| Harvest Energy Trust | ||||
| Consolidated Balance Sheets (Unaudited) | ||||
|
|
|
| |
| (thousands of Canadian dollars) |
|
|
|
|
|
|
|
| |
| September 30, 2006 |
| December 31, 2005 | |
| Assets |
|
|
|
|
|
|
|
| |
| Current assets |
|
|
|
|
Accounts receivable | $ | 180,358 | $ | 73,766 |
Fair value of risk management contracts [Note 12] |
| 16,422 |
| 21,231 |
Prepaid expenses and deposits |
| 8,046 |
| 1,126 |
Future income tax |
| - |
| 22,975 |
| 204,826 |
| 119,098 | |
|
|
|
| |
| Deferred charges [Note 3] |
| 11,417 |
| 12,768 |
| Fair value of risk management contracts [Note 12] |
| 15,167 |
| 2,628 |
| Deposit on North Atlantic Refinery Limited [Note 15] |
| 111,292 |
| - |
| Property, Plant and Equipment [Note 4] |
| 3,077,821 |
| 1,130,155 |
| Goodwill [Note 2] |
| 656,248 |
| 43,832 |
$ | 4,076,771 | $ | 1,308,481 | |
|
|
|
| |
| Liabilities and Unitholders' Equity |
|
|
|
|
|
|
|
| |
| Current liabilities |
|
|
|
|
Accounts payable and accrued liabilities [Note 5] | $ | 228,708 | $ | 99,576 |
Cash distribution payable |
| 42,163 |
| 18,544 |
Fair value deficiency of risk management contracts [Note 12] |
| 24,850 |
| 65,968 |
| 295,721 |
| 184,088 | |
|
|
|
| |
| Bank loan [Note 7] |
| 591,189 |
| 13,869 |
| Fair value deficiency of risk management contracts [Note 12] |
| 24,812 |
| 10,449 |
| 77/8% Senior notes |
| 279,425 |
| 290,750 |
| Convertible debentures [Note 8] |
| 235,114 |
| 44,455 |
| Deferred credit |
| 881 |
| 1,389 |
| Asset retirement obligation [Note 6] |
| 193,182 |
| 110,693 |
| Future income tax |
| - |
| 25,275 |
|
|
|
| |
| Non-controlling interest [Note 11] |
| - |
| 3,179 |
|
|
|
| |
| Unitholders' equity |
|
|
|
|
Unitholders' capital [Note 9] |
| 2,757,381 |
| 747,312 |
Equity component of convertible debentures [Note 8] |
| 24,539 |
| 2,639 |
Accumulated income |
| 269,622 |
| 135,665 |
Accumulated distributions |
| (595,095) |
| (261,282) |
| 2,456,447 |
| 624,334 | |
$ | 4,076,771 | $ | 1,308,481 | |
| Commitments, contingencies, and guarantees [Note 14] | ||||
| Subsequent events [Note 15] | ||||
| See accompanying notes to these consolidated financial statements | ||||
1
| Harvest Energy Trust | ||||||||
| Consolidated Statements of Income and Accumulated Income (Unaudited) | ||||||||
|
|
|
|
|
|
|
| |
| (thousands of Canadian dollars, except per Trust Unit amounts) |
|
|
|
|
|
|
|
|
Three Months | Three Months | Nine Months | Nine Months | |||||
| Ended |
| Ended |
| Ended |
| Ended | |
Sept 30, 2006 | Sept 30, 2005 | Sept 30, 2006 | Sept 30, 2005 | |||||
| Revenue |
|
|
|
|
|
|
|
|
Petroleum and natural gas sales | $ | 314,180 | $ | 208,628 | $ | 847,465 | $ | 481,672 |
Royalty expense |
| (54,362) |
| (38,974) |
| (149,384) |
| (81,824) |
Risk management contracts |
|
|
|
|
|
|
|
|
Realized net losses |
| (24,032) |
| (22,182) |
| (56,623) |
| (64,255) |
Unrealized net gains (losses) |
| 77,078 |
| (3,948) |
| 35,966 |
| (73,524) |
| 312,864 |
| 143,524 |
| 677,424 |
| 262,069 | |
|
|
|
|
|
|
|
| |
| Expenses |
|
|
|
|
|
|
|
|
Operating |
| 62,489 |
| 32,385 |
| 173,176 |
| 88,122 |
Transportation and marketing |
| 3,535 |
| 56 |
| 9,223 |
| 302 |
General and administrative |
| 7,500 |
| 12,971 |
| 21,825 |
| 25,046 |
Transaction charges |
| - |
| - |
| 12,072 |
| - |
Interest and other financing charges on short term |
|
|
|
|
|
|
|
|
debt |
| - |
| 1,083 |
| - |
| 6,452 |
Interest and other financing charges on long term |
|
|
|
|
|
|
|
|
debt |
| 16,685 |
| 7,682 |
| 42,573 |
| 21,460 |
Depletion, depreciation and accretion |
| 115,223 |
| 48,969 |
| 297,726 |
| 127,944 |
Foreign exchange (gain) loss |
| 163 |
| (13,974) |
| (11,327) |
| (8,607) |
Large corporations tax and other tax |
| (499) |
| 76 |
| 8 |
| 831 |
Future income tax (recovery) |
| - |
| 1,195 |
| (2,300) |
| (28,633) |
Non-controlling interest [Note 11] |
| - |
| 219 |
| (65) |
| (156) |
| 205,096 |
| 90,662 |
| 542,911 |
| 232,761 | |
| Net income for the period |
| 107,768 |
| 52,862 |
| 134,513 |
| 29,308 |
|
|
|
|
|
|
|
| |
| Accumulated income, beginning of period |
| 161,854 |
| 7,165 |
| 135,665 |
| 30,719 |
Redemption of exchangeable shares |
| - |
| - |
| (556) |
| - |
|
|
|
|
|
|
|
| |
| Accumulated income, end of period | $ | 269,622 | $ | 60,027 |
| 269,622 | $ | 60,027 |
|
|
|
|
|
|
|
| |
| Net income per Trust Unit, basic [Note 9] | $ | 1.01 | $ | 1.09 | $ | 1.39 | $ | 0.66 |
| Net income per Trust Unit, diluted [Note 9] | $ | 0.99 | $ | 1.08 | $ | 1.38 | $ | 0.64 |
| Consolidated Statements of Accumulated Distributions (Unaudited) | ||||||||
| (thousands of Canadian dollars) | ||||||||
Three Months | Three Months | Nine Months | Nine Months | |||||
| Ended |
| Ended |
| Ended |
| Ended | |
Sept 30, 2006 | Sept 30, 2005 | Sept 30, 2006 | Sept 30, 2005 | |||||
|
|
|
|
|
|
|
| |
| Accumulated distributions, beginning of period | $ | 471,983 | $ | 159,376 | $ | 261,282 | $ | 97,110 |
| Distributions |
| 123,112 |
| 46,691 |
| 333,813 |
| 108,957 |
| Accumulated distributions, end of period | $ | 595,095 | $ | 206,067 | $ | 595,095 | $ | 206,067 |
|
|
|
|
|
|
|
| |
| See accompanying notes to these consolidated financial statements. | ||||||||
2
| Harvest Energy Trust |
|
|
|
|
|
|
|
|
| Consolidated Statements of Cash Flows (Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| (thousands of Canadian dollars) |
|
|
|
|
|
|
|
|
| Three |
| Three |
| Nine |
| Nine | |
| Months |
| Months |
| Months |
| Months | |
| Ended |
| Ended |
| Ended |
| Ended | |
| Sept 30, |
| Sept 30, |
