UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the fiscal year ended December 31 , 2022
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from _________________________ to
Commission file number: 001-36246
____________
(Exact name of registrant as specified in its charter)
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| incorporation or organization) | Identification No.) | ||||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||
| (Registrant’s telephone number, including area code) | ||
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol(s) | Name of Exchange on Which Registered | ||||||
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
| Yes | ☐ | ☒ | |||||||||
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
| Yes | ☐ | ☒ | |||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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.
| ☒ | No | ☐ | |||||||||
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
| ☒ | No | ☐ | |||||||||
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "accelerated filer," "large accelerated filer," "smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
(Check one):
| Large Accelerated Filer | ☐ | ☒ | Emerging Growth Company | ||||||||||||||
| Non-Accelerated Filer | ☐ | Smaller Reporting Company | |||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
| Yes | No | ☒ | |||||||||
The aggregate market value of common shares held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter, June 30, 2022, was $332,630,445 .
The Registrant had 15,217,501 common shares outstanding as of February 24, 2023.
DOCUMENTS INCORPORATED BY REFERENCE
CIVEO CORPORATION
INDEX
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| Item 6. | Reserved | |||||||
| Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | ||||||||
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PART I
This annual report on Form 10-K (annual report) contains certain “forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 (the Securities Act) and Section 21E of the Securities Exchange Act of 1934 (the Exchange Act). Actual results could differ materially from those projected in the forward-looking statements as a result of a number of important factors. For a discussion of known material factors that could affect our results, refer to “Part I, Item 1. Business,” “Part I, Item 1A. Risk Factors,” “Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations” and “Part II, Item 7A. Quantitative and Qualitative Disclosures about Market Risk” of this annual report.
In addition, in certain places in this annual report, we refer to reports published by third parties that purport to describe trends or developments in the energy industry. We do so for the convenience of our shareholders and in an effort to provide information available in the market that will assist our investors in a better understanding of the market environment in which we operate. However, we specifically disclaim any responsibility for the accuracy and completeness of such information and undertake no obligation to update such information.
Cautionary Statement Regarding Forward-Looking Statements
We include the following cautionary statement to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 for any "forward-looking statement" made by us or on our behalf. All statements other than statements of historical facts included in this annual report are forward-looking statements. The forward-looking statements can be identified by the use of forward-looking terminology including “may,” “expect,” “anticipate,” “estimate,” “continue,” “believe” or other similar words. Such statements may include statements regarding our future financial position, budgets, capital expenditures, projected costs, plans and objectives of management for future operations and possible future strategic transactions. Where any such forward-looking statement includes a statement of the assumptions or bases underlying such forward-looking statement, we caution that, while we believe such assumptions or bases to be reasonable and make them in good faith, assumed facts or bases almost always vary from actual results. The differences between assumed facts or bases and actual results can be material, depending upon the circumstances. The factors identified in this cautionary statement are important factors (but not necessarily all of the important factors) that could cause actual results to differ materially from those expressed in any forward-looking statement made by us, or on our behalf.
In any forward-looking statement where we, or our management, express an expectation or belief as to future results, such expectation or belief is expressed in good faith and believed to have a reasonable basis. However, there can be no assurance that the statement of expectation or belief will result or be achieved or accomplished. Taking this into account, the following are identified as important factors that could cause actual results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, us:
•the level of supply and demand for oil, metallurgical coal, natural gas, iron ore and other minerals;
•the level of activity, spending and developments in the Canadian oil sands;
•the level of demand, particularly from China, for coal and other natural resources from Australia;
•the availability of attractive natural resource projects and assets, which may be affected by governmental actions, including changes in royalty or tax regimes, or environmental activists which may restrict drilling or development;
•fluctuations in the current and future prices of oil, coal, natural gas, iron ore and other minerals;
•failure by our customers to reach positive final investment decisions on, or otherwise not complete, projects with respect to which we have been awarded contracts to provide related hospitality services, which may cause those customers to terminate or postpone the contracts;
•fluctuations in currency exchange rates;
•general global economic conditions, such as the pace of global economic growth, a general slowdown in the global economy, supply chain disruptions, inflationary pressures and geopolitical events such as the ongoing Russia/Ukraine conflict;
•changes in tax laws, tax treaties or tax regulations or the interpretation or enforcement thereof, including taxing authorities not agreeing with our assessment of the effects of such laws, treaties and regulations;
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•changes to government and environmental regulations, including climate change;
•global weather conditions, natural disasters, global health concerns, such as the COVID-19 pandemic, and security threats;
•our ability to hire and retain skilled personnel;
•the availability and cost of capital, including the ability to access the debt and equity markets;
•our ability to integrate acquisitions;
•the development of new projects, including whether such projects will continue in the future; and
•other factors identified in Item 1A. - "Risk Factors" of this annual report.
Such risks and uncertainties are beyond our ability to control, and in many cases, we cannot predict the risks and uncertainties that could cause our actual results to differ materially from those indicated by the forward-looking statements.
All subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by reference to these risks and uncertainties. You should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement, and we do not undertake any obligation to publicly update or revise any forward-looking statements except as required by law.
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ITEM 1. Business
Available Information
We maintain a website with the address of www.civeo.com. We are not including the information contained on our website as a part of, or incorporating it by reference into, this annual report. We file or furnish annual, quarterly and current reports, proxy statements and other documents with the Securities and Exchange Commission (the SEC). We make available free of charge through our website our Annual Report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the SEC. Also, the SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us, and our filings are available on the Internet at www.sec.gov and free of charge upon written request to our corporate secretary at the address shown on the cover page of this annual report.
Our Company
We provide hospitality services to the natural resources industry in Canada, Australia and the United States (U.S.) We provide a full suite of services for our guests, including lodging, catering and food service, housekeeping and maintenance at accommodation facilities that we or our customers own. In many cases, we also provide services that support the day-to-day operations of these facilities, such as laundry, facility management and maintenance, water and wastewater treatment, power generation, communication systems, security and logistics. We also offer development activities for workforce accommodation facilities, including site selection, permitting, engineering and design, manufacturing management and site construction, along with providing hospitality services once the facility is constructed. We primarily operate in some of the world’s most active oil, metallurgical (met) coal, liquefied natural gas (LNG) and iron ore producing regions, and our customers include major and independent oil companies, mining companies, engineering companies and oilfield and mining service companies. Our extensive suite of services enables us to meet the unique needs of each of our customers, while providing comfortable accommodations for their employees.
Our Company is built on the foundation of the following core values: Safety, Care, Excellence, Integrity and Collaboration. We put the safety of our employees and guests above all other concerns. We care about our people, guests, customers, communities and the environment, and we deliver excellent service with passion and pride. We act with integrity and collaborate with our people, communities, customers and partners. We take an active role working to minimize the environmental impact of our operations through a number of sustainable initiatives. We also have a focus on water conservation and utilize alternative water supply options such as recycling and rainwater collection and use. By building infrastructure such as wastewater treatment and water treatment facilities to recycle gray and black water on some of our sites, we are able to gain cost efficiencies as well as reduce the use of trucks related to water and wastewater hauling, which in turn, reduces our carbon footprint. In our Australian villages, we utilize passive-solar-design principles and smart-switching systems to reduce the need for electricity related to heating and cooling.
We provide hospitality services that span the lifecycle of customer projects, from the initial exploration and resource delineation to long-term production. Initially, as customers assess the resource potential and determine how they will develop it, they typically need our hospitality services for a limited number of employees for an uncertain duration of time. Our fleet of mobile assets is well-suited to support this initial exploratory stage as customers evaluate their development and construction plans. As development of the resource begins, we are able to serve their needs through either: (1) our fleet of mobile assets, particularly for shorter term projects such as pipeline construction and seasonal drilling programs; (2) our scalable lodge or village model; or (3) our service of guests in customer-owned facilities. As projects grow and headcount needs increase, we are able to meet our customers growing needs at our accommodation facilities or with our hospitality services. By providing infrastructure support and hospitality services early in the project lifecycle, we are well positioned to continue to service our customers throughout the production phase, which typically lasts decades.
Our scalable facilities provide workforce accommodations where, in many cases, traditional accommodations or housing are not accessible, sufficient or cost effective. Our customers are able to outsource their accommodations needs to a single supplier, maintaining employee welfare and satisfaction while focusing their investment on their core resource production efforts. Our primary focus is on providing these hospitality services to leading natural resource companies at our major properties, which we refer to as lodges in Canada and the U.S. and villages in Australia, or at facilities owned by our customers. We own and operate 26 lodges and villages with approximately 28,000 rooms. We operate approximately 12,200 rooms owned by our customers. Additionally, in Canada, we also offer a fleet of mobile assets which serve shorter term projects, such as pipeline construction. We have long-standing relationships with many of our customers, many of whom are, or are affiliates of, large, investment-grade energy and mining companies.
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Demand for our hospitality services is influenced by five primary factors: (1) commodity prices, (2) customers' capital spending, (3) available infrastructure, (4) headcount requirements and (5) competition. Current commodity prices, and our customers’ expectations for future commodity prices, influence customers’ spending and maintenance on current productive assets, expansion of existing assets and greenfield development of new assets. In addition to commodity prices, different types of customer activity require varying workforce sizes, influencing the demand for our services. Competing locations, infrastructure and services will also influence demand for our rooms and services.
In the Canadian oil sands region, demand for our hospitality services is primarily influenced by the longer-term outlook for oil prices. Spending on the construction and development of new projects has historically decreased as the outlook for oil prices decreases. However, spending on current operations and maintenance has historically reacted less quickly and less severely to changes in oil prices, as customers consider their cash operating costs, rather than overall full-cycle returns. Likewise, construction and expansion projects already underway have also been less sensitive to commodity price decreases, as customers generally focus on completion and incremental costs. Depressed oil price levels of both West Texas Intermediate (WTI) and Western Canadian Select (WCS) resulting from the initial spread of COVID-19 materially impacted 2020 maintenance and production spending and activity by Canadian operators and, therefore, demand for our hospitality services. Customers began restoring production in the fourth quarter of 2020, reaching pre-pandemic levels in 2022. Although oil prices reached multi-year highs in the first half of 2022 and fluctuated in the second half of 2022, there is continued uncertainty around commodity price levels, including the ongoing impact of COVID-19, inflationary pressures, actions taken by OPEC+ to adjust production levels, geopolitical events such as the ongoing Russia/Ukraine conflict, and regulatory implications on such prices, which could cause our Canadian oil sands and pipeline customers to reduce production, delay expansionary and maintenance spending and defer additional investments in their oil sands assets. Natural gas prices also influence oil sands activity as an input cost: as natural gas prices fluctuate, a significant component of our customers’ operating costs fluctuate as well.
Another factor that influences demand for our hospitality services is the type of customer project we are supporting. Generally, Canadian customers require larger workforces during construction and expansionary periods, and therefore have higher demand for our rooms and services. Operational and maintenance headcounts are typically a fraction, 20% to 25%, of the headcounts experienced during construction.
In addition, proximity to customer activity and availability of customer-owned and competitor-owned rooms influences the rental demand of our rooms. Typically, customers prefer to first utilize their own rooms on location, and if such customer-owned rooms are insufficient, customers prefer to avoid busing their workforces to housing more than 45 kilometers away.
A number of multinational energy companies believe there is a potential to export LNG from Canada to meet the increasing global LNG demand, particularly in Asia. We expect that LNG investment and activity in Western Canada will be influenced by the global prices for LNG, which are largely tied to global oil prices, global supply/demand dynamics for LNG and Western Canadian wellhead prices for natural gas.
Currently, Western Canada does not have any operational LNG export facilities. LNG Canada (LNGC), a joint venture among Shell Canada Energy, an affiliate of Shell plc (40 percent), and affiliates of PETRONAS, through its wholly-owned entity, North Montney LNG Limited Partnership (25 percent), PetroChina (15 percent), Mitsubishi Corporation (15 percent) and Korea Gas Corporation (5 percent), is currently constructing a liquefaction and export facility in Kitimat, British Columbia (Kitimat LNG Facility). British Columbia LNG activity and related pipeline projects are a material driver of activity for our Sitka Lodge, as well as for our mobile assets, which are contracted to serve several portions of the related pipeline construction activity. The actual timing of when revenue is realized from the Coastal GasLink (CGL) pipeline and Sitka Lodge contracts could be impacted by any delays in the construction of the Kitimat LNG Facility or the pipeline, such as protest blockades and COVID-19. Our current expectation is that our contracted commitments associated with the CGL pipeline project will be completed in 2023. Any new delays in facility or pipeline construction may result in extensions to these dates. See "Canada-Canadian British Columbia Lodge" for more information.
Our Australian villages support similar activities as our Canadian lodges for the natural resources industry in Australia. Our customers are typically developing and producing met coal, iron ore and other minerals which have resource lives that are measured in decades. As such, their spending levels tend to react similarly to commodity prices as the spending levels of our Canadian customers. Spending on producing assets is less sensitive to commodity price decreases in the short and medium term, assuming the projects remain cash flow positive. However, new construction projects and expansionary projects are typically canceled or deferred during periods of lower met coal and iron ore prices. Similar to the Canadian market, new project construction activity typically requires larger workforces than day-to-day operations, where proximity and availability of customer-owned rooms influences the demand for our rooms and services. Our customer service requirements are primarily driven by production, maintenance and operational activities. Through 2022, we saw increased activity from both new and
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existing customers. With sustained met coal pricing above $200 per tonne, customers have committed to new projects and expansion projects and recommenced operations which were previously put on-hold. Current met coal prices continue to support an optimistic outlook for the sector, though exploration and future investment in Australia could be impacted with the recent increases to the Queensland royalty scheme introduced in mid-2022. Met coal prices have faced downward pressure in early 2023 due to falling steel demand, global economic weakness, and expected improvement in Australian supply as weather patterns and mining conditions improve. Iron ore prices fluctuated in the second half of 2022, with prices recovering from a low of $78 per tonne to over $100 per tonne with renewed support in the Chinese property sector. With stronger supply and a slow recovery in Chinese construction, downside pressure on current prices remains.
In the last half of 2022, we sold both our wellsite services and our offshore businesses in the U.S. Our remaining U.S. business supports completion activity in the Bakken and construction and turnaround work in the Louisiana industrial area. U.S. oil completion activity will continue to be impacted by oil prices, pipeline capacity, federal energy policies and availability of capital to support exploration and production completion plans.
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For the years ended December 31, 2022, 2021 and 2020, we generated $697.1 million, $594.5 million and $529.7 million in revenues and $17.0 million, $6.1 million and $(147.2) million in operating income (loss), respectively. The majority of our operations, assets and income are derived from the hospitality services provided at lodges and villages we own that have historically been contracted by our customers under multi-year, take-or-pay or exclusivity contracts. The hospitality services we provide at these facilities generated 62% of our revenue for the year ended December 31, 2022. Important performance metrics include revenue related to our major properties, average daily rate and aggregate billed rooms. The table below summarizes these key statistics for the periods presented in this annual report.
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (In thousands, except for room counts and average daily rate) | |||||||||||||||||
Accommodation Revenue (1) | |||||||||||||||||
| Canada | $ | 279,455 | $ | 239,526 | $ | 202,534 | |||||||||||
| Australia | 152,714 | 145,335 | 144,070 | ||||||||||||||
| U.S. | 3,058 | 5,437 | 2,451 | ||||||||||||||
| Total Accommodation Revenue | $ | 435,227 | $ | 390,298 | $ | 349,055 | |||||||||||
Mobile Facility Rental Revenue (2) | |||||||||||||||||
| Canada | $ | 96,400 | $ | 62,856 | $ | 33,192 | |||||||||||
| U.S. | 18,367 | 14,486 | 16,837 | ||||||||||||||
| Total Mobile Facility Rental Revenue | $ | 114,767 | $ | 77,342 | $ | 50,029 | |||||||||||
Food Service and Other Services Revenue (3) | |||||||||||||||||
| Canada | $ | 20,142 | $ | 18,996 | $ | 33,923 | |||||||||||
| Australia | 125,538 | 105,739 | 90,472 | ||||||||||||||
| U.S. | 90 | 50 | 50 | ||||||||||||||
| Total Food Service and Other Services Revenue | $ | 145,770 | $ | 124,785 | $ | 124,445 | |||||||||||
Manufacturing Revenue (4) | |||||||||||||||||
| U.S. | $ | 1,288 | $ | 2,038 | $ | 6,200 | |||||||||||
| Total Manufacturing Revenue | $ | 1,288 | $ | 2,038 | $ | 6,200 | |||||||||||
| Total Revenue | $ | 697,052 | $ | 594,463 | $ | 529,729 | |||||||||||
Average Daily Rates for Lodges and Villages (5) | |||||||||||||||||
| Canada | $ | 100 | $ | 99 | $ | 95 | |||||||||||
| Australia | $ | 75 | $ | 79 | $ | 73 | |||||||||||
Total Billed Rooms for Lodges and Villages (6) | |||||||||||||||||
| Canada | 2,759,521 | 2,404,880 | 2,095,784 | ||||||||||||||
| Australia | 2,024,068 | 1,846,882 | 1,968,284 | ||||||||||||||
| Average Exchange Rate | |||||||||||||||||
| Canadian dollar to U.S. dollar | $ | 0.77 | $ | 0.80 | $ | 0.75 | |||||||||||
| Australian dollar to U.S. dollar | 0.69 | 0.75 | 0.69 | ||||||||||||||
(1)Includes revenues related to lodge and village rooms and hospitality services for Civeo owned rooms for the periods presented.
(2)Includes revenues related to mobile assets for the periods presented.
(3)Includes revenues related to food service, laundry and water and wastewater treatment services, and facilities management for the periods presented.
(4)Includes revenues related to modular construction and manufacturing services for the periods presented. Civeo's remaining manufacturing operations in Louisiana were sold in the fourth quarter of 2022.
(5)Average daily rate is based on billed rooms and accommodation revenue for Civeo owned rooms during the periods presented.
(6)Billed rooms represents total billed days for Civeo owned rooms for the periods presented.
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Our History
Our Canadian operations, founded in 1977, began by providing modular rental housing to energy customers, primarily supporting drilling rig crews in the Western Canadian Sedimentary Basin. Over the next decade, we acquired a food service operation, enabling us to provide a more comprehensive accommodation solution. Through our experience with Syncrude’s Mildred Lake Village, a 2,100 bed facility that we operated and managed for them for nearly 20 years, we recognized the need for a premium, and more permanent, solution for workforce accommodations and hospitality services in the Canadian oil sands region. Pursuing this strategy, we opened PTI Lodge in 1998, one of the first independent lodging facilities in the region.
Through our wide range of hospitality services, we are able to identify, solve and implement solutions and services that enhance the guest experience and reduce the customer’s total cost of housing a workforce in a remote operating location. Using our experiences and service delivery model, our hospitality services have evolved to include fitness centers, water and wastewater treatment, laundry service and many other enhancements. In 2018, we acquired Noralta Lodge Ltd. (Noralta), which provided remote hospitality services in Alberta, Canada (the Noralta Acquisition) through eleven lodges comprising over 5,700 owned rooms and 7,900 total rooms. Over time, we have developed into Canada’s largest third-party provider of accommodations and hospitality services in the Canadian oil sands region.
During 2015, we entered the Canadian LNG market with the construction of our Sitka Lodge. In 2018, LNGC's partners announced that a positive FID had been reached on the Kitimat LNG Facility. British Columbia LNG activity and related pipeline projects are a material driver of activity for our Sitka Lodge, as well as for our mobile assets, which are contracted to serve several portions of the related pipeline construction activity.
With the acquisition of our Australian business in December 2010, we began providing hospitality services to support the Australian natural resources industry through our villages located in Queensland, New South Wales and Western Australia. Like Canada, our Australian business has a long-history of taking care of customers in remote regions, beginning with our initial Moranbah Village in 1996, and has grown to become Australia’s largest independent provider of hospitality services for people working in remote locations. Our Australian business was the first to introduce resort-style accommodations to the mining sector, adding landscaping, outdoor kitchens, pools, fitness centers and, in some cases, taverns. In 2019, we acquired Action Industrial Catering (Action), a provider of catering and managed services (which we refer to as our integrated services business) to the mining industry in Western Australia. The Action acquisition enhanced our service offering, geographic footprint and exposure to new commodities in Australia and underlines our focus on pursuing growth opportunities that fit within our core competencies and strategic direction. In all our operating regions, our business is built on a culture of continuous service improvement to enhance the guest experience and reduce customers' workforce housing costs.
Our Industry
We provide hospitality services to the natural resource industry. Our scalable facilities provide long-term and temporary workforce accommodations where traditional accommodations and related infrastructure often are not accessible, sufficient or cost effective. Once facilities are deployed in the field, we also provide services such as lodging, catering and food service, housekeeping and maintenance, as well as operations of these facilities, including laundry, water and wastewater treatment, power generation, communication systems, security and logistics. Our hospitality services can be provided at accommodation facilities we own or at facilities owned by our customers. Demand for our services is cyclical and substantially dependent upon activity levels, particularly our customers’ willingness to spend capital on the exploration for, development and production of oil, met coal, LNG, iron ore and other natural resources. Our customers’ spending plans generally are based on their view of commodity supply and demand dynamics, as well as the outlook for near-term and long-term commodity prices. As a result, the demand for our services is sensitive to current and expected commodity prices.
We serve multiple projects and multiple customers at most of our sites, which allows those customers to share some of the costs associated with their peak accommodations needs, including infrastructure (power, water, sewer and information technology) and central dining and recreation facilities.
Our business is significantly influenced by: (1) the level of production of oil sands deposits and associated maintenance and turnaround activities in Alberta, Canada; met coal production in Australia's Bowen Basin and iron ore production in Western Australia; (2) activity levels in support of extractive industries in Australia; (3) LNG and related pipeline activity in Canada; and (4) oil production in the U.S.
Historically, Canadian oil sands developers and Australian mining companies built and owned the accommodations necessary to house their personnel in these remote regions because local labor and third-party owned rooms were not available.
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Over the past 20 years, and increasingly over the past 10 years, some customers have moved away from the in sourcing business model for some of their accommodation needs as they recognize that owning accommodations and providing the hospitality services are non-core investments for their business.
We believe that our existing industry divides accommodations into two primary types: (1) lodges and villages and (2) mobile assets. Civeo is principally focused on hospitality services at lodges and villages. Lodges and villages typically contain a larger number of rooms and require more time and capital to develop. These facilities typically have dining areas, meeting rooms, recreational facilities, pubs and taverns and landscaped grounds where weather permits. Lodges and villages are generally supported by multi-year, take-or-pay or exclusivity contracts. These facilities are designed to serve the long-term needs of customers in developing and producing their natural resource developments. Mobile assets are designed to follow customers’ activities and can be deployed rapidly to scale. They are often used to support conventional and in-situ drilling crews, as well as pipeline and seismic crews, and are contracted on a project-by-project, well-by-well or short-term basis. Oftentimes, customers will initially require mobile assets as they evaluate or initially develop a field or mine. Mobile asset projects can be dedicated and committed to a single customer or project or can serve multiple customers.
The accommodation facilities market supporting the natural resource industry is segmented into competitors that serve components of the overall value chain, but very few offer the entire suite of hospitality services to customers. We estimate that customer-owned rooms represent over 50% of the market. Engineering firms such as Bechtel and Fluor often design accommodations facilities. Many public and private firms, such as ATCO Structures & Logistics Ltd. (ATCO), Dexterra Group Inc. (Dexterra), Alta-Fab Structures Ltd. (Alta-Fab) and Northgate Industries Ltd. (Northgate), build modular accommodations for sale. Dexterra, Black Diamond Group Limited (Black Diamond), ATCO, Royal Camp Services Ltd. and Target Hospitality primarily own and lease units to customers and, in some cases, provide facility management services, usually on a shorter-term basis with a more limited number of rooms, similar to our mobile assets business. Facility service companies, such as Aramark Corporation (Aramark), Sodexo Inc. (Sodexo), Compass Group PLC (Compass Group), or Cater Care typically do not invest in and own the accommodations assets, but will provide hospitality services at third-party or customer-owned facilities.
Canada
Overview
During the year ended December 31, 2022, we generated approximately 57% of our revenue from our Canadian operations. We are Western Canada’s largest provider of hospitality services for people working in remote locations. We provide our services through our lodges and mobile assets and at customer-owned locations. Our hospitality services support workforces in the Canadian LNG and oil sands markets and in a variety of oil and natural gas drilling, mining, pipeline and related natural resource applications.
Canadian Market
Demand for our hospitality services in the Canadian market is largely commodity price driven. In the Canadian oil sands region, demand is primarily influenced by the longer-term outlook for crude oil prices rather than current energy prices, given the multi-year production life of oil sands projects and the capital investment associated with development of such large-scale projects. Demand for our Canadian lodges is secondarily impacted by oil takeaway capacity. Demand for hospitality services related to LNG is influenced by the global prices for LNG. Utilization of our existing Canadian capacity and any future expansions will largely depend on continued LNG and oil sands spending related to existing production, maintenance activities and potential future expansion of existing projects.
The Athabasca oil sands are located in northern Alberta, an area that is very remote, with a limited local labor supply. Of Canada’s approximately 39 million residents, nearly half of the population lives in ten cities, while approximately 12% of the population lives in Alberta and less than 1% of the population lives within 100 kilometers of the oil sands activity. The local municipalities, of which Fort McMurray is the largest, have limited infrastructure to respond to workforce accommodation demands and are a significant driving distance from many of the oil sands projects. As such, the workforce accommodations market provides a cost-effective solution to the challenge of staffing large oil sands projects by sourcing labor largely throughout Canada to work on a rotational basis.
Similarly, the LNGC project located in Kitimat, British Columbia, is expected to need as many as 7,500 workers to construct the liquefaction facilities. The population of Kitimat and the surrounding area is approximately 9,000.
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Canadian Oil Sands Lodges
During the year ended December 31, 2022, activity in the Athabasca oil sands region generated approximately 62% of our Canadian revenue. The oil sands region continues to represent one of the world’s largest reserves for heavy oil. Our McClelland Lake, Wapasu Creek, Athabasca, Beaver River, Fort McMurray Village, Grey Wolf, Hudson, and Borealis lodges are focused on the northern region of the Athabasca oil sands, where customers primarily utilize surface mining to extract bitumen. Oil sands mining operations are characterized by large capital requirements, large reserves, large personnel requirements, long-term reserve lives, very low exploration or reserve risk and relatively lower cash operating costs per barrel of bitumen produced. Our Conklin, Anzac, Red Earth and Wabasca lodges, as well as a portion of our mobile assets, are focused in the southern portion of the region where we primarily serve in-situ operations and pipeline expansion and maintenance activity. In-situ methods are used on reserves that are too deep for traditional mining methods. In-situ technology typically injects steam or solvents into the deep oil sands in place to separate the bitumen from the sand and pumps it to the surface where it undergoes the same upgrading treatment as the mined bitumen. Reserves requiring in-situ techniques of extraction represent 80% of the established recoverable reserves in Alberta. In-situ operations generally require less capital and personnel and produce lower volumes of bitumen per development, with higher ongoing operating expense per barrel of bitumen produced.
Our oil sands lodges primarily support personnel for ongoing operations associated with surface mining and in-situ oil sands projects, as well as maintenance, turnaround and expansionary personnel, generally under short and medium-term contracts. Most of our oil sands lodges are located on land with leases obtained from the province of Alberta, with initial terms of ten years, or subleased from the resource developer. Our leases have expiration dates that range from 2023 to 2030. In recent years, we have successfully renewed or extended all expiring land leases which we have requested to renew or extend. Two of our oil sands properties are located on land which we own.
In order to operate a lodge in Canada, we are required to obtain a development permit from the regional municipality in which the lodge is located. The development permits are granted for a term of five years. Our development permits have expiration dates that range from 2023 to 2027. In recent years, we have successfully renewed or extended all expiring development permits. See “Item 1A. Risk Factors - Risks Related to Our Operations - The majority of our major Canadian lodges are located on land subject to leases. If we are unable to renew a lease or obtain permits necessary to operate on such leased land, we could be materially and adversely affected.” of this annual report for further information.
We provide a range of hospitality services at our lodges, including reservation management, check in and check out, food service, housekeeping and facilities management. Our lodge guests receive amenities similar to a full-service hotel plus three meals a day. Our Wapasu Creek Lodge, with more than 5,000 rooms, is equivalent in size to the largest hotels in North America.
We provide our hospitality services at the lodges we own on a day rate or monthly rental basis, and our customers typically commit for short to medium-term contracts (from several months up to several years). Most customers make a minimum nightly or monthly room commitment or an aggregate total room night commitment for the term of the contract, and the multi-year contracts typically provide for inflationary escalations in rates for increased food, labor and utilities costs.
Canadian British Columbia Lodge
As previously discussed, LNGC is currently constructing the Kitimat LNG Facility. British Columbia LNG activity and related CGL pipeline projects are a material driver of activity for our Sitka Lodge, as well as for our mobile assets, which are contracted to serve several portions of the related pipeline construction activity. The actual timing of when revenue is realized from the CGL pipeline and Sitka Lodge contracts could be impacted by any delays in the construction of the Kitimat LNG Facility or the pipeline, such as protest blockades or COVID-19. Our current expectation is that our contracted commitments associated with the CGL pipeline project will be completed in 2023.
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Canadian Lodge Locations
Rooms in our Canadian Lodges
| As of December 31, | ||||||||||||||||||||||||||||||||
| Lodges | Region | Extraction Technique | 2022 | 2021 | 2020 | |||||||||||||||||||||||||||
| Wapasu Creek | N. Athabasca | mining/in-situ | 5,174 | 5,174 | 5,246 | |||||||||||||||||||||||||||
Athabasca (1) | N. Athabasca | mining | 2,005 | 2,005 | 2,005 | |||||||||||||||||||||||||||
McClelland Lake (2) | N. Athabasca | mining | 1,997 | 1,997 | 1,997 | |||||||||||||||||||||||||||
Beaver River (1) | N. Athabasca | mining | 1,094 | 1,094 | 1,094 | |||||||||||||||||||||||||||
| Fort McMurray Village: | ||||||||||||||||||||||||||||||||
Black Bear (1) | N. Athabasca | mining | 531 | 531 | 531 | |||||||||||||||||||||||||||
| Bighorn | N. Athabasca | mining | 763 | 763 | 763 | |||||||||||||||||||||||||||
| Lynx | N. Athabasca | mining | 855 | 855 | 855 | |||||||||||||||||||||||||||
| Wolverine | N. Athabasca | mining | 855 | 855 | 855 | |||||||||||||||||||||||||||
Borealis (1) | N. Athabasca | mining | 1,504 | 1,504 | 1,504 | |||||||||||||||||||||||||||
| Grey Wolf | N. Athabasca | mining | 946 | 946 | 946 | |||||||||||||||||||||||||||
Hudson (1) | N. Athabasca | mining | 624 | 624 | 624 | |||||||||||||||||||||||||||
Wabasca (1) | S. Athabasca | mining | 288 | 288 | 288 | |||||||||||||||||||||||||||
Red Earth (1) | S. Athabasca | mining | 216 | 216 | 216 | |||||||||||||||||||||||||||
Conklin | S. Athabasca | mining/in-situ | 610 | 610 | 616 | |||||||||||||||||||||||||||
Anzac (1) | S. Athabasca | in-situ | 526 | 526 | 526 | |||||||||||||||||||||||||||
| Subtotal – Oil Sands | 17,988 | 17,988 | 18,066 | |||||||||||||||||||||||||||||
| Sitka Lodge | Kitimat, BC | LNG | 961 | 959 | 958 | |||||||||||||||||||||||||||
| Total Rooms | 18,949 | 18,947 | 19,024 | |||||||||||||||||||||||||||||
(1)Currently closed as of December 31, 2022, due to lodge loading strategy, seasonal activity fluctuations or low activity level in the region. All closed lodges are periodically assessed for impairment at an asset group level, in accordance with U.S. generally accepted accounting principles. See Note 4 - Impairment Charges to the notes to the consolidated financial statements in Item 8 of this annual report for further discussion.
(2)The land lease associated with the asset expires in June 2023. See "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Overview and Macroeconomic Environment - Capital Expenditures” of this annual report for additional information.
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Hospitality Services at Third-Party Owned Facilities
We also provide hospitality services at facilities owned by our customers. Historically, this has been focused around natural resource production-related housing facilities that are owned by oil production companies. The facilities we manage typically range anywhere from 500 to 1,500 rooms. We customize our service offerings depending on our customer’s needs. Hospitality services can be performed on an end-to-end basis with catering and food service, housekeeping, maintenance and utility services included or in segments such as food service only. Our focus on hospitality service contracts has allowed us to successfully pursue food service only opportunities. Due to our experience servicing customer-owned facilities, this business easily fits into our overall strategy.
Canadian Mobile Assets
Our mobile assets consist of modular, skid-mounted accommodations and central facilities that can be configured to serve a multitude of short to medium-term accommodation needs. Dormitory, kitchen and ancillary assets can be rapidly mobilized and demobilized and are scalable to support 200 to 800 people in a single location. In addition to asset rental, we provide hospitality services such as food service and housekeeping, as well as other camp management services. Our mobile assets service the traditional oil and gas sector in Alberta and British Columbia and in-situ oil sands drilling and development operations in Alberta, as well as pipeline construction crews throughout Western Canada. These assets have also been used in the past in disaster relief efforts, the 2010 Vancouver Winter Olympic Games and a variety of other non-energy related projects.
Our mobile assets are rented on a per unit basis based on the number of days that a customer utilizes the asset, and, in some cases, involve standby rental arrangements. In cases where we provide food service or ancillary services, the contract can provide for per unit pricing or cost-plus pricing. Customers are also typically responsible for mobilization and demobilization costs. Our focus on hospitality service contracts has allowed us to successfully pursue food service only opportunities. Due to our experience servicing customer-owned facilities, this business easily fits into our overall strategy.
Australia
Overview
During the year ended December 31, 2022, we generated 40% of our revenue from our Australian operations. As of December 31, 2022, we owned 8,814 rooms across eight villages, of which 7,392 rooms service the Bowen Basin of central Queensland, one of the premier met coal basins in the world. We provide hospitality services on a day rate basis to mining and related service companies (including construction contractors), typically under short and medium-term contracts (one to three years) with minimum nightly room commitments. In addition, we provide integrated services to the mining industry in Western Australia.
Australian Market
As the largest contributor to exports and a major contributor to the country’s gross domestic product and government revenue, the Australian natural resources industry plays a vital role in the Australian economy. Australia has broad natural resources, including met and thermal coal, conventional and coal seam gas, base metals, iron ore, copper and precious metals such as gold. Australia is the largest exporter of met coal and iron ore in the world, in addition to being in close proximity to the largest steel producing countries in the world. The growth of Australian natural resource commodity exports over the last decade has been largely driven by strong Asian demand for met coal, iron ore and LNG. Australia’s resources are primarily located in remote regions of the country that lack infrastructure and resident labor forces to produce these resources, as the majority of Australia’s population is located on the east coast of the country. As a result, much of the natural resources labor force works on a rotational basis, which often requires a commute from a major city or the coast to a living arrangement near the resource projects. Consequently, there is substantial need for workforce accommodations and hospitality services to support resource production in the country. Workforce accommodations have historically been built and owned by the resource developer/owner, with third parties providing the hospitality and facility management services, typical of an insourcing business model.
Since 1996, our Australian business has sought to change the insourcing business model through its hospitality services offering, allowing customers to outsource their accommodations needs and focus their investments on resource production operations. Our Australian villages are strategically located in proximity to long-lived, low-cost mines operated by investment-grade, international mining companies.
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Our Australian operations primarily serve the Bowen Basin of Queensland and the Pilbara region in Western Australia. During the year ended December 31, 2022, our five villages in the Bowen Basin generated 49% of our Australian revenue. The Bowen Basin contains one of the largest coal deposits in Australia and is renowned for its premium met coal. In addition, we provide village operation and mine site cleaning services at six customer locations in the Pilbara region, which is renowned for high grade iron ore production. Our villages and customer-based locations are focused on the mines in the central portion of the Pilbara and Bowen Basins and are well positioned for the active mines in the region.
The Chinese placed an embargo on several Australian products, including coal, in the fall of 2020. During the embargo, Australian met coal producers found new markets, including India and Europe, for their premium product. This led to a rebalancing of the market globally with China relying on domestic production along with increased met coal imports from the U.S., Canada and Mongolia. With the backdrop of continuing strong steel demand and met coal supply constraints, the spot price for met coal surged to record highs through the second half of 2021 into early 2022. The embargo was recently lifted during the first quarter of 2023. While met coal prices have receded from their all-time highs, they still remain over $350 per tonne as of February 24, 2023. Analysts forecast met coal prices to face downward pressure in early 2023 but to moderate during the year with supply improvement and weaker demand impacting prices. Downward pressure on prices could accelerate in the short term if demand in China worsens.
Beyond the Pilbara and Bowen Basins, we serve several other markets with four additional villages and three customer-owned villages. At the end of 2022, we had two villages with over 1,000 combined rooms in the Gunnedah Basin, a thermal and met coal region in New South Wales. In Western Australia, we serve workforces related to LNG facilities operations on the Northwest Shelf through our Karratha village. In addition, we provide hospitality services in Western Australia and Southern Australia at seven customer-owned villages which support workforces related to nickel, copper, zinc, silver and gold production in the Goldfields-Esperance region, lithium production in the Pilbara region and copper, silver and gold in Western Australia and South Australia.
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Australian Village Locations
Owned Rooms in our Australian Villages
| As of December 31, | ||||||||||||||||||||||||||||||||
| Villages | Resource Basin | Commodity | 2022 | 2021 | 2020 | |||||||||||||||||||||||||||
| Coppabella | Bowen | met coal | 3,048 | 3,048 | 3,048 | |||||||||||||||||||||||||||
| Dysart | Bowen | met coal | 1,798 | 1,798 | 1,798 | |||||||||||||||||||||||||||
| Moranbah | Bowen | met coal | 1,240 | 1,240 | 1,240 | |||||||||||||||||||||||||||
| Middlemount | Bowen | met coal | 816 | 816 | 816 | |||||||||||||||||||||||||||
| Boggabri | Gunnedah | met/thermal coal | 622 | 622 | 622 | |||||||||||||||||||||||||||
| Narrabri | Gunnedah | met/thermal coal | 502 | 502 | 502 | |||||||||||||||||||||||||||
| Nebo | Bowen | met coal | 490 | 490 | 490 | |||||||||||||||||||||||||||
Kambalda (1) | - | gold, lithium | — | 232 | 232 | |||||||||||||||||||||||||||
| Karratha | Pilbara | LNG, iron ore | 298 | 298 | 298 | |||||||||||||||||||||||||||
| Total Rooms | 8,814 | 9,046 | 9,046 | |||||||||||||||||||||||||||||
(1) Sold in the third quarter of 2022.
Our Australian segment includes eight company-owned villages with 8,814 rooms as of December 31, 2022, which are strategically located near long-lived, low-cost mines operated by large mining companies. Our Australian business provides hospitality services to mining and related service companies under short- and medium-term contracts. Our growth plan for this part of our business continues to include enhanced occupancy and expansion of these properties where we believe there is durable long-term demand, as well as to provide hospitality services at customer-owned assets.
Our Coppabella, Dysart, Moranbah, Middlemount and Nebo villages are located in the Bowen Basin. Coppabella, at over 3,000 rooms, is our largest village and provides rooms and related hospitality services to a variety of customers. Each of these villages supports both operational workforce needs and contractor needs with resort style amenities, including swimming pools, gyms, a walking track and a tavern.
Our Narrabri and Boggabri villages in New South Wales service met and thermal coal mines and coal seam gas in the Gunnedah Basin. Our Karratha village, in Western Australia, services workforces related to LNG facilities operations on the
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Northwest Shelf. Our Kambalda village was sold in the third quarter of 2022 to a customer, and we continue to operate the village as a customer-owned location.
Hospitality Services at Third-Party Owned Facilities
We also provide hospitality services at customer-owned villages to the mining industry in Western Australia. Historically, this has been focused around natural resource production-related village facilities that are primarily owned by iron ore production companies. We provide village operation services at 13 customer-owned locations, which represent over 10,000 rooms, primarily in the Pilbara region of Western Australia, one of the premier iron ore bodies in the world, and in the Goldfields-Esperance region of Western Australia. The facilities we manage range anywhere from 200 to over 1,900 rooms. We work together with our customers to customize our service offerings depending on our customer’s needs. Hospitality services can be performed on an end-to-end basis with catering and food service, housekeeping and site maintenance included or in segments such as food service only. Mine site cleaning services are also provided at some of our customer-owned locations.
U.S.
Overview
During the year ended December 31, 2022, our U.S. business generated 3% of our revenue. In the last half of 2022, we sold both our wellsite services and our offshore businesses. Our remaining U.S. business consists of two lodges - one in the Bakken region and one in Louisiana.
| As of December 31, | ||||||||||||||||||||||||||
| State | 2022 | 2021 | 2020 | |||||||||||||||||||||||
West Permian (1) | TX | — | — | 390 | ||||||||||||||||||||||
| Acadian Acres | LA | 300 | 300 | 300 | ||||||||||||||||||||||
| Killdeer | ND | 235 | 235 | 235 | ||||||||||||||||||||||
| Total Rooms | 535 | 535 | 925 | |||||||||||||||||||||||
(1) Sold in October 2021.
Our Killdeer Lodge provides rooms to the Bakken Shale region in North Dakota. Our Acadian Acres Lodge provides rooms near Lake Charles, Louisiana to support the Louisiana downstream market.
Community Engagement
With a focus on long-term Indigenous community participation, our Canadian operations continue to work closely with a number of First Nations to develop mutually beneficial partnerships focused on revenue sharing, capacity building, employment and community investment and support. For over a decade, our Canadian operations supported Buffalo Metis Catering, a partnership with three Metis communities in the Regional Municipality of Wood Buffalo. Through this partnership, food and housekeeping services were delivered to three of our lodges. Beyond these services, this partnership provided a business incubator environment for a number of Metis business ventures. Our Canadian operations also procure services from a number of other First Nations-owned, Metis-owned and member-owned businesses including water hauling, snow removal and security services. In 2022, we purchased more than C$66.2 million in goods and services from the Indigenous business community, representing 30% of our total Canadian local spending.
In 2021, the Fort McKay Metis community awarded Civeo with the inaugural 2020 Fort McKay Metis National President's Award. This award recognizes people or organizations who make a positive contribution to the well-being of the Metis community. In 2019, our Indigenous partnership initiatives earned Civeo a Gold level Progressive Aboriginal Relations (PAR) certification, by a jury comprised of Indigenous business people, which was supported by an unbiased, independent, third-party verification of our performance. In 2016, Civeo was awarded a Silver level PAR certification by the Canadian Council for Aboriginal Business (CCAB), demonstrating our commitment to the principles and practices established by the CCAB. In addition, in 2011 and 2012, we were recognized with awards from the Alberta Chamber of Commerce.
In 2018, Civeo entered into three new Indigenous partnerships in the oil sands region and two new partnerships in British Columbia and in 2021 entered into a new partnership in British Columbia. Our partnerships in British Columbia are tied to accommodations contracts secured by Civeo for the Kitimat LNG Facility, the CGL pipeline project that originates in the North Montney region of north-east British Columbia and the Trans Mountain expansion project that twins an existing pipeline
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between Edmonton, Alberta and Burnaby, British Columbia. Beyond revenue sharing, these arrangements provide procurement, employment, training, and ancillary business opportunities for Indigenous owned businesses.
In Australia, our community relations program also aims to build and maintain a positive social license to operate by consulting and engaging with local regional communities from project inception, through development, construction and operations. This is a major advantage for our business model, as it facilitates consistent communication, engenders trust and builds relationships to last throughout the resource lifecycle. There is an emphasis on developing partnerships that create a long-term sustainable outcome to address specific community needs. To that end, we partner with local municipalities to improve and expand municipal infrastructure. These improvements provide necessary infrastructure, allowing the local communities an opportunity to expand and improve. We also provide support to local community groups through sponsorship and in-kind contributions to local events and initiatives. In addition, all of our food suppliers are Australian companies and, where possible, are based locally. Through our membership with Supply Nation, a non-profit organization committed to supplier diversity and Indigenous business development, we have been able to direct approximately A$9.5 million in 2022 into Indigenous-owned and operated companies, and we are always looking for more opportunities to partner with these businesses.
In addition, we have three unincorporated joint venture partnerships with Indigenous landowners in Western Australia. Under these agreements, we strive to develop the business capacity, project management skills and expertise of the Indigenous joint venture members and also provide local employment opportunities and training. Two of the three unincorporated joint venture partnerships entitle Indigenous landowners to a profit distribution calculated in accordance with the unincorporated joint venture deeds. Additionally, two of the three remaining agreements incentivize the joint venture members via milestone payments for business objectives achieved.
Customers and Competitors
Our customers primarily operate in oil sands mining and development, drilling, exploration and extraction of oil and natural gas and coal and other extractive industries. To a lesser extent, we also support other activities, including pipeline construction, forestry and humanitarian aid. Our largest customers in 2022 were Suncor Energy Inc, Imperial Oil Limited (a company controlled by ExxonMobil Corporation) and Fortescue Metals Group Ltd who each accounted for more than 10% of our 2022 revenues.
Our primary competitors in Canada in lodge and mobile asset hospitality services include ATCO, Black Diamond, Dexterra and Clean Harbors, Inc. Some of these competitors have one or two locations similar to our oil sands lodges; however, based on our estimates, these competitors do not have the breadth or scale of our lodge operations. In Canada, we also compete against Aramark, Sodexo, Compass Group and Royal Camp Services for third-party facility management and hospitality services.
Our primary competitors in Australia for our village hospitality services are customer-owned and operated villages as well as Ausco Modular (a subsidiary of Modulaire Group), Fleetwood Corporation and smaller independent village operators. We compete against ISS, Sodexo, Compass Group, Northern Rise (as a division of Delaware North) and Cater Care for third-party facility management services.
In the U.S., we primarily offer our lodge hospitality services and compete against Target Hospitality, hotels, and local mobile home and RV parks.
Historically, many customers have invested in their own accommodations. We estimate that our existing and potential customers own approximately 50% of the rooms available in the Canadian oil sands and 50% of the rooms in the Australian coal mining regions.
Our Lodge and Village Contracts
During the year ended December 31, 2022, revenues from our lodges and villages represented over 62% of our consolidated revenues. Our contract terms generally provide for a rental rate for a reserved room and an occupied room rate that compensates us for hospitality services, including meals, housekeeping, utilities and maintenance for workers staying in the lodges and villages. In most multi-year contracts, our rates typically have annual escalation provisions to cover expected increases in labor and consumables costs over the contract term. In some contracts, customers have a contractual right to terminate, for reasons other than a breach, in exchange for a termination fee. Our customers typically contract for hospitality services under contracts with terms that most often range from several months to twelve years. The contracts expire throughout
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the year, and for many of the near-term expirations, we are in the process of negotiating extensions or new commitments. We cannot assure that we can renew existing contracts or obtain new business on the same or better terms, if at all.
Long-Term Take-or-Pay Contracts. Over the term of a take-or-pay contract, the customer commits to either a minimum number of rooms over a specified period or an aggregate number of room nights over the period, generally for terms greater than 12 months. During the year ended December 31, 2022, we billed approximately 2.5 million room nights under our long-term take-or-pay contracts, which included 0.6 million room nights in excess of the take-or-pay minimums. For the year ended December 31, 2023, we have commitments for 1.2 million room nights under our long-term take-or-pay contracts.
Short-Term Take-or-Pay Contracts. Customers may contract with us on a take-or-pay basis for less than 12 months, particularly for turnaround projects. Similar to long-term take-or-pay contracts, the customer commits to either a minimum number of rooms over a specified period or an aggregate number of room nights over the period. During the year ended December 31, 2022, we billed approximately 0.9 million room nights under our short-term take-or-pay contracts. For the year ended December 31, 2023, we have commitments for 0.2 million room nights under our short-term take-or-pay contracts.
Exclusivity Contracts. Over the term of an exclusivity contract, rather than receiving a minimum room commitment, we are the exclusive hospitality service provider for the customer's employees working on a specific project or projects. During the year ended December 31, 2022, we billed approximately 1.2 million room nights under our exclusivity contracts.
Casual / Walk-ins. Customers without long-term committed contracts may utilize lodge/village rooms via short-term bookings at lodge/village casual or agreed rates. During the year ended December 31, 2022, we billed approximately 0.2 million room nights to casual or walk-in customers.
Our Integrated Services Contracts
During the year ended December 31, 2022, revenues from our customer-owned locations represented 21% of our consolidated revenues. Our contract terms generally provide for a per guest per day rate for hospitality services, including meals and housekeeping. Similar to our owned lodge and villages contracts, in most multi-year contracts, our rates typically have annual escalation provisions to cover expected increases in labor and consumables costs over the contract term. Our customers typically contract for hospitality services under exclusivity contracts with terms that most often range from several months to five years. During the year ended December 31, 2022, we billed approximately 2.3 million room nights under our integrated services exclusivity contracts.
Seasonality of Operations
Our operations are directly affected by seasonal weather. A portion of our Canadian operations is conducted during the winter months when the winter freeze in remote regions is required for customers’ activity to occur. The spring thaw in these frontier regions restricts operations in the second quarter and adversely affects our customers' operations and our ability to provide services. Customers’ maintenance activities in the oil sands region, such as shutdown and turnaround activity, are typically performed in the second and third quarters annually. Our Canadian operations have also been impacted by forest fires and flooding in the past five years. During the Australian rainy season between November and April, our operations in Queensland and the northern parts of Western Australia can be affected by cyclones, monsoons and resultant flooding. In the U.S., winter weather in the first quarter and the resulting spring break up in the second quarter have historically negatively impacted our Bakken operations.
Human Capital Resources
We believe that our employees are one of our greatest resources. As of December 31, 2022, we had approximately 1,400 full-time employees and approximately 1,400 hourly employees on a consolidated basis, 59% of whom are located in Canada, 39% of whom are located in Australia and 2% of whom are located in the U.S. We were party to collective bargaining agreements covering 1,123 employees located in Canada and 768 employees located in Australia as of December 31, 2022.
As a company, we recognize the importance of a diverse workforce represented by people from different backgrounds, experiences and ways of looking at the world. We endeavor to hire Indigenous Peoples and expand our Indigenous workforce, excluding corporate staff, to 10% in Canada. In 2022, we reached 7% Indigenous employment, excluding corporate staff, in Canada despite challenging market conditions that resulted in reduced hiring across the region. Approximately 6% of our total new hires in Canada were of Indigenous background during 2022.
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Civeo strives to offer competitive compensation, benefits and services that meet the needs of its employees, including short and long-term incentive packages, various defined contribution plans, healthcare benefits, and wellness and employee assistance programs. Management monitors market compensation and benefits in order to attract, retain, and promote employees and reduce turnover and its associated costs.
Civeo is committed to operating in a safe, secure and responsible manner for the benefit of its employees, customers and the communities Civeo serves in Canada, Australia and the U.S. Because we are committed to protecting the health and safety of our people, we operate in accordance with rigorous standards documented in our Making Zero Count initiative, which recognizes the importance of zero harm, while focusing on the process to achieve excellent performance. We continue to monitor the COVID-19 pandemic to help ensure the health and well-being of our employees, guests and contractors. Most of our previously implemented measures have been revised to reflect improved conditions, and are currently being integrated into a more comprehensive communicable illness plan. Our safety culture is driven by our leaders, in conjunction with active employee engagement.
At Civeo, we believe that investing in our people is an investment in our own success. Our commitment to training and career development enables employees to grow and advance in their careers while supporting our industry-leadership position. Committed to the continuous improvement of our team, we provide training in the technical and managerial skills needed for employees' current and future roles, with a specific focus on safety, customer service and leadership development. Our learning and development program includes a mix of e-learning modules, face-to-face training and nationally certified programs as well as licensing training offered by external providers.
Government Regulation
Our business is significantly affected by Canadian, Australian and U.S. laws and regulations at the federal, provincial, state and local levels relating to the oil, natural gas and mining industries, worker safety and environmental protection. Changes in these laws, including more stringent regulations and increased levels of enforcement of these laws and regulations, and the development of new laws and regulations could significantly affect our business and result in:
•increased difficulty securing required permits, approvals, licenses or other authorizations issued by federal, provincial and local authorities needed to carry out our operations or our customers' operations;
•increased compliance costs or additional operating restrictions associated with our operations or our customers’ operations;
•other increased costs to our business or our customers’ business;
•reduced demand for oil, natural gas, and other natural resources that our customers produce; and
•reduced demand for our services.
To the extent that these laws and regulations impose more stringent requirements or increased costs or delays upon our customers in the performance of their operations, the resulting demand for our services by those customers may be adversely affected, which impact could be significant and long-lasting. Moreover, climate change laws or regulations could increase the cost of consuming, and thereby reduce demand for, oil and natural gas, which could reduce our customers’ demand for our services. We cannot predict changes in the level of enforcement of existing laws and regulations, how these laws and regulations may be interpreted or the effect changes in these laws and regulations may have on us or our customers or on our future operations or earnings. We also are not able to predict the extent to which new laws and regulations will be adopted or whether such new laws and regulations may impose more stringent or costly restrictions on our customers or our operations.
Our operations and the operations of our customers are subject to numerous stringent and comprehensive foreign, federal, provincial, state and local environmental laws and regulations governing the release or discharge of materials into the environment or otherwise relating to environmental protection. Numerous governmental agencies issue regulations to implement and enforce these laws, for which compliance is often costly yet critical. The violation of these laws and regulations may result in the denial or revocation of permits, issuance of corrective action orders, modification or cessation of operations, assessment of administrative and civil penalties, and even criminal prosecution. Although we do not anticipate that future compliance with existing environmental laws and regulations will have a material effect on our financial condition, results of operations or cash flows over the short term, there can be no assurance that substantial costs for compliance or penalties for non-compliance with these existing requirements will not be incurred in the future by us or our customers. Moreover, it is possible that other developments, such as the adoption of stricter environmental laws, regulations and enforcement policies or more stringent enforcement of existing environmental laws and regulations, could result in additional costs or liabilities upon us or our customers that we cannot currently quantify.
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Canadian Environmental Regulations
In Canada, the federal and provincial governments both have jurisdiction to regulate environmental matters. The provincial governments may also devolve jurisdiction over environmental matters to local governments. Our activities, or those of our customers, may be subject to environmental regulations imposed by these three levels of government. The following addresses updates to Canadian federal and provincial environmental regulations in 2022 that may affect us or our customers.
Air Quality Management
The Government of Canada (Canada), the Government of Alberta (Alberta), and the Government of British Columbia (British Columbia) each have frameworks for air quality management that may affect us and our customers.
At the federal level, the Reduction in the Release of Volatile Organic Compounds Regulations (Petroleum Sector) were published in 2020. Certain leak detection and repair provisions of that regulation took effect beginning in 2021 and the regulation sets additional monitoring and requirements for operators beginning in 2022 and 2023. These regulations will require the implementation of comprehensive leak detection and repair (LDAR) programs as well as design and operating standards that prevent leaks at Canadian petroleum refineries, upgraders and certain petrochemical facilities and may affect our customers’ operations.
In addition to federal requirements, emissions from facilities in Alberta are subject to provincial regulation. The Alberta Energy Regulator (AER), which is responsible for regulating upstream oil and gas activity in Alberta, oversees compliance with Directive 60: Upstream Petroleum Industry Flaring, Incinerating, and Venting (Directive 60). This Directive applies to all upstream petroleum industry wells, facilities and pipelines as well as all oil sands schemes and operations with the exception of oil sands mining. Directive 60 requires operators to eliminate or reduce flaring associated with a wide variety of energy development activities and operations. In December 2018, the AER finalized amendments to its Directive 60 and Directive 017: Measurement Requirements for Oil and Gas Operations (Directive 17) as part of its role in implementing commitments from the Alberta government to reduce methane emissions from upstream oil and gas operations by 45% by 2025. These requirements, among other things, set limits on methane emissions from various facilities and require annual reporting of such emissions to the AER. The methane reduction requirements in Directive 60 took effect in 2020, additional vent gas limits took effect on January 1, 2022 and additional vent gas limits took effect on January 1, 2023. Meeting these regulatory requirements may result in additional costs or liabilities for our customers’ operations.
Similarly, emissions from facilities in British Columbia are also subject to provincial regulation. The British Columbia Oil and Gas Commission (BCOGC) is responsible for regulating oil and gas activity in British Columbia. BCOGC oversees compliance with the Drilling and Production Regulation, which is one of British Columbia's primary regulatory instruments governing all aspects of oil and natural gas drilling and production. Effective January 1, 2020, that regulation was amended to require operators to eliminate or reduce natural gas leaking or venting associated with a wide variety of equipment and activities in energy development. Under this regulation, new requirements are imposed for facilities detecting leaks and inspecting seals as well as restrictions or prohibitions on the types of equipment used for energy development. Some of these requirements took effect in 2022 and further requirements took effect on January 1, 2023. In addition, the BCOGC completed consultation in 2022 on proposed amendments to the Drilling and Production Regulation to maintain equivalency with federal requirements. Those amendments are expected to be finalized in 2023. Meeting these regulatory requirements may result in additional costs or liabilities for our customers’ operations.
Environmental Assessment of Major Projects
Following a review process that began in January of 2016, Canada introduced new legislation to "rebuild public trust" in Canada's environmental review process. In August 2019, the Canadian Environmental Impact Assessment Act, 2012 (CEAA 2012) was repealed and replaced with the federal Impact Assessment Act. The Impact Assessment Act and regulations made under that Act provide that certain new projects and expansions to existing projects – including oil sands mining and in situ projects, metallurgical mining projects, pipelines and other developments – will likely require a federal planning and assessment process to understand the environmental and social impacts of the project, as well as decision on whether those impacts are in the public interest.
One of the stated objectives of the Impact Assessment Act was to shorten review times for projects that are subject to review under that Act. However, concerns about lengthy reviews that require substantial information from project proponents remain even after the implementation of the Impact Assessment Act. Our customers operate in the aforementioned industries and could be considering future projects that would be subject to the Impact Assessment Act. To the extent our customers are required to comply with this legislation, it is possible that the uncertainty regarding cost and timelines for navigating the
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planning, assessment, and decision-making processes may negatively impact our customers' decisions on whether to proceed with those projects.
