New Alberta Energy Regulator Reporting Requirements: Implications for Transactions and Borrowing

April 19, 2021

Written By Keely Cameron, Luke Morrison, Shawn Munro and Kevin Zych

On April 7, 2021, the Alberta Energy Regulator (AER) released a revised Directive 067: Eligibility Requirements for Acquiring and Holding Energy Licenses and Approvals, which is designed to enhance its ability to ensure that liabilities are properly managed by licensees. This follows other recent measures including amendments to its legislation to increase the ability of the AER to hold working interest participants accountable and to appoint receivers, as well as the introduction of a new liability management framework and licensee capability assessment.

The last amendment to Directive 067 was issued December 6, 2017, following the Court of Appeal's decision in Orphan Well Association v. Grant Thornton Limited which had upheld the lower court's finding that a receiver could disclaim non-producing wells and their associated liabilities in a receivership. This was subsequently overturned by the Supreme Court of Canada. Those amendments provided for additional scrutiny of parties seeking to obtain eligibility to hold AER licenses and created a new duty to advise the AER within 30 days of a material change. A material change is defined to include corporate changes, changes to directors, officers and shareholders with holdings of 20 percent or more of outstanding voting securities, a sale of all or substantially all of a licensees assets, commencement of insolvency proceedings or a significant reduction or cancellation of insurance coverage. The latest amendments go further and include:

• Financial reporting: An annual obligation to complete Schedule 3 to Directive 067, which provides a financial summary, and to provide audited financial statements. If audited statements are unavailable, those prepared by management within 180 days of fiscal year-end may be acceptable as directed by the AER. Applicants looking to obtain eligibility for newly-created companies (with no financial history) will need to provide details of their financing.
• Risk factors: The expansion of the factors the AER may consider in assessing whether an applicant, licensee, or approval holder poses an unreasonable risk to include consideration of:
  • outstanding debts owed for municipal taxes, surface lease payments or public land disposition fees or rental payments;
  • failure to maintain in Alberta persons who are authorized to make decisions and take actions on behalf of the licensee (which will have implications in particular for companies headquartered in other jurisdictions); and
  • the financial health of the applicant or licensee, as well as its affiliates and its directors, officers, and shareholders.
• Debt/credit agreement status: An obligation to notify the AER within 30 days of defaulting on debt or violating debt covenants.
• WIP reporting: An obligation to notify the AER of a significant change to working interest participant arrangements, including participant information and proportionate ownership shares.

Failure to provide the information required under Directive 067 may result in the AER revoking or restricting licensee eligibility. Restrictions imposed may include:

• limitation on the type or number of licenses held;
• additional scrutiny on application requirements and contents;
• requirement to provide security;
• requirements regarding the minimum or maximum working interest percentage permitted to be held by a particular licensee;
• requirement to address outstanding noncompliance of current or former AER licensees that are directly or indirectly associated with the applicant, or its directors, officers, or shareholders; and
• a new (and broad) ability for the AER to impose anything else the AER considers appropriate in the circumstances.

These latest Directive 067 amendments are intended to create a more proactive and robust “early warning” mechanism concerning the risks posed by an applicant or licensee, and to provide the AER a seat at the table concerning how financial issues for insolvent or struggling licensees are resolved. 

Also noteworthy is that the new Directive 067 amendments do not reflect any changes to the Alberta residency requirements. While Alberta recently removed the Canadian residency requirements of directors for Alberta corporations (previously required at least 25 percent of an Alberta corporation's directors to be resident Canadians), under Directive 067 an applicant must typically still be "resident" in Alberta as defined in applicable regulations or appoint an agent approved by the AER. 

In summary, the revisions further broaden the focus of Directive 067 beyond obtaining licensee eligibility, to maintaining that eligibility throughout the energy development life cycle, with a focus on ongoing assessment to ensure licensees can meet regulatory and liability obligations throughout. While the full impact of these changes remains to be seen, anticipated additional impacts include:

• increased initial and ongoing administrative and regulatory burdens for licensees;
• increased focus on the financials of a purchaser during proposed transactions; and
• potential challenges for lenders in dealing with borrower/licensee defaults and in seeking to enforce security, as declaring a default may impact the ability of a licensee to pursue transfers or new authorizations from the AER and/or the ability of the licensee to continue operations.

Given the breadth of these financial, transactional and regulatory implications, current licensees and parties seeking to obtain and hold licenses will face increased scrutiny. Bennett Jones assists clients regularly in meeting these evolving challenges in all aspect of their AER-regulated businesses and operations, including the increasingly broad and complex issues associated with licensee eligibility, compliance, and liability management.

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