2015 CONSOLIDATED FINANCIAL STATEMENTS

Transcription

1 CONSOLIDATED FINANCIAL STATEMENTS Ithaca Energy Inc. Year End Financial Statements 1

2 General Information Directors Jack C. Lee (Chairman) Les Thomas (Chief Executive) Frank Wormsbecker Jay Zammit Ron Brenneman Brad Hurtubise Alec Carstairs Joseph Asaf Bartfeld Yosef Abu Company Secretary Pinsent Masons Secretarial Limited 1 Park Row Leeds LS1 5AB Independent Auditors PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors 32 Albyn Place Aberdeen AB10 1YL Bankers BNP Paribas London Office 40 Harewood Avenue London NW1 6AA Solicitors Pinsent Masons 13 Queen's Road Aberdeen AB15 4YL Registered Office 1600, 333 7th Avenue S.W. Calgary Alberta Canada T2P 2Z1 Ithaca Energy Inc. Year End Financial Statements 2

3 Independent Auditors' Report To the Shareholders of Ithaca Energy Inc. We have audited the accompanying consolidated financial statements of Ithaca Energy Inc. and its subsidiaries, which comprise the consolidated Statement of Financial Position as at 31 December and 31 December, the Consolidated Statement of Income, the Consolidated Statement of Changes in Equity and Consolidated Statement of Cash Flow for the years then ended, 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, and 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 audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence 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 entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Ithaca Energy Inc. and its subsidiaries as at 31 December and 31 December and their financial performance and their cash flows for the years then ended in accordance with International Financial Reporting Standards. Chartered Accountants "PricewaterhouseCoopers LLP" PricewaterhouseCoopers LLP 32 Albyn Place Aberdeen AB10 1YL 21 March 2016 Ithaca Energy Inc. Year End Financial Statements 3

4 Consolidated Statement of Income For the year ended 31 December Note Revenue 5 Operating costs Oil purchases Movement in oil and gas inventory Depletion, depreciation and amortisation Cost of sales Gross Loss 206,975 (106,468) (6,030) (120,230) (232,728) (25,753) 378,593 (220,806) (1,087) (14,640) (167,378) (403,911) (25,318) Exploration and evaluation expenses 10 Gain on asset disposal 31 Gain on financial instruments 27 Impairment of oil & gas assets & onerous contracts 13 Impairment of goodwill 13 Total administrative expenses 6 Foreign exchange Finance costs 7 Interest income Loss Before Tax (30,522) (7,105) 26,600 3, , ,246 (386,679) (13,604) (441,457) (9,935) (13,937) (1,670) 8,405 (40,254) (32,071) (326,417) (332,476) Taxation 25 Loss for the year Earnings per share (US$ per share) Basic 24 Diluted ,412 (121,005) (0.35) (0.35) 307,941 (24,535) (0.07) (0.07) No separate statement of comprehensive income has been prepared as all such gains and losses have been incorporated in the consolidated statement of income above. The accompanying notes on pages 8 to 28 are an integral part of the financial statements. Ithaca Energy Inc. Year End Financial Statements 4

5 Consolidated Statement of Financial Position as at 31 December Note ASSETS Current assets Cash and cash equivalents CAS01 Accounts receivable 8 CAS02 Deposits, prepaid expenses and other CAS04 Inventory 9 CAS06 Derivative financial instruments 28 CAS10 Noncurrent assets Longterm receivable 30 Longterm Norwegian tax receivable 8 Longterm inventory 9 Investment in associate 14 Exploration and evaluation assets 10 Property, plant & equipment 11 CAS08 Deferred tax assets 25 Goodwill 12 11, , , , ,079 19, ,747 1,140 27, , ,509 61,052 58,338 7,032 7,908 8,126 18,337 18,337 11,223 89,844 1,102,046 1,435, , , , ,114 1,679,802 1,893,266 Total assets 2,062,881 2,358,775 LIABILITIES AND EQUITY Current Liabilities Trade and other payables 16 CLB01 Exploration obligations 17 Onerous contracts 13 Contingent consideration 21 CLB06 Noncurrent liabilities Borrowings 15 CLB02 Decommissioning liabilities 18 CLB04 Other long term liabilities 19 CLB03 Contingent consideration 21 Derivative financial instruments 28 CLB07 Net Assets Equity Share capital 22 SEQ01 Share based payment reserve 23 SEQ02 Retained earnings 22 SEQ03 Total Equity (275,907) (4,000) (4,000) (283,907) (666,130) (226,915) (92,543) (197) (985,785) 793, ,375 22, , ,189 (392,131) (5,431) (21,635) (419,197) (784,859) (213,105) (92,020) (4,000) (587) (1,094,571) 845, ,632 19, , ,007 The financial statements were approved by the Board of Directors on 21 March 2016 and signed on its behalf by: "Les Thomas" Director "Alec Carstairs" Director The accompanying notes on pages 8 to 28 are an integral part of the financial statements. Ithaca Energy Inc. Year End Financial Statements 5

