TRANSALTA CORPORATION | ||||
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By:
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/s/ Scott Jeffers | ||
Name: |
Scott Jeffers
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Title: |
Corporate Secretary
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Exhibit Number
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Description of Document
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99.1
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ITEM 1
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Name and Address of Company
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TransAlta Corporation (the “Company”)
110 – 12th Avenue S.W. Calgary, Alberta T2R 0G7 |
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ITEM 2
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Date of Material Change
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March 22, 2019
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ITEM 3
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News Release
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A news release with respect to the material change referred to in this report was disseminated through Cision by PR Newswire on March 25, 2019, a copy of which was filed on SEDAR on March 25, 2019 and is available under the Company’s profile at www.sedar.com.
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ITEM 4
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Summary of Material Change
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On March 25, 2019, the Company announced that it had entered into a definitive investment agreement dated as of March 22, 2019 (the “Investment Agreement”) whereby Brookfield BRP Holdings (Canada) Inc. or affiliates of Brookfield Renewable Partners L.P. (“Brookfield”) will invest $750 million in the Company, with the first tranche of $350 million being invested in exchange for Exchangeable Debentures (as defined below) of the Company and the second tranche of $400 million will be invested in exchange for a new series of Redeemable Preferred Shares (as defined below) of the Company.
A copy of the Investment Agreement, including schedules thereto, was filed on SEDAR on March 25, 2019 and is available under the Company’s profile at www.sedar.com.
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ITEM 5
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Full Description of Material Change
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5.1 – The Investment
Pursuant to the Investment Agreement, Brookfield will invest $750 million (the “Investment”) in the Company, with the first tranche of $350 million (the “2019 Tranche”) to be invested on a closing date (the “Initial Funding Date”) anticipated to occur three business days after the Company’s 2019 annual and special meeting of shareholders (the “Meeting”) in exchange for exchangeable, unsecured, subordinated debentures (the “Exchangeable Debentures”), and the remaining $400 million (the “2020 Tranche”) to be invested on October 30, 2020 (the “Second Funding Date”) in exchange for a new series of redeemable, retractable series I first preferred shares (the “Redeemable Preferred Shares” and, together with the Exchangeable Debentures, the “Exchangeable Securities”).
Under the terms of the Investment Agreement, the Exchangeable Securities will be exchangeable by Brookfield into an equity ownership interest in an entity to be formed that will hold the Company’s Alberta Hydro Assets (as defined below) in the future at a value calculated based on a multiple of 13 times the Hydro Assets’ future EBITDA (subject to certain adjustments, including a reduction for annual sustaining capital expenditures and for a tax deficiency pertaining to tax pools).
The Company will use $500 million from the Investment to fund the Company’s coal-to-gas conversion strategy as well as to fund existing and new growth projects and for general corporate purposes. Up to $250 million will be returned to shareholders by the Company
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through a substantial issuer bid or normal course issuer bids over three years following the Initial Funding Date.
In connection with the Investment, Brookfield has committed to purchase common shares of the Company (the “Common Shares”) on the open market over 24 months following the Initial Funding Date to bring its total share ownership to not less than 9% from approximately 4.9% today, subject to certain exceptions and provided that Brookfield is not obliged to purchase Common Shares at a price greater than $10 per share. As part of the Investment, the Company will include two experienced Brookfield nominees, Harry Goldgut and Richard Legault, on its slate of directors for election at the Meeting. The Company also announced that Robert C. Flexon, the former Chief Executive Officer of Dynegy Inc., will also stand for election at the Meeting.
The Investment, combined with the Company’s internally generated cash flows, will allow the Company to advance its coal-to-gas conversion strategy, continue to grow, return some capital to shareholders, and meet its target of repaying the $400 million medium term notes due in November 2020. The Investment also recognizes the future value of the Company’s Hydro Assets by valuing such assets based on the higher cash flows expected to be generated following expiry of the Alberta power purchase arrangements in 2020, while still allowing the Company to maintain a majority ownership position in the Hydro Assets and future anticipated upside for the Company and its shareholders.
