EXHIBIT 1
---------
HARVEST ENERGY TRUST
====================================================================================================
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER TRUST UNIT AMOUNTS)
(RESTATED, NOTE 2)
- ----------------------------------------------------------------------------------------------------
MARCH 31, 2005 December 31, 2004
- ----------------------------------------------------------------------------------------------------
ASSETS
Current assets
Accounts receivable $ 61,676 $ 44,028
Current portion of derivative contracts [NOTE 10] 5,582 8,861
Prepaid expenses and deposits 39,868 3,014
- ----------------------------------------------------------------------------------------------------
107,126 55,903
Deferred charges [NOTE 10] 19,697 25,540
Long term portion of derivative contracts [NOTE 10] 1,475 3,710
Capital assets 907,139 918,397
Goodwill 43,832 43,832
- ----------------------------------------------------------------------------------------------------
$ 1,079,269 $ 1,047,382
====================================================================================================
LIABILITIES AND UNITHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities [NOTE 3] $ 101,773 $ 76,251
Cash distribution payable 8,530 8,358
Current portion of derivative contracts [NOTE 10] 55,267 27,927
Bank debt 103,665 75,519
- ----------------------------------------------------------------------------------------------------
269,235 188,055
Deferred gains [NOTE 10] 1,732 2,177
Long term portion of derivative contracts [NOTE 10] 37,898 --
Convertible debentures [NOTES 2 AND 9] 19,134 25,750
Senior notes 302,400 300,500
Asset retirement obligation [NOTE 4] 92,009 90,085
Future income tax 8,632 34,671
- ----------------------------------------------------------------------------------------------------
731,040 641,238
Non-controlling interest [NOTES 1,2 AND 8] 3,436 6,895
Unitholders' equity
Unitholders' capital [NOTE 6] 490,303 465,524
Equity component of convertible debentures [NOTE 9] 77 116
Accumulated (loss) income (12,351) 30,719
Accumulated distributions (133,236) (97,110)
- ----------------------------------------------------------------------------------------------------
344,793 399,249
- ----------------------------------------------------------------------------------------------------
$ 1,079,269 $ 1,047,382
====================================================================================================
Commitments, contingencies and guarantees [Note 13]
See accompanying notes to these consolidated financial statements.
HARVEST ENERGY TRUST
====================================================================================================
CONSOLIDATED STATEMENTS OF INCOME AND ACCUMULATED INCOME
(THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER TRUST UNIT AMOUNTS)
(RESTATED, NOTE 2)
THREE MONTHS ENDED Three Months Ended
MARCH 31, 2005 March 31, 2004
====================================================================================================
REVENUE
Oil and natural gas sales $ 129,826 $ 47,495
Royalty expense (19,895) (8,197)
- ----------------------------------------------------------------------------------------------------
109,931 39,298
EXPENSES
Operating 27,348 13,873
General and administrative 5,469 1,379
Interest on short term debt 2,491 1,448
Interest on long term debt 6,871 1,000
Depletion, depreciation and accretion 41,567 12,116
Foreign exchange loss (gain) 2,119 (68)
Gains and losses on derivative contracts [NOTE 10] 93,393 14,347
- ----------------------------------------------------------------------------------------------------
179,258 44,095
- ----------------------------------------------------------------------------------------------------
Loss before taxes and non-controlling interest (69,327) (4,797)
TAXES
Large corporations tax 277 16
Future income tax recovery (26,039) (2,563)
- ----------------------------------------------------------------------------------------------------
NET LOSS BEFORE NON-CONTROLLING INTEREST (43,565) (2,250)
Non-controlling interest [NOTES 1, 2 AND 8] (495) --
- ----------------------------------------------------------------------------------------------------
NET LOSS $ (43,070) $ (2,250)
Accumulated income, beginning of period 30,719 19,478
- ----------------------------------------------------------------------------------------------------
ACCUMULATED (LOSS) INCOME, END OF PERIOD $ (12,351) $ 17,228
====================================================================================================
Net loss per trust unit, basic [NOTE 6] $ (1.02) $ (0.13)
Net loss per trust unit, diluted [NOTE 6] $ (1.02) $ (0.13)
- ----------------------------------------------------------------------------------------------------
See accompanying notes to these consolidated financial statements.
