EXHIBIT 99.1
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NO SECURITIES REGULATORY AUTHORITY HAS EXPRESSED AN OPINION ABOUT THESE
SECURITIES AND IT IS AN OFFENCE TO CLAIM OTHERWISE.
THIS SHORT FORM PROSPECTUS CONSTITUTES A PUBLIC OFFERING OF THESE SECURITIES
ONLY IN THOSE JURISDICTIONS WHERE THEY MAY BE LAWFULLY OFFERED FOR SALE AND
THEREIN ONLY BY PERSONS PERMITTED TO SELL SUCH SECURITIES. THESE SECURITIES HAVE
NOT BEEN AND WILL NOT BE REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF
1933, AS AMENDED (THE "1933 ACT") OR ANY STATE SECURITIES LAWS. ACCORDINGLY,
THESE SECURITIES MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO A
U.S. PERSON (AS SUCH TERM IS DEFINED IN REGULATION S UNDER THE 1933 ACT) EXCEPT
IN TRANSACTIONS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE 1933 ACT AND
APPLICABLE STATE SECURITIES LAWS. THIS SHORT FORM PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THESE SECURITIES
WITHIN THE UNITED STATES OF AMERICA. SEE "PLAN OF DISTRIBUTION".
SHORT FORM PROSPECTUS
New Issue January 30, 2003
[GRAPHIC OMITTED]
[LOGO - WESTERN OIL SANDE]
$50,225,000
2,050,000 COMMON SHARES
The outstanding Class A Shares ("Common Shares") of Western Oil Sands
Inc. ("Western" or the "Corporation") are listed for trading on the Toronto
Stock Exchange (the "TSX") under the trading symbol "WTO". On January 15, 2003,
the last trading day prior to the announcement of this offering, the closing
price of the Common Shares on the TSX was $24.55. On January 29, 2003, the last
trading day prior to the filing of this short form prospectus, the closing price
of the Common Shares on the TSX was $23.50. The offering price of the Common
Shares offered hereunder was determined by negotiation between the Corporation
and the Underwriters.
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$24.50 per Common Share
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NET PROCEEDS TO
OFFERING PRICE UNDERWRITERS' FEE WESTERN(1)
-------------- ----------------- ----------
Per Common Share $24.50 $0.98 $23.52
TOTAL OFFERING $50,225,000 $2,009,000 $48,216,000
NOTE:
(1) Before deducting expenses of the issue estimated to be $275,000, which are
payable by Western.
TD Securities Inc., BMO Nesbitt Burns Inc., Griffiths McBurney &
Partners, Raymond James Ltd., RBC Dominion Securities Inc., Scotia Capital Inc.,
CIBC World Markets Inc., FirstEnergy Capital Corp., Peters & Co. Limited, Salman
Partners Inc. and Tristone Capital Inc. (collectively, the "Underwriters"), as
principals, conditionally offer the Common Shares for sale, subject to prior
sale, if, as and when issued by Western and accepted by the Underwriters in
accordance with the conditions contained in the Underwriting Agreement referred
to under "Plan of Distribution" and subject to the approval of certain legal
matters on behalf of Western by Macleod Dixon llp and on behalf of the
Underwriters by Blake, Cassels & Graydon llp and Burstall Winger llp.
In the opinion of Macleod Dixon llp, counsel to Western, and Blake,
Cassels & Graydon llp, counsel to the Underwriters, the Common Shares offered
hereby will, on the date of closing, not be precluded as investments under
certain statutes. See "Eligibility for Investment".
Subscriptions for Common Shares will be received subject to rejection
or allotment in whole or in part and the Underwriters reserve the right to close
the subscription books at any time without notice. Definitive certificates
representing the Common Shares offered under this short form prospectus will be
available for delivery at the closing of this offering, which is expected to
occur on or about February 7, 2003 but in any event no later than March 13,
2003. The Underwriters may effect transactions which stabilize or maintain the
market price for the Common Shares at levels other than those which otherwise
might prevail in the open market. Such transactions, if commenced, may be
discontinued at any time. See "Plan of Distribution".
EACH OF TD SECURITIES INC., BMO NESBITT BURNS INC., RBC DOMINION
SECURITIES INC. AND SCOTIA CAPITAL INC. IS, DIRECTLY OR INDIRECTLY, A
WHOLLY-OWNED SUBSIDIARY OF A CANADIAN CHARTERED BANK (COLLECTIVELY, THE "BANKS")
WHICH IS A LENDER TO US AND TO WHICH WE ARE PRESENTLY INDEBTED. CONSEQUENTLY, WE
MAY BE CONSIDERED TO BE A "CONNECTED" ISSUER OF EACH OF THESE UNDERWRITERS FOR
THE PURPOSES OF CANADIAN SECURITIES LEGISLATION. A PORTION OF THE NET PROCEEDS
OF THIS OFFERING MAY BE USED TO REDUCE OUR INDEBTEDNESS TO THE BANKS. SEE
"RELATIONSHIP BETWEEN WESTERN AND THE UNDERWRITERS" AND "USE OF PROCEEDS".
