AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 9, 2002
REGISTRATION NO. 333-90736
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1 TO
FORM F-10
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
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WESTERN OIL SANDS INC.
(Exact name of Registrant as specified in its charter)
ALBERTA, CANADA 1311 NOT APPLICABLE
(Province or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
incorporation or organization) Classification Code Number) No., if applicable)
SUITE 2400, ERNST & YOUNG TOWER, 440 SECOND AVENUE S.W., CALGARY, ALBERTA, T2P 5E9, (403) 233-1700
(Address and telephone number of Registrant's principal executive offices)
CT CORPORATION SYSTEM
111 EIGHTH AVENUE
NEW YORK, NY 10011
(212) 894-8700
(Name, address and telephone number (including area code)
of agent for service in the United States)
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COPIES TO:
CHARLES BERARD DALE M. SARRO
MACLEOD DIXON LLP ANDREW J. FOLEY
3700, 400-3 AVENUE SW PAUL, WEISS, RIFKIND, WHARTON & GARRISON
CALGARY, AB T2P 4H2 1285 AVENUE OF THE AMERICAS
(403) 267-8222 NEW YORK, NY 10019-6064
(212) 373-3000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after the effective date of this Registration Statement.
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PROVINCE OF ALBERTA, CANADA
(Principal jurisdiction regulating this offering)
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It is proposed that this filing shall become effective (check appropriate box
below):
A. [_] upon filing with the Commission, pursuant to Rule 467(a) (if in
connection with an offering being made contemporaneously in the United
States and Canada).
B. [X]:at some future date (check appropriate box below)
1. [_] pursuant to Rule 467(b) on ( ) at ( ) (designate a time not
sooner than 7 calendar days after filing).
2. [_] pursuant to Rule 467(b) on ( ) at ( ) (designate a time 7
calendar days or sooner after filing) because the securities
regulatory authority in the review jurisdiction has issued a
receipt or notification of clearance on ( ).
3. [X] pursuant to Rule 467(b) as soon as practicable after
notification of the Commission by the Registrant or the
Canadian securities regulatory authority of the review
jurisdiction that a receipt or notification of clearance has
been issued with respect hereto.
4. [_] after the filing of the next amendment to this Form (if
preliminary material is being filed).
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to the home jurisdiction's
shelf prospectus offering procedures, check the following box. [_]
The Registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registration
statement shall become effective as provided in Rule 467 under the Securities
Act of 1933 or on such date as the Commission, acting pursuant to Section 8(a)
of the Act, may determine.
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PART I
INFORMATION REQUIRED TO BE
DELIVERED TO OFFEREES OR PURCHASERS
NO SECURITIES REGULATORY AUTHORITY HAS EXPRESSED AN OPINION ABOUT THESE
SECURITIES AND IT IS AN OFFENCE TO CLAIM OTHERWISE.
SHORT FORM PROSPECTUS
New Issue July 8, 2002
[GRAPHIC]
[LOGO - WESTERN OIL SANDS]
Western Oil Sands Inc.
Exchange Offer for US$450,000,000 of our
8 3/8% Senior Secured Notes Due 2012
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TERMS OF THE EXCHANGE OFFER
o It will expire at 5:00 p.m., New York City time, on
August 9, 2002, unless we extend it.
o If all the conditions to this exchange offer are satisfied, we
will exchange all of our 8 3/8% Senior Secured Notes due 2012
issued on April 23, 2002, which we refer to as the initial
notes, that are validly tendered and not withdrawn for new
notes, which we refer to as the exchange notes.
o You may withdraw your tender of initial notes at any time
before the expiration of this exchange offer.
o The exchange notes that we will issue you in exchange for your
initial notes will be substantially identical to your initial
notes except that, unlike your initial notes, the exchange
notes will have no transfer restrictions or registration
rights.
THERE IS NO MARKET THROUGH WHICH THESE SECURITIES MAY BE SOLD AND
PURCHASERS MAY NOT BE ABLE TO RESELL SECURITIES PURCHASED UNDER THE SHORT FORM
PROSPECTUS.
BEFORE PARTICIPATING IN THIS EXCHANGE OFFER, PLEASE REFER TO THE
SECTION IN THIS PROSPECTUS ENTITLED "RISK FACTORS" COMMENCING ON PAGE 17.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
NO UNDERWRITER HAS BEEN INVOLVED IN THE PREPARATION OF THIS SHORT FORM
PROSPECTUS OR PERFORMED ANY REVIEW OF THE CONTENTS OF THIS SHORT FORM
PROSPECTUS.
Each broker-dealer that receives exchange notes for its own account
pursuant to the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of such exchange notes. The letter of
transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act of 1933, as amended. This prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales or exchange notes received in exchange for initial notes
where such initial notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities. We have agreed that, for a
period of 180 days after the expiration of this exchange offer, we will make
this prospectus available to any broker-dealer for use in connection with any
such resale. See "Plan of Distribution".
TABLE OF CONTENTS
PAGE
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Summary............................................................ 1
Risk Factors....................................................... 16
Use of Proceeds.................................................... 31
Capitalization..................................................... 32
Selected Consolidated Financial Data............................... 33
Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 34
Business........................................................... 39
Management......................................................... 64
Executive Compensation and Remuneration of Directors............... 69
Stock Options...................................................... 70
Certain Relationships and Related Transactions..................... 71
Security Ownership of Principal Shareholders and Management........ 72
Description of Contingent Equity................................... 72
Inter-Creditor Agreements and Collateral........................... 73
Description of Other Indebtedness.................................. 81
The Exchange Offer................................................. 84
Description of the Exchange Notes.................................. 91
Description of the Initial Notes................................... 141
Book-entry, Delivery and Form...................................... 141
Registration Rights................................................ 144
Income Tax Consequences............................................ 146
Plan of Distribution............................................... 149
Certain Legal Matters.............................................. 150
Experts............................................................ 150
Interest of Experts................................................ 150
Independent Accountants............................................ 150
Where You Can Find More Information................................ 151
Index to Financial Statements...................................... F-1
Summary of the Report of Gilbert Laustsen Jung Associates Ltd...... A-1
Purvin & Gertz, Inc. Summary Review of the Athabasca Oil Sands
Project, Including Reports by NorWest Mine Services, Inc........... B-1
Purvin & Gertz, Inc. Update of Summary Review of the Athabasca
Oil Sands Project, Including NorWest's Update of Muskeg River...... C-1
Certificate of Western Oil Sands Inc............................... D-1
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DOCUMENTS INCORPORATED BY REFERENCE
INFORMATION HAS BEEN INCORPORATED BY REFERENCE IN THIS PROSPECTUS FROM
DOCUMENTS FILED WITH SECURITIES COMMISSIONS OR SIMILAR REGULATORY AUTHORITIES IN
CANADA. Copies of the documents incorporated herein by reference may be obtained
on request without charge from the Secretary of Western at Suite 2400, 440
Second Avenue S.W., Calgary, Alberta, T2P 5E9 (Telephone (403) 233-1700). The
following documents have been filed with the securities commission or similar
authority in each of the provinces of Canada and are specifically incorporated
by reference into, and form an integral part, of this short form prospectus:
1. the Annual Information Form dated May 10, 2002; and
2. the Management Information Circular dated March 27, 2002 in
connection with the annual and special meeting of shareholders held on May 7,
2002 (excluding those portions thereof which, pursuant to National Instrument
44-101 of the Canadian Securities Administrators, are not required to be
incorporated by reference herein, being the disclosure given under the headings
"Composition of the Compensation Committee", "Report on Executive Compensation"
and "Report on Corporate Governance").
We also incorporate by reference any other filings made with the
Securities and Exchange Commission, or the Commission, under Sections 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934 prior to termination
of this exchange offering.
Any of the following documents, if filed by us with the provincial
securities commissions or similar authorities in Canada after the date of this
short form prospectus and before the termination of the offering, are deemed to
be incorporated by reference in this short form prospectus:
(a) material change reports (except confidential material
change reports);
(b) comparative interim financial statements;
(c) comparative financial statements for Western's most
recently completed financial year, together with the accompanying
report of the auditor; and
i
(d) information circulars (other than any disclosure
comparable to the portion of our Management Information Circular dated
March 27, 2002 which is not incorporated in this short form
prospectus).
Documents are not incorporated by reference to the extent their
contents are modified or superseded by a statement contained in this short form
prospectus or in any other subsequently filed document that is also incorporated
by reference in this short form prospectus.
ENFORCEABILITY OF CIVIL LIABILITIES AGAINST FOREIGN PERSONS
We are a corporation organized under the laws of Alberta, Canada and
are governed by the applicable provincial and federal laws of Canada. Most of
our directors and officers and some of the experts named in this prospectus
reside principally in Canada. Because these persons are located outside the
United States it may not be possible for you to effect service of process within
the United States upon those persons. Furthermore, it may not be possible for
you to enforce against us or them, in the United States, judgments obtained in
U.S. courts, because all or a substantial portion of our assets and the assets
of these persons are located outside the United States. We have been advised by
Macleod Dixon LLP, our Canadian counsel, that there is doubt as to the
enforceability, in original actions in Canadian courts, of liabilities based
upon the U.S. federal securities laws and as to the enforceability in Canadian
courts of judgments of U.S. courts obtained in actions based upon the civil
liability provisions of the U.S. federal securities laws. Therefore, it may not
be possible to enforce those actions against us, our directors and officers or
the experts named in this prospectus.
PRESENTATION OF FINANCIAL INFORMATION
The historical financial statements contained in this prospectus are
reported in Canadian dollars and have been prepared in accordance with generally
accepted accounting principles in Canada. Note 13 to our historical consolidated
financial statements contained in this prospectus summarizes the differences
between generally accepted accounting principles in Canada and in the United
States.
EXCHANGE RATE DATA
We prepare our financial statements in Canadian dollars. In this
prospectus, unless otherwise specified, all references to "$" refer to Canadian
dollars and all references to "US$" refer to United States dollars.
The following table lists, for each period presented, the high and low
exchange rates, the average of the exchange rates on the last day of each month
during the period indicated and the exchange rates at the end of the period for
one Canadian dollar, expressed in United States dollars, based on the inverse of
the noon buying rate in New York City for cable transfers in Canadian dollars as
certified for customs purposes by the Federal Reserve Bank of New York.
YEAR ENDED DECEMBER 31,
1999 2000 2001
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High for period.......................... 0.6925 0.6969 0.6697
Low for period........................... 0.6535 0.6410 0.6241
End of period............................ 0.6925 0.6669 0.6279
Average for period....................... 0.6746 0.6734 0.6459
ii
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning
of the U.S. federal securities laws. These statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those included in the forward-looking statements. The words "believe",
"expect", "intend", "estimate" and "anticipate" and similar expressions, as well
as future or conditional verbs such as "will", "should", "would" and "could"
often identify forward-looking statements. Specific forward-looking statements
contained in this prospectus include, among others, statements regarding:
o our expected operational and financial performance in future
periods, including projected commodity price, production and
cash flows as set forth in the Purvin & Gertz, Inc. reports
attached to this prospectus as Appendices B and C;
o the completion of, and the capital expenditures for, the
Project's construction;
o timing for achieving construction completion, start-up and
commercial operation of the Project;
o our ability to obtain equipment, feedstocks and labor in a
timely and cost effective manner;
o our ability to market products successfully to our anticipated
customers;
o the impact of increasing competition;
o our ability to obtain financing on acceptable terms;
o our estimated cost to operate and maintain the Project; and
o our resources and reserves and the estimated present value of
our future net cash flows.
Some of the risks that could affect our future results and could cause
results to differ materially from those expressed in our forward-looking
statements include:
o volatility of oil and natural gas prices;
o performance of facilities owned or operated by third parties;
o labor and/or equipment shortages, disruptions or costs;
o uncertainty of estimates of oil resources and reserves;
o competition;
o difficulties encountered and costs incurred during the
extraction and processing of bitumen and upgrading of bitumen
products;
o difficulties encountered and costs incurred in delivering
upgraded bitumen products to commercial markets;
o inability to complete construction of the Project within the
contemplated timing or costs;
o difficulties or delays encountered in start-up of operations;
o availability and prices of alternative products;
o changes in customer demand;
o currency fluctuations;
o uncertainty in our ability to attract capital;
o changes in, or the introduction of new, government regulations
relating to the oil sands business;
o compliance with environmental regulations;
o liabilities stemming from damage, including damage to the
environment;
o loss of the services of any of our executive officers or key
employees;
iii
o lack of sole control over expenditure decisions relating to
the Project; and
o adverse changes in the economy generally.
The information contained in this prospectus, including the information
provided under the heading "Risk Factors", identifies additional factors that
could affect our operating results and performance. We urge you to carefully
consider those factors.
Our forward-looking statements are expressly qualified in their
entirety by this cautionary statement. Our forward-looking statements are only
made as of the date of this prospectus and we undertake no obligation to
publicly update these forward-looking statements to reflect new information,
subsequent events or otherwise.
PricewaterhouseCoopers LLP has neither examined nor compiled the
accompanying summary financial projections and, accordingly,
PricewaterhouseCoopers LLP does not express an opinion or any other form of
assurance with respect thereto. The PricewaterhouseCoopers LLP audit report
included in this prospectus relates to our historical financial information.
It does not extend to the summary financial projections and should not be read
to do so.
DEFINITIONS AND OTHER MATTERS
As used in this prospectus, the following terms have the meaning
indicated:
"(0)API" means degrees API, a measure of the density of crude oil and
oil products;
"ATCO Power" and "ATCO Pipelines" means ATCO Power Canada Ltd. and ATCO
Gas and Pipelines Ltd., respectively, each subsidiaries of ATCO Ltd.;
"bbls", "Mbbls" and "MMbbls" mean barrels, thousand barrels and million
barrels, respectively;
"bbls/d" means barrels per day;
"BHP" means Broken Hill Proprietary Company Limited;
"btu" and "MMbtu" mean British thermal units and million British
thermal units, respectively;
"Corridor" means Corridor Pipeline Ltd., a subsidiary of BC Gas Inc.;
"EBITDA" means earnings before deducting interest expenses, taxes,
depletion, depreciation and amortization;
"Edmonton Par" means light sweet crude oil at a reference sales point
in Edmonton, Alberta in western Canada, a common benchmark for Canadian crude
oil that typically trades at a small discount to WTI;
"finding and development costs" means capital costs to acquire, explore
for, and develop reserves;
"GAAP" means generally accepted accounting principles;
"Henry Hub" means natural gas located at a reference sales point in the
state of Louisiana in the southern United States;
"HSVGO" means heavy sour vacuum gas oil;
"probable reserves" means those reserves which analysis of drilling,
geological, geophysical and engineering data does not demonstrate to be proved
under current technology and existing economic conditions, but where such
analysis suggests the likelihood of their existence and future recovery;
"Project" means the design and construction of facilities and the
implementation of operations of the Muskeg River mine, extraction plant,
upgrader, ATCO cogeneration facilities, Corridor Pipeline and all other
facilities and related agreements necessary to mine, extract, transport and
upgrade bitumen from oil sands deposits on the western portion of Lease 13;
"Project administrator" means Shell Canada Limited;
iv
"proved reserves" means those quantities of reserves estimated as
recoverable with a high degree of certainty under current technology and
existing economic conditions, from that portion of a reservoir which can be
reasonably evaluated as economically productive on the basis of analysis of
drilling, geological, geophysical and engineering data;
"Purvin & Gertz" and "PGI" mean Purvin & Gertz, Inc.;
"resources" means in-place bitumen where the ore contains greater than
7% bitumen and the in-place ratio of total volume to bitumen is less than 12:1
with the waste to ore stripping ratio less than 1.5:1. Resources are not
necessarily economically extractable;
"sour condensate" means high sulphur liquid hydrocarbon obtained from
natural gas wells or plants;
"Suncor" means Suncor Energy Inc.;
"Syncrude" means Syncrude Canada Ltd.;
"start-up" means the date on which first scheduled production from the
Project occurs;
"TMPL" means Trans Mountain Pipeline Company Ltd., a subsidiary of BC
Gas Inc.;
"ton" means 2000 pounds and is equivalent to approximately 0.91 tonnes;
"tonne" means 1000 kilograms and is equivalent to approximately 1.1
tons; and
"turnaround" means planned maintenance of a facility undertaken
periodically and which normally is of a significant nature requiring the
complete shut-down of the facility;
"WTI" means West Texas Intermediate grade crude oil at a reference
sales point in Cushing, Oklahoma, a common benchmark for crude oil.
All reserve estimates, including proved and probable reserves, have
been independently estimated and verified by Gilbert Laustsen Jung Associates
Ltd., independent petroleum consultants of Calgary, Alberta, in their report
dated April 4, 2002. References in this prospectus to "GLJ" refer to Gilbert
Laustsen Jung Associates Ltd. and to the "GLJ report" refer to the report of GLJ
dated April 4, 2002. A summary of the GLJ report is attached to this prospectus
as Appendix A.
All resource estimates have been independently verified by NorWest
Corporation (formerly NorWest Mine Services, Inc.), independent mining
consultants of Salt Lake City, Utah, in their report dated January 18, 2000. All
references in this prospectus to "NorWest" refer to NorWest Corporation and to
the "NorWest report" refer to the report of NorWest dated January 18, 2000.
The definitions of "probable reserves", "proved reserves" and
"resources" have been provided to us by our independent consultants. The
definitions of "proved reserves" and "resources" are not necessarily equivalent
to those definitions required by the Commission. The Commission does not have a
definition of "probable reserves".
v
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. YOU SHOULD READ THE ENTIRE PROSPECTUS CLOSELY. EXCEPT WHERE THE
CONTEXT REQUIRES OTHERWISE, ALL REFERENCES IN THIS PROSPECTUS TO (I) "WESTERN",
"WE", "OUR" AND "US" REFER TO WESTERN OIL SANDS INC. AND ALL OF OUR
SUBSIDIARIES, INCLUDING WESTERN OIL SANDS L.P., THE WHOLLY-OWNED LIMITED
PARTNERSHIP THROUGH WHICH WE HOLD OUR INTEREST IN THE JOINT VENTURE; (II)
"SHELL" AND "CHEVRON" REFER TO SHELL CANADA LIMITED AND CHEVRON CANADA LIMITED,
RESPECTIVELY; AND (III) "OWNERS" REFERS TO WESTERN, SHELL AND CHEVRON,
COLLECTIVELY.
THE TERM "INITIAL NOTES" REFERS TO THE 8 3/8% SENIOR SECURED NOTES DUE
2012 THAT WERE ISSUED ON APRIL 23, 2002 IN A PRIVATE OFFERING. THE TERM
"EXCHANGE NOTES" REFERS TO THE 8 3/8% SENIOR SECURED NOTES DUE 2012 OFFERED BY
THIS PROSPECTUS. EXCEPT AS OTHERWISE PROVIDED HEREIN, THE TERM "NOTES" REFERS TO
THE INITIAL NOTES AND THE EXCHANGE NOTES, COLLECTIVELY.
OUR COMPANY
We hold a 20% undivided ownership interest in a multi-billion dollar
joint venture that is exploiting a portion of one of the largest reservoirs of
crude oil in the world. Shell and Chevron hold the remaining 60% and 20%
ownership interests in the joint venture, respectively. The Project, which
includes facilities owned by the joint venture and third parties, will use
established processes to mine oil sands deposits, extract and transport bitumen,
and upgrade the bitumen into synthetic crude oil and vacuum gas oil, or VGO.
The initial design capacity for the Project supports a non-declining
bitumen production rate of approximately 155,000 bbls/d that, together with
purchased feedstocks, supports total upgraded output of approximately 190,000
bbls/d. At full capacity, our share of the expected upgraded output will be
approximately 38,000 bbls/d. Following start-up, we believe that the owners will
be able to increase production at a relatively low capital cost through the
implementation of debottlenecking and other initiatives.
We have agreed to sell our share of VGO production, which will be
approximately 12,000 bbls/d, to an affiliate of Shell under a long-term sales
agreement, and we will take the remainder of our share of total sales volumes
and market it to refineries throughout North America.
The joint venture will develop the western portion of Lease 13, a large
oil sands lease in the Athabasca region of northeastern Alberta, Canada, held by
the owners and granted by the Government of Alberta. According to GLJ, the
western portion of Lease 13 contains approximately 1.7 billion bbls of proved
and probable reserves and is sufficient for 30 years of non-declining bitumen
production at 155,000 bbls/d. We have the option to participate in expansion
opportunities, including on the remainder of Lease 13 and on two other nearby
oil sands leases owned by Shell, referred to as Leases 88 and 89. The following
table outlines the joint venture's proved and probable reserves on the western
portion of Lease 13, as estimated by GLJ, and the resources available for future
expansion opportunities on the remainder of Lease 13 and Leases 88 and 89, as
verified by NorWest:
TOTAL OUR SHARE
----- ---------
(MMBBLS) (MMBBLS)
-------- --------
JOINT VENTURE
Reserves on western portion of Lease 13.......... 1,681 336
===== ===
FUTURE OPPORTUNITIES(1)
Resources on remainder of Lease 13............... 3,200 640
Resources on Leases 88 and 89.................... 3,900 780
----- ---
7,100 1,420
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(1) Assumes we maintain a 20% participation, which entails certain
significant costs and risks. See "Risk Factors."
We were selected by Shell in July 1999 to participate in the joint
venture due to our considerable expertise in mining and resource extraction,
which is critical to the success of any oil sands project and complements
Shell's expertise in hydrocarbon management and upgrading. We have a combined
500 man years of mining and resource extraction expertise derived from the
design, development and construction of over 15 mining and processing facilities
throughout the world. We are actively involved in the construction of, and will
have primary operational responsibility for, the mine and the extraction plant.
OUR INDUSTRY
Oil sands are composed primarily of sand, bitumen, mineral rich clays
and water. Bitumen, in its raw state, is a heavy, viscous, crude oil. According
to the Alberta Energy and Utilities Board, or AEUB, total Canadian in-place
bitumen volume is approximately 2.5 trillion bbls, of which 300 billion bbls are
potentially recoverable under anticipated technology and economic conditions.
While not an exact comparison, according to Canada's National Energy Board, or
NEB, these potentially recoverable bitumen resources are approximately
equivalent in size to Saudi Arabia's proved conventional oil reserves.
Existing oil sands operators Suncor and Syncrude have focused their oil
sands developments in northern Alberta, at sites near Lease 13, since 1967 and
1978, respectively. Syncrude is a joint venture among several oil and gas
producers, including Imperial Oil Resources (an affiliate of Exxon Mobil
Corporation) and Petro-Canada. Suncor and Syncrude have reported their 2001
average daily synthetic crude oil production as 123,200 bbls/d and 223,000
bbls/d, respectively.
THE PROJECT
Shell initiated the development of the western portion of Lease 13 due
in part to the success experienced by other oil sands operators in reducing
their capital and operating costs through the evolution of mining and extraction
processes and favorable changes to the governmental tax and royalty regimes
applicable to oil sands operations. Shell initially chose BHP to participate in
the pre-feasibility and feasibility studies of the Project due to BHP's
expertise in mining and mineral extraction. Following BHP's withdrawal from the
Project, we employed most of the BHP team involved in the execution of the
feasibility study. Shell conducted an extensive review of potential replacements
and selected Chevron and Western to participate in the joint venture.
The Project consists of several critical facilities owned by the joint
venture, as well as other facilities owned by third parties:
JOINT VENTURE FACILITIES
Muskeg River Mine: Located on the western portion of Lease
13, the mine will employ proven
continuous open pit mining methods in a
truck and shovel operation to mine the
oil sands.
Extraction Plant: Located at the Muskeg River mine, the
extraction plant will separate the
bitumen from the mined oil sands.
Upgrader: Located adjacent to Shell's Scotford
refinery, the upgrader will convert
bitumen and other feedstocks into
synthetic crude oil streams and VGO
utilizing a proven hydro-conversion
process.
SHARED FACILITIES
Hydrogen Manufacturing Unit, or Owned by the owners and an affiliate of
HMU: Shell, the HMU is located at the
upgrader and will supply approximately
75% of the hydrogen requirements of the
upgrader.
2
THIRD-PARTY FACILITIES
Corridor Pipeline: Owned by Corridor, the pipelines will
transport diluted bitumen from the
extraction plant to the upgrader via a
444 kilometer pipeline and synthetic
crude oil from the upgrader to the
pipeline systems in Edmonton, Alberta
via a 43 kilometer pipeline.
ATCO Cogeneration Facilities: Owned by ATCO Power, the cogeneration
facilities will be located at the Muskeg
River mine and upgrader, and will supply
the power and steam requirements of the
mine and extraction plant and the
upgrader.
ATCO Gas Pipeline: Owned by ATCO Pipelines, this pipeline
connects the intra-Alberta gas pipeline
network, west of the Muskeg River mine,
to the mine and cogeneration facility.
Financing for the HMU has been obtained by the owners and an affiliate
of Shell. Each of Corridor, ATCO Power and ATCO Pipelines are responsible for
financing their respectively owned facilities.
The Project uses engineering, procurement and construction management
organizations, or EPCM contractors, with significant experience in large-scale
construction projects, including other oil sands projects. The Project's design,
engineering and procurement are substantially complete and construction is at
peak activity levels. We believe the Project will start-up late in the fourth
quarter of 2002 and will reach 85% of design capacity in the second quarter of
2003. The Project administrator's view is that start-up could slip into early
2003. Operations teams have been established and are working closely with the
EPCM contractors and owners' management groups to optimize start-up performance.
As of March 31, 2002, engineering and construction of the mining and
extraction facility were approximately 100% and 79% complete, respectively. As
of March 31, 2002, engineering and construction of the upgrader were
approximately 98% and 69% complete, respectively. All major equipment purchases
are complete or under committed cost agreements. Based on information available
to us as of March 31, 2002, we have estimated our share of forecasted total
costs to be approximately $961.6 million, which is approximately 3.6% less than
the Project administrator's current view of costs. Labor productivity levels and
other costs at each construction site have varied throughout the development of
the Project and labor productivity and such other costs have not met our
expectations. We believe, therefore, that our share of forecasted total costs
will increase and that such increase may be material.
OUR STRENGTHS
LARGE RESOURCE BASE WITH SIGNIFICANT RESERVES AND OPPORTUNITIES FOR EXPANSION
The oil sands in the Athabasca region represent the largest known
single source of crude oil in Canada. According to GLJ, the western portion of
Lease 13 contains approximately 1.7 billion bbls of proved and probable
reserves, which is sufficient for 30 years of non-declining bitumen production
at 155,000 bbls/d. Our share of total reserves is approximately 336 million
bbls. Total estimated bitumen reserves and resources of Leases 13, 88 and 89
are, according to GLJ and NorWest, approximately 8.8 billion bbls, with our
share, assuming we maintain a 20% participation, totaling approximately 1.8
billion bbls.
LOWER COST AND RISK PROFILE COMPARED TO CONVENTIONAL OIL EXPLORATION AND
PRODUCTION
Unlike conventional oil exploration and production, the Project is
expected to have a constant non-declining rate of daily production and therefore
will not have to incur ongoing exploration risk to maintain its production rate.
Our total costs per bbl, which include operating, finding and development and
royalty costs, are expected to be lower than the average total costs per bbl for
conventional oil producers primarily due to our finding and development costs
which are currently estimated to be less than $2.90 per bbl. Our royalties are
expected to be less than 1% of gross revenues until capital costs associated
with the
3
mine and extraction plant, including a return on capital, are fully recovered.
Income taxes will be deferred due to accelerated capital cost allowances.
STRONG SPONSORSHIP
The joint venture benefits from the participation, sponsorship and
execution capabilities of Shell and Chevron. Shell and its affiliates provide
significant expertise in the upgrading process and in managing large and
multi-stage projects around the world. Chevron and its affiliates provide
substantial expertise in the upgrading process as a recognized leader in
catalysts and hydro-cracking and hydro-treating technologies. In addition, both
Shell and Chevron add significant refining expertise and have extensive capital
resources.
PROVEN PROCESSES
The Project will use many of the operating processes employed by other
oil sands operations in the Athabasca region. The joint venture benefits from
knowledge of process improvements that have resulted in operating efficiencies
and reduced operating costs for other oil sands projects over the last several
years. In addition, the Project has adopted mining and extraction techniques
commonly used in other mineral extraction processes, including those for copper,
gold, coal and nickel, that are expected to further improve operating efficiency
and product quality and reduce environmental emissions. The oil sands extraction
process employed by the Project was successfully tested during the 12 month
operation of the Project's pilot plant. Furthermore, the upgrader will utilize a
process that is employed by a number of other upgraders and refineries in North
America, including Syncrude.
ESTABLISHED MARKETS FOR PRODUCTS
We have agreed to sell our share of VGO production, which will be
approximately one-third of our share of upgraded output, to an affiliate of
Shell under a long-term sales agreement. The remaining upgrader output and any
third party feedstocks will initially form the basis for two streams of
synthetic crude oil (one heavy and one light), and later a single stream, which
we intend to sell to numerous refineries throughout North America. Synthetic
crude oil has been produced by other oil sands projects in the Athabasca region
for more than 20 years, and has competed with conventional crude oil production.
We expect that the demand for the two synthetic crude oil streams which we
initially produce will be strong due to their favorable sulphur and aromatics
content. We believe that within one year of start-up we will be in a position to
take our share of upgrader output and create a single stream blend which we
believe will have an even higher demand and a greater value than the two
synthetic crude oil streams.
EXPERIENCED WESTERN MANAGEMENT TEAM
We contribute design, construction and operations expertise for the
critical mining and extraction processes of the joint venture. In June 1999, Guy
Turcotte, our President and CEO, joined 20 former BHP personnel, who have a
combined 500 man years of mining and resource extraction expertise, to form
Western and to participate in the joint venture. In addition, Mr. Turcotte has
more than 20 years of oil and gas production and marketing experience. He was
the founder of Chauvco Resources Ltd. (sold to Pioneer Natural Resources Company
in 1997) and is the Chairman and CEO of Fort Chicago Energy Partners, the
largest partner in the $5 billion Alliance Pipeline.
4
PROJECT FEASIBILITY REPORTS AND INDEPENDENT REVIEWS
Since 1996, numerous studies, reports and reviews from independent
experts and consultants have been commissioned. The most recent of these
studies, reports and reviews include:
FIRM STUDY DATE
- ---- ----- ----
Shell, BHP and third parties...... Feasibility Study November 1999
GLJ............................... Reserve Evaluation(1) April 2002
Purvin & Gertz.................... Update of Summary Review of the Athabasca Oil Sands Project, Including April 2002
NorWest's Update of Muskeg River(2)
Summary Review of the Athabasca Oil Sands Project, Including Reports by August 2001
NorWest Mine Services, Inc.(2)
NorWest........................... Update of Muskeg River Mine Construction Status(3) April 2002
Update of Athabasca Oil Sands Project Due Diligence Report(3) June 2001
Review of Extraction Plant Reports, Muskeg River Oil Sands Projects(3) June 2001
Western Oil Sands Bitumen Reserves and Resources Report January 2000
- ------------------------
(1) A summary of the GLJ report is attached as Appendix A.
(2) Attached as Appendices B and C and referred to as the Purvin & Gertz
report.
(3) Summarized in the Purvin & Gertz report.
PRE-FEASIBILITY AND FEASIBILITY STUDIES
In 1996, Shell and BHP undertook a $133 million pre-feasibility and
feasibility study process that lasted approximately four years. These studies
identified and designed mitigation programs for the major risks regarding the
design, engineering, construction and operation of the mine, extraction plant
and upgrader. The feasibility study considered, among other things, resource
characterization and reserves, proposed technical scope and associated facility
costs, commercial arrangements, environmental considerations, risk factors and
risk mitigation and economics. Additionally, the feasibility study included
third-party technical analysis. The technical risks that were identified in the
feasibility study were tested in pilot plant operations, which ran for a 12
month period and produced bitumen that exceeded the quality specifications
required by the upgrader.
RESERVE EVALUATION
We engaged GLJ to conduct reserve estimates and an economic evaluation
of our interest in the joint venture. Established in 1972, GLJ provides
independent geological and engineering consulting services to companies in the
petroleum industry, including reserve and economic evaluations, technical
studies, advice and opinions. The GLJ report considered, among other things,
resource estimates, capital and operating costs, production rates and forecasted
oil and natural gas prices in its economic evaluation. These evaluations
estimate approximately 1.1 billion bbls of proved and 1.7 billion bbls of proved
plus probable crude oil reserves for the western portion of Lease 13.
UPGRADER AND SUMMARY PROJECT REVIEWS
We engaged Purvin & Gertz to prepare an independent review of the
upgrader. Purvin & Gertz is an oil and gas industry engineering and consulting
firm that has been providing companies in the oil and gas industry with
independent consulting reports for over 50 years. The Purvin & Gertz report
considered, among other things, upgrader facilities and process risk, utilities
and offsites, project contractors, feedstock and product prices, and capital and
operating costs. Its report concluded that, subject to suitable bitumen
5
feed quality from the Muskeg River mine, it did not see a major technology risk
with the upgrading process and our operating cost estimates were reasonable.
We also engaged Purvin & Gertz to provide us with reviews of the
Project as a whole, including summaries of other independent reviews. This
report covers all major facilities, capital costs, project schedules, processes,
operating costs and joint venture and related agreements. The report confirmed
the technical feasibility and economics of the Project and analyzed projected
financial results for our share of the joint venture. The most recent report
updates the capital cost, schedule and projected financial results of the
Project.
JOINT VENTURE AGREEMENT
The joint venture among the owners commenced December 6, 1999. Under
the joint venture agreement, an executive committee, comprised of two members
from each of Shell, Chevron and Western, has the authority to make most
decisions related to the Project. Voting on the executive committee is based on
each owner's ownership interest. Except for a limited number of matters relating
to specific operational aspects of the upgrader, ordinary resolutions require
the votes of two or more owners with combined votes in excess of 50% of the
owners' interests. In respect of maintenance shutdown or for safety,
environmental or regulatory compliance under applicable laws relating to the
upgrader and refinery, ordinary resolutions require the votes of one or more
owners with combined votes in excess of 50% of the owners' interests.
Extraordinary resolutions of the executive committee require the votes of two or
more owners holding combined ownership interests representing at least 85% of
the owners' interests. Given the current interests of the owners in the joint
venture, extraordinary resolutions effectively require unanimity. Extraordinary
resolutions are required for, among other things, material changes in basic
design, suspension of construction, certain curtailments or permanent shut down
and abandonment of facilities, and removal of the project administrator or an
operator. Unanimous approval of the owners is expressly required for, among
other things, mortgaging or encumbering joint venture assets and amendments to
certain Project agreements.
FINANCING PLAN
We estimate our forecasted total costs, prior to mitigation
initiatives, to be approximately $961.6 million. As of December 31, 2001, we had
incurred approximately $613.5 million of these costs and had approximately
$348.1 million of remaining forecasted total costs to be incurred. As of March
31, 2002, we estimate that our remaining forecasted total costs to be incurred
are $243.9 million, which includes $29.5 million for unallocated contingencies
and allowances. We estimate that the net proceeds we received from the offering
of the initial notes, together with all our other sources of funds, will be
sufficient to fully fund our remaining forecasted total costs. We also have an
$88 million subordinated cost overrun facility which can be drawn at any time to
fund Project costs, and Project delay/cost overrun insurance which are not
included as sources of funds. Furthermore, our net revenues prior to March 31,
2003, are estimated by Purvin & Gertz to be up to $50 million using our start-up
assumptions.
The table below summarizes our projected sources and uses of capital
from March 31, 2002:
SOURCES OF FUNDS USES OF FUNDS
- ---------------- -------------
(IN MILLIONS) (IN MILLIONS)
Senior secured notes(1)........................... $710.9 Remaining forecasted total costs(3)............... $243.9
Senior credit facility(2)......................... 75.0 Interest during construction(4)................... 67.9
Cash and cash equivalents......................... 70.2 Repay existing indebtedness(5).................... 473.9
Financing fees and expenses....................... 17.2
General corporate purposes(6)..................... 53.2
------ ------
TOTAL SOURCES..................................... $856.1 TOTAL USES........................................ $856.1
====== ======
- ------------------------
(1) US$450 million converted to Canadian dollars at noon buying rate on
April 16, 2002, which was US$1.00 = $1.5798.
6
(2) Represents the amount available to be drawn on this facility which is
comprised of a $75 million debt service/completion facility and a $25
million letter of credit facility.
(3) Represents those forecasted total costs to be incurred after March 31,
2002 and includes $38.7 million of our estimated operating expenses
from start-up until March 31, 2003. Forecasted total costs currently
exceed the original budget contained in the feasibility study. Does not
include capital leases or any associated capital costs incurred by us
in respect of the HMU.
(4) Includes funds to pay the first two interest payments on the notes and
interest payments on the senior credit facility.
(5) Includes, as of March 31, 2002, outstanding indebtedness under our
existing $535 million senior credit facility of $418.5 million and fees
of $55.4 million owed to Shell. Concurrent with the closing of the
offering of the initial notes, all amounts owed under our $535 million
senior credit facility (with the exception of any bankers' acceptances
outstanding on the Issue Date that were effectively defeased using a
portion of the proceeds of the offering of the initial notes) and
amounts owed to Shell were repaid and the $535 million senior credit
facility was cancelled.
(6) Includes cash to be used for general and administrative expenses and
other corporate purposes as well as for working capital, including
$11.8 million for the payment of accounts payable.
EQUITY PLACEMENTS
Since our incorporation in 1999, we have raised equity of $459.8
million. Our most recent equity financings of $47.4 million (through a rights
offering) and $2.6 million (through a private placement) were completed in
October and November of 2001, respectively. In addition to equity raised to
date, certain of our existing investors have agreed to purchase, at our option,
$48.9 million of equity which is available to us at any time prior to March 31,
2003 to provide further financial flexibility.
SENIOR CREDIT FACILITY
On April 23, 2002, we executed a credit agreement for a senior credit
facility of $100 million, which is comprised of a $75 million debt service and
construction completion facility which is to be used to fund the first two
interest payments on the notes and interest on the senior credit facility, with
the surplus to be available to fund Project construction costs as required, and
a $25 million letter of credit facility which is to be used to support our
overdraft arrangements under the joint venture agreement and our reclamation
obligations.
SUBORDINATED COST OVERRUN FACILITY
We have an $88 million subordinated cost overrun facility which can be
used at our option at any time to fund certain Project costs. Borrowings under
this facility can be converted by us at maturity at our option into our Common
Shares. We have not drawn on this facility.
PROJECT DELAY/COST OVERRUN INSURANCE
We have a $197.5 million insurance policy that insures us against
certain losses of revenues, from some delays in reaching certain production
levels and insures certain specified costs beyond the original budget
contained in the feasibility study. The maintenance of this policy is required
by the joint venture agreement. We have been working very closely with our
insurers and we intend to file an interim claim under this policy in the second
quarter of 2002.
OTHER CORPORATE INFORMATION
We were incorporated under the Business Corporations Act (Alberta) on
June 18, 1999. Our principal executive offices are located at Suite 2400, Ernst
& Young Tower, 440 Second Avenue S.W., Calgary, Alberta, T2P 5E9. Our registered
office is located at 3700, 400 Third Avenue S.W., Calgary, Alberta, T2P 4H2. Our
phone number is (403) 233-1700. Our Common Shares are listed and posted for
trading on The Toronto Stock Exchange under the trading symbol "WTO."
7
SUMMARY OF THE EXCHANGE OFFER
We are offering to exchange US$450,000,000 aggregate principal amount
of our exchange notes for a like aggregate principal amount of our initial
notes. In order to exchange your initial notes, you must properly tender them
and we must accept your tender. We will exchange all outstanding initial notes
that are validly tendered and not validly withdrawn.
EXCHANGE OFFER.......................... We will exchange our exchange notes
for a like aggregate principal amount
at maturity of our initial notes.
EXPIRATION DATE......................... This exchange offer will expire at
5:00 p.m., New York City time, on
August 9, 2002, unless we decide to
extend it.
CONDITIONS TO THE EXCHANGE OFFER........ We will complete this exchange offer
only if:
o there is no change in the laws and
regulations which would impair our
ability to proceed with this
exchange offer,
o there is no change in the current
interpretation of the staff of the
Commission which permits resales of
the exchange notes,
o there is no stop order issued by
the Commission which would suspend
the effectiveness of the
registration statement which
includes this prospectus or the
qualification of the exchange notes
under the Trust Indenture Act of
1939,
o there is no litigation or
threatened litigation which would
impair our ability to proceed with
this exchange offer, and
o we obtain all the governmental
approvals we deem necessary to
complete this exchange offer.
Please refer to the section in this
prospectus entitled "The Exchange
Offer--Conditions to the Exchange
Offer."
PROCEDURES FOR TENDERING INITIAL To participate in this exchange offer,
NOTES................................. you must complete, sign and date the
letter of transmittal or its facsimile
and transmit it, together with your
initial notes to be exchanged and all
other documents required by the letter
of transmittal, to The Bank of Nova
Scotia Trust Company of New York, as
exchange agent, at its address
indicated under "The Exchange
Offer--Exchange Agent." In the
alternative, you can tender your
initial notes by book-entry delivery
following the procedures described in
this prospectus. If your initial notes
are registered in the name of a
broker, dealer, commercial bank, trust
company or other nominee, you should
contact that person promptly to tender
your initial notes in this exchange
offer. For more information on
tendering your notes, please refer to
the section in this prospectus
entitled "The Exchange
Offer--Procedures for Tendering
Initial Notes."
SPECIAL PROCEDURES FOR BENEFICIAL If you are a beneficial owner of
OWNERS................................ initial notes that are registered in
the name of a broker, dealer,
commercial bank, trust company or
other nominee and you wish to tender
your initial notes in the exchange
offer, you should contact the
registered holder promptly and
instruct that person to tender on your
behalf.
GUARANTEED DELIVERY PROCEDURES.......... If you wish to tender your initial
notes and you cannot get the required
documents to the exchange agent on
time, you may tender your notes by
using the guaranteed delivery
procedures described
8
under the section of this prospectus
entitled "The Exchange
Offer--Procedures for Tendering
Initial Notes--Guaranteed Delivery
Procedure."
WITHDRAWAL RIGHTS....................... You may withdraw the tender of your
initial notes at any time before 5:00
p.m., New York City time, on the
expiration date of the exchange offer.
To withdraw, you must send a written
or facsimile transmission notice of
withdrawal to the exchange agent at
its address indicated under "The
Exchange Offer--Exchange Agent" before
5:00 p.m., New York City time, on the
expiration date of the exchange offer.
ACCEPTANCE OF INITIAL NOTES AND If all the conditions to the
DELIVER OF EXCHANGE NOTES............. completion of this exchange offer are
satisfied, we will accept any and all
initial notes that are properly
tendered in this exchange offer on or
before 5:00 p.m., New York City time,
on the expiration date. We will return
any initial note that we do not accept
for exchange to you without expense as
promptly as practicable after the
expiration date. We will deliver the
exchange notes to you as
promptly as practicable after the
expiration date and the acceptance of
your initial notes for exchange.
Please refer to the section in this
prospectus entitled "The Exchange
Offer--Acceptance of Initial Notes for
Exchange; Delivery of Exchange Notes."
INCOME TAX CONSEQUENCES Exchanging your initial notes for
RELATING TO THE EXCHANGE OFFER........ exchange notes will not be a taxable
event to you for United States federal
income tax purposes. Please refer to
the section of this prospectus
entitled "Income Tax Consequences--
U.S. Federal Income Tax Consequences."
EXCHANGE AGENT.......................... The Bank of Nova Scotia Trust Company
of New York is serving as exchange
agent in the exchange offer.
FEES AND EXPENSES....................... We will pay all expenses related to
this exchange offer. Please refer to
the section of this prospectus
entitled "The Exchange Offer--Fees and
Expenses."
USE OF PROCEEDS......................... We will not receive any proceeds from
the issuance of the exchange notes. We
are making this exchange offer solely
to satisfy certain of our obligations
under our registration rights
agreement entered into in connection
with the offering of the initial
notes.
CONSEQUENCES TO HOLDERS WHO DO If you do not participate in this
NOT PARTICIPATE IN THE EXCHANGE exchange offer:
OFFER.................................
o you will not necessarily be able to
require us to register your initial
notes under the Securities Act of
1933, as amended, or the Securities
Act,
o you will not be able to resell,
offer to resell or otherwise
transfer your initial notes unless
they are registered under the
Securities Act or unless you
resell, offer to resell or
otherwise transfer them under an
exemption from the registration
requirements of, or in a
transaction not subject to, the
Securities Act, and
9
o the trading market for your initial
notes will become more limited to
the extent other holders of initial
notes participate in the exchange
offer.
Please refer to the section of this
prospectus entitled "Risk
Factors--Your failure to
participate in the exchange offer
will have adverse consequences."
RESALES................................. It may be possible for you to resell
the notes issued in the exchange offer
without compliance with the
registration and prospectus delivery
provisions of the Securities Act,
subject to some conditions. Each
broker-dealer that receives exchange
notes for its own account in exchange
for initial notes, where such initial
notes were acquired by such
broker-dealer as a result of
market-making activities or other
trading activities, must acknowledge
that it will deliver a prospectus in
connection with any resale of such
exchange notes. See "Plan of
Distribution". Please refer to the
sections of this prospectus entitled
"Risk Factors--Risks Relating to the
Exchange Offer--Some persons who
participate in the exchange offer must
deliver a prospectus in connection
with resales of the exchange notes"
and "Plan of Distribution."
SUMMARY OF TERMS OF THE EXCHANGE NOTES
The summary below describes the principal terms of the exchange notes
offering. Some of the terms and conditions described below are subject to
important limitations and exceptions. You should carefully read the "Description
of the Exchange Notes" section of this prospectus for a more detailed
description of the exchange notes offering.
ISSUER.................................. Western Oil Sands Inc.
EXCHANGE NOTES OFFERED.................. US$450 million aggregate principal
amount of 8 3/8% Senior Secured Notes
due 2012. The form and terms of the
exchange notes are the same as the
form and terms of the initial notes
except that the issuance of the
exchange notes is registered under the
Securities Act, the exchange notes
will not bear legends restricting
their transfer and will not be
entitled to registration rights under
our registration rights agreement. The
exchange notes will evidence the same
debt as the initial notes, and both
the initial notes and the exchange
notes will be governed by the same
notes indenture.
MATURITY DATE........................... May 1, 2012.
INTEREST................................ 8 3/8% per year. We will make interest
payments in US dollars.
INTEREST PAYMENT DATES.................. May 1 and November 1 of each year,
beginning on November 1, 2002.
CONSTRUCTION ACCOUNT.................... We have placed approximately $189.3
million of the net proceeds from the
sale of the initial notes into a
construction account held by the
collateral agent. Deposited funds may
be disbursed from the construction
account only to pay obligations
related to the Project. See
"Description of the Exchange
Notes--Construction Account".
MIRROR NOTES............................ We advanced the gross proceeds from
the sale of the initial notes, or
US$450.0 million, to Western Oil Sands
Finance Inc., our wholly-owned
subsidiary. Western Oil Sands Finance
issued to us a secured mirror note in
the principal amount of US$450.0
million. Western Oil Sands Finance in
turn loaned the US$450.0 million to
Western Oil Sands L.P., which issued
to Western Oil Sands Finance a
10
secured mirror note in the principal
amount of US$450.0 million. Each of
the mirror notes (exclusive of the
security therefor) has been assigned
to the Trustee for the sole benefit of
the holders of the notes. See
"Description of the Exchange Notes--
Mirror Notes".
COLLATERAL.............................. The exchange notes will be secured by
first priority liens on the
construction account and the mirror
notes. The exchange notes will also be
secured by liens on all of our
interest in the assets and related
agreements utilized to mine, extract,
transport and upgrade our share of
bitumen from oil sands deposits on the
western portion of Lease 13. The liens
securing the exchange notes (other
than liens in respect of the
construction account and the mirror
notes) will be third in priority to
the liens securing our joint venture
obligations to the other owners under
the joint venture agreement and the
claims of the lender under the senior
credit facility. The priority of the
liens and the rights and remedies of
the various creditors will be governed
by several inter-creditor agreements.
See "Inter-Creditor Agreements and
Collateral".
COLLATERAL RELEASE...................... Except for the assignment of the
mirror notes, the collateral securing
the exchange notes (including the
collateral securing the mirror notes)
may, at our option, be released if we
obtain a corporate credit rating of at
least Baa2 from Moody's Investor
Services Inc., or Moody's, and BBB
from Standard & Poor's, or S&P, and
certain other conditions are
satisfied. See "Description of the
Exchange Notes--Certain
Definitions--Collateral Release Date".
In addition, certain covenants to
which we and our restricted
subsidiaries are subject will not be
applicable following the Collateral
Release Date. See "Description of the
Exchange Notes--Fall-Away of
Covenants".
RANKING................................. The exchange notes will rank senior in
right of payment to all of our
subordinated indebtedness and will
rank PARI PASSU in right of payment
with all of our other existing or
future unsubordinated indebtedness.
See "Descriptions of the Exchange
Notes--Ranking".
INTER-CREDITOR AGREEMENTS............... The security over the collateral
(other than the construction account
and the mirror notes) is subject to
various inter-creditor and
counterparty consent agreements which
we have entered into with Shell and
Chevron, the owners and operators of
third-party facilities, our lenders
and third-party lenders. These
agreements provide for consents to the
grant of security, priority of
security, notice of default, cure
periods, and various related matters.
See "Inter- Creditor Agreements and
Collateral".
OPTIONAL REDEMPTION..................... We may redeem some or all of the
exchange notes at any time at a
redemption price of 100% plus the
optional redemption make whole premium
and accrued and unpaid interest, if
any, to the redemption date. See
"Description of the Exchange
Notes--Optional Redemption".
REDEMPTION FOR CHANGES IN We will make payments on the exchange
CANADIAN OF OTHER WITHHOLDING notes free of withholding or deduction
TAXES................................. for Canadian or other taxes. If
withholding or deduction is required,
we will be required to pay additional
amounts so that the net amounts you
receive will equal the amount you
would have received if withholding or
deduction had not been
11
imposed. In that event, however, we
can redeem the exchange notes, in
whole but not in part, at 100% of
their principal amount, plus accrued
and unpaid interest, if any, to the
redemption date. See "Description of
the Exchange Notes--Additional
Amounts".
CHANGE OF CONTROL OFFER................. If we experience a change of control,
we will be obligated to make an offer
to holders of the exchange notes to
purchase their notes at 101% of their
principal amount, plus accrued and
unpaid interest, if any, to the date
of purchase. See "Description of the
Exchange Notes--Change of Control".
PROJECT INTEREST SALE OFFER............. Until the date on which the exchange
notes are first rated investment
grade, we and our restricted
subsidiaries may not dispose of any
beneficial interest in the Project if,
after giving effect to the
disposition, we and our restricted
subsidiaries would not in the
aggregate own more than 15% of all
voting interests in each functional
unit in the Project unless:
o such disposition involves our and
our restricted subsidiaries' entire
interests in the Project;
o we receive consideration at least
equal to the fair market value of
the interests sold; and
o we make an offer to the holders of
the notes to purchase their notes
at 100% of their principal amount,
plus accrued and unpaid interest,
if any, to the date of purchase.
See "Description of the Exchange
Notes--Certain
Covenants--Limitation on Sales of
the Project Interest".
ASSET SALES OF COLLATERAL............... Until the Collateral Release Date, we
may not dispose of any interest in the
construction account. In addition,
until the Collateral Release Date, if
we or our restricted subsidiaries sell
assets that are part of the other
collateral securing the exchange
notes, we generally must either invest
the net cash proceeds from those sales
in permitted collateral assets, prepay
indebtedness with a lien ranking prior
to the lien securing the exchange
notes or make an offer to purchase
exchange notes in an aggregate
principal amount equal to the net cash
proceeds from the asset sale. The
purchase price of the notes will be
100% of their principal amount, plus
accrued and unpaid interest, if any,
to the date of purchase. See
"Description of the Exchange
Notes--Certain Covenants--Limitation
on Asset Sales of Collateral".
ASSET SALES OF NON-COLLATERAL........... Until the date on which the exchange
notes are first rated investment
grade, if we or our restricted
subsidiaries sell assets that are not
part of the collateral securing the
exchange notes, we generally must
either invest the net cash proceeds
from those sales in permitted assets
within a period of time, prepay debt
secured by such assets or make an
offer to purchase a principal amount
of the notes equal to the excess net
cash proceeds. The purchase price of
the exchange notes will be 100% of
their principal amount, plus accrued
and unpaid interest, if any, to the
date of purchase. See "Description of
the Exchange Notes--Certain
Covenants--Limitation on Asset Sales
of Non-Collateral".
CERTAIN COVENANTS....................... The notes indenture contains
restrictions on our and our restricted
subsidiaries' abilities to:
o incur additional debt;
12
o pay dividends or distributions on
our capital stock or repurchase our
capital stock;
o sell our interest in the Project;
o sell assets;
o create restrictions on our
restricted subsidiaries' abilities
to pay dividends;
o issue stock of our restricted
subsidiaries;
o make certain investments;
o create liens on collateral and
non-collateral to secure debt;
o enter into transactions with
affiliates;
o merge or consolidate with another
company;
o enter into sale-leaseback
transactions;
o engage in certain lines of
business;
o designate subsidiaries as
unrestricted subsidiaries;
o issue guarantees; and
o vote in favor of certain amendments
to the joint venture agreement.
These covenants are subject to a
number of important limitations and
exceptions. In addition, certain of
these covenants will not be
applicable after the exchange notes
are rated investment grade and
certain others will not be
applicable following the Collateral
Release Date. See "Description of
the Exchange Notes--Fall-Away of
Covenants".
REGISTRATION RIGHTS..................... Under a registration rights agreement,
we have agreed to file a registration
statement on an appropriate form with
respect to this offer to exchange the
initial notes for the exchange notes,
which will be registered under the
Securities Act. This prospectus is
part of that registration statement.
USE OF PROCEEDS......................... We will not receive any proceeds from
the issuance of the exchange notes in
exchange for the outstanding initial
notes. We are making this exchange
solely to satisfy our obligations
under the registration rights
agreement entered into in connection
with the offering of the initial
notes.
ABSENCE OF A PUBLIC MARKET FOR The exchange notes are new securities
THE EXCHANGE NOTES.................... with no established market for them.
We cannot assure you that a market for
these exchange notes will develop or
that this market will be liquid.
Please refer to the section of this
prospectus entitled "Risk
Factors--Risks Relating to the
Exchange Offer--There might not be a
liquid market for resale of the
exchange notes."
FORM OF THE EXCHANGE NOTES.............. The exchange notes will be represented
by one or more permanent global
securities in registered form
deposited on behalf of The Depository
Trust Company with The Bank of Nova
Scotia Trust Company of New York, as
custodian. You will not receive
exchange notes in certificated form
unless one of the events described in
the section of this prospectus
entitled "Book-entry, Delivery and
Form--Exchange of Book Entry Notes for
Certificated Notes" occurs. Instead,
beneficial interests in the exchange
notes will be shown on, and transfers
of these exchange notes will be
effected only through, records
maintained in book-entry form by The
Depository Trust Company with respect
to its participants.
13
SUMMARY FINANCIAL PROJECTIONS
The summary projected financial data set forth below has been extracted
from the Purvin & Gertz report dated April 4, 2002 (attached as Appendix C to
this prospectus). The Purvin & Gertz report sets forth four production and
commodity price assumption cases:
o PGI Price and Production Case;
o PGI Price and Feasibility Study Production Case;
o US$20 per Barrel Price and PGI Production Case; and
o US$20 per Barrel Price and Feasibility Study Production Case.
We have set forth below summaries of the PGI Price and Production Case
and the US$20 per Barrel Price and Feasibility Study Production Case. The PGI
Price and Production Case uses commodity price and estimated production
assumptions of Purvin & Gertz, while the US$20 per Barrel Price and Feasibility
Study Production Case uses the estimated production assumptions from the
feasibility study. In preparing its report, Purvin & Gertz used the pricing set
out in the products disposition agreement relating to the sale of VGO and the
cost provisions consistent with the agreements relating to the third-party
facilities. The summary projected financial data should be read together with
information contained in "Risk Factors", "Management's Discussion and Analysis
of Financial Condition and Results of Operations", "Business" and the Purvin &
Gertz report.
PGI PRICE AND PRODUCTION CASE
YEARS ENDED DECEMBER 31,
------------------------
2003(1) 2004 2005 2006 2007 2008
------- ---- ---- ---- ---- ----
OPERATING AND FINANCIAL DATA:
Project bitumen production (bbls/d)...................... 126,000 142,500 150,000 155,000 155,000 155,000
Project upgrader output (bbls/d)......................... 166,940 175,240 184,460 190,610 190,610 190,610
Oil Price--WTI (US$/bbl)................................. 21.91 22.32 22.87 23.76 24.69 25.39
Oil Price--Edmonton Par ($/bbl).......................... 32.23 31.81 31.63 32.76 33.91 34.73
Natural gas price--Henry Hub (US$/MMbtu)................. 2.69 2.72 2.79 2.85 2.91 2.98
Exchange rate (US$/$).................................... 0.66 0.68 0.70 0.70 0.70 0.70
Upgrader product price-average ($/bbl)................... 27.61 30.01 29.72 30.83 31.97 32.87
Feedstock costs ($/bbl of upgraded output)............... 5.00 4.45 4.72 4.90 4.99 5.13
Operating costs ($/bbl of upgraded output)............... 9.19 9.24 8.99 8.95 9.10 9.24
OPERATING AND FINANCIAL DATA OF WESTERN:
Bitumen production (bbls/d).............................. 25,200 28,500 30,000 31,000 31,000 31,000
Upgrader output (bbls/d)................................. 33,390 35,050 36,890 38,120 38,120 38,120
Gross revenue ($million)................................. 336.5 383.9 400.2 429.0 444.9 457.4
Royalties ($million)..................................... 1.3 1.5 1.3 1.6 1.9 32.9
Feedstock costs ($million)............................... 60.9 56.9 63.6 68.2 69.4 71.4
Operating costs ($million)............................... 112.0 118.1 121.0 124.5 126.6 128.6
General and administrative costs ($million).............. 4.8 4.9 5.0 5.1 5.2 5.3
EBITDA ($million)........................................ 157.5 202.5 209.3 229.6 241.8 219.2
- ------------------------
(1) 2003 is based on selling light and heavy synthetic crude. 2004-2008 is
based on selling a medium synthetic crude.
14
US$20 PER BARREL PRICE AND FEASIBILITY STUDY PRODUCTION CASE
YEARS ENDED DECEMBER 31,
------------------------
2003(1) 2004 2005 2006 2007 2008
------- ---- ---- ---- ---- ----
OPERATING AND FINANCIAL DATA:
Project bitumen production (bbls/d)...................... 138,500 155,000 156,550 158,120 159,700 161,290
Project upgrader output (bbls/d)......................... 183,500 190,610 192,510 194,440 196,380 198,350
Oil Price--WTI (US$/bbl)................................. 20.00 20.00 20.00 20.00 20.00 20.00
Oil Price--Edmonton Par ($/bbl).......................... 29.85 29.77 29.72 29.62 29.47 29.32
Natural gas price--Henry Hub (US$/MMbtu)................. 3.69 3.77 3.81 3.20 3.21 3.23
Exchange rate (US$/$).................................... 0.65 0.65 0.65 0.65 0.65 0.65
Upgrader product price-average ($/bbl)................... 24.66 27.91 27.71 27.58 27.43 27.34
Feedstock costs ($/bbl of upgraded output)............... 4.46 4.14 4.41 4.40 4.29 4.28
Operating costs ($/bbl of upgraded output)............... 9.37 9.67 9.73 9.24 9.27 9.30
OPERATING AND FINANCIAL DATA OF WESTERN:
Bitumen production (bbls/d).............................. 27,700 31,000 31,310 31,620 31,940 32,260
Upgrader output (bbls/d)................................. 36,700 38,120 38,500 38,890 39,280 39,670
Gross revenue ($million)................................. 330.3 388.3 389.4 391.5 393.2 395.9
Royalties ($million)..................................... 1.3 1.2 0.9 1.1 1.3 1.4
Feedstock costs ($million)............................... 59.8 57.6 61.9 62.4 61.5 61.9
Operating costs ($million)............................... 125.4 134.5 136.8 131.2 132.9 134.7
General and administrative costs ($million).............. 4.8 4.9 5.0 5.1 5.2 5.3
EBITDA ($million)........................................ 139.0 190.1 184.8 191.7 192.3 192.6
- ------------------------
(1) 2003 is based on selling light and heavy synthetic crude. 2004-2008 is
based on selling a medium synthetic crude.
SHELL AND CHEVRON MAKE NO REPRESENTATION OR WARRANTY AS TO THE ACCURACY OR
COMPLETENESS OF THE INFORMATION CONTAINED IN THIS DOCUMENT AND THEY WERE NOT
RESPONSIBLE FOR ITS PREPARATION OR ASSEMBLY. SHELL AND CHEVRON ASSUME NO
RESPONSIBILITY FOR ANY ERRORS OR OMISSIONS IN OR FOR ANY DAMAGES RESULTING FROM
THE USE OF, OR RELIANCE ON, ANY PART OF THE INFORMATION CONTAINED IN THIS
DOCUMENT. NEITHER SHELL NOR CHEVRON IS A PROMOTER OR SPONSOR OF US OR OUR
PARTICIPATION IN THE PROJECT. THIS DOCUMENT IS NOT INTENDED TO BE A SOLICITATION
BY SHELL OR CHEVRON OF INVESTMENTS IN OUR SECURITIES.
15
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING MATTERS, AS WELL AS THE
OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, BEFORE TENDERING YOUR INITIAL
NOTES IN THE EXCHANGE OFFER. AN INVESTMENT IN THE NOTES IS HIGHLY SPECULATIVE
DUE TO OUR PRESENT STAGE OF DEVELOPMENT. INFORMATION CONTAINED IN THIS
PROSPECTUS CONTAINS "FORWARD-LOOKING STATEMENTS", WHICH ARE QUALIFIED BY THE
INFORMATION CONTAINED IN THE SECTION OF THIS PROSPECTUS ENTITLED "DISCLOSURE
REGARDING FORWARD-LOOKING STATEMENTS". IF ANY OF THE RISKS DESCRIBED BELOW
MATERIALIZE, OUR ABILITY TO SATISFY OUR OBLIGATIONS TO THE HOLDERS OF THE
EXCHANGE NOTES AND THE TRADING PRICE OF THE EXCHANGE NOTES MAY BE ADVERSELY
AFFECTED.
RISKS RELATING TO OUR BUSINESS
CONSTRUCTION OF THE PROJECT MAY NOT BE COMPLETED ON TIME OR ON BUDGET.
The exchange notes will be subject to all of the risks inherent in the
Project, including construction risks and overall feasibility. There is a risk
that the Project will not be completed on time or within the current budget. The
Project may have delays or increased costs due to many factors, including:
o breakdown or failure of equipment or processes;
o construction performance falling below expected levels of
output or efficiency;
o design errors;
o contractor or operator errors;
o non-performance by third-party contractors;
o labor disputes, disruptions or declines in productivity;
o increases in materials or labor costs;
o inability to attract sufficient numbers of qualified workers;
o changes in Project scope;
o violation of permit requirements;
o disruption in the supply of energy; and
o catastrophic events such as fire, earthquake, storms or
explosions.
The Project is not being constructed on a turnkey basis. We cannot
assure you that the current construction and operations schedules will proceed
as planned without any delays or on budget. Any such delays will likely increase
the costs of the Project and may require additional financing, and we cannot
assure you that such financing will be available. Cost trends with respect to
the Project are reviewed and identified by the owners on a monthly basis.
Accordingly, actual costs to construct the Project will vary from the estimates
set forth herein and such variances may be significant. Since completion of the
feasibility study, the joint venture has experienced significant engineering and
construction cost increases and we cannot assure you that we will not experience
further cost increases.
WE MAY NOT BE ABLE TO FUND COST OVERRUNS AND OTHER PRE-COMPLETION EXPENSES.
The total costs to construct the Project will not be fully determined
until construction of the Project is completed. In the event of cost overruns,
we may not have enough capital to fund our share of costs. We cannot assure you
that we will be able to draw on our subordinated cost overrun facility or that
our $197.5 million of project delay/cost overrun insurance will cover any or all
such overruns or that we will be able to satisfy the conditions to making a
claim under such insurance or that funds from claims made will be received in a
timely manner. In addition, we cannot assure you that we will be able to draw
under our senior credit facility, or receive funds from persons who have
committed to provide us with additional equity to fund construction completion
costs. Finally, we cannot assure you that we will be able to draw on our senior
credit facility to fund interest payments on the exchange notes. See
"Description of Other Indebtedness".
16
If any of these funds are unavailable, we cannot assure you that
alternative financing will be available.
THE PROJECT MAY NOT BE ABLE TO HIRE AND RETAIN THE SKILLED EMPLOYEES IT
REQUIRES.
The Project requires experienced employees with particular areas of
expertise. There are oil sands and other industrial projects, expansions and
turnarounds in Alberta that compete with us for skilled employees, and such
competition may result in increases to the compensation we pay to such
employees. We have already incurred increased costs as a result of such
competition and decreases in productivity. We cannot assure you that all of the
required employees with the necessary expertise will be available. Lack of
skilled employees has already resulted in delays and would result in further
delays which, in turn, would likely result in increased costs.
PRODUCTION FOLLOWING START-UP MAY NOT MEET THE PLANNED SCHEDULE OR BUDGET.
The Project has experienced cost overruns and certain delays. There is
a risk that production from the Project may not increase as quickly as planned,
or at the costs anticipated. Many factors in addition to the risks described
above under "--Construction of the Project may not be completed on time or on
budget" could impact the pace of start-up and economic efficiency of production
including:
o the operation of any part of the Project (mine, extraction
plant, upgrader or third-party facilities) falling below
expected levels of performance, output or efficiency; and
o unanticipated or unplanned shutdowns or curtailments of any
component of the Project.
THE PRICE OF CRUDE OIL AND NATURAL GAS MAY FLUCTUATE AND NEGATIVELY IMPACT OUR
FINANCIAL RESULTS.
Our financial results will be dependent upon the prevailing price of
crude oil and natural gas. Oil and natural gas prices fluctuate significantly in
response to supply and demand factors beyond our control. Political
developments, especially in the Middle East, can affect world oil supply and oil
prices. As a result of the relatively higher operating costs of the Project
compared to some conventional crude oil production, our operating margin is more
sensitive to oil prices than that of some conventional crude oil producers.
Any prolonged period of low oil prices could result in a decision by
the owners to suspend or reduce production. Any such suspension or reduction of
production would result in a corresponding substantial decrease in our revenues
and earnings and could expose us to significant additional expense as a result
of certain long-term contracts. If the owners did not decide to suspend or
reduce production, the sale of our product at reduced prices would lower our
revenues.
In addition, because natural gas comprises a substantial part of our
operating costs, any prolonged period of high natural gas prices will negatively
impact our financial results.
THE PROJECTIONS AND ASSUMPTIONS ABOUT OUR FUTURE PERFORMANCE MAY PROVE TO BE
INACCURATE.
The Project is not yet complete and we have limited historical
operating results. Accordingly, you have no significant historical financial
information upon which to base your evaluation of our performance and the
exchange notes. Our financing plan is based upon certain assumptions and
financial projections regarding our share of revenues and operating, maintenance
and capital costs of the Project.
Purvin & Gertz, in its role as an independent consultant, has reviewed
the Project and prepared reports on the economic aspects of the Project. The
report sets forth projections for our operations and includes discussions of the
many assumptions used by Purvin & Gertz in preparing their projections. Among
the many assumptions used by Purvin & Gertz and by us in developing these
projections are construction costs, market prices of feedstocks and energy
products, the production and sale of a single synthetic crude oil stream in
2004, operating costs, exchange rates and production rates.
These assumptions contain significant uncertainties and we can make no
representation about the likelihood of any particular future set of facts or
circumstances. Purvin & Gertz's projections are not necessarily an indication of
our future performance. In fact, our actual results will differ, perhaps
materially, from those projected. If our actual results are less favorable than
those projected, or if the assumptions
17
Purvin & Gertz used in preparing the financial projections prove to be
incorrect, we may be unable to make payments on the exchange notes and our other
debt when due.
INDEPENDENT REVIEWS MAY BE INACCURATE.
Although third parties have prepared reviews, reports and projections
relating to the viability and expected performance of the Project, we cannot
assure you that these reports, reviews and projections and the assumptions on
which they are based will, over time, prove to be accurate.
RESERVE AND RESOURCE ESTIMATES ARE UNCERTAIN.
There are numerous uncertainties inherent in estimating quantities of
reserves and resources, including many factors beyond our control. The reserve
and resource data set forth in this prospectus represent estimates only. The
usefulness of such estimates is highly dependent upon the accuracy of the
assumptions on which they are based, the quality of the information available
and the ability to compare such information against industry standards.
Fluctuations of oil prices may render the mining of oil sands reserves
uneconomical. Other factors relating to the oil sands reserves, such as the need
for orderly development of ore bodies or the processing of new or different
grades of ore, may impair our profitability.
