exv4w12



 





Exhibit 4.12




Appendix — U.S. GAAP reconciliation




Reconciliation to accounting principles generally accepted in the United States



The un-audited consolidated financial statements of the Company for the nine month periods ended
September 30, 2007 and 2006, and the audited consolidated financial statements for the years ended
December 31, 2006 have been prepared in accordance with generally accepted accounting principles in
Canada (“Canadian GAAP”) which, in most respects, conforms to generally accepted accounting
principles in the United States (“U.S. GAAP”). The reconciliations and other information presented
in this note are solely in relation to the consolidated financial statements. The significant
differences between Canadian GAAP and U.S. GAAP as they relate to the Company are presented
throughout this note. Additionally, where there is no significant conflict with Canadian GAAP
requirements some of the additional U.S. GAAP disclosure requirements have been incorporated
throughout the Canadian GAAP financial statements.




 









 










Reconciliation to accounting principles generally accepted in the United States (cont’d)




Consolidated Balance Sheets




	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	As at
	 	 	September 30, 2007	 	December 31, 2006	 	September 30, 2006
	 	 	$ (Un-audited)	 	$	 	$ (Un-audited)
	 	 	Canadian GAAP	 	US GAAP	 	Canadian GAAP	 	US GAAP	 	Canadian GAAP	 	US GAAP
	 
	Assets
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Current assets:
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Cash and cash equivalents (8)
	 	11,928,674	 	 	 	10,200,333	 	 	 	31,681,435	 	 	 	31,681,435	 	 	 	30,597,797	 	 	 	30,597,797	 
	Cash restricted
	 	 	26,672,843	 	 	 	26,672,843	 	 	 	29,301,940	 	 	 	29,301,940	 	 	 	35,652,911	 	 	 	35,652,911	 
	Trade receivables
	 	 	54,530,040	 	 	 	54,530,040	 	 	 	67,542,902	 	 	 	67,542,902	 	 	 	33,353,429	 	 	 	33,353,429	 
	Commodity derivative contracts
	 	 	—	 	 	 	—	 	 	 	1,759,575	 	 	 	1,759,575	 	 	 	1,703,100	 	 	 	1,703,100	 
	Other assets (8)
	 	 	2,931,626	 	 	 	134,098	 	 	 	2,954,946	 	 	 	2,954,946	 	 	 	95,265	 	 	 	95,265	 
	Inventories
	 	 	125,269,818	 	 	 	125,269,818	 	 	 	67,593,558	 	 	 	67,593,558	 	 	 	103,125,128	 	 	 	103,125,128	 
	Prepaid expenses (8)
	 	 	3,964,060	 	 	 	3,946,099	 	 	 	880,640	 	 	 	880,640	 	 	 	1,509,444	 	 	 	1,509,444	 
	Deposit on business acquisition
	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	30,639,000	 	 	 	30,639,000	 
	 
	Total current assets
	 	 	225,297,061	 	 	 	220,753,231	 	 	 	201,714,996	 	 	 	201,714,996	 	 	 	236,676,074	 	 	 	236,676,074	 
	Cash restricted
	 	 	1,229,726	 	 	 	1,229,726	 	 	 	3,217,284	 	 	 	3,217,284	 	 	 	3,158,378	 	 	 	3,158,378	 
	Deferred financing costs (7)
	 	 	—	 	 	 	1,500,949	 	 	 	1,716,757	 	 	 	1,716,757	 	 	 	1,831,073	 	 	 	1,831,073	 
	Investment in LNG Project (8)
	 	 	—	 	 	 	5,429,862	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 
	Plant and equipment (1), (8)
	 	 	237,671,816	 	 	 	225,432,318	 	 	 	242,642,077	 	 	 	231,175,281	 	 	 	236,989,837	 	 	 	225,352,161	 
	Oil and gas properties
	 	 	71,205,570	 	 	 	71,205,570	 	 	 	54,524,347	 	 	 	54,524,347	 	 	 	44,781,951	 	 	 	44,781,951	 
	Future income tax benefit
	 	 	2,251,626	 	 	 	2,251,626	 	 	 	1,424,014	 	 	 	1,424,014	 	 	 	1,203,600	 	 	 	1,203,600	 
	 
	Total assets
	 	 	537,655,799	 	 	 	527,803,282	 	 	 	505,239,475	 	 	 	493,772,679	 	 	 	524,640,913	 	 	 	513,003,237	 
	 