TABLE OF CONTENTS
ELIGIBILITY FOR INVESTMENT..........................2
DOCUMENTS INCORPORATED BY REFERENCE.................3
THE CORPORATION.....................................4
DESCRIPTION OF THE BUSINESS.........................4
RECENT DEVELOPMENTS.................................5
USE OF PROCEEDS.....................................6
PLAN OF DISTRIBUTION................................6
RELATIONSHIP BETWEEN WESTERN AND THE UNDERWRITERS...7
DESCRIPTION OF SHARE CAPITAL........................7
CONSOLIDATED CAPITALIZATION.........................8
PRICE RANGE AND TRADING VOLUME OF COMMON SHARES.....9
RISK FACTORS.......................................10
LEGAL MATTERS......................................18
INTERESTS OF EXPERTS...............................18
PURCHASERS' STATUTORY RIGHTS.......................19
CERTIFICATE OF THE CORPORATION.....................20
CERTIFICATE OF THE UNDERWRITERS....................21
SHELL CANADA LIMITED ("SHELL") AND CHEVRONTEXACO CORP. ("CHEVRON") MAKE NO
REPRESENTATION OR WARRANTY AS TO THE ACCURACY OR COMPLETENESS OF THE INFORMATION
CONTAINED IN THIS SHORT FORM PROSPECTUS 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 SHORT FORM
PROSPECTUS. NEITHER SHELL NOR CHEVRON IS A PROMOTER OR SPONSOR OF US OR OUR
PARTICIPATION IN THE PROJECT. THIS SHORT FORM PROSPECTUS IS NOT INTENDED TO BE A
SOLICITATION BY SHELL OR CHEVRON OF INVESTMENTS IN OUR SECURITIES.
ELIGIBILITY FOR INVESTMENT
In the opinion of Macleod Dixon llp, counsel for Western, and Blake, Cassels &
Graydon LLP, counsel for the Underwriters, based on legislation in effect on the
date of this short form prospectus, the Common Shares offered hereby will not be
precluded as investments, in each case subject to general investment standards
and the satisfaction of additional requirements relating to investment or
lending policies, standards, procedures, or goals, under or by the following
statutes and where applicable, the relevant regulations:
COOPERATIVE CREDIT ASSOCIATIONS ACT (Canada) THE TRUSTEE ACT (Manitoba)
INSURANCE COMPANIES ACT (Canada) PENSION BENEFITS ACT (Ontario)
TRUST AND LOAN COMPANIES ACT (Canada) AN ACT RESPECTING INSURANCE (Quebec)
PENSION BENEFITS STANDARDS ACT, 1985 (Canada) (in respect of insurers other than guarantee
ALBERTA HERITAGE SAVINGS TRUST FUND ACT (Alberta) fund corporations)
EMPLOYMENT PENSION PLANS ACT (Alberta) SUPPLEMENTAL PENSION PLANS ACT (Quebec)
LOAN AND TRUST CORPORATIONS ACT (Alberta) AN ACT RESPECTING TRUST COMPANIES AND SAVINGS
FINANCIAL INSTITUTIONS ACT (British Columbia) COMPANIES (Quebec)
PENSION BENEFITS STANDARDS ACT (British Columbia) (for a trust company investing its own funds and
THE INSURANCE ACT (Manitoba) deposits it receives and a savings company
THE PENSION BENEFITS ACT (Manitoba) investing its funds)
Also, in the opinion of such counsel, the Common Shares offered hereby
will, on the date of closing, be qualified investments under the INCOME TAX ACT
(Canada) and the regulations thereunder for trusts governed by registered
retirement savings plans, registered retirement income funds, deferred profit
sharing plans and registered education savings plans, and will not constitute
foreign property for such plans.
- 2 -
DOCUMENTS INCORPORATED BY REFERENCE
INFORMATION HAS BEEN INCORPORATED BY REFERENCE IN THIS SHORT FORM
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 Chief Financial
Officer of Western at Suite 2400, 440 Second Avenue S.W., Calgary, Alberta, T2P
5E9 (Telephone (403) 233-1700). For the purpose of the Province of Quebec, this
simplified prospectus contains information to be completed by consulting the
permanent information record. A copy of the permanent information record may be
obtained from the Chief Financial Officer of Western at the above-mentioned
address and telephone number.
The following documents of the Corporation 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;
2. the comparative audited consolidated financial statements for the year
ended December 31, 2001, together with the auditors' report thereon
contained in Western's Annual Report for the year ended December 31,
2001;
3. the comparative unaudited consolidated interim financial statements for
the three months and the nine months ended September 30, 2002 contained
in Western's Third Quarter Report for the nine months ended September
30, 2002, as amended;
4. Management's Discussion and Analysis for the year ended December 31,
2001 contained in Western's Annual Report for the year ended December
31, 2001; and
5. Management's Discussion and Analysis for the three months and the nine
months ended September 30, 2002 contained in Western's Third Quarter
Report for the nine months ended September 30, 2002, as amended.
Any of the following documents, if filed by Western 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
(d) information circulars (other than those portions thereof
which, pursuant to National Instrument 44-101 of the Canadian
Securities Administrators, are not required to be incorporated
by reference herein).
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.
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THE CORPORATION
Western Oil Sands Inc. is an oil sands corporation incorporated under
the BUSINESS CORPORATIONS ACT (Alberta) on June 18, 1999. Western has three
wholly-owned subsidiaries: 852006 Alberta Ltd., which, together with Western,
holds an indirect 20% interest in the Athabasca Oil Sands Project as shown
below; Western Oil Sands Finance Inc. and Western Oil Sands USA Inc.
[GRAPHIC OMITTED]
[ORGANIZATIONAL CHART]
Western
(Alberta)
________________________________________________________________________________
/ / / /
100% General 100% 100%
___________________ Partner _________________ _________________
852006 Alberta Ltd. / Western Oil Sands Western Oil Sands
(Alberta) 1% Limited Finance Inc. USA Inc.
___________________ Partnership Alberta (Delaware)
\ Units _________________ (inactive)
99% Limited / _________________
Partnership /
Units /
\ ______________________
\ Western Oil Sands L.P.
\_________ (Alberta)
______________________
/
20%
__________
Project
__________
Unless otherwise noted or the context otherwise indicates, the terms
"Western" or the "Corporation" refer to Western Oil Sands Inc., the terms "we",
"our" or "us" refer to Western and its direct and indirect subsidiaries and its
limited partnership, and the term "owners" collectively refers to Shell, Chevron
and us.
