InterOil Corporation Consolidated Financial Statements (Expressed in United States dollars)
Years ended December 31, 2011 and 2010 |
InterOil Corporation Consolidated Financial Statements (Expressed in United States dollars) |
Table of contents
Management’s Report | 3 | |
Auditor’s Report to the Shareholders | 4 | |
Consolidated Income Statements | 7 | |
Consolidated Statements of Comprehensive Income | 8 | |
Consolidated Balance Sheets | 9 | |
Consolidated Statements of Changes in Equity | 10 | |
Consolidated Statements of Cash Flows | 11 | |
Notes to the Consolidated Financial Statements | 12 |
Consolidated Financial Statements INTEROIL CORPORATION 2 |
InterOil Corporation Consolidated Financial Statements (Expressed in United States dollars) |
MANAGEMENT’S REPORT
The management of InterOil Corporation is responsible for the financial information and operating data presented in this Annual Report.
The consolidated financial statements have been prepared by management in accordance with International Financial Reporting Standards. When alternative accounting methods exist, management has chosen those it deems most appropriate in the circumstances. Financial statements are not precise as they include certain amounts based on estimates and judgments. Management has determined such amounts on a reasonable basis in order to ensure that the financial statements are presented fairly, in all material respects. Financial information presented elsewhere in this Annual Report has been prepared on a basis consistent with that in the consolidated financial statements.
InterOil Corporation maintains systems of internal accounting and administrative controls. These systems are designed to provide reasonable assurance that the financial information is relevant, reliable and accurate and that the Company’s assets are properly accounted for and adequately safeguarded.
The Audit Committee, appointed by the Board of Directors, is composed of independent non-management directors. The Committee meets regularly with management, as well as the independent auditors, to discuss auditing, internal controls, accounting policy and financial reporting matters. The Committee reviews the annual consolidated financial statements with both management and the independent auditors and reports its findings to the Board of Directors before such statements are approved by the Board.
The 2011 consolidated financial statements have been audited by PricewaterhouseCoopers, the independent auditors, in accordance with Canadian generally accepted auditing standards and auditing standards issued by the Public Company Accounting Oversight Board, on behalf of the shareholders. PricewaterhouseCoopers has full and free access to the Audit Committee.
/s/ Phil E. Mulacek | /s/ Collin F. Visaggio | ||
Phil E. Mulacek | Collin F. Visaggio | ||
Chief Executive Officer | Chief Financial Officer |
Consolidated Financial Statements INTEROIL CORPORATION 3 |
InterOil Corporation Consolidated Financial Statements (Expressed in United States dollars) |
March 16, 2012
Independent Auditor’s Report
To the Shareholders of InterOil Corporation
We have completed an integrated audit of InterOil Corporation 2011 consolidated financial statements and its internal control over financial reporting as at December 31, 2011 and an audit of its 2010 consolidated financial statements. Our opinions, based on our audits, are presented below.
Report on the consolidated financial statements
We have audited the accompanying consolidated financial statements of InterOil Corporation, which comprise the Consolidated Balance Sheets as at December 31, 2011, December 31, 2010 and January 1, 2010 and the Consolidated Income Statements, Statements of Comprehensive Income, Changes in Equity and Cash Flows for the years ended December 31, 2011 and December 31, 2010, and the related notes, which comprise a summary of significant accounting policies and other explanatory information.
Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Boardand for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. Canadian generally accepted auditing standards require that we comply with ethical requirements.
An audit involves performing procedures to obtain audit evidence, on a test basis, about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the company’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting principles and policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
PricewaterhouseCoopers, ABN 52 780 433 757
Darling Park Tower 2, 201 Sussex Street, GPO BOX 2650, SYDNEY NSW 1171
T +61 2 8266 0000, F +61 2 8266 9999, www.pwc.com.au
Liability limited by a scheme approved under Professional Standards Legislation.
Consolidated Financial Statements INTEROIL CORPORATION 4 |
InterOil Corporation Consolidated Financial Statements (Expressed in United States dollars) |
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion on the consolidated financial statements.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of InterOil Corporation as at December 31, 2011, December 31, 2010 and January 1, 2010 and its financial performance and its cash flows for years ended December 31, 2011 and December 31, 2010 in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.
Report on internal control over financial reporting
We have also audited InterOil Corporation’s internal control over financial reporting as at December 31, 2011, based on criteria established in Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Management’s responsibility for internal control over financial reporting
Management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in Management’s Report on Internal Control over Financial Reporting.
Auditor’s responsibility
Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control, based on the assessed risk, and performing such other procedures as we consider necessary in the circumstances.
We believe that our audit provides a reasonable basis for our audit opinion on the company’s internal control over financial reporting.
Definition of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Consolidated Financial Statements INTEROIL CORPORATION 5 |
InterOil Corporation Consolidated Financial Statements (Expressed in United States dollars) |
Inherent limitations
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Opinion
In our opinion, InterOil Corporation maintained, in all material respects, effective internal control over financial reporting as at December 31, 2011, based on criteria established in Internal Control - Integrated Framework issued by COSO.
/s/ PricewaterhouseCoopers
Chartered Accountants
March 16, 2012
PricewaterhouseCoopers
Sydney, Australia
Consolidated Financial Statements INTEROIL CORPORATION 6 |
InterOil Corporation Consolidated Income Statements (Expressed in United States dollars) |
Year ended | ||||||||
December 31, | December 31, | |||||||
2011 | 2010 | |||||||
$ | $ | |||||||
Revenue | ||||||||
Sales and operating revenues | 1,106,533,853 | 802,374,399 | ||||||
Interest | 1,356,124 | 150,816 | ||||||
Other | 11,058,090 | 4,470,048 | ||||||
1,118,948,067 | 806,995,263 | |||||||
Changes in inventories of finished goods and work in progress | 43,934,439 | 57,010,311 | ||||||
Raw materials and consumables used | (1,064,866,361 | ) | (758,566,961 | ) | ||||
Administrative and general expenses | (41,160,824 | ) | (41,047,949 | ) | ||||
Derivative gains/(losses) | 2,006,321 | (1,065,188 | ) | |||||
Legal and professional fees | (6,801,334 | ) | (6,902,241 | ) | ||||
Exploration costs, excluding exploration impairment (note 13) | (18,435,150 | ) | (16,981,929 | ) | ||||
Finance costs | (18,163,769 | ) | (12,064,982 | ) | ||||
Depreciation and amortization | (20,136,649 | ) | (14,274,922 | ) | ||||
Gain on sale of oil and gas properties | - | 2,140,783 | ||||||
Loss on extinguishment of liability | - | (30,568,710 | ) | |||||
Litigation settlement expense | - | (12,000,000 | ) | |||||
Loss on available-for-sale investment (note 14) | (3,420,406 | ) | - | |||||
Foreign exchange gains/(losses) | 25,018,661 | (10,776,823 | ) | |||||
(1,102,025,072 | ) | (845,098,611 | ) | |||||
Profit/(loss) before income taxes | 16,922,995 | (38,103,348 | ) | |||||
Income taxes | ||||||||
Current tax expense (note 15) | (5,512,842 | ) | (3,898,067 | ) | ||||
Deferred tax benefit/(expense) (note 15) | 6,248,509 | (2,511,656 | ) | |||||
735,667 | (6,409,723 | ) | ||||||
Profit/(loss) for the year | 17,658,662 | (44,513,071 | ) | |||||
Profit/(loss) is attributable to: | ||||||||
Owners of InterOil Corporation | 17,652,461 | (44,519,573 | ) | |||||
Non-controlling interest | 6,201 | 6,502 | ||||||
17,658,662 | (44,513,071 | ) | ||||||
Basic profit/(loss) per share | 0.37 | (1.00 | ) | |||||
Diluted profit/(loss) per share | 0.36 | (1.00 | ) | |||||
Weighted average number of common shares outstanding | ||||||||
Basic (Expressed in number of common shares) | 47,977,478 | 44,329,670 | ||||||
Diluted (Expressed in number of common shares) | 49,214,190 | 44,329,670 |
See accompanying notes to the consolidated financial statements
Consolidated Financial Statements INTEROIL CORPORATION 7 |
InterOil Corporation Consolidated Statements of Comprehensive Income (Expressed in United States dollars) |
Year ended | ||||||||
December 31, | December 31, | |||||||
2011 | 2010 | |||||||
$ | $ | |||||||
Profit/(loss) for the year | 17,658,662 | (44,513,071 | ) | |||||
Other comprehensive income: | ||||||||
Exchange difference on translation of foreign operations, net of tax | 20,527,270 | 1,110,201 | ||||||
Movement on available-for-sale financial assets, net of tax | (407,565 | ) | - | |||||
Other comprehensive income for the year, net of tax | 20,119,705 | 1,110,201 | ||||||
Total comprehensive income/(loss) for the year | 37,778,367 | (43,402,870 | ) | |||||
Total comprehensive income/(loss) for the year is attributable to: | ||||||||
Owners of InterOil Corporation | 37,772,166 | (43,409,372 | ) | |||||
Non-controlling interests | 6,201 | 6,502 | ||||||
37,778,367 | (43,402,870 | ) |
See accompanying notes to the consolidated financial statements
Consolidated Financial Statements INTEROIL CORPORATION 8 |
InterOil Corporation Consolidated Balance Sheets (Expressed in United States dollars) |
As at | ||||||||||||
December 31, | December 31, | January 1, | ||||||||||
2011 | 2010 | 2010 | ||||||||||
$ | $ | $ | ||||||||||
Assets | ||||||||||||
Current assets: | ||||||||||||
Cash and cash equivalents (note 6) | 68,846,441 | 233,576,821 | 46,449,819 | |||||||||
Cash restricted (note 9) | 32,982,001 | 40,664,995 | 22,698,829 | |||||||||
Short term treasury bills - held-to-maturity (note 8) | 11,832,110 | - | - | |||||||||
Trade and other receivables (note 10) | 135,273,600 | 48,047,496 | 61,194,136 | |||||||||
Derivative financial instruments (note 9) | 595,440 | - | - | |||||||||
Other current assets | 867,967 | 505,059 | 639,646 | |||||||||
Inventories (note 11) | 171,071,799 | 127,137,360 | 70,127,049 | |||||||||
Prepaid expenses | 5,477,596 | 3,593,574 | 6,964,950 | |||||||||
Total current assets | 426,946,954 | 453,525,305 | 208,074,429 | |||||||||
Non-current assets: | ||||||||||||
Cash restricted (note 9) | 6,268,762 | 6,613,074 | 6,609,746 | |||||||||
Goodwill (note 17) | 6,626,317 | 6,626,317 | 6,626,317 | |||||||||
Plant and equipment (note 12) | 246,043,948 | 225,205,427 | 218,794,649 | |||||||||
Oil and gas properties (note 13) | 362,852,766 | 255,294,738 | 172,483,562 | |||||||||
Deferred tax assets (note 15) | 35,965,273 | 28,477,690 | 30,319,163 | |||||||||
Available-for-sale investments (note 14) | 3,650,786 | - | - | |||||||||
Total non-current assets | 661,407,852 | 522,217,246 | 434,833,437 | |||||||||
Total assets | 1,088,354,806 | 975,742,551 | 642,907,866 | |||||||||
Liabilities and shareholders' equity | ||||||||||||
Current liabilities: | ||||||||||||
Trade and other payables (note 16) | 159,882,177 | 75,132,880 | 59,372,354 | |||||||||
Income tax payable | 4,085,137 | 955,074 | - | |||||||||
Derivative financial instruments (note 9) | 11,457 | 178,578 | - | |||||||||
Working capital facilities (note 18) | 16,480,503 | 51,254,326 | 24,626,419 | |||||||||
Unsecured loan and current portion of secured loan (note 20) | 19,393,023 | 14,456,757 | 9,000,000 | |||||||||
Current portion of Indirect participation interest (note 21) | 540,002 | 540,002 | 540,002 | |||||||||
Total current liabilities | 200,392,299 | 142,517,617 | 93,538,775 | |||||||||
Non-current liabilities: | ||||||||||||
Secured loan (note 20) | 26,037,166 | 34,813,222 | 43,589,278 | |||||||||
2.75% convertible notes liability (note 26) | 55,637,630 | 52,425,489 | - | |||||||||
Deferred gain on contributions to LNG project (note 22) | 5,810,775 | 8,949,857 | 10,824,212 | |||||||||
Indirect participation interest (note 21) | 34,134,840 | 34,134,387 | 39,559,718 | |||||||||
Asset retirement obligations (note 23) | 4,562,269 | - | - | |||||||||
Deferred tax liabilities (note 15) | 1,889,391 | - | - | |||||||||
Total non-current liabilities | 128,072,071 | 130,322,955 | 93,973,208 | |||||||||
Total liabilities | 328,464,370 | 272,840,572 | 187,511,983 | |||||||||
Equity: | ||||||||||||
Equity attributable to owners of InterOil Corporation: | ||||||||||||
Share capital (note 25) Authorized - unlimited Issued and outstanding - 48,121,071 (Dec 31, 2010 - 47,800,552) | 905,981,614 | 895,651,052 | 613,361,363 | |||||||||
2.75% convertible notes (note 26) | 14,298,036 | 14,298,036 | - | |||||||||
Contributed surplus | 25,644,245 | 16,738,417 | 21,297,177 | |||||||||
Accumulated Other Comprehensive Income | 29,380,882 | 9,261,177 | 8,150,976 | |||||||||
Conversion options (note 21) | 12,150,880 | 12,150,880 | 13,270,880 | |||||||||
Accumulated deficit | (227,565,221 | ) | (245,217,682 | ) | (200,698,109 | ) | ||||||
Total equity attributable to owners of InterOil Corporation | 759,890,436 | 702,881,880 | 455,382,287 | |||||||||
Non-controlling interest | - | 20,099 | 13,596 | |||||||||
Total equity | 759,890,436 | 702,901,979 | 455,395,883 | |||||||||
Total liabilities and equity | 1,088,354,806 | 975,742,551 | 642,907,866 |
See accompanying notes to the consolidated financial statements
Consolidated Financial Statements INTEROIL CORPORATION 9 |
InterOil Corporation Consolidated Statements of Changes in Equity (Expressed in United States dollars) |
Year ended | ||||||||
December 31, | December 31, | |||||||
2011 | 2010 | |||||||
Transactions with owners as owners: | $ | $ | ||||||
Share capital | ||||||||
At beginning of year | 895,651,052 | 613,361,363 | ||||||
Issue of capital stock (note 25) | 10,330,562 | 282,289,689 | ||||||
At end of year | 905,981,614 | 895,651,052 | ||||||
2.75% convertible notes | ||||||||
At beginning of year | 14,298,036 | - | ||||||
Issue of convertible notes (note 26) | - | 14,298,036 | ||||||
At end of year | 14,298,036 | 14,298,036 | ||||||
Contributed surplus | ||||||||
At beginning of year | 16,738,417 | 21,297,177 | ||||||
Fair value of options and restricted stock transferred to share capital (note 27) | (5,598,009 | ) | (8,454,758 | ) | ||||
Stock compensation expense (note 27) | 14,721,387 | 11,804,000 | ||||||
Loss on extinguishment of IPI conversion options (note 21) | - | (7,908,002 | ) | |||||
Loss on buyback of non-controlling interest (note 24) | (217,550 | ) | - | |||||
At end of year | 25,644,245 | 16,738,417 | ||||||
Accumulated Other Comprehensive Income | ||||||||
Foreign currency translation reserve | ||||||||
At beginning of year | 9,261,177 | 8,150,976 | ||||||
Foreign currency translation movement for the year, net of tax | 20,527,270 | 1,110,201 | ||||||
Foreign currency translation reserve at end of year | 29,788,447 | 9,261,177 | ||||||
Gain/(loss) on available-for-sale financial assets | ||||||||
At beginning of year | - | - | ||||||
Gain/(loss) on available-for-sale financial assets, net of tax (note 14) | (407,565 | ) | - | |||||
Gain/(loss) on available-for-sale financial assets at end of year | (407,565 | ) | - | |||||
Accumulated other comprehensive income at end of year | 29,380,882 | 9,261,177 | ||||||
Conversion options | ||||||||
At beginning of year | 12,150,880 | 13,270,880 | ||||||
Movement for the year (note 21) | - | (1,120,000 | ) | |||||
At end of year | 12,150,880 | 12,150,880 | ||||||
Accumulated deficit | ||||||||
At beginning of year | (245,217,682 | ) | (200,698,109 | ) | ||||
Net profit/(loss) for the year | 17,652,461 | (44,519,573 | ) | |||||
At end of year | (227,565,221 | ) | (245,217,682 | ) | ||||
Total InterOil Corporation shareholders' equity at end of year | 759,890,436 | 702,881,880 | ||||||
Transactions with non-controlling interest | ||||||||
At beginning of year | 20,099 | 13,597 | ||||||
Net profit for the year | 6,201 | 6,502 | ||||||
Buyback of non-controlling interest (note 24) | (26,300 | ) | - | |||||
At end of year | - | 20,099 | ||||||
Total equity at end of year | 759,890,436 | 702,901,979 |
See accompanying notes to the consolidated financial statements
Consolidated Financial Statements INTEROIL CORPORATION 10 |
InterOil Corporation Consolidated Statements of Cash Flows (Expressed in United States dollars) |
Year ended | ||||||||
December 31, | December 31, | |||||||
2011 | 2010 | |||||||
$ | $ | |||||||
Cash flows generated from (used in): | ||||||||
Operating activities | ||||||||
Net profit/(loss) for the year | 17,658,662 | (44,513,071 | ) | |||||
Adjustments for non-cash and non-operating transactions | ||||||||
Depreciation and amortization | 20,136,649 | 14,274,922 | ||||||
Deferred tax assets | (5,598,192 | ) | 1,841,473 | |||||
Gain on sale of exploration assets | - | (2,140,783 | ) | |||||
Accretion of convertible notes liability | 3,212,141 | 432,632 | ||||||
Amortization of deferred financing costs | 223,944 | 1,223,944 | ||||||
Timing difference between derivatives recognized and settled | (762,561 | ) | 178,578 | |||||
Stock compensation expense, including restricted stock | 14,721,387 | 11,804,000 | ||||||
Movement in net realizable value write down | 259,406 | - | ||||||
Accretion of asset retirement obligation liability | 159,356 | - | ||||||
Oil and gas properties expensed | 18,435,150 | 16,981,929 | ||||||
Loss on extinguishment of IPI Liability | - | 30,568,710 | ||||||
Non-cash litigation settlement expense | - | 12,000,000 | ||||||
Loss on Flex LNG investment | 3,420,406 | - | ||||||
Gain on proportionate consolidation of LNG project | (555,030 | ) | - | |||||
Unrealized foreign exchange gain | (2,618,814 | ) | (72,456 | ) | ||||
Change in operating working capital | ||||||||
Increase in trade and other receivables | (53,064,305 | ) | (9,224,005 | ) | ||||
(Increase)/decrease in other current assets and prepaid expenses | (2,246,930 | ) | 3,505,963 | |||||
Increase in inventories | (28,003,484 | ) | (56,115,637 | ) | ||||
Increase in trade and other payables | 77,291,915 | 5,692,543 | ||||||
Net cash generated from/(used in) operating activities | 62,669,700 | (13,561,258 | ) | |||||
Investing activities | ||||||||
Expenditure on oil and gas properties | (134,927,701 | ) | (113,128,916 | ) | ||||
Proceeds from IPI cash calls | 749,794 | 23,723,752 | ||||||
Expenditure on plant and equipment | (42,050,435 | ) | (22,560,055 | ) | ||||
Proceeds received on sale of exploration assets | - | 15,544,465 | ||||||
Investment in short term treasury bills | (11,832,110 | ) | - | |||||
Acquisition of Flex LNG Ltd shares, including transaction costs | (7,478,756 | ) | - | |||||
Decrease/(increase) in restricted cash held as security on borrowings | 8,027,306 | (17,969,494 | ) | |||||
Change in non-operating working capital | ||||||||
Increase in trade and other receivables | (10,000,000 | ) | - | |||||
(Decrease)/increase in trade and other payables | (6,727,960 | ) | 3,232,029 | |||||
Net cash used in investing activities | (204,239,862 | ) | (111,158,219 | ) | ||||
Financing activities | ||||||||
Repayments of OPIC secured loan | (9,000,000 | ) | (9,000,000 | ) | ||||
Proceeds from Mitsui for Condensate Stripping Plant | 9,872,532 | 11,913,514 | ||||||
Proceeds from/(repayments of) Clarion Finanz secured loan, net of transaction costs | - | (1,000,000 | ) | |||||
Proceeds from PNG LNG cash call | 2,247,533 | 866,600 | ||||||
Proceeds from Petromin for Elk and Antelope field development | - | 5,000,000 | ||||||
(Repayments of)/proceeds from working capital facility | (34,773,823 | ) | 26,627,907 | |||||
Proceeds from issue of common shares, net of transaction costs | 4,488,703 | 211,147,565 | ||||||
Proceeds from issue of convertible notes, net of transaction costs | - | 66,290,893 | ||||||
Net cash (used in)/generated from financing activities | (27,165,055 | ) | 311,846,479 | |||||
(Decrease)/increase in cash and cash equivalents | (168,735,217 | ) | 187,127,002 | |||||
Cash and cash equivalents, beginning of year | 233,576,821 | 46,449,819 | ||||||
Exchange gains on cash and cash equivalents | 4,004,837 | - | ||||||
Cash and cash equivalents, end of year (note 6) | 68,846,441 | 233,576,821 | ||||||
Comprising of: | ||||||||
Cash on Deposit | 18,758,288 | 233,576,821 | ||||||
Term Deposits | 50,088,153 | - | ||||||
Total cash and cash equivalents, end of year | 68,846,441 | 233,576,821 |
See accompanying notes to the consolidated financial statements
Consolidated Financial Statements INTEROIL CORPORATION 11 |
InterOil Corporation Notes to Consolidated Financial Statements (Expressed in United States dollars) |
1. | General information |
InterOil Corporation (the "Company" or "InterOil") is a publicly traded, integrated oil and gas company operating in Papua New Guinea (“PNG”). The Company is incorporated and domiciled in Canada. The Company is a Yukon Territory corporation, continued under the Business Corporations Act (Yukon Territory) on August 24, 2007. The address of its registered office is 300-204 Black Street, Whitehorse, Yukon, Canada.
Management has organized the Company’s operations into four major segments - Upstream, Midstream, Downstream and Corporate. Upstream includes exploration, appraisal and development operations for crude oil and natural gas structures in PNG. Upstream currently includes the development of the Elk and Antelope fields infrastructure, including the condensate stripping and associated facilities, and the gas gathering and associated common facilities, in connection with commercializing significant gas discoveries. Midstream consists of both Midstream Refining and Midstream Liquefaction. Midstream Refining includes refining of products for the domestic market in PNG and exports, and Midstream Liquefaction includes the work being undertaken to develop liquefaction and associated facilities (”LNG project”) in PNG for the export of liquefied natural gas. Downstream includes wholesale and retail distribution of refined products in PNG. Corporate engages in business development and improvement, common services and management, financing and treasury, product shipping, government and investor relations. Common and integrated costs are recovered from reporting segments on an equitable driver basis.
These consolidated financial statements were approved for issue on March 16, 2012.
2. | Significant accounting policies |
The accounting policies set out below have been applied consistently to all years presented in these consolidated financial statements and in preparing the opening IFRS balance sheet at January 1, 2010 for the purposes of the transition to IFRSs as if these policies had always been in effect unless otherwise indicated.
(a) | Basis of preparation and adoption of IFRS |
The Company prepares its consolidated financial statements in accordance with Canadian generally accepted accounting principles as set out in the Handbook of the Canadian Institute of Chartered Accountants (“CICA Handbook”). In 2010, the CICA Handbook was revised to incorporate International Financial Reporting Standards (“IFRS”) and to require publicly accountable enterprises to apply such standards effective for years beginning on or after January 1, 2011. Accordingly, the company has commenced reporting on this basis from January 1, 2011, and in these consolidated financial statements prepared for the year ended December 31, 2011 (“financial statements”). In these consolidated financial statements, the term “Canadian GAAP” refers to Canadian GAAP before the adoption of IFRS.
