OAO TNK-BP HOLDING
CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED 31 DECEMBER 2009 AND
31 DECEMBER 2008
OAO TNK-BP HOLDING
Consolidated Balance Sheets
(expressed in millions of USD, except as indicated)



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OAO TNK-BP HOLDING
Consolidated Statements of Income
(expressed in millions of USD, except as indicated)


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OAO TNK-BP HOLDING
Consolidated Statements of Cash Flows
(expressed in millions of USD)


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OAO TNK-BP HOLDING
Consolidated Statements of Changes in Equity
(expressed in millions of USD, except as indicated)


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OAO TNK-BP HOLDING
Consolidated Statements of Changes in Equity
(expressed in millions of USD, except as indicated)




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OAO TNK-BP HOLDING
Notes to the Consolidated Financial Statements
(expressed in USD, tabular amounts in millions, except a...
OAO TNK-BP HOLDING
Notes to the Consolidated Financial Statements
(expressed in USD, tabular amounts in millions, except a...
OAO TNK-BP HOLDING
Notes to the Consolidated Financial Statements
(expressed in USD, tabular amounts in millions, except a...
OAO TNK-BP HOLDING
Notes to the Consolidated Financial Statements
(expressed in USD, tabular amounts in millions, except a...
OAO TNK-BP HOLDING
Notes to the Consolidated Financial Statements
(expressed in USD, tabular amounts in millions, except a...
OAO TNK-BP HOLDING
Notes to the Consolidated Financial Statements
(expressed in USD, tabular amounts in millions, except a...
OAO TNK-BP HOLDING
Notes to the Consolidated Financial Statements
(expressed in USD, tabular amounts in millions, except a...
OAO TNK-BP HOLDING
Notes to the Consolidated Financial Statements
(expressed in USD, tabular amounts in millions, except a...
OAO TNK-BP HOLDING
Notes to the Consolidated Financial Statements
(expressed in USD, tabular amounts in millions, except a...
OAO TNK-BP HOLDING
Notes to the Consolidated Financial Statements
(expressed in USD, tabular amounts in millions, except a...
OAO TNK-BP HOLDING
Notes to the Consolidated Financial Statements
(expressed in USD, tabular amounts in millions, except a...
OAO TNK-BP HOLDING
Notes to the Consolidated Financial Statements
(expressed in USD, tabular amounts in millions, except a...
OAO TNK-BP HOLDING
Notes to the Consolidated Financial Statements
(expressed in USD, tabular amounts in millions, except a...
OAO TNK-BP HOLDING
Notes to the Consolidated Financial Statements
(expressed in USD, tabular amounts in millions, except a...
OAO TNK-BP HOLDING
Notes to the Consolidated Financial Statements
(expressed in USD, tabular amounts in millions, except a...
OAO TNK-BP HOLDING
Notes to the Consolidated Financial Statements
(expressed in USD, tabular amounts in millions, except a...
OAO TNK-BP HOLDING
Notes to the Consolidated Financial Statements
(expressed in USD, tabular amounts in millions, except a...
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OAO

  1. 1. OAO TNK-BP HOLDING CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED 31 DECEMBER 2009 AND 31 DECEMBER 2008
  2. 2. OAO TNK-BP HOLDING Consolidated Balance Sheets (expressed in millions of USD, except as indicated) Note 31 December 2009 31 December 2008 Assets Cash and cash equivalents 8 328 929 Restricted cash 8 5 4 Bank deposits with maturity more than 3 months 150 - Trade and other receivables, net 9 7,917 12,407 Inventories 10 707 629 Other current assets 87 184 Total current assets 9,194 14,153 Property, plant and equipment, net 11 16,893 16,314 Goodwill and intangible assets 12 663 684 Long-term loans issued to related parties 727 114 Other long-term assets 564 736 Total assets 28,041 32,001 Liabilities and Equity Short-term debt and current portion of long-term debt 13 634 620 Trade accounts and notes payable 2,097 6,657 Other accounts payable and accrued expenses 14 587 523 Deferred consideration for acquisition of subsidiaries 5 503 719 Taxes payable 17 764 528 Dividends payable 197 654 Total current liabilities 4,782 9,701 Long-term debt 13 1,591 1,184 Asset retirement obligations 11 347 341 Deferred income tax liabilities 16 735 662 Other long-term liabilities 423 319 Total liabilities 7,878 12,207 Commitments and contingencies 20 - - Common stock (authorised and issued: as of 31 December 2009 – 14,997 million shares, RUR 1.0 par value, as of 31 December 2008 - 15,847 million shares, RUR 1.0 par value) 15 520 550 Preferred stock (authorised and issued as of 31 December 2009 and 2008 – 450 million shares, RUR 1.0 par value) 15 16 16 Treasury stock, at cost 15 (2) (239) Additional paid-in capital 5, 7 4,932 4,924 Retained earnings 13,968 13,774 Accumulated other comprehensive loss - (48) Total Group shareholders’ equity 19,434 18,977 Noncontrolling interest 729 817 Total equity 20,163 19,794 Total liabilities and equity 28,041 32,001 The accompanying notes are an integral part of these consolidated financial statements 1
  3. 3. OAO TNK-BP HOLDING Consolidated Statements of Income (expressed in millions of USD, except as indicated) Year ended Year ended Note 31 December 2009 31 December 2008 Revenues Sales and other operating revenues 18 31,172 45,133 Costs and other deductions Export duties 7,681 13,528 Taxes other than income tax 17 5,809 10,888 Operating expenses 3,959 5,034 Transportation expenses 2,658 2,614 Cost of purchased products 1,758 1,605 Depreciation, depletion and amortization 1,714 1,481 Selling, general and administrative expenses 1,126 1,730 Loss on disposals and impairment of assets 11 141 160 Exploration expenses 54 57 Total costs and other deductions 24,900 37,097 Other income and expenses Earnings from equity investments 4 8 Gain on disposals of subsidiaries 6 167 60 Interest income and net other income 20 278 135 Exchange gain / (loss), net (50) 200 Interest expense 13 (114) (152) Total other income and expenses 285 251 Income before income taxes 6,557 8,287 Income taxes Current tax expense 1,032 2,075 Deferred tax expense/(benefit) 196 (268) Total income tax expense 16 1,228 1,807 Net income 5,329 6,480 Less: net income attributable to noncontrolling interest 154 113 Net income attributable to Group shareholders 5,175 6,367 Net income per share of common stock (US dollar) 15 0.34 0.42 The accompanying notes are an integral part of these consolidated financial statements 2
  4. 4. OAO TNK-BP HOLDING Consolidated Statements of Cash Flows (expressed in millions of USD) Year ended Year ended Note 31 December 2009 31 December 2008 Cash flows from operating activities Net income 5,329 6,480 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 1,714 1,481 Deferred tax expense/(benefit) 196 (268) Loss on disposals and impairment of assets 141 160 Gain on disposals of subsidiaries 6 (167) (60) Earnings from equity investments less dividends received (4) (8) Dry hole expenses 24 8 Non-cash provisions 47 163 Exchange gain from investing and financing activities (139) (492) Other non-cash adjustments, net (9) (10) Changes in operational working capital, excluding cash and cash equivalents: Restricted cash - 1 Trade and other receivables, net 4,961 (1,544) Inventories (145) 447 Accounts and notes payable and accrued expenses (4,655) 1,012 Taxes payable 250 (719) Other 88 (37) Net cash provided by operating activities 7,631 6,614 Investing activities Capital expenditures (2,375) (3,731) Grants used for capital expenditures (407) (622) Grants received 445 673 Purchase of intangible assets (9) (50) Proceeds from disposals of non-current assets 15 18 Acquisition of subsidiaries 5, 7 (236) - Cash flows from sales of subsidiaries 6 3 61 Promissory notes repaid - 167 Bank deposits with maturity more than 3 months (150) - Loans issued (1,169) (155) Loans repaid 703 75 Net cash used for investing activities (3,180) (3,564) Financing activities Proceeds from issuance of long-term debt 1,318 825 Cost associated with the issuance of debt (11) (6) Repayment of long-term debt (643) (964) Proceeds from issuance of short-term debt 510 703 Repayment of short-term debt (745) (426) Acquisition of treasury shares 15 (2) - Issue of shares in subsidiaries to noncontrolling interest shareholders 13 - Dividends paid to noncontrolling interest shareholders (284) (4) Dividends paid to Group shareholders (5,214) (2,856) Net cash used for financing activities (5,058) (2,728) Effect of exchange rate changes on cash and cash equivalents 6 (28) Net change in cash and cash equivalents (601) 294 Cash and cash equivalents at beginning of period 929 635 Cash and cash equivalents at end of period 8 328 929 The accompanying notes are an integral part of these consolidated financial statements 3