Our head office is located at Suite 2400, 440 Second Avenue S.W.,
Calgary, Alberta, T2P 5E9 and our registered office is located at 3700, 400
Third Avenue S.W., Calgary, Alberta, T2P 4H2.
DESCRIPTION OF THE BUSINESS
Western is a Canadian oil sands corporation which holds a 20% undivided
ownership interest in a multi-billion dollar joint venture to exploit the
recoverable bitumen reserves found in certain oil sands deposits in the
Athabasca region of Alberta (the "Project") and to pursue other oil sands
opportunities. Shell and Chevron hold the remaining 60% and 20% undivided
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 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 portion of
Lease 13 contains approximately 1.7 billion barrels of proved and probable
reserves and is sufficient for 30 years of non-declining bitumen production at a
rate of 155,000 barrels per day. Western is entitled to participate in future
expansion opportunities, including in respect of Lease 13 and on two other
nearby oil sands leases owned by Shell, referred to as Leases 88 and 89.
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RECENT DEVELOPMENTS
PROJECT UPDATE
Construction has recently been completed at the Muskeg River mine,
located approximately 75 kilometres north of Fort McMurray, Alberta and at the
Scotford upgrader, located near Fort Saskatchewan, Alberta. Both facilities are
now in the start-up process. At the end of 2002, operations management assumed
responsibility for all facilities and activities at both sites and initiated
start-up operations. Current trending analysis indicates that Project costs,
before taking into account expected pre-start-up revenues and other partially
offsetting factors, may be higher than the current budget. Based on this
analysis, Western estimates that its share of Project costs, including start-up
activities and final completion of electrical heat tracing and insulation will
be approximately $1.1 billion through to the end of March 2003. Although final
Project costs will not be determined until first production of synthetic crude
oil out of the Scotford upgrader, Western does not anticipate that such final
Project costs will differ materially from this estimate.
The Project achieved a major milestone on December 29, 2002 with first
bitumen production at the Muskeg River mine. Initial indications are that
bitumen recovery and quality were achieving design targets and meeting required
upgrading specifications. Deliveries of diluted bitumen into the Corridor
pipeline system for delivery to the Scotford upgrader commenced before the end
of 2002. At the Scotford upgrader, the primary distillation units were
successfully tested during the fourth quarter of 2002 and commissioning and
testing of the synthetic crude units was well underway at the end of 2002. The
primary focus during the first quarter of 2003 will be on completing repairs to
the froth treatment plant at the Muskeg River mine and commissioning and testing
the synthetic crude units at the Scotford upgrader. Western anticipates that
first production of synthetic crude oil from the Scotford upgrader will occur
before the end of the first quarter of 2003; however, production volatility is
anticipated during initial operations. The Project is targeted to ramp up to the
designed bitumen production rate of 155,000 barrels per day in the third quarter
of 2003.
OPERATIONAL UPDATE
Since the Project is still in the development phase, we do not have
operating revenue or expenses. During the fourth quarter of 2002, we initiated
first bitumen production and filling of the pipeline and storage tanks for
delivery to the Scotford upgrader, with first production of synthetic crude
currently expected to start in the first quarter of 2003. In anticipation of
moving into operations, we have initiated a hedging program by locking in crude
oil prices on approximately 15% of our budgeted production for the twelve months
commencing April 1, 2003 at $39.72 per barrel and approximately 29% of our
budgeted production for the twelve months commencing April 1, 2004 at $36.97 per
barrel. During the third quarter of 2002, we incurred a loss of $1.8 million
($0.04 per share) and for the nine months ended September 30, 2002, we incurred
a loss of $28.3 million ($0.59 per share). This loss was comprised of Western's
corporate expenses and an amount of $22.8 million representing the one-time
write-off of deferred finance costs related to credit facilities that were
replaced by Western's US$450 million Senior Secured Notes offering.
During the third quarter of 2002, our share of Project capital
expenditures totaled $145.3 million. These expenditures included $129.5 million
of construction costs for the Project, direct capitalized costs of $15.0 million
and $0.8 million of expansion pre-feasibility costs and corporate expenditures.
The direct capitalized costs are primarily comprised of interest accrued on the
Senior Secured Notes (see "Consolidated Capitalization"), bank stand-by fees and
other interest expenses that are being capitalized during the construction
period. To September 30, 2002, our share of total construction costs for the
Project amounted to $982.8 million.
On January 6, 2003, a hydrocarbon leak at the Muskeg River mine caused
a fire that was quickly extinguished. Damage was mainly limited to electrical
cables in the solvent recovery area of the froth treatment plant. It has been
determined that the hydrocarbon leak, which resulted in the fire, was caused by
the failure of a piping connection. Related repairs are underway and this
incident is not expected to materially impact the scheduled start-up of the
first synthetic crude oil production from the Scotford upgrader in the first
quarter of 2003. Based on preliminary Project estimates, our share of costs to
repair the damage is estimated to be in the order of $15 million, however this
will be dependent on weather conditions, and the cost of these repairs is
expected to be covered by insurance. The insurance policies for the Project
cover property damage of up to $500 million per incident at the Project level
($100 million as to our interest). In addition, subject to a 30-day waiting
period, potential start-up delay coverage is in place at the Project level for
up to $500 million per incident. Discussions are currently
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underway with the Project insurers to establish a process to provide interim
insurance proceeds for property damage repairs as they are incurred.
INSURANCE UPDATE
We have in place Project cost overrun and start-up delay insurance
policies in the amount of $200 million. We made a claim for cost overruns in the
amount of $430 million on August 16, 2002. On November 19, 2002, we made an
initial claim for start-up delay coverage and further claims for start-up delay
are being made on a weekly basis. Start-up delay claims now total $24 million.
We are currently in discussions with our insurers regarding our claims
and we are pursuing alternatives with respect to resolving disagreements with
them as to coverage under the policies. We remain confident in the extent of
coverage available under the insurance policies; however, we cannot at this time
estimate when any payments under the policies may be forthcoming.