| Sept 30, |
| Sept 30, | |
| 2006 |
| 2005 |
| 2006 |
| 2005 | |
| Cash provided by (used in) |
|
|
|
|
|
|
|
|
| Operating Activities |
|
|
|
|
|
|
|
|
Net income for the period | $ | 107,768 | $ | 52,862 | $ | 134,513 | $ | 29,308 |
Items not requiring cash |
|
|
|
|
|
|
|
|
Depletion, depreciation and accretion |
| 115,223 |
| 48,969 |
| 297,726 |
| 127,944 |
Unrealized foreign exchange gain |
| 834 |
| (13,829) |
| (10,289) |
| (8,038) |
Amortization of deferred finance charges and discount on debt |
| 1,095 |
| 894 |
| 3,972 |
| 4,334 |
Unrealized loss (gain) on risk management contracts [Note 12] |
| (77,078) |
| 3,948 |
| (35,966) |
| 73,524 |
Future income tax (recovery) |
| - |
| 1,195 |
| (2,300) |
| (28,633) |
Non-controlling interest |
| - |
| 219 |
| (65) |
| (156) |
Unit based compensation expense |
| (816) |
| 9,250 |
| 1,725 |
| 15,129 |
Deferred rent expense |
| (127) |
| - |
| (271) |
| - |
Amortization of office lease premium |
| 56 |
| - |
| 149 |
| - |
Settlement of asset retirement obligations |
| (2,285) |
| (1,169) |
| (4,028) |
| (2,333) |
Change in non-cash working capital [Note 13] |
| (1,073) |
| 29,810 |
| (17,824) |
| (25,867) |
| 143,597 |
| 132,149 |
| 367,342 |
| 185,212 | |
|
|
|
|
|
|
|
| |
| Financing Activities |
|
|
|
|
|
|
|
|
Issue of Trust Units, net of issue costs |
| 217,950 |
| 167,595 |
| 217,849 |
| 167,507 |
Redemption of exchangeable shares |
| - |
| - |
| (1,022) |
| - |
Borrowings of bank loan, net |
| 363,644 | (103,442) |
| 471,072 |
| (40,871) | |
Issuance of convertible debentures |
| - |
| 75,000 |
| - |
| 75,000 |
Issue costs for convertible debentures |
| - |
| (3,223) |
| - |
| (3,223) |
Financing costs |
| (54) |
| (1,518) |
| (1,183) |
| (2,052) |
Cash distributions |
| (73,566) |
| (29,286) | (184,734) |
| (74,314) | |
Change in non-cash working capital [Note 13] |
| 7,879 |
| 5,960 |
| (10,891) |
| 5,647 |
| 515,853 |
| 111,086 |
| 491,091 |
| 127,694 | |
|
|
|
|
|
|
|
| |
| Investing Activities |
|
|
|
|
|
|
|
|
Additions to Property, Plant and Equipment |
| (129,054) |
| (31,655) | (286,523) |
| (81,032) | |
Acquisition of Birchill Energy Limited |
| (452,269) |
| - | (452,269) |
| - | |
Acquisition of Hay River |
| - | (210,505) |
| - | (236,505) | ||
Deposit on North Atlantic Refinery Ltd. |
| (111,292) |
| - | (111,292) |
| - | |
Property acquisitions |
| (312) |
| 839 |
| (23,984) |
| (2,791) |
Change in non-cash working capital [Note 13] |
| 33,477 |
| (1,914) |
| 15,635 |
| 7,422 |
| (659,450) | (243,235) | (858,433) | (312,906) | ||||
|
|
|
|
|
|
|
| |
| Change in cash being cash at beginning and end of period | $ | - | $ | - | $ | - | $ | - |
|
|
|
|
|
|
|
| |
| Interest paid | $ | 6,304 | $ | 13,041 | $ | 23,586 | $ | 17,257 |
| Large corporation tax and other tax paid | $ | 68 | $ | 1,733 | $ | 880 | $ | 2,079 |
| See accompanying notes to these consolidated financial statements. | ||||||||
3
| Harvest Energy Trust |
| Notes to Unaudited Consolidated Financial Statements |
| Period ended September 30, 2006 |
| (Tabular amounts in thousands of Canadian dollars, except Trust Unit and per Trust Unit amounts) |
1. Significant Accounting Policies
These interim consolidated financial statements of Harvest Energy Trust (the "Trust" or "Harvest") have been prepared by management in accordance with Canadian generally accepted accounting principles ("Canadian GAAP"). The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingencies, if any, as at the date of the financial statements and the reported amounts of revenues and expenses during the period. In the opinion of management, these financial statements have been prepared within reasonable limits of materiality. These interim consolidated financial statements follow the same significant accounting policies as described and used in the consolidated financial statements of the Trust for the year ended December 31, 2005 and should be read in conjunction with that report.
These consolidated financial statements include the accounts of Harvest Energy Trust, its wholly owned subsidiaries and its proportionate interest in a partnership with a third party.
2. Business Acquisitions
Birchill Energy Limited ("BEL")
On July 26, 2006, management signed a binding agreement to purchase all of the issued and outstanding shares of BEL on August 15, 2006 for $452.3 million net of working capital adjustments and transaction costs. The results of operations of BEL have been included in the consolidated financial statements since the time of effective control, July 26, 2006.
The Trust's aggregate consideration for the acquisition of BEL consists of the following:
| Consideration for the acquisition: |
| Amount |
| Cash paid | $ | 450,960 |
| Acquisition costs |
| 1,309 |
$ | 452,269 |
This transaction has been accounted for using the purchase method whereby the assets acquired and the liabilities assumed are recorded at their fair values with the excess of the aggregate consideration over the fair value of the identifiable net assets allocated to goodwill. The following summarizes the allocation of the aggregate consideration for the BEL acquisition.
| Consideration for the acquisition: |
| Amount |
| Net working capital | $ | (2,001) |
| Capital assets |
| 455,489 |
| Asset retirement obligation |
| (1,219) |
$ | 452,269 |
The above amounts are estimates made by management based on currently available information. Amendments may be made to the purchase equation as the cost estimates and balances are finalized.
