PetroKazakhstan Inc. - Fourth Quarter and Year 2004 Financial
Results CALGARY, March 3 /PRNewswire-FirstCall/ -- PetroKazakhstan
Inc. ("PetroKazakhstan" or the "Company") announces its financial
results for the three months and year ended December 31, 2004. All
amounts are expressed in U.S. dollars unless otherwise indicated.
HIGHLIGHTS: - Record financial results; earnings up 58% over 2003
and cash flow up 40% over 2003 - Significant increases in oil
reserves attributed to exploration success and improved performance
in the Kumkol and Akshabulak fields - Reserve recognition of
substantial Natural Gas Liquids and natural gas - Exploration
success in Kyzylkiya and Aryskum - Increase of regular quarterly
dividend to C$0.20 per quarter - Shares begin trading on the
Kazakhstan Stock Exchange - Build up of oil and products
inventories decreases fourth quarter income FINANCIAL HIGHLIGHTS:
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(in thousands of US$ except per share amounts Three Months ended
Year ended and shares outstanding) December 31 December 31
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2004 2003 2004 2003
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Gross Revenue 405,131 310,648 1,642,427 1,117,324
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Net income 114,937 88,808 500,668 316,940
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Per share (basic) 1.51 1.14 6.40 4.06
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Per share (diluted) 1.49 1.09 6.28 3.90
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Cash flow 118,850 110,339 560,491 399,975
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Per share (basic) 1.56 1.42 7.16 5.12
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Per share (diluted) 1.55 1.36 7.03 4.92
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Weight Average Shares Outstanding
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Basic 76,089,557 77,827,328 78,285,025 78,149,904
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Diluted 76,922,009 81,110,704 79,708,905 81,292,206
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Shares Outstanding at End of Period 76,223,130 77,920,226
76,223,130 77,920,226
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The Company announces fourth-quarter 2004 net income of $114.9
million ($1.51 per share) compared with $88.8 million ($1.14 per
share) for the same period in 2003. Cash flow for the fourth
quarter of 2004 was $118.9 million ($1.56 per share) versus $110.3
million ($1.42 per share) for the same period in 2003. For the year
ended December 31, 2004, net income was $500.7 million ($6.40 per
share) compared with net income of $316.9 million ($4.06 per share)
in 2003. Cash flow for the year was $560.5 million ($7.16 per
share) compared to $400.0 million ($5.12 per share) for 2003. The
Company generated both record net income and cash flow in 2004.
Improvements in the Company's transportation costs and higher
prices contributed to these record results. Fourth quarter earnings
were affected by a build up of crude oil inventory and in transit
volumes of 1.7 million barrels and an increase in refined product
volumes of 630 thousand barrels as compared with inventory and in
transit volumes at September 30, 2004. Our refinery turnaround,
which began in the middle of October, was completed successfully,
but with a build up of crude inventories. We also moved the sales
point for crude oil on one of our export routes closer to the final
destination. This build up of inventories led to a deferral of
earnings and reduced our net income for the fourth quarter by an
estimated $32.0 million compared to the third quarter of 2004, an
impact of $0.42 per share. There was also a build up of crude oil
in transit and inventory levels when comparing with December 31,
2003. There was an increase of 1.08 million barrels with an
estimated reduction in net income of $14.5 million. SHARE
REPURCHASES The Company's substantial issuer bid share tender,
which ended on July 19, 2004, resulted in the repurchase and
cancellation of 3,999,975 shares at C$40.00 per share. The
Company's Normal Course Issuer Bid program was renewed on August
13, 2004 and will terminate on August 12, 2005. Under the terms of
this share repurchase program, the Company is able to repurchase up
to 7,091,429 Class A common shares through the facilities of the
TSX. In the third quarter of 2004, the Company repurchased and
cancelled 1,257,500 shares at an average price of C$40.00. No
repurchases were made in the fourth quarter of 2004. At the end of
the fourth quarter, the Company had 76,223,130 common shares and
2,086,656 options and convertible securities outstanding.
Additional repurchases and cancellations of 459,100 shares at an
average price of C$42.62 have been executed in January 2005.
LISTING ON THE KAZAKHSTAN STOCK EXCHANGE On December 27, 2004
PetroKazakhstan's common shares began trading on the Kazakhstan
Stock Exchange, being the first foreign company to be granted
approval for listing. The Company believes that this will create an
excellent opportunity for Kazakh investors to participate in the
growth and success of its business operations in Kazakhstan.
UPSTREAM OPERATIONS REVIEW -------------------------- PRODUCTION As
announced, for the fourth quarter 2004, production averaged 152,510
barrels of oil per day ("bopd") and for the year as a whole
production averaged 151,102 bopd. Mechanical pump failures on some
high rate wells as well as allocation of capacity at the Kumkol
Central Processing Facility used by both PetroKazakhstan and the
neighbouring field operator, Turgai Petroleum, and the delay in
drilling of a number of Aryskum development wells negatively
affected overall production. As these problems either have or are
being addressed, and as the development program for the Kyzylkiya,
Aryskum and Maibulak ("KAM"), Akshabulak and Kumkol North fields
progresses, PetroKazakhstan's 2005 annual production target is
170,000 bopd. However, the company recognizes that this target can
only be achieved with the timely receipt of various regulatory
approvals and in the absence of unforeseen marketing constraints.
EXPLORATION AND APPRAISAL During 2004, the Company's successful
exploration and appraisal program resulted in the addition of some
25 mmbbls in the proved and probable category. The extension of the
Kyzylkiya field to the north and into the new Kolzhan license is
now an integral part of the field development as new wells will be
brought on to production quickly. Similarly, the drilling of wells
to locations below the Aryskum gas cap, resulted in the discovery
of new reservoirs in high quality channels sands. Production rates
of up to 1,600 bopd confirm the similarity to sands in the
Akshabulak field. This opens up a whole new concept for development
of channel sands in this geological trend in our licenses, which
will be pursued with further seismic and appraisal wells in 2005.
As in previous years, the Akshabulak field yields further reserves
additions as channel sands and extensions to the existing
reservoirs are found from successful appraisal drilling. In 2005,
the Company will drill at least 17 E&A wells, acquire a minimum
of 400 kilometres ("kms") and 300 square kms of 2D and 3D seismic
respectively. The Company now has an exploration prospect inventory
that includes 94 independent structures and over 1.1 billion
barrels of unrisked reserves. RESERVES On February 23, 2005,
PetroKazakhstan reported significant additions to its oil and gas
reserves in 2004. As of January 1, 2005, Proved and Probable
reserves totaled 549.8 million barrels oil equivalent ("mmboe"),
compared to last year's total of 495.4 mmboe. This year's total
comprises 502.9 million barrels of oil ("mmbo"), 32.1 mmboe of
Natural Gas Liquids ("NGLs") and 88.4 billion cubic feet ("bcf") of
natural gas representing a replacement of production of 197%. Of
the 549.8 mmboe reported, 71% (or 392.0 mmboe) is proven and 29%
(or 157.8 mmboe) is probable. The proven reserves are further
broken down into 229.7 mmboe of proved producing and 162.3 mmboe of
proved undeveloped. Oil reserves have increased from 490.0 mmbo to
502.9 mmbo, replacing production by 123%. Similarly, total oil and
NGLs reserves have increased from 490.0 mmboe to 535.0 mmboe,
replacing production by 180%. NGLs and gas reserves additions have
been a result of PetroKazakhstan programs for the full utilization
of its gas resources: extraction of Liquefied Petroleum Gas ("LPG")
at plants in the Akshabulak and KAM fields, efficient use of
produced gas at the Kumkol Power Plant and conservation of dry gas
by re-injection into reservoirs for future extraction and sale.
These reserve additions and the low associated capital cost
translate into finding and development costs that are extremely low
at $1.08/bbl and $1.53/bbl for the one and five year periods,
respectively. Finally, the independent reserves evaluator,
McDaniels and Associates Consulting Ltd, has estimated that the
Company's proved, probable and possible reserves are in excess of
800 mmboe. DOWNSTREAM MARKETING, TRANSPORTATION AND REFINING
------------------------------------------------- CRUDE OIL PRICES
AND TRADING Throughout 2004 the international crude oil markets
remained nervous about the lead up to the elections in Iraq,
production interruptions, and the level of US inventories. At the
same time strong demand from China and transportation capacity
limits in Russia added further upward pressure to an already upward
market. As a consequence of these issues, international crude oil
prices remained at extremely high levels with an enormous level of
volatility. The highest recorded daily mean for Brent dated in 2004
was $52.03/bbl with a low of $29.13/bbl producing a price spread
over the year of $22.90/bbl. In response to the supply concerns
OPEC increased their output of heavier sour crudes. While this
addressed the overall supply demand balance it caused a distortion
of the heavy sour/light sweet differentials. Crude grades such as
Urals saw their discount against Brent rise from around $1.60/bbl
at the beginning of 2004 to a high of $7.50/bbl by October 2004.