Notwithstanding the amount of our claims, the policy limit of these insurance
policies is $200 million.
CAPITAL RESOURCES
On November 19, 2002, the Corporation entered into a $50 million credit
facility with a syndicate of Canadian chartered banks to fund our working
capital requirements. As at December 31, 2002, a total of $20 million had been
drawn on this facility. On January 30, 2003, this credit facility was amended to
increase the maximum amount of such facility to $75 million and to add an
additional Canadian chartered bank to the syndicate of lenders.
USE OF PROCEEDS
The net proceeds of this offering, after payment of the Underwriters'
fee of $2,009,000 and expenses of the issue estimated to be $275,000, will be
approximately $47,941,000. The net proceeds will be used to fund our 20% share
of the Project and related expenses, and for general corporate purposes. In
addition, the net proceeds may be used to reduce our $50 million working capital
credit facility.
PLAN OF DISTRIBUTION
Pursuant to an agreement dated January 20, 2003 (the "Underwriting
Agreement") among Western and the Underwriters, Western has agreed to issue and
sell and the Underwriters have agreed, severally and not jointly, to purchase on
or about February 7, 2003 (but no later than March 13, 2003), subject to the
terms and conditions stated therein, all but not less than all of the 2,050,000
Common Shares offered hereby at a price of $24.50 per Common Share for total
gross proceeds of $50,225,000 payable in cash to Western against delivery of the
2,050,000 Common Shares. In consideration of the services provided in connection
with this offering, Western will pay the Underwriters a fee of $0.98 per Common
Share issued pursuant to this offering for an aggregate fee of $2,009,000. The
offering price of the Common Shares offered hereunder was determined by
negotiation between Western and the Underwriters.
The obligations of the Underwriters under the Underwriting Agreement
are several and not joint and several and may be terminated upon the occurrence
of certain stated events. The Underwriters are, however, obligated to take up
and pay for all of the Common Shares if any of the Common Shares are purchased
under the Underwriting Agreement.
Western has agreed that, subject to certain exceptions, it will not
offer or issue, or enter into an agreement to offer or issue, Common Shares or
any securities convertible or exchangeable into Common Shares for a period of 90
days subsequent to the closing date of this offering without the consent of TD
Securities Inc. on behalf of the Underwriters, which consent may not be
unreasonably withheld.
The TSX has conditionally approved the listing of the 2,050,000 Common
Shares offered under this short form prospectus. Listing will be subject to
Western fulfilling all of the listing requirements of the TSX on or before April
22, 2003.
The Underwriters have advised Western that, in connection with the
offering, the Underwriters may effect transactions which stabilize or maintain
the market price of the Common Shares at levels other than those which might
otherwise prevail in the open market. Such transactions, if commenced, may be
discontinued at any time.
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The Common Shares have not been and will not be registered under the
United States SECURITIES ACT OF 1933, as amended (the "1933 Act") or any state
securities laws, and accordingly, may not be offered or sold within the United
States except in transactions exempt from the registration requirements of the
1933 Act and applicable state securities laws. The Underwriting Agreement
enables the Underwriters to offer and resell the Common Shares that they have
acquired pursuant to the Underwriting Agreement to "qualified institutional
buyers" (as defined in Rule 144A under the 1933 Act) in the United States
provided such offers and sales are made in accordance with Rule 144A under the
1933 Act. Moreover, the Underwriting Agreement provides that the Underwriters
will offer and sell the Common Shares outside of the United States only in
accordance with Regulation S under the 1933 Act.
In addition, until 40 days after the commencement of the offering, any
offer or sale of Common Shares offered hereby within the United States by any
dealer (whether or not participating in the offering) may violate the
registration requirements of the 1933 Act if such offer or sale is made
otherwise than in accordance with Rule 144A under the 1933 Act.
RELATIONSHIP BETWEEN WESTERN AND THE UNDERWRITERS
Each of TD Securities Inc., BMO Nesbitt Burns Inc., RBC Dominion
Securities Inc. and Scotia Capital Inc. is, directly or indirectly, a
wholly-owned subsidiary of a Canadian chartered bank which is a lender to us and
to which we are presently indebted. Consequently, we may be considered to be a
"connected" issuer of each of these Underwriters for the purposes of Canadian
securities legislation.
As at December 31, 2002, we were indebted to three of the Banks in the
amount of $153 million under certain credit facilities between us and three of
the Banks. We are in compliance with all material terms of the agreements
governing such credit facilities. Certain of the credit facilities are secured
by security interests over our interests in the Project. Neither our financial
position nor the value of the security under the credit facilities has changed
substantially since the indebtedness under the credit facilities was incurred.
See the notes under "Consolidated Capitalization".
A portion of the net proceeds received pursuant to this offering may be
used to reduce our indebtedness to the Banks. See "Use of Proceeds". The
decision to offer the Common Shares offered hereunder and the determination of
the terms of the distribution were made through negotiations between Western and
the Underwriters. The Banks did not have any involvement in such decision or
determination, but have been advised of the issuance and the terms thereof. As a
consequence of this offering, each of TD Securities Inc., BMO Nesbitt Burns
Inc., RBC Dominion Securities Inc. and Scotia Capital Inc. will receive its
share of the Underwriters' fee payable by Western to the Underwriters.
DESCRIPTION OF SHARE CAPITAL
Our authorized share capital includes an unlimited number of Common
Shares, an unlimited number of Non-voting Convertible Class B Equity Shares
("Non-voting Convertible Equity Shares"), an unlimited number of Class C
Preferred Shares ("Class C Shares") and an unlimited number of Class D Preferred
Shares, issuable in series ("Class D Shares"). As of January 15, 2003,
47,784,971 Common Shares, no Non-voting Convertible Equity Shares, no Class C
Preferred Shares and 666,667 Class D Shares, Series A, were issued and
outstanding.
