Wentworth Resources Limited Interim Condensed Consolidated Financial September 30, 2011
Unaudited Interim Condensed Consolidated Statement of Financial Position As at US 000s, unless otherwise stated September 30, 2011 December 31, 2010 January 1, 2010 Note (note 19) (note 19) ASSETS Current assets Cash and cash equivalents 5 11,176 4,587 2,144 Cash held in trust 5 - - 3,340 Trade and other receivables 5,689 6,043 4,113 Prepaid expenses and deposits 383 875 814 Inventories 633 366 697 17,881 11,871 11,108 Non-current assets Long-term receivable 6 19,322 17,399 19,556 Evaluation and exploration assets 7 17,288 17,418 17,960 Property and equipment 8 36,918 37,135 36,702 73,528 71,952 74,218 Total assets 91,409 83,823 85,326 LIABILITIES Current liabilities Trade and other payables 5,157 8,353 6,289 Current portion of long-term loan 9 894 - - Convertible bonds - - 3,240 6,051 8,353 9,529 Non-current liabilities Long-term loan 9 6,096 7,427 1,273 Derivative financial liability 12 988 5,008 - Provisions 3,148 3,679 93 10,232 16,114 1,366 EQUITY Share capital 10b 360,250 344,246 335,421 Contributed surplus 10d 16,815 15,958 9,037 Warrants - - 7,522 Deficit (308,400) (307,232) (284,803) Equity Attributable to Shareholders 68,665 52,972 67,177 Non-controlling interest 6,461 6,384 7,254 Total Equity 75,126 59,356 74,431 Total Liabilities and Equity 91,409 83,823 85,326 The accompanying notes are an integral part of these interim condensed consolidated financial statements. The interim condensed consolidated financial statements were approved by the Board of Directors on November 21, 2011 and were signed on its behalf by: (Signed) Cameron Barton Director (Signed) Neil Kelly Director 1
Unaudited Interim Condensed Consolidated Statement of Comprehensive Income (Loss) For the period ended September 30 3 months ended September 30, 9 months ended September 30, US 000s, unless otherwise stated 2011 2010 2011 2010 Note (note 19) (note 19) Total revenue 13 1,961 1,133 5,766 3,514 Operating expenses Production and operating (1,230) (1,182) (3,639) (3,359) Depreciation and depletion (519) (988) (1,622) (3,067) Loss on disposal of property and equipment 7,8 (71) (106) (72) (147) General and administrative (2,536) (2,819) (7,153) (13,704) Impairment of property and equipment - - - (691) Other expenses (285) (73) (868) (61) Total operating expenses (4,641) (5,168) (13,354) (21,029) Total other income (expenses) Financing costs 636 885 1,878 2,350 Gain on derivative financial liability 3,563-4,020 - Redemption of bonds - - - 162 Net foreign exchange gain/(loss) 67 (18) 599 (7) Total other income/(expenses) 4,266 867 6,497 2,505 Income/(loss) and comprehensive income/(loss) 1,586 (3,168) (1,091) (15,010) Income/(loss) and comprehensive income/(loss) attributable to: Owners of the Company 1,893 (3,104) (1,168) (14,747) Non-controlling interest (307) (64) 77 (263) Income/(loss) and comprehensive income/(loss) 1,586 (3,168) (1,091) (15,010) Income/(loss) per share 17 Basic 0.02 (0.06) (0.02) (0.33) Diluted 0.02 (0.06) (0.02) (0.33) The accompanying notes are an integral part of these interim condensed consolidated financial statements. 2
Unaudited Interim Condensed Consolidated Statement of Changes in Equity US 000s, unless otherwise stated Note Share Capital Contributed surplus Warrants Deficit Total Noncontrolling interest Total Equity As at January 1, 2010 335,421 9,037 7,522 (284,803) 67,177 7,254 74,431 Loss and comprehensive loss - - - (14,747) (14,747) (263) (15,010) Share-based compensation - (61) - - (61) - (61) Share issuance 9,794-1,714-11,508-11,508 As at September 30, 2010 345,215 8,976 9,236 (299,550) 63,877 6,991 70,868 As at December 31, 2010 344,246 15,958 - (307,232) 52,972 6,384 59,356 Loss and comprehensive loss - - - (1,168) (1,168) 77 (1,091) Share-based compensation expense 11-857 - - 857-857 Share issuance 10b 17,081 - - - 17,081-17,081 Share issue costs 10b (1,077) - - - (1,077) - (1,077) As at September 30, 2011 360,250 16,815 - (308,400) 68,665 6,461 75,126 3
Unaudited Interim Condensed Consolidated Statement of Cash flows For the period ended September 30 3 months ended September 30, 9 months ended September 30, US 000s, unless otherwise stated 2011 2010 2011 2010 Note Cash provided by (used for) the following activities Operating activities Income/(loss) for the period 1,586 (3,168) (1,091) (15,010) Add (deduct) non-cash items: Depreciation and depletion 7,8 519 988 1,622 3,067 Loss on sale of property and equipment 71 106 72 147 Share-based compensation expense 11 282 73 857 61 Accretion and provision (999) (1,227) (3,050) 1,069 Interest accrued 140-437 - Impairment of property and equipment - - - 691 Gain on derivative financial liability (3,563) - (4,020) - Unrealized foreign exchange loss (gain) (578) 5 (1,102) 680 Others - - - (82) (2,542) (3,223) (6,275) (9,377) Changes in working capital: Change in inventories (61) (20) (267) 313 Change in trade and other receivables (814) 329 817 674 Change in prepaid expenses and deposits 469 (279) 492 (442) Change in trade and other payables 280 (402) (2,921) (857) Cash used in operations (2,668) (3,595) (8,154) (9,689) Investment activities Purchase of property and equipment and evaluation and exploration assets 7,8 (105) (462) (1,364) (3,033) Proceeds from sale of property and equipment - 32 17 67 Cash used in investing activities (105) (430) (1,347) (2,966) Financing activities Issuance of common shares 10b - 9,180 17,081 9,180 Share issue costs 10b - - (1,077) - Proceeds of long term loan 9 17 89 17 5,977 Other long term liabilities - - 69 - Proceeds from convertible loan - - - 1,500 Repayment of convertible bonds - - - (2,340) Proceeds from redemption of convertible bonds - - - 2,340 Cash held in trust release for general use - - - 60 Finance expense - - - 121 Cash provided by financing activities 17 9,269 16,090 16,838 Increase (decrease) in cash and cash equivalents (2,756) 5,244 6,589 4,183 Cash and cash equivalents, beginning of the period 13,932 1,083 4,587 2,144 Cash and cash equivalents, end of the period 11,176 6,327 11,176 6,327 4
