The Liability Management Rating (LMR) program administered by
the Alberta Energy Regulator (AER) has created challenges for
companies seeking to dispose of oil and gas assets and has resulted
in litigation in a recent receivership matter (Alberta Treasury Branches v.
Redwater Energy Corp., as of the date of this
post a decision had not been issued). More recently, in National Bank of Canada v. Spyglass Resources
Corp., the AER entered into an agreement with
Spyglass' court-appointed receiver and manager to deal with
issues that were anticipated to be encountered in the marketing and
sale of Spyglass' assets. The agreement and court approval will allow for
dispositions of Spyglass' assets to be completed even if
Spyglass' pro forma LMR falls below 1.0 as a result of
the transaction (and provided there is no other material
non-compliance of AER regulations by Spyglass).
The LMR program is well-known to persons active in the industry
and reflects a comparison of a company's deemed assets to its deemed liabilities. The deemed asset
calculation is based on cash flow derived from oil and gas
production reported to PETRINEX from operated wells and therefore
subject to fluctuation based on market factors, while the deemed
liabilities calculation arises from three separate regulatory
programs (the Licensee Liability Rating program, the Large Facility
Liability Management program and Oilfield Waste Liability program)
administered by the AER. A security deposit is required if
the AER determines that the licensee's liabilities exceed its
deemed assets in an amount equal to the difference between the
deemed assets and deemed liabilities and effectively operates to
force the pro forma LMR back up to 1.0. The
AER updates each licensee's LMR calculation on a monthly basis
and makes the information publically available.
The most important aspect of the Spyglass agreement is that it
will permit the completion of asset sales even if Spyglass'
pro forma LMR dips below the 1.0 threshold. This
issue has presented a significant impediment for energy companies
that have LMR ratings near or below the 1.0 level mandated by the
AER. Many parties looking to vend assets find themselves with
a small collection of properties causing LMR difficulty and a
potential purchaser who is interested in acquiring the vendor's
other, higher quality assets, but with no corresponding interest in
also taking on the LMR challenged assets. This can make the
transaction very difficult to complete even if there is broad
consensus on other material terms. For Spyglass and its
creditors this issue is now resolved. The Spyglass
assets have been segregated into different packages and preference
will be given to bids that are for the entire package of assets (as
distinct from an offer for a subset of certain assets within a
particular package), but the AER will permit license transfers to
occur even if the transaction leaves Spyglass' pro
forma LMR at less than 1.0 so long as 50% of the security
deposit that would usually be required is posted from the net sale
proceeds. Other notable aspects of the agreement include the
The AER will actively participate in the Spyglass' sales
and investment solicitation process and have the opportunity to
review bids, including the ability to reject non-arm's length
$5,000,000 of the sale proceeds will be segregated for the
purposes of satisfying abandonment, shut-in and suspension
obligations associated with Spyglass' properties that cannot be
sold. The AER has abandoned any further claim to the Spyglass'
assets for these obligations;
Sale proceeds from transactions that do not cause Spyglass'
pro forma LMR to fall below 1.0. will be immediately
available for distribution to Spyglass' senior secured lending
The statutory super-priority charge afforded to the receiver to
secure payment of its fees, disbursements and borrowings is
expressly confirmed by the terms of the agreement.
The agreement with the AER in respect of Spyglass will
facilitate the ability of Spyglass to transact without the usual
uncertainty that a LMR security deposit will be a barrier to
securing the AER's consent to the transfer of licenses.
It remains to be seen whether this will become a precedent
agreement for other formal insolvency proceedings involving LMR
issues. While the goal of achieving certainty is laudable,
many have observed that the AER's insistence on receiving
proceeds of sale in the absence of a legislative priority is
overreaching and contrary to the well-established priority regime
mandated by federal insolvency laws. So stay tuned.
The Canadian bankruptcy regime was designed with two key purposes in mind – provide options to ‘honest but unfortunate' debtors struggling with an unmanageable financial load and create an orderly means for creditors to recover amounts owed them.
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