Viking Energy Royalty Trust ("Viking")
On February 3, 2006, the unitholders of the Trust and Viking voted to approve a resolution to effect the Plan of Arrangement (the "Plan of Arrangement") by which unitholders of Viking received 0.25 Harvest Trust Units for every Viking Trust Unit held, and the Trust acquired all of the assets and assumed all of the liabilities of Viking for total consideration of approximately $1,638.1 million. This amount consisted of the issuance of 46,040,788 Trust Units [Note 9(b)] at an ascribed value of $35.58 per Trust Unit, based on the weighted average trading price of the Harvest Trust Units before and after the announcement date of November 28, 2005. Pursuant to the terms and conditions of Vikings' convertible debenture indenture, Harvest's acquisition of Viking's net assets resulted in Harvest assuming the obligations of Viking's convertible debentures, including the adjustment of the conversion ratio to reflect the 0.25 Harvest Trust Unit for each Viking Trust Unit exchange ratio.
4
| Harvest Energy Trust |
| Notes to Unaudited Consolidated Financial Statements |
| Period ended September 30, 2006 |
| (Tabular amounts in thousands of Canadian dollars, except Trust Unit and per Trust Unit amounts) |
The Trust's aggregate consideration for the acquisition of Viking consists of the following:
| Consideration for the acquisition: |
| Amount |
| Ascribed value of Trust Units issued | $ | 1,638,131 |
| Bank debt assumed |
| 106,247 |
| Convertible debentures assumed |
|
|
Debt component |
| 202,232 |
Equity component |
| 24,123 |
| Acquisition costs |
| 4,600 |
$ | 1,975,333 |
This transaction has been accounted for using the purchase method whereby the assets acquired and the liabilities assumed are recorded at their fair values with the excess of the aggregate consideration over the fair value of the identifiable net assets allocated to goodwill. The following summarizes the allocation of the aggregate consideration for the Viking acquisition.
| Allocation of purchase price: |
| Amount |
| Net working capital deficiency | $ | (31,297) |
| Capital assets |
| 1,455,000 |
| Fair value deficiency of risk management contracts |
| (1,224) |
| Fair value of office lease |
| 931 |
| Goodwill |
| 612,416 |
| Asset retirement obligation |
| (60,493) |
$ | 1,975,333 |
Effective February 3, 2006, the results of Viking have been included in the consolidated financial statements.
3. Deferred Charges
September 30, 2006 | December 31, 2005 | |||
| Financing costs | $ | 9,153 | $ | 11,064 |
| Fair value of office lease [Note 2] |
| 782 |
| - |
| Discount on Senior Notes |
| 1,482 |
| 1,704 |
$ | 11,417 | $ | 12,768 | |
5
| Harvest Energy Trust |
| Notes to Unaudited Consolidated Financial Statements |
| Period ended September 30, 2006 |
| (Tabular amounts in thousands of Canadian dollars, except Trust Unit and per Trust Unit amounts) |
4. Property, Plant and Equipment
|
|
| Accumulated |
|
| |
|
|
| depletion and |
| Net book | |
| September 30, 2006 |
| Cost |
| depreciation |
| value |
| Petroleum and natural gas expenditures | $ | 3,663,542 | $ | (592,071) | $ | 3,071,471 |
| Office furniture and equipment |
| 8,719 |
| (2,369) |
| 6,350 |
| Total | $ | 3,672,261 | $ | (594,440) | $ | 3,077,821 |
|
|
|
|
|
| |
|
|
| Accumulated |
|
| |
|
|
| depletion and |
| Net book | |
| December 31, 2005 |
| Cost |
| depreciation |
| value |
| Petroleum and natural gas expenditures | $ | 1,433,284 | $ | (307,384) | $ | 1,125,900 |
| Office furniture and equipment |
| 5,377 |
| (1,122) |
| 4,255 |
| Total | $ | 1,438,661 | $ | (308,506) | $ | 1,130,155 |
General and administrative costs of $2.4 million have been capitalized during the three month period ended September 30, 2006 (three months ended September 30, 2005- $2.6 million), of which $128,000 (three months ended September 30, 2005 - $2,080,474) relate to the Trust Unit incentive plan and the Unit award incentive plan. For the nine month period ended September 30, 2006 $9.2 million (nine months ended September 30, 2005 - $4.5 million) of general and administrative costs have been capitalized, of which $2.9 million (nine months ended September 30, 2005 - $3.2 million) relate to the Trust Unit incentive plan and the unit award incentive plan.
5. Accounts Payable and Accrued Liabilities
September 30, 2006 | December 31, 2005 | |||
| Trade accounts payable | $ | 45,192 | $ | 22,484 |
| Accrued interest |
| 16,060 |
| 4,959 |
| Trust Unit Incentive Plan and Unit Award |
|
|
|
|
Incentive Plan [Note 10] |
| 7,623 |
| 17,828 |
| Premium on price risk management contract |
| - |
| 462 |
| Other accrued liabilities |
| 160,053 |
| 53,223 |
| Large corporation taxes payable |
| (220) |
| 620 |
$ | 228,708 | $ | 99,576 | |
6. Asset Retirement Obligation
The Trust's asset retirement obligation results from its net ownership interest in petroleum and natural gas assets including well sites, gathering systems and processing facilities and the estimated costs and timing to reclaim and abandon them. The Trust estimates the total undiscounted amount of cash flows required to settle its asset retirement obligation to be approximately $636 million which will be incurred between 2006 and 2053. The majority of the costs will be incurred between 2015 and 2026. A credit-adjusted risk-free discount rate of 8% and inflation rate of approximately 1% were used to calculate the fair value of the asset retirement obligation as at September 30, 2006.
6
| Harvest Energy Trust |
| Notes to Unaudited Consolidated Financial Statements |
| Period ended September 30, 2006 |
| (Tabular amounts in thousands of Canadian dollars, except Trust Unit and per Trust Unit amounts) |
A reconciliation of the asset retirement obligation is provided below:
Nine months ended September 30, 2006 | Year ended December 31, 2005 | |||
|
|
|
|
|
Balance, beginning of period | $ | 110,693 | $ | 90,085 |
Incurred on acquisition of Viking |
| 60,493 |
| - |
Incurred on acquisition of BEL |
| 1,219 |
| - |
Liabilities incurred |
| 839 |
| 7,328 |
Revision of estimates |
| 12,173 |
| 8,656 |
Liabilities settled |
| (4,028) |
| (4,146) |
Accretion expense |
| 11,793 |
| 8,770 |
Balance, end of period | $ | 193,182 | $ | 110,693 |
7. Bank Loan
The Trust entered into a new credit facility agreement on February 3, 2006, that increased its borrowing capacity from $400 million to $750 million. At March 31, 2006, the Trust completed a secondary syndication of its credit facility resulting in a broadening of its banking group and an increase in its three year extendible revolving credit facility to $900 million.