For the period ended September 30, 2011, US 000s, unless otherwise stated 1. Reporting Entity Wentworth Resources Limited ( Wentworth or the Company ) is an East African-focused oil and natural gas producer and explorer. Wentworth is actively involved in developing commercial opportunities for identified hydrocarbon resources, including Methanol, Ammonia, Urea, and electricity generation. The electricity generation and transmission and distribution activities are governed by the Electricity Act of the United Republic of Tanzania. Wentworth s corporate head office is located at Dar Es Salaam city in Tanzania, East Africa. The head office address is P.O. Box 203, 2 nd floor Coco plaza, 254 Toure Drive, Oyster Bay, Dar Es Salaam, Tanzania. 2. Basis of preparation Statement of compliance International Financial Reporting Standards ( IFRS ) require entities that adopt IFRS to make an explicit and unreserved statement in their first annual IFRS financial statements of compliance with IFRS. The Company will make this statement when it issues its financial statements for the year ending December 31, 2011. These financial statements have been prepared in accordance with IAS 34, Interim Financial Reporting ( IAS 34 ) as issued by the International Accounting Standards Board ( IASB ) and using the accounting policies the Company expects to adopt in its consolidated financial statements for the year ending December 31, 2011. The Company adopted IFRS in accordance with IFRS 1 First-time Adoption of International Financial Reporting Standards ( IFRS 1 ) with a transition date to IFRS of January 1, 2010. Consequently the comparative figures for 2010 and the Company s statement of financial position as at January 1, 2010 have been restated from accounting principles generally accepted in Canada ( Canadian GAAP ) to comply with IFRS. The preparation of these interim consolidated financial statements resulted in changes to the Company s accounting policies as presented in the consolidated financial statements for the year ended December 31, 2010 prepared under Canadian GAAP. The Company s accounting policies have been applied consistently to all years presented in these interim consolidated financial statements with the exception of certain IFRS 1 exemptions the Company applied in its transition from Canadian GAAP to IFRS as discussed in Note 19. These interim consolidated financial statements included all necessary disclosures required for interim financial statements but do not include all of the necessary disclosures required for annual financial statements. Therefore, these interim consolidated financial statements should be ready in conjunction with the annual audited consolidated financial statements and notes thereto for the year ended December 31, 2010 and the annual disclosures and accounting policies included in the interim consolidated financial statements as at and for the three months ended March 31, 2011. The standards that will be effective or available for voluntary early adoption in the consolidated financial statements for the year ending December 31, 2011 are subject to change and may be affected by additional interpretations. Accordingly the accounting policies will be finalized when the first annual IFRS consolidated financial statements are prepared for the year ending December 31, 2011. The accounting policies the Company expects to adopt in its consolidated financial statements as at and the year ending December 31, 2011 are disclosed in Note 3 of the Company s condensed interim consolidated financial statements as at and for the three months ended March 31, 2011. Basis of measurement These interim consolidated financial statements are presented in US dollars and were prepared on a going concern basis. 5
For the period ended September 30, 2011, US 000s, unless otherwise stated 2. Basis of preparation (continued) Use of estimates and judgments The preparation of interim consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities at the reporting date and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management s best knowledge of the amount, event or actions, actual results ultimately may differ from those estimates. Areas where estimates are significant to the interim consolidated financial statements are disclosed in Note 4. Functional and presentation currency These interim consolidated financial statements are presented in US dollars and the Company s functional currency is Canadian dollars. The functional currencies of all of Wentworth s subsidiaries are US dollars. 3. Recent accounting pronouncements Certain new standards, interpretations, amendments and improvements to existing standards were issued by the IASB or International Financial Reporting Interpretations Committee ( IFRIC ) that are mandatory for accounting periods beginning after January 1, 2013 or later periods. The standards impacted that are applicable to the Company are as follows: i) IAS 12 was amended in December 2010 to remove subjectivity in determining on which basis an entity measures the deferred tax relating to an asset. The amendment introduces a presumption that an entity will assess whether the carrying value of an asset will be recovered through the sale of the asset. The amendment to IAS 12 is effective for reporting periods beginning on or after January 1, 2012. The Company is currently evaluating the impact of this amendment to IAS 12 on its consolidated financial statements. ii) IAS 27 replaced the existing IAS 27 Consolidated and Separate Financial. IAS 27 contains accounting and disclosure requirements for investments in subsidiaries, joint ventures and associates when an entity prepares separate financial statements. IAS 27 requires an entity preparing separate financial statements to account for those investments at cost or in accordance with IFRS 9 Financial Instruments. IAS 27 is effective for annual periods beginning on or after January 1, 2013. Earlier application is permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements. iii) IAS 28 was amended in 2011 which prescribes the accounting for investments in associates and sets out the requirements for the application of the equity method when accounting for investments in associates and joint ventures. IAS 28 is effective for annual periods beginning on or after January 1, 2013. Earlier application is permitted. The Company is currently evaluating the impact of this amendment to IAS 28 on its consolidated financial statements. iv) IFRS 7 was amended in October 2010 to provide additional disclosure on the transfer of financial assets including the possible effects of any residual risks that the transferring entity retains. These amendments are effective as of July 1, 2011. The Company is currently evaluating the impact of these amendments to IFRS 7 on its consolidated financial statements. 6
