008, prior to taking account of the sale of the 15 percent working interest.
2008 (prior to the sale of the 15 percent working interest)
| | | Raw Bitumen | | | Gross Sales Volumes | |
| All volumes are millions of barrels | | | | | PSC™ | | | Bitumen | | | Butane | |
Proven (1) | | | 278 | | | | 210 | | | | 16 | | | | 8 | |
Proven plus probable (2) | | | 1,054 | | | | 827 | | | | 22 | | | | 32 | |
Proven plus probable plus possible (3) | | | 1,148 | | | | 902 | | | | 22 | | | | 34 | |
The following table shows OPTI’s 35 percent working interest in the raw bitumen reserves and the corresponding sales volumes as at December 31, 2008 after taking account of the sale of the 15 percent working interest.
2008 (subsequent to the sale of the 15 percent working interest)
| | | Raw Bitumen | | | Gross Sales Volumes | |
| All volumes are millions of barrels | | | | | PSC™ | | | Bitumen | | | Butane | |
Proven (1) | | | 194 | | | | 147 | | | | 11 | | | | 6 | |
Proven plus probable (2) | | | 738 | | | | 579 | | | | 15 | | | | 22 | |
Proven plus probable plus possible (3) | | | 803 | | | | 632 | | | | 15 | | | | 24 | |
| | Notes to both reserve tables: |
| | (1) Proven reserves are those reserves that can be estimated with a high degree of certainty to be recoverable. It is likely that the actual remaining quantities recovered will exceed the estimated proven reserves. |
| | (2) Probable reserves are those additional reserves that are less certain to be recovered than proven reserves. It is equally likely that the actual remaining quantities recovered will be greater or less than the sum of the estimated proven plus probable reserves. |
| | (3) Possible reserves are those additional reserves that are less certain to be recovered than probable reserves. There is a 10 percent probability that the remaining quantities actually recovered will be greater than the sum of proven plus probable plus possible reserves. |
In addition to estimating our reserves, McDaniel has estimated bitumen resources on all of OPTI’s lands including the Long Lake, Leismer and Cottonwood leases. A summary of the additional resource estimates as at December 31, 2008, on a 50 percent working interest basis prior to taking into account the 15 percent working interest sale, is shown below:
2008 (prior to the sale of the 15 percent working interest)
| All volumes are millions of barrels | | Raw Bitumen (1) | |
Remainder of Long Lake leases (2) | | | 363 | |
Leismer (2) | | | 954 | |
Cottonwood (3) | | | 717 | |
| Total | | | 2,034 | |
The following table shows OPTI’s 35 percent working interest in the additional resource estimates after taking account of the sale of the 15 percent working interest.
2008 (subsequent to the sale of the 15 percent working interest)
| All volumes are millions of barrels | | Raw Bitumen (1) | |
Remainder of Long Lake leases (2) | | | 254 | |
Leismer (2) | | | 668 | |
Cottonwood (3) | | | 502 | |
| Total | | | 1,424 | |
Notes to both resource tables: | |
| (1) | These estimates represent the "best estimate" of our resources, are not classified or recognized as reserves, and are in addition to our disclosed reserve volumes. These resource estimates are categorized primarily as Contingent Resources, with some categorized as Prospective Resources. See Notes 2 and 3 below. |
| | Contingent Resources are those quantities of petroleum estimated, as of a given date, to be potentially recoverable from known accumulations using established technology or technology under development, but which are not currently considered to be commercially recoverable due to one or more contingencies. Contingencies may include factors such as economic, legal, environmental, political, and regulatory matters, or a lack of markets. It is also appropriate to classify as Contingent Resources the estimated discovered recoverable quantities associated with a project in the early evaluation stage. There is no certainty that it will be commercially viable to produce any portion of the Contingent Resources. |
| | Prospective Resources are those quantities of petroleum estimated, as of a given date, to be potentially recoverable from undiscovered accumulations by application of future development projects. Prospective Resources have both an associated chance of discovery and a chance of development. There is no certainty that any portion of the Prospective Resources will be discovered. If discovered, there is no certainty that it will be commercially viable to produce any portion of the resources. |
| (2) | The resource estimates for Leismer and Long Lake are categorized as Contingent Resources. These volumes are classified as resources rather than reserves primarily due to less delineation and the absence of regulatory approvals, detailed design estimates and near-term development plans. |
| (3) | The resource estimate for Cottonwood is categorized as both Contingent and Prospective Resources. The estimate of 717 million barrels prior to the sale of the 15 percent working interest would be comprised of 274 MMbbl of Contingent Resources and 443 MMbbl of Prospective Resources. After taking account for the sale of the 15 percent working interest, the estimate of 502 million barrels is comprised of 192 MMbbl of Contingent Resources and 310 MMbbl of Prospective Resources. These Contingent Resource volumes are classified as resources rather than reserves primarily due to less delineation; the absence of regulatory approvals, detailed design estimates and near-term development plans; and less certainty of the economic viability of their recovery. In addition to those factors that result in Contingent Resources being classified as such, Prospective Resources are classified as such due to the absence of proximate delineation drilling. |
NETBACKS
We provide a financial outlook of our estimated netback for Phase 1 of the Project that was last updated in our third quarter MD&A dated October 28, 2008. The netback calculation shown below is consistent with this most recent update and includes our estimates of revenue, royalties, operating costs and General and Administrative (G&A) expenses per barrel of product sold.
This financial outlook is intended to provide investors with a measure of the ability of our Project to generate netbacks assuming full production capacity. We believe that the ability of the Project to generate cash to fund interest payments and future phases of development is a key advantage of our Project and important to our investors. The netback measure is the most appropriate financial gauge to demonstrate this ability as corporate costs, interest, and other non-cash items are excluded from the calculation. The financial outlook may not be suitable for other purposes. Netbacks generated by our Project are expected to be lower than shown in this outlook in the years following start-up due to the lower production volumes during ramp-up and an initially higher steam-to-oil ratio (SOR). The netback calculation as presented is a non-GAAP measure. The closest GAAP measure to the netback calculation is cash flow from operations. However, cash flow from operations includes many other corporate items that affect cash and are independent of the operations of the Project.
The actual netbacks achieved by the Project could differ materially from these estimates. The material risk factors that we have identified toward achieving these netbacks are as outlined in the Forward-Looking Information section of this document and in our 2007 Annual Information Form (AIF). In particular; the SAGD and Long Lake Upgrader facilities may not operate as planned; the operating costs of the Project may vary considerably during the operating period; our results of operations will depend upon the prevailing prices of oil and natural gas in the worldwide market and those prices can fluctuate substantially; we will be subject to foreign currency exchange fluctuation exposure; and our operating cash flows will be directly affected by the applicable royalty regime relating to our business. The key assumptions relating to the netback estimate are set out in the notes beneath the table.
Estimated Future Project Netbacks(1)
| In CDN$/bbl | | Post-payout | | | Pre-payout | |
| | | $/bbl | | | $/bbl | |
Revenue(1,2) | | $ | 86.33 | | | $ | 86.33 | |
Royalties and G&A(3) | | | (8.43 | ) | | | (3.84 | ) |
Operating costs(4) | | | | | | | | |
Natural gas(5) | | | (3.90 | ) | | | (3.90 | ) |
Other variable(6) | | | (2.76 | ) | | | (2.76 | ) |
| Fixed | | | (12.82 | ) | | | (12.82 | ) |
Property taxes and insurance(7) | | | (3.55 | ) | | | (3.55 | ) |
| Netback | | $ | 54.87 | | | $ | 59.46 | |
| (1) | The per barrel amounts are based on the expected yield for the Project of 57,700 bbl/d of PSC™ and 800 bbl/d of butane, and assume that the Upgrader will have an on-stream factor of 96 percent. These numbers are cash costs only and do not reflect non-cash charges. See “Forward-Looking Statements.” |
| (2) | For purposes of this projection, we assume a WTI price of US$75/bbl, foreign exchange rates of CDN$1.00 to US$0.85 and an electricity sales price of $106 per megawatt hour. Revenue includes sale of PSCtm, bitumen, butane and electricity. |
| (3) | Royalties are calculated based on a light/heavy differential of 30 percent of WTI. We anticipate payout for royalty purposes to occur in approximately 2022 based on the assumptions noted. |
| (4) | Costs are in 2009 dollars. |
| (5) | Natural gas costs are based on our long-term estimate for a SOR of 3.0. |
| (6) | Includes approximately $1.00/bbl for greenhouse gas mitigation costs based on an approximate average 20 percent reduction of CO2 emissions at a cost of $20 per tonne of CO2. |
| (7) | Property taxes are based on expected mill rates for 2009. |
Sustaining capital costs required to maintain production at design rates of capacity are estimated to be approximately $8 to $9 per barrel of PSC™, assuming full design rate production adjusted for long-term on-stream expectations. The netbacks as shown are prior to abandonment and reclamation costs. We do not include these costs due to the long-term nature of our assets.
CAPITAL EXPENDITURES
Our financial condition to date has been affected primarily by capital expenditures in connection with the construction, commissioning and start-up of the Project, related financings and the capital expenditures associated with the development of future phases.
The Project is essentially complete as of December 31, 2008. The remaining capital costs relate to the completion of the steam expansion project, expected in 2009, and the ash processing unit in the following year. The cost to complete these two projects is approximately $45 million net to OPTI.
The table below identifies historical expenditures incurred by us in relation to the Project, other oil sands activities and other capital expenditures.
| In millions | | Year ended 2008 (as revised) | | | Year ended 2007 (as revised) | | | Year ended 2006 (as revised) | |
| Long Lake Project - Phase 1 | | | | | | | | | |
| Upgrader | | $ | 285 | | | $ | 529 | | | $ | 476 | |
| SAGD | | | 195 | | | | 282 | | | | 440 | |
| Sustaining capital and capitalized operations | | | 92 | | | | 54 | | | | - | |
| Total Long Lake Project | | | 572 | | | | 865 | | | | 916 | |
| Other oil sands activities | | | 134 | | | | 96 | | | | 140 | |
| Total oil sands expenditures | | | 706 | | | | 961 | | | | 1,056 | |
| Capitalized interest | | | 139 | | | | 130 | | | | 47 | |
| Other capital expenditures | | | 45 | | | | 17 | | | | 6 | |
| Total cash expenditures | | | 890 | | | | 1,108 | | | | 1,109 | |
| Non-cash capital charges | | | 11 | | | | 1 | | | | 15 | |
| Total capital expenditures | | $ | 901 | | | $ | 1,109 | | | $ | 1,124 | |
For the year ended December 31, 2008, we incurred capital expenditures of $901 million. Phase 1 expenditures related to Upgrader and SAGD were primarily related to the completion of construction, commissioning and start-up of the Upgrader, and ongoing construction of the steam expansion project. Sustaining capital in 2008 related primarily to the installation of electric submersible pumps on some of our wells and engineering and resource delineation for future Phase 1 well pads.
We capitalized our share of the net SAGD operations until July 1, 2008, resulting in a net cost of $43 million. The SAGD operating results during the first half of the year were comprised of Premium Synthetic Heavy (PSH) sales of $81 million, power sales of $8 million, operating costs of $58 million, diluent and feedstock volumes consumed costs of $71 million and transportation costs of $3 million. These operating results reflect early stage SAGD operations and initial reservoir steaming during the first half of 2008 and as a result we did not achieve significant revenue from bitumen production during this period.
The expenditures of $134 million for other oil sands activities during the year related to engineering costs and resource delineation for future phases. This was comprised primarily of $56 million related to engineering and regulatory work, $55 million related to core hole delineation and seismic costs associated with future phases of development and $7 million in contract cancellation costs related to a reduction in the scope of our 2008/2009 winter drilling program.
Capitalized interest includes interest of $126 million on our senior secured notes (Notes) and $13 million with respect to our revolving credit facilities. The other capital expenditures of $45 million in the period related primarily to $30 million on corporate assets and $15 million for costs associated with the working interest sale to Nexen.
RESULTS OF OPERATIONS
Year Ended December 31, 2008
| In millions | | 2008 (as revised) | | | 2007 (as revised) | | | 2006 (as revised) | |
| Total Revenue | | $ | 204 | | | $ | 13 | | | $ | 10 | |
| Expenses | | | | | | | | | | | | |
| Operating expenses | | | 84 | | | | - | | | | | |
| Diluent and feedstock purchases | | | 165 | | | | - | | | | | |
| Transportation | | | 8 | | | | - | | | | | |
| Interest expense | | | 39 | | | | - | | | | | |
| Impairment related to asset sale | | | 369 | | | | - | | | | - | |
| General and administrative | | | 18 | | | | 14 | | | | 10 | |
| Depletion, depreciation and accretion | | | 17 | | | | 2 | | | | 22 | |
| Financing charges | | | 1 | | | | 12 | | | | - | |
| Realized gain on hedging instruments | | | (116 | ) | | | - | | | | - | |
| Unrealized loss (gain) on hedging instruments | | | (160 | ) | | | 61 | | | | 5 | |
| Foreign exchange translation loss (gain) | | | 373 | | | | (235 | ) | | | 29 | |
| Future tax expense (recovery) | | | (116 | ) | | | 9 | | | | (21 | ) |
Operational Overview
Our overall results in the second half of 2008 reflected the inconsistent performance of the SAGD operation and resulting relatively low SAGD volumes. Continuing challenges with SAGD surface equipment also kept volumes relatively low in the quarter. As a result of the timing of certain of our purchases and light heavy spreads, our diluent and feedstock purchases comprised the majority of our revenue from PSH. We will not have exposure to bitumen blend revenue or diluent costs in periods when the Upgrader is in normal operation.
Total Revenue
For the year ended December 31, 2008, we earned revenue of $187 million for Premium Synthetic Heavy (PSH), power sales of $11 million and interest income of $6 million. Our share of PSH sales averaged 15,450 bbls/day at a price of approximately $65.78/bbl. In the same period, we had power sales of $11 million representing 141,800 MW of electricity sold at an average price of $79.20/MW. In 2007, revenue of $13 million was entirely comprised of interest income.
Expenses, gains and losses
* Impairment Related to Asset Sale
To consider impairment as of December 31, 2008, assets were grouped into categories of depreciable assets, resource assets and unproved properties based on the nature of the asset and an assessment of its depreciation basis. Each asset type was assessed individually for impairment.
We allocated the sales proceeds to each asset type based on an estimate of fair value. The sales proceeds allocated to depreciable assets were lower than the book value of the asset; as a result, an impairment before taxes of $369 million was recorded in 2008. The sales proceeds allocated to resource assets did not alter the depletion rate by greater than 20 percent and, as a result, no gain or loss was recorded. The sales proceeds for resource assets will be recorded as a reduction to book value as of completion of the sale in 2009. The sales proceeds for unproved properties will be recorded as a reduction to book value as of completion of the sale in 2009. All of the Company’s remaining assets were subject to a ceiling test and cost recovery test which concluded no further impairment existed. The ceiling test is described in Note 2 of the financial statements.
With respect to the assets sold and the related impairment, there were a number of business conditions which led to the sale and the impairment. These factors include: restricted access to capital for OPTI as well as potential purchasers of our assets; relatively low and declining commodity prices during the second half of 2008; relatively low SAGD production volumes and delayed start-up of the Upgrader. We expect that as these conditions improve, the fair value of our assets will also increase.
* Operating expenses
For the year ended December 31, 2008, operating expenses associated with SAGD operation were $84 million, primarily comprised of natural gas, maintenance, labour and operating materials and services. These expenses are attributable to the last six months of 2008, as operating costs prior to July 1, 2008 were capitalized. There were no operating expenses recorded in 2007, as they were capitalized since we had not achieved significant revenue from bitumen production during this period.
* Diluent and Feedstock Purchases
For the year ended December 31, 2008, diluent and feedstock expenses were $165 million. Diluent purchases averaged $106.35/bbl. These purchases are attributable to the last six months of 2008, as diluent and feedstock purchases prior to July 1, 2008 were capitalized. There were no diluent and feedstock purchases included in operations in 2007
* Transportation
For the year ended December 31, 2008, transportation expenses were $8 million, which were comprised of pipeline costs associated with PSH sales. These expenses are attributable to the last six months of 2008, as transportation costs prior to July 1, 2008 were capitalized. There was no transportation expenses included in operations in the corresponding period in 2007.
* Interest Expense
For the year ended December 31, 2008, interest expense was $39 million. The expense relates to the amount of interest associated with our SAGD assets and does not include interest associated with the Upgrader assets, which continues to be capitalized. These expenses are attributable to the last six months of 2008, as interest costs prior to July 1, 2008 were capitalized. There was no interest expense recorded in 2007, as this cost was capitalized since we had not achieved significant revenue from bitumen production during this period. Our total interest cost for 2008 is $177 million.
* General and Administrative
For the year ended December 31, 2008, G&A expenses increased to $18 million from $14 million in 2007. The increase for 2008 is due to higher levels of corporate staffing.
* Depletion, Depreciation and Accretion
For the year ended December 31, 2008, depletion, depreciation and accretion expenses were $17 million compared to $2 million in 2007. For 2008, the increase in expense was primarily related to depletion and depreciation of SAGD assets starting July 1, 2008, while the 2007 expense only included depreciation of corporate assets.
* Financing Charges
For the year ended December 31, 2008, financing charges were $1 million compared to $12 million in 2007. Financing charges relate to the new $150 million revolving debt facility established in June 2008 and to the issuance of US$750 million in senior secured notes in 2007. Our policy is to expense financing costs as incurred.
* Foreign Exchange Translation Loss
For the year ended December 31, 2008, foreign exchange translation loss was to $373 million compared to a $235 million gain in 2007. The loss or gain is comprised of the re-measurement of our U.S.-dollar-denominated long-term debt and cash. The Canadian dollar weakened as compared to the U.S. dollar from CAD$0.99 to US1.00 at December 31,2007 to CAD$1.22 to US$1.00 at December 31, 2008.
* Realized Gain on Hedging Instruments
For the year ended December 31, 2008, we had a realized gain of $114 million related to our foreign exchange hedging instruments. In addition, we realized a gain of $2 million related to our US$50/bbl commodity puts.
* Unrealized Loss (Gain) on Hedging Instruments
For the year ended December 31, 2008, we had a gain of $160 million compared to a loss of $61 million in 2007. The gain in 2008 was due to a $93 million increase in the fair value of our foreign exchange hedging instruments due to a weakening Canadian dollar as compared to the U.S. dollar and a $67 million increase in the fair value of our commodity contracts put in place for 2009 production. During 2008, spot prices for WTI decreased from approximately US$92/bbl at the beginning of the year to approximately US$41/bbl at year-end.
* Future Tax Expense (Recovery)
Future tax expense for the year ended December 31, 2008 is a recovery of $116 million compared with a $9 million expense in the corresponding period of 2007. The recovery of future taxes in 2008 was primarily due to a reduction in book value associated with the impairment of assets, offset by future tax implications of foreign exchange movements and flow-through share renunciations.
* Foreign Exchange Hedging Instruments
OPTI is exposed to foreign exchange rate risk on our U.S.-dollar-denominated debt. To partially mitigate this exposure, we have entered into US$875 million of foreign exchange forwards to manage our exposure to repayment risk on our U.S.-dollar-denominated long-term debt. The forward contracts provide for the purchase of U.S. dollars and the sale of Canadian dollars at a rate of approximately CDN$1.17 to US$1.00 with an expiry in April 2010. With respect to our U.S.-dollar-denominated debt, we believe that these forward contracts provide protection against a decline in the value of the Canadian dollar below CDN$1.17 to US$1.00 on a portion of our debt. The period-end value of the forwards is an asset of $32 million. As noted under “Liquidity”, the value of these derivatives affects our debt covenants as the value of these contracts is included in the measurement of our debt for covenant purposes.
