EXHIBIT 2
---------
HARVEST ENERGY TRUST
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER TRUST UNIT AMOUNTS)
===========================================================================================================
(RESTATED, NOTE 2)
JUNE 30, 2005 December 31, 2004
- -----------------------------------------------------------------------------------------------------------
ASSETS
Current assets
Accounts receivable $ 66,329 $ 44,028
Current portion of derivative contracts [NOTE 10] 9,809 8,861
Prepaid expenses and deposits 45,929 3,014
Future income tax 9,963 3,101
- -----------------------------------------------------------------------------------------------------------
132,030 59,004
Deferred charges [NOTE 10] 13,734 25,540
Long term portion of derivative contracts [NOTE 10] 3,608 3,710
Capital assets 924,588 918,397
Goodwill 43,832 43,832
- -----------------------------------------------------------------------------------------------------------
$ 1,117,792 $ 1,050,483
===========================================================================================================
LIABILITIES AND UNITHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities [NOTE 3] $ 101,672 $ 76,251
Cash distribution payable 8,754 8,358
Current portion of derivative contracts [NOTE 10] 38,291 27,927
Bank debt -- 75,519
- -----------------------------------------------------------------------------------------------------------
148,717 188,055
Bank debt 138,090 --
Deferred gains [NOTE 10] 1,287 2,177
Long term portion of derivative contracts [NOTE 10] 52,603 --
Convertible debentures [NOTES 1, 2 AND 9] 10,723 25,750
Senior notes 306,350 300,500
Asset retirement obligation [NOTE 4] 94,042 90,085
Future income tax 14,806 37,772
- -----------------------------------------------------------------------------------------------------------
766,618 644,339
Non-controlling interest [NOTES 1,2 AND 8] 3,489 6,895
Unitholders' equity
Unitholders' capital [NOTE 6] 499,836 465,524
Equity component of convertible debentures [NOTE 9] 60 116
Accumulated income 7,165 30,719
Accumulated distributions (159,376) (97,110)
- -----------------------------------------------------------------------------------------------------------
347,685 399,249
- -----------------------------------------------------------------------------------------------------------
$ 1,117,792 $ 1,050,483
===========================================================================================================
Commitments, contingencies and guarantees [Note 13]
Subsequent Events [Note 14]
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) (RESTATED, NOTE 2)
THREE MONTHS ENDED Three Months Ended SIX MONTHS ENDED Six Months Ended
JUNE 30, 2005 June 30, 2004 JUNE 30, 2005 June 30, 2004
- ----------------------------------------------------------------------------------------------------------------------------
REVENUE
Oil and natural gas sales $ 143,218 $ 53,295 $ 273,044 $ 100,790
Royalty expense, net (22,955) (8,834) (42,850) (17,031)
- ----------------------------------------------------------------------------------------------------------------------------
120,263 44,461 230,194 83,759
EXPENSES
Operating 28,635 14,306 55,983 28,179
General and administrative 6,606 1,701 12,075 3,080
Interest on short-term debt 2,878 964 5,369 2,412
Interest on long-term debt 6,907 1,436 13,778 2,436
Depletion, depreciation and accretion 37,408 12,824 78,975 24,940
Foreign exchange loss (gain) 3,248 (1,222) 5,367 (1,290)
Derivative contracts [NOTE 10] 18,256 15,784 111,649 30,131
- ----------------------------------------------------------------------------------------------------------------------------
103,938 45,793 283,196 89,888
- ----------------------------------------------------------------------------------------------------------------------------
Income(loss) before taxes and 16,325 (1,332) (53,002) (6,129)
non-controlling interest
TAXES
Large corporations tax 478 120 755 136
Future income tax recovery (3,789) (1,603) (29,828) (4,166)
- ----------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) BEFORE NON-CONTROLLING
INTEREST 19,636 151 (23,929) (2,099)
Non-controlling interest [NOTES 1, 2
AND 8] 120 -- (375) --
- ----------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) 19,516 151 (23,554) (2,099)
Accumulated (loss) income, beginning of
period (12,351) 17,228 30,719 19,478
- ----------------------------------------------------------------------------------------------------------------------------
ACCUMULATED INCOME, END OF PERIOD $ 7,165 $ 17,379 $ 7,165 $ 17,379
============================================================================================================================
Net income (loss) per trust unit, basic
[NOTE 6] $ 0.45 $ 0.01 $ (0.55) $ (0.12)
Net income (loss) per trust unit, diluted
[NOTE 6] $ 0.44 $ 0.01 $ (0.56) $ (0.12)
- ----------------------------------------------------------------------------------------------------------------------------
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) (RESTATED, NOTE 2)
THREE MONTHS ENDED Three Months Ended SIX MONTHS ENDED Six Months Ended
JUNE 30, 2005 June 30, 2004 JUNE 30, 2005 June 30, 2004
- --------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Net income(loss) for the period $ 19,516 $ 151 $ (23,554) $ (2,099)
Items not requiring cash
Depletion, depreciation and accretion 37,408 12,824 78,975 24,940