The Government of Alberta, supported by the governments of Ontario and Saskatchewan, has challenged the constitutionality of the Impact Assessment Act. In May of 2022, the Alberta Court of Appeal released its opinion on that challenge (Opinion), with a majority concluding that the Impact Assessment Act is beyond the constitutional authority of the federal government on the basis that it encroaches too far into areas of exclusive provincial authority. The opinion is not binding and does not invalidate the Impact Assessment Act. The federal government has appealed the ruling to the Supreme Court of Canada. A decision on that appeal is expected in mid-late 2023. As a result, there is significant uncertainty about the future application of Canada's federal environmental assessment legislation to our customers.
Climate Change Regulation
Scientific studies have suggested that emissions of greenhouse gases (GHG), including carbon dioxide and methane, may be contributing to warming of the Earth’s atmosphere and other climatic changes. In December 2015, 195 nations, including Canada, Australia, and the U.S., adopted the Paris Agreement at the 21st “Conference of the Parties” to the United Nations Convention on Climate Change (COP 21). The Paris Agreement does not set legally binding emission reduction targets but does set a goal of limiting global temperature increases to less than 2° Celsius. Canada announced that it is in favor of the decision of the COP 21 to endeavor to take action to further limit global temperature increases to less than 1.5° Celsius. The Paris Agreement also requires parties to submit Intended Nationally Determined Contributions (INDCs) which set out their emission reduction targets and to renew these INDCs, with the goal of increasing the reductions, every five years. The Paris Agreement does not legally bind the parties to reach their INDCs, nor does it prescribe the measures that must take to achieve them. These measures are left to each participating nation. In September 2016, Canada's new federal government confirmed that it would not commit to a more ambitious INDC than the preceding Conservative federal government. The government maintained this approach in 2017 revisions to Canada’s INDC submission taking into account the federal Pan-Canadian Framework on Clean Growth and Climate Change (PCF) adopted in 2016.
In March 2016, Canada and the Government of the U.S. jointly announced their intention to take action to reduce methane emissions from the oil and gas sector in an effort to meet their respective INDCs pursuant to the Paris Agreement. For its part, Canada announced its intention to reduce methane emissions from the oil and gas sector by 40-45 percent below 2012 levels by 2025. In 2018, the government introduced the Regulations Respecting Reduction in the Release of Methane and Certain Volatile Organic Compounds (Upstream Oil and Gas Sector) (Federal Methane Regulations) to implement its methane commitment. The Federal Methane Regulations impose various quantity-based limits on the venting of natural gas (or in the case of well completions involving hydraulic fracturing, a ban on such venting) and include associated conservation, measurement, inspection and corrective action requirements. Certain requirements of the Federal Methane Regulations came into effect January 1, 2020, and other emissions limits are now in place for certain equipment installed on or after January 1, 2023. Further, in March 2022, the federal government began consultation on a proposed strategy to expand coverage and increase stringency of methane reduction obligations in the oil and gas sector specifically, and is expected to issue draft regulations in 2023. These requirements may result in additional costs or liabilities for our customers’ operations.
In 2018, the federal government enacted the Greenhouse Gas Pollution Pricing Act (GGPPA), which came into force on January 1, 2019. This regime has two parts: an output-based pricing system for large industry and a regulatory fuel charge. This system serves as a "backstop" and applies in provinces and territories that request it and in those that do not have their own emissions pricing systems in place that meet the federal standards. This ensures that there is a uniform price on emissions across the country. The backstop price under the GGPPA increased to $50 per tonne of CO2e in 2022. As of January 1, 2023, the backstop price is $65 per tonne of CO2e. The current government plan is to continue increasing that price by $15 per year until it reaches $170/tonne of CO2e in 2030.
On November 19, 2020, the federal government introduced the Canadian Net-Zero Emissions Accountability Act in Parliament. That Act was passed by Parliament and received Royal Assent on June 29, 2021 and binds the Government of Canada to a process intended to help Canada achieve net-zero emissions by 2050. It also establishes rolling five-year emissions-reduction targets and requires the government to develop plans to reach each target. The federal government is required to support those efforts by creating a Net-Zero Advisory Body and by publishing annual reports that describe how departments and Crown corporations are considering the financial risks and opportunities of climate change in their decision-making.
At the 26th Conference of the Parties to the UNFCCC (COP 26), held in Glasgow between October 31 and November 13, 2021, Canada presented a strengthened climate plan and committed to an enhanced emissions reduction target of between 40 and 45 percent below 2005 levels by 2030. Following a 2021 federal election, the Government of Canada delivered a new Throne Speech in November 2021 which reiterated its intent to take action that would "go further, faster" to fight climate change. Among other things, the federal government pledged to cap and cut oil and gas sector emissions while accelerating on
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the path to 100 percent net zero electricity. In July 2022, the federal government published a discussion paper on options to “cap and cut oil and gas sector greenhouse gas emissions” to achieve its emissions targets and solicited feedback on different regulatory options. It is expected to publish draft regulations to implement the emissions cap in 2023. These requirements, if implemented, may result in additional costs or liabilities for our customers’ operations.
In July 2022, Canada finalized Clean Fuel Regulations (CFR), which form part of its plan to reduce emissions, accelerate the use of clean technologies and fuels, and create good jobs in a diversified economy. The CFR requires liquid fuel suppliers to gradually reduce the carbon intensity of the fuels they produce and sell for use in Canada over time. Compliance with this new regulation is expected to increase the price of liquid fuels which, in turn, could increase operating costs for our customers while potentially lowering demand for some of their products.
In Alberta, GHGs are regulated pursuant to the Emissions Management and Climate Resilience Act and the Technology Innovation and Emissions Reduction Regulation (TIER Regulation). In December 2019, the TIER Regulation was deemed equivalent to the backstop prescribed by the federal GGPPA, meaning that facilities within Alberta subject to the TIER Regulation are not subject to the full costs of complying with the GGPPA. The TIER Regulation generally applies to Alberta-based facilities that emit over 100,000 tonnes of CO2e per year. Under the TIER Regulation, emissions from each facility are compared to either an industry-wide benchmark or a facility-specific benchmark which effectively permits facilities to emit GHGs up to a certain amount without being subject to the provincial carbon price. Those benchmarks “tighten” resulting in more onerous compliance costs, every year. Facilities with emissions that exceed the industry-wide benchmark or facility-specific benchmark, as applicable, must rely on one or more of the compliance options established by the TIER Regulation, such as purchase credits or offsets for each tonne of CO2e in excess of their limits. The Alberta government issues an order every year setting the price to acquire credits, which effectively dictates compliance costs. In December 2022, the Alberta government announced changes to the administration of the TIER Regulation, including planned increases to the carbon price and increases to annual benchmark tightening rates. These changes were announced in order to ensure that the TIER Regulation maintains equivalency with the framework established by GGPPA. Planned increases to the cost of TIER Regulation credits and annual benchmark tightening rates may result in additional costs or liabilities for our customers’ operations. In addition, similar increases in stringency of provincial GHG regulatory frameworks within British Columbia and Saskatchewan may result in additional costs or liabilities for our customers’ operations.
Finally, it should be noted that some scientists have concluded that increasing concentrations of GHGs in the Earth’s atmosphere may produce climate changes that have significant physical effects, such as higher sea levels, increased frequency and severity of storms, droughts, floods and other climatic events. If any such effects were to occur, they could have an adverse effect on our operations and our financial condition.
The Canadian Species at Risk Act is intended to prevent wildlife species in Canada from disappearing and to provide for the recovery of wildlife species that no longer exist in the wild in Canada, or that are endangered or threatened as a result of human activity, and to manage species of special concern to prevent them from becoming endangered or threatened. The designation of previously unprotected species as threatened or endangered in areas of Canada where our customers’ oil and natural gas exploration and production operations are conducted could cause them to incur increased costs arising from species protection measures or could result in limitations on their exploration and production activities, which could have an adverse impact on demand for our services.
Woodland caribou habitat covers large portions of several Canadian provinces including British Columbia, Alberta, and Saskatchewan. Many of our customers have existing or proposed developments in or near woodland caribou habitat. Conservation measures imposed by the federal or provincial governments could affect the business of our customers with operations near caribou habitat.
Abandonment and Remediation of Oil and Gas Infrastructure
As the lifecycle regulator for energy resource activities, the AER oversees closure requirements, including the abandonment and reclamation of wells, well sites, facilities, facility sites, and pipelines. Historically, the AER discharged this role through its Liability Management Rating Program (AB LMR Program). The AB LMR Program relied on the ratio of a company's assets and liabilities (Liability Management Ratio or LMR) to assess whether the company would be able to address closure obligations. Where a company's liabilities exceeded their assets (resulting in a LMR of less than 1.0), the AER could require the company to post security to bring the ratio to 1.0. The AB LMR Program was developed during a period of rapid growth in the province when companies were focused on well and infrastructure expansion. In recent years, it became clear that the LMR Program needed to be updated to reflect declining production and aging infrastructure.
As a result of the Supreme Court of Canada's decision in Orphan Well Association v Grant Thornton (also known as the Redwater decision), receivers and trustees can no longer avoid the AER's legislated authority to impose abandonment orders
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against licensees or to require a licensee to pay a security deposit before approving a license transfer when any such licensee is subject to formal insolvency proceedings. This means that insolvent estates can no longer disclaim assets that have reached the end of their productive lives (and therefore represent a net liability) in order to deal primarily with the remaining productive and valuable assets without first satisfying any abandonment and reclamation obligations associated with the insolvent estate's assets. In April 2020, the Government of Alberta passed the Liabilities Management Statutes Amendment Act, which places the burden of a defunct licensee's abandonment and reclamation obligations first on the defunct licensee's working interest partners, and second, the AER may order the orphan fund (Orphan Fund) established under the Oil and Gas Conservation Act (OGCA) to assume care and custody and accelerate the clean-up of wells or sites which do not have a responsible owner. These changes will come into force on proclamation.
As a result of the changing landscape and new direction from the Redwater decision, in July 2020, the Government of Alberta began implementing changes to its liability management policy. In particular, in July 2020, the Province released a new Liability Management Framework (AB LMF) which includes a series of mechanisms and requirements to improve and expedite reclamation efforts and to require industry to better manage clean-up of oil and gas wells, pipelines and facilities. Notably, the AB LMF provided policy direction allowing the AER to take "Licensee Special Action" to assist operators in managing their assets and maintaining operations under certain circumstances.
The Government of Alberta followed the announcement of the AB LMF with amendments to the Oil and Gas Conservation Rules and the Pipeline Rules in late 2020. The changes to these rules fall into three broad categories: (i) they introduce "closure" as a defined term, which captures both abandonment and reclamation; (ii) they expand the AER's authority to initiate and supervise closure; and (iii) they permit qualifying third parties on whose property wells or facilities are located to request that licensees prepare a closure plan.
The AB LMF provided Government of Alberta policy direction on managing energy sector closure requirements. The AER implements and administers that policy through directives. In April 2021, the AER made changes to Directive 67: Eligibility Requirements for Acquiring and Holding Energy Licenses and Approvals (Directive 67) in order to increase scrutiny the AER applies to ensure that authorization for oil and gas development is only granted to responsible parties. Those changes include additional requirements for industry to provide updated financial information when making certain applications to the AER and throughout the energy development lifecycle. As a result of the changes to Directive 67, the AER may revoke or restrict a company's eligibility to hold AER licenses if the AER determines that the licensee poses an "unreasonable risk", taking into account a broad range of financial and operational considerations.
In December 2021, the AER published a new Directive 88: Licensee Life-Cycle Management (Directive 88) and supporting guidance information to further support implementing the AB LMF. Among other things, Directive 88 establishes the AER's authority to conduct a holistic licensee assessment to inform regulatory decisions about a given licensee, including by conducting a "Licensee Capability Assessment." Directive 88 also establishes the Licensee Management Program contemplated in the AB LMF which enables the AER to proactively monitor licensees to identify those at risk of not meeting their regulatory obligations and to use appropriate regulatory tools to address that risk. Finally, Directive 88 establishes the Inventory Reduction Program and allows the AER to set licensee-specific and industry-wide closure targets.
Complementing the AB LMF Program and associated directives, Alberta's OGCA establishes an orphan fund (Orphan Fund) to help pay the costs to suspend, abandon, remediate and reclaim a well, facility or pipeline included in the AB LMR Program if a licensee or working interest participant becomes insolvent or is unable to meet its obligations. The Orphan Fund was originally conceived to be bankrolled by licensees in the AB LMR Program who contribute to a levy administered by the AER. However, given the increase in orphaned oil and natural gas assets, the Government of Alberta has loaned the Orphan Fund approximately $335 million to carry out abandonment and reclamation work. In response to the COVID-19 pandemic, the Government of Alberta also covered $113 million in levy payments that licensees would otherwise have owed to the Orphan Fund, corresponding to the levy payments due for the first six months of the AER's fiscal year. A separate orphan levy applies to persons holding licenses for large facilities. Collectively, these programs, the AB LMF, and associated directives are designed to minimize the risk to the Orphan Fund posed by the unfunded liabilities of licensees and to prevent the taxpayers of Alberta from incurring costs to suspend, abandon, remediate and reclaim wells, facilities or pipelines.
These and any other changes to the AER's approach to manages closure requirements for energy resource activities may result in additional costs or liabilities for our customers’ operations.
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Australian Environmental Regulations
Our Australian segment is regulated by general statutory environmental controls at the federal, state and territory and local government levels which may result in land use approval, regulation of operations and compliance risk. These controls include: land use and urban design controls; controls to protect Australia’s natural environment, iconic places and Aboriginal and Torres Strait islander native title and heritage; the regulation of hard and liquid waste, including the requirement for trade waste and/or wastewater permits or licenses; the regulation of water, noise, heat, and atmospheric gases emissions; the regulation of the production, transport and storage of dangerous and hazardous materials (including asbestos); the regulation of pollution and site contamination and requirements to notify of and clean-up environmental contamination.
Federal Controls
At a federal level, the Environment Protection and Biodiversity Conservation Act 1999 (EPBC Act) is Australia’s key piece of environmental legislation. The EPBC Act protects of matters of national environmental significance, for example, threatened species and communities (e.g. Koalas), migratory species, Ramsar wetlands and world heritage properties. Activities that have the potential to impact matters protected by the EPBC Act trigger referral to the federal government for Environmental Impact Assessment (EIA).
In October 2020, the findings of an independent review recommended reforms of the EPBC Act including (but not limited to) introduction of legally binding ‘National Environmental Standards’ and a ‘climate change’ referral trigger, stronger compliance and enforcement powers and proposals for new bilateral agreements with the States and Territories to streamline the EPBC Act approval process. Bills to effect many of the recommended reforms are currently before Parliament. Notably, the recommended climate change referral trigger will ensure Australia fulfills its obligations under the Paris Agreement by triggering EIA of emissions-intensive activities. It will also introduce criminal penalties for offenses relating to emissions-intensive actions.
In December 2022 the federal government announced further major reforms to the EPBC Act (in response to the October 2020 review and with similar proposed reforms) and foreshadowed that a draft bill will be released mid 2023. If any of these bills are assented to, our obligations under and compliance with the EPBC Act ought to be reviewed. However, its implications for our Australian operations are not anticipated to be significant.
Ongoing awareness of these reforms is important as the policy and legislative changes may affect our customers’ operations and have impacts on the non-renewable resources sector generally.
State and Territory Controls
At a State and Territory level, our operations are authorized and regulated by layers of planning and environmental approvals. Queensland, New South Wales and Western Australia all have multiple acts regulating matters of the environment, conservation, vegetation management and protection of aboriginal and Torres Strait island use rights which are administered by each States’ independent environment protection regulator (e.g. Queensland’s Environmental Protection Agency). If Parliament assents to the bill proposing to effect new bilateral agreements under EPBC Act, the States and Territories will be given further power to assess and approve actions under the EPBC Act.
Under state law, some specified activities, for example, sewage treatment works at our sites, may require regulation by way of environmental approvals. Such approvals may also impose monitoring and reporting obligations on the holder as well as obligations to rehabilitate the subject site once the regulated activity has ceased.
We must ensure that all necessary approvals, permits and licenses are in place to authorize our operations and that the conditions of those approvals, permits and licenses are complied with until the relevant operations cease (and are cleaned-up if necessary). Where approvals are not held and/or complied with, the operation may be unlawful and subject to penalties, including stop-work orders, remediation and financial penalties. Our Australian operations continue to comply with our existing approvals, permits and licenses.
We have a positive obligation under state legislation to notify of an incident causing (or threatening) material environmental harm. Examples of material environment harm include effluent overflow, chemical leaks and chemical fires. Failure to discharge this obligation can attract significant financial penalties.
There is an increasing emphasis from state and federal regulators on sustainability and energy efficiency in business operations. Federal requirements are now in place for the mandatory disclosure of energy performance under building rating
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schemes. These schemes require the tracking of specific environmental performance factors. Carbon reporting requirements currently exist for corporations which meet a reporting threshold for greenhouse gases or energy use or production for a reporting (financial) year under national legislation.
Local Government
At a local government level, our operations are subject to, and regulated by, local laws administered by local government authorities. Local laws may cover matters such as operation of certain activities, management of vegetation and natural and anthropogenic hazards, actionable nuisance and fencing. Local laws differ between each local government area and we must understand and operate within these laws as they apply to our operations Australia wide.
U.S. Environmental Regulations
The Clean Water Act, as amended, and analogous state laws impose restrictions and strict controls regarding the discharge of pollutants into state waters or waters of the U.S. The discharge of pollutants into jurisdictional waters is prohibited unless the discharge is permitted by the U.S. Environmental Protection Agency (EPA) or authorized state agencies. The EPA published a final rule outlining its position on the federal jurisdictional reach over waters of the U.S. in June 2015. However, the EPA rescinded this rule in 2019 and promulgated the Navigable Waters Protection Rule in 2020. The Navigable Waters Protection Rule defined what waters qualify as navigable waters of the United States and are under Clean Water Act jurisdiction and has generally been viewed as narrowing the scope of waters of the United States as compared to the 2015 rule. Litigation in multiple federal district courts is currently challenging the rescission of the 2015 rule and the promulgation of the Navigable Waters Protection Rule. On December 7, 2021, the U.S. EPA and the Department of the Army (the agencies) announced a proposed rule to revise the definition of “waters of the United States.” The agencies propose to put back into place the pre-2015 definition of “waters of the United States,” updated to reflect consideration of Supreme Court decisions. The public comment period on the proposed rule closed on February 7, 2022. On January 24, 2022, the Supreme Court agreed to consider the jurisdictional reach of the Clean Water Act again in Sackett v. EPA.
Many of our U.S. properties and operations require permits for discharges of wastewater and/or storm water, and we have developed a system for securing and maintaining these permits. In April 2020, a Montana federal judge vacated the U.S. Army Corps of Engineers (Corps) Nationwide Permit (NWP) 12 and enjoined the Corps from authorizing any dredge or fill activities under NWP 12 until the agency completed formal consultation with U.S. Fish and Wildlife Service (USFWS) under Endangered Species Act (ESA) regarding NWP 12 generally. The court later revised its order to vacate NWP 12 only as it relates to the construction of new oil and gas pipelines, and that order was partially vacated by the Ninth Circuit Court of Appeals as moot based on the Corps’ re-issuance of NWPs in 2021. In re-issuing NWP-12 in 2021, the Corps again elected not to consult with USFWS. Environmental groups have already challenged the re-issued NWP-12 in federal court. On March 28, 2022, the Corps published notice that it is undertaking formal review of NWP-12. The public comment period ended on May 27, 2022. The Clean Water Act and analogous state laws provide for administrative, civil and criminal penalties for unauthorized discharges and, together with the Oil Pollution Act of 1999, as amended, require the development and implementation of spill prevention and response plans and impose liability for the remedial costs and associated damages arising out of any unauthorized discharges.
GHG Emissions
The EPA has adopted rules requiring the monitoring and reporting of GHG emissions from specified large GHG emission sources in the U.S., including, offshore and onshore oil and natural gas production facilities, on an annual basis. In October 2015, the EPA finalized rules that added new sources to the scope of the GHG monitoring and reporting requirements. These new sources include gathering and boosting facilities as well as completions and workovers from hydraulically fractured oil wells. In addition, in June 2016 the EPA published new regulations to further restrict GHG emissions, such as new standards for methane and volatile organic compound (VOC) emissions from new and modified oil and gas sources. On September 11, 2018, the EPA proposed targeted improvements to the rule, including amendments to the rule’s fugitive emissions monitoring requirements, which were finalized in August 2020. Separately, in 2020, the EPA rescinded methane and volatile organic compound emissions standards for new and modified oil and gas transmission and storage infrastructure, as well as methane limits for new and modified oil and gas production and processing equipment. The EPA also relaxed requirements for oil and gas operators to monitor emissions leaks. In November 2021, the EPA proposed New Source Performance Standards (NSPS) updates and emission guidelines to reduce methane and other pollutants from the oil and gas industry. In December 2022, the EPA issued a supplemental proposal to update, strengthen, and expand the November 2021 proposed standards and further reduce methane and volatile organic compound emissions from oil and natural gas facilities. The public comment period on the proposed rule ended on January 5, 2023.
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Additionally, in November 2016, the Bureau of Land Management (BLM) issued new regulations to reduce “waste” of natural gas, of which methane is a primary constituent, from venting, flaring and leaks during oil and natural gas production activities on onshore federal and Indian lands. In 2018, the BLM announced a revised rule which scaled back the waste-prevention requirements of the 2016 rule. This revised rule was vacated by a California federal district court in 2020, a decision which BLM has appealed to the Ninth Circuit Court of Appeals. Furthermore, separately, in October 2020, the federal district court of Wyoming vacated the original 2016 rule, a decision which BLM has appealed to the Tenth Circuit Court of Appeals. In November 2022, the BLM proposed a new iteration of the regulations. The public comment period on the proposed rule ended on January 30, 2023. Litigation is ongoing and future implementation of the BLM rules, and the Biden Administration’s reaction, is uncertain at this time.
In October 2015, the EPA finalized the Clean Power Plan (CPP), which imposes additional obligations on the power generation sector to reduce GHG emissions. In August 2019, the EPA finalized the repeal of the 2015 regulations and replaced them with the Affordable Clean Energy rule (ACE), which designates heat rate improvement, or efficiency improvement, as the best system of emissions reduction for carbon dioxide from existing coal-fired electric utility generating units. In 2021, the U.S. Court of Appeals for the District of Columbia struck down the ACE rule but did not reinstate the former CPP regulation. In June 2022, the Supreme Court struck down the CPP, holding that Congress did not grant EPA the authority to devise emissions caps based on the generation-shifting approach the EPA took in the CPP. While our operations are not directly affected by these actions, their impact on our oil and natural gas exploration and production customers could result in a decreased demand for the services that we provide.
While the U.S. Congress has, from time to time, considered legislation to reduce emissions of GHGs, in recent years, there has not been significant activity in the form of adopted legislation to reduce GHG emissions at the federal level. In the absence of federal climate legislation in the U.S., a number of state and regional efforts have emerged that are aimed at tracking and/or reducing GHG emissions, including cap and trade programs that typically require major sources of GHG emissions, such as electric power plants, to acquire and surrender emission allowances in return for emitting those GHGs. The U.S. participated in the creation of the Paris Agreement at COP 21 in December 2015. Although the U.S. had withdrawn from the Paris Agreement, in November 2020, the Biden administration officially reentered the U.S. into the agreement in February 2021. In addition, the Biden Administration has issued multiple executive orders pertaining to environmental regulations and climate change, including the Executive Order on Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis and Executive Order on Tackling the Climate Crisis at Home and Abroad. In the latter executive order, President Biden established climate change as a primary foreign policy and national security consideration, affirmed that achieving net-zero greenhouse gas emissions by or before midcentury is a critical priority, affirmed the Biden Administration’s desire to establish the U.S. as a leader in addressing climate change, generally further integrated climate change and environmental justice considerations into government agencies’ decision making, and eliminated fossil fuel subsidies, among other measures. Under the Paris Agreement, the Biden Administration has committed the U.S. to reducing its greenhouse gas emissions by 50% to 52% from 2005 levels by 2030. In November 2021, the U.S. and other countries entered into the Glasgow Climate Pact, which includes a range of measures designed to address climate change, including but not limited to the phase-out of fossil fuel subsidies, reducing methane emissions 30% by 2030, and cooperating toward the advancement of the development of clean energy.
Although it is not possible at this time to predict how legislation or new regulations that may be adopted to address GHG emissions would impact our business, any such future laws and regulations could require us or our customers to incur increased operating costs, such as costs to purchase and operate emissions control systems, to acquire emission allowances or comply with new regulatory or reporting requirements. Any such legislation or regulatory programs could also increase the cost of consuming, and thereby reduce demand for oil and natural gas, which could reduce our customers’ demand for our services. Consequently, legislation and regulatory programs to reduce GHG emissions could have an adverse effect on our business, financial condition and results of operations.
Other Environmental Regulations
Our operations as well as the operations of our customers are also subject to various laws and regulations addressing the management, disposal and releases of regulated substances. For example, in the U.S., the federal Resource Conservation and Recovery Act, as amended (RCRA) and comparable state statutes regulate the generation, storage, treatment, transportation, disposal and cleanup of hazardous and non-hazardous solid wastes. Under the auspices of the EPA, most states administer some or all of the provisions of RCRA, sometimes in conjunction with their own, more stringent requirements. Federal and state regulatory agencies can seek to impose administrative, civil and criminal penalties for alleged non-compliance with RCRA and analogous state requirements. In the course of our operations, we generate some amounts of ordinary industrial wastes, such as paint wastes, waste solvents and waste oils that may be regulated as hazardous wastes. Moreover, the federal Comprehensive Environmental Response, Compensation and Liability Act, as amended (CERCLA), also known as the Superfund law, and
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comparable state laws impose liability, without regard to fault or legality of conduct, on classes of persons considered to be responsible for the release of a “hazardous substance” into the environment. These persons include the current and past owner or operator of the site where the release occurred and anyone who transported, disposed or arranged for the transport or disposal of a hazardous substance released at the site. Under CERCLA, such persons may be subject to joint and several strict liability for the costs of cleaning up the hazardous substances that have been released into the environment, for damages to natural resources and for the costs of certain health studies. CERCLA also authorizes the EPA and, in some instances, third parties to act in response to threats to the public health or the environment and to seek to recover from the responsible classes of persons the costs they incur. In addition, neighboring landowners and other third parties may file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment. We generate materials in the course of our operations that may qualify as hazardous substances. In the event of mismanagement or release of regulated substances upon properties where we conduct operations, we could become subject to liability and/or obligations under CERCLA, RCRA and/or analogous state laws. Under such laws, we could be required to undertake response or corrective measures, which could include removal of previously disposed substances and wastes, cleanup of contaminated property or performance of remedial operations to prevent future contamination.
The federal Endangered Species Act, as amended (ESA), restricts activities in the U.S. that may affect endangered or threatened species or their habitats. If endangered species are located in areas of the U.S. where our oil and natural gas exploration and production customers operate, such operations could be prohibited or delayed or expensive mitigation may be required. The designation of previously unprotected species as threatened or endangered or designation of previously unprotected habitat as critical habitat in areas of the U.S. where our customers’ oil and natural gas exploration and production operations are conducted could cause them to incur increased costs arising from species protection measures or could result in limitations on their exploration and production activities, which could have an adverse impact on demand for our services.
Hydraulic fracturing is an important and common practice in the oil and gas industry. The process involves the injection of water, sand and chemicals under pressure into a formation to fracture the surrounding rock and stimulate production of hydrocarbons. Certain environmental advocacy groups and regulatory agencies have suggested that additional federal, state and local laws and regulations may be needed to more closely regulate the hydraulic fracturing process, and have made claims that hydraulic fracturing techniques are harmful to surface water and drinking water resources and may cause earthquakes. Various governmental entities (within and outside the U.S.) are in the process of studying, restricting, regulating or preparing to regulate hydraulic fracturing, directly or indirectly.
In the U.S., the EPA already regulates certain hydraulic fracturing operations involving diesel under the Underground Injection Control program of the federal Safe Drinking Water Act. Additionally, in 2016, the federal Bureau of Land Management (BLM) under the Obama Administration published a final rule imposing more stringent standards on hydraulic fracturing activities on federal lands, including requirements for chemical disclosure, well bore integrity, and handling of flowback water. However, in late 2018, the BLM under the Trump Administration published a final rule rescinding the 2016 final rule. While the 2016 rule has been rescinded, new or more stringent regulations may be promulgated by the Biden administration. In January 2021, President Biden announced a moratorium on new oil and gas leasing on federal lands and offshore waters pending completion of a comprehensive review and reconsideration of Federal oil and gas permitting and leasing practices. In August 2022, a federal district judge in Louisiana permanently enjoined the moratorium in the 13 states that filed a lawsuit against the action.
States and local governments may also seek to limit hydraulic fracturing activities through time, place, and manner restrictions on operations or ban the process altogether. The adoption of legislation or regulatory programs that restrict hydraulic fracturing could adversely affect, reduce or delay well drilling and completion activities, increase the cost of drilling and production, and thereby reduce demand for our services. There also exists the potential for the Biden Administration to pursue new or amended laws, regulations, executive actions and other regulatory initiatives that could impose more stringent restrictions on hydraulic fracturing, including potential restrictions on hydraulic fracturing by banning new oil and gas permitting on federal lands. While our operations are not directly affected by these actions, their impact on our oil and natural gas exploration and production customers could result in a decreased demand for the services that we provide.
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ITEM 1A. Risk Factors
We are subject to various risks and hazards due to the nature of the business activities we conduct. The risks summarized and discussed below, any of which could materially and adversely affect our business, financial condition, cash flows and results of operations and the price of our shares, are not the only risks we face. We may experience additional risks and uncertainties not currently known to us or, as a result of developments occurring in the future, conditions that we currently deem to be immaterial may also materially and adversely affect our business, financial condition, cash flows and results of operations.
Risks in this section are grouped by category. Many risks affect more than one category and the risks are not in order of significance or probability of occurrence because they have been grouped by categories.
Summary of Risk Factors:
Set forth below is a summary of the risks more fully described in this Part I, Item 1A. “Risk Factors” of this Annual Report on Form 10-K. This summary should be read in connection with the Risk Factors more fully described below and should not be relied upon as an exhaustive summary of the material risks facing our business.
•Risks Related to Our Macroeconomic-Business Environment
◦Certain of our customers’ spending may be directly, and our business may be indirectly, affected by volatile or low oil, metallurgical (met) coal, natural gas or iron ore prices or unsuccessful exploration results.
◦The effects of public health crises, pandemics and epidemics, such as the COVID-19 pandemic, have materially affected, and may materially affect, how we and our customers are operating our and their businesses.
•Risks Related to Our Customers
◦Our customers and their operations are exposed to a number of unique operating risks and challenges.
◦We depend on several significant customers.
◦Our failure to retain our current customers, renew our existing customer contracts and obtain new customer contracts, or the termination of existing contracts, could adversely affect our business.
◦Adverse events in areas where we operate could negatively impact our business, and our geographic concentration could limit the number of customers seeking our services.
◦We may be adversely affected if customers reduce their accommodations outsourcing.
•Risks Related to Our Operations
◦We operate in a highly competitive industry, and if we fail to compete effectively, our business will suffer.
◦Our operations may suffer due to over-capacity of certain types of accommodations assets in certain regions.
◦Increased operating costs and limited cost recovery through pricing or contract terms may constrain our ability to make a profit.
◦Employee and customer labor problems could adversely affect us.
◦A failure to maintain food safety or comply with government regulations related to food and beverages or serving alcoholic beverages may subject us to liability.
◦The majority of our major Canadian lodges are located on land subject to leases.
◦We are susceptible to seasonal earnings volatility due to adverse weather conditions in our regions of operations.
◦Failure to maintain positive relationships with the Indigenous people in the areas where we operate could adversely affect our business.
◦Development of permanent infrastructure in the areas where we locate our assets could negatively impact our business.
◦We may be subject to risks associated with the transportation, installation and demobilization of mobile accommodations.
◦Our business could be negatively impacted by security threats, including cybersecurity threats and other disruptions.
◦Loss of key members of our management could adversely affect our business.
•Financial/Accounting Risks
◦Our indebtedness could restrict our operations and make us more vulnerable to adverse economic conditions.
◦Currency exchange rate fluctuations could adversely affect our U.S. dollar reported results of operations and financial position.
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◦The cyclical nature of our business and a severe prolonged downturn has, and could in the future, negatively affect the value of our long-lived assets and our goodwill.
◦Our inability to control the inherent risks of identifying, acquiring and integrating businesses that we may acquire could adversely affect our operations.
◦We may not have adequate insurance for potential liabilities and insurance may not cover certain liabilities.
•Legal and Regulatory Risks
◦We do business in Canada and Australia, whose political and regulatory environments and compliance regimes differ from those in the United States (U.S.)
◦We are subject to extensive and costly environmental laws and regulations.
◦We may be exposed to certain regulatory and financial risks related to climate change and other environmental, social and governance (ESG) related matters.
•Risks Related to Our Common Shares
◦The market price and trading volume of our common shares may be volatile.
◦Any repurchases of our common shares are within the discretion of our Board of Directors, and there is no guarantee that we will repurchase common shares in the future.
◦We are governed by the corporate laws in British Columbia, Canada.
◦Provisions contained in our articles and applicable Canadian and British Columbia laws could discourage a take-over attempt.
◦The enforcement of civil liabilities against Civeo may be more difficult.
•Risks Related to Our Structure
◦We are subject to various Canadian, Australian and other taxes.
◦We remain subject to changes in tax law (in various jurisdictions) and other factors that could impact our effective tax rate.
◦Future potential changes to U.S. tax laws could result in Civeo being treated as a U.S. corporation for U.S. federal income tax purposes.
Risk Factors:
Risks Related to Our Macroeconomic Business Environment
Certain of our customers’ spending may be directly, and our business may be indirectly, affected by volatile or low oil, met coal, natural gas or iron ore prices or unsuccessful exploration results.
Demand for our services is sensitive to the level of exploration, development and production activity of, and the corresponding capital spending by, natural resources companies. Our business typically supports customer projects that are capital intensive and require several years to generate first production, with production lasting for decades. The economic analyses conducted by our customers in Canadian oil sands, Australian mining and global liquefied natural gas (LNG) investment areas have historically assumed a relatively conservative longer-term price outlook for production from such projects to determine economic viability. The willingness of natural resources companies to explore, develop and produce depends largely upon the availability of attractive resource prospects and the prevailing view of future commodity prices, and expenditures by our natural resources customers generally lag changes in commodity prices by at least three to six months.
Prices for oil, met coal, LNG, iron ore and other natural resources are subject to large fluctuations in response to changes in global supply of and demand for these commodities. Global oil prices dropped to historically low levels in April 2020 due to severely reduced global oil demand, high global crude inventory levels, uncertainty around timing and slope of worldwide economic recovery after COVID-19 related economic shut-downs and effectiveness of production cuts by major oil producing countries, such as Saudi Arabia, Russia and the U.S. While oil prices have recovered from the low levels observed during 2020, commodity prices continue to be volatile. Other factors beyond our control that affect commodity prices include:
•worldwide economic activity including growth in and demand for oil, coal and other natural resources, particularly from developing countries, such as China and India;
•the level of activity and natural resource developments in Australia and the Canadian oil sands;
•the level of global oil and gas exploration and production and the impact of government regulation or Organization of Petroleum Exporting Companies (OPEC) policies that impact production levels and oil prices;
•the availability of transportation infrastructure and refining capacity for oil, natural gas, LNG and coal;
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•global weather conditions, natural disasters, global health concerns, such as the COVID-19 pandemic, or any future disaster or pandemic, and geopolitical events such as the ongoing conflict between Russia and Ukraine;
•global reduction in demand for fossil fuels due to international efforts to address climate change;
•rapid technological change and the timing and extent of energy resource development, including hydraulic fracturing of horizontally drilled wells in shale discoveries and LNG;
•development, commercialization, availability and economics of alternative fuels; and
•government, tax and environmental regulation, including climate change legislation and clean energy policies.
As of February 24, 2023, the West Texas Intermediate (WTI) price was $76.32 and the Western Canadian Select (WCS) price was $60.10, resulting in a discount (WCS Differential) at which WCS trades relative to WTI of $16.22. Should the price of WTI decline or the WCS discount to WTI widen further, our oil sands customers may delay or eliminate additional investments, further reduce their spending in the oil sands region or curtail or shut-down additional existing operations.
The effects of public health crises, pandemics and epidemics, such as the COVID-19 pandemic, have materially affected, and may materially affect, how we and our customers are operating our and their businesses.
Public health crises, pandemics and epidemics, such as the COVID-19 pandemic, have adversely impacted and may continue to adversely impact, worldwide economic activity, including the operations of natural resources companies in Canada, Australia and the U.S. and the worldwide demand for oil and natural gas. Other effects of such public health crises, pandemics and epidemics include significant volatility and disruption of the global financial markets; continued volatility of commodity prices and related uncertainties around OPEC+ production; disruption of operations resulting from decreased customer demand and labor shortages; supply chain disruptions or equipment shortages; reduced capital spending by oil and gas companies; and employee impacts from illness, travel restrictions, including border closures, and other community response measures.
Such public health crises, pandemics and epidemics are continuously evolving and the extent to which our business operations and financial results continue to be affected depends on various factors beyond our control, such as the duration, severity and sustained geographic resurgence of the COVID-19 virus; the emergence, severity and spread of new variants of the virus; the impact and effectiveness of governmental actions to contain and treat such outbreaks, including government policies and restrictions; vaccine hesitancy, vaccine mandates, and voluntary or mandatory quarantines; and the global response surrounding such uncertainties.
Risks Related to Our Customers
Our customers and their operations are exposed to a number of unique operating risks and challenges which could also adversely affect us.
We could be materially adversely affected by disruptions to our customers’ operations. The price of and demand for natural resources produced by our customers may impact their desire and/or ability to continue producing existing projects or start new projects. Customers may also experience unexpected problems, higher costs or delays in commencing or developing a project. Additionally, the willingness of natural resources companies to explore, develop and produce may be impacted by pressures to limit increases in capital spending generally and on met coal and hydrocarbons in particular, as well as by cost overruns on past and current projects, which could adversely impact demand for our services. Operating risks and challenges our customers face, which may ultimately affect their need for the accommodations and services we provide, include:
•commodity price volatility;
•unforeseen and adverse geological, geotechnical, seismic and mining conditions;
•lack of availability or failure of the required infrastructure, including sourcing sufficient water or power, necessary to maintain or to expand their operations;
•the breakdown or shortage of equipment and labor necessary to maintain their operations;
•capital project cost overruns and cost inflation;
•risks associated with the natural resources industry being subject to laws and regulations, including those governing air and greenhouse gas emissions, as well as various regulatory approvals, including a government agency failing to grant an approval or failing to renew an existing approval, or the approval or renewal not being provided by the government agency in a timely manner or the government agency granting or renewing an approval subject to materially onerous conditions;
•risks to land titles, mining titles and use thereof as a result of native title claims;
•claims by persons living in close proximity to mining projects, which may have an impact on the consents granted; and
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•interruptions to the operations of our customers caused by governmental action, industrial accidents, disputes or public health emergencies.
We depend on several significant customers.
We depend on several significant customers, including customers that operate in the natural resources industry. The loss of any one of our largest customers in any of our business segments or a sustained decrease in demand by any of such customers could result in a substantial loss of revenues and could have a material adverse effect on our results of operations. In addition, the concentration of customers in the natural resources industry may impact our overall exposure to credit risk, either positively or negatively, in that customers may be similarly affected by changes in economic and industry conditions. With low and/or volatile oil and gas prices, some of our customers may face liquidity issues, which could impair their ability to pay or otherwise perform on their obligations. Furthermore, some of our customers may be highly leveraged and subject to their own operating and regulatory risks, which increases the risk that they may default on their obligations to us. For a more detailed explanation of our customers, see “Business” in Item 1 of this annual report.
Our failure to retain our current customers, renew our existing customer contracts and obtain new customer contracts, or the termination of existing contracts, could adversely affect our business.
Our success depends on our ability to retain our current customers, renew or replace our existing customer contracts and obtain new business. Our ability to do so generally depends on a variety of factors, including overall customer expenditure levels and the quality, price and responsiveness of our services, as well as our ability to market these services effectively and differentiate ourselves from our competitors. We cannot assure that we will be able to obtain new business, renew existing customer contracts at the same or higher levels of pricing, or at all, or that our current customers will not turn to competitors, cease operations, elect to (1) utilize their own, on-site accommodations or (2) terminate contracts with us.
Our business is contract intensive and we are party to many contracts with customers. Due to the volatile nature of commodity prices, our customers may not renew contracts on terms favorable to us or, in some cases, at all, and we may have difficulty obtaining new business. Several contracts have clauses that allow termination upon the payment of a termination fee. As a result, our customers may choose to terminate their contracts. The likelihood that a customer may seek to terminate a contract is increased during periods of market volatility like those we are currently experiencing. Additionally, our exclusivity contracts do not include minimum room commitments, so we receive payment only if the customer utilizes our services. Finally, while we periodically review our compliance with contract terms and provisions, if customers were to dispute our contract determinations, the resolution of such disputes in a manner adverse to our interests, including customers withholding payments or modification of payment terms, could negatively affect sales and operating results.
We have agreed to not renew an expiring land lease associated with our McClelland Lake Lodge in Alberta, Canada, which currently expires in June 2023, to support our customer’s intent to mine the land where the lodge is currently located. In addition, our hospitality services contract at McClelland Lake Lodge expires in June 2023. Failure to secure a replacement contract for our McClelland Lake Lodge will impact our business and results of operations in the second half of 2023. Revenues associated with the 2022 room commitments at our McClelland Lake Lodge were approximately C$60 million.
Customer contract cancellations, reduced customer utilization, the failure to renew a significant number of our existing contracts or the failure to obtain new business would have a material adverse effect on our business and results of operations.
Due to the significant geographic concentration of our business, adverse events in areas where we operate could negatively impact our business, and our geographic concentration could limit the number of customers seeking our services.
Because of the concentration of our business in three relatively small geographic areas: the oil sands region of Alberta, Canada, the coal producing, Bowen Basin region of Queensland, Australia and the iron ore producing, Pilbarra region of Western Australia, we have increased exposure to political, regulatory, environmental, labor, climate or natural disasters such as forest fires or flooding, events or developments that could disproportionately impact our operations and financial results. For example, in 2011 and 2017, cyclones and resulting flooding threatened our villages in Australia. Similarly, in 2011 and 2016, forest fires in northern Alberta impacted areas near our Canadian oil sands lodges. Moreover, global climate change may result in significant natural disasters occurring more frequently or with greater intensity, such as drought, wildfires, storms, sea-level rise, and flooding. Many of the areas in which we operate are very remote with limited local supplies, including availability of water, electricity or natural gas necessary to operate our business, and any significant adverse events such as those discussed above could impact our ability to obtain good or services and personnel.
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In addition, a limited number of potential customers operate in the areas in which our business is located, and occupancy at each of our lodges may be constrained by the radius which potential customers are willing to transport their workers. Our geographic concentration could limit the number of customers seeking our services, and as to any single lodge or village, we may have few potential customers. Therefore, we are subject to volatility in occupancy in any location based on the capital spending plans of a limited number of customers, based on their changing decisions as to whether to outsource or use their own company-owned accommodations and whether other potential customers move into that lodge’s radius.
We may be adversely affected if customers reduce their accommodations outsourcing.
Our business and growth strategies depend in large part on customers outsourcing some or all of the services that we provide. Many natural resources companies in our core markets own their own accommodations facilities, while others outsource all or part of their accommodations requirements. Customers have largely built their own accommodations in the past but will outsource for additional capacity or if they perceive that outsourcing may provide quality services at a lower overall cost or allow them to accelerate the timing of their projects. We cannot be certain that these customer preferences will continue or that customers that have previously outsourced accommodations will not decide to perform these functions themselves or only outsource accommodations during the development or construction phases of their projects. In addition, labor unions representing customer employees and contractors have, in the past, opposed outsourcing accommodations to the extent that the unions believe that third-party accommodations negatively impact union membership and recruiting. The reversal or reduction in customer outsourcing of accommodations could negatively impact our financial results and growth prospects.
Risks Related to Our Operations
We operate in a highly competitive industry, and if we fail to compete effectively, our business will suffer.
The workforce accommodations and hospitality industry in which we operate is highly competitive. To be successful, we must provide hospitality services that meet the specific needs of our customers at competitive prices. The principal competitive factors in the markets in which we operate are service quality, availability, price, location, technical knowledge and experience and safety performance. We compete with international and regional competitors, several of which are significantly larger than us. These competitors offer similar services in the geographic regions in which we operate. Many natural resources companies in our core markets own their own accommodations facilities and outsource their service requirements, while others outsource all or part of their accommodations requirements. As a result of competition, we may be unable to continue to provide our present services, to provide such services at historical operating margins or to acquire additional business opportunities, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. Reduced levels of activity in the workforce accommodation industry can intensify competition and result in lower revenue to us.
Our operations may suffer due to over-capacity of certain types of accommodations assets in certain regions.
The demand for and/or pricing of rooms and accommodation services is subject to the overall availability of rooms in a region. If demand for our assets were to decrease, or to the extent that we and our competitors have capacity in excess of current demand, we may encounter decreased pricing for, or utilization of, our assets and services, which could adversely impact our operations and profits. For example, we experienced a decrease in customer demand in 2020 for accommodations in the Canadian oil sands and our U.S. business as a result of the economic disruption caused by COVID-19, and experienced a corresponding decrease in our occupancy and profitability. Although customer production activity and resulting demand for our accommodations approached pre-pandemic levels in 2022, volatility in commodity price levels, the ongoing impact of COVID-19 or other global health crises, inflationary pressures, actions taken by OPEC+ to adjust production levels, geopolitical events such as the ongoing Russia/Ukraine conflict, and regulatory implications on such prices, among other factors, could cause our Canadian oil sands and pipeline customers to reduce production, delay expansionary and maintenance spending and defer additional investments in their oil sands assets, which would cause a decrease in customer demand for our accommodations.
Increased operating costs and limited cost recovery through pricing or contract terms may constrain our ability to make a profit.
Our profitability can be adversely affected to the extent we are faced with cost increases for food, wages and other labor related expenses, insurance, fuel and utilities, especially to the extent we are unable to recover such increased costs through increases in the prices for our services, due to one or more of general economic conditions, competitive conditions or contractual provisions in our customer contracts. For example, substantial increases in the cost of fuel and utilities have historically resulted in cost increases in our lodges and villages.
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From time to time, we have experienced increases in our food costs. While we believe a portion of these increases were attributable to fuel prices, we believe the increases also resulted from rising global food demand, other general inflationary pressures and rising supply chain issues affecting supply of goods, which are exacerbated by the ongoing Russia/Ukraine conflict. In addition, food prices can fluctuate as a result of foreign exchange rates and temporary changes in supply, including as a result of incidences of wildfires or severe weather such as droughts, heavy rains and late freezes, or other climate effects. Climate and natural disaster events, such as forest fires or flooding, have the ability to impact local crop production, limiting supply and therefore having an upward pressure on food prices. For example, large swathes of farmland across the Australian states of New South Wales, Queensland and Victoria in 2022 were inundated with flood waters, damaging wheat and other crops including fruit and vegetables.
A shortage of skilled labor could also result in higher wages due to more expensive temporary hire labor resources that would increase our labor costs, which could negatively affect our profitability. Since the COVID-19 pandemic began, we have been impacted by increased staff costs as a result of hospitality labor shortages in Australia. This has been exacerbated by low levels of immigration into Australia and, specifically, an acute shortage of skilled labor. The reduced levels of immigration and shortage of skilled labor has subsequently led to an increased reliance on more expensive temporary labor hire resources and has negatively affected our profitability. Additionally, an increased proportion of temporary labor hire resources has the effect of driving up costs due to a lack of efficiency. The nature of temporary labor hire resource positions are short term, with key skills unable to be retained in our lodges and villages due to higher staff turnover.
While our multi-year contracts often provide for annual escalation in our room rates for food, labor and utility inflation, we may be unable to fully recover costs, or the recovery may be delayed, and such increases would negatively impact our profitability on contracts that do not contain such inflation protections.
Employee and customer labor problems could adversely affect us.
Our business is labor intensive requiring a significant number of employees to perform housekeeping, janitorial and food service functions at our locations or locations that we manage. As our operations grow or our occupancy increases, we require additional staff to take care of our guests at a standard we deem appropriate and to operate safely. If we are unable to hire a sufficient labor force, we could be required to increase wages or use temporary labor at a higher cost and reduced efficiency. In 2022, we experienced, and expect to continue to experience, a shortage of labor for certain functions, inflationary pressures on wages, and an increasingly competitive labor market. The extent and duration of the effect of these labor market challenges are subject to numerous factors, including geopolitical events such as the continuing effect of the COVID-19 pandemic or the ongoing Russia/Ukraine conflict, availability of qualified persons in the markets where we and our contracted service providers operate, inflation and unemployment levels within these markets and our reputation within the labor market. Inefficient operations or further increased labor costs resulting from these labor market challenges could negatively impact our profitability and could damage our reputation with our customers.
Additionally, as of December 31, 2022, we were party to collective bargaining agreements covering 1,123 employees in Canada and 768 employees in Australia. Efforts have been made from time to time to unionize other portions of our workforce. In addition, our facilities serving oil sands development work in Northern Alberta, Canada and mining operations in Australia house both union and non-union customer employees. We have not experienced strikes, work stoppages or other slowdowns in the past, but we cannot guarantee that we will not experience such events in the future. A prolonged strike, work stoppage or other slowdown by our employees or by the employees of our customers could cause us to experience a disruption of our operations or adversely impact our reputation, which could adversely affect our business and results of operations. Additional unionization efforts and new collective bargaining agreements also could materially increase our costs or limit our flexibility. Collective bargaining agreements in our Canadian operations have individual expiration dates, but in no case extend beyond 2026. Enterprise bargaining agreements in our Australian operations cover certain employees working at our villages in Queensland, New South Wales, Western Australia and South Australia, as well as certain employees working at our integrated services customer owned sites in Western Australia. These agreements either have individual expiration dates or continue until either party seeks to have such agreement cancelled, but in no case extend beyond 2024.
A failure to maintain food safety or comply with government regulations related to food and beverages or serving alcoholic beverages may subject us to liability.
Claims of illness or injury relating to food quality or food handling are common in the food service industry, and a number of these claims may exist at any given time. Because food safety issues could be experienced at the source or by food suppliers or distributors, food safety could, in part, be out of our control. Regardless of the source or cause, any report of food-borne illness or other food safety issues such as food tampering or contamination at one of our locations could adversely impact our reputation, hindering our ability to renew contracts on favorable terms or to obtain new business, and have a negative
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impact on our revenue. Future food product recalls and health concerns associated with food contamination may also increase our raw materials costs and, from time to time, disrupt our business.
A variety of regulations at various governmental levels relating to the handling, preparation and serving of food (including, in some cases, requirements relating to the temperature of food), cleanliness of food production facilities and hygiene of food-handling personnel are enforced primarily at the local public health department level. We can give no assurances that we are in full compliance with all applicable laws and regulations at all times or that we will be able to comply with any future laws and regulations. Furthermore, legislation and regulatory attention to food safety is very high. Additional or amended regulations in this area may significantly increase the cost of compliance or expose us to liabilities.
We serve alcoholic beverages at some of our facilities, and must comply with applicable licensing laws, as well as local service laws. These laws generally prohibit serving alcoholic beverages to certain persons such as a patron who is intoxicated or a minor. If we violate these laws, we may be liable to the patron and/or to third parties for the acts of the patron. We cannot guarantee that certain patrons will not be served or that liability for their acts will not be imposed on us. There can be no assurance that additional regulation in this area would not limit our activities in the future or significantly increase the cost of regulatory compliance. We must also obtain and comply with the terms of licenses in order to sell alcoholic beverages in the jurisdictions in which we serve alcoholic beverages. If we are unable to maintain food safety or comply with government regulations related to food, beverages or alcoholic beverages, the effect could be materially adverse to our business and results of operations.
The majority of our major Canadian lodges are located on land subject to leases. If we are unable to renew a lease or obtain permits necessary to operate on such leased land, we could be materially and adversely affected.
The majority of our major Canadian lodges are located on land subject to provincial leases. Accordingly, while we own the accommodations assets, we only own a leasehold in those properties. If we are found to be in breach of a lease, we could lose the right to use the property. In addition, our leases generally have an initial term of ten years and will expire between 2023 and 2030 unless extended. Unless we can extend the terms of these leases before their expiration, as to which no assurance can be given, we will lose our right to operate our facilities located on these properties upon expiration of the leases. In that event, we would be required to remove our accommodations assets and remediate the site at our own cost, which could be material.
We have agreed to not renew an expiring land lease associated with our McClelland Lake Lodge in Alberta, Canada, which currently expires in June 2023, to support our customer’s intent to mine the land where the lodge is currently located. As of December 31, 2022, we had an asset retirement obligation (ARO) liability related to the McClelland Lake Lodge on our balance sheet of $4.1 million. Consistent with U.S. generally accepted accounting principles, this liability is the estimated present value of the amount of required asset removal and site remediation costs related to the retirement of assets at this location in 2023.
As of December 31, 2022, we had other ARO liabilities on our balance sheet of $14.0 million. Should the remediation requirement be accelerated, our near term cash obligation could be significantly larger than the liability currently on our balance sheet and could negatively impact our cash flows and liquidity.
Also, in certain areas in which we operate, we are required to seek permits from local government agencies in order to build a new lodge or operate an existing lodge on leased land. A proposed regulation in the Regional Municipality of Wood Buffalo, Alberta, where we have eight facilities, would require us to seek renewal of such permits every four years; however, this proposal was abandoned in late 2019, and no update has been provided. We can provide no assurances that we will be able to renew our leases or permits upon expiration on similar terms, or at all. If we are unable to renew our leases or permits on similar terms, it may have an adverse effect on our business and results of operations.
We are susceptible to seasonal earnings volatility due to adverse weather conditions in our regions of operations.
Our operations are directly affected by seasonal differences in weather in the areas in which we operate. A portion of our Canadian operations is conducted during the winter months when the winter freeze in remote regions is required for exploration and production activity to occur. The spring thaw in these frontier regions restricts operations in the spring months and, as a result, adversely affects our operations and our ability to provide services in the second quarter. During the Australian rainy season, generally between the months of November and April, our operations in Queensland and the northern parts of Western Australia can be affected by cyclones, monsoons and resultant flooding. Additionally, the areas in which we operate are susceptible to wildfires. Finally, global climate change may result in certain of these adverse weather conditions occurring more
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frequently or with greater intensity. If any of these conditions occur, our operations could be interrupted and our earnings may be adversely impacted.
Failure to maintain positive relationships with the Indigenous people in the areas where we operate could adversely affect our business.
A component of our business strategy is based on developing and maintaining positive relationships with the Indigenous people and communities in the areas where we operate. These relationships are important to our operations and customers who desire to work on traditional Indigenous lands. The inability to develop and maintain relationships and to be in compliance with local requirements could have an adverse effect on our business and results of operations.
Development of permanent infrastructure in the areas where we locate our assets could negatively impact our business.
We specialize in providing hospitality services for workforces in remote areas which often lack the infrastructure typically available in nearby towns and cities. If permanent towns, cities and municipal infrastructure develop, grow or otherwise become available in the oil sands region of northern Alberta, Canada, the west coast of British Columbia or regions of Australia where we operate, then demand for our hospitality services could decrease as customer employees move to the region and choose to utilize permanent housing and food service.
We may be subject to risks associated with the transportation, installation and demobilization of mobile accommodations.
In connection with our Canadian business, we currently have several contracts to transport and install modular, skid-mounted accommodations and central facilities that can be quickly configured to serve a multitude of short to medium-term accommodation needs. In connection with the transportation and installation of these facilities, we may be exposed to various risks, including:
•delays in necessary approvals to install the facilities or objections to our activities or those of our customers aired by aboriginal or community interests, environment and/or neighborhood groups which may cause delays in the granting of such approvals and/or the overall progress of a project;
•challenges during installation, including problems, defects, inclement weather conditions, land contamination, cultural heritage claims, difficult site access or industrial relations issues; and
•risks related to the quality of our materials and workmanship, including warranties and defect liability obligations.
Our business could be negatively impacted by security threats, including cybersecurity threats and other disruptions.
We face various security threats, including cybersecurity threats to gain unauthorized access to sensitive information or to render data or systems unusable or hold them for ransom; threats to the safety of our employees; threats to the security of our facilities and infrastructure or third-party facilities and infrastructure; and threats from terrorist acts. Although we utilize various procedures and controls to monitor these threats and mitigate our exposure to such threats, including cybersecurity insurance, there can be no assurance that these procedures and controls will be sufficient in preventing security threats from materializing. If any of these events were to materialize, they could lead to losses of sensitive information, critical infrastructure, personnel or capabilities essential to our operations and could have a material adverse effect on our reputation, competitive position, financial position, results of operations or cash flows. In addition, such events could result in litigation, regulatory action and potential liability, including liability under laws that protect the privacy of personal information, as well as the costs and operational consequences of implementing further data protection measures.
Cybersecurity attacks in particular are evolving and include, but are not limited to, malicious software, attempts to gain unauthorized access to data, ransomware attacks and other electronic security breaches that could lead to disruptions in critical systems, unauthorized release of or denial of access to confidential or otherwise protected information and corruption of data. We have experienced, and expect to continue to confront, efforts by hackers and other third parties to gain unauthorized access or deny access to, or otherwise disrupt, our information technology systems and networks. While we have not experienced a material incident in the last three years, a material cyber-incident could have a material adverse effect on our business, financial condition, results of operations or liquidity.
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Loss of key members of our management could adversely affect our business.
