Repsol Oil & Gas Canada (TLM) 6-K Interim Condensed Consolidated Financial Statements

Exhibit 99.1

INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED SEPTEMBER 30, 2014

(Unaudited)

Talisman Energy Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

	September 30,		December 31,
(millions of US$)	2014		2013
Assets
Current
Cash and cash equivalents (note 22)		237		364
Accounts receivable		1,168		1,117
Risk management (note 16)		116		17
Income and other taxes receivable		96		52
Restricted cash (note 8)		177		121
Inventories		215		137
Prepaid expenses		40		14
Assets held for sale (note 4)		-		776
		2,049		2,598
Other assets (note 7)		178		160
Restricted cash (note 8)		-		94
Investments (note 5)		1,421		1,204
Risk management (note 16)		82		20
Goodwill (note 6)		568		575
Property, plant and equipment (note 9)		9,654		9,752
Exploration and evaluation assets (note 9)		3,133		3,165
Deferred tax assets		1,680		1,593
		16,716		16,563
Total assets		18,765		19,161
Liabilities
Current
Bank indebtedness		7		13
Accounts payable and accrued liabilities		1,628		1,835
Current portion of Yme removal obligation (note 8)		195		121
Risk management (note 16)		6		101
Income and other taxes payable		76		155
Loans from joint ventures (note 5)		318		288
Current portion of long-term debt (note 13)		722		882
Liabilities associated with assets held for sale (note 4)		-		160
		2,952		3,555
Decommissioning liabilities (note 11)		1,826		1,727
Yme removal obligation (note 8)		19		131
Other long-term obligations (note 14)		286		246
Risk management (note 16)		-		37
Long-term debt (note 13)		3,973		4,357
Deferred tax liabilities		675		553
		6,779		7,051
Contingencies and commitments (note 17)
Shareholders' equity
Common shares (note 15)		1,742		1,723
Preferred shares (note 15)		191		191
Contributed surplus		135		135
Retained earnings		6,155		5,695
Accumulated other comprehensive income		811		811
		9,034		8,555
Total liabilities and shareholders' equity		18,765		19,161
See accompanying notes.

2

Talisman Energy Inc.

Condensed Consolidated Statements of Income (Loss)

(Unaudited)	Three months ended						Nine months ended
	September 30,						September 30,
(millions of US$)	2014			2013			2014			2013
Revenue
Sales		1,114			1,159			3,649			3,409
Other income (note 18)		35			41			114			83
Income (loss) from joint ventures and associates, after tax (note 5)		(13	)		44			(44	)		65
Total revenue and other income		1,136			1,244			3,719			3,557
Expenses
Operating		339			338			1,051			1,048
Transportation		57			46			150			148
General and administrative		95			106			305			320
Depreciation, depletion and amortization		458			482			1,407			1,367
Impairment (note 10)		-			2			158			-
Dry hole		36			13			64			82
Exploration		53			66			162			208
Finance costs (note 12)		85			87			266			244
Share-based payments expense (recovery) (note 15)		(17	)		6			(24	)		30
(Gain) loss on held-for-trading financial instruments (note 16)		(428	)		120			(197	)		(21	)
(Gain) loss on disposals (note 4)		(6	)		1			(560	)		(58	)
Other, net (note 19)		(3	)		47			42			71
Total expenses		669			1,314			2,824			3,439
Income (loss) before taxes		467			(70	)		895			118
Income taxes (note 20)
Current income tax		58			171			318			457
Deferred income tax recovery		(16	)		(187	)		(102	)		(169	)
		42			(16	)		216			288
Net income (loss)		425			(54	)		679			(170	)
Per common share (US$):
Net income (loss)		0.41			(0.05	)		0.65			(0.17	)
Diluted net income (loss)		0.38			(0.08	)		0.57			(0.23	)
Weighted average number of common shares outstanding (millions)
Basic		1,033			1,031			1,033			1,029
Diluted		1,041			1,034			1,040			1,035
See accompanying notes.

3

Talisman Energy Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)
	Three months ended						Nine months ended
	September 30,						September 30,
(millions of US$)	2014			2013			2014			2013
Net income (loss)		425			(54	)		679			(170	)
Actuarial gains (losses) relating to pension and other post-employment benefits1		(1	)		(4	)		(4	)		4
Other comprehensive income (loss) not being reclassified to net income or loss in subsequent periods		(1	)		(4	)		(4	)		4
Comprehensive income (loss)		424			(58	)		675			(166	)
1. For the three and nine months ended September 30, 2014, is net of tax of $nil and $1 million respectively (2013 - $1 million and $1 million respectively).
See accompanying notes.

4

Talisman Energy Inc.

Condensed Consolidated Statements of Changes in Shareholders’ Equity

(Unaudited)	Three months ended						Nine months ended
	September 30,						September 30,
(millions of US$)	2014			2013			2014			2013
Common shares (note 15)
Balance at beginning of period		1,759			1,709			1,723			1,639
Issued on exercise of stock options		-			5			5			31
Shares purchased and held in trust for long-term PSU plan		(17	)		-			(17	)		-
Shares released from trust for long-term PSU plan		-			-			31			44
Balance at end of period		1,742			1,714			1,742			1,714
Preferred shares (note 15)
Balance at beginning of period		191			191			191			191
Issued		-			-			-			-
Balance at end of period		191			191			191			191
Contributed surplus
Balance at beginning of period		124			110			135			121
Settlement of long-term PSU plan grant		-			-			(31	)		(44	)
Share-based payments		11			14			31			47
Balance at end of period		135			124			135			124
Retained earnings
Balance at beginning of period		5,802			6,898			5,695			7,148
Net income (loss)		425			(54	)		679			(170	)
Actuarial gains (losses) transferred to retained earnings		(1	)		(4	)		(4	)		4
Common share dividends (note 15)		(69	)		(70	)		(209	)		(208	)
Preferred share dividends (note 15)		(2	)		(2	)		(6	)		(6	)
Balance at end of period		6,155			6,768			6,155			6,768
Accumulated other comprehensive income
Balance at beginning of period		811			811			811			811
Other comprehensive income (loss)		(1	)		(4	)		(4	)		4
Actuarial losses (gains) transferred to retained earnings		1			4			4			(4	)
Balance at end of period		811			811			811			811
See accompanying notes.

5

Talisman Energy Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)	Three months ended						Nine months ended
	September 30,						September 30,
(millions of US$)	2014			2013			2014			2013
Operating activities
Net income (loss)		425			(54	)		679			(170	)
Add: Finance costs (cash and non-cash) (note 12)		85			87			266			244
Dividends from associates (note 5)		-			37			-			37
Items not involving cash (note 21)		37			401			709			1,130
		547			471			1,654			1,241
Changes in non-cash working capital		(89	)		166			(360	)		84
Cash provided by operating activities		458			637			1,294			1,325
Investing activities
Capital expenditures
Exploration, development and other		(549	)		(608	)		(1,543	)		(1,826	)
Property acquisitions		-			(94	)		(23	)		(94	)
Proceeds of resource property dispositions (note 4)		102			4			1,494			103
Yme removal obligation (note 8)		(9	)		(14	)		(38	)		261
Restricted cash (note 8)		9			14			38			(224	)
Investments (note 5)		(186	)		(2	)		(186	)		(9	)
Loan to joint venture, net of repayments (note 5)		7			(126	)		(343	)		(215	)
Changes in non-cash working capital		141			(74	)		99			(189	)
Cash used in investing activities		(485	)		(900	)		(502	)		(2,193	)
Financing activities
Long-term debt repaid (note 13)		(18	)		-			(897	)		(4	)
Long-term debt issued (note 13)		44			557			359			1,066
Loans from joint venture (note 5)		12			1			30			50
Common shares issued (note 15)		-			4			4			21
Common shares purchased (note 15)		(17	)		-			(17	)		-
Finance costs (cash) (note 12)		(74	)		(77	)		(226	)		(218	)
Common share dividends (note 15)		(69	)		(70	)		(209	)		(208	)
Preferred share dividends (note 15)		(2	)		(2	)		(6	)		(6	)
Deferred credits and other		12			3			13			(12	)
Changes in non-cash working capital		18			20			31			31
Cash provided by (used in) financing activities		(94	)		436			(918	)		720
Effect of translation on foreign currency cash and cash equivalents		(1	)		-			5			-
Net increase (decrease) in cash and cash equivalents		(122	)		173			(121	)		(148	)
Cash and cash equivalents net of bank indebtedness, beginning of period		352			232			351			553
Cash and cash equivalents net of bank indebtedness, end of period		230			405			230			405
Cash and cash equivalents		237			407			237			407
Bank indebtedness		(7	)		(2	)		(7	)		(2	)
Cash and cash equivalents net of bank indebtedness, end of period		230			405			230			405
See accompanying notes.

6

Notes to the Interim Condensed Consolidated Financial Statements

(Unaudited)

(tabular amounts in millions of US dollars, except as noted)

1. CORPORATE INFORMATION

Talisman Energy Inc. (‘Talisman’ or ‘the Company’) is a public company incorporated pursuant to the laws of Canada and domiciled in Alberta, Canada, with common shares listed on the Toronto Stock Exchange and the New York Stock Exchange under the symbol ‘TLM’. The registered office is located at Suite 2000, 888 – 3rd Street SW, Calgary, Alberta, Canada, T2P 5C5.

