EXHIBIT 2
---------
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, OR ANY STATE SECURITIES LAWS. ACCORDINGLY, EXCEPT AS PERMITTED
BY THE UNDERWRITING AGREEMENT AND PURSUANT TO AN EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE UNITED STATES SECURITIES ACT OF 1933 AND STATE SECURITIES
LAWS, THESE SECURITIES MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES AND
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. SEE "PLAN OF DISTRIBUTION".
NEW ISSUE JULY 20, 2005
SHORT FORM PROSPECTUS
[GRAPHIC OMITTED]
[LOGO -- HARVEST ENERGY TRUST]
$175,000,640
6,505,600 SUBSCRIPTION RECEIPTS,
EACH REPRESENTING THE RIGHT TO RECEIVE ONE TRUST UNIT
AND
$75,000,000
6.5% CONVERTIBLE EXTENDIBLE UNSECURED SUBORDINATED DEBENTURES
SUBSCRIPTION RECEIPTS
Harvest Energy Trust (the "TRUST") is hereby qualifying for distribution
6,505,600 subscription receipts ("SUBSCRIPTION RECEIPTS"), at a price of $26.90
each and each of which will entitle the holder thereof to receive, without
payment of additional consideration, one trust unit ("UNIT") of the Trust upon
closing of the acquisition (the "ACQUISITION") by the Trust of the New
Properties (as defined herein) from the Vendor (as defined herein) described in
more detail under "Recent Developments - The Acquisition". The proceeds from the
sale of the Subscription Receipts (the "ESCROWED FUNDS") will be held by Valiant
Trust Company, as escrow agent (the "ESCROW AGENT"), and invested in short-term
obligations of, or guaranteed by, the Government of Canada (and other approved
investments) pending completion of the Acquisition. Upon the Acquisition being
completed on or before September 30, 2005, the Escrowed Funds and the interest
thereon will be released to the Trust and the Units will be issued to the
holders of Subscription Receipts. The Trust will utilize the Escrowed Funds to
repay a portion of the bank debt incurred to pay the purchase price of the
Acquisition and for general trust purposes.
If the closing of the Acquisition does not take place by 5:00 p.m. (Calgary
time) on September 30, 2005, the Acquisition is terminated at any earlier time
or the Trust has advised the Underwriters (as defined herein) or announced to
the public that it does not intend to proceed with the Acquisition (in any case,
the "TERMINATION TIME"), holders of Subscription Receipts shall be entitled to
receive an amount equal to the full subscription price therefor and their PRO
RATA entitlements to interest on such amount. The Escrowed Funds will be applied
towards payment of such amount.
If the closing of the Acquisition takes place prior to the Termination Time and
holders of Subscription Receipts become entitled to receive Units, such holders
will be entitled to receive an amount per Subscription Receipt equal to the
amount per Unit of any cash distributions for which record dates have occurred
during the period from the date of closing of the offering to the date
immediately preceding the date the Units are issued pursuant to the Subscription
Receipts. Accordingly, if the Acquisition closes on or before August 2, 2005 as
currently contemplated, holders of Subscription Receipts will become holders of
Units before August 25, 2005 and will be entitled, provided they continue to be
the registered holder of the Units received pursuant to the Subscription
Receipts on August 25, 2005, to receive the monthly distribution expected to be
paid on September 15, 2005 to Unitholders of record on August 25, 2005. See
"Details of the Offerings".
ii
DEBENTURES
The Trust is also hereby qualifying for distribution 75,000 6.5% convertible
extendible unsecured subordinated debentures (the "DEBENTURES") of the Trust at
a price of $1,000 per Debenture. The Debentures have an initial maturity date of
September 30, 2005 (the "INITIAL MATURITY DATE"). If the closing of the
Acquisition takes place by the Termination Time, the maturity date will be
automatically extended from the Initial Maturity Date to December 31, 2010 (the
"FINAL MATURITY DATE"). If closing of the Acquisition does not take place by the
Termination Time, the Debentures will mature on the Initial Maturity Date. See
"Details of the Offerings".
The Debentures bear interest at an annual rate of 6.5% payable semi-annually on
June 30 and December 31 in each year commencing December 31, 2005. The
Debentures are redeemable by the Trust at a price of $1,050 per Debenture after
December 31, 2008, and on or before December 31, 2009 and at a price of $1,025
per Debenture after December 31, 2009 and before maturity on December 31, 2010
in each case, plus accrued and unpaid interest thereon, if any. See "Details of
the Offerings".
- --------------------------------------------------------------------------------
DEBENTURE CONVERSION PRIVILEGE
If the closing of the Acquisition takes place by the Termination Time, each
Debenture will be convertible into Units at the option of the holder at any time
prior to the close of business on the Final Maturity Date, as applicable, and
the Business Day immediately preceding the date specified by the Trust for
redemption of the Debentures, at a conversion price of $31.00 per Unit, subject
to adjustment in certain events. Holders converting their Debentures will
receive accrued and unpaid interest thereon.
- --------------------------------------------------------------------------------
In the opinion of Burnet, Duckworth & Palmer LLP, counsel to the Trust, and
Blake, Cassels & Graydon LLP, counsel to the Underwriters (as defined herein),
subject to the qualifications and assumptions discussed under the heading
"Canadian Federal Income Tax Considerations", the Subscription Receipts, the
Debentures and the Units issuable pursuant to the Subscription Receipts and on
conversion, redemption or maturity of the Debentures, on the date of closing
will 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
(except, in the case of the Debentures, a deferred profit sharing plan to which
the Trust has made a contribution) and registered education savings plans. See
"Eligibility for Investment".
The issued and outstanding Units are listed on the Toronto Stock Exchange (the
"TSX") under the symbol "HTE.UN". On July 6, 2005, the last trading day prior to
the public announcement of the offering, the closing price of the Units on the
TSX was $27.70. The TSX has conditionally approved the listing of the
Subscription Receipts, the Debentures and the Units issuable pursuant to the
Subscription Receipts and on the conversion of the Debentures on the TSX.
Listing is subject to the Trust fulfilling all of the listing requirements of
the TSX on or before October 10, 2005. The offering price of the Subscription
Receipts and Debentures was determined by negotiation between Harvest Operations
Corp. (the "CORPORATION") on behalf of the Trust, and National Bank Financial
Inc., on its own behalf and on behalf of TD Securities Inc., CIBC World Markets
Inc., Scotia Capital Inc., Canaccord Capital Corporation, GMP Securities Ltd.,
FirstEnergy Capital Corp., Tristone Capital Inc., Haywood Securities Inc. and
Raymond James Ltd. (collectively, the "UNDERWRITERS").
NET PROCEEDS
PRICE TO THE PUBLIC UNDERWRITERS' FEE (1) TO THE TRUST (2)
------------------- --------------------- ----------------
Per Subscription Receipt $26.90 $1.345 $25.555
Total $175,000,640 $8,750,032 $166,250,608
Per Debenture $1,000 $40 $960
Total $75,000,000 $3,000,000 $72,000,000
Total $250,000,640 $11,750,032 $238,250,608
NOTES:
(1) The Underwriters' fee with respect to the Subscription Receipts is
payable as to 50% upon the closing of the offering and 50% on the
release of the Escrowed Funds to the Trust. If the Acquisition is not
completed, the Underwriters' fee with respect to the Subscription
Receipts will be reduced to the amount payable upon closing of the
offering. The Underwriters' fee with respect to the Debentures is
payable in full upon the closing of the offering.
iii
(2) Excluding interest, if any, on the Escrowed Funds and before deducting
expenses of the offering estimated to be $300,000, which will be paid
from the general funds of the Trust.
The Underwriters, as principals, conditionally offer the Subscription Receipts
and the Debentures, subject to prior sale, if, as and when issued by the Trust
and delivered and accepted by the Underwriters in accordance with the conditions
contained in the Underwriting Agreement referred to under "Plan of Distribution"
and subject to approval of certain legal matters relating to the offering on
behalf of the Trust by Burnet, Duckworth & Palmer LLP and on behalf of the
Underwriters by Blake, Cassels & Graydon LLP. See "Plan of Distribution".
EACH OF NATIONAL BANK FINANCIAL INC. AND TD SECURITIES INC. IS, DIRECTLY OR
INDIRECTLY, A WHOLLY-OWNED SUBSIDIARY OF A CANADIAN CHARTERED BANK THAT IS A
LENDER TO THE CORPORATION AND TO WHICH THE CORPORATION IS CURRENTLY INDEBTED. IN
ADDITION, SCOTIA CAPITAL INC. IS, DIRECTLY OR INDIRECTLY, A WHOLLY-OWNED
SUBSIDIARY OF A CANADIAN CHARTERED BANK THAT INTENDS TO BECOME A LENDER TO THE
CORPORATION UPON CLOSING OF THE ACQUISITION. CONSEQUENTLY, THE TRUST MAY BE
CONSIDERED A "CONNECTED" ISSUER OF EACH OF THESE UNDERWRITERS WITHIN THE MEANING
OF APPLICABLE CANADIAN SECURITIES LEGISLATION. IN ADDITION, NATIONAL BANK
FINANCIAL INC. WAS RETAINED BY THE TRUST IN CONNECTION WITH THE ACQUISITION AND
WILL RECEIVE A FEE FROM THE TRUST ON COMPLETION OF THE ACQUISITION. SEE
"RELATIONSHIP AMONG THE TRUST, THE CORPORATION AND CERTAIN UNDERWRITERS".
THERE IS CURRENTLY NO MARKET THROUGH WHICH THE SUBSCRIPTION RECEIPTS OR
DEBENTURES MAY BE SOLD AND PURCHASERS MAY NOT BE ABLE TO RESELL SUBSCRIPTION
RECEIPTS OR DEBENTURES PURCHASED UNDER THIS SHORT FORM PROSPECTUS.
Subscriptions for Subscription Receipts and Debentures will be received subject
to rejection or allotment in whole or in part and the right is reserved to close
the subscription books at any time without notice. It is expected that closing
will occur on or about August 2, 2005 or such other date not later than August
25, 2005 as the Trust and the Underwriters may agree. The Subscription Receipts
will be represented by a global certificate issued in registered form to the
Canadian Depository for Securities Limited ("CDS") or its nominee under the
book-based system administered by CDS. Certificates for the aggregate principal
amount of the Debentures will be issued in registered form to CDS and will be
deposited with CDS on the date of closing. No certificates evidencing the
Subscription Receipts or Debentures will be issued to subscribers for
Subscription Receipts or Debentures, except in certain limited circumstances,
and registration will be made in the depositary service of CDS. Subscribers for
Subscription Receipts or Debentures will receive only a customer confirmation
from the Underwriter or other registered dealer who is a CDS participant and
from or through whom a beneficial interest in the Subscription Receipts or
Debentures is purchased. Subject to applicable laws, the Underwriters may, in
connection with the offering, effect transactions which stabilize or maintain
the market price of the Subscription Receipts, the Units or the Debentures at
levels other than those that might otherwise prevail on the open market. See
"Plan of Distribution".
THE INTEREST COVERAGE RATIO IN RESPECT OF THE DEBENTURES FOR THE YEAR ENDED
DECEMBER 31, 2004 AND THE TWELVE MONTH PERIOD ENDED MARCH 31, 2005, IS LESS THAN
1:1. INTEREST COVERAGE RATIOS BASED ON CASH FLOW (DEFINED AS FUNDS FLOW FROM
OPERATIONS BEFORE WORKING CAPITAL CHANGES AND SITE RESTORATION EXPENDITURES) FOR
THESE PERIODS EXCEED 1:1. SEE "INTEREST COVERAGE".
A return on an investment in the Trust is not comparable to the return on an
investment in a fixed-income security. The recovery of an initial investment in
the Trust is at risk, and the anticipated return on such investment is based on
many performance assumptions. Although the Trust intends to make distributions
of its available cash to Unitholders, these cash distributions may be reduced or
suspended. The actual amount distributed will depend on numerous factors
including: the financial performance of the Trust, debt obligations, working
capital requirements and future capital requirements. In addition, the market
value of the Units may decline if the Trust's cash distributions decline in the
future, and that decline may be material.
The after-tax return from an investment in Units to Unitholders subject to
Canadian income tax can be made up of both a return on and a return of capital.
That composition may change over time, thus affecting an investor's after-tax
return. Returns on capital are generally taxed as ordinary income in the hands
of a Unitholder. Returns of capital are generally tax-deferred (and reduce the
holder's cost base in the Units for tax purposes).
THE SUBSCRIPTION RECEIPTS, THE UNITS AND THE DEBENTURES ARE NOT "DEPOSITS"
WITHIN THE MEANING OF THE CANADA DEPOSIT INSURANCE CORPORATION ACT (CANADA) AND
ARE NOT INSURED UNDER THE PROVISIONS OF THAT ACT OR ANY OTHER LEGISLATION.
FURTHERMORE, THE TRUST IS NOT A TRUST COMPANY AND, ACCORDINGLY, IT IS NOT
REGISTERED UNDER ANY TRUST AND LOAN COMPANY LEGISLATION AS IT DOES NOT CARRY ON
OR INTEND TO CARRY ON THE BUSINESS OF A TRUST COMPANY.
iv
Dominion Bond Rating Service Limited ("DBRS") has assigned a stability rating of
STA-6 (high) to the Units but has placed such stability rating "Under Review"
with "negative implications" following the announcement by the Trust of the
Acquisition. Income funds rated as STA-6 are considered by DBRS to have very
weak distributions per unit in terms of stability and sustainability. STA-1 is
the highest DBRS rating available to units of income funds and STA-7 is the
lowest DBRS rating available to units of income funds. Each of the Canadian
energy trusts currently rated by DBRS fall within the range of STA-5 (high) to
STA-6 (middle). See "Stability Rating".
TABLE OF CONTENTS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND OTHER DISCLOSURE.........1
SELECTED ABBREVIATIONS AND DEFINITIONS.........................................3
DOCUMENTS INCORPORATED BY REFERENCE............................................7
HARVEST ENERGY TRUST...........................................................9
DESCRIPTION OF BUSINESS.......................................................10
RECENT DEVELOPMENTS...........................................................10
INFORMATION CONCERNING THE NEW PROPERTIES.....................................12
EFFECT OF THE ACQUISITION ON THE TRUST........................................22
DESCRIPTION OF UNITS..........................................................25
EXCHANGEABLE SHARES...........................................................26
INTEREST COVERAGE.............................................................26
CONSOLIDATED CAPITALIZATION OF THE TRUST......................................27
STABILITY RATING..............................................................28
PRICE RANGE AND TRADING VOLUME OF THE UNITS...................................28
RECORD OF CASH DISTRIBUTIONS..................................................29
USE OF PROCEEDS...............................................................30
DETAILS OF THE OFFERINGS......................................................30
PLAN OF DISTRIBUTION..........................................................37
RELATIONSHIP AMONG THE TRUST, THE CORPORATION AND CERTAIN UNDERWRITERS........38
INTEREST OF EXPERTS...........................................................38
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS....................................38
ELIGIBILITY FOR INVESTMENT....................................................45
RISK FACTORS..................................................................45
MATERIAL CONTRACTS............................................................48
PROMOTERS.....................................................................48
LEGAL PROCEEDINGS.............................................................48
AUDITORS, TRANSFER AGENT AND REGISTRAR........................................48
STATUTORY AND CONTRACTUAL RIGHTS OF RESCISSION AND STATUTORY
RIGHTS OF WITHDRAWAL.......................................................49
AUDITORS' CONSENT.............................................................50
AUDITORS' CONSENT.............................................................51
AUDITORS' CONSENT.............................................................52
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF THE TRUST.....................F-1
FINANCIAL STATEMENTS OF THE NEW PROPERTIES..................................F-11
CERTIFICATE OF THE TRUST.....................................................C-1
CERTIFICATE OF THE UNDERWRITERS..............................................C-2
1
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND OTHER DISCLOSURE
FORWARD-LOOKING STATEMENTS
Certain statements contained in this short form prospectus, and in certain
documents incorporated by reference into this short form prospectus, constitute
forward-looking statements. The use of any of the words "anticipate",
"continue", "estimate", "expect", "may", "will", "project", "should", "believe"
and similar expressions are intended to identify forward-looking statements.
These statements involve known and unknown risks, uncertainties and other
factors that may cause actual results or events to differ materially from those
anticipated in such forward-looking statements. The Trust and the Corporation
believe the expectations reflected in those forward-looking statements are
reasonable but no assurance can be given that these expectations will prove to
be correct and such forward-looking statements included in, or incorporated by
reference into, this short form prospectus should not be unduly relied upon.
These statements speak only as of the date of this short form prospectus or as
of the date specified in the documents incorporated by reference into this short
form prospectus, as the case may be.
In particular, this short form prospectus, and the documents incorporated by
reference, contain forward-looking statements pertaining to the following:
o expected financial performance in future periods;
o expected increases in revenue attributable to development and production
activities;
o estimated capital expenditures for fiscal 2005 and subsequent periods;
o competitive advantages and ability to compete successfully;
o intention to continue adding value through drilling and exploitation
activities;
o emphasis on having a low cost structure;
o intention to retain a portion of our cash flows after distributions to
repay indebtedness and invest in further development of our properties;
o reserve estimates and estimates of the present value of future net cash
flows from such reserves;
o methods of raising capital for acquisition and for exploitation and
development of reserves;
o factors upon which the Corporation, on behalf of the Trust, or the Trust
will decide whether or not to undertake a development or exploitation
project;
o plans to make acquisitions and expected synergies from acquisitions made;
o expectations regarding the development and production potential of the
Properties; and
o treatment under government regulatory regimes.
With respect to forward looking statements contained in this prospectus and the
documents incorporated by reference, assumptions have been made regarding, among
other things:
o future oil and natural gas prices and differentials between light, medium
and heavy oil prices;
o the cost of expanding the Trust's property holdings;
o the ability of the Trust to obtain equipment in a timely manner to carry
out development activities;
o the ability of the Trust to market oil and natural gas successfully to
current and new customers;
o the impact of increasing competition;
o the ability of the Trust to obtain financing on acceptable terms; and
o the ability of the Trust to add production and reserves through
development and exploitation activities.
The actual results could differ materially from those anticipated in these
forward-looking statements as a result of the risk factors set forth below and
elsewhere in this short form prospectus:
o the volatility of oil and natural gas prices, including the differential
between the price of light, medium and heavy oil;
o the uncertainty of estimates of oil and natural gas reserves;
o the impact of competition;
o difficulties encountered during the drilling for and production of oil
and natural gas;
o difficulties encountered in delivering oil and natural gas to commercial
markets;
o foreign currency fluctuations;
o the uncertainty of the ability of the Trust to attract capital;
2
o changes in, or the introduction of new, government regulations relating
to the oil and natural gas business;
o costs associated with developing and producing oil and natural gas;
o compliance with environmental regulations;
o liabilities stemming from accidental damage to the environment;
o loss of the services of any of the Trust's senior management or
directors; and
o adverse changes in the economy generally.
These factors should not be construed as exhaustive. Neither the Trust nor the
Corporation undertakes any obligation to publicly update or revise any
forward-looking statements, except as required under applicable securities
legislation.
CERTAIN FINANCIAL REPORTING MEASURES
The Trust uses certain financial reporting measures that are commonly used as
benchmarks within the oil and natural gas industry. These measures include:
"Funds Flow from Operations before Changes in Working Capital and Settlement of
Asset Retirement Obligations", "Net Debt", "Payout Ratio", "Net Operating
Income" and "Operating Netbacks". These measures are not defined under Canadian
generally accepted accounting principles ("GAAP") and should not be considered
in isolation or as an alternative to conventional GAAP measures. Certain of
these measures are not necessarily comparable to a similarly titled measure of
another company or trust. When these measures are used, they have been footnoted
and the footnote to the applicable measure notes that the measure is "non-GAAP"
and contains a description of how to reconcile the measure to the applicable
financial statements. These measures should be given careful consideration by
the reader.
Specifically, management uses Funds Flow from Operations before Changes in
Working Capital and Settlement of Asset Retirement Obligations as cash flow from
operating activities before changes in non cash working capital and settlement
of asset retirement obligations. Under GAAP, this measure is defined as funds
flow, and the accepted definition of cash flow from operating activities is net
of changes in non cash working capital and settlement of asset retirement
obligations. Cash Flow from Operations as presented is not intended to represent
an alternative to net earnings, cash flow from operating activities or other
measures of financial performance calculated in accordance with Canadian GAAP.
Management believes its usage of Funds Flow from Operations before Changes in
Working Capital and Settlement of Asset Retirement Obligations is a better
indicator of our ability to generate cash flows from future operations. Net
Debt, Payout Ratio, Net Operating Income, and Operating Netbacks are additional
non GAAP measures used extensively in the Canadian energy trust sector for
comparative purposes. Net Debt includes total debt outstanding, any working
capital deficit (excluding the accounting liability for unit appreciation rights
and the current portions of commodity derivative contracts), the face value of
convertible debentures outstanding, and equity bridge notes. (Note: For
accounting purposes in 2004, convertible debentures and equity bridge notes were
classified as equity and not debt. In 2005, accounting rule changes have
resulted in those amounts being presented as debt.) Payout Ratio is the ratio of
distributions to total Funds Flow from Operations before Changes in Working
Capital and Settlement of Asset Retirement Obligations. Net Operating Income is
net revenue (gross revenue less royalties) less operating expenses. Operating
Netbacks are always reported on a per BOE basis, and include gross revenue,
royalties and operating expenses, net of any realized gains and losses on
related derivative contracts.