We depend on the continued employment and performance of key members of our management. If any of our key managers resign or become unable to continue in their present roles and are not adequately replaced, our business operations could be materially adversely affected. We do not maintain “key man” life insurance for any of our officers.
Financial/Accounting Risks
Our indebtedness could restrict our operations and make us more vulnerable to adverse economic conditions.
As of December 31, 2022, we had approximately $29.5 million outstanding under the term loan portion of our Syndicated Facility Agreement (Credit Agreement), $102.5 million outstanding under the revolving portion of the Credit Agreement, $1.4 million of outstanding letters of credit and capacity to borrow an additional $96.1 million under the revolving portion of the Credit Agreement. If market or other economic conditions remain depressed or further deteriorate, our borrowing capacity may be reduced.
Our Credit Agreement contains, and any future indebtedness we incur may contain, a number of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to, among other things, borrow funds, dispose of assets, pay dividends and make certain investments. In addition, these covenants also may limit our ability to obtain future financings, make needed capital expenditures, withstand a continued downturn in our business or a downturn in the economy in general or otherwise conduct necessary corporate activities. Our ability to comply with these covenants may be affected by events beyond our control. Declines in commodity prices, or a prolonged period of commodity prices at depressed levels, could eventually result in our failing to meet one or more of the financial covenants under the Credit Agreement, which could require us to refinance or amend such obligations resulting in the payment of consent fees or higher interest rates, or require us to raise additional capital at an inopportune time or on terms not favorable to us.
A failure to comply with these covenants, ratios or tests could also result in an event of default. A default under the Credit Agreement, if not cured or waived, could result in acceleration of all indebtedness outstanding thereunder. The accelerated debt would become immediately due and payable. If that should occur, we may be unable to pay all such debt or to borrow sufficient funds to refinance it. Even if new financing were then available, it may not be on terms that are acceptable to us. In addition, in the event of an event of default under the Credit Agreement, the lenders could foreclose on the collateral securing the credit facility and require repayment of all borrowings outstanding. If the amounts outstanding under the credit facility or any of our other indebtedness were to be accelerated, our assets may not be sufficient to repay in full the money owed to the lenders or to our other debt holders. Moreover, any new indebtedness we incur may impose financial restrictions and other covenants on us that may be more restrictive than our existing debt agreements.
Our ability to service our debt, including repaying outstanding borrowings under our Credit Agreement at maturity, will depend upon, among other things, our future financial and operating performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors, some of which are beyond our control. If our business does not generate sufficient cash flows from operations to enable us to meet our obligations under our indebtedness, we will be forced to take actions such as reducing or delaying business activities, acquisitions, investments and/or capital expenditures, selling assets, restructuring or refinancing our indebtedness or seeking additional equity capital. We may not be able to effect any of these remedies on satisfactory terms or at all, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Currency exchange rate fluctuations could adversely affect our U.S. dollar reported results of operations and financial position.
Our reporting currency is the U.S. dollar, and we are exposed to currency exchange risk primarily between the U.S. dollar and the Canadian and Australian dollars. For the year ended December 31, 2022, 97% of our revenues originated from subsidiaries outside of the U.S. and were denominated in either the Canadian dollar or the Australian dollar. As a result, a material decrease in the value of these currencies relative to the U.S. dollar has had, and may have in the future, a negative impact on our reported revenues, net income, financial condition and cash flows. Any currency controls implemented by local monetary authorities in countries where we currently operate could also adversely affect our business, financial condition and results of operations. We may attempt to limit the risks of currency fluctuation where possible by entering into financial instruments to protect against foreign currency exposure, but, to date, we have not entered into any foreign currency financial
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instruments. Our efforts to limit exchange risks may be unsuccessful, thereby exposing us to foreign currency fluctuations that could cause our results of operations, financial condition and cash flows to deteriorate.
The cyclical nature of our business and a severe prolonged downturn has, and could in the future, negatively affect the value of our long-lived assets and our goodwill.
We recorded impairments of our long-lived assets of $5.7 million, $7.9 million and $50.5 million in 2022, 2021 and 2020, respectively. We also recorded goodwill impairments of $93.6 million in 2020. As of December 31, 2022, goodwill at our Australian reporting unit represented 1% of total assets, or $7.7 million.
Factors that may cause us to recognize further impairment losses on our long-lived assets or on the goodwill at our Australian reporting unit include, among other things, extended periods of limited or no activity by our customers at our lodges or villages, increased or unanticipated competition, and downward forecast revisions or restructuring plans or if certain of our customers do not reach positive final investment decisions on projects with respect to which we have been awarded contracts to provide related accommodation, which may cause those customers to terminate the contracts.
Our inability to control the inherent risks of identifying, acquiring and integrating businesses that we may acquire, including any related increases in debt or issuances of equity securities, could adversely affect our operations.
Acquisitions have been, and our management believes acquisitions will continue to be, a key element of our growth strategy. We may not be able to identify and acquire acceptable acquisition candidates on favorable terms in the future. We may be required to incur substantial indebtedness to finance future acquisitions and also may issue equity securities in connection with such acquisitions. Such additional debt service requirements could impose a significant burden on our results of operations and financial condition. The issuance of additional equity securities could result in significant dilution to shareholders. In addition, overpayment of an acquisition could cause potential impairments which could affect our results of operations.
We expect to gain certain business, financial and strategic advantages as a result of business combinations we undertake, including synergies and operating efficiencies. Our forward-looking statements assume that we will successfully integrate our business acquisitions and realize these intended benefits. The success of any acquisitions we make depends, in large part, on our ability to realize the anticipated benefits, including operating synergies from combining our businesses, which were previously operated independently, and retaining and integrating key employees, vendors and customers from the acquired businesses. An inability to realize expected strategic advantages as a result of the acquisition would negatively affect the anticipated benefits of the acquisition.
Additionally, an acquisition may bring us into businesses we have not previously conducted and expose us to additional business risks that are different from those we have previously experienced. Our future success depends, in part, upon our ability to manage this expanded business, which will pose substantial challenges for our management, including challenges related to the management and monitoring of new operations and associated increased costs and complexity. If we fail to manage any of these risks successfully, our business could be harmed. Our capitalization and results of operations may change significantly following an acquisition, and our shareholders may not have the opportunity to evaluate the economic, financial and other relevant information that we will consider in evaluating future acquisitions.
We may not have adequate insurance for potential liabilities and insurance may not cover certain liabilities.
Our operations are subject to many hazards. In the ordinary course of business, we become the subject of various claims, lawsuits and administrative proceedings seeking damages or other remedies concerning our commercial operations, products, employees and other matters, including occasional claims by individuals alleging exposure to hazardous materials as a result of our products or operations. Some of these claims relate to the activities of businesses that we have acquired, even though these activities may have occurred prior to our acquisition of such businesses. We maintain insurance to cover many of our potential losses, including cyber risk insurance, and we are subject to various self-retentions and deductibles under our insurance policies. It is possible, however, that a judgment could be rendered against us in cases in which we could be uninsured and beyond the amounts that we currently have reserved or anticipate incurring for such matters. Even a partially uninsured or underinsured claim, if successful and of significant size, could have a material adverse effect on our results of operations or consolidated financial position. In addition, we are insured under the insurance policies of Oil States International, Inc. (Oil States) for occurrences prior to the completion of our spin-off from Oil States in May 2014 (the Spin-Off). The specifications and insured limits under those policies, however, may be insufficient for such claims. We also face other risks related to our insurance coverage, including (1) we may not be able to continue to obtain insurance on commercially reasonable terms; (2) the counterparties to our insurance contracts may pose credit risks; and (3) we may incur losses from interruption of our business that exceed our insurance coverage
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Legal and Regulatory Risks
We do business in Canada and Australia, whose political and regulatory environments and compliance regimes differ from those in the U.S.
A significant portion of our revenue is attributable to operations in Canada and Australia. These activities accounted for 97% of our consolidated revenue in the year ended December 31, 2022. Risks associated with our operations in Canada and Australia include, but are not limited to, (1) different taxing regimes; (2) changing political conditions at the federal, provincial or state level; (3) changing international and U.S. monetary policies; and (4) regional economic downturns.
The regulatory regimes in these countries are substantially different than those in the U.S., and may be unfamiliar to U.S. investors. Violations of non-U.S. laws could result in monetary and criminal penalties against us or our subsidiaries and could damage our reputation and, therefore, our ability to do business.
We are subject to extensive and costly environmental laws and regulations that may require us to take actions that will adversely affect our results of operations.
All of our operations are significantly affected by stringent and complex foreign, federal, provincial, state and local laws and regulations governing the discharge of substances into the environment or otherwise relating to environmental protection. We could be exposed to liabilities for cleanup costs, natural resource damages and other damages as a result of our conduct that was lawful at the time it occurred or the conduct of, or conditions caused by, prior operators or other third-parties. There is inherent risk of environmental costs and liabilities in our business as a result of historical industry operations and waste disposal practices, which include air emissions and waste water discharges as well as our handling of petroleum hydrocarbons related to our operations. Certain environmental statutes impose joint and several strict liability for these costs. For example, an accidental release by us in the performance of services at one of our or our customers’ sites could subject us to substantial liabilities arising from environmental cleanup, restoration costs and natural resource damages, claims made by neighboring landowners and other third parties for personal injury and property damage and fines or penalties for related violations of environmental laws or regulations. We may not be able to recover some or any of these costs from insurance.
Environmental laws and regulations are subject to change in the future, possibly resulting in more stringent requirements. The implementation of new laws and regulations could result in materially increased costs, stricter standards and enforcement, increased reporting obligations, larger fines and liability and increased capital expenditures and operating costs, particularly for our customers, and could have an adverse effect on our business or demand for our services. See Item 1. “Business - Government Regulation” of this annual report for a more detailed description of our risks associated with environmental laws and regulations. It should also be noted that scientists have concluded that increasing concentrations of GHGs in the earth’s atmosphere may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, droughts, and floods and other climatic events.
Any failure by us to comply with applicable environmental laws and regulations may result in governmental authorities taking actions against our business that could adversely impact our business and results of operations, including the issuance of administrative, civil and criminal penalties; denial or revocation of permits or other authorizations; reduction or cessation of operations; and performance of site investigatory, remedial or other corrective actions.
We may be exposed to certain regulatory and financial risks related to climate change and other ESG-related matters.
Climate change and other ESG-related matters are receiving increasing attention from the media, scientists and legislators alike which has resulted in legislative, regulatory and other initiatives, including international agreements, to reduce greenhouse gas emissions, such as carbon dioxide and methane, and proposed regulations to increase climate change reporting obligations. Significant focus is being made on companies that are active producers of fossil fuels, or companies which serve such producers.
Efforts have been made and continue to be made in the international community toward the adoption of international treaties or protocols that would address global climate change issues and impose reductions of hydrocarbon-based fuels. There are a number of legislative and regulatory proposals to address greenhouse gas emissions, including increased fuel efficiency standards, carbon taxes or cap and trade systems, restrictive permitting, and incentives for renewable energy, which are in various phases of discussion or implementation. Moreover, such legislation, regulations and proposals are subject to frequent change by regulatory authorities, including in connection with the change in the U.S. federal administration in January 2021. The outcome of Canadian, Australian and U.S. federal, regional, provincial and state actions to address global climate change could result in a variety of regulatory programs including potential new regulations, additional charges to fund energy
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efficiency activities, or other regulatory actions. These actions could both (1) directly impact us due to increased costs associated with our operations, and (2) indirectly impact us due to increased costs of and/or reduced demand for our customers' operations, and resulting reduced demand for our services.
Any adoption of these or similar proposals by Canadian, Australian or U.S. federal, regional, provincial, state or local governments mandating a substantial reduction in greenhouse gas emissions could have far-reaching and significant impacts on the energy industry, including negatively impacting the price of oil relative to other energy sources, reducing demand for hydrocarbons and other minerals or limiting drilling or mining in the areas in which we operate. Although it is not possible at this time to predict how legislation or new regulations that may be adopted to address greenhouse gas emissions would impact our business, any such future laws and regulations could result in increased compliance costs or additional operating restrictions, and could have a material adverse effect on our business or demand for our services.
In addition, there have also been efforts in recent years to influence the investment community, including investment advisors and certain sovereign wealth, pension and endowment funds promoting divestment of fossil fuel equities and pressuring lenders to limit funding to companies engaged in the extraction of fossil fuel reserves. Such environmental activism and initiatives aimed at limiting climate change and reducing air pollution could interfere with our business activities, operations and ability to access capital. Furthermore, members of the investment community are increasing their focus on ESG practices and disclosures by public companies. As a result, we may continue to face increasing pressure regarding our ESG disclosures and practices. If our ESG disclosures and practices do not meet investor or other stakeholder expectations and standards, which continue to evolve, it could have a material adverse effect on our business or demand for our services. Additionally, members of the investment community may screen companies such as ours for ESG disclosures and performance before investing in our common shares.
See Item 1. “Business - Government Regulation” of this annual report for a more detailed description of our climate-change related risks.
Risks Related to Our Common Shares
The market price and trading volume of our common shares may be volatile.
The market price of our common shares has historically experienced and may continue to experience volatility. For example, during 2022, the market price of our common shares ranged from a low of $18.90 per share to a high of $32.06 per share. The market price of our common shares may be influenced by many factors, some of which are beyond our control, including those described above and the following:
•changes in financial estimates by analysts and our inability to meet those financial estimates;
•strategic actions by us or our competitors;
•announcements by us or our competitors of significant contracts, acquisitions, joint marketing relationships, joint ventures or capital commitments;
•variations in our quarterly operating results and those of our competitors;
•general economic and stock market conditions;
•risks related to our business and our industry, including those discussed above;
•changes in conditions or trends in our industry, markets or customers;
•geopolitical events or terrorist acts;
•trading volume of our common shares;
•the majority of our common shares being held by a few shareholders;
•future sales of our common shares or other securities by us, members of our management team or our existing shareholders; and
•investor perceptions of the investment opportunity associated with our industry or common shares relative to other investment alternatives.
These broad market and industry factors may materially reduce the market price of our common shares, regardless of our operating performance. In addition, price volatility may be greater if the public float and trading volume of our common shares is low. Since the twelve-to-one reverse share split of our common shares on November 19, 2020 through February 24, 2023, our average daily trading volume on the NYSE has been approximately 36,400 shares.
In addition, in recent years the stock market has experienced substantial price and volume fluctuations. This volatility has had a significant effect on the market prices of securities issued by many companies for reasons potentially unrelated to their operating performance. For example, our share price may experience substantial volatility due to uncertainty regarding
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commodity prices. These market fluctuations, regardless of the cause, may materially and adversely affect our share price, regardless of our operating results. Price volatility may cause the average price at which we repurchase our common shares (see Note 17 – Common Share Repurchases for a discussion of repurchases of our common shares) in a given period to exceed the share price at a given point in time. In addition, stock market volatility may impact our ability to access the capital markets in the future on acceptable terms or at all. Furthermore, the trading market for our common shares is influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our share price or trading volume to decline.
Any repurchases of our common shares are within the discretion of our Board of Directors, and there is no guarantee that we will repurchase common shares in the future.
The amount and timing of all future purchases of common shares pursuant to our share repurchase program, if any, are subject to the discretion of the Board of Directors and will depend upon business conditions, results of operations, financial condition and other factors. Our Board of Directors may, without advance notice, suspend or terminate our share repurchase program. There can be no assurance that we will make repurchases of our common shares in the future. The existence of our share repurchase program could diminish our cash reserves, which may impact our ability to finance future growth and to pursue possible future strategic growth projects. In addition, any elimination of, or downward revision in, our share repurchase program could have an adverse effect on the market price of our common shares. While the U.S. has imposed an excise tax on U.S. domestic corporations repurchasing stock, our share repurchase program is not currently subject to this tax. A similar tax has been proposed in Canada, which if enacted, would apply to us and may impact the tax efficiency of our share repurchase program.
We are governed by the corporate laws in British Columbia, Canada which in some cases have a different effect on shareholders than the corporate laws in Delaware, U.S.
There are material differences between the Business Corporations Act (British Columbia) (BCBCA) as compared to the Delaware General Corporation Law (DGCL). For example, some of these material differences include the following: (1) for material corporate transactions (such as amalgamations, arrangements, the sale of all or substantially all of our undertaking, and other extraordinary corporate transactions), the BCBCA, subject to the provisions of our articles, generally requires two-thirds majority vote by shareholders, whereas DGCL generally only requires a majority vote of shareholders for similar material corporate transactions; and (2) under the BCBCA, a holder of 5% or more of our common shares can requisition a general meeting of shareholders for the purpose of transacting any business that may be transacted at a general meeting, whereas the DGCL does not give this right. We cannot predict if investors will find our common shares less attractive because of these material differences. If some investors find our common shares less attractive as a result, there may be a less active trading market for our common shares and our share price may be more volatile.
Provisions contained in our articles and applicable Canadian and British Columbia laws could discourage a take-over attempt, which may reduce or eliminate the likelihood of a change of control transaction and, therefore, the ability of our shareholders to sell their shares for a premium.
Provisions contained in our articles provide for a classified Board of Directors, limitations on the removal of directors, limitations on shareholder proposals at meetings of shareholders and limitations on shareholder action by written consent, which could make it more difficult for a third-party to acquire control of us. Our articles, subject to the corporate law of British Columbia, also authorize our Board of Directors to issue series of preferred shares without shareholder approval. If our Board of Directors elects to issue preferred shares, it could increase the difficulty for a third-party to acquire us, which may reduce or eliminate our shareholders’ ability to sell their common shares at a premium. In addition, in Canada, we may become subject to applicable securities laws, including National Instrument 62-104 Take-Over Bids and Issuer Bids of the Canadian Securities Administrators, which provide a heightened threshold for shareholder acceptance of third-party acquisition offers and could discourage take-over attempts that could result in a premium over the market price for our common shares.
As a British Columbia company, we may be subject to additional Canadian laws and regulations. The application of additional Canadian laws and regulations could make it more difficult for third parties to acquire control of us. For example, such laws and regulations may, depending on the circumstances, result in regulatory reviews of and may require regulatory approval for any proposed take-over attempts.
Any of the foregoing could prevent or delay a change of control and may deprive or limit strategic opportunities for our shareholders to sell their common shares and/or affect the market price of our common shares.
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The enforcement of civil liabilities against Civeo may be more difficult.
Civeo is a British Columbia company and a substantial portion of our assets are located outside the U.S. As a result, investors could experience more difficulty enforcing judgments obtained against us in U.S. courts than would be the case for U.S. judgments obtained against a U.S. company. In addition, some claims may be more difficult to bring against Civeo in Canadian courts than it would be to bring similar claims against a U.S. company in a U.S. court.
Risks Related to Our Structure
We are subject to various Canadian, Australian and other taxes.
Our effective tax rates (including our Canadian and Australian tax rate) are dependent on a variety of factors, many of which are beyond our ability to control, such as changes in the rate of economic growth in jurisdictions in which we operate, currency exchange rate fluctuations (especially between Canadian and U.S. dollars and Australian and U.S. dollars), and significant changes in trade, monetary or fiscal policies of Canada and Australia, including changes in interest rates, withholding taxes, tax treaties and federal and provincial tax rates generally. The impact of these factors, individually and in the aggregate, is difficult to predict, in part because the occurrence of any number of the events or circumstances described in such factors may be (and, in fact, often seem to be) interrelated, and the impact to us of the occurrence of any one of these events or circumstances could be compounded or, alternatively, reduced, offset, or more than offset, by the occurrence of one or more of the other events or circumstances described in such factors.
Canada’s tax rules under the Income Tax Act (Canada) (the Canadian Tax Act) allow for favorable tax treatment related to the repatriation of certain dividends from foreign affiliates. If it becomes necessary or desirable to repatriate earnings from subsidiaries, repatriating earnings could, in certain circumstances, give rise to the imposition of potentially significant withholding taxes by the jurisdictions in which such amounts were earned, without our receiving the benefit of any offsetting tax credits, which could adversely impact our effective tax rate and cash flows. These tax rules are complicated and could change over time. Any such changes could have a material impact on our overall tax rate.
Canada has also introduced tax rules governing “foreign affiliate dumping” in the Canadian Tax Act that can have adverse tax consequences in respect of non-Canadian business activities and investments for Canadian corporations that are controlled by non-Canadian corporations. These rules would have a negative impact on us to the extent that we became controlled by a non-Canadian resident corporation.
We remain subject to changes in tax law (in various jurisdictions) and other factors that could impact our effective tax rate.
The tax laws of Canada, Australia and the U.S. could change in the future, and such changes could cause a material change in our effective corporate tax rate. As a result, our realized effective tax rate may be materially different from our current expectation. Our provision for income taxes will be based on certain estimates and assumptions made by management in consultation with our tax and other advisors. Our consolidated income tax rate will be affected by the amount of net income earned in Canada and our other operating jurisdictions, the availability of benefits under tax treaties, and the rates of taxes payable in respect of that income. We will enter into many transactions and arrangements in the ordinary course of business in respect of which the tax treatment is not entirely certain. We will therefore make estimates and judgments based on our knowledge and understanding of applicable tax laws and tax treaties, and the application of those tax laws and tax treaties to our business, in determining our consolidated tax provision. The final outcome of any audits by taxation authorities may differ from the estimates and assumptions we may use in determining our consolidated tax provisions and accruals. This could result in a material adverse effect on our consolidated income tax provision, financial condition and the net income for the period in which such determinations are made.
The U.S. Congress, government agencies in non-U.S. jurisdictions where we and our affiliates do business, and the Organization for Economic Co-operation and Development (the “OECD”) have recently focused on issues related to the taxation of multinational corporations. For example, the OECD has proposed a two-pillar plan to reform international taxation, with proposals to ensure a fairer distribution of profits among countries and to impose a floor on tax competition through the introduction of a global minimum tax. As a result, the tax laws in the U.S. and other countries in which we and our affiliates do business could change on a prospective or retroactive basis (or both), and any such changes could materially adversely affect us.
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Future potential changes to U.S. tax laws could result in Civeo being treated as a U.S. corporation for U.S. federal income tax purposes.
Although we believe that we are treated as a foreign corporation for U.S. federal income tax purposes, changes to Section 7874 of the Internal Revenue Code or the U.S. Treasury regulations promulgated thereunder or official interpretations thereof, could adversely affect Civeo’s status as a foreign corporation for U.S. federal income tax purposes. For example, members of Congress from time to time have proposed changes to the Internal Revenue Code, and the U.S. Treasury has taken and may continue to take regulatory action, in connection with inversion transactions. The timing and substance of any such change in law or regulatory action is uncertain. Any such change of law or regulatory action could adversely impact the treatment of Civeo as a foreign corporation for U.S. federal income tax purposes and could adversely impact its tax position and financial position and results in a material manner. The precise scope and application of any legislative or regulatory proposals will not be clear until they are actually issued, and, accordingly, until such legislation or regulations are issued and fully understood, we cannot be certain as to their potential impact. Any such changes could apply retroactively to a date prior to the date of our redomestication from Delaware to British Columbia, Canada in 2015. If Civeo were to be treated as a U.S. corporation for U.S. federal income tax purposes, it could be subject to substantially greater U.S. federal income tax liability.
ITEM 1B. Unresolved Staff Comments
None.
ITEM 2. Properties
The following table presents information about our principal properties and facilities as of December 31, 2022. Except as indicated, we own all of the properties or facilities listed below. Each of the properties is encumbered by our secured credit facilities. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and Note 11 – Debt to the notes to consolidated financial statements included in Item 8 of this annual report for additional information concerning our credit facilities. For a discussion about how each of our business segments utilizes its respective properties, see Item 1, “Business” of this annual report.
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| Location | Approximate Square Footage/Acreage | Description | |||||||||
| Canada: | |||||||||||
| Fort McMurray, Alberta (leased land) | 240 acres | Wapasu Creek Lodge | |||||||||
| Fort McMurray, Alberta (leased land) | 138 acres | Fort McMurray Village | |||||||||
| Fort McMurray, Alberta (leased land) | 135 acres | Conklin Lodge | |||||||||
| Fort McMurray, Alberta (leased land) | 128 acres | Beaver River and Athabasca Lodges | |||||||||
| Fort McMurray, Alberta (leased land) | 78 acres | McClelland Lake Lodge (1) | |||||||||
| Kitimat, British Columbia | 59 acres | Sitka Lodge | |||||||||
| Fort McMurray, Alberta (leased land and lodges) | 58 acres | Hudson and Borealis Lodges | |||||||||
| Acheson, Alberta (lease) | 40 acres | Office and warehouse | |||||||||
| Fort McMurray, Alberta (leased land) | 30 acres | Greywolf Lodge | |||||||||
| Fort McMurray, Alberta (leased land) | 18 acres | Anzac Lodge | |||||||||
| Edmonton, Alberta (lease) | 86,376 sq. feet | Office and commercial production kitchen | |||||||||
| Calgary, Alberta (lease) | 7,000 sq. feet | Office | |||||||||
| Australia: | |||||||||||
| Coppabella, Queensland, Australia | 192 acres | Coppabella Village | |||||||||
| Narrabri, New South Wales, Australia | 82 acres | Narrabri Village | |||||||||
| Boggabri, New South Wales, Australia | 52 acres | Boggabri Village | |||||||||
| Dysart, Queensland, Australia | 50 acres | Dysart Village | |||||||||
| Middlemount, Queensland, Australia | 37 acres | Middlemount Village | |||||||||
| Karratha, Western Australia, Australia (owned and leased land) | 34 acres | Karratha Village | |||||||||
| Nebo, Queensland, Australia | 26 acres | Nebo Village | |||||||||
| Moranbah, Queensland, Australia | 17 acres | Moranbah Village | |||||||||
| Sydney, New South Wales, Australia (lease) | 11,518 sq. feet | Office | |||||||||
| Perth, Western Australia, Australia (lease) | 6,921 sq. feet | Office | |||||||||
| Brisbane, Queensland, Australia (lease) | 5,543 sq. feet | Office | |||||||||
| U.S.: | |||||||||||
| Houston, Texas (lease) | 8,900 sq. feet | Principal executive offices | |||||||||
| Sulphur, Louisiana | 44 acres | Acadian Acres Lodge | |||||||||
| Killdeer, North Dakota | 39 acres | Killdeer Lodge | |||||||||
(1)This land lease expires in June 2023 and will not be renewed in order to support our customer’s intent to mine the land where the lodge is currently located.
We also own various undeveloped properties in British Columbia.
We believe that our leases are at competitive or market rates and do not anticipate any difficulty in leasing additional suitable space upon expiration of our current lease terms.
Leased land for our lodge properties in Canada refers to land leased from the Alberta government. We also lease land for our Karratha Village from the state government in Australia. Generally, our leases have an initial term of ten years and are scheduled to expire between 2023 and 2030.
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ITEM 3. Legal Proceedings
We are a party to various pending or threatened claims, lawsuits and administrative proceedings seeking damages or other remedies concerning our commercial operations, products, employees and other matters, including occasional claims by individuals alleging exposure to hazardous materials as a result of our products or operations. Some of these claims relate to matters occurring prior to our acquisition of businesses, and some relate to businesses we have sold. In certain cases, we are entitled to indemnification from the sellers of businesses, and in other cases, we have indemnified the buyers of businesses from us. Although we can give no assurance about the outcome of pending legal and administrative proceedings and the effect such outcomes may have on us, we believe that any ultimate liability resulting from the outcome of such proceedings, to the extent not otherwise provided for or covered by indemnity or insurance, will not have a material adverse effect on our consolidated financial position, results of operations or liquidity.
ITEM 4. Mine Safety Disclosures
Not applicable.
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PART II
ITEM 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Market for Our Common Shares
Our common shares trade on the NYSE under the trading symbol “CVEO”.
Holders of Record
As of February 24, 2023, there were 21 holders of record of Civeo common shares.
Dividend Information
We do not currently pay any cash dividends on our common shares. The declaration and amount of all dividends will be at the discretion of our Board of Directors and will depend upon many factors, including our financial condition, results of operations, cash flows, prospects, industry conditions, capital requirements of our business, covenants associated with certain debt obligations, legal requirements, regulatory constraints, industry practice and other factors the Board of Directors deems relevant. We can give no assurances that we will pay a dividend in the future.
The preferred shares we issued in the Noralta Acquisition were entitled to receive a 2% annual dividend on the liquidation preference (initially $10,000 per share), paid quarterly in cash or, at our option, by increasing the preferred shares’ liquidation preference, or any combination thereof. Quarterly dividends were paid in-kind beginning June 30, 2018 through December 12, 2022, thereby increasing the liquidation preference to $10,982 per share as of December 12, 2022. We repurchased 40% of the outstanding preferred shares on October 30, 2022, which included accrued cash dividends for the month of October 2022 of under $0.1 million. On December 13, 2022, the holders of the preferred shares converted all outstanding preferred shares into approximately 1.5 million common shares. Following such conversion, no further dividends are required to be paid. For further information, see Note 16 - Preferred Shares to the notes to the consolidated financial statements included in Item 8 of this annual report.
Performance Graph
The share price performance shown on the graph is not necessarily indicative of future price performance. Information used in the graph was obtained from Research Data Group, Inc., a source believed to be reliable, but we are not responsible for any errors or omissions in such information.
The following performance graph and chart compare the cumulative total return to holders of our common shares with the cumulative total returns of the Standard & Poor's 500 Stock Index, Philadelphia OSX and with that of our peer group, for the period from December 31, 2017 to December 31, 2022. The graph and chart show the value, at the dates indicated, of $100 invested at December 31, 2017 and assume the reinvestment of all dividends, as applicable.
Our peer group consists of the following:
| Badger Daylighting Ltd. | Nine Energy Service, Inc. | ||||
| Black Diamond Group Limited | North American Construction Group | ||||
| Dexterra Group | Oil States International, Inc. | ||||
| Enerflex Ltd. | Precision Drilling Corporation | ||||
| Exterran Corporation | Select Energy Services Inc. | ||||
| Forum Energy Technologies, Inc. | Target Hospitality Corp. | ||||
| Matrix Service Company | Tetra Technologies, Inc. | ||||
McGrath RentCorp | Total Energy Services Inc. | ||||
| Newpark Resources, Inc. | |||||
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| 12/31/17 | 12/31/18 | 12/31/19 | 12/31/20 | 12/31/21 | 12/31/22 | |||||||||||||||||||||||||||||||||
| Civeo Corporation | $ | 100.00 | $ | 52.38 | $ | 47.25 | $ | 42.43 | $ | 58.52 | $ | 94.93 | ||||||||||||||||||||||||||
| S&P 500 | $ | 100.00 | $ | 95.62 | $ | 125.72 | $ | 148.85 | $ | 191.58 | $ | 156.89 | ||||||||||||||||||||||||||
| PHLX Oil Service Sector | $ | 100.00 | $ | 54.78 | $ | 54.48 | $ | 31.56 | $ | 38.10 | $ | 61.53 | ||||||||||||||||||||||||||
| Current Peer Group | $ | 100.00 | $ | 76.45 | $ | 89.83 | $ | 79.54 | $ | 107.71 | $ | 119.46 | ||||||||||||||||||||||||||
The performance graph above is furnished and not filed for purposes of the Securities Act and the Exchange Act. The performance graph is not soliciting material subject to Regulation 14A.
Unregistered Sales of Equity Securities and Use of Proceeds
None.
Repurchases of Registered Equity Securities by Registrant or its Affiliates in the Fourth Quarter
In August 2022, our Board of Directors authorized a new common share repurchase program to repurchase up to 5.0% of our total common shares which are issued and outstanding, or 685,614 common shares, over a twelve month period. We have not repurchased any shares under this repurchase program as of December 31, 2022.
ITEM 6. Reserved
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ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act that are based on management’s current expectations, estimates and projections about our business operations. Please read “Cautionary Statement Regarding Forward Looking Statements.” Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of numerous factors, including the known material factors set forth in Item 1A. “Risk Factors” of this annual report. You should read the following discussion and analysis together with our consolidated financial statements and the notes to those statements in Item 8 of this annual report.
This section of this annual report generally discusses key operating and financial data as of and for the years ended 2022 and 2021 and provides year-over-year comparisons for such periods. For a similar discussion and year-over-year comparisons to our 2020 results, refer to "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 28, 2022.
Description of the Business
We provide hospitality services to the natural resources industry in Canada, Australia and the United States (U.S.) We provide a full suite of services for our guests, including lodging, catering and food service, housekeeping and maintenance at accommodation facilities that we or our customers own. In many cases, we provide services that support our day-to-day operations of these facilities, such as laundry, facility management and maintenance, water and wastewater treatment, power generation, communication systems, security and logistics. We also offer development activities for workforce accommodation facilities, including site selection, permitting, engineering and design, manufacturing management and site construction, along with providing hospitality services once the facility is constructed. We primarily operate in some of the world’s most active oil, metallurgical (met) coal, liquefied natural gas (LNG) and iron ore producing regions, and our customers include major and independent oil companies, mining companies, engineering companies and oilfield and mining service companies. We operate in three principal reportable business segments – Canada, Australia and the U.S.
Basis of Presentation
Unless otherwise stated or the context otherwise indicates: (i) all references in these consolidated financial statements to “Civeo,” “us,” “our” or “we” refer to Civeo Corporation and its consolidated subsidiaries; and (ii) all references in this annual report to “dollars” or “$” are to U.S. dollars.
Overview and Macroeconomic Environment
We provide hospitality services to the natural resources industry in Canada, Australia and the U.S. Demand for our services can be attributed to two phases of our customers’ projects: (1) the development or construction phase; and (2) the operations or production phase. Historically, initial demand for our hospitality services has been driven by our customers’ capital spending programs related to the construction and development of natural resource projects and associated infrastructure, as well as the exploration for oil and natural gas. Long-term demand for our services has been driven by natural resource production, maintenance and operation of those facilities as well as expansion of those sites. In general, industry capital spending programs are based on the outlook for commodity prices, economic growth, global commodity supply/demand, estimates of resource production and the expectations of our customers' shareholders. As a result, demand for our hospitality services is largely sensitive to expected commodity prices, principally related to oil, met coal, LNG and iron ore, and the resultant impact of these commodity price expectations on customers’ spending. Other factors that can affect our business and financial results include the general global economic environment, including inflationary pressures, supply chain disruptions and labor shortages, and regulatory changes in Canada, Australia, the U.S. and other markets, including governmental measures introduced to fight climate change or to help slow the spread or mitigate the impact of COVID-19.
Our business is predominantly located in northern Alberta, Canada; British Columbia, Canada; Queensland, Australia; and Western Australia. We derive most of our business from natural resource companies who are developing and producing oil sands, met coal, LNG and iron ore resources and, to a lesser extent, other hydrocarbon and mineral resources. Approximately 62% of our revenue is generated by our lodges in Canada and our villages in Australia. Where traditional accommodations and infrastructure are insufficient, inaccessible or cost ineffective, our lodge and village facilities provide comprehensive hospitality services similar to those found in an urban hotel. We typically contract our facilities to our customers on a fee-per-person-per-day basis that covers lodging and meals and is based on the duration of customer needs, which can range from several weeks to several years. The remainder of our revenue is generated by our hospitality services at customer-owned locations in Canada and Australia, mobile assets in Canada and our lodges in the U.S.
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Generally, our core Canadian oil sands and Australian mining customers make significant, upfront capital investments to develop their prospects, which have estimated reserve lives ranging from ten years to in excess of 30 years. Consequently, these investments are primarily dependent on those customers’ long-term views of commodity demand and prices.
The spread of COVID-19 and the response thereto have negatively impacted the global economy. The actions taken by governments and the private-sector to mitigate the spread of COVID-19 and the risk of infection, including government-imposed or voluntary social distancing and quarantining, reduced travel and remote work policies, evolved with the introduction of vaccination efforts in 2021, and may continue to evolve as the surfacing of virus variants has added a degree of uncertainty to the continuing global impact. Since the COVID-19 pandemic began, we have been impacted by increased staff costs as a result of hospitality labor shortages in Australia. This labor shortage has been exacerbated by significantly reduced migration in and around Australia affecting labor availability, which has subsequently led to an increased reliance on more expensive temporary labor resources. We continue to monitor the COVID-19 pandemic to help ensure the health and well-being of our employees, guests and contractors. Most of our previously implemented measures have been revised to reflect improved conditions, and are currently being integrated into a more comprehensive communicable illness plan.
In part due to the impact of COVID-19 on the global economy and governmental responses thereto, increasing inflationary pressures and supply chain disruptions are being experienced worldwide. Price increases resulting from inflation and supply chain concerns have, and are expected to continue to have, a negative impact on our labor and food costs, as well as consumable costs such as fuel. We are managing inflation risk with negotiated service scope changes and contractual protections.
Global oil prices dropped to historically low levels in March and April 2020 due to severely reduced global oil demand, high global crude inventory levels, uncertainty around timing and slope of worldwide economic recovery after COVID-19 related economic shut-downs and effectiveness of production cuts by major oil producing countries, such as Saudi Arabia, Russia and the U.S. Since this trough in early 2020, global oil prices increased later in 2020 and throughout 2021 primarily due to improved global oil demand and lagging global oil supply due to oil production discipline from publicly traded oil producers and OPEC+ countries. These supply/demand dynamics continued in 2022 and have been exacerbated by the ongoing conflict between Russia/Ukraine and related sanctions on Russia, as well as actions taken by OPEC+ to adjust production levels, which decreased global fossil fuel supply even further. This led to a significant increase in global oil prices to above $100 per barrel. Several governments, including the U.S. government under the Biden administration, have released oil from the government controlled strategic reserves in an effort to stem high oil prices and the related impacts on higher heating fuels and gasoline.
Alberta, Canada. In Canada, Western Canadian Select (WCS) crude is the benchmark price for our oil sands customers. Pricing for WCS is driven by several factors, including the underlying price for West Texas Intermediate (WTI) crude, the availability of transportation infrastructure (consisting of pipelines and crude by railcar), refinery blending requirements and governmental regulation. Historically, WCS has traded at a discount to WTI, creating a “WCS Differential,” due to transportation costs and capacity restrictions to move Canadian heavy oil production to refineries, primarily along the U.S. Gulf Coast. The WCS Differential has varied depending on the extent of transportation capacity availability.
Certain expansionary oil pipeline projects have the potential to both drive incremental demand for mobile assets and to improve take-away capacity for Canadian oil sands producers over the longer term. The Enbridge Line 3 replacement project was completed at the end of 2021 and the Trans Mountain Pipeline (TMX) is currently under construction and continues to progress towards completion. The Canadian federal government acquired the TMX pipeline in 2018, approved the expansion of the project and is currently working through a revised construction timeline to adjust for recent delays related to legal challenges, COVID-19, flooding along certain sections of the pipeline corridor and seasonal wildfires. As a result, the TMX pipeline construction has been delayed, and there is a risk that there could be future delays. Recent legal issues between the Canadian government and First Nation groups have been resolved for the time being and construction has resumed.
WCS prices in the fourth quarter of 2022 averaged $54.72 per barrel compared to an average of $60.84 in the fourth quarter of 2021. The WCS Differential increased from $14.12 per barrel at the end of the fourth quarter of 2021 to $27.62 at the end of the fourth quarter of 2022. As of February 24, 2023, the WTI price was $76.32 and the WCS price was $60.10, resulting in a WCS Differential of $16.22.
Together with the initial spread of COVID-19, depressed oil price levels of both WTI and WCS materially impacted 2020 maintenance and production spending and activity by Canadian operators and, therefore, demand for our hospitality services. Customers began restoring production in the fourth quarter of 2020, reaching pre-pandemic levels in 2022. Although oil prices reached multi-year highs in the first half of 2022 and fluctuated in the second half of 2022, there is continued uncertainty around commodity price levels, including the impact of COVID-19, inflationary pressures, actions taken by OPEC+ to adjust production levels, geopolitical events such as the ongoing Russia/Ukraine conflict, and regulatory implications on such prices, which could cause our Canadian oil sands and pipeline customers to reduce production, delay expansionary and maintenance spending and defer additional investments in their oil sands assets.
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We have agreed to not renew an expiring land lease associated with our McClelland Lake Lodge in Alberta, Canada, which currently expires in June 2023, to support our customer’s intent to mine the land where the lodge is currently located, ten years earlier than originally expected. In addition, our hospitality services contract at McClelland Lake Lodge expires in June 2023. Based on ongoing discussion with customers in the region, our current assessment is there are no commercially viable opportunities that support the reinstalling of these assets in a different location within the Regional Municipality of Wood Buffalo. Accordingly, we intend to market these assets for new opportunities within Canada and the U.S. During such time, these assets will be stored in part or in whole at a nearby location. Based on our knowledge and understanding of the marketplace, we believe there is demand for these assets for sale or redeployment. However, should our marketing efforts fail to identify an economic alternative, other options will be considered. Revenues associated with the 2022 room commitments at our McClelland Lake Lodge were approximately C$60 million. We expect to have further clarity on potential sales or redeployment opportunities of these assets as we move through 2023.
British Columbia, Canada. Our Sitka Lodge supports the LNG Canada project and related pipeline projects (see discussion below). From a macroeconomic standpoint, LNG demand continued to grow despite COVID-19, reinforcing the need for the global LNG industry to expand access to natural gas. Evolving government energy policies around the world have amplified support for cleaner energy supply, creating more opportunities for natural gas and LNG. The conflict between Russia/Ukraine has further highlighted the need for secure natural gas supply globally, particularly in Europe. Accordingly, additional investment in LNG supply will be needed to meet the resulting expected long-term LNG demand growth.
Currently, Western Canada does not have any operational LNG export facilities. LNG Canada (LNGC), a joint venture among Shell Canada Energy, an affiliate of Shell plc (40 percent), and affiliates of PETRONAS, through its wholly-owned entity, North Montney LNG Limited Partnership (25 percent), PetroChina (15 percent), Mitsubishi Corporation (15 percent) and Korea Gas Corporation (5 percent), is currently constructing a liquefaction and export facility in Kitimat, British Columbia (Kitimat LNG Facility). British Columbia LNG activity and related pipeline projects are a material driver of activity for our Sitka Lodge, as well as for our mobile assets, which are contracted to serve several designated portions of the related pipeline construction activity. The actual timing of when revenue is realized from the Coastal GasLink pipeline (CGL) and Sitka Lodge contracts could be impacted by any delays in the construction of the Kitimat LNG Facility or the pipeline, such as protest blockades and COVID-19. Our current expectation is that our contracted commitments associated with the CGL pipeline project will be completed in 2023. Any new delays in facility or pipeline construction may result in extensions to these dates.
In late March 2020, LNGC announced steps being taken to reduce the spread of COVID-19, including reduction of the workforce at the project site to essential personnel only. In late December 2020, British Columbia’s public health officer issued a health order limiting workforce size at all large industrial projects across the province, including LNGC. These actions resulted in reduced occupancy at our Sitka Lodge beginning in the second quarter of 2020. British Columbia's public health order was phased out in the second quarter of 2021. It was replaced with less restrictive requirements focused on monitoring, allowing workforces to return to their optimal sizes, which increased occupancy at our Sitka Lodge in the second half of 2021 and into 2022.
Australia. In Australia, 84% of our rooms are located in the Bowen Basin of Queensland, Australia and primarily serve met coal mines in that region. Met coal pricing and production growth in the Bowen Basin region is predominantly influenced by the level of global steel production, which decreased by 4.3% during 2022 compared to 2021. The decrease was the result of weakness in the Chinese residential sector and slowing global growth due to inflationary pressures. As of February 24, 2023, met coal spot prices were $360 per tonne. Steel output is forecast to improve marginally through 2024, with large infrastructure rollouts in a number of major economies including the U.S. and India.
The Chinese placed an embargo on several Australian products, including coal, in the fall of 2020. During the embargo, Australian met coal producers found new markets, including India and Europe, for their premium product. This led to a rebalancing of the market globally, with China relying on domestic production along with increased met coal imports from the U.S., Canada and Mongolia. With the backdrop of continuing strong steel demand and met coal supply constraints, the spot price for met coal surged to record highs through the second half of 2021 into early 2022. The embargo was recently lifted during the first quarter of 2023. Since the historic highs in early 2022, prices have stabilized with weather-related supply interruptions in Australia offset by weakening steel demand. Analysts forecast met coal prices to face downward pressure in early 2023 but to moderate during the year with supply improvement and weaker demand impacting prices. Downward pressure on prices could accelerate in the short term if demand in China worsens.
Civeo's activity in Western Australia is driven primarily by iron ore production, which is a key steel-making ingredient. Through the second half of 2021, with forced cuts in Chinese steel production, prices retreated from the peaks experienced in mid-2021. Iron ore prices remained stable through early 2022 and fluctuated in the second half of 2022, with prices recovering from a low of $78 per tonne to over $100 per tonne with renewed support in the Chinese property sector. With stronger supply and a slow recovery in Chinese construction, downside pressure on current prices remains. As of February 24, 2023, iron ore
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spot prices were $119.17 per tonne. Analysts anticipate that infrastructure-led construction activity in China and other large world economies will continue to stabilize prices at current levels, though residential activity in China remains subdued. Analysts forecast pricing through 2023 to remain between $90 and $110.
U.S. In the last half of 2022, we sold both our wellsite services and our offshore businesses. Our remaining U.S. business supports completion activity in the Bakken and construction and turnaround work in the Louisiana industrial area. U.S. oil completion activity will continue to be impacted by oil prices, pipeline capacity, federal energy policies and availability of capital to support exploration and production completion plans.
Recent Commodity Prices. Recent WTI crude, WCS crude, met coal and iron ore pricing trends are as follows:
Average Price (1) | ||||||||||||||||||||||||||
| Quarter ended | WTI Crude (per bbl) | WCS Crude (per bbl) | Hard Coking Coal (Met Coal) (per tonne) | Iron Ore (per tonne) | ||||||||||||||||||||||
First Quarter through February 24, 2023 | $ | 77.56 | $ | 55.69 | $ | 336.02 | $ | 114.96 | ||||||||||||||||||
| 12/31/2022 | 82.82 | 54.72 | 276.19 | 94.93 | ||||||||||||||||||||||
| 9/30/2022 | 91.63 | 70.70 | 252.63 | 99.21 | ||||||||||||||||||||||
| 6/30/2022 | 108.77 | 92.89 | 464.61 | 128.80 | ||||||||||||||||||||||
| 3/31/2022 | 95.17 | 82.04 | 474.83 | 129.46 | ||||||||||||||||||||||
| 12/31/2021 | 77.31 | 60.84 | 371.95 | 104.88 | ||||||||||||||||||||||
| 9/30/2021 | 70.54 | 57.58 | 258.41 | 164.90 | ||||||||||||||||||||||
| 6/30/2021 | 66.19 | 53.27 | 136.44 | 195.97 | ||||||||||||||||||||||
| 3/31/2021 | 58.13 | 46.28 | 127.95 | 159.83 | ||||||||||||||||||||||
| 12/31/2020 | 42.63 | 31.34 | 109.37 | 128.24 | ||||||||||||||||||||||
| 9/30/2020 | 40.90 | 31.15 | 113.30 | 116.10 | ||||||||||||||||||||||
| 6/30/2020 | 27.95 | 19.73 | 120.27 | 89.53 | ||||||||||||||||||||||
| 3/31/2020 | 45.38 | 27.92 | 156.17 | 83.57 | ||||||||||||||||||||||
| 12/30/2019 | 56.85 | 37.94 | 141.39 | 85.13 | ||||||||||||||||||||||
(1)Source: WTI crude prices are from U.S. Energy Information Administration (EIA), WCS crude prices and iron ore prices are from Bloomberg and hard coking coal prices are from IHS Markit.
Foreign Currency Exchange Rates. Exchange rates between the U.S. dollar and each of the Canadian dollar and the Australian dollar influence our U.S. dollar reported financial results. Our business has historically derived the vast majority of its revenues and operating income (loss) in Canada and Australia. These revenues and profits/losses are translated into U.S. dollars for U.S. generally accepted accounting principles (U.S. GAAP) financial reporting purposes. The following tables summarize the fluctuations in the exchange rates between the U.S. dollar and each of the Canadian dollar and the Australian dollar:
| Year Ended December 31, | |||||||||||||||||||||||
| 2022 | 2021 | Change | Percentage | ||||||||||||||||||||
| Average Canadian dollar to U.S. dollar | $0.769 | $0.798 | (0.029) | (3.6)% | |||||||||||||||||||
| Average Australian dollar to U.S. dollar | $0.695 | $0.752 | (0.057) | (7.6)% | |||||||||||||||||||
| As of December 31, | |||||||||||||||||||||||
| 2022 | 2021 | Change | Percentage | ||||||||||||||||||||
| Canadian dollar to U.S. dollar | $0.738 | $0.789 | (0.051) | (6.4)% | |||||||||||||||||||
| Australian dollar to U.S. dollar | $0.679 | $0.726 | (0.047) | (6.5)% | |||||||||||||||||||
These fluctuations of the Canadian and Australian dollars have had and will continue to have an impact on the translation of earnings generated from our Canadian and Australian subsidiaries and, therefore, our financial results.
Capital Expenditures. We continue to monitor the global economy, commodity prices, demand for crude oil, met coal, LNG and iron ore, inflation, COVID-19 and the resultant impact on the capital spending plans of our customers in order to plan our business activities. We currently expect that our 2023 capital expenditures will be in the range of approximately $25 million to $30 million, compared to 2022 capital expenditures of $25.4 million. We may adjust our capital expenditure plans in the future as we continue to monitor customer activity. See “Liquidity and Capital Resources” below for further discussion of 2023 and 2022 capital expenditures.
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Results of Operations
Unless otherwise indicated, discussion of results for the year ended December 31, 2022 is based on a comparison with the corresponding period of 2021.
Results of Operations – Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | Change | |||||||||||||||
| ($ in thousands) | |||||||||||||||||
| Revenues | |||||||||||||||||
| Canada | $ | 395,997 | $ | 321,378 | $ | 74,619 | |||||||||||
| Australia | 278,252 | 251,074 | 27,178 | ||||||||||||||
| U.S. | 22,803 | 22,011 | 792 | ||||||||||||||
| Total revenues | 697,052 | 594,463 | 102,589 | ||||||||||||||
| Costs and expenses | |||||||||||||||||
| Cost of sales and services | |||||||||||||||||
| Canada | 293,576 | 235,419 | 58,157 | ||||||||||||||
| Australia | 200,944 | 179,142 | 21,802 | ||||||||||||||
| U.S. | 22,543 | 21,901 | 642 | ||||||||||||||
| Total cost of sales and services | 517,063 | 436,462 | 80,601 | ||||||||||||||
| Selling, general and administrative expenses | 69,962 | 60,600 | 9,362 | ||||||||||||||
| Depreciation and amortization expense | 87,214 | 83,101 | 4,113 | ||||||||||||||
| Impairment expense | 5,721 | 7,935 | (2,214) | ||||||||||||||
| Other operating expense | 74 | 313 | (239) | ||||||||||||||
| Total costs and expenses | 680,034 | 588,411 | 91,623 | ||||||||||||||
| Operating income | 17,018 | 6,052 | 10,966 | ||||||||||||||
| Interest expense, net | (11,435) | (13,378) | 1,943 | ||||||||||||||
| Other income | 5,149 | 13,199 | (8,050) | ||||||||||||||
| Income before income taxes | 10,732 | 5,873 | 4,859 | ||||||||||||||
| Income tax expense | (4,402) | (3,376) | (1,026) | ||||||||||||||
| Net income | 6,330 | 2,497 | 3,833 | ||||||||||||||
| Less: Net income attributable to noncontrolling interest | 2,333 | 1,147 | 1,186 | ||||||||||||||
| Net income attributable to Civeo Corporation | 3,997 | 1,350 | 2,647 | ||||||||||||||
| Less: Dividends attributable to Class A preferred shares | 1,771 | 1,925 | (154) | ||||||||||||||
| Net income (loss) attributable to Civeo common shareholders | $ | 2,226 | $ | (575) | $ | 2,801 | |||||||||||
We reported net income attributable to Civeo for 2022 of $2.2 million, or $0.21 loss per diluted share. As further discussed below, net income included a $5.7 million pre-tax loss resulting from the impairment of fixed assets included in Impairment expense.
We reported net loss attributable to Civeo for 2021 of $0.6 million, or $0.04 per diluted share. As further discussed below, net loss included a $7.9 million pre-tax loss resulting from the impairment of fixed assets included in Impairment expense.
Revenues. Consolidated revenues increased $102.6 million, or 17%, in 2022 compared to 2021. This increase was primarily driven by (i) higher billed rooms at our Canadian lodges as occupancy in 2021 was negatively impacted by COVID-19, (ii) increased mobile asset activity from pipeline projects in Canada, (iii) increased activity at our Australian Civeo owned villages in the Bowen and Gunnedah Basins and (iv) increased activity at our integrated services villages in Western Australia. These items were partially offset by a weaker Australian and Canadian dollar relative to the U.S. dollar in 2022 compared to 2021. See the discussion of segment results of operations below for further information.
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Cost of Sales and Services. Our consolidated cost of sales and services increased $80.6 million, or 18%, in 2022 compared to 2021. This increase was primarily due to (i) higher billed rooms at our Canadian lodges, (ii) increased mobile asset activity from pipeline projects in Canada, (iii) increased activity at our Australian Civeo owned villages in the Bowen and Gunnedah Basins (iv) increased activity at our integrated services villages in Western Australia and (v) increased costs due to inflationary pressures in both Canada and Australia. These items were partially offset by a weaker Australian and Canadian dollar relative to the U.S. dollar in 2022 compared to 2021. See the discussion of segment results of operations below for further information.
Selling, General and Administrative Expenses. SG&A expense increased $9.4 million, or 15%, in 2022 compared to 2021. This increase was primarily due to higher share-based compensation expense, travel and entertainment expense, compensation expense and information technology expense. The increase in share-based compensation expense was due to a relative increase in our stock price during 2022 compared to 2021. The increase in information technology expense was related to ongoing investment in our human capital management (HCM) system and set-up costs incurred in a cloud computing arrangement for our newly implemented HCM system, which are being amortized through SG&A expense instead of depreciation and amortization expense. The increase in travel and entertainment expenses was largely a result of a return to more normalized travel expenses with the lifting of travel restrictions associated with COVID-19. The increase in compensation expense was primarily due to increased staff and recruitment costs. These items were partially offset by a weaker Australian and Canadian dollar relative to the U.S. dollar in 2022 compared to 2021.
Depreciation and Amortization Expense. Depreciation and amortization expense increased $4.1 million, or 5%, in 2022 compared to 2021. The increase was primarily due to shortening the lives on certain assets in Canada, including the McClelland Lake Lodge, partially offset by assets in Canada becoming fully depreciated during 2021 and the disposal of our West Permian Lodge in the U.S. during 2021. Depreciation and amortization expense was also lower due to a weaker Australian and Canadian dollar relative to the U.S. dollar in 2022 compared to 2021.
Impairment Expense. We reported pre-tax impairment expense of $5.7 million in 2022 associated with long-lived assets in our U.S. and Australian reporting units. We recorded pre-tax impairment expense of $7.9 million in 2021 associated with long-lived assets in our Australian reporting unit.
See Note 4 - Impairment Charges to the notes to the consolidated financial statements included in Item 8 of this annual report for further discussion.
Operating Income. Operating income increased $11.0 million, or 181%, in 2022 compared to 2021 primarily due to higher activity levels in Canada and Australia in 2022 compared to 2021, partially offset by higher SG&A expense in 2022 compared to 2021.
Interest (Expense) and Income, net. Net interest expense decreased $1.9 million, or 15%, in 2022 compared to 2021 primarily related to lower average debt levels on credit facility borrowings during 2022 compared to 2021, partially offset by higher interest rates on credit facility borrowings.
Other Income. Other income decreased $8.1 million, or 61%, in 2022 compared to 2021. Other income in 2022 included $4.7 million in gains on the sale of assets primarily related to our Kambalda village and undeveloped land holdings in Australia, our wellsite and offshore businesses in the U.S. and various mobile assets across Canada, Australia and the U.S. Other income in 2021 included $3.5 million of other income related to proceeds from the Canada Emergency Wage Subsidy (CEWS), $2.7 million of other income related to the settlement of a contract dispute with a customer and a $6.2 million gain on sale of assets primarily related to the sale of our West Permian Lodge in the U.S. and the sale of a manufacturing facility and mobile assets in Canada.
Income Tax (Expense) Benefit. Our income tax expense for 2022 totaled $4.4 million, or 41.0% of pretax income, compared to an expense of $3.4 million, or 57.5% of pretax loss for 2021. Our effective tax rate for 2022 was higher than the Canadian federal statutory rate of 15%, primarily due to pre-tax income in Australia being taxed at the higher Australian income tax rate of 30%. Additionally, due to the full valuation allowances maintained in both Canada and the U.S., no tax expense or benefit was recorded related to pre-tax income in Canada and pre-tax losses in the U.S. Tax expense in Canada was offset by a valuation allowance release of $0.6 million and the tax benefit in the U.S. was offset by an increase to the valuation allowance of $1.0 million.
Our effective tax rate for 2021 was higher than the Canadian federal statutory rate of 15%, primarily due to pre-tax income in Australia being taxed at the higher Australian income tax rate of 30% and an increase in the valuation allowance related to a non-deductible Australian impairment charge of $5.1 million related to various undeveloped land positions in
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Australia. Additionally, due to the full valuation allowances maintained in both Canada and the U.S., no tax expense or benefit was recorded related to pre-tax income in Canada and pre-tax losses in the U.S. Tax expense in Canada was offset by a valuation allowance release of $1.3 million and the tax benefit in the U.S. was offset by an increase to the valuation allowance of $0.8 million.
Other Comprehensive Income (Loss). Other comprehensive loss increased $10.6 million in 2022 compared to 2021 primarily as a result of foreign currency translation adjustments due to changes in the Canadian and Australian dollar exchange rates compared to the U.S. dollar. The Canadian dollar exchange rate compared to the U.S. dollar decreased 6.4% in 2022 compared to remaining relative consistent in 2021. The Australian dollar exchange rate compared to the U.S. dollar decreased 6.5% in 2022 compared to a 6.1% decrease in 2021.