The Company is in the business of exploration, development, production and marketing of crude oil, natural gas and natural gas liquids (NGLs).

The interim condensed Consolidated Financial Statements as at and for the three and nine month periods ended September 30, 2014 were approved by the Audit Committee on November 3, 2014.

2. BASIS OF PREPARATION

These interim condensed Consolidated Financial Statements have been prepared in accordance with International Accounting Standard (IAS) 34, Interim Financial Reporting as issued by the International Accounting Standards Board (IASB). Certain information and disclosures required to be included in notes to annual Consolidated Financial Statements prepared in accordance with International Financial Reporting Standards (IFRS) and interpretations of the International Financial Reporting Interpretations Committee (IFRIC), as issued by the IASB, have been condensed or omitted.

The interim condensed Consolidated Financial Statements should be read in conjunction with the audited annual Consolidated Financial Statements as at and for the year ended December 31, 2013 and the notes thereto.

These interim condensed Consolidated Financial Statements were prepared on a going concern basis, under the historical cost convention, except for certain financial assets and liabilities measured at fair value through the condensed Consolidated Statement of Income (Loss).

3. SIGNIFICANT ACCOUNTING POLICIES

a) Accounting Policies Used

The interim condensed Consolidated Financial Statements have been prepared following the same accounting policies and methods of computation as the audited annual Consolidated Financial Statements as at and for the year ended December 31, 2013, except for adoption of the following new standards and interpretations effective as of January 1, 2014:

Offsetting Financial Assets and Financial Liabilities

· IAS 32 Offsetting Financial Assets and Financial Liabilities - Financial Instruments Presentation.  The amended standard requires entities to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement.  The scope includes derivatives, sale and repurchase agreements and reverse sale and repurchase agreements and securities borrowing and securities lending agreements.  The amendments to IAS 32 are effective for annual periods beginning on or after January 1, 2014 and require retrospective application. As the Company is not netting any significant amounts related to financial instruments and does not have any significant offsetting arrangements, the amendment does not have an impact on the Company’s financial statements.

7

Impairment of Assets

· IAS 36 Impairment of Assets – Amendments to IAS 36. The amended standard requires entities to disclose the recoverable amount of an impaired Cash Generating Unit (CGU). The amendments to IAS 36 are effective for annual periods beginning on or after January 1, 2014 and require retrospective application. This standard did not have an impact on the Company’s financial position or performance.

Levies

· IFRIC 21 Levies - Interpretation of IAS 37 Provisions, contingent liabilities and assets: IAS 37 sets out criteria for the recognition of a liability, one of which is the requirement for the entity to have a present obligation as a result of a past event. The interpretation clarifies that the obligation that gives rise to the liability to pay a levy is the activity described in the relevant legislation that triggers the payment of the levy. The Company reviewed payments considered to be levies and concluded that the application of the standard did not have a significant impact on the Company.

b) Accounting Pronouncements Not Yet Adopted

The Company continues to assess the impact of adopting the pronouncements from the IASB as described below:

Financial Instruments

· IFRS 9 Financial Instruments: IFRS 9 (July 2014) replaces earlier versions of IFRS 9 that had not yet been adopted by the Company and supersedes IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 introduces new models for classification and measurement of financial instruments, hedge accounting and impairment of financial assets and is mandatorily effective for periods beginning on or after January 1, 2018. The Company continues to review the standard as it is updated and monitor its impact on the Company’s financial statements.

Revenue

· IFRS 15 Revenue from Contracts with Customers: IFRS 15 specifies how and when to recognize revenue as well as requiring entities to provide users of financial statements with more informative, relevant disclosures. The standard supersedes IAS 18 Revenue, IAS 11 Construction Contracts, and a number of revenue-related interpretations. IFRS 15 will be effective for annual periods beginning on or after January 1, 2017. Application of the standard is mandatory and early adoption is permitted. The Company has not yet determined the impact of the standard on the Company’s financial statements.

8

4. DISPOSALS AND ASSETS HELD FOR SALE

North America Dispositions

In June 2014, Talisman signed a purchase and sale agreement to sell non-core assets in western Canada for total cash consideration of C$120 million, before closing adjustments. The transaction closed on July 31, 2014 with net proceeds of $99 million, resulting in a loss on disposal of $3 million ($3 million after tax).

In April 2014, Talisman sold non-core assets in western Canada for net proceeds of $45 million after $10 million in working capital adjustments, resulting in a loss on disposal of $3 million ($3 million after tax).

In March 2014, Talisman completed the sale of its Montney acreage in northeast British Columbia for proceeds of $1.3 billion, resulting in a pre-tax gain of $567 million ($493 million after tax).  The assets held for sale and liabilities associated with assets held for sale included in the Consolidated Balance Sheet as at December 31, 2013 were $776 million and $160 million respectively.  The operating results from January 1, 2014 up to the date of closing were included in net income for the three month period ended March 31, 2014 and the gain was included in ‘Gain on disposals’ on the condensed Consolidated Statement of Income (Loss).

In May 2013, Talisman completed sales of non-core assets in western Canada forproceeds of $63 million, resulting in a pre-tax gain of $52 million ($39 million after tax).

Southeast Asia Disposition

On May 3, 2013, Talisman completed the sale of its 5.03% interest in the Offshore Northwest Java Production Sharing Contract (PSC) in Indonesia for net proceeds of $36 million, resulting in a pre-tax gain of $9 million ($3 million after tax).

5. INVESTMENTS

	September 30, 2014		December 31,  2013
Investments in Joint Ventures
Equity investment in Equion		704		920
Equity investment in TSEUK		116		(606	)
Loan to TSEUK		521		812
		1,341		1,126
Available-for-sale investments
Transasia Pipeline Company Pvt. Ltd.		34		34
Other		46		44
		80		78
Total		1,421		1,204

The Company assesses investments for impairment whenever changes in circumstances or events indicate that the carrying value may not be recoverable. If such impairment indicators exist, the carrying amount of the investment is compared to its recoverable amount. The recoverable amount is the higher of the investment’s fair value less costs to sell and its value in use. The investment is written down to its recoverable amount when its carrying amount exceeds the recoverable amount.

9

Investments in Joint Ventures

Movement in investment in TSEUK joint ventures during the period:

	Nine months ended September 30, 2014			Year ended December 31, 2013
Balance, beginning of period		206			258
Investment in TSEUK		829			-
Loan to TSEUK, net of repayments and settlements		(291	)		398
Share of net loss and comprehensive loss		(107	)		(450	)
Balance, end of period		637			206

Talisman has a 51% interest in the ownership and voting rights of Talisman Sinopec Energy UK Limited (TSEUK) whose principal place of operations is the United Kingdom and is incorporated in England and Wales.  Talisman is one of two shareholders in this corporate joint venture engaging in the exploration for, and development and production of crude oil and natural gas.  The corporate joint venture is governed by a shareholders’ agreement, which requires that unanimous consent be obtained from the shareholders for all significant operating and financing decisions.

Movement in investment in Equion joint ventures during the period:

	Nine months ended September 30, 2014			Year ended December 31, 2013
Balance, beginning of period		920			804
Share of net loss and comprehensive loss		63			116
Dividend declared by Equion		(279	)		-
Balance, end of period		704			920

Talisman has a 49% interest in the ownership and voting rights of Equion Energía Limited (Equion) whose principal place of operations is Colombia.  Talisman is one of two shareholders in this strategic corporate joint venture engaged in the exploration for, and development and production of crude oil and natural gas.  The corporate joint venture is governed by a heads of agreement amongst the shareholders, which requires that unanimous consent be obtained from the shareholders for all significant operating and financing decisions.

The following table summarizes the financial information of the joint ventures. The table also reconciles financial information to the carrying amount of the Company's interests in joint ventures, which are accounted for using the equity method.

10

Summarized Balance Sheets	September 30, 2014								December 31, 2013
	TSEUK1			Equion1			Total		TSEUK1			Equion1			Total
Cash and cash equivalents		94			192			286		42			69			111
Current assets		547			422			969		527			304			831
Loans receivable from shareholders		-			648			648		-			587			587
Non-current assets		4,297			1,247			5,544		3,515			1,321			4,836
Total assets		4,938			2,509			7,447		4,084			2,281			6,365
Current liabilities		758			1,121			1,879		700			420			1,120
Loans payable to shareholders		1,021			-			1,021		1,592			-			1,592
Non-current liabilities		3,082			282			3,364		3,131			315			3,446
Total liabilities		4,861			1,403			6,264		5,423			735			6,158
Net assets (liabilities)		77			1,106			1,183		(1,339	)		1,546			207
Talisman’s interest		51	%		49	%				51	%		49	%
Talisman’s share of net assets (liabilities)		39			542			581		(683	)		758			75
Goodwill		77			162			239		77			162			239
		116			704			820		(606	)		920			314
Loan to TSEUK		521			-			521		812			-			812
		637			704			1,341		206			920			1,126
1.    Balances represent respective entity’s 100% share.

