 | INTERIM CONSOLIDATED FINANCIAL STATEMENTS |
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
| As At | ||||||||
(thousands of Canadian dollars) | Notes | September 30, 2012 | December 31, 2011 | ||||||
Assets | |||||||||
Current assets | |||||||||
Cash and cash equivalents | 17 | $ | 9,187 | $ | 6,607 | ||||
Accounts receivable and other | 17 | 170,578 | 212,252 | ||||||
Inventories | 4 | 76,033 | 60,952 | ||||||
Prepaid expenses | 14,087 | 18,526 | |||||||
Risk management contracts | 17 | 8,631 | 20,162 | ||||||
| 278,516 | 318,499 | |||||||
Non-current assets | |||||||||
Long-term deposit | 5,000 | 24,925 | |||||||
Investment tax credits and other | 53,860 | 53,994 | |||||||
Deferred income tax asset | 20,241 | – | |||||||
Exploration and evaluation assets | 5 | 74,328 | 74,517 | ||||||
Property, plant and equipment | 6 | 5,317,516 | 5,400,387 | ||||||
Other long-term asset | 8,509 | 7,105 | |||||||
Goodwill | 404,943 | 404,943 | |||||||
| 5,884,397 | 5,965,871 | |||||||
Total assets | $ | 6,162,913 | $ | 6,284,370 | |||||
| |||||||||
Liabilities | |||||||||
Current liabilities | |||||||||
Accounts payable and accrued liabilities | 17 | $ | 339,248 | $ | 464,148 | ||||
Current portion of convertible debentures | 10, 17 | 332,184 | 107,146 | ||||||
Current portion of decommissioning liabilities and environmental remediation liabilities | 7 | 22,664 | 12,782 | ||||||
| 694,096 | 584,076 | |||||||
Non-current liabilities | |||||||||
Bank loan | 9, 17 | 570,413 | 355,575 | ||||||
Convertible debentures | 10, 17 | 300,511 | 634,921 | ||||||
Senior notes | 17 | 480,319 | 495,674 | ||||||
Related party loan | 17, 20 | 168,109 | – | ||||||
Long-term liability | 8, 17 | 3,317 | – | ||||||
Decommissioning and environmental remediation liabilities | 7 | 671,901 | 674,522 | ||||||
Post-employment benefit obligations | 32,074 | 25,958 | |||||||
Deferred credits and other | 560 | 5,093 | |||||||
Deferred income tax liability | 13,521 | 54,907 | |||||||
| 2,240,725 | 2,246,650 | |||||||
Total liabilities | $ | 2,934,821 | $ | 2,830,726 | |||||
| |||||||||
Shareholder’s equity | |||||||||
Shareholder’s capital | 3,860,786 | 3,860,786 | |||||||
Deficit | (572,678 | ) | (388,995 | ) | |||||
Accumulated other comprehensive loss | 16 | (60,016 | ) | (18,147 | ) | ||||
Total shareholder’s equity | 3,228,092 | 3,453,644 | |||||||
Total liabilities and shareholder's equity | $ | 6,162,913 | $ | 6,284,370 | |||||
Commitments[Note 19]
The accompanying notes are an integral part of these consolidated financial statements.
| INTERIM CONSOLIDATED FINANCIAL STATEMENTS |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
| Three months ended | Nine months ended | |||||||||||||
| September 30, | September 30, | |||||||||||||
(thousands of Canadian dollars) | Notes | 2012 | 2011 | 2012 | 2011 | ||||||||||
| |||||||||||||||
Petroleum, natural gas, and refined products sales | $ | 1,311,827 | $ | 895,235 | $ | 4,363,982 | $ | 3,063,269 | |||||||
Royalties | (36,710 | ) | (46,996 | ) | (128,917 | ) | (139,415 | ) | |||||||
Revenues | 12 | 1,275,117 | 848,239 | 4,235,065 | 2,923,854 | ||||||||||
| |||||||||||||||
Expenses | |||||||||||||||
Purchased products for processing and resale | 968,620 | 527,722 | 3,309,139 | 1,941,396 | |||||||||||
Operating | 146,497 | 131,966 | 465,560 | 397,674 | |||||||||||
Transportation and marketing | 6,044 | 12,053 | 19,465 | 29,115 | |||||||||||
General and administrative | 16,827 | 15,062 | 47,242 | 44,283 | |||||||||||
Depletion, depreciation and amortization | 6 | 167,830 | 159,602 | 512,678 | 450,556 | ||||||||||
Exploration and evaluation | 5 | 5,618 | 831 | 24,702 | 11,286 | ||||||||||
Gains on disposition of property, plant and equipment | (4,881 | ) | (65 | ) | (5,350 | ) | (745 | ) | |||||||
Finance costs | 13 | 27,507 | 26,701 | 82,395 | 81,102 | ||||||||||
Risk management contracts (gains) losses | 17 | 1,838 | (2,833 | ) | 1,935 | (8,127 | ) | ||||||||
Foreign exchange (gains) losses | 14 | (4,296 | ) | 12,220 | (4,162 | ) | 948 | ||||||||
Impairment on property, plant and equipment | 6 | – | – | 21,843 | – | ||||||||||
Loss before income tax | (56,487 | ) | (35,020 | ) | (240,382 | ) | (23,634 | ) | |||||||
| |||||||||||||||
Income tax (recovery) expense | (18,178 | ) | 14,184 | (56,699 | ) | 7,134 | |||||||||
Net loss | (38,309 | ) | (49,204 | ) | (183,683 | ) | (30,768 | ) | |||||||
| |||||||||||||||
Other comprehensive income (loss) | |||||||||||||||
Gains (losses) on designated cash flow hedges, net of tax | 16,17 | (7,382 | ) | 42,930 | (7,688 | ) | 53,518 | ||||||||
Gains (losses) on foreign currency translation | 16 | (26,163 | ) | 79,260 | (26,231 | ) | 50,319 | ||||||||
Actuarial loss, net of tax | 16 | (3,331 | ) | (7,642 | ) | (7,950 | ) | (7,642 | ) | ||||||
Comprehensive income (loss) | $ | (75,185 | ) | $ | 65,344 | $ | (225,552 | ) | $ | 65,427 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
| INTERIM CONSOLIDATED FINANCIAL STATEMENTS |
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER’S EQUITY (UNAUDITED)
| Other | Total | |||||||||||||
| Shareholder’s | Comprehensive | Shareholder’s | ||||||||||||
(thousands of Canadian dollars) | Notes | Capital | Deficit | Income (Loss) | Equity | ||||||||||
Balance at December 31, 2011 | $ | 3,860,786 | $ | (388,995 | ) | $ | (18,147 | ) | $ | 3,453,644 | |||||
Losses on derivatives designated as cash flow hedges, net of tax | 16 | – | – | (7,688 | ) | (7,688 | ) | ||||||||
Losses on foreign currency translation | 16 | – | – | (26,231 | ) | (26,231 | ) | ||||||||
Actuarial loss, net of tax | 16 | – | – | (7,950 | ) | (7,950 | ) | ||||||||
Net loss | – | (183,683 | ) | – | (183,683 | ) | |||||||||
Balance at September 30, 2012 | $ | 3,860,786 | $ | (572,678 | ) | $ | (60,016 | ) | $ | 3,228,092 | |||||
| |||||||||||||||
Balance at December 31, 2010 | $ | 3,355,350 | $ | (284,338 | ) | $ | (54,157 | ) | $ | 3,016,855 | |||||
Issue of share capital for cash | 505,436 | – | – | 505,436 | |||||||||||
Gains on derivatives designated as cash flow hedges, net of tax | – | – | 53,518 | 53,518 | |||||||||||
Gains on foreign currency translation | – | – | 50,319 | 50,319 | |||||||||||
Actuarial loss, net of tax | – | – | (7,642 | ) | (7,642 | ) | |||||||||
Net loss | – | (30,768 | ) | – | (30,768 | ) | |||||||||
Balance at September 30, 2011 | $ | 3,860,786 | $ | (315,106 | ) | $ | 42,038 | $ | 3,587,718 |
The accompanying notes are an integral part of these consolidated financial statements.