3
SELECTED ABBREVIATIONS AND DEFINITIONS
In this short form prospectus, the following terms shall have the meanings set
forth below, unless otherwise indicated:
"ABCA" means the Business Corporations Act (Alberta), R.S.A. 2000, c. B-9, as
amended, including the regulations promulgated thereunder;
"ACQUISITION" means the acquisition of the New Properties and related assets
from the Vendor by HBT1 and HBT2 pursuant to the Purchase Agreement;
"ADMINISTRATION AGREEMENT" means the agreement dated September 27, 2002 between
the Trustee and the Corporation pursuant to which the Corporation provides
certain administrative and advisory services in connection with the Trust;
"AIF" means the Renewal Annual Information Form of the Trust dated March 30,
2005;
"BOARD OF DIRECTORS" means the board of directors of the Corporation;
"BRP" means Breeze Resources Partnership, a general partnership formed under the
laws of Alberta;
"BUSINESS DAY" means a day, other than a Saturday, Sunday or statutory holiday,
when banks are generally open in the City of Calgary, in the Province of
Alberta, for the transaction of banking business;
"CDS" means The Canadian Depositary for Securities Limited;
"CORPORATION" means Harvest Operations Corp., a corporation amalgamated under
the ABCA on June 30, 2004;
"CURRENT CREDIT FACILITIES" means the Corporation's existing credit facility
provided by the Current Lenders;
"CURRENT LENDERS" means a syndicate of lenders to the Corporation pursuant to
the Current Credit Facilities;
"DBRS" means Dominion Bond Rating Service;
"DEBENTURE TRUSTEE" means Valiant Trust Company or its successor as trustee
under the Indenture;
"DEBENTURES" means the 6.5% convertible extendible unsecured subordinated
debentures of the Trust offered hereby;
"DEFERRED PURCHASE PRICE OBLIGATION" or "DPPO" means, collectively, the ongoing
obligation of the Trust pursuant to the NPI Agreements to pay to the
Corporation, HST and HBT1, to the extent of the Trust's available funds, an
amount equal to 99% of the cost of, including any amount borrowed to acquire,
any Canadian resource property acquired by the Corporation, HST or HBT1, and the
cost of, including any amount borrowed to fund, certain designated capital
expenditures in relation to the Properties;
"DIRECT ROYALTIES" means royalty interests in petroleum and natural gas rights
acquired by the Trust from time to time pursuant to a Direct Royalties Sale
Agreement;
"DIRECT ROYALTIES SALE AGREEMENT" means any purchase and sale agreement between
the Trust and an Operating Subsidiary providing for the purchase by the Trust
from such Operating Subsidiary of Direct Royalties;
"ENCANA PROPERTIES" means the Properties acquired from EnCana Corporation in
September 2004;
"EQUITY BRIDGE NOTES" means, collectively, the equity bridge notes dated July
28, 2003 and amended September 29, 2003, June 29, 2004, July 7, 2004 and July 9,
2004 between the Trust and each of Caribou Capital Corp. and M. Bruce Chernoff
which provided for advances of up to $50 million to the Trust, which were used
to assist in the payout of the Corporation's then existing credit facility and
the payment of the Deferred Purchase Price Obligation as a result of an
acquisition by the Trust;
"ESCROW AGENT" means Valiant Trust Company or its successor as escrow agent
under the Subscription Receipt Agreement;
4
"ESCROWED FUNDS" means the proceeds from the sale of the Subscription Receipts;
"EXCHANGEABLE SHARES" means the non-voting exchangeable shares of the
Corporation;
"FINAL MATURITY DATE" means December 31, 2010;
"HBT1" means Harvest Breeze Trust No. 1, a trust established pursuant to the
laws of Alberta, wholly owned by HST;
"HBT2" means Harvest Breeze Trust No. 2, a trust established pursuant to the
laws of Alberta, wholly owned by the Trust;
"HST" means Harvest Sask Energy Trust, a trust established pursuant to the laws
of the Province of Alberta, wholly-owned by the Trust;
"INDENTURE" means, collectively, the indenture dated January 29, 2004, a
supplemental indenture thereto dated August 10, 2004 and a second supplemental
indenture thereto to be dated the date of closing of the offering between the
Trust, the Corporation and the Debenture Trustee governing the terms of the
Debentures;
"INITIAL MATURITY DATE" means September 30, 2005;
"NEW CREDIT FACILITIES" shall have the meaning ascribed thereto under Note (1)
to the table contained in "Consolidated Capitalization of the Trust";
"NEW PARTNERSHIP" means Nexen Canada No. 1 Partnership, a general partnership
formed under the laws of Alberta;
"NEW PROPERTIES" means crude oil and natural gas properties held in the New
Partnership and related assets to be indirectly acquired by HBT1 and HBT2
pursuant to the Purchase Agreement, described in more detail under the heading
"Information Concerning the New Properties";
"NOTES" means, collectively, the promissory notes issuable by the Corporation in
series pursuant to a note indenture to be redeemed in consideration for a
portion of the NPI, having a fair market value equal to such principal amount,
and being subject to the following terms and conditions:
(a) being unsecured and bearing interest at 6% per annum payable
monthly in arrears on the 20th day of the next following
month;
(b) being subordinate to all senior indebtedness which includes
all indebtedness for borrowed money or owing in respect of
property purchases on any default in payment of any such
senior indebtedness, and to all trade debt of the Corporation
or any subsidiary of the Corporation or the Trust on any
creditor proceedings such as bankruptcy, liquidation or
insolvency;
(c) being subject to earlier prepayment, being due and payable on
the 15th anniversary of the date of issuance; and
(d) being subject to such other standard terms and conditions as
would be included in a note indenture for promissory notes of
this kind, as may be approved by the Board of Directors;
and includes the 12% unsecured, subordinated promissory notes dated September 2,
2004 issued by each of HBT1 and HBT2 in the principal amounts of $246,824,811
and $2,493,180, respectively;
"NPI" means, collectively, the net profit interest owing by the Operating
Subsidiaries to the Trust pursuant to the NPI Agreements;
"NPI AGREEMENTS" means, collectively, the amended and restated net profit
interest agreement effective as of July 10, 2002 between the Corporation and the
Trust, the royalty agreement dated effective January 17, 2003 between Westcastle
Energy Inc. and BNY Trust Company of Canada, the net profit interest agreement
effective as of July 10, 2002 between HST and the Trust
5
and the net profit interest agreement between HBT1 and the Trust to be entered
into effective January 1, 2005, and "NPI AGREEMENT" means any one of these
agreements, as applicable;
"OPERATING SUBSIDIARIES" means, collectively, the Corporation, HST, Red Earth
Energy Inc., Red Earth Partnership, BRP, HBT1 and HBT2, each a direct or
indirect wholly-owned subsidiary of the Trust, and "OPERATING SUBSIDIARY" means
any of the Corporation, HST, Red Earth Energy Inc., Red Earth Partnership, BRP,
HBT1 and HBT2, as applicable;
"PROPERTIES" means the working, royalty or other interests of the Operating
Subsidiaries in any petroleum and natural gas rights, tangibles and
miscellaneous interests, including properties which may be acquired by any of
the Operating Subsidiaries from time to time;
"PURCHASE AGREEMENT" means the partnership purchase and sale agreement dated
June 23, 2005 among HBT1, HBT2 and the Vendor;
"REDEMPTION NOTES" means promissory notes issued by the Trust in accordance with
the terms and conditions of the Trust Indenture;
"SENIOR INDEBTEDNESS" means all indebtedness, liabilities and obligations of the
Trust (whether outstanding as at the date of the Indenture or thereafter
created, incurred or assumed or for which it is liable in respect of any
guarantee, indemnity, suretyship or joint and several liability) (i) in respect
of borrowed money of itself or any subsidiary; (ii) in connection with the
acquisition of any business, properties or asset by itself or any subsidiary;
(iii) in connection with risk mitigation instruments or agreements of itself or
a subsidiary; (iv) to any trade creditors of itself or any subsidiary; or (v)
renewals, extensions, restructurings, refinancings and refunding of any of the
foregoing; unless the instrument creating or evidencing any of the foregoing
provides that such indebtedness, liabilities or obligations are to rank PARI
PASSU, or subordinate, in right of payment to the Debentures;
"SENIOR NOTES" means the 7?% senior notes of the Corporation due October 15,
2011 unconditionally guaranteed by the Trust;
"SENIOR NOTEHOLDERS" means the holders from time to time of Senior Notes;
"SPECIAL VOTING UNITS" means the special voting units authorized pursuant to the
Trust Indenture, one of which is outstanding and held by the Voting Trustee
pursuant to the Voting Trust Agreement;
"SPROULE" means Sproule Associates Limited, independent oil and natural gas
reservoir engineers of Calgary, Alberta;
"SPROULE REPORT" means the report of Sproule dated March 31, 2005 evaluating the
crude oil, NGL and natural gas reserves attributable to the New Properties as at
March 31, 2005;
"STORM" means Storm Energy Ltd.;
"STORM ARRANGEMENT" means the Plan of Arrangement of Storm pursuant to which the
Corporation acquired all of the issued and outstanding shares of Storm;
"STORM PROPERTIES" means the properties which were acquired pursuant to the
Storm Arrangement;
"SUBSCRIPTION RECEIPT AGREEMENT" means the agreement to be dated the date of
closing of the offering between the Trust, the Underwriters and the Escrow Agent
governing the terms of the Subscription Receipts;
"SUBSCRIPTION RECEIPTS" means the subscription receipts of the Trust offered
hereby;
"TAX ACT" means the Income Tax Act (Canada), R.S.C. 1985, c. 1 (5th Supp), as
amended, including the regulations promulgated thereunder;
"TERMINATION TIME" means the earliest of: (i) 5:00 p.m. (Calgary time) on
September 30, 2005; (ii) the date upon which the Trust delivers to the
Underwriters a notice that the Acquisition has been terminated or that the Trust
does not intend to proceed with the Acquisition; or (iii) the date that the
Trust announces to the public that it does not intend to proceed with the
Acquisition;
6
"TRUST" means Harvest Energy Trust, a trust formed pursuant to the laws of
Alberta, and, unless the context otherwise requires, includes its subsidiaries,
trusts and partnerships;
"TRUST INDENTURE" means the amended and restated trust indenture dated January
1, 2004 between the Trustee and the Corporation as such indenture may be further
amended by supplemental indentures from time to time or as may be amended and
restated from time to time;
"TRUSTEE" means Valiant Trust Company, or its successor as trustee of the Trust;
"TSX" means the Toronto Stock Exchange;
"UNDERWRITERS" means, collectively, National Bank Financial Inc., TD Securities
Inc., CIBC World Markets Inc., Scotia Capital Inc., Canaccord Capital
Corporation, GMP Securities Ltd., FirstEnergy Capital Corp., Tristone Capital
Inc., Haywood Securities Inc. and Raymond James Ltd.;
"UNDERWRITING AGREEMENT" means the agreement dated as of July 11, 2005 among the
Trust, the Corporation and the Underwriters in respect of this offering;
"UNITED STATES" or "U.S." means the United States of America;
"UNITHOLDERS" means the holders from time to time of the Units; "UNITS" means
trust units of the Trust;
"VENDOR" means Nexen Inc. and certain corporations and partnerships controlled
by it;
"VOTING TRUST AGREEMENT" means the voting and exchange trust agreement dated
June 30, 2004 among the Trust, the Corporation, Harvest Exchangeco Ltd. and
Valiant Trust Company, as trustee, and the Trust;
"VOTING TRUSTEE" means Valiant Trust Company, in its capacity as trustee under
the Voting Trust Agreement;
"8% DEBENTURES" means the 8% convertible unsecured subordinated debentures of
the Trust issued on August 10, 2004; and
"9% DEBENTURES" means the 9% convertible unsecured subordinated debentures of
the Trust issued on January 29, 2004.
"BBL" means one barrel "BOE/D" means barrels of oil equivalent
"BBLS" means barrels per day
"BBLS/D" means barrels per day "MBBLS" means one thousand barrels
"BCF" means one billion cubic feet
"BOE" means barrels of oil equivalent. "MBOE" means one thousand barrels of
A barrel of oil equivalent is oil equivalent
determined by converting a volume of "MCF" means one thousand cubic feet
natural gas to barrels using the ratio
of six mcf to one barrel. Boes may be "MMCF" means one million cubic feet
misleading, per day particularly if
used in isolation. The boe conversion "MMCF/D" means one million cubic feet
ratio of 6 mcf:1 bbl is based on an
energy equivalency method primarily "NGL" means natural gas liquids
applicable at the burner tip and does
not represent a value equivalency at "$M" or "M$" means thousands of dollars
the wellhead.
Words importing the singular number only include the plural, and vice versa, and
words importing any gender include all genders.
All dollar amounts set forth in this short form prospectus are in Canadian
dollars, except where otherwise indicated.
7
DOCUMENTS INCORPORATED BY REFERENCE
Information has been incorporated by reference in this short form prospectus
from documents filed with securities commissions or similar authorities in
Canada. Copies of the documents incorporated herein by reference may be obtained
on request without charge from the Corporate Secretary of the Corporation at
2100, 330 - 5th Avenue S.W., Calgary, Alberta, T2P 0L4 (toll free number 1 (866)
666 1178). In addition, copies of the documents incorporated herein by reference
may be obtained from the securities commissions or similar authorities in Canada
through the SEDAR website at WWW.SEDAR.COM. The Trust's SEDAR profile number is
18577 and the Corporation's SEDAR profile number is 21007.
The following documents, filed with the various provincial securities
commissions or similar regulatory authorities in Canada, are specifically
incorporated into and form an integral part of this short form prospectus:
(a) the Renewal Annual Information Form of the Trust dated March
30, 2005;
(b) the audited comparative consolidated financial statements and
notes thereto of the Trust as at and for the years ended
December 31, 2004 and 2003, together with the report of the
auditors thereon;
(c) management's discussion and analysis of the financial
condition and operating results of the Trust for the year
ended December 31, 2004;
(d) the unaudited comparative interim consolidated financial
statements of the Trust as at and for the three months ended
March 31, 2005;
(e) management's discussion and analysis of the financial
condition and operating results of the Trust for the three
months ended March 31, 2005;
(f) the Information Circular - Proxy Statement of the Trust dated
March 16, 2005, relating to the annual and special meeting of
Unitholders held on May 4, 2005 (excluding those portions
thereof which appear under the headings "Performance Graph"
and "Statement of Corporate Governance Practices");
(g) the audited consolidated financial statements of Storm as at
December 31, 2003 and 2002 and for the year ended December 31,
2003 and the period from commencement of operations on August
23, 2002 to December 31, 2002, together with the notes thereto
and the report of the auditors thereon, which financial
statements are included in the short form prospectus of the
Corporation dated January 10, 2005 in respect of an exchange
offer for the then outstanding 7?% senior notes of the
Corporation due 2011 unconditionally guaranteed by the Trust
(the "EXCHANGE OFFER PROSPECTUS");
(h) the unaudited comparative interim consolidated financial
statements of Storm for the three months ended March 31, 2004,
which financial statements are attached to the Exchange Offer
Prospectus;
(i) the audited schedule of revenues, royalties and expenses of
the EnCana Properties (referred to therein as the "New
Properties") for the two years ended December 31, 2003 and
2002, which financial statements are attached to the Exchange
Offer Prospectus;
(j) the unaudited schedule of revenues, royalties and expenses of
the EnCana Properties (referred to therein as the "New
Properties") for the six months ended June 30, 2004 and 2003,
which financial statements are attached to the Exchange Offer
Prospectus;
(k) the Material Change Report of the Trust dated March 16, 2005,
relating to the fourth quarter of 2004 and full year 2004
financial and operating results; and
(l) the Material Change Report of the Trust dated June 29, 2005,
relating to, among other things, the Acquisition.
Any material change report and any document of the type referred to in the
preceding paragraph (excluding confidential material change reports) filed by
the Trust with the securities commissions or similar authorities in the
provinces of Canada subsequent
8
to the date of this short form prospectus and prior to the termination of this
distribution shall be deemed to be incorporated by reference into this short
form prospectus.
ANY STATEMENT CONTAINED IN A DOCUMENT INCORPORATED OR DEEMED TO BE INCORPORATED
BY REFERENCE HEREIN SHALL BE DEEMED TO BE MODIFIED OR SUPERSEDED FOR PURPOSES OF
THIS SHORT FORM PROSPECTUS TO THE EXTENT THAT A STATEMENT CONTAINED HEREIN OR IN
ANY OTHER SUBSEQUENTLY FILED DOCUMENT WHICH ALSO IS, OR IS DEEMED TO BE,
INCORPORATED BY REFERENCE HEREIN MODIFIES OR SUPERSEDES SUCH STATEMENT. THE
MODIFYING OR SUPERSEDING STATEMENT NEED NOT STATE THAT IT HAS MODIFIED OR
SUPERSEDED A PRIOR STATEMENT OR INCLUDE ANY OTHER INFORMATION SET FORTH IN THE
DOCUMENT THAT IT MODIFIES OR SUPERSEDES. THE MAKING OF A MODIFYING OR
SUPERSEDING STATEMENT SHALL NOT BE DEEMED AN ADMISSION FOR ANY PURPOSES THAT THE
MODIFIED OR SUPERSEDED STATEMENT, WHEN MADE, CONSTITUTED A MISREPRESENTATION, AN
UNTRUE STATEMENT OF A MATERIAL FACT OR AN OMISSION TO STATE A MATERIAL FACT THAT
IS REQUIRED TO BE STATED OR THAT IS NECESSARY TO MAKE A STATEMENT NOT MISLEADING
IN LIGHT OF THE CIRCUMSTANCES IN WHICH IT WAS MADE. ANY STATEMENT SO MODIFIED OR
SUPERSEDED SHALL NOT BE DEEMED, EXCEPT AS SO MODIFIED OR SUPERSEDED, TO
CONSTITUTE A PART OF THIS SHORT FORM PROSPECTUS.
9
HARVEST ENERGY TRUST
GENERAL
The Trust is an open-ended, unincorporated investment trust established under
the laws of the Province of Alberta and created pursuant to the Trust Indenture.
The head and principal office of the Trust is located at Suite 2100, 330 5th
Avenue S.W., Calgary, Alberta T2P 0L4. The Trust was formed on July 10, 2002.
All oil and natural gas operations are conducted through the Corporation and the
Trust is managed solely by the Corporation pursuant to the Trust Indenture and
the Administration Agreement.
INTER-CORPORATE RELATIONSHIPS
The following table provides the name, the percentage of voting securities owned
(directly or indirectly) by the Trust, the nature of the entity and the
jurisdiction of incorporation, continuance or formation of the Trust's material
subsidiaries, partnerships and trusts either, direct or indirect, as at the date
hereof.
PERCENTAGE OF VOTING
SECURITIES (DIRECTLY OR JURISDICTION OF
INDIRECTLY) NATURE OF ENTITY INCORPORATION/FORMATION
----------- ---------------- -----------------------
Harvest Operations Corp. 100% Corporation Alberta
Harvest Sask Energy Trust 100% Trust Alberta
Harvest Breeze Trust No. 1 100% Trust Alberta
Harvest Breeze Trust No. 2 100% Trust Alberta
Breeze Resources Partnership 100% General Partnership Alberta
ORGANIZATION STRUCTURE OF THE TRUST
The following diagram describes, as at the date of this prospectus, the
inter-corporate relationships among the Trust and its material subsidiaries,
trusts and partnerships.
[GRAPHIC OMITTED]
[ORGANIZATIONAL CHART]
NOTES:
(1) All operations and management of the Trust and the Operating Subsidiaries
are conducted through Harvest Operations Corp. The Trust holds all of the
voting securities of Harvest Operations Corp. and of Harvest Sask Energy
Trust.
(2) The Trust receives regular monthly payments in accordance with the NPI
Agreements as well as distributions and interest payments from Harvest Sask
Energy Trust, Harvest Breeze Trust No. 1 and Harvest Breeze Trust No. 2.
(3) Harvest Breeze Trust No. 1 and Harvest Breeze Trust No. 2 have also issued
priority units to Harvest Operations Corp.
10
DESCRIPTION OF BUSINESS
HARVEST ENERGY TRUST
The principal undertaking of the Trust is to issue Units and to acquire and hold
net profits interests, royalties, notes and other interests. The direct and
indirect subsidiaries, trusts and partnerships of the Trust carry on the
business of acquiring, developing, exploiting and holding interests in petroleum
and natural gas properties and assets related thereto. Cash flow from the
Properties is flowed from the Operating Subsidiaries to the Trust by way of
payments by the Corporation, HST and HBT1 under the NPI Agreements, interest
payments and principal repayments by the Corporation, HBT1 and HBT2 on the Notes
and payments by HST and HBT2 of distributions. The Trust also receives cash flow
from Direct Royalties.
The Trustee may declare payable to the Unitholders all or any part of the income
of the Trust. It is currently anticipated that the only income to be received by
the Trust will be from payments received from the Corporation, HST and HBT1
pursuant to the NPI Agreements, interest and principal repayments received from
the Corporation, HBT1 and HBT2 on the principal amount of the Notes and
distributions received from HST and HBT2 and payments received on Direct
Royalties. The Trust makes monthly cash distributions to Unitholders of the
income earned under the NPI Agreements, after expenses, if any, interest income
earned from the Notes, cash distributions from HST and HBT2, principal
repayments on intercorporate debt, dividends from subsidiaries and payments
received on Direct Royalties.
Cash distributions are made on or about the 15th day of each month to
Unitholders of record on or about the last Business Day of the immediately
preceding month. See "Description of Trust Units - Cash Distributions".
HARVEST OPERATIONS CORP.
The Corporation is a corporation amalgamated and subsisting pursuant to the
ABCA. The Corporation is actively engaged in the business of oil and natural gas
exploitation, development, acquisition and production in Canada.
The Trust is the sole common shareholder of the Corporation. Certain former
shareholders of Storm own Exchangeable Shares in accordance with the elections
made by such holders under the Storm Arrangement.
The head and principal office of the Corporation is located at 2100, 330 - 5th
Avenue S.W., Calgary, Alberta, T2P 0L4, and its registered office is located at
Suite 1400, 350 - 7th Avenue S.W., Calgary, Alberta, T2P 3N9.
RECENT DEVELOPMENTS
EXCHANGE OFFER
On January 10, 2005, the Corporation completed an exchange offer whereby the
outstanding US $250 million of 7 7/8% senior notes due October 15, 2011, which
were issued on October 14, 2004, were exchanged for US $250 million of Senior
Notes of the Corporation.
AMENDMENT OF TRUST INDENTURE
At the annual and special meeting of unitholders of the Trust held May 4, 2005
(the "2005 UNITHOLDER MEETING"), Unitholders approved by way of a special
resolution certain amendments to the Trust Indenture. Such amendments included:
(i) amendments largely technical in nature to allow for direct borrowing by the
Trust and all of the Trust's affiliated entities rather than just through the
Corporation; (ii) expanding the purposes of the Trust to allow the Trust to
directly undertake such other businesses and activities as are approved by the
Board of Directors; (iii) allowing further amendments to the Trust Indenture
without Unitholder approval in certain additional circumstances, namely,
allowing the Trustee to approve any amendment that is, in the opinion of the
Trustee, necessary or desirable as a result of changes or proposed changes in
taxation laws or the administration or enforcement thereof or changes in laws by
which the Trust is governed in order to provide Unitholders access to the
benefits of any new legislation that would limit their liability; (iv) to allow
the Trust to sell, transfer or assign any or all of its assets without
Unitholder approval provided that such sale, transfer or assignment is to
entities that are directly or indirectly wholly owned by the Trust; (v) to
clarify the limitations on delegation to the Corporation or any other person to
clearly provide that the Trustee may not delegate any authority with respect to
the Trustee's duties as transfer agent, termination of the Trust Indenture, the
waiver of
11
performance of any material provisions of the Trust Indenture or the
distribution of distributable income; and (vi) a number of immaterial amendments
to eliminate references to certain agreements that are no longer in force, to
update the references to agreements which have been amended, to add references
to certain of the trust controlled entities and to make other technical
amendments. The amendments to the Trust Indenture which were approved at the
2005 Unitholder Meeting are intended to be implemented shortly and such
amendments will be effective May 4, 2005.
AMENDMENT OF TRUST UNIT RIGHTS INCENTIVE PLAN
At the 2005 Unitholder Meeting, Unitholders also approved the following
amendments to the Trust Unit Rights Incentive Plan of the Trust: (i) deleting
references to a maximum number of Unit rights issuable or reserved pursuant to
the Plan, and provide that the maximum number of Trust Units issuable pursuant
to the Plan shall be a "rolling" maximum equal to 7% of the outstanding Trust
Units and the number of Trust Units issuable upon the exchange of any
outstanding Exchangeable Shares; (ii) amending the definition of "market price",
being the lowest price at which an exercise price of a right may be issued, to
be in accordance with the revised TSX rules; (iii) the number of Units issued
under the Plan and all other Unit compensation arrangements to insiders may not
exceed 10% of the outstanding Trust Units and the number of Units issuable upon
the exchange of any outstanding Exchangeable Shares and the number of Trust
Units issuable under the Plan and all other Unit compensation arrangements to
insiders, within a one year period, may not exceed 10% of the outstanding Units
and the number of Units issuable upon the exchange of any outstanding
Exchangeable Shares; and (iv) amending the Plan to allow for the Board of
Directors, by resolution, to amend the Plan without Unitholder approval;
however, the Board of Directors will not be entitled to amend a Unit right grant
for a Unit held by an insider to lower the exercise price or to extend the
expiry date.
THE ACQUISITION
On June 23, 2005, HBT1 and HBT2 entered into the Purchase Agreement with the
Vendor providing for the acquisition of the New Partnership and related assets
for the purchase price of approximately $240 million in cash, after interim
period adjustments. The acquisition of the New Partnership and related assets
will have an effective date of March 31, 2005 and is expected to close on August
2, 2005. The New Properties are crude oil and natural gas properties contained
within the New Partnership as well as pipeline and other related assets acquired
from the Vendor. Pursuant to the Purchase Agreement, HBT1 and HBT2 paid a
deposit of $26 million to the Vendor, which amount will be credited to the
purchase price in the event that the Acquisition is completed. See "Risk Factors
- - Possible Failure to Complete the Acquisition".
The New Properties consist primarily of medium gravity crude oil assets located
in Northeastern British Columbia which had average gross production for the
three months ended March 31, 2005 of approximately 5,267 boe/d. The New
Properties also include undeveloped lands located in British Columbia and
Alberta. See "Information Concerning the New Properties".
Less than 10% of the New Properties to be acquired pursuant to the Acquisition
are subject to "rights of first refusal" in favour of third parties triggered as
a result of the Acquisition. To the extent such rights are exercised, the
affected assets will be acquired by HBT1 and HBT2 pursuant to the Acquisition
and then immediately resold to the applicable third parties.
Conditions to closing of the Acquisition include standard conditions for
transactions of this nature including the following: the continued accuracy of
representations and warranties in the Purchase Agreement (except for
inaccuracies that, in the aggregate, are not material); title and environmental
due diligence satisfactory to the Trust; receipt of regulatory approvals; no
material adverse change to the New Properties; and release and discharge of
adverse security interests.
In connection with the Acquisition, the Vendor has agreed to indemnify HBT1 and
HBT2 in respect of certain liabilities in respect of the specific properties and
assets being acquired (to a maximum amount not exceeding the purchase price)
that may arise as a result of a breach of a representation, warranty, covenant
or agreement made by the Vendor. However, claims in respect of a breach of a
representation or warranty by the Vendor must exceed a minimum threshold of
1.25% of the purchase price before such claim or claims can be made against the
Vendor's indemnification obligations. HBT1 and HBT2 have also agreed to
indemnity the Vendor in respect of liabilities accruing from and after the April
1, 2005 adjustment date relating to the New Properties being acquired and all
past, present and future environmental liabilities.
12
INCREASE IN MONTHLY CASH DISTRIBUTIONS
On June 24, 2005 the Trust announced that the Board of Directors of the
Corporation approved an increase in monthly distributions to $0.25 per Unit
commencing with the distribution payable on August 15, 2005 to Unitholders of
record as at July 29, 2005.
POTENTIAL ACQUISITIONS
The Trust continues to evaluate potential acquisitions of all types of petroleum
and natural gas and other energy-related assets as part of its ongoing
acquisition program. The Trust is normally in the process of evaluating several
potential acquisitions at any one time which individually or together could be
material. As of the date hereof, other than as otherwise disclosed herein, the
Trust has not reached agreement on the price or terms of any potential material
acquisitions. The Trust cannot predict whether any current or future
opportunities will result in one or more acquisitions for the Trust.
INFORMATION CONCERNING THE NEW PROPERTIES
Certain information in this short form prospectus in respect of the New
Properties has been taken from information provided by the Vendor.
DRILLING HISTORY
The following table sets forth the number of gross and net wells that were
drilled on the New Properties during the periods indicated:
THREE MONTHS ENDED
MARCH 31, 2005 YEAR ENDED DECEMBER 31, 2004
-------------------- ----------------------------
GROSS(1) NET(2) GROSS(1) NET(2)
-------- ------ -------- ------
Oil Wells 6 6 16 16
Gas Wells - - 1 1
Other 7 7 13 13
Dry and Abandoned(3) - - - -
-------- ------ -------- ------
Total 13 13 30 30
======== ====== ======== ======
NOTES:
(1) "GROSS" wells are defined as the total number of wells in which the Trust
will acquire an interest pursuant to the Acquisition.
(2) "NET" wells are defined as the aggregate of the numbers obtained by
multiplying each gross well by the percentage working interest therein to
be acquired by the Trust.
(3) "DRY" refers to a well that is not productive. A productive well is a well
which is capable of producing hydrocarbons in quantities considered by the
operator to be sufficient to justify the costs required to complete, equip
and produce the well.
OIL AND GAS WELLS
The following table sets forth the number and status of wells in which the Trust
will acquire a material royalty or working interest effective March 31, 2005,
which were producing or which the Vendor considered to be capable of production
which will be acquired pursuant to the Acquisition:
PRODUCING SHUT-IN(1)
------------------------------------- -------------------------------------
CRUDE OIL NATURAL GAS CRUDE OIL NATURAL GAS
----------------- ----------------- ----------------- -----------------
GROSS(2) NET(3) GROSS(2) NET(3) GROSS(2) NET(3) GROSS(2) NET(3)
British Columbia 91 91 1 1 30 30 2 2
NOTES:
(1) "SHUT IN" wells means wells which have encountered and are capable of
producing crude oil or natural gas but which are not producing due to lack
of available transportation facilities, available markets or other reasons.
(2) "GROSS" wells are defined as the total number of wells in which the Trust
will acquire an interest pursuant to the Acquisition.
13
(3) "NET" wells are defined as the aggregate of the numbers obtained by
multiplying each gross well by the percentage working interest therein
acquired by Harvest.
PRINCIPAL PRODUCING PROPERTIES
The following is a description of the principal properties comprising the New
Properties on production or under development as at March 31, 2005. The term
"gross", when used to describe the share of production of the New Properties,
means the aggregate of the Vendor's working interest share to be acquired by
Harvest before deduction of royalties owned by others. Reserve amounts are
stated, before deduction of royalties, at March 31, 2005, based on forecast cost
and price assumptions as evaluated in the Sproule Report. See "Statement of
Reserves Data and Other Oil and Gas Information for the New Properties". The
following information in respect of gross and net acres of land is as at March
31, 2005 and information in respect of production is net for the New Properties
and is as at March 31, 2005 except where otherwise indicated. The reserves set
forth in the principal property description below are as presented in the
Sproule Report. Such additional reserves are set forth on a consolidated basis
in the oil and natural gas reserve tables set forth under the heading "Statement
of Reserves Data and Other Oil and Gas Information for the New Properties". All
of the New Properties proved producing reserves were on production on March 31,
2005.
HAY RIVER
The Trust will acquire an average 97% working interest in approximately 77,500
gross acres (approximately 75,300 net acres) of land, of which approximately
54,300 net acres are undeveloped and are strategically positioned for further
oil and natural gas exploitation and development. The average gross production
of the New Properties for the three months ended March 31, 2005 was
approximately 5,267 bbls/d of medium crude oil. The Trust will operate 100% of
and will acquire a working interest of 100% in the production from these
properties.
The Sproule Report assigned proven reserves of 15,335.0 mbbls of medium crude
oil and 6,512.0 mmcf of natural gas to these properties. In addition, probable
reserves of 3,182.6 mbbls of medium crude oil and 1,054.0 mmcf of natural gas
have been assigned to these properties.