Summarized Statements of Income (Loss)	Three months ended September 30, 2014									Three months ended September 30, 2013
	TSEUK1			Equion1			Total			TSEUK1			Equion1			Total
Revenue		233			167			400			411			166			577
Operating		349			26			375			308			21			329
Transportation		6			11			17			6			12			18
General and administrative		12			-			12			3			-			3
Depreciation, depletion and amortization		64			60			124			86			47			133
Exploration expense		5			-			5			21			-			21
Finance costs		27			-			27			23			2			25
Impairment		-			-			-			-			-			-
Other		26			(9	)		17			8			(11	)		(3	)
Income (loss) before tax		(256	)		79			(177	)		(44	)		95			51
Current income tax expense (recovery)		(24	)		50			26			(54	)		37			(17	)
Deferred income tax expense (recovery)		(173	)		(6	)		(179	)		20			(9	)		11
Net income (loss) and comprehensive income (loss)		(59	)		35			(24	)		(10	)		67			57
Talisman’s interest		51	%		49	%					51	%		49	%
Talisman’s share of income (loss) after tax		(30	)		17			(13	)		(5	)		33			28
Cash dividends received by Talisman		-			-			-			-			-			-

1. Balances represent respective entity’s 100% share.

11

Summarized Statements of Income (Loss)	Nine months ended September 30, 2014									Nine months ended September 30, 2013
	TSEUK1			Equion1			Total			TSEUK1			Equion1			Total
Revenue		939			488			1,427			1,122			563			1,685
Operating		1,005			71			1,076			892			67			959
Transportation		17			31			48			18			32			50
General and administrative		27			-			27			9			-			9
Depreciation, depletion and amortization		240			192			432			253			156			409
Exploration expense		10			-			10			34			1			35
Finance costs		94			1			95			62			2			64
Impairment		198			-			198			349			-			349
Other		53			(35	)		18			(27	)		(8	)		(35	)
Income (loss) before tax		(705	)		228			(477	)		(468	)		313			(155	)
Current income tax expense (recovery)		(50	)		125			75			(99	)		129			30
Deferred income tax recovery		(445	)		(25	)		(470	)		(226	)		(10	)		(236	)
Net income (loss) and comprehensive income (loss)		(210	)		128			(82	)		(143	)		194			51
Talisman’s interest		51	%		49	%					51	%		49	%
Talisman’s share of income (loss) after tax		(107	)		63			(44	)		(73	)		95			22
Cash dividends received by Talisman		-			-			-			-			-			-

1. Balances represent respective entity’s 100% share.

Summarized Statements of Cash Flows	Three months ended September 30, 2014									Three months ended September 30, 2013
	TSEUK1			Equion1			Total			TSEUK1			Equion1			Total
Operating activities
Net income (loss)		(59	)		35			(24	)		(10	)		67			57
Add: Finance costs (cash and non-cash)		27			-			27			23			2			25
Items not involving cash		(87	)		53			(34	)		119			39			158
Changes in non-cash working capital		24			48			72			(147	)		22			(125	)
Cash provided by (used in) operating activities		(95	)		136			41			(15	)		130			115
Investing activities
Capital expenditures		(237	)		(62	)		(299	)		(268	)		(55	)		(323	)
Loans to shareholders		-			(24	)		(24	)		-			-			-
Other		(19	)		12			(7	)		76			(35	)		41
Cash used in investing activities		(256	)		(74	)		(330	)		(192	)		(90	)		(282	)
Financing activities
Common shares issued		365			-			365			-			-			-
Loans from shareholders, net of repayments		(12	)		-			(12	)		245			-			245
Finance costs (cash)		(10	)		-			(10	)		(12	)		(2	)		(14	)
Other		10			-			10			-			-			-
Cash provided by (used in)  financing activities		353			-			353			233			(2	)		231

1. Balances represent respective entity’s 100% share.

12

Summarized Statements of Cash Flows	Nine months ended September 30, 2014									Nine months ended September 30, 2013
	TSEUK1			Equion1			Total			TSEUK1			Equion1			Total
Operating activities
Net income (loss)		(210	)		128			(82	)		(143	)		194			51
Add: Finance costs (cash and non-cash)		94			1			95			62			2			64
Items not involving cash		35			154			189			355			146			501
Changes in non-cash working capital		(65	)		21			(44	)		(87	)		(34	)		(121	)
Cash provided by (used in) operating activities		(146	)		304			158			187			308			495
Investing activities
Capital expenditures		(890	)		(131	)		(1,021	)		(672	)		(166	)		(838	)
Proceeds of dispositions		-			14			14			-			-			-
Loans to shareholders		-			(61	)		(61	)		-			(100	)		(100	)
Other		87			(3	)		84			73			(92	)		(19	)
Cash used in investing activities		(803	)		(181	)		(984	)		(599	)		(358	)		(957	)
Financing activities
Common shares issued		365			-			365			-			-			-
Loans from shareholders, net of repayments		674			-			674			421			-			421
Finance costs (cash)		(40	)		-			(40	)		(27	)		(2	)		(29	)
Other		2			-			2			-			-			-
Cash provided by (used in)  financing activities		1,001			-			1,001			394			(2	)		392

1. Balances represent respective entity’s 100% share.

The summarized financial information presented is the amounts included in the financial statements of the joint venture entities adjusted for fair value adjustments made at the time of acquisition, as appropriate. The fair value adjustments related to the Company's jointly controlled equity interest in Equion principally relate to property, plant and equipment, provisions and the related indemnification asset and goodwill.

TSEUK Joint Venture

Throughout 2014, TSEUK has been challenged with respect to asset uptime, declining production and emerging potential increases to development and decommissioning cost estimates. These challenges will be factored into the Company’s reserves, planning and impairment processes due to be completed in the fourth quarter of 2014. An adverse movement in any of these factors will result in lower estimated future cash flows than previously anticipated, and under these circumstances there is a risk of impairments. Management expects to reach its conclusions and book impairments, if any, in the fourth quarter. The total value of the Company’s investment in TSEUK at September 30, 2014 is $637 million. The magnitude of potential impairments could result in a material reduction in the carrying value of the Company’s investment in TSEUK.

During the nine month period ended September 30, 2014, TSEUK recorded an impairment of $100 million (net to Talisman), due to an increase in the decommissioning obligation and assets caused by a decrease in the discount rate used to measure decommissioning liabilities.

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In June 2014, the shareholders of TSEUK agreed to subscribe for common shares of TSEUK in the amount of $1.26 billion, of which Talisman’s share was $643 million, which settled shareholder loans of $1.24 billion and accrued interest of $18 million, of which Talisman’s share was $634 million and $9 million, respectively.

In addition, the shareholders of TSEUK provided an equity funding facility totaling $1.2 billion to TSEUK in June 2014, of which Talisman is committed to $612 million, for the purpose of funding capital, decommissioning and operating expenditures of TSEUK. TSEUK may fund operating expenditures under this facility to a maximum amount of $150 million.  This facility expires on June 30, 2015. During the three months ended September 30, 2014, the shareholders of TSEUK agreed to subscribe for common shares of TSEUK in the amount of $365 million under this facility, of which Talisman’s share was $186 million. As at September 30, 2014, remaining facility commitment is $835 million, of which the Company’s share is $426 million.

The shareholders of TSEUK have provided an unsecured loan facility with a borrowing limit of $2.4 billion to TSEUK, of which Talisman is committed to $1.2 billion, for the purpose of funding capital expenditures of TSEUK.  As at September 30, 2014, $1.0billion has been drawn under this facility, of which Talisman’s share is $521 million (December 31, 2013 - $812 million).  Remaining borrowing capacity under this facility as at September 30, 2014 is $740 million. Loans under this facility bear interest at the UK interest rate swap rate plus 2.5%, and are repayable quarterly in equal installments based upon a five year repayment period calculated from the date each loan is advanced.  All outstanding loans mature December 31, 2017, although the maturity date may be extended from time to time upon agreement between the shareholders and TSEUK.  Prior to the maturity date, TSEUK may repay, in full or in part, the balance outstanding on any loan under this facility.

TSEUK is required to provide demand letters of credit as security in relation to certain decommissioning obligations in the UK pursuant to contractual arrangements under Decommissioning Security Agreements (DSAs). Refer to “Liquidity Risk” in note 16.

Equion Joint Venture

During the three months ended September 30, 2014, Equion declared dividends payable to the shareholders in the amount of $570 million, of which Talisman’s share was $279 million.  The Company has recorded dividends receivable of $279 million with a corresponding reduction in the equity investment in Equion.

The loan due to Equion of $318million (December 31, 2013 - $288 million) is unsecured, due upon demand and bears interest at LIBOR plus 0.30%.

There have been no significant changes in expected future commitments of TSEUK and Equion, and the timing of those payments, since December 31, 2013. 

Investments in Joint Operations

Talisman accounts for joint operations using proportionate consolidation.  Talisman’s interest in the Talisman Sasol Montney Partnership (TSMP) was accounted for as a joint operation and proportionately consolidated as Talisman shared its interests in the partnership assets based on the Company’s 50% ownership interest and was jointly and severally liable for the obligations of the partnership. TSMP’s principal place of operations and country of incorporation was Canada. In 2013, Talisman reached an agreement to sell part of its Montney acreage in British Columbia, which included Talisman’s interest in TSMP. Talisman’s interest in TSMP was therefore classified as assets held for sale as at December 31, 2013. Talisman completed the sale during the three month period ended March 31, 2014 (note 4).

