2003 Financial statements

TABLE OF CONTENTS

Managements Report
FS2Report of Independent Registered Public Accounting Firm and Comments by Auditor toU.S. Readers on Canada  U.S. Reporting Differences
FS3Consolidated Financial Statements for the Years Ended December 31, 2003 and 2002Consolidated Statements of Income and Retained Earnings (Deficit)
FS4Consolidated Balance Sheets
FS5Consolidated Statements of Cash Flow
FS6Notes to the Consolidated Financial Statements
FS7


Managements report

The accompanying consolidated financial statements and all information in the annual report are the responsibility of management.

The consolidated financial statements have been prepared by management in accordance with generally accepted accounting principles. When alternative accounting methods exist, management has chosen those it deems most appropriate in the circumstances. The consolidated financial statements are not precise since they include certain amounts based on estimates and judgments. Management has determined such amounts on a reasonable basis in order to ensure that the consolidated financial statements are presented fairly, in all material respects. Financial information presented elsewhere in this annual report has been prepared on a basis consistent with that in the consolidated financial statements.

PetroKazakhstan Inc. maintains systems of internal accounting and administrative controls. These systems are designed to provide reasonable assurance that financial information is relevant, reliable and accurate and that the Corporations assets are properly accounted for and adequately safeguarded.

The Audit Committee of the Board of Directors, composed of non-management directors, meets regularly with management, as well as the external auditors, to discuss auditing (external and internal), internal controls, accounting policy and financial reporting matters. The Audit Committee reviews the consolidated financial statements with both management and the independent auditors and reports its finding to the Board of Directors before such statements are approved by the Board .

The consolidated financial statements have been audited by TOO Deloitte & Touche, the independent auditors, in accordance with the generally accepted auditing standards on behalf of the shareholders. TOO Deloitte & Touche have full and free access to the Audit Committee.

(signed)BERNARD F. ISAUTIER
NICHOLAS H. GAYPresident and Chief Executive Officer
Senior Vice President Finance and Chief Financial OfficerFebruary 6, 2004


Report of Independent Registered Public Accounting Firm

To the shareholders of PetroKazakhstan Inc.

We have audited the consolidated balance sheets of PetroKazakhstan Inc. as at December 31, 2003 and 2002 and the consolidated statements of income and retained earnings (deficit), and cash flows for each of the years in the three-year period ended December 31, 2003. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing standards and with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance whether the consolidated financial statements are fee of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Corporation as at December 31, 2003 and 2002 and the results of its operations and cash flows for each of the years in the three-year period ended December 31, 2003, in accordance with Canadian generally accepted accounting principles.

(signed)

TOO DELOITTE & TOUCHE

Almaty, Kazakhstan

February 6, 2004

Comments by Auditor to U.S. Readers on Canada  U.S. Reporting Differences

The standards of the Public Company Accounting Oversight Board (United States) for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when there are changes in accounting principles that have a material effect on the comparability of the Corporation's consolidated financial statement, such as the changes described in Note 2 to the consolidated financial statements. Our report to the shareholders dated February 6, 2004 is expressed in accordance with Canadian reporting standards, which do not require a reference to such a change in accounting principles in the auditors' report when the change is properly accounted for and adequately disclosed in the consolidated financial statements.

(signed)

TOO DELOITTE & TOUCHE

Almaty, Kazakhstan

February 6, 2004


Consolidated statements of income and retained earnings (deficit)

Years ended December 31

EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT PER SHARE AMOUNTS

2003


2002


2001REVENUECrude oil


621,126


481,114


252,981Refined products


481,326


332,639


328,958Service fee


11,532


9,646


18,631Interest income


3,340


1,951


2,4861,117,324


825,350


603,056EXPENSESProduction


65,516


60,596


41,231Royalties and taxes


82,295


68,714


41,023Transportation


224,987


163,801


50,237Refining


15,539


21,721


20,562Crude oil and refined product purchases


56,460


73,327


78,788Selling


26,540


23,253


19,277General and administrative


58,489


58,879


51,494Interest and financing costs


35,579


35,473


19,530Depletion and depreciation


81,985


45,088


34,254Foreign exchange (gain) loss


(5,333
)

2,233


1,453642,057


553,085


357,849INCOME BEFORE UNUSUAL ITEMS


475,267


272,265


245,207UNUSUAL ITEMSArbitration settlement(Note 20)





7,134


Defence costs related to potential takeover








5,546INCOME BEFORE INCOME TAXES


475,267


265,131


239,661INCOME TAXES(Note 15)Current provision


165,379


100,808


79,679Futureincome tax


(9,938
)

(313
)

(11,285
)155,441


100,495


68,394NET INCOME BEFORE NON-CONTROLLING INTEREST


319,826


164,636


171,267NON-CONTROLLING INTEREST


2,338


2,068


1,927NET INCOME


317,488


162,568


169,340RETAINED EARNINGS (DEFICIT), BEGINNING OF YEAR


78,821


(66,366
)

(18,887
)Normal course issuer bid(Note 14)


(11,232
)

(17,350
)

Common share dividends(Note 13)








(209,168
)Premium on redemption of series 5 warrants(Note 14 e)








(7,626
)Preferred share dividends


(32
)

(31
)

(25
)RETAINED EARNINGS (DEFICIT), END OF YEAR


385,045


78,821


(66,366
)BASIC NET INCOME PER SHARE(Note 16)


4.06


2.01


2.12DILUTED NET INCOME PER SHARE(Note 16)


3.91


1.93


2.02

See accompanying notes to the consolidated financial statements.


Consolidated balance sheets

As at December 31

EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS

2003


2002ASSETSCURRENTCash(Note 5)


184,660


74,796Accounts receivable(Note 6)


150,293


92,431Inventory(Note 7)


36,920


40,529Prepaid expenses(Note 8)


44,901


44,594Current portion of future income tax asset(Note 15)


14,697


9,049431,471


261,399Deferred charges(Note 13)


6,729


5,321Restricted cash(Note 9)


35,468


Futureincome tax asset(Note 15)


24,815


24,529Property, plant and equipment(Note 10)


527,136


405,479TOTAL ASSETS


1,025,619


696,728LIABILITIESCURRENTAccounts payable and accrued liabilities(Note 11)


88,422


90,522Short-term debt(Note 12)


73,225


16,307Prepayments for crude oil and refined products


6,652


3,540168,299


110,369Long-term debt(Note 13)


246,655


281,797Provision for future site restoration costs


6,567


4,167Future income tax liability(Note 15)


13,012


17,015434,533


413,348Non-controlling interest


13,091


10,753Preferred shares of subsidiary


80


83COMMITMENTS AND CONTINGENCIES(Note 20)SHAREHOLDERS EQUITYShare capital(Note 14)


191,695


193,723Contributed surplus(Notes 2, 14)


1,175


Retained earnings


385,045


78,821577,915


272,544TOTAL LIABILITIES AND SHAREHOLDERS EQUITY


1,025,619


696,728

See accompanying notes to the consolidated financial statements.

Approved by the Board of Directors:

(signed)BERNARD ISAUTIER
JACQUES LEFÈVREDirector
Director


Consolidated statements of cash flow

Years ended December 31

EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS

2003


2002


2001OPERATING ACTIVITIESNet income


317,488


162,568


169,340Items not affecting cash:Depletion and depreciation


81,985


45,088


34,254Amortization of deferred charges


3,936


1,402


16Loss on disposition of assets


794


3,360


Accrued interest on Kazgermunai debt


1,657


3,016


5,679Non-controlling interest


2,338


2,068


1,927Other non-cash charges


1,671


(395
)

418Future income tax


(9,938
)

(313
)

(11,285
)Cash flow


399,931


216,794


200,349Changes in non-cash operatingworking capital items(Note 19)


(60,581
)

(37,816
)

(48,396
)Cash flow from operating activities


339,350


178,978


151,953FINANCING ACTIVITIESShort-term debt, net(Note 19)


5,806


(26,610
)

51,557Common share dividends(Note 13)








(31,830
)Redemption of series 5 warrants(Note 14 e)








(9,425
)Redemption of series 5 correspondingconvertible securities(Note 14 e)








(3,878
)Purchase of common shares(Note 14)


(14,848
)

(23,549
)

Long-term debt(Note 19)


12,364


(17,658
)

(8,258
)Deferred charges paid


(3,642
)

(2,850
)

(2,520
)Proceeds from issue of share capital,net of share issuance costs


1,588


1,417


685Preferred share dividends


(32
)

(31
)

(25
)Cash flow from (used in) financing activities


1,236


(69,281
)

(3,694
)INVESTING ACTIVITIESRestricted cash


(35,468
)




Capital expenditures


(196,470
)

(136,852
)

(102,732
)Proceeds from sale of property, plant and equipment


1,258





Long-term investment(Note 19)





40,000


(40,000
)Acquisition of subsidiary, net of cash acquired


(38
)

(2,853
)

Purchase of preferred shares of subsidiary


(4
)

(8
)

(13
)Cash flow used in investing activities


(230,722
)

(99,713
)

(142,745
)INCREASE IN CASH


109,864


9,984


5,514CASH, BEGINNING OF YEAR


74,796


64,812


59,298CASH, END OF YEAR


184,660


74,796


64,812

See accompanying notes to the consolidated financial statements.


Notes to consolidated financial statements

Years ended December 31

EXPRESSED IN THOUSANDS OF UNITED S TATES DOLLARS, TABULAR AMOUNTS IN THOUSANDS OF DOLLARS UNLESS OTHERWISE INDICATED

NOTE1 SIGNIFICANT ACCOUNTING POLICIES
****

Principles of consolidation


PetroKazakhstan Inc. (PetroKazakhstan or the Corporation) formerly known as Hurricane Hydrocarbons Ltd. is an independent integrated oil and gas corporation, operating in the Republic of Kazakhstan, engaged in the acquisition, exploration, development and production of oil and gas, refining of oil, and the sale of oil and oil products.