UNDEVELOPED LANDS
The following table summarizes the undeveloped land holdings, in acres, as at
March 31, 2005 associated with the New Properties.
GROSS(1) NET(2) AVERAGE WORKING INTEREST
-------- ------ ------------------------
Alberta 32,100 31,800 99%
British Columbia 22,500 22,500 100%
------ ------ ----
Total 54,600 54,300 99%
====== ====== ====
NOTES:
(1) "GROSS" refers to the total acres in which the Trust will acquire an
interest pursuant to the Acquisition.
(2) "NET" refers to the total acres in which the Trust will acquire an
interest, multiplied by the percentage working interest therein to be
acquired.
STATEMENT OF RESERVES DATA AND OTHER OIL AND GAS INFORMATION FOR THE NEW
PROPERTIES
The statement of reserves data and other oil and gas information set forth below
(the "STATEMENT") is dated March 31, 2005 in respect of the reserves data for
the New Properties. The effective date of the Statement is March 31, 2005 and
the preparation date of the Statement is March 31, 2005.
DISCLOSURE OF RESERVES DATA
The reserves data set forth below (the "RESERVES DATA") for the New Properties
are based upon an evaluation by Sproule with an effective date of March 31, 2005
as contained in the Sproule Report. The Reserves Data summarizes the crude oil,
liquids and natural gas reserves of the New Properties and the net present
values of future net revenue for these reserves using constant prices and costs
and forecast prices and costs. The Reserves Data conforms with the requirements
of National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities
("NI 51-101") except that no estimate of future abandonment liabilities has
14
been made in determining the future cash flows. Additional information not
required by NI 51-101 has been presented to provide continuity and additional
information which we believe is important to the readers of this information.
Sproule was engaged to provide an evaluation of proved and proved plus probable
reserves and also proved plus probable plus possible reserves.
All of the New Properties' reserves are in located Canada and, specifically, in
the province of British Columbia.
DISCLOSURE PROVIDED HEREIN IN RESPECT OF BOES MAY BE MISLEADING, PARTICULARLY IF
USED IN ISOLATION. A BOE CONVERSION RATIO OF 6 MCF:1 BBL IS BASED ON AN ENERGY
EQUIVALENCY CONVERSION METHOD PRIMARILY APPLICABLE AT THE BURNER TIP AND DOES
NOT REPRESENT A VALUE EQUIVALENCY AT THE WELLHEAD.
IT SHOULD NOT BE ASSUMED THAT THE ESTIMATES OF FUTURE NET REVENUES PRESENTED IN
THE TABLES BELOW REPRESENT THE FAIR MARKET VALUE OF THE RESERVES. THERE IS NO
ASSURANCE THAT THE CONSTANT PRICES AND COSTS ASSUMPTIONS AND FORECAST PRICES AND
COSTS ASSUMPTIONS WILL BE ATTAINED AND VARIANCES COULD BE MATERIAL.
RESERVES DATA (CONSTANT PRICES AND COSTS)
SUMMARY OF OIL AND GAS RESERVES
AND NET PRESENT VALUES OF FUTURE NET REVENUE
AS OF MARCH 31, 2005
CONSTANT PRICES AND COSTS
RESERVES CATEGORY SOLUTION GAS MEDIUM OIL(1)
- ----------------- ------------ -------------
GROSS NET GROSS NET
(mmcf) (mmcf) (mbbl) (mbbl)
------ ------ -------- --------
Proved Producing 6,512 5,461 12,993.8 11,227.3
Proved Non-Producing -- -- -- --
------- ------- --------- ---------
Total Proved Developed 6,512 5,461 12,993.8 11,227.3
Proved Undeveloped -- -- 2,441.8 2,022.4
------- ------- --------- ---------
Total Proved 6,512 5,461 15,435.6 13,249.7
Probable 1,144 959 3,667.9 3,077.3
------- ------- --------- ---------
Total Proved + Probable 7,656 6,420 19,103.5 16,327.0
====== ====== ======== ========
NOTE:
(1) The crude oil for this property has an average API of 24(degree) (medium
grade); however, it benefits frOM A heavy oil royalty regime and therefore
would be classified as heavy oil according to NI 51-101.
15
NET PRESENT VALUES OF FUTURE NET REVENUE
BEFORE INCOME TAXES DISCOUNTED AT
(%/YEAR)
0 5 10 15 20
RESERVES CATEGORY (M$) (M$) (M$) (M$) (M$)
- ----------------- ------- ------- ------- ------- -------
Proved Producing 491,731 363,150 290,954 245,426 214,110
Proved Non-Producing -- -- -- -- --
------- ------- ------- ------- -------
Total Proved Developed 491,731 363,150 290,954 245,426 214,110
Proved Undeveloped 71,016 53,239 40,773 31,729 24,975
------- ------- ------- ------- -------
Total Proved 562,747 416,389 331,727 277,155 239,085
Probable 127,337 75,256 50,414 36,406 27,544
------- ------- ------- ------- -------
Total Proved + Probable 690,084 491,645 382,141 313,561 266,629
======= ======= ======= ======= =======
TOTAL FUTURE NET REVENUE
(UNDISCOUNTED)
AS OF MARCH 31, 2005
CONSTANT PRICES AND COSTS
FUTURE NET
REVENUE
OPERATING WELL ABANDONMENT BEFORE
REVENUE ROYALTIES COSTS DEVELOPMENT COSTS COSTS INCOME TAXES
RESERVES CATEGORY (M$) (M$) (M$) (M$) (M$) (M$)
- ----------------- --------- ------- ------- ------ ----- -------
Proved Reserves 1,014,005 141,093 252,194 57,971 -- 562,747
Proved + Probable Reserves 1,250,966 178,544 296,879 85,459 -- 690,084
FUTURE NET REVENUE
BY PRODUCTION GROUP
AS OF MARCH 31, 2005
CONSTANT PRICES AND COSTS
FUTURE NET REVENUE BEFORE
INCOME TAXES (DISCOUNTED AT
10%/YEAR)
RESERVES CATEGORY PRODUCTION GROUP (M$)
----------------- ---------------- ----------
Proved Reserves Medium Crude Oil (including solution gas and other by-products) 331,727
Proved Plus Probable Reserves Medium Crude Oil (including solution gas and other by-products) 382,141
16
RESERVES DATA (FORECAST PRICES AND COSTS)
SUMMARY OF OIL AND GAS RESERVES
AND NET PRESENT VALUES OF FUTURE NET REVENUE
AS OF MARCH 31, 2005
FORECAST PRICES AND COSTS
RESERVES CATEGORY SOLUTION GAS MEDIUM OIL(1)
----------------- ------------ -------------
GROSS NET GROSS NET
(mmcf) (mmcf) (mbbl) (mbbl)
------ ------ -------- --------
Proved Producing 6,512 5,464 12,893.2 11,353.5
Proved Non-Producing -- -- -- --
------ ------ -------- --------
Total Proved Developed 6,512 5,464 12,893.2 11,353.5
Proved Undeveloped -- -- 2,441.8 2,081.6
------ ------ -------- --------
Total Proved 6,512 5,464 15,335.0 13,435.1
Probable 1,054 882 3,182.6 2,707.7
------ ------ -------- --------
Total Proved + Probable 7,566 6,346 18,517.6 16,142.8
====== ====== ======== ========
NOTE:
(1) The crude oil for this property has an average API of 24(degree) (medium
grade); however, it benefits from a heavy oil royalty regime and therefore
would be classified as heavy oil according to NI 51-101.
NET PRESENT VALUES OF FUTURE NET REVENUE
BEFORE INCOME TAXES DISCOUNTED AT
(%/YEAR)
0 5 10 15 20
RESERVES CATEGORY (M$) (M$) (M$) (M$) (M$)
- ----------------- ------- ------- ------- ------- -------
Proved Producing 186,249 153,444 133,562 119,917 109,722
Proved Non-Producing -- -- -- -- --
------- ------- ------- ------- -------
Total Proved Developed 186,249 153,444 133,562 119,917 109,722
Proved Undeveloped 18,503 12,089 7,497 4,122 1,586
------- ------- ------- ------- -------
Total Proved 204,752 165,533 141,059 124,039 111,308
Probable 50,721 29,484 18,554 12,159 8,057
------- ------- ------- ------- -------
Total Proved + Probable 255,473 195,017 159,613 136,198 119,365
======= ======= ======= ======= =======
17
TOTAL FUTURE NET REVENUE
(UNDISCOUNTED)
AS OF MARCH 31, 2005
FORECAST PRICES AND COSTS
FUTURE NET
REVENUE
OPERATING WELL ABANDONMENT BEFORE
REVENUE ROYALTIES COSTS DEVELOPMENT COSTS COSTS INCOME TAXES
RESERVES CATEGORY (M$) (M$) (M$) (M$) (M$) (M$)
- ----------------- ------- ------ ------- ------ ----- -------
Proved Reserves 648,566 80,341 298,757 64,716 -- 204,752
Proved + Probable Reserves 781,380 99,388 337,056 89,463 -- 255,473
FUTURE NET REVENUE
BY PRODUCTION GROUP
AS OF MARCH 31, 2005
FORECAST PRICES AND COSTS
FUTURE NET REVENUE BEFORE
INCOME TAXES (DISCOUNTED AT
10%/YEAR)
RESERVES CATEGORY PRODUCTION GROUP (M$)
- ----------------- ---------------- ----
Proved Reserves Medium Crude Oil (including solution gas and other by-products) 141,059
Proved + Probable Reserves Medium Crude Oil (including solution gas and other by-products) 159,613
DEFINITIONS AND OTHER NOTES
In the tables set forth above and elsewhere in this short form prospectus except
where indicated otherwise the following definitions and other notes are
applicable:
(1) "GROSS" means:
(a) in relation to the interest in production and reserves of the
New Properties, its "gross reserves", which is the interest to
be acquired by the Trust (operating and non-operating) before
deduction of royalties and without including any royalty
interest of the New Properties;
(b) in relation to wells, the total number of wells in which the
Trust will acquire an interest; and
(c) in relation to properties, the total area of properties in
which the Trust will acquire an interest.
(2) "NET" means:
(a) in relation to the interest in production and reserves of the
New Properties, its "net reserves", which is the interest to
be acquired by the Trust (operating and non-operating) after
deduction of royalties obligations, plus the royalty interest
in production or reserves.
(b) in relation to wells, the number of wells obtained by
aggregating the working interest in each of its gross wells;
and
(c) in relation to interest in the New Properties, the total area
in which the Trust will acquire an interest multiplied by the
working interest to be acquired.
18
(3) "EXPLORATION WELL" means a well that is not a development well, a
service well or a stratigraphic test well.
(4) "DEVELOPMENT COSTS" means costs incurred to obtain access to reserves
and to provide facilities for extracting, treating, gathering and
storing the oil and gas from reserves. More specifically, development
costs, including applicable operating costs of support equipment and
facilities and other costs of development activities, are costs
incurred to:
(a) gain access to and prepare well locations for drilling,
including surveying well locations for the purpose of
determining specific development drilling sites, clearing
ground draining, road building, and relocating public roads,
gas lines and power lines, pumping equipment and wellhead
assembly;
(b) drill and equip development wells, development type
stratigraphic test wells and service wells, including the
costs of platforms and of well equipment such as casing,
tubing, pumping equipment and wellhead assembly;
(c) acquire, construct and install production facilities such as
flow lines, separators, treaters, heaters, manifolds,
measuring devices and production storage tanks, natural gas
cycling and processing plants, and central utility and waste
disposal systems; and
(d) provide improved recovery systems.
(5) "DEVELOPMENT WELL" means a well drilled inside the established limits
of an oil and gas reservoir, or in close proximity to the edge of the
reservoir, to the depth of a stratigraphic horizon known to be
productive.
(6) "EXPLORATION COSTS" means costs incurred in identifying areas that may
warrant examination and in examining specific areas that are considered
to have prospects that may contain oil and gas reserves, including
costs of drilling exploratory wells and exploratory type stratigraphic
test wells. Exploration costs may be incurred both before acquiring the
related property and after acquiring the property. Exploration costs,
which include applicable operating costs of support equipment and
facilities and other costs of exploration activities, are:
(a) costs of topographical, geochemical, geological and
geophysical studies, rights of access to properties to conduct
those studies, and salaries and other expenses of geologists,
geophysical crews and others conducting those studies;
(b) costs of carrying and retaining unproved properties, such as
delay rentals, taxes (other than income and capital taxes) on
properties, legal costs for title defence, and the maintenance
of land and lease records;
(c) dry hole contributions and bottom hole contributions;
(d) costs of drilling and equipping exploratory wells; and
(e) costs of drilling exploratory type stratigraphic test wells.
(7) "SERVICE WELL" means a well drilled or completed for the purpose of
supporting production in an existing field. Wells in this class are
drilled for the following specific purposes: gas injection (natural
gas, propane, butane or flue gas), water injection, steam injection,
air injection, salt water disposal, water supply for injection,
observation or injection for combustion.
(8) Definitions used for reserve categories are as follows:
The following definitions apply to both estimates of individual
reserves entities and the aggregate of reserves for multiple entities.
RESERVE CATEGORIES
Reserves are estimated remaining quantities of oil and natural gas and
related substances anticipated to be recoverable from known
accumulations, from a given date forward, based on
(a) analysis of drilling, geological, geophysical and engineering
data;
(b) the use of established technology; and
(c) specified economic conditions (see the discussion of "Economic
Assumptions" below).
19
Reserves are classified according to the degree of certainty associated
with the estimates.
(a) Proved reserves are those reserves that can be estimated with
a high degree of certainty to be recoverable. It is likely
that the actual remaining quantities recovered will exceed the
estimated proved reserves.
(b) Probable reserves are those additional reserves that are less
certain to be recovered than proved reserves. It is equally
likely that the actual remaining quantities recovered will be
greater or less than the sum of the estimated proved plus
probable reserves.
"Economic Assumptions" will be the prices and costs used in the
estimate, namely:
(a) constant prices and costs as at the preparation date of the
evaluation (March 31, 2005); and
(b) forecast prices and costs.
DEVELOPMENT AND PRODUCTION STATUS
Each of the reserve categories (proved and probable) may be divided
into developed and undeveloped categories:
(a) Developed reserves are those reserves that are expected to be
recovered from existing wells and installed facilities or, if
facilities have not been installed, that would involve a low
expenditure (for example, when compared to the cost of
drilling a well) to put the reserves on production. The
developed category may be subdivided into producing and
non-producing.
(b) Developed producing reserves are those reserves that are
expected to be recovered from completion intervals open at the
time of the estimate. These reserves may be currently
producing or, if shut-in, they must have previously been on
production, and the date of resumption of production must be
known with reasonable certainty.
(c) Developed non-producing reserves are those reserves that
either have not been on production, or have previously been on
production, but are shut-in, and the date of resumption of
production is unknown.
(d) Undeveloped reserves are those reserves expected to be
recovered from known accumulations where a significant
expenditure (for example, when compared to the cost of
drilling a well) is required to render them capable of
production. They must fully meet the requirements of the
reserves classification (proved, probable) to which they are
assigned.
In multi-well pools it may be appropriate to allocate total pool
reserves between the developed and undeveloped categories or to
subdivide the developed reserves for the pool between developed
producing and developed non-producing. This allocation should be based
on the estimator's assessment as to the reserves that will be recovered
from specific wells, facilities and completion intervals in the pool
and their respective development and production status.
LEVELS OF CERTAINTY FOR REPORTED RESERVES
The qualitative certainty levels referred to in the definitions above
are applicable to individual reserve entities (which refers to the
lowest level at which reserves calculations are performed) and to
reported reserves (which refers to the highest level sum of individual
entity estimates for which reserves are presented). Reported reserves
should target the following levels of certainty under a specific set of
economic conditions:
(a) at least a 90 percent probability the estimated proved
reserves will be recovered; and
(b) at least a 50 percent probability that the sum of the
estimated proved plus probable reserves will be recovered.
A qualitative measure of the certainty levels pertaining to estimates
prepared for the various reserves categories is desirable to provide a
clearer understanding of the associated risks and uncertainties.
However, the majority of reserves estimates will be prepared using
deterministic methods that do not provide a mathematically derived
quantitative measure of probability. In principle, there should be no
difference between estimates prepared using probabilistic or
deterministic methods.
(9) Forecast prices and costs
Future prices and costs that are:
20
(a) generally acceptable as being a reasonable outlook of the
future; and
(b) if and only to the extent that, there are fixed or presently
determinable future prices or costs to which the working
interest owner is legally bound by a contractual or other
obligation to supply a physical product, including those for
an extension period of a contract that is likely to be
extended, those prices or costs rather than the prices and
costs referred to in paragraph (a).
The forecast summary table under "Pricing Assumptions" identifies
benchmark reference pricing that apply to the New Properties.
(10) Constant prices and costs
Prices and costs used in an estimate that are:
(a) the Corporation's prices and costs as at the effective date of
the estimation, held constant throughout the estimated lives
of the properties to which the estimate applies; and
(b) if, and only to the extent that, there are fixed or presently
determinable future prices or costs to which the working
interest owner is legally bound by a contractual or other
obligation to supply a physical product, including those for
an extension period of a contract that is likely to be
extended, those prices or costs rather than the prices and
costs referred to in paragraph (a).
(c) For the purposes of paragraph (a), the Corporation's prices
are the posted prices for oil and the spot price for gas,
after historical adjustments for transportation, gravity and
other factors.
(11) Estimated future abandonment and reclamation costs related to a
property have not been taken into account by Sproule in determining
reserves that should be attributed to a property and in determining the
aggregate future net revenue therefrom. A reasonable estimate of future
well abandonment costs was not deducted.
(12) Numbers may not add due to rounding.
(13) Both the constant and forecast price and cost assumptions assumed the
continuance of current laws and regulations.
(14) The extended character of all factual data supplied to Sproule were
accepted by Sproule as represented. No field inspection was conducted.
(15) The estimates of future net revenue presented in the tables above do
not represent fair market value.
PRICING ASSUMPTIONS
The following sets out the benchmark reference prices, as at March 31, 2005,
reflected in the Reserves Data. These forecast price assumptions were provided
by the Vendor. The constant prices as of March 31, 2005 were supplied by
Sproule.
SUMMARY OF PRICING ASSUMPTIONS
AS OF MARCH 31, 2005
CONSTANT PRICES AND COSTS
OIL
----------------------------------
WTI CUSHING EDMONTON PAR PRICE NATURAL GAS
OKLAHOMA 40(DEGREE) API AECO GAS PRICE EXCHANGE RATE(1)
YEAR ($US/BBL) ($CDN/BBL) ($CDN/MCF) ($US/$CDN)
- ---- --------- ---------- ---------- ----------
March 31, 2005 and thereafter 55.41 67.38 7.56 0.827
NOTE:
(1) The exchange rate used to generate the benchmark reference prices in this
table.
21
SUMMARY OF PRICING AND INFLATION RATE ASSUMPTIONS
AS OF MARCH 31, 2005
FORECAST PRICES AND COSTS
OIL
----------------------------------------
WTI CUSHING EDMONTON PAR PRICE NATURAL GAS INFLATION EXCHANGE
OKLAHOMA 40(DEGREE) API AECO GAS PRICE RATES(1) RATE(2)
YEAR ($US/BBL) ($CDN/BBL) ($CDN/GJ) %/YEAR ($US/$CDN)
- ---- --------- ---------- --------- ------ ----------
Forecast
2005 43.07 50.969 6.712 2.15 0.825
2006 40.48 47.838 6.580 2.25 0.825
2007 37.37 44.016 6.373 2.25 0.825
2008 34.23 40.196 6.018 2.25 0.825
2009 33.17 38.898 5.781 1.75 0.825
2010 33.31 39.030 5.768 1.75 0.825
2011 33.90 39.715 5.924 1.75 0.825
2012 34.50 40.456 6.027 1.75 0.825
Thereafter Escalated at 2%/year Escalated at 2%/year Escalated at 2%/year 0.75 0.825
NOTES:
(1) Inflation rates for forecasting prices and costs.
(2) Exchange rates used to generate the benchmark reference prices in this
table.
Weighted average historical prices realized in respect of the New Properties for
the year ended December 31, 2004 were $46.33/bbl for medium oil. No natural gas
was sold during this period.
ADDITIONAL INFORMATION RELATING TO RESERVES DATA
The recovery of the Proven Undeveloped and Probable reserves of the New
Properties will occur primarily through development drilling, drilling injection
wells and improved waterflood recovery. The recovery of these reserves will be
dependent on these future wells exhibiting similar performance characteristics
to the existing wells drilled into the pool.
FUTURE DEVELOPMENT COSTS
The following table sets forth development costs deducted in the estimation of
the future net revenue in respect of the New Properties attributable to the
reserve categories noted below. All amounts are stated in thousands of dollars.
FORECAST PRICES AND COSTS CONSTANT PRICES AND COSTS
-------------------------------------------------- -------------------------------------------------
PROVED PLUS PROBABLE PROVED PLUS PROBABLE
YEAR PROVED RESERVES RESERVES PROVED RESERVES RESERVES
---- --------------- -------- --------------- --------
0% 10% 0% 10% 0% 10% 0% 10%
-- --- -- --- -- --- -- ---
2005 812 809 812 809 812 809 812 809
2006 25,282 23,317 39,472 36,405 24,750 22,860 38,641 35,691
2007 8,737 7,308 17,667 14,777 8,365 7,024 16,915 14,203
Thereafter 29,885 9,353 31,512 1,039 24,044 7,698 29,091 7,886
------ ----- ------ ----- ------ ----- ------ -----
Total 64,716 40,787 89,463 53,030 57,971 38,391 85,459 58,589
====== ====== ====== ====== ====== ====== ====== ======
These future development costs will be financed with undrawn capacity under the
New Credit Facilities. See Note (1) to the table under "Consolidated
Capitalization of the Trust".
CAPITAL EXPENDITURES
The following tables summarizes capital expenditures made by the Vendor on
acquisitions, development and exploration drilling and production facilities and
other equipment in respect of the New Properties for the periods indicated.
22
THREE MONTHS ENDED MARCH 31 YEAR ENDED DECEMBER 31(1)
2005 (1) 2004 2003
--------------------------- ----------- -----------
(unaudited) (unaudited) (unaudited)
($000's) ($000's) ($000's)
Property acquisitions (2) -- -- --
Development expenditures(3) 15,433 34,457 51,784
Production equipment (4) -- -- --
Exploration expenditures (5) 39 359 375
------ ------ ------
TOTAL 15,472 34,816 52,159
====== ====== ======
NOTES:
(1) Based on information provided to the Corporation by the Vendor.
(2) Property acquisitions include production lease/royalty purchases and
property exchanges of lease and royalty interests.
(3) Development expenditures include development drilling and miscellaneous
intangible expenditures. (4) Production equipment includes production
and facility equipment and miscellaneous tangible assets. (5)
Exploration expenditures include exploration drilling, geological and
geophysical costs and miscellaneous
intangible expenditures.
PRODUCTION HISTORY AND PRICES RECEIVED
The following table sets forth certain information in respect of production,
product prices received, royalties, production expenses and netbacks received by
the Vendor in respect of the New Properties for the period indicated.
OIL PRODUCTION (1) OIL PRICE RECEIVED(2) ROYALTY EXPENSE PRODUCTION EXPENSES(3) NETBACK RECEIVED
(BBLS/D) ($/BBL) ($/BBL) ($/BBL) ($/BBL)
-------- ------- ------- ------- -------
2005
First Quarter 5,267 53.57 12.55 13.53 27.49
2004
First Quarter 5,791 39.14 9.09 10.00 20.04
Second Quarter 7,508 44.96 11.28 5.53 28.15
Third Quarter 5,998 50.08 12.37 4.42 33.29
Fourth Quarter 5,551 51.30 12.54 4.56 34.20
2003
First Quarter 4,705 48.08 12.48 12.24 23.36
Second Quarter 9,812 31.14 7.69 1.53 21.92
Third Quarter 7,152 37.13 8.93 3.25 24.95
Fourth Quarter 4,475 51.14 11.70 4.89 34.55
NOTES:
(1) Before deduction of royalties.
(2) Product prices are net of costs to transport the product to market.
(3) This figure includes all field operating expenses.
EFFECT OF THE ACQUISITION ON THE TRUST
The following table sets out certain operational information for the Trust and
the New Properties and certain pro forma combined operational information after
giving effect to the Acquisition.
23
SELECTED PRO FORMA COMBINED OPERATIONAL INFORMATION
TRUST NEW PROPERTIES PRO FORMA COMBINED
----- -------------- ------------------
AVERAGE DAILY PRODUCTION (1)
(before royalties, for the 3 months ended March 31, 2005)
Crude oil and NGL (bbls/d) 30,867 5,267 36,134
Natural gas (mcf/d) 27,114 -- 27,114
Oil equivalent (boe/d) 35,386 5,267 40,653
AVERAGE DAILY PRODUCTION (1)
(before royalties, for the year ended December 31, 2004)
Crude oil and NGL (bbls/d) 21,201 6,210 27,411
Natural gas (mcf/d) 10,903 -- 10,903
Oil equivalent (boe/d) 23,019 6,210 29,229
PROVED RESERVES (2)(3)
(before royalties)
Crude oil and NGL (mbbls) 64,432.8 15,435.6 79,868.4
Natural gas (mmcf) 64,497.9 6,512.0 71,009.9
Oil equivalent (mboe) 75,182.5 16,520.9 91,703.4
PROVED PLUS PROBABLE RESERVES (2)(3)
(before royalties)
Crude oil and NGL (mbbls) 88,098.2 19,103.5 107,201.7
Natural gas (mmcf) 83,010.2 7,656.0 90,666.2
Oil equivalent (mboe) 101,933.2 20,379.5 122,312.7
NOTES:
(1) Average daily production for the Trust for the year ended December 31,
2004 includes production from the Storm acquisition as well as the
acquisition of the EnCana Properties from the date of closing of the
acquisitions.
(2) New Properties reserve information is as at March 31, 2005, based on
the Sproule Report and constant price and cost assumptions.
(3) The Trust reserve information is as of December 31, 2004, based on the
Trust's reserve report and constant price and cost assumptions.
SELECTED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
Certain selected pro forma consolidated financial information is set forth in
the following tables. SUCH INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF THE TRUST AFTER GIVING
EFFECT TO THE ACQUISITION AS AT AND FOR THE THREE MONTHS ENDED MARCH 31, 2005
AND THE YEAR ENDED DECEMBER 31, 2004 INCLUDED IN THIS SHORT FORM PROSPECTUS.
The pro forma adjustments are based upon the assumptions described in the notes
to the unaudited pro forma consolidated financial statements. The pro forma
consolidated financial statements are presented for illustrative purposes only
and are not necessarily indicative of the operating or financial results that
would have occurred had the Acquisition actually occurred at the times
contemplated by the notes to the unaudited pro forma consolidated financial
statements or of the results expected in future periods.