Unrealized foreign exchange loss
(gain) 3,681 (697) 5,791 (765)
Amortization of deferred finance
charges 1,638 714 3,285 1,540
Unrealized (gain) loss on derivative
contracts (5,093) 4,241 69,576 9,731
Non-cash interest expense 77 1 155 1
Future income tax expense (recovery) (3,789) (1,603) (29,828) (4,166)
Non-controlling interest 120 -- (375) --
Non-cash unit right compensation
expense 3,659 208 5,879 391
- --------------------------------------------------------------------------------------------------------------------------
57,217 15,839 109,904 29,573
Settlement of asset retirement obligation (663) (89) (1,164) (153)
Change in non-cash working capital
[NOTE 11] (6,983) 137 (55,677) (2,158)
- --------------------------------------------------------------------------------------------------------------------------
49,571 15,887 53,063 27,262
FINANCING ACTIVITIES
Trust unit issue costs -- (59) (88) (131)
Issue of equity bridge notes -- 25,000 -- 25,000
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 (30) (22) (534) (22)
Net increase in bank debt 34,425 48,211 62,571 23,104
Cash distributions (24,582) (8,447) (45,028) (17,502)
Change in non-cash working capital
[NOTE 11] (5,992) (514) (313) (228)
- --------------------------------------------------------------------------------------------------------------------------
3,821 64,169 16,608 62,554
INVESTING ACTIVITIES
Additions to capital assets (26,154) (8,323) (49,377) (18,513)
Property acquisitions (26,183) (273) (30,842) (2,127)
Property dispositions 1,212 -- 1,212 --
Acquisition of Storm Energy Ltd. -- (75,000) -- (75,000)
Change in non-cash working capital
[NOTE 11] (2,267) 3,540 9,336 5,824
- --------------------------------------------------------------------------------------------------------------------------
(53,392) (80,056) (69,671) (89,816)
Increase in cash and short-term
investments -- -- -- --
Cash (bank indebtedness), beginning of
period -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Cash (bank indebtedness), end of period $ -- $ -- $ -- $ --
- --------------------------------------------------------------------------------------------------------------------------
Cash interest payments $ 2,878 $ 2,203 $ 4,216 $ 2,721
Cash tax payments $ 275 $ 50 $ 346 $ 66
Cash distributions declared per trust unit $ 0.60 $ 0.60 $ 1.20 $ 1.20
==========================================================================================================================
See accompanying notes to these consolidated financial statements
HARVEST ENERGY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED JUNE 30, 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 only
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
or loss attributable to the non-controlling interest subsequent to
their issuance. Net income or loss 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 JUNE 30, 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 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 June 30, 2004, $25
million of equity bridge notes were outstanding and at December 31,
2004 there were no equity bridge notes payable. For the three and six
month periods ended June 30, 2004 and the year ended December 31, 2004,
interest payments were 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. (the "Corporation") are transferable and, in
accordance with EIC-151, have been reclassified to non-controlling
interest on the consolidated balance sheets. In addition, a provision
for non-controlling interest is reflected in the consolidated
statements of income. Prior periods have been retroactively restated to
reflect this presentation.
HARVEST ENERGY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED JUNE 30, 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, 2004 ADOPTION OF CICA ADOPTION OF DECEMBER 31, 2004
BALANCE SHEET SECTION 3860 EIC -151
-----------------------------------------------------------------------------------------------------------------------
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
-----------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
INCOME STATEMENT JUNE 30, 2004 JUNE 30, 2004
------------------------------------------------------------------------------------------------------------------------
Interest on long-term debt-- as reported $ -- $ --
Add: interest on convertible debentures 1,315 2,233
Add: amortization of deferred financing costs 121 203
------------------------------------------------------------------------------------------------------------------------
Interest on long-term debt - as restated $ 1,436 $ 2,436
========================================================================================================================
THREE MONTHS ENDED SIX MONTHS ENDED
INCOME STATEMENT JUNE 30, 2004 JUNE 30, 2004
------------------------------------------------------------------------------------------------------------------------
Interest on short-term debt - as reported $ 364 $ 883
Add: interest on equity bridge notes 7 192
Add: amortization of deferred financing costs(1) 593 1,337
------------------------------------------------------------------------------------------------------------------------
Interest on short-term debt - as restated $ 964 $ 2,412
========================================================================================================================
(1) PREVIOUSLY CLASSIFIED AS FINANCE CHARGES