HARVEST ENERGY TRUST
====================================================================================================
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER TRUST UNIT AMOUNTS)
(RESTATED, NOTE 2)
THREE MONTHS ENDED Three Months Ended
MARCH 31, 2005 March 31, 2004
====================================================================================================
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Net loss for the period $ (43,070) $ (2,250)
Items not requiring cash
Depletion, depreciation and accretion 41,567 12,116
Unrealized foreign exchange loss (gain) 2,110 (68)
Amortization of finance charges 1,647 826
Unrealized loss on derivative contracts 74,669 5,490
Non-cash interest expense 78 --
Future tax recovery (26,039) (2,563)
Non-controlling interest (495) --
Non-cash unit right compensation expense 2,220 183
- ----------------------------------------------------------------------------------------------------
52,687 13,734
Settlement of asset retirement obligation (501) (64)
Change in non-cash working capital [NOTE 11] (48,694) (269)
- ----------------------------------------------------------------------------------------------------
3,492 13,401
FINANCING ACTIVITIES
Trust unit issue costs (88) (72)
Repayment of equity bridge notes [NOTES 5 AND 12] -- (25,000)
Issuance of convertible debentures [NOTE 9] -- 60,000
Issue costs for convertible debentures -- (2,667)
Financing costs (504) --
Borrowings (repayment) of bank debt, net 28,146 (24,651)
Cash distributions (20,446) (9,055)
Change in non-cash working capital [NOTE 11] 5,679 286
- ----------------------------------------------------------------------------------------------------
12,787 (1,159)
INVESTING ACTIVITIES
Additions to capital assets (23,223) (10,157)
Property acquisitions (4,659) (1,854)
Change in non-cash working capital [NOTE 11] 11,603 224
- ----------------------------------------------------------------------------------------------------
(16,279) (11,787)
Increase in cash and short-term investments -- 455
Cash (bank indebtedness), beginning of period -- (3,274)
- ----------------------------------------------------------------------------------------------------
Cash (bank indebtedness), end of period $ -- $ (2,819)
- ----------------------------------------------------------------------------------------------------
Cash interest payments $ 1,338 ` $ 1,368
Cash tax payments $ 71 $ 16
Cash distributions declared per trust unit $ 0.60 $ 0.60
====================================================================================================
See accompanying notes to these consolidated financial stateme
HARVEST ENERGY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED MARCH 31, 2005
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT WHERE NOTED)
================================================================================
1. SIGNIFICANT ACCOUNTING POLICIES
These interim consolidated financial statements of Harvest Energy Trust
(the "Trust") 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. Except as noted below,
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, 2004 and should be
read in conjunction with that report. Certain comparative figures have been
reclassified to conform to the current period's presentation.
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.
a) Convertible debentures
The Trust presents its convertible debentures in their debt and equity
component parts, where applicable, as follows:
(i) The debt component represents the total discounted present
value of the semi-annual interest obligations to be satisfied
by cash and the principal payment due at maturity, using the
rate of interest that would have been applicable to a
non-convertible debt instrument of comparable term and risk at
the date of issue. Typically, this results in a lower
accounting value assigned to the debt component of the
convertible debentures compared to the principal amount due at
maturity. The debt component amount presented on the balance
sheet increases over the term of the relevant debenture to the
full face value of the outstanding debentures. The difference
is reflected as increased interest expense with the result
that adjusted interest expense reflects the effective yield of
the debt component of the convertible debenture.
(ii) The equity component of the convertible debentures is
presented under "Unitholders' Equity" in the consolidated
balance sheets. The equity component represents the value
ascribed to the conversion right granted to the holder, which
remains a fixed amount over the term of the debentures. Upon
conversion of the debentures into units by the holders, a
proportionate amount is transferred to Unitholders' capital.
b) Non-controlling interest
Non-controlling interest represents the exchangeable shares issued by a
subsidiary of the Trust to third parties which are ultimately
exchangeable for units of the Trust. These exchangeable shares were
issued as partial consideration for the acquisition of Storm Energy
Ltd. in 2004. Non-controlling interest on the consolidated balance
sheet is recognized based on the fair value of the exchangeable shares
on issuance together with a portion of the Trust's accumulated earnings
attributable to the non-controlling interest generated subsequent to
their issuance. Net income is reduced for the portion of earnings
attributable to the non-controlling interest. As the exchangeable
shares are converted to Trust Units, the non-controlling interest on
the consolidated balance sheet is reduced on a pro-rata basis together
with a corresponding increase in Unitholders' capital.
HARVEST ENERGY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED MARCH 31, 2005
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT WHERE NOTED)
================================================================================
2. CHANGES IN ACCOUNTING POLICY
a) Financial Instruments
On January 1, 2005, the Trust retroactively adopted the amendment to
the Canadian Institute of Chartered Accountants ("CICA") handbook
section 3860 "FINANCIAL INSTRUMENTS - DISCLOSURE AND PRESENTATION"
("Section 3860"). These changes require that fixed-amount contractual
obligations that can be settled by issuing a variable number of equity
instruments be classified as liabilities. The convertible debentures
and the equity bridge notes previously issued by the Trust have
characteristics that meet the noted criteria.
CONVERTIBLE DEBENTURES
The principal of the convertible debentures may be redeemed, at the
option of the Trust on or after a predetermined date, and may, at the
option of the Trust be redeemed through the issuance of units. The
number of units issued varies depending on the weighted average market
price of the units for the preceding 20 consecutive trading days, five
days prior to the settlement date.
The convertible debentures also have an option that allows the holder
to convert the debentures into a fixed number of units. In accordance
with CICA handbook section 3860, the convertible debentures have been
reclassified from equity to long term debt with a portion, representing
the value of the equity conversion feature, remaining in equity.
EQUITY BRIDGE NOTES
Under the terms of the equity bridge notes, the interest and principal
may have, at the option of the Trust, been repaid in Trust Units. The
number of Trust Units issued would have been dependent on the market
value of the units at the time of issue. As at March 31, 2005 and
December 31, 2004 there were no equity bridge notes payable. However,
for the three month period ended March 31, 2004 and the year ended
December 31, 2004 interest payments had been made related to these
notes. In accordance with the amended CICA handbook section 3860, these
notes would have been classified as debt rather than equity. The
interest associated with these notes has been reflected in these
consolidated financial statements as a direct charge to income rather
than to equity as it was previously classified.
b) Exchangeable shares
On January 19, 2005, the CICA issued EIC-151 "EXCHANGEABLE SECURITIES
ISSUED BY SUBSIDIARIES OF INCOME TRUSTS" ("EIC-151") that states that
equity interests held by third parties in subsidiaries of an income
trust should be reflected as either non-controlling interest or debt in
the consolidated balance sheet unless they meet certain criteria.