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Segment Results of Operations – Canadian Segment
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | Change | |||||||||||||||
| Revenues ($ in thousands) | |||||||||||||||||
Accommodation revenue (1) | $ | 279,455 | $ | 239,526 | $ | 39,929 | |||||||||||
Mobile facility rental revenue (2) | 96,400 | 62,856 | 33,544 | ||||||||||||||
Food service and other services revenue (3) | 20,142 | 18,996 | 1,146 | ||||||||||||||
| Total revenues | $ | 395,997 | $ | 321,378 | $ | 74,619 | |||||||||||
| Cost of sales and services ($ in thousands) | |||||||||||||||||
| Accommodation cost | $ | 204,592 | $ | 170,071 | $ | 34,521 | |||||||||||
| Mobile facility rental cost | 60,055 | 38,571 | 21,484 | ||||||||||||||
| Food service and other services cost | 18,372 | 16,750 | 1,622 | ||||||||||||||
| Indirect other cost | 10,557 | 10,027 | 530 | ||||||||||||||
| Total cost of sales and services | $ | 293,576 | $ | 235,419 | $ | 58,157 | |||||||||||
| Gross margin as a % of revenues | 25.9 | % | 26.7 | % | (0.9) | % | |||||||||||
Average daily rate for lodges (4) | $ | 100 | $ | 99 | $ | 1 | |||||||||||
Total billed rooms for lodges (5) | 2,759,521 | 2,404,880 | 354,641 | ||||||||||||||
| Average Canadian dollar to U.S. dollar | $ | 0.769 | $ | 0.798 | $ | (0.029) | |||||||||||
(1)Includes revenues related to lodge rooms and hospitality services for owned rooms for the periods presented.
(2)Includes revenues related to mobile assets for the periods presented.
(3)Includes revenues related to food service, laundry and water and wastewater treatment services for the periods presented.
(4)Average daily rate is based on billed rooms and accommodation revenue.
(5)Billed rooms represents total billed days for owned assets for the periods presented.
Our Canadian segment reported revenues in 2022 that were $74.6 million, or 23%, higher than 2021. The weakening of the average exchange rate for the Canadian dollar relative to the U.S. dollar by 4% in 2022 compared to 2021 resulted in a $15.1 million period-over-period decrease in revenues. Excluding the impact of the weaker Canadian exchange rate, the revenue increase was driven by (i) higher billed rooms at our lodges as occupancy in 2021 was negatively impacted by COVID-19 and (ii) increased mobile asset activity from pipeline projects.
Our Canadian segment cost of sales and services increased $58.2 million, or 25%, in 2022 compared to 2021. The weakening of the average exchange rate for the Canadian dollar relative to the U.S. dollar by 4% in 2022 compared to 2021 resulted in a $11.1 million period-over-period decrease in cost of sales and services. Excluding the impact of the weaker Canadian exchange rate, the increase in cost of sales and services was driven by increased occupancy at our lodges, increased operating costs due to inflationary pressures and increased mobile asset activity from pipeline projects.
Our Canadian segment gross margin as a percentage of revenues decreased from 27% in 2021 to 26% in 2022. This was primarily driven by a reduced margin at our lodges as cost increases due to inflationary pressures more than offset the higher average daily rate.
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Segment Results of Operations – Australian Segment
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | Change | |||||||||||||||
| Revenues ($ in thousands) | |||||||||||||||||
Accommodation revenue (1) | $ | 152,714 | $ | 145,335 | $ | 7,379 | |||||||||||
Food service and other services revenue (2) | 125,538 | 105,739 | 19,799 | ||||||||||||||
| Total revenues | $ | 278,252 | $ | 251,074 | $ | 27,178 | |||||||||||
| Cost of sales ($ in thousands) | |||||||||||||||||
| Accommodation cost | 73,325 | 71,550 | 1,775 | ||||||||||||||
| Food service and other services cost | 119,957 | 100,469 | 19,488 | ||||||||||||||
| Indirect other cost | 7,662 | 7,123 | 539 | ||||||||||||||
| Total cost of sales and services | $ | 200,944 | $ | 179,142 | $ | 21,802 | |||||||||||
| Gross margin as a % of revenues | 27.8 | % | 28.6 | % | (0.9) | % | |||||||||||
Average daily rate for villages (3) | $ | 75 | $ | 79 | $ | (4) | |||||||||||
Total billed rooms for villages (4) | 2,024,068 | 1,846,882 | 177,186 | ||||||||||||||
| Australian dollar to U.S. dollar | $ | 0.695 | $ | 0.752 | $ | (0.057) | |||||||||||
(1)Includes revenues related to village rooms and hospitality services for owned rooms for the periods presented.
(2)Includes revenues related to food service and other services, including facilities management, for the periods presented.
(3)Average daily rate is based on billed rooms and accommodation revenue.
(4)Billed rooms represents total billed days for owned assets for the periods presented.
Our Australian segment reported revenues in 2022 that were $27.2 million, or 11%, higher than 2021. The weakening of the average exchange rate for Australian dollars relative to the U.S. dollar by 8% in the 2022 compared to 2021 resulted in a $23.1 million period-over-period decrease in revenues. Excluding the impact of the weaker Australian exchange rate, the increase in the Australian segment was driven by increased activity at our Civeo owned villages in the Bowen and Gunnedah Basins and our integrated services villages in Western Australia.
Our Australian segment cost of sales and services increased $21.8 million, or 12%, in 2022 compared to 2021. The weakening of the average exchange rate for Australian dollars relative to the U.S. dollar by 8% in 2022 compared to 2021 resulted in a $16.8 million period-over-period decrease in cost of sales and services. Excluding the impact of the weaker Australian exchange rate, the increase in cost of sales and services was largely driven by increased activity at our Civeo owned villages in the Bowen and Gunnedah Basins and our integrated services villages in Western Australia and increased operating costs due to inflationary pressures.
Our Australian segment gross margin as a percentage of revenues decreased to 28% in 2022 from 29% in 2021. This was primarily driven by increased relative revenue contribution from our integrated services business, which has a service-only business model, and therefore generates lower overall gross margins than our accommodation business, partially offset by improved margins at Civeo owned villages in the Bowen and Gunnedah Basins as a result of increased activity.
Segment Results of Operations – U.S. Segment
| Year Ended December 31, | ||||||||||||||||||||
| 2022 | 2021 | Change | ||||||||||||||||||
| Revenues ($ in thousands) | $ | 22,803 | $ | 22,011 | $ | 792 | ||||||||||||||
| Cost of sales ($ in thousands) | $ | 22,543 | $ | 21,901 | $ | 642 | ||||||||||||||
| Gross margin as a % of revenues | 1.1 | % | 0.5 | % | 0.6 | % | ||||||||||||||
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Our U.S. segment reported revenues in 2022 that were $0.8 million, or 4%, higher than 2021. This increase was due to (i) greater U.S. drilling activity positively impacting our wellsite business that was sold on September 1, 2022 and (ii) increased activity from our Killdeer Lodge. These items were partially offset by (i) reduced revenue from our former offshore fabrication business that was sold on November 1, 2022, (ii) reduced revenue from our Acadian Acres Lodge and (iii) reduced revenue from our former West Permian Lodge, which operated in the first nine months of 2021 and was sold in the fourth quarter of 2021.
Our U.S. segment cost of sales and services increased $0.6 million, or 3%, in 2022 compared to 2021. This increase in cost of sales and services was due to (i) greater U.S. drilling activity impacting our wellsite business that was sold on September 1, 2022 and (ii) increased activity from our Killdeer Lodge. These items were partially offset by (i) reduced costs from our former offshore fabrication business that was sold on November 1, 2022, (ii) reduced costs from our Acadian Acres Lodge and (iii) reduced costs from our West Permian Lodge, which operated in the first nine months of 2021 and was sold in the fourth quarter of 2021.
Our U.S. segment gross margin as a percentage of revenues increased from 0.5% in 2021 to 1.1% in 2022, primarily due to improved margins in our wellsite business due to operating efficiencies at higher activity levels in the first eight months of 2022, partially offset by our former West Permian Lodge, which operated in the first nine months of 2021 and was sold in the fourth quarter of 2021.
Liquidity and Capital Resources
Our primary liquidity needs are to fund capital expenditures, which in the past have included expanding and improving our hospitality services, developing new lodges and villages, purchasing or leasing land, and for general working capital needs. In addition, capital has been used to repay debt, repurchase our common and preferred shares and fund strategic business acquisitions. In the future, capital may be required to move lodges from one site to another. Historically, our primary sources of funds have been available cash, cash flow from operations, borrowings under our Credit Agreement and proceeds from equity issuances. In the future, we may seek to access the debt and equity capital markets from time to time to raise additional capital, increase liquidity, fund acquisitions, refinance debt or retire preferred shares.
The following summarizes our material future cash requirements at December 31, 2022, and the effect such obligations are expected to have on our liquidity and cash flow over the next five years (in thousands):
| Total | Less Than 1 Year | 1 – 3 Years | 3 – 5 Years | More Than 5 Years | |||||||||||||||||||||||||
| Debt maturities | $ | 132,037 | $ | 29,532 | $ | 102,505 | $ | — | $ | — | |||||||||||||||||||
Interest payments(1) | 22,825 | 9,364 | 13,461 | — | — | ||||||||||||||||||||||||
| Purchase obligations | 9,428 | 9,428 | — | — | — | ||||||||||||||||||||||||
| Non-cancelable operating lease obligations | 19,546 | 4,771 | 7,739 | 5,285 | 1,751 | ||||||||||||||||||||||||
| Asset retirement obligations – expected cash payments | 70,626 | 4,550 | 2,262 | 868 | 62,946 | ||||||||||||||||||||||||
| Total contractual cash obligations | $ | 254,462 | $ | 57,645 | $ | 125,967 | $ | 6,153 | $ | 64,697 | |||||||||||||||||||
(1)Interest payments due under the Credit Agreement, which matures on September 8, 2025; based on an interest rate of 7.8% for Canadian term loan borrowings, 7.8% for Canadian revolver borrowings and 6.1% for Australian revolver borrowings.
Our debt obligations at December 31, 2022 are reflected in our consolidated balance sheet, which is a part of our consolidated financial statements in Item 8 of this annual report. We have not entered into any material leases subsequent to December 31, 2022.
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The following table summarizes our consolidated liquidity position as of December 31, 2022 and 2021 (in thousands):
| December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Lender commitments | $ | 200,000 | $ | 200,000 | |||||||
| Borrowings against revolving credit capacity | (102,505) | (112,026) | |||||||||
| Outstanding letters of credit | (1,365) | (1,439) | |||||||||
| Unused availability | 96,130 | 86,535 | |||||||||
| Cash and cash equivalents | 7,954 | 6,282 | |||||||||
| Total available liquidity | $ | 104,084 | $ | 92,817 | |||||||
Cash totaling $91.8 million was provided by operations during 2022 compared to $88.5 million provided by operations during 2021. During 2022 and 2021, net cash used by working capital was $13.9 million and $8.8 million, respectively. The increase in cash used in working capital in 2022 compared to 2021 is largely due to the timing of customer payments and revenue recognition as it relates to mobile asset activity in Canada during 2022 compared to 2021.
Cash was used in investing activities during 2022 of $8.9 million compared to cash used in investing activities of $0.7 million during 2021. The increase in cash used in investing activities was primarily due to higher capital expenditures. Capital expenditures totaled $25.4 million and $15.6 million during 2022 and 2021, respectively. Capital expenditures in both periods were primarily maintenance related. Offsetting these capital expenditures, we received proceeds from the sale of property, plant and equipment of $16.3 million during 2022 primarily related to the sale of our Kambalda village and undeveloped land holdings in Australia, unused corporate office space and various mobile assets in Canada and our wellsite and offshore businesses in the U.S., compared to $14.3 million during 2021 primarily related to the sale of our West Permian Lodge in the U.S. and the sale of our manufacturing facility and mobile assets in Canada.
We expect our capital expenditures for 2023 to be in the range of $25 million to $30 million, which excludes any unannounced and uncommitted projects, the spending for which is contingent on obtaining customer contracts or commitments. Whether planned expenditures will actually be spent in 2023 depends on industry conditions, project approvals and schedules, customer room commitments and project and construction timing. We expect to fund these capital expenditures with available cash, cash flow from operations and revolving credit borrowings under our Credit Agreement. The foregoing capital expenditure forecast does not include any funds for strategic acquisitions, which we could pursue should the transaction economics be attractive enough to us compared to the current capital allocation priorities of debt reduction and return of capital to shareholders. We continue to monitor the global economy, commodity prices, demand for crude oil, met coal, LNG and iron ore, inflation, COVID-19 and the resultant impact on the capital spending plans of our customers in order to plan our business activities, and we may adjust our capital expenditure plans in the future.
The table below delineates historical capital expenditures split between expansionary and maintenance spending on our lodges and villages, mobile asset spending and other capital expenditures. We classify capital expenditures for the development of rooms and central facilities at our lodges and villages as expansion capital expenditures. Other capital expenditures in the table below relate to routine capital spending for support equipment, upgrades to infrastructure at our lodge and village properties and spending related to our manufacturing facilities, among other items.
Based on management’s judgment of capital spending classifications, we believe the following table represents the components of capital expenditures for the years ended December 31, 2022 and 2021 (in millions):
| Year Ended December 31, | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||||||||||||||
| Expansion | Maint | Total | Expansion | Maint | Total | ||||||||||||||||||||||||||||||
| Lodge/village | $ | 0.2 | $ | 19.7 | $ | 19.9 | $ | 2.8 | $ | 8.7 | $ | 11.5 | |||||||||||||||||||||||
| Mobile assets | — | 1.1 | 1.1 | 1.6 | 0.6 | 2.2 | |||||||||||||||||||||||||||||
| Other | 2.0 | 2.4 | 4.4 | 0.7 | 1.2 | 1.9 | |||||||||||||||||||||||||||||
| Total | $ | 2.2 | $ | 23.2 | $ | 25.4 | $ | 5.1 | $ | 10.5 | $ | 15.6 | |||||||||||||||||||||||
Expansion lodge and village spending in 2021 was primarily related to infrastructure improvements at an Australian village.
Maintenance lodge and village spending in 2022 and 2021 was primarily associated with routine maintenance projects at our major properties.
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Mobile asset spending in 2022 was primary related to routine maintenance of our mobile assets in the U.S. and Canadian markets. Mobile asset spending in 2021 was primarily associated with Canadian pipeline-related capital expenditures.
Other maintenance and expansion spending in 2022 was primarily related to mobilization of new sites at our integrated services business in Western Australia, purchases of miscellaneous equipment and supplies to support the day-to-day operations at our accommodation facilities and information technology infrastructure to support our business. Other maintenance and expansion spending in 2021 was primarily associated with purchases of miscellaneous equipment and supplies to support the day-to-day operations at our accommodation facilities and information technology infrastructure to support our business.
Net cash of $79.7 million was used in financing activities during 2022 primarily due to (i) repayments of term loan borrowings of $30.4 million, (ii) repurchases of our preferred shares and our common shares of $30.6 million and $14.2 million, respectively, (iii) net repayments under our revolving credit facilities of $3.4 million, (iv) settlement of tax obligations on vested shares under our share-based compensation plans of $1.0 million and (v) a cash dividend paid on our preferred shares in connection with the repurchase of $0.1 million. Net cash of $86.5 million was used in financing activities during 2021 primarily due to repayments of term loan borrowings of $125.5 million, settlement of tax obligations on vested shares under our share-based compensation plans of $1.1 million, debt issuance costs of $4.4 million related to our Credit Agreement and repurchases of our common shares of $4.6 million, partially offset by net borrowings under our revolving credit facilities of $49.2 million.
The following table summarizes the changes in debt outstanding during 2022 (in thousands):
| Canada | Australia | U.S. | Total | ||||||||||||||||||||
| Balance as of December 31, 2021 | $ | 174,404 | $ | 726 | $ | — | $ | 175,130 | |||||||||||||||
| Borrowings under revolving credit facilities | 254,582 | 35,123 | — | 289,705 | |||||||||||||||||||
| Repayments of borrowings under revolving credit facilities | (258,813) | (34,266) | — | (293,079) | |||||||||||||||||||
| Repayments of term loans | (30,442) | — | — | (30,442) | |||||||||||||||||||
| Translation | (9,052) | (225) | — | (9,277) | |||||||||||||||||||
| Balance at December 31, 2022 | $ | 130,679 | $ | 1,358 | $ | — | $ | 132,037 | |||||||||||||||
We believe that cash on hand and cash flow from operations will be sufficient to meet our anticipated liquidity needs for the next 12 months. If our plans or assumptions change, including as a result of the impact of COVID-19 or changes in price of and demand for oil, or are inaccurate, or if we make acquisitions, we may need to raise additional capital. Acquisitions have been, and our management believes acquisitions will continue to be, an element of our long-term business strategy. The timing, size or success of any acquisition effort and the associated potential capital commitments are unpredictable and uncertain. We may seek to fund all or part of any such efforts with proceeds from debt and/or equity issuances or may issue equity directly to the sellers. Our ability to obtain capital for additional projects to implement our growth strategy over the longer term will depend on our future operating performance, financial condition and, more broadly, on the availability of equity and debt financing. Capital availability will be affected by prevailing conditions in our industry, the global economy, the global financial markets and other factors, many of which are beyond our control. In addition, any additional debt service requirements we take on could be based on higher interest rates and shorter maturities and could impose a significant burden on our results of operations and financial condition, and the issuance of additional equity securities could result in significant dilution to shareholders.
In August 2022, our Board of Directors authorized a common share repurchase program to repurchase up to 5.0% of our total common shares which are issued and outstanding, or 685,614 common shares, over a twelve month period. See Note 17 – Common Share Repurchases to the notes to the unaudited consolidated financial statements included in Item 1 of this quarterly report for further discussion.
Credit Agreement
As of December 31, 2022, our Credit Agreement (as then amended to date, the Credit Agreement), provided for: (i) a $200.0 million revolving credit facility scheduled to mature on September 8, 2025, allocated as follows: (A) a $10.0 million senior secured revolving credit facility in favor of one of our U.S. subsidiaries, as borrower; (B) a $155.0 million senior secured revolving credit facility in favor of Civeo, as borrower; and (C) a $35.0 million senior secured revolving credit facility in favor of one of our Australian subsidiaries, as borrower, and (ii) a C$100.0 million term loan facility scheduled to be fully repaid on December 31, 2023 in favor of Civeo.
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As of December 31, 2022, we had outstanding letters of credit of $0.3 million under the U.S. facility, zero under the Australian facility and $1.1 million under the Canadian facility. We also had outstanding bank guarantees of A$0.8 million under the Australian facility.
See Note 11 - Debt to the notes to the consolidated financial statements in Item 8 of this annual report for the terms of the Credit Agreement and further discussion regarding our debt.
Dividends
The declaration and amount of all potential future dividends will be at the discretion of our Board of Directors and will depend upon many factors, including our financial condition, results of operations, cash flows, prospects, industry conditions, capital requirements of our business, covenants associated with certain debt obligations, legal requirements, regulatory constraints, industry practice and other factors the Board of Directors deems relevant. In addition, our ability to pay cash dividends on common or preferred shares is limited by covenants in the Credit Agreement. Future agreements may also limit our ability to pay dividends, and we may incur incremental taxes if we are required to repatriate foreign earnings to pay such dividends. If we elect to pay dividends in the future, the amount per share of our dividend payments may be changed, or dividends may be suspended, without advance notice. The likelihood that dividends will be reduced or suspended is increased during periods of market weakness. There can be no assurance that we will pay a dividend in the future.
The preferred shares we issued in the Noralta Acquisition were entitled to receive a 2% annual dividend on the liquidation preference (initially $10,000 per share), paid quarterly in cash or, at our option, by increasing the preferred shares’ liquidation preference, or any combination thereof. Quarterly dividends were paid in-kind beginning June 30, 2018 through December 12, 2022, thereby increasing the liquidation preference to $10,982 per share as of December 12, 2022. We repurchased 40% of the outstanding preferred shares on October 30, 2022, which included accrued cash dividends for the month of October 2022 of under $0.1 million. On December 13, 2022, the holders of the preferred shares converted all outstanding preferred shares into approximately 1.5 million common shares. Following such conversion, no further dividends are required to be paid. For further information, see Note 16 - Preferred Shares to the notes to the consolidated financial statements included in Item 8 of this annual report for further information.
Critical Accounting Policies
Our consolidated financial statements in Item 8 of this annual report have been prepared in accordance with U.S. GAAP, which require that management make numerous estimates and assumptions. Actual results could differ from those estimates and assumptions, thus impacting our reported results of operations and financial position. The critical accounting policies and estimates described in this section are those that are most important to the depiction of our financial condition and results of operations and the application of which requires management’s most subjective judgments in making estimates about the effect of matters that are inherently uncertain. We describe our significant accounting policies more fully in Note 2 - Summary of Significant Accounting Policies to the notes to consolidated financial statements in Item 8 of this annual report.
Accounting for Contingencies
We have contingent liabilities and future claims for which we have made estimates of the amount of the eventual cost to liquidate these liabilities or claims. We make an assessment of our exposure and record a provision in our accounts to cover an expected loss when we believe a loss is probable and the amount of the loss can be reasonably estimated. These liabilities and claims sometimes involve threatened or actual litigation where damages have been quantified. Other claims or liabilities have been estimated based on their fair value or our experience in these matters and, when appropriate, the advice of outside counsel or other outside experts. Upon the ultimate resolution of these uncertainties, our future reported financial results will be impacted by the difference between our estimates and the actual amounts paid to settle a liability. Examples of areas where we have made important estimates of future liabilities include insurance claims, litigation, warranty claims, contract claims and obligations.
Impairment of Tangible and Intangible Assets, including Goodwill
Goodwill. Goodwill represents the excess of the purchase price paid for acquired businesses over the allocated fair value of the related net assets after impairments, if applicable. We evaluate goodwill for impairment, at the reporting unit level, annually and when an event occurs or circumstances change to suggest that the carrying amount may not be recoverable. A reporting unit is the operating segment, or a business one level below that operating segment (the “component” level) if discrete
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financial information is prepared and regularly reviewed by management at the component level. Each segment of our business represents a separate reporting unit, and all three of our reporting units have or previously had goodwill.
In connection with the preparation of our financial statements for the three months ended March 31, 2020, we performed a quantitative goodwill impairment test as of March 31, 2020, and we reduced the value of our goodwill in our Canadian reporting unit to zero. See Note 4 – Impairment Charges to the notes to consolidated financial statements in Item 8 of this annual report for further discussion of goodwill impairment recorded in the year ended December 31, 2020.
We conduct our annual impairment test as of November 30 of each year. We compare each reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. If the carrying amount of the reporting unit exceeds its fair value, goodwill is impaired.
We are given the option to test for impairment of our goodwill by first performing a qualitative assessment to determine whether it is more likely than not (that is, likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount, including goodwill. If it is determined that it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then performing the currently prescribed quantitative impairment test is unnecessary. In developing a qualitative assessment to meet the “more-likely-than-not” threshold, each reporting unit with goodwill is assessed separately and different relevant events and circumstances are evaluated for each unit. We have the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the quantitative goodwill impairment test.
When performing our annual assessment on November 30, 2022, we performed the qualitative assessment related to our Australia reporting unit. All of our goodwill resides in our Australia reporting unit as of November 30, 2022. Qualitative factors that we considered as part of our assessment include industry and market conditions, macroeconomic conditions and financial performance of our business. After assessing these events and circumstances, we determined that it was more likely than not that the fair value of the Australia reporting unit was greater than its carrying value. Based on the interim quantitative testing performed as of March 31, 2020, the fair value of the Australia reporting unit exceeded its carrying value by more than 125%.
In performing the quantitative goodwill impairment test, we compare each reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. Because none of our reporting units has a publicly quoted market price, we must determine the value that willing buyers and sellers would place on the reporting unit through a routine sale process (a Level 3 fair value measurement). In our analysis, we target a fair value that represents the value that would be placed on the reporting unit by market participants, and value the reporting unit based on historical and projected results throughout a cycle, not the value of the reporting unit based on trough or peak earnings. The fair value of the reporting unit is estimated using a combination of (i) an analysis of trading multiples of comparable companies (Market Approach) and (ii) discounted projected cash flows (Income Approach). We also use acquisition multiples analyses in certain circumstances. The relative weighting of each approach reflects current industry and market conditions.
Market Approach - This valuation approach utilizes publicly traded comparable companies’ enterprise values, as compared to their recent and forecasted earnings before interest, taxes and depreciation (EBITDA) information. We use EBITDA because it is a widely used (1) key indicator of the cash generating capacity and (2) valuation metric of companies in our industry.
Income Approach - This valuation approach derives a present value of the reporting unit’s projected future annual cash flows over the next five years with a terminal value assumption. We use a variety of underlying assumptions to estimate these future cash flows, including assumptions relating to future economic market conditions, rates, occupancy levels, costs and expenses and capital expenditures. These assumptions can vary by each reporting unit depending on market conditions. In addition, a terminal value is estimated, using a Gordon Growth methodology with a long-term growth rate of 2%. We discount our projected cash flows using a long-term weighted average cost of capital based on our estimate of investment returns that would be required by a market participant. The discount rates used to value our reporting units for the March 31, 2020 interim goodwill impairment test ranged between 10.5% and 14.0%.
The fair value of our reporting units is affected by future oil, coal and natural gas prices, anticipated spending by our customers and the cost of capital. Our estimate of fair value requires us to use significant unobservable inputs, representative of Level 3 fair value measurements, including numerous assumptions with respect to future circumstances, such as industry and/or local market conditions that might directly impact each reporting unit’s operations in the future. We selected these valuation approaches because we believe the combination of these approaches and our best judgment regarding underlying assumptions and estimates provides us with the best estimate of fair value for each of our reporting units. We believe these valuation approaches are proven valuation techniques and methodologies for our industry and widely accepted by investors. The fair
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value of each reporting unit would change if our assumptions under these valuation approaches, or relative weighting of the valuation approaches, were materially modified. The following assumptions are significant to our evaluation process:
Business Projections - We make assumptions about the level of revenues, gross profit, operating expenses, as well as capital expenditures and net working capital requirements. These assumptions drive our planning assumptions and represent key inputs for developing our cash flow projections. These projections are developed using our internal business plans
over a five-year planning period that are updated at least annually;
Long-term Growth Rates - We also utilize an assumed long-term growth rate representing the expected rate at which our cash flow stream is projected to grow. These rates are used to calculate the terminal value and are added to the cash flows projected during our planning period; and
Discount Rates - The estimated future cash flows are then discounted at a rate that is consistent with a weighted-average cost of capital that is likely to be expected by market participants. The weighted-average cost of capital is an estimate of the overall after-tax rate of return required by equity and debt holders of a business enterprise.
Definite-Lived Tangible and Intangible Assets. The recoverability of the carrying values of tangible and intangible assets is assessed at an asset group level which represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Whenever, in management’s judgment, we review our assets for impairment in step one when events or changes in circumstances indicate that the carrying value of such asset groups may not be recoverable based on estimated future cash flows, an asset impairment evaluation is performed. Indicators of impairment might include persistent and sustained negative economic trends affecting the markets we serve, recurring cash flow losses or significantly lowered expectations of future cash flows expected to be generated by our assets. As part of the initial step, we also reevaluate the remaining useful lives and salvage values of our assets when indicators of impairment exist.
Identification of Asset Groups – The following summarizes the asset groups that we have identified in each of our reporting segments.
Our Canada segment consists of numerous lodges, as well as our mobile assets. These properties are grouped in the following asset groups:
•Core Region
◦Fort McMurray Village – North Athabasca
◦Beaver River Lodge – North Athabasca
◦Athabasca Lodge – North Athabasca
◦Hudson and Borealis Lodges – North Athabasca
•McClelland Lake Lodge – North Athabasca
•Wapasu Creek Lodge – North Athabasca
•Grey Wolf Lodge - North Athabasca
•Conklin Lodge – South Athabasca
•Anzac Lodge – South Athabasca
•Red Earth Lodge - South Athabasca
•Wabasca Lodge - South Athabasca
•Sitka Lodge – Kitimat, British Columbia
•Geetla camp – British Columbia
•Antler River camp – Manitoba
•Red Earth camp – Alberta
•Christina Lake camp – Alberta
•Mobile assets
•Various land holdings in British Columbia purchased in anticipation of potential LNG related projects
In general, the lodges are operated on a lodge by lodge basis. However, for one set of lodges (the Core Region, including Beaver River, Athabasca, Hudson and Borealis Lodges and Fort McMurray Village), there are no identifiable cash flows largely independent of the cash flows of other assets and liabilities for such lodges, and therefore, such lodges are combined into a
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single asset group. Factors such as proximity to each other, commonality of customers, common monitoring by management and operating decisions being made to optimize these lodges as a group result in these lodges being treated as a single asset group for the purposes of our impairment assessments.
Our Australia segment consists of eight villages in several regions within the country, as well as our integrated services assets and land banked assets. These properties are grouped in the following asset groups:
•Karratha – Pilbara Region, Western Australia
•Integrated services – Assets held on client owned sites in Western Australia
•Gunnedah Basin
◦Narrabri – Gunnedah Basin, New South Wales
◦Boggabri – Gunnedah Basin, New South Wales
•Bowen Basin
◦Moranbah – Bowen Basin, Queensland
◦Dysart – Bowen Basin, Queensland
◦Nebo – Bowen Basin, Queensland
◦Coppabella – Bowen Basin, Queensland
◦Middlemount – Bowen Basin, Queensland
•Various non-operational sites acquired as part of Civeo’s land-banking strategy
In general, the villages are operated on a village by village basis, except for the villages located in the Bowen Basin (Moranbah, Dysart, Nebo, Coppabella and Middlemount) and the Gunnedah Basin (Narrabri and Boggabri). The villages in the Bowen and Gunnedah Basins contain significant levels of interdependency that allow these assets to be combined into cash generating units (asset groups). Factors such as commonality of customers, location, resource basins served and common monitoring by management result in the Bowen and Gunnedah Basins to be treated as single asset groups for the purposes of our impairment assessments. Integrated services assets provide catering and managed services to the mining industry in Western Australia.
Our U.S. segment consists of lodges in two geographical areas and a wastewater treatment plant (WWTP). These properties are grouped in the following asset groups:
• Killdeer Lodge – North Dakota
•Acadian Acres Lodge – Louisiana
•Killdeer WWTP – this asset group represents a WWTP in Killdeer, North Dakota, which was constructed in early 2014
Recoverability Assessment – In performing an impairment analysis, the second step is to compare each asset group’s carrying value to estimates of undiscounted future direct cash flows associated with the asset group over the remaining useful life of the asset group's primary asset. We use a variety of underlying assumptions to estimate these future cash flows, including assumptions relating to future economic market conditions, rates, occupancy levels, costs and expenses and capital expenditures. The estimates are consistent with those used for purposes of our goodwill impairment test, as further discussed in Goodwill, above.
Fair Value Determination – If, based on the assessment, the carrying values of any of our asset groups are determined to not be recoverable as a result of the undiscounted future cash flows not exceeding the net book value of the asset group, we proceed to the third step. In this step, we compare the fair value of the respective asset group to its carrying value. Our estimate of the fair value requires us to use significant unobservable inputs, representative of Level 3 fair value measurements, including numerous assumptions with respect to future circumstances, such as industry and/or local market conditions that might directly impact each of the asset groups’ operations in the future, and are therefore uncertain. In some cases our estimate of fair value is based on appraisals from third parties.
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Our industry is cyclical and our estimates of the period over which future cash flows will be generated, as well as the predictability of these cash flows and our determination of whether a decline in value of our investment has occurred, can have a significant impact on the carrying value of these assets and, in periods of prolonged down cycles, may result in impairment losses. If this assessment indicates that the carrying values will not be recoverable, an impairment loss is recognized equal to the excess of the carrying value over the fair value of the asset group. The fair value of the asset group is based on prices of similar assets, if available, or discounted cash flows.
In estimating future cash flows, we make numerous assumptions with respect to future circumstances that might directly impact each of the asset groups’ operations in the future and are therefore uncertain. These assumptions with respect to future circumstances include future oil and coal prices, anticipated customer spending, and industry and/or local market conditions. These assumptions represent our best judgment based on the current facts and circumstances. However, different assumptions could result in a determination that the carrying values of additional asset groups are no longer recoverable based on estimated future cash flows. Our estimate of fair value is primarily calculated using the Income Approach, which derives a present value of the asset group based on the asset groups’ estimated future cash flows. We discounted our estimated future cash flows using a long-term weighted average cost of capital based on our estimate of investment returns required by a market participant. The discount rates used during the 2021 Canadian and U.S. segments long-lived asset impairment analysis ranged between 10.5% and 14.0%.
See Note 4 – Impairment Charges to the notes to consolidated financial statements in Item 8 of this annual report for further discussion of impairments of definite-lived tangible and intangible assets recorded in the years ended December 31, 2022, 2021 and 2020.
Revenue and Cost Recognition
We generally recognize accommodation, mobile facility rental, food service and other services revenues over time as our customers simultaneously receive and consume benefits as we serve our customers because of continuous transfer of control to the customer. Revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. We transfer control and recognize a sale based on a periodic (usually daily) room rate each night a customer stays in our rooms or when the services are rendered. In some contracts, rates may vary over the contract term. In these cases, revenue may be deferred and recognized on a straight-line basis over the contract term. A limited portion of our revenue is recognized at a point in time when control transfers to the customer related to small modular construction and manufacturing contracts, minor food service arrangements and optional purchases our customers make for incidental services offered at our accommodation and mobile facilities.
For significant projects, manufacturing revenues are recognized over time with progress towards completion measured using the cost based input method as the basis to recognize revenue and an estimated profit. Billings on such contracts in excess of costs incurred and estimated profits are classified as deferred revenue. Costs incurred and estimated profits in excess of billings on these contracts are recognized as unbilled receivables. Management believes this input method is the most appropriate measure of progress to the satisfaction of a performance obligation on larger modular construction and manufacturing contracts. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, estimated profitability and final contract settlements may result in revisions to projected costs and revenue and are recognized in the period in which the revisions to estimates are identified and the amounts can be reasonably estimated. Factors that may affect future project costs and margins include weather, production efficiencies, availability and costs of labor, materials and subcomponents. These factors can significantly impact the accuracy of our estimates and materially impact our future reported earnings.
Because of control transferring over time, the majority of our revenue is recognized based on the extent of progress towards completion of the performance obligation. At contract inception, we assess the goods and services promised in our contracts with customers and identify a performance obligation for each promise to transfer our customers a good or service (or bundle of goods or services) that is distinct. Our customers typically contract for hospitality services under take-or-pay contracts with terms that most often range from several months to three years. Our contract terms generally provide for a rental rate for a reserved room and an occupied room rate that compensates us for services provided. We typically contract our facilities to our customers on a fee per day basis where the goods and services promised include lodging and meals. To identify the performance obligations, we consider all of the goods and services promised in the context of the contract and the pattern of transfer to our customers.
Revenues exclude taxes assessed based on revenues such as sales or value added taxes.
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Cost of services includes labor, food, utility costs, cleaning supplies, and other costs of operating our accommodations facilities. Cost of goods sold includes all direct material and labor costs and those costs related to contract performance, such as indirect labor, supplies, tools and repairs. Selling, general and administrative costs are charged to expense as incurred.
Estimation of Useful Lives
The selection of the useful lives of many of our assets requires the judgments of our operating personnel as to the length of these useful lives. Our judgment in this area is influenced by our historical experience in operating our assets, technological developments and expectations of future demand for the assets. Should our estimates be too long or short, we might eventually report a disproportionate number of losses or gains upon disposition or retirement of our long-lived assets. We reevaluate the remaining useful lives and salvage values of our assets when certain events occur that directly impact the useful lives and salvage values, including changes in operating condition, functional capability, impairment assessment and market and economic factors. We believe our estimates of useful lives are appropriate.
Share-Based Compensation
Our historic share-based compensation is based on participating in Civeo’s 2014 Equity Participation Plan (the Plan). Our disclosures reflect only our employees’ participation in the Plans. We are required to estimate the fair value of share compensation made pursuant to awards under the Plans. An initial estimate of the fair value of each option award, restricted share award or deferred share award determines the amount of share compensation expense we will recognize in the future. For stock option awards, which were all granted prior to our May 30, 2014 spin-off from Oil States, to estimate the value of the awards under the Plan, Oil States selected a fair value calculation model. Oil States chose the Black-Scholes option pricing model to value stock options awarded under the Plan. Oil States chose this model because option awards were made under straightforward vesting terms, option prices and option lives. Utilizing the Black-Scholes option pricing model required Oil States to estimate the length of time options will remain outstanding, a risk free interest rate for the estimated period options are assumed to be outstanding, forfeiture rates, future dividends and the volatility of its common stock. All of these assumptions affect the amount and timing of future share-based compensation expense recognition. We have not made any option awards subsequent to May 30, 2014, but, in the event that we make future awards, we expect to utilize a similar valuation methodology. We will continually monitor our actual experience and change assumptions for future awards as we consider appropriate.
We also grant performance share awards under the Plan. Awards granted in 2022 are earned in amounts between 0% and 200% of the participant’s target performance share award, based on (1) the payout percentage associated with Civeo’s relative TSR rank among a peer group that includes 17 other companies and (2) the payout percentage associated with Civeo's cumulative operating cash flow over the performance period relative to a preset target. The fair value of the TSR portion of each award was estimated using a Monte Carlo simulation pricing model. We chose this model because the performance awards contain complex vesting terms. Utilizing the Monte Carlo simulation pricing model required us to estimate the risk-free interest rate and the expected market price volatility of our common shares as well as the peer group of companies over a time period equal to the expected term of the award. The fair value of the operating cash flow portion of each award was based on the closing market price of our common shares on the date of grant. We evaluate the probability of achieving the performance criteria throughout the performance period and make adjustments based on the number of shares expected to vest based on our estimate of the most probable performance outcome. The resulting costs for each portion of the award is recognized over the period during which an employee is required to provide service in exchange for the awards, usually the vesting period. For additional details, see Note 19 – Share-Based Compensation to the notes to the consolidated financial statements included in Item 8 of this annual report.
Income Taxes
We follow the liability method of accounting for income taxes in accordance with current accounting standards regarding the accounting for income taxes. Under this method, deferred income taxes are recorded based upon the differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws in effect at the time the underlying assets or liabilities are recovered or settled.
When our earnings from foreign subsidiaries are considered to be indefinitely reinvested, no provision for Canadian income taxes is made for these earnings. If any of the subsidiaries have a distribution of earnings in the form of dividends or otherwise, we could be subject to both Canadian income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to various foreign countries.
We record a valuation allowance in each reporting period when our management believes that it is more likely than not that any recorded deferred tax asset will not be realized. Our management will continue to evaluate the appropriateness of the
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valuation allowance in the future, based upon our current and historical operating results and other potential sources of future taxable income. See Note 14 – Income Taxes to the notes to consolidated financial statements in Item 8 of this annual report for further discussion.
In accounting for income taxes, we are required to estimate a liability for future income taxes for any uncertainty for potential income tax exposures. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for anticipated tax audit issues in Canada and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due, including an accrual of interest and penalties, if applicable, related to the unrecognized tax benefits. If we ultimately determine that payment of these amounts is unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine that the liability is no longer necessary. We record an additional charge in our provision for taxes in the period in which we determine that the recorded tax liability is less than we expect the ultimate assessment to be.
Recent Accounting Pronouncements
See Note 2 – Summary of Significant Accounting Policies – Recent Accounting Pronouncements to the notes to consolidated financial statements in Item 8 of this annual report for further discussion.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
Our principal market risks are our exposure to changes in interest rates and foreign currency exchange rates.
Interest Rate Risk
We have credit facilities that are subject to the risk of higher interest charges associated with increases in interest rates. As of December 31, 2022, we had $132.0 million of outstanding floating-rate obligations under our credit facilities. These floating-rate obligations expose us to the risk of increased interest expense in the event of increases in short-term interest rates. If floating interest rates increased by 100 basis points, our consolidated interest expense would increase by approximately $1.3 million annually, based on our floating-rate debt obligations and interest rates in effect as of December 31, 2022.
Foreign Currency Exchange Rate Risk
Our operations are conducted in various countries around the world, and we receive revenue and pay expenses from these operations in a number of different currencies. As such, our earnings are subject to movements in foreign currency exchange rates when transactions are denominated in (i) currencies other than the U.S. dollar, which is our reporting currency, or (ii) the functional currency of our subsidiaries, which is not necessarily the U.S. dollar. Excluding intercompany balances, our Canadian dollar and Australian dollar functional currency net assets total approximately C$189 million and A$232 million, respectively, at December 31, 2022. We use a sensitivity analysis model to measure the impact of a 10% adverse movement of foreign currency exchange rates against the U.S. dollar. A hypothetical 10% adverse change in the value of the Canadian dollar and Australian dollar relative to the U.S. dollar as of December 31, 2022 would result in translation adjustments of approximately $19 million and $23 million, respectively, recorded in other comprehensive loss. Although we do not currently have any foreign exchange agreements outstanding, in order to reduce our exposure to fluctuations in currency exchange rates, we may enter into foreign exchange agreements with financial institutions in the future.
ITEM 8. Financial Statements and Supplementary Data
Our Consolidated Financial Statements and supplementary data appear on pages 71 through 106 of this Annual Report on Form 10-K and are incorporated by reference into this Item 8.
ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
There were no changes in or disagreements on any matters of accounting principles or financial statement disclosure between us and our independent auditors during our two most recent years or any subsequent interim period.
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ITEM 9A. Controls and Procedures
(i) Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this annual report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2022 at the reasonable assurance level.
(ii) Internal Control Over Financial Reporting
(a) Management's annual report on internal control over financial reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with GAAP. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of management and our directors, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Accordingly, even effective internal control over financial reporting can only provide reasonable assurance of achieving their control objectives.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2022 was conducted. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control–Integrated Framework (2013 Framework). Based on our assessment we believe that, as of December 31, 2022, our internal control over financial reporting is effective based on those criteria.
(b) Attestation report of the registered public accounting firm.
The attestation report of Ernst & Young LLP, our independent registered public accounting firm, on our internal control over financial reporting is set forth in this annual report on page 74 and is incorporated herein by reference.
(c) Changes in internal control over financial reporting.
During the three months ended December 31, 2022, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. Other Information
Not applicable.
ITEM 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
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PART III
ITEM 10. Directors, Executive Officers and Corporate Governance
The information required by Item 10 hereby is incorporated by reference to such information as set forth in the Company's Definitive Proxy Statement for the 2023 Annual General Meeting of Shareholders.
The Board of Directors of the Company has documented its governance practices by adopting several corporate governance policies. These governance policies, including the Company's Corporate Governance Guidelines, Corporate Code of Business Conduct and Ethics and Financial Code of Ethics for Senior Officers, as well as the charters for the committees of the Board of Directors (Audit Committee, Compensation Committee, Finance and Investment Committee and Environmental, Social, Governance and Nominating Committee) may also be viewed at the Company's website. The Financial Code of Ethics for Senior Officers applies to our principal executive officer, principal financial officer, principal accounting officer and certain other senior officers. We intend to disclose any amendments to or waivers from our Financial Code of Ethics for Senior Officers by posting such information on our website at www.civeo.com within four business days following the date of the amendment or waiver. Copies of such documents will be sent to shareholders free of charge upon written request to the corporate secretary at the address shown on the cover page of this annual report.
ITEM 11. Executive Compensation
The information required by Item 11 hereby is incorporated by reference to such information as set forth in the Company's Definitive Proxy Statement for the 2023 Annual General Meeting of Shareholders.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
The information required by Item 12 hereby is incorporated by reference to such information as set forth in the Company's Definitive Proxy Statement for the 2023 Annual General Meeting of Shareholders.
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
The information required by Item 13 hereby is incorporated by reference to such information as set forth in the Company's Definitive Proxy Statement for the 2023 Annual General Meeting of Shareholders.
ITEM 14. Principal Accounting Fees and Services
The information required by Item 14 hereby is incorporated by reference to such information as set forth in the Company's Definitive Proxy Statement for the 2023 Annual General Meeting of Shareholders.
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PART IV
ITEM 15. Exhibits, Financial Statement Schedules
(a) Index to Financial Statements, Financial Statement Schedules and Exhibits
(1) Financial Statements: Reference is made to the index set forth on page 71 of this Annual Report on Form 10-K.
(2) Financial Statement Schedules: No schedules have been included herein because the information required to be submitted has been included in the Consolidated Financial Statements or the Notes thereto, or the required information is inapplicable.
(3) Index of Exhibits: See Index of Exhibits, below, for a list of those exhibits filed herewith, which index also includes and identifies management contracts or compensatory plans or arrangements required to be filed as exhibits to this Annual Report on Form 10-K by Item 601 of Regulation S-K.
(b) Index of Exhibits
| Exhibit No. | Description | |||||||
| 2.1 | ||||||||
| 2.2 | ||||||||
| 2.3 | ||||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| 3.3* | ||||||||
| 4.1 | ||||||||
| 4.2 | ||||||||
| 4.3 | Description of Securities (incorporated herein by reference to Exhibit 4.3 to the Annual Report on Form 10-K (File No. 001-36246) filed on February 26, 2021). | |||||||
| 10.1† | ||||||||
| 10.2† | ||||||||
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| 10.3† | Performance Share Award Program under the 2014 Equity Participation Plan (incorporated herein by reference to Exhibit 10.3 to the Annual Report on Form 10-K (File No. 001-36246) filed on February 26, 2021). | |||||||
| 10.4† | ||||||||
| 10.5† | ||||||||
| 10.6† | ||||||||
| 10.7† | ||||||||
| 10.8† | ||||||||
| 10.9† | ||||||||
| 10.10† | ||||||||
| 10.11† | ||||||||
| 10.12† | ||||||||
| 10.13† | ||||||||
| 10.14† | ||||||||
| 10.15† | ||||||||
| 10.16† | Variation to Executive Services Agreement dated May 30, 2012 between Peter McCann and Civeo Pty Ltd. (incorporated herein by reference to Exhibit 10.18 to the Annual Report on Form 10-K (File No. 001-36246) filed on February 26, 2021). | |||||||
| 10.17† | ||||||||
| 10.18† | ||||||||
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| 10.19† | ||||||||
| 10.20† | ||||||||
| 10.21† | ||||||||
| 10.22 | ||||||||
| 10.23† | ||||||||
| 10.24† | ||||||||
| 10.25†* | ||||||||
| 10.26† | ||||||||
| 21.1* | ||||||||
| 23.1* | ||||||||
| 31.1* | ||||||||
| 31.2* | ||||||||
| 32.1** | ||||||||
| 32.2** | ||||||||
| 101.INS* | Inline XBRL Instance Document | |||||||
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document | |||||||
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||||||
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document | |||||||
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |||||||
| * | Filed herewith. | ||||
| † | Management contracts and compensatory plans and arrangements. | ||||
| ** | Furnished herewith. | ||||
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NOTE: Pursuant to the rules and regulations of the Securities and Exchange Commission, we have filed or incorporated by reference the agreements referenced above as exhibits to this Annual Report on Form 10-K. The agreements have been filed to provide investors with information regarding their respective terms. The agreements are not intended to provide any other factual information about Civeo or its business or operations. In particular, the assertions embodied in any representations, warranties and covenants contained in the agreements may be subject to qualifications with respect to knowledge and materiality different from those applicable to investors and may be qualified by information in confidential disclosure schedules not included with the exhibits. These disclosure schedules may contain information that modifies, qualifies and creates exceptions to the representations, warranties and covenants set forth in the agreements. Moreover, certain representations, warranties and covenants in the agreements may have been used for the purpose of allocating risk between the parties, rather than establishing matters as facts. In addition, information concerning the subject matter of the representations, warranties and covenants may have changed after the date of the respective agreement, which subsequent information may or may not be fully reflected in our public disclosures. Accordingly, investors should not rely on the representations, warranties and covenants in the agreements as characterizations of the actual state of facts about Civeo or its business or operations on the date hereof.
ITEM 16. Form 10-K Summary
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on February 28, 2023.
| CIVEO CORPORATION | |||||||||||
| By | /s/ CAROLYN J. STONE | ||||||||||
| Carolyn J. Stone | |||||||||||
Senior Vice President, Chief Financial Officer and Treasurer (Duly Authorized Officer and Principal Financial Officer) | |||||||||||
| Signature | Title | |||||||
| /s/ RICHARD A. NAVARRE | Chairman of the Board | |||||||
| Richard A. Navarre | ||||||||
| /s/ BRADLEY J. DODSON | Director, President & Chief Executive Officer | |||||||
| Bradley J. Dodson | (Principal Executive Officer) | |||||||
| /s/ CAROLYN J. STONE | Senior Vice President, Chief Financial Officer and Treasurer | |||||||
| Carolyn J. Stone | (Principal Financial Officer and Accounting Officer) | |||||||
| /s/ C. RONALD BLANKENSHIP | Director | |||||||
| C. Ronald Blankenship | ||||||||
| /s/ JAY K. GREWAL | Director | |||||||
| Jay K. Grewal | ||||||||
| /s/ MARTIN A. LAMBERT | Director | |||||||
| Martin A. Lambert | ||||||||
| /s/ MICHAEL MONTELONGO | Director | |||||||
| Michael Montelongo | ||||||||
| /s/ CONSTANCE B. MOORE | Director | |||||||
| Constance B. Moore | ||||||||
| /s/ CHARLES SZALKOWSKI | Director | |||||||
| Charles Szalkowski | ||||||||
| /s/ TIMOTHY O. WALL | Director | |||||||
| Timothy O. Wall | ||||||||
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CIVEO CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Page No. | |||||
71
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Civeo Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Civeo Corporation (“the Company”) as of December 31, 2022 and 2021, and the related consolidated statements of operations, comprehensive loss, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 28, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
72
Realizability of Deferred Tax Assets | |||||
Description of the Matter | As more fully described in Note 2 and Note 14 to the consolidated financial statements, at December 31, 2022, the Company had deferred tax assets related to deductible temporary differences and net loss carryforwards of $62.6 million, net of an $82.9 million valuation allowance. Deferred tax assets are reduced by a valuation allowance if, based on the weight of all available evidence, in management’s judgment it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. Auditing management’s assessment of the realizability of its deferred tax assets was complex and involved a high degree of subjectivity because the assessment process includes scheduling the use of the applicable deferred tax assets, which includes management’s judgments on significant assumptions that may be affected by future market or economic conditions. | ||||
How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company's process to assess the realizability of its deferred tax assets. For example, we tested controls over management's scheduling of the future reversal of existing taxable temporary differences. To test the Company’s assessment of the realizability of its deferred tax assets, our audit procedures included, among others, testing the completeness and accuracy of the Company’s scheduling of the reversal of existing temporary taxable differences. With the assistance of our tax specialists, we verified the appropriateness of the projected usage of tax attributes and assessed the reasonableness of the timing of the reversal of the deferred tax liabilities into taxable income. For example, in certain instances, we compared the projections of the future reversals to other forecasted information prepared by the Company. | ||||
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2013.
Houston, Texas
February 28, 2023
73
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Civeo Corporation
Opinion on Internal Control over Financial Reporting
We have audited Civeo Corporation’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Civeo Corporation (“the Company”) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2022 and 2021, and the related consolidated statements of operations, comprehensive loss, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and our report dated February 28, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s annual report on internal control over financial reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
February 28, 2023
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CIVEO CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
| YEAR ENDED DECEMBER 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Revenues: | |||||||||||||||||
| Service and other | $ | $ | $ | ||||||||||||||
| Rental | |||||||||||||||||
| Product | |||||||||||||||||
| Costs and expenses: | |||||||||||||||||
| Service and other costs | |||||||||||||||||
| Rental costs | |||||||||||||||||
| Product costs | |||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||
| Depreciation and amortization expense | |||||||||||||||||
| Impairment expense | |||||||||||||||||
| Other operating expense | |||||||||||||||||
| Operating income (loss) | ( | ||||||||||||||||
| Interest expense | ( | ( | ( | ||||||||||||||
| Loss on extinguishment of debt | ( | ( | |||||||||||||||
| Interest income | |||||||||||||||||
| Other income | |||||||||||||||||
| Income (loss) before income taxes | ( | ||||||||||||||||
| Income tax (expense) benefit | ( | ( | |||||||||||||||
| Net income (loss) | ( | ||||||||||||||||
| Less: Net income attributable to noncontrolling interest | |||||||||||||||||
| Net income (loss) attributable to Civeo Corporation | ( | ||||||||||||||||
| Less: Dividends attributable to Class A preferred shares | |||||||||||||||||
| Net income (loss) attributable to Civeo common shareholders | $ | $ | ( | $ | ( | ||||||||||||
Per Share Data (see Note 6) (1) | |||||||||||||||||
| Basic net loss per share attributable to Civeo Corporation common shareholders | $ | ( | $ | ( | $ | ( | |||||||||||
| Diluted net loss per share attributable to Civeo Corporation common shareholders | $ | ( | $ | ( | $ | ( | |||||||||||
| Weighted average number of common shares outstanding: | |||||||||||||||||
| Basic | |||||||||||||||||
| Diluted | |||||||||||||||||
(1)Reflects our 1-for-12 reverse share split that became effective November 19, 2020. See Note 1 - Description of Business and Basis of Presentation to the notes to the consolidated financial statements in Item 8 of this annual report for further discussion.
The accompanying notes are an integral part of these financial statements.
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CIVEO CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In Thousands)
| YEAR ENDED DECEMBER 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Net income (loss) | $ | $ | $ | ( | |||||||||||||
| Other comprehensive income (loss), net of taxes: | |||||||||||||||||
Foreign currency translation adjustment, net of | ( | ( | |||||||||||||||
| Total other comprehensive income (loss), net of taxes | ( | ( | |||||||||||||||
| Comprehensive loss | ( | ( | ( | ||||||||||||||
| Less: Comprehensive income attributable to noncontrolling interest | |||||||||||||||||
| Comprehensive loss attributable to Civeo Corporation | $ | ( | $ | ( | $ | ( | |||||||||||
The accompanying notes are an integral part of these financial statements.
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CIVEO CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands)
| DECEMBER 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| ASSETS | ||||||||||||||
| Current assets: | ||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
| Accounts receivable, net | ||||||||||||||
| Inventories | ||||||||||||||
| Prepaid expenses | ||||||||||||||
| Other current assets | ||||||||||||||
| Assets held for sale | ||||||||||||||
| Total current assets | ||||||||||||||
| Property, plant and equipment, net | ||||||||||||||
| Goodwill | ||||||||||||||
| Other intangible assets, net | ||||||||||||||
| Operating lease right-of-use assets | ||||||||||||||
| Other noncurrent assets | ||||||||||||||
| Total assets | $ | $ | ||||||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||
| Current liabilities: | ||||||||||||||
| Accounts payable | $ | $ | ||||||||||||
| Accrued liabilities | ||||||||||||||
| Income taxes | ||||||||||||||
| Current portion of long-term debt | ||||||||||||||
| Deferred revenue | ||||||||||||||
| Other current liabilities | ||||||||||||||
| Total current liabilities | ||||||||||||||
| Long-term debt, less current maturities | ||||||||||||||
| Deferred income taxes | ||||||||||||||
| Operating lease liabilities | ||||||||||||||
| Other noncurrent liabilities | ||||||||||||||
| Total liabilities | ||||||||||||||
| Commitments and contingencies (Note 15) | ||||||||||||||
| Shareholders’ Equity: | ||||||||||||||
Preferred shares (Class A Series 1, | ||||||||||||||
Common shares ( | ||||||||||||||
| Additional paid-in capital | ||||||||||||||
| Accumulated deficit | ( | ( | ||||||||||||
Common shares held in treasury at cost, | ( | ( | ||||||||||||
| Accumulated other comprehensive loss | ( | ( | ||||||||||||
Total Civeo Corporation shareholders’ equity | ||||||||||||||
| Noncontrolling interest | ||||||||||||||
| Total shareholders’ equity | ||||||||||||||
Total liabilities and shareholders’ equity | $ | $ | ||||||||||||
The accompanying notes are an integral part of these financial statements.
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CIVEO CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS’ EQUITY
(In Thousands)
| Attributable to Civeo | |||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Shares | Common Shares | ||||||||||||||||||||||||||||||||||||||||||||||
| Par Value | Additional Paid-in Capital | Accumulated Deficit | Treasury Shares | Accumulated Other Comprehensive Income (Loss) | Noncontrolling Interest | Total Shareholders’ Equity | |||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2019 | $ | $ | $ | $ | ( | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||
| Currency translation adjustment | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Dividends paid | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Paid-in-kind dividends attributable to Class A preferred shares | — | — | ( | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | ( | — | — | |||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | $ | ( | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Currency translation adjustment | — | — | — | — | — | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Dividends paid | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Paid-in-kind dividends attributable to Class A preferred shares | — | — | ( | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Common shares repurchases | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | ( | — | — | |||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Currency translation adjustment | — | — | — | — | — | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Dividends paid | — | — | — | ( | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Paid-in-kind dividends attributable to Class A preferred shares | — | — | ( | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Preferred shares repurchased | ( | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Preferred shares converted to common shares | ( | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Common shares repurchases | — | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | ( | — | — | |||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||
| Preferred Shares | Common Shares (in thousands) (1) | ||||||||||
| Balance, December 31, 2019 | |||||||||||
| Share-based compensation | |||||||||||
| Balance, December 31, 2020 | |||||||||||
| Share-based compensation | |||||||||||
| Shares repurchased | ( | ||||||||||
| Balance, December 31, 2021 | |||||||||||
| Share-based compensation | |||||||||||
| Shares repurchased | ( | ( | |||||||||
| Preferred shares converted to common shares | ( | ||||||||||
| Balance, December 31, 2022 | |||||||||||
(1)Reflects our 1-for-12 reverse share split that became effective November 19, 2020. See Note 1 - Description of Business and Basis of Presentation to the notes to the consolidated financial statements in Item 8 of this annual report for further discussion.
The accompanying notes are an integral part of these financial statements.
