ROSN.L Regulatory News (ROSN)

18 Jun 2007 17:03

OJSC OC Rosneft18 June 2007 OJSC Rosneft Oil Company Interim Condensed Consolidated Financial StatementsThree months ended March 31, 2007 and 2006 ----- ------------ ------------ Notes March 31, 2007 December 31, (unaudited) 2006 ----- ------------ ------------ASSETSCurrent assets:Cash and cash equivalents 4 $ 1,626 $ 505Restricted cash 29 29Short-term investments 418 460Accounts receivable, net of allowance 5,603 4,839of US$ 68 and US$65, respectivelyInventories 918 905Deferred tax assets 1,138 1,135Prepayments and other current assets 13 1,324 1,589 ------------ ------------Total current assets 11,056 9,462 ------------ ------------Non-current assets:Long-term investments 594 568Long-term bank loans granted, 152 110net of allowance of US$ 8 and US$6,respectivelyOil and gas properties, net 6 33,252 32,959Property, plant and equipment, net 2,596 2,598Construction-in-progress 375 388Goodwill 161 161Deferred tax assets 104 110Prepayments and other non-currentassets 5 2,075 434 ------------ ------------Total non-current assets 39,309 37,328 ------------ ------------Total assets $ 50,365 $ 46,790 ============ ============LIABILITIES AND SHAREHOLDERS' EQUITYCurrent liabilities: Accounts payable and accruedliabilities $ 2,048 $ 1,998Short-term loans and current portionof long-term debt 7 7,954 6,427Income and other tax liabilities 2,860 2,472Deferred tax liabilities 11 17Other current liabilities 21 20 ------------ ------------Total current liabilities 12,894 10,934 ------------ ------------Asset retirement obligations 815 748Long-term debt 7 8,663 7,402Deferred tax liabilities 5,381 5,446Other non-current liabilities 153 160 ------------ ------------Total non-current liabilities 15,012 13,756 ------------ ------------Minority interest 226 225 ------------ ------------Shareholders' equity:Common stock par value 0.01 RUB(shares issued and outstanding: 10,598 million as of March 31, 2007 20 20and December 31, 2006)Additional paid-in capital 11,352 11,352Retained earnings 10,861 10,503 ------------ ------------Total shareholders' equity 22,233 21,875 ------------ ------------Total liabilities and shareholders'equity $ 50,365 $ 46,790 ============ ============ The accompanying notes to the interim condensed consolidated financialstatements are an integral part of these statements. ----- ------------ ------------ Notes Three months Three months ended ended March 31, 2007 March 31, 2006 (unaudited) (as restated) (unaudited) ----- ------------ ------------RevenuesOil and gas sales 8, 12 $ 5,638 $ 5,039Petroleum products andprocessing fees 8, 12 2,496 2,219Support services and otherrevenues 86 69 ------------ ------------Total 8,220 7,327 Costs and expenses Production and operatingexpenses 542 443Cost of purchased oil, gas,petroleum products andrefining costs 480 288Selling, general andadministrative expenses 186 142Pipeline tariffs andtransportation costs 939 735Exploration expenses 35 26Depreciation, depletion andamortization 673 384Accretion expense 11 8Taxes other than income tax 14 1,916 1,609Export customs duty 8 2,678 2,164 ------------ ------------ Total 7,460 5,799 ------------ ------------ Operating income 760 1,528Other income/(expenses)Interest income 37 38Interest expense (201) (206)Loss on disposal of property,plant and equipment (12) (4)Gain on disposal ofinvestments 4 -Equity share in affiliates'(loss)/profits (11) 8Dividends and income fromjoint ventures 1 1Other expenses, net (51) (26)Foreign exchange loss (47) (159) ------------ ------------Total other income/(expenses) (280) (348) ------------ ------------ Income before income tax andminority interest 480 1,180 Income tax expense 9 (121) (335) ------------ ------------ Income before minorityinterest 359 845 Minority interest insubsidiaries' earnings (1) (43) ------------ ------------ Net income $ 358 $ 802 ============ ============ Earnings per share (in US$) -basic and diluted $ 0.03 $ 0.09Weighted average number ofshares outstanding (millions) 10,598 9,092 The accompanying notes to the interim condensed consolidated financialstatements are an integral part of these statements. ----- ------------ ------------ Notes Three months Three months ended ended March 31, 2007 March 31, 2006 (unaudited) (as restated) (unaudited) ----- ------------ ------------Operating activitiesNet income $ 358 $ 802Reconciliation of net income to net cashprovided by operating activities:Effect of foreign exchange 43 135Depreciation, depletion andamortization 673 384Dry well expenses 16 1Loss on disposal of property,plant and equipment 12 4Deferred income tax (115) (78)Accretion expense 11 8Equity share in affiliates'loss /(profits) 11 (8)Gain on disposal ofinvestments (4) -Acquisition of tradingsecurities (165) (6)Proceeds from sale of tradingsecurities 183 6Increase in allowance fordoubtful accounts and bankloans granted 5 1Minority interests insubsidiaries' earnings 1 43Changes in operating assets and liabilities net of acquisitions:Increase in accountsreceivable (758) (110)Increase in inventories (13) (97)Increase in restricted cash - (1)Decrease/(increase) inprepayments and other currentassets 267 (47)Increase in prepayments andother non-current assets (35) (14)(Increase)/decrease inlong-term bank loans granted (44) 15Increase in interest payable 2 25Increase in accounts payableand accrued liabilities 64 231Increase in income and othertax liabilities 388 118(Decrease)/increase in othercurrent and non-currentliabilities (6) 1 ------------ ------------Net cash provided byoperating activities 894 1,413 ------------ ------------Cash flows from investing activitiesCapital expenditures (1,033) (590)Acquisition of licences - (258)Proceeds from disposals ofproperty, plant and equipment 7 4Acquisition of short-terminvestments (11) (69)Proceeds from sale ofshort-term investments - 4Acquisition of entities andadditional shares insubsidiaries, (8) (105)net of cash acquiredProceeds from sale oflong-term investments 9 7Acquisition of debtreceivable - (463)Acquisition of long-terminvestments (10) (36) ------------ ------------Net cash used in investingactivities $ (1,046) $ (1,506) ------------ ------------ The accompanying notes to the interim condensed consolidated financialstatements are an integral part of these statements. ----- ------------ ------------ Notes Three months Three months ended ended March 31, 2007 March 31, 2006 (unaudited) (as restated) (unaudited) ----- ------------ ------------Cash flows from financing activitiesProceeds from short-term debt $ 5,284 $ 99Repayment of short-term debt (2,061) (518)Proceeds from long-term debt 42 669Repayment of long-term debt (490) (851)Prepayment for acquisition oftreasury shares andpromissory notes 5 (1,503) -Dividends paid to minorityshareholders in subsidiaries (1) - ------------ ------------Net cash, provided by/(usedin) financing activities 1,271 (601) ------------ ------------ Increase/(decrease) in cashand cash equivalents 1,119 (694)Cash and cash equivalents atbeginning of period 505 1,173Effect of foreign exchange oncash and cash equivalents 2 10 ------------ ------------Cash and cash equivalents atend of period $ 1,626 $ 489 ============ ============ Supplementary disclosures of cash flowinformationCash paid for interest (netof amount capitalized) $ 158 $ 166Cash paid for income taxes $ 288 $ 374 The accompanying notes to the interim condensed consolidated financialstatements are an integral partof these statements. 1. Nature of Operations Open Joint Stock Company ("OJSC") Rosneft Oil Company ("Rosneft") and itssubsidiaries, (collectively the "Company" or the "Group"), are principallyengaged in exploration, development, production and sale of crude oil and gasand refining, transportation and sale of petroleum products in the RussianFederation and in certain international markets. 