These consolidated financial statements have been prepared in accordance with IFRS as issued by the IASB applicable to the preparation of financial statements including IFRS 1 – ‘First-time Adoption of International Financial Reporting Standards’.
The effective date of transition is January 1, 2010. An explanation of how the transition to IFRSs has affected the reported balance sheets, income statements and cash flows of the Company is provided in note 3. This note includes reconciliations of equity and total comprehensive income for comparative years and of equity at the date of transition reported under Canadian GAAP to those reported for those years and at the date of transition under IFRSs.
The consolidated financial statements for the year ended December 31, 2011 have been prepared under the historical cost convention, except for derivative financial instruments and available-for-sale investments which are measured at fair value.
The preparation of financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Company’s accounting policies. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Company makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below.
- | Net realizable value of inventory:Inventory is recorded at the lower of cost or net realizable value. To determine the net realizable value of finished goods inventory, the IPP pricing from January 2012 is considered (IPP is based on December MOPS product pricing) along with estimated Naphtha, LSWR and LPG pricing based on the expected date of sale. The estimates are based on the most reliable evidence available at the time the estimates are made, of the amounts that are expected to be realized. These estimates take into consideration fluctuations of price or cost directly relating to events occurring after the end of the period to the extent that such events confirm conditions existing at the end of the reporting period. |
Consolidated Financial Statements INTEROIL CORPORATION 12 |
InterOil Corporation Notes to Consolidated Financial Statements (Expressed in United States dollars) |
2. | Significant accounting policies (cont’d) |
- | Convertible notes:The convertible notes are assessed based on the substance of the contractual arrangement in determining whether it exhibits the fundamental characteristic of a financial liability or equity. Management has assessed that the note instrument mainly exhibits characteristics that are liability in nature, however, the embedded conversion feature is in equity in nature and needs to be bifurcated and disclosed separately within equity. Management applied residual basis and valued the liability component first and assigned the residual value to the equity component. Management fair valued the liability component by deducting the premium paid by holders specifically for the conversion feature. The conversion price of $95.625 per share includes a premium of 27.5% to the issue price of the concurrent common shares offering of $75 per share. Therefore, the $70,000,000 total issue represents 127.5% of the liability portion. |
- | Deferred gain on contributions to LNG project:The Company has a recognized deferred gain on its contributions to the Joint Venture based on the share of other joint venture partners in the project. As InterOil’s shareholding within the Joint Venture Company as at December 31, 2011 is 84.582%, the gain on contribution of non cash assets to the project by InterOil relating to other joint venture partners’ shareholding (15.418% - amounting to $15,113,190) has been recognized by InterOil in its balance sheet as a deferred gain. This deferred gain will increase/decrease as the other Joint Venture partners decrease/increase their shareholding in the project. |
This amount has been recorded as a reduction of deferred LNG project costs of $9,302,415 at December 31, 2011 which has reduced the LNG project costs to nil at December 31, 2011, with the remaining balance of $5,810,775 being recorded as a deferred gain. The deferred gain will be recognized in the consolidated income statement when the risks and rewards have considered to be passed.
- | Asset retirement obligation:A liability is recognized for future legal or constructive retirement obligations associated with the Company’s property, plant and equipment. The amount recognized is the net present value of the estimated costs of future dismantlement, site restoration and abandonment of properties based upon current regulations and economic circumstances at period end. During the quarter ended June 30, 2011, Management received the results of an independent assessment of the potential asset retirement obligations of the refinery. As a result of this assessment, Management has recognized an asset retirement obligation at December 31, 2011 of $4,562,269. |
- | Share-based payments:The fair value of stock options at grant date is determined using a Black-Scholes option pricing model that takes into account the exercise price, the terms of the option, the vesting criteria, the share price at grant date, expected price volatility of the underlying share, the expected yield and risk-free interest rate for the term of the option. Upon exercise of options, the balance of the contributed surplus relating to those options is transferred to share capital. The fair value of restricted stock on grant date is the market value of the stock. The Company uses the fair value based method to account for employee stock based compensation benefits. Under the fair value based method, compensation expense is measured at fair value at the date of grant and is expensed over the award's vesting period. |
Rate regulation
InterOil is currently the sole refiner of hydrocarbons in PNG. The Company’s 30 year project agreement with the Independent State of Papua New Guinea (“the State”) expires in 2035. The State has undertaken to ensure that all domestic distributors purchase their refined petroleum products from the Company’s refinery, or any other refinery which is constructed in PNG, at an Import Parity Price (”IPP”). The IPP is monitored by the Papua New Guinea Independent Consumer and Competition Commission (”ICCC”). In general, the IPP is the price that would be paid in PNG for a refined product being imported. For all price controlled products (diesel, unleaded petrol, kerosene and aviation fuel) produced and sold locally in PNG, the IPP is calculated by adding the costs that would typically be incurred to import such product to ‘Mean of Platts Singapore’ (“MOPS”) which is the benchmark price for refined products in the region in which the Company operates.
InterOil is also a significant participant in the retail and wholesale distribution business in PNG. The ICCC regulates the maximum prices that may be charged by the wholesale and retail hydrocarbon distribution industry in PNG. The Downstream business may charge less than the maximum margin set by the ICCC in order to maintain its competitiveness with other participants in the market. In November 2010, the ICCC released its review report which will govern the pricing arrangements for petroleum products in PNG until the end of 2014, taking effect from November 1, 2010. The purpose of the review was to consider the extent to which the existing regulation of price setting arrangements at both wholesale and retail levels should continue or be revised for the next five year period. The report recommended an increase in margins for wholesale business and certain other activities, while the retail margin is to remain the same. It also recommended some increases in monitoring industry activity in PNG mainly, relating to import of products by distributors and in relation to aviation fuel pricing.
No rate regulated assets or liabilities have been recognized.
Consolidated Financial Statements INTEROIL CORPORATION 13 |
InterOil Corporation Notes to Consolidated Financial Statements (Expressed in United States dollars) |
2. | Significant accounting policies (cont’d) |
(b) | Going concern |
These consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and settlement of liabilities in the normal course of business as they become due.
The net current assets as at December 31, 2011 amounted to $226.6 million compared to $311.0 million as at December 31, 2010. The Company has cash, cash equivalents and cash restricted of $108.1 million as at December 31, 2011 (December 2010 - $280.9 million), of which $39.3 million is restricted (December 2010 - $47.3 million). The Company also has investments in Bank of PNG treasury bills of $11.8 million as at December 31, 2011 (December 2010 - $nil).
With respect to its Upstream operations, the Company has no obligation to execute exploration activities within a set timeframe and therefore has the ability to select the timing of these activities as long as the minimum license commitments in relation to the Company’s Petroleum Prospecting Licenses (“PPL”) and Petroleum Retention Licenses (“PRL”) are met. Refer note 29 for further information on these commitments.
The Company has a short term total working capital facility of $230.0 million (increased temporarily to $260.0 million in November 2011, and reverted back to $230.0 million on January 31, 2012) for its Midstream – Refining operation that is renewable annually with BNP Paribas. This facility is secured by the assets it is drawn down against. As at December 31, 2011 $174.9 million of the combined facility has been utilized, and the remaining facility of $85.1 million (including the temporary increase of $30.0 million) remains available for use. The facility was renewed in February 2012 at an increased limit of $240.0 million until January 31, 2013.
The Company has an approximate $60.6 million (Papua New Guinea Kina (“PGK”) 130.0 million) revolving working capital facility for its Downstream operations in PNG from Bank of South Pacific Limited (“BSP”) and Westpac Bank PNG Limited (“Westpac”). As at December 31, 2011, $6.4 million (PGK 13.8 million) of this combined facility has been utilized, and $54.2 million (PGK 116.2 million) of this facility remains available for use. The Westpac facility was for an initial term of three years and was renewed in November 2011 through to November 2014. The facility was further increased, subsequent to year end in February 2012, by $4.7 million (PGK 10.0 million) bringing the total facility to $65.3 million (PGK 140.0 million). In addition a secured loan of $15.0 million was provided as part of this increased facility which is repayable in equal installments over 3.5 years with an interest rate of LIBOR + 4.4% per annum. The BSP facility is renewable annually and was renewed in August 2011 through to August 2012.
The Company believes that it has sufficient funds for the Midstream Refinery and Downstream operations; however, existing cash balances and ongoing cash generated from these operations will not be sufficient to facilitate further necessary development of the Elk and Antelope fields, condensate stripping and liquefaction facilities. Therefore the Company must extend or secure sufficient funding through renewed or additional borrowings, equity raising and or asset sales to enable sufficient cash to be available to further its development plans. Management expects that the Company will be able to secure the necessary financing through one, or a combination of, the aforementioned alternatives. Accordingly, these consolidated financial statements have been prepared on a going concern basis in the belief that the Company will realize its assets and settle its liabilities and commitments in the normal course of business and for at least the amounts stated.
(c) | New standards issued but not yet effective |
The following new standards, new interpretations and amendments to standards and interpretations have been issued but are not yet effective for the financial year beginning January 1, 2011 and have not been early adopted:
- | IFRS 9 ‘Financial Instruments’(effective from January 1, 2015): This addresses the classification and measurement of financial assets. The standard is not applicable until January 1, 2015 but is available for early adoption. The Company is yet to assess IFRS 9’s full impact. The Company has not yet decided to early adopt IFRS 9. |
- | IFRS 10 'Consolidated Financial Statements'(effective from January 1, 2013): This builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements. The standard provides additional guidance to assist in determining control where this is difficult to assess. This new standard might impact the entities that a group consolidates as its subsidiaries. The Company is yet to assess IFRS 10’s full impact. |
- | IFRS 11 'Joint Arrangements' (effective from January 1, 2013): This provides for a more realistic reflection of joint arrangements by focusing on the rights and obligations of the arrangement, rather than its legal form. There are two types of joint arrangements: joint operations and joint ventures. Joint operations arise where a joint operator has rights to the assets and obligations relating to the arrangement and hence accounts for its interest in assets, liabilities, revenue and expenses. Joint ventures arise where the joint operator has rights to the net assets of the arrangement and hence equity accounts for its interest. Proportional consolidation of joint ventures is no longer allowed. The Company is yet to assess IFRS 11’s full impact. |
Consolidated Financial Statements INTEROIL CORPORATION 14 |
InterOil Corporation Notes to Consolidated Financial Statements (Expressed in United States dollars) |
2. | Significant accounting policies (cont’d) |
- | IFRS 12 'Disclosure of Interests in Other Entities'(effective from January 1, 2013): This is a new standard on disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, special purpose vehicles and other off balance sheet vehicles. The Company is yet to assess IFRS 12’s full impact. |
- | IFRS 13 ‘Fair Value Measurement’(effective from January 1, 2013): This aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRSs. The Company is yet to assess IFRS 13’s full impact. |
- | IAS 27 ‘Separate Financial Statements’(effective from January 1, 2013): This includes the provisions on separate financial statements that are left after the control provisions of IAS 27 have been included in the new IFRS 10. The Company is yet to assess IAS 27’s full impact. |
- | IAS 28 ‘Investments in Associates and Joint Ventures’(effective from January 1, 2013): This now includes the requirements for joint ventures, as well as associates, to be equity accounted following the issue of IFRS 11. The Company is yet to assess IAS 28’s full impact. |
- | IAS 1 ‘Presentation of financial statements’(amendment): The IASB has issued an amendment to IAS 1,which changes the disclosure of items presented in other comprehensive income ("OCI") in the statement of comprehensive income. The IASB originally proposed that all entities should present profit or loss and OCI together in a single statement of comprehensive income. The proposal has been withdrawn and IAS 1 will still permit profit or loss and OCI to be presented in either a single statement or in two consecutive statements. The amendment was developed jointly with the FASB, which has removed the option in US GAAP to present OCI in the statement of changes in equity. The amendment is effective for annual periods starting on or after 1 July 2012, subject to EU endorsement. This amendment will not have any material impact on the Company’s financial statements. |
(d) | Principles of consolidation |
- | Business combinations:The Company applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair value of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The Company recognizes any non-controlling interest in the acquiree on an acquisition-by-acquisition basis, either at fair value or at the non-controlling interest’s proportionate share of the recognized amounts of acquiree’s identifiable net assets. |
If the business combination is achieved in stages, the acquisition date fair value of the acquirer’s previously held equity interest in the acquire is remeasured to fair value at the acquisition date through profit or loss. Any contingent consideration to be transferred by the Company is recognized at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration that is deemed to be an asset or liability is recognized in accordance with IAS 39 either in profit or loss or as a change to other comprehensive income. Contingent consideration that is classified as equity is not remeasured, and its subsequent settlement is accounted for within equity.
The Company measures goodwill at the acquisition date as the fair value of the consideration transferred including the recognized amount of any non-controlling interests in the acquiree, less the fair value of the identifiable assets acquired and liabilities assumed, all measured as of the acquisition date.
Transaction costs, other than those associated with the issue of debt or equity securities, that the Company incurs in connection with a business combination are expensed as incurred.
- | Subsidiaries:The consolidated financial statements of the Company incorporates the assets, liabilities and results of InterOil Corporation and of all subsidiaries as at December 31, 2011 and December 31, 2010, and for the periods then ended. Subsidiaries of InterOil Corporation as at December 31, 2011 included SP InterOil LDC (100%), SPI Exploration and Production Corporation (100%), SPI Distribution Limited (100%), InterOil LNG Holdings Inc. (100%), InterOil Australia Pty Ltd (100%), Direct Employment Services Company (100%), InterOil New York Inc. (100%), InterOil Singapore Pte Ltd (100%), InterOil Finance Inc. (100%), InterOil Shipping Pte Ltd (100%) and their subsidiaries. InterOil Corporation and its subsidiaries together are referred to in these consolidated financial statements as the Company or the consolidated entity. |
Subsidiaries are all those entities over which the Company has the power to determine strategic operating, investing and financing policies without the cooperation of others. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Company controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Company. They are de-consolidated from the date that control ceases.
Consolidated Financial Statements INTEROIL CORPORATION 15 |
InterOil Corporation Notes to Consolidated Financial Statements (Expressed in United States dollars) |
2. | Significant accounting policies (cont’d) |
Intercompany transactions, balances and unrealized gains on transactions between companies are eliminated on consolidation. Non-controlling interests in the results and equity of subsidiaries are shown separately in the consolidated income statements, statements of comprehensive income, balance sheets and statement of changes in equity.
In April 2010, InterOil Shipping Pte Ltd. was incorporated in Singapore as a 100% subsidiary of InterOil Corporation to provide shipping services to domestic customers within PNG and also to export customers from PNG.
In May 2010, SPI CSP Holdings Limited was incorporated in PNG as a 100% subsidiary of SPI Exploration & Production Corporation to hold InterOil’s interest in the proposed condensate stripping facilities, including gathering condensate pipeline, condensate storage and associated facilities being progressed in joint venture with Mitsui & Co. Ltd. (“CS Project”).
In May 2010, SPI Holdings No.1 Limited was incorporated in PNG as a 100% subsidiary of SPI (208) Limited to hold an interest in PRL15. There have been no transactions in this entity as of December 31, 2011.
In May 2010, SPI Holdings No.2 Limited was incorporated in PNG as a 100% subsidiary of SPI (208) Limited to hold an interest in PRL15. There have been no transactions in this entity as of December 31, 2011.
In June 2010, Champion No. 50 Limited was incorporated in PNG as a 100% subsidiary of Liquid Niugini Gas Limited. In January 2011, this company underwent a change of name to LNG Train 1 Limited and then a further name change in February 2011 to LNGL Train 1 Limited. The purpose of LNGL Train 1 Limited is to be the owner and operator of a modular LNG plant to be acquired from Energy World Corporation. There have been no transactions in this entity as of December 31, 2011.
In May 2011, SPI Holdings No.3 Limited was incorporated in PNG as a 100% subsidiary of SPI (208) Limited to hold an interest in PRL15. There have been no transactions in this entity as of December 31, 2011.
- | Proportionate consolidation of Joint Venture interests:The Company’s interests in PNG LNG Inc. is governed by a Shareholders’ Agreement signed on July 30, 2007 between the Joint Ventures’. Guidance under IAS 31 – ‘Interest in Joint Ventures’ is followed and the entity has been proportionately consolidated in InterOil’s consolidated financial statements. The consolidated results of InterOil’s proportionate shareholding in the LNG Project has been disclosed separately within the segment notes under Midstream - Liquefaction, refer to note 5. |
(e) | Segment reporting |
An operating segment is a component of an enterprise:
- | that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other segments of the same enterprise), |
- | whose operating results are regularly reviewed by the chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and |
- | for which discrete financial information is available. |
Segment capital expenditure is the total cost incurred during the period to acquire property, plant and equipment, and intangible assets other than goodwill. Refer to note 1 for the management’s organization of the Company by reporting segment.
(f) | Foreign currency |
- | Functional and presentation currency:These consolidated financial statements are presented in United States Dollars (“USD”) which is InterOil’s functional and presentation currency. |
- | Foreign currency transactions:Transactions in foreign currencies are translated to the respective functional currencies of Company entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortized cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortized cost in foreign currency translated at the exchange rate at the end of the period. |
Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Non-monetary items in a foreign currency that are measured in terms of historical cost are translated using the exchange rate at the date of the transaction. Foreign currency differences arising on retranslation are recognized in profit or loss.
Consolidated Financial Statements INTEROIL CORPORATION 16 |
InterOil Corporation Notes to Consolidated Financial Statements (Expressed in United States dollars) |
2. | Significant accounting policies (cont’d) |
- | Foreign operations:For subsidiaries considered to be foreign operations, all assets and liabilities denominated in foreign currency are translated to USD at exchange rates in effect at the balance sheet date and all revenue and expense items are translated at the rates of exchange in effect at the time of the transactions. Foreign exchange gains or losses are recognized and presented in other comprehensive income and in the foreign currency translation reserve in equity. Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the closing rate. |
(g) | Financial instruments |
(i) Non-derivative financial assets
The Company initially recognizes loans and receivables and deposits on the date that they are originated. All other financial assets (including assets designated at fair value through profit or loss) are recognized initially on the trade date at which the Company becomes a party to the contractual provisions of the instrument. The Company derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Company is recognized as a separate asset or liability.
Financial assets and liabilities are offset and the net amount presented in the balance sheet when, and only when, the Company has a legal right to offset the amounts and intends to either settle on a net basis or to realize the asset and settle the liability simultaneously. The Company classifies non-derivative financial assets into the following categories: financial assets at fair value through profit or loss, loans or receivables, held to maturity financial assets and available-for-sale financial assets.
- | Loans and receivables:Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition loans and receivables are measured at amortized cost using the effective interest method, less any impairment losses. Loans and receivables comprise of trade and other receivables. |
- | Held-to-maturity: Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Company’s management has the positive intention and ability to hold to maturity. Held-to-maturity financial assets are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, held-to-maturity financial assets are measured at amortized cost using the effective interest method, less any impairment losses. If the Company were to sell other than an insignificant amount of held-to-maturity financial assets, the whole category would be tainted and reclassified as available-for-sale. Held-to-maturity financial assets are included in non-current assets, except for those with maturities less than 12 months from the end of the reporting period, which are classified as current assets. |
- | Available-for-sale:Available-for-sale financial assets are non-derivative financial assets that are designated as available for sale or are not classified in any of the other categories. The Company’s investments in equity securities are classified as available-for-sale financial assets. Subsequent to initial recognition, they are measured at fair value and changes therein, other than impairment losses, are recognized in other comprehensive income. When an investment is derecognized, the gain or loss accumulated in equity is reclassified to profit or loss. |
(ii) Non-derivative financial liabilities
The Company initially recognizes debt securities issued and subordinated liabilities on the date that they originated. All other financial liabilities (including liabilities designated at fair value through profit or loss) are recognized initially on the trade date at which the Company becomes a party to the contractual provisions of the instrument. The Company derecognizes a financial liability when its contractual obligations are discharged or cancelled or expire. Financial assets and liabilities are offset and the net amount presented in the balance sheet when, and only when, the Company has a legal right to offset the amounts and intends to either settle on a net basis or to realize the asset and settle the liability simultaneously.
The Company classifies non-derivative financial liabilities into the other financial liabilities category. Financial liabilities not designated at fair value through profit or loss are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, these financial liabilities are measured at amortized cost using the effective interest method. Other financial liabilities comprise secured and unsecured loans, bank overdrafts, and trade and other payables. Trades and other payables represent liabilities for goods and services provided to the Company prior to the end of financial period which are unpaid. These amounts are unsecured and are usually paid within 30 days of recognition.
Consolidated Financial Statements INTEROIL CORPORATION 17 |
InterOil Corporation Notes to Consolidated Financial Statements (Expressed in United States dollars) |
2. | Significant accounting policies (cont’d) |
(iii) Derivative financial instruments
Derivative financial instruments are utilized by the Company in the management of its crude purchase cost exposures, its finished products sales price exposures and its foreign exchange management. The Company's policy is not to utilize derivative financial instruments for trading or speculative purposes. The Company may choose to designate derivative financial instruments as hedges.
When applicable, at the inception of the hedge, the Company formally documents all relationships between hedging instruments and the hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions, the nature of the risk being hedged, how the hedging instruments’ effectiveness in offsetting the hedged risk will be assessed and a description of the method for measuring effectiveness. This process includes linking all derivatives to specific assets and liabilities on the balance sheet or to specific firm commitments or anticipated transactions. The Company also assesses whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair value or cash flows of hedged items at inception and on an ongoing basis.
Changes in the fair value of a derivative that is highly effective and that is designated and qualifies as a cash-flow hedge are recorded as a component of Other Comprehensive Income until earnings are affected by the variability in cash flows of the designated hedged item. For cash flow hedges that have been terminated or cease to be effective, prospective gains or losses on the derivative are recognized in earnings. Any gain or loss that has been included in accumulated other comprehensive income at the time the hedge is discontinued continues to be deferred in accumulated other comprehensive income until the original hedged transaction is recognized in earnings. If the likelihood of the original hedged transaction occurring is no longer probable, the entire gain or loss in accumulated other comprehensive income related to this transaction is immediately reclassified to earnings.
The Company discontinues hedge accounting prospectively when it is determined that the derivative is no longer effective in offsetting changes in cash flows of the hedged item, the derivative expires or is sold, terminated or exercised, the derivative is no longer designated as a hedging instrument because it is unlikely that a forecasted transaction will occur, a hedged firm commitment no longer meets the definition of a firm commitment or management determines that designation of the derivative as a hedging instrument is no longer appropriate.
(iv) Compound financial instruments
Compound financial instruments issued by the Company comprise convertible notes that can be converted to share capital at the option of the holder, when the number of shares to be issued does not vary with changes in their fair value. The liability component of a compound financial instrument is recognized initially at fair value of a similar liability that does not have an equity conversion option. The equity component is recognized initially at the difference between the fair value of the compound financial instrument as a whole and the fair value of the liability component. Any directly attributable transaction costs are allocated to the liability and equity components in proportion to their initial carrying amounts.
Subsequent to initial recognition, the liability component of a compound financial instrument is measured at amortized cost using the effective interest method. The equity component of a compound financial instrument is not remeasured subsequent to initial recognition. Interest and losses and gains relating to the financial liability are recognized in profit or loss. On conversion, the financial liability is reclassified to equity and no gain or loss is recognized on conversion.
(h) | Cash and cash equivalents |
Cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to insignificant risk of changes in value.
(i) | Cash restricted |
Cash restricted consists of cash on deposit which is restricted from being used in daily operations. Cash restricted is carried at cost and any accrued interest is classified under other assets.