The consolidated financial statements of PetroKazakhstan have been pre p a red in accordance with Canadian Generally Accepted Accounting Principles (GAAP) and include the accounts of the Corporation, which is incorporated under the laws of Alberta, together with the accounts of its subsidiaries which are incorporated under the laws of Canada, Cyprus, England, the Netherlands, British Virgin Islands and Kazakhstan. Intercompany transactions are eliminated upon consolidation.

On August 28, 1996, the Corporation entered into a Share Sale-Purchase Agreement with the Republic of Kazakhstan for the purchase of 100% of the issued common shares of Yuzhneftegas, a state owned joint stock Company, later renamed to OJSC Hurricane Kumkol Munai and then to PetroKazakhstan Kumkol Resources (PKKR), operating in the South Turgai Basin, located in South Central Kazakhstan.

On March 31, 2000, the Corporation acquired 88.4% of the common shares of OJSC Shymkentnefteorgsyntez (Shymkent), later renamed to OJSC Hurricane Oil Products and then to PetroKazakhstan Oil Products (PKOP). The Corporation acquired an additional 8.3% of the common shares of PKOP over the following period ending December 31, 2003 and has a 96.7% interest in PKOP as at that date. PKOP owns and operates an oil refinery located in Shymkent, a city in South Central Kazakhstan.

These consolidated financial statements are prepared in accordance with Canadian GAAP and have been reconciled to U.S. GAAP in Note 21.

Use of estimates

The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are subject to measurement uncertainty. Actual results could differ from and affect the results reported in these consolidated financial statements.

With respect to accounting for oil and gas properties, amounts recorded for depreciation, depletion, future site restoration and amounts used for ceiling test calculations, are based on estimates of oil and natural gas reserves. By their nature, these estimates of reserves and the related future cash flows are subject to measurement uncertainty, and the impact on the consolidated financial statements of future periods could be material.

Joint ventures

As more fully explained in Note 4, certain of PetroKazakhstans activities are conducted jointly with others through incorporated joint ventures. Accordingly, these consolidated financial statements reflect PetroKazakhstans proportionate interest in such activities.


Foreign currency translation

Foreign currency amounts, including those of foreign subsidiaries, are translated in United States $s using the temporal method as follows:

(a)
Monetary assets and liabilities  at the rate of exchange in effect at year end;(b)
Non-monetary assets and liabilities  at historical rates; and(c)
Revenues and expenses  at the average exchange rates during the period, except for provisions for depletion and depreciation, which are translated on the same basis as the related assets.

Gains or losses resulting from such translations are charged to operations.

Cash

Cash may include term deposits with original maturity terms not exceeding 90 days.

Inventory

Crude oil and oil products are recorded at the lower of average cost and net realizable value. Materials and supplies are recorded at the lower of average cost and replacement cost. Cost comprises direct materials and, where applicable, direct labour costs and those overheads, which have been incurred in bringing the inventories to their present location and condition. Net realizable value represents the estimated selling price less all estimated costs to completion and costs to be incurred in marketing, selling and distribution.

Deferred charges

Costs related to the issuance of long-term debt are deferred and amortized over the term of the respective debt instrument on a straight-line basis.

Property, plant and equipment

a) Petroleum and natural gas properties

PetroKazakhstan follows the full cost method of accounting for oil and gas operations whereby all acquisition, exploration and development expenditures are capitalized. Capitalized expenditures include land acquisition costs, geological and geophysical expenses, costs of drilling both productive and non-productive wells, gathering and production facilities and equipment and overhead expenses related to exploration and development activities. Interest is capitalized during the development phase of large capital projects until operations or production commences. Proceeds from sales of oil and gas properties are recorded as reductions of capitalized costs, unless the cost centres depreciation and depletion rate would change by a factor of 20% or more, whereupon gains or losses are recognized as income. Maintenance and repair costs are expensed as incurred, while impro


vements and major renovations to assets are capitalized.

Costs accumulated within each cost centre are depreciated and depleted using the unit-of-production method based upon estimated proved developed reserves before royalties. Significant development projects and expenditures on exploration properties are excluded from the depletion calculation prior to assessment of the existence of proved reserves. Costs for unproved properties and significant developments are evaluated periodically for impairment.

Capitalized costs are subject to a cost recovery test (the ceiling test). Under this test, costs accumulated are limited to the estimate of future undiscounted net revenues from production of estimated proved reserves at prices and costs in effect at the year end, plus the cost of major developments and unproved developed properties less any impairment of such costs, and less estimated future interest expense, administrative costs, future site restoration costs and income taxes attributable to those operations. If the net carrying cost exceeds the ultimate recoverable amount as computed under the test, a write down is recorded.

b) Refining

Maintenance and repairs, including minor renewals and improvements are charged to income as incurred. The cost of major renovations and improvements, which increase useful lives, are capitalized. Direct costs incurred in the construction of fixed assets, including labour, materials and supplies are capitalized.


Depreciation is calculated using the straight-line method based upon the following estimated useful lives:

Buildings, warehouses and storage facilities
10  20 yearsProcess machinery and equipment
5  20 yearsTransport equipment
5  30 yearsOther tangible fixed assets
3  15 years

Site restoration

Estimated future site restoration costs are provided for on the unit-of-production basis. Costs are based on engineering estimates of the anticipated method and extent of site restoration, in accordance with current legislation, industry practices and costs. Site restoration expenditures are charged to accumulated provision as incurred. Provision is being made for site restoration costs, where they are probable and can be reasonably estimated.

Revenue recognition

Sales of petroleum and refined products are recorded in the period in which the title to the petroleum or refined product transfers to the customer. Produced but unsold products are recorded as inventory until sold. In the case of FCA sales, title to the crude oil passes at the point of loading. The Corporation records revenue based on a provisional Brent price at the time of delivery, then marks to market at month end to reflect increases or decreases in prevailing Brent prices and adjusts the final price, if necessary, at the bill of lading date according to the contract terms.

Derivative commodity instruments

The Corporation utilizes derivative instruments to manage the Corporations exposure to fluctuations in the price of crude oil as described in Note 17.

Hedge accounting is used when there is a high degree of correlation between movements in the fair value of the derivative instrument and the item designated as being hedged. Gains and losses are recorded in the same period as the hedged item and are recorded in the same manner as the hedged item in the Consolidated Statement of Income. If correlation ceases, hedge accounting is terminated and changes in the market value of the derivative instruments are recognized in the period of change.

Stock-based compensation

The Corporation has a stock option plan as described in Note 14. The Corporation recognizes compensation expense using the fair value of the equity instrument granted.

Income taxes

Income taxes are calculated using the liability method of tax accounting. Under this method, future income tax assets and liabilities are computed based on temporary differences between the tax basis and carrying amount on the balance sheet for assets and liabilities. Future income tax assets and liabilities are calculated using tax rates anticipated to apply in the periods that the temporary differences are expected to reverse.

Comparative figures

The presentation of certain amounts for previous years has been changed to conform with the presentation adopted for the current year.


NOTE 2 CHANGES IN ACCOUNTING STANDARDS

Effective January1, 2002 the Corporation adopted the recommendations of the Canadian Institute of Chartered Accountants regarding stock based compensation. The Canadian Institute of Chartered Accountants revised their recommendations and effective January 1, 2004 recognition of compensation expense using the fair value of the equity instrument granted is required. The Corporation has adopted this recommendation on a prospective basis, effective January 1, 2003 as provided under the transitional provisions. Accordingly, the Corporation has recognized compensation expense for all common stock options granted to employees and non-executive directors on or after January 1, 2003 using the estimated fair value. The Corporation has recorded compensation expense of $1.2 million in general and administrative expenses within the consolidated statements of income and retained earni


ngs for the year ended December 31, 2003 with a corresponding increase in contributed surplus within shareholders equity. Compensation expense for options granted on or after January 1, 2003 is recognized as compensation expense over the vesting period of the respective options. For common share options granted prior to January 1, 2003 the Corporation discloses the pro forma impact on net income and net income per share as if the estimated fair value of common stock options granted had been recognized as an expense.

Effective January 1, 2002 the Corporation adopted the amended recommendation of the Canadian Institute of Chartered Accountants with respect to accounting for foreign currency translation. All exchange gains and losses on long-term monetary items that do not qualify for hedge accounting are recognized in income. As at December 31, 2003 the adoption of this amended standard has no impact on the consolidated
financial statements.

NOTE 3 SEGMENTED INFORMATION

Following the acquisition of PKOP in 2000, the Corporation became an integrated oil and gas company. All of the commercial activity of the Corporation is concentrated in the Republic of Kazakhstan in Central Asia.

On a primary basis, the business segments are:

·
Upstream comprising the exploration, development and production of crude oil and natural gas.·
Downstream comprising the refining and marketing of refined products and the management of the marketing of crude oil.

The accounting policies of the operating segments are the same as those described in Note 1. Identifiable assets are those used in the operation of the segment.

The consolidated income tax impact of non-deductible interest expense of $2.6 million for the year ended December 31, 2003 ($7.5 million  2002 and $3.2 million  2001) has been allocated to Corporate.


Year ended December 31, 2003


Upstream


Downstream


Corporate


Eliminations


ConsolidatedREVENUECrude oil


729,607








(108,481
)

621,126Refined products


77,618


441,200





(37,492
)

481,326Service fee


9,086


2,191


255





11,532Interest income


936


416


1,988





3,340817,247


443,807


2,243


(145,973
)

1,117,324EXPENSESProduction


65,516











65,516Royalties and taxes


80,046


2,249








82,295Transportation


223,000


1,987








224,987Refining





15,539








15,539Crude oil and refinedproduct purchases


55,467


146,966





(145,973
)

56,460Selling


10,508


16,032








26,540General and administrative


32,721


20,285


5,483





58,489Interest and financing costs


24,226


2,576


8,777





35,579Depletion and depreciation


62,954


18,849


182





81,985Foreign exchange loss (gain)


2,632


(9,863
)

1,898





(5,333
)557,070


214,620


16,340


(145,973
)

642,057INCOME (LOSS) BEFOREINCOME TAXES


260,177


229,187


(14,097
)




475,267INCOME TAXESCurrent provision


108,350


52,670


4,359





165,379Future income tax


(25,900
)

15,962








(9,938
)82,450


68,632


4,359





155,441NON-CONTROLLING INTEREST





2,338








2,338NET INCOME (LOSS)


177,727


158,217


(18,456
)




317,488

There were no sales to an individual customer in excess of 10% of consolidated revenue.