THREE MONTHS ENDED SIX MONTHS ENDED
NET INCOME (LOSS) JUNE 30, 2004 JUNE 30, 2004
------------------------------------------------------------------------------------------------------------------------
Net income - as reported $ 1,594 $ 529
Less: amortization of deferred financing costs (121) (203)
Less: interest on equity bridge notes (7) (192)
Less: interest on convertible debentures (1,315) (2,233)
------------------------------------------------------------------------------------------------------------------------
Net income (loss) - as restated $ 151 $ (2,099)
========================================================================================================================
THREE MONTHS ENDED SIX MONTHS ENDED
INCOME (LOSS) PER UNIT JUNE 30, 2004 JUNE 30, 2004
------------------------------------------------------------------------------------------------------------------------
Basic as reported $ 0.02 $ (0.11)
Basic as restated 0.01 (0.12)
Diluted as reported 0.02 (0.11
Diluted as restated 0.01 (0.12)
========================================================================================================================
HARVEST ENERGY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED JUNE 30, 2005
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT WHERE NOTED)
================================================================================
3. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
JUNE 30, 2005 DECEMBER 31, 2004
---------------------------------------------------------------------------------------------------------------------
Trade accounts payable $ 25,104 $ 13,697
Accrued interest 5,680 5,993
Trust unit incentive plans 16,688 9,774
Premium on derivative contracts 3,077 4,500
Accrued closing adjustments on asset
acquisition -- 13,546
Other accrued liabilities 49,581 27,139
Large corporations tax payable 1,542 1,602
---------------------------------------------------------------------------------------------------------------------
$ 101,672 $ 76,251
=====================================================================================================================
4. ASSET RETIREMENT OBLIGATION
The Trust's asset retirement obligation results from its 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
$337 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 obligation is provided below:
THREE MONTHS ENDED JUNE 30, 2005 THREE MONTHS ENDED JUNE 30, 2004
-------------------------------------------------------------------------------------------------------------------
Balance, beginning of period $ 92,009 $ 42,743
Revision of estimates 45 --
Liabilities incurred 304 6,478
Liabilities settled (663) (89)
Accretion expense 2,347 875
-------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 94,042 $ 50,007
===================================================================================================================
SIX MONTHS ENDED SIX MONTHS ENDED YEAR ENDED DECEMBER
JUNE 30, 2005 JUNE 30, 2004 31, 2004
-------------------------------------------------------------------------------------------------------------------
Balance, beginning of period $ 90,085 $ 42,009 $ 42,009
Revision of estimates 45 -- (8,704)
Liabilities incurred 435 6,477 53,488
Liabilities settled (1,164) (153) (929)
Accretion expense 4,641 1,674 4,221
-------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 94,042 $ 50,007 $ 90,085
===================================================================================================================
HARVEST ENERGY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED JUNE 30, 2005
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT WHERE NOTED)
================================================================================
5. EQUITY BRIDGE NOTES
No equity bridge notes were outstanding at June 30, 2005.
On June 29, 2004, the Trust drew $25 million under an equity bridge note
agreement with a corporation controlled by a director of the Corporation.
Interest in respect of the equity bridge notes accrues at 10% per annum and
is a charge to income.
On January 26 and 29, 2004, the Trust repaid two equity bridge notes
outstanding in the amounts of $7.4 million and $17.6 million, respectively.
During the six months ended June 30, 2004, the Trust also paid 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.
(b) Issued
Number of Trust Units Amount
(000s) (restated Note 2)
---------------------------------------------------------------------------------------------------------------
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 571 7,916
Convertible debenture conversions-8% series 442 7,118
Equity component of convertible debenture conversions-9% series -- 2
Equity component of convertible debenture conversions-8% series -- 54
Exchangeable share retraction 234 3,031
Distribution reinvestment plan issuance 272 6,164
Special distribution 465 10,678
Trust unit issue costs -- (651)
---------------------------------------------------------------------------------------------------------------
AS AT JUNE 30, 2005 43,772 $ 499,836
===============================================================================================================
On February 28, 2005, the Trust declared a special distribution of 2004
income to be made to unitholders' effective as at December 31, 2004. The
special distribution was 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.