The following is a brief description of the attributes of our Common
Shares, Non-voting Convertible Equity Shares, Class C Shares and Class D Shares.
COMMON SHARES
The holders of Common Shares are entitled, subject to specified
preferences in favour of holders of Class C Shares and Class D Shares, to
dividends if, as and when declared by the directors and to one vote per share at
meetings of the holders of Common Shares and, upon liquidation, subject to
specified preferences in favour of holders of Class C Shares and Class D Shares,
to share equally share for share with the Non-voting Convertible Equity Shares
in our remaining assets.
NON-VOTING CONVERTIBLE EQUITY SHARES
The holders of Non-voting Convertible Equity Shares are entitled to
dividends in parity with the Common Shares if, as and when declared by the
directors and, upon liquidation, subject to specified preferences in favour of
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holders of Class C Shares and Class D Shares, to share equally share for share
with the Common Shares in our remaining assets. Holders of Non-voting
Convertible Shares are not entitled to receive notice of, attend or vote at any
meetings of shareholders unless otherwise entitled pursuant to applicable laws.
Each Non-voting Convertible Equity Share shall entitle the holder to
acquire (subject to adjustment), at no additional cost, one Common Share at 4:30
p.m. (Calgary time) (the "Acquisition Expiry Time") on the earlier of: (i) five
(5) business days following the date upon which a receipt for a prospectus (the
"Qualifying Prospectus") to be filed by us with respect to the distribution of
the Common Shares upon conversion of the Non-voting Convertible Equity Shares
has been issued by the last of the securities commissions or similar regulatory
authorities in the Province of Alberta and such other provinces of Canada in
which the Corporation files such Qualifying Prospectus (based upon the
residences of Canadian subscribers); and (ii) 12 months from the date of
issuance of the Non-voting Convertible Equity Shares. Non-voting Convertible
Equity Shares outstanding at the Acquisition Expiry Time shall be deemed to be
converted by the holder, without any further action on the part of the holder,
at the Acquisition Expiry Time.
CLASS C SHARES
The Corporation is authorized to make one issuance of Class C Shares.
The holders of Class C Shares shall not be entitled to receive notice of, attend
or vote at any meetings of the shareholders of the Corporation unless otherwise
entitled pursuant to applicable laws but shall be entitled to receive in respect
of each calendar year, if, as and when declared by the directors, a
non-cumulative preferential dividend in the amount (if any) declared by the
directors. No dividends shall be declared or paid in any year on the Common
Shares, Non-voting Convertible Equity Shares, Class D Shares or any other shares
of the Corporation ranking junior to the Class C Shares from time to time with
respect to the payment of dividends, unless all dividends which shall have been
declared and which remain unpaid on the Class C Shares then issued and
outstanding shall have been paid or provided for at the date of such declaration
or payment. Upon liquidation, holders of Class C Shares shall be entitled to
payment of an amount (subject to adjustment) equal to the amount or value of the
consideration paid for such shares (the "Redemption Amount") in priority to the
Common Shares, the Non-voting Convertible Equity Shares, the Class D Shares and
any other shares ranking junior to the Class C Shares from time to time. The
Class C Shares are redeemable by the Corporation or the holders of Class C for
the Redemption Amount.
CLASS D SHARES
The Class D Shares are entitled to receive notice of, attend and vote
at any meetings of shareholders and are convertible into Common Shares, prior to
redemption, on a one-for-one basis. The Class D Shares are redeemable by the
Corporation at a price equal to their issue price plus a cumulative dividend of
12% per annum compounded semi-annually until January 1, 2007, from which date
the dividend increases by 3% per quarter to a maximum of 24% per annum.
CONSOLIDATED CAPITALIZATION
The following table sets forth our consolidated capitalization as of
the dates indicated.
AMOUNT OUTSTANDING AS AT
SEPTEMBER 30, 2002
DESCRIPTION AND AMOUNT OUTSTANDING AS AT AMOUNT OUTSTANDING AS AT AFTER GIVING EFFECT TO THE
AUTHORIZED AMOUNT DECEMBER 31, 2001 SEPTEMBER 30, 2002 OFFERING
----------------- ----------------- ------------------ --------
(000's except shares) (audited) (unaudited) (unaudited)
(000's except shares) (000's except shares) (000's except shares)
Credit Facility $279,481 - -
($535,000)
Senior Secured Notes(1) - $713,610 $713,610
(US $450,000)
Bridge Note Facility(2) - $78,000 $78,000
($88,000)
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AMOUNT OUTSTANDING AS AT
SEPTEMBER 30, 2002
DESCRIPTION AND AMOUNT OUTSTANDING AS AT AMOUNT OUTSTANDING AS AT AFTER GIVING EFFECT TO THE
AUTHORIZED AMOUNT DECEMBER 31, 2001 SEPTEMBER 30, 2002 OFFERING
----------------- ----------------- ------------------ --------
(000's except shares) (audited) (unaudited) (unaudited)
(000's except shares) (000's except shares) (000's except shares)
Senior Credit Facility(3) - - -
($100,000)
Class D Preferred Shares,
Series A $11,963 $11,963 $11,963
(666,667) (666,667 shares) (666,667 shares) (666,667 shares)
Common Shares(4) $435,340 $436,991 $484,932
(unlimited) (47,513,971 shares) (47,704,471 shares) (49,754,471 shares)
NOTES:
(1) On April 23, 2002, Western issued US$450 million of Senior Secured Notes,
bearing interest at 8.375%, with a maturity of May 1, 2012. The net
proceeds of such offering were used to repay all amounts outstanding under
Western's $535 million Credit Facility and repay all amounts due to Shell,
with the balance of net proceeds placed in a trust account to be used for
funding our share of remaining construction costs for the Project. Such
Senior Secured Notes are secured by security interests over all of our
interest in the Project. The $535 million Credit Facility was cancelled
upon repayment. US dollar amounts as at September 30, 2002 have been
converted to Canadian dollars at the noon buying rate of 1.5858 on
September 30, 2002. As at December 31, 2002, the value of the outstanding
Senior Secured Notes was $710.82 million based on the noon buying rate of
1.5796 on December 31, 2002.
