U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 40-F

(Check One)

o		Registration statement pursuant to Section 12 of the Securities Exchange Act of 1934

þ		Annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934

PRECISION DRILLING TRUST

(Exact name of registrant as specified in its charter)

Alberta, Canada		1381		Not applicable
(Province or other jurisdiction of incorporation or organization)		(Primary Standard Industrial Classification Code Number (if applicable))		(I.R.S. Employer Identification Number (if Applicable))

4200-150 6th Avenue, S.W., Calgary, Alberta, Canada T2P 3Y7
(403) 716-4500
(Address and Telephone Number of Registrant’s Principal Executive Offices)

CT Corporation System, North St. Paul Street, Dallas, Texas 77022
(214) 979-1172
(Name, Address (Including Zip Code) and Telephone Number
(Including Area Code) of Agent For Service in the United States)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

Title of each class		Name of each exchange on which registered
Trust Units		New York Stock Exchange

Securities registered or to be registered pursuant to Section 12(g) of the Act. None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. None.

For annual reports, indicate by check mark the information filed with this Form:

þ Annual Information Form               þ Audited Annual Financial Statements

     Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 160,042,065 Trust Units outstanding as at December 31, 2008.

     Indicate by check mark whether the Registrant by filing 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 (the “Exchange Act”). If “Yes” is marked, indicate the file number assigned to the Registrant in connection with such rule.

Yes o          No þ

     Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.

Yes þ          No o

     The documents (or portions thereof) forming part of this Form 40-F are incorporated by reference into the following registration statement under the Securities Act of 1933, as amended:

Form		Registration No.
F-10			333-156844

 

 

PRINCIPAL DOCUMENTS

          The following documents are being filed as part of this Annual Report on Form 40-F:

     A. Annual Information Form for the fiscal year ended December 31, 2008 (the “Annual Information Form”).

     B. Management’s Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended December 31, 2008 (“Management’s Discussion and Analysis”).

     C. Consolidated Financial Statements for the fiscal year ended December 31, 2008 (the “Consolidated Financial Statements”). Note 20 to the Consolidated Financial Statements relates to United States Generally Accepted Accounting Principles. Management’s annual report on internal control over financial reporting and the attestation report of KPMG LLP regarding management’s assessment of internal controls over financial reporting are included in the Consolidated Financial Statements.

UNDERTAKING

          The Registrant undertakes to make available, in person or by telephone, representatives to respond to inquiries made by the staff of the Securities and Exchange Commission (the “Commission”), and to furnish promptly, when requested to do so by the Commission staff, information relating to: the securities registered pursuant to Form 40-F; the securities in relation to which the obligation to file an Annual Report on Form 40-F arises; or transactions in said securities.

DISCLOSURE CONTROLS AND PROCEDURES

          For information on disclosure controls and procedures, see “Evaluation of Disclosure Controls and Procedures” in the Annual Information Form and “Disclosure Controls and Procedures” in Management’s Discussion and Analysis.

AUDIT COMMITTEE FINANCIAL EXPERT

          The board of directors of Precision Drilling Corporation, the administrator of the registrant, has determined that it has at least one audit committee financial expert serving on its audit committee. Each of Patrick M. Murray, William T. Donovan and Allen R. Hagerman has been designated an audit committee financial expert and is independent, as that term is defined by the New York Stock Exchange’s listing standards applicable to the Registrant. The Commission has indicated that the designation of each of Messrs. Murray and Hagerman as an audit committee financial expert does not make either of them an “expert” for any purpose, impose any duties, obligations or liability on them that is greater than that imposed on members of the audit committee and board of directors who do not carry this designation or affect the duties, obligations or liability of any other member of the audit committee.

CODE OF ETHICS

          The Registrant and Precision Drilling Corporation have adopted a Joint Code of Business Conduct and Ethics for their principal executive officer, principal financial officer, principal accounting officer or controller and any person performing similar functions. The Registrant’s code is available on its website at www.precisiondrilling.com. No waivers have been granted from, and there have been no amendments to, any provision of the code during the 2008 fiscal year.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

          For information on principal accountant fees and services, see “Audit Committee Information — Audit Fees” in the Annual Information Form.

OFF-BALANCE SHEET ARRANGEMENTS

          The Registrant has no off-balance sheet arrangements, as defined in this Form.

TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

          For information on Tabular Disclosure of Contractual Obligations, see “Liquidity and Capital Resources” in Management’s Discussion and Analysis.

IDENTIFICATION OF THE AUDIT COMMITTEE

          The Registrant has a separately-designated standing Audit Committee. The members of the Audit Committee are:

Chair:		Patrick M. Murray
Members:		Allen R. Hagerman
		Robert J.S. Gibson
		William T. Donovan
		Robert L. Phillips

SIGNATURES

          Pursuant to the requirements of the Exchange Act, the Registrant certifies that it meets all of the requirements for filing on Form 40-F and has duly caused this Annual Report to be signed on its behalf by the undersigned, thereto duly authorized, in the City of Calgary, Province of Alberta, Canada.

Date: March 30, 2009

EXHIBITS

23.1		Consent of KPMG LLP, Chartered Accountants.
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Chief Executive Officer regarding Periodic Report containing Financial Statements.
32.2		Certification of Chief Financial Officer regarding Periodic Report containing Financial Statements.

 

PRECISION DRILLING TRUST
ANNUAL INFORMATION FORM

 

 

For the fiscal year ended December 31, 2008

 

 

Dated March 27, 2009

TABLE OF CONTENTS

 

 

This Annual Information Form contains certain forward-looking information and statements, including statements relating to matters that are not historical facts and statements of our beliefs, intentions and expectations about developments, results and events which will or may occur in the future, which constitute “forward-looking information” within the meaning of applicable Canadian securities legislation and “forward-looking statements” within the meaning of the “safe harbor” provisions of the United States Private Securities Litigation Reform Act of 1995 (collectively the “forward-looking information and statements”). Forward-looking information and statements are typically identified by words such as “anticipate”, “could”, “should”, “expect”, “seek”, “may”, “intend”, “likely”, “will”, “plan”, “estimate”, “believe” and similar expressions suggesting future outcomes or statements regarding an outlook.

 

Forward-looking information and statements are included throughout this Annual Information Form including under the headings “General Development of the Business”, “Description of the Business of Precision” and “Risk Factors” and include, but are not limited to statements with respect to:

 

 

 

All such forward-looking information and statements are based on certain assumptions and analyses made by the Trust in light of its experience and perception of historical trends, current conditions and expected future developments, as well as other factors the Trust believes are appropriate in the circumstances. These statements are, however, subject to known and unknown risks and uncertainties and other factors. As a result, actual results, performance or achievements could differ materially from those expressed in, or implied by, these forward-looking information and statements and, accordingly, no assurance can be given that any of the events anticipated by the forward-looking information and statements will transpire or occur, or if any of them do so, what benefits will be derived therefrom. These risks, uncertainties and other factors include, among others:

 

 

 

These risk factors are discussed in this Annual Information Form, the Trust’s Annual Report and Form 40-F on file with the Canadian securities commissions and the United States Securities and Exchange Commission (the ‘‘SEC”) and available on the Canadian System for Electronic Document Analysis and Retrieval (“SEDAR”) at www.sedar.com and the SEC’s Electronic Document Gathering and Retrieval System (“EDGAR”) at www.sec.gov, respectively. Except as required by law, Precision Drilling Trust, Precision Drilling Limited Partnership and Precision Drilling Corporation disclaim any intention or obligation to update or revise any forward-looking information or statements, whether as a result of new information, future events or otherwise.

The forward-looking information and statements contained in this Annual Information Form are expressly qualified by this cautionary statement.

 

Unless otherwise stated, all references in this Annual Information Form to sums of money are expressed in Canadian dollars.

 

Precision Drilling Trust (the “Trust”) is an unincorporated open-ended investment trust established under the laws of the Province of Alberta pursuant to a declaration of trust dated September 22, 2005 (the “Declaration of Trust”). The Trust maintains its head office and principal place of business at 4200, 150 – 6th Avenue S.W., Calgary, Alberta, T2P 3Y7, telephone (403) 716-4500, facsimile (403) 264-0251, email info@precisiondrilling.com and website www.precisiondrilling.com. For a discussion of the Declaration of Trust, see “Description of Capital Structure”.

 

Pursuant to a reorganization of the former Precision Drilling Corporation (“Precision”) into a “mutual fund trust” for purposes of the Tax Act (as defined herein), the Trust issued units (“Trust Units”) to certain former shareholders of Precision in exchange for such holders’ common shares pursuant to a plan of arrangement which was approved by the former shareholders of Precision at a special meeting held on October 31, 2005 (the “Plan of Arrangement”).

 

Precision Drilling Limited Partnership (“PDLP”) is a limited partnership formed pursuant to the laws of the Province of Manitoba pursuant to a limited partnership agreement dated as of September 28, 2005 (the “Limited Partnership Agreement”). The Trust holds a 99.91% partnership interest in PDLP through its holding of Class A Limited Partnership Units (the ‘‘PDLP A Units”) and the remaining 0.09% limited partnership interest in PDLP is held by former shareholders of Precision who elected to receive Class B Limited Partnership Units (“Exchangeable Units”) which are exchangeable into Trust Units on a one-for-one basis and are the economic equivalent of Trust Units. The general partner of PDLP is 1194312 Alberta Ltd. (the “General Partner”) which holds a nominal (0.001%) interest in PDLP. The head and principal offices of PDLP are located at 4200, 150 – 6th Avenue S.W., Calgary, Alberta, T2P 3Y7, telephone (403) 716-4500, facsimile (403) 264-0251 and email info@precisiondrilling.com.

 

Precision was originally incorporated on March 25, 1985 and carried out amalgamations with wholly-owned subsidiary companies on January 1, 2000, January 1, 2002 and January 1, 2004 pursuant to Articles of Amalgamation and the Business Corporations Act (Alberta). On November 7, 2005, Precision became a wholly-owned subsidiary of PDLP. As part of the Plan of Arrangement, Precision amalgamated with a number of its wholly-owned subsidiaries: 1195309 Alberta ULC on November 23, 2005; Live Well Service Ltd. (“Live Well Service”) on January 1, 2006; and Terra Water Group Ltd. (“Terra”) on January 1, 2007. In each amalgamation, the name of the amalgamated company remained “Precision Drilling Corporation”. The head and principal offices of Precision are located at 4200, 150 – 6th Avenue S.W., Calgary, Alberta, T2P 3Y7, telephone (403) 716-4500, facsimile (403) 264-0251, email info@precisiondrilling.com and website www.precisiondrilling.com.

 

The Trust and Precision are parties to an administration agreement entered into on November 7, 2005 (the “Administration Agreement”). Under the terms of the Administration Agreement, Precision provides administrative and support services to the Trust including, without limitation, those necessary to:

 

 

 

The following table sets forth the names of the material subsidiaries (which includes limited partnerships) of the Trust, the percent of shares (or interest) owned by the Trust and the jurisdiction of incorporation, continuance or formation of each such subsidiary as of December 31, 2008:

 

 

NOTE:

 

Organizational Structure of the Trust

 

The following diagram sets forth the organizational structure of the Trust and its material subsidiaries as of the date hereof:

 

NOTES:

 

 

 

 

 

 

NOTES:

 

 

Management of the Trust believes that Precision will be able to meet its debt obligations under the Credit Facilities notwithstanding the current and anticipated near-term decline in drilling and well servicing activity. See “Description of the Business of Precision – Material Debt” and “Risk Factors – Deteriorating conditions in the credit markets may adversely affect business”.

 

 

The Trust is an unincorporated open-ended investment trust established under the laws of the Province of Alberta pursuant to the Declaration of Trust. The beneficiaries of the Trust are the Unitholders. The Trust’s principal

undertaking is to issue Trust Units and to indirectly carry on the business of the provision of land-based contract drilling, well servicing and ancillary oilfield services to oil and gas exploration and production companies through its direct and indirect subsidiaries. This business is carried out in two segments, Contract Drilling Services and Completion and Production Services.

 

As of December 31, 2008, Management believes that the Trust is the second largest land driller in North America, based on the number of rigs in its drilling rig fleet. The Trust presently operates in most conventional and unconventional oil and natural gas basins in Canada and the United States and has an emerging presence in Mexico. Management believes that the Trust’s high performance drilling rigs, supply chain management systems and technology, together with its Canadian and United States customer base, deep drilling capabilities and positions in Canadian and United States sedimentary basins, provides it with a substantial foundation for expansion, both in North America and internationally. After giving effect to the Acquisition, the Trust has a high quality fleet consisting of 374 drilling rigs, 229 service rigs and 29 snubbing units. In addition, Precision presently offers its customers a complementary suite of wellsite products and services including camp and catering, wastewater treatment and rental equipment. Most of these complementary operations and the service rig business are located in Canada.

 

2008

 

On December 23, 2008, the Trust completed the indirect acquisition of Grey Wolf, Inc. (“Grey Wolf”) (the “Acquisition”) pursuant to an agreement and plan of merger dated August 24, 2008, as amended December 2, 2008 (the “Merger Agreement”) with Grey Wolf, Precision and Precision Lobos Corporation (“Lobos” a subsidiary of the Trust). Pursuant to the Acquisition, Grey Wolf was merged with and into Lobos pursuant to the Texas Business Corporations Act and the Texas Corporation Law. Accordingly, the separate legal existence of Grey Wolf has ceased and Lobos, which was subsequently renamed “Precision Drilling Oilfield Services Corporation”, became the surviving corporation. Upon the closing of the Acquisition, Messrs. Frank M. Brown, William T. Donovan and Trevor M. Turbidy, each of whom was a director of Grey Wolf, were appointed to the Board of Directors of Precision.

 

Under the terms of the Merger Agreement, shareholders of Grey Wolf elected to receive either cash or Trust Units in exchange for their shares of Grey Wolf common stock. Each share of Grey Wolf common stock was convertible, at the option of the holder, into US$9.02 in cash or 0.4225 Trust Units, subject to proration. The total consideration paid by the Trust to shareholders of Grey Wolf in connection with the Acquisition was approximately US$897.2 million and 34.4 million Trust Units. Costs of approximately US$219.2 million (after accounting for applicable discounts), including a US$25 million break-up fee payable by Grey Wolf to a third party, debt issuance costs, professional services fees, severance costs and other costs were incurred in respect of the Acquisition.

 

At closing of the Acquisition, Grey Wolf had outstanding US$262.3 million aggregate principal amount of convertible notes. Pursuant to the terms of the convertible notes, during the first quarter of 2009, PDOS, as successor to Grey Wolf, made to the holders thereof a change of control offer to repurchase any or all of the outstanding convertible notes at 100% of the principal amount thereof, plus accrued but unpaid interest to the date of the repurchase, payable in cash. As at March 20, 2009 the holders of such notes representing US$262.3 million have notified the Trust that they will be accepting the purchase offer made pursuant to the terms thereof. PDOS purchased such notes at the principal balance plus accrued interest of approximately US$2.3 million on March 24, 2009.