(j) | Inventory |
- | Raw materials and parts inventory:Raw materials and parts inventory are stated at the lower of costs and net realizable value. Costs comprise direct materials, direct labor and an appropriate proportion of variable and fixed overhead expenditure. Net realizable value is the estimated selling price in the ordinary course of the business less the estimated costs of completion and the estimated costs necessary to make the sale. |
Consolidated Financial Statements INTEROIL CORPORATION 18 |
InterOil Corporation Notes to Consolidated Financial Statements (Expressed in United States dollars) |
2. | Significant accounting policies (cont’d) |
- | Crude oil and refined petroleum products:Crude oil and refined petroleum products are recorded on a first-in, first-out basis and the net realizable value test for crude oil and refined petroleum products are performed separately. The cost of Midstream Refining petroleum products consist of raw material, labor, direct overheads and transportation costs. The cost of Downstream petroleum products includes the cost of the product plus related freight, wharfage and insurance. |
(k) | Deferred financing costs |
Deferred financing costs represent the unamortized financing costs paid to secure borrowings. Amortization is provided on an effective yield basis over the term of the related debt and is included in expenses for the period. Unamortized deferred financing costs are offset against the respective liability accounts.
(l) | Plant and equipment |
- | Refinery assets:The Company’s most significant item of plant and equipment is the oil refinery in PNG which is included within Midstream Refining assets. The pre-operating stage of the refinery ceased on January 1, 2005. Project costs, net of any recoveries, incurred during the pre-operating stage were capitalized as part of plant and equipment. Development costs and the costs of acquiring or constructing support facilities and equipment are also capitalized. Interest costs relating to the construction and pre-operating stage of the development project prior to commencement of commercial operations were capitalized as part of the cost of such plant and equipment. |
The refinery assets are recorded at cost less accumulated depreciation and accumulated impairment losses, if any. Refinery related assets are depreciated on straight line basis over their useful lives, at an average rate of 4% per annum. The refinery is built on land leased from the State. The lease expires on July 26, 2097.
Repairs and maintenance costs, other than major turnaround costs, are expensed as incurred. Major turnaround costs will be capitalized when incurred and amortized over the estimated period of time to the next scheduled turnaround. Major turnaround work commenced at the refinery on October 1, 2010 and was completed on November 2, 2010 with the refinery being shut down during the turnaround period. Turnaround costs of approximately $2.5 million had been incurred during the year ended December 31, 2010, and no major turnaround costs have been incurred since.
- | Other assets:Property, plant and equipment are recorded at amortized cost. Depreciation of assets begins when the asset is in place and ready for its intended use. Assets under construction and deferred project costs are not depreciated. Depreciation of plant and equipment is calculated using the straight line method, based on the estimated service life of the asset. Maintenance and repair costs are expensed as incurred. Improvements that increase the capacity or prolong the service life of an asset are capitalized. |
Land is not depreciated. Depreciation on other assets is calculated using the straight-line method to allocate their cost or revalued amounts, net of their residual values, over their estimated useful lives as follows:
Leasehold land improvements | Shorter of 100 years or lease period | |
Refinery | 25 – 33 years | |
Buildings | 20 – 40 years | |
Plant and equipment | 3 – 15 years | |
Motor vehicles | 4 – 5 years |
- | Leased assets (accounting as lessee):Leases of property, plant and equipment where the Company has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are classified at the inception of the lease at the lower of the fair value of the leased property and the present value of the minimum lease payments. The corresponding rental obligations, net of finance charges, are included in other long term payables. Each lease payment is allocated between the liability and the finance charges so as to achieve a constant rate on the finance balance outstanding. The interest element of the finance cost is charged to the comprehensive income statement over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The property, plant and equipment acquired under finance leases are depreciated over the shorter of the asset’s useful life and the lease term. |
Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Operating lease payments are representative of the pattern of benefit derived from the leased asset and accordingly are included in expenses on a straight line basis over the period of the lease.
- | Leased assets (accounting as lessor):Assets are leased out under an operating lease. The asset is included in the balance sheet based on the nature of the asset. Lease income is recognized over the term of the lease on a straight-line basis. |
Consolidated Financial Statements INTEROIL CORPORATION 19 |
InterOil Corporation Notes to Consolidated Financial Statements (Expressed in United States dollars) |
2. | Significant accounting policies (cont’d) |
- | Asset retirement obligations:A liability is recognized for future legal or constructive retirement obligations associated with the Company’s property, plant and equipment. The amount recognized is the net present value of the estimated costs of future dismantlement, site restoration and abandonment of properties based upon current regulations and economic circumstances at period end. During the quarter ended June 30, 2011, Management received the results of an independent assessment of the potential asset retirement obligations of the refinery. As a result of this assessment, Management has recognized an asset retirement obligation at December 31, 2011 of $4,562,269 (refer to note 23 for further details). No asset retirement obligations had been recognized at December 31, 2010. |
- | Environmental remediation:Remediation costs are accrued based on estimates of known environmental remediation exposure. Ongoing environmental compliance costs, including maintenance and monitoring costs, are expensed as incurred. Provisions are determined on an assessment of current costs, current legal requirements and current technology. Changes in estimates are dealt with on a prospective basis. |
- | Disposal of property, plant and equipment:At the time of disposal of plant and equipment, the carrying values of the assets are written off along with accumulated depreciation and any resulting gain or loss is included in the income statement. Gains and losses on disposals are determined by comparing proceeds with carrying amounts. |
- | IT Development and software:Costs incurred in development products or systems and costs incurred in acquiring software and licenses that will contribute to future period financial benefits through revenue generation and/or cost reduction are capitalized. Costs capitalized include external direct costs of materials and service, direct payroll and payroll related costs of employees’ time spent on the project. Amortization is calculated on a straight line basis over periods generally ranging from 3 to 5 years. IT development costs include only those costs directly attributable to the development phase and are only recognized following completion of technical feasibility and where the Company has an intention and ability to use the asset. These amounts are capitalized as part of property, plant and equipment in the Corporate segment. |
(m) | Oil and gas properties |
The Company uses the successful-efforts method to account for its oil and gas exploration and development activities. Under this method, costs are accumulated on a field-by-field basis with certain exploratory expenditures and exploratory dry holes being expensed as incurred. The Company continues to carry as an asset the cost of drilling exploratory wells if the required capital expenditure is made and drilling of additional exploratory wells is underway or firmly planned for the near future or when exploration and evaluation activities have not yet reached a stage to allow reasonable assessment regarding the existence of economic reserves. Capitalized costs for producing wells will be subject to depletion using the units-of-production method.
Geological and geophysical costs are expensed as incurred, except when they have been incurred to facilitate production techniques, to increase total recoverability and to determine the desirability of drilling additional development wells within a proved area. Geological and geophysical costs capitalized would be included as part of the cost of producing wells and be subject to depletion using the units-of-production method.
(n) | Impairment |
- | Non-derivative financial assets:A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset. |
An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount, and the present value of the estimated future cash flows discounted at the original effective interest rate. An impairment loss in respect of an available-for-sale financial asset is calculated by reference to its fair value.
Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics.
All impairment losses are recognized in the consolidated income statement. An impairment loss, other than relating to available-for-sale equity instruments, is reversed through profit and loss if the reversal can be related objectively to an event occurring after the impairment loss was recognized. The reversal of an impairment loss relating to available-for-sale equity instruments is through other comprehensive income.
Consolidated Financial Statements INTEROIL CORPORATION 20 |
InterOil Corporation Notes to Consolidated Financial Statements (Expressed in United States dollars) |
2. | Significant accounting policies (cont’d) |
Trade receivables
The collectability of trade receivables is assessed on an ongoing basis. Debts which are known to be uncollectible are written off by reducing the carrying amount directly. An allowance account (provision for impairment of trade receivables) is used when there is objective evidence that the company will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization, and default or delinquency in payments are considered indicators that the trade receivable is impaired. The amount of the impairment allowance is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. Cash flows relating to short-term receivables are not discounted if the effect of discounting is immaterial.
The amount of the impairment loss is recognized in the income statement. When a trade receivable for which an impairment allowance had been recognized becomes uncollectible in a subsequent period, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the income statement.
The Company sells certain trade receivables with recourse to BNP Paribas under its working capital facility. The receivables are retained on the balance sheet as the Company retains the credit risk and control over these receivables.
- | Non-financial assets:The carrying amounts of the Company’s non-financial assets, other than inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the asset’s recoverable amount is estimated. For goodwill, and intangible assets that have indefinite useful lives or that are not yet available for use, the recoverable amount is estimated each period at the same time. |
The recoverable amount of an asset is the greater of its value in use and its fair value less costs to sell and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. In that situation, the assets are tested as part of a cash-generating unit (“CGU”), which is the smallest identifiable group of assets, liabilities and associated goodwill that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.
Fair value is the amount of the consideration that would be agreed upon in an arm's length transaction between knowledgeable, willing parties who are under no compulsion to act. Value in use is determined as the net present value of the estimated future cash flows expected to arise from the continued use of the asset in its present form and its eventual disposal, discounted at the risk free rate of interest plus a risk premium. If an impairment loss is recognized, the adjusted carrying amount becomes the new cost basis.
An impairment loss is recognized if the carrying amount of an asset or its CGU exceeds its recoverable amount. Impairment losses are recognized in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the CGU and then to reduce the carrying amounts of the other assets in the CGU on a pro rata basis. Impairment losses are recognized in profit or loss.
Impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized.
There has been no impairment of assets or goodwill based on the assessments performed during the period.
(o) | Revenue recognition |
Revenue is measured at the fair value of the consideration received or receivable. Amounts disclosed as revenue are net of returns, trade allowances and duties and taxes paid. The following particular accounting policies, which significantly affect the measurement of results, have been applied.
- | Revenue from Midstream Refining operations:Revenue from sales of products is recognized when products are shipped and the customer takes ownership and assumes risk of loss, collection of the relevant receivable is probable and when the amount of revenue can be reliably measured. Sales between the operating segments of the Company have been eliminated from sales and operating revenues and cost of sales. |
Consolidated Financial Statements INTEROIL CORPORATION 21 |
InterOil Corporation Notes to Consolidated Financial Statements (Expressed in United States dollars) |
2. | Significant accounting policies (cont’d) |
- | Revenue from Downstream operations:Sales of goods are recognized when the Company has delivered products to the customer, the customer takes ownership and assumes risk of loss, collection of the receivable is probable, and when the amount of revenue can be reliably measured. It is not the Company’s policy to sell products with a right of return. |
- | Revenue from Upstream operations:Revenue from rig and constructions services are recognized in the accounting period in with the services are rendered. |
- | Interest revenue: Interest revenue is recognized as the interest accrues using the effective interest rate. |
(p) | Income tax |
Income tax comprises current and deferred tax. Income tax is recognized in the income statement except to the extent that it relates to items recognized directly in other comprehensive income or directly in equity, in which case the income tax is also recognized directly in other comprehensive income or equity respectively.
The income tax expense or benefit for the period is the tax payable on the current period’s taxable income based on the national income tax rate for each jurisdiction; adjusted by changes in deferred tax assets and liabilities attributable to temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements and to unused tax losses.
Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation.
Deferred tax assets and liabilities are recognized for temporary differences at the tax rates expected to apply when the assets are recovered or liabilities are settled, based on those tax rates which are enacted or substantively enacted for each jurisdiction. The relevant tax rates are applied to the cumulative amounts of deductible and taxable temporary differences to measure the deferred tax asset or liability. Deferred income tax assets and liabilities are presented as non-current.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously.
Deferred tax assets are recognized for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilize those temporary differences and losses. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.
The Refinery Project Agreement gave “pioneer” status to InterOil Limited (”IOL”). This status gave IOL a tax holiday beginning upon the date of the commencement of commercial production, January 1, 2005 and ended December 31, 2010.
In addition to income taxes, InterOil is subject to Goods and Services Tax, Excise Duty and other taxes in PNG, Australia, Singapore and Canada. The consolidated financial statements are prepared on a net of Goods and Services Tax basis.
(q) | Employee entitlements |
- | Wages and salaries, and annual leave:Liabilities for wages and salaries, including annual leave expected to be settled within 12 months of the reporting date are recognized in accounts payable and accrued liabilities in respect of employees’ services up to the reporting date and are measured at the amounts expected to be paid when liabilities are settled. |
- | Long service leave:The liability for long service leave is recognized in the provision for employee benefits and measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date. Consideration is given to expected future wage and salary levels, experience of employee departures, periods of service and statutory obligations. |
- | Post-employment obligations:The Company contributed to a defined contribution plan and the Company’s legal or constructive obligation is limited to these contributions. Contributions to the defined contribution fund are recognized as an expense as they become payable. |
Consolidated Financial Statements INTEROIL CORPORATION 22 |
InterOil Corporation Notes to Consolidated Financial Statements (Expressed in United States dollars) |
2. | Significant accounting policies (cont’d) |
- | Share-based payments:Stock-based compensation benefits are provided to employees and directors pursuant to the 2009 Stock Incentive Plan (with options still in existence having been granted under the now superseded 2006 Stock Incentive Plan). The Company currently issues stock options and restricted stock units as part of its stock-based compensation plan. The fair value of stock options at grant date is determined using a Black-Scholes option pricing model that takes into account the exercise price, the terms of the option, the vesting criteria, the share price at grant date and expected price volatility of the underlying share, the expected yield and risk-free interest rate for the term of the option. Upon exercise of options, the balance of the contributed surplus relating to those options is transferred to share capital. The fair value of restricted stock units on grant date is the market value of the stock. |
The Company uses the fair value based method to account for employee stock based compensation benefits. Under the fair value based method, compensation expense is measured at fair value at the date of grant and is expensed over the award's vesting period.
- | Profit-sharing and bonus plans:The Company recognizes a provision where contractually obliged or where there is a past practice that has created a constructive obligation. |
(r) | Earnings per share |
- | Basic earnings per share:Basic common shares outstanding are the weighted average number of common shares outstanding for each period. Basic earnings per share is calculated by dividing the profit or loss attributable to shareholders of the Company by the weighted average number of common shares outstanding during the period. |
- | Diluted earnings per share:Diluted earnings per share is determined by adjusting the profit or loss attributable to shareholders and the weighted average number of common shares outstanding, for the effects of all dilutive potential ordinary shares, which comprise convertible notes and share options granted to employees. |
3. | Transition to International Financial Reporting Standards (“IFRS”) |
(a) | Basis of transition to IFRS |
(i) Application of IFRS 1
The Company’s financial statements for the year ending December 31, 2011, are the first annual financial statements that comply with IFRS as disclosed in Note 2(a). The Company has applied IFRS 1 in preparing these consolidated financial statements.
The Company’s transition date is January 1, 2010. The Company prepared its opening IFRS balance sheet at that date. The reporting date of these consolidated financial statements is December 31, 2011. In preparing these consolidated financial statements in accordance with IFRS 1, the Company has applied the relevant mandatory exceptions and certain optional exemptions from full retrospective application of IFRS.
(ii) Exemptions from full retrospective application – elected by the Company
The Company has elected to apply the following optional exemptions from full retrospective application.
- | Business combinations exemption: A first-time adopter may elect not to apply IFRS 3 - ‘Business Combinations’ (as revised in 2008) retrospectively to past business combinations (business combinations that occurred before the date of transition to IFRSs). However, if a first-time adopter restates any business combination to comply with IFRS 3 (as revised in 2008), it shall restate all later business combinations and shall also apply IAS 27 (as amended in 2008) from that same date. InterOil has made the election not to apply IFRS 3 retrospectively to past business combinations. |
- | Fair value as deemed cost exemption: An entity may elect to measure an item of property, plant and equipment at the date of transition to IFRSs at its fair value and use that fair value as its deemed cost at that date. InterOil has made the election not to use deemed cost. Historical cost will be maintained as plant and equipment cost base on transition. |
- | Cumulative translation differences exemption: Consistent with the Company’s Canadian GAAP treatment in prior periods, IAS 21 requires an entity: (a) to recognize some translation differences in other comprehensive income and accumulate these in a separate component of equity; and (b) on disposal of a foreign operation, to reclassify the cumulative translation difference for that foreign operation (including, if applicable, gains and losses on related hedges) from equity to profit or loss as part of the gain or loss on disposal. An election can be made to be exempted from this requirement on transition and start with 'zero' translation differences. InterOil has not made the election to restate its cumulative translation differences balance to zero, and has elected to continue with the current translation differences in comprehensive income as these are already in compliance with IAS 21. |
Consolidated Financial Statements INTEROIL CORPORATION 23 |
InterOil Corporation Notes to Consolidated Financial Statements (Expressed in United States dollars) |
3. | Transition to International Financial Reporting Standards (“IFRS”) (cont’d) |
- | Oil and Gas assets exemption: Oil and Gas industry specific accounting under IFRS or Canadian GAAP is currently not as comprehensive as the guidance provided under U.S. GAAP accounting for industry specific oil and gas transactions. Para D8A of IFRS 1 provides an exemption in relation to Oil and Gas assets by allowing Companies to continue using the same policies as used under the previous GAAP and carrying forward the carrying amounts of the Oil and Gas assets under Canadian GAAP into IFRS. InterOil has availed this exemption and elected to maintain the Company’s Oil and Gas assets at carrying amount under Canadian GAAP treatment in prior periods, which will be the deemed cost under IFRS. |
- | Interests in Joint Ventures entities exemption: Superseded CICA Section 3055 differs from IAS 31 as IAS 31 permits the use of either the proportionate consolidation method or the equity method to account for joint venture entities. IAS 31 recommends the use of proportionate consolidation as it better reflects the substance and economic reality, however, it does permit the use of equity method. Superseded CICA Section 3055 only allows the use of proportionate consolidation method to account for joint venture entities. InterOil has elected to maintain its joint venture accounting under the proportionate consolidation model for both its incorporated and unincorporated joint venture interests. |
The remaining optional exemptions are not applicable to the Company.
(iii) Exceptions from full retrospective application followed by the Company
All mandatory exceptions in IFRS 1 were not applicable because there were no significant differences in management’s application of Canadian GAAP in these areas.
(b) | Reconciliations between IFRS and Canadian GAAP |
The following reconciliations provide a quantification of the effect of the transition to IFRS. The first reconciliation provides an overview of the impact on equity of the transition at January 1, 2010 and December 31, 2010. The second reconciliation provides an overview of the impact of the transition on comprehensive income for the year ended December 31, 2010. There are no material differences between the statement of cash flows presented in accordance with IFRSs and the statement of cash flows presented in accordance with Canadian GAAP.
Consolidated Financial Statements INTEROIL CORPORATION 24 |
InterOil Corporation Notes to Consolidated Financial Statements (Expressed in United States dollars) |
3. | Transition to International Financial Reporting Standards (“IFRS”) (cont’d) |
(i) Reconciliation of equity
Canadian GAAP January 1, 2010 | Effect of transition to IFRSs | IFRS January 1, 2010 | Canadian GAAP December 31, 2010 | Effect of transition to IFRSs | IFRS December 31, 2010 | |||||||||||||||||||
$ | $ | $ | $ | $ | $ | |||||||||||||||||||
Assets | ||||||||||||||||||||||||
Current assets: | ||||||||||||||||||||||||
Cash and cash equivalents | 46,449,819 | - | 46,449,819 | 233,576,821 | - | 233,576,821 | ||||||||||||||||||
Cash restricted | 22,698,829 | - | 22,698,829 | 40,664,995 | - | 40,664,995 | ||||||||||||||||||
Trade receivables | 61,194,136 | - | 61,194,136 | 48,047,496 | - | 48,047,496 | ||||||||||||||||||
Other assets | 639,646 | - | 639,646 | 505,059 | - | 505,059 | ||||||||||||||||||
Inventories | 70,127,049 | - | 70,127,049 | 127,137,360 | - | 127,137,360 | ||||||||||||||||||
Prepaid expenses | 6,964,950 | - | 6,964,950 | 3,593,574 | - | 3,593,574 | ||||||||||||||||||
Total current assets | 208,074,429 | - | 208,074,429 | 453,525,305 | - | 453,525,305 | ||||||||||||||||||
Non-current assets: | ||||||||||||||||||||||||
Cash restricted | 6,609,746 | - | 6,609,746 | 6,613,074 | - | 6,613,074 | ||||||||||||||||||
Goodwill | 6,626,317 | - | 6,626,317 | 6,626,317 | - | 6,626,317 | ||||||||||||||||||
Plant and equipment (1) | 221,046,709 | (2,252,060 | ) | 218,794,649 | 229,331,842 | (4,126,415 | ) | 225,205,427 | ||||||||||||||||
Oil and gas properties | 172,483,562 | - | 172,483,562 | 255,294,738 | - | 255,294,738 | ||||||||||||||||||
Deferred tax assets (2) | 16,912,969 | 13,406,194 | 30,319,163 | 14,098,128 | 14,379,562 | 28,477,690 | ||||||||||||||||||
Total non-current assets | 423,679,303 | 11,154,134 | 434,833,437 | 511,964,099 | 10,253,147 | 522,217,246 | ||||||||||||||||||
Total assets | 631,753,732 | 11,154,134 | 642,907,866 | 965,489,404 | 10,253,147 | 975,742,551 | ||||||||||||||||||
Liabilities and shareholders' equity | ||||||||||||||||||||||||
Current liabilities: | ||||||||||||||||||||||||
Accounts payable and accrued liabilities | 59,372,354 | - | 59,372,354 | 76,087,954 | - | 76,087,954 | ||||||||||||||||||
Derivative contracts | - | - | - | 178,578 | - | 178,578 | ||||||||||||||||||
Working capital facilities | 24,626,419 | - | 24,626,419 | 51,254,326 | - | 51,254,326 | ||||||||||||||||||
Current portion of secured and unsecured loans | 9,000,000 | - | 9,000,000 | 14,456,757 | - | 14,456,757 | ||||||||||||||||||
Current portion of Indirect participation interest | 540,002 | - | 540,002 | 540,002 | - | 540,002 | ||||||||||||||||||
Total current liabilities | 93,538,775 | - | 93,538,775 | 142,517,617 | - | 142,517,617 | ||||||||||||||||||
Non-current liabilities: | ||||||||||||||||||||||||
Secured loan | 43,589,278 | - | 43,589,278 | 34,813,222 | - | 34,813,222 | ||||||||||||||||||
2.75% convertible notes liability | - | - | - | 52,425,489 | - | 52,425,489 | ||||||||||||||||||
Deferred gain on contributions to LNG project (1) | 13,076,272 | (2,252,060 | ) | 10,824,212 | 13,076,272 | (4,126,415 | ) | 8,949,857 | ||||||||||||||||
Indirect participation interest | 39,559,718 | - | 39,559,718 | 34,134,387 | - | 34,134,387 | ||||||||||||||||||
Total non-current liabilities | 96,225,268 | (2,252,060 | ) | 93,973,208 | 134,449,370 | (4,126,415 | ) | 130,322,955 | ||||||||||||||||
Total liabilities | 189,764,043 | (2,252,060 | ) | 187,511,983 | 276,966,987 | (4,126,415 | ) | 272,840,572 | ||||||||||||||||
Non-controlling interest | 13,596 | - | 13,596 | 20,099 | - | 20,099 | ||||||||||||||||||
Shareholders' equity: | ||||||||||||||||||||||||
Share capital | 613,361,363 | - | 613,361,363 | 895,651,052 | - | 895,651,052 | ||||||||||||||||||
2.75% convertible notes | - | - | - | 14,298,036 | - | 14,298,036 | ||||||||||||||||||
Contributed surplus | 21,297,177 | - | 21,297,177 | 16,738,417 | - | 16,738,417 | ||||||||||||||||||
Accumulated Other Comprehensive Income | 8,150,976 | - | 8,150,976 | 9,261,177 | - | 9,261,177 | ||||||||||||||||||
Conversion options | 13,270,880 | - | 13,270,880 | 12,150,880 | - | 12,150,880 | ||||||||||||||||||
Accumulated deficit (2) | (214,104,303 | ) | 13,406,194 | (200,698,109 | ) | (259,597,244 | ) | 14,379,562 | (245,217,682 | ) | ||||||||||||||
Total shareholders' equity | 441,976,093 | 13,406,194 | 455,382,287 | 688,502,318 | 14,379,562 | 702,881,880 | ||||||||||||||||||
Total liabilities and shareholders' equity | 631,753,732 | 11,154,134 | 642,907,866 | 965,489,404 | 10,253,147 | 975,742,551 |
Consolidated Financial Statements INTEROIL CORPORATION 25 |
InterOil Corporation Notes to Consolidated Financial Statements (Expressed in United States dollars) |
3. | Transition to International Financial Reporting Standards (“IFRS”) (cont’d) |
(ii) Reconciliation of total comprehensive income
Canadian GAAP December 31, 2010 | Year ended Effect of transition to IFRSs | IFRS December 31, 2010 | ||||||||||
$ | $ | $ | ||||||||||
Loss for the period (2) | (45,486,439 | ) | 973,368 | (44,513,071 | ) | |||||||
Other comprehensive income/(loss): | ||||||||||||
Exchange difference on translation of foreign operations, net of tax | 1,110,201 | - | 1,110,201 | |||||||||
Other comprehensive income/(loss) for the period, net of tax | 1,110,201 | - | 1,110,201 | |||||||||
Total comprehensive income/(loss) for the period | (44,376,238 | ) | 973,368 | (43,402,870 | ) |
(iii) Notes to the reconciliations
(1) | In September 2009, as part of acquisition by Pacific LNG of a 2.5% direct working interest in the Elk and Antelope fields, Pacific LNG transferred to InterOil 2.5% of Pacific LNG’s unexercised economic interest in the joint venture LNG Project. Based on this transaction, as at December 31, 2011, InterOil and Pacific LNG hold 52.5% and 47.5% economic interest respectively in the LNG project, subject to the exercise of all their rights to the ‘B’ Class shares on payment of cash calls. |
To date InterOil has a recognized deferred gain on its contributions to the Joint Venture based on the share of other joint venture partners in the project. As InterOil’s shareholding within the Joint Venture Company as at December 31, 2011 is 84.582% (Dec 2010 – 86.66%), the gain on contribution of non cash assets to the project by InterOil relating to other joint venture partners’ shareholding (15.418% - amounting to $15,113,190) has been recognized by InterOil in its balance sheet as a deferred gain. This deferred gain will increase/decrease as the other Joint Venture partners decrease/increase their shareholding in the project. Previously under Canadian GAAP, the amount was recognized as a deferred gain in full. However, under IFRS, unrealized gains or losses on non-monetary assets contributed to joint ventures shall be eliminated against the underlying assets under the proportionate consolidation method. Such unrealized gains or losses shall not be presented as deferred gains or losses in the venturer's consolidated balance sheet. |
As such, the deferred gain has been recorded as a reduction of deferred LNG project costs of $9,302,415 at December 31, 2011 (Dec 31, 2010 - $4,126,415, Jan 1, 2010 - $2,252,060), which has reduced the LNG project costs to nil at December 31, 2011, with the remaining balance of $5,810,775 (Dec 31, 2010 - $8,949,857, Jan 1, 2010 - $10,824,212) being recorded as a deferred gain. The deferred gain will be recognized in the consolidated income statement when the risks and rewards have considered to be passed. The intangible assets of the Joint Venture Company, contributed by InterOil, have been eliminated on proportionate consolidation of the joint venture balances.
