 | NEWS RELEASE |
| FOR IMMEDIATE RELEASE – July 29, 2004 | |
| FOR: | PetroKazakhstan Inc. |
| SUBJECT: | Financial Results for the Second Quarter Ending June 30, 2004 |
CALGARY, Alberta – PetroKazakhstan Inc. (“PetroKazakhstan”) announces its financial results for the three months ending June 30, 2004.All amounts are expressed in U.S. dollars unless otherwise indicated.
HIGHLIGHTS:
| l | Strong earnings and cash flow continue in the second quarter 2004 | |
| l | Continued reduction of export differential | |
| l | Additional drilling in Kyzylkiya confirms further field extension to the north | |
| l | Aryskum gas injection facility commissioned and operational | |
| l | VGO exports commenced |
FINANCIAL HIGHLIGHTS:
(in millions of US$ except per share amounts) | Six Months ended June 30 | Three Months ended June 30 | |||||||||||
2004 |
|
| 2003 |
|
| 2004 |
|
| 2003 |
| |||
| Gross Revenue | $ | 721.4 | $ | 503.5 | $ | 399.9 | $ | 254.6 | |||||
| Net income | 209.5 | 137.0 | 122.0 | 68.4 | |||||||||
Per share (basic) | 2.64 | 1.74 | 1.54 | 0.88 | |||||||||
Per share (diluted) | 2.60 | 1.68 | 1.51 | 0.84 | |||||||||
| Cash flow | 256.2 | 180.0 | 141.6 | 91.0 | |||||||||
Per share (basic) | 3.23 | 2.29 | 1.78 | 1.17 | |||||||||
Per share (diluted) | 3.18 | 2.20 | 1.75 | 1.12 | |||||||||
| Weight Average Shares Outstanding | |||||||||||||
Basic | 79,257,431 | 78,538,671 | 79,442,775 | 78,000,877 | |||||||||
Diluted | 80,484,892 | 81,676,831 | 80,721,531 | 81,173,957 | |||||||||
| Shares Outstanding at End of Period | 80,597,166 | 77,653,139 | 80,597,166 | 77,653,139 | |||||||||
PetroKazakhstan is pleased to announce its financial results for the second quarter of 2004 achieving $122.0 million of net income and $141.6 million of cash flow. This represents basic net income per share of $1.54 and basic cash flow per share of $1.78 for the quarter. The comparable figures for the quarter ended June 30, 2003 were $0.88 basic net income per share and $1.17 basic cash flow per share.
For the six months ended June 30, 2004 net income was $209.5 million and cash flow was $256.2 million. This represented basic net income per share of $2.64 and basic cash flow per share of $3.23. The comparable figures for the six months ended June 30, 2003, were net income per share of $1.74 and basic cash flow per share of $2.29.
Substantial Issuer Bid
The Company’s substantial issuer bid share tender, which ended on July 19, 2004, has resulted in the repurchase of 3,999,975 shares at C$ 40.00 per share. After giving effect to the repurchase and cancellation of the repurchased shares, the Company will have 76,597,191 shares outstanding.
| 1 | ||
UPSTREAM OPERATIONS REVIEW
Production
During the second quarter of 2004, PetroKazakhstan’s production volumes totaled 13.75 million barrels or an average of 151,104 barrels of oil per day (“bopd”) representing an increase of 4.2% over the second quarter 2003 average production of 145,066 bopd and a 5.7% increase over the first quarter of 2004 average production rates of 142,919 bopd. Kumkol South production has gradually increased in the quarter as all but one of the 19 wells shut in late in 2004 were brought back on line. A resolution has been agreed with the neighbouring license holder Turgai Petroleum and the Government authorities on mutually acceptable operating conditions of wells located at the border between Kumkol South and Kumkol North.
New development wells in Kumkol North and the KAM fields have also contributed to the increase in production.
Field Developments
Five production wells were drilled in the Kyzylkiya field and the neighbouring Kolzhan license to the north this quarter bringing the total number of wells drilled this year to nine. Of particular interest are wells Kyzylkiya-26 (drilled in the first quarter of 2004) and 34, which have been tested at rates of 1,600 bopd and 1,050 respectively and have confirmed an extension of the main field to the north. Four more development wells should be drilled by the end of the year.
Maibulak wells continue to perform at higher rates following the successful fracture stimulation. Maibulak-01 for example was produced at 910 bopd a 550% increase over previously recorded rates. Water injection facilities for reservoir pressure maintenance with a total injection capacity of 7,000 barrels of water a day (“bwpd”) were commissioned and are in operation.
The Aryskum drilling campaign commenced with 3 wells completed in the second quarter of 2004. Up to thirteen more wells will be drilled in the second half of the year one of which will be a horizontal well for enhanced production and reserves exploitation.
A gas injection system for the Aryskum field development has been commissioned and is operational. This is the first stage of the facilities that will eventually enable complete re-injection of Aryskum produced gas to minimize flaring and contribute to pressure maintenance of the reservoir.
Work has commenced on the upgrade of the Akshabulak processing facilities that will enable production rates to increase to over 60,000 bopd (30,000 bopd net) by mid 2005. In addition, a water injection system has been commissioned to stabilize reservoir pressure and allow increased production off-take.
Development of and production from the East Kumkol field is expected to recommence in the third quarter of 2004, subject to regulatory approvals.
Exploration and Appraisal
A total of 215 square kilometres (“km2”) of 3D seismic was acquired over the northern and southern areas of the Kyzylkiya field along with 300 kilometres (“kms”) of 2D seismic over the eastern half of the Kolzhan license to the northeast. This information will enable selection of appraisal/exploration well locations to prove up further reservoir extensions and possible satellite accumulations of the Kyzylkiya field within the recently acquired Kolzhan license.
Further enhanced seismic interpretation of the North Nurali field is close to completion. This will enable the selection of two follow-on appraisal wells which should be drilled before year-end. Temporary single well
| 2 | ||
production units have been installed at two wells enabling extended testing for reservoir delineation purposes with combined rates of up to 1,800 bopd.
A well drilled to 4,244 metres (“m”) within the Aryskum license area encountered hydrocarbon bearing sands. In the lower sections, the sands were tight and not tested. In the upper well section several zones are still being evaluated to determine possible hydrocarbon potential.
PetroKazakhstan is now the operator and 75% equity partner of the License 951-D which covers two blocks (the Doshan block and the Zhamansu block) in the South Turgai Basin over a total area of 4,290 km2. 600 kms of 2D seismic data has been acquired over the two blocks. An exploration well was drilled to 2,350 m in the northern Doshan block south of the Aryskum field. Despite encountering oil shows whilst drilling and the presence of unusually thick reservoir intervals, the well failed to encounter hydrocarbons within the main reservoir units. The existing D-3 well within the Doshan Block has been put back on test at low rates – currently around 100 bopd. This well is being considered for future fracture stimulation. At least two wells are planned in the southern Zhamansu block later in 2004.
Exploitation of Gas Resources
Following the completion of the 55 megawatt power plant in Kumkol, which exploits part of the gas previously flared from Kumkol South, South Kumkol and Kumkol North reservoirs, PetroKazakhstan continues to assess additional methods to increase gas utilization.
Evaluation has commenced on the feasibility of gas usage for miscible hydrocarbon injection for enhanced oil recovery. A pilot project is being designed for one of the Kumkol fields. In parallel, assessment is being made of a Liquefied Petroleum Gas (“LPG”) facility in Kumkol.
PetroKazakhstan, as a 50% partner in the Kazgermunai Joint Venture, is also participating in Kazgermunai’s LPG extraction plant for the Akshabulak field. The 30 million standard cubic feet per day (“mmscfd”) plant will provide 2,900 bopd of LPG and 600 bopd of condensate. Facilities design has commenced and long lead item orders placed. Civil works including road and site grading have also commenced and piling and transportation contracts have been awarded. The dry gas will be provided to the city of Kyzylorda through a pipeline to be constructed by KazTransGaz.