 

The Acquisition is described in greater detail in the business acquisition report of the Trust dated January 21, 2009, in respect of the Acquisition (the “BAR”) and the material change report of the Trust dated December 23, 2008, in respect of the Acquisition (the “Grey Wolf MCR”), both the BAR and the Grey Wolf MCR having been filed on SEDAR at www.sedar.com and EDGAR at www.sec.gov. The BAR also contains audited annual financial statements of Grey Wolf for the year ended December 31, 2007, unaudited comparative interim financial statements of Grey Wolf for the nine months ended September 30, 2008 and unaudited pro forma consolidated financial statements of the Trust for the year ended December 31, 2007 and nine months ended September 30, 2008 that give effect to the Acquisition.

 

On July 31, 2008, Precision also closed the acquisition of six service rigs from a private well servicing company for approximately $16 million. The assets are positioned in south-eastern Saskatchewan and southwestern

Manitoba and strengthen Precision’s capabilities in these oil regions. Subsequent to this acquisition, Precision moved an additional three service rigs into these regions.

 

Precision’s Super Series^tm drilling rig build program in 2008 was comprised of 10 Super Single^tm rigs and nine Super Triple rigs. Eighteen of these rigs are under signed term customer contracts. Management expects the remaining capital cost of the rig build program for 2009 to be approximately $167 million. Of the 19 rigs, three were completed in 2008 and management expects the remaining contracted rigs to be delivered before the fourth quarter of 2009.

 

On September 1, 2008, Precision transferred substantially all of the assets of its Precision Well Servicing, Live Well Service, Precision Rentals and LRG Catering (“LRG”) divisions to Terra Water Systems Limited Partnership, which subsequently changed its name to “Precision Limited Partnership”. PLP carries on Precision’s Completion and Production Services business. See “Description of the Business of Precision – Completion and Production Services”.

 

On August 31, 2008, certain non-compete obligations from a 2005 business divestiture that restricted the Trust’s growth outside of North America and in certain business lines expired. Through its international subsidiaries, the Trust can now pursue global contract drilling opportunities without restriction.

 

In addition to the Acquisition, Precision’s organic growth in the United States accelerated during 2008 with 18 rigs moved from Canada.

 

Pursuant to amendments to the Income Tax Act (Canada) (the “Tax Act”) made effective on October 31, 2006 (the “SIFT Rules”, and which, for greater certainty, include all proposed amendments to said rules publicly announced by or on behalf of the Minister of Finance (Canada) prior to the date hereof on the assumption that such proposed amendments will be executed substantially in the form proposed), a trust that is resident in Canada for purposes of the Tax Act, that holds one or more “non-portfolio properties”, and the units of which are listed on a stock exchange or other public market (a “SIFT trust”) will be subject to tax at the prevailing federal corporate income tax rate, plus an additional provincial tax factor, on certain of its income paid, or made payable, to unitholders, and such distributions will be treated as eligible dividends paid by a taxable Canadian corporation. In general terms, a trust that existed on October 31, 2006 and to which the SIFT trust legislation otherwise would apply should not be a SIFT trust until the earlier of January 1, 2011 or the first day after December 15, 2006 that the trust exceeds “normal growth” determined by reference to guidelines first issued on December 15, 2006 by the Minister of Finance (Canada) and amended effective December 31, 2008 (the “Guidelines”). Provided that the Trust does not issue new equity in an amount greater than the “safe-harbour” determined by the market capitalization of the Trust on October 31, 2006, the Trust should not be considered to exceed “normal growth” and should not be a SIFT trust until January 1, 2011. However, no assurances can be provided that the Trust will not become a SIFT trust prior to January 1, 2011. The SIFT Rules (including the Guidelines) may adversely effect the marketablility of the Trust Units and the ability of the Trust to undertake financings and acquisitions, and at such time as the new rules apply to the Trust, the distributions on Trust Units may be materially reduced.

 

On March 12, 2009 specific proposals to amend the Tax Act that are intended to facilitate the conversion of mutual fund trusts (as defined in the Tax Act) into corporations (the “SIFT Conversion Rules”) on a, generally, tax-deferred basis were enacted. These transition rules are only available to trusts that convert to corporations prior to January 1, 2013.

 

The Trust, with input from external legal and financial advisors, is carefully assessing the impact of the SIFT Rules on the business and financial outlook of the Trust and its broader effect on the income trust sector as a whole. The Board of Trustees continues to examine whether changes in the current legal structure are appropriate and in the best interests of Unitholders and, if so, when such changes should be implemented. See “Risk Factors – A change in the structure of the Trust may have an adverse effect on the Unitholders”.

 

2007

 

In 2007, Precision increased capital spending on additions to property, plant and equipment to grow and upgrade its high performance drilling rig fleet in Canada and the United States, significantly expanded its contract drilling operations in the United States and mobilized one drilling rig for a project in Chile.

Precision invested $141 million in expansion capital for the purchase of property, plant and equipment and $46 million in upgrade capital in 2007. In 2007, Precision commissioned 16 new drilling rigs and two new service rigs and decommissioned 11 drilling and 16 service rigs.

 

In 2007, Precision deployed an additional seven Super Single^tm rigs and four triple diesel-electric rigs for work contracted in Texas, Colorado, Oklahoma and Wyoming. In early 2008, Precision also mobilized one additional Super Single^tm rig to Colorado and one additional triple diesel-electric rig to New York, bringing its fleet of high performance drilling rigs operating in the United States to 14, and entered into contracts for the delivery of three additional new Super Single^tm rigs to Colorado in 2009.

 

On January 1, 2007, Precision amalgamated with Terra.

 

2006

 

During 2006, Precision focused capital spending on additions to property, plant and equipment to grow and upgrade its rig fleet and initiated contract drilling operations in the United States.

 

On August 17, 2006, Precision acquired Terra, a privately owned wastewater treatment business operating at remote worksite locations, for an aggregate purchase price of $16 million. Terra had 41 treatment units at the time of the acquisition and closed the year with 51 treatment units. The service provided by Terra complements those provided by the LRG Catering and Precision Rentals divisions and expanded the diversity of services Precision offers customers. Also on August 17, 2006, Terra transferred substantially all of its net assets to Terra Water Systems Limited Partnership.

 

Precision invested $171 million in expansion capital for the purchase of property, plant and equipment and $92 million in productive capacity maintenance in 2006. When combined with the acquisition of Terra, Precision increased its asset base by $279 million in 2006. A total of 13 new drilling rigs were commissioned in 2006 and two were decommissioned.

 

The expansion of Precision’s Contract Drilling Services segment in the United States began in June 2006 with the deployment of one Super Single^tm drilling rig to Texas. Precision deployed a second drilling rig to the United States from Canada in early 2007 which commenced drilling in Colorado.

 

On January 1, 2006, Precision amalgamated with Live Well Service.

 

Precision’s continuing operations are carried out in two segments: Contract Drilling Services and Completion and Production Services. In Canada, the Contract Drilling Services segment included land drilling services, camp and catering services, procurement and distribution of oilfield supplies and the manufacture and refurbishment of drilling and service rig equipment, and the Completion and Production Services segment included service rig well completion and workover services, snubbing services, wastewater treatment services and the rental of oilfield surface equipment, tubulars and well control equipment and wellsite accommodations. In the United States, the Contract Drilling Services segment includes land drilling services and trucking services for the movement of Precision rigs. Internationally, the Contract Drilling Services segment includes land drilling services. As at December 31, 2008, Precision had over 7,200 employees.

Precision’s revenue by business segment from continuing operations is illustrated in the following table:

 

(in thousands of Canadian dollars)

 

 

NOTE:

 

 

In North America, the economics of oilfield services align with global and regional fundamentals. Important regional drivers include the underlying hydrocarbon make-up of the sedimentary basins where Precision’s customers explore for and develop natural resources and the existence of an established, competitive and efficient oilfield service infrastructure. Increasingly, natural gas production is driving economics in North America as approximately 60% of new well completions in Canada and 80% of new well completions in the United States in 2008 targeted natural gas.

 

The hydrocarbon structures in North America are diverse with conventional and unconventional sources of oil and natural gas reservoirs existing at a variety of depths. In Canada, such depths are comparatively shallow by global standards. Conventional sources are complemented by more costly and challenging unconventional reservoirs associated with oil sands, heavy oil and natural gas in coal, in shale and in deeper, low permeability formations. Unconventional reservoirs typically require more complex drilling and completion technologies, including high performance rigs and directional and horizontal drilling techniques, to effectively develop. As between Canada and the United States, approximately 70% of the proven natural gas reserves are situated in the United States with the remaining 30% in Canada. Today, Canada is the world’s seventh largest producer of oil and third largest producer of natural gas. Approximately half of Canada’s oil and gas production is exported to the United States. In Canada, there are three major areas that are considered unconventional resource plays: the Montney and Horn River shale gas plays in northeastern British Columbia; the Bakken shale play in southern Saskatchewan; and the heavy oil and oil sands in northeastern Alberta. In the United States there are several unconventional resource plays, two of which are believed to present the greatest growth potential for Precision: the Haynesville play in Texas and Louisiana and the Marcellus play in New York and Pennsylvania. Precision has a growing presence in those and the other major unconventional plays in Canada and the United States.

 

The ability to move heavy equipment in oil and natural gas fields in Canada and the northern United States is dependent on weather conditions. As warm weather returns in the spring, the thawing of ground frost typically renders secondary roads incapable of supporting the weight of heavy equipment until such time as the roads have thoroughly dried. The duration of spring breakup has a direct impact on Precision’s activity levels. In addition, many exploration and production areas in northern Canada are accessible only in winter when the ground is frozen enough to support the transportation of heavy equipment. The timing of winter freeze-up and spring breakup affects Precision’s ability to move equipment in and out of these areas. Wet weather can further defer commencement of drilling or servicing operations on any given day or well location.

 

Providing oilfield services incorporates three main elements: people, technology and equipment. Attracting, training and retaining qualified employees is a challenge for oilfield services providers. As exploration and production activities are taking place in an ever increasing variety of surface and subsurface conditions, developing technology and building equipment that can withstand increasing physical challenges and operate more efficiently is required to maintain and improve the economics of crude oil and natural gas production. The primary economic risk assumed by oilfield service providers relates to the volatility in activity levels which affect utilization rates, investment in people, technology and equipment and cost controls.

The economics of oilfield services providers are largely driven by current and expected prices of crude oil and natural gas which are determined by supply and demand fundamentals on a global and regional level. Crude oil and natural gas prices have historically been volatile. The upward trend in commodity prices since 2002 through 2008 peaked for natural gas in December 2005 and for oil in July 2008. The price for gas has fluctuated from that time and is currently at lower levels when compared to pricing trends over the past five years.

 

In Canada, as at December 31, 2008, the Contract Drilling Services segment comprised:

 

 

In the United States, as at December 31, 2008, the Contract Drilling Services segment comprised:

 

 

Internationally, as at December 31, 2008, the Contract Drilling Services segment comprised:

 

 

Precision Drilling

 

The Precision Drilling division owned and operated the largest fleet of land drilling rigs in Canada, with 220 actively marketed drilling rigs located throughout western Canada, accounting for approximately 25% of the industry’s fleet of 884 drilling rigs in Canada at December 31, 2008.

 

In the United States at December 31, 2008, Precision had a fleet of 151 land drilling rigs representing approximately 7% of the estimated total marketed land drilling rigs, primarily operating in the following drilling markets: Ark-La-Tex (northeast Texas, northern Louisiana and southern Arkansas); United States Gulf Coast in southern Louisiana and the upper Texas Gulf Coast; Mississippi/Alabama; South Texas; Rocky Mountain (Wyoming, Colorado, northwest Utah and northern New Mexico); Mid-Continent (west Texas, southwest New Mexico, the Barnett Shale area in north Texas and the mid-continent region); and Appalachia (New York and Pennsylvania). The 151 land drilling rig fleet in the Unites States comprises the 30 rigs operated by PDOSI and the 121 rigs acquired in connection with the Acquisition.

 

Internationally, as at December 31, 2008, Precision had two land drilling rigs acquired in connection with the Acquisition operating in Mexico and one Precision land drilling rig racked in Chile.

 

In 2008, Precision had approximately 450 customers including approximately 250 in Canada and approximately 200 in the United States, which included independent producers and major oil and gas companies. In fiscal 2008, only one customer accounted for more than 10% of Precision’s revenue.

 

Precision primarily markets its drilling rigs on a regional basis through employee sales personnel and contracts for drilling oil and natural gas wells are obtained either through competitive bidding or as a result of relationships and negotiations with customers. Contract terms offered by Precision are generally dependent on the complexity and risk of operations, on-site drilling conditions, type of equipment used and the anticipated duration of the work to be performed. Drilling contracts can be for a single or multiple wells and may vary in duration from a day or two on shallow single well applications to multiple year, multiple well drilling programs. Term drilling

contracts typically contain early termination penalties while non-term contracts are typically subject to termination by the customer on short notice or with little or no penalty.

 

Oil and natural gas well drilling contracts are carried out on a daywork, metreage or turnkey basis. On a daywork basis, Precision contracts to provide a drilling rig with required personnel where the customer supervises the drilling of the well and Precision charges the customer a fixed rate per day regardless of the number of days needed to drill the well. Daywork contracts usually also provide for a reduced day rate (or a lump sum amount) for mobilization of the rig to the well location and for both rig-up and rig-down of the rig. On a daywork basis, Precision ordinarily bears no part of the costs arising from downhole risks (such as time delays for various reasons, including a stuck or broken drill string or blowouts). Under a metreage contract, Precision would be paid a fixed charge for each metre drilled regardless of the time required or the problems encountered in drilling the well or, in some cases, may be carried out on a metreage basis to a specified depth and on a daywork basis thereafter. Under a turnkey contract, Precision contracts to drill a well to an agreed depth, under specified conditions, for a fixed price. Compared to daywork contracts, metreage and turnkey contracts involve a higher degree of risk to Precision and, accordingly, normally provide greater profit or loss potential. See “Risk Factors – Unexpected cost overruns on turnkey drilling jobs could adversely affect Precision’s revenues”. From time to time, Precision may also enter into informal, non-binding commitments with its customers to provide drilling rigs for future periods at agreed upon rates plus fuel and mobilization charges, if applicable, and escalation provisions. In Canada, Precision’s contracts have been carried out almost exclusively on a daywork basis. In the United States, the majority of Precision’s contracts have been carried out on a daywork basis, with only approximately 13% performed on a turnkey basis, subsequent to the Acquisition. Precision’s newly built drilling rigs tend to have term contracts in place prior to the rig being completed and in many cases have a three to five year capital payout contract in place at the time construction commences.