RBC Global Asset Management Inc., the Company’s largest shareholder holding approximately 12.4% of the outstanding Common Shares, is supportive of the strategic Investment and has committed to supporting the Company’s slate of director nominees at the upcoming Meeting.
In concluding that the Investment is in the best interests of the Company and its shareholders, the Board of Directors of the Company received the recommendation of its independent special committee formed to evaluate and oversee the negotiations of the transaction and the analysis and advice from its financial advisor, CIBC World Markets Inc. and its legal advisor.
Additional details concerning the terms and conditions of the Investment are set out below. The following is only a summary of the key terms and conditions of the Investment Agreement, a copy of which has been filed under the Company’s profile on SEDAR at www.sedar.com. In the event of any conflict between the provisions thereof and this summary, the provisions of the Investment Agreement on SEDAR will govern. Readers are urged to read the Investment Agreement carefully.
5.1.1 – The Exchangeable Securities
The Redeemable Preferred Shares have a perpetual term and will rank pari passu to all existing series of first preferred shares of the Company with respect to dividends and liquidation preferences. The Redeemable Preferred Shares are entitled to a 7% cumulative dividend payable quarterly in cash.
The Exchangeable Debentures have a 20-year term starting on the Initial Funding Date, are unsecured and will rank subordinate to all existing and future secured senior and unsecured indebtedness of the Company. The Exchangeable Debentures will accrue interest at 7% per annum from the Initial Funding Date, payable quarterly in cash in arrears.
Under the Investment Agreement, redemption of the Exchangeable Securities will be satisfied through the Hydro Equity Interest (as defined below), or in some cases cash, based on their redemption price. The redemption price payable is equal to (i) in the case of the Redeemable Preferred Shares, the subscription price paid by Brookfield together with all accrued but unpaid dividends thereon and (ii) in the case of the Exchangeable Debentures, at a redemption price equal to 100% of the principal amount of such Exchangeable Debentures plus accrued and unpaid interest thereon (the “Redemption Price”). Upon the occurrence of an Optional Redemption, as defined and described below, or a Cash Acceleration Event, as
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defined and described below, the Company will pay the Redemption Price in cash (the “Cash Redemption Amount”).
Except in the case of an Optional Redemption by the Company or a Cash Acceleration Event, as described below, the Exchangeable Securities will be exchangeable into interests (the “Hydro Equity Interest”) in the equity (the “Hydro Equity”) of a special purpose vehicle (the “Hydro Assets Owner”) to be formed by the Company pursuant to the Hydro Assets Reorganization (as defined and described below). At any time after December 31, 2024, Brookfield will be entitled to exchange all, but not less than all, of the Exchangeable Securities requiring the Company to redeem or exchange all of the Exchangeable Securities held by Brookfield (minus the number of Exchangeable Securities that have been redeemed pursuant to an Optional Redemption) (the “Exchange Right”).
Prior to any Optional Redemption by the Company, the exercise of the Exchange Right or the occurrence of an Equity Acceleration Event, as defined and described below, will entitle Brookfield to receive that percentage of a Hydro Equity Interest that is equal to the aggregate Redemption Price for all Exchangeable Securities issued to Brookfield divided by the tax affected equity value of the Hydro Assets Owner, as further described in the Investment Agreement (the “Equity Redemption Amount”). The maximum Hydro Equity Interest issuable to Brookfield upon the exercise of the Exchange Right is 49% of the total Hydro Equity. The balance of the redemption price will be paid by the Company in cash.