(2) As at December 31, 2002, the Corporation had a $88 million subordinated
bridge note purchase facility with a Canadian chartered bank which is due
October 2003. This credit facility is unsecured. As at December 31, 2002,
the outstanding balance of this credit facility was $88 million.
(3) As at December 31, 2002, the Corporation had a credit facility with a
syndicate of Canadian chartered banks, $75 million of which is to fund
interest on the Senior Secured Notes and construction costs for the Project
and the remaining $25 million is for letter of credit requirements. This
credit facility provides the banks with security over all of our assets
with the exception of certain notes and note guarantees issued as among
Western and its subsidiaries in connection with the Senior Secured Notes
referred to above in Note 1. As at December 31, 2002, the outstanding
balance of this credit facility was $45 million.
(4) Does not include Common Shares issuable upon exercise of warrants to
purchase Common Shares or Common Shares issuable upon the exercise of stock
options granted pursuant to Western's stock option plan or Common Shares
issuable upon the call of call obligations. As at January 15, 2003, options
to purchase 1,287,000 Common Shares and Class A warrants to purchase
494,224 Common Shares were outstanding.
(5) On November 19, 2002, Western entered into a $50 million credit facility
agreement with a syndicate of Canadian chartered banks to fund our working
capital requirements. On January 30, 2003, this credit facility was amended
to increase the maximum amount of such facility to $75 million and to add
another Canadian chartered bank to the syndicate of lenders. This credit
facility provides the banks with security over all of our assets with the
exception of certain notes and note guarantees issued as among Western and
its subsidiaries in connection with the Senior Secured Notes referred to
above in Note 1. See "Recent Developments - Capital Resources". As at
December 31, 2002, the outstanding balance of this credit facility was $20
million.
(6) As at December 31, 2002, the Corporation had 5,629,641 call obligations
($48,865,000) outstanding. Certain of the call obligations cannot be
exercised until Western undertakes a rights offering. This restriction
applies to 2,589,641 call obligations entered into in July 2001, each with
an exercise price of $13.00. All call obligations will expire, unless
called, on March 31, 2003.
(7) As at September 30, 2002 our deficit was approximately $40.7 million.
PRICE RANGE AND TRADING VOLUME OF COMMON SHARES
Our outstanding Common Shares are listed for trading on the TSX under
the trading symbol "WTO". The following table sets out the price range for and
trading volume of the Common Shares as reported by the TSX for the periods
indicated.
PERIOD HIGH LOW VOLUME
------ ---- --- ------
2001
First Quarter...................... $15.20 $13.40 1,582,200
Second Quarter..................... $14.25 $13.70 747,800
Third Quarter...................... $18.00 $13.75 4,589,440
Fourth Quarter..................... $19.20 $15.00 3,409,408
- 9 -
PERIOD HIGH LOW VOLUME
------ ---- --- ------
2002
First Quarter...................... $28.45 $18.15 12,013,186
Second Quarter..................... $30.15 $24.80 5,691,109
July............................... $28.15 $22.50 1,532,917
August............................. $26.50 $23.50 987,380
September.......................... $26.25 $23.24 901,078
October............................ $24.50 $20.00 1,443,088
November........................... $22.01 $20.00 1,742,031
December........................... $26.00 $20.65 1,172,795
2003
January (1-29)..................... $26.50 $23.20 2,263,200
On January 15, 2003, the last trading day prior to the announcement of this
offering, the closing price per Common Share on the TSX was $24.55. On January
29, 2003, the last trading day prior to the date of this prospectus, the closing
price per Common Share on the TSX was $23.50.
RISK FACTORS
An investment in the Common Shares should be considered speculative due
to the risk factors set out below, all of which should be carefully considered
by an investor.
CONSTRUCTION OF THE PROJECT MAY NOT BE COMPLETED ON TIME OR ON BUDGET.
An investment in us will be subject to all of the risks inherent in the
Project, including construction risks and overall feasibility. There remains a
risk that the Project will not be completed on time or within the current
budget. The Project may still encounter delays or increased costs due to many
factors, including:
o breakdown or failure of equipment or processes;
o design errors;
o operator errors;
o violation of permit requirements;
o disruption in the supply of energy; and
o catastrophic events such as fire, earthquake, storms or
explosions.
As commissioning of the Project has not yet been entirely completed, we
cannot assure you that the current operations schedules will continue to 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 complete the Project, including repair costs in
respect of the fire at the Muskeg River mine, 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 engineering and
construction cost increases and we cannot assure you that we will not experience
further increased costs during the commissioning and start-up phases.
- 10 -
WE MAY NOT BE ABLE TO FUND COST OVERRUNS.
The total costs to construct the Project will not be fully determined
until commissioning of the Project is completed. In the event of cost overruns,
we may not have enough capital to complete our share of costs. We cannot assure
you that our $200 million policy of project delay/cost overrun insurance will
cover all such overruns, that we will be able to satisfy the conditions to
making a claim under such insurance, that we will be successful in asserting any
claim under such insurance or any insurance claim to be made with respect to the
fire at the Muskeg River mine or that any claims under any insurance will be
paid in a timely fashion. In addition, we cannot assure you that we will be able
to receive funds from persons who have committed to provide us with additional
equity (see "Risk Factors - Holders of the call obligations may not honour their
funding obligations"). If these funds are unavailable, we cannot assure you that
alternative financing would 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 other oil sands and other industrial projects and
expansions 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 would result in delays which, in turn, would likely result in
increased costs.