At September 30, 2006, the Trust had $591.2 million drawn under the $900 million three year extendible revolving credit facility. With the consent of the lenders, the facility may be extended on an annual basis for an additional 364 days. The facility is secured by a $1.5 billion first floating charge over all of the assets of the operating subsidiaries and a guarantee from the Trust. Amounts borrowed under this facility bear interest at a floating rate based on bankers acceptances plus 65 basis points to 115 basis points depending on the Trust's Senior Debt to Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) Ratio as defined in the Credit Agreement. Availability under this facility is subject to quarterly financial covenants requiring that the Senior Debt to EBITDA Ratio is less than 3 to 1, the Total Debt to EBITDA Ratio is less than 3.5 to 1, Senior Debt to Capitalization Ratio is less than 50% and Total Debt to Capitalization Ratio is less than 55%, all as defined in the Credit Agreement. [See Note 15].
8. Convertible Debentures
The Trust has issued three series of unsecured subordinated debentures and has assumed two additional series as part of the Viking acquisition [Note 2]. The two additional series of debentures assumed in the Viking acquisition have the same general terms as the three series issued by Harvest, the details of which have been outlined in our December 31, 2005 annual financial statements.
The following is a summary of the five series of convertible debentures.
| Original | Conversion | |||||||
| Interest | face value | price / Trust | First redemption | Second redemption | ||||
| Issue date | rate | (millions) | Unit | Maturity | period | period | ||
| Jan 29, 2004 | 9% | $ | 60 | $ | 13.85 | May 31, 2009 | Jun. 1/07-May 31/08 | Jun. 1/08-May. 30/09 |
| Aug 10, 2004 | 8% | $ | 100 | $ | 16.07 | Sept. 30, 2009 | Oct. 1/07-Sept. 30/08 | Oct. 1/08-Sept. 29/09 |
| Aug 2, 2005 | 6.5% | $ | 75 | $ | 31.00 | Dec. 31, 2010 | Jan. 1/09-Dec. 31/09 | Jan. 1/10-Dec. 30/10 |
| Feb. 3, 2006 | 10.5% | $ | 35(2) | $ | 29.00 | Jan.31, 2008 | Feb. 1/06-Jan. 31/07 | Feb. 1/07-Jan. 30/08 |
| Feb. 3, 2006 | 6.40%(1) | $ 175(2) | $ | 46.00 | Oct. 31, 2012 | Nov. 1/08-Oct. 31/09 | Nov. 1/09-Oct. 31/10 | |
| (1) This series of convertible debentures may also be redeemed by the Trust at a price of $1,000 per debenture on or after November 1, 2009 until maturity. (2)The fair value, including the equity component, of the 10.5% convertible debentures and the 6.40% convertible debentures at acquisition was $44.8 million and $181.5 million, respectively. | ||||||||
7
| Harvest Energy Trust |
| Notes to Unaudited Consolidated Financial Statements |
| Period ended September 30, 2006 |
| (Tabular amounts in thousands of Canadian dollars, except Trust Unit and per Trust Unit amounts) |
The following table summarizes the issuance and subsequent conversions of the convertible debentures:
| 9% | 8% | 6.5% | 10.5% | 6.40% |
|
| |||||
|
| Series |
| Series |
| Series |
| Series |
| Series |
| Total |
As at December 31, 2004 | $ | 10,698 | $ | 15,052 | $ | - | $ | - | $ | - | $ | 25,750 |
August 2, 2005 issuance |
| - |
| - |
| 75,000 |
| - |
| - |
| 75,000 |
Portion allocated to equity |
| - |
| - |
| (4,932) |
|
|
|
|
| (4,932) |
Accretion of non-cash interest expense |
| - |
| 11 |
| 228 |
| - |
| - |
| 239 |
Converted into Trust Units |
| (8,921) |
| (11,299) | (31,382) |
| - |
| - |
| (51,602) | |
As at December 31, 2005 |
| 1,777 |
| 3,764 |
| 38,914 |
| - | - |
| 44,455 | |
February 3, 2006 assumption |
| - |
| - |
| - |
| 44,822 | 181,533 |
| 226,355 | |
Portion allocated to equity |
| - |
| - |
| - |
| (9,301) | (14,822) |
| (24,123) | |
Accretion of non-cash interest expense (premium) |
|
|
| 3 |
| 300 |
| (129) | 650 |
| 824 | |
Converted into Trust Units |
| (398) |
| (1,069) |
| (3,330) |
| (7,581) | (19) |
| (12,397) | |
As at September 30, 2006 | $ | 1,379 | $ | 2,698 | $ | 35,884 | $ | 27,811 | $ | 167,342 | $ | 235,114 |
|
| |||||
| 9% | 8% | 6.5% | 10.5% | 6.40% |
|
| Series | Series | Series | Series | Series | Total |
Number outstanding at December 31, 2004 | 10,700 | 15,159 | - | - | - | 25,859 |
August 2, 2005 issuance | - | - | 75,000 | - | - | 75,000 |
Converted into Trust Units | (8,923) | (11,373) | (33,527) | - | - | (53,823) |
Outstanding at December 31, 2005 | 1,777 | 3,786 | 41,473 | - | - | 47,036 |
February 3, 2006 assumption | - | - | - | 35,058 | 174,965 | 210,023 |
Converted into Trust Units | (398) | (1,075) | (3,544) | (7,502) | (20) | (12,539) |
Outstanding at September 30, 2006 | 1,379 | 2,711 | 37,929 | 27,556 | 174,945 | 244,520 |
The following table summarizes the reclassification of the equity component of convertible debentures to Unitholders' equity:
| 9% Series | 8% Series | 6.5% Series | 10.5% Series | 6.40% Series |
|
| |||||
| Equity Value | Equity Value | Equity Value | Equity Value | Equity Value |
| Total | |||||
As at December 31, 2004 | $ | 3 | $ | 113 | $ | - | $ | - | $ | - | $ | 116 |
August 2, 2005 issuance, net |
| - |
| - |
| 4,720 |
| - |
| - |
| 4,720 |
Converted into Trust Units, net |
| (3) |
| (85) |
| (2,109) |
| - |
| - |
| (2,197) |
As at December 31, 2005 |
| - |
| 28 |
| 2,611 |
| - |
| - |
| 2,639 |
February 3, 2006 assumption |
| - |
| - |
| - |
| 9,301 |
| 14,822 |
| 24,123 |
Converted into Trust Units, net |
| - |
| (8) |
| (223) |
| (1,990) |
| (2) |
| (2,223) |
As at Sept 30, 2006 | $ | - | $ | 20 | $ | 2,388 | $ | 7,311 | $ | 14,820 | $ | 24,539 |
8
| Harvest Energy Trust |
| Notes to Unaudited Consolidated Financial Statements |
| Period ended September 30, 2006 |
| (Tabular amounts in thousands of Canadian dollars, except Trust Unit and per Trust Unit amounts) |
9. Unitholders' Capital
(a) Authorized
The authorized capital consists of an unlimited number of Trust Units.