For the period ended September 30, 2011, US 000s, unless otherwise stated 3. Recent accounting pronouncements (continued) v) IFRS 9 was issued in November 2009 and is the first step to replace current IAS 39, Financial Instruments: Recognition and Measurement. IFRS 9 uses a single approach to determine whether a financial asset is measured at amortized cost or fair value, replacing the multiple rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial instruments in the context of its business model and the contractual cash flow characteristics of the financial assets. The new standard also requires a single impairment method to be used, replacing the multiple impairment methods in IAS 39. IFRS 9 is effective for annual periods beginning on or after January 1, 2013. The Company is currently evaluating the impact of IFRS 9 on its consolidated financial statements. vi) IFRS 10 establishes principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. IFRS 10 supersedes IAS 27 Consolidated and Separate Financial and SIC-12 Consolidation Special Purpose Entities and is effective for annual periods beginning on or after January 1, 2013. Earlier application is permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements. vii) IFRS 11 establishes principles for financial reporting by parties to a joint arrangement. IFRS 11 supersedes current IAS 31 Interests in Joint Ventures and SIC-13 Jointly Controlled Entities - Non- Monetary Contributions by Venturers and is effective for annual periods beginning on or after January 1, 2013. Earlier application is permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements. viii) IFRS 12 applies to entities that have an interest in a subsidiary, a joint arrangement, an associate or an unconsolidated structured entity. IFRS 12 is effective for annual periods beginning on or after January 1, 2013. Earlier application is permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements. ix) IFRS 13 defines fair value, sets out in a single IFRS framework for measuring fair value and requires disclosures about fair value measurements. The IFRS 13 applies to IFRSs that require or permit fair value measurements or disclosures about fair value measurements (and measurements, such as fair value less costs to sell, based on fair value or disclosures about those measurements), except in specified circumstances. IFRS 13 is to be applied for annual periods beginning on or after January 1, 2013. Earlier application is permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements. 4. Critical judgments and accounting estimates The preparation of the interim consolidated financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and contingent liabilities at the date of the interim consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Estimates and judgments are continuously evaluated and are based on management s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual outcomes can differ from these estimates. 7
For the period ended September 30, 2011, US 000s, unless otherwise stated 4. Critical judgments and accounting estimates (continued) The key sources of estimation uncertainty that have a significant risk of causing material adjustment to the amounts recognized in the interim consolidated financial statements are: Assessment of commercial reserves and resources Management is required to assess the Company s resources together with the future expenditures to access those resources, which are utilized in assessing whether any impairment charge is required against producing and developed assets, and the determination of the deferred tax liability. Management is also required to assess the Company s reserves in determining the depletion charge for the period. By their nature, these estimates of discovered and probable crude oil and natural gas reserves and resources, including the estimates of future prices, costs, related future cash flows and the selection of a pre-tax risked discount rate relevant to the asset in question are subject to measurement uncertainty. The Company employs an independent resources specialist who periodically assesses the Company s level of commercial reserves and resouces by reference to data sets including geological, geophysical and engineering data together with reports, presentation and financial information pertaining to the contractual and fiscal terms applicable to the Company s assets. Significant judgment is involved when determining whether there have been any significant changes in the Company s crude oil and natural gas reserves and resources. To the extent that these are not yet commercial, the Company classifies its oil and natural gas as resources. Impairment of non-financial assets Impairment exists when the carrying value of an asset or cash generating unit exceeds its recoverable amount, which is the higher of its fair value less costs to sell and its value in use. The fair value less costs to sell calculation is based on available data from binding sales transactions in an arm s length transaction of similar assets or observable market prices less incremental costs for disposing of the asset. The value in use calculation is based on a discounted cash flow model. The cash flows are derived from the budget for the next five years