Urals Energy Plc Regulatory News (UEN)

18 Dec 2006 07:01

Urals Energy Public Company Limited18 December 2006 Urals Energy Public Company Limited ("Urals Energy" or "the Company") Adjustment to Interim Results to 30 June 2006 The Company announces that following consultation with its auditors,PricewaterhouseCoopers, it is adjusting a non-cash item relating to theCompany's previously reported results for the period ended 30 June 2006, andwhich will result in a reduction of the reported net income for the period. Thisadjustment arises out of new treatment of previously issued warrants. In connection with raising debt financing in January 2006, Urals Energy issuedwarrants to purchase two million common shares for £3.03 per share. The Companydenominated the exercise price in Sterling for the convenience of the holders,as it is the currency in which the Company's shares are traded. In the interimcondensed consolidated financial information as originally issued on 4 September2006, the Company and its auditors determined that the correct treatment was toclassify the warrants within equity in the consolidated balance sheet. After further consultation with its auditors, the Company has concluded that thecorrect accounting treatment under IFRS requires warrants issued with anexercise price in a currency different than that of the Company's functionalcurrency (the Russian Rouble) be recorded at its fair value within liabilitiesand that changes in its fair value be recorded within the income statement. Asa result, the Company is reissuing its interim condensed consolidated financialstatements as of and for the six months ended 30 June 2006 to properly reflectthis non-cash adjustment. The revised interim condensed consolidated financialstatements are set out below, along with the review report of its independentauditors, PricewaterhouseCoopers, and can also be found on the Company's website(uralsenergy.com). There is no impact on operating profit as a result of this non-cash adjustmentand it also has no impact on EBITDA. As of 30 June 2006, share premium wasreduced by $1,750,000 to $398,601,000, warrants classified as liabilities wererecorded at $5,064,000 and retained earnings was reduced by $3,314,000 to$3,100,000. Profit attributable to shareholders of Urals Energy Public CompanyLimited was reduced by $3,314,000 to $386,000 for the six months ended 30 June2006. These warrants will continue to be adjusted to fair value each reporting periodthrough the statement of income until such time as they are exercised or expire.Given the non-cash nature of this accounting treatment, the Company intends toprovide an earnings measure in future which adjusts for this effect and which itbelieves more accurately reflects the underlying financial position of theCompany. 18 December 2006 Enquiries Pelham PRJames Henderson +44(0) 207 743 6673/+44(0) 777 4444 163Gavin Davis +44(0) 207 743 6677/+44(0) 791 0104 660 INTERIM CONDENSED CONSOLIDATED BALANCE SHEET AT (unaudited) Note 30 June 2006 31 December 2005Assets Current assets Cash and cash equivalents 68,747 32,334Accounts receivable and prepayments 32,210 23,788Inventories 17,899 12,641 Total current assets 118,856 68,763 Non-current assetsProperty, plant and equipment 513,421 287,485Other non-current assets 2,093 2,098 Total non-current assets 515,514 289,583 Total assets 634,370 358,346 Liabilities and equity Current liabilitiesAccounts payable and accrued expenses 15,110 7,932Taxes payable 14,555 11,487Short-term borrowings and current 9 22,656 34,117portion of long-term borrowingsAdvances from customers 670 523Amounts due for acquisition of subsidiaries 8,000 - Total current liabilities before 60,991 54,059warrants classified as liabilities Warrants classified as liabilities 9 5,064 - Total current liabilities 66,055 54,059 Long-term liabilitiesLong-term borrowings 9 51,135 47,005Long-term finance lease obligations 1,395 1,357Dismantlement provision 881 813Deferred tax liability 98,846 51,100Other long term liabilities 663 580 Total liabilities 218,975 154,914 EquityShare capital 6 633 460Share premium 6 398,601 201,355Translation difference 11,695 (2,296)Retained earnings 3,100 2,714 Equity attributable to shareholders of 414,029 202,233Urals Energy Public Company Limited Minority interest 1,366 1,199 Total equity 415,395 203,432 Total liabilities and equity 634,370 358,346 MEMORANDUM NOTE:Total equity 415,395 203,432Warrants classified as