Revenue eliminations are intersegment revenue.

Year ended December 31, 2003


Export


Domestic


ConsolidatedCrude oil


596,673


24,453


621,126Refined products


113,700


367,626


481,326


As at December 31, 2003


Upstream


Downstream


Corporate


ConsolidatedTotal assets


721,859


157,474


146,286


1,025,619Total liabilities


387,087


45,383


2,063


434,533Capital expenditures for the year


183,134


19,070


1,009


203,213



Year ended December 31, 2002


Upstream


Downstream


Corporate


Eliminations


ConsolidatedREVENUECrude oil


566,033








(84,919
)

481,114Refined products


97,761


266,420





(31,542
)

332,639Service fee


5,610


3,423


613





9,646Interest income


282


217


1,452





1,951669,686


270,060


2,065


(116,461
)

825,350EXPENSESProduction


60,596











60,596Royalties and taxes


61,400


7,314








68,714Transportation


163,791


10








163,801Refining





21,721








21,721Crude oil and refined product purchases


68,758


121,030





(116,461
)

73,327Selling


6,815


16,438








23,253General and administrative


37,093


17,216


4,570





58,879Interest and financing costs


9,023


1,514


24,936





35,473Depletion and depreciation


31,647


13,347


94





45,088Foreign exchange loss


1,024


995


214





2,233440,147


199,585


29,814


(116,461
)

553,085INCOME BEFORE UNUSUAL ITEMS


229,539


70,475


(27,749
)




272,265Arbitration settlement


7,134











7,134INCOME (LOSS) BEFOREINCOME TAXES


222,405


70475


(27,749
)




265,131INCOME TAXESCurrent provision


64,500


26,463


9,845





100,808Future income tax


7,737


(8,050
)







(313
)72,237


18,413


9,845





100,495NON-CONTROLLING INTEREST





2,068








2,068NET INCOME (LOSS)


150,168


49,994


(37,594
)




162,568

Included in Upstream crude oil revenue are sales to one customer in the amount of $103.0 million.

Year ended December 31, 2002
Export
Domestic
ConsolidatedCrude oil
445,290
35,824
481,114Refined products
53,711
278,928
332,639


As at December 31, 2002
Upstream
Downstream
Corporate
ConsolidatedTotal assets
493,920
169,071
33,737
696,728Total liabilities
148,247
36,859
228,242
413,348Capital expenditures for the year
131,875
8,227

140,102




Year ended December 31, 2001


Upstream


Downstream


Corporate


Eliminations


ConsolidatedREVENUECrude oil


420,631


2,034





(169,684
)

252,981Refined products


15,656


327,346





(14,044
)

328,958Service fee


7,154


11,029


448





18,631Interest income


1,972


400


114


-


2,486445,413


340,809


562


(183,728
)

603,056EXPENSESProduction


41,231











41,231Royalties and taxes


41,023











41,023Transportation


50,237











50,237Refining





20,562








20,562Crude oil and refined product purchases


14,044


248,472





(183,728
)

78,788Selling


5,621


13,656








19,277General and administrative


28,024


17,906


5,564





51,494Interest and financing costs


7,815


1,029


10,686





19,530Depletion and depreciation


24,116


9,764


374





34,254Foreign exchange loss (gain)


342


1,478


(367
)




1,453212,453


312,867


16,257


(183,728
)

357,849INCOME BEFORE UNUSUAL ITEMS


232,960


27,942


(15,695
)




245,207Defence costs related topotential takeover








5,546





5,546INCOME (LOSS) BEFOREINCOME TAXES


232,960


27,942


(21,241
)




239,661INCOME TAXESCurrent provision


57,590


16,299


5,790





79,679Future income tax


(4,877
)

(6,408
)







(11,285
)52,713


9,891


5,790





68,394NON-CONTROLLING INTEREST





1,927








1,927NET INCOME (LOSS)


180,247


16,124


(27,031
)




169,340

Included in Upstream crude oil revenue are sales to one customer in the amount of $99.5 million.

Year ended December 31, 2001


Export


Domestic


ConsolidatedCrude oil


225,938


27,043


252,981Refined products


46,771


282,187


328,958



NOTE 4 JOINT VENTURES

The Corporation has the following interests in two joint ventures:

a)
a 50% equity shareholding with equivalent voting power in Turgai Petroleum CJSC (Turgai), which operates the northern part of the Kumkol field in Kazakhstan.b)
a 50% equity shareholding with equivalent voting power in LLP Kazgermunai (Kazgermunai), which operates three oil fields in Kazakhstan: Akshabulak, Nurali and Aksai. Kazgermunai is restricted from paying dividends until all outstanding loans have been repaid in full. The long-term debt is non-recourse to the Corporation (as more fully disclosed in Note 13).

The Corporations interests in these joint ventures have been accounted for using the proportionate consolidation method. Under this method, the Corporations balance sheets, statements of income, retained earnings and deficit and cash flow include the Corporations share of income, expenses, assets, liabilities and cash flows of these joint ventures.

The following amounts are included in the Corporations consolidated financial statements as a result of the proportionate consolidation of its joint ventures and before consolidation eliminations:

Year ended December 31, 2003


Turgai


Kazgermunai


TotalCash


8,370


10,432


18,802Current assets, excluding cash


26,890


32,875


59,765Property, plant and equipment


82,682


66,397


149,079Current liabilities


76,533


11,260


87,793Long-term debt





37,743


37,743Revenue


118,167


111,860


230,027Expenses


81,623


76,675


158,298Net income


36,544


35,185


71,729Cash flow from operating activities


58,566


39,089


97,655Cash flow used in financing activities





(9,317
)

(9,317
)Cash flow used in investing activities


(50,503
)

(22,193
)

(72,696
)

The revenue for the year ended December 31, 2003 includes $35.9 million of crude oil sales made by Turgai to Downstream and $2.5 million of crude oil sales made by Turgai to Upstream. These amounts were eliminated on consolidation.

The revenue for the year ended December 31, 2003 includes $0.5 million of crude oil sales made by Kazgermunai to Upstream and no crude oil sales to Downstream. This amount was eliminated on consolidation.

Year ended December 31, 2002


Turgai


Kazgermunai


TotalCash


307


2,854


3,161Current assets, excluding cash


14,248


14,743


28,991Property, plant and equipment


41,602


58,853


100,455Current liabilities


24,909


4,798


29,707Long-term debt





45,231


45,231Revenue


72,938


48,284


121,222Expenses


47,241


37,431


84,672Net income


25,697


10,853


36,550Cash flow from operating activities


25,420


19,264


44,684Cash flow used in financing activities





(15,837
)

(15,837
)Cash flow used in investing activities


(26,613
)

(12,089
)

(38,702
)



Revenue for the year ended December 31, 2002 includes $55.0 million of crude oil sales made by Turgai and $6.3 million of crude oil sales made by Kazgermunai to Downstream. These amounts were eliminated on consolidation.

Year ended December 31, 2001


Turgai


Kazgermunai


TotalCash


1,500


11,516


13,016Current assets, excluding cash


7,426


12,728


20,154Property, plant and equipment


19,394


55,031


74,425Current liabilities


16,899


5,598


22,497Long-term debt





61,068


61,068Revenue


67,819


49,803


117,622Expenses


31,758


39,092


70,850Net income


36,061


10,711


46,772Cash flow from operating activities


43,748


18,227


61,975Cash flow used in financing activities


(50,000
)

(20,980
)

(70,980
)Cash flow used in investing activities


(13,330
)

(4,386
)

(17,716
)

Revenue for the year ended December 31, 2001 includes $52.9 million of crude oil sales made by Turgai and $2.6 million of crude oil sales made by Kazgermunai to Downstream. These amounts were eliminated on consolidation.

NOTE 5 CASH

As at December 31, 2002, cash included $5.7 million of cash dedicated to a margin account for the Corporations hedging program, which was released on January 2, 2003, when PKKR entered into a new facility agreement (Note 13).

NOTE 6 ACOUNTS RECEIVABLE

Accounts receivable consist of the following:

2003


2002Trade


78,330


61,085Value added tax recoverable


14,816


1,718Due from Turgai


37,231


17,357Other


19,916


12,271150,293


92,431

NOTE 7 INVENTORY

Inventory consists of the following:

2003


2002Refined products


6,626


6,458Crude oil purchased





7,413Crude oil produced


12,502


7,837Materials and supplies


17,792


18,82136,920


40,529




NOTE 8 PREPAID EXPENSES

Prepaid expenses consist of the following:

2003


2002Advances for services and equipment


10,930


23,722Prepayment of transportation for crude oil sales


30,422


17,210Prepayment for pipeline tariff


3,549


3,66244,901


44,594

NOTE 9 RESTRICTED CASH

Restricted cash includes $10.5 million of cash dedicated to a debt service reserve account for the Corporations term facility (nil as at December 31, 2002). This cash is not available for general corporate purposes until the term facility is repaid in full (Note 13).

Restricted cash balance as at December 31, 2003 includes $25.0 million of cash dedicated to a margin account for the hedging program (Note 17).