  5. 5. OAO TNK-BP HOLDING Consolidated Statements of Changes in Equity (expressed in millions of USD, except as indicated) Year ended 31 December 2009 Year ended 31 December 2008 Note Equity Comprehensive Equity Comprehensive income income Common stock Balance at 1 January 550 550 Retirement of treasury stock 15 (30) - Balance at 31 December 520 550 Preferred stock Balance at 1 January 16 16 Balance at 31 December 16 16 Treasury stock Balance at 1 January (239) (239) Acquisition of treasury stock 15 (2) - Retirement of treasury stock 15 239 - Balance at 31 December (2) (239) Additional paid-in capital Balance at 1 January 4,924 4,933 Acquisition of noncontrolling interest 7 8 - Acquisition of subsidiaries in transaction 5 under common control - (9) Balance at 31 December 4,932 4,924 Retained earnings Balance at 1 January 13,774 10,325 Net income attributable to Group shareholders 5,175 5,175 6,367 6,367 Retirement of treasury stock 15 (209) - Dividends to Group shareholders 15 (4,772) (2,918) Balance at 31 December 13,968 13,774 Accumulated other comprehensive loss Currency translation adjustment Balance at 1 January (48) - Translation adjustment for the year attributable to Group shareholders (15) (15) (48) (48) Currency translation loss realized on disposal of subsidiaries 63 63 - - Balance at 31 December - (48) Total comprehensive income attributable to Group shareholders for the year 5,223 6,319 Total Group shareholders’ equity at 31 December 19,434 18,977 Noncontrolling interest Balance as of 1 January 817 709 Net income attributable to noncontrolling interest 154 154 113 113 Dividends to noncontrolling interest shareholders (264) - Acquisition of subsidiaries and noncontrolling interests and other movements 22 (5) Total comprehensive income attributable to noncontrolling interest for the year 154 113 Total noncontrolling interest as of 31 December 729 817 Total comprehensive income for the year 5,377 6,432 Total equity as of 31 December 20,163 19,794 The accompanying notes are an integral part of these consolidated financial statements 4
  6. 6. OAO TNK-BP HOLDING Consolidated Statements of Changes in Equity (expressed in millions of USD, except as indicated) 31 December 2009 31 December 2008 (millions of shares) (millions of shares) Number of Ordinary shares issued At 1 January 15,847 15,847 Treasury shares retired (850) - At 31 December 14,997 15,847 Number of Preferred shares issued At 1 January 450 450 At 31 December 450 450 Number of Treasury shares issued At 1 January (850) (850) Treasury shares retired 850 - Own shares acquired from shareholders (2) - At 31 December (2) (850) The accompanying notes are an integral part of these consolidated financial statements 5
  7. 7. OAO TNK-BP HOLDING Notes to the Consolidated Financial Statements (expressed in USD, tabular amounts in millions, except as indicated) Note 1: Organization OAO TNK-BP Holding (“TBH” or “the Company”) is a subsidiary of TNK-BP Limited (“TNK-BP”), a British Virgin Islands company. TNK-BP was formed effective 29 August 2003 by Alfa Group, Access Industries and Renova Group (jointly “AAR”) and BP plc. (“BP”), to hold their respective interests in their Russian and Ukrainian oil and gas assets. AAR contributed its 100 percent interest in TNK Industrial Holdings Limited which held a 100 percent interest in TNK-BP International Limited, which in turn owned a 96.1 percent interest in OAO Tyumen Oil Company (“TNK”) and a 100 percent interest in Sborsare Management Limited, which in turn effectively held a 68 percent interest in OAO Sidanco (“Sidanco”) for its 50.0 percent interest in TNK-BP. BP contributed its 29.6 percent interest in Sidanco, 33.4 percent interest in OAO Rusia Petroleum (“Rusia Petroleum”) and 75.0 percent interest in BP Moscow Retail for its 50.0 percent interest in TNK-BP. BP also made a balancing payment directly to AAR in cash and BP shares, payable over three years. In 2005, TNK-BP completed several reorganizations under its corporate restructuring program. Pursuant to the program, in December 2005 TBH, a newly created holding company, accessioned TNK, Sidanco and OAO ONAKO (“ONAKO”), the key holding companies of TNK-BP in Russia. As part of this accession, TBH issued shares to the minority interest holders in these entities. Furthermore, most of the minority shareholders in 14 key subsidiaries of TNK-BP in Russia were consolidated within TBH through a voluntary share exchange program also completed in December 2005. As a result of these accessions and the above described share exchange, minority shareholders received approximately 5% of the shares in TBH. All purchases of minority interests have been treated as acquisitions and accounted for using the purchase method of accounting. The Company and its subsidiaries (jointly referred to as “the Group”) conduct exploration and development activities and produce oil and gas in the Russian Federation, operate petroleum refineries and market oil and petroleum products in the Russian Federation. TNK-BP’s assets held outside of TBH include its equity interest in OAO NGK Slavneft, interests in Rusia Petroleum, OAO East Siberian Gas Company, certain Moscow retail assets and its Ukrainian businesses. In December 2009, the Group acquired a 100 percent interest in the gasoline filling stations and other retail assets in Moscow and the Moscow region (the “Retail assets”) from a TNK-BP controlled company for the cash consideration of USD 719 million. This transaction is recognized as a transaction under common control – See Note 5. The Retail assets were acquired by TNK-BP in December 2007 through March 2008 and before December 2009 were leased and operated by TBH under operating lease agreements. The consolidated financial statements of the Group present the Group’s financial position as of 31 December 2009 and the results of its operations, its cash flows and its changes in equity for the year then ended as though the transfer of the 100 percent interest in the Retail assets discussed above had occurred on 1 January 2009. The comparative information has been restated to present the combined financial position, results of operations, cash flows of the Group and the Retail assets. Note 2: Basis of Presentation The consolidated financial statements of the Group are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). The Company and its subsidiaries maintain their accounting records in accordance with the Regulations on Accounting and Reporting in the Russian Federation. The accompanying consolidated financial statements have been prepared from these accounting records and adjusted as necessary in order to comply with US GAAP. 6
  8. 8. OAO TNK-BP HOLDING Notes to the Consolidated Financial Statements (expressed in USD, tabular amounts in millions, except as indicated) In preparing the consolidated financial statements in conformity with US GAAP, management makes estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Actual results could differ from such estimates. Effective from the annual reporting period ended 31 December 2009, the Group adopted the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC). The ASC was established as the sole source of US GAAP and superseded existing accounting and reporting guidance issued by the FASB, Emerging Issues Task Force and other sources. The ASC did not change US GAAP. All references to accounting standards in these consolidated financial statements were changed to corresponding ASC references. Effective 1 January 2009, the Group adopted the authoritative guidance of ASC 810, Consolidation, as it relates to noncontrolling interests – see Note 3. This guidance changed the accounting and reporting standards for minority interests, which were recharacterized as non-controlling interests and classified as a component of equity. In accordance with this guidance, the Group changed retrospectively the presentation of existing minority interests in these consolidated financial statements. Reporting and functional currency. The Company has determined that the United States dollar (“USD”) is the reporting currency for the purposes of financial reporting under US GAAP. For the majority of subsidiaries of the Group, the functional currency is the USD as a significant portion of the Group’s business is conducted in USD; management uses the USD to manage the Group’s financial risks and exposures, and to measure its performance. The local currency of all subsidiaries of the Group is the Russian Rouble (“RUR”). For the purposes of financial reporting under US GAAP, transactions and balances have been remeasured into the functional currency of the subsidiary which, in the majority of cases, is the USD. Monetary assets and liabilities are remeasured at closing exchange rates and non-monetary items are measured at historic exchange rates and adjusted for any impairment. The consolidated statements of income and of cash flows have been remeasured at the average exchange rates during the period or the actual rate on the transaction date. Exchange differences resulting from the use of these exchange rates have been included in the