6 Consolidated Statement of Changes in Equity For the year ended 31 December Share capital Share based payment reserve Retained earnings Total Equity Balance, 1 Jan Share based payment Options exercised Loss for the year Balance, 31 December 535,716 19, , ,646 6,223 6,223 15,916 (6,243) 9,673 (24,535) (24,535) 551,632 19, , ,007 Balance, 1 Jan Share based payment Shares issued Loss for the year Balance, 31 December 551,632 65, ,375 19, ,141 3,444 (121,005) 22, , ,007 3,444 65,743 (121,005) 793,189 The accompanying notes on pages 8 to 28 are an integral part of the financial statements. Ithaca Energy Inc. Year End Financial Statements 6

7 Consolidated Statement of Cash Flow For the year ended 31 December CASH PROVIDED BY (USED IN): Note Operating activities Loss Before Tax (326,417) (332,476) Adjustments for: Depletion, depreciation and amortisation 11 Exploration and evaluation expenses 10 Impairment of oil & gas assets 13 Impairment of goodwill 13 Onerous contracts Share based payment Loan fee amortisation 7 Revaluation of financial instruments 27 Gain on disposal Accretion 7 Bank interest & charges Cash flow from operations 120, ,378 30,522 7, , ,457 13,604 (21,080) 172 1,983 5,591 22,602 4,232 (161,201) (26,600) (3,030) 9,092 5,724 25,571 22, , ,207 Changes in inventory, debtors and creditors relating to operating activities Petroleum Revenue Tax paid Net cash generated from operating activities Investing activities Acquisition of Summit Capital expenditure Loan to associate Proceeds on disposal Changes in debtors and creditors relating to investing activities Net cash used in investing activities Financing activities Proceeds from issuance of shares 32 Decrease in restricted cash Derivatives Share issue costs Loan (repayment)/draw down 15 Senior notes 15 Bank interest & charges Net cash generated from financing activities Currency translation differences relating to cash & cash equivalents (Decrease) in cash & cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period (19,987) (4,446) 215,533 (164,789) (2,504) 32,521 (33,317) (168,089) 66,086 (344) (81,312) (38,510) (54,080) (1,202) (7,838) 19,381 11,543 73,253 (3,137) 223,323 (163,541) (406,413) (26,864) 2,190 (19,711) (614,339) 9,673 12,609 (2,365) 51, ,000 (27,534) 343,974 2,988 (44,054) 63,435 19,381 The accompanying notes on pages 8 to 28 are an integral part of the financial statements. Ithaca Energy Inc. Year End Financial Statements 7

8 Notes to the consolidated financial statements 1. NATURE OF OPERATIONS Ithaca Energy Inc. (the Corporation or Ithaca ), incorporated and domiciled in Alberta, Canada on 27 April 2004, is a publicly traded company involved in the development and production of oil and gas in the North Sea. The Corporation's registered office is 1600, 333 7th Avenue S.W., Calgary, Alberta, Canada, T2P 2Z1. The Corporation's shares trade on the Toronto Stock Exchange in Canada and the London Stock Exchange s Alternative Investment Market in the United Kingdom under the symbol IAE. The consolidated financial statements of Ithaca Energy Inc. for the year ended 31 December were authorised for issue in accordance with a resolution of the directors on 21 March BASIS OF PREPARATION The Corporation prepares its financial statements in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and in accordance with IFRS Interpretations Committee (IFRS IC) interpretations. The consolidated financial statements have been prepared on a going concern basis using the historical cost convention, except for financial instruments which are measured at fair value. The consolidated financial statements are presented in US dollars and all values are rounded to the nearest thousand (A1057), except when otherwise indicated. 3. SIGNIFICANT ACCOUNTING POLICIES, JUDGEMENTS AND ESTIMATION UNCERTAINTY Basis of measurement The consolidated financial statements have been prepared under the historical cost convention, except for the revaluation of certain financial assets and financial liabilities (under IFRS) to fair value, including derivative instruments. Basis of consolidation The consolidated financial statements of the Corporation include the financial statements of Ithaca Energy Inc. and all whollyowned subsidiaries as listed per note 30. Ithaca has twenty whollyowned subsidiaries, four of which were acquired on 31 July as part of the acquisition of Summit Petroleum Limited ("Summit"). The consolidated financial statements include the Summit group of companies from 31 July only (being the acquisition date). All intercompany transactions and balances have been eliminated on consolidation. Subsidiaries are all entities, including structured entities, over which the group has control. The group controls an entity when the group is exposed to or has rights to variable returns from its investments with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the group. They are deconsolidated on the date that control ceases. Business Combinations Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the fair value of the assets acquired, equity instruments issued and liabilities incurred or assumed at the date of completion of the acquisition. Acquisition costs incurred are expensed and included in administrative expenses. 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 excess of the cost of acquisition over the fair value of the Corporation's share of the identifiable net assets acquired is recorded as goodwill. If the cost of the acquisition is less than the Corporation's share of the net assets acquired, the difference is recognised directly in the statement of income as negative goodwill. Goodwill Capitalisation Goodwill acquired through business combinations is initially measured at cost, being the excess of the aggregate of the consideration transferred and the amount recognised as the fair value of the Corporation's share of the identifiable net assets acquired and liabilities assumed. If this consideration is lower than the fair value of the identifiable assets acquired, the difference is recognised in the statement of income. Impairment Goodwill is tested annually for impairment and also when circumstances indicate that the carrying value may be at risk of being impaired. Impairment is determined for goodwill by assessing the recoverable amount of each cash generating unit ("CGU") to which the goodwill relates. Where the recoverable amount of the CGU is less than its carrying amount, an impairment loss is recognised in the statement of income. Impairment losses relating to goodwill cannot be reversed in future periods. Ithaca Energy Inc. Year End Financial Statements 8