	Liabilities and shareholders’ equity
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Current liabilities:
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Accounts payable and accrued liabilities
(7),(8)
	 	 	132,626,075	 	 	 	132,408,209	 	 	 	76,095,369	 	 	 	76,095,369	 	 	 	75,855,550	 	 	 	75,855,553	 
	Commodity derivative contracts
	 	 	562,725	 	 	 	562,714	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 
	Working capital facility — crude feedstock
	 	 	27,948,185	 	 	 	27,948,185	 	 	 	36,873,508	 	 	 	36,873,508	 	 	 	66,425,433	 	 	 	66,425,433	 
	Deferred hedge gain (2)
	 	 	—	 	 	 	—	 	 	 	1,385	 	 	 	—	 	 	 	959,687	 	 	 	—	 
	Deferred liquefaction project liability
	 	 	—	 	 	 	—	 	 	 	6,553,080	 	 	 	6,553,080	 	 	 	5,092,097	 	 	 	5,092,097	 
	Current
portion of secured loan (7)
	 	 	144,187,210	 	 	 	144,245,543	 	 	 	13,500,000	 	 	 	13,500,000	 	 	 	—	 	 	 	—	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Current portion of indirect participation
interest — PNGDV
	 	 	580,775	 	 	 	580,775	 	 	 	730,534	 	 	 	730,534	 	 	 	1,961,867	 	 	 	1,961,867	 
	 
	Total current liabilities
	 	 	305,904,970	 	 	 	305,745,426	 	 	 	133,753,876	 	 	 	133,752,491	 	 	 	150,294,634	 	 	 	149,334,950	 
	Accrued financing costs
	 	 	—	 	 	 	—	 	 	 	1,087,500	 	 	 	1,087,500	 	 	 	1,450,000	 	 	 	1,450,000	 
	Secured loan
(7)
	 	 	58,000,000	 	 	 	58,000,000	 	 	 	184,166,433	 	 	 	184,166,433	 	 	 	186,053,775	 	 	 	186,053,775	 
	Deferred gain on contributions to LNG
project (8)
	 	 	8,910,293	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 
	Indirect participation interest (5)
	 	 	96,086,369	 	 	 	115,926,369	 	 	 	96,861,259	 	 	 	116,861,259	 	 	 	96,861,259	 	 	 	116,861,259	 
	Indirect participation interest — PNGDV
	 	 	1,343,719	 	 	 	1,343,719	 	 	 	1,190,633	 	 	 	1,190,633	 	 	 	—	 	 	 	—	 
	 
	Total liabilities
	 	 	468,830,754	 	 	 	481,015,514	 	 	 	417,059,701	 	 	 	437,058,316	 	 	 	434,659,668	 	 	 	453,699,984	 
	 
	Non-controlling interest (6)
	 	 	5,692,678	 	 	 	5,354,150	 	 	 	5,759,206	 	 	 	5,416,831	 	 	 	5,726,684	 	 	 	5,374,388	 
	Shareholders’ equity:
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Share capital
	 	 	235,327,634	 	 	 	235,327,634	 	 	 	233,889,366	 	 	 	233,889,366	 	 	 	232,678,088	 	 	 	232,678,088	 
	Contributed surplus
	 	 	9,148,271	 	 	 	9,148,271	 	 	 	4,377,426	 	 	 	4,377,426	 	 	 	4,196,247	 	 	 	4,196,247	 
	Warrants
	 	 	2,119,034	 	 	 	2,119,034	 	 	 	2,137,852	 	 	 	2,137,852	 	 	 	2,137,852	 	 	 	2,137,852	 
	Induced Conversions of Convertible Debt
(4)
	 	 	—	 	 	 	6,899,211	 	 	 	—	 	 	 	6,899,211	 	 	 	—	 	 	 	6,899,211	 
	Accumulated Other Comprehensive Income
	 	 	2,374,528	 	 	 	2,374,528	 	 	 	1,492,869	 	 	 	1,494,258	 	 	 	1,343,294	 	 	 	2,313,448	 
	Conversion options (5)
	 	 	19,840,000	 	 	 	—	 	 	 	20,000,000	 	 	 	—	 	 	 	20,000,000	 	 	 	—	 
	Accumulated deficit
	 	 	(205,677,100	)	 	 	(214,435,060	)	 	 	          (179,476,945	)	 	 	(197,500,581	)	 	 	        (176,100,920	)	 	 	(194,295,981	)
	 
	Total shareholders’ equity
	 	 	63,132,367	 	 	 	41,433,618	 	 	 	82,420,568	 	 	 	51,297,532	 	 	 	84,254,561	 	 	 	53,928,865	 
	 
	Total liabilities and shareholders’ equity
	 	 	537,655,799	 	 	 	527,803,282	 	 	 	505,239,475	 	 	 	493,772,679	 	 	 	524,640,913	 	 	 	513,003,237	 
	 







 











 






Reconciliation
to accounting principles generally accepted in the United States (cont’d)




Consolidated statements of operations



The following table presents the consolidated statements of operations under U.S. GAAP compared to
Canadian GAAP:




	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Nine month period ended	 	 	Year ended	 	 	Nine month period ended	 
	 	 	September 30, 2007	 	 	December 31, 2006	 	 	September 30, 2006	 
	 	 	$ (Un-audited)	 	 	$	 	 	$ (Un-audited)	 
	 	 	Canadian GAAP	 	 	U.S. GAAP	 	 	Canadian GAAP	 	 	U.S. GAAP	 	 	Canadian GAAP	 	 	U.S. GAAP	 
	 