liabilities 9 5,064 - 420,459 203,432 Approved on behalf of the Board of Directors on 15 December 2006 ____________________________ ___________________________ W.R. Thomas S. M. BuscherChief Executive Officer Chief Financial Officer INTERIM CONDENSED CONSOLIDATED STATEMENT OF INCOME (unaudited) Note Six months ended 30 June: 2006 2005 RevenuesGross revenues 78,444 27,279Less: excise taxes and export duties (20,006) (6,047) Net revenues 58,438 21,232 Operating CostsCost of sales 7 (40,134) (12,732)Selling, general and administration expenses 8 (13,527) (5,137) Total operating costs (53,661) (17,869) Operating profit (loss) 4,777 3,363 Finance costs 9 (3,485) (3,217)Foreign currency gains/(losses), net 4,319 (192)Change in fair value of warrants classified as 9 (3,314) -liabilities Result before tax 2,297 (46) Income tax (charge) benefit (1,821) (754) Net result 476 (800) - Attributable to minority shareholders 90 86- Attributable to shareholders of the parent 386 (886)company Basic weighted average number of shares 91,891,653 45,143,468Diluted weighted average number of shares 93,390,285 45,143,468 Basic earnings per share (USD) 0.004 (0.02)Diluted earnings per share (USD) 0.004 (0.02) INTERIM CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW (unaudited) Six months ended 30 June: 2006 2005Cash flow from operating activitiesResult before tax 2,297 (46) Total adjustments 12,922 3,944 Operating cash flow before changes in working capital 15,219 3,898 Changes in working capital (3,810) (17,894) Cash flow from/(used in) operations 11,409 (13,996) Interest paid (4,949) (1,377)Income tax paid (1,177) (297) Net cash flow from/(used in) operating activities 5,283 (15,670) Cash flow used for investmentsAcquisition of subsidiaries, net of cash acquired (142,735) (4,500)Purchase of property, plant and equipment (18,958) (4,348) Net cash used in investing activities (161,693) (8,848) Cash flow from financing activitiesProceeds from loans 12,000 35,001Repayment of loans (17,165) (30,053)Proceeds from issuance of ordinary shares, net of associated 197,988 26,215costsContributions from shareholders 881 Net cash from financing activities 192,823 32,044 Effect of exchange rate changes - (50) Net increase in cash and cash equivalents 36,413 7,476Cash and cash equivalents at beginning of the period 32,334 1,421Cash and cash equivalents at end of the period 68,747 8,897 Urals Energy Public Company Limited (presented in US$ thousands) INTERIM CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (unaudited) Note Share Share Unpaid Translation Retained Equity Minority Total capital premium capital difference earnings attributable to interest equity (accumulated Shareholders of deficit) Urals Energy Public Company Limited Balanceat 31 December 209 42,172 (11,324) 1,236 (4,341) 27,952 1,327 29,2792004Issue of shares 6 50 24,950 - - - 25,000 - 25,000Contribution from - - 11,324 - - 11,324 - 11,324shareholdersTranslation difference - - - (2,061) - (2,061) (45) (2,106)for the periodNet result for the - - - - (886) (886) 86 (800)period Balance at 30 June 2005 259 67,122 - (825) (5,227) 61,329 1,368 62,697 Balance at 31 December 460 201,355 - (2,296) 2,714 202,233 1,199 203,4322005Issue of shares 6 173 194,961 - - - 195,134 - 195,134Share-based payments - 2,285 - - - 2,285 - 2,285Translation difference - - - 13,991 - 13,991 77 14,068for the periodNet result for the - - - - 386 386 90 476period Balance at 30 June 2006 633 398,601 - 11,695 3,100 414,029 1,366 415,395 SELECTED NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL INFORMATION(unaudited) Note 1: Activities Urals Energy Public Company Limited ("Urals Energy" or the "Company") wasincorporated as a limited liability company in Cyprus on 10 November 2003. UralsEnergy and its subsidiaries (the ''Group'') are primarily engaged in oil and gasexploration and production in the Russian Federation and processing of crude oilfor distribution on both the Russian and international markets. The Group operates in one business segment which is crude oil exploration andproduction. The Group assesses its results of operations and makes itsstrategic and investment decisions based on the analysis of its profitability asa whole. The Group operates within one geographical segment, which is theRussian Federation. The registered office of Urals Energy is at 31 Evagorou Avenue, Suite 34,CY-1066, Nicosia, Cyprus. InJuly 2005, the Company changed its name to