The information presented below and in the unaudited pro forma consolidated
financial statements of the Trust assumes completion of the Acquisition and the
issuance of 6,505,600 Subscription Receipts and $75,000,000 principal amount of
Debentures pursuant to the offering.
24
AS AT AND FOR THE THREE MONTHS ENDED MARCH 31, 2005
---------------------------------------------------
PRO FORMA
TRUST (4) NEW PROPERTIES(7) CONSOLIDATED (8)
--------- ----------------- ----------------
(stated in thousands of dollars, except unit amounts)
Revenue - net (1) 109,931 19,446 129,377
Net income (loss) (43,070) 3,553 (38,094)
Funds flow from operations before changes in working capital 52,687 9,883 64,268
and settlement of asset retirement obligations (2)
Total Assets 1,079,269 244,100 1,326,519
Net debt (including working capital) (3) 421,612 241,500 497,307
Equity 344,793 -- 513,748
Units outstanding (000s) (9) 43,115 N/A 49,621
FOR THE YEAR ENDED DECEMBER 31, 2004
--------------------------------------------------------------------------------
STORM ENCANA PRO FORMA
TRUST(4) PROPERTIES(5) PROPERTIES(6) NEW PROPERTIES(7) CONSOLIDATED(8)
-------- ------------- ------------- ----------------- ---------------
(stated in thousands of dollars)
Revenue - net (1) 277,095 28,504 164,397 79,650 549,646
Net income (loss) 11,241 (1,302) 31,218 26,887 74,800
Funds flow from operations before changes in 123,710 14,340 109,219 53,015 308,249
working capital and settlement of asset
retirement obligations (2)
NOTES:
(1) Revenue - net consists of gross revenue net of applicable royalties.
(2) Funds flow from operations before changes in working capital and settlement
of asset retirement obligations is before changes in non-cash working
capital. As such, it is not a measure recognized by Canadian generally
accepted accounting principles ("GAAP") and does not have a standardized
meaning prescribed by GAAP. Therefore, funds flow from operations before
changes in working capital and settlement of asset retirement obligations
of the Trust may not be comparable to similar measures presented by other
issuers, and subscribers are cautioned that it should not be construed as
an alternative to net earnings, cash flow from operating activities or
other measures of financial performance calculated in accordance with GAAP.
See "Special Note Regarding Forward Looking Statements and Other Disclosure
- Certain Financial Reporting Measures". For the Trust's three months ended
March 31, 2005 and year ended December 31, 2004, funds flow from operations
before changes in working capital and settlement of asset retirement
obligations is reconciled to its closest GAAP measure of cash flow from
operating activities as follows:
Three Months Ended Year Ended
March 31, 2004 December 31, 2004
-------------- -----------------
Funds flow from operations before changes in
working capital and settlement of asset
retirement obligations 52,687 123,710
Changes in non-cash working capital (48,694) (11,103)
Settlement of asset retirement obligations (501) (929)
------- -------
Cash flow from operating activities 3,492 111,678
(3) Net debt is bank debt, senior notes, equity bridge notes, convertible
debentures and any working capital deficit excluding the current portion of
derivative contracts and the accounting liability related to the Trust's
unit incentive plan.
(4) The Trust financial information for the year ended December 31, 2004 was
obtained from the Trust's restated consolidated financial statements for
the year ended December 31, 2004 and for the three months ended March 31,
2005 was obtained from the Trust's unaudited consolidated financial
statements for the three months ended March 31, 2005.
(5) The Storm Properties financial information for the year ended December 31,
2004 was derived from the Storm's unaudited financial statements for the
six months ended June 30, 2004.
(6) The EnCana Properties financial information for the year ended December 31,
2004 was derived from the unaudited statement of revenue and expenses for
the six months ended June 30, 2004 included in the Exchange Offer
Prospectus and the unaudited interim period results to the date of closing.
(7) The New Properties financial information for the year ended December 31,
2004 was obtained from the audited schedules of revenues, royalties and
operating expenses for the New Properties for the year ended December 31,
2004 set forth herein and for the three months ended March 31, 2005 was
obtained from the unaudited schedules of revenues, royalties and operating
expenses for the New Properties for the three months ended March 31, 2005
set forth herein, and reflects the pro forma adjustments as noted in the
Pro Forma Consolidated Financial Statements set forth herein. These amounts
do not reflect adjustments related to this offering as
25
reflected in the respective pro forma financial statements. These are
reflected in the pro forma consolidated column in each of the tables above.
(8) See the notes to the unaudited pro forma consolidated financial statements
set forth herein for assumptions and adjustments. The unaudited pro forma
consolidated financial statements may not be indicative of results that
actually would have occurred if the events reflected herein had been in
effect on the dates indicated or of the results expected in future periods.
(9) Pro Forma Units outstanding includes Units issued upon conversion of
Subscription Receipts, excluding Exchangeable Shares exchangeable into
266,823 Units as at March 31, 2005, and 1,500,450 trust unit rights
outstanding as at March 31, 2005 with a weighted average exercise price of
$13.47.
DESCRIPTION OF UNITS
UNITS
An unlimited number of Units may be created and issued pursuant to the Trust
Indenture. Each Unit represents an equal fractional undivided beneficial
interest in any distribution from the Trust (whether of net income, net realized
capital gains or other amounts) and in any net assets of the Trust in the event
of termination or winding-up of the Trust. All Units outstanding from time to
time are entitled to an equal share of any distributions from, and in any net
assets of, the Trust in the event of the termination or winding-up of the Trust.
All Units rank among themselves equally and rateably without discrimination,
preference or priority. Each Unit is transferable, is not subject to any
conversion or pre-emptive rights and entitles the holder thereof to require the
Trust to redeem any or all of the Units held by such holder and to one vote at
all meetings of Unitholders for each Unit held. Unitholders shall not be subject
to any liability in contract or tort or of any other kind in connection with the
assets, obligations or affairs of the Trust or with respect to any acts
performed by the Trustee or any other person pursuant to the Trust Indenture.
As holders of Units, Unitholders do not have the statutory rights normally
associated with ownership of shares of a corporation including, for example, the
statutory right given shareholders to bring an action against an issuer and its
directors. The Trust is not a legally recognized entity within the relevant
definitions of the Bankruptcy and Insolvency Act (Canada), the Companies'
Creditors Arrangement Act (Canada), and in some cases the Winding Up and
Restructuring Act (Canada). As a result, in the event a restructuring of the
Trust were necessary, the Trust would not be able to access the remedies
available thereunder. In the event of a restructuring, the position of
Unitholders may be different than that of the shareholders of a corporation.
At July 19, 2005, there were 43,844,933 Units outstanding.
SPECIAL VOTING UNITS
In order to allow the Trust flexibility in pursuing corporate acquisitions, the
Trust Indenture allows for the creation of Special Voting Units which will
enable the Trust to effect exchangeable securities transactions. Exchangeable
securities transactions are commonly used in corporate acquisitions to give the
selling securityholder a tax deferred "rollover" on the sale of the
securityholder's securities, which may not otherwise be available. In an
exchangeable securities transaction the tax event is generally deferred until
the exchangeable securities are actually exchanged.
An unlimited number of Special Voting Units may be created and issued pursuant
to the Trust Indenture. Holders of Special Voting Units are not entitled to any
distributions of any nature whatsoever from the Trust, but are entitled to such
number of votes at meetings of Unitholders as may be prescribed by the Board of
Directors of the Corporation in the resolution authorizing the issuance of any
Special Voting Units. Except for the right to vote at meetings of the
Unitholders, the Special Voting Units shall not confer upon the holders thereof
any other rights.
One Special Voting Unit was issued and is outstanding in connection with the
issue of the Exchangeable Shares. Each Harvest Exchangeable Share is
exchangeable on a one for one basis for Units, subject to adjustment for
distributions. The holders of the Exchangeable Shares are entitled to one vote
per Harvest Exchangeable Share at all meetings of Unitholders. There were
239,882 Exchangeable Shares outstanding at July 19, 2005. See "Exchangeable
Shares".
26
ISSUANCE OF UNITS
The Trust Indenture provides that Units, including rights, warrants, options and
other securities to purchase, to convert into or to exchange into Units, may be
created, issued, sold and delivered on such terms and conditions and at such
times as the Board of Directors may determine.
CASH DISTRIBUTIONS
The Trust receives cash in amounts equal to all of the interest, royalty, trust
distribution and dividend income of the Trust, net of the Trust's administrative
expenses. In addition, the Trust may, at the discretion of the Board of
Directors of the Corporation, make distributions in respect of repayments of
principal made by the Corporation to the Trust on the Notes. The Corporation has
historically endeavoured, on behalf of the Trust, to retain up to approximately
50% of the consolidated cash flow of the Trust over time to fund capital
expenditures and to distribute the balance to Unitholders. The actual percentage
retained by the Trust is subject to the discretion of the Board of Directors of
the Corporation and will vary from month to month depending on, among other
things, the current and anticipated commodity price environment. Assuming
completion of the Acquisition and based on current forward commodity prices, the
Corporation anticipates that the portion of cash flow retained for the balance
of 2005 will be approximately 50% and in 2006 will be approximately 50%.
The Trust's current policy is to distribute $0.25 per Unit per month ($3.00 per
Unit per annum) commencing with the distribution payable on August 15, 2005 to
Unitholders of record as of July 29, 2005.
For additional information respecting the Units, including information
respecting Unitholders' limited liability, restrictions on non resident
Unitholders, the redemption right attached to the Units, meetings of
Unitholders, and amendments to the Trust Indenture, see "Trust Indenture " at
pages 53 through 59, inclusive, of the AIF, incorporated by reference herein.
EXCHANGEABLE SHARES
The Corporation is authorized to issue an unlimited number of Exchangeable
Shares without nominal or par value, issuable in one or more series, each series
to consist of such number of shares and having designations, rights, privileges,
restrictions and conditions attaching to each series of exchangeable shares as
may be determined by the board of directors of the Corporation before the
issuance thereof. The Corporation is authorized to issue an unlimited number of
Exchangeable Shares, Series 1. The Exchangeable Shares rank prior to the common
shares of the Corporation and any other shares ranking junior to the
Exchangeable Shares with respect to the payment of dividends and the
distribution of assets in the event of the liquidation, dissolution or
winding-up of the Corporation.
Exchangeable Shares were issued pursuant to the Storm Arrangement on June 30,
2004 to Canadian-resident former shareholders of Storm who elected to receive
such shares. The Exchangeable Shares are exchangeable into Units at a
pre-determined exchange ratio, which is increased for each distribution made by
the Trust following the Storm Arrangement.
At July 19, 2005, 239,882 Exchangeable Shares were outstanding, exchangeable at
such date into 270,244 Units.
INTEREST COVERAGE
The following interest coverages are calculated on a consolidated basis for the
twelve month periods ended December 31, 2004 and March 31, 2005 and are based on
audited financial information in the case of December 31, 2004, and unaudited
financial information in the case of March 31, 2005.
The earnings (loss) of the Trust before interest and income tax expense for the
year ended December 31, 2004 and the twelve month period ended March 31, 2005
were $24.3 million and $(33.3) million, respectively. The pro forma interest
expense for the year ended December 31, 2004 and the twelve month period ended
March 31, 2005, was $57.4 million and $54.2 million, respectively, for a ratio
of less than one in each case. The dollar amount of the average deficiency for
such periods would have been $33.1 million and $87.5 million, respectively. Cash
flow (defined as funds from operations before working capital changes and site
restoration expenses) before interest for the twelve month periods ended
December 31, 2004 and March 31, 2005 was $142.3 and $187.1 million,
respectively, resulting in cash flow coverage for such periods of 2.5 and 3.5
times, respectively.
27
These ratios reflect historical earnings, excluding the pro forma impact of the
Acquisition, but including the related interest expense on debt associated with
the Acquisition.
After giving effect to the issuance of the Debentures, the Acquisition, the pro
forma earnings of the Trust before interest and income tax expense for the year
ended December 31, 2004 and the twelve month period ended March 31, 2005 would
be $125.6 million and $84.1 million, respectively, for a ratio of 2.2 and 1.6
times, respectively.
CONSOLIDATED CAPITALIZATION OF THE TRUST
The following table sets forth the consolidated capitalization of the Trust as
at December 31, 2004 and as at March 31, 2005 both before and after giving
effect to the offering and the Acquisition.
AS AT MARCH 31, 2005
AS AT MARCH 31, 2005 BEFORE AFTER GIVING EFFECT TO
AS AT GIVING EFFECT TO THE THE OFFERING AND THE
DESIGNATION (AUTHORIZED) DECEMBER 31, 2004 OFFERING AND THE ACQUISITION ACQUISITION
- ------------------------ ----------------- ---------------------------- -----------
($ thousands, except unit and vote amounts)
Bank Debt 75,519 103,665 107,215
($325 million) (1)
Debentures -- -- 75,000 (6)
($75 million)
9% Debentures (2) 10,700 9,263 9,263
($60 million)
8% Debentures (3) 15,159 9,948 9,948
($100 million)
Senior Notes
(US $250 million)(4) 300,500 302,400 302,400
Unitholders' Capital
Units (5) 465,131 490,303 656,403(6)
(unlimited) (41,788,000 Units) (43,115,000 Units) (49,620,600 Units)
Special Voting Units Nil Nil Nil
(unlimited) (1 Unit; 504,047 votes) (1 Unit; 271,494 votes) (1 Unit; 271,494 votes)
NOTES:
(1) The Corporation has the Current Credit Facilities with a syndicate of banks
consisting of $325 million of revolving credit facilities. The Current
Credit Facilities bear interest for Canadian dollar borrowings at the
lenders' prime rate or bankers' acceptances, plus an applicable margin,
based on the debt to cash flow ratio. The Current Credit Facilities are
secured by a $750 million principal amount fixed and floating charge
debenture from each of the Operating Subsidiaries and the Trust with a
charge over substantially all of their respective assets. The Corporation
has obtained committed replacement credit facilities (the "NEW CREDIT
FACILITIES") in the aggregate principal amount of $400 million to be
available for the closing of the Acquisition. The New Credit Facilities
will bear interest for Canadian dollar borrowings at the lenders' prime
rate or bankers' acceptances, plus an applicable margin, based on the debt
to cash flow ratio. The New Credit Facilities will be secured by a $750
million principal amount fixed and floating charge debenture from each of
the Operating Subsidiaries and the Trust with a charge over substantially
all of their respective assets. The New Credit Facilities will mature in
July 2006, subject to extension on an annual basis. Availability under the
New Credit Facilities will be $400 million upon closing of the Acquisition
but is subject to a borrowing base calculation performed by the lenders at
least on a semi-annual basis. Bank debt excludes working capital (deficit)
amounts of $(27.8) million, $3.6 million and $3.6 million for each
scenario, respectively in the capitalization table. For this purpose,
working capital deficit excludes bank debt, the accounting liability
related to the Trust's unit incentive plan and the current portion of
derivative contracts.
(2) The Trust issued 60,000 9% Debentures at a price of $1,000 per debenture on
January 29, 2004. The 9% Debentures bear interest at an annual rate of 9%
payable semi-annually on May 31 and November 30 of each year. The 9%
Debentures are redeemable by the Trust at a price of $1,050 per debenture
after May 31, 2007 and on or before May 31, 2008 and at a price of $1,025
per debenture after May 31, 2008 and before maturity on May 31, 2009, in
each case, together with accrued and unpaid interest. The 9% Debentures are
convertible into Units at the option of the holder at any time prior to
maturity at a conversion price of $13.85 per Unit. The Trust may elect,
from time to time, to satisfy its obligation to pay interest on the 9%
Debentures by delivering sufficient Units to the trustee of the 9%
Debentures for sale in order to satisfy the cash interest payment to
holders. The Trust may also satisfy its obligation to pay the principal
owing on redemption or maturity by the issue of Units at a deemed price of
95% of the weighted average trading price of the Units preceding the
redemption or maturity date.
28
(3) The Trust issued 100,000 8% Debentures at a price of $1,000 per debenture
on August 10, 2004. The 8% Debentures bear interest at an annual rate of 8%
payable semi-annually on March 31 and September 30 of each year. The 8%
Debentures are redeemable by the Trust at a price of $1,050 per debenture
after September 30, 2007 and on or before September 30, 2008 and at a price
of $1,025 per debenture after September 30, 2008 and before maturity on
September 30, 2009, in each case, together with accrued and unpaid
interest. The 8% Debentures are convertible into Units at the option of the
holder at any time prior to maturity at a conversion price of 16.07 per
Unit. The Trust may elect, from time to time, to satisfy its obligation to
pay interest on the 8% Debentures by delivering sufficient Units to the
trustee of the 8% Debentures for sale in order to satisfy the cash interest
payment to holders. The Trust may also satisfy its obligation to pay the
principal owing on redemption or maturity by the issue of Units at a deemed
price of 95% of the weighted average trading price of the Units preceding
the redemption or maturity date.
(4) The Corporation issued US $250 million of 7?% senior notes due October 15,
2011 and unconditionally guaranteed by the Trust on October 14, 2004. On
January 10, 2005 the Corporation completed an exchange offer whereby the
outstanding US $250 million of senior notes which were issued on October
14, 2004 were exchanged for US $250 million of 7?% senior notes of the
Corporation due October 15, 2011, unconditionally guaranteed by the Trust.
(5) In addition, at March 31, 2005, 1,500,450 Units were reserved for issuance
on exercise of rights to purchase Units under the Trust's unit incentive
plan and 10,930 Units were reserved for issuance under the Trust's unit
award incentive plan. In addition, the Corporation has a total of 244,812
Exchangeable Shares issued and outstanding as at March 31, 2005
exchangeable as at such date for 266,823 Units.
(6) Based on the issuance of 6,505,600 Subscription Receipts (and the issue of
6,505,600 Units pursuant thereto) and $75 million principal amount of
Debentures for aggregate gross proceeds of $250,000,640 less the
Underwriters' fee of $11,750,032 and expenses of the issue estimated to be
$300,000, the net proceeds from this issue are estimated to be
$237,950,608, which will be applied to satisfy a portion of the purchase
price of the Acquisition.
(7) At March 31, 2005, the Trust had an accumulated loss of $12.4 million,
accumulated Unitholder distributions of $133.2 million and a working
capital surplus of $3.6 million.
STABILITY RATING
DBRS has assigned a stability rating of STA-6 (high) to the Trust Units but has
placed such stability rating "Under Review" with "negative implications"
following the announcement by the Trust on June 24, 2005 of the Acquisition and
other matters. The stability rating is based on a rating scale developed by DBRS
that provides an indicator of both the stability and sustainability of an income
fund's distributions per unit. Ratings categories range from STA-1 to STA-7,
with STA-1 being the highest. In addition, DBRS further separates the ratings
into "high", "middle" and "low" subcategories to indicate where they fall within
the rating category. Ratings take into consideration the seven main factors of:
(1) operating and industry characteristics; (2) asset quality; (3) financial
flexibility; (4) diversification; (5) size and market position; (6)
sponsorship/governance; and (7) growth. In addition, consideration is given to
specific structural or contractual elements that may eliminate or mitigate risks
or other potentially negative factors.
Specifically, income funds rated as STA-6 are considered by DBRS to have very
weak distributions per unit in terms of stability and sustainability. Each of
the Canadian energy trusts currently rated by DBRS fall within the range of
STA-5 (high) to STA-6 (middle).
A rating is not a recommendation to buy, sell or hold any security and may be
subject to revision or withdrawal at any time by DBRS.
PRICE RANGE AND TRADING VOLUME OF THE UNITS
The outstanding Units are listed on the TSX under the trading symbol "HTE.UN".
The following table sets forth the price range and trading volume of the Units
as reported by the TSX for the periods indicated.
29
PERIOD HIGH ($) LOW ($) VOLUME (000'S)
------ -------- ------- --------------
2004
First Quarter 15.18 12.15 3,470
Second Quarter 15.49 13.80 4,219
Third Quarter 20.79 14.75 19,309
Fourth Quarter 24.03 19.82 21,595
2005
January 24.00 22.10 2,987
February 25.97 23.75 3,533
March 26.45 23.01 5,126
April 25.75 22.15 3,086
May 23.00 21.02 2,927
June 28.26 22.60 4,026
July (to July 19) 28.76 27.01 2,787
On July 6, 2005, the last trading day prior to the public announcement of the
offering, the closing price of the Units on the TSX was $27.70. On July 19,
2005, the closing price of the Units on the TSX was $28.75.
RECORD OF CASH DISTRIBUTIONS
The following table sets forth the per Unit amount of monthly cash distributions
paid by the Trust since December 2002.
DISTRIBUTION PER UNIT (1)
-------------------------
2002
December $0.20
2003
January $0.20
February $0.20
March $0.20
April $0.20
May $0.20
June $0.20
July $0.20
August $0.20
September $0.20
October $0.20
November $0.20
December $0.20
2004
January $0.20
February $0.20
March $0.20
April $0.20
May $0.20
June $0.20
July $0.20
August $0.20
September $0.20
October $0.20
November $0.20
December $0.20 (2)
30
DISTRIBUTION PER UNIT (1)
-------------------------
2005
January $0.20
February $0.20
March $0.20
April $0.20
May $0.20
June $0.20
NOTES:
(1) Monthly information makes reference to the month in which the record
date for the relevant distribution occurs, with the distribution being
paid in the following month.
(2) In addition, on April 15, 2005, the Trust made a special distribution
of taxable income to Unitholders of record on December 31, 2004. The
distribution amount of $0.252 per Unit was settled in Units.
The Trust makes cash distributions on the 15th day of each month (or the first
Business Day thereafter) to holders of Units of record on the immediately
preceding record date.
Accordingly, if the Acquisition closes on or before August 2, 2005 as currently
contemplated, holders of Subscription Receipts will become holders of Units on
or before August 25, 2005 and will be entitled as Unitholders, provided they
continue to be the registered holder of the Units received pursuant to the
Subscription Receipts on August 25, 2005, to receive the monthly distribution
expected to be paid on September 15, 2005 to Unitholders of record on August 25,
2005.
The Trust announced on June 24, 2005 that the Board of Directors of the
Corporation approved an increase in monthly distributions to $0.25 per Unit
commencing with the distribution payable on August 15, 2005 to Unitholders of
record as at July 29, 2005.
USE OF PROCEEDS
The net proceeds to the Trust from the sale of the Subscription Receipts and the
Debentures hereunder are estimated to be $237,950,608 after deducting the fees
of $11,750,032 payable to the Underwriters and the estimated expenses of the
issue of $300,000. The net proceeds of the offering will be used to repay a
portion of the bank indebtedness incurred to pay the purchase price of the
Acquisition and for general trust purposes. See "Relationship Among the Trust,
the Corporation and Certain Underwriters".
DETAILS OF THE OFFERINGS
SUBSCRIPTION RECEIPTS
The following is a summary of the material attributes and characteristics of the
Subscription Receipts. This summary does not purport to be complete and is
subject to, and qualified in its entirety by, reference to the terms of the
Subscription Receipt Agreement.
At closing, a certificate representing the Subscription Receipts will be issued
in registered form to CDS or its nominee, CDS & Co., and will be deposited with
CDS on the closing date of this offering pursuant to the book-entry only system.
Unless the book-entry only system is terminated, and except in certain limited
circumstances, owners of beneficial interests in Subscription Receipts shall not
receive a certificate for Subscription Receipts or, unless requested, for the
Trust Units issuable on the exchange of the Subscription Receipts. Beneficial
interests in Subscription Receipts will generally be represented solely through
the book-entry only system and such interests will be evidenced by customer
confirmations of purchase from the Underwriters.
The Escrowed Funds will be delivered to and held by the Escrow Agent and
invested in short-term obligations of, or guaranteed by, the Government of
Canada (and other approved investments) pending the closing of the Acquisition.
Provided that the closing of the Acquisition occurs by 5:00 p.m. (Calgary time)
on September 30, 2005, the Escrowed Funds and the interest earned thereon will
be released to the Trust and the Units will be issued to holders of Subscription
Receipts who will receive, without payment of additional consideration or
further action, one Unit for each Subscription Receipt held.
31
Forthwith upon the closing of the Acquisition, the Trust will execute and
deliver to the Escrow Agent a notice thereof, and will issue and deliver the
Units to the Escrow Agent. Contemporaneously with the delivery of such notice,
the Trust will issue a press release specifying that the Units have been issued.
If the closing of the Acquisition does not take place by 5:00 p.m. (Calgary
time) on September 30, 2005, the Acquisition is terminated at any earlier time
or the Trust has advised the Underwriters or announced to the public that it
does not intend to proceed with the Acquisition (in any case, the "TERMINATION
TIME"), holders of Subscription Receipts shall be entitled to receive an amount
equal to the full subscription price therefor and their pro rata entitlements to
interest on such amount. The Escrowed Funds will be applied toward payment of
such amount. The issuance of a cheque in payment of the subscription price for
the Subscription Receipts will require the surrender of the certificate(s)
representing the same at the principal office of the Escrow Agent in Calgary,
Alberta. If any certificates representing Subscription Receipts have not been
surrendered one year after the Termination Time, the Escrow Agent will mail the
cheques that the holders thereof are entitled to receive to their last addresses
of record.
If the closing of the Acquisition takes place prior to the Termination Time and
holders of Subscription Receipts become entitled to receive Units pursuant to
the Subscription Receipt Agreement, such holders will be entitled to receive an
amount per Subscription Receipt equal to the amount per Unit of any cash
distributions for which record dates have occurred during the period from the
date of closing of the offering to the date immediately preceding the date the
Units are issued pursuant to the Subscription Receipts. All or a portion of this
amount will be satisfied by the payment by the Escrow Agent to holders of
Subscription Receipts of interest earned on the Escrowed Funds. The difference,
if any, between the amount of interest earned on the Escrowed Funds and the
distribution that would have been payable on the Units will be paid by the
Trust. If holders of Subscription Receipts become entitled to receive Units, the
Escrow Agent and the Trust will pay such amounts to holders on the later of the
date the Units are issued and the date such distribution(s) is paid to
Unitholders. For greater certainty, if the closing of the Acquisition takes
place on a date that is a Unit distribution record date, holders of Subscription
Receipts shall not be entitled as such to receive a payment in respect of the
cash distribution for such record date but shall instead be deemed to be holders
of Units on such date and will be entitled as Unitholders to receive such
monthly distribution.
In addition, if the Acquisition closes on or before August 2, 2005 as currently
contemplated, holders of Subscription Receipts will become holders of Units on
or before August 25, 2005 and will be entitled, provided they continue to be the
registered holder of the Units received pursuant to the Subscription Receipts on
August 25, 2005, to receive the monthly distribution expected to be paid on
September 15, 2005 to Unitholders of record on August 25, 2005.
Under the Subscription Receipt Agreement, original purchasers of Subscription
Receipts under the offering will have a contractual right of rescission
following the issuance of Units to such purchaser upon the exchange of the
Subscription Receipts to receive the amount paid for the Subscription Receipts
if this short form prospectus (including documents incorporated by reference)
and any amendment contains a misrepresentation or is not delivered to such
purchaser, provided such remedy for rescission is exercised within 180 days of
closing of the offering.