	Revenue
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Sales and operating revenues (1)
	 	 	453,603,730	 	 	 	453,603,730	 	 	 	511,087,934	 	 	 	511,189,438	 	 	 	340,758,419	 	 	 	340,758,419	 
	Interest income
	 	 	1,734,361	 	 	 	—	 	 	 	3,223,995	 	 	 	—	 	 	 	2,375,543	 	 	 	—	 
	Other income
	 	 	2,202,510	 	 	 	—	 	 	 	3,747,603	 	 	 	—	 	 	 	2,149,562	 	 	 	—	 
	 
	 
	 	 	457,540,601	 	 	 	453,603,730	 	 	 	518,059,532	 	 	 	511,189,438	 	 	 	345,283,524	 	 	 	340,758,419	 
	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Expenses
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Cost of sales and operating expenses (excluding
depreciation shown below) (1)
	 	 	423,976,643	 	 	 	423,976,643	 	 	 	499,494,540	 	 	 	499,584,532	 	 	 	339,958,342	 	 	 	339,980,788	 
	Administrative and general expenses (1), (2), (8)
	 	 	23,348,650	 	 	 	23,339,627	 	 	 	20,728,618	 	 	 	20,762,574	 	 	 	16,129,026	 	 	 	16,129,026	 
	Depreciation and amortization (1)
	 	 	10,037,606	 	 	 	9,679,389	 	 	 	12,352,672	 	 	 	11,591,513	 	 	 	8,799,170	 	 	 	8,208,891	 
	Exploration costs, excluding exploration
impairment
	 	 	12,071,133	 	 	 	12,071,133	 	 	 	6,176,866	 	 	 	6,176,866	 	 	 	6,226,731	 	 	 	6,226,731	 
	Exploration impairment
	 	 	525,741	 	 	 	525,741	 	 	 	1,647,185	 	 	 	1,647,185	 	 	 	1,528,495	 	 	 	1,528,495	 
	Legal and professional fees (1), (8)
	3,742,659	 	 	 	3,307,433	 	 	 	3,937,517	 	 	 	3,937,517	 	 	 	2,803,935	 	 	 	2,803,935	 
	Short term borrowing costs
	 	 	8,773,023	 	 	 	8,773,023	 	 	 	8,478,540	 	 	 	8,478,540	 	 	 	6,625,549	 	 	 	6,625,549	 
	Long term borrowing costs (1)
	7,621,055	 	 	 	7,621,055	 	 	 	11,856,872	 	 	 	11,856,872	 	 	 	7,247,211	 	 	 	7,247,211	 
	Loss on amendment of indirect participation
interest —  PNGDV
	 	 	—	 	 	 	—	 	 	 	1,851,421	 	 	 	1,851,421	 	 	 	1,851,421	 	 	 	1,851,421	 
	Gain on LNG shareholder agreement
	 	 	(6,553,080	)	 	 	(6,553,080	)	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 
	Loss on proportionate consolidation of LNG
Project (8)
	 	 	2,432,652	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 
	Gain on equity accounted investment (8)
	 	 	—	 	 	 	(6,043,353	)	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 
	Foreign exchange loss/(gain) (2), (8)
	 	 	(2,239,613	)	 	 	(2,238,875	)	 	 	(4,744,810	)	 	 	(4,744,810	)	 	 	(4,493,566	)	 	 	(4,493,566	)
	Non-controlling interest (6)
	 	 	(66,513	)	 	 	(62,679	)	 	 	(263,959	)	 	 	(265,865	)	 	 	(306,943	)	 	 	(308,307	)
	Interest income (8)
	 	 	—	 	 	 	(1,726,138	)	 	 	—	 	 	 	(3,223,995	)	 	 	—	 	 	 	(2,375,543	)
	Other income
	 	 	—	 	 	 	(2,202,510	)	 	 	—	 	 	 	(3,747,603	)	 	 	—	 	 	 	(2,149,562	)
	 
	 
	 	 	483,669,956	 	 	 	470,467,409	 	 	 	561,515,462	 	 	 	553,904,747	 	 	 	386,369,370	 	 	 	381,275,069	 
	 
	Loss before income taxes
	 	 	(26,129,355	)	 	 	(16,863,679	)	 	 	(43,455,930	)	 	 	(42,715,309	)	 	 	(41,085,846	)	 	 	(40,516,650	)
	 
	Income tax expense (3)
	 	 	(70,800	)	 	 	(70,800	)	 	 	(2,342,873	)	 	 	(2,342,873	)	 	 	(1,336,932	)	 	 	(1,336,932	)
	 
	Net loss
	 	 	(26,200,155	)	 	 	(16,934,479	)	 	 	(45,798,803	)	 	 	(45,058,182	)	 	 	(42,422,778	)	 	 	(41,853,582	)
	 
















 





Reconciliation
to accounting principles generally accepted in the United States (cont’d)