(b) Issued
| Number of Units |
| Amount | |
| As at December 31, 2004 | 41,788,500 | $ | 465,524 |
| Conversion of subscription receipts | 6,505,600 |
| 175,001 |
| Convertible debenture conversions-9% series | 643,133 |
| 8,924 |
| Convertible debenture conversions-8% series | 703,976 |
| 11,383 |
| Convertible debenture conversion-6.5% series | 1,081,497 |
| 33,585 |
| Exchangeable share retraction [Note 11] | 299,123 |
| 3,865 |
| Distribution reinvestment plan issuance | 1,167,109 |
| 36,217 |
| Special distribution | 465,285 |
| 10,678 |
| Exercise of unit appreciation rights and other | 328,344 |
| 12,084 |
| Issue costs | - |
| (9,949) |
| As at December 31, 2005 | 52,982,567 | $ | 747,312 |
| Issued in exchange for assets of Viking [Note2(a)] | 46,040,788 |
| 1,638,131 |
| Issued for cash | 7,026,500 |
| 230,118 |
| Convertible debenture conversions-9% series | 28,732 |
| 398 |
| Convertible debenture conversions-8% series | 66,883 |
| 1,077 |
| Convertible debenture conversions-6.5% series | 114,313 |
| 3,562 |
| Convertible debenture conversions-10.5% series | 256,104 |
| 9,570 |
| Convertible debenture conversions-6.40% series | 434 |
| 21 |
| Exchangeable share retraction [Note 11] | 184,809 |
| 2,648 |
| Distribution reinvestment plans | 3,907,825 |
| 125,470 |
| Exercise of unit appreciation rights | 347,715 |
| 11,912 |
| Issue costs | - |
| (12,838) |
| As at September 30, 2006 | 110,956,670 | $ | 2,757,381 |
(c) Per Trust Unit Information
The following tables summarize the net income and Trust Units used in calculating income per Trust Unit:
| Net income adjustments | Three Months ended | Three Months ended | Nine Months ended | Nine Months ended | ||||
|
| Sept 30, 2006 |
| Sept 30, 2005 |
| Sept 30, 2006 |
| Sept 30, 2005 | |
| Net income, basic | $ | 107,768 | $ | 52,862 | $ | 134,513 | $ | 29,308 |
| Non-controlling interest |
| - |
| 219 |
| (65) |
| (156) |
| Interest on convertible debentures |
| 4,674 |
| - |
| 292 |
| - |
| Net income, diluted(1) | $ | 112,442 | $ | 53,081 | $ | 134,740 | $ | 29,152 |
9
| Harvest Energy Trust |
| Notes to Unaudited Consolidated Financial Statements |
| Period ended September 30, 2006 |
| (Tabular amounts in thousands of Canadian dollars, except Trust Unit and per Trust Unit amounts) |
| |||||
|
| Three Months | Three Months | Nine Months ended | Nine Months ended |
| Weighted average Trust Units adjustments | ended Sept 30, 2006 | ended Sept 30, 2005 | Sept 30, 2006 | Sept 30, 2005 |
| Number of Units | ||||
| Weighted average Trust Units outstanding, basic | 106,390,853 | 48,305,977 | 96,797,055 | 44,611,706 |
| Effect of convertible debentures | 6,380,559 | - | 302,484 | - |
| Effect of exchangeable shares | - | 268,398 | 42,507 | 300,830 |
| Effect of unit appreciation rights | 312,605 | 791,489 | 289,678 | 805,779 |
| Weighted average Trust Units outstanding, diluted( 2) | 113,084,017 | 49,365,864 | 97,431,724 | 45,718,315 |
(1) Net income, diluted excludes the impact of the conversions of certain of the convertible debentures for the three month and nine month period ended September 30, 2006, of nil and $12,301,000, respectively (three and nine months ended September 30, 2005 - $924,027 and $1,730,487), as the impact was anti-dilutive.
(2) Weighted average Trust Units outstanding, diluted for the three and nine months ended September 30, 2006, does not include the impact of the units related to certain of the convertible debentures of nil and 6,167,722, respectively (three and nine months ended September 30, 2005 – 509,408 and 1,408,899, respectively), as the impact was anti-dilutive.
10. Employee Unit Incentive Plans
Trust Unit Rights Incentive Plan
As at September 30, 2006, a total of 2,080,625 (1,305,143 – December 31, 2005) Unit Appreciation Rights were outstanding under the Trust Unit Incentive Plan at an average exercise price of $32.20 ($16.73 – December 31, 2005).
The following summarizes the Trust Units reserved for issuance under the Trust Unit incentive plan:
Nine Months ended September 30, 2006 | Year ended December 31, 2005 | |||||
|
|
| Unit |
| Weighted | |
Unit Appreciation | Weighted Average | Appreciation |
| Average | ||
Rights |
| Exercise Price | Rights |
| Exercise Price | |
| Outstanding beginning of period | 1,305,143 | $ | 19.72 | 1,117,725 | $ | 11.92 |
Granted | 2,124,300 |
| 36.60 | 793,325 |
| 26.69 |
Exercised | (979,818) |
| 18.24 | (420,157) |
| 9.49 |
Cancelled | (369,000) |
| 37.28 | (185,750) |
| 25.70 |
Outstanding before exercise |
|
|
|
|
|
|
price reductions | 2,080,625 |
| 34.54 | 1,305,143 |
| 19.72 |
Exercise price reductions | - |
| (2.34) | - |
| (2.99) |
| Outstanding, end of period | 2,080,625 | $ | 32.20 | 1,305,143 | $ | 16.73 |
| Exercisable before exercise price reductions | 325,325 | $ | 24.19 | 109,068 | $ | 13.56 |
| Exercise price reductions | - |
| (4.75) | - |
| (4.04) |
325,325 | $ | 19.44 | 109,068 | $ | 9.52 | |
10
| Harvest Energy Trust |
| Notes to Unaudited Consolidated Financial Statements |
| Period ended September 30, 2006 |
| (Tabular amounts in thousands of Canadian dollars, except Trust Unit and per Trust Unit amounts) |
The following table summarizes information about Unit appreciation rights outstanding at September 30, 2006.