This generated a strong incentive for European refineries to buy
the cheaper heavier grades and consequently the Mediterranean
market became long on sweet crude and prices for sweet crudes began
to slide against Brent in November 2004. Grades like CPC Blend and
Siberian Light faired worst recording a discount to Brent of up to
$4.50/bbl. While Kumkol performed better, the premium against Brent
which typically was between $0.50 to $0.80/bbl slipped to a
discount of between $0.10 and $2.00/bbl during the last 6 weeks of
2004. Kumkol closed the year at a discount to Brent of $0.12/bbl.
DIFFERENTIALS Our export netback differential to Brent constitutes
our largest single expenditure and the management of this cost is
one of our primary objectives. On a yearly basis, our average 2004
differential was $12.62/bbl, $1.49/bbl lower than the $14.11/bbl
achieved in 2003. This was the result of the elimination of FCA
contracts, the higher utilization of cheaper routes and our KAM
pipeline and Dzhusaly terminal. However, the fourth quarter of 2004
saw a deterioration of the differential (to $13.83) reflecting the
changes in the crude oil markets above and the seasonal impact of
night time shipping restrictions in the Bosphorous Straits,
increased demurrage costs and shipping rates. This situation is
expected to continue for the first quarter of 2005. On a go forward
basis, the Company anticipates the average differential to return
to the $12.00/bbl range. New pipeline infrastructure currently
being built in or near Kazakhstan, namely the Baku-Tbilisi-Ceyhan
("BTC") pipeline to the Mediterranean and the pipeline from Atasu
to Western China expected to be operational by mid-2006 are
anticipated to have a positive impact on differentials. REFINING
AND REFINED PRODUCT SALES ---------------------------------- The
ongoing continuous improvement program at our Shymkent refinery
continues to yield significant value benefits. By measuring the
change in product yield value on a fixed crude and product price
basis (thus eliminating the variations of market prices) we obtain
indications of a steady trend of improvements over the last two
years which have generated efficiencies in excess of $2.00/bbl.
This trend has shown an on going improvement as well as a
significant reduction in volatility. By the second quarter of 2004
the Vacuum Distillation Unit ("VDU") was operating at maximum
capacity and regular sales were being made through the Baltic port
of Tallinn. During 2005 we expect to be able to increase the yield
and to develop additional outlets for our Vacuum Gasoil ("VGO").
Refinery unit costs showed an increase from $0.58/bbl in 2003 to
$0.80/bbl which is line with the equivalent figures in 2002. The
primary reasons for the increase was lower throughput reflecting
partially the maintenance turnaround in 2004 and the additional
operating costs associated with the start up of the VDU. DIVIDEND
POLICY --------------- PetroKazakhstan introduced a regular
quarterly dividend policy on March 4, 2004. The initial dividend
was for C$0.15 per share per quarter. In the year 2004, a total
amount of C$0.45 per share was paid. On December 13, 2004, the
Company's Board of Directors approved an increase in its regular
quarterly dividend for 2005. The first 2005 quarterly dividend was
increased by 33% to C$0.20 per share per quarter and was paid on
February 3, 2005. The second 2005 regular quarterly dividend has
been declared at C$0.20 per share to shareholders of record on
April 15, 2005 and will be paid on May 2, 2005. The Company
anticipates that its regular quarterly dividend will continue to be
reviewed quarterly. ANNUAL GENERAL MEETING ----------------------
PetroKazakhstan advises that the Annual General Meeting of
Shareholders will be held at 11:00 am Eastern (9:00 am Mountain) on
Tuesday, May 3, 2005 at the Albany Club of Toronto, 91 King Street
East, Toronto, Ontario. Only shareholders of record on March 16,
2005 will be entitled to vote. MANAGEMENT DISCUSSION AND ANALYSIS
("MD&A") ------------------------------------------- A full
MD&A of the Fourth Quarter of 2004 is available on the
Company's website and can also be obtained on application from the
Company. PetroKazakhstan is a vertically integrated, international
energy company, celebrating its eighth year of operations in the
Republic of Kazakhstan. It is engaged in the acquisition,
exploration, development and production of oil and gas, refining of
oil and the sale of oil and refined products. PetroKazakhstan
shares trade in the United States on the New York Stock Exchange,
in Canada on The Toronto Stock Exchange, in the United Kingdom on
the London Stock Exchange and in Germany on the Frankfurt Exchange
under the symbol PKZ. Its shares also trade in Kazakhstan on the
Kazakhstan Stock Exchange under the symbol CA_PKZ. The Company's
website can be accessed at http://www.petrokazakhstan.com/. The
Toronto Stock Exchange has neither approved nor disapproved the
information contained herein. This news release contains statements
that constitute forward-looking statements within the meaning of
the U.S. Private Securities Litigation Reform Act of 1995.
Forward-looking statements are not guarantees of future performance
and involve risks and uncertainties, and actual results may differ
materially from those in the forward-looking statements as a result
of various factors. You are referred to our Annual Report on Form
40-F and our other filings with the U.S. Securities and Exchange
Commission and the Canadian securities commissions for a discussion
of the various factors that may affect our future performance and
other important risk factors concerning us and our operations.
INTERIM CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT PER SHARE
AMOUNTS) UNAUDITED
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Three Months Ended Years Ended December 31 December 31 2004 2003
2004 2003 (Restated - (Restated - see Note 2) see Note 2) REVENUE
Crude oil 257,640 180,754 992,880 621,126 Refined products 143,931
121,557 639,405 481,326 Service fees 2,318 7,341 6,484 11,532
Interest income 1,242 996 3,658 3,340 ----------- -----------
----------- ----------- 405,131 310,648 1,642,427 1,117,324
----------- ----------- ----------- ----------- EXPENSES Production
18,831 15,555 89,339 65,516 Royalties and taxes 29,231 28,146
126,444 82,295 Transportation 83,938 53,396 271,809 224,987
Refining 6,429 4,862 21,646 17,760 Crude oil and refined product
purchases 18,892 14,066 111,339 56,460 Selling 9,866 8,196 37,934
28,529 General and administrative 16,422 17,085 60,915 54,279
Interest and financing costs 4,566 6,818 24,330 35,579 Depletion,
depreciation and accretion 25,456 23,165 105,520 82,352 Foreign
exchange gain (3,558) (1,757) (9,919) (5,333) -----------
----------- ----------- ----------- 210,073 169,532 839,357 642,424
----------- ----------- ----------- ----------- INCOME BEFORE
INCOME TAXES 195,058 141,116 803,070 474,900 -----------
----------- ----------- ----------- INCOME TAXES (Note 12) Current
provision 101,846 56,236 356,249 165,379 Future income tax recovery
(21,793) (4,444) (55,166) (9,757) ----------- -----------
----------- ----------- 80,053 51,792 301,083 155,622 -----------
----------- ----------- ----------- NET INCOME BEFORE
NON-CONTROLLING INTEREST 115,005 89,324 501,987 319,278
NON-CONTROLLING INTEREST 68 516 1,319 2,338 ----------- -----------
----------- ----------- NET INCOME 114,937 88,808 500,668 316,940
RETAINED EARNINGS, BEGINNING OF PERIOD 591,286 290,019 378,819
73,143 Substantial issuer bid (Note 11) - - (111,335) - Normal
course issuer bid (Note 11) - - (35,528) (11,232) Common share
dividends (12,878) - (39,253) - Preferred share dividends (9) (8)
(35) (32) ----------- ----------- ----------- ----------- RETAINED
EARNINGS, END OF PERIOD 693,336 378,819 693,336 378,819 -----------
----------- ----------- ----------- ----------- -----------
----------- ----------- BASIC NET INCOME PER SHARE (Note 13) 1.51
1.14 6.40 4.06 ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- DILUTED NET INCOME
PER SHARE (Note 13) 1.49 1.09 6.28 3.90 ----------- -----------
----------- ----------- ----------- ----------- -----------
----------- See accompanying notes to the interim consolidated
financial statements. INTERIM CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS) UNAUDITED
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As at As at December 31, December 31, 2004 2003 (Restated - see
Note 2) ------------ ------------ ASSETS CURRENT Cash 199,105
184,660 Accounts receivable (Note 6) 198,504 150,293 Inventory
(Note 7) 61,242 36,920 Prepaid expenses (Note 8) 62,179 44,901
Current portion of future income tax asset (Note 12) 65,431 14,697
------------ ------------ 586,461 431,471 Deferred charges 4,662
6,729 Restricted cash (Note 5) 47,741 35,468 Future income tax
asset (Note 12) 28,470 25,466 Property, plant and equipment 601,747
542,317 ------------ ------------ TOTAL ASSETS 1,269,081 1,041,451
------------ ------------ ------------ ------------ LIABILITIES
CURRENT Accounts payable and accrued liabilities (Note 9) 161,759
88,422 Short-term debt (Note 10) 15,541 73,225 Prepayments for
crude oil and refined products 9,916 6,652 ------------