9 Interest in joint operations Under IFRS 11, joint arrangements are those that convey joint control which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control. Investments in joint arrangements are classified as either joint operations or joint ventures depending on the contractual rights and obligations of each investor. Associates are investments over which the Corporation has significant influence but not control or joint control, and generally holds between 20% and 50% of the voting rights. Under the equity method, investments are carried at cost plus postacquisition changes in the Corporation's share of net assets, less any impairment in value in individual investments. The consolidated income statement reflects the Corporation's share of the results and operations after tax and interest. The Corporation's interest in joint operations (e.g. exploration and production arrangements) are accounted for by recognising its assets (including its share of assets held jointly), its liabilities (including its share of liabilities incurred jointly), its revenue from the sale of its share of the output arising from the joint operation, its share of revenue from the sale of output by the joint operation and its expenses (including its share of any expenses incurred jointly). Revenue Oil, gas and condensate revenues associated with the sale of the Corporation s crude oil and natural gas are recognised when title passes to the customer. This generally occurs when the product is physically transferred into a vessel, pipe or other delivery mechanism. Revenues from the production of oil and natural gas properties in which the Corporation has an interest with joint venture partners are recognised on the basis of the Corporation s working interest in those properties (the entitlement method). Differences between the production sold and the Corporation s share of production are recognised within cost of sales at market value. Interest income is recognised on an accruals basis and is separately recorded on the face of the statement of income. Foreign currency translation Items included in the financial statements are measured using the currency of the primary economic environment in which the Corporation and its subsidiaries operate (the functional currency ). The consolidated financial statements are presented in United States Dollars, which is the Corporation s functional and presentation currency. Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of income. Share based payments The Corporation has a share based payment plan as described in note 22 (c). The expense is recorded in the statement of income or capitalised for all options granted in the year, with the gross increase recorded in the share based payment reserve. Compensation costs are based on the estimated fair values at the time of the grant and the expense or capitalised amount is recognised over the vesting period of the options. Upon the exercise of the stock options, consideration paid together with the amount previously recognised in share based payment reserve is recorded as an increase in share capital. In the event that vested options expire unexercised, previously recognised compensation expense associated with such stock options is not reversed. In the event that unvested options are forfeited or expired, previously recognised compensation expense associated with the unvested portion of such stock options is reversed. Cash and cash equivalents For the purpose of the statement of cash flow, cash and cash equivalents include investments with an original maturity of three months or less. Ithaca Energy Inc. Year End Financial Statements 9