In general, estimates of economically recoverable bitumen reserves and
the related future net pre-tax cash flows are based upon a number of variable
factors and assumptions, such as:
o historical production from similar properties;
o the assumed effects of regulation by governmental agencies;
o estimated future operating costs; and
o the availability of enhanced recovery techniques;
all of which may vary considerably from actual results.
There is no history of production from our properties. All such
estimates are to some degree speculative, and classifications of reserves are
only attempts to define the degree of speculation involved. Our reserve figures
have been determined based upon assumed oil prices and operating costs. For
those reasons, estimates of the economically recoverable bitumen reserves
attributable to any particular group of properties, classification of such
reserves based on risk of recovery and estimates of future net revenues expected
therefrom, prepared by different engineers or by the same engineers at different
times, may vary substantially. Our actual production, revenues, taxes and
development and operating expenditures with respect to our reserves will vary
from such estimates, and such variances could be material. Because production
has not yet commenced, reserve estimates may require revision based on actual
production experience.
The estimates of the mineable resources on the remainder of Lease 13,
and on Leases 88 and 89 are based on data which is not as detailed as that in
respect of reserves and therefore are more speculative in nature than the
reserve estimates.
The SEC PV-10 of proved reserves referred to in the summary of the GLJ
report attached as Appendix A to this prospectus should not be construed as the
current market value of our estimated proved reserves. The estimated discounted
future net cash flows from proved reserves are generally based on prices and
costs as of the date of the estimate, whereas actual future prices and costs may
be materially higher or lower. Actual future net cash flows also will be
affected by the timing of production and related expenses, changes in
consumption levels, and governmental regulations or taxation. In addition, the
calculation of the present value of the future net cash flows uses a 10%
discount and is not necessarily the most appropriate discount factor based on
interest rates in effect from time to time and risks associated with our
reserves or the oil industry in general. Furthermore, our reserves may be
subject to downward or upward revision based upon actual production, results of
future development, supply and demand for our upgrader products, prevailing oil
and natural gas prices and other factors.
18
IF WE DEFAULT ON OUR OBLIGATIONS UNDER THE JOINT VENTURE AGREEMENT, SHELL AND
CHEVRON WILL HAVE THE RIGHT TO PURCHASE OUR INTEREST IN THE JOINT VENTURE AT A
DISCOUNT.
If we fail to meet all or part of our obligations under the joint
venture agreement, including by failing to participate in any expansion of an
existing mine which does not require an expansion of the extraction plant,
upgrader, major shared facilities or third party facilities (which expansions
can be carried out pursuant to ordinary resolution of the executive committee),
the other owners will have an option to purchase our entire ownership interest
in the joint venture and related assets at a discount. The amount at which they
could purchase our ownership interest would be equal to 80% of the capital costs
incurred if default occurs prior to final completion, or 80% of fair market
value if default occurs after final completion. See "Business--The
Project--Summary of Principal Project Documents". In the event our interest in
the joint venture is purchased, we would be required under the notes indenture
to make an offer to purchase the exchange notes. See "Description of the
Exchange Notes--Certain Covenants--Limitation on Sales of the Project Interest".
We cannot assure you that in such event the proceeds from the purchase of our
interest in the joint venture will be sufficient to satisfy all of our
obligations to you.
IF WE DO NOT PARTICIPATE IN CERTAIN EXPANSIONS, WE WILL LOSE VOTING OR
SIGNIFICANT EXPANSION RIGHTS.
If we do not participate in expansions on the western portion of Lease
13, in certain circumstances our voting interest will be diluted and our consent
will no longer be required for extraordinary resolutions. In addition, if we do
not participate in an expansion on the eastern portion of Lease 13 or on Leases
88, 89 or Shell's other Athabasca leases, or if we no longer have an ownership
interest in each functional unit comprising the Project, we will lose our right
to participate in any further expansions, lose any rights to share in the
resources contained on Leases 88, 89 and Shell's other Athabasca leases and lose
any rights to participate in an area of mutual interest with the other owners.
The other owners of the joint venture, Shell and Chevron, have significantly
greater capital resources than us. If the other owners decide to undertake
expansions, including expansions on the eastern portion of Lease 13 and on
Leases 88 and 89, we cannot assure you that we will be able to fund our share of
the expansion. Our participation would be subject to several conditions,
including our satisfaction with feasibility studies and our access to the
necessary capital resources.
IF WE PARTICIPATE IN CERTAIN EXPANSIONS, THOSE EXPANSIONS WILL BE SUBJECT TO
MANY OF THE SAME RISKS AS THE PROJECT.
We may participate in expansions on the western portion of Lease 13, on
the remainder of Lease 13, on Leases 88 or 89 or on Shell's other Athabasca
leases. The owners have announced plans to evaluate potential long-term
development opportunities relating to the resources contained within Lease 13
and on Shell's other Athabasca leases. See "Business--The Project--Proposed
Expansions and Pre-Feasibility Study Agreement". If we were to participate in
any expansion, we may require additional debt financing and may require
additional equity financing in order to fund our share of costs associated with
an expansion. The debt financings incurred to fund such expansions may be
secured by a lien on the collateral that is PARI PASSU in right of priority with
the lien on the collateral for the benefit of the holders of the exchange notes.
Additionally, our participation in expansions will be subject to many of the
same risks as the Project.
WE MAY NOT BE ABLE TO EFFECTIVELY MANAGE OUR GROWTH.
The joint venture agreement permits our participation in certain
expansion opportunities. Participation in any expansion opportunities may
significantly increase the demands on our management resources. We may not be
able to effectively manage these expansions, and any failure to do so could have
a material adverse effect on our business or financial condition.
THE MINE, EXTRACTION PLANT AND UPGRADER MAY NOT PERFORM AS PLANNED.
Many of the risks outlined above under "--Construction of the Project
may not be completed on time or on budget" relating to the construction and
start-up phase of the Project will also affect the operations of the Project.
The Project consists of multiple facilities, all of which must be successfully
integrated and coordinated. We cannot assure you that each component will
operate as designed or expected or that the
19
necessary levels of integration and coordination will be achieved. Some of the
mining and extraction processes employed in the Project represent new
applications of established processes, processes that are larger in scale than
other commercial operations, or new processes that are scaled-up from the pilot
plant processes we used to test the feasibility of the mine and extraction
plant. We cannot assure you that all components of the mining and extraction
facility will perform as expected or that the costs to operate this facility
will not be significantly higher than we expect.
The extraction plant will utilize a three-stage countercurrent
decantation process and configurations that have not previously been used
commercially in oil sands extraction and have only been tested on a reduced
scale in the pilot plant at Lease 13. We cannot assure you that the extraction
plant, once constructed, will achieve the same performance results as the pilot
plant nor can we assure you that the extraction plant will be able to
economically produce the quality and quantity of bitumen required by the
upgrader.
We cannot assure you that the upgrader, once constructed, will achieve
the same performance results as the upgrader pilot plant or that the upgrader
will have the same level of success in upgrading bitumen and purchased
feedstocks into products with the desired specifications. Costs to operate the
upgrader may be significantly higher than we expect.
THIRD-PARTY FACILITIES MAY NOT OPERATE AS PLANNED.
The Project depends upon successful operation of facilities owned and
operated by third parties. The owners are party to certain agreements with third
parties to provide for, among other things, the following services and
utilities:
o pipeline transportation to be provided through the Corridor
Pipeline;
o electricity and steam to be provided to the mine and the
extraction plant from the Muskeg River cogeneration facility;
o transportation of natural gas to the Muskeg River cogeneration
facility by the ATCO pipeline;
o hydrogen to be provided to the upgrader from the HMU and Dow
Chemicals Canada Inc., or Dow; and
o electricity and steam to be provided to the upgrader from the
upgrader cogeneration facility.
For the mine and extraction plant, electricity and steam will be
provided by the Muskeg River cogeneration facility. If the Muskeg River
cogeneration facility fails to operate in the manner designed, there can be no
assurance that the owners will be able to obtain alternative sources of
electricity on a timely basis, at prices acceptable to us, or at all. If the
cogeneration facility does not provide the required steam, it is unlikely that
other sources of steam could be acquired on a timely basis, at prices acceptable
to us, or at all.
For the upgrader, the electricity and steam will be provided by the
upgrader cogeneration facility. We cannot assure you that in the event the
upgrader cogeneration facility fails to operate in the manner designed, the
owners will be able to secure alternative sources of electricity and steam on a
timely basis, at prices acceptable to us, or at all.
The HMU is designed to produce approximately 75% of the upgrader's
hydrogen requirements, with the remainder to be provided by Dow. If the HMU
fails to perform as designed or Dow fails to deliver pursuant to its contract,
there can be no assurance that the Project will be able to obtain its hydrogen
requirements on a timely basis, at prices acceptable to us, or at all.
The Project relies on transportation of bitumen and upgrader output
from a pipeline system to be owned and operated by Corridor and TMPL,
respectively. If the Corridor Pipeline is unavailable for any reason, we will
have to find alternatives to the Corridor Pipeline which may not be available on
a timely basis, at prices acceptable to us, or at all.
Under the terms of certain third-party agreements, the owners will be
committed to pay for utilities and services on a long-term "take-or-pay" basis,
regardless of the extent that such utilities and services are actually used. In
addition, under the terms of our agreement with Corridor, we must make scheduled
20
payments to them even if the Corridor Pipeline has diminished capacity or is
unavailable. If, due to Project delays, suspensions, shut-downs or other
reasons, the owners fail to meet their commitments under these long-term
agreements, the owners may incur substantial costs and may, in some
circumstances, be obligated to purchase the facilities constructed by the third
parties to provide the services and utilities for a purchase price in excess of
the fair market value of the facilities. We cannot assure you that we will have
sufficient funds to satisfy these obligations.
Most of our contracts with third-party operators do not contain
provisions for the payment of liquidated damages. Accordingly, if certain of the
third-party facilities do not operate as planned, we will not have a direct
financial claim against the third-party operators.
The tariffs for certain utilities and services are based on the capital
cost of the facilities, and if the costs of constructing the third-party
facilities are higher than anticipated, our operating costs will be higher than
anticipated.
THE PROJECT MAY EXPERIENCE EQUIPMENT FAILURES FOR WHICH WE DO NOT HAVE
SUFFICIENT INSURANCE.
The upgrader will process large volumes of hydrocarbons at high
pressure and temperatures in equipment with fine tolerances. Equipment failures
could result in damage to the extraction plant and upgrader and liability to
third parties against which we may not be able to fully insure or may elect not
to insure for various reasons, including high premium costs. Even if adequate
insurance is obtained, delays in realizing on our claims and replacing damaged
equipment could adversely affect our operations and revenues.
SHELL AND CHEVRON MAY NOT AGREE WITH US ON MATTERS RELATED TO THE PROJECT.
The joint venture owners are Shell, Chevron and Western. Future plans
of the Project, including decisions related to levels of production, will depend
on agreement among the owners and will depend on the financial strength and
views of Shell and Chevron. We cannot assure you that the owners will agree on
all matters relating to the Project.
Under the joint venture agreement, ordinary resolutions may be passed
without our consent and we cannot assure you that such resolutions would not
adversely affect us.
In addition, if our voting interest in any functional unit falls below
15%, our consent will not be required for an extraordinary resolution relating
to that functional unit and such resolutions may adversely affect us.
SHELL AND CHEVRON MAY NOT MEET THEIR OBLIGATIONS TO THE PROJECT.
We are subject to the risk of non-payment by Shell or Chevron in
meeting their payment obligations to the Project. To the extent any owner does
not meet its obligations to fund its costs in respect of the joint venture
agreement and related agreements, we, together with any other performing owners,
would be required to fund those obligations.
FEEDSTOCK SUPPLY FOR THE UPGRADER AND FOR BLENDING PURPOSES MAY NOT ALWAYS BE
AVAILABLE.
The upgrader will require certain additional feedstocks to produce its
output and for blending of upgrader output. To date, the owners have entered
into contracts for less than 3,800 bbls/d of required feedstocks. There can be
no assurance that additional feedstocks of the desired quality will be available
on a timely basis, at prices acceptable to us, or at all. Unavailability of
required feedstocks could have an adverse effect on the rate and quality of
upgrader output.
21
OUR HEDGING ACTIVITIES COULD RESULT IN LOSSES OR LIMIT THE BENEFIT OF CERTAIN
COMMODITY PRICE INCREASES.
The nature of our operations results in exposure to fluctuations in
commodity prices. We may use financial instruments and physical delivery
contracts to hedge our exposure to these risks. If we engage in hedging we will
be exposed to credit-related losses in the event of non-performance by
counterparties to the financial instruments. From time to time, we may enter
into hedging activities in an effort to mitigate the potential impact of
declining oil prices. These activities may consist of, but are not limited to:
o buying a price floor under which we will receive a minimum
price for our oil production;
o buying a collar under which we will receive a price within a
specified range for our oil production;
o entering into fixed contracts for our oil production; and
o entering into a contract to fix the differential between our
outputs and WTI or Edmonton Par.
If product prices increase above those levels specified in any future
hedging agreements, we could lose the cost of floors or ceilings or a fixed
price could limit us from receiving the full benefit of commodity price
increases. In addition, by entering into these hedging activities, we may suffer
financial loss if we are unable to commence operations on schedule or are unable
to produce sufficient quantities of oil to fulfil our obligations.
We may hedge our exposure to the costs of various inputs to the
Project, such as natural gas or feedstocks. If the prices of these inputs falls
below the levels specified in any future hedging agreements, we could lose the
cost of ceilings or a fixed price could limit us from receiving the full benefit
of commodity price decreases.
Our hedging activities will be restricted by our senior credit facility
and by the terms of the exchange notes and therefore we cannot assure you that
we may be able to effect hedges to protect our revenues.
SHELL MAY NOT FULFILL ITS OBLIGATIONS TO US UNDER OUR LONG-TERM SALES CONTRACT
AND THE CONTRACT REQUIRES US TO MEET PRODUCT SPECIFICATIONS.
We expect to sell our share of VGO produced by the Project to an
affiliate of Shell on a long-term basis. Since a large portion of our revenues
will be received from an affiliate of Shell, we will have a concentration of
credit risk. Furthermore, if the Shell affiliate does not have the capacity at
the Scotford refinery to physically process our share of VGO produced by the
Project after using its commercially reasonable efforts to maintain such
capacity, it will not be required to purchase our share of VGO until the
refinery regains such capacity. Certain modifications to the Scotford refinery
are being undertaken to permit it to take the expected VGO output. If such
modifications are not completed on a timely or satisfactory basis, the Scotford
refinery may not be able to process the VGO output from the upgrader. If the
affiliate of Shell were to default on, or not be required to fulfill its
obligations to us, or if the Scotford refinery is not capable of processing the
VGO, we cannot assure you that we could sell our share of VGO to other
purchasers at a price equal to or greater than that provided for in our contract
with the Shell affiliate, or at all.
Additionally, the price we receive for products sold to the affiliate
of Shell may vary depending on the characteristics of the products sold. To the
extent the characteristics of the products fail to meet agreed upon
specifications, the purchase price for such products will be adjusted downward.
If the characteristics of the products are significantly below specifications,
the affiliate of Shell is entitled to reject such products. Downward adjustment
of the purchase price or rejection of the products could have an adverse effect
on our operations and revenues, and we cannot assure you that we could sell any
rejected products elsewhere. See "Business--Products Disposition Agreement".
22
WE MAY EXPERIENCE PRICING PRESSURE ON OUR SHARE OF THE PROJECT'S SYNTHETIC CRUDE
OIL PRODUCTION DUE TO OVERSUPPLY AND COMPETITION.
We intend to sell our share of synthetic crude oil streams to
refineries in North America. These sales will compete with the sales of both
synthetic and conventional crude oil. We have not entered into contracts to sell
our synthetic crude oil, and we cannot assure you that we will be able to effect
any such sale at prices acceptable to us, or at all. There exist other
suppliers of synthetic crude oil and there are several additional projects being
contemplated. If undertaken and completed, these projects will result in a
significant increase in the supply of synthetic crude oil to the market. In
addition, not all refineries are able to process or refine synthetic crude oil.
There can be no assurance that sufficient market demand will exist at all times
to absorb our share of the Project's synthetic crude oil production.
WE MAY NOT BE ABLE TO PRODUCE A HIGH VALUE SINGLE STREAM BLEND.
We expect that within one year of start-up we will be in a position to
market a single stream blend of synthetic crude oil which has a greater value
than the heavy and light streams to be marketed initially. There is a risk that
we will be unable to create a single stream with a higher value than the heavy
and light streams. According to Purvin & Gertz, on a per barrel of bitumen
basis, the EBITDA from selling two synthetic crude oil streams and VGO is
estimated to be approximately $1.50/bbl to $3.00/bbl less than if one synthetic
crude oil stream and VGO is sold.
WE WILL COMPETE WITH LARGER COMPANIES AND ALTERNATIVE FUELS WHEN WE SEEK TO SELL
OUR SHARE OF THE PROJECT'S PRODUCTION.
The Canadian and international petroleum industry is highly competitive
in all aspects, including the distribution and marketing of petroleum products.
We will compete with established oil sands operators which have established
operating histories and greater financial and other resources than we have. In
addition, we will compete with other producers of synthetic crude oil blends and
producers of conventional crude oil, including Shell and Chevron, some of whom
have lower operating costs and many of whom have extensive marketing networks.
The crude oil industry also competes with other industries and alternative
energy sources in supplying energy, fuel and related products to consumers. See
"Business--Competition".
THE PROJECT MAY FAIL TO COMPLY WITH VARIOUS ENVIRONMENTAL APPROVALS WHICH MAY
EITHER CAUSE THE WITHDRAWAL OF THESE APPROVALS OR IMPOSE OTHER COSTS.
The construction, operation and decommissioning of the Project and
reclamation of the Project's lands are conditional upon various environmental
and regulatory approvals issued by governmental authorities. Further, the
construction, operation and decommissioning of the Project and reclamation of
the Project's lands will be subject to approvals and laws and regulations
relating to environmental protection and operational safety. Risks of
substantial costs and liabilities are inherent in oil sands operations, and we
cannot assure you that substantial costs and liabilities will not be incurred or
that the Project will be permitted to carry on its operations. Other
developments, such as increasingly strict environmental and safety laws,
regulations and enforcement policies thereunder, and claims for damages to
property or persons resulting from the Project's operations, could also result
in substantial costs and liabilities to us, delays in operations or abandonment
of the Project. See "Business--Regulations--Environmental".
Canada is a signatory to the December 1997 Kyoto treaty with respect to
instituting reductions to greenhouse gases. The Project will be a significant
producer of some greenhouse gases covered by the treaty. While specific measures
for meeting Canada's commitments have not been developed and the Kyoto treaty
may be modified or nullified, actions taken under the treaty may adversely
impact the Project. We cannot assure you that future environmental approvals,
laws or regulations will not adversely impact the owners' ability to operate the
Project or increase or maintain production or will not increase unit costs of
production. Equipment from suppliers that can meet future emission standards may
not be available on an economic basis, or at all, and other methods of reducing
emissions to required levels may significantly increase operating costs or
reduce output. There is a risk that the Canadian federal and/or provincial
governments
23
could pass legislation which would tax such emissions or require, directly or
indirectly, reductions in such emissions produced by energy industry
participants, including the Project.
THE ABANDONMENT AND RECLAMATION COSTS RELATING TO THE PROJECT MAY BE HIGHER THAN
ANTICIPATED.
We will be responsible for compliance with terms and conditions set
forth in our environmental and regulatory approvals and all laws and regulations
regarding the decommissioning and abandonment of the Project and reclamation of
its lands. The costs related to these activities may be substantially higher
than we anticipate. It is not possible to accurately predict these costs since
they will be a function of regulatory requirements at the time and the value of
the equipment salvaged. In addition, to the extent we do not meet the minimum
credit rating required of us under the joint venture agreement, we must
establish and fund a reclamation trust fund. We currently do not hold the
minimum credit rating. Even if we do hold the minimum credit rating, in the
future we may determine that it is prudent or required by applicable laws or
regulations to establish and fund one or more additional funds to provide for
payment of future decommissioning, abandonment and reclamation costs. Even if we
conclude that the establishment of such a fund is prudent or required, we may
lack the financial resources to do so.
CHANGES IN GOVERNMENT REGULATION OF OUR OPERATIONS MAY HARM US.
Our mining, extraction and upgrading operations and the operations of
third- party contractors are subject to extensive Canadian federal, provincial
and local laws and regulations governing exploration, development,
transportation, production, exports, labor standards, occupational health, waste
disposal, protection and remediation of the environment, mine safety, hazardous
materials, toxic substances and other matters. Amendments to current laws and
regulations governing operations and activities of mining corporations and more
stringent application of such laws and regulations are actively considered from
time to time and could harm the Project.
We cannot assure you that the various government licenses and approvals
sought will be granted to the Project or, if granted, will not be cancelled or
will be renewed upon expiry or that income tax laws and government incentive
programs relating to the Project, and the mining, oil sands and oil and gas
industries generally, will not be changed in a manner which may adversely affect
us.
Currently, we benefit from a favorable royalty regime; however, we
cannot assure you that this royalty regime will not change in a manner that
would adversely affect us. See "Business--Royalties".
Lease 13 is subject to the Oil Sands Tenure Regulation (Alberta) which
was enacted in 2000. This legislation deems Lease 13 to be designated as
producing and continued beyond its current term unless the owners fail to comply
with or meet the milestones set out in the development plan in respect of Lease
13 or if the owners alter or reduce the development plan without the prior
written consent of the Minister of Energy. We cannot assure you that the owners
will be able to comply with or meet the milestones set out in the development
plan or that the Minister will consent to any planned amendments thereto. In
addition, the Minister, in certain circumstances, may change the designation of
any lease subject to the legislation and provide notice requiring the owners to
commence production or recovery of, or to increase existing production or
recovery of bitumen within the time specified in such notice. We cannot assure
you that if such a notice is given, the owners will be able to comply with its
terms to maintain Lease 13. Additionally, the Oil Sands Tenure Regulation
(Alberta) expires on December 1, 2004 and, if such legislation is not renewed in
its present or similarly favorable form, the status of Lease 13 may be in
question. See "Business--Regulations--Land Tenure".
ABORIGINAL PEOPLES MAY MAKE CLAIMS AGAINST US OR THE PROJECT REGARDING THE LANDS
ON WHICH THE PROJECT IS LOCATED.
Aboriginal peoples have claimed aboriginal title and rights to a
substantial portion of western Canada. Certain aboriginal peoples have filed a
claim against the Government of Canada, certain governmental entities and the
City of Fort McMurray, Alberta claiming, among other things, aboriginal title to
large areas of lands surrounding Fort McMurray, including the lands on which the
Project and most of the other oil
24
sands operations in Alberta are located. Such claims, if successful, could have
an adverse effect on the Project.
VARIOUS HAZARDS INHERENT IN OUR OPERATIONS COULD RESULT IN LOSS OF EQUIPMENT OR
LIFE.
The operation of the Project will be subject to the customary hazards
of mining, extracting, transporting and processing hydrocarbons. A casualty
occurrence might result in the loss of equipment or life, as well as injury or
property damage. We will not carry insurance with respect to all potential
casualty occurrences and disruptions. We cannot assure you that our insurance
will be sufficient to cover any such casualty occurrences or disruptions. Losses
and liabilities arising from uninsured or under-insured events could have a
material adverse effect on the Project and on our business, financial condition
and results of operations.
WE ARE HIGHLY DEPENDENT ON CERTAIN KEY PERSONNEL.
We are highly dependent upon the efforts of our senior management and
certain key employees, the loss of any of whom could impede the achievement of
our objectives and could have a material adverse effect on us. We do not
maintain key-man insurance with respect to any of these persons.
FLUCTUATIONS IN THE US AND CANADIAN DOLLAR EXCHANGE RATE MAY CAUSE OUR OPERATING
AND CAPITAL COSTS TO RISE.
Crude oil prices are generally based on a US dollar market price, while
our operating and capital costs are primarily denominated in Canadian dollars.
Prior to Project start-up, adverse fluctuations in the US and Canadian dollar
exchange rate may cause our capital costs to increase. Following Project
start-up, adverse fluctuations in the US and Canadian dollar exchange rate may
cause our operating costs to rise in relation to our revenues. We do not
currently hedge against currency fluctuations and there can be no assurance that
any hedging policy we may adopt would be successful.
RISKS RELATING TO THE NOTES AND THE EXCHANGE OFFER
OUR DEBT LEVELS COULD LIMIT OUR FUTURE FLEXIBILITY IN OBTAINING ADDITIONAL
FINANCING AND IN PURSUING BUSINESS OPPORTUNITIES.
As a result of the issuance of the initial notes and after giving
effect to the use of proceeds from the offering of initial notes, as of December
31, 2001 we have approximately $746.0 million of debt, represented by the
initial notes and by our obligations under the HMU lease. We may also incur
significant additional indebtedness for various purposes, including expansions.
Our debt level and restrictive covenants will have important effects on
our future operations, including:
o requiring a significant portion of our cash flow to pay
interest and principal on our debt, making this cash flow
unavailable for other purposes;
o requiring us to meet financial tests in order to incur
additional debt, which could limit our ability to fund future
operations, expansions and/or acquisitions; and
o limiting our ability to obtain additional debt and equity
financing to fund capital expenditures and other requirements.
In addition, our ability to make scheduled payments or to refinance our
debt obligations (including the exchange notes) will depend upon our financial
and operating performance, which, in turn, will depend upon prevailing industry
and general economic conditions beyond our control. If our cash flow and capital
resources are insufficient to service or repay our debt obligations, we might be
forced to:
o reduce or delay scheduled capital expenditures;
o forego expansion opportunities;
25
o obtain additional capital; or
o restructure our debt.
We cannot assure you that our operating performance, cash flow and
capital resources will be sufficient to repay our debt in the future. If we are
required to dispose of material assets or operations or restructure our debt to
meet our debt service and repayment obligations, we cannot assure you that the
terms of any such transaction will be favorable to us and we cannot foresee how
quickly any such transaction could be completed, if at all.
THE NOTES INDENTURE CONTAINS COVENANTS LIMITING OUR DISCRETION TO OPERATE OUR
BUSINESS.
The notes indenture contains provisions that limit our discretion to
operate our business, including by restricting our ability to:
o incur additional debt;
o pay dividends or distributions on our capital stock or
repurchase our capital stock;
o create liens to secure debt;
o sell our interests in the assets comprising the joint venture;
o enter into transactions with affiliates;
o merge or consolidate with another company;
o transfer and sell assets; and
o enter into hedging contracts.
If we fail to comply with the restrictions set forth in the notes
indenture or any other subsequent financing agreements we will be in default,
and the principal and accrued interest on the exchange notes would become due
and payable. A default may allow our other lenders, if the agreements so
provide, to accelerate the related obligations and any other obligations to
which a cross-acceleration or cross-default provision applies. In addition,
other lenders may be able to terminate any previous commitments made to us to
provide additional funds.
THE COLLATERAL SECURING THE EXCHANGE NOTES IS SUBJECT TO SEVERAL LIMITATIONS AND
MAY BE RELEASED UNDER CERTAIN CIRCUMSTANCES.
GENERAL; RELEASE. The notes are secured by third-priority liens on all of our
interest in the assets and related agreements utilized to mine, extract,
transport and upgrade our share of bitumen from oil sands deposits on the
western portion of Lease 13. Property and assets acquired by us which are not
part of the Project, including property and assets relating to expansions, will
not form part of the collateral. Your rights as a noteholder with respect to
security will be governed by agreements with Shell and Chevron, certain
third-party facility owners, their lenders, the lender under the senior credit
facility and certain future secured lenders, as more fully described under
"Inter-Creditor Agreements and Collateral". Pursuant to the joint venture
agreement, we have granted to each other owner a first fixed and specific
mortgage, charge, lien and security interest in, and a first floating charge on,
all of our interests in the joint venture to secure our obligations under the
joint venture agreement. On the date of consummation of the offering of the
initial notes, we granted the lender under the senior credit facility a
second-priority interest in the same assets.
In addition to the security interest in the collateral described above,
the holders of the notes will have the sole security interest in the mirror
notes (exclusive of the security therefor) and the first priority security
interest in all funds contained in the construction account.
26
No appraisal or valuation of any of the collateral has been obtained.
We cannot assure you that, in the event of a sale of all or any part of the
collateral and after payment of all prior claims on such collateral, there will
be sufficient proceeds to repay noteholders all amounts owed to them under the
notes indenture and the exchange notes. In addition, except for the assignment
of the mirror notes, the collateral securing the exchange notes (including the
collateral securing the mirror notes) may, at our option, be released if we
obtain a corporate credit rating of at least Baa2 from Moody's and BBB from
Standard & Poor's and certain other conditions are satisfied. See "Description
of the Exchange Notes--Certain Definitions--Collateral Release Date". Following
that date, the exchange notes will be unsecured, and any changes to our ratings
will not cause the security interest in the collateral to be reinstated.
PRIORITY OF CLAIMS. In addition to the agreements described under
"Inter-Creditor Agreements and Collateral", the priority of the liens on any
item of collateral securing the claims of noteholders will be determined by,
among other things, the time of perfection of a security interest in that item.
In addition, under various laws, certain creditors, such as purchase money
lenders, may be entitled to a prior claim to that of a person who has previously
perfected a security interest in an item of collateral. Furthermore, landlords',
warehousemen's and materialmen's liens and certain tax liens may, as a matter of
law, have priority over the liens granted in the collateral to the collateral
trustee or the exchange notes trustee for the benefit of the noteholders. The
notes indenture also permits significant amounts of additional indebtedness to
be secured by liens on collateral which are senior to or equal in right of
priority with the liens for the benefit of the noteholders. Liens that are
senior to the liens for the benefit of the noteholders are permitted to be
incurred at several levels of priority. See "Description of the Exchange
Notes--Certain Covenants--Limitation on Liens on Collateral".
The collateral agent, on behalf of the noteholders and the lender under
the senior credit facility, has entered into an inter-creditor agreement with
Shell, Chevron and an affiliate of Shell for the purpose of establishing the
relative rights and obligations of the parties, each of whom hold prior security
over the assets comprising the Project pursuant to the joint venture agreement.
The agreement provides that the security interests of the lenders and the
noteholders in the assets constituting collateral are subordinated to the
security interests held by any owner under the joint venture agreement.
Furthermore, in an insolvency proceeding, monies collected by the notes trustee
on behalf of the noteholders must be turned over to the owners until the owners
are fully paid.
The notes trustee, for the benefit of itself and the noteholders, has
entered into an inter-creditor agreement with us and with the collateral agent
and the administrative agent under the senior credit facility for the purpose of
establishing the relative priorities of the claims of the creditors in various
items of the collateral and establishing their relative rights and remedies in
respect of the collateral. The agreement provides that the claims of the
noteholders in the assets constituting collateral (other than the mirror notes
and the construction account) rank subsequent to the claims of the lender under
the senior credit facility. Furthermore, in an insolvency proceeding monies
collected by the notes trustee on behalf of the noteholders (other than from the
construction account) must be turned over to the lender under the senior credit
facility until the lender is fully paid.
We do not believe there are any material existing prior liens on the
collateral securing claims of persons not party to the inter-creditor agreements
described above. However, we cannot assure you that future additional prior
claims will not arise by reason of applicable law or that a bankruptcy or other
court would not enforce the terms of the inter-creditor agreements in a manner
that was disadvantageous to the noteholders.
NATURE OF THE COLLATERAL. Our sole significant asset is our 20% ownership
interest in the assets comprising the joint venture. Accordingly, there are no
assets related to the Project that we own in their entirety, and therefore no
such assets could be so owned upon any foreclosure of the collateral. We are
prevented by the joint venture agreement from disposing of these assets
separately from the joint venture. This might therefore reduce the price
obtained for the assets in the event of a realization, which might materially
reduce the recovery by our secured creditors, including the holders of the
notes. In addition, if we default on our obligations under the joint venture
agreement, Shell and Chevron will have a first right to
27
purchase our entire interest in the joint venture and related assets at a
discount. See "Risks Relating to our Business--If we default on our obligations
under the joint venture agreement, Shell and Chevron will have the right to
purchase our interest in the joint venture at a discount".
ABILITY TO REALIZE UPON COLLATERAL. Under the principal inter-creditor
agreement, prior to enforcing their claims in the collateral, the notes trustee
must give the collateral agent and the representatives of the other lenders
notice of the enforcement and must not commence enforcement action until the
expiry of a 15 day standstill period. After the notice of enforcement is given,
if any lenders holding senior priority claims in the collateral determine to
proceed to enforce their claims, decisions regarding enforcement of the
collateral will, subject to applicable law, be determined by the secured
creditor or creditors entitled to the senior priority claims on the collateral.
Decisions with respect to collateral will also be made by a majority of the
members of the class holding the senior priority claim on the collateral. Even
if the noteholders were to hold a senior priority lien on the collateral, there
can be no assurance that they would hold the majority of interests in, and
therefore control the decisions made by, that class of creditors.
Interests of holders of senior priority claims may diverge from those
of holders entitled to junior priority claims. For example, it may be in the
best interest of a lienholder entitled to a senior priority claim to seek an
expeditious sale of collateral, while it may be in the best interest of a
lienholder entitled to a junior claim to delay the sale. No assurance can be
given that noteholders will be able to realize the fair market value of their
interest in the collateral.
Any sale of the collateral following a default can only be made to a
party who has a requisite minimum credit rating (see "Inter-Creditor Agreements
and Collateral") and who is willing to assume a minority interest in the Project
and who is willing to become a party to the joint venture agreement and other
agreements relating to the joint venture and to fulfill the obligations required
of an owner in such agreements. These limitations might reduce the price
obtained for these assets and reduce the recovery by our secured creditors,
including the holders of the notes.
Proceeds from the sale of collateral generally will first be used to
satisfy payments due to the holders of senior priority claims. There can be no
assurance that the proceeds of any sale of the collateral following a default
would be sufficient to satisfy payments due to holders of the notes after
satisfying payment due to the holders of senior priority claims. If the proceeds
from the collateral were not sufficient to pay such amounts, then noteholders
would have only an unsecured claim against our remaining assets.
CANADIAN BANKRUPTCY AND INSOLVENCY LAWS. The rights of the trustee who
represents the holders of the exchange notes to enforce remedies are likely to
be significantly impaired by the restructuring provisions of applicable Canadian
federal bankruptcy, insolvency and other restructuring legislation if the
benefit of such legislation is sought with respect to us. For example, both the
Bankruptcy and Insolvency Act (Canada) and the Companies' Creditors Arrangement
Act (Canada) contain provisions enabling an insolvent person to obtain a stay of
proceedings against its creditors and others and to prepare and file a proposal
or plan of arrangement for consideration by all or some of its creditors to be
voted on by the various classes of its creditors affected thereby. Such a
restructuring proposal, if accepted by the requisite majorities of each affected
class of creditors and if approved by the relevant Canadian court, would be
binding on creditors within any such class who may not otherwise by willing to
accept it. Moreover, this legislation permits the insolvent debtor to retain
possession and administration of its property, subject to court oversight, even
though it may be in default under the applicable debt instrument.
The powers of the court under the Bankruptcy and Insolvency Act and
particularly under the Companies' Creditors Arrangement Act have been exercised
broadly to protect a restructuring entity from actions taken by creditors and
other parties. Accordingly, we cannot predict if payments under the exchange
notes would be made following commencement of or during such proceeding, whether
or when the notes trustee could exercise its rights under the notes indenture or
whether and to what extent holders of the exchange notes would be compensated
for any delays in payment, if any, of principal, interest and costs, including
the fees and disbursements of the notes trustee.
28
WE MAY BE UNABLE TO FUND AN OFFER TO REPURCHASE THE EXCHANGE NOTES UPON A CHANGE
OF CONTROL.
If we experience a change of control, we will be required to make an
offer to you to repurchase the exchange notes. We might not have sufficient
financial resources to fund such an offer, or might be prohibited from doing so
under our senior credit facility or other indebtedness, in which case, we will
be required to repay such other debt or obtain consents from lenders of such
debt to permit the purchase of the exchange notes. If we experience a change of
control, we cannot assure you that we will have sufficient funds to repay our
other debt. We also cannot assure you that, whether or not we are required to
repay such debt, we will have sufficient funds to meet our repurchase
obligations under the notes indenture. See "Description of the Exchange
Notes--Change of Control".
WE WILL NOT BE SUBJECT TO CERTAIN COVENANTS IN THE NOTES INDENTURE FOLLOWING THE
DATE ON WHICH THE EXCHANGE NOTES ARE FIRST RATED INVESTMENT GRADE AND WILL NOT
BE SUBJECT TO CERTAIN OTHER COVENANTS FOLLOWING THE COLLATERAL RELEASE DATE.
Our obligations to comply with certain provisions of the notes
indenture will be terminated on the date that the exchange notes have first
received an investment grade rating from Standard & Poor's and Moody's. After
that time, the exchange notes will be entitled to substantially reduced covenant
protection. In addition, certain other provisions of the notes indenture will be
terminated on the Collateral Release Date, including the provisions providing
for a security interest in the collateral. See "Description of the Exchange
Notes--Certain Covenants" and "--Fall-Away of Covenants".
If our corporate credit rating were to fall below BBB by S&P or Baa2 by
Moody's or the ratings on the notes were to fall below BBB- by S&P or Baa3 by
Moody's, neither the covenants nor the security interests would be reinstated.
We cannot assure you that either we or the exchange notes will maintain these
investment grade ratings.
THERE MIGHT NOT BE A LIQUID MARKET FOR RESALE OF THE EXCHANGE NOTES.
The exchange notes will be a new class of securities for which there is
currently no trading market. We do not intend to list the exchange notes on any
securities exchange. We cannot assure you that an active or liquid trading
market for the exchange notes will develop. The initial purchasers of the
initial notes are not obligated to make a market in the exchange notes, and if
they do choose to make such a market they may discontinue their market-making
activities at any time without notice. See "Plan of Distribution". Accordingly,
we cannot assure you as to the development or liquidity of any market for the
exchange notes. If a market for the exchange notes were to develop, the exchange
notes could trade at prices that may be higher or lower than reflected by their
initial offering price, depending on many factors, including prevailing interest
rates, our operating results and the market for similar securities.
Historically, the market for non-investment grade debt has been
volatile. We cannot assure you that the market for the notes, if any, will not
be similarly volatile. Any volatility could adversely affect you as a holder of
the exchange notes.
US INVESTORS IN THE EXCHANGE NOTES MAY HAVE DIFFICULTIES ENFORCING CIVIL
LIABILITIES.
We are governed by the laws of the Province of Alberta. Most of our
directors, controlling persons and officers, as well as some of the experts
named in this prospectus, are residents of Canada or other jurisdictions outside
of the United States and all or a substantial portion of our assets and their
assets are located outside of the United States. As a result, it may be
difficult for holders of exchange notes to effect service of process upon us or
such persons within the United States or to enforce against us or them in the
United States, judgments of courts of the United States predicated upon the
civil liability provisions of the U.S. federal securities laws or other laws of
the United States. In addition, we have been advised by our Canadian counsel
that there is doubt as to the enforceability in Canada of liabilities predicated
upon U.S. federal securities law against us, or directors, controlling persons
and officers and the experts named in
29
this prospectus who are not residents of the United States, in original actions
or in actions for enforcement of judgments of U.S. courts.
THE ISSUANCE OF THE EXCHANGE NOTES MAY ADVERSELY AFFECT THE MARKET FOR THE
INITIAL NOTES.
If initial notes are tendered for exchange and accepted in the exchange
offer, the trading market for the untendered and tendered but unaccepted initial
notes could be adversely affected. Please refer to the subsection in "The
Exchange Offer" and the risk factor entitled "Your failure to participate in the
exchange offer will have adverse consequences."
YOUR FAILURE TO PARTICIPATE IN THE EXCHANGE OFFER WILL HAVE ADVERSE
CONSEQUENCES.
The initial notes were not registered under the Securities Act or under
the securities laws of any state and you may not resell them, offer them for
resale or otherwise transfer them unless they are subsequently registered or
resold under an exemption from the registration requirements of the Securities
Act and applicable state securities laws. If you do not exchange your initial
notes for exchange notes pursuant to this exchange offer, or if you do not
properly tender your initial notes in this exchange offer, you will not be able
to resell, offer to resell or otherwise transfer the initial notes unless they
are registered under the Securities Act or unless you resell them, offer to
resell or otherwise transfer them under an exemption from the registration
requirements of, or in a transaction not subject to, the Securities Act. In
addition, you may no longer be able to obligate us to register the initial notes
under the Securities Act.
SOME PERSONS WHO PARTICIPATE IN THE EXCHANGE OFFER MUST DELIVER A PROSPECTUS IN
CONNECTION WITH RESALES OF THE EXCHANGE NOTES.
In some instances described in this prospectus under "Plan of
Distribution," you will remain obligated to comply with the registration and
prospectus delivery requirements of the Securities Act to transfer your exchange
notes. In these cases, if you transfer any exchange note without delivering a
prospectus meeting the requirements of the Securities Act or without an
exemption from registration of your exchange notes under the Securities Act, you
may incur liability under this Act. We do not and will not assume, or indemnify
you against, this liability.
30
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the exchange
notes in exchange for the outstanding initial notes. We are making this exchange
solely to satisfy our obligations under the registration rights agreement
entered into in connection with the offering of the initial notes. In
consideration for issuing the exchange notes, we will receive initial notes in
the same aggregate principal amount.
31
CAPITALIZATION
The following table provides as of March 31, 2002:
o our actual capitalization; and
o our actual capitalization as adjusted to take into account the
offering of the initial notes and the application of the net
proceeds of the offering of the initial notes.
You should read this table together with "Management's Discussion and
Analysis of Financial Condition and Results of Operations", and our consolidated
financial statements and the related notes included elsewhere in this
prospectus.
AS OF MARCH 31, 2002
--------------------
(IN THOUSANDS)
ACTUAL AS ADJUSTED
------ -----------
Cash and cash equivalents......................... $ 70,239 $ 290,001
========= ==========
Long-term debt (including current portion):
Senior credit facility(1)....................... -- $ 0
Initial notes(2)................................ -- $ 710,910
Other long-term debt(3)......................... $ 513,862 $ 39,932
Subordinated cost overrun facility(4)........... -- $ 0
-- --
Total long-term debt.............................. $ 513,862 $ 750,842
========= ==========
Shareholders' equity:
Share capital(5)................................ $ 448,373 $ 448,373
Deficit......................................... $(14,192) $ (14,192)
--------- ----------
Total shareholders' equity........................ $ 434,181 $ 434,181
========= ==========
Total capitalization.............................. $ 948,043 $1,185,023
======== ==========
- ------------------------
(1) This $100 million facility consists of a $75 million debt service and
construction completion facility available to fund the first two
interest payments on the notes and interest on the facility, with the
remaining amounts to be available for Project construction costs.
(2) The initial notes offered have been converted to Canadian dollars at
noon buying rate on April 16, 2002 which was US$1.00 = $1.5798.
(3) Includes outstanding indebtedness under our $535 million senior credit
facility ($418.50 million), indebtedness under our HMU capital lease
($39.93 million) and fees owed to Shell ($55.44 million). Concurrent
with the closing of the offering of the initial notes, all amounts
drawn under our $535 million senior credit facility were repaid (with
the exception of any bankers' acceptances outstanding on the Issue Date
that were effectively defeased using a portion of the proceeds of the
offering of the initial notes), that credit facility was cancelled and
the fees owed to Shell were repaid.
(4) This $88 million facility is available to fund any Project cost
overruns.
(5) Includes $12 million of our Class D Preferred Shares, Series A. The
Class D Preferred Shares, Series A can be converted into our Common
Shares prior to redemption on a one-for-one basis. If not previously
converted, the Class D Preferred Shares, Series A are redeemable by us
at any time at a price equal to their issue price, plus a cumulative
dividend of 12% per year compounded semi-annually until January 1,
2007, from which date the dividend increases by 3% per quarter to a
maximum of 24% per year. Cash dividends are not paid on the Class D
Preferred Shares, Series A.
32
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected historical consolidated
financial data for the period from June 18 to December 31, 1999 and the years
ended December 31, 2000 and December 31, 2001. The financial data for each of
the period from June 18 to December 31, 1999 and the years ended December 31,
2000 and 2001 have been derived from our audited consolidated financial
statements for those periods, which were audited by PricewaterhouseCoopers LLP,
independent accountants. In some respects, Canadian GAAP differs from US GAAP.
For a discussion of the material differences in some line items between Canadian
GAAP and US GAAP, you should read note 13 to our consolidated financial
statements. You should read the selected consolidated financial data in
conjunction with our consolidated financial statements and the notes thereto
that are included elsewhere in this prospectus. See also "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
PERIOD FROM JUNE 18 TO YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 2000 2001
---- ---- ----
(in thousands)
INCOME STATEMENT DATA:
CANADIAN GAAP:
Corporate expenses ................... -- $ 5,422 $ 7,015
Net income (loss) .................... -- $ (5,422) $ (7,015)
US GAAP:
Corporate expenses ................... -- $ 10,791 $ 11,425
Net income (loss) .................... -- $ (10,791) $ (11,425)
CASH FLOW INFORMATION:
CANADIAN GAAP:
Operating activities ................. -- $ (5,252) $ (6,845)
Financing activities ................. $ 103,852 $ 185,644 $ 404,941
Capital expenditures ................. $ (46,710) $(192,141) $(433,604)
US GAAP:
Operating activities ................. -- $ (10,621) $ (11,255)
Financing activities ................. $ 103,852 $ 185,644 $ 404,941
Capital expenditures ................. $ (46,710) $(186,772) $(429,194)
BALANCE SHEET DATA (at end of period):
CANADIAN GAAP:
Total assets ......................... $ 167,509 $ 428,088 $ 854,394
Total long-term debt ................. $ 40,000 $ 65,477 $ 368,306
Shareholders' equity ................. $ 118,173 $ 297,904 $ 434,866
US GAAP:
Total assets ......................... $ 167,509 $ 422,719 $ 844,615
Total long-term debt ................. $ 40,000 $ 65,477 $ 368,306
Shareholders' equity ................. $ 118,173 $ 292,535 $ 421,387
33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion and analysis along with our
audited and unaudited financial statements and the related notes appearing
elsewhere in this prospectus. The discussion contains forward-looking statements
that involve risks and uncertainties.
We were incorporated on June 18, 1999 and became a reporting issuer in
Canada in December 2000. We were formed for the purpose of being the general
partner of Western Oil Sands L.P., a wholly-owned limited partnership that owns
our 20% undivided interest in the joint venture. The Project is in its
development and construction stage and accordingly our limited historical and
consolidated financial information is not necessarily indicative of future
results, particularly after Project start-up which we expect to occur late in
the fourth quarter of 2002.
REVENUES
Apart from our interest in the joint venture, we have no other
operating assets nor do we have any other on-going operations. Accordingly, we
will not recognize any operating revenues and expenses prior to the commencement
of commercial operations which is expected to occur in the second quarter of
2003.
OPERATING COSTS
Upon the commencement of commercial operations, we will be billed
monthly for our 20% share of the total operating costs of the joint venture, all
of which will be classified as our operating costs. These joint venture
operating costs will be made up of the following components:
o fixed costs, including those related to:
-- non-energy mining activities, including labor, mine
supplies, contracts, contract vehicle maintenance and
mobile equipment lease payments;
-- non-energy upgrader activities, including labor,
equipment, turnarounds and allocated project
administrator costs;
-- extraction plant activities, including labor,
operating supplies, maintenance parts and supplies
and process consumables;
-- contracted minimum payments to various third parties,
including Corridor, ATCO Power, ATCO Pipelines, Dow
and Scotford HMU Leasing Inc., or SHMUL; and
-- general and administrative functions, including
direct and allocated portions; and
o variable costs, including those related to:
-- the cost of natural gas consumed by the cogeneration
facilities at the mining and extraction and upgrader
sites and the HMU; and
-- the purchase price of feedstocks, hydrogen,
catalysts, chemicals and diesel fuel purchased from
third parties.
GENERAL AND ADMINISTRATIVE EXPENSES
Our general and administrative expenses include the costs incurred to
sustain and expand our staff, as well as our corporate overhead, including
rental expenses for office space and office equipment required to support our
operational, managerial and systems infrastructures.
INTEREST EXPENSE
We will continue to capitalize our interest costs incurred prior to the
commencement of commercial operations, at which point these costs will begin to
be amortized. Upon the commencement of commercial operations, we will recognize
any interest arising on our debt as an expense.
34
QUARTERLY FINANCIAL INFORMATION
- -------------------------------
THREE MONTH PERIOD ENDED
---------------------------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30,
2002 2001 2001 2001 2001 2000 2000 2000
---- ---- ---- ---- ---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
($ THOUSANDS, EXCEPT PER SHARE NUMBERS)
Revenue ................ - - - - - - - -
Net Loss................ 1,755 2,777 1,623 1,354 1,261 1,480 1,821 1,030
Loss Per Share (basic).. $0.04 $0.07 $0.04 $0.03 $0.03 $0.04 $0.08 $0.04
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001
OPERATIONS
During the three months ended March 31, 2002, we incurred a loss of
$1.8 million ($0.04 per share) compared to a loss of $1.3 million ($0.03 per
share) in the comparative period last year. This loss is comprised entirely of
our corporate expenses. General and administrative expenses increased by
$279,000 from $1.0 million in 2001 to $1.3 million in 2002, primarily due to the
addition of three new employees and increased general expenses in line with the
growth in our corporate activities. Federal Large Corporations Tax also
increased from $213,000 for the first quarter of 2001 to $427,000 for the first
quarter of 2002, commensurate with our larger capital base.
CAPITAL EXPENDITURES
During the first quarter of 2002, our share of Project capital
expenditures totaled $110 million compared to $77.9 million in the first quarter
of 2001. These expenditures include construction activities at the Muskeg River
Mine and at the Scotford Upgrader, together with direct capitalized costs of
$7.2 million in 2002 compared to $0.3 million in 2001. The capitalized costs are
primarily comprised of bank stand-by fees and interest expenses that are being
capitalized during the construction period. We capitalized a further $4.8
million during the first quarter of 2002, compared to $4.4 million in the first
quarter of 2001, related to our share of costs for construction of the HMU at
the upgrader, which costs are being financed under a long-term capital lease.
In the first quarter of 2002, the owners signed an amendment to the
original AFE, which increased our estimate of our share of forecasted total
costs from $709.4 million to $961.6 million.
The following table details the components of our capital asset
expenditures:
CAPITAL ASSETS
YEAR ENDED PERIOD FROM FROM JUNE 18, 1999 TO
DECEMBER 31, JUNE 18 TO MARCH 31,
DECEMBER 31,
THREE MONTHS 2001 2000 1999 2002
------------- ---- ---- ---- ----
ENDED MARCH 31,
---------------
2002
----
($MILLIONS)
Expenditures
Muskeg River mine........................... $49.6 $212.1 $66.7 $3.9 $332.3
Scotford upgrader(1)........................ 54.5 210.0 118.0 5.5 388.0
Capitalized finance costs................... 5.4 9.5 6.4 -- 21.3
Entry fee................................... -- 1.2 -- 34.2 35.4
-- --- -- ---- ----
Project expenditures.......................... 109.5 432.8 191.1 43.6 777.0
Corporate assets.............................. 0.5 0.8 1.0 3.1 5.4
--- --- --- --- ---
Cash Expenditures............................. 110.0 433.6 192.1 46.7 782.4
Non-cash capitalized costs
Shell fees and interest..................... 1.7 6.4 7.3 40.0 55.4
Hydrogen Manufacturing Unit................. 4.8 17.8 17.3 -- 39.9
Corporate assets............................ (0.4) -- -- 1.1 0.7
----- -- -- --- ---
Total......................................... $116.1 $457.8 $216.7 $87.8 $878.4
====== ====== ====== ===== ======
- ------------------------
(1) Includes our share of direct Project administrator costs. Also includes
our capitalized foreign exchange on Project costs of $2.3 million and
ancillary costs of $0.4 million. Excluding the foreign exchange and
ancillary costs, the total costs incurred by us directly on the Muskeg
River mine and upgrader to March 31, 2002 amount to $717.7 million.
35
YEAR ENDED DECEMBER 31, 2001 COMPARED TO PERIOD ENDED DECEMBER 31, 2000
OPERATIONS
During the year ended December 31, 2001, we spent $7.0 million on
corporate expenses, an increase of $1.6 million from the year ended December 31,
2000. As we do not yet have revenues from on-going operations to offset these
costs, the net loss for the year ended December 31, 2001 equaled our corporate
expenses. The net loss for the year ended December 31, 2001 was $0.17 per share
compared to $0.21 per share for the year ended December 31, 2000. These
corporate expenses were comprised primarily of head office costs including rent,
salaries and the Federal Large Corporations Tax for the year. General and
administrative expenses increased from $4.4 million for the year ended December
31, 2000 to $5.3 million for the year ended December 31, 2001, primarily due to
increased investor relations activities and increased reporting costs associated
with becoming a public company in December 2000. In addition, cost of living
salary increases and the addition of two finance personnel contributed to the
increase. A significant number of our employees have been seconded to the
construction effort and, therefore these costs are borne directly by the joint
venture and are charged back to us as capital additions of the Project. As the
Project moves towards the operations phase, corporate expenses will increase
gradually in line with operational requirements; notably in respect of marketing
staff and costs, as we will be marketing our share of production that is
received in kind from the Project. Federal large corporations tax increased from
$850,000 in the year ended December 31, 2000 to $1.5 million in the year ended
December 31, 2001, as a direct result of the expansion of our capital arising
from our $144 million of net equity issuances and the utilization of credit
facilities to fund construction costs. Depreciation remains at $170,000 and
relates solely to office assets, as amortization of the Project assets will only
begin once production has commenced.
CAPITAL EXPENDITURES
During the year ended December 31, 2001, our share of Project capital
expenditures totaled $432.8 million, compared to $191.1 million for the year
ended December 31, 2000. These expenditures include work done at the Muskeg
River mine and the upgrader as well as capitalized costs of $9.5 million for the
year ended December 31, 2001, up from $6.4 million capitalized in the year ended
December 31, 2000. The capitalized costs include primarily bank interest and
stand-by fees that are being capitalized during the construction period as is
consistent with industry practice and our policy. An additional $6.4 million of
interest that accrued during the year on the balance payable to Shell, in
respect of lease acquisition costs and infrastructure costs reimbursement, was
also capitalized. We capitalized a further $17.8 million in the year ended
December 31, 2001 related to our share of the costs for construction of the HMU,
compared to $17.3 million in the year ended December 31, 2000. The HMU costs are
being financed through a capital lease.
In 2001 we spent $0.8 million on consulting fees and our share of
pre-feasibility study costs related to new ventures and potential expansions.
These costs were capitalized in accordance with generally accepted accounting
practice and industry practice.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO PERIOD ENDED DECEMBER 31, 1999
OPERATIONS
During the year ended December 31, 2000, we spent $5.4 million on
corporate expenses. The net loss for the year ended December 31, 2000 equated to
the level of corporate expenses. Any costs incurred in the prior year were
capitalized. In the year ended December 31, 2000, corporate expenses were
comprised primarily of head office costs including rent, salaries and federal
large corporations tax for the year. A significant number of our employees were
seconded to the Project and, therefore any associated costs for these employees
were borne directly by the joint venture.
CAPITAL EXPENDITURES
Capital expenditures for the year ended December 31, 2000 amounted to
$192.1 million compared to $46.7 million for the period ended December 31, 1999.
This increase was in line with the Project's construction timetable.
Expenditures for the year ended December 31, 2000 related primarily to work done
36
at the Muskeg River mine and the upgrader, acquisition of corporate assets as
well as capitalized costs of $6.4 million. Capitalized costs included,
primarily, bank interest and stand-by fees that are being capitalized during the
construction period.
LIQUIDITY AND CAPITAL RESOURCES
In conjunction with the execution of the joint venture agreement, we
completed a private placement of Non-voting Convertible Equity Shares, Class A
Special Warrants and Class B Special Warrants with certain of our founders for
aggregate gross proceeds of approximately $21 million. We also completed a
private placement of units consisting of Non-voting Convertible Equity Shares
and call obligations with certain seed investors for aggregate gross proceeds of
approximately $62 million. On December 17, 1999, we completed a further private
placement of Non-voting Convertible Equity Shares for aggregate gross proceeds
of $40 million. In conjunction with these offerings the agent for the private
placement received a commission of 138,071 Non-voting Convertible Equity Shares
valued at $1.6 million.
In December 1999, we entered into a $535 million senior credit facility
with certain Canadian lending institutions to assist us in funding the budgeted
construction costs of the joint venture. The $535 million senior credit facility
is available for:
o funding budgeted construction costs of the joint venture of up
to $385 million;
o funding non-budgeted construction costs of the joint venture
of up to $100 million; and
o pre-completion debt service, which includes interest costs and
fees under the credit facility, of up to $50 million.
As of December 31, 2001 we had drawn $279.5 million under our $535
million senior credit facility. Upon completion of the offering of the notes,
any amounts outstanding under the $535 million senior credit facility will be
repaid and the facility will be cancelled.
On September 28, 2000, through a rights offering to the holders of
existing equity securities and a private placement, we issued Non-voting
Convertible Equity Shares for aggregate consideration of $130 million.
On December 21, 2000, we completed our initial public offering of
4,000,000 Common Shares for aggregate gross proceeds of $60 million.
Concurrently with our initial public offering, the Common Shares were listed on
The Toronto Stock Exchange under the symbol "WTO."
On February 1, 2001, we filed two prospectuses qualifying the issuance
of an aggregate of 34,033,029 Common Shares, 494,224 Class A Warrants and
465,188 Class B Warrants issuable upon the conversion or exercise, as the case
may be, of convertible securities previously issued by us.
During the first quarter of 2001, we raised $3.7 million through the
exercise of 465,188 Class B Warrants exercisable for Common Shares at $8.00 per
share.
On March 14, 2001, we entered into a $90 million credit facility which
was subsequently repaid and cancelled on October 25, 2001. Also on March 14,
2001, we completed a private placement for the issuance of 666,667 Class D
Preferred Shares, Series A for net proceeds of $12 million.
On April 27, 2001 we sold 625,000 Common Shares issuable on a
flow-through basis, which yielded proceeds of $10 million.
On June 15, 2001 we entered into an additional $30 million credit
facility on terms substantially similar to the terms contained in the $90
million credit facility entered into on March 14, 2001. This facility was repaid
and cancelled on October 25, 2001.
On July 25, 2001 we issued 2,266,267 Non-voting Convertible Equity
Shares and 1,138,462 units consisting of Non-voting Convertible Equity Shares
and call obligations and 725,589 Non-voting Convertible Equity Shares, issued on
a flow-through basis and call obligations to some of our existing shareholders
and received gross proceeds of approximately $57.9 million. Certain shareholders
also entered into irrevocable commitments to subscribe for 725,590 Non-voting
Convertible Equity Shares to be issued on a flow-through
37
basis, upon receipt of subscription agreements and funds amounting to $11.3
million, which funds were received and the shares issued on November 2, 2001.
On October 25, 2001, we completed a rights offering to our existing
shareholders, of 3,384,835 Common Shares at a price of $14.00 per share for
gross proceeds of $47.4 million.
On October 25, 2001, we established an $88 million two-year
subordinated cost overrun facility with a Canadian chartered bank. The notes
issuable pursuant to draws on the subordinated cost overrun facility are
convertible, at our option on maturity, and in the event of a default, at the
option of the bank, into Common Shares at 95% of the then current market price.
The subordinated cost overrun facility has not been drawn upon. We intend to
maintain the availability of this facility following completion of the offering
of the notes.
In November 2001, we completed a private placement of 150,000
Non-voting Convertible Equity Shares issued on a flow-through basis at $17.30
per share for gross proceeds of $2.6 million. On November 27, 2001, we filed a
prospectus which qualified for issuance an aggregate of 5,005,908 Common Shares
issuable upon conversion of all the Non-voting Convertible Equity Shares issued
in July and November 2001.
In the first three months of 2002, we received proceeds of $1.1 million
from the exercise of employee stock options into 125,500 Common Shares.
To date, we have financed our share of joint venture costs out of
proceeds from our equity financings and our various credit facilities. Our cash
balances decreased by $41.1 million during the year ended December, 2001, from
$94.1 million at December 31, 2000 to $53.0 million at December 31, 2001. Cash
inflows were comprised of $144.0 million of equity capital (net of issue costs)
raised throughout the year and $279.5 million of long-term debt issued during
the year (net of repayments). Cash outflows included capital expenditures of
$433.6 million, debt issue costs and deferred charges of $16.3 million, an $18.2
million increase in working capital throughout the year, corporate expenses of
$7.0 million and repayment of other long-term liabilities of $2.1 million. In
addition, we replaced restricted cash balances of $12.6 million that were
provided to secure an overdraft facility available to fund capital commitments
to the Project with letters of credit in the same amount, such that this cash
became available to us in the year.
We believe that the net proceeds from the sale of the initial notes
together with all of our other sources of funds will be sufficient to fund:
o our remaining forecasted total costs as at March 31, 2002
($205.2 million), including contingencies and allowances;
o our share of operating expenses until March 31, 2003 ($38.7
million);
o general and administrative expenses and working capital
requirements;
o the repayment of certain existing indebtedness; and
o fees and expenses related to the notes and the senior credit
facility.
The equity which we have previously raised and the net proceeds from
the sale of the initial notes, together with our credit facilities available to
us, fully fund our remaining forecasted total costs to complete the Project. We
have additional sources of financing including:
o a $197.5 million project delay/cost overrun insurance policy;
o $48.9 million of contingent equity which is available to us,
at our option, until March 31, 2003; and
o net revenues prior to March 31, 2003 estimated by Purvin &
Gertz to be up to $50 million using our start-up assumptions.
38
BUSINESS
OUR COMPANY
We hold a 20% undivided ownership interest in a multi-billion dollar
joint venture that is exploiting a portion of one of the largest reservoirs of
crude oil in the world. Shell and Chevron hold the remaining 60% and 20%
ownership interests in the joint venture, respectively. The Project, which
includes facilities owned by the joint venture and third parties will use
established processes to mine oil sands deposits, extract and transport bitumen,
and upgrade the bitumen into synthetic crude oil and VGO.
The initial design capacity for the Project supports a non-declining
bitumen production rate of approximately 155,000 bbls/d that, together with
purchased feedstocks, supports total upgraded output of approximately 190,000
bbls/d. At full capacity, our share of the expected upgraded output will be
approximately 38,000 bbls/d. Following start-up, we believe that the owners will
be able to increase production at a relatively low capital cost through the
implementation of debottlenecking and other initiatives.
We have agreed to sell our share of VGO production, which will be
approximately 12,000 bbls/d, to an affiliate of Shell under a long-term sales
agreement, and we will take the remainder of our share of total sales volumes
and market it to refineries throughout North America.
We were selected by Shell in July 1999 to participate in the joint
venture due to our considerable expertise in mining and resource extraction,
which is critical to the success of any oil sands project and complements
Shell's expertise in hydrocarbon management and upgrading. We have a combined
500 man years of mining and resource extraction expertise derived from the
design, development and construction of over 15 mining and processing facilities
throughout the world. We are actively involved in the construction of, and
through involvement in Albian will have primary operational responsibility for,
the mine and the extraction plant.
OUR INDUSTRY
Oil sands are composed primarily of sand, bitumen, mineral rich clays
and water. Bitumen, in its raw state, is a heavy, viscous, crude oil. According
to the AEUB, total Canadian in-place bitumen volume is approximately 2.5
trillion bbls, of which 300 billion bbls are potentially recoverable under
anticipated technology and economic conditions. While not an exact comparison,
according to the NEB, these potentially recoverable bitumen resources are
approximately equivalent in size to Saudi Arabia's proved conventional oil
reserves.
Canadian oil sand deposits are primarily found in the Athabasca, Cold
Lake and Peace River regions of northeast and north central Alberta. According
to the AEUB, the Athabasca oil sands are Alberta's largest containing all of the
known surface mineable oil sands deposits in Alberta. Although large portions of
the oil sands deposits are accumulated in thick seams near the surface, these
deposits contain oil sands that are located at various depths, from surface
outcroppings to several hundred meters below ground. The deeper deposits are
potentially exploitable using in-situ methods of extraction while the deposits
at or near the surface (less than 75 meters below the surface) are recovered
using large scale surface mining techniques. The Athabasca oil sands are
estimated by the AEUB to contain over 35 billion bbls of bitumen resources that
are shallow enough to be mined with current technology under present and
anticipated economic conditions. According to the reserves and resource
estimates of GLJ and NorWest, respectively, Leases 13, 88 and 89 account for
approximately one-quarter of these mineable resources. The bitumen extracted
from the mined oil sand is subsequently transported by pipeline or conveying
systems from mining facilities to extraction facilities and the processed
bitumen is transported to upgrading facilities where it can be upgraded into a
light synthetic crude oil for use by conventional refineries.
Existing oil sands operators Suncor and Syncrude have focused their oil
sands developments in northern Alberta, at sites near Lease 13, since 1967 and
1978, respectively. Syncrude is a joint venture among several oil and gas
producers, including Imperial Oil Resources (an affiliate of Exxon Mobil
Corporation) and
39
Petro-Canada. Since start-up, both Suncor and Syncrude have reported significant
growth in production. We believe that their production increases are related to:
o technological improvements, which have led to major reductions
in capital intensity and operating costs;
o the ability to incrementally expand output by a process of
continuous optimization, or debottlenecking, of plant
performance;
o fiscal regimes which encourage expansion by allowing income to
be offset by capital investment in the year incurred, thus
deferring the payment of taxes; and
o a large, high quality resource base that has not been a
limitation to growth.
Suncor's average daily synthetic crude oil production has increased
from less than a reported 20,000 bbls/d in 1968 to a reported 123,200 bbls/d in
2001. Suncor's major expansion, the Millennium Project, has added approximately
115,000 bbls/d in additional production capacity. Similarly, Syncrude has
reported that average daily synthetic crude oil production has increased from
approximately 50,000 bbls/d in 1979 to 223,000 bbls/d in 2001. The Syncrude
expansions, which include the Aurora 1 Mine and other planned expansions near
the site for the Project, are expected to increase production to between
approximately 535,000 bbls/d and 560,000 bbls/d by 2015.
OUR STRENGTHS
LARGE RESOURCE BASE WITH SIGNIFICANT RESERVES AND OPPORTUNITIES FOR EXPANSION
The oil sands in the Athabasca region represent the largest known
single source of crude oil in Canada. According to GLJ, the western portion of
Lease 13 contains approximately 1.7 billion bbls of proved and probable
reserves, which is sufficient for 30 years of non-declining bitumen production
at 155,000 bbls/d. Our share of total reserves is approximately 336 million
bbls. Total estimated bitumen reserves and resources of Leases 13, 88 and 89
are, according to GLJ and NorWest, approximately 8.8 billion bbls, with our
share, assuming we maintain a 20% participation, totaling approximately 1.8
billion bbls.
LOWER COST AND RISK PROFILE COMPARED TO CONVENTIONAL OIL EXPLORATION AND
PRODUCTION
Unlike conventional oil exploration and production, the Project is
expected to have a constant non-declining rate of daily production and therefore
will not have to incur ongoing exploration risk to maintain its production rate.
Our total costs per bbl, which include operating, finding and development and
royalty costs, are expected to be lower than the average total costs per bbl for
conventional oil producers primarily due to our finding and development costs
which are currently estimated to be less than $2.90 per bbl. Our royalties are
expected to be less than 1% of gross revenues until capital costs associated
with the mine and extraction plant, including a return on capital, are fully
recovered. Income taxes will be deferred due to accelerated capital cost
allowances.
STRONG SPONSORSHIP
The joint venture benefits from the participation, sponsorship and
execution capabilities of Shell and Chevron. Shell and its affiliates provide
significant expertise in the upgrading process and in managing large and
multi-stage projects around the world. Chevron and its affiliates provide
substantial expertise in the upgrading process as a recognized leader in
catalysts and hydro-cracking and hydro-treating technologies. In addition, both
Shell and Chevron add significant refining expertise and have extensive capital
resources.
PROVEN PROCESSES
The Project will use many of the operating processes employed by other
oil sands operations in the Athabasca region. The joint venture benefits from
knowledge of process improvements that have resulted in operating efficiencies
and reduced operating costs for other oil sands projects over the last several
years. In addition, the Project has adopted mining and extraction techniques
commonly used in other mineral extraction processes, including those for copper,
gold, coal and nickel, that are expected to further improve operating efficiency
and product quality and reduce environmental emissions. The oil sands extraction
process employed by the Project was successfully tested during the 12 month
operation of the Project's pilot
40
plant. Furthermore, the upgrader will utilize a process that is employed by a
number of other upgraders and refineries in North America, including Syncrude.
ESTABLISHED MARKETS FOR PRODUCTS
We have agreed to sell our share of VGO production, which will be
approximately one-third of our share of upgraded output, to an affiliate of
Shell under a long-term sales agreement. The remaining upgrader output and any
third party feedstocks will initially form the basis for two streams of
synthetic crude oil (one heavy and one light), and later a single stream, which
we intend to sell to numerous refineries throughout North America. Synthetic
crude oil has been produced by other oil sands projects in the Athabasca region
for more than 20 years, and has competed with conventional crude oil production.