| Outstanding | Exercisable | |||||
| Exercise | ||||||
| Exercise Price | Exercise Price | Price net of | Remaining | Exercise Price | ||
| before price | net of price | At Sept 30, | price | Contractual | At Sept 30, | net of price |
| reductions | reductions | 2006 | reductions(a) | Life (a) | 2006 | reductions (a) |
| $12.19-$13.25 | $ 5.30-$ 6.63 | 14,100 | $ 5.85 | 2.1 | 14,100 | $ 5.85 |
| $13.35-$17.84 | $ 7.02-$12.41 | 62,375 | 9.48 | 2.8 | 62,375 | 9.48 |
| $18.90-$25.10 | $13.55-$20.15 | 166,550 | 19.19 | 3.5 | 166,550 | 19.19 |
| $29.21-$37.56 | $25.13-$36.22 | 1,837,600 | 34.35 | 4.4 | 82,300 | 29.86 |
| $12.19-$37.56 | $ 5.30-$36.22 | 2,080,625 | $ 32.20 | 4.3 | 325,325 | $ 19.45 |
(a) Based on weighted average Unit appreciation rights outstanding. | ||||||
Unit Award Incentive Plan
At September 30, 2006, 180,281 Units were outstanding under the Unit Award Incentive Plan.
Upon completion of the Plan of Arrangement with Viking [Note 2], Unitholders approved the issuance of up to 0.5% of outstanding Trust Units under the Unit award plan.
| Nine Months ended | Year ended |
Number | September 30, 2006 | December 31, 2005 |
Outstanding, beginning of period | 35,365 | 10,662 |
Granted | 193,489 | 23,466 |
Adjusted for distributions | 18,801 | 1,237 |
Exercised | (34,329) | - |
Cancelled | (33,045) | - |
Outstanding, end of period | 180,281 | 35,365 |
Upon closing of the Plan of Arrangement with Viking [Note 2] all awards and rights issued under the Trusts' employee unit incentive plans vested. Subsequent to closing additional rights and awards were issued under both plans.
The Trust has recognized compensation expense of $0.5 million and $10.0 million for the three and nine months ended September 30, 2006 respectively ($10.0 million and $16.1 million – three and nine months ended September 30, 2005 respectively), including a non cash compensation recovery of $2.2 million and $7.1 million for the three and nine months ended September 30, 2006, respectively ($3.7 million and $9.6 million – three and nine months ended September 30, 2005 respectively), related to the Trust Unit Incentive Plan and the Unit award plan. Recoveries occur when the Trust Unit market price decreases below the previous measurement date.
Of the total compensation expense for the three and nine months ended September 30, 2006, $nil and $9.0 million, respectively, have been recorded within transaction costs, with the remaining recorded as part of general and administrative expenses. The compensation expense related to the transaction with Viking, was measured based on the Trust Unit price on February 3, 2006, the effective date of the Plan of Arrangement.
11. Exchangeable Shares
(a) Authorized
Harvest Operations Corp., a subsidiary of the Trust, is authorized to issue an unlimited number of exchangeable shares without nominal or par value.
11
| Harvest Energy Trust |
| Notes to Unaudited Consolidated Financial Statements |
| Period ended September 30, 2006 |
| (Tabular amounts in thousands of Canadian dollars, except Trust Unit and per Trust Unit amounts) |
(b) Issued
| Exchangeable shares, series 1 | Nine Months ended | Year ended |
|
| September 30, 2006 | December 31, 2005 |
| Outstanding, beginning of period | 182,969 | 455,547 |
| Shareholder retractions | (156,067) | (272,578) |
| Issuer redemption | (26,902) | - |
| Outstanding , end of period | - | 182,969 |
| Exchange ratio | - | 1.17475 |
On March 16, 2006, the Trust elected to exercise its deminimus redemption right to redeem all of the exchangeable shares outstanding. On June 20, 2006 the redemption was completed.
(c) Non-controlling interest
The following is a summary of the non-controlling interest:
|
| Nine Months |
|
| |
|
| ended Sept 30, |
| Year ended | |
|
| 2006 | December 31, 2005 | ||
| Non-controlling interest, beginning of period | $ | 3,179 | $ | 6,895 |
| Exchanged for Trust Units |
| (2,648) |
| (3,865) |
| Redeemed for cash |
| (1,022) |
| - |
| Excess of redemption price over cost, accumulated income |
| 556 |
| - |
| Current period income (loss) attributable to non-controlling interest |
| (65) |
| 149 |
| Non-controlling interest, end of period | $ | - | $ | 3,179 |
| Accumulated income attributed to non-controlling interest | $ | 865 | $ | 374 |
12. Financial Instruments and risk management contracts
The Trust is exposed to market risks resulting from fluctuations in commodity prices, foreign exchange rates and interest rates in the normal course of operations as outlined in the annual consolidated financial statements for the year ended December 31, 2005 and 2004.
The following is a summary of Harvest's risk management contracts outstanding, along with their fair value at September 30, 2006.
