Prospectus re Admission to the Official List - Heritage Oil

2007 convertible bondsOn 16 February 2007, the Corporation raised $165,000,000 by completing the private placement ofconvertible bonds. Issue costs amounted to $6,979,268 resulting in net proceeds of $158,020,732. TheCorporation issued 1,650 unsecured convertible bonds at par, which have a maturity of five years andone day and an annual coupon of 8.00% payable semi-annually on 17 August and 17 February of eachyear. The bondholders had the right to convert the bonds into Common Shares at a price of $47.00 pershare at any time. The Corporation had the right to redeem, in whole or part, the bonds for cash atany time on or before 16 February 2008, at 150% of par value. This right was not exercised. Proceedswere used to finance the redemption of the outstanding of convertible bonds, issued on26 March 2006, at a premium of 150% and for general corporate funding purposes.Bondholders have a put option requiring the Corporation to redeem the bonds at par, plus accruedinterest, in the event of a change of control of the Corporation or revocation or surrender of theZapadno Chumpasskoye licence in Russia. In the event of a change of control and redemption of thebonds or exercise of the conversion rights, a cash payment of up to $19,700 on each bond will be madeto the bondholder, the amount of which depends upon the date of redemption and market value atthe date of any change of control event.The bonds included conversion features which in certain circumstances could be settled in cash and sothese features represent a derivative financial instrument which is classified as a liability.The fair value of the liability component of the bonds (net of issue costs) was estimated at$140,154,215. The fair value of the derivative liability representing the bondholders’ conversionfeature (note 23) (net of issue costs) was estimated at $17,866,517 on 16 February 2007. Thedifference between the $165,000,000 due on maturity and the initial liability component is accretedusing the effective interest method and is recorded as finance costs. The derivative financialinstrument is recorded at fair value with resulting gains and losses recorded in finance incomeand costs.In July 2007, a bondholder with US$7 million of bonds gave notice of the exercise of 70 bonds andreceived 148,937 Common Shares in August 2007. As a result of this conversion, $8,944,487 wastransferred to Share Capital from convertible bonds, derivative liability component of convertiblebonds and accrued liabilities.Pursuant to the terms of the convertible bond, the Corporation is required to provide security, in aseparate escrow account, equal to the first three interest payments in the total amount of $19,841,551.The escrow account is reduced for each interest payment such that it will be nil on 17 August 2008. InAugust 2007, the first interest payment of $6,355,108 was made from the escrow account. Cash in theescrow account, including accrued interest income, is included in cash and cash equivalents.Long-term debtIn January 2005, a wholly-owned subsidiary of the Corporation received a sterling denominated loanof £4.5 million to refinance the acquisition of a corporate office. Interest on the loan is fixed at 6.515%for the first five years and is then variable at a rate of London Interbank Offered Rate (‘‘LIBOR’’)plus 1.35%. The loan, which is secured on the property, is scheduled to be repaid by 240 instalments ofcapital and interest at monthly intervals, subject to a residual debt at the end of the term of the loan of$3.5 million (£1,860,000). The current principal balance outstanding as at 30 September 2007 was$8,814,740 (31 December 2006—$8,557,513 (£4.4 million)).Fair valuesAt 31 December 2006 and 30 September 2007, the fair values of borrowings are approximately equalto their carrying amounts as the facilities bear interest at market rates of interest.18 ProvisionsThe Group’s asset retirement obligation results from net ownership interests in petroleum and naturalgas assets including well sites and gathering systems. The Group estimates the total undiscountedinflation-adjusted amount of cash flows required to settle its asset retirement obligation to beapproximately $406,835, which is expected to be incurred in 2012 and 2024. A cost pool specificdiscount rate, related to the liability, of 9% was used to calculate the fair value of the asset retirementobligation in 2007 (2006—10%).204