 

Precision’s rig fleet can drill virtually all types of on-shore conventional and unconventional oil and gas wells in North America. These rigs are particularly adept in developing unconventional resources such as oil sands, natural gas in coal or in shale or tight gas reservoirs. The increase in drilling-intensive unconventional resource plays creates opportunities for technically innovative and operationally efficient drillers like Precision.

 

Precision’s drilling rigs have varying configurations and capabilities which enable Precision to provide services in virtually all areas of drilling activity in North America, with rig capacities of up to 4,000 horsepower. Conventional rigs are configured to handle either one, two or three joints of standard length drill pipe at one time and are categorized as singles, doubles or triples based on this capability. As well, Precision has coiled tubing drilling rigs which utilize a single strand of pipe coiled around a reel. As a coil tubing drilling rig drills, the tubing is unwound and as the tubing is rewound onto the reel the bit returns to surface.

 

To facilitate customer requirements Precision also utilizes top drives in its drilling operations. A top drive is suspended in the mast of the drilling rig and is powered by a hydraulic or electric motor and is used to rotate the drill string in the place of a traditional rotary table and kelly bushing. Top drives enable the use of 30-metre or 15-metre lengths of drill pipe on triple, double and Super Single^tm rigs, respectively, rather than traditional 10-metre lengths thereby reducing the number of required connections in the drill string and generally increasing drilling efficiency. At the end of 2008, Precision had 15 mobile and 58 integrated top drives in its operations in Canada and 37 mobile and 16 integrated top drives in the United States.

 

Single, double and coiled tubing rigs are generally used in the shallow drilling markets in Canada, while triple rigs, which have greater hoisting capacity, are used in deeper exploration and development drilling applications such as the foothills and Rocky Mountain regions of Canada, and the United States, in Louisiana and in west Texas.

 

Precision’s rig fleet includes Super Single^tm rigs which are manufactured by Precision and are equipped with top drive drilling systems, extended length drill pipe and an automated pipe handling system and generally have slant drilling capability. Precision believes the Super Single^tm rig category will continue to offer significant revenue growth. In addition to conventional wells, Precision’s Super Single^tm rigs have been adapted to meet a variety of operational needs in Canada, the United States and internationally.

 

The Super Single^tm Light is a scaled-down version of the Super Single^tm without slant drilling capabilities. These rigs have been built for drilling shallow wells. Using extended length drill pipe, the design incorporates

proven technology and reliability in a light weight, easily moved load configuration. The Super Single^tm Light competes with coiled tubing rigs and offers greater drilling capability over a wider range of well configurations than coiled tubing rigs.

 

Rigs built by Precision are designed for greater safety and operating efficiency to deliver well cost savings to customers. High performance drilling rigs combine high mobility, automation, advanced control systems, minimal environmental impact, and highly trained crews. Over the past 13 years Precision has been developing the Super Series^tm drilling rigs and has built 40 Super Single^tm, seven Super Single^tm Light and ten Super Triple rigs. Precision continually seeks to upgrade and modify its rig fleet to maximize performance. Precision works hard to remain abreast of and, in many cases, lead advances in specialized drilling techniques and technology in order to maximize rig efficiency and minimize environmental impact. A total of 176 of Precision’s drilling rigs are diesel-electric powered, including 70 in Canada, 103 in the United States and 3 internationally, with the remaining rigs being mechanically powered. Diesel-electric powered rigs provide more precise control of drilling components than mechanical rigs and are well suited for horizontal and directional drilling. Many of the diesel electric rigs are AC power driven which provides more efficient power conversion and smaller component size and weight. Many of Precision’s mechanically powered rigs are also capable of horizontal and directional drilling.

 

The following table lists the capacity of Precision’s land drilling rigs as at December 31, 2008:

 

 

In 2008 there was a net reduction of 14 drilling rigs or approximately 2% in the Canadian industry fleet. Approximately 338 drilling rigs were added to the number of marketed rigs in the United States during 2008, an increase of approximately 15% over 2007. In 2006, customer demand for drilling conventional oil and natural gas wells, in combination with improving commercialization of natural gas in coal and in shale, oil sands, heavy oil and deeper natural gas formations had driven demand for rigs to record levels but the slowdown in drilling activity commencing in the second half of 2006 led to reduced 2007 and 2008 rig utilization rates. In 2008, Precision’s average land drilling rig utilization in Canada was approximately 37% compared to 35% in 2007. In the United States, Precision’s average land drilling rig utilization was approximately 95% in 2008 and 99% in 2007.

 

During 2008, Precision achieved a utilization rate of 37% for its Canadian drilling rigs compared to the estimated average industry utilization rate in Canada of 42% and a utilization rate of 95% for its United States rigs compared to an estimated industry utilization rate of 77%. Precision strives to balance utilization and optimal profitability given competitive pricing and seasonal reductions in drilling demand during the second and third quarters.

 

The drilling industry requires specialized skill and knowledge which, due to increased utilization levels over the past decade, has been in short supply. A drilling rig crew is generally comprised of a rig manager, driller, derrickman, motorman, two floormen and possibly a leaseman. Rig crew configuration may vary from three crews working 8-hour shifts to two crews working 12-hour shifts, with varying rotations for days off. The floorman and leaseman positions are entry level, with the motorman, derrickman and driller positions being more advanced. Each position has certain prerequisite qualifications and training. Well control, H₂S, first aid, fall protection, work place hazardous materials and various aspects of Precision’s health, safety and environment management systems are all key training components. The provision of an experienced and competent crew is a competitive strength, highly valued by Precision’s customers.

 

The shortage of labour in the oilfield service industry in recent years continues with human resource issues expected to remain a priority for the industry for the foreseeable future. For Precision, emphasis is placed on retention of experienced employees in derrickman, driller and rig manager positions. A shortage occurs in high

activity periods when most of the rig fleet is working. The service industry loses experienced employees to customers, competitors, other oilfield businesses and to other industries due to the cyclical nature of the work and the resulting uncertainty of continuing employment. Precision focuses on the retention of existing employees through initiatives that provide a safe and productive work environment and opportunity for advancement and, in some cases, added wage security through programs such as the Designated Driller Program in Canada.

 

LRG Catering

 

LRG provides food and accommodation to personnel working at the wellsite, typically in remote locations in western Canada. LRG has 97 drilling camps and base camps representing approximately 10% of the camp and catering business in western Canada and three drilling camps in the United States. In Canada, LRG also provides food service for all field workers on a location. LRG’s mobile camps include five or six units and can accommodate 20 to 25 crew members and individual dormitory units that can accommodate up to 45 workers. LRG also has the ability to configure several of its camps and dormitories on a single site to create a base camp for major projects which can house as many as 200 workers and provide up to 1,000 meals per day. As the oil and gas industry in western Canada moves to more remote locations in search of new reserves there is increasing demand for crews to stay near the worksite, often in camps, throughout the duration of a project. LRG serves Precision and other companies in the upstream oil and gas sector and periodically secures opportunities to serve other industries that operate in remote locations.

 

Rostel Industries

 

Rostel Industries manufactures and refurbishes custom drilling rig and service rig components. This uniquely positions Precision with in-house rig manufacturing capability. Approximately 80% of Rostel Industries’ activities support Precision business units. The ability to repair or provide new components for either drilling or service rigs in-house improves the efficiency and reliability of Precision’s fleets. In addition to quality construction and repair services, Rostel Industries sustains high plant utilization by providing specialized services, including inspection and certification of critical drilling components such as overhead equipment, well control equipment and handling tools. Rostel Industries’ expertise includes an in-house engineering group as well as an equipment sales group that specializes in the distribution of mud pumps and other imported products. Rostel Industries designs and builds a significant portion of the components for Precision’s Super Single^tm drilling rigs and is developing products that can be applied to new rigs and retro-fitted to improve the versatility of many of Precision’s existing rigs. Strategically, Rostel Industries gives Precision the ability to control cost, quality and production schedules that meet customer requirements.

 

Columbia Oilfield Supply

 

Columbia is a general supply store that procures, packages and distributes large volumes of consumable oilfield supplies for the contract drilling and well servicing industry. Approximately 90% of Columbia’s activities support Precision operations and it plays a key role in supply chain management for Precision. Columbia’s key strengths, which contribute to Precision’s competitiveness, are in inventory management, demand anticipation and distribution. Precision and its customers also benefit from Columbia’s purchasing power, standardized product selection, streamlined business processes and coordinated distribution. Strategically, Columbia gives Precision the ability to set its own service level priorities and to standardize products used on its equipment. Through Columbia, Precision has direct control over supply distribution to field destinations which enhances its reliability in the execution of its operations.

 

As at December 31, 2008, Precision’s Completion and Production Services segment comprised the following businesses in Canada:

 

 

 

Precision Well Servicing

 

The Precision Well Servicing division is Canada’s largest service rig contractor, providing customers with a complete range of oil and natural gas well services – completion, workover, abandonment, well maintenance, high pressure and critical sour gas well work and re-entry preparation. Precision’s service rig fleet completes all types of new wells and works over existing wells to optimize oil and natural gas production. The configuration of the Precision Well Servicing fleet as at December 31, 2008 is illustrated in the following table:

 

 

At the end of 2008, Precision Well Servicing had an industry market share of approximately 21% with a rig fleet of 229 rigs after the acquisition of six rigs, while the average registered CAODC industry fleet was approximately 1,100 service rigs in western Canada. Precision Well Servicing continued to upgrade its fleet through initiatives that included freestanding conversions and new transporters along with engines and combination trailers. As at December 31, 2008, Precision Well Servicing had 137 freestanding service rigs representing 60% of its service rig fleet. A freestanding rig is more efficient to set up, minimizes surface disturbance and, as there is no need for anchors, reduces the possibility of striking underground utilities. However, a majority of the mobile double rigs are not freestanding as the additional weight to convert them would limit movement during restricted road use periods. Skid double rigs are ideal for deeper natural gas wells which require multi-zone completion or re-completion. This type of work usually has the service rig working for a greater length of time so the rig does not need to be moved as often. They also include additional equipment such as circulating pumps, tanks, blowout preventers and tools.

 

Well servicing requires its own unique skill set and – in addition to physical work, harsh weather and other factors – crews must deal with the potential dangers and safety concerns of working with pressurized wellbores. A typical service rig crew has four members: driller, derrickman and two floormen, in addition to the rig manager. Servicing wells often means the customer must coordinate activities of several service companies, so work normally takes place in daylight hours. Jobs are typically shorter in well servicing than contract drilling so the ability of a service rig to move quickly from one site to another is critical. Precision Well Servicing typically charges its customers an hourly rate for its services based on a number of considerations including market demand in the region, the type of rig and complement of equipment required.

 

The Precision Well Servicing rig fleet is deployed throughout western Canada to improve efficiency and reduce travel time to wellsites. Well servicing operations have two distinct functions – completions and workovers. Service rigs are typically used during the completion phase of a well, instead of larger, more expensive drilling rigs, in order to reduce the cost of completing the well. The demand for well completion services is related to the level of drilling activity in a region whereas the demand for production or workover services is based upon the total number of active wells, their age and their producing characteristics. Consequently, demand for completion services is generally more volatile than workover services. Completions accounted for approximately 32% and workovers accounted for 68% of total activity for Precision Well Servicing in 2008, no change from 2007.

After a well is initially drilled, the customer contracts a service provider such as Precision Well Servicing to supply the crew and equipment to complete the well. Completion services prepare a newly drilled well for initial production and may involve cleaning out the wellbore and the installation of production tubing, downhole equipment and wellheads. Service rigs work jointly with other services to perforate the wellbore to open the producing zones and stimulate the producing zones to improve productivity. The well completion process may take one day to many weeks to complete and Precision Well Servicing provides a service rig to assist during most or all of this process.

 

Workover services are generally provided according to preventative maintenance schedules or on a call-out basis when a well needs major repairs or modifications. This can involve operations similar to those conducted during the initial completion of a well. Workovers may also involve restoring or enhancing production in an existing producing zone, changing to a new producing zone, converting the well for use as an injection well for enhanced recovery operations or plugging and abandoning the well. Workover services also include major subsurface repairs such as casing repair or replacement, recovery of tubing and removal of foreign objects from the wellbore, such as lost tools. Workover activities may require a few days to several weeks to complete. During this time, Precision Well Servicing may work alongside other oilfield service providers on the well location while other services are being directed by the customer.

 

A typical gas well in western Canada is likely to require one or more workovers during its operating life compared with four or five workovers for some conventional oil wells. Wells for some heavy oil and bitumen production could require many workovers during their lifecycle. Workovers take place over the producing life of the well and involve a variety of activities to restore or enhance production. Well maintenance services are often required to ensure continuous and efficient operation of producing wells. These services include routine mechanical repairs such as repairing failed wellbore pumping equipment or replacing damaged rods and tubing.

 

Live Well Service

 

Live Well Service markets 22 portable hydraulic rig-assist snubbing units, six self-contained units and one rack and pinion unit in western Canada for a market share of approximately 24%. Snubbing units are equipped with specialized pressure control devices which allow tubing to be pushed (snubbed) into and pulled out of a wellbore while a well is under pressure and production has been suspended.

 

Traditional well servicing operations require the pressure in a well to be neutralized prior to performing such operations so they can be conducted safely. Some reservoirs can be damaged if a well is neutralized prior to workover operations, as the fluids used in the process may cause the flow characteristics of the reservoir to be impaired. Consequently, snubbing units have been developed to perform certain workover and completion activities without neutralizing the well.

 

Live Well Service has three types of snubbing units: rig-assist, self-contained and rack and pinion. Rig-assist units work with a service rig to complete the snubbing activity for a well. Self-contained and rack and pinion units do not require a service rig on site and are capable of snubbing and many other services traditionally completed by a service rig. Snubbing is primarily used to enhance natural gas production on gas wells.

 

Precision Rentals

 

Precision Rentals is a provider of oilfield rental equipment with four operating centres and 12 stocking points located throughout western Canada as well as a central technical support centre in Edmonton, Alberta. Most exploration and production companies do not own the specialty equipment used in oil and gas operations and rely on suppliers such as Precision Rentals for access to large inventories of drilling, completion and production equipment.

 

Precision Rentals’ inventory of equipment is marketed through three product categories: surface equipment; tubulars and well control equipment; and wellsite accommodation units. Surface equipment includes 2,300 drilling and production tanks and other equipment primarily associated with fluid handling. Tubular equipment includes approximately 9,000 joints of specialty-sized drill pipe and collars. Well-control equipment includes handling tools and equipment such as blowout preventers and diverter systems. Wellsite accommodations comprise 250 fully equipped units that provide office and lodging for oil and gas field personnel.

Precision Rentals also supplies the patented Vapour Tight Oil Battery which allows for single well production of oil with hydrogen sulphide (H₂S) content through the use of a 500 barrel NACE (National Association of Corrosion Engineers) certified vessel with gas metering and flaring capabilities.