Urals Energy Public Company Limited.The Group's primary office in Russia is located at 6 Oktyabrskaya Ul. Moscow,127018, Russian Federation. At 30 June 2006, the Group comprises the following significant subsidiaries: Entity Nature Jurisdiction Economic interest at 30 June 2006 ZAO Petrosakh Exploration & production Sakhalin 97.2 percentZAO Arcticneft Exploration & production Nenetsky 100.0 percentOOO CNPSEI Exploration & production Komi 100.0 percentZAO Chepetskoye NGDU Exploration & production Udmurtia 100.0 percentOOO Dinyu Exploration & production Komi 100.0 percentOOO Oil Company Dulisma Exploration & production Irkutsk 100.0 percentOOO Michayuneft Exploration & production Komi 100.0 percentOOO Lenskaya Transportnaya Exploration & production Irkutsk 100.0 percentKompaniyaOOO Urals Energy Management Moscow 100.0 percentOOO Urals-Nord Exploration Nenetsky 100.0 percentUrals Energy (UK) Limited Corporate Services UK 100.0 percentUENEXCO Limited Trading Cyprus 100.0 percent Note 2: Seasonality The Group's largest producing subsidiaries, ZAO Petrosakh and ZAO Arcticneft,operate on Sakhalin and Kolguev Islands, respectively, and are not connected tothe State owned pipeline monopoly, Transneft. Accordingly, the majority oftheir production is exported by tanker. Due to severe weather conditions,shipping tankers can only load during the period of June through early December. Outside this period, oil is either stored or processed and sold on the localmarket. During the period under review, Petrosakh and Arcticneft had produced74.5 and 23.8 thousand tons of crude oil, respectively, and sold 66.0 and 22.0thousand tons of crude oil and oil products. The crude oil export sales tookplace in June 2006. Additionally, Arcticneft sold 8.6 thousands tons ofpurchased crude oil. Most of the crude oil in stock was sold in June; however13,900 tons of crude oil remained in stock at 30 June 2006 in Petrosakh. Note 3: Basis of Presentation Reissuance of accounts. Management has withdrawn the previously issuedconsolidated interim condensed financial information which was issued on 4September 2006 in order to correct the classification of warrants issued inJanuary 2006 (Note 9). In the originally issued consolidated interim condensedfinancial information, these warrants were recorded within equity at their fairvalue on the date they were issued. Management has concluded that IFRS requiresthat such instruments be classified as liabilities and that changes in the fairvalue of such instruments be recorded in the statement of income. As a resultof this adjustment, at 30 June 2006, share premium was reduced by $1,750,000,warrants classified as liabilities were recorded at $5,064,000 (representing theestimated fair value of the warrants on 30 June 2006) and retained earnings wasreduced by $3,314,000. Profit attributable to shareholders of Urals EnergyPublic Company Limited was reduced by $3,314,000 for the six months ended 30June 2006. These warrants will continue to be adjusted to fair value eachreporting period through the statement of income until such time as they areexercised or expire. The consolidated interim condensed financial information has been prepared inaccordance with International Accounting Standard No. 34, Interim FinancialReporting ("IAS 34"). This consolidated interim condensed financial informationshould be read in conjunction with the Company consolidated financial statementsas of and for the year ended 31 December 2005 prepared in accordance withInternational Financial Reporting Standards ("IFRS"). The 31 December 2005interim condensed consolidated balance sheet data has been derived from auditedfinancial statements. Use of estimates. The preparation of consolidated interim condensed financialinformation in conformity with IFRS requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities at thedate of the financial statements preparation and the reported amounts of assets,liabilities, revenues and expenses, and the disclosure of contingent assets andliabilities during the reporting period. Estimates have principally been made inrespect to fair values of assets and liabilities, impairment provisions anddeferred income taxes. Actual results may differ from such estimates. Exchange rates. The official rate of exchange of the Russian rouble to the USdollar ("USD") at 30 June 2006 and 31 December 2005 was 27.0789 and 28.7825Russian roubles to USD 1.00, respectively. Any translation