NOTE 10 PROPERTY, PLANT AND EQUIPMENT

AccumulatedDepletion and


Net BookCost


Depreciation


Value2003Oil and gas


703,540


362,054


341,486Refining


154,401


44,483


109,918Transportation


73,666


4,087


69,579931,607


410,624


520,983Other


9,365


3,212


6,153940,972


413,836


527,1362002Oil and gas


569,050


305,568


263,482Refining


138,532


27,706


110,826Transportation


27,060





27,060734,642


333,274


401,368Other


7,108


2,997


4,111741,750


336,271


405,479

Excluded from the depletable base of oil and gas properties are undeveloped properties of $17.0 million (December 31, 2002  $17.0 million) and work in progress of $29.1 million (December 31, 2002  $50.4 million). During the year ended December 31, 2003, $0.4 million of interest was capitalized ($0.3 in 2002).

NOTE 11 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities consist of the following:

2003


2002Trade


66,115


67,167Royalties


16,133


15,929Income taxes





4,729Other


6,174


2,69788,422


90,522



NOTE 12 SHORT-TERM DEBT

2003


2002Working capital facilities





3,268Current portion of term facility


35,692


Current portion of term loans


2,039


2,039Joint venture loan payable


11,000


11,000PKOP bonds


24,494


73,225


16,307

The Corporation has four working capital facilities available totaling $72 million, that are revolving, three of the facilities are unsecured with one of the facilities secured by a mortgage on our office building in Almaty and the facilities have interest rates ranging from LIBOR plus 3.5% per annum to 14% per annum.

NOTE 13 LONG-TERM DEBT

Long-term debt is represented by:

2003


2002Term facility


71,384


9.625% bonds


125,000


12% Notes





208,210Kazgermunai debt


37,743


45,231Term loans


12,528


15,194PKOP bonds





13,162246,655


281,797

Term facility

On January 2, 2003, PKKR entered into a $225.0 million term facility secured by crude oil export contracts This facility is repayable in 42 equal monthly installments commencing July 2003. The facility bears interest at rate of LIBOR plus 3.25% per annum. PKKR has drawn $190.0 million under this facility and has chosen not to utilize the remainder. PKKR has the right to repay the facility prior to its maturity, under certain terms and conditions and is required to make mandatory prepayments when the price of crude oil exceeds $24 Brent for the preceding month. As at December 31, 2003, PKKR has repaid principal in the amount of $82.9 million, representing $50.0 million early repayment, $8.8 million of mandatory prepayments and $24.1 million representing monthly installment repayments. When mandatory prepayments are made, monthly installments are recalculated taking into a


ccount the prepayment. The mandatory prepayments also form a cumulative prepayment credit, which may, at the option of the Corporation, be used to reduce the amount of a required monthly installment by up to 65% in the event that average Brent oil prices fall below $17.0 for the preceding month.

The estimated prepayment amount for 2004, using forward Brent prices and minimum assigned volumes $14.0 million. This amount has not been classified as current in the balance sheet because actual Brent crude oil prices may differ significantly from forward Brent.

As a guarantor of the facility, the Corporation must comply with certain covenants including a limitation as to total debt and certain other financial covenants. The Corporation must also maintain a minimum cash balance of $40.0 million, of which an amount equal to 3 months principal and interest payments must be maintained a security deposit account (see Note 9).

PKKR is required to hedge 450,000 bbls of crude oil production per month for 2004 with a minimum price of $17.0 per bbl. As PKKR has not drawn the full amount of the facility, the hedged volumes have been reduce to 372,500 bbls of crude oil per month for 2004.

As of December 31, 2003, the Corporation is in compliance with all covenants under the facility agreement.

Included in deferred charges as at December 31, 2003 are $2.8 million of issue costs related to the term facility, which will be amortized over the term of the facility.




9.625% Notes

On February 12, 2003, PetroKazakhstan Finance B.V., a wholly owned subsidiary of PKKR issued U.S.$125.0 million 9.625% Notes due February 12, 2010. The Notes are unsecured, unconditionally guaranteed by the Corporation, PKKR and PKOP, and were issued at a price of 98.389% of par value. Each of the guarantors has agreed to certain covenants, including limitations on indebtedness, restrictions on payments of dividends, repurchase all or any part of the Notes at the holders discretion in the case of the occurrence of a change of control.

Issue costs of $1.8 million and the discount on the sale of the Notes of $2.0 million are recorded as deferred charges and will be amortized over the term of the Notes.

12% Notes

The Corporation declared a special dividend of C$4.00 per share to the shareholders of record as of August 2, 2001 in the form of $208,610,000, 12% Notes issued on August 3, due in 2006. These Notes were unsecured, bore interest at the rate of 12% per annum payable semi-annually on August 3 and February 3 and matured on August 4, 2006. The Notes were redeemable at the Corporations option in whole or in part on the interest payment dates at 102% up to and including February 3, 2003, at 101% up to and including February 3, 2004 and at 100% thereafter. Each holder of the Notes had the right, upon the occurrence of a change in control, to require the Company to repurchase all or any part (equal to $10,000 or an integral multiple thereof) of the Notes at a price of 101% of the aggregate principal plus accrued and unpaid interest.

Upon issuance, the Corporation paid fractional interests and withholding taxes of $31.8 million in cash and retained a corresponding amount of the Notes. The Corporation repurchased $0.9 million of these Notes on the market in 2001 and subsequently sold all of the Notes except for $0.4 million of the Notes, which were cancelled.

On February 3, 2003 the Corporation redeemed all $208.2 million of its outstanding 12% Notes. The Notes were redeemed for an aggregate redemption price of $212.4 million, representing 102% of the principal amount of the Notes, plus accrued and unpaid interest of $12.5 million, for a total of $224.9 million.

The unamortized issue costs related to the Notes of $1.4 million as at December 31, 2002 ($1.8 million as at December 31, 2001), and the discount on sale of Notes of $1.1 million as at December 31, 2002 ($0.9 million as at December 31, 2001) were recorded as deferred charges and were being amortized over the term of the Notes. These amounts were expensed upon redemption .

Kazgermunai debt

The Kazgermunai debt is non-recourse to the Corporation. The amounts set out below re p resent 50% of Kazgermunais total debt, which has been included in the consolidated financial statements on a proportionate consolidation basis (see Note 4).

2003


2002Kazgermunai senior debt





9,072Kazgermunai subordinated debt


25,057


24,000Loan from Government of Kazakhstan


12,686


12,15937,743


45,231

Kazgermunai senior debt

The senior debt bore interest at LIBOR plus 3% and was unsecured. Accrued interest was added to the principal on a semi-annual basis.

Amounts repaid


2003


2002Principal repaid


5,224


17,506Interest repaid


3,848


1,3479,072


18,853




NOTE 14 SHARE CAPITA L

Authorized share capital consists of an unlimited number of Class A common shares, and an unlimited number of Class A redeemable preferred shares, issuable in series.

Issued Class A common shares:

December 31, 2003
December 31, 2002Number


Amount


Number


AmountBalance, beginning of year


78,956,875


193,723


80,103,784


198,506Shares repurchased and cancelled pursuantto normal course issuer bid (a)


(1,477,400
)

(3,616
)

(2,531,870
)

(6,199
)Stock options exercised for cash


411,275


1,608


1,267,525


1,314Corresponding convertible securities,converted (b)


29,476


(20
)

125,756


113Cancelled shares (c)








(8,320
)

(11
)Balance, end of year


77,920,226


191,695


78,956,875


193,723

(a)
During 2002, the Corporation adopted a normal course issuer bid to repurchase, for cancellation, up to 5,253,238 common shares during the period from August 7, 2002 to August 6, 2003. This repurchase program, which was renewed on August 5, 2003, allows the Corporation to repurchase for cancellation, up to 5,775,028 common shares during the period from August 7, 2003 to August 6, 2004. As at December 31, 2002, the Corporation had purchased and cancelled 2,531,870 shares at an average price of C$14.57 per s h a re. The Corporation purchased and cancelled an additional 1,477,400 at an average price of C$14.69 per share during the year ended December 31, 2003. The excess of cost over the book value for the shares purchased was applied to retained earnings.(b)
On March 31, 2000, also in connection with the acquisition of PKOP, the Corporation issued corresponding convertible securities as follows:Options to purchase 1,105,753 common shares of the Corporation at prices and terms which are identical to those options outstanding at March 31, 2000, but in each case the number of options equals 41.16% of the outstanding options. This percentage was changed to 40.80% of the outstanding options granted prior to March 31, 2000. As at December 31, 2003 there were 36,717 outstanding corresponding convertible securities (66,193  as at December 31, 2002).(c)
The Corporation cancelled 8,320 shares in 2002 to correct the number of shares issued on the exercise of stock options in 2001. The Corporation cancelled 153,657 of the shares issued for the acquisition of PKOP in 2001 to correct an error made upon issuance.(d)
The Corporation maintains an incentive stock option plan (plan) under which directors, officers and key personnel may be granted options to purchase class A common shares of the Corporation. The Corporation has reserved 8,076,050 class A common shares for issuance upon the exercise of options granted under the terms of the plan (2002  8,076,050). The Board of Directors determines the exercise price of each option, provided that no option shall be granted with an exercise price at a discount to market. The vesting periods established under the Corporations stock option plan and the term of the options are set by the board of directors, subject to a maximum term for any option of 10 years. Granted options have a vesting period of 3-5 years, except for options granted to non-executive directors, which vest immediately.




Kazgermunai subordinated debt

The subordinated debt bears interest at LIBOR plus 3% and is unsecured. Accrued interest is added to the principal on a semi-annual basis. Repayment of the debt may begin after full repayment of the senior debt.

Loan from Government of Kazakhstan

The loan from the Government of Kazakhstan relates to exploration and development work performed by PKKR on the Akshabulak, Nurali and Aksai fields prior to the formation of Kazgermunai. The loan bears interest at LIBOR plus 3% and is unsecured. Accrued interest is added to the principal on a semi-annual basis. Repayment of the debt will be in proportion to repayment of the subordinated debt.