 

Terra Water Systems

 

Terra’s principal role is the provision of portable on-site wastewater handling, treatment, and disposal expertise within a remote worksite environment. Terra’s equipment focuses on reducing environmental impacts from wastewater generated on-site.

 

The wastewater treatment units are designed and manufactured in-house and are built to industry leading standards. Terra provides regular servicing for all of its equipment and tests treated effluent samples to ensure the units are producing high quality treated effluent with no detectible odours. Terra has 76 portable treatment units comprising approximately 9% of the industry within the remote work site market in western Canada.

 

Terra’s fleet of 52 large units can accommodate camp sites of up to 50 people and several units can be combined to serve large-scale base camp configurations. To meet specific requests from customers, Terra has also developed a fleet of 24 smaller models which are better suited to lower volume requirements of remote locations that accommodate less than 15 people.

 

 

In connection with the Acquisition, Precision entered into a new US$1.2 billion senior secured credit facility with a syndicate of lenders consisting of the Royal Bank of Canada, RBC Capital Markets, Deutsche Bank AG Cayman Islands Branch, Deutsche Bank Securities Inc., HSBC Bank Canada, HSBC Bank USA, National Association and the Toronto-Dominion Bank (the “Commitment Banks”), and certain other lenders (the “Secured Facility”) that is guaranteed by the Trust and is comprised of US$800 million of term loans and a US$400 million revolving credit facility and also entered into a US$400 million unsecured credit facility (sometimes referred to as a bridge loan) with certain of the Commitment Banks (the “Unsecured Facility” and, together with the Secured Facility, the “Credit Facilities”) that is also guaranteed by the Trust. The Credit Facilities funded the cash portion of the Acquisition and refinanced the pre-closing Precision bank debt and certain pre-closing debt obligations of Grey Wolf. On February 18, 2009, the Trust received gross proceeds of US$172.5 million from the Trust Unit Offering. As a result of the Trust Unit Offering, the funds available under the Unsecured Facility were reduced to US$235 million. The Unsecured Facility was used in the repurchase of US$262.3 million principal amount of Grey Wolf convertible notes tendered for repurchase by holders under a change of control offer made by PDOS in the first quarter of 2009. Taking into account upfront issue discount and applicable fees, the all-in cost of capital borrowing under the Credit Facilities at December 31, 2008 was approximately 13%. See “General Development of the Business – Recent Developments” and “Three Year History – 2008”.

 

In order to complete a successful syndication of the Secured Facility, the Commitment Banks are entitled, prior to March 23, 2009 (extended at Precision’s option to May 22, 2009) in consultation with Precision, to change certain of the terms of the Credit Facilities including, without limitation, to implement additional increases in interest rates, original issue discounts and/or upfront fees, reallocate up to US$250 million between the Term Loan A Facility (as defined herein) and the Term Loan B Facility (as defined herein) (US$69 million (US$64 million on February 4, 2009 and US$5 million on March 26, 2009) of which has been reallocated from the Term Loan A Facility to the Term Loan B Facility as at March 27, 2009), reallocate up to US$150 million between the Secured Facility and the Unsecured Facility and amend certain covenants, financial ratio tests and other provisions for portions of the Secured Facility.

 

The following is a summary of the material terms of the Secured Facility and the Unsecured Facility. Potential investors may refer to copies of the credit agreements governing such facilities, which are available on SEDAR at www.sedar.com and EDGAR at www.sec.gov.

 

Secured Facility

 

Precision (as borrower) and the Trust (as a guarantor) have entered into a credit agreement dated December 23, 2008, as amended, governing the Secured Facility with the lenders parties thereto, Royal Bank

of Canada, as administrative agent, Deutsche Bank Securities Inc., as syndication agent, and HSBC Bank Canada and The Toronto-Dominion Bank, as co-documentation agents.

 

The Secured Facility provides senior secured financing of up to approximately US$1.2 billion, consisting of (after giving effect to the reallocation between the Term Loan A Facility and the Term Loan B Facility):

 

 

The terms of the Secured Facility include:

 

 

Up to US$200 million of the Revolving Credit Facility is available for letters of credit in United States dollars and/or Canadian dollars.

 

The interest rate on loans under the Secured Facility that are denominated in United States dollars is, at the option of Precision, either a margin over an adjusted United States base rate or a margin over a Eurodollar rate. The interest rate on loans denominated in Canadian dollars is, at the option of Precision, a margin over the Canadian prime rate or a margin over the bankers’ acceptance rate. Certain of the margins on the Revolving Credit Facility are subject to reduction based upon a leverage test.

 

The Revolving Credit Facility provides for: a commitment fee of 0.60% (subject to reduction based on a leverage test) on the unused portion; a fee on the outstanding amount of the letters of credit denominated in United States dollars equal to the margin applicable to the Eurodollar rate; and a fee on the outstanding amount of the letters of credit denominated in Canadian dollars equal to the margin applicable to the bankers’ acceptance rate (subject to reduction for non-financial letters of credit).

 

The Secured Facility requires the following amounts to be used as prepayments of the term loans: (i) 100% of the net cash proceeds of any incurrence of debt by the Trust, Precision or their subsidiaries (subject to certain exceptions); (ii) 100% of the net cash proceeds of certain sales or other dispositions of any assets belonging to the Trust, Precision or their subsidiaries, except to the extent the Trust, Precision or their subsidiaries use the proceeds from the sale or disposition to acquire, improve or repair assets useful in their business within a specified period; and (iii) 75% of the Trust’s annual excess cash flow, which percentage will be reduced to 50%, 25% and 0% if the Trust achieves and maintains a consolidated leverage ratio of less than 2.00 to 1.00, 1.25 to 1.00, and 0.75 to 1.00, respectively. In addition to mandatory prepayments, the Trust will have the option to prepay the loans under the Secured Facility generally without premium or penalty, other than customary “breakage” costs for Eurodollar rate loans.

 

The Term Loan A Facility is repayable in quarterly installments in aggregate annual amounts equal to 5% of the original principal amount thereof in the first year following the closing date, 10% of the original principal amount thereof in the second year following the closing date, 10% of the original principal amount thereof in the

third year following the closing date and 15% of the original principal amount thereof in the fourth and fifth years following the closing date, with the balance payable on the final maturity date thereof, which is December 23, 2013.

 

The Term Loan B Facility is repayable in quarterly installments in an aggregate annual amount equal to 5% of the original principal amount thereof with the balance payable on the final maturity date thereof, which is September 30, 2014.

 

The Trust, Precision and their material subsidiaries organized in Canada or the United States (other than certain excluded subsidiaries) and each other subsidiary that becomes a party to the collateral documents (collectively, the “Subsidiary Guarantors”) have pledged substantially all of their tangible and intangible assets (with certain exceptions) that are located in Canada or the United States as collateral, secured by a perfected first priority lien, subject to certain permitted liens. In addition, the Trust and the Subsidiary Guarantors have guaranteed the obligations of Precision under the Secured Facility.

 

The Secured Facility contains a number of covenants that, among other things, restrict, subject to certain exceptions, the Trust’s, Precision’s and their subsidiaries’ ability to:

 

 

The Secured Facility requires the Trust and Precision to comply with the following financial ratios:

 

 

The Secured Facility also contains customary affirmative covenants and events of default.

Unsecured Facility

 

Precision (as the borrower) and the Trust (as a guarantor) entered into a credit agreement dated December 23, 2008 governing the Unsecured Facility with the lenders parties thereto, Royal Bank of Canada, as syndication agent, Deutsche Bank AG Cayman Islands Branch, as administrative agent and HSBC Bank USA, National Association, as documentation agent. The Unsecured Facility originally provided senior unsecured financing of up to US$400 million of which approximately US$137.5 million was drawn after completion of the Acquisition and the related financing transactions. Net proceeds of US$165 million were received by the Trust in connection with the Trust Unit Offering in February 2009, which reduced the amount available under the Unsecured Facility by an equivalent amount. The Unsecured Facility, along with net proceeds from the Trust Unit Offering was used to fund the repurchase of Grey Wolf convertible notes tendered for repurchase by holders under a change of control offer made in the first quarter of 2009. See “General Development of the Business – Recent Developments” and “Three Year History – 2008.”

 

The loans under the Unsecured Facility bear interest at a fixed rate per annum of 17%, will initially mature on December 23, 2009, and, to the extent unpaid on that date, will be converted into term loans that will mature on December 23, 2016 provided that the loans will not be converted to term loans if an event of default has occurred under the Unsecured Facility or the Secured Facility or certain other conditions are not satisfied.

 

The loans under the Unsecured Facility are subject to mandatory prepayments from the net cash proceeds from the issuance or sale of any equity interests by the Trust (subject to certain exceptions), and, subject to the prior rights of the lenders under the Secured Facility, are also subject to mandatory prepayments from: (i) 100% of the net cash proceeds of any incurrence of debt by the Trust, Precision or their subsidiaries (subject to certain exceptions); and (ii) 100% of the net cash proceeds of certain sales or other dispositions of any assets belonging to the Trust, Precision or their subsidiaries, except to the extent the Trust, Precision or their subsidiaries use the proceeds from a sale or disposition to acquire, improve or repair assets to be used in their business within a specified period. In addition to mandatory prepayments, the Trust has the option to prepay the loans under the Unsecured Facility, without premium or penalty, prior to the exchange of the loans for exchange notes.

 

After the initial maturity date of the Unsecured Facility of December 23, 2009, each lender under the Unsecured Facility may request the Trust issue an exchange note bearing interest at a specified interest rate (to be calculated on the date of issuance of such exchange note based on the greater of 16.66% and a market-based interest rate cap) in replacement for the term loan (or a portion thereof) made under the Unsecured Facility. In the event that the Trust receives such a request, the Trust shall, as promptly as practicable after being requested to do so, among other things: (i) enter into an exchange note indenture pursuant to which the exchange notes will be issued and governed; (ii) enter into an exchange and registration rights agreement providing for, among other things, registration rights in respect of the exchange notes in favour of the holders thereof; and (iii) cause to be issued exchange notes in the same principal aggregate amount as the term loan being exchanged.

 

In addition, after June 30, 2009 (or after April 1, 2009 in certain circumstances), the lenders under the Unsecured Facility may require that debt securities be issued and sold to repay amounts outstanding under the Unsecured Facility, subject to certain specified terms and conditions. Precision has agreed to engage one or more investment banks to publicly sell or privately place debt securities in such circumstances, the proceeds of which will be used to repay outstanding loans under the Unsecured Facility. The Trust may also, at any time, issue equity or debt securities and Precision may, at any time, issue debt securities to repay outstanding loans under the Unsecured Facility.

 

The Unsecured Facility is unsecured and has been guaranteed by the Trust and each subsidiary of the Trust that guaranteed the Secured Facility.

 

The Unsecured Facility contains a number of covenants that, among other things, restrict, subject to certain exceptions, the Trust’s, Precision’s and their subsidiaries ability to:

 

 

 

The terms of the Unsecured Facility limit (subject to certain exceptions) the Trust’s ability to make distributions in the following circumstances:

 

 

The Unsecured Facility also contains customary affirmative covenants and events of default, including customary cross payment defaults.

 

General

 

The terms of the documents governing the Credit Facilities contain provisions that in effect ensure that the lenders have priority as to payment over the Unitholders in respect to the assets and income of the Trust and its subsidiaries. Amounts due and owing to the lenders under the Credit Facilities must be paid before any distributions can be made to Unitholders. This relative priority of payments could result in a temporary or permanent interruption of distributions to Unitholders. See “Risk Factors – The Trust’s debt service obligation may limit the amount of cash available for distributions” and “Distributions on the Trust Units have been suspended and may not be reinstated”.

 

As at December 31, 2008, approximately $1,087 million ($130.5 million plus US$781.1 million) was outstanding under the Secured Facility and approximately US$137.5 million was outstanding under the Unsecured Facility. On March 20, 2009, an additional US$98 million was borrowed under the Unsecured Facility to fund the repurchase of the Grey Wolf convertible notes, bringing the balance outstanding under this facility to US$235 million. The Revolving Credit Facility may be redrawn by Precision in the future to fund capital expenditures or for other corporate purposes.

 

At the time of the closing of the Acquisition, Grey Wolf had outstanding US$262.3 million aggregate principal amount of convertible notes, the obligations for which were assumed by PDOS. Pursuant to the terms of the convertible notes, during the first quarter of 2009, PDOS, as successor to Grey Wolf, made to the holders thereof a change of control offer to repurchase any or all of the outstanding convertible notes at 100% of the principal amount thereof, plus accrued but unpaid interest to the date of the repurchase, payable in cash. On March 23, 2009, US$262.3 million of Grey Wolf convertible notes were tendered for repurchase.

 

On February 9, 2009, the Trust announced that it had suspended cash distributions payable on both the Trust Units and Exchangeable Units for an indefinite period. See “General Development of the Business – Recent Developments” and “Risk Factors – Distributions on the Trust Units have been suspended and may not be reinstated”. This measure was taken in response to lower financial operating performance at the start of 2009 and will allow Precision to increase debt repayment capabilities and balance sheet strength. The Trust will continue to monitor its financial situation and evaluate the possibility of the reinstatement of monthly cash distributions based on the relevant factors in effect from time to time.

 

The following table sets forth the distributions (in Canadian dollars) paid or declared payable by the Trust on each Trust Unit for the three most recently completed financial years:

 

 

NOTE:

 

 

The following table sets forth the amount of payments (in Canadian dollars) paid or payable on each Exchangeable Unit for the three most recently completed financial years:

 

 

NOTE:

 

 

The historical distributions described above may not be reflective of future distributions, which are subject to review by the Board of Trustees taking into account the prevailing circumstances at the relevant time. See “Risk Factors – Distributions on the Trust Units are variable” and “Distribution on the Trust Units have been suspended and may not be reinstated.”

 

The terms of the documents governing the Credit Facilities contain provisions that in effect ensure that the lenders have priority as to payment over the Unitholders in respect to the assets and income of the Trust and its subsidiaries. Amounts due and owing to the lenders under the Credit Facilities must be paid before any distributions can be made to Unitholders. This relative priority of payments could result in a temporary or permanent interruption of distributions to Unitholders. See “Risk Factors – The Trust’s debt service obligations may limit the amount of cash available for distributions” and “Distribution on the Trust Units have been suspended and may not be reinstated”.

 

As of March 27, 2009, there were 206,065,086 Trust Units and 128,562 Exchangeable Units issued and outstanding. Each Exchangeable Unit can be exchanged into Trust Units at any time at the option of the holder based on the exchange ratio in effect at the date of exchange. Each Trust Unit entitles the holder thereof to one vote at any meeting of Unitholders, or in respect of any written resolution of Unitholders, and represents an equal undivided beneficial interest in any distribution from the Trust (whether from income, net realized capital gains or other amounts) and in any net assets of the Trust in the event of the termination or winding up of the Trust. All Trust Units rank among themselves equally and rateably without discrimination, preference or priority whatsoever. Each Trust 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 Trust Units held by such holder.