EIC-151 requires that the shares be non-transferable in order to be
classified as equity. The exchangeable shares issued by Harvest
Operations Corp. are transferable and, in accordance with EIC-151, have
been reclassified to non-controlling interest on the consolidated
balance sheet. In addition, a provision for non-controlling interest is
reflected on the consolidated statement of income. Prior periods have
been retroactively restated.
HARVEST ENERGY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED MARCH 31, 2005
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT WHERE NOTED)
================================================================================
c) Impact of changes in accounting policy
AS REPORTED CHANGE UPON CHANGE UPON AS RESTATED
DECEMBER 31, ADOPTION OF CICA ADOPTION OF EIC DECEMBER 31,
BALANCE SHEET 2004 3860 -151 2004
-----------------------------------------------------------------------------------------------------------------------
Deferred charges $ 24,507 $ 1,033 $ -- $ 25,540
Convertible debentures-debt -- 25,750 -- 25,750
Non-controlling interest -- -- 6,895 6,895
Unitholders' capital 465,131 335 58 465,524
Exchangeable shares 6,728 -- (6,728) --
Convertible debentures-equity 24,696 (24,580) -- 116
Accumulated income 31,416 (472) (225) 30,719
-----------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT THREE MONTHS ENDED
MARCH 31, 2004
-----------------------------------------------------------------------------------------------------------------------
Interest on long-term debt - as reported $ --
Add: interest on convertible debentures 918
Add: amortization of deferred financing costs 82
-----------------------------------------------------------------------------------------------------------------------
Interest on long-term debt - as restated $ 1,000
=======================================================================================================================
INCOME STATEMENT THREE MONTHS ENDED
MARCH 31, 2004
-----------------------------------------------------------------------------------------------------------------------
Interest on short-term debt - as reported $ 519
Add: interest on equity bridge notes 185
Add: amortization of deferred financing costs(1) 744
-----------------------------------------------------------------------------------------------------------------------
Interest on short-term debt - as restated $ 1,448
=======================================================================================================================
(1) PREVIOUSLY CLASSIFIED AS FINANCE CHARGES
NET LOSS AND LOSS PER UNIT THREE MONTHS ENDED
MARCH 31, 2004
-----------------------------------------------------------------------------------------------------------------------
Net loss - as reported $ (1,065)
Add: amortization of deferred financing charges (82)
Add: interest on equity bridge loan (185)
Add: interest on convertible debentures (918)
-----------------------------------------------------------------------------------------------------------------------
Net loss - as restated $ (2,250)
=======================================================================================================================
LOSS PER UNIT THREE MONTHS ENDED
MARCH 31, 2004
-----------------------------------------------------------------------------------------------------------------------
Basic as reported (0.13)
Basic as restated (0.13)
Diluted as reported (0.13)
Diluted as restated (0.13)
=======================================================================================================================
HARVEST ENERGY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED MARCH 31, 2005
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT WHERE NOTED)
================================================================================
3. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
MARCH 31, 2005 DECEMBER 31, 2004
----------------------------------------------------------------------------------------------------------
Trade accounts payable $ 21,039 $ 13,697
Accrued interest 11,673 5,993
Trust unit incentive plans 12,347 9,774
Premium on derivative contracts 4,003 4,500
Accrued closing adjustments on asset 2,447 13,546
acquisition
Other accrued liabilities 48,372 27,139
Large corporations tax payable 1,892 1,602
----------------------------------------------------------------------------------------------------------
$ 101,773 $ 76,251
==========================================================================================================
4. ASSET RETIREMENT OBLIGATION
The Trust's asset retirement obligation results from net ownership
interests in petroleum and natural gas assets including well sites,
gathering systems and processing facilities. The Trust estimates the total
undiscounted amount of its asset retirement obligation is approximately
$336 million, the majority of which will be settled between 2015 and 2023.
A credit-adjusted risk-free rate of 10 percent was used to calculate the
fair value of the asset retirement obligation on the consolidated balance
sheet.
A reconciliation of the asset retirement obligations is provided below:
-----------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED THREE MONTHS ENDED YEAR ENDED DECEMBER
MARCH 31, 2005 MARCH 31, 2004 31, 2004
-----------------------------------------------------------------------------------------------------------------------
Balance, beginning of period $ 90,085 $ 42,009 $ 42,009
Revision of estimates -- -- (8,704)
Liabilities incurred 131 -- 53,488
Liabilities settled (501) (64) (929)
Accretion expense 2,294 798 4,221
------------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 92,009 $ 42,743 $ 90,085
-----------------------------------------------------------------------------------------------------------------------
5. EQUITY BRIDGE NOTES
No equity bridge notes were outstanding at March 31, 2005. On January 26
and 29, 2004, the Trust repaid the two equity bridge notes outstanding in
the amounts of $7.4 million and $17.6 million, respectively. At that time,
the Trust also settled accrued and outstanding interest in the amount of
$850,300.
6. UNITHOLDERS' CAPITAL
(a) Authorized
The authorized capital consists of an unlimited number of Trust Units.