SELECTED ANNUAL INFORMATION
In millions (except per share amounts) | | 2008 (as revised) | | | 2007 (as revised) | | | 2006 (as revised) | |
| Total revenue | | $ | 204 | | | $ | 13 | | | $ | 10 | |
| Net (loss) earnings | | | (477 | ) | | | 151 | | | | (35 | ) |
| Net (loss) earnings per share, basic and diluted | | | (2.43 | ) | | | 0.77 | | | | (0.20 | ) |
| Total assets | | | 4,472 | | | | 4,002 | | | | 3,326 | |
| Total long-term liabilities | | | 2,656 | | | | 1,861 | | | | 1,749 | |
Prior to 2008, the amount of revenue in each year is attributable to interest income resulting from cash and cash equivalents available for investment. The amount of cash in each year is influenced by the size and timing of financing activities, as well as capital expenditures related to project development.
Earnings have been influenced by fluctuating foreign exchange translation gains and losses primarily related to re-measurement of our U.S.-dollar-denominated long-term debt, fluctuating realized and unrealized gains and losses on hedging instruments, fluctuating interest income, increasing levels of G&A expenses and fluctuating future tax expense. In 2006, we had a foreign exchange translation loss of $35 million loss. During 2007, we had a foreign exchange translation gain of $235 million and a $61 million unrealized loss on hedging instruments. During 2008, we recorded a before tax impairment of assets as a result of our working interest sale of $369 million and a total future tax recovery of $116 million. In addition, we had a $373 million foreign exchange translation loss, a $160 million unrealized gain on hedging instruments and a $116 million realized gain on hedging instruments. We anticipate fluctuations in earnings attributable to these items based on future changes in foreign exchange rates (Canadian dollars relative to U.S. dollar) and WTI. Also in 2008, we earned revenue and operating expenses associated with early stages of SAGD operation. These initial stages of SAGD operation are at relatively low operating volumes and therefore our operating results associated with these activities are expected to improve as SAGD production increases.
Our total assets have been increasing continuously as a result of expenditures on the Project and future phase development, offset by the asset impairment at December 31, 2008. Increases in long-term financial liabilities are a result of a weaker Canadian dollar increasing the measurement amount of our U.S.-dollar-denominated debt and borrowings under our revolving credit facilities.
SUMMARY FINANCIAL INFORMATION
| | | 2008 | | | 2007 | |
In millions (except per share amounts) | | | Q4 | | | | Q3 | | | | Q2 | | | | Q1 | | | | Q4 | | | | Q3 | | | | Q2 | | | | Q1 | |
| Total revenue | | $ | 73 | | | $ | 128 | | | $ | 1 | | | $ | 2 | | | $ | 3 | | | $ | 3 | | | $ | 2 | | | $ | 5 | |
| Net earnings (loss) | | | (422 | ) | | | (17 | ) | | | (32 | ) | | | (6 | ) | | | 32 | | | | 11 | | | | 108 | | | | - | |
| Earnings (loss) per share, basic and diluted | | | (2.15 | ) | | | (0.09 | ) | | | (0.16 | ) | | | (0.03 | ) | | | 0.16 | | | | 0.06 | | | | 0.55 | | | | - | |
Prior to the third quarter of 2008, quarterly variations in revenue are attributable to interest income which is primarily the result of the amount of cash and cash equivalents available for investment during the applicable period. The amount of cash and cash equivalents is influenced by the size and nature of financing activities and the level of investing activities during the period.
Earnings have been influenced by fluctuating foreign exchange translation gains and losses primarily related to re-measurement of our U.S.-dollar denominated long-term debt, fluctuating realized and unrealized gains and losses on hedging instruments, fluctuating interest income, increasing levels of G&A expenses and fluctuating future tax expense. During the second quarter of 2007, we had a $112 million foreign exchange translation gain. In the third quarter of 2007, we expensed financing charges of $11 million, which increased our loss during the period. During the fourth quarter of 2007, we had a $20 million unrealized gain on hedging instruments, a $6 million foreign exchange translation gain and a $9 million recovery of future taxes primarily as a result of a reduction in the applicable federal tax rate that increased our earnings. During the second quarter of 2008, we had a $34 million unrealized loss on hedging instruments. During the fourth quarter of 2008, we had a $96 million SAGD operating loss, a pre-tax asset impairment for accounting purposes related to our working interest sale of $369 million and a future tax expense recovery, primarily related to this impairment, of $116 million, as well as a $254 million foreign exchange translation loss and a $105 million realized gain and a $28 million unrealized gain on hedging instruments.
In the second half of 2008, we earned revenue and operating expenses associated with early stages of SAGD operation. These initial stages of SAGD operation are at relatively low operating volumes and therefore our operating results associated with these activities are expected to improve as SAGD production increases. In addition, we had significant realized and unrealized gains and losses related to foreign exchange translation losses and hedging instruments. We anticipate fluctuations in earnings attributable to these items based on future changes in foreign exchange rates (Canadian dollars relative to U.S. dollar) and WTI.
SHARE CAPITAL
At January 31, 2009, OPTI had 195,929,526 common shares and 7,150,116 common share options outstanding. The common share options have a weighted average exercise price of $13.14 per share. At January 31, 2009, OPTI’s fully diluted shares outstanding were 203,079,642.
Effective November 2008, 5,991,000 common share warrants with an exercise price of $14.75 per share expired without being exercised. Effective June 2008, $202 million of call obligations with an exercise price of $2.20 per share expired without being exercised.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
For the year ended December 31, 2008, cash used by operating activities was $10 million, cash provided by financing activities was $651 million and cash used in investing activities was $764 million. These changes, combined with a gain on our U.S.-dollar-denominated cash of $10 million, resulted in a decrease in cash and cash equivalents during the year of $93 million.
During 2008 we funded our capital expenditures and ongoing start-up activities from existing working capital and borrowings under our credit facilities. In 2009, sales proceeds from the working interest sale to Nexen, operating cash flow and availability under our revolving credit facilities are expected to fund our capital expenditures.
After completion of the working interest sale to Nexen, the Company will have cash and unused credit facilities of approximately $450 million. In order to continue to access the revolving credit facility, we are required to meet a first lien to EBITDA covenant commencing in the third quarter of 2009. The most significant risk to us not achieving this covenant is lower than expected bitumen production and associated PSC™ sales. Commodity pricing is a less significant risk in 2009 as a substantial portion of our production is hedged. We have hedged 6,000 bbl/d at a net price of approximately US$76/bbl, which is a substantial portion of our expected 2009 PSC™ sales volume. An additional 500 bbl/d of 2009 production is hedged with a US$77/bbl swap (risks associated with our hedging instruments are discussed in more detail under “Financial Instruments”, below). If we have lower than expected SAGD production or lower PSC™ sales, we may have to repay amounts outstanding under the revolving credit facility or may be prevented from further borrowings. The majority of our operating costs and interest costs are fixed. Aside from changes in the price of natural gas, our costs will neither decrease nor increase significantly as a result of fluctuations in WTI prices other than with respect to royalties, which increase at WTI prices higher than $55/bbl.
We have semi-annual interest payments of US$71 million in June and December of each year until maturity of the Notes in 2014. Also, we estimate our share of capital expenditures required to sustain production of Phase 1 at or near planned capacity for the Project will be approximately $60 million per year for the next five years. We expect to fund these payments from operating cash flow and from existing financial resources.
A significant portion of our capital budget for 2009 has been pre-funded. As part of the working interest sale to Nexen, we provided $85 million to Nexen in January to be applied against our working interest share of the 2009 joint venture capital budget of $114 million net to OPTI. On a gross basis, the budget is $325 million of which approximately $200 million relates to sustaining capital including the completion of an additional well pad, $100 million relates to Phase 2 engineering and $25 million relates to future phases and resource development.
Recent developments in capital markets have restricted our access to new debt and equity. Although our current financial resources are considered sufficient for the next 12 to 24 months, further deterioration of commodity prices, delays in ramp-up of SAGD production, or operating issues with the SAGD or Upgrader operations could result in additional funding requirements earlier than we have estimated. Should the Company require such funding, it may be difficult to obtain such financing on reasonable terms.
If Phase 2 is sanctioned, which is not currently scheduled for consideration prior to mid-2010, we expect possible future capital requirements in excess of operating cash flows. Unless we have stable operations at or near capacity for the Project and high commodity prices, such external financing requirements would be significant. We expect that these financing requirements will come at a higher cost and contain more restrictions than the financings completed to date by OPTI. Current market conditions would not support such a financing requirement so some improvement will be required in order to support such development. In addition, our joint venture partner may evaluate the economics of future phases differently than we do and will likely have a different evaluation of the ability to fund this development. As a result, Nexen may decide to proceed with development of future phases, which may result in OPTI having to reduce our working interest in such future phases.
Our debt facilities contain a number of provisions that serve to limit the amount of debt we may incur. With respect to our revolving credit facility, the key maintenance covenants are with respect to debt to capitalization and the ratio of debt outstanding under the revolving credit facility to EBITDA. Maintenance covenants are important as they are ongoing conditions that must be satisfied to provide continued access to the revolving credit facility.
The first lien to EBITDA covenant, as amended in January 2009, is measured quarterly and requires that this ratio is lower than 2.5:1 commencing for the quarter ended September 30, 2009. The first three measurements of EBITDA for this covenant will annualize EBITDA as measured from July 1, 2009, to the end of the applicable covenant period. Thereafter, EBITDA will be based on a trailing four quarters. Realized cash gains on commodity contracts, such as our existing puts and forwards, are included in EBITDA for the purposes of the covenant. If we are unable to generate sufficient EBITDA, we may be required to repay all or a portion of amounts outstanding under that facility or be unable to make additional borrowings under the revolving credit facility prior to the end of a covenant quarter or will be required to request and obtain approval for a waiver from our lenders under the facility.
The covenant as amended in January 2009 for debt to capitalization requires that we do not exceed a ratio of 70 percent as calculated on a quarterly basis. The covenant is calculated based on the book value of debt and equity. The book value of debt is adjusted for the effect of any foreign exchange derivatives issued in connection with the debt that may be outstanding. At December 31, 2008, this means that our debt would be reduced by the value of our foreign exchange forward in the amount of $32 million. With respect to U.S.-dollar-denominated debt, for purposes of the debt to capitalization ratio, the debt is translated to Canadian dollars based on the average exchange rate for the quarter. The debt to capitalization is therefore influenced by the variability in the measurement of the foreign exchange forward, which is subject to mark to market variability and average foreign exchange rate changes during the quarter.
In respect of new borrowings under the $350 million revolving credit facility prior to reaching completion of the Project, we are required to have sufficient funds (including cash and undrawn revolver) to fund our share of remaining Project costs.
With respect to our senior secured notes, the covenants are in place primarily to limit the total amount of debt that OPTI may incur at any time. This limit is most affected by the present value of our total proven reserves using forecast prices discounted at 10 percent. Based on our 2008 reserve report, as adjusted for our new working interest in the joint venture, we have sufficient capacity under this test to incur additional debt beyond our existing $350 million revolving credit facility and existing senior secured notes. Other leverage factors, such as debt to capitalization and total debt to EBITDA, are expected to be more constraining than this limitation.
Capital Resources
Our long-term debt currently consists of US$1,750 million of senior secured notes and a $350 million revolving credit facility. At February 17, 2009, we have approximately $280 million of cash on hand and have drawn $87 million on our $350 million revolving credit facility.
At December 31, 2008, our cash resources included cash of $217 million. Our cash and cash equivalents are invested exclusively in money market instruments issued by major Canadian banks. At December 31, 2008, $486 million had been drawn on the $500 million revolving credit facility and $146 million had been drawn on the $150 million revolving credit facility. As of February 17, 2009, after using proceeds from the working interest sale to Nexen to fund a partial pay-down, $87 million remained outstanding on the $350 million revolving credit facility and our $150 million revolving credit facility had been repaid and cancelled. We eliminated the working capital deficiency that existed at December 31, 2008 as a result of the completion of the working interest sale to Nexen on January 27, 2009.
CREDIT RATINGS
OPTI, OPTI's revolving credit facility and OPTI’s Notes are currently rated by Moody’s Investor Service (Moody’s) and Standard and Poors (S&P). Please refer to the table below for the respective ratings.
| Type of Security | Moody's | S&P |
| OPTI Corporate Rating | B1 | B+ |
| Revolving Credit Facility | Ba3 | BB |
| 8.25% Notes | B2 | BB |
| 7.875% Notes | B2 | BB |
The Moody’s ratings have been under review for potential downgrade by Moody’s since November 2008. The S&P ratings have been on credit watch with negative implications since November 2008.
A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the rating organization.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
Commitments for contracts and purchase orders at December 31, 2008, related to project development are $22 million based on a working interest of 50 percent.
During the 12 months ended December 31, 2008, our long-term debt increased by $486 million due to borrowings under our $500 million revolving credit facility and the short-term portion increased by $146 million due to borrowings on our $150 million revolving credit facility.
The following table shows our contractual obligations and commitments related to financial liabilities at December 31, 2008. This table is prior to the January 2009 working interest sale to Nexen, which would reduce payments under our capital leases, operating leases and contracts and purchase orders by 30 percent.
| In millions | | Total | | | < 181 days | | | 181- 365 days | | | | 2010-2011 | | | | 2012-2013 | | | 2014 or later | |
| Accounts payable and accrued liabilities | | $ | 200 | | | $ | 195 | | | $ | 5 | | | $ | - | | | $ | - | | | $ | - | |
Short-term debt(1) | | | 146 | | | | 146 | | | | - | | | | - | | | | - | | | | - | |
Long-term debt (Notes-interest)(2) | | | 1,034 | | | | 86 | | | | 86 | | | | 345 | | | | 345 | | | | 172 | |
Long-term debt (Notes-principal)(2) | | | 2,132 | | | | - | | | | - | | | | - | | | | - | | | | 2,132 | |
Long-term debt (Revolving)(3) | | | 486 | | | | 136 | | | | - | | | | 350 | | | | - | | | | - | |
Capital leases(4) | | | 106 | | | | 2 | | | | 3 | | | | 9 | | | | 8 | | | | 84 | |
Operating leases and other commitments(5) | | | 115 | | | | 6 | | | | 7 | | | | 28 | | | | 29 | | | | 45 | |
Contracts and purchase orders(6) | | | 22 | | | | 22 | | | | - | | | | - | | | | - | | | | - | |
| Total commitments | | $ | 4,241 | | | $ | 593 | | | $ | 101 | | | $ | 732 | | | $ | 382 | | | $ | 2,433 | |
| (1) | Consists of CDN$146 million of borrowings on our short-term revolving debt facility. This facility was repaid and cancelled in January 2009. |
| (2) | Consists of US$1,000 million and US$750 million under our Notes. Amounts represent scheduled principal and interest payments. |
| (3) | Consists of $486 million drawn on the revolving credit facility. The repayment represents only the required reduction to reduce the facility to $350 million in January 2009 and the final repayment of the facility at its scheduled maturity in 2011. In addition, we are contractually obligated for interest payments on borrowings and standby charges in respect to undrawn amounts under the revolving credit facility, which are not reflected in the above table as amounts cannot be estimated due to the revolving nature of the facility and variable interest rates. See “Liquidity” section for repayments completed as part of working interest sale. |
| (4) | Consists of our share of future payments under our product transportation agreements with respect to future tolls during the initial contract term at a working interest of 50 percent. |
| (5) | Consists of our share of payments under our product transportation agreements with respect to future tolls during the initial contract term at a working interest of 50 percent. This amount also includes our share of future commitments with respect to rail traffic transportation assuming a 50 percent working interest. |
| (6) | Consists of our share of commitments associated with contracts and purchase orders in connection with the Project and our other oil sands activities. |
OFF-BALANCE-SHEET ARRANGEMENTS
We have no off-balance-sheet arrangements.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Chief Executive Officer and the Chief Financial Officer are responsible for establishing and maintaining disclosure controls and procedures (DC&P), as such term is defined in National Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings, for OPTI. They have, as at the financial year ended December 31, 2008, designed such DC&P, or caused them to be designed under their supervision, to provide reasonable assurance that information required to be disclosed by OPTI in its annual filings, interim filings or other reports filed or submitted by OPTI under applicable securities legislation is recorded, processed, summarized and reported within the time periods specified in applicable securities legislation and that all material information relating to OPTI is made known to them by others, particularly during the periods in which OPTI's annual and interim filings are being prepared.
Under the supervision of the Chief Executive Officer and the Chief Financial Officer, OPTI conducted an evaluation of the effectiveness of our DC&P as at December 31, 2008. Based on this evaluation, the officers concluded that as of December 31, 2008, OPTI's disclosure controls and procedures provide reasonable assurance that information required to be disclosed by OPTI in its annual filings, interim filings or other reports that we file or submit under applicable securities legislation is recorded, processed, summarized and reported within the time periods specified in such legislation and that these controls and procedures also provide reasonable assurance that material information relating to OPTI is made known to our Chief Executive Officer and Chief Financial Officer by others.
It should be noted that while our officers believe that OPTI’s disclosure controls and procedures provide a reasonable level of assurance with regard to their effectiveness, they do not expect that the disclosure controls and procedures or internal controls over financial reporting will prevent all errors and fraud. A control system, no matter how well conceived or operated, can provide only reasonable, but not absolute, assurance that the objectives of the control system are met.
Internal Controls over Financial Reporting
The Chief Executive Officer and the Chief Financial Officer are responsible for establishing and maintaining internal control over financial reporting (ICFR), as such term is defined in National Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings, for OPTI. They have, as at the financial year ended December 31, 2008, designed ICFR, or caused it to be designed under their supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian GAAP. The control framework our officers used to design OPTI's ICFR is the Internal Control - Integrated Framework (COSO Framework) published by The Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Under the supervision of the Chief Executive Officer and the Chief Financial Officer, OPTI conducted an evaluation of the effectiveness of our ICFR as at December 31, 2008 based on the COSO Framework. Based on this evaluation, the officers concluded that as of December 31, 2008, OPTI's ICFR provides reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian GAAP.
There were no changes in our internal control over financial reporting during the year ended December 31, 2008 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
CRITICAL ACCOUNTING ESTIMATES
Capital Assets
We capitalize costs in connection with the development of oil sands projects. The measurement of these costs at each financial statement date requires estimates to be made with respect to construction progress, materials procurement and drilling progress. An increase in the measurement amount of these items would increase our property, plant and equipment and accrued liabilities accordingly.
Capital assets are reviewed for impairment whenever events or conditions indicate that the net carrying amount may not be recoverable from estimated future cash flows. We have evaluated the book value of our assets in connection with the working interest sale to Nexen. We have determined that the related assets sold were impaired as of December 31, 2008 and as a result recorded a loss of $369 million. We have also evaluated the remaining assets and determined that these costs are recoverable based on our ceiling test as described in our accounting policies.
The quantity of reserves is subject to a number of estimates and projections, including assessment of engineering data, projected future rates of production, characteristics of bitumen reservoirs, commodity prices, foreign exchange rates, operating costs and sustaining capital expenditures. These estimates and projections are uncertain as we do not have any commercial production history to assist in the development of these forward-looking estimates. However, all reserve and associated financial information is evaluated and reported on by a firm of qualified independent reserve evaluators in accordance with the standards prescribed by applicable securities regulators.