determination of net income and are included in net exchange gains and losses in the accompanying consolidated statements of income. As of 31 December 2009 and 31 December 2008, exchange rates were 30.24 and 29.38 RUR to the USD, respectively. Average exchange rates for the years ended 31 December 2009 and 31 December 2008 were 31.72 and 24.86 RUR to the USD, respectively. Any remeasurement of RUR amounts to USD should not be construed as a representation that such RUR amounts have been, could be, or will in the future be converted into USD at the exchange rate shown or at any other exchange rate. Note 3: Summary of Significant Accounting Policies Principles of consolidation. The consolidated financial statements include the operations of all entities in which the Group directly or indirectly owns or controls more than 50 percent of the voting stock and variable interest entities in which the Group is the primary beneficiary. Joint ventures and investments in which the Group has voting ownership interests between 20 and 50 percent and where the Group exerts significant influence are accounted for using the equity method. Investments in other companies are accounted for at cost and adjusted for estimated impairment. Cash equivalents. Cash equivalents include all liquid securities with original maturities of three months or less when acquired. Accounts receivable. Accounts receivable are presented at net realisable value and include value-added and excise taxes. 7
  9. 9. OAO TNK-BP HOLDING Notes to the Consolidated Financial Statements (expressed in USD, tabular amounts in millions, except as indicated) Inventories. Inventories are valued at the lower of cost, using the average method, or net realisable value. Costs include applicable purchase costs and production costs. Property, plant and equipment. The Group follows the successful efforts method of accounting for its oil and gas properties whereby property acquisitions, successful exploratory wells, all development costs (including development dry holes), and support equipment and facilities are capitalized. Under this method, costs are accumulated with certain exploratory expenditures and exploratory dry holes being expensed as incurred. The Group carries exploratory well costs as an asset when the well has found a sufficient quantity of reserves to justify its completion as a producing well and where the Group is making sufficient progress assessing the reserves and the economic and operating viability of the project. Exploratory well costs not meeting these criteria are charged to expense. Production costs, overheads, and all exploration costs other than exploratory drilling are charged to expense as incurred. Acquisition costs of unproved properties are evaluated periodically and any impairment assessed is charged to expense. Proved oil and gas properties and other long-lived assets are assessed for possible impairment in accordance with ASC 360, Property, Plant and Equipment, which requires long-lived assets with recorded values that are not expected to be recovered through future cash flows to be written down to current fair value. Fair value is generally determined by estimating discounted future net cash flows to be generated by the assets. Depreciation, depletion and amortization of capitalized costs of proved oil and gas properties and equipment is calculated using the unit-of-production method for each field based upon proved reserves for property acquisitions and proved developed reserves for exploration and development costs. In both cases the proved reserves data used is estimated on a “life of field” basis as management believes it will continue to be successful in the renewal of its oil and gas licences. Property, plant and equipment which is not associated with exploration and production activities are carried at cost less accumulated depreciation. Depreciation of these assets is calculated on a straight-line basis as follows: Buildings and constructions 5 - 33 years Machinery and equipment 5 - 15 years Maintenance and repairs and minor renewals are expensed as incurred. Major renewals and improvements which extend the useful lives of the assets are capitalized. Capitalization of interest. The Group capitalizes interest costs necessarily incurred to finance expenditures for long-lived assets during construction and development period as part of the historical cost of acquiring the constructed assets. Capitalized interest costs are included in property, plant and equipment and are depreciated over the useful life of the related assets. Capital grants. The Group recognises capital grants from local governments when there is a reasonable assurance that the Group will comply with the conditions attached and that the grant will be received. The capital grants are accounted for as a reduction of the cost of the asset for which the grant is received. Goodwill. The Group recognizes goodwill as the excess of the purchase price over the estimated fair value of assets acquired and liabilities incurred in a business combination. The goodwill is not amortized, but rather is tested for impairment annually and when events or changes in circumstances indicate that the fair value of a reporting unit with goodwill has been reduced below carrying value. Intangible assets. The Group's intangible assets primarily include intangible assets associated with land rights and permits, software licenses and road-use rights. The intangible assets associated with land rights and permits are amortized on a straight-line basis over 20 years. Software licenses are amortised on a straight-line basis over the related license period. The road-use rights are amortised on a straight-line basis over the expected lives of the related contracts. Amortized intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected future cash flows from the use of the asset and its eventual disposition is less than the carrying amount of the asset, an impairment loss is recognized based on the fair value of the asset. The Group does not have intangible assets with indefinite lives. 8
  10. 10. OAO TNK-BP HOLDING Notes to the Consolidated Financial Statements (expressed in USD, tabular amounts in millions, except as indicated) Asset retirement obligations. The Group incurs retirement obligations for its upstream assets. The fair values of these obligations are recorded as liabilities on a discounted basis, which is typically at the time the assets are installed. The costs associated with these liabilities are capitalized as part of the related assets and depleted as the reserves are produced. Over time, the liabilities are accreted for the change in present value. Asset retirement obligations are not recorded for downstream facilities, because such potential obligations cannot be measured since it is not possible to estimate the settlement dates. Environmental liabilities. Liabilities for environmental remediation are recorded when it is probable that obligations have been incurred and the amounts can be reasonably estimated. Environmental remediation liabilities are not discounted for the time value of future expected payments. Environmental expenditures that have future benefit are capitalized. Derivative instruments. The Group recognises all derivatives as either assets or liabilities in the balance sheet and measures those instruments at fair value. The accounting for changes in fair value depends on its intended use and designation and could entail recording the gain or loss through earnings of the current period or as part of other comprehensive income and subsequently reclassifying into earnings when the gain or loss is realised. Pension and post-employment benefits. The Group’s mandatory contributions to the governmental pension plan are expensed when incurred. Discretionary pensions and other post-employment benefits are not material. Revenue recognition. Revenues from the production and sale of crude oil and petroleum products are recognised when title has transferred and collectibility is reasonably assured. Purchases and sales of inventory with the same counterparty that are entered into in contemplation of one another are combined, considered as a single arrangement and netted against each other on the consolidated statements of income. When the Group companies act as an agent for purchases and sales of inventory, they are also reported on a net basis. Income taxes. Deferred income tax assets and liabilities are recognised for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, in accordance with ASC 740, Income Taxes. Deferred income tax assets and liabilities are measured using enacted tax rates for the years in which these temporary differences are expected to reverse. Included in this calculation are deferred income taxes for unremitted earnings of equity affiliates and subsidiaries on basis differences between the relevant parent company financial statement carrying amounts and the