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FORM 6-K SECURITIES AND EXCHANGE COMMISSION REPORT OF FOREIGN PRIVATE ISSUER April 22, 2008 Commission File Number: 333-121627 HARVEST ENERGY TRUST
Washington, D.C. 20549
PURSUANT TO RULE 13a-16 OR 15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
Suite 2100, 330 - 5th Avenue S.W,
Calgary, Alberta, Canada T2P 0L4
(403) 265-1178
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.
Form 20-F £ Form 40-F R
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1). £
Note: Regulation S-T Rule 101(b)(1) only permits the submission in paper of a Form 6-K if submitted solely to provide an attached annual report to security holders.
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): £
Note: Regulation S-T Rule 101(b)(7) only permits the submission in paper of a Form 6-K if submitted to furnish a report or other document that the registrant foreign private issuer must furnish and make public under the laws of the jurisdiction in which the registrant is incorporated, domiciled or legally organized (the registrants home country), or under the rules of the home country exchange on which the registrants securities are traded, as long as the report or other document is not a press release, is not required to be and has not been distributed to the registrants security holders, and, if discussing a material event, has already been the subject of a Form 6-K submission or other Commission filing on EDGAR.
Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes £ No R
If Yes is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b):
SIGNATURE Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HARVEST ENERGY TRUST | |
(Registrant) | |
Date: April 22, 2008 | By: /s/ John Zahary |
John Zahary | |
President & Chief Executive Officer |
INDEX TO EXHIBITS
LETTER OF CONFIRMATION
April 18, 2008
To:
British Columbia
Securities Commission
Alberta Securities Commission
Saskatchewan Financial Services Commission
Manitoba Securities Commission
Ontario Securities Commission
Autorité des marches financiers
Office of the Administrator, New Brunswick
Nova Scotia Securities Commission
Prince Edward Island Securities Commission
Securities Commission of Newfoundland and Labrador
Registrar of Securities, Northwest Territories
Registrar of Securities, Yukon
Registrar of Securities, Nunavut
Dear Sirs:
Subject: Harvest Energy Trust. ("Trust")
We confirm that items 2 through 4 were sent by pre-paid mail on April 16, 2008, to the registered holders of trust units of the Trust.
1. 2007 Annual Report
2. Notice of Annual & Special Meeting / Information
Circular
3. Proxy
4. Proxy Return Envelope
We further confirm that copies of the items 2 through 4, along with the Supplemental Mailing List Return Card, were sent by courier on April 16, 2008 to those intermediaries holding trust units of the Trust who responded directly to Valiant Trust Company with respect to the search procedures in compliance with current securities legislation requirements for delivery to beneficial owners.
In addition, in accordance with securities regulations, a copy of item 1 was sent via first class mail on April 9, 2008 to the registered unit-holders of the Trust , and to the nonregistered unit-holders who completed and returned a mail list card requesting receipt of the Annual Financial Statements.
We are providing this confirmation to you in our capacity as agent for the Trust.
Yours truly,
VALIANT TRUST COMPANY
Signed "June Lam"
June Lam
Officer, Income Trusts
Cc: Harvest Energy Trust
Attn: Cindy Gray
HARVEST ENERGY TRUST
Instrument of Proxy
For the Annual and Special Meeting of Unitholders
The undersigned unitholder (the "Unitholder") of Harvest Energy Trust (the "Trust") hereby appoints M. Bruce Chernoff, Chairman of Harvest Operations Corp., of the City of Calgary, in the Province of Alberta, or, failing him, John Zahary, President and Chief Executive Officer of Harvest Operations Corp., of the City of Calgary, in the Province of Alberta, or instead of either of the foregoing, __________________________________________, as proxyholder of the undersigned, with full power of substitution, to attend and act and vote for and on behalf of the undersigned at the Annual and Special Meeting of the Unitholders of the Trust (the "Meeting"), to be held on May 20, 2008 and at any adjournment or adjournments thereof and on every ballot that may take place in consequence thereof to the same extent and with the same powers as if the undersigned were personally present at the Meeting with authority to vote at the said proxyholders' discretion, except as specified below. Without limiting the general powers hereby conferred, the undersigned hereby directs the said proxyholder to vote the Harvest Energy Trust Units (the "Units") represented by this instrument of proxy in the following manner:
1.
Re: the ordinary resolution to re-appoint Valiant Trust Company as the Trustee of the Trust to hold office until the end of the next annual meeting of unitholders as specified in the Information Circular Proxy Statement of the Trust dated March 20, 2008 (the "Information Circular")
FOR £ or WITHHOLD VOTE £ |
2.
Re: the ordinary resolution to fix the number of directors of Harvest Operations Corp. to be elected at the Meeting at 8 members;
FOR £ or WITHHOLD VOTE £ |
3.
Re: the ordinary resolutions to elect the following nominees as directors of Harvest Operations Corp. for the ensuing year;
Dale Blue | FOR £ or WITHHOLD VOTE £ |
David J. Boone | FOR £ or WITHHOLD VOTE £ |
John A. Brussa | FOR £ or WITHHOLD VOTE £ |
M. Bruce Chernoff | FOR £ or WITHHOLD VOTE £ |
William A. Friley Jr. | FOR £ or WITHHOLD VOTE £ |
Verne G. Johnson | FOR £ or WITHHOLD VOTE £ |
Hector J. McFadyen | FOR £ or WITHHOLD VOTE £ |
John Zahary | FOR £ or WITHHOLD VOTE £ |
4.
Re: the ordinary resolution to appoint KPMG LLP, Chartered Accountants, to serve as auditors of the Trust until the next annual meeting of Unitholders and to authorize the directors of Harvest Operations Corp. to fix their remuneration as such;
FOR £ or WITHHOLD VOTE £ |
5.
Re: the special resolution to approve the amendments to the Fourth Amended and Restated Trust Indenture dated January 1, 2008 as described in the Information Circular;
FOR £ or WITHHOLD VOTE £ |
6.
Re: the ordinary resolution to approve grant of unallocated rights under the Trust Unit Rights Incentive Plan as described in the Information Circular;
FOR £ or WITHHOLD VOTE £ |
7.
Re: the ordinary resolution to approve grant of unallocated rights under the Unit Award Incentive Plan as described in the Information Circular; and
FOR £ or WITHHOLD VOTE £ |
2 8.
At the discretion
of the said proxyholder, for or against any amendment or variation of the above
matters or any other matter that may properly be brought before the Meeting or
any adjournment thereof, in such manner as such proxyholder, in his sole
judgment may determine. This Instrument of Proxy is solicited on behalf of the
management of Harvest Operations Corp. The Units represented by this Instrument
of Proxy will be voted and, where the Unitholder has specified a choice with
respect to the above matters, will be voted as directed or, if no direction is
given, will be voted in favour of the above matters. Each Unitholder has the
right to appoint a proxyholder, other than the persons designated above, who
need not be a Unitholder, to attend and to act for him and on his behalf at the
Meeting. To exercise such right, the names of the nominees of management should
be crossed out and the name of the Unitholder's appointee should be legibly
printed in the blank space provided. The undersigned hereby revokes any proxies heretofore given.
Dated this ____ day of ________________, 2008.
(Signature of Unitholder) | |
(Name of Unitholder - please print) |
NOTES:
1.
If the Unitholder is a corporation, its corporate seal must be affixed or this form of proxy must be signed by a duly authorized officer or attorney of the corporation.
2.
This form of proxy must be dated and the signature hereon should be exactly the same as the name in which the Units are registered.
3.
Persons signing as executors, administrators, trustees, etc., should so indicate and give their full title as such.
4.
This instrument of proxy will not be valid and will not be acted upon or voted unless it is completed as outlined herein and delivered to the attention of Valiant Trust Company, 310, 606 4th Street S.W., Calgary, Alberta, T2P 1T1, not less than two business days before the time for holding the Meeting or any adjournment thereof. A proxy is valid only at the Meeting in respect of which it is given or any adjournment or adjournments of that Meeting.
HARVEST ENERGY TRUST
Notice of
Annual and Special Meeting of Unitholders
to be held on May 20, 2008
The annual and special meeting of the unitholders of Harvest Energy Trust will be held in the Lecture Theatre, Metropolitan Centre, 333 - 4th Avenue S.W., Calgary, Alberta on Tuesday, May 20, 2008 at 3:00 p.m. (Calgary time) to:
(1)
receive and consider our financial statements for the year ended December 31, 2007, together with the report of the auditors;
(2)
appoint Valiant Trust Company to act as our trustee;
(3)
fix the number of directors of Harvest Operations Corp. to be elected at the meeting at 8 members; (4) elect 8 directors of Harvest Operations Corp.; (5) appoint the auditors and to authorize the directors to fix their remuneration as such; (6) approve the amendment of our trust indenture;
(7)
approve the grant of unallocated rights under each of the Trust Unit Rights Incentive Plan and the Unit Award Incentive Plan; and
(8)
transact such other business as may properly be brought before the meeting or any adjournment thereof.
The specific details of the matters proposed to be put before the meeting are set forth in the information circular - proxy statement accompanying this notice.
If you are unable to attend the meeting in person, we request that you date and sign the enclosed form of proxy and mail it to or deposit it with Valiant Trust Company, Suite 310, 606 4th Street S.W., Calgary, Alberta T2P 1T1. In order to be valid and acted upon at the meeting, forms of proxy must be returned to the aforesaid address not less than 2 business days before the time for holding the meeting or any adjournment thereof.
Only unitholders of record at the close of business on March 31, 2008 will be entitled to vote at the meeting, unless that unitholder has transferred any units subsequent to that date and the transferee unitholder, not later than 10 days before the meeting, establishes ownership of the trust units and demands that the transferee's name be included on the list of unitholders.
DATED at Calgary, Alberta this 20th day of March, 2008.
By order of the Board of Directors
of Harvest
Operations Corp.
(signed) John Zahary
President and Chief Executive Officer
HARVEST ENERGY TRUST
Notice of
Annual and Special Meeting of Unitholders
to be held on May 20, 2008
The annual and special meeting of the unitholders of Harvest Energy Trust will be held in the Lecture Theatre, Metropolitan Centre, 333 - 4th Avenue S.W., Calgary, Alberta on Tuesday, May 20, 2008 at 3:00 p.m. (Calgary time) to:
(1)
receive and consider our financial statements for the year ended December 31, 2007, together with the report of the auditors;
(2)
appoint Valiant Trust Company to act as our trustee;
(3)
fix the number of directors of Harvest Operations Corp. to be elected at the meeting at 8 members;
(4)
elect 8 directors of Harvest Operations Corp.;
(5)
appoint the auditors and to authorize the directors to fix their remuneration as such;
(6)
approve the amendment of our trust indenture;
(7)
approve the grant of unallocated rights under each of the Trust Unit Rights Incentive Plan and the Unit Award Incentive Plan; and
(8)
transact such other business as may properly be brought before the meeting or any adjournment thereof.
The specific details of the matters proposed to be put before the meeting are set forth in the information circular - proxy statement accompanying this notice.
If you are unable to attend the meeting in person, we request that you date and sign the enclosed form of proxy and mail it to or deposit it with Valiant Trust Company, Suite 310, 606 4th Street S.W., Calgary, Alberta T2P 1T1. In order to be valid and acted upon at the meeting, forms of proxy must be returned to the aforesaid address not less than 2 business days before the time for holding the meeting or any adjournment thereof.
Only unitholders of record at the close of business on March 31, 2008 will be entitled to vote at the meeting, unless that unitholder has transferred any units subsequent to that date and the transferee unitholder, not later than 10 days before the meeting, establishes ownership of the trust units and demands that the transferees name be included on the list of unitholders.
DATED at Calgary, Alberta this 20th day of March, 2008.
By order of the Board of Directors
of Harvest
Operations Corp.
(signed) John Zahary
President and Chief Executive Officer
HARVEST ENERGY TRUST
Information Circular - Proxy Statement
for the Annual and Special Meeting to be held on May 20, 2008
PROXIES
Solicitation of Proxies
This information circular - proxy statement is furnished in connection with the solicitation of proxies for use at our annual and special meeting of the holders ("unitholders") of ordinary trust units ("trust units") of Harvest Energy Trust ("the Trust" or "Harvest") to be held on Tuesday, May 20, 2008 in the Lecture Theatre, Metropolitan Centre, 333 - 4th Avenue S.W., Calgary, Alberta, and at any adjournment thereof. Forms of proxy must be addressed to and reach Valiant Trust Company, Suite 310, 606 4th Street S.W., Calgary, Alberta T2P 1T1, not less than 2 business days before the time for holding the meeting or any adjournment thereof. Only unitholders of record at the close of business on March 31, 2008 will be entitled to vote at the meeting, unless that unitholder has transferred any trust units subsequent to that date and the transferee unitholder, not later than 10 days before the meeting, establishes ownership of the trust units and demands that the transferees name be included on the list of unitholders.
The instrument appointing a proxy must be in writing and must be executed by you or your attorney authorized in writing or, if you are a corporation, under your corporate seal or by a duly authorized officer or attorney of the corporation.
The persons named in the enclosed form of proxy are officers of Harvest Operations Corp. As a unitholder, you have the right to appoint a person (who need not be a unitholder) to represent you at the meeting. To exercise this right you should insert the name of the desired representative in the blank space provided on the form of proxy and strike out the other names or submit another appropriate proxy.
Advice to Beneficial Holders of Trust Units
The information set forth in this section is of significant importance to you if you do not hold your trust units in your own name. Only proxies deposited by unitholders whose names appear on our records as the registered holders of trust units can be recognized and acted upon at the meeting. If trust units are listed in your account statement provided by your broker, then in almost all cases those trust units will not be registered in your name on our records. Such trust units will likely be registered under the name of your broker or an agent of that broker. In Canada, the vast majority of such trust units is registered under the name of CDS & Co., the registration name for The Canadian Depository for Securities Limited, which acts as nominees for many Canadian brokerage firms. Trust units held by your broker or their nominee can only be voted upon your instructions. Without specific instructions, your broker or its nominee is prohibited from voting your trust units.
Applicable regulatory policy requires your broker to seek voting instructions from you in advance of the meeting. Every broker has its own mailing procedures and provides its own return instructions, which you should carefully follow to ensure that your units are voted at the meeting. Often, the form of proxy supplied by your broker is identical to the form of proxy provided to registered unitholders. However, its purpose is limited to instructing the registered unitholder how to vote on your behalf. The majority of brokers now delegates responsibility for obtaining instructions from clients to Broadridge Financial Solutions, Inc. ("Broadridge"). Broadridge mails a scannable voting instruction form in lieu of the form of proxy. You are asked to complete and return the voting instruction form to Broadridge by mail or facsimile. Alternately, you can call Broadridges toll-free telephone number to vote your units. They then tabulate the results of all instructions received and provide appropriate instructions respecting the voting of units to be represented at the meeting. If you receive a voting instruction form from Broadridge, it cannot be used as a proxy to vote trust units directly at the meeting as the proxy must be returned to Broadridge well in advance of the meeting in order to have the trust units voted.
2
Revocability of Proxy
You may revoke your proxy at any time prior to a vote. If you or the person to whom you give your proxy attends personally at the meeting, you or such person may revoke the proxy and vote in person. In addition to revocation in any other manner permitted by law, a proxy may be revoked by an instrument in writing executed by you or your attorney authorized in writing or, if you are a corporation, under your corporate seal or by a duly authorized officer or attorney of the corporation. To be effective, the instrument in writing must be deposited either at our head office at any time up to and including the last business day before the day of the meeting, or any adjournment thereof, at which the proxy is to be used, or with the chairman of the meeting on the day of the meeting, or any adjournment thereof.
Persons Making the Solicitation
This solicitation is made on behalf of our management. Harvest will bear the costs incurred in the preparation and mailing of the form of proxy, notice of annual and special meeting and this information circular - proxy statement. In addition to mailing forms of proxy, proxies may be solicited by personal interviews, or by other means of communication, by our directors, officers and employees who will not be remunerated therefore.
Exercise of Discretion by Proxy
The trust units represented by proxy in favour of management nominees will be voted on any poll at the meeting. Where you specify a choice with respect to any matter to be acted upon the trust units will be voted on any poll in accordance with the specification so made. If you do not provide specific instructions, your trust units will be voted in favour of the matters to be acted upon as set out herein. The persons appointed under the form of proxy that we have furnished are conferred with discretionary authority with respect to amendments or variations of those matters specified in the form of proxy and notice of annual meeting and with respect to any other matters that may properly be brought before the meeting or any adjournment thereof. At the time of printing this information circular - proxy statement, we know of no such amendment, variation or other matter.
VOTING UNITS AND PRINCIPAL HOLDERS THEREOF
We are authorized to issue an unlimited number of ordinary trust units, special trust units and special voting units without nominal or par value. Such units may be issued for such consideration as may be determined by resolution of the Board of Directors of Harvest Operations Corp. (the "Board of Directors" or "Board"). As at March 20, 2008, there were 151,132,746 ordinary trust units and no special trust units or special voting units issued and outstanding.
All references in this information circular proxy statement to trust units are deemed to be references to ordinary trust units unless indicated otherwise.
As a holder of trust units you are entitled to one vote for each trust unit you own.
To the knowledge of our directors and officers, as at March 20, 2008, no person or company beneficially owned, controlled or directed, directly or indirectly, trust units entitled to more than 10% of the votes which may be cast at the meeting.
As at March 20, 2008, our directors and officers, as a group, beneficially owned, controlled or directed, directly or indirectly, 7,862,664 trust units or approximately 5.2% of the votes to be cast at the meeting.
MATTERS TO BE ACTED UPON AT THE MEETING
Appointment of the Trustee
Harvests trust indenture provides that the unitholders shall, at each annual meeting, re-appoint or appoint a successor to its Trustee. Accordingly, unitholders will consider an ordinary resolution to re-appoint Valiant Trust Company as Harvests trustee to hold office until the end of the next annual meeting. Valiant Trust Company has been Harvests trustee since September 27, 2002.
3 Election of Directors At the meeting, the unitholders will be asked to fix the
number of directors of Harvest Operations Corp. to be elected at the meeting at
8 members and to elect 8 directors. Management is soliciting proxies, in the accompanying form of
proxy, for ordinary resolutions in favour of fixing the Board of Directors at 8
members, and in favour of the election of each of the following nominees as
directors:
Dale Blue | David J. Boone |
John A. Brussa | M. Bruce Chernoff |
William A. Friley Jr. | Verne G. Johnson |
Hector J. McFadyen | John E. Zahary |
In the event that a vacancy among such nominees occurs because of death or for any other reason prior to the meeting, the proxy shall not be voted with respect to such vacancy.
The following pages set out the names of proposed nominees for election as directors, together with their age, place of primary residence, year first elected or appointed as a director, a brief resume, membership on committees of the Board of Directors, attendance at Board and committee meetings during 2007, and directorships of other public entities. The Board of Directors has determined that all of the above nominees, with the exception of John Zahary, are independent within the meaning of National Instrument 58-101 entitled "Disclosure of Corporate Governance Practices".
Also indicated for each person proposed as a director is the number of Trust Units and Convertible Debentures beneficially owned, or controlled or directed, directly or indirectly, on March 20, 2008 and, as of the same date, the number of Rights held by each director under each of the Trust Unit Incentive Rights Plan and the Unit Award Incentive Plan. See the description of these plans below. The Trust has adopted a Trust Unit ownership requirement under which directors are expected to maintain ownership of at least 5,000 Trust Units, or an equivalent value of Convertible Debentures, while they are directors of Harvest Operations Corp. New directors have five years to acquire the necessary holdings. Non-independent directors are required to meet higher Trust Unit ownership requirements. All directors are currently in compliance with the Trust Unit ownership requirements.
The members of the Board have diverse backgrounds and expertise, and were selected in the belief that the Trust and its unitholders benefit materially from such a broad range of experience and talent. The Board is committed to reviewing the number of directors regularly and currently considers eight directors to be appropriate for the Trusts size and integrated business structure as well as providing an appropriate mix of backgrounds and skills for the stewardship of the Trust. See below for additional information on each directors individual skills and experience.
Dale Blue |
|
Mr. Blue is an independent consultant with over thirty years experience in financial services. He has served on numerous domestic and international Boards and served as Chairman, President & Chief Executive Officer of Chase Manhattan Bank of Canada and Managing Director of Chase Manhattan Bank in New York until 2001. |
Attendance: |
|
Toronto, Ontario |
|
|
|
|
Age: 62 |
|
Board: |
11/11 |
|
Independent Director |
|
|
|
|
Director Since: 2006 |
|
Audit Committee |
4/4 |
|
|
|
|
|
|
Ownership: |
|
|
|
|
Trust Units: |
13,028 |
Current Public Board Memberships: |
||
Incentive Rights: |
50,000 |
N/A |
|
|
Unit Award Rights: |
- |
|
|
|
Total Equivalent Trust Units: |
63,028 |
|
|
4
David J. Boone |
|
Mr. Boone is a Professional Engineer and is currently the President of Escavar Energy Inc. Prior thereto he served as the Executive Vice President of EnCana Corporation and President of EnCanas Offshore and International Operations division from 2002 2003. From 2000 to 2002, Mr. Boone was Executive Vice-President and Chief Operating Officer of PanCanadian Petroleum. Prior to 2000, he held various positions with Imperial Oil and was also the Vice-Chair, Canadian National Committee of the World Petroleum Congress. |
Attendance: |
|
Calgary, Alberta |
|
|
|
|
Age: 52 |
|
Board: |
11/11 |
|
Independent Director |
|
|
|
|
Director Since: 2006 |
|
Reserves, Safety & Environment |
||
|
|
Committee: |
4/4 |
|
Ownership: |
|
|
|
|
Trust Units: |
12,522 |
|
|
|
Incentive Rights: |
50,000 |
Current Public Board Memberships: |
||
Convertible Debentures: |
$15,000 |
Western Zagros Resources Ltd. |
||
Unit Award Rights: |
- |
|
|
|
Total Equivalent Trust Units: |
63,072 |
|
|
|
|
|
|
||
John A. Brussa |
|
Mr. Brussa is a Barrister and Solicitor and has been a Partner of Burnet, Duckworth & Palmer LLP (a law firm) since 1987. He is recognized by his peers as one of the 500 Top Lawyers in Canada and one of the 100 Most Creative Lawyers in Canada. He also has extensive experience in the energy business and was instrumental in developing the energy trust model in 1986. He sits on the board of directors of several Canadian public entities.