We expect that the demand for the two synthetic crude oil streams which we
initially produce will be strong due to their favorable sulphur and aromatics
content. We believe that within one year of start-up we will be in a position to
take our share of upgrader output and create a single stream blend which we
believe will have an even higher demand and a greater value than the two
synthetic crude oil streams.
EXPERIENCED WESTERN MANAGEMENT TEAM
We contribute design, construction and operations expertise for the
critical mining and extraction processes of the joint venture. In June 1999, Guy
Turcotte, our President and CEO, joined 20 former BHP personnel, who have a
combined 500 man years of mining and resource extraction expertise, to form
Western and to participate in the joint venture. In addition, Mr. Turcotte has
more than 20 years of oil and gas production and marketing experience. He was
the founder of Chauvco Resources Ltd. (sold to Pioneer Natural Resources Company
in 1997) and is the Chairman and CEO of Fort Chicago Energy Partners, the
largest partner in the $5 billion Alliance Pipeline.
THE PROJECT
BACKGROUND
Shell purchased Lease 13 in 1956 and purchased other oil sand
properties, including Leases 88 and 89, in 1996. Shell and others thoroughly
characterized the resources underlying these properties, but chose not to
develop them for many years due to the relatively high capital intensity of
these projects and the high historic cost of mining, extracting and refining the
oil sands and bitumen. In the 1990's, Shell decided to reassess the development
of its oil sands properties due in part to the success experienced by other oil
sands operators in reducing their capital and operating costs through the
evolution of mining and extraction processes and favorable changes to the
governmental royalty and fiscal regimes applicable to oil sands operations.
Shell began the development of the Project in 1996 when it initiated a
pre-feasibility review for an oil sands development on Lease 13 and an
integrated upgrader near its existing Scotford refinery in Fort Saskatchewan,
Alberta. Shell initially chose BHP to participate in the pre-feasibility and
feasibility studies of the Project due to BHP's expertise in mining and resource
extraction. The pre-feasibility study determined that the Project had sufficient
technical and commercial merit to justify a full feasibility study and in 1998,
Shell and BHP commissioned a full feasibility study.
In early 1999, BHP made a strategic decision to focus on existing
conventional exploration and production and advised Shell that it would not
participate in the joint venture beyond the feasibility study. In a subsequent
decision, BHP elected to downsize its mineral development capability in North
America, an action that ultimately permitted the BHP team that was involved in
the execution of the feasibility study to become employed by us. As a result of
BHP's decision not to participate in the joint venture, Shell conducted an
extensive review of potential replacements for BHP, and selected Chevron and
Western to participate in the joint venture. After the completion of the
feasibility study and the preparation of the necessary joint venture
documentation, Shell, Chevron and Western elected to proceed with the Project on
December 6, 1999.
BITUMEN RESERVES AND RESOURCES
The joint venture will develop the western portion of Lease 13, a large
oil sands lease in the Athabasca region of northeastern Alberta, Canada held by
the owners and granted by the Government of Alberta. The western
41
portion of Lease 13 covers approximately 50,000 acres on a six-by-twelve mile
lease. The western portion of Lease 13 contains, on average, in excess of 11.5%
bitumen by weight and has a relatively low stripping ratio. The combination of a
large ore body, high ore grade and low stripping ratio results in one of the
largest undeveloped total mineable oil sands areas within the oil sands deposits
of the Athabasca region.
According to GLJ, the western portion of Lease 13 contains
approximately 1.7 billion bbls of proved and probable reserves and is sufficient
for 30 years of non-declining bitumen production at 155,000 bbls/d. We have the
option to participate in expansion opportunities, including on the remainder of
Lease 13 and on two other nearby oil sands leases owned by Shell, Leases 88 and
89. The following table outlines the joint venture's proved and probable
reserves on the western portion of Lease 13, as estimated by GLJ, and the
resources available for future expansion opportunities on the remainder of Lease
13 and Leases 88 and 89, as verified by NorWest:
TOTAL OUR SHARE
----- ---------
(MMBBLS) (MMBBLS)
-------- --------
JOINT VENTURE
Reserves on western portion of Lease 13.................. 1,681 336
===== ===
FUTURE OPPORTUNITIES(1)
Resources on remainder of Lease 13....................... 3,200 640
Resources on Leases 88 and 89............................ 3,900 780
----- ---
7,100 1,420
===== =====
- ------------------------
(1) Assumes we maintain a 20% participation, which entails certain
significant costs and risks. See "Risk Factors".
Estimates of recoverable portions of bitumen resources are based on
current technology and economic efficiency of the mining and extraction process.
PROJECT OVERVIEW
The principal facilities of the joint venture will be constructed and
owned directly by the owners, while other facilities will be constructed and
owned by various third parties. The production process consists of four primary
activities including mining and overburden removal, extraction, transportation
and upgrading. A list of joint venture owned and third-party facilities and a
process flow diagram for the Project (after our initial year of production) are
set forth below.
JOINT VENTURE FACILITIES
o Muskeg River Mine
o Extraction Plant
o Upgrader
SHARED FACILITIES
o HMU
THIRD-PARTY FACILITIES
o Corridor Pipeline
o ATCO Cogeneration Facilities
o ATCO Pipeline
[GRAPHIC OMITTED]
42
MINING AND OVERBURDEN REMOVAL
The Muskeg River mine will employ proven continuous open pit mining
methods that have been effectively utilized by existing oil sands operators.
However, the mine will also incorporate design improvements that we believe will
provide increased operational flexibility, reduced oil sands losses, higher
productivity and increased energy efficiency compared to the oil sands mining
operations of existing operators. The Muskeg River mine will employ a fleet of
trucks and shovels that operate 24 hours a day, 365 days per year, subject to
normal course maintenance shutdowns.
A combination of electric cable shovels and hydraulic shovels will be
used to excavate the waste and ore and load it into large haul trucks. The cable
shovels have up to 100 ton capacity buckets, while the hydraulic shovels have up
to 80 ton capacity buckets. It is expected that three cable shovels and two
hydraulic shovels will be used. Approximately 275,000 tonnes per day of ore, in
addition to approximately 155,000 tonnes per day of overburden, low grade
(waste) oil sand and extraction plant rejects will be mined. From the start of
operations, waste and ore haul trucks will be used interchangeably. The haul
truck fleet will consist of up to 25 haul trucks each with a load capacity of up
to 400 tons in order to transport an average of 14,000 tonnes of ore per hour
and overburden waste.
The truck and shovel techniques to be used at the Muskeg River mine
reflect the improvements that have occurred in oil sands mining methods over the
last decade. Previously, bucketwheels, or a combination of draglines and
bucketwheels, were considered the most economical method of mining oil sands but
are being phased out. Enhanced efficiencies of truck and shovel mining include
higher productivity, energy conservation, more reliable equipment, operational
flexibility, consistent and reliable ore feed to the extraction plant, reduced
oil sands losses and co-ordinated and progressive mine reclamation.
Once ore has been excavated, it is subjected to a conditioning process.
The haul trucks dump the ore into a semi-mobile crusher where it is reduced in
size and then moved into rotary breakers where it is further reduced to 2-inch
and smaller particles. Oversize material is rejected and warm water is added to
create a slurry which flows through a pipeline that conditions the ore as it is
transported to the extraction plant. The semi-mobile crusher will be
strategically moved every two to four years to reduce the distance the trucks
must travel, thereby reducing haulage costs and improving operating
efficiencies.
EXTRACTION
The extraction plant at the Muskeg River mine site will separate
bitumen from mined oil sands and process the bitumen to meet the specifications
of the upgrader. The extraction plant has an initial design capacity of 155,000
bbls/d of bitumen. The extraction process consists of primary extraction and
froth treatment stages. The following simplified process flow diagram and
summary explanations illustrate and describe generally the extraction process.
[GRAPHIC OMITTED]
o Primary Extraction. The primary extraction process separates
bitumen from much of the sand, clay and other materials. Air
is added to the warm water slurry received from the mine site
and discharged
43
into two primary separation cells, which are large gravity
separation vessels. The bitumen attaches to air bubbles and
floats to the top to form a bitumen rich froth while most of
the sand and fine clays settle to the bottom of the vessels
and are pumped to the tailings processing system. The
bitumen-rich froth is decanted and then processed through a
steam stripper which removes air bubbles and some of the
remaining solids. The bitumen-rich froth is then directed to
storage tanks where it awaits further treatment in the
countercurrent decantation process. The froth contains about
60% bitumen, 30% water, and 10% sand and fine clay.
o Froth Treatment. Bitumen froth is drawn from the storage tanks
and directed to a countercurrent decantation circuit. In this
circuit, the bitumen froth is diluted with a paraffinic
hydrocarbon solvent and introduced into countercurrent
settling vessels to remove most of the water and solids, and
heavy asphaltenes. This is a two-train, three-stage circuit in
which bitumen froth is successively cleaned of undesirable
solids, water and heavy asphaltene particles. Some of the
solvent will then be removed from the bitumen to yield a
diluted bitumen with appropriate viscosity for shipment to the
upgrader via the Corridor Pipeline. Residual solvent is
recovered from the froth treatment tailings stream. The water,
sand and fine clay is sent, via pipeline, along with the
tailings material from the primary extraction process to the
tailings thickening circuit and settling pond where the warm
water is reclaimed for reuse in the ore preparation process.
The froth treatment process was tested at the pilot plant
during a 12 month period during which the countercurrent
decantation process produced a clean bitumen grade that is
essential for satisfactory processing in the upgrader's
hydro-treating circuit.
The extraction process follows well established oil sands extraction
techniques with the exception of the froth treatment stage, which utilizes a
three-stage countercurrent decantation process that is commonly applied in other
mineral extraction processes, including those for copper, gold, coal and nickel.
The bitumen product resulting from the extraction process is a very clean heavy
crude oil that is low in asphaltenes, fines, clays, ultrafines and other
contaminants.
Albian Sands Energy Inc., or Albian, was formed for the sole purpose of
constructing and operating the mine and the extraction plant. Albian is owned by
the owners in proportion to their respective ownership interests in the joint
venture. About one-half of our employees provide management services to Albian
pursuant to the mining and extraction services agreement. Albian manages and has
primary responsibility for the construction and operation of the mine and the
extraction plant, subject to directions provided by the executive committee of
the joint venture.
UPGRADING
The diluted bitumen separated in the extraction process is delivered
via the Corridor Pipeline to the upgrader. Upgrading is the final stage of the
production process. The initial design of the upgrader supports the processing
of 155,000 bbls/d of bitumen. An additional 30,000 bbls/d of feedstocks and the
equivalent of approximately 5,000 bbls/d of hydrogen are added to the bitumen to
produce synthetic crude oil and VGO. The upgrader is expected to have a total
output of 190,000 bbls/d which includes 60,000 bbls/d of VGO. It is the current
intention of the owners to purchase additional third party bitumen feedstocks
which may be either processed through the upgrader as feedstock or directly
blended into our heavy synthetic crude oil stream as required. The total sales
volume will be 190,000 bbls/d plus any third party bitumen feedstocks not
processed through the upgrader. Initially, our heavy stream will be a heavy
synthetic blend (20(0) API) with a sulphur content lower than most heavy crude
oils, comprised of premium synthetic sweet components and purchased third party
bitumen blends. Our light stream will be composed of a premium light sweet
synthetic crude (35(0) API) characterized by low sulphur, a high distillate
yield (kerosene) and the absence of vacuum residue. The mix of feedstocks and
bitumen can be altered to produce various custom-made refinery feedstocks and
synthetic crude oil blends. Within one year of start-up we believe that we will
be in a position to take our share of upgrader output and create a single stream
blend of synthetic crude which we believe will have a higher demand and greater
value than the heavy and light streams initially marketed.
44
Once the diluted bitumen arrives at the upgrader, it is distilled to
recover diluent, which is then returned to the extraction plant via pipeline.
The primary upgrading unit will generate product streams suitable for processing
in conventional refineries. The hydro-conversion process used at the upgrader is
currently being employed at a number of upgraders including Syncrude, which has
reported that it utilizes the process for 40,000 bbls/d of its production. The
hydro-conversion process yields 103 bbls of oil per 100 bbls of bitumen and
feedstock blend and has several positive environmental characteristics relative
to a coking process, including reduced carbon dioxide and sulphur dioxide
emissions. A process flow diagram for the upgrader (after our initial year of
production) is set forth below.
[GRAPHIC OMITTED]
MARKETING AND SALES ARRANGEMENTS
We have agreed to sell approximately 12,000 bbls/d of VGO to an
affiliate of Shell under a long-term sales agreement. Our share of synthetic
crude oil production will be approximately 26,000 bbls/d (plus our share of
additional third party bitumen blend acquired) and will be taken in-kind. We
intend to market our synthetic crude oil to domestic refineries in western
Canada and Ontario, and refineries in the midwest, Rocky Mountain states and the
northwest regions of the United States.
The synthetic crude oil streams to be marketed will compete with other
crude oils in the market place. We believe that demand for the Project's
synthetic crude oil streams will be strong due to their relatively low sulphur
and aromatics content. We have initiated contact with potential crude oil
customers in Canada and the northern United States. Definitive assay
specifications have been developed which will properly value the synthetic crude
oil streams that will initially be marketed.
We will ship our synthetic crude oil via the Corridor Pipeline to the
pipeline systems in Edmonton, Alberta, the hub of the western Canadian refining
industry. Provisions for pipeline deliveries are being established through TMPL
and Enbridge. We believe there is adequate refining and transportation capacity
to enable us to transport and market our share of production.
TAILINGS DISPOSAL AND RECLAMATION
During the first five to seven years of operation, all of the tailings
from the extraction process will be transported to an external tailings settling
pond by pipeline to enable the solids to settle from the water. Subsequent to
this five to seven year period, fresh coarse dewatered tailings produced in the
extraction plant will be processed and deposited in dyked-off areas in the mine
pit.
45
An objective of the tailings management plan will be to minimize the
size of the tailings settling pond. We expect to accomplish this by arranging
the mine plan to provide available storage for the consolidated tailings in the
mine pit as soon as possible and subsequently by increasing the production of
consolidated tailings, as space in the mine pit becomes available. The major
benefit of this consolidated tailings method will be to enable the mined area to
be reclaimed as a solid landform as the tailings deposits progressively
consolidate towards a geotechnically stable mine backfill. This is designed to
minimize land disturbance and the subsequent impact on the environment.
Contemporaneous reclamation is one advantage of truck and shovel
mining. It will permit disturbed areas to be returned to productive and diverse
environments during the life of the Project. Sufficient organic soils will be
stripped ahead of the mining faces and either stockpiled or directly placed on
disposal sites to facilitate ongoing reclamation.
At the end of the mine life, all remaining surface disposal sites will
be reclaimed. The remaining void from the last few years of mining will be used
to dispose of any fine tailings and water from the tailings settling pond, and
will be capped with fresh water to form a lake. Appropriate drainage systems
will be incorporated into the final landform to provide a self-sustaining
ecosystem.
THIRD-PARTY FACILITIES
PIPELINE TRANSPORTATION
Pipelines will be owned and operated by third parties to fulfill the
Project's transportation requirements. The most significant of these pipelines
will be the Corridor Pipeline, which is being constructed and will be owned by
Corridor and will be operated by TMPL. The Corridor Pipeline consists of the
following two pipelines:
o the 444 kilometer Dilbit pipeline system consisting of:
-- a 24-inch pipeline with an initial design capacity of
approximately 225,000 bbls/d that will transport
diluted bitumen from the extraction plant to the
upgrader; and
-- a 12-inch pipeline with an initial design capacity of
approximately 65,000 bbls/d that will transport
diluent from the upgrader to the extraction plant.
o the 43 kilometer upgrader pipeline system consisting of:
-- a 20-inch pipeline that will transport production
from the upgrader to pipeline transportation
facilities in Edmonton; and
-- a 16-inch pipeline that will transport feedstocks for
use in the upgrading process from transportation
facilities in Edmonton to the upgrader.
Tariffs to be charged to the joint venture for its use of the Corridor
Pipeline have been established under a traditional rate-based approach that will
provide Corridor with a full recovery of operating, finance and maintenance
costs and a return on capital. The joint venture has a long-term "take-or-pay"
contract for capacity on the Corridor Pipeline, with an obligation to pay
regardless of actual levels of use even if the Corridor Pipeline is unavailable.
In cases where there is excess pipeline capacity in the Corridor Pipeline,
capacity may be sold to third-parties and the revenues will be shared among the
owners and, in certain circumstances, Corridor.
In addition to the Corridor Pipeline, the Project will also use a 110
kilometer pipeline to supply natural gas to the cogeneration facility at the
mine and extraction plant. This recently constructed pipeline is owned and
operated by ATCO Pipelines and consists of a 16-inch pipeline with an initial
design capacity of 95 million cubic feet per day that will deliver natural gas
from the TransCanada Transmission Chipewyan Station. The existing ATCO natural
gas pipeline system in the area will be extended to transport natural gas to the
upgrader cogeneration facility.
The joint venture benefits from its contracts with TMPL and ATCO
Pipelines. TMPL owns and operates pipelines that transport crude oil, diluted
bitumen and refined products from Edmonton to the west coast of
46
Canada. TMPL is an established operator that has operated its pipelines
continuously since 1953. ATCO Pipelines also has significant experience in
natural gas transportation and it operates a pipeline system with more than
7,900 kilometers of gas transmission lines and 212 producer receipt points.
COGENERATION AND UTILITIES
MINING AND EXTRACTION ENERGY. The power and steam needed to support the mining
and extraction facility is to be supplied by a conventional cogeneration
facility that is being constructed, and will be owned and operated by ATCO
Power, an experienced independent power producer. This facility will consist of:
o two natural gas-fired turbine and generator sets with low
nitrous oxide burners, each with output of approximately 85
megawatts; and
o two heat recovery steam generators with supplemental heat
injection, each with heat output of approximately 1,000
gigajoules per hour.
Energy from the turbine's hot exhaust gas will be captured and used to
generate steam for use in the extraction process. The cogeneration facility will
have a high voltage power substation that will be connected to the Alberta
Interconnected System power grid via one or more 260 kilovolt power lines.
Natural gas fuel will be transported to the cogeneration facility by the ATCO
pipeline. The mine and extraction plant will use more than one-half of the
electricity generated by the cogeneration facility, with the balance being
available to ATCO Power for sale into the Alberta power grid.
The joint venture will purchase power and steam under a long-term "take
or pay" purchase contract with ATCO Power, with pricing based on a full recovery
of operating, maintenance and capital costs for the cogeneration facility. The
joint venture will be obligated to pay for its committed base levels of power
regardless of actual use.
UPGRADER ENERGY. The power and steam necessary to support the upgrader will be
supplied by a cogeneration facility that is being constructed by the owners.
This facility will be owned and operated by ATCO Power and will consist of:
o one natural gas-fired turbine and generator set equipped with
low nitrous oxide burners, with output of approximately 80
megawatts, and
o one steam turbine generator with output of approximately 70
megawatts.
A heat recovery steam generator will supply supplemental steam to the
upgrader. The upgrader will use approximately 75% of the electricity generated
by the cogeneration facility, with the balance being available to ATCO Power for
sale to third parties. An existing power substation will provide grid access for
the cogeneration facility and three existing 240 kilovolt power lines will
connect the plant to the Alberta power grid. In addition, the existing ATCO
natural gas pipeline system in the area will be extended to transport natural
gas to the cogeneration facility.
The joint venture will purchase power and steam under a long-term
"take-or-pay" purchase contract with ATCO Power, with pricing based upon a full
recovery of operating, maintenance and capital costs for the cogeneration
facility. The joint venture will be obligated to pay for its committed base
levels of power regardless of actual use.
UTILITIES. Initially, water for the extraction plant will be supplied from the
Athabasca River. After a period of clarification in the tailings system, water
will be recycled, thereby reducing usage of river water.
HYDROGEN SUPPLY
Approximately 75% of the hydrogen requirements for the upgrader will be
provided by the HMU. The HMU will also supply hydrogen to the Scotford refinery.
The remaining 25% of the hydrogen requirements for the upgrader will be supplied
pursuant to a long-term purchase agreement with Dow. Hydrogen purchased from Dow
is to be delivered to the upgrader through a pipeline that is 9 kilometers long
and 30 inches in diameter.
47
The HMU is owned by SHMUL, which in turn is owned by the owners,
independently from the joint venture, and an affiliate of Shell. The capital
investment by SHMUL in the HMU is being financed through a secured bank loan in
principal amount of up to $290 million. The owners and an affiliate of Shell
have entered into a capital lease with SHMUL in respect of the HMU. Our
ownership interest in the HMU, which will be operated by an affiliate of Shell,
is approximately 18%.
The HMU is a two-train hydrogen plant and uses conventional steam
methane reforming followed by pressure swing absorption. The upgrader will
provide process gas which the HMU will use, along with natural gas, as feedstock
to produce approximately 216 million cubic feet per day of hydrogen. The process
was designed by Krupp Uhde/Parsons Energy and Chemical Group Inc. and is similar
to units that are operated by Shell at the existing Scotford refinery.
PROJECT DEVELOPMENT AND CONSTRUCTION
PROJECT DEVELOPMENT
The Project has six primary stages, two of which have been completed.
These stages are:
o Pre-Feasibility.Undertaken in 1996, this initial stage was
completed in late 1997 at a cost of approximately $25 million.
The pre-feasibility stage involved the development of an
updated geological model to utilize all historical data and
the results of more recent core hole and geophysical
information from three winter field programs and identified
and designed mitigation programs for the major risks regarding
design, engineering, construction and operation of the mine,
extraction plant and upgrader.
o Feasibility.This stage was completed in late 1999 at a cost of
approximately $108 million. The feasibility study considered,
among other things, resource characterization and reserves,
proposed technical scope and associated facility costs,
commercial arrangements, environmental considerations, risk
factors and risk mitigation and project economics.
Additionally, the feasibility study included third-party
technical analysis. The technical risks that were identified
in the feasibility study were tested in pilot plant
operations, which ran for a 12 month period and produced
bitumen that exceeded the quality specifications required by
the upgrader.
o Execution.This stage began in late 1999 and is expected to be
completed late in the fourth quarter of 2002. This stage
involves the detailed design, materials procurement and
construction of the mine, extraction plant, upgrader, pipeline
systems, HMU and cogeneration facilities, including
establishing all necessary systems, suppliers, contractors,
procedures and hiring staff.
o Start-up Procedures.We expect this stage to begin in late
summer 2002 and end late in the fourth quarter of 2002. Prior
to initiating full-scale operations, all systems will be
checked and tested against the design basis and equipment will
be commissioned.
o Operations.We expect this stage to begin late in the fourth
quarter of 2002. The owners will begin the ongoing task of
fine-tuning and optimizing all aspects of the Project as we
ramp-up to full capacity.
o Debottlenecking.Following start-up late in the fourth quarter
of 2002, we believe that the owners will be able to implement
debottlenecking and other opportunities that may increase
production at a relatively low capital cost. We anticipate
that this will be possible in all our facilities, including
the mine, extraction plant and upgrader.
PROJECT MANAGEMENT GROUP
The Project uses EPCM contractors, with significant experience in
large-scale construction projects, including other oil sands projects. Shell is
the project administrator and, under the direction of the executive committee of
the joint venture, has primary responsibility for construction of the Project.
Shell and its affiliates have extensive experience in managing large and
multi-stage projects around the world. Albian, Shell, TMPL/Corridor, ATCO Power
and ATCO Pipelines each form a management group, with responsibilities for the
completion of specific components of the Project. Each brings significant
expertise in
48
its area of primary responsibility and organizes, supervises and manages its own
development team as well as any EPCM contractors. The respective areas of
primary responsibility are:
PROJECT COMPONENT RESPONSIBLE MANAGEMENT GROUP
- ----------------- ----------------------------
Mining and Extraction................... Albian / Western
Cogeneration / Gas Pipeline............. ATCO Power / ATCO Pipelines
Corridor Pipeline....................... TMPL / Corridor
Upgrader................................ Shell
PROJECT EPCM CONTRACTORS
The Project management groups, with the exception of ATCO Power and
ATCO Pipelines (which are using standardized designs), draw upon the knowledge
and expertise of major EPCM contractors that have a focus in the specific fields
related to their respective Project components. This is particularly important
given the large magnitude and diverse nature of the various components of the
Project. The EPCM contractors are engaged under cost recovery and fixed fee
arrangements with some EPCM contractors having incentives forperformance. The
diagram below sets forth those EPCM contractors responsible for key components
of the Project.
[GRAPHIC OMITTED]
JOINT VENTURE COSTS AND PROJECT SCHEDULE
The Project's design, engineering and procurement are within 2% of
completion currently and construction is at peak activity levels. We believe the
Project will start-up late in the fourth quarter of 2002 and will reach 85% of
design capacity in the second quarter of 2003. Operations teams have been
established and are working closely with the EPCM contractors and owners'
management groups to optimize start-up performance. As of March 31, 2002,
engineering and construction of the mining and extraction facility were
approximately 100% and 79% complete, respectively. As of March 31, 2002,
engineering and construction of the upgrader were approximately 98% and 69%
complete, respectively. All major equipment purchases are complete or under
committed cost agreements.
Based on information available to us as of March 31, 2002, we have
estimated that our share of forecasted total costs, prior to mitigation
initiatives, is approximately $961.6 million. Upon completion of the offering of
the initial notes our remaining forecasted total costs were fully funded. This
forecast includes our estimate of unallocated contingencies and allowances of
approximately $29.5 million.
During the last half of 2001, the Project administrator undertook a
definitive cost estimate with respect to the upgrader. This definitive estimate
analyzed the schedule and costs to complete the upgrader in detail,
49
however it was developed during the period when productivity and progress on the
Project were low due to a shortage of labor. Therefore, in preparing the
analysis, certain productivity, progress and other factors were used to develop
the draft definitive estimate. As a result of the trends at that time and the
work performed in respect of the definitive estimate, the Project administrator
announced that it expected that start-up could slip into early 2003. The
positive change to the availability of labor which occurred early in the fall of
2001 and the success of management initiatives undertaken, have resulted in
progress levels improving beyond the assumptions contained in the draft
definitive estimate. In the first quarter of 2002 the owners signed an amendment
to the original AFE. We estimate that our share of total forecasted costs is
$961.6 million, which is approximately 3.6% less than the Project
administrator's current view of costs and includes our share of operating
expenses from start-up to March 31, 2003 and unallocated contingencies and
allowances. Our estimate of costs is based on a start-up for late in the fourth
quarter of 2002. Notwithstanding significant progress in all areas, the Project
continues to face significant cost pressures based on productivity, man hours,
schedule delays and other costs. Labor productivity levels and other costs at
each construction site have varied throughout the development of the Project and
labor productivity and such other costs have not met our expectations. We
believe, therefore, that our share of remaining total forecasted costs will
increase and that such increase may be material.
Since completion of the feasibility study, the joint venture has
experienced, and continues to experience, significant engineering and
construction cost increases. The primary drivers of these cost increases
include:
o increased labor costs;
o inadequate estimates of piping complexity at the upgrader;
o scope changes; and
o further engineering definition.
In November of 2001, various organizational changes and initiatives
occurred in respect of the upgrader construction. These changes were instituted
in order to increase the efficiency of supervision with the ultimate goal of
increasing construction progress. These initiatives included streamlined
reporting requirements with the contractors, debottlenecking the decision making
process, labor recognition plans and rewards, reorganization of the downstream
project construction team that incorporated a simplified organizational
structure, increased accountability, more rigorous workforce planning, enhanced
management controls and various others. However, notwithstanding these
intiatives which have assisted in maintaining a favorable start-up schedule, the
Project continues to face significant cost pressures based on productivity, man
hours, schedule delays and other costs.
MINING AND EXTRACTION
Through Albian, the mine and extraction plant operator, the owners
negotiate and enter into contracts for the construction of the mine and
extraction plant, implement the detailed process design specifications,
supervise matters arising under the contracts for construction and work to
ensure that construction is conducted in an appropriate manner. A consortium of
firms, collectively known as the mine consortium, is designing and constructing
the mining and extraction facility. The mine consortium has a broad range of
mining and mineral processing expertise and specific experience in executing the
design and construction of major oil sands projects. The members of the mine
consortium are AGRA Monenco Inc., Fluor Daniel Wright Ltd., H.A. Simons Ltd.,
North American Construction Group and the Fort McKay Group of Companies. There
is also direct involvement by Colt Engineering Corporation and GKO Engineering.
Albian commenced construction of the mine and extraction plant in late 1999.
Mechanical completion is scheduled for June and August 2002 for trains 1 and 2,
respectively, with start-up late in the fourth quarter of 2002.
The commissioning of the various facilities included in the Project
will be completed in phases. The extraction plant will be completed by late
summer and first oil will be supplied to the Corridor Pipeline sometime later,
providing the owners with the ability to test and trouble-shoot various
facilities.
A major shift from construction to pre-commissioning to operations is
now taking place. In addition there is increased focus on start-up planning and
start-up activities. Construction execution is now being
50
switched to a system based approach and each system will be tested for technical
integrity, adherence to design and operability to ensure a smooth and efficient
start-up.
UPGRADER
Through Shell, the operator of the upgrader, the owners hired a number
of contractors for the various key components of the upgrader, including the
HMU, due to the upgrader's significant scope. Bantrel Inc. was selected as an
overall managing contractor and, in this capacity, provides the policies,
procedures and systems necessary to co-ordinate the activities of the seven
separate technology and engineering firms responsible for the key components of
the upgrader. Construction of the upgrader began in May 1999. Mechanical
completion is scheduled for the fourth quarter of 2002 with start-up late in the
fourth quarter of 2002.
THIRD-PARTY FACILITIES
SCHEDULE AND BUDGET. The construction of all third-party facilities is
progressing on schedule to permit start-up late in the fourth quarter of 2002.
Based on performance to date, we believe that the third-party facilities will be
completed within or close to their collective estimated costs.
PIPELINES. Construction of the Corridor Pipeline commenced in August 2000 and is
scheduled for completion in the fourth quarter of 2002. As of March 31, 2002,
engineering was approximately 96.5% complete and construction was approximately
88% complete. Construction of the ATCO pipeline commenced in August 2000 and was
completed in June 2001.
COGENERATION FACILITIES. Construction of the cogeneration facility at the Muskeg
River mine began in December 2000 and is scheduled for completion in August
2002. As of March 31, 2002, engineering was complete and construction was
approximately 71.5% complete. Construction of the cogeneration facility at the
upgrader site commenced in February 2001 and is scheduled for completion in July
2002. As of March 31, 2002, engineering was complete and construction was
approximately 55.3% complete.
HYDROGEN MANUFACTURING UNIT. Construction commenced in May 2000 and is scheduled
for completion in May 2002. As of March 31, 2002, engineering was complete and
construction was approximately 83% complete.
REGULATORY APPROVALS
The Project has obtained all material regulatory approvals and permits
that it requires for the construction, completion and operation of the Project.
Minor additional regulatory approvals and amendments will be required in the
ordinary course of business but we do not anticipate any significant difficulty
in the Project's ability to obtain these approvals when and if they must be
procured.
LABOR RELATIONS
We are currently at the peak of Project construction with more than
11,700 people (with approximately 7,700 people located at the upgrader site and
4,000 at the mining and extraction facilities) constructing the Project. The
owners have engaged various contractors to build the components of the Project
and many of these contractors employ unionized personnel. Labor stability of the
unionized contract work force is maintained through a number of industry
agreements which set labor rates and working conditions for unionized trade
workers engaged in the construction and maintenance of various projects in
Alberta, including the Project.
Up until the completion of Suncor's Millennium Project, the owners and
their contractors had encountered difficulty in obtaining the requisite number
of skilled employees necessary to construct the Project in accordance with
original scheduling and productivity estimates. As a result of the increased
availability of large numbers of skilled workers, construction progress and
productivity has improved significantly. Although refinery turnarounds in the
spring of 2002 will increase the demand for skilled personnel, the owners
believe that they have effective programs in place, including financial
incentives, in order to retain the required labor.
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INSURANCE
Insurance policies are carried by the joint venture to protect the
owners and by us for our own protection. The insurance carried by the joint
venture is customary for large construction projects. Shell is responsible for
administering all insurance reporting and claims under the joint venture
insurance. The joint venture maintains the following insurance coverage:
POLICY TYPE LIMIT
----------- -----
Wrap-up liability........................... $100 million
Errors and omissions........................ $50 million
Builder's all risk.......................... $500 million
Advance loss of profits..................... $500 million
Ocean/air cargo............................. $35 million
In addition to the joint venture insurance, for so long as we do not
have the required minimum credit rating, we are required by the joint venture
agreement to carry our own project delay/cost-overrun insurance policy. Our
current policy is in the amount of $197.5 million, which will cover certain
costs, expenses and losses of revenue arising from some events and occurrences
beyond our control. The Project delay/cost overrun policy includes coverage for
the following:
o revenue losses and continuing expenses arising from delays in
achieving the production levels which are set forth in the
feasibility study;
o expenditures reasonably incurred to modify, repair or replace
equipment that is necessary to achieve the production levels
which are set forth in the feasibility study;
o costs of work or expenses beyond the budgeted joint venture
costs that are directly related to achieving the production
levels which are set forth in the feasibility study; and
o debt service costs related to obligations incurred to finance
any of the above items.
We have assembled a team comprised of insurance, engineering,
accounting, process and legal advisors, all of whom are highly specialized in
insurance claim matters. As a result of the significant cost overruns incurred
which were beyond our budgeted expenditures to achieve the production levels
which were set out in the feasibility study, we have filed an initial interim
claim with the insurers under our project delay/cost overrun insurance in the
amount of $116 million. Given the nature of the overruns and the coverage in
place, we anticipate receiving interim payments as provided for in the policy.
We have been working very closely with this group of advisors and we
intend to make an interim claim with the insurers in the second quarter of 2002.
We have met with representatives of the insurers who have commenced the process
of gathering information in respect of matters relating to the project
delay/cost overrun policy, however these discussions are not sufficiently
advanced to allow us to assess the timing or extent of the payment of any claims
which will be made.
Upon commencement of operations, we intend to have in place insurance
designed to protect our ownership interest against losses or damage to the
owners' facilities, to preserve our operating income and to protect against our
risk of loss to third parties.
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PROPOSED EXPANSIONS AND PRE-FEASIBILITY STUDY AGREEMENT
The owners have announced that they intend to evaluate potential
long-term development opportunities relating to the resources contained within
Lease 13 and on Shell's other Athabasca leases. These opportunities include:
o optimization and expansion of the western portion of Lease 13
and Lease 90, which is one of Shell's other Athabasca leases,
to increase total bitumen production from the current design
of 155,000 bbls/d to 225,000 bbls/d. This development would
likely occur in the 2005 to 2010 time frame;
o development of a new mine and extraction facility, known as
the Jackpine mine--phase one, to be located on the eastern
portion of Lease 13 with a capacity of approximately 200,000
bbls/d of bitumen production. This development would follow
expansion of the western portion of Lease 13; and
o development of additional resources located on Leases 88 and
89, known as the Jackpine mine phase two, with a capacity of
approximately 100,000 bbls/d of bitumen production. This
development would follow the development of Jackpine
mine--phase one.
In conjunction with these developments, Western, Shell and Chevron have
entered into a scoping study agreement in respect of the development of the
Jackpine mine--phase one. The objective of the agreement is to obtain primary
regulatory approvals, licenses, permits and authorizations for the construction
of the Jackpine mine--phase one mine and extraction plant and may also in
certain circumstances incorporate the resources for Leases 88, 89 and/or Lease
90. The interests of the parties to this agreement will be the same as in the
joint venture agreement; however, the terms of the joint venture agreement will
not govern this undertaking. The budgeted cost of these activities to the owners
is approximately $18.7 million, of which our share is approximately $3.7
million. This agreement is not an amendment to the joint venture agreement and
is not considered a feasibility study or an expansion pursuant to the joint
venture agreement, nor will it trigger any rights for notices for proposed
expansions under the joint venture agreement. This agreement does not add to nor
detract from any of our rights under the joint venture agreement. The overall
management has been delegated to the executive committee of the joint venture
which will specifically delegate certain matters to the project administrator.
We may withdraw from the agreement at any time, however, we may be reinstated by
paying twice the costs we would have otherwise been required to pay to preserve
our rights to participate in a feasibility study and expansion pursuant to the
joint venture agreement. In May 2002, Shell submitted an application and
environmental impact assessment to the AEUB and Alberta Environment requesting
approval for the proposed Jackpine mine--phase one.
ROYALTIES
The Province of Alberta imposes royalties of varying rates on the
production of crude oil from lands in which it owns the mineral rights.
Alberta's current royalty system for oil sands, introduced in September 1997, is
designed to support the development of the oil sands industry. An initial
royalty of 1% of the quantity of oil sands product that is recovered and
delivered to the royalty calculation point (which, for the Project, is prior to
upgrading of the bitumen produced) is payable until the owners have recovered
specified allowed costs, including certain exploration and development costs,
operating costs, a return allowance (based on the monthly federal long-term bond
rate) and royalties paid to the Crown. Subsequent thereto, the royalty payable
will be the greater of the 1% royalty and that percentage of the quantity of the
oil sands so recovered and delivered determined by dividing the net revenue of
the project by the gross revenue of the project, and multiplying the quotient by
25. The royalty payable to the Crown is free and clear of all deductions.
REGULATIONS
LAND TENURE
Oil produced from oil sands is produced under Crown oil sands leases
granted by the Province of Alberta. Such Crown oil sands leases have an initial
term of 15 years, and continue thereafter to the extent that such leases are
subject to a development plan approved under the Oil Sands Conservation
Regulation (Alberta). Under current law, the lease will be continued as long as
the development plan is complied with
53
and is not altered or reduced or the lease is producing at an acceptable level.
The real property related to the pipelines, the upgrader and the cogeneration
facilities fall into two basic categories of ownership:
o a number of locations, including some pumping/compressor
stations, are owned in fee simple; and
o the majority of locations are covered by leases, easements,
rights-of-way, permits or licenses from landowners or
governmental authorities permitting the land to be used in
such a manner.
OPERATIONS
In Alberta, the regulation of oil sands operations, pipelines and
upgraders is undertaken by the AEUB under various statutes, including the Oil
Sands Conservation Act (Alberta), and by Alberta Environment under the
Environmental Protection and Enhancement Act (Alberta). In addition to requiring
certain approvals prior to the construction and operation of oil sands mining
projects, pipelines and upgraders, the Oil Sands Conservation Act allows the
AEUB to inspect and investigate and to make remedial orders where a practice
employed or a facility used is hazardous to human health or the environment.
Similar powers are available to Alberta Environment. Certain changes to oil
sands mining operations, pipelines and upgraders also require the approval of
the AEUB, Alberta Environment or both.
EXPORTS AND MARKETING
In Canada, producers of oil negotiate sales contracts directly with oil
purchasers, generally at market prices. The price depends in part on oil
quality, prices of competing fuels, distance to market and the value of refined
products. Oil exported from Canada is subject to regulation by the Government of
Canada through the National Energy Board. Oil exports from Canada may be made
for a term not exceeding one year in the case of oil other than heavy crude oil
and not exceeding two years in the case of heavy crude oil, so long as an order
approving any such export has been obtained from the National Energy Board. Any
oil export to be made for a longer duration requires an exporter to obtain an
export license from the National Energy Board which requires the approval of the
Canadian federal government. The term of the license may not exceed 25 years.
ENVIRONMENTAL
Oil sands operations are subject to environmental regulation under
Canadian provincial and federal legislation. In December 1997, Shell filed
applications for the mining and extraction facility and the upgrader with the
provincial government for approvals pursuant to section 10 of the Oil Sands
Conservation Act (Alberta), the Environmental Protection and Enhancement Act
(Alberta) and the Water Resources Act (Alberta).
Included in the application to the provincial government was an
environmental impact assessment which assessed the impacts associated with the
development, operation and reclamation of the Project within the context of
existing regional developments. The assessment identified several favorable
environmental aspects of the Project, including the following:
o the non-caustic extraction process which reduces water quality
concerns and allows for faster consolidation of tailings to
facilitate contemporaneous reclamation;
o the transportation of diluted bitumen to the upgrader for
processing will reduce regional air emissions that would
otherwise occur in the Fort McMurray area;
o the absence of coke as a by-product of the upgrading process
which results in higher recoveries of bitumen;
o contemporaneous reclamation of the Muskeg River mine site
which decreases surface disturbance; and
o low levels of carbon dioxide and sulphur dioxide emissions
resulting from the upgrading process.
The owners have committed to an environmental management system
approach to operate the Project based on these and other advantages. This system
aims to support environmentally sound development
54
through the integration of environmental planning and accountability at all
levels of operations and management.
The key environmental issues to be managed by the owners in the
development of the mine are similar to those currently being managed by existing
oil sands operators and communities and include the health of local and regional
residents and Project employees, surface disturbance on the terrestrial
ecosystem, effects on traditional land use and historical resources, local and
regional air quality, water quality, health of the aquatic ecosystem in the
Athabasca and Muskeg rivers and cumulative effects on wildlife populations and
aquatic resources. The owners have committed to both site-specific and regional
monitoring programs that will track the effects of the Project and the
cumulative effects of regional development on environmental components and
ecosystems.
The owners will operate the Project to achieve compliance with
applicable statutes, regulations, codes, permit conditions and, to the extent
practicable, government guidelines. Where the applicable laws are not clear or
do not address all environmental concerns, the owners will apply appropriate
internal standards and guidelines to address such concerns. In addition to
complying with legislation and regulations and exercising due diligence, the
owners will strive to continuously improve the overall environmental performance
of the operation and products while aspiring to achieve short-term and long-term
commercial success for the Project.
SUMMARY OF PRINCIPAL PROJECT DOCUMENTS
The following describes the general terms of the joint venture
agreement and other relevant agreements.
JOINT VENTURE AND RELATED AGREEMENTS
GENERAL. The joint venture, which commenced December 6, 1999, provides for the
following:
o the mining of oil sands from the western portion of Lease 13;
o the extraction of bitumen from the oil sands at the extraction
plant and the preparation of diluted bitumen for
transportation in a pipeline;
o the transportation of diluted bitumen via the Corridor
Pipeline to the upgrader;
o the removal of diluent from the bitumen, and the return of
diluent to the extraction plant;
o the upgrading of bitumen in the upgrader and the addition of
feedstocks to create refinery feedstocks and synthetic crude
oil blends;
o certain rights of us and Chevron to participate in mining
operations and associated upgrading on the remainder of Lease
13 and in Shell's other Athabasca leases;
o an area of mutual interest for expansion of operations of the
joint venture beyond Shell's existing leases;
o the disposition of the upgrader output; and
o the construction and operations relating to the foregoing.
The joint venture has been established under a number of agreements
among the owners. The owners have in turn entered into other agreements with
third parties.
The principal agreement establishing the joint venture and governing
the relationship of the owners is the joint venture agreement. This agreement
also imposes constraints on certain of the other Project agreements.
The joint venture agreement specifies the formation of the joint
venture and the manner in which the joint venture is to be administered, and
provides for the creation of the executive committee, which is the decision
making body in respect of most matters relating to the Project. The joint
venture agreement also specifies the responsibilities of the project
administrator, secondments of owners' personnel, budgets, costs, technology
matters, dispositions, defaults, environmental matters, expansions, owner's
rights vis-a-vis each
55
other, as well as financial, accounting, banking matters, basic design
parameters of the Project and other matters.
EXECUTIVE COMMITTEE AND PROJECT ADMINISTRATOR. The joint venture agreement
establishes an executive committee that is responsible for most decisions
relating to the joint venture. One of Shell's representatives has been appointed
as the first Chairman, and each owner has two representatives on the executive
committee. We have appointed Mr. Guy Turcotte and Mr. John Frangos as our
executive committee representatives and Mr. David Dyck as an alternate. Meetings
are called by the Chairman but are held at least monthly during the initial
construction period and quarterly after completion. Matters are decided by
ordinary joint venture resolution other than those matters that are specified to
require an extraordinary joint venture resolution. Among other things,
extraordinary joint venture resolutions are required for material changes in the
basic design of the Project (other than a change resulting from an expansion),
suspension of construction of a facility, certain curtailments or permanent
shut-down and abandonment of any facility, removal of the project administrator
or an operator, custom processing, amending the lifting rules, certain matters
relating to third parties, amendments to certain Project agreements and
schedules to the joint venture agreement and certain other matters. Any
extraordinary resolution requires the affirmative vote of two or more owners
representing at least 85% of the voting interests in the functional unit of the
Project to which the vote relates. As such, under the current ownership
arrangement, unanimity is required among the owners in respect of a vote for an
extraordinary resolution. Unanimity is effectively required among the owners in
respect of, among other things, a vote for amendments to the Project agreements,
to mortgage or encumber the Project or the Project assets, changes to individual
facility initial construction budgets of $10 million or more, and where the
Project agreements expressly require. The executive committee has the ability to
delegate certain functions to subcommittees and to the project administrator.
The executive committee will also oversee the operations of Albian and Shell as
operators of the mine and extraction plant and the upgrader and related
facilities and ensure that each owner has an ongoing opportunity to provide
qualified secondees to the Project. An optimization group has been formed
pursuant to the joint venture agreement to provide direction to the upgrader
operator in respect of upgrader product matters.
The project administrator, which initially is Shell, has an
administrative function and deals with day to day matters that include making
payments under third-party Project agreements and dealing with administrative
matters relating to non-performing owners. The project administrator is
responsible for carrying out the directions of the executive committee and
appointing an individual to act as project integration manager.
WESTERN PERSONNEL. Albian will operate the mining and the extraction facility
pursuant to an operating agreement. The mining and extraction services agreement
provides that we will supply certain mining and extraction management services
including the full and part-time services of certain of our employees and
consultants to Albian. Furthermore, we will identify additional personnel to be
employed by Albian beyond our personnel who are necessary for the construction
and operation of the mine and the extraction plant. Certain of our personnel
will be dedicated to the Project until three years after extraction plant
start-up while others, whose functions relate solely to construction, will be
dedicated to the Project until six months after extraction plant start-up. The
mining and extraction services agreement may be terminated by us or by the
project administrator in certain circumstances. All costs incurred by us and
approved by the executive committee in respect of the provision of our services
under the mining and extraction services agreement shall be reimbursed by
Albian. The joint venture agreement also provides that the owners will not
provide services to or operate any other oil sands project in the Athabasca
region until three years after extraction plant start-up except in accordance
with the joint venture agreement.
INVESTMENTS BY WESTERN. We will not undertake any material investments (other
than in respect of the Project or an expansion thereto, the development of
Shell's other Athabasca leases or a lease under the participation and area of
mutual interest agreement), unless the fees owed by us to Shell have been paid
in full and until six months after all the key components of the Project have
concurrently operated continuously at not less than 85% of their design
capacity; provided that a material investment may be made by us at any time with
the consent of Shell and Chevron, which consent shall not be withheld unless, at
the time the
56
consent is requested, the investment could reasonably be expected to materially
adversely affect our ability to perform our obligations in respect of the
Project.
COSTS. All costs for the joint venture are to be borne by the owners in
proportion to their ownership interest in each of the key components of the
joint venture. Each owner must set up accounts that fund the project
administrator's or relevant operator's concentration accounts that end each day
with a zero balance. The owner's funding accounts are required to have overdraft
protection to ensure funds are available when called upon by the project
administrator or relevant operator. Should an owner not meet its obligation to
fund a concentration account in respect of costs relating to the major shared
facilities agreement and to Project agreements relating to the key components of
the Project other than third-party project agreements, the other owners will be
required to fund the concentration account on behalf of the non-paying owner
with any such funds paid by the other owners deemed to be immediately due and
payable by the non-paying owner.
SECURITY INTEREST AND NON-PERFORMING OWNERS. Pursuant to the joint venture
agreement, each owner has granted to each other owner a first fixed and specific
mortgage, charge, lien, and security interest in, and a first floating charge
on, all of its interest in the joint venture to secure its obligations under the
joint venture. Before an owner may grant any other security interest in its
joint venture interest, it must first obtain a lender's acknowledgment from the
secured party. In the event of non-payment or of defaults by an owner under the
joint venture agreement, performing owners have various remedies available to
them, including the right, for so long as the defaulting owner remains in
default, to exercise an irrevocable option granted to performing owners to
purchase the defaulting owner's entire joint venture interest and related assets
for an amount which is equal to 80% of the capital costs incurred by or on
behalf of such owner, if the default occurs prior to Project start-up, or 80% of
the fair market value of the joint venture interest plus 80% of the value of any
reclamation trust that has been established by the defaulting owner minus the
net present value of the defaulting owner's Project reclamation costs if the
default occurs after Project start-up. Additionally, the upgrader operator and
third-party purchasers of upgraded products may each be directed to pay to the
project administrator, on behalf of the other owners, the purchase price paid by
any such third-party or received by the upgrader operator in respect of the
defaulting owner's interest in any upgraded products.
EVENTS OF DEFAULT. An owner will be in default in certain circumstances,
including, if:
o certain bankruptcy-related events occur with respect to such
owner;
o an owner creates, voluntarily or involuntarily, a security
interest in its joint venture interest that is not
subordinated to the other owners' security interests and such
security interest remains for 30 days;
o the owner fails to perform any material obligation under the
Project agreements and the breach is not cured on a timely
basis;
o the owner fails to pay amounts owing in respect of third-party
agreements if such failure would allow the contracted services
to be curtailed and the breach is not cured on a timely basis;
o the owner fails to make a required payment to a reclamation
trust;
o a person who guaranteed the owner's obligation has certain
bankruptcy-related events occur unless an equivalent guarantee
or security is provided;
o in the case of limited partnerships (i.e. Western Oil Sands
L.P.), the general partner of the limited partnership has
certain bankruptcy-related events occur and a new general
partner is not appointed in a timely manner; or
o notice is given to the owner of the cancellation of its
overdraft protection under the banking procedure and such
overdraft protection is not reinstated before the end of the
notice period.
An owner that is in default pursuant to the Project agreements will
have all of its rights suspended except for its right to receive minutes of
executive committee meetings and Project construction, operation and financial
reports.
57
FORCE MAJEURE. An owner will not be in default with respect to non-performance
of its obligations under the joint venture agreement, other than financial
obligations, to the extent its non-performance is caused by certain events
beyond its reasonable control. Lack of funds and changes in economic
circumstances will not constitute events beyond an owner's reasonable control.
An owner claiming suspension of its obligations due to force majeure must
promptly notify the other owners and thereafter diligently remedy the cause and
effect of the force majeure event.
EXPANSIONS AND PARTICIPATION AND AREA OF MUTUAL INTEREST AGREEMENT. Should an
owner with at least a 20% interest in a functional unit wish to undertake an
expansion of a functional unit, the mining of the remainder of Lease 13 or the
construction of a new mine under the participation and area of mutual interest
agreement, it must first advise the other owners and provide a period of time
for them to decide whether or not they will participate in the feasibility study
for the proposed expansion. If an owner does not originally participate in a
feasibility study it may, upon completion of the feasibility study, purchase the
right to participate in the feasibility study and the expansion by paying twice
the cost of its proportionate share of the feasibility study unless such owner's
share of the expansion has been taken up by a non-owner third-party.
An owner desiring to undertake a project expansion may do so only after
providing a full indemnity to the non-participating owners if it has the minimum
credit rating required under the joint venture agreement or if it does not wish
to, or cannot provide the indemnity, by meeting certain defined expansion
criteria, taking into account the nature and level of experience and reputations
of the proposed contractors, appropriate insurance coverage, proper design basis
and the compliance with all laws. An expansion solely of an existing Project
mine will only require the approval of the executive committee. See "Risk
Factors".
Expansion of mining operations on the remainder of Lease 13, or
expansion in respect of the upgrader prior to five years after Project start-up
may only be undertaken with the written approval of Shell (provided that for
expansion of mining operations on the remainder of Lease 13, Shell or an
affiliate has an ownership interest in that portion, and for expansions in
respect of the upgrader, Shell or an affiliate has an ownership interest in the
upgrader and is an owner and operator of the Scotford refinery at the time in
respect of expansion to the upgrader). In order to participate in an expansion
in respect of the remainder of Lease 13, we and Chevron will be required to
acquire our ownership interest in these leases by paying to Shell a nominal
price per barrel based on the share of the recoverable bitumen reserves to be
acquired by us and Chevron, respectively. Owners' interests in functional units
will be adjusted to reflect relative participation in expansions. Expansions may
only be undertaken by owners with total ownership interest of a minimum of 40%
in the functional unit to be expanded. If an owner other than Shell does not
participate in an expansion on the east portion of Lease 13 or in Shell's other
Athabasca leases, it will lose the right to participate in further expansions.
The participation and area of mutual interest agreement provides that
we and Chevron may participate with Shell in bitumen recovery projects on
Shell's other Athabasca leases on the same ownership basis as is currently held
in the Project. If we participate in a new oil sands project on Shell's other
Athabasca leases, we will be required to acquire the ownership interest in
Shell's other Athabasca leases by paying Shell a nominal amount per barrel on
our share of the recoverable bitumen reserves acquired. Shell has also provided
the other owners with a qualified right of first refusal on Shell's other
Athabasca leases should Shell wish to dispose or surrender them, subject to
certain exceptions. The participation and area of mutual interest agreement also
provides that prior to December 6, 2009, an owner acquiring an interest in oil
sands leases within a defined area must afford the other owners an opportunity
to participate in such leases on an equal basis.
UPGRADER, SHARED SERVICES AND FACILITIES. The owners have entered into various
agreements with respect to upgrader operations, including the major shared
facilities agreement which appoints Shell as operator and provides for the
construction, ownership and operation of those facilities relating to both the
upgrader and Shell's refinery by the owners and a non-owner affiliate company of
Shell.
These shared facilities include:
o the sulphur recovery unit;
58
o the demineralization unit;
o the waste water treatment unit;
o the sour water processing unit; and
o the HMU and the Dow hydrogen facilities.
The upgrader and refinery shared services and facilities agreement sets
out the cost sharing agreement between the upgrader owners, represented by
Shell, and the Scotford refinery owner, an affiliate company of Shell, with
respect to a number of matters including security, maintenance, equipment,
effluent treatment, roads, cafeteria, laboratory, warehousing and other shared
facilities and services. The owners have entered into site leases with the
non-owner Shell affiliate in respect of the lands which underlie the upgrader
and certain other facilities.
DISPOSITIONS. Until three years following Project start-up, owners may only
assign, sell, transfer, grant security in, or otherwise dispose of any ownership
interests in the Project if such disposition is:
o a grant of security in respect of an ownership interest in the
Project and the secured party acknowledges it is subject to
the joint venture agreement and is subordinate to the liens
granted by the owners to each other thereunder and that it is
further subject to the major shared facilities agreement and
the security granted by the owners to a non-owner affiliate
company of Shell thereunder;
o a disposition to an affiliate of an owner; or
o a certain limited type of monetization by Shell or Chevron of
its respective ownership interests in the Project,
and, in addition to the foregoing permitted dispositions, beginning three years
after Project start-up owners may make dispositions subject to the following
conditions:
o compliance by the disposing owner with rights of first refusal
granted by each owner to the other owners;
o the proposed transferee having a minimum required credit
rating, unless such disposition is a monetization. See
"Inter-Creditor Agreements and Collateral";
o delivery of the prior written acknowledgement by the proposed
transferee that it will be bound by the terms of the Project
agreements;
o consent of the other owners, not to be unreasonably withheld;
and
o receipt of all required third-party approvals and
acknowledgements.
Partial dispositions are only permissible if the selling owner's
ownership interest is 10% or greater after the sale. The owners have also
granted each other a right of first refusal in respect of proposed dispositions
other than to their respective affiliates.
TERM. The joint venture continues until:
o all abandonment and decommissioning obligations of the owners
have been fulfilled in accordance with applicable laws and all
required regulatory approvals have been received;
o all third-party Project agreements have been terminated; and
o all accounts among the owners in respect of the Project have
been settled.
ENVIRONMENTAL. A greenhouse gas management plan agreed upon by the owners has
been established. The plan addresses the reduction of carbon dioxide emissions
generated by the Project and includes a public communications program to deal
with greenhouse gas emissions.
The owners are severally responsible for payment of site reclamation
and restoration at the end of the Project. To ensure that this obligation will
be met, if an owner does not have the minimum credit rating,
60
such owner must establish a reclamation trust fund. Commencing five years after
Project start-up, an owner who does not have the minimum credit rating will, for
so long as it does not have the minimum credit rating, pay into the reclamation
trust fund a monthly contributed amount calculated so that at the end of the
economic life of the mine and at all times thereafter, the amount in the
reclamation trust fund (including after tax income) will equal the present value
of such owner's Project reclamation obligations. The monthly contributed amount
will be adjusted to reflect the executive committee's view of projected
reclamation costs each year. Excess amounts accumulated in the reclamation trust
fund will be repaid to the owner and deficiencies will require additional
contributions. If, and for so long as, an owner that established a reclamation
trust fund achieves the minimum credit rating it may withdraw any funds placed
in trust by it.
Each owner will be responsible for all liabilities associated with
environmental, site reclamation and restoration laws in proportion to its
ownership interest on a several basis. An owner lacking a minimum credit rating
must maintain sudden and accidental pollution insurance at a minimum level
determined by an ordinary resolution of the executive committee. We do not
currently have the required minimum credit rating.
TECHNOLOGY. Any jointly developed technology related to a functional unit will
be owned by the owners of that functional unit in proportion to their ownership
interests together with certain licensing rights. Subject to certain exceptions,
all jointly developed technology may only be used in the Athabasca region in
relation to the Project.
SHARED FACILITIES AND SERVICES AGREEMENT
The upgrader operator has entered into agreements with an affiliate of
Shell that provide for the sharing of certain items including telephone systems,
maintenance and warehousing facilities, equipment, laboratory, cafeteria, roads
and effluent disposal systems. The shared services include items such as
emergency response, security, maintenance, warehouse and information systems.
The owners will generally be responsible for costs on a usage basis. Some
capital costs for the expansion of existing facilities will be incurred by the
owners.
In addition, Shell, on behalf of the owners, has entered into the major
shared facilities agreement which will govern the relationship between the
parties in respect of the major shared facilities to be located at the Scotford
site and which provides for the ownership, construction, expansion and operation
of certain facilities.
PRODUCTS DISPOSITION AGREEMENT
The owners are parties to the Athabasca Oil Sands Project Products
Disposition Agreement, or PDA, with an affiliate of Shell. The PDA provides that
the Shell affiliate will purchase a specified daily volume of VGO from the
upgrader owners other than Shell for a term of 25 years for use in the Scotford
refinery. VGO represents approximately one-third of the total upgrader output.
The price for VGO is a fixed discount to Edmonton Par for the first 15 years
with the discount being escalated by 1% in each of the remaining 10 years.
The price for VGO may vary depending on the specifications of the VGO.
To the extent the VGO has product characteristics below certain of the
specifications set out in the PDA for prescribed periods, the purchase price for
the VGO will be adjusted either upwards or downwards according to established
formulas. If the VGO has product characteristics significantly below certain of
the specifications set out in the PDA, the Shell affiliate is entitled to reject
such VGO without penalty or other monetary obligation. See "Risk Factors--Risk
Relating to Our Business--Shell may not fulfill its obligations to us under our
long-term sales contract; the contract requires us to meet product
specifications".
The actual daily volume of VGO purchased by the Shell affiliate could
be less than the specified amount due to full or partial shutdowns of the
refinery or curtailments in the refinery processing rate, or the inability to
transport the VGO from the upgrader to the refinery, provided that reductions
will not be allowed if they are attributable to any voluntary redesign of the
refinery or any lack of or loss of demand for any of the refined products
produced at the refinery. Similarly, the actual volume of VGO may be less than
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the specified volume in the event the VGO produced by the upgrader or supplied
by the owners from other sources is less than the specified amount due to full
or partial shutdowns of the upgrader or curtailments in the upgrader processing
rate. In certain circumstances the Shell affiliate will compensate us for any
inability to purchase VGO, other than by reason of a force majeure event, by
paying the difference between the price otherwise received and the price payable
under the PDA. Similarly, in certain circumstances we will be required to
compensate the Shell affiliate for our inability to deliver VGO, other than by
reason of a force majeure event, by paying the difference between the price
otherwise paid for VGO feedstock and the price payable under the PDA. The PDA
establishes the framework for determining the location of deliveries and the
remedies for failure by an owner to take delivery of its share of VGO from the
upgrader.
CORRIDOR PIPELINE AGREEMENTS
The owners have entered into various contracts with Corridor and its
affiliates whereby Corridor and its affiliates have agreed to construct and
operate the Corridor Pipeline. The initial term of these agreements is for 25
years and the owners will have the option to extend the agreement indefinitely.
Under these agreements, the owners have agreed to ship all of their bitumen,
diluent and other pipeline products from the Muskeg River mine through the
Corridor Pipeline. Additionally, the owners have agreed to ship all pipeline
products resulting from expansions through the Corridor Pipeline unless they can
obtain a lower price which Corridor is unwilling to match. Corridor and its
affiliates have obtained financing which is being used to pay the costs of
construction of the Corridor Pipeline. Beginning when the Corridor Pipeline is
commissioned (expected to be the fourth quarter of 2002, or up to three months
later if the other Project facilities are not ready for operations and the
owners exercise their option to extend the date on which payments commence), the
owners will begin making payments to Corridor and its affiliates in monthly
amounts which will be sufficient to provide Corridor and its affiliates with
funds that will repay the capital costs of constructing the pipeline over the
term of the contract (including capitalized interest) and the operating expenses
of Corridor and its affiliates in respect of the Corridor Pipeline and will
provide Corridor a return on investment. These payments are required regardless
of whether the Corridor Pipeline is operational and regardless of whether the
owners utilize any of its capacity. Additionally, the Corridor Pipeline
agreements provide for additional payments by an owner that does not have the
minimum credit rating.
The owners have certain rights to suspend construction of the Corridor
Pipeline because of delays in the overall Project. If such suspension continues
for more than one year, the owners will have the right to purchase the Corridor
Pipeline from Corridor and Corridor will have the right to require the owners to
purchase the pipeline from it, in each case, at a price based on Corridor's
unrecovered capital costs.
The Corridor Pipeline agreements also allow for additional shipping
capacity to be sold by Corridor to the owners as well as to third parties not
affiliated with the Project.
ATCO COGENERATION AGREEMENTS
The owners have entered into various contracts with ATCO whereby ATCO
will construct the Muskeg River cogeneration facility and operate both this
cogeneration facility and the upgrader cogeneration facility which will provide
electricity and steam to be utilized at the extraction plant and upgrader,
respectively. The electricity and steam will be produced using natural gas
supplied to ATCO by the owners. The joint venture will utilize a portion of the
electricity generated by the facilities and ATCO will sell the remaining
electricity to third parties. The initial term of these agreements is 25 years,
and the owners will have the option to extend the agreements. Beginning on the
later of the date on which the upgrader has met certain performance requirements
and the date on which the upgrader cogeneration facility has met or is deemed to
have met certain performance requirements, the owners will begin making payments
to ATCO relating to the upgrader cogeneration facility for the electrical and
steam capacity devoted to the upgrader. Beginning when the Muskeg River mine
cogeneration facility is commissioned (or up to three months later if the other
Project facilities are not ready for operations and the owners exercise their
option to extend the date on which payments commence), the owners will begin
making payments to ATCO in monthly amounts relating to the Muskeg River mine
cogeneration facility for the electrical and steam capacity devoted to the
Muskeg River mine. These monthly payments will provide ATCO with the funds
necessary to repay the capital costs
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of constructing the ATCO cogeneration facilities (including capitalized
interest) to the extent related to that portion of the facilities' dedicated to
the Project and will be sufficient to cover the operating expenses of ATCO
attributable to the portion of the facilities' electrical capacity devoted to
the Project and will provide ATCO with a return on investment. The payments are
required regardless of whether the owners utilize any of the capacity devoted to
the Project.
The owners will have the right to suspend construction of the ATCO
cogeneration facilities if other aspects of the Project are delayed. If
suspension of construction of the upgrader cogeneration facility causes
commencement of payments to ATCO respecting such facility (as above described)
to occur more than one year following the projected commencement date (currently
December 31, 2002), or if suspension of construction of the Muskeg River mine
lasts for more than one year (or if all suspensions of construction of the
Muskeg River mine last for an aggregate of more than 547 days), the owners will
have the right to purchase the applicable facilities from ATCO and ATCO will
have the right to require the owners to purchase the applicable facilities from
it.
MOBILE EQUIPMENT LEASE
Pursuant to leases made available under a master equipment lease
agreement and related agreements dated July 30, 2001, trucks, shovels and
certain other mobile equipment to be used for mining and overburden removal will
be leased by the owners. The master equipment lease agreement enables the owners
to lease the equipment from time to time as required for lease terms of between
two and seven years. The relevant agreements currently provide for a commitment
from the lessor to acquire and lease to the joint venture equipment having an
aggregate acquisition cost of up to $60 million. This commitment expires on July
28, 2002, but may be renewed and extended if requested by the joint venture and
agreed to on behalf of the lessor (provided that the joint venture is not
entitled to request a renewal and extension that would result in the lessor
acquiring and leasing to the joint venture equipment having an aggregate
acquisition cost in excess of $260 million).
The owners will have the right to purchase the leased equipment
(subject to certain restrictions if not all equipment then leased is being
purchased) at any time until the end of the applicable lease term. If the owners
do not elect to purchase the leased equipment by the end of its applicable lease
term, all equipment then under lease (regardless of the applicable lease terms)
must be returned to the lessor. In returning the equipment, the owners must meet
certain return conditions, including requirements that the equipment be returned
in a certain condition. If after electing to return the equipment, the owners
are not able to comply with the return conditions at the time of return, the
owners will be required to purchase all equipment then under lease at a purchase
price equal to the original acquisition cost of the equipment. If the equipment
is returned to the lessor and the lessor is unable to recover through
remarketing efforts the acquisition cost of the returned equipment, together
with remarketing costs, the owners will be obligated to pay to the lessor the
shortfall amount up to a maximum of 85% of the acquisition cost of the returned
equipment.
If the owners default on any of their obligations under the master
equipment lease agreement or related agreements, the lessor will have the right
to exercise various default rights. These default rights include the right to
take possession of the leased equipment, terminate any or all of the leases, the
right to require the owners to purchase the equipment at a purchase price equal
to the original acquisition cost of the equipment, the right to enforce
performance by the owners or recover liquidated damages or, at the lessor's
option, actual damages, and the right to pursue any other remedy available to
the lessor at law. The exercise by the lessor of any default right is generally
subject to the requirement that the lessor first give the owners notice of, and
an opportunity to cure, the default.
COMPETITION
The Canadian and international petroleum industry, including the
distribution and marketing of petroleum products, is highly competitive. The
Project will compete with other producers of synthetic crude oil blends and
other traditional producers of crude oil. We will compete with other oil
companies in the marketing and sale of oil to transporters, distributors,
refiners and end users, including industrial,
62
commercial and individual customers. Crude oil competes with other energy
sources for use in fuel applications and in related products for consumers.
The oil sands industry is highly competitive, especially in development
and application of new operating technologies and techniques as they relate to
the upgrading process. The Project's competitive position depends on the owners'
geological, geophysical and engineering expertise, financial resources, their
ability to construct the Project facilities and the efficiency of their mining,
extraction and upgrading processes.
There are two additional oil sands operators in Alberta, Syncrude and
Suncor, which represent our principal competition in the synthetic crude oil
market. The Project competes with these oil sands operators for qualified labor,
particularly during the construction stage of the Project's development. The
Project also competes with Suncor and Syncrude as well as with other oil and
mining companies in attempting to secure equipment necessary for the mining,
extraction, transportation and upgrading of bitumen.
Companies that have not previously invested in oil sands may choose to
acquire reserves or resources to establish firm supplies, as an investment or as
a new development opportunity. Such companies may compete against us.
OFFICE PROPERTIES
We have entered into a ten year lease for 15,948 square feet of
corporate office space in Calgary, Alberta to house our corporate executive
offices and administrative functions. We believe that this space will be
sufficient for our corporate activities and we do not believe that we will
encounter any difficulty in obtaining further space if needed in the future.
EMPLOYEES
We currently employ 28 people, of which 15 are seconded to the Project.
Of our employees, 18 are technical positions, four are considered management,
two are involved in business development and four are administrative personnel.
LITIGATION
Klemke Mining Corporation, a company which had provided certain earth
moving and other contracting services to the Project, has filed a statement of
claim in the Court of Queen's Bench of Alberta seeking damages of $60.2 million
against the owners and Albian in respect of a breach of an alleged contract. We,
the other owners and Albian have filed a statement of defence to the statement
of claim.
Other than as described above, we are not involved in, or aware of any
threatened, legal proceedings that, individually or in the aggregate could have
a material adverse effect on our business or financial condition.
63
MANAGEMENT
The following table sets forth the name, age as of the date hereof and
position held of our directors, officers and key employees.