respective tax basis of its investments in subsidiaries and equity affiliates. Management periodically assesses possible methods of remitting the earnings to the parent and adjusts the liability to the amount calculated at enacted rates corresponding to the expected method of distribution. Valuation allowances are provided for deferred income tax assets when management believes it is more likely than not that the assets will not be realised. The Group applies the authoritative guidance of ASC 740, Income taxes, which prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements uncertain tax positions that the Company or its subsidiaries have taken or expect to take in their income tax returns. Income tax penalties expense and payable are included in Taxes other than income tax in the consolidated statements of income and Taxes payable in the consolidated balance sheets, respectively. Income tax interest expense and payable are included in Interest expense in the consolidated statements of income and Other accounts payable and accrued expenses in the consolidated balance sheets, respectively. Comprehensive income. The Group’s comprehensive income consists of net income and other comprehensive income represented by currency translation adjustments related to those subsidiaries, which functional currency is different from the reporting currency of the Group. New accounting standards adopted. Effective 1 January 2008, the Group adopted the authoritative guidance of ASC 820, Fair Value Measurements and Disclosures, as it relates to items that are recognized at fair value in the financial statements on a recurring basis. For the recognition, measurement and disclosure of nonfinancial assets and liabilities measured at fair value on a non-recurring basis, the guidance of ASC 820 became effective for the Group on 1 January 2009. The guidance defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The adoption of this guidance had no material effect on the Group’s results of operations, financial position or liquidity. 9
  11. 11. OAO TNK-BP HOLDING Notes to the Consolidated Financial Statements (expressed in USD, tabular amounts in millions, except as indicated) Effective 1 January 2009, the Group adopted the authoritative guidance of ASC 805, Business Combinations. ASC 805 provides guidance for recognition and measurement in the financial statements of identifiable assets acquired, liabilities assumed and noncontrolling interest in the acquiree. ASC 805 similarly provides guidance for accounting for goodwill acquired in a business combination or a gain arising from a bargain purchase. This guidance also requires the Group to recognize acquired contingencies at fair value on the acquisition date if fair value can be reasonably estimated during the allocation period. The adoption of this guidance had no material effect on the Group’s results of operations, financial position or liquidity. Effective 1 January 2009, the Group adopted the authoritative guidance of ASC 810, Consolidation, as it relates to noncontrolling interests. This guidance changed the accounting and reporting for noncontrolling (minority) interests in partially owned consolidated subsidiaries and for the loss of control of subsidiaries. The guidance establishes that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. The adoption of this guidance had no material effect on the Group’s results of operations, financial position or liquidity. The presentation of noncontrolling interest in these consolidated financial statements has been changed retrospectively to comply with the requirements of this guidance. Effective 1 January 2009, the Group adopted the authoritative guidance of ASC 815, Derivatives and Hedging, as it relates to disclosures on derivatives and hedging activities. This guidance requires enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under ASC 815, Derivatives and Hedging, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Effective 1 January 2009, the Group adopted the authoritative guidance of ASC 350, Intangibles - Goodwill and Other, and ASC 275, Risks and Uncertainties, as it relates to determining the useful life of intangible assets. This guidance was issued to improve the consistency between the useful life of a recognized intangible asset under ASC 350, Intangibles - Goodwill and Other, and the period of expected cash flows used to measure the fair value of the asset under ASC 805, Business Combinations, and other accounting guidance. The guidance for determining the useful life of a recognized intangible asset is to be applied prospectively. The adoption of this guidance had no material effect on the Group’s results of operations, financial position or liquidity. Effective from the interim period ended on 30 June 2009, the Group adopted the authoritative guidance of ASC 855, Subsequent Events. This guidance sets forth the period after the balance sheet date during which events or transactions that may occur should be evaluated for potential recognition or disclosure in the financial statements, the circumstances under which events or transactions occurring after the balance sheet date should be recognized in financial statements and the disclosures that should be made about events or transactions that occurred after the balance sheet date. The guidance introduced the concept of financial statements being available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. The adoption of this guidance had no material effect on the Group’s results of operations, financial position or liquidity. Effective from the interim period ended on 30 June 2009, the Group adopted the authoritative guidance of ASC 820, Fair Value Measurements and Disclosures, as it relates to estimating the fair value when the volume and level of activity for the asset or liability have significantly decreased. This guidance also clarifies the approach for identifying circumstances that indicate a transaction is not orderly. This guidance emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation techniques used, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. The adoption of this guidance had no material effect on the Group’s results of operations, financial position or liquidity. Effective from the interim period ended on 30 June 2009, the Group adopted the authoritative guidance of ASC 825, Financial Instruments, as it relates to fair value disclosures of financial instruments in interim financial statements. This guidance requires fair value disclosures for financial instruments on a quarterly basis, providing qualitative and quantitative information about fair value estimates for all those financial instruments not 10
  12. 12. OAO TNK-BP HOLDING Notes to the Consolidated Financial Statements (expressed in USD, tabular amounts in millions, except as indicated) measured on the balance sheet at fair value. The adoption of this guidance had no material effect on the Group’s results of operations, financial position or liquidity. In January 2010, ASU No. 2010-2, Accounting and Reporting for Decreases in Ownership of a Subsidiary, a Scope Clarification, was issued and became effective for the Group from the annual reporting period ended 31 December 2009. This ASU clarifies that transactions involving transfer of a subsidiary or group of assets that constitutes a business to an equity method investee or joint-venture and exchange of a group of assets for a non- controlling interest in an entity are included in the scope of ASC 810, Consolidation. This ASU also expands disclosures about the deconsolidation of a subsidiary or derecognition of a group of assets. The adoption of this ASU had no material effect on the Group’s results of operations, financial position or liquidity. In January 2010, ASU No 2010-3, Oil and Gas Reserves Estimation and Disclosures, was issued and became effective for the Group from the annual reporting period ended 31 December 2009. This ASU amends oil and gas reserves estimation and disclosure requirements in ASC 932, Extractive Industry – Oil and Gas, to align it with the Securities and Exchange Commission’s final rule, Modernization of the Oil and Gas Reporting Requirements, issued in December 2008. This ASU revised the definition of the oil- and gas-producing activities to classify non-traditional resources as reserves. The definition of proved oil and gas reserves was amended, so that the Group is required to use average, first-day-of-the-month price during the reporting period rather than the year-end price in determining reserves quantities which are economical to produce. The adoption of this ASU had no material effect on the Group’s results of operations, financial position or liquidity. The presentation of Supplemental Information on Oil and Gas Exploration and Production activities was amended prospectively in accordance with the requirements of the ASU. In February 2010, ASU No. 2010-9, Amendments to Certain Recognition and Disclosure Requirements, was issued and became effective for the Group from the annual reporting period ended 31 December 2009. This ASU amends ASC 855, Subsequent Events, and requires an entity which is either a Securities and Exchange Commission filer or a conduit bond obligor for conduit debt securities that are traded in a public market to evaluate subsequent events through the date that the financial statements are issued. An entity that meets neither of those criteria is required to evaluate subsequent events through the date the financial statements are available to be issued. Pursuant to the requirements of this ASU, the Group evaluates subsequent events through the date the financial statements are available to be issued. Recent accounting pronouncements. In December 2009, ASU No. 