41.58mmbb.com

Calgary,Alberta–HuskyEnergyInc.
reportednetearningsof$239millionor$0.
54pershare(diluted)inthesecondquarterof2004,comparedwithnetearningsof$441millionor$1.
09pershare(diluted)inthesecondquarterof2003.
Includedinearningsofthesecondquarterof2003aretaxratechangesof$161millionor$0.
38pershareandanetgainof$66millionor$0.
16pershareonU.
S.
denominateddebttranslation.
Cashflowfromoperationswas$588millionor$1.
37pershare(diluted)inthesecondquarterof2004,comparedwith$540millionor$1.
27pershare(diluted)inthesecondquarterof2003.
SecondQuarter($millions)(loss/(gain))20042003Netearnings$239$441Taxratechanges-(161)NetU.
S.
denominateddebttranslation8(66)$247$214Productioninthesecondquarterof2004rosefivepercentto326,400barrelsofoilequivalentaday,comparedwith310,600barrelsofoilequivalentadayinthesecondquarterof2003.
Totalcrudeoilandnaturalgasliquidsproductionwas212,200barrelsperday,comparedwith209,000barrelsperdayinthesecondquarterof2003.
Naturalgasproductionwas685.
4millioncubicfeetperday,comparedwith609.
4millioncubicfeetperdayinthesameperiodlastyear.
Duringthesecondquarterof2004,Huskymadeprogressonseveralinitiatives.
HuskyreceivedAlbertaEnergyandUtilitiesBoardapprovalfortheTuckeroilsandsprojectandwillproceedwiththeTuckerProject,whichisexpectedtoachieveapeakproductionrateof30,000to35,000barrelsofoilperday.
TheacquisitionofTempleExplorationInc.
willaddapproximately4,400barrelsofoilequivalentperdayfortheremainderof2004andundevelopedgasprospectsinnorthwesternAlberta.
TheWhiteRoseFPSO("FloatingProduction,StorageandOffloading")arrivedatMarystown,NewfoundlandinApril2004fortopsidemoduleintegration.
Huskyreceivedsubmissionsfrommorethan40interestedpartiesinresponsetotheCompany'sinvitationforexpressionsofinteresttoevaluatethepossibilitiesofdevelopingtheWhiteRosenaturalgas.
HUSKYENERGYREPORTS2004SECONDQUARTERRESULTS2674412390100200300400500Q22002Q22003Q22004NetEarnings($millions)2893113260100200300400500TotalProduction(mboe/day)Q22002Q22003Q220044985405880100200300400500600700CashFlowfromOperations($millions)Q22002Q22003Q220042004HUSKYENERGYINC.
–SECONDQUARTERRESULTS2"Huskycontinuestodevelopitsportfolioofassetsandimproveitsoperatingperformance,"saidMr.
JohnC.
S.
Lau,President&ChiefExecutiveOfficer,HuskyEnergyInc.
"SolidprogressisbeingmadeontheWhiteRoseprojectonCanada'sEastCoastandontheTuckeroilsandsprojectinnorthernAlberta.
Wewillcontinuetoworkonacquisitionopportunitiesandfinancialrestructuringofourmidstreamassets.
"Husky'snetearningsforthefirstsixmonthsof2004were$502millionor$1.
14pershare(diluted),comparedwith$849millionor$2.
10pershare(diluted)forthesameperiodin2003.
Cashflowfromoperationsforthefirstsixmonthsof2004was$1,171millionor$2.
72pershare(diluted),comparedwith$1,287millionor$3.
03pershare(diluted)forthesameperiodof2003.
Operatingresultswereinfluencedbystrongerupstreamvolumesoffsetbyslightlylowerupstreamnetpricesandtheimpactofhedging.
Husky'soperationalresultswere$479millionbeforeforeignexchangelossesonU.
S.
denominateddebttranslationandtaxratechangesinthefirsthalfof2004,comparedto$530millionbeforeforeignexchangegainsonU.
S.
debtandtaxratechangesinthefirsthalfof2003.
Productioninthefirstsixmonthsof2004was325,400barrelsofoilequivalentaday,comparedwith311,300barrelsofoilequivalentperdayinthesameperiodin2003.
Totalcrudeoilandnaturalgasliquidsproductionwas212,100barrelsperday,comparedwith211,300barrelsperdayinthefirstsixmonthsof2003.
Naturalgasproductionwas679.
5millioncubicfeetperday,comparedwith600.
4millioncubicfeetperdayinthesameperiodlastyear.
2004HUSKYENERGYINC.
–SECONDQUARTERRESULTS3Management'sDiscussionandAnalysisistheCompany'sexplanationofitsfinancialperformancefortheperiodcoveredbytheunauditedfinancialstatementsalongwithananalysisoftheCompany'sfinancialpositionandprospects.
ItshouldbereadinconjunctionwiththeunauditedConsolidatedFinancialStatementsforthesixmonthsendedJune30,2004inthisInterimReportandtheauditedConsolidatedFinancialStatements,Management'sDiscussionandAnalysisandAnnualInformationFormfortheyearendedDecember31,2003filedMarch18,2004onSEDARatwww.
sedar.
com.
TheunauditedConsolidatedFinancialStatementshavebeenpreparedinaccordancewithaccountingprinciplesgenerallyacceptedinCanada.
AlldollaramountsareinmillionsofCanadiandollars,unlessotherwiseindicated.
Allcomparisonsrefertothesecondquarterof2004comparedwiththesecondquarterof2003andthefirstsixmonthsof2004comparedwiththefirstsixmonthsof2003,unlessotherwiseindicated.
Thecalculationsofbarrelsofoilequivalent("boe")andthousandcubicfeetofgasequivalent("mcfge")arebasedonaconversionrateofsixthousandcubicfeetofnaturalgastoonebarrelofcrudeoil.
Unlessotherwiseindicated,allproductionvolumesquotedaregross,whichrepresenttheCompany'sworkinginterestsharebeforeroyalties,andpricesquotedarethoserealizedbytheCompany,whichincludetheeffectofhedginggainsandlosses.
Crudeoilhasbeenclassifiedasthefollowing:lightcrudeoilhasanAPIgravityof30degreesormore;mediumcrudeoilhasanAPIgravityof21degreesormoreandlessthan30degrees;heavycrudeoilhasanAPIgravityoflessthan21degrees.
Management'sDiscussionandAnalysiscontainstheterm"cashflowfromoperations",whichshouldnotbeconsideredanalternativeto,ormoremeaningfulthan"cashflowfromoperatingactivities"asdeterminedinaccordancewithgenerallyacceptedaccountingprinciplesasanindicatoroftheCompany'sfinancialperformance.
TheCompany'sdeterminationofcashflowfromoperationsmaynotbecomparabletothatreportedbyothercompanies.
Cashflowfromoperationsgeneratedbyeachbusinesssegmentrepresentsameasurementoffinancialperformanceforwhicheachreportingbusinesssegmentisresponsible.
Theitemsreportedunderthecaption"Corporateandeliminations"arerequiredtoreconciletotheconsolidatedtotalandareconsideredtobecorporateinnature.
Certainofthestatementssetforthunder"Management'sDiscussionandAnalysis"andelsewhereinthisInterimReport,includingstatementswhichmaycontainwordssuchas"could","expect","believe","will"andsimilarexpressionsandstatementsrelatingtomattersthatarenothistoricalfacts,areforward-lookingandarebasedupontheCompany'scurrentbeliefastotheoutcomeandtimingofsuchfutureevents.
Therearenumerousrisksanduncertaintiesthatcanaffecttheoutcomeandtimingofsuchevents,includingmanyfactorsbeyondthecontroloftheCompany.
Thesefactorsinclude,butarenotlimitedto,themattersdescribedundertheheading"BusinessEnvironment".
Shouldoneormoreoftheseeventsoccur,orshouldanyoftheunderlyingassumptionsproveincorrect,theCompany'sactualresultsandplansfor2004andbeyondcoulddiffermateriallyfromthoseexpressedintheforward-lookingstatements.
TheCompanydoesnotundertaketoupdate,reviseorcorrectanyoftheforward-lookinginformation.
Suchforward-lookingstatementsshouldbereadinconjunctionwiththeCompany'sdisclosuresundertheheading:"CAUTIONARYSTATEMENTFORTHEPURPOSESOFTHE'SAFEHARBOR'PROVISIONSOFTHEPRIVATESECURITIESLITIGATIONREFORMACTOF1995".
Refertothesection"Forward-lookingStatements".
FinancialSummary(1)ThreemonthsendedJune30March31Dec.
31Sept.
30June30March31Dec.
31Sept.
3020042004200320032003200320022002Salesandoperatingrevenues,netofroyalties$2,306$2,086$1,800$1,871$1,769$2,218$1,697$1,669Cashflowfromoperations588583568604540747635590SegmentedearningsUpstream$204$236$169$215$374$309$209$207Midstream5360464149494827RefinedProducts21562231(1)16Corporateandeliminations(39)(38)15(29)1549(15)(76)Netearnings$239$263$236$249$441$408$241$174Pershare-Basic$0.
54$0.
60$0.
60$0.
56$1.
09$1.
01$0.
57$0.
38-Diluted0.
540.
600.
600.
561.
091.
010.
570.
38Dividendsdeclaredpercommonshare0.
120.
100.
100.
100.
090.
090.
090.
09Specialdividendpercommonshare---1.
00----Returnonequity(2)(percent)16.
120.
524.
125.
223.
621.
716.
913.
1Returnonaveragecapitalemployed(2)(percent)12.
615.
918.
118.
517.
615.
812.
39.
7(1)2003and2002amountsasrestated.
Refertonote3totheconsolidatedfinancialstatements.
(2)Calculatedforthetwelvemonthsendedfortheperiodsshown.
Management'sDiscussionandAnalysisJuly21,2004Highlights2004HUSKYENERGYINC.
–SECONDQUARTERRESULTS4Production,beforeRoyaltiesThreemonthsendedJune30March31Dec.
31Sept.
30June3020042004200320032003Crudeoil&NGL(mbbls/day)WesternCanadaLightcrudeoil&NGL32.
932.
934.
730.
331.
4Mediumcrudeoil35.
636.
137.
938.
239.
4Heavycrudeoil107.
4105.
6107.
899.
294.
7175.
9174.
6180.
4167.
7165.
5EastCoastCanadaTerraNova-lightcrudeoil15.
717.
617.
814.
619.
0ChinaWenchang-lightcrudeoil20.
619.
919.
520.
324.
5212.
2212.
1217.
7202.
6209.
0Naturalgas(mmcf/day)685.
4673.
6655.
7585.
7609.
4Total(mboe/day)326.
4324.
4327.
0300.
2310.
6SecondQuarterof2004ComparedwiththeFirstQuarterof2004TotalproductionfromHusky'spropertiesinWesternCanadainthesecondquarterof2004averaged290.
1mboeperday,uponepercentfromthe286.
9mboeperdayinthefirstquarterof2004.
Naturalgasproductionwasuptwopercentfromfirstquarterof2004levels,averaging685.
4mmcfperday.
Theincreaseinnaturalgasproductionrelatedtotheadditionof51mmcfperdayfromnewnaturalgaswellspartiallyoffsetbynaturalreservoirdeclines.
TotalcrudeoilandNGLproductioninWesternCanadainthesecondquarterof2004was175.
9mbblsperday,uponepercentfrom174.
6mbblsperdayinthepreviousquarter.
Thehighercrudeoilproductionduringthesecondquarterof2004wasduetoadditionalprimaryproduction,thecontinuedexpansionoftheBolney/Celticthermalprojectandrecoveryofproductivecapacitythatwasdowninthefirstquarterof2004duetoadverseweatherconditionspartiallyoffsetbynaturalreservoirdeclines.
Husky'sshareofproductionfromtheTerraNovaoilfieldaveraged15.
7mbblsofoilperdayinthesecondquarterof2004,down11percentfrom17.
6mbblsperdayinthepreviousquarter.