If, at the time the Exchange Right is exercised (including, for clarity, in connection with a Permitted Hydro Assets Sale, as defined and described below, or an Equity Acceleration Event resulting from the breach of the covenant to complete the Hydro Assets Reorganization), the Equity Redemption Amount is insufficient to permit Brookfield to acquire 49% of the Hydro Equity, Brookfield has a one-time top-up option, exercisable until December 31, 2028, to acquire an additional amount of Hydro Equity. As long as Brookfield holds at least 8.5% of the issued and outstanding Common Shares, Brookfield may purchase: (i) if the 20-day volume weighted average price (“VWAP”) of the Common Shares is not less than $14, up to an additional 10% of Hydro Equity, to a maximum interest of 49% of the Hydro Equity; or (ii) if the 20-day VWAP of the Common Shares is not less than $17, the additional percentage required that would bring Brookfield’s ownership level up to but not exceeding 49% of the Hydro Equity. If the Exchange Right is exercised and the Equity Redemption Amount is insufficient to permit Brookfield to acquire at least 25% of the Hydro Equity, Brookfield will have an option to acquire that additional percentage of Hydro Equity that would result in Brookfield having 25% of the Hydro Equity upon payment in cash. If Brookfield exercises its top-up option, the cash amount payable by Brookfield is calculated as the same price as in the case of an exchange for the Hydro Equity Interest, however, in such a case, the price is based on the equity value of the Hydro Assets Owner without any reduction for the tax deficiency value associated with certain tax pools. Exercise of this top-up option triggers a lock-up obligation of Brookfield (on the same terms as the Lock-Up obligation described below) for a further period of 18 months following its exercise.
At any time after December 31, 2028, the Company may redeem the Exchangeable Securities, in whole or in part, at the Redemption Price (the “Optional Redemption”) provided that the minimum proceeds to Brookfield for each such redemption (other than the final redemption) may not be less than $100,000,000 and further provided that all Exchangeable Securities must be redeemed by the Company within 36 months of the date of the first Optional Redemption.
The Investment Agreement also provides for certain acceleration events (the “Acceleration Events”). In the event of bankruptcy, a breach of a certain material covenants by the Company or if a material adverse effect occurs after the Initial Funding Date and prior to the Second Funding Date (each, an “Equity Acceleration Event”), Brookfield will be entitled to give notice and will be entitled to the Equity Redemption Amount. If an Equity Acceleration Event occurs prior to December 31, 2024, a true-up payment will be made by Brookfield to the Company or by the Company to Brookfield to account for the difference between $1.95 billion and the tax affected value of the Hydro Equity Interest calculated as of a date (to be
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determined by Brookfield) within the period commencing January 1, 2025 and ending December 31, 2027. Any difference in favour of Brookfield between the true-up value and the value of the Hydro Equity Interest issued to Brookfield is to be satisfied by delivery of additional Hydro Equity. If the Company does not obtain the requisite regulatory approvals for the exchange for Hydro Equity contemplated by the Exchange Right or the Equity Redemption Amount or a final order is made which enjoins the closing of the 2020 Tranche or the completion of the Exchange Right (the “Cash Acceleration Event”), then Brookfield will be entitled to the Cash Redemption Amount.
5.1.2 – Reorganization and Hydro Assets
The Investment Agreement provides that the Company will use commercially reasonable efforts to effect a reorganization of the corporate structure, capital structure, business operations and assets of the Company or any of its subsidiaries (the “Hydro Assets Reorganization”) that is an owner of the Alberta hydro generation facilities described in the Investment Agreement (the “Hydro Assets”) and to obtain the required regulatory approvals necessary to transfer the Hydro Assets to the Hydro Assets Owner. The Hydro Assets Reorganization must occur as reasonably practicable following the earlier of: (i) occurrence of an Acceleration Event and (ii) June 30, 2020, subject to an extension to October 30, 2020 if the Company has not yet obtained the required regulatory approvals.
The Investment Agreement also provides for a mutual covenant to cooperate and negotiate, prior to the Initial Funding Date, a governance agreement governing the parties’ rights and obligations with respect to the Hydro Assets Owner that is to own the Hydro Assets (the “Governance Agreement”). The key terms to be included in the Governance Agreement are appended to the Investment Agreement and are summarized below.