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, was issued and will become effective for the Group on 1 January 2010. This ASU amends ASC 810, Consolidation, and changes the rules for determination when an entity should be consolidated. The new guidance requires the Group to perform an analysis to determine whether the Group’s variable interest or interests give it a controlling financial interest in a variable interest entity. The Group is also required to assess whether it has an implicit financial responsibility to ensure that the variable interest entity operates as designed when determining whether it has the power to direct the activities of the variable interest entity that most significantly impact the entity’s economic performance. It is expected that the adoption of this ASU will have no material effect on the Group’s results of operations, financial position or liquidity. In August 2009, ASU No. 2009-5, Measuring Liabilities at Fair Value, was issued and will become effective for the Group on 1 January 2010. This ASU amends ASC 820, Fair Value Measurements and Disclosures, and provides additional guidance on how companies should measure liabilities at fair value. While reaffirming the existing definition of fair value, this ASU reintroduces the concept of entry value into the determination of fair value. Entry value is the amount an entity would receive to enter into an identical liability. Under the new guidance, the fair value of a liability is not adjusted to reflect the impact of contractual restrictions that prevent its transfer. It is expected that the adoption of this ASU will have no material effect on the Group’s results of operations, financial position or liquidity. In January 2010, ASU No. 2010-6, Fair Value Measurements and Disclosures, was issued. The ASU amends ASC 820, Fair Value Measurements and Disclosures, and requires separate disclosures of transfers in and out Level 1 and Level 2 fair value measurements and the reasons for the transfers. Also the ASU requires disclosure of activity in Level 3 fair value measurements on a gross basis rather than as one net number. The guidance 11
  13. 13. OAO TNK-BP HOLDING Notes to the Consolidated Financial Statements (expressed in USD, tabular amounts in millions, except as indicated) requires the Group to provide fair value measurement disclosure for each class of assets and liabilities as well as disclosures about valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements that fall either in Level 2 or Level 3. The provisions of this ASU will become effective for the Group on 1 January 2010 with the exception of disclosure of activity in Level 3 fair value measurements which will become effective on 1 January 2011. Note 4: Financial and Derivative Instruments Fair values. The estimated fair values of financial instruments are determined with reference to various market information and other valuation techniques as considered appropriate. ASC 820, Fair Value Measurements and Disclosures, requires an entity to maximize its use of observable inputs when measuring fair value. In the absence of observable inputs, considerable judgment is required in interpreting market data to develop these estimates. Accordingly, the estimates are not necessarily indicative of the amounts that the Group could realize or settle in a market transaction. Certain of these financial instruments are with major financial institutions and expose the Group to market and credit risk. The creditworthiness of these institutions is routinely reviewed and full performance is anticipated. The Group is also exposed to a credit risk in the event of non-payment by counterparties. The creditworthiness of customers and other counterparties is continually reviewed. ASC 820, Fair Value Measurements and Disclosures, prioritises the inputs to valuation techniques into three levels as follows: Level 1 – Quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to assess at the measurement date. Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 – Unobservable inputs for the asset or liability. These inputs reflect the Company’s own assumptions about the assumptions a market participant would use in pricing the asset or liability. The methods and assumptions used to estimate fair value of each class of financial instruments are summarized below. Cash and cash equivalents, short-term bank deposits, accounts receivable and accounts payable. The carrying amounts of these items are a reasonable approximation of their fair value. Derivative instruments – commodity price swaps. The strategy of the Group is to obtain competitive prices for its hydrocarbons and allow operating results to reflect market price movements dictated by supply and demand. The Group seeks, however, to minimize the distorting effects of individual markets where, for example, it has to negotiate fixed prices within a narrow trading window. To mitigate the price risks of these markets, the Group employs derivative instruments – short-term price swaps. For the derivative instruments entered into during the years ended 31 December 2009 and 2008, the Group did not apply hedge accounting under the provisions of ASC 815, Derivatives and Hedging. Gains and losses related to changes in the fair value of derivatives were recognized in the consolidated statements of income within Interest income and net other income. The Group maintains a system of controls that includes the authorization, reporting and monitoring of derivative activity. The limited derivative activities of the Group pose no material credit or market risks to its operations, financial condition or liquidity. Derivatives are included at fair value in Other current assets or Other accounts payable and accrued expenses in the consolidated balance sheets. Fair values are calculated by the Group based on quoted market prices for hydrocarbons futures (Level 2 in the Fair Value Measurement Hierarchy). 12
  14. 14. OAO TNK-BP HOLDING Notes to the Consolidated Financial Statements (expressed in USD, tabular amounts in millions, except as indicated) The transactions and balances for derivatives are as follows: For the year ended 31 For the year ended 31 Gains/ (losses) from derivatives December 2009 December 2008 Commodity contracts – crude oil and oil products swaps 13 (2) Fair value 31 December 2009 31 December 2008 Commodity contracts – crude oil and oil products swaps 2 11 The volumes for the above mentioned swap transactions where the Group was the fixed price payer were 4.6 million tonnes (6.5% of the total crude oil production) and 0.3 million tonnes (0.4% of the total crude oil production) for the years ended 31 December 2009 and 2008, respectively. The volumes for the above mentioned swap transactions where the Group was the fixed price seller were 1.9 million tonnes (2.7% of the total crude oil production) and 0.1 million tonnes (0.1% of the total crude oil production) for the years ended 31 December 2009 and 2008, respectively. Short-term debt. Loan arrangements have both fixed and variable interest rates that reflect the currently available terms for a similar debt. The carrying value of this debt is a reasonable approximation of its fair value. Long-term debt. Loans under bank arrangements and significant loans from related parties have variable interest rates that reflect currently available terms and conditions for similar debt. The carrying value of the debt to banks and related parties is a reasonable approximation of its fair value. Note 5: Acquisition of subsidiaries in the transaction under common control In December 2009, the Group acquired a 100 percent interest in the Retail assets of a TNK-BP controlled company for the cash consideration of USD 719 million. The Retail assets were acquired by TNK-BP in December 2007 through March 2008 for the cash consideration of USD 710 million. The total purchase price was allocated in the TNK-BP’s consolidated financial statements as of and for the year ended 31 December 2008 as follows: Property, plant and equipment 301 Intangible assets 250 Goodwill 280 Long-term deferred income tax liability (121) Total consideration 710 The Group recognized the acquisition of the Retail assets from the TNK-BP controlled company as a transaction under common control. The excess of the purchase price over the carrying value of the Retail assets in the TNK-BP consolidated financial statements was recognized as a reduction in the additional paid-in capital by USD 9 million. As of 31 December 2009, the Group paid USD 216 million to the TNK-BP controlled company. The outstanding consideration of USD 503 million and USD 719 million as of 31 December 2009 and 2008, respectively, was included in Deferred consideration for acquisition of subsidiaries in the accompanying consolidated balance sheets. In February 2010, the Group paid USD 495 million out of the outstanding consideration. 13