2. Significant Accounting Policies Form and Content of the Interim Condensed Consolidated Financial Statements The Company maintains its books and records in accordance with accounting andtaxation principles and practices mandated by the Russian legislation. Theaccompanying interim condensed consolidated financial statements were derivedfrom the Company's Russian statutory books and records with adjustments made topresent them in accordance with accounting principles generally accepted in theUnited States of America ("US GAAP"). The interim condensed consolidated financial statements included herein areunaudited and have been prepared in accordance with US GAAP for interimfinancial reporting of public companies (primarily Accounting Principle BoardOpinion 28 (APB 28) "Interim Financial Reporting") and do not include alldisclosures required by US GAAP. The Company omitted disclosures which wouldsubstantially duplicate the disclosures contained in its 2006 auditedconsolidated financial statements, such as accounting policies and details ofaccounts which have not changed significantly in amount or composition.Additionally, the Company has provided disclosures where significant events haveoccurred subsequent to the issuance of its 2006 audited consolidated financialstatements. Management believes that the disclosures are adequate to make theinformation presented not misleading if these interim condensed consolidatedfinancial statements are read in conjunction with the Company's 2006 auditedconsolidated financial statements and the notes related thereto. In the opinionof management, the financial statements reflect all adjustments of a normal andrecurring nature necessary to present fairly the Company's financial position,results of operations and cash flows for the interim periods. The results of operations for three months ended March 31, 2007 may not beindicative of the results of operations for the full year. These interimcondensed consolidated financial statements contain information updated throughJune 15, 2007. The accompanying interim condensed consolidated financial statements differ fromthe financial statements issued for statutory purposes in Russia in that theyreflect certain adjustments, not recorded in the Company's statutory books,which are appropriate to present the financial position, results of operationsand cash flows in accordance with US GAAP. The principal adjustments relate to:(1) recognition of certain expenses; (2) valuation and depreciation of property,plant and equipment; (3) foreign currency translation; (4) deferred incometaxes; (5) valuation allowances for unrecoverable assets; (6) accounting for thetime value of money; (7) accounting for investments in oil and gas property andconveyances; (8) consolidation principles; (9) recognition and disclosure ofguarantees, contingencies, commitments and certain assets and liabilities; (10)accounting for asset retirement obligations; (11) business combinations andgoodwill/negative goodwill; (12) accounting for derivative instruments. 2. Significant Accounting Policies (continued) Form and Content of the Interim Condensed Consolidated Financial Statements(continued) As previously reported in the financial statements for the three months endedMarch 31, 2006, revenues associated with the sales of crude oil purchased fromthird parties and flowed through Caspian Pipeline Consortium system werepresented on a gross basis under the provisions ofEITF 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent.During 2006, a review was undertaken into the presentation of certain of thesetransactions where the ultimate customer was an affiliate of the crude oilsupplier. It was concluded that such transactions should be reported on a netbasis. The effect of this restatement on the first quarter of 2006 amounted to areduction in Oil and gas sales in the consolidated statement of income by US$174 million and a reduction of Cost of purchased oil, gas, petroleum productsand refining costs in the consolidated statement of income by US$ 174 millionwith no effect on net income. Certain other amounts in the consolidated statements of income and cash flowsfor three months ended March 31, 2006 were reclassified to conform to thecurrent period presentation. The following is a summary of reclassifications made in the consolidatedstatement of income for three months ended March 31, 2006 as a result of therestatement and reclassifications discussed above: --------- --------- --------- Three months Adjustments Three months ended and ended March 31, 2006 reclassificatio March 31, 2006 as previously ns as restated reported (unaudited) (unaudited) --------- --------- --------- Oil and gassales $ 5,213 $ (174) $ 5,039Petroleumproducts andprocessingfees 2,219 - 2,219Supportservices andother revenues 84 (15) 69Total sales 7,516 (189) 7,327Production andoperatingexpenses 421 22 443Cost ofpurchased oil,gas, petroleum 541 (253) 288products and refining costsSelling,general andadministrativeexpenses 167 (25) 142Pipelinetariffs andtransportationcosts 693 42 735Explorationexpenses 35 (9) 26Depreciation,depletion andamortization 384 - 384Accretionexpense 8 - 8Taxes otherthan incometax 1,574 35 1,609Export customsduty 2,168 (4) 2,164Total 5,991 (192) 5,799 Operatingincome 1,525 3 1,528 Total otherincome/(expenses) (345) (3) (348) Income beforeincome tax andminorityinterest $ 1,180 $ - $ 1,180 2. Significant Accounting Policies (continued) Management Estimates The preparation of the financial statements in conformity with US GAAP requiresmanagement to make estimates and assumptions that affect the reported amounts ofassets and liabilities in the balance sheet as well as the amounts of revenuesand expenses recognized during the reporting periods. Certain significant estimates and assumptions for the Company include:estimation of economically recoverable oil and gas reserves; rights to andrecoverability and useful lives of long-term assets and investments; impairmentof goodwill; allowances for doubtful accounts receivable; asset retirementobligations; legal and tax contingencies; environmental remediation obligations;recognition and disclosure of guarantees and other commitments; fair valuemeasurements; ability to renew operating leases and to enter into new leaseagreements; classification of certain debt amounts. Some of the most significantestimates are made in connection with OJSC Yuganskneftegaz. Management believesit has a reasonable and appropriate basis for its judgment pertaining to itsestimates and assumptions. However, actual results could differ from thoseestimates. Foreign Currency Translation The management of the Company has determined the US Dollar as the functional andreporting currency for the purpose of financial reporting under US GAAP.Monetary assets and liabilities have been translated into US dollars using theofficial exchange rate as of the balance sheet date. Non-monetary assets andliabilities have been translated at historical rates. Revenues, expenses andcash flows are translated into US dollars at average exchange rates for theperiod or exchange rates prevailing on transaction dates where practicable. Gains and losses resulting from the re-measurement into US dollars are includedin the "Foreign exchange gain" in the consolidated statement of income. As of March 31, 2007, December 31, 2006, and as of March 31, 2006, the CentralBank of Russian Federation ("CBR") official rates of exchange were 26.01 rubles("RUB"), 26.33 RUB and 27.76 RUB per US dollar, respectively. Average rates ofexchange in the first three months of 2007 and 2006 were calculated as 26.31 RUBand 28.16 RUB per US dollar, respectively. As of June 15, 2007 the official rateof exchange was 26.05 RUB per US dollar. The translation of local currency denominated assets and liabilities into USdollars for the purposes of these financial statements does not indicate thatthe Company could realize or settle, in US dollars, the reported values of theseassets and liabilities. Likewise, it does not indicate that the Company couldreturn or distribute the reported US dollar value of capital to itsshareholders. Income Taxes The Company follows the provisions of Accounting Principles Board Opinion("APB") 28, Interim Financial Reporting, to arrive at the effective tax rate.The effective tax rate is the best estimate of the expected annual tax rate tobe applied to the taxable income for the current reporting period. The rate isbased on the currently enacted tax rate (24%) and includes estimates of theannual tax effect of permanent differences and the realization of certaindeferred tax assets. 