Kazgermunai is restricted from paying dividends until all outstanding loans have been repaid in full.

Term loans

PKKR has obtained secured term loans guaranteed by Export Credit Agencies for certain equipment related to the KAM pipeline and the Gas Utilization Facility. The loans are secured by the equipment purchased, bear interest at LIBOR plus 4% per annum, are repayable in equal semi-annual installments and have final maturity dates ranging from five to seven years.

PKOP bonds

On February 16, 2001 PKOP registered 250,000 unsecured bonds (par value $100) in the amount of $25.0 million with the National Securities Commission of the Republic of Kazakhstan (the PKOP bonds). The PKOP bonds have a three-year maturity, are due on February 26, 2004 and bear a coupon rate of 10% per annum. The PKOP bonds are listed on the Kazakh Stock Exchange.

As at December 31, 2002, 134,800 bonds had been issued for consideration of $13.2 million. On February 13, 2003, PKOP issued the remaining 115,200 Bonds for consideration of $11.3 million.

The PKOP bonds contain certain covenants including a limitation on indebtedness.

Repayment

Principal repayments due for each of the next five years and in total are as follows:

Lessamountsincluded in
Totalshort-term
long-term2004
2005
2006
2007
2008
Thereafter
debt
debt9.625% Notes






125,000

125,000Term facility

35,692
35,692
35,692



(35,692)
71,384Kazgermunai






37,743

37,743Term loans

2,039
2,665
2,665
2,271
1,878
3,049
(2,039)
12,52837,731
38,357
38,357
2,271
1,878
165,792
(37,731)
246,655

The Kazgermunai debt does not have fixed repayment terms.

Interest Expense

2003


2002


2001Interest on long-term debt


23,375


29,897


15,870Interest on short-term debt


12,204


5,576


3,66035,579


35,473


19,530



A summary of the status of the Corporations stock option plan as of December 31, 2003 and the changes during the year ended December 31, 2003 and year ended December 31, 2002 is presented below (expressed in Canadian dollars):

Weighted AverageOptions


Exercise PriceOutstanding at December 31, 2000


4,685,705


3.15Granted


1,644,243


9.71Exercised


(446,568
)

2.28Forfeited


(146,500
)

7.89Outstanding at December 31, 2001


5,736,880


3.07Granted


605,000


14.65Exercised


(1,393,281
)

1.09Forfeited


(98,463
)

6.73Outstanding at December 31, 2002


4,850,136


5.01Granted


791,000


25.82Exercised


(440,751
)

3.76Forfeited


(84,925
)

9.27Outstanding at December 31, 2003


5,115,460


8.17Options exercisable as at:December 31, 2002 (as amended)


1,908,798


3.87December 31, 2003


2,816,683


5.14

The weighted average fair value of the 791,000 options granted during the year ended December 31, 2003 was $6.2 million.

All stock options outstanding as of August 3, 2001 were re-priced in connection with the special dividend that was issued by the Corporation. The exercise price was reduced by C$3.78 per share. Certain options had exercise prices less than C$3.78.

Outstanding Options
Exercisable Options
WeightedAverage

Weighted




WeightedRange of


Number of


Remaining

Average

Number


AverageExercise Price


Options


Contractual Life

Exercise Price

of Options


Exercise Price(C $)




(C $
)As at December 31, 20030 to 2.5


2,426,717


1.24

0.65

1,691,518


0.452.5 to 7.5


217,500


2.15

5.58

98,750


5.247.5 to 12.5


1,137,493


2.60

9.35

699,915


9.4112.5 to 17.5


559,750


3.95

14.70

186,500


14.6517.5 to 28.64


774,000


4.93

26.04

140,000


27.795,115,460


2.44

8.17

2,816,683


5.14




The pro forma net income per share had we recognized compensation expense using the fair value of common stock options granted for all stock options outstanding prior to January 1, 2003 follows:

2003


2002


2001Net incomeAs reported


317,488


162,568


169,340Proforma


315,300


160,038


165,693Basic net income per shareAs reported


4.06


2.01


2.12Proforma


4.03


1.98


2.08Diluted net income per shareAs reported


3.91


1.93


2.02Proforma


3.88


1.90


1.98

The estimated fair value of the stock options issued were determined using the Black-Scholes option pricing model with the following assumptions:

2003


2002


2001Risk-free interest rate


3.91%


3.96%


4.69%Expected option life


5 years


5 years


5 yearsExpected volatility in the priceof the Corporations common shares


38%


68%


66%Expected dividends








Weighted average fair value of options granted during the year


$7.82


$5.73


$3.63

(e)
On March 26, 1997, the Corporation issued C$110.0 million (U.S.$80.0 million) of Special Warrants under a Special Warrant Indenture (the Indenture). The Corporation reached an agreement with the Series 5 warrant holders to redeem 4,943,020 of the outstanding Series 5 warrants on February 23, 2001 at C$2.90 per warrant for a total consideration of $9.4 million. $1.8 million was recorded as a reduction of share capital based upon the average cost of each warrant at issuance, and the remaining $7.6 million was recorded as an increase in the Corporations deficit. On February 23, 2001, 2,200 Series 5 warrants were exercised and as at December 31, 2001 there were no outstanding Series 5 warrants. Simultaneously, the corresponding convertible securities associated with the Series 5 warrants were redeemed under the same terms as the Series 5 warrants at C$2.90 per corresponding convertible security for the total consideration of $3.9 million. On February 2


3, 2001, 906 of these corresponding convertible securities were exercised and as at December 31, 2001 there were no outstanding corresponding convertible securities associated with the Series 5 warrants.



NOTE 15 INCOME TAXES
****
The Corporation and its subsidiaries are required to file tax returns in each of the jurisdictions in which they operate. The primary operating jurisdiction is Kazakhstan with substantially all income earned in Kazakhstan.

The provision for income taxes differs from the results, which would have been obtained by applying the statutory tax rate of 30% to PetroKazakhstans income before income taxes. This difference results from the following items:


2003


2002


2001Statutory Kazakhstan income tax rate


30
%

30
%

30
%Expected tax expense


142,580


79,539


71,898Non-deductible amounts, net


10,141


16,230


7,619Higher tax rate for Kazgermunai


2,720





Lower tax rate for South Kumkol field








(2,338
)Reversal of lower tax rate for South Kumkol field





4,726


Income tax withheld on joint venture dividend








2,500Future tax recognized








(11,285
)Income tax expense


155,441


100,495


68,394

The following are the major future income tax assets and liabilities arising from temporary differences between the carrying values and tax basis of the following assets and liabilities:

2003


2002Future income tax assets:Fixed assets


22,475


21,331Provision for doubtful debts


1,515


2,707Provision for obsolete inventories


1,180


1,096Provision for royalties


4,831


4,777Provision for inter-company profit eliminations


9,087


3,390Other


424


277Total future income tax assets


39,512


33,578Less: current portion of future income tax assets


14,697


9,049Long-term future income tax assets


24,815


24,529Future income tax liabilities:Fixed assets


13,012


17,015

The Corporations principal subsidiaries, PKKR and PKOP, and the Corporations other subsidiaries and joint ventures operating in Kazakhstan are separate taxpayers under Kazakhstani tax legislation.

Taxes are payable in Kazakhstan based on financial statements prepared in accordance with the laws of Kazakhstan rather than financial statements prepared in accordance with GAAP in Canada. The majority of the differences between the two sets of financial statements are temporary differences where an expense or revenue item is recorded for Canadian GAAP purposes in a diff e rent period than allowed under Kazakhstani law. The provision for Kazakhstani income taxes has been calculated by applying the Kazakhstani statutory tax rate of 30% to the income of PetroKazakhstans Kazakhstan subsidiaries.


NOTE 16 NET INCOME PER SHARE
****
The income per share calculations are based on the weighted average and diluted numbers of Class A common shares outstanding during the period as follows:

2003


2002


2001Weighted average number of common shares outstanding


78,149,904


80,853,597


79,807,038Dilution from options (including convertible securities)


3,142,302


3,346,939


3,842,122Diluted number of shares outstanding


81,292,206


84,200,536


83,649,160

774,000 options were excluded from the calculation of diluted number of shares outstanding for the year ended December 31, 2003, as the exercise price was in excess of the average market price for the year. No options w e re excluded from the calculation of diluted number of shares outstanding for the years ended December 31, 2002 and 2001.

NOTE 17 FINANCIAL INSTRUMENTS

The nature of the Corporations operations and issuance of long-term debt exposes the Corporation to fluctuations in commodity prices, foreign currency exchange rates, interest rates and credit risk. The Corporation recognizes these risks and manages operating in a manner such that exposure to these risks is minimized to the extent practical.

The Corporations financial instruments include cash, accounts receivable, all current liabilities and long-term debt. The fair value of cash, accounts receivable and current liabilities approximates their carrying amounts due to the short-term maturity of these instruments. The fair value of the term facility, Kazgermunai debt and the term loans approximates their carrying value as they bear interest at market rates. The fair value of the 9.625% Notes is $142.5 million versus the carrying value of $125.0 million as at December 31, 2003 as determined through reference to the market price.

a) Commodity price risk

The Corporation has entered into a commodity-hedging program where it is utilizing derivative instruments to manage the Corporations exposure to fluctuations in the price of crude oil. The Corporation has entered into the following contracts with a major financial institution.

Price Ceiling orContract Amount
Contract Period
Contract Type
Contracted Price
Price Floor(bbls per month)75,000
January 2004 to December 2004
Zero cost collar
28.00
17.0075,000
January 2004 to December 2004
Zero cost collar
29.00
17.0075,000
January 2004 to December 2004
Zero cost collar
29.25
17.0037,500
January 2004 to December 2004
Zero cost collar
29.60
17.00110,000
January 2004 to December 2004
Zero cost collar
30.20
18.00120,000
January 2005 to March 2005
IPE Future
26.30  26.5240,000
April 2005 to June 2005
IPE Future
25.92458,333
January 2005 to December 2005
IPE Future
25.65  25.90

The unrealized loss on these hedges as at December 31, 2003 is $2.8 million.

b) Foreign currency exchange rate risk

Export revenues are denominated in U.S. dollars and domestic sales of refined products and crude oil are made in the Tenge equivalent to U.S. dollars at the time of sale. Substantial portions of the Corporations operating costs are denominated in Tenge. The Corporation manages this exposure by operating in a manner that minimizes the need to convert between these currencies.