10 Financial instruments All financial instruments are initially recognised at fair value in the statement of financial position. The Corporation s financial instruments consist of cash, accounts receivable, deposits, derivatives, accounts payable, accrued liabilities, contingent consideration and borrowings. The Corporation classifies its financial instruments into one of the following categories: heldfortrading financial assets and financial liabilities; heldtomaturity investments; loans and receivables; and other financial liabilities. All financial instruments are required to be measured at fair value on initial recognition. Measurement in subsequent periods is dependent on the classification of the respective financial instrument. Heldfortrading financial instruments are subsequently measured at fair value with changes in fair value recognised in net earnings. All other categories of financial instruments are measured at amortised cost using the effective interest method. Cash and cash equivalents are classified as heldfortrading and are measured at fair value. Accounts receivable are classified as loans and receivables. Accounts payable, accrued liabilities, certain other longterm liabilities, and longterm debt are classified as other financial liabilities. Although the Corporation does not intend to trade its derivative financial instruments, they are classified as heldfortrading for accounting purposes. Transaction costs that are directly attributable to the acquisition or issue of a financial asset or liability and original issue discounts on longterm debt have been included in the carrying value of the related financial asset or liability and are amortised to consolidated net earnings over the life of the financial instrument using the effective interest method. Analyses of the fair values of financial instruments and further details as to how they are measured are provided in notes 27 to 29. Inventory Inventories of materials and product inventory supplies are stated at the lower of cost and net realisable value. Cost is determined on the firstin, firstout method. Current oil and gas inventories are stated at fair value less cost to sell. Noncurrent oil and gas inventories are stated at historic cost. Trade receivables Trade receivables are recognised and carried at the original invoiced amount, less any provision for estimated irrecoverable amounts. Trade payables Trade payables are measured at cost. Property, plant and equipment Oil and gas expenditure exploration and evaluation assets Capitalisation Preacquisition costs on oil and gas assets are recognised in the consolidated statement of income when incurred. Costs incurred after rights to explore have been obtained, such as geological and geophysical surveys, drilling and commercial appraisal costs and other directly attributable costs of exploration and evaluation including technical, administrative and share based payment expenses are capitalised as intangible exploration and evaluation ( E&E ) assets. E&E costs are not amortised prior to the conclusion of evaluation activities. At completion of evaluation activities, if technical feasibility is demonstrated and commercial reserves are discovered then, following development sanction, the carrying value of the E&E asset is reclassified as a development and production ( D&P ) asset, but only after the carrying value is assessed for impairment and where appropriate its carrying value adjusted. If after completion of evaluation activities in an area, it is not possible to determine technical feasibility and commercial viability or if the legal right to explore expires or if the Corporation decides not to continue exploration and evaluation activity, then the costs of such unsuccessful exploration and evaluation are written off to the statement of income in the period the relevant events occur. Impairment The Corporation s oil and gas assets are analysed into CGU for impairment review purposes, with E&E asset impairment testing being performed at a grouped CGU level. The current E&E CGU consists of the Corporation s whole E&E portfolio. E&E assets are reviewed for impairment when circumstances arise which indicate that the carrying value of an E&E asset exceeds the recoverable amount. When reviewing E&E assets for impairment, the combined carrying value of the grouped CGU is compared with the grouped CGU's recoverable amount. The recoverable amount of a grouped CGU is determined as the higher of its fair value less costs to sell and value in use. Impairment losses resulting from an impairment review are written off to the statement of income. Ithaca Energy Inc. Year End Financial Statements 10

11 Oil and gas expenditure development and production assets Capitalisation Costs of bringing a field into production, including the cost of facilities, wells and subsea equipment, direct costs including staff costs and share based payment expense together with E&E assets reclassified in accordance with the above policy, are capitalised as a D&P asset. Normally each individual field development will form an individual D&P asset but there may be cases, such as phased developments, or multiple fields around a single production facility when fields are grouped together to form a single D&P asset. Depreciation All costs relating to a development are accumulated and not depreciated until the commencement of production. Depreciation is calculated on a unit of production basis based on the proved and probable reserves of the asset. Any reassessment of reserves affects the depreciation rate prospectively. Significant items of plant and equipment will normally be fully depreciated over the life of the field. However, these items are assessed to consider if their useful lives differ from the expected life of the D&P asset and should this occur a different depreciation rate would be charged. Impairment A review is carried out each reporting date for any indication that the carrying value of the Corporation s D&P assets may be impaired. For D&P assets where there are such indications, an impairment test is carried out on the CGU. Each CGU is identified in accordance with IAS 36. The Corporation s CGUs are those assets which generate largely independent cash flows and are normally, but not always, single developments or production areas. The impairment test involves comparing the carrying value with the recoverable value of an asset. The recoverable amount of an asset is determined as the higher of its fair value less costs to sell and value in use, where the value in use is determined from estimated future net cash flows. Any additional depreciation resulting from the impairment testing is charged to the statement of income. Non oil and natural gas operations Computer and office equipment is recorded at cost and depreciated over its estimated useful life on a straightline basis over three years. Furniture and fixtures are recorded at cost and depreciated over their estimated useful lives on a straightline basis over five years. Borrowings All interestbearing loans and other borrowings with banks are initially recognised at fair value net of directly attributable transaction costs. After initial recognition, interestbearing loans and other borrowings are subsequently measured at amortised cost using the effective interest method. Amortised cost is calculated by taking into account any issue costs, discount or premium. Loan origination fees are capitalised and amortised over the term of the loan. Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets until such time as the assets are substantially ready for their intended use of sale. All other borrowing costs are expensed as incurred. Senior notes are measured at amortised cost. Decommissioning liabilities The Corporation records the present value of legal obligations associated with the retirement of longterm tangible assets, such as producing well sites and processing plants, in the period in which they are incurred with a corresponding increase in the carrying amount of the related longterm asset. The obligation generally arises when the asset is installed or the ground/environment is disturbed at the field location. In subsequent periods, the asset is adjusted for any changes in the estimated amount or timing of the settlement of the obligations. The carrying amounts of the associated assets are depleted using the unit of production method, in accordance with the depreciation policy for development and production assets. Actual costs to retire tangible assets are deducted from the liability as incurred. Onerous contracts Onerous contract provisions are recognised where the unavoidable costs of meeting the obligations under a contract exceed the economic benefits expected to be received under it. Contingent consideration Contingent consideration is accounted for as a financial liability and measured at fair value at the date of acquisition with any subsequent remeasurements recognised either in profit or loss or in other comprehensive income in accordance with IAS 39. Ithaca Energy Inc. Year End Financial Statements 11