HARVEST ENERGY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED MARCH 31, 2005
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT WHERE NOTED)
================================================================================
(b) Issued
Number of units (000s) Amount
(restated)
-----------------------------------------------------------------------------------------------------------------------
AS AT DECEMBER 31, 2003 17,109 $ 117,407
Issued pursuant to corporate acquisition 2,721 40,183
Conversion of subscription receipts 12,167 175,200
Convertible debenture conversions-9% series 3,521 49,287
Convertible debenture conversions-8% series 5,221 84,226
Equity component of convertible debenture conversions-9% series -- 14
Equity component of convertible debenture conversions-8% series -- 632
Exchangeable share retraction 152 2,200
Distribution reinvestment plan issuance 752 12,553
Unit appreciation rights exercise 145 721
Trust unit issue costs -- (16,899)
-----------------------------------------------------------------------------------------------------------------------
AS AT DECEMBER 31, 2004 41,788 $ 465,524
-----------------------------------------------------------------------------------------------------------------------
Convertible debenture conversions-9% series 103 1,438
Convertible debenture conversions-8% series 321 5,182
Equity component of convertible debenture conversions-9% series -- --
Equity component of convertible debenture conversions-8% series -- 39
Exchangeable share retraction 229 2,964
Distribution reinvestment plan issuance 209 4,761
Special distribution 465 10,748
Trust unit issue costs -- (353)
=======================================================================================================================
AS AT MARCH 31, 2005 43,115 $ 490,303
=======================================================================================================================
On February 28, 2005, the Trust declared a special distribution to be made
to unitholders' on April 15, 2005. The special distribution will be paid in
units, with each unitholder of record on March 31, 2005 receiving 0.01098
of a Trust Unit per Trust unit held on that date. Although this special
distribution is deemed payable as at December 31, 2004, for tax purposes,
pursuant to the terms of Harvest's trust indenture, it has been reflected
in the financial statements in the period it was formally declared by the
Board of Directors of Harvest Operations Corp. As a result, at March 31,
2005, unitholders' capital was increased by $10.7 million with a
corresponding increase to accumulated distributions as a result of the
special distribution.
(c) Per Trust Unit information
The following table summarizes the Trust Units used in calculating loss per
Trust Unit:
NET INCOME ADJUSTMENTS:
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2005 MARCH 31, 2004
-----------------------------------------------------------------------------------------------------------------------
Net loss, basic (43,070) (2,250)
Non-controlling interest (495) --
-----------------------------------------------------------------------------------------------------------------------
Net loss, diluted(1) (43,565) (2,250)
===========================================================================================================================
HARVEST ENERGY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED MARCH 31, 2005
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT WHERE NOTED)
================================================================================
WEIGHTED AVERAGE TRUST UNIT ADJUSTMENTS
THREE MONTHS ENDED MARCH Three Months Ended March
NUMBER OF UNITS (000S) 31, 2005 31, 2004
-----------------------------------------------------------------------------------------------------------------------
Weighted average Trust Units outstanding, basic 42,134,156 17,130,519
Effect of exchangeable shares 397,579 --
-----------------------------------------------------------------------------------------------------------------------
Weighted average Trust Units outstanding, diluted(1) 42,531,735 17,130,519
=======================================================================================================================
NOTE 1 WEIGHTED AVERAGE TRUST UNITS, DILUTED DOES NOT INCLUDE THE IMPACT
OF THE CONVERSION OF THE DEBENTURES AS THE IMPACT WOULD BE
ANTI-DILUTIVE. TOTAL UNITS EXCLUDED AMOUNT TO 1,537,871 (4,266,979 -
MARCH 31, 2004). WEIGHTED AVERAGE TRUST UNITS, DILUTED DOES NOT
INCLUDE THE IMPACT OF THE TRUST UNIT APPRECIATION RIGHTS AS THE
IMPACT WOULD BE ANTI-DILUTIVE. TOTAL UNITS EXCLUDED WERE 699,350
(430,194 - MARCH 31, 2004).
7. TRUST UNIT INCENTIVE PLAN
As at March 31, 2005, a total of 1,500,450 unit appreciation rights were
outstanding under the Trust Unit incentive plan at an average exercise
price of $13.47. This represents 3.5% of the total Trust Units outstanding.
For the three months ended March 31, 2005, the Trust incurred non-cash
compensation costs of 2.6 million (183,000 - March 31, 2004). $2.2 million
($183,000 - March 31, 2004) of this amount was expensed and reflected as
general and administrative costs in the statement of income, and $353,000
(nil - March 31, 2004) of costs associated with personnel whose
compensation is reflected in capital asset costs was capitalized.
The following summarizes the Trust Units reserved for issuance under the
Trust Unit incentive plan:
THREE MONTHS ENDED Year ended
MARCH 31, 2005 December 31, 2004
----------------------------------------------------------------------------------------------------------------
NUMBER OF UNIT WEIGHTED Number of Unit
APPRECIATION AVERAGE Appreciation Weighted Average
RIGHTS EXERCISE PRICE Rights Exercise Price
----------------------------------------------------------------------------------------------------------------
Outstanding, beginning of period 1,117,725 $ 11.92 1,065,150 $ 9.04
Granted 390,600 24.91 445,600 16.47
Exercised (2,750) 12.11 (253,750) 8.30
Cancelled (5,125) 15.45 (139,275) 10.91
----------------------------------------------------------------------------------------------------------------
Outstanding before exercise price 1,500,450 15.29 1,117,725 11.92
reductions
Exercise price reductions - (1.82) - (1.83)
----------------------------------------------------------------------------------------------------------------
Outstanding, end of period 1,500,450 $ 13.47 1,117,725 $ 10.09
================================================================================================================
Exercisable before exercise price $ 9.07 206,688 $ 8.89
reductions 220,863
Exercise price reductions - (3.09) - (2.64)
----------------------------------------------------------------------------------------------------------------
Exercisable, end of period 220,863 $ 5.98 206,688 $ 6.25
================================================================================================================
HARVEST ENERGY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED MARCH 31, 2005
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT WHERE NOTED)
================================================================================
The following table summarizes information about unit appreciation rights
outstanding at March 31, 2005.