2. Significant Accounting Policies (continued) Derivative Instruments All derivative instruments are recorded on the balance sheet at fair value ineither prepayments and other current assets, other non-current assets, otheraccruals, or other liabilities and deferred credits. Recognition andclassification of the gain or loss that results from recording and adjusting aderivative to fair value depends on the purpose for issuing or holding thederivative. Gains and losses from derivatives that are not accounted for ashedges under Statement of Financial Accounting Standard ("SFAS") 133, Accountingfor Derivative Instruments and Hedging Activities, are recognized immediately inearnings. Comprehensive Income The Company applies SFAS 130, Reporting Comprehensive Income which establishesstandards for the calculation and reporting of the Company's comprehensiveincome (net income plus all other changes in net assets from non-owner sources)and its components in consolidated financial statements. As of March 31, 2007, and 2006, there were no other comprehensive income itemsand, therefore, comprehensive income for the first three months of 2007 and 2006equals net income. Changes in Accounting Policies Since January 1, 2007 the Company has applied Interpretation ("FIN") 48,Accounting for Uncertainty in Income Taxes while preparing the US GAAP financialstatements. Income tax additionally accrued under the provisions of FIN 48 (ifany) together with corresponding interest and penalties will be recognized inthe consolidated statement of income in the Income tax expense line. Accruedliabilities for interest and penalties for income tax totalled US$ 211 millionas of January 1, 2007 and US$ 249 million as of March 31, 2007. As of January 1, 2007 the Company analyzed its tax positions for uncertaintiesaffecting the recognition and measurement of tax positions. The adoption of FIN48 had an insignificant impact on the financial statements of the Company. TheCompany had unrecognized tax benefits in the amount of RUB 890.1 million as ofboth January 1, 2007 and March 31, 2007 (US$ 33.8 million as of January 1, 2007and US$ 34.2 million as of March 31, 2007). The total amount of unrecognized taxbenefits that, if recognized, would affect the effective income tax rate is RUB890.1 million as of both January 1, 2007 and March 31, 2007 (US$ 33.8 million asof January 1, 2007 and US$ 34.2 million as of March 31, 2007). During the first quarter of 2007 no additional uncertainties relating to incometax were identified which would influence the recognition and measurement of theCompany's tax positions. As discussed in the Note 11, the tax authorities are currently examining theCompany's income tax returns for the years 2004-2006 (for the period up toSeptember 30, 2006). There are no other tax years that remain subject toexamination. Recent Accounting Standards In May 2007, the Financial Accounting Standards Board ("FASB") issued FASB StaffPosition ("FSP") FIN 39-1, Amendment of FASB Interpretation No. 39, to amendparagraph 10 of FASB Interpretation ("FIN") 39, Offsetting of Amounts Related toCertain Contracts, to permit a reporting entity that is party to a masternetting arrangement to offset the receivable or payable recognized upon paymentor receipt of cash collateral against the fair value amounts recognized againstderivative instruments that had been offset under the same master nettingarrangement in accordance with paragraph 10. 2. Significant Accounting Policies (continued) Recent Accounting Standards (continued) FSP FIN 39-1 also amends paragraph 3 of FIN 39 to replace the terms,"conditional contracts" and "exchange contracts," with the broader term,"derivative contracts," as defined in SFAS 133, Accounting for DerivativeInstruments and Hedging Activities. FSP FIN 39-1 applies to fiscal yearsbeginning after November 15, 2007, with early application permitted. The Companyexpects that FSP FIN 39-1 will not have a material impact on the Company'sfinancial statements. In May 2007, the FASB issued FSP FIN 48-1, Definition of Settlement in FASBInterpretation No. 48, an amendment of FIN 48, Accounting for Uncertainty inIncome Taxes, to clarify that a tax position is effectively settled for thepurpose of recognizing previously unrecognized tax benefits in accordance withparagraph 10(b) of that Interpretation if (a) the taxing authority has completedall of its required or expected examination procedures, (b) the enterprise doesnot intend to appeal or litigate any aspect of the tax position, and (c) it isconsidered remote that the taxing authority would reexamine the tax position.FSP FIN 48-1 is effective as of the same dates as FIN 48, with retrospectiveapplication required for entities that have not applied FIN 48 in a mannerconsistent with the provisions of the proposed FSP. The Company expects that FSPFIN 48-1 will not have a material impact on the Company's financial statements. 3. Acquisitions In January 2007, the Company co-founded Truboprovodny ConsortiumBurgas-Alexandroupolis Limited. The other co-founders were OJSC Transneft andOJSC Gazprom. The Company has a 33.3% interest in this new entity and accountsfor it using the equity method. The total amount of the Company's investment isRUB 3 million (US$ 0.1 million at the CBR exchange rate as of the transactiondate). In January 2007, the Company paid RUB 629 million (US$ 24 million at the CBRexchange rate as of the transaction date) to acquire 55,331,951 newly issuedordinary shares of OJSC Ohinskaya TETS. Following this acquisition the Companyholds an 85.61% equity interest. OJSC Ohinskaya TETS is a combined heat andpower station. One of the main consumers of OJSC Ohinskaya TETS's production isRN-Sakhalinmorneftegaz LLC, the Company's subsidiary. The primary reason forthis acquisition is to improve electricity supply management. The purchase pricewas fully allocated to the fair values of assets acquired and liabilitiesassumed. The results of operations of OJSC Ohinskaya TETS are not significantand therefore pro forma financial information has not been disclosed. In January 2007, the Company bought 339,582 ordinary shares of additional shareissue of OJSC Verhnechonskneftegaz paying RUB 201 million (US$ 7.6 million atthe CBR exchange rate as of the transaction date). Through this purchase theCompany maintained its previous share of 25.94% in this investment. 4. Cash and Cash Equivalents Cash and cash equivalents comprise the following: ----------- ----------- March 31, 2007 December 31, (unaudited) 2006 ----------- -----------Cash in hand and cash in bank - RUB $ 141 $ 244Cash in hand and cash in bank - foreigncurrencies 195 192Deposits and other 1,290 69 ----------- -----------Total cash and cash equivalents $ 1,626 $ 505 =========== =========== Cash accounts denominated in foreign currencies represent primarily cash in US$. As of March 31, 2007, Cash (Deposits and other) include a deposit in the amountofUS$ 1,113 million paid in March 2007 for participation in auctions for sales ofOJSC Gazprom neft shares and other assets of Yukos Oil Company in April 2007.The deposit was subsequently returned to the Company following an unsuccessfulbid. 5. Prepayments and Other Non-current Assets As of March 31, 2007, Prepayments and other non-current assets includes adeposit in the amount of US$ 1,503 million paid in March 2007 for participationin the auction for the sale of 1 billion ordinary shares of Rosneft (9.44% ofshare capital) and promissory notes of OJSC Yuganskneftegaz which were owned byYukos Oil Nompany (see Note 14). 6. Oil and Gas Properties, Net Oil and gas properties comprise the following: ----------- ----------- March 31, 2007 December 31, (unaudited) 2006 ----------- ----------- Wells and related facilities $ 18,034 $ 17,128Mineral rights 19,356 19,356Pipelines 1,645 1,627Equipment under capital lease 23 26 ----------- -----------Total cost 39,058 38,137Less: accumulated depletion (5,806) (5,178) ----------- -----------Total oil and gas properties, net $ 33,252 $ 32,959 =========== =========== Mineral rights includes costs to acquire unproved properties in the amount ofUS$ 3,878 million as of March 31, 2007 and December 31, 2006. The Company plansto explore and develop the respective fields. The Company's management believesthese costs are recoverable. 