Thelowerproductioninthesecondquarterof2004wasdueprimarilytodown-timeinAprilandMaytoundertakerepairs.
IntheSouthChinaSea,Husky'sshareofproductionfromtheWenchangoilfieldaveraged20.
6mbblsofoilperdayduringthesecondquarterof2004,upfourpercentfrom19.
9mbblsperdayinthepreviousquarter.
ExplorationWesternCanadaDuringthesecondquarterof2004,17netexplorationwellsweredrilledintheWesternCanadaSedimentaryBasin,resultinginfivenetoilcompletionsand11netnaturalgascompletions.
WildcatexplorationduringthesecondquarterwasrestrictedtothefoothillsanddeepbasinareasofwesternAlbertaduetospringsurfacerestrictionsinotherareas.
DuringthesecondquarteronenetnaturalgaswellwascompletedandatJune30threenetwellsweredrillinginthedeepbasin.
SouthChinaSeaDuringthesecondquarterof2004,theChangchang12-1-1deep-waterexploratorytestwelllocatedonBlock40-30waspluggedandabandonedwithouttesting.
Thedataacquiredfromthewellwillbeincorporatedinfurtherdevelopingthegeologicalcharacterofthisportionofthebasin.
CorporateAcquisitionOnJune18,2004,HuskyagreedtoacquirealloftheissuedandoutstandingsharesofTempleExplorationInc.
("Temple")foracashpurchasepriceof$101.
5million.
Inaddition,Huskywill2004HUSKYENERGYINC.
–SECONDQUARTERRESULTS5assumeaworkingcapitaldeficiencyof$13.
5million.
ThepurchaseclosedonJuly15,2004.
Temple'sestimatedproductionisapproximately4,400boeperdaybeforeroyaltiesfortheremainderof2004andislocatedintheAlbertadeepbasinnearGrandePrairieandatIngaapproximately65kilometresnorthwestofFortSt.
John,BritishColumbia.
Templealsohasalandpositionwithbothexplorationanddevelopmentopportunities,whichhasthepotentialtoaddproductionandreserves.
MajorProjectsShackleton/LacadenaDuringthesecondquarterof2004,fivenaturalgasdevelopmentwellswerebroughtonstreambringingthetotalnumberofproducingwellsto230.
Currentplanscallforanadditional30wellstobedrilledand45wellstobetied-inbythefourthquarterof2004.
Huskyplanstoincreasecompressioninthethirdquarterof2004toatotalcapacityof60mmcfperday.
ThermalProjectsAbatteryexpansionattheBolney/Celticthermalprojectwascommissionedandbroughtonstreamduringthesecondquarter.
Husky'sthermaloperationsatBolney/CelticandPikesPeakaveraged19.
1mbblsperdayduringthesecondquarterof2004,upfivepercentfromthepreviousquarter.
OilSandsTucker,AlbertaTheCompanyannouncedprojectsanctionoftheTuckeroilsandsproject,whichisexpectedtoachieveaproductionrateof30,000to35,000bblsperday.
Constructionisscheduledforcompletionin2006,withcommissioningplannedforthethirdquarterofthatyear.
Sunrise,AlbertaDuringthesecondquarter,thestratigraphicdrillingprogramattheSunriseoilsandsprojectwascompletedandanalysisofthedataiscurrentlynearingcompletion.
WiththependingcompletionoftheEnvironmentalImpactAssessmentstudy,HuskyexpectstosubmitacommercialapplicationtotheGovernmentofAlbertainthethirdquarterof2004.
WhiteRoseSincethearrivaloftheSeaRoseFPSOinMarystown,Newfoundland,activityhasfocussedontheinstallationofthevarioustopsidemodules.
TheheavyliftprocessbeganinJunewiththefirstfourof16liftscompleted.
Integrationofthetopsidemoduleswillcontinueoverthenextfewmonths.
AttheWhiteRoseoilfield,componentsofthevesselmooringsystemwereinstalledduringthesecondquarter.
Duringtheremainderofthesummerthesubseaproductionfacilitiesandflowlineswillbeinstalled.
Twowaterinjectionwellswerecompletedduringthesecondquarterandthefirstproductionwellisonscheduletobecompletedandtestedduringthethirdquarterof2004.
Theprojecttimingforfirstoilremainsunchangedatlate2005orearly2006.
HuskyLloydminsterUpgraderAmajordebottleneckprogramisunderwayattheHuskyLloydminsterUpgrader.
Thisprogramisexpectedtoincreasethethroughputcapacityoftheplantfrom77,000barrelsperstreamdayto82,000barrelsperstreamdayofsyntheticcrudeoilanddiluent.
Nineprojectshavebeenidentifiedofwhichsixareunderway.
Thefullscopeofthedebottleneckingprogramisexpectedtobecompletedwithinthenexttwoyears.
Engineeringstudiestoidentifyfurtherdebottleneckopportunitiesarecontinuing.
LloydminsterEthanolPlantDuringthesecondquarterof2004theLloydminsterethanolplantprogressedwithdetailedengineeringtoestablishcost,scheduleandexecutionplans.
TheprojectreceivedenvironmentalapprovalfromtheSaskatchewanGovernment.
The130millionlitreperyearplantisexpectedtocommenceproductionbytheendof2005.
PrinceGeorgeRefineryDuringthesecondquarterof2004thecleanfuelprojectattherefineryinPrinceGeorge,BritishColumbiaprogressedtotheconstructionphase.
Theupgradewillincreaseprocessingcapacityby10percentandallowtherefinerytoproducelowsulphurgasolineanddieselfuelsthatmeettheGovernmentofCanada'snewfuelspecifications.
Constructionisexpectedtobecompletedandtheplantonstreambytheendof2005.
ThePrinceGeorgerefineryproducesafullslateoflightrefinedpetroleumproductsandhasacurrentdesignratecapacityof10,000barrelsperdaywhichhasbeenconsistentlyexceeded.
2004HUSKYENERGYINC.
–SECONDQUARTERRESULTS6Productionversus2004ForecastSixmonthsendedJune30Forecast20042004Crudeoil&NGL(mbbls/day)Lightcrudeoil&NGL69.
867-76Mediumcrudeoil35.
835-40Heavycrudeoil106.
5105-115212.
1207-231Naturalgas(mmcf/day)679.
5670-710Totalbarrelsofoilequivalent(mboe/day)325.
4320-350BUSINESSENVIRONMENTHusky'sfinancialresultsaresignificantlyinfluencedbyitsbusinessenvironment.
Risksinclude,butarenotlimitedto:%Crudeoilandnaturalgasprices%Costtofind,develop,produceanddelivercrudeoilandnaturalgas%Demandforandabilitytodelivernaturalgas%TheexchangeratebetweentheCanadianandU.
S.
dollars%Refinedpetroleumproductsmargins%DemandforHusky'spipelinecapacity%Demandforrefinedpetroleumproducts%Governmentregulations%CostofcapitalAverageBenchmarkPricesandU.
S.
ExchangeRateThreemonthsendedJune30March31Dec.
31Sept.
30June3020042004200320032003WTI(1)(U.
S.
$/bbl)$38.
32$35.
15$31.
18$30.
20$28.
91Canadianparlightcrude0.
3%sulphur($/bbl)50.
9946.
0039.
9541.
3341.
58NYMEX(U.
S.
$/mmbtu)5.
975.
694.
584.
975.
39NOVAInventoryTransfer($/GJ)6.
456.
265.
305.
976.
63WTI/Lloydblenddifferential(U.
S.
$/bbl)11.
8210.
1210.
378.
736.
98U.
S.
/Canadiandollarexchangerate(U.
S.
$)0.
7360.
7590.
7600.
7250.
716(1)Pricesquotedarenear-monthcontractpricesforsettlementduringthenextmonth.
CommodityPriceRiskCrudeOilTheaveragepriceforWestTexasIntermediatecrudeoil("WTI")was33percenthigherduringthesecondquarterof2004comparedwiththesameperiodin2003.
TheimpactofthehigherpricewaspartiallyoffsetbytheeffectofthelowerrateofexchangefromU.
S.
toCanadiandollars.
TheeffectoftheCdn.
/U.
S.
dollarexchangeratefluctuationisexplainedinmoredetailinthesectionentitled"ForeignExchangeRisk"inthisreport.
2004HUSKYENERGYINC.
–SECONDQUARTERRESULTS7Duringthesecondquarterof2004WTIpricesaveragedbetweenU.
S.
$9-$10/bblhigherthaninthesecondquarterof2003.
ThecontinuedstrongdemandintheUnitedStatesformotorfuel,increasingdemandinChinaandcontinueduncertaintyinIraqandcertainotheroilproducingcountriessupportedthehigheroilprices.
NotwithstandinghigherOPECproduction,thepotentialforpricespikesresultingfrompoliticalinstabilityintheMiddleEastishigh,especiallyinlightoflowerworldcrudeoilinventoriesandlimitedsurplusproductivecapacity.
Duringthesecondquarterof2004heavycrudeoildifferentialsaveragedU.
S.
$11.
82/bblforWTI/LloydblendcomparedwithU.
S.
$6.
98/bblduringthesameperiodayearearlier.
ThewiderdifferentialtendstoreduceHusky'soverallfinancialresultsastheCompany'scrudeoilproductionisweightedtowardheaviergravitycrudes.
Inperiodsofwiderdifferentials,Husky'sheavyoilupgraderpartiallyoffsetstheimpactoflowerheavycrudepricesduetothewiderdifferentials.
WTIandHuskyAverageCrudeOilPrices($/bbl)NaturalGasThepriceofnaturalgasinNorthAmericaisaffectedbyregionalsupplyanddemandfactors,particularlythoseaffectingtheUnitedStatessuchasweatherconditions,pipelinedeliverycapacity,theavailabilityofalternativesourcesoflesscostlyenergysupplysuchasfueloilandcoal,naturalgasinventorylevelsandgeneralindustryactivitylevels.
Periodicimbalancesbetweensupplyanddemandfornaturalgasarecommonandresultinvolatilepricing.
Thepriceofnaturalgas,unlikecrudeoil,isnotsubjecttotheinfluenceofanorganizationsuchasOPEC.
TheaverageNYMEXnaturalgaspriceduringthesecondquarterof2004wassubstantiallythesameasinthesecondquarterof2003.
$0.
00$10.
00$20.
00$30.
00$40.
00$50.
00$60.
00WestTexasIntermediate("WTI")(U.
S.
$)$27.
96$26.
76$20.
43$21.
64$26.
25$28.
27$28.
15$33.
86$28.
91$30.
20$31.
18$35.
15$38.
32Huskyaveragelightcrudeoilprice(C$)$28.
62$32.
24$19.
51$30.
35$35.
56$39.
64$42.
23$48.
58$36.
45$38.
49$38.
55$42.
50$47.
99Huskyaveragemediumcrudeoilprice(C$)$24.
81$27.
78$15.
84$24.
84$30.
90$34.
76$30.
12$37.
86$30.
48$29.
68$27.
25$32.
97$35.
98Huskyaverageheavycrudeoilprice(C$)$15.
52$23.
65$10.
44$20.
95$27.
75$31.
41$26.
20$33.
02$25.
13$25.
13$20.
84$26.
38$27.
54Q2-01Q3-01Q4-01Q1-02Q2-02Q3-02Q4-02Q1-03Q2-03Q3-03Q4-03Q1-04Q2-042004HUSKYENERGYINC.
–SECONDQUARTERRESULTS8NYMEXNaturalGas,NITNaturalGasandHuskyAverageNaturalGasPricesForeignExchangeRiskHusky'sresultsareaffectedbytheexchangeratebetweentheCanadianandU.
S.
dollars.
ThemajorityofHusky'srevenuesarereceivedinU.
S.
dollarsorfromthesaleofoilandgascommoditiesthatreceivepricesdeterminedbyreferencetoU.
S.
dollarbenchmarkprices.
AnincreaseinthevalueoftheCanadiandollarrelativetotheU.