 

The Trust Units do not represent a traditional investment and should not be viewed by investors as “shares” in either the Trust or Precision. As holders of Trust Units, Unitholders do 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 market price of the Trust Units will be sensitive to, among other things, the anticipated distributable income from the Trust, as well as a variety of market conditions including, but not limited to, interest rates, commodity prices and the ability of the Trust to maintain and grow revenues. Changes in market conditions may adversely affect the trading price of the Trust Units. See “Risk Factors – Trust Units have certain risks not associated with traditional investments in the oil and natural gas services business”.

 

The Trust Units 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, 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.

 

The Trust is not a legally recognized entity within the relevant definitions of the Bankruptcy and Insolvency Act (Canada), the Companies’ Creditors Arrangement Act (Canada) and, in some cases, the Winding Up and Restructuring Act (Canada). As a result, in the event a restructuring of the Trust were necessary, the Trust would not be able to access the remedies available thereunder. In the event of a restructuring, the position of Unitholders may be different than that of the shareholders of a corporation.

 

Issuance of Trust Units

 

The Declaration of Trust provides that Trust Units, including rights, warrants, options or other securities convertible into or exchangeable for Trust Units, may be created, issued, sold and delivered on such terms and conditions and at such times as the Trustees (as defined herein) may determine. The Declaration of Trust also provides that the Trustees may authorize the creation and issuance of any type of debt securities or convertible debt securities of the Trust from time to time on such terms and conditions to such persons and for such consideration as the Trustees may determine.

 

Purchase of Trust Units

 

The Trust may from time to time purchase for cancellation some or all of the Trust Units (or other securities of the Trust which may be issued and outstanding from time to time) in the market, by private agreement or upon any recognized stock exchange on which such Trust Units are traded or pursuant to tenders received by the Trust upon request for tenders addressed to all holders of record of Trust Units, provided in each case that the Trustees have determined that such purchases are in the best interests of the Trust. Any such purchases may constitute an “issuer bid” under Canadian provincial securities legislation and must be conducted in accordance with the applicable requirements thereof.

Cash Distributions on Trust Units and Exchangeable Units

 

On February 9, 2009, the Trust announced that it had suspended cash distributions for an indefinite period. This measure was taken in response to lower financial operating performance at the start of 2009. The previously announced distribution of $0.04 per unit payable on February 17, 2009 to Trust and PDLP Unitholders of record on January 30, 2009 was unaffected by the suspension. The Trust will continue to monitor its financial situation and evaluate the possibility of the reinstatement of monthly cash distributions based on the relevant factors in effect from time to time. See “Risk Factors – Distributions on Trust Units have been suspended and may not be reinstated”.

 

Under the terms of the Declaration of Trust, the Trust is required to make distributions to holders of Trust Units in amounts at least equal to its taxable income. Distributions may be monthly or special and in cash or in Trust Units (“in-kind”) at the discretion of the Board of Trustees. To the extent that additional cash distributions are paid and capital expenditure or investment programs are not adjusted, debt levels may increase. In the event that a distribution in the form of Trust Units is declared, the terms of the Declaration of Trust require that the outstanding Trust Units be consolidated immediately subsequent to the distribution. The number of outstanding Trust Units would remain at the number outstanding immediately prior to the Trust Unit distribution and an amount equal to the distribution would be allocated to the holders of Trust Units. For greater clarity, holders of Trust Units do not receive additional Trust Units during an “in-kind” issuance and consolidation process.

 

The Board of Trustees reviews the Trust’s distribution policy from time to time. The actual amount distributed is dependent on various economic factors and distributions are declared at the discretion of the Board of Trustees. The actual cash flow available for distribution to Unitholders is a function of numerous factors, including the Trust’s, PDLP’s and Precision’s financial performance; debt covenants and obligations; working capital requirements; productive capacity maintenance expenditures and expansion capital expenditure requirements for the purchase of property, plant and equipment and number of Trust Units and Exchangeable Units issued and outstanding.

 

Distribution Reinvestment Plan

 

Effective December 18, 2006, the distribution reinvestment plan (the “DRIP”), outlined below, was suspended indefinitely by the Board of Trustees. Details of the DRIP are described more fully in the DRIP document available on the Trust’s website at www.precisiondrilling.com.

 

The DRIP was approved by the Board of Trustees on February 14, 2006. The DRIP was implemented on March 31, 2006 and allows certain holders of Trust Units, at their option, to reinvest monthly cash distributions to acquire additional Trust Units at the average market price as defined in the DRIP. Unless otherwise announced by the Trust, Trust Unitholders who are not residents of Canada are not eligible to participate, directly or indirectly, in the DRIP. Exchangeable Unitholders also are not eligible to participate in the DRIP. Generally, no brokerage fees or commissions are payable by participants for the purchase of Trust Units under the DRIP, but holders of Trust Units should make inquiries with their broker, investment dealer or financial institution through which their Trust Units are held as to any policies that may result in any fees or commissions being payable. The Trust reserved the right to amend, terminate or suspend the DRIP at any time provided that such amendment, termination or suspension does not prejudice the interests of holders of Trust Units.

 

Trust Unit Redemption Right

 

Trust Units are redeemable at any time on demand by the holders thereof upon delivery to the Trust of a duly completed and properly executed notice requesting the Trust to redeem Trust Units. Upon receipt of the notice to redeem Trust Units by the Trust, the holder thereof shall thereafter cease to have any rights with respect to the Trust Units tendered for redemption (other than to receive the redemption payment therefor unless the redemption payment is not made as required) including the right to receive any distributions thereon which are declared payable on a date subsequent to the day of receipt by the Trust of the notice requesting redemption.

Cash Redemption

 

Upon receipt by the Trust of the notice to redeem Trust Units, the tendering Unitholder will thereafter be entitled to receive a price per Trust Unit (the “Market Redemption Price”) equal to the lesser of: (a) 90% of the market price per Trust Unit on the principal stock exchange on which the Trust Units are listed (or, if the Trust Units are not listed on any such exchange, on the principal market on which the Trust Units are quoted for trading) during the period of the last ten trading days immediately prior to the date on which the Trust Units were tendered for redemption; and (b) the closing market price per Trust Unit on the principal stock exchange on which the Trust Units are listed (or, if the Trust Units are not listed on any such exchange, on the principal market on which the Trust Units are quoted for trading) on the date that the Trust Units were tendered for redemption.

 

The aggregate Market Redemption Price payable by the Trust in respect of the Trust Units tendered for redemption during any calendar month shall be satisfied by way of a cash payment on the last day of the calendar month following the month in which the Trust Units were tendered for redemption.

 

Unitholders will not receive cash upon the redemption of their Trust Units if:

 

 

 

 

 

In Specie Redemption

 

If a Unitholder is not entitled to receive cash upon the redemption of Trust Units as a result of one or more of the foregoing limitations, then each Trust Unit tendered for redemption will, subject to any applicable regulatory approvals, be redeemed by way of a distribution in specie. In such circumstances, the support agreement dated November 7, 2005, among the Trust, PDLP, the General Partner and Precision (the “Support Agreement”) provides that, upon the direction of the Trustees, PDLP will request partial repayment of the debt incurred by Precision in connection with its conversion into a trust structure and use the funds received therefrom to subscribe for new notes from Precision (the “Redemption Notes”) with a 15 year maturity and that will bear interest at a market rate to be determined by the Board of Directors of Precision, payable monthly in arrears on the 15th day of each calendar month that such Redemption Note is outstanding.

 

Pursuant to the terms of the Support Agreement, PDLP will distribute the Redemption Notes to the Trust as the holder of Class A limited partnership units of PDLP and the Trust will distribute these Redemption Notes to the redeeming Unitholders in satisfaction of the Market Redemption Price.

 

Pursuant to the terms of the Support Agreement, Precision has agreed to enter into a note indenture, prior to issuance of the Redemption Notes, that will set out the definitive terms of the Redemption Notes and provide for a note trustee. The Support Agreement provides that the Redemption Notes will be direct, subordinated obligations of

Precision ranking subordinate to all senior unsecured indebtedness. The Support Agreement further provides that the note indenture governing the Redemption Notes must contain events of default that are market standard for notes of this nature, the occurrence of which will result in the principal and any accrued and unpaid interest on the Redemption Notes being immediately due and payable.

 

Rather than distributing Redemption Notes in satisfaction of the Market Redemption Price for Trust Units tendered for redemption in the circumstances described above, the Trustees may, provided certain conditions have been met, determine to satisfy the Market Redemption Price by way of an alternate distribution in specie to redeeming Unitholders. In order to make an in specie distribution other than Redemption Notes to redeeming Unitholders or for the Trust to redeem Trust Units with its own indebtedness, the Trustees must have received both a written opinion of tax counsel that such a distribution of Trust assets does not have a material adverse effect on other Unitholders and a written opinion from a financial advisor that such Trust assets being distributed in lieu of Redemption Notes would be reasonably considered to be financially equivalent in value to Redemption Notes.

 

Where the Trust makes a distribution in specie of any assets of the Trust on the redemption of Trust Units by a Unitholder, the Trustees retain the discretion to designate to the account of such Unitholder any capital gains realized by the Trust or income of the Trust arising as a result of such redemption and distribution. It is anticipated that the redemption right described above will not be the primary mechanism for holders of Trust Units to dispose of their Trust Units. Redemption Notes or other Trust assets that may be distributed in specie to Unitholders in connection with a redemption will not be listed on any stock exchange, no market is expected to develop in Redemption Notes or other Trust assets and they may be subject to resale restrictions under applicable securities laws. Redemption Notes or other Trust assets so distributed may not be qualified investments for Exempt Plans (as defined herein) depending on the circumstances at the time. See “Risk Factors – Risks Relating to the Structure of the Trust”.

 

The aggregate Market Redemption Price payable by the Trust in respect of the Trust Units tendered for redemption during any calendar month shall be paid by the transfer, to or to the order of the Unitholder who exercised the right of redemption, on the last day of the calendar month following the month in which the Trust Units were tendered for redemption, of Redemption Notes or Trust assets, as the case may be.

 

Meetings of Unitholders

 

The Declaration of Trust provides that meetings of Unitholders must be called and held for, among other matters, the election of Trustees, the appointment or removal of the auditors of the Trust, the approval of amendments to the Declaration of Trust (except as described below under “Amendments to the Declaration of Trust”), the sale of all or substantially all of the Trust’s assets and the dissolution or termination of the Trust. Meetings of Unitholders will be called and held annually for, among other things, the election of Trustees and the appointment of the auditors of the Trust.

 

A meeting of Unitholders may be convened at any time and for any purpose by the Trustees and must be convened, except in certain circumstances, if requisitioned by the holders of not less than 5% of all votes entitled to be voted at a meeting of Unitholders (including the votes attached to Exchangeable Units (as defined herein) by virtue of the special voting unit (the “Special Voting Unit”) of the Trust issued pursuant to the Voting and Exchange Trust Agreement dated November 7, 2005, among the Trust, PDLP and Computershare Trust Company of Canada (the “Voting and Exchange Trust Agreement”)) by a written requisition. A requisition must, among other things, state in reasonable detail the business purpose for which the meeting is to be called.

 

Subject to the Voting and Exchange Trust Agreement, only Unitholders of record may attend and vote at meetings of Unitholders either in person or by proxy and a proxyholder need not be a Unitholder. Two persons present in person or represented by proxy and representing in the aggregate at least 5% of the votes attaching to all outstanding Trust Units shall constitute a quorum for the transaction of business at all such meetings. For the purposes of determining such quorum, the Special Voting Unit shall be regarded as representing outstanding Trust Units equivalent in number to the number of Exchangeable Units represented by proxy by Computershare Trust Company of Canada at such meeting.

The Declaration of Trust contains provisions as to the notice required and other procedures with respect to the calling and holding of meetings of Unitholders in accordance with the requirements of applicable laws.

 

Limitation on Non-Resident Ownership

 

It is in the best interest of Unitholders that the Trust always qualify as a “mutual fund trust” under the Tax Act and in order to ensure the maintenance of such status the Declaration of Trust provides, in part, that:

 

 

 

Amendments to the Declaration of Trust

 

The Trustees may, without the consent, approval or ratification of any of the Unitholders, amend the Declaration of Trust at any time:

 

 

 

 

 

 

Term of the Trust

 

The Unitholders may vote by special resolution to terminate the Trust at any meeting of the Unitholders duly called for that purpose, following which the Trustees shall commence to wind-up the affairs of the Trust (and shall thereafter be restricted to only such activities).

Unless the Trust is earlier terminated or extended by vote of the Unitholders, the Trustees shall commence to wind-up the affairs of the Trust on such date as may be determined by the Trustees, being not more than two years prior to the earlier of September 21, 2105 and the date which is one day prior to the date, if any, the Trust would otherwise be void by virtue of any applicable rule against perpetuities then in force in Alberta. In the event that the Trust is wound-up, the Trustees will sell and convert into money the assets of the Trust in one transaction or in a series of transactions at public or private sales and do all other acts appropriate to liquidate the property of the Trust, and shall in all respects act in accordance with the directions, if any, of the Unitholders (in respect of termination authorized pursuant to a special resolution). After paying, retiring or discharging or making provision for the payment, retirement or discharge of all known liabilities and obligations of the Trust and providing for indemnity against any other outstanding liabilities and obligations, the Trustees shall, subject to obtaining all necessary regulatory approvals, distribute the remaining part of the proceeds of the sale of the assets together with any cash forming part of the Trust’s assets pro-rata among the Unitholders.

 

Take-Over Bids

 

The Declaration of Trust contains provisions to the effect that if a take-over bid, as defined under the Securities Act (Alberta), is made for the Trust Units and not less than 90% of the Trust Units (including Trust Units issuable upon the conversion, exercise or exchange of any securities exchangeable into Trust Units but not including any Trust Units held at the date of the take-over bid by or on behalf of, or issuable to, the offeror or an affiliate or associate of the offeror) are taken up and paid for by the offeror, the offeror will be entitled to acquire the Trust Units and Exchangeable Units held by Unitholders who did not accept the take-over bid on the terms offered by the offeror.

 

Special Voting Unit

 

Pursuant to the provisions of the Declaration of Trust a Special Voting Unit was issued to Computershare Trust Company of Canada, as the initial trustee (the “Voting and Exchange Trustee”) under a Voting and Exchange Trust Agreement, which allows the Special Voting Unit to be voted by the Voting and Exchange Trustee for and on behalf of the holders of Exchangeable Units. The Voting and Exchange Trustee is only entitled to the number of votes at meetings of Trust Unit holders which is equal to the number of Exchangeable Units registered and outstanding on the record date in respect of each meeting. The Voting and Exchange Trustee will be obligated to vote the Special Voting Unit at meetings of Trust Unit holders pursuant to instructions of the holders of Exchangeable Units. However, if no instructions are provided by holders of Exchangeable Units, the votes associated therewith in the Special Voting Unit will be withheld from voting.