7. Short-Term Loans and Long-Term Debt Short-term loans and borrowings comprise the following: ----------- ----------- March 31, 2007 December 31, (unaudited) 2006 ----------- -----------Bank loans - US$denominated $ 3,310 $ 79Bank loans - RUB denominated 487 2,517Customer deposits - US$denominated 33 29Customer deposits - RUB denominated 155 164Promissory notes payable 806 771Other 513 505 ----------- ----------- 5,304 4,065Current portion of long-term debt 2,650 2,362 =========== ===========Total short-term loans and current $ 7,954 $ 6,427portion of long-term debt =========== =========== US$ denominated bank loans represent loans received from a consortium ofinternational banks and inter-bank loans raised by the Company's subsidiarybank. The interest rates for these loans ranged from LIBOR plus 0.25% p.a. toLIBOR plus 3.02% p.a. In March 2007, two companies within the Group signed loan agreements with aconsortium of international banks with the following terms: an amount of US$ 9.5billion is for 6 months,US$ 6 billion is for 12 months and US$ 6.5 billion is for 18 months. These loansare at LIBOR plus 0.25-0.50% annual interest rates depending on the finalsettlement date. These loans were drawn to finance the planned acquisition ofassets during the auctions for sales of the assets of Yukos Oil Company. Thetotal amount drawn down as of March 31, 2007 is US$ 2.6 billion and is includedinto Bank loans - US$ denominated (See also Note 14). The RUB denominated loans represent a loan received from a domestic bank thatbears interest rates ranging from 6.2% to 6.5% p.a., depending on the maturityschedule, and inter-bank loans raised by the Company's subsidiary bank withinterest rates ranging from 4% to 7.25% p.a. Customer deposits represent fixed-term deposits placed by customers with theCompany's subsidiary bank, denominated in RUB and foreign currencies. Customerdeposits denominated in RUB bear interest rates ranging from 0% to 12.2% p.a.Customer deposits denominated in foreign currencies bear interest rates rangingfrom 0% to 8% p.a. Promissory notes are primarily payable on demand and bear interest rates rangingfrom 0% to 18%. The promissory notes are recorded at amortized cost. Other borrowings primarily include four RUB-denominated loans provided to OJSCYuganskneftegaz by Yukos Capital S.a.r.l., which bear interest of 9% p.a. andmature in 2007. 7. Short-Term Loans and Long-Term Debt (continued) Long-term debt comprises the following: ----------- ----------- March 31, 2007 December 31, (unaudited) 2006 ----------- -----------Bank loans - foreign currencies $ 6,627 $ 4,826Bank loans raised for funding the acquisitionof 4,537 4,780OJSC Yuganskneftegaz - US$ denominatedBorrowings - US$ denominated 15 30Customer deposits - foreign currencies 12 15Borrowings - RUB denominated 1 2Customer deposits - RUB denominated 90 85Bonds of the subsidiary bank - RUB denominated 4 4Other long-term liabilities - RUB denominated 27 22 ----------- ----------- 11,313 9,764 ----------- -----------Current portion of long-term debt (2,650) (2,362) ----------- -----------Total long-term debt $ 8,663 $ 7,402 =========== =========== The interest rates on the Company's long-term bank loans denominated in foreigncurrencies range from 4.35% to 5.97% p.a. Weighted average interest rates onthese loans were 5.89% and 5.96% (LIBOR plus 0.57% and LIBOR plus 0.64%) as ofMarch 31, 2007 and as of December 31, 2006, respectively. These loans areprimarily secured by contracts for the export of crude oil. In February 2007, the Company signed and drew down a six month bridge-loan froma consortium of international banks in the amount of US$ 2.5 billion at LIBORplus 0.25-0.30% p.a., depending on the final settlement date. These funds wereused for temporary refinancing (until other long-term loans are received) ofshort-term loans obtained from the Russian banks in the fourth quarter of 2006with less favorable terms. This bridge-loan was partially refinanced by along-term loan in May 2007 in the amount of US$ 2 billion (See Note 14) andtherefore this debt is classified as long-term. In January 2006, a subsidiary of the Company registered in Cyprus signed a loanagreement with a major international bank for an amount of EUR 188 million orUS$ 251 million using the CBR rate as of March 31, 2007. The loan bears aninterest rate of EURIBOR plus 0.35%. As of March 31, 2007 the drawdown amountwas of EUR 122.7 million or US$ 163.6 million using the CBR rate as ofMarch 31, 2007. Funds borrowed are to be invested in the construction ofice-reinforced tankers for crude oil transportation purposes in north-westernregions of the Russian Federation. The loan is scheduled to be repaid within thetwelve years following the completion of tanker construction. As of March 31, 2007 the bank loans raised for funding the acquisition of OJSCYuganskneftegaz represent a long-term loan obtained through a government-ownedbank at a rate of LIBOR plus 0.7% p.a. repayable in equal monthly installments.It is scheduled for repayment in 2011 and is secured by pledging the Company'sreceivables under a long-term contract for the supply of crude oil (seeNote 11). Weighted average interest rates on US$ denominated borrowings were 7.35% and8.85% as of March 31, 2007, as of December 31, 2006, respectively. Customer deposits include fixed-term RUB and foreign currency denominatedcustomer deposits placed with the Company's subsidiary bank which matureprimarily during 2007 and are included in the current portion of long-term debt.The RUB-denominated deposits bear an interest rate ranging from 2% to 12% p.a.Deposits denominated in foreign currencies bear an interest rate of 5.5% p.a. 7. Short-Term Loans and Long-Term Debt (continued) As of March 31, 2007, other long-term liabilities include promissory notes whichmostly mature in 2008. The promissory notes are recorded at amortized cost. Generally, long-term loans are secured by oil export contracts. Usually, underthe terms of such contracts, the lender is provided with an express right ofclaim for contractual revenue which must be remitted directly to transitcurrency accounts (US$ denominated) with those banks, should the Company fail torepay its debt in time. The Company is obliged to comply with a number of restrictive financial andother covenants contained within its loan agreements. Restrictive covenantsinclude maintaining certain financial ratios. As a result of the Company'sacquisition of OJSC Yuganskneftegaz in December 2004, and the resulting debtincurred and assets and liabilities, including contingent liabilities,consolidated, the Company was not in compliance with various financial and othercovenants of existing loan agreements as of December 31, 2004. In July 2005, the creditors waived violations related to restrictive financialratios and agreed to amend the financial ratio covenants in line with theCompany's new structure and new scope of activities. The creditors also waivedother events of default arising from the breach of other covenant provisions.Effective 1 January 2007, the creditors granted amendments to the loanagreements which remove these provisions and have included new waivers whichstate that the Company must: •redeem, secure, discharge in full or restructure (and comply with any restructuring plans once it is agreed upon) all OJSC Yuganskneftegaz's tax liabilities by January 3, 2008 (see also Note 14); • pay any arbitration award relating to Moravel Litigation (see Note 11) or the Yukos Capital S.a.r.l. Litigation (see above) if any such arbitration award is granted by a court of the Russian Federation, within the time frame provided for such payment under Russian Law. These conditions also apply to certain new borrowings obtained throughout thefirst quarter of 2007. As of March 31, 2007, the Company is in compliance withall restrictive financial and other covenants contained within its loanagreements. The aggregate maturity of long-term debt outstanding as of March 31, 2007 is asfollows (assuming the debt will not be called by creditors ahead of scheduledmaturities): (unaudited) -----------Up to December 31, 2007 $ 2,0632008 2,6472009 2,9002010 2,6132011 7512012 and after 339 -----------Total long-term debt $ 11,313 =========== 8. Revenue Related Taxes Revenues include the following taxes and duties: ----------- ----------- Three months Three months ended March 31, ended March 31, 2007 2006 (as (unaudited) restated) (unaudited) ----------- -----------Oil and gas salesExport customs duty $ 2,312 $ 1,833Petroleum products sales and processing feesExport customs duty 366 331 ----------- -----------Total revenuerelated taxes $ 2,678 $ 2,164 =========== =========== 9. Taxes Income taxes comprise the following: ----------- ----------- Three months Three months ended March 31, ended March 31, 2007 (unaudited) 2006 (as restated) (unaudited) Current incometax expense $ 236 $ 413Deferredincome taxbenefit (115) (78) ----------- -----------Total $ 121 $ 335 =========== =========== The most significant reconciling items between theoretical income tax expenseand recorded tax are foreign exchange effects and tax related interest (See Note14). However, the variations in the customary relationship between income taxexpense and pretax accounting income are not significant. 