The Corporation, through its Downstream operations has foreign currency exposure as the tax basis of its assets a re denominated in Tenge. For Upstream, the Corporation has the possibility to revalue the tax basis of its assets using the official annual rate of inflation through the tax stability provisions of its hydrocarbon contracts. There is no significant forward market for the Tenge, there f o re, the Corporation does not hedge this exposure .

c) Interest rate risk

The Corporation manages its interest rate risk through utilizing fixed and floating rate debt to finance its operations. The floating rate debt exposes the Corporation to fluctuations in interest payments due to changes in interest rates.

d) Credit risk

A substantial portion of the Corporations accounts receivable are with customers in the energy industry and are subject to normal industry risk. The Corporations crude oil sales are sold on credit to purchasers with A rating and all other sales are supported by letters of credit issued by major financial institutions. The Corporations sales of refined products are either made on a prepayment basis or supported by letters of credit issued by major financial institutions.

NOTE 18 RELATED PA RTY TRANSACTIONS

The Corporation had the following transactions with its joint ventures.

(mm$)


2003


2002


2001Crude oil purchased from Turgai


76.8


110.0


105.8Crude oil purchased from Kazgermunai


1.1


12.6


5.2Services provided to Turgai


21.0


16.4


5.2

The amounts in the table above re p resent 100% of transactions with the joint ventures. 50% of these amounts were eliminated on consolidation of the Corporations 50% interest in joint ventures. The remaining 50% remains in the results of operations.

As at December 31, 2003 the Corporation has a loan receivable from Turgai for $11.0 million, representing 50% of the total balance ($11.0 million as at December 31, 2002 and $6.0 million as at December 31, 2001).

As at December 31, 2003 the Corporation has an account payable to the shareholder of the Turgai joint venture amounting to $16.6 million.

The Kazgermunai senior and subordinated debt is loans provided by the partners holding the remaining 50% of the Kazgermunai joint venture .

NOTE 19 CASH FLOW INFORMATION
****
Interest and income taxes paid:

2003


2002


2001Interest paid


33,988


30,622


7,491Income taxes paid


173,275


97,903


102,238




Changes in non-cash operating working capital items include:

2003


2002


2001(Increase)/decrease in accounts receivable


(57,525
)

(40,144
)

(16,573
)Decrease/(increase) in inventory


3,609


(10,583
)

(9,138
)(Increase)/decrease in prepaid expenses


(306
)

(27,275
)

(7,089
)(Decrease)/increase in accounts payable and accrued liabilities


(9,470
)

44,068


(11,044
)Increase/(decrease) in prepayments forcrude oil and refined products


3,111


(3,882
)

(4,552
)(60,581
)

(37,816
)

(48,396
)

Changes in long-term debt includes:

2003


2002


2001Proceeds from PKOP bonds








13,227Proceeds from term facility


190,000


(16,000
)

16,000Repayment of term facility


(82,923
)




Proceeds for sale of 9.625% notes, net of discount


122,986





12% Notes repurchased








(900
)12% Notes sold, net of discount





17,195


14,080Redemption of 12% Notes


(208,210
)




Repayment of Kazgermunai debt


(9,489
)

(18,853
)

(26,659
)Repayment of Canadian and US notes








(24,006
)12,364


(17,658
)

(8,258
)

Changes in short-term debt includes:

2003


2002


2001Proceeds from PKOP bonds


11,332





Proceeds from term facility





40,000


4,000Repayment of term facility





(44,000
)

Joint venture loan





5,000


6,000Proceeds from working capital facilities


66,079


64,954


41,557Repayment of working capital facilities


(71,605
)

(92,564
)

5,806


(26,610
)

51,557

During the year ended December 31, 2001, the Corporation entered into a Sale and Purchase Agreement to acquire a 49.9% interest, with equal management rights in a company, which had a 1.75% interest in the CPC pipeline. The first payment of $40.0 million was made on December 28, 2001.

Conditions set out in the Sale and Purchase agreement could not be met by the deadline of June 13, 2002 and the agreement was terminated. The first payment was refunded in full.



NOTE 20 COMMITMENTS AND CONTINGENCIES

Kazakhstani environment

Kazakhstan, as an emerging market, has a legal and regulatory infrastructure that is not as mature and stable as those usually existing in more developed free market economies. As a result, operations carried out in Kazakhstan can involve risks and uncertainties that are not typically associated with those in developed markets.

The instability associated with the ongoing transformation process to a market economy can lead to changes in the business conditions in which the Corporation currently operates. Changes in the political, legal, tax or regulatory environment could adversely impact the Corporations operations.

Tax matters

The local and national tax environment in the Republic of Kazakhstan is subject to change and inconsistent application, interpretation and enforcement. Non-compliance with Kazakhstan laws and regulations, as interpreted by the Kazakh authorities, can lead to the imposition of fines, penalties and interest.

In response to the Corporations submission, the Minister of Finance initiated the creation of a highlevel Working Group between its Officials and the Corporations representatives to address and seek resolution of all outstanding tax issues through dialogue and negotiations. On January 22, 2004, the Working Group signed a memorandum that sets out the agreed resolution of all outstanding tax issues. Certain actions, such as amendments to hydrocarbon contracts and issuance of instruction letters must be taken to fully implement the terms of the memorandum. The terms of this memorandum are reflected in the ensuing discussion of the Corporations tax matters.

Assessments for 1998 and 1999

The Corporations subsidiaries have been engaged in two court cases in Kazakhstan pertaining to disputed tax assessments received for 1998 and 1999.

The first involved PKOP and was for approximately $8.8 million. PKOP has successfully argued its case at the first level of the court system in Kazakhstan and at the Supreme Court level. There is no possibility of further Government appeal and accordingly, no provision has been made in the consolidated financial statements for this assessment.

The second case involved PKKR and was for a total of approximately $10.5 million including taxes, fines, interest and penalties. PKKR was successful at the first level of the court system and was unsuccessful on the majority of the issues at the Supreme Court level. PKKR was unsuccessful in obtaining agreement of the Supervisory Panel of the Supreme Court to hear its appeal on the assessed taxes. The Corporation provided for $2.9 million of the $10.5 million total assessment in the December 31, 2002 consolidated financial statements. PKKR has been disputing the remaining $7.6 million of the $10.5 million, which relates to fines and penalties assessed, because PKKR believes there was an incorrect application of the provisions of the tax act. PKKR has paid this amount to stop the further accumulation of fines and penalties and has recorded this payment as an account receiv


able pending resolution of this issue. The Working Group agreed with PKKRs position and determined that there was an incorrect application of the provisions of the tax legislation. The account receivable of $7.6 million will be recovered through offsetting current taxes payable in 2004.

Assessments for 2000 and 2001

The Corporation, through its operating subsidiaries in Kazakhstan received tax assessments for 2000 and 2001 amounting to $56.0 million, which were reduced through negotiations to $45.0 million (including our 50% share of Turgais assessments). The Corporation does not agree with these assessments and has filed court cases disputing these amounts. The following paragraphs discuss the 2000 and 2001 assessments.

PKOP has been successful at the first level of the court system and at the Supreme Court with respect to the entire $12.5 million of its assessment. This assessment was for withholding taxes on the acquisition of an interest in the CPC pipeline and the assessment was made despite the fact that this transaction was not completed. This case may be appealed by the Ministry of Finance.


Turgai has been successful at the first two levels of the court system on almost its entire assessment of $12.0 million, of which $6.0 million is our 50% share. There is no possibility of further Government appeal.

The PKKR assessment was split into two cases. The first case was for amounts totaling approximately $13.0 million and at the first level of the court system PKKR was successful on $6.8 million of the $13.0 million and was unsuccessful on the re m a i n d e r. The major issue on which PKKR was unsuccessful was the assessment of royalties on flared associated gas (approximately $4.5 million). The Corporation believes the claim for royalties on flare d associated gas, which has no commercial value, contravenes the provisions of its hydrocarbon contracts. PKKR appealed to the Supreme Court and was unsuccessful. The Working Group determined that PKKR would pay royalties on produced gas volumes less gas volumes reinjected and gas consumed in operations as fuel gas. A flat 5% royalty rate is to be applied and the valuation will be based upon sales value for those volumes sold a


nd lifting costs for the remaining volumes. PKKR has provided $0.4 million for royalties on associated gas for the years 1998-2001 and $0.2 million for 2002 and 2003. PKKR has also provided $1.8 million for the years 2000 and 2001 and made a further provision of $1.7 million for 2002 and 2003 for the remaining issues.

The second case was for $13.5 million, with $6.9 million related to transfer pricing sent back by the court for re -negotiation. The transfer pricing amount has been reduced through re-negotiation to $700,000. The second case was heard in September 2003 with PKKR being successful on almost all of the issues. The final assessment resulting from the court decision totalled $783,000 including the transfer pricing issue. The Ministry of Finance appealed to the Supreme Court, approximately $2.1 million of the assessment relating to the methodology used to revalue tax pools for currency fluctuations ($1.7 million) and the accelerated write-off of certain assets ($0.4 million). PKKR was unsuccessful at the Supreme Court. The working group did not resolve this issue as it was a matter of current litigation. The Corporation has provided for these amounts and plans to appeal to th


e Supervisory panel of the Supreme Court. There is no impact on following years.