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CIVEO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
| YEAR ENDED DECEMBER 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Cash flows from operating activities: | |||||||||||||||||
| Net income (loss) | $ | $ | $ | ( | |||||||||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||||||||||
| Depreciation and amortization | |||||||||||||||||
| Impairment charges | |||||||||||||||||
| Loss on extinguishment of debt | |||||||||||||||||
| Deferred income tax expense (benefit) | ( | ||||||||||||||||
| Non-cash compensation charge | |||||||||||||||||
| Gain on disposals of assets | ( | ( | ( | ||||||||||||||
| Provision for credit losses, net of recoveries | |||||||||||||||||
| Other, net | ( | ||||||||||||||||
| Changes in operating assets and liabilities: | |||||||||||||||||
| Accounts receivable | ( | ( | |||||||||||||||
| Inventories | ( | ( | |||||||||||||||
| Accounts payable and accrued liabilities | |||||||||||||||||
| Taxes payable | ( | ( | |||||||||||||||
| Other current assets and liabilities, net | ( | ( | |||||||||||||||
| Net cash flows provided by operating activities | |||||||||||||||||
| Cash flows from investing activities: | |||||||||||||||||
| Capital expenditures | ( | ( | ( | ||||||||||||||
| Proceeds from disposition of property, plant and equipment | |||||||||||||||||
| Other, net | |||||||||||||||||
| Net cash flows used in investing activities | ( | ( | ( | ||||||||||||||
| Cash flows from financing activities: | |||||||||||||||||
| Revolving credit borrowings | |||||||||||||||||
| Revolving credit repayments | ( | ( | ( | ||||||||||||||
| Term loan repayments | ( | ( | ( | ||||||||||||||
| Debt issuance costs | ( | ( | |||||||||||||||
| Repurchases of common shares | ( | ( | |||||||||||||||
| Repurchases of preferred shares | ( | ||||||||||||||||
| Other, net | ( | ( | ( | ||||||||||||||
| Net cash flows used in financing activities | ( | ( | ( | ||||||||||||||
| Effect of exchange rate changes on cash | ( | ( | |||||||||||||||
| Net change in cash and cash equivalents | |||||||||||||||||
| Cash and cash equivalents, beginning of period | |||||||||||||||||
| Cash and cash equivalents, end of period | $ | $ | $ | ||||||||||||||
| Non-cash investing activities: | |||||||||||||||||
| Capital expenditure additions accrued at end of period | |||||||||||||||||
| Non-cash financing activities: | |||||||||||||||||
| Preferred dividends paid-in-kind | |||||||||||||||||
The accompanying notes are an integral part of these financial statements.
79
1.DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of the Business
We provide hospitality services to the natural resources industry in Canada, Australia and the United States (U.S.) We provide a full suite of services for our guests, including lodging, catering and food service, housekeeping and maintenance at accommodation facilities that we or our customers own. In many cases, we provide services that support the day-to-day operations of these facilities, such as laundry, facility management and maintenance, water and wastewater treatment, power generation, communication systems, security and logistics. We also offer development activities for workforce accommodation facilities, including site selection, permitting, engineering and design, manufacturing management and site construction, along with providing hospitality services once the facility is constructed. We primarily operate in some of the world’s most active oil, metallurgical (met) coal, liquefied natural gas (LNG) and iron ore producing regions, and our customers include major and independent oil companies, mining companies, engineering companies and oilfield and mining service companies. We operate in three principal reportable business segments – Canada, Australia and the U.S.
Basis of Presentation
Unless otherwise stated or the context otherwise indicates: (i) all references in these consolidated financial statements to “Civeo,” “us,” “our” or “we” refer to Civeo Corporation and its consolidated subsidiaries; and (ii) all references in this report to “dollars” or “$” are to U.S. dollars.
Reverse Share Split
On November 19, 2020, we effected a reverse share split where each twelve issued and outstanding common shares were converted into one common share. Our common shares began trading on a reverse share split adjusted basis on November 19, 2020. A total of 14,215,169
The reverse share split did not affect the number of authorized or issued and outstanding shares of our preferred shares. As a result of the reverse share split, the conversion price for the Company’s outstanding Class A Series 1 preferred shares (Series A preferred shares) was automatically increased to $39.60 for each Series A preferred share (previously it was $3.30 per Series A preferred share).
All authorized, issued and outstanding shares and per share amounts contained in the accompanying consolidated financial statements have been adjusted to reflect this reverse share split for all prior periods presented.
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash
We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Allowance for Credit Losses
We are exposed to credit losses primarily through the sale of our products and services. We maintain allowances for credit losses for estimated losses resulting from the inability of our customers to make required payments. If a trade receivable is deemed to be uncollectible, such receivable is charged-off against the allowance for credit losses account. Our expected loss allowance methodology for accounts receivable is developed using historical collection experience, current and future economic and market conditions and a review of the current status of customers' trade receivables. Due to the short-term nature of such receivables, the estimate of the amount of accounts receivable that may not be collected is based on an aging of the accounts receivable balances and the financial condition of customers. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. If we have no previous experience with the customer, we typically obtain reports from various credit organizations to ensure that the customer has a history of paying its creditors. We may also request financial information, including combined financial statements or other documents, to ensure
80
Inventories
Inventories consist of work in process, raw materials and supplies and materials for the construction and operation of remote accommodation facilities. Inventories also include food, raw materials, labor, subcontractor charges, manufacturing overhead and catering and other supplies needed for operation of our facilities. Inventories are carried at the lower of cost or net realizable value. The cost of inventories is determined on an average cost or specific-identification method.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost or at estimated fair market value at acquisition date if acquired in a business combination, and depreciation is computed, for assets owned or recorded under capital lease, using the straight-line method, after allowing for salvage value where applicable, over the estimated useful lives of the assets. Leasehold improvements are capitalized and amortized over the lesser of the life of the lease or the estimated useful life of the asset.
We record the fair value of a liability, which reflects the estimated present value of the amount of asset removal and site reclamation costs related to the retirement of our assets, for an asset retirement obligation (ARO) when it is incurred (typically when the asset is installed). When the liability is initially recorded, we capitalize the associated asset retirement cost by increasing the carrying amount of the related property, plant and equipment. See Asset Retirement Obligations below for further discussion.
Expenditures for repairs and maintenance are charged to expense when incurred. Expenditures for major renewals and betterments, which extend the useful lives of existing equipment, are capitalized and depreciated. Upon retirement or disposition of property and equipment, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in the consolidated statements of operations.
Business Combinations
We evaluate acquisitions of assets and other similar transactions to assess whether or not the transaction should be accounted for as a business combination by assessing whether or not we have acquired inputs and processes that have the ability to create outputs. If determined to be a business combination, we account for a business acquisition under the acquisition method of accounting. The accounting rules governing business combinations require the acquiring entity in a business combination to recognize the fair value of all assets acquired and liabilities assumed and establish the acquisition date as the fair value measurement point. Accordingly, we recognize assets acquired and liabilities assumed in a business combination based on the fair value estimates as of the date of acquisition. Goodwill is measured as the excess of the fair value of the consideration paid over the fair value of the identified net assets, including intangible assets, acquired.
The fair value measurement of the identified net assets requires the significant use of estimates and is based on information that was available to management at the time the purchase price allocation was prepared. We utilize recognized valuation techniques, including the cost approach, the market approach and the income approach, to value the net assets acquired. The impact of changes to the estimated fair values of assets acquired and liabilities assumed is recorded in the reporting period in which the adjustment is identified. Final valuations of assets and liabilities are obtained and recorded within one year from the date of the acquisition.
Impairment of Long-Lived Assets
The recoverability of the carrying values of long-lived assets, including amortizable intangible assets, is assessed in step one whenever, in management’s judgment, events or changes in circumstances indicate that the carrying value of such asset groups may not be recoverable based on estimated future cash flows. If this assessment indicates that the carrying values will not be recoverable, as determined based on undiscounted cash flows over the remaining useful lives, an impairment loss is recognized. The impairment loss equals the excess of the carrying value over the fair value of the asset group.
In performing this analysis, the second step is to review asset groups at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. For each asset group, we compare its carrying value to estimates of undiscounted future cash flows. We use a variety of underlying assumptions to estimate these future cash flows,
81
See Note 4 – Impairment Charges for a discussion of impairment charges we recognized in 2022, 2021 and 2020 related to our long-lived assets.
Goodwill and Other Intangible Assets
Goodwill. Goodwill represents the excess of the purchase price paid for acquired businesses over the allocated fair value of the related net assets after impairments, if applicable. All of our goodwill as of December 31, 2022 was included in our Australia reporting unit.
We evaluate goodwill for impairment, at the reporting unit level, annually and when an event occurs or circumstances change to suggest that the carrying amount may not be recoverable. A reporting unit is the operating segment, or a business one level below that operating segment (the “component” level) if discrete financial information is prepared and regularly reviewed by management at the component level. Each segment of our business represents a separate reporting unit.
In connection with the preparation of our financial statements for the three months ended March 31, 2020, we performed a quantitative goodwill impairment test as of March 31, 2020, which resulted in a reduction of the value of our goodwill in our Canadian reporting unit to zero. See Note 4 – Impairment Charges for further discussion of goodwill impairments recorded in the year ended December 31, 2020.
We conduct our annual impairment test as of November 30 of each year. We compare each reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. If the carrying amount of the reporting unit exceeds its fair value, goodwill is impaired.
We are given the option to test for impairment of our goodwill by first performing a qualitative assessment to determine whether it is more likely than not (that is, likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount, including goodwill. If it is determined that it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then performing the currently prescribed quantitative impairment test is unnecessary. In developing a qualitative assessment to meet the “more-likely-than-not” threshold, each reporting unit with goodwill is assessed separately and different relevant events and circumstances are evaluated for each unit. We have the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the quantitative goodwill impairment test.
When performing our annual assessment on November 30, 2022, 2021 and 2020, we performed a qualitative assessment related to goodwill at our Australia reporting unit. Qualitative factors that we considered as part of our assessment included industry and market conditions, macroeconomic conditions and the financial performance of our Australian business. We also noted that, based on the interim quantitative testing performed as of March 31, 2020, the estimated fair value of the Australia reporting unit exceeded its carrying value by more than 125 %. After assessing these events and circumstances, we determined that, as of November 30, 2022, it was more likely than not that the fair value of the Australia reporting unit was greater than its carrying value.
In performing the quantitative goodwill impairment test, we compare each reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. Because none of our reporting units has a publicly quoted market price, we must determine the value that willing buyers and sellers would place on the reporting unit through a routine sale process (a Level 3 fair value measurement). In our analysis, we target a fair value that represents the value that would be placed on the reporting unit by market participants, and value the reporting unit based on historical and projected results throughout a cycle, not the value of the reporting unit based on trough or peak earnings. The fair value of the reporting unit is estimated using a combination of (i) an analysis of trading multiples of comparable companies (Market Approach) and (ii) discounted projected cash flows (Income Approach). The relative weighting of each approach reflects current industry and market conditions.
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Market Approach - This valuation approach utilizes publicly traded comparable companies’ enterprise values, as compared to their recent and forecasted earnings before interest, taxes and depreciation (EBITDA) information. We use EBITDA because it is a widely used key indicator of the cash generating capacity of companies in our industry.
Income Approach - This valuation approach derives a present value of the reporting unit’s projected future annual cash flows over the next five years with a terminal value assumption. We use a variety of underlying assumptions to estimate these future cash flows, including assumptions relating to future economic market conditions, rates, occupancy levels, costs and expenses and capital expenditures. These assumptions can vary by each reporting unit depending on market conditions. In addition, a terminal value is estimated, using a Gordon Growth methodology with a long-term growth rate of 2 %. We discount our projected cash flows using a long-term weighted average cost of capital based on our estimate of investment returns that would be required by a market participant.
The fair value of our reporting units is affected by future oil, coal and natural gas prices, anticipated spending by our customers, and the cost of capital. Our estimate of fair value requires us to use significant unobservable inputs, representative of Level 3 fair value measurements, including numerous assumptions with respect to future circumstances, such as industry and/or local market conditions that might directly impact each of the reporting units’ operations in the future. We selected these valuation approaches because we believe the combination of these approaches and our best judgment regarding underlying assumptions and estimates provides us with the best estimate of fair value for each of our reporting units. We believe these valuation approaches are proven valuation techniques and methodologies for our industry and widely accepted by investors. The fair value of each reporting unit would change if our assumptions under these valuation approaches, or relative weighting of the valuation approaches, were materially modified.
See Note 9 – Goodwill and Other Intangible Assets for further information.
Foreign Currency and Other Comprehensive Income
Gains and losses resulting from consolidated balance sheet translation of foreign operations where a foreign currency is the functional currency are included as a separate component of accumulated other comprehensive income within shareholders’ equity representing substantially all of the balances within accumulated other comprehensive income. Remeasurements of intercompany loans denominated in a different currency than the functional currency of the entity that are of a long-term investment nature are recognized as other comprehensive income within shareholders’ equity. Gains and losses resulting from consolidated balance sheet remeasurements of assets and liabilities denominated in a different currency than the functional currency, other than intercompany loans that are of a long-term investment nature, are included in the consolidated statements of operations as incurred. For the years ended December 31, 2022, 2021, and 2020, we recognized approximately $0.1 million, $0.3 million and $0.5 million in foreign currency losses, respectively.
Foreign Currency Exchange Rate Risk
A significant portion of revenues, earnings and net investments in foreign affiliates are exposed to changes in foreign currency exchange rates. We seek to manage our foreign exchange risk in part through operational means, including managing expected local currency revenues in relation to local currency costs and local currency assets in relation to local currency liabilities. We have not entered into any foreign currency forward contracts.
Revenue and Cost Recognition
For the majority of our operations and contracts, we generally recognize accommodation, mobile facility rental, food service and other services revenues over time as our customers simultaneously receive and consume benefits as we serve our customers because of continuous transfer of control to the customer. Revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. We transfer control and recognize a sale based on a periodic (usually daily) room rate each night a customer stays in our rooms or when the services are rendered. In some contracts, rates may vary over the contract term. In these cases, revenue may be deferred and recognized on a straight-line basis over the contract term.
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Because of control transferring over time, the majority of our revenue is recognized based on the extent of progress towards completion of the performance obligation. At contract inception, we assess the goods and services promised in our contracts with customers and identify a performance obligation for each promise to transfer our customers a good or service (or bundle of goods or services) that is distinct. Our customers typically contract for hospitality services under take-or-pay contracts with terms that most often range from several months to three years. Our contract terms generally provide for a rental rate for a reserved room and an occupied room rate that compensates us for services provided. We typically contract our facilities to our customers on a fee per day basis where the goods and services promised include lodging and meals. To identify the performance obligations, we consider all of the goods and services promised in the context of the contract and the pattern of transfer to our customers.
A limited portion of our revenue is recognized at a point in time when control transfers to the customer related to small modular construction and manufacturing contracts. We recognize our manufacturing and construction contract revenue over time as we provide services to satisfy our performance obligations. We generally use the cost based percentage-of-completion measure of progress as it best depicts how control transfers to our clients. The cost based approach measures progress towards completion based on the ratio of contract cost incurred to date compared to total estimated contract cost. Use of the cost based measure of progress requires us to prepare estimates of total expected revenue and cost to complete our projects.
Revenues exclude taxes assessed based on revenues such as sales or value added taxes.
Cost of services includes labor, food, utility costs, cleaning supplies, and other costs of operating our accommodations facilities. Cost of goods sold includes all direct material and labor costs and those costs related to contract performance, such as indirect labor, supplies, tools and repairs. Selling, general and administrative costs are charged to expense as incurred.
Income Taxes
Our operations are subject to Canadian federal and provincial income taxes, as well as foreign income taxes. We determine the provision for income taxes using the asset and liability approach. Under this approach, deferred income taxes represent the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities.
Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. In assessing the need for a valuation allowance, we look to the future reversal of existing taxable temporary differences, taxable income in carryback years, the feasibility of tax planning strategies and estimated future taxable income. The valuation allowance can be affected by changes to tax laws, changes to statutory tax rates and changes to future taxable income estimates and historical losses.
We recognize tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such positions are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. See Note 14 – Income Taxes for further information.
Receivables and Concentration of Credit Risk
Based on the nature of our customer base, we do not believe that we have any significant concentrations of credit risk other than our concentration in the Canadian oil sands and Australian mining industries. We evaluate the credit-worthiness of our significant, new and existing customers’ financial condition and, generally, we do not require collateral from our customers. For the year ended December 31, 2022, each of Suncor Energy, Imperial Oil and Fortescue Metals Group Ltd accounted for more than 10 10
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Asset Retirement Obligations
We have AROs that we are required to perform under law or contract once an asset is permanently taken out of service. We initially record the liability at fair value, which reflects the estimated present value of the amount of asset removal and site reclamation costs related to the retirement of our assets, for an ARO when it is incurred (typically when the asset is installed). When the liability is initially recorded, we capitalize the associated asset retirement cost by increasing the carrying amount of the related property, plant and equipment. Over time, the liability increases for the change in its present value, while the capitalized cost depreciates over the useful life of the related asset. Accretion expense is recognized over the estimated productive life of the related assets. If the fair value of the estimated ARO changes, an adjustment is recorded to both the ARO and the capitalized asset retirement cost. Revisions in estimated liabilities can result from changes in estimated inflation rates, changes in service and equipment costs and changes in the estimated timing of settling the ARO. We utilize current retirement costs to estimate the expected cash outflows for retirement obligations. We estimate the ultimate productive life of the properties and a risk-adjusted discount rate in order to determine the current present value of the obligation.
We relieve ARO liabilities when the related obligations are settled. Most of these obligations are not expected to be paid until many years in the future and will be funded from general company resources at the time of removal. See Note 12 – Asset Retirement Obligations for further discussion.
Share-Based Compensation
We sponsor an equity participation plan in which certain of our employees participate. We measure the cost of employee services received in exchange for an award of equity instruments (typically restricted share awards and deferred share awards) based on the grant-date fair value of the award. The fair value is calculated based on our share price on the grant-date. The resulting cost is recognized over the period during which an employee is required to provide service in exchange for the awards, usually the vesting period.
We also grant performance share awards. For awards granted in 2022, awards are earned in amounts between 0 % and 200 % of the participant’s target performance share award, based on (1) the payout percentage associated with Civeo’s relative total shareholder return (TSR) rank among a peer group of other companies and (2) the payout percentage associated with Civeo's cumulative operating cash flow over the performance period relative to a preset target. Awards granted in 2021 are earned in amounts between 0 % and 200 % of the participant’s target performance share award, based on (1) the payout percentage associated with Civeo’s relative TSR rank among a peer group of 17 other companies and (2) the payout percentage associated with Civeo's cumulative free cash flow over the performance period relative to a preset target. The fair value of the TSR portion of each performance share is estimated using option-pricing models at the grant date. The fair value of the operating cash flow and free cash flow portion of each performance share is based on the closing market price of our common shares on the date of grant and adjusted throughout the performance period based on our estimate of the most probable outcome. The resulting costs for each portion of the award is recognized over the period during which an employee is required to provide service in exchange for the awards, usually the vesting period.
Additionally, we grant phantom shares. All of the awards vest in equal annual installments and are accounted for as a liability based on the fair value of our share price. Participants granted units of phantom shares are entitled to a lump sum cash payment equal to the fair market value of a common share on the vesting date.
Guarantees
Substantially all of our Canadian and U.S. subsidiaries are guarantors under our Credit Agreement. See Note 11 – Debt for further discussion.
During the ordinary course of business, we also provide standby letters of credit or other guarantee instruments to certain parties as required for certain transactions initiated by us or our subsidiaries. As of December 31, 2022, the maximum potential amount of future payments that we could be required to make under these guarantee agreements (letters of credit) was approximately $2.0 million. We have not recorded any liability in connection with these guarantee arrangements. We do not believe, based on historical experience and information currently available, that it is likely that any amounts will be required to be paid under these guarantee arrangements.
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Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires the use of estimates and assumptions by management in determining the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Examples of a few such estimates include revenue and income recognized on the cost-based input method, estimates of the amount and timing of costs to be incurred for AROs, any valuation allowance recorded on net deferred tax assets, warranty claims, long-lived asset and goodwill impairments and allowance for credit losses. Actual results could materially differ from those estimates.
Accounting for Contingencies
We have contingent liabilities and future claims for which we have made estimates of the amount of the eventual cost to liquidate these liabilities or claims. We make an assessment of our exposure and record a provision in our accounts to cover an expected loss when we believe a loss is probable and the amount of the loss can be reasonably estimated. These liabilities and claims sometimes involve threatened or actual litigation where damages have been quantified. Other claims or liabilities have been estimated based on their fair value or our experience in these matters and, when appropriate, the advice of outside counsel or other outside experts. Upon the ultimate resolution of these uncertainties, our future reported financial results will be impacted by the difference between our estimates and the actual amounts paid to settle a liability. Examples of areas where we have made important estimates of future liabilities include litigation, insurance claims, warranty claims, contract claims and obligations.
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board, which are adopted by us as of the specified effective date. Unless otherwise discussed, management believes that the impact of recently issued standards or other guidance updates, which are not yet effective, will not have a material impact on our consolidated financial statements upon adoption.
3.REVENUE
The following table disaggregates our revenue by our three reportable segments: Canada, Australia and the U.S., and major categories for the years ended December 31, 2022, 2021 and 2020 (in thousands):
| 2022 | 2021 | 2020 | |||||||||||||||
| Canada | |||||||||||||||||
| Accommodation revenues | $ | $ | $ | ||||||||||||||
| Mobile facility rental revenues | |||||||||||||||||
| Food service and other services revenues | |||||||||||||||||
| Total Canada revenues | |||||||||||||||||
| Australia | |||||||||||||||||
| Accommodation revenues | $ | $ | $ | ||||||||||||||
| Food service and other services revenues | |||||||||||||||||
| Total Australia revenues | |||||||||||||||||
| U.S. | |||||||||||||||||
| Accommodation revenues | $ | $ | $ | ||||||||||||||
| Mobile facility rental revenues | |||||||||||||||||
| Manufacturing revenues | |||||||||||||||||
| Food service and other services revenues | |||||||||||||||||
| Total U.S. revenues | |||||||||||||||||
| Total revenues | $ | $ | $ | ||||||||||||||
Our payment terms vary by the type and location of our customer and the products or services offered. The term between invoicing and when our performance obligations are satisfied is not significant. Payment terms are generally within 30 days and in most cases do not extend beyond 60 days. We do not have significant financing components or significant payment terms.
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The table only includes revenue expected to be recognized from contracts where the quantity of service is certain (in thousands):
| For the years ending December 31, | |||||||||||||||||||||||||||||
| 2023 | 2024 | 2025 | Thereafter | Total | |||||||||||||||||||||||||
| Revenue expected to be recognized as of December 31, 2022 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
4.IMPAIRMENT CHARGES
2022 Impairment Charges
The following summarizes pre-tax impairment charges recorded during 2022, which are included in Impairment expense in our consolidated statements of operations (in thousands):
| Canada | Australia | U.S. | Total | ||||||||||||||||||||
| Quarter ended December 31, 2022 | |||||||||||||||||||||||
| Long-lived assets | $ | $ | $ | $ | |||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
Quarter ended December 31, 2022. During the fourth quarter of 2022, we recorded impairment expense of $3.8 million, related to fixed assets in a village located in Western Australia. At December 31, 2022, we identified an impairment trigger due to an expiring contract that was not renewed. Accordingly, the assets were written down to their estimated fair value of $1.8 million. In addition, we recorded impairment expense of $1.9 million, related to fixed assets in a lodge located in our U.S. market. The lodge is recorded at the estimated fair value (less costs to sell) and was reduced to $7.7 million.
2021 Impairment Charges
The following summarizes pre-tax impairment charges recorded during 2021, which are included in Impairment expense in our consolidated statements of operations (in thousands):
| Canada | Australia | U.S. | Total | ||||||||||||||||||||
| Quarter ended June 30, 2021 | |||||||||||||||||||||||
| Long-lived assets | $ | $ | $ | $ | |||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
Quarter ended June 30, 2021. During the second quarter of 2021, we recorded impairment expense of $7.9 million related to various undeveloped land positions and related permitting costs in Australia. At June 30, 2021, we identified an impairment trigger related to certain of these properties due to the cancellation of a significant thermal coal project in Australia and our negative expectations related to other possible Australian thermal coal projects becoming viable in the near term. Accordingly, the assets were written down to their estimated fair value of $2.4 million.
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2020 Impairment Charges
The following summarizes pre-tax impairment charges recorded during 2020, which are included in Impairment expense in our consolidated statements of operations (in thousands):
| Canada | Australia | U.S. | Total | ||||||||||||||||||||
| Quarter ended March 31, 2020 | |||||||||||||||||||||||
| Goodwill | $ | $ | $ | $ | |||||||||||||||||||
| Long-lived assets | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
Quarter ended March 31, 2020. During the first quarter of 2020, we recorded impairment expense related to goodwill and long-lived assets.
The spread of COVID-19 and the response thereto during the first quarter of 2020 negatively impacted the global economy. The resulting unprecedented decline in oil demand, coupled with disagreements between Saudi Arabia and Russia about production limits, resulted in a collapse of global oil prices in March 2020, thereby creating unprecedented downward pressure on stock prices in the energy industry, particularly small-cap companies with operations in the U.S. and Canada, such as Civeo. As a result, we experienced a sustained reduction of our share price during the first quarter of 2020. Our market capitalization implied an enterprise value which was significantly less than the sum of the estimated fair values of our reporting units, and we determined that an indicator of a goodwill impairment was present as of March 31, 2020. Accordingly, we performed an interim goodwill impairment test as of March 31, 2020, and the carrying amount of our Canadian reporting unit exceeded the reporting unit's fair value. Based on the results of the impairment test, we reduced the value of our goodwill in our Canadian reporting unit to zero and recognized impairment expense in the first quarter of 2020 of $93.6 million.
Furthermore, as a result of the decline in global oil prices and forecasts for a potentially protracted period of lower prices, as well as the goodwill impairment in our Canadian segment, we determined all asset groups within this segment had experienced a trigger that indicated that the carrying values might not be recoverable. Accordingly, we assessed the carrying value of each asset group to determine if it continued to be recoverable based on estimated future cash flows. Based on the assessment, the carrying values of certain asset groups were determined to not be fully recoverable, and we proceeded to compare the estimated fair value of these asset groups to their respective carrying values. As a result, certain asset groups were written down to their estimated fair values of $43.5 million and we recorded impairment expense of $38.1 million related to these long-lived assets.
Also, as a result of the decline in global oil prices and forecasts for a potentially protracted period of lower prices, we reviewed all asset groups in our U.S. segment to determine if an indicator of impairment had occurred that would indicate that the carrying values of the asset groups in the segment might not be recoverable. We determined that certain asset groups within the segment had experienced an indicator of impairment, and thus we assessed the carrying values of our long-lived assets in the U.S. to determine if they continued to be recoverable based on estimated future cash flows. Based on the assessment, the carrying values of certain of our U.S. asset groups were determined to not be recoverable, and we proceeded to compare the estimated fair values of the asset groups to their respective carrying values. Accordingly, these assets were written down to their estimated fair values of $12.5 million and we recorded impairment expense of $12.4 million during the first quarter of 2020 related to these long-lived assets.
5.FAIR VALUE MEASUREMENTS
Our financial instruments consist of cash and cash equivalents, receivables, payables and debt instruments. We believe that the carrying values of these instruments on the accompanying consolidated balance sheets approximate their fair values.
As of December 31, 2022 and 2021, we believe the carrying value of our floating-rate debt outstanding under our term loans and revolving credit facilities approximates fair value because the terms include short-term interest rates and exclude penalties for prepayment. We estimated the fair value of our floating-rate term loan and revolving credit facilities using significant other observable inputs, representative of a Level 2 fair value measurement, including terms and credit spreads for these loans. In addition, the estimated fair value of our assets held for sale is based upon Level 2 fair value measurements, which include appraisals and previous negotiations with third parties.
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During the first quarter of 2020, we recorded a goodwill impairment charge related to one of our reporting units. Our estimates of fair value required us to use significant unobservable inputs, representative of Level 3 fair value measurements, including numerous assumptions with respect to future circumstances that might directly impact each of the relevant asset groups’ operations in the future and are therefore uncertain. These assumptions with respect to future circumstances included future cash flows, oil, met coal and natural gas prices, anticipated spending by our customers, the cost of capital, and industry and/or local market conditions. We estimated the fair value when conducting the first quarter of 2020 goodwill impairment test primarily using an income approach. The discount rates used to value our reporting units for the first quarter of 2020 for the goodwill impairment test ranged between 10.5 % and 14.0 %.
During the fourth quarter of 2022, the second quarter of 2021 and the first quarter of 2020, we wrote down certain long-lived assets to fair value. During the first quarter of 2020, we estimated the fair value when conducting the long-lived asset impairment tests primarily using an income approach. We used a variety of unobservable inputs and underlying assumptions consistent with those discussed above for purposes of our goodwill impairment test. The discount rates used to value our Canadian and U.S. segments long-lived asset impairment analysis ranged between 11.0 % and 14.0 %. Additionally, during the first quarter of 2020 and the fourth quarter of 2022, our estimate of fair value of a property in the U.S. was based on appraisals from third parties, which referenced available market information, such as listing agreements, offers, and pending and closed sales. During the second quarter of 2021 and the fourth quarter of 2022, our estimate of fair value in Australia for assets that were impaired, was based on appraisals from third parties.
See Note 2 – Summary of Significant Accounting Policies – Impairment of Long-Lived Assets and Note 2 – Summary of Significant Accounting Policies – Goodwill and Other Intangible Assets for further discussion of the significant judgments and assumptions used in calculating their fair value.
6.EARNINGS PER SHARE
We use the two-class method to calculate basic and diluted earnings per share because we had participating securities in the form of Series A preferred shares. The two-class method requires a proportional share of net income to be allocated between common shares and participating securities. The proportional share to be allocated to participating securities is determined by dividing total weighted average participating securities by the sum of total weighted average common shares and participating securities.
Basic earnings per share is computed under the two-class method by dividing the net income (loss) attributable to common shareholders by the weighted average number of common shares outstanding during the period. Net income attributable to common shareholders represents our net income reduced by an allocation of current period earnings to participating securities as described above. No such adjustment is made during periods with a net loss, as the adjustment would be anti-dilutive.
Diluted earnings per share is computed under the two-class method by dividing diluted net income (loss) attributable to common shareholders by the weighted average number of common shares outstanding, plus, for periods with net income attributable to common stockholders, the potential dilutive effects of share-based awards. In addition, we calculate the potential dilutive effect of any outstanding dilutive security under both the two-class method and the “if-converted” method, and we report the more dilutive of the methods as our diluted earnings per share. We also apply the treasury stock method with respect to certain share-based awards in the calculation of diluted earnings per share, if dilutive.
On October 30, 2022, we repurchased 3,617 Series A preferred shares from the holders for approximately $30.6 million. The repurchase premium of $5.2 million is treated as a reduction to the numerator of net income (loss) attributable to Civeo common shareholders utilized in the calculation of earnings per share for the year ended December 31, 2022.
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The calculation of earnings per share attributable to Civeo common shareholders is presented below for the periods indicated (in thousands, except per share amounts):
| 2022 | 2021 | 2020 | |||||||||||||||
| Numerator: | |||||||||||||||||
| Net income (loss) attributable to Civeo common shareholders | $ | $ | ( | $ | ( | ||||||||||||
| Less: premium paid for repurchase of preferred shares | ( | ||||||||||||||||
| Less: income allocated to participating securities | |||||||||||||||||
| Basic net loss attributable to Civeo Corporation common shareholders | $ | ( | $ | ( | $ | ( | |||||||||||
| Add: undistributed income attributable to participating securities | |||||||||||||||||
| Less: undistributed income reallocated to participating securities | |||||||||||||||||
| Diluted net loss attributable to Civeo Corporation common shareholders | $ | ( | $ | ( | $ | ( | |||||||||||
| Denominator: | |||||||||||||||||
| Weighted average shares outstanding - basic | |||||||||||||||||
| Dilutive shares - share based awards | |||||||||||||||||
| Weighted average shares outstanding - diluted | |||||||||||||||||
Basic net loss per share attributable to Civeo Corporation common shareholders (1) | $ | ( | $ | ( | $ | ( | |||||||||||
Diluted net loss per share attributable to Civeo Corporation common shareholders (1) | $ | ( | $ | ( | $ | ( | |||||||||||
The following common share equivalents have been excluded from the calculation of weighted-average common shares outstanding because the effect is anti-dilutive for the periods presented (in millions of shares):
| 2022 | 2021 | 2020 | |||||||||||||||
| Share-based awards | |||||||||||||||||
| Preferred shares | |||||||||||||||||
7.DETAILS OF SELECTED BALANCE SHEET ACCOUNTS
Additional information regarding selected balance sheet accounts at December 31, 2022 and 2021 is presented below (in thousands):
| December 31, 2022 | December 31, 2021 | ||||||||||
| Accounts receivable, net: | |||||||||||
| Trade | $ | $ | |||||||||
Unbilled revenue | |||||||||||
| Other | |||||||||||
Total accounts receivable | |||||||||||
| Allowance for credit losses | ( | ( | |||||||||
Total accounts receivable, net | $ | $ | |||||||||
| December 31, 2022 | December 31, 2021 | ||||||||||
| Inventories: | |||||||||||
| Finished goods and purchased products | $ | $ | |||||||||
| Work in process | |||||||||||
| Raw materials | |||||||||||
Total inventories | $ | $ | |||||||||
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| Estimated Useful Life (in years) | December 31, 2022 | December 31, 2021 | |||||||||||||||
| Property, plant and equipment, net: | |||||||||||||||||
| Land | $ | $ | |||||||||||||||
| Accommodations assets | |||||||||||||||||
| Buildings and leasehold improvements | |||||||||||||||||
| Machinery and equipment | |||||||||||||||||
| Office furniture and equipment | |||||||||||||||||
| Vehicles | |||||||||||||||||
| Construction in progress | |||||||||||||||||
| Total property, plant and equipment | |||||||||||||||||
| Accumulated depreciation | ( | ( | |||||||||||||||
| Total property, plant and equipment, net | $ | $ | |||||||||||||||
| December 31, 2022 | December 31, 2021 | ||||||||||
| Accrued liabilities: | |||||||||||
| Accrued compensation | $ | $ | |||||||||
| Accrued taxes, other than income taxes | |||||||||||
| Other | |||||||||||
Total accrued liabilities | $ | $ | |||||||||
| December 31, 2022 | December 31, 2021 | ||||||||||
| Deferred revenue: | |||||||||||
| Contract liabilities | $ | $ | |||||||||
Deferred revenue consists of contract liabilities resulting from upfront payments related to the mobilization of mobile assets to service pipeline projects in our Canadian business segment. The decrease in deferred revenue from December 31, 2021 to December 31, 2022 was primarily due to the recognition of deferred revenue over the contracted terms of these pipeline projects in Canada.
8.ASSETS HELD FOR SALE
As of December 31, 2022, assets held for sale included certain assets in our U.S. and Canadian business segments. These assets were recorded at the estimated fair value less costs to sell, which exceeded or equaled their carry values.
As of December 31, 2021, assets held for sale included certain assets in our U.S. business segment and undeveloped land holdings in our Australia business segment. These assets were recorded at the estimated fair value less costs to sell, which exceeded their carrying values.
The following table summarizes the carrying amount as of December 31, 2022 and 2021 of the assets classified as held for sale (in thousands):
| December 31, 2022 | December 31, 2021 | ||||||||||
| Assets held for sale: | |||||||||||
| Property, plant and equipment, net | $ | $ | |||||||||
| Total assets held for sale | $ | $ | |||||||||
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9.GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of goodwill from December 31, 2020 to December 31, 2022 are as follows (in thousands):
| Canada | Australia | U.S. | Total | ||||||||||||||||||||
| Goodwill as of December 31, 2020 | $ | $ | $ | $ | |||||||||||||||||||
| Foreign currency translation | ( | ( | |||||||||||||||||||||
| Goodwill as of December 31, 2021 | $ | $ | $ | $ | |||||||||||||||||||
| Foreign currency translation | ( | ( | |||||||||||||||||||||
| Goodwill as of December 31, 2022 | $ | $ | $ | $ | |||||||||||||||||||
The following table presents the total amount of other intangible assets and the related accumulated amortization for major intangible asset classes as of December 31, 2022 and 2021 (in thousands):
| December 31, | December 31, | ||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | ||||||||||||||||||||
| Amortizable Intangible Assets | |||||||||||||||||||||||
| Customer relationships | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Trade name | ( | ( | |||||||||||||||||||||
| Contracts / agreements | ( | ( | |||||||||||||||||||||
| Total amortizable intangible assets | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Indefinite-Lived Intangible Assets Not Subject to Amortization | |||||||||||||||||||||||
| Licenses | — | — | |||||||||||||||||||||
| Total indefinite-lived intangible assets | — | — | |||||||||||||||||||||
| Total intangible assets | $ | $ | ( | $ | $ | ( | |||||||||||||||||
The weighted average remaining amortization period for all intangible assets, other than indefinite-lived intangibles, was 15.0 years as of December 31, 2022 and 16.0 years as of December 31, 2021. Amortization expense was $5.9 million, $6.0 million and $14.1 million in the years ended December 31, 2022, 2021 and 2020, respectively.
As of December 31, 2022, the estimated remaining amortization of our amortizable intangible assets was as follows (in thousands):
| Year Ending December 31, | |||||
| 2023 | $ | ||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| Thereafter | |||||
| Total | $ | ||||
10.LEASES
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The components of lease expense were $5.0 million, $5.9 million and $6.8 million under operating leases for the years ended December 31, 2022, 2021 and 2020, respectively. Included in the measurement of lease liabilities, we paid $5.3 million in cash related to operating leases during the year ended December 31, 2022. Right-of-use assets obtained in exchange for new lease obligations related to operating leases during the year ended December 31, 2022 were $2.3 million.
Supplemental balance sheet information related to leases were as follows (in thousands):
| December 31, 2022 | December 31, 2021 | ||||||||||
| Operating leases | |||||||||||
| Operating lease right-of-use assets | $ | $ | |||||||||
| $ | $ | ||||||||||
| Operating lease liabilities | |||||||||||
| Total operating lease liabilities | $ | $ | |||||||||
| Weighted average remaining lease term | |||||||||||
| Operating leases | |||||||||||
| Weighted average discount rate | |||||||||||
| Operating leases | % | % | |||||||||
Maturities of operating lease liabilities at December 31, 2022, were as follows (in thousands):
| Year Ending December 31, | |||||
| 2023 | $ | ||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| Thereafter | |||||
| Total lease payments | |||||
| Less imputed interest | |||||
| Total | $ | ||||
11.DEBT
As of December 31, 2022 and 2021, long-term debt consisted of the following (in thousands):
| December 31, 2022 | December 31, 2021 | ||||||||||
Canadian term loan; weighted average interest rate of | $ | $ | |||||||||
U.S. revolving credit facility; weighted average interest rate of | |||||||||||
Canadian revolving credit facility; weighted average interest rate of | |||||||||||
Australian revolving credit facility; weighted average interest rate of | |||||||||||
| Less: Unamortized debt issuance costs | |||||||||||
| Total debt | |||||||||||
| Less: Current portion of long-term debt, including unamortized debt issuance costs, net | |||||||||||
| Long-term debt, less current maturities | $ | $ | |||||||||
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Scheduled maturities of long-term debt as of December 31, 2022 are as follows (in thousands):
| Year Ending December 31, | |||||
| 2023 | $ | ||||
| 2024 | |||||
| 2025 | |||||
| $ | |||||
Credit Agreement
As of December 31, 2022, our Credit Agreement (as then amended to date, the Credit Agreement) provided for: (i) a $200.0 million revolving credit facility scheduled to mature on September 8, 2025, allocated as follows: (A) a $10.0 million senior secured revolving credit facility in favor of one of our U.S. subsidiaries, as borrower; (B) a $155.0 million senior secured revolving credit facility in favor of Civeo, as borrower; and (C) a $35.0 million senior secured revolving credit facility in favor of one of our Australian subsidiaries, as borrower; and (ii) a C$100.0 million term loan facility scheduled to be fully repaid on December 31, 2023 in favor of Civeo.
U.S. dollar amounts outstanding under the facilities provided by the Credit Agreement bear interest at a variable rate equal to the London Inter-Bank Offered Rate (LIBOR) plus a margin of 3.00 % to 4.00 %, or a base rate plus 2.00 % to 3.00 %, in each case based on a ratio of our total net debt to Consolidated EBITDA (as defined in the Credit Agreement). Canadian dollar amounts outstanding bear interest at a variable rate equal to a Bankers' Acceptance Discount Rate (as defined in the Credit Agreement) based on the Canadian Dollar Offered Rate (CDOR) plus a margin of 3.00 % to 4.00 %, or a Canadian Prime rate plus a margin of 2.00 % to 3.00 %, in each case based on a ratio of our total debt to Consolidated EBITDA. Australian dollar amounts outstanding under the Credit Agreement bear interest at a variable rate equal to the Bank Bill Swap Bid Rate plus a margin of 3.00 % to 4.00 %, based on a ratio of our total net debt to Consolidated EBITDA. The future transitions from LIBOR and CDOR as interest rate benchmarks are addressed in the Credit Agreement and at such time the transition from (i) LIBOR takes place, an alternate benchmark will be established based on the first alternative of the following, plus a benchmark replacement adjustment, Term Secured Overnight Financing Rate (SOFR), Daily Simple SOFR and an alternative benchmark selected by the administrative agent and the applicable borrowers giving due consideration to any selection or recommendation by a government body or any evolving or then-prevailing market convention for determining a benchmark rate as a replacement for the then-current Benchmark for U.S. dollar-denominated syndicated credit facilities at such time or (ii) CDOR takes place, we will endeavor with the administrative agent to establish an alternate rate of interest to CDOR that gives due consideration to any evolving or then existing convention for similar Canadian Dollar denominated syndicated credit facilities for the replacement of CDOR.
The Credit Agreement contains customary affirmative and negative covenants that, among other things, limit or restrict: (i) indebtedness, liens and fundamental changes; (ii) asset sales; (iii) acquisitions of margin stock; (iv) specified acquisitions; (v) certain restrictive agreements; (vi) transactions with affiliates; and (vii) investments and other restricted payments, including dividends and other distributions. In addition, we must maintain a minimum interest coverage ratio, defined as the ratio of consolidated EBITDA to consolidated interest expense, of at least 3.00 to 1.00 and our maximum net leverage ratio, defined as the ratio of total net debt to Consolidated EBITDA, of no greater than 3.00 to 1.00. Following a qualified offering of indebtedness, we will be required to maintain a maximum leverage ratio of no greater than 3.50 to 1.00 and a maximum senior secured ratio less than 2.00 to 1.00. Each of the factors considered in the calculations of these ratios are defined in the Credit Agreement. EBITDA and consolidated interest, as defined, exclude goodwill and asset impairments, debt discount amortization, amortization of intangibles and other non-cash charges. We were in compliance with our covenants as of December 31, 2022.
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12.ASSET RETIREMENT OBLIGATIONS
AROs at December 31, 2022 and 2021 were (in thousands):
| 2022 | 2021 | ||||||||||
| Asset retirement obligations | $ | $ | |||||||||
Less: Asset retirement obligations due within one year (1) | |||||||||||
| Long-term asset retirement obligations | $ | $ | |||||||||
(1) | Classified as a current liability on the consolidated balance sheets, under the caption “Other current liabilities.” Balance at December 31, 2022 related to remediation work planned for 2023. | ||||
Total accretion expense related to AROs was $1.8 million, $1.4 million and $1.5 million during the years ended December 31, 2022, 2021 and 2020, respectively.
During the years ended December 31, 2022, 2021 and 2020, our ARO changed as follows (in thousands):
| 2022 | 2021 | 2020 | |||||||||||||||
| Balance as of January 1 | $ | $ | $ | ||||||||||||||
| Accretion of discount | |||||||||||||||||
| Change in estimates of existing obligations | ( | ( | |||||||||||||||
| Settlement of obligations | ( | ( | ( | ||||||||||||||
| Foreign currency translation | ( | ||||||||||||||||
| Balance as of December 31 | $ | $ | $ | ||||||||||||||
13.RETIREMENT PLANS
We sponsor various defined contribution plans. Participation in these plans is available to substantially all employees. A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and will generally have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution plans are recognized as an employee benefit expense in profit or loss in the periods during which services are rendered by employees. We recognized expense of $8.2 million, $7.6 million and $6.8 million related to matching contributions under our various defined contribution plans during the years ended December 31, 2022, 2021 and 2020, respectively.
Canadian Retirement Savings Plan
We offer a defined contribution retirement plan to our Canadian employees. In Canada, we contribute, on a matched basis, an amount up to 5 % of each Canadian based, salaried employee’s earnings (base salary plus annual incentive compensation) to the legislated maximum for a Deferred Profit Sharing Plan (DPSP). The maximum for 2022 was C$15,390 . DPSP is a form of defined contribution retirement savings plan governed by Canadian federal tax legislation which provides for the deferral of tax on deposits and investment returns until removed from the plan to support retirement income. Employer contributions vest upon the completion of two years of service. Employee contributions are required in order to be eligible for the DPSP employer matching. Maximum employer matching (5 % noted above) is attained with 6 % employee contribution which would go into a Group Registered Retirement Savings Plan. The two plans work in tandem. Contributions to the “Retirement Savings Plan” for Canadian employees are subject to the annual maximum total registered savings limit of C$29,210 in 2022 as set out in the Canadian Tax Act.
Australian Retirement Savings Plan
Our Australian subsidiary contributes to various defined contribution plans for its employees in accordance with legislation governing the calculation of the Superannuation Guarantee Surcharge (SGC). SGC is contributed by the employer at a rate of 10.5 % of the base salary of an employee, capped at the legislated maximum contribution base which is indexed annually.
Our Australian subsidiary makes no investment decisions on behalf of the employee and has no obligations other than to remit the defined contributions to the plan selected by each individual employee.
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U.S. Retirement Savings Plan
We offer a defined contribution 401(k) retirement plan to substantially all of our U.S. employees. Participants may contribute from 1 % to 75 % of their base and cash incentive compensation (subject to Internal Revenue Service limitations), and we make matching contributions under this plan on the first 6 % of the participant’s compensation (100 % match of the first 4 % employee contribution and 50 % match on the next 2 % contribution). Our matching contributions vest at a rate of 40 % after two years of service and 20 % per year for each of the employee’s next three years of service and are fully vested thereafter.
14.INCOME TAXES
The Company’s operations are conducted through various subsidiaries in a number of countries throughout the world. The Company has provided for income taxes based upon the tax laws and rates in the countries in which operations are conducted and income is earned.
Income tax expense (benefit). Pre-tax income (loss) for the years ended December 31, 2022, 2021 and 2020 consisted of the following (in thousands):
| 2022 | 2021 | 2020 | |||||||||||||||
| Canada operations | $ | $ | $ | ( | |||||||||||||
| Foreign operations | ( | ||||||||||||||||
| Total | $ | $ | $ | ( | |||||||||||||
The components of the income tax expense (benefit) for the years ended December 31, 2022, 2021 and 2020 consisted of the following (in thousands):
| 2022 | 2021 | 2020 | |||||||||||||||
| Current: | |||||||||||||||||
Canada | $ | $ | $ | ||||||||||||||
| Foreign | |||||||||||||||||
| Total | $ | $ | $ | ||||||||||||||
| Deferred: | |||||||||||||||||
Canada | $ | $ | $ | ( | |||||||||||||
| Foreign | ( | ||||||||||||||||
| Total | $ | $ | $ | ( | |||||||||||||
| Net income tax expense (benefit) | $ | $ | $ | ( | |||||||||||||
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The net income tax expense (benefit) differs from an amount computed at Canadian statutory rates as follows for the years ended December 31, 2022, 2021 and 2020 (in thousands):
| 2022 | 2021 | 2020 | |||||||||||||||||||||||||||||||||
| Canadian federal tax benefit at statutory rates | $ | % | $ | % | $ | ( | % | ||||||||||||||||||||||||||||
| Canadian provincial income tax | % | % | ( | % | |||||||||||||||||||||||||||||||
| Effect of foreign income tax, net | % | % | ( | % | |||||||||||||||||||||||||||||||
| Valuation allowance | % | % | ( | % | |||||||||||||||||||||||||||||||
| Noncontrolling interest | ( | ( | % | % | % | ||||||||||||||||||||||||||||||
| Non-deductible goodwill impairment | % | % | ( | % | |||||||||||||||||||||||||||||||
| Non-deductible compensation | % | % | ( | % | |||||||||||||||||||||||||||||||
| Unrealized intercompany foreign currency translation gain | ( | ( | % | ( | ( | % | ( | % | |||||||||||||||||||||||||||
| Non-taxable Noralta representations and warranties claim | % | % | ( | % | |||||||||||||||||||||||||||||||
| Deemed income from foreign subsidiaries | % | % | ( | % | |||||||||||||||||||||||||||||||
| Other, net | % | % | ( | % | |||||||||||||||||||||||||||||||
| Net income tax expense (benefit) | $ | % | $ | % | $ | ( | % | ||||||||||||||||||||||||||||
Canadian Rate Change. As part of Alberta’s Recovery Plan, effective July 1, 2019, the government introduced a four-year graduated decrease in the income tax rate from 12% to 8% but subsequently accelerated the rate reduction to 8% effective July 1, 2020. As the impact of the full rate change was effectuated on our net deferred tax liability in 2020, the acceleration had no impact to our net deferred tax liability as of December 31, 2021 or December 31, 2022.
97
Deferred Tax Liabilities and Assets. The significant items giving rise to the deferred tax assets and liabilities as of December 31, 2022 and 2021 are as follows (in thousands):
| 2022 | 2021 | ||||||||||
| Deferred tax assets: | |||||||||||
Net operating loss | $ | $ | |||||||||
Employee benefits | |||||||||||
Deductible goodwill and other intangibles | |||||||||||
| Land | |||||||||||
Other reserves | |||||||||||
Operating lease liabilities | |||||||||||
| Capital losses | |||||||||||
Other | |||||||||||
| Deferred tax assets | |||||||||||
Valuation allowance | ( | ( | |||||||||
Deferred tax assets, net | $ | $ | |||||||||
| Deferred tax liabilities: | |||||||||||
| Intangibles | $ | ( | $ | ( | |||||||
| Depreciation | ( | ( | |||||||||
Operating lease right-of-use assets | ( | ( | |||||||||
Deferred tax liabilities | ( | ( | |||||||||
| Net deferred tax liabilities, net | $ | ( | $ | ( | |||||||
At December 31, 2022 and 2021, we had no undistributed earnings of foreign subsidiaries that would be subject to income tax upon distribution to Canada from a foreign subsidiary. As such, as of December 31, 2022 and 2021, we did not provide for deferred taxes on any such earnings of our foreign subsidiaries.
NOL Carryforwards. The following table summarizes net operating loss (NOL) carryforwards at December 31, 2022 (in thousands):
| Amount | Expiration Period | ||||||||||
| Net operating loss carryforwards: | |||||||||||
| Canada – Federal and provincial | $ | Begins to expire in 2035 | |||||||||
| Australia | Does not expire | ||||||||||
| U.S. – Federal | Begins to expire in 2036 | ||||||||||
| U.S. – Federal | Does not expire | ||||||||||
| U.S. – State, tax effected | Begins to expire in 2023 | ||||||||||
Change in Valuation Allowance. Realization of our deferred tax assets is dependent upon, among other things, our ability to generate taxable income of the appropriate character in the future.
Changes in our valuation allowance for the years ended December 31, 2022 and 2021 are as follows (in thousands):
| Balance as of December 31, 2020 | $ | ( | |||
| Change in income tax provision | ( | ||||
| Other change | |||||
| Foreign currency translation | |||||
| Balance as of December 31, 2021 | ( | ||||
| Change in income tax provision | ( | ||||
| Other change | ( | ||||
| Foreign currency translation | |||||
| Balance as of December 31, 2022 | $ | ( | |||
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As of each reporting date, management considers new evidence, both positive and negative, that could affect our view of the future realization of deferred tax assets. As of December 31, 2022, management determined that there is not sufficient evidence to conclude that it is more likely than not that the Canadian and U.S. net deferred tax assets are realizable, therefore we have maintained the valuation allowance in both of these jurisdictions. As of December 31, 2022, management determined that there is not sufficient evidence to conclude that it is more likely than not that the Australia deferred tax assets related to certain capital assets are realizable, therefore we have maintained a partial valuation allowance in Australia.
Unrecognized Tax Benefits. We file tax returns in the jurisdictions in which they are required. All of these returns are subject to examination or audit and possible adjustment as a result of assessments by taxing authorities. We believe that we have recorded sufficient tax liabilities and do not expect the resolution of any examination or audit of our tax returns to have a material adverse effect on our operating results, financial condition or liquidity.
Our Canadian federal tax returns subsequent to 2017 are subject to audit by the Canada Revenue Agency. Our Australian subsidiary’s federal income tax returns subsequent to 2017 are open for review by the Australian Taxation Office. Our U.S. subsidiary’s federal tax returns subsequent to 2018 are subject to audit by the U.S. Internal Revenue Service.
The total amount of unrecognized tax benefits as of December 31, 2022, 2021 and 2020 was zero zero
15.COMMITMENTS AND CONTINGENCIES
16.PREFERRED SHARES
As further discussed in Note 21 – Acquisitions, on April 2, 2018, we issued 9,679 Series A preferred shares as part of the acquisition of Noralta Lodge Ltd. (Noralta Acquisition). The Series A preferred shares had an initial liquidation preference of $10,000 per share. Holders of the Series A preferred shares were entitled to receive a 2 % annual dividend on the liquidation preference paid quarterly in cash or, at our option, by increasing the Series A preferred shares’ liquidation preference or any combination thereof. During the fourth quarter of 2018, 637 Series A preferred shares initially held in escrow to support certain obligations of the Noralta Acquisition were released. On October 30, 2022, 3,617 Series A preferred shares were repurchased from the holders for approximately $30.6 million, which included accrued dividends of under $0.1 million. On December 13, 2022, the holders of the Series A preferred shares elected to convert the remaining 5,425 Series A preferred shares outstanding into 1,504,539 common shares. As of December 31, 2022, we had no Series A preferred shares outstanding.
During the years ended December 31, 2022, 2021 and 2020, we recognized preferred dividends on the Series A preferred shares as follows (in thousands):
| 2022 | 2021 | 2020 | |||||||||||||||
| In-kind dividends | $ | $ | $ | ||||||||||||||
| Cash dividend on repurchased preferred shares | |||||||||||||||||
| Total preferred dividends | $ | $ | $ | ||||||||||||||
The Board of Directors elected to pay the dividends beginning June 30, 2018 through December 12, 2022 through an increase in the liquidation preference rather than in cash. The paid-in-kind dividend of $1.7 million, $1.9 million and $1.9 million is included in Preferred dividends on the accompanying consolidated statements of operations for the years ended December 31, 2022, 2021 and 2020, respectively. On December 13, 2022, the holders of the Series A preferred shares converted all outstanding Series A preferred shares into common shares. Following such conversion, no further dividends are required to be paid.
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17.COMMON SHARE REPURCHASES
In August 2021, our Board of Directors authorized a common share repurchase program (the 2021 Share Repurchase Program) to repurchase up to 5.0 % of our total common shares which were issued and outstanding, or approximately 715,000 common shares, over a twelve month period. In August 2022, our Board of Directors authorized a new common share repurchase program (the 2022 Share Repurchase Program) to repurchase up to 5.0 % of our total common shares which are issued and outstanding, or approximately 685,000 common shares, over a twelve month period. The 2022 Share Repurchase Program and the 2021 Share Repurchase Program are collectively referred to as the "Share Repurchase Programs."
The repurchase authorization allows repurchases from time to time in open market transactions, including pursuant to trading plans adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934. We have funded, and intend to continue to fund, repurchases through cash on hand and cash generated from operations. The common shares repurchased under the Share Repurchase Programs are cancelled in the periods they are acquired and the payment is accounted for as an increase to accumulated deficit in our Consolidated Statements of Changes in Shareholders’ Equity in the period the payment is made.
Pursuant to our 2021 Share Repurchase Program, during the year ended December 31, 2022, we repurchased an aggregate of 123,882 of our common shares outstanding at a weighted average price of $28.54 per share, for a total of approximately $3.5 million. We repurchased an aggregate of 341,061 of our common shares outstanding at a weighted average price of $23.98 per share for a total cost of $8.2 million during the twelve month period comprising the 2021 Share Repurchase Program. We have not repurchased any shares under the 2022 Share Repurchase Program as of December 31, 2022.
In addition to the shares repurchased pursuant to the 2021 Share Repurchase Program, we repurchased 374,753 common shares from a shareholder for approximately $10.7 million during the three months ended September 30, 2022.
18.ACCUMULATED OTHER COMPREHENSIVE LOSS
19.SHARE-BASED COMPENSATION
Certain key employees and non-employee directors participate in the Amended and Restated 2014 Equity Participation Plan of Civeo Corporation (the Civeo Plan). The Civeo Plan authorizes our Board of Directors and the Compensation Committee of our Board of Directors to approve grants of options, awards of restricted shares, performance awards, phantom share awards and dividend equivalents, awards of deferred shares, and share payments to our employees and non-employee directors. No more than 2.4 million Civeo common shares are authorized to be issued under the Civeo Plan.
Share-based compensation expense recognized in the years ended December 31, 2022, 2021 and 2020 totaled $14.9 million, $9.9 million and $8.4 million, respectively. Share-based compensation expense is reflected in Selling, general and administrative expense in our consolidated statements of operations. The total income tax benefit recognized in the consolidated statements of operations for share based compensation arrangements was approximately $0.8 million, $0.5 million and $0.5 million for the years ended December 31, 2022, 2021 and 2020, respectively.