|
Attendance: |
|
Calgary, Alberta |
|
|
|
|
Age: 51 |
|
Board: |
10/11 |
|
Independent Director |
|
|
|
|
Director Since: 2002 |
|
Compensation & Corporate Governance |
||
|
|
Committee: |
1/1 |
|
|
|
|
|
|
Ownership: |
|
|
|
|
Trust Units: |
361,064 |
|
|
|
Incentive Rights: |
60,000 |
|
|
|
Unit Award Rights: |
2,229 |
|
|
|
Total Equivalent Trust Units: |
423,293 |
|
|
|
|
|
|
||
|
|
Current Public Board Memberships: |
|
|
|
|
1322256 Alberta Ltd. (formerly
|
Galleon Energy Inc. |
|
|
|
Highpine Oil & Gas Limited |
||
|
|
6550568 Canada Inc. |
North American Energy Partners Inc. |
|
|
|
Baytex Energy Trust |
Energy Savings Income Fund |
|
|
|
BlackWatch Energy Services Trust |
Orleans Energy Ltd. |
|
|
|
Cirrus Energy Corporation |
Penn West Energy Trust |
|
|
|
Crew Energy Inc. |
Progress Energy Trust |
|
|
|
Divestco Inc. |
Storm Exploration Inc. |
|
|
|
Endev Energy Inc. |
Strategic Energy Fund |
|
|
|
Enseco Energy Services Corp. |
Trafalgar Energy Ltd. |
|
|
|
Flagship Energy Inc. |
Yoho Resources Inc. |
5
M. Bruce Chernoff |
|
Mr. Chernoff is Harvests Chairman, a Professional Engineer who co-founded Harvest Energy Trust in June 2002 to pursue oil and natural gas development and acquisition opportunities. Since June of 1999, he has been President and Director of Caribou Capital Corp. (a private investment management company). From April 2000 to October 2001, he was Executive Vice President and Chief Financial Officer of Petrobank Energy and Resources Ltd. In 1988, Mr. Chernoff helped found Pacalta Resources Ltd. (a junior oil and natural gas company with operations in Ecuador) and held various senior positions including Executive Vice President and Chief Financial Officer until the company was purchased by Alberta Energy Company Ltd., a predecessor to EnCana Corp., in May 1999 for $1 billion. |
Attendance: |
|
Calgary, Alberta |
|
|
|
|
Age: 42 |
|
Board: |
11/11 |
|
Independent Director |
|
|
|
|
Director Since: 2002 |
|
Compensation & Corporate Governance |
||
|
|
Committee: |
1/1 |
|
Ownership: |
|
|
|
|
Trust Units: |
6,442,767 |
Current Public Board Memberships: |
||
Incentive Rights: |
- |
|
|
|
Unit Award Rights: |
- |
Arcan Resources Ltd. |
||
Total Equivalent Trust Units: |
6,442,767 |
Maxim Power Corp. |
||
|
|
BlackWatch Energy Services Trust |
||
|
|
West Energy Ltd. |
||
|
|
|
|
|
William A. Friley Jr. |
|
Mr. Friley is currently President and Chief Executive Officer of Telluride Oil and Gas Ltd. and President of Skyeland Oils Ltd. He currently serves as Director of Mustang Resources Inc., and Chairman of TimberRock Energy Corporation. Prior thereto, Mr. Friley was President and Chief Executive Officer of Triumph Energy Corporation. |
Attendance: |
|
Calgary, Alberta |
|
|
|
|
Age: 56 |
|
Board: |
10/11 |
|
Independent Director |
|
|
|
|
Director Since: 2006 |
|
Compensation & Corporate Governance |
||
|
|
Committee: |
1/1 |
|
Ownership: |
|
|
|
|
Trust Units: |
9,686 |
Current Public Board Memberships: |
||
Incentive Rights: |
50,000 |
|
||
Unit Award Rights: |
928 |
N/A |
||
Total Equivalent Trust |
|
|
|
|
Units: |
60,614 |
|
|
|
|
|
|
|
|
Verne G. Johnson |
|
Mr. Johnsons extensive career in the oil and gas industry has spanned more than 40 years. Since January of 2000, he has been an independent businessman. He also served as Senior Vice President, Funds Management of Enerplus Resources Group from 2000 to 2002. From 1989 until its sale in 1997, Mr. Johnson was President and Director of ELAN Energy Inc. He has also been President of a number of other independent companies in the energy sector. |
Attendance: |
|
Calgary, Alberta |
|
|
|
|
Age: 64 |
|
Board: |
11/11 |
|
Independent Director |
|
|
|
|
Director Since: 2002 |
|
Audit Committee |
4/4 |
|
|
|
|
|
|
Ownership: |
|
Reserves, Safety & Environment |
||
Trust Units: |
19,336 |
Committee: |
3/4 |
|
Incentive Rights: |
60,000 |
|
|
|
Unit Award Rights: |
2,254 |
Current Public Board Memberships: |
||
Total Equivalent Trust Units: |
81,590 |
Builders Energy Services Trust |
||
Fort Chicago Energy Partners L.P. |
||||
Gran Tierra Energy |
||||
|
|
Suroco Energy |
6
Hector J. McFadyen |
|
Mr. McFadyen is currently an independent businessman and Director of Hunting PLC, a public U.K.-based international oil services company and Director of Computershare Trust Company of Canada, a private Canadian company that manages the administration of shareholder and employee records from public and private companies throughout North America. Formerly, Mr. McFadyen had been President, Midstream Division, with Alberta Energy Company Ltd. (now EnCana Corporation) from 1995 until 2002. |
Attendance: |
|
Calgary, Alberta |
|
|
|
|
Age: 64 |
|
Board: |
10/11 |
|
Independent Director |
|
|
|
|
Director Since: 2002 |
|
Audit Committee |
4/4 |
|
|
|
|
|
|
Ownership: |
|
|
|
|
Trust Units: |
55,329 |
|
|
|
Incentive Rights: |
60,000 |
Current Public Board Memberships: |
||
Unit Award Rights: |
2,286 |
|
|
|
Total Equivalent Trust Units: |
117,615 |
Hunting PLC |
|
|
|
|
|
|
|
John E. Zahary |
|
Mr. Zahary is a Professional Engineer with over 20 years of operational and management experience in the oil and natural gas industry, and is currently responsible for Harvests overall executive leadership. Mr. Zahary was President and Chief Executive Officer of Viking from April 2004 until its merger with Harvest in February 2006. Prior thereto, he held senior positions at numerous integrated oil and gas companies in western Canada. Mr. Zahary has a broad range of industry involvement including Chair of the Petroleum Technology Research Centre, Governor of the Canadian Association of Petroleum Producers, and ex-President of the Alberta Chamber of Resources. |
Attendance: |
|
Calgary, Alberta |
|
|
|
|
Age: 46 |
|
Board: |
n/a |
|
Non-Independent Nominee |
|
|
||
Director Since: n/a |
|
Audit Committee |
n/a |
|
|
|
|
|
|
Ownership: |
|
Reserves, Safety & Environment |
||
Trust Units: |
99,979 |
Committee: |
n/a |
|
Incentive Rights: |
325,000 |
|||
Unit Award Rights: |
13,000 |
|||
Convertible Debentures: |
$800,000 |
Current Public Board Memberships: |
||
Total Equivalent Trust Units: |
462,848 |
N/A |
|
|
|
|
Cease Trade Orders, Bankruptcies, Penalties or Sanctions
Mr. John Brussa was a director of Imperial Metals Limited, a corporation engaged in both oil and gas and mining operations, in the year prior to that corporation implementing a plan of arrangement under the Company Act (British Columbia) and under the Companies Creditors Arrangement Act (Canada) in 2003, which resulted in the separation of its two businesses and the creation of two public corporations: Imperial Metals Corporation and IEI Energy Inc. (now Rider Resources Ltd.).
Other than the item referenced above, to our knowledge, no proposed director: (i) is, or has been in the last ten years, a director, chief executive officer or chief financial officer of an issuer (including the Trust) that, (a) while that person was acting in that capacity was the subject of a cease trade order or similar order or an order that denied the issuer access to any exemptions under securities legislation, for a period of more than 30 consecutive days, (b) was subject to an event that occurred while that person was acting in the capacity of director, chief executive officer or chief financial officer, which resulted, after that person ceased to be a director, chief executive officer or chief financial officer, in the issuer being the subject of a cease trade or similar order or an order that denied the issuer access to any exemption under securities legislation, for a period of more than 30 consecutive days, or (c) while that person was acting in the capacity or within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets; (ii) has, within the last 10 years, become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or become subject to or instituted any proceedings, arrangements or compromises with creditors, or had a receiver, receiver manager or trustee appointed to hold his assets; or (iii) has been subject to: (a) any penalties or sanctions imposed by a court relating to securities legislation or by a securities regulatory authority or has entered into a settlement agreement with a securities regulatory authority, or (b) any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable securityholder in deciding whether to vote for a proposed director.
7 Appointment of Auditors Management is soliciting proxies, in the accompanying form of
proxy, in favour of the appointment of the firm of KPMG LLP, Chartered
Accountants, as the auditor of the Trust, to hold office until the next annual
meeting of unitholders and to authorize the directors to fix their remuneration
as such. KPMG LLP has been the Trusts auditor since 2002. Approval of the Amendment of our Trust Indenture At the meeting, securityholders will be asked to approve an
amendment to our trust indenture, as recommended by management. The following
provides a summary of the proposed change. A copy of the proposed blacklined
changes to the trust indenture as approved by the Board of Directors, subject to
securityholder approval, has been filed on SEDAR, which may be accessed at
www.sedar.com or may be obtained at no cost upon request from the Chief
Financial Officer of Harvest Operations Corp. at 2100, 330 5tth
Avenue S.W., Calgary, Alberta T2P 0L4, telephone (403) 265-1178. Repurchase by the Trust of Trust Units or Other Securities
We are proposing to amend the trust indenture to allow the
Trust to purchase for cancellation from time to time trust units (or other
securities of the Trust which may be issued and outstanding from time to time)
to the extent allowed under the Trusts various debt indentures. The repurchases
would be made in the market or upon any recognized stock exchange on which such
securities are traded or pursuant to tenders received by the Trust upon request
for tenders addressed to all holders of record of such securities. While the Trust has no current or future plans to repurchase
its units, it wishes to have the flexibility to do so should the opportunity
arise in the future. Approval Required Pursuant to the provisions of the trust indenture, these
amendments must be approved by the holders of 66
BE IT RESOLVED, AS A SPECIAL RESOLUTION OF THE SECURITYHOLDERS OF HARVEST ENERGY TRUST, that the amendment of the Fourth Amended and Restated Trust Indenture dated January 1, 2008 (the "Trust Indenture") as described in the information circular proxy statement of Harvest Energy Trust dated March 20, 2008 be and the same is hereby authorized and approved and Harvest Operations Corp. and Valiant Trust Company be authorized to execute an amendment and restatement of such Trust Indenture which gives effect to such amendments.
Approval of Grant of Unallocated Incentive Rights Trust Unit Rights Incentive Plan
Unitholders will also be asked at the meeting to consider and, if thought fit, pass an ordinary resolution to approve the grant of unallocated rights to purchase trust units under our trust unit rights incentive plan (the "Trust Unit Rights Incentive Plan"). A detailed description of the Trust Unit Rights Incentive Plan is set forth under "Directors and Officers Compensation" in the section entitled "Description of Trust Unit Rights Incentive Plan".
Section 613(a) of the Toronto Stock Exchange Company Manual provides that every three (3) years after the institution of a security-based compensation arrangement all unallocated rights, options or other entitlements under such arrangement that does not have a fixed maximum number of securities issuable must be approved by a majority of the issuers directors and by the issuers security holders. As the Trust Unit Rights Incentive Plan is considered to be a security-based compensation arrangement and as the maximum number of trust units issuable pursuant to such plan is not a fixed number and instead is equal to 7% of the aggregate of the number of outstanding trust units and the number of trust units issuable upon the exchange of any outstanding exchangeable shares, approval is being sought at this meeting to approve the grant of unallocated rights under the Trust Unit Rights Incentive Plan. If approval is obtained at the meeting, the Trust will not be required to seek further approval of the grant of unallocated rights under the Trust Unit Rights Incentive Plan until May 20, 2011. If approval is not obtained at the meeting, rights that are outstanding as of May 4, 2008 will be unaffected; however, rights that have not been allocated as of May 4, 2008 and rights that are outstanding as of May 4, 2008 and that are subsequently cancelled, terminated or exercised will not be available for any new grants of rights under the Trust Unit Rights Incentive Plan.
8 Approval Required In accordance with the requirements of the Toronto Stock
Exchange, approval of the grant of unallocated rights under the Trust Unit
Rights Incentive Plan requires approval of a majority of the votes cast at the
meeting. Accordingly, at the meeting, unitholders will be asked to consider and,
if thought fit, pass an ordinary resolution of unitholders as follows: BE IT RESOLVED AS
AN ORDINARY RESOLUTION THAT all unallocated rights issuable pursuant the Trust
Unit Rights Incentive Plan of Harvest Energy Trust are approved and authorized
until May 20, 2011.
Approval of Grant of Unallocated Rights Unit Award Incentive Plan
Unitholders will also be asked at the meeting to consider and, if thought fit, pass an ordinary resolution to approve the grant of unallocated rights to be issued trust units under our unit award incentive plan (the "Unit Award Incentive Plan"). A detailed description of the Unit Award Incentive Plan is set forth under "Directors and Officers Compensation" in the section entitled "Description of Unit Award Incentive Plan".
Section 613(a) of the Toronto Stock Exchange Company Manual provides that every three (3) years after the institution of a security-based compensation arrangement all unallocated rights, options or other entitlements under such arrangement that does not have a fixed maximum number of securities issuable must be approved by a majority of the issuers directors and by the issuers security holders. As the Unit Award Incentive Plan is considered to be a security-based compensation arrangement and as the maximum number of trust units issuable pursuant to such plan is not a fixed number and instead is equal to 0.5% of the aggregate of the number of outstanding trust units and the number of trust units issuable upon the exchange of any outstanding exchangeable shares, approval is being sought at this meeting to approve the grant of unallocated rights under the Unit Award Incentive Plan. If approval is obtained at the meeting, the Trust will not be required to seek further approval of the grant of unallocated rights under the Unit Award Incentive Plan until May 20, 2011. If approval is not obtained at the meeting, rights that are outstanding as of May 20, 2008 will be unaffected; however, rights that have not been allocated as of May 20, 2008 and rights that are outstanding as of May 20, 2008 and that are subsequently cancelled, terminated or exercised will not be available for any new grants of rights under the Unit Award Incentive Plan.
In accordance with the requirements of the Toronto Stock Exchange, approval of the grant of unallocated rights under the Unit Award Incentive Plan requires approval of a majority of the votes cast at the meeting. Accordingly, at the meeting, unitholders will be asked to consider and, if thought fit, pass an ordinary resolution of unitholders as follows:
BE IT RESOLVED AS AN ORDINARY RESOLUTION THAT all unallocated rights issuable pursuant the Unit Award Incentive Plan of Harvest Energy Trust are approved and authorized until May 20, 2011.
9 DIRECTORS AND OFFICERS COMPENSATION Compensation and Corporate Governance Committee The Compensation and Corporate Governance Committee of the
Board of Directors consists of John A. Brussa, M. Bruce Chernoff and William A.
Friley Jr. The Compensation and Corporate Governance Committee periodically
reviews the Trusts compensation policy with respect to its executive officers
and employees. Board of Directors Report on Compensation TO: The Unitholders of Harvest Energy Trust Compensation Strategy - Executives Harvests compensation plan for the executive officers has
consisted of a combination of base salary, bonuses and the grant of rights under
both the Trusts Unit Rights Incentive Plan and Unit Award Incentive Plan. The
Compensation and Corporate Governance Committee, when making such salary, bonus
and other incentive determinations, takes into consideration individual
salaries, bonuses and benefits paid to executives of other Canadian conventional
oil and natural gas trusts and similar sized oil and natural gas companies with
a view to ensuring that such overall compensation packages are competitive. Such
information is obtained from the annual Canadian oil and gas industry salaries
and benefits survey prepared by Mercer Human Resource Consulting (" Mercer"), a firm of independent consultants that
regularly reviews compensation practices in Canada. CEO Compensation The compensation for the President and Chief Executive
Officer is set annually by the Board of Directors. Salary, bonus and grants of
Incentive Rights and Unit Awards (both defined below) are determined based on
both comparable compensation in the marketplace, as published by Mercer, and
individual performance against set objectives. The Compensation and Corporate Governance Committee reviewed
the CEOs performance in 2007 against several specific corporate and individual
goals and objectives. These included goals relating to financial returns, asset
quality, production and reserve levels on an absolute and per unit basis,
refining output, operating and administrative costs, reserve replacement costs,
recycle ratios, oil refining margins, balance sheet strength, and employee and
organizational culture issues. In addition, performance was assessed against
specific goals concerning safety and environment issues, corporate governance,
staff development, and involvement and leadership within industry and the
community. Performance in these areas was reviewed on both a stand-alone basis
and relative to other oil and gas entities, where applicable. Based on the
review, the CEOs salary, bonus and unit-based compensation were determined
accordingly. The committee also reviewed the other senior executives
performance in relation to similar goals in their respective areas of
responsibility and determined their salaries, bonuses, and unit-based
compensation accordingly. Base Salaries Base salaries for employees are determined with reference to
comparable marketplace salaries, as published by Mercer. Harvests base salary
structure is competitive with other Canadian independent oil and gas royalty
trusts and similar sized oil and natural gas companies and is targeted at the
median of Harvests peer group.
Short-Term Incentive Program
All employees are eligible to participate in Harvests annual short-term incentive program, which is designed to reward individual and corporate performance in the form of cash bonus payments. These bonus payments are determined with reference to comparable marketplace amounts, as published by Mercer. Awards are intended to be competitive with Harvests peer group if average individual and corporate performance is achieved, and exceed the average if performance is better. The measures used to assess performance include changes in production and reserves per Trust Unit, total unitholder return (capital appreciation plus distributions), and individual contributions to Harvest.
10 Long-Term Trust Unit Rights Incentive Plan and Unit Award Incentive Plan Rights are granted under our Trust Unit Rights Incentive Plan
and Unit Award Incentive Plan to our directors, officers, employees and other
service providers upon their commencement of service. Additional grants are made
periodically to recognize the exemplary performance of or the special
contribution by eligible individuals. An annual grant may be made to eligible
individuals based on individual performance and our performance during the most
recently completed financial year in relation to expected performance.
Additional grants may also be made to replace vested and/or expired rights. Description of Trust Unit Rights Incentive Plan The Trust has adopted the Trust Unit Rights Incentive Plan,
which permits the Board of Directors to grant nontransferable rights to purchase
trust units ("Incentive Rights") to the directors, officers, consultants,
employees and other ongoing service providers of the Trust and its subsidiaries
(referred to in the following description as "Service Providers"). The
purpose of the Trust Unit Rights Incentive Plan is to provide an effective long
term incentive to eligible participants and to reward them on the basis of long
term performance and contribution to the success of Harvest. The Trust Unit Rights Incentive Plan was last ratified by
Unitholders at a meeting held May 4, 2005 where effective on such date the Trust
Unit Rights Incentive Plan was amended: (i) to increase the total number of
trust units issuable under the Trust Unit Rights Incentive Plan from 1,487,250
trust units to a cumulative maximum equal to 7% of the aggregate of the number
of outstanding trust units and the number of trust units issuable upon the
exchange of any outstanding exchangeable shares; (ii) by amending the definition
of "market price", being the lowest grant price at which an Incentive Right may
be issued, to be the volume weighted average trading price of the trust units
for the 5 trading days prior to the date of grant; (iii) to provide that the
number of trust units issuable pursuant to the Trust Unit Rights Incentive Plan
and all other trust unit compensation arrangements to insiders shall not exceed
10% of the aggregate of the number of outstanding trust units and the number of
trust units issuable upon the exchange of any outstanding exchangeable shares
and to provide that the number of trust units issuable within one year pursuant
to the Trust Unit Rights Incentive Plan and all other trust unit compensation
arrangements to insiders shall not exceed 10% of the aggregate of the number of
outstanding trust units and the number of trust units issuable upon the exchange
of any outstanding exchangeable shares; and (iv) to allow the Board of
Directors, by resolution, to amend the Incentive Plan without unitholder
approval; however, the directors are not entitled to amend a grant for an
Incentive Right held by an insider to lower the exercise price or to extend the
expiry date. As at March 20, 2008, Incentive Rights to acquire 5,394,505
trust units (representing 3.6% of the outstanding trust units) were outstanding
and Incentive Rights to acquire 5,184,787 trust units (representing 3.4%
of the outstanding trust units) were available for future grants. The Board of Directors administers the Trust Unit Rights
Incentive Plan and determines participants in such plan, numbers of Incentive
Rights granted, and the terms of vesting of Incentive Rights. Substantially all
Incentive Rights vest 25% per year beginning on the first anniversary of the
grant date. Incentive Rights may not be assigned or transferred. The grant price
of the Incentive Rights (the "Grant Price") shall not be less than the
volume weighted average trading price of the trust units for the 5 trading days
prior to the date of grant and the exercise price ("Exercise Price") of the Incentive Rights is
calculated by deducting from the Grant Price an amount in respect of each
distribution (but not exceeding the amount of the distribution) made by the
Trust after the Grant Date, but only if the Trusts net operating cash flow for
that month in which the distribution was made exceeds 0.833% of the Trusts recorded cost of capital assets less all debt, working capital deficiency
(surplus) and debt equivalent instruments, accumulated depletion, depreciation
and amortization charges, asset retirement obligations and any future income tax
liability associated with such capital assets at the end of each month. In no
event will the Exercise Price be less than $0.01 per trust unit. Incentive Rights are exercisable for a maximum of five years from the date of
the grant thereof and are subject to early termination upon the holder ceasing
to be a Service Provider. In the case of early termination, a holder is
entitled, from the date the holder
ceased to be a Service Provider until the earlier of 30 days and the end of the
exercise period, to exercise vested Incentive Rights. In the case of death, the
estate of the holder is entitled, from the date of death until the earlier of 6
months and the end of the exercise period, to exercise vested Incentive Rights
at the Exercise Price in effect at the date of death. Incentive Rights not
vested at the date of early termination or at date of the holders death are
immediately null and void. The holder has the option to settle outstanding
vested Incentive Rights with either trust units and/or cash. The number of trust
units to be issued to settle outstanding Incentive Rights shall be equal to the
amount determined by multiplying the number of Incentive Rights by the quotient
obtained by dividing the difference between the current market price of a trust
unit and the Exercise Price by the current market price of a trust unit. Cash
paid to settle outstanding Incentive Rights will equal the difference between
the current market price of a trust unit less the Exercise Price multiplied by
the number of Incentive Rights to be settled.
11 The number of trust units reserved for issuance pursuant to
the Trust Unit Rights Incentive Plan to any one person shall not at any time
exceed 5% of the aggregate number of outstanding trust units and trust units
issuable upon the exchange of any outstanding exchangeable shares. The number of
trust units issuable pursuant to the Trust Unit Rights Incentive Plan and all
other trust unit compensation arrangements to insiders of the Trust shall not
exceed 10% of the aggregate of the number of outstanding trust units and the
number of trust units issuable upon the exchange of any outstanding exchangeable
shares. The number of trust units issued within one (1) year pursuant to the
Trust Unit Rights Incentive Plan and all other trust unit compensation
arrangements to insiders of the Trust shall not exceed 10% of the aggregate of
the number of outstanding trust units and the number of trust units issuable
upon the exchange of any outstanding exchangeable shares. All unvested Incentive
Rights will vest and become exercisable in the event of a change of control (as
hereinafter defined). For the purposes of the Trust Unit Rights Incentive Plan,
"change of control" includes: (i) a successful take-over bid pursuant to which
the offeror would, as a result of such take-over bid, if successful,
beneficially own in excess of 50% of the outstanding trust units; (ii) the
issuance to or acquisition by any person, or group of persons acting in concert,
of trust units that in the aggregate total 50% or more of the then issued and
outstanding trust units; (iii) a change in the ownership of Harvest Operations
Corp., the effect of which is that a sufficient number of voting shares
necessary to elect a majority of directors are not beneficially held or under
the direction or control of the Trust; (iv) a sale of assets representing at
least 75% of Harvest Operations Corp.s total assets; and (v) the termination of
the Trust or a going private transaction. The Board of Directors may, subject to stock exchange or
other regulatory approval, amend or discontinue the Trust Unit Rights Incentive
Plan or any Incentive Rights at any time, provided that no such amendment may
increase the maximum number of trust units that may be granted under the
Incentive Plan in the aggregate or to any person or group of persons, change the
manner of determining the market price, extend the period during which Incentive
Rights may be exercised or, without the consent of the service provider, alter
or impair any Incentive Right previously granted to a service provider under the
Incentive Plan. Notwithstanding the foregoing, however, the amendment of
Incentive Rights that have been granted pursuant to the Incentive Plan require
only the prior approval of the Board of Directors, provided, however that
amendments to Incentive Rights that have been granted pursuant to the Incentive
Plan that are held by insiders and that entail a reduction in the Grant Price or
an extension of the term of such Incentive Rights will require disinterested
unitholder approval. Section 613(a) of the Toronto Stock Exchange Company Manual
provides that every three (3) years after the institution of a security based
compensation arrangement all unallocated rights, options or other entitlements
under such arrangement which does not have a fixed maximum number of securities
issuable must be approved by a majority of the issuers directors and by the
issuers security holders. The Trust Unit Rights Incentive Plan is considered to
be a security based compensation arrangement and as the maximum number of trust
units issuable pursuant to such plan is not a fixed number and instead is equal
to 7% of the aggregate of the number of outstanding trust units and the number
of trust units issuable upon the exchange of any outstanding exchangeable
shares. In the resolutions above, the Trust is seeking approval of the grant of
unallocated Incentive Rights under the Trust Unit Rights Incentive Plan until
May 20, 2011. Description of Unit Award Incentive Plan The Trust has also adopted the Unit Award Incentive Plan, which authorizes
the Board of Directors to grant unit awards ("
12
The Unit Award Incentive Plan was initially ratified by Unitholders at a meeting held June 22, 2004 and at a meeting of Unitholders held February 2, 2006, amendments to the Unit Award Incentive Plan were approved to: (i) delete the reference to the fixed number of trust units issuable pursuant to the plan, and provide that the number of trust units granted and outstanding thereunder at any time shall not exceed a number of trust units equal to 0.5% of the aggregate number of issued and outstanding trust units and the number of trust units issuable upon exchange of Exchangeable Securities, if any; (ii) add a definition of "Exchangeable Securities" to mean shares or other securities in the capital of the Corporation or any other Trust Affiliate that are exchangeable into Harvest trust units; (iii) amend the definition of "Adjustment Ratio", which is the ratio used to adjust the number of trust units to be issued on the applicable Issue Date(s) pertaining to any Unit Awards determined in accordance with the terms of the Plan, such that it shall initially be equal to one, and shall be cumulatively adjusted thereafter by increasing the Adjustment Ratio on each ex distribution date for each distribution record date by an amount, rounded to the nearest five decimal places, equal to a fraction having as its numerator the distribution, expressed as an amount per unit, declared for that distribution record date multiplied by the Adjustment Ratio immediately prior to the ex distribution date for the distribution record date, and having as its denominator the fair market value of the trust units immediately preceding that ex distribution date for the distribution record date; and (iv) amend the definition of "Distribution" to mean a distribution declared by Harvest in respect of the trust units, expressed as an amount per unit.
As at March 20, 2008, Unit Awards to acquire 326,053 trust units (representing 0.2% of the outstanding trust units) were outstanding and Unit Awards to acquire 429,610 trust units (representing 0.3% of the outstanding trust units) were available for future grants.
The Board of Directors administers and determines participants in the Unit Award Incentive Plan and the number Unit Awards to be granted to participants. Unit Awards may not be assigned or transferred. Each Unit Award entitles the holder to be issued the number of trust units designated in the Unit Award. As set out in the plan, one-fourth of Unit Awards vest on each of the first, second, third and fourth anniversary dates of the date of grant. The Board may, in its sole discretion, accelerate the vesting period for all or any Unit Awards. Currently, most Unit Awards carry a vesting period as accelerated by the board of 50% per year beginning on the first anniversary of the grant date. A holder of a Unit Award may elect, subject to the consent of the Board of Directors, to receive an amount in cash equal to the aggregate current market value of the trust units to which the holder is entitled under his or her Unit Award in lieu of the issue of trust units under such Unit Award. The amount payable to the holder is based on the closing price of the trust units on the Toronto Stock Exchange on the trading day immediately preceding the issue date of the trust units. If Harvest and the holder so agree, this amount may be satisfied in whole or in part by trust units acquired by Harvest on the Toronto Stock Exchange provided that the total number of trust units that may be so acquired on the Toronto Stock Exchange within any twelve month period may not exceed 5% of the outstanding trust units at the beginning of the period and within any 30 day period may not exceed 2% of the outstanding trust units at the beginning of the period.