------------ 187,216 168,299 Long-term debt (Note 10) 134,862
246,655 Asset retirement obligations (Note 2) 32,499 28,625 Future
income tax liability (Note 12) 9,936 13,012 ------------
------------ 364,513 456,591 ------------ ------------
Non-controlling interest 14,411 13,091 Preferred shares of
subsidiary 80 80 COMMITMENTS AND CONTINGENCIES (Note 16)
SHAREHOLDERS' EQUITY Share capital (Note 11) 191,529 191,695
Contributed surplus 5,212 1,175 Retained earnings 693,336 378,819
------------ ------------ 890,077 571,689 ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 1,269,081 1,041,451
------------ ------------ ------------ ------------ See
accompanying notes to the interim consolidated financial
statements. INTERIM CONSOLIDATED STATEMENTS OF CASH FLOW (EXPRESSED
IN THOUSANDS OF UNITED STATES DOLLARS) UNAUDITED
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Three Months Ended Years Ended December 31 December 31 2004 2003
2004 2003 (Restated - (Restated - see Note 2) see Note 2)
----------- ----------- ----------- ----------- OPERATING
ACTIVITIES Net income 114,937 88,808 500,668 316,940 Items not
affecting cash: Depletion, depreciation and accretion 25,456 23,165
105,520 82,352 Future income tax recovery (21,793) (4,444) (55,166)
(9,757) Non-controlling interest 68 516 1,319 2,338 Compensation
cost 1,236 1,175 4,037 1,175 Amortization of deferred charges 262
374 3,572 3,936 Other non-cash items (1,316) 745 541 2,991
----------- ----------- ----------- ----------- Cash flow 118,850
110,339 560,491 399,975 Changes in non-cash operating working
capital items (76,128) (13,918) (24,899) (60,625) -----------
----------- ----------- ----------- Cash flow from operating
activities 42,722 96,421 535,592 339,350 ----------- -----------
----------- ----------- FINANCING ACTIVITIES Short-term debt
proceeds - - 98,006 77,411 Short-term debt repayment (14,802)
(69,278) (171,231) (154,528) Long-term debt proceeds - - - 312,986
Long-term debt repayment (1,366) (3,473) (97,016) (217,699)
Deferred charges paid (974) (42) (1,674) (3,642) Common share
dividends (9,093) - (26,665) - Preferred share dividends (9) (8)
(35) (32) Purchase of common shares under a normal course issuer
bid (Note 11) - - (38,648) (14,848) Purchase of common shares under
a substantial issuer bid (Note 11) - - (121,117) - Proceeds from
issue of share capital, net of share issuance costs 2,503 796
12,736 1,588 ----------- ----------- ----------- ----------- Cash
flow (used in) from financing activities (23,741) (72,005)
(345,644) 1,236 ----------- ----------- ----------- -----------
INVESTING ACTIVITIES Restricted cash 2,950 - (12,273) (35,468)
Capital expenditures (68,801) (74,990) (163,230) (196,470) Proceeds
from sale of fixed assets - - - 1,258 Acquisition of PKOP, net of
cash acquired - (38) - (38) Purchase of preferred shares of
subsidiary - - - (4) ----------- ----------- -----------
----------- Cash flow used in investing activities (65,851)
(75,028) (175,503) (230,722) ----------- ----------- -----------
----------- (DECREASE) / INCREASE IN CASH (46,870) (50,612) 14,445
109,864 CASH, BEGINNING OF PERIOD 245,975 235,272 184,660 74,796
----------- ----------- ----------- ----------- CASH, END OF PERIOD
199,105 184,660 199,105 184,660 ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- See
accompanying notes to the interim consolidated financial
statements. NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, TABULAR AMOUNTS
IN THOUSANDS OF DOLLARS, UNLESS OTHERWISE INDICATED) UNAUDITED
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1 SIGNIFICANT ACCOUNTING POLICIES The interim consolidated
financial statements of PetroKazakhstan Inc. ("PetroKazakhstan" or
the "Corporation") have been prepared by management in accordance
with generally accepted accounting principles in Canada. Its main
operating subsidiaries are PetroKazakhstan Kumkol Resources
("PKKR") and PetroKazakhstan Oil Products ("PKOP"). Certain
information and disclosures normally required to be included in the
notes to the annual financial statements have been omitted or
condensed. The interim consolidated financial statements should be
read in conjunction with the consolidated financial statements and
the notes thereto in PetroKazakhstan's Annual Report for the year
ended December 31, 2003. The accounting principles applied are
consistent with those as set out in the Corporation's annual
financial statements for the year ended December 31, 2003, except
for the changes in accounting standards as described in Note 2. The
presentation of certain amounts for previous periods has been
changed to conform with the presentation adopted for the current
period. 2 CHANGES IN ACCOUNTING STANDARDS Asset Retirement
Obligations Effective January 1, 2004, the Corporation adopted the
new recommendation of the Canadian Institute of Chartered
Accountants ("CICA") regarding asset retirement obligations. This
new standard changes the method of estimating and accounting for
future site restoration costs. Total estimated asset retirement
obligations are discounted to estimate the fair value of the
obligation and recorded as a liability when the related assets are
constructed and commissioned. The fair value of the obligation
increases the value of property, plant and equipment and depleted
using the unit-of- production method based upon estimated proved
reserves before royalties. Accretion expense, resulting from
increase in the present value of the liability due to the passage
of time is recorded as part of depletion, depreciation and
accretion expense. Estimated cash flows are discounted at 8.5%. The
total undiscounted estimated cash flows required to settle the
obligations are $77.4 million with the expenditures being incurred
over ten years commencing in 2014. The new standard has been
applied retroactively, and the financial statements of prior
periods have been restated. Adoption of the new standard of
accounting for asset retirement obligations resulted in the
following changes in the consolidated balance sheet and statement
of income and retained earnings. Changes in consolidated balance
sheets: As at As at December 31, December 31, Increase / (decrease)
2004 2003 Future income tax asset 377 651 Property, plant and
equipment 14,457 15,181 ------------ ------------ Total assets
14,834 15,832 ------------ ------------ ------------ ------------
Asset retirement obligations 21,527 22,058 Retained earnings
(6,693) (6,226) ------------ ------------ Total liabilities and
shareholders' equity 14,834 15,832 ------------ ------------
------------ ------------ Changes in consolidated statements of
income and retained earnings for the three months and years ended
December 31, 2004 and 2003: Three months ended Years ended December
31 December 31 Increase / (decrease) 2004 2003 2004 2003 Accretion
expense 608 585 2,433 2,124 Depletion and depreciation (529) 1,473
(2,240) (1,757) ----------- ----------- ----------- -----------
Income before income taxes (79) (2,058) (193) (367) Income taxes 59
(546) 274 181 ----------- ----------- ----------- ----------- Net
income (138) (1,512) (467) (548) ----------- -----------
----------- ----------- ----------- ----------- -----------
----------- Basic net income per share - (0.02) - (0.01) Diluted
net income per share - (0.02) - (0.01) The change in asset
retirement obligations is as follows: Asset retirement obligations
liability as at January 1, 2004 28,625 Revisions 1,578 Accretion
expense 2,433 Settlements (137) ----------- Asset retirement
obligations liability as at December 31, 2004 32,499 -----------
----------- Full Cost Accounting In September 2003 the CICA issued
Accounting Guideline 16 "Oil and Gas Accounting - Full Cost" ("AcG
16"), which replaced Accounting Guideline 5 "Full Cost Accounting
in the Oil and Gas Industry" ("AcG 5"). The most significant change
between AcG 16 and AcG 5 is that under AcG 16 the carrying value of
oil and gas properties should not exceed their fair value. The fair
value is equal to estimated future cash flows from proved reserves,
unproved properties and major development projects using future
price forecasts and costs discounted at a risk-free rate. This
differs from the cost recovery ceiling test under AcG 5 that used
undiscounted cash flows, and constant prices, less general and
administrative, financing costs and taxes. The Corporation adopted
AcG 16 effective January 1, 2004 and as at December 31, 2004 there
were no indications of impairment. Impairment of Long-Lived Assets
Effective January 1, 2004, the Corporation adopted the new
recommendation of the CICA issued in December 2002 on impairment of
long-lived assets. This recommendation provides guidance on the
recognition, measurement and disclosure of impairment of long-lived
assets. There is a requirement to recognize an impairment loss for
a long-lived asset when its carrying amount exceeds the sum of the
undiscounted cash flows expected from its use and eventual
disposition. The impairment loss is measured as the amount by which
carrying amount of the asset exceeds its fair value. As at December
31, 2004 there were no indications of impairment of long-lived
assets. Hedge Accounting Effective January 1, 2004, the Corporation
adopted Accounting Guideline 13 "Hedging Relationships" ("AcG 13").