NAME AGE POSITIONS HELD
- ---- --- --------------
Guy J. Turcotte.................... 50 President, Chief Executive Officer and Director
Geoffrey A. Cumming................ 50 Chairman and Director
John Frangos....................... 61 Executive Vice-President and Chief Operating Officer
David A. Dyck...................... 41 Vice-President, Finance and Chief Financial Officer
Gerry Luft......................... 53 Vice-President Marketing
Charles W. Berard.................. 48 Corporate Secretary
W. Michael Andersen................ 55 Human Resources
Allen P. Barber.................... 54 Vice-President, Commercial--Albian
John C. Hannah..................... 63 Vice-President, Operations--Albian
Stanley C. Jonsson................. 56 Senior Advisor to the Project administrator
Raymond L. Morley.................. 58 Business Development
Glen F. Andrews.................... 68 Director
Tullio Cedraschi................... 63 Director
Walter W. Grist.................... 62 Director
Brian F. MacNeill.................. 63 Director
Robert G. Puchniak................. 55 Director
Mac H. Van Wielingen............... 49 Director
DIRECTORS, OFFICERS AND KEY PERSONNEL
GUY J. TURCOTTE, PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR
Mr. Turcotte was appointed our Chairman and Chief Executive Officer in
June 1999. Effective January 1, 2002, Mr. Turcotte ceased being Chairman and
assumed the position of President, filling the vacancy created with the
retirement of Timothy Winterer effective December 31, 2001. Mr. Turcotte was
appointed Chairman and Chief Executive Officer of Fort Chicago Energy Partners,
L.P. in September 1997. Fort Chicago is a public limited partnership listed on
The Toronto Stock Exchange which holds a 26% interest in the $5.0 billion
Alliance Pipeline of which Mr. Turcotte is the current Chairman. Fort Chicago is
the single largest owner in the Alliance Pipeline. Mr. Turcotte also holds the
position of Chief Executive Officer of Stone Creek Properties Inc., a private
real estate corporation. Mr. Turcotte is a director of a number of public and
private corporations including Alliance Pipeline Limited, Fort Chicago and The
Westaim Corporation. Mr. Turcotte holds a Masters of Business Administration
from the University of Alberta, a Bachelor of Science (with honours) in Chemical
Engineering from Tulsa, Oklahoma and a Diploma in Gas Technology (with honours)
from the Northern Alberta Institute of Technology.
GEOFFREY A. CUMMING, CHAIRMAN AND DIRECTOR
Mr. Cumming was appointed our Chairman on February 25, 2002. Mr.
Cumming is Vice-Chairman and Chief Executive Officer of Gardiner Group Capital
Limited of Toronto, Ontario and Managing Director of Emerald Capital Limited in
Auckland, New Zealand. Gardiner Group Capital Limited is a private Canadian
investment corporation, owned by the estate of the late George R. Gardiner and
possesses a long-term investment orientation. Gardiner Group Capital Limited
holds an array of public and private investments with particular focus on the
Canadian petroleum industry and Australia and New Zealand. Mr. Cumming holds a
variety of public and private directorships in Canada and New Zealand. From 1989
to 1994, he was President and Chief Executive Officer of Gardiner Oil & Gas
Limited. Mr. Cumming worked previously as a principal with Peters & Co. Limited,
a Canadian energy investment dealer, and for the Global Energy Group of the
Royal Bank of Canada. Mr. Cumming is a past governor of the Canadian Association
of Petroleum Producers and a past chairman of the New Zealand branch of the
Young Presidents Organization.
64
Mr. Cumming holds an Honours B.A. in economics from the University of Calgary
and a M.Sc. (Economics) from the London School of Economics.
JOHN FRANGOS, EXECUTIVE VICE-PRESIDENT AND CHIEF OPERATING OFFICER
Mr. Frangos has been employed by us since October 1999 and initiated
our formation in May 1999. He was appointed Executive Vice-President and Chief
Operating Officer effective January 1, 2002. He has been employed in the mining
industry for 35 years. His career includes 5 years with Bechtel Corp. in their
mining and metals division and 27 years with BHP and predecessor corporations in
project management, strategic planning, mine operations management, corporate
management and business development. In his last 3 years at BHP, from 1996 to
1999, he held the position of Vice-President International Business Development
for the Minerals Business unit. In this capacity, he has managed a group of
executives involved in the identification, evaluation and capture of minerals
opportunities around the world, including the Project in which he managed BHP's
involvement, beginning in 1997. Mr. Frangos is a member of the Society of the
American Institute of Mining, Metallurgy and Petroleum Engineers. Mr. Frangos
holds a Diploma in Mechanical and Electrical Engineering and an Associate
Diploma in Mechanical Engineering from the Institute of Technology (now the
University of Technology) in Brisbane, Australia, and a Masters of Business
Administration from Golden Gate University in San Francisco.
DAVID A. DYCK, VICE-PRESIDENT, FINANCE AND CHIEF FINANCIAL OFFICER
Mr. Dyck was appointed our Vice-President, Finance and Chief Financial
Officer in April of 2000. Prior to joining the Western executive team, Mr. Dyck
was employed with Summit Resources Limited, a junior oil and gas exploration and
production company, where in October 1996, he was appointed Vice-President
Finance and Chief Financial Officer and in September 1998 he was promoted to
Senior Vice-President Finance & Administration and Chief Financial Officer.
Throughout his 16 years of experience in the oil and gas industry Mr. Dyck has
been responsible for all areas of accounting, finance, tax, budgeting, planning
and investor relations. Mr. Dyck received his Bachelor of Commerce Degree (with
Distinction) in 1985 from the University of Saskatchewan. In 1987, Mr. Dyck
obtained his Chartered Accountant designation while employed with Thorne Riddell
Chartered Accountants. Mr. Dyck is a member of the Alberta and Canadian
Institutes of Chartered Accountants, the Financial Executives Institute, the
Canadian Petroleum Tax Society and the Treasury Management Association of
Canada.
GERRY LUFT, VICE-PRESIDENT, MARKETING
Mr. Luft was appointed our Vice-President, Marketing effective January
1, 2002. Prior to assuming this position, Mr. Luft acted in a consultant role to
us since June 1999 and he was directly involved in negotiating certain of the
terms of the joint venture on our behalf. During the past seven years of his
career, Mr. Luft was President of ProServ Energy Inc. which consulted to
numerous oil and gas companies in western Canada and participated in direct
management and ownership of crude oil blending operations located in
Saskatchewan. Throughout his 25 years of experience in the oil and gas industry,
Mr. Luft has been responsible for all areas of crude oil, natural gas, natural
gas liquids, and sulphur marketing, pipeline management and development,
refinery supply optimization, and business development. Mr. Luft received his
Bachelor of Commerce Degree from the University of Calgary, and completed the
MBA executive program from the University of Western Ontario located in London,
Ontario.
CHARLES W. BERARD, CORPORATE SECRETARY
Mr. Berard is a partner in the Calgary law firm of Macleod Dixon LLP
and has been practicing in the corporate and resource areas for in excess of 20
years. Mr. Berard is currently a director of several public and private
corporations including Vermilion Resources Ltd., International Properties Group
Ltd., Geodyne Energy Inc., Torode Realty Inc., Kaiser Francis Oil Company of
Canada, Consolidated Properties Ltd., Ranchgate Oil and Gas Limited and
Connacher Oil and Gas Limited. Mr. Berard has also worked in various positions
in the mining industry in Canada including at BHP's former open pit operations
in Port Hardy, British Columbia and at the Navasivik Mine located on Baffin
Island, NWT. Mr. Berard is a member of the Canadian Institute of Mining and
Metallurgy. Mr. Berard holds a Bachelor of Engineering degree in Mining
65
Engineering from McGill University and holds a Bachelor of Law degree in civil
law and a Bachelor of Law degree in common law, both from the University of
Ottawa.
W. MICHAEL ANDERSEN, HUMAN RESOURCES
Mr. Andersen has been employed by us since October 1999. Prior to 1999,
he was employed in the San Francisco based minerals group of BHP and predecessor
companies as Vice-President, Human Resources. During his 25 year career with
BHP, Mr. Andersen was responsible for human resources management at business
operations in the countries of Australia, Belgium, Brazil, Canada, Chile,
Indonesia, Japan, Mali, the United Kingdom, the United States and Zimbabwe. Mr.
Andersen is a member of the National Mining Association Human Resources
Committee, and he serves on the Board of Directors for the Minerals Information
Institute, as well as the Romney Spring Meeting Group. Mr. Andersen holds a
Masters degree in Industrial and Personnel Relations from the University of
Oregon's Institute of Industrial and Labor Relations and a Bachelor of Science
degree in Psychology from the University of California, Berkeley.
ALLEN P. BARBER, VICE-PRESIDENT, COMMERCIAL--ALBIAN
Mr. Barber has been employed by us since October 1999 and has been
seconded to and is currently serving as Vice-President, Commercial of Albian. He
has been employed in the mining industry since 1969. Mr. Barber was employed by
BHP Minerals until September 1999, advancing through the positions of Chief
Mining Engineer, Mine Superintendent, Manager Environment, Health and Safety,
and Manager New Business Evaluation. Since July 1996 Mr. Barber has been focused
on developing the Project. He has managed BHP's team in Calgary since June 1997
and in conjunction with the Shell team has taken the Project from
pre-feasibility through feasibility and into development. A major portion of his
time has been spent negotiating the various agreements among the owners and
third parties. Mr. Barber holds a Bachelor of Science degree in mining
engineering from the University of Utah and is a registered professional
engineer in New Mexico.
JOHN C. HANNAH, VICE-PRESIDENT, OPERATIONS--ALBIAN
Mr. Hannah has been employed by us since August 2000 and has been
seconded to and is currently serving as Vice-President, Operations of Albian. He
has spent the last 28 years of his career in the minerals industry in project
engineering, mine and plant maintenance operations and productions, and mine and
executive management for BHP and its predecessor corporations. Since 1988, Mr.
Hannah has held positions as Vice-President, Operations at Minera Escondida, the
world's second largest copper mine; President of Minera Escondida; Group General
Manager and Senior Vice-President of BHP Australia Coal, the world's largest
producer of metallurgical coal; Group General Manager and Executive
Vice-President of BHP Coal; and President of BHP Iron Ore, among the world's
largest producers of blast furnace feed. Mr. Hannah received his Bachelor of
Civil Engineering from the University of British Columbia.
STANLEY C. JONSSON, SENIOR ADVISOR TO THE PROJECT ADMINISTRATOR
Mr. Jonsson has been employed by us since October 1999 and has been
seconded to and is currently serving as a Senior Advisor to the Project
administrator. Prior to 1999, Mr. Jonsson was employed by BHP and its
predecessors for 22 years. His last position with BHP was Senior Vice-President,
Development, BHP World Minerals Business Unit, with responsibility for strategic
planning, market analysis, resource evaluation, mine planning, new business
development, farm-in and farm-outs, environment, engineering and construction.
Mr. Jonsson is a Certified Professional Mechanical Engineer in the state of
California, a director of the National Coal Association and past President of
the American Chamber of Commerce in Chile. Mr. Jonsson holds a Masters of
Business Administration degree and a Bachelor of Science degree in Mechanical
Engineering from the University of California, Berkeley.
RAYMOND L. MORLEY, BUSINESS DEVELOPMENT
Mr. Morley has been employed by us since October 1999. Prior to 1999,
he was employed in the San Francisco mining group of BHP and predecessor
corporations for 20 years. During his career with BHP,
66
Mr. Morley has managed the Western US (including Alaska) exploration program,
the BHP Minerals strategic planning effort and international business
development. Mr. Morley generated the Project opportunity for BHP. Mr. Morley is
a director of Tiberon Minerals Ltd. and McVicar Minerals Ltd. Mr. Morley served
on the board of the Northwest Mining Association and on the Energy Minerals
committee of the American Association of Professional Geologists. He is a member
of the Society of Economic Geologists and a Chartered Engineer in The
Institution of Mining and Metallurgy. Mr. Morley holds a Masters of Business
Administration from Anderson School University of New Mexico, a Masters degree
in Geology from New Mexico Tech and a Bachelor of Science degree in Geology from
the University of Notre Dame.
GLEN F. ANDREWS, DIRECTOR
Mr. Andrews was President of BHP Copper North America from June 1998
until his retirement in June 1999. Prior thereto, he was Executive
Vice-President and Group General Manager of BHP Copper with responsibilities for
South America and Pacific regions and later North America. Mr. Andrews has been
employed in the resource industry since 1960. From 1992 to 1998, Mr. Andrews was
a Chairman of the Minera Escondida Owners Council. Mr. Andrews holds a Bachelor
of Science degree in Engineering from the University of Alberta.
TULLIO CEDRASCHI, DIRECTOR
Mr. Cedraschi is President and Chief Executive Officer of CN Investment
Division, a position he has held since 1977. The CN Investment Division is
responsible for investing the assets of the Canadian National Railways Pension
Trust Funds. The Canadian National Railways Pension Trust Funds' assets have a
market value of approximately $12 billion. Mr. Cedraschi is a director of Helix
Investments (Canada) Inc. and Freehold Resources Ltd. He is a Governor of McGill
University, Chairman of the McGill Investment Committee, and Governor and former
President of the National Theatre School of Canada. Mr. Cedraschi is a former
director of S G Warburg plc, Hollinger Inc. and Cambridge Shopping Centres Ltd.
Mr. Cedraschi holds an M.B.A. from McGill University.
WALTER W. GRIST, DIRECTOR
Mr. Grist is a Managing Director in the Corporate Finance Department of
the private banking firm Brown Brothers Harriman & Co., or Brown Brothers.
Currently, Mr. Grist is one of several managers of Brown Brothers' 1818 Funds.
The 1818 Funds are private investment funds of which Brown Brothers is the
general partner. Mr. Grist has been at Brown Brothers for over 30 years and his
responsibilities have included providing financial advisory services to foreign
and domestic clients as well as other merger and acquisition related services.
Mr. Grist also serves on the board of directors of VAALCO Energy Inc. and
Computerized Medical Systems Inc. and in the past has held directorships for
Western Gas Resources Inc., Steri-Oss Inc., WellCare Management Group Inc. and
Government Property Investors, Inc. Mr. Grist holds a Bachelor of Science in
Business Administration from New York University.
BRIAN F. MACNEILL, DIRECTOR
Mr. MacNeill was President and Chief Executive Officer of Enbridge
Inc., an energy, transportation, distribution and services corporation, from
1991 to 2001. Mr. MacNeill is currently Chairman of the Board of Directors of
Petro- Canada and Chairman of the Board of Governors of the University of
Calgary. Mr. MacNeill is a Director of Enbridge Inc., The Toronto-Dominion Bank,
Dofasco Inc., Sears Canada Inc., Telus Corporation and Veritas DGC Inc. Mr.
MacNeill is a member of the Alberta and Ontario Institutes of Chartered
Accountants. Mr. MacNeill holds a Bachelor of Commerce degree from Montana State
University and earned a Certified Public Accountant designation while with
Haskin and Sells, San Francisco, California and holds a Chartered Accountant
designation in Canada.
67
ROBERT G. PUCHNIAK, DIRECTOR
Mr. Puchniak was appointed Executive Vice-President and Chief Financial
Officer of James Richardson & Sons, Limited, an investment and holding
corporation, in March 2001 and prior thereto was Vice-President, Finance and
Investment with James Richardson & Sons, Limited since November 1996. Mr.
Puchniak has been President and Chief Executive Officer of Tundra Oil and Gas
Ltd., a private oil and gas corporation, since January 1989. Mr. Puchniak has
also held positions with Gendis Inc. and Richardson Securities Limited. Mr.
Puchniak is a director of a number of public and private corporations including
James Richardson International Limited, Tundra Oil and Gas Ltd., Opti Canada
Inc., Terraquest Energy Corporation, Wapella Pipelines Ltd. and Lombard Realty
Limited. Past involvements include Director, Moffat Communications Limited and
Richland Petroleum Corporation; Chairman, Manitoba Teachers' Retirement Fund;
Chairman, Council of Examiners, Institute of Chartered Financial Analysts; and
President, Winnipeg Society of Financial Analysts. Mr. Puchniak holds a Bachelor
of Commerce (Honours) degree from the University of Manitoba and was awarded the
University Gold Medal for his achievements. He earned a Chartered Financial
Analyst designation in 1975.
MAC H. VAN WIELINGEN, DIRECTOR
Mr. Van Wielingen is the Chairman of ARC Financial Group Ltd., an
investment management and merchant banking corporation focused on the energy
sector in Canada. Mr. Van Wielingen is also Vice Chairman and a director of
ARC Energy Trust and Chairman of ARC STRATEGIC Energy Fund. He is also Chairman
and director of Gauntlet Energy Corporation and a director of TESCO Corporation.
Mr. Van Wielingen is also a director of the United Way of Calgary and area. Mr.
Van Wielingen holds an Honours Business Degree from the University of Western
Ontario Business School and has studied post-graduate Economics at Harvard
University.
68
EXECUTIVE COMPENSATION AND REMUNERATION OF DIRECTORS
EXECUTIVE COMPENSATION
The following table discloses, for the periods indicated, total
compensation received by the following executive officers:
o our Chief Executive Officer; and
o executive officers (other than the Chief Executive Officer)
whose total salary and bonus exceeded $100,000 in respect of
fiscal 2001 (referred to as the Named Executive Officers).
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
----------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------- ------ -------
NAME AND PRINCIPAL POSITION YEAR(1) SALARY BONUS OTHER ANNUAL SECURITIES UNDER RESTRICTED SHARES LTIP ALL OTHER
- --------------------------- ------- ($) ($) COMPENSATION OPTIONS GRANTED OR RESTRICTED PAYOUTS COMPENSATION
--- --- ($) (#) SHARE UNITS ($) ($)
--- --- ($) --- ---
---
Guy J. Turcotte(3) ................. 2001 $100,000 Nil N/A(2) Nil Nil Nil Nil
Chairman and Chief Executive Officer 2000 $100,000 Nil N/A(2) Nil Nil Nil Nil
Timothy R. Winterer(3) ............. 2001 $400,000 Nil N/A(2) Nil Nil Nil Nil
President and Chief Operating ...... 2000 $396,028 Nil N/A(2) 10,000 Nil Nil Nil
Officer
David A. Dyck(4) ................... 2001 $173,250 Nil N/A(2) 15,000 Nil Nil Nil
Vice-President, Finance and Chief .. 2000 $113,438 Nil N/A(2) 60,000 Nil Nil Nil
Financial Officer
- ------------------------
(1) Western was only required to publicly disclose this information
commencing in 2000.
(2) The aggregate amount of such compensation is no greater than the lesser
of $50,000 and 10% of the total of the annual salary and bonus of the
Named Executive Officer for the financial year specified.
(3) Effective December 31, 2001, Mr. Winterer retired. Guy Turcotte assumed
the role of President and John Frangos was appointed Executive
Vice-President and Chief Operating Officer effective January 1, 2002.
(4) Mr. Dyck was appointed Vice-President, Finance and Chief Financial
Officer on April 24, 2000.
OPTIONS GRANTED FOR COMMON SHARES DURING THE YEAR ENDED DECEMBER 31, 2001
The following table sets forth the options granted to our Named
Executive Officers in fiscal 2001.
NAME SECURITIES % OF TOTAL EXERCISE OR BASE MARKET VALUE OF EXPIRATION DATE(2)
- ---- UNDER OPTIONS GRANTED PRICE ($/SECURITY) SECURITIES ------------------
OPTIONS TO EMPLOYEES IN ------------------ UNDERLYING OPTIONS
GRANTED(1) FINANCIAL YEAR ON THE DATE OF GRANT
(#) -------------- ($/SECURITY)
--- ------------
Guy J. Turcotte............ Nil 0% N/A N/A N/A
Timothy R. Winterer........ Nil 0% N/A N/A N/A
David A. Dyck.............. 15,000 7.4% $14.70 $14.20 June 12, 2007
Final Expiry Date:
June 12, 2010
- ------------------------
(1) Represents stock options to acquire Common Shares.
(2) Stock options generally vest over four years in equal annual amounts of
25% of the total outstanding stock option. The stock options generally
expire five years from the date of vesting.
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AGGREGATE OPTION EXERCISES DURING THE YEAR ENDED DECEMBER 31, 2001 AND OPTION
VALUES AS AT DECEMBER 31, 2001
The following table sets forth all options exercised during the fiscal
year ended December 31, 2001 and the fiscal year-end values for options granted
to our Named Executive Officers.
NAME SECURITIES AGGREGATE UNEXERCISED VALUE OF UNEXERCISED
- ---- ACQUIRED ON VALUE REALIZED OPTIONS/SARS AT FY-END IN-THE-MONEY OPTIONS/SARS AT
EXERCISE ($) EXERCISABLE/ FY-END EXERCISABLE/
(#) --- UNEXERCISABLE UNEXERCISABLE(1)(2)
--- (#) ($)
--- ---
Guy J. Turcotte........................... Nil Nil 0 / 0 0 / 0
Timothy R. Winterer....................... Nil Nil 80,000/80,000 847,200/847,200(3)
David A. Dyck............................. Nil Nil 15,000/60,000 158,850/549,900
- ------------------------
(1) The closing price of our Common Shares on The Toronto Stock Exchange on
December 31, 2001 was $19.09.
(2) Calculated by multiplying the number of Common Shares purchasable on
exercise of the options by the difference between the market price of
the Common Shares at December 31, 2001 and the exercise price of the
options.
(3) Subsequent to year end, Mr. Winterer exercised options to acquire
80,000 Common Shares and options to acquire 80,000 Common Shares were
cancelled.
COMPENSATION OF DIRECTORS
Our directors are entitled to participate in our stock option plan.
During the fiscal year ended December 31, 2001, 25,000 options were granted to
one of the independent, non-management directors. No other compensation was paid
to our directors who are not executive officers for their services as directors.
Effective January 1, 2002 our directors will receive compensation comprised of
an annual retainer of $8,000; $1,000 per meeting attended in person ($350 if
attended by telephone); and $600 per board committee meeting attended ($250 if
attended by telephone).
EMPLOYMENT CONTRACTS AND EXECUTIVE COMPENSATION
Our employees who will be providing services to Albian have entered
into employment agreements with us. The terms of the employment agreements will,
subject to extension or early termination, continue for six months after
extraction plant start-up for those employees involved in the construction of
the mine and extraction plant and continue until three years after extraction
plant start-up for those employees involved in the operations of the mine and
extraction plant.
Employees are entitled to base salary, reimbursement of reasonable
travel and business related expenses and certain benefits established by us from
time to time. The compensation committee of our Board of Directors will be
responsible for reviewing our compensation policies and guidelines with a view
to establishing base salaries, bonuses and incentive compensation programs
(including under the stock option plan) which are competitive within the
industry and reflect the individual competencies and experience of our senior
officers based on its review of market comparisons and advice from independent
external consultants.
STOCK OPTIONS
We established a stock option plan for the issuance of options to
purchase our Common Shares to our directors, officers and employees of us and
our subsidiaries and persons providing ongoing services to us and our
subsidiaries. The maximum number of stock options available under our stock
option plan shall not, without the approval of our shareholders, exceed
3,000,000 Common Shares. In any event, Common Shares reserved for issuance
pursuant to stock options granted under our stock option plan cannot exceed 6.3%
of our issued and outstanding Common Shares without shareholder approval.
At the time a stock option is granted, our Board of Directors
determines the number of our Common Shares purchasable under the option, the
date when the option is to become effective and, subject to the provisions of
our stock option plan, all other terms and conditions of the stock option. An
optionee is
70
entitled to hold more than one stock option at any time, however, no
one optionee can receive stock options entitling the optionee to purchase more
than 5% of our outstanding Common Shares (calculated on a non-diluted basis).
The exercise price of each stock option is determined in the discretion
of the compensation committee of our Board of Directors at the time of granting
stock options, provided that the exercise price will not be less than the
closing trading price of our Common Shares on the principal Canadian stock
exchange on which such shares are listed on the last trading day prior to the
date of grant or, if such Common Shares are not so listed, the price determined
by the compensation committee of our Board of Directors, acting in good faith.
All stock options are for a term and exercisable from time to time as determined
in the discretion of our Board of Directors at the time of grant, provided that
no stock option shall have a term exceeding ten years.
The following table sets forth the details of all options granted to
May 31, 2002:
MARKET VALUE
OF SECURITIES
NAME SECURITIES UNDER % OF TOTAL EXERCISE PRICE UNDERLYING OPTIONS INITIAL EXPIRATION FINAL EXPIRATION
- ---- OPTIONS OPTIONS ($/SHARE) ON THE DATE DATE(2) DATE(2)
GRANTED(#) GRANTED --------- OF GRANT ------- -------
---------- ------- ($/SECURITY)(1)
---------------
Directors(3).............. 137,500 10.0% 8.50 8.50 Dec. 22, 2005 Dec. 22, 2008
25,000 1.8% 14.20 14.20 June 12, 2007 June 12, 2010
Executive Officers(4)..... 150,000 11.0% 8.50 8.50 Dec. 22, 2005 Dec. 22, 2008
60,000 4.4% 8.50 8.50 April 24, 2006 April 24, 2009
15,000 1.1% 14.20 14.20 June 12, 2007 June 12, 2010
55,000 4.0% 15.70 15.70 Dec. 5, 2007 Dec. 5, 2010
355,000 25.9% 24.00(5) 24.00 Feb. 25, 2008 Feb. 25, 2011(6)
Employees(4).............. 429,500 31.4% 8.50 8.50 Dec. 22, 2005 Dec. 22, 2008
10,000 0.7% 12.00 12.00 Oct. 18, 2006 Oct. 18, 2009
2,000 0.1% 14.25 14.25 Feb. 1, 2007 Feb. 1, 2010
104,500 7.6% 14.20 14.20 June 12, 2007 June 12, 2010
25,000 1.8% 24.00(5) 24.00 Feb. 25, 2008 Feb. 25, 2011(6)
Total..................... 1,368,500 100%
- ------------------------
(1) The exercise price of the $8.50 stock options was determined by
reference to the issue price of $8.50 per share which was paid under a
private placement completed on December 17, 1999 and the exercise price
of the $12.00 stock options was determined by reference to the issue
price of $12.00 which was paid under a private placement and rights
offering completed on September 28, 2000.
(2) All stock options of current directors, officers and employees will
vest over four years in equal annual amounts of 25% of the total
outstanding stock options. The stock options will expire five years
from the date when they become vested resulting in the range of
expiration dates noted above. The terms of vesting and certain other
terms of certain stock options granted to a former executive officer
and a former employee have been amended and, effective January 1, 2001,
options to acquire 40,000 Common Shares and 5,000 Common Shares,
respectively, became fully vested and exercisable.
(3) Only includes the seven of our directors who are not also executive
officers.
(4) Including former executive officers and employees.
(5) The exercise price is subject to escalation as determined by the
Compensation Committee.
(6) The expiry date may be determined to be an earlier date in the
discretion of the Board of Directors.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Charles W. Berard, one of our officers, is a partner of Macleod Dixon
LLP. Macleod Dixon LLP is passing upon Canadian legal matters for us relating to
the offering of the exchange notes. Macleod Dixon LLP has provided legal
services to us from time to time, including in connection with the offering of
the exchange notes and the preparation of this prospectus. Mr. Berard currently
owns less than 1% of our outstanding securities.
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SECURITY OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT
The following table sets forth those persons who own of record or are
known by us to own beneficially, directly or indirectly, our Common Shares or
our Class D Shares as of May 31, 2002 in an amount equal to or greater than 10%
of our outstanding Common Shares or Class D Shares:
NAME AND MUNICIPALITY OF RESIDENCE SHARES HELD PERCENT OF SHARES HELD
- ---------------------------------- ----------- ----------------------
Gardiner Group Capital Limited.......... 800,000 3%
Toronto, Ontario Common Shares (1.7% of Common Shares
and 100% of Class D
Shares)
Our directors and officers, together with their respective spouses and
children and corporations controlled by them, as a group, own or control,
directly or indirectly, 6,754,043 Common Shares or approximately 14.2% of the
issued and outstanding Common Shares as of May 31, 2002.
DESCRIPTION OF CONTINGENT EQUITY
As of December 31, 2001 we had outstanding $48.9 million of call
obligations expiring March 31, 2003. 3,040,000 of these call obligations are
exercisable, at our option, into one Non-voting Convertible Equity Share at a
price of $5.00 per share.
An additional 2,589,641 call obligations which expire March 31, 2003
are exercisable, at our option, into units, consisting of one Non-voting
Convertible Equity Share and one warrant to purchase a Non-voting Convertible
Equity Share, at a price of $13.00 per unit. Each warrant entitles the holder to
acquire one Non-voting Convertible Equity Share for a period of four years from
the date that we exercise our call rights at an exercise price equal to the 10
day weighted average trading price of our Common Shares prior to the date of
exercise of the call obligations. Certain of the call obligations are secured by
guarantees of the holders and, at our option, the funding obligations underlying
certain other call obligations must be secured by the posting of acceptable
security by the holders. Prior to exercising our call rights under these
2,689,641 call obligations, we are required to undertake a rights offering to
our shareholders on terms and conditions no less favorable than those of the
call obligations.
72
INTER-CREDITOR AGREEMENTS AND COLLATERAL
INTER-CREDITOR AND COUNTERPARTY CONSENT AGREEMENTS
The rights of a holder of exchange notes in respect of the security it
will hold will be subject to various agreements which we have entered into with
Shell and Chevron, the owners and operators of third-party facilities, certain
of their lenders, and our lenders.
The inter-creditor agreements to which we and our creditors are a party
contain restrictions on the identity of our future secured creditors. Future
secured lenders (other than hedge providers) may share in the collateral covered
by the inter-creditor agreements only with the consent of Shell and Chevron,
which may not be unreasonably withheld. In addition, no future lenders may share
in the collateral covered by the inter-creditor agreements if the maturity of
the relevant indebtedness is later than the scheduled maturity of the notes
without the consent of Shell and Chevron.
PRINCIPAL INTER-CREDITOR AGREEMENT
The notes trustee, the collateral agent, and the administrative agent
under the senior credit facility have entered into the Western Oil Sands
inter-creditor agreement governing their respective rights in respect of the
collateral. The principal inter-creditor agreement also governs any future
secured lenders of our permitted debt whose security is held by the collateral
agent.
In the principal inter-creditor agreement, the lenders (acting through
their respective representatives selected for that purpose for each separate
credit facility) agree:
o that all security is held for the joint benefit of the lenders
under the principal inter-creditor agreement except as
otherwise provided in the principal inter-creditor agreement;
o to provide each other with information relating to amounts
owed by us to them for the purposes of the principal
inter-creditor agreement; and
o to provide each other with notice of events of default, notice
of acceleration and notice of commencement of legal
proceedings against us.
The Western Oil Sands inter-creditor agreement provides the framework
for our lenders to have different "priority levels" with respect to the
distribution of proceeds following a realization against our assets. These
"priority levels" on payment effectively determine each lender's priority
against the security we have granted to our lenders that is governed by the
principal inter-creditor agreement. The levels themselves will be dictated by
the terms of our various permitted indebtedness. See "Description of the
Exchange Notes--Limitation on Liens on Collateral". The liens of the noteholders
in our interest in the assets and related agreements utilized to mine, extract,
transport and upgrade our share of bitumen from oil sand deposits on the western
portion of Lease 13 will rank third in priority. Pursuant to the joint venture
agreement, we have granted to each other owner a first fixed and specific
mortgage, charge, lien and security interest in, and a first floating charge on,
all of our interests in the joint venture to secure our obligations under the
joint venture agreement. We have granted the lender under the senior credit
facility a second-priority interest in the same assets. See "Risk Factors--The
collateral securing the exchange notes is subject to several limitations and may
be released under certain circumstances".
In respect of security enforcement actions, any secured lender wishing
to enforce will give notice to the collateral agent and each other lender
representative, following which no action may be taken for 15 days (subject to
certain limited and customary exceptions) to allow other secured lenders to
elect to join enforcement. Such notice period may be waived by all lenders and,
in any event, shall only apply to the enforcement of the common security and
shall not limit the enforcement of other remedies by our lenders. Following such
15 day period, any enforcing secured lender wishing to take particular
enforcement action can direct the collateral agent to do so, provided that the
lenders at the first ranking priority level will be the ones who direct and
control the enforcement proceedings and, unless they are not taking any positive
enforcement action, no other lender can direct the enforcement. Unless waived by
the enforcing secured lenders, the enforcement must first take the form of an
application for a court-appointed receiver. However, if no such receiver is
appointed by the court, the top priority level lenders may use whatever other
remedies
73
are open to them. The proceeds of any such enforcement will be applied first to
enforcement expenses, and then in accordance with the priority levels of the
obligations owed by us, provided that no obligations with respect to a lower
priority level will be paid until all of the obligations of the enforcing
secured lenders of each higher priority level has been paid in full.
Notwithstanding the shared security and enforcement mechanisms, the
lenders agree that the mirror notes (exclusive of the security therefor) and the
construction account are security held solely for the benefit of the
noteholders, and all enforcement against this security may only be directed by
the noteholders.
The lenders further agree that any decisions or determinations required
to be made with respect to the common security by the secured lenders, or by the
enforcing secured lenders, unless otherwise provided for in the principal
inter-creditor agreement, will be made on the basis of the majority of the
commitments and obligations outstanding prior to default and, after default, by
the majority of obligations outstanding.
JV OWNERS INTER-CREDITOR AGREEMENT
The collateral agent, on behalf of the holders of notes and the lender
of the senior credit facility, has entered into an inter-creditor agreement with
Shell, Chevron and an affiliate of Shell, to govern the rights and obligations
of the parties as against Shell, Chevron and an affiliate of Shell, each of whom
hold prior security over the Project assets granted by us under the joint
venture agreement. The joint venture agreement requires our lenders to enter
into an agreement of this nature as a condition to allowing us to mortgage our
joint venture interest. In this inter-creditor agreement, the parties:
o consent to each others' security and agree not to contest it;
o agree to provide each other with notices of default or
termination under their respective documents;
o confirm that the lenders' security is subordinated to the
security held by Shell, Chevron, an affiliate of Shell and any
other owner under the joint venture agreement and major shared
facilities agreement;
o agree that in insolvency proceedings, monies collected by the
lenders at any time prior to Shell, Chevron and an affiliate
of Shell being fully paid must be turned over to them.
However, if Shell, Chevron and an affiliate of Shell receive
monies on account of liability claims that they have against
us for their future losses or damages as a result of our
non-performance, they must turn those amounts over to the
collateral agent until the lenders are fully repaid;
o agree that the lenders can retain monies we pay to them until:
-- insolvency proceedings commence against us;
-- Shell, Chevron and an affiliate of Shell begin
enforcing their secured rights or set-off rights
against us; or
-- Shell, Chevron and an affiliate of Shell give a
notice of our default under the joint venture
agreement to the collateral agent; and
o confirm that any enforcement of security and entry into
possession by the lenders will be subject to the joint venture
agreement and the major shared facilities agreement, as will
any sale or realization by the lenders. In particular, the
lenders agree that any sale or realization is subject to the
disposition restrictions in the joint venture agreement
including that the acquiror must have:
-- a minimum senior unsecured debt rating of A- by S&P,
or A3 by Moody's or A (low) by DBRS and if such debt
is rated by two or more of such agencies, at least
two of such ratings meet such standard;
-- a minimum indicative rating of A- by S&P, or A3 by
Moody's or A (low) by DBRS; or
-- if its obligations pursuant to the agreement will be
guaranteed, the guarantor has an indicative rating
from one of the aforementioned rating agencies which
is equal to or higher than the ratings set forth
above.
74
However, if such disposition results from any enforcement of security
within a period of five years from the date of the issuance of the initial
notes, the ratings are reduced to:
-- a minimum senior unsecured debt rating of BBB- by
S&P, or Baa3 by Moody's or BBB (low) by DBRS and if
such debt is rated by two or more of such agencies,
at least two of such ratings meet such standards;
-- a minimum indicative rating of BBB- by S&P, or Baa3
by Moody's or BBB (low) by DBRS; or
-- if its obligations pursuant to the agreement will be
guaranteed, the guarantor has an indicative rating
from one of the aforementioned rating agencies which
is equal to or higher than the ratings set forth
above;
o agree to a 30 day standstill period by Shell, Chevron and an
affiliate of Shell following our default under the joint
venture agreement before they are entitled to begin exercising
remedies against us (other than their secured rights or
set-off rights against our share of monies due to us), and
provide for lender cure rights in certain circumstances, and
the postponement of their termination rights in respect of the
Project agreements in certain circumstances;
o provide for a further 120 day period beyond the 30 day cure
period before Shell, Chevron and an affiliate of Shell can
finalize foreclosure proceedings against us; and
o agree on certain mechanics for the lenders to realize or
foreclose on our interest in the Project assets, and to
recognize and deal with the first rights of refusal and option
rights held by the owners under the joint venture agreement in
respect of realization by the lenders.
Shell, Chevron and the affiliate of Shell have no obligation to extend
the application of this inter-creditor agreement to other credit agreements
(other than permitted hedging agreements), although in certain circumstances
they have agreed not to unreasonably withhold their consent to our request that
they do so if the lenders fall into certain prescribed categories of financial
institutions. Further, unless Chevron and the affiliate of Shell agree, this
inter-creditor agreement cannot apply to any credit agreement with a maturity
date ending after the scheduled maturity date of the notes. In any case where
this inter-creditor agreement does not apply, the form of inter-creditor
agreement that Shell, Chevron and the affiliate of Shell will be required to
accept under the joint venture agreement will not be as favorable to those new
lenders.
ATCO AND CORRIDOR
The collateral agent has entered into counterparty consent and
acknowledgement agreements with ATCO Pipelines, ATCO Power and Corridor, as the
counterparties, in respect of the major project agreements governing utilities,
cogeneration, the ATCO Pipeline and the Corridor Pipeline, all on substantially
similar terms. In those agreements:
o the counterparties consent to us granting security over our
interest in the relevant agreements;
o all parties agree to provide each other with notices of
default or termination under their respective documents;
o the counterparties agree to allow a 30 day cure period for our
default under the relevant agreements before exercising
remedies against us; and
o the parties provide for the conditions on which the lenders
can realize and sell our rights under the relevant agreements.
In particular, the lenders agree that any sale or realization
is subject to the disposition restrictions in the joint
venture agreement including that the acquiror must have:
-- a minimum senior unsecured debt rating of A- by S&P,
or A3 by Moody's or A (low) by DBRS and if such debt
is rated by two or more of such agencies, at least
two of such ratings meet such standards, or
-- a minimum indicative rating of A- by S&P, or A3 by
Moody's or A (low) by DBRS; or
75
-- if its obligations pursuant to the agreement will be
guaranteed, the guarantor has an indicative rating
from one of the aforementioned rating agencies which
is equal to or higher than the ratings set forth
above.
However, if such disposition results from any enforcement of security
within a period of five years from the date of the issuance of the initial
notes, the ratings are reduced to:
-- a minimum senior unsecured debt rating of BBB- by
S&P, or Baa3 by Moody's or BBB (low) by DBRS and if
such debt is rated by two or more of such agencies,
at least two of such ratings meet such standards;
-- a minimum indicative rating of BBB- by S&P, or Baa3
by Moody's or BBB (low) by DBRS; or
-- if its obligations pursuant to the agreement will be
guaranteed, the guarantor has an indicative rating
from one of the aforementioned rating agencies which
is equal to or higher than the ratings set forth
above.
HYDROGEN MANUFACTURING UNIT
The HMU is leased to us and to the other owners under a capital lease
from SHMUL. SHMUL acquired the HMU with proceeds of a loan from its lenders,
which have first security in SHMUL's interest as lessor under that lease, and
first security in our approximately 18% interest in the share capital of SHMUL.
The collateral agent will hold our lessee interest under that capital lease as
security for our lenders. SHMUL's lenders have entered into an inter-creditor
agreement with the collateral agent to govern their rights and the rights of our
lenders, primarily in respect of that capital lease and our equity in SHMUL. In
that agreement the parties:
o consent to the security granted by SHMUL and us in our
respective interests in the HMU and the capital lease and
agree not to contest it;
o agree to provide each other with notices of default or
termination under their respective documents;
o provide for a 30 business day cure period before the lease can
be terminated or remedies exercised by SHMUL and its lenders;
o provide for the conditions on which the lenders can realize
and sell our rights under the lease. In particular, the
lenders agree that any sale or realization is subject to the
disposition restrictions in the joint venture agreement
including that the acquiror must have:
-- a minimum senior unsecured debt rating of A- by S&P,
or A3 by Moody's or A (low) by DBRS and if such debt
is rated by two or more of such agencies, at least
two of such ratings meet such standards;
-- a minimum indicative rating of A- by S&P, or A3 by
Moody's or A (low) by DBRS; or
-- if its obligations pursuant to the agreement will be
guaranteed, the guarantor has an indicative rating
from one of the aforementioned rating agencies which
is equal to or higher than the ratings set forth
above.
However, if such disposition results from any enforcement of security
within a period of five years from the date of the issuance of the initial
notes, the ratings are reduced to:
-- a minimum senior unsecured debt rating of BBB- by
S&P, or Baa3 by Moody's or BBB (low) by DBRS and if
such debt is rated by two or more of such agencies,
at least two of such ratings meet such standards;
-- a minimum indicative rating of BBB- by S&P, or Baa3
by Moody's or BBB (low) by DBRS; or
-- if its obligations pursuant to the agreement will be
guaranteed, the guarantor has an indicative rating
from one of the aforementioned rating agencies which
is equal to or higher than the ratings set forth
above; and
76
o provide for the priority of the SHMUL lenders' security
interest in the SHMUL shares and the subordination of the
security interest held by our lenders in the shares; and
o provide for the conditions on which our lenders can perform
our obligations in order to preserve our rights under the
capital lease.
MOBILE EQUIPMENT LEASE
Pursuant to a master equipment lease agreement, trucks, shovels and
other mobile mining equipment will be leased to us and the other owners. The
security trustee will hold our lessee interests under leases as security for our
lenders. The lessor of this equipment has entered into an inter-creditor
agreement with the collateral agent to govern their rights and the rights of our
lenders, primarily in respect of the leases, and our interest in the equipment.
In that agreement the parties:
o consent to the security granted by us in our interests in the
leases and agree not to contest it;
o agree to provide each other with notices of default or
termination under their respective documents;
o provide for a 30 business day cure period before the leases
can be terminated or remedies exercised by the lessor;
o provide for the conditions on which the lenders can realize
and sell our rights under the leases. In particular, the
lenders agree that any sale or realization is subject to the
disposition restrictions in the joint venture agreement and
the inter-creditor agreement with the other joint venture
owners including that the acquiror must have:
-- a minimum senior unsecured debt rating of AA- by S&P,
or AA3 by Moody's or AA (low) by DBRS and if such
debt is rated by two or more of such agencies, at
least two of such ratings meet such standards;
-- a minimum indicative rating of AA- by S&P, or AA3 by
Moody's or AA (low) by DBRS; or
-- if its obligations pursuant to the agreement will be
guaranteed, the guarantor has an indicative rating
from one of the aforementioned rating agencies which
is equal to or higher than the ratings set forth
above.
However, if such disposition results from any enforcement of security
within a period of five years from the date of the issuance of the initial
notes, the ratings are reduced to:
-- a minimum senior unsecured debt rating of BBB- by
S&P, or Baa3 by Moody's or BBB (low) by DBRS and if
such debt is rated by two or more of such agencies,
at least two of such ratings meet such standards;
-- a minimum indicative rating of BBB- by S&P, or Baa3
by Moody's or BBB (low) by DBRS; or
-- if its obligations pursuant to the agreement will be
guaranteed, the guarantor has an indicative rating
from one of the aforementioned rating agencies which
is equal to or higher than the ratings set forth
above.
Thereafter, the joint venture agreement minimum ratings will again
become applicable. The master equipment lease agreement provides that, if the
collective debt ratings of the owners would not meet certain criteria as a
result of any assignment of an owner's lessee interest, the owners must purchase
all the leased equipment at its original acquisition cost. This requirement
would apply to any assignment by our lenders through realization proceedings;
and
o provide for the conditions on which our lenders can perform
our obligations in order to preserve our rights under the
leases.
LAND OWNERS
Shell is the freehold owner of certain lands that have been leased to
the owners to be used as the site for the upgrader. The leases require that an
agreement among the owners, the lessor and our lenders be
77
entered into to govern the respective rights of Shell, as lessor, and our
lenders. The inter-creditor agreement to be entered into by the collateral agent
with the joint venture owners includes provisions pursuant to which Shell and
our lenders agree as follows:
o Shell consents to the lenders' security and agrees not to
contest it;
o the parties agree to provide each other with notices of
default or termination under their respective documents;
o the lenders confirm that their security is subordinated to the
lessor interest of Shell;
o the parties confirm that any enforcement of security and entry
into possession by the lenders will be subject to the joint
venture agreement and the major shared facilities agreement,
as will any sale or realization by the lenders. In particular,
the lenders agree that any sale or realization is subject to
the disposition restrictions in the joint venture agreement
including that the acquiror must have:
-- a minimum senior unsecured debt rating of A- by S&P,
or A3 by Moody's or A (low) by DBRS and if such debt
is rated by two or more of such agencies, at least
two of such ratings meet such standards;
-- a minimum indicative rating of A- by S&P, or A3 by
Moody's or A (low) by DBRS; or
-- if its obligations pursuant to the agreement will be
guaranteed, the guarantor has an indicative rating
from one of the aforementioned rating agencies which
is equal to or higher than the ratings set forth
above.
However, if such disposition results from any enforcement of scurity
within a period of five years from the date of the issuance of the initial
notes, the ratings are reduced to:
-- a minimum senior unsecured debt rating of BBB- by
S&P, or Baa3 by Moody's or BBB (low) by DBRS and if
such debt is rated by two or more of such agencies,
at least two of such ratings meet such standards; or
-- a minimum indicative rating of BBB- by S&P, or Baa3
by Moody's or BBB (low) by DBRS; or
-- if its obligations pursuant to the agreement will be
guaranteed, the guarantor has an indicative rating
from one of the aforementioned rating agencies which
is equal to or higher than the ratings set forth
above.
o Shell agrees to a 30 day standstill period following our, or
any other owner's default, under the lease before it is
entitled to begin exercising remedies against us, and to
provide the lenders with lender cure rights in certain
circumstances.
ATCO'S AND CORRIDOR'S LENDERS
ATCO and Corridor have entered into credit facilities with their
lenders to finance construction of the Corridor Pipeline, the upgrader
cogeneration facility and various utilities. Their lenders require interlender
acknowledgement and consent agreements with our lenders to deal with the major
agreements that the owners are party to, and which ATCO and Corridor have
assigned as security to their lenders. In those agreements:
o our lenders consent to the security ATCO and Corridor provided
to their respective lenders;
o both lenders agree not to take realization steps without
notifying the other lenders; and
o both lenders agree not to enforce their security in a manner
inconsistent with the inter-creditor acknowledgement and
consent agreements referred to above.
In addition to the foregoing, we and the other owners are parties to a
lender and shipper acknowledgement agreement with Corridor's lenders in respect
of the firm service agreement governing the Corridor Pipeline, an ATCO consent
and acknowledgement agreement with ATCO's lenders relating to the upgrader
cogeneration project agreements and an ATCO consent and acknowledgement
agreement with
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ATCO's lenders relating to the Muskeg River cogeneration project agreement. In
those acknowledgement agreements:
o we consent to Corridor and ATCO's security to their lenders;
o we agree to give notice of defaults to their lenders and to
consider cure actions they might propose in that regard;
o we agree not to contest their security and to accept certain
limitations on exercising our remedies in a manner adverse to
their lenders, including provision of notices and cure
periods;
o we preserve our rights to acquire the various project
facilities as may be provided in the underlying agreements,
and in certain circumstances to assume their debt as partial
or full payment therefor, or to discharge that debt; and
o we deal with their lenders' rights to realize on the assets
subject to the owners' purchase rights, and their lenders'
rights to resume realization if the owners do not exercise
those rights.
DESCRIPTION OF COLLATERAL
Pursuant to the security documents, we and 852006 Alberta Ltd., Western
Oil Sands Finance Inc. and Western Oil Sands L.P., our restricted subsidiaries,
have granted to the collateral agent, for the benefit of the notes trustee and
the holders of the notes, security interests in certain of their real and
personal property. Such security interests will not extend to any property and
assets which do not form part of the Project that are acquired by us or any of
our restricted subsidiaries after the issue date of the initial notes.
Our obligations under the exchange notes will be secured by liens on
our direct and indirect ownership interests in all assets and related agreements
utilized or to be utilized to mine, extract, transport and upgrade our share of
bitumen from oil sands deposits on the western portion of Lease 13, including:
o the mine on the western portion of Lease 13;
o the extraction plant;
o the upgrader;
o our contractual rights under all related agreements,
including:
-- the ATCO cogeneration facilities agreements;
-- the Corridor Pipeline agreements;
-- the mobile equipment lease;
-- the shared facilities and services agreement;
-- the products disposition agreement;
-- the shared facilities and services agreement; and
-- the joint venture agreement;
in each case as contemplated in the joint venture agreement as in effect on the
issue date of the initial notes and to the extent applicable to the western
portion of Lease 13. In addition, the exchange notes are secured by liens on:
o all amounts on deposit in the construction account;
o the mirror notes; and
o all of the outstanding shares of each of our subsidiaries
which is a corporation and all of the outstanding partnership
units of Western Oil Sands L.P.
Except for the payment obligations under the mirror notes, we have
pledged our entire interest in the collateral, including the security for the
mirror notes and our partnership interest in Western Oil Sands L.P.,
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to the collateral agent pursuant to a debenture, a general security agreement, a
share pledge agreement and a unit pledge agreement. The mirror notes represent
the intercompany loan to be made by us to Western Oil Sands Finance Inc., and
the intercompany loan to be made by Western Oil Sands Finance Inc. to Western
Oil Sands L.P., which loans were funded by the gross proceeds of the offering of
the initial notes. The mirror notes were assigned to the notes trustee pursuant
to an assignment of notes agreement. As security for its mirror note, Western
Oil Sands L.P. pledged its entire interest in the collateral, including its
ownership interest in the joint venture, to the collateral agent pursuant to a
debenture and a general security agreement. As security for its mirror note,
Western Oil Sands Finance Inc. pledged its entire interest in the collateral,
including its interest in the mirror note and related security from Western Oil
Sands L.P., to the collateral agent pursuant to a debenture, a general security
agreement and an assignment agreement. As security for the mirror note issued by
Western Oil Sands Finance Inc., 852006 Alberta Ltd. pledged its entire interest
in the collateral, including its partnership interest in Western Oil Sands L.P.,
pursuant to a guarantee and a unit pledge agreement.
In general, the liens on the collateral granted to the collateral
agent, for its benefit and the benefit of the notes trustee and the holders of
the notes, are subject to the prior liens of the joint venture owners, the prior
claims of the senior credit facility and certain other liens and claims. See
"Description of the Exchange Notes--Certain Covenants--Limitations on Liens on
Collateral" and "Risk Factors--The collateral securing the exchange notes is
subject to several limitations and may be released under certain circumstances".
If an event of default occurs under the notes indenture, the notes
trustee, on behalf of the holders of the notes, in addition to any rights or
remedies available to it under the notes indenture, may, subject to the
provisions of the inter-creditor agreements, cause the collateral agent to take
such action as the notes trustee deems advisable to protect and enforce its
rights in the collateral, including the institution of receivership or
foreclosure proceedings. The proceeds received by the collateral agent, after
payment of the expenses of such proceedings and other amounts then payable to
the collateral agent and any prior lienholder (whether pursuant to the
inter-creditor agreements or otherwise), to which the notes trustee and the
noteholders are entitled from any receivership or foreclosure proceedings in
respect of any collateral by which the notes are secured will be applied by the
notes trustee under the notes indenture, first, to pay the expenses and other
amounts payable to the notes trustee and, thereafter, to pay the principal of,
premium, if any, and interest on the notes.
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DESCRIPTION OF OTHER INDEBTEDNESS
SENIOR CREDIT FACILITY
We have entered into a senior credit facility which is comprised of two
revolving credit facilities in an aggregate amount of $100 million which
include:
o $75 million available to finance interest payable on the notes
and to finance interest, fees and other costs payable to the
bank syndicate with the surplus to be available to fund our
Project construction costs (the "debt service/completion
facility"); and
o $25 million available to issue letters of credit to backstop
our overdraft arrangements under the joint venture agreement
and our land reclamation requirements (the "LC facility").
The debt service/completion facility will be available on a revolving
basis until six months after completion of the Project. Thereafter, this
facility will become non-revolving and any unused portion of this facility will
be cancelled. This facility will be required to be repaid in full on April 23,
2005.
The LC facility is available on a 364-day revolving basis subject to
annual extensions with the consent of the lender, failing which this facility
will become non-revolving at the end of the then current 364-day period, any
undrawn availability will be cancelled and any drawn amount will be required to
be repaid within one year thereafter.
Borrowings under these credit facilities are expected to bear interest
at the following rates per annum:
o Canadian or US dollar prime rate advances at the agent's prime
rate plus a margin of 1.00%;
o US dollar LIBOR advances at LIBOR plus a margin of 2.00%;
o Canadian dollar bankers' acceptance at the applicable discount
rate referred to on the "CDOR Page" of Reuters Monitor Money
Rates plus a margin of 2.00%; and
o Canadian or US dollar letters of credit at an issuance fee of
2.00% for financial letters of credit and 1.00% for
non-financial letters of credit.
In addition, a standby fee applies to the undrawn availability during
the applicable revolving period at a rate per annum of 0.75%.
The documentation governing the facilities includes covenants which
restrict our ability to:
o incur indebtedness;
o change our business;
o incur liens;
o effect fundamental changes such as liquidations, dissolutions
and wind-ups of a subsidiary (other than Western Oil Sands
L.P.) unless the successor is us or a wholly-owned subsidiary
which has provided security;
o effect sales of assets or our ownership interest in the
Project;
o make investments, loans, guarantees and other types of
financial assistance;
o repurchase equity or pay cash dividends until after
completion;
o enter into transactions with affiliates;
o enter into hedging transactions; and
o make capital expenditures.
Events of default under these credit facilities include non-payment of
principal, interest or fees, breach of covenants, inaccuracy of representations
and warranties, cessation of business, certain enforcement, bankruptcy and
insolvency events, material judgments or environmental claims, a change of
control, defaults under certain other material indebtedness and agreements,
termination of certain material agreements,
81
material breach by other Project owners of their obligations and failure to
achieve completion of the Project by December 31, 2003 (subject to an extension
of up to three months if insurance or equity proceeds will place us in the same
financial position as if completion occurred by December 31, 2003). Upon the
occurrence of an event of default, the agent may terminate the facilities and
declare all outstanding amounts to be due and payable.
The conditions precedent to draw under these credit facilities include
that we have sufficient funding prior to each drawdown or the shortfall is less
than $40 million and has existed for less than 90 days.
Our obligations under these credit facilities are secured by the same
security arrangements which secure the notes, but the scope of such security
will encompass all of our and our subsidiaries' present and after-acquired
property other than the mirror notes. Except with respect to the construction
account, the claims of the lender under these credit facilities will rank ahead
of the claims of noteholders. See "Inter-Creditor Agreements and Collateral".
SUBORDINATED COST OVERRUN FACILITY
We are party to a subordinated cost overrun facility in an aggregate
amount of $88 million dated October 25, 2001. The subordinated cost overrun
facility is a non-revolving note purchase facility, the purpose of which is to
finance our obligations under the joint venture and to service interest and
other obligations payable under this facility.
Under the terms of the subordinated cost overrun facility we have
provided standard representations and warranties and have also made certain
negative covenants, including providing limitations on incurring additional
debt.
We may draw under this facility every 14 days until the maturity date
which is October 25, 2003. Prior to our first drawdown we must satisfy standard
conditions precedent. Prior to any further drawdowns, we must meet certain other
conditions such as not being in default, all fees having been paid and no notice
of conversion to equity shall have been given.
At our option, borrowings under the cost overrun facility will:
o in the case of bankers' acceptance notes, be discounted by the
annual yield applicable to Canadian Dollars bankers'
acceptances having identical issue and comparable maturity
dates and will bear interest at the lender's bankers'
acceptance rate plus 1.75% per annum; or
o in the case of prime rate notes, accrue interest at the prime
rate established by Bank of Nova Scotia for Canadian Dollar
demand loans in Canada plus 0.75% per annum.
Provided no major event of insolvency or cross acceleration or
abandonment has occurred, we can force a conversion of the facility into equity
at maturity by giving the lender a notice 30 trading days prior to the maturity
date of the facility that we wish to convert all amounts owing under the
facility into freely tradeable common shares at a price equal to 95% of the then
current market price. Further, at any time when an event of default under the
facility has occurred and is continuing, the lender may notify us that it will
convert all or any part in excess of $10 million of the outstanding obligations
under the facility into our common shares on the same basis described above.
Upon any conversion of the facility to equity, we have an obligation to file a
prospectus to qualify any shares issued by us on an equity conversion.
We may, at any time, upon giving notice, cancel or permanently reduce
any unutilized portion of the facility. In addition, we may repay, without
penalty, the whole or any part of the principal amount owing under the facility.
The facility is to be repaid on October 25, 2003.
We are obligated to make mandatory repayments and/or cancellations of
the facility from the net proceeds of long term debt (other than replacement
debt and other permitted debt) to the extent permitted by the notes indenture
and our senior credit agreement or the issuance of new equity (other than our
existing equity call obligations, existing or future stock options, existing
purchase warrants and any other equity proceeds to the extent that such other
proceeds do not exceed $25 million plus an additional amount to cover certain
cost overruns in the Project). The lender has agreed that the proceeds of the
initial notes
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and the senior credit facility qualify as permitted debt and may be used for
their intended purpose (without reduction or cancellation of the facility).
Events of default under the facility include non-payment of any amounts
due under the facility; breach of covenants; inaccuracy of representations and
warranties, cessation of business, certain bankruptcy and insolvency events, a
change of control, default under the notes indenture or our senior credit
facility, default as an owner or under any joint venture contracts that have a
material adverse effect on us, security realization or seizure of any of our
assets with a value of $50 million or greater, judgement against us in an amount
greater than $50 million and abandonment of the Project.
This facility is unsecured and subordinated to the notes and our senior
credit facility but can be repaid subject to the applicable limitations in the
notes indenture and the senior credit agreement.
HMU CAPITAL LEASE
The owner of the HMU is SHMUL. The cost of the HMU is being financed
through a secured bank loan in the principal amount of up to $290 million made
available by a syndicate of banks to SHMUL. Upon the completion of construction
of the HMU, SHMUL has agreed to lease the HMU to the owners for a term of 25
years with an option to extend for an additional 15 years. Pursuant to this
capital lease, rent is a flow through of the lessor's financing costs that
reflect accrued interest plus, in respect of our ownership interest, an
amortization of 2.5% per year. Prior to the completion of the HMU, accrued
interest on the financing will be capitalized and rent will not become payable
until the earlier of completion of the HMU and June 30, 2003.
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THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER
We are offering to exchange our exchange notes for a like aggregate
principal amount of our initial notes.
The exchange notes that we propose to issue in this exchange offer will
be substantially identical to our initial notes except that, unlike our initial
notes, the exchange notes will have no transfer restrictions or registration
rights. You should read the description of the exchange notes in the section in
this prospectus entitled "Description of the Exchange Notes."
We reserve the right in our sole discretion to purchase or make offers
for any initial notes that remain outstanding following the expiration or
termination of this exchange offer and, to the extent permitted by applicable
law, to purchase initial notes in the open market or privately negotiated
transactions, one or more additional tender or exchange offers or otherwise. The
terms and prices of these purchases or offers could differ significantly from
the terms of this exchange offer. In addition, nothing in this exchange offer
will prevent us from exercising our right to discharge our obligations on the
initial notes by depositing certain securities with the trustee and otherwise.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS; TERMINATION
This exchange offer will expire at 5:00 p.m., New York City time, on
August 9, 2002, unless we extend it in our reasonable discretion. The expiration
date of this exchange offer will be at least 20 business days after the
commencement of the exchange offer in accordance with Rule 14e-1(a) under the
Securities Exchange Act of 1934, or the Exchange Act.
We expressly reserve the right to delay acceptance of any initial
notes, extend or terminate this exchange offer and not accept any initial notes
that we have not previously accepted if any of the conditions described below
under "--Conditions to the Exchange Offer" have not been satisfied or waived by
us. We will notify the exchange agent of any extension by oral notice promptly
confirmed in writing or by written notice. We will also notify the holders of
the initial notes by mailing an announcement or by a press release or other
public announcement communicated before 9:00 a.m., New York City time, on the
next business day after the previously scheduled expiration date unless
applicable laws require us to do otherwise.
We also expressly reserve the right to amend the terms of this exchange
offer in any manner. If we make any material change, we will promptly disclose
this change in a manner reasonably calculated to inform the holders of our
initial notes of the change, including providing public announcement or giving
oral or written notice to these holders. A material change in the terms of this
exchange offer could include a change in the timing of the exchange offer, a
change in the exchange agent and other similar changes in the terms of this
exchange offer. If we make any material change to this exchange offer, we will
disclose this change by means of a post-effective amendment to the registration
statement which includes this prospectus and will distribute an amended or
supplemented prospectus to each registered holder of initial notes. In addition,
we will extend this exchange offer for an additional five to ten business days
as required by the Exchange Act, depending on the significance of the amendment,
if the exchange offer would otherwise expire during that period. We will
promptly notify the exchange agent by oral notice, promptly confirmed in
writing, or written notice of any delay in acceptance, extension, termination or
amendment of this exchange offer.
PROCEDURES FOR TENDERING INITIAL NOTES
PROPER EXECUTION AND DELIVERY OF LETTERS OF TRANSMITTAL
To tender your initial notes in this exchange offer, you must use ONE
OF THE THREE alternative procedures described below:
(1) REGULAR DELIVERY PROCEDURE: Complete, sign and date
the letter of transmittal, or a facsimile of the letter of transmittal.
Have the signatures on the letter of transmittal guaranteed if required
by the letter of transmittal. Mail or otherwise deliver the letter of
transmittal or the facsimile together with the
84
certificates representing the initial notes being tendered and any
other required documents to the exchange agent on or before 5:00 p.m.,
New York City time, on the expiration date.
(2) BOOK-ENTRY DELIVERY PROCEDURE: Send a timely
confirmation of a book-entry transfer of your initial notes, if this
procedure is available, into the exchange agent's account at The
Depository Trust Company in accordance with the procedures for
book-entry transfer described under "Book-Entry Delivery Procedure"
below, on or before 5:00 p.m., New York City time, on the expiration
date.
(3) GUARANTEED DELIVERY PROCEDURE: If time will not
permit you to complete your tender by using the procedures described in
(1) or (2) above before the expiration date and this procedure is
available, comply with the guaranteed delivery procedures described
under "--Guaranteed Delivery Procedure" below.
The method of delivery of the initial notes, the letter of transmittal
and all other required documents is at your election and risk. Instead of
delivery by mail, we recommend that you use an overnight or hand-delivery
service. If you choose the mail, we recommend that you use registered mail,
properly insured, with return receipt requested. IN ALL CASES, YOU SHOULD ALLOW
SUFFICIENT TIME TO ASSURE TIMELY DELIVERY. You should not send any letters of
transmittal or initial notes to us. You must deliver all documents to the
exchange agent at its address provided below. You may also request your broker,
dealer, commercial bank, trust company or nominee to tender your initial notes
on your behalf.
Only a holder of initial notes may tender initial notes in this
exchange offer. A holder is any person in whose name initial notes are
registered on our books or any other person who has obtained a properly
completed bond power from the registered holder.
If you are the beneficial owner of initial notes that are registered in
the name of a broker, dealer, commercial bank, trust company or other nominee
and you wish to tender your notes, you must contact that registered holder
promptly and instruct that registered holder to tender your notes on your
behalf. If you wish to tender your initial notes on your own behalf, you must,
before completing and executing the letter of transmittal and delivering your
initial notes, either make appropriate arrangements to register the ownership of
these notes in your name or obtain a properly completed bond power from the
registered holder. The transfer of registered ownership may take considerable
time.
You must have any signatures on a letter of transmittal or a notice of
withdrawal guaranteed by:
(1) a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc.,
(2) a commercial bank or trust company having an office
or correspondent in the United States, or
(3) an eligible guarantor institution within the meaning
of Rule 17Ad-15 under the Exchange Act, UNLESS the initial notes are
tendered:
(a) by a registered holder or by a participant
in The Depository Trust Company whose name appears on a
security position listing as the owner, who has not completed
the box entitled "Special Issuance Instructions" or "Special
Delivery Instructions" on the letter of transmittal and only
if the exchange notes are being issued directly to this
registered holder or deposited into this participant's account
at The Depository Trust Company, or
(b) for the account of a member firm of a
registered national securities exchange or of the National
Association of Securities Dealers, Inc., a commercial bank or
trust company having an office or correspondent in the United
States or an eligible guarantor institution within the meaning
of Rule 17Ad-15 under the Exchange Act.
If the letter of transmittal or any bond powers are signed by:
(1) the recordholder(s) of the initial notes tendered:
the signature must correspond with the name(s) written on the face of
the initial notes without alteration, enlargement or any change
whatsoever.
85
(2) a participant in The Depository Trust Company: the
signature must correspond with the name as it appears on the security
position listing as the holder of the initial notes.
(3) a person other than the registered holder of any
initial notes: these initial notes must be endorsed or accompanied by
bond powers and a proxy that authorize this person to tender the
initial notes on behalf of the registered holder, in satisfactory form
to us as determined in our sole discretion, in each case, as the name
of the registered holder or holders appears on the initial notes.
(4) trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in a
fiduciary or representative capacity: these persons should so indicate
when signing. Unless waived by us, evidence satisfactory to us of their
authority to so act must also be submitted with the letter of
transmittal.
To effectively tender notes through The Depository Trust Company, the
financial institution that is a participant in The Depository Trust Company will
electronically transmit its acceptance through the Automatic Tender Offer
Program. The Depository Trust Company will then edit and verify the acceptance
and send an agent's message to the exchange agent for its acceptance. An agent's
message is a message transmitted by The Depository Trust Company to the exchange
agent stating that The Depository Trust Company has received an express
acknowledgment from the participant in The Depository Trust Company tendering
the notes that this participant has received and agrees to be bound by the terms
of the letter of transmittal, and that we may enforce this agreement against
this participant.
BOOK-ENTRY DELIVERY PROCEDURE
Any financial institution that is a participant in The Depository Trust
Company's systems may make book-entry deliveries of initial notes by causing The
Depository Trust Company to transfer these initial notes into the exchange
agent's account at The Depository Trust Company in accordance with The
Depository Trust Company's procedures for transfer. To effectively tender notes
through The Depository Trust Company, the financial institution that is a
participant in The Depository Trust Company will electronically transmit its
acceptance through the Automatic Tender Offer Program. The Depository Trust
Company will then edit and verify the acceptance and send an agent's message to
the exchange agent for its acceptance. An agent's message is a message
transmitted by The Depository Trust Company to the exchange agent stating that
The Depository Trust Company has received an express acknowledgment from the
participant in The Depository Trust Company tendering the notes that this
participation has received and agrees to be bound by the terms of the letter of
transmittal, and that we may enforce this agreement against this participant.
The exchange agent will make a request to establish an account for the initial
notes at The Depository Trust Company for purposes of the exchange offer within
two business days after the date of this prospectus.
A delivery of initial notes through a book-entry transfer into the
exchange agent's account at The Depository Trust Company will only be effective
if an agent's message or the letter of transmittal or a facsimile of the letter
of transmittal with any required signature guarantees and any other required
documents is transmitted to and received by the exchange agent at the address
indicated below under "--Exchange Agent" on or before the expiration date unless
the guaranteed delivery procedures described below are complied with. DELIVERY
OF DOCUMENTS TO THE DEPOSITORY TRUST COMPANY DOES NOT CONSTITUTE DELIVERY TO THE
EXCHANGE AGENT.
GUARANTEED DELIVERY PROCEDURE
If you are a registered holder of initial notes and desire to tender
your notes, and (1) these notes are not immediately available, (2) time will not
permit your notes or other required documents to reach the exchange agent before
the expiration date or (3) the procedures for book-entry transfer cannot be
completed on a timely basis and an agent's message delivered, you may still
tender in this exchange offer if:
(1) you tender through a member firm of a registered
national securities exchange or of the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an
office or correspondent in the United States, or an eligible guarantor
institution within the meaning of Rule 17Ad-15 under the Exchange Act,
86
(2) on or before the expiration date, the exchange agent
receives a properly completed and duly executed letter of transmittal
or facsimile of the letter of transmittal, and a notice of guaranteed
delivery, substantially in the form provided by us, with your name and
address as holder of the initial notes and the amount of
notes tendered, stating that the tender is being made by that letter
and notice and guaranteeing that within three New York Stock Exchange
trading days after the expiration date the certificates for all the
initial notes tendered, in proper form for transfer, or a book-entry
confirmation with an agent's message, as the case may be, and any other
documents required by the letter of transmittal will be deposited by
the eligible institution with the exchange agent, and
(3) the certificates for all your tendered initial notes
in proper form for transfer or a book-entry confirmation as the case
may be, and all other documents required by the letter of transmittal
are received by the exchange agent within three New York Stock Exchange
trading days after the expiration date.
ACCEPTANCE OF INITIAL NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Your tender of initial notes will constitute an agreement between you
and us governed by the terms and conditions provided in this prospectus and in
the related letter of transmittal.
We will be deemed to have received your tender as of the date when your
duly signed letter of transmittal accompanied by your initial notes tendered, or
a timely confirmation of a book-entry transfer of these notes into the exchange
agent's account at The Depository Trust Company with an agent's message, or a
notice of guaranteed delivery from an eligible institution is received by the
exchange agent.