| INTERIM CONSOLIDATED FINANCIAL STATEMENTS |
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| Nine Months Ended September 30, | ||||||||
(thousands of Canadian dollars) | Notes | 2012 | 2011 | ||||||
Cash provided by (used in) | |||||||||
Operating Activities | |||||||||
Net loss | $ | (183,683 | ) | $ | (30,768 | ) | |||
Items not requiring cash | |||||||||
Depletion, depreciation and amortization | 512,678 | 450,556 | |||||||
Accretion of decommissioning and environmental remediation liabilities | 7, 13 | 15,488 | 17,662 | ||||||
Unrealized (gains) losses on risk management contracts | 17 | 911 | (4,212 | ) | |||||
Unrealized (gains) losses on foreign exchange | 14 | (4,985 | ) | 10,143 | |||||
Non-cash interest income | (432 | ) | (491 | ) | |||||
Unsuccessful exploration and evaluation costs | 5 | 21,940 | 10,952 | ||||||
Impairment on property, plant and equipment | 6 | 21,843 | – | ||||||
Gains on disposition of property, plant and equipment | (5,350 | ) | (745 | ) | |||||
Deferred income tax (recovery) expense | (56,707 | ) | 7,129 | ||||||
Other non-cash items | (7,207 | ) | 582 | ||||||
Settlement of decommissioning and environmental remediation liabilities | 7 | (16,079 | ) | (12,172 | ) | ||||
Change in non-cash working capital | 15 | 11,438 | (32,774 | ) | |||||
| 309,855 | 415,862 | |||||||
| |||||||||
Financing Activities | |||||||||
Issue of common shares, net of issue costs | – | 505,436 | |||||||
Bank borrowing, net of repayments | 215,335 | 244,179 | |||||||
Borrowings from related party loan | 20 | 167,977 | – | ||||||
Redemption of convertible debentures | 10 | (106,796 | ) | – | |||||
Other cash items | (224 | ) | – | ||||||
| 276,292 | 749,615 | |||||||
| |||||||||
Investing Activities | |||||||||
Business acquisitions | – | (509,591 | ) | ||||||
Additions to property, plant and equipment | 6 | (471,493 | ) | (750,647 | ) | ||||
Additions to exploration and evaluation assets | 5 | (38,332 | ) | (47,851 | ) | ||||
Additions to other long term assets | (2,014 | ) | (7,413 | ) | |||||
Property dispositions (acquisitions), net | 8,835 | (3,736 | ) | ||||||
Change in long-term liability | 8 | 3,317 | – | ||||||
Change in non-cash working capital | 15 | (83,880 | ) | 142,588 | |||||
| (583,567 | ) | (1,176,650 | ) | |||||
| |||||||||
Change in cash and cash equivalents | 2,580 | (11,173 | ) | ||||||
| |||||||||
Effect of exchange rate changes on cash | – | 107 | |||||||
| |||||||||
Cash and cash equivalents, beginning of period | 6,607 | 18,906 | |||||||
| |||||||||
Cash and cash equivalents, end of period | $ | 9,187 | $ | 7,840 | |||||
| |||||||||
Interest paid | $ | 52,983 | $ | 46,594 | |||||
Income tax paid | $ | 8 | $ | 5 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
| INTERIM CONSOLIDATED FINANCIAL STATEMENTS |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the three and nine months ended September 30, 2012 and 2011
(Tabular amounts in thousands of Canadian dollars)
| 1. | Nature of Operations and Structure of the Company | |
Harvest Operations Corp. (“Harvest” or the “Company”) is an energy company with petroleum and natural gas operations focused on the operation and further development of assets in western Canada (“Upstream”) and a medium gravity sour crude hydrocracking refinery and retail and wholesale petroleum marketing business both located in the Province of Newfoundland and Labrador (“Downstream”). Harvest’s Downstream business operates under its wholly owned subsidiary, North Atlantic Refining Limited (“North Atlantic”). | ||
Harvest is a wholly owned subsidiary of Korea National Oil Corporation (“KNOC”). The Company is incorporated and domiciled in Canada. Harvest’s principal place of business is located at 2100, 330 – 5thAvenue SW, Calgary, Alberta, Canada T2P 0L4. | ||
These consolidated financial statements were approved and authorized for issue by the Board of Directors on November 14, 2012. | ||
| 2. | Basis of Presentation | |
These interim consolidated financial statements have been prepared in accordance with IAS 34 – “Interim Financial Reporting” using accounting policies consistent with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). The interim consolidated financial statements do not include all of the information required for annual financial statements and should be read in conjunction with the Audited Consolidated Financial Statements as at and for the year ended December 31, 2011, which were prepared in accordance with IFRS as issued by the IASB. | ||
| (a) | Basis of Measurement | |
The consolidated financial statements have been prepared on the historical cost basis except for held- for-trading financial assets and derivative financial instruments, which are measured at fair value. | ||
| (b) | Functional and Presentation Currency | |
In these consolidated financial statements, unless otherwise indicated, all dollar amounts are expressed in Canadian dollars, which is the Company’s functional currency. All references to US$ are to United States dollars. | ||
| 3. | Significant Accounting Policies | |