AcG 13 provides guidance regarding the identification, designation,
documentation and effectiveness of hedging relationships for the
purposes of applying hedge accounting. This guideline establishes
certain conditions for when hedge accounting may be applied. The
Corporation has applied hedge accounting for the financial
instruments disclosed in Note 14. 3 SEGMENTED INFORMATION On a
primary basis the business segments are: - Upstream comprising the
exploration, development and production of crude oil and natural
gas. - Downstream comprising refining and the marketing and
transportation of refined products and the management of the
marketing and transportation of crude oil. Upstream results include
revenue from crude oil sales to Downstream, reflected as crude oil
purchases in Downstream, as this presentation properly reflects
segment results. This revenue is eliminated on consolidation.
Corporate income tax for the three months and the year ended
December 31, 2004 includes withholding tax on dividends paid to
Canada. The Corporation does not disclose export revenue
attributable to individual countries as it is impractical to obtain
the information. Three months ended December 31, 2004 Elimin-
Consol- Upstream Downstream Corporate ations idated REVENUE Crude
oil 278,054 - - (20,414) 257,640 Refined products 62,982 89,930 -
(8,981) 143,931 Service fees 1,047 1,074 197 - 2,318 Interest
income 968 116 158 - 1,242 --------- --------- --------- ---------
--------- 343,051 91,120 355 (29,395) 405,131 --------- ---------
--------- --------- --------- EXPENSES Production 18,831 - - -
18,831 Royalties and taxes 27,293 1,938 - - 29,231 Transportation
83,938 - - - 83,938 Refining - 6,429 - - 6,429 Crude oil and
refined product purchases 14,294 33,993 - (29,395) 18,892 Selling
4,698 5,168 - - 9,866 General and administrative 10,277 3,624 2,521
- 16,422 Interest and financing costs 4,558 4 4 - 4,566 Depletion,
depreciation and accretion 19,892 5,253 311 - 25,456 Foreign
exchange loss (gain) 3,663 (5,733) (1,488) - (3,558) ---------
--------- --------- --------- --------- 187,444 50,676 1,348
(29,395) 210,073 --------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES 155,607 40,444 (993) - 195,058
--------- --------- --------- --------- --------- INCOME TAXES
Current provision 84,660 12,168 5,018 - 101,846 Future income tax
recovery (21,466) (327) - - (21,793) --------- --------- ---------
--------- --------- 63,194 11,841 5,018 - 80,053 NON-CONTROLLING
INTEREST - 68 - - 68 --------- --------- --------- ---------
--------- NET INCOME (LOSS) 92,413 28,535 (6,011) - 114,037
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- Eliminations are
intersegment revenue. Included in Upstream crude revenue are sales
to one customer in the amount of $46.9 million. As at December 31,
2004 Upstream Downstream Corporate Consolidated Total assets
1,038,727 180,081 50,273 1,269,081 Total liabilities 333,591 29,431
15,982 379,004 Capital expenditures in the quarter 59,186 7,855 211
67,252 Three months ended December 31, 2004 Export Domestic
Consolidated Crude oil 226,045 31,595 257,640 Refined products
60,628 83,303 143,931 Three months ended December 31, 2003 Elimin-
Consol- Upstream Downstream Corporate ations idated REVENUE Crude
oil 192,072 - - (11,318) 180,754 Refined products 33,943 101,934 -
(14,320) 121,557 Service fees 5,868 1,256 217 - 7,341 Interest
income 217 112 667 - 996 --------- --------- --------- ---------
--------- 232,100 103,302 884 (25,638) 310,648 --------- ---------
--------- --------- --------- EXPENSES Production 15,555 - - -
15,555 Royalties and taxes 29,160 (1,014) - - 28,146 Transportation
53,421 (25) - - 53,396 Refining - 4,862 - - 4,862 Crude oil and
refined product purchases 22,826 16,878 - (25,638) 14,066 Selling
2,630 5,566 - - 8,196 General and administrative 9,185 5,325 2,575
- 17,085 Interest and financing costs 6,109 695 14 - 6,818
Depletion, depreciation and accretion 18,321 4,744 100 - 23,165
Foreign exchange loss (gain) 4,910 (7,840) 1,173 - (1,757)
--------- --------- --------- --------- --------- 162,117 29,191
3,862 (25,638) 169,532 --------- --------- --------- ---------
--------- INCOME (LOSS) BEFORE INCOME TAXES 69,983 74,111 (2,978) -
141,116 --------- --------- --------- --------- --------- INCOME
TAXES Current provision 28,727 24,944 2,565 - 56,236 Future income
tax (5,454) 1,010 - - (4,444) --------- --------- ---------
--------- --------- 23,273 25,954 2,565 - 51,792 NON-CONTROLLING
INTEREST - 516 - - 516 --------- --------- --------- ---------
--------- NET INCOME (LOSS) 46,710 47,641 (5,543) - 88,808
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- Eliminations are
intersegment revenue. There were no sales to an individual customer
in excess of 10% of consolidated revenue. As at December 31, 2003
Upstream Downstream Corporate Consolidated Total assets 737,691
157,474 146,286 1,041,451 Total liabilities 409,145 58,554 2,063
469,762 Capital expenditures in the quarter 71,362 7,509 248 79,119
Three months ended December 31, 2003 Export Domestic Consolidated
Crude oil 164,544 16,210 180,754 Refined products 35,286 86,271
121,557 Year ended December 31, 2004 Elimin- Consol- Upstream
Downstream Corporate ations idated REVENUE Crude oil 1,090,815 - -
(97,935) 992,880 Refined products 219,348 480,318 - (60,261)
639,405 Service fees 3,018 3,040 426 - 6,484 Interest income 1,765
638 1,255 - 3,658 ---------- ---------- ---------- ----------
---------- 1,314,946 483,996 1,681 (158,196) 1,642,427 ----------
---------- ---------- ---------- ---------- EXPENSES Production
89,339 - - - 89,339 Royalties and taxes 120,042 6,402 - - 126,444
Transportation 271,809 - - - 271,809 Refining - 21,646 - - 21,646
Crude oil and refined product purchases 86,943 182,592 - (158,196)
111,339 Selling 18,083 19,851 - - 37,934 General and administrative
34,955 14,493 11,467 - 60,915 Interest and financing costs 23,848
473 9 - 24,330 Depletion, depreciation and accretion 83,927 20,338
1,255 - 105,520 Foreign exchange loss (gain) 3,963 (13,767) (115) -
(9,919) ---------- ---------- ---------- ---------- ----------
732,909 252,028 12,616 (158,196) 839,357 ---------- ----------
---------- ---------- ---------- INCOME (LOSS) BEFORE INCOME TAXES
582,037 231,968 (10,935) - 803,070 ---------- ---------- ----------
---------- ---------- INCOME TAXES Current provision 272,863 75,770
7,616 - 356,249 Future income tax recovery (54,649) (517) - -
(55,166) ---------- ---------- ---------- ---------- ----------
218,214 75,253 7,616 - 301,083 NON-CONTROLLING INTEREST - 1,319 - -
1,319 ---------- ---------- ---------- ---------- ---------- NET
INCOME (LOSS) 363,823 155,396 (18,551) - 500,668 ----------
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- Eliminations are intersegment
revenue. Included in Upstream crude revenue are sales to one
customer in the amount of $167.4 million. As at December 31, 2004
Upstream Downstream Corporate Consolidated Total assets 1,038,727
180,081 50,273 1,269,081 Total liabilities 333,591 29,431 15,982
379,004 Capital expenditures for the year 148,993 15,687 1,272
165,952 Year ended December 31, 2004 Export Domestic Consolidated
Crude oil 912,854 80,026 992,880 Refined products 219,508 419,897
639,405 Year ended December 31, 2003 Elimin- Consol- Upstream
Downstream Corporate ations idated REVENUE Crude oil 719,009 - -
(97,883) 621,126 Refined products 76,885 441,200 - (36,759) 481,326
Services fees 9,086 2,191 255 - 11,532 Interest income 936 416
1,988 - 3,340 ---------- ---------- ---------- ----------
---------- 805,916 443,807 2,243 (134,642) 1,117,324 ----------
---------- ---------- ---------- ---------- EXPENSES Production
65,516 - - - 65,516 Royalties and taxes 80,046 2,249 - - 82,295
Transportation 223,000 1,987 - - 224,987 Refining - 17,760 - -
17,760 Crude oil and refined product purchases 55,161 135,941 -
(134,642) 56,460 Selling 10,508 18,021 - - 28,529 General and
administrative 32,721 16,075 5,483 - 54,279 Interest and financing
costs 24,226 2,576 8,777 - 35,579 Depletion, depreciation and
accretion 63,321 18,849 182 - 82,352 Foreign exchange loss (gain)
2,632 (9,863) 1,898 - (5,333) ---------- ---------- ----------
---------- ---------- 557,131 203,595 16,340 (134,642) 642,424
---------- ---------- ---------- ---------- ---------- INCOME
(LOSS) BEFORE INCOME TAXES 248,785 240,212 (14,097) - 474,900
---------- ---------- ---------- ---------- ---------- INCOME TAXES
Current provision 86,803 74,217 4,359 - 165,379 Future income tax
recovery (7,910) (1,847) - - (9,757) ---------- ----------
---------- ---------- ---------- 78,893 72,370 4,359 - 155,622
NON-CONTROLLING INTEREST - 2,338 - - 2,338 ---------- ----------
---------- ---------- ---------- NET INCOME (LOSS) 169,892 165,504
(18,456) - 316,940 ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Eliminations are intersegment revenue. There were no sales to an
individual customer in excess of 10% of consolidated revenue. As at
December 31, 2003 Upstream Downstream Corporate Consolidated Total
assets 737,691 157,474 146,286 1,041,451 Total liabilities 409,145
58,554 2,063 469,762 Capital expenditures for the year 183,134
19,070 1,009 203,213 Year ended December 31, 2003 Export Domestic
Consolidated Crude oil 596,673 24,453 621,126 Refined products
112,316 369,010 481,326 4 JOINT VENTURES The Corporation has the
following interests in two joint ventures: a) a 50% equity
shareholding with equivalent voting power in Turgai Petroleum CJSC
("Turgai"), which operates the northern part of the Kumkol field in
Kazakhstan. b) a 50% equity shareholding with equivalent voting
power in LLP Kazgermunai ("Kazgermunai"), which operates three oil
fields in Kazakhstan: Akshabulak, Nurali and Aksai. The following
amounts are included in the Corporation's consolidated financial
statements as a result of the proportionate consolidation of its
joint ventures before consolidation eliminations: Three months
ended December 31, 2004 Turgai Kazgermunai Total Cash 34,678 50,800
85,478 Current assets, excluding cash 103,183 57,495 160,678
Property, plant and equipment 86,791 62,555 149,346 Current
liabilities 77,849 24,343 102,192 Long-term debt - - - Revenue
81,353 71,859 153,212 Expenses 53,174 46,310 99,484 Net income
28,179 25,549 53,728 Cash flow from operating activities (6,345)
12,216 5,871 Cash flow used in financing activities (46,204)
(1,366) (47,570) Cash flow used in investing activities (11,523)