  15. 15. OAO TNK-BP HOLDING Notes to the Consolidated Financial Statements (expressed in USD, tabular amounts in millions, except as indicated) Note 6: Disposal of subsidiaries On 29 May 2009, a TNK-BP controlled company held outside of the Group entered into an agreement with Weatherford International Ltd. (“Weatherford”) for the sale of TNK-BP’s Oil Field Services (“OFS companies), which was completed on 27 July 2009. As part of this transaction, on 22 June 2009, the Group sold shares of OFS companies to that TNK-BP controlled company for the total consideration of USD 495 million. As of 31 December 2009, the Group had received USD 15 million. The remaining amount of USD 480 million is included in Trade and other receivables, net in the consolidated balance sheet – See Note 9. The Group recognized a gain on disposal of the OFS companies in the amount of USD 167 million. Note 7: Acquisition of subsidiaries and noncontrolling interest In July 2009, the Group acquired the majority stake in OAO TNK-Yaroslavl from OAO NGK Slavneft for USD 20 million. Through this acquisition, the Group obtained control over a number of retail stations and oil depots in the Yaroslavl, Kostroma and Ivanovo regions in Russia. In December 2009, the Group acquired additional share in OAO TNK-Yaroslavl from noncontrolling interest shareholders for USD 9 million. As a result the Group recognized an increase in the additional paid-in capital by USD 8 million with a reduction of noncontrolling interest by USD 17 million. Note 8: Cash and Cash Equivalents and Supplemental Cash Flow Information As of 31 December 2009 and 2008, restricted cash included cash deposits used to secure open letters of credit and bank guarantees. As of 31 December 2009 and 31 December 2008, cash balances included accounts denominated in Russian Roubles of USD 180 million and USD 128 million, respectively. During the years ended 31 December 2009 and 31 December 2008, cash payments for interest (net of capitalized interest) totalled USD 17 million and USD 16 million, respectively, payments for income tax excluding withholding tax on intragroup dividends totalled USD 957 million and USD 2,376 million, respectively, and payments for withholding tax on intragroup dividends totalled USD 16 million and USD 8 million, respectively. Note 9: Trade and Other Receivables, Net 31 December 2009 31 December 2008 Trade accounts and notes receivable (net of allowance for doubtful accounts of USD 9 million and USD 14 million as of 31 December 2009 and 31 December 2008, respectively) 4,985 10,023 Advances issued (net of allowance for doubtful accounts of USD 6 million as of 31 December 2008) 1,319 1,151 Recoverable value-added tax 867 848 Deferred consideration for disposal of OFS 480 - Taxes receivable 201 272 Other receivables (net of allowance for doubtful accounts of USD 2 million and USD 6 million as of 31 December 2009 and 31 December 2008, respectively) 65 113 Total trade and other receivables, net 7,917 12,407 Included in Trade accounts and notes receivable are amounts due from TNK-BP controlled companies of USD 4,551 million and USD 9,753 million as of 31 December 2009 and 31 December 2008, respectively – see Note 19. Advances issued primarily relate to prepayments of customs duties and transportation services. 14
  16. 16. OAO TNK-BP HOLDING Notes to the Consolidated Financial Statements (expressed in USD, tabular amounts in millions, except as indicated) Note 10: Inventories 31 December 2009 31 December 2008 Crude oil and petroleum products 506 367 Materials and supplies 201 262 Total inventories 707 629 Note 11: Property, Plant and Equipment and Asset Retirement Obligations Accumulated Cost DD&A Net book value Oil and gas, including: 16,917 (4,829) 12,088 Unproved properties 1,019 - 1,019 Refining, marketing and distribution 2,459 (789) 1,670 Oil field services 529 (306) 223 Other 281 (85) 196 Assets under construction, including: 2,137 - 2,137 Capitalized exploratory well costs pending the determination of proved reserves 108 - 108 Balance as of 31 December 2008 22,323 (6,009) 16,314 Oil and gas, including: 18,890 (5,859) 13,031 Unproved properties 978 - 978 Refining, marketing and distribution 2,694 (1,004) 1,690 Other 282 (96) 186 Assets under construction, including: 1,986 - 1,986 Capitalized exploratory well costs pending the determination of proved reserves 84 - 84 Balance as of 31 December 2009 23,852 (6,959) 16,893 During the year ended 31 December 2009, oil and gas assets with carrying value of USD 149 million, including unproved properties of USD 81 million, were written down to their fair value of USD 31 million, with the resulting impairment charge of USD 118 million recorded in Loss on disposals and impairment of assets in the consolidated statement of income, including USD 61 million related to unproved properties. During the year ended 31 December 2008, oil and gas assets with the carrying value of USD 239 million, including unproved properties of USD 84 million, were written down to their fair value of USD 105 million, with the resulting impairment charge of USD 134 million recorded in Loss on disposals and impairment of assets in the consolidated statement of income, including USD 49 million related to unproved properties. Fair value of the impaired assets is determined using discounted cashflow approach (Level 3 in the fair value measurement hierarchy). The cash flows are developed based on annually updated corporate plan investment evaluation assumptions for crude oil commodity prices and foreign currency exchange rates. Annual production volumes are based on individual field production profiles, which are also updated annually. Income tax and other taxes rates are as enacted on the date fair value is measured. The discount rate is derived from the Group’s weighted-cost of capital and adjusted for risks specific to the asset. The Group’s oil and gas fields are situated on land belonging to government authorities. The Group obtains licenses from such authorities and pays exploration and production taxes to explore and produce oil and gas from these fields. These licenses may be extended provided the Group is in compliance with the license terms and approval is obtained from the appropriate regulatory authorities. Management expects to extend such licenses for properties expected to have production subsequent to their license expiry dates. 15
  17. 17. OAO TNK-BP HOLDING Notes to the Consolidated Financial Statements (expressed in USD, tabular amounts in millions, except as indicated) The following tables provide details of the changes in the balance of capitalized exploratory well costs pending the determination of proved reserves as well as an aging summary of those costs. Balance as of 31 December 2007 89 Additions to capitalized exploratory well costs pending the determination of proved reserves 88 Reclassifications to wells, facilities, and equipment based on the determination of proved reserves (55) Capitalized exploratory well costs charged to expense (14) Balance as of 31 December 2008 108 Additions to capitalized exploratory well costs pending the determination of proved reserves 50 Reclassifications to wells, facilities, and equipment based on the determination of proved reserves (51) Capitalized exploratory well costs charged to expense (23) Balance as of 31 December 2009 84 The following table provides an aging of capitalized exploratory well costs based on the date the drilling was completed: 31 December 2009 31 December 2008 Capitalized exploratory well costs that have been capitalized for a 43 80 period of one year or less Capitalized exploratory well costs that have been capitalized for a 41 28 period greater than one year Number of projects that have exploratory well costs that have been 4 5 capitalized for a period greater than one year Exploratory well costs that have been capitalized for a period of greater than one year since the completion of drilling consist of costs in the amount of USD 41 million incurred in 2004-2008 in relation to the projects described below. For each of these projects exploratory wells have also been drilled in the proceeding 12 months and further exploration drilling is planned in the next year. 16