The Unit Award Incentive Plan provides for cumulative compounding adjustments to the number of Harvest Units to be issued on each date that distributions accrue to Harvest Units by an amount equal to a fraction having as its numerator the amount of the distribution per Harvest Unit multiplied by the number of Harvest Units issuable immediately prior to the ex-distribution date and having as its denominator the fair market value, as calculated under the Unit Award Incentive Plan, of the Harvest Units.
Unit Awards are exercisable for a maximum of four years from the date of the grant thereof. Unless otherwise provided in a particular Unit Award agreement or any written employment agreement, if a holder of a Unit Award ceases to be a service provider as a result of termination for cause, all outstanding Unit Award agreements under which Unit Awards have been made to such holder will be terminated and all rights to receive trust units thereunder, except to the extent that those rights have vested, shall be forfeited. If the holder ceases to be a service provider as a result of being terminated other than a termination for cause, effective as of the last day of any notice period applicable in respect of such termination, all outstanding Unit Award agreements under which Unit Awards have been made to such holder shall be terminated and all rights to receive trust units thereunder, except to the extent that those rights have vested, shall be forfeited, unless otherwise approved by the Board of Directors.
13
If a holder of Unit Awards voluntarily ceases to be a service provider for any reason other than such retirement or death, effective as of the later of: (i) last day of any notice period applicable in respect of such voluntary resignation; or (ii) the date which is thirty (30) days after the date that the holder ceases to be a service provider, all outstanding Unit Award agreements under which Unit Awards have been made to such holder shall be terminated and all rights to receive Harvest Units thereunder shall be forfeited provided, however, that notwithstanding the foregoing, the right to receive trust units under a Unit Award shall not be affected by a change of employment or term of office or appointment within or among Harvest of any of its affiliates so long as the holder continues to be a service provider. If a holder of Unit Awards ceases to be a service provider as a result of retirement or death, the issue date for all vested trust units awarded to such person under any outstanding Unit Award agreements shall be as of the date such person ceases to be a service provider as a result of such retirement or the date of death, as the case may be.
No one person may be granted any Unit Award under the Unit Award Incentive Plan if such grant could result, at any time, in: (i) the number of trust units reserved for issuance pursuant to issuances under the plan and all other established or proposed trust unit compensation arrangements granted to insiders of Harvest exceeding 10% of the aggregate issued and outstanding Harvest Units; (ii) the issuance to insiders of Harvest pursuant to the Unit Award Incentive Plan and all other established or proposed trust unit compensation arrangements, within a one year period, of a number of trust units exceeding 10% of the aggregate issued and outstanding trust units; (iii) the issuance pursuant to the Plan and all other established or proposed trust unit compensation arrangements to any one insider of Harvest, or such insiders associates, within a one year period, of a number of trust units exceeding 5% of the aggregate issued and outstanding trust units; or (iv) the issuance pursuant to the Unit Award Incentive Plan to any one person of a number of trust units exceeding 5% of the aggregate issued and outstanding trust units.
In the event of a change of control (as hereinafter defined), the vesting provisions attaching to the Unit Awards are accelerated and all unexercised Unit Awards will be issued immediately prior to the date upon which the change of control is completed. In the Unit Award Incentive Plan "change of control" is defined as: (i) a successful take-over bid; (ii) any change in the beneficial ownership or control of the outstanding securities or other interests which results in a person or group of persons acting jointly or in concert or an affiliate or associate of such person or group of persons holding, owning or controlling, directly or indirectly, more than 50% of the outstanding voting securities or interests of the Trust other than as a result of a transaction or series of transactions approved by the Board of Directors unless such holding, owning or controlling exceeds 50% of the outstanding voting securities or interests of the Trust; (iii) incumbent members of the Board of Directors no longer constituting a majority of the Board of Directors; (iv) the sale, lease or transfer of all or substantially all of the directly or indirectly held assets of the Trust to any person or persons other than pursuant to an internal reorganization; or (v) any determination by a majority of the Board of Directors that a change of control has occurred or is about to occur.
Harvest Operations Corp. has the right to amend from time to time or to terminate the terms and conditions of the Unit Award Incentive Plan by resolution of the Board of Directors. Any amendments shall be subject to the prior consent of any applicable regulatory bodies, including the Toronto Stock Exchange. Any amendment to the Unit Award Incentive Plan shall take effect only with respect to Unit Awards granted after the effective date of such amendment, provided that it may apply to any outstanding Unit Awards with the mutual consent of HOC and the service providers to whom such Unit Awards have been made.
Section 613(a) of the Toronto Stock Exchange Company Manual provides that every three (3) years after the institution of a security based compensation arrangement all unallocated rights, options or other entitlements under such arrangement which does not have a fixed maximum number of securities issuable must be approved by a majority of the issuers directors and by the issuers security holders. The Unit Award Incentive Plan is considered to be a security based compensation arrangement and as the maximum number of trust units issuable pursuant to such plan is not a fixed number and instead is equal to 0.5% of the aggregate of the number of outstanding trust units and the number of trust units issuable upon the exchange of any outstanding Exchangeable Securities. In the resolutions above, the Trust is seeking approval of the grant of unallocated Unit Awards under the Unit Award Incentive Plan until May 20, 2011.
14
Summary
The Board of Directors believes that long term unitholder value is enhanced by compensation based upon corporate performance achievements. Through the plans described above, a significant portion of the compensation for all employees, including executive officers, is based on corporate performance, as well as industry-competitive pay practices.
The foregoing report is submitted by the Compensation and Corporate Governance Committee, the Board members of which are:
John A. Brussa
M. Bruce Chernoff
William A. Friley Jr.
Compensation of Named Executive Officers
The following table sets forth information concerning the compensation paid for each of the years ended December 31, 2007, 2006 and 2005 to our Chief Executive Officer, Chief Financial Officer and the next three highest paid executive officers whose total salary and bonus exceeded $150,000 in the year ended December 31, 2007.
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Annual Compensation |
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Securities |
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Under |
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Other Annual |
Rights |
All Other |
Name and Principal |
|
Salary |
Bonus |
Compensation |
Granted |
Compensation |
Position |
Year |
($) |
($) |
($) |
(#)(12) |
($) |
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John Zahary(1) |
2007 |
355,000 |
- |
45,531(8) |
178,000 |
- |
President and Chief |
2006 |
303,188 |
250,000 |
53,568(9) |
160,000 |
- |
Executive Officer |
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|
|
|
|
|
Robert Fotheringham(2) |
2007 |
225,000 |
75,000 |
47,065(8) |
43,100 |
- |
Chief Financial Officer |
2006 |
192,500 |
150,000 |
25,455(9) |
138,000 |
- |
Robert Morgan(3) |
2007 |
225,000 |
- |
32,247(8) |
92,500 |
- |
Chief Operating Officer, |
2006 |
186,708 |
150,000 |
25,391(9) |
138,000 |
- |
Upstream |
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|
|
|
|
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Jacob Roorda(4) |
2007 |
187,212 |
- |
23,145(8) |
52,000 |
- |
Vice President, Corporate |
2006 |
208,333 |
150,000 |
533,576(9)(10) |
140,500 |
621,750(13) |
|
2005 |
190,000 |
175,000(7) |
20,056(11) |
30,000 |
- |
Phillip Reist(5) |
2007 |
175,000 |
37,500 |
42,198(8) |
14,500 |
- |
Vice President, Controller |
2006 |
142,083 |
75,000 |
37,406(9) |
43,310 |
- |
Brad Aldrich(6) |
2007 |
129,006 |
- |
14,013(8) |
230,500 |
- |
Chief Operating Officer, |
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|
|
|
|
Downstream |
|
|
|
|
|
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Notes:
(1) Mr. Zahary was appointed as President and Chief Executive
Officer of Harvest Operations Corp. on February 2, 2006.
(2) Mr. Fotheringham was appointed as Chief Financial Officer of Harvest
Operations Corp. on February 2, 2006.
(3) Mr. Morgan was appointed as Chief Operating Officer, Upstream of Harvest
Operations Corp. on February 2, 2006.
(4) Mr. Roorda was appointed as Vice President, Corporate of Harvest Operations
Corp. on February 3, 2006 and resigned as President of Harvest Operations Corp.
on such date.
(5) Mr. Reist was appointed Controller of Harvest Operations Corp. on February
3, 2006 and was appointed Vice President, Controller on March 16, 2007.
(6) Mr. Aldrich began employment with Harvest on June 11, 2007 and was appointed
as Chief Operating Officer, Downstream of Harvest Operations Corp. on
November 26, 2007. If Mr. Aldrichs compensation were annualized, he would be
one of the "next three highest paid executive officers".
(7) Bonuses paid to executive officers in 2005 were paid with Unit Awards.
(8) Includes employer savings plan contributions of $35,500, $22,500, $22,500,
$16,744, $17,500 and $10,542 for Messrs Zahary, Fotheringham, Morgan, Roorda,
Reist and Aldrich respectively.
15
(9) Includes employee savings plan contribution of $29,216,
$18,550, $18,006, $18,208 and $13,693 for Messrs. Zahary, Fotheringham, Morgan,
Roorda and Reist respectively.
(10) Includes the cash received as a result of exercising Incentive Rights under
the Trust Unit Rights Incentive Plan in the amount of $507,370.
(11) Includes employer savings plan contributions of $19,000.
(12) Messrs Zahary, Fotheringham, Morgan, Aldrich and Roorda were granted their
Securities Under Rights in February 2008. Mr. Aldrich was granted 92,500 of his
Securities Under Rights in February 2008.
(13) Represents the payment made pursuant to Mr. Roordas employment agreement
resulting from the Plan of Arrangement involving, among others, Harvest Energy
Trust and Viking Energy Royalty Trust.
The total cash compensation paid to our Chief Executive Officer, Chief Financial Officer and the next three highest paid executive officers whose total salary and bonus exceeded $150,000 as a percentage of annual cash flow from operations was 0.22%
, 0.51%, and 0.62% for 2007, 2006, and 2005 respectively.CEO Compensation Table
The following table summarizes the total compensation paid to Harvests Chief Executive Officer in each of 2005, 2006, and 2007.
CEO Compensation |
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John Zahary |
Jacob Roorda |
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Total (2005-2007) |
2007 |
2006 |
2005 |
Annual Compensation |
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|
|
|
Base Salary |
$875,750 |
$355,000 |
$330,750 |
$190,000 |
Variable Compensation |
|
|
|
|
Annual Bonus |
$425,000 |
- |
$250,000 |
$175,000 |
Incentive Rights Granted |
355,000 |
175,000 |
150,000 |
30,000 |
Value of Incentive Rights(1)(3) |
$1,073,435 |
$523,775 |
$516,150 |
$33,510 |
Unit Awards Granted |
19,394 |
3,000 |
10,000 |
6,394 |
Value of Unit Awards(2)(3) |
$387,233, |
$51,750 |
$224,100 |
$111,383 |
Total Direct Compensation |
$2,761,418 |
$930,525 |
$1,321,000 |
$509,893 |
Savings Plan Contributions |
$83,716 |
$35,500 |
$29,216 |
$19,000 |
Other taxable benefits |
$38,439 |
$10,031 |
$27,352 |
$1,056 |
Total Compensation |
$2,883,573 |
$976,056 |
$1,377,568 |
$529,949 |
|
Notes:
(1) Incentive Rights value is calculated using binomial lattice methodology.
(2) Unit Awards value is calculated using binomial lattice methodology.
(3) Mr. Zahary was granted his Incentive Rights and Unit Awards relating to 2007
compensation in February 2008.
Trust Unit Ownership requirements of the CEO
The CEO is expected to maintain ownership of Trust Units, or an equivalent value of Convertible Debentures, equal or in excess of two times his annual salary. The CEO is in compliance with the Trust Unit ownership requirements. The CEO is required to disclose to the Chairman of the Board of Directors and the Compensation and Corporate Governance Committee any intention to dispose of Trust Units.
Remuneration of Directors
Each of the directors of Harvest Operations Corp., except for Mr. Chernoff, is paid an annual retainer of $20,000, $500 for each Board meeting attended, $500 for each committee meeting attended (if on a date different from a
16
Board meeting date) and is entitled to reimbursement for expenses incurred in carrying out his duties as director. The directors are also entitled to participate in the Trust Unit Rights Incentive Plan and the Unit Award Incentive Plan. For the year ended December 31, 2007, the directors of Harvest Operations Corp. earned the following remuneration:
Directors Compensation | |||||
Committee | Value of | ||||
Meeting | Meeting | Incentive | |||
Annual | Attendance | Attendance | Rights | ||
Name | Retainer | Fees(1) | Fees(1) | Total Fees | Granted(2) |
Kevin Bennett | 20,000 | 5,500 | 1,500 | 27,000 | 44,895 |
Dale Blue | 20,000 | 5,500 | - | 25,500 | 44,895 |
David Boone | 20,000 | 5,500 | 1,500 | 27,000 | 44,895 |
John A. Brussa | 20,000 | 5,000 | 500 | 25,500 | 44,895 |
M. Bruce Chernoff | - | - | - | - | - |
William A. Friley, Jr. | 20,000 | 5,000 | 500 | 25,500 | 44,895 |
Verne G. Johnson | 20,000 | 5,500 | 1,000 | 26,500 | 44,895 |
Hector J. McFadyen | 20,000 | 5,000 | - | 25,000 | 44,895 |
Total | 140,000 | 37,000 | 5,000 | 182,000 | 314,265 |
Notes:
(1)
Directors may elect to be paid meeting fees with Unit Awards.
(2)
Value of Incentive Rights is calculated using binomial lattice methodology.
Total Directors fees for the fiscal years ended December 31, 2006 and 2005 were $214,500 and $82,000 respectively.
Trust Unit Incentive Rights and Unit Awards Granted During the Year Ended December 31, 2007
The following table sets forth details with respect to all rights granted under the Trust Unit Rights Incentive Plan during 2007 to our chief executive officer, our chief financial officer and the next three highest paid executive officers whose total salary and bonus exceeded $150,000 for the year ended December 31, 2007.
Dec 31, 2007 | |||||
Weighted | |||||
% of Total | Average | Market Value of | |||
Securities | Rights Granted | Exercise | Securities Underlying | ||
Under | to Employees in | Price | Rights on the Date of | Expiration | |
Name | Rights(1) | Fiscal Year | ($/Security) | Grant ($/Security) | Date |
John Zahary | - | - | n/a | n/a | n/a |
Robert Fotheringham | - | - | n/a | n/a | n/a |
Robert Morgan | - | - | n/a | n/a | n/a |
Jacob Roorda | - | - | n/a | n/a | n/a |
Phillip Reist | - | - | n/a | n/a | n/a |
Brad Aldrich | 130,000 | 22.55 | 30.23 | 32.62 | June 11, 2012 |
Notes:
(1)
Messrs Zahary, Fotheringham, Morgan, Roorda, Reist and Aldrich were granted 175,000, 40,600, 90,000, 50,000, 12,500 and 90,000 Incentive Rights respectively in February 2008.
17
The following table sets forth details with respect to all rights granted under the Unit Award Incentive Plan during 2007 to our chief executive officer, our chief financial officer and the next three highest paid executive officers whose total salary and bonus exceeded $150,000 for the year ended December 31, 2007.
% of Total | ||||
Rights | Market Value of | |||
Securities | Granted to | Securities Underlying | ||
Under | Employees in | Rights on the Date of | Expiration | |
Name | Rights(1) | Financial Year | Grant ($/Security) | Date |
John Zahary | - | - | n/a | n/a |
Robert Fotheringham | - | - | n/a | n/a |
Robert Morgan | - | - | n/a | n/a |
Jacob Roorda | - | - | n/a | n/a |
Phillip Reist | - | - | n/a | n/a |
Brad Aldrich | 8,000 | 14.25 | 32.62 | June 11, 2011 |
Notes:
(1)
Messrs Zahary, Fotheringham, Morgan, Roorda, Reist and Aldrich and were granted 3,000, 2,500, 2,500, 2,000, 2,000 and 2,500 Unit Awards respectively in February 2008.
The following tables outline, as at December 31, 2007, the number of trust units issuable upon the exercise of outstanding rights, the weighted average exercise price of outstanding rights and the number of trust units available for future issuance under the Trust Unit Rights Incentive Plan and the Unit Award Incentive Plan.
Trust Unit Rights Incentive Plan
# of trust units to be issued | # of available trust units | ||
upon exercise of | Weighted-average exercise | available for future issuance | |
outstanding rights | price of outstanding rights | under the plan | |
Incentive Rights approved by Unitholders | 3,823,683 | $25.74 | 6,556,699 |
Incentive Rights not approved by Unitholders | - | - | - |
Total | 3,823,683 | $25.74 | 6,556,699 |
Unit Award Incentive Plan
# of trust units to be issued | # of available trust units | ||
upon exercise of | Weighted-average exercise | available for future issuance | |
outstanding rights | price of outstanding rights | under the plan | |
Unit Awards approved by Unitholders | 279,720 | $0.00 | 461,735 |
Unit Awards not approved by Unitholders | - | - | - |
Total | 279,720 | $0.00 | 461,735 |
18
Trust Unit Incentive Rights and Unit Awards Exercised During the Year Ended December 31, 2007 and Year End Rights Values
The following table sets forth with respect to our chief executive officer, our chief financial officer and the next three highest paid executive officers whose total salary and bonus exceeded $150,000 for the year ended December 31, 2007, the number of Incentive Rights and Unit Awards exercised and the number of unexercised rights and the value of in-the-money rights under the Trust Unit Rights Incentive Plan and the Unit Award Incentive Plan based upon the closing price of the trust units of $20.63 on December 31, 2007.
Value of unexercised in- | ||||
Aggregate | Unexercised unit rights at | the-money unit rights at | ||
Securities acquired | Value | year-end (#) | year-end(1) ($) | |
Name | on exercise (#) | Realized ($) | exerciseable/unexercisable | exerciseable/unexercisable |
John Zahary | - | - | 43,333/116,667 | 151,611/106,122 |
Robert Fotheringham | - | - | 37,167/100,833 | 121,305/84,881 |
Robert Morgan | - | - | 37,167/100,833 | 121,305/84,881 |
Jacob Roorda | - | - | 78,651/100,833 | 720,089/84,881 |
Phillip Reist | 647 | 17,646 | 10,830/31,380 | 20,121/15,017 |
Brad Aldrich | - | - | 0/138,000 | 0/178,796 |
Notes:
(1)
Incentive Rights are valued based on the difference between the closing price of $20.63 per trust unit on the TSX on December 31, 2007 and the grant price of the Incentive Right, giving effect to distributions per trust unit paid after the date the Incentive Right was granted multiplied by the number of trust units issuable under the Incentive Right. Unit Awards are valued using the closing price of $20.63 per trust unit on the TSX on December 31, 2007 multiplied by the number of trust units issuable under the Unit Award, giving effect to distributions per trust unit paid after the date the Unit Award was granted.
Employment Contracts
Harvest Operations Corp. has entered into employment agreements with each of Messrs Zahary, Fotheringham, Morgan, Aldrich and Roorda. Under each contract, if an executive is terminated without cause (including pursuant to a "change in control"), such executive is entitled to a payment of no less than 15 months of his prior salary, bonus and benefits and no more than 18 months of his prior salary, bonus and benefits, depending on the executives years of service. A "change of control" is defined as one of (a) a successful "take-over bid" as defined in the Securities Act, (b) the issuance or acquisition of units representing more than 50% of the issued and outstanding units of Harvest, (c) a change in the ownership of Harvest Operation Corp. such that Harvest no longer holds the votes necessary to elect a majority of the Board of Directors, (d) incumbent directors no longer constituting a majority of the Board of Directors, (e) a sale of at least 75% of Harvest Operations Corp.s assets, (f) the termination of Harvest or a going private transaction, or (g) such other event that, in the opinion of the Board of Directors, should be a change in control.
19 Performance Graph The closing price of the Trust Units on the TSX on December
31, 2002 was $9.50. The closing price of the Trust Units on the TSX on December
31, 2007 was $20.63. The following graph illustrates changes from December 31,
2002 to December 31, 2007, in cumulative Unitholder return, assuming an initial
investment of $100 in Trust Units on December 31, 2002 with all cash
distributions reinvested, compared to the S&P/TSX Composite Index and the S&P/TSX
Energy Trust Index with all dividends and distributions reinvested.
Dec 31
2002
Dec 31
2003
Dec 31
2004
Dec 30
2005
Dec 29
2006
Dec 31
2007
Harvest Energy Trust
100.00
183.33
344.54
627.50
508.86
469.86
S&P/TSX Composite Index
100.00
126.72
145.07
180.08
211.16
231.92
S&P/TSX Energy Trust Index
100.00
146.40
191.07
285.43
274.81
283.77
20 AUDIT COMMITTEE The audit committee is composed of Verne G. Johnson, Hector
J. McFadyen, and Dale Blue. All of the Audit Committee members are independent
directors, as defined in Multilateral Instrument 52-110 Audit Committees. Multilateral Instrument 52-110 Audit Committees provides
that an individual is "financially literate" if he or she has the ability to
read and understand a set of financial statements that present a breadth and
level of complexity of accounting issues that are generally comparable to the
breadth and complexity of the issues that can reasonably be expected to be
raised by the Trusts financial statements. All of the members of the Audit
Committee are "financially literate" under the definition set out above. Additional information in respect of the Audit Committee of
Harvest Operations Corp. is contained in Appendix C and D to the Trusts Annual
Information Form dated March 27, 2008, which is available on SEDAR at
www.sedar.com. CORPORATE GOVERNANCE DISCLOSURE National Instrument 58-101 entitled "Disclosure of Corporate
Governance Practices" ("NI 58-101") requires that if management of an
issuer solicits proxies from its security holders for the purpose of electing
directors that certain prescribed disclosure respecting corporate governance
matters be included in its management information circular. The TSX also
requires listed companies to provide, on an annual basis, the corporate
governance disclosure that is prescribed by NI 58-101. The prescribed corporate governance disclosure for Harvest is that contained
in Form 58-101F1 which is attached to NI 58-101 ("Form 58-101F1 Disclosure").
The corporate governance structure of Harvest is not the same
as for a corporation. Harvest Operations Corp., by agreement with the Trustee of
the Trust, is responsible for the overall governance of Harvest. Harvest
Operations Corp. is, in turn, managed by the Board of Directors of Harvest
Operations Corp. (the "Board of Directors" or the "Board"). The
Board of Directors is, in effect, responsible for the overall stewardship and
governance of Harvest, and has put in place standards and benchmarks by which
that responsibility can be measured. Set out below is a description of Harvests current corporate governance
practices, relative to the Form 58-101F1 Disclosure (which is set out below in
italics). (1) Board of Directors (a) Disclose the identity of
directors who are independent. The Board of Directors has determined that the
following eight (8) directors of Harvest Operations Corp. are independent: M. Bruce Chernoff (b) Disclose the identity of
directors who are not independent, and describe the basis for that
determination.
John A. Brussa
Verne G. Johnson
Hector J. McFadyen
Kevin A. Bennett
Dale Blue
David J. Boone
William A. Friley Jr.
21 The Board of Directors has determined
that all current directors of Harvest Operations Corp. are independent. John
Zahary, a candidate for director in 2008, is not independent. He is the
President and CEO of Harvest Operations Corp. (c) Disclose
whether or not a majority of directors is independent. If a majority of
directors is not independent, describe what the Board of Directors does to
facilitate its exercise of independent judgement in carrying out its
responsibilities. The Board of Directors has determined
that a majority of the directors is independent. (d) If a director
is presently a director of any other issuer that is a reporting issuer (or the
equivalent) in a jurisdiction or a foreign jurisdiction, identify both the
director and the other issuer. The following directors of Harvest
Operations Corp. are presently directors of other issuers that are reporting
issuers (or the equivalent):
Name of Director | Name of Other Issuer | |
M. Bruce Chernoff | Arcan Resources Ltd. | |
Maxim Power Corp. | ||
BlackWatch Energy Services Trust | ||
West Energy Ltd. | ||
John A. Brussa | 1322256 Alberta Ltd. (formerly Inex Pharmaceuticals Corporation) | |
6550568 Canada Inc. | ||
Baytex Energy Trust | ||
BlackWatch Energy Services Trust | ||
Cirrus Energy Corporation | ||
Crew Energy Inc. | ||
Divestco Inc. | ||
Endev Energy Inc. | ||
Enseco Energy Services Corp. | ||
Flagship Energy Inc. | ||
Galleon Energy Inc. | ||
Highpine Oil & Gas Limited | ||
North American Energy Partners Inc. | ||
Energy Savings Income Fund | ||
Orleans Energy Ltd. | ||
Penn West Energy Trust | ||
Progress Energy Trust | ||
Storm Exploration Inc. | ||
Strategic Energy Fund | ||
Trafalgar Energy Ltd. | ||
Yoho Resources Inc. | ||
Verne G. Johnson | Builders Energy Services Trust | |
Fort Chicago Energy Partners L.P. | ||
Gran Tierra Energy | ||
Suroco Energy | ||
Hector J. McFadyen | Hunting PLC (U.K.) | |
Kevin A. Bennett | N/A | |
Dale Blue | N/A | |
David J. Boone | Western Zagros Resources Ltd. | |
William A. Friley Jr. | N/A |
22 (e)
Disclose whether or not the independent directors hold regularly scheduled meetings at which non-independent directors and members of management are not in attendance. If the independent directors hold such meetings, disclose the number of meetings held since the beginning of the issuers most recently completed financial year. If the independent directors do not hold such meetings, describe what the Board does to facilitate open and candid discussion among its independent directors.