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Investments in Associate

Talisman held a 12.152% interest in Ocensa whose principal place of operations and country of incorporation is Colombia. On January 17, 2013, Ocensa’s shareholders approved a resolution to change the nature of Ocensa’s business from a cost recovery operating model to a profit oriented operating model, and certain elements of the governance structure within Ocensa.  Among these changes, the arrangement for appointing the Board of Directors was modified, which provided Talisman with the ability to appoint one director to Ocensa’s Board based upon its ownership interest in Ocensa.  Talisman was able to exercise significant influence over Ocensa from its ability to participate in the significant operating and financing decisions of Ocensa and as a result, Talisman accounted for its investment in Ocensa using the equity method commencing January 17, 2013 until December 19, 2013, when Talisman sold its 12.152% equity interest in Ocensa. In addition, Talisman obtained the option to sell, on a temporary or permanent basis, all or a part of its entitlement to shipping capacity on the Ocensa pipeline (the Transportation Rights). As a result of this change, Talisman attributed $108 million to the Transportation Rights given its ability to sell excess transportation capacity in the Colombian markets. After the sale of its interest in Ocensa, Talisman retained its crude oil transportation rights and its right to generate third party revenue from sales of excess capacity (note 7).

The following table summarizes the financial information of Ocensa. No summarized balance sheet of Ocensa is presented as there was no investment balance at the beginning or end of 2012 and 2013, or as at September 30, 2014.

	Three months ended September 30					Nine months ended September 30
Summarized Statements of Income1	2014		2013			2014		2013
Revenue		-		338			-		922
Expenses (including income taxes)		-		209			-		571
Net income and comprehensive income		-		129			-		351
Talisman’s Interest		-		12.152	%		-		12.152	%
Talisman’s share of net income and comprehensive income		-		16			-		43

	Three months ended September 30					Nine months ended September 30
Summarized Statements of Cash Flows1	2014		2013			2014		2013
Operating Activities
Net income		-		129			-		351
Items not involving cash		-		57			-		177
Changes in non-cash working capital		-		77			-		402
Cash provided by operating activities		-		263			-		930
Cash used in investing activities		-		(12	)		-		(19	)
Cash used in financing activities		-		(557	)		-		(612	)

1.   Talisman recognized Ocensa as an associate effective January 17, 2013, when Talisman gained significant influence, until December 19, 2013 when the Company sold its 12.152% equity interest in Ocensa.

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6. GOODWILL

Continuity of goodwill	Nine months ended September 30, 2014			Year ended December 31, 2013
Balance, beginning of period		575			775
Reclassified to assets held for sale (note 4)		-			(14	)
Disposals		(7	)		(1	)
Impairments		-			(185	)
Balance, end of period		568			575

During 2013, the Company recorded a non-taxable impairment of $185 million relating to North Sea goodwill arising from diminution of the Company’s view of the value of its North Sea assets.

The Company’s goodwill balance includes $287 million relating to the North Sea. The value of North Sea goodwill is supported by a combination of United Kingdom and Norway asset values, and any potential future diminution of those valuations, as referenced in note 5, will increase the risk of impairment of North Sea goodwill.

7. OTHER ASSETS

	September 30, 2014		December 31,  2013
Accrued pension asset		3		-
Decommissioning sinking funds		54		50
Transportation rights (net of $14 million accumulated depreciation) (note 5)		94		100
Income taxes receivable		10		-
Other		17		10
Total		178		160

8. YME REMOVAL OBLIGATION

In March 2013, Talisman, acting on behalf of its partners in the Yme field in Norway, entered into an agreement with the platform contractor. This agreement terminated all existing Yme contracts and outstanding disputes between the Yme partners and the platform contractor, set out the provisions regarding the removal of the existing above-surface Yme structure, the delivery of the existing above-surface Yme structure to the platform contractor (which Talisman, acting on behalf of the Yme partners, will complete as the “Talisman Works”) and provided for a payment of $470 million from the platform contractor to the Yme partners to fund the cost of the Talisman Works.  The Yme partners agreed to deposit $409 million into an escrow account, which can only be withdrawn for purposes of settling costs and liabilities associated with the Talisman Works.

As at September 30, 2014, Talisman’s share of the liability associated with the Talisman Works in the amount of $214 million has been recorded as the Yme removal obligation of which $195 million has been classified as current, as it is expected to be settled within the next twelve months, while the remaining $19 million has been classified as long-term.  Talisman’s share of the cash held in the escrow account in the amount of $177 million has been recorded as restricted cash, all of which has been classified as current.  During the three and nine month periods ended September 30, 2014, $9 million and $38 million in eligible expenditures, respectively, were incurred on the Talisman Works which reduced both the restricted cash and the Yme removal obligation by an equal amount.

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9. OIL AND GAS ASSETS

The cost and accumulated DD&A of the Company’s PP&E (including corporate assets) and E&E assets are as follows:

	PP&E			E&E assets			Total
Cost
At December 31, 2012		21,550			5,577			27,127
Additions		1,943			522			2,465
Disposals and derecognition		(354	)		(39	)		(393	)
Transfers from E&E assets to PP&E		481			(481	)		-
Change in decommissioning liabilities		271			(5	)		266
Expensed to dry hole		-			(89	)		(89	)
Transfers to assets held for sale		(852	)		(92	)		(944	)
At December 31, 2013		23,039			5,393			28,432
Additions		1,235			343			1,578
Disposals and derecognition		(1,835	)		-			(1,835	)
Transfers from E&E assets to PP&E		177			(177	)		-
Change in decommissioning liabilities		159			23			182
Expensed to dry hole		-			(64	)		(64	)
At September 30, 2014		22,775			5,518			28,293
Accumulated DD&A
At December 31, 2012		11,088			2,258			13,346
Charge for the period		1,921			-			1,921
Disposals and derecognition		(269	)		(36	)		(305	)
Impairment losses		755			17			772
Impairment reversals		-			(11	)		(11	)
Transfers to assets held for sale		(208	)		-			(208	)
At December 31, 2013		13,287			2,228			15,515
Charge for the period		1,425			7			1,432
Disposals and derecognition		(1,599	)		-			(1,599	)
Impairment losses, net of reversals (note 10)		28			130			158
Transfers from PP&E to E&E assets		(20	)		20			-
					.
At September 30, 2014		13,121			2,385			15,506
Net book value
At September 30, 2014		9,654			3,133			12,787
At December 31, 2013		9,752			3,165			12,917
At December 31, 2012		10,462			3,319			13,781

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10. IMPAIRMENT

	Three months ended September 30					Nine months ended September 30
	2014		2013			2014			2013
Impairment losses
E&E assets		-		1			130			20
PP&E		-		3			60			3
		-		4			190			23
Impairment reversals
E&E assets		-		(2	)		-			(20	)
PP&E		-		-			(32	)		(3	)
		-		(2	)		(32	)		(23	)
Net Impairment (reversal)		-		2			158			-

During the three month period ended September 30, 2014, the Company did not record any impairment losses or reversals.

During the nine month period ended September 30, 2014, the Company recorded an impairment of $60 million in Norway ($13 million after tax), due to an increase in the decommissioning obligation and asset caused by a 1% decrease in the real discount rate used to measure decommissioning liabilities (note 11), and a $130 million impairment expense relating to the withdrawal from an exploration license in Norway. The Company also recorded an impairment reversal of $32 million in North America, due to the estimated recoverable amount of assets held for sale exceeding their carrying amounts.

During the three months ended September 30, 2014, the Company declared commerciality and filed a development plan for the K44 license in the Kurdistan Region of Iraq. The Kurdistan Regional Government (KRG) has requested revisions to the development plan, which will require further negotiations between the K44 partners and the KRG within the contractual framework set out in the production sharing contract. The carrying value of the Company’s investment in K44 is $234 million at September 30, 2014.

During the nine month period ended September 30, 2013, the Company recorded $12 million of impairment expense relating to its exit from Sierra Leone, and $7 million of impairment expense relating to Yme in Norway. The Company also recorded impairment reversals of $21 million in the North Sea, due primarily to a reduction in the decommissioning obligation and assets caused by a 1% increase in the real discount rate used to measure decommissioning liabilities.

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11. DECOMMISSIONING LIABILITIES

Continuity of decommissioning liabilities	Nine months ended September 30, 2014			Year ended December 31, 2013
Balance, beginning of period		1,769			1,557
Liabilities incurred during the period		5			73
Liabilities settled during the period		(45	)		(77	)
Accretion expense (note 12)		40			36
Revisions in estimated cash flows		(1	)		405
Change in discount rate		178			(212	)
Disposals		(77	)		(4	)
Reclassified to liabilities associated with assets held for sale (note 4)		-			(9	)
Balance, end of period		1,869			1,769
Expected to be settled within one year		43			42
Expected to be settled in more than one year		1,826			1,727
		1,869			1,769

The provision has been discounted using a weighted average credit-adjusted risk free rate of 2.8% at September 30, 2014 (December 31, 2013 – 3.8%), which excludes the impact of inflation.

12. FINANCE COSTS

	Three months ended September 30				Nine months ended September 30
	2014		2013		2014		2013
Interest on long-term debt		66		68		203		203
Miscellaneous interest expense and other fees		8		9		23		25
Accretion expense (note 11)		11		10		40		26
Less: interest capitalized		-		-		-		(10	)
		85		87		266		244

Interest capitalization ceased in the HST/HSD blocks in Vietnam upon first production in May 2013.