12 Taxation Current income tax Current income tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amounts are those that are enacted or substantively enacted by the reporting date. Deferred income tax Deferred tax is recognised for all deductible temporary differences and the carryforward of unused tax losses. Deferred tax assets and liabilities are measured using enacted or substantively enacted income tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in rates is included in earnings in the period of the enactment date. Deferred tax assets are recorded in the consolidated financial statements if realisation is considered more likely than not. Deferred tax assets and liabilities are offset only when a legally enforceable right of offset exists and the deferred tax assets and liabilities arose in the same tax jurisdiction. Petroleum Revenue Tax In addition to corporate income taxes, the Corporation's financial statements also include and disclose Petroleum Revenue Tax (PRT) on net income determined from oil and gas production. PRT is accounted for under IAS 12 since it has the characteristics of an income tax as it is imposed under Government authority and the amount payable is based on taxable profits of the relevant field. Deferred PRT is accounted for on a temporary difference basis. Operating leases Rentals under operating leases are charged to the statement of income on a straight line basis over the period of the lease. Finance leases Finance leases that transfer substantially all the risks and benefits incidental to ownership of the leased item to the Corporation, are capitalised at the commencement of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognised in finance costs in the income statement. A leased asset is depreciated over the useful life of the asset. However, if there is no reasonable certainty that the Corporation will obtain ownership by the end of the lease term, the asset is depreciated over the shorter of the estimated useful life of the asset and the lease term. Maintenance expenditure Expenditure on major maintenance refits or repairs is capitalised where it enhances the life or performance of an asset above its originally assessed standard of performance; replaces an asset or part of an asset which was separately depreciated and which is then written off, or restores the economic benefits of an asset which has been fully depreciated. All other maintenance expenditure is charged to the statement of income as incurred. Recent accounting pronouncements New and amended standards and interpretations need to be adopted in the first financial statements issued after their effective date (or date of early adoption). There are no new IFRSs or IFRICs that are effective for the first time for this period that would be expected to have a material impact on the Corporation. Significant accounting judgements and estimation uncertainties The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions regarding certain assets, liabilities, revenues and expenses. Such estimates must often be made based on unsettled transactions and other events and a precise determination of many assets and liabilities is dependent upon future events. Actual results may differ from estimated amounts. The amounts recorded for depletion, depreciation of property and equipment, longterm liability, share based payment, contingent consideration, onerous contract provisions, decommissioning liabilities, derivatives, and deferred taxes are based on estimates. The depreciation charge, any impairment tests and fair value estimates for the purpose of purchase price allocation (business combinations) are based on estimates of proved and probable reserves, production rates, prices, future costs and other relevant assumptions. By their nature, these estimates are subject to measurement uncertainty and the effect on the financial statements of changes in such estimates in future periods could be material. Further information on each of these estimates is included within the notes to the financial statements. Ithaca Energy Inc. Year End Financial Statements 12

13 4. SEGMENTAL REPORTING The Company operates a single class of business being oil and gas development and production and related activities in a single geographical area presently being the North Sea. 5. REVENUE Oil sales Gas sales Condensate sales Other income REV01 REV02 REV03 REV04 REV01 REV02 REV03 REV04 201, ,274 4,965 6, , , , ADMINISTRATIVE EXPENSES General & administrative Share based payment EXP01 EXP16 EXP01 EXP16 (9,763) (172) (9,935) (11,954) (1,983) (13,937) Employee benefit expense Wages and salaries Social security costs Share options Pension costs (7,821) (4,793) (3,444) (1,141) (17,199) (10,186) (4,214) (6,223) (1,080) (21,703) Staff costs above are recharged to joint venture partners or capitalised to the extent that they are directly attributable to capital projects. 7. FINANCE COSTS Bank charges and interest Senior notes interest Finance lease interest Nonoperated asset finance fees Prepayment interest Loan fee amortisation Accretion (7,384) (15,009) (1,048) (71) (2,059) (5,591) (9,092) (40,254) (12,993) (7,831) (415) (160) (716) (4,232) (5,724) (32,071) 8. ACCOUNTS RECEIVABLE Norwegian tax receivable noncurrent Norwegian tax receivable current Trade debtors Accrued income 7,032 25, , , , , , INVENTORY Current Crude oil inventory Materials inventory 18,721 2,179 20,900 25,333 2,148 27,481 Noncurrent Crude oil inventory 7,908 8,126 The noncurrent portion of inventory relates to long term stocks at the Sullom Voe Terminal. Ithaca Energy Inc. Year End Financial Statements 13

