(1) Excludes unrealized gains (losses) on derivative contracts.
There were no changes in the Company's approach to capital management during the year.
The high ratios reflect low natural gas prices, the capital expenditures and the convertible debenture financing required to make the transition from a gas-weighted company to an oil-weighted company. The 28 per cent decline in natural gas liquids prices and 17 per cent decline Canadian oil prices compared to the fourth quarter of 2011 have materially affected funds from operations and have increased the debt to funds from operations ratios. The impact on the net debt before convertible debentures ratio was mitigated by reducing bank debt with proceeds from dispositions during the year more so than the impact of the reduction of total net debt because there was not a proportionate reduction in the convertible debenture balances.
Neither the Company nor any of its subsidiaries are subject to externally imposed capital requirements. The credit facilities are subject to a semi-annual review of the borrowing base which is directly impacted by the value of the oil and natural gas reserves.
20. RELATED PARTY TRANSACTIONS
Key management personnel are comprised of all officers and directors of the Company.
On June 8, 2011, the Company issued 1,575 Series B Convertible Debentures to key management personnel at a price of $1,000 per convertible debenture for total gross proceeds of $1.6 million as part of a $46.0 million bought deal offering of convertible debentures.
Compensation of key management personnel was as follows:
December December 31, 2012 31, 2011Salaries and other short-term employee benefits $ 2,720 $ 2,469Share-based payments 629 902 -------------------------- $ 3,349 $ 3,371Capitalized portion of key management personnel compensation (1,340) (1,552) -------------------------- $ 2,009 $ 1,819----------------------------------------------------------------------------
21. COMMITMENTS AND CONTINGENCIES
(a) Capital commitments. The Company has entered into "farm-in" agreements whereby the Company may earn working interests in oil and gas properties in exchange for undertaking capital spending programs to develop the properties. In December 2012, the Company reached an agreement to terminate its previous commitment to drill 74 Edmonton Sand gas wells. In consideration for the termination of the commitment, the Company conveyed to the farmor a 25 per cent carried interest in four Cardium horizontal light oil wells. Three of the four wells were existing farm-in commitment wells to parties unrelated to the farmor. At December 31, 2012, one drilling commitment remained outstanding. This remaining commitment well was drilled in January 2013.
As at December 31, 2012, the Company also had commitments for future capital expenditures of $0.4 million that are expected to be incurred during the first quarter of 2013.
(b) Operating lease commitments. The Company leases various equipment, vehicles, and surface land locations under cancellable operating lease agreements. Surface lease arrangements may be cancelled at any time following reclamation of any site used in the Company's operations. For equipment and vehicle leases, the Company may terminate the leases at any time, subject to certain immaterial conditions and guarantees.