(c) Per Trust Unit information
The following table summarizes the Trust Units and net income (loss)
used in calculating income (loss) per Trust Unit:
HARVEST ENERGY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED JUNE 30, 2005
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT WHERE NOTED)
================================================================================
NET INCOME ADJUSTMENTS:
THREE MONTHS ENDED THREE MONTHS ENDED SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2005 JUNE 30, 2004 JUNE 30, 2005 JUNE 30, 2004
--------------------------------------------------------------------------------------------------------------------------
Net income (loss), basic 19,516 151 (23,554) (2,099)
Non-controlling interest -- -- (375) --
--------------------------------------------------------------------------------------------------------------------------
Net income (loss), diluted(1) 19,516 151 (23,929) (2,099)
==========================================================================================================================
WEIGHTED AVERAGE TRUST UNIT ADJUSTMENTS:
NUMBER OF UNITS (000S) THREE MONTHS Three Months SIX MONTHS Six Months
ENDED Ended ENDED Ended
JUNE 30, 2005 June 30, 2004 JUNE 30, 2005 June 30, 2004
--------------------------------------------------------------------------------------------------------------------------
Weighted average Trust Units outstanding,
basic 43,327 17,382 42,734 17,281
Effect of exchangeable shares -- 7 326 --
Effect of unit appreciation rights 926 420 -- --
--------------------------------------------------------------------------------------------------------------------------
Weighted average Trust Units outstanding, 44,253 17,809 43,060 17,281
diluted(1)
==========================================================================================================================
NOTE 1 WEIGHTED AVERAGE TRUST UNITS, DILUTED, DOES NOT INCLUDE THE IMPACT
OF THE CONVERSION OF THE CONVERTIBLE DEBENTURES AS THE IMPACT WOULD
BE ANTI-DILUTIVE. TOTAL UNITS EXCLUDED AMOUNT TO 182 AND 1,280 FOR
THE THREE AND SIX MONTH PERIOD ENDED JUNE 30, 2005, RESPECTIVELY
(4,189 AND 4,220 - FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE
30, 2004). WEIGHTED AVERAGE TRUST UNITS, DILUTED, FOR THE SIX MONTHS
ENDED JUNE 30, 2005 AND 2004 DO NOT INCLUDE THE IMPACT OF THE TRUST
UNIT APPRECIATION RIGHTS AS THE IMPACT WOULD BE ANTI-DILUTIVE. TOTAL
UNITS EXCLUDED WERE 813 (393 - SIX MONTHS ENDED JUNE 30,
2004).WEIGHTED AVERAGE TRUST UNITS, DILUTED, FOR THE THREE MONTH
PERIOD ENDED JUNE 30, 2005 AND THE SIX MONTHS ENDED JUNE 30, 2004
EXCLUDES THE IMPACT OF EXCHANGEABLE SHARES AS THE IMPACT WOULD BE
ANTI-DILUTIVE. TOTAL UNITS EXCLUDED WERE 262 AND 3 RESPECTIVELY.
7. TRUST UNIT INCENTIVE PLANS
As at June 30, 2005, a total of 1,538,525 unit appreciation rights were
outstanding under the regular Trust Unit incentive plan at an average
exercise price of $13.51. This represents 3.5% of the total Trust Units
outstanding.
For the three and six month periods ended June 30, 2005, the Trust incurred
non-cash compensation costs related to this incentive plan of $4.1 million
and $6.7 million, respectively ($208,000 and $391,000 - three and six month
periods ended June 30, 2004, respectively). For the three months ended June
30, 2005, $3.5 million ($208,000 - June 30, 2004) of this amount was
expensed and reflected as general and administrative costs in the statement
of income, and $683,000 (nil - June 30, 2004) of costs associated with
personnel whose compensation is reflected in capital asset costs was
capitalized. For the six months ended June 30, 2005 $5.7 million ($391,000
- June 30, 2004) was expensed and $1 million (nil - June 30, 2004) was
capitalized.
HARVEST ENERGY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED JUNE 30, 2005
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT WHERE NOTED)
================================================================================
The following summarizes the Trust Units reserved for issuance under the
Trust Unit incentive plan:
SIX MONTHS ENDED Year ended
JUNE 30, 2005 December 31, 2004
-------------------------------------------------------------------------------------------------------------------------
Number of Unit
NUMBER OF UNIT WEIGHTED AVERAGE Appreciation Weighted Average
APPRECIATION RIGHTS EXERCISE PRICE Rights Exercise Price
-------------------------------------------------------------------------------------------------------------------------
Outstanding, beginning of period 1,117,725 $ 11.92 1,065,150 $ 9.04
Granted 473,575 24.53 445,600 16.47
Exercised (18,850) 12.63 (253,750) 8.30
Cancelled (33,925) 17.94 (139,275) 10.91
--------------------------------------------------------------------------------------------------------------------------
Outstanding before exercise price 1,538,525 15.66 1,117,725 11.92
reductions
Exercise price reductions -- (2.15) -- (1.83)
--------------------------------------------------------------------------------------------------------------------------
Outstanding, end of period 1,538,525 $ 13.51 1,117,725 $ 10.09
=========================================================================================================================
Exercisable before exercise price 230,888 $ 9.45 206,688 $ 8.89
reductions
Exercise price reductions -- (3.39) -- (2.64)
-------------------------------------------------------------------------------------------------------------------------
Exercisable, end of period 230,888 $ 6.06 206,688 $ 6.25
=========================================================================================================================
The following table summarizes information about unit appreciation rights
outstanding at June 30, 2005.