(3,731) (15,254) Revenue for the three months ended December 31,
2004 for Turgai includes $18.4 million of crude oil sales made to
Downstream and $12.3 million of crude oil sales made by Turgai to
Upstream. These amounts were eliminated on consolidation. Revenue
for the three months ended December 31, 2004 for Kazgermunai
includes $0.1 million crude oil sales to Downstream. This amount
was eliminated on consolidation. Three months ended December 31,
2003 Turgai Kazgermunai Total Cash 8,370 10,432 18,802 Current
assets, excluding cash 26,890 32,875 59,765 Property, plant and
equipment 82,682 66,397 149,079 Current liabilities 76,533 11,260
87,793 Long-term debt - 37,743 37,743 Revenue 28,325 36,400 64,725
Expenses 22,721 27,339 50,060 Net income 5,604 9,061 14,665 Cash
flow from operating activities 10,701 13,419 24,120 Cash flow used
in financing activities - (3,301) (3,301) Cash flow used in
investing activities (20,436) (10,789) (31,225) Revenue for the
three months ended December 31, 2003 includes $5.4 million of crude
oil sales made by Turgai to Downstream. This amount was eliminated
on consolidation. Year ended December 31, 2004 Turgai Kazgermunai
Total Revenue 310,221 225,882 536,103 Expenses 206,869 140,312
347,181 Net income 103,352 85,570 188,922 Cash flow from operating
activities 66,634 77,968 144,602 Cash flow used in financing
activities (46,204) (25,632) (71,836) Cash flow used in investing
activities (18,328) (11,967) (30,295) Revenue for the year ended
December 31, 2004 for Turgai includes $72.9 million of crude oil
sales made to Downstream and $29.9 million of crude oil sales made
by Turgai to Upstream. These amounts were eliminated on
consolidation. Revenue for the year ended December 31, 2004 for
Kazgermunai includes $8.1 million of crude oil sales made to
Upstream and $4.6 million crude oil sales to Downstream. These
amounts were eliminated on consolidation. Year ended December 31,
2003 Turgai Kazgermunai Total Revenue 118,167 111,860 230,027
Expenses 81,623 76,675 158,298 Net income 36,544 35,185 71,729 Cash
flow from operating activities 58,566 39,089 97,655 Cash flow used
in financing activities - (9,317) (9,317) Cash flow used in
investing activities (50,503) (22,193) (72,696) Revenue for the
year ended December 31, 2003 for Turgai includes $35.9 million of
crude oil sales made to Downstream and $2.5 million of crude oil
sales made to Upstream. These amounts were eliminated on
consolidation. Revenue for the year ended December 31, 2003 for
Kazgermunai includes $0.5 million of crude oil sales made to
Upstream and no crude oil sales to Downstream. This amount was
eliminated on consolidation. 5 RESTRICTED CASH Restricted cash
comprises: a) Cash dedicated to a debt service reserve account for
the Corporation's term facility of $8.7 million at December 31,
2004 ($10.5 million as at December 31, 2003). On September 30, 2004
the term facility was repaid in full. The Corporation discharged
all hedging liabilities related to this facility as at December 31,
2004. The debt service reserve account was repaid in January 2005.
b) Cash dedicated to a margin account for the Corporation's hedging
program being $39.0 million at December 31, 2004 ($25.0 million as
at December 31, 2003). Restricted cash is not available for current
purposes. 6 ACCOUNTS RECEIVABLE Accounts receivable consist of the
following: 2004 2003 Trade 150,462 70,282 Value added tax
recoverable 29,316 22,864 Due from Turgai 6,942 37,231 Other 11,784
19,916 ------------ ------------ 198,504 150,293 ------------
------------ ------------ ------------ 7 INVENTORY Inventory
consists of the following: 2004 2003 Refined products 16,682 6,626
Crude oil produced 25,275 12,502 Materials and supplies 19,285
17,792 ------------ ------------ 61,242 36,920 ------------
------------ ------------ ------------ 8 PREPAID EXPENSES Prepaid
expenses consist of the following: 2004 2003 Advances for services
and equipment 16,825 10,930 Prepayment of transportation for crude
oil sales 40,911 30,422 Prepayment for pipeline tariff 4,443 3,549
------------ ------------ 62,179 44,901 ------------ ------------
------------ ------------ 9 ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES Accounts payable and accrued liabilities consist of the
following: 2004 2003 Trade 70,160 66,115 Due to Turgai 19,668 -
Royalties 18,259 16,133 Income taxes 30,175 - Common share
dividends 12,588 - Other 10,909 6,174 ------------ ------------
161,759 88,422 ------------ ------------ ------------ ------------
10 INDEBTEDNESS SHORT-TERM DEBT 2004 2003 Current portion of term
facility - 35,692 Current portion of term loans 2,039 2,039 Joint
venture loan payable - 11,000 PKOP bonds - 24,494 Kazgermunai debt
13,502 - ------------ ------------ 15,541 73,225 ------------
------------ ------------ ------------ LONG-TERM DEBT 2004 2003
Long-term portion of term facility - 71,384 Long-term portion of
term loans 9,862 12,528 9.625% bonds 125,000 125,000 Kazgermunai
debt - 37,743 ------------ ------------ 134,862 246,655
------------ ------------ ------------ ------------ Committed
credit facility On May 25, 2004 the Corporation entered into a five
and one half year $100.0 million committed credit facility. This
facility is unsecured, bears interest at LIBOR plus 2.65% and is
subject to annual review. $30.0 million of this facility has been
dedicated to cover margin calls under the Corporation's hedging
program. This amount is not available for general corporate
purposes. Costs related to this facility amounting to $1.5 million
are recorded as deferred charges and amortized over the life of the
facility. Term facility On January 2, 2003, PetroKazakhstan Kumkol
Resources ("PKKR") entered into a $225.0 million term facility
secured by crude oil export contracts. This facility was repayable
in 42 equal monthly installments commencing July 2003. The facility
bore interest at a rate of LIBOR plus 3.25% per annum. PKKR drew
$190.0 million under this facility and chose not to utilize the
remainder. On September 30, 2004 the Corporation had fully repaid
the term facility. Unamortized issue costs of $2.1 million related
to the term facility have been expensed. Joint venture loan The
joint venture loan was fully repaid on October 7, 2004. PKOP bonds