Recent PKKR assessments

PKKR received an assessment for royalties on oil production during testing of the East Kumkol discovery on its exploration contract for $0.3 million and was assessed a fine of $1.3 million. The Corporation believes this assessment is without merit because the assessment is contrary to the hydrocarbon contract and relevant legislation. The Working Group determined that royalties on oil production under the Corporations exploration contract would be payable in accordance with the production contract entered into upon determination that the discovery is commercial. Royalties will be paid 30 days subsequent to signing the production contract. The Working Group determined that the assessment for royalties and the associated fine would be withdrawn. The Corporation has estimated that the royalties payable on accumulated production would amount to $0.4 and has provided fo


r this amount.

Kazgermunai assessments

The Corporation, through its joint venture Kazgermunai, has received tax assessments for 2001 and 2002 amounting to $9.2 million (of which our 50% share is $4.6 million). Neither the Corporation nor Kazgermunai agree with these assessments, and Kazgermunai will be disputing these amounts through the legal system.

Capital expenditures commitment

Pursuant to the Share Sale-Purchase Agreement with the Republic of Kazakhstan, a commitment was made to invest, in Kazakhstan, an aggregate of $280 million in capital expenditures, investments or other items that may be treated as capital assets of PKKR on or before December 31, 2002. These expenditures were to be used to further exploit and develop existing fields and to explore for new additional reserves to enhance future production and revenues. If the required investment is not made within the agreed time period, the Corporation may be required under the terms of the Agreement to pay a penalty of 15% of the amount not invested. As at December 31, 2002, the Corporation believes it has met this commitment. The expenditures and commitments may be subject to audit and certification by the Government of Kazakhstan.

The Corporation has assumed the rights and obligations under the PKOP privatization agreement, whereby the Government of Kazakhstan privatized PKOP. Under this agreement, the Corporation was required to invest, or cause PKOP to invest, the Tenge equivalent of $150.0 million in capital expenditures or investments by December 31, 2001.


As of December 31, 2003, the Corporation believes it has met this commitment. The Corporation is currently engaged in discussions with representatives of the Government of Kazakhstan concerning the level of capital expenditures or commitments made as at December 31, 2001. The Government of Kazakhstan agrees with the Corporations assertion regarding $116.0 million of this commitment and is claiming the remaining obligation has not been met. If it is established that the Corporation has not met the remaining obligation, the Corporation may be required, under the terms of the agreement, to pay a penalty of 15% of the unfulfilled obligation or $5.1 million.

Legal proceedings

The Corporation and its subsidiary PKKR were claimants in arbitration proceedings being conducted under the auspices of the International Court of Arbitration of the International Chamber of Commerce, in Paris, France. The Corporation and PKKR are claiming damages in the amount of $31.5 million. The Corporation contends that the defendants, EEG and RWE (the joint venture partners of PKKR in the joint venture Kazgermunai LLP) have acted in breach of the Foundation Agreement of the Kazgermunai LLP and certain other related agreements. No amount has been recorded in the consolidated financial statements as at December 31, 2003.

The Corporation had been named as defendant in a claim filed by a company alleging it was retained under a consulting contract since January 17, 1997 until services were suspended in May 1999. The liquidated principal amount claimed was, in aggregate, $6.6 million and an additional unspecified amount was claimed as an alleged penalty provision, with the total claim not to exceed $35.0 million. The arbitration decision has been received and the Corporation has paid $7.1 million for full settlement of the claim.

The Corporation has been named as defendant in a claim filed by a company alleging breach of a consulting contract, in aggregate of $4.7 million. The Corporation believes this claim is without merit and, accordingly, no amount has been recorded in the consolidated financial statements at December 31, 2003.

The Corporation has been named as a defendant in a claim filed by a company alleging a breach of an agreement in the amount of $2.4 million. The Corporation believes this lawsuit is without merit and, accordingly, no amount has been recorded in the consolidated financial statements at December 31, 2003.

Agency for Regulation of Natural Monopolies and Protection of Competition

The ARNM alleged that PKOP charged prices for refined oil products that in total were $6.3 million in excess of ARNM authorized maximum prices. The Corporation has always taken the position that the ARNM does not have the right to establish prices for PKOP under the terms of the Privatization Agreement relating to the Shymkent refinery, which operates in a highly competitive environment. PKOP initiated legal proceedings to annul the ARNM claim and the court of first instance has reduced the ARNM claim to approximately $1.1 million. PKOP and the ARNM have both appealed this decision to the Supreme Court. PKOPs position remains that the ARNM does not have the right to establish prices for the refinery and the Corporation, as the party in interest under the Privatization Agreement for the Shymkent refinery has notified the Government of Kazakhstan that it is in breach


 of relevant provisions of the Privatization Agreement. The Corporation has the right to proceed to international arbitration under the terms of the Privatization Agreement.

The ARNM claimed $31 million from a group company for allegedly violating Kazakhstans competition law. The Corporation initiated legal proceedings and the court of first instance dismissed the ARNM claim. The ARNM has appealed this decision. The date to hear this appeal has not been set.

The ARNM claimed $91.4 million from group companies for allegedly violating Kazakhstans competition law. The group companies initiated legal action to defend themselves, and at the Astana City Court they were unsuccessful in their challenge of allegations by the ARNM that these companies had violated Kazakhstan competition laws. The judgment upheld the ARNM determination that these distributors had received unjustified revenues totaling approximately $91.4 million.

It remains the Corporations view that the allegations are without justification; a highly competitive market exists for oil products within Kazakhstan and the current level of prices reflects current world crude oil prices, which a re close to their historical high. Also, the prices charged by the group companies are competitive with Russian imports and with those charged by distributors of the other two refineries in Kazakhstan.


The Corporation is considering its recourse rights under the terms of the Shymkent Refinery Privatization Agreement, which clearly stipulates the right to sell any and all its products in Kazakhstan and abroad at free market prices.

The Corporation will continue to seek a dialogue with the appropriate authorities to address the concerns related to the pricing of refined products and possible measures to be taken to further promote transparency and effective monitoring of the dynamics of competition, consistent with market economy principles.

Excess profit tax

The Corporation, through its subsidiary PKKR and joint venture Turgai, is subject to excess profit tax under the terms of the Hydrocarbon Exploration and Production contracts they have for oil and gas production. The contracts are specific to each field.

Excess profit tax is in addition to statutory income taxes, which are at a rate of 30%, and excess profit tax takes effect after the field has achieved a cumulative internal rate of return higher than 20% for the specific field. The excess profit tax ranges from 0% to 30% of taxable income for the year for PKKR and from 0% to 50% for Turgai. The Corporation did not incur excess profits tax in 2003; it may be subject to excess profit tax for the year ended December 31, 2004 and subsequent years in certain of its fields.

Environmental matters

Extensive national, regional and local environmental laws and regulations in Kazakhstan affect nearly all of our operations. These laws and regulations set various standards regulating certain aspects of health and environmental quality provide for user fees, penalties and other liabilities for the violation of these standards and establish, in some circumstances, obligations to remediate current and former facilities and off-site locations.

The Corporation believes it is currently in compliance with all existing Republic of Kazakhstan environmental laws and regulations. However, as new environmental laws and legislation are enacted and the old laws are repealed, interpretation, application and enforcement of the laws may become inconsistent. Compliance in the future could require significant expenditures, which may adversely affect the Corporations operations.

NOTE 21 RECONCILIATION OF RESULTS FROM CANADIAN GAAP TO U.S. GAAP

These consolidated financial statements have been pre p a red in accordance with Canadian GAAP which conform in all material respects with those applicable with U.S. GAAP, except as set forth below:

Income taxes

Recommendations of the Canadian Institute of Chartered Accountants with respect to accounting for future income taxes differ from United States GAAP due to accounting for certain tax incentives. Under the tax legislation in the Republic of Kazakhstan, the Corporation may revalue the tax pool of its Upstream assets using the prescribed inflation rate. A future income tax asset is recognized to reflect such revaluation in the consolidated financial statements, which is reversed for United States GAAP.

Foreign currency translation

PetroKazakhstans principal operating subsidiaries are PKKR and PKOP and for Canadian GAAP are classified as integrated which leads to the use of the temporal method of translation (Note 1). Under United States GAAP, the Corporation, on a consolidated basis, is required to translate the accounts of its principal operating subsidiaries using the current rate method. The significant changes which result from this difference are a reduction in the carrying value of capital assets and the creation of a cumulative translation account within the equity section of the balance sheet, which reduces total equity.



Accounting for commodity hedges

The Corporation has entered into a commodity-hedging program where it is utilizing derivative instruments as described in Note 17. The Corporation has designated these as cash flow hedges under SFAS 133 and recognizes in earnings, changes in fair value of these derivatives in the same period as the hedged item. Any change in the fair value of these cash flow hedges before that period are recognized in the balance sheet and in other comprehensive income. The change to comprehensive income for the year ended December 31, 2003 was $1.6 million (2002  $4.4 million). The amount recorded as accounts payable as at December 31, 2003 was $2.8 million (2002  $4.4 million).

Accounting for oil and gas properties

The Corporation has completed a ceiling test calculation under United States GAAP at December 31, September 30, June 30 and March 31, in 2003, 2002 and 2001.

There are certain differences between the full cost method of accounting for oil and gas assets as applied in Canada and as applied in the United States. The Corporation has reviewed such differences and determined that no variances in financial statement balances would have resulted from the application of full cost accounting in accordance with United States GAAP.

Change in accounting principles

Effective January 1, 2003 the Corporation adopted SFAS 143, Accounting for Asset Retirement Obligations. The Corporation recognized the estimated fair value of the liability for its assets retirement obligation. As at December 31, 2003, the fair value of the obligation was estimated to be $11.0 million. These estimated costs were recorded as an increase in the gross book value of property, plant and equipment with a corresponding increase in the provision for future site restoration. The asset retirement obligation is depleted on a unit-of-production basis over the useful life of the related assets. An accretion expense, resulting from the changes in the liability due to passage of time by applying an interest method of allocation to the amount of the liability at the beginning of the period, is recorded as part of interest expense.