Reconciliation of Canadian GAAP net income/(loss) to U.S. GAAP net income/(loss)




	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Nine Month	 	 	 	Nine Month
	 	 	period ended	 	Year ended	 	period ended
	 	 	September 30,	 	December 31,	 	September 30,
	 	 	2007	 	2006	 	2006
	 	 	$ (Un-audited)	 	$	 	$ (Un-audited)
	 
	Net loss as shown in the Canadian GAAP financial statements
	 	 	(26,200,155	)	 	 	(45,798,803	)	 	 	(42,422,778	)
	Description of items having the effect of increasing reported income
	 	 	 	 	 	 	 	 	 	 	 	 
	Decrease in depreciation and amortization due to difference in
date of commencement of operations of refinery (1)
	 	 	358,217	 	 	 	761,159	 	 	 	590,279	 
	Decrease in non-controlling interest expense (6)
	 	 	(3,833	)	 	 	1,907	 	 	 	1,365	 
	Increase in reporting income due to reversal of proportionate
consolidation of LNG Project and equity accounting the
investment (8)
	 	 	8,911,292	 	 	 	—	 	 	 	—	 
	Increase in sales from ineffective portion of hedges (2)
	 	 	—	 	 	 	101,504	 	 	 	—	 
	Description of items having the effect of decreasing reported income
	 	 	 	 	 	 	 	 	 	 	 	 
	Increase in cost of sales from ineffective portion of hedges (2)
	 	 	—	 	 	 	(89,992	)	 	 	(22,448	)
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Increase in administrative and general expenses from
ineffective portion of hedges (2)
	 	 	—	 	 	 	(33,956	)	 	 	—	 
	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Net loss according to US GAAP
	 	 	(16,934,479	)	 	 	(45,058,182	)	 	 	(41,853,582	)
	 






Statement of comprehensive income/(loss), net of tax




	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Nine months	 	 	 	Nine months
	 	 	period ended	 	Year ended	 	period ended
	 	 	September 30,	 	December 31,	 	December 31,
	 	 	2007	 	2006	 	2005
	 	 	$ (Un-audited)	 	$	 	$ (Un-audited)
	 
	Net loss in accordance with U.S. GAAP, net of tax
	 	 	(16,934,479	)	 	 	(45,058,182	)	 	 	(41,853,582	)
	Foreign currency translation reserve, net of tax
	 	 	880,270	 	 	 	1,015,426	 	 	 	865,851	 
	Deferred hedge gain, net of tax
	 	 	(1,389	)	 	 	(993,153	)	 	 	(24,388	)
	 
	Total other comprehensive income, net of tax
	 	 	878,881	 	 	 	22,273	 	 	 	841,463	 
	 
	Comprehensive loss, net of tax
	 	 	(16,055,598	)	 	 	(45,035,909	)	 	 	(41,012,119	)
	 



















 




Reconciliation
to accounting principles generally accepted in the United States (cont’d)



Consolidated
Statements of Shareholders’ Equity




	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Nine month Period ended	 	Year ended	 	Nine month Period ended
	 	 	September 30, 2007	 	December 31, 2006	 	September 30, 2006
	 	 	$ (Un-audited)	 	$	 	$ (Un-audited)
	 	 	Canadian GAAP	 	US GAAP	 	Canadian GAAP	 	US GAAP	 	Canadian GAAP	 	US GAAP
	 
	Share capital
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	At beginning of period
	 	 	233,889,366	 	 	 	233,889,366	 	 	 	223,934,500	 	 	 	223,934,500	 	 	 	223,934,500	 	 	 	223,934,500	 
	Issue of capital stock
	 	 	1,438,268	 	 	 	1,438,268	 	 	 	9,954,866	 	 	 	9,954,866	 	 	 	8,743,588	 	 	 	8,743,588	 
	 
	At end of period
	 	 	235,327,634	 	 	 	235,327,634	 	 	 	233,889,366	 	 	 	233,889,366	 	 	 	232,678,088	 	 	 	232,678,088	 
	 
	Contributed surplus
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	At beginning of period
	 	 	4,377,426	 	 	 	4,377,426	 	 	 	2,933,586	 	 	 	2,933,586	 	 	 	2,933,586	 	 	 	2,933,586	 
	Stock compensation
	 	 	4,770,845	 	 	 	4,770,845	 	 	 	1,443,840	 	 	 	1,443,840	 	 	 	1,262,661	 	 	 	1,262,661	 
	 
	At end of period
	 	 	9,148,271	 	 	 	9,148,271	 	 	 	4,377,426	 	 	 	4,377,426	 	 	 	4,196,247	 	 	 	4,196,247	 
	 
	Warrants
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	At beginning of period
	 	 	2,137,852	 	 	 	2,137,852	 	 	 	2,137,852	 	 	 	2,137,852	 	 	 	2,137,852	 	 	 	2,137,852	 
	Movement for period
	 	 	(18,818	)	 	 	(18,818	)	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 
	 