S.
dollarwilldecreasetherevenuesreceivedfromthesaleofoilandgascommoditiesand,correspondingly,adecreaseinthevalueoftheCanadiandollarrelativetotheU.
S.
dollarwillincreasetherevenuesreceivedfromthesaleofoilandgascommodities.
ThemajorityofHusky'sexpendituresareinCanadiandollars.
Inaddition,achangeinthevalueoftheCanadiandollaragainsttheU.
S.
dollarwillresultinanincreaseordecreaseinHusky'sU.
S.
dollardenominateddebt,asexpressedinCanadiandollars.
ThegainorlossfromtranslationofU.
S.
dollardenominatedmonetaryitemsisevidentintheConsolidatedStatementsofEarningsoppositethecaption"Foreignexchange".
TheeffectofforeignexchangeonU.
S.
dollardenominatedmonetaryitemsis,somewhat,offsetthroughincreasesordecreasesincommoditypricesduetocurrencyfluctuationswhichareembeddedwithin"Salesandoperatingrevenues".
AtJune30,2004,84percentor$1.
6billionofHusky'slong-termdebt,excludingU.
S.
$225millionofcapitalsecurities,wasdenominatedinU.
S.
dollars.
TheCdn.
/U.
S.
exchangerateattheendofthesecondquarterof2004was$1.
34.
ThepercentageofHusky'slong-termdebtexcludingcapitalsecuritiesexposedtotheCdn.
/U.
S.
exchangeratefluctuationdecreasesto63percentwhentheeffectofthecrosscurrencyswapsisincluded.
Referto"FinancialandDerivativeInstruments"inthisManagement'sDiscussionandAnalysis.
InterestRateRiskTheCompanymaintainsaportionofitsdebtinfloatingratefacilitieswhichareexposedtointerestratefluctuations.
TheCompanywilloccasionallyfixitsfloatingratedebtorcreateavariablerateforitsfixedratedebtusingderivativefinancialinstruments.
Referto"FinancialandDerivativeInstruments"inthisManagement'sDiscussionandAnalysis.
$0.
00$2.
00$4.
00$6.
00$8.
00$10.
00$12.
00NYMEXnaturalgas(U.
S.
$/mmbtu)$4.
78$2.
98$2.
50$2.
38$3.
37$3.
26$3.
99$6.
60$5.
39$4.
97$4.
58$5.
69$5.
97NITnaturalgas(C$/GJ)$6.
71$3.
72$3.
13$3.
17$4.
19$3.
08$4.
98$7.
51$6.
63$5.
97$5.
30$6.
26$6.
45Huskyaveragenaturalgasprice(C$/mcf)$6.
57$3.
25$3.
01$3.
10$3.
98$3.
42$4.
76$7.
80$5.
50$5.
40$4.
87$6.
05$6.
38Q2-01Q3-01Q4-01Q1-02Q2-02Q3-02Q4-02Q1-03Q2-03Q3-03Q4-03Q1-04Q2-042004HUSKYENERGYINC.
–SECONDQUARTERRESULTS9SENSITIVITYANALYSISThefollowingtableisindicativeoftherelativeeffectonnetearningsandpre-taxcashflowfromoperationsofchangesincertainkeyvariables.
Theanalysisisbasedonbusinessconditionsandproductionvolumesduringthesecondquarterof2004.
Eachseparateiteminthesensitivityanalysisshowstheeffectofanincreaseinthatvariableonly;allothervariablesareheldconstant.
Whilethesesensitivitiesareapplicablefortheperiodandmagnitudeofchangesonwhichtheyarebased,theymaynotbeapplicableinotherperiods,underothereconomiccircumstancesorgreatermagnitudesofchange.
SensitivityAnalysisItemIncreaseEffectonPre-taxCashFlowfromOperationsEffectonNetEarnings($millions)($/share)(4)($millions)($/share)(4)WTIbenchmarkcrudeoilpriceExcludingcommodityhedgesU.
S.
$1.
00/bbl920.
22630.
15IncludingcommodityhedgesU.
S.
$1.
00/bbl500.
12330.
08NYMEXbenchmarknaturalgasprice(1)ExcludingcommodityhedgesU.
S.
$0.
20/mmbtu410.
10270.
06IncludingcommodityhedgesU.
S.
$0.
20/mmbtu400.
09260.
06Light/heavycrudeoildifferential(2)Cdn.
$1.
00/bbl(33)(0.
08)(23)(0.
05)LightoilmarginsCdn.
$0.
005/litre150.
04100.
02AsphaltmarginsCdn.
$1.
00/bbl90.
0260.
01Exchangerate(U.
S.
$/Cdn.
$)(3)IncludingcommodityhedgesU.
S.
$0.
01(58)(0.
14)(41)(0.
10)(1)Includesdecreaseinearningsrelatedtonaturalgasconsumption.
(2)Includesimpactofupstreamandupgradingoperationsonly.
(3)AssumesnoforeignexchangegainsorlossesonU.
S.
dollardenominatedlong-termdebtandothermonetaryitems.
TheimpactoftheCanadiandollarstrengtheningbyU.
S.
$0.
01wouldbeanincreaseof$13millioninnetearningsbasedonJune30,2004U.
S.
dollardenominateddebtlevels.
(4)BasedonJune30,2004commonsharesoutstandingof423.
6million.
UPSTREAMEarningsandProductionUpstreamEarningsSummary(1)ThreemonthsendedJune30SixmonthsendedJune302004200320042003Grossrevenues$1,097$891$2,110$2,071Royalties182137340337Hedging115(6)18910Netrevenues8007601,5811,724Operatingandadministrativeexpenses240216465443Depletion,depreciationandamortization("DD&A")262214516437Incometaxes94(44)160161Earnings$204$374$440$683(1)2003amountsasrestated.
Refertonote3totheconsolidatedfinancialstatements.
ResultsofOperations2004HUSKYENERGYINC.
–SECONDQUARTERRESULTS10NetRevenueVarianceAnalysisCrudeoil&NGLNaturalgasOtherTotalThreemonthsendedJune30,2003$516$228$16$760Pricechanges11054-164Volumechanges(1)38-37Royalties(21)(24)-(45)Hedging(124)3-(121)Processingandsulphur--55ThreemonthsendedJune30,2004$480$299$21$800SixmonthsendedJune30,2003$1,146$544$34$1,724Pricechanges(8)(51)-(59)Volumechanges(4)99-95Royalties1(4)-(3)Hedging(187)8-(179)Processingandsulphur--33SixmonthsendedJune30,2004$948$596$37$1,581Lowerupstreamearningsinthesecondquarterof2004comparedwiththesecondquarterof2003wereprimarilytheresultofthefollowingfactors:hedginglossesthatamountedto$3.
97perboeduringthesecondquarterof2004comparedwithhedginggainsof$0.
21perboeinthesecondquarterof2003higherroyaltiesduetohigheroilandgaspricesinthesecondquarterof2004unitoperatingcoststhatwere$0.
37perboehigher.
Theincreaseinoperatingcostswasdueprimarilytohigherfluidtruckingandnaturalgascostshigherdepletion,depreciationandamortizationduetohigherproductionvolumeandcapitalbasehigherincometaxes;therecoveryofincometaxesinthesecondquarterof2003reflectedtheeffectoftaxratereductionsrecordedinthatquarterwhichwerepartiallyoffsetby:highercrudeoilandnaturalgaspriceshigherproductionofheavycrudeoilandnaturalgasLowerupstreamearningsduringthefirstsixmonthsof2004comparedwiththesameperiodin2003resultedfromloweraveragecrudeoilandnaturalgaspricesandhedginglosses.
AveragePricesThreemonthsendedJune30SixmonthsendedJune302004200320042003CrudeOil($/bbl)Lightcrudeoil&NGL47.
4135.
5844.
6041.
36Mediumcrudeoil35.
9830.
4834.
4634.
24Heavycrudeoil27.
5425.
1326.
9629.
12Totalaverage35.
1229.
9133.
7734.
41Totalaverageafterhedging29.
1730.
4328.
7734.
26NaturalGas($/mcf)Average6.
385.
506.
226.
63Averageafterhedging6.
375.
436.
256.
592004HUSKYENERGYINC.
–SECONDQUARTERRESULTS11EffectiveRoyaltyRates(1)ThreemonthsendedJune30SixmonthsendedJune30Percentageofupstreamsalesrevenues2004200320042003Crudeoil&NGL13%12%13%13%Naturalgas23%23%22%26%Total17%16%16%16%(1)Beforecommodityhedging.
Production,beforeRoyaltiesThreemonthsendedJune30SixmonthsendedJune302004200320042003Lightcrudeoil&NGL(mbbls/day)69.
274.
969.
874.
6Mediumcrudeoil(mbbls/day)35.
639.
435.
840.
4Heavycrudeoil(mbbls/day)107.
494.
7106.
596.
3Totalcrudeoil&NGL(mbbls/day)212.
2209.
0212.
1211.
3Naturalgas(mmcf/day)685.
4609.
4679.
5600.
4Barrelsofoilequivalent(6:1)(mboe/day)326.
4310.
6325.
4311.
3UpstreamRevenueMix(1)ThreemonthsendedJune30SixmonthsendedJune30Percentageofupstreamsalesrevenues,netofroyalties2004200320042003Lightcrudeoil&NGL28%29%28%29%Mediumcrudeoil11%12%11%12%Heavycrudeoil26%26%26%26%Naturalgas35%33%35%33%100%100%100%100%(1)Beforecommodityhedging.
2004HUSKYENERGYINC.
–SECONDQUARTERRESULTS12OperatingNetbacksWesternCanadaLightCrudeOilNetbacks(1)ThreemonthsendedJune30SixmonthsendedJune30Perboe2004200320042003Salesrevenuesbeforehedging$45.
82$38.
90$43.
11$43.
11Royalties8.
836.
457.
998.
25Operatingcosts9.
309.
209.
0710.
01Netback$27.
69$23.
25$26.
05$24.
85MediumCrudeOilNetbacks(1)ThreemonthsendedJune30SixmonthsendedJune30Perboe2004200320042003Salesrevenuesbeforehedging$35.
98$30.
77$34.
51$34.
43Royalties6.
295.
285.
956.
07Operatingcosts9.
669.
669.
659.
41Netback$20.
03$15.
83$18.
91$18.
95HeavyCrudeOilNetbacks(1)ThreemonthsendedJune30SixmonthsendedJune30Perboe2004200320042003Salesrevenuesbeforehedging$27.
65$25.
17$27.
09$29.
23Royalties3.
132.
422.
963.
28Operatingcosts9.
249.
249.
319.
65Netback$15.
28$13.
51$14.
82$16.
30NaturalGasNetbacks(2)ThreemonthsendedJune30SixmonthsendedJune30Permcfge2004200320042003Salesrevenuesbeforehedging$6.
36$5.
34$6.
19$6.
52Royalties1.
511.
281.
431.
56Operatingcosts0.
870.
780.
830.
78Netback$3.
98$3.
28$3.
93$4.
18TotalWesternCanadaUpstreamNetbacks(1)ThreemonthsendedJune30SixmonthsendedJune30Perboe2004200320042003Salesrevenuesbeforehedging$34.
84$30.
14$33.
75$35.
26Royalties6.
455.
306.
066.
53Operatingcosts7.
777.
577.
697.
80Netback$20.
62$17.
27$20.
00$20.
93(1)Includesassociatedco-productsconvertedtoboe.
(2)Includesassociatedco-productsconvertedtomcfge.
2004HUSKYENERGYINC.
–SECONDQUARTERRESULTS13TerraNovaCrudeOilNetbacksThreemonthsendedJune30SixmonthsendedJune30Perboe2004200320042003Salesrevenuesbeforehedging$47.
69$32.
16$45.
37$39.
08Royalties1.
160.
831.
120.
66Operatingcosts2.
863.
092.
823.
21Netback$43.
67$28.
24$41.
43$35.