| Quantity | Type of Contract | Term | Reference | Fair |
| value | ||||
| 4,000 bbl/d | Differential swap – Bow River | October – December 2006 | 29.58% | 1,769 |
| 5,000 bbl/d | Differential swap – Bow River | October – December 2006 | 27.50% | 1,650 |
| 1,000 bbl/d | Differential swap – Wainwright | October - December 2006 | 29.58% | 691 |
| 1,000 bbl/d | Differential swap – Wainwright | October 2006 – April 2007 | 27.70% | 970 |
| 5,000 GJ/d | Natural gas price collar contract | October 2006 | Cdn$9.00-$13.06 | 741 |
| 25,000 GJ/d | Natural gas price collar contract | October 2006 – March 2007 | Cdn$5.00-$13.55 | 1,240 |
| 25,000 GJ/d | Natural gas price collar contract | November 2006 – March 2007 | Cdn$7.00-$12.50 | 188 |
| $250,000,000 | Foreign currency swap | October 2006 | 1.1066 Cdn/US(i) | 2,775 |
| $250,000,000 | Foreign currency swap | October 2006 | 1.1091 Cdn/US(i) | 2,150 |
| $250,000,000 | Foreign currency swap | October 2006 | 1.1093Cdn/US(i) | 2,110 |
| 45 MWH | Electricity price swap contracts | October – December 2006 | Cdn $51.48 | 2,138 |
Total current portion of fair value | 16,422 | |||
12
| Harvest Energy Trust |
| Notes to Unaudited Consolidated Financial Statements |
| Period ended September 30, 2006 |
| (Tabular amounts in thousands of Canadian dollars, except Trust Unit and per Trust Unit amounts) |
Fair | ||||
| Quantity | Type of Contract | Term | Reference | value |
| 5,000 bbl/d | Participating swap | January – December 2007 | U.S.$60.00(g) | 127 |
| 5,000 bbl/d | Participating swap | January – December 2007 | U.S.$65.00(h) | 5,429 |
| 5,000 bbl/d | Participating swap | January – June 2008 | U.S.$65.00(e) | 2,452 |
| ||||
| 35 MWH | Electricity price swap contracts | January – December 2007 | Cdn $56.69 | 2,472 |
| 35 MWH | Electricity price swap contracts | January – December 2008 | Cdn $56.69 | 1,864 |
| ||||
| $416,700/mnth | Foreign currency swap | January – December 2007 | 1.14 Cdn/U.S. | 183 |
| $4,167,000/mnth | Foreign currency swap | January - December 2007 | 1.1189 Cdn/U.S. | 770 |
| $8,333,000/mnth | Foreign currency swap | January – June 2008 | 1.1099 Cdn/U.S. | 559 |
| $4,167,000/mnth | Foreign currency swap | January – December 2007 | 1.1249 Cdn/U.S. | 1,311 |
| Total long-term portion fair value | 15,167 | |||
| ||||
| ||||
| Quantity | Type of Contract | Term | Reference | Fair value |
| 8,750 bbl/d | Participating swap | October – December 2006 | U.S.$38.16(a) | (11,672) |
| 5,000 bbl/d | Participating swap | October – December 2006 | U.S.$45.17(a) | (4,884) |
| 5,000 bbl/d | Participating swap | October 2006 – June 2007 | U.S.$49.03(b) | (6,106) |
| ||||
| 5,000 bbl/d | Indexed put contract – bought put | October – December 2006 | U.S.$55.00(c) | 111 |
| 2,500 bbl/d | Indexed put contract – sold call | October – December 2006 | U.S.$55.00(c) | (2,439) |
| 2,500 bbl/d | Indexed put contract – bought call | October – December 2006 | U.S.$65.00(c) | 525 |
| 2,500 bbl/d | Indexed put contract – sold call | October – December 2006 | U.S.$70.00(c) | (184) |
| 2,500 bbl/d | Indexed put contract – bought call | October – December 2006 | U.S.$83.00(c) | 15 |
| ||||
| 200 GJ/d | Fixed price - natural gas contract | October – December 2006 | Cdn.$5.35(d) | (96) |
| Cdn.$2.23- |
| |||
| 76 GJ/d | Fixed price – natural gas contract | October 2006 – September 2007 | $2.28(d) | (120) |
| ||||
| Total current portion of fair value deficiency |
| |||
| (24,850) | ||||
| Quantity | Type of Contract | Term | Reference | Fair value |
| 10,000 bbl/d | Participating swap | January – December 2007 | U.S.$55.00(e) | (13,212) |
| 5,000 bbl/d | Participating swap | January – June 2008 | U.S.$55.00(f) | (707) |
| ||||
| 5,000 bbl/d | Indexed put contract – bought put | January – December 2007 | U.S.$50.00(c) | 1,547 |
| 2,500 bbl/d | Indexed put contract – sold call | January – December 2007 | U.S.$50.00(c) | (18,406) |
| 2,500 bbl/d | Indexed put contract – bought call | January – December 2007 | U.S.$60.00(c) | 10,338 |
| 2,500 bbl/d | Indexed put contract – sold call | January – December 2007 | U.S.$70.00(c) | (4,591) |
| 2,500 bbl/d | Indexed put contract – bought call | January – December 2007 | U.S.$83.00(c) | 1,416 |
| ||||
| 200 GJ/d | Fixed price – natural gas contract | January 2007 – December 2008 | Cdn. $5.35(d) | (1,041) |
| Cdn. $2.28- |
| |||
| 76 GJ/d | Fixed price – natural gas contract | October 2007 - October 2008 | $2.34(d) | (156) |
| ||||
| Total long-term portion of fair value deficiency | (24,812) | |||
| (a) This price is a floor.The Trust realizes this price plus 50% of the difference between spot price and this price. (b) This price is a floor. The Trust realizes this price plus 75% of the difference between spot price and this price. (c) Each group of a puts and call reflect an "indexed put option". These series of puts and calls serve to fix a floor price while retaining upward price exposure on a portion of price movements above the floor price. (d) This contract contains an annual escalation factor such that the fixed price is adjusted each year. (e) This price is a floor.The Trust realizes this price plus 67% of the difference between spot price and this price. (f) This price is a floor. The Trust realizes this price plus 80% of the difference between spot price and this price (g) This price is a floor. The Trust realizes this price plus 77% of the difference between spot price and this price. (h) This price is a floor. The Trust realizes this price plus 79% of the difference between spot price and this price. (i) See Note 15 | ||||
13
| Harvest Energy Trust |
| Notes to Unaudited Consolidated Financial Statements |
| Period ended September 30, 2006 |
| (Tabular amounts in thousands of Canadian dollars, except Trust Unit and per Trust Unit amounts) |
At September 30, 2006, the net unrealized loss position reflected on the balance sheet for all the risk management contracts outstanding at that date was approximately $18.1 million ($52.6 million – December 31, 2005).
For the three and nine months ended September 30, 2006, the total unrealized gain recognized in the consolidated statement of income, including amortization of deferred charges and gains, was $77.1 and $36.0 million (loss of $3.9 million and $73.5 million – three and nine months ended September 30, 2005 respectively). The realized gains and losses on all risk management contracts are included in the period in which they are incurred.
13. Change in Non-Cash Working Capital
Three Months | Three Months | Nine Months | Nine Months | |||||
| ended |
| ended |
| ended |
| ended | |
Sept 30, 2006 | Sept 30, 2005 | Sept 30, 2006 | Sept 30, 2005 | |||||
|
|
|
|
|
|
|
| |
| Changes in non-cash working capital items: |
|
|
|
|
|
|
|
|
Accounts receivable | $ | (382) | $ | (18,292) | $ | (10,303) | $ | (40,593) |
Prepaid expenses and deposits |
| (1,144) |
| 44,171 |
| (2,207) |
| 1,256 |
Current portion of risk management contracts assets |
| (8,147) |
| (9,596) |
| 4,809 |
| (10,544) |
Current portion of future income tax asset |
| - |
| (20,832) |
| 22,975 |
| (27,694) |
Accounts payable and accrued liabilities |
| 39,664 |
| 16,613 |
| 16,699 |
| 42,034 |
Cash distribution payable |
| 3,330 |
| 9,212 |
| 1,752 |
| 9,608 |
Current portion of risk management contracts liability |
| (44,600) |
| 54,209 |
| (41,983) |
| 64,573 |
$ | (11,279) | $ | 75,485 | $ | (8,258) | $ | 38,640 | |
|
|
|
|
|
|
|
| |
| Changes relating to operating activities | $ | (1,073) | $ | 29,810 | $ | (17,824) | $ | (25,867) |
| Changes relating to financing activities |
| 7,879 |
| 5,960 |
| (10,891) |
| 5,647 |
| Changes relating to investing activities |
| 33,477 |
| (1,914) |
| 15,635 |
| 7,422 |
| Add: Non cash changes |
| (51,562) |
| 41,629 |
| 4,822 |
| 51,438 |
$ | (11,279) | $ | 75,485 | $ | (8,258) | $ | 38,640 | |
14. Commitments, Contingencies and Guarantees
The Trust has letters of credit outstanding in the amount of approximately $8.0 million primarily provided to electricity infrastructure providers. These letters are provided by Harvest Operations' lenders pursuant to the secured senior credit agreement [Note 7]. These letters expire between October 1, 2006 and December 31, 2006, and are expected to be renewed as required.
