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Press release from Marketwire

Third Quarter 2012 Financial Results

Monday, November 12, 2012

Third Quarter 2012 Financial Results06:20 EST Monday, November 12, 2012ABERDEEN, SCOTLAND--(Marketwire - November 12, 2012) -TSX-V:IAENot for Distribution to U.S. Newswire Services or for Dissemination in the United States Ithaca Energy Inc. Third Quarter 2012 Financial ResultsIthaca Energy Inc. (TSX: IAE, LSE AIM: IAE) announces its quarterlyfinancial results for the three months ended September 30, 2012.HIGHLIGHTSFinancial- Q3 profit before tax and unrealised gains/losses on financial instruments of $14.9 million (Q3 2011: $15.6 million) representing an increase of $10.5 million on Q2 2012 (Q2 2012: $4.4 million)- Q3 net earnings of $4.9 million including $12.9 million unrealised loss from financial instruments (Q3 2011: $16.0 million) resulting in earnings per share of $0.02 (Q3 2011: $0.06)- Q3 cashflow from operations of $30.1 million (Q3 2011: $18.1 million). Q3 cashflow per share of $0.12 (Q3 2011: $0.07)- Q3 average realised oil price of $110.26 / bbl (Q3 2011: $111.24 / bbl) plus an additional realized hedging gain of $2.56 / bbl in the quarter- Cash of $77.4 million, inclusive of $20.6 million restricted cash, with senior debt facility remaining undrawn- UK tax allowances pool of $387 million representing an increase of $39 million on Q2 2012 (Q2 2012: $348 million)Operational & Corporate- Q3 export production of 5,061 barrels of oil equivalent per day ("boepd") (Q3 2011: 3,602 boepd). This represents an increase of approximately 28% on the second quarter of 2012, reflecting the first full quarter's production from the Athena field and a strong performance from the Beatrice and Jacky fields compensating for the anticipated reduction in Cook and Broom production during the quarter due to planned maintenance shutdowns- Production from the Athena field stabilised at a gross rate of 10,000 to 11,000 barrels of oil per day ("bopd"), 2,250 to 2,475 bopd net to Ithaca, with the field continuing to produce "dry" oil- Hurricane appraisal well successfully drilled, identifying hydrocarbons in two reservoir intervals,with pressure and fluid samples recovered from both intervals and a drill stem test performed on the Andrew sand reservoir- An Engineering, Procurement, Installation and Construction ("EPIC") contract was awarded to Technip UK Limited covering the major subsea works that are to be conducted on the Greater Stella Area, with installation of the subsea infrastructure scheduled for 2013- Entered into further swaps of 503,800 barrels of oil at a weighted average price of $108.67 and put options, at market price, for 300,300 barrels of oil at a weighted average oil price floor of $111.34 / bbl for the period October 2012 to December 2013.POST QUARTER END EVENTS- Entered into agreements with Noble Energy Capital Limited to acquire corporate entities owning non-operated interests in two United Kingdom ("UK") North Sea producing fields: a 12.885% interest in the Cook field (increasing the Company's field interest in Cook to 41.345%) and a 14% interest in the MacCulloch field. The total acquisition consideration is $38.5 million and is to be funded from the Company's existing cash resources. The two fields are anticipated to increase the Company's net proved and probable reserves by approximately 3.4 mmboe based on the effective date of the transaction of 1 January 2012.- Closure of oversubscribed syndication of $430 million debt facility with BNP Paribas and six other leading international banks working in the oil and gas sector- Offered two Blocks by the Department of Energy and Climate Change in the 27th UK Licence Round - Block 29/5e in the vicinity of the Company's existing Greater Stella Area ("GSA") interests and Block 15/17b in the Outer Moray Firth- The Company has issued today a full update on the progress made on the Greater Stella Area development.Notes:Unrealised gains/losses on financial instruments are non-cash mark tomarket movements on derivative instruments that account for the fairvalue of an asset or liability based on the current market price usingquoted market prices when available, or industry accepted third-partymodels and valuation methodologies that utilise