 

As a result of the Plan of Arrangement, PDLP issued 122,512,799 Class A Limited Partnership Units to the Trust on November 7, 2005 (the effective date of the reorganization of the business of Precision into the Trust). An additional 1,840,122 Class A Limited Partnership Units were issued between November 7 and November 22, 2005 inclusive (the last date on which holders of New Options could exercise their options pursuant to the Plan of Arrangement). As of December 31, 2008, there were 125,606,341 Class A Limited Partnership Units issued to the Trust. As of March 27, 2009 there were 125,629,362 Class A Limited Partnership Units issued to the Trust.

 

Also, as part of the Plan of Arrangement, PDLP issued 1,108,382 Exchangeable Units to certain shareholders of Precision who elected to receive such Exchangeable Units instead of Trust Units. As of December 31, 2008, 151,583 Exchangeable Units remained outstanding. As of March 27, 2009, 128,562 Exchangeable Units remained outstanding. The Exchangeable Units have the economic equivalence of the Trust Units and the principal terms of the Exchangeable Units are:

 

 

 

 

 

 

In addition to the foregoing, the Support Agreement requires the Trust or its affiliates to take all actions and do all things as are reasonably necessary or desirable to enable and permit PDLP to meet all of its obligations with respect to the Exchangeable Units and such agreement also provides that the Trust will not, without the prior approval of PDLP and holders of Exchangeable Units:

 

 

 

 

 

 

 

 

unless the economic equivalent on a per Exchangeable Unit basis of such rights, options, warrants, securities, shares, evidences of indebtedness or other assets is issued or loaned simultaneously to the holders of Exchangeable Units.

 

Payments on Exchangeable Units

 

Holders of Exchangeable Units will be entitled to receive, and PDLP will make, subject to applicable law, on each date on which the Board of Trustees declares a distribution on the Trust Units, a loan in respect of each Exchangeable Unit in an amount in cash for each Exchangeable Unit equal to the distribution declared on each Trust Unit; or in the case of a distribution declared on the Trust Units in securities or property other than cash or Trust Units, a loan in the amount equal to the value of such type and amount of securities or property which is the same as, or economically equivalent to, the type and amount of property declared as a distribution on each Trust Unit.

 

On February 9, 2009, the Trust announced that it had suspended cash distributions for an indefinite period. This measure was taken in response to lower financial operating performance at the start of 2009. The previously announced distribution of $0.04 per unit payable on February 17, 2009 to Trust and PDLP unitholders of record on January 30, 2009 was unaffected by the suspension. The Trust will continue to monitor its financial situation and evaluate the possibility of the reinstatement of monthly cash distributions based on the relevant factors in effect from time to time. See “Risk Factors – Distributions on Trust Units have been suspended and may not be reinstated”.

Any amount loaned in respect of Exchangeable Units pursuant to these distribution entitlements will not constitute a distribution of profits or other compensation by way of income in respect of such Exchangeable Units, rather, will constitute a non-interest bearing loan of the amount thereof, or in the case of property, a loan in the amount equal to the fair market value thereof as determined in good faith by the board of directors of the General Partner, which loan is repayable on the first day of January of the calendar year next following the date of the loan or such earlier date as may be applicable.

 

On the date on which the loan is repayable, PDLP will make a distribution in respect of each Exchangeable Unit equal to the amount of the loan outstanding in respect thereof. PDLP will set off and apply the amount of any such distribution payment against the obligation of any holder of Exchangeable Units under any loan outstanding in respect thereof.

 

In the event that a payment in the form of Trust Units is declared the outstanding units will be consolidated immediately subsequent to the payment. The number of outstanding Exchangeable Units would remain at the number outstanding immediately prior to the Exchangeable Unit payment and an amount equal to the payment would be allocated to the holders of Exchangeable Units. For greater clarity, holders of Exchangeable Units do not receive additional Exchangeable Units during an in-kind issuance and consolidation process.

 

The General Partner

 

The General Partner of PDLP is a direct wholly-owned subsidiary of the Trust. The General Partner is the managing partner of PDLP and has the exclusive authority to manage the business and affairs of PDLP, to make all decisions regarding the business of PDLP and to bind PDLP.

 

Partnership Units

 

PDLP is authorized to issue an unlimited number of PDLP A Units and Exchangeable Units. The General Partner may, in respect of PDLP, also issue at any time units of any class or series or secured and unsecured debt obligations, debt obligations convertible into any class or series of units, or options, warrants, rights, appreciation rights or subscription rights relating to any class or series of units, to the General Partner, to limited partners or any other person who is not a non-resident of Canada and is not exempt from tax under Part I of the Tax Act (as defined herein). Each unit ranks equally with each other unit of the same class or series and entitles the holder thereof to the same rights and obligations as the holder of any other unit of the same class or series and no limited partner is entitled to any privilege, priority or preference in relation to any other limited partner holding units of the same class or series.

 

In addition, on a distribution of assets in the event of the liquidation, dissolution or winding-up of PDLP, whether voluntary or involuntary, or any other distribution of the assets of PDLP among its Partners for the purpose of winding-up its affairs: (a) the holders of PDLP A Units will be distributed an amount equal to the aggregate of all liabilities of the Trust; and (b) the balance of the assets of PDLP will be distributed: (i) as to that proportion of such assets equal to the result obtained by dividing the amount of such assets by the sum of the number of Exchangeable Units and the number of Trust Units, in each case as outstanding on the date of such distribution, in respect of each Exchangeable Unit outstanding; and (ii) as to the remaining portion of such assets, to the holders of PDLP A Units rateably in accordance with the number of PDLP A Units held thereby.

 

Amendment and Approval

 

An amendment to the Limited Partnership Agreement may be proposed by the General Partner and, subject to the following limitations, will be deemed to be effective if approved by the General Partner:

 

 

 

 

 

Partners must be notified of the full details of any amendment to the Limited Partnership Agreement within 30 days of the effective date of such amendment.

 

Trading Price and Volume of Trust Units

 

The Trust Units are listed for trading under the symbol “PD.UN” on the Toronto Stock Exchange (the “TSX”) and under the symbol “PDS” on the New York Stock Exchange (the “NYSE”). The following table sets forth the price range and trading volumes for the Trust Units on each of the TSX and NYSE, as reported by each of the TSX and NYSE, for the periods indicated:

 

Prior Sales

 

The following table summarizes the issuances of Trust Units within the twelve month period ending December 31, 2008⁽¹⁾.

 

 

NOTES:

 

Pursuant to the terms of the Declaration of Trust, the board of trustees of the Trust (the “Board of Trustees” and, each member thereof, a “Trustee”) consists of three members who are responsible for supervising the activities and managing the affairs of the Trust.

 

The Declaration of Trust provides that, subject to its terms and conditions, the Board of Trustees has full, absolute and exclusive power, control, authority and discretion over the Trust assets and the management of the affairs of the Trust to the same extent as if the Board of Trustees were the sole and absolute legal and beneficial owners of the Trust assets.

 

Trustees are elected at each annual meeting of Unitholders to hold office for a term expiring at the close of the next annual meeting. A quorum of the Board of Trustees is a majority of the Trustees then holding office. A majority of the Trustees may fill a vacancy in the Board of Trustees, except a vacancy resulting from an increase in the number of Trustees or from a failure of the Unitholders to elect the required number of Trustees. In the absence of a quorum of Trustees, or if the vacancy has arisen from a failure of the Unitholders to elect the required number of Trustees, the Board of Trustees will promptly call a special meeting of the Unitholders to fill the vacancy. If the Board of Trustees fails to call that meeting or if there are no Trustees then in office, any Unitholder may call the meeting. Except as otherwise provided in the Declaration of Trust, the Board of Trustees may, between annual meetings of Unitholders, appoint one or more additional Trustees to serve until the next annual meeting of Unitholders, but the number of additional Trustees will not at any time exceed one-third of the number of Trustees who held office at the expiration of the immediately preceding annual meeting of Unitholders.

 

Any one or more of the Trustees may resign upon 30 Days written notice to the Trust and may be removed by an ordinary resolution of the Unitholders and the vacancy created by such removal may be filled at the same meeting, failing which it may be filled by the affirmative vote of a quorum of the Board of Trustees.

 

The following table sets forth, for each Trustee and Director and each officer of Precision: his or her name; municipality, province or state and country of residence; all positions and offices now held by him or her; the month and year in which he or she was first elected a Trustee, Director or officer; and his or her principal occupation during the preceding five years.

 

 

NOTES:

 

At March 27, 2009, the Trustees, Directors and officers of Precision, as a group, beneficially owned, directly or indirectly, or controlled or directed over 1,062,577 Trust Units and no Exchangeable Units, or approximately 0.516% of the issued and outstanding Trust Units and Exchangeable Units, which aggregate number includes a total of 73,536 Trust Units credited to the accounts of non-management Directors pursuant to a deferred trust unit plan approved by Unitholders on May 7, 2008.

 

 

Corporate Cease Trade Orders

 

To the knowledge of the Trust, no Trustee, Director or executive officer of the Trust or Precision, as applicable, is as at the date hereof or has been, within the 10 years before the date hereof, a director, chief executive officer or chief financial officer of any company that: (i) was subject to an order that was issued while the director or executive officer was acting in the capacity as director, chief executive officer or chief financial officer; or (ii) was subject to an order that was issued after the director or executive officer ceased to be a director, chief executive officer or chief financial officer and which resulted from an event that occurred while that person was acting in the capacity as director, chief executive officer or chief financial officer.

Corporate Bankruptcies

 

To the knowledge of the Trust, no Trustee, Director, executive officer or controlling securityholder of the Trust or Precision, as applicable, is, as of the date hereof, or has been within the 10 years before the date hereof, a director or executive officer of any company that, while that person was acting in that 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.

 

Personal Bankruptcies

 

To the knowledge of the Trust, no Trustee, Director, executive officer or controlling securityholder of the Trust or Precision, as applicable, has, within the 10 years before the date hereof, become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or became subject to or instituted any proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold such person’s assets.

 

Penalties or Sanctions

 

To the knowledge of the Trust, no Trustee, Director, executive officer or controlling securityholder of the Trust or Precision, as applicable, has been subject to: (i) 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 (ii) any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable investor in making an investment decision.

 

 

Audit Committee Charter

 

The Audit Committee Charter and Terms of Reference (the “Audit Committee Charter”) of Precision is set forth in Appendix 1 of this Annual Information Form.

 

Composition of the Audit Committee

 

The Audit Committee of Precision currently consists of Patrick M. Murray (Chairman), Robert L. Phillips, Allen R. Hagerman, Robert J.S. Gibson and William T. Donovan. The Audit Committee is a standing committee appointed by the Board of Directors to assist the Board of Directors in fulfilling its oversight responsibilities with respect to financial reporting by Precision and the Trust, in its own capacity and in its capacity as the administrator of the Trust. Each member of the Audit Committee is independent and none received, directly or indirectly, any compensation from Precision or the Trust other than for services as a member of the Board of Trustees or the Board of Directors and its committees. All members of the Audit Committee are “financially literate” (as that term is defined in Multilateral Instrument 52-110 – Audit Committees). In addition, the Board of Directors has determined that each of Messrs. Murray, Hagerman and Donovan qualify as “audit committee financial experts” (as that term is defined in the United States Sarbanes-Oxley Act of 2002).

 

Relevant Education and Experience

 

In addition to each member’s general business experience, the education and experience of each Audit Committee member that is relevant to the performance of his responsibilities as an Audit Committee member are as follows: Patrick M. Murray (Chair) is the retired Chairman, President and Chief Executive Officer of Dresser, Inc. Mr. Murray received a B.Sc. degree in Accounting in 1964 from Seton Hall University and an MBA in 1973. Mr. Murray has been a member of Precision’s Audit Committee since April 2003. Robert L. Phillips’ experience includes executive level positions at several corporations and board membership on several public corporations. Mr. Phillips received a B.Sc. in Chemical Engineering in 1971 and a LLB in 1976 from the University of Alberta. Mr. Phillips was appointed to the Audit Committee in December, 2008. Allen R. Hagerman is the Executive Vice

President, Canadian Oil Sands Limited and was Chief Financial Officer of Canadian Oil Sands Limited from 2003 to 2007. Mr. Hagerman received a B. Comm. from the University of Alberta in 1973, his Chartered Accountant designation in 1975 and his FCA designation in 1996 from the Institute of Chartered Accountants of Alberta. Mr. Hagerman also received an MBA from the Harvard School of Business in 1977. Mr. Hagerman was appointed to the Audit Committee in May 2007. Robert J. S. Gibson is the President of Stuart & Company Limited and has been a member of the Audit Committee since June 1997. William T. Donovan is the Chairman of Rockland Industrial Holdings LLC of Milwaukee, Wisconsin and was a director of Grey Wolf from 1997 until the date of the Acquisition. Mr. Donovan has a B.Sc (1974) and an MBA (1976) from the University of Notre Dame. Mr. Donovan was appointed to the Audit Committee in December 2008.

 

Pre-approval Policies and Procedures

 

Under the Audit Committee Charter, the Audit Committee is required to approve the terms of the engagement and the compensation to be paid to the external auditor of the Trust. In addition, the Audit Committee is required to review and pre-approve all permitted non-audit services to be provided to the Trust or any affiliated entities by the external auditors or any of their affiliates subject to any de minimus exception allowed by applicable law. The Audit Committee may delegate to one or more designated members of the Audit Committee the authority to pre-approve non-audit services. Non-audit services that have been pre-approved by any such delegate must be presented to the Audit Committee at its first scheduled meeting following such pre-approval.

 

The Audit Committee implemented specific procedures regarding the pre-approval of services to be provided by Precision’s external auditor commencing in 2003. These procedures specify certain prohibited services that are not to be performed by the external auditor. In addition, these procedures require that at least annually, prior to the period in which the services are proposed to be provided, Precision’s management will, in conjunction with the Trust’s external auditor, prepare and submit to the Audit Committee a complete list of all proposed services to be provided to Precision and the Trust by the external auditor. Under the Audit Committee pre-approval procedures, for those services proposed to be provided by the external auditor that have not been previously approved by the Audit Committee, the Chairman of the Audit Committee has the authority to grant pre-approvals of such services. The decision to pre-approve a service covered under this procedure is required to be presented to the full Audit Committee at the next scheduled meeting. At each of the Audit Committee’s regular meetings, the Audit Committee is to be provided with an update as to the status of services previously pre-approved.