and do not include restructuring activities that the Company is not yet committed to or significant future investments that will enhance the asset s performance of the cash generating unit being tested. The recoverable amount is most sensitive to the discount rate used for the discounted cash flow model as well as the expected future cash inflows and the growth rate used for extrapolation purposes. Share-based payments The Company measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. Estimating fair value for share-based payment transactions requires determining the most appropriate valuation model, which is dependent on the terms and conditions of the grant. This estimate also requires determining and making assumptions about the most appropriate inputs to the valuation model including the expected life, expected volatility and expected dividend yield of the share option. Warrants and Derivative financial liability Warrants which are denominated in a currency other than the US dollar are initially recognized at the fair value of the derivative financial liability, which is determined using the Black-Scholes option pricing model. Any changes in the fair value of the derivative financial liability at each reporting period are recognized in the statement of comprehensive income (loss).. Estimating the fair value of the derivative financial liability requires determining the most appropriate valuation model, which is dependent on the terms of the warrants. This estimate also requires determining and making assumptions about the most appropriate inputs to the valuation model including the expected life, expected volatility and expected dividend yield. Decommissioning provisions Decommissioning provisions consist of obligations for the retirement of assets that are based, in part, on estimates of future costs to settle the obligation, in addition to estimates of the useful life of the underlying assets, the rate of inflation and the risk-free interest rate. 8
For the period ended September 30, 2011, US 000s, unless otherwise stated 4. Critical judgments and accounting estimates (continued) Useful lives of property and equipment The Company estimates the useful lives of property and equipment based on the period over which the assets are expected to be available for use. The estimated useful lives of property and equipment are reviewed periodically and are updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limits on the use of the relevant assets. In addition, the estimation of the useful lives of property and equipment are based on internal technical evaluation and experience with similar assets. It is possible, however, that future results of operations could be materially affected by changes in the estimates brought about by changes in factors mentioned above. The amounts and timing of recorded expenses for any period would be affected by changes in these factors and circumstances. A reduction in the estimated useful lives of the property and equipment would increase the recorded expenses and decrease the non-current assets. Fair value of financial instruments The estimated fair value of financial assets and liabilities, by their very nature, are subject to measurement uncertainty. Taxes Provisions for taxes are made using the best estimate of the amount expected to be paid based on a qualitative assessment of all available tax pools and tax deductions and other relevant factors. The Company reviews the adequacy of these provisions at the end of the reporting period. However, it is possible that at some future date an additional liability could result from audits by taxing authorities. Where the final outcome of these tax-related matters is different from the amounts that were initially recorded, such differences will affect the tax provisions in the period in which such determination is made. 5. Cash and cash equivalents September 30, 2011 December 31, 2010 January 1, 2010 Cash on deposit at banks and on hand 6,176 4,587 2,144 Term deposits 5,000 - - Restricted cash held in trust - - 3,340 11,176 4,587 5,484 9
For the period ended September 30, 2011, US 000s, unless otherwise stated 6. Long-term receivable On June 30, 2009, the Tanzania Petroleum Development Corporation ( TPDC ) and the Company entered into a Joint Operating Agreement ( JOA ) related to the gas concession in Tanzania. Under the terms of the agreement, TPDC will participate in a 20% share in the Mnazi Bay Development Area production, and will pay the Company for the past costs incurred, from its share of future production. The undiscounted amount receivable from TPDC is 31.5 million. The Company initially determined the fair value of this receivable, given the credit quality and term of the financial instrument to be approximately 20 million. This long term receivable will be accreted over the expected term of the asset (2015), and the accretion is included in interest expense on the statement of comprehensive income (loss) in each period. TPDC receivable As at January 1, 2010 20,016 Accretion 3,335 Amount offset against TPDC receivable (482) Addition (15) Changes in accounting estimates (4,749) As at December 31, 2010 18,105 Accretion 2,318 Amount offset against TPDC receivable (532) Addition 164 As at September 30, 2011 20,055 Current portion included in trade and other receivables (733) Long term portion 19,322 7. Exploration and evaluation assets Exploration and evaluation assets Cost At January 1, 2010 85,868 Transfer to property and equipment (99) Impairment (123) At December 31, 2010 85,646 Additions - At September 30, 2011 85,646 Amortization and impairment losses At January 1, 2010 (67,908) Amortization (321) At December 31, 2010 (68,229) Amortization (129) At September 30, 2011 (68,358) Net book value At January 1, 2010 17,960 At December 31, 2010 17,418 10