HOLDERS OF SUBSCRIPTION RECEIPTS ARE NOT UNITHOLDERS. HOLDERS OF SUBSCRIPTION
RECEIPTS ARE ENTITLED ONLY TO RECEIVE UNITS ON SURRENDER OF THEIR SUBSCRIPTION
RECEIPTS TO THE ESCROW AGENT OR TO A RETURN OF THE SUBSCRIPTION PRICE FOR THE
SUBSCRIPTION RECEIPTS TOGETHER WITH ANY PAYMENTS IN LIEU OF INTEREST OR
DISTRIBUTIONS, AS APPLICABLE, AS DESCRIBED ABOVE.
DEBENTURES
The offering of Debentures consists of 75,000 Debentures at a price of $1,000
per Debenture. The following is a summary of the material attributes and
characteristics of the Debentures. This summary does not purport to be complete
and is subject to, and qualified in its entirety by, reference to the terms of
the Indenture referred to below.
GENERAL
The Debentures will be issued under the Indenture. The Debentures authorized for
issue under this offering will be limited in aggregate principal amount to
$75,000,000. The Trust may, however, from time to time, without the consent of
the holders of the Debentures but subject to the limitations described herein,
issue additional debentures of the same series or of a different series under
the Indenture, in addition to the Debentures offered hereby. The Debentures will
be issuable only in denominations of $1,000 and integral multiples thereof.
32
The Debentures will be dated as of the closing date of the offering and will
have an initial maturity date of September 30, 2005. If the closing of the
Acquisition takes place by the Termination Time, the maturity date will be
automatically extended from the Initial Maturity Date to December 31, 2010. If
the closing of the Acquisition does not take place by the Termination Time, the
Debentures will mature on the Initial Maturity Date.
The Debentures will bear interest from the date of issue at 6.5% per annum,
which will be payable semi-annually in arrears on June 30 and December 31 in
each year, commencing with December 31, 2005. The first interest payment will
include interest accrued from the closing of the offering to December 31, 2005.
The principal amount of the Debentures will be payable in lawful money of Canada
or, at the option of the Trust and subject to applicable regulatory approval, by
payment of Units as further described under "- Payment upon Redemption or
Maturity" and "- Redemption and Purchase". The interest on the Debentures will
be payable in lawful money of Canada including, at the option of the Trust and
subject to applicable regulatory approval, in accordance with the Unit Interest
Payment Election as described under "Interest Payment Option".
The Debentures will be direct obligations of the Trust and will not be secured
by any mortgage, pledge, hypothec or other charge and will be subordinated to
other liabilities of the Trust as described under "Subordination". The Indenture
will not restrict the Trust from incurring additional indebtedness for borrowed
money or from mortgaging, pledging or charging its properties to secure any
indebtedness. The Debentures will rank PARI PASSU with the 9% Debentures and the
8% Debentures.
CONVERSION PRIVILEGE
If the closing of the Acquisition takes place by the Termination Time, each
Debenture will be convertible at the holder's option into fully paid and
non-assessable Units at any time prior to 5:00 p.m. (Calgary time) on the
earlier of the Final Maturity Date, and the Business Day immediately preceding
the date specified by the Trust for redemption of the Debentures, at a
conversion price of $31.00 per Unit (the "CONVERSION PRICE"), being a conversion
rate of 32.2581 Units for each $1,000 principal amount of Debentures. No
adjustment will be made for distributions on Units issuable upon conversion or
for interest accrued on Debentures surrendered for conversion; however, holders
converting their Debentures will receive accrued and unpaid interest thereon.
Subject to the provisions thereof, the Indenture will provide for the adjustment
of the Conversion Price in certain events including: (a) the subdivision or
consolidation of the outstanding Units; (b) the distribution of Units to holders
of Units by way of distribution or otherwise other than an issue of securities
to holders of Units who have elected to receive distributions in securities of
the Trust in lieu of receiving cash distributions paid in the ordinary course;
(c) the issuance of options, rights or warrants to holders of Units entitling
them to acquire Units or other securities convertible into Units at less than
95% of the then current market price (as defined below under "Payment upon
Redemption or Maturity") of the Units; and (d) the distribution to all holders
of Units of any securities or assets (other than cash distributions and
equivalent distributions in securities paid in lieu of cash distributions in the
ordinary course). There will be no adjustment of the Conversion Price in respect
of any event described in (b), (c) or (d) above if the holders of the Debentures
are allowed to participate as though they had converted their Debentures prior
to the applicable record date or effective date. The Trust will not be required
to make adjustments in the Conversion Price unless the cumulative effect of such
adjustments would change the conversion price by at least 1%.
In the case of any reclassification or capital reorganization (other than a
change resulting from consolidation or subdivision) of the Units or in the case
of any consolidation, amalgamation or merger of the Trust with or into any other
entity, or in the case of any sale or conveyance of the properties and assets of
the Trust as, or substantially as, an entirety to any other entity, or a
liquidation, dissolution or winding-up of the Trust, the terms of the conversion
privilege shall be adjusted so that each holder of a Debenture shall, after such
reclassification, capital reorganization, consolidation, amalgamation, merger,
sale, conveyance, liquidation, dissolution or winding up, be entitled to receive
the number of Units or other securities or property such holder would be
entitled to receive if on the effective date thereof, it had been the holder of
the number of Units into which the Debenture was convertible prior to the
effective date of such reclassification, capital reorganization, consolidation,
amalgamation, merger, sale, conveyance, liquidation, dissolution or winding up.
No fractional Units will be issued on any conversion but in lieu thereof the
Trust shall satisfy fractional interests by a cash payment equal to the current
market price of any fractional interest.
33
REDEMPTION AND PURCHASE
The Debentures will not be redeemable on or before December 31, 2008. After
December 31, 2008 and prior to maturity, the Debentures may be redeemed in whole
or in part from time to time at the option of the Trust on not more than 60 days
and not less than 40 days prior notice, at a redemption price of $1,050 per
Debenture after December 31, 2008 and on or before December 31, 2009 and at a
redemption price of $1,025 per Debenture after December 31, 2009 and before
maturity (each a "REDEMPTION PRICE"), in each case, plus accrued and unpaid
interest thereon, if any.
In the case of redemption of less than all of the Debentures, the Debentures to
be redeemed will be selected by the Debenture Trustee on a pro rata basis or in
such other manner as the Debenture Trustee deems equitable, subject to the
consent of the TSX. The Trust will have the right to purchase Debentures in the
market, by tender or by private contract.
PAYMENT UPON REDEMPTION OR MATURITY
On redemption or at maturity, the Trust will repay the indebtedness represented
by the Debentures by paying to the Debenture Trustee in lawful money of Canada
an amount equal to the aggregate Redemption Price of the outstanding Debentures
which are to be redeemed or the principal amount of the outstanding Debentures
which have matured, as the case may be, together with accrued and unpaid
interest thereon. If the closing of the Acquisition takes place by the
Termination Time, the Trust may, at its option, on not more than 60 days and not
less than 40 days prior notice and subject to applicable regulatory approval,
elect to satisfy its obligation to pay the Redemption Price of the Debentures
which are to be redeemed or the principal amount of the Debentures which have
matured, as the case may be, by issuing Units to the holders of the Debentures.
Any accrued and unpaid interest thereon will be paid in cash. The number of
Units to be issued will be determined by dividing the aggregate Redemption Price
of the outstanding Debentures which are to be redeemed or the principal amount
of the outstanding Debentures which have matured, as the case may be, by 95% of
the current market price on the date fixed for redemption or the maturity date,
as the case may be. No fractional Units will be issued on redemption or maturity
but in lieu thereof the Trust shall satisfy fractional interests by a cash
payment equal to the current market price of any fractional interest.
The term "current market price" will be defined in the Indenture to mean the
weighted average trading price of the Units on the TSX for the 20 consecutive
trading days ending on the fifth trading day preceding the date fixed for
redemption or the maturity date, as the case may be.
SUBORDINATION
The payment of the principal of, and interest on, the Debentures will be
subordinated in right of payment, as set forth in the Indenture, to the prior
payment in full of all Senior Indebtedness of the Trust and indebtedness to
trade creditors of the Trust. "Senior Indebtedness" of the Trust will be defined
in the Indenture as the principal of and premium, if any, and interest on and
other amounts in respect of all indebtedness of the Trust (whether outstanding
as at the date of the Indenture or thereafter incurred), other than indebtedness
evidenced by the Debentures and all other existing and future debentures or
other instruments of the Trust which, by the terms of the instrument creating or
evidencing the indebtedness, is expressed to be PARI PASSU with, or subordinate
in right of payment to, the Debentures.
The Indenture will provide that in the event of any insolvency or bankruptcy
proceedings, or any receivership, liquidation, reorganization or other similar
proceedings relative to the Trust, or to its property or assets, or in the event
of any proceedings for voluntary liquidation, dissolution or other winding-up of
the Trust, whether or not involving insolvency or bankruptcy, or any marshalling
of the assets and liabilities of the Trust, then those holders of Senior
Indebtedness, including any indebtedness to trade creditors, will receive
payment in full before the holders of Debentures will be entitled to receive any
payment or distribution of any kind or character, whether in cash, property or
securities, which may be payable or deliverable in any such event in respect of
any of the Debentures or any unpaid interest accrued thereon. The Indenture will
also provide that the Trust will not make any payment, and the holders of the
Debentures will not be entitled to demand, institute proceedings for the
collection of, or receive any payment or benefit (including, without any
limitation, by set-off, combination of accounts or realization of security or
otherwise in any manner whatsoever) on account of indebtedness represented by
the Debentures (a) in a manner inconsistent with the terms (as they exist on the
date of issue) of the Debentures or (b) at any time when an event of default has
occurred under the Senior Indebtedness and is continuing and notice of such
event of default has been given by or on behalf of the holders of Senior
Indebtedness to the Debenture Trustee, unless the Senior Indebtedness has been
repaid in full. No holder of a Debenture has the right to institute any act or
proceeding to enforce the Debentures in a manner inconsistent with the terms of
the Indenture.
34
The Debentures will also be effectively subordinate to claims of creditors of
the Trust's subsidiaries except to the extent the Trust is a creditor of such
subsidiaries ranking at least PARI PASSU with such other creditors.
Specifically, the Debentures will be subordinated in right of payment to the
prior payment in full of all indebtedness under the Current Credit Facilities,
the New Credit Facilities and the Senior Notes.
PRIORITY OVER TRUST DISTRIBUTIONS
The Trust Indenture provides that certain expenses of the Trust must be deducted
in calculating the amount to be distributed to the Unitholders. Accordingly, the
funds required to satisfy the interest payable on the Debentures, as well as the
amount payable upon redemption or maturity of the Debentures or upon an Event of
Default (as defined below), will be deducted and withheld from the amounts that
would otherwise be payable as distributions to Unitholders except for
distributions that have been publicly announced by the Trust.
CHANGE OF CONTROL OF THE TRUST
Within 30 days following the occurrence of a change of control of the Trust
involving the acquisition of voting control or direction over 66 2/3% or more of
the Units (a "CHANGE OF CONTROL"), the Trust will be required to make an offer
in writing to purchase all of the Debentures then outstanding (the "DEBENTURE
OFFER"), at a price equal to 101% of the principal amount thereof plus accrued
and unpaid interest (the "DEBENTURE OFFER PRICE").
The Indenture contains notification and repurchase provisions requiring the
Trust to give written notice to the Debenture Trustee of the occurrence of a
Change of Control within 30 days of such event together with the Debenture
Offer. The Debenture Trustee will thereafter promptly mail to each holder of
Debentures a notice of the Change of Control together with a copy of the
Debenture Offer to repurchase all the outstanding Debentures.
If 90% or more of the aggregate principal amount of the Debentures outstanding
on the date of the giving of notice of the Change of Control have been tendered
to the Trust pursuant to the Debenture Offer, the Trust will have the right and
obligation to redeem all the remaining Debentures at the Debenture Offer Price.
Notice of such redemption must be given by the Trust to the Debenture Trustee
within 10 days following the expiry of the Debenture Offer, and as soon as
possible thereafter, by the Debenture Trustee to the holders of the Debentures
not tendered pursuant to the Debenture Offer.
INTEREST PAYMENT OPTION
If the closing of the Acquisition takes place by the Termination Time, the Trust
may elect, from time to time, to satisfy its obligation to pay all or any part
of the interest on the Debentures (the "INTEREST OBLIGATION"), on the date it is
payable under the Indenture (an "INTEREST PAYMENT DATE"), by delivering
sufficient Units to the Debenture Trustee to satisfy all or any part, as the
case may be, of the Interest Obligation in accordance with the Indenture (the
"UNIT INTEREST PAYMENT ELECTION"). The Indenture will provide that, upon such
election, the Debenture Trustee shall (a) accept delivery from the Trust of
Units, (b) accept bids with respect to, and consummate sales of, such Units,
each as the Trust shall direct in its absolute discretion, (c) invest the
proceeds of such sales in short-term permitted government securities (as defined
in the Indenture) which mature prior to the applicable Interest Payment Date,
and use the proceeds received from such permitted government securities,
together with any proceeds from the sale of Units not invested as aforesaid, to
satisfy the Interest Obligation, and (d) perform any other action necessarily
incidental thereto.
The Indenture will set forth the procedures to be followed by the Trust and the
Debenture Trustee in order to effect the Unit Interest Payment Election. If a
Unit Interest Payment Election is made, the sole right of a holder of Debentures
in respect of interest will be to receive cash from the Debenture Trustee out of
the proceeds of the sale of Units (plus any amount received by the Debenture
Trustee from the Trust attributable to any fractional Units) in full
satisfaction of the Interest Obligation, and the holder of such Debentures will
have no further recourse to the Trust in respect of the Interest Obligation.
Neither the Trust's making of the Unit Interest Payment Election nor the
consummation of sales of Units will (a) result in the holders of the Debentures
not being entitled to receive on the applicable Interest Payment Date cash in an
aggregate amount equal to the interest payable on such Interest Payment Date, or
(b) entitle such holders to receive any Units in satisfaction of the Interest
Obligation.
35
EVENTS OF DEFAULT
The Indenture will provide that an event of default ("EVENT OF DEFAULT") in
respect of the Debentures will occur if any one or more of the following
described events has occurred and is continuing with respect of the Debentures:
(a) failure for 10 days to pay interest on the Debentures when due; (b) failure
to pay principal or premium, if any, on the Debentures when due, whether at
maturity, upon redemption, by declaration or otherwise; (c) certain events of
bankruptcy, insolvency or reorganization of the Trust under bankruptcy or
insolvency laws; or (d) default in the observance or performance of any material
covenant or condition of the Indenture and continuance of such default for a
period of 30 days after notice in writing has been given by the Debenture
Trustee to the Trust specifying such default and requiring the Trust to rectify
the same. If an Event of Default has occurred and is continuing, the Debenture
Trustee may, in its discretion, and shall upon request of holders of not less
than 25% of the principal amount of Debentures then outstanding, declare the
principal of and interest on all outstanding Debentures to be immediately due
and payable. In certain cases, the holders of more than 50% of the principal
amount of the Debentures then outstanding may, on behalf of the holders of all
Debentures, waive any Event of Default and/or cancel any such declaration upon
such terms and conditions as such holders shall prescribe.
OFFERS FOR DEBENTURES
The Indenture will contain provisions to the effect that if an offer is made for
the Debentures which is a take-over bid for Debentures within the meaning of the
Securities Act (Alberta) and not less than 90% of the Debentures (other than
Debentures held at the date of the take-over bid by or on behalf of the offeror
or associates or affiliates of the offeror) are taken up and paid for by the
offeror, the offeror will be entitled to acquire the Debentures held by the
holders of Debentures who did not accept the offer on the terms offered by the
offeror.
MODIFICATION
The rights of the holders of the Debentures as well as any other series of
debentures that may be issued under the Indenture may be modified in accordance
with the terms of the Indenture. For that purpose, among others, the Indenture
will contain certain provisions which will make binding on all Debenture holders
resolutions passed at meetings of the holders of Debentures by votes cast
thereat by holders of not less than 66 2/3% of the principal amount of the
Debentures present at the meeting or represented by proxy, or rendered by
instruments in writing signed by the holders of not less than 66 2/3% of the
principal amount of the Debentures then outstanding. In certain cases, the
modification will, instead or in addition, require assent by the holders of the
required percentage of Debentures of each particularly affected series.
LIMITATION ON ISSUANCE OF ADDITIONAL DEBENTURES
The Indenture will provide that the Trust shall not issue additional convertible
debentures of equal ranking if the principal amount of all issued and
outstanding convertible debentures of the Trust exceeds 25% of the Total Market
Capitalization of the Trust immediately after the issuance of such additional
convertible debentures. "Total Market Capitalization" will be defined in the
Indenture as the total principal amount of all issued and outstanding debentures
of the Trust which are convertible at the option of the holder into Units of the
Trust plus the amount obtained by multiplying the number of issued and
outstanding Units of the Trust and any outstanding exchangeable equity interests
of the Trust (other than subordinated convertible debt) by the current market
price of the Units on the relevant date.
LIMITATION ON NON-RESIDENT OWNERSHIP
At no time may non-residents of Canada be the beneficial owners of a majority of
the Units, on a fully diluted basis, including any Units which may be issued
upon conversion, redemption or maturity of the Debentures. The Debenture Trustee
may require declarations as to the jurisdictions in which beneficial owners of
Debentures are resident. If the Debenture Trustee becomes aware as a result of
requiring such declarations as to beneficial ownership, that the beneficial
owners of 49% of the Units then outstanding, on a fully diluted basis, are, or
may be, non-residents or that such a situation is imminent, the Debenture
Trustee may make a public announcement thereof and shall not register a transfer
of Debentures to a person unless the person provides a declaration that the
person is not a non-resident. If, notwithstanding the foregoing, the Debenture
Trustee determines that a majority of the Units are held by non-residents, the
Debenture Trustee may send a notice to non-resident holders of Debentures,
chosen in inverse order to the order of acquisition or registration of the
Debentures or in such manner as the Debenture Trustee may consider equitable and
practicable, requiring them to sell their Debentures or a portion thereof within
a specified period of
36
not less than 60 days. If the Debenture holders receiving such notice have not
sold the specified number of Debentures or provided the Debenture Trustee with
satisfactory evidence that they are not non-residents within such period, the
Debenture Trustee may on behalf of such Debenture holder sell such Debentures,
and, in the interim, shall suspend the rights attached to such Debentures. Upon
such sale the affected holders shall cease to be holders of Debentures, and
their rights shall be limited to receiving the net proceeds of sale upon
surrender of such Debentures. The trustee of the Trust has similar obligations
in respect of the Units. More information regarding these obligations is set
forth at page 55 of the Trust's AIF, incorporated herein by reference.
BOOK-ENTRY SYSTEM FOR DEBENTURES
The Debentures will be issued in "book-entry only" form and must be purchased or
transferred through a participant in the depository service of CDS (a
"PARTICIPANT"). On the closing date of the offering, the Debenture Trustee will
cause the Debentures to be delivered to CDS and registered in the name of its
nominee. The Debentures will be evidenced by a single book-entry only
certificate. Registration of interests in and transfers of the Debentures will
be made only through the depository service of CDS.
Except as described below, a purchaser acquiring a beneficial interest in the
Debentures (a "BENEFICIAL OWNER") will not be entitled to a certificate or other
instrument from the Debenture Trustee or CDS evidencing that purchaser's
interest therein, and such purchaser will not be shown on the records maintained
by CDS, except through a Participant. Such purchaser will receive a confirmation
of purchase from the Underwriter or other registered dealer from whom Debentures
are purchased.
Neither the Trust nor the Underwriters will assume any liability for: (a) any
aspect of the records relating to the beneficial ownership of the Debentures
held by CDS or the payments relating thereto; (b) maintaining, supervising or
reviewing any records relating to the Debentures; or (c) any advice or
representation made by or with respect to CDS and contained in this short form
prospectus and relating to the rules governing CDS or any action to be taken by
CDS or at the direction of its Participants. The rules governing CDS provide
that it acts as the agent and depositary for the Participants. As a result,
Participants must look solely to CDS and Beneficial Owners must look solely to
Participants for the payment of the principal and interest on the Debentures
paid by or on behalf of the Trust to CDS.
As indirect holders of Debentures, investors should be aware that they (subject
to the situations described below): (a) may not have Debentures registered in
their name; (b) may not have physical certificates representing their interest
in the Debentures; (c) may not be able to sell the Debentures to institutions
required by law to hold physical certificates for securities they own; and (d)
may be unable to pledge Debentures as security.
The Debentures will be issued to Beneficial Owners in fully registered and
certificate form (the "DEBENTURE CERTIFICATES") only if: (a) required to do so
by applicable law; (b) the book-entry only system ceases to exist; (c) the Trust
or CDS advises the Debenture Trustee that CDS is no longer willing or able to
properly discharge its responsibilities as depositary with respect to the
Debentures and the Trust is unable to locate a qualified successor; (d) the
Trust, at its option, decides to terminate the book-entry only system through
CDS; or (e) after the occurrence of an Event of Default (as defined herein),
Participants acting on behalf of Beneficial Owners representing, in the
aggregate, more than 25% of the aggregate principal amount of the Debentures
then outstanding advise CDS in writing that the continuation of a book-entry
only system through CDS is no longer in their best interest, provided the
Debenture Trustee has not waived the Event of Default in accordance with the
terms of the Indenture.
Upon the occurrence of any of the events described in the immediately preceding
paragraph, the Debenture Trustee must notify CDS, for and on behalf of
Participants and Beneficial Owners, of the availability through CDS of Debenture
Certificates. Upon surrender by CDS of the single certificate representing the
Debentures and receipt of instructions from CDS for the new registrations, the
Debenture Trustee will deliver the Debentures in the form of Debenture
Certificates and thereafter the Trust will recognize the holders of such
Debenture Certificates as debentureholders under the Indenture.
Interest on the Debentures will be paid directly to CDS while the book-entry
only system is in effect. If Debenture Certificates are issued, interest will be
paid by cheque drawn on the Trust and sent by prepaid mail to the registered
holder or by such other means as may become customary for the payment of
interest. Payment of principal, including payment in the form of Units if
applicable, and the interest due, at maturity or on a redemption date, will be
paid directly to CDS while the book-entry only system is in effect. If Debenture
Certificates are issued, payment of principal, including payment in the form of
Units if applicable, and interest due, at maturity or on a redemption date, will
be paid upon surrender thereof at any office of the Debenture Trustee or as
otherwise specified in the Indenture.
37
PLAN OF DISTRIBUTION
Pursuant to the Underwriting Agreement, the Trust has agreed to issue and sell
an aggregate of 6,505,600 Subscription Receipts and an aggregate of 75,000
Debentures to the Underwriters, and the Underwriters have severally agreed to
purchase such Subscription Receipts and Debentures on August 2, 2005, or such
other date not later than August 25, 2005 as may be agreed among the parties to
the Underwriting Agreement. Delivery of the Subscription Receipts and Debentures
is conditional upon payment on closing of $26.90 per Subscription Receipt by the
Underwriters to the Escrow Agent and $1,000 per Debenture by the Underwriters to
the Trust. The Underwriting Agreement provides that the Trust will pay the
Underwriters' fee of $1.345 per Subscription Receipt for Subscription Receipts
issued and sold by the Trust and $40 per Debenture for Debentures issued and
sold by the Trust, for an aggregate fee payable by the Trust of $11,750,032, in
consideration for their services in connection with the offering. The
Underwriters' fee in respect of the Subscription Receipts is payable as to 50%
upon the closing of the offering and 50% upon closing of the Acquisition. If the
Acquisition is not completed by September 30, 2005, the Underwriters' fee in
respect of the Subscription Receipts will be reduced to the amount payable upon
closing of the offering. The Underwriters fee for the Debentures is payable at
closing. The terms of the offering were determined by negotiation between the
Corporation, on behalf of the Trust, and National Bank Financial Inc., on its
own behalf and on behalf of the other Underwriters.
The obligations of the Underwriters under the Underwriting Agreement are several
and not joint, and may be terminated at their discretion upon the occurrence of
certain stated events. The obligations of the Trust and the Underwriters under
the Underwriting Agreement to complete the purchase and sale of the Subscription
Receipts and Debentures will terminate automatically if the Acquisition is
terminated or the Trust has advised the Underwriters or announced to the public
that it does not intend to proceed with the Acquisition. If one or more of the
Underwriters fails to purchase its allotment of Subscription Receipts and
Debentures, the remaining Underwriter or Underwriters are obligated to purchase
the Subscription Receipts and Debentures not purchased by the Underwriter or
Underwriters which fail to purchase. Notwithstanding the foregoing, however, in
the event one or more of the Underwriters who have an obligation to purchase in
the aggregate more than 7% of the Subscription Receipts and Debentures offered
hereunder fail to purchase their allotment of Subscription Receipts and
Debentures, the remaining Underwriter or Underwriters have the right but not the
obligation to purchase the Subscription Receipts and Debentures not purchased by
the Underwriter or Underwriters which fail to purchase or the remaining
Underwriter or Underwriters have the right to terminate their obligations under
the Underwriting Agreement. The Underwriters are obligated to take up and pay
for all of the Subscription Receipts and Debentures if any purchased under the
Underwriting Agreement. The Underwriting Agreement also provides that the Trust
and the Corporation will indemnify the Underwriters and their directors,
officers, agents, shareholders and employees against certain liabilities and
expenses.
Except in certain limited circumstances, the Subscription Receipts and the
Debentures will be issued in "book-entry only" form and must be purchased or
transferred through a participant in the depository service of CDS. See "Details
of the Offering - Subscription Receipts" and "Details of the Offering -
Debentures - Book-Entry System for Debentures".
The Trust has been advised by the Underwriters that, in connection with the
offering, the Underwriters may effect transactions that stabilize or maintain
the market price of the Subscription Receipts, the Units or the Debentures at
levels other than those that might otherwise prevail in the open market. Such
transactions, if commenced, may be discontinued at any time.
The Trust has agreed that, subject to certain exceptions, it will not offer or
issue, or enter into an agreement to offer or issue, Units or any securities
convertible or exchangeable into Units for a period of 90 days subsequent to the
closing date of the offering without the consent of National Bank Financial Inc.
on behalf of the Underwriters, which consent may not be unreasonably withheld.
The TSX has conditionally approved the listing of the Subscription Receipts and
the Debentures offered hereunder and the Units issuable pursuant to the
Subscription Receipts and on the conversion of the Debentures on the TSX.
Listing is subject to the Trust fulfilling all of the listing requirements of
the TSX on or before October 10, 2005.
The Subscription Receipts and the Debentures offered hereby and the Units
issuable pursuant to the Subscription Receipts and on conversion of the
Debentures (the "SECURITIES") have not been and will not be registered under the
United States Securities Act of 1933, as amended (the "U.S. SECURITIES ACT"), or
any state securities laws, and accordingly may not be offered or sold within the
United States or to U.S. persons (as such term is defined in Regulation S under
the U.S. Securities Act) except in transactions exempt from the registration
requirements of the U.S. Securities Act and applicable state securities laws.