  18. 18. OAO TNK-BP HOLDING Notes to the Consolidated Financial Statements (expressed in USD, tabular amounts in millions, except as indicated) The following table provides details of such projects: Cost as of Projects 31 December 2009 Comment Orenburg project 26 The project covers exploration and development activities in the Orenburg region. The largest fields in the region have already been developed. Marginal areas of reservoirs are being appraised and new areas have been prepared for drilling through seismic works. A high success rate of exploration drilling has been achieved over the last three years, with the available reserves being brought into development in less than one year. Future exploration activity is planned. Rospan project 23 The Rospan project refers to the large gas and condensate field in the Yamalo-Nenets Autonomous District. While the reserves already developed cover many years of production at current levels, there is potential for a significant increase in gas output in the event that the restrictions over access to the gas pipeline infrastructure are removed. An optimization of the flows and infrastructure of Rospan and other Group’s subsidiaries in the area is also expected to generate significant synergies. For these reasons as well as for license compliance, work to explore and appraise the currently unproved areas is underway. Other projects 35 Exploration and appraisal work is being carried out on potentially commercial hydrocarbon quantities in a number of areas; assessments have been completed in a number of cases; certain development options have been identified and are either under evaluation or in the process of execution. Total costs capitalized 84 Asset retirement obligations are as follows: Balance as of 31 December 2007 335 Accretion expense 20 Liabilities incurred in the current period 23 Liabilities settled in the current period (22) Change in estimated costs and timing (15) Balance as of 31 December 2008 341 Accretion expense 25 Liabilities incurred in the current period 27 Liabilities settled in the current period (10) Change in estimated costs and timing (36) Balance as of 31 December 2009 347 17
  19. 19. OAO TNK-BP HOLDING Notes to the Consolidated Financial Statements (expressed in USD, tabular amounts in millions, except as indicated) Note 12: Goodwill and Intangible Assets Accumulated Cost amortization Net book value Intangible assets Intangible assets associated with land rights and permits 297 (13) 284 Other intangible assets 170 (50) 120 Total intangible assets 467 (63) 404 Goodwill related to the acquisition of subsidiaries 280 - 280 Balance as of 31 December 2008 747 (63) 684 Accumulated Cost amortization Net book value Intangible assets Intangible assets associated with land rights and permits 297 (27) 270 Other intangible assets 182 (69) 113 Total intangible assets 479 (96) 383 Goodwill related to the acquisition of subsidiaries 280 - 280 Balance as of 31 December 2009 759 (96) 663 As of 31 December 2009 and 31 December 2008, the Group’s intangible assets associated with land rights and permits include USD 225 million and USD 238 million (net of accumulated amortization), respectively, relating to the acquisition of certain gasoline filling stations and other retail assets in Moscow and the Moscow region. These intangible assets are amortized on a straight-line basis over a weighted average period of 20 years – see Note 5. Other intangible assets include mainly software licenses used in subsidiaries and road-use rights which are being amortized on a straight-line basis over average periods of 3 years and 48 years, respectively. Total amortization expense for intangible assets amounted to USD 33 million and USD 32 million for the years ended 31 December 2009 and 31 December 2008, respectively. For each of the five succeeding years the estimated annual amortization expense is USD 33 million. As of 31 December 2009 and 31 December 2008, the Group had goodwill amounting to USD 280 million, relating to acquisition of subsidiaries – see Note 5. Goodwill is not tax deductible. The goodwill is allocated to the Refining, Marketing and Distribution segment. Note 13: Debt Short-term debt and the current portion of long-term debt are as follows: 31 December 2009 31 December 2008 Obligations to banks, US dollar denominated: Unsecured loans with composite variable interest 260 50 Unsecured loans with fixed interest 50 95 Secured loans with fixed interest - 400 Current portion of long-term debt received from third parties 240 30 Current portion of long-term debt received from TNK-BP controlled entities 84 45 Total short-term debt and the current portion of long-term debt 634 620 As of 31 December 2009, short-term debt was provided for funding of working capital and consisted of unsecured facilities from international and Russian banks. Secured short-term loans outstanding as of 31 December 2008 were repaid in full amount within the first six months of 2009. The weighted average interest rate on short-term borrowings outstanding was 4.4 percent and 11.01 percent as of 31 December 2009 and 2008, 18
  20. 20. OAO TNK-BP HOLDING Notes to the Consolidated Financial Statements (expressed in USD, tabular amounts in millions, except as indicated) respectively. In January through March 2010, the Group repaid ahead of schedule all short-term loans from international and Russian banks outstanding as at 31 December 2009 in the total amount of USD 310 million. Secured loans. In December 2008, the Group obtained a short-term committed credit line with a credit limit of USD 400 million. The credit facility was to mature in one year with the credit limit reducing by USD 100 million each month starting from September 2009. The credit line was secured by a mortgage of office property, pledge of land lease rights and pledge of rights under an oil products delivery contract. As of 31 December 2008 the amount outstanding under this facility was USD 400 million. This amount was repaid in February 2009. The Group early terminated this loan agreement in September 2009. Long-term debt is as follows: 31 December 2009 31 December 2008 Long-term debt received from third parties: Pre-export collateralized finance, US dollar denominated - variable interest debt 480 150 Russian Rouble denominated loans 260 212 Unsecured loans with fixed interest from Russian banks, US dollar denominated 100 Long-term debt received from TNK-BP controlled companies, Russian Rouble denominated 1,075 897 Less: current portion of long-term debt received from third parties (240) (30) Less: current portion of long-term debt received from TNK-BP controlled companies (84) (45) Total long-term debt 1,591 1,184 Pre-export collateralized finance. In December 2008, the Group entered into an agreement for up to USD 750 million loan facility with a consortium of international banks. The facility matures in November 2011. The loan is to be repaid in ten equal instalments on a quarterly basis starting from August 2009. The facility is secured by assignment of crude oil export contracts. As of 31 December 2008, the loan was drawn for USD 150 million. In April, June and July 2009, the Group drew down additional USD 165 million, USD 180 million and USD 105 million tranches, respectively. The interest rate on the loan facility was changed from the initial LIBOR plus 2.85 percent to LIBOR plus 4 percent in April 2009. The amount outstanding as of 31December 2009 and 31 December 2008 was USD 480 million and USD 150 million, respectively. Unsecured loans with fixed interest from Russian banks. In January 2009, the Group obtained a loan from Gazprombank in the amount of USD 500 million. The loan was to mature in July 2011 and was to be repaid in full amount on the maturity date. The facility bore interest at 12.95 percent. The loan was fully repaid ahead of schedule in July 2009. In October 2009, the Group obtained a committed credit line from Gazprombank with a credit limit of USD 300 million and drew USD 115 million under this loan agreement. The facility matures in three years and bears interest of 8 percent. In November 2009, USD 15 million was repaid under this facility. Thus, the amount outstanding as of 31 December 2009 was USD 100 million. In January and February 2010, the amount drawn under this facility was fully repaid in two USD 50 million installments. Russian Rouble denominated long-term debt received from third parties. Long-term debt received from third parties is represented by eight Russian Rouble denominated facilities with total amount of RUR 7.8 billion (USD 260 million) and RUR 6.3 billion (USD 212 million) outstanding as of 31 December 2009 and 31 December 2008, respectively. These facilities bear interest at the refinancing rate of the Russian Central Bank (8.75 percent and 13 percent as of 31 December 2009 and 31 December 2008, respectively) and mature in December 2011 through December 2014, with interest payable at maturity. Long-term debt received from TNK-BP controlled companies. Apart from long-term debt received from third parties, the Group has obtained loans from Russian and offshore TNK-BP controlled companies which are not 19