DOWNSTREAM MARKETING, TRANSPORTATION AND REFINING
Crude Oil Logistics
The volume of crude oil exported during the second quarter of 2004 was 6.99 mmbbls (902.3 thousand tonnes) representing a decrease of approximately 3% compared to the second quarter of 2003 and an 11% decline as compared to the first quarter of 2004. This performance reflects the operational problems with the Atasu pipeline and terminal, which occurred mid February 2004 and were finally resolved mid May 2004 together with a limitation on export quotas issued by the Ministry of Energy and Mineral Resources (“MEMR”) in Kazakhstan. The volume accounted for by our Dzhusaly terminal continued to grow reaching 78% of all shipments during the second quarter as compared to 70% during the first quarter. Our Dzhusaly terminal came into operation at the end of the second quarter in 2003 and therefore accounted for less than 1% of the shipments during the same period in 2003.
Deliveries to China during the second quarter of 2004 represented 83% of the equivalent shipments during the first quarter and 74% of the volumes shipped during the same quarter in 2003. Again, this performance reflects a combination of the operational issues surrounding the Atasu pipeline and terminal and the export quotas issued by MEMR.
| 3 | ||
Deliveries via the CPC pipeline continued to grow and were up by 5% compared to the first quarter of 2004. There are no comparative numbers for 2003 as deliveries via CPC did not commence until September of that year.
Shipments to the Tehran refinery under our swap contract continued to grow albeit at a slower rate than anticipated due to the export quota restrictions imposed by MEMR during April and May. The facilities are now in place to handle the maximum contractual volumes and, in the absence of any further export quota restrictions, the maximum volumes will be achieved during the third quarter of 2004.
Crude Oil Prices and Transportation Differentials
International crude oil prices remained high with an extremely high volatility. The average of the daily mean of the Platts quotations for Brent was $35.32 per barrel in the second quarter as compared to $26.03 per barrel in the same period of 2003. The spread of the mean of the daily quotations in the second quarter of 2004 was much higher than that seen during the first quarter registering $8.44 per barrel and $5.85 respectively. The highest mean of the daily quotations seen during the second quarter was $39.36 as compared to $34.97 during the first quarter.
Net returns measured fully costed at the Kumkol field gate continued to improve on the back of an improved combination of transportation routes, better pricing received from our customers, and better world market prices.
Refining and Refined Product Sales
The volumes of refined products processed at our refinery were 7.7 mmbbls and were marginally higher in the second quarter of 2004 than in the first quarter when volumes processed stood at 7.1 mmbbls. The equivalent figure in 2003 was 7.5 mmbbls. However, refined product sales volumes were significantly higher in the second quarter of 2004 than had been in the first quarter of 2004. Though average prices of key product fell in the quarter the change in mix of sales to the higher value products caused an increase in refined product revenue.
Following the resolution with the customs authorities of the classification of Vacuum Gasoil (VGO) as distinct from diesel, the Vacuum Distillation Unit was restarted during the second quarter. The first export sales of VGO were successfully made via the port of Tallinn in Estonia and to China. The production of VGO has had a positive effect on weighted average refined product prices.
Refined product exports to neighbouring countries were further developed and in most cases we are now selling either direct to end users or at the border station of the receiving country. As a consequence we are beginning to see improved prices on exports of refined products.
MANAGEMENT DISCUSSION AND ANALYSIS (“MD&A”)
A full MD&A of the Second Quarter of 2004 is available on the Company’s website and can also be obtained on application from the Company.
PetroKazakhstan Inc. is a vertically integrated, international energy company, celebrating its seventh year of operations in the Republic of Kazakhstan. It is engaged in the acquisition, exploration, development and production of oil and gas, refining of oil and the sale of oil and refined products.
PetroKazakhstan shares trade on the New York Stock Exchange, The Toronto Stock Exchange, the London Stock Exchange, and the Frankfurt exchange under the worldwide symbol PKZ. The Company’s website can be accessed atwww.petrokazakhstan.com.
The Toronto Stock Exchange has neither approved nor disapproved the information contained herein.
| 4 | ||
For further information please contact:
Nicholas H. Gay Senior Vice President Finance and CFO +44 (1753) 410-020 +44 77-48-633-226 (cell) | Ihor P. Wasylkiw Vice President Investor Relations +1 (403) 221-8658 +1 (403) 383-2234 (cell) | Jeffrey D. Auld Manager Investor Relations-Europe + 44 (1753) 410-020 + 44 79-00-891-538 (cell) |
This news release contains statements that constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those in the forward-looking statements as a result of various factors. You are referred to our Annual Report on Form 20-F and our other filings with the U.S. Securities and Exchange Commission and the Canadian securities commissions for a discussion of the various factors that may affect our future performance and other important risk factors concerning us and our operations.
| 5 | ||
INTERIM CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT PER SHARE AMOUNTS)
UNAUDITED
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||
2004 | 2003 | 2004 | 2003 | ||||||||||
REVENUE | |||||||||||||
| Crude oil | 206,086 | 134,175 | 413,564 | 276,417 | |||||||||
| Refined products | 189,116 | 119,459 | 300,008 | 222,414 | |||||||||
| Service fees | 3,904 | 460 | 6,572 | 3,327 | |||||||||
| Interest income | 797 | 507 | 1,240 | 1,366 | |||||||||
| 399,903 | 254,601 | 721,384 | 503,524 | ||||||||||
EXPENSES | |||||||||||||
| Production | 25,669 | 16,893 | 47,116 | 34,149 | |||||||||
| Royalties and taxes | 25,543 | 17,617 | 45,924 | 29,420 | |||||||||
| Transportation | 51,230 | 60,269 | 115,309 | 115,272 | |||||||||
| Refining | 5,494 | 5,452 | 9,402 | 8,804 | |||||||||
| Crude oil and refined product purchases | 32,409 | 16,046 | 65,965 | 25,416 | |||||||||
| Selling | 9,206 | 7,358 | 17,663 | 12,829 | |||||||||
| General and administrative | 15,664 | 10,556 | 28,907 | 23,533 | |||||||||
| Interest and financing costs | 6,082 | 7,380 | 13,485 | 22,152 | |||||||||
| Depletion and depreciation | 26,998 | 18,857 | 48,331 | 36,485 | |||||||||
| Foreign exchange gain | (1,111 | ) | (3,428 | ) | (5,795 | ) | (5,526 | ) | |||||
| 197,184 | 157,000 | 386,307 | 302,534 | ||||||||||
| INCOME BEFORE INCOME TAXES | 202,719 | 97,601 | 335,077 | 200,990 | |||||||||
| INCOME TAXES (Note 9) | |||||||||||||
| Current provision | 89,643 | 27,080 | 135,002 | 63,252 | |||||||||
| Future income tax | (9,651 | ) | 1,470 | (10,785 | ) | (515 | ) | ||||||
| 79,992 | 28,550 | 124,217 | 62,737 | ||||||||||
NET INCOME BEFORE NON-CONTROLLING INTEREST | 122,727 | 69,051 | 210,860 | 138,253 | |||||||||
| NON-CONTROLLING INTEREST | 699 | 621 | 1,347 | 1,271 | |||||||||
NET INCOME | 122,028 | 68,430 | 209,513 | 136,982 | |||||||||
| RETAINED EARNINGS, BEGINNING OF PERIOD | 466,295 | 140,903 | 378,819 | 73,151 | |||||||||
| Normal course issuer bid | - | (10,440 | ) | - | (11,232 | ) | |||||||
| Common share dividends | (17,706 | ) | - | (17,706 | ) | - | |||||||
| Preferred share dividends | (8 | ) | (8 | ) | (17 | ) | (16 | ) | |||||
RETAINED EARNINGS, END OF PERIOD | 570,609 | 198,885 | 570,609 | 198,885 | |||||||||
| BASIC NET INCOME PER SHARE (Note 10) | 1.54 | 0.88 | 2.64 | 1.74 | |||||||||
| DILUTED NET INCOME PER SHARE (Note 10) | 1.51 | 0.84 | 2.60 | 1.68 | |||||||||
See accompanying notes to the interim consolidated financial statements.