21WenchangCrudeOilNetbacksThreemonthsendedJune30SixmonthsendedJune30Perboe2004200320042003Salesrevenuesbeforehedging$48.
24$38.
42$44.
77$43.
46Royalties4.
813.
034.
513.
52Operatingcosts2.
021.
162.
101.
62Netback$41.
41$34.
23$38.
16$38.
32TotalUpstreamSegmentNetbacks(1)ThreemonthsendedJune30SixmonthsendedJune30Perboe2004200320042003Salesrevenuesbeforehedging$36.
31$30.
92$35.
04$36.
13Royalties6.
094.
845.
715.
96Operatingcosts7.
176.
807.
107.
05Netback$23.
05$19.
28$22.
23$23.
12(1)Includesassociatedco-productsconvertedtoboe.
MIDSTREAMEarningsUpgradingEarningsSummaryThreemonthsendedJune30SixmonthsendedJune302004200320042003Grossmargin$83$79$168$160Operatingcosts5352105110Otherexpenses(recoveries)(1)(1)(2)(2)DD&A45910Incometaxes8(3)144Earnings$19$26$42$38Selectedoperatingdata:Upgraderthroughput(1)(mbbls/day)56.
674.
063.
472.
6Syntheticcrudeoilsales(mbbls/day)44.
166.
551.
163.
0Upgradingdifferential($/bbl)$17.
10$12.
65$15.
25$13.
21Unitmargin($/bbl)$20.
76$13.
12$18.
02$14.
04Unitoperatingcost(2)($/bbl)$10.
31$7.
80$9.
12$8.
38(1)Throughputincludesdiluentreturnedtothefield.
(2)Basedonthroughput.
2004HUSKYENERGYINC.
–SECONDQUARTERRESULTS14UpgradingEarningsVarianceAnalysisThreemonthsendedJune30,2003$26Volume(27)Margin31Operatingcosts-energyrelated3Operatingcosts-non-energyrelated(4)DD&A1Incometaxes(11)ThreemonthsendedJune30,2004$19SixmonthsendedJune30,2003$38Volume(29)Margin37Operatingcosts-energyrelated8Operatingcosts-non-energyrelated(3)DD&A1Incometaxes(10)SixmonthsendedJune30,2004$42Upgradingearningsdecreasedinthesecondquarterof2004comparedwiththesecondquarterof2003primarilydueto:lowerplantthroughputasaresultofascheduled19-dayplantturnaroundinAprilandadditionalfoundworkthatresultedintheplantoperatingatreducedratesfor11daysinMayhigherincometaxes;therecoveryoftaxesinthesecondquarterof2003reflectedtheeffectofincometaxratereductionsrecordedinthatquarterwhichwerepartiallyoffsetby:higherdifferentialbetweenblendedheavycrudefeedstockandsyntheticcrudeoil.
Thedifferentialwas$4.
45/bblhigherduringthesecondquarterof2004comparedwiththesecondquarterof2003Higherupgradingearningsduringthefirstsixmonthsof2004comparedwiththesameperiodin2003wereprimarilyduetoahigherupgradingdifferentialpartiallyoffsetbyhigherincometaxesandlowerplantthroughput.
InfrastructureandMarketingEarningsSummaryThreemonthsendedJune30SixmonthsendedJune302004200320042003Grossmargin-pipeline$23$16$42$33-otherinfrastructureandmarketing342677765742119109Otherexpenses2345DD&A551010Incometaxes16113434Earnings$34$23$71$60Selectedoperatingdata:Aggregatepipelinethroughput(mbbls/day)5204805154792004HUSKYENERGYINC.
–SECONDQUARTERRESULTS15Infrastructureandmarketingearningsincreasedinthesecondquarterof2004comparedwiththesecondquarterof2003dueprimarilyto:higherheavycrudeoilpipelinethroughputhighercrudeoilcommoditymarketingmarginswhichwerepartiallyoffsetby:lowercogenerationincomelowernaturalgascommoditymarketingmarginsHigherinfrastructureandmarketingearningsduringthefirstsixmonthsof2004comparedwiththesameperiodin2003resultedprimarilyfromthesamefactorsthataffectedthesecondquarterof2004.
REFINEDPRODUCTSEarningsRefinedProductsEarningsSummary(1)ThreemonthsendedJune30SixmonthsendedJune302004200320042003Grossmargin-fuelsales$37$9$60$32-ancillarysales781414-asphaltsales1712211061299556Operatingandotherexpenses18183536DD&A971814Incometaxes131162Earnings$21$3$26$4Selectedoperatingdata:Numberoffueloutlets536568Lightoilsales(millionlitres/day)8.
57.
88.
48.
1Lightoilsalesperoutlet(thousandlitres/day)11.
210.
111.
310.
4PrinceGeorgerefinerythroughput(mbbls/day)10.
411.
010.
710.
8Asphaltsales(mbbls/day)24.
220.
721.
318.
9Lloydminsterrefinerythroughput(mbbls/day)26.
725.
425.
725.
1(1)2003amountsasrestated.
Refertonote3totheconsolidatedfinancialstatements.
Refinedproductsearningsincreasedinthesecondquarterof2004comparedwiththesecondquarterof2003primarilydueto:higherlightoilmarginshigherlightoilproductsalesvolumehigherasphaltproductmarginswhichwerepartiallyoffsetby:higherincometaxes;thelowertaxesinthesecondquarterof2003reflectedtheeffectofincometaxratereductionsrecordedinthatquarterHigherrefinedproductsearningsduringthefirstsixmonthsof2004comparedwiththesameperiodin2003resultedprimarilyfromthesamefactorsthataffectedthesecondquarterof2004.
CORPORATEInterestExpenseInterest-net,whichistotaldebtchargesnetofcapitalizedinterestandinterestincome,was$10millioninthesecondquarterof2004comparedwith$20millioninthesecondquarterof2003.
Interestcapitalizedduringthesecondquarterof2004was$18millioncomparedwith$13millioninthesameperiodof2003reflectingthehigheraggregatecapitalinvestedintheWhiteRosedevelopmentprojectin2004HUSKYENERGYINC.
–SECONDQUARTERRESULTS16thesecondquarterof2004.
Interestincomewas$1millioninthesecondquarterof2004comparedwith$2millioninthesameperiodof2003.
Totalinterestonshortandlong-termdebtinthesecondquarterof2004was$29millioncomparedwith$35millioninthesecondquarterof2003.
Thedecreaseintotalinterestchargesinthesecondquarterof2004wasduetolowerdebtlevelsandlowereffectiveinterestrates.
Theimpactofthefixedtofloatinginterestrateswapsinplacewasareductiontointerestexpenseof$5millioninthesecondquarterof2004comparedwithareductionof$2millioninthesecondquarterof2003.
Husky'seffectiveinterestrateforthesecondquarterof2004aftertheeffectofinterestrateswapswas5.
8percentcomparedwith6.
9percentduringthesecondquarterof2003.
FixedtofloatinginterestrateswapsinplaceatJune30,2004hadeffectivelyconverted$870millionoffixedratelong-termdebttofloatingrates.
ForeignExchangeForeignexchangelossesduringthesecondquarterof2004amountedto$5millioncomparedwithagainof$72millionduringthesameperiodin2003.
Thevariouscomponentsofforeignexchangeareshowninthefollowingtable:ThreemonthsendedJune30SixmonthsendedJune302004200320042003Loss(gain)ontranslationofU.
S.
dollardenominatedlong-termdebtRealized2)$-Unrealized18(126)37(250)18(126)35(250)Crosscurrencyswaps(9)40(14)48Otherlosses(gains)(4)14(8)30$5$(72)$13$(172)U.
S.
/Canadiandollarexchangerates:AtbeginningofperiodU.
S.
$0.
763U.
S.
$0.
681U.
S.
$0.
774U.
S.
$0.
633AtendofperiodU.
S.
$0.
746U.
S.
$0.
738U.
S.
$0.
746U.
S.
$0.
738SellingandAdministrationExpensesSellingandadministrationexpensestotalled$59millionduringthesecondquarterof2004comparedwith$31millionduringthesecondquarterof2003.
TheincreaseinsellingandadministrationexpenseswasprimarilyduetoHuskyamendingitsstockoptionplaninthesecondquarterof2004;marktomarketstockoptionexpensetotalling$22millionwaschargedtoearnings.
IncomeTaxesConsolidatedincometaxeswere$104millioninthesecondquarterof2004comparedwitharecoveryof$16millioninthesecondquarterof2003.
OnMay11,2004,Bill27–AlbertaCorporateTaxAmendmentAct,2004receivedroyalassent.
Bill27resultedinHuskyrecordinganon-recurringbenefitof$40millioninthefirstquarterof2004.
Inthesecondquarterof2004currentincometaxestotalled$59millionandcomprised$19millioninrespectoftheWenchangoilfieldoperation,$5millionofcapitaltaxand$35millionofCanadianincometax.
Inthesecondquarterof2003currentincometaxestotalled$42millionandcomprised$22millionforWenchang,$5millionofcapitaltaxand$15millionofCanadianincometax.
Thefollowingtableshowstheeffectofnon-recurringbenefitsfortheperiodsnoted:ThreemonthsendedJune30SixmonthsendedJune302004200320042003Incometaxesasreported$104$(16)$182$236Bill27–AlbertaCorporateTaxAmendmentAct,2004--40-BillC-48–Canada-141-141Bill41–AlbertaCorporateTaxAmendmentAct,2003-20-20Otheritems13-13-Proformaincometaxes$117$145$235$397Proformaeffectivetaxrate34%34%34%37%2004HUSKYENERGYINC.
–SECONDQUARTERRESULTS17AssetRetirementObligationsEffectiveJanuary1,2004HuskyadoptedtheCanadianInstituteofCharteredAccountants("CICA")section3110,"AssetRetirementObligations".
Thisnewmethodforaccountingforassetretirementobligationsrequiresanentitytorecordthefairvalueofaliabilityforanassetretirementobligationintheperiodinwhichitisincurred.
Wheninitiallyrecorded,theliabilityisaddedtotherelatedproperty,plantandequipment,subsequentlyincreasingdepletion,depreciationandamortizationexpense.
Inaddition,theliabilityisaccretedforthechangeinpresentvalueineachperiod.
UponadoptionofCICAsection3110,theCompanyadjusteditsexistingfutureremovalandsiterestorationliabilityretroactivelywithrestatement.
Thecumulativeeffectresultedinanincreasetotheassetretirementobligationsof$129million,anincreasetorelatednetproperty,plantandequipmentof$164million,anincreasetothefutureincometaxliabilityof$13millionandanincreasetoretainedearningsof$22million.
Duringthefirstsixmonthsof2004thenetincreaseinassetretirementobligationswas$12million.
OPERATINGACTIVITIESInthesecondquarterof2004cashgeneratedbyoperatingactivitieswas$471millioncomparedwith$521millionrecordedinthesecondquarterof2003.
Thedecreaseincashfromoperatingactivitiesinthesecondquarterof2004wasprimarilyduetoanincreaseinnon-cashworkingcapitalrelatedtooperatingactivitiesthatwaspartiallyoffsetbyhigherrealizedcommodityprices,higherproductionvolume,higherupgradingmarginsandhigherrefinedproductsmargins.
FINANCINGACTIVITIESInthesecondquarterof2004cashprovidedbyfinancingactivitiesamountedto$122million.
Thecashwasprovidedbythenetissuanceofdebttotalling$178millionand$3millionprovidedbytheexerciseofstockoptionspartiallyoffsetbydividendsof$51million,debtissuecostsof$5millionandchangeinnon-cashworkingcapitalof$3million.
Cashprovidedfromfinancingactivitiesinthesecondquarterof2003comprised$44millionfrommonetizationofinterestswapsand$3millionfromexerciseofstockoptionspartiallyoffsetby$38millionofdividendsoncommonsharesandachangeof$6millioninnon-cashworkingcapital.