14 10. EXPLORATION AND EVALUATION ASSETS At 1 January Additions Transfer from E&E to D&P (note 11) Release of exploration obligations Write offs/relinquishments At 31 December and 1 January Additions Disposals (note 31) Release of exploration obligations Write offs/relinquishments Impairment (note 13) At 31 December 57,628 48,114 (1,365) (7,428) (7,105) 89,844 30,263 (44,005) (1,431) (30,522) (32,926) 11,223 Following completion of geotechnical evaluation activity, certain North Sea licences were declared unsuccessful and certain prospects were declared noncommercial. This resulted in the carrying value of these licences being fully written off to nil with $30.5 million being expensed in the year to 31 December. The majority of these write offs primarily relate to the Norwegian Snomus project ($29.7 million). The above also includes the release of the exploration obligation provision against expenditure incurred (see note 17). 11. PROPERTY, PLANT AND EQUIPMENT Cost Development & Production Oil and Gas assets Other fixed assets Total At 1 January Acquisitions Additions Transfers from E&E to D&P (note 10) At 31 December and 1 January Additions Disposals Release of onerous contract provision At 31 December 1,743,349 3,163 1,746, , , , ,163 1,365 1,365 2,341,069 4,140 2,345, , ,035 (1,451) (1,451) (377) (377) 2,482,010 3,406 2,485,416 DD&A and Impairment At 1 January DD&A charge for the period Impairment charge for the period (419,822) At 31 December and 1 January DD&A charge for the period Disposals Impairment charge for the period (note 13) At 31 December (320,501) (166,982) (907,305) (119,768) (353,753) (1,380,826) (2,299) (396) (2,695) (2,544) (322,800) (167,378) (419,822) (910,000) (462) (120,230) (353,753) (1,383,370) NBV at 31 December 2013 NBV at 31 December 1,422,848 1,433, ,445 1,423,712 1,435,209 NBV at 31 December 1,101, ,102,046 The net book amount of property, plant and equipment includes $30.2 million (: $32.2 million) in respect of the Pierce FPSO lease held under finance lease. Ithaca Energy Inc. Year End Financial Statements 14

15 12. GOODWILL Opening balance Addition in the period Impairments in the period Closing balance 137, ,129 (13,604) 123, ,114 As at 31 December, $136.1 million represented a goodwill asset recognised on the acquisition of Summit Petroleum Limited as a result of recognising a $136.9 million deferred tax liability as required under IFRS 3 fair value accounting for business combinations. Absent the deferred tax liability the price paid for the Summit assets equated to the fair value of the assets. $1.0 million represented goodwill recognised on the acquisition of gas assets from GDF in December As at 31 December a nontaxable impairment of $13.6 million was recorded relating to goodwill. Goodwill has been tested for impairment by assessing the recoverable amount of the CGU to which the goodwill relates using the fair value less cost of disposal method. The period over which management has projected cash flows ranges from 1 to 21 years in line with the expected economic life of the assets. The significant assumptions used and details of the sensitivity analysis performed are disclosed in note IMPAIRMENT AND ONEROUS CONTRACTS D&P Assets E&E assets Onerous contracts North Sea oil and gas assets Goodwill Total impairment (353,753) (32,926) (386,679) (13,604) (400,283) (419,822) (21,635) (441,457) (441,457) During, the Company recorded a $386.7 million pretax impairment expense (: $419.8 million) relating to oil and gas assets and a $13.6 million goodwill impairment. The impairment was driven predominantly by the overall lower commodity price environment leading to a decrease in the asset valuation. The review was carried out on a fair value less cost of disposal basis using risk adjusted cash flow projections discounted at a posttax rate of 9.0%. For impairment of property, plant and equipment and intangible oil and gas assets, fair value less costs of disposal are determined by discounting the posttax cash flows expected to be generated from oil and gas production net of selling costs taking into account assumptions that market participants would typically use in estimating fair values. Applying the same fair value less cost of disposal methodology, goodwill has been tested for impairment by assessing the recoverable amount of the CGU to which the goodwill relates. In, the Company provided for future losses on longterm contracts where it was considered that the contract costs were likely to exceed revenues in future periods. Onerous contract provisions totalling $21.6 million were therefore made for the fully written down Beatrice, Jacky & Nigg Inner Moray Forth assets subsequent to their write off in December 2013 as well as Anglia and Athena, both of which were fully written down in due to the expectation that would be the last year of production. The provision was fully utilised during and no further provision required. Associated with the impairment charge is a deferred tax credit to the Income Statement of $197.7 million which results in a net impact on earnings in the year of $202.6 million. The following assumptions were used in developing the cash flow model and applied over the expected life of the respective fields: Discount rate Shortterm price assumptions Longterm price assumptions assumption H H Oil Gas North Sea 9% $38/bbl $53/bbl $55/bbl $65/bbl $75/bbl 51p/th The recoverable amount of the operating segment, being North Sea D&P assets, is $1,359 million. Ithaca Energy Inc. Year End Financial Statements 15