of Russian roubleamounts to US dollars or any other hard currency should not be construed as arepresentation that such Russian rouble amounts have been, could be, or will inthe future be converted into hard currency at the exchange rate shown or at anyother exchange rate. Through early 2006, the Russian rouble was not a convertible currency in mostcountries outside of the former Soviet Union and, further, the Group wasrequired to convert 10 percent of its hard currency proceeds into Russianroubles. During the first half of 2006, substantially all restrictions for hardcurrency transactions were lifted and the rights of the government of theRussian Federation and those of the Central Bank of the Russian Federation toimpose such restrictions were waived. Reclassifications. Certain reclassifications have been made to the first halfof 2005 amounts to conform them to the first half of 2006 presentation. For theperiod ended 30 June 2005, selling, general and administrative expenses weredecreased and cost of sales was increased by $416 thousand, primarily to recordother taxes of exploration and production entities. For the period ended 30 June2005, selling, general and administrative expenses were decreased and othernon-operating gains were decreased by $23 thousand. Note 4: Accounting Policies Except as discussed below, the principal accounting policies followed by theGroup are consistent with those disclosed in the financial statements for theyear ended 31 December 2005. Certain new standards and interpretations have been published that are mandatoryfor the Group's accounting periods beginning on or after 1 January 2007 or laterperiods and which the Group has not early adopted. These new standards and interpretations are not expected to significantly affectthe Group's financial statements when adopted: IFRS 7, Financial Instruments:Disclosures and a Complementary Amendment to IAS 1 Presentation of FinancialStatements - Capital Disclosures (effective from 1 January 2007); IFRIC 7,Applying the Restatement Approach under IAS 29 (effective for annual periodsbeginning on or after 1 March 2006); IFRIC 8, Scope of IFRS 2 (effective forannual periods beginning on or after 1 May 2006); and IFRIC 9 Reassessment ofEmbedded Derivatives (effective for annual periods beginning on or after 1 June2006); and IFRIC 10, Interim Financial Reporting and Impairment (effective forannual periods beginning on or after 1 November 2006). New or amended standards and interpretations effective for the Group from 1January 2006 are discussed below. None of the adoptions had a material impact on the Group's financial position orresults of operations. IFRIC 4, Determining whether an Arrangement contains a Lease ("IFRIC 4"). IFRIC4 provides guidance on how to determine whether an arrangement contains a leaseas defined in IAS 17, Leases, on when the assessment or reassessment of anarrangement should be made and on how lease payments should be separated fromany other elements in the arrangement. IAS 39 (Amendment), The Fair Value Option; IAS 39 (Amendment), Cash Flow HedgeAccounting of Forecast Intragroup Transactions; IAS 39 (Amendment), FinancialGuarantee Contracts. The amendments to IAS 39 clarified the use of the fairvalue through profit or loss category of financial instruments and clarified theaccounting for financial guarantees as either insurance contracts or financialinstruments. IAS 19 (Amendment), Employee Benefits. The amendment to IAS 19 introduces anadditional recognition option for actuarial gains and losses in post-employmentdefined benefit plans. IFRS 1 (Amendment), First-time Adoption of International Financial ReportingStandards and IFRS 6 (Amendment), Exploration for and Evaluation of MineralResources. The amendments to IFRS 1 and IFRS 6 provided limited relief tofirst-time adopters of IFRS with respect to the provisions of IFRS 6. IFRIC 5, Rights to Interests arising from Decommissioning, Restoration andEnvironmental Rehabilitation Funds ("IFRIC 5"). IFRIC 5 provides guidance on theaccounting for interests in decommissioning funds. IFRIC 6, Liabilities arising from Participating in a Specific Market - WasteElectrical and Electronic Equipment ("IFRIC 6"). IFRIC 6 addresses theaccounting for liabilities under an EU Directive on waste management for salesof household equipment. Note 5: Acquisition of OOO Dulisma and OOO LTK In April 2006, the Group acquired a 100 percent stake in OOO Oil