Moody's rates Harvest notes B3

Moody's Investors Service said it assigned a B2 senior implied rating to Harvest Operations Corp., a B3 rating to its pending $200 million of seven-year senior unsecured notes, and an SGL-3 liquidity rating.

Harvest Energy Trust wholly owns Harvest Operations. The notes and Harvest Operations' C$370 million of secured bank facilities receive guarantees from Harvest Energy Trust, Harvest Operations subsidiaries (except Red Earth Partnership which holds 13% of reserves), and Harvest Operations' sister affiliate Harvest Sask.

Proceeds will refund C$182.5 million of secured bank debt and a C$70 million bridge loan, incurred as partial funding for the Storm Energy (C$189 million) and Encana reserve (C$526 million) acquisitions.

Moody's said the ratings are restrained by Harvest Energy Trust's: comparatively small size; short intra-year duration of ownership of much of the property base; very mature nature and high water cut for most of its properties; modest pro-forma unit cash flow cover of its C$13.85/boe in net reserve replacement costs; high leverage; relatively short reserve life of 5.2 years on net proven developed reserves; potential leveraged acquisitions and need to accommodate a growth-by-acquisition strategy; high cash flow payout inherent to its unit trust structure, coupled with the depleting nature of oil and gas reserves; and modest potential for Harvest Energy Trust's properties to generate full organic reserve replacement.

The ratings benefit from: adequate liquidity and cash flow support from an expected supportive price environment; a substantially strengthened property base from recent acquisitions that added diversification, greater scale, and exploitation opportunity; a high proportion of reserves in well-known regions; incremental exploitation potential; and a high degree of ownership by the chairman and his demonstrated willingness and capacity to invest new second secured funding for acquisitions.

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