16 Sensitivity to changes in assumptions The principal assumptions used in assessing the recoverable amount of oil and gas assets and goodwill are the discount rate and commodity prices. The impacts of a reasonably possible change in discount rate or price are detailed in the tables below for both oil and gas assets and goodwill: Oil and gas assets Original Discount rate Discount rate Long term price Long term price Discount rate Price Impairment 9% $75/bbl (386,679) 10% $75/bbl (415,879) 8% $75/bbl (356,279) 9% $85/bbl (333,879) 9% $65/bbl (445,409) Variance 29,200 (30,400) (52,800) 58,730 Goodwill Original Discount rate Discount rate Long term price Long term price Discount rate Price Impairment Variance 9% $75/bbl (13,604) 10% $75/bbl (24,504) 10,900 8% $75/bbl (1,904) (11,700) 9% $85/bbl (13,604) 9% $65/bbl (49,839) 36, INVESTMENT IN ASSOCIATES Investment in FPF1 and FPU Services 18,337 18,337 Investment in associates comprises shares, acquired by Ithaca Energy (Holdings) Limited, in FPF1 Limited and FPU Services Limited as part of the completion of the Greater Stella Area transactions in There has been no change in value during the period with the above investment reflecting the Company's share of the associates' results. 15. BORROWINGS RBL facility Senior notes Norwegian facility Long term bank fees Long term senior notes fees (376,793) (300,000) 6,779 3,884 (666,130) (480,588) (300,000) (17,444) 7,635 5,538 (784,859) Extension and amendment to bank debt facilities In April, the Corporation executed extended and simplified bank debt financing facilities totalling $650 million. The $650 million is comprised of a senior RBL facility of $575 million and junior RBL facility of $75 million. This junior RBL facility replaced the former Corporate Facility and removed the use of historic financial covenant tests from the debt facilities. Both RBL facilities are based on conventional oil and gas industry borrowing base financing terms, with loan maturities in September 2018, and are available to fund ongoing development activities and general corporate purposes. The combined interest rate of the two bank debt facilities, fully drawn, is LIBOR plus 3.4% prior to Stella coming onstream, stepping down to LIBOR plus 2.9% after Stella production has been established. The availability to draw upon the facilities is reviewed by the bank syndicate on a semiannual basis, with the results of the October redetermination resulting in debt availability of $515 million. Senior Reserves Based Lending Facility As at 31 December, the Corporation has a Senior Reserved Based Lending ("Senior RBL") Facility of $575 million. As at 31 December, $377 million (31 December : $481 million) was drawn down under the Senior RBL. $6.8 million (31 December : $7.6 million) of loan fees relating to the RBL have been capitalised and remain to be amortised. Junior Reserves Based Lending Facility As at 31 December, the Corporation had a Junior Reserved Based Lending ("Junior RBL") Facility of $75 million. The facility remains undrawn at the year end. Norwegian Tax Rebate Facility The Norwegian Tax Rebate Facility ("Norwegian Facility") of NOK 600 million was fully repaid and retired as part of the completion of the Norway sale to MOL in the second quarter of. (Note 31). Ithaca Energy Inc. Year End Financial Statements 16

17 Senior Notes As at 31 December, the Corporation had $300 million 8.125% senior unsecured notes due July 2019, with interest payable semiannually. $3.9 million of loan fees (31 December : $5.5 million) have been capitalised and remain to be amortised. Covenants The Corporation is subject to financial and operating covenants related to the facilities. Failure to meet the terms of one or more of these covenants may constitute an event of default as defined in the facility agreements, potentially resulting in accelerated repayment of the debt obligations. The Corporation was in compliance with all its relevant financial and operating covenants during the period. The key covenants in both the Senior and Junior RBLs are: A corporate cashflow projection showing total sources of funds must exceed total forecast uses of funds for the later of the following 12 months or until forecast first oil from the Stella field. The ratio of the net present value of cashflows secured under the RBL for the economic life of the fields to the amount drawn under the facility must not fall below 1.15:1 The ratio of the net present value of cashflows secured under the RBL for the life of the debt facility to the amount drawn under the facility must not fall below 1.05:1. There are no financial maintenance covenants tests under the senior notes. Security provided against the facilities The RBL facilities are secured by the assets of the guarantor members of the Ithaca Group, such security including share pledges, floating charges and/or debentures. The Senior notes are unsecured senior debt of Ithaca Energy Inc., guaranteed by certain members of the Ithaca Group and subordinated to existing and future secured obligations. 16. TRADE AND OTHER PAYABLES Trade payables Accruals and deferred income 17. EXPLORATION OBLIGATIONS Exploration obligations (129,719) (146,188) (275,907) (4,000) (308,704) (83,427) (392,131) (5,431) The above reflects the fair value of E&E commitments assumed as part of the Valiant transaction. During the year to 31 December, $1.4 million was released reflecting expenditure incurred in the period. 18. DECOMMISSIONING LIABILITIES Balance, beginning of period Additions Accretion Revisions to estimates Balance, end of period (213,105) (172,047) (45,715) (9,092) (5,724) (4,718) 10,381 (226,915) (213,105) The total future decommissioning liability was calculated by management based on its net ownership interest in all wells and facilities, estimated costs to reclaim and abandon wells and facilities and the estimated timing of the costs to be incurred in future periods. The Corporation uses a risk free rate of 4.0 percent (31 December : 4.2 percent) and an inflation rate of 2.0 percent (31 December : 2.0 percent) over the varying lives of the assets to calculate the present value of the decommissioning liabilities. These costs are expected to be incurred at various intervals over the next 21 years. The economic life and the timing of the obligations are dependent on Government legislation, commodity price and the future production profiles of the respective production and development facilities. Ithaca Energy Inc. Year End Financial Statements 17