 

Pursuant to these procedures, since their implementation in 2003, 100% of each of the services provided by the Trust’s external auditor relating to the fees reported as audit, audit-related, tax and all other fees were pre-approved by the Audit Committee or its delegate.

 

Audit Fees

 

The following table provides information about fees billed to the Trust and its affiliates for professional services rendered by KPMG LLP, the Trust’s external auditor, during fiscal 2008 and 2007:

 

(in thousands of Canadian dollars)

 

 

Audit fees consist of fees for the audit of the Trust’s annual financial statements or services that are normally provided in connection with statutory and regulatory filings or engagements and include fees related to Sarbanes-Oxley section 404 compliance. The increase in audit fees from 2007 to 2008 was primarily due to the Acquisition.

Audit-related fees consist of fees for assurance and related services that are reasonably related to the performance of the audit or review of the Trust’s financial statements and are not reported as audit fees. There were no such fees incurred in 2007 or 2008.

 

Tax fees consist of fees for tax compliance services, tax advice and tax planning. During fiscal 2008 and 2007 the services provided in this category included assistance and advice in relation to the preparation of income tax returns for the Trust and its subsidiaries, expatriate tax compliance matters, tax advice and planning, commodity tax and property tax consultation.

 

All other fees consist of fees for those services provided to the Trust. In 2008, these fees were for services rendered with respect to the Trust’s International Financial Reporting Standards conversion project. There were no such fees in 2007.

 

Except as described herein under the heading “Risk Factors – Risks Relating to the Acquisition – PDOS, as the successor to Grey Wolf, is subject to litigation regarding the Acquisition”, the Trust is not involved in any legal proceedings that it believes might have a material adverse effect on its business or results of operations.

 

During the course of the year ended December 31, 2008, the Trust was not subject to any penalties or sanctions imposed by a court in relation to securities legislation or by securities regulatory authority, was not the subject of any other penalties or sanctions imposed by a court or regulatory authority and did not enter into any settlement agreements with a court relating to securities legislation or with a securities regulatory authority.

 

There were no material interests, direct or indirect, of the Trustees, Directors and executive officers of Precision, any Unitholder who beneficially owns more than 10% of the outstanding Trust Units or Exchangeable Units, or any known associate or affiliate of such persons, in any transaction within the last fiscal year and in any proposed transaction which has materially affected or is reasonably expected to materially affect the Trust.

 

Computershare Trust Company of Canada, located in Calgary, Alberta, is the transfer agent and registrar of the Trust Units and the Special Voting and Exchange Trustee for the holders of Exchangeable Units. In the United States, the co-transfer agent for the Trust is Computershare Trust Company NA located in Golden, Colorado.

 

The only material contracts entered into by Precision, the Trust or PDLP during the most recently completed financial year, or before the most recently completed financial year that are still in effect, other than contracts during the ordinary course of business, are as follows:

 

Declaration of Trust

 

See “Corporate Structure – The Trust” and “Description of Capital Structure”.

 

Limited Partnership Agreement

 

See “Corporate Structure – Precision Drilling Limited Partnership” and “Description of Capital Structure”.

 

Voting and Exchange Trust Agreement

 

See “Description of Capital Structure”.

Support Agreement

 

See “Description of Capital Structure”.

 

Administration Agreement

 

See “Corporate Structure – Administration Agreement”.

 

Merger Agreement

 

See “General Development of the Business – Three Year History”.

 

Secured Facility Agreement

 

See “Description of the Business of Precision – Material Debt”.

 

Unsecured Facility Agreement

 

See “Description of the Business of Precision – Material Debt”.

 

Copies of the material agreements described above have been filed by the Trust on SEDAR and are available online at www.sedar.com.

 

KPMG LLP, the Trust’s external auditor, has prepared an opinion with respect to the Trust’s consolidated financial statements as at and for the year ended December 31, 2008. In connection with the audit of the Trust’s annual financial statements for the year ended December 31, 2008, the auditors confirmed that they are independent within the meaning of the Rules of Professional Conduct of the Institute of Chartered Accountants of Alberta.

 

As of the fiscal year ended December 31, 2008, an evaluation of the effectiveness of the Trust’s “disclosure controls and procedures” (as such term is defined in Rules 13a-15(e) and 15d-15(e) of the United States Securities Exchange Act of 1934, as amended (the “Exchange Act”)) was carried out by the Trust’s management with the participation of the principal executive officer and principal financial and accounting officer of Precision on behalf of the Trust. Based upon that evaluation, the principal executive officer and the principal financial and accounting officer of Precision have concluded that as of the end of that fiscal year, the Trust’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Trust in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and is accumulated and communicated to the Trust’s management, including the principal executive officer and principal financial and accounting officer of Precision, to allow timely decisions regarding required disclosure.

 

It should be noted that while Precision’s principal executive officer and principal financial and accounting officer believe that the Trust’s disclosure controls and procedures provide a reasonable level of assurance that they are effective, they do not expect that the Trust’s disclosure controls and procedures or internal control over financial reporting will prevent all errors and fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

 

With the Acquisition occurring close to the fiscal year end, management of Precision is not required to conclude as to the effectiveness of disclosure controls and procedures within Grey Wolf. As such, the principal executive officer and principal financial accounting officer have not concluded as to the design and effectiveness of disclosure controls and procedures in Grey Wolf.

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and preparation of financial statements for external purposes in accordance with Canadian generally accepted accounting principles (“Canadian GAAP”) including reconciliation to United States generally accepted accounting principles (“U.S. GAAP”).

 

Under the supervision and with the participation of management, including the principal executive officer and principal financial and accounting officer, Precision conducted an evaluation of the design and effectiveness of our internal control over financial reporting as of the end of the fiscal year based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. On December 23, 2008, Precision acquired Grey Wolf and began consolidating the operations from that date. Based on the proximity of this acquisition to year end, management has excluded this business from its evaluation of the effectiveness of Precision’s internal control over financial reporting as of December 31, 2008. The net earnings attributable to this business represented approximately 1% of the Trust’s consolidated net earnings for the year ended December 31, 2008, and its aggregate total assets represented approximately 56% of the consolidated total assets as at December 31, 2008.

 

Based on this evaluation, management concluded that as of December 31, 2008, the Trust did maintain effective internal control over financial reporting.

 

Management’s Discussion and Analysis relating to the consolidated financial statements for the fiscal year ended December 31, 2008 forms part of the Trust’s 2008 Annual Report and is incorporated by reference in this Annual Information Form. Management’s Discussion and Analysis appears on pages 2 to 53 of the 2008 Annual Report.

 

Additional information concerning the Trust is available through the Internet on SEDAR which may be accessed at www.sedar.com. Copies of such information may also be obtained without charge, on the Trust’s website at www.precisiondrilling.com or by request to the Vice President, General Counsel and Corporate Secretary, at the offices of Precision at 4200, 150 – 6th Avenue S.W., Calgary, Alberta, Canada T2P 3Y7; by email at corporatesecretary@precisiondrilling.com; by telephone at (403) 716-4500; and by facsimile at (403) 264-0251.

 

Additional information, including information regarding Precision’s Trustees’, Directors’ and officers’ remuneration, will be contained in the Management Information Circular of the Trust provided for the Annual and Special Meeting of Unitholders of the Trust to be held on May 6, 2009, and filed on SEDAR. Additional financial information is provided in the Trust’s annual consolidated financial statements and management’s discussion and analysis for the year ended December 31, 2008 which are contained in the Annual Report. Copies of such documents may be obtained in the manner set forth above.

 

An investment in the Trust Units and Exchangeable Units is subject to certain risks. Investors should carefully review and consider the risks described below and all other information contained in this Annual Information Form before making an investment decision and consult their own experts where necessary.

 

Precision may be unable to obtain access to additional financing.

 

Precision may find it necessary in the future to obtain additional debt or equity financing through the Trust to support ongoing operations, to undertake capital expenditures, to repay existing indebtedness or to undertake acquisitions or other business combination transactions. There can be no assurance that additional financing will be available to Precision when needed or on terms acceptable or favourable to Precision. Precision’s inability to raise financing to support ongoing operations or to fund capital expenditures, acquisitions, debt repayments or other business combination transactions could limit Precision’s growth and may have a material adverse effect upon Precision. See “Description of the Business of Precision – Material Debt”.

 

The Trust may not be able to obtain financing or obtain financing on acceptable terms because of the deterioration of the credit and capital markets.

 

On February 19, 2009, the Trust announced that the Senior Note Offering had been postponed due to currently unfavourable market conditions. Global financial markets and economic conditions have been, and continue to be, disrupted and volatile. The debt and equity capital markets have been exceedingly distressed. The re-pricing of credit risk and the current weak economic conditions have made, and will likely continue to make, it difficult to obtain funding on acceptable terms, if at all. In particular, the cost of raising money in the debt and equity capital markets has increased substantially, while the availability of funds from those markets has diminished significantly. Also, as a result of concerns about the stability of financial markets generally and the solvency of counterparties specifically, the cost of obtaining money from the credit markets has increased as many lenders and institutional investors have increased interest rates, enacted tighter lending standards, refused to refinance existing debt at maturity at all or on terms similar to the Trust’s current debt and reduced and, in some cases, ceased to provide funding to borrowers.

 

If the Trust’s business does not generate sufficient cash flow from operations to enable it to pay its indebtedness or to fund its other liquidity needs, then, as a consequence of these changes in the credit markets, the Trust cannot assure that future borrowings will be available to it under its credit facilities in sufficient amounts, either because the Trust’s lending counterparties may be unwilling or unable to meet their funding obligations or because the Trust’s borrowing base may decrease as a result of lower asset valuations, operating difficulties, lending requirements or regulations, or for any other reason. Moreover, even if lenders and institutional investors are willing and able to provide adequate funding, interest rates may rise in the future and therefore increase the cost of borrowing the Trust incurs on any of its floating rate debt. Finally, the Trust may need to refinance all or a portion of its indebtedness on or before maturity, sell assets, reduce or delay capital expenditures, seek additional equity financing or seek third-party financing to satisfy such obligations. The Trust cannot assure that it will be able to refinance any of its indebtedness on commercially reasonable terms or at all. There can be no assurance that the Trust’s business, liquidity, financial condition, or results of operations will not be materially and adversely impacted in the future as a result of the existing or future credit market conditions. See “General Development of the Business – Recent Developments”.

 

The Trust’s debt service obligations may limit the amount of cash available for distributions.

 

The Trust and its affiliates may, from time to time, finance a significant portion of their growth (either from acquisitions or capital expenditure additions) and operations through debt. Amounts paid in respect of interest and principal on debt incurred by Precision and its affiliates may impair Precision’s ability to satisfy its obligations under its debt instruments. Variations in interest rates and scheduled principal repayments could result in significant changes in the amount required to be applied to service debt before payment of inter-entity debt. This may result in lower levels of cash available for distribution by the Trust. Ultimately, subordination agreements or other debt obligations (including the terms of the Credit Facilities, see “Description of the Business of Precision – Material Debt”) could preclude distributions altogether. See “Risk Factors – Risks Relating to the Acquisition”.

 

The terms of the documents governing the Credit Facilities contain provisions that in effect ensure that the lenders have priority as to payment over the Unitholders in respect to the assets and income of the Trust and its subsidiaries. Amounts due and owing to the lenders under the Credit Facilities must be paid before any distributions

can be made to Unitholders. This relative priority of payments could result in a temporary or permanent interruption of distributions to Unitholders. See “Risk Factors – Distributions on the Trust Units have been suspended and may not be reinstated”.

 

Sales of additional Trust Units could negatively affect the value of the Trust Units.

 

The Trust may issue additional Trust Units in the future to fund the requirements of Precision and other entities now or hereafter owned directly or indirectly by the Trust. Such additional Trust Units may be issued without the approval of Unitholders. Unitholders have no pre-emptive rights in connection with such additional issues. The Board of Trustees has discretion in connection with the price and the other terms of the issue of such additional Trust Units. See “General Development of the Business – Recent Developments”.

 

The price of Trust Units may experience volatility.

 

The price of Trust Units may be volatile. Some of the factors that could affect the price of the Trust Units are increases or decreases in revenue or earnings, changes in cash distributions made by the Trust, changes in revenue or earnings estimates by the investment community, the ability of the Trust to implement its integration strategy and to realize the expected benefits from the Acquisition and speculation in the press or investment community about the Trust’s financial condition or results of operations. General market conditions and Canadian, United States or international economic factors and political events unrelated to the performance of the Trust may also affect the price of Trust Units. For these reasons, investors should not rely on past trends in the price of Trust Units to predict the future price of Trust Units or the Trust’s financial results. Precision has experienced a reduction in the demand for its services in late 2008 and early 2009 in correlation with the significant downward trend in oil and natural gas prices over the same period. See “General Development of the Business – Recent Developments”.

 

Distributions on the Trust Units have been suspended and may not be reinstated.

 

On February 9, 2009, the Trust announced that it had suspended cash distributions for an indefinite period. The Trust’s ability to resume making cash distributions, if any, in the future and the actual cash flow available for distribution to Unitholders is a function of numerous factors including, among other things, the Trust’s, Precision’s and PDLP’s financial performance; debt covenants and obligations; working capital requirements; future upgrade capital expenditures and future expansion capital expenditure requirements for the purchase of property, plant and equipment; tax obligations; the impact of interest rates and/or foreign exchange rates; the growth of the general economy; the price of crude oil and natural gas; weather; and number of Trust Units and Exchangeable Units issued and outstanding. Cash distributions may or may not be reinstated, may be reinstated at amounts different than historical or recent amounts (and subsequently increased or reduced) or may be eliminated entirely depending on the Trust’s operations and the performance of its assets. The market value of the Trust Units may deteriorate if the Trust is unable to reinstate its cash distributions or otherwise meet cash distribution expectations in the future, and that deterioration may be material. See “Risk Factors – The Trust is dependent on Precision and its subsidiaries for the amount of cash available for distributions” and “Distributions on the Trust Units are variable”.

 

Asset valuation variability could negatively affect the value of the Trust Units.

 

The net asset value of the assets of the Trust from time to time will vary depending upon factors which are beyond the control of the Trust. The trading price of the Trust Units also fluctuates due to factors beyond the control of the Trust and such trading prices may be greater than the net asset value of the Trust’s assets.

 

The Trust could face negative tax consequences for previous transactions.

 

The business and operations of Precision prior to completion of the Plan of Arrangement pursuant to which former shareholders of Precision were issued Trust Units were complex and Precision has executed a number of significant financings, business combinations, acquisitions and dispositions over the course of its history. The computation of income taxes payable as a result of these transactions involves many complex factors as well as Precision’s interpretation of relevant tax legislation and regulations. Management believes that the provision for income tax is adequate and in accordance with generally accepted accounting principles and applicable legislation

and regulations. However, there are a number of tax filing positions that can still be the subject of review by taxation authorities who may successfully challenge Precision’s interpretation of the applicable tax legislation and regulations, with the result that additional taxes could be payable by Precision and the amount payable without penalties could be up to $382 million as of December 31, 2008. Any increase in tax liability would reduce the net assets of and funds available to the Trust.