Company Dulisma("Dulisma") and OOO Lenskaya Transportnaya Kompaniya ("LTK") for $135 millionnet of debt at amount of $15 million. Dulisma holds exploration and productionlicenses in Irkutsk. Net losses of $0.3 million associated with Dulisma wereincluded in the Group's results for the six months ended 30 June 2006. Nogoodwill was recognized in relation to the acquisition of Dulisma and LTK. The table below presents the preliminary fair values of 100 percent of Dulisma'sand LTK's assets and liabilities as of the date of acquisition. No informationon the IFRS carrying values before the acquisition is available as Dulisma andLTK did not prepare IFRS financial statements prior to the acquisition. Fair values at acquisition Cash and cash equivalents 61Accounts receivable and prepayments 2,216Other current assets 2,474Oil and gas properties and equipment 194,297Short-term borrowings and current portion of long-term borrowings (399)Other current liabilities (18,507)Deferred income tax liability, non-current (44,378) Net assets 135,764Less: minority interest - Share in net assets acquired less minority interest 100%Purchase consideration share in net assets acquired 135,764 Excess of the Group's share in -net assets over purchase consideration Included within oil and gas properties and equipment acquired with Dulisma andLTK are property acquisition costs with a fair value of $113.7 million that arenot subject to depletion pending the results of management's assessment of theeconomic viability of the properties. Additionally, included within oil and gasproperties and equipment acquired with Dulisma and LTK are property acquisitioncosts with a fair value of $26.7 million that are being depleted over totalproved reserves. Group Dulisma Adjustments Summary results and and combined LTK elimination Total revenues 78,444 2,389 (991) 79,842Profit (loss) for the period 3,790 (747) 332 3,375 Note 6: Equity Share activity. In May 2006, the Group's shareholders approved a resolutionincreasing the authorized shares be 130 million to 250 million. Also in May2006, the Group completed a private placement of its shares. Proceeds from theissuance totalled $195.1 million, net of associated expenses of $14.0 million. Share activity for the six months ending 30 June 2006 is outlined in the tablebelow. Number of shares Share capital Share premium outstanding (thousands) $ thousands $ thousands At 31 December 2005 86,911 460 201,355 Private placement 31,089 173 194,961 At 30 June 2006 118,000 633 396,316 Share-based payments. In February 2006, the Group's Board of Directors approveda Restricted Stock Plan (the "Plan") authorizing the Compensation Committee ofthe Board of Directors to issue restricted stock of up to five percent of theoutstanding shares of the Group. Upon adoption, the Group issued 1,332,330shares of restricted stock. The vesting schedule for the restricted stockvaries by individual award and, of the February 2006 grant, 811,080 shares,260,625 shares and 260,625 shares vest on 1 January 2007, 2008 and 2009,respectively. The total cost associated with the award was $6.58 million. Such cost will berecognized over the vesting periods of the grants. During the six months ended30 June 2006, the Group recognized $2.29 million in compensation expenseassociated with the Plan. Such amount was recognized within selling, generaland administrative expenses in the interim consolidated condensed statement ofoperations. Note 7: Cost of Sales Period ended 30 June: 2006 2005 Unified production tax 16,744 5,588Depreciation and depletion 7,784 2,706Wages and salaries including payroll taxes 7,046 2,270Cost of purchased production 2,324 -Materials 2,702 1,088Other taxes 968 416Other 2,566 664 Total cost of sales 40,134 12,732 Note 8: Selling, General and Administrative Expenses Period ended 30 June: 2006 2005Wages and salaries 4,248 2,224Audit and professional consultancy fees 2,024 223Office rent and other expenses 596 89Transport and storage services 2,277 365Loading services 240 445Loss on disposal of assets 202 -Share-based payments 2,285 -Other expenses 1,655 1,791 Total selling, general and administrative expenses 13,527 5,137 Note 9: Borrowings All borrowings outstanding at 30 June 2006 and 31 December 2005 were denominatedin US Dollars. Short-term borrowings. Short-term borrowings and current portion of long-termborrowings were as follows at30 June 2006 and 31 December 2005. 