Duringthesecondquarterof2004Husky'slong-termdebtbalanceswereincreasedbythewideningoftheexchangeratebetweenCanadianandU.
S.
dollars.
Thisamountedto$18millionatJune30,2004comparedwithadecreaseinlong-termdebtof$126millionfromanarrowingoftheexchangerateatJune30,2003.
OnJune18,2004theCompanyissuedU.
S.
$300millionof6.
15percentnotesdueJune15,2019.
Interestispayablesemi-annuallyonJune15andDecember15.
Thenoteswerepricedtoyield6.
194percentandareredeemableattheoptionoftheCompanyatanytimesubjecttoamakewholeprovision.
ThenotesareunsecuredandunsubordinatedandrankequallywithallofHusky'sotherunsecuredandunsubordinatedindebtedness.
Netproceedsfromtheissuewereusedtorepaybankindebtedness.
ThenoteswerethesecondofferingofpublicdebtsecuritiesintheUnitedStatesunderashelfprospectusdatedJune6,2002permittingtheissuanceofanaggregateprincipalamountofU.
S.
$1billioninnotes.
ThisshelfprospectusexpiredonJuly7,2004.
HuskycurrentlyplanstofileanothershelfprospectusinthethirdquarterthatwillpermittheissuanceofanaggregateprincipalamountofU.
S.
$1billioninnotes.
INVESTINGACTIVITIESCashusedininvestingactivitiesamountedto$550millioninthesecondquarterof2004comparedwith$363millioninthesecondquarterof2003.
Cashinvestedinthesecondquarterof2004comprisedcapitalexpendituresof$453millionandchangesinnon-cashworkingcapitalof$97million.
CapitalResources2004HUSKYENERGYINC.
–SECONDQUARTERRESULTS18CAPITALEXPENDITURESThreemonthsendedJune30SixmonthsendedJune302004200320042003UpstreamExplorationWesternCanada$56$56$204$185EastCoastCanada83143International9211127361229200DevelopmentWesternCanada209129533370EastCoastCanada13087206191International4-4-343216743561416277972761MidstreamUpgrader1862610InfrastructureandMarketing43752293315RefinedProducts1492417Corporate67119$458$302$1,040$802Capitalexpendituresexcludecapitalizedcostsrelatedtoassetretirementobligationsincurredduringtheperiod.
UpstreamCapitalExpendituresInWesternCanadathemajorityofHusky'sexplorationanddevelopmentexpendituresduringthefirstsixmonthsof2004weredirectedtowardnaturalgas.
Oilrelatedexpenditureswerefocussedprimarilyonaccelerationandoptimization.
IntheLloydminsterheavyoilarea,explorationanddevelopmentcapitalexpenditurestotalled$150million.
IntheTuckerandSunrise,Albertaoilsandsareascapitalexpenditurestotalled$27millionforpreliminaryengineeringworkandstratigraphictesting.
WellsDrilled(1)(2)ThreemonthsendedJune30SixmonthsendedJune302004200320042003GrossNetGrossNetGrossNetGrossNetWesternCanadaExplorationOil5511131254Gas161115111241119181Dry11332929212022171915166152117105DevelopmentOil88856765196180187172Gas1211136764411388286274Dry10106637344038219208140135644602513484241225159150810754630589(1)Excludesstratigraphictestwells.
(2)Includesnon-operatedwells.
2004HUSKYENERGYINC.
–SECONDQUARTERRESULTS19MidstreamCapitalExpendituresMidstreamcapitalexpendituresattheHuskyLloydminsterUpgraderduringthefirstsixmonthsof2004amountedto$26millionfordebottleneckingworkandprocessimprovementprojects.
Capitalexpendituresformidstreaminfrastructureamountedto$7million.
RefinedProductsCapitalExpendituresRefinedproductscapitalexpendituresduringthefirstsixmonthsof2004amountedto$24million.
Capitalexpendituresincluded$11millionformarketingoutletconstructionandremodelling,$4millionforvariousupgradingprojectsattheHuskyLloydminsterrefinery,$8millionatthePrinceGeorgerefineryand$1millionatotherterminalsandplants.
CorporateCapitalExpendituresDuringthefirstsixmonthsof2004capitalexpendituresforofficeequipment,computingequipmentandpremiseimprovementstotalled$11million.
SOURCESOFCAPITALAtJune30,2004Husky'stotaldebtwas$1,927million,producingaratiooftotaldebttototalcapitalof23percent.
Duringthefirstsixmonthsof2004,Huskyincreaseditsrevolvingsyndicatedcreditfacilityfrom$830millionto$950millionandaddedanotherrevolvingbilateralcreditfacilityof$50million.
Therewerenodrawingsundereitherthesyndicatedcreditfacilityor$150millioninbilateralcreditfacilitiesatJune30,2004.
AtJune30,2004themaximum$250millionofnettradereceivableshadbeensoldundertheCompany'ssecuritizationprogram.
FinancialRatiosThreemonthsendedJune30SixmonthsendedJune302004200320042003Cashflow-operatingactivities$471$521$1,179$1,417-financingactivities$122$3$37$(376)-investingactivities$(550)$(363)$(1,144)$(850)Debttocapitalemployed(percent)23.
425.
3Debttocashflowfromoperations(1)(times)0.
80.
8Corporatereinvestmentratio(1)(2)1.
10.
6Interestcoverageratioonlong-termdebt-excludingcapitalsecurities(1)Earnings12.
514.
0Cashflowfromoperations22.
020.
4Interestcoverageratioonlong-termdebt-includingcapitalsecurities(1)Earnings10.
111.
3Cashflowfromoperations17.
916.
5(1)Calculatedforthetwelvemonthsendedfortheperiodsshown.
(2)Capitalandinvestmentexpendituresdividedbycashflowfromoperations.
CONTRACTUALOBLIGATIONSANDCOMMERCIALCOMMITMENTSInthenormalcourseofbusinessHuskyisobligatedtomakefuturepayments.
Theseobligationsrepresentcontractsandothercommitmentsthatareknownandnon-cancellable.
Liquidity2004HUSKYENERGYINC.
–SECONDQUARTERRESULTS20ContractualObligationsPaymentsduebyperiodTotalSixmonthsof20042005-20062007-2008ThereafterLong-termdebt$1,927$43$297$148$1,439Capitalsecurities302---302Operatingleases60927144151287Firmtransportationagreements1,670118443369740Unconditionalpurchaseobligations75216644412517Leaserentals442239393233Explorationworkcommitments31-274-Engineeringandconstructioncommitments474189285--$6,207$566$1,733$890$3,018InvestmentCanadaUndertakingsInrespectoftheacquisitionofMarathonCanada,HuskyconfirmedcertainundertakingstotheMinisterResponsiblefortheInvestmentCanadaAct.
TheundertakingsincludedcapitalexpendituresonthepurchasedandretainedMarathonCanadalandsamountingto$65million,spendingoncommunityactivitiesamountingto$1.
35millionandenvironmentalprotectionexpendituresof$40million,alltooccurin2004.
AtJune30,2004Huskyhadspentapproximately$21milliononMarathonCanadalands,$27milliononenvironmentalprotectionand$650,000oncommunityactivities.
OFFBALANCESHEETARRANGEMENTSHuskydoesnotcurrentlyutilizeanyoffbalancesheetarrangementswithunconsolidatedentitiestoenhanceliquidityandcapitalresourcepositionsorforanyotherpurpose.
Husky,intheordinarycourseofbusiness,ispartytoaleaseagreementwithWesternCanadianPlaceLtd.
Thetermsoftheleaseprovidefortheleaseofofficespace,managementservicesandoperatingcostsatcommercialrates.
WesternCanadianPlaceLtd.
isindirectlycontrolledbyHusky'sprincipalshareholders.
Duringthesecondquarterof2004theleasewasextendedfromeightto13years.
Duringthefirstsixmonthsof2004Huskypaidapproximately$9millionforofficespaceinWesternCanadianPlace.
Huskyisexposedtomarketrisksrelatedtothevolatilityofcommodityprices,foreignexchangeratesandinterestrates.
Refertothesection"BusinessEnvironment".
Husky,fromtimetotime,usesderivativeinstrumentstomanageitsexposuretotheserisks.
COMMODITYPRICERISKMANAGEMENTHuskyusesderivativecommodityinstrumentstomanageexposuretopricevolatilityonaportionofitsoilandgasproductionandfirmcommitmentsforthepurchaseorsaleofcrudeoilandnaturalgas.
NaturalGasHusky'snaturalgaspriceriskmanagementprogramfor2004expiredinApril2004.
Asaresultofacorporateacquisition,Huskyassumedanaturalgasderivativecontractforanotional7.
5mmcfperdaythatmaturesattheendof2005.
CrudeOilAtJune30,2004Huskyhadcrudeoilswapagreementsinplacetohedge2004production.
Thecontractswereasfollows:TransactionswithRelatedPartiesFinancialandDerivativeInstruments2004HUSKYENERGYINC.
–SECONDQUARTERRESULTS21CrudeOilHedgesNotionalVolumes(mbbls/day)TermPriceUnrecognizedGain/(Loss)NYMEXfixedprice85JulytoDec.
2004U.
S.
$27.
46/bbl$(196)PowerConsumptionAtJune30,2004Huskyhadhedgedpowerconsumptionasfollows:PowerConsumptionHedgesNotionalVolumes(MW)TermPriceUnrecognizedGain/(Loss)Fixedpricepurchase37.
5JulytoDec.
2004$46.
72/MWh$3FOREIGNCURRENCYRISKMANAGEMENTAtJune30,2004,theCompanyhadthefollowingcrosscurrencydebtswapsinplace:U.
S.
$150millionat7.
125percentswappedat$1.
45to$218millionat8.
74percentuntilNovember15,2006U.
S.
$150millionat6.
250percentswappedat$1.
41to$212millionat7.
41percentuntilJune15,2012AtJune30,2004thecostofaU.
S.
dollarinCanadiancurrencywas$1.
34.
Inthesecondquarterof2004,thecrosscurrencyswapsresultedinanoffsettoforeignexchangelossesontranslationofU.
S.
dollardenominateddebtamountingto$9million.
Inaddition,HuskyengagedinU.
S.
dollarforwardcontracts,whichresultedinrealizedlossestotallingapproximately$0.
5millioninthesecondquarterof2004.
INTERESTRATERISKMANAGEMENTInthesecondquarterof2004,theinterestrateriskmanagementactivitiesresultedinadecreasetointerestexpenseof$5million.
Thecrosscurrencydebtswapsresultedinanadditiontointerestexpenseof$2millioninthesecondquarterof2004.
Huskyhasinterestrateswapson$200millionoflong-termdebteffectiveFebruary8,2002whereby6.
95percentwasswappedforCDOR+175bpsuntilJuly14,2009.
Duringthesecondquarterof2004theseswapsresultedinanoffsettointerestexpenseamountingto$1million.
HuskyhasinterestrateswapsonU.
S.
$200millionoflong-termdebteffectiveFebruary12,2002whereby7.
55percentwasswappedforanaverageU.
S.
LIBOR+194bpsuntilNovember15,2011.
Duringthesecondquarterof2004theseswapsresultedinanoffsettointerestexpenseamountingto$3million.
HuskyhasinterestrateswapsonU.
S.
$300millionoflong-termdebteffectiveJune18,2004whereby6.
15percentwasswappedforanaverageU.
S.
LIBOR+63bpsuntilJune15,2019.
Duringthesecondquartertheseswapsresultedinanoffsettointerestexpenseamountingto$1million.
Theamortizationofpreviousinterestrateswapterminationsresultedinanadditional$2millionoffsettointerestexpenseinthesecondquarterof2004.
2004HUSKYENERGYINC.
–SECONDQUARTERRESULTS22SixmonthsendedJune30YearendedDecember31(inthousands,exceptpershareamounts)20042003Shareprice(1)High$28.
30$23.
95Low$22.
73$16.
03Closeatendofperiod$25.
65$23.