OUTSTANDING EXERCISABLE
----------------------------------------------- -------------------------------
EXERCISE
EXERCISE PRICE NET OF
EXERCISE PRICE EXERCISE PRICE NUMBER PRICE NET OF REMAINING NUMBER PRICE
BEFORE PRICE NET OF PRICE OUTSTANDING AT PRICE CONTRACTUAL EXERCISABLE AT REDUCTIONS
REDUCTIONS REDUCTIONS MARCH 31, 2005 REDUCTIONS(A) LIFE (YEARS)(A) MARCH, 31, 2005 (A)
------------------------------------------------------------------------------------------------------------------------
$8.00 - 10.21 $4.71 - $7.39 509,000 $ 4.80 2.7 164,625 $ 4.78
$10.30 - $13.15 $7.51 - $11.11 199,750 9.72 3.5 50,688 9.28
$13.35 - $17.95 $11.50 - $17.00 286,600 13.97 4.2 5,550 11.72
$18.55 - $25.68 $17.68 - $25.41 505,100 23.40 4.8 -- n/a
------------------------------------------------------------------------------------------------------------------------
$8.00 - $25.68 $4.71 - $25.41 1,500,450 $ 13.47 3.8 220,863 $ 5.98
========================================================================================================================
(A) BASED ON WEIGHTED AVERAGE UNIT APPRECIATION RIGHTS OUTSTANDING
Prior to December 31, 2004, the Trust utilized the fair value method to
account for its unit rights plan. The fair value of each Trust Unit right
was estimated on the grant date using the following assumptions.
Three Months Ended
March 31, 2004
-----------------------------------------------------------------------------------------------------------------------
Expected volatility 23%
Risk free interest rate 4.0%
Expected life of the trust unit rights 4 years
Estimated annual distributions per unit $2.40
=======================================================================================================================
For the purposes of pro forma disclosures, the estimated fair value of all
of the trust unit rights is amortized to expense over the vesting periods.
The Trust's pro forma net income and per trust amounts would have been
accounted for as follows:
(RESTATED NOTE 2)
Three Months Ended
March 31, 2004
-----------------------------------------------------------------------------------------------------------------------
Net loss As reported ($2,250)
Pro forma ($2,633)
Loss per unit - basic As reported ($0.13)
Pro forma ($0.15)
Loss per unit - diluted As reported ($0.13)
Pro forma ($0.15)
=======================================================================================================================
HARVEST ENERGY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED MARCH 31, 2005
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT WHERE NOTED)
================================================================================
UNIT AWARD INCENTIVE PLAN
At March 31, 2005 10,930 units were outstanding under the Unit Award
Incentive Plan. The Trust recorded compensation expense of $38,000 for the
three months ended March 31, 2005 (nil - March 31, 2004) related to this
plan.
-----------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED Year ended
NUMBER MARCH 31, 2005 December 31, 2004
-----------------------------------------------------------------------------------------------------------------------
Outstanding, beginning of period 10,662 --
Granted -- 15,000
Adjusted for distributions 268 662
Cancelled -- (5,000)
-----------------------------------------------------------------------------------------------------------------------
Outstanding, end of period 10,930 10,662
=======================================================================================================================
8. EXCHANGEABLE SHARES
(a) Authorized
Harvest Operations Corp., a wholly-owned subsidiary of the Trust, is
authorized to issue an unlimited number of exchangeable shares without
nominal or par value.
(b) Issued
EXCHANGEABLE SHARES, SERIES 1 THREE MONTHS ENDED Year Ended
(NUMBER) MARCH 31, 2005 December 31, 2004
---------------------------------------------------------------------------------------------------------------------
Outstanding, beginning of period 455,547 --
Issued pursuant to corporate acquisition -- 600,587
Shareholder retractions (210,735) (145,040)
---------------------------------------------------------------------------------------------------------------------
Outstanding, end of period 244,812 455,547
---------------------------------------------------------------------------------------------------------------------
Exchange ratio at end of period(1) 1:1.08991 1:1.06466
=====================================================================================================================
(1) AS A RESULT OF DECLARING THE SPECIAL DISTRIBUTION THE EXCHANGE RATIO
INCREASED TO 1.10188 TO BE IN EFFECT AFTER APRIL 15, 2005.
The Trust retroactively applied EIC-151 "Exchangeable Securities Issued
by a Subsidiary of an Income Trust" in the first quarter of 2005. The
non-controlling interest on the consolidated balance sheet consists of
the fair value of the exchangeable shares upon issuance plus the
accumulated earnings attributable to such non-controlling interest less
conversions to date. On the consolidated statement of income the
non-controlling interest represents the share of net income
attributable to the non-controlling interest based on the Trust Units
issuable for exchangeable shares in proportion to total Trust Units
issued and issuable at each period end.