The cumulative effect from the date the liability would have been recognized and the date of adoption of SFA S 143 was $2.1 million and is included in net income for the year ended December 31, 2003.

The assets retirement obligation liability, had we applied SFAS 143 for all years presented in these financial statements, would be:

As at January 1, 2002
9,293As at January 1, 2003
10,129

The pro forma information, had we applied SFAS 143 for comparative years presented in these consolidated financial statements, would be as follows:

2002


2001Net incomeAs reported


162,539


162,643Proforma


162,498


162,868Basic net income per share :As reported


2.01


2.04Proforma


2.01


2.04Diluted net income per share :As reported


1.93


1.94Proforma


1.93


1.95



Consolidated statements of income

The application of United States GAAP would have the following effects on net income as reported:

Years ended December 31


2003


2002


2001Net income as reported in accordance with Canadian GAAP


317,488


162,568


169,340Accounting for income taxes


629





(6,157
)Amortization of debt issue costs





(29
)

(540
)Interest expense (accretion expense)


(912
)




Depletion and depreciation


2,159





Future income tax


(374
)




Net income under U.S. GAAP before cumulativeeffect of initial application of SFAS 143


318,990


162,539


162,643Cumulative effect of initial application of SFAS 143


(2,107
)




Net income under U.S. GAAP


316,883


162,539


162,643Basic income per share under United States GAAP:Net income under U.S. GAAP before cumulativeeffect of initial application of SFAS 143


4.08


2.01


2.04Cumulative effect of initial application of SFAS 143


(0.03
)




Basic net income per share under U.S. GAAP


4.05


2.01


2.04Diluted income per share under United States GAAP:Net income under U.S. GAAP before cumulative effectof initial application of SFAS 143


3.92


1.93


1.94Cumulative effect of initial application of SFAS 143


(0.02
)




Diluted net income per share under U.S. GAAP


3.90


1.93


1.94Comprehensive incomeNet income under U.S. GAAP


316,883


162,539


162,643Foreign exchange translation adjustment


35,199


(2,235
)

(1,598
)Fair value adjustment cash flow hedges


1,594


(4,392
)

Total comprehensive income


353,676


155,912


161,045

Stock based compensation

The Corporation has a stock-based compensation plan as described in Note 14. During the year ended December 2003, the Corporation adopted SFAS 123 and 148, which require recognition of compensation expense using the fair value of the equity instrument granted. The Corporation has adopted this recommendation on a prospective basis, effective January 1, 2003. Accordingly, the Corporation has recognized compensation expense for all common stock options granted to employees and non-executive directors on or after January 1, 2003 using the estimated fair value. The Corporation has recorded compensation expense of $1.2 million in general and administrative expenses within the consolidated statements of income and retained earnings for the year ended December 31, 2003 with a corresponding increase in contributed surplus within shareholders equity. Compensation expense for


 options granted on or after January 1, 2003 is recognized as compensation expense over the vesting period of the respective options. For common share options granted prior to January 1, 2003 the pro forma impact on net income and net income per share are as follows.


Years ended December 31


2003


2002


2001Net income under U.S. GAAP:As reported


316,883


162,539


162,643Add stock-based employee compensation expenseincluded in reported net income


1,175





Deduct total stock-based employeecompensation expense for all awards


(3,363
)

(2,530
)

(3,647
)Proforma


314,695


160,009


158,996Basic net income per share :As reported


4.05


2.01


2.04Proforma


4.03


1.98


1.99Diluted net income per share :As reported


3.90


1.93


1.94Proforma


3.87


1.90


1.90Stock options vested during period(thousands)


381


513


1,013Weighted average exercise price


6.59


6.02


5.90Weighted average fair value of options vestedduring the period


5.74


4.93


3.60Weighted average fair value of options grantedduring the period


7.82


5.73


3.63

The foregoing information is calculated in accordance with the Black-Scholes option pricing model, using the following data and assumptions: volatility, as of the date of grant, computed using the prior one to three-year weekly average prices of the Corporations common shares, which ranged from 38% to 70%; expected dividend yield  0%; option terms to expiry  5 years as defined by the option contracts; risk-free rate of return as of the date of grant  3.91% to 5.16%, based on five year Government of Canada Bond yields.

Consolidated balance sheets

The application of U.S. GAAP would have the following effects on balance sheet items as reported:

Foreign


Fair valueexchange


adjustment


Accounting


AssetAs


translation


cash flow


for income


retirement


U.S.reported


adjustment


hedges


taxes


obligation


GAAPDecember 31, 2003Current assets


431,471














431,471Deferred charges


6,729














6,729Property, plantand equipment


527,136


(13,446
)







3,614


517,304Restricted cash


35,468














35,468Futureincome tax assets


24,815








(5,528
)

(374
)

18,913Current liabilities


168,299





2,798








171,097Long-term debt


246,655














246,655Futureincome tax liability


13,012














13,012Provision for futuresite restoration


6,567











4,474


11,041Non-controlling interest


13,091














13,091Preferred shares of subsidiary


80














80Shareholders equity


577,915


(13,446
)

(2,798
)

(5,528
)

(1,234
)

554,909




Foreign


Fair valueexchange


adjustment


Accounting


AssetAs


translation


cash flow


for income


retirement


U.S.reported


adjustment


hedges


taxes


obligation


GAAPDecember 31, 2002Current assets


261,399














261,399Deferred charges


5,321














5,321Property, plant and equipment


405,479


(48,645
)










356,834Futureincome tax assets


24,529








(6,157
)




18,372Current liabilities


110,369





4,392








114,761Long-term debt


281,797














281,797Futureincome tax liability


17,015














17,015Provision for future site restoration


4,167














4,167Non-controlling interest


10,753














10,753Preferred shares of subsidiary


83














83Shareholders equity


272,544


(48,645
)

(4,392
)

(6,157
)




213,350

Consolidated statements of income and deficit reclassifications

Interest and other income is presented within revenue under Canadian GAAP, under the U.S. GAAP this would be presented as a separate line item after operating income.

Interest and financing costs is presented within expenses under Canadian GAAP, under U.S. GAAP this would be presented as a separate line item after operating income.

Unusual items as presented under Canadian GAAP would be included within expenses under U.S. GAAP.

The Cash flow subtotal line would not be presented in a cash flow statement pre p a red under U.S. GAAP.

Impact of new and impending U.S. GAAP accounting standards

Statement of Financial Accounting Standards No. 145 (SFAS 145)  Rescission of FA S B Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, addressed income statement classification of gains and losses from extinguishment of debt. SFAS No. 64 amended SFAS No. 4 and is no longer necessary due to the rescission of SFAS No. 4. SFA S No. 145 also amended SFAS No. 13 to require sale-leaseback accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS No. 145 has no impact on the Corporations financial statements.

Statement of Financial Accounting Standards No. 146 (SFAS 146)  Accounting for Costs Associated with Exit or Disposal Activities

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which requires the recognition of a liability when incurred for costs associated with an exit or disposal activity. S FAS No. 146 has no material impact on the Corporations financial statements.

Statement of Financial Accounting Standards No. 148 (SFAS 148)  Accounting for Stock-based Compensation Transition and Disclosure  an Amendment of FASB Statement No. 123

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-based Compensation Transition and Disclosure  an Amendment of FASB Statement No. 123, to provide alternative methods of accounting for stock-based employee compensation. SFAS No. 148 is effective for fiscal years ending after December 15, 2002 and interim periods beginning after December 15, 2002. The prospective method was adopted by the Corporation in the year ended December 31, 2003.


Statement of Financial Accounting Standards No. 149 (SFAS 149)  Amendment of Statement 133 on Derivative Instruments and Hedging Activities

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, to clarify accounting for derivative instruments, including certain derivative instruments embedded in other contracts. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, except for hedging relationships designated after June 30, 2003. The guidance should be applied prospectively. SFAS No. 149 has no material impact on the Corporations financial statements.

Statement of Financial Accounting Standards No. 150 (SFAS 150)  Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity

In May 2003, FASB issued SFAS No. 150 (SFAS 150), Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, to improve the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. SFAS 150 requires that those instruments be classified as liabilities in statements of financial position. SFAS No. 150 did not have a material impact on the Corporations financial statements.

Interpretation No. 45  Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others

In November 2002, FASB issued Interpretation No.45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. This interpretation sets forth expanded disclosure requirements in the financial statements about a guarantors obligations under certain guarantees that it has issued. It also clarifies that, under certain circumstances, a guarantor is required to recognize a liability for the fair value of the obligation at the inception of the guarantee. Certain types of guarantees, such as product warranties, guarantees accounted for as derivatives, and guarantees related to parent-subsidiary relationships are excluded from the liability recognition provisions of Interpretation No.45, however, they are subject to the disclosure requirements. The initial liability recognition provisions are


 applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of Interpretation No.45 are effective for financial statements for interim or annual periods ending after December 15, 2002. As at December 31, 2003, the Corporation had not issued guarantees that require this disclosure. The adoption of the new rules did not have a material impact on its financial position or results of operations.

Interpretation No. 46  Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements

FIN No. 46, Consolidation of Variable Interest Entities, was issued in January 2003. FIN No.46 addresses consolidation by business enterprises of variable interest entities. FIN 46 provides criteria for identifying variable interest entities (VIEs) and further criteria for determining what entity, if any, should consolidate them. In general, VIEs are entities that either do not have equity investors with voting rights or have equity investors that do not provide sufficient financial resources for the entity to support its activities. In December 2003, the FASB issued FIN No. 46R to clarify some of the provisions of FIN No. 46 and to exempt certain entities from its requirements. The additional guidance was issued in response to input received from constituents regarding certain issues arising in implementing FIN No. 46. FIN 46 is effective for fis


cal years beginning January 1, 2004. Management is still in the process of evaluating the impact of FIN 46.