The Company has agreed to, for a period of six years following the Initial Funding Date, establish an operating committee for the Hydro Assets that will consist of two persons employed by Brookfield or an affiliate thereof, having expertise in managing hydro facilities, and two representatives of the Company. The committee will advise management of the Company on optimizing the operations and maximizing the value of the Hydro Assets. Brookfield will be paid a management fee of $1.5 million per year for six years for its work on the committee. The Company may, at its option, extend the term of this committee for an additional two years for the same annual management fee.
5.1.3 – Additional Key Terms
Upon entering into the Investment Agreement, the Company paid a non-refundable structuring fee of 1% ($7.5 million) of the Investment to Brookfield. An additional commitment fee of 2% ($15 million) of the Investment (the “Commitment Fee”) will be payable by the Company upon receipt of the 2019 Tranche. The Commitment Fee will be netted against the 2019 Tranche, unless the Company elects not to proceed with the Investment in accordance with the termination right described below, in which case the Commitment Fee will be payable upon such termination.
The Investment Agreement contains customary representations, warranties and covenants made by the Company and Brookfield. The Company made various covenants relating to the financial health of the Company, the Hydro Assets and the business of the Hydro Assets, as well as a covenant to maintain the priority of the Exchangeable Securities and a covenant to continue to pay the principal and interest on the Exchangeable Debentures and the dividend on the Redeemable Preferred Shares.
The Company has covenanted that it will provide Brookfield with reports and notices relating to the Hydro Assets, material adverse effects, communications of interested parties whose consent is required to complete the transactions contemplated under the Investment
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Agreement, and material filings or proceedings against the Company related to the Investment Agreement and the Registration Rights Agreement (as defined below) (together, the “Transaction Agreements”), as described below. Additionally, the Company has undertaken to use commercially reasonable efforts to obtain any required consents, to act consistently with the Transaction Agreements, as described below, and to repay its 5% medium term notes when due in November 2020.
Brookfield will be entitled to terminate the Investment Agreement prior to the Initial Funding Date if the Company does not satisfy, or Brookfield does not waive, the conditions precedent to the initial funding or if a material adverse effect occurs. Upon such a termination, Brookfield will be entitled to the Commitment Fee. The closing of each tranche of the Investment is subject to customary conditions precedent, including the delivery of the Exchangeable Securities, compliance with the covenants in the Investment Agreement in all material respects, the representations and warranties being true and correct to a material adverse effect standard, no law making the consummation of the Investment illegal, no governmental entity having commenced an action to enjoin the Investment, and no material adverse effect having occurred during the relevant period.
Upon completion of the Hydro Assets Reorganization and until the Exchange Right is exercised or an Equity Acceleration Event occurs, the Company is permitted to divest up to 51% of the Hydro Assets (a “Permitted Hydro Assets Sale”) subject to the requirement that the Company give prior notice to Brookfield and that the proposed purchaser (who must be acceptable to Brookfield, acting reasonably, based on the purchaser’s experience with hydro and creditworthiness) agrees to assume the obligations of the Company under the Investment Agreement and enter into a governance agreement on substantially the same terms as the Governance Agreement.
The Investment Agreement provides for a mutual covenant to cooperate and negotiate the Company’s articles of amendment in respect of the Redeemable Preferred Shares, which are to include the principal terms, covenants and conditions set forth in Schedule A to the Investment Agreement.
The Investment Agreement provides for a mutual covenant to cooperate and negotiate a registration rights agreement (the “Registration Rights Agreement”) on customary terms, pursuant to which the Company will provide Brookfield with registration rights for the resale of the Common Shares that are held by Brookfield. If the Common Shares to be registered are freely tradeable upon their resale in both Canada and the United States, then Brookfield will pay all costs incurred by the Company to effect the registration. The Registration Rights Agreement is to be entered into by the parties on the Initial Funding Date.