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Options to Purchase Common Shares
| Options | Weighted Average Exercise Price Per Share | Weighted Average Contractual Life (Years) | Intrinsic Value (Thousands) | ||||||||||||||||||||
| Outstanding Options at December 31, 2019 | $ | $ | |||||||||||||||||||||
| Forfeited / Expired | ( | ||||||||||||||||||||||
| Outstanding Options at December 31, 2020 | $ | $ | |||||||||||||||||||||
| Forfeited / Expired | ( | ||||||||||||||||||||||
| Outstanding Options at December 31, 2021 | $ | $ | |||||||||||||||||||||
| Forfeited / Expired | ( | ||||||||||||||||||||||
| Outstanding Options at December 31, 2022 | $ | $ | |||||||||||||||||||||
| Exercisable Options at December 31, 2020 | $ | $ | |||||||||||||||||||||
| Exercisable Options at December 31, 2021 | $ | $ | |||||||||||||||||||||
| Exercisable Options at December 31, 2022 | $ | $ | |||||||||||||||||||||
As no options were exercised in the last three years, the total intrinsic value of options exercised by our employees during 2022, 2021 and 2020 was zero zero
At December 31, 2022, unrecognized compensation cost related to options was zero .
The following table summarizes information for outstanding options of our employees at December 31, 2022:
| Options Outstanding | Options Exercisable | |||||||||||||||||||||||||||||||
| Range of Exercise Prices | Number Outstanding as of December 31, 2022 | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | Number Exercisable as of December 31, 2022 | Weighted Average Exercise Price | |||||||||||||||||||||||||||
| $ | $ | $ | ||||||||||||||||||||||||||||||
| $ | $ | $ | ||||||||||||||||||||||||||||||
$ | $ | $ | ||||||||||||||||||||||||||||||
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Restricted Share Awards/ Restricted Share Units/ Deferred Share Awards
The following table presents the changes in restricted share awards, restricted share units and deferred share awards outstanding and related information for our employees and non-employee directors during the years ended December 31, 2022, 2021 and 2020:
| Number of Awards/Units | Weighted Average Grant Date Fair Value Per Share | ||||||||||
| Nonvested shares at December 31, 2019 | $ | ||||||||||
| Granted | |||||||||||
| Vested | ( | ||||||||||
| Forfeited | ( | ||||||||||
| Nonvested shares at December 31, 2020 | $ | ||||||||||
| Granted | |||||||||||
| Vested | ( | ||||||||||
| Forfeited | ( | ||||||||||
| Nonvested shares at December 31, 2021 | $ | ||||||||||
| Granted | |||||||||||
| Vested | ( | ||||||||||
| Nonvested shares at December 31, 2022 | |||||||||||
The weighted average grant date fair value per share for restricted share awards, restricted share units and deferred share awards granted during 2022, 2021 and 2020 was $25.64 , $17.58 and $4.95 , respectively. The total fair value of restricted share awards, restricted share units and deferred share awards vested during 2022, 2021 and 2020 was $2.1 million, $1.5 million and $2.6 million, respectively. At December 31, 2022, unrecognized compensation cost related to restricted share awards, restricted share units and deferred share awards was $0.4 million, which is expected to be recognized over a weighted average period of 0.4 years.
Phantom Share Awards
Each phantom share award is equal in value to one common share. Upon vesting, each recipient will receive a lump sum cash payment equal to the fair market value of a common share on the respective vesting date. These awards are accounted for as a liability that is remeasured at each reporting date until paid.
The following table presents the changes in phantom share awards outstanding and related information for our employees during the years ended December 31, 2022, 2021 and 2020:
| Number of Awards | |||||
| Nonvested shares at December 31, 2019 | |||||
| Granted | |||||
| Vested | ( | ||||
| Forfeited | ( | ||||
| Nonvested shares at December 31, 2020 | |||||
| Granted | |||||
| Vested | ( | ||||
| Forfeited | ( | ||||
| Nonvested shares at December 31, 2021 | |||||
| Granted | |||||
| Vested | ( | ||||
| Forfeited | ( | ||||
| Nonvested shares at December 31, 2022 | |||||
102
At December 31, 2022, the balance of the liability for the phantom share awards was $9.5 million. For the years ended December 31, 2022, 2021 and 2020, we made phantom share cash payments of $6.0 million, $3.1 million and $0.9 million, respectively. At December 31, 2022, unrecognized compensation cost related to phantom shares was $11.6 million, as remeasured at December 31, 2022, which is expected to be recognized over a weighted average period of 1.7 years. The weighted average grant date fair value per share of phantom shares granted during the years ended December 31, 2022, 2021 and 2020 was $21.97 , $19.80 and $15.84 , respectively.
Performance Share Awards
We grant performance awards, which cliff vest in three years subject to attainment of applicable performance criteria. Awards granted in 2022 will be earned in amounts between 0 % and 200 % of the participant’s target performance share award, based equally on (1) the payout percentage associated with Civeo’s relative TSR rank among a peer group that includes 17 other companies and (2) the payout percentage associated with Civeo's cumulative operating cash flow over the performance period relative to a preset target. Awards granted in 2021 are earned in amounts between 0 % and 200 % of the participant’s target performance share award, based on (1) the payout percentage associated with Civeo’s relative TSR rank among a peer group that includes 17 other companies and (2) the payout percentage associated with Civeo's cumulative free cash flow over the performance period relative to a preset target. The portion of the performance awards tied to cumulative operating cash flow and free cash flow includes a performance-based vesting requirement. The fair value of these awards is based on the closing market price of our common shares on the date of grant. We evaluate the probability of achieving the performance criteria throughout the performance period and will adjust share-based compensation expense based on the number of shares expected to vest based on our estimate of the most probable performance outcome.
The fair value of the TSR portion of each performance share award was estimated using a Monte Carlo simulation pricing model that uses the assumptions noted in the following table. The risk-free interest rate is based on the U.S. Treasury yield curve in effect for the expected term of the performance share at the time of grant. The dividend yield on our common shares was assumed to be zero since we do not currently pay dividends. The expected market price volatility of our common shares was based on an estimate that considers the historical and implied volatility of our common shares as well as a peer group of companies over a time period equal to the expected term of the option. The initial TSR performance was based on historical performance of our common shares and the peer group’s common shares.
| 2022 | 2021 | ||||||||||
| Risk-free weighted interest rate | % | % | |||||||||
| Expected volatility | % | % | |||||||||
| Initial TSR | % | % | |||||||||
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The following table presents the changes in performance share awards outstanding and related information for our employees during the year ended December 31, 2022, 2021 and 2020:
| Number of Awards | Weighted Average Grant Date Fair Value Per Share | ||||||||||
| Nonvested shares at December 31, 2019 | $ | ||||||||||
| Granted | |||||||||||
Performance adjustment (1) | |||||||||||
| Vested | ( | ||||||||||
| Forfeited | ( | ||||||||||
| Nonvested shares at December 31, 2020 | $ | ||||||||||
| Granted | |||||||||||
Performance adjustment (2) | |||||||||||
| Vested | ( | ||||||||||
| Forfeited | ( | ||||||||||
| Nonvested shares at December 31, 2021 | $ | ||||||||||
| Granted | |||||||||||
Performance adjustment (3) | |||||||||||
| Vested | ( | ||||||||||
| Forfeited | |||||||||||
| Nonvested shares at December 31, 2022 | $ | ||||||||||
(1)Related to 2017 performance share awards that vested in 2020, which were paid out at 175 % based on Civeo's TSR rank.
(2)Related to 2018 performance share awards that vested in 2021, which were paid out at 150 % based on Civeo's TSR rank.
(3)Related to 2019 performance share awards that vested in 2022, which were paid out at 126 % based on Civeo's TSR rank.
During the years ended December 31, 2022, 2021 and 2020, we recognized compensation expense associated with performance share awards totaling $2.6 million, $2.4 million and $2.7 million, respectively. At December 31, 2022, unrecognized compensation cost related to performance share awards was $4.0 million, which is expected to be recognized over a weighted average period of 1.8 years.
20.SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the years ended December 31, 2022, 2021 and 2020 for interest and income taxes was as follows (in thousands):
| 2022 | 2021 | 2020 | |||||||||||||||
| Interest (net of amounts capitalized) | $ | $ | $ | ||||||||||||||
| Net income taxes paid, net of refunds received | |||||||||||||||||
21.ACQUISITIONS
Noralta
On April 2, 2018, we acquired the equity of Noralta. As a result of the Noralta Acquisition, we expanded our existing accommodations business in the Canadian oil sands market. The total consideration, which is subject to adjustment in accordance with the terms of the definitive agreement, included (i) C$207.7 million (or approximately US$161.2 million) in cash, subject to customary post-closing adjustments for working capital, indebtedness and transactions expenses, (ii) 2.7 million of our common shares, of which 1.1 million shares are held in escrow and will be released based on certain conditions related to Noralta customer contracts remaining in place, and (iii) 9,679 Series A preferred shares with an initial liquidation preference of $96.8 million and initially convertible into 2.4 million of our common shares. We funded the cash consideration with cash on hand and borrowings under our revolving credit facility.
During the second quarter of 2022 and 2021, 0.4 million shares and 0.4 million shares, respectively, were released to the sellers from an escrow established to cover conditions related to Noralta customer contracts remaining in place. During the
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22.SEGMENT AND RELATED INFORMATION
In accordance with current accounting standards regarding disclosures about segments of an enterprise and related information, we have identified the following reportable segments: Canada, Australia and the U.S., which represent our strategic focus on hospitality services and workforce accommodations.
Financial information by business segment for each of the three years ended December 31, 2022, 2021 and 2020 is summarized in the following table (in thousands):
| Total Revenues | Depreciation and amortization | Operating (loss) income | Capital expenditures | Total assets | |||||||||||||||||||||||||
| 2022 | |||||||||||||||||||||||||||||
| Canada | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Australia | |||||||||||||||||||||||||||||
| U.S. | ( | ||||||||||||||||||||||||||||
| Corporate and eliminations | ( | ( | |||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| 2021 | |||||||||||||||||||||||||||||
| Canada | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Australia | |||||||||||||||||||||||||||||
| U.S. | ( | ||||||||||||||||||||||||||||
| Corporate and eliminations | ( | ( | |||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| 2020 | |||||||||||||||||||||||||||||
| Canada | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||
| Australia | |||||||||||||||||||||||||||||
| U.S. | ( | ||||||||||||||||||||||||||||
| Corporate and eliminations | ( | ( | |||||||||||||||||||||||||||
| Total | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||
Financial information by geographic segment as of and for each of the three years ended December 31, 2022, 2021 and 2020, is summarized below (in thousands). Revenues in the U.S. include export sales. Revenues are attributable to countries based on the location of the entity selling the products or performing the services. Long-lived assets are attributable to countries based on the physical location of the entity and its operating assets and do not include intercompany balances.
| Canada | Australia | U.S. and Other | Total | ||||||||||||||||||||
| 2022 | |||||||||||||||||||||||
| Revenues from unaffiliated customers | $ | $ | $ | $ | |||||||||||||||||||
| Long-lived assets | |||||||||||||||||||||||
| 2021 | |||||||||||||||||||||||
| Revenues from unaffiliated customers | $ | $ | $ | $ | |||||||||||||||||||
| Long-lived assets | |||||||||||||||||||||||
| 2020 | |||||||||||||||||||||||
| Revenues from unaffiliated customers | $ | $ | $ | $ | |||||||||||||||||||
| Long-lived assets | |||||||||||||||||||||||
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23.VALUATION ACCOUNTS
Activity in the valuation accounts was as follows (in thousands):
| Balance at Beginning of Period | Charged (Reduction) to Costs and Expenses | Deductions (Net of Recoveries) | Translation and Other, Net | Balance at End of Period | |||||||||||||||||||||||||
| Year Ended December 31, 2022: | |||||||||||||||||||||||||||||
| Allowance for credit losses on accounts receivable | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||
| Valuation allowance for deferred tax assets | ( | ||||||||||||||||||||||||||||
| Year Ended December 31, 2021: | |||||||||||||||||||||||||||||
| Allowance for credit losses on accounts receivable | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||
| Valuation allowance for deferred tax assets | ( | ( | |||||||||||||||||||||||||||
| Year Ended December 31, 2020: | |||||||||||||||||||||||||||||
| Allowance for credit losses on accounts receivable | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||
| Valuation allowance for deferred tax assets | ( | ( | |||||||||||||||||||||||||||
106
BUSINESS CORPORATIONS ACT BRITISH COLUMBIA ARTICLES Of CIVEO CORPORATION INDEX PART 1 INTERPRETATION ....................................................................................................... 1 1.1 Definitions ...................................................................................................................................... 1 1.2 Business Corporations Act and Interpretation Act Definitions Applicable .................................... 1 PART 2 SHARES AND SHARE CERTIFICATES .................................................................... 1 2.1 Authorized Share Structure ............................................................................................................. 1 2.2 Form of Share Certificate ................................................................................................................ 1 2.3 Shareholder Entitled to Certificate or Acknowledgement .............................................................. 1 2.4 Delivery by Mail ............................................................................................................................. 2 2.5 Replacement of Worn Out or Defaced Certificate or Acknowledgement ...................................... 2 2.6 Replacement of Lost, Stolen or Destroyed Certificate or Acknowledgement ................................ 2 2.7 Splitting Share Certificates ............................................................................................................. 2 2.8 Certificate Fee ................................................................................................................................. 2 2.9 Recognition of Trusts ...................................................................................................................... 2 PART 3 ISSUE OF SHARES ........................................................................................................ 2 3.1 Directors Authorized ....................................................................................................................... 2 3.2 Commissions and Discounts ........................................................................................................... 3 3.3 Brokerage ........................................................................................................................................ 3 3.4 Conditions of Issue ......................................................................................................................... 3 3.5 Share Purchase Warrants and Rights .............................................................................................. 3 PART 4 SHARE REGISTERS ...................................................................................................... 3 4.1 Central Securities Register .............................................................................................................. 3 4.2 Closing Register .............................................................................................................................. 3 PART 5 SHARE TRANSFERS ..................................................................................................... 4 5.1 Registering Transfers ...................................................................................................................... 4 5.2 Form of Instrument of Transfer ...................................................................................................... 4 5.3 Transferor Remains Shareholder .................................................................................................... 4 5.4 Signing of Instrument of Transfer ................................................................................................... 4 The existing Articles of the Company have been altered by consolidating all amendments to form one complete set of Articles. The Articles were amended by resolution of the board of directors of the Company and received for deposit at the records office of the Company on December 22, 2022.
2 5.5 Transfer Fee .................................................................................................................................... 4 PART 6 TRANSMISSION OF SHARES ..................................................................................... 4 6.1 Legal Personal Representative Recognized on Death ..................................................................... 4 6.2 Rights of Legal Personal Representative ........................................................................................ 5 PART 7 PURCHASE OF SHARES .............................................................................................. 5 7.1 Company Authorized to Purchase Shares ....................................................................................... 5 7.2 Purchase When Insolvent ................................................................................................................ 5 7.3 Sale and Voting of Purchased Shares ............................................................................................. 5 PART 8 BORROWING POWERS ............................................................................................... 5 8.1 Borrowing Powers .......................................................................................................................... 5 PART 9 ALTERATIONS .............................................................................................................. 6 9.1 Alteration of Authorized Share Structure ....................................................................................... 6 9.2 Special Rights and Restrictions of Issued Preferred Shares............................................................ 6 9.3 Special Rights and Restrictions ...................................................................................................... 6 9.4 Alterations by Directors' Resolutions ............................................................................................. 7 9.5 Change of Name ............................................................................................................................. 7 9.6 Other Alterations ............................................................................................................................. 7 9.7 Other Alterations after one or more Adjournments ........................................................................ 7 PART 10 MEETINGS OF SHAREHOLDERS ............................................................................. 8 10.1 Annual General Meetings ............................................................................................................... 8 10.2 Resolution Instead of Annual or Special Meeting Prohibited ......................................................... 8 10.3 Calling of Meetings of Shareholders .............................................................................................. 8 10.4 Notice for Meetings of Shareholders .............................................................................................. 8 10.5 Record Date for Notice ................................................................................................................... 8 10.6 Record Date for Voting ................................................................................................................... 9 10.7 Record Date for Other Purposes ..................................................................................................... 9 10.8 Failure to Give Notice and Waiver of Notice ................................................................................. 9 10.9 Notice of Special Business at Meetings of Shareholders ................................................................ 9 10.10 Location of General Meetings ........................................................................................................ 9 10.11 Notice of Shareholder Business and Nominations .......................................................................... 9 PART 11 PROCEEDINGS AT MEETINGS OF SHAREHOLDERS ...................................... 14 11.1 Special Business ........................................................................................................................... 14 11.2 Business Approval ........................................................................................................................ 15 11.3 Actions Requiring a Special Resolution ....................................................................................... 15
3 11.4 Quorum ......................................................................................................................................... 15 11.5 One Shareholder May Constitute Quorum.................................................................................... 16 11.6 Other Persons May Attend ............................................................................................................ 16 11.7 Requirement of Quorum ............................................................................................................... 16 11.8 Lack of Quorum ............................................................................................................................ 16 11.9 Quorum Required at Succeeding Meeting .................................................................................... 16 11.10 Chair.............................................................................................................................................. 16 11.11 Inspectors of Elections; Opening and Closing the Polls ............................................................... 16 11.12 Conduct of Meetings ..................................................................................................................... 17 11.13 Adjournments ................................................................................................................................ 17 11.14 Notice of Adjourned Meeting ....................................................................................................... 17 11.15 Decision by Show of Hands or Poll .............................................................................................. 17 11.16 Declaration of Result .................................................................................................................... 17 11.17 Motion Need Not be Seconded ..................................................................................................... 17 11.18 Casting Vote ................................................................................................................................. 17 11.19 Meetings by Remote Communication........................................................................................... 18 PART 12 VOTES OF SHAREHOLDERS ................................................................................... 18 12.1 Number of Votes by Shareholder or by Shares ............................................................................. 18 12.2 Votes of Persons in Representative Capacity ............................................................................... 18 12.3 Votes by Joint Holders .................................................................................................................. 18 12.4 Legal Personal Representatives as Joint Shareholders ................................................................. 18 12.5 Representative of a Corporate Shareholder .................................................................................. 18 12.6 Proxy Provisions Do Not Apply to All Companies ...................................................................... 19 12.7 Appointment of Proxy Holders ..................................................................................................... 19 12.8 Alternate Proxy Holders ............................................................................................................... 19 12.9 When Proxy Holder Need Not Be Shareholder ............................................................................ 19 12.10 Deposit of Proxy ........................................................................................................................... 20 12.11 Validity of Proxy Vote .................................................................................................................. 20 12.12 Form of Proxy ............................................................................................................................... 20 12.13 Revocation of Proxy ..................................................................................................................... 20 12.14 Revocation of Proxy Must Be Signed ........................................................................................... 21 12.15 Production of Evidence of Authority to Vote ............................................................................... 21 12.16 Appointment of Attorney or Agent to Cast Vote in any other Corporation .................................. 21
4 PART 13 DIRECTORS .................................................................................................................. 21 13.1 First Directors; Number of Directors ............................................................................................ 21 13.2 Change in Number of Directors .................................................................................................... 21 13.3 Directors' Acts Valid Despite Vacancy ......................................................................................... 22 13.4 Remuneration of Directors ............................................................................................................ 22 13.5 Reimbursement of Expenses of Directors ..................................................................................... 22 13.6 Special Remuneration for Directors .............................................................................................. 22 13.7 Gratuity, Pension or Allowance on Retirement of Director .......................................................... 22 PART 14 ELECTION AND REMOVAL OF DIRECTORS ...................................................... 22 14.1 Procedure for Election of Directors; Required Vote ..................................................................... 22 14.2 Election and Rotation at Annual General Meeting ....................................................................... 22 14.3 Consent to be a Director ............................................................................................................... 23 14.4 Failure to Elect or Appoint Directors ............................................................................................ 23 14.5 Places of Retiring Directors Not Filled ......................................................................................... 23 14.6 Directors May Fill Vacancies ....................................................................................................... 23 14.7 Remaining Directors Power to Act ............................................................................................... 24 14.8 Additional Directors...................................................................................................................... 24 14.9 Ceasing to be a Director ................................................................................................................ 24 14.10 Removal of Director by Shareholders ........................................................................................... 24 14.11 Removal of Director by Directors ................................................................................................. 24 PART 15 POWERS AND DUTIES OF DIRECTORS ............................................................... 24 15.1 Powers of Management................................................................................................................. 24 15.2 Appointment of Attorney of Company ......................................................................................... 25 PART 16 DISCLOSURE OF INTEREST OF DIRECTORS..................................................... 25 16.1 Obligation to Account for Profits ................................................................................................. 25 16.2 Restrictions on Voting by Reason of Interest ............................................................................... 25 16.3 Interested Director Counted in Quorum........................................................................................ 25 16.4 Disclosure of Conflict of Interest or Property ............................................................................... 25 16.5 Director Holding Other Office in the Company ........................................................................... 25 16.6 No Disqualification ....................................................................................................................... 25 16.7 Professional Services by Director or Officer ................................................................................ 25 16.8 Director or Officer in Other Corporations .................................................................................... 26 PART 17 PROCEEDINGS OF DIRECTORS ............................................................................. 26 17.1 Regular Meetings of Directors ...................................................................................................... 26
5 17.2 Special Meetings of Directors ....................................................................................................... 26 17.3 Voting at Meetings ........................................................................................................................ 26 17.4 Chair of Meetings ......................................................................................................................... 26 17.5 Meetings by Telephone or Other Communications Medium ........................................................ 26 17.6 Notice of Meetings ........................................................................................................................ 26 17.7 When Notice Not Required ........................................................................................................... 27 17.8 Meeting Valid Despite Failure to Give Notice ............................................................................. 27 17.9 Waiver of Notice of Meetings ....................................................................................................... 27 17.10 Quorum ......................................................................................................................................... 27 17.11 Validity of Acts Where Appointment Defective ........................................................................... 27 17.12 Action by Consent of Board ......................................................................................................... 27 PART 18 EXECUTIVE AND OTHER COMMITTEES ............................................................ 28 18.1 Appointment and Powers of Executive Committee ...................................................................... 28 18.2 Appointment and Powers of Other Committees ........................................................................... 28 18.3 Obligations of Committees ........................................................................................................... 28 18.4 Powers of Board ............................................................................................................................ 28 18.5 Committee Meetings ..................................................................................................................... 29 PART 19 OFFICERS ..................................................................................................................... 29 19.1 Directors May Appoint Officers ................................................................................................... 29 19.2 Election and Term of Office ......................................................................................................... 29 19.3 Chairman of the Board .................................................................................................................. 29 19.4 Chief Executive Officer ................................................................................................................ 30 19.5 President ........................................................................................................................................ 30 19.6 Vice Presidents ............................................................................................................................. 30 19.7 Treasurer ....................................................................................................................................... 30 19.8 Secretary ....................................................................................................................................... 30 19.9 Assistant Secretaries ..................................................................................................................... 30 19.10 Removal ........................................................................................................................................ 30 19.11 Vacancies ...................................................................................................................................... 31 19.12 Functions, Duties and Powers of Officers .................................................................................... 31 19.13 Qualifications ................................................................................................................................ 31 PART 20 INDEMNIFICATION ................................................................................................... 31 20.1 Right to Indemnification ............................................................................................................... 31 20.2 Right of Claimant to Bring Suit .................................................................................................... 32
6 20.3 Non-Exclusivity of Rights ............................................................................................................ 32 20.4 Indemnification of Other Persons ................................................................................................. 32 20.5 Non-Compliance with Business Corporations Act ....................................................................... 32 20.6 Company May Purchase Insurance ............................................................................................... 32 20.7 Amendment, Repeal or Modification............................................................................................ 33 PART 21 DIVIDENDS ................................................................................................................... 33 21.1 Payment of Dividends Subject to Special Rights .......................................................................... 33 21.2 Declaration of Dividends .............................................................................................................. 33 21.3 No Notice Required ...................................................................................................................... 33 21.4 Record Date .................................................................................................................................. 33 21.5 Manner of Paying Dividend .......................................................................................................... 33 21.6 Settlement of Difficulties .............................................................................................................. 33 21.7 When Dividend Payable ............................................................................................................... 33 21.8 Dividends to be Paid in Accordance with Number of Shares ....................................................... 33 21.9 Receipt by Joint Shareholders ....................................................................................................... 33 21.10 Dividend Bears No Interest ........................................................................................................... 33 21.11 Fractional Dividends ..................................................................................................................... 34 21.12 Payment of Dividends ................................................................................................................... 34 21.13 Capitalization of Surplus............................................................................................................... 34 PART 22 DOCUMENTS, RECORDS AND REPORTS ............................................................ 34 22.1 Recording of Financial Affairs ..................................................................................................... 34 22.2 Inspection of Records ................................................................................................................... 34 PART 23 NOTICES ....................................................................................................................... 34 23.1 Method of Giving Notice .............................................................................................................. 34 23.2 Deemed Receipt of Mailing .......................................................................................................... 35 23.3 Certificate of Sending ................................................................................................................... 35 23.4 Notice to Joint Shareholders ......................................................................................................... 35 23.5 Notice to Trustees ......................................................................................................................... 35 PART 24 SEAL AND EXECUTION OF DOCUMENTS ........................................................... 36 24.1 Who May Attest Seal .................................................................................................................... 36 24.2 Sealing Copies .............................................................................................................................. 36 24.3 Mechanical Reproduction of Seal ................................................................................................. 36 24.4 Execution of Documents Generally .............................................................................................. 36
7 PART 25 COMMON SHARES SPECIAL RIGHTS AND RESTRICTIONS ......................... 37 25.1 Special Rights and Restrictions .................................................................................................... 37 25.2 Voting Rights ................................................................................................................................ 37 25.3 Dividends ...................................................................................................................................... 37 25.4 Dissolution .................................................................................................................................... 37 PART 26 CLASS A PREFERRED SHARES SPECIAL RIGHTS AND RESTRICTIONS ... 37 26.1 Special Rights and Restrictions .................................................................................................... 37 PART 27 CLASS A SERIES 1 PREFERRED SHARES SPECIAL RIGHTS AND RESTRICTIONS ........................................................................................................... 39 PART 28 CLASS B PREFERRED SHARES SPECIAL RIGHTS AND RESTRICTIONS ... 39 28.1 Special Rights and Restrictions .................................................................................................... 39 PART 29 CLASS B SERIES 1 PREFERRED SHARES SPECIAL RIGHTS AND RESTRICTIONS ........................................................................................................... 41 29.1 Special Rights and Restrictions .................................................................................................... 41
ARTICLES Company Name: CIVEO CORPORATION Certificate of Incorporation Number: BC1023108 PART 1 INTERPRETATION 1.1 Definitions. In these Articles, unless the context otherwise requires: "Board" and "directors" mean the directors or sole director of the Company for the time being; "Business Corporations Act" means the Business Corporations Act (British Columbia) from time to time in force and all amendments thereto and includes all regulations and amendments thereto made pursuant to that Act; "Exchange Act" means the U.S. Securities Exchange Act of 1934, as amended, and any successor statute; "legal personal representative" means the personal or other legal representative of the shareholder; "registered address" of a shareholder means the shareholder's address as recorded in the central securities register; "seal" means the seal of the Company, if any. 1.2 Business Corporations Act and Interpretation Act Definitions Applicable. The definitions in the Business Corporations Act and the definitions and rules of construction in the Interpretation Act (British Columbia), with the necessary changes, so far as applicable, and unless the context requires otherwise, apply to these Articles as if they were an enactment. If there is a conflict between a definition in the Business Corporations Act and a definition or rule in the Interpretation Act relating to a term used in these Articles, the definition in the Business Corporations Act will prevail in relation to the use of the term in these Articles. If there is a conflict between these Articles and the Business Corporations Act, the Business Corporations Act will prevail. PART 2 SHARES AND SHARE CERTIFICATES 2.1 Authorized Share Structure. The authorized share structure of the Company consists of shares of the class or classes and series, if any, described in the Notice of Articles of the Company. 2.2 Form of Share Certificate. Each share certificate issued by the Company must comply with, and be signed as required by, the Business Corporations Act. 2.3 Shareholder Entitled to Certificate or Acknowledgement. Each shareholder is entitled, without charge, to (a) one share certificate representing the shares of each class or series of shares registered in the shareholder's name or (b) a non-transferable written acknowledgement of the shareholder's right to obtain such a share certificate, provided that in respect of a share held jointly by several persons, the Company is not bound to issue more than one share certificate and delivery of a share certificate for a share
2 to one of several joint shareholders or to one of the shareholders' duly authorized agents will be sufficient delivery to all. 2.4 Delivery by Mail. Any share certificate or non-transferable written acknowledgement of a shareholder's right to obtain a share certificate may be sent to the shareholder by mail at the shareholder's registered address and neither the Company nor any director, officer or agent of the Company is liable for any loss to the shareholder because the share certificate or acknowledgement is lost in the mail or stolen. 2.5 Replacement of Worn Out or Defaced Certificate or Acknowledgement. If the directors are satisfied that a share certificate or a non-transferable written acknowledgement of the shareholder's right to obtain a share certificate is worn out or defaced, they must, on production to them of the share certificate or acknowledgement, as the case may be, and on such other terms, if any, as they think fit: (a) order the share certificate or acknowledgement, as the case may be, to be cancelled; and (b) issue a replacement share certificate or acknowledgement, as the case may be. 2.6 Replacement of Lost, Stolen or Destroyed Certificate or Acknowledgement. If a share certificate or a non-transferable written acknowledgement of a shareholder's right to obtain a share certificate is lost, stolen or destroyed, a replacement share certificate or acknowledgement, as the case may be, must be issued to the person entitled to that share certificate or acknowledgement, as the case may be, if the directors receive: (a) proof satisfactory to them that the share certificate or acknowledgement is lost, stolen or destroyed; and (b) any indemnity the directors consider adequate. 2.7 Splitting Share Certificates. If a shareholder surrenders a share certificate to the Company with a written request that the Company issue in the shareholder's name two or more share certificates, each representing a specified number of shares and in the aggregate representing the same number of shares as the share certificate so surrendered, the Company must cancel the surrendered share certificate and issue replacement share certificates in accordance with that request. 2.8 Certificate Fee. There must be paid to the Company, in relation to the issue of any share certificate under Articles 2.5, 2.6 or 2.7, the amount, if any and which must not exceed the amount prescribed under the Business Corporations Act, determined by the directors. 2.9 Recognition of Trusts. Except as required by law or statute or these Articles, no person will be recognized by the Company as holding any share upon any trust, and the Company is not bound by or compelled in any way to recognize (even when having notice thereof) any equitable, contingent, future or partial interest in any share or fraction of a share or (except as by law or statute or these Articles provided or as ordered by a court of competent jurisdiction) any other rights in respect of any share except an absolute right to the entirety thereof in the shareholder. PART 3 ISSUE OF SHARES 3.1 Directors Authorized. Subject to the Business Corporations Act and the rights of the holders of issued shares of the Company, the Company may issue, allot, sell or otherwise dispose of the
3 unissued shares, and issued shares held by the Company, at the times, to the persons, including directors, in the manner, on the terms and conditions and for the issue prices (including any premium at which shares with par value may be issued) that the directors may determine. The issue price for a share with par value must be equal to or greater than the par value of the share. 3.2 Commissions and Discounts. The Company may at any time, pay a reasonable commission or allow a reasonable discount to any person in consideration of that person purchasing or agreeing to purchase shares of the Company from the Company or any other person or procuring or agreeing to procure purchasers for shares of the Company. 3.3 Brokerage. The Company may pay such brokerage fee or other consideration as may be lawful for or in connection with the sale or placement of its securities. 3.4 Conditions of Issue. Except as provided for by the Business Corporations Act, no share may be issued until it is fully paid. A share is fully paid when: (a) consideration is provided to the Company for the issue of the share by one or more of the following: (i) past services performed for the Company; (ii) property; (iii) money; and (b) the value of the consideration received by the Company equals or exceeds the issue price set for the share under Article 3.1. 3.5 Share Purchase Warrants and Rights. Subject to the Business Corporations Act, the Company may issue share purchase warrants, options and rights upon such terms and conditions as the directors determine, which share purchase warrants, options and rights may be issued alone or in conjunction with debentures, debenture shares, bonds, shares or any other securities issued or created by the Company from time to time. PART 4 SHARE REGISTERS 4.1 Central Securities Register. As required by and subject to the Business Corporations Act, the Company must maintain in British Columbia a central securities register. The directors may, subject to the Business Corporations Act, appoint an agent to maintain the central securities register. The directors may also appoint one or more agents, including the agent which keeps the central securities register, as transfer agent for its shares or any class or series of its shares, as the case may be, and the same or another agent as registrar for its shares or such class or series of its shares, as the case may be. The directors may terminate such appointment of any agent at any time and may appoint another agent in its place. 4.2 Closing Register. The Company must not at any time close its central securities register.
4 PART 5 SHARE TRANSFERS 5.1 Registering Transfers. A transfer of a share of the Company must not be registered unless: (a) a duly signed instrument of transfer in respect of the share has been received by the Company; (b) if a share certificate has been issued by the Company in respect of the share to be transferred, that share certificate has been surrendered to the Company; and (c) if a non-transferable written acknowledgement of the shareholder's right to obtain a share certificate has been issued by the Company in respect of the share to be transferred, that acknowledgement has been surrendered to the Company. 5.2 Form of Instrument of Transfer. The instrument of transfer in respect of any share of the Company must be either in the form on the back of the share certificate representing such share or in such other form as may be approved by the directors from time to time. 5.3 Transferor Remains Shareholder. Except to the extent that the Business Corporations Act otherwise provides, the transferor of shares is deemed to remain the holder of the shares until the name of the transferee is entered in a securities register of the Company in respect of the transfer. 5.4 Signing of Instrument of Transfer. If a shareholder, or the duly authorized attorney of that shareholder, signs an instrument of transfer in respect of shares registered in the name of the shareholder, the signed instrument of transfer constitutes a complete and sufficient authority to the Company and its directors, officers and agents to register the number of shares specified in the instrument of transfer or specified in any other manner, or, if no number is specified, all the shares represented by the share certificates deposited with the instrument of transfer: (a) in the name of the person named as transferee in that instrument of transfer; or (b) if no person is named as transferee in that instrument of transfer, in the name of the person on whose behalf the instrument is deposited for the purpose of having the transfer registered. 5.5 Transfer Fee. There must be paid to the Company, in relation to the registration of any transfer, the amount, if any, determined by the directors. PART 6 TRANSMISSION OF SHARES 6.1 Legal Personal Representative Recognized on Death. In case of the death of a shareholder, the legal personal representative, or if the shareholder was a joint holder, the surviving joint holder, will be the only person recognized by the Company as having any title to the shareholder's interest in the shares. Before recognizing a person as a legal personal representative, the directors may require proof of appointment by a court of competent jurisdiction, a grant of letters probate, letters of administration or such other evidence or documents as the directors consider appropriate.
5 6.2 Rights of Legal Personal Representative. The legal personal representative has the same rights, privileges and obligations that attach to the shares held by the shareholder, including the right to transfer the shares in accordance with these Articles, provided the documents required by the Business Corporations Act and the directors have been deposited with the Company. PART 7 PURCHASE OF SHARES 7.1 Company Authorized to Purchase Shares. Subject to Article 7.2, the special rights and restrictions attached to the shares of any class or series and the Business Corporations Act, the Company may, if authorized by the directors, purchase or otherwise acquire any of its shares at the price and upon the terms specified in such resolution. 7.2 Purchase When Insolvent. The Company must not make a payment or provide any other consideration to purchase or otherwise acquire any of its shares if there are reasonable grounds for believing that: (a) the Company is insolvent; or (b) making the payment or providing the consideration would render the Company insolvent. 7.3 Sale and Voting of Purchased Shares. If the Company retains a share redeemed, purchased or otherwise acquired by it, the Company may sell, gift or otherwise dispose of the share, but, while such share is held by the Company, it: (a) is not entitled to vote the share at a meeting of its shareholders; (b) must not pay a dividend in respect of the share; and (c) must not make any other distribution in respect of the share. PART 8 BORROWING POWERS 8.1 Borrowing Powers. The Board may from time to time at its discretion on behalf of the Company: (a) borrow money in the manner and amount, on the security, from the sources and on the terms and conditions that they consider appropriate; (b) issue bonds, debentures and other debt obligations either outright or as security for any liability or obligation of the Company or any other person and at such discounts or premiums and on such other terms as they consider appropriate; (c) guarantee the repayment of money by any other person or the performance of any obligation of any other person; and (d) mortgage, charge, whether by way of specific or floating charge, grant a security interest in, or give other security on, the whole or any part of the present and future assets and undertaking of the Company.
6 PART 9 ALTERATIONS 9.1 Alteration of Authorized Share Structure. Subject to Article 9.2, Article 9.3 and the Business Corporations Act, the Company may by a resolution passed at a general meeting of shareholders by two thirds of the votes cast on such resolution by shareholders voting shares that carry the right to vote at general meetings: (a) create one or more classes or series of shares or, if none of the shares of a class or series of shares are allotted or issued, eliminate that class or series of shares; (b) increase, reduce or eliminate the maximum number of shares that the Company is authorized to issue out of any class or series of shares or establish a maximum number of shares that the Company is authorized to issue out of any class or series of shares for which no maximum is established; (c) subdivide or consolidate all or any of its unissued, or fully paid issued, shares; (d) if the Company is authorized to issue shares of a class of shares with par value: (i) decrease the par value of those shares; or (ii) if none of the shares of that class of shares are allotted or issued, increase the par value of those shares; (e) change all or any of its unissued, or fully paid issued, shares with par value into shares without par value or any of its unissued shares without par value into shares with par value; (f) alter the identifying name of any of its shares; or (g) otherwise alter its shares or authorized share structure when required or permitted to do so by the Business Corporations Act. 9.2 Special Rights and Restrictions of Issued Preferred Shares. Subject to the requirements under the Business Corporations Act, the Company may by an ordinary resolution of the shareholders, voting together as a single class: (a) create special rights or restrictions for, and attach those special rights or restrictions to, the shares of any class of preferred shares or series of preferred shares that have been issued; or (b) vary or delete any special rights or restrictions attached to the shares of any class of preferred shares or series of preferred shares that have been issued. 9.3 Special Rights and Restrictions. Subject to the Business Corporations Act, the Company may by a resolution passed at a general meeting of shareholders by two thirds of the votes cast on such resolution by shareholders voting shares that carry the right to vote at general meetings: (a) create special rights or restrictions for, and attach those special rights or restrictions to, the shares of any class or series of shares that have not been issued; or
7 (b) vary or delete any special rights or restrictions attached to the shares of any class or series of shares that have not been issued. 9.4 Alterations by Directors' Resolutions. Subject to the Business Corporations Act, and without restricting the powers of the directors pursuant to Parts 26, 27, 28 and 29 of these Articles, the Company may by a simple majority of the Board: (a) Alter the authorized share structure: (i) if none of the shares of a class or series of shares are allotted or issued, eliminate that class or series of shares; (ii) subdivide or consolidate all or any of its unissued shares; (iii) if the Company is authorized to issue shares of a class of shares with par value: (A) decrease the par value of those shares; or (B) if none of the shares of that class of shares are allotted or issued, increase the par value of those shares; (iv) change all or any of its unissued, or fully paid issued, shares with par value into shares without par value or any of its unissued shares without par value into shares with par value; (v) alter the identifying name of any of its shares. (b) Alter any other sections of these Articles to the fullest extent permitted by the Business Corporations Act if the Business Corporations Act does not specify the type of resolution required and these Articles do not specify a shareholders' resolution is required. 9.5 Change of Name. The Company may by a directors' resolution authorize an alteration of its Notice of Articles in order to change its name. 9.6 Other Alterations. If the Business Corporations Act does not specify the type of resolution, these Articles do not give authority to the directors to make such a resolution, and these Articles do not specify another type of resolution, the Company may by the affirmative vote of the holders of 66 2/3% of the voting power of the issued and outstanding shares entitled to vote on such matters, voting together as a single class, alter these Articles. 9.7 Alterations after one or more Adjournments. If a meeting of shareholders has been adjourned one or more times due to insufficient attendance required to pass any resolution, and at such adjourned meeting, less than the number of holders required to pass any resolution requiring 66 2/3% of the voting power of the issued and outstanding shares, as applicable, is present in person or by proxy, with the approval of the Board, the holders holding at least 66 2/3% of the shares represented at such adjourned meeting and entitled to vote on the matter, voting together as a single class, may alter these Articles.
8 PART 10 MEETINGS OF SHAREHOLDERS 10.1 Annual General Meetings. Unless an annual general meeting is deferred or waived in accordance with the Business Corporations Act, the Company must hold an annual general meeting at least once in each calendar year and not more than 15 months after the last annual reference date on a date and at a time as may be fixed by resolution of the Board and set forth in the notice of meeting. 10.2 Resolution Instead of Annual or Special Meeting Prohibited. Any action required or permitted to be taken by the shareholders of the Company must be taken at a duly held annual or special meeting of shareholders and may not be taken by any consent in writing of such shareholders. 10.3 Calling of Meetings of Shareholders. Meetings of shareholders of the Company to consider special business may be called by: (a) the Board, pursuant to a resolution stating the purpose or purposes thereof approved by a majority of the Board, or (b) the Chairman of the Board. No business other than that stated in the notice shall be transacted at any meetings called to consider special business pursuant to this Section 10.3. 10.4 Notice for Meetings of Shareholders. The Company must send notice of the date, time, location, and the means of remote communication, if any, by which shareholders and proxy holders may be deemed to be present in person and vote at the meeting, of any meeting of shareholders, in the manner provided in these Articles, or in such other manner, if any, as may be prescribed by ordinary resolution (whether previous notice of the resolution has been given or not), to each shareholder entitled to attend the meeting, to each director and to the auditor of the Company, unless these Articles otherwise provide, not more than two months and at least the following number of days before the meeting: (a) if and for so long as the Company is a public company, 21 days; (b) otherwise, 10 days. Except as required by law, holders of Preferred Shares are not entitled to receive notice of any meeting of shareholders at which they are not entitled to vote. Subject to the Business Corporations Act, any previously scheduled meeting of the shareholders may be postponed by resolution of the Board upon public notice given prior to the date previously scheduled for the meeting of shareholders. 10.5 Record Date for Notice. The directors may set a date as the record date for the purpose of determining shareholders entitled to notice of any meeting of shareholders. The record date must not precede the date on which the meeting is to be held by more than two months or, in the case of a general meeting requisitioned by shareholders under the Business Corporations Act, by more than four months. The record date must not precede the date on which the meeting is held by fewer than: (a) if and for so long as the Company is a public company, 21 days; (b) otherwise, 10 days.
9 If no record date is set, the record date is 5 p.m. pacific time on the day immediately preceding the first date on which the notice is sent or, if no notice is sent, the beginning of the meeting. 10.6 Record Date for Voting. The directors may set a date as the record date for the purpose of determining shareholders entitled to vote at any meeting of shareholders. The record date must not precede the date on which the meeting is to be held by less than 21 days or more than two months or, in the case of a general meeting requisitioned by shareholders under the Business Corporations Act, by more than four months. If no record date is set, the record date is 5 p.m. pacific time on the day immediately preceding the first date on which the notice is sent or, if no notice is sent, the beginning of the meeting. When a determination of shareholders entitled to vote at any meeting of shareholders has been made, as provided in this Section, the determination shall apply to any adjournment thereof except where the determination has been made through the closing of share transfer books and the stated period of closing has expired. 10.7 Record Date for Other Purposes. The directors may set a date as the record date for the purpose of determining shareholders for any purpose. The record date must not precede the date on which the meeting is to be held by less than 21 days or more than two months or, in the case of a general meeting requisitioned by shareholders under the Business Corporations Act, by more than four months. If no record date is set, the record date is 5 p.m. on the date on which the directors pass the resolution relating to the matter for which the record date is required. 10.8 Failure to Give Notice and Waiver of Notice. The accidental omission to send notice of any meeting to, or the non-receipt of any notice by, any of the persons entitled to notice does not invalidate any proceedings at that meeting. Any person entitled to notice of a meeting of shareholders may, in writing or otherwise, waive or reduce the period of notice of such meeting. 10.9 Notice of Special Business at Meetings of Shareholders. If a meeting of shareholders is to consider special business within the meaning of Article 11.1, the notice of meeting must: (a) state the general nature of the special business; and (b) if the special business includes considering, approving, ratifying, adopting or authorizing any document or the signing of or giving of effect to any document, have attached to it a copy of the document or state that a copy of the document will be available for inspection by shareholders: at the Company's records office, or at such other reasonably accessible location in British Columbia as is specified in the notice; and (c) be delivered during statutory business hours on any one or more specified days before the day set for the holding of the meeting. 10.10 Location of General Meetings. The Chairman of the Board, or the Board, by a resolution passed by a majority of the directors, may determine the location of any meeting of shareholders, and such locations may be held outside of British Columbia. 10.11 Notice of Shareholder Business and Nominations. (a) Annual Meetings of Shareholders. (i) Nominations of persons for election to the Board and the proposal of business to be considered by the shareholders may be made at an annual meeting of shareholders (A) pursuant to the Company’s notice of meeting in accordance with Part 10 of these Articles, (B) by or at the direction of the Board, (C) by or at the
10 direction or request of one or more "qualified shareholders" pursuant to a valid "proposal", each as defined in the Business Corporations Act, and made in accordance with Part 5, Division 7 of the Business Corporations Act, (D) pursuant to a requisition of the shareholders that complies with and is made in accordance with section 167 of the Business Corporations Act or (E) by any shareholder of the Company who was a shareholder of record at the time the notice was delivered, who is entitled to vote at the meeting and who complies with the notice procedures set forth below. For greater certainty, this Section 10.11(a) shall not apply to nominations of persons for election to the Board and the proposal of business to be considered by the shareholders pursuant to a shareholder requisition or a shareholder proposal specified in clauses (C) and (D) of the immediately preceding sentence that is made in accordance with the applicable provisions of the Business Corporations Act. (ii) For nominations or other business to be properly brought before an annual meeting by a shareholder pursuant to paragraph (i)(E) of this Section 10.11(a), the shareholder must have given timely notice thereof in writing to the Secretary of the Company in accordance with this Section 10.11(a) and, in the case of business other than nominations, such other business must otherwise be a proper matter for shareholder action under the Business Corporations Act. To be considered timely, a shareholder’s notice shall be delivered to the Secretary at the principal executive offices of the Company not later than the close of business on the 120th calendar day prior to the first anniversary of the preceding year’s annual meeting; provided, however, that in the event that the date of the annual meeting is more than 30 calendar days before or more than 30 calendar days after the anniversary date, notice by the shareholder to be timely must be so delivered not later than the close of business on the later of (A) the 120th calendar day prior to the annual meeting or (B) the 10th calendar day following the calendar day on which public announcement of the date of the meeting is first made by the Company. The number of nominees a shareholder may nominate for election at the annual meeting (or in the case of a shareholder giving the notice on behalf of a beneficial owner, the number of nominees a shareholder may nominate for election at the annual meeting on behalf of the beneficial owner) shall not exceed the number of directors to be elected at such annual meeting. In no event shall the public announcement of an adjournment of an annual meeting commence a new time period for the giving of a shareholder’s notice as described above. (iii) A shareholder’s notice shall set forth: (A) to each person whom the shareholder proposes to nominate for election or re-election as a director, (i) all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors and (ii) a written representation and agreement, which shall be signed by such person and pursuant to which such person shall represent and agree that such person (a) consents to being named in a proxy statement and form of proxy as a nominee and to serving as a director if elected; (b) is not and will not become a party to any agreement, arrangement or understanding with, and has not given any commitment or assurance to, any person or entity as to how the person, if elected as a director, will act or vote on any issue or question that has not been disclosed to the Company
11 or that could limit or interfere with the person’s ability to comply, if elected as a director, with such person’s fiduciary duties under applicable law; (c) is not and will not become a party to any agreement, arrangement or understanding with any person or entity other than the Company with respect to any direct or indirect compensation, reimbursement or indemnification in connection with service or action as a director or nominee that has not been disclosed to the Company; and (d) if elected as a director, will comply with all of the Company’s corporate governance policies and guidelines related to conflict of interest, confidentiality, stock ownership and trading policies and guidelines, and any other policies and guidelines applicable to directors (which will be promptly provided following a request therefor); (B) as to any other business that the shareholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the text of the proposal or business (including the text of any resolutions proposed for consideration and in the event that such business includes a proposal to alter the Articles of the Company, the language of the proposed alteration), the reasons for conducting such business at the meeting and any material interest in such business of such shareholder and the beneficial owner, if any, on whose behalf the proposal is made; and (C) as to the shareholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made, and if such shareholder or beneficial owner is an entity, as to each individual who is a director, executive officer, general partner or managing member of such entity or of any other entity that has or shares control of such entity (any such individual or entity, a “control person”) (i) the name and address of such shareholder, as they appear on the Company’s books, and of such beneficial owner, (ii) the class or series and number of shares of the Company held of record and beneficially by such shareholder, such beneficial owner and any control person, (iii) a description of any agreement, arrangement or understanding with respect to the nomination or proposal between or among such shareholder and such beneficial owner, any of their respective affiliates or associates, and any others acting in concert with any of the foregoing, (iv) a description of any agreement, arrangement or understanding (including any derivative or short positions, profit interests, options, warrants, share appreciation or similar rights, hedging transactions, and borrowed or loaned shares) that has been entered into as of the date of the shareholder’s notice by, or on behalf of, such shareholder, such beneficial owners or any control person, the effect or intent of which is to mitigate loss to, manage risk or benefit of share price changes for, or increase or decrease the voting power of, such shareholder or such beneficial owner, with respect to shares of the Company, (v) the name in which all such shares are registered on the share transfer books of the Company, (vi) a representation that the shareholder is a holder of record of shares of the Company entitled to vote at such meeting and intends to appear at the meeting in person or by proxy to submit the business or nomination specified in such notice, (vii) a representation as to whether the shareholder, the beneficial owner, if any, any control person
12 or any other participant (as defined in Item 4 of Schedule 14A under the Exchange Act) will engage in a solicitation with respect to such nomination or proposal and, if so, whether or not such solicitation will be conducted as an exempt solicitation under Rule 14a-2(b) under the Exchange Act, the name of each participant in such solicitation and (a) in the case of a proposal of business other than nominations, whether such person or group intends to deliver, through means satisfying each of the conditions that would be applicable to the Company under either Exchange Act Rule 14a-16(a) or Exchange Act Rule 14a-16(n), a proxy statement and form of proxy to holders (including any beneficial owners pursuant to Rule 14b-1 and Rule 14b-2 under the Exchange Act) of at least the percentage of the Company's outstanding share capital required under applicable law to approve or adopt the proposal or (b) in the case of any solicitation that is subject to Rule 14a-19 under the Exchange Act, confirming that such person or group will deliver, through means satisfying each of the conditions that would be applicable to the Company under either Exchange Act Rule 14a-16(a) or Exchange Act Rule 14a- 16(n), a proxy statement and form of proxy to holders (including any beneficial owners pursuant to Rule 14b-1 and Rule 14b-2 under the Exchange Act) of at least 67% of the voting power of the Company’s outstanding share capital entitled to vote generally in the election of directors, (viii) a representation that immediately after soliciting proxies from the percentage of shareholders referred to in the representation required under the immediately preceding clause (vii)(b), and no later than the 10th day before such meeting of shareholders, such shareholder or beneficial owner will provide the Company with documents, which may take the form of a certified statement and documentation from a proxy solicitor, specifically demonstrating that the necessary steps have been taken to deliver a proxy statement and form of proxy to holders of such percentage of the Company’s outstanding share capital and (ix) all other information relating to the proposed business or nomination which may be required to be disclosed under applicable law. In addition, a shareholder seeking to submit such business or nomination at the meeting shall promptly provide any other information reasonably requested by the Company. The foregoing notice requirements of this Section 10.11(a) shall be deemed satisfied by a shareholder with respect to business other than a nomination if the shareholder has notified the Company of his, her or its intention to present a proposal at an annual meeting in compliance with Rule 14a-8 under the Exchange Act and such shareholder’s proposal has been included in a proxy statement that has been prepared by the Company to solicit proxies for such annual meeting. The Company may require any proposed nominee to furnish such other information as it may reasonably require to determine the eligibility of such proposed nominee to serve as a director of the Company, including, without limitation, a written questionnaire with respect to the background and qualification of any proposed nominee in the form required by the Company. (iv) Notwithstanding anything in the second sentence of paragraph (ii) of this Section 10.11(a) to the contrary, in the event that the number of directors to be elected to the Board is increased and there is no public announcement by the Company
13 naming all of the nominees for director or specifying the size of the increased Board at least 120 calendar days prior to the first anniversary of the preceding year’s annual meeting, a shareholder's notice required by this Section 10.11 shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it is delivered to the Secretary at the principal executive offices of the Company not later than the close of business on the 10th calendar day following the day on which such public announcement is first made by the Company. (b) Special Meetings of the Shareholders. (i) Only such business shall be conducted at a special meeting of shareholders as shall have been brought before the meeting (A) by or at the direction of the Board pursuant to the Company's notice of meeting under Section 10.4 of these Articles, (B) by or at the direction or request of one or more "qualified shareholders" pursuant to a valid "proposal", each as defined in the Business Corporations Act, and made in accordance with Part 5, Division 7 of the Business Corporations Act, or (C) pursuant to a requisition of the shareholders that complies with and is made in accordance with section 167 of the Business Corporations Act. (ii) Nominations of persons for election to the Board may be made at a special meeting of shareholders at which directors are to be elected (A) by or at the direction of the Board pursuant to the Company's notice of meeting, provided that the Board has determined that directors shall be elected at such meeting, (B) by or at the direction or request of one or more "qualified shareholders" pursuant to a valid "proposal", each as defined in the Business Corporations Act, and made in accordance with Part 5, Division 7 of the Business Corporations Act, (C) pursuant to a requisition of the shareholders that complies with and is made in accordance with section 167 of the Business Corporations Act, or (D) by any shareholder of the Company who is a shareholder of record at the time of giving of notice provided for in this Section 10.11 who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 10.11. In the event the Company calls a special meeting of shareholders for the purpose of electing one or more directors to the Board, any shareholder may nominate a person or persons (as the case may be) for election to such position(s) as specified in the Company’s notice of meeting pursuant to paragraph (ii)(D) of this Section 10.11(b) if the shareholder’s notice required by paragraph (a)(iii) of this Section 10.11 is delivered to the Secretary at the principal executive offices of the Company not later than the close of business on the later of the 120th calendar day prior to such special meeting or the 10th calendar day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board to be elected at such meeting. The number of nominees a shareholder may nominate for election at the special meeting (or in the case of a shareholder giving the notice on behalf of a beneficial owner, the number of nominees a shareholder may nominate for election at the special meeting on behalf of such beneficial owner) shall not exceed the number of directors to be elected at such special meeting. In no event shall the public announcement of an adjournment of a special meeting commence a new time period for the giving of a shareholder’s notice as described above.