47Averagedailytradingvolume390400WeightedaveragenumberofcommonsharesoutstandingBasic423,062419,543Diluted424,944421,549Numberofcommonsharesoutstandingatendofperiod423,576422,176Numberofstockoptionsoutstandingatendofperiod11,1704,597Numberofwarrantsoutstandingatendofperiod41159(1)TradinginthecommonsharesofHuskyEnergyInc.
("HSE")commencedontheTorontoStockExchangeonAugust28,2000.
TheCompanyisrepresentedintheS&P/TSXComposite,S&P/TSXCanadianEnergySectorandintheS&P/TSX60indices.
CAUTIONARYSTATEMENTFORTHEPURPOSESOFTHE'SAFEHARBOR'PROVISIONSOFTHEPRIVATESECURITIESLITIGATIONREFORMACTOF1995Thisdocumentcontainscertainforward-lookingstatementsrelating,butnotlimited,toHusky'soperations,anticipatedfinancialperformance,businessprospectsandstrategiesandwhicharebasedonHusky'scurrentexpectations,estimates,projectionsandassumptionsandweremadebyHuskyinlightofexperienceandperceptionofhistoricaltrends.
SomeofHusky'sforward-lookingstatementsmaybeidentifiedbywordslike"expects","anticipates","plans","intends","believes","projects","could","vision","goal","objective"andsimilarexpressions.
Husky'sbusinessissubjecttorisksanduncertainties,someofwhicharesimilartootherenergycompaniesandsomeofwhichareuniquetoHusky.
Allstatementsthataddressexpectationsorprojectionsaboutthefuture,includingstatementsaboutstrategyforgrowth,expectedexpenditures,commodityprices,costs,schedulesandproductionvolumes,operatingorfinancialresults,areforward-lookingstatements.
ThereaderiscautionednottoplaceunduerelianceonHusky'sforward-lookingstatementsincludingforward-lookingstatementsrelatingtooilandnaturalgasproductionratesinthesectioncaptioned"Productionversus2004Forecast".
Husky'sactualresultsmaydiffermateriallyfromthoseexpressedorimpliedbyHusky'sforward-lookingstatementsasaresultofknownandunknownrisks,uncertaintiesandotherfactors.
Bytheirnature,forward-lookingstatementsinvolvenumerousassumptions,inherentrisksanduncertainties,bothgeneralandspecific,thatcontributetothepossibilitythatthepredictedoutcomeswillnotoccur.
Therisks,uncertaintiesandotherfactors,manyofwhicharebeyondHusky'scontrol,thatcouldinfluenceactualresultsinclude,butarenotlimitedto:fluctuationsincommoditypriceschangesingeneraleconomic,marketandbusinessconditionsfluctuationsinsupplyanddemandforHusky'sproductsfluctuationsinthecostofborrowingHusky'suseofderivativefinancialinstrumentstohedgeexposuretochangesincommoditypricesandfluctuationsininterestratesandforeigncurrencyexchangeratespoliticalandeconomicdevelopments,expropriations,royaltyandtaxincreases,retroactivetaxclaimsandchangestoimportandexportregulationsandotherforeignlawsandpoliciesinthecountriesinwhichHuskyoperatesHusky'sabilitytoreceivetimelyregulatoryapprovalstheintegrityandreliabilityofHusky'scapitalassetsthecumulativeimpactofotherresourcedevelopmentprojectstheaccuracyofHusky'soilandgasreserveestimates,estimatedproductionlevelsandHusky'ssuccessatexplorationanddevelopmentdrillingandrelatedactivitiesOutstandingShareDataForward-lookingStatements2004HUSKYENERGYINC.
–SECONDQUARTERRESULTS23themaintenanceofsatisfactoryrelationshipswithunions,employeeassociationsandjointventurerscompetitiveactionsofothercompanies,includingincreasedcompetitionfromotheroilandgascompaniesorfromcompaniesthatprovidealternatesourcesofenergytheuncertaintiesresultingfrompotentialdelaysorchangesinplanswithrespecttoexplorationordevelopmentprojectsorcapitalexpendituresactionsbygovernmentalauthorities,includingchangesinenvironmentalandotherregulationstheabilityandwillingnessofpartieswithwhomHuskyhasmaterialrelationshipstofulfiltheirobligationstheoccurrenceofunexpectedeventssuchasfires,blowouts,freeze-ups,equipmentfailuresandothersimilareventsaffectingHuskyorotherpartieswhoseoperationsorassetsdirectlyorindirectlyaffectHusky.
2004HUSKYENERGYINC.
–SECONDQUARTERRESULTS24CONSOLIDATEDBALANCESHEETSJune30December31(millionsofdollars)20042003(unaudited)(audited)AssetsCurrentassetsCashandcashequivalents$75$3Accountsreceivable569618Inventories295211Prepaidexpenses5433993865Property,plantandequipment-(fullcostaccounting)(notes3,4)17,96516,944Lessaccumulateddepletion,depreciationandamortization6,6626,09511,30310,849Goodwill120120Otherassets123112$12,539$11,946LiabilitiesandShareholders'EquityCurrentliabilitiesBankoperatingloans$-$71Accountspayableandaccruedliabilities1,1051,126Long-termdebtduewithinoneyear(note5)672591,1721,456Long-termdebt(note5)1,8601,439Otherlong-termliabilities(notes3,4)515519Futureincometaxes(notes4,6)2,6782,621Commitmentsandcontingencies(note7)Shareholders'equityCapitalsecuritiesandaccruedreturn309298Commonshares(notes3,8)3,5023,457Retainedearnings2,5032,1566,3145,911$12,539$11,946Commonsharesoutstanding(millions)(note8)423.
6422.
2Theaccompanyingnotestotheconsolidatedfinancialstatementsareanintegralpartofthesestatements.
2003amountsasrestated.
2004HUSKYENERGYINC.
–SECONDQUARTERRESULTS25CONSOLIDATEDSTATEMENTSOFEARNINGSThreemonthsendedJune30SixmonthsendedJune30(millionsofdollars,exceptpershareamounts)(unaudited)2004200320042003Salesandoperatingrevenues,netofroyalties$2,306$1,769$4,392$3,987CostsandexpensesCostofsalesandoperatingexpenses(notes3,4)1,5991,1243,0152,488Sellingandadministrationexpenses(note3)59318558Depletion,depreciationandamortization(notes3,4)288239571485Interest-net(note5)10202041Foreignexchange(note5)5(72)13(172)Other-net22421,9631,3443,7082,902Earningsbeforeincometaxes3434256841,085Incometaxes(note6)Current594211990Future45(58)63146104(16)182236Netearnings$239$441$502$849Earningspershare(note9)Basic$0.
54$1.
09$1.
14$2.
11Diluted$0.
54$1.
09$1.
14$2.
10Weightedaveragenumberofcommonsharesoutstanding(millions)(note9)Basic423.
4418.
5423.
1418.
4Diluted425.
2420.
3424.
9420.
2CONSOLIDATEDSTATEMENTSOFRETAINEDEARNINGSThreemonthsendedJune30SixmonthsendedJune30(millionsofdollars)(unaudited)2004200320042003Beginningofperiod(note4)$2,325$1,754$2,156$1,357Netearnings239441502849Dividendsoncommonshares(51)(38)(93)(75)Returnandforeignexchangeoncapitalsecurities(netofrelatedtaxes)(10)16(18)33Stock-basedcompensation-retroactiveadoption(note3)--(44)-Assetretirementobligations-retroactiveadoption(notes3,4)---9Endofperiod$2,503$2,173$2,503$2,173Theaccompanyingnotestotheconsolidatedfinancialstatementsareanintegralpartofthesestatements.
2003amountsasrestated.
2004HUSKYENERGYINC.
–SECONDQUARTERRESULTS26CONSOLIDATEDSTATEMENTSOFCASHFLOWSThreemonthsendedJune30SixmonthsendedJune30(millionsofdollars)(unaudited)2004200320042003OperatingactivitiesNetearnings$239$441$502$849ItemsnotaffectingcashAccretion(notes3,4)851410Depletion,depreciationandamortization(notes3,4)288239571485Futureincometaxes45(58)63146Foreignexchange9(86)21(202)Other(1)(1)-(1)Cashflowfromoperations5885401,1711,287Settlementofassetretirementobligations(7)(2)(13)(8)Changeinnon-cashworkingcapital(note10)(110)(17)21138Cashflow-operatingactivities4715211,1791,417FinancingactivitiesBankoperatingloansfinancing-net(33)-(71)-Long-termdebtissue1,405-1,461-Long-termdebtrepayment(1,194)-(1,267)(140)Returnoncapitalsecuritiespayment--(13)(15)Debtissuecosts(5)-(5)-Proceedsfromexerciseofstockoptions33169Proceedsfrominterestswapsmonetization-44-44Dividendsoncommonshares(51)(38)(93)(75)Changeinnon-cashworkingcapital(note10)(3)(6)9(199)Cashflow-financingactivities122337(376)Availableforinvesting5935241,2161,041InvestingactivitiesCapitalexpenditures(453)(300)(1,029)(794)Assetsales14421449Other(14)2(12)4Changeinnon-cashworkingcapital(note10)(97)(107)(117)(109)Cashflow-investingactivities(550)(363)(1,144)(850)Increaseincashandcashequivalents4316172191Cashandcashequivalentsatbeginningofperiod323363306Cashandcashequivalentsatendofperiod$75$497$75$497Theaccompanyingnotestotheconsolidatedfinancialstatementsareanintegralpartofthesestatements.
2003amountsasrestated.
2004HUSKYENERGYINC.
–SECONDQUARTERRESULTS27NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTSSixmonthsendedJune30,2004(unaudited)Exceptwhereindicatedandpershareamounts,alldollaramountsareinmillions.
Note1SegmentedFinancialInformationCorporateandUpstreamMidstreamRefinedProductsEliminations(2)TotalUpgradingInfrastructureandMarketing200420032004200320042003200420032004200320042003ThreemonthsendedJune30(1)Salesandoperatingrevenues,netofroyalties$800$760$213$256$1,669$1,205$457$352$(833)$(804)$2,306$1,769CostsandexpensesOperating,costofsales,sellingandgeneral2402161822281,6141,166414341(790)(794)1,6601,157Depletion,depreciationandamortization26221445559788288239Interest-net10201020Foreignexchange5(72)5(72)5024301862331,6191,171423348(767)(838)1,9631,344Earnings(loss)beforeincometaxes29833027235034344(66)34343425Currentincometaxes2939--14(4)531145942Futureincometaxes65(83)8(3)2158(2)(38)1545(58)Netearnings(loss)$204$374$19$26$34$23$21$3$(39)$15$239$441Capitalexpenditures-ThreemonthsendedJune30$416$277$18$6$4$3$14$9$6$7$458$302SixmonthsendedJune30(1)Salesandoperatingrevenues,netofroyalties$1,581$1,724$459$532$3,107$2,637$817$736$(1,572)$(1,642)$4,392$3,987CostsandexpensesOperating,costofsales,sellingandgeneral4654433944802,9922,533757716(1,504)(1,624)3,1042,548Depletion,depreciationandamortization516437910101018141814571485Interest-net20412041Foreignexchange13(172)13(172)9818804034903,0022,543775730(1,453)(1,741)3,7082,902Earnings(loss)beforeincometaxes600844564210594426(119)996841,085Currentincometaxes6377--2617823411990Futureincometaxes97841448339(6)(65)3163146Netearnings(loss)$440$683$42$38$71$60$26$4$(77)$64$502$849Capitalemployed-AsatJune30$7,215$6,187$484$468$256$440$356$405$(70)$395$8,241$7,895Capitalexpenditures-SixmonthsendedJune30$972$761$26$10$7$5$24$17$11$9$1,040$802Totalassets-AsatJune30$10,464$8,590$688$656$578$946$617$610$192$584$12,539$11,386(1)2003amountsasrestated.