| 6 | ||
INTERIM CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
UNAUDITED
As at | As at | ||||||
June 30, | December 31, | ||||||
2004 | 2003 | ||||||
ASSETS | |||||||
| CURRENT | |||||||
| Cash | 322,350 | 184,660 | |||||
| Accounts receivable | 169,330 | 150,293 | |||||
| Inventory | 39,298 | 36,920 | |||||
| Prepaid expenses | 37,282 | 44,901 | |||||
| Current portion of future income tax asset | 23,252 | 14,697 | |||||
| 591,512 | 431,471 | ||||||
| Deferred charges | 6,619 | 6,729 | |||||
| Restricted cash (Note 5) | 47,028 | 35,468 | |||||
| Future income tax asset | 25,307 | 25,466 | |||||
| Property, plant and equipment | 557,449 | 542,317 | |||||
TOTAL ASSETS | 1,227,915 | 1,041,451 | |||||
LIABILITIES | |||||||
| CURRENT | |||||||
| Accounts payable and accrued liabilities | 147,997 | 88,422 | |||||
| Short-term debt (Note 6) | 42,654 | 73,225 | |||||
| Prepayments for crude oil and refined products | 17,439 | 6,652 | |||||
| 208,090 | 168,299 | ||||||
| Long-term debt (Note 7) | 195,097 | 246,655 | |||||
| Asset retirement obligations (Note 2) | 29,842 | 28,625 | |||||
| Future income tax liability | 10,623 | 13,012 | |||||
| 443,652 | 456,591 | ||||||
| Non-controlling interest | 14,438 | 13,091 | |||||
| Preferred shares of subsidiary | 80 | 80 | |||||
COMMITMENTS AND CONTINGENCIES (Note 13) | |||||||
SHAREHOLDERS’ EQUITY | |||||||
| Share capital (Note 8) | 195,867 | 191,695 | |||||
| Contributed surplus | 3,269 | 1,175 | |||||
| Retained earnings | 570,609 | 378,819 | |||||
| 769,745 | 571,689 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | 1,227,915 | 1,041,451 | |||||
See accompanying notes to the interim consolidated financial statements.
| 7 | ||
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOW
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
UNAUDITED
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||
2004 |
|
| 2003 |
|
| 2004 |
|
| 2003 | ||||
OPERATING ACTIVITIES | |||||||||||||
| Net income | 122,028 | 68,430 | 209,513 | 136,982 | |||||||||
| Items not affecting cash: | |||||||||||||
Depletion and depreciation | 26,998 | 18,857 | 48,331 | 36,485 | |||||||||
Amortization of deferred charges | 396 | 359 | 783 | 3,052 | |||||||||
Non-controlling interest | 699 | 621 | 1,347 | 1,271 | |||||||||
Other non-cash charges | 1,082 | 1,283 | 7,044 | 2,618 | |||||||||
Future income tax | (9,651 | ) | 1,470 | (10,785 | ) | (515 | ) | ||||||
| Cash flow | 141,552 | 91,020 | 256,233 | 179,893 | |||||||||
| Changes in non-cash operating working capital items | 63,774 | (58,272 | ) | 44,214 | (42,368 | ) | |||||||
| Cash flow from operating activities | 205,326 | 32,748 | 300,447 | 137,525 | |||||||||
FINANCING ACTIVITIES | |||||||||||||
Short-term debt | - | (33,827 | ) | (24,494 | ) | 16,675 | |||||||
Common share dividends | (8,829 | ) | - | (8,829 | ) | - | |||||||
Purchase of common shares | - | (13,816 | ) | - | (14,847 | ) | |||||||
Long-term debt | (42,392 | ) | 34,698 | (58,325 | ) | 98,808 | |||||||
Deferred charges paid | (650 | ) | (1,150 | ) | (650 | ) | (3,601 | ) | |||||
Proceeds from issue of share capital, net of share issuance costs | 596 | 20 | 4,172 | 470 | |||||||||
Preferred share dividends | (8 | ) | (8 | ) | (17 | ) | (16 | ) | |||||
Cash flow (used in) from financing activities | (51,283 | ) | (14,083 | ) | (88,143 | ) | 97,489 | ||||||
INVESTING ACTIVITIES | |||||||||||||
Restricted cash | (10,160 | ) | - | (11,560 | ) | - | |||||||
Capital expenditures | (28,018 | ) | (38,364 | ) | (63,054 | ) | (85,464 | ) | |||||
Purchase of preferred shares of subsidiary | - | (2 | ) | - | (4 | ) | |||||||
Cash flow used in investing activities | (38,178 | ) | (38,366 | ) | (74,614 | ) | (85,468 | ) | |||||
INCREASE / (DECREASE) IN CASH | 115,865 | (19,701 | ) | 137,690 | 149,546 | ||||||||
CASH, BEGINNING OF PERIOD | 206,485 | 244,043 | 184,660 | 74,796 | |||||||||
CASH, END OF PERIOD | 322,350 | 224,342 | 322,350 | 224,342 | |||||||||
See accompanying notes to the interim consolidated financial statements.
| 8 | ||
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, TABULAR AMOUNTS IN THOUSANDS OF DOLLARS,
UNLESS OTHERWISE INDICATED)
UNAUDITED
| 1 | SIGNIFICANT ACCOUNTING POLICIES |
| The interim consolidated financial statements of PetroKazakhstan Inc. (“PetroKazakhstan” or the “Corporation”) have been prepared by management in accordance with generally accepted accounting principles in Canada. Its main operating subsidiaries are PetroKazakhstan Kumkol Resources ("PKKR") and PetroKazakhstan Oil Products ("PKOP"). Certain information and disclosures normally required to be included in the notes to the annual financial statements have been omitted or condensed. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto in PetroKazakhstan’s Annual Report for the year ended December 31, 2003. The accounting principles applied are consistent with those as set out in the Corporation’s annual financial statements for the year ended December 31, 2003, except for the changes in accounting standards as described in Note 2. | |
| The presentation of certain amounts for previous periods has been changed to conform with the presentation adopted for the current period. | |
| 2 | ACCOUNTING CHANGES |
| Asset Retirement Obligations | |
| Effective January 1, 2004, the Corporation adopted the new recommendation of the Canadian Institute of Chartered Accountants (“CICA”) regarding asset retirement obligations. This new standard changes the method of estimating and accounting for future site restoration costs. Total estimated asset retirement obligations are discounted to estimate the fair value of the obligation and recorded as a liability when the related assets are constructed and commissioned. The fair value increases the value of property, plant and equipment and is depleted over the life of the asset. Accretion expense, resulting from the changes in the present value of the liability due to the passage of time is recorded as part of interest and financing costs. | |
| Estimated cash flows are discounted at 8.5%. The total undiscounted estimated cash flows required to settle the obligations is $73.0 million with the expenditures being incurred over ten years commencing in 2014. | |
| The new standard has been applied retroactively, and the financial statements of prior periods have been restated. |
| 9 | ||
| Adoption of the new standard of accounting for asset retirement obligations resulted in the following changes in the consolidated balance sheet and statement of income and retained earnings. | |
| Changes in consolidated balance sheets: | |
| Increase / (decrease) |
As at | As at | ||||||
June 30, | December 31, | ||||||
2004 | 2003 | ||||||
| Future income tax asset | 510 | 651 | |||||
| Property, plant and equipment | 14,819 | 15,181 | |||||
| Total assets | 15,329 | 15,832 | |||||
| Asset retirement obligations | 21,780 | 22,058 | |||||
| Retained earnings | (6,451 | ) | (6,226 | ) | |||
| Total liabilities and shareholders' equity | 15,329 | 15,832 | |||||
| Changes in consolidated statements of income and retained earnings for the three monthsended June 30, 2004 and 2003: | |
| Increase / (decrease) |
Three months ended June 30 | |||||||
2004 | 2003 | ||||||
| Interest and financing costs | 609 | 513 | |||||
| Depletion and depreciation | (571 | ) | (930 | ) | |||
| Income before income taxes | (38 | ) | 417 | ||||
| Income taxes | 72 | 198 | |||||
| Net income | (110 | ) | 219 | ||||
| Basic net income per share | - | - | |||||
| Diluted net income per share | - | - | |||||
| Changes in consolidated statements of income and retained earnings for the six months ended June 30, 2004 and 2003: | |
| Increase / (decrease) |
Six months ended June 30 | |||||||
2004 | 2003 | ||||||
| Interest and financing costs | 1,217 | 1,026 | |||||
| Depletion and depreciation | (1,133 | ) | (2,016 | ) | |||
| Income before income taxes | (84 | ) | 990 | ||||
| Income taxes | 141 | 443 | |||||
| Net income | (225 | ) | 547 | ||||
| Basic net income per share | - | 0.01 | |||||
| Diluted net income per share | - | 0.01 | |||||
| 10 | ||
The change in asset retirement obligations is as follows:
| Asset retirement obligations liability as at January 1, 2003 | 22,831 | |||
| Revisions | 3,670 | |||
| Accretion expense | 2,124 | |||
| Settlements | - | |||
| Asset retirement obligations liability as at January 1, 2004 | 28,625 | |||
| Revisions | - | |||
| Accretion expense | 1,217 | |||
| Settlements | - | |||
| Asset retirement obligations liability as at June 30, 2004 | 29,842 | |||
Full Cost Accounting
In September 2003 the CICA issued Accounting Guideline 16 "Oil and Gas Accounting - Full Cost" ("AcG 16"), which replaced Accounting Guideline 5 "Full Cost Accounting in the Oil and Gas Industry" ("AcG 5"). The most significant change between AcG 16 and AcG 5 is that under AcG 16 the carrying value of oil and gas properties should not exceed their fair value. The fair value is equal to estimated future cash flows from proved and probable reserves using future price forecasts and costs discounted at a risk-free rate. This differs from the cost recovery ceiling test under AcG 5 that used undiscounted cash flows, and constant prices, less general and administrative, financing costs and taxes. The Corporation adopted AcG 16 effective January 1, 2004 and as at June 30, 2004 there were no indications of impairment.