The calculation of future cash flows based on these reserves is dependent on a number of estimates, production volumes, facility performance, commodity prices, royalties, operating costs, sustaining capital and foreign exchange rates. The price used in our assessment of future cash flows is based on our independent evaluators’ estimate of future prices and evaluated for reasonability by OPTI against other available information. Although the future prices used are significantly higher than current prices, we believe these prices are reasonable estimates for a long-term outlook. In addition, lower prices could be used without resulting in any additional impairment. Different or significantly lower price assumptions could result in a ceiling test impairment. Impairment and a corresponding loss would be recognized in earnings in the period in which capitalized costs exceeded estimated future cash flows.
Asset Retirement Obligations
We measure asset retirement obligations at each financial statement date. The estimate is based on our share of costs to reclaim the resource assets and certain facilities related to the Project as well as other resource assets associated with future phases. The liability is primarily related to reclamation of the SAGD facility and drilling assets. To determine the future value of the liability, we estimate the amount, timing and inflation of the associated abandonment costs. We then calculate the present value of the cost to record the current asset retirement obligation using a credit-adjusted risk-free rate. In some cases, due to the long-lived nature of the asset, the timing of future abandonment cannot be made and no asset retirement obligation is recorded. Due to the long-term nature of current and future project developments, abandonment costs will be incurred over many years in the future. As a result of these factors, different estimates could be used for such abandonment costs and the associated timing. Assumptions of higher future abandonment costs, higher inflation, higher credit-adjusted risk-free rates or an assumption of earlier or specified timing of abandonment would cause the asset retirement obligation and corresponding asset to increase. These changes would also cause future accretion expenses to increase and future earnings to decrease.
Future Taxes
We measure our future tax asset or liability based on estimates of temporary differences between our book and tax assets. In addition, an estimate is required for both the timing and tax rate of this reversal. Should these estimates change, it could impact the measurement amount of our asset or liability as well as future tax recovery or expense and earnings. These estimates would not impact cash flow from operations. At December 31, 2008, we have recorded a future tax asset. The recognition of a future tax asset requires further estimates that these taxes will be recoverable in the future. We have estimated future cash flow based on reports from our independent engineers and concluded that, more likely than not, we will be able to earn taxable earnings in excess of the future tax asset that we have recorded.
ACCOUNTING POLICIES
On January 1, 2008, we adopted the following Canadian Institute of Chartered Accountants (CICA) standards: Section 1535 “Capital Disclosures,” Section 3862 “Financial Instruments - Disclosures,” and Section 3863 “Financial Instruments - Presentation.”
Section 1535 requires the disclosure of OPTI’s objectives, policies and processes for managing capital. This includes qualitative information regarding OPTI’s objectives, policies and processes for managing capital and quantitative data about what OPTI manages as capital. These disclosures are based on information that is used internally by our management.
Sections 3862 and 3863 replace Section 3861 “Financial Instruments - Disclosure and Presentation,” which revises financial instruments disclosure requirements and leaves unchanged the presentation requirements. These new sections place increased emphasis on disclosures about the nature and extent of risks arising from financial instruments and how OPTI manages those risks.
There is no impact on our financial position or results of operations as a result of the adoption of these sections.
NEW ACCOUNTING PRONOUNCEMENTS
This revised MD&A and related revised financial statements reflect the changes described in Note 2 of the financial statements. As a result of these changes, OPTI expensed certain previously capitalized costs with retroactive effect on January 1, 2007 with a corresponding increase to opening deficit. The opening deficit increased by $85 million and this increase is comprised of deferred costs related to SAGD start-up activities, translation of OPTI’s U.S.-dollar debt, offset by gains related to financial derivatives associated with OPTI’s debt and by a recovery of future tax expense.
IFRS
The Canadian Accounting Standards Board has announced that Canadian Generally Accepted Accounting Principles (GAAP) no longer apply for all publically accountable enterprises as of January 1, 2011. From that date forward, OPTI will be required to report under International Financial Reporting Standards (IFRS) as set out by the International Accounting Standards Board (IASB). Any adjustments resulting from a change in policy are applied retroactively with corresponding adjustment to opening retained earnings.
OPTI is currently in the initial stages of planning for the IFRS transition. A formal changeover plan has not been approved by management. We are currently evaluating potential areas impacted by the new standards including adoption criteria as prescribed under IFRS1 - First-Time Adoption of International Financial Reporting Standards.
Business Impact of IFRS
OPTI has recorded a pre-tax asset impairment for accounting purposes of $369 million with respect to the working interest sale to Nexen. Under IFRS this loss would have been significantly higher as all of OPTI’s assets would have been considered impaired based on the implied valuation. IFRS permits subsequent recovery of such write downs in future periods to the extent that fair value increases. Therefore, the cumulative effect of the Nexen working interest sale at the date of adoption on January 1, 2011 will depend on a fair value assessment of the assets as of December 31, 2010.
FINANCIAL INSTRUMENTS
The Company considers its risks in relation to financial instruments in the following categories:
Credit Risk
Credit risk is the risk that counterparty to a financial instrument will not discharge its obligations, resulting in a financial loss to the Company. The Company has policies and procedures in place that govern the credit risk it will assume. We evaluate credit risk on an ongoing basis including an evaluation of counterparty credit rating and counterparty concentrations measured by amount and percentage. Our objective is to have no credit losses.
The primary sources of credit risk for the Company arise from the following financial assets: (1) cash and cash equivalents; (2) accounts receivable; and (3) derivatives contracts. The Company has not had any credit losses in the past and the risk of financial loss is considered to be low given the counterparties used by the Company. As at December 31, 2008, the Company has no financial assets that are past due or impaired due to credit-risk-related defaults.
Liquidity Risk
Liquidity risk is the risk that the Company will not be able to meet obligations associated with financial liabilities. Our financial liabilities are comprised of accounts payable and accrued liabilities, long-term debt and obligations under capital leases. The Company frequently assesses its liquidity position and obligations under its financial liabilities by preparing regular financial forecasts. We mitigate liquidity risk by maintaining a sufficient cash balance as well as maintaining sufficient current and projected liquidity to meet expected future payments. Our financial liabilities arose primarily from the development of the Project. As at December 31, 2008, the Company has met all of the obligations associated with its financial liabilities. As noted under “Liquidity,” continued access to our revolving credit facility is a key liquidity risk.
Market Risk
Market risk is the risk that the fair value (for assets or liabilities considered to be held for trading and available for sale) or future cash flows (for assets or liabilities considered to be held-to-maturity, other financial liabilities, and loans and receivables) of a financial instrument will fluctuate because of changes in market prices. We evaluate market risk on an ongoing basis. We assess the impact of variability in identified market risks on our medium-term cash requirements and impact with respect to covenants on our credit facilities. At December 31, 2008, we had mitigation programs to reduce market risk related to foreign exchange and commodity price changes. Changes in these market risks related to foreign exchange would not have had an impact on our earnings as translation gains and losses on our U.S.-dollar debt and related hedging activities were capitalized. The primary market risks related to our commodity contracts relates to future estimated prices for WTI. A $5 change in estimated future WTI prices would change our unrealized loss by approximately $10 million in U.S. dollars at December 31, 2008 as a result of an estimated change in the value of our commodity contracts.
The following sections describe these risks in relation to the Company’s key financial instruments.
* Cash and Cash Equivalents
The Company has cash deposits with Canadian banks and has money market investments. Counterparty selection is governed by the Company’s Treasury Policy, which limits concentration of investments and requires that all instruments be rated as investment grade by at least one rating agency. As at December 31, 2008 the amount in cash and cash equivalents was $217 million and the maximum exposure to a single counterparty was $51 million which is guaranteed by a Canadian bank.
At December 31, 2008, the remaining terms on investments made by the Company are less than 90 days with interest fixed over the period of investment. Maturity dates for investments are established to ensure cash availability for project development and interest payments. Investments are held to maturity and the maturity value does not deviate with changes in market interest rates.
Our cash balances are currently invested almost exclusively in money market instruments with major Canadian banks in the form of banker’s acceptances or term deposits. These instruments are widely offered by banks we deal with and are considered direct obligations of the banks that offer them. We manage our exposure to these banks in two primary ways: by limiting the amount invested with a single issuer or guarantor and by investing for relatively short periods of time. We do not expect any investment losses based on these money market investments.
* Accounts Receivable
Our accounts receivable includes amounts due from Nexen Inc. related to project development and Nexen Marketing related to marketing activities, interest earned but not received on money market investments, and amounts due from the Canada Revenue Agency in relation to GST refunds. The amounts due from Nexen increased significantly subsequent to year-end as a result of the completion of the working interest sale. The agreement included $85 million as a pre-funded amount for 2009 development activities. These funds will be released as work is completed on the 2009 joint venture capital program. OPTI is entitled to a refund of such dollars or contribution of further dollars in the event that OPTI’s working interest share of 2009 joint venture capital expenditures is less than or exceeds $85 million. The Company’s credit risk in regard to accounts receivable therefore relates primarily to the risk of default by Nexen, which has an investment-grade corporate rating from Moody’s Investor Service, and by financial institutions with an investment grade rating. Therefore, we estimate the risk of credit loss as low.
* Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities are comprised primarily of amounts due in respect of development of the Project and certain other corporate expenses. Payment terms on these amounts are typically 30 to 60 days from receipt of invoice and generally do not bear interest. The Company has met its obligations in respect of these liabilities. As at December 31, 2008 accounts payable and accrued liabilities were $200 million.
* Debt and Obligations under Capital Lease
The terms of the Company’s debt and obligations under capital lease are described in the notes to our audited financial statements as at December 31, 2008. The Company has met its obligations in respect of these liabilities. The Company accounts for its borrowings under all of its long-term debt and obligations under capital lease on an amortized cost basis. As at December 31, 2008 long-term debt was $2,618 million, short-term debt was $146 million and obligations under capital leases were $30 million.
The revolving credit facilities are variable interest rate facilities with borrowing rates and duration established at the time of the initial borrowing or subsequent extension. Our current borrowings have an approximate initial term of 90 days and therefore fluctuations in the value of such borrowings are not material during the term they are outstanding. The Company is exposed to interest rate changes if and when it extends each borrowing. The extent of the exposure to interest rate risk depends on the amount outstanding under the facility. As at December 31, 2008, there was $486 million drawn under the $500 million revolving credit facility and $146 million drawn under the $150 million revolving credit facility. As described under ”Capital Resources,” these amounts were reduced in early 2009. During 2008, a 1 percent change in interest rates would not have had a material impact on the interest expense due to the fixed nature of our senior notes and relatively low average balance of our revolving credit facilities.
Our senior secured notes are comprised of US$1,750 million of debt which has fixed U.S. dollar semi-annual interest payments. Changes in the exchange rate between the Canadian dollar and U.S. dollar impact the carrying value of the senior secured notes. A US$0.01 change in the exchange rate will impact the carrying value of the senior secured notes by approximately US$18 million. A US$0.01 change in the exchange rate will change our interest costs by approximately US$1.4 million. The exposure to exchange rate fluctuations has been partially mitigated by the forward contracts described under “Foreign Exchange Hedging Instruments.” These changes also influence our compliance with debt covenants as described under ”Liquidity.”
* Derivative Contracts
The Company periodically uses derivative contracts to hedge certain of the Company’s projected operational or financial risks. In the past, such instruments have involved the use of interest rate swaps, cross-currency interest swaps, currency-forward contracts and crude oil put options. Derivative contracts outstanding at December 31, 2008 are described in the notes to our audited financial statements as at December 31, 2008. These instruments are designated as held-for-trading and are measured at fair value at each financial statement date.
As at December 31, 2008, we had US$875 million of foreign currency forwards to manage a portion of the exposure to the foreign exchange variations on the Company’s long-term debt. Changes in the exchange rate between Canadian and U.S. dollars change the value of these instruments. The foreign currency forwards at December 31, 2008 had a fair value of $32 million. The foreign exchange forwards are measured by the present value of the difference between the settlement amounts of the foreign currency forwards as measured in Canadian dollars. The counterparties to the foreign currency forwards are major Canadian and international banks. Our exposure to non-payment from any single institution is less than 25 percent of the value of the forwards.
The fair value of the foreign currency forwards is determined by calculating the present value of the existing contract as measured in Canadian dollars in reference to established market rates, primarily foreign exchange rates at the end of the year and discounted at market interest rates. The foreign currency forwards were valued primarily using a period-end foreign exchange rate of 1.22. Based on the active market for the underlying market variables used in the valuation, we do not believe other market assumptions with respect to these variables could result in a materially different valuation than the one we have determined. This conclusion is supported by an internal comparison completed by OPTI to compare the valuation provided by each counterparty to the forwards. The value of the foreign currency forwards would change by approximately $8 million for each $0.01 change in the foreign exchange rate between U.S. and Canadian dollars. This change would have a corresponding impact on our earnings before taxes.
We have established commodity hedging contracts to mitigate the Company’s exposure of future operations to decreases in the price of its synthetic crude oil. The Company has chosen to use put options and commodity price swaps to mitigate a portion of the exposure. As at December 31, 2008 the Company had deferred premium put options covering 2.2 million barrels of 2009 production at a price of US$80/bbl (deferred premiums to be paid on the expiration of the option are $4/bbl); and commodity price swaps covering 0.2 million barrels of 2009 production at a price of US$77/bbl. The value of these financial instruments as at December 31, 2008 was an asset of $78 million. The counterparties to the commodity hedges are major Canadian and international banks. Our exposure to non-payment from any single institution is approximately 60 percent of the value of the commodity hedge, which is due from a major Canadian bank.
The fair value of the commodity hedges is determined by calculating the present value of the existing contract as measured in Canadian dollars in reference to established market rates, primarily future estimated prices for WTI and period-end foreign exchange rates. Based on the active market for the underlying market variables used in the evaluation, we do not believe other market assumptions with respect to these variables could result in a materially different valuation than the one we have determined. This conclusion is supported by an internal comparison completed by OPTI to compare the valuation provided by each counterparty to the contract. The value of the commodity hedges would change by approximately US$2 million for each US$1/bbl change in future estimated prices for WTI. This change would have a corresponding impact on our earnings before taxes for the year.
We view the credit risk of these counterparties as low due to the diversification of the instrument with a number of banks.
RISK FACTORS
Readers should be aware that the list of assumptions, risks and uncertainties set forth herein are not exhaustive. Readers should refer to OPTI's current Annual Information Form (AIF), which is available at www.sedar.com, for a detailed discussion of these assumptions, risks and uncertainties.
Market Risks
We are involved in a capital intensive industry. Oil sands development requires significant investment prior to any cash being returned to the business in the form of operating cash flow. Our development cycle for each phase can be greater than five years. This means significant external capital may be required. In addition, a combination of poor operating results, requirement for major repairs or improvements to our facilities and low commodity prices could require us to seek additional capital during 2009. Recent developments in the banking sector and the economy as a whole have meant such capital may be restricted in terms of size, extremely expensive in historical terms, or not available at all. Although the recent asset sale to Nexen has improved our short-term financial position, there is no assurance that, should we require additional capital in the future, we will be able to obtain such financing on a timeline suitable for OPTI.
Risk Factors During Operations
* Oil Prices and Foreign Exchange
Our financial results will be dependent upon the future price of crude oil. Oil prices fluctuate significantly in response to regional, national and global supply and demand factors beyond our control. Political and economic developments around the world can affect world oil supply and oil prices.
The Long Lake Upgrader will ultimately produce a fully upgraded product called PSCTM. The price we will receive for PSC™ will be dependent on the demand for it and will primarily be influenced by changes in the market price for WTI, which is influenced by global market factors. To a lesser extent, the price we receive for PSCtm will be affected by regional factors such as supply of other synthetic and conventional crude oils. Although we expect PSCtm to trade at a price similar to WTI, PSCtm will be a new synthetic crude oil product and no assurance can be given as to its price and marketability. We have engaged Nexen Marketing, which has extensive experience in marketing synthetic crude, to sell all of our production from the Long Lake Project.
After the Long Lake Upgrader start-up and during periods when the Upgrader is not operating, including planned and unplanned maintenance and repair, we may be unable to upgrade the bitumen produced by the Project. During these periods, bitumen would be mixed with diluent and sold as a bitumen blend. The blend would be priced significantly lower than conventional light oil or PSCtm.
Our future results of operations will be impacted by certain factors outside of our control, such as the gravity and quality of the bitumen produced from the Long Lake leases, which can ultimately determine the amount of syngas and PSCtm produced from the Long Lake Upgrader.
Crude oil prices are generally based on a U.S.-dollar market price, while most of our operating and capital costs are denominated in Canadian dollars. Fluctuations in exchange rates between the U.S. and Canadian dollars result in foreign currency exchange exposure. Therefore, changes in the exchange rate will affect the price we receive for PSCtm. We have protected a portion of this exposure to oil price fluctuation from our commodity contracts and have no protection from foreign exchange rates fluctuations related to the sale of our products.
* Operating Risk
The performance of the SAGD operation, the Long Lake Upgrader, or both may differ from our expectations. There are many factors related to the characteristics of the reservoir and SAGD operating facilities that could cause bitumen production to be lower than anticipated.
The Long Lake Upgrader is comprised of a number of facilities that upgrade bitumen, in part using high pressure and temperature. There are inherent risks in the initial and ongoing operation of our facility. The processing of hydrocarbons requires intensive planning and execution expertise. Problems during this process could result in increases to cost, reduced production or damage to facilities. All of these factors could negatively affect our results from operations.
* Non-operator
Nexen is the operator of the Long Lake Project. We rely on Nexen’s operating expertise to generate cash flow from the Project and to provide information on the status and results of operations. There are no assurances that Nexen will be able to generate financial results from the Project or that Nexen will be able to provide adequate financial and operational information on a timely basis.
* Natural Gas
During commercial operations, we will require a significant amount of natural gas to provide energy to generate steam for SAGD operations. The integrated Project design has mitigated a large amount of the risk, as syngas is expected to be produced through the gasification process and will be used to provide energy to the steam generation facilities. The amount of third-party natural gas purchases required is largely determined by the SOR that is required for SAGD production. If the SOR is higher than anticipated, we may be required to purchase natural gas beyond existing forecasted levels at prevailing market rates. This would cause our operating costs to increase and reduce our earnings.
* Reserves and Resources
There are numerous uncertainties inherent in estimating quantities of reserves and resources, including many factors beyond our control, and no assurance can be given that the indicated level of reserves or resources or recovery of bitumen will be realized. In general, estimates of resources and of economically recoverable bitumen reserves are based upon a number of factors and assumptions made as of the date on which the reserve and resource estimates were determined, such as geological and engineering estimates that have inherent uncertainties, the assumed effects of regulation by governmental agencies and estimates of future commodity prices and operating costs, all of which may vary considerably from actual results. All such estimates are, to some degree, uncertain and classifications of reserves are only attempts to define the degree of uncertainty involved. For these reasons, estimates of the economically recoverable bitumen, the classification of such reserves based on risk of recovery, prepared by different engineers or by the same engineers at different times, may vary substantially.
The estimates with respect to reserves and resources that may be developed and produced in the future have been based upon volumetric calculations and upon analogy to similar types of reserves and resources, rather than upon actual production history. Estimates based on these methods generally are less reliable than those based on actual production history. Subsequent evaluation of the same reserves and resources based upon production history will result in variations, which may be material, in the estimated reserves and resources.