	At end of period
	 	 	2,119,034	 	 	 	2,119,034	 	 	 	2,137,852	 	 	 	2,137,852	 	 	 	2,137,852	 	 	 	2,137,852	 
	 
	Accumulated Other Comprehensive Income
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	At beginning of period
	 	 	1,492,869	 	 	 	1,494,258	 	 	 	477,443	 	 	 	1,471,985	 	 	 	477,443	 	 	 	1,471,985	 
	Deferred hedge gain recognised on transition
	 	 	1,385	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 
	Deferred hedge (loss)/gain movement for period, net of tax
	 	 	(1,385	)	 	 	(1,389	)	 	 	—	 	 	 	(993,153	)	 	 	—	 	 	 	(24,388	)
	Foreign currency translation adjustment movement for period, net of tax
	 	 	881,659	 	 	 	881,659	 	 	 	1,015,426	 	 	 	1,015,426	 	 	 	865,851	 	 	 	865,851	 
	 
	At end of period
	 	 	2,374,528	 	 	 	2,374,528	 	 	 	1,492,869	 	 	 	1,494,258	 	 	 	1,343,294	 	 	 	2,313,448	 
	 
	Induced Conversions of Convertible Debt
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	At beginning of period (4)
	 	 	—	 	 	 	6,899,211	 	 	 	—	 	 	 	6,899,211	 	 	 	—	 	 	 	6,899,211	 
	Movement for the period
	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 
	 
	 
	 	 	—	 	 	 	6,899,211	 	 	 	—	 	 	 	6,899,211	 	 	 	—	 	 	 	6,899,211	 
	 
	Conversion options
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	At beginning of period
	 	 	20,000,000	 	 	 	—	 	 	 	20,000,000	 	 	 	—	 	 	 	20,000,000	 	 	 	.	 
	Movement for period
	 	 	(160,000	)	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 
	 
	At end of period
	 	 	19,840,000	 	 	 	—	 	 	 	20,000,000	 	 	 	—	 	 	 	20,000,000	 	 	 	—	 
	 
	Accumulated deficit
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	At beginning of period
	 	 	(179,476,945	)	 	 	(197,500,581	)	 	 	(133,678,142	)	 	 	(152,442,399	)	 	 	(133,678,142	)	 	 	(152,442,399	)
	Net loss for period
	 	 	(26,200,155	)	 	 	(16,934,479	)	 	 	(45,798,803	)	 	 	(45,058,182	)	 	 	(42,422,778	)	 	 	(41,853,582	)
	Deduct:
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Preference Share Dividends
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
	At end of period
	 	 	(205,677,100	)	 	 	(214,435,060	)	 	 	(179,476,945	)	 	 	(197,500,581	)	 	 	(176,100,920	)	 	 	(194,295,981	)
	 
	Shareholders’ equity at end of period
	 	 	63,132,367	 	 	 	41,433,618	 	 	 	82,420,568	 	 	 	51,297,532	 	 	 	84,254,561	 	 	 	53,928,865	 
	 






 









 





Reconciliation
to accounting principles generally accepted in the United States (cont’d)





Consolidated Statement of Cash Flows




	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Nine month period	 	 	 	Nine month period
	 	 	ended	 	 Year ended	 	ended
	 	 	September 30, 2007	 	December 31, 2006	 	September 30, 2006
	 	 	$ (Un-audited)	 	$	 	$ (Un-audited)
	 
	Cash flows provided by (used in):
	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Operating activities — Canadian GAAP (as per consolidated cash flows)
	 	 	(19,781,769	)	 	 	2,187,462	 	 	 	(15,926,643	)
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Reconciling items:
	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Exploration costs expensed including exploration impairment
	 	 	(12,596,874	)	 	 	(7,824,051	)	 	 	(7,755,226	)
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Being LNG project equity accounted under US GAAP as opposed to proportionate consolidation under Canadian GAAP
	 	 	6,912,669	 	 	 	—	 	 	 	—	 
	 
	Operating activities — U.S. GAAP
	 	 	(25,465,974	)	 	 	(5,636,589	)	 	 	(23,681,869	)
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Investing activities — Canadian GAAP (as per consolidated cash flows)
	 	 	1,172,609	 	 	 	(97,071,319	)	 	 	(97,193,271	)
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Reconciling items:
	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Exploration costs expensed including exploration impairment
	 	 	12,596,874	 	 	 	7,824,051	 	 	 	7,755,226	 
	Being cash investment in LNG Project
	 	 	(1,976,975	)	 	 	—	 	 	 	—	 
	Being reversal of PNG LNG cash call proportionately consolidated in cash flow statement
	 	 	(6,664,035	)	 	 	—	 	 	 	—	 
	 