In accordance with the mandate of the Board of Directors as well as the mandate of each of the Audit Committee, the Compensation and Corporate Governance Committee and the Reserves, Safety and Environment Committee, at the end of or during each meeting of the Board of Directors or Audit Committee, as applicable, the members of management of the Corporation who are present at such meeting may be asked to leave the meeting in order that the independent directors can discuss any necessary matters without management being present.
During 2007, the Board of Directors conducted 20 meetings, including Board committee meetings, of which all meetings included an in camera session without members of management present.
(f)
Disclose whether or not the chair of the Board is an independent director. If the Board has a chair or lead director who is an independent director, disclose the identity of the independent chair or lead director, and describe his or her role and responsibilities. If the Board has neither a chair that is independent nor a lead director that is independent, describe what the Board does to provide leadership for its independent directors.The Board of Directors has determined that M. Bruce Chernoff, the Chairman of the Board of Directors, is independent. As the Chairman, Mr. Chernoff provides overall leadership to the Board. The Chairman maintains communication with all directors and committee chairs to coordinate input from directors and optimize the effectiveness of the Board and its committees. The Chairman communicates regularly with the President and CEO to ensure that the Board receives adequate and regular updates on all issues important to the direction of Harvest. The Chairman is also responsible for the overall management of the Board.
(g)
Disclose the attendance record of each director for all Board meetings held since the beginning of the issuers most recently completed financial year.
The attendance record of each of the directors of Harvest Operations Corp. is as follows:
Name of Director |
Board Meetings Attended | Committee Meetings Attended | |
M. Bruce Chernoff | 11 out of 11(100%) | 1 out of 1 (100%) | |
John A. Brussa | 10 out of 11(91%) | 1 out of 1 (100%) | |
Verne G. Johnson | 11 out of 11(100%) | 7 out of 8 (88%) | |
Hector J. McFadyen | 10 out of 11(91%) | 4 out of 4 (100%) | |
Kevin A. Bennett | 11 out of 11(100%) | 4 out of 4 (100%) | |
Dale Blue | 11 out of 11(100%) | 4 out of 4 (100%) | |
David J. Boone | 11 out of 11(100%) | 4 out of 4 (100%) | |
William A. Friley Jr. | 10 out of 11(91%) | 1 out of 1 (100%) |
Note: All of the above meetings included an in camera session without members of management present.
23 (2) Board Mandate Disclose the text of the Boards written mandate. If
the Board does not have a written mandate, describe how the Board delineates its
role and responsibilities. The mandate of the Board of Directors is attached as
Schedule "A" hereto. (3) Position Descriptions (a) Disclose
whether or not the Board has developed written position descriptions for the
chair and the chair of each board committee. If the Board has not developed
written position descriptions for the chair and/or the chair of each board
committee, briefly describe how the Board delineates the role and
responsibilities of each such position. The Board of Directors has developed
written position descriptions for the Chairman of the Board of Directors as well
as the Chairman of each of the Audit Committee, the Compensation and Corporate
Governance Committee, and the Reserves, Safety and Environment Committee. (b) Disclose
whether or not the Board and CEO have developed a written position description
for the CEO. If the Board and the CEO have not developed such a position
description, briefly describe how the Board delineates the role and
responsibilities of the CEO. The Board has developed a position description for
the President and Chief Executive Officer of Harvest Operations Corp. (the "CEO").
(4) Orientation and Continuing
Education (a) Briefly describe what measures
the Board takes to orient new directors regarding: (i) the role of the Board, its
committees and its directors; and (ii) the nature and operation of
the issuers business. The Compensation and Corporate
Governance Committee has the mandate to develop for approval by the Board, an
orientation and education program for new Board members in order to ensure that
new directors are familiarized with Harvests business, including Harvests field operations, management, administration, policies and plans, and the
procedures of the Board. When a new director is appointed to the Board and/or a
Board Committee the director is provided with copies of Harvests most recent
Annual Report, Quarterly Report and AIF, as well as a copy of the Board Mandate
and relevant Committee Mandates. (b) Briefly
describe what measures, if any, the Board takes to provide continuing education
for its directors. If the Board does not provide continuing education, describe
how the Board ensures that its directors maintain the skill and knowledge
necessary to meet their obligations as directors. Harvest Operations Corp. encourages
directors to attend, enrol or participate in courses and/or seminars dealing
with financial literacy, corporate governance and related matters and has agreed
to pay the cost of such courses and seminars. From time to time, Harvest
organizes guest seminars for the benefit of its directors related to various
relevant topics.
24 (5) Ethical Business Conduct (a) Disclose whether or not the
Board has adopted a written code for the directors, officers and employees. If
the Board has adopted a written code: (i) disclose how a person or
company may obtain a copy of the code; The Board of Directors has adopted a
code of ethics applicable to all members of Harvest Operations Corp., including
directors, officers and employees. In addition, the Board of Directors
has adopted a code of ethics specifically applicable to its senior officers.
Each director, officer and employee of Harvest Operations Corp. has been
provided with a copy of the applicable code of ethics. In addition, a copy of
each code of ethics has been filed on SEDAR at www.sedar.com. (ii) describe how
the Board monitors compliance with its code, or if the Board does not monitor
compliance, explain whether and how the Board satisfies itself regarding
compliance with its code; and The Board of Directors monitors
compliance with the codes of ethics by requiring each of the officers and
employees of Harvest Operations Corp. to affirm in writing on hiring and
annually thereafter their compliance with the applicable code of ethics. (iii) provide a
cross-reference to any material change report filed since the beginning of the
issuers most recently completed financial year that pertains to any conduct of
a director or executive officer that constitutes a departure from the code. There have been no material change
reports filed since the beginning of the year ended December 31, 2007, that
pertain to any conduct of a director or executive officer that constitutes a
departure from the Corporations code of ethics. (b) Describe any
steps the Board takes to ensure directors exercise independent judgement in
considering transactions and agreements in respect of which a director or
executive officer has a material interest. In accordance with the Business
Corporations Act (Alberta), directors who are a party to or are a director
or an officer of a person who is a party to a material contract or material
transaction or a proposed material contract or proposed material transaction are
required to disclose the nature and extent of their interest and not to vote on
any resolution to approve the contract or transaction. In certain cases, an
independent committee may be formed to deliberate on such matters in the absence
of the interested party. (c) Describe any other steps the
Board takes to encourage and promote a culture of ethical business conduct. The Board of Directors has also
adopted a "Whistleblower Policy" wherein employees of Harvest Operations Corp.
are provided with a mechanism by which they can raise concerns in a confidential
and anonymous process. (6) Nomination of Directors (a) Describe the process by which
the Board identifies new candidates for board nomination. The responsibility for proposing new nominees to the
Board falls within the mandate of the Compensation and Corporate Governance
Committee. New candidates for nomination to the
25 Board of Directors are identified and selected having
regards to the strengths and constitution of the Board members and the
perception of the Committee of the needs of Harvest. (b) Disclose
whether or not the Board has a nominating committee composed entirely of
independent directors. If the Board does not have a nominating committee
composed entirely of independent directors, describe what steps the Board takes
to encourage an objective nomination process. The Compensation and Corporate
Governance Committee, which has the responsibility for proposing new nominees to
the Board, is comprised of John A. Brussa, M. Bruce Chernoff and William A.
Friley Jr., each of whom is independent. (c) If the Board has a nominating
committee, describe the responsibilities, powers and operation of the nominating
committee. The Compensation and Corporate
Governance Committee, which has the responsibility for proposing new nominees to
the Board, also assists the Board of Directors in matters pertaining to its
approach to governance issues, the organization and composition of the Board of
Directors, the organization and conduct of Board of Directors meetings, and the
effectiveness of the Board of Directors in performing and fulfilling its
responsibilities. In addition to any other duties and
authorities delegated to it by the Board from time to time, the Compensation and
Corporate Governance Committee has the authority and responsibility for each of
the following matters: (i) annually
reviewing the mandates of the Board and its committees and recommend to the
Board such amendments to those mandates as the Committee believes are necessary
or desirable; (ii) considering and, if thought fit,
approving requests from directors or committees of directors of the engagement
of special advisors from time to time; (iii) preparing and
recommending to the Board annually a statement of corporate governance practices
to be included in Harvests annual report or information circular as required by
the Toronto Stock Exchange and any other regulatory authority; (iv) making
recommendations to the Board as to which directors should be classified as
"independent directors", "related" directors or "unrelated" directors pursuant
to any such report or circular; (v) reviewing on a
periodic basis the composition of the Board and ensuring that an appropriate
number of independent directors sit on the Board, analyzing the needs of the
Board and recommending nominees who meet such needs; (vi) assessing, at
least annually, the effectiveness of the Board as a whole, the committees of the
Board and the contribution of individual directors, including considering the
appropriate size of the Board; (vii) recommending
suitable candidates for nominees for election or appointment as directors, and
recommending the criteria governing the overall composition of the Board and
governing the desirable individual characteristics for directors; (viii) as required, overseeing the
development, for approval by the Board, an orientation and education program for
new recruits to the Board;
26 (ix) acting as a forum
for concerns of individual directors in respect of matters that are not readily
or easily discussed in a full Board meeting, including the performance of
management or individual members of management or the performance of the Board
or individual members of the Board; (x) developing and
recommending to the Board for approval and periodically review structures and
procedures designed to ensure that the Board can function effectively and
independently of management; (xi) reviewing annually the
Committees Mandate and Terms of Reference; (xii) reviewing and
considering the engagement at the expense of Harvest Operations Corp. of
professional and other advisors by any individual director when so requested by
any such director; (xiii) establishing,
reviewing and updating periodically a Code of Business Conduct and Ethics (the "Code")
and ensuring that management has established a system to monitor compliance with
this code; and (xiv) reviewing managements monitoring
of Harvest Operations Corp.s compliance with the organizations Code. (7) Compensation (a) Describe the process by which
the Board determines the compensation for the issuers directors and officers.
Compensation of Directors The Compensation and Corporate
Governance Committee reviews annually the form and amount of compensation to
ensure that such compensation reflects the responsibilities and risks of being
an effective director. The Compensation and Corporate Governance Committee
benchmarks directors compensation against compensation received by directors in
similar positions. The Board of Directors will set director compensation based
upon recommendations from this committee. Compensation of Officers The compensation plan for the
executive officers has consisted of a combination of base salary, bonuses and
the grant of rights under both the Trusts Unit Rights Incentive Plan and Unit
Award Incentive Plan. The Compensation and Corporate Governance Committee, when
making such salary, bonus and other incentive determinations, takes into
consideration individual salaries, bonuses and benefits paid to executives of
other Canadian conventional oil and natural gas trusts and similar sized oil and
natural gas companies with a view to ensuring that such overall compensation
packages are competitive. Such information is obtained from the annual Canadian
oil and gas industry salaries and benefits survey prepared by Mercer Human
Resource Consulting ("Mercer"), a firm of independent consultants
that regularly reviews compensation practices in Canada. The compensation for the President
and Chief Executive Officer is set annually by the Board of Directors. Salary,
bonus and grants of Incentive Rights and Unit Awards (both defined below) are
determined based on both comparable compensation in the marketplace, as
published by Mercer, and individual performance against set objectives.
27 The Compensation and Corporate
Governance Committee reviews the CEOs performance against several specific
corporate and individual goals and objectives. These include goals relating to
financial returns, asset quality, production and reserve levels on an absolute
and per unit basis, refining output, operating and administrative costs, reserve
replacement costs, recycle ratios, oil refining margins, balance sheet strength,
and employee and organizational culture issues. In addition, performance is
assessed against specific goals concerning safety and environment issues,
corporate governance, staff development, and involvement and leadership within
industry and the community. Performance in these areas is reviewed on both a
stand-alone basis and relative to other oil and gas entities, where applicable.
The committee also reviews the other
senior executives performance in relation to similar goals in their respective
areas of responsibility and determines their salaries, bonuses, and unit-based
compensation accordingly. Base salaries for officers are determined with
reference to comparable marketplace salaries, as published by Mercer. Harvests
base salary structure is competitive with other Canadian independent oil and gas
royalty trusts and similar sized oil and natural gas companies and is targeted
at the median of Harvests peer group. All officers are eligible to
participate in Harvests annual short-term incentive program, which is designed
to reward individual and corporate performance in the form of cash bonus
payments. These bonus payments are determined with reference to comparable
marketplace amounts, as published by Mercer. Awards are intended to be
competitive with Harvests peer group if average individual and corporate
performance is achieved, and exceed the average if performance is better. The
measures used to assess performance include changes in production and reserves
per Trust Unit, total unitholder return (capital appreciation plus
distributions), and individual contributions to Harvest. Rights are granted under our Trust
Unit Rights Incentive Plan and Unit Award Incentive Plan to directors and
officers upon their commencement of service. Additional grants are made
periodically to recognize exemplary performance or special contributions. An
annual grant may be made based on individual performance and Harvests
performance during the most recently completed financial year in relation to
expected performance. Additional grants may also be made to replace vested
and/or expired rights. (b) Disclose
whether or not the Board has a compensation committee composed entirely of
independent directors. If the Board does not have a compensation committee
composed entirely of independent directors, describe what steps the Board takes
to ensure an objective process for determining such compensation. The Board of
Directors has appointed the Compensation and Corporate Governance Committee,
whose members are John A. Brussa, M. Bruce Chernoff and William A. Friley Jr.,
each of whom is independent. (c) If the Board has a compensation
committee, describe the responsibilities, powers and operation of the
compensation committee. The Compensation
and Corporate Governance Committee is responsible to the Board for reviewing
matters relating to the human resource policies, employee retention and short
and long-term compensation of the directors, officers and employees of Harvest
Operations Corp. and its subsidiaries in the context of the budget and business
plan of Harvest Operations Corp. The operation of the Compensation and Corporate
Governance Committee is described more fully above is sections 6, 7(a) and 7(b).
(d) If a
compensation consultant or advisor has, at any time since the beginning of the
issuers most recently completed financial year, been retained to assist in
determining compensation for any of
28 the issuers directors and officers,
disclose the identity of the consultant or advisor and briefly summarize the
mandate for which they have been retained. If the consultant or advisor has been
retained to perform any other work for the issuer, state that fact and briefly
describe the nature of the work. The Compensation and Corporate
Governance Committee has not engaged any advisors during 2007 to assist in
developing compensation for Harvests directors and officers other than relying
on the market compensation information published by Mercer. (8) Other Board Committees If the Board has standing committees
other than the audit, compensation and nominating committees, identify the
committees and describe their function. In addition to the Audit Committee,
the Compensation and Corporate Governance Committee, the Board has also
appointed a Reserves, Safety and Environment Committee. The Reserves, Safety and Environment
Committee is comprised of David J. Boone, Kevin A. Bennett and Verne G. Johnson.
The Reserves, Safety and Environment Committees responsibilities include
reviewing the annual evaluation reports on our oil and gas reserves,
periodically reviewing the qualifications, experience and independence of the
consulting engineering firms reporting on our oil and natural gas reserves and
meeting with the engineers employed or otherwise retained by the us who prepare
such reports. The Reserves, Safety and Environment
Committee is also responsible for monitoring Harvests performance in the areas
of safety and environmental stewardship and providing strategic direction in
those areas when required. (9) Assessments Disclose whether or not the Board,
its committees and individual directors are regularly assessed with respect to
their effectiveness and contribution. If assessments are regularly conducted,
describe the process used for the assessments. If assessments are not regularly
conducted, describe how the Board satisfies itself that the Board, its
committees, and its individual directors are performing effectively. The Compensation and Corporate
Governance Committee is responsible for reviewing, on an ongoing basis, the
effectiveness of the Board as a whole and its committees and the contribution
and effectiveness of each individual director. The committee, which includes the
Chairman of the Board, assesses the performance of each director, each committee
and the Board as a whole on a regular basis, including having each director
complete a yearly self-assessment and questionnaire. The Compensation and
Corporate Governance Committee also annually reviews the need to recruit and
recommend new candidates to fill vacancies on the Board giving consideration to
their competencies, skills and personal qualities with a view of improving the
overall effectiveness of the Board. The committee then recommends to the Board
the nominees for election at each annual meeting. The Compensation and Corporate
Governance Committee also develops and reviews the Trusts approach to corporate
governance matters and reviews, develops and recommends to the Board for
approval, procedures designed to ensure that the Board can function
independently of management.
29 INTEREST OF INFORMED PERSONS IN MATERIAL TRANSACTIONS There are no material interests, direct or indirect, of our
insiders, proposed nominees for election as directors, or any associate or
affiliate of such insiders or nominees since January 1, 2007, or in any proposed
transaction which has materially affected or would materially affect Harvest or
any of its subsidiaries. INDEBTEDNESS OF DIRECTORS AND SENIOR OFFICERS AND OTHERS At no time since inception has there been any indebtedness of
any director or officer of Harvest Operations Corp., or any associate of any
such director or officer, to the Trust or any of its subsidiaries, including
Harvest Operations Corp. or to any other entity which is, or at any time since
the beginning of the most recently completed financial period has been, the
subject of a guarantee, support agreement, letter of credit or other similar
arrangement or understanding provided by the Trust or any of its subsidiaries,
including Harvest Operations Corp. INTEREST OF CERTAIN PERSONS AND COMPANIES IN MATTERS TO BE
ACTED UPON Our management is not aware of any material interest of any
director or executive officer or anyone who has held office as such since the
beginning of our last financial year or of any associate or affiliate of any of
the foregoing in any matter to be acted on at the meeting, save as is disclosed
herein. ADDITIONAL INFORMATION We undertake to provide, upon request, a copy of our 2007
annual report, containing financial information in the managements discussion
and analysis of financial condition and results of operations and the 2007
audited consolidated financial statements sections, as well as a copy of our
annual information form, subsequent interim financial statements and this
information circular - proxy statement. Our annual information form also
contains disclosure relating to our audit committee and the fees paid to KPMG LLP in 2007. Copies of these documents may be obtained on request without charge
from the Chief Financial Officer of Harvest Operations Corp. at 2100, 330 - 5th
Avenue S.W. Calgary, Alberta T2P 0L4, telephone (403) 265-1178 or by accessing
the disclosure documents available through the Internet on the Canadian System
for Electronic Document Analysis and Retrieval (SEDAR) website at
www.sedar.com. OTHER MATTERS Our management knows of no amendment, variation or other
matter to come before the meeting other than the matters referred to in the
notice of annual and special meeting. However, if any other matter properly
comes before the meeting, the accompanying proxy will be voted on such matter in
accordance with the best judgment of the person voting the proxy. The contents and the sending of this information circular proxy statement
have been approved by our directors. Dated: March 20, 2008
SCHEDULE "A" HARVEST OPERATIONS CORP. MANDATE OF THE BOARD OF DIRECTORS The Board of Directors (the "Board") of Harvest
Operations Corp. ("HOC" or the "Corporation") is responsible for
the stewardship of the Corporation, the other subsidiaries of Harvest Energy
Trust ("the Trust") and the Trust to the extent delegated to the
Corporation under the Trust Indenture (hereinafter collectively referred to as "Harvest").
In discharging its responsibility, the Board will exercise the care, diligence
and skill that a reasonably prudent person would exercise in comparable
circumstances and will act honestly and in good faith with a view to the best
interests of Harvest. In general terms, the Board will: Without limiting the generality of the foregoing, the Board
will perform the following duties: Strategic Direction, Operating, Capital and Financial Plans
(1) require Management
to present annually to the Board a longer range strategic plan and a shorter
range business plan for Harvests business, which plans must: (a) be designed to
achieve Harvests principal objectives; (b) identify the
principal strategic and operational opportunities and risks of Harvests business, and (c) be approved by
the Board as a pre-condition to the implementation of such plans; (2) review progress
towards the achievement of the goals established in the strategic, operating and
capital plans; (3) identify the
principal risks of Harvests business and take all reasonable steps to ensure
the implementation of the appropriate systems to manage these risks; (4) approve the annual
operating and capital plans; (5) approve
acquisitions and dispositions in excess of a pre-determined limit; (6) approve the
establishment of credit facilities; (7) approve issuances
of additional trust units or other securities to the public; (8) monitor Harvests progress towards its goals, and to revise and alter its direction through
management in light of changing circumstances.
in
consultation with the President and CEO of HOC, define the principal
objective(s) of Harvest;
Management and Organization (1) monitor overall
human resources policies and procedures, including compensation and succession
planning; (2) approve the
distribution policy of Harvest; (3) appoint the
President and CEO and determine the terms of the President and CEOs employment
with Harvest; (4) in consultation
with the President and CEO, develop a position description for the President and
CEO; (5) in consultation
with the President and CEO, establish the limits of managements authority and
responsibility in conducting Harvests business; (6) in consultation
with the President and CEO, appoint all officers of HOC and approve the terms of
each officers employment with HOC; (7) receive annually
from the Compensation & Corporate Governance Committee its evaluation of the
performance of each senior officer; (8) develop a system
under which succession to senior management positions will occur in a timely
manner; (9) approve any proposed significant change in the management
organization structure of Harvest; (10) in consultation with the President and
CEO, establish a communications policy for Harvest; (11) generally provide
advice and guidance to management. Finances and Controls (1) use reasonable
efforts to ensure that Harvest maintains appropriate systems to manage the risks
of Harvests business; (2) monitor the
appropriateness of Harvests capital structure; (3) ensure that the
financial performance of Harvest is properly reported to unitholders, other
security holders and regulators on a timely and regular basis; (4) in consultation
with the President and CEO, establish the ethical standards to be observed by
all officers and employees of HOC and use reasonable efforts to ensure that a
process is in place to monitor compliance with those standards; (5) require that the
President and CEO institute and monitor processes and systems designed to ensure
compliance with applicable laws by HOC and its officers and employees; (6) require that the
President and CEO institute, and maintain the integrity of, internal control and
information systems, including maintenance of all required records and
documentation; (7) review and approve
material contracts to be entered into by Harvest; (8) recommend to the
unitholders of Harvest a firm of chartered accountants to be appointed as
Harvests auditors;
(9) take all necessary
actions to gain reasonable assurance that all financial information made public
by Harvest (including Harvests annual and quarterly financial statements) is
accurate and complete and represents fairly Harvests financial position and
performance. Governance (1) in consultation
with the Chairman of the Board, develop a position description for the Chairman
of the Board; (2) facilitate the
continuity, effectiveness and independence of the Board by, amongst other
things: (a) selecting from nominees made by independent directors for election
to the Board; (b) appointing a Chairman of the Board who is not a member of
management; (c) appointing from
amongst the directors an audit committee and such other committees of the Board
as the Board deems appropriate and in compliance with corporate governance
regulations; (d) defining the
mandate of each committee of the Board; (e) ensuring that
processes are in place and are utilized to assess the size of the Board, the
effectiveness of the Chairman of the Board, the Board as a whole, each committee
of the Board and each director, (f) reviewing the
orientation and education program for new (and existing) members to the Board to
ensure that it is adequate and effective; and (g) establishing a
system to enable any director to engage an outside adviser at the expense of
Harvest. (3) review annually
the adequacy and form of the compensation of directors. Delegation The Board may delegate its duties to and receive reports and
recommendations from any committee of the Board. Meetings (1) The Board shall
meet at least four times per year and/or as deemed appropriate by the Board
Chairman; (2) Minutes of each meeting shall be prepared; (3) The President and
CEO or his/her designate(s) may be present at all meetings of the Board; (4) Vice-Presidents
and such other staff as appropriate to provide information to the Board shall
attend meetings at the invitation of the Board; (5) The Board shall
implement medium(s) to solicit feedback from stakeholders; (6) At the end of each
meeting independent members have the option to meet without non-independent
directors and management present.
FINANCIAL STATEMENT REQUEST FORM
TO: NON-REGISTERED UNITHOLDERS
In accordance with securities regulations, Harvest Energy Trust will send its annual financial statements and quarterly financial statements (including the related MD & A) only to those nonregistered holders of trust units of Harvest Energy Trust who request to receive such documents.
Therefore, we are writing to ask you if you would like to receive these documents by mail.
If you are interested in receiving such mailings, please complete and return this form:
□ Mark this box if you wish to receive quarterly financial statements and related "MD&A" by mail. □ Mark this box if you wish to receive annual financial statements and related "MD&A" (and annual reports) by mailIf you choose not to receive this information by mail, it will still be available to you on SEDAR at www.sedar.com and on our website at www.harvestenergy.ca
As long as you remain a non-registered unitholder, you will be asked to renew your requests to receive interim financial statements and annual financial statements and related "MD&A" each year.
Name: (Please Print) ___________________________________________________
Address:______________________________________________________________
______________________________________________ Postal Code: ____________
Signature: _____________________________________ Date: __________________
CUSIP: 41752X 101
THE ADDRESS FOR RETURN OF THIS FORM IS INDICATED BELOW:
VALIANT TRUST COMPANY
310, 606 4th Street S.W.
Calgary, Alberta T2P 1T1 CANADA
Fax: 403-233-2857
A copy of this preliminary short form prospectus has been filed with the securities regulatory authorities in each of the provinces and territories of Canada but has not yet become final for the purpose of the sale of securities. Information contained in this preliminary short form prospectus may not be complete and may have to be amended. The securities may not be sold until a receipt for the short form prospectus is obtained from the securities regulatory authorities.