Reserve and resource estimates may require revision based on actual production experience. Such figures have been determined based upon assumed oil prices and operating costs. Market fluctuations of oil prices may render uneconomic the recovery of certain grades of bitumen. Also, short-term factors relating to oil sands resources may impair the profitability of the Project in any particular period.
Should the reserve estimate change in future periods, there could be a material impact on the fair value of our securities, our results of operations and our ability to obtain financing.
* Commodities Risk
During regular operations, our exposure to natural gas prices is reduced as the Long Lake Upgrader is expected to generate syngas, which will be used instead of natural gas. In the long-term, we expect approximately two thirds of our natural gas requirements will be generated by syngas with approximately one third being supplied from purchased natural gas. Although we expect stable Upgrader operations, during periods of Upgrader downtime we have significant exposure to natural gas prices. During these periods, virtually all of the energy required to generate steam for the SAGD operations will be from the purchase of natural gas.
During periods when the Upgrader is not in operation, we will be producing raw bitumen from the SAGD process. These bitumen barrels will be blended with a purchased diluent and sold as a bitumen blend. The price per barrel of purchased diluent will approximate WTI. The price we receive for this bitumen blend may vary widely and may be at a significant discount to WTI. At low commodity prices and high differentials between light oil and heavy oil in Northern Alberta as experienced in late 2008, the revenue we receive for bitumen blend may approximate the cost of the diluent.
Project Development Risk
* Financing Risk
Continuing access to our revolving credit facility is critical to our financial position, as noted under “Liquidity,” and there are risks of failure to meet covenants that would impair this access. The development of oil sands projects in connection with the Project and our multi-stage expansion plan requires a significant amount of capital investment that occurs over a number of years. We currently do not have the capital or committed financing necessary to complete our future phases of development and we expect to need to complete additional debt or equity financing to obtain the funds necessary to complete future phases. The cost of additional financing may not make future projects economically feasible.
* Regulatory Risk
We are subject to extensive Canadian federal, provincial and local laws and regulations governing exploration, development, transportation, production, exports, occupational health, protection and reclamation of the environment, safety and other matters.
Completed phases of the Project will produce greenhouse gases (GHGs) and other industrial air pollutants. The Canadian federal government has released a framework that outlines proposed new requirements governing the emission of GHGs and other industrial pollutants. It is possible that new federal or provincial requirements with respect to GHGs and industrial air pollutants will be imposed. This may require additional funding or facilities to comply with such requirements.
* Risks to Future Phase Development
We have announced phased development for up to five additional phases of projects of a similar size to the Project. The development of these phases is subject to a number of risks, primarily in the areas of resource extent and quality, cost, execution, long-term commodity price expectation and regulatory approval. If the estimates of costs to complete these future phases are higher than anticipated, these future phases may be deferred or cancelled. The execution of these future phases requires specialized labour, module construction, engineering expertise and construction management. As oil sands development in Alberta has been and may be in the future at high levels of development activity, some or all of these resources may not be available to us on the schedule that we require, which could delay future development. We have regulatory approval for the Phase 2 upgrader, but do not have regulatory approval for any future phase of SAGD development or upgraders. These regulatory approvals may delay or restrict our development of future phases.
* Infrastructure Risk
The Project will depend on successful operation of certain infrastructure owned and operated by others, including, without limitation:
| | • | pipelines for the transportation of feedstocks and petroleum products to be sold ; |
| | • | pipelines for the transportation of natural gas; |
| | • | a railway spur for the transportation of products and byproducts including sulfur; |
| | • | disposal facilities for by-products of the Project (e.g. sulphur); and |
| | • | electricity transmission systems for the provision and/or sale of electricity. |
The failure of any or all of these utilities to supply service will negatively impact the operation of the Project which, in turn, may have a material adverse effect on our business or results of operations.
Financial Statements
Revised (Retroactive change in accounting policy) and Restated (US GAAP)
For the year ended
December 31, 2008
Independent Auditors’ Report
To the Directors of OPTI Canada Inc.:
We have audited the balance sheets of OPTI Canada Inc. as at December 31, 2008 and 2007 and the statement of earnings (loss), comprehensive earnings (loss) and retained earnings (deficit), shareholders’ equity and cash flows for each of the years in the two year period ended December 31, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
In our opinion, these financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2008 and 2007 and the results of its operations and its cash flows for each of the years in the two year period ended December 31, 2008 in accordance with Canadian generally accepted accounting principles.
As discussed in Note 2, 4 and 6 to the financial statements, the Company has changed its accounting for costs incurred during the pre-operating period. Furthermore, as discussed in Note 14 to the financial statements, the Company has restated its 2008 and 2007 reconciliation to United States generally accepted accounting principles (US GAAP).
Chartered Accountants
Calgary, Alberta Canada
February 24, 2009 (except for Note 2, 4, 6 and 14, which is as of May 25, 2009)
“PricewaterhouseCoopers” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership, or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity.
Balance Sheets
As at December 31
| | | | | | | |
| (amounts in thousands of Canadian dollars) | | 2008 (Revised - Note 2p) | | | 2007 (Revised - Note 2p) | |
| | | | | | | |
| ASSETS | | | | | | |
| Current | | | | | | |
| Cash and cash equivalents (note 2f) | | $ | 217,145 | | | $ | 310,504 | |
| Accounts and other receivables | | | 22,807 | | | | 13,495 | |
| Commodity contracts (note 3) | | | 78,003 | | | | - | |
| Future income taxes (note 6) | | | 2,709 | | | | - | |
| Interest reserve account (note 2n) | | | - | | | | 137,328 | |
| | | | 320,664 | | | | 461,327 | |
| | | | | | | | | |
| Property, plant and equipment (note 4) | | | 4,052,525 | | | | 3,540,784 | |
| Future income taxes (note 6) | | | 67,534 | | | | - | |
| Financial hedging instruments (note 9c) | | | 31,679 | | | | - | |
| | | $ | 4,472,402 | | | $ | 4,002,111 | |
| LIABILITIES | | | | | | | | |
| Current | | | | | | | | |
| Accounts payable and accrued liabilities | | $ | 199,907 | | | $ | 190,723 | |
| Short-term debt (note 5) | | | 145,500 | | | | - | |
| | | | 345,407 | | | | 190,723 | |
| | | | | | | | | |
| Long-term debt (note 5) | | | 2,618,000 | | | | 1,734,775 | |
| Obligation under capital lease (note 11b) | | | 30,195 | | | | 29,600 | |
| Other long-term liabilities (note 7) | | | 7,937 | | | | 66,677 | |
| Future income taxes (note 6) | | | - | | | | 29,592 | |
| | | | 3,001,539 | | | | 2,051,367 | |
SHAREHOLDERS’ EQUITY (note 8) | | | | | | | | |
| Capital stock | | | 1,847,461 | | | | 1,837,253 | |
| Warrants | | | - | | | | 15,686 | |
| Contributed surplus | | | 31,080 | | | | 11,897 | |
| Retained earnings (deficit) | | | (407,678 | ) | | | 85,908 | |
| | | | 1,470,863 | | | | 1,950,744 | |
| | | $ | 4,472,402 | | | $ | 4,002,111 | |
Commitments (note 11)
Subsequent events (note 13)
See accompanying notes to the financial statements
| Signed | “Chris P Slubicki” | | Signed | “Bruce G. Waterman” | |
| Director | | | Director | | |
May 25, 2009
OPTI CANADA INC. – 2 – 2008 ANNUAL FINANCIAL STATEMENTS
Statements of Earnings (Loss), Comprehensive Earnings (Loss)
and Retained Earnings (Deficit)
Years ended December 31
| | | | |
| | | 2008 | | | 2007 | |
| (amounts in thousands of Canadian dollars, except per share amounts) | | (Revised - Note 2p) | | | (Revised - Note 2p) | |
| | | | | | | |
| Revenue | | | | | | |
| Petroleum sales | | $ | 187,069 | | | $ | - | |
| Power sales | | | 11,232 | | | | - | |
| Interest income | | | 5,985 | | | | 13,303 | |
| Royalties | | | (365 | ) | | | - | |
| | | | 203,921 | | | | 13,303 | |
| | | | | | | | | |
| Expenses | | | | | | | | |
| Foreign exchange translation loss (gain) | | | 372,626 | | | | (235,161 | ) |
| Impairment of assets (note 13) | | | 369,353 | | | | - | |
| Diluent and feedstock purchases | | | 164,547 | | | | - | |
| Operating | | | 83,759 | | | | - | |
| Interest | | | 38,527 | | | | - | |
| General and administrative | | | 17,616 | | | | 14,206 | |
| Depletion , depreciation and accretion | | | 17,067 | | | | 2,011 | |
| Transportation | | | 8,230 | | | | - | |
| Financing charges | | | 893 | | | | 11,927 | |
| Realized gain on hedging instruments | | | (115,415 | ) | | | - | |
| Unrealized loss (gain) on hedging instruments | | | (160,460 | ) | | | 60,761 | |
| | | | 796,743 | | | | (146,256 | ) |
| | | | | | | | | |
| Earnings (loss) before taxes | | | (592,822 | ) | | | 159,559 | |
| | | | | | | | | |
| Income taxes | | | | | | | | |
| Future tax expense (recovery) (note 6) | | | (115,900 | ) | | | 8,736 | |
| | | | | | | | | |
| Net earnings (loss) and comprehensive earnings (loss) | | | (476,922 | ) | | | 150,823 | |
| | | | | | | | | |
| Retained earnings (deficit) - beginning of year | | | 85,908 | | | | (39,737 | ) |
| Adoption of new accounting policy (note 2p) | | | - | | | | (25,178 | ) |
| Retained earnings (deficit) - beginning of year | | | 85,908 | | | | (64,915 | ) |
| Expiration of call obligations (note 8) | | | (16,664 | ) | | | - | |
| Retained earnings (deficit) - end of year | | $ | (407,678 | ) | | $ | 85,908 | |
| | | | | | | | | |
| Loss per share, basic and diluted | | $ | (2.43 | ) | | $ | 0.77 | |
See accompanying notes to the financial statements
OPTI CANADA INC. – 3 – 2008 ANNUAL FINANCIAL STATEMENTS
Statement of Shareholders’ Equity
Years ended December 31
(Revised - Note 2p) | | Warrants | | | Call Obligations | | | Common & Preferred Shares | | | Contributed Surplus | | | Deficit | | | Total | |
| (amounts in thousands of Canadian dollars) | | | |
| Balance at December 31, 2006 | | $ | 15,686 | | | $ | (16,664 | ) | | $ | 1,447,679 | | | $ | 9,357 | | | $ | (39,737 | ) | | $ | 1,418,427 | |
| Issued for cash | | | - | | | | - | | | | 352,156 | | | | - | | | | - | | | | 352,156 | |
| Issued for cash - flow-though | | | - | | | | - | | | | 60,021 | | | | - | | | | - | | | | 60,021 | |
| Share issue costs | | | - | | | | - | | | | (16,768 | ) | | | - | | | | - | | | | (16,768 | ) |
| Stock options exercised | | | - | | | | - | | | | 16,795 | | | | (1,548 | ) | | | - | | | | 15,247 | |
| Stock based compensation | | | - | | | | - | | | | 1,548 | | | | 4,088 | | | | - | | | | 5,636 | |
| Tax effect on financing activities | | | - | | | | - | | | | (7,514 | ) | | | - | | | | - | | | | (7,514 | ) |
| Adoption of new accounting policy | | | - | | | | - | | | | - | | | | - | | | | (25,178 | ) | | | (27,284 | ) |
| Net earnings and comprehensive earnings | | | - | | | | - | | | | - | | | | - | | | | 150,823 | | | | 150,823 | |
| Balance at December 31, 2007 | | $ | 15,686 | | | $ | (16,664 | ) | | $ | 1,853,917 | | | $ | 11,897 | | | $ | 85,908 | | | $ | 1,950,744 | |
| Share issue costs | | | - | | | | - | | | | (71 | ) | | | - | | | | - | | | | (71 | ) |
| Stock options exercised | | | - | | | | - | | | | 4,870 | | | | (1,030 | ) | | | - | | | | 3,840 | |
| Stock based compensation | | | - | | | | - | | | | - | | | | 5,076 | | | | - | | | | 5,076 | |
| Expiration of call options | | | - | | | | 16,664 | | | | - | | | | - | | | | (16,664 | ) | | | - | |
| Warrants exercised | | | (549 | ) | | | - | | | | 3,750 | | | | - | | | | - | | | | 3,201 | |
| Reclassified expired warrants | | | (15,137 | ) | | | - | | | | - | | | | 15,137 | | | | - | | | | - | |
| Tax effect on financing activities | | | - | | | | - | | | | (15,005 | ) | | | - | | | | - | | | | (15,005 | ) |
| Net (loss) and comprehensive (loss) | | | - | | | | - | | | | - | | | | - | | | | (476,922 | ) | | | (476,922 | ) |
| Balance at December 31, 2008 | | $ | - | | | $ | - | | | $ | 1,847,461 | | | $ | 31,080 | | | $ | (407,678 | ) | | $ | 1,470,863 | |
See accompanying notes to the financial statements
OPTI CANADA INC. – 4 – 2008 ANNUAL FINANCIAL STATEMENTS
Statement of Cash Flows
Years ended December 31
| | | 2008 | | | 2007 | |
| (amounts in thousands of Canadian dollars) | | (Revised - Note 2p) | | | (Revised - Note 2p) | |
| Cash provided by (used in): | | | | | | |
| Operating activities | | | | | | |
| Net earnings (loss) | | $ | (476,922 | ) | | $ | 150,823 | |
| Items not affecting cash | | | | | | | | |
| Amortization and accretion expense | | | 17,067 | | | | 2,011 | |
| Stock-based compensation expense | | | 1,895 | | | | 1,356 | |
| Impairment of assets | | | 369,353 | | | | - | |
| Imputed interest on commodity contract liability | | | 189 | | | | - | |
| Unrealized (gain) loss on hedging instruments | | | (160,460 | ) | | | 60,761 | |
| Foreign exchange translation loss (gain) | | | 372,626 | | | | (235,161 | ) |
| Future tax expense (recovery) | | | (115,900 | ) | | | 8,736 | |
| | | | 7,848 | | | | (11,474 | ) |
| Asset retirement costs incurred | | | (9 | ) | | | (24 | ) |
| Financing charges | | | 893 | | | | 11,927 | |
| Net change in non-cash working capital | | | 1,157 | | | | 4,496 | |
| | | | 9,889 | | | | 4,925 | |
| Financing activities | | | | | | | | |
| Increase in long-term debt | | | 632,000 | | | | 930,700 | |
| Repayments of long-term debt | | | - | | | | (612,820 | ) |
| Proceeds from share issuances | | | 7,041 | | | | 428,972 | |
| Share issue costs | | | (71 | ) | | | (16,768 | ) |
| Financing charges | | | (893 | ) | | | (11,927 | ) |
| Decrease in principal portion of capital lease obligation | | | (305 | ) | | | - | |
| Net change in non-cash working capital | | | 13,241 | | | | (4,793 | ) |
| | | | 651,013 | | | | 713,364 | |
| Investing activities | | | | | | | | |
| Property, plant and equipment additions | | | (890,324 | ) | | | (1,108,367 | ) |
| Proceeds of cross-currency and interest rate swaps | | | - | | | | (2,201 | ) |
| Decrease in short-term investments | | | - | | | | 37,097 | |
| Decrease in interest reserve account | | | 158,398 | | | | 102,626 | |
| Net change in non-cash working capital | | | (31,950 | ) | | | 30,837 | |
| | | | (763,876 | ) | | | (940,008 | ) |
| Foreign exchange gain (loss) on cash and cash | | | | | | | | |
| equivalents held in foreign currency | | | 9,615 | | | | (4,443 | ) |
| | | | | | | | | |
| Decrease in cash | | | (93,359 | ) | | | (226,162 | ) |
| | | | | | | | | |
| Cash and cash equivalents - beginning of year | | | 310,504 | | | | 536,666 | |
| Cash and cash equivalents - end of year | | $ | 217,145 | | | $ | 310,504 | |
See accompanying notes to the financial statements
OPTI CANADA INC. – 5 – 2008 ANNUAL FINANCIAL STATEMENTS
OPTI Canada Inc.
Notes to Financial Statements
Years ended December 31, 2008 and 2007
OPTI Canada Inc. (OPTI) is a public Canadian company with its shares listed for trading on the Toronto Stock Exchange (Symbol: OPC). OPTI’s primary activity is the Long Lake Project (the Project), in which OPTI has a 50 percent working interest as at December 31, 2008. Effective January 1, 2009, OPTI has a 35 percent working interest in all the joint venture assets, including Phase 1 of the Long Lake Project, all future phase reserves and resources, and future phases of development. See note 13.
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
| | a) | Property, plant and equipment |
| | On January 1, 2008, OPTI Long Lake LP (Partnership) was dissolved by a distribution of assets to each of the partners, OPTI and OPTI GP Inc. On January 1, 2008, OPTI GP Inc. was amalgamated with OPTI Canada Inc. Accordingly, the 2007 comparable financial results are consolidated. |
| (ii) | Petroleum and natural gas properties |
| | OPTI follows the full cost method of accounting for petroleum and natural gas properties (SAGD assets), whereby all costs of exploring for and developing petroleum and natural gas reserves are capitalized. Costs include land acquisition costs, geological and geophysical costs, carrying charges on non-productive properties, costs of drilling both productive and non-productive wells, costs of testing the bitumen upgrading process, related overhead and pre-operating costs. Under the full cost method of accounting, we deplete oil and gas capitalized costs using the unit-of-production method. Depletion is calculated using remaining proved developed reserves before royalties. OPTI evaluates the carrying value of assets whenever events or conditions occur that indicate that the carrying value of assets on our balance sheet may not be recoverable from future cash flows. Impairment is recognized if the carrying amount of the property, plant and equipment (PP&E) exceeds the sum of the undiscounted cash flows expected to result from proved reserves (ceiling test). Cash flows are calculated based on an estimate of future prices. In circumstances of impairment, the impairment would be calculated as the amount by which carrying amounts of the PP&E exceed the net present value of future cash flows from proved plus risked probable reserves. The risk-free interest rate is used to arrive at the net present value of the future cash flows. Any excess carrying value above the net present value of OPTI’s future cash flows would be recorded as a permanent impairment. The costs of unproved properties are excluded from the ceiling test calculation and subject to a separate impairment test. In circumstances of impairment, the impairment would be calculated as the amount by which carrying amounts of unproved properties exceed the net present value of future cash flows. The impaired amount would be moved to the full cost amount subject to depletion. Proceeds from the sale of oil and gas properties reduce PP&E, with no gain or loss recognized, unless such a sale would significantly alter the rate of depletion and depreciation. Effective July 1, 2008 revenue and operating costs related to the SAGD assets have been recorded in the Statement of Earnings (Loss). |
NOTES TO FINANCIAL STATEMENTS
OPTI CANADA INC. – 6 – 2008 ANNUAL FINANCIAL STATEMENTS
| TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT AS NOTED |
OPTI Canada Inc.
Notes to Financial Statements
Years ended December 31, 2008 and 2007
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
| | Major facilities include the Upgrader and central plant facilities related to the SAGD assets. Operating costs net of revenues in relation to major facilities that are not considered to be ready for their intended use are capitalized. Judgement is required to determine whether facilities are ready for their intended use. The factors considered include whether the plant is producing a saleable product, and whether the plant is operating at pre-determined operating levels or other factors as circumstances warrant. Once the assets are considered ready for their intended use, revenue is recognized and operating costs are recorded in earnings during the year.