14 (c) General. (i) Only the persons who are nominated in accordance with the procedures set forth in this Article are eligible to serve as directors and only such business shall be conducted at a meeting of shareholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 10.11. Except as otherwise provided by law, the Notice of Articles or these Articles, the chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this Article (including whether a shareholder or beneficial owner complied or did not comply with the requirements of Rule 14a-19 under the Exchange Act) and, if any proposed nomination or business in not in compliance with this Article and/or Rule 14a-19 under the Exchange Act, shall declare that the defective proposal or nomination will be disregarded, notwithstanding that votes and proxies in respect of any such nomination or other business have been received by the Company. (ii) For purposes of this Section 10.11, “public announcement” shall mean disclosure in a press release reported by a comparable US or Canadian national news service or in a document publicly filed by the Company with the Securities and Exchange Commission, and the Toronto Stock Exchange and “close of business” shall mean 5:00 p.m. (New York City time) on any calendar day, whether or not the day is a business day. (iii) Notwithstanding the foregoing provisions, shareholders shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 10.11; provided however, that any references in these Articles to the Exchange Act or the rules and regulations promulgated thereunder are not intended to and shall not limit any requirements applicable to nominations or proposals as to any other business to be considered pursuant to this Section 10.11. Nothing in this Section 10.11 shall be deemed to affect any rights (A) of shareholders to request inclusion of proposals in the Company’s proxy statement pursuant to Rule 14a-8 under the Exchange Act or (B) of the holders of any series of Preferred Shares to elect directors under an applicable Designation of Series of Class A Preferred Shares or Designation of Series of Class B Preferred Shares (as defined in Part 26 and 28 of these Articles). (iv) Any shareholder directly or indirectly soliciting proxies from other shareholders must use a proxy card color other than white, which shall be reserved for the exclusive use for solicitation by the Board. PART 11 PROCEEDINGS AT MEETINGS OF SHAREHOLDERS 11.1 Special Business. At a meeting of shareholders, the following business is special business: (a) at a meeting of shareholders that is not an annual general meeting, all business is special business except business relating to the conduct of or voting at the meeting; (b) at an annual general meeting, all business is special business except for the following:
15 (i) business relating to the conduct of or voting at the meeting; (ii) consideration of any financial statements of the Company presented to the meeting; (iii) consideration of any reports of the directors or auditor; (iv) the setting or changing of the number of directors; (v) the election or appointment of directors; (vi) the compensation and remuneration of directors and officers, including "say-on- pay" and "say-when-on-pay" votes regarding director or officer compensation and any plans or programs regarding such compensation; (vii) the appointment of an auditor or the ratification of the Company's appointment of an auditor; (viii) the setting of the remuneration of an auditor; (ix) business arising out of a report of the directors not requiring the passing of a special resolution or an exceptional resolution; and (x) any other business which, under these Articles or the Business Corporations Act, may be transacted at a meeting of shareholders without prior notice of the business being given to the shareholders. 11.2 Business Approval. Except as otherwise required by these Articles or the Business Corporations Act, the Company may by a resolution of shareholders approved by the majority of the votes cast by shareholders voting shares that carry the right to vote thereon approve any business to be considered by the shareholders, including special business, at any meeting of shareholders. In the case of any business, including special business, submitted for a vote of the shareholders as to which a shareholder approval requirement is applicable under the shareholder approval policy of any stock exchange or quotation system on which the shares of the Company are traded or quoted, the requirements of Rule 16b-3 under the Exchange Act or any provision of the U.S. Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), in each case for which no higher voting requirement is specified by the Business Corporations Act or these Articles, the vote required for approval shall be the requisite vote specified in such shareholder approval policy, Rule 16b-3 or Internal Revenue Code provision, as the case may be (or the highest such requirement if more than one is applicable). In the case of any proposal for shareholder action properly made by a shareholder pursuant to Rule 14a-8 under the Exchange Act, the vote required for approval shall be the affirmative vote of the holders of a majority of the shares entitled to vote on, and who voted for or against or abstained from voting on, the matter. 11.3 Actions Requiring a Special Resolution. The following actions that are required by the Business Corporations Act to be passed by a special resolution of the shareholders, being an arrangement, conversion, amalgamation, a sale, lease or a disposition of all or substantially all of its undertaking, continuation or liquidation, may be passed only with a special resolution having a requisite special majority of two-thirds of the votes cast at a meeting of shareholders. 11.4 Quorum. Except as otherwise provided by law, the Notice of Articles or these Articles, the holders of a majority of the voting power of all outstanding shares of the Company represented in person or by proxy, shall constitute a quorum at a meeting of shareholders, except that when specified business is
16 to be voted on by a class or series of shares voting as a class, the holders of a majority of the shares of that class or series shall constitute a quorum of the class or series for the transaction of business. The chairman of the meeting or a majority of the shares so represented may adjourn the meeting from time to time, whether or not there is a quorum. No notice of the time and place of adjourned meetings need be given except as required by law or these Articles. The shareholders present in person or by proxy at a duly called meeting at which a quorum is present may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum. 11.5 One Shareholder May Constitute Quorum. If there is only one shareholder entitled to vote at a meeting of shareholders: (a) the quorum is one person who is, or who represents by proxy, that shareholder, and (b) that shareholder, present in person or by proxy, may constitute the meeting. 11.6 Other Persons May Attend. The directors, the president (if any), the secretary (if any), the assistant secretary (if any), any lawyer for the Company, the auditor of the Company and any other persons invited by the directors are entitled to attend any meeting of shareholders, but if any of those persons does attend a meeting of shareholders, that person is not to be counted in the quorum and is not entitled to vote at the meeting unless that person is a shareholder or proxy holder entitled to vote at the meeting. 11.7 Requirement of Quorum. No business, other than the adjournment of the meeting, may be transacted at any meeting of shareholders unless a quorum of shareholders entitled to vote is present at the commencement of the meeting, but such quorum need not be present throughout the meeting. 11.8 Lack of Quorum. If, within one-half hour from the time set for the holding of a meeting of shareholders, a quorum is not present: (a) in the case of a general meeting requisitioned by shareholders, the meeting is dissolved, and (b) in the case of any other meeting of shareholders, the meeting stands adjourned to the same day in the next week at the same time and place. 11.9 Quorum Required at Succeeding Meeting. No business may be transacted at any adjourned meeting of shareholders referred to in Article 11.8(b) unless a quorum of shareholders entitled to vote is present at the commencement of the meeting, but such quorum need not be present throughout the meeting. 11.10 Chair. The chair of the shareholders' meetings shall be the Chairman of the Board, failing him/her, the then Chief Executive Officer, failing him/her, whomever the Chairman of the Board appoints is entitled to chair the shareholders' meetings. 11.11 Inspectors of Elections; Opening and Closing the Polls. The Board by resolution shall appoint, or shall authorize an officer of the Company to appoint, one or more inspectors, which inspector or inspectors may include individuals who serve the Company in other capacities, including, without limitation, as officers, employees, agents or representatives, to act at the meetings of shareholders and make a written report thereof. One or more persons may be designated as alternate inspector(s) to replace any inspector who fails to act. If no inspector or alternate has been appointed to act or is able to act at a meeting of the shareholders, the chairman of the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before discharging such person’s duties, shall take and sign an oath faithfully to execute
17 the duties of inspector with strict impartiality and according to the best of such person’s ability. The inspector(s) shall have the duties prescribed by law. The chairman of the meeting shall fix and announce at the meeting the date and time of the opening and the closing of the polls for each matter upon which the shareholders will vote at a meeting. 11.12 Conduct of Meetings. The Board may to the extent not prohibited by law adopt such rules and regulations for the conduct of meetings of shareholders as it shall deem appropriate. Except to the extent inconsistent with such rules and regulations as adopted by the Board, the chairman of any meeting of shareholders shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are appropriate for the proper conduct of the meeting. Such rules, regulations or procedures, whether adopted by the Board or prescribed by the chairman of the meeting, may to the extent not prohibited by law include, without limitation, the following: (a) the establishment of an agenda or order of business for the meeting; (b) rules and procedures for maintaining order at the meeting and the safety of those present; (c) limitations on attendance at or participation in the meeting to shareholders of record of the Company, their duly authorized and constituted proxies or such other persons as the chairman of the meeting shall determine; (d) restrictions on entry to the meeting after the time fixed for the commencement thereof; and (e) limitations on the time allotted to questions or comments by participants. Unless and to the extent determined by the Board or the chairman of the meeting, meetings of shareholders are not required to be held in accordance with the rules of parliamentary procedure. 11.13 Adjournments. The chair of a meeting of shareholders may, and if so directed by the meeting must, adjourn the meeting from time to time and from place to place, but no business may be transacted at any adjourned meeting other than the business left unfinished at the meeting from which the adjournment took place. 11.14 Notice of Adjourned Meeting. It is not necessary to give any notice of an adjourned meeting or of the business to be transacted at an adjourned meeting of shareholders except that, when a meeting is adjourned for 30 days or more, notice of the adjourned meeting must be given as in the case of the original meeting. 11.15 Decision by Show of Hands or Poll. Subject to the Business Corporations Act, every motion put to a vote at a meeting of shareholders will be decided on a show of hands unless a poll, before or on the declaration of the result of the vote by show of hands, is directed by the chair or demanded by at least one shareholder entitled to vote who is present in person or by proxy. 11.16 Declaration of Result. The chair of a meeting of shareholders must declare to the meeting the decision on every question in accordance with the result of the show of hands or the poll, as the case may be, and that decision must be entered in the minutes of the meeting. A declaration of the chair that a resolution is carried by the necessary majority or is defeated is, unless a poll is directed by the chair or demanded under Article 11.15, conclusive evidence without proof of the number or proportion of the votes recorded in favour of or against the resolution. 11.17 Motion Need Not be Seconded. No motion proposed at a meeting of shareholders need be seconded unless the chair of the meeting rules otherwise, and the chair of any meeting of shareholders is entitled to propose or second a motion. 11.18 Casting Vote. In case of an equality of votes, the chair of a meeting of shareholders does not have a second or casting vote.
18 11.19 Meetings by Remote Communication. If authorized by the Board, and subject to any guidelines and procedures that the Board may adopt, shareholders and proxy holders not physically present at a meeting of shareholders may, by means of remote communication, participate in the meeting and be deemed present in person and vote at the meeting, whether the meeting is to be held in a designated place or solely by means of remote communication, provided that (a) the Company implements reasonable measures to verify that each person deemed present and permitted to vote at the meeting by means of remote communication is a shareholder or proxy holder; (b) the Company implements reasonable measures to provide shareholders and proxy holders a reasonable opportunity to participate in the meeting and to vote on matters submitted to the shareholders, including the opportunity to read or hear the proceedings in the meeting substantially concurrently with such proceedings; and (c) if the shareholder or proxy holder votes or takes other action at the meeting by means of remote communication, a record of the vote or other action is maintained by the Company. A shareholder or proxy holder who participates in a meeting in a manner contemplated by this Article 11.19 is deemed for all purposes of the Business Corporations Act and these Articles to be present at the meeting and to have agreed to participate in that manner. PART 12 VOTES OF SHAREHOLDERS 12.1 Number of Votes by Shareholder or by Shares. Subject to any special rights or restrictions attached to any shares and to the restrictions imposed on joint shareholders under Article 12.3: (a) on a vote by show of hands, every person present who is a shareholder or proxy holder and entitled to vote on the matter has one vote; and (b) on a poll, every shareholder entitled to vote on the matter has one vote in respect of each share entitled to be voted on the matter and held by that shareholder and may exercise that vote either in person or by proxy. 12.2 Votes of Persons in Representative Capacity. A person who is not a shareholder may vote at a meeting of shareholders, whether on a show of hands or on a poll, and may appoint a proxy holder to act at the meeting, if, before doing so, the person satisfies the chair of the meeting, or the directors, that the person is a legal personal representative or a trustee in bankruptcy for a shareholder who is entitled to vote at the meeting. 12.3 Votes by Joint Holders. If there are joint shareholders registered in respect of any share: (a) any one of the joint shareholders may vote at any meeting, either personally or by proxy, in respect of the share as if that joint shareholder were solely entitled to it; or (b) if more than one of the joint shareholders is present at any meeting, personally or by proxy, and more than one of them votes in respect of that share, then only the vote of the joint shareholder present whose name stands first on the central securities register in respect of the share will be counted. 12.4 Legal Personal Representatives as Joint Shareholders. Two or more legal personal representatives of a shareholder in whose sole name any share is registered are, for the purposes of Article 12.3, deemed to be joint shareholders. 12.5 Representative of a Corporate Shareholder. If an entity that is not an individual and that is not a subsidiary of the Company is a shareholder, that entity may appoint a person to act as its representative at any meeting of shareholders of the Company, and:
19 (a) for that purpose, the instrument appointing a representative must: (i) be received at the registered office of the Company or at any other place specified, in the notice calling the meeting, for the receipt of proxies, at least the number of business days specified in the notice for the receipt of proxies, or if no number of days is specified, two business days before the day set for the holding of the meeting; or (ii) be provided, at the meeting, to the chair of the meeting or to a person designated by the chair of the meeting; (b) if a representative is appointed under this Article 12.5: (i) the representative is entitled to exercise in respect of and at that meeting the same rights on behalf of the entity that the representative represents as that corporation could exercise if it were a shareholder who is an individual, including, without limitation, the right to appoint a proxy holder; and (ii) the representative, if present at the meeting, is to be counted for the purpose of forming a quorum and is deemed to be a shareholder present in person at the meeting. Evidence of the appointment of any such representative may be sent to the Company by written instrument, fax or any other method of transmitting legibly recorded messages. 12.6 Proxy Provisions Do Not Apply to All Companies. Articles 12.7 to 12.15 do not apply to the Company if and for so long as it is a public company within the meaning of the Business Corporations Act. 12.7 Appointment of Proxy Holders. Every shareholder of the Company, including an entity that is a shareholder but not a subsidiary of the Company, entitled to vote at a meeting of shareholders of the Company may, by proxy, appoint one or more (but not more than five) proxy holders to attend and act at the meeting in the manner, to the extent and with the powers conferred by the proxy. 12.8 Alternate Proxy Holders. A shareholder may appoint one or more alternate proxy holders to act in the place of an absent proxy holder. 12.9 When Proxy Holder Need Not Be Shareholder. A person must not be appointed as a proxy holder unless the person is a shareholder, although a person who is not a shareholder may be appointed as a proxy holder if: (a) the person appointing the proxy holder is a corporation or a representative of a corporation appointed under Article 12.5; (b) the Company has at the time of the meeting for which the proxy holder is to be appointed only one shareholder entitled to vote at the meeting; or (c) the shareholders present in person or by proxy at and entitled to vote at the meeting for which the proxy holder is to be appointed, by a resolution on which the proxy holder is not entitled to vote but in respect of which the proxy holder is to be counted in the quorum, permit the proxy holder to attend and vote at the meeting.
20 12.10 Deposit of Proxy. A proxy for a meeting of shareholders must: (a) be received at the registered office of the Company or at any other place specified, in the notice calling the meeting, for the receipt of proxies, at least the number of business days specified in the notice, or if no number of days is specified, two business days before the day set for the holding of the meeting; or (b) unless the notice provides otherwise, be provided, at the meeting, to the chair of the meeting or to a person designated by the chair of the meeting. A proxy may be sent to the Company by written instrument, fax or any other method of transmitting legibly recorded messages. 12.11 Validity of Proxy Vote. A vote given in accordance with the terms of a proxy is valid notwithstanding the death or incapacity of the shareholder giving the proxy and despite the revocation of the proxy or the revocation of the authority under which the proxy is given, unless notice in writing of that death, incapacity or revocation is received: (a) at the registered office of the Company, at any time up to and including the last business day before the day set for the holding of the meeting at which the proxy is to be used; or (b) by the chair of the meeting, before the vote is taken. 12.12 Form of Proxy. A proxy, whether for a specified meeting or otherwise, must be either in the following form or in any other form approved by the directors or the chair of the meeting: [Name of Company] The undersigned, being a shareholder of the above named Company, hereby appoints ______________, or, failing that person, _____________ , as proxy holder for the undersigned to attend, act and vote for and on behalf of the undersigned at the meeting of shareholders of the Company to be held on [ __ day of _______, 202__] and at any adjournment of that meeting. Signed this ___ day of _________, 202__. _________________________ Signature of shareholder _________________________ Name of shareholder - printed 12.13 Revocation of Proxy. Subject to Article 12.14, every proxy may be revoked by an instrument in writing that is: (a) received at the registered office of the Company at any time up to and including the last business day before the day set for the holding of the meeting at which the proxy is to be used; or (b) provided, at the meeting, to the chair of the meeting.
21 12.14 Revocation of Proxy Must Be Signed. An instrument referred to in Article 12.13 must be signed as follows: (a) if the shareholder for whom the proxy holder is appointed is an individual, the instrument must be signed by the shareholder or his or her legal personal representative or trustee in bankruptcy; or (b) if the shareholder for whom the proxy holder is appointed is a corporation, the instrument must be signed by the corporation or by a representative appointed for the corporation under Article 12.5. 12.15 Production of Evidence of Authority to Vote. The chair of any meeting of shareholders may, but need not, inquire into the authority of any person to vote at the meeting and may, but need not, demand from that person production of evidence as to the existence of the authority to vote. 12.16 Appointment of Attorney or Agent to Cast Vote in any other Corporation. Unless otherwise provided by directors resolution, the Chief Executive Officer, the Chairman of the Board, the President or any Executive Vice President, Senior Vice President or Vice President may from time to time appoint an attorney or attorneys or agent or agents of the Company, in the name of and on behalf of the Company, to cast the votes which the Company may be entitled to cast as the holder of shares or other securities in any other entity, any of whose shares or other securities may be held by the Company, at meetings of the holders of the shares or other securities of the other entity, or to consent in writing, in the name of the Company as such holder, to any action by such other entity, and may instruct the person or persons so appointed as to the manner of casting such votes or giving such consent, and may execute or cause to be executed in the name and on behalf of the Company and under its corporate seal, if any, or otherwise, all such written proxies or other instruments as he or she may deem necessary or proper. PART 13 DIRECTORS 13.1 First Directors; Number of Directors. The first directors are the persons designated as directors of the Company in the Notice of Articles that applies to the Company when it is recognized under the Business Corporations Act. The number of directors, excluding additional directors appointed under Article 14.8, is set at: (a) if the Company is a public company, the greater of three and the most recently set of: (i) the number of directors as determined by the Board; and (ii) the number of directors set under Article 14.5; (b) if the Company is not a public company, the most recently set of: (i) the number of directors as determined by the Board; and (ii) the number of directors set under Article 14.5. 13.2 Change in Number of Directors. If the number of directors is changed pursuant to Article 13.1, the majority of the directors during a directors' meeting or if by written resolution, by unanimous written consent of the directors may appoint a director or directors, as the case may be, to accommodate
22 any vacancies in the Board of directors resulting from the change in the number of directors set by the shareholders. 13.3 Directors' Acts Valid Despite Vacancy. An act or proceeding of the directors is not invalid merely because fewer than the number of directors set or otherwise required under these Articles is in office. 13.4 Remuneration of Directors. The directors are entitled to the remuneration for acting as directors, if any, as the directors may from time to time determine. If the directors so decide, the remuneration of the directors, if any, will be determined by the shareholders. That remuneration may be in addition to any salary or other remuneration paid to any officer or employee of the Company as such, who is also a director. 13.5 Reimbursement of Expenses of Directors. The Company must reimburse each director for the reasonable expenses that he or she may incur in and about the business of the Company. 13.6 Special Remuneration for Directors. If any director performs any professional or other services for the Company that in the opinion of the directors are outside the ordinary duties of a director, or if any director is otherwise specially occupied in or about the Company's business, he or she may be paid remuneration fixed by the directors, or, at the option of that director, fixed by ordinary resolution, and such remuneration may be either in addition to, or in substitution for, any other remuneration that he or she may be entitled to receive. 13.7 Gratuity, Pension or Allowance on Retirement of Director. Unless otherwise determined by ordinary resolution, the directors on behalf of the Company may pay a gratuity or pension or allowance on retirement to any director who has held any salaried office or place of profit with the Company or to his or her spouse or dependants and may make contributions to any fund and pay premiums for the purchase or provision of any such gratuity, pension or allowance. PART 14 ELECTION AND REMOVAL OF DIRECTORS 14.1 Procedure for Election of Directors; Required Vote. Election of directors at all meetings of the shareholders at which directors are to be elected need not be by written ballot unless otherwise determined by the Board prior to such meeting, and, subject to the rights of the holders of any series of Preferred Shares to elect directors under an applicable series of Preferred Shares, a plurality of the votes of the shares present in person or represented by proxy at the meeting of shareholders and entitled to vote upon the election the directors shall elect directors. 14.2 Election and Rotation at Annual General Meeting. The directors of the Company shall be elected and divided into three classes, as nearly equal in number as is ratably possible: Class I directors, Class II directors and Class III directors and shall retire in rotation such that each director is always appointed for a three-year term. Each director shall serve for a term ending on the third annual meeting following the annual meeting of shareholders at which such director was elected; provided, however, that the directors first elected to Class I shall serve for a term expiring at the next annual meeting of shareholders following the end of the 2017 calendar year, the directors first elected to Class II shall serve for a term expiring at the annual meeting of shareholders following the end of the 2015 calendar year, and the directors first elected to Class III shall serve for a term expiring at the annual meeting of shareholders following the end of the 2016 calendar year. Each director shall hold office until the annual meeting of shareholders at which such director's term expires
23 and, the foregoing notwithstanding, shall serve until his or her successor shall have been duly elected and qualified or until his or her earlier death, resignation or removal. At such annual election, the directors chosen to succeed those whose terms then expire shall be of the same class as the directors they succeed, unless, by reason of any intervening changes in the authorized number of directors, the Board shall have designated one or more directorships whose terms then expire as directorships of another class in order to more nearly achieve equality of number of directors among the classes. In the event of any changes in the authorized number of directors, each director then continuing to serve shall nevertheless continue as a director of the class of which he or she is a member until the expiration of his or her current term, or his or her prior death, resignation or removal. The Board, or shareholders, as applicable, shall specify the class to which a newly created directorship shall be allocated. 14.3 Consent to be a Director. No election, appointment or designation of an individual as a director is valid unless: (a) that individual consents to be a director in the manner provided for in the Business Corporations Act; (b) that individual is elected or appointed at a meeting at which the individual is present and the individual does not refuse, at the meeting, to be a director; or (c) with respect to first directors, the designation is otherwise valid under the Business Corporations Act. 14.4 Failure to Elect or Appoint Directors. If: (a) the Company fails to hold an annual general meeting, on or before the date by which the annual general meeting is required to be held under the Business Corporations Act; or (b) the shareholders fail, at the annual general meeting, to elect or appoint any directors; then each director then in office continues to hold office until the earlier of: (i) the date on which his or her successor is elected or appointed; and (ii) the date on which he or she otherwise ceases to hold office under the Business Corporations Act or these Articles. 14.5 Places of Retiring Directors Not Filled. If, at any meeting of shareholders at which there should be an election of directors, the places of any of the retiring directors are not filled by that election, those retiring directors who are not re-elected and who are asked by the newly elected directors to continue in office will, if willing to do so, continue in office to complete the number of directors for the time being set pursuant to these Articles until further new directors are elected at a meeting of shareholders convened for that purpose. If any such election or continuance of directors does not result in the election or continuance of the number of directors for the time being set pursuant to these Articles, the number of directors of the Company is deemed to be set at the number of directors actually elected or continued in office. 14.6 Directors May Fill Vacancies. Any vacancy occurring in the Board may only be filled by a majority of the directors during a directors' meeting or if by written resolution, by unanimous written consent of the directors.
24 14.7 Remaining Directors Power to Act. The directors may act notwithstanding any vacancy in the Board, but if the Company has fewer directors in office than the number set pursuant to these Articles as the quorum of directors, the directors may only act for the purpose of appointing directors up to that number or of summoning a meeting of shareholders for the purpose of filling any vacancies on the Board or, subject to the Business Corporations Act, for any other purpose. 14.8 Additional Directors. Notwithstanding Articles 13.1 and 13.2, between annual general meetings, a majority of the directors may appoint one or more additional directors, but the number of additional directors appointed under this Article 14.8 must not at any time exceed: (a) one-third of the number of first directors, if, at the time of the appointments, one or more of the first directors have not yet completed their first term of office; or (b) in any other case, one-third of the number of the current directors who were elected or appointed as directors other than under this Article 14.8. Any director so appointed shall hold office pursuant to the terms of the class of directors he or she was appointed to, and shall cease to hold office immediately before the next election or appointment of such class of directors under Article 14.2, and is eligible for re-election or re-appointment. For greater clarity, a director appointed to be a Class I director may hold office until the three-year term of the Class I directors has expired. 14.9 Ceasing to be a Director. A director ceases to be a director when: (a) the term of office of the director expires; (b) the director dies; (c) the director resigns as a director by notice in writing or by electronic submission provided to the Company or a lawyer for the Company; or (d) the director is removed from office pursuant to Articles 14.10 or 14.11. 14.10 Removal of Director by Shareholders. Pursuant to this Article 14.10, the shareholders may remove any director before the expiration of his or her term of office by passing a special resolution with the requisite special majority of three-quarters of the votes cast at a meeting of shareholders entitled to vote in the election of directors, voting together as a single class. Upon such a vacancy being created, only the directors are entitled to appoint a director to fill the resulting vacancy. 14.11 Removal of Director by Directors. The directors may remove any director before the expiration of his or her term of office if the director is convicted of an indictable offence, or if the director ceases to be qualified to act as a director of a company and does not promptly resign, and only the directors may appoint a director to fill the resulting vacancy. PART 15 POWERS AND DUTIES OF DIRECTORS 15.1 Powers of Management. The directors must, subject to the Business Corporations Act and these Articles, manage or supervise the management of the business and affairs of the Company and have the authority to exercise all such powers of the Company as are not, by the Business Corporations Act or by these Articles, required to be exercised by the shareholders of the Company.
25 15.2 Appointment of Attorney of Company. The directors may from time to time, by power of attorney or other instrument, under seal if so required by law, appoint any person to be the attorney of the Company for such purposes, and with such powers, authorities and discretions (not exceeding those vested in or exercisable by the directors under these Articles and excepting the power to fill vacancies in the Board, to remove a director, to change the membership of, or fill vacancies in, any committee of the directors, to appoint or remove officers appointed by the directors and to declare dividends) and for such period, and with such remuneration and subject to such conditions as the directors may think fit. Any such power of attorney may contain such provisions for the protection or convenience of persons dealing with such attorney as the directors think fit. Any such attorney may be authorized by the directors to sub-delegate all or any of the powers, authorities and discretions for the time being vested in him or her. PART 16 DISCLOSURE OF INTEREST OF DIRECTORS 16.1 Obligation to Account for Profits. A director or senior officer who holds a disclosable interest (as that term is used in the Business Corporations Act) in a contract or transaction into which the Company has entered or proposes to enter is liable to account to the Company for any profit that accrues to the director or senior officer under or as a result of the contract or transaction only if and to the extent provided in the Business Corporations Act. 16.2 Restrictions on Voting by Reason of Interest. A director who holds a disclosable interest in a contract or transaction into which the Company has entered or proposes to enter is not entitled to vote on any directors' resolution to approve that contract or transaction, unless all the directors have a disclosable interest in that contract or transaction, in which case any or all of those directors may vote on such resolution. 16.3 Interested Director Counted in Quorum. A director who holds a disclosable interest in a contract or transaction into which the Company has entered or proposes to enter and who is present at the meeting of directors at which the contract or transaction is considered for approval may be counted in the quorum at the meeting whether or not the director votes on any or all of the resolutions considered at the meeting. 16.4 Disclosure of Conflict of Interest or Property. A director or senior officer who holds any office or possesses any property, right or interest that could result, directly or indirectly, in the creation of a duty or interest that materially conflicts with that individual's duty or interest as a director or senior officer, must disclose the nature and extent of the conflict as required by the Business Corporations Act. 16.5 Director Holding Other Office in the Company. A director may hold any office or place of profit with the Company, other than the office of auditor of the Company, in addition to his or her office of director for the period and on the terms (as to remuneration or otherwise) that the directors may determine. 16.6 No Disqualification. No director or intended director is disqualified by his or her office from contracting with the Company either with regard to the holding of any office or place of profit the director holds with the Company or as vendor, purchaser or otherwise, and no contract or transaction entered into by or on behalf of the Company in which a director is in any way interested is liable to be voided for that reason. 16.7 Professional Services by Director or Officer. Subject to the Business Corporations Act, a director or officer, or any person in which a director or officer has an interest, may act in a professional
26 capacity for the Company, except as auditor of the Company, and the director or officer or such person is entitled to remuneration for professional services as if that director or officer were not a director or officer. 16.8 Director or Officer in Other Corporations. A director or officer may be or become a director, officer or employee of, or otherwise interested in, any person in which the Company may be interested as a shareholder or otherwise, and, subject to the Business Corporations Act, the director or officer is not accountable to the Company for any remuneration or other benefits received by him or her as director, officer or employee of, or from his or her interest in, such other person. PART 17 PROCEEDINGS OF DIRECTORS 17.1 Regular Meetings of Directors. The directors may meet together for the conduct of business, adjourn and otherwise regulate their meetings as they think fit, and meetings of the directors held at regular intervals may be held at the place, at the time and on the notice, if any, as the directors may from time to time determine. The Chairman of the Board or any four directors may call a regular meeting of the directors at any time. The place of any meeting of the directors shall be the corporate headquarters of the Company unless otherwise agreed by a majority of the directors. 17.2 Special Meetings of Directors. A special meeting of the directors may be called at any time at the request of (a) the Chairman of the Board or (b) any four directors. The place of any special meeting shall be the corporate headquarters of the Company unless otherwise agreed by a majority of the directors. 17.3 Voting at Meetings. Questions arising at any meeting of directors are to be decided by a majority of votes at which a quorum is present and, in the case of an equality of votes, the chair of the meeting does not have a second or casting vote. 17.4 Chair of Meetings. The Chairman of the Board shall preside at all meetings of the shareholders and of the Board. He shall make reports to the Board and the shareholders and shall see that all orders and resolutions of the Board and of any committee thereof are carried into effect. The Chairman of the Board may also serve as President or Chief Executive Officer, if so elected by the Board. The directors also may elect a vice-chairman to act in the place of the Chairman of the Board upon his or her absence or inability to act. 17.5 Meetings by Telephone or Other Communications Medium. A director may participate in a meeting of the directors or of any committee of the directors in person or by telephone if all directors participating in the meeting, whether in person or by telephone or other communications medium, are able to communicate with each other. A director may participate in a meeting of the directors or of any committee of the directors by a communications medium other than telephone if all directors participating in the meeting, whether in person or by telephone or other communications medium, are able to communicate with each other. A director who participates in a meeting in a manner contemplated by this Article 17.5 is deemed for all purposes of the Business Corporations Act and these Articles to be present at the meeting and to have agreed to participate in that manner. 17.6 Notice of Meetings. Other than for meetings held at regular intervals as determined by the directors pursuant to Article 17.1, reasonable notice of each regular and special meetings of the directors, specifying the place, day and time of that meeting must be given to each of the directors by any method set out in Article 23.1 and shall be delivered in person or by telephone or electronic transmission to each director or sent by first-class mail, addressed to each director. If the notice is mailed, it shall be deposited in the U.S. mail at least five days prior to any regular or special meeting. If the notice is delivered in person,
27 by telephone or electronic transmission, it shall be delivered at least two days prior to any regular meeting and 24 hours prior to any special meeting. The notice for special meeting need not specify the purpose or place of the meeting if the meeting is to be held at the corporate headquarters of the Company. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board need be specified in the notice of such meeting, except for amendments to these Articles, as provided under section 9.5 of the Articles of the Company. A meeting may be held at any time without notice if all the directors are present or if those not present waive notice of the meeting in accordance with section 17.7 of these Articles. 17.7 When Notice Not Required. It is not necessary to give notice of a meeting of the directors to a director if: (a) the meeting is to be held immediately following a meeting of shareholders at which directors are elected, or is the meeting of the directors at which that director is appointed; or (b) the director has waived notice of the meeting. 17.8 Meeting Valid Despite Failure to Give Notice. The accidental omission to give notice of any meeting of directors to, or the non-receipt of any notice by, any director does not invalidate any proceedings at that meeting. 17.9 Waiver of Notice of Meetings. Any director may send to the Company a document signed by him or her waiving notice of any past, present or future meeting or meetings of the directors and may at any time withdraw that waiver with respect to meetings held after that withdrawal. After sending a waiver with respect to all future meetings and until that waiver is withdrawn, no notice of any meeting of the directors need be given to such director and all meetings of the directors so held are deemed not to be improperly called or constituted by reason of notice not having been given to such director. 17.10 Quorum. The quorum necessary for the transaction of the business of the directors is deemed to be set at a majority of the entire Board who are present in person, telephonically or by proxy and those directors may constitute a meeting; however if at any meeting of the Board there is less than a quorum present, a majority of the directors present may adjourn the meeting from time to time without further notice. Subject to any provisions of any law and these Articles, the act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board. The directors present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough directors to leave less than a quorum. 17.11 Validity of Acts Where Appointment Defective. Subject to the Business Corporations Act, an act of a director or officer is not invalid merely because of an irregularity in the election or appointment or a defect in the qualification of that director or officer. 17.12 Action by Consent of Board. To the extent permitted by applicable law, the Board and any committee thereof may act without a meeting so long as all members of the Board or committee have delivered, in writing or by electronic transmission, a consent with respect to any Board action taken in lieu of a meeting.
28 PART 18 EXECUTIVE AND OTHER COMMITTEES 18.1 Appointment and Powers of Executive Committee. The directors may, by resolution, appoint an executive committee consisting of the director or directors that they consider appropriate, and this committee has, during the intervals between meetings of the Board, all of the directors' powers, except: (a) the power to fill vacancies in the Board; (b) the power to remove a director; (c) the power to change the membership of, or fill vacancies in, any committee of the directors; and (d) such other powers, if any, as may be set out in the resolution or any subsequent directors' resolution. 18.2 Appointment and Powers of Other Committees. The directors may, by resolution: (a) appoint one or more committees (other than the executive committee) consisting of the director or directors that they consider appropriate; (b) delegate to a committee appointed under paragraph (a) any of the directors' powers, except: (i) the power to fill vacancies in the Board; (ii) the power to remove a director; (iii) the power to change the membership of, or fill vacancies in, any committee of the directors; and (iv) the power to appoint or remove officers appointed by the directors; and (c) make any delegation referred to in paragraph (b) subject to the conditions set out in the resolution or any subsequent directors' resolution. 18.3 Obligations of Committees. Any committee appointed under Articles 18.1 or 18.2, in the exercise of the powers delegated to it, must: (a) conform to any rules that may from time to time be imposed on it by the directors; and (b) report every act or thing done in exercise of those powers at such times as the directors may require. 18.4 Powers of Board. The directors may, at any time, with respect to a committee appointed under Articles 18.1 or 18.2: (a) revoke or alter the authority given to the committee, or override a decision made by the committee, except as to acts done before such revocation, alteration or overriding; (b) terminate the appointment of, or change the membership of, the committee; and
29 (c) fill vacancies in the committee. 18.5 Other Committee Matters. Subject to Article 18.3(a) and unless the directors otherwise provide in the resolution appointing the committee or in any subsequent resolution, with respect to a committee appointed under Articles 18.1 or 18.2: (a) the committee may meet and adjourn as it thinks proper; (b) the committee may elect a chair of its meetings but, if no chair of a meeting is elected, or if at a meeting the chair of the meeting is not present within 15 minutes after the time set for holding the meeting, the directors present who are members of the committee may choose one of their number to chair the meeting; (c) a majority of the members of the committee constitutes a quorum of the committee; (d) questions arising at any meeting of the committee are determined by a majority of votes of the members present, and in case of an equality of votes, the chair of the meeting does not have a second or casting vote; and (e) the committee may appoint such subcommittees as it deems necessary or desirable. PART 19 OFFICERS 19.1 Directors May Appoint Officers. The elected officers of the Company shall be selected by, and serve at the pleasure of, the Board. Such officers shall have the authority and duties delegated to each of them, respectively, by the Board from time to time. The elected officers of the Company shall be a Chairman of the Board, a Chief Executive Officer, a President, a Secretary, a Treasurer, and such other officers (including, without limitation, Executive Vice Presidents, Senior Vice Presidents and Vice Presidents) as the Board from time to time may deem proper. The Chairman of the Board shall be chosen from among the directors. All officers elected by the Board shall each have such powers and duties as generally pertain to their respective offices, subject to the specific provisions of this section 19.1. The Board or any committee thereof may from time to time elect, or the Chairman of the Board may appoint, such other officers (including one or more Vice Presidents, Controllers, Assistant Secretaries and Assistant Treasurers), as may be necessary or desirable for the conduct of the business of the Company. Such other officers and agents shall have such duties and shall hold their offices for such terms as shall be provided in these Articles or as may be prescribed by the Board or such committee or by the Chairman of the Board, as the case may be. 19.2 Election and Term of Office. The elected officers of the Company shall be elected from time to time by the Board. Each officer shall hold office until such person’s successor is duly elected and qualified or until such person’s death or until he or she resigns or is removed pursuant to these Articles. 19.3 Chairman of the Board. The Chairman of the Board shall preside at all meetings of the shareholders and of the Board. He shall make reports to the Board and the shareholders and shall see that all orders and resolutions of the Board and of any committee thereof are carried into effect. The Chairman of the Board may also serve as President or Chief Executive Officer, if so elected by the Board. The directors also may elect a vice-chairman to act in the place of the Chairman of the Board upon his or her absence or inability to act.
30 19.4 Chief Executive Officer. The Chief Executive Officer shall be responsible for the general management of the affairs of the Company and shall perform all duties incidental to such person’s office which may be required by law and all such other duties as are properly required of him by the Board. Unless the Board has elected a vice-chairman and such vice-chairman is able to act in the place of the Chairman of the Board, the Chief Executive Officer, if he is also a director, shall, in the absence of or because of the inability to act of the Chairman of the Board, perform all duties of the Chairman of the Board and preside at all meetings of shareholders and the Board. 19.5 President. The President shall act in a general executive capacity and shall assist the Chief Executive Officer in the administration and operation of the Company’s business and general supervision of its policies and affairs. The President shall have such other powers and shall perform such other duties as are assigned to him by the Board or the Chairman of the Board. 19.6 Vice Presidents. Any Executive Vice President, Senior Vice President and Vice President shall have such powers and perform such duties as are assigned to him by the Board or the Chairman of the Board. 19.7 Treasurer. The Treasurer shall exercise general supervision over the receipt, custody and disbursement of corporate funds. The Treasurer shall cause the funds of the Company to be deposited in such banks as may be authorized by the Board, or in such banks as may be designated as depositories in the manner provided by resolution of the Board. The Treasurer shall, in general, perform all duties incident to the office of the Treasurer and shall have such further powers and duties and shall be subject to such directions as may be granted or imposed from time to time by the Board or the Chairman of the Board. 19.8 Secretary. The Secretary shall keep or cause to be kept, in one or more books provided for that purpose, the minutes of all meetings of the Board, the committees of the Board and the shareholders. The Secretary shall see that all notices are duly given in accordance with the provisions of these Articles and as required by law; shall be custodian of the records and the seal of the Company and affix and attest the seal to all share certificates of the Company (unless the seal of the Company on such certificates shall be a facsimile, as hereinafter provided) and affix and attest the seal to all other documents to be executed on behalf of the Company under its seal; and shall see that the books, reports, statements, certificates and other documents and records required by law to be kept and filed are properly kept and filed; and in general, shall perform all the duties incident to the office of Secretary and such other duties as from time to time may be assigned to the Secretary by the Board or the Chairman of the Board. 19.9 Assistant Secretaries. Assistant Secretaries shall have such of the authority and perform such of the duties of the Secretary as may be provided in these Articles or assigned to them by the Board, the Chairman of the Board or the Secretary. Assistant Secretaries shall assist the Secretary in the performance of the duties assigned to the Secretary, and in assisting the Secretary, each Assistant Secretary shall for such purpose have the powers of the Secretary. During the Secretary’s absence or inability, the Secretary’s authority and duties shall be possessed by such Assistant Secretary or Assistant Secretaries as the Board or the Chairman of the Board may designate. 19.10 Removal. Any officer elected, or agent appointed, by the Board may be removed by the affirmative vote of a majority of the Board or, except in the case of an officer chosen by the Board, by the Chairman of the Board or any other officer upon whom such power of removal may be conferred by the Board. No elected officer shall have any contractual rights against the Company for compensation by virtue of such election beyond the date of the election of such person’s successor or such person’s death, resignation or removal, whichever event shall first occur, except as otherwise provided in an employment contract or under an employee deferred compensation plan.
31 19.11 Vacancies. A newly created elected office and a vacancy in any elected office because of death, resignation or removal may be filled by the Board, the Company’s Chairman of the Board or any other officer upon whom such power may be conferred by the Board for the unexpired portion of the term. 19.12 Functions, Duties and Powers of Officers. The directors may, for each officer: (a) determine the functions and duties of the officer; (b) entrust to and confer on the officer any of the powers exercisable by the directors on such terms and conditions and with such restrictions as the directors think fit; and (c) revoke, withdraw, alter or vary all or any of the functions, duties and powers of the officer. 19.13 Qualifications. No officer may be appointed unless that officer is qualified in accordance with the Business Corporations Act. One person may hold more than one position as an officer of the Company. Any person appointed as the Chairman of the Board must be a director. Any other officer need not be a director. PART 20 INDEMNIFICATION 20.1 Right to Indemnification. Each person who was or is made a party to or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter, a "proceeding"), by reason of the fact that such person, or a person of whom such person is the legal representative, is or was a director or officer of the Company or is or was serving at the request of the Company as a director, officer, employee or agent of another company or of a partnership, joint venture, trust or other unincorporated entity, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Company to the fullest extent authorized by the Business Corporations Act, as the same exists or may hereafter be amended (but, in the case of any such amendment, to the fullest extent permitted by law, only to the extent that such amendment permits the Company to provide broader indemnification rights than said law permitted the Company to provide prior to such amendment), against all expense, liability and loss (including, without limitation, attorneys’ fees, judgments, fines, amounts paid or to be paid in settlement and excise taxes or penalties arising under the Employment Retirement Income Security Act of 1974, as in effect from time to time) reasonably incurred or suffered by such person in connection therewith, and such indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of such person’s heirs, executors and administrators; provided, however, that, except as provided in Section 20.3, the Company shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board. The right to indemnification conferred in this Section 20.1 shall be a contract right and shall include, to the fullest extent authorized by the Business Corporations Act, the right to have the Company pay the expenses incurred in defending any such proceeding in advance of its final disposition, any advance payments to be paid by the Company within 20 calendar days after the receipt by the Company of a statement or statements from the claimant requesting such advance or advances from time to time; provided, however, that, if and to the extent the Business Corporations Act requires, the payment of such expenses incurred by a director or officer in such person’s capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer including, without limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding shall be made only upon delivery to the Company of an undertaking, by or on behalf of such director or officer, to repay all amounts so
32 advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under this Section 20.1 or otherwise. 20.2 Right of Claimant to Bring Suit. If a claim under Section 20.1 of these Articles is not paid in full by the Company within 60 calendar days after a written claim has been received by the Company, the claimant may at any time thereafter bring suit against the Company to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Company) that the claimant has not met the standard of conduct which makes it permissible under the Business Corporations Act for the Company to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the Company. Neither the failure of the Company (including its Board, independent legal counsel or its shareholders) to have made a determination prior to the circumstances that the claimant has met the applicable standard of conduct set forth in the Business Corporations Act, nor an actual determination by the Company (including its Board, independent legal counsel or its shareholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. 20.3 Non-Exclusivity of Rights. The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Part 20 is not exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Notice of Articles, these Articles, agreement, vote of shareholders or disinterested directors or otherwise. No repeal or modification of these Articles shall in any way diminish or adversely affect the rights of any director, officer, employee or agent of the Company to indemnification hereunder in respect of any occurrence or matter arising prior to any such repeal or modification. 20.4 Indemnification of Other Persons. Subject to any restrictions in the Business Corporations Act, the Company may grant rights to indemnification, and rights to have the Company pay the expenses incurred in defending any proceeding in advance of its final disposition to any person. 20.5 Non-Compliance with Business Corporations Act. The failure of a director or officer of the Company to comply with the Business Corporations Act or these Articles does not invalidate any indemnity to which he or she is entitled under this Article 20. 20.6 Company May Purchase Insurance. The Company may purchase and maintain insurance for the benefit of any person (or his or her heirs or legal personal representatives) who: (a) is or was a director, officer, employee or agent of the Company; (b) is or was a director, officer, employee or agent of an entity at a time when the entity is or was an affiliate of the Company; (c) at the request of the Company, is or was a director, officer, employee or agent of an entity or of a partnership, trust, joint venture or other unincorporated entity; (d) at the request of the Company, holds or held a position equivalent to that of a director or officer of a partnership, trust, joint venture or other unincorporated entity; against any liability incurred by him or her as such director, officer, employee or agent or person who holds or held such equivalent position.
33 20.7 Amendment, Repeal or Modification. Any amendment, repeal or modification of these provisions will be prospective only and would not affect any limitation on liability of a director for acts or omissions that occurred prior to any such amendment, repeal or modification. PART 21 DIVIDENDS 21.1 Payment of Dividends Subject to Special Rights. The provisions of this Article 21 are subject to the rights, if any, of shareholders holding shares with special rights as to dividends. 21.2 Declaration of Dividends. Subject to the Business Corporations Act and the rights of the holders of issued shares of the Company, the directors may from time to time declare and authorize payment of such dividends as they may deem advisable. 21.3 No Notice Required. The directors need not give notice to any shareholder of any declaration under Article 21.2. 21.4 Record Date. The directors may set a date as the record date for the purpose of determining shareholders entitled to receive payment of a dividend. The record date must not precede the date on which the dividend is to be paid by more than two months. If no record date is set, the record date is 5 p.m. on the date on which the directors pass the resolution declaring the dividend. 21.5 Manner of Paying Dividend. A resolution declaring a dividend may direct payment of the dividend wholly or partly by the distribution of cash, of specific assets, of fully paid shares or of bonds, debentures or other securities of the Company, or in any one or more of those ways. 21.6 Settlement of Difficulties. If any difficulty arises in regard to a distribution under Article 21.5, the directors may settle the difficulty as they deem advisable, and, in particular, may: (a) set the value for distribution of specific assets; (b) determine that cash payments in substitution for all or any part of the specific assets to which any shareholders are entitled may be made to any shareholders on the basis of the value so fixed in order to adjust the rights of all parties; and (c) vest any such specific assets in trustees for the persons entitled to the dividend. 21.7 When Dividend Payable. Any dividend may be made payable on such date as is fixed by the directors. 21.8 Dividends to be Paid in Accordance with Number of Shares. All dividends on shares of any class or series of shares must be declared and paid according to the number of such shares held. 21.9 Receipt by Joint Shareholders. If several persons are joint shareholders of any share, any one of them may give an effective receipt for any dividend, bonus or other money payable in respect of the share. 21.10 Dividend Bears No Interest. No dividend bears interest against the Company.
34 21.11 Fractional Dividends. If a dividend to which a shareholder is entitled includes a fraction of the smallest monetary unit of the currency of the dividend, that fraction may be disregarded in making payment of the dividend and that payment represents full payment of the dividend. 21.12 Payment of Dividends. Any dividend or other distribution payable in cash in respect of shares may be paid by cheque, made payable to the order of the person to whom it is sent, and mailed to the address of the shareholder, or in the case of joint shareholders, to the address of the joint shareholder who is first named on the central securities register, or to the person and to the address the shareholder or joint shareholders may direct in writing. The mailing of such cheque will, to the extent of the sum represented by the cheque (plus the amount of the tax required by law to be deducted), discharge all liability for the dividend unless such cheque is not paid on presentation or the amount of tax so deducted is not paid to the appropriate taxing authority. 21.13 Capitalization of Surplus. Notwithstanding anything contained in these Articles, the directors may from time to time capitalize any surplus of the Company and may from time to time issue, as fully paid, shares or any bonds, debentures or other securities of the Company as a dividend representing the surplus or any part of the surplus. PART 22 DOCUMENTS, RECORDS AND REPORTS 22.1 Recording of Financial Affairs. The directors must cause adequate accounting records to be kept to record properly the financial affairs and condition of the Company and to comply with the Business Corporations Act. 22.2 Inspection of Records. Upon receipt of a shareholder request, the directors may, but need not, determine that the shareholders are entitled to inspect or obtain a copy of any accounting records of the Company, with such determination to be made by way of a directors' resolution. PART 23 NOTICES 23.1 Method of Giving Notice. Unless the Business Corporations Act or these Articles provides otherwise, a notice, statement, report, consent, waiver or other record required or permitted by the Business Corporations Act or these Articles to be sent by or to a person may be sent by any one of the following methods: (a) mail addressed to the person at the applicable address for that person as follows: (i) for a record mailed to a shareholder, the shareholder's registered address; (ii) for a record mailed to a director or officer, the prescribed address for mailing shown for the director or officer in the records kept by the Company or the mailing address provided by the recipient for the sending of that record or records of that class; (iii) in any other case, the mailing address of the intended recipient; (b) delivery at the applicable address for that person as follows, addressed to the person: (i) for a record delivered to a shareholder, the shareholder's registered address;
35 (ii) for a record delivered to a director or officer, the prescribed address for delivery shown for the director or officer in the records kept by the Company or the delivery address provided by the recipient for the sending of that record or records of that class; (iii) in any other case, the delivery address of the intended recipient; (c) sending the record by fax to the fax number provided by the intended recipient for the sending of that record or records of that class; (d) sending the record by email to the email address provided by the intended recipient for the sending of that record or records of that class; (e) physical delivery to the intended recipient; or (f) as otherwise permitted by any securities legislation (together with all regulations and rules made and promulgated thereunder and all administrative policy statements, blanket orders, and rulings, notices, and other administrative directions issued by securities commissions or similar authorities appointed thereunder) in any province or territory of Canada or in the federal jurisdiction of the United States or in any state of the United States that is applicable to the Company. 23.2 Deemed Receipt of Mailing. A record that is mailed to a person by ordinary mail to the applicable address for that person referred to in Article 23.1 is deemed to be received by the person to whom it was mailed on the day, Saturdays, Sundays and holidays excepted, following the date of mailing. 23.3 Certificate of Sending. A certificate signed by the secretary, if any, or other officer of the Company or of any other entity acting in that behalf for the Company stating that a notice, statement, report, consent, waiver or other record was addressed as required by Article 23.1, prepaid and mailed or otherwise sent as permitted by Article 23.1 is conclusive evidence of that fact. 23.4 Notice to Joint Shareholders. A notice, statement, report, consent, waiver or other record may be provided by the Company to the joint shareholders of a share by providing the record to the joint shareholder first named in the central securities register in respect of the share. 23.5 Notice to Trustees. A notice, statement, report, consent, waiver or other record may be provided by the Company to the persons entitled to a share in consequence of the death, bankruptcy or incapacity of a shareholder by: (a) mailing the record, addressed to them: (i) by name, by the title of the legal personal representative of the deceased or incapacitated shareholder, by the title of trustee of the bankrupt shareholder or by any similar description; and (ii) at the address, if any, supplied to the Company for that purpose by the persons claiming to be so entitled; or (b) if an address referred to in paragraph (a)(ii) has not been supplied to the Company, by giving the notice in a manner in which it might have been given if the death, bankruptcy or incapacity had not occurred.
36 PART 24 SEAL AND EXECUTION OF DOCUMENTS 24.1 Who May Attest Seal. Except as provided in Articles 24.2 and 24.3, the Company's seal, if any, must not be impressed on any record except when that impression is attested by the signatures of: (a) any two directors; (b) the Secretary or any Assistant Secretary; (c) any other officer, together with any director; (d) if the Company only has one director, that director; or (e) any one or more directors or officers or persons as may be determined by the directors. 24.2 Sealing Copies. For the purpose of certifying under seal a certificate of incumbency of the directors or officers of the Company or a true copy of any resolution or other document, despite Article 24.1, the impression of the seal may be attested by the signature of any director or officer. 24.3 Mechanical Reproduction of Seal. The directors may authorize the seal to be impressed by third parties on share certificates or bonds, debentures or other securities of the Company as they may determine appropriate from time to time. To enable the seal to be impressed on any share certificates or bonds, debentures or other securities of the Company, whether in definitive or interim form, on which facsimiles of any of the signatures of the directors or officers of the Company are, in accordance with the Business Corporations Act or these Articles, printed or otherwise mechanically reproduced, there may be delivered to the person employed to engrave, lithograph or print such definitive or interim share certificates or bonds, debentures or other securities one or more unmounted dies reproducing the seal and the Chairman of the Board or any senior officer together with the secretary, treasurer, secretary-treasurer, an assistant secretary, an assistant treasurer or an assistant secretary-treasurer may in writing authorize such person to cause the seal to be impressed on such definitive or interim share certificates or bonds, debentures or other securities by the use of such dies. Share certificates or bonds, debentures or other securities to which the seal has been so impressed are for all purposes deemed to be under and to bear the seal impressed on them. 24.4 Execution of Documents Generally. The directors may from time to time appoint any one or more persons, officers or directors for the purpose of executing any instrument, document or agreement in the name of and on behalf of the Company for which the seal need not be affixed, and if no such person, officer or director is appointed, then any one officer or director of the Company may execute such instrument, document or agreement. Unless provided otherwise by resolution of the Board, the Chairman of the Board, the Chief Executive Officer, the President or any Executive Vice President, Senior Vice President or Vice President may execute bonds, contracts, deeds, leases and other instruments to be made or executed for or on behalf of the Company. Subject to any restrictions imposed by the Board, the Chairman of the Board, the Chief Executive Officer, the President or any Executive Vice President, Senior Vice President or Vice President of the Company may delegate contractual powers to others under such person’s jurisdiction, it being understood, however, that any such delegation of power shall not relieve the officer of responsibility with respect to the exercise of the delegated power.
37 PART 25 COMMON SHARES SPECIAL RIGHTS AND RESTRICTIONS 25.1 Special Rights and Restrictions. The Company is authorized to issue up to 550,000,000 shares of a class designated as "Common Shares" without par value and such shares shall have attached thereto the following rights, privileges, restrictions and conditions. 25.2 Voting Rights. The holders of the Common Shares shall be entitled to receive notice of, and to attend, all meetings of the shareholders of the Company and shall have one (1) vote for each Common Share held at all meetings of the shareholders of the Company, except for meetings at which only holders of another specified class or series of shares of the Company are entitled to vote separately as a class or series. 25.3 Dividends. Subject to the prior rights and preferences attaching to any other class of shares of the Company, the right to receive any dividend declared by the Company in such amount and in such form as the directors of the Company may from time to time determine, and all dividends which the directors of the Company may declare on the Common Shares shall be declared and paid in equal amounts per share on all Common Shares at the time outstanding. For greater certainty, the Board may in their absolute discretion declare dividends on any one or more classes of shares in the Company to the exclusion of all other classes of shares of the Company. 25.4 Dissolution. In the event of the dissolution, liquidation or winding-up of the Company, whether voluntary or involuntary, or any other distribution of assets of the Company among its shareholders for the purpose of winding-up its affairs, the holders of the Common Shares shall, subject to the prior rights of the holders of the Preferred Shares, be entitled to receive the remaining property and assets of the Company. PART 26 CLASS A PREFERRED SHARES SPECIAL RIGHTS AND RESTRICTIONS 26.1 Special Rights and Restrictions. The Company is authorized to issue a class A of preferred shares, up to a maximum of 50,000,000 shares, with such limit to be the aggregate number of class A and class B preferred shares to be issued by the Company, to be designated as "Class A Preferred Shares", without par value, which may be issued in one or more series as determined by the directors of the Company. The Class A Preferred Shares shall be entitled to receive notice of any meeting of shareholders and shall be entitled to such number of votes per Class A Preferred Share as authorized by the directors, by resolution, at or prior to the time of the creation or designation of the applicable series, except as otherwise required by the Business Corporations Act. In addition to such rights respecting voting, the Class A Preferred Shares shall have attached thereto the following rights, privileges, restrictions and conditions: (a) subject to the provisions of the Business Corporations Act, the special rights and restrictions attached to the Class A Preferred Shares authorize the directors, by resolution, to do one or more of the following: (i) create and designate any series of Class A Preferred Shares and authorize the alteration of the Notice of Articles to provide for such series; (ii) determine the maximum number of shares of each of those series of shares that the Company is authorized to issue, determine that there is no maximum number or
38 alter any determination made, under this subparagraph or otherwise, in relation to a maximum number of those shares, and authorize the alteration of the Notice of Articles accordingly; (iii) alter the Articles, and authorize the alteration of the Notice of Articles, to create an identifying name by which the shares of any of those series of shares may be identified or to alter any identifying name created for those shares; (iv) create, define and attach special rights and restrictions to the shares of each series and alter the Articles, and authorize the alteration of the Notice of Articles, to attach special rights or restrictions to the shares of any of those series of shares or to alter any special rights or restrictions attached to those shares at any time as the directors determine; including the determination of any or all of the following: (A) the voting powers, if any, and whether such voting powers are full or limited, in such series; (B) the redemption provisions, if any, applicable to such series, including the redemption price or prices to be paid; (C) whether dividends, if any, shall be cumulative or noncumulative, the dividend rate of such series, and the dates and preferences of dividends on such series; (D) the rights of such series upon the voluntary or involuntary dissolution of, or upon any distribution of the assets of, the Company; (E) the provisions, if any, pursuant to which the shares of such series are convertible into, or exchangeable for, shares of any other class or classes of any other series of the same or any other class or classes of shares, or any other security, of the Company or any other entity, and price or prices or the rates of exchange applicable thereto; (F) the right, if any, to subscribe for or to purchase any securities of the Company or any other entity; (G) the provisions, if any, of a sinking fund applicable to such series; and (H) any other relative, participating, optional or other special powers, preferences, rights, qualifications, limitations or restrictions thereof; all as shall be determined from time to time by the Board and shall be stated in a resolution or resolutions providing for the issuance of such Class A Preferred Shares (a "Designation of Series of Class A Preferred Shares"); (b) the directors are authorized to issue a first series of up to 50,000,000 series 1 Class A Preferred Shares, with such limit to be the aggregate number of class A and class B preferred shares to be issued by the Company, designated as the "Class A Series 1 Preferred
39 Shares", having the rights, privileges, restrictions and conditions as set out in Part 27 of these Articles; and (c) the number of authorized shares of the Class A Preferred Shares may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of two-thirds of the holders of the outstanding Common Shares, without a vote of the holders of the Class A or Class B Preferred Shares, or of any series thereof, unless a vote of any such holders is required pursuant to any Designation of Series of Class A Preferred Shares. PART 27 CLASS A SERIES 1 PREFERRED SHARES SPECIAL RIGHTS AND RESTRICTIONS Part 27 of the Articles was replaced by the directors resolutions dated November 26, 2017 and received at the Records Office March 28, 2018. Part 27 of the Articles is attached as Schedule A to these Articles. PART 28 CLASS B PREFERRED SHARES SPECIAL RIGHTS AND RESTRICTIONS 28.1 Special Rights and Restrictions. The Company is authorized to issue a class B of preferred shares, up to a maximum of 50,000,000 shares, with such limit to be the aggregate number of class A and class B preferred shares to be issued by the Company, to be designated as "Class B Preferred Shares", without par value, which may be issued in one or more series as determined by the directors of the Company. The Class B Preferred Shares shall not be entitled to receive notice of any meeting of shareholders or to vote at any such meeting, except as otherwise required by the Business Corporations Act. In addition to such rights respecting voting, the Class B Preferred Shares shall have attached thereto the following rights, privileges, restrictions and conditions: (a) subject to the provisions of the Business Corporations Act, the special rights and restrictions attached to the Class B Preferred Shares authorize the directors, by resolution, to do one or more of the following: (i) create and designate any series of Class B Preferred Shares and authorize the alteration of the Notice of Articles to provide for such series; (ii) determine the maximum number of shares of each of those series of shares that the Company is authorized to issue, determine that there is no maximum number or alter any determination made, under this subparagraph or otherwise, in relation to a maximum number of those shares, and authorize the alteration of the Notice of Articles accordingly; (iii) alter the Articles, and authorize the alteration of the Notice of Articles, to create an identifying name by which the shares of any of those series of shares may be identified or to alter any identifying name created for those shares; (iv) create, define and attach special rights and restrictions to the shares of each series and alter the Articles, and authorize the alteration of the Notice of Articles, to attach special rights or restrictions to the shares of any of those series of shares or
40 to alter any special rights or restrictions attached to those shares at any time as the directors determine; including the determination of any or all of the following: (A) the voting powers, if any, and whether such voting powers are full or limited, in such series; (B) the redemption provisions, if any, applicable to such series, including the redemption price or prices to be paid; (C) whether dividends, if any, shall be cumulative or noncumulative, the dividend rate of such series, and the dates and preferences of dividends on such series; (D) the rights of such series upon the voluntary or involuntary dissolution of, or upon any distribution of the assets of, the Company; (E) the provisions, if any, pursuant to which the shares of such series are convertible into, or exchangeable for, shares of any other class or classes of any other series of the same or any other class or classes of shares, or any other security, of the Company or any other entity, and price or prices or the rates of exchange applicable thereto; (F) the right, if any, to subscribe for or to purchase any securities of the Company or any other entity; (G) the provisions, if any, of a sinking fund applicable to such series; and (H) any other relative, participating, optional or other special powers, preferences, rights, qualifications, limitations or restrictions thereof; all as shall be determined from time to time by the Board and shall be stated in a resolution or resolutions providing for the issuance of such Class B Preferred Shares (a "Designation of Series of Class B Preferred Shares"); and (b) the directors are authorized to issue a first series of up to 50,000,000 series 1 Class B Preferred Shares, with such limit to be the aggregate number of class A and class B preferred shares to be issued by the Company, designated as the "Class B Series 1 Preferred Shares", having the rights, privileges, restrictions and conditions as set out in Part 29 of these Articles; and (c) except as required by law, holders of Class B Preferred Shares, being non-voting preferred shares, shall not be entitled to receive notice of any meeting of shareholders at which they are not entitled to vote. The number of authorized shares of the Class B Preferred Shares may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of two-thirds of the holders of the outstanding Common Shares, without a vote of the holders of the Class A or Class B Preferred Shares, or of any series thereof, unless a vote of any such holders is required pursuant to any Designation of Series of Class B Preferred Shares.