The Underwriting Agreement permits the Underwriters to offer and resell the
Securities that they have acquired pursuant to the Underwriting Agreement to
certain institutional accredited investors in the United States, provided such
offers and sales are made in accordance
38
with exemptions from the registration requirements under the U.S. Securities
Act. Moreover, the Underwriting Agreement provides that the Underwriters will
offer and sell the Securities outside the United States only in accordance with
Regulation S under the U.S. Securities Act.
In addition, until 40 days after the commencement of the offering, an offer or
sale of Securities within the United States by any dealer (whether or not
participating in the offering) may violate the registration requirements of the
U.S. Securities Act if such offer or sale is made otherwise than in accordance
with an exemption from registration under the U.S. Securities Act.
RELATIONSHIP AMONG THE TRUST, THE CORPORATION AND CERTAIN UNDERWRITERS
Each of National Bank Financial Inc. and TD Securities Inc. is, directly or
indirectly, a wholly-owned subsidiary of a Canadian chartered bank
(collectively, the "CURRENT LENDERS") that is a lender to the Corporation.
Accordingly, the Trust may be considered a "connected issuer" of these
Underwriters under applicable Canadian securities legislation. Under the Current
Credit Facilities described in Note 1 to the table under "Consolidated
Capitalization of the Trust" the Corporation was indebted to the Current Lenders
for an aggregate amount of $103,665,000 as at March 31, 2005. The Corporation is
in compliance with all material terms of the agreements governing the Current
Credit Facilities, and none of the Current Lenders has waived any material
breach by the Corporation of such agreements since their execution. Neither the
financial position of the Corporation nor the value of the security under the
Current Credit Facilities has changed substantially since the indebtedness under
the Current Credit Facilities was incurred. In addition, the Corporation has
obtained a commitment for the New Credit Facilities with, among others, the
Canadian chartered banks of which National Bank Financial Inc., TD Securities
Inc. and Scotia Capital Inc. are subsidiaries, in addition to other lenders. The
New Credit Facilities will be used to, among other things, repay amounts
outstanding under the Current Credit Facilities and to pay a portion of the
purchase price of the Acquisition. The net proceeds of the offering will be used
to fund a portion of the purchase price of the Acquisition and the balance of
the purchase price will be funded from the New Credit Facilities.
In addition, National Bank Financial Inc. was retained by the Trust in
connection with the Acquisition and will receive a fee from the Trust on
completion of the Acquisition.
The decision to distribute the Subscription Receipts and the Debentures offered
hereby and the determination of the terms of the offering were made through
negotiations between the Corporation on behalf of the Trust and National Bank
Financial Inc., on its own behalf and on behalf of the other Underwriters. The
Current Lenders did not have any involvement in such decision or determination,
but have been advised of the issuance and terms thereof. As a consequence of the
offering, each of the Underwriters will receive its share of the underwriting
fee payable by the Trust to the Underwriters.
INTEREST OF EXPERTS
Certain legal matters relating to the offering will be passed upon by Burnet,
Duckworth & Palmer LLP on behalf of the Trust, and by Blake, Cassels & Graydon
LLP on behalf of the Underwriters. As at the date hereof, the partners and
associates of Burnet, Duckworth & Palmer LLP, as a group, owned less than 1% of
outstanding Units and Blake, Cassels & Graydon LLP, as a group, own, directly or
indirectly, less than 1% of the Units. Oil and natural gas reserve estimates
contained in or incorporated by reference into this short form prospectus have
been prepared by McDaniel & Associates Consultants Ltd, Gilbert Laustsen Jung
Associates Ltd., Paddock, Lindstrom and Associates Ltd. and Sproule. As of the
date hereof, the directors, officers and associates of each of McDaniel &
Associates Consultants Ltd., Gilbert Laustsen Jung Associates Ltd., Paddock,
Lindstrom and Associates Ltd. and Sproule, as a group, own, directly or
indirectly, less than 1% of the Units.
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Burnet, Duckworth & Palmer LLP and Blake, Cassels & Graydon
LLP (collectively, "CoUnsel"), the following summary fairly describes the
principal Canadian federal income tax considerations pursuant to the Tax Act and
the regulations thereunder (the "REGULATIONS") generally applicable to a
subscriber who acquires Subscription Receipts or Debentures pursuant to the
offering and who at all relevant times, for purposes of the Tax Act, holds the
Subscription Receipts, the Debentures and the Units issued pursuant to the
Subscription Receipts and the Units issued on the conversion, redemption or
repayment of the Debentures (collectively, the "SECURITIES") as capital property
and deals at arm's length with the Trust and the Underwriters and is not
affiliated with the Trust. Generally speaking, the Securities will be considered
to be capital property to a holder provided the holder does not hold the
Securities in the course of carrying on a business of trading or dealing in
securities and has not acquired
39
them in one or more transactions considered to be an adventure in the nature of
trade. Certain holders who might not otherwise be considered to hold their
Debentures and Units as capital property may, in certain circumstances, be
entitled to have them treated as capital property by making the election
permitted by subsection 39(4) of the Tax Act. This summary is not applicable to:
(i) a holder that is a "financial institution", as defined in the Tax Act for
purposes of the mark-to-market rules; (ii) a holder an interest in which would
be a "tax shelter investment" as defined in the Tax Act; or (iii) a holder that
is a "specified financial institution" as defined in the Tax Act. Any such
holder should consult its own tax advisor with respect to an investment in the
Securities.
This summary is based upon the provisions of the Tax Act and the Regulations in
force as of the date hereof and Counsel's understanding of the current published
administrative practices of the Canada Revenue Agency ("CRA"). Except for
specifically proposed amendments (the "PROPOSED AMENDMENTS") to the Tax Act and
the Regulations that have been publicly announced by the federal Minister of
Finance prior to the date hereof, this summary does not take into account or
anticipate changes thereto, whether by legislative, governmental or judicial
action, nor any changes in the administrative practices of the CRA. This summary
is not exhaustive of all Canadian federal income tax considerations nor does it
take into account any provincial, territorial or foreign tax considerations
arising from the acquisition, ownership or disposition of the Securities. Except
as otherwise indicated, this summary is based on the assumption that all
transactions described herein occur at fair market value.
PROSPECTIVE UNITHOLDERS THAT ARE REGISTERED PENSION PLANS OR WHO ARE NOT
RESIDENT (OR DEEMED TO BE RESIDENT) IN CANADA SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING THE INCOME TAX CONSIDERATIONS APPLICABLE TO THEM IN THEIR
PARTICULAR CIRCUMSTANCES.
THIS SUMMARY IS OF A GENERAL NATURE ONLY AND IS NOT INTENDED TO BE, NOR SHOULD
IT BE CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY PROSPECTIVE PURCHASER OR
HOLDER OF SECURITIES, AND NO REPRESENTATIONS WITH RESPECT TO THE INCOME TAX
CONSEQUENCES TO ANY PROSPECTIVE PURCHASER OR HOLDER ARE MADE. CONSEQUENTLY,
PROSPECTIVE HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THEIR
PARTICULAR CIRCUMSTANCES.
HOLDERS OF SECURITIES RESIDENT IN CANADA
This portion of the summary is applicable to holders of Securities who, for the
purposes of the Tax Act and at all relevant times, are resident or deemed to be
resident in Canada.
SUBSCRIPTION RECEIPTS
No gain or loss will be realized by a holder on the issuance of a Unit pursuant
to a Subscription Receipt. If the Acquisition is completed prior to the
Termination Time, the holder of a Subscription Receipt will be required to
include in income the amount equal to the distributions that the holder would
have received on such Unit had the Unit been issued to the holder on the date of
closing of this offering, and such amount will not reduce the cost of the
acquired Units. The cost of any Units acquired must be averaged with the cost of
any other Units held by the Unitholder to determine the adjusted cost base of
each Unit held.
In the event the Acquisition does not close before the Termination Time or if
the Acquisition is terminated at an earlier time, holders of Subscription
Receipts will be required to include their proportionate share of interest on
the Escrowed Funds in computing their income for purposes of the Tax Act.
A disposition or deemed disposition by a holder of a Subscription Receipt, other
than on the exchange thereof for a Unit, will generally result in the holder
realizing a capital gain (or capital loss) equal to the amount by which the
proceeds of disposition are greater (or less) than the aggregate of the holder's
adjusted cost base thereof and any reasonable costs of disposition. Prior to
delivery of a Unit pursuant to a Subscription Receipt, the cost of a
Subscription Receipt need not be averaged with the cost of any Units held. Any
such capital gains or capital losses will be treated, for tax purposes in the
same manner as capital gains and capital losses arising from a disposition of
Units, which treatment is described below under "Holders of Securities Resident
in Canada -- Units".
40
DEBENTURES
INTEREST ON DEBENTURES
A holder of Debentures that is a corporation, partnership, unit trust or any
trust of which a corporation or a partnership is a beneficiary will be required
to include in computing its income for a taxation year any interest on the
Debentures that accrues to it to the end of the particular taxation year or that
has become receivable by or is received by it before the end of that taxation
year, except to the extent that such interest was included in computing the
holder's income for a preceding taxation year.
Any other holder will be required to include in computing income for a taxation
year all interest on the Debentures that is received or receivable by the holder
in that taxation year (depending upon the method regularly followed by the
holder in computing income), except to the extent that the interest was included
in the holder's income for a preceding taxation year. In addition, although the
Debenture will generally not be an "investment contract" (as defined in the Tax
Act) in relation to a holder, if at any time a Debenture should become an
"investment contract" in relation to a holder, such holder will be required to
include in computing income for a taxation year any interest that accrues to the
holder on the Debenture to the end of any "anniversary day" (as defined in the
Tax Act) in that year to the extent such interest was not otherwise included in
the holder's income for that year or a preceding year.
A transferor of a Debenture will generally be required to include as interest,
and not as proceeds of disposition, the amount of accrued but unpaid interest on
such Debenture at the time of transfer except to the extent such amount was
otherwise included in the transferor's name. The computation of the amount of
such interest on a transfer of Debentures is complex, and in some circumstances
unclear. Sellers or transferors of Debentures should consult their own advisors
regarding the tax consequences applicable to them.
EXERCISE OF CONVERSION PRIVILEGE
A holder of a Debenture who exchanges the Debenture for Units pursuant to the
conversion privilege will be considered to have disposed of the Debenture for
proceeds of disposition equal to the aggregate of the fair market value of the
Units so acquired at the time of the exchange and the amount of any cash
received in lieu of fractional Units (other than Units issued or cash received
in respect of interest). The holder will realize a capital gain or capital loss
computed as described below under "Other Dispositions of Debentures".
The cost to the holder of the Units so acquired will also be equal to their fair
market value at the time of the exchange and must be averaged with the adjusted
cost base of all other Units held as capital property by the holder for the
purpose of calculating the adjusted cost base of such Units.
REDEMPTION OR REPAYMENT OF DEBENTURES
If the Trust redeems a Debenture prior to maturity or repays a Debenture upon
maturity, the holder will be considered to have disposed of the Debenture for
proceeds of disposition equal to the amount received by the holder (other than
the amount received as or in lieu of unpaid interest) on such redemption or
repayment. If the holder receives Units on redemption or repayment (otherwise
than in respect of interest), the holder will be considered to have proceeds of
disposition equal to the fair market value of the Units so received and the
amount of any cash received in lieu of fractional Units. The holder may realize
a capital gain or capital loss computed as described below under "Other
Dispositions of Debentures". The cost to the holder of the Units so received
will also be equal to their fair market value at the time of the exchange and
must be averaged with the adjusted cost base of all other Units held as capital
property by the holder for the purpose of calculating the adjusted cost base of
such Units.
OTHER DISPOSITIONS OF DEBENTURES
A disposition or deemed disposition by a holder of a Debenture will generally
result in the holder realizing a capital gain (or capital loss) equal to the
amount by which the proceeds of disposition (adjusted as described above, in
respect of accrued interest) are greater (or less) than the aggregate of the
holder's adjusted cost base thereof and any reasonable costs of disposition. Any
such capital gains or capital losses will be treated, for tax purposes, in the
same manner as capital gains and capital losses arising from a disposition of
Units which treatment is discussed below under "Holders of Securities Resident
in Canada -- Units".
41
Upon such a disposition or deemed disposition of a Debenture, interest accrued
thereon to the date of disposition will generally be excluded in computing the
holder's proceeds of disposition of the Debenture.
UNITS
A Unitholder will generally be required to include in computing income for a
particular taxation year of the Unitholder the portion of the net income of the
Trust for a taxation year, including taxable dividends and net realized taxable
capital gains, that is paid or payable to the Unitholder in that particular
taxation year, irrespective of whether such amount is payable in cash or by the
issuance of additional Units. Income of a Unitholder from the Units will be
considered to be income from property. Any loss of the Trust for the purposes of
the Tax Act cannot be allocated to and treated as a loss of a Unitholder.
Provided that appropriate designations are made by the Trust, such portions of
its net taxable capital gains and taxable dividends as are paid or payable to a
Unitholder will effectively retain their character as taxable capital gains and
taxable dividends, respectively, and shall be treated as such in the hands of
the Unitholder for purposes of the Tax Act.
The non-taxable portion of net realized capital gains of the Trust that is paid
or payable to a Unitholder in a year will not be included in computing the
Unitholder's income for the year. Any other amount in excess of the net income
of the Trust that is paid or payable by the Trust to a Unitholder in a year will
not generally be included in the Unitholder's income for the year. However,
where such an amount becomes payable to a Unitholder, other than as proceeds of
disposition of Units or fractions thereof, the adjusted cost base of the Units
held by such Unitholder will generally be reduced by such amount. To the extent
that the adjusted cost base to a Unitholder of a Unit is less than zero at any
time in a taxation year, such negative amount will be deemed to be a capital
gain of the Unitholder from the disposition of the Unit in that year. The amount
of such capital gains will be added to the adjusted cost base of such Unit.
The initial cost to a holder of a Unit issued pursuant to a Subscription Receipt
will be equal to the cost of such Subscription Receipt to the holder. This
initial cost will be averaged with the adjusted cost base of all other Units
held by the holder in order to determine the respective adjusted cost base of
each such Unit.
The cost to a Unitholder of Units acquired on conversion of a Debenture will
equal the fair market value of the Units at that time (including Units issued in
respect of accrued but unpaid interest) plus the amount of any other reasonable
costs incurred in connection therewith. This cost will be averaged with the
adjusted cost base of all other Units held by the Unitholder at that time as
capital property to determine the adjusted cost base to the Unitholder of each
Unit.
Upon the disposition or deemed disposition by a Unitholder of a Unit, whether on
redemption or otherwise, the Unitholder will generally realize a capital gain
(or a capital loss) equal to the amount by which the proceeds of disposition
(excluding any amount which represents an amount that must otherwise be included
in the Unitholder's income as described above) are greater (or less) than the
aggregate of the Unitholder's adjusted cost base of the Unit and any reasonable
costs of disposition. Where Units are redeemed and Redemption Notes (as defined
in the AIF) are issued to the Unitholder, the proceeds of disposition will
include the fair market value of the Redemption Notes. Where Units are redeemed
and Notes are distributed to the Unitholder in payment thereof, the proceeds of
disposition to the Unitholder of the Units will generally be equal to the fair
market value of the Notes so distributed. Generally, one-half of any capital
gain (a "TAXABLE CAPITAL GAIN") realized by a Unitholder in a taxation year must
be included in the Unitholder's income for the year, and one-half of any capital
loss (an "ALLOWABLE CAPITAL LOSS") realized by a Unitholder in a taxation year
must be deducted from taxable capital gains realized by the Unitholder in that
year. Allowable capital losses for a taxation year in excess of taxable capital
gains for that year may generally be carried back and deducted in any of the
three preceding taxation years or carried forward and deducted in any subsequent
taxation year against net taxable capital gains realized in such years, to the
extent and under the circumstances described in the Tax Act.
A capital loss realized on the disposition of a Unit will generally be reduced
by the amount of any non-taxable dividends which are received by the Trust and
payable to the Unitholder and, where the Unitholder is a corporation, the amount
of any taxable dividends which are received by the Trust, are payable to such
Unitholder and are deductible by the corporation in computing its taxable
income. Similar rules apply where the Unitholder is a partnership or a trust.
Taxable capital gains realized by a Unitholder who is an individual may give
rise to "alternative minimum tax" depending on the particular Unitholder's
circumstances. A Unitholder that throughout the relevant taxation year is a
"Canadian controlled private
42
corporation", as defined in the Tax Act, may be liable to pay an additional
refundable tax of 6?% on certain investment income including taxable capital
gains.
The adjusted cost base of any Note or Redemption Note distributed or issued to a
Unitholder by the Trust upon a redemption of Units will be equal to the fair
market value of the Note or Redemption Note at the time of the distribution or
issuance, as the case may be, less any accrued interest thereon. Such a
Unitholder will be required to include in income interest on the Note or
Redemption Note (including interest that had accrued to the date of the
acquisition of the Note by a Unitholder) in accordance with the provisions of
the Tax Act. To the extent that a Unitholder is required to include in income
any interest that had accrued to the date of the acquisition of the Note, an
offsetting deduction may be available.
HOLDERS OF SECURITIES NOT RESIDENT IN CANADA
This portion of the summary applies to a holder of Securities who, for the
purposes of the Tax Act and at all relevant times, is not resident in Canada and
is not deemed to be resident in Canada, does not use or hold, and is not deemed
to use or hold, Securities in, or in the course of, carrying on a business in
Canada, and is not an insurer who carries on an insurance business or is deemed
to carry on an insurance business in Canada and elsewhere (a "NON-RESIDENT").
SUBSCRIPTION RECEIPTS
No gain or loss will be realized by a holder on the issuance of a Unit pursuant
to a Subscription Receipt. However, if the Acquisition is completed prior to the
Termination Time, the Non Resident holder of a Subscription Receipt, in addition
to receiving a Unit in exchange therefor, will be entitled to receive an amount
equal to the distributions that the holder would have received on such Unit had
the Unit been issued to the holder on the date of closing of this offering.
Although the nature of such payment is not entirely clear, the payment may be
subject to Canadian withholding tax at the rate of 25%, and the Trust intends to
withhold such amount from any payment. Non Residents are urged to consult their
own advisors as to the treatment of such payment. In the event the Acquisition
does not close before the Termination Time or if the Acquisition is terminated
at an earlier time, a Non Resident holder of Subscription Receipts who is not
resident or deemed to be resident in Canada will be subject to withholding tax
on such holder's proportionate share of interest on the Escrowed Funds which is
paid or credited to such holders at the rate of 25%, unless such rate is reduced
under the provisions of a tax treaty between Canada and the Non Resident's
jurisdiction of residence. A holder resident in the United States for the
purposes of the Canada -- US Income Tax Convention (the "US Treaty") will
generally be entitled to have the rate of withholding reduced to 10% of the
amount of any interest paid or credited. To the extent the Escrowed Funds are
invested in obligations of, or guaranteed by, the Government of Canada, interest
on such obligations that is paid or credited to a Non-Resident holder of
Subscription Receipts as, on account of, in lieu of, or in satisfaction of such
interest will not be subject to Canadian withholding tax.
A disposition or deemed disposition of Subscription Receipts by a Non Resident
will not be subject to tax under the Tax Act provided that Units to be issued
thereunder to a particular holder (including Units issued pursuant to
Subscription Receipts) would not constitute "taxable Canadian property" as
described under "Holders of Securities Not Resident in Canada -- Units".
DEBENTURES
Interest paid or credited, or deemed to be paid or credited (including any
premium on redemptions and accrued interest on sales or transfers described
below), to a Non-Resident holder of Debentures, Notes or Redemption Notes will
generally be subject to Canadian withholding tax at a rate of 25% unless such
rate is reduced under the provisions of an applicable tax treaty. The rate of
withholding is reduced to 10% where such interest is paid or credited, or deemed
paid or credited, to Non-Resident holders of Debentures, Notes or Redemption
Notes who are residents of the United States for purposes of the US Treaty. A
transfer or sale of a Debenture by a Non-Resident where there is accrued or
unpaid interest will, in certain circumstances, be treated as the receipt of
interest by the Non-Resident and will also be subject to Canadian withholding
tax, as described herein, and the vendor or transferee will be subject to the
obligation to withhold and remit such tax in the manner prescribed in the Tax
Act.
Interest paid or credited, or deemed to be paid or credited, to a Non-Resident
on a Note or Redemption Note will generally be subject to Canadian withholding
tax at the rate of 25%, unless such rate is reduced under the provisions of an
applicable tax treaty. The rate of withholding generally is reduced to 10% where
such interest is paid or credited, or deemed to be paid or credited, to
Non-Residents who are residents of the United States for purposes of the US
Treaty.
43
The disposition of a Debenture by a Non-Resident holder will generally not be
subject to tax under the Tax Act for the same reasons as discussed below if
Units held by a particular holder (including Units acquired upon a conversion or
repayment of Debentures) would not constitute "taxable Canadian property" as
described under "Holders of Securities Not Resident in Canada -- Units" except
to the extent that the disposition is to a Canadian resident and a portion of
the proceeds are deemed to be interest. Such interest will generally be subject
to Canadian withholding tax as described above.
THE COMPUTATION OF THE AMOUNT OF INTEREST WHICH IS DEEMED TO HAVE BEEN PAID ON A
TRANSFER OF DEBENTURES IS COMPLEX, AND IN SOME CIRCUMSTANCES UNCLEAR. SELLERS OR
TRANSFERORS OF DEBENTURES SHOULD CONSULT THEIR OWN ADVISORS AS TO WHETHER ANY
WITHHOLDING OBLIGATION APPLIES.
UNITS
Where the Trust pays or credits, or is deemed to pay or credit, an amount to a
Non-Resident Unitholder out of the income of the Trust, such amount will be
subject to Canadian withholding tax at the rate of 25%, unless such rate is
reduced under the provisions of an applicable tax treaty. The rate of
withholding is reduced to 15% where such distributions are paid or credited, or
deemed to be paid or credited, to Non-Resident Unitholders who are residents of
the United States for purposes of the US Treaty.
The Trust is required to maintain a special "TCP gains balance" account to which
it will add its capital gains from dispositions after March 22, 2004 of "taxable
Canadian property" (as defined in the Tax Act) and from which it will deduct its
capital losses from dispositions of such property and the amount of all "TCP
gains distributions" (as defined in the Tax Act) made by it in previous taxation
years. If the Trust pays an amount to a Non-Resident Unitholder, makes a
designation to treat that amount as a taxable capital gain of the Unitholder and
the total of all such amounts designated by the Trust in a taxation year to
Non-Resident Unitholders exceeds 5% of all such designated amounts, such portion
of that amount as does not exceed the Non-Resident Unitholder's pro rata portion
of the Trust's "TCP gains balance" account (as defined in the Tax Act) for the
taxation year effectively will be subject to the same Canadian withholding tax
as described above for distributions of income (other than net realized capital
gains). All other amounts distributed by the Trust to a Non-Resident Unitholder
other than amounts described above, where more than 50% of the fair market value
of a Trust Unit is attributable to, INTER ALIA, real property situated in Canada
or a "Canadian resource property" (as defined in the Tax Act) will be subject to
a special Canadian tax of 15% of the amounts of such distributions as an income
tax on the deemed capital gain. This tax will be withheld from such
distributions by the Trust. A Non-Resident Unitholder will not be required to
report such distribution in a Canadian tax return and such distribution will not
reduce the adjusted cost base of the Non-Resident Unitholder's Trust Units. If a
Non-Resident Unitholder realizes a capital loss on the disposition of a Trust
Unit in a particular taxation year and files a special tax return on or before
such Non-Resident Unitholder's filing due date for such taxation year, the
Non-Resident Unitholder will have a "Canadian property mutual fund loss" (as
defined in the Tax Act) equal to the lesser of such loss and sum of all
distributions previously received on such Trust Unit that were subject to 15%
tax. The Non-Resident Unitholder's tax liability for such taxation year shall be
computed by reducing any deemed capital gain for the taxation year by the
aggregate of such loss and any unused "Canadian property mutual fund losses" (as
defined in the Tax Act) from previous taxation years arising from the
disposition of a Trust Unit or a share of the capital stock of a mutual fund
corporation or a unit of another mutual fund trust. In certain circumstances,
the Non-Resident Unitholder may be entitled to receive a refund of all or a
portion of such tax. A Canadian property mutual fund loss and unused Canadian
mutual fund losses generally may be carried back up to three years and forward
indefinitely and deducted against similar distributions received in such years.
A capital gain realized by a Non-Resident Unitholder from a disposition or
deemed disposition of a Unit will not be subject to tax under the Tax Act
provided that the Unit does not constitute "taxable Canadian property" to the
particular holder. Units of a Non-Resident Unitholder will generally not
constitute "taxable Canadian property" under the Tax Act unless either: (a) at
any time during the period of sixty months immediately preceding the disposition
of Units by such Non-Resident Unitholder, not less than 25% of the issued Units,
or rights to acquire not less than 25% of the issued Units (including rights
arising under the Subscription Receipts or Debentures), were owned by the
Non-Resident Unitholder, by persons with whom the Non-Resident Unitholder did
not deal at arm's length or by any combination thereof; or (b) the Non-Resident
Unitholder's Units are otherwise deemed to be taxable Canadian property. A
Non-Resident Unitholder will generally compute the adjusted cost base of the
Units under the same rules that apply to residents of Canada.
If the Trust ceases to qualify as a mutual fund trust, there may be adverse
income tax consequences for Non-Resident Unitholders who acquire an interest in
the Trust.
44
STATUS OF THE TRUST
Based on representations made to Counsel by the Corporation, the Trust currently
qualifies, and will qualify on the date of the closing of this Offering, as a
"unit trust" and a "mutual fund trust" as defined in the Tax Act and this
summary assumes that the Trust will continue to so qualify thereafter for the
duration of its existence. The qualification of the Trust as a mutual fund trust
under the Tax Act requires that certain factual conditions generally be met
throughout its existence. Firstly, in order for the Trust to qualify as a mutual
fund trust, it must not have been established or at any time be maintained
primarily for the benefit of persons who are not residents of Canada for the
purposes of the Tax Act. Secondly, the Trust must have at least 150 Unitholders
each of whom owns not less than one "block" of Units and each of whom owns Units
having an aggregate fair market value of not less than $500. In this case, a
"block" of Units generally means 100 Units if the fair market value of one Unit
is less than $25. Thirdly, the Trust is required to restrict its activities to
investing in property (other than real property or an interest in real property)
and acquiring, holding, maintaining, improving, leasing or managing real
property (or an interest in real property) that is capital property to the
Trust.
Should the Trust not qualify as a mutual fund trust, the income tax
considerations applicable to the Trust and to holders of Securities would in
some respects be materially different than those described in this summary.