13. LONG-TERM DEBT

	September 30, 2014	December 31,  2013
Bank Credit Facilities	-	250
Commercial Paper	341	544
Tangguh Project Financing	46	81
Debentures and Notes (Unsecured)
US$ denominated	3,904	3,951
UK£ denominated (UK£250 million)	404	413
Gross debt	4,695	5,239
Less: current portion	(722)	(882)
Long-term debt	3,973	4,357

During the three and nine month periods ended September 30, 2014, Talisman repaid debt of $18million and $897 million, respectively. The current liability of $722 million consists of $341 million in commercial paper, $375 million of 5.125% notes, and $6 million in Tangguh project financing.

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Bank Credit Facilities and Commercial Paper

At September 30, 2014, Talisman had unsecured credit facilities totaling $3.2 billion, consisting of facilities of $3billion (Facility No. 1), maturing March 19, 2019 and $200 million (Facility No. 2), maturing October 21, 2019.

Borrowings under Facility No. 1 are available in the form of prime loans, C$ or US$ bankers’ acceptances, US$ base rate loans, LIBOR-based loans and letters of credit.  In addition, drawings to a total of $1.0 billion are available in the form of letters of credit.  Borrowings under Facility No. 2 are available in the form of prime loans, C$ or US$ bankers’ acceptances, US$ base rate loans, LIBOR-based loans and letters of credit.

At September 30, 2014, $341 million of commercial paper was outstanding. Available borrowing capacity was $2.9 billion at September 30, 2014.

On May 5, 2014, Talisman amended certain terms of Facility No.1, converting the denomination to US dollars, extending the facility to $3 billion, and extending the term to five years maturing on March 19, 2019.

On August 12, 2014, the maturity date of Facility No.2 was extended to October 21, 2019.

Talisman is in compliance with all of its debt covenants.  The Company’s principal financial covenant under its primary bank credit facility is a debt-to-cash flow ratio of less than 3.5:1, calculated quarterly on a trailing 12-month basis as of the last day of each fiscal quarter.

14. OTHER LONG-TERM OBLIGATIONS

	September 30, 2014		December 31,  2013
Accrued pension and other post-employment benefits liability		128		114
Deferred credits		52		33
Long-term portion of discounted obligations under finance leases		36		44
Long-term portion of share-based payments liability (note 15)		17		10
Other		53		45
		286		246

The fair value of financial liabilities included above approximates the carrying amount.

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15. SHARE CAPITAL AND SHARE-BASED PAYMENTS

Authorized

Talisman's authorized share capital consists of an unlimited number of common shares without nominal or par value and an unlimited number of first and second preferred shares.

Common Shares Issued

Continuity of common shares	Nine months ended September 30, 2014						Year ended December 31, 2013
	Shares			Amount			Shares			Amount
Balance, beginning of period		1,031,356,870			1,723			1,025,449,730			1,639
Issued on exercise of stock options		478,244			5			3,223,810			41
Shares purchased and held in trust for long-term PSU plan		(1,769,900	)		(17	)		(100,000	)		(1	)
Shares released from trust for long-term PSU plan		1,956,772			31			2,783,330			44
Balance, end of period		1,032,021,986			1,742			1,031,356,870			1,723

Subsequent to September 30, 2014,nostock options were exercised for shares and 450,000 common shares were purchased and held in trust for the long-term PSU plan.  There were 1,031,571,986common shares outstanding at October 30, 2014.

During the three month period ended September 30, 2014, Talisman declared common share dividends of $0.0675 per share for an aggregate dividend of $69 million.  During the nine month period ended September 30, 2014, Talisman declared common share dividends of $209 million.

Preferred Shares Issued

Continuity of preferred shares	Nine months ended September 30, 2014				Year ended December 31, 2013
	Shares		Amount		Shares		Amount
Cumulative Redeemable Rate Reset First Preferred Shares, 4.2% Series 1:
Balance, beginning and end of period		8,000,000		191		8,000,000		191

During the three month period ended September 30, 2014, Talisman declared preferred share dividends of C$0.2625 per share for an aggregate dividend of $2 million. During the nine month period ended September 30, 2014, Talisman declared preferred share dividends of $6 million.

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Share-Based Payments1

	Options			Restricted Share Units (RSU)			Deferred Share Units (DSU)			Long-term Performance Share Units (PSU)
Continuity of share-based payment plans	Number of shares underlying options			Number of units			Number of units			Number of units
Outstanding at December 31, 2013		43,285,254			7,005,696			1,932,380			12,496,313
Employees transferred from TSEUK		-			105,397			-			-
Granted		-			7,875,044			1,077,274			1,341,145
Dividend equivalent		-			208,333			59,055			212,966
Exercised for common shares/settled		(518,834	)		(2,520,986	)		(109,653	)		(1,956,772	)
Surrendered for cash		(27,812	)		-			-			-
Forfeited		(7,825,962	)		(1,280,089	)		-			(1,495,792	)
Outstanding at September 30, 2014		34,912,646			11,393,395			2,959,056			10,597,860
Exercisable at September 30, 2014		30,660,912
Weighted average grant price during period	$nil									$	11.05

1.   Dollar amounts in share-based payments tables are provided in C$.

During the three month period ended September 30, 2014, the Company recorded a share-based payments recovery of $17 million (2013 - $6 million expense) in respect of the following plans: stock options - $25 million recovery, cash units - $1 million recovery, PSUs - $10 million expense, RSUs - $2 million expense, and DSUs - $3 million recovery.   The share-based payments expense includes cash payments of $2 million (2013 - $nil) to employees in settlement of fully accrued share-based payments liabilities for RSUs, stock options and cash units exercised in the period. In general and administrative expense in the condensed Consolidated Statement of Income (Loss), the Company recognized a $nil DSU expense relating to the directors and executive deferrals.

During the nine month period ended September 30, 2014, the Company recorded a share-based payments recovery of $24 million (2013 - $30 million expense) in respect of the following plans: stock options $70 million recovery, cash units - $2 million expense, PSUs - $28 million expense, RSUs - $15 million expense, and DSUs - $1 million expense. The share-based payments expense includes cash payments of $20 million (2013 - $4 million) to employees in settlement of fully accrued share-based payments liabilities for RSUs, stock options and cash units exercised in the period. In general and administrative expense in the condensed Consolidated Statement of Income (Loss), the Company recognized $1 million DSU recovery relating to the directors and executive deferrals.

Of the combined obligation for cash-settled stock option, cash unit, DSU and RSU plans of $95 million (December 31, 2013 – $152 million), $78 million (December 31, 2013 – $142 million) is included in accounts payable and accrued liabilities on the interim condensed Consolidated Balance Sheets and $17 million (December 31, 2013 – $10 million) is included in other long-term obligations.

In April 2014, Talisman granted RSUs under the “Global Restricted Share Unit Plan for Eligible Employees of Talisman Energy Inc. and its affiliates”. All RSUs issued by the Company permit the holder to receive a cash payment equal to the market value of the common shares at the vest date. Participants are also credited with additional RSUs corresponding to any associated notional dividend payments (referred to as ‘dividend equivalent RSUs’). One third of the RSUs granted will be paid on the grant anniversary date every year for the three years following the grant date.  In April 2014, non-executive employees were granted a total of 7.8 millionRSUs.

22

Subsequent to September 30, 2014, no stock options were granted, surrendered for cash, or exercised for shares, and 667,596 were forfeited with 34,245,050 outstanding at October 30, 2014.  Subsequent to September 30, 2014, no PSUs were granted, long-term PSUs forfeitures were reduced by 10,116, with 10,607,976 outstanding at October 30, 2014. Subsequent to September 30, 2014, no RSUs were granted, 19,266 were exercised and 113,981 were forfeited, with 11,260,148 outstanding at October 30, 2014. There were 226 DSUs granted subsequent to September 30, 2014, no DSUs were exercised, with 2,959,282 outstanding at October 30, 2014.

16. FINANCIAL INSTRUMENTS

Talisman’s financial assets and liabilities at September 30, 2014 consisted of cash and cash equivalents, accounts receivable, available-for-sale investments, bank indebtedness, accounts payable and accrued liabilities, loans from joint ventures, long-term debt (including the current portion) and risk management assets and liabilities arising from the use of derivative financial instruments.

Fair Value of Financial Assets and Liabilities

The fair values of cash and cash equivalents, accounts receivable, bank indebtedness, accounts payable and accrued liabilities, and loans from joint ventures approximate their carrying values due to the short-term maturity of those instruments.

Borrowings under bank credit facilities are short-term in nature and are market rate-based, thus, carrying value approximates fair value.  The fair value of public debentures and notes is based on market quotations, which reflect the discounted present value of the principal and interest payments using the effective yield for instruments having the same term and risk characteristics.  The fair values of private notes are based on estimations provided by third parties.  The fair value of Talisman’s floating rate debt is determined by discounting future estimated coupon payments at the current market interest rate.  The fair value of Talisman’s long-term debt (including the current portion) at September 30, 2014 was $5.2billion (December 31, 2013 - $5.5 billion), while the carrying value was $4.7billion (December 31, 2013 - $5.2 billion). The Company uses level 2 inputs as described below to estimate the fair value of the outstanding long-term debt as at September 30, 2014.

The fair values of all other financial assets and liabilities approximate their carrying values.