10. Related Party Transactions In the course of its usual activity, the Company regularly enters intotransactions with other enterprises which are directly or indirectly controlledby the Russian Government. Such enterprises are business units of RAO UES, OJSCGazprom, OJSC Russian Railways, OJSC Sberbank, Vnesheconombank, OJSC Bank VTB,CJSC Gazprombank, OJSC AK Transneft and federal agencies including taxauthorities. Management considers these business relations as part of regularactivities in the Russian Federation and believes that they will remainunchanged in the foreseeable future. Total amounts of transactions and balances with companies controlled by theGovernment of the Russian Federation for each of the reporting periods endingMarch 31, as well as related party balances as of March 31, 2007 and December31, 2006 are provided in the table below: 10. Related Party Transactions (continued) ----------- ----------- Three months Three months ended March 31, ended March 31, 2007 2006 (as (unaudited) restated) (unaudited) ----------- -----------RevenuesOil and gassales $ 19 $ -Sales ofpetroleumproducts andprocessingfees 32 66Supportservices andother revenues 1 - ----------- ----------- $ 52 $ 66 =========== ===========Costs and expensesPipelinetariffs andtransportationcosts $ 615 $ 449Other expenses 20 3 ----------- ----------- $ 635 $ 452 =========== ===========Other operations Sale ofshort-term andlong-terminvestments $ - $ 2Proceeds fromshort-term andlong-term debt 443 2Repayment ofshort-term andlong-term debt 2,729 1,180Deposits placed - 2,694Deposits paid 55 2,877Interestexpense 95 122Interest income 1 -Banking fees $ 3 $ - ----------- ----------- March 31, 2007 December 31, (unaudited) 2006 ----------- -----------AssetsCash and cash equivalents $ 42 $ 69Accounts receivable 20 20Prepayments and other current assets 152 137Short-term and long-term investments - 172 ----------- ----------- $ 214 $ 398 =========== ===========LiabilitiesAccounts payable $ 26 $ 24Short-term and long-term debt (includinginterest) 4,992 7,282 ----------- ----------- $ 5,018 $ 7,306 =========== =========== Total amounts of transactions and balances with related parties (except forthose controlled by the Government of the Russian Federation), which areprimarily equity investees and joint ventures, for each of the reporting periodsending March 31, as well as related party balances as of March 31, 2007 andDecember 31, 2006 are provided in the table below: 10. Related Party Transactions (continued) ----------- ----------- Three months Three months ended March 31, ended March 31, 2007 (unaudited) 2006 (as restated) (unaudited) ----------- -----------RevenuesOil and gas sales $ 7 $ 9Sales of petroleumproducts andprocessing fees 24 16Support servicesand other revenues 22 8 ----------- ----------- $ 53 $ 33 =========== ===========Costs and expensesPurchase of oil andpetroleum products $ 265 $ 7Other 28 9expenses ----------- ----------- $ 293 $ 16 =========== =========== OtheroperationsSales ofshort-termand long-term investments $ - $ 10Acquisitionof short-termand long-terminvestments 8 26Proceedsfrom short-term and long-termdebt - 14Repaymentof short-term and long-termdebt - 24Borrowingsissued 5 15Repaymentof borrowings issued 1 1 Interest expense 2 -Interest income $ 40 $ - ----------- ----------- March 31, 2007 December 31, (unaudited) 2006 ----------- -----------AssetsAccounts receivable $ 43 $ 33Prepayments and other current assets 41 42Short-term and long-term investments 129 121 ----------- ----------- $ 213 $ 196 =========== ===========LiabilitiesAccounts payable $ 266 $ 193Short-term and long-term debt (includinginterest) 10 9 ----------- ----------- $ 276 $ 202 =========== =========== 11. Commitments and Contingencies Russian Business Environment Whilst there have been improvements in the Russian economic situation, such asan increase in gross domestic product and a reduced rate of inflation, Russiacontinues economic reforms and development of its legal, tax and regulatoryframeworks as required by a market economy. The future stability of the Russianeconomy is largely dependent upon these reforms and developments and theeffectiveness of economic, financial and monetary measures undertaken by thegovernment. In addition laws and regulations, including interpretations,enforcement and judicial processes, continue to evolve in Russia. Other laws andregulations and certain other restrictions producing a significant effect on theCompany's industry, including, but not limited to the following issues: rightsto use subsurface resources, environmental matters, site restoration,transportation and export, corporate governance, taxation, etc. 11. Commitments and Contingencies (continued) Taxation Legislation and regulations regarding taxation in Russia continue to evolve. Thevarious legislation and regulations are not always clearly written and theirinterpretation is subject to the opinions of the local, regional and nationaltax authorities. Instances of inconsistent opinions are not unusual. The current regime of penalties and interest related to reported and discoveredviolations of Russia's laws, decrees and related regulations is severe. Interestand penalties are levied when an understatement of a tax liability isdiscovered. As a result, the amounts of penalties and interest can besignificant in relation to the amounts of unreported taxes. In Russia tax returns remain open and subject to inspection for a period of upto three years. The fact that a year has been reviewed does not close that year,or any tax return applicable to that year, from further review during thethree-year period. Russian transfer pricing rules were introduced in 1999, giving Russian taxauthorities the right to make transfer pricing adjustments and impose additionaltax liabilities in respect of all controlled transactions, provided that thetransaction price differs from the market price by more than 20%. Controlledtransactions include transactions between related entities and certain othertypes of transactions between independent parties, such as foreign tradetransactions with significant (by more than 20%) price fluctuations. The Russiantransfer pricing rules are vaguely drafted, leaving wide scope forinterpretation by Russian tax authorities and courts. Due to the uncertaintiesin interpretation of transfer pricing legislation, the tax authorities maychallenge the Group's prices and propose an adjustment. If such priceadjustments are upheld by the Russian courts and implemented, the Group's futurefinancial results could be adversely affected. In addition, the Group could facelosses associated with the assessment of prior tax underpaid and relatedinterest and penalties, which could have an adverse effect on the Group'sfinancial condition and results of operations. The Company's management believesthat such transfer pricing related tax contingencies are possible but will nothave any significant impact on the Company's financial statements. The Company and its certain subsidiaries are currently being audited by taxauthorities for the years 2004-2006 (for the period up to September 30, 2006).The Company's management believes that the outcome of these tax audits will notresult in any material tax payments. The Company provides finance for operations of its subsidiaries by various meanswhich may lead to certain tax risks. The Company's management believes that therelated tax contingencies are remote rather than possible and will not have anysignificant impact on the Company's financial statements. The Company is currently appealing a number of decisions made by the taxauthorities not to reimburse VAT paid by the Company. The Company's relatedclaims in the amount ofRUB 1,172 million (US$ 45 million at the CBR exchange rate as of the balancesheet date) have been upheld by various courts. The remaining claims in theamount of RUB 1,124 million (US$ 43 million at the CBR exchange rate as of thebalance sheet date) are still being heard in the courts. Overall, management believes that the Company has paid or accrued all taxes thatare applicable. For taxes other than income tax, where uncertainty exists, theCompany has accrued tax liabilities based on management's best estimate of theprobable outflow of resources embodying economic benefits, which will berequired to settle these liabilities. Possible liabilities which were identifiedby management at the balance sheet date as those that can be subject todifferent interpretations of the tax laws and regulations are not accrued in theinterim condensed consolidated financial statements. 