TAXATION OF THE TRUST
The Trust is subject to taxation in each taxation year on its income for the
year, including net realized taxable capital gains, less the portion thereof
that is paid or payable in the year to Unitholders (whether paid in cash or
Units) and which is deducted by the Trust in computing its income for the
purposes of the Tax Act. An amount will be considered to be payable to a
Unitholder in a taxation year only if it is paid in the year by the Trust or the
Unitholder is entitled in that year to enforce payment of the amount. The
taxation year of the Trust is the calendar year.
The Trust is required to include in its income for each taxation year all
amounts that accrue to it during the year on royalties held by it, including the
NPI. The Trust will also be required to include in its income all interest,
including interest on indebtedness of the Operating Subsidiaries that accrues to
it to the end of the year or becomes receivable or is received by it before the
end of the year, except to the extent that such interest was included in
computing its income for a preceding taxation year, and distributions from HST
and HBT2. Provided that appropriate designations are made by the Trust, all
dividends which would otherwise be included in its income as dividends received
on shares owned by the Trust will be deemed to have been received by Unitholders
and not to have been received by the Trust.
The Trust will be entitled to deduct, on an annual basis, reasonable
administrative expenses incurred in its ongoing operations. The Trust generally
will be entitled to deduct a portion of any costs incurred by it in connection
with the issuance of Securities. The amount of such issue costs deductible by
the Trust in a taxation year is 20% of such costs, pro-rated for short taxation
years, to the extent such amount was not deductible by the Trust in computing
income for a preceding taxation year. The Trust generally will be able to deduct
interest paid or payable on the 9% Debentures, the 8% Debentures and the
Debentures. Interest on the Redemption Notes may not be deductible by the Trust.
The Trust may also deduct, in computing its income from all sources for a
taxation year, an amount not exceeding 10% on a declining balance basis of its
cumulative Canadian oil and gas property expense ("COGPE") account at the end of
that year, prorated for short taxation years. Counsel is advised that the cost
of the NPI has been added to the Trust's cumulative COGPE account. Provided that
the NPI constitutes a "Canadian resource property", where, as a result of a sale
of a property by an Operating Subsidiary and the extinguishment of the NPI with
respect thereto, proceeds of disposition become receivable by the Trust in a
taxation year, the amount of such proceeds ("ROYALTY DISPOSITION PROCEEDS") will
be required to be deducted from the balance of the Trust's cumulative COGPE
account otherwise determined. If all or a portion of the Royalty Disposition
Proceeds receivable in a taxation year is utilized in that year by the Trust to
acquire additional oil and gas royalty interests in respect of one or more
"Canadian resource properties", as defined under the Tax Act, the amount so
utilized will be added, in that year, to its cumulative COGPE account. If, after
taking into account all additions and deductions for any taxation year, the
balance of the cumulative COGPE account of the Trust is negative at the end of
such taxation year, the negative balance will be included in the income of the
Trust for such year. Amendments to the Tax Act clarify that the NPI will only
constitute a "Canadian resource property" if, generally speaking, 90% or more of
the revenue therefrom is derived from production.
Subject to the comments below, the Trust may generally deduct in computing its
income for a year a "resource allowance" computed by reference to its "adjusted
resource profits" calculated in accordance with the Regulations and a portion of
Crown charges paid or reimbursed by it in respect of the NPI. Generally, the
Trust's adjusted resource profits will equal its income from
45
any royalties less amounts deducted in computing its income other than
deductions in respect of its cumulative COGPE, interest expense or any amount
deducted in respect of distributions to Unitholders. Recent amendments to the
Tax Act will phase out the resource allowance and phase in the deductibility of
Crown charges commencing in 2003. After 2006, the resource allowance will be
eliminated and Crown charges will be fully deductible.
Under the Trust Indenture, an amount equal to all of the royalty, interest and
dividend income of the Trust for each year, together with the taxable and
non-taxable portions of any capital gains realized by the Trust in the year (net
of the Trust's expenses, including interest on the 9% Debentures, the 8%
Debentures and the Debentures, and amounts, if any, required to be retained to
pay any tax liability of the Trust) will be payable to the Unitholders. Royalty
Disposition Proceeds will also be payable to the Unitholders to the extent such
proceeds create a negative balance in the cumulative COGPE account of the Trust
as at December 31 of any year. Subject to the exceptions described below, all
amounts payable to the Unitholders shall be paid by way of cash distributions.
Under the Trust Indenture, income received by the Trust may be used to finance
cash redemptions of Units. Further, it is possible that income received by the
Trust will be used to repay the principal amount of any outstanding indebtedness
(including the Debentures and the Redemption Notes). Accordingly, such income so
utilized will not be payable to holders of the Units by way of cash
distributions. In such circumstances, such income may be payable to holders of
Units in the form of additional Units in lieu of the Trust paying tax thereon.
For purposes of the Tax Act, Counsel is advised that the Trust intends to
deduct, in computing its income, the full amount available for deduction in each
year to the extent of its income for the year otherwise determined. As a result
of such deduction from income, it is expected that the Trust will not be liable
for any material amount of income tax under the Tax Act.
ELIGIBILITY FOR INVESTMENT
In the opinion of Counsel, based on representations from the Corporation and the
Trust as to certain factual matters, and subject to the qualifications and
assumptions discussed under the heading "Canadian Federal Income Tax
Considerations", the Subscription Receipts, Debentures and the Units issuable
pursuant to a Subscription Receipt or on the conversion, redemption or at
maturity of the Debentures will, on the date of closing, be qualified
investments for trusts governed by registered retirement savings plans ("RRSP"),
registered retirement income funds ("RRIF"), deferred profit sharing plans
(other than, with respect to the Debentures, a trust governed by a deferred
profit sharing plan to which contributions are made by the Trust or a
corporation with which the Trust does not deal at arm's length within the
meaning of the Tax Act) ("DPSP") and registered education savings plans ("RESP")
under the Tax Act (collectively, the "DEFERRED PLANS") as in effect on the date
hereof. If the Trust ceases to qualify as a mutual fund trust, the Subscription
Receipts, the Debentures and the Units issuable pursuant to the Subscription
Receipts and on conversion, redemption or maturity of the Debentures will cease
to be qualified investments for Deferred Plans. Adverse tax consequences may
apply to a Deferred Plan, or an annuitant thereunder, if the Deferred Plan
acquires or holds property that is not a qualified investment for the Deferred
Plan.
RISK FACTORS
An investment in the Subscription Receipts, Debentures and Units is subject to
certain risks. Investors should carefully consider the risks described under
"Risk Factors" in the AIF in addition to the following risk factors.
POSSIBLE FAILURE TO REALIZE ANTICIPATED BENEFITS OF ACQUISITIONS
Since July 2002, the Trust has completed a number of acquisitions and is
proposing to complete the Acquisition to strengthen its position in the oil and
natural gas industry and to create the opportunity to realize certain benefits
including, among other things, potential cost savings. Achieving the benefits of
these and future acquisitions the Trust may complete depends in part on
successfully consolidating functions and integrating operations, procedures and
personnel in a timely and efficient manner, as well as the Trust's ability to
realize the anticipated growth opportunities and synergies from combining the
acquired businesses and operations with those of the Operating Subsidiaries. The
integration of acquired businesses requires the dedication of substantial
management effort, time and resources which may divert management's focus and
resources from other strategic opportunities and from operational matters during
this process. The integration process may result in the loss of key employees
and the disruption of ongoing business, customer and employee relationships that
may adversely affect the Trust's ability to achieve the anticipated benefits of
these and future acquisitions.
46
POSSIBLE FAILURE TO COMPLETE THE ACQUISITION
The Acquisition is subject to normal commercial risk that the Acquisition may
not be completed on the terms negotiated or at all. If closing of the
Acquisition does not take place by the Termination Time, the Escrow Agent and
the Trust will repay to holders of Subscription Receipts, commencing on or
before the second Business Day following the Termination Time, an amount equal
to the issue price therefor plus a pro rata share of the interest earned on the
Escrowed Funds. In addition, the maturity date of the Debentures will not be
extended past the Initial Maturity Date and will be repayable by the Trust on
that date.
Pursuant to the Purchase Agreement, HBT1 and HBT2 (the "HARVEST PARTIES") paid a
deposit of $26 million (the "DEPOSIT") to the Vendor which amount will be
credited to the purchase price in the event the Acquisition is completed. If the
Acquisition does not occur due to a default by the Harvest Parties, the Vendor
shall be entitled to retain the Deposit, plus interest. In all other cases where
the Harvest Parties are not in default and the Acquisition does not occur, the
Deposit and interest accrued thereon shall be refunded to the Harvest Parties.
See "Recent Developments - The Acquisition".
OPERATIONAL AND RESERVE RISKS RELATING TO THE NEW PROPERTIES
The risk factors set forth in the Trust's AIF and in this short form prospectus
relating to the oil and natural gas business and the operations and reserves of
the Trust apply equally in respect of the New Properties that the Trust is
acquiring pursuant to the Acquisition. In particular, the reserve and recovery
information contained in the Sproule Report in respect of the New Properties is
only an estimate and the actual production from and ultimate reserves of those
properties may be greater or less than the estimates contained in such report.
MARKET FOR SECURITIES
There is currently no market through which the Subscription Receipts or the
Debentures may be sold and purchasers may not be able to resell Subscription
Receipts or Debentures purchased under this short form prospectus. There can be
no assurance that an active trading market will develop for the Subscription
Receipts or the Debentures after the offering, or if developed, that such a
market will be sustained at the price level of the offering.
PRIOR RANKING INDEBTEDNESS; ABSENCE OF COVENANT PROTECTION
The Debentures will be subordinate to all Senior Indebtedness and to any
indebtedness of creditors of the Trust. The Debentures will also be effectively
subordinate to claims of creditors of the Trust's subsidiaries except to the
extent the Trust is a creditor of such subsidiaries ranking at least PARI PASSU
with such other creditors.
The Indenture will not limit the ability of the Trust to incur additional debt
or liabilities (including Senior Indebtedness) or to make distributions. The
Indenture does not contain any provision specifically intended to protect
holders of the Debentures in the event of a future leveraged transaction
involving the Trust other than a restriction on issuance of additional
convertible debentures of equal ranking such that the total of all issued and
outstanding convertible debentures cannot exceed 25% of the Total Market
Capitalization of the Trust. However, the Trust Indenture, among other things,
restricts the Trust's level of indebtedness, provides operating investment
guidelines, mandates the making of distributions and specifies the nature of its
business.
RESERVE ESTIMATES
The reserve and recovery information contained in the Sproule Report and in the
reserve reports as described in or incorporated by reference in this short form
prospectus are only estimates and the actual production and ultimate reserves
from the properties may be greater or less than the estimates prepared. In
addition, probable reserve estimates for properties may require revision based
on the actual development strategies employed to prove such reserves. Estimated
reserves may also be affected by changes in oil and natural gas prices. Declines
in the reserves of the Operating Subsidiaries which are not offset by the
acquisition or development of additional reserves may reduce the underlying
value of Units to Unitholders.
47
VOLATILITY OF OIL AND NATURAL GAS PRICES
The Trust's operational results and financial condition are dependent on the
prices received by the Operating Subsidiaries for oil and natural gas
production. Oil and natural gas prices have fluctuated widely during recent
years and are determined by supply and demand factors, including weather and
general economic conditions as well as economic, political and other conditions
in other oil and natural gas regions, all of which are beyond the Trust's
control. Any decline in oil and natural gas prices could have an adverse effect
on the Trust's financial condition and therefore on the distributable income
available to holders of Units as well as on the future value of the Trust's
Reserves as determined by independent evaluators.
VARIATIONS IN FOREIGN EXCHANGE RATES AND INTEREST RATES
Most of the Trust's expenses are denominated in Canadian dollars, while much of
its sales and the price of oil and natural gas are generally denominated in U.S.
dollars. The exchange rate for the Canadian dollar versus the U.S. dollar has
increased significantly over the last 12 months, resulting in the receipt by the
Trust of fewer Canadian dollars for its production. If the value of the Canadian
dollar against the U.S. dollar continues to increase, the ability of the Trust
to maintain distributions at current levels may be negatively affected. The
Corporation has initiated certain hedges to mitigate these risks. Future
fluctuations in the Canadian/United States foreign exchange rate may impact
future distributions and the future value of the Trust's reserves as determined
by independent evaluators.
In addition, variations in interest rates could result in a significant change
in the amount the Trust pays to service debt, potentially impacting
distributions to Unitholders.
INVESTMENT ELIGIBILITY; MUTUAL FUND TRUST STATUS
If the Trust ceases to qualify as a mutual fund trust, the Subscription
Receipts, the Debentures and the Units will cease to be qualified investments
for RRSPs, RRIFs, DPSPs and RESPs ("Deferred Plans"). Where at the end of any
month a Deferred Plan holds Subscription Receipts, Debentures or Units that are
not qualified investments, the Deferred Plan must, in respect of that month, pay
a tax under Part XI.1 of the Tax Act equal to 1% of the fair market value of the
Subscription Receipts, Debentures or Units, as the case may be, at the time such
Subscription Receipts, Debentures or Units were acquired by the Deferred Plan.
In addition, where a trust governed by an RRSP or RRIF holds Subscription
Receipts, Debentures or Units that are not qualified investments, the Trust will
become taxable on its income attributable to the Subscription Receipts,
Debentures or Units, as the case may be, while they are not qualified
investments, including the full amount of any capital gain realized on a
disposition of Subscription Receipts, Debentures or Units while they are not
qualified investments. Where a trust governed by an RESP holds Subscription
Receipts, Debentures or Units that are not qualified investments, the plan's
registration may be revoked. In addition, if the Trust were to cease to qualify
as a mutual fund trust:
(a) Subscription Receipts, Debentures and Units would become
foreign property for registered pension plans;
(b) the Trust would be taxed on certain types of income
distributed to Unitholders including income generated by the
NPI held by the Trust. Payment of this tax may have adverse
consequences for some Unitholders, particularly Unitholders
that are not residents of Canada and residents of Canada that
are otherwise exempt from Canadian income tax; and
(c) Units, Debentures and Subscription Receipts held by
Unitholders that are not residents of Canada would become
taxable Canadian property. These non-resident holders would be
subject to Canadian income tax on any gains realized on a
disposition of Debentures, Subscription Receipts and Units
held by them.
TAXATION
The Trust will distribute all of its taxable income to the Unitholders in each
taxation year. See "Canadian Federal Income Tax Considerations - Taxation of the
Trust". To the extent the Trust has insufficient deductions to offset its
taxable income, such amounts will be taxable to Unitholders and the portion of
cash distributions paid to Unitholders that is taxable may change from time to
time.
48
MATERIAL CONTRACTS
The only material contracts entered into or to be entered into by the Trust in
connection with the offering are as follows:
(a) the Subscription Receipt Agreement;
(b) the Indenture; and
(c) the Underwriting Agreement.
Copies of the foregoing agreements (in draft form prior to closing in the case
of the Subscription Receipt Agreement and the Indenture) may be inspected during
regular business hours at the offices of the Trust, at 2100, 330 5th Avenue
S.W., Calgary, Alberta, T2P 0L4 until the expiry of the 30-day period following
the date of the final short form prospectus.
PROMOTERS
M. Bruce Chernoff and Kevin A. Bennett may be considered to be the promoters of
the Trust by reason of their initiative in organizing the business and affairs
of the Trust. The following table sets forth the number of Units owned, directly
or indirectly, by Mr. Chernoff and Mr. Bennett.
NAME AND MUNICIPALITY OF
RESIDENCE OF UNITHOLDER TYPE OF OWNERSHIP NUMBER OF UNITS OWNED PERCENTAGE OF UNITS
----------------------- ----------------- --------------------- -------------------
M. Bruce Chernoff Direct and Beneficial 7,733,504(1) 17.64%
Calgary, Alberta
Kevin A. Bennett Direct and Beneficial 505,489(2) 1.15%
Calgary, Alberta
NOTES:
(1) Includes Units held by Caribou Capital Corp., a company controlled by
Mr. Chernoff, Units held by Spasovka Merchant Corp., a company
controlled by Mr. Chernoff and Units held in RESP accounts for the
benefit of Mr. Chernoff's children. Does not include Units held by Mr.
Chernoff's spouse.
(2) Does not include Units held by Mr. Bennett's spouse.
(3) Mr. Chernoff has from time to time, directly or indirectly, provided
various loans to the Trust. The terms of such loans are described in
note 10 to the audited consolidated financial statements of the Trust
for the year ended December 31, 2004 and in note 5 to the unaudited
interim consolidated financial statements of the Trust for the three
months ended March 31, 2005, all of which are incorporated by reference
in this short form prospectus.
Messrs. Chernoff and Bennett have advised the Corporation that they intend to
purchase, directly or indirectly, 10,000 and nil Subscription Receipts,
respectively, and 181 ($181,000) and nil Debentures, respectively, in this
offering.
LEGAL PROCEEDINGS
There are no outstanding legal proceedings material to the Trust to which the
Trust or the Corporation is a party or in respect of which any of their
respective properties are subject, nor are there any such proceedings known to
be contemplated.
AUDITORS, TRANSFER AGENT AND REGISTRAR
The auditors of the Trust are KPMG LLP, Chartered Accountants, 1200, 205 - 5th
Avenue S.W., Calgary, Alberta T2P 0S7.
The transfer agent and registrar for the Units, the Subscription Receipts and
Debentures is Valiant Trust Company at its principal offices in Calgary, Alberta
and Toronto, Ontario.
49
STATUTORY AND CONTRACTUAL RIGHTS OF RESCISSION AND
STATUTORY RIGHTS OF WITHDRAWAL
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, 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 province in which the purchaser resides for the particulars
of these rights or consult with a legal advisor.
In addition, original purchasers of Subscription Receipts will have the benefit
of a contractual right of rescission exercisable following the issuance of Units
to such purchasers. See "Details of the Offering - Subscription Receipts".
50
AUDITORS' CONSENT
The Directors of Harvest Operations Corp.
We have read the short form prospectus dated July 20, 2005 of Harvest Energy
Trust (the "TRUST") relating to the qualification for distribution of 6,505,600
subscription receipts each representing the right to receive one trust unit of
the Trust and $75,000,000 principal amount of convertible extendible unsecured
subordinated debentures of the Trust. We have complied with Canadian generally
accepted standards for an auditor's involvement with offering documents.
We consent to the incorporation by reference in the above-mentioned short form
prospectus of our report to the unitholders of the Trust on the consolidated
balance sheets of the Trust as at December 31, 2004 and 2003 and the
consolidated statements of income and accumulated income and cash flows for each
of the years in the two-year period ended December 31, 2004. Our report is dated
March 24, 2005.
Calgary, Canada (signed) "KPMG LLP"
July 20, 2005 Chartered Accountants
51
AUDITORS' CONSENT
We have read the short form prospectus of Harvest Energy Trust (the "TRUST")
dated July 20, 2005 relating to the qualification for distribution of 6,505,600
subscription receipts, each representing the right to receive one trust unit of
the Trust, and $75,000,000 principal amount of convertible extendible unsecured
subordinated debentures of the Trust. We have complied with Canadian generally
accepted standards for an auditor's involvement with offering documents.
We consent to the use in or by incorporation by reference in the above-mentioned
short form prospectus of our report dated July 16, 2004 to the Trustee of the
Trust and the Board of Directors of Harvest Operations Corp. on the schedule of
revenues, royalties and operating expenses of the EnCana Properties for the two
years ended December 31, 2003 and 2002;
Calgary, Alberta (signed) "PricewaterhouseCoopers LLP"
July 20, 2005 Chartered Accountants
52
AUDITORS' CONSENT
We have read the short form prospectus of Harvest Energy Trust (the "TRUST")
dated July 20, 2005 qualifying the distribution of 6,505,600 subscription
receipts, each representing the right to receive one trust unit of the Trust,
and $75,000,000 principal amount of convertible extendible unsecured
subordinated debentures of the Trust. We have complied with Canadian generally
accepted standards for an auditor's involvement with offering documents.
We consent to the use through incorporation by reference in the above-mentioned
short form prospectus of our report to the shareholders of Storm Energy Ltd.
("STORM") on the consolidated balance sheets of Storm as at December 31, 2003
and 2002 and the consolidated statements of income and retained earnings and
cash flows for the year ended December 31, 2003 and the period from commencement
of operations on August 23, 2002 to December 31, 2002. Our report is dated
February 18, 2004 (except as to note 1(a) and 11 which are as at October 7,
2004).
We also consent to the use in the above-mentioned prospectus of our report to
the managing partner of Nexen Canada No. 1 on the schedule of revenue and
expenses of the properties of Nexen Canada No. 1 (the "NEW Properties") for each
of the years in the two year period ended December 31, 2004. Our report is dated
February 28, 2005.
Calgary, Alberta (signed) "Deloitte & Touche LLP"
July 20, 2005 Chartered Accountants
F-1
PRO FORMA CONSOLIDATED FINANCIAL
STATEMENTS OF THE TRUST
COMPILATION REPORT
To the Directors of Harvest Operations Corp.
We have read the accompanying unaudited pro forma consolidated balance sheet of
Harvest Energy Trust (the "Trust") as at March 31, 2005 and the unaudited pro
forma consolidated statements of operations for the three months then ended and
for the year ended December 31, 2004, and have performed the following
procedures:
1. Compared the figures in the columns captioned "Harvest Energy Trust" to
the unaudited interim consolidated financial statements of the Trust as
at March 31, 2005 and for the three months then ended.
2. Compared the figures in the column captioned "Harvest Energy Trust
Restated" for the year ended December 31, 2004 to the audited
consolidated statement of income of the Trust for the year ended
December 31, 2004 as adjusted for the changes in accounting policies
set out in the unaudited interim consolidated financial statements of
the Trust as at and for the three months ended March 31, 2005.
3. Compared the figures in the column captioned "Storm Energy Ltd." to a
schedule that combines the unaudited consolidated statement of income
of Storm Energy Ltd. for the three month period ended March 31, 2004
and the unaudited results of operations for the three month period
ended June 30, 2004 and found them to be in agreement.
4. Compared the figures in the column captioned "EnCana Properties" to a
schedule that combines the unaudited schedule of revenues, royalties
and operating expenses of the properties for the six month period ended
June 30, 2004, and the unaudited revenues, royalties and operating
expenses of the properties for the two months ended August 31, 2004 and
found them to be in agreement.
5. Compared the figures in the columns captioned "New Properties" to the
unaudited schedule of revenue, royalties and operating expenses
associated with the properties for the three month period ended March
31, 2005, and to the audited schedule of revenue, royalties and
operating expenses for the year ended December 31, 2004 and found them
to be in agreement.
6. Made enquiries of certain officials of the Trust who have
responsibility for financial and accounting matters about:
(a) the basis for the determination of the pro forma adjustments;
and
(b) whether the pro forma financial statements comply as to form
in all material respects with the regulatory requirements of
the various Securities Commissions and similar regulatory
authorities in Canada.
The officials:
(a) described to us the basis for determination of the pro forma
adjustments; and
(b) stated that the pro forma financial statements comply as to
form in all material respects with the regulatory requirements
of the various Securities Commissions and similar regulatory
authorities in Canada.
7. Read the notes to the pro forma financial statements, and found them to
be consistent with the basis described to us for determination of the
pro forma adjustments.
8. Recalculated the application of the pro forma adjustments to the
aggregate of the amounts in the other applicable columns as at March
31, 2005 and for the three months then ended and for the year ended
December 31, 2004 and found the amounts in the column captioned "Pro
Forma Consolidated" to be arithmetically correct.
F-2
A pro forma financial statement is based on management assumptions and
adjustments which are inherently subjective. The foregoing procedures are
substantially less than either an audit or a review, the objective of which is
the expression of assurance with respect to management's assumptions, the pro
forma adjustments and the application of the adjustments to the historical
financial information. Accordingly, we express no such assurance. The foregoing
procedures would not necessarily reveal matters of significance to the pro forma
financial statements, and we therefore make no representation about the
sufficiency of the procedures for the purposes of a reader of such statements.