Risk management assets and liabilities are recorded at their estimated fair values. To estimate fair value, the Company uses quoted market prices when available, or models that utilize observable market data. In addition to market information, the Company incorporates transaction-specific details that market participants would utilize in a fair value measurement, including the impact of non-performance risk.  The Company’s non-performance risk is determined based on third party quotes for the Company’s debt instruments with maturity dates that are similar, or in close approximation, to the maturity dates of the corresponding financial instrument. The Company characterizes inputs used in determining fair value using a hierarchy that prioritizes inputs depending on the degree to which they are observable.

23

The three levels of the fair value hierarchy are as follows:

· Level 1 – inputs represent quoted prices in active markets for identical assets or liabilities (for example, exchange-traded commodity derivatives).  Active markets are those in which transactions occur in sufficient frequency and volume to provide pricing information on an ongoing basis;

· Level 2 – inputs other than quoted prices included within level 1 that are observable, either directly or indirectly, as of the reporting date. Level 2 valuations are based on inputs, including quoted forward prices for commodities, market interest rates and volatility factors, which can be observed or corroborated in the marketplace.  The Company obtains information from sources such as the New York Mercantile Exchange (NYMEX) and independent price publications; and

· Level 3 – inputs that are less observable, unavailable or where the observable data does not support the majority of the instrument’s fair value, such as the Company’s internally developed assumptions about market participant assumptions used in pricing an asset or liability, for example, an estimate of future cash flows used in the Company’s internally developed present value of future cash flows model that underlies the fair value measurement.

In forming estimates, the Company utilizes the most observable inputs available for valuation purposes.  If a fair value measurement reflects inputs of different levels within the hierarchy, the measurement is categorized based upon the lowest level of input that is significant to the fair value measurement.  The valuation of over-the-counter financial swaps and collars is based on similar transactions observable in active markets or industry standard models that rely primarily on market observable inputs.  Substantially all of the assumptions for industry standard models are observable in active markets throughout the full term of the instrument. These are categorized as level 2.

Fair values for cross-currency and interest rate derivative instruments are determined based on the estimated cash payment or receipt necessary to settle the contract.  Cash payments or receipts are based on discounted cash flow analysis using current market rates and prices.  Fair values for commodity price derivatives are based on discounted cash flow analysis using current market rates and prices and option pricing models using forward pricing curves and implied volatility, as appropriate, which are compared to quotes received from financial institutions for reasonability.

The following table presents the Company’s risk management assets and liabilities measured at fair value for each hierarchy level at September 30, 2014:

	Fair value measurements using
	Level 1 inputs		Level 2 inputs		Level 3 inputs		Total fair value
Assets
Interest rate swaps		-		13		-		13
Commodity contracts		-		185		-		185
Liabilities
Commodity contracts		-		6		-		6

24

Risk Management Assets, Liabilities, Gains and Losses

Derivative instrument	Balance sheet presentation	September 30, 2014		December 31, 2013
Interest rate swaps	Current assets		13		13
Interest rate swaps	Non-current assets		-		6
Commodity contracts	Current assets		103		4
Commodity contracts	Non-current assets		82		14
Risk management assets			198		37
Commodity contracts	Current liabilities		6		101
Commodity contracts	Non-current liabilities		-		37
Risk management liabilities			6		138

During the three month period ended September 30, 2014, the Company recorded a gain on held-for-trading financial instruments of $428million (2013 - $120 million loss) and a gain of $197 millionfor the nine month period ended September 30, 2014 (2013 - $21 million gain).

Currency Risk

Talisman operates internationally and is therefore exposed to foreign exchange risk.  Talisman’s primary exposure is from fluctuations in the US$ relative to the C$, UK£, and NOK.

Talisman manages its foreign exchange exposure in a number of ways.  By denominating most of its borrowings in US$, the Company is able to reduce some of its economic exposure to currency fluctuations.  Talisman also manages its translation exposure by generally matching internal borrowings with its subsidiaries’ functional currencies.  The Company purchases foreign currencies, mostly at spot value, to meet its current foreign currency obligations as they come due.

In respect of financial instruments existing at September 30, 2014, a 1% strengthening of the US$ against the other currencies noted above, with all other variables assumed constant, would have resulted in an increase of $4million in net income and a $4 million impact on comprehensive income during the three month period ended September 30, 2014.  A similar weakening of the US$ would have had the opposite impact.

Interest Rate Risk

Talisman is exposed to interest rate risk principally by virtue of its borrowings including loans from joint ventures.  Borrowing at floating rates exposes Talisman to short-term movements in interest rates.  Borrowing at fixed rates exposes Talisman to reset risk (i.e. at debt maturity).  Risk management activities aim to manage the mix of fixed-to-floating debt to best manage the trade-off between longer term interest rate reset risk and shorter term volatility in interest rates.

In order to mitigate its exposure to interest rate changes, Talisman enters into interest rate swaps from time to time to manage the ratio of fixed rate debt to floating rate debt.  At September 30, 2014, the Company had fixed-to-floating interest rate swap contracts with a total notional amount of $300 million that expire on May 15, 2015.  During the three month and nine month periods ended September 30, 2014, the fair value of the fixed-to-floating interest rate swaps decreased by $nil and $7 million, respectively.

25

In respect of financial instruments existing at September 30, 2014, a 1% increase in interest rates would have resulted in a $5million decrease in net income and a $5 million impact on comprehensive income during the three month period ended September 30, 2014.

Credit Risk

A significant proportion of Talisman’s accounts receivable balance is with customers in the oil and gas industry and is subject to normal industry credit risks. At September 30, 2014, approximately 87% of the Company's trade accounts receivable was current and the largest single counterparty exposure, accounting for 4% of the total, was with an investment grade counterparty.  Concentration of counterparty credit risk is mitigated by having a broad domestic and international customer base of highly rated counterparties.

Liquidity Risk

Talisman is exposed to liquidity risk, which is the risk that the Company may be unable to generate or obtain sufficient cash to meet its commitments as they come due. Talisman mitigates this risk through its management of cash, debt, committed credit capacity and its capital program.

Talisman manages its liquidity requirements by use of both short-term and long-term cash forecasts, and by maintaining appropriate undrawn capacity under committed bank credit facilities. At September 30, 2014, Talisman had unsecured credit facilities totaling $3.2billion, consisting of facilities of $3 billion (Facility No. 1), maturing March 19, 2019 and $200 million (Facility No. 2) maturing October 21, 2019. Available borrowing capacity was $2.9 billion at September 30, 2014.

In addition, the Company utilizes letters of credit pursuant to letter of credit facilities, most of which are uncommitted.  At September 30, 2014, demand letters of credit guaranteed by the Company totaling $1.1 billion were issued, of which $1.0 billion were issued from uncommitted facilities.  Of that total, $0.8 billion is provided as security for the costs of decommissioning obligations in the UK, as described below. The remaining outstanding letters of credit relate primarily to a retirement compensation arrangement, guarantees of minimum work commitments and decommissioning obligations in other areas.

TSEUK is required to provide letters of credit as security in relation to certain decommissioning obligations in the United Kingdom pursuant to contractual arrangements under Decommissioning Security Agreements (DSAs). At the commencement of the joint venture, Addax assumed 49% of the decommissioning obligations of TSEUK; Addax’s parent company, China Petrochemical Corporation (Sinopec), has provided an unconditional and irrevocable guarantee for this 49% of the UK decommissioning obligations.

The United Kingdom Government passed legislation in 2013 which provides for a contractual instrument, known as a Decommissioning Relief Deed, for the Government to guarantee tax relief on decommissioning costs at 50%, allowing security under DSAs to be posted on an after-tax basis and reducing the value of letters of credit required to be posted correspondingly. TSEUK has entered into a Decommissioning Relief Deed with the United Kingdom Government and continues to negotiate with counterparties to amend all DSAs accordingly.

26

At September 30, 2014, TSEUK has $2.5 billion of demand shared facilities in place under which letters of credit of $1.6 billion have been issued. Total letters of credit issued by TSEUK have been reduced from $1.8 billion at July 1, 2014 to $1.6 billion at September 30, 2014, as a result of selective letters of credit that are now posted on an after-tax basis. The Company intends to complete the process of replacing the remaining letters of credit as planned during the remainder of 2014, recognizing that beneficiary approval is required for these to be placed on an after-tax basis. The Company guarantees 51% of all letters of credit issued under these shared facilities.

The Company has also granted guarantees to various beneficiaries in respect of decommissioning obligations of TSEUK.

At September 30, 2014, TSEUK’s total recorded decommissioning liabilities were $3.4 billion. Decommissioning estimates are subject to a significant amount of management judgment given the long dated nature of the assets and the timing of remediation upon cessation of production. The Company reviews its assessment of decommissioning liabilities annually, or where a triggering event causes a review, taking into account new information and industry experience.  Management is in the process of reviewing the latest decommissioning liability estimates and believes, based on emerging information, that there is a possibility of increases being confirmed as the process is progressed. At this stage, management has not concluded on the magnitude of the adjustments, if any, but will progress the review process, and make any necessary adjustments to remediation liabilities, in future periods.

Any changes to decommissioning estimates influence the value of letters of credit to be provided pursuant to DSAs. In addition, the extent to which shared facility capacity is available, and the cost of that capacity, is influenced by the Company’s Investment Grade credit rating.

Except for commodity price derivative contracts that mature as noted below, long-term debt that matures as outlined in note 13 and other long-term obligations detailed in note 14, all of the Company’s financial liabilities are due within one year.