For the period ended September 30, 2011, US 000s, unless otherwise stated At September 30, 2011 17,288 8. Property and equipment Natural gas properties Power generation, transmission and distribution facilities Office and other equipment Total Cost At January 1, 2010 88,754 16,639 8,026 113,419 Additions 310 4,575-4,885 Transfer from E&E 99 - - 99 Disposals - (99) (696) (795) At December 31, 2010 89,163 21,115 7,330 117,608 Additions 725 639-1,364 Disposals - (140) (85) (225) At September 30, 2011 89,888 21,614 7,245 118,747 Depreciation and impairment losses At January 1, 2010 (69,774) (2,414) (4,529) (76,717) Depreciation charge for the period (429) (1,143) (2,072) (3,644) Impairment - (691) - (691) Disposals - 25 555 580 At December 31, 2010 (70,203) (4,223) (6,046) (80,472) Depreciation charge for the period (301) (979) (213) (1,493) Disposals - 66 70 136 At September 30, 2011 (70,504) (5,136) (6,189) (81,829) Net book value January 1, 2010 18,980 14,225 3,497 36,702 December 31, 2010 18,960 16,892 1,283 37,135 September 30, 2011 19,384 16,467 1,067 36,918 11
For the period ended September 30, 2011, US 000s, unless otherwise stated 9. Long-term loan Secured bank loan Balance, end of period Currency Year of maturity Description September 30,2011 Tsh September 30,2011 December 31, 2010 January 1, 2010 (a) TZS 2017 Principal 9,996,774 7,357 7,340 1,273 Accrued 1,450,793 948 511 - interest FX valuation - (1,315) (424) - Sub total 11,447,567 6,990 7,427 1,273 Current portion (1,430,946) (894) - - 10,016,621 6,096 7,427 1,273 (a) Secured bank loan On December 24, 2009, the Tanzania Investment Bank Limited ( TIB ) extended a long term loan of a maximum of 10 billion Tanzanian Shillings (approximately 7 million) to Wentworth Gas Limited (formerly AG&P Gas Limited), a subsidiary of the Company for its operating requirements and the repayment of an intercompany debt (2.4 million) to its parent company. As at December 31, 2010 the loan was fully drawn. The term of the facility is eight years, which includes a two year grace period ending January 4, 2012 in which no interest or principal will be payable. Interest charges during the grace period will be added to the principal at the end of the grace period, whereas interest following the grace period will be paid quarterly at a fixed rate of 9.18% per annum. Principal repayment will be required to be made in 24 equal quarterly installments following the grace period. Security for the long term loan is a debenture creating a first charge over all issued share capital of Wentworth Gas Limited, supported by a pledge to assign to TIB the Company s exploration/concession rights over the Mnazi Bay petroleum reserves and wells in case of default. 12
For the period ended September 30, 2011, US 000s, unless otherwise stated 10. Share capital and reserves A) Authorised Unlimited number of common voting shares without nominal or par value Unlimited number of non-voting preferred shares to be issued in series, without nominal or par value B) Issued common shares Number of Shares Artumas At January 1, 2010 31,764,804 335,421 Shares issued for cash 1,571,347 764 As at July 25, 2010 33,336,151 336,185 Wentworth (Business combination) Shares issued for cash 28,383,789 8,061 As at December 31, 2010 61,719,940 344,246 Shares issued for cash (i) 15,000,000 13,527 Share issue costs (i) - (846) Shares issued for cash (ii) 3,750,000 3,554 Share issue costs (ii) - (231) As at September 30, 2011 80,469,940 360,250 i) On February 28, 2011, the Company completed the financing with investors for a private placement issuance of 15,000,000 new common shares, for cash consideration of NOK 5.15 (approximately 0.90 per share) for total gross proceeds of NOK 77,250 (approximately 13,527). Share issue costs were 846. ii) On April 26, 2011, the Company completed the financing with investors for a private placement issuance of 3,750,000 new common shares, for cash consideration of NOK 5.445 (approximately 0.948 per share) for total gross proceeds of NOK 20,419 (approximately 3,554). Share issue costs were 231. C) Non-controlling interest Netherlands Development Financial Institution s ( FMO s ) non-controlling interest in a subsidiary holding the Company s Tanzanian assets was 12.67%, as at September 30, 2011 (December 31, 2010 12.67%). D) Contributed surplus The contributed surplus reserve is used to recognise the fair value of share options granted to employees, including key management personnel, as part of their remuneration. When options are subsequently exercised, the fair value of such options in contributed surplus is credited to share capital. Refer to Note 11 for further details of these plans. Contributed surplus As at January 1, 2010 9,037 Warrants expired 7,522 Share-based compensation (763) Share-based compensation expense 150 Warrants issued to officer and director 12 As at December 31, 2010 15,958 Share-based compensation expense 857 As at September 30, 2011 16,815 13
For the period ended September 30, 2011, US 000s, unless otherwise stated 11. Share-based payments A summary of the share option transactions for the periods ended September 30, 2011 and 2010 are as follows: Number of options 2011 2010 Weighted Number of average options exercise price Weighted average exercise price Outstanding at January 1, 4,750,000 0.60 8,805 267 Issued 1,950,000 1.03 - - Forfeited/expired (500,000) - (2,728) 197 Outstanding at September 30, 6,200,000 0.73 6,077 250 The following table summarizes stock options outstanding and exercisable under the Plan: September 30, 2011 December 31, 2010 January 1, 2010 Exercise prices Number outstanding Expiry date Number outstanding Expiry date Number outstanding Expiry date 29.00 - - - - 3,750 January 23, 2019 175.00 - - - - 700 April 15, 2014 225.00 - - - - 750 Jan 1, 2015 469.00 - - - - 1,302 March 31, 2018 500.00 - - - - 1,978 Dec 22, 2016 1,069.00 - - - - 325 March, 31 2017 0.54 1,000,000 October 1, 2020 1,000,000 October 1, 2020 - - 0.62 3,250,000 October 4, 2020 3,750,000 October 4, 2020 - - 0.99 1,600,000 April 6, 2021 - - - - 0.85 350,000 July 6, 2021 - - - - 6,200,000 4,750,000 8,805 The exercise prices for the stock options are in NOK and as a result the US dollar equivalent amounts shown above have been updated at September 30, 2011 for any changes in exchange rates. The Company accounts for its stock-based compensation at fair value. During the periods for the three and nine months ended September 30, 2011, 282 and 857 in stock-based compensation cost was incurred as a result of ongoing vesting of previously awarded stock options and was recognized in comprehensive loss with an offsetting amount charged to contributed surplus (2010-73 and 61). The estimated weighted average fair value of share options granted during the period was 0.73 (2010-0.291) per unit option. The fair value of each share option grant was estimated on the date of the grant, as determined by using the Black-Scholes option-pricing model with the following assumptions: 2011 2010 Expected interest rate (%) 3.4 3.28 Expected volatility (%) 73 74 Expected life (in years) 3 3 Expected forfeiture rate (%) 1 1 Expected dividends () nil nil 14