(2)Eliminationsrelatetosalesandoperatingrevenuesbetweensegmentsrecordedattransferpricesbasedoncurrentmarketprices,andtounrealizedintersegmentprofitsininventories.
2004HUSKYENERGYINC.
–SECONDQUARTERRESULTS28Note2SignificantAccountingPoliciesTheinterimconsolidatedfinancialstatementsofHuskyEnergyInc.
("Husky"or"theCompany")havebeenpreparedbymanagementinaccordancewithaccountingprinciplesgenerallyacceptedinCanada.
TheinterimconsolidatedfinancialstatementshavebeenpreparedfollowingthesameaccountingpoliciesandmethodsofcomputationastheconsolidatedfinancialstatementsforthefiscalyearendedDecember31,2003,exceptasnotedbelow.
TheinterimconsolidatedfinancialstatementsshouldbereadinconjunctionwiththeconsolidatedfinancialstatementsandthenotestheretointheCompany'sannualreportfortheyearendedDecember31,2003.
Certainprioryears'amountshavebeenreclassifiedtoconformwithcurrentpresentation.
Note3ChangeinAccountingPoliciesa)AssetRetirementObligationsEffectiveJanuary1,2004theCompanyretroactivelyadoptedtheCanadianInstituteofCharteredAccountants("CICA")section3110,"AssetRetirementObligations".
Thenewrecommendationsrequirethattherecognitionofthefairvalueofobligationsassociatedwiththeretirementoftangiblelong-livedassetsberecordedintheperiodtheassetisputintouse,withacorrespondingincreasetothecarryingamountoftherelatedasset.
Theobligationsrecognizedarestatutory,contractualorlegalobligations.
Theliabilityisaccretedovertimeforchangesinthefairvalueoftheliabilitythroughchargestoaccretionwhichisincludedincostofsalesandoperatingexpenses.
Thecostscapitalizedtotherelatedassetsareamortizedtoearningsinamannerconsistentwiththedepreciation,depletionandamortizationoftheunderlyingasset.
Note4disclosestheimpactoftheadoptionofCICAsection3110onthefinancialstatements.
b)Stock-basedCompensationEffectiveJanuary1,2004theCompanyadoptedtherecommendationsofCICAsection3870,"Stock-basedCompensationandOtherStock-basedPayments",retroactivelywithoutrestatementofpriorperiods.
TherecommendationsrequiretheCompanytorecordacompensationexpenseoverthevestingperiodbasedonthefairvalueofoptionsgrantedtoemployeesanddirectors.
Stockcompensationexpenseisincludedinsellingandadministrationexpenses.
Thischangeresultedinadecreasetoretainedearningsof$44million,anincreasetocontributedsurplusof$21millionandanincreasetosharecapitalof$23million.
EffectiveJune1,2004theCompanyamendeditsstockoptionplantoatandemplanthatprovidesthestockoptionholderwiththerighttoexercisethestockoptionorsurrendertheoptionforacashpayment.
Thechangeresultedinanincreasetocurrentliabilitiesof$34million,adecreasetocontributedsurplusof$16millionandanincreasetocompensationexpenseof$18million.
AliabilityforexpectedcashsettlementsisaccruedoverthevestingperiodofthestockoptionsbasedonthedifferencebetweentheexercisepriceofthestockoptionsandthemarketpriceoftheCompany'scommonshares.
TheliabilityisrevaluedtoreflectchangesinthemarketpriceoftheCompany'scommonsharesandthenetchangeisrecognizedinearnings.
Whenstockoptionsaresurrenderedforcash,thecashsettlementpaidreducestheoutstandingliability.
Whenstockoptionsareexercisedforcommonshares,considerationpaidbythestockoptionholdersandthepreviouslyrecognizedliabilityassociatedwiththestockoptionsarerecordedassharecapital.
c)Property,PlantandEquipment-OilandGasEffectiveJanuary1,2004theCompanyadoptedAccountingGuideline16,"OilandGasAccounting–FullCost"("AcG-16"),whichreplacesAccountingGuideline5,"FullCostAccountingintheOilandGasIndustry".
AcG-16modifieshowtheceilingtestisperformedandisconsistentwithCICAsection3063,"ImpairmentofLong-livedAssets".
Therecoverabilityofacostcentreistestedbycomparingthecarryingvalueofthecostcentretothesumoftheundiscountedcashflowsexpectedfromthecostcentre'suseandeventualdisposition.
Ifthe2004HUSKYENERGYINC.
–SECONDQUARTERRESULTS29carryingvalueisunrecoverablethecostcentreiswrittendowntoitsfairvalueusingtheexpectedpresentvalueapproach.
Thisapproachincorporatesrisksanduncertaintiesintheexpectedfuturecashflowswhicharediscountedusingariskfreerate.
TheadoptionofAcG-16hadnoeffectontheCompany'sfinancialresults.
d)ImpairmentofLong-livedAssetsEffectiveJanuary1,2004theCompanyadoptedCICAsection3063,"ImpairmentofLong-livedAssets",whichhadnoeffectontheconsolidatedfinancialstatements.
e)HedgingRelationshipsEffectiveJanuary1,2004theCompanyadoptedAccountingGuideline13,"HedgingRelationships"("AcG-13"),thatestablishesstandardsforthedocumentationandeffectivenesstestingofhedgingactivities.
TheadoptionofAcG-13hadnoeffectontheCompany'sfinancialresults.
f)ReclassificationEffectiveJanuary1,2004theCompanyadoptedCICAsection1100,"GenerallyAcceptedAccountingPrinciples".
Uponadoption,certaintransportationcoststhatwerepreviouslynettedagainstrevenuearenowbeingrecordedascostofsales.
Thischangehasbeenadoptedprospectively.
Note4AssetRetirementObligationsTheCompanyretroactivelyadoptedthenewrecommendationsontherecognitionoftheobligationstoretirelong-livedtangibleassets.
ThechangewaseffectiveJanuary1,2004andtherevisionwasappliedretroactively.
Theimpactwasasfollows:ConsolidatedBalanceSheet-AsatDecember31,2003AsReportedChangeAsRestatedAssetsNetproperty,plantandequipment$10,685$164$10,849Liabilitiesandshareholders'equityOtherlong-termliabilities390129519Futureincometaxes2,608132,621Retainedearnings2,134222,156ConsolidatedStatementofEarnings-SixmonthsendedJune30,2003AsReportedChangeAsRestatedDepletion,depreciationandamortization$511$(26)$485Accretion(1)-1010Netearnings83316849(1)Includedincostofsalesandoperatingexpenses.
AtJune30,2004,theestimatedtotalundiscountedamountrequiredtosettletheassetretirementobligationswas$2.
3billion.
Theseobligationswillbesettledbasedontheusefullivesoftheunderlyingassets,whichcurrentlyextendupto30yearsintothefuture.
Thisamounthasbeendiscountedusingarisk-freeinterestrateof6.
4percent.
Theimpactonpreviousperiodsisdisclosedinnote20oftheCompany'sannualreportfortheyearendedDecember31,2003.
2004HUSKYENERGYINC.
–SECONDQUARTERRESULTS30Changestoassetretirementobligationswereasfollows:SixmonthsendedJune30,2004Assetretirementobligationsatbeginningofperiod$432Liabilitiesincurredduringperiod11Liabilitiessettledduringperiod(13)Accretion14AssetretirementobligationsatJune30$444Note5Long-termDebtMaturityJune302004Dec.
312003June302004Dec.
312003Cdn.
$AmountU.
S.
$AmountLong-termdebt6.
25%notes2012$536$517$400$4006.
15%notes2019402-300-7.
125%notes20062011941501507.
55%debentures20162682582002008.
45%seniorsecuredbonds2004-12180188134145Privateplacementnotes2004-540413032Medium-termnotes2007-9300500--Totallong-termdebt1,9271,698$1,214$927Amountduewithinoneyear(67)(259)$1,860$1,439Duringthefirstsixmonthsof2004,Huskyincreaseditsrevolvingsyndicatedcreditfacilityfrom$830millionto$950millionandaddedanotherrevolvingbilateralcreditfacilityof$50million.
AtJune30,2004,theCompanydidnothaveanyborrowingsunderits$950millionrevolvingsyndicatedcreditfacilityorits$150millionrevolvingbilateralcreditfacilities.
InterestratesundertherevolvingsyndicatedcreditfacilityvarybasedonCanadianprime,Bankers'Acceptance,U.
S.
LIBORorU.
S.
baserate,dependingontheborrowingoptionselected,creditratingsassignedbycertainratingagenciestotheCompany'sseniorunsecureddebtandwhetherthefacilityisrevolvingornon-revolving.
The$150millionrevolvingbilateralcreditfacilitieshavesubstantiallythesametermsastherevolvingsyndicatedcreditfacility.
OnJune18,2004theCompanyissuedU.
S.
$300millionof6.
15percentnotesdueJune15,2019,thesecondofferingbyHuskyunderabaseshelfprospectusdatedJune6,2002filedwithsecuritiesregulatoryauthoritiesinCanadaandtheUnitedStates.
ThenotesareredeemableattheoptionoftheCompanyatanytime,subjecttoamakewholeprovision.
Interestispayablesemi-annually.
ThenotesareunsecuredandunsubordinatedandrankequallywithallofHusky'sotherunsecuredandunsubordinatedindebtedness.
Netproceedsfromtheissuewereusedtorepaybankindebtedness.
Interest-netconsistedof:ThreemonthsendedJune30SixmonthsendedJune302004200320042003Long-termdebt$28$34$54$66Short-termdebt112129355667Amountcapitalized(18)(13)(35)(22)11222145Interestincome(1)(2)(1)(4)$10$20$20$412004HUSKYENERGYINC.
–SECONDQUARTERRESULTS31Foreignexchangeconsistedof:ThreemonthsendedJune30SixmonthsendedJune302004200320042003Loss(gain)ontranslationofU.
S.
dollardenominatedlong-termdebt$18$(126)$35$(250)Crosscurrencyswaps(9)40(14)48Otherlosses(gains)(4)14(8)30$5$(72)$13$(172)Note6IncomeTaxesOnMay11,2004,Bill27–AlbertaCorporateTaxAmendmentAct,2004receivedroyalassentintheAlbertaLegislativeAssembly.
Asaresult,anon-recurringbenefitof$40millionwasrecordedinthefirstsixmonthsof2004.
Alsoduringthefirstsixmonthsof2004,a$13milliontaxbenefitrelatedtothechangeintheCompany'sstockoptionplanandothertaxbenefitswasrecognized.
Incometaxexpenseforthefirstsixmonthsof2003includedanon-recurringadjustmenttofutureincometaxesof$20millionresultingfromachangeintheAlbertacorporateincometaxrate.
Additionally,BillC-48amendedtheIncomeTaxAct(naturalresources)andresultedinanon-recurringtaxbenefitof$141million.
Theresourcetaxchangesincludedachangeinthefederaltaxrate,deductibilityofcrownroyaltiesandeliminationoftheresourceallowance,tobephasedinoverafive-yearperiod.
Note7CommitmentsandContingenciesTheCompanyisinvolvedinvariousclaimsandlitigationarisinginthenormalcourseofbusiness.
WhiletheoutcomeofthesemattersisuncertainandtherecanbenoassurancethatsuchmatterswillberesolvedintheCompany'sfavour,theCompanydoesnotcurrentlybelievethattheoutcomeofadversedecisionsinanypendingorthreatenedproceedingsrelatedtotheseandothermattersoranyamountwhichitmayberequiredtopaybyreasonthereofwouldhaveamaterialadverseimpactonitsfinancialposition,resultsofoperationsorliquidity.
Note8ShareCapitalTheCompany'sauthorizedsharecapitalconsistsofanunlimitednumberofnoparvaluecommonandpreferredshares.
CommonSharesChangestoissuedcommonshareswereasfollows:SixmonthsendedJune3020042003NumberofSharesAmountNumberofSharesAmountBalanceatbeginningofperiod422,175,742$3,457417,873,601$3,406Stock-basedcompensation-adoption-23--Exercised-optionsandwarrants1,399,96722927,0829BalanceatJune30423,575,709$3,502418,800,683$3,4152004HUSKYENERGYINC.