Depletion of Property, Plant and Equipment
Effective January 1, 2004 PetroKazakhstan commenced using proved reserves to calculate depletion. Previously, the Corporation used proved developed reserves. The impact on the three and six month periods ended June 30, 2004 was a decrease in depletion expense of $0.5 million and $0.7 million, respectively.
Proved developed reserves were previously used to calculate depletion because this resulted in a more representative charge to earnings.
Impairment of Long-Lived Assets
Effective January 1, 2004, the Corporation adopted the new recommendation of the CICA issued in December 2002 on impairment of long-lived assets. This recommendation provides guidance on the recognition, measurement and disclosure of impairment of long-lived assets. There is a requirement to recognize an impairment loss for a long-lived asset when its carrying amount exceeds the sum of the undiscounted cash flows expected from its use and eventual disposition. The impairment loss is measured as the amount by which carrying amount of the asset exceeds its fair value. As at June 30, 2004 there were no indications of impairment of long-lived assets.
| 11 | ||
| Hedge Accounting | ||
| Effective January 1, 2004, the Corporation adopted Accounting Guideline 13 "Hedging Relationships" (AcG 13"). AcG 13 provides guidance regarding the identification, designation, documentation and effectiveness of hedging relationships for the purposes of applying hedge accounting. This guideline establishes certain conditions for when hedge accounting may be applied. The Corporation has applied hedge accounting for the financial instruments disclosed in Note 11. | ||
| 3 | SEGMENTED INFORMATION | |
| On a primary basis the business segments are: | ||
| l | Upstream comprising the exploration, development and production of crude oil and natural gas. | |
| l | Downstream comprising refining and the marketing and transportation of refined products and the management of the marketing and transportation of crude oil. | |
| Upstream results include revenue from crude oil sales to Downstream, reflected as crude oil purchases in Downstream, as this presentation properly reflects segment results. This revenue is eliminated on consolidation. | ||
| 12 | ||
Three months ended June 30, 2004
Upstream | Downstream | Corporate | Eliminations | Consolidated | ||||||||||||
| REVENUE | ||||||||||||||||
| Crude oil | 221,765 | - | - | (15,679 | ) | 206,086 | ||||||||||
| Refined products | 61,937 | 144,694 | - | (17,515 | ) | 189,116 | ||||||||||
| Service fees | 2,167 | 1,589 | 148 | - | 3,904 | |||||||||||
| Interest income | 211 | 190 | 396 | - | 797 | |||||||||||
| 286,080 | 146,473 | 544 | (33,194 | ) | 399,903 | |||||||||||
| EXPENSES | ||||||||||||||||
| Production | 25,669 | - | - | - | 25,669 | |||||||||||
| Royalties and taxes | 25,206 | 337 | - | - | 25,543 | |||||||||||
| Transportation | 51,230 | - | - | - | 51,230 | |||||||||||
| Refining | - | 5,494 | - | - | 5,494 | |||||||||||
| Crude oil and refined product purchases | 31,542 | 34,061 | - | (33,194 | ) | 32,409 | ||||||||||
| Selling | 4,109 | 5,097 | - | - | 9,206 | |||||||||||
| General and administrative | 7,917 | 3,467 | 4,280 | - | 15,664 | |||||||||||
| Interest and financing costs | 6,082 | - | - | - | 6,082 | |||||||||||
| Depletion and depreciation | 21,638 | 5,046 | 314 | - | 26,998 | |||||||||||
| Foreign exchange loss (gain) | (55 | ) | (1,894 | ) | 838 | - | (1,111 | ) | ||||||||
| 173,338 | 51,608 | 5,432 | (33,194 | ) | 197,184 | |||||||||||
| INCOME (LOSS) BEFORE INCOME TAXES | 112,742 | 94,865 | (4,888 | ) | - | 202,719 | ||||||||||
| INCOME TAXES | ||||||||||||||||
| Current provision | 58,562 | 29,967 | 1,114 | - | 89,643 | |||||||||||
| Future income tax | (13,574 | ) | 3,923 | - | - | (9,651 | ) | |||||||||
| 44,988 | 33,890 | 1,114 | - | 79,992 | ||||||||||||
| NON-CONTROLLING INTEREST | - | 699 | - | - | 699 | |||||||||||
| NET INCOME (LOSS) | 67,754 | 60,276 | (6,002 | ) | - | 122,028 | ||||||||||
Eliminations are intersegment revenue.