An impairment loss is recognized on major facilities when the carrying amount is not recoverable and exceeds its fair value. The carrying amount is not recoverable if the carrying amount exceeded the sum of the undiscounted cash flows from expected use and eventual disposition. If the carrying amount is not recoverable, an impairment loss is measured as the amount by which the assets exceed the discounted future cash flows from the major facilities assets.
OPTI’s major facilities are depreciated using the unit of production method based on the facilities’ productive capacity over 40 years.
Effective July 1, 2008 revenue and operating costs related to the SAGD assets have been recorded in the Statement of Earnings (Loss). |
| (iv) | Asset retirement obligations |
| | OPTI recognizes the fair value of the liability for asset retirement obligations in the period it is incurred with a corresponding increase to the carrying amount of the related asset. The initial obligation recognized is accreted over time until the future period in which the obligation is settled. The related asset will be amortized over its estimated useful life using straight line or the unit of production method once operations commence. |
| | Corporate office assets are recorded at cost less accumulated amortization, which is calculated using the declining balance method at rates of 30 percent to 50 percent per annum. |
| (vi) | Maintenance and turnarounds |
| | Expenditures associated with maintenance activities or major turnarounds that improve the productive capacity or extend the life of an asset are capitalized. These costs are included in property and equipment when incurred and charged to depletion and depreciation over the estimated useful life. Maintenance and repairs, other than major turnaround costs, are expensed as incurred. |
| (vii) | Capitalized interest |
| | OPTI capitalizes interest costs in relation to its long-term debt for major development projects. These costs are subsequently amortized to income with the related assets. Capitalization of interest ceases when the assets are ready for their intended use. Effective July 1, 2008 interest expense related to the SAGD assets has been recorded in the Statement of Earnings (Loss). |
A significant portion of OPTI’s activities are conducted within a joint venture. The accounts reflect OPTI’s proportionate interest in such activities.
NOTES TO FINANCIAL STATEMENTS
OPTI CANADA INC. – 7 – 2008 ANNUAL FINANCIAL STATEMENTS
| TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT AS NOTED |
OPTI Canada Inc.
Notes to Financial Statements
Years ended December 31, 2008 and 2007
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(CONTINUED) |
| | c) | Revenue recognition - Oil and gas products |
Revenue from the production of oil and gas products is recognized when the risks and rewards are transferred to the customer. At the Long Lake Project, our share of sales are recognized when the Oil and gas product leaves the plant gate. Revenue represents OPTI’s share and is recorded gross of royalty obligations to governments and other mineral interest owners.
| | d) | Revenue recognition - Power |
Revenue from power generated in excess of the Long Lake project requirements is recognized when the risks and rewards are transferred to the customer. At the Long Lake Project, our share of sales is recognized when the excess power leaves the plant gate. Revenue represents OPTI’s share.
We pay to transport our share of oil and gas products sold, as well as transmission costs for our share of excess power sold. This transportation is presented in our financial statements as transportation expense.
| | f) | Cash and cash equivalents |
Cash and cash equivalents include cash, bankers’ acceptances, term deposits and bankers’ deposit notes that carry terms less than 91 days at the date of purchase.
Accounts receivable are recorded based on our revenue recognition policy, see notes 3(d) and 3(e). If applicable, an allowance for doubtful accounts will be recorded to provide for specific doubtful receivables.
Leases that transfer substantially all the benefits, risks and rewards of ownership to OPTI are recorded as capital leases and classified as PP&E with a corresponding increase to obligations under capital leases. All other leases are classified as operating leases under which leasing costs are expensed in the period incurred.
OPTI uses the liability method of accounting for income taxes. Future tax assets and liabilities are recognized based on differences in the financial statement carrying amount for assets and liabilities and the associated tax balance. Future taxes are measured based on substantially enacted tax rates in the period in which the temporary differences are expected to be realized or settled. The asset must be more likely than not to be realized, otherwise a valuation allowance reduces the tax asset.
Tax deductions for income tax purposes related to exploratory and development activities funded by flow-through share arrangements are renounced to investors in accordance with income tax legislation. Share capital is reduced, with a corresponding increase to the future tax liability, by the estimated cost of the tax deductions when such deductions are renounced to the investors.
| | k) | Stock-based compensation plans |
Stock options granted to directors, officers, employees and consultants are accounted for using the fair value method under which compensation expense is recorded based on the estimated fair value of the options at the grant date using the Black-Scholes option pricing model. Compensation cost is either expensed or capitalized over the vesting period with a corresponding increase in contributed surplus. When stock options are exercised, the cash proceeds along with the amount previously recorded as contributed surplus are recorded as share capital.
NOTES TO FINANCIAL STATEMENTS
OPTI CANADA INC. – 8 – 2008 ANNUAL FINANCIAL STATEMENTS
| TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT AS NOTED |
OPTI Canada Inc.
Notes to Financial Statements
Years ended December 31, 2008 and 2007
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(CONTINUED) |
| | l) | Earnings (loss) per share |
Earnings (loss) per share is calculated using net earnings or loss and the weighted average number of common shares outstanding during the year. For the year ended December 31, 2008, the weighted average number of common shares of all classes outstanding is 195.7 million (December 31, 2007 - 177.4 million) and on a fully diluted basis is 195.7 million (December 31, 2007 - 181.6 million). OPTI uses the treasury stock method of calculating diluted earnings or loss per common share. There is no difference in basic or diluted loss per share.
The number of shares used in earnings (loss) per share calculations is reconciled as follows:
| Number of shares (thousands) | | December 31, 2008 | | | December 31, 2007 | |
| Weighted average shares outstanding | | | 195,930 | | | | 195,356 | |
Diluted effect of stock options (1) | | | - | | | | - | |
| Weighted average diluted shares outstanding | | | 195,930 | | | | 195,356 | |
| Basic and fully diluted loss per share | | $ | (2.43 | ) | | $ | 0.77 | |
1 - As a result of the net loss for the year ended December 31, 2008 and the effects of the treasury stock method of calculating diluted shares at December 31, 2007, all potentially dilutive securities were considered anti-dilutive.
The preparation of the financial statements in accordance with Canadian Generally Accepted Accounting Principles (GAAP) requires management to make estimates and assumptions that affect reported amounts and presentation of assets, liabilities, revenues, expenses and disclosures of contingencies and commitments. Such estimates primarily relate to unsettled transactions and events at the balance sheet date which are based on information available to management at each financial statement date. Actual results could differ from those estimated.
The estimate of the percentage of completion of various projects at the financial statement date affects PP&E additions and the related accrued liability. Various estimates are required in consideration of impairment of capitalized costs. Consideration of impairment includes estimates relating to future cash flows, regulatory approval, and commodity prices.
For petroleum and natural gas properties, OPTI assesses impairment using management estimates of total proved oil and gas reserves, commodity prices and capital and operating costs required to develop those reserves. By their nature, these estimates and the related future net cash flows are subject to measurement uncertainty, and the impact of differences between actual and estimated amounts on the financial statements of future periods could be material. Our reserve estimates, which have been estimated by independent engineering firms, are subject to change as additional information becomes available or if different assumptions are used.
The estimate related to asset retirement obligations requires estimates of the amount and timing of future abandonment liabilities, inflation, and interest rates. The recognition of amounts in relation to stock-based compensation requires estimates related to valuation of stock options at the time of issuance. Future taxes require estimates as to the realization of future tax assets and the timing of reversal of tax assets and liabilities. The fair value of the commodity contracts and foreign exchange hedging instruments is calculated using valuation models that require estimates as to future market prices.
By their nature, these estimates are subject to measurement uncertainty and the effect of changes in such estimates on the financial statements for current and future periods could be significant.
NOTES TO FINANCIAL STATEMENTS
OPTI CANADA INC. – 9 – 2008 ANNUAL FINANCIAL STATEMENTS
| TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT AS NOTED |
OPTI Canada Inc.
Notes to Financial Statements
Years ended December 31, 2008 and 2007
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(CONTINUED) |
| | n) | Interest reserve account |
Cash is considered to be restricted when its availability is limited to a specified purpose. At December 31, 2007, OPTI’s restricted cash balance was connected with the Senior Secured Notes. The loan agreements required OPTI to maintain an account to fund anticipated interest payments through December 2008.
| | o) | Foreign currency translation |
Monetary assets and liabilities are translated at exchange rates in effect on the balance sheet date. Other assets, other liabilities and expenses are translated at rates in effect at the date of the transaction. OPTI includes foreign exchange gains or losses in earnings. These gains and losses are related to the revaluations of its U.S. dollar (US$) denominated cash and cash equivalents, derivatives, U.S. dollar (US$) denominated long-term debt, and exchange gains and losses resulting from operating activities.
On January 1, 2008, OPTI adopted the Canadian Institute of Chartered Accountants (CICA) handbook section 1535 “Capital Disclosures.” Section 1535 requires the disclosure of OPTI’s objectives, policies and processes for managing capital. This includes qualitative information regarding OPTI’s objectives, policies and processes for managing capital and quantitative data about what OPTI manages as capital. These disclosures are based on information used internally by OPTI’s management. See note 10.
| (ii) | Financial instruments |
On January 1, 2008, OPTI adopted the CICA handbook section 3862 “Financial Instruments - Disclosures,” and section 3863 “Financial Instruments - Presentation.” Sections 3862 and 3863 replace section 3861 “Financial Instruments - Disclosure and Presentation” which revises financial instruments disclosure requirements and leaves unchanged its presentation requirements. These new sections place increased emphasis on disclosures about the nature and extent of risks arising from financial instruments and how OPTI manages those risks. See discussion in OPTI’s 2008 annual Management’s Discussion and Analysis (“MD&A”) under the heading “Financial Instruments.”
| (iii) | Goodwill and Intangible Assets |
NOTES TO FINANCIAL STATEMENTS
OPTI CANADA INC. – 10 – 2008 ANNUAL FINANCIAL STATEMENTS
| TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT AS NOTED |
OPTI Canada Inc.
Notes to Financial Statements
Years ended December 31, 2008 and 2007
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(CONTINUED) |
The Company’s previously issued financial statements have been revised and reissued to reflect the retroactive adoption of this change in accounting policy. The impact of adoption is as follows:
Year ended December 31, 2007 (amounts in thousands of Canadian dollars, except per share amounts) | | As previously issued 2007 | | | Adjustment | | | Revised 2007 | |
| Foreign exchange translation gain | | $ | - | | | $ | 235,161 | | | $ | 235,161 | |
| Unrealized loss on hedging instruments | | | (3,779 | ) | | | (56,982 | ) | | | (60,761 | ) |
| Future tax recovery (expense) | | | 9,134 | | | | (17,870 | ) | | | (8,736 | ) |
| Net earnings (loss) and comprehensive earnings (loss) | | | (9,486 | ) | | | 160,309 | | | | 150,823 | |
| Loss per share, basic and diluted | | $ | (0.05 | ) | | $ | 0.82 | | | $ | 0.77 | |
| At December 31, 2007 | | As previously issued 2007 | | | Adjustment | | | Revised 2007 | |
| Opening (deficit) | | $ | (39,737 | ) | | $ | (25,178 | ) | | $ | (64,915 | ) |
| Property, plant & equipment | | | 3,373,908 | | | | 166,876 | | | | 3,540,784 | |
| Future income tax | | | 2,153 | | | | (31,745 | ) | | | (29,592 | ) |
| Closing (deficit) retained earnings | | | (49,223 | ) | | | 135,131 | | | | 85,908 | |
Year ended December 31, 2008 (amounts in thousands of Canadian dollars, except per share amounts) | | As previously issued 2008 | | | Adjustment | | | Revised 2008 | |
| Petroleum sales | | $ | - | | | $ | 187,069 | | | $ | 187,069 | |
| Power sales | | | - | | | | 11,232 | | | | 11,232 | |
| Royalties | | | - | | | | (365 | ) | | | (365 | ) |
| Operating expenses | | | - | | | | (83,759 | ) | | | (83,759 | ) |
| Diluent and feedstock purchases | | | - | | | | (164,547 | ) | | | (164,547 | ) |
| Transportation | | | - | | | | (8,230 | ) | | | (8,230 | ) |
| Interest expense | | | - | | | | (38,527 | ) | | | (38,527 | ) |
| Depletion, depreciation and amortization | | | (5,973 | ) | | | (11,094 | ) | | | (17,067 | ) |
| Impairment of assets | | | (391,686 | ) | | | 22,333 | | | | (369,353 | ) |
| Foreign exchange translation loss | | | - | | | | (372,626 | ) | | | (372,626 | ) |
| Unrealized gain on hedging instruments | | | 66,973 | | | | 93,487 | | | | 160,460 | |
| Realized gain on hedging instruments | | | 1,653 | | | | 113,762 | | | | 115,415 | |
| Future tax recovery | | | 85,025 | | | | 30,875 | | | | 115,900 | |
| Net earnings (loss) and comprehensive earnings (loss) | | | (256,532 | ) | | | (220,390 | ) | | | (476,922 | ) |
| Earnings (loss) per share, basic and diluted | | $ | (1.31 | ) | | $ | (1.12 | ) | | $ | (2.43 | ) |
| At December 31, 2008 | | As previously issued 2008 | | | Adjustment | | | Revised 2008 | |
| Opening (deficit) retained earnings | | $ | (49,223 | ) | | $ | 135,131 | | | $ | 85,908 | |
| Property, plant & equipment | | | 4,160,901 | | | | (108,376 | ) | | | 4,052,525 | |
| Future income tax | | | 47,126 | | | | 23,117 | | | | 70,243 | |
| Closing deficit | | | (322,419 | ) | | | (85,259 | ) | | | (407,678 | ) |
OPTI previously capitalized gains and losses related to the translation of OPTI’s U.S. dollar debt, capitalized operations, as well as unrealized gains and losses related to certain financial derivatives associated with its long-term debt. As a result of the adoption of this new accounting standard, these capitalized amounts will no longer meet the criteria for capitalization.
NOTES TO FINANCIAL STATEMENTS
OPTI CANADA INC. – 11 – 2008 ANNUAL FINANCIAL STATEMENTS
| TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT AS NOTED |
OPTI Canada Inc.
Notes to Financial Statements
Years ended December 31, 2008 and 2007
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(CONTINUED) |
| (iv) | Future accounting changes |
On February 13, 2008 the CICA Accounting Standards Board announced that Canadian public reporting issuers will be required to report under International Financial Reporting Standards (IFRS) in 2011. Prior to the adoption date, certain MD&A disclosures are required, beginning for the fourth quarter of 2008. OPTI is currently evaluating the impact of these new standards.
| | q) | Adoption of new accounting policies |
On January 1, 2007, OPTI adopted the Canadian Institute of Chartered Accountants (CICA) handbook sections 1530 “Comprehensive Income,” section 3251 “Equity,” section 3855 “Financial Instruments - Recognition and Measurement” and section 3865 “Hedges.” These standards result in changes in the accounting for financial instruments and hedges as well as introduce comprehensive income as a separate component of shareholders’ equity. As required, these standards have been adopted prospectively and comparative amounts for the prior periods have not been restated.
Comprehensive income is comprised of net earnings or loss and other comprehensive income (OCI). OCI represents the change in equity for a period that arises from unrealized gain and losses on available-for-sale securities and changes in the fair market value of derivative instruments designated as cash flow hedges. OPTI does not currently have any transactions that give rise to OCI, therefore OPTI’s net loss and comprehensive loss for the years ended December 31, 2007 and 2008 are the same amount.
This section establishes the standards for presentation of equity and changes in equity during the period. The section requires separate presentation of changes in equity for the period arising from net income, OCI, contributed surplus, retained earnings, share capital and reserves. Accumulated OCI is included in the consolidated balance sheet as a separate component of shareholders’ equity.
| (iii) | Financial instruments |
This section establishes standards for the recognition and measurement of financial instruments, which is comprised of financial assets, financial liabilities, derivatives and non-financial derivatives.
A financial asset is cash or a contractual right to receive cash or another financial asset, including equity, from another party. A financial liability is the contractual obligation to deliver cash or another financial asset to another party.
A derivative is a financial instrument whose value changes in response to a specified variable, requires little or no net investment and is settled at a future date. An embedded derivative is a derivative that is a part of a non-derivative contract and not directly related to that contract. Under this standard, embedded derivatives must be accounted for as a separate financial instrument. A non-financial derivative is a contract that can be settled net in cash or another financial instrument.
Under this standard, all financial instruments are initially recorded at fair-value and are subsequently accounted for based on one of five classifications: held for trading, held-to-maturity, other financial liabilities, loans and receivables or available-for-sale. The classification of a financial instrument depends on its characteristics and the purpose for which it was acquired.
NOTES TO FINANCIAL STATEMENTS
OPTI CANADA INC. – 12 – 2008 ANNUAL FINANCIAL STATEMENTS
| TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT AS NOTED |
OPTI Canada Inc.
Notes to Financial Statements
Years ended December 31, 2008 and 2007
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(CONTINUED) |
Held for trading financial instruments are financial assets or financial liabilities that are purchased with the intention of selling or repurchasing in the near term. Any financial instrument can be designated as held for trading as long as its fair value can be reliably measured. A derivative is classified as held for trading unless designated as and considered an effective hedge. Held for trading instruments are recorded at fair value with any subsequent gains or losses from changes in the fair value included in earnings.
OPTI’s commodity contracts and foreign exchange hedging instruments are derivatives and accounted for as held for trading financial instruments and are recorded at fair value.
Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and a fixed maturity that OPTI has the intent and ability to hold to maturity. These financial assets are measured at amortized cost using the effective interest method. Any gains or losses arising from the sale of a held-to-maturity investment are included in earnings. All of OPTI’s cash equivalents and the interest reserve account are designated as held-to-maturity investments.
The fair values of cash equivalents, short-term investments and the interest reserve account approximate their carrying value due to their short-term nature.
| | C) | Other financial liabilities |
Items classified as other financial liabilities, excluding asset retirement obligation, on OPTI’s financial statements are accounted for at amortized cost using the effective interest method. Any gains or losses in the realization of other financial liabilities are included in earnings.
Items classified as receivables in OPTI’s financial statements are accounted for at amortized cost using the effective interest method. Any gains or losses on the realization of receivables are included in earnings.
The fair value of accounts and other receivables and accounts payable and accrued liabilities approximate their carrying values due to the short-term nature of these instruments. All costs related to debt issuance are expensed as incurred.
Available-for-sale assets are those financial assets that are not classified as held for trading, held-to-maturity or loans and receivables. Available-for-sale instruments are recorded at fair value. Any gains or losses arising from the change in fair value is recorded in OCI and upon the sale of the instrument or other-than-temporary impairment, the cumulative gain or loss is included in earnings.
OPTI has not designated any financial instruments as available-for-sale assets.
Fair values are based upon quoted market prices available from active markets or are otherwise determined using a variety of valuation techniques and models using quoted market prices.
Effective January 1, 2007, transaction costs relating to all financial instruments are expensed as incurred. As a result, $38 million of deferred financing costs, net of taxes of $11 million, have been charged to opening deficit.
NOTES TO FINANCIAL STATEMENTS
OPTI CANADA INC. – 13 – 2008 ANNUAL FINANCIAL STATEMENTS
| TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT AS NOTED |
OPTI Canada Inc.