For the period ended September 30, 2011, US 000s, unless otherwise stated 12. Derivative financial liability A summary of the warrant transactions for the periods ended September 30, 2011 and 2010 are as follows: 2011 2010 Weighted Weighted Number of Number of average average exercise warrants warrants exercise price price Outstanding at January 1, 14,191,888 0.67 5,600,000 0.65 Issued - - 14,191,888 0.74 Expired - - (5,600,000) - Outstanding at September 30, 2011 14,191,888 0.74 14,191,888 0.67 The following table summarizes warrants outstanding and exercisable: September 30, 2011 December 31, 2010 January 1, 2010 Exercise prices Number outstanding Expiry date Number outstanding Expiry date Number outstanding Expiry date 0.65 - - - - 5,600,000 October 1,2010 0.74 14,191,888 July 25, 2012 14,191,888 July 25, 2012 - - 14,191,888 14,191,888 5,600,000 The exercise prices for the warrant are in NOK and as a result the US dollar equivalent exercise prices above have been updated at September 30, 2011 for any changes in exchange rates. The Company accounts for its warrants at fair value, as at September 30, 2011 the fair value was 988 (2010-5,008). The fair value of each warrant was estimated on the date of issuance, as determined by using the Black- Scholes-pricing model with the following assumptions: 2011 2010 Expected interest rate (%) 1.79 2.35 Expected volatility (%) 73 74 Expected life (in years) 2 2 Expected dividends () nil nil 15
For the period ended September 30, 2011, US 000s, unless otherwise stated 13. Revenue Three months ended September 30 Nine months ended September 30 2011 2010 2011 2010 Natural gas sales 174 105 510 310 Power sales 1,787 1,021 5,203 3,088 Other - 7 53 116 Total revenue 1,961 1,133 5,766 3,514 14. Capital management Wentworth management considers its capital structure to consist of cash and cash equivalents, longterm loan and shareholders equity. Management continues to actively pursue possible sources of funding to satisfy longer term liquidity requirements including the completion of the financing of the Mtwara Energy Project and accessing capital and debt markets. Management reviews its capital management approach on an ongoing basis. There were no material changes to this approach during the period ended September 30, 2011. The Company is not subject to externally imposed capital requirements. Total capitalization As at, September 30, 2011 December 31, 2010 January 1, 2010 Shareholders equity 68,665 52,972 67,177 Long-term loan 6,990 7,427 1,273 Cash and cash equivalents (11,176) (4,587) (5,484) 64,479 55,812 62,966 16
For the period ended September 30, 2011, US 000s, unless otherwise stated 15. Financial instruments and risk management Set out below is a comparison, by category, of the carrying amounts and fair values of all of the Company financial instruments that are carried in the financial statements and how the fair value of financial instruments measured. Fair values Fair value represents the price at which a financial instrument could be exchanged in an orderly market, in an arm s length transaction between knowledgeable and willing parties who are under no compulsion to act. The Company classifies the fair value of the financial instruments according to the following hierarchy based on the amount of observable inputs used to value the instrument. The following table provides an analysis of the financial instruments that are measured subsequent to initial recognition at fair value, grouped into Levels 1 to 3 based on the degree to which the fair value is observable. Level 1 fair value measurements are those derived from quoted prices (unadjusted) in the active market for identical assets or liabilities. Level 2 fair value measurements are those derived from inputs other than quoted prices that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (derived from prices) Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs). Financial Instrument Classification Note September 30, 2011 December 31, 2010 January 1, 2010 Carrying Carrying Carrying Fair value Fair Value Fair Value Value Value Value FVTPL: Cash and cash equivalents (a) 11,176 11,176 4,587 4,587 2,144 2,144 Cash held in trust (a) - - - - 3,340 3,340 Derivative financial liability (c) 988 988 5,008 5,008 - - Loans and receivables: Trade and other receivables Long-term receivables (b) 5,689 5,689 6,043 6,043 4,113 4,113 (c) 19,322 19,322 17,399 17,399 19,566 19,566 Other financial liabilities: Trade and other payables (b) 5,157 5,157 8,353 8,353 6,289 6,289 Convertible bonds (b) - - - - 3,240 3,240 Long-term loan (b) 6,990 6,990 7,427 7,427 1,273 1,273 (a) Fair values are determined from transaction values which reflect quoted active market prices. Fair values of these financial instruments are based on Level 1 measurements. (b) Carrying value is measured at amortized cost using the effective interest rate method. The carrying values approximate fair values due to the short term nature of the instrument. (c) Fair values are determined through valuation techniques which reflect inputs that are not based on observable market data. Fair values of these financial instruments are based on Level 3 measurements. 17