These interim consolidated financial statements follow the same accounting principles and methods of application as those disclosed in note 2 to the Company’s Audited Consolidated Financial Statements as at and for the year ended December 31, 2011. | ||
The comparative consolidated financial statements have been reclassified from statements previously presented to conform to the presentation of the current period consolidated financial statements. | ||
| INTERIM CONSOLIDATED FINANCIAL STATEMENTS |
| 4. | Inventories |
| September 30, 2012 | December 31, 2011 | ||||||
Petroleum products | |||||||
Upstream – pipeline fill | $ | 1,063 | $ | 1,325 | |||
Downstream | 71,203 | 56,298 | |||||
Total petroleum product inventory | 72,266 | 57,623 | |||||
Parts and supplies | 3,767 | 3,329 | |||||
| $ | 76,033 | $ | 60,952 |
For the three months and nine months ended September 30, 2012, Downstream recognized an inventory recovery (net of impairments) of $4.2 million (2011 – impairment of $4.8 million) and an impairment charge (net of reversals) of $7.5 million (2011 - $8.0 million), respectively. These amounts are included with “purchased products for processing and resale” in the consolidated statements of comprehensive income. | |
| 5. | Exploration and Evaluation Assets (“E&E”) |
As at December 31, 2010 | $ | 59,554 | ||
Additions | 50,883 | |||
Acquisition | 18,627 | |||
Dispositions | (717 | ) | ||
Unsuccessful exploration & evaluation costs | (17,757 | ) | ||
Transfer to property, plant & equipment | (36,073 | ) | ||
As at December 31, 2011 | $ | 74,517 | ||
Additions | 38,332 | |||
Disposition | (368 | ) | ||
Unsuccessful exploration and evaluation costs | (21,940 | ) | ||
Transfer to property, plant and equipment | (16,213 | ) | ||
As at September 30, 2012 | $ | 74,328 |
Harvest determined certain E&E costs to be unsuccessful and not recoverable, which were expensed as follows, together with pre-licensing expenses:
| Three months ended | Nine months ended | ||||||||||||
| September 30 | September 30 | ||||||||||||
| 2012 | 2011 | 2012 | 2011 | ||||||||||
| Pre-licensing costs | $ | 150 | $ | 118 | $ | 2,762 | $ | 334 | |||||
| Unsuccessful E&E costs | 5,468 | 713 | 21,940 | 10,952 | |||||||||
| E&E expense | $ | 5,618 | $ | 831 | $ | 24,702 | $ | 11,286 | |||||
| INTERIM CONSOLIDATED FINANCIAL STATEMENTS |
| 6. | Property, Plant and Equipment (“PP&E”) |
| Upstream | Downstream | Total | |||||||
Cost: | ||||||||||
As at December 31, 2010 | $ | 3,964,155 | $ | 1,081,885 | $ | 5,046,040 | ||||
Additions | 682,497 | 284,244 | 966,741 | |||||||
Acquisitions | 533,963 | – | 533,963 | |||||||
Change in decommissioning liabilities | (18,245 | ) | 3,767 | (14,478 | ) | |||||
Transfers from E&E | 36,073 | – | 36,073 | |||||||
Disposals | (882 | ) | (18,031 | ) | (18,913 | ) | ||||
Exchange adjustment | – | 36,928 | 36,928 | |||||||
Investment tax credits | – | (10,187 | ) | (10,187 | ) | |||||
As at December 31, 2011 | $ | 5,197,561 | $ | 1,378,606 | $ | 6,576,167 | ||||
Additions | 438,807 | 32,686 | 471,493 | |||||||
Acquisitions | 1,270 | – | 1,270 | |||||||
Change in decommissioning liabilities | 6,674 | – | 6,674 | |||||||
Transfers from E&E | 16,213 | – | 16,213 | |||||||
Disposals | (4,385 | ) | – | (4,385 | ) | |||||
Exchange adjustment | – | (46,409 | ) | (46,409 | ) | |||||
Investment tax credits | – | (496 | ) | (496 | ) | |||||
As at September 30, 2012 | $ | 5,656,140 | $ | 1,364,387 | $ | 7,020,527 | ||||
| ||||||||||
Accumulated depletion, depreciation, amortization and impairment losses: | ||||||||||
As at December 31, 2010 | $ | 484,302 | $ | 78,502 | $ | 562,804 | ||||
Depreciation, depletion and amortization | 535,384 | 91,006 | 626,390 | |||||||
Disposals | – | (18,031 | ) | (18,031 | ) | |||||
Exchange adjustment | – | 4,617 | 4,617 | |||||||
As at December 31, 2011 | 1,019,686 | 156,094 | 1,175,780 | |||||||
Depreciation, depletion and amortization | 433,579 | 78,489 | 512,068 | |||||||
Impairment | 21,843 | – | 21,843 | |||||||
Exchange adjustment | – | (6,680 | ) | (6,680 | ) | |||||
As at September 30, 2012 | $ | 1,475,108 | $ | 227,903 | $ | 1,703,011 | ||||
| ||||||||||
Net Book Value | ||||||||||
As at September 30, 2012 | $ | 4,181,032 | $ | 1,136,484 | $ | 5,317,516 | ||||
As at December 31, 2011 | $ | 4,177,875 | $ | 1,222,512 | $ | 5,400,387 | ||||
General and administrative costs of $5.6 million and $17.2 million have been capitalized during the three and nine months ended September 30, 2012 (2011 – $5.5 million and $14.5 million respectively). Borrowing costs relating to the development of BlackGold assets and the Downstream debottlenecking project have been capitalized within PP&E during the three and nine months ended September 30, 2012 in the amounts of $3.9 million and $10.1 million (2011 – $2.6 million and $5.9 million respectively), at a weighted average interest rate of 5.74% and 5.65% respectively (2011 – 6.36% and 6.76% respectively).
At September 30, 2012 the following costs were excluded from the asset base subject to depreciation, depletion and amortization: BlackGold oil sands assets of $625.7 million (2011 – $497.2 million); Downstream assets under construction of $118.4million (2011 – $102.5 million); and Downstream major parts inventory of $7.3million (2011 – $7.5 million).