Notes to Financial Statements
Years ended December 31, 2008 and 2007
OPTI has deferred premium West Texas Intermediate (WTI) put options that provide a US$80 per barrel strike price for 6,000 bbl/d of crude oil through 2009. At December 31, 2008 these instruments had an estimated value of $73 million. The cost of the put options is paid as the contracts expire and has been included in accounts payable and accrued liabilities. Additionally, OPTI has crude swaps at US$77 per barrel for 500 bbl/d of crude oil through 2009, with an estimated value of $5 million at December 31, 2008.
| 4. | PROPERTY, PLANT AND EQUIPMENT |
| | | December 31, 2008 (Revised - Note 2p) | |
| | | Cost | | | Accumulated DD&A | | | Net book value | |
| Oil sands assets - subject to depletion | | | 1,169,515 | | | | (9,150 | ) | | | 1,160,365 | |
| Oil sands assets - subject to depreciation | | | 2,862,762 | | | | (1,944 | ) | | | 2,860,818 | |
| Corporate assets and computer software | | | 3,555 | | | | (2,408 | ) | | | 1,147 | |
| Capital lease | | | 30,195 | | | | - | | | | 30,195 | |
| | | | 4,066,027 | | | | (13,502 | ) | | | 4,052,525 | |
| | | December 31, 2007 (Revised - Note 2p) | |
| | | Cost | | | Accumulated DD&A | | | Net book value | |
| Oil sands assets - subject to depletion | | | 899,172 | | | | - | | | | 899,172 | |
| Oil sands assets - subject to depreciation | | | 2,597,206 | | | | - | | | | 2,597,206 | |
| Corporate assets and computer software | | | 17,470 | | | | (2,665 | ) | | | 14,805 | |
| Capital lease | | | 29,600 | | | | - | | | | 29,600 | |
| | | | 3,543,448 | | | | (2,665 | ) | | | 3,540,783 | |
During the year ended December 31, 2008, OPTI capitalized $3 million (2007 - $5 million) of general and administrative expenses and $138 million (2007 - $130 million) of interest. Depletion and depreciation of SAGD assets commenced July 1, 2008 as these assets were ready for their intended use. The cost of unproved property was $423 million (2007 - $289 million). As a result of the asset sale noted in note 13, subsequent events, an impairment loss before taxes of $369 million was recorded in 2008.
For the calculation of the December 31, 2008 ceiling test, the benchmark prices for WTI in US$/barrel were as follows: 2009 - $60.00; 2010 - $71.40; 2011 - $83.20; 2012 - $93.90; 2013 - $97.40; and thereafter annual increases of 2 percent. See note 2a(ii) for discussion of impairment policy.
OPTI is engaged in the development of oil sands projects. Since inception, OPTI has been developing the Long Lake Project and proceeding with the development of future phases.
| | | | | | Years ended | |
| Amounts capitalized | | Inception to 2008 (Revised -Note 2p) | | | 2008 (Revised -Note 2p) | | | 2007 (Revised -Note 2p) | |
| | | | | | | | | | |
| Revenue | | $ | (98,254 | ) | | $ | (88,630 | ) | | $ | - | |
| Operating costs | | | 242,027 | | | | 171,578 | | | | 36,995 | |
| Standby charges on debt | | | 33,210 | | | | 1,603 | | | | 3,491 | |
| Interest | | | 329,652 | | | | 138,953 | | | | 130,109 | |
| General and administrative costs | | | 22,751 | | | | 2,636 | | | | 4,538 | |
| Future tax | | | 6,203 | | | | 997 | | | | 911 | |
NOTES TO FINANCIAL STATEMENTS
OPTI CANADA INC. – 14 – 2008 ANNUAL FINANCIAL STATEMENTS
| TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT AS NOTED |
OPTI Canada Inc.
Notes to Financial Statements
Years ended December 31, 2008 and 2007
OPTI’s debt consists of the following:
| | | 2008 | | | 2007 | |
| Senior secured notes (a) | | $ | 2,131,500 | | | $ | 1,734,775 | |
| $500 million revolving credit facility (b) | | | 486,500 | | | | - | |
| Long-term debt | | | 2,618,000 | | | | 1,734,775 | |
| | | | | | | | | |
| Short-term debt: $150 million revolving credit facility (c) | | | 145,500 | | | | - | |
| Total debt | | $ | 2,763,500 | | | $ | 1,734,775 | |
OPTI has US$1,000 million senior secured notes which bear interest at a fixed 8.25 percent and mature on December 15, 2014. These notes are collateralized by a second priority security interest on all OPTI’s existing and future property. OPTI may redeem up to 35 percent of these notes prior to December 15, 2009 with net proceeds from certain equity offerings. At any time prior to December 31, 2010, OPTI may redeem these notes at the principal amount, plus the applicable premium and accrued interest and at any time after December 31, 2010 at redemption prices between 104.13 percent and 100 percent of the principal amount.
OPTI also has US$750 million senior secured notes. These notes bear interest at a fixed 7.875 percent and mature December 15, 2014. The other terms and conditions associated with these notes are substantially the same as the notes described above. See note 10 for discussion of the debt covenants.
| | b) | $500 million revolving credit facility |
OPTI has a $500 million revolving credit facility due December 15, 2011. Amounts drawn under this facility can take the form of prime rate based loans, bankers’ acceptances, LIBOR loans or letters of credit. The facility will bear interest at the prime rate, bankers’ acceptance rate or at LIBOR plus a spread above the reference rate between 1.0 percent and 2.5 percent per annum. During 2008 the weighted average interest rate on borrowings of this line was 5.4% (2007 - 6.6%). This facility is collateralized by a first priority security interest on all present and after acquired property of OPTI. The revolving credit facility includes certain conditions precedent to all borrowings which include a sufficient funding test related to the Project. At December 31, 2008, $486.5 million was outstanding under this facility. Subsequent to December 31, 2008, the $500 million revolving credit facility was reduced to $350 million. See note 13, Subsequent events.
| | c) | $150 million revolving credit facility |
On June 23, 2008, OPTI established a $150 million revolving credit facility due June 22, 2009. Borrowings under this facility can take the form of prime rate based loans, bankers’ acceptances, LIBOR loans or letters of credit. Borrowings will bear interest at the prime rate, bankers’ acceptance rate or at LIBOR plus a spread above the reference rate between 1.0 percent and 2.5 percent per annum. During 2008 the weighted average interest rate on borrowings of this line was 5.4% (2007 - nil). This facility is collateralized by a first priority security interest on all present and after acquired property of OPTI. This facility includes certain conditions precedent to all borrowings which include a sufficient funding test related to the Project. At December 31, 2008, $145.5 million was outstanding under this facility. Subsequent to December 31, 2008, this $150 million revolving credit facility was repaid and cancelled. See note 13, Subsequent events.
NOTES TO FINANCIAL STATEMENTS
OPTI CANADA INC. – 15 – 2008 ANNUAL FINANCIAL STATEMENTS
| TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT AS NOTED |
OPTI Canada Inc.
Notes to Financial Statements
Years ended December 31, 2008 and 2007
The provision for income taxes reflects an effective tax rate of 20 percent (2007 - 5 percent) which differs from the statutory tax rate of 29.5 percent (2007 - 32.1 percent). The reasons for the difference are discussed below.
| | | 2008 | | | 2007 | | | 2008 (Revised - Note 2p) | | | 2007 (Revised - Note 2p) | |
| Expense (recovery) based on book earnings - Federal rate | | | 19.5 | % | | | 22.1 | % | | $ | (115,601 | ) | | $ | 35,294 | |
| Expense (recovery) based on book earnings - Provincial rate | | | 10.0 | % | | | 10.0 | % | | | (59,282 | ) | | | 15,956 | |
| Expense (recovery) based on book earnings - total | | | 29.5 | % | | | 32.1 | % | | | (174,883 | ) | | | 51,250 | |
| Impact of future tax rate and timing changes | | | | 21,072 | | | | (2,488 | ) |
| Non-deductible portion of unrealized foreign exchange losses on U.S.$ debt | | | | 58,517 | | | | (39,640 | ) |
| Non-taxable portion of realized foreign exchange gains on swaps | | | | (13,789 | ) | | | - | |
| Non-taxable portion of unrealized foreign exchange gains on hedging instruments | | | | (8,390 | ) | | | (4,170 | ) |
| Stock-based compensation | | | | 559 | | | | 435 | |
| Other | | | | 1,014 | | | | 3,349 | |
| Future tax (recovery) expense | | | $ | (115,900 | ) | | $ | 8,736 | |
Significant components of OPTI’s future tax liabilities (assets) are as follows:
| | | 2008 (Revised - Note 2p) | | | 2007 (Revised - Note 2p) | |
| Book value in excess of tax value - capital assets | | $ | 242,934 | | | $ | 231,143 | |
| Book value in excess of tax value - long-term debt | | | (23,663 | ) | | | 25,928 | |
| Asset retirement obligation | | | (1,984 | ) | | | (1,767 | ) |
| Benefit of share issuance costs | | | (9,198 | ) | | | (15,561 | ) |
| Losses for income tax purposes | | | (278,332 | ) | | | (210,151 | ) |
| Future tax liability (asset) | | | (70,242 | ) | | | 29,592 | (2,153) |
| Short-term future tax liability (asset) | | | (2,709 | ) | | | - | |
| Long-term future tax liability (asset) | | $ | (67,534 | ) | | $ | 29,592 | |
At December 31, 2008, the expiry dates of losses for income tax purposes are $13 million in 2009, $9 million in 2014, $16 million in 2015, $117 million in 2026, $685 million in 2027, and $273 million in 2028. In 2008, OPTI has not taken a valuation allowance against any portion of the future tax benefits.
| 7. | OTHER LONG-TERM LIABILITIES |
OPTI’s other long-term liabilities consists of the following:
| | | 2008 | | | 2007 | |
| Foreign exchange hedging instruments (a) | | $ | - | | | $ | 59,607 | |
| Asset retirement obligation (b) | | | 7,937 | | | | 7,070 | |
| Other long-term liabilities | | $ | 7,937 | | | $ | 66,677 | |
| | a) | Foreign exchange hedging instruments |
In 2008, OPTI settled its existing foreign currency hedging instruments for a net realized gain of $114 million. These instruments consisted of a US$200 million foreign exchange forward contract and US$875 million of cross currency swaps. OPTI’s new foreign exchange hedging instruments are in other long-term assets and discussed in note 9c.
NOTES TO FINANCIAL STATEMENTS
OPTI CANADA INC. – 16 – 2008 ANNUAL FINANCIAL STATEMENTS
| TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT AS NOTED |
OPTI Canada Inc.
Notes to Financial Statements
Years ended December 31, 2008 and 2007
| 7. | OTHER LONG-TERM LIABILITIES(CONTINUED) |
| | b) | Asset retirement obligation |
OPTI’s obligations with respect to asset retirement relate to reclamation of sites and facilities on which the Project operations are situated. The obligation is recognized in the period in which the obligation is created based on the estimated future reclamation cost using an average discount rate of 11.5 percent and estimated inflation of 3.0 percent annually. The total undiscounted future obligation is $151 million.
| Continuity of asset retirement obligation | | | |
| Present value of obligation at January 1, 2007 | | $ | 5,832 | |
| New obligations during the year | | | 835 | |
| Asset retirement costs incurred | | | (24 | ) |
| Accretion expense | | | 427 | |
| Present value of obligation at December 31, 2007 | | | 7,070 | |
| New obligations during the year | | | 309 | |
| Asset retirement costs incurred | | | (9 | ) |
| Accretion expense | | | 567 | |
| Present value of obligation at December 31, 2008 | | $ | 7,937 | |
OPTI estimates its obligations related to drilling activities will be settled over approximately the next 20 years and obligations relating to resource assets will be settled in approximately 55 years. OPTI’s upgrading facilities related to the Project have retirement obligations with indeterminate settlement dates and for which present value cannot be reasonably determined because the asset currently has an indeterminable useful life. An asset retirement obligation for these assets will be recorded in the period in which the lives of the assets become reasonably determinable.
a) Authorized
Unlimited number of common shares and preferred shares without nominal or par value.
| | | Number of shares (thousands) | | | Amount | |
| Common shares - January 1, 2007 | | | 172,684 | | | $ | 1,447,679 | |
| Issued for cash (c) | | | 18,535 | | | | 352,156 | |
| Issued for cash - flow-through (c) | | | 2,430 | | | | 60,021 | |
| Common share options exercised | | | 1,707 | | | | 18,343 | |
| Share issue costs | | | | | | | (16,768 | ) |
| Tax effect on flow-through shares and share issue costs | | | | | | | (7,514 | ) |
| Common shares - December 31, 2007 | | | 195,356 | | | | 1,853,917 | |
| Common share options exercised | | | 357 | | | | 4,870 | |
| Warrants exercised | | | 217 | | | | 3,750 | |
| Share issue costs | | | | | | | (71 | ) |
| Tax effect on flow-through shares and share issue costs | | | | | | | (15,005 | ) |
| Common shares - December 31, 2008 | | | 195,930 | | | $ | 1,847,461 | |
| | | | | | | | | |
| Call obligations - December 31, 2007 | | | | | | | (16,664 | ) |
| Expiration of call obligations (e) | | | | | | | 16,664 | |
| Call obligations - December 31, 2008 | | | | | | | - | |
| Total capital stock - December 31, 2008 | | | 195,930 | | | $ | 1,847,461 | |
NOTES TO FINANCIAL STATEMENTS
OPTI CANADA INC. – 17 – 2008 ANNUAL FINANCIAL STATEMENTS
| TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT AS NOTED |
OPTI Canada Inc.
Notes to Financial Statements
Years ended December 31, 2008 and 2007
| 8. | SHAREHOLDERS’ EQUITY(CONTINUED) |
c) 2007 equity issuance
On November 21, 2007 OPTI issued 18,534,500 common shares at a price of $19.00 per common share and 2,430,000 flow-through common shares at a price of $24.70 per common share for aggregate gross proceeds of $412 million.
d) Outstanding warrants
OPTI had common share warrants outstanding that entitled the holders to purchase a total of 5,991,000 common shares at a price of $14.75 each. These warrants expired in November 2008 and have been reclassified as contributed surplus.
e) Call obligations
On June 30, 2008, $202 million of outstanding call obligations expired unexercised by OPTI. The call obligations consisted of unconditional and irrevocable call options whereby OPTI, at its option, could have required a subscription for either a convertible preferred share or a common share for the face amount of the call obligation. The exercise price per share of the call obligations was $2.20 per share. The amount of the expired call obligations has been recorded as an adjustment to deficit.
f) Outstanding stock options
OPTI may grant stock options to executives, certain employees, consultants, and directors as determined by the Board of Directors. The exercise price of each option is determined by the Board based on the current market price of OPTI’s common shares at the date of the grant. Vesting rights are determined at the discretion of the Board. Under OPTI’s plans, options vest at the time of grant or over a five-year period. The remaining number of options that are authorized for issuance under the stock option plan is approximately 9 million. Options outstanding expire at dates up to 2018.
| OPTIONS OUTSTANDING | | Options (thousands) | | | Exercise price (per share) | |
| Balance January 1, 2007 | | | 8,136 | | | $ | 11.69 | |
| Granted | | | 1,003 | | | | 19.58 | |
| Forfeited | | | (224 | ) | | | 15.77 | |
| Exercised | | | (1,707 | ) | | | 9.82 | |
| Balance December 31, 2007 | | | 7,208 | | | $ | 13.03 | |
| Granted | | | 761 | | | | 15.74 | |
| Forfeited | | | (452 | ) | | | 17.80 | |
| Exercised | | | (357 | ) | | | 10.76 | |
| Balance December 31, 2008 | | | 7,160 | | | $ | 13.14 | |
| | | | | | Options outstanding (1) | | | Exercisable options(1) | |
| Exercise price range | | Options (thousands) | | | Remaining contractual life (years) | | | Weighted average exercise price | | | Options (thousands) | | | Weighted average exercise price | |
| $1.95 to $4.99 | | | 281 | | | | 2.7 | | | $ | 4.22 | | | | 260 | | | $ | 4.32 | |
| $5.00 to $9.99 | | | 2,890 | | | | 1.7 | | | | 9.06 | | | | 2,834 | | | | 9.12 | |
| $10.00 to $14.99 | | | 1,153 | | | | 5.7 | | | | 10.97 | | | | 782 | | | | 10.95 | |
| $15.00 to $19.99 | | | 2,009 | | | | 8.5 | | | | 18.14 | | | | 465 | | | | 18.54 | |
| $20.00 to $23.50 | | | 827 | | | | 7.6 | | | | 21.27 | | | | 257 | | | | 21.23 | |
| Balance December 31, 2008 | | | 7,160 | | | | 5.0 | | | $ | 13.14 | | | | 4,598 | | | $ | 10.79 | |
(1) The intrinsic value of all options outstanding and exercisable was zero as of December 31, 2008.
At December 31, 2007 there were 4,139,556 exercisable common share options with a weighted average exercise price of $9.88.
NOTES TO FINANCIAL STATEMENTS
OPTI CANADA INC. – 18 – 2008 ANNUAL FINANCIAL STATEMENTS
| TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT AS NOTED |
OPTI Canada Inc.
Notes to Financial Statements
Years ended December 31, 2008 and 2007
| 8. | SHAREHOLDERS’ EQUITY(CONTINUED) |
The following table sets forth non-vested stock options activity and related information during the year ended December 31, 2008:
| | | Number of Options (thousands) | | | Weighted Average Grant date Fair Value | |
| Non-vested at the beginning of the year | | | 3,068 | | | $ | 10.47 | |
| Granted | | | 761 | | | $ | 8.33 | |
| Vested and forfeited | | | (1,267 | ) | | $ | 10.42 | |
| Non-vested at the end of the year | | | 2,562 | | | $ | 9.80 | |
| | As of December 31, 2008 there was $12.9 million of unrecognized compensation cost related to stock |
| | options outstanding. That cost is expected to be recognized over a weighted average period of 2.5 years. |
g) Stock-based compensation
During the year ended December 31, 2008, there were 760,500 (2007 - 1,002,500) common share options granted which had a total fair value of $4 million (2007 - $7 million) equating to $5.07 per option (2007 - $6.54).
The fair value was calculated using the Black-Scholes pricing model at the date of each grant using the following assumptions:
| | | 2008 | | | 2007 | |
Expected life of options(1) | | 10 years | | 10 years |
Expected dividend yield of options(2) | | | 0 | % | | | 0 | % |
Expected volatility(3) | | | 45 | % | | | 36 | % |
Risk free interest rate(4) | | | 2.75% - 3.75 | % | | | 4.0 | % |
Estimated forfeiture rate(5) | | | 15 | % | | | 15 | % |
| | (1) | The expected life of the options is based on the term of the options. |
| | (2) | The expected dividend yield of options is 0% since OPTI has not historically paid dividends, nor does it intend to. |
| | (3) | Expected volatility is based on the annual historical volatility of OPTI’s share price from the date of OPTI’s Initial Public Offering. |
| | (4) | The risk free rate is based upon interest rates for a zero coupon 10 year Government of Canada bond. |
| | (5) | The estimated forfeiture rate is based on historical forfeitures. |
Stock-based compensation costs for the year ended December 31, 2008 are $5 million (2007 - $4 million), of which $2 million is included in general and administrative expenses (2007 - $1 million) and $3 million is included in PP&E (2007 - $3 million).
h) Contributed surplus
The following outlines changes in contributed surplus:
| | | | |
| Balance January 1, 2007 | | $ | 9,357 | |
| Capitalized stock-based compensation | | | 2,732 | |
| Expensed stock-based compensation | | | 1,356 | |
| Stock options exercised | | | (1,548 | ) |
| Balance December 31, 2007 | | $ | 11,897 | |
| Capitalized stock-based compensation | | | 3,181 | |
| Expensed stock-based compensation | | | 1,895 | |
| Reclassified expired warrants | | | 15,137 | |
| Stock options exercised | | | (1,030 | ) |
| Balance December 31, 2008 | | $ | 31,080 | |
NOTES TO FINANCIAL STATEMENTS
OPTI CANADA INC. – 19 – 2008 ANNUAL FINANCIAL STATEMENTS
| TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT AS NOTED |
OPTI Canada Inc.