For the period ended September 30, 2011, US 000s, unless otherwise stated 15. Financial instruments and risk management (continued) The Company s activities expose it to a variety of financial risks: credit risk, liquidity risk and market risk (currency fluctuations, interest rates and commodity prices) The Company s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Company s financial performance. Credit Risk Credit risk is the risk that the financial assets from a specific counterparty will be lost if a counterparty defaults on its obligations. Wentworth maximum credit risk is equal to the carrying value of its trade, other and long term receivables and its credit risk with respect to current accounts receivable is limited due to the high proportion of amounts due from government departments as tax input credits for Goods and Services Tax (GST) in Canada and Value Added Tax (VAT) in Tanzania and Mozambique. No material amounts are past due and no material allowances have been made. The credit risk with respect to the long-term receivable is limited as it is due from the Tanzania Petroleum Development Corporation ( TPDC ) and is to be paid from TPDC s share of Tanzanian gas production. All of the operating revenues of the Company are paid by Tanzania Electric Supply Company Limited ( TANESCO ) under an Interim Purchase Power Agreement. Any failure of TANESCO to fulfill its obligations under the agreement would have an adverse effect on the Company s business, financial condition and results of its operations. Substantially all of the Company s cash and cash equivalents are held at one recognized international financial institution in Canada. Cash held in trust was held in a trust company in the United States of America. As a result, the Company was exposed to concentration of credit risk associated with these institutions. The Company manages its risk on investments by limiting them to guaranteed investment certificates purchased at this financial institution and investing for short periods of time. The maximum exposure to credit risk as at: September 30, 2011 December 31, 2010 January 1, 2010 Trade and other receivables 5,689 6,043 4,113 Long-term receivable 19,322 17,399 19,556 Cash held in trust - - 3,340 Cash and cash equivalents 11,176 4,587 2,144 36,187 28,029 29,153 18
For the period ended September 30, 2011, US 000s, unless otherwise stated 15. Financial instruments and risk management (continued) Liquidity risk Liquidity risk is the risk that the Company will not have sufficient funds to meet its liabilities. Other than routine trade and other payables, incurred in the normal course of business, the Company also has a long term loan. The table below summarizes the maturity profile of the Corporation s financial liabilities at September 30, 2011, December 31, 2010 and January 1, 2010 based on contractual undiscounted payments. Less than 1 year 1 to 2 years 2 to 5 years > 5 years Total As at September 30, 2011 Trade and other payables 5,157 - - - 5,157 Long-term loan 894 1,192 4,904-6,990 Derivative financial liability - 988 - - 988 6,051 2,180 4,904-13,135 As at December 31, 2010 Trade and other payables 8,353 - - - 8,353 Long-term loan - 2,068 5,359-7,427 Derivative financial liability - 5,008 - - 5,008 6,867 8,562 5,359-20,788 As at January 1, 2010 Trade and other payables 6,289 - - - 6,289 Long-term loan - 1,273 - - 1,273 6,289 1,273 - - 7,562 Market risk Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk is comprised of foreign currency risk, interest rate risk and other price risk, for example, commodity price risk. The objective of market risk management is to manage and control market price exposures within acceptable limits, while maximizing returns. Commodity price risk Commodity price risk is the risk that the Company suffers financial loss as a result of fluctuations in crude oil or natural gas prices. The Company s exposure to commodity price risk is not significant as it has not yet begun large-scale commercial production in the gas segment. Interest rate risk Interest rate risk is the risk that future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company s debt in the form of the long term loan, is at fixed rates, and therefore there is no interest rate risk related to these instruments. The Company s objective is to minimize its interest rate risk by investing for short periods (less than 1 year) and only in term deposits. The risk related to interest rates is not material. 19
For the period ended September 30, 2011, US 000s, unless otherwise stated 15. Financial instruments and risk management (continued) Foreign exchange risk Foreign exchange rate risk is the risk that the Company suffers financial loss as a result of changes in the value of an asset or liability or in the value of future cash flows due to movements in foreign currency exchange rates. Wentworth operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the Tanzanian shilling and Canadian dollar against its functional currency of its operating entities, the US dollar. The Company s objective is to minimize its risk by borrowing funds in US dollars and revenues are paid (or indexed) to the US dollar. In addition, it holds substantially all of its cash and cash equivalents in US dollars, and converts to other currencies only when cash requirements demand such conversion. The Company does not have any exposure to highly inflationary foreign currencies. As at September 30, 2011 and December 31, 2010, the following balances are denominated in foreign currency: United States dollar Canadian dollar Tanzanian Shilling Other currency September 30, 2011 Cash and cash equivalents 11,044 60 56 16 Trade and other receivables 5,277 35 760 - Trade and other payables 4,455 156 536 10 Derivative financial liability 988 - - - Provisions 1,285 1,863 - - Long term loan - - 6,990 - December 31, 2010 Cash and cash equivalents 4,478 24 33 52 Trade and other receivables 2,531-1,672 1,840 Trade and other payables 3,564 903 1,732 2,154 Derivative financial liability - - - 5,008 Provisions 105 3,574 - - Long term loan - - 7,427 - January 1, 2010 Cash and cash equivalents 1,753 372-19 Cash held in trust 3,340 - - - Trade and other receivables 2,474 59 294 1,286 Trade and other payables 3,810 1,256 79 1,144 Convertible bonds 3,240 - - - Provisions 93 - - - Long term loan - - 1,273 - A 10% increase/decrease of the Canadian dollar against the U.S dollar would result in a change in net loss before tax and comprehensive loss of approximately 56 In addition, a 10% increase/decrease of the Tanzanian shilling against the U.S dollar would result in a change in net income (loss) before tax and comprehensive income (loss) of approximately 137. 20