18 19. OTHER LONGTERM LIABILITIES Shell prepayment Finance lease Balance, end of period (62,227) (60,168) (30,316) (31,852) (92,543) (92,020) The Shell prepayment relates to cash advances of $62 million under the Shell oil sales agreements which have been transferred to longterm liabilities as shortterm repayment is not due in the current oil price environment and the finance lease relates to the Pierce FPSO acquired as part of the Summit acquisition. 20. FINANCE LEASE LIABILITIES Total minimum lease payments Less than 1 year Between 1 and 5 years 5 years and later Interest Less than 1 year Between 1 and 5 years 5 years and later Present value of minimum lease payments Less than 1 year Between 1 and 5 years 5 years and later (2,602) (12,570) (23,502) (994) (4,123) (3,569) (1,608) (8,447) (19,933) (2,595) (12,714) (25,959) (1,048) (4,408) (4,279) (1,547) (8,306) (21,680) The finance lease relates to the Pierce FPSO acquired as part of the Summit acquisition in July. 21. CONTINGENT CONSIDERATION Balance outstanding (4,000) (4,000) The contingent consideration at the end of the period relates to the acquisition of the Stella field and is payable subsequent to first oil. 22. SHARE CAPITAL Number of Amount Authorised share capital ordinary shares At 31 December and 31 December Unlimited (a) Issued The issued share capital is as follows: Issued Balance 1 January Issued for cash options exercised Transfer from Share based payment reserve on options exercised Balance 1 January Shares issued (note 32) Balance 31 December Capital Management The Corporation s objectives when managing capital are: Number of common shares 323,633,620 5,885, ,518,620 81,865, ,384,045 Amount 535,716 9,673 6, ,632 65, ,375 to safeguard the Corporation s ability to continue as a going concern; to maintain balance sheet strength and optimal capital structure, while ensuring the Corporation s strategic objectives are met; and to provide an appropriate return to shareholders relative to the risk of the Corporation s underlying assets. Ithaca Energy Inc. Year End Financial Statements 18

19 Capital is defined as shareholders equity and net debt. Shareholders equity includes share capital, share based payment reserve, warrants issued, retained earnings or deficit and other comprehensive income. Share capital Share based payment reserve Retained earnings Total Shareholders' Equity SEQ01 SEQ02 SEQ03 617, ,632 22,678 19, , , , ,007 The Corporation maintains and adjusts its capital structure based on changes in economic conditions and the Corporation s planned requirements. The Board of Directors reviews the Corporation s capital structure and monitors requirements. The Corporation may adjust its capital structure by issuing new equity and/or debt, selling and/or acquiring assets, and controlling capital expenditure programs. The Company assesses its capital structure mainly on a forwardlooking basis by modelling net cash flows over the next few years and considering the economic conditions and operational factors which could lead to financial stress. A range of measurement tools is used, including gearing (calculated at year end below), net cash flow coverage of net interest payments, and the time to repay net debt from net cash flow. No specific numerical range for each of these parameters is targeted, as the overall assessment reflects a consideration of a wide range of factors. Total borrowings Less: cash and cash equivalents Net debt Equity Net debt plus equity 666, ,859 (11,543) (19,381) 654, , , ,007 1,482,422 1,610,485 Net Debt as a % of Net Debt plus Equity 44% 48% (b) Stock options In the 12 months ended 31 December, the Corporation's Board of Directors granted 950,000 options at an exercise price of $0.84 (C$1.04). The Corporation s stock options and exercise prices are denominated in Canadian Dollars when granted. As at 31 December, 19,216,206 stock options to purchase common shares were outstanding, having an exercise price range of $0.84 to $2.52 (C$1.04 to C$2.71) per share and a vesting period of up to 3 years in the future. Changes to the Corporation s stock options are summarised as follows: Balance, beginning of period Granted Forfeited / expired Exercised Options 31 December 31 December Wt. Avg Exercise Wt. Avg Exercise No. of Options Price * No. of Options Price * 24,232,428 $ ,593,567 $ ,000 $ ,905,000 $1.63 (5,966,222) $2.05 (381,139) $2.39 (5,885,000) $ ,216,206 $ ,232,428 $1.81 * The weighted average exercise price has been converted into U.S. dollars based on the foreign exchange rate in effect at the date of issuance. Ithaca Energy Inc. Year End Financial Statements 19