The Investment Agreement contains customary lock-up provisions that restrict Brookfield or its affiliates’ ability to transfer the Common Shares during a period that commences on the Initial Funding Date and terminates on December 31, 2023 (the “Lock-Up”). The Lock-Up contains customary exceptions, including an exception for transfers of Common Shares by investment funds managed by or affiliated with Brookfield Asset Management, Inc. undertaken in accordance with the investment funds’ fund requirements. For purposes of the Investment Agreement, the term “affiliate” does not include any affiliates of Brookfield that operate behind an information wall.
The Investment Agreement contemplates that the Exchangeable Securities will be a long-term investment and therefore may not be transferred except by Brookfield to one of its affiliates. Brookfield has agreed to be the sole representative of all of its permitted transferees for the purpose of the Investment Agreement.
The Investment Agreement includes customary standstill commitments by Brookfield (the “Standstill”), with customary exceptions, which will be in effect for three years starting from
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the Initial Funding Date (the “Standstill Period”). Among other things, the Standstill prohibits Brookfield from acquiring an ownership interest in the Company above 19.9%. During the Standstill Period, Brookfield has also agreed that it will: (i) vote in favour of each director nominated by the board of directors of the Company (the “Board”); (ii) vote against any shareholder nomination for directors that is not approved by the Board; (iii) vote against any proposal or resolution to remove any Board member; and (iv) vote in accordance with any recommendations by the Board on all other proposals. Certain Standstill provisions extend beyond the Standstill Period so long as Brookfield has nominees on the Board.
Brookfield has covenanted to purchase Common Shares in the secondary market over a 24-month period following the Initial Funding Date in order to beneficially own not less than 9% of the Common Shares (the “Follow-On”). The calculation of the 24-month share purchase period excludes any days during which Brookfield is subject to a restriction on buying shares under applicable securities laws or Company policies (or during periods when the covenant is suspended, as described below). Brookfield will not be obliged to purchase Common Shares at a price in excess of $10 per share.
If Brookfield’s director nominees are not elected to the Board at the Meeting, or any subsequent annual meeting of shareholders of the Company, or if an Equity Acceleration Event occurs, Brookfield’s obligations under the Standstill, Lock-Up and Follow-On will be suspended until the date that both of its director nominees (or replacement director nominees) are elected or appointed to the Board.
If two or more directors (excluding Brookfield’s nominees to the Board) are elected as directors at the Meeting who are not among the Company’s director nominees recommended in the Company’s proxy circular for election to the Board at the Meeting, then the Company may elect to delay the 2019 Tranche to a date that is not later than the 30th day following the date of the Meeting. If the Company elects to delay the 2019 Tranche and subsequently determines to proceed with the Investment, it must provide notice to Brookfield and upon delivery of such notice, the Initial Funding Date shall occur on the earlier of (x) the third business day following the date of delivery of such notice and (y) the date that is 30 days following the date of the Meeting. If the Company elects not to proceed with the 2019 Tranche, it must provide notice to Brookfield and, upon payment to Brookfield of the Commitment Fee, the Investment Agreement will automatically terminate and neither party will have any liability or obligations to the other party under such agreement.
5.2 Hydro Assets Owner Management and Governance
The key terms to be reflected in the Governance Agreement to be agreed upon by the Company and Brookfield with respect to the Hydro Assets Owner are set out in Schedule B to the Investment Agreement and are summarized below. The following is only a summary and in the event of any conflict between the provisions thereof and this summary, the provisions of the Investment Agreement and the schedules thereto on SEDAR will govern. Readers are urged to read the Investment Agreement carefully.
The Governance Agreement will govern the rights and obligations of the parties (the “SPV Owners”) with respect to their interest in the Hydro Assets Owner upon Brookfield’s exchange of the Exchangeable Securities for an interest in the Hydro Assets Owner.