30 June 31 December 2006 2005 Current portion of long-term borrowings 22,656 34,117Total short-term borrowings and 22,656 34,117current portion of long-term borrowings Long-term borrowings. Long-term borrowings were as follows at 30 June 2006 and31 December 2005. 30 June 31 December 2006 2005 BNP Paribas Subordinated Loan 10,395 -BNP Paribas Reserve Based Loan Facility 62,835 69,000Bank Zenit - 12,000Other 561 122 Subtotal 73,791 81,122Less: current portion of long-term borrowings (22,656) (34,117) Total long-term borrowings 51,135 47,005 Note 9: Borrowings (Continued) Subordinated Loan. In January 2006, the Group obtained a $12.0 millionsubordinated loan from BNP Paribas (the "Subordinated Loan"). The SubordinatedLoan bears interest at LIBOR plus 5.0 percent and is repayable over five yearsin one payment on 10 November 2010. Attached to the Subordinated Loan werewarrants to purchase up to two million of the Group's common stock for £3.03.The warrants are exercisable at any time and expire in November 2010. The Groupused the proceeds from the Subordinated Loan to repay its debt to bank Zenit of$12.0 million. Management estimated the value of the warrants to be $1.75 million at the timeof issue. As the exercise price of the warrants is denominated in a currencyother than the Group's functional currency, IFRS requires that they beclassified as a liability in the Group's balance sheet and adjusted to fairvalue at each reporting date, with the change in fair value recorded within thestatement of income. As the warrants are exerciseable at any time, this amountwas originally recorded within current liabilities in the Group's consolidatedbalance sheet, with a corresponding reduction in the carrying value of theSubordinated Loan. The difference between the carrying value and the face valueof the Subordinated Loan is accreted over the term to maturity as interestexpense at the effective interest rate of the debt. Interest expense. Interest expense for the periods ended 30 June 2006 and 2005comprised the following: Period ended 30 June: 2006 2005Short-term borrowingsAlfa Eco M - 923Related party borrowings - 559Related party borrowings converted into equity - 540Nimir - 490BNP Paribas Pre-export Loan - 410Zenit 127 62Other short-term borrowings 466 202 Total interest expense associated with short-term borrowings 593 3,186 Long-term borrowingsBNP Paribas Subordinated Loan- interest at coupon rate 492 -- amortisation of issuance costs and discount associated with warrants 174 -BNP Paribas Reserve Based Loan Facility- interest at coupon rate 3,330 -- amortisation of issuance costs 374 - Total interest expense associated with long-term borrowings 4,370 - Financial leasing 80 156 Capitalized interest expense (793) (125) Interest incomeJP Morgan Liquidity Fund (466) -Related party loans issued (64) -Bank deposit (235) - Total interest income (765) - 3,485 3,217 Total finance costs Note 10: Related-Party Transactions For the purposes of the interim consolidated financial information, parties areconsidered to be related if one party has the ability to control the otherparty, is under common control, or can exercise significant influence over theother party in making financial or operational decisions as defined by IAS 24,Related Party Disclosures. In considering each possible related partyrelationship, attention is directed to the substance of the relationship, notmerely the legal form. Below are the related party transactions for the six months ended 30 June 2006and 2005: Six months ended 30 June: 2006 2005 - 4,399Sales of crude oil on export markets Associated volumes, tons - 13,580 Interest expense/(income), net (64) 1,099Office rent paid (included in selling, general and administrative expense) 242 172Other expenses 17 - Sales of crude oil to related parties. Through September 2005 the Group enteredinto transactions in the ordinary course of business with ZAO NC Urals, UralsARA NV and Nafta (B) NV which all are controlled by major shareholders. Thesetransactions included sales and purchases of crude oil and petroleum products.Such transactions substantially ended beginning September 2005. Interest expense. In first half of 2005 of the $1,099 of interest expense $559was paid in cash to UEN Trading and the rest relates to shareholders' loanswhich were converted into equity in August 2005. Compensation to senior management. The Group's senior management team comprises12 people whose compensation totaled $6.778 million, including salary andbonuses of $4.493 million, and stock compensation of $2.285 million. Below are the related party balances as of 30 June 2006 and 31 December 2005: 30 June 31 December 2006 2005 Accounts and notes receivable 1,474 1,474Loans receivable 1,251 1,251Interest receivable 141 77Trade advances received 92 3Other payables and accrued expenses 74 74 Note 11: Contingencies, Commitments and Operating Risks Operating environment. The Russian Federation continues to display somecharacteristics of an emerging market. These characteristics include, but arenot limited to, the existence of a currency that is not yet full convertible inmost countries outside of the Russian Federation, and relatively high inflation.The tax and customs legislation within the Russian Federation is subject tovarying interpretations and changes that can occur frequently. The future economic direction of the Russian Federation is largely dependentupon the effectiveness of economic, financial and monetary measures undertakenby the Government, together with tax, legal, regulatory, and politicaldevelopments. Sales and royalty commitments. In accordance with the sale purchase agreementto acquire Petrosakh, the Group agreed to pay a perpetual royalty to theprevious shareholders of $0.25 per ton of crude oil produced from the currentlyunproved off-shore licensed area. There was no production from the area in2006. This amount will be recognized within selling, general and administrativeexpenses within the consolidated statement of operations when first productionstarts. Oilfield licenses. The Group is subject to periodic reviews of its activitiesby governmental authorities with respect to the requirements of its oil fieldlicenses. Management of the Group correspond with governmental authorities toagree on remedial actions, if necessary, to resolve any findings resulting fromthese reviews. Failure to comply with the terms of a license could result infines, penalties or license limitations, suspension or revocations. The Group's management believes any issues of non-compliance will be resolvedthrough negotiations or corrective actions without any materially adverse effecton the financial position or the operating results of the Group. In January 2006, an extension of the Pogranichnoye License area offshoreSakhalin Island was granted by the Russian Federal Agency for Natural Resources. Under the terms of the grant, the license period was extended to 1 February2011. The terms of the amended license require a total of five explorationwells to be drilled during the period 2005-2010. The East Okruzhnoye No. 1 wellspudded in 2005 will qualify as the first of the five exploration wells requiredby the amended license. Urals Nord has five geological studies licenses which expire in January 2008.According to the license agreement terms Urals Nord is required to drillexploration wells and perform seismic works. Management currently does not believe that any of its significant exploration orproduction licenses are at risk of being withdrawn by the licensing authorities. Additionally, management currently plans to complete all the requiredexploration or development work, as appropriate, within the timetablesestablished in the licenses. Taxation. Russian tax, currency and customs legislation is subject to varyinginterpretations, and changes, which can occur frequently. Management'sinterpretation of such legislation as applied to the transactions and activityof the Group may be challenged by the relevant regional and federal authorities.Recent events within the Russian Federation suggest that the tax authorities maybe taking a more assertive position in their interpretation of the legislationand assessments, and it is possible that transactions and activities that havenot been challenged in the past may be challenged. As a result, significantadditional taxes, penalties and interest may be assessed. Fiscal periods remainopen to review by the authorities in respect of taxes for three calendar yearspreceding the year of review. Under certain circumstances reviews may coverlonger periods. Management believes that its interpretation of the relevant legislation isappropriate and the Group's tax, currency and customs positions will besustained. Where management believes it is probable that a position cannot besustained, an appropriate amount has been accrued for in these financialstatements. Note 11: Contingencies, Commitments and Operating Risks (Continued) Insurance policies. At 30 June 2006, the Group held limited insurance policiesin relation to its assets, operations, or in respect of public liability orother insurable risks. Since the absence of insurance alone does not indicate anasset has been impaired or a liability incurred, no provision has been made inthese financial statements. In August the company insured all of its majorassets, including oil in stock, for a total value of $ 90 million. Also, aliability insurance policy was put in place, including environmental liability,with a total limit of $ 7.8 million. Restoration, rehabilitation and environmental costs. The Group companies haveoperated in the upstream and refining oil industry in the Russian Federation formany years and its activities have had an impact on the environment. Theenforcement of environmental regulations in the Russian Federation is evolvingand the enforcement posture of government authorities is continually beingreconsidered. The Group periodically evaluates its obligation related thereto.The outcome of environmental liabilities under proposed or future legislation,or as a result of stricter enforcement of existing legislation, cannotreasonably be estimated at present, but could be material. Under the currentlevels of enforcement of existing legislation, management believes there are nosignificant liabilities in addition to amounts which are already accrued andwhich would have a material adverse effect on the financial position of theGroup. Legal proceedings. The Group is involved in a number of court proceedings (bothas a plaintiff and a defendant) arising in the ordinary course of business. Inthe opinion of management, there are no current legal proceedings or otherclaims outstanding, which could have a material effect on the result ofoperations or financial position of the Group and which have not been accrued ordisclosed in these consolidated financial statements. Other capital commitments. At 30 June 2006, the Company had no significantcontractual commitments for capital expenditures. ZAO PricewaterhouseCoopers AuditKosmodamianskaya Nab. 52, Bld. 5115054 MoscowRussiaTelephone +7 (495) 967 6000Facsimile +7 (495) 967 6001www.pwc.com REVIEW REPORT OF THE AUDITORS To the Shareholders and Board of Directors of Urals Energy Public Company Limited 1. We have reviewed the accompanying condensed consolidated interimbalance sheet of Urals Energy Public Company Limited and its subsidiaries (the "Group") as at 30 June 2006, and the related condensed consolidated interimstatements of income, cash flows and of changes in equity for the six monthsthen ended as presented on pages 1 through 14. This condensed consolidatedinterim financial information is the responsibility of the Group's management.Our responsibility is to issue a report on this condensed consolidated interimfinancial information based on our review. 2. We conducted our review in accordance with the International Standardon Review Engagements 2400. This Standard requires that we plan and perform thereview to obtain moderate assurance about whether the condensed consolidatedinterim financial information is free of material misstatement. A review islimited primarily to inquiries of company personnel and analytical proceduresapplied to financial data and thus provides less assurance than an audit. Wehave not performed an audit and, accordingly, we do not express an auditopinion. 3. Based on our review, nothing has come to our attention that causes usto believe that the accompanying condensed consolidated interim financialinformation has not been properly prepared, in all material respects, inaccordance with International Accounting Standard 34, Interim FinancialReporting. 4. Without qualifying our report, we draw your attention to Note 3 to theinterim condensed consolidated financial information. Management has withdrawnthe previously issued interim condensed consolidated financial information onwhich we issued an audit report dated 4 September 2006 due to an erroridentified by management related to the classification and valuation of warrantsto purchase the Group's shares. The interim condensed consolidated financialinformation as previously reported by the Group have been revised to adjust forthis matter. Moscow, Russian Federation15 December 2006 This information is provided by RNS The company news service from the London Stock Exchange