The following is a summary of the Trust's contractual obligations and commitments as at September 30, 2006:
Remaining Payments Due by Period | |||||||
2006 | 2007 | 2008 | 2009 | 2010 | Thereafter | Total | |
| Debt repayments (1) | $ - | $ - | $ - | $ 591,189 | $ - | $ 279,425 | $ 870,614 |
| Capital commitments (3) | 5,556 | 8,605 | 2,880 | - | - | - | 17,041 |
| Operating leases (2) | 1,508 | 3,570 | 3,506 | 3,506 | 1,573 | - | 13,663 |
| Total contractual |
|
|
|
|
|
|
|
| obligations | $ 7,064 | $ 12,175 | $ 6,386 | $ 594,695 | $ 1,573 | $ 279,425 | $ 901,318 |
| (1) Assumes that the outstanding convertible debentures either convert at the holders' option for Units or are redeemed for Units at the Trust's option. | |||||||
| (2) Relating to building and automobile leases. | |||||||
| (3) Relating to drilling contracts. | |||||||
14
| Harvest Energy Trust |
| Notes to Unaudited Consolidated Financial Statements |
| Period ended September 30, 2006 |
| (Tabular amounts in thousands of Canadian dollars, except Trust Unit and per Trust Unit amounts) |
15. Subsequent Events
a) Acquisition of Refinery
On August 22, 2006, the Trust entered into an agreement to purchase North Atlantic Refinery Limited and related businesses ("North Atlantic") for US $1.4 billion, before working capital and other adjustments. A US $100 million (CDN$111.3 million) deposit was paid into escrow upon entering into the purchase agreement and is recorded as a long term asset at September 30, 2006. In anticipation of the closing of the refinery we entered into a series of swaps and forward purchase contracts for US$750.0 million. The total gain that we realized on this hedging strategy was CDN$22.5 million. This acquisition closed on October 19, 2006, with the remaining cash payment of US $1.3 billion (CDN$1.5 billion) wired to the vendor. The Trust will include the results of North Atlantic in its consolidated results from October 19, 2006 onward.
Concurrent with the purchase of the refinery by the Trust, North Atlantic entered into a supply and offtake agreement with a division of Vitol Refining Group B.V, called Vitol Refining S.A. for a minimum period of up to two years. This agreement provides that the ownership of substantially all crude oil feedstock and refined product inventory at the refinery be retained by Vitol Refining S.A. and that during the term of the supply and offtake agreement, Vitol Refining S.A. will be granted the right and obligation to provide crude oil feedstock for delivery to the refinery as well as the right and obligation to purchase all refined products produced by the refinery. As at November 8, 2006, North Atlantic had commitments totaling approximately US$400 million in respect of future crude oil feedstock purchases from Vitol Refining S.A.
The financing for the acquisition was also finalized on October 19, 2006, when the Trust entered into an amended and restated credit agreement which increased its three year extendible revolving credit facility from $900 million to $1.4 billion and established a $350 million Senior Secured Bridge Facility. The terms and conditions of the three year extendible revolving credit facility remained unchanged except for changes to the security pledged and the addition of a 15 basis point additional fee applicable so long as the Senior Unsecured Bridge Facility is outstanding. The amended and restated credit agreement required the Trust to increase the first floating charge over all of the assets of Harvest's operating subsidiaries to $2.5 billion plus grant a first mortgage security interest on the Refinery assets of North Atlantic. The $350 million Senior Secured Bridge Facility provided Harvest with a single draw on this facility within five days of the closing of its acquisition of North Atlantic and, subject to the repayment requirements of the $450 million Senior Unsecured Bridge Facility, requires repayments equivalent to the net proceeds from an issuance of equity or equity like securities including convertible debentures and repayment in full within 18 months of the initial draw. Harvest is entitled to make additional repayments on the $350 million Senior Secured Bridge Facility without penalty or notice.
Also on October 19, 2006, Harvest entered into a credit agreement that established a $450 million Senior Unsecured Bridge Facility which provided for only a single draw on the facility within five days for the closing of its acquisition of North Atlantic and requires repayments equivalent to the net proceeds from an issuance of equity or equity like securities including convertible debentures and repayment in full within 6 months of the initial draw. Amounts borrowed under this facility bear interest at a floating rate based on bankers' acceptances plus a range of 230 to 280 basis points depending on the Harvest financial ratios as set forth in the amended and restated credit agreement.
On October 16, 2006, North Atlantic entered into an amended and restated credit agreement that provides for a $10 million demand operating line of credit to finance its receivables and inventory in the Province of Newfoundland and Labrador as well as support period cash management market transactions. This facility is secured by a guarantee from Harvest Operations Corp. with amounts borrowed bearing interest at the bank's prime lending rate.
b) Trust Unit and Debenture Offering
On October 31, 2006 we issued a preliminary prospectus in respect of a "bought deal" agreement to sell $400 million of convertible debentures and 3,150,000 Trust Units at a price of $31.75 per Trust Unit. The preliminary prospectus also included an option (the "Over-allotment Option") to the underwriters to purchase up to an additional 472,500 Trust Units at a price of $31.75 per Trust Unit and up to an additional 60,000 Debentures at a price of $1,000 per Debenture on the same terms and conditions as the offering, exercisable from time to time, in whole or in part, for a period of up to 30 days following closing of the Offering, to cover over-allotments, if any, and for market stabilization purposes. The "bought deal" agreement entitles the underwriters to terminate and cancel their respective obligation if certain standard terms and conditions are not met.
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| Harvest Energy Trust |
| Notes to Unaudited Consolidated Financial Statements |
| Period ended September 30, 2006 |
| (Tabular amounts in thousands of Canadian dollars, except Trust Unit and per Trust Unit amounts) |
On the evening of October 31, 2006, changes to the Canadian income tax treatment of distributions from publicly traded trusts were announced by the Government of Canada which have resulted in considerable disruption of the valuations of all income and royalty trusts. In light of this announcement and the ensuing impact on capital markets, Harvest remains in discussions with its underwriters and is assessing various alternatives to proceed with this offering.
16. Comparatives
Certain comparative figures have been reclassified to conform to the current period's presentation.
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