| INTERIM CONSOLIDATED FINANCIAL STATEMENTS |
PP&E impairment expense for the three and nine months ended September 30, 2012 was $nil and $21.8 million respectively (2011 - $nil). During the first quarter of 2012, Harvest recorded an impairment of $21.8 million (before tax) to its Upstream PP&E relating to certain gas properties in the South Alberta cash generating unit to reflect lower forecasted gas prices, which resulted in lower estimated future cash flows. The recoverable amount was based on the assets’ value-in-use, estimated using the net present value of the future cash flows using a pre-tax discount rate of 10%. | |
| 7. | Decommissioning & Environmental Remediation Liabilities |
Harvest estimates the total undiscounted amount of cash flows required to settle its decommissioning and environmental remediation liabilities to be approximately $1.5 billion at September 30, 2012 (2011 - $1.4 billion), which will be incurred between now and 2072. A risk-free discount rate of 3.0% (2011 - 3.0%) and inflation rate of 1.7% (2011 - 1.7%) were used to calculate the fair value of the decommissioning and environmental remediation liabilities. The following is a reconciliation of the decommissioning liabilities: |
| Upstream | Downstream | Total | |||||||
Decommissioning liabilities at December 31, 2010 | $ | 649,098 | $ | 10,426 | $ | 659,524 | ||||
Liabilities assumed on acquisitions | 36,403 | – | 36,403 | |||||||
Liabilities incurred | 26,922 | – | 26,922 | |||||||
Settled during the period | (22,110 | ) | – | (22,110 | ) | |||||
Revisions (change in estimate) | (46,627 | ) | 3,767 | (42,860 | ) | |||||
Disposals | (708 | ) | – | (708 | ) | |||||
Accretion | 22,895 | 400 | 23,295 | |||||||
Decommissioning liabilities at December 31, 2011 | $ | 665,873 | $ | 14,593 | $ | 680,466 | ||||
Environmental remediation at December 31, 2011 | 6,838 | – | 6,838 | |||||||
Balance at December 31, 2011 | $ | 672,711 | $ | 14,593 | $ | 687,304 | ||||
| ||||||||||
Decommissioning liabilities at December 31, 2011 | $ | 665,873 | $ | 14,593 | $ | 680,466 | ||||
Liabilities incurred | 14,210 | – | 14,210 | |||||||
Settled during the period | (14,939 | ) | – | (14,939 | ) | |||||
Revisions (change in estimated timing and costs) | (7,536 | ) | – | (7,536 | ) | |||||
Accretion | 15,007 | 324 | 15,331 | |||||||
Decommissioning liabilities at September 30, 2012 | $ | 672,615 | $ | 14,917 | $ | 687,532 | ||||
Environmental remediation at September 30, 2012 | 7,033 | – | 7,033 | |||||||
Balance at September 30, 2012 | $ | 679,648 | $ | 14,917 | $ | 694,565 | ||||
| ||||||||||
Current portion | $ | 22,664 | $ | – | $ | 22,664 | ||||
Non-current portion | 656,984 | 14,917 | 671,901 | |||||||
Balance at September 30, 2012 | $ | 679,648 | $ | 14,917 | $ | 694,565 |
| INTERIM CONSOLIDATED FINANCIAL STATEMENTS |
| 8. | Long-Term Liability |
On May 30, 2012, Harvest amended certain aspects of its BlackGold oil sands project engineering, procurement and construction (“EPC”) contract, including revising the compensation terms from a lump sum price to a cost reimbursable price and confirming greater Harvest control over project execution. The cost pressures and resultant contract changes are expected to increase the net EPC costs to approximately $520 million from $311 million, after allowing for certain costs which are not reimbursable to the EPC contractor. Harvest and the EPC contractor also agreed to apply the cumulative progress payments made under the lump sum contract and the remaining deposit of $24.4 million as at May 30, 2012 towards costs incurred to date. | |
Under the amended EPC contract, a maximum of approximately $101 million of the EPC costs will be paid in equal installments, without interest, over 10 years commencing on the completion of the EPC work in 2014. The liability is considered a financial liability and is initially recorded at fair value, which is estimated as the present value of all future cash payments discounted using the prevailing market rate of interest for similar instruments. As at September 30, 2012, Harvest recognized a liability of $3.3 million using a discount rate of 4.50%. | |
| 9. | Bank Loan |
Under the credit facility agreement, Harvest is required to maintain certain financial ratios. On June 29, 2012, the credit facility agreement was amended to revise the maximum allowable total debt to annualized EBITDA ratio from 3.5:1 to the following: |
| Twelve months ending | Total debt to annualized EBITDA(1) | |
| June 30, 2012 | 4.25:1.0 or less | |
| September 30, 2012 | 4.25:1.0 or less | |
| December 31, 2012 | 4.00:1.0 or less | |
| March 31, 2013 | 3.75:1.0 or less | |
| June 30, 2013 and thereafter | 3.50:1.0 or less |
| (1) | Calculated based on Harvest’s credit facility covenant requirements (see note 11). |
On July 31, 2012, Harvest extended the credit facility agreement by one year to April 30, 2016. Except for the above amendments, all other terms to the credit facility agreement remain unchanged. | |
At September 30, 2012, Harvest had $573.5 million drawn from the $800 million credit facility capacity (2011 - $358.9 million). The carrying value of the bank loan includes $3.1 million of deferred financial charges at September 30, 2012 (2011 - $3.3 million). For the three and nine month periods ended September 30, 2012, interest charges on bank loans aggregated to $4.6 million and $12.7 million (2011 - $1.7 million and $3.0 million respectively), reflecting an effective interest rate of 3.14% and 4.42% (2011 – 2.98% for both periods). | |
| 10. | Convertible Debentures |
On September 19, 2012, Harvest redeemed $106.8 million of the outstanding 6.40% series of convertible debentures at an amount of $1,024.90 per $1,000 principal amount. The redemption price was equal to the principal plus all accrued and unpaid interest thereon. Harvest recognized a nominal gain on the redemption, which has been included in “finance costs” in the consolidated statements of comprehensive income (see note 13). |
| INTERIM CONSOLIDATED FINANCIAL STATEMENTS |
| 11. | Capital Structure |
Harvest considers its capital structure to be its credit facility, senior notes, related party loan, convertible debentures and shareholder’s equity. |
| September 30, 2012 | December 31, 2011 | ||||||
| Bank loan(1) | $ | 573,495 | $ | 358,885 | |||
| Senior notes (US$500 million)(2) | 491,600 | 508,500 | |||||
| Related party loan (US$170 million)(2) | 167,144 | – | |||||
| Principal amount of convertible debentures | 627,177 | 733,973 | |||||
| $ | 1,859,416 | $ | 1,601,358 | ||||
| Shareholder’s equity | 3,228,092 | 3,453,644 | |||||
| $ | 5,087,508 | $ | 5,055,002 |
| (1) | Excludes deferred financing fees | |
| (2) | Principal amount converted at the period end exchange rate |
Harvest’s primary objective in its management of capital resources is to have access to capital to fund its financial obligations as well as future growth. Harvest monitors its capital structure and makes adjustments according to market conditions to remain flexible while meeting these objectives. Accordingly, Harvest may adjust its capital spending programs, issue equity, issue new debt or repay existing debt.