5.2.1 – Governance
The Governance Agreement is expected to provide that if Brookfield owns at least 33⅓% of the Hydro Equity, then the SPV Owners will each be entitled to nominate two directors to the board of the general partner of the Hydro Assets Owner (the “SPV Board”). If Brookfield owns less than 33⅓% of the Hydro Equity, then the Company will be entitled to nominate three
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directors and Brookfield will be entitled to nominate two directors to the SPV Board.
The powers of the SPV Board to manage and supervise the affairs of the Hydro Assets Owner will be removed and vested into the SPV Owners who will be represented by representatives on a to be established management committee (the “Representatives”). As long as Brookfield owns at least 33⅓% of the Hydro Equity, then the SPV Owners will each be entitled to nominate two Representatives. If Brookfield owns less than 33⅓% of the Hydro Equity, then the Company will be entitled to nominate three Representatives and Brookfield will be entitled to nominate two Representatives. The voting power at meetings of the management committee will be commensurate with the ownership percentage of the Hydro Equity held by the SPV Owners and not based on the number of Representatives.
The Hydro Assets Owner’s management committee will declare cash distributions equal to 100% of all distributable cash allocated based on the SPV Owner’s ownership percentage of the Hydro Equity less sums required for budgeted expenditures.
The Governance Agreement will contain a number of matters that will require the approval of each SPV Owner that holds at least 25% of the Hydro Equity. Refer to Schedule B of the Investment Agreement for a list of these extraordinary approval matters.
5.2.2 – Additional Key Terms
The Governance Agreement contemplates that the Hydro Assets Owner will enter into agreements with the Company, or affiliates thereof, to provide certain services for the Hydro Assets Owner.
The SPV Owners will be prohibited from transferring Hydro Equity except for: (i) transfers to affiliates; and (ii) transfers to qualified third parties, subject to a right of first offer in favour of the other SPV Owner. In addition, if the Company elects to sell all of its Hydro Equity to a third party, then Brookfield may, at its option, exercise customary tag along rights but only if Brookfield owns less than 25% of the Hydro Equity.
Between January 1, 2030 and December 31, 2033, if Brookfield’s Hydro Equity Interest is less than 25% of the total Hydro Equity, Brookfield will, on notice to the Company, have a right to put all (but not less than all) of its Hydro Equity Interest to the Company for cash at a price equal to the tax affected equity value of the Hydro Equity Interest at that time. The Company will have 36 months to pay the purchase price. Prior to exercising this put right, Brookfield must have complied with the right of first offer in respect of the entirety of its Hydro Equity Interest and attempted to sell its entire Hydro Equity Interest to a third party.
The Governance Agreement is expected to contain provisions addressing certain defaults by an SPV Owner, such as failures to make a capital contribution when due, failures to provide its share of credit support, and certain other material and continuing defaults under the Governance Agreement, in which case the defaulting SPV Owner will lose its distribution rights during the period of default. The Hydro Assets Owner may also offer for sale sufficient Hydro Equity held by the defaulting SPV Owner to satisfy the obligations of the defaulting SPV Owner, in each case, to the non-defaulting SPV Owner with the price to be paid at a 5% discount to fair value.
The Governance Agreement will terminate on the earlier of when: (i) the agreement is terminated through written consent of all SPV Owners; and (ii) the Hydro Assets Owner is dissolved in accordance with the terms of the Governance Agreement or applicable law.
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ITEM 6
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Reliance on subsection 7.1(2) of National Instrument 51-102
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This report is not being filed on a confidential basis.
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ITEM 7
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Omitted Information
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None.
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ITEM 8
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Executive Officer
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For further information, please contact:
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Kerry O’Reilly Wilks
Chief Legal & Compliance Officer Telephone: (403) 267.7110 |
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ITEM 9
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Date of Report
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March 26, 2019
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