EXERCISE EXERCISE
EXERCISE PRICE EXERCISE PRICE NUMBER PRICE NET OF REMAINING NUMBER PRICE NET OF
BEFORE PRICE NET OF PRICE OUTSTANDING AT PRICE CONTRACTUAL EXERCISABLE AT PRICE
REDUCTIONS REDUCTIONS JUNE 30, 2005 REDUCTIONS(A) LIFE (YEARS)(A) JUNE 30, 2005 REDUCTIONS(A)
---------------------------------------------------------------------------------------------------------------------------
$8.00 - 10.21 $4.26 - $6.94 506,500 $ 4.34 2.4 162,125 $ 4.31
$10.30 - $13.15 $7.06 - $10.66 186,525 9.26 3.2 43,838 8.75
$13.35 - $17.95 $11.05 -$16.55 270,350 13.53 4.0 24,925 12.70
$18.55 - $25.68 $17.23 - $24.96 575,150 22.97 4.7 -- n/a
---------------------------------------------------------------------------------------------------------------------------
$8.00 - $25.68 $4.26 - $24.96 1,538,525 $ 13.51 3.6 230,888 $ 6.06
===========================================================================================================================
(A) BASED ON WEIGHTED AVERAGE UNIT APPRECIATION RIGHTS OUTSTANDING
When the Trust adopted the fair value method of accounting for its Trust
Unit incentive plan on January 1, 2003, it was required to calculate the
pro forma impact of having adopted that method from the date all rights
were initially granted.
For purposes of those calculations the fair value of each Trust Unit right
has been estimated on the grant date using the following:
June 30, 2004
------------------------------------------------------------------------------------------------------------------------
Expected volatility 27.5%
Risk free interest rate 4.0%
Expected life of the trust unit rights 4 years
Estimated annual distributions per unit $2.40
========================================================================================================================
HARVEST ENERGY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED JUNE 30, 2005
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT WHERE NOTED)
================================================================================
As at June 30, 2004 for the purposes of pro forma disclosures, the expense
related to all of the Trust Unit rights issued prior to December 31, 2002
is reflected in pro forma net income as shown below:
(RESTATED NOTE 2) (RESTATED NOTE 2)
Three Months Ended Six Months Ended
June 30, 2004 June 30, 2004
-------------------------------------------------------------------------------------------------------------------------
Net income (loss) As reported $ 151 $ (2,099)
Pro forma (232) (2,864)
Income (loss) per unit - basic As reported $ 0.01 $ (0.12)
Pro forma $ (0.01) $ (0.17)
Income (loss) per unit - diluted As reported $ 0.01 $ (0.12)
Pro forma $ (0.01) $ (0.17)
=========================================================================================================================
UNIT AWARD INCENTIVE PLAN
At June 30, 2005, 31,441 units were outstanding under the Unit Award
Incentive Plan. The Trust recorded compensation expense of $201,000 and
$239,000 for the three and six month period ended June 30, 2005,
respectively (nil - three and six month period ended June 30, 2004) related
to this plan.
------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED Year ended
NUMBER JUNE 30, 2005 December 31, 2004
------------------------------------------------------------------------------------------------------------------------
Outstanding, beginning of period 10,662 --
Granted 20,248 15,000
Adjusted for distributions 531 662
Cancelled -- (5,000)
------------------------------------------------------------------------------------------------------------------------
Outstanding, end of period 31,441 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 SIX MONTHS ENDED Year Ended
(NUMBER) JUNE 30, 2005 December 31, 2004
---------------------------------------------------------------------------------------------------------------------
Outstanding, beginning of period 455,547 --
Issued pursuant to corporate acquisition -- 600,587
Shareholder retractions (215,536) (145,040)
---------------------------------------------------------------------------------------------------------------------
Outstanding, end of period 240,011 455,547
---------------------------------------------------------------------------------------------------------------------
Exchange ratio at end of period 1.11928 1:1.06466
=====================================================================================================================
The Trust retroactively applied EIC-151 "Exchangeable Securities Issued by
a Subsidiary of an Income Trust" at January 1, 2005. The non-controlling
interest on the consolidated balance sheet consists of the fair value of
the exchangeable
HARVEST ENERGY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED JUNE 30, 2005
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT WHERE NOTED)
================================================================================
shares upon issuance plus the accumulated earnings attributable to such
non-controlling interest less conversions to date. The non-controlling
interest on the statement of income represents the share of net income or
loss 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.