Harvest evaluates its capital structure using the following financial ratios. These ratios are also included in the externally imposed capital requirements under the Company’s credit facility, senior notes and convertible debentures. Harvest was in compliance with all debt covenants at September 30, 2012.
| Covenant | September 30, 2012 | December 31, 2011 | ||||||||
| Senior debt(1)to Annualized EBITDA(3) | 3.00 to 1.0 or less | 1.38 | 0.73 | |||||||
| Total debt(2)to Annualized EBITDA(3) | 4.25 to 1.0(4) or less | 3.73 | 2.72 | |||||||
| Senior debt(1)to Capitalization(5) | 50% or less | 14% | 10% | |||||||
| Total debt(2)to Capitalization(5) | 55% or less | 38% | 36% |
| (1) | Senior debt consists of letters of credit of $8.1 million (December 31, 2011 – $8.7 million), bank loan of $570.4 million (December 31, 2011 - $355.6 million) and guarantees of $75.8 million (December 31, 2011 - $92.1 million) at September 30, 2012. | |
| (2) | Total debt consists of senior debt, convertible debentures and senior notes. | |
| (3) | Annualized EBITDA is defined in Harvest’s credit facility agreement as earnings before finance costs, income tax expense or recovery, depletion, depreciation and amortization, exploration and evaluation costs, impairment of assets, unrealized gains or losses on risk management contracts, unrealized gains or losses on foreign exchange, gains or losses on disposition of assets and other non-cash items. | |
| (4) | The covenant ratio was changed from 3.5 to 1.0 to 4.25 to 1.0 on June 29, 2012. See note 9. | |
| (5) | Capitalization consists of total debt, related party loan and shareholder’s equity less equity for BlackGold of $458.8 million at September 30, 2012 (December 31, 2011 - $459.9 million). |
| 12. | Revenues |
| Three months ended | Nine months ended | ||||||||||||
| September 30 | September 30 | ||||||||||||
| 2012 | 2011 | 2012 | 2011 | ||||||||||
Petroleum and natural gas sales, net of royalty | $ | 239,346 | $ | 264,607 | $ | 751,971 | $ | 792,331 | |||||
Refined products sales | 1,026,161 | 576,504 | 3,461,788 | 2,140,031 | |||||||||
Effective portion of realized crude oil hedges | 9,610 | 7,128 | 21,306 | (8,508 | ) | ||||||||
| $ | 1,275,117 | $ | 848,239 | $ | 4,235,065 | $ | 2,923,854 | ||||||
| INTERIM CONSOLIDATED FINANCIAL STATEMENTS |
| 13. | Finance Costs |
| Three months ended | Nine months ended | ||||||||||||
| September 30 | September 30 | ||||||||||||
| 2012 | 2011 | 2012 | 2011 | ||||||||||
Interest and other finance charges | $ | 26,275 | $ | 23,493 | $ | 77,080 | $ | 69,334 | |||||
Accretion of decommissioning and environmental remediation liabilities | 5,158 | 5,819 | 15,488 | 17,662 | |||||||||
Gain on redemption of convertible debentures | (48 | ) | – | (48 | ) | – | |||||||
Less: capitalized interest | (3,878 | ) | (2,611 | ) | (10,125 | ) | (5,894 | ) | |||||
| $ | 27,507 | $ | 26,701 | $ | 82,395 | $ | 81,102 | |||||
| 14. | Foreign Exchange |
| Three months ended | Nine months ended | ||||||||||||
| September 30 | September 30 | ||||||||||||
| 2012 | 2011 | 2012 | 2011 | ||||||||||
Realized (gains) losses on foreign exchange | $ | 1,515 | $ | (9,029 | ) | $ | 823 | $ | (9,195 | ) | |||
Unrealized (gains) losses on foreign exchange | (5,811 | ) | 21,249 | (4,985 | ) | 10,143 | |||||||
| $ | (4,296 | ) | $ | 12,220 | $ | (4,162 | ) | $ | 948 | ||||
| 15. | Supplemental Cash Flow Information |
| Nine months ended September 30 | |||||||
| 2012 | 2011 | ||||||
Source (use) of cash: | |||||||
Accounts receivable and other | $ | 41,674 | $ | 3,218 | |||
Prepaid expenses and long-term deposit | 24,364 | 45,530 | |||||
Inventories | (15,081 | ) | (52,808 | ) | |||
Accounts payable and accrued liabilities | (124,900 | ) | 117,848 | ||||
Net changes in non-cash working capital | $ | (73,943 | ) | $ | 113,788 | ||
| |||||||
Changes relating to operating activities | 11,438 | (32,774 | ) | ||||
Changes relating to investing activities | (83,880 | ) | 142,588 | ||||
Add: Non-cash changes | (1,501 | ) | 3,974 | ||||
| $ | (73,943 | ) | $ | 113,788 | |||
| INTERIM CONSOLIDATED FINANCIAL STATEMENTS |
| 16. | Other Comprehensive Income (“OCI”) and Accumulated Other Comprehensive Income (“AOCI”) |
| Foreign | Designated | ||||||||||||
| Currency | Cash Flow | Actuarial | |||||||||||
| Translation | Hedges, Net of | Loss, Net of | |||||||||||
| Adjustment | Tax | Tax | Total | ||||||||||
AOCI at December 31, 2010 | $ | (45,920 | ) | $ | (5,020 | ) | $ | (3,217 | ) | $ | (54,157 | ) | |
Reclassification to net income of losses on cash flow hedges | – | 7,050 | – | 7,050 | |||||||||
Gains on derivatives designated as cash flow hedges | – | 12,371 | – | 12,371 | |||||||||
Actuarial loss | – | – | (4,891 | ) | (4,891 | ) | |||||||
Gains on foreign currency translation | 21,480 | – | – | 21,480 | |||||||||
AOCI at December 31, 2011 | $ | (24,440 | ) | $ | 14,401 | $ | (8,108 | ) | $ | (18,147 | ) | ||
Reclassification to net income of gains on cash flow hedges | – | (15,423 | ) | – | (15,423 | ) | |||||||
Gains on derivatives designated as cash flow hedges | – | 7,735 | – | 7,735 | |||||||||
Actuarial loss | – | – | (7,950 | ) | (7,950 | ) | |||||||
Losses on foreign currency translation | (26,231 | ) | – | – | (26,231 | ) | |||||||
AOCI at September 30, 2012 | $ | (50,671 | ) | $ | 6,713 | $ | (16,058 | ) | $ | (60,016 | ) |
The following table summarizes the impacts of the cash flow hedges on the OCI:
| Three months ended September 30 | Nine months ended September 30 | ||||||||||||||||||||||||
| After - tax | Pre - tax | After - tax | Pre - tax | ||||||||||||||||||||||
| 2012 | 2011 | 2012 | 2011 | 2012 | 2011 | 2012 | 2011 | ||||||||||||||||||
(Gains) losses reclassified from OCI to revenues | $ | (6,956 | ) | $ | (5,360 | ) | $ | (9,610 | ) | $ | (7,128 | ) | $ | (15,423 | ) | $ | 6,364 | $ | (21,306 | ) | $ | 8,508 | |||
Gains (losses) recognized in OCI | $ | (426 | ) | $ | 48,290 | $ | (588 | ) | $ | 64,221 | $ | 7,735 | $ | 47,154 | $ | 10,685 | $ | 63,031 | |||||||
| Total | $ | (7,382 | ) | $ | 42,930 | $ | (10,198 | ) | $ | 57,093 | $ | (7,688 | ) | $ | 53,518 | $ | (10,621 | ) | $ | 71,539 | |||||
Effective July 31, 2012, the Company discontinued hedge accounting for its crude oil and foreign exchange derivative contracts that had been previously designated as cash flow hedges as the hedges were no longer considered highly effective. Though the hedges no longer meet the criteria for hedge accounting, the hedged forecast crude sales are still expected to occur. As such, the cumulative gains or losses that had been recognized in OCI during the period when the hedges were effective remain in AOCI until the hedged transactions occur. Changes in the fair value of these derivative contracts subsequent to July 31, 2012 have been recognized in “risk management contracts gains or losses” within the consolidated statements of comprehensive income (see note 17). As at September 30, 2012, $6.7 million of gains remained in AOCI related to the effective cash flow hedges prior to the discontinuation of hedge accounting and are expected to be released to revenues within the next three months when the hedged sales affect earnings.