HARVEST ENERGY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED MARCH 31, 2005
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT WHERE NOTED)
================================================================================
The following is a summary of the non-controlling interest:
MARCH 31, December 31,
2005 2004
--------------------------------------------------------------------------------------------------------------------
Non-controlling interest, beginning of period $ 6,895 $ --
Issue of exchangeable shares -- 8,870
Exchanged for Trust Units (2,964) (2,200)
Current period (loss) income attributable to non-controlling interest (495) 225
--------------------------------------------------------------------------------------------------------------------
NON-CONTROLLING INTEREST, END OF PERIOD 3,436 6,895
--------------------------------------------------------------------------------------------------------------------
ACCUMULATED (LOSS) INCOME ATTRIBUTABLE TO NON-CONTROLLING INTEREST $ (270) $ 225
====================================================================================================================
9. CONVERTIBLE DEBENTURES
The following is a summary of the terms of the Trust's outstanding series
of convertible debentures
INTEREST ORIGINAL EARLIEST REDEMPTION
ISSUE DATE RATE FACE VALUE CONVERSION PRICE(A) MATURITY DATE
-----------------------------------------------------------------------------------------------------------------------
January 29, 2004 9% 60 million $14.00 per trust unit May 31, 2009 May 31, 2007
August 10, 2004 8% 100 million $16.25 per trust unit September 30, 2009 September 30, 2007
=======================================================================================================================
(A) SUBSEQUENT TO MARCH 31, 2005, THE CONVERSION PRICE FOR THE $60 MILLION
DEBENTURE AND THE $100 MILLION DEBENTURE CHANGED AS A RESULT OF THE
SPECIAL DISTRIBUTION. THE CONVERSION PRICE CHANGED TO $13.85 AND
$16.07, RESPECTIVELY.
As at January 1, 2005, the Trust adopted the amended CICA Handbook Section
3860 relating to the classification of liabilities that may be settled with
a variable number of equity instruments such as Trust Units. The adoption
has resulted in the convertible debentures being classified as debt rather
than equity, with a small portion remaining in equity representing the
value associated with the conversion feature. As the debentures are
converted, a portion of the debt and equity amounts are transferred to
Unitholders' capital. The debt balance associated with the convertible
debentures accretes over time to the amount owing on maturity, and such
increases in the debt balance are reflected as non-cash interest expense in
the statement of income.
The following table summarizes the issuance and subsequent conversions of
the convertible debentures:
9% SERIES 8% SERIES TOTAL
------------------------- ------------------------- ------
NUMBER OF NUMBER OF
DEBENTURES AMOUNT DEBENTURES AMOUNT AMOUNT
-----------------------------------------------------------------------------------------------------------------------
January 29, 2004 issuance 60,000 $ 60,000 -- -- $ 60,000
August 10, 2004 issuance -- -- 100,000 $ 100,000 100,000
Portion allocated to equity -- (17) -- (745) (762)
Accretion of non-cash interest expense -- 2 -- 23 25
Converted into Trust Units (49,300) (49,287) (84,841) (84,226) (133,513)
-----------------------------------------------------------------------------------------------------------------------
As at December 31, 2004 10,700 $ 10,698 15,159 $ 15,052 $ 25,750
-----------------------------------------------------------------------------------------------------------------------
Accretion of non-cash interest expense - -- -- 4 4
Converted into Trust Units (1,438) (1,438) (5,218) (5,182) (6,620)
-----------------------------------------------------------------------------------------------------------------------
As at March 31, 2005 9,262 $ 9,260 9,941 $ 9,874 $ 19,134
=======================================================================================================================
HARVEST ENERGY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED MARCH 31, 2005
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT WHERE NOTED)
================================================================================
The following table summarizes the reclassification of the equity portion
to Unitholders' capital:
9% SERIES 8% SERIES
EQUITY VALUE EQUITY VALUE TOTAL
----------------------------------------------------------------------------------------------------------------------
January 29, 2004 issuance $ 17 $ -- $ 17
August 10, 2004 issuance -- 745 745
Converted into Trust Units (14) (632) (646)
----------------------------------------------------------------------------------------------------------------------
As at December 31, 2004 $ 3 $ 113 $ 116
Converted into Trust Units -- (39) (39)
----------------------------------------------------------------------------------------------------------------------
As at March 31, 2005 $ 3 $ 74 $ 77
======================================================================================================================
10. FINANCIAL INSTRUMENTS
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.
(a) INTEREST RATE RISK
The Trust is exposed to interest rate risk on its bank debt. All of the
Trust's other debt has fixed interest rates.
(b) CREDIT RISK
Substantially all accounts receivable are due from customers in the oil
and natural gas industry and are subject to normal industry credit
risks. Concentration of credit risk is mitigated by having a broad
customer base, which includes a significant number of companies engaged
in joint operations with the Trust. The Trust periodically assesses the
financial strength of its partners and customers, including parties
involved in marketing or other commodity arrangements. The carrying
value of accounts receivable reflects management's assessment of the
associated credit risks.
(c) FOREIGN EXCHANGE RATE RISK
The Trust is exposed to the risk of changes in the Canadian/US dollar
exchange rate on sales of commodities that are denominated in US
dollars or directly influenced by US dollar benchmark prices. In
addition, the Trust's senior notes are denominated in US dollars
(US$250 million). These notes act as an economic hedge to help offset
the impact of exchange rate movements on commodity sales during the
year. As at March 31, 2005 the full balance of the notes is still
outstanding and is not repayable until October 15, 2011. Interest is
payable semi-annually on the notes in US dollars.
(d) COMMODITY RISK MANAGEMENT
The Trust uses fixed price oil sales contracts and derivative financial
instruments to manage its commodity price exposure. Under the terms of
some of the derivative instruments, the Trust is required to provide
security from time to time based on the underlying market value of
those contracts. The Trust is also exposed to counterparty risk for
these derivative contracts. This risk is managed by diversifying the
Trust's derivative portfolio among a number of counterparties and by
dealing with large investment grade institutions.
HARVEST ENERGY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED MARCH 31, 2005
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT WHERE NOTED)
================================================================================
The following is a summary of the oil sales price derivative contracts
as at March 31, 2005.