Three months ended June 30, 2004 | Export | Domestic | Consolidated | |||||||
| Crude oil | 194,437 | 11,649 | 206,086 | |||||||
| Refined products | 62,403 | 126,713 | 189,116 |
As at June 30, 2004 | Upstream | Downstream | Corporate | Consolidated | |||||||||
| Total assets | 831,552 | 181,124 | 215,239 | 1,227,915 | |||||||||
| Total liabilities | 394,345 | 49,336 | 14,489 | 458,170 | |||||||||
| Capital expenditures in the quarter | 24,488 | 2,441 | 362 | 27,291 |
| 13 | ||
Three months ended June 30, 2003
Upstream | Downstream | Corporate | Eliminations | Consolidated | ||||||||||||
| REVENUE | ||||||||||||||||
| Crude oil | 169,134 | - | - | (34,959 | ) | 134,175 | ||||||||||
| Refined products | 13,866 | 113,002 | - | (7,409 | ) | 119,459 | ||||||||||
| Service fees | 198 | 245 | 17 | - | 460 | |||||||||||
| Interest income | - | 111 | 396 | - | 507 | |||||||||||
| 183,198 | 113,358 | 413 | (42,368 | ) | 254,601 | |||||||||||
| EXPENSES | ||||||||||||||||
| Production | 16,893 | - | - | - | 16,893 | |||||||||||
| Royalties and taxes | 16,918 | 699 | - | - | 17,617 | |||||||||||
| Transportation | 60,244 | 25 | - | - | 60,269 | |||||||||||
| Refining | - | 5,452 | - | - | 5,452 | |||||||||||
| Crude oil and refined product purchases | 8,808 | 49,606 | - | (42,368 | ) | 16,046 | ||||||||||
| Selling | 2,490 | 4,868 | - | - | 7,358 | |||||||||||
| General and administrative | 7,333 | 2,723 | 500 | - | 10,556 | |||||||||||
| Interest and financing costs | 6,640 | 695 | 45 | - | 7,380 | |||||||||||
| Depletion and depreciation | 14,174 | 4,651 | 32 | - | 18,857 | |||||||||||
| Foreign exchange (gain) loss | (2,294 | ) | (1,484 | ) | 350 | - | (3,428 | ) | ||||||||
| 131,206 | 67,235 | 927 | (42,368 | ) | 157,000 | |||||||||||
| INCOME (LOSS) BEFORE INCOME TAXES | 51,992 | 46,123 | (514 | ) | - | 97,601 | ||||||||||
| INCOME TAXES | ||||||||||||||||
| Current provision | 14,879 | 12,305 | (104 | ) | - | 27,080 | ||||||||||
| Future income tax | 478 | 992 | - | - | 1,470 | |||||||||||
| 15,357 | 13,297 | (104 | ) | 28,550 | ||||||||||||
| NON-CONTROLLING INTEREST | - | 621 | - | - | 621 | |||||||||||
| NET INCOME (LOSS) | 36,635 | 32,205 | (410 | ) | - | 68,430 | ||||||||||
Eliminations are intersegment revenue.
Three months ended June 30, 2003 | Export | Domestic | Consolidated | |||||||
| Crude oil | 134,175 | - | 134,175 | |||||||
| Refined products | 27,034 | 92,425 | 119,459 |
As at June 30, 2003 | Upstream | Downstream | Corporate | Consolidated | |||||||||
| Total assets | 602,385 | 179,373 | 151,272 | 933,030 | |||||||||
| Total liabilities | 469,454 | 55,018 | 6,993 | 531,465 | |||||||||
| Capital expenditures in the quarter | 32,853 | 3,658 | 183 | 36,694 |
| 14 | ||
Six months ended June 30, 2004
Upstream | Downstream | Corporate | Eliminations | Consolidated | ||||||||||||
| REVENUE | ||||||||||||||||
| Crude oil | 445,901 | - | - | (32,337 | ) | 413,564 | ||||||||||
| Refined products | 92,801 | 236,668 | - | (29,461 | ) | 300,008 | ||||||||||
| Service fees | 4,584 | 1,769 | 219 | - | 6,572 | |||||||||||
| Interest income | 343 | 224 | 673 | - | 1,240 | |||||||||||
| 543,629 | 238,661 | 892 | (61,798 | ) | 721,384 | |||||||||||
| EXPENSES | ||||||||||||||||
| Production | 47,116 | - | - | - | 47,116 | |||||||||||
| Royalties and taxes | 41,716 | 4,208 | - | - | 45,924 | |||||||||||
| Transportation | 115,309 | - | - | - | 115,309 | |||||||||||
| Refining | - | 9,402 | - | - | 9,402 | |||||||||||
| Crude oil and refined product purchases | 66,522 | 61,241 | - | (61,798 | ) | 65,965 | ||||||||||
| Selling | 8,234 | 9,429 | - | - | 17,663 | |||||||||||
| General and administrative | 15,260 | 6,831 | 6,816 | - | 28,907 | |||||||||||
| Interest and financing costs | 13,016 | 469 | - | - | 13,485 | |||||||||||
| Depletion and depreciation | 37,791 | 9,915 | 625 | - | 48,331 | |||||||||||
| Foreign exchange loss (gain) | (1,364 | ) | (5,723 | ) | 1,292 | - | (5,795 | ) | ||||||||
| 343,600 | 95,772 | 8,733 | (61,798 | ) | 386,307 | |||||||||||
| INCOME (LOSS) BEFORE INCOME TAXES | 200,029 | 142,889 | (7,841 | ) | - | 335,077 | ||||||||||
| INCOME TAXES | ||||||||||||||||
| Current provision | 85,722 | 46,598 | 2,682 | - | 135,002 | |||||||||||
| Future income tax | (11,569 | ) | 784 | - | - | (10,785 | ) | |||||||||
| 74,153 | 47,382 | 2,682 | - | 124,217 | ||||||||||||
| NON-CONTROLLING INTEREST | - | 1,347 | - | - | 1,347 | |||||||||||
| NET INCOME (LOSS) | 125,876 | 94,160 | (10,523 | ) | - | 209,513 | ||||||||||
Eliminations are intersegment revenue.
Six months ended June 30, 2004 | Export | Domestic | Consolidated | |||||||
| Crude oil | 384,771 | 28,793 | 413,564 | |||||||
| Refined products | 94,795 | 205,213 | 300,008 |
As at June 30, 2004 | Upstream | Downstream | Corporate | Consolidated | |||||||||
| Total assets | 831,552 | 181,124 | 215,239 | 1,227,915 | |||||||||
| Total liabilities | 394,345 | 49,336 | 14,489 | 458,170 | |||||||||
| Capital expenditures in the half year | 60,086 | 5,686 | 644 | 66,416 |
| 15 | ||
Six months ended June 30, 2003
Upstream | Downstream | Corporate | Eliminations | Consolidated | ||||||||||||
| REVENUE | ||||||||||||||||
| Crude oil | 345,593 | - | - | (69,176 | ) | 276,417 | ||||||||||
| Refined products | 14,536 | 216,691 | - | (8,813 | ) | 222,414 | ||||||||||
| Services fees | 2,210 | 1,092 | 25 | - | 3,327 | |||||||||||
| Interest income | 509 | 153 | 704 | - | 1,366 | |||||||||||
| 362,848 | 217,936 | 729 | (77,989 | ) | 503,524 | |||||||||||
| EXPENSES | ||||||||||||||||
| Production | 34,149 | - | - | - | 34,149 | |||||||||||
| Royalties and taxes | 26,333 | 3,087 | - | - | 29,420 | |||||||||||
| Transportation | 115,272 | - | - | - | 115,272 | |||||||||||
| Refining | - | 8,804 | - | - | 8,804 | |||||||||||
| Crude oil and refined product purchases | 10,912 | 92,493 | - | (77,989 | ) | 25,416 | ||||||||||
| Selling | 4,507 | 8,322 | - | - | 12,829 | |||||||||||
| General and administrative | 15,121 | 6,889 | 1,523 | - | 23,533 | |||||||||||
| Interest and financing costs | 12,207 | 1,182 | 8,763 | - | 22,152 | |||||||||||
| Depletion and depreciation | 27,106 | 9,321 | 58 | - | 36,485 | |||||||||||
| Foreign exchange (gain) loss | (3,668 | ) | (2,450 | ) | 592 | - | (5,526 | ) | ||||||||
| 241,939 | 127,648 | 10,936 | (77,989 | ) | 302,534 | |||||||||||
| INCOME (LOSS) BEFORE INCOME TAXES | 120,909 | 90,288 | (10,207 | ) | - | 200,990 | ||||||||||
| INCOME TAXES | ||||||||||||||||
| Current provision | 39,048 | 24,076 | 128 | - | 63,252 | |||||||||||
| Future income tax | (1,307 | ) | 792 | - | - | (515 | ) | |||||||||
| 37,741 | 24,868 | 128 | - | 62,737 | ||||||||||||
| NON-CONTROLLING INTEREST | - | 1,271 | - | - | 1,271 | |||||||||||
| NET INCOME (LOSS) | 83,168 | 64,149 | (10,335 | ) | - | 136,982 | ||||||||||
Eliminations are intersegment revenue.