All questions as to the validity, form, eligibility, including time of
receipt, acceptance and withdrawal of tenders will be determined by us in our
sole discretion. Our determination will be final and binding.
We reserve the absolute right to reject any and all initial notes not
properly tendered or any initial notes which, if accepted, would, in our opinion
or our counsel's opinion, be unlawful. We also reserve the absolute right to
waive any conditions of this exchange offer or irregularities or defects in
tender as to particular notes. Our interpretation of the terms and conditions of
this exchange offer, including the instructions in the letter of transmittal,
will be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of initial notes must be cured within
such time as we shall determine. We, the exchange agent or any other person will
be under no duty to give notification of defects or irregularities with respect
to tenders of initial notes. We and the exchange agent or any other person will
incur no liability for any failure to give notification of these defects or
irregularities. Tenders of initial notes will not be deemed to have been made
until such irregularities have been cured or waived. The exchange agent will
return without cost to their holders any initial notes that are not properly
tendered and as to which the defects or irregularities have not been cured or
waived as promptly as practicable following the expiration date.
If all the conditions to the exchange offer are satisfied or waived on
the expiration date, we will accept all initial notes properly tendered and will
issue the exchange notes promptly thereafter. Please refer to the section of
this prospectus entitled "--Conditions to the Exchange Offer" below. For
purposes of this exchange offer, initial notes will be deemed to have been
accepted as validly tendered for exchange when, as and if we give oral or
written notice of acceptance to the exchange agent.
We will issue the exchange notes in exchange for the initial notes
tendered pursuant to a notice of guaranteed delivery by an eligible institution
only against delivery to the exchange agent of the letter of transmittal, the
tendered initial notes and any other required documents, or the receipt by the
exchange agent of a timely confirmation of a book-entry transfer of initial
notes into the exchange agent's account at The Depository Trust Company with an
agent's message, in each case, in form satisfactory to us and the exchange
agent.
If any tendered initial notes are not accepted for any reason provided
by the terms and conditions of this exchange offer or if initial notes are
submitted for a greater principal amount than the holder desires to exchange,
the unaccepted or non-exchanged initial notes will be returned without expense
to the tendering holder, or, in the case of initial notes tendered by book-entry
transfer procedures described above, will be
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credited to an account maintained with the book-entry transfer facility, as
promptly as practicable after withdrawal, rejection of tender or the expiration
or termination of the exchange offer.
By tendering into this exchange offer, you will irrevocably appoint our
designees as your attorney-in-fact and proxy with full power of substitution and
resubstitution to the full extent of your rights on the notes tendered. This
proxy will be considered coupled with an interest in the tendered notes. This
appointment will be effective only when, and to the extent that we accept your
notes in this exchange offer. All prior proxies on these notes will then be
revoked and you will not be entitled to give any subsequent proxy. Any proxy
that you may give subsequently will not be deemed effective. Our designees will
be empowered to exercise all voting and other rights of the holders as they may
deem proper at any meeting of note holders or otherwise. The initial notes will
be validly tendered only if we are able to exercise full voting rights on the
notes, including voting at any meeting of the note holders, and full rights to
consent to any action taken by the note holders.
WITHDRAWAL OF TENDERS
Except as otherwise provided in this prospectus, you may withdraw
tenders of initial notes at any time before 5:00 p.m., New York City time, on
the expiration date.
For a withdrawal to be effective, you must send a written or facsimile
transmission notice of withdrawal to the exchange agent before 5:00 p.m., New
York City time, on the expiration date at the address provided below under
"--Exchange Agent" and before acceptance of your tendered notes for exchange by
us.
Any notice of withdrawal must:
(1) specify the name of the person having tendered the
initial notes to be withdrawn,
(2) identify the notes to be withdrawn, including, if
applicable, the registration number or numbers and total principal
amount of these notes,
(3) be signed by the person having tendered the initial
notes to be withdrawn in the same manner as the original signature on
the letter of transmittal by which these notes were tendered, including
any required signature guarantees, or be accompanied by documents of
transfer sufficient to permit the trustee for the initial notes to
register the transfer of these notes into the name of the person having
made the original tender and withdrawing the tender,
(4) specify the name in which any of these initial notes
are to be registered, if this name is different from that of the person
having tendered the initial notes to be withdrawn, and
(5) if applicable because the initial notes have been
tendered through the book-entry procedure, specify the name and number
of the participant's account at The Depository Trust Company to be
credited, if different than that of the person having tendered the
initial notes to be withdrawn.
We will determine all questions as to the validity, form and
eligibility, including time of receipt, of all notices of withdrawal and our
determination will be final and binding on all parties. Initial notes that are
withdrawn will be deemed not to have been validly tendered for exchange in this
exchange offer.
The exchange agent will return without cost to their holders all
initial notes that have been tendered for exchange and are not exchanged for any
reason, as promptly as practicable after withdrawal, rejection of tender or
expiration or termination of this exchange offer.
You may retender properly withdrawn initial notes in this exchange
offer by following one of the procedures described under "--Procedures for
Tendering Initial Notes" above at any time on or before the expiration date.
CONDITIONS TO THE EXCHANGE OFFER
We will complete this exchange offer only if:
(1) there is no change in the laws and regulations which,
in our judgment or in the opinion of our counsel, would reasonably be
expected to impair our ability to proceed with this exchange offer,
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(2) there is no change in the current interpretation of
the staff of the Commission which permits resales of the exchange
notes,
(3) there is no stop order issued by the Commission or
any state securities authority suspending the effectiveness of the
registration statement which includes this prospectus or the
qualification of the indenture for our exchange notes under the Trust
Indenture Act of 1939 and there are no proceedings initiated or, to our
knowledge, threatened for that purpose,
(4) there is no action or proceeding instituted or
threatened in any court or before any governmental agency or body that
in our judgment or in the opinion of our counsel would reasonably be
expected to prohibit, prevent or otherwise impair our ability to
proceed with this exchange offer, and
(5) we obtain all governmental approvals that we deem in
our sole discretion necessary to complete this exchange offer.
These conditions are for our sole benefit. We may assert any one of
these conditions regardless of the circumstances giving rise to it and we may
also waive any one of them, in whole or in part, at any time and from time to
time, if we determine in our reasonable discretion that it has not been
satisfied, subject to applicable law. We will not be deemed to have waived our
rights to assert or waive these conditions if we fail at any time to exercise
any of them. Each of these rights will be deemed an ongoing right which we may
assert at any time and from time to time.
If we determine that we may terminate this exchange offer because any
of these conditions is not satisfied, we may:
(1) refuse to accept and return to their holders any
initial notes that have been tendered,
(2) extend the exchange offer and retain all notes
tendered before the expiration date, subject to the rights of the
holders of these notes to withdraw their tenders, or
(3) waive any condition that has not been satisfied and
accept all properly tendered notes that have not been withdrawn or
otherwise amend the terms of this exchange offer in any respect as
provided under the section in this prospectus entitled "--Expiration
Date; Extensions; Amendments; Termination."
ACCOUNTING TREATMENT
We will record the exchange notes at the same carrying value as the
initial notes as reflected in our accounting records on the date of the
exchange. Accordingly, we will not recognize any gain or loss for accounting
purposes. We will amortize the costs of the exchange offer and the unamortized
expenses related to the issuance of the exchange notes over the term of the
exchange notes.
EXCHANGE AGENT
We have appointed The Bank of Nova Scotia Trust Company of New York as
exchange agent for this exchange offer. You should direct all questions and
requests for assistance on the procedures for tendering and all requests for
additional copies of this prospectus or the letter of transmittal to the
exchange agent as follows:
By mail: The Bank of Nova Scotia Trust Company of New York
One Liberty Plaza, 23rd Floor
New York, New York 10006
Attention: Exchanges
By hand/overnight
delivery: The Bank of Nova Scotia Trust Company of New York
One Liberty Plaza, 23rd Floor
New York, New York 10006
Attention: Exchanges
Facsimile Transmission: (212) 225-5436
Confirm by Telephone: (212) 225-5427
Attention: Exchanges
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FEES AND EXPENSES
We will bear the expenses of soliciting tenders in this exchange offer,
including fees and expenses of the exchange agent and trustee and accounting,
legal, printing and related fees and expenses.
We will not make any payments to brokers, dealers or other persons
soliciting acceptances of this exchange offer. However, we will pay the exchange
agent reasonable and customary fees for its services and will reimburse the
exchange agent for its reasonable out-of-pocket expenses in connection with this
exchange offer. We will also pay brokerage houses and other custodians, nominees
and fiduciaries their reasonable out-of-pocket expenses for forwarding copies of
the prospectus, letters of transmittal and related documents to the beneficial
owners of the initial notes and for handling or forwarding tenders for exchange
to their customers.
We will pay all transfer taxes, if any, applicable to the exchange of
initial notes in accordance with this exchange offer. However, tendering holders
will pay the amount of any transfer taxes, whether imposed on the registered
holder or any other persons, if:
(1) certificates representing exchange notes or initial
notes for principal amounts not tendered or accepted for exchange are
to be delivered to, or are to be registered or issued in the name of,
any person other than the registered holder of the notes tendered,
(2) tendered initial notes are registered in the name of
any person other than the person signing the letter of transmittal, or
(3) a transfer tax is payable for any reason other than
the exchange of the initial notes in this exchange offer.
If you do not submit satisfactory evidence of the payment of any of
these taxes or of any exemption from this payment with the letter of
transmittal, we will bill you directly the amount of these transfer taxes.
YOUR FAILURE TO PARTICIPATE IN THE EXCHANGE OFFER WILL HAVE ADVERSE CONSEQUENCES
The initial notes were not registered under the Securities Act or under
the securities laws of any state and you may not resell them, offer them for
resale or otherwise transfer them unless they are subsequently registered or
resold under an exemption from the registration requirements of the Securities
Act and applicable state securities laws. If you do not exchange your initial
notes for exchange notes in accordance with this exchange offer, or if you do
not properly tender your initial notes in this exchange offer, you will not be
able to resell, offer to resell or otherwise transfer the initial notes unless
they are registered under the Securities Act or unless you resell them, offer to
resell or otherwise transfer them under an exemption from the registration
requirements of, or in a transaction not subject to, the Securities Act. In
addition, you may no longer be able to obligate us to register the initial notes
under the Securities Act.
DELIVERY OF PROSPECTUS
Each broker-dealer that receives exchange notes for its own account in
exchange for initial notes, where such initial notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such exchange notes. See "Plan of Distribution."
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DESCRIPTION OF THE EXCHANGE NOTES
The initial notes were, and the exchange notes will be issued under an
indenture (the "INDENTURE") dated as of April 23, 2002 by and between the
Company and The Bank of Nova Scotia Trust Company of New York, as Trustee (the
"Trustee"). The following summary of the Indenture does not include all of the
information included in the Indenture and may not include all of the information
that you would consider important. This summary is qualified by reference to the
Trust Indenture Act of 1939, as amended (the "TIA"), and to all of the
provisions of the Indenture, including the definitions of terms therein and
those terms made a part of the Indenture by reference to the TIA as in effect on
the date of the Indenture. The definitions of most of the capitalized terms used
in the following summary are set forth below under "--Certain Definitions." For
purposes of this section, references to the "Company" include only Western Oil
Sands Inc. and not its Subsidiaries.
The notes will be issued in fully registered form only, without
coupons, in denominations of US$1,000 and integral multiples thereof. Initially,
the Trustee will act as paying agent and registrar for the notes. The notes may
be presented for registration or transfer and exchange at the offices of the
registrar, which initially will be the Trustee's corporate trust office. The
Company may change any paying agent and registrar without notice to holders of
the notes. The Company will pay principal (and premium, if any) on the notes at
the Trustee's corporate office in New York, New York. Interest may be paid at
the Trustee's corporate trust office, by check mailed to the registered address
of the holders or by wire transfer if instructions therefor are furnished by a
holder. Any initial notes that remain outstanding after the completion of the
exchange offer, together with the exchange notes issued in connection with the
exchange offer, will be treated as a single class of securities under the
Indenture.
PRINCIPAL, MATURITY AND INTEREST
The notes are limited in aggregate principal amount to US$450.0
million, and will mature on May 1, 2012. Interest on the notes will accrue at
the rate of 8 3/8% per annum and will be payable semiannually in cash on each
May 1 and November 1, commencing on November 1, 2002, to the persons who are
registered holders at the close of business on the April 15 and October 15
immediately preceding the applicable interest payment date. Interest on the
notes will accrue from and including the most recent date to which interest has
been paid or, if no interest has been paid, from and including the date of
issuance.
The notes will not be entitled to the benefit of any mandatory sinking
fund.
CREDIT RATINGS
We have received a Ba2 rating from Moody's and a BB+ rating from
Standard and Poor's in respect of our senior secured notes, including the
initial notes and the exchange notes. Credit ratings are intended to provide
investors with an independent measure of credit quality of an issue of
securities. S&P rates debt instruments by rating categories ranging from AAA,
which represents the highest quality of securities, to D, which represents the
lowest quality of securities rated. Moody's rates debt instruments by rating
categories ranging from Aaa, which represents the highest quality of securities,
to C, which represents the lowest quality of securities.
According to the Moody's rating system, debt securities rated Ba are
judged to have speculative elements; their future cannot be considered as
well-assured and often the protection of interest and principal payments may be
very moderate and uncertain, and therefore not well safeguarded throughout
future economic cycles. Moody's applies numerical modifiers (1, 2 and 3) in each
rating classification from Aa through Caa. The modifier 1 indicates that the
obligation ranks in the higher end of its rating category, the modifier 2
indicates a mid-range ranking and the modifier 3 indicates a ranking in the
lower end of its rating category.
According to the S&P rating system, debt securities rated BB exhibit
less vulnerability to non-payment than other speculative issues. However, there
are major ongoing uncertainties or exposure to adverse business, financial, or
economic conditions which could lead to the obligor's inadequate capacity to
meet its financial commitment on the obligation. A plus (+) or minus (-)
description after a rating shows the
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relative standing within the major rating categories (AA to CCC). The lack of
one of these designations indicates a rating which is essentially in the middle
of the category.
The credit ratings accorded to our senior secured notes are not
recommendations to purchase, hold or sell our senior secured notes inasmuch as
those ratings do not comment as to market price or suitability for a particular
investor. There is no assurance that those ratings will remain in effect for any
given period of time or that those ratings will not be revised or withdrawn
entirely by those rating agencies in the future if, in their judgment,
circumstances so warrant.
ADDITIONAL AMOUNTS
All payments by the Company in respect of the notes or by any Guarantor
in respect of its Guarantee shall be made free and clear of and without
withholding or deduction for or on account of any present or future taxes,
duties, assessments or other governmental charges of whatever nature, including
penalties, interest and any other liabilities related thereto ("TAXES"), imposed
or levied by or on behalf of Canada or any other jurisdiction in which the
Company or any Guarantor or any successor of the Company or any Guarantor is
organized or resident for tax purposes or conducts business, or from which or
through which payment is made, or any political subdivision or authority thereof
or therein having power to tax (any of the aforementioned being a "TAXING
JURISDICTION"). The Indenture provides that if the Company or any Guarantor, as
the case may be, is required to make any withholding or deduction for or on
account of any Taxes from any payment made under or with respect to the notes or
its Guarantee, as the case may be, the Company or any Guarantor, as the case may
be, will pay such additional amounts ("ADDITIONAL AMOUNTS") as may be necessary
so that the net amount received by each holder of notes (including Additional
Amounts) after such withholding or deduction will not be less than the amount
the holder would have received had such Taxes not been withheld or deducted;
PROVIDED that no Additional Amounts will be payable to a holder of notes (an
"EXCLUDED HOLDER") (i) with which the Company or any Guarantor, as the case may
be, does not deal at arm's length (within the meaning of the INCOME TAX ACT
(Canada)) at the time of making such payment, (ii) which is subject to such
Taxes by reason of its being connected with the jurisdiction imposing such Taxes
otherwise than by the mere holding of the notes or the receipt of payments
thereunder, (iii) which presents any note for payment of principal more than 60
days after the later of (x) the date on which payment first became due and (y)
if the full amount payable has not been received by the Trustee on or prior to
such date, the date on which the full amount payable having been so received,
notice to that effect shall have been given to the holders by the Trustee,
except to the extent that the holder would have been entitled to such Additional
Amounts on presenting such note for payment on the last day of the applicable
60-day period, (iv) which failed to duly and timely comply with a timely request
of the Company to provide information, documents or other evidence concerning
the holder's nationality, residence, entitlement to treaty benefits, identity or
connection with a relevant Taxing Jurisdiction, if and to the extent that due
and timely compliance with such request would have reduced or eliminated any
Taxes as to which Additional Amounts would have otherwise been payable to such
holder but for this clause (iv), (v) on account of any estate, inheritance,
gift, sale, transfer, personal property or other similar Taxes, (vi) which is a
fiduciary, a partnership or not the beneficial owner of any payment on a note,
if and to the extent that any beneficiary or settlor of such fiduciary, any
partner in such partnership or the beneficial owner of such payment (as the case
may be) would not have been entitled to receive Additional Amounts with respect
to such payment if such beneficiary, settlor, partner or beneficial owner had
been the holder of such note or (vii) to which any combination of the foregoing
numbered clauses of this proviso applies.
The Company or any Guarantor, as the case may be, will also (i) make
such withholding or deduction as required by applicable law and (ii) remit the
full amount deducted or withheld to the relevant authority in accordance with
applicable law. The Company or any Guarantor, as the case may be, will furnish,
within 60 days after the date the payment of any Taxes is due pursuant to
applicable law, to the Trustee copies of tax receipts evidencing that such
payment has been made by the Company or such Guarantor, as the case may be, in
such form as provided in the normal course by the taxing authority imposing such
Taxes and is reasonably available to the Company or such Guarantor, as the case
may be. The Trustee shall make such evidence available to the holders of notes
upon request.
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If the Company or any Guarantor, as the case may be, has paid any
Additional Amounts to any holder of notes, or, if different, the beneficial
owners of an interest in any note, and such person is entitled to a refund of
the Taxes to which such Additional Amounts are attributable from any competent
taxation authority or other governmental body, then (i) such person shall, as
soon as practicable but in any event within 30 days after receiving a written
request therefor from the Company or such Guarantor, as the case may be, comply
with any administrative procedure to obtain such refund and (ii) upon receipt of
such refund, promptly pay over such refund to the Company or such Guarantor, as
the case may be. If Additional Amounts are paid to a holder, or, if different,
the beneficial owner of an interest in any note, and it is subsequently
determined that such person was not entitled to such Additional Amounts, then
such person shall promptly refund to the Company or such Guarantor, as the case
may be, the amount of all such Additional Amounts previously paid to such
person.
The Company will indemnify and hold harmless each holder of notes that
are outstanding on the date that withholding or deduction was required pursuant
to applicable law (other than an Excluded Holder) and upon written request
reimburse each such holder for the amount of (i) any Taxes so levied or imposed
and paid by such holder as a result of payments made under or with respect to
the notes or any Guarantee, as the case may be, (ii) any liability (including
penalties, interest and expenses) arising therefrom or with respect thereto, and
(iii) any Taxes imposed with respect to any reimbursement under clause (i) or
(ii) above.
The Company will pay any present or future stamp, court, documentary or
other similar Taxes, charges or levies that arise in any Taxing Jurisdiction
from the execution, delivery or registration of, or enforcement of rights under,
the notes, the Indenture or any related document ("DOCUMENTARY TAXES").
The obligation to pay Additional Amounts and Documentary Taxes under
the terms and conditions described above will survive any termination,
defeasance or discharge of the Indenture. Whenever in the Indenture there is
mentioned, in any context, (i) the payment of principal (and premium, if any),
(ii) purchase prices in connection with a repurchase of notes, (iii) interest or
(iv) any other amount payable on or with respect to any of the notes, such
mention shall be deemed to include mention of the payment of Additional Amounts
provided for in this section to the extent that, in such context, Additional
Amounts are, were or would be payable in respect thereof.
The Company may redeem, at its option, all, but not less than all, the
notes at a redemption price equal to 100% of the principal amount so redeemed,
plus accrued and unpaid interest, if any, thereon to the redemption date if the
Company determines and certifies to the Trustee immediately prior to the giving
of the notice of redemption that (i) it or any Guarantor has or will become
obligated to pay any Additional Amounts in respect of the notes as a result of
any change in or amendment to the laws (or any regulations or rulings
promulgated thereunder) of any Taxing Jurisdiction or taxing authority thereof
or therein affecting taxation, or any change in administrative position
regarding the application or interpretation of such laws, regulations or rulings
(including a holding by a court of competent jurisdiction) which change,
amendment, application or interpretation is announced on or after the Issue Date
and (ii) such obligation cannot be avoided by the Company or such Guarantor
taking reasonable measures available to it. Notice of redemption shall be mailed
at least 30 but not more than 60 days before the redemption date to each holder
of notes at its registered address.
No such notice of redemption may be given earlier than 90 days prior to
the earliest date on which the Company or such Guarantor would but for such
redemption be obligated to pay such Additional Amounts or later than 180 days
after the Company or such Guarantor first becomes liable to pay any Additional
Amounts as a result of any changes in or amendments to laws, regulations or
administrative positions described above. At the time such notice is given, the
Company's or such Guarantor's obligation to pay such Additional Amounts must
remain in effect.
OPTIONAL REDEMPTION
The notes will be redeemable, at the Company's option, in whole at any
time or in part from time to time, at a redemption price equal to the sum of (a)
the principal amount thereof plus any accrued and unpaid interest, if any,
thereon to the redemption date, and (b) the "OPTIONAL REDEMPTION MAKE WHOLE
PREMIUM," which shall equal the excess, if any, of (i) the sum of the present
values of all remaining
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scheduled payments of principal, premium and interest (other than accrued
interest payable on such redemption date) from the applicable redemption date to
maturity, discounted semi-annually on each applicable interest payment date at a
rate equal to the sum of the Treasury Rate (as defined below) plus 50 basis
points, based on a 360-day year of two 180-day periods, over (ii) the
outstanding principal balance of such note (or portion thereof).
"TREASURY RATE" with respect to a note means the per annum rate,
determined by the Trustee and approved by the Company, equal to the yield for US
Treasury securities with a term equal to the then remaining term to maturity as
indicated by Bloomberg Financial Markets (page PXI or the relevant page at the
date of determination indicating such yields) (or, if such data ceases to be
available, any publicly available source of similar market data) at
approximately 10:00 A.M., New York City time, on the applicable day, calculated
based on straight line interpolation of the yields of the nearest relevant
on-the-run US Treasury securities.
SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the notes are to be redeemed at any
time, selection of the notes for redemption will be made by the Trustee in
compliance with the requirements of the principal national securities exchange,
if any, on which the notes are listed or, if the notes are not then listed on a
national securities exchange, on a PRO RATA basis, by lot or by such method as
the Trustee shall deem fair and appropriate; PROVIDED, HOWEVER, that no notes of
a principal amount of US$1,000 or less shall be redeemed in part.
Notice of an optional redemption shall be mailed at least 30 but not
more than 60 days before the redemption date to each holder of notes to be
redeemed at its registered address. If any note is to be redeemed in part only,
the notice of redemption that relates to such note shall state the portion of
the principal amount thereof to be redeemed. A new note in a principal amount
equal to the unredeemed portion thereof will be issued in the name of the holder
thereof upon cancellation of the original note. On and after the redemption
date, interest will cease to accrue on notes or portions thereof called for
redemption as long as the Company has deposited with the paying agent funds in
satisfaction of the applicable redemption price pursuant to the Indenture.
CHANGE OF CONTROL
The Indenture provides that upon the occurrence of a Change of Control,
each holder of notes will have the right to require that the Company purchase
all or a portion of such holder's notes pursuant to the offer described below
(the "CHANGE OF CONTROL OFFER"), at a purchase price equal to 101% of the
principal amount thereof plus accrued and unpaid interest, if any, thereon to
the purchase date.
Within 30 days following the date upon which the Change of Control
occurs, the Company must send, by first class mail, a notice to each holder,
with a copy to the Trustee, which notice shall govern the terms of the Change of
Control Offer. Such notice shall state, among other things, the purchase date,
which must be no earlier than 30 days nor later than 60 days from the date such
notice is mailed, other than as may be required by law (the "CHANGE OF CONTROL
PURCHASE DATE"). Holders electing to have a note purchased pursuant to a Change
of Control Offer will be required to surrender the note, with the form entitled
"Option of Holder to Elect Purchase" on the reverse of the note completed, to
the paying agent at the address specified in the notice prior to the close of
business on the Change of Control Purchase Date.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations to the extent such
laws and regulations are applicable in connection with a Change of Control
Offer. To the extent that the provisions of any securities laws or regulations
conflict with the "Change of Control" provisions of the Indenture, the Company
shall comply with the applicable securities laws and regulations and shall not
be deemed to have breached its obligations under the "Change of Control"
provisions of the Indenture by virtue thereof.
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RANKING
The Indebtedness of the Company evidenced by the notes will rank senior
in right of payment to all Subordinated Indebtedness of the Company and will
rank PARI PASSU in right of payment with all other existing or future
unsubordinated Indebtedness of the Company. The Indebtedness of any Guarantor
evidenced by its Guarantee will rank senior in right of payment to all
Subordinated Indebtedness of such Guarantor and will rank PARI PASSU in right of
payment with all other existing and future unsubordinated Indebtedness of such
Guarantor.
The notes will be effectively subordinate in right of payment to all
existing and future liabilities, including trade payables, of any of the
Company's future subsidiaries which are not Guarantors.
As of the Issue Date, certain of the liens in favor of the holders of
the notes ranked behind liens held by other creditors of the Company. The
Indenture and the Inter-Creditor Agreements permit a significant amount of
indebtedness to be secured by liens on the Collateral on a senior and PARI PASSU
basis following the Issue Date. See "Risk Factors--Risks Relating to the
Exchange Notes." The collateral securing the notes is subject to several
limitations. See "Inter-Creditor Agreements and Collateral" for a discussion of
the relative priority of the Trustee's claims against certain of the Collateral
securing the notes as compared with that of certain other creditors. In
addition, the Collateral securing the notes will be released permanently on the
Collateral Release Date and the notes will be unsecured obligations of the
Company from such date.
MIRROR NOTES
Upon closing of the offering of the initial notes, we advanced US$450.0
million to Newco, our wholly-owned subsidiary which is a single purpose company
incorporated to participate in this transaction. Newco issued to us a secured
Mirror Note in the principal amount of US$450.0 million, which is secured by the
Collateral granted by Newco.
Newco loaned the US$450.0 million received from us to Western L.P.,
which issued to Newco a secured Mirror Note in the principal amount of US$450.0
million, is secured by the Collateral granted by Western L.P. Each of the Mirror
Notes has been assigned to the Trustee for the sole benefit of the holders of
the notes. However, the underlying collateral is not for the sole benefit of the
holders of the notes but is subject to the priorities set forth in the
Inter-Creditor Agreements.
The obligations of Newco to the Company under its Mirror Note and the
obligations of Western L.P. to Newco under its Mirror Note are guaranteed by
852006 Alberta Ltd., our wholly-owned subsidiary, which is secured by the
Collateral granted by 852006 Alberta Ltd.
CONSTRUCTION ACCOUNT
Under the Indenture, on the Issue Date approximately $189.3 million of
the net proceeds from the sale of initial notes was placed in a construction
account held by the Collateral Agent. The Indenture provides that deposited
funds, together with earnings thereon, may be disbursed from the construction
account only to pay obligations of the Company or any Restricted Subsidiary
related to the Project, as directed in writing to the Collateral Agent by the
Company. Upon Completion of the Project, all funds remaining in the construction
account shall be released to the Company, and the construction account shall
terminate. Upon the acceleration of the maturity of the notes or the failure to
pay principal or premium when due, the Indenture provides for the foreclosure by
the Collateral Agent upon the proceeds of the construction account. Pending such
disbursement, all funds contained in the construction account will be invested
in Cash Equivalents. In addition to the other Collateral, the notes are secured
by a first priority security interest in all funds contained in the construction
account, pending disbursement or release pursuant to the Indenture.
SECURITY
For a description of certain of the Collateral securing the notes and
the Inter-Creditor Agreements which establish among certain creditors the
relative rights and priorities of such creditors, including noteholders, in and
to the Collateral (whether under the Indenture or the Mirror Notes), see
"Inter-Creditor Agreements and Collateral." Except for the assignment of the
Mirror Notes, the liens on the Collateral in
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favor of the noteholders will be permanently released on the Collateral Release
Date and the notes will be unsecured obligations of the Company from such date.
CERTAIN COVENANTS
The Indenture contains among others, the following covenants:
LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS. The Company will not, and
will not permit any of the Restricted Subsidiaries to, directly or indirectly,
create, incur, issue, assume, guarantee, acquire, become liable, contingently or
otherwise, with respect to, or otherwise become responsible for payment of
(collectively, "INCUR") any Indebtedness (other than Permitted Indebtedness);
PROVIDED, HOWEVER, that if no Default or Event of Default shall have occurred
and be continuing at the time of or as a consequence of the incurrence of any
such Indebtedness, the Company, any Mirror Note Issuer and any Guarantor (or any
Restricted Subsidiary that substantially contemporaneously with such incurrence
becomes a Mirror Note Issuer or Guarantor) may incur Indebtedness (including,
without limitation, Acquired Indebtedness) if on the date of the incurrence of
such Indebtedness, after giving effect to the incurrence thereof, the
Consolidated Fixed Charge Coverage Ratio of the Company would be greater than
2.0:1.0 ("RATIO INDEBTEDNESS").
No Ratio Indebtedness shall reduce the amount of Indebtedness which may
be incurred pursuant to any clause of the definition of Permitted Indebtedness.
The Company's and its Restricted Subsidiaries' obligations to comply
with the provisions of this covenant will be terminated in the event that at any
time the notes attain Investment Grade status.
LIMITATION ON RESTRICTED PAYMENTS. The Company will not, and will not cause or
permit any of the Restricted Subsidiaries to, directly or indirectly:
(a) declare or pay any dividend or make any distribution
(other than dividends or distributions payable in Qualified Capital
Stock of the Company) on or in respect of shares of its Capital Stock
to holders of such Capital Stock (including by means of a Person
(including an Unrestricted Subsidiary) making such a payment with the
proceeds of an Investment made by the Company or any Restricted
Subsidiary);
(b) purchase, redeem or otherwise acquire or retire for
value any Capital Stock of the Company or any warrants, rights or
options to purchase or acquire shares of any class of such Capital
Stock (including by means of a Person (including an Unrestricted
Subsidiary) making such a payment with the proceeds of an Investment
made by the Company or any Restricted Subsidiary);
(c) make any principal payment on or purchase, defease,
repurchase, redeem or otherwise acquire or retire for value, in each
case prior to any scheduled maturity, scheduled repayment, scheduled
sinking fund payment or other stated maturity, any Subordinated
Indebtedness (other than any such Subordinated Indebtedness owned by
the Company or a Restricted Subsidiary) (a "SUBORDINATED INDEBTEDNESS
PAYMENT"); or
(d) make any Investment (other than Permitted
Investments)
(each of the foregoing actions set forth in clauses (a), (b), (c) and (d) being
referred to as a "RESTRICTED PAYMENT"), if at the time of such Restricted
Payment or immediately after giving effect thereto:
(1) a Default or an Event of Default shall have occurred
and be continuing;
(2) the Company is not able to incur at least $1.00 of
Ratio Indebtedness in compliance with the covenant described under
"--Limitation on Incurrence of Additional Indebtedness"; or
(3) the aggregate amount of Restricted Payments
(including such proposed Restricted Payment) made after the Issue Date
(the amount expended for such purpose, if other than in cash, being the
Fair Market Value of the Company's or the applicable Restricted
Subsidiary's proportionate interest in such
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property as determined reasonably and in good faith by the Board of
Directors of the Company) shall exceed the sum of:
(v) 50% of the cumulative Consolidated Net
Income (or if cumulative Consolidated Net Income shall be a
loss, minus 100% of such loss) of the Company earned during
the period beginning on the first day of the fiscal quarter
during which the Completion of the Project occurs and through
the end of the most recent fiscal quarter for which financial
statements are available prior to the date such Restricted
Payment occurs (the "REFERENCE DATE") (treating such period as
a single accounting period); PLUS
(w) 100% of the net cash proceeds received by
the Company from any Person (other than a Subsidiary of the
Company) from the issuance and sale subsequent to the Issue
Date and on or prior to the Reference Date of Qualified
Capital Stock of the Company (excluding any net cash proceeds
taken into account with respect to Indebtedness incurred
pursuant to clause (4) of the definition of "Permitted
Indebtedness"); PLUS
(x) without duplication of any amounts included
in clause (3)(w) above, 100% of the Fair Market Value of the
net proceeds of any contribution to the common equity capital
of the Company received by the Company from a holder of the
Company's Capital Stock (excluding any net cash proceeds taken
into account with respect to Indebtedness incurred pursuant to
clause (4) of the definition of "Permitted Indebtedness")
subsequent to the Issue Date; PLUS
(y) an amount equal to the lesser of (A) the sum
of the Fair Market Value of the Capital Stock of an
Unrestricted Subsidiary owned by the Company and/or the
Restricted Subsidiaries and the aggregate amount of all
Indebtedness of such Unrestricted Subsidiary owed to the
Company and each Restricted Subsidiary on the date of
Revocation of such Unrestricted Subsidiary as an Unrestricted
Subsidiary in accordance with the covenant described under
"--Limitation on Designations of Unrestricted Subsidiaries" or
(B) the Designation Amount with respect to such Unrestricted
Subsidiary on the date of the Designation of such Subsidiary
as an Unrestricted Subsidiary in accordance with the covenant
described under "--Limitation on Designations of Unrestricted
Subsidiaries"; PLUS
(z) 100% of the net cash proceeds received by
the Company from the issuance or sale after the Issue Date
(other than to a Subsidiary) of any Indebtedness or other
securities of the Company that are convertible into or
exercisable or exchangeable for Qualified Capital Stock of the
Company and that have been so converted, exercised or
exchanged, as the case may be.
Notwithstanding the foregoing, the provisions set forth in the
immediately preceding paragraph do not prohibit:
(1) the payment of any dividend within 60 days after the
date of declaration of such dividend if the dividend would have been
permitted on the date of declaration;
(2) the acquisition of any shares of Capital Stock of the
Company or the making of any Subordinated Indebtedness Payment either
(A) by way of or in exchange for shares of Qualified Capital Stock of
the Company or (B) through the application of net proceeds of a
substantially concurrent sale for cash (other than to a Subsidiary of
the Company) of shares of Qualified Capital Stock of the Company;
(3) so long as no Default or Event of Default shall have
occurred and be continuing, repurchases of Capital Stock (or rights or
options therefor) of the Company from officers, directors, employees or
consultants pursuant to equity ownership or compensation plans or
stockholders agreements not to exceed $2.5 million in any twelve-month
period;
(4) the making of any Subordinated Indebtedness Payment
either (A) in exchange for Subordinated Indebtedness that constitutes
Refinancing Indebtedness or (B) through the application of net proceeds
of a substantially concurrent sale for cash (other than as a Subsidiary
of the Company) of Subordinated Indebtedness that constitutes
Refinancing Indebtedness;
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(5) dividends and distributions paid on Common Stock of a
Restricted Subsidiary on a PRO RATA basis;
(6) payment or redemption on or after January 1, 2007 of
amounts owed under the Company's Class D Preferred Stock existing and
subject to the terms as in effect on the Issue Date; and
(7) at any time after Completion of the Project, the
making of Restricted Payments which do not, in the aggregate, exceed
US$30.0 million.
In determining the aggregate amount of Restricted Payments made
subsequent to the Issue Date in accordance with clause (3) of the first
paragraph of this covenant "--Limitation on Restricted Payments," amounts
expended pursuant to clause (1), (2), (3) or (6) shall be included in such
calculations; PROVIDED that any Restricted Payment made with Qualified Capital
Stock shall not reduce amounts available for Restricted Payments in accordance
with clause (3) of the first paragraph of this covenant "--Limitation on
Restricted Payments".
The Company's and its Restricted Subsidiaries' obligations to comply
with the provisions of this covenant will be terminated in the event that at any
time the notes attain Investment Grade status.
LIMITATION ON SALES OF THE PROJECT INTEREST. The Company will not, and will not
permit any Restricted Subsidiary to, directly or indirectly sell, transfer or
otherwise dispose of any beneficial ownership interest owned by it in the
Project (other than to the Company, any Mirror Note Issuer or any Guarantor) if,
after giving effect to such sale, transfer or other disposition, the Company and
its Restricted Subsidiaries would not in the aggregate own in excess of 15% of
all Voting Interests in each Functional Unit that constitutes part of the
Project (solely if such Functional Unit constitutes part of the Project) unless
(1) such sale, transfer or other disposition includes all
of the ownership interests in the Project owned by the Company and its
Subsidiaries to a Person other than the Company or a Subsidiary of the
Company;
(2) the Company or the applicable Restricted Subsidiary,
as the case may be, receives consideration at the time of such sale,
transfer or other disposition at least equal to the Fair Market Value
of its ownership interests in the Project sold, transferred or
otherwise disposed of; and
(3) the Company makes the offer to purchase all of the
outstanding notes as described below (the "PROJECT INTEREST SALE
OFFER") at a purchase price equal to 100% of the principal amount
thereof plus accrued and unpaid interest, if any, to the purchase date.
Within 30 days following the date upon which such sale, transfer or
other disposition occurs, the Company must send, by first class mail, a notice
to each holder, with a copy to the Trustee, which notice shall govern the terms
of the Project Interest Sale Offer. Such notice shall state, among other things,
the purchase date, which must be no earlier than 30 days nor later than 60 days
from the date such notice is mailed, other than as may be required by law (the
"PROJECT INTEREST SALE OFFER PURCHASE DATE"). Holders electing to have a note
purchased pursuant to a Project Interest Sale Offer will be required to
surrender the note, with the form entitled "Option of Holder to Elect Purchase"
on the reverse of the note completed, to the paying agent at the address
specified in the notice prior to the close of business on the Project Interest
Sale Offer Purchase Date.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations to the extent such
laws and regulations are applicable in connection with a Project Interest Sale
Offer. To the extent that the provisions of any securities laws or regulations
conflict with the provisions of this covenant, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under this covenant by virtue thereof.
If such sale, transfer or other disposition of ownership interests in
the Project constitutes a Change of Control, the Company shall comply with the
obligations set forth under "--Change of Control" and shall not be obligated to
also comply with the provisions of this covenant.
A sale, transfer or other disposition governed by this covenant shall
not be subject to the covenant described below under "--Limitation on Asset
Sales of Collateral".
98
The Company's and its Restricted Subsidiaries' obligations to comply
with the provisions of this covenant will be terminated in the event that at any
time the notes attain Investment Grade status.
LIMITATION ON ASSET SALES OF COLLATERAL. The Company will not and will not
permit any of its Restricted Subsidiaries to, sell, transfer or otherwise
dispose of any interest in a Mirror Note or the construction account. In
addition, the Company will not, and will not permit any of the Restricted
Subsidiaries to, consummate an Asset Sale of other Collateral unless:
(1) the Company or the applicable Restricted Subsidiary,
as the case may be, receives consideration in connection with such
Asset Sale at least equal to the Fair Market Value of the Company's or
the applicable Restricted Subsidiary's proportionate interest in the
assets sold, transferred or otherwise disposed of;
(2) the consideration received by the Company or the
Restricted Subsidiary, as the case may be, from such Asset Sale shall
be in the form of cash, Cash Equivalents and/or Permitted Collateral
Assets; and
(3) such Asset Sale complies with all applicable
provisions described under "Possession, Use and Release of Collateral."
On the 366th day after the Company or a Restricted Subsidiary receives
Net Cash Proceeds from an Asset Sale or such earlier date, if any, as the Board
of Directors of the Company or of such Restricted Subsidiary determines not to
apply the Net Cash Proceeds relating to such Asset Sale either (A) to
permanently repay any Indebtedness secured by a Lien ranking prior to, or
(provided that a pro rata portion of such Net Cash Proceeds is applied to the
repayment of the notes) PARI PASSU with, the Lien on the applicable Collateral
for the benefit of the holders of notes, (B) to acquire Permitted Collateral
Assets or (C) a combination of prepayment and investment permitted by the
foregoing clauses (A) and (B) (each, a "NET COLLATERAL PROCEEDS OFFER TRIGGER
DATE"), such aggregate amount of Net Cash Proceeds which have not been applied
on or before such Net Collateral Proceeds Offer Trigger Date as permitted in the
preceding clauses (A), (B) and (C) (each a "NET COLLATERAL PROCEEDS OFFER
AMOUNT") shall be applied by the Company to make an offer to purchase (the "NET
COLLATERAL PROCEEDS OFFER") on a date (the "NET COLLATERAL PROCEEDS OFFER
PURCHASE DATE") not less than 30 nor more than 60 days following the later of
the applicable Net Collateral Proceeds Offer Trigger Date and the date the
Company receives Net Cash Proceeds from the sale of applicable Collateral, from
all holders on a PRO RATA basis, that principal amount of notes equal to the Net
Collateral Proceeds Offer Amount (subject to reduction as provided in the last
sentence of this paragraph) at a price equal to 100% of the principal amount of
the notes to be purchased, plus accrued and unpaid interest, if any, thereon to
the purchase date; PROVIDED, HOWEVER, that if at any time (i) any non-cash
consideration received by the Company or any Restricted Subsidiary, as the case
may be, in connection with such an Asset Sale is converted into or sold or
otherwise disposed of for cash or Cash Equivalents or (ii) any cash or Cash
Equivalents paid as consideration in connection with such Asset Sale are
received by the Company or a Restricted Subsidiary and the use by the Company or
a Restricted Subsidiary of such cash or Cash Equivalents in which the Company or
any Restricted Subsidiary has an undivided beneficial ownership interest ceases
to be subject to any restriction under agreements with the other beneficial
owners of such cash or Cash Equivalents preventing the Company or a Restricted
Subsidiary from applying such cash or Cash Equivalents to any use permitted by
clause (A), (B) or (C) above or to repurchase notes, then such conversion,
disposition or cessation, as the case maybe, shall be deemed to constitute such
an Asset Sale hereunder and the Net Cash Proceeds thereof shall be applied in
accordance with this covenant. Notwithstanding the foregoing, if a portion of
the Net Collateral Proceeds Offer Amount with respect to any Collateral is
required to be utilized to repay or offer to purchase Indebtedness secured by a
Lien on such Collateral ranking PARI PASSU with the Lien on such Collateral for
the benefit of the holders of the notes, a PRO RATA portion of such Net
Collateral Proceeds Offer Amount (based on the aggregate principal amount of
outstanding notes and the aggregate principal amount of such other Indebtedness)
may be utilized to permanently repay or purchase and retire such other
Indebtedness.
The Company may defer the Net Collateral Proceeds Offer until there is
an aggregate unutilized Net Collateral Proceeds Offer Amount equal to or in
excess of US$20.0 million resulting from one or more Asset
99
Sales or deemed Asset Sales (at which time, the entire unutilized Net Proceeds
Offer Amount, and not just the amount in excess of US$20.0 million, shall be
applied as required pursuant to the preceding paragraph).
In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and the Restricted Subsidiaries as an
entirety to a Person in a transaction permitted under "--Merger, Consolidation
and Sale of Assets," the successor corporation shall be deemed to have sold the
Collateral of the Company and the Restricted Subsidiaries not so transferred for
purposes of this covenant, and shall comply with the provisions of this covenant
with respect to such deemed sale as if it were an Asset Sale. In addition, the
Company's or the applicable Restricted Subsidiary's proportionate interest in
the Fair Market Value of such Collateral of the Company or the Restricted
Subsidiaries deemed to be sold shall be deemed to be Net Cash Proceeds to the
successor corporation for purposes of this covenant.
Each Net Collateral Proceeds Offer will be mailed to the record holders
as shown on the register of holders within 30 days following the later of the
Net Collateral Proceeds Offer Trigger Date and the date the Company receives Net
Cash Proceeds from the sale of applicable Collateral, with a copy to the
Trustee, and shall comply with the procedures set forth in the Indenture. Upon
receiving notice of the Net Collateral Proceeds Offer, holders may elect to
tender their notes in whole or in part in integral multiples of US$1,000 in
exchange for cash. To the extent holders properly tender notes in an amount
exceeding the Net Collateral Proceeds Offer Amount available to purchase notes,
notes of tendering holders will be purchased on a PRO RATA basis (based on
amounts tendered). A Net Collateral Proceeds Offer shall remain open for a
period of 20 business days or such longer period as may be required by law.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations to the extent such
laws and regulations are applicable in connection with the repurchase of notes
pursuant to a Net Collateral Proceeds Offer. To the extent that the provisions
of any securities laws or regulations conflict with this covenant, the Company
shall comply with the applicable securities laws and regulations and shall not
be deemed to have breached its obligations under this covenant by virtue
thereof.
The Company's and its Restricted Subsidiaries' obligations to comply
with the provisions of this covenant will be terminated on the Collateral
Release Date.
LIMITATION ON ASSET SALES OF NON-COLLATERAL. The Company will not, and will not
permit any of the Restricted Subsidiaries to, consummate an Asset Sale of an
asset that is not Collateral unless:
(1) the Company or the applicable Restricted Subsidiary,
as the case may be, receives consideration in connection with such
Asset Sale at least equal to the Fair Market Value of the Company's or
the applicable Restricted Subsidiary's proportionate interest in the
assets sold, transferred or otherwise disposed of; and
(2) at least 75% of the consideration received by the
Company or the Restricted Subsidiary, as the case may be, from such
Asset Sale shall be in the form of cash, Cash Equivalents and/or
Permitted Assets.
On the 366th day after the Company or a Restricted Subsidiary receives
Net Cash Proceeds from such an Asset Sale or such earlier date, if any, as the
Board of Directors of the Company or of such Restricted Subsidiary determines
not to apply the Net Cash Proceeds relating to such Asset Sale either (A) to
repay any Indebtedness secured by a Lien on the assets subject to such Asset
Sale, (B) to acquire Permitted Assets or (C) a combination of prepayment and
investment permitted by the foregoing clauses (A) and (B) (each, a "NET PROCEEDS
OFFER TRIGGER DATE"), such aggregate amount of Net Cash Proceeds which have not
been applied on or before such Net Proceeds Offer Trigger Date as permitted in
the preceding clauses (A), (B) and (C) (each a "NET PROCEEDS OFFER AMOUNT")
shall be applied by the Company to make an offer to purchase (the "NET PROCEEDS
OFFER") on a date (the "NET PROCEEDS OFFER PURCHASE DATE") not less than 30 nor
more than 60 days following the later of the applicable Net Proceeds Offer
Trigger Date and the date the Company receives Net Cash Proceeds from the sale
of applicable Collateral, from all holders on a PRO RATA basis, that principal
amount of notes equal to the Net Proceeds Offer Amount (subject to reduction as
provided in the last sentence of this paragraph) at a price equal to 100% of the
principal amount of the notes to be purchased, plus accrued and unpaid interest,
if any, thereon to the purchase date; PROVIDED,
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HOWEVER, that if at any time (i) any non-cash consideration received by the
Company or any Restricted Subsidiary, as the case may be, in connection with any
such Asset Sale is converted into or sold or otherwise disposed of for cash
(other than interest received with respect to any such non-cash consideration)
or Cash Equivalents or (ii) any cash or Cash Equivalents paid as consideration
in connection with such Asset Sale are received by the Company or a Restricted
Subsidiary and the use by the Company or a Restricted Subsidiary of such cash or
Cash Equivalents in which the Company or any Restricted Subsidiary has an
undivided beneficial ownership interest ceases to be subject to any restriction
under agreements with the other beneficial owners of such cash or Cash
Equivalents preventing the Company or a Restricted Subsidiary from applying such
cash or Cash Equivalents to any use permitted by clause (A), (B) or (C) above or
to repurchase notes, then such conversion, disposition or cessation shall be
deemed to constitute such an Asset Sale hereunder and the Net Cash Proceeds
thereof shall be applied in accordance with this covenant. Notwithstanding the
foregoing, if a portion of the Net Proceeds Offer Amount with respect to any
Asset Sale is required to be utilized to repay or offer to purchase any
Indebtedness (other than Subordinated Indebtedness), a pro rata portion of such
Net Proceeds Offer Amount (based on aggregate principal amount of outstanding
notes and the aggregate principal amount of such other Indebtedness) may be
utilized to permanently repay or purchase and retire such other Indebtedness.
The Company may defer the Net Proceeds Offer until there is an
aggregate unutilized Net Proceeds Offer Amount equal to or in excess of US$20.0
million resulting from one or more Asset Sales or deemed Asset Sales (at which
time, the entire unutilized Net Proceeds Offer Amount, and not just the amount
in excess of US$20.0 million, shall be applied as required pursuant to the
preceding paragraph).
In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and the Restricted Subsidiaries as an
entirety to a Person in a transaction permitted under "--Merger, Consolidation
and Sale of Assets," the successor corporation shall be deemed to have sold the
Non-Collateral of the Company and the Restricted Subsidiaries not so transferred
for purposes of this covenant, and shall comply with the provisions of this
covenant with respect to such deemed sale as if it were an Asset Sale. In
addition, the Company's or the applicable Restricted Subsidiary's proportionate
interest in the Fair Market Value of such Non-Collateral of the Company or the
Restricted Subsidiaries deemed to be sold shall be deemed to be Net Cash
Proceeds to the successor corporation for purposes of this covenant.
Each Net Proceeds Offer will be mailed to the record holders as shown
on the register of holders within 30 days following the later of the Net
Proceeds Offer Trigger Date and the date the Company receives Net Cash Proceeds
from the sale of applicable Collateral, with a copy to the Trustee, and shall
comply with the procedures set forth in the Indenture. Upon receiving notice of
the Net Proceeds Offer, holders may elect to tender their notes in whole or in
part in integral multiples of US$1,000 in exchange for cash. To the extent
holders properly tender notes in an amount exceeding the Net Proceeds Offer
Amount, notes of tendering holders will be purchased on a PRO RATA basis (based
on amounts tendered). A Net Proceeds Offer shall remain open for a period of 20
business days or such longer period as may be required by law.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations to the extent such
laws and regulations are applicable in connection with the repurchase of notes
pursuant to a Net Proceeds Offer. To the extent that the provisions of any
securities laws or regulations conflict this covenant, the Company shall comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations under this covenant by virtue thereof.
The Company's and its Restricted Subsidiaries' obligations to comply
with the provisions of this covenant will be terminated in the event that at any
time the notes attain Investment Grade status.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES. The Company will not, and will not cause or permit any of the
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or
permit to exist or become effective, any encumbrance or restriction on the
ability of any Restricted Subsidiary to:
(a) pay dividends or make any other distributions on or in respect
of its Capital Stock;
(b) make loans or advances or to pay any Indebtedness or other
obligation owed to the Company or any other Restricted Subsidiary; or
101
(c) transfer any of its property or assets to the Company or any
other Restricted Subsidiary,
in each of clauses (a), (b) and (c) above, except for such encumbrances or
restrictions existing under or by reasons of:
(1) applicable law;
(2) the Indenture, the Mirror Notes, any Guarantees and
the Security Documents;
(3) the Senior Credit Facility;
(4) customary non-assignment provisions of any contract
or any lease governing a leasehold interest;
(5) any instrument governing Acquired Indebtedness, which
encumbrance or restriction is not applicable to any Person, or the
properties or assets of any Person, other than the Person or the
properties or assets of the Person so acquired;
(6) agreements existing on the Issue Date to the extent
and in the manner such agreements are in effect on the Issue Date;
(7) any other agreement entered into after the Issue Date
which contains encumbrances and restrictions which are not materially
more restrictive with respect to any Restricted Subsidiary than those
in effect with respect to such Restricted Subsidiary pursuant to
agreements as in effect on the Issue Date;
(8) restrictions applicable to any Restricted Subsidiary
substantially all of whose assets relate to Oil Sands Projects (other
than the Project);
(9) customary restrictions on the transfer of any
property or assets arising under a security agreement governing a Lien
permitted under the Indenture;
(10) any agreement governing Refinancing Indebtedness
incurred to Refinance the Indebtedness issued, assumed or incurred
pursuant to an agreement referred to in clause (2), (3), (5), (6) or
(8) above; PROVIDED, HOWEVER, that the provisions relating to such
encumbrance or restriction contained in any such Refinancing
Indebtedness are not materially more restrictive than the provisions
relating to such encumbrance or restriction contained in agreements
referred to in such clause (2), (3), (5), (6) or (8); and
(11) any agreement governing the sale or disposition of
any Restricted Subsidiary which restricts dividends and distributions
pending such sale or disposition.
The Company's and its Restricted Subsidiaries' obligations to comply
with the provisions of this covenant will be terminated in the event that at any
time the notes attain Investment Grade status.
LIMITATION ON ISSUANCES OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES. The
Company will not permit any of the Restricted Subsidiaries to issue any
Preferred Stock (other than to the Company or to a Restricted Subsidiary) or
permit any Person (other than the Company or a Restricted Subsidiary) to own any
Preferred Stock of any Restricted Subsidiary. The Company will not, and will not
permit any Restricted Subsidiary to, issue, sell, transfer or dispose of any
Capital Stock of any Restricted Subsidiary that is not a Guarantor (other than
the granting of Liens permitted by the covenant described under "--Limitation on
Liens on Collateral" or "--Limitation on Liens on Non-Collateral," as
applicable) unless such issuance, sale, transfer or disposition results in the
issuer of such Capital Stock no longer being a Restricted Subsidiary.
The Company's and its Restricted Subsidiaries' obligations to comply
with the provisions of this covenant will be terminated in the event that at any
time the notes attain Investment Grade status.
LIMITATION ON LIENS ON COLLATERAL. The Company will not, and will not cause or
permit any Restricted Subsidiary to, directly or indirectly, create, incur,
assume or permit or suffer to exist any Liens of any kind upon a Mirror Note or,
prior to the Collateral Release Date, the construction account except, in each
case, for Liens created by the Indenture or the Security Documents for the
benefit of the holders of notes.
102
(A) In addition, prior to the Collateral Release Date, the Company
will not, and will not cause or permit any of the Restricted Subsidiaries to,
directly or indirectly, create, incur, assume or permit or suffer to exist any
Liens of any kind against or upon any other Collateral, whether owned on the
Issue Date or acquired after the Issue Date, other than:
(1) Liens in favor of JV Owners as contemplated by the
Joint Venture Agreement as such agreement is in effect on the Issue
Date;
(2) Liens existing on the Issue Date to the extent and in
the manner such Liens are in effect on the Issue Date;
(3) Liens created under the HMU Lease and under any
renewal, replacement or refinancing thereof, in each case governing the
types of assets included under or contemplated by the HMU Lease as of
the Issue Date;
(4) Liens created under the Mobile Equipment Lease and
under any lease or other arrangement that renews, replaces or
refinances the Mobile Equipment Lease, in each case governing the types
of assets included under or contemplated by the Mobile Equipment Lease
as of the Issue Date;
(5) Liens in favor of an MSF Owner as contemplated by the
Major Shared Facilities Agreement as such agreement is in effect on the
Issue Date;
(6) Liens securing Obligations under the Senior Credit
Facility incurred for purposes permitted thereunder and Refinancing
Indebtedness in respect thereof, not to exceed $100.0 million in
aggregate principal amount;
(7) Liens created under the Indenture and the Security
Documents for the benefit of the holders of notes;
(8) Liens ranking PARI PASSU in priority with Liens for
the benefit of the holders of notes securing Indebtedness incurred to
finance Oil Sands Projects which is secured by assets or property
relating to an Oil Sands Project, including Debottle-necking
Indebtedness (and any Refinancing Indebtedness incurred to Refinance
such Indebtedness); PROVIDED that the notes are equally and ratably
secured by any other assets of the Company and/or the Restricted
Subsidiaries securing such Indebtedness for so long as such
Indebtedness is secured by a Lien on Collateral ranking PARI PASSU in
priority with Liens for the benefit of the holders of notes (other than
Collateral granted for the benefit of the holders of notes by reason of
this proviso);
(9) Liens granted for the benefit of the holders of notes
by reason of the proviso of clause (8) of this covenant;
(10) Liens securing working capital and other Indebtedness
in an aggregate amount not to exceed the sum of (i) US$75.0 million in
principal amount and (ii) all other Obligations in respect of such
working capital and other Indebtedness (other than principal in excess
of US$75.0 million and any interest or fees relating to such excess);
(11) Liens securing letters of credit provided pursuant to
obligations of the Company and its Restricted Subsidiaries under the
Joint Venture Agreement as such agreement is in effect on the Issue
Date;
(12) Liens securing letters of credit provided to secure
environmental reclamation obligations to governmental agencies,
workers' compensation claims, payment obligations in connection with
self-insurance or similar requirements in the ordinary course of
business;
(13) Liens ranking at the same level in right of priority
with respect to Liens for the benefit of the holders of the notes as
the Indebtedness to which such Interest Swap Obligations relate ranks
with respect to the notes, in each case securing Obligations under
Interest Swap Obligations of a type permitted to be incurred under
clause (6) of the definition of "Permitted Indebtedness" incurred in
the ordinary course of business and not for speculative purposes;
103
(14) Liens securing Obligations under Currency Agreements
of a type permitted to be incurred under clause (7) of the definition
of "Permitted Indebtedness" which are incurred in the ordinary course
of business and not for speculative purposes; PROVIDED that, until
Completion of the Project, with respect to any such Liens ranking
senior in priority to Liens for the benefit of the holders of the
notes, such Liens either (a) secure hedges of notional purchase prices
to be received in connection with Commodity Agreements permitted to be
incurred under clauses (15) and (16) of this covenant, or (b) secure
notional principal amounts that, taken together with amounts hedged
pursuant to clause (a) above, do not in the aggregate exceed 50% of
budgeted revenue from the Project during the two-year period following
expected Completion of the Project (as evidenced by an Officer's
Certificate of the Company delivered to the Trustee within 30 days of
the effective date of such hedge);
(15) Liens securing Obligations under Commodity Agreements
(other than for Consumable Commodities) of a type permitted to be
incurred under clause (8) of the definition of "Permitted Indebtedness"
which relate to hedges (including forward sales, collars, floors and
other hedges) of production of the Project and which are incurred in
the ordinary course of business and not for speculative purposes;
PROVIDED that, until Completion of the Project, with respect to any
such Liens ranking senior in priority to Liens for the benefit of the
holders of the notes, such Commodity Agreements shall not involve
hedges in excess of the greater of (a) amounts permitted to be hedged
under the Senior Credit Facility as in effect on the Issue Date as
"Permitted Senior Hedging"; and (b) 25% of budgeted production from the
Project during the two-year period following Completion of the Project
(as evidenced by an Officer's Certificate of the Company delivered to
the Trustee within 30 days of the effective date of such hedge);
(16) Liens securing Obligations under Commodity Agreements
for Consumable Commodities of a type permitted to be incurred under
clause (8) of the definition of "Permitted Indebtedness" which relate
to hedges (including forward sales, collars, floors and other hedges)
of Consumable Commodities and which are incurred in the ordinary course
of business and not for speculative purposes; PROVIDED that, until
Completion of the Project, with respect to any such Liens ranking
senior in priority to Liens for the benefit of the holders of the
notes, such Commodity Agreements shall not involve hedges in excess of
the greater of (a) amounts permitted under the Senior Credit Facility
as in effect on the Issue Date as "Permitted Senior Hedging" and (b)
25% of budgeted consumption of Consumable Commodities by the Project
during the two-year period following Completion of the Project (as
evidenced by an Officer's Certificate of the Company delivered to the
Trustee within 30 days of the effective date of such hedge);
(17) Liens securing Obligations in an aggregate amount
from time to time after Completion of the Project not to exceed the sum
of (i) principal amount equal to 5% of Adjusted Consolidated Net
Tangible Assets and (ii) all other Obligations thereunder (other than
principal in excess of an amount equal to 5% of Adjusted Consolidated
Net Tangible Assets and any interest or fees relating to such excess);
(18) Liens ranking junior in priority to Liens for the
benefit of the holders of notes;
(19) Permitted Liens;
(20) Liens securing Obligations under Indebtedness
permitted to be incurred under clause (18) of the definition of
"Permitted Indebtedness"; and
(21) any other Liens expressly permitted by the terms of
the applicable Security Documents.
(B) From and following the Collateral Release Date, the Company
will not, and will not cause or permit any of the Restricted Subsidiaries to,
directly or indirectly, create, incur, assume, permit or suffer to exist any
Liens of any kind against or upon any property, right or asset that would have
constituted a portion of the Collateral prior to the Collateral Release Date
unless the notes are secured equally and ratably with (or prior to) any and all
obligations secured by such Liens, other than:
(1) Liens in favor of JV Owners as contemplated by the
Joint Venture Agreement as such agreement is in effect on the Issue
Date;
104
(2) Liens existing on the Issue Date to the extent and in
the manner such Liens are in effect on the Issue Date (other than Liens
ranking PARI PASSU or junior to the Notes on the Collateral Release
Date);
(3) Liens created under the HMU Lease and under any
renewal, replacement or refinancing thereof, in each case governing the
types of assets included under or contemplated by the HMU Lease as of
the Issue Date;
(4) Liens created under the Mobile Equipment Lease and
under any lease or other arrangement that renews, replaces or
refinances the Mobile Equipment Lease, in each case governing the types
of assets included under or contemplated by the Mobile Equipment Lease
as of the Issue Date;
(5) Liens in favor of an MSF Owner as contemplated by the
Major Shared Facilities Agreement as such agreement is in effect on the
Issue Date;
(6) Liens securing Obligations under the Senior Credit
Facility incurred for purposes permitted thereunder and Refinancing
Indebtedness in respect thereof, not to exceed $100.0 million in
aggregate principal amount;
(7) Liens created under the Indenture and the Security
Documents for the benefit of the holders of notes;
(8) Liens granted for the benefit of the holders of
notes;
(9) Liens securing working capital and other Indebtedness
in an aggregate amount not to exceed the sum of (i) US$75.0 million in
principal amount and (ii) all other Obligations in respect of such
working capital and other Indebtedness (other than principal in excess
of US$75.0 million and any interest or fees relating to such excess);
(10) Liens securing letters of credit provided pursuant to
obligations of the Company and its Restricted Subsidiaries under the
Joint Venture Agreement as such agreement is in effect on the Issue
Date;
(11) Liens securing letters of credit provided to secure
environmental reclamation obligations to governmental agencies,
workers' compensation claims, payment obligations in connection with
self-insurance or similar requirements in the ordinary course of
business;
(12) Liens ranking at the same level in right of priority
as the Liens relating to the Indebtedness to which Interest Swap
Obligations relate, in each case securing Obligations under Interest
Swap Obligations of a type permitted to be incurred under clause (6) of
the definition of "Permitted Indebtedness" incurred in the ordinary
course of business and not for speculative purposes, PROVIDED that the
Liens in respect of the Indebtedness to which such Interest Swap
Obligations relate are otherwise permitted under this paragraph (B);
(13) Liens securing Obligations under Currency Agreements
of a type permitted to be incurred under clause (7) of the definition
of "Permitted Indebtedness" which are incurred in the ordinary course
of business and not for speculative purposes;
(14) Liens securing Obligations under Commodity Agreements
(other than for Consumable Commodities) of a type permitted to be
incurred under clause (8) of the definition of "Permitted Indebtedness"
which relate to hedges (including forward sales, collars, floors and
other hedges) of production of the Project and which are incurred in
the ordinary course of business and not for speculative purposes;
(15) Liens securing Obligations under Commodity Agreements
for Consumable Commodities of a type permitted to be incurred under
clause (8) of the definition of "Permitted Indebtedness" which relate
to hedges (including forward sales, collars, floors and other hedges)
of Consumable Commodities and which are incurred in the ordinary course
of business and not for speculative purposes;
(16) Liens securing Obligations in an aggregate amount
from time to time after Completion of the Project not to exceed the sum
of (i) principal amount equal to 5% of Adjusted Consolidated Net
105
Tangible Assets and (ii) all other Obligations thereunder (other than
principal in excess of an amount equal to 5% of Adjusted Consolidated
Net Tangible Assets and any interest or fees relating to such excess);
(17) Liens ranking junior in priority to Liens for the
benefit of the holders of notes if the notes are secured by a Lien on
the same assets covered by such junior Lien;
(18) Permitted Liens;
(19) Liens securing Obligations under Indebtedness
permitted to be incurred under clause (18) of the definition of
"Permitted Indebtedness"; and
(20) any other Liens expressly permitted by the terms of
the applicable Security Documents.
(C) If any Lien incurred by the Company or any Restricted
Subsidiary would qualify in more than one of the categories of Liens set forth
in this covenant, the Company may designate under which category such incurrence
shall be deemed to have been made.
To the extent not specified in this covenant, Liens permitted by this
covenant may be senior, PARI PASSU or junior in right of priority to Liens for
the benefit of the holders of notes. To the extent Liens permitted by this
covenant are specified as ranking senior in priority to the Liens for the
benefit of the holders of the notes, such permitted Liens may be senior, PARI
PASSU or junior in priority to the Liens for the benefit of the holders of the
notes. To the extent Liens permitted by this covenant are specified as ranking
PARI PASSU in priority with the Liens for the benefit of the holders of the
notes, such permitted Liens may be PARI PASSU with or junior to the Liens for
the benefit of the holders of the notes. Any holder of Obligations secured by
Liens ranking PARI PASSU or junior in priority to the Liens for the benefit of
the holders of the notes shall become a party to and comply with all of the
provisions of the Principal Inter-Creditor Agreement applicable to the
Collateral which secures such Obligations.
If requested in writing by the Company, the Trustee and the Collateral
Agent shall execute and deliver such documents, instruments or statements and
take such other action as the Company may request to evidence or confirm that a
Lien falling under this "Limitation on Liens on Collateral" provision is senior
or PARI PASSU, as applicable, in priority under the Inter-Creditor Agreement to
Liens for the benefit of the holders of the notes, so long as an opinion from
legal counsel has been provided to the Trustee to the effect that the indenture
governing the notes permits such a Lien.
For the avoidance of doubt, the Company or any of its Restricted
Subsidiaries may create, incur, assume, permit or suffer to exist any Liens upon
the Collateral that are not permitted by any one or more of the clauses of
paragraph (A) or paragraph (B), as the case may be, if such Liens are permitted
under any other clause or clauses of such paragraph.
LIMITATION ON LIENS ON NON-COLLATERAL. The Company will not, and will not cause
or permit any of the Restricted Subsidiaries to, directly or indirectly, create,
incur, assume or permit or suffer to exist any Liens of any kind against or upon
any property or assets of the Company, any Mirror Note Issuer or any Guarantor
not included in the Collateral and/or any proceeds therefrom, or assign or
otherwise convey any right to receive income or profits therefrom unless the
notes, a Mirror Note or a Guarantee, as applicable, is equally and ratably
secured, except for:
(1) Liens existing as of the Issue Date, including,
without limitation, Liens in favor of the lenders under the Senior
Credit Facility;
(2) Liens on property, assets, rights or proceeds
acquired after the Issue Date;
(3) Liens on rights in respect of any leases relating to
oil sands properties other than the lease on the western portion of
Lease 13;
(4) Liens securing the notes, any Mirror Note or any
Guarantee;
(5) Liens in favor of the Company, any Mirror Note Issuer
or a Guarantor;
106
(6) Liens securing Refinancing Indebtedness which is
incurred to Refinance any Indebtedness secured by a Lien on property or
assets not included in the Collateral permitted under the Indenture;
PROVIDED, HOWEVER, that such Liens do not extend to or cover any
property or assets of the Company or any of the Restricted Subsidiaries
not securing the Indebtedness so Refinanced; and
(7) Permitted Liens.
MERGER, CONSOLIDATION AND SALE OF ASSETS. The Company will not, in a single
transaction or series of related transactions, consolidate or merge with or into
any Person, or sell, assign, transfer, lease, convey or otherwise dispose of (or
cause or permit any Restricted Subsidiary to sell, assign, transfer, lease,
convey or otherwise dispose of) all or substantially all of the Company's assets
(determined on a consolidated basis for the Company and the Restricted
Subsidiaries) whether as an entirety or substantially as an entirety to any
Person unless:
(1) either (A) the Company shall be the surviving or
continuing corporation or (B) the Person (if other than the Company)
formed by such consolidation or into which the Company is merged or the
Person which acquires by sale, assignment, transfer, lease, conveyance
or other disposition the properties and assets of the Company and the
Restricted Subsidiaries substantially as an entirety (the "SURVIVING
ENTITY") (x) shall be a corporation organized and validly existing
under the laws of the United States or any State thereof or the
District of Columbia or of Canada or any province or territory thereof
and (y) shall expressly assume, by supplemental indenture, executed and
delivered to the Trustee, the due and punctual payment of the principal
of, and premium, if any, and interest on all of the notes and the
performance of every covenant of the notes, the Indenture, the Security
Documents, the Inter-Creditor Agreements and the Registration Rights
Agreement on the part of the Company to be performed or observed;
(2) immediately after giving effect to such transaction
and the assumption contemplated by clause (1)(B)(y) above (including
giving effect to any Indebtedness and Acquired Indebtedness incurred or
anticipated to be incurred in connection with or in respect of such
transaction), the Company or such Surviving Entity, as the case may be,
shall (i) be able to incur at least $1.00 of Ratio Indebtedness
pursuant to the covenant described under "--Limitation on Incurrence of
Additional Indebtedness" and (ii) have a Consolidated Net Worth at
least equal to the Consolidated Net Worth of the Company immediately
prior to such transaction; PROVIDED that the Company shall not be
required to comply with the provisions of this clause (2) (and this
clause (2) shall terminate) in the event that at any time the notes
attain Investment Grade status;
(3) immediately after giving effect to such transaction
and the assumption contemplated by clause (1)(B)(y) above (including,
without limitation, giving effect to any Indebtedness and Acquired
Indebtedness incurred or anticipated to be incurred and any Lien
granted in connection with or in respect of the transaction), no
Default or Event of Default shall have occurred and be continuing; and
(4) the Company or the Surviving Entity shall have
delivered to the Trustee an officer's certificate and an opinion of
counsel, each stating that such consolidation, merger, sale,
assignment, transfer, lease, conveyance or other disposition and, if a
supplemental indenture is required in connection with such transaction,
such supplemental indenture, comply with the applicable provisions of
the Indenture and that all conditions precedent in the Indenture
relating to such transaction have been satisfied.