On February 16, 2001 PetroKazakhstan Oil Products ("PKOP")
registered 250,000 unsecured bonds (par value $100) in the amount
of $25.0 million with the National Securities Commission of the
Republic of Kazakhstan (the "PKOP bonds"). The PKOP bonds had a
three-year maturity and bore a coupon rate of 10% per annum. The
PKOP bonds were listed on the Kazakh Stock Exchange. The PKOP bonds
were fully redeemed on February 26, 2004. Term loans PKKR has
obtained secured term loans guaranteed by Export Credit Agencies
for certain equipment related to the KAM pipeline and Gas
Utilization Facility. The loans are secured by the equipment
purchased, bear interest at LIBOR plus 4% per annum, are repayable
in equal semi-annual installments and have final maturity dates
ranging from five to seven years. 9.625% Notes On February 12,
2003, PetroKazakhstan Finance B.V., a wholly owned subsidiary of
PKKR issued U.S. $125.0 million 9.625% Notes due February 12, 2010.
The Notes are unsecured, unconditionally guaranteed by the
Corporation, PKKR and PKOP, and were issued at a price of 98.389%
of par value. Each of the guarantors has agreed to certain
covenants, including limitations on indebtedness, restrictions on
payments of dividends, repurchase all or any part of the notes at
the holders' discretion in the case of a change of control. On
March 15, 2004 the Corporation's Notes were approved for listing on
the Kazakhstan Stock Exchange. As at December 31, 2004 issue costs
and the discount on the sale of the Notes of $3.2 million are
recorded as deferred charges and are amortized over the term of the
Notes. Kazgermunai debt The Kazgermunai debt is non-recourse to the
Corporation. On June 24, Kazgermunai repaid $24.3 million of its
outstanding subordinated debt and as at December 31, 2004 the
subordinated debt was repaid in full. Kazgermunai expects to repay
the government loan in 2005. 11 SHARE CAPITAL The Corporation's
common shares are listed on the New York, Toronto, London and
Frankfurt Stock Exchanges. On October 21, 2004 PetroKazakhstan
shares were listed on the Kazakhstan Stock Exchange. Authorized
share capital consists of an unlimited number of Class A common
shares, and an unlimited number of Class B redeemable preferred
shares, issuable in series. Issued Class A common shares: Three
months ended Three Months ended December 31, 2004 December 31, 2003
---------------------- ---------------------- Number Amount Number
Amount ---------------------- ---------------------- Balance,
beginning of period 76,023,141 189,026 77,771,788 190,899 Stock
options exercised for cash 199,989 2,503 137,525 816 Corresponding
convertible securities, converted - - 10,913 (20) ------------
--------- ------------ --------- Balance, end of period 76,223,130
191,529 77,920,226 191,695 ------------ --------- ------------
--------- ------------ --------- ------------ --------- Year ended
Year ended December 31, 2004 December 31, 2003
---------------------- ---------------------- Number Amount Number
Amount ---------------------- ---------------------- Balance,
beginning of period 77,920,226 191,695 78,956,875 193,723 Shares
repurchased and cancelled pursuant to Normal Course Issuer Bid (a)
(1,257,500) (3,120) (1,477,400) (3,616) Shares repurchased and
cancelled pursuant to Substantial Issuer Bid (b) (3,999,975)
(9,782) - - Stock options exercised for cash 3,531,821 12,726
411,275 1,608 Corresponding convertible securities, converted
28,558 10 29,476 (20) ------------ --------- ------------ ---------
Balance, end of period 76,223,130 191,529 77,920,226 191,695
------------ --------- ------------ --------- ------------
--------- ------------ --------- (a) The Corporation's Normal
Course Issuer Bid program was renewed on August 5, 2003. Under the
program up to 5,775,028 common shares may be repurchased for
cancellation, during the period from August 7, 2003 to August 6,
2004. In August 2004 the Corporation again renewed this program
which enabled the Corporation to repurchase 7,091,429 Class A
common shares during the period from August 13, 2004 to August 12,
2005. The Corporation purchased and cancelled 1,477,400 shares at
an average price of C$14.69 per share during the year ended
December 31, 2003 and 1,257,500 shares at an average price of
C$40.0 per share during the year ended December 31, 2004. The
excess of cost over the book value for the shares purchased was
applied to retained earnings. (b) In June 2004 the Corporation
commenced a Substantial Issuer Bid to repurchase, for cancellation,
up to C$160 million of its Class A common shares. As at December
31, 2004, the Corporation had purchased and cancelled 3,999,975
shares at an average price of C$40.0 per share. The excess of cost
over the book value for the shares purchased was applied to
retained earnings. A summary of the status of the Corporation's
stock option plan as of December 31, 2004 and the changes during
the years ended December 31, 2004 and 2003 are presented below
(weighted average exercise price expressed in Canadian dollars):
Weighted Average Exercise Options Price ------------ ------------
Outstanding at December 31, 2003 5,115,460 8.17 Granted 724,100
42.50 Exercised (3,560,379) 4.77 Forfeited (192,525) 15.94
------------ ------------ Outstanding at December 31, 2004
2,086,656 25.17 ------------ ------------ ------------ ------------
Options exercisable as at: December 31, 2003 2,816,683 5.14
December 31, 2004 866,903 16.29 The pro forma net income per share
for the three months and the years ended December 31, 2003 and
2004, had the Corporation recognized compensation expense using the
fair value of common stock options granted for all stock options
outstanding prior to January 1, 2003 follows: Three Months Ended
Years Ended December 31, December 31, 2004 2003 2004 2003 Net
income As reported 114,937 88,808 500,668 316,940 Pro forma 113,944
86,905 499,532 314,752 Basic net income per share As reported 1.51
1.14 6.40 4.06 Pro forma 1.50 1.12 6.38 4.03 Diluted net income per
share As reported 1.49 1.09 6.28 3.90 Pro forma 1.48 1.07 6.27 3.87
12 INCOME TAXES The provision for income taxes differs from the
results, which would have been obtained by applying the statutory
tax rate of 30% to the Corporation's income before income taxes.