(2) | In accordance with guidance under IFRS, deferred tax assets have been recognized for temporary differences that arise on translation of the nonmonetary assets held by Midstream refining operations that are translated from the functional currency of the tax return (PGK) to the reporting currency (USD) using period end rates. Previously under Canadian GAAP, these temporary differences in relation to functional currency translation of nonmonetary assets were specifically disallowed from recognition. |
4. | Financial Risk Management |
The Company’s activities expose it to a variety of financial risks; market risk, credit risk, liquidity risk and geographic risk. The Company’s overall risk management program focuses on the unpredictability of markets and seeks to minimize potential adverse effects on the financial performance of the Company. The Company uses derivative financial instruments to hedge certain price risk exposures.
Risk Management is carried out under policies approved by the Board of Directors. The Finance Department identifies, evaluates and hedges financial risks in close cooperation with the Company’s operating units. The product pricing risks are managed by the Supply and Trading Department under the guidance of the Risk Management Committee. The Board provides written principles for overall risk management, as well as written policies covering specific areas, such as use of derivative financial instruments. The Company’s overall risk management program seeks to minimize potential adverse effects on the Company’s financial performance.
Consolidated Financial Statements INTEROIL CORPORATION 26 |
InterOil Corporation Notes to Consolidated Financial Statements (Expressed in United States dollars) |
4. | Financial Risk Management (cont’d) |
(a) | Market risk |
(i) Foreign exchange risk
Foreign exchange risk arises when future commercial transactions and recognized assets and liabilities are denominated in a currency that is not the Company’s functional currency. The Company operates internationally and is exposed to foreign exchange risk arising from currency exposures to the USD. The consolidated financial statements are presented in USD which is the Company’s functional and reporting currency. Most of the Company’s transactions are undertaken in USD, PGK, Australian Dollars (“AUD”) and Singapore Dollars (“SGD”).
The PGK exposures mainly relate to the exchange rates achieved from the banks on transfer of PGK sale proceeds to USD to repay the Company’s crude cargo borrowings. The rates achieved fluctuate significantly based on other exporters/importers looking to convert their USD into PGK, and is also impacted by seasonality based farm produce exports from PNG. The Company is unable to do any hedging due to PGK illiquidity and small size of the market. The translation of PGK denominated balances in the Company’s operating entities into USD at period ends can also result in material impact on the foreign exchange gains/losses on consolidation.
Changes in the PGK to USD exchange rate can affect the Company’s Midstream Refining results as there is a timing difference between the foreign exchange rates utilized when setting the monthly PGK IPP price and the foreign exchange rate used to convert the subsequent receipt of PGK proceeds to USD to repay the Company’s crude cargo borrowings. The foreign exchange movement also impacts equity as translation gains/losses of the Company’s Downstream operations from PGK to USD is included in other comprehensive income. The PGK strengthened against the USD during the year ended December 31, 2011 (from 0.3785 to 0.4665).
The financial instruments denominated in PGK and translated to USD as at December 31, 2011 are as follows:
December 31, | December 31, | |||||||
2011 | 2010 | |||||||
$ | $ | |||||||
Financial assets | ||||||||
Cash and cash equivalents | 42,669,762 | 11,789,931 | ||||||
Cash restricted | 161,801 | 130,486 | ||||||
Short term treasury bills | 11,832,110 | - | ||||||
Receivables | 96,322,533 | 42,006,504 | ||||||
Other financial assets | 3,289,791 | 1,771,866 | ||||||
Financial liabilities | ||||||||
Payables | 30,866,291 | 16,980,909 | ||||||
Working capital facility | 6,450,372 | 1,230,767 |
The following table summarizes the sensitivity of financial instruments held at balance sheet date to movement in the exchange rate of the USD to the PGK, with all other variables held constant. Certain USD debt and other financial assets and liabilities are not held in the functional currency of the relevant subsidiary. This results in an accounting exposure to exchange gains and losses as the financial assets and liabilities are translated into the functional currency of the subsidiary that accounts for those assets and liabilities. These exchange gains and losses are recorded in the consolidated income statement except to the extent that they can be taken to equity under the Company’s accounting policy. If PGK appreciates/(depreciates) by 5% against the USD, it will result in a gain/(loss) as per the table below.
Year ended | Year ended | |||||||||||||||
December 31, 2011 | December 31, 2010 | |||||||||||||||
Impact on profit | Impact on equity - excluding profit impact | Impact on profit | Impact on equity - excluding profit impact | |||||||||||||
$ | $ | $ | $ | |||||||||||||
Post-tax gain/(loss) | ||||||||||||||||
Effect of 5% appreciation of PGK | 2,386,925 | 3,474,679 | 212,281 | 1,662,074 |
Consolidated Financial Statements INTEROIL CORPORATION 27 |
InterOil Corporation Notes to Consolidated Financial Statements (Expressed in United States dollars) |
4. | Financial Risk Management (cont’d) |
The changes in AUD and SGD to USD exchange rate can affect the Company’s Corporate results as the expenses of the Corporate offices in Australia and Singapore are incurred in the respective local currencies. The AUD and SGD exposures are minimal currently as funds are transferred to AUD and SGD from USD as required. No material balances are held in AUD or SGD. However, the Company is exposed to translation risks resulting from AUD and SGD fluctuations as in country costs are being incurred in AUD and SGD and reporting for those costs being in USD. The Company has entered into AUD to USD foreign currency forward contracts to manage the foreign exchange risk in relation to the expenses to be incurred in AUD.
(ii) Price risk
Product Price Risk:
The Midstream Refining operations of the Company are largely exposed to price fluctuations during the period between the crude purchases and the refined products leaving the refinery when sold to Downstream operations and other distributors. The Company actively tries to manage the price risk by entering into derivative contracts to buy and sell crude and finished products.
The derivative contracts are entered into by Management based on documented risk management strategies which have been approved by the Risk Management Committee. All derivative contracts entered into are reviewed by the Risk Management Committee as part of the meetings of the Committee.
The following table summarizes the sensitivity of derivative financial instruments held at balance sheet date to $10.0 movement in benchmark pricing, with all other variables held constant. If the pricing increases/(declines) by $10.0, it will result in a (loss)/gain as per the table below.
Year ended | Year ended | |||||||||||||||
December 31, 2011 | December 31, 2010 | |||||||||||||||
Impact on profit | Impact on equity - excluding profit impact | Impact on profit | Impact on equity - excluding profit impact | |||||||||||||
$ | $ | $ | $ | |||||||||||||
Post-tax gain/(loss) | ||||||||||||||||
$10 increase in benchmark pricing of derivative contracts | (6,550,000 | ) | - | (540,000 | ) | - |
Securities Price Risk:
The Company is also exposed to equity securities price risk. This arises from investments held by the Company and classified in the balance sheet as available-for-sale. The Company’s equity investments are publicly traded and are quoted on the Oslo stock exchange Axess. Refer to note 14 for further details of this investment.
The following table summarizes the sensitivity of these investments held at balance sheet date to 10% movement in benchmark pricing, with all other variables held constant. If the pricing increases/(declines) by 10%, it will result in a (loss)/gain as per the table below.
Year ended | Year ended | |||||||||||||||
December 31, 2011 | December 31, 2010 | |||||||||||||||
Impact on profit | Impact on equity - excluding profit impact | Impact on profit | Impact on equity - excluding profit impact | |||||||||||||
$ | $ | $ | $ | |||||||||||||
Post-tax gain/(loss) | ||||||||||||||||
10% increase in benchmark pricing of equity investments | 365,079 | - | - | |||||||||||||
10% decrease in benchmark pricing of equity investments | (365,079 | ) |
(iii) Interest rate risk
Interest rate risk is the risk that the Company’s financial position will be adversely affected by movements in interest rates that will increase the cost of floating rate debt or opportunity losses that may arise on fixed rate borrowings in a falling interest rate environment. As the Company has no significant interest-bearing assets other than cash and cash equivalents, the Company’s income and operating cash flows are substantially independent of changes in market interest rates.
Consolidated Financial Statements INTEROIL CORPORATION 28 |
InterOil Corporation Notes to Consolidated Financial Statements (Expressed in United States dollars) |
4. | Financial Risk Management (cont’d) |
The Company’s interest-rate risk arises from cash and cash equivalent balances, borrowings and working capital financing facilities. Deposits/borrowings at variable rates expose the Company to cash flow interest-rate risk. Deposits/borrowings at fixed rates expose the Company to fair value interest-rate risk. The Company is actively seeking to manage its cash flow interest-rate risks by holding some cash, cash equivalents and borrowings in fixed rate instruments and others in variable rate instruments.
The financial instruments exposed to cash flow and fair value interest rate risk are as follows:
December 31, 2011 | December 31, 2010 | Cash flow/fair value interest rate risk | ||||||||||
$ | $ | |||||||||||
Financial assets | ||||||||||||
Cash and cash equivalents | 37,891,187 | 1,205,304 | fair value interest rate risk | |||||||||
Cash and cash equivalents | 30,955,254 | 232,371,517 | cash flow interest rate risk | |||||||||
Cash restricted | 365,281 | 309,926 | fair value interest rate risk | |||||||||
Cash restricted | 38,885,482 | 46,968,143 | cash flow interest rate risk | |||||||||
Short term treasury bills | 11,832,110 | - | fair value interest rate risk | |||||||||
Financial liabilities | ||||||||||||
OPIC secured loan | 35,500,000 | 44,500,000 | fair value interest rate risk | |||||||||
Mitsui unsecured loan | 10,393,023 | 5,456,757 | cash flow interest rate risk | |||||||||
BNP working capital facility | 10,030,131 | 50,023,559 | cash flow interest rate risk | |||||||||
Westpac working capital facility | 6,450,372 | 1,230,767 | cash flow interest rate risk | |||||||||
2.75% convertible notes | 70,000,000 | 70,000,000 | fair value interest rate risk |
The following table summarizes the sensitivity of the cash flow interest-rate risk of financial instruments held at balance date, following a movement to LIBOR, with all other variables held constant. Increase in LIBOR rates will result in a higher expense for the Company.
Year ended | Year ended | |||||||||||||||
December 31, 2011 | December 31, 2010 | |||||||||||||||
Impact on profit | Impact on equity - excluding profit impact | Impact on profit | Impact on equity - excluding profit impact | |||||||||||||
$ | $ | $ | $ | |||||||||||||
Post-tax loss/(gain) | ||||||||||||||||
LIBOR Increase by 1% | 507,666 | - | 338,291 | - |
(iv) Product risk
The composition of the crude feedstock will vary the refinery output of products. The 2011 year to date output achieved includes gasoline and distillates fuels (which includes diesel and jet fuels) 58% (Dec 2010 – 53%), and naphtha and low sulphur waxy residue 37% (Dec 2010 – 42%). The product yields obtained will vary based on the type of crude feedstock used.
Management endeavors to manage the product risk by actively reviewing the market for demand and supply, trying to maximize the production of the higher margin products and also renegotiating the selling prices for the lower margin products.
(b) | Liquidity risk |
Liquidity risk is the risk that InterOil will not meet its financial obligations as they fall due. Prudent liquidity risk management therefore implies that, under both normal and stressed conditions, the Company maintains:
· | sufficient cash and marketable securities; |
· | access to, or availability of, funding through an adequate amount of committed credit facilities; and |
· | the ability to close-out any open market positions. |
Consolidated Financial Statements INTEROIL CORPORATION 29 |
InterOil Corporation Notes to Consolidated Financial Statements (Expressed in United States dollars) |
4. | Financial Risk Management (cont’d) |
The Company manages liquidity risk by continuously monitoring forecast and actual cash flows; matching maturity profiles of financial assets and liabilities; and by maintaining flexibility in funding including ensuring that surplus funds are generally only invested in instruments that are tradable in highly liquid markets or that can be relinquished with minimal risk of loss.
(i) Financing arrangements
The Company had the following established undrawn borrowing facilities at the reporting date:
Undrawn Amount | ||||||||
Total Facility | December 31, 2011 | |||||||
$ | $ | |||||||
Facility | ||||||||
OPIC secured loan | 35,500,000 | - | ||||||
Mitsui unsecured loan | 10,393,023 | - | ||||||
2.75% convertible notes | 70,000,000 | - | ||||||
BNP Paribas working capital facility 1* | 200,000,000 | 35,090,000 | ||||||
BNP Paribas working capital facility 2 | 60,000,000 | 49,969,869 | ||||||
Westpac working capital facility (PGK denominated) | 37,320,000 | 30,869,628 | ||||||
BSP working capital facility (PGK denominated) | 23,325,000 | 23,325,000 | ||||||
436,538,023 | 139,254,497 |
* Includes the temporary increase of $30.0 million that expires on January 31, 2012.
(ii) Maturities of financial liabilities
The tables below analyses the Company’s financial liabilities, net and gross settled derivative financial instruments into relevant maturity groupings based on the remaining period at the reporting date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows.
Less than 1 year | Between 1 and 5 years | More than 5 years | Total contractual cash flow | |||||||||||||
Non-derivatives | ||||||||||||||||
Trade and other payables (note 16) | 159,882,177 | - | - | 159,882,177 | ||||||||||||
Working capital facility (note 18) | 16,480,503 | - | - | 16,480,503 | ||||||||||||
Secured and unsecured loans (note 20) | 21,727,400 | 29,859,050 | - | 51,586,450 | ||||||||||||
2.75% convertible notes (note 26) | 1,925,000 | 75,614,583 | - | 77,539,583 | ||||||||||||
Total non-derivatives | 200,015,080 | 105,473,633 | - | 305,488,713 | ||||||||||||
Derivatives | ||||||||||||||||
Derivative financial instruments (note 9) | 11,457 | - | - | 11,457 | ||||||||||||
Total derivatives | 11,457 | - | - | 11,457 | ||||||||||||
200,026,537 | 105,473,633 | - | 305,500,170 |
The ageing of trade and other payables are as follows:
Payable ageing between | ||||||||||||||||
Total | <30 days | 30-60 days | >60 days | |||||||||||||
Trade and other payables | $ | $ | $ | $ | ||||||||||||
December 31, 2011 | 159,882,177 | 157,758,605 | 979,728 | 1,143,844 | ||||||||||||
December 31, 2010 | 75,132,880 | 70,788,064 | 1,766,354 | 2,578,462 |
(c) | Credit risk |
Credit risk is the risk that a contracting entity will not complete its obligation under a financial instrument that will result in a financial loss to the Company. The carrying amount of financial assets represents the maximum credit exposure.
Consolidated Financial Statements INTEROIL CORPORATION 30 |
InterOil Corporation Notes to Consolidated Financial Statements (Expressed in United States dollars) |
4. | Financial Risk Management (cont’d) |
The Company’s credit risk is limited to the carrying value of its financial assets. A significant amount of the Company’s export sales are made to two customers which represented $260,468,514 (Dec 2010 - $211,864,290) or 24% (Dec 2010 – 26%) of total sales in the year ended December 31, 2011. The Company’s domestic sales for the year ended December 31, 2011 were not dependent on a single customer or geographic region within PNG. The export sales to two customers is not considered a key risk as there is a ready market for InterOil export products and the prices are quoted on active markets. The receivables from these customers are current as at December 31, 2011. The Company actively manages credit risk by routinely monitoring the credit ratings of the Company’s export customers and by monitoring the ageing of trade receivables of the Company’s domestic customers. The credit terms provided to customers are revised if any changes are noted to customer ratings or payment cycles.
Credit risk on cash, cash equivalents and short term treasury bills held directly by the Company are minimized as all cash amounts, certificates of deposit and treasury bills are held with banks which have acceptable credit ratings.
The maximum exposure to credit risk at the reporting date was as follows:
December 31, | December 31, | |||||||
2011 | 2010 | |||||||
$ | $ | |||||||
Current | ||||||||
Cash and cash equivalents | 68,846,441 | 233,576,821 | ||||||
Cash restricted | 32,982,001 | 40,664,995 | ||||||
Short term treasury bills | 11,832,110 | - | ||||||
Trade and other receivables | 135,273,600 | 48,047,496 | ||||||
Commodity derivative contracts | 595,440 | - | ||||||
Non-current | ||||||||
Cash restricted | 6,268,762 | 6,613,074 |
The ageing of trade receivables at the reporting date was as follows (the ageing days relates to balances past due):
Receivable ageing | ||||||||||||||||||||
Total | Current | <30 days | 30-60 days | >60 days | ||||||||||||||||
Net trade receivables | $ | $ | $ | $ | $ | |||||||||||||||
December 31, 2011 | 112,239,803 | 51,026,962 | 40,875,467 | 13,076,371 | 7,261,003 | |||||||||||||||
December 31, 2010 | 45,428,435 | 20,344,957 | 19,239,373 | 3,198,155 | 2,645,950 |
The impairment of trade receivables at the reporting date was as follows:
Overdue | Overdue | ||||||||||||||||
Total | Current | (not impaired) | (impaired) | ||||||||||||||
Gross trade receivables | $ | $ | $ | $ | |||||||||||||
December 31, 2011 | 113,761,948 | 51,026,961 | 61,212,842 | 1,522,145 | |||||||||||||
December 31, 2010 | 47,934,378 | 20,344,957 | 25,083,478 | 2,505,943 |
Impairment is assessed by the Company on an individual customer basis, based on customer ratings and payment cycles of the customers. An impairment provision is taken for all receivables where objective evidence of impairment exists. The movement in impairment is also influenced by the translation rates used to convert these amounts from local currency to USD.
Other receivables as at December 31, 2011 of $23,033,797 (Dec 2010 - $2,619,061) were not impaired.
The movement in impaired trade receivables for the year ended December 31, 2011 was as follows:
Consolidated Financial Statements INTEROIL CORPORATION 31 |
InterOil Corporation Notes to Consolidated Financial Statements (Expressed in United States dollars) |
4. | Financial Risk Management (cont’d) |
Year ended | Year ended | |||||||
December 31, 2011 | December 31, 2010 | |||||||
$ | $ | |||||||
Trade receivables - Impairment provisions | ||||||||
Opening balance | 2,505,943 | 3,603,342 | ||||||
Foreign exchange impact on opening balance | 582,623 | 82,779 | ||||||
Amounts written off during the year | (1,078,455 | ) | (666,034 | ) | ||||
Movement in provisions, net of reversals made | (487,966 | ) | (514,144 | ) | ||||
Closing balance | 1,522,145 | 2,505,943 |
(d) | Geographic risk |
The operations of InterOil are concentrated in PNG.