For purposes of the foregoing, the transfer (by lease, assignment, sale
or otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries, the Capital Stock of which constitutes all or substantially all of
the properties and assets of the Company, shall be deemed to be the transfer of
all or substantially all of the properties and assets of the Company.
The Indenture provides that upon any consolidation, combination or
merger or any transfer of all or substantially all of the assets of the Company
in accordance with the foregoing in which the Company is not the continuing
corporation, the successor Person formed by such consolidation or into which the
Company is merged or to which such conveyance, lease or transfer is made shall
succeed to, and be substituted for, and
107
may exercise every right and power of, the Company under the Indenture and the
notes with the same effect as if such surviving entity had been named as such.
No Mirror Note Issuer or Guarantor (other than (i) any Mirror Note
Issuer whose Mirror Note is to be cancelled in accordance with the terms of the
Mirror Note and the Indenture, (ii) any Subsidiary Guarantor whose Subsidiary
Guarantee is to be released in accordance with the terms of the Subsidiary
Guarantee and the Indenture, and (iii) any Mirror Note Guarantor whose Mirror
Note Guarantee is to be cancelled in accordance with the terms of the Mirror
Note Guarantee and the Indenture, in each case in connection with any
transaction complying with the provisions of the covenant described under
"--Limitation on Asset Sales of Collateral" or "--Limitation on Asset Sales of
Non-Collateral," as applicable) will, and the Company will not cause or permit
any such Person to, consolidate with or merge with or into any other Person
other than the Company, a Mirror Note Issuer or a Guarantor unless:
(1) the entity formed by or surviving any such
consolidation or merger is a corporation organized and existing under
the laws of the United States or any State thereof or the District of
Columbia or of Canada or any province or territory thereof;
(2) such entity assumes by Mirror Note, supplemental
indenture or Mirror Note Guarantee, as the case may be, all of the
obligations, if any, of the Mirror Note Issuer or the Guarantor, as the
case may be, under the Indenture, the Security Documents, the
Inter-Creditor Agreements, the Mirror Notes, the applicable Guarantee
and the Registration Rights Agreement;
(3) immediately after giving effect to such transaction,
no Default or Event of Default shall have occurred and be continuing;
(4) immediately after giving effect to such transaction
and the use of any net proceeds therefrom on a PRO FORMA basis, the
Company could satisfy the provisions of clause (2) of the first
paragraph of this covenant (if still in effect); and
(5) the Company shall have delivered to the Trustee an
officer's certificate and opinion of counsel, each stating that such
consolidation or merger and, if a supplemental indenture is required in
connection with such transaction, such supplemental indenture comply
with the applicable provisions of the Indenture and that all conditions
precedent in the Indenture relating to such transaction have been
satisfied.
LIMITATION ON TRANSACTIONS WITH AFFILIATES. (a) The Company will not, and will
not permit any of the Restricted Subsidiaries to, directly or indirectly, enter
into or permit to exist any transaction or series of related transactions
(including, without limitation, the purchase, sale, lease or exchange of any
property or the rendering of any service) with, or for the benefit of, any of
its Affiliates (each an "AFFILIATE TRANSACTION"), other than:
(x) Affiliate Transactions permitted under paragraph (b)
below; and
(y) Affiliate Transactions on terms that are not
materially less favorable than those that would have reasonably been
expected in a comparable transaction at such time on an arm's-length
basis from a Person that is not an Affiliate of the Company or such
Restricted Subsidiary.
All Affiliate Transactions (and each series of related Affiliate
Transactions which are similar or part of a common plan) involving aggregate
payments or other property with respect to which the Company's ownership
interest has a Fair Market Value in excess of US$10.0 million shall be approved
by the Board of Directors of the Company or such Restricted Subsidiary, as the
case may be, such approval to be evidenced by a Board Resolution stating that
such Board of Directors has determined that such transaction complies with the
foregoing provisions. If the Company or any Restricted Subsidiary enters into an
Affiliate Transaction (or series of related Affiliate Transactions related to a
common plan) with respect to which the Company's ownership interest has an
aggregate Fair Market Value of more than US$25.0 million, the Company or such
Restricted Subsidiary, as the case may be, shall, prior to the consummation
thereof, obtain a favorable opinion as to the fairness of such transaction or
series of related transactions to the Company or the relevant Restricted
Subsidiary, as the case may be, from a financial point of view, from an
Independent Financial Advisor and file the same with the Trustee.
108
(b) The restrictions set forth in clause (a) shall not apply to:
(1) employment, consulting and compensation arrangements
and agreements of the Company or any Restricted Subsidiary consistent
with past practice or approved by a majority of the disinterested
members of the Board of Directors (or a committee comprised of
disinterested directors);
(2) reasonable fees and compensation paid to, and
indemnity provided on behalf of, officers, directors, employees,
consultants or agents of the Company or any Restricted Subsidiary as
determined in good faith by the Company's Board of Directors or senior
management;
(3) transactions exclusively between or among the Company
and any of the Restricted Subsidiaries or exclusively between or among
such Restricted Subsidiaries; PROVIDED that such transactions are not
otherwise prohibited by the Indenture;
(4) affiliate transactions existing on the Issue Date and
on the terms in effect on the Issue Date, and extensions and renewals
of such transactions on the terms in effect on the Issue Date; and
(5) Restricted Payments or Permitted Investments
permitted by the Indenture.
The Company's and its Restricted Subsidiaries' obligations to comply
with the provisions of this covenant will be terminated in the event that at any
time the notes attain Investment Grade status.
ISSUANCE OF SUBSIDIARY GUARANTEES AND MIRROR NOTE GUARANTEES. If the Company
forms or acquires any Restricted Subsidiary (other than an Acquired Subsidiary
for so long as it is not a Wholly Owned Restricted Subsidiary) that is not a
Guarantor or Mirror Note Issuer and that incurs any Indebtedness (other than
Indebtedness owing to the Company or a Restricted Subsidiary), or if any
Restricted Subsidiary that is not a Guarantor or a Mirror Note Issuer guarantees
any Indebtedness of the Company, a Guarantor or a Mirror Note Issuer (other than
a guarantee of Indebtedness owing to the Company or a Restricted Subsidiary),
then the Company shall cause such Restricted Subsidiary to:
(1) execute and deliver to the Trustee a supplemental
indenture in form reasonably satisfactory to the Trustee pursuant to
which such Restricted Subsidiary shall unconditionally guarantee (each,
a "SUBSIDIARY GUARANTEE") all of the Company's obligations under the
notes and the Indenture on the terms set forth in the Indenture or
unconditionally guarantee to the Person to whom the applicable Mirror
Note is issued (each, a "MIRROR NOTE GUARANTEE") all of the Mirror Note
Issuers' obligations under the Mirror Notes; and
(2) deliver to the Trustee an opinion of counsel (which
may contain customary exceptions) that such supplemental indenture or
Mirror Note Guarantee has been duly authorized, executed and delivered
by such Restricted Subsidiary and constitutes a legal, valid, binding
and enforceable obligation of such Restricted Subsidiary.
Thereafter, such Restricted Subsidiary shall be a Guarantor for all
purposes of the Indenture. The Company may cause any other Restricted Subsidiary
of the Company to issue a Subsidiary Guarantee or Mirror Note Guarantee and
become a Guarantor. At any time the Indebtedness or guarantee of Indebtedness
referred to above is repaid or released without further obligation by such
Restricted Subsidiary, such Restricted Subsidiary need no longer be a Guarantor
for purposes of this covenant, and the Trustee shall promptly execute such
documents and instrument as the Company or such Restricted Subsidiary may
request to evidence the termination of the applicable Guarantee.
The Company's and its Restricted Subsidiaries' obligations to comply
with the provisions of this covenant will be terminated in the event that at any
time the notes attain Investment Grade status.
PAYMENTS FOR CONSENT. The Company will not, and will not cause or permit any of
its Subsidiaries to, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any holder of
any notes for or as an inducement to any consent, waiver or amendment of any of
the terms or provisions of the Indenture, the notes, any Guarantees, the Mirror
Notes, the Security Documents or the Inter-Creditor Agreements unless such
consideration is offered to be paid to all holders who so consent,
109
waive or agree to amend in the time frame set forth in solicitation documents
relating to such consent, waiver or amendment.
LIMITATION ON DESIGNATIONS OF UNRESTRICTED SUBSIDIARIES. As of the Issue Date,
there were no Unrestricted Subsidiaries.
(1) After the Issue Date and prior to the date the notes
attain Investment Grade status, the Company may designate any
Subsidiary of the Company (other than Western L.P., Newco, a Guarantor,
or a Subsidiary of the Company which owns Capital Stock of a Restricted
Subsidiary) as an "Unrestricted Subsidiary" under the Indenture (a
"DESIGNATION") only if:
(a) no Default or Event of Default shall have
occurred and be continuing at the time of or after giving
effect to such Designation; and
(b) either (i) the Company would be permitted
under the Indenture to make an Investment at the time of
Designation (assuming the effectiveness of such Designation)
in an amount (the "DESIGNATION AMOUNT") equal to the sum of
(A) the Fair Market Value of the Capital Stock of such
Subsidiary owned by the Company and/or any of the Restricted
Subsidiaries on such date and (B) the aggregate amount of
Indebtedness of such Subsidiary owed to the Company and the
Restricted Subsidiaries on such date or (ii) the Subsidiary to
be so designated has total assets of US$10,000 or less when
taken individually, and has total assets of US$100,000 or less
when taken together with all other Subsidiaries so designated
since the Issue Date at the time of their designation.
From and following the date the notes attain Investment Grade status,
the Company may not designate any Subsidiary of the Company as an "Unrestricted
Subsidiary" under the Indenture. For the avoidance of doubt, this provision will
not affect the status of any Subsidiary that is an Unrestricted Subsidiary as of
the date the notes first attain Investment Grade status.
In the event of any Designation under clause (b)(i) above, the Company
shall be deemed to have made an Investment constituting a Restricted Payment in
the Designation Amount pursuant to the covenant described under "--Limitation on
Restricted Payments" for all purposes of the Indenture.
(2) The Indenture further provides that the Company will
not, and will not permit any Restricted Subsidiary to, at any time:
(a) provide direct or indirect credit support
for or a guarantee of any Indebtedness of any Unrestricted
Subsidiary (including any undertaking, agreement or instrument
evidencing such Indebtedness);
(b) be directly or indirectly liable for any
Indebtedness of any Unrestricted Subsidiary; or
(c) be directly or indirectly liable for any
Indebtedness which provides that the holder thereof may (upon
notice, lapse of time or both) declare a default thereon or
cause the payment thereof to be accelerated or payable prior
to its final scheduled maturity upon the occurrence of a
default with respect to any Indebtedness of any Unrestricted
Subsidiary (including any right to take enforcement action
against such Unrestricted Subsidiary),
except, in the case of clauses (a), (b) or (c), to the extent the amount for
which such Person would be liable would be a Restricted Payment permitted under
the covenant described under "--Limitation on Restricted Payments".
(3) The Indenture further provides that the Company may
revoke any Designation of a Subsidiary as an Unrestricted Subsidiary
("REVOCATION"), whereupon such Subsidiary shall then constitute a
Restricted Subsidiary, if
(a) no Default or Event of Default shall have
occurred and be continuing at the time and after giving effect
to such Revocation; and
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(b) all Liens and Indebtedness of such
Unrestricted Subsidiaries outstanding immediately following
such Revocation would, if incurred at such time, have been
permitted to be incurred for all purposes of the Indenture.
All Designations and Revocations must be evidenced by an officer's
certificate of the Company delivered to the Trustee certifying compliance with
the foregoing provisions.
(4) The Company's obligations to comply with the
provisions of the preceding paragraph (2) will be terminated in the
event that at any time the notes attain Investment Grade status.
LIMITATION ON EXTRAORDINARY RESOLUTIONS, UNANIMOUS RESOLUTIONS AND AMENDMENTS
TO JOINT VENTURE AND PROJECT AGREEMENTS. Except to effect incurrence of
Indebtedness, incurrence of Liens, Asset Sales and other transactions to be
effected by the Company and its Restricted Subsidiaries in compliance with the
other provisions of the Indenture, the Company will not, and will not permit any
Restricted Subsidiary to:
(1) vote in favor of any Extraordinary Resolution (as
defined in the Joint Venture Agreement as in effect on the Issue Date),
or consent in writing to any matter requiring written consent of all of
the JV Owners, or amend, waive or modify the Joint Venture Agreement or
any related agreement to:
(a) permit any ownership interests in or assets
included in the Project to become subject to any Liens created
by any Person other than the Company or any Restricted
Subsidiary unless such Liens could have been incurred by a
Restricted Subsidiary under the Indenture, in which case (i)
such Liens shall be deemed to have been incurred by a
Restricted Subsidiary for all purposes of the Indenture, and
(ii) the assets securing such Liens shall also secure the
notes pursuant to a Lien subject only to Liens that would have
been permitted to be incurred on such assets if such assets
were owned by a Restricted Subsidiary; or
(b) permit any Person other than the Company or
any Restricted Subsidiary through which ownership interests in
or assets included in the Project are held to incur any
Indebtedness unless such Indebtedness could have been incurred
by a Restricted Subsidiary under the Indenture, in which case
such Indebtedness shall be deemed to have been incurred by a
Restricted Subsidiary for all purposes of the Indenture; or
(c) permit any Person other than the Company or
any Restricted Subsidiary to sell, transfer or otherwise
dispose of any ownership interests in or assets included in
the Project unless (i) such sale, transfer or other
disposition could have been made by a Restricted Subsidiary in
compliance with the covenant described under "--Limitation on
Sales of the Project Interest" and (ii) the proceeds from such
sale, transfer or other disposition are applied in accordance
with the covenant described under "--Limitation on Asset Sales
of Collateral"; or
(2) amend, waive or modify any other material agreement
(including, without limitation, material agreements with Persons other
than the JV Owners) related to the Project in a manner that, when taken
together with all amendments, waivers, modifications and agreements
made concurrently therewith, could reasonably be expected to (i)
adversely affect the ability of the Company to pay when due any
principal, interest or premium with respect to the notes, or (ii)
materially adversely affect the validity or priority of any Lien for
the benefit of the holders of the notes on the Collateral taken as a
whole, or on any material portion of the Collateral.
The Company's and its Restricted Subsidiaries' obligations to comply
with the provisions of paragraphs (1)(b) and (c) and 2(ii) of this covenant will
be terminated on the Collateral Release Date.
LIMITATION ON SALE AND LEASEBACK TRANSACTIONS. The Company will not, and will
not permit any of its Restricted Subsidiaries to, enter into any Sale and
Leaseback Transaction with respect to any portion of the Collateral.
Notwithstanding the foregoing, the Company and the Restricted Subsidiaries may
enter into Sale and Leaseback Transactions with respect to any portion of the
Collateral; PROVIDED that (a) the Attributable Value of such Sale and Leaseback
Transaction shall be deemed to be Indebtedness of the Company or such Restricted
Subsidiary, as the case may be, (b) after giving PRO FORMA effect to any such
Sale and Leaseback Transaction and the foregoing clause (a), the Company would
be able to incur such deemed Indebtedness
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pursuant to the covenant described under "Limitation on Incurrence of Additional
Indebtedness" above (to the extent the Company and its Restricted Subsidiaries
are then required to comply with the provisions of such covenant) and (c) such
Sale and Leaseback Transaction shall be in compliance with the covenant
described under "Limitations on Liens on Collateral" (to the extent the Company
and its Restricted Subsidiaries are then required to comply with the provisions
of such covenant).
LIMITATION ON BUSINESS ACTIVITIES. The Company shall not, and shall not permit
any Restricted Subsidiary to, conduct any trade or business other than a
Permitted Business.
The Company's and its Restricted Subsidiaries' obligations to comply
with the provisions of this covenant will be terminated in the event that at any
time the notes attain Investment Grade status.
LIMITATION ON STATUS AS INVESTMENT COMPANY. The Company will not, and will not
permit any of its Subsidiaries to, conduct its business in a fashion that would
cause the Company to be required to register as an "investment company" (as that
term is defined in the Investment Company Act of 1940, as amended (the
"INVESTMENT COMPANY ACT")).
MAINTENANCE OF INSURANCE. The Company will maintain, and will cause the
Restricted Subsidiaries to maintain, insurance with responsible carriers against
such risks and in such amounts and with such deductibles, retention,
self-insurance and co-insurance provisions as are customarily carried by similar
businesses of similar size; PROVIDED that the Company or any Restricted
Subsidiary may discontinue any policy of insurance (other than the Cost Overrun
Insurance, which the Company will use all reasonable efforts to maintain until
Completion of the Project) if it reasonably determines in good faith that such
discontinuance will not adversely affect the holders of notes.
REPORTS TO HOLDERS. The Indenture provides that whether or not required by the
rules and regulations of the Commission, the Company shall furnish to the
holders of the notes all annual and quarterly financial information that would
be required to be contained in a filing with the Commission on Forms 20-F, 40-F
and 6-K, as applicable, if the Company were required to file such Forms,
including a "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and, with respect to the annual financial information, a
report thereon by the Company's chartered accountants. In addition, whether or
not required by the rules and regulations of the Commission, the Company will
file a copy of all such information and reports with the Commission for public
availability (unless the Commission will not accept such a filing). The Company
will also comply with the other provisions of TIA 314(a).
EVENTS OF DEFAULT
The following events are defined in the Indenture as "EVENTS OF
DEFAULT":
(1) the failure to pay interest on any notes when the
same becomes due and payable which default continues for a period of 30
days;
(2) the failure to pay the principal on any notes, when
such principal becomes due and payable, at maturity, upon redemption or
otherwise (including the failure to make a payment to purchase notes
tendered pursuant to a Change of Control Offer, Project Interest Sale
Offer, Net Collateral Proceeds Offer or a Net Proceeds Offer);
(3) a default in the observance or performance of any
other covenant or agreement contained in the Indenture or the notes
which default continues for a period of 30 days after the Company
receives written notice specifying the default from the Trustee or the
holders of at least 25% of the outstanding principal amount of the
notes (except in the case of a default with respect to the covenant
described under "--Certain Covenants--Merger, Consolidation and Sale of
Assets," which will constitute an Event of Default with such notice
requirement but without such passage of time requirement);
(4) default by the Company or any Restricted Subsidiary
in the performance of or compliance with, or breach of, any material
term, covenant, condition, or provision of the Security Documents or
the Inter-Creditor Agreements, which default or breach shall continue
unremedied for 45 days after written notice to the Company and the
112
applicable Pledgor by the Trustee or to the Company and the applicable
Pledgor and the Trustee by holders of at least 25% in aggregate
principal amount of the outstanding notes;
(5) a default under any mortgage, indenture or instrument
under which there may be issued or by which there may be secured or
evidenced any Indebtedness of the Company or of any Restricted
Subsidiary (or the payment of which is guaranteed by the Company or any
Restricted Subsidiary), whether such Indebtedness now exists or is
created after the Issue Date, which default (A) is caused by a failure
to pay principal of such Indebtedness after any applicable grace period
provided in such Indebtedness on the date of such default, as the same
may be extended or waived (a "PAYMENT DEFAULT") or (B) results in the
acceleration of such Indebtedness prior to its express maturity (and
such acceleration is not rescinded, or such Indebtedness is not repaid,
within 30 days) and, in each case, the principal amount of any such
Indebtedness, together with the principal amount of any other such
Indebtedness under which there has been an uncured and unwaived payment
default or the maturity of which has been so accelerated (and such
acceleration is not rescinded, or such Indebtedness is not repaid,
within 30 days), aggregates US$50.0 million;
(6) one or more judgments in an aggregate amount in
excess of US$50.0 million not covered by adequate insurance shall have
been rendered by a court of competent jurisdiction against the Company
or any of the Restricted Subsidiaries and such judgments remain
undischarged, unpaid, unbonded or unstayed for a period of 60 days
after such judgment or judgments become final and nonappealable;
(7) either any holder of Indebtedness secured by any of
the Collateral or any holder of at least US$50.0 million in aggregate
principal amount of Indebtedness of the Company or any of its
Restricted Subsidiaries shall commence (or have commenced on its
behalf) judicial proceedings to foreclose upon assets of the Company or
any of its Restricted Subsidiaries having an aggregate Fair Market
Value, individually or in the aggregate, in excess of US$50.0 million
or shall have exercised any right under applicable law or applicable
security documents to take ownership of any such assets in lieu of
foreclosure;
(8) except as contemplated by their terms, (A) any of the
Security Documents or the Inter-Creditor Agreements ceases to be in
full force and effect or (B) any of the Security Documents or the
Inter-Creditor Agreements ceases to give the Collateral Agent or the
Trustee (as applicable under the relevant documents), in any material
respect, the Liens, rights, powers and privileges purported to be
created thereby which default in the case of clause (B) continues
unremedied for a period of 45 days;
(9) (A) any Guarantor which is a Significant Subsidiary
denies its liability under its Guarantee (other than by reason of
release of such Guarantor in accordance with the terms of the
Indenture) or (B) through no fault of the Company or any Subsidiary of
the Company, any Guarantee of a Significant Subsidiary of the Company
ceases to be in full force and effect or any Guarantee of such a
Significant Subsidiary is declared to be null and void and
unenforceable or any Guarantee of such a Significant Subsidiary is
found to be invalid which default in the case of clause (B) continues
unremedied for a period of 30 days; or
(10) certain events of bankruptcy affecting the Company or
any of its Significant Subsidiaries occur.
If an Event of Default (other than an Event of Default specified in
clause (10) above) shall occur and be continuing, the Trustee or the holders of
at least 25% in principal amount of outstanding notes may declare the principal
of, premium, if any, and accrued interest on all the notes to be due and payable
by notice in writing to the Company and (if given by the holders) the Trustee
specifying the respective Events of Default and that it is a "notice of
acceleration," and the same shall become immediately due and payable. If an
Event of Default specified in clause (10) above occurs and is continuing, then
all unpaid principal of, premium, if any, and accrued and unpaid interest on all
of the outstanding notes shall IPSO FACTO become and be immediately due and
payable without any declaration or other act on the part of the Trustee or any
holder.
The Indenture provides that, at any time after a declaration of
acceleration with respect to the notes as described in the preceding paragraph
(but before a foreclosure (whether pursuant to judicial proceedings or
otherwise) or the taking of ownership in lieu of foreclosure, upon any
Collateral by the Collateral Agent (on
113
behalf of the Trustee or the holders of notes), by the Trustee or at the
direction of the holders of notes), the holders of a majority in principal
amount of the then outstanding notes may rescind and cancel such declaration and
its consequences:
(1) if the rescission would not conflict with any
judgment or decree;
(2) if all existing Events of Default have been cured or
waived except nonpayment of principal or interest that has become due
solely because of the acceleration;
(3) to the extent the payment of such interest is lawful,
if interest on overdue installments of interest and overdue principal,
which has become due otherwise than by such declaration of
acceleration, has been paid;
(4) if the Trustee has been paid its reasonable
compensation and reimbursed for its reasonable expenses, disbursements
and advances; and
(5) in the event of the cure or waiver of an Event of
Default of the type described in clause (10) of the description above
of Events of Default, the Trustee shall have received an officer's
certificate and an opinion of counsel that such Event of Default has
been cured or waived.
No such rescission shall affect any subsequent Default or Event of
Default or impair any right consequent thereto.
The holders of a majority in principal amount of the then outstanding
notes may waive any existing Default or Event of Default under the Indenture,
and its consequences, except a default in the payment of the principal of or
premium, if any, or interest on any notes.
Holders of the notes may not enforce the Indenture, the notes, any
Guarantees, the Security Documents or the Inter-Creditor Agreements except as
provided in the Indenture and under the TIA. Subject to the provisions of the
Indenture relating to the duties of the Trustee, the Trustee is under no
obligation to exercise any of its rights, or powers under the Indenture, the
notes, any Guarantees, the Security Documents or the Inter-Creditor Agreements
at the request, order or direction of any of the Holders, unless such Holders
have offered to the Trustee reasonable indemnity. Subject to all provisions of
the Indenture, the Security Documents and the Inter-Creditor Agreements and
applicable law, the Holders of a majority in aggregate principal amount of the
then outstanding notes have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or exercising
any trust or power confined to the Trustee.
Under the Indenture, the Company is required to provide an officer's
certificate to the Trustee promptly upon the Company obtaining knowledge of any
Default or Event of Default (PROVIDED that the Company shall provide such
certification at least annually whether or not it knows of any Default or Event
of Default) that has occurred and, if applicable, describe such Default or Event
of Default and the status thereof.
FALL-AWAY OF COVENANTS
From and following such time as the notes are first rated Investment
Grade, the covenants described under the following headings will not apply:
(1) "--Certain Covenants--Limitation on Incurrence of
Additional Indebtedness";
(2) "--Certain Covenants--Limitation on Restricted
Payments";
(3) "--Certain Covenants--Limitation on Sales of the
Project Interest";
(4) "--Certain Covenants--Limitation on Asset Sales of
Non-Collateral";
(5) "--Certain Covenants--Limitation on Dividend and
Other Payment Restrictions Affecting Restricted Subsidiaries";
(6) "--Certain Covenants--Limitation on Issuances of
Capital Stock of Restricted Subsidiaries";
(7) "--Certain Covenants--Limitation on Transactions with
Affiliates";
114
(8) "--Certain Covenants--Issuance of Subsidiary
Guarantees and Mirror Note Guarantees"; and
(9) "--Certain Covenants--Limitation on Business
Activities."
In addition, certain provisions of the covenants described under
"--Certain Covenants--Merger, Consolidation and Sale of Assets" and "--Certain
Covenants--Limitation on Designations of Unrestricted Subsidiaries" will not
apply from and following such time as the notes are first rated Investment
Grade.
From and following the Collateral Release Date, the covenant described
under the heading "--Certain Covenants--Limitation on Asset Sales of Collateral"
will not apply. In addition, certain provisions of the covenant described under
"--Certain Covenants--Limitation on Extraordinary Resolutions, Unanimous
Resolutions and Amendments to Joint Venture and Project Agreements" and
"--Certain Covenants--Limitation on Liens on Collateral" will not apply from and
following the Collateral Release Date.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have its
obligations and the obligations of any Guarantors discharged with respect to the
outstanding notes ("LEGAL DEFEASANCE"). Such Legal Defeasance means that the
Company shall be deemed to have paid and discharged the entire indebtedness
represented by the outstanding notes, except for:
(1) the rights of holders to receive payments in respect
of the principal of, premium, if any, and interest on the notes when
such payments are due;
(2) the Company's obligations with respect to the notes
concerning issuing temporary notes, registration of notes, mutilated,
destroyed, lost or stolen notes and the maintenance of an office or
agency for payments;
(3) the rights, powers, trust, duties and immunities of
the Trustee and the Company's obligations in connection therewith; and
(4) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to
have the obligations of the Company released with respect to certain covenants
that are described in the Indenture ("COVENANT DEFEASANCE") and thereafter any
omission or failure to comply, with such obligations shall not constitute a
Default or Event of Default with respect to the notes. In the event Covenant
Defeasance occurs, certain events (not including nonpayment, bankruptcy,
receivership, reorganization and insolvency events) described under "Events of
Default" will no longer constitute an Event of Default with respect to the
notes.
In order to exercise Legal Defeasance or Covenant Defeasance:
(1) the Company must irrevocably deposit with the
Trustee, in trust, for the benefit of the holders cash in US dollars,
non-callable U.S. government obligations, or a combination thereof, in
such amounts as will be sufficient, in the opinion of a nationally
recognized firm of independent chartered accountants selected by the
Company, to pay the principal of, premium, if any, and interest on the
notes on the stated date of payment thereof or on the applicable
redemption date, as the case may be;
(2) in the case of Legal Defeasance, the Company shall
have delivered to the Trustee an opinion of counsel in the United
States reasonably acceptable to the Trustee confirming that (A) the
Company has received from, or there has been published by, the Internal
Revenue Service a ruling or (B) since the date of the Indenture, there
has been a change in the applicable U.S. federal income tax law, in
either case to the effect that, and based thereon such opinion of
counsel shall confirm that, the holders will not recognize income, gain
or loss for U.S. federal income tax purposes as a result of such Legal
Defeasance and will be subject to U.S. federal income tax on the same
amounts, in the same manner and at the same times as would have been
the case if such Legal Defeasance had not occurred;
(3) in the case of Legal Defeasance, the Company shall
have delivered to the Trustee an opinion of counsel in Canada
reasonably acceptable to the Trustee confirming that (A) the Company
has received from, or there has been published by, the Canadian tax
authorities a ruling or (B) since the
115
date of the Indenture, there has been a change in the applicable
Canadian federal income tax law, in either case to the effect that, and
based thereon such opinion of counsel shall confirm that, the holders
will not recognize income, gain or loss for Canadian federal income tax
purposes as a result of such Legal Defeasance and will be subject to
Canadian federal income tax on the same amounts, in the same manner and
at the same times as would have been the case if such Legal Defeasance
had not occurred;
(4) in the case of Covenant Defeasance, the Company shall
have delivered to the Trustee an opinion of counsel in the United
States reasonably acceptable to the Trustee confirming that the holders
will not recognize income, gain or loss for U.S. federal income tax
purposes as a result of such Covenant Defeasance and will be subject to
U.S. federal income tax on the same amounts, in the same manner and at
the same times as would have been the case if such Covenant Defeasance
had not occurred;
(5) in the case of Covenant Defeasance, the Company shall
have delivered to the Trustee an opinion of counsel in Canada
reasonably acceptable to the Trustee confirming that the holders will
not recognize income, gain or loss for Canadian federal tax purposes as
a result of such Covenant Defeasance and will be subject to Canadian
federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such Covenant Defeasance had
not occurred;
(6) no Default or Event of Default shall have occurred
and be continuing on the date of such deposit or insofar as Events of
Default from bankruptcy or insolvency events are concerned, at any time
in the period ending on the 91st day after the date of deposit;
(7) such Legal Defeasance or Covenant Defeasance shall
not result in a breach or violation of or constitute a default under
the Indenture or any other material agreement or instrument to which
the Company or any of its Subsidiaries is a party or by which the
Company or any of its Subsidiaries is bound;
(8) the Company shall have delivered to the Trustee an
officer's certificate stating that the deposit was not made by the
Company with the intent of preferring the holders over any other
creditors of the Company or with the intent of defeating, hindering,
delaying or defrauding any other creditors of the Company or others;
(9) the Company shall have delivered to the Trustee an
officer's certificate stating that all conditions precedent provided
for or relating to the Legal Defeasance or the Covenant Defeasance have
been complied with; and
(10) the Company shall have delivered to the Trustee an
opinion of counsel to the effect that (A) the trust funds will not be
subject to any rights of holders of debt ranking senior to the notes,
including without limitation, those arising under the Indenture, and
(B) after the 91st day following the deposit, payments to the holders
of notes from such trust funds will not be rescinded or voided under
any applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
notes, as expressly provided for in the Indenture) as to all outstanding notes
and all rights of the Trustee and the holders of notes in and to the Collateral
under the Security Documents and the Inter-Creditor Agreements shall be released
when:
(1) either (a) all the notes theretofore authenticated
and delivered (except lost, stolen or destroyed notes which have been
replaced or paid and notes for whose payment money has theretofore been
deposited in trust or segregated and held in trust by the Company and
thereafter repaid to the Company or discharged from such trust) have
been delivered to the Trustee for cancellation or (b) all notes not
theretofore delivered to the Trustee for cancellation have become due
and payable and the Company has irrevocably deposited or caused to be
deposited with the Trustee funds in an amount sufficient to pay and
discharge the entire Indebtedness on the notes not theretofore
delivered to
116
the Trustee for cancellation, for principal of, premium, if any, and
interest on the notes to the date of deposit together with irrevocable
instructions from the Company directing the Trustee to apply such funds
to the payment thereof at maturity or redemption, as the case may be;
(2) the Company and/or the Guarantors have paid all other
sums payable under the Indenture, the Security Documents and the
Inter-Creditor Agreements; and
(3) the Company has delivered to the Trustee an officer's
certificate and an opinion of counsel stating that all conditions
precedent under the Indenture relating to the satisfaction and
discharge of the Indenture have been complied with.
MODIFICATION OF THE INDENTURE
From time to time, the Company and the Trustee, without the consent of
the holders, may amend the Indenture, the notes, any Guarantee, the Mirror
Notes, the Security Documents and the Inter-Creditor Agreements for certain
specified purposes, including curing ambiguities, defects or inconsistencies,
and may make minor amendments to such documents, instruments and agreements, so
long as such change does not, in the opinion of the Trustee, adversely affect
the rights of any of the holders in any material respect. In formulating its
opinion on such matters, the Trustee will be entitled to rely on such evidence
as it deems appropriate, including, without limitation, solely on an opinion of
counsel. Other modifications and amendments of the Indenture, the notes, any
Guarantee, the Mirror Notes, the Security Documents and the Inter-Creditor
Agreements may be made with the consent of the holders of a majority in
principal amount of the then outstanding notes issued under the Indenture,
except that, without the consent of each holder affected thereby, no amendment
may:
(1) reduce the amount of notes whose holders must consent
to an amendment;
(2) reduce the rate of, or change or have the effect of
changing the time for payment of, interest, including defaulted
interest, on any note;
(3) reduce the principal of or change or have the effect
of changing, the fixed maturity of any notes, or change the date on
which any notes may be subject to redemption or repurchase, or reduce
the redemption or repurchase price therefor;
(4) make any notes payable in any currency other than
that stated in the notes;
(5) make any change in provisions of the Indenture
protecting the right of each holder to receive payment of principal of,
premium, if any, and interest on such notes on or after the stated due
date thereof or to bring suit to enforce such payment, or permitting
holders of a majority in principal amount of the then outstanding notes
to waive Events of Default;
(6) amend, change or modify in any material respect the
obligation of the Company to make and consummate a Change of Control
Offer after the occurrence of a Change of Control, to make or
consummate a Project Interest Sale Offer with respect to sale, transfer
or other disposition of a Project Interest that gives rise to the
requirement to make a Project Interest Sale Offer that has been
consummated, or to make and consummate a Net Collateral Proceeds Offer
or a Net Proceeds Offer with respect to any Asset Sale that has been
consummated or modify any of the provisions or definitions with respect
thereto;
(7) modify or change any provision of the Indenture or
the related definitions affecting the ranking of the notes or any
Guarantee or any Mirror Note in any manner adverse to the holders of
the notes;
(8) modify the provisions of "--Certain Covenants--
Payments for Consent" in any manner adverse to a holder of notes;
(9) release any Guarantor that is a Significant
Subsidiary from any of its obligations under its Guarantee or the
Indenture otherwise than in accordance with the terms of the Indenture;
117
(10) modify or change any provision of the Indenture, the
Mirror Notes, the Security Documents or the Inter-Creditor Agreements
affecting the ranking of the notes or any Guarantee or the priority of
the claims of the noteholders in and to the Collateral in any manner
adverse to the holders of the notes; or
(11) directly or indirectly release any Lien on the
Collateral except in compliance with the terms of the Indenture, the
Security Documents and the Inter-Creditor Agreements; or (ii) modify or
change any provision of the Mirror Notes in any manner adverse to the
holders of notes.
POSSESSION, USE AND RELEASE OF COLLATERAL
Unless an Event of Default shall have occurred and be continuing, the
Pledgors will have the right to remain in possession and retain exclusive
control of the Collateral securing the notes (other than the amounts held in the
construction account and any cash, securities, obligations and Cash Equivalents
constituting part of the Collateral and deposited or required to be deposited
with the Collateral Agent and other than as set forth in the Security Documents
and the Inter-Creditor Agreements), to freely operate the Collateral and to
collect, invest and dispose of any income therefrom.
RELEASE OF COLLATERAL. On the Collateral Release Date, except for the
assignment of the Mirror Notes, all Liens on the Collateral in favor of the
holders of notes (including the Collateral securing the Mirror Notes) shall be
released, and the Trustee shall execute such documents, instruments and
termination statements (and shall instruct the Collateral Agent to execute such
documents, instruments and termination statements) as the Company may request to
effect and evidence such release. Upon the Collateral Release Date the
Collateral shall be free and clear of all Liens created by, through, under or in
favor of the holders of notes. Prior to the Collateral Release Date (from and
following which date the Pledgors will not be subject to the restrictions set
forth in the remainder of this covenant), the Pledgors will have the right to
sell, exchange or otherwise dispose of any of the Collateral (other than Trust
Moneys not constituting Net Cash Proceeds from an Asset Sale, which Trust Moneys
are subject to release from the Lien of the Security Documents as provided under
"--Use of Trust Moneys" below), upon compliance with the requirements and
conditions of the provisions described below, and the Trustee shall promptly
instruct the Collateral Agent to promptly release the same from the Lien of any
of the Security Documents upon receipt by the Trustee and the Collateral Agent
of a notice requesting such release and describing the property to be so
released, together with delivery of the following, among other matters:
(a) An Officer's Certificate of the Company and any other
Pledgor, as applicable, dated not more than 30 days prior to the date
of the application for such release and signed also, in the case of
property to be released in which the Company's proportionate interest
has a book value of more than US$50.0 million and in the case of the
following clauses (ii) and (iv), by an Independent Appraiser or, if
such property consists of securities, by any Independent Financial
Advisor, in each case stating in substance as to certain matters,
including the following:
(i) that in the opinion of the signers, the
security afforded by the Security Documents will not be
impaired by such release in contravention of the provisions of
the Indenture because either (1) other assets (including, in
the case of any acquisition of Permitted Collateral Assets,
the assets so acquired) are to be substituted as Substitute
Collateral in accordance with the "Substitute Collateral"
provisions described below or (2) the Company's or the
applicable Pledgor's proportionate interest in the Collateral
to be released is not Net Cash Proceeds from an Asset Sale and
is not being replaced with Substitute Collateral, has a Fair
Market Value of less than US$50.0 million and is not necessary
for the efficient operation of the remaining property of the
Company and the Restricted Subsidiaries or in the conduct of
their business or (3) the Collateral to be released is Trust
Moneys representing Net Cash Proceeds from an Asset Sale that
are either being utilized in accordance with, or are not
required, or cannot be required to be used to offer to
purchase notes under, the covenant described under "--Certain
Covenants--Limitation of Asset Sales of Collateral" or (4) the
Collateral to be released is being released in connection with
an Asset Sale of such Collateral and the Net Cash Proceeds and
Substitute Collateral from such Asset Sale are being delivered
to the Collateral Agent in accordance with, and to the extent
required by, the provisions of clause (ii) of paragraph (b)
below;
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(ii) except in the case of a release referred to
the preceding paragraphs (a)(i)(2) or (a)(i)(3), that the
Company or any other Pledgor, as applicable, has either
disposed of or will dispose of the Collateral so to be
released in compliance with all applicable terms of the
Indenture and for a consideration representing,
in the opinion of the signers, the Company's or the applicable
Pledgor's proportionate interest in its Fair Market Value,
which consideration will be subject to the Lien of the
Security Documents (except as provided in paragraph (b)
below), and subject to no Lien other than Liens permitted by
the Indenture and the Security Documents and the Principal
Inter-Creditor Agreement, all of such consideration to be
briefly described in the certificate;
(iii) that no Event of Default has occurred and is
continuing;
(iv) the Fair Market Value, in the opinion of the
signers, of the Company's or the applicable Pledgor's
proportionate interest in the property to be released at the
date of such application for release; and
(v) that all conditions precedent in the
Indenture, the Security Documents and the Principal
Inter-Creditor Agreement relating to the release of the
Collateral in question have been complied with.
(b) If release is required by reason of an Asset Sale of
Collateral, possession by the Collateral Agent of (i) the Substitute
Collateral (if and to the extent the Substitute Collateral consists of
property the possession of which is necessary for the perfection by the
Collateral Agent of a Lien thereon) and all documents required by the
"Substitute Collateral" provisions below and (ii) the Net Cash
Proceeds; PROVIDED that if the Collateral so to be released is subject
to a prior Lien permitted by the Security Documents, in lieu of
delivering proceeds of such Substitute Collateral and/or Net Cash
Proceeds, there also may be delivered to the Trustee and the Collateral
Agent a certificate of the trustee, mortgagee or other holder of such
prior Lien that it has received such Substitute Collateral and/or Net
Cash Proceeds and has been irrevocably authorized by the applicable
Pledgor to pay over to the Collateral Agent any balance of such
Substitute Collateral and/or Net Cash Proceeds remaining after the
discharge of such Indebtedness secured by such prior Lien.
In case an Event of Default shall have occurred and be continuing, the
Company and the other Pledgors, while in possession of the Collateral, may do
any of the things enumerated in these "Release of Collateral" provisions only if
the Trustee, in its discretion, or the holders of a majority in aggregate
principal amount of the outstanding notes shall consent to such action, in which
event any certificate filed under these "Release of Collateral" provisions shall
omit the statement to the effect that no Event of Default has occurred and is
continuing.
All cash or Cash Equivalents received by the Collateral Agent pursuant
to the provisions described under "Release of Collateral" will be held by the
Collateral Agent as Trust Moneys under the Indenture subject to application as
provided in "--Release of Collateral" (in the case of any Net Cash Proceeds from
Asset Sales) or in "--Use of Trust Moneys" below.
Any releases of Collateral made in strict compliance with these
"Release of Collateral" provisions shall be deemed not to impair the security
interest created by the Security Documents in favor of the Collateral Agent, on
behalf of the Trustee for the benefit of the holders of notes, in contravention
of the provisions of the Indenture.
SUBSTITUTE COLLATERAL. Prior to the Collateral Release Date (when the Liens on
the Collateral in favor of the holders of notes will be permanently released),
the Company or any other Pledgor may obtain a release of any of the Collateral
by subjecting other property, if the proportionate interest of the Company or
any other Pledgor in such substitute property has a Fair Market Value equal to
or greater than the Collateral to be released (the "SUBSTITUTE COLLATERAL"), to
the Lien of any Security Document or a similar instrument in
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place of and in exchange for any of the Collateral to be released upon
presentation to the Collateral Agent and the Trustee of, among other things, the
following documents:
(a) an application of the Company and any other Pledgor,
as applicable, requesting such substitution of Substitute Collateral
and describing the property to be so released and the property to be
substituted therefor;
(b) the certificates, opinions and other statements
required by the "Release of Collateral" provisions summarized above, as
applicable, in respect of any of the Collateral to be released;
(c) an officer's certificate of the Company and any other
Pledgor, as applicable, stating in substance the Fair Market Value, in
the opinion of the signers, of the proportionate interest of the
Company or any other Pledgor in the Substitute Collateral and also
signed by an Independent Appraiser or, if the property to be released
consists of securities, by an Independent Financial Advisor, in each
case only if such Fair Market Value of the Company's proportionate
interest equals or exceeds US $50.0 million; and
(d) an instrument or instruments sufficient for the Lien
of the Security Documents to cover the Substitute Collateral together
with, in the case of personal property, an opinion of counsel stating
that the Lien of the Security Documents constitutes a valid Lien on
such Substitute Collateral, together with an officer's certificate
stating that any specific exceptions to such Lien are Liens of the
character which, under the provisions of the Indenture and the Security
Documents, are permitted to be incurred.
DISPOSITION OF COLLATERAL WITHOUT RELEASE. Notwithstanding the provisions of
"--Release of Collateral" or "--Substitute Collateral" above, so long as no
Event of Default shall have occurred and be continuing, the Company and any
other Pledgor may, without any release or consent by the Collateral Agent or the
Trustee, do any number of ordinary course activities in connection with certain
types of property and assets. For example, among other things the Company may
sell or otherwise dispose of any machinery, equipment, furniture, tools,
materials or supplies or other similar property subject to the Lien of the
Security Documents which may have become worn out or obsolete or are otherwise
subject to replacement in the ordinary course of business; grant rights-of-way
and easements over or in respect of any real property; abandon, terminate,
cancel, release or make alterations in or substitutions of any leases, contracts
or rights-of-way; surrender or modify any franchise, license or permit subject
to the Lien of any of the Security Documents which it may own or under which it
may be operating; alter, repair, replace, change the location or position of and
add to it plants, structures, machinery, systems, equipment, fixtures and
appurtenances; demolish, dismantle, tear down or scrap any Collateral or abandon
any thereof other than land or interests in land (other than leases); grant a
non-exclusive license of any intellectual property; and abandon intellectual
property under certain circumstances. If requested in writing by the Company or
any other Pledgor, the Trustee shall instruct the Collateral Agent to execute
and deliver such documents, instruments or statements and to take such other
action as the Company or such other Pledgor may request to evidence or confirm
that the Collateral falling under this "Disposition of Collateral Without
Release" provision has been released from the Liens of each of the Security
Documents. The Collateral Agent shall execute and deliver such documents,
instruments and statements and shall take all such actions promptly upon receipt
of such instructions from the Trustee.
RELEASE OF INVENTORY AND ACCOUNTS RECEIVABLE COLLATERAL. Notwithstanding any
provision to the contrary in the Indenture, Collateral comprised of accounts
receivable, inventory or (prior to an Event of Default) the proceeds of the
foregoing shall be subject to release upon sales of such inventory and
collection of the proceeds of such receivables in the ordinary course of
business. If requested in writing by the Company or any other Pledgor, the
Trustee shall instruct the Collateral Agent to execute and deliver such
documents, instruments or statements and to take such other action as the
Company or such other Pledgor may request to evidence or confirm that the
Collateral falling under this "Release of Inventory and Accounts Receivable
Collateral" provision has been released from the Liens of each of the Security
Documents. The Collateral Agent shall execute and deliver such documents,
instruments and statements and shall take all such actions promptly upon receipt
of such instructions from the Trustee.
USE OF TRUST MONEYS. Until the Collateral Release Date, all Trust Moneys
(including, without limitation, all Net Cash Proceeds required to be deposited
with the Collateral Agent) shall be held by the Collateral
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Agent as a part of the Collateral securing the notes and, so long (other than in
the case of clause (i)) as no Default shall have occurred and be continuing, may
either (i) if such Trust Moneys are sums contained in the construction account,
be released in accordance with the terms thereof described as above under
"--Construction Account", (ii) be released in accordance with "--Release of
Collateral" above if such Trust Moneys represent Net Cash Proceeds from an Asset
Sale or (iii) at the direction of the Company and any other applicable Pledgor,
be applied by the Collateral Agent from time to time to the acquisition of
assets to be made subject to the Lien of the Security Documents pursuant to the
"Substitute Collateral" provisions above, to the payment of the principal,
premium, if any, and interest at maturity, redemption or other permanent
repayment of (a) notes or (b) any Indebtedness with a Lien ranking prior to or
PARI PASSU with Liens thereon for the benefit of the holders of notes, in each
case in accordance with the terms of the Indenture. The Company and any other
applicable Pledgor may also withdraw Trust Moneys constituting the proceeds of
insurance upon any part of the Collateral or an award for any Collateral taken
by eminent domain to reimburse the Company or such other Pledgor for repair or
replacement of such Collateral; PROVIDED that, with respect to Indebtedness
secured by PARI PASSU Liens, not greater than a pro rata portion (based on the
outstanding principal amounts of the notes and such other Indebtedness) of such
Trust Moneys may be used to make payments with respect to such Indebtedness.
Notwithstanding the foregoing, on the Collateral Release Date the Trustee shall
instruct the Collateral Agent to release to the Company all Trust Moneys.
REGARDING THE TRUSTEE AND THE COLLATERAL AGENT
The Bank of Nova Scotia Trust Company of New York will serve as Trustee
under the Indenture, and Computershare Trust Company of Canada will act as
Collateral Agent under the Inter-Creditor Agreements and the Security Documents.
Computershare Trust Company of Canada will also, in its capacity as Collateral
Agent, be serving as a collateral agent for the other Secured Creditors under
the Principal Inter-Creditor Agreement. The Indenture provides that, except
during the continuance of an Event of Default, the Trustee thereunder will
perform only such duties as are specifically set forth in the Indenture. If an
Event of Default has occurred and is continuing, the Trustee will exercise such
rights and powers vested in it under the Indenture and use the same degree of
care and skill in their exercise as a prudent person would exercise under the
circumstances in the conduct of such person's own affairs.
The Principal Inter-Creditor Agreement provides that the Collateral
Agent will perform only such duties as are specifically set forth in the
Principal Inter-Creditor Agreement and the other Inter-Creditor Agreements and
Security Documents to which it is a party. See "Inter-Creditor Agreements and
Collateral".
The Indenture and the provisions of the TIA incorporated by reference
therein contain limitations on the rights of the Trustee thereunder, should it
become a creditor of the Company or any Guarantor, to obtain payment of claims
in certain cases or to realize on certain property received by it in respect of
any such claims, as security or otherwise. The Trustee is permitted to engage in
other transactions; PROVIDED that if it acquires any conflicting interest (as
defined in the TIA), it must eliminate such conflict or resign.
GOVERNING LAW
The Indenture and the initial notes are, and the exchange notes and the
Subsidiary Guarantees (if any) will be, governed by the laws of the State of New
York without regard to the principles of conflicts of law. The Security
Documents, Mirror Notes, the Mirror Note Guarantees and Inter-Creditor
Agreements are governed by the laws of the Province of Alberta, Canada.
ENFORCEABILITY OF JUDGMENTS
Since substantially all of the Collateral is located outside the United
States, any judgment obtained in the United States against the Company or any
Guarantor, including judgments with respect to the payment of principal or
interest on the notes, may not be collectible within the United States.
The Company has been informed by their counsel that the laws of the
province of Alberta permit an action to be brought in a court of competent
jurisdiction in the province of Alberta (an "ALBERTA COURT") on any final and
conclusive judgment IN PERSONAM of any federal or state court located in the
Borough of
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Manhattan in The City of New York (a "NEW YORK COURT") that is subsisting and
unsatisfied respecting the enforcement of the Indenture, the Notes, any
Guarantees, the Security Documents, the Inter-Creditor Agreements and the
Registration Rights Agreement that is not impeachable as void or voidable under
the internal laws of the State of New York for a sum certain if (i) the court
rendering such judgment had jurisdiction over the judgment debtor, as recognized
by an Alberta Court (and submission by the Company and any Guarantor in the
Indenture to the jurisdiction of the New York Court will be sufficient for the
purpose); (ii) such judgment was not obtained by fraud or in a manner contrary
to natural justice and the enforcement thereof would not be inconsistent with
public policy, as such term is understood under the laws of the province of
Alberta or contrary to any order made by the Attorney General of Canada under
the Foreign Extraterritorial Measures Act (Canada) or the Competition Tribunal
under the Competition Act (Canada); (iii) the enforcement of such judgment does
not constitute, directly or indirectly, the enforcement of foreign revenue,
expropriatory or penal laws; (iv) no new admissible evidence relevant to the
action is discovered prior to the rendering of judgment by an Alberta court; and
(v) the action to enforce such judgment is commenced within six years of the
date of such judgment. Assuming that the Indenture, the notes, any Guarantees
and the Registration Rights Agreement are interpreted and understood under New
York law to have the same meaning and contents as they would have under the laws
of Alberta, an Alberta Court would not avoid the recognition of judgments of a
New York Court respecting the Indenture, the notes, any Guarantees and the
Registration Rights Agreement on the basis of public policy, as that term is
understood under the laws of the Province of Alberta and the laws of Canada
applicable therein.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in
the Indenture. Reference is made to the Indenture for the definition of all such
terms, as well as any other terms used herein for which no definition is
provided.
"ACQUIRED INDEBTEDNESS" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary,
or at the time it merges or consolidates with the Company or any of the
Restricted Subsidiaries, or assumed by the Company or any Restricted Subsidiary
in connection with the acquisition of assets from such Person and in each case
not incurred by such Person in connection with, or in anticipation or
contemplation of, such Person becoming a Restricted Subsidiary or such
acquisition, merger or consolidation.
"ACQUIRED SUBSIDIARY" means a Person which becomes a Restricted
Subsidiary after the Issue Date; PROVIDED that such Person has outstanding
voting Capital Stock prior to becoming a Subsidiary of the Company and a
majority of such voting Capital Stock was owned by Persons other than the
Company and its Restricted Subsidiaries.
"ADDITIONAL AMOUNTS" has the meaning set forth under "--Additional
Amounts."
"ADJUSTED CONSOLIDATED NET TANGIBLE ASSETS" means, as of the date of
determination, without duplication, (a) the sum of (i) discounted future net
revenue from proved oil and gas reserves of the Company and its Restricted
Subsidiaries calculated using year-end constant prices and zero inflation
assumptions and discounted at 10% before any provincial or federal income taxes,
as estimated in a reserve report prepared as of the end of the Company's most
recently completed fiscal year, which reserve report is prepared or audited by
Independent petroleum engineers, as increased by, as of the date of
determination, the discounted future net revenue of (A) estimated proved oil and
gas reserves of the Company and its Subsidiaries attributable to Oil Sands
Projects, (B) estimated proved oil and gas reserves of the Company and its
Restricted Subsidiaries attributable to any acquisition consummated since the
date of such year-end reserve report, and (C) estimated oil and gas reserves of
the Company and its Restricted Subsidiary attributable to extensions,
expansions, discoveries and other additions and upward revisions of estimates of
proved oil and gas reserves due to exploration, development, exploitation,
production or other activities conducted or otherwise occurring since the date
of such year-end reserve report which would, in the case of determinations made
pursuant to clauses (A), (B) and (C), in accordance with standard industry
practice, result in such additions or revisions, in each case calculated in
accordance with Commission guidelines to the extent applicable, utilizing the
prices utilized in such year-end reserve report, and decreased by, as of the
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date of determination, the discounted future net revenue of (D) estimated proved
oil and gas reserves of the Company and its Restricted Subsidiaries produced or
disposed of since the date of such year-end reserve report and (E) reductions in
the estimated oil and gas reserves of the Company and its Restricted
Subsidiaries since the date of such year-end reserve report attributable to
downward revisions of estimates of proved oil and gas reserves due to
exploration, development, exploitation, production or other activities conducted
or otherwise occurring since the date of such year-end reserve report which
would, in the case of determinations made pursuant to clauses (D) and (E), in
accordance with standard industry practice, result in such revisions, in each
case calculated in accordance with Commission guidelines to the extent
applicable, utilizing the prices utilized in such year-end reserve report;
PROVIDED that, in the case of each of the determinations made pursuant to
clauses (A) through (E), such increases and decreases shall be as estimated by
the Company's engineers or engineers retained by it, except that if as a result
of such acquisitions, dispositions, discoveries, extensions, expansions or
revisions, there is a Material Change that is an increase, then such increases
and decreases in the discounted future net revenue shall be confirmed in writing
by independent petroleum engineers, (ii) the capitalized costs that are
attributable to oil and gas properties of the Company and its Restricted
Subsidiaries to which no proved oil and gas reserves are attributed, based on
the Company's books and records as of a date no earlier than the date of the
Company's latest annual or quarterly financial statements, (iii) the net working
capital (which shall be calculated as all current assets of the Company and its
Restricted Subsidiaries minus all current liabilities of the Company and its
Restricted Subsidiaries, except current liabilities included in Indebtedness on
a date no earlier than the date of the Company's latest annual or quarterly
financial statements) and (iv) the greater of (I) the net book value of the
other tangible assets of the Company and its Restricted Subsidiaries on a date
no earlier than the date of the Company's latest annual or quarterly financial
statements and (II) the appraised value, as estimated by independent appraisers,
of other tangible assets of the Company and its Restricted Subsidiaries as of a
date no earlier than the date of the Company's latest audited financial
statements, MINUS (b) the sum of (i) minority interests of third parties to the
extent included in the calculation of the immediately preceding clause (a) and
(ii) the discounted future net revenue, calculated in accordance with Commission
guidelines to the extent applicable, utilizing the same prices utilized in the
Company's year-end reserve report, attributable to oil and gas reserves of the
Company and its Restricted Subsidiaries subject to participation interests,
overriding royalty interests or other interests of third parties, pursuant to
participation, partnership, vendor financing or other agreements then in effect,
or that otherwise are required to be delivered to third parties.
"AFFILIATE" means, with respect to any specified Person, any other
Person who directly or indirectly through one or more intermediaries controls,
or is controlled by, or is under common control with, such specified Person. The
term "CONTROL" means the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of a Person,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "CONTROLLING" and "CONTROLLED" have meanings correlative of the
foregoing. For the avoidance of doubt and for all purposes in connection with
the Indenture and the notes, none of Shell, Chevron or any of their respective
Affiliates shall be considered an Affiliate of the Company or any of its
Subsidiaries solely by virtue of the Joint Venture Agreement as in effect on the
Issue Date.
"AFFILIATE TRANSACTION" has the meaning set forth under "--Certain
Covenants--Limitation on Transactions with Affiliates."
"ASSET ACQUISITION" means (1) an Investment by the Company or any
Restricted Subsidiary in any other Person pursuant to which such Person shall
become a Restricted Subsidiary, or shall be merged with or into the Company or
any Restricted Subsidiary, or (2) the acquisition by the Company or any
Restricted Subsidiary of the assets of any Person (other than a Restricted
Subsidiary) which constitute all or substantially all of the assets of such
Person or comprise any division or line of business of such Person or any other
properties or assets of such Person other than in the ordinary course of
business.
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"ASSET SALE" means any direct or indirect sale, issuance, conveyance,
lease (other than operating leases entered into in the ordinary course of
business), assignment or other transfer (other than the granting of a Lien in
accordance with the Indenture) for value by the Company or any of the Restricted
Subsidiaries (including any Sale and Leaseback Transaction) to any Person other
than the Company or a Restricted Subsidiary of (a) any Capital Stock of any
Restricted Subsidiary; or (b) any other property or assets of the Company or any
Restricted Subsidiary other than in the ordinary course of business; PROVIDED,
HOWEVER, that Asset Sales shall not include:
(1) a transaction or series of related transactions for
which the Company or the Restricted Subsidiaries receive aggregate
consideration of less than US$10.0 million;
(2) the sale, lease, conveyance, disposition or other
transfer of all or substantially all of the assets of the Company as
permitted by the covenant described under "--Certain Covenants--Merger,
Consolidation and Sale of Assets";
(3) a transfer of assets between or among the Company and
its Restricted Subsidiaries;
(4) a disposition in the ordinary course of business of
obsolete, worn-out or otherwise unsuitable assets or excess equipment
or of assets or equipment no longer used or useful;
(5) a disposition of inventory in the ordinary course of
business; or
(6) any Restricted Payment made in accordance with the
covenant described under "--Certain Covenants--Limitation on Restricted
Payments."
"ATTRIBUTABLE VALUE" means, as to any particular lease under which any
Person is at the time liable other than a Capitalized Lease Obligation, and at
any date as of which the amount thereof is to be determined, the total net
amount of rent required to be paid by such Person under such lease during the
initial term thereof as determined in accordance with GAAP, discounted from the
last date of such initial term to the date of determination at a rate PER ANNUM
equal to the discount rate which would be applicable to a Capitalized Lease
Obligation with a like term in accordance with GAAP. The net amount of rent
required to be paid under any such lease for any such period shall be the
aggregate amount of rent payable by the lessee with respect to such period after
excluding amounts required to be paid on account of insurance, taxes,
assessments, utility, operating and labor costs and similar charges. In the case
of any lease which is terminable by the lessee upon the payment of a penalty,
such net amount shall also include the amount of such penalty, but no rent shall
be considered as required to be paid under such lease subsequent to the first
date upon which it may be so terminated. "Attributable Value" means, as to a
Capitalized Lease Obligation under which any person is at the time liable and at
any date as of which the amount thereof is to be determined, the capitalized
amount thereof that would appear on the face of a balance sheet of such person
in accordance with GAAP.
"BANK OF NOVA SCOTIA SUBORDINATED FACILITY" means the subordinated
non-revolving note purchase facility provided by the Bank of Nova Scotia to the
Company pursuant to the Master Note Purchase Agreement entered into as of
October 25, 2001, as amended or modified from time to time.
"BOARD OF DIRECTORS" means, as to any Person, the board of directors of
such Person or any duly authorized committee thereof.
"BOARD RESOLUTION" means, with respect to any Person, a copy of a
resolution certified by the Secretary, an Assistant Secretary or other officer
of such Person to have been duly adopted by the Board of Directors of such
Person and to be in full force and effect on the date of such certification, and
delivered to the Trustee.
"CAPITAL STOCK" means (1) with respect to any Person that is a
corporation, any and all shares, interests, participations or other equivalents
(however designated and whether or not voting) of corporate stock, including
each class of Common Stock and Preferred Stock of such Person and (2) with
respect to any Person that is not a corporation, any and all partnership or
other equity interests of such Person.
"CAPITALIZED LEASE OBLIGATION" means, as to any Person, the obligations
of such Person under a lease that are required to be classified and accounted
for as capital lease obligations under GAAP and, for purposes of
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this definition, the amount of such obligations at any date shall be the
capitalized amount of such obligations at such date, determined in accordance
with GAAP.
"CASH EQUIVALENTS" means:
(1) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or the
Canadian Government or issued by any agency thereof and backed by the
full faith and credit of the United States or the Canadian Government,
in each case maturing within one year from the date of acquisition
thereof;
(2) marketable direct obligations issued by any state of
the United States of America or any province of Canada or any political
subdivision of any such state or province or any public instrumentality
thereof maturing within one year from the date of acquisition thereof
and, at the time of acquisition, having one of the three highest
ratings obtainable from either Standard & Poor's Corporation ("S&P") or
Moody's Investors Service, Inc. ("MOODY'S") or having one of the two
highest ratings obtainable from Dominion Bond Rating Service ("DBRS");
(3) commercial paper maturing no more than one year from
the date of creation thereof and, at the time of acquisition, having a
rating of at least A-1 from S&P or at least P-1 from Moody's or at
least R-1 (high) by DBRS;
(4) certificates of deposit or bankers' acceptances
maturing within one year from the date of acquisition thereof issued by
any bank organized under the laws of the United States of America or
any state thereof or the District of Columbia or Canada or any province
thereof or any US or Canadian branch of a foreign bank having at the
date of acquisition thereof combined capital and surplus of not less
than US$250 million;
(5) repurchase obligations with a term of not more than
seven days for underlying securities of the types described in clause
(1) above entered into with any bank meeting the qualifications
specified in clause (4) above; and
(6) investments in money market funds which invest
substantially all their assets in securities of the types described in
clauses (1) through (5) above.
"CHANGE OF CONTROL" means the occurrence of one or more of the
following events:
(1) any sale, lease, exchange or other transfer of
control (by contract, sale or otherwise) (in one transaction or a
series of related transactions) of all or substantially all of the
assets of the Company and its Subsidiaries on a consolidated basis to
any Person or group of related Persons for purposes of Section 13(d) of
the Exchange Act (a "GROUP"), together with any Affiliates thereof
(whether or not otherwise in compliance with the provisions of the
Indenture);
(2) the approval by the holders of Capital Stock of the
Company of any plan or proposal for the liquidation or dissolution of
the Company (whether or not otherwise in compliance with the provisions
of the Indenture);
(3) any Person or Group shall become the beneficial
owner, directly or indirectly, of shares representing more than 50% of
the aggregate ordinary voting power represented by the issued and
outstanding Capital Stock of the Company;
(4) during any period of two consecutive years,
individuals who at the beginning of such period constituted the Board
of Directors (together with any new directors whose election by such
Board of Directors or whose nomination for election by the shareholders
of the Company was approved pursuant to a vote of a majority of the
directors then still in office who were either directors at the
beginning of such period or whose election or nomination for election
was previously so approved) cease for any reason to constitute a
majority of the Board of Directors then in office; or
(5) any merger, consolidation, amalgamation or share
exchange in which Persons who were the owners of the voting Capital
Stock of the Company immediately prior to the consummation of such
transaction do not own at least a majority of the voting Capital Stock
of the surviving entity.
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"CHANGE OF CONTROL OFFER" has the meaning set forth under "--Change of
Control."
"CHANGE OF CONTROL PURCHASE DATE" has the meaning set forth under
"--Change of Control."
"COLLATERAL" means all assets, property and rights constituting the
Project and securing the notes, a Mirror Note or a Guarantee pursuant to the
Indenture and the Security Documents.
"COLLATERAL RELEASE DATE" means the date selected by the Company on or
after the date on which the Company first attains a corporate credit rating of
at least BBB by S&P and a long-term senior unsecured issuer rating or a senior
implied issuer rating (or, in each case, the equivalent thereof) of at least
Baa2 by Moody's, PROVIDED that to the extent the Company's corporate credit
rating is BBB by S&P or the Company's long-term senior unsecured issuer rating
or senior implied issuer rating (or, in each case, the equivalent thereof) is
Baa2 by Moody's, such rating shall not be accompanied by either (i) in the case
of S&P, a negative outlook, creditwatch negative or the equivalent thereof or
(ii) in the case of Moody's, a negative outlook, a review for possible downgrade
or the equivalent thereof and PROVIDED further that no Default or Event of
Default shall have occurred and be continuing at the time and after giving
effect to the occurrence of the Collateral Release Date.
"COMMISSION" means the Securities and Exchange Commission, as from time
to time constituted, or if at any time after the execution of the Indenture such
Commission is not existing and performing the applicable duties now assigned to
it, then the body or bodies performing such duties at such time.
"COMMODITY AGREEMENTS" means any agreement or arrangement designed to
hedge against fluctuations in commodity (including, without limitation, oil and
natural gas) values.
"COMMON STOCK" of any Person means any and all shares, interests or
other participations in, and other equivalents (however designated and whether
voting or non-voting) of such Person's common stock, whether outstanding on the
Issue Date or issued after the Issue Date, and includes, without limitation, all
series and classes of such common stock.
"COMPLETION OF THE PROJECT" means the first day of the fiscal quarter
in which each of (i) the initial mine contemplated by the Joint Venture
Agreement for the western portion of Lease 13; and (ii) the extraction plant
contemplated by the Joint Venture Agreement to be constructed near the surface
of the western portion of Lease 13 is operational, and the upgrader contemplated
by the Joint Venture Agreement to be used in upgrading bitumen mined from the
western portion of Lease 13 has operated at not less than 75% of the capacity at
which it is designed to operate for a period of 15 consecutive days, as
determined by the Company and certified to the Trustee in an Officer's
Certificate.
"CONSOLIDATED EBITDA" means, with respect to the Company, for any
period, the sum (without duplication) of:
(1) Consolidated Net Income; and
(2) to the extent Consolidated Net Income has been
reduced thereby:
(A) all income taxes of the Company and the
Restricted Subsidiaries paid or accrued in accordance with
GAAP for such period;
(B) Consolidated Interest Expense, and
(C) Consolidated Non-cash Charges,
LESS any non-cash items increasing Consolidated Net Income for such period, all
as determined on a consolidated basis for the Company and the Restricted
Subsidiaries in accordance with GAAP.
"CONSOLIDATED FIXED CHARGE COVERAGE RATIO" means, with respect to the
Company, the ratio of Consolidated EBITDA of the Company during the four full
fiscal quarters (the "FOUR QUARTER PERIOD") ending on or prior to the date of
the transaction giving rise to the need to calculate the Consolidated Fixed
Charge Coverage Ratio (the "TRANSACTION DATE") to Consolidated Fixed Charges of
the Company for the Four Quarter Period. In addition to and without limitation
of the foregoing, for purposes of this definition,
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"Consolidated EBITDA" and "Consolidated Fixed Charges" shall be calculated after
giving effect on a PRO FORMA basis for the period of such calculation to:
(1) the incurrence or repayment of any Indebtedness of
the Company or any of the Restricted Subsidiaries (and the application
of the proceeds thereof) giving rise to the need to make such
calculation and any incurrence or repayment of other Indebtedness (and
the application of the proceeds thereof), other than the incurrence or
repayment of Indebtedness in the ordinary course of business for
working capital purposes pursuant to working capital facilities
occurring during the Four Quarter Period or at any time subsequent to
the last day of the Four Quarter Period and on or prior to the
Transaction Date, as if such incurrence or repayment, as the case may
be (and the application of the proceeds thereof), occurred on the first
day of the Four Quarter Period; and
(2) any Asset Sales or other disposition or Asset
Acquisitions (including, without limitation, any Asset Acquisition
giving rise to the need to make such calculation as a result of the
Company or one of the Restricted Subsidiaries (including any Person who
becomes a Restricted Subsidiary as a result of the Asset Acquisition)
incurring, assuming or otherwise being liable for Acquired Indebtedness
and also including any Consolidated EBITDA (PROVIDED that such
Consolidated EBITDA shall be included only to the extent includable
pursuant to the definition of "Consolidated Net Income") attributable
to the assets which are the subject of the Asset Acquisition or Asset
Sale or other disposition during the Four Quarter Period) occurring
during the Four Quarter Period or at any time subsequent to the last
day of the Four Quarter Period and on or prior to the Transaction Date,
as if such Asset Sale or Asset Acquisition or other disposition
(including the incurrence, assumption or liability for any such
Acquired Indebtedness) occurred on the first day of the Four Quarter
Period.