This difference results from the following items: Three Months
Ended Years Ended December 31, December 31, 2004 2003 2004 2003
Income before income taxes 195,058 141,116 803,070 474,900
Statutory Kazakhstan income tax rate 30% 30% 30% 30% Expected tax
expense 58,517 42,335 240,921 142,470 Higher tax rate in
Kazgermunai 4,676 3,334 12,165 2,444 Excess profit tax provision
9,943 - 35,000 - Withholding tax on dividends 4,850 - 6,849 1,384
Non-deductible amounts, net 2,067 6,123 6,148 9,324 -----------
----------- ----------- ----------- Income tax expense 80,053
51,792 301,083 155,622 ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- The
following are the major future income tax assets and liabilities
arising from temporary differences between the carrying values and
tax basis of the following assets and liabilities: 2004 2003 Future
income tax assets: Fixed assets 34,487 23,126 Excess profit tax
36,647 - Provision for inter-company profit eliminations 15,516
9,087 Provision for royalties 5,448 4,831 Provision for obsolete
inventories 1,310 1,180 Provision for doubtful debts 6 1,515 Other
487 424 ------------ ------------ Total future income tax assets
93,901 40,163 Less: current portion of future income tax assets
(65,431) (14,697) ------------ ------------ Long-term future income
tax assets 28,470 25,466 ------------ ------------ ------------
------------ Future income tax liabilities: ------------
------------ Fixed assets 9,936 13,012 ------------ ------------
------------ ------------ Excess profit tax is in addition to
statutory income taxes, which are at a rate of 30%, and excess
profit tax takes effect after the field has achieved a cumulative
internal rate of return higher than 20% for the specific field. The
excess profit tax ranges from 0% to 30% of taxable income for the
year for PKKR and from 0% to 50% for Turgai. A provision has been
made for expected excess profit tax for the 2004 tax year for
Turgai. Excess profit tax paid in one year is deductible in the
calculation of the excess profit tax liability in the following
year. 13 NET INCOME PER SHARE The net income per share calculations
are based on the weighted average and diluted numbers of Class A
common shares outstanding during the period as follows: Three
Months Ended Years Ended December 31 December 31 2004 2003 2004
2003 Weighted average number of common shares outstanding
76,089,557 77,827,328 78,285,025 78,149,904 Dilution from
exercisable options (including convertible securities) 832,452
3,283,376 1,423,880 3,142,302 ----------- ----------- -----------
----------- Diluted number of shares outstanding 76,922,009
81,110,704 79,708,905 81,292,206 ----------- -----------
----------- ----------- ----------- ----------- -----------
----------- No options were excluded from the calculation of
diluted number of shares outstanding for the three months ended
December 31, 2004 as the market price was in excess of the exercise
price. 649,100 options were excluded from the calculation of
diluted number of shares outstanding for the year ended December
31, 2004 as the exercise price was in excess of the average market
price for the year. 100,000 options were excluded from the
calculation of diluted number of shares outstanding for the three
months ended December 31, 2003 and 774,000 options for the year
ended December 31, 2003. 14 FINANCIAL INSTRUMENTS The nature of the
Corporation's operations and issuance of long-term debt exposes the
Corporation to fluctuations in commodity prices, foreign currency
exchange rates, interest rates and credit risk. The Corporation
recognizes these risks and manages operations in a manner such that
exposure to these risks is minimized to the extent practical. The
Corporation's financial instruments include cash, accounts
receivable, all current liabilities and long-term debt. The fair
value of cash, accounts receivable and current liabilities
approximates their carrying amounts due to the short-term maturity
of these instruments. The fair value of Kazgermunai debt and the
term loans approximates their carrying value as they bear interest
at market rates. The fair value of the 9.625% Notes is $139.5
million versus the carrying value of $125.0 million as at December
31, 2004 as determined through reference to the market price. The
Corporation has entered into a commodity-hedging program where it
is utilizing derivative instruments to manage the Corporation's
exposure to fluctuations in the price of crude oil. The Corporation
has entered into the following contracts with major financial
institutions. Contract Amount (bbls per Contract Contract Price
Ceiling or Price month) Period Type Contracted Price Floor 362,000
January 2004 to March 2004 Dated Brent 29.80-29.82 - 75,000 January
2004 to December 2004 Zero cost collar 28.00 17.00 75,000 January
2004 to December 2004 Zero cost collar 29.00 17.00 75,000 January
2004 to December 2004 Zero cost collar 29.25 17.00 37,500 January
2004 to December 2004 Zero cost collar 29.60 17.00 110,000 January
2004 to December 2004 Zero cost collar 30.20 18.00 120,000 January
2005 to March 2005 IPE Future 26.30-26.52 - 40,000 April 2005 to
June 2005 IPE Future 25.92 - 458,333 January 2005 to December 2005
IPE Future 25.65-25.90 - During the three months ended December 31,
2004, the Corporation has foregone revenue of $16.6 million through
these contracts ($42.1 million during the year ended December 31,
2004). The unrealized loss under these hedges as at December 31,
2004 is $60.9 million. This amount is deferred and recognized in
the consolidated statement of income when the related contract is
settled. The fair value of these hedges was determined based on
forward prices as at December 31, 2004. 15 CASH FLOW INFORMATION
Interest and income taxes paid: Three Months Ended Years Ended
December 31, December 31, 2004 2003 2004 2003 Interest paid 4,310
3,005 22,111 33,988 ----------- ----------- ----------- -----------
Income taxes paid 146,382 68,621 322,907 173,275 -----------
----------- ----------- ----------- 16 COMMITMENTS AND
CONTINGENCIES Agency for Regulation of Natural Monopolies and
Protection of Competition ("ARNM") PKOP The ARNM alleged that PKOP
charged prices for refined oil products that in total were $6.3
million in excess of ARNM authorized maximum prices. PKOP initiated
legal proceedings to annul the ARNM claim and the court of first
instance reduced the ARNM claim to approximately $1.1 million. PKOP
and the ARNM appealed this decision to the Supreme Court. The
Supreme Court recognized approximately $3.6 million of the ARNM's
original assessment. This amount has been paid and recorded in the
financial statements. The Corporation has no plans to appeal. PKOP
received an additional assessment from ARNM in the amount of $8.8
million for allegedly charging prices for refined products in
excess of ARNM authorized maximum prices. PKOP appealed this
assessment. The ARNM revoked approximately $5.2 million of the
assessment and the court of the first instance recognized
approximately $1.4 million of the remaining $3.6 million. PKOP
appealed this decision and was unsuccessful. $1.4 million has been
recorded in the financial statements as a final settlement. PKOP's
position remains that the ARNM does not have the right to establish
prices for the refinery, and the Corporation, as the party in
interest under the Privatization Agreement for the Shymkent
Refinery, has notified the Government of Kazakhstan that it is in
breach of provisions of the Privatization Agreement. The
Corporation has the right to proceed to international arbitration
under the terms of the Privatization Agreement. Group companies The
ARNM claimed $34.1 million ($31.0 million at December 31, 2003)
from a group company for allegedly violating Kazakhstan's
competition law. The group company initiated legal proceedings and
the court of first instance dismissed the ARNM claim. The ARNM
appealed this decision; the appellate court upheld the decision of
the lower court. The ARNM has filed a motion to re-open the court
case on the basis of new information. The ARNM claimed
approximately $96.4 million ($91.4 million at December 31, 2003)
from group companies for allegedly violating Kazakhstan's
competition law. The group companies initiated legal action, and at
the Astana City Court were unsuccessful in their challenge of
allegations by the ARNM that these companies had violated
Kazakhstan competition laws. The initial trial court judgment
upheld the ARNM determination that these group companies had
received unjustified revenues totaling approximately $96.4 million.
The group companies appealed this judgment to the Supreme Court.
The initial Supreme Court hearing on the matter was held in the
second quarter of 2004 and the Court suspended the case and
instructed the parties to seek an agreed settlement. During the
period from April to May 13, 2004 the parties did engage in
discussions aimed at a settlement, but were unable to resolve the
matter through negotiations. On May 13, 2004, after a hearing on
the merits, the Supreme Court overturned the lower court decision
which was in favour of the ARNM and sent the case back to the
Astana City Court for a new trial. During the third quarter of
2004, the General Prosecutor's office filed a protest regarding the
May 13 decision of the Supreme Court with the Supreme Court
Supervisory Panel. On August 25, 2004, the Supervisory Panel issued
an opinion upholding the May 13, 2004 decision and returned the
case to the Astana City Court. In September 2004, the Astana City
Court issued a ruling suspending further consideration of the
merits of the case pending the completion of parallel
investigations being conducted by the "Agency of the Republic of
Kazakhstan for Fight Against Economic and Corruption Criminality".