Six months ended June 30, 2003 | Export | Domestic | Consolidated | |||||||
| Crude oil | 276,417 | - | 276,417 | |||||||
| Refined products | 48,903 | 173,511 | 222,414 |
As at June 30, 2003 | Upstream | Downstream | Corporate | Consolidated | |||||||||
| Total assets | 602,385 | 179,373 | 151,272 | 933,030 | |||||||||
| Total liabilities | 469,454 | 55,018 | 6,993 | 531,465 | |||||||||
| Capital expenditures inthe half year | 77,425 | 9,249 | 341 | 87,015 |
| 16 | ||
| 4 | JOINT VENTURES | |
| The Corporation has the following interests in two joint ventures: | ||
| a) | a 50% equity shareholding with equivalent voting power in Turgai Petroleum CJSC (“Turgai”), which operates the northern part of the Kumkol field in Kazakhstan. | |
| b) | a 50% equity shareholding with equivalent voting power in LLP Kazgermunai (“Kazgermunai”), which operates three oil fields in Kazakhstan: Akshabulak, Nurali and Aksai. | |
| The following amounts are included in the Corporation’s consolidated financial statements as a result of the proportionate consolidation of its joint ventures before consolidation eliminations: | ||
Three months ended June 30, 2004 | Turgai | Kazgermunai | Total | |||||||
| Cash | 28,140 | 24,204 | 52,344 | |||||||
| Current assets, excluding cash | 58,609 | 40,169 | 98,778 | |||||||
| Property, plant and equipment, net | 79,769 | 64,437 | 144,206 | |||||||
| Current liabilities | 76,536 | 19,899 | 96,435 | |||||||
| Long-term debt | - | 14,480 | 14,480 | |||||||
| Revenue | 64,873 | 49,019 | 113,892 | |||||||
| Expenses | 37,315 | 31,673 | 68,988 | |||||||
| Net income | 27,558 | 17,346 | 44,904 | |||||||
| Cash flow from operating activities | 11,046 | 22,824 | 33,870 | |||||||
| Cash flow used in financing activities | - | (24,266 | ) | (24,266 | ) | |||||
| Cash flow used in investing activities | (1,585 | ) | (2,363 | ) | (3,948 | ) |
| Revenue for the three months ended June 30, 2004 includes $12.0 million of crude oil sales made by Turgai and $2 million of crude oil sales made by Kazgermunai to Downstream. These amounts were eliminated on consolidation. |
Three months ended June 30, 2003 | Turgai | Kazgermunai | Total | |||||||
| Cash | 13,206 | 14,123 | 27,329 | |||||||
| Current assets, excluding cash | 6,511 | 20,758 | 27,269 | |||||||
| Property, plant and equipment, net | 59,565 | 58,342 | 117,907 | |||||||
| Current liabilities | 26,643 | 6,467 | 33,110 | |||||||
| Long-term debt | - | 46,035 | 46,035 | |||||||
| Revenue | 29,494 | 20,653 | 50,147 | |||||||
| Expenses | 16,469 | 16,052 | 32,521 | |||||||
| Net income | 13,025 | 4,601 | 17,626 | |||||||
| Cash flow from operating activities | 24,255 | 4,930 | 29,185 | |||||||
| Cash flow used in financing activities | - | (6,016 | ) | (6,016 | ) | |||||
| Cash flow used in investing activities | (11,200 | ) | (2,342 | ) | (13,542 | ) |
| Revenue for the three months ended June 30, 2003 includes $10.6 million of crude oil sales made by Turgai to Downstream. This amount was eliminated on consolidation. |
| 17 | ||
Six months ended June 30, 2004 | Turgai | Kazgermunai | Total | |||||||
| Revenue | 124,508 | 87,554 | 212,062 | |||||||
| Expenses | 78,594 | 54,602 | 133,196 | |||||||
| Net income | 45,914 | 32,952 | 78,866 | |||||||
| Cash flow from operating activities | 22,306 | 42,604 | 64,910 | |||||||
| Cash flow used in financing activities | - | (24,266 | ) | (24,266 | ) | |||||
| Cash flow used in investing activities | (2,534 | ) | (4,566 | ) | (7,100 | ) | ||||
| Revenue for the six months ended June 30, 2004 includes $22.3 million of crude oil sales made by Turgai and $2.0 million of crude oil sales made by Kazgermunai to Downstream. These amounts were eliminated on consolidation. | ||||||||||
Six months ended June 30, 2003 | Turgai | Kazgermunai | Total | |||||||
| Revenue | 59,710 | 42,787 | 102,497 | |||||||
| Expenses | 39,028 | 28,741 | 67,769 | |||||||
| Net income | 20,682 | 14,046 | 34,728 | |||||||
| Cash flow from operating activities | 34,314 | 17,693 | 52,007 | |||||||
| Cash flow used in financing activities | - | (6,016 | ) | (6,016 | ) | |||||
| Cash flow used in investing activities | (21,416 | ) | (6,251 | ) | (27,667 | ) |
| Revenue for the six months ended June 30, 2003 includes $18.7 million of crude oil sales made by Turgai to Downstream. This amount was eliminated on consolidation. | |
| 5 | RESTRICTED CASH |
| Restricted cash includes $10.5 million of cash dedicated to a debt service reserve account for the Corporation's Term Facility ($10.5 as at December 31, 2003). This cash is not available for general corporate purposes until the Term Facility is repaid in full. | |
| Restricted cash as at June 30, 2004 includes $36.5 million of cash dedicated to a margin account for the Corporation’s hedging program ($25.0 million as at December 31, 2003). |
| 18 | ||
| 6 | SHORT-TERM DEBT |
June 30, | December 31, | ||||||
2004 | 2003 | ||||||
| Current portion of term facility | 29,615 | 35,692 | |||||
| Current portion of term loans | 2,039 | 2,039 | |||||
| Joint venture loan payable | 11,000 | 11,000 | |||||
| PKOP bonds | - | 24,494 | |||||
| 42,654 | 73,225 | ||||||
| The PKOP bonds were fully redeemed on February 26, 2004. | |
| 7 | LONG-TERM DEBT |
June 30, | December 31, | ||||||
2004 | 2003 | ||||||
| 9.625% bonds | 125,000 | 125,000 | |||||
| Long-term portion of term facility | 44,422 | 71,384 | |||||
| Long-term portion of term loans | 11,195 | 12,528 | |||||
| Kazgermunai debt | 14,480 | 37,743 | |||||
| 195,097 | 246,655 | ||||||
| On June 24, 2004 Kazgermunai repaid $24.3 million of its outstanding subordinated debt. | |
| On May 25, 2004 the Corporation entered into a five and one half year $100.0 million committed credit facility. This facility is unsecured, bears interest at Libor plus 2.65% and is subject to annual review. Certain conditions precedent and final syndication remain to be completed as at June 30, 2004. | |
| Included in deferred charges as at June 30, 2004 is $0.7 million of issue costs relating to the facility, which will be amortized over the term of the facility. | |
| 8 | SHARE CAPITAL |
| Authorized share capital consists of an unlimited number of Class A common shares, and an unlimited number of Class ? redeemable preferred shares, issuable in series. | |
| Issued Class A common shares: |
Three Months Ended | Three Months Ended | ||||||||||||
June 30, 2004 | June 30, 2003 | ||||||||||||
| Number | Amount | Number | Amount | ||||||||||
| Balance, beginning of period | 79,865,009 | 195,271 | 79,028,539 | 193,933 | |||||||||
| Shares repurchased and cancelled pursuant to normal course issuer bid | - | - | (1,379,300 | ) | (3,376 | ) | |||||||
| Stock options exercised for cash | 732,157 | 596 | 3,900 | 20 | |||||||||
| Balance, end of period | 80,597,166 | 195,867 | 77,653,139 | 190,577 | |||||||||
| 19 | ||
Six Months Ended | Six Months Ended | ||||||||||||
June 30, 2004 | June 30, 2003 | ||||||||||||
| Number |
| Amount |
| Number |
| Amount | |||||||
| Balance, beginning of period | 77,920,226 | 191,695 | 78,956,875 | 193,723 | |||||||||
| Shares repurchased and cancelledpursuant to normal course issuer bid | - | - | (1,477,400 | ) | (3,616 | ) | |||||||
| Stock options exercised for cash | 2,648,382 | 4,163 | 170,400 | 467 | |||||||||
| Corresponding convertible securities, converted | 28,558 | 9 | 3,264 | 3 | |||||||||
| Balance, end of period | 80,597,166 | 195,867 | 77,653,139 | 190,577 | |||||||||