11. Commitments and Contingencies (continued) Capital Commitments The Company and its subsidiaries are engaged in ongoing capital projects forexploration and development of production facilities and modernization ofrefineries and the distribution network. The budgets for these projects aregenerally set on an annual basis. Depending on the current market situation,actual expenditures may vary from the budgeted amounts. It is planned that future costs will be primarily self-financed. In addition,the Company is seeking external sources of financing. Management believes thatthe Company will receive all the financing required to complete both existingand scheduled projects. Environmental Matters Due to the nature of its business, Rosneft and its subsidiaries are subject tofederal legislation regulating environmental protection. The majority ofenvironmental liabilities arise as a result of accidental oil spills and leaksthat pollute land, and air pollution. The Company considers fines paid and otherenvironmental liabilities as immaterial, given the scale of its operations. In the course of its operations, the Company seeks to comply with internationalenvironmental standards and monitors compliance therewith on a regular basis.With a view to improve environmental activities, the Company takes specificmeasures to mitigate the adverse impact of its current operations on theenvironment. Legislation that regulates environmental protection in the Russian Federation isevolving, and the Company evaluates its liabilities in accordance therewith.Currently it is not possible to reasonably estimate the liabilities of theCompany which may be incurred should the legislation be amended. The management believes that, based on the existing legislation, the Company isunlikely to have liabilities that need to be accrued in addition to the amountsalready recognized in the interim condensed consolidated financial statementsand that may have a material adverse effect on the operating results orfinancial position of the Company. Social Commitments The Company is required to maintain certain social infrastructure assets (notowned by the Company and not recorded in the interim condensed consolidatedfinancial statements) for use by its employees. The Company incurred US$ 9 million and US$ 6 million in social infrastructureand similar expenses for the first three months of 2007 and 2006, respectively.These expenses are presented as other expenses in the consolidated statement ofincome. Pension Plans For the first three months of 2007 and 2006 the Company contributed to thecorporate pension fund US$ 28 million and US$ 5 million, respectively. Insurance The Company insured its assets through the insurance company SK Neftepolis LLC. As of March 31, 2007 and December 31, 2006 the amount of coverage on assetsunder such insurance amounted to US$ 2,234 million and US$ 2,209 million,respectively. Russian insurance providers do not offer business interruption insurance.Currently, it is not a common practice in Russia to obtain such insurance. 11. Commitments and Contingencies (continued) Guarantees and Indemnity As of March 31, 2007, the Company has provided guarantees for certain debtagreements primarily of its subsidiaries. In accordance with the debtagreements, the Company is obliged to perform on the guarantee and to pay thebank all amounts of outstanding guaranteed liabilities, including interest. The Company cannot substitute guarantees issued by any novation agreement ormutual offset. The Company's obligations under guarantees issued are valid incase of any change in loan agreements. After the full payment and settlement of all obligations under the guarantees,the Company has the right to subrogate its respective part of all bank claimsagainst the debtor in accordance with the loan agreement. In the event theCompany makes payments under guarantees issued, it has a right to claim theamounts paid from the debtor. In January 2007, the Company signed a guarantee agreement in respect of all theobligations of CJSC Vankorneft per the irrevocable uncovered documentary letterof credit for the amount ofUS$ 62 million and the period of up to 730 days. In the event of default, asspecified in the agreement,the bank may request the Company to place a depositin the amount necessary to ensure all of the Company's existing and potentialobligations are payable for the period of validity of such letter of credit. In January 2007, RN-Yuganskneftegaz LLC signed a guarantee agreement in respectof all the obligations of RN Energo LLC under the contract of electricity supplywith OJSC TEC (Tyumenskaya Energosbytovaya Companiya) for the period untilJanuary 31, 2010, in the amount of approximately US$ 58 million. The Company's outstanding guarantees as of March 31, 2007 are as follows: ------------ ---------- --------- ----------- ------------- Contractual Maximum guarantee Beneficiary Loan Maturity principal amount Bank/Company debtor date amount as of March31,2007 ------------ ---------- --------- ----------- -------------Societe Generale S.A Yukos (as Facility Agent) Oil Company May 29, 2009 $ 1,600 $ 662 ---------- --------- ----------- ------------- ------------ In May 2005, Moravel Investments Limited, an affiliate of Yukos Oil Company,filed an arbitral claim against OJSC Yuganskneftegaz in the London Court ofInternational Arbitration for the recovery of US$ 662 million pertaining to theloan of US$ 1,600 million from Societe Generale S.A. The case was heard in July 2006. On April 16, 2007, the London Court of InternationalArbitration made an intermediate ruling to dismiss Moravel's claim to OJSCYuganskneftegaz. On April 26, 2007, Moravel informed the Company that in itsview the intermediate ruling was a nullity and accused the Company of arepudiatory breach of the arbitration clause contained in the guarantee underwhich the London Court of International Arbitration was brought. Moravelreserved its rights to challenge the interim ruling. The Company expects toreceive the final ruling in June, 2007. The Company believes that theprobability of any payments under the above guarantee is remote. On March 17,2006, the Moscow Arbitration Court ruled that the guarantee agreement signed byOJSC Yuganskneftegaz with respect to Yukos Oil Company loan received fromSociete Generale S.A. in the amount of US$ 1,600 million was invalid. Thisruling was upheld on May 15, 2006 by the 9th Appeal Arbitration Court in appealhearings, which made it legally binding and enforceable. This ruling was alsoupheld in cassational instance on August 31, 2006. 