observable market data.Further details on the above are provided in the Interim ConsolidatedFinancial Statements and Management's Discussion and Analysis for thethree and nine months ended September 30, 2012, which have been filedwith securities regulatory authorities in Canada. These documents areavailable on the System for Electronic Document Analysis and Retrievalat www.sedar.com and on the Company's website: www.ithacaenergy.com.Notes to oil and gas disclosure:In accordance with AIM Guidelines, John Horsburgh, BSc (Hons)Geophysics (Edinburgh), MSc Petroleum Geology (Aberdeen) and SubsurfaceManager at Ithaca is the qualified person that has reviewed thetechnical information contained in this press release. Mr Horsburgh hasover 15 years operating experience in the upstream oil industry.The term "boe" may be misleading, particularly if used in isolation. Aboe conversion of 6 Mcf: 1 bbl is based on an energy equivalencyconversion method primarily applicable at the burner tip and does notrepresent a value equivalency at the wellhead. Given the value ratiobased on the current price of crude oil as compared to natural gas issignificantly different from the energy equivalency of 6 Mcf: 1 bbl,utilizing a conversion ratio at 6 Mcf: 1 bbl may be misleading as anindication of value.Enquiries:Ithaca Energy Inc.Iain McKendrick, CEO imckendrick@ithacaenergy.com +44 (0) 1224 650 261Graham Forbes, CFO gforbes@ithacaenergy.com +44 (0) 1224 652 151NOMAD and Joint Broker: Cenkos Securities plcJon Fitzpatrick jfitzpatrick@cenkos.com +44 (0) 207 397 8900Ken Fleming kfleming@cenkos.com +44 (0) 131 220 6939Joint Broker: RBC Capital MarketsTim Chapman tim.chapman@rbccm.com +44 (0) 207 653 4641Matthew Coakes matthew.coakes@rbccm.com +44 (0) 207 653 4871Public Relations: FTI ConsultingBilly Clegg billy.clegg@fticonsulting.com +44 (0) 207 269 7157Edward Westropp edward.westropp@fticonsulting.com +44 (0) 207 269 7230Georgia Mann georgia.mann@fticonsulting.com +44 (0) 207 269 7212About Ithaca Energy:Ithaca Energy Inc. (TSX: IAE, LSE AIM: IAE) and its wholly ownedsubsidiary Ithaca Energy (UK) Limited ("Ithaca" or "the Company"), isan oil and gas operator focused on production, appraisal anddevelopment activities on the United Kingdom Continental Shelf. Thegoal of Ithaca, in the near term, is to maximize production and achieveearly production from the development of existing discoveries onproperties held by Ithaca, to originate and participate in explorationand appraisal on properties held by Ithaca when capital permits, and toconsider other opportunities for growth as they are identified fromtime to time by Ithaca.Not for Distribution to U.S. Newswire Services or for Dissemination in the United StatesReader AdvisoryForward-looking statementsThis news release contains certain forward looking statements. Thereader is cautioned that all such forward looking statements involvesubstantial risks and uncertainties and the assumptions used in theirpreparation may not prove to be correct. Ithaca's actual results coulddiffer materially from those expressed in, or implied by, these forwardlooking statements and accordingly, the forward looking statements arequalified by reference to these cautionary statements. The forwardlooking statements contained herein are made as at the date of thisnews release. Ithaca undertakes no obligation to update or publiclyrevise forward looking statements or information unless so required byapplicable securities laws.TSX notificationsThe TSX accepts no responsibility for the adequacy or accuracy of thisrelease.Cenkos Securities plc, which is authorised and regulated in the UnitedKingdom by the Financial Services Authority under FSA number 416932, isacting exclusively as Nominated Adviser and Joint Broker to the Companyand is not acting for or advising any other person and accordingly willnot be responsible to any person other than the Company for providingadvice in relation to the contents of this announcement. Neither CenkosSecurities plc nor any of its affiliates owes or accepts any duty,liability or responsibility whatsoever (whether direct or indirect,whether in contract, in tort, under statute or otherwise) to any personwho is not a customer of Cenkos Securities plc in connection with thisannouncement, any statement contained herein or