Commodity Price Risk

Talisman is exposed to commodity price risk since its revenues are dependent on the price of crude oil, natural gas and NGLs.  Talisman enters into derivative instruments from time to time to mitigate commodity price risk volatility under guidelines approved by the Board of Directors.  The Company may hedge a portion of its future production to protect cash flows to allow it to meet its strategic objectives.

The Company had the following commodity price derivative contracts outstanding at September 30, 2014, none of which are designated as hedges:

Two-way collars (Oil)	Term	bbls/d		Floor/ceiling $/bbl		Fair value asset (liability)
Dated Brent oil index	2014 Oct – Dec		10,000		95.00/110.07		2
Dated Brent oil index	2014 Oct – Dec		10,000		90.00/105.22		-
NYMEX WTI oil index	2014 Oct – Dec		5,000		80.00/95.00		-
Dated Brent oil index	2015 Jan – Dec		5,000		90.00/100.01		(2	)
NYMEX WTI oil index	2015 Jan – Dec		5,000		80.00/95.02		-
Dated Brent oil index	2015 Jan – Dec		20,000		90.00/106.16		5
Dated Brent oil index	2016 Jan – Dec		5,000		90.00/108.00		3
NYMEX WTI oil index	2016 Jan – Dec		5,000		85.00/95.95		6
							14

27

Fixed priced swaps (Oil)	Term	bbls/d		$/bbl			Fair value asset (liability)
NYMEX WTI oil index	2014 Oct - Dec		2,500		91.91			-
Dated Brent oil index	2014 Oct - Dec		10,000		104.02			9
NYMEX WTI oil index	2014 Oct - Dec		10,000		94.28			4
Dated Brent oil index	2014 Oct - Dec		10,000		103.31			8
Dated Brent oil index	2014 Oct - Dec		8,000		111.79			13
WCS Differential	2014 Nov - Dec1		6,500		(21.55	)		(2	)
Dated Brent oil index	2015 Jan - Dec		10,000		100.46			14
Dated Brent oil index	2015 Jan - Dec		1,000		104.00			3
Dated Brent oil index	2015 Jan - Dec		9,000		100.59			13
NYMEX WTI oil index	2015 Jan - Dec		5,000		96.36			16
WCS Differential	2015 Jan - Mar		6,500		(21.55	)		(2	)
Dated Brent oil index	2016 Jan - Dec		10,000		98.01			6
Dated Brent oil index	2016 Jan - Dec		5,000		100.29			7
Dated Brent oil index	2016 Jan - Dec		10,000		102.98			24
								113

Two-way collars (Gas)	Term	mcf/d		Floor/ceiling $/mcf		Fair value asset (liability)
NYMEX HH LD	2014 Nov - Dec1		94,936		4.21/4.71		-
NYMEX HH LD	2014 Nov - Dec1		47,468		4.21/4.64		-
NYMEX HH LD	2014 Nov - Dec1		47,468		4.21/4.99		-
NYMEX HH LD	2015 Jan - Dec		47,468		4.23/4.87		4
NYMEX HH LD	2015 Jan - Dec		94,936		4.21/5.06		9
NYMEX HH LD	2016 Jan - Dec		47,468		4.21/4.75		2
NYMEX HH LD	2016 Jan - Dec		47,468		4.21/4.87		3
							18

Fixed priced swaps (Gas)	Term	mcf/d		$/mcf		Fair value asset (liability)
NYMEX HH LD	2014 Nov - Dec1		47,468		4.24		-
NYMEX HH LD	2014 Nov - Dec1		47,468		4.25		-
NYMEX HH LD	2014 Nov - Dec1		47,468		4.34		-
NYMEX HH LD	2014 Nov - Dec1		47,468		4.42		-
NYMEX HH LD	2014 Nov - Dec1		47,468		4.44		-
NYMEX HH LD	2014 Nov - Dec1		47,468		4.29		-
NYMEX HH LD	2014 Nov - Dec1		47,468		4.43		-
NYMEX HH LD	2015 Jan - Dec		47,468		4.54		6
NYMEX HH LD	2015 Jan - Dec		47,468		4.39		3
NYMEX HH LD	2015 Jan - Dec		47,468		4.39		3
NYMEX HH LD	2015 Jan - Dec		47,468		4.48		4
NYMEX HH LD	2015 Jan - Dec		47,468		4.53		5
NYMEX HH LD	2015 Jan - Dec		47,468		4.55		6
NYMEX HH LD	2016 Jan - Dec		47,468		4.48		3
NYMEX HH LD	2016 Jan - Dec		42,721		4.55		4
							34

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Fixed priced swaps (Power)	Term	MWh		$CAD/MWh		Fair value asset (liability)
Alberta Power	2014 Oct - Dec		7		74.66		-
Alberta Power	2015 Jan - Dec		5		73.72		-
Alberta Power	2016 Jan - Dec		2		73.83		-
Alberta Power	2017 Jan - Dec		1		74.75		-
Alberta Power	2018 Jan - Dec		1		74.75		-
							-

1.  The fair value balances as at September 30, 2014 do not include October 2014 commodity derivatives contracts that were settled in September.

Subsequent to September 30, 2014, the Company did not enter into any derivative contracts as at October 30, 2014.

In respect of outstanding financial instruments and assuming forward commodity prices in existence at September 30, 2014, an increase of $1/bbl in the price of oil and an increase of $0.10/mcf in the price of gas would have reduced the net fair value of commodity derivatives, thereby resulting in a decrease in net income of $39 million for the three month period ended September 30, 2014.  A similar decrease in commodity prices would result in an increase in net income of approximately $41 million for the three month period ended September 30, 2014.

17. CONTINGENCIES AND COMMITMENTS

Provisions and Contingencies

From time to time, Talisman is the subject of litigation arising out of the Company’s operations.  Damages claimed under such litigation may be material or may be indeterminate and the outcome of such litigation may materially impact the Company’s financial condition or results of operations.  While Talisman assesses the merits of each lawsuit and defends itself accordingly, the Company may be required to incur significant expenses or devote significant resources to defend itself against such litigation.  These claims are not currently expected to have a material impact on the Company’s financial position.

Commitments

During the nine month period ended September 30, 2014, as a result of the sale of the Company’s Montney acreage and non-core assets in western Canada, there was a total of $339 million decrease in the Company’s expected future commitments, including a $286 million decrease in transportation and processing commitments, a $50 million decrease in PP&E and E&E asset commitments, and a $3 million decrease in office lease commitments. There was a further $135 million decrease in the Company’s transportation and processing commitments in western Canada and Indonesia.  There have been no additional significant changes in the Company’s expected future commitments, and the timing of those payments, since December 31, 2013.

18. OTHER INCOME

	Three months ended September 30				Nine months ended September 30
	2014		2013		2014		2013
Pipeline and customer treating tariffs		14		20		47		42
Investment income		4		6		14		10
Interest on loan to TSEUK (note 5)		4		7		23		16
Marketing and other income		13		8		30		15
		35		41		114		83

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19. OTHER EXPENSES, NET

	Three months ended September 30						Nine months ended September 30
	2014			2013			2014			2013
Foreign exchange (gain) loss		(18	)		45			(15	)		6
PP&E derecognition		4			1			4			1
Restructuring		1			6			18			34
Other miscellaneous		10			(5	)		35			30
		(3	)		47			42			71

20. INCOME TAXES

Current Income Tax Expense

	Three months ended September 30						Nine months ended September 30
	2014			2013			2014			2013
North America		(38	)		(1	)		(34	)		(18	)
Southeast Asia		94			149			318			453
North Sea		(6	)		(2	)		(12	)		(36	)
Other		8			25			46			58
Total		58			171			318			457

Deferred Income Tax (Recovery) Expense

	Three months ended September 30						Nine months ended September 30
	2014			2013			2014			2013
North America		(34	)		(36	)		10			(126	)
Southeast Asia		7			(106	)		20			(103	)
North Sea		14			(35	)		(132	)		85
Other		(3	)		(10	)		-			(25	)
Total		(16	)		(187	)		(102	)		(169	)

During the three months ended September 30, 2014, the Company recorded a $60 million benefit ($38 million current and $22 million deferred) as a result of a settlement of appeals in Canada.

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21. SUPPLEMENTAL CASH FLOW

Items Not Involving Cash

	Three months ended September 30						Nine months ended September 30
	2014			2013			2014			2013
Depreciation, depletion and amortization		458			482			1,407			1,367
Impairment, net of reversals		-			2			158			-
Dry hole		36			13			64			82
Share-based payments expense (recovery)		(17	)		5			(23	)		26
(Gain) loss on disposals		(6	)		1			(560	)		(58	)
Unrealized (gain) loss on held-for-trading financial instruments		(420	)		94			(292	)		(61	)
Deferred income tax recovery		(16	)		(187	)		(102	)		(169	)
Foreign exchange		(18	)		38			(16	)		3
Derecognition		4			1			4			1
(Income) loss from joint ventures and associates, after tax		13			(44	)		44			(65	)
Other		3			(4	)		25			4
		37			401			709			1,130

Other Cash Flow Information

	Three months ended September 30				Nine months ended September 30
	2014		2013		2014		2013
Cash interest paid		49		57		174		166
Cash interest received		-		10		24		21
Cash income taxes paid		115		152		446		485

22. CASH AND CASH EQUIVALENTS

Of the cash and cash equivalents balance of $237 million (December 31, 2013 - $364 million), $206 million (December 31, 2013 - $364 million) has been invested in bank deposits and the remainder in highly rated marketable securities with original maturities of less than three months.