–SECONDQUARTERRESULTS32StockOptionsAsummaryofthestatusoftheCompany'sstockoptionplanispresentedbelow:SixmonthsendedJune3020042003NumberofOptions(thousands)WeightedAverageExercisePricesNumberofOptions(thousands)WeightedAverageExercisePricesOutstanding,beginningofperiod4,597$13.
887,920$13.
91Granted7,988$24.
90326$16.
85Exercisedforcommonshares(1,189)$13.
11(705)$13.
74Surrenderedforcashsettlement(167)$13.
21-$-Forfeited(59)$20.
46(70)$14.
52Outstanding,June3011,170$21.
827,471$14.
05OptionsexercisableatJune302,497$13.
104,314$13.
81AtJune30,2004,theoptionsoutstandinghadexercisepricesrangingfrom$10.
34to$27.
69withaweightedaveragecontractuallifeof4.
1years.
Stock-basedCompensationBeginningJanuary1,2004,stockcompensationisbeingrecognizedinearningsandincludedinsellingandadministrationexpenses.
Asdescribedinnote3b),onJune1,2004theCompanymodifieditsstockoptionplantoatandemplanthatprovidesthestockoptionholderwiththerighttoexercisetheoptionorsurrendertheoptionforacashpayment.
Priortomodification,thefairvaluesofallcommonshareoptionsgrantedwereestimatedonthedateofgrantusingtheBlack-Scholesoption-pricingmodel.
TheassumptionsusedtodeterminethefairvaluespriortoJune1,2004were:ThreemonthsendedJune30SixmonthsendedJune3020042003(1)20042003(1)Weightedaveragefairmarketvalueperoption$6.
03$3.
59$5.
67$3.
76Risk-freeinterestrate(percent)3.
53.
93.
13.
9Volatility(percent)22232124Expectedlife(years)5555Expectedannualdividendpershare$0.
48$0.
36$0.
44$0.
36(1)OptionsgrantedpriortoSeptember3,2003wererevaluedasaresultofthespecial$1.
00persharedividendpaidin2003.
IftheCompanyhadappliedthefairvaluebasedmethodretroactivelywithrestatementofpriorperiodsforalloptionsgranted,inthefirstsixmonthsof2003theCompany'snetearningsavailabletocommonshareholderswouldhavedecreasedby$7millionforstockcompensation.
Basicearningspersharewouldhavedecreasedfrom$2.
11to$2.
09anddilutedearningspersharewouldhavedecreasedfrom$2.
10to$2.
08.
ContributedSurplusChangestocontributedsurpluswereasfollows:ThreemonthsendedJune30SixmonthsendedJune302004200320042003Balanceatbeginningofperiod$16Stock-basedcompensation-adoption--21-Stock-basedcompensationcost1-1-Stockoptionsexercised(1)-(6)-Modificationofstockoptionplan-June1,2004(16)-(16)-BalanceatJune302004HUSKYENERGYINC.
–SECONDQUARTERRESULTS33Note9EarningsperCommonShareThreemonthsendedJune30SixmonthsendedJune302004200320042003Netearnings$239$441$502$849Returnandforeignexchangeoncapitalsecurities(netofrelatedtaxes)(10)16(18)32Netearningsavailabletocommonshareholders$229$457$484$881Weightedaveragenumberofcommonsharesoutstanding-Basic(millions)423.
4418.
5423.
1418.
4Effectofdilutivestockoptionsandwarrants1.
81.
81.
81.
8Weightedaveragenumberofcommonsharesoutstanding-Diluted(millions)425.
2420.
3424.
9420.
2Earningspershare-Basic$0.
54$1.
09$1.
14$2.
11-Diluted$0.
54$1.
09$1.
14$2.
10Note10CashFlows-ChangeinNon-cashWorkingCapitalThreemonthsendedJune30SixmonthsendedJune302004200320042003a)Changeinnon-cashworkingcapitalwasasfollows:Decrease(increase)innon-cashworkingcapitalAccountsreceivable$74$58$49$(293)Inventories(59)(23)(84)(10)Prepaidexpenses(22)(13)(16)(7)Accountspayableandaccruedliabilities(203)(152)(36)140Changeinnon-cashworkingcapital(210)(130)(87)(170)Relatingto:Financingactivities(3)(6)9(199)Investingactivities(97)(107)(117)(109)Operatingactivities$(110)$(17)$21$138b)Othercashflowinformation:Cashtaxespaid$101$49$152$65Cashinterestpaid$43$45$59$68Note11FinancialInstrumentsandRiskManagementUnrecognizedgains(losses)onderivativeinstrumentswereasfollows:June302004Dec.
312003CommoditypriceriskmanagementNaturalgas$(15)$(8)Crudeoil(196)(109)Powerconsumption32InterestrateriskmanagementInterestrateswaps2231ForeigncurrencyriskmanagementForeignexchangecontracts(22)(19)Foreignexchangeforwards10152004HUSKYENERGYINC.
–SECONDQUARTERRESULTS34CommodityPriceRiskManagementNaturalGasDuringthefirstsixmonthsof2004theimpactofthe2004naturalgashedgeprogramwasagainof$8million.
AtJune30,2004theCompanyhadhedged7.
5mmcfofnaturalgasperdayatNYMEXforJulytoDecember2004andJanuarytoDecember2005atanaveragepriceofU.
S.
$1.
92permcf.
Duringthefirstsixmonthsof2004theimpactwasalossof$4million.
CrudeOilAtJune30,2004theCompanyhadhedgedcrudeoilaveraging85,000bblsperdayfromJulytoDecember2004atanaveragefixedWTIpriceofU.
S.
$27.
46perbbl.
Theimpactofthehedgeprogramduringthefirstsixmonthsof2004wasalossof$193million.
PowerConsumptionAtJune30,2004theCompanyhadhedgedpowerconsumptionof165,600MWhfromJulytoDecember2004atanaveragefixedpriceof$46.
72perMWh.
Theimpactofthehedgeprogramduringthefirstsixmonthsof2004wasagainof$1million.
NaturalGasContractsAtJune30,2004theunrecognizedgains(losses)onexternaloffsettingphysicalpurchaseandsalenaturalgascontractswereasfollows:Volumes(mmcf)UnrecognizedGain(Loss)Physicalpurchasecontracts23,350$3Physicalsalecontracts(23,350)$(1)InterestRateRiskManagementTheCompanyhasinterestrateswaparrangementswherebythefixedinterestratecoupononcertaindebtwasswappedtofloatingrateswiththefollowingtermsasatJune30,2004:DebtSwapAmountSwapMaturitySwapRate(percent)6.
95%medium-termnotes$200July14,2009CDOR+175bps7.
55%debenturesU.
S.
$200November15,2011U.
S.
LIBOR+194bps6.
15%notesU.
S.
$300June15,2019U.
S.
LIBOR+63bpsDuringthefirstsixmonthsof2004theCompanyrealizedagainof$9millionfrominterestrateriskmanagementactivities.
ForeignCurrencyRiskManagementAtJune30,2004theCompanyhadthefollowingcrosscurrencydebtswaps:DebtSwapAmountCanadianEquivalentSwapMaturityInterestRate7.
125%notesU.
S.
$150$218November15,20068.
74%6.
25%notesU.
S.
$150$212June15,20127.
41%Duringthefirstsixmonthsof2004theCompanyrealizedan$11milliongainfromallforeigncurrencyriskmanagementactivities.
2004HUSKYENERGYINC.
–SECONDQUARTERRESULTS35SaleofAccountsReceivableInNovember2003,theCompanyestablishedasecuritizationprogramtosell,onarevolvingbasis,upto$250millionofaccountsreceivabletoathirdparty.
AsatJune30,2004,$250millioninoutstandingaccountsreceivablehadbeensoldundertheprogram.
TheagreementincludesaprogramfeebasedonCanadiancommercialpaperrates.
Note12SubsequentEventTheCompanyannouncedthatithadacquiredalloftheissuedandoutstandingsharesofTempleExplorationInc.
,fortotalcashconsiderationof$101.
5million,effectiveJuly15,2004.
Inaddition,theCompanywillassumeaworkingcapitaldeficiencyof$13.
5million.
2004HUSKYENERGYINC.
–SECONDQUARTERRESULTS36TermsandAbbreviationsbblsbarrelsbpsbasispointsmbblsthousandbarrelsmbbls/daythousandbarrelsperdaymmbblsmillionbarrelsmcfthousandcubicfeetmmcfmillioncubicfeetmmcf/daymillioncubicfeetperdaybcfbillioncubicfeettcftrillioncubicfeetboebarrelsofoilequivalentmboethousandbarrelsofoilequivalentmboe/daythousandbarrelsofoilequivalentperdaymmboemillionbarrelsofoilequivalentmcfgethousandcubicfeetofgasequivalentGJgigajoulemmbtumillionBritishThermalUnitsmmltmillionlongtonsMWmegawattMWhmegawatthourNGLnaturalgasliquidsWTIWestTexasIntermediateNYMEXNewYorkMercantileExchangeNITNOVAInventoryTransfer(1)LIBORLondonInterbankOfferedRateCDORCertificateofDepositOfferedRateSEDARSystemforElectronicDocumentAnalysisandRetrievalFPSOFloatingproduction,storageandoffloadingvesselOPECOrganizationofPetroleumExportingCountriesCapitalEmployedShort-andlong-termdebtandshareholders'equityCapitalExpendituresIncludescapitalizedadministrativeexpensesandcapitalizedinterestbutdoesnotincludeproceedsorotherassetsCashFlowfromOperationsEarningsfromoperationsplusnon-cashchargesbeforechangeinnon-cashworkingcapitalEquityCapitalsecuritiesandaccruedreturn,sharesandretainedearningsTotalDebtLong-termdebtincludingcurrentportionandbankoperatingloanshectare1hectareisequalto2.
47acreswildcatwellExploratorywelldrilledinanareawherenoproductionexistsfeedstockRawmaterialswhichareprocessedintopetroleumproducts(1)NOVAInventoryTransferisanexchangeortransferoftitleofgasthathasbeenreceivedintotheNOVApipelinesystembutnotyetdeliveredtoaconnectingpipeline.
Naturalgasconvertedonthebasisthatsixmcfequalsonebarrelofoil.
Inthisreport,theterms"HuskyEnergyInc.
","Husky"or"theCompany"meanHuskyEnergyInc.
anditssubsidiariesandpartnershipinterestsonaconsolidatedbasis.
HuskyEnergywillhostaconferencecallforanalystsandinvestorsonThursday,July22,2004at4:15p.
m.
EasterntimetodiscussHusky'ssecondquarterresults.
Toparticipate,pleasedial1(800)291-5032beginningat4:05p.
m.
Easterntime.
Mediaareinvitedtoparticipateinthecallonalisten-onlybasisbydialing1(800)289-6406beginningat4:05p.
m.
Easterntime.
Thosewhoareunabletolistentothecalllivemaylistentoarecordingofthecallbydialing1(800)558-5253onehourafterthecompletionofthecall,approximately6:15p.
m.
Easterntime,thendialingreservationnumber21200086.
ThePostViewwillbeavailableuntilSunday,August22,2004.
-End-Forfurtherinformation,pleasecontact:InvestorRelationsInvestorRelationsMr.
DonCampbellMr.
ColinLuciukManager,Communications,InvestorManager,InvestorRelationsRelationsandGovernmentAffairsHuskyEnergyInc.
HuskyEnergyInc.
Tel:(403)750-4938Tel:(403)298-6153707-8thAvenueS.
W.
,Box6525,StationD,Calgary,Alberta,CanadaT2P3G7Telephone:(403)298-6111Facsimile:(403)298-6515Website:www.
huskyenergy.
cae-mail:Investor.
Relations@huskyenergy.
ca