(e) | Financing facilities |
As at December 31, 2011, the Company had drawn down against the following financing facilities:
- | BNP working capital facility (refer note 18) |
- | Westpac working capital facility (refer note 18) |
- | OPIC secured loan facility (refer note 20) |
- | Mitsui unsecured loan facility (refer note 20) |
- | 2.75% convertible notes (refer note 26) |
Repayment obligations in respect of the amount of the facilities utilized are as follows:
December 31, | December 31, | |||||||
2011 | 2010 | |||||||
$ | $ | |||||||
Due: | ||||||||
No later than one year | 35,873,526 | 65,711,083 | ||||||
Later than one year but not later than two years | 9,000,000 | 9,000,000 | ||||||
Later than two years but not later than three years | 9,000,000 | 9,000,000 | ||||||
Later than three years but not later than four years | 78,500,000 | 9,000,000 | ||||||
Later than four years but not later than five years | - | 78,500,000 | ||||||
Later than five years | - | - | ||||||
132,373,526 | 171,211,083 |
(f) | Effective interest rates and maturity profile |
Floating | Fixed interest maturing between | Effective | ||||||||||||||||||||||||||||||||||||||
interest | 1 year | more than | Non-interest | interest | ||||||||||||||||||||||||||||||||||||
rate | or less | 1-2 | 2-3 | 3-4 | 4-5 | 5 years | bearing | Total | rate | |||||||||||||||||||||||||||||||
December 31, 2011 | $ | $ | $ | $ | $ | $ | $ | $ | $ | % | ||||||||||||||||||||||||||||||
Financial assets | ||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | 30,955,254 | 37,891,187 | - | - | - | - | - | - | 68,846,441 | 0.23 | % | |||||||||||||||||||||||||||||
Cash restricted | 38,885,482 | 365,281 | - | - | - | - | - | - | 39,250,763 | 2.86 | % | |||||||||||||||||||||||||||||
Short term treasury bills | - | 11,832,110 | - | - | - | - | - | - | 11,832,110 | 4.32 | % | |||||||||||||||||||||||||||||
Receivables | - | - | - | - | - | - | - | 135,273,600 | 135,273,600 | - | ||||||||||||||||||||||||||||||
Investments | - | - | - | - | - | - | - | 3,650,786 | 3,650,786 | - | ||||||||||||||||||||||||||||||
Other financial assets | - | - | - | - | - | - | - | 6,073,036 | 6,073,036 | - | ||||||||||||||||||||||||||||||
69,840,736 | 50,088,578 | - | - | - | - | - | 144,997,422 | 264,926,736 | ||||||||||||||||||||||||||||||||
Financial liabilities | ||||||||||||||||||||||||||||||||||||||||
Payables | - | - | - | - | - | - | - | 159,882,177 | 159,882,177 | - | ||||||||||||||||||||||||||||||
Interest bearing liabilities | 26,873,526 | 9,000,000 | 9,000,000 | 9,000,000 | 8,500,000 | - | - | - | 62,373,526 | 6.93 | % | |||||||||||||||||||||||||||||
Convertible notes liability | - | - | - | - | 70,000,000 | - | - | - | 70,000,000 | 7.91 | % | |||||||||||||||||||||||||||||
Other financial liabilities | - | - | - | - | - | - | - | 11,457 | 11,457 | - | ||||||||||||||||||||||||||||||
26,873,526 | 9,000,000 | 9,000,000 | 9,000,000 | 78,500,000 | - | - | 159,893,634 | 292,267,160 |
Consolidated Financial Statements INTEROIL CORPORATION 32 |
InterOil Corporation Notes to Consolidated Financial Statements (Expressed in United States dollars) |
4. | Financial Risk Management (cont’d) |
Floating | Fixed interest maturing between | Effective | ||||||||||||||||||||||||||||||||||||||
interest | 1 year | more than | Non-interest | interest | ||||||||||||||||||||||||||||||||||||
rate | or less | 1-2 | 2-3 | 3-4 | 4-5 | 5 years | bearing | Total | rate | |||||||||||||||||||||||||||||||
December 31, 2010 | $ | $ | $ | $ | $ | $ | $ | $ | $ | % | ||||||||||||||||||||||||||||||
Financial assets | ||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | 232,371,517 | 1,205,304 | - | - | - | - | - | - | 233,576,821 | 0.21 | % | |||||||||||||||||||||||||||||
Cash restricted | 46,968,143 | 309,926 | - | - | - | - | - | - | 47,278,069 | 2.89 | % | |||||||||||||||||||||||||||||
Receivables | - | - | - | - | - | - | - | 48,047,496 | 48,047,496 | - | ||||||||||||||||||||||||||||||
Other financial assets | - | - | - | - | - | - | - | 3,593,574 | 3,593,574 | - | ||||||||||||||||||||||||||||||
279,339,660 | 1,515,230 | - | - | - | - | - | 51,641,070 | 332,495,960 | ||||||||||||||||||||||||||||||||
Financial liabilities | ||||||||||||||||||||||||||||||||||||||||
Payables | - | - | - | - | - | - | - | 76,087,954 | 76,087,954 | - | ||||||||||||||||||||||||||||||
Interest bearing liabilities | 56,711,083 | 9,000,000 | 9,000,000 | 9,000,000 | 9,000,000 | 8,500,000 | - | - | 101,211,083 | 6.80 | % | |||||||||||||||||||||||||||||
Convertible notes liability | - | - | - | - | - | 70,000,000 | - | - | 70,000,000 | 7.91 | % | |||||||||||||||||||||||||||||
Other financial liabilities | - | - | - | - | - | - | - | 178,578 | 178,578 | - | ||||||||||||||||||||||||||||||
56,711,083 | 9,000,000 | 9,000,000 | 9,000,000 | 9,000,000 | 78,500,000 | - | 76,266,532 | 247,477,615 |
(g) | Fair values |
December 31, 2011 | December 31, 2010 | Fair value | ||||||||||||||||||||||
Carrying amount | Fair value | Carrying amount | Fair value | hierarchy level | Method of | |||||||||||||||||||
$ | $ | $ | $ | (as required) * | measurement | |||||||||||||||||||
Financial instruments | ||||||||||||||||||||||||
Financial assets | ||||||||||||||||||||||||
Loans and receivables | ||||||||||||||||||||||||
Cash and cash equivalents (note 6) | 68,846,441 | 68,846,441 | 233,576,821 | 233,576,821 | Amortized Cost | |||||||||||||||||||
Cash restricted (note 9) | 39,250,763 | 39,250,763 | 47,278,069 | 47,278,069 | Amortized Cost | |||||||||||||||||||
Short term treasury bills (note 8) | 11,832,110 | 11,832,110 | - | - | Amortized Cost | |||||||||||||||||||
Receivables (note 10) | 135,273,600 | 135,273,600 | 48,047,496 | 48,047,496 | Amortized Cost | |||||||||||||||||||
Available-for-sale | ||||||||||||||||||||||||
Investments (note 14) | 3,650,786 | 3,650,786 | - | - | Level 1 | Fair Value - See (i) below | ||||||||||||||||||
Held for trading | ||||||||||||||||||||||||
Derivative contracts (note 9) | 583,983 | 583,983 | (178,578 | ) | (178,578 | ) | Level 2 | Fair Value - See (ii) below | ||||||||||||||||
Financial liabilities | ||||||||||||||||||||||||
Current liabilities: | ||||||||||||||||||||||||
Accounts payable and accrued liabilities (note 16) | 159,882,177 | 159,882,177 | 76,087,954 | 76,087,954 | Amortized Cost | |||||||||||||||||||
Working capital facility (note 18) | 16,480,503 | 16,480,503 | 51,254,326 | 51,254,326 | Amortized Cost | |||||||||||||||||||
Current portion of secured and unsecured loans (note 20) | 19,393,023 | 19,638,921 | 14,456,757 | 14,583,922 | Amortized cost See (iii) below | |||||||||||||||||||
Non-current liabilities | ||||||||||||||||||||||||
Secured loan (note 20) | 26,037,166 | 28,911,667 | 34,813,222 | 38,879,426 | Amortized cost See (iii) below | |||||||||||||||||||
2.75% Convertible notes liability (note 26) | 55,637,630 | 55,637,630 | 52,425,489 | 52,425,489 | Amortized Cost |
* Where fair value of financial assets or liabilities is approximated by its carrying value, designation under the fair value hierarchy is not required.
The net fair value of cash and cash equivalents and non-interest bearing financial assets and financial liabilities of the Company approximates their carrying amounts.
The carrying values (less impairment provision if provided) of trade receivables and payables are assumed to approximate their fair values due to their short-term nature. The carrying value of financial liabilities approximates their fair values which, for disclosure purposes, are estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Company for similar financial instruments.
Commodity derivative contracts’ and available-for-sale investments are the only items from the above table that are measured at fair value on a recurring basis. All the remaining financial assets and financial liabilities are measured at a fair value on a non-recurring basis and are maintained at historical amortized cost.
Consolidated Financial Statements INTEROIL CORPORATION 33 |
InterOil Corporation Notes to Consolidated Financial Statements (Expressed in United States dollars) |
4. | Financial Risk Management (cont’d) |
The fair value of financial assets and financial liabilities must be estimated for recognition and measurement or for disclosure purposes. The Company has classified the fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy shall have the following levels:
Level 1- quoted prices (unadjusted) in active markets for identical assets or liabilities
Level 2 - inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices); and
Level 3 - inputs for the asset or liability that are not based on observable market data (unobservable inputs).
(i) Investments classified as being available-for-sale are fair valued by using quoted prices on Oslo stock exchange Axess.
(ii) Derivative contracts classified as being at fair value through profit and loss are fair valued by comparing the contracted rate to the current market rate for a contract with the same remaining period to maturity. The fair value of the Company’s derivative contracts are based on price indications provided to us by an external brokerage who enter into derivative transactions with counter parties on the Company’s behalf.
(iii) The fair value of the secured loan is based on discounted cash flow analysis using a current market interest rate applicable for the loan arrangement, being the current interest rate on a U.S. treasury note with the same approximate maturity profile plus the OPIC spread (3%).
(h) | Capital management |
The finance department of the Company is responsible for capital management. This involves the use of operating and development economic forecasting models which facilitates analysis of the Company’s financial position including cash flow forecasts to determine the future capital management strategy. Capital management is undertaken to ensure a secure, cost-effective and flexible supply of funds is available to meet the Company’s expenditure requirements and safeguard its abilities to continue as a going concern.
The Company is actively managing the gearing levels and raising equity/debt as required for optimizing shareholder returns. The Company is managing its gearing levels by maintaining the debt-to-capital ratio (debt/(shareholders’ equity + debt)) at 50% or less. The gearing levels were 12% in December 2011 (13% in December 2010). The optimum gearing levels for the Company are overseen by the Board of Directors based on recommendations by Management. Recommendations are based on operating cash flows, future cash needs for development, capital market conditions, economic conditions, and will be reassessed as situations change.
On February 2, 2011, the Company and Liquid Niugini Gas Limited, the Company’s joint venture liquefied natural gas project company with Pacific LNG Operations Ltd, signed a Project Funding and Construction Agreement (“PFCA”) and a Shareholder Agreement with Energy World Corporation Ltd (“EWC”) governing the parameters in respect of the development, construction, financing and operation of a planned three million tonne per annum land-based modular LNG plant in PNG. In return for its commitment to fully fund the development and construction of the LNG plant, the agreements provide that EWC will be entitled to a fee of 14.5% of the proceeds from the sale of LNG from the plant, less agreed deductions and financing costs, and that EWC will also own a 14.5% interest in the operating company of the LNG plant. The PFCA and Shareholder Agreement with EWC are conditional on reaching final investment decision to proceed with the LNG plant no later than March 31, 2012.
On April 11, 2011, the Company and Pac LNG executed a conditional framework agreement with FLEX LNG and Samsung Heavy Industries related to the construction and operation of a two mtpa floating LNG processing vessel. The project is intended to integrate with and augment proposed infrastructure to LNG from the onshore Elk and Antelope fields in the Gulf Province of Papua New Guinea pursuant to arrangements with EWC and Mitsui. FLEX LNG will be responsible for the design, engineering, construction and commissioning of the FLNG vessel. Construction of the FLNG vessel will be fully financed by FLEX LNG and Samsung Heavy Industries. The framework agreements provided that the parties were to undertake project specific FEED work and negotiate final binding agreements in time for a FID decision in mid-December 2011. Project specific FEED work was carried out. However, as FID was reached by mid-December 2011, these framework agreements with FLEX LNG and Samsung lapsed and were not extended. The Company is continuing to negotiate with FLEX LNG.
In September 2011, the Company retained financial advisors to help solicit and evaluate proposals from potential strategic partners to, amongst other things, obtain an interest in, operate and help finance the development of the Gulf LNG Project. The Company believes that it has sufficient funds for the Midstream Refinery and Downstream operations; however, existing cash balances and ongoing cash generated from these operations will not be sufficient to facilitate further necessary development of the Elk and Antelope fields, condensate stripping and liquefaction facilities. Therefore the Company must extend or secure sufficient funding through renewed or additional borrowings, equity raising and or asset sales to enable sufficient cash to be available to further its development plans. Management expects that the Company will be able to secure the necessary financing through one, or a combination of, the aforementioned alternatives.
Consolidated Financial Statements INTEROIL CORPORATION 34 |
InterOil Corporation Notes to Consolidated Financial Statements (Expressed in United States dollars) |
5. | Segmented financial information |
As stated in note 1, management has identified four major reporting segments - Upstream, Midstream, Downstream and Corporate. Midstream consists of both Midstream Refining and Midstream Liquefaction. The Corporate segment includes assets and liabilities that do not specifically relate to the other reporting segments. Results in this segment primarily include management expenses. Consolidation adjustments relating to total assets relates to the elimination of intercompany loans and investments in subsidiaries.
Notes to and forming part of the segment information
Segment information is prepared in conformity with the accounting policies of the entity. Segment revenues, expenses and total assets are those that are directly attributable to a segment and the relevant portion that can be allocated to the segment on a reasonable basis. Upstream, Midstream and Downstream include costs allocated from the Corporate activities based on a fee for services provided. The eliminations relate to sales and operating revenues between segments recorded at transfer prices based on current market prices and to unrealized intersegment profits in inventories. The majority of the Company’s operations are located in Papua New Guinea, with the exception of the Corporate segment which also has operations in the United States, Australia and Singapore.
Included in the Company’s revenues from external customers for the year ended December 31, 2011 is revenue from exports to foreign countries of $273,827,525 (Dec 2010 - $227,932,775). The Midstream – Refining segment derives their revenue from the sale of refined petroleum product to the domestic market in PNG and for export. The Downstream segment derives their revenue from the sale of refined petroleum product to the domestic market in PNG on a wholesale and retail basis. The Corporate segment derives their revenue from the shipping business which currently operates two vessels transporting petroleum products for our Downstream segment and external customers, both within PNG and for export in the South Pacific region.
Year ended December 31, 2011 | Upstream | Midstream - Refining | Midstream - Liquefaction | Downstream | Corporate | Consolidation adjustments | Total | |||||||||||||||||||||
Revenues from external customers | - | 362,605,718 | - | 743,662,499 | 265,636 | - | 1,106,533,853 | |||||||||||||||||||||
Intersegment revenues | - | 585,513,409 | - | 196,988 | 53,362,401 | (639,072,798 | ) | - | ||||||||||||||||||||
Interest revenue | 15,146 | 830,795 | 2 | 7,968 | 38,511,774 | (38,009,561 | ) | 1,356,124 | ||||||||||||||||||||
Other revenue | 9,826,126 | - | - | 1,255,434 | (23,470 | ) | - | 11,058,090 | ||||||||||||||||||||
Total segment revenue | 9,841,272 | 948,949,922 | 2 | 745,122,889 | 92,116,341 | (677,082,359 | ) | 1,118,948,067 | ||||||||||||||||||||
Cost of sales and operating expenses | - | 897,824,569 | - | 704,213,086 | 11,420,968 | (592,526,701 | ) | 1,020,931,922 | ||||||||||||||||||||
Administrative, professional and general expenses | 5,122,087 | 18,939,165 | 14,121,189 | 15,780,247 | 47,371,224 | (48,541,459 | ) | 52,792,453 | ||||||||||||||||||||
Derivative (gain)/loss | - | (2,017,778 | ) | - | - | 11,457 | - | (2,006,321 | ) | |||||||||||||||||||
Foreign exchange loss/(gain) | 2,152,675 | (26,458,424 | ) | 13,127 | 229,042 | (955,081 | ) | - | (25,018,661 | ) | ||||||||||||||||||
Loss on Flex LNG investment | - | - | - | - | 3,420,406 | - | 3,420,406 | |||||||||||||||||||||
Exploration costs, excluding exploration impairment | 18,435,150 | - | - | - | - | - | 18,435,150 | |||||||||||||||||||||
Depreciation and amortisation | 3,254,672 | 11,253,854 | 25,632 | 4,026,422 | 1,706,037 | (129,968 | ) | 20,136,649 | ||||||||||||||||||||
Interest expense | 30,012,655 | 9,664,482 | 1,307,901 | 4,346,081 | 6,011,916 | (38,009,561 | ) | 13,333,474 | ||||||||||||||||||||
Total segment expenses | 58,977,239 | 909,205,868 | 15,467,849 | 728,594,878 | 68,986,927 | (679,207,689 | ) | 1,102,025,072 | ||||||||||||||||||||
Segment (loss)/profit before income taxes | (49,135,967 | ) | 39,744,054 | (15,467,847 | ) | 16,528,011 | 23,129,414 | 2,125,330 | 16,922,995 | |||||||||||||||||||
Income tax benefit/(expense) | - | 6,945,518 | - | (4,962,288 | ) | (1,247,563 | ) | - | 735,667 | |||||||||||||||||||
Segment net (loss)/profit | (49,135,967 | ) | 46,689,572 | (15,467,847 | ) | 11,565,723 | 21,881,851 | 2,125,330 | 17,658,662 | |||||||||||||||||||
Segment assets | 390,448,139 | 444,687,129 | 7,925,856 | 201,906,476 | 69,624,747 | (62,202,814 | ) | 1,052,389,533 | ||||||||||||||||||||
Unallocated: | ||||||||||||||||||||||||||||
Deferred tax (note 15) | 35,965,273 | |||||||||||||||||||||||||||
Total assets per the balance sheet | 1,088,354,806 | |||||||||||||||||||||||||||
Segment liabilities | 79,730,935 | 139,105,842 | 8,759,273 | 85,110,349 | 74,025,870 | (60,157,290 | ) | 326,574,979 | ||||||||||||||||||||
Unallocated: | ||||||||||||||||||||||||||||
Deferred tax (note 15) | 1,889,391 | |||||||||||||||||||||||||||
Total liabilities per the balance sheet | 328,464,370 | |||||||||||||||||||||||||||
Capital expenditure (net of cash calls) | 107,558,028 | 15,861,056 | 5,173,603 | 10,240,083 | 3,118,687 | - | 141,951,457 |
Consolidated Financial Statements INTEROIL CORPORATION 35 |
InterOil Corporation Notes to Consolidated Financial Statements (Expressed in United States dollars) |
5. | Segmented financial information (cont’d) |
Year ended December 31, 2010 | Upstream | Midstream - Refining | Midstream - Liquefaction | Downstream | Corporate | Consolidation adjustments | Total | |||||||||||||||||||||
Revenues from external customers | - | 298,070,718 | - | 504,303,681 | - | - | 802,374,399 | |||||||||||||||||||||
Intersegment revenues | - | 379,343,999 | - | 483,134 | 32,563,686 | (412,390,819 | ) | - | ||||||||||||||||||||
Interest revenue | 14,757 | 58,229 | 643 | 23,490 | 24,334,629 | (24,280,932 | ) | 150,816 | ||||||||||||||||||||
Other revenue | 3,290,721 | 107,714 | - | 1,048,251 | 23,362 | - | 4,470,048 | |||||||||||||||||||||
Total segment revenue | 3,305,478 | 677,580,660 | 643 | 505,858,556 | 56,921,677 | (436,671,751 | ) | 806,995,263 | ||||||||||||||||||||
Cost of sales and operating expenses | - | 605,602,656 | - | 470,771,827 | - | (374,817,833 | ) | 701,556,650 | ||||||||||||||||||||
Administrative, professional and general expenses | 13,746,219 | 11,939,500 | 7,022,644 | 15,975,882 | 40,291,485 | (36,324,778 | ) | 52,650,952 | ||||||||||||||||||||
Derivative loss/(gain) | - | 1,591,878 | - | - | (526,690 | ) | - | 1,065,188 | ||||||||||||||||||||
Foreign exchange loss/(gain) | 3,043,907 | 7,517,961 | 90,367 | 1,175,894 | (1,051,306 | ) | - | 10,776,823 | ||||||||||||||||||||
Gain on sale of exploration assets | (2,140,783 | ) | - | - | - | - | - | (2,140,783 | ) | |||||||||||||||||||
Loss on extinguishment of IPI liability | 30,568,710 | - | - | - | - | - | 30,568,710 | |||||||||||||||||||||
Litigation settlement expense | - | - | - | - | 12,000,000 | - | 12,000,000 | |||||||||||||||||||||
Exploration costs, excluding exploration impairment | 16,981,929 | - | - | - | - | - | 16,981,929 | |||||||||||||||||||||
Depreciation and amortisation | 1,132,118 | 10,355,057 | 25,227 | 2,786,500 | 105,988 | (129,968 | ) | 14,274,922 | ||||||||||||||||||||
Interest expense | 18,527,881 | 6,584,584 | 1,252,796 | 3,739,297 | 1,540,594 | (24,280,932 | ) | 7,364,220 | ||||||||||||||||||||
Total segment expenses | 81,859,981 | 643,591,636 | 8,391,034 | 494,449,400 | 52,360,071 | (435,553,511 | ) | 845,098,611 | ||||||||||||||||||||
Segment (loss)/profit before income taxes | (78,554,503 | ) | 33,989,024 | (8,390,391 | ) | 11,409,156 | 4,561,606 | (1,118,240 | ) | (38,103,348 | ) | |||||||||||||||||
Income tax (expense)/benefit | - | (504,387 | ) | 35,905 | (4,701,386 | ) | (1,239,855 | ) | - | (6,409,723 | ) | |||||||||||||||||
Segment net (loss)/profit | (78,554,503 | ) | 33,484,637 | (8,354,486 | ) | 6,707,770 | 3,321,751 | (1,118,240 | ) | (44,513,071 | ) | |||||||||||||||||
Segment assets | 266,169,785 | 325,089,253 | 7,823,600 | 117,708,440 | 265,233,362 | (34,759,579 | ) | 947,264,861 | ||||||||||||||||||||
Unallocated: | ||||||||||||||||||||||||||||
Deferred tax (note 15) | 28,477,690 | |||||||||||||||||||||||||||
Total assets per the balance sheet | 975,742,551 | |||||||||||||||||||||||||||
Segment liabilities | 81,193,873 | 109,332,954 | 11,561,364 | 35,055,512 | 66,139,037 | (30,442,168 | ) | 272,840,572 | ||||||||||||||||||||
Capital expenditure (net of cash calls) | 82,811,176 | 6,972,505 | 1,876,736 | 7,623,024 | 3,661,267 | - | 102,944,708 |
6. | Cash and cash equivalents |
The components of cash and cash equivalents are as follows:
December 31, | December 31, | |||||||
2011 | 2010 | |||||||
$ | $ | |||||||
Cash on deposit | 45,970,047 | 233,576,821 | ||||||
Bank term deposits | ||||||||
- Papua New Guinea kina deposits | 22,876,394 | - | ||||||
68,846,441 | 233,576,821 |
In 2011, cash and cash equivalents earned an average interest rate of 0.23% per annum (2010 – 0.21%).
Consolidated Financial Statements INTEROIL CORPORATION 36 |
InterOil Corporation Notes to Consolidated Financial Statements (Expressed in United States dollars) |
7. | Supplemental cash flow information |
Year ended | ||||||||
December 31, | December 31, | |||||||
2011 | 2010 | |||||||
$ | $ | |||||||
Cash paid during the year | ||||||||
Interest | 7,238,610 | 5,827,959 | ||||||
Income taxes | 1,450,341 | 3,254,382 | ||||||
Interest received | 1,008,407 | 143,315 | ||||||
Non-cash investing activities: | ||||||||
Fair value of Flex LNG option received | 4,214,258 | - | ||||||
Increase in share capital from: | ||||||||
buyback of non-controlling interest | 243,850 | - | ||||||
Non-cash financing activities: | ||||||||
Increase in share capital from: | ||||||||
the exercise of share options and vesting of restricted stock | 5,598,009 | 8,454,758 | ||||||
buyback of IPI #3 investor rights | - | 50,687,368 | ||||||
litigation settlement settled in shares | - | 12,000,000 |
8. | Short term treasury bills |
During the quarter ended September 30, 2011, the Company purchased two treasury bills from the Bank of Papua New Guinea totaling approximately $11,832,110 (PGK 25,363,312). Both of these treasury bills have a 182 day term and will mature in January 2012. The first treasury bill for approximately $2,697,850 (PGK 5,783,112) has an interest rate of 4.4% and the second treasury bill for approximately $9,134,260 (PGK 19,580,200) has an interest rate of 4.3%.
Based on the guidance under IAS 39 ‘Financial Instruments Recognition and Measurement’, these investments have been classified as held-to-maturity financial assets and are therefore recorded at amortized cost using the effective interest method.
9. | Financial instruments |
(a) | Cash and cash equivalents |
With the exception of cash and cash equivalents, restricted cash and short term treasury bills, all financial assets are non-interest bearing. In 2011, the Company earned nil interest (2010 – nil) on the cash on deposit which related to the working capital facility. However, the cash deposit relating to the BNP working capital facility reduced the interest costs relating to the facility usage in 2011 by 3.38% (2010 – 3.33%).