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23. INTERESTS IN SUBSIDIARIES

The interim condensed Consolidated Financial Statements include the financial statements of Talisman Energy Inc. and its directly or indirectly owned subsidiaries.  Transactions between subsidiaries are eliminated on consolidation.  The following table lists the material operating subsidiaries owned directly or indirectly by Talisman as at September 30, 2014:

Name of Subsidiary	Jurisdiction of Incorporation	Percentage of Voting Securities Owned
Talisman Energy Canada1	Alberta	100%
Talisman Energy USA Inc.	Delaware	100%
Talisman Alberta Shale Partnership	Alberta	100%
Talisman Energy Norge AS	Norway	100%
Talisman (Corridor) Ltd.	Barbados	100%
Talisman (Vietnam 15-2/01) Ltd.	Alberta	100%
Talisman Malaysia Limited	Barbados	100%
Talisman Malaysia (PM3) Limited	Barbados	100%
Talisman (Algeria) BV	The Netherlands	100%

1. Talisman Energy Canada is an Alberta general partnership which currently carries on substantially all of Talisman’s conventional Canadian oil and gas operations.

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24. SEGMENTED INFORMATION

Talisman's activities are conducted in four geographic segments: North America, the North Sea, Southeast Asia and Other.  The North America segment includes operations and exploration in Canada and the US.  The Southeast Asia segment includes operations and exploration activities in Indonesia, Malaysia, Vietnam, Papua New Guinea and Australia/Timor-Leste. The North Sea segment includes operations and exploration activities in the UK and Norway. The Company also has non-operated production in Algeria, operations and exploration activities in Colombia, and exploration activities in the Kurdistan Region of Iraq. In 2013, the Company exited Poland and received government approval to transfer its interests in Sierra Leone.  Furthermore, the Company is in the process of exiting Peru. For ease of reference, all of the activities in Algeria, Colombia, Peru, Poland, Sierra Leone and the Kurdistan Region of Iraq are referred to collectively as the Other geographic segment.  All activities relate to the exploration, development, production and transportation of oil, liquids and natural gas.

	North America (1)												Southeast Asia (2)
	Three months ended September 30						Nine months ended September 30						Three months ended September 30				Nine months ended September 30
(millions of US$)	2014			2013			2014			2013			2014		2013		2014		2013
Revenue
Sales		427			428			1,445			1,213			494		551		1,591		1,593
Other income		18			17			45			43			-		1		1		1
Income (loss) from joint ventures and associates, after tax		-			-			-			-			-		-		-		-
Total revenue and other income		445			445			1,490			1,256			494		552		1,592		1,594
Segmented expenses
Operating		128			135			396			426			114		135		366		384
Transportation		26			23			65			79			13		15		40		44
DD&A		282			309			844			895			111		129		341		326
Impairment		-			3			(32	)		3			-		1		-		1
Dry hole		-			-			-			-			6		14		34		66
Exploration		2			15			11			29			27		15		66		50
Other		10			-			41			46			1		-		3		8
Total segmented expenses		448			485			1,325			1,478			272		309		850		879
Segmented income (loss) before taxes		(3	)		(40	)		165			(222	)		222		243		742		715
Non-segmented expenses
General and administrative
Finance costs
Share-based payments (recovery) expense
Currency translation
(Gain) loss on held-for-trading
financial instruments
(Gain) loss on asset disposals
Total non-segmented expenses
Income (loss) before taxes
Capital expenditure
Exploration		33			25			78			57			66		18		103		92
Development		315			322			871			958			59		76		205		260
Exploration and development		348			347			949			1,015			125		94		308		352
Acquisitions
Proceeds on dispositions
Other non-segmented
Net capital expenditures
Property, plant and equipment								6,663			6,636							2,308		2,318
Exploration and evaluation assets								1,570			1,579							698		717
Goodwill								111			118							170		170
Investments in joint ventures and associates								-			-							-		-
Other								553			677							774		740
Asset held for sale								-			776							-		-
Segmented assets								8,897			9,786							3,950		3,945
Non-segmented assets
Total assets (5)
Decommissioning liabilities (5)								436			450							300		280

	Three months ended September 30				Nine months ended September 30
1. North America	2014		2013		2014		2013
Canada		177		209		635		608
US		268		236		855		648
Total revenue and other income		445		445		1,490		1,256
Canada						2,405		2,544
US						4,258		4,092
Property, plant and equipment (5)						6,663		6,636
Canada						946		905
US						624		674
Exploration and evaluation assets (5)						1,570		1,579

	Three months ended September 30			Nine months ended September 30
2. Southeast Asia		2014	2013		2014	2013
Indonesia		266	273		794	900
Malaysia		136	110		422	381
Vietnam		88	116		304	181
Australia		4	53		72	132
Total revenue and other income		494	552		1,592	1,594
Indonesia					980	1,023
Malaysia					752	707
Vietnam					342	460
Papua New Guinea					119	40
Australia					115	88
Property, plant and equipment (5)					2,308	2,318
Indonesia					40	19
Malaysia					81	83
Vietnam					178	145
Papua New Guinea					399	470
Exploration and evaluation assets (5)					698	717
5. Current year represents balances at September 30. Prior year represents balances at December 31.

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	North Sea (3)								Other (4)							Total
	Three months ended September 30				Nine months ended September 30				Three months ended September 30				Nine months ended September 30			Three months ended September 30				Nine months ended September 30
(millions of US$)	2014		2013		2014		2013		2014		2013		2014	2013		2014		2013		2014		2013
Revenue
Sales	141		110		412		426		52		70		201	177		1,114		1,159		3,649		3,409
Other income	5		9		26		18		12		14		42	21		35		41		114		83
Income (loss) from joint ventures and associates, after tax	(30	)	(5	)	(107	)	(73	)	17		49		63	138		(13	)	44		(44	)	65
Total revenue and other income	116		114		331		371		81		133		306	336		1,136		1,244		3,719		3,557
Segmented expenses
Operating	76		57		245		214		21		11		44	24		339		338		1,051		1,048
Transportation	10		6		22		20		8		2		23	5		57		46		150		148
DD&A	60		33		187		123		5		11		35	23		458		482		1,407		1,367
Impairment	-		-		190		(14	)	-		(2	)	-	10		-		2		158		-
Dry hole	-		(1	)	-		18		30		-		30	(2	)	36		13		64		82
Exploration	9		5		35		33		15		31		50	96		53		66		162		208
Other	1		1		3		9		3		1		10	2		15		2		57		65
Total segmented expenses	156		101		682		403		82		54		192	158		958		949		3,049		2,918
Segmented income (loss) before taxes	(40	)	13		(351	)	(32	)	(1	)	79		114	178		178		295		670		639
Non-segmented expenses
General and administrative																95		106		305		320
Finance costs																85		87		266		244
Share-based payments (recovery) expense																(17	)	6		(24	)	30
Currency translation																(18	)	45		(15	)	6
(Gain) loss on held-for-trading																(428	)	120		(197	)	(21	)
financial instruments
(Gain) loss on asset disposals																(6	)	1		(560	)	(58	)
Total non-segmented expenses																(289	)	365		(225	)	521
Income (loss) before taxes																467		(70	)	895		118
Capital expenditure
Exploration	3		3		20		38		28		39		118	97		130		85		319		284
Development	31		96		103		269		1		4		8	15		406		498		1,187		1,502
Exploration and development	34		99		123		307		29		43		126	112		536		583		1,506		1,786
Acquisitions																-		105		36		105
Proceeds on dispositions																(102	)	(4	)	(1,494	)	(103	)
Other non-segmented																10		19		30		29
Net capital expenditures																444		703		78		1,817
Property, plant and equipment					457		537						226	261						9,654		9,752
Exploration and evaluation assets					199		289						666	580						3,133		3,165
Goodwill					287		287						-	-						568		575
Investments in joint ventures and associates					637		206						704	920						1,341		1,126
Other					2,231		1,911						311	402						3,869		3,730
Asset held for sale					-		-						-	-						-		776
Segmented assets					3,811		3,230						1,907	2,163						18,565		19,124
Non-segmented assets																				200		37
Total assets (5)																				18,765		19,161
Decommissioning liabilities (5)					1,104		1,009						29	30						1,869		1,769

	Three months ended September 30						Nine months ended September 30
3. North Sea	2014			2013			2014			2013
Norway		146			119			438			444
Loss from TSEUK JV after tax		(30	)		(5	)		(107	)		(73	)
Total revenue and other income		116			114			331			371
Norway								457			537
Property, plant and equipment (5)								457			537
Norway								199			289
Exploration and evaluation assets (5)								199			289
	Three months ended September 30						Nine months ended September 30
4. Other		2014			2013			2014			2013
Algeria		27			67			134			164
Colombia6		54			66			172			172
Total revenue and other income		81			133			306			336
Algeria								226			260
Colombia								-			1
Property, plant and equipment (5)								226			261
Colombia								234			203
Kurdistan Region of Iraq								432			377
Exploration and evaluation assets (5)								666			580
5. Current year represents balances at September 30. Prior year represents balances at December 31.
6. Balances include after-tax equity income from Equion.

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