If the Company or any of the Restricted Subsidiaries directly or
indirectly guarantees Indebtedness of a third Person, the preceding sentence
shall give effect to the incurrence of such guaranteed Indebtedness as if the
Company or any Restricted Subsidiary had directly incurred or otherwise assumed
such guaranteed Indebtedness. Furthermore, in calculating "Consolidated Fixed
Charges" for purposes of determining the denominator (but not the numerator) of
this "Consolidated Fixed Charge Coverage Ratio":
(1) interest on outstanding Indebtedness determined on a
fluctuating basis as of the Transaction Date and which will continue to
be so determined thereafter shall be deemed to have accrued at a fixed
rate per annum equal to the rate of interest on such Indebtedness in
effect on the Transaction Date;
(2) if interest on any Indebtedness actually incurred on
the Transaction Date may optionally be determined at an interest rate
based upon a factor of a prime or similar rate, a eurocurrency
interbank offered rate, or other rates, then the interest rate in
effect on the Transaction Date will be deemed to have been in effect
during the Four Quarter Period; and
(3) notwithstanding clause (1) above, interest on
Indebtedness determined on a fluctuating basis, to the extent such
interest is covered by agreements relating to Interest Swap
Obligations, shall be deemed to accrue at the rate per annum in effect
on the Transaction Date resulting after giving effect to the operation
of such agreements on such date.
"CONSOLIDATED FIXED CHARGES" means, with respect to the Company for any
period, the sum, without duplication, of:
(1) Consolidated Interest Expense, plus
(2) the product of (x) the amount of all dividend
payments on any series of Preferred Stock of the Company (other than
dividends paid in Qualified Capital Stock) or any Restricted Subsidiary
paid, accrued and/or scheduled to be paid or accrued during such period
times (y) a fraction, the numerator of which is one and the denominator
of which is one minus the then current effective consolidated federal,
state, foreign and local income tax rate of the Company, expressed as a
decimal.
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"CONSOLIDATED INTEREST EXPENSE" means, with respect to the Company for
any period, the sum of, without duplication:
(1) the aggregate of the interest expense of the Company
and the Restricted Subsidiaries for such period determined on a
consolidated basis in accordance with GAAP, including without
limitation,
(A) any amortization of debt discount,
(B) the net costs under Interest Swap
Obligations,
(C) all capitalized interest, and
(D) the interest portion of any deferred payment
obligation; and
(2) the interest component of Capitalized Lease
Obligations paid, accrued and/or scheduled to be paid or accrued by the
Company and the Restricted Subsidiaries during such period as
determined on a consolidated basis in accordance with GAAP.
The amortization of interest previously capitalized and paid in cash
will not be counted twice for purposes of this definition.
"CONSOLIDATED NET INCOME" means, with respect to the Company, for any
period, the aggregate net income (or loss) of the Company and the Restricted
Subsidiaries for such period as determined on a consolidated basis in accordance
with GAAP; PROVIDED that there shall be excluded therefrom:
(1) after-tax gains and losses from Asset Sales or
abandonments or reserves relating thereto;
(2) extraordinary or non-recurring gains or losses
(determined on an after-tax basis);
(3) the net income of any Person acquired in a "pooling
of interests" transaction accrued prior to the date it becomes a
Restricted Subsidiary or is merged or consolidated with the Company or
any Restricted Subsidiary;
(4) the net income (but not loss) of any Restricted
Subsidiary to the extent that the declaration of dividends or similar
distributions by that Restricted Subsidiary of that income is
restricted by a contract, operation of law or otherwise;
(5) the net income of any Person, other than a Restricted
Subsidiary, except to the extent of cash dividends or distributions
paid to the Company or to a Restricted Subsidiary by such Person;
(6) any restoration to income of any contingency reserve,
except to the extent that provision for such reserve was made out of
Consolidated Net Income accrued at any time following the Issue Date;
(7) income or loss attributable to discontinued
operations (including, without limitation, operations disposed of
during such period whether or not such operations were classified as
discontinued); and
(8) in the case of a successor to the Company by
consolidation or merger or as a transferee of the Company's assets, any
earnings of the successor corporation prior to such consolidation,
merger or transfer of assets.
"CONSOLIDATED NET WORTH" of any Person means the consolidated
stockholders' equity of such Person, determined on a consolidated basis in
accordance with GAAP, less (without duplication) amounts attributable to
Disqualified Capital Stock of such Person.
"CONSOLIDATED NON-CASH CHARGES" means, with respect to the Company, for
any period, the aggregate depreciation, amortization and other non-cash expenses
of the Company and the Restricted Subsidiaries reducing Consolidated Net Income
of the Company for such period, determined on a consolidated basis in accordance
with GAAP (excluding any such charge which requires an accrual of or a reserve
for cash charges for any future period).
"CONSUMABLE COMMODITIES" means any commodities or inputs used in
connection with the Project, including without limitation natural gas, hydrogen,
bitumen, electricity, chemicals and thermal energy.
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"COST OVERRUN INSURANCE" means the Non-Traditional Coverage established
in favor of the Company and Western L.P. pursuant to Policy No. CS 8690, placed
through Jardine Lloyd Thompson Canada Inc. and dated July 18, 2000.
"COVENANT DEFEASANCE" has the meaning set forth under "--Legal
Defeasance and Covenant Defeasance."
"CURRENCY AGREEMENT" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any Restricted Subsidiary against fluctuations in currency values.
"DE-BOTTLENECKING INDEBTEDNESS" means Indebtedness used to finance
incremental increases in capacity of the Project.
"DEFAULT" means an event or condition the occurrence of which is, or
with the lapse of time or the giving of notice or both would be, an Event of
Default.
"DESIGNATION" has the meaning set forth under "--Certain
Covenants--Limitation on Designations of Unrestricted Subsidiaries."
"DESIGNATION AMOUNT" has the meaning set forth under "--Certain
Covenants--Limitation on Designations of Unrestricted Subsidiaries."
"DISQUALIFIED CAPITAL STOCK" means that portion of any Capital Stock
which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is mandatorily exchangeable for Indebtedness, or is
redeemable or exchangeable for Indebtedness, at the sole option of the holder
thereof on or prior to the final maturity date of the notes.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended,
or any successor statute or statutes thereto, and the rules and regulations of
the Commission promulgated thereunder.
"EXCLUDED HOLDER" has the meaning set forth under "--Additional
Amounts".
"FAIR MARKET VALUE" means, with respect to any asset or property (or
ownership interest therein, as the case may be) of the applicable Person, the
price which could be negotiated in an arm's-length transaction, or ownership
interest therein, as the case may be, of the applicable Person between a willing
seller and a willing and able buyer, neither of whom is under undue pressure or
compulsion to complete the transaction. Except as otherwise provided in the
Indenture, Fair Market Value shall be determined by the Board of Directors of
the Company acting reasonably and in good faith and shall be evidenced by a
Board Resolution of the Board of Directors of the Company.
"FUNCTIONAL UNIT" has the meaning set forth in the Joint Venture
Agreement as in effect on the Issue Date.
"GAAP" means generally accepted accounting principles as may be
approved by a significant segment of the accounting profession of Canada as in
effect from time to time.
"GUARANTEE" means either a Subsidiary Guarantee or a Mirror Note
Guarantee.
"GUARANTOR" means each Restricted Subsidiary that in the future
executes a Subsidiary Guarantee or Mirror Note Guarantee pursuant to the
covenant described under "--Certain Covenants--Issuance of Subsidiary Guarantees
and Mirror Note Guarantees" or otherwise; PROVIDED that any Person constituting
a Guarantor as described above shall cease to constitute a Guarantor when its
Subsidiary Guarantee or Mirror Note Guarantee is released in accordance with the
terms of the Indenture.
"HMU LEASE" means the Capital Lease Agreement dated as of June 28, 2000
between Scotford HMU Leasing Inc. and Shell Canada Limited, Shell Canada
Products Limited, Chevron Canada Resources Limited and Western L.P., as amended
or modified from time to time.
"INCUR" has the meaning set forth under "--Certain Covenants--
Limitation on Incurrence on Additional Indebtedness".
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"INDEBTEDNESS" means, with respect to any Person, without duplication:
(1) all Obligations of such Person for borrowed money;
(2) all Obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments;
(3) all Capitalized Lease Obligations of such Person;
(4) all Obligations of such Person issued or assumed as
the deferred purchase price of property, all conditional sale
obligations and all Obligations under any title retention agreement
(but excluding trade accounts payable and other accrued liabilities
arising in the ordinary course of business that are not overdue by 90
days or more or are being contested in good faith by appropriate
proceedings promptly instituted and diligently conducted);
(5) all Obligations of such Person for the reimbursement
of any obligor on any letter of credit, bankers' acceptance or similar
credit transaction;
(6) guarantees and other contingent obligations of such
Person in respect of Indebtedness of any other Person referred to in
clauses (1) through (5) above and clauses (8) and (9) below;
(7) all Obligations of any other Person of the type
referred to in clauses (1) through (6) which are secured by any Lien on
any property or asset of such Person, the amount of such Obligation
being deemed to be the lesser of the Fair Market Value of such property
or asset or the amount of the Obligation so secured;
(8) all Obligations under Currency Agreements, Commodity
Agreements and Interest Swap Obligations of such Person; and
(9) all Disqualified Capital Stock of the Company and all
Preferred Stock of a Restricted Subsidiary with the amount of
Indebtedness represented by such Disqualified Capital Stock or
Preferred Stock being equal to the greater of its voluntary or
involuntary liquidation preference and its maximum fixed repurchase
price, but excluding accrued and unpaid dividends, if any.
For purposes hereof, the "maximum fixed repurchase price" of any
Disqualified Capital Stock or Preferred Stock which does not have a fixed
repurchase price shall be calculated in accordance with the terms of such
Disqualified Capital Stock or Preferred Stock as if such Disqualified Capital
Stock or Preferred Stock were purchased on any date on which Indebtedness shall
be required to be determined pursuant to the Indenture, and if such price is
based upon, or measured by, the Fair Market Value of such Disqualified Capital
Stock or Preferred Stock, such Fair Market Value shall be determined reasonably
and in good faith by the Board of Directors of the issuer of such Disqualified
Capital Stock or Preferred Stock. For the avoidance of doubt, obligations under
operating leases, including obligations under the Mobile Equipment Lease as in
effect on the Issue Date, do not constitute Indebtedness.
"INDEPENDENT APPRAISER" means a person who in the ordinary course of
its business appraises assets, who is recognized and licensed to do so, and who
(a) does not, and whose directors, officers and employees and Affiliates do not,
have a direct or indirect financial interest in the Company or any of its
Subsidiaries and (b) in the judgment of an officer of the Company, is otherwise
independent and qualified to perform the task for which it is to be engaged.
"INDEPENDENT FINANCIAL ADVISOR" means a firm (1) which does not, and
whose directors, officers and employees and Affiliates do not, have a direct or
indirect material financial interest in the Company and (2) which, in the
judgment of the Board of Directors of the Company, is otherwise independent and
qualified to perform the task for which it is to be engaged.
"INITIAL PURCHASERS" means Salomon Smith Barney Inc. and TD Securities
(USA) Inc.
"INTER-CREDITOR AGREEMENTS" means:
(1) Principal Inter-Creditor Agreement dated the Issue
Date among Western Oil Sands Inc., 852006 Alberta Ltd., Western Oil
Sands L.P., Western Oil Sands Finance Inc., The Toronto-Dominion
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Bank, The Bank of Nova Scotia Trust Company of New York and
Computershare Trust Company of Canada and the other Persons party
thereto from time to time in accordance with the terms thereof (the
"PRINCIPAL INTER-CREDITOR AGREEMENT");
(2) Counterparty Consent and Acknowledgement Agreement
among ATCO Pipelines, Western Oil Sands L.P. and Computershare Trust
Company of Canada dated the Issue Date;
(3) Counterparty Consent and Acknowledgement Agreement
among ATCO Power Canada Ltd., Western Oil Sands L.P. and Computershare
Trust Company of Canada dated the Issue Date;
(4) Counterparty Consent and Acknowledgement Agreement
among ATCO Power Canada Ltd., ATCO Resources Ltd., Western Oil Sands
L.P. and Computershare Trust Company of Canada dated the Issue Date;
(5) Counterparty Consent and Acknowledgement Agreement
among Corridor Pipeline Limited, Trans Mountain Pipe Line Company Ltd.,
BC Gas Inc., Western Oil Sands L.P. and Computershare Trust Company of
Canada dated the Issue Date;
(6) HMU/Western Inter-Creditor Agreement among Canadian
Imperial Bank of Commerce, Computershare Trust Company of Canada,
Scotford HMU Leasing Inc., Western Oil Sands L.P. and Western Oil Sands
Inc. dated the Issue Date;
(7) Western Oil Sands Inter-Creditor Agreement among
Shell Canada Limited, Western Oil Sands L.P., Western Oil Sands Inc.,
852006 Alberta Ltd., Western Oil Sands Finance Inc., Chevron Canada
Limited, Shell Canada Products, Computershare Trust Company of Canada,
The Toronto-Dominion Bank and The Bank of Nova Scotia Trust Company of
New York dated the Issue Date;
(8) Interlenders Acknowledgement Agreement among ATCO
Power Canada Ltd., Royal Bank of Canada, Montreal Trust Company of
Canada, Computershare Trust Company of Canada, Western Oil Sands L.P.
and ATCO Resources Ltd. dated the Issue Date;
(9) Interlenders Acknowledgement Agreement among Corridor
Pipeline Limited, The Canada Trust Company, Computershare Trust Company
of Canada and Western Oil Sands L.P. dated the Issue Date;
(10) Acknowledgement Agreement among MRM Mobile Equipment
Leasing L.P., Computershare Trust Company of Canada, Western Oil Sands
L.P. and Western Oil Sands Inc. dated the Issue Date;
(11) Interlenders Acknowledgement Agreement among ATCO
Power Canada Ltd., Bank of Montreal, Computershare Trust Company of
Canada, Western Oil Sands L.P., SaskPower International Inc. and ATCO
Resources Ltd. dated the Issue Date; and
(12) Bridge Facility Intercreditor Agreement among The
Bank of Nova Scotia Trust Company of New York, The Bank of Nova Scotia,
Western Oil Sands Inc., Western Oil Sands L.P., 852006 Alberta Ltd. and
Western Oil Sands Finance Inc. dated the Issue Date,
in each case as the same may be amended or modified from time to time.
"INTEREST SWAP OBLIGATIONS" means the obligations of the Company and
the Restricted Subsidiaries pursuant to any arrangement with any other Person,
whereby, directly or indirectly, the Company or any Restricted Subsidiary is
entitled to receive from time to time periodic payments calculated by applying
either a floating or a fixed rate of interest on a stated notional amount in
exchange for periodic payments made by such other Person calculated by applying
a fixed or a floating rate of interest on the same notional amount and shall
include, without limitation, interest rate swaps, caps, floors, collars and
similar agreements.
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"INVESTMENT" means, with respect to any Person, any direct or indirect
loan or other extension of credit (including, without limitation, guarantee) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness issued
by, any Person. "Investment" shall exclude extensions of trade credit by the
Company and the Restricted Subsidiaries on commercially reasonable terms in
accordance with normal trade practices of the Company or such Restricted
Subsidiaries, as the case may be. If the Company or any Restricted Subsidiary
sells or otherwise disposes of any Capital Stock of any Restricted Subsidiary
(the "Referent Subsidiary") such that, after giving effect to any such sale or
disposition, the Referent Subsidiary shall cease to be a Restricted Subsidiary,
the Company shall be deemed to have made an Investment on the date of any such
sale or disposition equal to the Fair Market Value of the Capital Stock of the
Referent Subsidiary not sold or disposed of.
"INVESTMENT COMPANY ACT" has the meaning set forth under "--Certain
Covenants--Limitation on Status as Investment Company."
"INVESTMENT GRADE" means, with respect to the notes, that the notes
have a rating of both (i) in the case of S&P, at least BBB-, and (ii) in the
case of Moody's, at least Baa3; PROVIDED that a rating of BBB-, with respect to
S&P or Baa3, with respect to Moody's, shall not qualify under this definition if
either such rating agency shall have then placed the notes on credit watch with
negative implications.
"ISSUE DATE" means April 23, 2002.
"JOINT VENTURE AGREEMENT" means the Athabasca Oil Sands Project Joint
Venture Agreement dated as of December 6, 1999, as amended or modified from time
to time, including any schedules, exhibits and annexes thereto and documents
referred to therein.
"JV OWNERS" means Shell, Chevron, Western L.P. and their respective
successors and assigns pursuant to the Joint Venture Agreement.
"LEGAL DEFEASANCE" has the meaning set forth under "--Legal Defeasance
and Covenant Defeasance."
"LIEN" means any lien, mortgage, deed of trust, pledge, security
interest, charge or encumbrance of any kind (including any conditional sale or
other title retention agreement, any lease in the nature thereof and any
agreement to give any security interest).
"MATERIAL CHANGE" means an increase or decrease (excluding changes that
result solely from changes in prices) of more than 10% during a fiscal quarter
in the discounted future net cash flows from proved oil and gas reserves of the
Company and its Restricted Subsidiaries calculated in accordance with clause
(a)(i) of the definition of Adjusted Consolidated Net Tangible Assets; PROVIDED,
HOWEVER, that there will be excluded from the calculation of Material Change any
acquisition during the quarter of oil and gas reserves that have been estimated
by independent petroleum engineers and on which a report or reports exist.
"MIRROR NOTE GUARANTEE" has the meaning set forth under "--Certain
Covenants--Issuance of Subsidiary Guarantees and Mirror Note Guarantees."
"MIRROR NOTE ISSUER" means Newco and Western L.P.
"MIRROR NOTES" means the promissory notes issued by Newco and Western
L.P. on the Issue Date evidencing Indebtedness equal in aggregate principal
amount to that of the notes outstanding from time to time.
"MOBILE EQUIPMENT LEASE" means the Master Lease Agreement dated July
30, 2001 among MRM Mobile Equipment Leasing L.P., as lessor, and Shell Canada
Limited, Chevron Canada Resources Limited and Western L.P., as lessees, as its
terms (other than the maximum principal amount of the leases thereunder except
as such amount may be increased due to increases in the costs of replacement
equipment) may be amended or modified from time to time.
"NET CASH PROCEEDS" means, with respect to any Asset Sale, the proceeds
in the form of
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cash or Cash Equivalents, including payments in respect of deferred payment
obligations when received in the form of cash or Cash Equivalents (other than
the portion of any such deferred payment constituting interest), received by the
Company or any of the Restricted Subsidiaries from such Asset Sale net of:
(1) reasonable out-of-pocket expenses and fees relating
to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, sales commissions and relocation
expenses);
(2) taxes paid or payable after taking into account any
reduction in consolidated tax liability due to available tax credits or
deductions and any tax sharing arrangements;
(3) repayments of Indebtedness secured by the property or
assets subject to such Asset Sale that is required to be repaid in
connection with such Asset Sale; and
(4) appropriate amounts to be determined by the Company
or any Restricted Subsidiary, as the case may be, as a reserve, in
accordance with GAAP, against any liabilities associated with such
Asset Sale and retained by the Company or any Restricted Subsidiary, as
the case may be, after such Asset Sale, including, without limitation,
pension and other post-employment benefit liabilities, liabilities
related to environmental matters and liabilities under any
indemnification obligations associated with such Asset Sale;
PROVIDED, HOWEVER, that cash and/or Cash Equivalents in which the Company or a
Restricted Subsidiary has an individual beneficial ownership interest shall not
be deemed to be received by the Company or a Restricted Subsidiary until such
time as such cash and/or Cash Equivalents are free from any restrictions under
agreements with the other beneficial owners of such cash and/or Cash Equivalents
preventing the Company or a Restricted Subsidiary from applying such cash and/or
Cash Equivalents to any use permitted by clause (A), (B) or (C) of the second
paragraph of the covenant described under "--Certain Covenants--Limitation of
Asset Sales of Collateral" or by clause (A), (B) or (C) of the second paragraph
of the covenant described under "--Certain Covenants--Limitation on Asset Sales
of Non-Collateral," as applicable, or to purchase notes.
"NET COLLATERAL PROCEEDS OFFER" has the meaning set forth under
"--Certain Covenants--Limitation on Asset Sales of Collateral."
"NET COLLATERAL PROCEEDS OFFER AMOUNT" has the meaning set forth under
"--Certain Covenants--Limitation on Asset Sales of Collateral."
"NET COLLATERAL PROCEEDS OFFER PURCHASE DATE" has the meaning set forth
under "--Certain Covenants--Limitation on Asset Sales of Collateral."
"NET COLLATERAL PROCEEDS OFFER TRIGGER DATE" has the meaning set forth
under "--Certain Covenants--Limitation on Asset Sales of Collateral."
"NET PROCEEDS OFFER" has the meaning set forth under "--Certain
Covenants--Limitation on Asset Sales of Non-Collateral."
"NET PROCEEDS OFFER AMOUNT" has the meaning set forth under "--Certain
Covenants--Limitation on Asset Sales of Non-Collateral."
"NET PROCEEDS OFFER PURCHASE DATE" has the meaning set forth under
"--Certain Covenants--Limitation on Asset Sales of Non-Collateral."
"NET PROCEEDS OFFER TRIGGER DATE" has the meaning set forth under
"--Certain Covenants--Limitation on Asset Sales of Non-Collateral."
"NEWCO" means Western Oil Sands Finance Inc.
"NON-COLLATERAL" means all assets, property and rights that are not
Collateral.
"OBLIGATIONS" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
"OIL SANDS PROJECTS" means a business principally involving the
exploration, extraction, production, refining, marketing or sale of hydrocarbon
products from oil sands and activities relating thereto or in
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furtherance thereof (including feasibility studies with respect thereto). If the
Company or any Restricted Subsidiary acquires in any transaction assets not
principally involving the exploration, extraction, production, refining,
marketing or sale of petroleum products from oil sands and activities relating
thereto or in furtherance thereof (such exploration, extraction, production,
refining, marketing or sales, "OIL SANDS RELATED ACTIVITIES") but that are used
or useful in a Permitted Business, any such assets may be included under this
definition so long as the Company is diligently and in good faith attempting to
dispose of the non-compliant assets so that the assets acquired and held by the
Company or any Restricted Subsidiary, in the aggregate, principally involve oil
sands related activities.
"OWNERSHIP INTEREST" has the meaning set forth in the Joint Venture
Agreement as in effect on the Issue Date.
"PERMITTED ASSETS" means any assets to be utilized in a Permitted
Business.
"PERMITTED BUSINESS" means the exploration, extraction, production,
refining, marketing and sale of hydrocarbon products and activities relating
thereto or in furtherance thereof (including feasibility studies with respect
thereto).
"PERMITTED COLLATERAL ASSETS" means (1) assets that replace the assets
that were subject to the applicable Asset Sale, (2) tangible assets or reserves
or resources used or useful in a Permitted Business (or any Person whose assets
consist substantially of such assets), or (3) other assets used or useful in an
Oil Sands Project.
"PERMITTED INDEBTEDNESS" means, without duplication, each of the
following:
(1) Indebtedness under the notes, the Indenture and any
Guarantees;
(2) Indebtedness under (i) the Senior Credit Facility and
Refinancing Indebtedness in respect thereof in an aggregate principal
amount not to exceed $100.0 million, and (ii) the Bank of Nova Scotia
Subordinated Facility and Refinancing Indebtedness in respect thereof
in an aggregate principal amount not to exceed $88.0 million;
(3) Indebtedness incurred following Completion of the
Project in an aggregate principal amount at any time outstanding which,
together with Indebtedness outstanding under the Debt
Service/Completion Facility and the Bank of Nova Scotia Subordinated
Facility (but for the avoidance of doubt excluding Indebtedness
outstanding under the Letter of Credit Facility), does not exceed the
sum of (i) $50.0 million PLUS (ii) 20% of Adjusted Consolidated Net
Tangible Assets;
(4) Indebtedness of the Company, a Mirror Note Issuer or
a Guarantor incurred to finance Oil Sands Projects; PROVIDED that if on
the date of the incurrence of such Indebtedness, after giving effect to
the incurrence thereof, the ratio of (i) total Indebtedness outstanding
incurred to finance Oil Sands Projects to (ii) the sum of (a) 100% of
the net cash proceeds received by the Company from any Person (other
than a Subsidiary of the Company) from the issuance or sale subsequent
to the Issue Date and on or prior to the date such incurrence of
Indebtedness occurs of Qualified Capital Stock of the Company, (b)
without duplication of amounts included in clause (4)(ii)(a) above,
100% of the net cash proceeds of any contribution to the common equity
capital of the Company received by the Company from a holder of the
Company's Capital Stock subsequent to the Issue Date and on or prior to
the date such incurrence of Indebtedness occurs and (c) if positive,
100% of the cumulative Consolidated Net Income during the period
beginning on the first day of the fiscal quarter during which the Issue
Date occurs and through the end of the most recent fiscal quarter for
which consolidated financial statements of the Company are available
prior to the date of incurrence of such Indebtedness, would not be
greater than 3.0:2.0;
(5) De-Bottlenecking Indebtedness (and any Refinancing
Indebtedness incurred to refinance such De-Bottlenecking Indebtedness)
in an aggregate principal amount not to exceed $60.0 million at any
time outstanding;
(6) Interest Swap Obligations of the Company, a Mirror
Note Issuer or a Guarantor covering Indebtedness of the Company or any
Restricted Subsidiary entered into in the ordinary course of
134
business; PROVIDED, HOWEVER, that the notional principal amount of such
Interest Swap Obligations does not exceed the principal amount of the
Indebtedness to which such Interest Swap Obligation relates;
(7) Indebtedness under Currency Agreements entered into
in the ordinary course of business; PROVIDED that in the case of
Currency Agreements which relate to Indebtedness, such Currency
Agreements do not increase the Indebtedness of the Company and the
Restricted Subsidiaries outstanding, other than as a result of
fluctuations in foreign currency exchange rates or by reason of fees,
indemnities and compensation payable thereunder;
(8) Indebtedness under Commodity Agreements entered into
in the ordinary course of business and reasonably designed to protect
the Company or any Restricted Subsidiary against fluctuations
(including, without limitation, oil and natural gas) in commodity
values; PROVIDED that such Commodity Agreements do not increase the
Indebtedness of the Company and the Restricted Subsidiaries
outstanding, other than as a result of fluctuations in commodity prices
or by reason of fees, indemnities and compensation payable thereunder;
(9) Indebtedness of a Restricted Subsidiary to the
Company, a Guarantor, a Mirror Note Issuer or an Unlevered Restricted
Subsidiary for so long as such Indebtedness is held by the Company, a
Guarantor, a Mirror Note Issuer, Western L.P. (so long as Western L.P.
is a Restricted Subsidiary) or an Unlevered Restricted Subsidiary, in
each case subject to no Lien held by a Person other than the Company, a
Guarantor, a Mirror Note Issuer or an Unlevered Restricted Subsidiary;
PROVIDED that if as of any date any Person other than the Company, a
Guarantor, a Mirror Note Issuer or an Unlevered Restricted Subsidiary
owns or holds any such Indebtedness or holds a Lien in respect of such
Indebtedness, such date shall be deemed the incurrence of Indebtedness
not constituting Permitted Indebtedness by the issuer of such
Indebtedness under this paragraph (9);
(10) Indebtedness of the Company to a Guarantor, Western
L.P., Newco or an Unlevered Restricted Subsidiary, for so long as such
Indebtedness is held by a Guarantor, Western L.P., Newco or an
Unlevered Restricted Subsidiary, in each case subject to no Lien held
by a Person other than a Guarantor, Western L.P., Newco or an Unlevered
Restricted Subsidiary; PROVIDED that if as of any date any Person other
than a Guarantor, Western L.P., Newco or an Unlevered Restricted
Subsidiary owns or holds any such Indebtedness or holds a Lien in
respect of such Indebtedness, such date shall be deemed the incurrence
of Indebtedness not constituting Permitted Indebtedness by the Company
under this paragraph (10);
(11) Indebtedness of the Company or any of the Restricted
Subsidiaries arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument drawn against
insufficient funds in the ordinary course of business; PROVIDED,
HOWEVER, that such Indebtedness is extinguished within five business
days after receipt of notice of its incurrence;
(12) Indebtedness of the Company or any of the Restricted
Subsidiaries represented by letters of credit for the account of the
Company, or any such Restricted Subsidiary, as the case may be,
provided pursuant to obligations of the Company or any Restricted
Subsidiary under the Joint Venture Agreement as such agreement is in
effect on the Issue Date;
(13) Indebtedness of the Company or any Restricted
Subsidiary represented by letters of credit for the account of the
Company, or any such Restricted Subsidiary, as the case may be,
provided in order to provide security for environmental reclamation
obligations to governmental agencies, workers' compensation claims,
payment obligations in connection with self-insurance or similar
requirements in the ordinary course of business;
(14) Refinancing Indebtedness incurred to Refinance (i)
Ratio Indebtedness, (ii) Indebtedness incurred pursuant to clause (4)
or (21) of this definition or (iii) Indebtedness incurred pursuant to
this clause (14);
(15) Indebtedness represented by the Mirror Notes;
135
(16) additional Indebtedness for working capital and other
purposes of the Company and the Restricted Subsidiaries in an aggregate
principal amount not to exceed US$75.0 million at any time outstanding;
(17) Purchase Money Indebtedness and Capitalized Lease
Obligations (and any Refinancing Indebtedness incurred to Refinance
such Purchase Money Indebtedness or Capitalized Lease Obligations) in
an aggregate principal amount not to exceed $50.0 million at any time
outstanding;
(18) Indebtedness under any overdraft facilities required
to be entered into pursuant to the Joint Venture Agreement as in effect
on the Issue Date so long as amounts incurred under such a facility are
discharged within 22 days of incurrence;
(19) Indebtedness incurred in connection with any lease or
purchase of the types of assets included under or contemplated by the
Mobile Equipment Lease (and any Refinancing Indebtedness incurred to
Refinance such Indebtedness) in an aggregate principal amount not to
exceed $60.0 million at any time outstanding or such greater amount as
may be required due to increases in the replacement cost of the
equipment leased or purchased thereunder;
(20) Indebtedness incurred in connection with any lease or
purchase of the types of assets included under or contemplated by the
HMU Lease (and any Refinancing Indebtedness incurred to Refinance such
Indebtedness) in an aggregate principal amount not to exceed $58.0
million at any time outstanding; and
(21) Indebtedness existing on the Issue Date as in effect
on the Issue Date.
If any Indebtedness incurred by the Company or any Restricted
Subsidiary would qualify in more than one of the categories of Permitted
Indebtedness as set forth in clauses (1) through (21) of this definition, the
Company may designate under which category such incurrence shall be deemed to
have been made.
"PERMITTED INVESTMENTS" means:
(1) Investments by the Company or any Restricted
Subsidiary in any Person that is or will become immediately after such
Investment a Restricted Subsidiary or that will merge or consolidate
into the Company or a Restricted Subsidiary;
(2) Investments in the Company by any Restricted
Subsidiary; PROVIDED that any Indebtedness evidencing such Investment
is unsecured (except to the extent permitted by clause (6) of the
definition of "Permitted Liens");
(3) Investments in cash and Cash Equivalents;
(4) loans and advances to employees, officers and
directors of the Company and the Restricted Subsidiaries in the
ordinary course of business for bona fide business purposes not in
excess of an aggregate of $5.0 million at any one time outstanding;
(5) Currency Agreements, Commodity Agreements and
Interest Swap Obligations entered into in the ordinary course of the
Company's or a Restricted Subsidiary's businesses and otherwise in
compliance with the Indenture;
(6) Investments in trade creditors or customers received
pursuant to any plan of reorganization or similar arrangement upon the
bankruptcy or insolvency of such trade creditors or customers;
(7) Investments made by the Company or the Restricted
Subsidiaries as a result of consideration received in connection with
an Asset Sale made in compliance with the covenants described under
"--Certain Covenants--Limitation on Asset Sales of Collateral" and
"--Certain Covenants--Limitation on Asset Sales of Non-Collateral";
(8) Investments in Oil Sands Projects or a Person whose
business principally involves Oil Sands Projects;
136
(9) Investments in Persons, including, without
limitation, Unrestricted Subsidiaries and joint ventures, engaged in a
business similar or related to or logical extensions of the businesses
in which the Company and the Restricted Subsidiaries are engaged on the
Issue Date, not to exceed $25.0 million;
(10) Investments existing on the Issue Date; and
(11) Investments in the notes.
"PERMITTED LIENS" means the following types of Liens:
(1) Liens for taxes, assessments or governmental charges
or claims either (A) not delinquent or (B) contested in good faith by
appropriate proceedings and, in each case, as to which the Company or
any Restricted Subsidiary shall have set aside on its books such
reserves (if any) as may be required pursuant to GAAP;
(2) statutory Liens of landlords and Liens of carriers,
warehousemen, mechanics, suppliers, materialmen, repairmen and other
Liens imposed by law incurred in the ordinary course of business for
sums not yet delinquent or being contested in good faith, if such
reserve or other appropriate provision, if any, as shall be required by
GAAP shall have been made in respect thereof;
(3) Liens incurred or deposits made in the ordinary
course of business in connection with workers' compensation,
unemployment insurance and other types of social security, including
any Lien securing letters of credit issued in the ordinary course of
business consistent with past practice in connection therewith, or to
secure the performance of tenders, statutory obligations, surety and
appeal bonds, bids, leases, contracts, performance and return-of-money
bonds and other similar obligations (exclusive of obligations for the
payment of borrowed money);
(4) easements, rights-of-way, zoning restrictions and
other similar charges or encumbrances in respect of real property not
impairing in any material respect the ordinary conduct of the business
of the Company or any of the Restricted Subsidiaries;
(5) Liens encumbering deposits made to secure obligations
arising from statutory, regulatory, contractual or warranty
requirements of the Company or any of the Restricted Subsidiaries,
including rights of offset and set-off;
(6) Liens for the benefit of the Company, any Mirror Note
Issuer or any Guarantor;
(7) Liens arising under or in respect of operating
leases, including lessor Liens;
(8) Liens under or pursuant to any judgment rendered or
claim filed so long as the judgment or claim shall be contested and
adequately bonded;
(9) undetermined or inchoate Liens incidental to
construction or operations which relate to obligations not due or
delinquent or, if due or delinquent, the validity of which is being
contested;
(10) Liens in favor of a public utility or any
municipality or governmental or other public authority when
required by such utility or municipality or other authority in the
ordinary course;
(11) the reservation in any original grants from the Crown
of any land or interests therein and statutory exceptions to title; and
(12) Liens encumbering a cash collateral account with The
Toronto-Dominion Bank made to effectively defease any bankers'
acceptances outstanding on the Issue Date under the existing $535
million senior credit facility.
"PERSON" means an individual, partnership, corporation, unincorporated
organization, trust or joint venture, or a governmental agency or political
subdivision thereof.
"PLEDGOR" means each of the Company and its Restricted Subsidiaries
that grants a Lien on any Collateral pursuant to the Indenture or a Security
Document.
"PREFERRED STOCK" of any Person means any Capital Stock of such Person
that has preferential rights to any other Capital Stock of such Person with
respect to dividends or redemptions or upon liquidation.
137
"PROJECT" means the direct or indirect ownership interests of the
Company and its Restricted Subsidiaries in:
(i) the mining of oil sands from the western portion of
Lease 13 (as defined in the Joint Venture Agreement as in effect on the
Issue Date);
(ii) the extraction of bitumen from such oil sands;
(iii) the Lease 13 cogeneration project;
(iv) the Corridor Pipeline system project;
(v) the upgrading of bitumen from such oil sands into
refinery feedstocks;
(vi) the Downstream Cogeneration project; and
(vii) the major shared facilities pursuant to the Major
Shared Facilities Agreement dated as of December 6, 1999 among Shell,
Western L.P., Chevron and Shell Canada Products Limited (the "MAJOR
SHARED FACILITIES AGREEMENT"),
in each case, as contemplated by the Joint Venture Agreement as in effect on the
Issue Date and to the extent applicable to the western portion of Lease 13.
"PROJECT INTEREST SALE OFFER" has the meaning set forth under
"--Certain Covenants--Limitation on Sales of the Project Interest."
"PROJECT INTEREST SALE OFFER PURCHASE DATE" has the meaning set forth
under "--Certain Covenants--Limitation on Sales of the Project Interest."
"PURCHASE MONEY INDEBTEDNESS" means Indebtedness of the Company or any
Restricted Subsidiary incurred for the purpose of financing all or any part of
the purchase price or the cost of an Asset Acquisition or construction or
improvement of any property; PROVIDED that the aggregate principal amount of
such Indebtedness does not exceed such purchase price or cost.
"QUALIFIED CAPITAL STOCK" means any Capital Stock that is not
Disqualified Capital Stock.
"RATIO INDEBTEDNESS" has the meaning set forth under "--Certain
Covenants--Limitation on Incurrence of Additional Indebtedness."
"REFERENCE DATE" has the meaning set forth under "--Certain
Covenants--Limitation on Restricted Payments."
"REFINANCE" means in respect of any security or Indebtedness, to
refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or
to issue a security or Indebtedness in exchange or replacement for, such
security or Indebtedness in whole or in part. "Refinanced" and "Refinancing"
shall have correlative meanings.
"REFINANCING INDEBTEDNESS" means any Refinancing by the Company or any
Restricted Subsidiary of Indebtedness in each case that does not:
(1) result in an increase in the aggregate principal
amount of any Indebtedness of such Person as of the date of such
proposed Refinancing (plus the amount of any premium reasonably
necessary to Refinance such Indebtedness and plus the amount of
reasonable expenses incurred by the Company in connection with such
Refinancing); or
(2) create Indebtedness with (A) a Weighted Average Life
to Maturity that is less than the Weighted Average Life to Maturity of
the Indebtedness being Refinanced or (B) a final maturity earlier than
the final maturity of the Indebtedness being Refinanced,
PROVIDED that if such Refinancing Indebtedness is secured by liens on the
Collateral ranking pari passu or junior to the liens in favor of the holders of
the notes, the holder of such Indebtedness shall become a party to and comply
with all of the provisions of the Inter-Creditor Agreements applicable to the
Collateral which secures such Indebtedness.
138
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights Agreement
dated April 23, 2002 between the Company and the Initial Purchasers.
"RESTRICTED PAYMENT" has the meaning set forth under "--Certain
Covenants--Limitation on Restricted Payments."
"RESTRICTED SUBSIDIARY" means any Subsidiary of the Company that has
not been designated by the Board of Directors of the Company, by a Board
Resolution delivered to the Trustee, as an Unrestricted Subsidiary pursuant to
and in compliance with the covenant described under "--Certain
Covenants--Limitation on Designations of Unrestricted Subsidiaries." Any such
Designation may be revoked by a Board Resolution of the Company delivered to the
Trustee, subject to the provisions of such covenant.
"REVOCATION" has the meaning set forth under "--Certain
Covenants--Limitation on Designations of Unrestricted Subsidiaries."
"SALE AND LEASEBACK TRANSACTION" means any direct or indirect
arrangement with any Person or to which any such Person is a party, providing
for the leasing to the Company or a Restricted Subsidiary of any property,
whether owned by the Company or any Restricted Subsidiary on the Issue Date or
later acquired, which has been or is to be sold or transferred by the Company or
such Restricted Subsidiary to such Person or to any other Person from whom funds
have been or are to be advanced on the security of such Property.
"SECURED CREDITORS" means holders of obligations secured by Liens on
Collateral who are parties to the Principal Inter-Creditor Agreement.
"SECURITIES ACT" means the Securities Act of 1933, as amended, or any
successor statute or statutes thereto, and the rules and regulations of the
Commission promulgated thereunder.
"SECURITY DOCUMENTS" means the Principal Inter-Creditor Agreement and
all agreements in favor of the Collateral Agent that create a security interest
in the Collateral.
"SENIOR CREDIT FACILITY" means the Credit Agreement dated as of the
Issue Date among the Company, the lenders party thereto in their capacities as
lenders thereunder and the agent, comprised of:
(1) a debt service and construction completion facility
(the "Debt Service/Completion Facility") and
(2) a letter of credit facility (the "Letter of Credit
Facility"),
together with the related documents thereto (including, without limitation, any
guarantee agreements and security documents), in each case as such agreements
may be amended (including any amendment and restatement thereof), supplemented
or otherwise modified from time to time, including any agreement extending the
maturity of, refinancing, replacing or otherwise restructuring or adding
Subsidiaries as additional borrowers or guarantors thereunder, all or any
portion of the Indebtedness under such agreement or any successor or replacement
agreement and whether by the same or any other agent, lender or group of
lenders.
"SIGNIFICANT SUBSIDIARY" means, with respect to any Person, any
Restricted Subsidiary of such Person that satisfies the criteria for a
"significant subsidiary" set forth in Rule 1.02(w) of Regulation S-X under the
Securities Act.
"SUBORDINATED INDEBTEDNESS" means Indebtedness of the Company, Western
L.P., Newco or a Guarantor which is expressly subordinated in right of payment
to the notes, a Mirror Note or the Guarantee of such Guarantor, as the case may
be.
"SUBORDINATED INDEBTEDNESS PAYMENT" has the meaning set forth under
"--Certain Covenants--Limitation on Restricted Payments."
"SUBSIDIARY", with respect to any Person, means (1) any corporation of
which the outstanding Capital Stock having at least a majority of the votes
entitled to be cast in the election of directors under ordinary circumstances
shall at the time be owned, directly or indirectly, by such Person or (2) any
other Person of
139
which at least a majority of the voting interest under ordinary circumstances is
at the time, directly or indirectly, owned by such Person.
"SUBSIDIARY GUARANTEE" has the meaning set forth under "--Certain
Covenants--Issuance of Subsidiary Guarantees and Mirror Note Guarantees."
"SUBSTITUTE COLLATERAL" has meaning ascribed to that term under
"--Possession, Use and Release of Collateral."
"SURVIVING ENTITY" has the meaning set forth under "--Certain
Covenants--Merger, Consolidation and Sale of Assets."
"TAXES" has the meaning set forth under "--Additional Amounts."
"TRANSACTION DATE" has the meaning set forth in the definition of
Consolidated Fixed Charge Coverage Ratio.
"TRUST MONEYS" means (i) all amounts in the construction account and
(ii) all cash or Cash Equivalents received by the Trustee or the Collateral
Agent, as the case may be: (a) upon the release of property from the Lien of any
of the Security Documents, including all moneys received in respect of the
principal of all purchase money, governmental and other obligations; (b) as
compensation for, or proceeds of the sale of all or any party of the Collateral
taken by eminent domain or purchased by, or sold pursuant to any order of, a
governmental authority or otherwise disposed of; (c) as proceeds of insurance
upon any, all or part of the Collateral (other than any liability insurance
proceeds payable to the Trustee or the Collateral Agent, as the case may be, for
any loss, liability or expense incurred by it); (d) pursuant to certain
provisions of the mortgages included in the Security Documents; (e) as proceeds
of any other sale or other disposition of all or any part of the Collateral by
or on behalf of the Trustee or the Collateral Agent, as the case may be, or any
collection, recovery, receipt, appropriation or other realization of or from all
or any part of the Collateral pursuant to the Security Documents or otherwise;
or (f) for application under the Indenture as provided in the Indenture, any
Security Document or any Inter-Creditor Agreement, or whose disposition is not
otherwise specifically provided for in the Indenture, any Security Document or
any Inter-Creditor Agreement.
"UNLEVERED RESTRICTED SUBSIDIARY" means a Restricted Subsidiary that
has no Indebtedness owing to any Person other than the Company or a Restricted
Subsidiary.
"UNRESTRICTED SUBSIDIARY" means any Subsidiary of the Company
designated as such pursuant to and in compliance with the covenant described
under "--Certain Covenants--Limitation on Designations of Unrestricted
Subsidiaries." Any such designation may be revoked by a Board Resolution of the
Company, subject to the provisions of such covenant.
"VOTING INTERESTS" has the meaning set forth in the Joint Venture
Agreement as in effect on the Issue Date.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (i) the then
outstanding aggregate principal amount of such Indebtedness into (ii) the sum of
the total of the products obtained by multiplying (a) the amount of each then
remaining installment, sinking fund, serial maturity or other required payment
of principal, including payment at final maturity, in respect thereof, by (b)
the number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"WESTERN L.P." means Western Oil Sands L.P., an Alberta limited
partnership.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" of the Company means any
Restricted Subsidiary of which all the outstanding voting securities (other than
directors' qualifying shares or an immaterial amount of shares required to be
owned by other Persons pursuant to applicable law) are owned by the Company or
any other Wholly Owned Restricted Subsidiary.
140
DESCRIPTION OF THE INITIAL NOTES
The initial notes were issued and sold on April 23, 2002, in a private
transaction that was exempt from the registration requirements of the Securities
Act. The form and terms of the initial notes are the same as the form and terms
of the exchange notes, except that:
o the initial notes are not registered under the Securities Act
and bear legends restricting their transfer, and
o holders of initial notes have rights under a registration
rights agreement which will terminate upon the consummation of
the exchange offer.
Please refer to the section of this prospectus entitled "Description of
the Exchange Notes," which begins on page 93.
BOOK-ENTRY, DELIVERY AND FORM
Except as described below, we will initially issue the exchange notes
in the form of one or more registered exchange notes in global form without
coupons. We will deposit each global note on the date of the closing of this
exchange offer with, or on behalf of, The Depository Trust Company in New York,
New York, and we will register the exchange notes in the name of The Depository
Trust Company or its nominee, or will leave these notes in the custody of the
trustee.
DEPOSITORY TRUST COMPANY PROCEDURES
For your convenience, we are providing you with a description of the
operations and procedures of The Depository Trust Company, the Euroclear System
and Clearstream Banking, S.A. These operations and procedures are solely within
the control of the respective settlement systems and are subject to changes by
them. We are not responsible for these operations and procedures and urge you to
contact the system or its participants directly to discuss these matters.
The Depository Trust Company has advised us that it is a
limited-purpose trust company created to hold securities for its participating
organizations and to facilitate the clearance and settlement of transactions in
those securities between its participants through electronic book entry changes
in the accounts of these participants. These direct participants include
securities brokers and dealers, banks, trust companies, clearing corporations
and other organizations. Access to The Depository Trust Company's system is also
indirectly available to other entities that clear through, or maintain a direct
or indirect custodial relationship with, a direct participant. The Depository
Trust Company may hold securities beneficially owned by other persons only
through its participants and the ownership interests and transfers of ownership
interests of these other persons will be recorded only on the records of the
participants and not on the records of The Depository Trust Company.
The Depository Trust Company has also advised us that, in accordance
with its procedures,
(1) upon deposit of the global notes, it will credit the
accounts of the direct participants with an interest in the global
notes, and
(2) it will maintain records of the ownership interests
of these direct participants in the global notes and the transfer of
ownership interests by and between direct participants.
The Depository Trust Company will not maintain records of the ownership
interests of, or the transfer of ownership interests by and between, indirect
participants or other owners of beneficial interests in the global notes. Both
direct and indirect participants must maintain their own records of ownership
interests of, and the transfer of ownership interests by and between, indirect
participants and other owners of beneficial interests in the global notes.
Investors in the global notes may hold their interests in the notes
directly through The Depository Trust Company if they are direct participants in
The Depository Trust Company or indirectly through organizations that are direct
participants in The Depository Trust Company. Investors in the global notes may
also hold their interests in the notes through Euroclear and Clearstream if they
are direct participants in those systems
141
or indirectly through organizations that are participants in those systems.
Euroclear and Clearstream will hold omnibus positions in the global notes on
behalf of the Euroclear participants and the Clearstream participants,
respectively, through customers' securities accounts in Euroclear's and
Clearstream's names on the books of their respective depositories, which are
Morgan Guaranty Trust Company of New York, Brussels office, as operator of
Euroclear, and Citibank, N.A. and The Chase Manhattan Bank, N.A., as operators
of Clearstream. These depositories, in turn, will hold these positions in their
names on the books of The Depository Trust Company. All interests in a global
note, including those held through Euroclear or Clearstream, may be subject to
the procedures and requirements of The Depository Trust Company. Those interests
held through Euroclear or Clearstream may also be subject to the procedures and
requirements of those systems.
The laws of some states require that some persons take physical
delivery in definitive certificated form of the securities that they own. This
may limit or curtail the ability to transfer beneficial interests in a global
note to these persons. Because The Depository Trust Company can act only on
behalf of direct participants, which in turn act on behalf of indirect
participants and others, the ability of a person having a beneficial interest in
a global note to pledge its interest to persons or entities that are not direct
participants in The Depository Trust Company or to otherwise take actions in
respect of its interest, may be affected by the lack of physical certificates
evidencing the interests.
Except as described below, owners of interests in the global notes will
not have notes registered in their names, will not receive physical delivery of
notes in certificated form and will not be considered the registered owners or
holders of these notes under the indenture for any purpose.
Payments with respect to the principal of and interest on any notes
represented by a global note registered in the name of The Depository Trust
Company or its nominee on the applicable record date will be payable by the
trustee to or at the direction of The Depository Trust Company or its nominee in
its capacity as the registered holder of the global note representing these
notes under the indenture. Under the terms of the indenture, we and the trustee
will treat the person in whose names the notes are registered, including notes
represented by global notes, as the owners of the notes for the purpose of
receiving payments and for any and all other purposes whatsoever. Payments in
respect of the principal and interest on global notes registered in the name of
The Depository Trust Company or its nominee will be payable by the trustee to
The Depository Trust Company or its nominee as the registered holder under the
indenture. Consequently, none of the exchange agent, the trustee or any of our
agents, or the trustee's agents has or will have any responsibility or liability
for:
(1) any aspect of The Depository Trust Company's records
or any direct or indirect participant's records relating to, or
payments made on account of, beneficial ownership interests in the
global notes or for maintaining, supervising or reviewing any of The
Depository Trust Company's records or any direct or indirect
participant's records relating to the beneficial ownership interests in
any global note or
(2) any other matter relating to the actions and
practices of The Depository Trust Company or any of its direct or
indirect participants.
The Depository Trust Company has advised us that its current practice,
upon receipt of any payment in respect of securities such as the notes,
including principal and interest, is to credit the accounts of the relevant
participants with the payment on the payment date, in amounts proportionate to
their respective holdings in the principal amount of beneficial interest in the
security as shown on its records, unless it has reasons to believe that it will
not receive payment on the payment date. Payments by the direct and indirect
participants to the beneficial owners of interests in the global note will be
governed by standing instructions and customary practice and will be the
responsibility of the direct or indirect participants and will not be the
responsibility of The Depository Trust Company, the trustee or us.
Neither we nor the trustee will be liable for any delay by The
Depository Trust Company or any direct or indirect participant in identifying
the beneficial owners of the notes and the exchange agent and the trustee may
conclusively rely on, and will be protected in relying on, instructions from The
Depository Trust Company or its nominee for all purposes, including with respect
to the registration and delivery, and the respective principal amounts, of the
notes.
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Transfers between participants in The Depository Trust Company will be
effected in accordance with The Depository Trust Company's procedures, and will
be settled in same day funds, and transfers between participants in Euroclear
and Clearstream will be effected in accordance with their respective rules and
operating procedures.
Cross-market transfers between the participants in The Depository Trust
Company, on the one hand, and Euroclear or Clearstream participants, on the
other hand, will be effected through The Depository Trust Company in accordance
with The Depository Trust Company's rules on behalf of Euroclear or Clearstream,
as the case may be, by its respective depositary; however, such cross-market
transactions will require delivery of instructions to Euroclear or Clearstream,
as the case may be, by the counterparty in such system in accordance with the
rules and procedures and within the established deadlines (Brussels time) of
such system. Euroclear or Clearstream, as the case may be, will, if the
transaction meets its settlement requirements, deliver instructions to its
respective depositary to take action to effect final settlement on its behalf by
delivering or receiving interests in the relevant global note in The Depository
Trust Company, and making or receiving payment in accordance with normal
procedures for same-day funds settlement applicable to The Depository Trust
Company. Euroclear participants and Clearstream participants may not deliver
instructions directly to the depositories for Euroclear or Clearstream.
The Depository Trust Company has advised us that it will take any
action permitted to be taken by a holder of notes only at the direction of one
or more participants to whose account The Depository Trust Company has credited
the interests in the global notes and only in respect of the portion of the
aggregate principal amount of the notes as to which the participant or
participants has or have given that direction. However, if there is an event of
default with respect to the notes, The Depository Trust Company reserves the
right to exchange the global notes for legended notes in certificated form and
to distribute them to its participants.
Although The Depository Trust Company, Euroclear and Clearstream have
agreed to these procedures to facilitate transfers of interests in the global
notes among participants in The Depository Trust Company, Euroclear and
Clearstream, they are under no obligation to perform or to continue to perform
these procedures and may discontinue them at any time. None of the exchange
agent, the trustee or any of our or the trustee's respective agents will have
any responsibility for the performance by The Depository Trust Company,
Euroclear or Clearstream or their direct or indirect participants of their
respective obligations under the rules and procedures governing their
operations.
EXCHANGE OF BOOK-ENTRY NOTES FOR CERTIFICATED NOTES
A global note will be exchangeable for definitive notes in registered
certificated form if:
(1) The Depository Trust Company notifies us that it is
unwilling or unable to continue as depository for the global notes and
we fail to appoint a successor depository [within 90 days];
(2) The Depository Trust Company ceases to be a clearing
agency registered under the Exchange Act [and we fail to appoint a
successor within 90 days]; or
(3) a default or an event of default under the indenture
for the notes has occurred and is continuing.
In all cases, certificated notes delivered in exchange for any global
note or beneficial interests in a global note will be registered in the name,
and issued in any approved denominations, requested by or on behalf of The
Depository Trust Company, in accordance with its customary procedures.
EXCHANGE OF CERTIFICATED NOTES FOR BOOK-ENTRY NOTES
Initial notes issued in certificated form may be exchanged for
beneficial interests in the global note.
SAME DAY SETTLEMENT
We expect that the interests in the global notes will be eligible to
trade in The Depository Trust Company's Same-Day Funds Settlement System. As a
result, secondary market trading activity in these
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interests will settle in immediately available funds, subject in all cases to
the rules and procedures of The Depository Trust Company and its participants.
We expect that secondary trading in any certificated notes will also be settled
in immediately available funds.
Because of time zone differences, the securities account of a Euroclear
or Clearstream participant purchasing an interest in a global note from a
participant in The Depository Trust Company will be credited, and any such
crediting will be reported to the relevant Euroclear or Clearstream participant,
during the securities settlement processing day (which must be a business day
for Euroclear and Clearstream) immediately following the settlement date of The
Depository Trust Company. The Depository Trust Company has advised us that cash
received in Euroclear or Clearstream as a result of sales of interests in a
global note by or through a Euroclear or Clearstream participant to a
participant in The Depository Trust Company will be received with value on the
settlement date of The Depository Trust Company but will be available in the
relevant Euroclear or Clearstream cash account only as of the business day for
Euroclear or Clearstream following The Depository Trust Company's settlement
date.
PAYMENT
The notes indenture requires that payments in respect of the notes
represented by global notes, including principal and interest, be made by wire
transfer of immediately available funds to the accounts specified by the holder
of the global notes. With respect to notes in certificated form, we will make
all payments of principal and interest on the notes at our office or agency
maintained for that purpose within the city and state of New York. This office
will initially be the office of the Paying Agent maintained for that purpose. At
our option however, we may make these installments of interest by:
(1) check mailed to the holders of notes at their
respective addresses provided in the register of holder of notes, or
(2) transfer to an account maintained by the payee.
REGISTRATION RIGHTS
We entered into a registration rights agreement in connection with the
offering of the initial notes (the "Registration Rights Agreement"), pursuant to
which we agreed, for the benefit of the holders of the initial notes, to file
with the Commission following the issue date of the initial notes a registration
statement (the "Exchange Offer Registration Statement") under the Securities Act
relating to this exchange offering.
We agreed to cause the Exchange Offer Registration Statement to be
declared effective by the Commission within 180 days following the issue date of
the initial notes if MJDS is available to us, and within 270 days after the
issue date of the initial notes if MJDS is no longer available due to a change
in law or regulations. We further agreed to complete this exchange offering
promptly but in no event later than within 40 days after the Exchange Offer
Registration Statement has become effective, to hold the offer open for at least
30 days, and exchange exchange notes for all initial notes validly tendered and
not withdrawn before the expiration of this exchange offering.
Under existing Commission interpretations, the exchange notes will in
general be freely transferable after this exchange offering without further
registration under the Securities Act, except that broker-dealers
("Participating Broker-Dealers") receiving exchange notes in this exchange
offering will be subject to a prospectus delivery requirement with respect to
resales of the exchange notes. The Commission has taken the position that
Participating Broker-Dealers may fulfill their prospectus delivery requirements
with respect to the exchange notes (other than a resale of an unsold allotment
from the original sale of the initial notes) by delivery of the prospectus
contained in the Exchange Offer Registration Statement. Under the Registration
Rights Agreement, we are required to allow Participating Broker-Dealers and
other persons, if any, subject to similar prospectus delivery requirements to
use the prospectus contained in the Exchange Offer Registration Statement in
connection with the resale of the exchange notes. The Exchange Offer
Registration Statement will be kept effective as long as necessary after this
exchange offering has been consummated in order to permit resales of exchange
notes acquired by broker-dealers in after-market transactions. Each holder of
initial notes (other than certain specified holders) who wishes to exchange such
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initial notes for exchange notes in this exchange offering will be required to
represent that any exchange notes to be received by it will be acquired in the
ordinary course of its business, that at the time of the commencement of this
exchange offering it has no arrangement with any person to participate in the
distribution (within the meaning of the Securities Act) of the exchange notes
and that it is not us or an affiliate of ours.
However, if:
(1) the existing Commission interpretations are changed such that
we cannot effect this exchange offering or this exchange
offering is not for any reason consummated within 40 days
after the effectiveness of the Exchange Offer Registration
Statement; or
(2) any initial purchaser so requests under certain circumstances;
or
(3) this exchange offering is not available to any holder of the
initial notes,
we will, in lieu of (or, in the case of clause (2), in addition to) effecting
registration of exchange notes, use our commercially reasonable best efforts to
cause a registration statement under the Securities Act relating to a shelf
registration of the initial notes for resale by holders or, in the case of
clause (2), of the initial notes held by the initial purchasers for resale by
the initial purchasers (the "Resale Registration") to become effective and to
remain effective until two years following the issue date of the initial notes
or such shorter period that will terminate when all the securities covered by
the shelf registration statement have been sold pursuant to the shelf
registration statement.
We will, in the event of the Resale Registration, provide to the holder
or holders of the applicable initial notes copies of the prospectus that is a
part of the registration statement filed in connection with the Resale
Registration, notify such holder or holders when the Resale Registration for the
applicable initial notes has become effective and take certain other actions as
are required to permit unrestricted resales of the applicable initial notes. A
holder of initial notes that sells such initial notes pursuant to the Resale
Registration generally will be required to be named as a selling securityholder
in the related prospectus and to deliver a prospectus to purchasers, will be
subject to certain of the civil liability provisions under the Securities Act in
connection with such sales and will be bound by the provisions of the
Registration Rights Agreement that are applicable to such a holder (including
certain indemnification obligations).
If we cannot complete this exchange offering in the United States, we
will be obligated to pay liquidated damages.
The interest rate borne by the notes increases by 0.25% per year if:
o the Exchange Offer Registration Statement is not declared
effective on or before the 180th day after the date the
initial notes are issued if MJDS is available to us, and
within 270 days after the issue date of the initial notes if
MJDS is no longer available due to a change in law or
regulations;
o this exchange offering in the United States is not completed
(or a shelf registration statement with respect to the notes
is not declared effective) 40 days after the effectiveness of
the registration statement; or
o any registration statement required by the Registration Rights
Agreement is filed and declared effective but then ceases to
be effective (except as specifically permitted in the
Registration Rights Agreement) without being succeeded
promptly by an additional registration statement filed and
declared effective.
The amount of additional interest will increase by an additional 0.25%
for each subsequent 90 day period until the registration default described in
any of the bullet points above has been cured. The maximum aggregate amount of
increase from the original interest rate under these provisions is 1.25% per
year. Upon:
o the effectiveness of the Exchange Offer Registration Statement
after the 180-day period or 270-day period, as the case may
be, described in the first bullet above;
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o the completion of this exchange offering in the
United States or the effectiveness of a shelf
registration statement, as the case may be, after the
40-day period described in the second bullet above;
or
o the effectiveness of a succeeding registration statement after
the date in the third bullet above;
the interest rate borne by the initial notes or exchange notes, as the case may
be, from the date of such filing, effectiveness or completion, as the case may
be, will be reduced to the original interest rate listed on the cover page of
this prospectus.
The description in this prospectus of some of the provisions of the
Registration Rights Agreement is a summary only. We urge you to read all the
provisions of the Registration Rights Agreement, a copy of which is available
from us upon request, because it, and not this summary, defines your rights.
INCOME TAX CONSEQUENCES
The following summary is of a general nature only and is not intended
to be, and should not be construed to be, legal or tax advice to any prospective
holder and no representation with respect to the tax consequences to any
particular holder is made. Accordingly, prospective holders should consult with
their own tax advisers for advice with respect to the income tax consequences of
acquiring, holding and disposing of the exchange notes having regard to their
particular circumstances.
CANADIAN FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Macleod Dixon LLP, Canadian legal counsel to Western,
the following summary describes the principal Canadian federal income tax
considerations as of the date of this prospectus, generally applicable to a
purchaser of initial notes and exchange notes (a "Non-Resident Holder") who, for
the purposes of the INCOME TAX ACT (Canada) (the "ITA") at all relevant times,
is not, and is not deemed to be, resident in Canada, does not use or hold and is
not deemed to use or hold the initial notes or exchange notes in carrying on a
business in Canada, deals at arm's length with Western, is not an authorized
foreign bank and is not an insurer that carries on an insurance business in
Canada and elsewhere.
This summary takes into account the current provisions of the ITA and
the regulations passed pursuant to the ITA (the "ITA Regulations") in force as
of the date of this prospectus, any proposals to amend the ITA and the ITA
Regulations publicly announced by the date of this prospectus by the federal
Minister of Finance and the current published administrative practices of the
Canada Customs and Revenue Agency. This description is not exhaustive of all
Canadian federal income tax considerations and does not anticipate any changes
in law whether by legislative, governmental or judicial action other than the
passage of such publicly announced proposed amendments to the ITA or ITA
Regulations, nor does it take into account provincial, territorial or foreign
tax considerations which may differ from the Canadian federal income tax
considerations described in this prospectus.
This summary is not intended to be, nor should it be construed to be,
legal or tax advice to any particular holder of initial notes or exchange notes.
Prospective holders should consult their own Canadian tax advisors with respect
to the Canadian income tax considerations associated with their participation in
this exchange offering.
Pursuant to the ITA, interest paid or credited or deemed to be paid or
credited by Western on the initial notes or exchange notes, as the case may be,
to a Non-Resident Holder will be exempt from Canadian withholding tax. No other
taxes on income (including taxable capital gains) will be payable pursuant to
the ITA by a Non-Resident Holder in respect of the acquisition, ownership or
disposition of the initial notes or exchange notes including exchange of the
exchange notes for the initial notes.
U.S. FEDERAL INCOME TAX CONSEQUENCES
The following summary describes the material United States federal
income tax consequences of the exchange of initial notes for exchange notes in
accordance with the exchange offer and of the ownership and disposition of those
exchange notes by United States persons (as defined below) who acquire the
exchange
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notes in the exchange offer. This discussion assumes that United States
persons hold the exchange notes as capital assets ("United States Holders")
within the meaning of Section 1221 of the Internal Revenue Code of 1986, as
amended (the "Code"). Furthermore, the following discussion does not purport to
be a complete analysis of all of the potential United States federal income tax
considerations that may be relevant to particular holders of exchange notes in
light of their particular circumstances nor does it deal with persons that are
subject to special tax rules, such as dealers in securities or currencies,
financial institutions, insurance companies, tax-exempt organizations, persons
holding the initial notes or exchange notes as part of a straddle, hedge or
conversion transaction or a synthetic security or other integrated transaction,
holders whose "functional currency" is not the United States dollar, and holders
who are not United States Holders. In addition, the discussion below does not
address tax consequences applicable to subsequent purchasers of the exchange
notes nor does it address the tax consequences of the law of any state, locality
or foreign jurisdiction. There can be no assurance that the United States
Internal Revenue Service ("IRS") will take a similar view as to any of the tax
consequences described in this summary.
The following is based on currently existing provisions of the Code,
existing and proposed Treasury regulations under the Code and current
administrative rulings and court decisions. Everything listed in the previous
sentence may change, possibly on a retroactive basis, and any change could
affect the continuing validity of this discussion.
PERSONS CONSIDERING THE PURCHASE, OWNERSHIP OR DISPOSITION OF NOTES
SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE U.S. FEDERAL INCOME TAX
CONSEQUENCES APPLICABLE TO THEM IN LIGHT OF THEIR PARTICULAR SITUATION AS WELL
AS ANY CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING
JURISDICTION.
As used in this section, the term "United States person" means a
beneficial owner of a note that is: (i) a citizen or resident of the United
States, (ii) a corporation created or organized in or under the laws of the
United States or any political subdivision of the United States; (iii) an estate
the income of which is subject to United States federal income taxation
regardless of its source; or (iv) a trust which is (A) subject to the
supervision of a court within the United States and the control of a United
States fiduciary as described in Section 7701(a)(30) of the Code; or (B) has
made a valid election to be treated as a United States person.
EXCHANGE OF INITIAL NOTES FOR EXCHANGE NOTES
The exchange of initial notes for exchange notes pursuant to the
exchange offer will not constitute a recognition event for U.S. federal income
tax purposes. Consequently, (1) no gain or loss will be realized by a United
States Holder upon receipt of an exchange note, (2) the holding period of the
exchange note will include the holding period of the initial note exchanged for
the exchange note, (3) the adjusted tax basis of the exchange note will be the
same as the adjusted tax basis of the initial note exchanged therefor
immediately before the exchange and (4) any market discount or bond premium
(discussed below) applicable to the initial notes should carry over to the
exchange notes. Further, the tax consequences of ownership and disposition of
any exchange note should be the same as the tax consequences of ownership and
disposition of an initial note.
PAYMENTS OF INTEREST
Interest on a note will generally be taxable to a United States Holder
as ordinary income at the time it is paid or accrued in accordance with the
United States Holder's method of accounting for tax purposes. In addition to
interest on the notes, a United States Holder will be required to include in
income any additional amounts received pursuant to the section of this offering
memorandum entitled "Summary of Terms of the Exchange Notes -- Redemption for
Changes in Canadian or Other Withholding Taxes" and any taxes withheld from
interest payments, notwithstanding that the United States Holder does not in
fact receive such withheld taxes.
A United States Holder may be entitled to claim a credit against its
U.S. federal income tax liability, or a deduction in computing its U.S. federal
taxable income, for Canadian income taxes withheld and paid over to the Canadian
taxing authorities or for any of those taxes paid directly to the Canadian
taxing authorities.
147
The rules governing the foreign tax credit are complex. Investors are urged to
consult their tax advisors regarding the availability of the foreign tax credit
under their particular circumstances. Interest income on an exchange note
generally will constitute foreign source income and generally will be considered
"passive" income or "financial services" income (or, if Canadian withholding tax
at a rate of 5% or more were to be imposed, as "high withholding tax interest"),
which are treated separately from other types of income in computing the foreign
tax credit allowable to United States Holders under the Code.
MARKET DISCOUNT AND BOND PREMIUM
If a United States Holder purchased an initial note after its initial
issuance for an amount that is less than its principal amount, then, subject to
a statutory de minimis rule, the difference generally will be treated as market
discount. If a United States Holder exchanges an initial note, with respect to
which there is market discount, for an exchange note pursuant to the exchange
offer, the market discount applicable to the initial note should carry over to
the exchange note so received. In that case, any partial principal payment on,
or any gain realized on the sale, exchange, retirement or other disposition of,
including dispositions which are nonrecognition transactions under certain
provisions of the Code, the exchange note will be included in gross income and
characterized as ordinary income to the extent of the market discount that (1)
has not previously been included in income and (2) is treated as having accrued
on the exchange note prior to the payment or disposition. In addition, to the
extent that the exchange notes are acquired with market discount, a United
States Holder generally may be required to defer a portion of the interest
expense on indebtedness incurred or continued to purchase or carry such notes.