Notes to Financial Statements
Years ended December 31, 2008 and 2007
| 9. | FINANCIAL INSTRUMENTS AND RISK MANAGEMENT |
| | OPTI’s financial instruments include cash equivalents, interest reserve account, accounts receivable and accounts payable and accrued liabilities. Due to the short-term nature of the instruments, the carrying values approximate the fair values. The commodity contracts, cross currency interest rate swaps and foreign exchange contracts are considered to be held-for-trading and are recorded at fair value. OPTI’s senior secured notes and the revolving credit facilities are recorded at cost. At December 31, 2008, the estimated fair value of the notes is US$934 million (CDN$1,137 million) and the carrying value of the revolving credit facilities approximates their fair value due to their variable rate, first priority security position and short-term duration of instruments outstanding under the facilities. |
| | OPTI provides a risk management discussion as required by the CICA handbook section 3862 “Financial Instruments - Disclosures” on its exposure to and management of credit risk, liquidity risk and market risk in the 2008 annual MD&A under the heading “Financial Instruments”. |
| | c) | Financial hedging instruments |
| | At December 31, 2008, OPTI has foreign exchange forward contracts to provide for a fixed payment of CDN$1,028 million in exchange for receipt of US$875 million on April 16, 2010 at a rate of approximately CDN$1.17 per U.S. dollar. Prior to the commencement of operations, any gains or losses based on mark to market of the contract are capitalized to property, plant and equipment. |
| | During 2008, OPTI purchased put options that provide a price floor for a portion of its anticipated 2009 production. See note 3. |
| | • | to manage capital in a manner that will maintain compliance with its financial covenants; |
| | • | to manage a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business; |
| | • | to maintain an appropriate balance between debt and equity sources of financing; and |
| | • | to maintain sufficient undrawn credit capacity to provide liquidity. |
OPTI defines its capital as follows:
| | • | debt, including long and short-term portions. |
Virtually all of our capital to date has resulted from the issuance of debt and equity. To date, OPTI has been funded with both long-term debt and equity. A description of debt and related changes in the period is described in note 5 and note 13. Equity capital for OPTI is described in note 8. We expect to generate positive operating cash flows to support funding for interest costs and future expenditures once bitumen production rises and the Upgrader has achieved stable operations. The sale of a portion of the Long Lake project in January 2009 is expected to provide an additional financing for 2009.
OPTI is a public company and has established access in past transactions to both public and private debt and equity markets. OPTI anticipates continued long-term access to both the debt and equity markets to fund future growth of the business. In the short-term, there may be times where access to debt and equity markets is restricted or unavailable.
All of OPTI’s debt facilities set certain limitations on its capital structure primarily through financial covenants. Measurement of the ratios for this purpose is defined in the relevant credit agreement.
NOTES TO FINANCIAL STATEMENTS
OPTI CANADA INC. – 20 – 2008 ANNUAL FINANCIAL STATEMENTS
| TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT AS NOTED |
OPTI Canada Inc.
Notes to Financial Statements
Years ended December 31, 2008 and 2007
10. CAPITAL MANAGEMENT (CONTINUED)
OPTI is presently in compliance with these financial maintenance covenants:
| | | | Calculated ratio at December 31, | |
Financial Ratio | Covenant(1) | | 2008 | | | 2007 | |
Debt to Capitalization (2) | Maximum 65% | | | 64 | % | | | 50 | % |
First Lien to EBITDA (3) | Minimum 3.5:1 | | | N/A | (4) | | | N/A | (4) |
(1) Covenants noted are as of December 31, 2008 and have not been restated for the change in accounting policy described in note 2p(iii) because our banking agreements require us to calculate the covenants based on accounting policies in effect at the time of the agreement. On January 27, 2009, the facilities were renegotiated and resulted in adjustments to the covenants. See note 13.
(2) "Debt to Capitalization” means, as at any date of determination, the ratio of Total Consolidated Debt to Total Capitalization (net of the effect of any currency Hedge Agreements relating to any Debt included therein). "Total Capitalization" means, as at any date of determination, the aggregate of Total Consolidated Debt, and Shareholders' Equity on such date.
(3) EBITDA (defined here as total revenue less direct costs and selling and administrative costs) is not a recognized measure under GAAP, does not have a standardized meaning prescribed by GAAP and therefore may not be comparable to similar measures presented by other issuers. First Lien for the purposes of this ratio includes the debt outstanding under the revolving credit facilities.
(4) Under the amended revolving credit facility, the first time this covenant is applicable is the third quarter of 2009, previously it was to be assessed for the first quarter of 2009.
With respect to our senior secured notes, the covenants are in place primarily to govern the total amount of debt that OPTI may incur at any time. This limit is most affected by the present value of our total proved reserves using forecast prices discounted at 10 percent. We have sufficient capacity under this test to incur additional debt beyond our amended $350 million revolving credit facility. Other leverage factors, such as debt to capitalization, interest coverage ratios and total debt to EBITDA are expected to be more constraining in future than this limitation. Under certain payment related defaults under our revolving credit facility, we may be required to offer to repay our senior secured notes.
OPTI sets internal targets for its financial ratios that are similar to the requirements in the debt agreements. These internal targets support evaluation of the timing and amount of new debt and equity that balance creation of value for stakeholders with the management of risks associated with debt. Capital funding plans and targets are set annually based on expected growth programs and forecasted financial results for the business.
In management’s opinion, OPTI has met its objectives as outlined and has available borrowing capacity under its debt facilities. Ongoing access to its revolving credit facility requires that production levels for the project continue to ramp up so that the company can meet its financial ratios described above.
OPTI has commitments in connection with contracts and purchase orders of $22 million at December 31, 2008. Commitment amounts are measured within contracts and purchase orders through letters of intent, scheduled work releases and forecast expenditures for labour and equipment utilization. These commitments will be realized in incurred expenditures over time as certain milestones are met, work is completed, or both.
| | b) | Lease obligations and other commitments |
OPTI has an agreement with Enbridge Pipelines (Athabasca) Inc. that provides for the storage, measurement and transportation of crude oil and other liquids between the Athabasca main line and the Long Lake Project site. This agreement is considered to be a capital lease for accounting purposes. This agreement has a primary term of 25 years and an option for renewal of five additional years.
NOTES TO FINANCIAL STATEMENTS
OPTI CANADA INC. – 21 – 2008 ANNUAL FINANCIAL STATEMENTS
| TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT AS NOTED |
OPTI Canada Inc.
Notes to Financial Statements
Years ended December 31, 2008 and 2007
11. COMMITMENTS (CONTINUED)
Capital lease payments on this agreement for the next five years and thereafter are as follows:
| | | | |
| 2009 | | $ | 4,646 | |
| 2010 | | | 4,646 | |
| 2011 | | | 4,647 | |
| 2012 | | | 4,315 | |
| 2013 | | | 4,149 | |
| Thereafter | | | 79,517 | |
| Total including interest | | | 101,920 | |
| Less imputed interest | | | (71,725 | ) |
| Capital lease obligation | | $ | 30,195 | |
The above table is based on OPTI’s 50 percent working interest in the Long lake Project as of December 31, 2008. Capital lease obligation as at January 27, 2009 was $21.1 million based on a 35 percent working interest. See note 13.
OPTI has an agreement with Enbridge Pipelines (Athabasca) Inc. for transportation of oil products from Long Lake to Hardisty. The initial term of this agreement extends to 2012. OPTI also has an agreement with Pembina Oil Sands Pipeline L.P. for a pipeline which transports synthetic crude oil, for use as a diluent, available to the Long Lake site. This agreement has an initial term of 25 years. These two pipeline agreements are considered to be operating leases for accounting purposes, total expenses related to these 2 contracts were $[XX] in 2008 (2007- $nil). OPTI entered into a long-term traffic guarantee agreement with Canadian National Railway Company (CN) under which traffic is moved to and from the Project site by rail and CN invests in upgrades to the Athabasca Northern Railway rail line. The rail line will move, amongst other commodities, sulphur, catalysts, and construction materials to and from the Project site for periods up to 2032. Total expenses related to this contract was $[XX] in 2008 (2007- $nil). Prior to the commencement of operations, OPTI capitalizes operating lease payments.
Operating lease payments on these agreements for the next five years and thereafter are as follows:
| | | | |
| 2009 | | $ | 13,418 | |
| 2010 | | | 14,279 | |
| 2011 | | | 13,725 | |
| 2012 | | | 14,177 | |
| 2013 | | | 14,414 | |
| Thereafter | | | 44,728 | |
| Total | | $ | 114,741 | |
The above table is based on OPTI’s 50 percent working interest in the Long lake Project. Actual commitments are $80 million based on a 35 percent working interest in the Long Lake Project. See note 13.
| 12. | SUPPLEMENTAL INFORMATION TO STATEMENT OF CASH FLOW |
| | | 2008 | | | 2007 | |
| Cash taxes paid | | $ | - | | | $ | - | |
| Cash interest received | | | 5,909 | | | | 23,281 | |
| Cash interest paid | | | 173,511 | | | | 142,049 | |
| Non-cash changes to property, plant and equipment | | | (358,760 | ) | | | 697 | |
| Non-cash changes to capital stock | | | (13,246 | ) | | | (5,966 | ) |
NOTES TO FINANCIAL STATEMENTS
OPTI CANADA INC. – 22 – 2008 ANNUAL FINANCIAL STATEMENTS
| TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT AS NOTED |
OPTI Canada Inc.
Notes to Financial Statements
Years ended December 31, 2008 and 2007
12. SUPPLEMENTAL INFORMATION TO STATEMENT OF CASH FLOW (CONTINUED)
| | | 2008 | | | 2007 | |
| Change in non-cash working capital | | | | | | |
| Accounts and other receivables | | $ | (10,224 | ) | | $ | (6,014 | ) |
| Accounts payable and accrued liabilities | | | (7,328 | ) | | | 36,554 | |
| Net change in non-cash working capital | | $ | (17,552 | ) | | $ | 30,540 | |
| | | | | | | | | |
| Operating activities | | $ | 1,157 | | | $ | 4,496 | |
| Financing activities | | | 13,241 | | | | (4,793 | ) |
| Investing activities | | | (31,950 | ) | | | 30,837 | |
| Net change in non-cash working capital | | $ | (17,552 | ) | | $ | 30,540 | |
On January 27, 2009, OPTI completed a sale of a 15 percent working interest in its joint venture assets to Nexen Inc. (Nexen) for $735 million. Effective January 1, 2009, OPTI has a remaining 35 percent working interest in all the joint venture assets, including Phase 1 of the Long Lake Project, all future phase reserves and resources, and future phases of development. As part of the sale, Nexen retained $85 million of the proceeds to pre-fund OPTI’s share of 2009 joint venture capital requirements.
To consider impairment as of December 31, 2008, assets were grouped to depreciable assets, resource assets and unproved properties based on the nature of the asset and an assessment of their depreciation basis. Each asset type was assessed individually for impairment.
We allocated the sales proceeds to each asset type based on an estimate of fair value. The sales proceeds allocated to depreciable assets were lower than the book value of the asset, as a result a loss before taxes of $369 million was recorded in 2008. The sales proceeds allocated to resource assets did not alter the depletion rate by greater than 20 percent and as a result no gain or loss was recorded. The sales proceeds will be recorded as a reduction to book value as of completion of the sale in 2009. The sales proceeds for unproved properties and resource assets will be recorded as a reduction to book value as of completion of the sale in 2009. The remaining assets were subject to a ceiling test and cost recovery test which concluded no further impairment existed.
Additionally, as a result of the asset sale, the revolving debt facilities were amended on January 27, 2009. Significant changes include:
| | • | $150 million revolving credit facility was repaid and cancelled; |
| | • | $500 million revolving credit facility was reduced to $350 million, $400 million was repaid through February 25, 2009 and applicable interest rates were increased by approximately 2 to 4 percent depending on our debt rating; |
| | • | First lien to EBITDA covenant commences in the third quarter of 2009 with a maximum ratio 2.5:1 as defined in Note 10 (previously the first quarter of 2009 and a ratio of 3.5:1); |
| | • | Debt to Capitalization ratio was increased to 70 percent from 65 percent as defined in Note 10; and |
| | • | The Canadian measurement of our U.S. dollar denominated debt was changed from a period end exchange rate to the average rate for the preceding quarter for debt covenant calculation purposes. |
NOTES TO FINANCIAL STATEMENTS
OPTI CANADA INC. – 23 – 2008 ANNUAL FINANCIAL STATEMENTS
| TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT AS NOTED |
OPTI Canada Inc.
Notes to Financial Statements
Years ended December 31, 2008 and 2007
| 14. | RECONCILATION TO U.S. GAAP (Revised and Restated) |
OPTI prepares its financial statements in accordance with accounting principles generally accepted in Canada (“Canadian GAAP”) which differ from those principles that the Company would have followed had its financials statements been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). The following adjustments and additional disclosures would be required in order to present the financial statements in accordance with US GAAP.
OPTI is revising and restating its US GAAP reconciliation note in its financial statements as at December 31, 2008 and 2007 and for the years then ended. The revision relates to the retroactive application of the change in accounting policy under Canadian GAAP as described in note 2(p)(iii). OPTI has revised its financial statements prepared in accordance with Canadian GAAP to reflect this change. This change impacts the previously reported differences between Canadian GAAP and US GAAP as at December 31, 2008 and 2007 and for the years then ended and therefore the revised US GAAP reconciliation has been adjusted accordingly.
As a result of performing a detailed review of capitalized costs that no longer qualify for capitalization upon the retroactive application of CICA handbook section 3064, the company has corrected its previously reported differences between Canadian GAAP and US GAAP. Specifically, OPTI has determined that for US GAAP purposes, the company’s petroleum and natural gas assets should be considered substantially complete and ready for its intended use effective July 1, 2008, which is consistent with the “commencement of operations” date under Canadian GAAP. Previously, OPTI had used a date for US GAAP purposes of January 1, 2007. The impact of this restatement is a net decrease in US GAAP net loss of $89 million and $28 million in 2008 and 2007, respectively.
The details of the impact of the revision to Canadian GAAP (on the US GAAP reconciliation as previously reported ) and the restatement are provided below in paragraph (k).
| | a) | Earnings (loss) and comprehensive earnings (loss) reconciliation |
| (amounts in thousands of Canadian dollars, except per share amounts) | | Year-ended December 31 | |
| | | 2008 | | | 2007 | |
| | | (as revised and restated) | | | (as revised and restated) | |
| Net earnings (loss) in accordance with CDN GAAP | | $ | (476,922 | ) | | $ | 150,823 | |
| Standby charges capitalized (c) | | | (1,603 | ) | | | (3,491 | ) |
| Reduction (increase) in future tax (c,e,f) | | | (1,821 | ) | | | (573 | ) |
| Flow-through share premium (d) | | | 13,778 | | | | 8,959 | |
| Tax effect of flow-through shares (d) | | | (15,005 | ) | | | (11,706 | ) |
| Deferred financing charges (e) | | | 893 | | | | 11,927 | |
| Deferred financing amortization (e) | | | (7,481 | ) | | | (6,144 | ) |
| Asset impairment under Canadian GAAP (f) | | | 369,353 | | | | - | |
| Asset impairment under US GAAP (f) | | | (353,877 | ) | | | - | |
| Net earnings (loss) in accordance with US GAAP | | $ | (472,685 | ) | | $ | 149,795 | |
| Earnings (loss) per share, basic and diluted | | $ | (2.41 | ) | | $ | 0.84 | |
NOTES TO FINANCIAL STATEMENTS
OPTI CANADA INC. – 24 – 2008 ANNUAL FINANCIAL STATEMENTS
| TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT AS NOTED |
OPTI Canada Inc.
Notes to Financial Statements
Years ended December 31, 2008 and 2007
14. | RECONCILATION TO U.S. GAAP (Revised and Restated) (CONTINUED) |
| | b) | Balance sheet reconciliation |
| (amounts in thousands of Canadian dollars) | | At December 31, 2008 | | | At December 31, 2007 | |
| | | CDN GAAP | | | US GAAP | | | CDN GAAP | | | US GAAP | |
| | | (as revised - note 2p) | | | (as revised and restated) | | | (as revised - note 2p) | | | (as revised and restated) | |
| Assets | | | | | | | | | | | | |
| Property, plant and equipment(c,f) | | $ | 4,066,027 | | | $ | 4,024,463 | | | $ | 3,543,488 | | | $ | 3,488,011 | |
| Accumulated depletion and depreciation | | | (13,502 | ) | | | (16,985 | ) | | | (2,665 | ) | | | (6,148 | ) |
| Deferred financing charges (e) | | | - | | | | 39,362 | | | | - | | | | 44,211 | |
| Liabilities | | | | | | | | | | | | | | | | |
| Flow-through share premium (d) | | | - | | | | - | | | | - | | | | 13,778 | |
| Future tax liability (asset) (c,f) | | | (70,242 | ) | | | (64,074 | ) | | | 29,592 | | | | 24,099 | |
| Shareholders’ equity | | | | | | | | | | | | | | | | |
| Capital stock (d) | | | 1,847,461 | | | | 1,931,315 | | | | 1,837,253 | | | | 1,906,102 | |
| (Deficit) retained earnings | | | (407,678 | ) | | | (466,496 | ) | | | 85,908 | | | | 22,853 | |
| Total Shareholders’ equity | | | 1,470,863 | | | | 1,495,898 | | | | 1,950,744 | | | | 1,956,538 | |
| | c) | Under Canadian GAAP during the construction period, standby fees associated with borrowing facilities can be capitalized. Under US GAAP, during the construction period these costs would be expensed as incurred. |
| | d) | Under Canadian GAAP, the proceeds from the issuance of flow-through shares are recorded in equity at their face value. Under US GAAP, the proceeds must be allocated between the sale of the shares and the sale of the tax benefit. A liability is created for the difference between the market price of the existing shares and the price the investor paid for the flow-through shares. In November 2007, OPTI issued 2,430,000 flow-through common shares at a price of $24.70 per share for gross proceeds of $60 million which has resulted in a $14 million liability. When the tax benefits are renounced to shareholders, the difference between this liability and the value of the tax basis given up is recorded as tax expense. Under Canadian GAAP the value of the tax basis given up reduces the value of the flow-through shares issued. During March 2008, OPTI fully renounced the tax deductions to investors in relation to the flow-through shares issued in 2007 and recorded the related entries to future tax. |
| | e) | On January 1, 2007, OPTI adopted to Canadian Institute of Chartered Accountants section 3855 “Financial Instruments - Recognition and Measurement.” As a result of the adoption, all previously recorded deferred financing charges, net of future tax, were recorded as an adjustment to opening deficit. Under this new section, all transactions costs relating to financial instruments are to be expensed as incurred. Under US GAAP, debt transactions costs are deferred and amortized over the life of the associated debt. |
| | f) | OPTI recognized an impairment of $369 million (revised - note 2p) at December 31, 2008 related to the pending sale of assets under Canadian GAAP. The carrying value of assets held for sale under US GAAP is lower based on the capitalized pre-operating costs and results in a lower impairment. As such, the Canadian GAAP impairment was reversed out of net earnings (loss) and the recalculated US GAAP impairment was included. |
NOTES TO FINANCIAL STATEMENTS
OPTI CANADA INC. – 25 – 2008 ANNUAL FINANCIAL STATEMENTS
| TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT AS NOTED |
OPTI Canada Inc.