PRODUCTION FOLLOWING START-UP MAY NOT MEET THE PLANNED SCHEDULE OR BUDGET.
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 "Risk Factors - 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 operations, 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 operational and we have limited historical
operating results. Accordingly, you have no significant historical financial or
operating information upon which to base your evaluation of our performance. Our
financing plan is based upon certain assumptions and financial projections
regarding our share of revenues and of operating, maintenance and capital costs
of the Project.
- 11 -
OUR DEBT LEVELS COULD LIMIT OUR FUTURE FLEXIBILITY IN OBTAINING ADDITIONAL DEBT
FINANCING AND IN PURSUING BUSINESS OPPORTUNITIES.
As at December 31, 2002, we had approximately $915 million of debt
(including our obligations under the owners' hydrogen manufacturing unit 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.
In addition, our ability to make scheduled payments or to refinance our
debt obligations will depend upon our financial and operating performance,
which, in turn, will depend upon prevailing industry and general economic
conditions beyond our control.
We cannot assure you that our operating performance, cash flow and
capital resources will be sufficient to repay our debt in the future.
OUR FINANCING ARRANGEMENTS CONTAIN COVENANTS LIMITING OUR DISCRETION TO OPERATE
OUR BUSINESS.
Our financing arrangements contain provisions that limit our discretion
to operate our business. If we fail to comply with the restrictions set forth in
our current or future financing agreements, we will be in default and the
principal and accrued interest may become due and payable.
HOLDERS OF THE CALL OBLIGATIONS MAY NOT HONOUR THEIR FUNDING OBLIGATIONS.
To the extent that holders of our existing call obligations do not
honour their obligations, we may be unable to pay our share of the costs of the
Project without additional funding. In the event of default by a holder of our
existing call obligations, we will take steps to enforce the security posted by
such defaulting holders, if any, and pursue all other remedies to the full
extent permitted by law to enforce our rights, however, we cannot assure you
that we will be successful in realizing on all of our existing call obligations.
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. Our reserve
and resource data 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 pretax cash flows of the Project are based upon a number
of variable factors and assumptions, such as:
o historical production from similar properties which are owned
by other operators;
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 of the Project.
- 12 -
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.
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 an ordinary resolution of the executive committee
of the joint venture), 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.
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 of the executive
committee of the joint venture. In addition, if we do not participate in an
expansion on the remainder of Lease 13 or Leases 88 or 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 and 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 we have. 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 resources contained within Lease 13 and on
Shell's other Athabasca leases. If we were to participate in any expansion, we
will require additional financing in order to fund our share of costs associated
with an expansion. 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 would
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, financial condition or results of
operations.
THE MINE, EXTRACTION PLANT AND UPGRADER MAY NOT PERFORM AS PLANNED.
Many of the risks outlined above under "Risk Factors - 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 co-ordinated. We cannot assure you that each
component will operate as designed or expected or that the necessary levels of
integration and co-ordination 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
- 13 -
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 that 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 and commissioned, 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 and
commissioned, 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 system;
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 hydrogen
manufacturing unit and Dow Chemicals Canada Inc. ("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 hydrogen manufacturing unit is designed to produce approximately
75% of the upgrader's hydrogen requirements, with the remainder to be provided
by Dow. If the hydrogen manufacturing unit fails to perform as designed or Dow
fails to deliver pursuant to its contract, respectively, 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 Pipeline Ltd.
("Corridor") and Trans Mountain Pipeline Company Ltd., respectively. If the
Corridor pipeline system is unavailable for any reason, we will have to find
alternatives to the Corridor pipeline system 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
payments to them even if the Corridor pipeline system has diminished capacity or
is unavailable. If, due to Project delays, suspensions, shut-
- 14 -
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 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 the 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 Project is a joint venture among Shell, Chevron and us. 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 of the
executive committee of the joint venture may be passed without our consent and
we cannot assure you that such resolutions may not adversely affect us.
In addition, if our voting interest in any functional units falls below
15%, our consent will not be required for an extraordinary resolution of the
executive committee of the joint venture relating to that functional unit and
such resolutions may adversely effect 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 MAY NOT ALWAYS BE AVAILABLE.
The upgrader will require certain additional feedstocks to produce its
output. We have entered into contracts for less than 2,000 barrels per day of
required feedstocks. There can be no assurance that these additional feedstocks
of the desired quality will be available on a timely basis, at prices acceptable
to us, or at all. Unavailability of required feed stocks could have an adverse
effect on the rate and quality of upgrader output.
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 have initiated a hedging program to use financial
instruments and physical delivery contracts to hedge our exposure to these
risks. When 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 additional hedging activities in an effort
to mitigate the potential impact of declining oil prices. These activities may
consist of, but may not be 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
- 15 -
o entering into a contract to fix the differential between the
price for our outputs and either the West Texas Intermediate
or the Edmonton Par crude oil pricing benchmarks.
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 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.
SHELL MAY NOT FULFIL ITS OBLIGATIONS TO US UNDER OUR LONG-TERM SALES CONTRACT.
We expect to sell our share of vacuum gas oil 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 vacuum
gas oil produced by the Project after using its commercially reasonable efforts
to maintain such capacity, it will not be required to purchase our share of
vacuum gas oil until the refinery regains such capacity. Certain modifications
to the Scotford refinery are being undertaken to permit it to take the expected
vacuum gas oil output. If such modifications are not completed on a timely or
satisfactory basis, the Scotford refinery may not be able to process the vacuum
gas oil 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 vacuum gas oil, we cannot assure you that we
could sell our share of vacuum gas oil 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.
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 production 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. There is also a risk that the price per barrel from selling
two synthetic crude oil streams and vacuum gas oil could be significantly less
than the price per barrel from selling a single synthetic crude oil stream and
vacuum gas oil.