OIL PRICE SWAP CONTRACTS BASED ON WEST TEXAS INTERMEDIATE
------------------------------------------------------------------------------------------------------------------------
Price per Barrel Mark to Market
Daily Quantity Term ($U.S.) Gain (Loss)
-------------- ---- ------- -----------
500 bbl/d April through December 2005 $24.00 $ (5,168)
1,030 bbl/d April through June 2005 $22.18 $ (3,899)
50% PARTICIPATING SWAP CONTRACTS BASED ON WEST TEXAS INTERMEDIATE
------------------------------------------------------------------------------------------------------------------------
8,750 bbl/d January - December 2006 $38.16 (b) $ (28,761)
5,000 bbl/d July - December 2006 $45.17(b) $ (2,675)
OIL PRICE COLLAR CONTRACTS BASED ON WEST TEXAS INTERMEDIATE
------------------------------------------------------------------------------------------------------------------------
2,500 bbl/d April through June 2005 $28.40 - 32.25 ($21.80) $ (5,774) (a)
1,500 bbl/d July through December 2005 $28.17 - 32.10 ($22.33) $ (8,270) (a)
2,000 bbl/d April through December 2005 $28.00 - 42.00 $ (8,652)
------------------------------------------------------------------------------------------------------------------------
(a) THE TRUST HAS SOLD PUT OPTIONS AT THE AVERAGE PRICE DENOTED IN
PARENTHESIS, FOR THE SAME VOLUMES AS THE ASSOCIATED COMMODITY
CONTRACTS. THE COUNTERPARTY MAY EXERCISE THESE OPTIONS IF THE
RESPECTIVE INDEX FALLS BELOW THE SPECIFIED PRICE ON A MONTHLY
SETTLEMENT BASIS.
(b) THIS PRICE IS A FLOOR. THE TRUST REALIZES THIS PRICE PLUS
50% OF THE DIFFERENCE BETWEEN SPOT PRICE AND THIS PRICE.
-----------------------------------------------------------------------------------------------------------------------
Daily Quantity Term Type Price per Bbl ($U.S.) Mark to Market Gain (Loss)
-----------------------------------------------------------------------------------------------------------------------
4,000 bbl/d April - December 2005 Long Put $30.00 $ 20
1,972 bbl/d April - December 2005 Short Call $30.00 (17,304)
1,972 bbl/d April - December 2005 Long Call $40.00 10,975
7,000 bbl/d April - December 2005 Long Put $35.00(2) $ (88)
2,380 bbl/d April - December 2005 Short Call $35.00 (17,016)
2,380 bbl/d April - December 2005 Long Call $45.00 9,685
7,500 bbl/d April - December 2005 Long Put $40.00 $ 646
3,675 bbl/d April - December 2005 Short Call $40.00 (20,452)
3,675 bbl/d April - December 2005 Long Call $50.00 10,030
7,500 bbl/d January - June 2006 Long Put $34.00 $ 237
3,750 bbl/d January - June 2006 Short Call $34.00 (17,285)
3,750 bbl/d January - June 2006 Long Call $44.00 10,586
=======================================================================================================================
(1) EACH GROUP OF A LONG PUT, SHORT CALL AND A LONG 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.
(2) HARVEST PAYS A PREMIUM OF U.S.$1.00 PER BBL ON 7,000 BBL/D FOR EACH
MONTH IN WHICH WTI EXCEEDS U.S.$50.00/BBL.
HARVEST ENERGY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED MARCH 31, 2005
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT WHERE NOTED)
================================================================================
The following is a summary of electricity price physical and financial swap
contracts entered into by Harvest to fix the cost of future electricity
usage as well as a put option related to the US/Canadian dollar exchange
rate as at March 31, 2005:
SWAP CONTRACTS BASED ON ELECTRICITY PRICES
-----------------------------------------------------------------------------------------------------------------------
Weighted Average Average Price
Quantity Term per Megawatt Mark to Market Gain
-----------------------------------------------------------------------------------------------------------------------
24.8 MWH April through December 2005 Cdn $47.43 $ 3,836
29.9 MWH January through December 2006 Cdn $47.51 1,475
SWAP CONTRACTS BASED ON ELECTRICITY HEAT RATE
-----------------------------------------------------------------------------------------------------------------------
Quantity Term Heat Rate Mark to Market Gain
-----------------------------------------------------------------------------------------------------------------------
5 MW April through December 2005 8.40 GJ/MWh $ 293
-----------------------------------------------------------------------------------------------------------------------
FOREIGN CURRENCY CONTRACTS
-----------------------------------------------------------------------------------------------------------------------
Monthly Contract Amount Term Contract Rate Mark to Market Gain
-----------------------------------------------------------------------------------------------------------------------
U.S. $8.33 million April through December 2005 1.20 Cdn / US $ 1,453
=======================================================================================================================
At March 31, 2005, the net unrealized loss position reflected on the
balance sheet for all the financial derivative contracts outstanding at
that date was approximately $86.1 million.
For the three months ended March 31, 2005, the total unrealized loss
recognized in the statement of income was $74.7 million ($5.5 million -
March 31, 2004). The realized losses on all derivative contracts are
included in the period in which they are incurred. Both of these amounts
are reflected in gains and losses on derivative contracts on the statement
of income.
At October 1, 2004, the Trust discontinued hedge accounting for all of its
derivative financial instruments. For those contracts where hedge
accounting had previously been applied, a deferred charge or gain was
recorded equal to the fair value of the contracts at the time hedge
accounting was discontinued with a corresponding amount recorded in the
derivative contracts balance. The deferred charge or gain is subsequently
recognized in income in the period in which the underlying transaction is
recognized.