41 PART 29 CLASS B SERIES 1 PREFERRED SHARES SPECIAL RIGHTS AND RESTRICTIONS 29.1 Special Rights and Restrictions. The Company is authorized to issue up to 50,000,000 Class B Series 1 Preferred Shares, with such limit to be the aggregate number of class A and class B preferred shares to be issued by the Company, without par value, which may be issued at any time as determined by the directors of the Company and having the special rights and restrictions authorized by the directors, by resolution.
Schedule “A” PART 27.1 SPECIAL RIGHTS AND RESTRICTIONS OF CLASS A SERIES 1 PREFERRED SHARES 27.1.1 Definitions As used herein, the following terms shall have the following meanings: (a) “Accrued Dividends” shall mean, with respect to any Class A Series 1 Preferred Share, as of any date, the accrued and unpaid dividends on such share from, and including, the most recently preceding Dividend Payment Date (or the Issue Date, if such date is prior to the first Dividend Payment Date) to, but not including, such date. (b) “Article 27.1.9(a) Distribution” shall have the meaning set forth in Article 27.1.9(d)(v)(A). (c) “Article 27.1.9(b) Distribution” shall have the meaning set forth in Article 27.1.9(d)(v)(B). (d) “Article 27.1.9(d) Distribution” shall have the meaning set forth in Article 27.1.9(d)(v)(B). (e) “Automatic Conversion” shall have the meaning set forth in Article 27.1.6(d)(i). (f) “Automatic Conversion Time” shall have the meaning set forth in Article 27.1.6(d)(i). (g) “Average VWAP” per share over a certain period shall mean the arithmetic average of the VWAP per share for each Trading Day in such period. (h) “Business Day” shall mean any day other than a Saturday or Sunday or any other day on which commercial banks in New York City or the province of British Columbia, Canada are authorized or required by law or executive order to close. (i) “Cash Dividends” shall have the meaning set forth in Article 27.1.3(a). (j) “Change of Control” shall mean any proposed transaction or series of related transactions (i) that results in any person or group (as such terms are defined in Sections 13(d) and 14(d) of the Exchange Act) acquiring “beneficial ownership” (as defined in Rules 13d-3 and 13d-5 under the Exchange Act) of more than 50% of the total combined voting power of outstanding Common Shares and Class A Series 1 Preferred Shares (considered on a basis as if fully converted into Common Shares) or (ii) pursuant to which the Company is consolidated, merged, combined or amalgamated with another corporation or entity, and, as a result of such consolidation, merger, combination or amalgamation, less than 50% of the outstanding voting securities of the surviving or resulting corporation or entity are then owned by the former shareholders of the Company and, in each of clause (i) and (ii), the Common Shares are converted into, or exchanged for, cash, securities or other property of another Person.
2 (k) “close of business” as of any Business Day shall mean 5:00 p.m. (New York City time) on such Business Day. (l) “Conversion” means Early Conversion, Forced Conversion, Mandatory Conversion or Automatic Conversion, as applicable. (m) “Conversion Date” shall mean the Early Conversion Date, the Forced Conversion Date, the Mandatory Conversion Date or the Automatic Conversion Date, as applicable. (n) “Conversion Price” shall mean, as of any time, US$10,000 divided by the Conversion Rate as of such time. (o) “Conversion Rate” shall equal 3,030.3030 Common Shares per each US$10,000 of Liquidation Preference of Class A Series 1 Preferred Shares, subject to adjustment in accordance with Article 27.1.9, rounded to the nearest 1/10,000th of a share. (p) “Current Market Price” per Common Share (or, in the case of Article 27.1.9(d), per Common Share, shares, capital stock or equity interests, as applicable) on any date means for the purposes of determining an adjustment to the Conversion Rate: (i) for purposes of any adjustment pursuant to Article 27.1.9(b), Article 27.1.9(d) (but only in the event of an adjustment thereunder not relating to a Spin-Off), or Article 27.1.9(e), the Average VWAP per Common Share over the five consecutive Trading Day period ending on the Trading Day immediately preceding the Ex-Date with respect to the issuance or distribution requiring such computation; (ii) for purposes of any adjustment pursuant to Article 27.1.9(d) relating to a Spin-Off, the Average VWAP per Common Share, share, capital stock or equity interests of the subsidiary or other business unit being distributed, as applicable, over the first 10 consecutive Trading Days commencing on and including the fifth Trading Day immediately following the effective date of such distribution; and (iii) for purposes of any adjustment pursuant to Article 27.1.9(f), the Average VWAP per Common Share over the 10 consecutive Trading Day period commencing on, and including, the Trading Day next succeeding the Expiration Date of the relevant tender offer or exchange offer. (q) “Dividend Payment Date” shall mean March 30, June 30, September 30 and December 30 of each year, commencing June 30, 2018. (r) “Dividend Rate” shall mean, as of any date of determination, the rate per annum of 2.0%, subject to increase and subsequent decrease as set forth in Section 3(e)(iv) of the Registration Rights, Lock-Up and Standstill Agreement, dated as of April 2, 2018, between the Company and the shareholders party thereto, as may be amended from time to time. (s) “Dividend Record Date” shall mean, with respect to any Dividend Payment Date, the March 25, June 25, September 25 or December 24 immediately preceding such Dividend Payment Date. (t) “Early Conversion” shall have the meaning set forth in Article 27.1.6(a)(i).
3 (u) “Early Conversion Date” shall have the meaning set forth in Article 27.1.6(a)(i). (v) “Early Conversion Effective Date” shall have the meaning set forth in Article 27.1.6(a)(iii). (w) “Exchange Property” shall have the meaning set forth in Article 27.1.10(a). (x) “Ex-Date,” when used with respect to any issuance or distribution on the Common Shares or any other securities, means the first date on which the Common Shares or such other securities trade without the right to receive such issuance or distribution. (y) “Expiration Date” shall have the meaning set forth in Article 27.1.9(f)(i). (z) “Fair Market Value” means the fair market value as determined in good faith by the Board (or an authorized committee thereof), whose determination shall be conclusive and final. (aa) “Forced Conversion” shall have the meaning set forth in Article 27.1.6(b)(i). (bb) “Forced Conversion Date” shall have the meaning set forth in Article 27.1.6(b)(ii). (cc) “Forced Conversion Notice” shall have the meaning set forth in Article 27.1.6(b)(ii). (dd) “Forced Conversion Notice Date” shall have the meaning set forth in Article 27.1.6(b)(ii). (ee) “Issue Date” shall mean the original date of issuance of the Class A Series 1 Preferred Shares. (ff) “Liquidation Preference” shall mean, with respect to each Class A Series 1 Preferred Share, $10,000, subject to increase in accordance with Article 27.1.3(c), and, with respect to any Conversion only, shall include any Accrued Dividends as provided in Article 27.1.3(e). (gg) “Mandatory Conversion” shall have the meaning set forth in Article 27.1.6(c)(i). (hh) “Mandatory Conversion Date” means June 30, 2023. (ii) “Mandatory Conversion Issuance Date” shall have the meaning set forth in Article 27.1.6(c)(ii). (jj) “Ownership Notice” shall mean any written notice of the Company containing the information, if any, required to be set forth or stated on certificates pursuant to the Business Corporations Act, which shall include the information set forth in Exhibit B. (kk) “Redemption Date” shall have the meaning set forth in Article 27.1.7(a). (ll) “Reorganization Event” shall have the meaning set forth in Article 27.1.10(a). (mm) “Settlement Period” means the 10-consecutive Trading Day period before a Conversion Date.
4 (nn) “Spin-Off” means a distribution by the Company to all holders of Common Shares consisting of common shares or capital stock of, or similar equity interests in, or relating to, a subsidiary or other business unit of the Company. (oo) “Trading Day” shall mean a day during which trading in securities generally occurs on the New York Stock Exchange or, if the Common Shares are not listed on the New York Stock Exchange, on the principal other national or regional securities exchange on which the Common Shares are then listed or, if the Common Shares are not listed on a national or regional securities exchange, on the principal other market on which the Common Shares are then traded. If the Common Shares are not so listed or traded, “Trading Day” shall mean a Business Day. (pp) “Trigger Event” shall have the meaning set forth in Article 27.1.9(d)(iv). (qq) “Unit of Exchange Property” shall have the meaning set forth in Article 27.1.10(a). (rr) “VWAP” per Common Share on any Trading Day shall mean the per share volume- weighted average price as displayed on Bloomberg page “CVEO Equity VWAP” (or its equivalent successor if such page is not available) in respect of the period from 9:30 a.m. to 4:00 p.m., New York City time, on such Trading Day; or, if such price is not available, “VWAP” shall mean the market value per Common Share on such Trading Day as determined, using a volume-weighted average method, by a nationally recognized independent investment banking firm retained by the Company for this purpose. VWAP for any other security will be determined in the manner set forth above, with all references to Common Shares being to such other securities. 27.1.2 Amount; Ranking (a) There shall be created from the Class A Series 1 Preferred Shares of the Company authorized to be issued pursuant to the Articles of the Company, 9,679 Class A Series 1 Preferred Shares. (b) The Class A Series 1 Preferred Shares that are redeemed, purchased or otherwise acquired by the Company, or converted into Common Shares, shall be cancelled, shall revert to authorized but unissued Class A Series 1 Preferred Shares and shall not be reissued. (c) The Class A Series 1 Preferred Shares shall rank senior in all respects to the Common Shares with respect to dividend rights and rights upon the liquidation, dissolution or winding-up of the Company up to the amount of the Liquidation Preference and Accrued Dividends, as provided more fully herein. 27.1.3 Dividends (a) Holders of Class A Series 1 Preferred Shares shall be entitled to receive, with respect to each Class A Series 1 Preferred Share, and as, when and if declared by the Board out of funds of the Company legally available for payment, cash dividends (“Cash Dividends”) on the Liquidation Preference in effect immediately after the immediately prior Dividend Payment Date (or if there has been no prior Dividend Payment Date, the Issue Date), computed on the basis of a 360-day year consisting of twelve 30-day months, at the Dividend Rate, compounded quarterly on each Dividend Payment Date.
5 (b) To the extent the Board so declares, Cash Dividends shall be payable in arrears on each Dividend Payment Date for the quarterly period ending immediately prior to such Dividend Payment Date (or with respect to the first Dividend Payment Date, for the period commencing on the Issue Date and ending immediately prior to the first Dividend Payment Date), to the holders of the Class A Series 1 Preferred Shares as they appear on the Company’s central securities register at the close of business on the relevant Dividend Record Date. If a Dividend Payment Date is not a Business Day, then any Cash Dividend in respect of such Dividend Payment Date shall be due and payable on the first Business Day following such Dividend Payment Date without any accrual of additional dividends or interest on account of such delay in payment. (c) Notwithstanding Article 27.1.3(a), the Company may, at the sole election of the Board, elect not to declare or pay a Cash Dividend, or to pay a partial Cash Dividend, in respect of any Dividend Payment Date, subject to the provisions of this Article 27.1.3(c). In the event that the Company does not declare and pay a Cash Dividend, or elects to pay a partial Cash Dividend, at the Dividend Rate in respect of any Dividend Payment Date, then, effective upon such Dividend Payment Date, an amount equal to, if the Board elects not to declare or pay a Cash Dividend, the amount that would have been payable if such dividend had been paid as a Cash Dividend, or if the Board elects to pay a partial Cash Dividend, the amount not paid as a Cash Dividend, shall be deemed paid-in-kind and such amount shall be added to the Liquidation Preference. (d) Dividends on the Class A Series 1 Preferred Shares shall accumulate and become Accrued Dividends on a day-to-day basis, whether or not declared (and whether or not permitted to be declared under applicable law), from the most recent Dividend Payment Date, or if there has been no prior Dividend Payment Date, from the Issue Date, until Cash Dividends are paid pursuant to Article 27.1.3(b) in respect of such accumulated amounts or the Liquidation Preference is increased in respect of such accumulated amounts pursuant to Article 27.1.3(c). (e) Notwithstanding anything to the contrary herein, if any Class A Series 1 Preferred Shares are converted into Common Shares, any Accrued Dividends with respect to such Class A Series 1 Preferred Shares shall not be permitted to be paid in cash, but shall be added to the Liquidation Preference for purposes of such Conversion. For the avoidance of doubt, such Accrued Dividends shall include dividends accruing from, and including, the most recently preceding Dividend Payment Date to, but not including, the Conversion Date. 27.1.4 Liquidation, Dissolution or Winding-Up (a) In the event of the liquidation, dissolution or winding-up of the Company or other distribution of assets of the Company among its shareholders for the purpose of winding- up its affairs, the holders of the Class A Series 1 Preferred Shares shall be entitled to receive pro rata the Liquidation Preference and Accrued Dividends for each Class A Series 1 Preferred Share held before any amount shall be paid or any property or assets of the Company distributed to the holders of Common Shares or shares ranking junior to the Class A Series 1 Preferred Shares. Upon payment of the amount so payable to them, the holders of the Class A Series 1 Preferred Shares shall not be entitled to share in any further distribution of the property or assets of the Company.
6 27.1.5 Voting Rights. (a) Each Class A Series 1 Preferred Share shall have only such voting rights as prescribed by the Business Corporations Act and, in connection with such voting rights, shall be entitled to one vote per Class A Series 1 Preferred Share. 27.1.6 Conversion (a) Early Conversion at the Option of the Holder (i) The holders of the Class A Series 1 Preferred Shares shall have the right, exercisable from time to time, to convert their Class A Series 1 Preferred Shares, in whole or in part (but in no event less than whole Class A Series 1 Preferred Shares), at any time after April 2, 2020 and prior to the Mandatory Conversion Date (“Early Conversion”), into Common Shares at the Conversion Rate then in effect, subject to satisfaction of the Conversion procedures set forth in this Article 27.1.6(a) (the date of issuance of such Shares, the “Early Conversion Date”). (ii) To effect an Early Conversion of any Class A Series 1 Preferred Shares pursuant to this Article 27.1.6(a), the holder thereof must deliver to the Company the Share Certificate(s) representing such Class A Series 1 Preferred Shares, together with the Notice in Exhibit A hereto and, if required by clause (iv) of this Article 27.1.6(a) below, pay all transfer or similar taxes or duties, if any. (iii) The Early Conversion shall be effective on the date on which a holder of Class A Series 1 Preferred Shares has satisfied the foregoing requirements, to the extent applicable (such date, the “Early Conversion Effective Date”). A holder of Class A Series 1 Preferred Shares shall not be required to pay any transfer or similar taxes or duties relating to the issuance or delivery of any Common Shares if such holder exercises its conversion rights, but such holder shall be required to pay any transfer or similar tax or duty that may be payable relating to any transfer involved in the issuance or delivery of Common Shares in a name other than the name of such holder. As Common Shares issued upon an Early Conversion will be in book entry form, the Common Shares issuable upon conversion shall be delivered to the converting holder through book-entry transfer through the facilities of DTC or the Company’s transfer agent, as applicable, together with delivery by the Company to the converting holder of Class A Series 1 Preferred Shares of any cash to which such converting holder is entitled. The Common Shares will be issued on the latest of (i) the 10th Business Day immediately succeeding the Early Conversion Effective Date, and (ii) the Business Day after such holder has paid in full all applicable taxes and duties, if any, in accordance with the foregoing provisions. On any Early Conversion Effective Date, dividends shall cease to accrue on the Class A Series 1 Preferred Shares so converted and all other rights with respect to the Class A Series 1 Preferred Shares so converted, including the rights, if any, to receive notices, will terminate, except only the rights of holders thereof to receive the number of whole Common Shares into which such of Class A Series 1 Preferred Shares have been converted (with cash payment for fractional shares pursuant to Article 27.1.8).
7 (iv) The Person or Persons entitled to receive the Common Shares issuable upon Early Conversion shall be treated for all purposes as the record holder(s) of such Common Shares as of 5:00 p.m., New York City time, on the applicable Early Conversion Date. Except as set forth in Article 27.1.9(j)(iii), prior to 5:00 p.m., New York City time, on such applicable Early Conversion Date, the Common Shares issuable upon Early Conversion of any Class A Series 1 Preferred Shares shall not be deemed to be outstanding for any purpose, and holders of Class A Series 1 Preferred Shares shall have no rights with respect to such Common Shares, including voting rights, rights to respond to tender offers for the Common Shares or rights to receive any dividends or other distributions on the Common Shares, by virtue of holding Class A Series 1 Preferred Shares. (v) In the event that an Early Conversion is effected with respect to Class A Series 1 Preferred Shares representing less than all the Class A Series 1 Preferred Shares held by a holder of Class A Series 1 Preferred Shares, upon such Early Conversion the Company shall execute and instruct its transfer agent to countersign and deliver to the holder thereof, at the expense of the Company, a certificate evidencing the Class A Series 1 Preferred Shares as to which Early Conversion was not effected. (b) Forced Conversion by the Company. (i) The Company shall have the right, at any time and from time to time, to cause the outstanding Class A Series 1 Preferred Shares to be converted, in whole or in part, into Common Shares at the Conversion Rate then in effect (“Forced Conversion”); provided, however that, in order for the Company to exercise such right, the Average VWAP of the Common Shares during a 15 consecutive Trading Day period ending on, and including, the Trading Day immediately preceding the Forced Conversion Notice Date shall be greater than or equal to the Conversion Price then in effect. (ii) To convert Class A Series 1 Preferred Shares into Common Shares pursuant to this Article 27.1.6(b), the Company shall give written notice (the “Forced Conversion Notice” and the date of such notice, the “Forced Conversion Notice Date”) to each holder of Class A Series 1 Preferred Shares stating that the Company elects to force Conversion of such Class A Series 1 Preferred Shares pursuant to this Article 27.1.6(b) and shall state therein: (A) the number of Class A Series 1 Preferred Shares to be converted; (B) the Conversion Rate on the Forced Conversion Notice Date; and (C) the Company’s computation of the number of Common Shares to be received by such holder. If the Company validly delivers a Forced Conversion Notice in accordance with this Article 27.1.6(b), the Company shall issue the Common Shares as soon as reasonably practicable, but not later than 10 Business Days thereafter (the date of issuance of such shares, the “Forced Conversion Date”). (iii) The Person or Persons entitled to receive the Common Shares issuable upon the Forced Conversion of Class A Series 1 Preferred Shares shall be treated as the
8 record holder(s) of such Common Shares as of 5:00 p.m., New York City time, on the Forced Conversion Date. Except as provided under Article 27.1.9(j)(iii), prior to 5:00 p.m., New York City time, on the Forced Conversion Date, the Common Shares issuable upon the Forced Conversion of Class A Series 1 Preferred Shares shall not be outstanding for any purpose and holders of Class A Series 1 Preferred Shares shall have no rights with respect to such Common Shares, including voting rights, rights to respond to tender offers or rights to receive any dividends or other distributions on the Common Shares, by virtue of holding Class A Series 1 Preferred Shares. As Common Shares issued upon a Forced Conversion will be in book entry form, the Common Shares issuable upon Forced Conversion shall be delivered to the converting holder through book-entry transfer through the facilities of DTC or the Company’s transfer agent, as applicable, together with delivery by the Company to the converting holder of Class A Series 1 Preferred Shares of any cash to which such converting holder is entitled. On the Forced Conversion Notice Date, dividends shall cease to accrue on the Class A Series 1 Preferred Shares so converted and all other rights with respect to the Class A Series 1 Preferred Shares so converted, including the rights, if any, to receive notices, will terminate, except only the rights of holders thereof to receive the number of whole Common Shares into which such of Class A Series 1 Preferred Shares have been converted (with cash payment for fractional shares pursuant to Article 27.1.8). (iv) In the event that a Forced Conversion is effected with respect to Class A Series 1 Preferred Shares representing less than all the Class A Series 1 Preferred Shares held by a holder of Class A Series 1 Preferred Shares, upon such Forced Conversion the Company shall execute and instruct its transfer agent to countersign and deliver to the holder thereof, at the expense of the Company, a certificate evidencing the Class A Series 1 Preferred Shares as to which Forced Conversion was not effected. (c) Mandatory Conversion (i) Each Class A Series 1 Preferred Share shall automatically convert on the Mandatory Conversion Date (“Mandatory Conversion”) into Common Shares at the Conversion Rate in effect on such date. (ii) The Person or Persons entitled to receive the Common Shares issuable upon the Mandatory Conversion of Class A Series 1 Preferred Shares shall be treated as the record holder(s) of such Common Shares as of 5:00 p.m., New York City time, on the Mandatory Conversion Issuance Date. Except as provided under Article 27.1.9(j)(iii), prior to 5:00 p.m., New York City time, on the Mandatory Conversion Issuance Date, the Common Shares issuable upon the Mandatory Conversion of Class A Series 1 Preferred Shares shall not be outstanding for any purpose and holders of Class A Series 1 Preferred Shares shall have no rights with respect to such Common Shares, including voting rights, rights to respond to tender offers or rights to receive any dividends or other distributions on the Common Shares, by virtue of holding Class A Series 1 Preferred Shares. As Common Shares issued upon a Mandatory Conversion will be in book entry form, the Common Shares issuable upon Mandatory Conversion shall be delivered to the converting holder through book-entry transfer through the facilities of DTC or the
9 Company’s transfer agent, as applicable, together with delivery by the Company to the converting holder of Class A Series 1 Preferred Shares of any cash to which such converting holder is entitled. The Common Shares will be issued as soon as reasonably practicable but in no event later than the 10th Business Day immediately succeeding the Mandatory Conversion Date (the date of issuances of such shares, the “Mandatory Conversion Issuance Date”). On the Mandatory Conversion Date, dividends shall cease to accrue on the Class A Series 1 Preferred Shares so converted and all other rights with respect to the Class A Series 1 Preferred Shares so converted, including the rights, if any, to receive notices, will terminate, except only the rights of holders thereof to receive the number of whole Common Shares into which such of Class A Series 1 Preferred Shares have been converted (with cash payment for fractional shares pursuant to Article 27.1.8). (d) Automatic Conversion on Change of Control (i) Immediately prior to the consummation of a Change of Control, each Class A Series 1 Preferred Share shall automatically convert (“Automatic Conversion”) into Common Shares at the Conversion Rate in effect on such date (the “Automatic Conversion Time”). Such Automatic Conversion shall be automatic, without need for any further action by the holders of Class A Series 1 Preferred Shares and regardless of whether the certificates representing such shares are surrendered to the Company or its transfer agent. Upon the Automatic Conversion of the Class A Series 1 Preferred Shares pursuant to this Article 27.1.6(d), the Company shall promptly send written notice thereof to each holder of record of the Class A Series 1 Preferred Shares at such holder’s address then shown on the records of the Company. (ii) The Person or Persons entitled to receive the Common Shares issuable upon the Automatic Conversion of Class A Series 1 Preferred Shares shall be treated as the record holder(s) of such Common Shares as of the Automatic Conversion Time. Except as provided under Article 27.1.9(j)(iii), prior to the Automatic Conversion Time, the Common Shares issuable upon the Automatic Conversion of Class A Series 1 Preferred Shares shall not be outstanding for any purpose and holders of Class A Series 1 Preferred Shares shall have no rights with respect to such Common Shares, including voting rights, rights to respond to tender offers or rights to receive any dividends or other distributions on the Common Shares, by virtue of holding Class A Series 1 Preferred Shares. The Common Shares will be deemed issued as of the Automatic Conversion Time. (e) General Conversion Provisions. The Company shall be entitled to register the Common Shares issued on a Conversion, and make such payment, in the name of the holder of Class A Series 1 Preferred Shares as shown on the records of the Company. 27.1.7 Redemption (a) Redemption at the Company’s Option. The Company shall have the right, at any time and from time to time, to redeem the Class A Series 1 Preferred Shares, in whole or in part, for cash. The Company may exercise such right upon giving notice of redemption pursuant to Article 27.1.7(b) and paying a redemption price per share equal to the Liquidation
10 Preference plus Accrued Dividends as of the Business Day immediately preceding the date of redemption (the “Redemption Date”). (b) Notice of Redemption. Notice of redemption of Class A Series 1 Preferred Shares shall be given to the holders of record of the Class A Series 1 Preferred Shares to be redeemed at their respective last addresses appearing on the books of the Company at least 15 days and not more than 60 days before the Redemption Date. Any notice given as provided in this Article 27.1.7(b) shall be conclusively presumed to have been duly given, whether or not the holder of the Class A Series 1 Preferred Shares to be redeemed receives such notice, but failure duly to give such notice, or any defect in such notice, to any holder of Class A Series 1 Preferred Shares shall not affect the validity of the proceedings for the redemption of any other Class A Series 1 Preferred Shares. The notice of redemption given to a holder of the Class A Series 1 Preferred Shares shall state: (i) the Redemption Date; (ii) the number of Class A Series 1 Preferred Shares to be redeemed; (iii) the redemption price as provided in Article 27.1.7(a); and (iv) the place or places where certificates for such Class A Series 1 Preferred Shares are to be surrendered for payment of the redemption price. (c) Effectiveness of Redemption. If notice of redemption has been duly given and if on or before the Redemption Date specified in the notice all funds necessary for the redemption have been deposited by the Company, in trust for the pro rata benefit of the holders of the shares called for redemption, with a bank or trust company doing business in New York City, and having a capital and surplus of at least $50 million and selected by the Board, so as to be and continue to be available solely therefor, then, notwithstanding that any certificate for any share so called for redemption has not been surrendered for cancellation, on and after the Redemption Date dividends shall cease to accrue on all shares so called for redemption, all shares so called for redemption shall no longer be deemed outstanding and all rights with respect to such shares shall forthwith on such Redemption Date cease and terminate, except only the right of the holders thereof to receive the amount payable on such redemption from such bank or trust company, without interest. Any funds unclaimed at the end of three years from the Redemption Date shall, to the extent permitted by applicable law, be released to the Company, after which time the holders of the shares so called for redemption shall look only to the Company for payment of the redemption price of such shares. 27.1.8 No Fractional Shares (a) No fractional Common Shares shall be issued upon Conversion, whether voluntary or mandatory. (b) In lieu of any fractional Common Shares otherwise issuable in respect of a Conversion, the Company shall make a cash payment to each holder of the Class A Series 1 Preferred Shares that would otherwise be entitled to a fractional share (based on the Average VWAP
11 of the Common Shares over the five consecutive Trading Day period beginning on, and including, the seventh Trading Day immediately prior to the applicable Conversion Date). (c) If more than one Class A Series 1 Preferred Share is surrendered for Conversion at one time by or for the same holder, the number of full Common Shares issuable upon Conversion thereof shall be computed on the basis of the aggregate number of Class A Series 1 Preferred Shares so surrendered. 27.1.9 Anti-Dilution Adjustments to the Conversion Rate The Conversion Rate shall be subject to the following adjustments: (a) Stock Dividends and Distributions (i) If the Company issues Common Shares to all holders of Common Shares as a dividend or other distribution, the Conversion Rate in effect at 5:00 p.m., New York City time, on the date fixed for determination of the holders of Common Shares entitled to receive such dividend or other distribution shall be divided by a fraction: (A) the numerator of which is the number of Common Shares outstanding at 5:00 p.m., New York City time, on the date fixed for such determination; and (B) the denominator of which is the sum of the number of Common Shares outstanding at 5:00 p.m., New York City time, on the date fixed for such determination and the total number of Common Shares constituting such dividend or other distribution. (ii) Any adjustment made pursuant to this Article 27.1.9(a) shall become effective immediately after 5:00 p.m., New York City time, on the date fixed for such determination. If any dividend or distribution described in this Article 27.1.9(a) is declared but not so paid or made, the Conversion Rate shall be readjusted, effective as of the date the Board (or an authorized committee thereof) publicly announces its decision not to pay or make such dividend or distribution, to the Conversion Rate that would be in effect if such dividend or distribution had not been declared. For the purposes of this Article 27.1.9(a), the number of Common Shares outstanding at 5:00 p.m., New York City time, on the date fixed for such determination shall include any shares issuable in respect of any scrip certificates issued in lieu of fractions of Common Shares. (b) Issuance of Stock Purchase Rights (i) If the Company issues to all holders of Common Shares rights or warrants (other than rights or warrants issued pursuant to a dividend reinvestment plan, shareholder rights plan or share purchase plan or other similar plans) entitling such holders, for a period of up to 45 calendar days from the date of issuance of such rights or warrants, to subscribe for or purchase Common Shares at a price per share less than the Current Market Price, the Conversion Rate in effect at 5:00 p.m., New York City time, on the date fixed for determination of the holders of Common
12 Shares entitled to receive such rights or warrants shall be increased by multiplying the Conversion Rate by a fraction: (A) the numerator of which is the sum of the number of Common Shares outstanding at 5:00 p.m., New York City time, on the date fixed for such determination and the number of Common Shares issuable pursuant to such rights or warrants; and (B) the denominator of which is the sum of the number of Common Shares outstanding at 5:00 p.m., New York City time, on the date fixed for such determination and the number of Common Shares equal to the quotient of the aggregate offering price payable to exercise such rights or warrants divided by the Current Market Price. (ii) Any adjustment made pursuant to this Article 27.1.9(b) shall become effective immediately after 5:00 p.m., New York City time, on the date fixed for such determination. In the event that such rights or warrants described in this Article 27.1.9(b) are not so issued, the Conversion Rate shall be readjusted, effective as of the date the Board (or an authorized committee thereof) publicly announces its decision not to issue such rights or warrants, to the Conversion Rate that would then be in effect if such issuance had not been declared. To the extent that such rights or warrants are not exercised prior to their expiration or Common Shares are otherwise not delivered pursuant to such rights or warrants upon the exercise of such rights or warrants, the Conversion Rate shall be readjusted to the Conversion Rate that would then be in effect had the adjustment made upon the issuance of such rights or warrants been made on the basis of the delivery of only the number of Common Shares actually delivered. In determining whether any rights or warrants entitle the holders thereof to subscribe for or purchase Common Shares at less than the Current Market Price, and in determining the aggregate offering price payable for Common Shares, there shall be taken into account any consideration received for such rights or warrants and the value of such consideration (if other than cash, to be determined in good faith by the Board or an authorized committee thereof, which determination shall be conclusive and final). For the purposes of this Article 27.1.9(b), the number of Common Shares at the time outstanding shall include any shares issuable in respect of any scrip certificates issued in lieu of fractions of Common Shares. (c) Subdivisions and Combinations of the Common Shares (i) If outstanding Common Shares shall be subdivided into a greater number of Common Shares or combined into a lesser number of Common Shares, the Conversion Rate in effect at 5:00 p.m., New York City time, on the effective date of such subdivision or combination shall be multiplied by a fraction: (A) the numerator of which is the number of Common Shares that would be outstanding immediately after, and solely as a result of, such subdivision or combination; and (B) the denominator of which is the number of Common Shares outstanding immediately prior to such subdivision or combination.
13 (ii) Any adjustment made pursuant to this Article 27.1.9(c) shall become effective immediately after 5:00 p.m., New York City time, on the effective date of such subdivision or combination. (d) Debt or Asset Distribution (i) If the Company distributes to all holders of Common Shares evidences of its indebtedness, shares, securities, rights to acquire shares of the Company, cash or other assets (excluding: (1) any dividend or distribution covered by Article 27.1.9(a); (2) any rights or warrants covered by Article 27.1.9(b); (3) any dividend or distribution covered by Article 27.1.9(e); and (4) any Spin-Off to which the provisions set forth in Article 27.1.9(d)(ii) apply), the Conversion Rate in effect at 5:00 p.m., New York City time, on the date fixed for the determination of holders of Common Shares entitled to receive such distribution shall be multiplied by a fraction: (A) the numerator of which is the Current Market Price; and (B) the denominator of which is the Current Market Price minus the Fair Market Value, on such date fixed for determination, of the portion of the evidences of indebtedness, shares, securities, rights to acquire the Company’s shares, cash or other assets so distributed applicable to one Common Share. (ii) In the case of a Spin-Off, the Conversion Rate in effect at 5:00 p.m., New York City time, on the date fixed for the determination of holders of Common Shares entitled to receive such distribution shall be multiplied by a fraction: (A) the numerator of which is the sum of the Current Market Price of the Common Shares and the Fair Market Value of the portion of those shares or similar equity interests so distributed that is applicable to one Common Share as of the 15th Trading Day after the effective date for such distribution (or, if such shares or equity interests are listed on a U.S. national or regional securities exchange, the Current Market Price of such securities); and (B) the denominator of which is the Current Market Price of the Common Shares. (iii) Any adjustment made pursuant to this Article 27.1.9(d) shall become effective immediately after 5:00 p.m., New York City time, on the date fixed for the determination of the holders of Common Shares entitled to receive such distribution. In the event that such distribution described in this Article 27.1.9(d) is not so made, the Conversion Rate shall be readjusted, effective as of the date the Board (or an authorized committee thereof) publicly announces its decision not to make such distribution, to the Conversion Rate that would then be in effect if such distribution had not been declared. If an adjustment to the Conversion Rate is required under this Article 27.1.9(d) during any Settlement Period in respect of Class A Series 1 Preferred Shares that have been tendered for Conversion, delivery of the Common Shares issuable upon Conversion shall be delayed to the extent
14 necessary in order to complete the calculations provided for in this Article 27.1.9(d). (iv) For purposes of this Article 27.1.9(d) (and subject in all respects to Article 27.1.9(b)), rights, options or warrants distributed by the Company to all holders of its Common Shares entitling them to subscribe for or purchase shares of the Company, including Common Shares (either initially or under certain circumstances), which rights, options or warrants, until the occurrence of a specified event or events (“Trigger Event”): (i) are deemed to be transferred with such shares of the Common Shares; (ii) are not exercisable; and (iii) are also issued in respect of future issuances of the Common Shares, shall be deemed not to have been distributed for purposes of this Article 27.1.9(d) (and no adjustment to the Conversion Rate under this Article 27.1.9(d) shall be required) until the occurrence of the earliest Trigger Event, whereupon such rights, options or warrants shall be deemed to have been distributed and an appropriate adjustment (if any is required) to the Conversion Rate shall be made under this Article 27.1.9(d). If any such right, option or warrant, including any such existing rights, options or warrants distributed prior to the Issue Date, are subject to events, upon the occurrence of which such rights, options or warrants become exercisable to purchase different securities, evidences of indebtedness or other assets, then the date of the occurrence of any and each such event shall be deemed to be the date of distribution and the date fixed for the determination of the holders of Common Shares entitled to receive such distribution with respect to new rights, options or warrants with such rights (in which case the existing rights, options or warrants shall be deemed to terminate and expire on such date without exercise by any of the holders thereof). In addition, in the event of any distribution (or deemed distribution) of rights, options or warrants, or any Trigger Event or other event (of the type described in the immediately preceding sentence) with respect thereto that was counted for purposes of calculating a distribution amount for which an adjustment to the Conversion Rate under this Article 27.1.9(d) was made, (1) in the case of any such rights, options or warrants that shall all have been redeemed or purchased without exercise by any holders thereof, upon such final redemption or purchase (x) the Conversion Rate shall be readjusted as if such rights, options or warrants had not been issued, and (y) the Conversion Rate shall then again be readjusted to give effect to such distribution, deemed distribution or Trigger Event, as the case may be, as though it were a cash distribution, equal to the per share redemption or purchase price received by a holder or holders of Common Shares with respect to such rights, options or warrants (assuming such holder had retained such rights, options or warrants), made to all holders of Common Shares as of the date of such redemption or purchase; and (2) in the case of such rights, options or warrants that shall have expired or been terminated without exercise by any holders thereof, the Conversion Rate shall be readjusted as if such rights, options and warrants had not been issued. (v) For purposes of Article 27.1.9(a), Article 27.1.9(b) and this Article 27.1.9(d), if any dividend or distribution to which this Article 27.1.9(d) is applicable includes one or both of: (A) a dividend or distribution of Common Shares to which Article 27.1.9(a) is applicable (the “Article 27.1.9(a) Distribution”); or
15 (B) an issuance of rights or warrants to which Article 27.1.9(b) is applicable (the “Article 27.1.9(b) Distribution”), then (1) such dividend or distribution, other than the Article 27.1.9(a) Distribution, if any, and the Article 27.1.9(b) Distribution, if any, shall be deemed to be a dividend or distribution to which this Article 27.1.9(d) is applicable (the “Article 27.1.9(d) Distribution”) and any Conversion Rate adjustment required by this Article 27.1.9(d) with respect to such Article 27.1.9(d) Distribution shall then be made; and (2) the Article 27.1.9(a) Distribution, if any, and Article 27.1.9(b) Distribution, if any, shall be deemed to immediately follow the Article 27.1.9(d) Distribution and any Conversion Rate adjustment required by Article 27.1.9(a) and Article 27.1.9(b) with respect thereto shall then be made, except that, if determined by the Company: (I) the date fixed for determination of the holders of Common Shares entitled to receive any Article 27.1.9(a) Distribution or Article 27.1.9(b) Distribution shall be deemed to be the date fixed for the determination of holders of Common Shares entitled to receive the Article 27.1.9(d) Distribution; and (II) any Common Shares included in any Article 27.1.9(a) Distribution or Article 27.1.9(b) Distribution shall be deemed not to be “outstanding at 5:00 p.m., New York City time, on the date fixed for such determination” within the meaning of Article 27.1.9(a) and Article 27.1.9(b). (e) Cash Distributions (i) If the Company pays or makes a dividend or other distribution consisting exclusively of cash to all holders of Common Shares (excluding (1) any cash that is distributed in a Reorganization Event to which Article 27.1.10 applies; (2) any dividend or other distribution in connection with the voluntary or involuntary liquidation, dissolution or winding up of the Company; and (3) any consideration payable as part of a tender or exchange offer by the Company or any subsidiary of the Company covered by Article 27.1.9(f)), the Conversion Rate in effect at 5:00 p.m., New York City time, on the date fixed for determination of the holders of Common Shares entitled to receive such dividend or other distribution shall be multiplied by a fraction: (A) the numerator of which is the Current Market Price per share of Common Shares; and
16 (B) the denominator of which is the Current Market Price per share of Common Shares minus the amount per share of such dividend or other distribution. (ii) Any adjustment made pursuant to this Article 27.1.9(e) shall become effective immediately after 5:00 p.m., New York City time, on the date fixed for the determination of the holders of Common Shares entitled to receive such dividend or other distribution. In the event that any dividend or other distribution described in this Article 27.1.9(e) is not so paid or made, the Conversion Rate shall be readjusted, effective as of the date the Board (or an authorized committee thereof) publicly announces its decision not to pay such dividend or make such other distribution, to the Conversion Rate which would then be in effect if such dividend or other distribution had not been declared. (f) Self Tender Offers and Exchange Offers (i) If the Company or any subsidiary of the Company successfully completes a tender or exchange offer pursuant to a Schedule TO or registration statement on Form S-4 (or any successor form) for Common Shares (excluding any securities convertible or exchangeable for Common Shares), where the cash and the value of any other consideration included in the payment per share of Common Shares exceeds the Current Market Price, the Conversion Rate in effect at 5:00 p.m., New York City time, on the date of expiration of the tender or exchange offer (the “Expiration Date”) shall be multiplied by a fraction: (A) the numerator of which shall be equal to the sum of: (1) the aggregate cash and Fair Market Value on the Expiration Date of any other consideration paid or payable for Common Shares purchased in such tender or exchange offer; and (2) the product of (x) the Current Market Price and (y) the number of Common Shares outstanding at the time such tender or exchange offer expires, less any purchased shares; and (B) the denominator of which shall be equal to the product of: (1) the Current Market Price; and (2) the number of Common Shares outstanding at the time such tender or exchange offer expires, including any purchased shares. (ii) Any adjustment made pursuant to this Article 27.1.9(f) shall become effective immediately after 5:00 p.m., New York City time, on the 10th Trading Day immediately following the Expiration Date but will be given effect as of 9:00 a.m., New York City time, on the Expiration Date. In the event that the Company or one of its subsidiaries is obligated to purchase Common Shares pursuant to any such tender offer or exchange offer, but the Company or such subsidiary is permanently prevented by applicable law from effecting any such purchases, or all such purchases are rescinded, then the Conversion Rate shall be readjusted to be
17 the Conversion Rate that would then be in effect if such tender offer or exchange offer had not been made. Except as set forth in the preceding sentence, if the application of this Article 27.1.9(f) to any tender offer or exchange offer would result in a decrease the Conversion Rate, no adjustment shall be made for such tender offer or exchange offer under this Article 27.1.9(f). If an adjustment to the Conversion Rate is required pursuant to this Article 27.1.9(f) during any Settlement Period in respect of Class A Series 1 Preferred Shares that have been tendered for Conversion, delivery of the related Conversion consideration shall be delayed to the extent necessary in order to complete the calculations provided for in this Article 27.1.9(f). (g) Fair Market Value in Excess of Current Market Price. Except with respect to a Spin-Off, in cases where the Fair Market Value of the evidences of the Company’s indebtedness, shares, securities, rights to acquire the Company’s shares, cash or other assets as to which Article 27.1.9(d) or Article 27.1.9(e) apply, applicable to one share of Common Shares, distributed to holders of Common Shares equals or exceeds the Current Market Price (as determined for purposes of calculating the Conversion Rate adjustment pursuant to such Article 27.1.9(d) or Article 27.1.9(e)), rather than being entitled to an adjustment in the Conversion Rate, holders of Class A Series 1 Preferred Shares shall be entitled to receive upon Conversion, in addition to a number of Common Shares otherwise deliverable on the applicable Conversion Date, the kind and amount of the evidences of the Company’s indebtedness, shares of the Company, securities, rights to acquire the Company’s shares, cash or other assets comprising the distribution that such holder of Class A Series 1 Preferred Shares would have received if such holder of Class A Series 1 Preferred Shares had owned, immediately prior to the record date for determining the holders of Common Shares entitled to receive the distribution, for each Class A Series 1 Preferred Share, a number of Common Shares equal to the Conversion Rate in effect on the date of such distribution. (h) Rights Plans. To the extent that the Company has a rights plan in effect with respect to the Common Shares on any Conversion Date, upon Conversion of any Class A Series 1 Preferred Shares, converting holders of Class A Series 1 Preferred Shares shall receive, in addition to the Common Shares, the rights issued under such rights plan, unless, prior to such Conversion Date, the rights have separated from the Common Shares, in which case the Conversion Rate shall be adjusted at the time of separation of such rights as if the Company made a distribution to all holders of the Common Shares as described in Article 27.1.9(d), subject to readjustment in the event of the expiration, termination or redemption of such rights. Any distribution of rights or warrants pursuant to a rights plan that would allow holders of Class A Series 1 Preferred Shares to receive upon Conversion, in addition to any Common Shares, the rights described therein (unless such rights or warrants have separated from Common Shares) shall not constitute a distribution of rights or warrants that would entitle holders of the Class A Series 1 Preferred Shares to an adjustment to the Conversion Rate. (i) Adjustment for Tax Reasons. The Company may make such increases in the Conversion Rate, in addition to any other increases required by this Article 27.1.9, as the Company deems advisable to avoid or diminish any income tax to holders of the Common Shares resulting from any dividend or distribution of Common Shares (or issuance of rights or warrants to acquire Common Shares) or from any event treated as such for income tax
18 purposes or for any other reason; provided that the same proportionate adjustment must be made to the Conversion Rate. (j) Calculation of Adjustments; Adjustments to Threshold Appreciation Price, Initial Price and Share Price (i) All adjustments to the Conversion Rate shall be calculated to the nearest 1/10,000th of a Common Share. Prior to any Conversion Date, no adjustment in the Conversion Rate shall be required unless such adjustment would require an increase or decrease of at least one percent therein. If any adjustment by reason of this Article 27.1.9(j)(i) is not required to be made because it would not change the Conversion Rate by at least one percent, such adjustment shall be carried forward and taken into account in any subsequent adjustment; provided, however, that on a Conversion Date, adjustments to the Conversion Rate shall be made with respect to any such adjustment carried forward that has not been taken into account before such date. (ii) Whenever any provision of these Articles requires the Company to calculate the VWAP per Common Share over a span of multiple days, the Board (or an authorized committee thereof) shall make appropriate adjustments (including, without limitation, to the Fair Market Value and the Current Market Price (as the case may be)) to account for any adjustments, pursuant to Article 27.1.9, to the Conversion Rate that become effective, or any event that would require such an adjustment if the Ex-Date, effective date or Expiration Date (as the case may be) of such event occurs, during the relevant period used to calculate such prices or values (as the case may be). (iii) Notwithstanding anything herein to the contrary, no adjustment to the Conversion Rate shall be made if holders of the Class A Series 1 Preferred Shares may participate, at the same time, upon the same terms and otherwise on the same basis as holders of Common Shares and solely as a result of holding Class A Series 1 Preferred Shares, in the transaction that would otherwise give rise to an adjustment as if they held, for each Class A Series 1 Preferred Share, a number of Common Shares equal to the Conversion Rate then in effect. The Company shall notify holders of the Class A Series 1 Preferred Shares, in the event they may so participate, at the same time it notifies holders of Common Shares of their participation in such transaction. In addition, the Conversion Rate shall not be adjusted: (A) upon the issuance of any Common Shares pursuant to any present or future plan providing for the reinvestment of dividends or interest payable on the Company’s securities and the investment of additional optional amounts in Common Shares under any plan; (B) upon the issuance of any Common Shares or options or rights to purchase those shares pursuant to any present or future employee, director or consultant benefit, compensation or stock purchase plan or program of or assumed by the Company or any of its subsidiaries;
19 (C) upon the issuance of any Common Shares pursuant to any option, warrant, right or exercisable, exchangeable or convertible security outstanding as of the Issue Date; (D) for a change in the par value of the Common Shares; (E) for stock repurchases that are not tender offers or exchange offers, including structured or derivative transactions; or (F) for Accrued Dividends. (k) Notice of Adjustment. Whenever the Conversion Rate is to be adjusted, the Company shall compute such adjusted Conversion Rates and transmit to the holders of the Class A Series 1 Preferred Shares a statement setting forth such adjusted Conversion Rate, the method of calculation thereof in reasonable detail and the facts requiring such adjustment and upon which such adjustment is based in reasonable detail. 27.1.10 Recapitalization, Reclassifications and Changes of Common Shares (a) In the event of the following, other than on a transaction which results in a Change of Control (each, a “Reorganization Event”): (i) any consolidation, amalgamation, arrangement or merger of the Company with or into another Person (other than an amalgamation, arrangement, merger or consolidation in which the Company is the surviving corporation and in which the Common Shares outstanding immediately prior to the amalgamation, arrangement, merger or consolidation are not exchanged for cash, securities or other property of the Company or another Person); (ii) any sale, transfer, lease or conveyance to another Person of all or substantially all of the property and assets of the Company; (iii) any reclassification of Common Shares into securities other than Common Shares; or (iv) any statutory exchange or arrangement of securities of the Company with another Person (other than in connection with a merger or acquisition); in each case, as a result of which the Common Shares would be converted into, or exchanged for, securities, cash or property, each Class A Series 1 Preferred Share outstanding immediately prior to such Reorganization Event shall, without the consent of the holders of Class A Series 1 Preferred Share, become convertible into the kind of securities, cash and other property that such holder of Class A Series 1 Preferred Shares would have been entitled to receive if such holder had converted its Class A Series 1 Preferred Shares into Common Shares immediately prior to such Reorganization Event (such securities, cash and other property, the “Exchange Property,” with each “Unit of Exchange Property” meaning the kind and amount of such Exchange Property that a holder of one Common Share is entitled to receive). (b) For purposes of the foregoing in Article 27.1.10(a), the type and amount of Exchange Property in the case of any Reorganization Event that causes the Common Shares to be
20 converted into the right to receive more than a single type of consideration (determined based in part upon any form of shareholder election) shall be deemed to be the weighted average of the types and amounts of consideration received by the holders of Common Shares that affirmatively make such an election (or of all holders of Common Shares if none makes an election). The value of a Unit of Exchange Property shall be determined in good faith by the Board or an authorized committee thereof (which determination will be conclusive and final). The Company shall notify holders of the Class A Series 1 Preferred Shares of the weighted average as soon as practicable after such determination is made. The number of Units of Exchange Property for each Class A Series 1 Preferred Share converted or subject to Conversion or redemption following the effective date of such Reorganization Event shall be determined as if references in Article 27.1.6 to Common Shares were to Units of Exchange Property (without interest thereon and without any right to dividends or distributions thereon which have a record date that is prior to such Conversion Date, except as provided in Article 27.1.9(j)(iii)). (c) The above provisions of this Article 27.1.10 shall apply to any shares or capital stock of the Company (or any successor thereto) received by the holders of Common Shares in connection with any such Reorganization Event. (d) The Company (or any successor thereto) shall, as soon as reasonably practicable (but in any event within 20 calendar days) after the occurrence of any Reorganization Event, provide written notice to the holders of Class A Series 1 Preferred Shares of such occurrence and of the kind and amount of the cash, securities or other property that constitute the Exchange Property. Failure to deliver such notice shall not affect the operation of this Article 27.1.10. 27.1.11 Other Provisions. (a) If any of the Class A Series 1 Preferred Shares are issued in uncertificated, book entry form as permitted by the Business Corporations Act and the Articles of the Company, then within a reasonable time after the issuance or transfer of such uncertificated shares, the Company shall send to the registered owner thereof an Ownership Notice. (b) The Company shall use its commercially reasonable efforts to ensure that all Common Shares issued upon a Conversion will be listed and posted for trading on each stock exchange on which the Common Shares are then listed and posted for trading.
21 EXHIBIT A NOTICE OF CONVERSION (To be Executed by the Holder in order to Convert Class A Series 1 Preferred Shares) The undersigned hereby irrevocably elects to convert (the “Conversion”) Class A Series 1 Preferred Shares (the “Class A Series 1 Preferred Shares”), of Civeo Corporation (hereinafter called the “Company”), represented by stock certificate No(s). [ ] (the “Class A Series 1 Preferred Shares Certificates”), into Common Shares, without par value, of the Company (the “Common Shares”) according to the conditions of the Articles of the Company (“Articles”), as of the date written below. If Common Shares are to be issued in the name of a Person other than the undersigned, the undersigned shall pay all applicable taxes and duties payable with respect thereto, if any. Each Class A Series 1 Preferred Shares Certificate (or evidence of loss, theft or destruction thereof) is attached hereto. Capitalized terms used but not defined herein shall have the meanings ascribed thereto in or pursuant to the Articles of the Company. Date of Conversion: Applicable Conversion Rate: Class A Series 1 Preferred Shares to be Converted: Common Shares to be Issued:* Signature: Name: Address:** Fax No.: * If the Class A Series 1 Preferred Shares are evidenced by a Share Certificate, the Company is not required to issue Common Shares until the original Class A Series 1 Preferred Shares Certificate(s) (or evidence of loss, theft or destruction thereof) to be converted are received by the Company or its transfer agent. ** Address where Common Shares and any other payments or certificates shall be sent by the Company.
22 EXHIBIT B OWNERSHIP NOTICE There are special rights or restrictions attached to each Class A Series 1 Preferred Share. A copy of the full text of those special rights or restrictions may be obtained, without charge, at the registered or records office of the Company.
FIRST AMENDMENT TO
EXECUTIVE CHANGE OF CONTROL SEVERANCE AGREEMENT
This First Amendment (this “Amendment”) to the Executive Change of Control Severance Agreement by and between Civeo Corporation (the “Company”) and Carolyn Stone (“Executive”), dated May 10, 2015 (the “Executive Agreement”), is hereby entered into by the Company and Executive, effective as of April 4, 2022 (the “Amendment Effective Date”). Capitalized terms used but not defined herein shall have the meanings assigned to such terms in the Executive Agreement.
WHEREAS, the Company and Executive desire to amend the Executive Agreement on the terms set forth herein.
NOW, THEREFORE, in consideration of the foregoing, effective as of the Amendment Effective Date, the Executive Agreement is hereby amended as follows:
1.Section 4(A) is hereby amended and restated in its entirety to read as follows:
“(A) Within 15 days of the expiration of the Release Period (as defined in Section 12), the Company shall pay to Executive in a lump sum, in cash, an amount equal to 2.0 times the sum of Executive’s (i) Termination Base Salary and (ii) Target AICP.”
2.Except as expressly amended hereby, the Executive Agreement shall remain in full force and effect and is specifically ratified and reaffirmed.
3.This Amendment will be governed by and construed in accordance with the laws of the State of Texas without regard to conflicts of law principles.
4.This Amendment may be executed in any number of counterparts, including by electronic mail or facsimile, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute one and the same instrument. Each counterpart may consist of a copy hereof containing multiple signature pages, each signed by one party, but together signed by both parties hereto.
IN WITNESS WHEREOF, the Company and Executive have executed this Amendment effective for all purposes as of the Amendment Effective Date.
CIVEO CORPORATION
By: /s/ Bradley J. Dodson
Name: Bradley J. Dodson
Title: President & CEO
EXECUTIVE
/s/ Carolyn Stone
Name: Carolyn Stone
Signature Page to First Amendment to
Executive Change of Control Severance Agreement
Exhibit 21.1
SIGNIFICANT SUBSIDIARIES OF CIVEO CORPORATION
Name of Entity | Jurisdiction of Organization | |||||||||||||
| Civeo Canada Limited Partnership | Alberta, Canada | |||||||||||||
| Civeo Holding Company 1 Pty Ltd | Australia | |||||||||||||
| Civeo Holding Company 2 Pty Ltd | Australia | |||||||||||||
| Civeo Management LLC | Delaware, U.S. | |||||||||||||
| Civeo Pty Ltd | Australia | |||||||||||||
| Civeo USA LLC | Delaware, U.S. | |||||||||||||
| Action Industrial Catering Pty Ltd | Australia | |||||||||||||
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the following Registration Statements:
i.the Registration Statement (Form S-8 No. 333-196292, as amended) pertaining to the 2014 Equity Participation Plan of Civeo Corporation,
ii.the Registration Statement (Form S-8 No. 333-211393) pertaining to the Amended and Restated 2014 Equity Participation Plan of Civeo Corporation,
iii.the Registration Statement (Form S-8 No. 333-226388) pertaining to the Amended and Restated 2014 Equity Participation Plan of Civeo Corporation,
iv.the Registration Statement (Form S-8 No. 333-240167) pertaining to the Amended and Restated 2014 Equity Participation Plan of Civeo Corporation, and
v.the Registration Statement (Form S-3 No. 333-267148) pertaining to the registration of common shares, preferred shares, debt securities and warrants
of our reports dated February 28, 2023, with respect to the consolidated financial statements of Civeo Corporation and the effectiveness of internal control over financial reporting of Civeo Corporation included in this Annual Report (Form 10-K) for the year ended December 31, 2022.
/s/ Ernst & Young LLP
Houston, Texas
February 28, 2023
EXHIBIT 31.1
CERTIFICATION OF
CHIEF EXECUTIVE OFFICER
OF CIVEO CORPORATION
PURSUANT TO RULE 13a–14(a) UNDER THE
SECURITIES EXCHANGE ACT OF 1934
I, Bradley J. Dodson, certify that:
1.I have reviewed this Annual Report on Form 10-K of Civeo Corporation (“Registrant");
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
4.The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
a.designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and
5.The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s Board of Directors (or persons performing the equivalent functions):
a.all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
b.any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.
Date: February 28, 2023
| /s/ Bradley J. Dodson | ||||||||
| Bradley J. Dodson President and Chief Executive Officer | ||||||||
EXHIBIT 31.2
CERTIFICATION OF
CHIEF FINANCIAL OFFICER
OF CIVEO CORPORATION
PURSUANT TO RULE 13a–14(a) UNDER THE
SECURITIES EXCHANGE ACT OF 1934
I, Carolyn J. Stone, certify that:
1.I have reviewed this Annual Report on Form 10-K of Civeo Corporation (“Registrant”);
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
4.The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
a.designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and
5.The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s Board of Directors (or persons performing the equivalent functions):
a.all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
b.any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.
Date: February 28, 2023
| /s/ Carolyn J. Stone | ||||||||
| Carolyn J. Stone Senior Vice President, Chief Financial Officer and Treasurer | ||||||||
EXHIBIT 32.1
CERTIFICATION OF
CHIEF EXECUTIVE OFFICER
OF CIVEO CORPORATION
PURSUANT TO 18 U.S.C. § 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of Civeo Corporation (the “Company”) for the twelve month period ended December 31, 2022, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Bradley J. Dodson, President and Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:
1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| /s/ Bradley J. Dodson | |||||||||||
| Name: | Bradley J. Dodson | ||||||||||
| Date: | February 28, 2023 | ||||||||||
EXHIBIT 32.2
CERTIFICATION OF
CHIEF FINANCIAL OFFICER
OF CIVEO CORPORATION
PURSUANT TO 18 U.S.C. § 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of Civeo Corporation (the “Company”) for the twelve month period ended December 31, 2022, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Carolyn J. Stone, Senior Vice President, Chief Financial Officer and Treasurer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:
1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| /s/ Carolyn J. Stone | |||||||||||
| Name: | Carolyn J. Stone | ||||||||||
| Date: | February 28, 2023 | ||||||||||