otherwise.This announcement is not intended to, and does not, constitute or formpart of any offer, invitation or the solicitation of an offer topurchase, otherwise acquire, subscribe for, sell or otherwise disposeof, any securities whether pursuant to this announcement or otherwise.ITHACA ENERGY INC.MANAGEMENT'S DISCUSSION AND ANALYSISFOR THE QUARTER ENDED SEPTEMBER 30, 2012The following is management's discussion and analysis ("MD&A") of theoperating and financial results of Ithaca Energy Inc. (the"Corporation" or "Ithaca" or the "Company") for the three and ninemonths ended September 30, 2012. The information is provided as ofNovember 9, 2012. The third quarter 2012 results have been compared tothe results of the comparative period in 2011. This MD&A should be readin conjunction with the Corporation's unaudited consolidated financialstatements as at September 30, 2012 and with the Corporation's auditedconsolidated financial statements as at December 31, 2011 together withthe accompanying notes, MD&A and Annual Information Form ("AIF") forthe 2011 fiscal year. These documents and additional information aboutIthaca are available on SEDAR at www.sedar.com.Certain statements contained in this MD&A, including estimates ofreserves, estimates of future cash flows and estimates of futureproduction as well as other statements about future events oranticipated results, are forward-looking statements. Theforward-looking statements contained herein are based on assumptionsand are subject to known and unknown risks, uncertainties and otherfactors. Should the underlying assumptions prove incorrect or shouldone or more of these risks, uncertainties or factors materialize,actual results may vary significantly from those expected. See"Forward-Looking Information", below.All financial data contained herein is presented in accordance withInternational Financial Reporting Standards ("IFRS") and is expressedin United States dollars ("$"), unless otherwise stated.BUSINESS OF THE CORPORATIONIthaca is an oil and gas company focused on production, appraisal, anddevelopment activities in the United Kingdom's Continental Shelf("UKCS").Ithaca's strategy is to:- Fast track, appraise and develop oil and gas fields- Acquire producing fields or undeveloped discoveries that: o are not material for larger companies o need technical or financial investment o no longer fit with an existing company's strategy and business model- Use tried and tested development and production technologies- Employ in-house technical excellence to generate development and acquisition opportunities- Participate in licensing rounds to gain acreage positions around its core assets- Lever its commercial and operator capability to establish solid oil and gas field positions- Prioritize capital investment to accretive projects with early production and significant cash flowThe Corporation's common shares are traded on the Toronto StockExchange in Canada under the symbol "IAE" and on AIM in the UnitedKingdom under the symbol "IAE".NON-IFRS MEASURES 'Cashflow from operations' referredto in this MD&A is not prescribedby IFRS. This non-IFRS financial measure does not have any standardizedmeaning and therefore is unlikely to be comparable to similar measurespresented by other companies. The Corporation uses this measure to helpevaluate its performance. As an indicator of the Corporation'sperformance, cashflow from operations should not be considered as analternative to, or more meaningful than, net cash from operatingactivities as determined in accordance with IFRS. The Corporationconsiders Cashflow from operations to be a key measure as itdemonstrates the Corporation's underlying ability to generate the cashnecessary to fund operations and support activities related to itsmajor assets. Cashflow from operations is determined by adding backchanges in non-cash operating working capital to cash from operatingactivities.'Profit before tax and unrealised gains/losses on financialinstruments' referred to in this MD&A is not prescribed by IFRS. Thisnon-IFRS financial measure does not have any standardized meaning andtherefore is unlikely to be comparable to similar measures presented byother companies. The Corporation uses this measure to help evaluate itsperformance. As an indicator of the Corporation's