	Investing activities — U.S. GAAP
	 	 	5,128,473	 	 	 	(89,247,268	)	 	 	(89,438,045	)
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Financing activities — Canadian and U.S. GAAP
	 	 	(1,143,601	)	 	 	66,963,485	 	 	 	84,115,904	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	(Decrease)/increase in cash and cash equivalents
	 	 	(21,481,102	)	 	 	(27,920,372	)	 	 	(29,004,010	)
	Cash and cash equivalents, beginning of period
	 	 	31,681,435	 	 	 	59,601,807	 	 	 	59,601,807	 
	 
	Cash and cash equivalents, end of period (U.S. GAAP)
	 	 	10,200,333	 	 	 	31,681,435	 	 	 	30,597,797	 
	 




Under Canadian GAAP, InterOil share in the LNG Joint venture project is proportionately
consolidated and InterOil’s share of the JV cash flows will be taken up in InterOil consolidated
cash flow statement. The cash flows would be classified between operating, investing and financing
as per the nature of the transaction. Under U.S. GAAP, When an investment in an entity is accounted
for by use of the equity method, an investor restricts its reporting in the cash flow statement to
the cash flows between itself and the investee, for example, to dividends and advances. The above
cash and cash equivalents is different to the Canadian cash and cash equivalents balance due to the
proportionate take up of the cash balance under Canadian GAAP, but equity accounting of the LNG
investment in U.S. GAAP (refer (8) below).




Per share amounts



Basic per share amounts are computed by dividing net income available to shareholders by the
weighted average number of shares outstanding for the reporting period. Diluted per share amounts
reflects the potential dilution that could occur if options or contracts to issue shares were
exercised or converted into shares.



For the calculation of diluted per share amounts, the basic weighted average number of shares is
increased by the dilutive effect of stock options determined using the treasury method. No
potential shares in options or warrants on issue were dilutive for the nine month period ended
September 30, 2007, year ended December 31, 2006 and nine month period ended September 30, 2006.



Reconciliation to accounting principles generally accepted in the United States (cont’d)





 











 








	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Nine month	 	 	 	 	 	Nine month
	 	 	period ended	 	Year ended	 	period ended
	Weighted average number of shares on which earnings per	 	September 30,	 	December 31,	 	September 30,
	share calculations are based in accordance with U.S. GAAP	 	2007	 	2006	 	2006
	 
	Basic
	 	 	29,908,847	 	 	 	29,602,360	 	 	 	29,523,026	 
	Effect of dilutive options
	 	 	—	 	 	 	—	 	 	 	—	 
	 
	Diluted
	 	 	29,908,847	 	 	 	29,602,360	 	 	 	29,523,026	 
	 
	Net income/(loss) per share in accordance with U.S. GAAP
	 	(Restated)	 	(Restated)	 	(Restated)
	Basic
	 	 	(0.57	)	 	 	(1.52	)	 	 	(1.42	)
	 
	Diluted
	 	 	(0.57	)	 	 	(1.52	)	 	 	(1.42	)
	 







	(1)	 	Operations
	 
	 	 	The Company determined that refinery operations commenced under U.S. GAAP at December 1,
2004, which is the date management assessed that construction of the refinery was
substantially complete and ready for its intended use. The Company ceased capitalization of
certain costs to the refinery project at this date and recognized one month’s results from
sales, related costs of sales and operating expenses and administrative and general expenses
in the statement of operations for the year ended December 31, 2004.
	 
	 	 	As disclosed in note 3(q) in the consolidated financial statements, operations commenced on
January 1, 2005 under Canadian GAAP. Therefore, the Company continued to capitalize
December 2004’s results to the refinery project. Due to the difference in the cost basis of
the refinery, the depreciation expense recorded under U.S. GAAP differs from that recorded
under Canadian GAAP.
	 
	 	 	The useful life for the refinery under U.S. GAAP is the same as that disclosed under
Canadian GAAP.
	 
	(2)	 	Derivative instruments and hedging
	 
	 	 	The Company accounts for derivatives and hedging activities in accordance with FASB
Statement No. 133, “Accounting for Derivative Instruments and Certain Hedging Activities”,
as amended (“SFAS No. 133”), which requires that all derivative instruments be recorded on
the balance sheet at their respective fair values.
	 
	 	 	The Canadian Institute of Chartered Accountants issued Accounting Guideline 13 “Hedging
Relationships” (“AcG-13”), which became effective January 1, 2004. This guideline was
issued to align certain accounting principles under Canadian GAAP with SFAS No. 133,
including hedge documentation and assessing hedge effectiveness. The Company adopted the
hedge accounting provisions in AcG-13 and SFAS No. 133 in respect of the commodity forward
contracts it transacted beginning in July 2004. Under Canadian GAAP, the Company included
hedges which are unsettled at period end in current liabilities based on a marked to market
calculation. Under SFAS No. 133 the marked to market amount for the unsettled hedges is
included in other comprehensive income to the extent that they are effective. The
ineffective portion is expensed.
	 