Notes to Financial Statements
Years ended December 31, 2008 and 2007
14. RECONCILATION TO U.S. GAAP (Revised and Restated) (CONTINUED)
| | g) | The statement of cash flows are prepared in accordance with Canadian GAAP and conform in all material respects to US GAAP except that Canadian GAAP allows for the presentation of operating cash flow before changes in non-cash working capital in the statement of cash flows. This total cannot be presented under US GAAP. |
| | h) | Under Canadian full cost accounting rules, impairment is recognized if the carrying amount of the PP&E exceeds the sum of the undiscounted cash flows expected to result from proved reserves using estimated future prices and costs (the “ceiling test”). Under the full cost method of accounting as set forth by the US Securities and Exchange Commission, the ceiling test differs from Canadian GAAP in that future net revenues from proved reserves are based on prices and costs as at the balance sheet date (“constant dollar pricing”) and are discounted at 10 percent. Management has reviewed the valuation of the Long Lake Project and other oil sands properties and estimates that the recoverable value of these properties exceeds their carrying amount. Therefore no difference is recorded. |
| | i) | Accounts payable and accrued liabilities |
The components of accounts payable and accrued liabilities are as follows:
| | | | | | | |
| (amounts in thousands of Canadian dollars) | | December 31, 2008 | | | December 31, 2007 | |
| Accounts payable | | $ | 19,686 | | | $ | 14,242 | |
| Accrued interest payable to financial institutions | | | 6,299 | | | | 5,591 | |
| Accrued liabilities | | | 173,922 | | | | 170,890 | |
| Total | | $ | 199,907 | | | $ | 190,723 | |
| | j) | Cash and cash equivalents |
Cash and cash equivalents is made up of the following instruments held with Canadian financial institutions:
| (amounts in thousands of Canadian dollars) | | December 31, 2008 | | | December 31, 2007 | |
| Cash | | $ | 5,464 | | | $ | 3,372 | |
| CDN dollar term deposits * | | | 168,480 | | | | 278,134 | |
| US dollar term deposits (CDN equivalent) * | | | 43,201 | | | | 28,998 | |
| | | $ | 217,145 | | | $ | 310,504 | |
* maturing less than 90 days from balance sheet date
| | k) | Revision and restatement of U.S. GAAP |
The details of the impact of the revision to Canadian GAAP (note 2p) and its related impact on the US GAAP reconciliation as previously reported, and the restatement to correct for the error are as follows:
Year ended December 31, 2007 (amounts in thousands of Canadian dollars, except per share amounts) | | As previously issued 2007 | | | Adjustment | | | Restated 2007 | |
| Net earnings (loss) in accordance with CDN GAAP | | $ | (9,486 | ) | | $ | 160,309 | | | $ | 150,823 | |
| Pre-operating expenses capitalized (i) | | | (36,995 | ) | | | 36,995 | | | | - | |
| Foreign exchange gain (loss) capitalized (ii) | | | 235,164 | | | | (235,164 | ) | | | - | |
| Foreign currency hedging instruments (ii) | | | (56,982 | ) | | | 56,982 | | | | - | |
| Reduction (increase) in future tax (iii) | | | (9,426 | ) | | | 8,853 | | | | (573 | ) |
| Net earnings (loss) in accordance with US GAAP | | | 121,820 | | | | 27,975 | | | | 149,795 | |
| Earnings (loss) per share, basic and diluted | | $ | 0.69 | | | $ | 0.15 | | | $ | 0.84 | |
NOTES TO FINANCIAL STATEMENTS
OPTI CANADA INC. – 26 – 2008 ANNUAL FINANCIAL STATEMENTS
| TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT AS NOTED |
OPTI Canada Inc.
Notes to Financial Statements
Years ended December 31, 2008 and 2007
14. RECONCILATION TO U.S. GAAP (Revised and Restated) (CONTINUED)
At December 31, 2007 (amounts in thousands of Canadian dollars) | | As previously issued 2007 | | | Adjustment | | | Restated 2007 | |
| Property, Plant & Equipment (i, ii) | | $ | 3,438,084 | | | $ | 49,927 | | | $ | 3,488,011 | |
| Accumulated Depreciation (i) | | | (3,483 | ) | | | (2,665 | ) | | | (6,148 | ) |
| Future income tax liability (asset) (i, ii) | | | 4,259 | | | | 19,840 | | | | 24,099 | |
| (Deficit) retained earnings (i, ii, iii) | | | (4,570 | ) | | | 27,423 | | | | 22,853 | |
Year ended December 31, 2008 (amounts in thousands of Canadian dollars, except per share amounts) | | As previously issued 2008 | | | Adjustment | | | Restated 2008 | |
| Net earnings (loss) in accordance with CDN GAAP | | $ | (256,532 | ) | | $ | (220,390 | ) | | $ | (476,922 | ) |
| Revenue capitalized (i, ii) | | | 286,931 | | | | (286,931 | ) | | | - | |
| Pre-operating expenses capitalized (i, ii) | | | (388,118 | ) | | | 388,118 | | | | - | |
| Depletion and deprecation expense (i) | | | (11,875 | ) | | | 11,875 | | | | - | |
| Foreign exchange gain (loss) capitalized (ii) | | | (372,625 | ) | | | 372,625 | | | | - | |
| Foreign currency hedging instruments (ii) | | | 207,049 | | | | (207,049 | ) | | | - | |
| Asset impairment under Canadian GAAP (ii) | | | 391,686 | | | | (22,333 | ) | | | 369,353 | |
| Asset impairment under US GAAP (i, ii) | | | (354,274 | ) | | | 397 | | | | (353,877 | ) |
| Reduction (increase) in future tax (iii) | | | 16,002 | | | | (17,823 | ) | | | (1,821 | ) |
| Net earnings (loss) in accordance with US GAAP | | | (491,174 | ) | | | 18,489 | | | | (472,685 | ) |
| Earnings (loss) per share, basic and diluted | | $ | (2.51 | ) | | $ | 0.10 | | | $ | (2.41 | ) |
At December 31, 2008 (amounts in thousands of Canadian dollars) | | As previously issued 2008 | | | Adjustment | | | Restated 2008 | |
| Property, Plant & Equipment (i, ii) | | $ | 3,973,965 | | | $ | 50,498 | | | $ | 4,024,463 | |
| Accumulated Depreciation (i) | | | (15,538 | ) | | | (1,447 | ) | | | (16,985 | ) |
| Future income tax liability (asset) (i, ii) | | | (67,032 | ) | | | 2,958 | | | | (64,074 | ) |
| Deficit (i, ii, iii) | | | (512,409 | ) | | | 45,913 | | | | (466,496 | ) |
NOTES:
i - Adjustments to these accounts are a result of a correction discussed in note 14
ii - - Adjustment to these accounts are due to for the retroactive adoption of CICA Handbook Section 3064 “Goodwill and Intangible Assets”, see note 2p(iii)
iii - - Adjustment to this account is the net result of the adjustments discussed in i and ii above
| | l) | Recent Accounting Pronouncements |
The Company has assessed new and revised accounting pronouncements that have been issued that are not yet effective:
In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” This standard became effective November 15, 2008 following the SEC’s approval of the Public Company Accounting Oversight Board Auditing amendments to AU Section, 411 “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The statement is intended to improve financial reporting by identifying a consistent hierarchy for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. GAAP. The adoption of this standard did not have a material impact on OPTI’s Financial Statements.
NOTES TO FINANCIAL STATEMENTS
OPTI CANADA INC. – 27 – 2008 ANNUAL FINANCIAL STATEMENTS
| TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT AS NOTED |
OPTI Canada Inc.
Notes to Financial Statements
Years ended December 31, 2008 and 2007
14. RECONCILATION TO U.S. GAAP (Revised and Restated) (CONTINUED)
As of January 1, 2009, SFAS 141(R), “Business Combinations,” replaces SFAS 141. This revised standard requires assets and liabilities acquired in a business combination, contingent consideration, and certain acquired contingencies to be measured at their fair values as of the date of acquisition. In addition, acquisition-related and restructuring costs are to be recognized separately from the business combination. This new standard will only impact acquisitions occurring on or after January 1, 2009
As of January 1, 2009, SFAS No. 160, “Noncontrolling Interests in Financial Statements, an Amendment of ARB No. 51” will come into effect. This standard requires a noncontrolling interest in a subsidiary to be classified as a separate component of equity. The standard also changes the way the U.S. GAAP Statement of Earnings is presented by requiring net earnings to include the amounts attributable to both the parent and the noncontrolling interest and to disclose these respective amounts. The adoption of this standard will not have any impact on OPTI’s Financial Statements.
As of December 31, 2009, OPTI will be required to prospectively adopt the new reserves requirements that arise from the completion of the SEC’s project, Modernization of Oil and Gas Reporting. The new rules include provisions that permit the use of new technologies to establish proved reserves if those technologies have been demonstrated empirically to lead to reliable conclusions about reserves volumes. Additionally, oil and gas reserves will be reported using an average price based upon the prior 12-month period rather than year-end prices. The new rules will affect the reserve estimate used in the calculation of DD&A and the ceiling test for U.S. GAAP purposes. The Company is assessing the impact these new rules will have on its Financial Statements
15. FAS 69 RESERVES DISCLOSURE (unaudited)
The following oil and gas information is provided in accordance with the FASB statement No. 69 Disclosures about Oil and Gas Producing Activities.
These rules restrict the measurement and evaluation of reserves and cash flow to those activities associated with a stand-alone SAGD operation. These rules also do not permit recognition of resources. In order to satisfy these requirements, amounts noted include estimated costs to purchase natural gas to generate steam, costs to purchase diluent to transport raw bitumen and a sales price based on the resulting blended barrel which has historically sold at a price substantially lower than WTI . These assumptions are not consistent with the planned development of our reserves at the Long Lake Project. The Long Lake Project is an integrated project and includes facilities that are expected to produce a synthetic gas which significantly reduces our need to purchase natural gas and our expected primary sales product is primarily Premium Sweet Crude (PSC™) which is expected to sell at a price similar to WTI and does not require diluent for transportation. Our reserves are all located in Canada.
NOTES TO FINANCIAL STATEMENTS
OPTI CANADA INC. – 28 – 2008 ANNUAL FINANCIAL STATEMENTS
| TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT AS NOTED |
OPTI Canada Inc.
Notes to Financial Statements
Years ended December 31, 2008 and 2007
15. FAS 69 RESERVES DISCLOSURE (unaudited) (CONTINUED)
| | a) | Reserve Quantity Information |
Our net proved reserves and changes in those reserves for our operations are disclosed below. The net proved reserves represent management’s best estimate of proved oil and natural gas reserves after royalties. Reserve estimates for each property are prepared each year, and all reserves have been assessed by independent qualified reserves consultants.
Estimates of crude oil and natural gas proved reserves are determined through analysis of geological and engineering data, and demonstrate reasonable certainty that they are recoverable from known reservoirs under economic and operating conditions that existed at year end.
| Thousands of barrels | | Bitumen | |
| | | | |
| December 31, 2006 Closing / 2007 Opening Total Proved Reserve Balance | | | 217,829 | |
| Revisions of Previous Estimates of total proved reserves | | | 17,525 | |
| December 31, 2007 Closing / 2008 Opening Total Proved Reserve Balance | | | 235,354 | |
| Extensions | | | 9,661 | |
| Revisions of Previous Estimates of total proved reserves | | | 31,293 | |
| Production | | | (1,439 | ) |
| December 31, 2008 Closing Total Proved Reserve Balance | | | 274,869 | |
Notes:
| | 1. | Represents bitumen reserves rather than upgraded synthetic crude oil reserves (PSC™ ) |
| | 2. | Proved reserves are the estimated quantities that geological and engineering data demonstrate with reasonable certainty can be recovered in future years from known reservoirs under existing economic and operating conditions. Reserves are considered "proved" if they can be produced economically, as demonstrated by either actual production or conclusive formation testing. |
| | 3. | Reserve quantities are shown prior to the 15% working interest sale to Nexen completed January 27, 2009. |
| Cdn$ millions | | As at December 31, 2008 | | | As at December 31, 2007 | |
| Proved Properties | | $ | 1,074 | | | $ | 828 | |
| Unproved Properties | | | 352 | | | | 258 | |
| | | | 1,426 | | | | 1,086 | |
| Depreciation, depletion and amortization | | | 14 | | | | - | |
| Net Capitalized Costs | | $ | 1,412 | | | $ | 1,086 | |
NOTES TO FINANCIAL STATEMENTS
OPTI CANADA INC. – 29 – 2008 ANNUAL FINANCIAL STATEMENTS
| TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT AS NOTED |
OPTI Canada Inc.
Notes to Financial Statements
Years ended December 31, 2008 and 2007
15. FAS 69 RESERVES DISCLOSURE (unaudited) (CONTINUED)
| Cdn$ millions | | Years ended | |
| | | 2008 | | | 2007 | |
| Property Acquisition Costs | | | | | | |
Proved | | $ | - | | | $ | - | |
Unproved | | | - | | | | 5 | |
| Exploration costs | | | 71 | | | | 55 | |
| Development costs | | | 268 | | | | 309 | |
| Asset retirement costs | | | - | | | | 1 | |
| Total Costs Incurred | | $ | 339 | | | $ | 370 | |
| | d) | Results of operations for oil and gas producing properties |
| Cdn$ millions | | Years ended | |
| | | 2008 | | | 2007 | |
| Revenues | | | | | | |
Sales | | $ | 257 | | | $ | - | |
| | | | | | | | | |
| Production costs | | | 358 | | | | - | |
| Depreciation, depletion and amortization | | | 14 | | | | | |
| | | | 372 | | | | - | |
| Income tax expenses | | | - | | | | - | |
| Results of operations from producing activities | | $ | (115 | ) | | $ | - | |
| | e) | Standardized Measure of Discounted Future Net Cash Flows and Changes Therein |
In calculating the standardized measure of discounted future net cash flows, year-end constant prices and cost assumptions were applied to OPTI’s estimated annual future production from proved reserves to determine cash inflows. Future production and development costs are based on constant period end price assumptions and assume the continuation of existing economic, operating and regulatory conditions. Future income taxes are calculated by applying statutory income tax rates to future pre-tax cash flows after provision for the tax cost of the oil properties based upon existing laws and regulations. The discount was computed by application of a 10% discount factor to the future net cash flows. The calculation of the standardized measure of discounted future net cash flows is based upon the discounted future net cash flows prepared by OPTI’s independent qualified reserves evaluators in relation to the reserves they respectively evaluated.
NOTES TO FINANCIAL STATEMENTS
OPTI CANADA INC. – 30 – 2008 ANNUAL FINANCIAL STATEMENTS
| TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT AS NOTED |
OPTI Canada Inc.
Notes to Financial Statements
Years ended December 31, 2008 and 2007
15. FAS 69 RESERVES DISCLOSURE (unaudited) (CONTINUED)
OPTI cautions that the discounted future net cash flows relating to proved reserves are an indication of neither the fair market value of OPTI’s oil properties, nor the future net cash flows expected to be generated from such properties. The discounted future net cash flows do not include the fair market value of probable or possible oil reserves, nor is consideration given to the effect of future changes in crude oil prices, development, asset retirement and production costs and possible changes to tax and royalty regulations. In addition, no consideration for the benefit of our on site Upgrader is included. The prescribed discount rate of 10% may not appropriately reflect future interest rates.
| Cdn$ millions | | Years ended | |
| | | 2008 | | | 2007 | |
| Future revenue net of royalties | | $ | 9,030 | | | $ | 12,582 | |
| Less future: | | | | | | | | |
| Production costs | | | 5,466 | | | | 4,666 | |
| Development costs | | | 1,662 | | | | 1,673 | |
| Asset retirement obligation payments | | | 36 | | | | 73 | |
| Income taxes | | | 27 | | | | 1,252 | |
| Future net cash flow | | | 1,839 | | | | 4,918 | |
| Less effect of 10% annual discount | | | 1,193 | | | | 2,803 | |
| Discounted future net cash flow | | $ | 646 | | | $ | 2,115 | |
| Cdn$ millions | | 2008 | | | 2007 | |
| Discounted net cash flow - beginning of year | | $ | 2,115 | | | $ | 991 | |
| Changes due to prices | | | (1423 | ) | | | 1,457 | |
| Actual development costs during the period | | | 268 | | | | 272 | |
| Changes in future development costs | | | (300 | ) | | | (451 | ) |
| Accretion of discount | | | 253 | | | | 131 | |
| Net changes in income taxes | | | 415 | | | | (98 | ) |
| Changes resulting from changes to royalty regime | | | (221 | ) | | | 252 | |
| Changes resulting from technical reserves revisions | | | 290 | | | | 71 | |
| Changes resulting from effects of production timing | | | (250 | ) | | | (301 | ) |
| Changes from production costs | | | (501 | ) | | | (209 | ) |
| Discounted net cash flow - beginning of year | | $ | 646 | | | $ | 2,115 | |
NOTES TO FINANCIAL STATEMENTS
OPTI CANADA INC. – 31 – 2008 ANNUAL FINANCIAL STATEMENTS
| TABULAR AMOUNTS ARE IN THOUSANDS OF DOLLARS EXCEPT AS NOTED |
Certifications and Disclosure Regarding Controls and Procedures.
Certifications. See Exhibits 99.1, 99.2. 99.3, 99.4, 99.5 and 99.6 to this Amendment No. 1 to the Annual Report on Form 40-F.
Identification of the Audit Committee.
The registrant has a separately-designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. The members of the audit committee are: Charles Dunlap, Bruce Waterman and Edythe Marcoux.
Audit Committee Financial Expert.
The registrant’s board of directors has determined that Mr. Bruce Waterman, a member of the registrant’s audit committee, qualifies as an “audit committee financial expert” (as such term is defined in Form 40-F), and is “independent” as that term is defined in the rules of the New York Stock Exchange.
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UNDERTAKING AND CONSENT TO SERVICE OF PROCESS
A. Undertaking.
The registrant undertakes to make available, in person or by telephone, representatives to respond to inquiries made by the Commission staff, and to furnish promptly, when requested to do so by the Commission staff, information relating to: the securities registered pursuant to Form 40-F; the securities in relation to which the obligation to file an annual report on Form 40-F arises; or transactions in said securities.
B. Consent to Service of Process.
The registrant has previously filed a Form F-X in connection with the class of securities in relation to which the obligation to file this report arises.
Any change to the name or address of the agent for service of process of the registrant shall be communicated promptly to the Commission by an amendment to the Form F-X referencing the file number of the relevant registration statement.
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant certifies that it meets all of the requirements for filing on Form 40-F and has duly caused this annual report to be signed on its behalf by the undersigned, thereto duly authorized, on June 3, 2009.
OPTI Canada Inc.
By: /s/ Joe Bradford
Name: Joe Bradford
Title: Vice President, Legal & Administration
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