No securities regulatory authority has expressed an opinion about these securities and it is an offence to claim otherwise. This short form prospectus constitutes a public offering of these securities only in those jurisdictions where they may be lawfully offered for sale and therein only by persons permitted to sell such securities. These securities have not been and will not be registered under the United States Securities Act of 1933, as amended (the "1933 Act"), or any state securities laws. Accordingly, except as permitted by the Underwriting Agreement and pursuant to an exemption from the registration requirements of the 1933 Act and state securities laws, these securities 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 1933 Act). 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".
Information has been incorporated by reference in this short form prospectus from documents filed with the securities commissions or similar authorities in Canada. Copies of the documents incorporated herein by reference may be obtained on request without charge from the secretary of Harvest Operations Corp., the administrator of Harvest Energy Trust, at Suite 2100, 330 5th Avenue S.W., Calgary, Alberta T2P 0L4, Toll free number 1 (866) 666-1178, and are also available electronically at www.sedar.com.
New Issue
April 11, 2008
PRELIMINARY SHORT FORM PROSPECTUS
$250,000,000
7.50% Convertible Unsecured Subordinated Debentures
Harvest Energy Trust (the "Trust") is hereby qualifying for distribution $250,000,000 aggregate principal amount of 7.50% convertible unsecured subordinated debentures (the "Debentures") of the Trust at a price of $1,000 per Debenture (the "Offering").
The Debentures have a maturity date of May 31, 2015 (the "Maturity Date"). The Debentures bear interest at an annual rate of 7.50% payable semi-annually on May 31 and November 30 in each year commencing November 30, 2008. The Debentures are redeemable by the Trust at a price of $1,050 per Debenture on or after June 1, 2011, and on or before May 31, 2012, at a price of $1,025 per Debenture on or after June 1, 2012 and on or before May 31, 2013 and at a price of $1,000 per Debenture on or after June 1, 2013 and before maturity on May 31, 2015, in each case, plus accrued and unpaid interest thereon, if any. See "Details of the Offering".
Debenture Conversion Privilege
Each Debenture will be convertible into Trust Units at the
option of the holder at any time prior to the close of business on the
Maturity Date, and the Business Day immediately preceding the date specified
by the Trust for redemption of the Debentures, at a conversion price of $27.40
per Trust Unit, subject to adjustment in certain events. Holders converting
their Debentures will receive accrued and unpaid interest thereon.
The issued and outstanding trust units ("Trust Units") of the Trust are listed on the Toronto Stock Exchange (the "TSX") under the symbol HTE.UN and on the New York Stock Exchange ("NYSE") under the symbol HTE. On April 10, 2008, the closing price of the Trust Units on the TSX was $23.89 and on the NYSE was US$23.45. The Trust has applied to list the Debentures and the Trust Units issuable on conversion, redemption or maturity of the Debentures on the TSX and the Trust Units issuable on the conversion, redemption or maturity of the Debentures on the NYSE. Such listings will be subject to the Trust fulfilling all of the listing requirements of the TSX and the NYSE, respectively. The offering price of the Debentures was determined by negotiation between Harvest Operations Corp. ("HOC"), on behalf of the Trust, and CIBC World Markets Inc. on its own behalf and on behalf of TD Securities Inc., RBC Dominion Securities Inc., Scotia Capital Inc., HSBC Securities (Canada) Inc. and National Bank Financial Inc. (collectively, the "Underwriters").
ii
|
|
Price: $1,000 per Debenture |
|
|
|
|
|
|
Price to the Public |
Underwriters' Fee |
Net Proceeds to the Trust(1) |
Per Debenture |
$1,000 |
$40 |
$960 |
Total |
$250,000,000 |
$10,000,000 |
$240,000,000 |
Notes:
(1)
Before deducting expenses of the Offering, estimated to be $500,000, which will be paid from the general funds of the Trust.
(2)
The Trust has also granted to the Underwriters an option (the "Over-allotment Option") to purchase up to an additional $37,500,000 aggregate principal amount of Debentures at a price of $1,000 per Debenture on the same terms and conditions as the Offering, exercisable from time to time, in whole or in part, for a period of up to 30 days following closing of the Offering, to cover over-allotments, if any, and for market stabilization purposes. A purchaser who acquires Debentures forming part of the Over-allotment Option acquires those Debentures under this short form prospectus, regardless of whether the over-allocation position is ultimately filled through the exercise of the Over-allotment Option or secondary market purchases. If the Over-allotment Option is exercised in full, the total Offering, Underwriters' fee and net proceeds to the Trust (before deducting expenses of the Offering) will be $287,500,000, $11,500,000 and $276,000,000, respectively. This prospectus also qualifies for distribution the grant of the Over-allotment Option and the issuance of Debentures pursuant to the exercise of the Over-allotment Option. See "Plan of Distribution".
In the opinion of Burnet, Duckworth & Palmer LLP, counsel to the Trust, and Macleod Dixon LLP, counsel to the Underwriters, on the basis of the applicable legislation in effect on the date hereof, provided that the Trust Units and Debentures are listed on a designated stock exchange for the purposes of the Tax Act (as defined herein) (which includes the TSX and NYSE), the Debentures and the Trust Units issuable on conversion, redemption or maturity of the Debentures, on the date of closing of the Offering, will be qualified investments under the Tax Act (as defined herein) 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), registered education savings plans and registered disability savings plans. See "Eligibility for Investment".
The Underwriters, as principals, conditionally offer the Debentures, subject to prior sale, if, as and when issued by the Trust 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 Macleod Dixon LLP. 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 Trust Units at levels other than those that might otherwise prevail in the open market. Such transactions, if commenced, may be discontinued at any time.
Underwriters' Position |
Maximum size or number of |
Exercise period | Exercise price |
Over-allotment Option | $37,500,000 aggregate principal amount of Debentures | 30 days following closing of the Offering | $1,000 per Debenture |
The Underwriters propose to offer the Debentures initially at the offering price specified above. After a reasonable effort has been made to sell all of the Debentures at the price specified, the Underwriters may subsequently reduce the selling price to investors from time to time in order to sell any of the Debentures remaining unsold. Any such reduction will not affect the proceeds received by the Trust. See "Plan of Distribution".
The head office of the Trust and the head office of HOC is located at 2100, 330 5th Avenue S.W., Calgary, Alberta, T2P 0L4.
Each of CIBC World Markets Inc., TD Securities Inc., RBC Dominion Securities Inc., Scotia Capital Inc., HSBC Securities (Canada) Inc. and National Bank Financial Inc. are direct or indirect wholly-owned subsidiaries of Canadian chartered banks which are lenders to HOC and to which HOC is currently indebted. Consequently, the Trust may be considered to be a connected issuer of these Underwriters for the purposes of securities regulations in certain provinces. All of the net proceeds of this Offering will be used to repay a portion of indebtedness to these banks outstanding related to the Trust's credit facilities. See "Relationship Among the Trust and Certain Underwriters" and "Use of Proceeds".
There is currently no market through which the Debentures may be sold and purchasers may not be able to resell Debentures purchased under this short form prospectus. This may affect the pricing of the securities in the secondary market, the transparency and availability of trading prices, the liquidity of securities, and the extent of issuer regulation. See "Risk Factors".
iii
A return on an investment in Trust Units is not comparable to the return on an investment in a fixed-income security. The recovery of an initial investment in Trust Units 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 holders of Trust Units ("Unitholders"), these cash distributions are not guaranteed and may be reduced or suspended. The actual amount distributed will depend on numerous factors including: the financial performance of the Trust's operating subsidiaries, debt obligations, working capital requirements and future capital requirements. In addition, the market value of the Trust Units or Debentures may decline if the Trust's cash distributions decline in the future, and that market value decline may be material.
It is important for an investor to consider the particular risk factors that may affect the industry in which it is investing, and therefore the stability of the distributions that it receives. See "Risk Factors".
The after tax return from an investment in Trust Units to Unitholders subject to Canadian income tax can be made up of both a return on capital and a return of capital. That composition may change over time, thus affecting an investor's after tax return. On October 31, 2006, the Department of Finance (Canada) ("Finance") announced proposed changes to the taxation of certain publicly-traded trusts and partnerships and their unitholders. Bill C-52, which received Royal Assent on June 22, 2007, contained legislation implementing these proposals (collectively, the "SIFT Rules"). Subject to the SIFT Rules, returns on capital are generally taxed as ordinary income in the hands of a Unitholder who is resident in Canada for purposes of the Tax Act. Pursuant to the SIFT Rules, commencing January 1, 2011 (provided the Trust only experiences "normal growth" and no "undue expansion" before then) certain distributions from the Trust which would have otherwise been taxed as ordinary income generally will be characterized as dividends in addition to being subject to tax at corporate rates at the Trust level. Returns of capital generally are (and under the SIFT Rules will continue to be) tax-deferred for Unitholders who are resident in Canada for purposes of the Tax Act (and reduce such Unitholder's adjusted cost base in the Trust Unit for purposes of the Tax Act). Distributions, whether of income or capital to a Unitholder who is not resident in Canada for purposes of the Tax Act, or that is a partnership that is not a "Canadian partnership" for purposes of the Tax Act, generally will be subject to Canadian withholding tax. Prospective purchasers should consult their own tax advisors with respect to the Canadian income tax considerations applicable in their own circumstances. See "Canadian Federal Income Tax Considerations".
Subscriptions for 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 April 25, 2008 or such other date not later than May 29, 2008 as the Trust and the Underwriters may agree. Certificates for the aggregate principal amount of the Debentures will be issued in registered form to the Canadian Depository for Securities Limited ("CDS") and will be deposited with CDS on the date of closing. No certificates evidencing the Debentures will be issued to subscribers for Debentures, except in certain limited circumstances, and registration will be made in the depositary service of CDS. Subscribers for 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 Debentures is purchased. See "Plan of Distribution".
The Trust 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.
DBRS Limited ("DBRS") has confirmed a stability rating of STA-5 (low) to the Trust. However, such stability rating is presently under review by DBRS. See "Stability Rating".
TABLE OF CONTENTS
Page | |
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS | 1 |
NON-GAAP MEASURES | 2 |
GLOSSARY OF TERMS | 3 |
SELECTED ABBREVIATIONS | 6 |
EXCHANGE RATE INFORMATION | 6 |
PRESENTATION OF FINANCIAL STATEMENTS | 6 |
DOCUMENTS INCORPORATED BY REFERENCE | 6 |
HARVEST ENERGY TRUST | 8 |
DESCRIPTION OF BUSINESS | 8 |
RECENT DEVELOPMENTS | 10 |
DESCRIPTION OF TRUST UNITS | 10 |
INTEREST COVERAGE | 11 |
STABILITY RATING | 12 |
CONSOLIDATED CAPITALIZATION OF THE TRUST | 14 |
PRICE RANGE AND TRADING VOLUME OF THE TRUST UNITS AND THE EXISTING DEBENTURES | 16 |
DISTRIBUTIONS TO UNITHOLDERS | 19 |
USE OF PROCEEDS | 20 |
DETAILS OF THE OFFERING | 20 |
PLAN OF DISTRIBUTION | 26 |
RELATIONSHIP AMONG THE TRUST AND CERTAIN UNDERWRITERS | 27 |
INTEREST OF EXPERTS | 28 |
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS | 28 |
ELIGIBILITY FOR INVESTMENT | 33 |
RISK FACTORS | 34 |
LEGAL PROCEEDINGS | 34 |
STATUTORY RIGHTS OF WITHDRAWAL AND RESCISSION | 34 |
AUDITORS' CONSENTS | 36 |
CERTIFICATE OF THE TRUST | C-1 |
CERTIFICATE OF THE UNDERWRITERS | C-2 |
1 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements contained in this short form prospectus,
and in certain documents incorporated by reference herein, constitute
forward-looking statements. These statements relate to future events or future
performance. All statements other than statements of historical fact may be
forward-looking statements. Forward-looking statements are often, but not
always, identified by the use of words such as "seek", "anticipate", "plan",
"continue", "estimate", "expect", "may", "will", "project", "predict",
"potential", "targeting", "intend", "could", "might", "should", "believe" and
similar expressions. 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. HOC
believes 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 herein, contain forward-looking statements pertaining
to:
expected financial performance in future periods;
expected increases in revenue attributable to development and production activities;
estimated capital expenditures;
competitive advantages and ability to compete successfully;
intention to continue adding value through drilling and exploitation activities;
emphasis on having a low cost structure;
intention to retain a portion of the Trust's cash flows after distributions to repay indebtedness and invest in further development of properties of Harvest (as defined below);
reserve estimates and estimates of the present value of the Trust's future net cash flows;
methods of raising capital for exploitation and development of reserves;
factors upon which HOC will decide whether or not to undertake a development or exploitation project;
plans to make acquisitions and expected synergies from acquisitions made;
expectations regarding the development and production potential of the Trust's properties;
treatment under government regulatory regimes including, without limitation, environmental and tax regulation;
overall demand for gasoline, low sulphur diesel, jet fuel, furnace oil and other refined products; and
the level of global production of crude oil feedstocks and refined products.
With respect to forward-looking statements contained in this short form prospectus and the documents incorporated by reference herein, the Trust has made assumptions regarding, among other things:
future oil and natural gas prices and differentials between light, medium and heavy oil prices;
the cost of expanding Harvest's property holdings;
the ability to obtain equipment in a timely manner to carry out development activities;
the ability to market oil and natural gas successfully to current and new customers;
the impact of increasing competition;
the ability to obtain financing on acceptable terms;
the ability to add production and reserves through development and exploitation activities; and
the ability to produce gasoline, low sulphur diesel, jet fuel, furnace oil and other refined products that meet our customers' specifications.
Some of the risks that could affect the Trust's future results and could cause results to differ materially from those expressed in the forward-looking statements include:
the volatility of oil and natural gas prices, including the differential between the price of light, medium and heavy oil;
the uncertainty of estimates of oil and natural gas reserves;
the impact of competition;
difficulties encountered in the integration of acquisitions;
2
difficulties encountered during the drilling for and production of oil and natural gas;
difficulties encountered in delivering oil and natural gas to commercial markets;
foreign currency fluctuations;
the uncertainty of the Trust's ability to attract capital;
changes in, or the introduction of new, government laws and regulations relating to the oil and natural gas business including, without limitation, tax, royalty and environmental regulation;
costs associated with developing and producing oil and natural gas;
compliance with environmental and tax regulations;
liabilities stemming from accidental damage to the environment;
loss of the services of any of Harvest's senior management or directors;
adverse changes in the economy generally;
the volatility of refining gross margins including the price of crude oil feedstocks as well as the prices for refined products; and
the stability of the Refinery (as defined below) throughput performance.
Statements relating to "reserves" are deemed to be forward-looking statements, as they involve the implied assessment, based on certain estimates and assumptions, that the resources and reserves described can be profitably produced in the future. Readers are cautioned that the foregoing lists of factors are not exhaustive. The forward-looking statements contained in this short form prospectus and the documents incorporated by reference herein are expressly qualified by this cautionary statement. Except as required by law, neither the Trust, HOC, nor any of the Underwriters undertakes any obligation to publicly update or revise any forward-looking statements and readers should also carefully consider the matters discussed under the heading "Risk Factors" in this short form prospectus.
NON-GAAP MEASURES
In this short form prospectus and the documents which are incorporated by reference in this short form prospectus, the Trust uses certain financial reporting measures that are commonly used as benchmarks within the oil and natural gas industry. These measures include: "Payout Ratio", "Cash G&A", "Operating Netbacks", "Earnings from Operations" and "Gross Margin". These measures are not defined under Canadian GAAP (as defined below) and should not be considered in isolation or as an alternative to conventional Canadian 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, in the documents which are incorporated by reference in this short form prospectus management uses Payout Ratio, Cash G&A and Operating Netbacks as they are non-GAAP measures used extensively in the Canadian energy trust sector for comparative purposes. Payout Ratio is the ratio of distributions to total Cash from Operating Activities. Operating Netbacks are always reported on a per boe (as defined below) basis, and include gross revenue, royalties, transportation and operating expenses. Cash G&A are general and administrative expenses, excluding the effect of unit based compensation plans. Gross Margin is commonly used in the refining industry to reflect the net cash received from the sale of refined product after considering the cost to purchase the feedstock and is calculated by deducting purchased products for resale and processing from total revenue. Earnings from Operations is also commonly used in the petroleum and natural gas and in the refining and marketing industries to reflect operating results before items not directly related to operations.
3 GLOSSARY OF TERMS In this short form prospectus, the following terms shall have
the meanings set forth below, unless otherwise indicated: "6.40% Debentures Due 2012" means the 6.40%
convertible unsecured subordinated debentures of the Trust due October 31, 2012
assumed on February 3, 2006 pursuant to the terms of the Viking Arrangement; "6.5% Debentures Due 2010" means the 6.5% convertible
unsecured subordinated debentures of the Trust due December 31, 2010; "7.25% Debentures Due 2013" means the 7.25%
convertible unsecured subordinated debentures of the Trust due September 30,
2013; "7.25% Debentures Due 2014" means the 7.25%
convertible unsecured subordinated debentures of the Trust due February 28,
2014; "8% Debentures Due 2009" means the 8% convertible
unsecured subordinated debentures of the Trust due September 30, 2009; "9% Debentures Due 2009" means the 9% convertible
unsecured subordinated debentures of the Trust due May 31, 2009; "10.5% Debentures Due 2008" means the 10.5%
convertible unsecured subordinated debentures of the Trust due January 31, 2008
assumed on February 3, 2006 pursuant to the terms of the Viking Arrangement; "
"ABCA" means the Business Corporations Act (Alberta), R.S.A. 2000, c. B-9, as amended, including the regulations promulgated thereunder;
"Administration Agreement" means the agreement dated September 27, 2002 between the Trustee and HOC pursuant to which HOC provides certain administrative and advisory services in connection with the Trust;
"AIF" means the Annual Information Form of the Trust dated March 27, 2008;
"Board of Directors" means the board of directors of HOC;
"Breeze Trust No. 1" means Harvest Breeze Trust 1, a trust established under the laws of the Province of Alberta, wholly-owned by the Trust;
"Breeze Trust No. 2" means Harvest Breeze Trust 2, a trust established under the laws of the Province of Alberta, wholly-owned by the Trust;
"Business Day" means a day, which is not a Saturday, Sunday or statutory holiday, when banks in the place at which any action is required to be taken hereunder are generally open for the transaction of commercial banking business;
"Canadian GAAP" or "GAAP" means generally accepted accounting principles in Canada;
"Debenture Trustee" means Valiant Trust Company or its successor as trustee under the Indenture;
"Debentures" means the 7.50% convertible unsecured subordinated debentures of the Trust due May 31, 2015 offered hereby;
"Downstream" means Harvest's petroleum refining and marketing segment operating under the North Atlantic trade name, comprised of a medium gravity sour crude hydrocracking refinery with a 115,000 bbls/d nameplate capacity and a marketing division with 64 gasoline outlets, a retail heating fuels business and a commercial and wholesale petroleum products business, all located in the Province of Newfoundland and Labrador;
4
"DRIP Plan" means the Trust's Premium Distribution, Distribution Reinvestment and Optional Trust Unit Purchase Plan;
"Existing Debentures" means, collectively, the 7.25% Debentures Due 2014, the 7.25% Debentures Due 2013, the 6.40% Debentures Due 2012, the 6.5% Debentures Due 2010, the 8% Debentures Due 2009 and the 9% Debentures Due 2009;
"Harvest" means, collectively, the Trust and its subsidiaries, trusts and partnerships;
"Hay River Partnership" means Hay River Partnership;
"HOC" means Harvest Operations Corp., a corporation incorporated under the ABCA and a wholly-owned subsidiary of the Trust and, all references to "HOC", unless the context otherwise requires, are references to HOC and its predecessors;
"Indenture" means, collectively, the indenture dated January 29, 2004, a first supplemental indenture thereto dated August 10, 2004, a second supplemental indenture dated August 2, 2005, a third supplemental indenture dated November 22, 2006, a fourth supplemental indenture dated June 1, 2007 and a fifth supplemental debenture thereto to be dated the date of closing of the Offering among the Trust, the Corporation and the Debenture Trustee governing the terms of the Debentures;
"Information Circular" means the Proxy Statement of the Trust dated March 20, 2008 relating to the annual and special meeting of Unitholders to be held on May 20, 2008;
"Maturity Date" means May 31, 2015;
"NI 51-101" means National Instrument 51-101, Standards of Disclosure for Oil and Gas Activities;
"North Atlantic" means North Atlantic Refining Limited, a private company which was acquired by Harvest on October 19, 2007;
"NYSE" means the New York Stock Exchange;
"Offering" means the offering of $250,000,000 aggregate principal amount of Debentures of the Trust at a price of $1,000 per Debenture pursuant to this short form prospectus;
"Ordinary Trust Units" means the Ordinary Trust Units of the Trust created, issued, and certified under the Trust Indenture and for the time being outstanding and entitled to the benefits thereof;
"Over-allotment Option" means the option granted to the Underwriters to purchase up to an additional $37,500,000 aggregate principal amount of Debentures at a price of $1,000 per Debenture on the same terms and conditions as the Offering, exercisable from time to time, in whole or in part, for a period of 30 days following closing of the Offering to cover over-allotments, if any, and for market stabilization purposes;
"Redearth Partnership" means Redearth Partnership, a partnership established under the laws of Alberta, a 60% interest of which is owned by HOC;
"Refinery" means the 115,000 barrel per stream day sour crude hydrocracking refinery located in the Province of Newfoundland and Labrador, owned by North Atlantic;
"SIFT Rules" has the meaning ascribed thereto in "Canadian Federal Income Tax Considerations SIFT Rules";
"Special Trust Units" means the Special Trust Units of the Trust created, issued, and certified under the Trust Indenture and for the time being outstanding and entitled to the benefits thereof;
"Special Voting Unit" means a Special voting unit of the Trust;
"Supply and Offtake Agreement" means the supply and offtake agreement dated October 19, 2006 entered into between North Atlantic and Vitol Refining, S.A.;
5
"Tax Act" means the Income Tax Act (Canada), R.S.C. 1985, c.1, 5th Supplement, as amended including the regulations promulgated thereunder;
"Three Year Extendible Revolving Credit Facility" or "Credit Facility" has the meaning ascribed to the term Three Year Extendible Revolving Credit Facility in note (1) to the table set forth in "Consolidated Capitalization of the Trust";
"Trust" means Harvest Energy Trust, an open-end, unincorporated investment trust established under the laws of the Province of Alberta pursuant to the Trust Indenture;
"Trust Indenture" means the fourth amended and restated trust indenture dated January 1, 2008 between the Trustee and HOC as such indenture may be further amended by supplemental indentures from time to time;
"Trust Unit" or "Unit" means a trust unit of the Trust and unless the context otherwise requires means Ordinary Trust Units;
"Trust Unit Rights Incentive Plan" means the trust unit rights incentive plan as described under the heading "Directors and Officers Compensation" in the Information Circular;
"Trustee" means Valiant Trust Company, or its successor as trustee of the Trust;
"TSX" means the Toronto Stock Exchange;
"Underwriters" means, collectively, CIBC World Markets Inc., TD Securities Inc., RBC Dominion Securities Inc., Scotia Capital Inc., HSBC Securities (Canada) Inc. and National Bank Financial Inc.;
"Underwriting Agreement" means the agreement dated April 7, 2008 among the Trust, HOC and the Underwriters in respect of the Offering;
"Unit Award Incentive Plan" means the unit award incentive plan as described under the heading "Directors and Officers Compensation" in the Information Circular;
"United States" or "U.S." means the United States of America;
"Unitholders" means the holders from time to time of the Trust Units;
"Upstream" means Harvest's petroleum and natural gas segment, consisting of the development, production and subsequent sale of petroleum, natural gas and natural gas liquids in Alberta, Saskatchewan and British Columbia;
"US GAAP" means accounting principles generally accepted in the United States;
"Viking" means Viking Energy Royalty Trust, an open-end, unincorporated investment trust established under the laws of the Province of Alberta; and
"Viking Arrangement" means the Plan of Arrangement involving the Trust, HOC, Viking, Viking Holdings Inc., Trust securityholders and Viking unitholders as approved by the Trust securityholders and the Viking unitholders on February 2, 2006 and effective February 3, 2006.
Certain other terms used herein but not defined herein are defined in NI 51-101 and, unless the context otherwise requires, shall have the same meanings herein as in NI 51-101.
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.
6 SELECTED ABBREVIATIONS "bbl" means one barrel. "boe" means barrels of oil equivalent. A barrel of oil
equivalent is determined by converting a volume of natural gas to barrels using
the ratio of six mcf to one barrel. Boes may be misleading, particularly if used
in isolation. The boe conversion ratio of 6 mcf:1 bbl is based on an energy
equivalency method primarily applicable at the burner tip and does not represent
a value equivalency at the wellhead. "boe/d" means barrels of oil equivalent per day. "Mcf" means one thousand cubic feet. EXCHANGE RATE INFORMATION All dollar amounts set forth in this prospectus are expressed
in Canadian dollars, except where otherwise indicated. References to Canadian
dollars, CDN$ or $ are to the currency of Canada and references to U.S. dollars
or US$ are to the currency of the United States. The following table sets forth for each period indicated, the
average, high, low and end of period noon buying rates in New York for cable
transfers as certified for customs purposes by the Federal Reserve Bank of New
York (the "noon buying rate"). Such rates are set forth as U.S. dollars per
$1.00 and are the inverse of the rates quoted by the Federal Reserve Bank of New
York for Canadian dollars per US$1.00.