	 	 	Effective January 1, 2007, CICA 3865 – Hedges came into effect as explained under Note 3(c).
This revision brings Canadian accounting treatment of hedges in line with the U.S. GAAP
treatment and the Company has followed the transition provisions as per guidance under the
new standard to reclassify the marked to market amount for the unsettled hedges from current
liabilities to other comprehensive income. Details of hedge accounting are disclosed in note
8 of the unaudited consolidated financial statements of the Company for the nine month
period ended September 30, 2007.
	 
	(3)	 	Income tax effect of adjustments
	 
	 	 	The income tax effect of U.S. GAAP adjustments was a reduction to the future tax asset of
$277,175 (years ended December 31, 2006 — $259,957) for the nine month period ended
September 30, 2007. A corresponding decrease in the valuation allowance was recorded. No
income tax expense was recorded in the periods disclosed due to the tax holiday period in
Papua New Guinea through five years after the refinery commences operations.





Reconciliation to accounting principles generally accepted in the United States (cont’d)




 









 






	(4)	 	Debt conversion expense
	 
	 	 	100% of the outstanding convertible debentures were converted before December 31, 2004. The
Company issued an additional 180,000 shares to induce conversion before the end of the year.
Under Canadian GAAP, the fair value of these shares was recorded as an increase in share
capital of $6,976,800 with offsetting adjustments to retained earnings of $6,899,211 and a
conversion expense of $77,589.
	 
	 	 	FASB Statement No. 84, “Induced Conversions of Convertible Debt” requires an expense to be
recorded when convertible debt is converted under an inducement. The Company recognized the
entire fair value of the inducement shares of $6,976,800 as a conversion expense under U.S.
GAAP.
	 
	(5)	 	Indirect participation interest
	 
	 	 	As disclosed in note 2 in the unaudited consolidated financial statements, the Company
entered into an indirect participation interest agreement in exchange for proceeds of
$125,000,000. Under Canadian GAAP, this amount was apportioned between non financial
liabilities and equity. Under U.S. GAAP, Company has not bifurcated the amount as the
Company has opted to utilize the scope exception under SFAS 133 Para 10(f) for ‘derivatives
that serve as impediments to sales accounting’.
	 
	(6)	 	Non controlling interest
	 
	 	 	The non-controlling interest movements are the result of the U.S. GAAP adjustments relating
to the midstream operations described in points 1 to 3 above.
	 
	(7)	 	Deferred Financing costs
	 
	 	 	Deferred financial costs are offset against the respective liabilities under Canadian GAAP;
however, the same is disclosed as a separate item on the face of the balance sheet under US
GAAP in accordance with guidance under APB 21.
	 
	(8)	 	Investment in LNG Project/Deferred gain on contributions to LNG Project:
	 
	 	 	As disclosed in Note 13 of the unaudited consolidated financial statements for the nine
month period ended September 30, 2007, a Shareholders Agreement was signed on July 30, 2007
which converted PNG LNG Inc. and its subsidiaries into a joint venture project from being a
subsidiary of InterOil. Under Canadian GAAP, joint ventures are proportionately consolidated
into the Company’s consolidated financials based on the shareholding in the joint venture.
	 
	 	 	Applying the guidance under APB 18, a Corporate joint venture has to be equity accounted
under U.S. GAAP. InterOil has also followed the guidance under SAB Topic 5H wherein a gain
on contributions to the joint venture is recognised as a result of a change in economic
interest of the entity. For Canadian GAAP this gain is deferred and recognised over the
life of the contributed assets..
	 
	 	 	InterOil will account for the joint venture using equity accounted method. In addition to
the gain or loss recognised as part of the operations, InterOil will also recognise any
difference between the Investment carried in its balance sheet and the underlying equity in
net assets of the joint venture in the statement of operations to account for this
difference and the investment balance will increase/decrease in line with this difference.
	 
	 	 	The adjustments to reflect the reversal of proportionately consolidated balances and take-up
of equity accounted balances have been summarised below. Given below is the Midstream –
liquefaction consolidated balance sheet and statement of operations under Canadian GAAP and
U.S. GAAP. The statement of operations incorporates results for the nine month period ended
September 30, 2007. PNG LNG Inc. was a subsidiary of InterOil till the date of the
Shareholder’s Agreement and has been proportionately consolidated subsequent to that date.





Reconciliation to accounting principles generally accepted in the United States (cont’d)





 











 







	 	 	 	 	 	 	 	 	 	 	 	 	 
	Midstream - liquefaction	 	 	 	 	 	GAAP	 	 
	Consolidated Balance Sheet	 	Canadian GAAP	 	Adjustments	 	US GAAP
	Cash and cash equivalents
	 	 	1,728,341	 	 	 	(1,728,341	)	 	 	—	 
	Cash restricted
	 	 	—	 	 	 	—	 	 	 	—	 
	Other assets
	 	 	2,797,528	 	 	 	(2,797,528	)	 	 	—	 
	Prepaid expenses
	 	 	17,961	 	 	 	(17,961	)	 	 	—	 
	 