For the three months ended March 31, 2005, $4.4 million ($5.5 - three
months ended March 31, 2004) of the deferred charge and $445,000 (nil -
March 31, 2004) of the deferred gain has been amortized and recorded in
gains and losses on derivative contracts in the statement of income. At
March 31, 2005, $6.4 million ($10.8 million - December 31, 2004) and $1.7
million ($2.2 million - December 31, 2004) has been recorded as a deferred
charge and a deferred gain, respectively on the balance sheet, relating to
derivatives.
HARVEST ENERGY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED MARCH 31, 2005
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT WHERE NOTED)
================================================================================
DEFERRED CHARGES - ASSET THREE MONTHS ENDED Year Ended
MARCH 31, 2005 December 31, 2004
---------------------------------------------------------------------------------------------------------------------
Balance, beginning of period $ 25,540 $ 1,989
Deferred charge related to derivative contracts recorded
upon adoption of AcG-13 -- 5,490
Deferred charge related to derivative contracts
recorded upon discontinuing hedge accounting -- 20,215
Discount on senior notes -- 2,075
Financing costs incurred 504 20,971
Financing costs transferred to share issue costs on
conversion of debentures (265) (5,721)
Amortization of deferred charges related to derivative
contracts(1) (4,361) (14,946)
Amortization of deferred financing costs(2) (1,721) (4,533)
----------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 19,697 $ 25,540
=====================================================================================================================
THREE MONTHS ENDED Year Ended
DEFERRED GAINS - LIABILITY MARCH 31, 2005 December 31, 2004
----------------------------------------------------------------------------------------------------------------------
Balance, beginning of period $ 2,177 $ --
Deferred gains related to derivative contracts
recorded upon discontinuing hedge accounting -- 2,527
Amortization of deferred gains related to derivative (445) (350)
contracts(1)
---------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 1,732 $ 2,177
=====================================================================================================================
(1) RECORDED WITHIN GAINS AND LOSSES ON DERIVATIVE CONTRACTS.
(2) RECORDED WITHIN INTEREST EXPENSE ON LONG-TERM DEBT AND SHORT-TERM
DEBT.
HARVEST ENERGY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED MARCH 31, 2005
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT WHERE NOTED)
================================================================================
11. CHANGE IN NON-CASH WORKING CAPITAL
THREE MONTHS ENDED Three Months Ended
MARCH 31, 2005 March 31, 2004
--------------------------------------------------------------------------------------------------------------
Changes in non-cash working capital items:
Accounts receivable $ (17,648) $ 5,472
Current portion of derivative contracts assets 3,279 --
Prepaid expenses and deposits (36,854) (7,178)
Accounts payable and accrued liabilities 25,522 1,692
Cash distribution payable 172 34
Current portion of derivative contracts liabilities 27,340 --
--------------------------------------------------------------------------------------------------------------
$ 1,811 $ 20
--------------------------------------------------------------------------------------------------------------
Changes relating to operating activities $ (48,694) $ (269)
Changes relating to financing activities 5,679 286
Changes relating to investing activities 11,603 224
Add: Non cash changes 33,223 (221)
--------------------------------------------------------------------------------------------------------------
$ 1,811 $ 20
==============================================================================================================
12. RELATED PARTY TRANSACTIONS
A director and a corporation controlled by a director of Harvest Operations
Corp., were repaid $25 million under the equity bridge notes during the
three month period ended March 31, 2004. The Trust also paid $850,300 of
accrued interest during the year. [Note 5]
A corporation controlled by a director of Harvest Operations Corp. sublets
office space and is provided administrative services on a cost recovery
basis.
13. COMMITMENTS, CONTINGENCIES AND GUARANTEES
From time to time, the Trust is involved in litigation or has claims
brought against it in the normal course of business operations. Management
of the Trust is not currently aware of any claims or actions that would
materially affect the Trust's reported financial position or results from
operations.
In the normal course of operations, management may also enter into certain
types of contracts that require the Trust to indemnify parties against
possible third party claims, particularly when these contracts relate to
purchase and sale agreements. The terms of such contracts vary and
generally a maximum is not explicitly stated; as such the overall maximum
amount of the obligations cannot be reasonably estimated. Management does
not believe payments, if any, related to such contracts would have a
material affect on the Trust's reported financial position or results from
operations.
The Trust has letters of credit outstanding in the amount of approximately
$5 million related to electricity infrastructure usage. These letters are
provided by Harvest Operations' lenders pursuant to its secured senior
credit facility. These letters expire throughout 2005, and are expected to
be renewed as required.
HARVEST ENERGY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED MARCH 31, 2005
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT WHERE NOTED)
================================================================================
Following is a summary of the Trust's contractual obligations and
commitments as at March 31, 2005:
REMAINING PAYMENTS DUE BY PERIOD
----------------------------------------------------------------------
2005 2006-- 2007 2008-- 2009 THEREAFTER TOTAL
---- ----------- ----------- ---------- -----
Debt repayments (1) $ 103,665 -- -- $ 302,400 $ 406,065
Operating leases 400 $ 2,869 $ 2,869 956 7,094
--------------------------------------------------------------------------------------------------------
Total contractual obligations $ 104,065 $ 2,869 $ 2,869 $ 303,356 $ 413,159
========================================================================================================
(1) INCLUDES LONG-TERM AND SHORT-TERM DEBT. ASSUMES THAT THE OUTSTANDING
CONVERTIBLE DEBENTURES EITHER EXCHANGE AT HOLDERS' OPTION FOR UNITS OR
ARE REDEEMED FOR UNITS AT THE TRUST'S OPTION.