Year Ended December 31, | |||
2007 | 2006 | 2005 | |
High | 1.0852 | 0.9099 | 0.8690 |
Low | 0.8453 | 0.8528 | 0.7872 |
Period End | 1.0088 | 0.8581 | 0.8579 |
Average(1) | 0.9418 | 0.8846 | 0.8276 |
Note:
(1)
Average represents the average of the rates on the last day of each month during the period.
PRESENTATION OF FINANCIAL STATEMENTS
Unless otherwise indicated, all financial information included and incorporated by reference in this Prospectus is determined using Canadian GAAP. The financial statements incorporated by reference herein have been prepared in accordance with Canadian GAAP, which differs from US GAAP. Therefore, the comparative consolidated financial statements which are incorporated by reference in this Prospectus, may not be comparable to financial statements prepared in accordance with US GAAP. Where applicable, prospective investors should refer to the notes to the comparative audited consolidated financial statements which are incorporated by reference into this Prospectus for a discussion of the principal differences between financial results calculated under Canadian GAAP and under US GAAP.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents of the Trust, filed with the various securities commissions or similar authorities in the Provinces and Territories of Canada, are specifically incorporated by reference into and form an integral part of this short form prospectus:
1.
the AIF;
2.
the audited comparative consolidated financial statements of the Trust as at and for the years ended December 31, 2007 and 2006, together with the notes thereto and the auditors' report thereon including the auditors' report on internal control over financial reporting;
7 3. the management's
discussion and analysis of the financial condition and results of operations of
the Trust for the year ended December 31, 2007; and 4. the Information
Circular. Any documents of the type required by National Instrument
44-101 to be incorporated by reference in a short form prospectus including any
material change reports (excluding confidential reports), comparative interim
financial statements, comparative annual financial statements and the auditors'
report thereon, management's discussion and analysis of financial condition and
results of operations, information circulars, annual information forms and
business acquisition reports filed by the Trust with the securities commissions
or similar authorities in the Provinces and Territories of Canada subsequent to
the date of this short form prospectus and prior to the termination of this
distribution are deemed to be incorporated by reference in 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 the 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.
8 HARVEST ENERGY TRUST General The Trust is an open-ended, unincorporated investment trust
established under the laws of the Province of Alberta on July 10, 2002 pursuant
to the Trust Indenture between HOC, a wholly-owned subsidiary and administrator
of the Trust, and Valiant Trust Company, as trustee. The Trust's assets consist
of the securities, unsecured debt and net profits interests on the oil and
natural gas properties of several direct and indirect subsidiaries, trusts and
partnerships as well as direct ownership of royalties on certain petroleum and
natural gas properties. The head and principal office of the Trust is located at
Suite 2100, 330-5th Avenue S.W., Calgary, Alberta T2P 0L4 while the registered
office of the Trust is located at Suite 1400, 350-7th Avenue S.W., Calgary,
Alberta T2P 3N9. The Trust is managed by HOC pursuant to the Administration
Agreement. The beneficiaries of the Trust are the holders of its Units
who receive monthly distributions from the Trust's net cash flow from its
various investments after certain administrative expenses and the provision for
interest due to the holders of convertible debentures. See "Description
of Trust Units Cash Distributions".
Pursuant to the Trust Indenture, the Trust is required to distribute 100% of its
taxable income to its Unitholders each year and limit its activities to holding
and administering permitted investments and making distributions to its
Unitholders. The Trust has provided an undertaking to the securities
regulatory authorities in each of the Provinces and Territories of Canada to: (i)
treat each of HOC, Breeze Trust No. 1, Breeze Trust No. 2, Breeze Resources
Partnership, Hay River Partnership, Redearth Partnership and North Atlantic
Refining Limited Partnership as a subsidiary of the Trust in complying with its
reporting issuer obligations unless generally accepted accounting principles
prohibit the consolidation of financial information of HOC, Breeze Trust No. 1,
Breeze Trust No. 2, Breeze Resources Partnership, Hay River Partnership,
Redearth Partnership, North Atlantic Refining Limited Partnership and the Trust,
at which time the Trust will provide Unitholders with separate financial
statements for each of HOC, Breeze Trust No. 1, Breeze Trust No. 2, Breeze
Resources Partnership, Hay River Partnership, Redearth Partnership and North
Atlantic Refining Limited Partnership for as long as any of HOC, Breeze Trust
No. 1, Breeze Trust No. 2, Breeze Resources Partnership, Hay River Partnership,
Redearth Partnership or North Atlantic Refining Limited Partnership represents a
significant asset of the Trust; (ii) take appropriate measures to require each
person who would be an insider of each of HOC, Breeze Trust No. 1, Breeze Trust
No. 2, Breeze Resources Partnership, Hay River Partnership, Redearth Partnership
and North Atlantic Refining Limited Partnership, if HOC, Breeze Trust No. 1,
Breeze Trust No. 2, Breeze Resources Partnership, Hay River Partnership,
Redearth Partnership and North Atlantic Refining Limited Partnership were a
reporting issuer, to file insider reports about trades in Trust Units, including
securities which are exchangeable into Trust Units, and to comply with statutory
prohibitions against insider trading for as long as the Trust is a reporting
issuer; and (iii) the Trust will annually certify that it has complied with the
undertakings in (i) and (ii) and will file such certificate on SEDAR
concurrently with the filing of its annual financial statements. DESCRIPTION OF BUSINESS Harvest Energy Trust The business of the Trust is to indirectly exploit, develop
and hold interests in petroleum and natural gas properties in its Upstream
segment as well as conduct petroleum refining and marketing operations in its
Downstream segment through its investments. Cash from the Upstream operations
flows to the Trust by way of payments by HOC and Breeze Trust No. 1 pursuant to
net profit interests held by the Trust, interest and principal payments by HOC,
Breeze Trust No. 1 and Breeze Trust No. 2 on unsecured debt owing to the Trust
and payments by Breeze Trust No. 1 and Breeze Trust No. 2 of trust
distributions. The Trust also receives cash flow from its direct royalties on
certain petroleum and natural gas properties. Cash flow from the Downstream
operations flows to the Trust in the form of interest and principal on unsecured
debt owing to the Trust from North Atlantic Refining Limited as well as
partnership distributions from Harvest Refining General Partnership. Pursuant to the terms of each respective net
profits interest agreement, the Trust is entitled to payments equal to the
amount by which 99% of the gross proceeds from the sale of production from
petroleum and natural gas properties exceed 99% of certain deductible
expenditures. Deductible expenditures may include discretionary amounts to fund
capital expenditures, to repay third party debt and to provide for working
capital required to maintain the operations of the operating subsidiaries. See
also "Structure of Harvest
Energy Trust The Net Profits Interest Agreements"
on pages 15 through 17 in the AIF.
9 Operating Subsidiaries The business of the Trust is carried on by HOC and
the Trust's other operating subsidiaries, Redearth Partnership, Breeze Resources
Partnership, Breeze Trust No. 1, Breeze Trust No. 2 and Harvest Refining General
Partnership (and all direct and indirect wholly-owned subsidiaries of Harvest
Refining General Partnership). The activities of the operating subsidiaries are
financed through interest bearing notes from the Trust, the purchase of net
profit interests by the Trust and third party debt. For additional information respecting HOC and
certain other operating subsidiaries of the Trust, see "Structure
of Harvest Energy Trust Operating Subsidiaries"
on pages 13 through 15 inclusive of the AIF. Organizational Structure of the Trust The following diagram describes the inter-corporate
relationships among the Trust and its material subsidiaries, trusts and
partnerships (each such subsidiary being wholly-owned (except as noted below)
and being created, formed or organized, as the case may be, and governed by the
laws of the Province of Alberta except for North Atlantic which was created
under the laws of the Province of Newfoundland and Labrador):
Notes:
(1)
All operations and management of the Trust and the Trust's operating subsidiaries are conducted through HOC except for the operations of the North Atlantic Refining Limited Partnership which are conducted by the management and employees of North Atlantic Refining Limited.
(2)
The Trust receives regular monthly net profits interest payments and/or interest payments from HOC, Breeze Trust No. 1, Breeze Trust No. 2 and North Atlantic Refining Limited and distributions from Breeze Trust No. 1, Breeze Trust No. 2, and Harvest Refining General Partnership.
(3)
Breeze Trust No. 1 and Breeze Trust No. 2 have also issued priority trust units to HOC.
10
Ongoing Acquisition and Disposition Activity
The Trust continues to pursue and evaluate potential acquisitions of oil and natural gas assets as part of its ongoing acquisition program. The Trust cannot predict whether any current or future opportunities will ultimately result in one or more acquisitions for the Trust. The Trust also routinely evaluates its property portfolio and disposes of properties that it views can realize full value from divestment proceeds.
RECENT DEVELOPMENTS
Proposed Changes to Board of Directors
On May 20, 2008 at Harvests annual and special meeting, Unitholders will be asked to elect the eight directors of Harvest Operations Corp. including the following changes as compared to Harvests current Board of Directors: (i) Kevin Bennett will not be standing for re-election; and, (ii) for the first time, John Zahary, the President and Chief Executive Officer of Harvest Operations Corp., will be standing for election.
Contract to Sell High Sulphur Fuel Oil
Effective January 20, 2008, Harvest entered into a one year Fuel Oil Off-Take Agreement with an affiliate of one of the worlds largest integrated oil and natural gas producers, for the sale of 100% of its high sulphur fuel oil with prices calculated at a premium over the Platts quoted price for New York Harbour deliveries less a fixed transportation adjustment. The contract will renew for one additional one year term unless terminated by either party with notice at least 60 days prior to termination. The Supply and Off-Take Agreement provides Harvest with the option to independently market its heavy fuel oil products.
DESCRIPTION OF TRUST UNITS
Trust Units
Effective upon the amendment and restatement of the Trust Indenture which occurred concurrent with the closing of the Viking Arrangement on February 3, 2006, the Trust is authorized to issue three classes of trust units, described and designated as Ordinary Trust Units, Special Trust Units and Special Voting Units, pursuant to the amended and restated Trust Indenture. Each Ordinary Trust Unit entitles the holder or holders thereof to one vote at any meeting of the Unitholders and each Special Trust Unit shall entitle the holder or holders thereof to three-sixteenths of one vote at any meeting of the Unitholders. The Special Trust Units were created and issued to enable the closing of the Viking Arrangement and all have been subsequently cancelled. Unless otherwise specifically designated as such, all references to Trust Units or Units in this short form prospectus are deemed to be references to Ordinary Trust Units.
As of April 10, 2008, there were 151,135,997 Units issued and outstanding. Each Unit entitles the holder thereof to one vote at any meeting of the holders of Units and represents an equal 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 shall 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.
The Trust Indenture also provides that Units, including rights, warrants and other securities to purchase, to convert into or exchange into Units, may be created, issued, sold and delivered on such terms and conditions and at such times as the Board of Directors of HOC may determine. The Trust Indenture also provides that HOC may authorize the creation and issuance of debentures, notes and other evidences of indebtedness of the Trust from time to time on such terms and conditions to such persons and for such consideration as HOC may determine.
The Units do not represent a traditional investment and should not be viewed by investors as "shares" in the Trust. Corporate law does not govern the Trust and the rights of Unitholders. As holders of Units in the Trust, the Unitholders will not have the statutory rights normally associated with ownership of shares of a corporation including, for example, the right to bring "oppression" or "derivative" actions. The rights of Unitholders are specifically set forth in the Trust Indenture. In addition, trusts are not defined as recognized entities within the definitions of legislation such as 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 of an insolvency or restructuring, a Unitholder's position as such may be quite different than that of a shareholder of a corporation.
11
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 "General Description of Capital Structure - Trust Units and the Trust Indenture" at pages 72 through 77, inclusive, of the AIF.
The Trust Indenture allows for the creation of an unlimited number of Special Voting Units to 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. 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 HOC 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. As of April 10, 2008, no Special Voting Units are outstanding.
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 HOC, make distributions in respect of repayments of principal made by HOC, Breeze Trust No. 1, Breeze Trust No. 2 and North Atlantic Refining Limited to the Trust on unsecured debt owing by them. Harvest retains a portion of its consolidated cash flow to fund capital expenditures and distributes the balance to Unitholders. The actual percentage retained is subject to the discretion of the Board of Directors of HOC and will vary from month to month depending on, among other things, the current and anticipated commodity price environment. Based on current forward commodity prices, the Trust anticipates that the portion of cash flow retained for 2008 will be approximately 60% to 80%. Although the Trust intends to make distributions of its available cash to Unitholders, these cash distributions are not guaranteed and may be reduced or suspended. See "Risk Factors".
Non-Resident Ownership
The Trust Indenture provides that it is intended that the Trust qualify as a "unit trust" and a "mutual fund trust" under the Tax Act. For the Trust to qualify as a "mutual fund trust" for purposes of the Tax Act, it is required that, among other things, (i) the Trust not be considered to be a trust established or maintained primarily for the benefit of non residents of Canada; or (ii) the Trust satisfies certain conditions as to the nature of the assets of the Trust as specified in the Tax Act (the "Asset Test"). Harvest believes that the Trust has at all material times satisfied the Asset Test and accordingly, for purposes of the Tax Act, the Trust should qualify as a "mutual fund trust".
In addition, Harvest, with the assistance of its transfer agent and registrar for the Trust Units, Valiant Trust Company, maintains a process of soliciting Participant Declaration Forms from all registered holders of its Trust Units. The Participant Declaration Form requires the certification of the number of Trust Units held by non-residents and the number of non-resident holders, all as defined by the Tax Act. This process includes the solicitation of such forms by the Canadian Depository for Securities and, indirectly, the Depository Trust Company. At the end of each quarter, Harvest instructs Valiant Trust Company to complete this solicitation process and report the results. As at December 31, 2007, the non-resident holders of Trust Units represented approximately 66% of the Trust's issued and outstanding Trust Units.
12
INTEREST COVERAGE
The following interest coverages are calculated on a consolidated basis for the twelve month periods ended December 31, 2007 based on the audited financial statements for the year ended December 31, 2007 incorporated by reference into this short form prospectus.
The pro forma interest expense for the twelve month period ending December 31, 2007, after giving effect to the issuance of the Debentures and adjusting for the January 31, 2008 settlement of $24.3 million principal amount of 10.5% Debentures Due 2008 with the issuance of 1,166,593 Trust Units, is $161.3 million. The earnings of the Trust before interest and income tax expense for the twelve month period ended December 31, 2007 was $191.3 million which is 1.2 times the pro forma interest expense for the twelve month period. Cash flow (defined as cash flow from operations before working capital changes and settlement of asset retirement obligations) before interest and income tax expense for the year ended December 31, 2007 was $812.6 million resulting in cash flow coverage of 5.0 times the pro forma interest expense for the twelve month period.
STABILITY RATING
DBRS maintains a stability rating system for income funds to provide an indication of both the stability and sustainability of cash distributions per trust unit, which is essentially an assessment of an income fund's ability to generate sufficient cash to pay out a stable level of distributions on a per unit basis over the longer term. The DBRS stability ratings provide opinions and research on income funds related to stability and sustainability of distributions over time and are not a recommendation to buy, sell or hold the trust units. In determining a DBRS stability rating, the following factors are evaluated: (1) operating characteristics, (2) asset quality, (3) financial profile, (4) diversification, (5) size and market position, (6) sponsorship/governance, and (7) growth. The rating categories range from STA-1 being the highest stability and sustainability of distributions per unit to STA-7 being poor stability and sustainability with each category refined into further subcategories of high, middle and low providing a total of 21 possible rating categories.
On May 13, 2005, DBRS initiated coverage of the Trust and assigned a stability rating of STA-6 (high) citing its strengths as a steady distribution since inception, a conservative payout ratio of 52% in 2004, the acquisition of the 19,000 boe/d of production in September of 2004 as positive in diversifying its production mix and reserve base and management's hedging of 50% to 75% of its net production to reduce cash flow volatility. While recognizing favourable oil price outlook for 2006, DBRS noted the Trust's challenges as high balance sheet leverage, average production decline rates of 22% combined with low capital spending placing increasing reliance on purchasing reserves in a competitive acquisition market and a significant proportion of heavy oil production which have generally higher operating costs and is subject to price differential risk.
On June 29, 2006, DBRS upgraded the stability rating of the Trust to STA-5 (low) following its merger with Viking. Based on its ranking as the fifth largest oil and gas trust, DBRS cited the increased size of core operating areas as providing operating efficiencies and improved access to field services which are in tight supply in western Canada. In addition, DBRS noted the Trust's strengths as a high degree of control over costs with its operated properties representing 85% of total production, the retention of senior Viking management with expertise in heavy oil production complementing its significant heavy oil assets, a larger asset base providing greater access to more favourable lending terms and an active hedging program ensuring some cash flow certainty. The Trust's rating also reflected a below average reserve life index among DBRS-rated trusts, an 80% to 85% payout ratio which is high compared to its peers and a continued reliance on acquisitions to maintain its long term asset base.
Following its announcement of the acquisition of Birchill and equity financing on July 26, 2006, DBRS confirmed the STA-5 (low) rating of the Trust noting the high cost of the acquisition as reflective of a broader industry trend with more emphasis placed on probable reserves in evaluating acquisitions in a highly competitive environment. In addition, DBRS recognized that the Birchill properties fit well with the Trust's existing assets providing a high degree of certainty regarding expectation of future performance and that the 50:50 debt and equity financing should result in a modest decline in the Trust's payout ratio.
13
On August 23, 2006, DBRS placed the stability rating of Harvest "Under Review with Negative Implications" following its announcement of the proposed acquisition of North Atlantic citing the multiple paid as likely being at the height of the market. DBRS also noted that the North Atlantic Refinery is well located with ready access to the eastern United States finished products markets as well as crude oil supply sources globally while recognizing that the vertical integration provides cash flow diversification, additional opportunities to achieve growth and creates a much larger entity which should lead to greater financial resources, liquidity and a lower average cost of capital over time. The rating action reflects (1) the initially debt funded transaction would result in a substantially higher debt to capital and debt to cash flow ratios; (2) Harvest's limited expertise in the refining segment which is a highly cyclical business with significant margin volatility; and, (3) the North Atlantic Refinery is relatively small and a single asset in an industry that is increasingly focused on scale to achieve cost advantages and market presence.
On November 1, 2006, DBRS placed the stability ratings of select Canadian income trusts "Under Review with Developing Implications" following the Federal Minister of Finance's announcement to make significant changes to the way in which Canadian income trusts will be taxed in the future, which has since been formalized in the SIFT Rules (see "Canadian Federal Income Tax Considerations SIFT Rules"). For income trusts that plan to reduce the level of their distributions to unitholders to reflect the additional tax burden, the reduction would be viewed as a one time event and DBRS's analytical focus would then be on the stability and sustainability of distributions following the adjustments. Under this scenario, the stability ratings would likely be confirmed. However, the SIFT Rules could encourage trusts to develop alternative capitalization or operating strategies and DBRS will take the appropriate rating actions when the individual trusts strategies are known. Until DBRS is able to discuss these issues with those trusts implementing alternative capitalization or operating strategies, their ratings would remain under review. Harvest's stability rating would also be subject to this latest "Under Review with Developing Implications" rating adjustment.
14
CONSOLIDATED CAPITALIZATION OF THE TRUST
The following table sets forth the consolidated capitalization of Harvest as at December 31, 2007 before and after giving effect to this Offering:
As at December 31, 2007 | ||
As at | after giving effect to the | |
December 31, 2007 | Offering(1)(5)(6)(7) | |
(in thousands, except Trust Units) | ||
Credit Facilities(1)(4) | ||
Three Year Extendible Revolving Credit Facility | $1,279,501 | $1,040,001 |
77⁄8% Senior Notes(2) | $241,148 | $241,148 |
Debentures(4) | ||
- Discounted Obligation |
- | $190,600 |
- Equity Component |
- | $48,900 |
9% Debentures Due 2009(3) | ||
- Discounted Obligation |
$962 | $962 |
- Equity Component |
- | - |
8% Debentures Due 2009(3) | ||
- Discounted Obligation |
$1,692 | $1,692 |
- Equity Component |
$12 | $12 |
6.5% Debentures Due 2010(3) | ||
- Discounted Obligation |
$34,653 | $34,653 |
- Equity Component |
$2,332 | $2,332 |
10.5% Debentures Due 2008(3)(8) | ||
- Discounted Obligation |
$24,273 | $24,273 |
- Equity Component |
$6,436 | $6,436 |
6.40% Debentures Due 2012(3) | ||
- Discounted Obligation |
$168,325 | $168,325 |
- Equity Component |
$14,795 | $14,795 |
7.25% Debentures Due 2013(3) | ||
- Discounted Obligation |
$355,145 | $355,145 |
- Equity Component |
$11,792 | $11,792 |
7.25% Debentures Due 2014(3) | ||
- Discounted Obligation |
$66,718 | $66,718 |
- Equity Component |
$4,170 | $4,170 |
Trust Units (unlimited) (5)(6)(7) | $3,736,080 | $3,736,080 |
(148,291,170 Trust Units) | (148,291,170 Trust Units) |
Notes:
(1)
On February 3, 2006, Harvest entered into a credit agreement which established a $750 million three year extendible revolving credit facility (the "Three Year Extendible Revolving Credit Facility") and on March 31, 2006, a secondary syndication was completed with an increase in the facility to $900 million. On October 19, 2006, Harvest entered into an amended and restated credit agreement with its lenders which increased the Three Year Extendible Revolving Credit Facility from $900 million to $1.4 billion. On May 7, 2007, Harvest and its lenders amended the Three Year Extendible Revolving Credit Facility to increase the aggregate commitment amount from $1.4 billion to $1.6 billion and to extend the maturity date from March 31, 2009 to April 30, 2010 with respect to $1,535 million of the aggregate commitment amount with one lender remaining committed to provide $65 million with a maturity date of March 31, 2009. On October 1, 2007, two of Harvests existing lenders agreed to assume $50 million of the $65 million non-extended commitment and concurrently extended the maturity to April 30, 2010. On November 1, 2007, another of Harvests existing lenders agreed to assume the remaining $15 million of non-extended commitment and similarly extended the maturity to April 30, 2010. Subsequent to these reassignments, the entire $1.6 million of the Three Year Extendible Credit Facility matures on April 30, 2010.
15 Other than as noted, the terms and
conditions of the Three Year Extendible Revolving Credit Facility have remained
unchanged since February 2006 except for changes to the security pledged which
increased from a $1.5 billion first floating charge over all of the assets of
Harvest's operating subsidiaries to $2.5 billion plus the granting of a first
mortgage security interest on the Refinery assets of North Atlantic. Amounts
borrowed under the Three Year Extendible Revolving Credit Facility bear interest
at a floating rate based on bankers' acceptances plus a range of 65 to 115 basis
points depending on Harvest's ratio of senior debt (excluding convertible
debentures) to its earnings before interest, taxes, depletion, amortization and
other non-cash amounts ("EBITDA"). Availability under the Three Year
Extendible Revolving Credit Facility is subject to the following quarterly
financial covenants: Senior debt to EBITDA 3.0 to 1.0 or
less Total debt to EBITDA 3.5 to 1.0 or less Senior debt to Capitalization 50%
or less Total debt to Capitalization 55% or less On October 19, 2006, North Atlantic
entered into an amended and restated credit agreement that provides for a $10
million demand operating line of credit to finance its receivables and inventory
in the Province of Newfoundland and Labrador as well as support periodic cash
management market transactions. This facility is secured by a guarantee from
Harvest Operations Corp. with amounts borrowed bearing interest at the bank's
prime lending rate. (2) Harvest Operations Corp., a
wholly-owned subsidiary of the Trust, issued US$250 million of 77⁄8% Senior Notes with interest
payable semi-annually on April 15 and October 15 each year and mature on October
15, 2011. Prior to maturity, redemptions are permitted as follows: Beginning on October 15, 2008 at
103.938% of the principal amount, The 77⁄8%
Senior Notes contain certain covenants restricting, among other things, the sale
of assets and the issuance of additional indebtedness, except for the issuance
of indebtedness subordinate to the 77⁄88% Senior Notes debt, if such issuance
would result in an interest coverage ratio, as defined, of less than 2.5 to 1.0.
The covenants of the 77⁄8% Senior Notes also restrict
Harvest's secured indebtedness to an amount less than 65% of the present value
of the future net revenues from its proven petroleum and natural gas reserves
discounted at an annual rate of 10%. In addition, the 77⁄8% Senior Notes restrict
distributions to Unitholders to 80% of the cumulative net proceeds from the
issuance of Trust Units plus the Trust's consolidated earnings before depletion,
depreciation, amortization and non-cash income taxes, both from the date of the
issuance of the 77⁄8% Senior Notes. For such purposes, the
surplus carry forward balance as at December 31, 2007 was approximately $1.5
billion. The 77⁄8% Senior Notes are unconditionally
guaranteed by the Trust and all its wholly-owned subsidiaries. (3) The Trust has issued five series of
unsecured subordinated convertible debentures and, upon the completion of the
acquisition of Viking, assumed two additional series. Interest on the Existing
Debentures is payable semi-annually in arrears in equal instalments on dates
prescribed by each series. The Existing Debentures are convertible into fully
paid and non-assessable Trust Units at the option of the holder at any time
prior to the close of business on the earlier of the maturity date and the
Business Day immediately preceding the date specified by the Trust for
redemption. The conversion price per Trust Unit is specified for each series and
may be supplemented with a cash payment for accrued interest and in lieu of any
fractional Trust Units resulting from the conversion. See Note 12 of Harvest's
2007 audited consolidated financial statements incorporated herein by reference
for the maturity dates and conversion prices for each series of convertible
debenture. (4) Based on the issuance of $250 million
principal amount of Debentures for aggregate proceeds of $250,000,000 less
Underwriters' fees of $10,000,000 and expenses of the Offering estimated to be
$500,000 with the estimated net proceeds of $239,500,000 applied against the
Three Year Extendible Revolving Credit Facility. If the Over-allotment Option is
exercised in full, the aggregate gross proceeds, Underwriters' fees, estimated
expenses of the Offering and net proceeds will be $287,500,000, $11,500,000,
$500,000 and $275,500,000, respectively, with the amount applied against the
Three Year Extendible Revolving Credit Facility increasing by $36,000,000. (5) Does not include 245 Trust Units
issued pursuant to the exercise of rights granted under the Trust Unit Rights
Incentive Plan of the Trust subsequent to December 31, 2007 and prior to April
10, 2008. For additional information respecting the Trust Unit Rights Incentive
Plan, see "Description of
Trust Unit Rights Incentive Plan"
at page 10 of the Trust's Information Circular incorporated by reference in this
short form prospectus.