| A summary of the status of the Corporation's stock option plan as of June 30, 2004 and the changes during the six months ended June 30, 2004 and the year ended December 31, 2003 are presented below (weighted average exercise price expressed in Canadian dollars): |
|
|
|
| Weighted |
| ||
|
|
|
| Average Exercise |
| ||
|
| Options |
|
| Price | ||
| Outstanding at December 31, 2002 | 4,850,136 | 5.01 | |||||
| Granted | 791,000 | 25.82 | |||||
| Exercised | (440,751 | ) | 3.76 | ||||
| Forfeited | (84,925 | ) | 9.27 | ||||
| Outstanding at December 31, 2003 | 5,115,460 | 8.17 | |||||
| Granted | 60,000 | 31.62 | |||||
| Exercised | (2,676,940 | ) | 2.05 | ||||
| Forfeited | (111,525 | ) | 14.85 | ||||
| Outstanding at June 30, 2004 | 2,386,995 | 15.31 | |||||
| Options exercisable as at: | |||||||
| December 31, 2003 | 2,816,683 | 5.14 | |||||
| June 30, 2004 | 981,342 | 12.05 | |||||
| The pro forma net income per share for the three and six months ended June 30, 2003 and 2004, had we recognized compensation expense using the fair value of common stock options granted for all stock options outstanding prior to January 1, 2003 follows: |
Three Months Ended June 30 | Six Months Ended June 30 | ||||||||||||
2004 | 2003 | 2004 | 2003 | ||||||||||
| Net income | |||||||||||||
As reported | 122,028 | 68,430 | 209,513 | 136,982 | |||||||||
Pro forma | 121,915 | 68,221 | 209,389 | 136,743 | |||||||||
| Basic net income per share | |||||||||||||
As reported | 1.54 | 0.88 | 2.64 | 1.74 | |||||||||
Pro forma | 1.54 | 0.88 | 2.64 | 1.74 | |||||||||
| Diluted net income per share | |||||||||||||
As reported | 1.51 | 0.84 | 2.60 | 1.68 | |||||||||
Pro forma | 1.51 | 0.84 | 2.60 | 1.68 | |||||||||
| 20 | ||
| 9 | INCOME TAXES |
| The provision for income taxes differs from the results, which would have been obtained by applying the statutory tax rate of 30% to the Corporation's income before income taxes. This difference results from the following items: |
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||
2004 | 2003 | 2004 | 2003 | ||||||||||
| Statutory Kazakhstanincome tax rate | 30% | 30% | 30% | 30% | |||||||||
| Expected tax expense | 60,816 | 29,280 | 100,523 | 60,297 | |||||||||
| Effect of higher tax rate in Kazgermunai | 2,138 | - | 1,465 | - | |||||||||
| Excess profit tax provision | 6,833 | - | 9,833 | - | |||||||||
| Other permanent differences, net | 10,205 | (730 | ) | 12,396 | 2,440 | ||||||||
| Income tax expense | 79,992 | 28,550 | 124,217 | 62,737 | |||||||||
| 10 | NET INCOME PER SHARE |
| The net income per share calculations are based on the weighted average and diluted numbers of Class A common shares outstanding during the period as follows: |
Three Months Ended June 30 | Six Months Ended June 30 | ||||||||||||
2004 |
|
| 2003 |
|
| 2004 |
|
| 2003 | ||||
| Weighted average number of common shares outstanding | 79,442,775 | 78,000,877 | 79,257,431 | 78,538,671 | |||||||||
| Dilution from exercisable options(including convertible securities) | 1,278,756 | 3,173,080 | 1,227,461 | 3,138,160 | |||||||||
| Diluted number of shares outstanding | 80,721,531 | 81,173,957 | 80,484,892 | 81,676,831 | |||||||||
| No options were excluded from the calculation of diluted number of shares outstanding for the three months ended June 30, 2004 and 2003, as the market price was in excess of exercise price. | |
| 11 | FINANCIAL INSTRUMENTS |
| The Corporation’s financial instruments include cash, accounts receivable, all current liabilities and long-term debt. The fair value of cash, accounts receivable and current liabilities approximates their carrying amounts due to the short-term maturity of these instruments. The fair value of the Term facility, Kazgermunai debt and the term loans approximates their carrying value as they bear interest at market rates. The fair value of the 9.625% Notes is $130.1 million versus the carrying value of $125.0 million as at June 30, 2004 as determined through reference to the market price. |
| 21 | ||
| The Corporation has entered into a commodity-hedging program where it is utilizing derivative instruments to manage the Corporation’s exposure to fluctuations in the price of crude oil. The Corporation has entered into the following contracts with major financial institutions. |
Contract |
|
|
| Price |
| |||
Amount |
|
|
| Ceiling or |
| |||
(bbls per |
|
| Contract |
| Contracted |
| Price | |
month) |
| Contract Period |
| Type |
| Price |
| Floor |
| 75,000 | January 2004 to December 2004 | Zero cost collar | 28.00 | 17.00 | ||||
| 75,000 | January 2004 to December 2004 | Zero cost collar | 29.00 | 17.00 | ||||
| 75,000 | January 2004 to December 2004 | Zero cost collar | 29.25 | 17.00 | ||||
| 37,500 | January 2004 to December 2004 | Zero cost collar | 29.60 | 17.00 | ||||
| 110,000 | January 2004 to December 2004 | Zero cost collar | 30.20 | 18.00 | ||||
| 120,000 | January 2005 to March 2005 | IPE Future | 26.30-26.52 | |||||
| 40,000 | April 2005 to June 2005 | IPE Future | 25.92 | |||||
| 458,333 | January 2005 to December 2005 | IPE Future | 25.65-25.90 | |||||
| 362,000 | January 2004 to March 2004 | Dated Brent | 29.80-29.82 |
| During the three months ended June 30, 2004, the Corporation has foregone revenue of $6.7 million through these contracts ($12.0 million during the six months ended June 30, 2004). | |
| The unrealized loss under these hedges as at June 30, 2004 is $31.1 million. | |
| 12 | CASH FLOW INFORMATION |
| Interest and income taxes paid: |
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||
2004 | 2003 | 2004 | 2003 | ||||||||||
| Interest paid | 2,205 | 7,363 | 10,702 | 16,832 | |||||||||
| Income taxes paid | 61,701 | 36,050 | 104,114 | 26,292 | |||||||||
| 13 | COMMITMENTS AND CONTINGENCIES |
| Substantial Issuer Bid | |
| The Corporation announced a substantial issuer bid for its class A common shares conducted in the form of a modified “Dutch Auction”. | |
| The bid expired on July 19, 2004, and the Corporation purchased 3,999,975 of common shares at the final purchase price of C$40.00 per share. | |
| If we had excluded these shares from the common and diluted weighted average number of shares in the periods ended June 30, 2004, the pro forma net income per share would be as follows: |
| 22 | ||
|
| Three months |
|
|
| ||
|
| ended |
|
| Six months ended |
| |
|
| June 30, 2004 |
|
| June 30, 2004 | ||
| Net income | |||||||
As reported | 122,028 | 209,513 | |||||
| Basic net income per share | |||||||
As reported | 1.54 | 2.64 | |||||
Pro forma | 1.62 | 2.78 | |||||
| Diluted net income per share | |||||||
As reported | 1.51 | 2.60 | |||||
Pro forma | 1.59 | 2.74 | |||||
Agency for Regulation of Natural Monopolies and Protection of Competition (“ARNM”)
PKOP
The ARNM alleged that PKOP charged prices for refined oil products that in total were $6.3 million in excess of ARNM authorized maximum prices. The Corporation has always taken the position that the ARNM does not have the right to establish prices for PKOP under the terms of the Privatization Agreement relating to the Shymkent refinery, which operates in a highly competitive environment. PKOP initiated legal proceedings to annul the ARNM claim and the court of first instance reduced the ARNM claim to approximately $1.1 million. PKOP and the ARNM appealed this decision to the Supreme Court. The Supreme Court recognized approximately $3.6 million of the ARNM’s original assessment. This amount has been paid and provided for in the financial statements.