Market discount generally accrues on a straight-line basis over the remaining
term of the exchange note. A taxpayer may elect, however, to accrue market
discount on a constant yield basis. Further, a United States Holder may elect to
include market discount in gross income currently as it accrues. If such an
election is made, the preceding rules relating to the recognition of market
discount and deferral of interest expense will not apply. An election made to
include market discount in gross income as it accrues will apply to all debt
instruments acquired by the United States Holder on or after the first day of
the taxable year to which the election applies and may be revoked only with the
consent of the IRS.
If a United States Holder purchased an initial note for an amount in
excess of principal, the excess will be treated as bond premium. If a United
States Holder exchanges an initial note, with respect to which there is bond
premium, for an exchange note pursuant to the exchange offer, the bond premium
applicable to the initial note should carry over to the exchange note so
received. In general, a United States Holder may elect to amortize bond premium
over the remaining term of the exchange note on a constant yield method. An
election to amortize bond premium applies to all taxable debt instruments held
at the beginning of the first taxable year to which the election applies and
thereafter acquired by the United States Holder and may be revoked only with the
consent of the IRS.
SALE, EXCHANGE AND REDEMPTION OF NOTES
Upon the sale, exchange or redemption of an exchange note, a United
States Holder will recognize gain or loss equal to the difference between the
amount realized upon the sale, exchange or redemption (less any accrued
interest, which will be taxable as ordinary interest income) and the United
States Holder's adjusted tax basis in the exchange note. A United States
Holder's adjusted tax basis in a note generally will be the adjusted tax basis
of such holder in the initial note that was exchanged therefor, increased by
market discount, if any, that is included in such holder's income and reduced
(but not below zero) by any amortized bond premium which a United States Holder
has elected to deduct from taxable income on an annual basis. If a United States
Holder exchanges an initial note, with respect to which there is market discount
or bond premium, for an exchange note pursuant to the exchange offer, the market
discount or bond premium applicable to the initial note should carry over to the
exchange note so received. In general, market discount on an initial note is the
excess, if any, of the principal amount of an initial note over the United
States Holder's tax basis in such initial note at the time of acquisition
(unless the amount of such excess is less than a specified DE MINIMIS amount, in
which case market discount is considered to be zero). In general, bond premium
on an initial note equals the excess, if any, of the purchase price of the
initial note over the amount payable at maturity of the initial note (other than
stated interest thereon). Except as provided above
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(see "Market Discount and Bond Premium"), gain or loss realized on the sale,
exchange or redemption of an exchange note will be capital gain or loss and will
be long-term capital gain or loss if at the time of sale, exchange or retirement
the exchange note has been held for more than one year. Under current law, net
capital gains of individuals are, under some circumstances, taxed at lower rates
than items of ordinary income. The deductibility of capital losses is subject to
limitations. If the United States Holder is a U.S. resident (as defined in
section 865 of the Code), gains realized upon disposition of an exchange note by
such United States Holder generally will be U.S. source income, and disposition
losses generally will be allocated to reduce U.S. source income.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting requirements will apply to certain
payments of principal and interest on a note and to the payments of proceeds of
the sale of an exchange note made to United States Holders other than certain
exempt recipients (such as corporations). A United States Holder that is not an
exempt recipient will generally be subject to backup withholding with respect to
such payments (currently at a rate of 30%, declining until 2006 to 28%, which
rate will remain constant until replaced by a 31% rate beginning in 2011) unless
the United States Holder provides an accurate taxpayer identification number and
otherwise complies with applicable requirements of the backup withholding rules.
Any amounts withheld under the backup withholding rules will be allowed
as a credit against the United States Holder's U.S. federal income tax liability
or refundable to the extent that it exceeds such liability. A United States
Holder who does not provide a correct taxpayer identification number may be
subject to penalties imposed by the IRS.
THE U.S. FEDERAL INCOME TAX DISCUSSION PROVIDED ABOVE IS INCLUDED FOR
GENERAL INFORMATION ONLY AND MAY OR MAY NOT APPLY TO YOU DEPENDING UPON YOUR
PARTICULAR SITUATION. YOU SHOULD CONSULT YOUR OWN TAX ADVISOR WITH RESPECT TO
THE TAX CONSEQUENCES TO YOU OF OWNING, HOLDING, AND DISPOSING OF A NOTE,
INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN, AND OTHER TAX LAWS
AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.
PLAN OF DISTRIBUTION
Each broker-dealer that receives exchange notes for its own account
pursuant to the exchange offer in exchange for initial notes acquired by such
broker-dealer as a result of market making or other trading activities may be
deemed to be an "underwriter" within the meaning of the Securities Act and,
therefore, must deliver a prospectus meeting the requirements of the Securities
Act in connection with any resales, offers to resell or other transfers of the
exchange notes received by it in connection with the exchange offer.
Accordingly, each such broker-dealer must acknowledge that it will deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resale of such exchange notes. The letter of transmittal states that by
acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of exchange notes received in exchange for initial notes where such
initial notes were acquired as a result of market-making activities or other
trading activities. We have agreed that, for a period of 180 days after the
expiration of this exchange offer, we will make this prospectus, as amended or
supplemented, available to any broker-dealer for use in connection with any such
resale. In addition, until 90 days after the commencement of this exchange
offer, all dealers effecting transactions in the exchange notes may be required
to deliver a prospectus meeting the requirements of the Securities Act.
We will not receive any proceeds from any sale of exchange notes by
broker-dealers. Exchange notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the exchange notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers
149
of any such exchange notes. Any broker-dealer that resells exchange notes that
were received by it for its own account pursuant to the exchange offer and any
broker or dealer that participates in a distribution of such exchange notes may
be deemed to be an "underwriter" within the meaning of the Securities Act and
any profit of any such resale of exchange notes and any commissions or
concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The letter of transmittal states that by
acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
For a period of 180 days after the expiration of this exchange offer,
we will promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests such documents
in the letter of transmittal. We have agreed to pay all expenses incident to the
exchange offer (including the expenses of one counsel for the holders of the
notes) other than commissions or concessions of any brokers or dealers and will
indemnify the holders of the notes (including any broker-dealer) against certain
liabilities, including liabilities under the Securities Act.
CERTAIN LEGAL MATTERS
Certain legal matters in connection with the exchange offer will be
passed upon for us by Paul, Weiss, Rifkind, Wharton & Garrison, New York, New
York (concerning matters of U.S. law), and Macleod Dixon LLP, Calgary, Alberta
(concerning certain matters of Canadian law). Charles W. Berard, one of our
officers, is a partner of Macleod Dixon LLP.
EXPERTS
Information about our estimated net proved and probable reserves and
the present values of future net cash flows attributable to these reserves as of
January 1, 2002 and January 1, 2003 was prepared by GLJ. Information about our
estimated resources was prepared by NorWest.
Purvin & Gertz prepared the "Summary Review of the Athabasca Oil Sands
Project, Including Reports by NorWest Mine Services, Inc." included as Appendix
B to this prospectus and the "Update of Summary Review of the Athabasca Oil
Sands Project, Including NorWest's Update of Muskeg River" included as Appendix
C to this prospectus. These summaries contain projected financial data related
to the Project. We include these reports and these projections in the prospectus
in reliance upon Purvin & Gertz's authority as a leading consulting and
engineering firm experienced in review of the design, construction and
operations of petroleum projects. Purvin & Gertz in turn relied on other
consultants as noted and assumes no responsibility for such other consultants
results. You should read these reports in their entirety for information
contained therein with respect to the Project, Purvin & Gertz's role and the
related matters discussed therein, including the projected financial data in
those reports.
INTERESTS OF EXPERTS
As at the date hereof,the partners and associates of each of Macleod
Dixon LLP as a group own beneficially, directly or indirectly, less than 1% of
the outstanding Common Shares. As at the date hereof, the partners of
PricewaterhouseCoopers LLP, the auditors of Western, as a group did not
beneficially own any of the outstanding Common Shares.
As at the date hereof, the principals of Purvin & Gertz, Inc.,
independent petroleum consultants to Western, as a group did not beneficially
own any of the outstanding Common Shares. As at the date hereof, the principals
of NorWest Corporation and Gilbert Laustsen Jung Associates Ltd., independent
petroleum consultants to Western, as respective groups own beneficially,
directly or indirectly, less than 1% of the outstanding Common Shares.
INDEPENDENT ACCOUNTANTS
Our financial statements as at December 31, 2001 and 2000 and for the
period ended December 31, 1999 and the years ended December 31, 2001 and 2000,
included in this prospectus have been audited by PricewaterhouseCoopers LLP,
Chartered Accountants, as stated in their report appearing herein.
150
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form F-10 with the Securities
and Exchange Commission covering the exchange notes. This prospectus is part of
our registration statement. For further information about us and the exchange
notes, you should refer to our registration statement and its exhibits. This
prospectus summarizes material provisions of contracts and other documents to
which we refer you. Since the prospectus might not contain all of the
information that you might find important, you should review the full text of
these documents. We have included copies of these documents as exhibits to our
registration statement.
We are subject to the periodic reporting and other informational
requirements of the U.S. Securities Exchange Act of 1934, and accordingly we
file reports and other information with the Securities and Exchange Commission.
Copies of our reports and other information may be inspected and copied at the
public reference facilities maintained by the Securities and Exchange
Commission. However, we are a "foreign private issuer" as defined in Rule 405 of
the Securities Act, and therefore are not required to comply with Exchange Act
provisions regarding proxy statements and short swing profit disclosure.
Copies of these materials may also be obtained by mail at prescribed
rates from the Public Reference Section of the Securities and Exchange
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 or by calling the
Securities and Exchange Commission at 1-800-SEC-0330.
We also file information, such as periodic reports and financial
information, with the Canadian Securities Administrators, which may be accessed
at www.sedar.com.
Anyone who receives a copy of this prospectus may obtain a copy of the
indenture without charge by writing to us at Suite 2400, Ernst & Young Tower,
440 Second Avenue S.W., Calgary, Alberta, T2P 5E9.
151
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Auditors' Report.............................................................F-2
Consolidated Balance Sheets as at December 31, 2001 and 2000.................F-3
Consolidated Statements of Operations for years ended
December 31, 2001 and 2000 and the period ended December 31, 1999..........F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 2001 and 2000 and the period ended December 31, 1999..........F-5
Notes to the Consolidated Financial Statements...............................F-6
F-1
AUDITORS' REPORT
TO THE SHAREHOLDERS OF WESTERN OIL SANDS INC.
We have audited the consolidated balance sheets of Western Oil Sands
Inc. as at December 31, 2001 and 2000 and the consolidated statements of
operations, and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these consolidated financial statements present fairly,
in all material respects, the financial position of Western Oil Sands Inc. as at
December 31, 2001 and 2000 and the results of its operations and its cash flows
for the years then ended in accordance with Canadian generally accepted
accounting principles.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
Chartered Accountants
Calgary, Canada
February 15, 2002 except for note 12
which is as at April 23, 2002
F-2
WESTERN OIL SANDS INC.
CONSOLIDATED BALANCE SHEETS
($ THOUSANDS)
DECEMBER 31
-----------
MARCH 31 2002 2001 2000
------------- ---- ----
(UNAUDITED)
ASSETS
Current Assets
Cash ....................................... $ 70,239 $ 52,973 $ 94,111
Restricted cash ............................ -- -- 12,601
Accounts receivable ........................ 3,781 7,228 1,233
--------- --------- ---------
74,020 60,201 107,945
--------- --------- ---------
Capital Assets (Note 3) ...................... 878,415 761,939 304,255
Deferred Charges (Note 4) .................... 32,402 32,254 15,888
--------- --------- ---------
910,817 794,193 320,143
--------- --------- ---------
$ 984,837 $ 854,394 $ 428,088
========= ========= =========
LIABILITIES
Current Liabilities
Accounts payable and accrued liabilities ... $ 36,794 $ 51,222 $ 64,707
--------- --------- ---------
36,794 51,222 64,707
Long-term Liabilities
Long-term Debt (Note 5) .................... 418,496 279,481 --
Other (Note 7) ............................. 95,366 88,825 65,477
--------- --------- ---------
513,862 368,306 65,477
--------- --------- ---------
550,656 419,528 130,184
--------- --------- ---------
Shareholders' Equity
Share Capital (Note 8) ....................... 448,373 447,303 303,326
Deficit ...................................... (14,192) (12,437) (5,422)
--------- --------- ---------
434,181 434,866 297,904
--------- --------- ---------
$ 984,837 $ 854,394 $ 428,088
========= ========= =========
See accompanying Notes to the Consolidated Financial Statements
Approved by the Board of Directors:
/s/ Robert G. Puchniak /s/ Brian F. MacNeill
- ---------------------- ---------------------
Robert G. Puchniak Brian F. MacNeill
Director Director
F-3
WESTERN OIL SANDS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
($ THOUSANDS, EXCEPT AMOUNTS PER SHARE)
THREE MONTHS ENDED PERIOD ENDED DECEMBER 31
------------------ ------------------------
MARCH 31
--------
2002 2001 2001 2000 1999
---- ---- ---- ---- ----
(UNAUDITED)
CORPORATE EXPENSES
General and administrative.............. $ 1,285 $ 1,006 $ 5,310 $ 4,402 $ --
Large Corporations Tax.................. 427 213 1,535 850 --
Depreciation............................ 43 42 170 170 --
NET LOSS.................................. $ 1,755 $ 1,261 $ 7,015 $ 5,422 $ --
-------- -------- -------- -------- ------
Deficit at Beginning of Year.............. 12,437 5,422 5,422 -- --
-------- -------- -------- -- --
Deficit at End of Year.................... $ 14,192 $ 6,683 $ 12,437 $ 5,422 $ --
======== ======== ======== ======= ======
Net Loss per share (Note 8)............... $ 0.04 $ 0.03 $ 0.17 $ 0.21 $ --
======== ======== ======== ======== ======
See accompanying Notes to the Consolidated Financial Statements
F-4
WESTERN OIL SANDS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ THOUSANDS)
THREE MONTHS ENDED MARCH 31 PERIOD ENDED DECEMBER 31
--------------------------- ------------------------
2002 2001 2001 2000 1999
---- ---- ---- ---- ----
(UNAUDITED)
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net loss ...................................... $ (1,755) $ (1,261) $ (7,015) $ (5,422) $ --
Depreciation .................................. 43 42 170 170 --
-- -- --- --- --
(1,712) (1,219) (6,845) (5,252) --
--------- --------- --------- --------- ---------
FINANCING ACTIVITIES
Issue of share capital ........................ 1,070 15,524 143,978 185,153 117,173
Issue of long-term debt, net of repayment ..... 139,014 -- 279,481 -- --
Debt issue and deferred costs ................. (148) (4,942) (16,366) (4,698) (11,190)
Increase in long-term liabilities ............. -- -- -- 4,250 --
Repayment of long-term liabilities ............ -- -- (2,152) (1,192) --
(Increase) decrease in non-cash working capital (675) 3,331 -- 2,131 (2,131)
--------- --------- --------- --------- ---------
CASH GENERATED .................................. 139,261 13,913 404,941 185,644 103,852
--------- --------- --------- --------- ---------
INVESTING ACTIVITIES
Capital expenditures .......................... (109,978) (77,880) (433,604) (192,141) (46,710)
Restricted cash ............................... -- (260) 12,601 (12,601) --
(Increase) decrease in non-cash working capital (10,305) (223) (18,231) 52,304 9,015
--------- --------- --------- --------- ---------
CASH INVESTED ................................... (120,283) (78,363) (439,234) (152,438) (37,695)
--------- --------- --------- --------- ---------
Increase (decrease) in Cash ..................... 17,266 (65,669) (41,138) 27,954 66,157
Cash at Beginning of Year ....................... 52,973 94,111 94,111 66,157 --
--------- --------- --------- --------- ---------
Cash at End of Year* ............................ $ 70,239 $ 28,442 $ 52,973 $ 94,111 $ 66,157
========= ========= ========= ========= =========
* Cash comprises cash and temporary investments.
See accompanying Notes to the Consolidated Financial Statements
F-5
WESTERN OIL SANDS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR DOLLAR AMOUNTS IN $ THOUSANDS)
(INFORMATION AS AT MARCH 31, 2002 AND FOR THE THREE MONTH
PERIODS ENDED MARCH 31, 2002 AND 2001, AND FOR THE
PERIOD ENDED DECEMBER 31, 1999 IS UNAUDITED)
1. BUSINESS OF THE CORPORATION
Western Oil Sands Inc. (the "Corporation") was incorporated on June 18,
1999 under the laws of the Province of Alberta. The Corporation was created to
acquire a direct, undivided 20% working interest in an oil sands project in the
Athabasca region of northeast Alberta ("the oil sands project"). The oil sands
project will consist of direct or indirect participation in the design,
construction and operation of mining, extracting, transporting and upgrading of
oil sands deposits. The consolidated financial statements for the period ended
December 31, 1999 represent the results and cash flows from incorporation to
December 31, 1999.
2. SUMMARY OF ACCOUNTING POLICIES
(a) PRINCIPLES OF CONSOLIDATION The consolidated financial statements
include the accounts of the Corporation and its wholly-owned subsidiary
corporations and limited partnership, 852006 Alberta Limited, Western
Oil Sands Finance Inc. (inactive) and Western Oil Sands L.P. The
Corporation's oil sands activities are conducted jointly with others
who have direct, undivided interests in the same assets. These
financial statements reflect only the Corporation's proportionate
interest in such activities.
(b) MEASUREMENT UNCERTAINTY The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during
the reporting period.
(c) CAPITAL ASSETS Capital assets are recorded at cost less accumulated
provisions for depreciation, depletion and amortization. Capitalized
costs include costs specifically related to the acquisition,
exploration, development and construction of the oil sands project.
Capital assets are reviewed for impairment whenever events or
conditions indicate that their net carrying amount may not be
recoverable from estimated future cash flows.
Depletion over the life of proved reserves is on a unit of production
basis, commencing when the facilities are substantially complete and
after commercial production has begun. Capital assets are depreciated
on a straight-line basis over their useful lives, except for lease
acquisition costs and certain mine assets, which are amortized and
depreciated over the life of proved reserves. The estimated useful
lives of depreciable capital assets are as follows:
Leasehold improvements..................... 5 years
Furniture and fixtures..................... 5 years
Computers.................................. 3 years
(d) FUTURE SITE RESTORATION Estimated future site restoration and
reclamation costs are provided on a unit of production method based on
estimated proved reserves. Actual costs are charged against the
provision when incurred.
(e) FOREIGN CURRENCY TRANSLATION Transactions in foreign currencies are
translated into Canadian dollars at exchange rates prevailing at the
transaction dates. Monetary assets and liabilities are translated into
Canadian dollars at rates of exchange in effect at the end of the
period while non-monetary assets and liabilities are translated at
historical rates of exchange.
(f) FINANCIAL INSTRUMENTS The Corporation's financial assets and
liabilities as at March 31, 2002, December 31, 2001 and December 31,
2000 included cash accounts, temporary investments, accounts
F-6
receivable and accounts payable and long-term liabilities. The
following methods and assumptions were used to estimate the fair value
of each class of financial instrument:
o Short-term financial assets and liabilities are valued at
their carrying amounts as presented in the Balance Sheet,
which are reasonable estimates of fair value due to the
relatively short period to maturity of these instruments.
o The fair value of long-term liabilities is determined based
upon market prices at December 31, 2001 for other similar
liabilities with similar terms and conditions. The fair value
of this item is equal to book value.
(g) STOCK-BASED COMPENSATION PLAN The Corporation has a stock-based
compensation plan which is described in Note 8. No compensation expense
is recognized for the plan when the stock options are issued. Any
consideration received on exercise of stock options is credited to
share capital.
Effective January 1, 2002, the Corporation adopted CICA 3870
"Stock-based Compensation and Other Stock-based Payments". The new
standard is applied prospectively to all stock-based payments to
non-employees, and to employee awards that are direct awards of stock,
stock appreciation rights and similar awards to be settled in cash. The
new standard is applied to all grants of stock options on or after
January 1, 2002, and is applied retroactively for grants outstanding at
January 1, 2002 that call for settlement in cash or stock appreciation
rights that call for settlement in equity instruments. The Corporation
had no such grants qualifying for retroactive treatment.
(h) LOSS PER SHARE On January 1, 2001, the Corporation retroactively
adopted the new CICA standard for the computation and disclosure of
earnings per share, with all prior periods being restated. Under the
new standard, the treasury stock method is used to determine the
dilutive effects of stock options and other dilutive instruments. The
adoption of the new accounting standard changes any fully diluted
earnings per share number to a diluted earnings per share number.
Neither fully diluted nor diluted net loss per share amounts have been
presented as the results are anti-dilutive.
(i) CASH AND CASH EQUIVALENTS Cash and cash equivalents presented in the
consolidated financial statements include short-term investments with a
maturity of three months or less when purchased.
3. CAPITAL ASSETS
AS AT DECEMBER 31
-----------------
2001 2000
---- ----
Oil Sands Project.................. $756,181 $299,250
Corporate Assets................... 6,098 5,175
-------- --------
762,279 304,425
Less: accumulated depreciation..... (340) (170)
-------- --------
$761,939 $304,255
======== ========
It is the Corporation's policy to capitalize carrying costs including
net interest for capital assets which are acquired, constructed or developed
over time. As at December 31, 2001, $15.5 million of net interest (December 31,
2000--$4.5 million) has been capitalized as part of the cost of the oil sands
project. Cash
F-7
interest paid for the year ended December 31, 2001 was $6.7 million (December
31, 2000--$0.3 million). Cash interest received for the year ended December 31,
2001 was $2.9 million (December 31, 2000--$3.1 million).
4. DEFERRED CHARGES
AS AT DECEMBER 31
-----------------
2001 2000
---- ----
Deferred charges................... $ 32,254 $ 15,888
======== ========
Deferred charges include primarily debt financing costs that have been
incurred in establishing the Corporation's various debt facilities. These
amounts will be amortized over the term of the related debt facilities following
the start-up of the oil sands project.
5. LONG-TERM DEBT
(a) On December 6, 1999 the Corporation entered into a credit agreement
with a banking syndicate led by three Canadian chartered banks to
provide credit facilities to the Corporation in the amount of $535
million as follows: $385 million of budgeted construction costs of the
oil sands project; $100 million of cost overrun construction costs; and
up to $50 million of pre-completion debt servicing costs. The
conditions precedent for drawing under the credit facility are
customary for facilities of this nature, including receipt of
satisfactory documentation for drawdown, evidence of acceptable
insurance and receipt of acceptable updated third party consulting
reports. At December 31, 2001 an amount of $279.5 million had been
drawn upon this facility.
The loan commitment will be in-place until completion of the oil sands
project, such completion to occur on or before December 31, 2003. Any
undrawn portion at completion of the oil sands project will be
cancelled and the loan balance will be non-revolving.
Following completion of the oil sands project, a certain portion of the
cash flow will be dedicated to repayment of the loan and a principal
payment in the amount of $150 million is due on the second anniversary
of completion of the oil sands project. All amounts under the loan
commitment shall be paid by the third anniversary of completion, not to
be later than December 31, 2006.
The credit facility contains certain covenants and other provisions
which restrict the Corporation's ability to incur additional
indebtedness, pay dividends or make distributions of any kind,
undertake an expansion of the oil sands project, dispose of its
interest in the oil sands project, or change the nature of its
business. The credit facility provides the banks with security over all
of the assets of the Corporation.
Borrowings under the facility bear interest at the lenders' prime
lending rate plus a margin of 175 basis points, or at the bankers'
acceptance rate or LIBOR rates plus a margin of 275 basis points. The
Corporation has agreed to pay a standby fee of 1% per annum of the
undrawn facilities.
(b) On October 25, 2001 the Corporation established a new $88 million
two-year bridge note purchase facility with a Canadian Chartered Bank.
The notes issuable pursuant to draws on the bridge facility are
convertible, at maturity at the option of the Corporation and in the
event of a default at the option of the bank into Common Shares of the
Corporation. Borrowings under the facility bear interest at the
F-8
lenders' prime lending rate, or at the bankers' acceptance rate plus a
margin of 100 basis points. The Corporation has agreed to pay a standby
fee of 0.5% per annum on the undrawn facilities. At December 31, 2001
this facility had not been drawn upon.
6. INCOME TAXES
At December 31, 2001, the Corporation has approximately $12.4 million
of loss carry forwards and tax pools in excess of book values. In addition, the
Corporation has $28.5 million of financing issue costs, which can be used to
offset future taxable income. The potential future benefit relating to the loss
carry forwards and share issue costs has not been recorded in these financial
statements. Recognition of future tax benefits relating to the share issue costs
would be recorded as an increase to Share Capital. Cash taxes paid during the
year ended December 31, 2001 was $1.0 million (December 31, 2000--$0.4 million)
and related solely to Large Corporations Tax.
7. OTHER LONG-TERM LIABILITIES
AS AT DECEMBER 31
-----------------
2001 2000
---- ----
Payable to Shell Canada Limited.... $ 53,687 $ 47,259
Capital lease obligation........... 35,138 17,314
Other.............................. -- 904
-------- --------
$ 88,825 $ 65,477
======== ========
The Corporation is obligated to pay $40 million to acquire an interest
in the lease and to compensate the vendor of the interest for the benefit of
existing infrastructure at the upgrader site. The Corporation has elected to
defer payment of the $40 million by paying an annual deferral charge which
includes interest plus an adjustment for income taxes. A total of $16 million
plus accrued interest and adjustment is payable within 5 years of project start
up and $24 million plus accrued interest and adjustment is payable within 10
years of project start up.
The capital lease obligation is the Corporation's share of the
hydrogen-manufacturing unit for the oil sands project. A schedule of repayment
has been excluded because the final amounts, estimated to be $40 to $60 million,
will not be finalized until construction of the unit has been completed.
8. SHARE CAPITAL
(a) AUTHORIZED The Corporation is authorized to issue an unlimited number
of Class A shares ("Common Shares"), an unlimited number of non-voting
Convertible Class B Equity Shares ("Class B Shares"), an unlimited
number of non-voting Class C Preferred Shares and an unlimited number
of Class D Preferred Shares, issuable in series.
The Common Shares are without nominal or par value. The Class B Shares
are convertible into Common Shares upon successful completion of a
public offering or certain other events, but with no additional
consideration owing to the Corporation. There have been no Class C
Preferred Shares issued. The Class D Preferred Shares, Series A, which
have been issued, are convertible into Common Shares prior to
redemption on a one for one basis.
F-9
(b) ISSUED AND OUTSTANDING
COMMON SHARES NUMBER AMOUNT
- ------------- ------ ------
OF SHARES
---------
June 18, 1999--Issued for cash.............. 11 $ --
Balance at December 31, 1999................ 11 --
Issued for cash............................. 4,000,000 60,000
Share issue costs........................... -- (3,540)
----------- -----------
Balance at December 31, 2000................ 4,000,011 $ 56,460
Issued on conversion of:
Class B Shares........................ 37,935,280 315,656
Class A Special Warrants.............. 279,950 912
Class B Special Warrants.............. 823,707 2,059
Issued on exercise of Class B Warrants...... 465,188 3,721
Issued for cash(3).......................... 625,000 10,000
Issued upon rights offering................. 3,384,835 47,388
Share issue costs........................... -- (856)
----------- -----------
Balance at December 31, 2001................ 47,513,971 $ 435,340
=========== ===========
CLASS B SHARES
Issued for cash in 1999..................... 22,220,296 $ 115,202
----------- -----------
Balance at December 31, 1999................ 22,220,296 115,202
Issued for cash(1).......................... 10,709,076 130,000
Share issue costs........................... -- (1,307)
----------- -----------
Balance at December 31, 2000................ 32,929,372 $ 243,895
Issued for cash(2).......................... 5,005,908 71,761
Converted to Common Shares.................. (37,935,280) (315,656)
----------- -----------
Balance at December 31, 2001................ -- $ --
=========== ===========
CLASS A SPECIAL WARRANTS
Issued for cash in 1999..................... 279,950 $ 912
----------- -----------
Balance at December 31, 1999 and
December 31, 2000 279,950 $ 912
Converted to Common Shares.................. (279,950) (912)
----------- -----------
Balance at December 31, 2001................ -- $ --
----------- -----------
COMMON SHARES NUMBER AMOUNT
- ------------- ------ ------
OF SHARES
---------
CLASS B SPECIAL WARRANTS
Issued for cash in 1999..................... 823,707 $ 2,059
----------- -----------
Balance at December 31, 1999 and
December 31, 2000........................ 823,707 $ 2,059
Converted to Common Shares.................. (823,707) (2,059)
----------- -----------
Balance at December 31, 2001................ -- $ --
----------- -----------
CLASS D PREFERRED SHARES
Balance at December 31, 1999 and
December 31, 2000........................ -- $ --
Issued for cash............................. 666,667 12,000
Share issue costs........................... (37)
----------- -----------
Balance at December 31, 2001................ 666,667 $ 11,963
----------- -----------
TOTAL SHARE CAPITAL AT DECEMBER 31, 2001.... 48,180,638 $ 447,303
=========== ===========
Common shares issued on exercise of
employee options......................... 125,500 $ 1,067
Share issue cost recovery................... -- 3
----------- -----------
TOTAL SHARE CAPITAL AT MARCH 31, 2002....... 48,306,138 $ 448,373
=========== ===========
- ------------------------
(1) Includes 1,491,084 shares issued by the Corporation on a flow-through
basis. In accordance with certain provisions of the Income Tax Act,
Canadian exploration expenses or Canadian development expenses related
to expenditures of the subscribed
F-10
funds will be transferred to the shareholders. When the expenditures
are renounced and the tax deductions are transferred to the
shareholders, future income tax liabilities will increase and share
capital will be reduced.
(2) Includes 1,601,179 shares issued by the Corporation on a flow-through
basis.
(3) Includes 625,000 shares issued by the Corporation on a flow-through
basis.
(c) NET LOSS PER SHARE In calculating the weighted average number of common
shares outstanding, the Corporation includes Common Shares, Class B
shares, Class A Special Warrants, and Class B Special Warrants. The
Class B Shares have been included as they are entitled to dividends in
parity with the Common Shares. On February 1, 2001 the Corporation
qualified for distribution the Common Shares issuable on conversion or
exercise of the Class B Shares and the Class A and B Special Warrants.
Weighted average number of common shares outstanding for December 31,
2001 is 41,404,904 (December 31, 2000--26,220,847).
(d) CLASS D PREFERRED SHARES On March 14, 2001, the Corporation completed a
private placement for the issuance of 666,667 Class D Preferred Shares,
Series A, for proceeds of $12 million. The Class D Preferred Shares,
Series A, can be converted into Common Shares prior to redemption on a
one for one basis at the holder's option, which would result in the
forfeiture of any accrued dividend. If not previously converted, they
are redeemable at the option of the Corporation at any time at a price
equal to their issue price, plus a cumulative dividend of 12% per year
compounded semi-annually until January 1, 2007, from which date the
dividend increases by 3% per quarter to a maximum of 24% per year. Cash
dividends are not paid on the Class D Preferred Shares.
(e) CALL OBLIGATIONS The Corporation has entered into call obligation
agreements with certain shareholders, which obligate the holders of the
obligations to purchase up to 3,040,000 Class B Shares for $5.00 per
share. The Corporation is entitled to require the subscriber to
exercise their call obligations at its discretion upon the satisfaction
of certain conditions. These call obligations were to expire on
December 31, 2001, but were extended until March 31, 2003. An
additional 2,589,641 call obligations were entered into in July 2001,
whereby each call obligation is exercisable into one Class B Share and
one warrant to purchase a Class B Share upon the payment of $13.00 per
call obligation. These call obligations are exercisable until March 31,
2003 at the Corporation's discretion and the underlying warrant is
exercisable at the then market price for a period of four years after
the call obligation exercise. There is a requirement imposed by the TSE
to undertake a rights offering prior to exercising any of the call
obligations entered into in July 2001.
(f) WARRANTS Effective February 1, 2001 the Corporation qualified for
distribution 34,033,029 Common Shares, 494,224 Class A Warrants and
465,188 Class B Warrants resulting from the conversion of 32,929,372
Class B Shares; 279,950 Class A Special Warrants; and 823,707 Class B
Special Warrants. In the first quarter of 2001, all Warrant Options and
the 465,188 Class B Warrants were exercised. Consequently, the
Corporation issued 465,188 Common Shares and received proceeds of $3.7
million. Each Class A Warrant entitles the holder to purchase one
Common Share at $2.50 per share until five years after start-up of the
oil sands project. At December 31, 2001, there were 494,224 Class A
Warrants outstanding.
(g) ISSUANCES On July 25, 2001, the Corporation completed a private
placement to certain of its existing shareholders for the issuance of
4,130,318 Class B Shares, of which 725,589 were issued on a
flow-through basis, for aggregate proceeds of $57.9 million. Certain
shareholders also undertook to subscribe for 725,590 Class B Shares on
a flow-through basis that were issued on November 1, 2001 for
F-11
proceeds of $11.3 million. In addition, the Corporation issued a
further 150,000 Class B shares on a flow-through basis on November 1,
2001 at a price of $17.30 per share, for gross proceeds of $2.6
million. All 5,005,908 Class B Shares issued during the year were
converted into Common Shares on November 27, 2001 upon qualification by
prospectus, for no additional proceeds.
On October 25, 2001 the Corporation completed a Rights Offering,
whereby Rights to subscribe for 3,384,835 Common Shares at a price of
$14.00 per Share were offered to the holders of Common Shares and Class
B Shares, for aggregate proceeds of $47.4 million.
(h) STOCK OPTIONS The Corporation has established a Stock Option Plan for
the issuance of options to purchase Common Shares to directors,
officers and employees of the Corporation and its subsidiaries and
persons providing ongoing services to the Corporation and its
subsidiaries. Options granted under the Stock Option Plan generally
vest on an annual basis over four years. The stock options expire five
years from each vesting date.
The following table summarizes Stock Options outstanding and
exercisable under the Stock Option Plan at December 31, 2001:
2001 2000
---- ----
NUMBER OF WEIGHTED NUMBER OF WEIGHTED
OPTIONS AVERAGE OPTIONS AVERAGE
------- EXERCISE PRICE ------- EXERCISE PRICE
-------------- --------------
(THOUSANDS) (THOUSANDS)
Outstanding at beginning of year.......... 1,077 $8.53 997 $8.50
Granted................................... 201 14.61 80 8.94
Exercised................................. -- -- -- --
Cancelled................................. (40) 8.50 -- --
---- ---- -- --
Outstanding at end of year................ 1,238 $9.52 1,077 $8.53
===== ===== ===== =====
OPTIONS OUTSTANDING
-------------------- OPTIONS EXERCISABLE
WEIGHTED -------------------
EXERCISE PRICE $ NUMBER OF AVERAGE AVERAGE NUMBER OF WEIGHTED
- ---------------- OPTIONS REMAINING EXERCISE OPTIONS AVERAGE
------- LIFE PRICE ------- EXERCISE PRICE
---- ----- --------------
(THOUSANDS) (MONTHS) (THOUSANDS)
$8.50-$12.00.............................. 1,037 69.5 $8.53 526 $8.53
$12.01-$16.00............................. 201 85.0 14.61 -- --
--- ---- ----- -- --
1,238 72.0 $9.52 526 $8.53
===== ==== ===== === =====
The number of Common Shares reserved for issuance under the Stock
Option Plan was 3,000,000 at December 31, 2001 (3,000,000 at December
31, 2000). No compensation expense has been recognized when stock
options are granted, in accordance with Note 2(g). Had compensation
expense been
F-12
determined based on the fair value method for awards made after
December 31, 2001, the Corporation's net income and earnings per share
would have been adjusted to the pro forma amounts indicated below:
THREE MONTHS ENDED
MARCH 31, 2002
--------------
Net loss for the period-- as reported....... $1,755
Net loss for the period-- pro forma......... $1,832
Loss per share-- as reported................ $0.04
Loss per share-- pro forma.................. $0.04
The pro forma amounts exclude the effect of stock options granted prior
to January 1, 2002. The weighted average fair value of options granted
during the three months ended March 31, 2002, was $8.44 per option
using the Black-Scholes option pricing model. The following table sets
out the assumptions used in applying the Black-Scholes model:
THREE MONTHS ENDED
MARCH 31, 2002
--------------
Risk free interest rate..................... 4.61%
Expected life (in years).................... 5.00
Expected volatility......................... 0.30
Dividend per share.......................... --
9. SHAREHOLDERS' RIGHTS PLAN
The Corporation has a shareholders' rights plan (the "Plan"). Under the
Plan, one right will be issued with each Common Share issued. The rights remain
attached to the Common Share and are not exercisable or separable unless one or
more certain specified events occur. If a person or group acting in concert
acquires 20 per cent or more of the Common Shares of the Corporation, the rights
will entitle the holders thereof (other than the acquiring person or group) to
purchase Common Shares of the Corporation at a 50 per cent discount from the
then market price. The rights are not triggered by a "Permitted Bid", as defined
in the Plan.
10. COMMITMENTS
On December 6, 1999 the Corporation executed an Authority for
Expenditure ("AFE") related to the oil sands project. The original AFE obligated
the Corporation to expend $709.4 million from 1999 to 2003. During the course of
construction, additional costs of $248 million have been identified that will be
required to complete the oil sands project. On the basis of this level of
expenditures, the Corporation has funding arrangements that are sufficient to
cover its share of commitments. The Corporation continues to pursue initiatives
to optimize and refine its capital structure as it progresses through project
construction to operations.
In addition the Corporation has executed or will execute long-term
third party agreements to provide for the following services and utilities;
pipeline transportation of bitumen and upgraded products, electrical and thermal
energy, production and supply of hydrogen and transportation of natural gas.
Under the terms of these agreements, the Corporation is committed to pay for
these utilities and services on a long-term
F-13
basis, regardless of the extent that such services and utilities are actually
used. If due to project delay, suspension, shut down or other reason, the
Corporation fails to meet its commitment under these agreements, the Corporation
may incur substantial costs and may, in some circumstances, be obligated to
purchase the facilities constructed by the third parties for a purchase price in
excess of the fair market value of the facilities.
The Corporation and the other owners of the oil sands joint venture
will be entering into long-term capital lease obligations for certain facilities
and equipment related to the oil sands project in addition to the amounts
committed to under the AFE. The Corporation has anticipated its share of the
value of the leased facilities and equipment will total $40 to $60 million.
11. SUPPLEMENTARY INFORMATION
The following represents the Corporation's cumulative statement of cash
flow from June 18, 1999 to December 31, 2001.
CUMULATIVE
FROM INCEPTION
--------------
($THOUSANDS)
CASH PROVIDED BY (USED IN) OPERATING
Net loss for the period........................ $ (12,437)
Amortization................................... 340
---------
(12,097)
FINANCING
Issue of share capital......................... 446,303
Increase in long-term debt, net of repayment... 279,481
Increase in long-term liabilities.............. 4,250
Repayment of long-term liabilities............. (3,344)
Debt issue and deferred charges................ (32,254)
---------
CASH GENERATED................................... 694,436
---------
INVESTING
Capital expenditures........................... (672,455)
Restricted cash................................ --
Decrease in non-cash working capital........... 43,089
---------
CASH INVESTED.................................... (629,366)
---------
Increase in cash................................. 52,973
Cash at beginning of period...................... --
---------
Cash at end of period*........................... $52,973
=========
* Cash comprises cash and temporary investments.
F-14
WESTERN OIL SANDS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR DOLLAR AMOUNTS ARE IN $ THOUSANDS)
12. SUBSEQUENT EVENTS
(a) On April 23, 2002, the Corporation issued US$450 million of senior
secured notes bearing interest at 8.375% and repayable by May 1, 2012.
A portion of the proceeds of the offering of the initial notes was used
to replace the Corporation's existing $535 million credit facility and
repay all amounts payable to Shell Canada Limited, with the balance of
the proceeds placed in a trust account to be used for funding the
Corporation's share of remaining construction costs for the oil sands
project.
(b) On April 23, 2002, the Corporation established a new credit facility
with a Canadian chartered bank in the amount of $100 million to be
provided as follows: $75 million of debt service and construction
completion costs; $25 million for letter of credit requirements.
Borrowings under the facility bear interest at the lenders' prime
lending rate plus a margin of 100 basis points, or at the bankers'
acceptance rate plus a margin of 200 basis points. Repayment of any
amounts drawn are due by the third anniversary of establishment of the
credit facility.
13. UNITED STATES ACCOUNTING PRINCIPLES AND REPORTING
The consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in Canada (Canadian GAAP) which,
in most respects, conform to accounting principles generally accepted in the
United States (US GAAP). Canadian GAAP differs from US GAAP in the following
respects:
RECONCILIATION OF NET EARNINGS UNDER CANADIAN GAAP TO US GAAP
PERIOD ENDED DECEMBER 31,
-------------------------
NOTE 2001 2000 1999
---- ---- ---- ----
Net Loss--Canadian GAAP........................ $ 7,015 $ 5,422 $ --
Impact of US GAAP
Stand-by Fees................................ (ix) 4,410 5,369 --
Net Loss--US GAAP.............................. $ 11,425 $10,791 $ --
Net Loss per Share
Basic--Canadian GAAP........................... $ 0.17 $ 0.21 $ --
Basic--US GAAP................................. $ 0.28 $ 0.41 $ --
CONSOLIDATED STATEMENT OF CASH FLOWS--US GAAP
PERIOD ENDED DECEMBER 31,
-------------------------
NOTE 2001 2000 1999
---- ---- ---- ----
Cash provided by (used in)
Operating activities......................... (ix) $(11,255) $(10,621) $ --
Financing activities......................... 404,941 185,644 103,852
Investing activities......................... (ix) (434,824) (147,069) (37,695)
(Decrease) Increase in Cash.................... $(41,138) $ 27,954 $66,157
F-15
CONSOLIDATED BALANCE SHEET
AS AT DECEMBER 31,
------------------
2001 2000
---- ----
NOTE AS REPORTED US GAAP AS REPORTED US GAAP
---- ----------- ------- ----------- -------
ASSETS
Current Assets................................. $ 60,201 $ 60,201 $107,945 $107,945
Capital Assets................................. (ix) 761,939 752,160 304,255 298,886
Deferred Charges............................... 32,254 32,254 15,888 15,888
$854,394 $844,615 $428,088 $422,719
LIABILITIES
Current Liabilities............................ (v) $51,222 $ 54,922 $ 64,707 $ 64,707
Long-term Debt................................. 279,481 279,481 -- --
Other Long-term liabilities.................... 88,825 88,825 65,477 65,477
419,528 423,228 130,184 130,184
SHAREHOLDERS' EQUITY
Share Capital.................................. (v) 447,303 443,603 303,326 303,326
Deficit........................................ (ix) (12,437) (22,216) (5,422) (10,791)
434,866 421,387 297,904 292,535
$854,394 $844,615 $428,088 $422,719
i. STOCK BASED COMPENSATION
The Corporation accounts for its stock-based compensation plans under
APB Opinion No. 25 and related interpretations, under which no compensation
costs have been recognized in the consolidated financial statements in respect
of share options granted to employees and directors. If compensation costs had
been recorded in accordance with Statement of Financial Accounting Standards
("FAS") No. 123, the Corporation's net loss and net loss per share would
approximate the following pro forma amounts:
YEAR ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2000 1999
---- ---- ----
Compensation Costs.......................... $596 $552 $--
Net Loss:
As reported-- US GAAP..................... (11,425) (10,791) --
Pro forma................................. (12,021) (11,343) --
Net Loss per Common Share
As reported-- US GAAP..................... (0.28) (0.41) --
Pro forma................................. (0.29) (0.43) --
F-16
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option pricing model with weighted average assumptions
for grants as follows:
YEAR ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2000 1999
---- ---- ----
Risk free interest rate..................... 5.20% 5.94% 5.99%
Expected lives (years)...................... 4.00 4.00 4.00
Expected volatility......................... 0.22 0.20 0.20
Dividend per share.......................... -- -- --
ii. RECENT ACCOUNTING PRONOUNCEMENTS
STOCK-BASED COMPENSATION AND OTHER STOCK-BASED PAYMENTS
The CICA issued CICA 3870 "Stock-based Compensation and Other
Stock-based Payments", effective for fiscal years beginning on or after January
1, 2002. The new standard requires that stock-based payments to non-employees,
stock appreciation rights and similar awards to be settled in cash granted to
employees and non-employees, and direct awards of stock to employees and
non-employees be accounted for using a fair value-based method of accounting.
The Corporation anticipates that adoption of CICA 3870 will not have a material
effect on its consolidated financial statements.
FOREIGN CURRENCY TRANSLATION
The CICA approved amendments to CICA 1650 "Foreign Currency
Translation", effective for fiscal years beginning on or after January 1, 2002.
The amendments eliminate the deferral and amortization of translation gains and
losses on long-term monetary assets and liabilities. At this time, there will be
no effect on the Corporation's consolidated financial statements.
HEDGING RELATIONSHIPS
The CICA issued Accounting Guideline 13 "Hedging Relationships",
effective for fiscal years beginning on or after June 1, 2002. The guideline
establishes certain conditions for when hedge accounting may be applied, but
does not specify hedge accounting methods. At this time, there would be no
effect on the Corporation's consolidated financial statements from adopting the
guideline.
ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS
The Financial Accounting Standards Board ("FASB") issued FAS No. 143
"Accounting for Asset Retirement Obligations", effective for financial
statements issued for fiscal years beginning after June 15, 2002. FAS No. 143
applies to legal obligations associated with the retirement of a tangible
long-lived asset that result from the acquisition, construction, development
and/or the normal operation of a long-lived asset, except for certain
obligations of lessees. The effect on the Corporation's consolidated financial
statements has not been determined at this time.
ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
FASB issued FAS No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets", effective for financial statements issued for fiscal years
beginning after December 15, 2001 and interim periods within
F-17
those fiscal years. The standard supersedes FAS No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-lived Asset to be Disposed of" and
APB Opinion No. 30 "Reporting Results of Operations--Reporting the Effects of
Disposal of a Segment of a Business". The standard requires an impairment to be
recognized on long-lived assets when the expected undiscounted cash flows are
less than the carrying amount. Impairment would be calculated as the carrying
amount less the fair value of the assets. The value of long-lived assets to be
disposed of by sale is measured at the lower of the carrying amount or the fair
value less selling costs. In addition, earnings from discontinued operations
between the measurement date and the disposal date are excluded from the net
gain/loss on disposal. The Corporation anticipates that the adoption of FAS No.
144 will not have a material effect on its consolidated financial statements.
iii. FINANCIAL INSTRUMENTS
DECEMBER 31,
------------
2001 2000
---- ----
Long-term liabilities
Balance sheet amount...................... $368,306 $65,477
Fair value................................ $368,306 $65,477
iv. INCOME TAXES
Under US GAAP, the net deferred income tax asset is comprised of:
DECEMBER 31,
------------
2001 2000
---- ----
Deferred Income tax assets
Net operating losses carried forward...... $15,430 $7,447
Share issue costs......................... 3,191 3,878
Deferred Income tax liabilities
Debt issue costs.......................... (4,132) (1,432)
Less: valuation allowance................... (14,489) (9,893)
-------- -------
NET DEFERRED INCOME TAX ASSET............... $-- $--
=== ===
v. FLOW-THROUGH SHARES
Under Canadian GAAP flow-through shares are recorded at their face
value within share capital. When the expenditures are renounced and the tax
deductions transferred to the shareholders, future income liabilities will
increase and share capital will be reduced. Under US GAAP when the shares are
issued the proceeds are allocated between the offering of shares and the sale of
tax benefits. The allocation is made based on the difference between the quoted
price of the existing shares and the amount the investor pays for the
flow-through shares (given no other differences between the securities). A
liability is recognized for this difference. The liability is reversed when tax
benefits are renounced and a deferred tax liability recognized at that time.
Income tax expense is the difference between the amount of the deferred tax
liability and the liability recognized on issuance. As of December 31, 2001 the
Corporation has not yet recognized any renouncements of the tax deductions to
the investors. The effect of this difference is to reduce share capital by $3.7
million and increase liabilities by $3.7 million.
F-18
vi. COMPREHENSIVE INCOME
Comprehensive income is measured in accordance with FAS 130 "Reporting
Comprehensive Income". This standard defines comprehensive income as all changes
in equity other than those resulting from investments by owners and
distributions to owners. The Corporation does not have any "other comprehensive
income" transactions. Therefore comprehensive income under US GAAP is equal to
net income under Canadian GAAP for all periods.
vii. DEVELOPMENT STAGE ENTERPRISES
The Corporation would be defined as a development stage company under
US GAAP in accordance with FAS No. 7 "Accounting and Reporting by Development
Stage Enterprises". Under FAS No. 7, the deficit accumulated during the
development stage is required to be presented on the balance sheet, and this
equates directly to the deficit as presented in the Corporation's balance sheet
under Canadian GAAP for all periods. In addition, the Corporation is required to
present cumulative statements of operations since incorporation. The
Corporation's cumulative Statement of Operations as presented for the periods
ended December 31, 2001 and 2000 are as follows:
CUMULATIVE SINCE INCEPTION TO
-----------------------------
DECEMBER 31, 2001 DECEMBER 31, 2000
----------------- -----------------
AS REPORTED US GAAP AS REPORTED US GAAP
----------- ------- ----------- -------
CORPORATE EXPENSES
General and administrative................ $9,712 $19,491 $4,402 $9,771
Large Corporations Tax.................... 2,385 2,385 850 850
Depreciation.............................. 340 340 170 170
--- --- --- ---
$12,437 $22,216 $5,422 $10,791
======= ======= ====== =======
viii. CAPITAL ASSET IMPAIRMENT
Under Canadian GAAP when the net carrying value of a capital asset,
less its related provision for future removal and site restoration costs and
future income taxes, exceeds the estimated undiscounted future net cash flows
together with its residual value, the excess is charged to earnings. Under US
GAAP the Corporation would account for long-lived assets in accordance with the
United States provisions FAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-lived Asset to be Disposed of". This Statement
requires that long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets.
ix. STANDBY FEES
Under Canadian GAAP, standby fees associated with borrowing facilities
can be deferred as costs incurred during the pre-operating period. Under US
GAAP, these costs associated with the start-up activities would be expensed as
incurred. The effect of this difference is to increase general and
administrative expenses by $4.4 million for the year ended December 31, 2001
(2000 -- $5.4 million) and to reduce capital assets at December 31, 2001 by $9.8
million (2000 -- $5.4 million).
F-19
APPENDIX A
SUMMARY OF THE REPORT OF GILBERT LAUSTSEN JUNG ASSOCIATES LTD.
GLJ prepared a report dated April 4, 2002 evaluating the reserves
attributable to Western as of January 1, 2002 and January 1, 2003, after the
expected mechanical completion of the construction of the Project.
SEC PV-10 CALCULATION
Since we have no actual production or sales on which to base our year
end pricing reserves evaluation, the year end 2001 constant price and zero
inflation scenario uses $27.67/bbl as the upgraded bitumen price (Edmonton Par
price of $31.17/bbl, less $3.50/bbl), $10.84/bbl as the bitumen price for
royalty calculation purposes (12(0) API crude at Hardisty of $14.84/bbl less
$4.00/bbl), $3.47/MMbtu gas. Negligible value was assigned to the sulphur.
Effective as of January 1, 2002, the present value of our estimated
future net cash flow before income taxes of our proved Project reserves,
discounted at 10% is $853 million.
The tables below summarize the oil reserves and the present value of
the estimated future net cash flow attributable to our ownership interest in the
joint venture as evaluated in the GLJ report. All evaluations of future net cash
flow are stated prior to any provisions for income tax, reclamation costs,
project financing, general and corporate overhead and fees to Shell. The future
net cash flows are estimates only and should not be construed as representing
the fair market value of the reserves. See the notes below the tables and "Risk
Factors".
SUMMARY OF RESERVES AND PRESENT VALUES OF ESTIMATED
FUTURE NET CASH FLOW AS OF JANUARY 1, 2002
ESCALATED PRICES AND COSTS
PRESENT VALUES OF ESTIMATED
---------------------------
FUTURE NET CASH FLOW BEFORE
---------------------------
INCOME TAXES
------------
PROJECT OUR INTEREST NET AFTER 0% 10% 15% 20%
-------- ------------- ---------- -- --- --- ---
RESERVES RESERVES (MMBBLS) ROYALTY
(MMBBLS) (MMBBLS)
-------- --------
($ IN MILLIONS)
Proved............................ 1,111 222 206 2,359 708 401 219
Probable.......................... 570 114 94 2,087 351 199 134
Risked probable (50%)............. 285 57 47 1,044 175 99 67
Proved plus 50% probable.......... 1,396 279 253 3,403 884 501 286
Proved plus probable.............. 1,681 336 300 4,447 1,059 600 353
CONSTANT PRICES AND COSTS
PRESENT VALUES OF ESTIMATED
---------------------------
FUTURE NET CASH FLOW BEFORE
---------------------------
INCOME TAXES
------------
PROJECT OUR INTEREST NET AFTER 0% 10% 15% 20%
-------- ------------- ---------- -- --- --- ---
RESERVES RESERVES (MMBBLS) ROYALTY
--------- ----------------- -------
(MMBBLS) (MMBBLS)
-------- --------
($ IN MILLIONS)
Proved............................ 1,111 222 220 2,705 853 505 298
Probable.......................... 570 114 100 1,919 345 201 138
Risked probable (50%)............. 285 57 50 960 172 101 69
Proved plus 50% probable.......... 1,396 279 270 3,664 1,025 606 367
Proved plus probable.............. 1,681 336 320 4,624 1,197 707 436
A-1
The tables below summarize the oil reserves and the present value of
the estimated future net cash flow attributable to our ownership interest in the
joint venture as evaluated in the GLJ report as of January 1, 2003, after the
expected completion of the construction of the Project and expenditure of total
capital investment for the period beginning in 1999 and ending December 31,
2002. See the notes below and "Risk Factors".
SUMMARY OF RESERVES AND PRESENT VALUES OF ESTIMATED FUTURE
NET CASH FLOW AS OF JANUARY 1, 2003
ESCALATED PRICES AND COSTS
PRESENT VALUES OF ESTIMATED
---------------------------
FUTURE NET CASH FLOW BEFORE
---------------------------
INCOME TAXES
------------
PROJECT OUR INTEREST NET AFTER 0% 10% 15% 20%
-------- ------------- ---------- -- --- --- ---
RESERVES RESERVES (MMBBLS) ROYALTY
--------- ----------------- -------
(MMBBLS) (MMBBLS)
($ IN MILLIONS)
Proved............................ 1,111 222 206 2,724 1,161 853 662
Probable.......................... 570 114 94 2,067 365 207 139
Risked probable (50%)............. 285 57 47 1,033 183 104 69
Proved plus 50% probable.......... 1,396 279 253 3,758 1,344 956 732
Proved plus probable.............. 1,681 336 300 4,791 1,527 1,060 801
CONSTANT PRICES AND COSTS
PRESENT VALUES OF ESTIMATED
---------------------------
FUTURE NET CASH FLOW BEFORE
---------------------------
INCOME TAXES
------------
PROJECT OUR INTEREST NET AFTER 0% 10% 15% 20%
-------- ------------- ---------- -- --- --- ---
RESERVES RESERVES (MMBBLS) ROYALTY
--------- ----------------- -------
(MMBBLS) (MMBBLS)
($ IN MILLIONS)
Proved............................ 1,111 222 220 3,070 1,321 973 757
Probable.......................... 570 114 100 1,899 358 210 144
Risked probable (50%)............. 285 57 50 950 179 105 72
Proved plus 50% probable.......... 1,396 279 270 4,019 1,500 1,078 829
Proved plus probable.............. 1,681 336 320 4,969 1,679 1,183 901
- ------------------------
NOTES:
o Columns may not add due to rounding.
o Reserve definitions consistent with National Policy Statement
2-B of the Canadian Securities Administrators have been used
in the GLJ Report, where:
_ "Proved Reserves" are those quantities of reserves estimated
as recoverable with a high degree of certainty under current
technology and existing economic conditions, from that portion
of a reservoir which can be reasonably evaluated as
economically productive on the basis of analysis of drilling,
geological, geophysical and engineering data.
_ "Probable Reserves" are those reserves which analysis of
drilling, geological, geophysical and engineering data does
not demonstrate to be proved under current technology and
existing economic conditions, but where such analysis suggests
the likelihood of their existence and future recovery.
_ "Established" is a proved plus risked probable category that
incorporates 50 percent of the unrisked probable reserves,
production and cash flow.
o The Project reserves are undeveloped. No reserves have been
attributed to the bitumen deposits present in the remainder of
Lease 13, or Leases 88 and 89, because of the current
uncertainty of their development.
o Oil volumes correspond to upgraded bitumen on the basis of
1.03 bbls per bbl of undiluted bitumen. Production from the
upgrader will include volumes that are attributable to
off-lease feedstock purchases that cannot be booked as Project
reserves. In the escalated price case, GLJ estimates the oil
pricing to be Edmonton Par less $3.50/bbl in 2003, $2.50/bbl
in 2004 and $2.00/bbl thereafter. In the constant price case,
GLJ estimates the oil pricing to be Edmonton Par less
$3.50/bbl. These pricing forecasts reflect total revenues
associated with the output from the upgrader less the purchase
costs associated with feedstock.
A-2
o Bitumen production has been forecast by GLJ to start in 2003,
and reach 155,000 bbls per day by 2007 in the proved plus
risked probable category. Although production is currently
targeted for late 2002, any production prior to 2003 has been
considered negligible. Production in the proved case is
forecast to be 105,000 bbls per day in 2003 and to average
150,000 bbls per day thereafter, with a mine life of 20 years.
The 150,000 bbls per day rate and 20 years of operation is
consistent with the regulatory applications. In the proved
plus probable case, production is forecast to grow from a rate
of 124,000 bbls per day in 2003 to an average rate of 160,000
bbls per day by 2007. The reserves recovered in the proved
plus probable category reflect a 10 year extension to the
proved forecast consistent with the Mine plan prepared for the
feasibility study which was prepared in connection with the
Project.
o Remaining capital costs relating to post-AFE Project costs are
forecast in the proved plus risked probable reserves
evaluation to be $386 million (2002 $).
o Operating costs over the Project life will fluctuate, with an
average of approximately $12.22/bbl (2002 $) undiluted bitumen
forecast in the proved plus risked probable category.
Sustaining capital of approximately $1.05/bbl (2002 $) bitumen
is forecast in the proved plus risked probable category. The
evaluation recognizes that a component of operating costs is
tied to the price of natural gas; $3.47/MMbtu was used in the
above estimate. A range of operating and capital costs are
used by GLJ, with higher estimates being used in the proved
category and lower estimates used in the proved plus probable
category.
o While the production, operating and capital costs were
prepared with an understanding as to the feasibility study
prepared in connection with the Project and due diligence
reports obtained by us, these forecasts reflect GLJ's
judgement and interpretations and should not be construed as
corresponding to the owners' expectations.
o Royalties are anticipated to be paid at the Muskeg River mine
boundary using a deemed bitumen revenue. The basis for
determining the bitumen price has not been determined. For
purposes of this evaluation, GLJ has deducted $4.00/bbl from
GLJ's price for 12 degree heavy oil at Hardisty to reflect the
lower quality and transportation. The royalties correspond to
the generic oil sand royalty regime recently enacted. An
initial royalty of 1% on gross revenue is paid until 100% of
the Project capital, including a return on capital, has been
recovered. The royalty subsequently becomes 25% of net deemed
bitumen revenue. The return allowance is set at the monthly
federal long-term bond rate, which is forecast to be 4% real.
o The constant price assumptions reflect GLJ's December 31, 2001
price of $31.17/bbl (US$19.84 WTI) Edmonton Par oil,
$14.84/bbl 12 degree crude at Hardisty, $3.47/MMbtu gas and
zero inflation. In the escalated price assumptions, the
following GLJ price forecast effective January 1, 2002 was
used:
YEAR PROJECT EXCHANGE WTI CRUDE OIL LIGHT, SWEET HEAVY CRUDE OIL ALBERTA SPOT
- ---- INFLATION RATE AT CUSHING CRUDE OIL (12 API) AT GAS
% $US/$CDN OKLAHOMA $CDN/BBL HARDISTY $/MMBTU
- -------- $YS/BBL -------- $CDN/BBL -------
------- --------
2002............. 4.0 0.63 21.75 33.75 21.50 3.95
2003............. 4.0 0.65 21.00 31.25 19.75 4.45
2004............. 3.0 0.67 21.00 30.50 19.50 4.50
2005............. 2.0 0.69 21.00 29.50 19.25 4.50
2006............. 1.5 0.70 21.25 29.50 19.25 4.50
2007............. 1.5 0.70 21.75 30.00 19.75 4.50
2008............. 1.5 0.70 22.00 30.50 20.25 4.50
2009............. 1.5 0.70 22.25 31.00 20.75 4.55
2010............. 1.5 0.70 22.50 31.50 21.25 4.60
2011............. 1.5 0.70 23.00 32.00 21.75 4.70
2012............. 1.5 0.70 23.25 32.50 22.25 4.75
2013+............ 1.5 0.70 +1.5%/yr +1.5%/yr +1.5%/yr +1.5%/yr
A-3
CERTIFICATE OF WESTERN OIL SANDS INC. AND THE PROMOTERS
Dated: July 8, 2002
This short from prospectus, together with the documents incorporated
herein by reference, constitutes full, true and plain disclosure of all material
facts relating to the securities being offered by this short form prospectus as
required by the securities laws of the Province of Alberta.
/s/ Guy J. Turcotte /s/ David A. Dyck
------------------- -----------------
President and Chief Executive Officer Vice-President, Finance
and Chief Financial Officer
ON BEHALF OF THE BOARD OF DIRECTORS
/s/ Geoffrey A. Cumming /s/ Brian F. MacNeill
----------------------- ---------------------
Director Director
PROMOTERS
/s/ Guy J. Turcotte /s/ John Frangos
------------------- ----------------
/s/ Allen P. Barber
-------------------
================================================================================
Western Oil Sands Inc.
Exchange Offer for US$450,000,000
8 3/8% Senior Secured Notes Due 2012
[GRAPHIC]
-----
P R O S P E C T U S
July 8, 2002
-----
No person has been authorized to give any information or to make any
representation other than those contained in this prospectus, and, if given or
made, any information or representations must not be relied upon as having been
authorized. This prospectus does not constitute an offer to sell or the
solicitation of an offer to buy any securities other than the securities to
which it relates or an offer to sell or the solicitation of an offer to buy
these securities in any circumstances in which this offer or solicitation is
unlawful. Neither the delivery of this prospectus nor any sale made under this
prospectus shall, under any circumstances, create any implication that there has
been no change in the affairs of Western Oil Sands Inc. since the date of this
prospectus or that the information contained in this prospectus is correct as of
any time subsequent to its date.
Broker-dealers that effect transactions in these securities, whether or
not participating in this exchange offering, may be required to deliver a
prospectus. This is in addition to the broker-dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
================================================================================
PART II
INFORMATION NOT REQUIRED TO BE DELIVERED
TO OFFEREES OR PURCHASERS
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The BUSINESS CORPORATIONS ACT (Alberta) provides that a corporation
may, in certain circumstances, indemnify a director or officer of the
corporation, a former director or officer of the corporation, a person who acts
or acted at the corporation's request as a director or officer of a body
corporate of which the corporation is or was a shareholder or creditor and the
heirs and legal representatives of any such persons (collectively, "Indemnified
Persons") against all costs, charges and expenses reasonably incurred by any
such Indemnified Person in respect of any civil, criminal or administrative
action or proceeding to which he is made a party by reason of being or having
been a director or officer of the corporation or other body corporate, if (a) he
acted honestly and in good faith with a view to the best interests of the
corporation, and (b) in the case of a criminal or administrative action or
proceeding that is enforced by a monetary penalty, he had reasonable grounds for
believing that his conduct was lawful.
The by-laws of the Registrant provide that it shall indemnify
Indemnified Persons of the Registrant to the maximum extent permitted by the
BUSINESS CORPORATIONS ACT (Alberta).
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors and officers and persons controlling
the Registrant pursuant to the foregoing provisions, the Registrant has been
advised that, in the opinion of the Commission, such indemnification is against
public policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. The Registrant carries certain insurance coverage, in respect of
potential claims against its directors and officers and in respect of losses of
which the Registrant may be required or permitted by law to indemnify such
directors and officers.
II-1
EXHIBITS
EXHIBIT DESCRIPTION
NUMBER -----------
- ------
4.1* Company Annual Information Form dated May 10, 2002.
4.2* Company Management Information Circular dated March 27, 2002.
4.3* Company Comparative Audited Consolidated Financial Statements for
the year ended December 31, 2001, together with the auditors'
report thereon (contained in the Company's Annual Report for the
year ended December 31, 2001).
4.4* Management's Discussion and Analysis for the year ended December
31, 2001 contained in the Company's Annual Report for the year
ended December 31, 2001.
5.1* Consent of Gilbert Laustsen Jung Associates Ltd.
5.2* Consent of Macleod Dixon.
5.3* Consent of NorWest Mine Services, Inc.
5.4 Consent of PricewaterhouseCoopers LLP, Chartered Accountants.
5.5* Consent of Purvin & Gertz, Inc.
6.1* Powers of Attorney.
7.1* Indenture, dated as of April 23, 2002 by and between the Company
and The Bank of Nova Scotia Trust Company of New York, as
Trustee.
7.2* Statement of Eligibility on Form T-1 of The Bank of Nova Scotia
Trust Company of New York.
9.1* Letter of Transmittal.
9.2* Notice of Guaranteed Delivery.
- ------------------------
* Previously filed.
II-2
PART III
UNDERTAKING AND CONSENT TO SERVICE OF PROCESS
ITEM 1. UNDERTAKING
The Registrant undertakes to make available, in person or by telephone,
representatives to respond to inquiries made by the Commission staff, and to
furnish promptly, when requested to do so by the Commission staff, information
relating to the securities registered pursuant to Form F-10 or to transactions
in said securities.
ITEM 2. CONSENT TO SERVICE OF PROCESS
Concurrently with the initial filing of this Registration Statement on
Form F-10, the Registrant filed with the Commission a written irrevocable
consent and power of attorney on Form F-X.
Any change to the name or address of the agent for service of process
of the Registrant shall be communicated promptly to the Securities and Exchange
Commission by an amendment to the Form F-X referencing the file number of the
relevant registration statement.
III-1
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form F-10 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Calgary, Province of Alberta, Canada, on July 8,
2002.
WESTERN OIL SANDS INC.
By: /s/ David A. Dyck
---------------------------------------
Name: David A. Dyck
Title: Vice-President, Finance and
Chief Financial Officer
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities indicated
on July 8, 2002.
SIGNATURE TITLE
- --------- -----
/s/ * President and Chief Executive Officer and Director
- ------------------------ (Principal Executive Officer)
Guy J. Turcotte
/s/ * Vice-President, Finance and Chief Financial Officer
- ------------------------ (Principal Financial and Accounting Officer)
David A. Dyck
/s/ * Chairman and Director
- ------------------------
Geoffrey A. Cumming
/s/ * Director
- ------------------------
Glen F. Andrews
/s/ * Director
- ------------------------
Tullio Cedraschi
/s/ * Director
- ------------------------
Walter W. Grist
/s/ * Director
- ------------------------
Brian F. MacNeill
/s/ * Director
- ------------------------
Robert G. Puchniak
/s/ * Director
- ------------------------
Mac H. Van Wielingen
Signed pursuant to power of
attorney previously filed.
*By: /s/ David A. Dyck
------------------------
Name: David A. Dyck
Title: Attorney-in-fact
July 8, 2002
AUTHORIZED REPRESENTATIVE
Pursuant to the requirements of Section 6(a) of the Securities Act of
1933, the Authorized Representative has duly caused this Registration Statement
to be signed on its behalf by the undersigned, in Calgary, Canada, on July 8,
2002.
WESTERN OIL SANDS (U.S.A.) INC.
By: /s/ David A. Dyck
---------------------------------------
Name: David A. Dyck
Title: Authorized Signatory
EXHIBIT INDEX
EXHIBIT DESCRIPTION
NUMBER -----------
- ------
4.1* Company Annual Information Form dated May 10, 2002.
4.2* Company Management Information Circular dated March 27, 2002.
4.3* Company Comparative Audited Consolidated Financial Statements for
the year ended December 31, 2001, together with the auditors'
report thereon (contained in the Company's Annual Report for the
year ended December 31, 2001).
4.4* Management's Discussion and Analysis for the year ended December
31, 2001 contained in the Company's Annual Report for the year
ended December 31, 2001.
5.1* Consent of Gilbert Laustsen Jung Associates Ltd.
5.2* Consent of Macleod Dixon.
5.3* Consent of NorWest Mine Services, Inc.
5.4 Consent of PricewaterhouseCoopers LLP, Chartered Accountants.
5.5* Consent of Purvin & Gertz, Inc.
6.1* Powers of Attorney.
7.1* Indenture, dated as of April 23, 2002 by and between the Company
and The Bank of Nova Scotia Trust Company of New York, as
Trustee.
7.2* Statement of Eligibility on Form T-1 of The Bank of Nova Scotia
Trust Company of New York.
9.1* Letter of Transmittal.
9.2* Notice of Guaranteed Delivery.
- ------------------------
* Previously filed.