The following is a summary of the non-controlling interest:
(restated)
JUNE 30, 2005 December 31, 2004
---------------------------------------------------------------------------------------------------------------------
Non-controlling interest, beginning of period $ 6,895 $ --
Issue of exchangeable shares -- 8,870
Exchanged for Trust Units (3,031) (2,200)
Current period (loss) income attributable to non-controlling interest (375) 225
---------------------------------------------------------------------------------------------------------------------
NON-CONTROLLING INTEREST, END OF PERIOD 3,489 6,895
---------------------------------------------------------------------------------------------------------------------
ACCUMULATED (LOSS) INCOME ATTRIBUTABLE TO NON-CONTROLLING INTEREST (150) 225
=====================================================================================================================
9. CONVERTIBLE DEBENTURES
The following is a summary of certain 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 $13.85 per trust unit May 31, 2009 May 31, 2007
August 10, 2004 8% $100 million $16.07 per trust unit September 30, 2009 September 30, 2007
======================================================================================================================
(A) THE CONVERSION PRICE FOR THE 9% DEBENTURES AND THE 8% DEBENTURES CHANGED FROM $14.00 AND $16.25 PER UNIT
RESPECTIVELY, AS A RESULT OF THE SPECIAL DISTRIBUTION DESCRIBED IN NOTE 6.
See Note 14 regarding subsequent issue of additional convertible
debentures.
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 portion remaining in equity representing the value of
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:
HARVEST ENERGY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED JUNE 30, 2005
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT WHERE NOTED)
================================================================================
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 -- -- -- 7 7
Converted into Trust Units (7,917) (7,916) (7,167) (7,118) (15,034)
-----------------------------------------------------------------------------------------------------------------------
As at June 30, 2005 2,783 $ 2,782 7,992 $ 7,941 $ 10,723
=======================================================================================================================
The following table summarizes the reclassification of the equity component
of convertible debentures 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 (2) (54) (56)
------------------------------------------------------------------------------------------------------------------------
As at June 30, 2005 $ 1 $ 59 $ 60
========================================================================================================================
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; 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, including a 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$250 million). These notes act as an economic hedge to help offset
the impact of exchange rate movements on commodity sales during the
year. As at June 30, 2005 the full balance of the
HARVEST ENERGY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED JUNE 30, 2005
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT WHERE NOTED)
================================================================================
notes is still outstanding and is not repayable until October 15, 2011.
Interest is payable semi-annually on the notes in US dollars.
(d) COMMODITY RISK
The Trust is exposed to fluctuations in prices for oil and natural gas
and the differentials between prices received for light oil versus
those received for medium and heavy gravity oil. The Trust uses
derivative financial instruments to manage its commodity price
exposure. Under the terms of certain of the derivative instruments, the
Trust is required to provide security if the contracts favour the
counterparty. The Trust is also exposed to counterparty risk on
balances due if the contracts favour the Trust. This risk is managed by
diversifying the Trust's derivative portfolio among a number of
counterparties and by dealing with large investment grade institutions.
The following is a summary of the oil sales price derivative contracts
as at June 30, 2005.
OIL PRICE SWAP CONTRACTS BASED ON WEST TEXAS INTERMEDIATE
-------------------------------------------------------------------------------------------------------------------------
Price per Barrel Mark to Market
Daily Quantity Term (U.S.$) Gain (Loss)
-------------------------------------------------------------------------------------------------------------------------
500 bbl/d July through December 2005 $24.00 $ (3,943)
PARTICIPATING SWAP CONTRACTS BASED ON WEST TEXAS INTERMEDIATE
-------------------------------------------------------------------------------------------------------------------------
8,750 bbl/d January - December 2006 $38.16 (b) $ (38,459)
5,000 bbl/d July - December 2006 $45.17(b) (6,286)
5,000 bbl/d January 2006 - June 2007 $49.03(c) (1,004)
OIL PRICE COLLAR CONTRACTS BASED ON WEST TEXAS INTERMEDIATE
-------------------------------------------------------------------------------------------------------------------------
1,500 bbl/d July through December 2005 $28.17 - 32.10 ($22.33)(a) $ (9,095)
2,000 bbl/d July through December 2005 $28.00 - 42.00 (7,653)
=========================================================================================================================
(a) THE TRUST HAS SOLD PUT OPTIONS AT THE AVERAGE PRICE DENOTED IN
PARENTHESIS, FOR THE SAME VOLUMES AS THE ASSOCIATED COMMODITY
CONTRACTS. THE COUNTERPARTY MAY EXERCISE THESE OPTIONS IF THE
RESPECTIVE INDEX FALLS BELOW THE SPECIFIED PRICE ON A MONTHLY
SETTLEMENT BASIS.
(b) THIS PRICE IS A FLOOR. THE TRUST REALIZES THIS PRICE PLUS 50% OF THE
DIFFERENCE BETWEEN SPOT PRICE AND THIS PRICE.
(c) THIS PRICE IS A FLOOR. THE TRUST REALIZES THIS PRICE PLUS 75% OF THE
DIFFERENCE BETWEEN SPOT PRICE AND THIS PRICE.