  21. 21. OAO TNK-BP HOLDING Notes to the Consolidated Financial Statements (expressed in USD, tabular amounts in millions, except as indicated) part of the Group. The total amount of these loans outstanding as of 31 December 2009 and 31 December 2008 was USD 1.1 billion and USD 0.9 billion, respectively. The Russian Rouble denominated loans received from TNK-BP controlled companies are mainly represented by a number of facilities received by a subsidiary of the Group with a total amount of RUR 24.3 billion (USD 0.8 billion) and RUR 20.5 billion (USD 0.7 billion) outstanding as of 31 December 2009 and 31 December 2008, respectively. These facilities bear interest at the refinancing rate of the Russian Central Bank with interest payable at the maturity of the loans which is presented in the table below. 31 December 2009 Debt payable to third parties 2011 281 2012 184 2013 100 2014 35 Debt payable to related parties 2011 113 2012 225 2013 571 2014 82 Total long-term debt 1,591 Note 14: Other Accounts Payable and Accrued Expenses 31 December 2009 31 December 2008 Advances from customers 274 199 Salaries payable and other related costs 163 196 Interest accrued 42 9 Other 108 119 Total other accounts payable and accrued expenses 587 523 As of 31 December 2009 and 31 December 2008, interest accrued includes income tax interest payable of USD 2 million and 6 million, respectively – see Note 16. As of 31 December 2009 and 31 December 2008, the Group had long-term interest accrued amounting to USD 156 million and USD 123 million, respectively, which was included in Other long-term liabilities. Note 15: Group shareholders’ equity As of 31 December 2009, the share capital of the Company comprised 14,997 million authorized and issued ordinary shares of RUR 1 par value and 450 million authorized and issued non-cumulative preferred shares of RUR 1 par value. As of 31 December 2008, the share capital of the Company comprised 15,847 million authorized and issued ordinary shares of RUR 1 par value and 450 million authorized, issued and outstanding non-cumulative preferred shares of RUR 1 par value. In June 2009, the Group initiated a legal reorganization by accession of its four wholly-owned subsidiaries OAO "Sborsare Management", ZAO "Sidanco-Investments", ZAO "Sidanco-Neftepererabotka", and ZAO "Sidanco-Securities" to TBH. As of 31 December 2008, these subsidiaries held 850 million ordinary shares of the Company, which were presented in the consolidated balance sheet as Treasury stock, at cost. Shareholders of TBH voting at the annual meeting of shareholders against the accession had the right to sell their shares to TBH at a price determined by an independent appraiser. As of 14 August 2009, the legal term for buy-out requests had expired. As a result, the Company acquired 0.3 million of its own ordinary shares and 1.8 million of its own non-cumulative preferred shares for a total consideration of USD 2 million. 20
  22. 22. OAO TNK-BP HOLDING Notes to the Consolidated Financial Statements (expressed in USD, tabular amounts in millions, except as indicated) As of 31 December 2009, the legal reorganization of the Company was completed, and 850 million ordinary treasury shares were retired. The Company recognized reduction of common stock by USD 30 million on par value of the retired treasury stock with the excess of the cost of treasury stock over par in the amount of USD 209 million charged to retained earnings. As of 31 December 2009, the treasury stock comprised 0.3 million ordinary shares and 1.8 million non-cumulative preferred shares, which are held at cost. Profits available for distribution to shareholders in respect of any reporting period are determined by reference to the statutory financial statements of the Company and its subsidiaries prepared in accordance with the law of the Russian Federation and denominated in Russian Roubles. During the years ended 31 December 2009 and 31 December 2008 the Group declared dividends of USD 4,772 million and USD 2,918 million, respectively. Earnings per share. The calculation of earnings per share for the reporting period was as follows: Year ended Year ended 31 December 2009 31 December 2008 Net income attributable to Group shareholders 5,175 6,367 Deduct dividends declared on preferred stock (138) (85) Net income available to common shareholders 5,037 6,282 Weighted average number of common shares, millions of shares 15,634 15,847 Deduct weighted average number of treasury shares, millions of shares (637) (850) Weighted average number of outstanding common shares, millions of shares 14,997 14,997 Earnings per share 0.34 0.42 As of 31 December 2009 and 2008, the Company had no securities which would have a dilutive effect on net income per share of common stock. Note 16: Income taxes The Group is not subject to corporate income tax on a consolidated basis, rather Group entities are assessed for corporate income taxes on an individual basis. The statutory corporate income tax rate in the Russian Federation is 20 percent and 24 percent for the years ended 31 December 2009 and 31 December 2008, respectively. The Group calculates deferred income taxes in accordance with ASC 740, Income Taxes. For an entity using the US dollar as a functional currency, ASC 740 requires deferred income taxes to be computed on non-current assets in local currencies (Russian Roubles in the Group’s case) by comparing the historical book and tax basis in local currency after the respective depreciation but before any indexing for either book or tax purposes. The local currency deferred income tax is then remeasured into US dollars using the prevailing year-end exchange rate. Deferred income tax reflects the impact of temporary differences between the carrying values of assets and liabilities recognised for financial reporting purposes and such amounts recognised for statutory tax purposes. Deferred income tax assets and liabilities primarily result from the difference between the carrying value of property, plant and equipment, intangible assets and working capital. In November 2008, a new statutory corporate income tax rate applicable in the Russian Federation of 20% was enacted effective 1 January 2009. Accordingly, deferred tax liabilities and assets of the Group as of 31December 2008 were calculated using the new rate. 21
  23. 23. OAO TNK-BP HOLDING Notes to the Consolidated Financial Statements (expressed in USD, tabular amounts in millions, except as indicated) Deferred income taxes are included in the consolidated balance sheet as follows: 31 December 2009 31 December 2008 Assets Other current assets 71 104 Other long-term assets 53 140 Liabilities Taxes payable 4 - Deferred income tax liability (non-current) 735 662 Net deferred income tax liabilities 615 418 The following table sets out the tax effects of each type of temporary differences which give rise to deferred income tax assets and liabilities: 31 December 2009 31 December 2008 Long-term liabilities 112 104 Operating loss carry forward 63 68 Accounts payable 41 67 Accounts receivable 7 6 Property, plant and equipment 6 25 Inventories 3 15 Other 47 42 Deferred income tax assets 279 327 Property, plant and equipment 809 679 Intangible assets 50 50 Inventories 21 9 Other 14 7 Deferred income tax liability 894 745 Net deferred income tax liability 615 418 In 2004, the Group entered into an agreement with the Tyumen regional authorities which granted certain subsidiaries of the Group a tax concession by way of a four percent relief to the statutory corporate income tax rate subject to certain subsidiaries of the Group making qualified capital investments in the region. In 2006, the Group entered into a similar type agreement with the Orenburg regional authorities. For the years ended 31 December 2009 and 31 December 2008, the Group’s income tax expense in the accompanying financial statements includes a tax benefit relating to these tax concessions of USD 264 million and USD 359 million, respectively. The effective tax rate of the Group approximated 19 percent and 22 percent for the years ended 31 December 2009 and 31 December 2008, respectively. Year ended Year ended 31 December 2009 31 December 2008 Income before income taxes 6,557 8,287 Notional income tax at Russian statutory rate 1,311 1,989 Increase (reduction) in income tax due to: Domestic tax rate differences (264) (359) Foreign exchange differences 46 190 Unremitted earnings of subsidiaries and equity affiliates and withholding tax on intragroup dividends 8 17 Russian income tax rate change effective 1 January 2009 - (83) Other permanent differences 127 53 Total income taxes expense 1,228 1,807 22

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