| INTERIM CONSOLIDATED FINANCIAL STATEMENTS |
| 17. | Financial Instruments |
(a) Fair Values | |
The carrying value and fair value of Harvest’s financial instruments are disclosed below by financial instrument category: |
| September 30, 2012 | December 31, 2011 | ||||||||||||
| Carrying | Carrying | ||||||||||||
| Value | Fair Value | Value | Fair Value | ||||||||||
Financial assets | |||||||||||||
Loans and Receivables | |||||||||||||
Accounts receivable and other | $ | 170,578 | $ | 170,578 | $ | 212,252 | $ | 212,252 | |||||
Held for Trading | |||||||||||||
Cash and cash equivalents | 9,187 | 9,187 | 6,607 | 6,607 | |||||||||
Risk management contracts | 8,631 | 8,631 | 20,162 | 20,162 | |||||||||
Total Financial Assets | $ | 188,396 | $ | 188,396 | $ | 239,021 | $ | 239,021 | |||||
Financial Liabilities | |||||||||||||
Measured at Amortized Cost | |||||||||||||
Accounts payable and accrued liabilities | 339,248 | 339,248 | 464,148 | 464,148 | |||||||||
Bank loan | 570,413 | 573,495 | 355,575 | 358,885 | |||||||||
Senior notes | 480,319 | 538,302 | 495,674 | 523,119 | |||||||||
Related party loan | 168,109 | 168,109 | – | – | |||||||||
Convertible debentures | 632,695 | 643,496 | 742,067 | 752,345 | |||||||||
Long-term liability | 3,317 | 3,317 | – | – | |||||||||
| Total Financial Liabilities | $ | 2,194,101 | $ | 2,265,967 | $ | 2,057,464 | $ | 2,098,497 | |||||
(b) Risk Management Contracts
Harvest at times uses electricity price swap contracts to manage some of its price risk exposure. These swap contracts are not designated as hedges and are entered into for periods consistent with forecast electricity purchases. Harvest did not have any electricity price swap contracts during the three and nine months ended September 30, 2012.
The Company enters into crude oil and foreign exchange contracts to reduce the volatility of cash flows from some of its forecast sales. Effective July 31, 2012, Harvest no longer designates its crude oil derivative contracts and certain foreign exchange contracts as cash flow hedges. Prior to the discontinuation of hedge accounting, the effective portion of the unrealized gains and losses was included in OCI. The effective portion of the realized gains and losses was removed from AOCI and included in petroleum, natural gas, and refined product sales (see note 16). The ineffective portion of the unrealized and realized gains and losses were recognized in the consolidated income statement. Subsequent to the discontinuation of hedge accounting, all changes in the fair value of these derivative contracts are recognized in the consolidated income statement.
Risk management contracts (gains) losses recorded to income include the ineffective portion of the gains or losses on the derivative contracts designated as cash flow hedges, the gains or losses on the derivatives that were not designated as hedges and the gains or losses subsequent to the discontinuation of hedge accounting on the previously designated derivatives:
| Three months ended September 30 | |||||||||||||||||||||||||
| 2012 | 2011 | ||||||||||||||||||||||||
| Crude | Crude | ||||||||||||||||||||||||
| Power | oil | Currency | Total | Power | oil | Currency | Total | ||||||||||||||||||
| Realized (gains) losses | $ | – | $ | 707 | $ | 143 | $ | 850 | $ | (3,178 | ) | $ | 1,471 | $ | – | $ | (1,707 | ) | |||||||
| Unrealized (gains) losses | – | 986 | 2 | 988 | 1,507 | (2,470 | ) | (163 | ) | (1,126 | ) | ||||||||||||||
| $ | – | $ | 1,693 | $ | 145 | $ | 1,838 | $ | (1,671 | ) | $ | (999 | ) | $ | (163 | ) | $ | (2,833 | ) | ||||||
| INTERIM CONSOLIDATED FINANCIAL STATEMENTS |
| Nine months ended September 30 | |||||||||||||||||||||||||
| 2012 | 2011 | ||||||||||||||||||||||||
| Crude | Crude | ||||||||||||||||||||||||
| Power | oil | Currency | Total | Power | oil | Currency | Total | ||||||||||||||||||
Realized (gains) losses | $ | – | $ | 725 | $ | 299 | $ | 1,024 | $ | (5,794 | ) | $ | 1,879 | $ | – | $ | (3,915 | ) | |||||||
Unrealized (gains) losses | – | 909 | 2 | 911 | (1,453 | ) | (2,596 | ) | (163 | ) | (4,212 | ) | |||||||||||||
| $ | – | $ | 1,634 | $ | 301 | $ | 1,935 | $ | (7,247 | ) | $ | (717 | ) | $ | (163 | ) | $ | (8,127 | ) | ||||||
The following is a summary of Harvest’s risk management contracts outstanding at September 30, 2012:
| Contracts Not Designated as Hedges | |||||||||||||
| Contract Quantity | Type of Contract | Term | Contract Price | Fair Value | |||||||||
| 4,200 bbls/day | Crude oil price swap | Oct – Dec 2012 | US $111.37/bbl | $ | 6,939 | ||||||||
| US $468/day | Foreign exchange swap | Oct – Dec 2012 | $1.0236 Cdn/US | 1,692 | |||||||||
| $ | 8,631 | ||||||||||||
| INTERIM CONSOLIDATED FINANCIAL STATEMENTS |
| 18. | Segment Information |
Harvest operates in Canada and has two reportable operating segments: Upstream and Downstream. Harvest’s Upstream operations consist of development, production and subsequent sale of petroleum, natural gas and natural gas liquids, while its Downstream operations include the purchase of crude oil, the refining of crude oil, the sale of the refined products including a network of retail operations and the supply of refined products to commercial and wholesale customers. |
| Three months ended September 30 | |||||||||||||||||||