11. Commitments and Contingencies (continued) Litigation, Claims and Assessments In 2002, an option agreement was entered into between Total E&P Vankor (Total)and Anglo-Siberian Oil Company Limited (ASOC) under which Total had aconditional option to buy the latter's 60% stake in Taimyrneft LLC which ASOCheld through Anglo-Siberian Oil Company Limited (Cyprus) (ASOC Cyprus) for US$ 1million. ASOC and ASOC Cyprus belong to the Rosneft International Group. Total obtained injunctions in various jurisdictions to prevent ASOC Cyprus fromtrading in the shares of Taimyrneft LLC. In 2005 Total E&P Vankor filed anarbitration claim, asking to exercise the option or cover the losses amountingto above US$ 700 million. In early 2007, the court awarded US$ 116 million toTotal E&P Vankor, including interest at 6.5% p.a. from December 31, 2004 to thedate of payment, and also to compensate Total E&P Vankor for the related courtexpenses ofUS$ 2.8 million. The amounts to be paid are provided in full in the Company's2006 audited consolidated financial statements. During 2004, Total E&P Vankor issued a claim against ASOC Cyprus for US$ 640million under the sale and purchase agreement for a 52% share in Eniseineft LLC.Total alleged that under the terms of a sale agreement, the shareholding inEniseineft LLC should have been sold to them. The Company contested this on thegrounds that the relevant conditions precedent to the sale had not been met. Thearbitration proceedings were completed in 2006 and the final decision was madein late 2006 in the Company's favor. Apart from the court expenses, which arenot significant for the Company, there are no additional liabilities related tothis claim. No additional actions have been taken by any of the partiesregarding this case. The Company is a co-defendant in the litigation in the USA in respect of theacquisition of OJSC Yuganskneftegaz. This litigation was brought by certainholders of American Depository Receipts ("ADRs") of Yukos Oil Company seekingunspecified damages due to the fall in market value of the ADRs. On July 13,2006, plaintiffs filed an amended complaint. The amended complaint seeks torecover from alleged loss resulting from events surrounding Yukos Oil Company,including levying of taxes upon Yukos Oil Company by the Russian Federation, thearrest of certain assets of Yukos Oil Company to pay owed taxes. Defendantsfiled motions to dismiss on numerous grounds. The Company believes that thisclaim is without merit. The Company is also a co-defendant in litigation in the Moscow Arbitration Courtwith respect to the auction for the common shares of OJSC Yuganskneftegaz. Thislitigation was brought by Yukos Oil Company. The claimant is seeking to recoverall the common shares of OJSC Yuganskneftegaz and also damages in the totalamount of RUB 388 billion (approximately US$ 14.9 billion at the CBR exchangerate as of March 31, 2007). In February 2007, the Moscow Arbitration Courtdismissed Yukos Oil Company's claim. This ruling was upheld in appeal hearingson May 23, 2007. The Company's subsidiaries are involved in other litigations which arise fromtime to time in the course of their business activities. The Company'smanagement believes that the ultimate result of these litigations will notsignificantly affect the operating results or financial position of the Company. 11. Commitments and Contingencies (continued) License Agreements In accordance with certain licence agreements or separate agreements concludedfrom time to time with the local and regional authorities the Company isrequired to maintain certain levels of expenditures for health, safety andenvironmental protection, as well as maintain certain level of capitalexpenditures. Generally these expenditures are within the normal operating andcapital budgets and are accounted for when incurred in accordance with existingaccounting policies for respective costs and expenses. Oil Supplies In January 2005, the Company entered into a long-term contract until 2010 withChina National United Oil Corporation for export supplies of crude oil in thetotal amount of 48.4 million tonnes to be delivered in equal annual amounts. Theprices are determined based on usual commercial terms for crude oil deliveries. 12. Segment Information Presented below is information about the Company's operating segments inaccordance with SFAS 131, Disclosures about Segments of an Enterprise andRelated Information. The Company determines its operating segments based ondifferences in the nature of their operations. The performance of theseoperating segments is assessed by management on a regular basis. The explorationand production segment is engaged in field exploration and development andproduction of crude oil and natural gas. The refinery, marketing anddistribution segment is engaged in processing crude oil and other hydrocarbonsinto petroleum products, as well as purchasing, sale and transportation of crudeoil and petroleum products. The other activities segment consists of banking,finance services, drilling services, construction services and other activities.Substantially all of the Company's operations are conducted in the RussianFederation. Further, the geographical regions within the Russian Federation havesubstantially similar economic and regulatory conditions. Therefore, the Companyhas not presented any separate geographical disclosure. The significant accounting policies applied to each segment are consistent withthose applied to the interim condensed consolidated financial statements. Salestransactions for goods and services between the segments are carried out usingprices agreed upon between Rosneft and its subsidiaries. 12. Segment Information (continued) Operating segments during the three months ended March 31, 2007 are as follows: --------- --------- --------- --------- --------- Exploration Refining, and marketing and Total production distribution Other activities Elimination Consolidated (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) --------- --------- --------- --------- ---------Revenues fromexternalcustomers $ 362 $ 7,816 $ 42 $ - $ 8,220Intersegmental revenues 1,411 481 282 (2,174) - --------- --------- --------- --------- ---------Total revenues $ 1,773 $ 8,297 $ 324 $ (2,174) $ 8,220 ========= ========= ========= ========= =========Operating expenses andcost ofpurchased oiland petroleumproducts $ 491 $ 512 $ 19 $ - $ 1,022Depreciation,depletion andamortization $ 580 $ 89 $4 $ - $ 673 Operatingincome $ 715 $ 1,937 $ 282 $ (2,174) $ 760 Total otherexpenses, net (280) ---------Income beforeincome tax $ 480 ========= Total assets $ 34,229 $ 11,303 $ 4,833 $ - $ 50,365 Operating segments during the three months ended March 31, 2006 are as follows(as restated): --------- --------- --------- --------- --------- Refining, Exploration marketing and Total and production distribution Other activities Elimination Consolidated (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) --------- --------- --------- --------- ---------Revenues from external customers $ 117 $ 7,170 $ 40 $ - $ 7,327In tersegmentalrevenues 2,679 209 129 (3,017) - --------- --------- --------- --------- ---------Total $ 2,796 $ 7,379 $ 169 $ (3,017) $ 7,327revenues ========= ========= ========= ========= ========= Operatingexpenses and cost of purchased oiland petroleumproducts $ 315 $ 406 $ 10 $ - $ 731Depreciation,depletion andamortization $ 287 $ 94 $ 3 $ - $ 384 Operatingincome $ 605 $ 3,816 $ 124 $ (3,017) $ 1,528 Total otherexpenses, net (348) ---------Income before income tax $ 1,180 ========= Total assets $ 23,358 $ 6,189 $ 1,126 $ - $ 30,673 12. Segment Information (continued) Below is a breakdown of revenues by domestic and export sales, with aclassification of export sales based on the direction of shipment. ------------ ------------ Three months Three months ended ended March 31, March 31, 2007 2006 (as restated) (unaudited) (unaudited)Oil and gas sales ------------ ------------Export salesof crude oil - Europe $ 3,802 $ 3,573Export salesof crude oil - Asia 1,229 963Export salesof crude oil - CIS 362 395Export salesof crude oil - other directions 128 -Domestic salesof crude oil 38 58Domestic sales of gas 79 50 ------------ ------------Total oil andgas sales $ 5,638 $ 5,039 ============ ============ Petroleum products and processing feesExport sales of petroleum products - Europe and other directions $ 800 $ 810Export sales of petroleum products - Asia 515 456Export sales of petroleum products - CIS 24 38Domestic sales of petroleum products and processing fees 1,157 915 ------------ ------------Total petroleum products and processing fees $ 2,496 $ 2,219 ============ ============ 13. Fair Value of Financial Instruments and Risk Management The Company, in connection with its current activities, is exposed to variousfinancial risks, such as foreign currency risks, interest rate risks and creditrisks. The Company manages these risks and monitors its exposure on a regularbasis. A substantial portion of the Company's sales revenues