16 (6) Does not include 37,611 Trust Units issued upon exercise
of awards granted under the Unit Award Incentive Plan of the Trust subsequent to
December 31, 2007 and prior to April 10, 2008. For additional information
respecting the Unit Award Incentive Plan, see "Description
of Unit Award Incentive Plan"
at page 11 of the Trust's Information Circular incorporated by reference in this
short form prospectus. (7) Does not include
1,637,601 Trust Units issued subsequent to December 31, 2007 and prior to
April 10, 2008 pursuant to participation in Harvest's Premium Distribution,
Distribution Reinvestment and Optional Trust Unit Purchase Plan. For additional
information respecting the Premium Distribution, Distribution Reinvestment and
Optional Trust Unit Purchase Plan, see "Premium Distribution, Distribution
Reinvestment and Optional Trust Unit Purchase Plan" on page 83 of the
Trust's AIF incorporated by reference in this short form prospectus. (8) On January 31, 2008, the 10.5% Debentures Due 2008
matured and the obligation was settled with the issuance of 1,166,593 Trust
Units. PRICE RANGE AND TRADING VOLUME OF THE TRUST UNITS AND THE
EXISTING DEBENTURES The Trust Units are listed and traded on the TSX and the
NYSE. The trading symbol on the TSX for the Trust Units is "HTE.UN", and on the
NYSE is "HTE". The Trust has issued five series of unsecured subordinated
debentures which trade on the TSX under the symbols "HTE.DB" for the 9%
Debentures Due 2009, "HTE.DB.A" for the 8% Debentures Due 2009, "HTE.DB.B" for
the 6.5% Debentures Due 2010, "HTE.DB.E" for the 7.25% Debentures Due 2013 and "HTE.DB.F"
for the 7.25% Debentures Due 2014. In addition, pursuant to the Viking
Arrangement, the Trust assumed the two outstanding series of convertible
debentures that Viking had outstanding as of February 3, 2006. One of these two
series, "HTE.DB.C" ("VKR.DB" prior to the Viking Arrangement) 10.5% Debentures
Due 2008, matured on January 31, 2008 and the $24.3 million principal amount was
settled on maturity with the issuance of 1,166,593 Trust Units. The 6.4%
Debentures Due 2012 series trade on the TSX under the symbol "HTE.DB.D" ("VKR.DB.A"
prior to the Viking Arrangement). The trading history for each of the series of
debentures is presented below. The following sets forth the price range and consolidated
trading volume of the Trust Units on the TSX and the NYSE for the periods
indicated.
After October 15, 2009 at 101.969% of the
principal amount, and
After October 15, 2010 at 100.000% of the principal
amount.
TSX
NYSE
Price Range
Price Range
2007
High
Low
Volume
High
Low
Volume
January
$26.22
$23.20
12,822,502
$22.20
$19.70
16,693,600
February
$27.49
$24.81
10,036,635
$23.55
$21.18
10,059,454
March
$29.22
$25.90
11,430,584
$25.22
$21.97
12,316,050
April
$31.10
$27.74
10,244,956
$28.07
$24.00
10,038,123
May
$33.16
$30.25
13,984,905
$30.70
$27.05
14,253,739
June
$34.48
$31.38
19,605,824
$32.46
$29.47
13,474,838
July
$34.97
$29.50
19,478,671
$33.97
$27.15
17,505,628
August
$31.52
$26.10
17,373,101
$29.74
$24.29
23,146,747
September
$29.40
$25.18
15,463,720
$27.94
$25.15
19,625,622
October
$28.39
$25.92
13,236,903
$29.11
$25.94
20,887,843
November
$26.99
$20.42
12,281,080
$28.96
$20.50
27,496,352
December
$22.22
$19.75
7,729,610
$22.20
$19.80
18,794,208
2008
January
$23.56
$20.48
10,474,631
$23.24
$20.00
18,167,009
February
$26.00
$22.49
8,552,342
$25.70
$22.51
15,108,961
March
$24.13
$22.00
9,638,750
$24.49
$21.44
17,099,323
April (1-10)
$24.05
$22.88
3,841,804
$23.64
$22.25
5,969,199
17
The following table sets forth the high, low and closing trading prices and the aggregate trading volume of the 9% Debentures Due 2009 as reported by the TSX under the symbol "HTE.DB" for the periods indicated.
2007 | High | Low | Close | Volume |
January | $180.99 | $173.00 | $180.99 | 140 |
February | $190.02 | $176.01 | $178.32 | 760 |
March | $200.00 | $193.10 | $200.00 | 600 |
April | $195.02 | $195.02 | $195.02 | 400 |
May | No trades | No trades | No trades | - |
June | $205.00 | $205.00 | $205.00 | 220 |
July | $246.00 | $200.13 | $238.08 | 470 |
August | No trades | No trades | No trades | - |
September | No trades | No trades | No trades | - |
October | $199.95 | $195.94 | $195.94 | 300 |
November | $185.00 | $165.01 | $185.00 | 300 |
December | No trades | No trades | No trades | - |
2008 | ||||
January | No trades | No trades | No trades | - |
February | $172.00 | $172.00 | $172.00 | 100 |
March | No trades | No trades | No trades | - |
April (1-10) | No trades | No trades | No trades | - |
The following table sets forth the high, low and closing trading prices and the aggregate trading volume of the 8% Debentures Due 2009 as reported by the TSX under the symbol "HTE.DB.A" for the periods indicated. |
||||
2007 | High | Low | Close | Volume |
January | No trades | No trades | No trades | - |
February | $170.00 | $156.66 | $170.00 | 1,600 |
March | $165.02 | $165.00 | $165.00 | 250 |
April | $171.04 | $165.00 | $171.04 | 1,150 |
May | $199.33 | $170.00 | $194.35 | 810 |
June | $195.00 | $190.02 | $190.02 | 300 |
July | $195.00 | $195.00 | $195.00 | 100 |
August | No trades | No trades | No trades | - |
September | No trades | No trades | No trades | - |
October | $175.22 | $153.80 | $175.22 | 450 |
November | $165.00 | $165.00 | $165.00 | 100 |
December | $117.04 | $117.04 | $117.04 | 170 |
2008 | ||||
January | $139.01 | $130.77 | $130.77 | 220 |
February | No trades | No trades | No trades | - |
March | $145.00 | $130.04 | $145.00 | 1,710 |
April (1-10) | No trades | No trades | No trades | - |
18
The following table sets forth the high, low and closing trading prices and the aggregate trading volume of the 6.5% Debentures Due 2010 as reported by the TSX under the symbol "HTE.DB.B" for the periods indicated. |
||||
|
|
|
|
|
2007 |
High |
Low |
Close |
Volume |
January |
$100.00 |
$96.00 |
$100.00 |
10,635 |
February |
$102.69 |
$93.26 |
$99.25 |
18,710 |
March |
$103.80 |
$98.50 |
$103.80 |
11,810 |
April |
$104.00 |
$100.26 |
$103.11 |
8,220 |
May |
$107.14 |
$104.00 |
$105.00 |
14,515 |
June |
$109.00 |
$105.00 |
$106.41 |
7,090 |
July |
$112.50 |
$102.70 |
$105.03 |
12,440 |
August |
$102.73 |
$95.62 |
$100.00 |
4,810 |
September |
$102.00 |
$96.25 |
$100.00 |
3,120 |
October |
$100.00 |
$98.02 |
$99.00 |
5,010 |
November |
$99.50 |
$98.00 |
$98.25 |
3,260 |
December |
$98.90 |
$96.25 |
$97.00 |
2,230 |
2008 |
|
|
|
|
January |
$99.99 |
$97.00 |
$99.50 |
1,370 |
February |
$101.75 |
$98.00 |
$100.75 |
1,540 |
March |
$103.80 |
$99.50 |
$99.50 |
3,150 |
April (1-10) |
$100.50 |
$99.00 |
$99.00 |
3,030 |
|
|
|
|
|
The following table sets forth the high, low and closing trading prices and the aggregate trading volume of the 6.4% Debentures Due 2012 as reported by the TSX under the symbol "HTE.DB.D" for the periods indicated. |
||||
|
|
|
|
|
2007 |
High |
Low |
Close |
Volume |
January |
$92.00 |
$90.34 |
$91.30 |
45600 |
February |
$98.49 |
$90.76 |
$96.01 |
45760 |
March |
$97.50 |
$92.53 |
$94.11 |
50,050 |
April |
$97.88 |
$93.02 |
$95.77 |
64,820 |
May |
$100.00 |
$96.50 |
$99.35 |
47,330 |
June |
$99.74 |
$98.00 |
$99.49 |
40,260 |
July |
$100.00 |
$97.51 |
$99.00 |
27,040 |
August |
$99.29 |
$91.50 |
$94.79 |
14,250 |
September |
$98.99 |
$88.00 |
$94.00 |
16,930 |
October |
$98.00 |
$91.51 |
$92.51 |
25,620 |
November |
$97.99 |
$82.00 |
$88.70 |
34,300 |
December |
$90.00 |
$77.00 |
$85.00 |
31,020 |
2008 |
|
|
|
|
January |
$92.50 |
$86.00 |
$92.50 |
16,530 |
February |
$92.49 |
$89.51 |
$91.99 |
15,050 |
March |
$92.24 |
$90.01 |
$91.99 |
21,460 |
April (1-10) |
$92.99 |
$90.76 |
$92.99 |
9,100 |
19
The following table sets forth the high, low and closing trading prices and the aggregate trading volume of the 7.25% Debentures Due 2009 subsequent to their issue on November 22, 2006 as reported by the TSX under the symbol "HTE.DB.E" for the periods | ||||
indicated. | ||||
2007 | High | Low | Close | Volume |
January1 | $99.00 | $95.00 | $96.15 | 231,410 |
February | $98.97 | $96.00 | $98.35 | 364,150 |
March | $101.75 | $96.50 | $100.70 | 379,220 |
April | $104.00 | $99.79 | $103.75 | 198,740 |
May | $106.75 | $103.75 | $105.50 | 337,880 |
June | $109.45 | $105.00 | $105.00 | 310,060 |
July | $110.00 | $102.00 | $103.50 | 220,970 |
August | $103.40 | $95.05 | $98.50 | 109,130 |
September | $101.00 | $95.00 | $97.50 | 98,550 |
October | $100.00 | $95.75 | $99.98 | 197,180 |
November | $99.98 | $89.25 | $91.00 | 176,960 |
December | $92.00 | $82.00 | $90.94 | 90,540 |
2008 | ||||
January | $93.74 | $89.00 | $92.50 | 107,160 |
February | $98.25 | $91.56 | $96.75 | 63,000 |
March | $97.00 | $92.76 | $93.50 | 136,630 |
April (1-10) | $94.00 | $92.00 | $92.50 | 34,930 |
The 7.25% Debentures Due 2014 issued on February 1, 2007 are listed for trading on the TSX under the symbol "HTE.DB.F". The following table sets forth the high, low and closing trading prices and the aggregate trading volume of these Debentures subsequent to their issue as reported by the TSX under the symbol "HTE.DB.F" for the periods indicated. |
||||
2007 | High | Low | Close | Volume |
February | $105.75 | $99.75 | $103.50 | 573,990 |
March | $110.65 | $102.00 | $107.60 | 421,080 |
April | $115.00 | $105.00 | $113.48 | 291,440 |
May | $120.90 | $112.93 | $116.00 | 363,380 |
June | $125.87 | $115.40 | $120.20 | 808,690 |
July | $128.00 | $110.50 | $115.25 | 304,040 |
August | $116.00 | $101.02 | $104.25 | 17,930 |
September | $107.00 | $100.50 | $102.00 | 16,790 |
October | $106.00 | $100.60 | $101.75 | 138,460 |
November | $102.50 | $89.01 | $90.35 | 22,540 |
December | $95.00 | $83.00 | $89.99 | 129,900 |
2008 | ||||
January | $98.00 | $88.01 | $94.40 | 53,590 |
February | $104.80 | $95.50 | $101.45 | 32,320 |
March | $101.50 | $95.07 | $97.00 | 14,720 |
April (1-10) | $99.95 | $95.55 | $95.55 | 5,010 |
DISTRIBUTIONS TO UNITHOLDERS
The Trust makes monthly distributions of its available cash to Unitholders to the extent determined prudent by HOC. Monthly cash distributions are paid to Unitholders of record on the last business day of each calendar month or such other date as may be determined from time to time by HOC and are paid generally on the 15th day of the following month. The monthly cash distributions for 2005, 2006 and 2007have been determined to be fully taxable distributions for Canadian income tax purposes.
20
The following is a summary of the distributions made by the Trust since December 31, 2006.
For the 2007 Period Ended | Distributions per Unit | Payment Date |
January 31 | $0.35 | February 15, 2007 |
February 28 | $0.38 | March 15, 2007 |
March 31 | $0.38 | April 16, 2007 |
April 30 | $0.38 | May 15, 2007 |
May 31 | $0.38 | June 15, 2007 |
June 30 | $0.38 | July 16, 2007 |
July 31 | $0.38 | August 15, 2007 |
August 31 | $0.38 | September 17, 2007 |
September 30 | $0.38 | October 15, 2007 |
October 31 | $0.38 | November 15, 2007 |
November 30 | $0.30 | December 17, 2007 |
December 31 | $0.30 | January 15, 2008 |
For the 2008 Period Ended(1) | Distributions per Unit | Payment Date |
January 31 | $0.30 | February 15, 2008 |
February 29 | $0.30 | March 17, 2008 |
Note:
(1)
The Trust announced on March 12, 2008 that a distribution of $0.30 per Trust Unit will be payable on April 15, 2008 to Unitholders of record on the close of business on March 25, 2008 and a distribution of $0.30 per Trust Unit will be payable on May 15, 2008 to Unitholders of record on the close of business on April 22, 2008.
For additional information respecting cash distribution payments to the Trust Unitholders, including the factors influencing the amount available for distribution to the Trust Unitholders, see "Description of Trust Units Cash Distributions" above and "Distributions to Unitholders" on page 71 of the AIF.
The historical distributions described above may not be reflective of future distributions, which will be subject to review by the Board of Directors of HOC taking into account the prevailing circumstances at the relevant time. See "Risk Factors".
USE OF PROCEEDS
The net proceeds to the Trust from the Offering are estimated to be $239,500,000 after deducting the fees of $10,000,000 payable to the Underwriters and the estimated expenses of the Offering of $500,000. If the Over-allotment Option is exercised in full, the net proceeds from the sale of the Debentures hereunder are estimated to be $275,500,000 after deducting the fees of $11,500,000 payable to the Underwriters and the estimated expenses of the Offering of $500,000. See "Plan of Distribution". All of the net proceeds of this Offering will be used to reduce bank indebtedness which totals approximately $1.4 billion as of April 10, 2008. Over the past two years, Harvest has used $2.2 billion of borrowings under its credit facilities to fund three acquisitions. On August 15, 2006, Harvest acquired Birchill Energy Limited for cash consideration of $447.8 million and on October 19, 2006 Harvest acquired North Atlantic Refining Limited for cash consideration of $1.6 billion. During 2007, Harvest acquired Grand Petroleum Inc. for cash consideration of $139.3 million. Subsequent to its acquisition of North Atlantic, Harvest has raised $1.2 billion from public offerings of convertible debentures and Trust Units with the net proceeds from this Offering to add a further $239,500,000. See also "Relationship Among the Trust and Certain Underwriters".
With the proceeds of this Offering, Harvest will improve its financial liquidity enabling the acquisition of upstream assets of modest size within the capacity of its existing Credit Facility. See "Description of Business Ongoing Asset and Disposition Activity". In addition, Harvest's improved liquidity may be used to fund its Downstream business if Harvest were to encounter an extended period of tight refining margins or experience a significant unplanned shutdown. While Harvest carries business interruption insurance for shutdowns resulting from an incident, there is a 45 day deductible period and immediate funding may be required to expeditiously restore operations. Further, with improved financial liquidity, Harvest improves its capacity to participate in the expected consolidation of the energy trust sector over the next two years.
21 DETAILS OF THE OFFERING The Offering consists of $250,000,000 aggregate principal amount of
Debentures at a price of $1,000 per Debenture. Debentures The following is a summary of the material attributes and
characteristics of the Debentures. This summary does not, however, include a
description of all of the terms of the Debentures, and reference should be made
to the Indenture for a complete description of the terms of the Debentures. 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 $287,500,000. 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. The Debentures will be dated as of the closing date of the offering and will
have a maturity date of May 31, 2015. The Debentures will bear interest from the date of issue at
7.50% per annum, which will be payable semi-annually in arrears on May 31 and
November 30 in each year, commencing with November 30, 2008. The first interest
payment will include interest accrued from the closing of the offering to
November 30, 2008. 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 Existing Debentures. Conversion Privilege 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 $27.40 per Unit (the "Conversion
Price"), being a conversion rate of 36.4964 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, redivision or consolidation, reduction or combination 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%.
22 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, arrangement 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 registered 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. Redemption and Purchase The Debentures will not be redeemable on or before
May 31, 2011. On or after June 1, 2011 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 30 days prior notice, at a redemption
price of $1,050 per Debenture on or after June 1, 2011 and on or before May 31,
2012, at a redemption price of $1,025 per Debenture on or after June 1, 2012 and
on or before May 31, 2013 and at a redemption price of $1,000 per Debenture on
or after June 1, 2012 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. 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 or
any subsidiary 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.
23 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.
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
Credit Facility and the Existing Debentures. 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 Trust 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 provides that a change of control does not
include a merger, reorganization, combination or other similar transaction if
the previous holders of Trust Units and securities convertible or carrying the
right to acquire Trust Units hold at least 50% of the voting control or
direction in such merged, reorganized, combined or other continuing entity. 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.
24 Restrictions on Certain Transactions The Indenture will contain provisions to the effect
that subject to the discussion under "Offers for Debentures" below, the Trust
shall not enter into any transaction or series of transactions whereby all or
substantially all of its undertaking, property or assets would become the
property of any other person (herein called a "Successor") whether by way
of reorganization, consolidation, amalgamation, arrangement, merger, transfer,
sale or otherwise, unless, among other things prior to or contemporaneously with
the consummation of such transaction the Trust and the Successor shall have
executed such instruments and done such things as are necessary or advisable to
establish that upon the consummation of such transaction the Successor will have
assumed all the covenants and obligations of the Trust under the Indenture in
respect of the Debentures and the Debentures will be valid and binding
obligations of the Successor entitling the holders thereof, as against the
Successor, to all the rights of Debentureholders under the Indenture. Interest Payment Option 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. 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
receipt of a written request signed by 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, by
written request, instruct the Debenture Trustee to 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.
25 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. Book-Entry System for Debentures Except as described below, the Debentures will be
issued in "book-entry only" form pursuant to the Indenture. Debentures issued in
"book-entry only" form 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.
26 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. PLAN OF DISTRIBUTION Pursuant to the Underwriting Agreement, the Trust has agreed
to issue and sell an aggregate of $250,000,000 aggregate principal amount of
Debentures to the Underwriters, and the Underwriters have severally agreed to
purchase such Debentures on April 25, 2008 or such other date not later than May
29, 2008 as may be agreed among the parties to the Underwriting Agreement.
Delivery of the Debentures is conditional upon payment on closing of $1,000 per
Debenture by the Underwriters to the Trust. The Underwriting Agreement provides
that the Trust will pay the Underwriters' Fee of $40 per Debenture for
Debentures issued and sold by the Trust for an aggregate fee payable by the
Trust of $10,000,000 in consideration for the Underwriters' services in
connection with the Offering. The Trust has granted to the Underwriters the Over-allotment
Option to purchase up to an additional $37,500,000 aggregate principal amount of
Debentures at a price of $1,000 per Debenture on the same terms and conditions
as the Offering, exercisable from time to time, in whole or in part, for a
period of up to 30 days following closing of the Offering to cover
over-allotments, if any, and for market stabilization purposes. If the
Over-allotment Option is exercised in full, the total Offering, Underwriters'
fee and net proceeds to the Trust (before expenses of the Offering) will be
$287,500,000, $11,500,000 and $276,000,000, respectively. This prospectus also
qualifies for distribution the grant of the Over-allotment Option and the
issuance of Debentures pursuant to the exercise of the Over-allotment Option.
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. If one or more of the Underwriters
fails to purchase its allotment of the Debentures that it has agreed to
purchase, the remaining Underwriters may, but are not obligated to, purchase
such Debentures. The Underwriters are, however, obligated to take up and pay for
all of the Debentures if any are purchased under the Underwriting Agreement. The
Underwriting Agreement also provides that the Trust and HOC will indemnify the
Underwriters and their directors, officers, agents, shareholders and employees
against certain liabilities and expenses. 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 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 it shall not offer or issue, or
enter into an agreement to offer or issue, equity securities of the Trust for a
period of 90 days subsequent to the closing date of the Offering, except for the
grant of rights pursuant to the Trust Unit Rights Incentive Plan and the issue
of Trust Units upon the exercise of rights which have been granted pursuant to
such plan, the grant of awards pursuant to the Unit Award Incentive Plan and the
issue of Trust Units upon the payment of awards which have been granted under
such plan and the issue of Trust Units pursuant to the DRIP Plan, upon the
conversion, redemption or maturity of, or interest payments on, the Existing
Debentures or the conversion of the Debentures, or as full or partial
consideration for arm's length mergers, acquisition or transactions of similar
nature without the consent of CIBC World Markets Inc., which consent may not be
unreasonably withheld.
27 The Underwriters propose to offer the Debentures initially at
the offering price specified herein. After a reasonable effort has been made to
sell all of the Debentures at the price specified, the Underwriters may
subsequently reduce the selling prices to investors from time to time in order
to sell any of the Debentures remaining unsold. In the event the offering price
of the Debentures is reduced, the compensation received by the Underwriters will
be decreased by the amount of the aggregate price paid by the purchasers for the
Debentures is less than the gross proceeds paid by the Underwriters to the Trust
for the Debentures. Any such reduction will not affect the proceeds received by
the Trust. The Trust has applied to list the Debentures and the Trust
Units issuable on conversion, redemption or maturity of the Debentures. on the
TSX. The Trust has also applied to list the Trust Units issuable on the
conversion, redemption or maturity of the Debentures on the NYSE. Such
listings will be subject to the Trust fulfilling all of the listing requirements
of the TSX and the NYSE, respectively. The Debentures offered hereby and the Trust Units issuable on
conversion, redemption or maturity of the Debentures (the "Securities")
have not been and will not be registered under the 1933 Act, or any state
securities laws, and accordingly may not be offered or sold within the United
States or to or for the account of U.S. Persons (as such term is defined in
Regulation S under the 1933 Act), except in transactions exempt from the
registration requirements of the 1933 Act and applicable state securities laws.
The Underwriting Agreement permits the Underwriters to offer and resell the
Securities that they have acquired pursuant to the Underwriting Agreement to
qualified institutional buyers and certain institutional accredited investors in
the United States, provided such offers and sales are made in accordance with
exemptions from the registration requirements under the 1933 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 1933 Act. Accordingly, each Underwriter has agreed that, except as permitted
by the Underwriting Agreement, it will not offer, sell or deliver the Debentures
to a U.S. Person or for the account or benefit of a U.S. Person (a) as part of
its distribution at any time, or (b) until 40 days after completion of the later
of the commencement of the offering to persons other than any Underwriter or
other person who participates in the distribution of the Debentures and the
closing date (the "distribution compliance period"), and it will have
sent to each Underwriter or other person receiving a selling concession, fee or
other remuneration to which it sells Debentures during the distribution
compliance period a confirmation or other notice setting forth the restrictions
on offers and sales of the Debentures to a U.S. Person or for the account or
benefit of a U.S. Person. Terms used in this paragraph have the meanings given
to them by Regulation S under the 1933 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 1933 Act if such offer or sale is made otherwise than in
accordance with an exemption from registration under the 1933 Act. RELATIONSHIP AMONG THE TRUST AND CERTAIN UNDERWRITERS Each of CIBC World Markets Inc., TD Securities Inc., RBC
Dominion Securities Inc., Scotia Capital Inc., HSBC Securities (Canada) Inc. and
National Bank Financial Inc. are direct or indirect wholly-owned subsidiaries of
Canadian chartered banks which are lenders to HOC pursuant to the Credit
Facility and to which HOC is currently indebted. Consequently, the Trust may be
considered a connected issuer of CIBC World Markets Inc., TD Securities Inc.,
RBC Dominion Securities Inc., Scotia Capital Inc., HSBC Securities (Canada) Inc.
and National Bank Financial Inc. under applicable securities laws. As at April 10, 2008, approximately $1,366.0 million was
outstanding under the Credit Facility. HOC is in compliance with all
material terms of the agreement governing the Credit Facility and none of the
lenders under the Credit Facility has waived any breach by HOC thereunder since
its execution. Harvest has granted security to the lenders under the
Credit Facility. Neither the financial position of the Trust nor the value
of the security under the Credit Facility has changed substantially since the
indebtedness under the Credit Facility was incurred. All of the net
proceeds of this Offering will be used to repay a portion of indebtedness to
these banks outstanding under the Credit Facility. See
"Consolidated Capitalization of the Trust" and
"Use of Proceeds". The decision to distribute the Debentures offered hereunder
and the determination of the terms of the distribution were made through
negotiations primarily between HOC, on behalf of the Trust, and CIBC World
Markets Inc. on its own behalf and on behalf of the other Underwriters. The
lenders under the Credit Facility did not have any involvement in such decision
or determination, but have been advised of the issuance and terms thereof. As a
consequence of this issuance, CIBC World Markets Inc., TD Securities Inc., RBC
Dominion Securities Inc., Scotia Capital Inc., HSBC Securities (Canada) Inc. and
National Bank Financial Inc. will receive their respective share of the
Underwriters' fee.