| Downstream(2) | Upstream(2) | Total | |||||||||||||||||
| 2012 | 2011 | 2012 | 2011 | 2012 | 2011 | ||||||||||||||
Petroleum, natural gas and refined products sales(1) | $ | 1,026,161 | $ | 576,504 | $ | 285,666 | $ | 318,731 | $ | 1,311,827 | $ | 895,235 | |||||||
Royalties | – | – | (36,710 | ) | (46,996 | ) | (36,710 | ) | (46,996 | ) | |||||||||
Revenues | $ | 1,026,161 | $ | 576,504 | $ | 248,956 | $ | 271,735 | $ | 1,275,117 | $ | 848,239 | |||||||
| |||||||||||||||||||
Expenses | |||||||||||||||||||
Purchased products for resale and processing | 968,620 | 527,722 | – | – | 968,620 | 527,722 | |||||||||||||
Operating | 53,334 | 43,845 | 93,163 | 88,121 | 146,497 | 131,966 | |||||||||||||
Transportation and marketing | 757 | 2,295 | 5,287 | 9,758 | 6,044 | 12,053 | |||||||||||||
General and administrative | 150 | 441 | 16,677 | 14,621 | 16,827 | 15,062 | |||||||||||||
Depletion, depreciation and amortization | 25,182 | 22,532 | 142,648 | 137,070 | 167,830 | 159,602 | |||||||||||||
Exploration and evaluation | – | – | 5,618 | 831 | 5,618 | 831 | |||||||||||||
Gains on disposition of PP&E | – | – | (4,881 | ) | (65 | ) | (4,881 | ) | (65 | ) | |||||||||
Risk management contracts (gains) losses | – | – | 1,838 | (2,833 | ) | 1,838 | (2,833 | ) | |||||||||||
Operating income (loss) | $ | (21,882 | ) | $ | (20,331 | ) | $ | (11,394 | ) | $ | 24,232 | $ | (33,276 | ) | $ | 3,901 | |||
| |||||||||||||||||||
Finance costs | 27,507 | 26,701 | |||||||||||||||||
Foreign exchange (gains) losses | (4,296 | ) | 12,220 | ||||||||||||||||
Loss before income tax | $ | (56,487 | ) | $ | (35,020 | ) | |||||||||||||
| |||||||||||||||||||
Income tax recovery (expense) | (18,178 | ) | 14,184 | ||||||||||||||||
Net loss | $ | (38,309 | ) | $ | (49,204 | ) | |||||||||||||
| (1) | Of the total Downstream revenue, one customer represents sales of $853.1 million for the three months ended September 30, 2012 (2011 – two customers with sales of $368.9 million and $30.9 million). No other single customer within either segment represents greater than 10% of Harvest’s total revenue. | |
| (2) | There is no intersegment activity. |
| Three months ended September 30 | |||||||||||||||||||
| Downstream | Upstream | Total | |||||||||||||||||
| Capital Expenditures | 2012 | 2011 | 2012 | 2011 | 2012 | 2011 | |||||||||||||
Business acquisition | $ | – | $ | – | $ | – | $ | (2,932 | ) | $ | – | $ | (2,932 | ) | |||||
Additions to PP&E | 12,886 | 100,132 | 106,276 | 184,316 | 119,162 | 284,448 | |||||||||||||
Additions to E&E | – | – | 7,636 | 6,281 | 7,636 | 6,281 | |||||||||||||
Additions to other long term assets | – | – | 2,014 | 7,413 | 2,014 | 7,413 | |||||||||||||
Property acquisitions (dispositions), net | – | – | (8,082 | ) | 350 | (8,082 | ) | 350 | |||||||||||
Total expenditures | $ | 12,886 | $ | 100,132 | $ | 107,844 | $ | 195,428 | $ | 120,730 | $ | 295,560 | |||||||
| INTERIM CONSOLIDATED FINANCIAL STATEMENTS |
| Nine months ended September 30 | |||||||||||||||||||
| Downstream(2) | Upstream(2) | Total | |||||||||||||||||
| 2012 | 2011 | 2012 | 2011 | 2012 | 2011 | ||||||||||||||
Petroleum, natural gas and refined products sales(1) | $ | 3,461,788 | $ | 2,140,031 | $ | 902,194 | $ | 923,238 | $ | 4,363,982 | $ | 3,063,269 | |||||||
Royalties | – | – | (128,917 | ) | (139,415 | ) | (128,917 | ) | (139,415 | ) | |||||||||
Revenues | $ | 3,461,788 | $ | 2,140,031 | $ | 773,277 | $ | 783,823 | $ | 4,235,065 | $ | 2,923,854 | |||||||
| |||||||||||||||||||
Expenses | |||||||||||||||||||
Purchased products for resale and processing | 3,309,139 | 1,941,396 | – | – | 3,309,139 | 1,941,396 | |||||||||||||
Operating | 183,886 | 143,643 | 281,674 | 254,031 | 465,560 | 397,674 | |||||||||||||
Transportation and marketing | 3,111 | 5,229 | 16,354 | 23,886 | 19,465 | 29,115 | |||||||||||||
General and administrative | 450 | 1,323 | 46,792 | 42,960 | 47,242 | 44,283 | |||||||||||||
Depletion, depreciation and amortization | 78,489 | 64,208 | 434,189 | 386,348 | 512,678 | 450,556 | |||||||||||||
Exploration and evaluation | – | – | 24,702 | 11,286 | 24,702 | 11,286 | |||||||||||||
Gains on disposition of PP&E | – | – | (5,350 | ) | (745 | ) | (5,350 | ) | (745 | ) | |||||||||
Risk management contracts (gains) losses | – | – | 1,935 | (8,127 | ) | 1,935 | (8,127 | ) | |||||||||||
Impairment on PP&E | – | – | 21,843 | – | 21,843 | – | |||||||||||||
Operating income (loss) | $ | (113,287 | ) | $ | (15,768 | ) | $ | (48,862 | ) | $ | 74,184 | $ | (162,149 | ) | $ | 58,416 | |||
| |||||||||||||||||||
Finance costs | 82,395 | 81,102 | |||||||||||||||||
Foreign exchange (gains) losses | (4,162 | ) | 948 | ||||||||||||||||
Loss before income tax | $ | (240,382 | ) | $ | (23,634 | ) | |||||||||||||
| |||||||||||||||||||
Income tax (recovery) expense | (56,699 | ) | 7,134 | ||||||||||||||||
Net loss | $ | (183,683 | ) | $ | (30,768 | ) | |||||||||||||
| (1) | Of the total Downstream revenue, one customer represents sales of $2.9 billion for the nine months ended September 30, 2012 (2011 – two customers with sales of $1.4 billion and $161.3 million). No other single customer within either segment represents greater than 10% of Harvest’s total revenue. | |
| (2) | There is no intersegment activity. |
| Nine months ended September 30 | |||||||||||||||||||