Cash restricted, which mainly relates to the working capital facility, is comprised of the following:
December 31, | December 31, | |||||||
2011 | 2010 | |||||||
$ | $ | |||||||
Cash deposit on working capital facility (0.0%) | 32,982,001 | 40,664,995 | ||||||
Cash restricted - Current | 32,982,001 | 40,664,995 | ||||||
Bank term deposits on Petroleum Prospecting Licenses (1.6%) | 161,801 | 130,486 | ||||||
Cash deposit on office premises (5.3%) | 203,480 | 179,440 | ||||||
Cash deposit on secured loan (0.1%) | 5,903,481 | 6,303,148 | ||||||
Cash restricted - Non-current | 6,268,762 | 6,613,074 | ||||||
39,250,763 | 47,278,069 |
Cash held as deposit on the BNP working capital facility supports the Company’s working capital facility with BNP Paribas. The balance is based on 20% of the outstanding balance of the BNP working capital facility 1 (refer note 18) plus any amounts that are fully cash secured. The cash deposit on this facility did not receive interest during the year as these deposit amounts reduced the interest being charged by BNP on the facility utilization.
Consolidated Financial Statements INTEROIL CORPORATION 37 |
InterOil Corporation Notes to Consolidated Financial Statements (Expressed in United States dollars) |
9. | Financial instruments (cont’d) |
The cash held as deposit on secured loan is used to support the Company’s secured loan borrowings with the Overseas Private Investment Corporation (“OPIC”) and relates to one half yearly installment of $4.5 million and the related interest that will be payable with the next installment.
Bank term deposits on PPL’s are unavailable for use while PPL 236, 237 and 238 are being utilized by the Company.
(b) | Commodity derivative contracts |
InterOil uses derivative commodity instruments to manage its exposure to price volatility on a portion of its refined product and crude inventories in accordance with risk management policy described in note 4.
At December 31, 2011, InterOil had a net receivable of $595,440 (Dec 2010 – payable of $178,578) relating to outstanding derivative contracts for which hedge accounting was not applied or had been discontinued.
The Company had no outstanding hedge accounted derivative contracts as at December 31, 2011 and December 31, 2010.
As at December 31, 2011, the Company had the following open non-hedge accounted derivative contracts outstanding.
Notional | Fair Value | ||||||||||
Volumes | December 31, 2011 | ||||||||||
Derivative | Type | (bbls) | Expiry | Derivative type | $ | ||||||
Brent Swap | Sell Brent | 70,000 | Q1 2012 | Cash flow hedge - Manages the export price risk of naphtha | (63,681) | ||||||
Gasoil Crack Swap | Sell Gasoil Crack | 195,000 | Q1 2012 | Cash flow hedge - Manages the sales price risk of gasoil (diesel) | 154,516 | ||||||
Gasoil Crack Swap | Sell Gasoil Crack | 195,000 | Q2 2012 | Cash flow hedge - Manages the sales price risk of gasoil (diesel) | 185,495 | ||||||
Gasoil Crack Swap | Sell Gasoil Crack | 195,000 | Q3 2012 | Cash flow hedge - Manages the sales price risk of gasoil (diesel) | 221,160 | ||||||
497,490 | |||||||||||
Add: Priced out non-hedge accounted contracts as at December 31, 2011 | 97,950 | ||||||||||
595,440 |
As at December 31, 2010, the Company had the following open non-hedge accounted derivative contracts outstanding.
Notional | Fair Value | ||||||||||
Volumes | December 31, 2010 | ||||||||||
Derivative | Type | (bbls) | Expiry | Derivative type | $ | ||||||
Naphtha Swap | Sell Naphtha | 54,000 | Q1 2011 | Cash flow hedge - Manages the export price risk of naphtha | (275,958) | ||||||
Brent Swap | Buy Brent | 54,000 | Q1 2011 | Cash flow hedge - Manages the export price risk of naphtha | 179,118 | ||||||
Naphtha/Brent Swap | Sell Naphtha/ Buy Brent | 54,000 | Q1 2011 | Cash flow hedge - Manages the export price risk of naphtha | (81,738) | ||||||
(178,578) | |||||||||||
Add: Priced out non-hedge accounted contracts as at December 31, 2010 | - | ||||||||||
(178,578) |
A gain of $2,017,778 was recognized on the non-hedge accounted derivative contracts for the year ended December 31, 2011 (Dec 2010 – loss of $1,591,878). This gain is included in derivative gain/(loss) in the consolidated income statement.
(c) | Currency derivative contracts |
During the year ended December 31, 2010, the Company started to enter into AUD to USD foreign currency forward contracts to minimize the foreign exchange risk in relation to the expenses to be incurred in AUD. As at December 31, 2011, the Company had a net payable of $11,457 (Dec 2010 - $nil) in relation to outstanding non-hedge accounted currency derivative contracts.
Consolidated Financial Statements INTEROIL CORPORATION 38 |
InterOil Corporation Notes to Consolidated Financial Statements (Expressed in United States dollars) |
9. | Financial instruments (cont’d) |
A loss of $11,457 was recognized on the non-hedge accounted currency derivative contracts for the year ended December 31, 2011 (Dec 2010 – gain of $526,690). This loss is included in derivative gain/(loss) in the consolidated income statement.
10. | Trade and other receivables |
December 31, | December 31, | |||||||
2011 | 2010 | |||||||
$ | $ | |||||||
Trade receivables | 112,239,803 | 45,428,435 | ||||||
Other receivables | 23,033,797 | 2,619,061 | ||||||
Total | 135,273,600 | 48,047,496 |
InterOil has a discounting facility with BNP Paribas on specific monetary receivables under which the Company is able to sell, on a revolving basis, trade receivables up to $60,000,000 (refer to note 18). As at December 31, 2011, $10,030,131 (Dec 2010 - $nil) in outstanding trade receivables had been sold with recourse under the facility. As the sale is with recourse, the discounted trade receivables, if any, are retained on the balance sheet and included in the accounts receivable and the sale proceeds are recognized in the working capital facility. The Company has retained the responsibility for administering and collecting accounts receivable sold. The discounted trade receivables are usually settled within a month of their discounting and there have not been any collection issues relating to these discounted trade receivables.
At December 31, 2011, $74,265,832 (Dec 2010 - $26,884,664) of the trade receivables secures the BNP Paribas working capital facility disclosed in note 18. This balance includes $53,815,857 (Dec 2010 - $21,797,631) of intercompany receivables which were eliminated on consolidation.
11. | Inventories |
December 31, | December 31, | |||||||
2011 | 2010 | |||||||
$ | $ | |||||||
Midstream - Refining (crude oil feedstock) | 40,311,108 | 23,004,883 | ||||||
Midstream - Refining (refined petroleum product) | 70,267,854 | 67,006,941 | ||||||
Midstream - Refining (parts inventory) | 2,721,147 | 673,283 | ||||||
Downstream (refined petroleum product) | 57,771,690 | 36,452,253 | ||||||
171,071,799 | 127,137,360 |
As at December 31, 2011, inventory had been written down to its net realizable value. The write down of $259,406 at December 31, 2011 relating to refined petroleum products is included in ‘Changes in inventories of finished goods and work in progress’ within the consolidated income statement. As at December 31, 2010 no net realizable value write down was necessary. At December 31, 2011, $113,300,109 (Dec 2010 - $90,685,107) of the Midstream Refining inventory balance secures the BNP Paribas working capital facility disclosed in note 18.
Consolidated Financial Statements INTEROIL CORPORATION 39 |
InterOil Corporation Notes to Consolidated Financial Statements (Expressed in United States dollars) |
12. | Plant and equipment |
Refinery | Land and Buildings | Plant and Equipment | Motor Vehicles | Deferred Project Costs and Work in Progress | Totals | |||||||||||||||||||
At January 1, 2010: | ||||||||||||||||||||||||
Cost | 242,397,179 | 15,932,657 | 31,842,143 | 3,224,542 | 8,615,638 | 302,012,159 | ||||||||||||||||||
Accumulated depreciation | (51,718,661 | ) | (8,859,006 | ) | (20,323,035 | ) | (2,316,808 | ) | - | (83,217,510 | ) | |||||||||||||
Net book value | 190,678,518 | 7,073,651 | 11,519,108 | 907,734 | 8,615,638 | 218,794,649 | ||||||||||||||||||
Year ended December 31, 2010: | ||||||||||||||||||||||||
Opening net book value | 190,678,518 | 7,073,651 | 11,519,108 | 907,734 | 8,615,638 | 218,794,649 | ||||||||||||||||||
Additions | 1,371,819 | 69,375 | 706,503 | 766,235 | 16,137,409 | 19,051,341 | ||||||||||||||||||
Disposals | - | (5,678 | ) | (13,248 | ) | (28,388 | ) | - | (47,314 | ) | ||||||||||||||
Transfers from work in progress | 2,832,316 | 1,780,516 | 3,812,781 | 541,703 | (8,967,316 | ) | - | |||||||||||||||||
Reclassification to other asset categories | (3,082,278 | ) | 2,982,970 | 141,614 | (42,306 | ) | - | - | ||||||||||||||||
Depreciation for the period | (9,525,893 | ) | (947,248 | ) | (2,223,661 | ) | (446,279 | ) | - | (13,143,081 | ) | |||||||||||||
Exchange differences | - | 157,005 | 313,345 | (42,460 | ) | 121,942 | 549,832 | |||||||||||||||||
Closing net book value | 182,274,482 | 11,110,591 | 14,256,442 | 1,656,239 | 15,907,673 | 225,205,427 | ||||||||||||||||||
At December 31, 2010: | ||||||||||||||||||||||||
Cost | 243,519,036 | 20,042,453 | 36,563,947 | 4,046,294 | 15,907,673 | 320,079,403 | ||||||||||||||||||
Accumulated depreciation | (61,244,554 | ) | (8,931,862 | ) | (22,307,505 | ) | (2,390,055 | ) | - | (94,873,976 | ) | |||||||||||||
Net book value | 182,274,482 | 11,110,591 | 14,256,442 | 1,656,239 | 15,907,673 | 225,205,427 | ||||||||||||||||||
Year ended December 31, 2011: | ||||||||||||||||||||||||
Opening net book value | 182,274,482 | 11,110,591 | 14,256,442 | 1,656,239 | 15,907,673 | 225,205,427 | ||||||||||||||||||
Additions | 4,624,888 | 4,297,395 | 4,614,370 | 1,547,508 | 14,467,925 | 29,552,086 | ||||||||||||||||||
Disposals | - | (33,950 | ) | (395,961 | ) | (7,234 | ) | - | (437,145 | ) | ||||||||||||||
Transfers from work in progress | 570,847 | 671,101 | 7,396,780 | 34,892 | (8,673,620 | ) | - | |||||||||||||||||
Reclassification to other asset categories | - | 6,493 | (1,024,903 | ) | 1,018,410 | - | - | |||||||||||||||||
Depreciation for the period | (10,703,288 | ) | (981,574 | ) | (4,132,887 | ) | (1,064,228 | ) | - | (16,881,977 | ) | |||||||||||||
Exchange differences | - | 1,713,531 | 2,918,193 | 650,839 | 3,322,994 | 8,605,557 | ||||||||||||||||||
Closing net book value | 176,766,929 | 16,783,587 | 23,632,034 | 3,836,426 | 25,024,972 | 246,043,948 | ||||||||||||||||||
At December 31, 2011: | ||||||||||||||||||||||||
Cost | 248,714,771 | 28,419,395 | 53,076,624 | 8,325,671 | 25,024,972 | 363,561,433 | ||||||||||||||||||
Accumulated depreciation | (71,947,842 | ) | (11,635,808 | ) | (29,444,590 | ) | (4,489,245 | ) | - | (117,517,485 | ) | |||||||||||||
Net book value | 176,766,929 | 16,783,587 | 23,632,034 | 3,836,426 | 25,024,972 | 246,043,948 |
Consolidated Financial Statements INTEROIL CORPORATION 40 |
InterOil Corporation Notes to Consolidated Financial Statements (Expressed in United States dollars) |
13. | Oil and gas properties |
Costs of oil and gas properties which are not subject to depletion are as follows:
December 31, | December 31, | |||||||
2011 | 2010 | |||||||
$ | $ | |||||||
Drilling and construction equipment | 79,367,759 | 28,653,929 | ||||||
Drilling consumables and spares | 14,129,959 | 10,924,708 | ||||||
Petroleum Prospecting License drilling programs (Unproved) | 269,355,048 | 215,716,101 | ||||||
Gross Capitalized Costs | 362,852,766 | 255,294,738 | ||||||
Accumulated depletion and amortization | ||||||||
Unproved oil and gas properties | - | - | ||||||
Proved oil and gas properties | - | - | ||||||
Net Capitalized Costs | 362,852,766 | 255,294,738 |
The majority of the costs capitalized under ‘Petroleum Prospective License drilling programs (Unproved)’ above relates to the exploration and development expenditure on the Elk and Antelope fields. The development and monetization efforts of these fields are ongoing, and include the condensate stripping and associated facilities, the gas gathering and associated common facilities, and developing a liquefied natural gas plant and associated facilities in PNG.
The majority of current year increase in the PPL drilling programs relates to the preparation and drilling activities on the Triceratops field.
The following table discloses a breakdown of the exploration costs incurred for the periods ended:
December 31, | December 31, | |||||||
2011 | 2010 | |||||||
$ | $ | |||||||
Property Acquisition Costs | ||||||||
Unproved | - | - | ||||||
Proved | - | - | ||||||
Total acquisition costs | - | - | ||||||
Exploration Costs | - | 207,054 | ||||||
Development Costs | 116,493,004 | 96,325,176 | ||||||
Add: Amounts capitalized in relation to the appraisal program cash calls on IPI interest buyback transactions | - | 3,922,683 | ||||||
Add: Premium paid on IPI buyback transactions | - | 1,550,020 | ||||||
Less: Conveyance accounting offset against properties | - | (192,622 | ) | |||||
Less: Costs allocated against cash calls | (8,934,976 | ) | (19,001,135 | ) | ||||
Total Costs capitalized | 107,558,028 | 82,811,176 | ||||||
Charged to expense | ||||||||
Geophysical and other costs | 18,435,150 | 16,981,929 | ||||||
Total charged to expense | 18,435,150 | 16,981,929 | ||||||
Oil and Gas Property Additions (capitalized and expensed) | 125,993,178 | 99,793,105 |
14. | Investments |
On April 11, 2011, the Company and Pacific LNG Operations Ltd. executed a framework agreement with Flex LNG Ltd related to the construction and operation of a two million tonnes per annum floating liquefied natural gas processing vessel. Under the framework agreement, an equity purchase option was issued to the Company and Pacific LNG Operations Ltd. to acquire up to 11,315,080 common shares in Flex LNG Ltd at an average strike price of 4.5909 Norwegian Kroner.
Consolidated Financial Statements INTEROIL CORPORATION 41 |
InterOil Corporation Notes to Consolidated Financial Statements (Expressed in United States dollars) |
14. | Investments (cont’d) |
On May 16, 2011, the Company and Pacific LNG Operations Ltd. exercised this option with the Company acquiring 8,938,913 common shares of Flex LNG Ltd at a cost of $7,461,407 and Pacific LNG Operations Ltd acquiring the remaining 2,376,167 common shares. Based on guidance under IAS 39, the Company recognized the financial asset, the Flex LNG Ltd options, on the date of grant of those options to the Company, April 11, 2011. Considering the various classification options available and managements intention to hold the options/shares after exercising for the medium term, the options were classified as a derivative financial instrument at initial recognition and then reclassified as ‘available-for-sale’ when the options were exercised and the common shares acquired.
Management used the Black Scholes pricing model to fair value the options at grant date and subsequently the derivative through to the date of exercise. The option value on exercise date was $4,214,258 and the exercise price paid was $7,461,407. The cumulative fair value of the options received of $4,214,258 was recognized in the consolidated income statement under ‘Gain on Flex LNG options received’. Transaction costs of $17,350 were also incurred in relation to the transaction and were allocated to the investment. Management has determined that recognition of this gain is appropriate as there is no ongoing obligation or commitment that the Company needs to fulfill as a result of receiving these options. The total amount recognized as the long term investment in relation to the Flex LNG shares in the balance sheet after the exercise of the options was $11,693,015.
Based on guidance under IAS 39, changes in the fair value of the Flex LNG Ltd shares after initial recognition are to be recognized in other comprehensive income within shareholders equity, except for impairment losses which can be evidenced by a significant or prolonged decline in the fair value of an investment. The fair value at December 31, 2011 was $3,650,786 and was calculated using quoted prices on Oslo stock exchange Axess. As at December 31, 2011, the decrease in the value of this investment from initial recognition was $8,042,229, with $407,565 of this amount being attributable to a reduction in the Norwegian Kroner exchange rates and $7,634,664 being attributable to a reduction in the share price of the investment. Based on the guidance on significant decline in fair value, Management has determined that the decrease in fair value attributable to the reduction in share price ($7,634,664) needs to be recognized in the consolidated income statement and the decrease in fair value attributable to the reduction in exchange rates ($407,565) needs to be recognized in OCI for the year ended December 31, 2011. If the fair value of the investment increases in subsequent periods, this increase will be recognized through OCI, rather than through profit and loss statements in accordance with the guidance under the standards on reversal of prior impairment write offs relating to equity investments.
15. | Income taxes |
(a) | Income tax expense |
The combined income tax expense in the consolidated income statements reflects an effective tax rate which differs from the expected statutory rate (combined federal and provincial rates). Differences for the years ended were accounted for as follows:
December 31, | December 31, | |||||||
2011 | 2010 | |||||||
$ | $ | |||||||
Profit/(loss) before income taxes and non controlling interest | 16,922,995 | (38,103,348 | ) | |||||
Statutory income tax rate | 31.50 | % | 33.00 | % | ||||
Computed tax expense/(benefit) | 5,330,743 | (12,574,105 | ) | |||||
Effect on income tax of: | ||||||||
Income/(losses) in foreign jurisdictions not assessable/(deductible) | 3,236,314 | 2,073,636 | ||||||
Non-deductible stock compensation expense | 897,703 | 317,671 | ||||||
Non-deductible pre-LNG Project Agreement costs | 983,644 | 1,146,936 | ||||||
Non-deductible premium paid on buyback of IPI interest | - | 10,087,674 | ||||||
Non-taxable gain on sale of exploration assets | - | (706,458 | ) | |||||
Effect of currency translation on tax base | (3,236,709 | ) | 202,029 | |||||
Tax rate differential in foreign jurisdictions | (556,744 | ) | (726,664 | ) | ||||
Over provision for income tax in prior years | 588,333 | 1,501,234 | ||||||
Midstream - Refining tax exempt income as per Refinery Project Agreement | - | (8,423,607 | ) | |||||
Tax losses for which no future tax benefit has been brought to account | 8,718,157 | 16,299,899 | ||||||
Initial recognition of future tax assets/liabilities based on recoverability assessment | (15,498,147 | ) | (973,368 | ) | ||||
Other - net | (1,198,961 | ) | (1,815,154 | ) | ||||
(735,667 | ) | 6,409,723 |
Consolidated Financial Statements INTEROIL CORPORATION 42 |
InterOil Corporation Notes to Consolidated Financial Statements (Expressed in United States dollars) |
15. | Income taxes (cont’d) |
(b) | Deferred income tax |
December 31, | December 31, | |||||||
2011 | 2010 | |||||||
$ | $ | |||||||
Deferred tax assets | 35,965,273 | 28,477,690 | ||||||
Deferred tax liabilities | (1,889,391 | ) | - | |||||
Deferred tax assets (net) | 34,075,882 | 28,477,690 |
The gross movement on the deferred income tax account is as follows:
December 31, | December 31, | |||||||
2011 | 2010 | |||||||
$ | $ | |||||||
At January 1 | 28,477,690 | 30,319,163 | ||||||
Charge to the income statement | 6,248,509 | (2,511,656 | ) | |||||
Exchange differences | (650,317 | ) | 670,183 | |||||
At December 31 | 34,075,882 | 28,477,690 |
The movement in deferred income tax assets and liabilities during the year, without taking into consideration the offsetting of balances within the same tax jurisdiction, is as follows:
Tax losses | Other | Tax depreciation | Unrealized foreign exchange gains | Total | ||||||||||||||||
Deferred tax assets and liabilities | $ | $ | $ | $ | $ | |||||||||||||||
At January 1, 2010 | 23,800,726 | 2,620,198 | 5,535,521 | (1,637,282 | ) | 30,319,163 | ||||||||||||||
Charge to the income statement | (21,663 | ) | (1,244,491 | ) | (1,168,649 | ) | (76,853 | ) | (2,511,656 | ) | ||||||||||
Exchange differences | 547,561 | 181,093 | (216,347 | ) | 157,876 | 670,183 | ||||||||||||||
At December 31, 2010 | 24,326,624 | 1,556,800 | 4,150,525 | (1,556,259 | ) | 28,477,690 | ||||||||||||||
Charge to the income statement | (3,691,894 | ) | 389,142 | 14,252,367 | (4,701,106 | ) | 6,248,509 | |||||||||||||
Exchange differences | 4,136,543 | 262,241 | (2,723,692 | ) | (2,325,408 | ) | (650,316 | ) | ||||||||||||
At December 31, 2011 | 24,771,273 | 2,208,183 | 15,679,200 | (8,582,774 | ) | 34,075,882 |
The deferred tax assets recorded in the consolidated balance sheet mainly relate to Midstream – Refining assets in PNG while the deferred tax liabilities relate to Downstream assets in PNG. The amounts are non-current as at December 31, 2011.
In addition to the above, the Company has temporary differences and losses carried forward in relation to exploration expenditure incurred in PNG of $221,468,770 at December 31, 2011. No deferred tax assets have been recognized for the exploration expenditure pending final investment decision on projects for monetization of resources from the licenses held.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the actual levels of past taxable income, scheduled reversal of deferred tax liabilities, projected future taxable income, projected tax rates and tax planning strategies in making this assessment. Management has determined that 100% of the deferred tax assets required in relation to the net operating loss carry-forwards of the Midstream – Refining segment should be recognized during the year ended 2010. This was based on the refinery generating consistent profits, and the view that any carry forward tax losses will be recouped in the coming years.
Consolidated Financial Statements INTEROIL CORPORATION 43 |
InterOil Corporation Notes to Consolidated Financial Statements (Expressed in United States dollars) |
15. | Income taxes (cont’d) |
The Refinery Project Agreement gave “pioneer” status to InterOil Limited (”IOL”). This status gave IOL a tax holiday beginning upon the date of the commencement of commercial production, January 1, 2005 and ended December 31, 2010. In relation to the refinery, tax losses incurred prior to January 1, 2005 were frozen during the tax holiday and became available for use after the tax holiday ceased on December 31, 2010. Tax losses incurred during the tax holiday also became available for use after December 31, 2010. Tax losses carried forward to offset against future earnings total PGK 176,872,859 ($82,512,063) at December 31, 2011. All losses incurred by InterOil Limited have a twenty year carry forward period.
16. | Trades and other payables |
December 31, | December 31, | |||||||
2011 | 2010 | |||||||
$ | $ | |||||||
Trade payables - crude import | 69,042,031 | - | ||||||
Trade payables - product import | 10,470,860 | 5,241,216 | ||||||
Other accounts payable and accrued liabilities | 53,541,263 | 47,999,907 | ||||||
Petromin cash calls received | 15,435,000 | 15,435,000 | ||||||
Mitsui cash calls received | 11,393,023 | 6,456,757 | ||||||
Total trade and other payables | 159,882,177 | 75,132,880 |
(a) Petromin participation in Elk and Antelope fields
On October 30, 2008, Petromin PNG Holdings Limited (”Petromin”), a government entity mandated to invest in resource projects on behalf of the State, entered into an agreement to take a 20.5% direct interest in the Elk and Antelope fields if and once nominated by the State to take its legislative interest. Petromin contributed an initial deposit and agreed to conditionally fund 20.5% of the costs of developing these fields. The State’s (and Petromin’s) right to take an interest arises upon issuance of the Prospecting Development License (”PDL”), which has not yet occurred. The obligation to fund its portion of the costs of developing the field, including sunk costs, also applies upon issuance of the PDL. As at December 31, 2011, $15,435,000 in advance payments received from Petromin has been held under ‘Petromin cash calls received’ above. At the end of the 2011 year, the parties agreed that the Agreement’s intended operation had ended, and that it should terminate. Petromin remains the State’s nominee to acquire the State’s interest under relevant Papua New Guinean legislation, once a PDL is granted. InterOil has proposed that cash contributions made by Petromin to date to fund the development will be held and credited against the State’s obligation to contribute its portion of sunk costs upon grant of the PDL.