This suspension was removed in late 2004 and the case is currently
being reviewed by economic and financial experts under order of the
Court. It is currently expected that the economic and financial
expertise will be concluded during the spring of 2005 and that the
case will, at that point, be subject to further review and decision
by the Astana City Court. No provision has been made in the
consolidated financial statements for these assessments. It remains
the Corporation's view that the allegations leveled against the
group companies are without justification. A highly competitive
market exists for oil products within Kazakhstan and the current
level of prices reflects current world crude oil prices. Also, the
prices charged by the group companies are competitive with Russian
imports and with those charged by distributors of the other two
refineries in Kazakhstan. The Corporation is considering its
recourse rights under the terms of the Shymkent refinery
Privatization Agreement, which clearly stipulates the right to sell
any and all its products in Kazakhstan and abroad at free market
prices. The Corporation will continue to seek a dialogue with the
appropriate authorities to address the concerns related to the
pricing of refined products and possible measures to be taken to
further promote transparency and effective monitoring of the
dynamics of competition, consistent with market economy principles.
Tax matters The local and national tax environment in the Republic
of Kazakhstan is subject to change and inconsistent application,
interpretation and enforcement. Non-compliance with Kazakhstan laws
and regulations, as interpreted by the Kazakh authorities, can lead
to the imposition of fines, penalties and interest. In response to
the Corporation's submission, the Minister of Finance initiated the
creation of a high-level Working Group between its officials and
the Corporation's representatives to address and seek resolution of
all outstanding tax issues through dialogue and negotiations. On
January 22, 2004, the Working Group signed a memorandum that sets
out the agreed resolution of several important tax issues which
were pending. Certain actions, such as the approval of the
amendments to hydrocarbon contracts and issuance of instruction
letter, were required to fully implement the terms of the
memorandum. The hydrocarbon contract amendments were approved on
July 21, 2004, but the instruction letter has not been issued. The
terms of this memorandum are reflected in the following discussion
of the Corporation's tax matters. Tax assessments 1998 and 1999
PKKR received tax assessments for 1998 and 1999. The assessments
were for a total of approximately $10.5 million including taxes,
fines, interest and penalties. PKKR was successful in challenging
the assessments at the first level of the court system and was
unsuccessful on the majority of the issues at the Supreme Court
level. Specifically, PKKR was unsuccessful in obtaining agreement
of the Supervisory Panel of the Supreme Court to hear its appeal on
the assessed taxes. Accordingly, the Corporation provided for $2.9
million of the $10.5 million total assessment in the consolidated
financial statements for the year ended December 31, 2002. PKKR has
been disputing the remaining $7.6 million (currently $8.0 million
due to strengthening of the tenge), which relates to fines and
penalties assessed, because PKKR believes there was an incorrect
application of the provisions of tax legislation. However, PKKR
paid this amount to stop the further accumulation of fines and
penalties and recorded this payment as an account receivable
pending resolution of the issue. The Working Group agreed with
PKKR's position and determined that there was an incorrect
application of the provisions of the tax legislation. This matter
was simultaneously appealed to the Supervisory Panel of the Supreme
Court ("Supervisory Panel") due to time limitations. The
Supervisory Panel remanded the case back to the lower court for a
retrial. The lower court rejected the Supervisory Panel's
instruction, a retrial was not held, and the lower court let the
original decision stand. The lower court's refusal to comply with
the Supervisory Panel's instruction was appealed to the Supervisory
Panel. The Supervisory Panel refused to hear the appeal. The
Ministry of Finance has requested that the Working Group memorandum
be revised to reflect the Court's decision. The Corporation does
not agree and intends to pursue this matter with the Ministry of
Finance. The Corporation believes, and the Ministry of Finance has
previously agreed, that there was an incorrect application of the
provisions of the tax legislation. Due to the uncertainty of the
outcome, the Corporation has recorded, as an expense, the remaining
amount of approximately $8.0 million in the consolidated financial
statements for the year ended December 31, 2004. Tax assessments
2000 and 2001 PKKR also received assessments for 2000 and 2001.
Challenges to the assessments were divided into two court cases.
The first case was for amounts totaling approximately $13.0 million
and at the first level of the court system PKKR was successful on
$6.8 million of the $13.0 million and was unsuccessful on the
remainder. The major issue on which PKKR was unsuccessful was the
assessment of royalties on flared associated gas. PKKR believes the
claim for royalties on flared associated gas, which has no
commercial value, contravenes the provisions of its hydrocarbon
contracts. PKKR appealed to the Supreme Court and the Supervisory
Panel of the Supreme Court and was unsuccessful. Royalties on
flared gas were recorded in the consolidated financial statements
as follows: $2.2 million in 2002, $0.2 million in 2003 and $2.1
million in 2004. As a result of the lost cases, the Corporation
recorded additional $2.9 million related to royalties on gas for
2002 and 2003 in its consolidated financial statements for the year
ended December 31, 2004. Additionally, the Corporation has provided
for $1.6 million relating to interest charges on this tax
assessment. A further provision of $1.7 million was made regarding
other issues, which was recorded in 2003. The second case was for
$13.5 million, with $6.9 million related to transfer pricing sent
back by the court for re-negotiation. The final assessment
resulting from the court hearing held in September 2003 totalled
$783,000 including the transfer pricing issue. The Ministry of
Finance appealed to the Supreme Court, approximately $2.1 million
of the assessment relating to the methodology used to revalue tax
pools for currency fluctuations ($1.7 million) and the accelerated
write-off of certain assets ($0.4 million). PKKR was unsuccessful
at the Supreme Court. The Corporation had provided for these
amounts in its consolidated financial statements for the year ended
December 31, 2003. Excess profit tax The Corporation, through its
subsidiary PKKR and joint venture Turgai, is subject to excess
profit tax under the terms of the Hydrocarbon Exploration and
Production contracts they have for oil and gas production. The
contracts are specific to each field. As at December 31, 2004 the
Corporation through Turgai provided for excess profit tax of $35.0
million for 2004. PetroKazakhstan did not incur excess profit tax
in any of its other fields in 2004. It may, however be subject to
excess profit tax for the year ended December 31, 2005 and
subsequent years in certain of its fields. Turgai tax assessments
During 2004, Turgai was subject to a tax audit for the years
2002-2003 and received a tax assessment for approximately $148.0
million including penalties and interest (the Corporation's 50%
share is $74.0 million). The major issue was an assessment for
excess profit taxes of approximately $100.0 million including fines
(the Corporation's 50% share is $50.0 million). The Ministry of
Finance had adopted the position that expenditures relating to
construction in progress are not allowed as a cash outflow when
computing the internal rate of return. The Corporation believes
this position is contrary to the concept of an internal rate of
return calculation and counter to the legislation of the Republic
of Kazakhstan. The Corporation, fellow shareholder Lukoil and
Turgai entered into discussions regarding this assessment with the
Ministry of Finance. As a result, the assessment was re-issued for
$27.0 million (the Corporation's 50% share is $13.5 million) and
discussions will be held to determine the correct method of
calculating excess profit tax and to clarify the interpretation of
current legislation. A further revised assessment may be issued
depending on the outcome of the discussions. The Corporation will
continue to work with government authorities, Turgai, and Lukoil to
resolve the dispute. No provision has been made in the financial
statements for this assessment. Commitments The Corporation has
entered into a number of operating leases for rail cars, certain
oil field equipment and office space. As at December 31, 2004 such
commitments totalled $104.0 million. The obligations for each of
the next five years and in total are as follows: $ millions 2005
2006 2007 2008 2009 Thereafter Total Operating leases 43.0 38.8
21.0 1.0 0.2 - 104.0 Work commitments 3.5 2.1 0.5 - - - 6.1 Total
46.5 40.9 21.5 1.0 0.2 - 110.1 17 SUBSEQUENT EVENTS In February
2005 the Corporation, through one of its operating subsidiaries in
Kazakhstan received a court claim filed by Turgai for $17.0 million
in damages. This claim relates to the temporary production
curtailment of Turgai in late December 2004. The Corporation
believes the claim is without merit and, accordingly, no provision
has been made in the financial statements. In February 2005 the
Corporation, through its joint venture Kazgermunai, received a
court claim filed by the Kyzylorda Akimat for failure to fulfill
infrastructure obligations. The claim is for approximately $102.0
million (our 50% share is $51.0 million), $28.1 million relating to
infrastructure obligations with the remainder being interest
charges. The Corporation believes the claim is without merit as a
substantial portion of the obligation has been met and the
agreement does not impose deadlines. Accordingly, no provision has
been made for this claim in the financial statements. DATASOURCE:
PetroKazakhstan Inc. CONTACT: Clayton J. Clift, Chief Financial
Officer, +7 (3272) 58-18-48; Ihor P. Wasylkiw, Vice President
Investor Relations, (403) 221-8658, (403) 383-2234 (cell); Jeffrey
D. Auld, Vice President, Treasurer, +44 (1753) 410-020, +44
79-00-891-538 (cell)
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