is received in US dollars.In addition, substantial financing and investing activities, obligations andcommitments are also undertaken inUS dollars. However, significant operating and investing expenditures, otherobligations and commitments as well as tax liabilities are undertaken in rubles.As a result of any decline of theUS dollar against the ruble, the Company is exposed to the correspondingcurrency risk. The Company enters into contracts to economically hedge certain of its risksassociated withRUB appreciation but these are not eligible for hedge accounting by SFAS 133. In the first quarter of 2007, the Company entered into forward currencycontracts which were being used to hedge this foreign currency risk offorecasted operating expense. These financial exposures are managed as anintegral part of the Company's risk management program, which seeks to reducethe potentially adverse effect that the volatility of the exchange rate marketsmay have on operating results. Presently, the maximum term over which theCompany has hedged exposures to the variability of the currency exchange ratesunder its derivative instruments is 12 months. As a result of the above mentioned forward foreign currency contracts enteredinto in the first quarter of 2007, fair value of forward contracts in the amountof US$ 39.7 million was recorded as prepayments and other current assets in theconsolidated balance sheet, and the change in fair value was recognized as aforeign exchange gain in the amount of US$ 30.2 million in the consolidatedstatement of income, net of tax effects. 14. Subsequent Events On April 3, 2007, the Company acquired 100% interest in CJSC Yukos-Mamontovo forno consideration. Transfer of rights of ownership was made upon the decision ofthe Moscow Arbitration Court. CJSC Yukos-Mamontovo is an owner servicefacilities leased by RN-Yuganskneftegas and used in crude oil production. Thisacquisition will be accounted for as an asset acquisition, not as a businesscombination. In May 2007, the Company signed a long-term loan agreement with a syndicate ofWestern banks in the amount of US$ 2 billion, maturing in 5 years at theinterest rate of LIBOR plus 0.5% applies for the first three years and LIBORplus 0.575% for the remaining term. These funds were used to refinance part ofthe bridge loan in the amount of US$ 2.5 billion (See Note 7). In April-May 2007, the Company received the remaining US$ 19.4 billion relatedto the loan agreement with a syndicate of Western banks for US$ 22 billion (SeeNote 7). In April 2007, the Company paid RUB 112 million (US$ 4 million at the CBRexchange rate as of the transaction date) to acquire 9,876,869 additionallyissued ordinary shares of OJSC Ohinskaya TETS (see Note 3), thus increasing itsshare in OJSC Ohinskaya TETS equity to 87.52%. On March 27, 2007, RN-Razvitie LLC, the Company's wholly owned subsidiary, wonthe auction for the acquisition of 1 billion ordinary shares of Rosneft (9.44%of share capital) and promissory notes of OJSC Yuganskneftegaz from Yukos OilCompany. RN-Razvitie LLC offered RUB 197.84 billion (US$ 7.59 billion at the CBRexchange rate as of the date of the auction). For the purpose of consolidatedfinancial statements the purchase price was allocated proportionally to the fairvalue of assets acquired and amounted to RUB 194.43 billion for Rosneft shares,or RUB 194.43 for 1 share (US$ 7.46 billion and US$ 7.46 for 1 share at the CBRexchange rate as of the date of the auction, respectively) and RUB 3,412 millionfor the promissory notes of OJSC Yuganskneftegaz(US$ 131 million at the CBR exchange rate as of the date of the auction). Theface value of the promissory notes amounted to RUB 3,558 million (US$ 136million at the CBR exchange rate as of the date of the auction). Title to theshares and promissory notes was transferred to RN-Razvitie LLC on April 17,2007. In April and May 2007, Neft-Aktiv LLC, the Company's wholly owned subsidiary,won a number of auctions for the sale of certain assets of Yukos Oil Company.These assets comprise shares in various exploration and production, refining,oilfield service and marketing companies located in Siberia and Povolzhskiyregions of Russian Federation. The total consideration was RUB 344.1 billion(US$ 13.3 billion at the CBR exchange rate as of the date of the auction). TheCompany is currently analyzing the assets acquired and liabilities assumed,including an assessment of the related tax and legal contingencies which existedas of the date of acquisition. On May 22, 2007, the Rosneft's Board of Directors recommended to the annualshareholders' meeting to declare annual dividends (based on 2006 performanceresults) for common stock in the amount of RUB 14,096 million or RUB 1.33 pershare (US$ 541.9 million or US$ 0.05 per share at the CBR rate as of March 31,2007). 14. Subsequent events (continued) In June 2007 a subsidiary of the Company won an auction for licence for theexploration and development of two oil and gas fields in Samara Region. Totalcost of licenses amounted toRUR 932 million (US$ 35.8 million at the CBR rate as of March 31, 2007). In June 2007 the Company made an irrevocable offer to purchase certain assets ofYukos Oil Company that were not purchased by the successful bidder at theauction. The assets comprise shares in various marketing and energy-generatingcompanies located in the South region of Russia. The total consideration will beRUB 4.9 billion (US$ 188 million at the CBR rate as of March 31, 2007). In June 2007, the Company expects to receive cash proceeds in the amount ofapproximatelyRUB 263.7 billion (US$ 10.1 billion at the CBR rate as of March 31, 2007)following the bankruptcy proceedings of Yukos Oil Company. As a result, theCompany expects to record a gain in the second quarter of 2007 in the amount ofapproximately US$ 8.8 billion (before considering tax effects). These proceedsare expected to be used to repay the Company's debt that was drawn for theacquisition of certain assets of Yukos Oil Company during the auctions (see Note7). In May 2007, the governmental order was issued whereby Rosneft was included inthe list of "Strategic Companies of Russia". As such Rosneft became generallyeligible for tax restructuring procedure. Following the intention of the Company to proceed with the tax restructuringprocess in respect of OJSC Yuganskneftegaz back-taxes, the tax authoritiesretroactively cancelled suspension of certain interest accruals for them to befully included in the tax restructuring plan. These tax liabilities were alreadyfully accrued in the consolidated financial statements in prior periods togetherwith all penalties and a portion of interest before such interest accrual wassuspended following the Company's applications for restructuring. As a result ofthe cancellation, additional interest of approximately US$ 388 million becamedue as of June 1, 2007. The additional amount of interest, not previouslyrecorded, amounted to approximately US$ 332 million as of March 31, 2007. Thetotal amount of interest and penalties payable as of March 31, 2007 amounted toUS$ 831 million. The interest will continue to accrue in accordance with the TaxCode of the Russian Federation at the CBR refinancing rate until therestructuring plan is approved by the Government of the Russian Federation whichis currently expected before the end of 2007. The total principle amount subjectto tax restructuring provisions is US$ 1,260 million. Tax restructuring rules generally provide for forgiveness of interest andpenalties subject to overall compliance with the restructuring plan andaccelerated payments of principal amounts of tax liabilities. The Companyintends to comply with the tax restructuring plan, including accelerationprovision, once and if it is in force. The management concluded that thecriteria of 'more-likely than-not' in respect of forgiveness of income taxrelated interest and penalties is currently not met as well as 'probable'criteria in respect of forgiveness of all other tax interest and penalties.Therefore the full accrual of additional interest in the amount of US$ 332million was recorded in these interim condensed consolidated financialstatements for the period ended March 31, 2007 as a change in estimate. This information is provided by RNS The company news service from the London Stock Exchange