28 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 Macleod
Dixon LLP on behalf of the Underwriters. As at the date hereof, the partners and
associates of Burnet, Duckworth & Palmer LLP, as a group, and Macleod Dixon LLP,
as a group, each own, directly or indirectly, less than 1% of the Units,
respectively. Reserves estimates incorporated by reference into this short form
prospectus are based upon reports prepared by GLJ Petroleum Consultants Ltd. ("GLJ")
and McDaniel & Associates Consultants Ltd. ("McDaniel"). As of the date hereof,
the principals of GLJ, as a group, and the principals of McDaniel, as a group,
beneficially own, directly or indirectly, less than 1% of the Trust Units,
respectively. CANADIAN FEDERAL INCOME TAX CONSIDERATIONS In the opinion of Burnet, Duckworth & Palmer LLP and Macleod
Dixon LLP (collectively, "Counsel"), the following summary fairly
describes the principal Canadian federal income tax considerations pursuant to
the Tax Act generally applicable to a subscriber who acquires Debentures
pursuant to the offering and who at all relevant times, for purposes of the Tax
Act, holds the Debentures and the Units issued on the conversion, redemption or
maturity 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 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 of 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 in
force as of the date hereof and Counsel's understanding of the current
administrative policies of Canada Revenue Agency ("CRA"). Except for
specifically proposed amendments to the Tax Act 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 in the income tax law,
whether by legislative, regulatory or judicial action, nor any changes in the
administrative or assessing practices of the CRA. This summary is not exhaustive
of all of the Canadian federal income tax considerations nor does it take into
account or anticipate any provincial, territorial or foreign tax considerations
arising from the acquisition, ownership or disposition of Debentures or Trust
Units and the conversion, redemption or maturity of the Debentures. Except as
otherwise indicated, this summary is based on the assumption that all
transactions described herein occur at fair market value. This summary is of a general nature only and is not intended
to be legal or tax advice to any prospective purchaser of Debentures.
Consequently, prospective holders of Securities 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. Trust Units Subject to the SIFT Rules, each Unitholder that is a resident
of Canada for purposes of the Tax Act is required to include in computing income
for a particular taxation year the portion of the net income of the Trust,
including net taxable capital gains, that is paid or payable to the Unitholder
in that taxation year, whether or not the amount was actually paid to the
Unitholder in that year. Income of a Unitholder from the Trust Units will
generally be considered to be income from property and not resource income (or "resource
profits") for purposes of the Tax Act. If appropriate designations are made
by the Trust, such portion of the net taxable gains of the Trust and any taxable
dividends received from taxable Canadian corporations as are paid or become
payable to a Unitholder will effectively retain their character and be treated
as such in the hands of the Unitholder for purposes of the Tax Act. Any loss of
the Trust for purposes of the Tax Act cannot be allocated to, or treated as a
loss of a Unitholder.
29 Once the Trust becomes subject to the SIFT Rules (which is
anticipated to be, subject to the Trust exceeding any "normal growth", deferred
until January 1, 2011), taxable distributions from the Trust received by holders
and paid from the Trust's after tax income will generally be deemed to be
received by the Unitholder as a taxable dividend from a taxable Canadian
corporation. Such dividend will be subject to the gross-up and dividend
tax credit provisions in respect of Unitholders that are individuals.
Under the SIFT Rules, the dividends deemed to be paid by the Trust will be
deemed to be "eligible dividends' and individual Unitholders would therefore
benefit from the enhanced gross-up and dividend tax credit rules of the Tax Act.
Such dividends received by corporations resident in Canada will generally be
eligible for full dividends received deduction and potentially subject to a 33 %
refundable tax under Par IV of the Tax Act. Units issued to a Unitholder in lieu of a cash distribution
will have a cost equal to the fair market value of such units and will be
averaged with the adjusted cost base of all other Trust Units held by the
Unitholder at that time as capital property in order to determine the adjusted
cost base of each Trust Unit. Any amounts paid or payable by the Trust to a Unitholder in
excess of the Unitholder's share of the income of the Trust and the non-taxable
portion of capital gains made payable to Unitholders in the year will generally
not be included in the income of the Unitholder but will reduce the adjusted
cost base of such Unitholder's Trust Units. To the extent that the adjusted cost
base to a holder of a Trust Unit would otherwise be less than nil, the negative
amount will be deemed to be a capital gain of the Unitholder from the
disposition of the Trust Unit in the year in which the negative amount arises.
The non-taxable portion of capital gains of the Trust that is paid or made
payable to the Unitholder in a year will not be included in computing the
Unitholder's income for the year and will not reduce the adjusted cost base to
the Unitholder of the Trust Units. An actual or deemed disposition (other than in a tax deferred
transaction) of Trust Units by a Unitholder, whether on a redemption or
otherwise, will give rise to a capital gain (or capital loss) equal to the
amount by which the proceeds of disposition (excluding any amount payable by the
Trust which represents an amount that must otherwise be included in the
Unitholder's income as described above) are greater than (or less than) the
aggregate of the adjusted cost base of the Trust Units to the Unitholder plus
any reasonable costs associated with the disposition. One-half of any capital
gain realized by a Unitholder on a disposition of a Trust Unit will be included
in the Unitholder's income under the Tax Act for the year of disposition as a
taxable capital gain. One-half of any capital loss realized on a disposition of
a Trust Unit must be deducted against taxable capital gains realized by the
Unitholder in the year of disposition, and may be deducted in the three
preceding taxation years or in any subsequent taxation year, to the extent and
under the circumstances described in the Tax Act. Taxable capital gains realized by a Unitholder who is an
individual may give rise to minimum tax depending on such Unitholder's
circumstances. A Unitholder that throughout the relevant year is a
"Canadian-controlled private corporation" as defined in the Tax Act may be
liable to pay a refundable tax of 6 2/3% on certain investment income, including
taxable capital gains. A redemption of Trust Units in consideration for cash, notes
or redemption notes, as the case may be, will be a disposition of such Trust
Units for proceeds of disposition equal to the amount of such cash or the fair
market value of such notes or redemption notes, as the case may be, less any
portion thereof that is considered to be a distribution out of the income of the
Trust. Redeeming Unitholders will consequently recognize a capital gain, or
sustain a capital loss, depending upon whether such proceeds exceed, or are
exceeded by, the adjusted cost base of the Trust Units so redeemed. The receipt
of notes or redemption notes in substitution for Trust Units may result in a
change in the income tax characterization of distributions. Holders of notes or
redemption notes generally will be required to include in income interest that
is received or receivable or that accrues (depending on the status of the
Unitholder as an individual, corporation or trust) on the notes or redemption
notes. The cost to a Unitholder of any property distributed to a Unitholder by
the Trust will be deemed to be equal to the fair market value of such property
at the time of distribution less, in the case of notes, any accrued interest
thereon. Unitholders should consult with their own tax advisors as to the
consequences of receiving notes or redemption notes on a redemption. 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.
30 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 holder's income for a
preceding year. 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 a Debenture
for Trust 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 Trust Units so acquired at the time of the exchange
and the amount of any cash received in lieu of fractional Trust Units (other
than Trust 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 Trust 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 Trust
Units held as capital property by the holder for the purpose of calculating the
adjusted cost base of such Trust 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 Trust 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 Trust Units so received and the amount of any cash received in lieu of
fractional Trust 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 Trust 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 Trust Units held as capital property by the
holder for the purpose of calculating the adjusted cost base of such Trust
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 Trust Units which treatment is discussed above under
"Holders of Securities Resident in Canada Trust Units". 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. 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 any relevant tax treaty, 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").
31 Trust Units Subject to the SIFT Rules, any distribution of income of the
Trust to a Non-Resident Unitholder will generally be subject to Canadian
withholding tax at the rate of 25%, unless such rate is reduced under the
provisions of a tax treaty between Canada and the Unitholder's jurisdiction of
residence. A Unitholder resident in the United States who is entitled to claim
the benefit of the Canada-US Tax Convention will be entitled to have the rate of
withholding reduced to 15% of the amount of any income distributed. Based on
representations from HOC, Counsel is of the opinion that a Trust Unit is a
Canadian property mutual fund investment, and therefore, the Trust is also
obligated to withhold on all distributions to non-residents in excess of the
Unitholder's share of the income of the Trust at the rate of 15%. Where a
non-resident sustains a capital loss on a disposition of Trust Units (or other
properties that qualify as a Canadian property mutual fund investment) such loss
may be utilized to reduce or recover the non resident's tax liability in respect
of such distributions in limited circumstances as provided in the Tax Act. Pursuant to the SIFT Rules, amounts in respect of Trust
income payable to Unitholders that are not deductible to the Trust as a result
of the Trust being characterized as a SIFT trust will be treated as dividends
payable to the Unitholders. Under existing law, dividends paid to a Non Resident
will be subject to Canadian withholding tax at a rate of 25%, unless such rate
is reduced under the provisions of an applicable tax treaty. A taxable
Unitholder resident in the United States who is entitled to claim the benefit of
the Canada-US Tax Convention generally will be entitled to have the rate of
withholding reduced to 15% of the amount of such dividend. A disposition or deemed disposition of a Trust
Unit, whether on redemption or otherwise, will not give rise to any capital
gains subject to tax under the Tax Act to a Non-Resident provided that the Trust
Units are not "taxable Canadian property" of the holder for the purposes of the
Tax Act. Trust Units will not be considered taxable Canadian property to such a
holder unless: (a) the holder holds or uses, or is deemed to hold or use the
Trust Units in the course of carrying on business in Canada; (b) the Trust Units
are "designated insurance property" of the holder for purposes of the Tax Act;
(c) at any time during the 60 month period immediately preceding the disposition
of the Trust Units the holder or persons with whom the holder did not deal at
arm's length or any combination thereof, held 25% or more of the issued Trust
Units; or (d) the Trust is not a mutual fund trust for the purposes of the Tax
Act on the date of disposition. Interest paid or credited on notes to a
Non-Resident Unitholder who receives notes or redemption notes on a redemption
of Trust Units will not be subject to Canadian withholding tax. 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 not be subject to Canadian withholding tax. 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 above if Trust Units held by a particular holder (including
Trust Units acquired upon a conversion, repayment or maturity of Debentures)
would not constitute "taxable Canadian property" as described under "Holders
of Securities Not Resident in Canada Trust Units". Status of the Trust Based upon representations made by HOC, in the
opinion of Counsel, the Trust presently qualifies as a "mutual fund trust" as
defined by the Tax Act, and this summary assumes that the Trust will continue to
so qualify. Counsel is advised by HOC that it is intended that the requirements
necessary for the Trust to qualify as a mutual fund trust will continue to be
satisfied so that the Trust will continue to qualify as a mutual fund trust at
all times throughout its existence. In the event that the Trust were not to so
qualify, the income tax considerations would in some respects be materially
different from those described herein.
32 SIFT Rules On October 31, 2006, the Department of Finance (Canada) ("Finance")
announced proposed changes to the taxation of certain publicly-traded trusts and
partnerships and their unitholders. Bill C-52, which received Royal Assent on
June 22, 2007, contained legislation implementing these proposals (collectively,
the "SIFT Rules"). The SIFT Rules apply to trusts and partnerships that are
resident in Canada for purposes of the Tax Act (in the case of partnerships,
pursuant to new residency rules for this purpose), that hold one or more
"non-portfolio properties", and the units of which are listed on a stock
exchange or other public market (a "specified investment flow-through trust" or
"SIFT trust", and a "specified investment flow-through partnership" or "SIFT
partnership"). In the case of a trust or partnership that was a SIFT trust or
SIFT partnership on October 31, 2006, the SIFT Rules generally will not take
effect until January 1, 2011, provided the trust or partnership experiences only
"normal growth" and no "undue expansion" before then. On December 15, 2006
Finance issued guidelines with respect to what would be considered "normal
growth" for this purpose (the "Guidelines"). Commencing January 1, 2011 (subject to experiencing only
"normal growth" and no "undue expansion" before then), the Trust would be a
"SIFT trust" under the SIFT Rules. Pursuant to the SIFT Rules, a SIFT trust will
be subject to tax on its income from non-portfolio properties and taxable
capital gains from dispositions of non-portfolio properties at a rate comparable
to the combined federal and provincial corporate income tax rate, and
distributions of such income to unitholders will be treated as eligible
dividends paid by a taxable Canadian corporation. The properties owned by the
Trust constitute "non-portfolio properties" under the SIFT Rules, with the
result that all or substantially all of the Trust's income would be subject to
the new tax. Currently, the SIFT Rules provide that the tax rate will be
the federal general corporate income tax rate (which is anticipated to be 16.5%
in 2011, and 15% in 2012) plus the provincial SIFT tax factor (which is set at a
fixed rate of 13%), for a combined tax rate of 29.5% in 2011 and 28% in 2012.
On March 14, 2008, draft legislation (the "Provincial SIFT
Tax Proposal") received its first reading in the House of Commons, that
would have the effect of instead of basing the provincial component of the tax
on a flat rate of 13%, the provincial component will be based on the general
provincial corporate income tax rate in each province in which the Trust has a
permanent establishment. For purposes of calculating this component of the tax,
the general corporate taxable income allocation formula will be used.
Specifically, the Trust's taxable distributions will be allocated to provinces
by taking half of the aggregate of:
that proportion of the Trust's taxable distributions for the year that the Trust's wages and salaries in the province are of its total wages and salaries in Canada; and
that proportion of the Trust's taxable distributions for the year that the Trust's gross revenues in the province are of its total gross revenues in Canada.
Under the Provincial SIFT Tax Proposal, the Trust would be considered to have a permanent establishment only in Alberta, where the provincial tax rate in 2011 is expected to be 10%, which will result in an effective tax rate of 26.5% in 2011 and 25% in 2012. Taxable distributions that are not allocated to any province would instead be subject to a 10% rate constituting the provincial component. There can be no assurance, however, that the Provincial SIFT Tax Proposal will be enacted as proposed.
As noted, the SIFT Rules are not expected to take effect, generally, until 2011. However, the Trust could become subject to the SIFT Rules sooner than 2011 if it experiences growth other than "normal growth" before then. Under the Guidelines, a SIFT trust will be considered to have experienced only "normal growth" if its issuances of new equity, which includes trust units and debt convertible into trust units, do not exceed certain thresholds measured by reference to the SIFT trust's market capitalization as of the close of trading on October 31, 2006, taking into account only the SIFT trust's publicly-traded units and not any securities, whether or not listed, that are convertible into or exchangeable for units. The permitted expansion thresholds are the greater of $50 million and 40% of a SIFT trust's October 31 market capitalization for the period from November 1, 2006 to the end of 2007, and the greater of $50 million and 20% of a SIFT trust's October 31 market capitalization for each of 2008, 2009 and 2010. HOC has advised Counsel that the Trust's market capitalization, determined in accordance with the Guidelines, as of October 31, 2006 was approximately $3.7 billion. HOC has further advised Counsel that the offering of Debentures pursuant to this prospectus (including the Over-Allotment Option) will not, in and of itself, cause the Trust to exceed its permitted normal growth threshold for the period from October 31, 2006 to December 31, 2008 under the Guidelines.
33 It is therefore assumed, for the purposes of this summary,
that the Trust will not be subject to the SIFT Rules until January 1, 2011. No
assurance can be provided that the SIFT Rules will not apply to the Trust prior
to 2011. Taxation of the Trust The Trust is required to include in its income for each
taxation year all net realized taxable capital gains, dividends, accrued
interest and amounts accrued in respect of the Trust's net profit interests held
by it. The Trust may deduct in respect of each taxation year an amount not
exceeding 20% of the total issue expenses of the offering and other offerings of
its Trust Units or debt obligations (subject to proration for a short taxation
year) to the extent that those expenses were not otherwise deductible in a
preceding year, and may also deduct reasonable management and administration
fees incurred by it in the year. 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
account at the end of that year, prorated for short taxation years. Subject to the SIFT Rules, to the extent that the Trust has
any income for a taxation year after the inclusions and deductions outlined
above, the Trust will be permitted to deduct all amounts of income which are
paid or become payable by it to Unitholders in the year. An amount will be
considered 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 the year to enforce payment
of the amount. 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 taxable income for the year otherwise determined. As a result of such
deductions from income, it is expected that the Trust will not be liable for any
material amount of tax under the Tax Act; however no assurances can be given in
this regard. Once the Trust becomes subject to the SIFT Rules (which is
anticipated to be, subject to the Trust exceeding any "normal growth", deferred
until January 1, 2011), the Trust will no longer be able to deduct any part of
the amounts payable to Unitholders in respect of: (i) income from businesses it
carries on in Canada or from its non-portfolio properties (exceeding any losses
for the taxation year from businesses or non-portfolio properties), and (ii)
taxable capital gains from its dispositions of non-portfolio properties
(exceeding its allowable capital losses from the disposition of such
properties). A deduction is permitted for dividends received by a SIFT where the
dividends could have been deducted if the SIFT were a corporation.
"Non-portfolio properties" include: (i) Canadian real and resource properties if
the total fair market value of such properties is greater than 50% of the equity
value of the SIFT itself, (ii) a property that the SIFT (or a non-arm's length
person or partnership) uses in the course of carrying on a business in Canada,
and (iii) investments in a subject entity that have a fair market value greater
than 10% of the subject entity's equity value or a subject entity where the SIFT
holds securities of it or its affiliates that have a total fair market value
greater than 50% of the equity value of the SIFT. A subject entity includes
corporations resident in Canada, trusts resident in Canada, and Canadian
resident partnerships. The investments by the Trust in its material subsidiaries
will likely be investments in subject entities for this purpose. Income which a
SIFT is unable to deduct will be taxed in the SIFT at rates of tax similar to
the combined federal and provincial corporate tax rate. The SIFT Rules do not
change the tax treatment of distributions that are paid as returns of capital.
Under the Trust Indenture, income received by the Trust may
be used to finance cash redemptions of Trust 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, notes and any redemption
notes). Accordingly, such income so utilized will not be payable to holders of
the Trust Units by way of cash distributions. In such circumstances, such income
may be payable to holders of Trust Units in the form of additional Trust Units.
ELIGIBILITY FOR INVESTMENT Provided that the Trust Units and the Debentures are listed
on a designated stock exchange for the purposes of the Tax Act (which includes
the TSX and the NYSE), the Debentures and the Trust Units issuable upon
conversion, redemption or maturity of the Debentures, on the date of the Closing
of the Offering, will be qualified investments under the Tax Act 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),
registered education savings plans and registered disability savings plans
(collectively, the "Plans"). See also "Risk
Factors Risks Related to Harvest's Structure Investment Eligibility"
on page 68 in the AIF.
34 RISK FACTORS An investment in the securities of the Trust is subject to
certain risks. Harvest's operations are conducted in the same business
environment as other similar operators and the business risks are very similar.
However, the Harvest Energy Trust structure is significantly different than that
of a traditional corporation with share capital and there are certain unique
business risks of Harvest's structure. A summary of risks related to Harvest's
Upstream operations and its Downstream operations as well as the risks of its
structure are presented on pages 59 through 71, inclusive, of the AIF. In
addition to such risk factors, investors should carefully consider the risks
described below. Income Tax Matters There can be no assurance that Canadian federal income tax
laws and administrative policies respecting the treatment of mutual fund trusts
will not be changed in a manner which adversely affects the holders of Trust
Units. If the Trust ceases to qualify as a "mutual fund trust" under the Tax
Act, the income tax considerations described under the heading "Canadian
Federal Income Tax Considerations"
would be materially and adversely different in certain respects. The SIFT Rules, which are discussed in more detail under the
heading "Canadian Federal
Income Tax Considerations",
generally operate to apply a tax at the trust level on distributions of certain
income at rates of tax comparable to the combined federal and provincial
corporate tax rate and to treat such distributions to Unitholders in a manner
similar to dividends from a taxable Canadian corporation. Generally, the application of the SIFT Rules will be delayed
to the 2011 taxation year with respect to existing SIFT trusts, such as the
Trust. However, the SIFT Rules also provide that there are circumstances under
which an existing SIFT trust may lose its transitional relief, including where
the "normal growth" of the existing SIFT trust is exceeded. On December 15,
2006, Finance issued the Guidelines which established objective tests with
respect to how much an income trust is permitted to grow without jeopardizing
its transitional relief. See "Canadian
Federal Income Tax Considerations SIFT Rules".
Based on certain representations from HOC, the offering of Debentures pursuant
to this short form prospectus should not cause, by itself, the Trust to be
subject to the SIFT Rules prior to its 2011 taxation year. However, no assurance
can be provided that the SIFT Rules will not apply to the Trust prior to 2011.
The SIFT Rules may have an adverse impact on the Trust, its
Unitholders and the value of the Trust Units and on the ability of the Trust to
undertake financings and acquisitions, and, at such time as the rules apply to
the Trust, the distributable cash of the Trust may be materially reduced. The
effect of the recently enacted SIFT Rules on the market for Trust Units is
uncertain. Trading Market for Debentures The Debentures constitute a new issue of securities of the
Trust for which there is currently no public market. If the Debentures are
traded after their initial issuance, they may trade at a discount from their
offering price depending on prevailing interest rates, the market for similar
securities, the performance of the Trust and other factors. No assurance can be
given as to whether an active trading market will develop or be maintained for
the Debentures. To the extent that an active trading market for the Debentures
does not develop, the liquidity and trading prices for the Debentures may be
adversely affected. LEGAL PROCEEDINGS There are no outstanding legal proceedings material to the
Trust to which the Trust or HOC is a party or in respect of which any of its
respective properties are subject, nor are any such proceedings known by the
Trust to be contemplated, except as described elsewhere in this short form
prospectus including the AIF incorporated by reference into this short form
prospectus.
35 STATUTORY RIGHTS OF WITHDRAWAL AND RESCISSION Securities legislation in certain of the provinces and
territories 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 and territories, the securities legislation further
provides a purchaser with remedies for rescission or, in some jurisdictions,
damages if the prospectus and any amendment contains a misrepresentation or is
not delivered to the purchaser, provided that such remedies for rescission or
damages are exercised by the purchaser within the time limit prescribed by the
securities legislation of the purchaser's province or territory. The purchaser
should refer to any applicable provisions of the securities legislation of the
province or territory in which the purchaser resides for the particulars of
these rights or consult with a legal advisor.
36 AUDITORS' CONSENTS Consent of KPMG LLP The Board of Directors of Harvest Operations Corp. on behalf
of Harvest Energy Trust We have read the preliminary short form prospectus dated April 11, 2008
relating to the sale and issue of $250,000,000 aggregate principal amount of
convertible unsecured subordinated debentures of Harvest Energy Trust (the "Trust").
We have complied with Canadian generally accepted standards for an auditors'
involvement with offering documents. We consent to the incorporation by reference in the
above-mentioned short form prospectus of our audit report to the Unitholders of
the Trust on the consolidated balance sheets of the Trust as at December 31,
2007 and 2006 and the consolidated statements of income and comprehensive (loss)
income, unitholders' equity and cash flows for the years then ended. Our report
is dated March 12, 2008. We consent to the incorporation by reference in the
above-mentioned short form prospectus of our audit report to the Board of
Directors of Harvest Operations Corp. on behalf of the Trust and the Unitholders
of the Trust on the effectiveness of the internal control over financial
reporting as at December 31, 2007. Our report is dated March 12, 2008.
(signed) "KPMG
LLP"
Chartered Accountants
Calgary, Canada
April 11, 2008
C-1 CERTIFICATE OF THE TRUST Dated: April 11, 2008 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
and Territories of Canada. HARVEST ENERGY TRUST
By: HARVEST OPERATIONS CORP.
(signed) "John Zahary" | (signed) "Robert Fotheringham" |
President and Chief Executive Officer | Chief Financial Officer |
ON BEHALF OF THE BOARD OF DIRECTORS |
|
(signed) "David J. Boone" | (signed) "Verne G. Johnson" |
Director | Director |
C-2 CERTIFICATE OF THE UNDERWRITERS Dated: April 11, 2008 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 and Territories of Canada.
CIBC
WORLD MARKETS INC.
TD
SECURITIES INC.
By:
(signed) "Brenda A. Mason"
By:
(signed) "Alec W.G. Clark"
RBC
DOMINION SECURITIES INC.
SCOTIA CAPITAL INC.
By:
(signed) "Derek Neldner"
By:
(signed) "Craig Langpap"
HSBC
SECURITIES (CANADA) INC.
NATIONAL BANK FINANCIAL INC.
By:
(signed) "Laura McElwain"
By:
(signed) "Robert B.
Wonnacott"
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