	Current assets
	 	 	4,543,830	 	 	 	(4,543,830	)	 	 	—	 
	 
	Investment in PNG LNG Inc.
	 	 	—	 	 	 	5,429,862	 	 	 	5,429,862	 
	Plant and equipment
	 	 	1,130,919	 	 	 	(1,130,919	)	 	 	—	 
	 
	Total assets
	 	 	5,674,749	 	 	 	(244,887	)	 	 	5,429,862	 
	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Accounts payable and accrued liabilities
	 	 	268,949	 	 	 	(245,886	)	 	 	23,063	 
	Intercompany payables
	 	 	2,060,598	 	 	 	—	 	 	 	2,060,598	 
	 
	Current liabilities
	 	 	2,329,547	 	 	 	(245,886	)	 	 	2,083,661	 
	 
	Deferred gain on contributions to LNG project
	 	         8,910,293	 	 	(8,910,293	)	 	 	—	 
	 
	Total liabilities
	 	 	8,910,293	 	 	 	(8,910,293	)	 	 	—	 
	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Share capital
	 	 	1	 	 	 	—	 	 	 	1	 
	Accumulated deficit
	 	 	(5,565,092	)	 	 	8,911,293	 	 	 	3,346,201	 
	 
	Shareholders’ Equity
	 	 	(5,565,091	)	 	 	8,911,293	 	 	 	3,346,202	 
	 
	Total liabilities and Shareholders’ equity
	 	 	5,674,749	 	 	 	(244,886	)	 	 	5,429,863	 
	 






	 	 	 	 	 	 	 	 	 	 	 	 	 
	Midstream - liquefaction	 	 	 	 	 	GAAP	 	 
	Consolidated Statement of Operation	 	Canadian GAAP	 	Adjustments	 	US GAAP
	Interest income
	 	 	15,336	 	 	 	(8,223	)	 	 	7,113	 
	 
	Total revenues
	 	 	15,336	 	 	 	(8,223	)	 	 	7,113	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Office and Administrative expenses
	 	 	1,502,726	 	 	 	(9,023	)	 	 	1,493,703	 
	Professional fees
	 	 	952,950	 	 	 	(435,226	)	 	 	517,724	 
	Exchange (Gain) loss
	 	 	(2,097	)	 	 	738	 	 	 	(1,359	)
	Loss on
proportionate consolidation of PNG LNG Inc
	 	 	         2,432,652	 	 	 	(2,432,652	)	 	 	—	 
	Gain on equity accounted investment
	 	 	—	 	 	 	(6,043,353	)	 	 	(6,043,353	)
	 
	Total expenses
	 	 	4,886,231	 	 	 	(8,919,516	)	 	 	(4,033,285	)
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	 
	Net gain/(loss)
	 	 	(4,870,895	)	 	 	8,911,293	 	 	 	4,040,398	 
	 





Recent Accounting Pronouncements




Fair value measurements



In September 2006, the FASB issued FAS 157 which defines fair value, establishes a framework for
measuring fair value in U.S. GAAP, and expands disclosures about fair value measurements. The
standard is effective for fiscal years beginning after November 15, 2007 and all interim periods
within those fiscal years. The Company does not expect that the application of FAS 157 will have a
material impact on the financial statements.




 









 








Reconciliation to accounting principles generally accepted in the United States (cont’d)




Fair Value Option for Financial Assets and Financial Liabilities



In February 2007, the FASB issued FAS 159 which permits entities to choose to measure many
financial instruments and certain other items at fair value. The objective is to improve financial
reporting by providing entities with the opportunity to mitigate volatility in reported earnings
caused by measuring related assets and liabilities differently without having to apply complex
hedge accounting provisions. This Statement is expected to expand the use of fair value
measurement, which is consistent with the Board’s long-term measurement objectives for accounting
for financial instruments. This Statement is effective as of the beginning of an entity’s first
fiscal year beginning after November 15, 2007. The Company does not expect that the application of
FAS 159 will have a material impact on the financial statements.




Business combinations



In December 2007, the FASB issued FAS 141 (revised 2007) to improve the relevance, representational
faithfulness, and comparability of the information that a reporting entity provides in its
financial reports about a business combination and its effects. This Statement applies
prospectively to business combinations for which the acquisition date is on or after the beginning
of the first annual reporting period beginning on or after December 15, 2008.




Non-controlling interests in consolidated financial statements



The objective of this Statement is to improve the relevance, comparability, and transparency of the
financial information that a reporting entity provides in its consolidated financial statements by
establishing accounting and reporting standards. It clarifies that a noncontrolling interest in a
subsidiary is an ownership interest in the consolidated entity that should be reported as equity in
the consolidated financial statements. This Statement changes the way the consolidated income
statement is presented. It requires consolidated net income to be reported at amounts that include
the amounts attributable to both the parent and the noncontrolling interest. It also requires
disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net
income attributable to the parent and to the noncontrolling interest. Previously, net income
attributable to the noncontrolling interest generally was reported as an expense or other deduction
in arriving at consolidated net income. This Statement applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008.