(signed) "KPMG LLP"
Chartered Accountants
Calgary, Canada
July 20, 2005
F-3
HARVEST ENERGY TRUST
Pro Forma Consolidated Balance Sheet
As at March 31, 2005
(000's)
- ------------------------------------------------------------------------------------------------------------------------------------
Harvest Equity/Issue
Harvest New Energy Trust Convertible Pro Forma
Energy Trust Properties Adjustments Subtotal Debentures Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets
Accounts receivable $ 61,676 -- -- $ 61,676 -- $ 61,676
Current portion of derivative 5,582 -- -- 5,582 -- 5,582
contracts
Prepaid expenses and deposits 39,868 -- -- 39,868 -- 39,868
----------- ---------- --------- ----------- --------- -----------
107,126 -- -- 107,126 -- 107,126
Deferred charges 19,697 -- 1,500(2a) 21,197 3,150(2a) 24,347
Long term portion of derivative 1,475 -- -- 1,475 -- 1,475
contracts
Capital assets 907,139 240,000 2,600(2a) 1,149,739 -- 1,149,739
Goodwill 43,832 -- -- 43,832 -- 43,832
----------- ---------- --------- ----------- --------- -----------
$ 1,079,269 240,000 4,100 $ 1,323,369 3,150 $ 1,326,519
=========== ========== ========= =========== ========= ===========
LIABILITIES AND UNITHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued $ 101,773 -- -- $ 101,773 -- $ 101,773
liabilities
Cash distributions payable 8,530 -- -- 8,530 -- 8,530
Current portion of derivative 55,267 -- -- 55,267 -- 55,267
contracts
Bank debt 103,665 240,000 1,500(2a) 345,165 (237,950)(2a) 107,215
----------- ---------- --------- ----------- --------- -----------
269,235 240,000 1,500 510,735 (237,950) 272,785
Deferred gains 1,732 -- -- 1,732 -- 1,732
Long term portion of derivative 37,898 -- -- 37,898 -- 37,898
contracts
Convertible debentures 19,134 -- -- 19,134 72,145(2d) 91,279
Senior notes 302,400 -- -- 302,400 -- 302,400
Asset retirement obligation 92,009 -- 2,600(2a) 94,609 -- 94,609
Future income tax 8,632 -- -- 8,632 -- 8,632
----------- ---------- --------- ----------- --------- -----------
731,040 240,000 4,100 975,140 (165,805) 809,335
Non-controlling interest 3,436 -- -- 3,436 -- 3,436
Unitholders' equity
Unitholders' capital 490,303 -- -- 490,303 175,000(2a) 656,403
(8,900)(2a)
Equity component of convertible 77 -- -- 77 2,855(2d) 2,932
debentures
Accumulated loss (12,351) -- -- (12,351) -- (12,351)
Accumulated cash distributions (133,236) -- -- (133,236) -- (133,236)
----------- ---------- --------- ----------- --------- -----------
344,793 -- -- 344,793 168,955 513,748
----------- ---------- --------- ----------- --------- -----------
$ 1,079,269 240,000 4,100 $ 1,323,369 3,150 $ 1,326,519
=========== ========== ========= =========== ========= ===========
F-4
HARVEST ENERGY TRUST
Pro Forma Consolidated Statement of Income
For the three months ended March 31, 2005
(000's except per unit amounts)
- ------------------------------------------------------------------------------------------------------------------------------------
Harvest Equity Issue/
Harvest New Energy Trust Convertible Pro Forma
Energy Trust Properties Adjustments Subtotal Debentures Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
REVENUE
Oil and natural gas sales $ 129,826 25,393 -- $ 155,219 -- $ 155,219
Royalty expense (19,895) (5,947) -- (25,842) -- (25,842)
---------- -------- ---------- ---------- --------- ----------
109,931 19,446 -- 129,377 -- 129,377
EXPENSES
Operating 27,348 6,413 33,761 -- 33,761
General and administrative 5,469 -- 250(2f) 5,719 -- 5,719
Interest on short term debt 2,491 -- 2,900(2a) 5,766 (2,900)(2a) 2,866
375
Interest on long term debt 6,871 -- -- 6,871 146(2a, 2d) 8,336
1,202(2a, 2d)
117(2d)
Depletion, depreciation and
accretion 41,567 -- 5,925(2e) 47,492 -- 47,492
Foreign exchange loss (gain) 2,119 -- -- 2,119 -- 2,119
Gains and losses on derivative
contracts 93,393 -- -- 93,393 -- 93,393
---------- -------- ---------- ---------- --------- ----------
179,258 6,413 9,450 195,121 (1,435) 193,686
---------- -------- ---------- ---------- --------- ----------
Income (losses) before taxes (69,327) 13,033 (9,450) (65,744) 1,435 (64,309)
TAXES
Current income tax 277 -- -- 277 -- 277
Future tax recovery (26,039) -- -- (26,039) -- (26,039)
---------- -------- ---------- ---------- --------- ----------
NET INCOME (LOSS) BEFORE (43,565) 13,033 (9,450) (39,982) 1,435 (38,547)
NON-CONTROLLING INTEREST
Non-controlling interest (495) -- 30(2i) (465) 12(2i) (453)
---------- -------- ---------- ---------- --------- ----------
NET INCOME (LOSS) FOR THE PERIOD $ (43,070) 13,033 (9,480) (39,517) 1,423 $ (38,094)
Loss per trust unit, basic $ (1.02) $ (0.78)
Loss per unit, diluted $ (1.02) $ (0.78)
F-5
HARVEST ENERGY TRUST
Pro Forma Consolidated Statement of Income
For the year ended December 31, 2004
(000's except per unit amounts)
- ----------------------------------------------------------------------------------------------------------------------------
Harvest
Energy Storm
Trust Energy Encana
Restated Ltd. Adjustments Properties Adjustments
- ----------------------------------------------------------------------------------------------------------------------------
REVENUE
Oil and natural gas sales $ 331,331 40,814 (5,029) 187,592 --
Royalty expense (54,236) (8,902) 1,095 (23,195) --
Other -- 198 -- -- --
Alberta royalty tax credit -- 328 -- -- --
277,095 32,438 (3,934) 164,397 --
EXPENSES
Operating 73,442 4,711 (1,024) 33,830
General and administrative 19,980 1,839 (1,075) -- 1,200
Interest on short term debt 10,515 -- -- -- 3,000
Interest on long term debt 11,183 1,113 2,957 -- 10,193
5,081
4,874
1,064
Depletion, depreciation and accretion 102,776 9,153 6,734 -- 73,317
Foreign exchange loss (gain) (7,111) -- -- -- --
Gains and losses on derivative
contracts 63,701 4,685 -- -- --
274,486 21,501 7,592 33,830 98,729
Income (loss) before taxes 2,609 10,937 (11,526) 130,567 (98,729)
TAXES
Current income tax -- 841 -- -- --
Large corporation tax 1,505 117 -- -- --
Future tax expense (recovery) (10,362) 2,293 (2,512) -- --
NET INCOME (LOSS) BEFORE 11,466 7,686 (9,014) 130,567 (98,729)
NON-CONTROLLING INTEREST
Non-controlling interest 225 -- (26) -- 620
NET INCOME (LOSS) FOR THE PERIOD $ 11,241 7,686 (8,988) 130,567 (99,349)
Income per trust unit, basic $ 0.45
Income per unit, diluted $ 0.43
- ------------------------------------------------------------------------------------------------------------------------------
Harvest
Energy Equity Issue/
New Trust Convertible Pro Forma
Properties Adjustments Subtotal Debentures Consolidated
- ------------------------------------------------------------------------------------------------------------------------------
Oil and natural gas sales 105,333 -- $ 660,041 -- $ 660,041
Royalty expense (25,683) -- (110,921) -- (110,921)
Other -- -- 198 -- 198
Alberta royalty tax credit -- -- 328 -- 328
--------- ---------- --------- --------- ----------
79,650 -- 549,646 -- 549,646
EXPENSES
Operating 12,795 123,754 -- 123,754
General and administrative -- 1,000(2f) 22,944 -- 22,944
Interest on short term debt -- 12,840(2a,2d) 27,855 (12,840)(2a,2d) 15,015
1,500
Interest on long term debt -- -- 36,465 581(2a,2d) 42,415
4,875(2a,2d)
494(2d)
Depletion, depreciation and accretion -- 24,094(2e) 216,074 -- 216,074
Foreign exchange loss (gain) -- -- (7,111) -- (7,111)
Gains and losses on derivative
contracts -- -- 68,386 -- 68,386
--------- ---------- --------- --------- ----------
12,795 39,434 488,367 (6,890) 481,477
--------- ---------- --------- --------- ----------
Income (loss) before taxes 66,855 (39,434) 61,279 6,890 68,169
TAXES
Current income tax -- -- 841 -- 841
Large corporation tax -- -- 1,622 -- 1,622
Future tax expense (recovery) -- -- (10,581) -- (10,581)
--------- ---------- --------- --------- ----------
NET INCOME (LOSS) BEFORE 66,855 (39,434) 69,397 6,890 76,287
NON-CONTROLLING INTEREST
Non-controlling interest -- 534(2i) 1,353 134(2i) 1,487
--------- ---------- --------- --------- ----------
NET INCOME (LOSS) FOR THE PERIOD $ 66,855 (39,968) $ 68,044 6,756 $ 74,800
Income per trust unit, basic $ 1.82
Income per unit, diluted $ 1.65
F-6
HARVEST ENERGY TRUST
Notes to Consolidated Pro Forma Balance Sheet and Statements of Income
- ------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
Harvest Energy Trust (the "Trust") is an open-ended, unincorporated investment
trust formed under the laws of Alberta. Pursuant to the trust indenture and an
administration agreement, the Trust is managed by its wholly owned subsidiary,
Harvest Operations Corp. ("Harvest Operations" or the "Corporation"). The Trust
acquires and holds net profit interests in oil and natural gas properties in
Alberta acquired and held by Harvest Operations and a partnership held by the
Subsidiary Trusts. The Trust acquires and holds net profit interests in oil and
natural gas properties in Saskatchewan and held by Harvest Sask. Energy Trust.
The Trust is the sole unitholder of Harvest Sask. Energy Trust. The New
Properties to be acquired, as described below, are held in a partnership. The
partnership will be owned by Harvest Breeze Trust 1 and Harvest Breeze Trust 2
(collectively "Subsidiary Trusts"), of which the Trust is the direct or indirect
sole unitholder of each. All properties under the Trust are operated by Harvest
Operations.
The accompanying unaudited consolidated pro forma financial statements have been
prepared by the management of Harvest Operations in accordance with Canadian
generally accepted accounting principles on a basis consistent with the
consolidated financial statements of the Trust. These consolidated pro forma
financial statements should be read in conjunction with the historical financial
statements of the Trust. The consolidated statement of income for the year ended
December 31, 2004 has been restated to reflect the adoption of new accounting
pronouncements. In the opinion of management, the pro forma consolidated
financial statements include all material adjustments necessary for fair
presentation in accordance with Canadian generally accepted accounting
principles.
The pro forma consolidated financial statements are not necessarily indicative
either of the results that actually would have occurred if the following events
reflected herein had taken place on the dates indicated or of the results that
may be obtained in the future.
o On June 30, 2004, the Trust completed a plan of arrangement with Storm
Energy Ltd. ("Storm"), whereby the Trust acquired all of the outstanding
shares of Storm for approximately $192.2 million, including assumed net
debt and transaction costs of approximately $67.3 million. As part of the
Plan of Arrangement, certain assets of Storm were transferred to a new
entity ("ExploreCo") which is owned by former Storm shareholders.
o On September 2, 2004, the Trust completed the acquisition of oil and
natural gas properties from EnCana Corporation ("EnCana") (the "EnCana
Properties"). The cost to the Trust and Harvest Operations was
approximately $511.4 million net of adjustments and costs.
o On October 14, 2004, Harvest Operations Corp. closed an agreement to
sell, on a private placement basis in the United States, US$250 million
of senior notes due October 15, 2011. The senior notes are unsecured and
unsubordinated and bear interest at an annual rate of 7 7/8% and were
sold at a price of 99.3392% of their principal amount. The senior notes
are unconditionally guaranteed by the Trust and all of its wholly-owned
subsidiaries.
o On June 24, 2005, the Subsidiary Trusts entered into an agreement to
acquire properties from a third party (the "New Properties"). The cost to
the Trust and the Corporation is approximately $240 million net of
adjustments, including transaction costs.
The unaudited pro forma consolidated balance sheet and statement of income as at
and for the three month period ended March 31, 2005, and the statement of income
for the year ended December 31, 2004 have been based on the following financial
statements:
The unaudited consolidated balance sheet and statement of income of the Trust as
at and for the three month period ended March 31, 2005, the unaudited schedule
of revenue and expenses of the New Properties for the three months ended March
31, 2005 and the audited consolidated statement of income of the Trust for the
year ended December 31, 2004, and the audited schedule of revenue and expenses
of the new Properties for the year ended December 31, 2004.
F-7
HARVEST ENERGY TRUST
Notes to Consolidated Pro Forma Balance Sheet and Statements of Income
- ------------------------------------------------------------------------------
2. PRO FORMA ASSUMPTIONS AND ADJUSTMENTS
The consolidated pro forma statements of income for the three month period ended
March 31, 2005 and for the year ended December 31, 2004 have been prepared
assuming that the transactions described in notes 2(a), 2(b) and 2(c) were
completed at the beginning of the respective periods as follows:
a) ACQUISITION OF NEW PROPERTIES
The amounts included in the pro forma consolidated statements of income for the
three month period ended March 31, 2005 and the year ended December 31, 2004
related to the New Properties are derived from the unaudited Schedule of Revenue
and Expenses for the New Properties for the three month period ended March 31,
2005 and the audited Schedule of Revenue and Expenses for the New Properties for
the year ended December 31, 2004, respectively. Consideration for the New
Properties is estimated to be $240 million, consisting of a purchase price of
$260 million net of estimated interim adjustments and transaction costs of $20
million. Asset retirement obligations related to this property are estimated to
be $2.6 million.
In accordance with the financing requirements it has been assumed for these
consolidated pro forma financial statements that the following transactions have
occurred:
i) Issue of Subscription Receipts
On July 11, 2005, the Trust entered into an underwriting agreement for the issue
of 6,505,600 subscription receipts ("Subscription Receipts") at a price of
$26.90 per Subscription Receipt each of which will entitle the holder to receive
one trust unit for gross proceeds of $175 million. The net proceeds are expected
to be $166 million after deduction of the underwriters' commission at 5% and
estimated costs of $150,000.
ii) Issue of Convertible Unsecured Extendible Subordinated Debentures.
On July 11, 2005, the Trust entered into an underwriting agreement for the issue
of 75,000 convertible extendible unsecured subordinated debentures
("Debentures") at a price of $1,000 each, for total gross proceeds of $75
million. The net proceeds are estimated to be $72 million after the deduction of
the underwriters' commission at 4% and estimated costs of $150,000. The
Debentures have an initial maturity date of September 30, 2005 (the "Initial
Maturity Date"). If the closing of the Acquisition takes place by September 30,
2005, the maturity date will be automatically extended from the Initial Maturity
Date to December 31, 2010 ("Final Maturity Date"). The Debentures bear interest
at an annual rate of 6.5% payable semi-annually on June 30 and December 31 in
each year commencing on December 31, 2005. The Debentures are redeemable by the
Trust at a price of $1,050 per Debenture after December 31, 2008 and at a price
of $1,025 per Debenture after December 31, 2009 and before maturity on December
31, 2010, in each case, plus accrued and unpaid interest thereon, if any.
iii) Debt Facility
Upon acquisition of the New Properties, the Trust will initially finance the
acquisition by drawing on the credit facility. The Trust's existing credit
facilities total $325 million but will be replaced by a new credit facility
totalling $400 million in connection with the acquisition of the New Properties.
The new credit facility will bear interest at variable rates based on, among
other things, the lenders' prime rates. The closing of the Subscription Receipts
and the $75 million Debentures will be used to reduce outstanding balances under
the credit facility. Fees to be incurred in connection with the new credit
facility are estimated to be $1.5 million.
(b) ACQUISITION OF ENCANA ASSETS
The amounts included in the pro forma consolidated statement of income for the
year ended December 31, 2004 have been derived from the unaudited schedule of
revenues, royalties and operating expenses for the EnCana assets for the six
F-8
HARVEST ENERGY TRUST
Notes to Consolidated Pro Forma Balance Sheet and Statements of Income
- ------------------------------------------------------------------------------
month period ended June 30, 2004 and the unaudited financial information of the
revenues, royalties and operating expenses of the EnCana assets for the two
month period ended August 31, 2004. Historical results for the period from
September 2, 2004, the date of acquisition, to December 31, 2004, are included
in the Trust's consolidated statement of income for the year ended December 31,
2004. Consideration for the EnCana Properties was $511.4 million, consisting of
the purchase price of $526 million net of interim adjustments and acquisition
costs estimated to be $14.6 million. The following is a table reconciling the
amounts within the pro forma statement of income to the New Properties Schedule
of Revenue, Royalties and Operating Expenses statement included in the Exchange
Offer Prospectus relating to the 7 7/8% Senior Notes of the Corporation due
October 15, 2011:
Six months ended Two months ended EnCana Properties
June 30, 2004 August 31,2004 Pro forma
---------------- ---------------- -----------------
Revenue $ 135,246 $ 52,346 $ 187,592
Royalties 16,800 6,395 23,195
118,446 45,951 164,397
Operating expenses 24,652 9,178 33,830
- ---------------------------------------------------------------------------------------------------------------
Excess of revenue over operating expenses $ 93,794 $ 36,773 $ 130,567
- ---------------------------------------------------------------------------------------------------------------
In accordance with the financing requirements for the purchase of the EnCana
Properties, it has been assumed for these pro forma financial statements that
the following transactions occurred on January 1, 2004 for the consolidated pro
forma income statement for the year ended December 31, 2004.
(i) Issue of Subscription Receipts
On July 15, 2004, the Trust entered into an underwriting agreement for the issue
of 12,166,666 subscription receipts at a price of $14.40 each, which entitled
the holder to receive one trust unit per subscription receipt for approximate
gross proceeds of $175.2 million. The net proceeds were $165.9 million after the
deduction of the underwriters' commission at 5% and approximately $0.5 million
for other transaction costs.
(ii) Issue of Convertible Unsecured Subordinated Debentures
On July 15, 2004, the Trust entered into an underwriting agreement for the issue
of 100,000 convertible unsecured subordinated debentures ("debentures") at a
price of $1,000 each, for gross proceeds of $100 million. The net proceeds were
$95.5 million after the deduction of the underwriters' commission at 4% and
estimated costs of $0.5 million. The debentures have a maturity date of
September 30, 2009. The debentures bear interest at an annual rate of 8% payable
semi-annually on March 31 and September 30 in each year commencing on March 31,
2005. The debentures are redeemable by the Trust at a price of $1,050 per
debenture after September 30, 2007, and on or before September 30, 2008, and at
a price of $1,025 per debenture after September 30, 2008 and before maturity on
September 30, 2009, in each case, plus accrued and unpaid interest thereon, if
any.
(iii) Bank Borrowings
The cost of the EnCana Properties, less the net proceeds from the issuance of
subscription receipts and debentures, was financed through a new credit facility
arrangement. The new facilities bear interest at variable rates based on the
lenders' prime rates.
(c) PLAN OF ARRANGEMENT WITH STORM
The amounts included in the pro forma consolidated statement of income for Storm
for the year ended December 31, 2004 include amounts derived from Storm's
unaudited financial statements for the six months ended June 30, 2004.
Historical results from the Storm assets for the period from July 1, 2004
through December 31, 2004 are included in the Trust's consolidated statement of
income for the year ended December 31, 2004. In accordance with the terms of the
plan of arrangement with Storm concluded June 30, 2004, the consideration paid
F-9
HARVEST ENERGY TRUST
Notes to Consolidated Pro Forma Balance Sheet and Statements of Income
- ------------------------------------------------------------------------------
consisted of 2,720,837 trust units and 600,587 exchangeable shares at an
ascribed value of $14.77 per trust unit and exchangeable share, and cash of $75
million for an aggregate consideration of approximately $192.2 million
(including assumed debt and transaction costs totalling approximately $67.3
million). The exchangeable shares are exchangeable by the holder at any time
into trust units. Application of a new accounting pronouncement EIC-151 during
the first quarter of 2005 required retroactive restatement resulting in an
allocation of $26,000 of the loss incurred to the non-controlling interest
holders, being the holders of the exchangeable shares.
(d) INTEREST AND AMORTIZATION OF DEFERRED FINANCING CHARGES
Interest has been adjusted to include the costs associated with the new bank
loan borrowings upon acquisition of Storm, the new bank loan and bridge loan
borrowings upon acquisition of the EnCana assets, and the initial bank loan
financing upon acquisition of the New Properties and the subsequent issue of the
convertible debentures. The balance also includes the interest on the senior
notes as if the senior notes had been issued at the beginning of the respective
period, offset with interest on bank loan and bridge loan amounts repaid with
net proceeds from the senior note issuance. Deferred finance costs associated
with the senior note and convertible debenture issuances as well as new bank
financings have been amortized over their respective periods to maturity.
The Trust adopted the amendments to CICA Handbook Section 3860, "Financial
Instruments - Disclosure and Presentation", on January 1, 2005. As a result, the
debentures issued to finance the EnCana acquisition as well as the debentures
used to finance the acquisition of the New Properties have been classified as
debt with a portion, representing the value of the conversion feature, allocated
to equity. The interest relating to the debentures is a direct charge to income
and includes a non-cash interest charge. The debt balance associated with the
convertible debentures accretes over time to the amount owing on maturity, as
such, increases in the debt balance are reflected as non-cash interest expense
in the statement of income.
(e) DEPLETION, DEPRECIATION AND ACCRETION
The pro forma adjustments for depletion, depreciation and accretion have been
determined using the full cost method of accounting based on combined proved
reserves, future development costs and production volumes and incorporation of
the cost of the properties acquired pursuant to the Storm plan of arrangement,
the purchase of the EnCana Properties and the purchase of New Properties.
(f) GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense has been adjusted to reflect the estimated
costs of the associated combined entity under the plan of arrangement with
Storm, the purchase of the EnCana Properties and the purchase of the New
Properties, respectively.
(g) TAXES
For income tax purposes, the Trust is able to, and intends to, claim a deduction
for all amounts paid or payable to unitholders, and then to allocate the
remaining income, if any, to the unitholders. With respect to the Storm
acquisition, the pro forma adjustment for future income taxes has been based on
the assumption that 50% of the incremental cash flow related to the Storm assets
would have been paid by Storm to the Trust as a royalty payment. Future tax
expense is calculated based on the adjustments at an average rate of 40%. The
EnCana Properties and the New Properties are held by trusts, and as such, there
is no adjustment required for future or corporate taxes.
(h) INCOME PER TRUST UNIT
The number of trust units included in the basic weighted average number
outstanding for the three month period ended March 31, 2005 was based on the
weighted average number of trust units actually outstanding for the period, plus
the 6,505,600 to be issued to acquire the New Properties.
F-10
HARVEST ENERGY TRUST
Notes to Consolidated Pro Forma Balance Sheet and Statements of Income
- ------------------------------------------------------------------------------
The diluted weighted average number of trust units for the three month period
ended March 31, 2005 was 48,639,756 which excluded the potentially dilutive
impact of the exchangeable shares, the convertible debentures and the unit
appreciation rights as these instruments were anti-dilutive.
The number of trust units included in the basic weighted average number
outstanding for the year ended December 31, 2004 was based on the weighted
average number of trust units actually outstanding for the period, plus a
pro-ration of the trust units issued under the terms of the Storm plan of
arrangement of 1,352,984 and a pro-ration of the trust units issued in the
purchase of the EnCana Properties of 8,210,837 and 6,505,600 units representing
the trust units to be issued in connection with the acquisition of the New
Properties.
The pro forma diluted weighted average number of trust units for the year ended
December 31, 2004 was 54,756,280 which includes trust unit appreciation rights
issued to new employees of Harvest associated with the Storm plan of arrangement
and the EnCana Properties acquisition, a pro-ration of the exchangeable shares
issued under the terms of the Storm plan of arrangement and the dilutive impact
of the convertible debentures.
(i) NON-CONTROLLING INTEREST
The adjustments to non-controlling interest income for the original consolidated
pro forma statement of income for the six months ended June 30, 2004 resulting
from the Storm plan of arrangement, and to the pro forma consolidated statement
of income for the nine months ended September 30, 2004 associated with the
acquisition of EnCana Properties were due to the Trust's retroactive application
of EIC-151 "Exchangeable Securities Issued by a Subsidiary of an Income Trust"
in the first quarter of 2005. EIC-151 requires recognition of non-controlling
interests on the balance sheet to reflect the fair value of exchangeable shares
upon issuance plus the accumulated earnings attributable to such non-controlling
interest less conversions to date. On the consolidated statement of income, the
non-controlling interest represents the share of net income attributable to the
non-controlling interest based on the Trust Units issuable for exchangeable
shares in proportion to total Trust Units issued and issuable at each period
end.
For the year ended December 31, 2004 adjustments were made to non-controlling
interest to reflect the non-controlling interest attributable to income from the
New Properties.
F-11
HARVEST ENERGY TRUST
Notes to Consolidated Pro Forma Balance Sheet and Statements of Income
- ------------------------------------------------------------------------------
FINANCIAL STATEMENTS OF THE NEW PROPERTIES
AUDITORS' REPORT
To the Managing Partner of Nexen Canada No. 1
We have audited the schedule of revenue and expenses of the properties of Nexen
Canada No. 1 (the "New Properties") for each of the years in the two year period
ended December 31, 2004. This financial information is the responsibility of the
management of Nexen Canada No. 1. Our responsibility is to express an opinion on
this financial information 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 information is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial information. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial
information.
In our opinion, this schedule presents fairly, in all material respects, the
revenue and expenses of the New Properties as described in Note 1 for each of
the years in the two year period ended December 31, 2004 in accordance with
Canadian generally accepted accounting principles.
Calgary, Alberta (signed) "Deloitte & Touche LLP"
February 28, 2005 Chartered Accountants
F-12
HARVEST ENERGY TRUST
Notes to Consolidated Pro Forma Balance Sheet and Statements of Income
- ------------------------------------------------------------------------------
NEW PROPERTIES
Schedule of Revenue and Expenses
for the Years Ended December 31, 2004 and 2003
and the Three Months Ended March 31, 2005 and 2004
($000'S)
Three Months ended March 31, For the Years ended December 31,
------------------------------------- --------------------------------------
2005 2004 2004 2003
-------------- ------------- -------------- -------------
(unaudited) (unaudited)
Revenue $ 25,393 $ 20,625 $ 105,333 $ 93,649
Royalties (5,947) (4,792) (25,683) (23,028)
Operating Expenses (6,413) (5,270) (12,795) (10,172)
--------- --------- ---------- ---------
Net Operating Income $ 13,033 $ 10,563 $ 66,855 $ 60,449
========= ========= ========== =========
F-13
HARVEST ENERGY TRUST
Notes to Consolidated Pro Forma Balance Sheet and Statements of Income
- ------------------------------------------------------------------------------
NEW PROPERTIES
SCHEDULE OF REVENUE AND EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
AND THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(Information for the three months ended March 31, 2005 and 2004 is unaudited)
1. BASIS OF PRESENTATION
This schedule has been prepared by management of Nexen Inc. (the managing
partner) and relates only to the working interests in the properties
transferred from Nexen Petroleum Canada (partnership) as at December 31,
2004.
This schedule includes only those revenues, royalties, and operating
expenses that are directly related to the properties transferred and does
not include any expenses related to general and administrative expenses,
insurance, interest, income and capital taxes or any provisions related
to depletion, depreciation or asset retirement obligations.
SIGNIFICANT ACCOUNTING POLICIES
(a) Revenue
Sales are recorded when title to the commodities passes to the
purchaser, at the pipeline delivery point for gas and at the
wellhead for crude oil.
(b) Royalties
Royalties are recorded at the time the product is produced and are
calculated in accordance with the applicable regulations.
(c) Operating expenses
Operating expenses include all costs related to the lifting,
gathering, processing, and delivery to a sales point of the
commodities.
C-1
CERTIFICATE OF THE TRUST
Dated: July 20, 2005
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 other than the
Province of Quebec.
HARVEST ENERGY TRUST
BY: HARVEST OPERATIONS CORP.
/s/ Jacob Roorda /s/ David J. Rain
- --------------------------- -------------------------------
Jacob Roorda David J. Rain
President, as chief executive officer Vice President, Corporate Secretary
and Chief Financial Officer
ON BEHALF OF THE BOARD OF DIRECTORS
/s/ M. Bruce Chernoff /s/ Kevin A. Bennett
- --------------------------- -------------------------------
M. Bruce Chernoff Kevin A. Bennett
Director Director
PROMOTERS
/s/ M. Bruce Chernoff /s/ Kevin A. Bennett
- --------------------------- -------------------------------
M. Bruce Chernoff Kevin A. Bennett
C-2
CERTIFICATE OF THE UNDERWRITERS
Dated: July 20, 2005
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 other than the
Province of Quebec.
NATIONAL BANK FINANCIAL INC.
By: /s/ L. Trevor Anderson
TD SECURITIES INC.
By: /s/ Alec W.G. Clark
CIBC WORLD MARKETS INC.
By: /s/ T. Timothy Kitchen
SCOTIA CAPITAL INC.
By: /s/ Mark Herman
CANACCORD CAPITAL CORPORATION GMP SECURITIES LTD.
By: /s/ Karl B. Staddon By: /s/ Sandy L. Edmonstone
FIRSTENERGY CAPITAL CORP. TRISTONE CAPITAL INC.
By: /s/ Nicholas J. Johnson By: /s/ R. Bradley Hurtubise
HAYWOOD SECURITIES INC. RAYMOND JAMES LTD.
By: /s/ David G. McGorman By: /s/ Jason Holtby