| Downstream | Upstream | Total | |||||||||||||||||
| Capital Expenditures | 2012 | 2011 | 2012 | 2011 | 2012 | 2011 | |||||||||||||
| Business acquisition | $ | – | $ | – | $ | – | $ | 509,591 | $ | – | $ | 509,591 | |||||||
| Additions to PP&E | 32,686 | 244,752 | 438,807 | 505,895 | 471,493 | 750,647 | |||||||||||||
| Additions to E&E | – | – | 38,332 | 47,851 | 38,332 | 47,851 | |||||||||||||
| Additions to other long term assets | – | – | 2,014 | 7,413 | 2,014 | 7,413 | |||||||||||||
| Property acquisitions (dispositions), net | – | – | (8,835 | ) | 3,736 | (8,835 | ) | 3,736 | |||||||||||
| Total expenditures | $ | 32,686 | $ | 244,752 | $ | 470,318 | $ | 1,074,486 | $ | 503,004 | $ | 1,319,238 | |||||||
| INTERIM CONSOLIDATED FINANCIAL STATEMENTS |
| Other Long- | ||||||||||||||||
| Total Assets | PP&E | E&E | Term Assets | Goodwill | ||||||||||||
| September 30, 2012 | ||||||||||||||||
| Downstream | $ | 1,317,454 | $ | 1,136,484 | $ | – | $ | – | $ | – | ||||||
| Upstream | 4,845,459 | 4,181,032 | 74,328 | 8,509 | 404,943 | |||||||||||
| Total | $ | 6,162,913 | $ | 5,137,516 | $ | 74,328 | $ | 8,509 | $ | 404,943 | ||||||
| December 31, 2011 | ||||||||||||||||
| Downstream | $ | 1,408,112 | $ | 1,222,512 | $ | – | $ | – | $ | – | ||||||
| Upstream | 4,876,258 | 4,177,875 | 74,517 | 7,105 | 404,943 | |||||||||||
| Total | $ | 6,284,370 | $ | 5,400,387 | $ | 74,517 | $ | 7,105 | $ | 404,943 |
| 19. | Commitments |
The following is a summary of Harvest’s contractual obligations and commitments as at September 30, 2012:
| Maturity | ||||||||||||||||
| After 5 | ||||||||||||||||
| 1 year | 2-3 years | 4-5 years | years | Total | ||||||||||||
Debt repayments(1) | $ | 330,548 | $ | 296,629 | $ | 573,495 | $ | 658,744 | $ | 1,859,416 | ||||||
Debt interest payments(1) | 98,690 | 136,643 | 89,606 | – | 324,939 | |||||||||||
Purchase commitments(2) | 259,836 | 83,663 | 20,000 | 60,000 | 423,499 | |||||||||||
Operating leases | 11,928 | 16,814 | 6,645 | 786 | 36,173 | |||||||||||
Transportation agreements(3) | 9,659 | 12,714 | 2,790 | 218 | 25,381 | |||||||||||
Feedstock & other purchase commitments(4) | 842,509 | – | – | – | 842,509 | |||||||||||
Employee benefits(5) | 10,730 | 15,787 | 9,351 | 236 | 36,104 | |||||||||||
Decommissioning liabilities and environmental remediation liabilities(6) | 22,664 | 37,865 | 34,256 | 1,372,370 | 1,467,155 | |||||||||||
Total | $ | 1,586,564 | $ | 600,115 | $ | 736,143 | $ | 2,092,354 | $ | 5,015,176 | ||||||
| (1) | Assumes constant period end foreign exchange rate. | |
| (2) | Relates to the BlackGold oil sands project commitment, drilling commitments, and Downstream capital commitments. . | |
| (3) | Relates to firm transportation commitments. | |
| (4) | Includes commitments to purchase refinery crude stock under the supply and offtake agreement, purchased fuel and other additives. | |
| (5) | Relates to the expected contributions to employee benefit plans and long-term incentive plan payments. | |
| (6) | Represents the undiscounted obligation by period. |
| 20. | Related Party Transactions |
For the three and nine months ended September 30, 2012, Harvest billed KNOC and certain KNOC subsidiaries for a total of $0.9 million and $1.7 million, respectively (2011 - $0.2 million and $0.5 million) primarily related to technical services provided by Harvest’s Global Technology and Research Centre (“GTRC”). As at September 30, 2012, $0.8 million (2011 - $1.1 million) remained outstanding from KNOC in accounts receivable. KNOC billed Harvest $0.1 million for the nine months ended September 30, 2012 (2011 – $nil) for reimbursement to KNOC for secondee salaries. As at September 30, 2012, $0.2 million (2011 - $0.6 million) remains outstanding in accounts payable.
KNOC Trading Corporation (“KNOC Trading”) is a wholly owned subsidiary of North Atlantic. On a monthly basis, KNOC Trading receives revenue from ANKOR E&P Holdings Corp. (“ANKOR”) and Dana Petroleum plc (“Dana”), both of which are wholly owned U.S. subsidiaries of KNOC, by providing oil marketing service such as the sale of products on behalf of ANKOR and Dana. For the three and nine months ended September 30, 2012, all of KNOC Trading’s revenue of $0.3 million and $0.6 million respectively (2011 - $nil) were derived from ANKOR and Dana.
On August 16, 2012, Harvest entered into a subordinated loan agreement with ANKOR to borrow US $170 million at a fixed interest rate of 4.62% per annum. The principal balance outstanding and accrued interest is revalued using the exchange rate at the end of each reporting period. At September 30, 2012, $167.1 million of principal and $1.0 million of accrued interest remained outstanding. Interest expense was $1.0 million for the three and nine months ended September 30, 2012. Harvest may, at its sole discretion, repay the principal in whole or in part without premium or penalty, together with all accrued interest at any time during the term of the agreement. No payments of principal or interests are scheduled before the maturity of the loan on October 2, 2017. The loan is unsecured and the loan agreement contains no restrictive covenants. For purposes of Harvest’s bank loan covenant requirements, the loan is excluded from the ‘total debt’ amount but included in the ‘total capitalization’ amount.