(b) Mitsui & Co. participation in Condensate Stripping Plant
On April 15, 2010, the Company entered into a preliminary works joint venture and preliminary works financing agreement with Mitsui relating to the CS Project. The proposed joint venture is to be entered into for equal shares between Mitsui and InterOil. Mitsui will be responsible for arranging or providing financing for the capital costs of the plant. On August 4, 2010, the JVOA for the CS Project was finalized. Refer to note 20 for further details in relation to this agreement.
The portion of funding that relates to Mitsui’s share of the project as at December 31, 2011, amounting to $11,393,023 is held in current liabilities as the agreement requires repayment if FID is not reached. The portion of funding that relates to InterOil’s share of the project, funded by Mitsui, is classified as an unsecured loan (refer to note 20).
17. | Goodwill |
(a) Acquisition of interest from Merrill Lynch
On February 27, 2009, InterOil LNG Holdings Inc. acquired half of Merrill Lynch’s interest in the LNG Joint Venture Company for $11,250,000. As part of the acquisition, InterOil LNG Holdings Inc. was transferred 548,806 ‘B’ Class shares held by Merrill Lynch. The amount recognized as goodwill of $5,761,940 represents the amount of purchase consideration paid to Merrill Lynch over and above the fair value of the identifiable net assets acquired.
(b) Acquisition of interest from Pacific LNG
During September 2009, InterOil also acquired a further 2.5% of Pacific LNG’s economic interest in the joint venture LNG Project from Pacific LNG as part of the Elk and Antelope interest acquisition. The fair value of 2.5% of Pacific LNG’s economic interest in the joint venture LNG Project was valued at $864,377 based on the previous transaction with Merrill Lynch that was completed in February 2009, being the most appropriate guide to the fair value of the interest acquired. This fair value has been recognized as goodwill on acquisition of the LNG interest in the Balance Sheet.
Consolidated Financial Statements INTEROIL CORPORATION 44 |
InterOil Corporation Notes to Consolidated Financial Statements (Expressed in United States dollars) |
17. | Goodwill |
(c) Impairment tests for goodwill
Management reviews the business performance based on operating segments and goodwill is monitored by the management at the operating segment level. The goodwill recognized at December 31, 2011 is allocated to the Midstream – Liquefaction segment.
The recoverable amount of the Midstream – Liquefaction segment has been determined based on fair value less costs to sell calculations. These calculations use cash flow projections covering a twenty-year period and the key assumptions used in the calculations include an oil price of $90/bbl and an annual inflation rate of 2%.
18. | Working capital facilities |
December 31, | December 31, | |||||||
2011 | 2010 | |||||||
Amounts drawn down | $ | $ | ||||||
BNP Paribas working capital facility - midstream | 10,030,131 | 50,023,559 | ||||||
Westpac working capital facility - downstream | 6,450,372 | 1,230,767 | ||||||
Total working capital facility | 16,480,503 | 51,254,326 |
(a) BNP Paribas working capital facility
InterOil has a syndicated working capital credit facility led by BNP Paribas (Singapore branch) with a maximum availability of $230,000,000 (increased temporarily to $260,000,000 in November 2011, and reverting back to $230,000,000 on January 31, 2012). The total facility is split into Facility 1 and Facility 2 as per the agreement with BNP Paribas. Facility 1 is for $170,000,000 (increased temporarily to $200,000,000) and finances purchases of hydrocarbons via the issuance of documentary letters of credit and or standby letters of credit, short term advances, advances on merchandise, freight loans, and includes a sublimit of Euro 18,000,000 or USD equivalent for hedging transactions via BNP Paribas Commodity Indexed Transaction Group or other acceptable counter parties.
Facility 2 is for $60,000,000 partly cash-secured short term advances and for discounting of any monetary receivables acceptable to BNP Paribas in order to reduce Facility 1 balances. The facility is secured by sales contracts, purchase contracts, certain cash accounts associated with the refinery, all crude and refined products of the refinery and trade receivables.
The total facility is renewable annually and during the prior year renewal process, the facility was renewed until January 31, 2012 with an increase in Facility 1 limit by an additional $30,000,000 to $160,000,000, and a maximum availability of $220,000,000 for the combined facility. In June 2011, there was an additional increase in Facility 1 limit by $10,000,000 to $170,000,000, and a maximum availability of $230,000,000 for the combined facility. In November 2011, the limit of Facility 1 was further increased temporarily by $30,000,000 to $200,000,000, and a maximum availability of $260,000,000 for the combined facility. The combined facility reverted back to a maximum availability of $230,000,000 at the end of January 2012. As part of the current year renewal process, the facility was renewed in February 2012 with an increase in Facility 1 limit by an additional $10,000,000 to $180,000,000, and a maximum availability of $240,000,000 for the combined facility until January 31, 2013.
The facility bears interest at LIBOR + 3.5% on the short term advances. During the year the weighted average interest rate was 2.96% (2010 – 2.69%) after considering the reduction in interest due to the deposit amounts maintained which reduces the interest being charged on the facility utilization (refer section ‘Cash and cash equivalents’ under note 9).
The following table outlines the facility and the amount available for use at year end:
December 31, | December 31, | |||||||
2011 | 2010 | |||||||
$ | $ | |||||||
Working capital credit facility | 260,000,000 | 190,000,000 | ||||||
Less amounts included in the working capital facility liability: | ||||||||
Short term advances/facilities drawn down | - | (50,023,559 | ) | |||||
Discounted receivables | (10,030,131 | ) | - | |||||
(10,030,131 | ) | (50,023,559 | ) | |||||
Less: other amounts outstanding under the facility: | ||||||||
Letters of credit outstanding | (164,910,000 | ) | (93,710,000 | ) | ||||
Working capital credit facility available for use | 85,059,869 | 46,266,441 |
Consolidated Financial Statements INTEROIL CORPORATION 45 |
InterOil Corporation Notes to Consolidated Financial Statements (Expressed in United States dollars) |
18. | Working capital facilities (cont’d) |
At December 31, 2011, the company had six letters of credit outstanding totaling $164,910,000. The first letter of credit for $42,720,000 was for a crude cargo and was drawn down on January 3, 2012. The second letter of credit for $73,470,000 was for a crude cargo and was drawn down on January 3, 2012. The third letter of credit for $5,800,000 was for a diesel and jet cargo and was drawn down on January 9, 2012. The fourth letter of credit for $5,020,000 was for a gasoline cargo and was drawn down on January 11, 2012. The fifth letter of credit for $7,800,000 was for a diesel cargo and was drawn down on January 17, 2012. The sixth letter of credit for $30,100,000 was for a crude cargo and was drawn down on January 18, 2012.
The cash deposit on working capital facility, as separately disclosed in note 9, included restricted cash of $32,982,001 (2010 - $40,664,995) which is being maintained as a security margin for the facility. In addition, inventory of $113,300,109 (2010 - $90,685,107) and trade receivables of $74,265,832 (2010 – $26,884,664) also secured the facility. The trade receivable balance securing the facility includes $53,815,857 (2010 - $21,797,631) of inter-company receivables which were eliminated on consolidation.
(b) Westpac and Bank South Pacific working capital facility
The Company has an approximately $60,645,000 (PGK 130,000,000) revolving working capital facility for its Downstream operations in PNG from BSP and Westpac. Westpac facility limit is approximately $37,320,000 (PGK 80,000,000) and the initial BSP facility limit is approximately $23,325,000 (PGK 50,000,000). The Westpac facility is for an initial term of three years and was renewed in November 2011 through to November 2014. The Westpac facility was further increased, subsequent to year end in February 2012, by $4,665,000 (PGK 10,000,000) bringing the Westpac facility to $41,985,000 (PGK 90,000,000) and the combined facility to $65,310,000 (PGK 140,000,000). In addition, a secured loan of $15,000,000 was provided as part of this increased facility which is repayable in equal installments over 3.5 years with an interest rate of LIBOR + 4.4% per annum. The BSP facility is renewable annually and was renewed in August 2011 through to August 2012. As at December 31, 2011, $6,450,372 (PGK 13,827,164) of this combined facility has been utilized, and $54,194,628 (PGK 116,172,836) of this facility remains available for use. During the year the weighted average interest rate was 9.6%. These facilities are secured by a fixed and floating charge over the assets of Downstream operations.
19. | Related parties |
(a) Petroleum Independent and Exploration Corporation (“P.I.E”)
P.I.E is controlled by Phil Mulacek, an officer and director of InterOil and acted as a sponsor of the Company's oil refinery project until late June 2011. Articles of association of SPI InterOil LDC (“SPI”) provide for the business and affairs of the entity to be managed by a general manager appointed by the shareholders of SPI. SPI does not have a Board of Directors, instead P.I.E has been appointed as the general manager of SPI. Under the laws of the Commonwealth of The Bahamas, the general manager exercises all powers which would typically be exercised by a Board of Directors, being those which are not required by laws or by SPI’s constituting documents to be exercised by the members (shareholders) of SPI. InterOil is the majority shareholder of SPI and therefore has the power to appoint the general manager.
During the year ended December 31, 2011, $nil (Dec 2010 - $150,000) was expensed for the sponsor's management fees in relation to legal, accounting and reporting costs. Of these costs, $nil (Dec 2010 - $112,500) were included in accrued liabilities at December 31, 2011.
In November of 2011, the Company elected to exchange the 5,000 shares held in SP InterOil LDC by PIE for 5,000 shares in InterOil Corporation. The sponsor agreements were terminated with PIE on exchange of the share holding interest in SPI LDC. Subsequent to year end, SPI LDC has been renamed South Pacific Refining Limited.
(b) Breckland Limited
This entity is controlled by Roger Grundy, a director of InterOil, and provides technical and advisory services to the Company on normal commercial terms. Amounts paid or payable to Breckland for technical services during the year amounted to $nil (Dec 2010 - $21,923).
(c) Key management compensation
Key management includes directors (executive and non-executive) and executive officers. The compensation paid or payable to key management for services is shown below:
December 31, | December 31, | |||||||
2011 | 2010 | |||||||
$ | $ | |||||||
Salaries and other short-term employee benefits | 3,985,427 | 2,653,219 | ||||||
Post-employment benefits | 94,732 | 83,277 | ||||||
Share-based payments | 9,341,730 | 6,328,176 | ||||||
Total | 13,421,889 | 9,064,672 |
Consolidated Financial Statements INTEROIL CORPORATION 46 |
InterOil Corporation Notes to Consolidated Financial Statements (Expressed in United States dollars) |
19. | Related parties (cont’d) |
(d) Joint ventures
The Company’s interests in PNG LNG Inc. is governed by a Shareholders’ Agreement signed on July 30, 2007 between the Joint Ventures’. Guidance under IAS 31 – ‘Interest in Joint Ventures’ is followed and the entity has been proportionately consolidated in InterOil’s consolidated financial statements. The consolidated results of InterOil’s proportionate shareholding in the LNG Project has been disclosed separately within the segment notes under Midstream - Liquefaction, refer to note 5.
20. | Secured and unsecured loans |
December 31, | December 31, | |||||||
2011 | 2010 | |||||||
$ | $ | |||||||
Secured loan (OPIC) - current portion | 9,000,000 | 9,000,000 | ||||||
Unsecured loan (Mitsui) | 10,393,023 | 5,456,757 | ||||||
Total current portion of loans | 19,393,023 | 14,456,757 | ||||||
Secured loan (OPIC) - non current portion | 26,500,000 | 35,500,000 | ||||||
Secured loan (OPIC) - deferred financing costs | (462,834 | ) | (686,778 | ) | ||||
Total non current secured loan | 26,037,166 | 34,813,222 | ||||||
Total secured and unsecured loans | 45,430,189 | 49,269,979 |
(a) OPIC Secured Loan
On June 12, 2001, the Company entered into a loan agreement with OPIC to secure a project financing facility of $85,000,000. The loan agreement stipulates half yearly principal payments of $4,500,000, due in June and December of each year, with the final repayment to be made in December 31, 2015. On June 20, 2011, the loan agreement was amended to release certain sponsor support collateral related to the loan agreement and to terminate various other sponsor support arrangements. OPIC released the common stock which was pledged by PIE Group LLC, and a parent guarantee originally provided by InterOil Corporation in 2001 will continue for the remaining life of the loan. The loan is secured over the assets of the refinery project which had a carrying value of $200,632,040 at December 31, 2011 (2010 - $196,024,838).
The interest rate on the loan is equal to the treasury cost applicable to each promissory note (at the date of draw down) outstanding plus the OPIC spread (3.00%). During 2011 the weighted average interest rate was 6.93% (2010 – 6.80%) and the total interest expense included in long term borrowing costs was $2,901,250 (2010 - $3,461,800).
As at December 31, 2011, two installment payments amounting to $4,500,000 each which will be due for payment on June 30, 2012 and December 31, 2012 have been classified into the current portion of the liability. The agreement contains certain financial covenants which include the maintenance of minimum levels of tangible net worth and limitations on the incurrence of additional indebtedness for the refining operations. A deposit is also required to be maintained to cover the next installment and interest payment. As of December 31, 2011, the company was in compliance with all applicable covenants.
Deferred financing costs relating to the OPIC loan of $462,834 (2010 - $686,778) are being amortized over the period until December 2014 and has been offset against the long term liability and are being amortized using the effective interest method.
Bank covenants under the above facility currently restrict the payment of dividends by the Company’s subsidiaries E.P. InterOil Limited and InterOil Limited.
(b) Mitsui Unsecured Loan
On April 15, 2010, the Company entered into preliminary joint venture and financing agreements with Mitsui relating to the CS Project. The proposed joint venture is to be entered into for equal shares between Mitsui and InterOil. On August 4, 2010, the JVOA for the CS Project was finalized. The amount financed by Mitsui for InterOil’s proportion of cash calls is treated as an unsecured loan with interest being accrued daily at LIBOR plus a margin of 6.00%. The portion of funding that relates to Mitsui’s share of the project is held in current liabilities. In the event that a positive FID is not reached or made, InterOil will be required to refund Mitsui’s share of capital expenditure incurred and the unsecured loan within a specified period.
Consolidated Financial Statements INTEROIL CORPORATION 47 |
InterOil Corporation Notes to Consolidated Financial Statements (Expressed in United States dollars) |
21. | Indirect participation interests |
December 31, | December 31, | |||||||
2011 | 2010 | |||||||
$ | $ | |||||||
Indirect participation interest (PNGDV) - current portion | 540,002 | 540,002 | ||||||
Total current indirect participation interest | 540,002 | 540,002 | ||||||
Indirect participation interest (PNGDV) - non current portion | 844,490 | 844,490 | ||||||
Indirect participation interest ("IPI") | 33,290,350 | 33,289,897 | ||||||
Total non current indirect participation interest | 34,134,840 | 34,134,387 | ||||||
Total indirect participation interest | 34,674,842 | 34,674,389 |
(a) Indirect participation interest (“IPI”)
The IPI balance relates to $125,000,000 received by InterOil subject to the terms of the agreement dated February 25, 2005 between the Company and a number of investors. In exchange InterOil had provided the investors with a 25% interest in an eight well drilling program to be conducted in InterOil’s PPL 236, 237 and 238.
Under the IPI agreement, InterOil is responsible for drilling eight exploration wells, four of which will be in PPL 238, one in PPL 236, and one in PPL 237. The location of the other two wells is yet to be determined. The investors will be able to approve the location of the final two wells to be drilled. In the instance that InterOil proposes appraisal or completion of an exploration or development well, the investors will be asked to contribute to the completion work in proportion to their IPI percentage and InterOil will bear the remaining cost.
InterOil has made cash calls for the completion, appraisal and development programs performed on the exploration or development wells that form part of the IPI Agreement. These cash calls are shown as a liability when received and reduced as amounts are spent on the extended well programs. Should an investor choose not to participate in the completion works of an exploration well, the investor will forfeit certain rights to the well in question as well as their right to convert into common shares. InterOil has drilled four exploration wells under the IPI agreement as at December 31, 2011.
The funds of $125,000,000 were partly accounted for as a non-financial liability and partly as a conversion option. The non-financial liability was initially valued at $105,000,000, being the estimated expenditures to complete the eight well drilling program, and the residual value of $20,000,000 has been allocated to the conversion option presented under Shareholder’s equity. InterOil paid financing fees and transaction costs of $8,138,741 related to the indirect participation interest on behalf of the indirect participation interest investors in 2005. These fees have been allocated against the non-financial liability, reducing the liability to $96,861,259. InterOil will maintain the liability at its initial value until conveyance is triggered on the lapse of the conversion option available to the investors, or they elect to participate in the PDL for a successful well. InterOil will account for the exploration costs relating to the eight well program under the successful efforts accounting policy adopted by the Company. All geological and geophysical costs relating to the exploration program will be expensed as incurred and all drilling costs will be capitalized and assessed for recovery at each period.
When an investor elects to participate in a PDL or when the investor forfeits the conversion option, conveyance accounting will be applied. This entails determination of proceeds for the interests conveyed and the cost of that interest as represented in the ‘Oil and gas properties’ in the balance sheet. The difference between proceeds on conveyance and capitalized costs to the interests conveyed will be recognized as gain or loss in the income statement.
Under the agreement, all or part of the 25% initial indirect participation interest could have been converted to a maximum of 3,333,334 common shares in the company, at a price of $37.50 per share, between June 15, 2006 and the later of December 15, 2006, or 90 days after the completion of the eighth well. Any partial conversion of an indirect participation interest into common shares will result in a corresponding decrease in the investors’ interest in the eight well drilling program. As at December 31, 2011, the balance of the indirect participation interest that may be converted into shares is a maximum of 340,480 common shares (Dec 2010 – 340,480). Should the option to convert to shares not be exercised, the indirect participation interest in the eight well drilling program will be maintained and distributions from success in these wells will be paid in accordance with the agreement.
Consolidated Financial Statements INTEROIL CORPORATION 48 |
InterOil Corporation Notes to Consolidated Financial Statements (Expressed in United States dollars) |
21. | Indirect participation interests (cont’d) |
From the date of the agreement up to December 31, 2011, the following transactions have occurred:
(i) Increase in InterOil’s direct interest in the IPI program by 9.8614% due to the following:
- | Conversion of IPI interests:Certain IPI investors representing a 3.575% interest in the IPI agreement have exercised their right to convert their interest into common shares resulting in issuance of 476,667 InterOil common shares. These conversions reduced the initial IPI liability balance by $13,851,160 and the initial conversion option balance by $2,860,000. |
- | Buyback of IPI interests by the Company:Certain IPI investors representing a 6.2864% interest in the IPI agreement have sold their interest to the Company. Detailed disclosure of this transaction is provided in the section ‘Extinguishment of IPI liability’ below. |
On April 15, 2010 one IPI investor representing 0.4% interest in the IPI agreement waived the conversion right to convert their IPI percentage into 53,333 shares. On July 19, 2010, the Company bought back this 0.4% interest in the IPI Agreement from the investor for 208,281 common shares of the Company. The Company has not applied conveyance accounting on this portion of the IPI agreement, but has accounted for the buyback under the ‘Extinguishment of IPI liability’ model in the quarter ended September 30, 2010.
As at December 31, 2011, InterOil’s direct interest in exploration licenses is 75.6114%, assuming that all remaining indirect participation interest investors take up their working interest rights in such licenses, and excluding the 20.5% interest that the State is able to take up under relevant legislation.
(ii) Waiver of conversion rights resulting in conveyance accounting
- | Certain IPI investors representing a 12.585% interest in the IPI agreement have waived their right to convert their IPI percentage into 1,678,000 common shares. As a result, conveyance was triggered on this portion of the IPI agreement, which reduced the IPI liability by $25,363,405. |
- | During December 2010, the Company bought a combined 1.05% interest in the IPI Agreement from two investors, out of which 0.05% related to interests that had already been waived by the investor in the prior year, hence conveyance accounting was followed for this interest and any premium paid was capitalized to Oil and Gas properties. This 0.05% was bought for $1,881,959 which was settled through the issue of 25,805 InterOil common shares. The excess of this consideration over the book value of the IPI liability and the appraisal costs previously cash called from this investor was $1,550,020 and has been capitalized to Oil and Gas properties. |
- | As at December 31, 2011, IPI investors with a combined 2.5536% interest in the IPI agreement still have the conversion rights outstanding resulting in a maximum of 340,480 common shares being issued if all these IPI investors choose to exercise their conversion options. |
(iii) Extinguishment of IPI liability
During September 2009, the Company bought a combined 4.3364% interest in the IPI Agreement from two investors for $56,479,615 which was settled in two tranches of InterOil common shares. The first tranche of common shares was for 35% of the total consideration and was issued on September 15, 2009. The second tranche of shares for the remaining 65% of the total consideration was issued on December 15, 2009 based on a ten day VWAP immediately prior to the date of issue. As part of this transaction a total number of 1,236,666 shares were issued.
During December 2009, the Company bought a further combined 0.5% interest in the IPI Agreement from two investors for $6,500,546 which was settled in two tranches of InterOil common shares. The first tranche of common shares was for 35% of the total consideration and was issued on December 1, 2009. The second tranche of shares for the remaining 65% of the total consideration was issued on December 15, 2009 based on a ten day VWAP immediately prior to the date of issue. As part of this transaction a total number of 108,044 shares were issued.
During July 2010, the Company bought a further 0.4% interest in the IPI Agreement from an investor for $10,830,612 which was settled in InterOil common shares. As part of this transaction a total number of 208,281 shares were issued.
During December 2010, the Company bought a further 1.0% interest in the IPI Agreement from one investor for $37,974,797 which was settled in InterOil common shares. As part of this transaction a total number of 520,702 shares were issued.
Management has adopted the extinguishment liability model. Under this model the consideration paid is allocated to the various components involved in the exchange transactions. These components include:
Consolidated Financial Statements INTEROIL CORPORATION 49 |
InterOil Corporation Notes to Consolidated Financial Statements (Expressed in United States dollars) |
21. | Indirect participation interests (cont’d) |
- | cash calls made from the IPI investors in relation to the completion, appraisal and development program undertaken in Elk and Antelope fields as part of the IPI agreement. These cash call amounts were previously offset against the capitalized oil and gas properties, and have been reinstated in the oil and gas properties asset to their full historical cost basis for those programs following this exchange transaction. |
- | fair value of the conversion options extinguished as part of the exchange transactions. |
- | IPI liability extinguished as part of the exchange transactions whereby the difference between the fair value of the shares issued and the book value of the IPI liability post allocation to the other components mentioned above has been recorded as an expense in the statement of operations. |
The following table discloses a breakdown of the loss on extinguishment of IPI liability for the periods ended:
Year ended | ||||||||
December 31, | December 31, | |||||||
2011 | 2010 | |||||||
$ | $ | |||||||
Loss on extinguishment of IPI liability | ||||||||
Consideration paid for exchange transactions | - | 48,805,409 | ||||||
less amounts capitalized in relation to the appraisal program cash calls | - | (3,784,466 | ) | |||||
less book value of IPI liability extinguished | - | (5,424,231 | ) | |||||
less book value of conversion options extinguished | - | (1,120,000 | ) | |||||
less difference between book value and fair value of conversion options extinguished taken to contributed surplus | - | (7,908,002 | ) | |||||
- | 30,568,710 |
(b) Indirect participation interest – PNGDV
As at December 31, 2011, the balance of the PNG Drilling Ventures Limited ("PNGDV") indirect participation interest in the Company’s phase one exploration program within the area governed by PPL 236, 237 and 238 is $1,384,492 (Dec 2010 - $1,384,492). This balance is based on the initial liability recognized in 2006 of $3,588,560 relating to its obligation to drill the four exploration wells on behalf of the investors, being reduced by amounts already incurred in fulfilling the obligation. PNGDV has a 6.75% interest in the four exploration wells starting with Elk-1 (with an additional two exploration wells to be drilled after Elk-4/A). PNGDV also has the right to participate in the 16 wells that follow the first four mentioned above up to an interest of 5.75% at a cost of $112,500 per 1% per well (with higher amounts to be paid if the depth exceed 3,500 meters and the cost exceeds $8,500,000).