PKOP received an additional assessment from ARNM in the amount of $8.8 million for allegedly charging prices for refined products in excess of ARNM authorized maximum prices. PKOP has appealed this assessment and a preliminary hearing has been held. The court hearing is expected to take place during the third quarter. No provision has been made in the accompanying financial statements for this assessment.
PKOP’s position remains that the ARNM does not have the right to establish prices for the refinery, and the Corporation, as the party in interest under the Privatization Agreement for the Shymkent Refinery, has notified the Government of Kazakhstan that it is in breach of provisions of the Privatization Agreement. The Corporation has the right to proceed to international arbitration under the terms of the Privatization Agreement.
Group companies
The ARNM claimed $31.0 million from a group company for allegedly violating Kazakhstan’s competition law. The Corporation initiated legal proceedings and the court of first instance dismissed the ARNM claim. The ARNM appealed this decision, the appellate court upheld the decision of the lower court.
The ARNM claimed approximately $91.4 million from group companies for allegedly violating Kazakhstan’s competition law. The group companies initiated legal action, and at the Astana City Court they were unsuccessful in their challenge of allegations by the ARNM that these companies had violated Kazakhstan competition laws. The judgment upheld the ARNM determination that these distributors had received unjustified revenues totaling approximately $91.4 million. The Corporation appealed this judgment to the Supreme Court. The Supreme Court hearing for the ARNM claim of $91.4 million was held in April 2004 and the Court suspended the case and instructed the parties to
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seek an agreed settlement. During the period from April to May 13, the parties did engage in discussions aimed at a settlement, but were unable to resolve the matter through negotiations. On May 13, 2004 the Supreme Court overturned the lower court decision in favour of the ARNM and sent the case back to the Astana City Court for a new trial. The Prosecutor General (which participates in all civil cases in Kazakhstan and which supported the views of the ARNM at the Supreme Court hearing) has appealed this decision to Supervisory Panel of the Supreme Court. The date to hear this appeal has not been set.
It remains the Corporation's view that the allegations leveled against the group companies are without justification; a highly competitive market exists for oil products within Kazakhstan and the current level of prices reflects current world crude oil prices, which are close to their historical high. Also, the prices charged by the group companies are competitive with Russian imports and with those charged by distributors of the other two refineries in Kazakhstan.
The Corporation is considering its recourse rights under the terms of the Shymkent refinery Privatization Agreement, which clearly stipulates the right to sell any and all its products in Kazakhstan and abroad at free market prices.
The Corporation will continue to seek a dialogue with the appropriate authorities to address the concerns related to the pricing of refined products and possible measures to be taken to further promote transparency and effective monitoring of the dynamics of competition, consistent with market economy principles.
Tax matters
The local and national tax environment in the Republic of Kazakhstan is subject to change and inconsistent application, interpretation and enforcement. Non-compliance with Kazakhstan laws and regulations, as interpreted by the Kazakh authorities, can lead to the imposition of fines, penalties and interest.
In response to the Corporation’s submission, the Minister of Finance initiated the creation of a high-level Working Group between its Officials and the Corporation’s representatives to address and seek resolution of all outstanding tax issues through dialogue and negotiations. On January 22, 2004, the Working Group signed a memorandum that sets out the agreed resolution of all outstanding tax issues. Certain actions, such as amendments to hydrocarbon contracts and issuance of instruction letters must be taken to fully implement the terms of the memorandum. The terms of this memorandum are reflected in the ensuing discussion of the Corporation’s tax matters.
PKKR received tax assessments for 1998 and 1999. The assessment was for a total of approximately $10.5 million including taxes, fines, interest and penalties. PKKR was successful at the first level of the court system and was unsuccessful on the majority of the issues at the Supreme Court level. PKKR was unsuccessful in obtaining agreement of the Supervisory Panel of the Supreme Court to hear its appeal on the assessed taxes. The Corporation provided for $2.9 million of the $10.5 million total assessment in the December 31, 2002 consolidated financial statements. PKKR has been disputing the remaining $7.6 million of the $10.5 million, which relates to fines and penalties assessed, because PKKR believes there was an incorrect application of the provisions of the tax act. PKKR has paid this amount to stop the further accumulation of fines and penalties and has recorded this payment as an account receivable pending resolution of this issue. The Working Group agreed with PKKR’ ;s position and determined that there was an incorrect application of the provisions of the tax legislation. This matter was simultaneously appealed to the Supervisory Panel of the Supreme Court due to time limitations and the Supreme Court remanded the case back to the lower court for a retrial. The lower court rejected the Supreme Court’s instruction, a retrial was not held, and they let the original decision
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| stand. The Corporation will appeal this decision to the Supreme Court. The account receivable of $7.6 million will either be recovered or expensed upon final resolution of this issue. | |
PKKR also received assessments for 2000 and 2001. The assessment was split into two cases. The first case was for amounts totaling approximately $13.0 million and at the first level of the court system PKKR was successful on $6.8 million of the $13.0 million and was unsuccessful on the remainder. The major issue on which PKKR was unsuccessful was the assessment of royalties on flared associated gas (approximately $4.5 million). The Corporation believes the claim for royalties on flared associated gas, which has no commercial value, contravenes the provisions of its Hydrocarbon Contracts. PKKR appealed to the Supreme Court and was unsuccessful. The Corporation will appeal to the Supervisory Panel of the Supreme Court. The Corporation will also file an appeal regarding the method used to determine the value of gas for royalty purposes. The method used was not provided to the Corporation. The Working Group determined that PKKR would pay royalties on produced gas volumes less gas volumes reinjected and gas consumed in operations as fuel gas. A flat 5% royalty rate is to be applied and the valuation will be based upon sales value for those volumes sold and lifting costs for the remaining volumes. PKKR has provided $0.4 million for royalties on associated gas for the years 1998-2001 and $0.2 million for 2002 and 2003. PKKR has also provided $1.8 million for the years 2000 and 2001 and made a further provision of $1.7 million for 2002 and 2003 for the remaining issues. | |
| There has been no change in the status of the second case from December 31, 2003. | |
Certain subsidiaries of the Corporation received assessments totaling $2.9 million including fines and penalties claiming incorrect application of the Canadian-Kazakhstan double tax treaty. The allegation is that the proper documentation was not in place to support withholding tax relief on the payment of dividends. The Ministry of Finance has asserted that the Certificates of Residency as legalized by the Government of Canada are not valid. The Corporation disputes this assertion. The Corporation has confirmation from the Kazakhstan Ministry of Foreign Affairs that the legalization process followed in Canada is in fact valid. The subsidiaries have filed court cases disputing these assessments. The court of first instance ruled in favour of the Ministry of Finance. The Corporation has appealed this assessment. No provision has been made in the financial statements for these assessments, as the Corporation believes it will ultimately prevail in its position. | |
| 14 | SUBSEQUENT EVENTS |
| The Corporation received an approval from government authorities to amend certain of its hydrocarbon contracts. These amendments clarify a number of provisions related to taxes, which were previously subject to interpretation, particularly the issue of royalties on gas, value added tax and cost allocations between licenses. These amendments are effective from July 21, 2004. |
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