For the period ended September 30, 2011, US 000s, unless otherwise stated 16. Related party transaction Balances and transactions between Wentworth and its subsidiaries, which are related parties of the Wentworth, have been eliminated on consolidation and are not disclosed in this note. Details of transactions between the Group and other related parties are disclosed below. Transactions with related parties (a) During the period ended September 30, 2011, legal services amounting to 357 (2010-97) were provided by a law firm in which one of the director of the Wentworth Jersey Companies is a partner. The transactions have been recorded at the fair value. (b) During the period ended September 30, 2011, legal services amounting to nil (2010-735) were provided by a law firm in which one of the former officers of the Company is a partner. The transactions have been recorded at the fair value. Compensation of key management personnel The remuneration of directors and other members of key management personnel during the three and nine months period were as follows: Three months ending September 30, 2011 Nine months ending September 30, 2010 September 30, 2011 September 30, 2010 Short-term employee benefits 312 199 937 470 17. Income (loss) per share Basic and diluted loss per share The calculation of basic income (loss) per share for the three months ending September 30, 2011 was based on income of 1,893 (2010: 3,104) and for the nine months ending September 30, 2011 was based on loss of 1,168 (2010: 14,747). Stock options were dilutive and other equity instruments such as warrants, and convertible bonds were anti-dilutive for both periods. Weighted average number of shares (thousands) Per share amount For period ending September 30, 2011 Three months period Basic 80,470 0.02 Diluted 80,470 0.02 Nine months period Basic 76,528 (0.02) Diluted 76,528 (0.02) For period ending September 30, 2010 Three months period Basic 53,609 (0.06) Diluted 53,609 (0.06) Nine months period Basic 45,233 (0.33) Diluted 45,233 (0.33) 21
For the period ended September 30, 2011, US 000s, unless otherwise stated 18. Segmented information The Company conducts its business through three major operating business segments. Gas operations include the exploration, development, production and transportation of natural gas and other hydrocarbons, and these activities are carried out in Tanzania and Mozambique. The Power segment includes the production and distribution of electricity in Tanzania. Inter-segment transfers of products, which are accounted for at market value, are eliminated on consolidation. Shared Services includes investment income, interest expense, financing related expenses and general corporate expenditures. For the nine months ended September 30, 2011 Tanzania Gas Operations Tanzania Power Operations Mozambique Gas Operations Shared Services Consolidated Revenue Segmented sales to customers 562 5,204 - - 5,766 Expenses Gas purchase cost - 2,504 - - 2,504 Operating expenses 175 866 94-1,135 Depreciation and depletion 69 969 108 487 1,633 General and administrative expenses 2,615 685 175 3,678 7,153 Other (income) expenses (5,570) (96) 275 (177) (5,568) Total segmented expenses (2,711) 4,928 652 3,988 6,857 Income (loss) before noncontrolling interest 3,273 276 (652) (3,988) (1,091) Non-controlling interest (77) Net loss (1,168) Long-term receivable 19,322 - - - 19,322 Property and equipment additions 725 639 - - 1,364 Exploration and evaluation assets (NBV) 11,444-5,844-17,288 Property and equipment (NBV) 19,383 16,476-1,059 36,918 Included in other (income) expenses is 4,020 on the gain on derivative financial liability 22
For the period ended September 30, 2011, US 000s, unless otherwise stated 18. Segmented information (continued) For the three months ended September 30, 2011 Tanzania Gas Operations Tanzania Power Operations Mozambique Gas Operations Shared Services Consolidated Revenue Segmented sales to customers 175 1,786 - - 1,961 Expenses Gas purchase cost - 854 - - 854 Operating expenses 17 281 78-376 Depreciation and depletion 39 324 33 126 522 General and administrative expenses 963 174 42 1,357 2,536 Other (income) expenses (3,360) (115) 1 (439) (3,913) Total segmented expenses (2,341) 1,518 154 1,044 375 Income (loss) before noncontrolling interest 2,516 268 (154) (1,044) 1,586 Non-controlling interest 307 Net loss 1,893 Property and equipment additions/(write-off) 89 78 (62) - 105 Included in other (income) expenses is 3,563 on the gain on derivative financial liability 23
For the period ended September 30, 2011, US 000s, unless otherwise stated 18. Segmented information (continued) For the nine months ended September 30, 2010 Tanzania Gas Operations Tanzania Power Operations Mozambique Gas Operations Shared Services Consolidated Revenue Segmented sales to customers 426 3,088 - - 3,514 Inter-segment sales - - - - - 426 3,088 - - 3,514 Expenses Gas purchase cost - 1,528 - - 1,528 Operating expenses 555 1,188 88-1,831 Depreciation and depletion 103 807 257 1,900 3,067 General and administrative expenses 1,934 1,309 (89) 10,550 13,704 Other (income) expenses (2,562) 701 (2) 257 (1,606) Inter-segment expenses 6 3 - (9) - Total segmented expenses 36 5,536 254 12,698 18,524 Income (loss) before noncontrolling interest 390 (2,448) (254) (12,698) (15,010) Non-controlling interest 263 Net loss (14,747) Long-term receivable 22,257 - - - 22,257 Property and equipment additions 7 3,845 (123) (696) 3,033 24