(c) PNG Energy Investors
PNG Energy Investors (“PNGEI”), an indirect participation interest investor who converted all of its interest to common shares in fiscal year 2004, has the right to participate up to a 4.25% interest in 16 wells commencing from exploration wells numbered 9 to 24. As at the end of December 31, 2011 we have drilled 6 exploration wells since inception of the Company’s exploration program within PPL 236, 237 and 238 in PNG. In order to participate, PNGEI would be required to contribute for each exploration well, a) $112,500 per percentage point or b) where the well is planned to be drilled beyond 2,000 meters, $112,500 per percentage point plus actual cost over $1,000,000 charged pro-rata per percentage point.
22. | Deferred gain on contributions to LNG Project |
On July 30, 2007, a Shareholders’ Agreement was signed between InterOil LNG Holdings Inc., Pacific LNG Operations Ltd., Merrill Lynch Commodities (Europe) Limited and PNG LNG Inc.. As part of the Shareholders’ Agreement, five ‘A’ Class shares were issued by PNG LNG Inc. with full voting rights with each share controlling one board position. Two ‘A’ Class shares were owned by InterOil LNG Holdings Inc., two by Merrill Lynch Commodities (Europe) Limited, and one by Pacific LNG Operations Ltd. All key operational matters require ‘Unanimous’ or ‘Super-majority’ Board resolution which confirms that none of the joint ventures are in a position to exercise unilateral control over the joint venture.
Consolidated Financial Statements INTEROIL CORPORATION 50 |
InterOil Corporation Notes to Consolidated Financial Statements (Expressed in United States dollars) |
22. | Deferred gain on contributions to LNG Project (cont’d) |
On February 27, 2009, InterOil LNG Holdings Inc. and Pacific LNG Operations Ltd, acquired Merrill Lynch’s interest in the Joint Venture Company. InterOil issued 499,834 common shares valued at $11,250,000 for its share of the settlement. After the completion of this transaction, Merrill Lynch did not retain any ownership or other interest in the PNG LNG project. The two ‘A’ Class shares held by Merrill Lynch have been transferred to InterOil LNG Holdings Inc. and Pacific LNG Operations Ltd respectively. A further 172 ‘A’ Class shares have been issued to InterOil LNG Holdings Inc. and 173 ‘A’ Class shares have been issued to Pacific LNG Operations Ltd bringing the ‘A’ Class shareholding of both remaining joint venture partners to 175 ‘A’ Class shares each, giving equal voting rights and board positions in the joint venture.
As part of the Shareholders’ Agreement on July 30, 2007, InterOil was also provided with ‘B’ Class shares in the Joint Venture Company with a fair value of $100,000,000 in recognition of its contribution to the LNG Project at the time of signing the Shareholders’ Agreement. The main items contributed by InterOil into the Joint Venture Company were infrastructure developed by InterOil near the proposed LNG site at Napa Napa, stakeholder relations within Papua New Guinea, general supply agreements secured with landowners for supply of gas, advanced stage of project development, etc. Fair value was determined based on the agreement between the independent joint venture partners.
The other Joint Venture partner is being issued ‘B’ Class shares as it contributes cash into the Joint Venture Company by way of cash calls.
During September 2009, as part of acquisition by Pacific LNG of a 2.5% direct working interest in the Elk and Antelope fields, Pacific LNG transferred to InterOil 2.5% of Pacific LNG’s unexercised economic interest in the joint venture LNG Project. Based on this transaction, as at December 31, 2010, InterOil and Pacific LNG hold 52.5% and 47.5% economic interest respectively in the LNG project, subject to the exercise of all their rights to the ‘B’ Class shares on payment of cash calls.
To date InterOil has a recognized deferred gain on its contributions to the Joint Venture based on the share of other joint venture partners in the project. As InterOil’s shareholding within the Joint Venture Company as at December 31, 2011 is 84.582% (Dec 2010 – 86.66%), the gain on contribution of non cash assets to the project by InterOil relating to other joint venture partners’ shareholding (15.418% - amounting to $15,113,190) has been recognized by InterOil in its balance sheet as a deferred gain. This deferred gain may increase/decrease as the other Joint Venture partners decrease/increase their shareholding in the project.
This amount has been recorded as a reduction of deferred LNG project costs of $9,302,415 at December 31, 2011 (Dec 31, 2010 - $4,126,415), which has reduced the LNG project costs to nil at December 31, 2011, with the remaining balance of $5,810,775 (Dec 31, 2010 - $8,949,857) being recorded as a deferred gain. Any deferred gain will be recognized in the consolidated income statement when/if the risks and rewards have considered to be passed. The intangible assets of the Joint Venture Company, contributed by InterOil, have been eliminated on proportionate consolidation of the joint venture balances.
23. | Asset retirement obligations |
The Company plans to dismantle the refinery and restore the site when the refinery is decommissioned. During the quarter ended June 30, 2011, Management received the final results of an independent assessment of the potential asset retirement obligations of the refinery at the time of decommissioning and a provision of $4,100,735 was recognized for the present value of the estimated expenditure required to complete this obligation. The fair value of the best estimate was derived based on discounting the obligation to the current period end using a discount rate of 7.78%. These costs have been capitalized as part of the cost of the refinery and are depreciated over the life of the asset. The provision will be accreted over the remaining useful life of the refinery to bring the provision to the estimated expenditure required at the time of decommissioning. The accretion expense for the year ended December 31, 2011 was $159,356 (Dec 2010 - $nil).
24. | Non controlling interest |
The non controlling interest as at December 31, 2010 related to Petroleum Independent and Exploration Corporation’s (“PIE Corp.”) 0.01% minority shareholding in SPI InterOil LDC. InterOil had entered into an agreement with PIE Corp. under which the remaining 5,000 shares of SPI InterOil LDC held by PIE Corp. may be exchanged, at InterOil’s election, for Common Shares on a one-for-one basis. On September 30, 2011, the Company elected to exchange the 5,000 shares of SPI InterOil LDC held by PIE Corp. with the issue of 5,000 Common Shares of InterOil Corporation. The 5,000 Common Shares issued by InterOil Corporation were valued at $243,850. The Company now holds 100% of the equity share capital of SPI InterOil LDC. The carrying amount of the non-controlling interest in the Company on the date of acquisition was $26,300. The Company derecognized non-controlling interests of $26,300 and recorded a decrease in equity attributable to owners of the Company of $217,550. The effect of changes in the ownership interest of SPI InterOil LDC on the equity attributable to owners of the Company during the year is summarized as follows:
Consolidated Financial Statements INTEROIL CORPORATION 51 |
InterOil Corporation Notes to Consolidated Financial Statements (Expressed in United States dollars) |
24. | Non controlling interest (cont’d) |
December 31, | December 31, | |||||||
2011 | 2010 | |||||||
$ | $ | |||||||
Carrying amount of non-controlling interests acquired | 26,300 | - | ||||||
Consideration paid to non-controlling interests | (243,850 | ) | - | |||||
Excess of consideration paid recognised in Company's equity | (217,550 | ) | - |
25. | Share capital and reserves |
The authorized share capital of the Company consists of an unlimited number of common shares with no par value. Each common share entitles the holder to one vote.
(a) Common shares -Changes to issued share capital were as follows:
Number of shares | $ | |||||||
January 1, 2010 | 43,545,654 | 613,361,363 | ||||||
Shares issued on exercise of options under Stock Incentive Plan | 479,733 | 19,310,657 | ||||||
Shares issued on vesting of restricted stock units under Stock Incentive Plan | 20,700 | 1,418,985 | ||||||
Shares issued on buyback of IPI#3 Interest | 754,788 | 50,687,368 | ||||||
Shares issued on litigation settlement | 199,677 | 12,000,000 | ||||||
Shares issued on public offering | 2,800,000 | 198,872,679 | ||||||
December 31, 2010 | 47,800,552 | 895,651,052 | ||||||
Shares issued on exercise of options under Stock Incentive Plan | 265,440 | 7,087,574 | ||||||
Shares issued on vesting of restricted stock units under Stock Incentive Plan | 50,079 | 2,999,138 | ||||||
Shares issued on buyback of non-controlling interest | 5,000 | 243,850 | ||||||
December 31, 2011 | 48,121,071 | 905,981,614 |
Settlement of litigation -The Company's Chief Executive Officer, Phil Mulacek, and his controlled entities Petroleum Independent & Exploration Corporation and P.I.E. Group, LLC, together with the Company and certain of its subsidiaries, were defendants in Todd Peters, et. al. v. Phil Mulacek et. al.; Cause No. 05-040-03592-CV; in the 284th District Court of Montgomery County, Texas. The plaintiffs are members of a partnership that bought a modular oil refinery that was subsequently, through a series of transactions, sold to a subsidiary of the Company. We entered into an agreement in August 2010 to settle and release all claims against us and our subsidiaries. Pursuant to the agreed settlement, which was approved by the Court in September, we issued 199,677 common shares to the plaintiffs during October, valued at $12 million based on a volume weighted average price calculated over the ten trading days prior to execution of the settlement agreement.
(b) Nature and purpose of reserves
- | Foreign currency translation reserve:Exchange differences arising on translation of the foreign controlled entity are recognized in other comprehensive income and accumulated in a separate reserve within equity. The cumulative amount is reclassified to profit or loss when the net investment is disposed of. |
- | Available-for-sale financial assets:Changes in the fair value and exchange differences arising on translation of investments, such as equities classified as available-for-sale financial assets, are recognized in other comprehensive income and accumulated in a separate reserve within equity. Amounts are reclassified to profit or loss when the associated assets are sold or impaired. |
- | Conversion options:This reserve is used to recognize the value of the conversion option included in the agreement with IPI investors (refer to note 21). This balance will reduce when IPI investors sell their interest back to the Company. |
- | Contributed surplus:The contributed surplus reserve is used to recognize the fair market value of employee stock options and restricted stock units that have not been forfeited or been exercised. |
Consolidated Financial Statements INTEROIL CORPORATION 52 |
InterOil Corporation Notes to Consolidated Financial Statements (Expressed in United States dollars) |
26. | 2.75% convertible notes |
On November 10, 2010, the Company completed the issue of $70,000,000 unsecured 2.75% convertible notes with a maturity of five years. The note holders have the right to convert their note into common shares at any time at a conversion rate of 10.4575 common shares per $1,000 principal amount of notes (which results in an effective initial conversion price of approximately $95.625 per share). The Company has the right to redeem the notes if the daily closing sale price of the common shares has been at least 125% of the conversion price then in effect for at least 15 trading days during any 20 consecutive trading day period. Accrued interest on these notes is to be paid semi-annually in arrears, in May and November of each year, commencing May 2011.
The liability component on initial recognition after adjusting for the underwriting placement fee and transaction costs amounted to $51,992,857 and the equity component amounted to $14,298,036. The liability component will be accreted over the five year maturity period to bring the liability back to the carrying value. The accretion expense relating to the note liability for the year ended December 31, 2011 was $3,212,141 (Dec 2010 - $432,632). In addition to the accretion, interest at 2.75% per annum has been expensed for the year ended December 31, 2011 amounting to $1,925,000 (Dec 2010 - $278,056). The interest payable up to November 2011 was paid in cash.
27. | Stock compensation |
(a) Stock options
Options are issued at no less than market price to directors, certain employees and to a limited number of contractor personnel. Options are exercisable for common shares on a 1:1 basis. Individuals are granted options which only vest if certain performance standards are met, with the vesting of the majority of options issued only being reliant on the individual remaining employed with the Company for a certain time period, while the vesting of some options granted are reliant on various performance conditions. Options vest at various dates in accordance with the applicable individual option agreements, vesting generally between one to four years after the date of grant, have an exercise period of three to five years after the date of grant, and are subject to the option plan rules. Upon resignation or retirement, vested options must generally be exercised within 90 days or before expiry of the options if this occurs earlier.
December 31, 2011 | December 31, 2010 | |||||||||||||||
Stock options outstanding | Number of options | Weighted average exercise price $ | Number of options | Weighted average exercise price $ | ||||||||||||
Outstanding at beginning of period | 1,688,267 | 27.31 | 1,838,500 | 22.07 | ||||||||||||
Granted | 110,000 | 59.89 | 330,000 | 54.02 | ||||||||||||
Exercised | (265,440 | ) | (16.91 | ) | (479,733 | ) | (25.59 | ) | ||||||||
Forfeited | (45,000 | ) | (47.33 | ) | - | - | ||||||||||
Expired | - | - | (500 | ) | (28.68 | ) | ||||||||||
Outstanding at end of period | 1,487,827 | 30.97 | 1,688,267 | 27.31 |
At December 31, 2011, in addition to the options outstanding as per the above table, there were an additional 1,176,531 (2010 – 1,315,617) common shares reserved for issuance under the Company’s 2009 stock incentive plan as approved on June 19, 2009.
Options issued and outstanding | Options exercisable | |||||||||||||||||||
Range of exercise prices $ | Number of options | Weighted average exercise price $ | Weighted average remaining term (years) | Number of options | Weighted average exercise price $ | |||||||||||||||
8.01 to 12.00 | 503,160 | 9.80 | 1.90 | 403,160 | 9.80 | |||||||||||||||
12.01 to 24.00 | 135,000 | 16.90 | 1.78 | 95,000 | 17.37 | |||||||||||||||
24.01 to 31.00 | 100,500 | 27.74 | 1.44 | 100,500 | 27.74 | |||||||||||||||
31.01 to 41.00 | 234,167 | 35.46 | 1.20 | 180,833 | 35.94 | |||||||||||||||
41.01 to 51.00 | 75,000 | 44.86 | 1.48 | 75,000 | 44.86 | |||||||||||||||
51.01 to 61.00 | 380,000 | 53.08 | 3.72 | - | - | |||||||||||||||
61.01 to 71.00 | 30,000 | 66.58 | 3.63 | 15,000 | 66.58 | |||||||||||||||
71.01 to 81.00 | 30,000 | 74.82 | 4.23 | - | - | |||||||||||||||
1,487,827 | 30.97 | 2.70 | 869,493 | 22.14 |
Consolidated Financial Statements INTEROIL CORPORATION 53 |
InterOil Corporation Notes to Consolidated Financial Statements (Expressed in United States dollars) |
27. | Stock compensation (cont’d) |
Aggregate intrinsic value of the 1,487,827 options issued and outstanding as at December 31, 2011 is $27,993,610. Aggregate intrinsic value of 869,493 options exercisable as at December 31, 2011 is $12,123,867.
The weighted-average grant-date fair value of options granted during 2011 was $37.46 (2010 - $32.26). The total intrinsic value of options exercised during the year ended December 31, 2011 was $2,598,871 (2010 - $7,035,772). Cash received from option exercise under all share-based payment arrangements for the year ended December 31, 2011 was $4,488,703 (2010 - $12,274,885).
The weighted-average share price at the date of exercise of options exercised during the year ended December 31, 2011 was $61.54 (2010 - $68.32).
The fair value of the 110,000 (2010 – 330,000) options granted subsequent to January 1, 2011 has been estimated at the date of grant in the amount of $4,121,016 (2010 - $10,645,501) using a Black-Scholes pricing model. An amount of $9,839,824 (2010 - $7,628,017) has been recognized as compensation expense for the year ended December 31, 2011. The current year compensation expense of $9,839,824 (2010 - $7,628,017) was adjusted against contributed surplus under equity and $2,598,871 (2010 - $7,035,773) was transferred to share capital on exercise of options, leaving a net impact of $7,240,953 (2010 - $592,244) on contributed surplus.
The assumptions contained in the Black Scholes pricing model are as follows:
Year | Period | Risk free interest rate (%) | Dividend yield | Volatility (%) | Weighted average expected life for options | ||||||
2011 | Apr 1 to Dec 31 | 0.4 | - | 78 | 5.0 | ||||||
2011 | Jan 1 to Mar 31 | 1.2 | - | 79 | 5.0 | ||||||
2010 | Jul 1 to Dec 31 | 0.8 | - | 87 | 5.0 | ||||||
2010 | Jan 1 to Jun 30 | 1.2 | - | 87 | 5.0 |
(b) Restricted stock
Restricted stock may be issued to directors, certain employees and to a limited number of contractor personnel under the Company’s 2009 stock incentive plan. Restricted stock vests at various dates in accordance with the applicable restricted stock agreement, vesting generally between one to three years after the date of grant.
December 31, 2011 | December 31, 2010 | |||||||||||||||
Restricted stock units outstanding | Number of restricted stock units | Weighted Average Grant Date Fair Value per restricted stock unit $ | Number of restricted stock units | Weighted Average Grant Date Fair Value per restricted stock unit $ | ||||||||||||
Outstanding at beginning of period | 124,192 | 56.99 | 41,400 | 68.55 | ||||||||||||
Granted | 97,069 | 67.06 | 107,483 | 54.73 | ||||||||||||
Exercised | (50,079 | ) | (59.89 | ) | (20,700 | ) | (68.55 | ) | ||||||||
Forfeited | (18,992 | ) | (64.34 | ) | (3,991 | ) | (56.13 | ) | ||||||||
Total | 152,190 | 61.54 | 124,192 | 56.99 |
An amount of $4,881,563 (2010 - $4,175,983) has been recognized as compensation expense for the year ended December 31, 2011. The current year compensation expense of $4,881,563 (2010 - $4,175,983) was adjusted against contributed surplus under equity and $2,999,138 (2010 - $1,418,985) was transferred to share capital on vesting of stock units, leaving a net impact of $1,882,425 (2010 - $2,756,998) on contributed surplus.
Consolidated Financial Statements INTEROIL CORPORATION 54 |
InterOil Corporation Notes to Consolidated Financial Statements (Expressed in United States dollars) |
28. | Earnings/(Loss) per share |
Conversion options, convertible notes, stock options and restricted stock units totaling 2,712,522 common shares at prices ranging from $9.80 to $95.63 were outstanding as at December 31, 2011 and some of these were included in the computation of the diluted earnings per share for the year ended December 31, 2011. The dilutive instruments outstanding at December 31, 2010 were not included in the computation of the diluted loss per share in respective periods because they caused the loss per share to be anti-dilutive.
Potential dilutive instruments outstanding | Number of shares December 31, 2011 | Number of shares December 31, 2010 | ||||||
Employee stock options | 1,487,827 | 1,688,267 | ||||||
Employee Restricted Stock | 152,190 | 124,192 | ||||||
IPI Indirect Participation interest - conversion options | 340,480 | 340,480 | ||||||
2.75% Convertible notes | 732,025 | 732,025 | ||||||
Others | - | 5,000 | ||||||
Total stock options/shares outstanding | 2,712,522 | 2,889,964 |
The income available to the common shareholders and the income available to the dilutive holders, used in the calculation of the numerator in the EPS calculation for the year ended December 31, 2011 and 2010 is the net profit/loss as per Consolidated Income Statement. This is due to the fact that the inclusion of convertible securities in the calculation would result in the EPS being anti-dilutive.
The reconciliation between the ‘Basic’ and ‘Basic and Diluted’ shares, used in the calculation of the denominator in the EPS calculation is as follows:
Year ended | ||||||||
December 31, | December 31, | |||||||
2011 | 2010 | |||||||
Basic | 47,977,478 | 44,329,670 | ||||||
Employee options | 803,507 | - | ||||||
Employee restricted stock | 88,985 | - | ||||||
Indirect participation interest | 340,480 | - | ||||||
Other | 3,740 | - | ||||||
Diluted | 49,214,190 | 44,329,670 |
29. | Commitments and contingencies |
(a) Exploration and debt commitments
Payments due by period contractual obligations are as follows:
Total | Less than 1 year | 1-2 years | 2-3 years | 3-4 years | 4-5 years | More than 5 years | ||||||||||||||||||||||
'000 | '000 | '000 | '000 | '000 | '000 | '000 | ||||||||||||||||||||||
Petroleum prospecting and retention licenses (a) | 134,900 | 44,400 | 36,350 | 44,050 | 9,900 | 200 | - | |||||||||||||||||||||
Secured and unsecured loans (b) | 51,586 | 21,727 | 10,749 | 10,131 | 8,979 | - | - | |||||||||||||||||||||
Convertible notes obligations | 77,540 | 1,925 | 1,925 | 1,925 | 71,765 | - | - | |||||||||||||||||||||
Indirect participation interest - PNGDV (note 21) | 1,384 | 540 | 844 | - | - | - | - | |||||||||||||||||||||
265,410 | 68,592 | 49,868 | 56,106 | 90,644 | 200 | - |
(a) | The amount pertaining to the petroleum prospecting and retention licenses represents the amount InterOil has committed as a condition on renewal of these licenses. Company is committed to spend a further $61.9 million as a condition of renewal of our petroleum prospecting licenses up to 2014. Of this $61.9 million commitment, as at December 31, 2011, management estimates that satisfying this license commitment would also satisfy our commitments to the IPI investors in relation to drilling the final four wells and satisfy the commitments in relation to the IPI agreement. In addition, the terms of grant of PRL15, requires the Company to spend a further $73.0 million on the development of the Elk and Antelope fields by the end of 2014. |
(b) | The effective interest rate on this loan for the year ended December 31, 2011 was 6.93%. |
Consolidated Financial Statements INTEROIL CORPORATION 55 |
InterOil Corporation Notes to Consolidated Financial Statements (Expressed in United States dollars) |
29. | Commitments and contingencies (cont’d) |
(b) Operating lease commitments – Company as lessee
The Company leases various retail service station premises, commercial office properties, residential apartments, motor vessels and office equipment under non-cancellable operating lease agreements. The remaining lease terms are between 1 and 30 years, and the majority of lease agreements are renewable at the end of the lease period at market rate.
The future aggregate minimum lease payments under non-cancellable operating leases are as follows:
December 31, | December 31, | |||||||
2011 | 2010 | |||||||
$ | $ | |||||||
Not later than 1 year | 6,983,149 | 6,257,276 | ||||||
Later than 1 year and not later than 5 years | 6,560,263 | 8,558,043 | ||||||
Later than 5 years | 2,957,605 | 458,071 | ||||||
Total | 16,501,017 | 15,273,390 |
(c) Contingencies:
From time to time the Company is involved in various claims and litigation arising in the course of its business. While the outcome of these matters is uncertain and there can be no assurance that such matters will be resolved in the Company’s favor, the Company does not currently believe that the outcome of adverse decisions in any pending or threatened proceedings or any amount which it may be required to pay by reason thereof would have a material adverse impact on its financial position, results of operations or liquidity.
Audit by PNG Customs
During the second half of 2011, the PNG Customs Service commenced an audit of our petroleum product imports into Papua New Guinea for the years 2007 to 2010. The Company received a letter in November 2011 from the then Commissioner of Customs setting out certain findings from the audit. This letter included comments alleging that payment of import GST was required and had not been made on imports of certain refined products. As well as requiring payment of GST, the letter noted that administrative penalties were able to be levied by Customs in the range of 50% to 200% of the assessed amounts as per the Customs Act. The Company has since met with the Customs Service and provided it with supporting documentation to demonstrate that the GST amounts claimed in their letter have all been paid. Management has included a provision in these financial statements based on their best estimate in relation to this matter and is working closely with the authority to provide all requested information in order to finalize the audit.
Consolidated Financial Statements INTEROIL CORPORATION 56 |