OIL PRICE INDEXED PUT CONTRACTS BASED ON WEST TEXAS INTERMEDIATE
-------------------------------------------------------------------------------------------------------------------------
Daily Quantity Term Type Price per Bbl (U.S.$) Mark to Market Gain (Loss)
-------------------------------------------------------------------------------------------------------------------------
4,000 bbl/d July - December 2005 Long Put $30.00 $ 1
1,972 bbl/d July - December 2005 Short Call $30.00 (12,967)
1,972 bbl/d July - December 2005 Long Call $40.00 8,583
7,000 bbl/d July - December 2005 Long Put $35.00(2) $ (246)
2,380 bbl/d July - December 2005 Short Call $35.00 (12,998)
2,380 bbl/d July - December 2005 Long Call $45.00 7,773
7,500 bbl/d July - December 2005 Long Put $40.00 $ 73
3,675 bbl/d July - December 2005 Short Call $40.00 (15,992)
3,675 bbl/d July - December 2005 Long Call $50.00 8,207
7,500 bbl/d January - June 2006 Long Put $34.00 $ 666
3,750 bbl/d January - June 2006 Short Call $34.00 (22,839)
3,750 bbl/d January - June 2006 Long Call $44.00 15,319
=========================================================================================================================
(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 JUNE 30, 2005
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT WHERE NOTED)
================================================================================
OIL PRICE DIFFERENTIAL SWAP CONTRACT BASED ON BOW RIVER CRUDE BLEND
------------------------------------------------------------------------------------------------------------------------
Daily Quantity Term Percent of WTI (%) Mark to Market Gain
------------------------------------------------------------------------------------------------------------------------
4,000 bbl/d July 2005 - June 2006 29.9 $ 2,034
5,000 bbl/d July 2005 - June 2006 27.5 $ 2,368
4,000 bbl/d July 2006 - December 2006 29.58 $ 466
OIL PRICE DIFFERENTIAL SWAP CONTRACT BASED ON WAINWRIGHT CRUDE BLEND
------------------------------------------------------------------------------------------------------------------------
1,000 bbl/d July 2005 - June 2006 29.9 $ 509
1,000 bbl/d July 2006 - December 2006 29.58 $ 117
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 June 30, 2005.
SWAP CONTRACTS BASED ON ELECTRICITY PRICES
-----------------------------------------------------------------------------------------------------------------------
Weighted Average Term Average Price Mark to Market Gain
Quantity per Megawatt
-----------------------------------------------------------------------------------------------------------------------
24.8 MWH July through December 2005 Cdn $47.43 $ 4,305
29.9 MWH January through December 2006 Cdn $47.51 3,025
SWAP CONTRACTS BASED ON ELECTRICITY HEAT RATE
-----------------------------------------------------------------------------------------------------------------------
Quantity Term Heat Rate Mark to Market Loss
-----------------------------------------------------------------------------------------------------------------------
5 MW July through December 2005 8.40 GJ/MWh $ (34)
NATURAL GAS CONTRACTS
-----------------------------------------------------------------------------------------------------------------------
Quantity Term Price per GJ Mark to Market Gain
-----------------------------------------------------------------------------------------------------------------------
1,008 GJ/day July through December 2005 7.59/GJ 285
The following is a derivative contract utilized to mitigate the impact of a
strengthening Canadian dollar.
FOREIGN CURRENCY CONTRACT
-----------------------------------------------------------------------------------------------------------------------
Monthly Contract Amount Term Type Contract Rate Mark to Market Gain
-----------------------------------------------------------------------------------------------------------------------
U.S. $8.33 million July through December 2005 Long Put 1.20 Cdn / US $ 308
=======================================================================================================================
At June 30, 2005, the net unrealized loss position reflected on the balance
sheet for all the financial derivative contracts outstanding at that date
was approximately $77.5 million.
For the three and six month periods ended June 30, 2005, the total
unrealized (gain)loss recognized in the statement of income, including
amortization of deferred charges and gains, was $(5.1) million ($4.2
million - three months ended June 30, 2004) and $69.6 million ($9.7 million
- six months ended June 30, 2004), respectively. The realized gains and
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
HARVEST ENERGY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED JUNE 30, 2005
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT WHERE NOTED)
================================================================================
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 and six month periods ended June 30, 2005, $4.0 million and
$8.3 million, respectively (nil - three months ended June 30, 2004 and $5.5
million-six months ended June 30, 2004) of the deferred charge and $445,000
and $890,000, respectively (nil - three months ended June 30, 2004 and nil
- six months ended June 30, 2004) of the deferred gain has been amortized
and recorded in gains and losses on derivative contracts in the statement
of income. At June 30, 2005, $2.4 million ($10.8 million - December 31,
2004) and $1.3 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.