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
- 16 -
with established oil sands operators which have established operating histories
and greater financial and other resources than we do. 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.
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 present and future 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 by regulators 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.
Canada is a signatory to the United Nations Framework Convention on
Climate Change and has ratified the Kyoto Protocol established thereunder to set
legally binding targets to reduce nation-wide emissions of carbon dioxide,
methane, nitrous oxide and other so-called "greenhouse gases". The Project will
be a significant producer of some greenhouse gases covered by the treaty. The
Government of Canada has put forward a Climate Change Plan for Canada which
suggests further legislation will set greenhouse gases emission reduction
requirements for various industrial activities, including oil and gas
production. Future federal legislation, together with provincial emission
reduction requirements, such as those proposed in Alberta's Bill 32: Climate
Change and Emissions Management Act, may require the reduction of emissions
and/or emissions intensity from the Project. The direct or indirect costs of
these regulations may adversely affect 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 or other environmental requirements 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.
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 present and future
laws and regulations regarding the decommissioning and abandonment of the
Project and the 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 that we are
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. We may
also be required by future regulatory requirements to establish a fund or place
funds in trust with regulators for the decommissioning and abandonment of the
Project and the reclamation of its lands.
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 and the introduction of new 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.
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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.
Lease 13 is subject to the OIL SANDS TENURE REGULATION (Alberta) which
was introduced 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.
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, that the plaintiffs
have aboriginal title to large areas of lands surrounding Fort McMurray,
including the lands on which the Project and most of the other oil 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, including the
risk of catastrophic events such as fire, earthquake, storms or explosions. 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
casualty occurrences and disruptions. We cannot assure you that our insurance
will be sufficient to cover any such casualty occurrences or disruptions,
including with respect to the damage caused by the fire at the Muskeg River
mine. 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.
FLUCTUATIONS IN THE US AND CANADIAN DOLLAR EXCHANGE RATE MAY CAUSE OUR OPERATING
COSTS TO RISE.
Crude oil prices are generally based on a US dollar market price, while
our operating costs are primarily denominated in Canadian dollars. 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.
LEGAL MATTERS
Certain legal matters relating to this offering will be passed upon by
Macleod Dixon llp on behalf of Western and by Blake, Cassels & Graydon llp and
Burstall Winger llp on behalf of the Underwriters.
INTERESTS OF EXPERTS
As at the date hereof, the principals of each of NorWest Corporation
and Gilbert Laustsen Jung Associates Ltd., independent petroleum and mining
consultants to the Corporation, as respective groups, own beneficially, directly
or indirectly, less than 1% of the outstanding Common Shares.
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As at the date hereof, the partners and associates of each of Macleod
Dixon llp and Blake, Cassels & Graydon llp, as respective groups, own
beneficially, directly or indirectly, less than 1% of the outstanding Common
Shares. Mr. Charles W. Berard is a partner of Macleod Dixon llp and the
Corporate Secretary of Western.
PURCHASERS' STATUTORY RIGHTS
Securities legislation in certain of the provinces of Canada provides
purchasers with the right to withdraw from an agreement to purchase securities.
This right may be exercised within two business days after receipt or deemed
receipt of a prospectus and any amendment. In several of the provinces, the
securities legislation further provides a purchaser with remedies for rescission
or, in some jurisdictions, damages if the prospectus and any amendment contains
a misrepresentation or is not delivered to the purchaser, provided that the
remedies for rescission or damages are exercised by the purchaser within the
time limit prescribed by the securities legislation of the purchaser's province.
The purchaser should refer to any applicable provisions of the securities
legislation of the purchaser's province for the particulars of these rights or
consult with a legal adviser.
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CERTIFICATE OF THE CORPORATION
Dated: January 30, 2003
This short form prospectus, together with the documents incorporated
herein by reference, constitutes full, true and plain disclosure of all material
facts relating to the securities offered by this short form prospectus as
required by the securities laws of each of the provinces of Canada. For the
purpose of the Province of Quebec, this simplified prospectus, as supplemented
by the permanent information record, contains no misrepresentation that is
likely to affect the value or the market price of the securities to be
distributed.
(signed) Guy J. Turcotte (signed) David A. Dyck
President and Chief Executive Officer Vice-President, Finance and
Chief Financial Officer
On behalf of the Board of Directors
(signed) Brian F. MacNeill (signed) Robert G. Puchniak
Director Director
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CERTIFICATE OF THE UNDERWRITERS
Dated: January 30, 2003
To the best of our knowledge, information and belief, this short form
prospectus, together with the documents incorporated herein by reference,
constitutes full, true and plain disclosure of all material facts relating to
the securities offered by this short form prospectus as required by the
securities legislation of each of the provinces of Canada. For the purpose of
the Province of Quebec, to our knowledge, this simplified prospectus, as
supplemented by the permanent information record, contains no misrepresentation
that is likely to affect the value or the market price of the securities to be
distributed.
TD SECURITIES INC.
By: (signed) Robert J. Mason
BMO NESBITT BURNS INC. GRIFFITHS MCBURNEY & RAYMOND JAMES LTD. RBC DOMINION SECURITIES SCOTIA CAPITAL INC.
PARTNERS INC.
By: (signed) Philip D. By: (signed) Thomas A. By: (signed) Naveen By: (signed) Gordon M. By: (signed) Mark
Lunn Budd Dargan Ritchie Herman
CIBC WORLD MARKETS INC.
By: (signed) Brenda A. Mason
FIRSTENERGY CAPITAL CORP. PETERS & CO. LIMITED SALMAN PARTNERS INC. TRISTONE CAPITAL INC.
By: (signed) John S. Chambers By: (signed) Christopher S. By: (signed) Terrance K. By: (signed) Vincent Chahley
Potter Salman