 

The Trust received Notices of Reassessment from a provincial taxing authority relating to a prior period tax filing position in the total amount of $58 million as of December 31, 2008. This $58 million has been paid, recorded as a long-term receivable and included in the $382 million tax contingency disclosed in the preceding paragraph. The income tax-related portion of the applicable reassessments and the interest portion is $38 million and $20 million, respectively.

 

The Trust is dependent on Precision and its subsidiaries for the amount of cash available for distributions.

 

To receive cash available for distribution, the Trust is dependent on the operations and assets of Precision (as well as its direct and indirect subsidiaries, including PDOS, the former Grey Wolf) through its interest in PDLP, which in turn owns 100% of the shares of Precision and the Promissory Note. Distributions to Unitholders are dependent on the ability of Precision to make principal and interest payments on the Promissory Note, dividends and return of capital payments. The actual amount of cash available for distribution is dependent upon numerous factors relating to the business of Precision including profitability, changes in revenue, fluctuations in working capital, capital expenditure levels, applicable laws, compliance with contracts, contractual restrictions contained in the instruments governing its indebtedness, the impact of interest rates, the growth of the general economy, industry activity, the price of crude oil and natural gas, changes to tax laws, weather, future capital requirements and the number of Trust Units and Exchangeable Units issued and outstanding and potential tax liabilities resulting from any successful reassessments of prior taxation years by taxation authorities.

 

Any reduction in the amount of cash available for distribution, or actually distributed, by Precision to the Trust will adversely impact or limit the amount of cash available for distributions by the Trust to Unitholders. The market value of the Trust Units may deteriorate if the Trust is unable to meet distribution expectations in the future, and such deterioration may be material. See “Risk Factors – Distributions on the Trust Units are variable” and “Distributions on the Trust Units have been suspended and may not be reinstated”.

 

Risks associated with the taxation of the Trust and Precision could negatively affect the value of the Trust Units.

 

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 that adversely affects Unitholders. For example, if the Trust ceases to qualify as a “mutual fund trust” under the Tax Act, certain Canadian income tax considerations would be materially and adversely different in certain respects.

 

To qualify as a “mutual fund trust” for purposes of the Tax Act the Trust must continuously satisfy certain requirements as to the nature of its undertakings (primarily that it must restrict its activities to the investment of funds), its ability to distribute Trust Units to the public, the dispersal of ownership of its Trust Units and the requirement that, unless it meets certain exceptions, it must not be reasonable to consider that it was established or is maintained primarily for the benefit of Non-Canadian Holders (as defined herein).

 

As noted above, the Tax Act provides that a trust will not be considered to be a “mutual fund trust” for purposes of the Tax Act if it is established or is maintained primarily for the benefit of non-residents of Canada. However, this disqualification rule does not apply if all or substantially all of the trust’s property is property other than “taxable Canadian property” as defined in the Tax Act. Although no assurances can be provided, all or substantially all of the assets of the Trust should be property other than “taxable Canadian property” as defined in the Tax Act.

 

Relevant specific proposals to amend the Tax Act that have been publicly announced by the Minister of Finance (Canada) prior to the date of this Annual Information Form (the “Proposed Amendments”) provide that the Trust will lose its status as a “mutual fund trust” if the aggregate fair market value of all Trust Units issued by the

Trust and held by one or more non-residents of Canada or partnerships that are not “Canadian partnerships” (as defined in the Tax Act) is more than 50% of the aggregate fair market value of all of the Trust Units issued by the Trust and if more than 10% (based on fair market value) of the Trust’s property consists of certain types of “taxable Canadian property”, “Canadian resource property” or “timber resource property”, all as defined in the Tax Act. Since no more than 10% of the Trust’s property should be “taxable Canadian property”, “Canadian resource property” or “timber resource property” these Proposed Amendments should not adversely affect the Trust’s status as a “mutual fund trust”. However, no assurances can be provided that no more than 10% of the Trust’s property will be “taxable Canadian property”, “Canadian resource property” or “timber resource property” and, therefore, that, if enacted, these Proposed Amendments would not adversely affect the Trust’s status as a “mutual fund trust” under the Tax Act.

 

Provided the Trust satisfies the foregoing requirements it should be a “mutual fund trust” for purposes of the Tax Act. If the Trust ceased to qualify as a “mutual fund trust” under the Tax Act, certain Canadian federal income tax considerations would be materially and adversely different in certain respects.

 

Moreover, if the Trust were to cease to qualify as a “mutual fund trust”, Trust Units held by Unitholders who are not resident in Canada for the purposes of the Tax Act (“Non-Canadian Holders”) would become “taxable Canadian property” under the Tax Act. These Non-Canadian Holders would be subject to Canadian income tax on any gains realized on a disposition of the Trust Units held by them unless they were exempt under an income tax convention, and Non-Canadian Holders may be subject to certain notification and withholding requirements on a disposition of their Trust Units. In addition, the Trust would be taxed on certain types of income distributed to Unitholders (apart from under the specified investment flow-through legislation discussed below). Payment of this tax may have adverse consequences for some Unitholders, particularly Non-Canadian Holders and residents of Canada that are otherwise exempt from Canadian income tax.

 

The SIFT Rules apply to trusts that are resident in Canada for purposes of the Tax Act, that hold one or more “non-portfolio properties”, and the trust units of which are listed on a stock exchange or other public market. A SIFT trust effectively is subject to tax on its income from non-portfolio properties and taxable capital gains from dispositions of non-portfolio properties paid, or made payable, to unitholders at a rate comparable to the combined federal and provincial corporate income tax rate.

 

In general terms, a trust that existed on October 31, 2006 and to which the SIFT Rules otherwise would apply (i.e., the Trust), should not become a SIFT trust until the earlier of January 1, 2011 or the first day after December 15, 2006 that the trust exceeds “normal growth” determined by reference to the Guidelines. The Guidelines provide that a trust should not be considered to exceed “normal growth” if the trust does not issue new equity (including convertible debentures or other equity substitutes) that exceeds the greater of $50 million per year or certain specified “safe harbour” amounts based on the market capitalization of the trust on October 31, 2006.

 

Provided that the Trust does not issue new equity (including debt that is convertible into equity) in an amount greater than the “safe-harbour” amount of $4 billion determined by reference to the market capitalization of the Trust on October 31, 2006, the Trust should not be considered to exceed “normal growth” as set forth in the Guidelines. No assurances can be provided that the Trust will not otherwise become a SIFT trust prior to January 1, 2011.

 

As part of its ongoing strategic planning, the Trust will continue to examine and evaluate its various strategic alternatives, including its ability to reorganize its legal and tax structure to mitigate the expected impact of the SIFT Rules. While no assurances can be provided regarding the strategic alternatives, if any, that may be available, the strategic alternatives considered will recognize that on March 12, 2009 the federal government enacted the SIFT Conversion Rules.

 

There can be no assurance that the Trust will not cease to qualify as a “mutual fund trust” under the Tax Act or that it will not become a SIFT trust prior to January 1, 2011.

If the Trust does not constitute a “qualified foreign corporation” for United States federal income tax purposes, individual U.S. Holders (as defined below) may be taxed at a higher rate on distributions.

 

Management expects that distributions it makes to non-corporate U.S. Holders (including individual U.S. Holders) that are treated as dividends for United States federal income tax purposes will be treated as qualified dividend income eligible for the reduced maximum rate to individuals of 15% (5% for individuals in lower tax brackets). However, if the Trust does not constitute a “qualified foreign corporation” for United States federal income tax purposes, and as a result such dividends to non-corporate U.S. Holders do not qualify for this reduced maximum rate, such holders will be subject to tax on such dividends at ordinary income rates (currently at a maximum rate of 35%). In addition, under current law, the preferential tax rate for qualified dividend income will not be available for taxable years beginning after December 31, 2010.

 

For the purposes of this Annual Information Form, the term “U.S. Holder” means a beneficial owner of Trust Units that for United States federal income tax purposes is:

 

 

 

 

 

Changes in legislation may have an adverse effect on Unitholders.

 

There can be no assurance that income tax laws related to the status of “mutual fund trusts”, the taxation of “mutual fund trusts”, or other matters will not be changed in a manner which adversely affects Unitholders. Environmental and applicable operating legislation may be changed in a manner which adversely affects Unitholders.

 

Precision has retained liabilities as a consequence of prior reorganizations.

 

Precision, the successor entity to amalgamations involving its predecessor companies, has retained all liabilities of its predecessor companies, including liabilities relating to corporate and income tax matters.

 

A successful challenge by the tax authorities of the amount of interest expense deducted by Precision on its payments of Promissory Note interest could negatively affect the value of the Trust Units.

 

Income fund structures often involve significant amounts of inter-entity debt, which may generate substantial interest expense and which serves to reduce earnings and therefore income tax payable. This is the case in respect of Precision and its interest expense on the Promissory Note. There can be no assurance that the taxation authorities will not seek to challenge the amount of interest expense deducted. If such a challenge were to succeed against Precision or the Trust, it could have a material adverse affect on the amount of distributions paid by the Trust to Unitholders.

 

A successful challenge by the tax authorities of the amount of expenses deducted by the Trust or its subsidiaries could negatively affect the value of the Trust Units.

 

There can be no assurance that the applicable taxation authorities will agree with the classification of expenses claimed by the Trust or its subsidiaries. If the taxation authorities successfully challenge the deductibility of any such expenses, the return to Unitholders may be adversely affected.

A change in the structure of the Trust may have an adverse effect on Unitholders.

 

As a result of the adoption of the SIFT Rules, management of the Trust may, from time to time, evaluate the organizational and capital structure of the Trust and its subsidiaries to ensure that it remains appropriate and efficient for the business of the Trust and the benefit of Unitholders. Such evaluation and review may result in the recommendation that Unitholders approve a conversion of the Trust to a corporation.

 

In the event that such a recommendation were to be made, approved and implemented, the Trust’s income trust structure could be reorganized into a corporation and the Unitholders may become shareholders of that corporation which would own all of the Trust Units of the Trust. Under this form of reorganization, each Unitholder would exchange its Trust Units for shares of the successor corporation. Such reorganization would be subject to a review of all possible reorganization alternatives as well as approval of the Unitholders and to such other approvals as may be required, including regulatory, stock exchange and court approvals.

 

In connection with any such reorganization, the current distribution policies of the Trust would be replaced by the dividend policy of the successor corporation which may result in a decrease in the cash amount distributed compared with the current or prior distributions of the Trust. Furthermore, the reorganization would result in the conversion of the Trust into an entity that would be subject to Canadian federal and provincial income tax.

 

Any such reorganization may occur prior to January 1, 2011 and may have an adverse impact on the market price of the Trust Units.

 

Trust Units have certain risks not associated with traditional investments in the oil and natural gas services business.

 

The Trust Units do not represent a traditional investment in the oil and natural gas services business and should not be viewed as shares of a corporation. The Trust Units represent a fractional interest in the Trust. Unitholders do 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 Trust’s sole assets are the shares of the General Partner, the Class A Limited Partnership Units of PDLP and other investments in securities. The price per Trust Unit is a function of anticipated net earnings, the amount of cash distributions paid by the Trust to Unitholders, the underlying assets of the Trust and management’s ability to effect long-term growth in the value of Precision and other entities now or hereafter owned directly or indirectly by the Trust. The market price of the Trust Units are sensitive to a variety of market conditions including, but not limited to, interest rates, the growth of the general economy, the price of crude oil and natural gas and changes in law. Changes in market conditions may adversely affect the trading price of the Trust Units.

 

The Trust Units 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, 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.

 

The Trust is not a legally recognized entity within the relevant definitions of the Bankruptcy and Insolvency Act (Canada), the Companies’ Creditors Arrangement Act (Canada) and, in some cases, the Winding Up and Restructuring Act (Canada). As a result, in the event a restructuring of the Trust were necessary, the Trust would not be able to access the remedies available thereunder. In the event of a restructuring, the position of Unitholders may be different than that of the shareholders of a corporation.

 

The composition for Canadian federal income tax purposes of distributions on Trust Units may change over time, and such changes could negatively affect the return on the Trust Units.

 

Unlike interest payments on an interest-bearing security, distributions by income trusts on trust units (including the Trust Units) are, for Canadian federal income tax purposes, composed of different types of payments (portions of which may be fully or partially taxable or may constitute non-taxable “returns of capital”). The composition for Canadian federal income tax purposes of distributions may change over time, thus affecting the after-tax return to Unitholders who are resident in Canada for purposes of the Tax Act (“Canadian Holders”). Therefore, the rate of return for Canadian Holders over a defined period may not be comparable to the rate of return

on a fixed-income security that provides a return on capital over the same period. This is because a Canadian Holder may receive distributions that constitute a return of capital (rather than a return on capital) to some extent during the relevant period. Returns on capital are generally taxed as ordinary income, dividends or taxable capital gains in the hands of a holder of Trust Units, while returns of capital are generally non-taxable to a Canadian Holder (but reduce the adjusted cost base in a Trust Unit for Canadian federal income tax purposes).

 

If the Trust ceases to qualify as a “mutual fund trust” under the Tax Act, the Trust Units will cease to be qualified investments for a variety of plans, which could have negative tax consequences.

 

If the Trust ceases to qualify as a “mutual fund trust”, the Trust Units will cease to be qualified investments for trusts governed by “registered retirement savings plans”, “registered retirement income funds”, “deferred profit sharing plans” and “registered education savings plans”, each as defined in the Tax Act (collectively, “Exempt Plans”) and for trusts governed by “tax-free savings accounts”, as defined in the Tax Act. Where, at the end of any month, an Exempt Plan holds trust units that are not qualified investments, the Exempt Plan must, in respect of that month, pay a tax under Part XI.1 of the Tax Act equal to 1% of the fair market value of the trust units at the times such trust units were acquired by the Exempt Plan. In addition, where a trust governed by a “registered retirement savings plan” or “registered retirement income fund” holds trust units that are not qualified investments, such trust will become taxable on its income attributable to the trust units while they are not qualified investments, including the full amount of any capital gain realized on a disposition of trust units while they are not qualified investments. Where a trust governed by a “registered education savings plan” holds trust units that are not qualified investments, the plan’s registration may be revoked. Where a trust governed by a “tax-free savings account” holds trust units that cease to be qualified investments, the holder of that “tax-free savings account” may be required to pay a tax under Part XI.01 of the Tax Act equal to 50% of the fair market value of such trust units at the time the trust units ceased to be a qualified investment.

 

Canadian withholding tax may exceed allowable United States foreign tax credits and reduce effective yield to United States investors.