DEFERRED FINANCE CHARGES - ASSET SIX MONTHS ENDED Year Ended
JUNE 30, 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 534 20,971
Financing costs transferred to share issue costs on conversion
of debentures (563) (5,721)
Amortization of deferred charges related to derivative
contracts(1) (8,344) (14,946)
Interest expense (148) (75)
Amortization of deferred financing costs(2) (3,285) (4,458)
----------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 13,734 $ 25,540
-----------------------------------------------------------------------------------------------------------------------
AS AT As at
COMPRISED OF: JUNE 30, 2005 December 31, 2004
Derivative asset $ 2,415 $ 10,759
Financing costs 9,467 12,781
Discount on senior notes 1,852 2,000
----------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 13,734 $ 25,540
-----------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED Year Ended
DEFERRED GAINS-- LIABILITY JUNE 30, 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
contracts(1) (890) (350)
---------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 1,287 $ 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 JUNE 30, 2005
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT WHERE NOTED)
================================================================================
11. CHANGE IN NON-CASH WORKING CAPITAL
THREE MONTHS Three Months SIX MONTHS Six Months
ENDED Ended ENDED Ended
JUNE 30, 2005 June 30, 2004 JUNE 30, 2005 June 30, 2004
------------------------------------------------------------------------------------------------------------------------
Changes in non-cash working capital items:
Accounts receivable $ (4,653) $ (19,161) $ (22,301) $ (13,689)
Current portion of derivative contracts assets (4,227) -- (948)
Prepaid expenses and deposits (6,061) 4,657 (42,915) (2,521)
Accounts payable and accrued liabilities (101) 24,226 25,421 25,918
Cash distribution payable 224 590 396 624
Current portion of derivative contracts
liabilities (16,976) -- 10,364 --
-------------------------------------------------------------------------------------------------------------------------
$ (31,794) $ 10,312 $ (29,983) $ 10,332
-------------------------------------------------------------------------------------------------------------------------
Changes relating to operating activities $ (6,983) $ 137 $ (55,677) $ (2,158)
Changes relating to financing activities (5,992) (514) (313) (228)
Changes relating to investing activities (2,267) 3,540 9,336 5,824
Add: Non-cash changes (16,552) 7,149 16,671 6,894
------------------------------------------------------------------------------------------------------------------------
$ (31,794) $ 10,312 $ (29,983) $ 10,332
========================================================================================================================
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 six
month period ended June 30, 2004. The Trust also paid $850,300 of accrued
interest during the period. See Note 5.
A corporation controlled by a director of Harvest Operations Corp. sublets
office space from and is provided administrative services by the Trust 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 pursuant to the 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 JUNE 30, 2005
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT WHERE NOTED)
================================================================================
The following is a summary of the Trust's contractual obligations and
commitments as at June 30, 2005:
REMAINING PAYMENTS DUE BY PERIOD
------------------------------------------------------------------------------------
2005 2006 - 2007 2008 - 2009 THEREAFTER TOTAL
Debt repayments (1) $ -- $ 138,090 -- $ 306,350 $ 444,440
Operating leases 400 $ 2,869 $ 2,869 956 7,094
-----------------------------------------------------------------------------------------------------------------------
Total contractual obligations $ 400 $ 140,959 $ 2,869 $ 307,306 $ 451,534
=======================================================================================================================
(1) INCLUDES LONG-TERM AND SHORT-TERM DEBT. ASSUMES THAT THE OUTSTANDING
CONVERTIBLE DEBENTURES ARE EITHER EXCHANGED AT THE HOLDERS' OPTION FOR
UNITS OR ARE REDEEMED FOR UNITS AT THE TRUST'S OPTION. THE INITIAL
MATURITY OF THE TRUST'S BANK DEBT HAS BEEN EXTENDED TO JULY 31, 2006
WITH A ONE YEAR TERM-OUT OPTION, PURSUANT TO THE NEW CREDIT FACILITY
DESCRIBED IN NOTE 14.
14. SUBSEQUENT EVENTS
On June 24, 2005, the Trust entered into an agreement to purchase
properties located in Northern BC for $260 million, before working capital
adjustments. A $26 million deposit paid to the vendor as part of this
acquisition is included in the capital assets balance at June 30, 2005.
This acquisition closed on August 2, 2005 and the Trust's consolidated
financial statements will reflect the results from the acquired properties
from that date onward. The purchase was financed with the drawings from the
Corporation's senior secured credit facility, which was increased in size
from $325 million to $400 million coincident with the closing of the
acquisition.
On August 2, 2005, the Trust completed the issuance of 6,505,600
subscription receipts for gross proceeds of $175 million and $75 million
principal amount of 6.5% convertible extendible unsecured subordinated
debentures. Net proceeds from this financing were used to settle
outstanding bank debt under the credit facility.
On August 11, 2005, the Board of Directors of Harvest Operations Corp.
approved an increase in monthly cash distributions to $0.35 per Trust Unit
commencing with the August distribution payable September 15, 2005.