performance, Profitbefore tax and unrealised gains/losses on financial instruments shouldnot be considered as an alternative to, or more meaningful than, Profitbefore tax as determined in accordance with IFRS. The Corporationconsiders Profit before tax and unrealised gains/losses on financialinstruments to be a key measure as it demonstrates the Corporation'sunderlying profitability, stripping out the effects of non cashfinancial instrument gains / losses. Profit before tax and unrealisedgains/losses on financial instruments is determined by deducting /adding back non-cash gains / losses on financial instruments.BOE PRESENTATIONThe calculation of barrels of oil equivalent ("boe") is based on aconversion rate of six thousand cubic feet of natural gas ("mcf") toone barrel of crude oil ("bbl"). The term boe may be misleading,particularly if used in isolation. A boe conversion ratio of 6 mcf: 1bbl is based on an energy equivalency conversion method primarilyapplicable at the burner tip and does not represent a value equivalencyat the wellhead. Given the value ratio based on the current price ofcrude oil as compared to natural gas is significantly different fromthe energy equivalency of 6 mcf: 1 bbl, utilizing a conversion ratio at6 mcf: 1 bbl may be misleading as an indication of value.HIGHLIGHTS THIRD QUARTER 2012Financial- Q3 profit before tax and unrealised gains/losses on financial instruments of $14.9 million (Q3 2011: $15.6 million)- Q3 net earnings of $4.9 million including $12.9 million unrealised loss from financial instruments (Q3 2011: $16.0 million) resulting in earnings per share of $0.02 (Q3 2011: $0.06)- Q3 cashflow from operations of $30.1 million (Q3 2011: $18.1 million). Q3 cashflow per share of $0.12 (Q3 2011: $0.07)- Q3 average realized oil price of $110.26 / bbl (Q3 2011: $111.24 / bbl) plus an additional realized hedging gain of $2.56 / bbl in the quarter- Cash of $77.4 million, inclusive of $20.6 million restricted cash, with fully syndicated senior debt facility of $430 million remaining undrawn- UK tax allowances pool of $387 millionOperational & Corporate- Q3 export production of 5,061 barrels of oil equivalent per day ("boepd") (Q3 2011: 3,602 boepd) - a 40% increase despite the planned maintenance shutdown of the Cook field during the quarter- Production from the Athena field stabilised at a gross rate of 10,000 to 11,000 barrels of oil per day ("bopd"), 2,250 to 2,475 bopd net to Ithaca, with the field continuing to produce "dry" oil- Hurricane appraisal well successfully drilled, identifying hydrocarbons in two reservoir intervals, with pressure and fluid samples recovered from both intervals and a highly successful drill stem test performed on the Andrew sand reservoir- An Engineering, Procurement, Installation and Construction ("EPIC") contract was awarded to Technip UK Limited covering the major subsea works that are to be conducted on the Greater Stella Area, with installation of the subsea infrastructure scheduled for 2013- Entered into further swaps of 503,800 barrels of oil at a weighted average price of $108.67 and put options, at market price, for 300,300 barrels of oil at a weighted average oil price floor of $111.34 / bbl for the period October 2012 to December 2013.Post quarter end- Entered into agreements with Noble Energy Capital Limited to acquire corporate entities owning non-operated interests in two United Kingdom ("UK") North Sea producing fields: a 12.885% interest in the Cook field (increasing the Company's field interest in Cook to 41.345%) and a 14% interest in the MacCulloch field. The total acquisition consideration is $38.5 million and is to be funded from the Company's existing cash resources. The two fields are anticipated to increase the Company's net proved and probable reserves by approximately 3.4 mmboe based on the effective date of the transaction of 1 January 2012- Closure of an oversubscribed syndication of $430 million debt facility (the "Facility") with BNP Paribas ("BNPP") and six other leading international banks working in the oil and gas sector- Offered two Blocks by the Department of Energy and Climate Change ("DECC") in the 27th UK Licence Round - Block 29/5e in the vicinity of the Company's existing Greater Stella Area ("GSA")interests and Block 15/17b in the Outer Moray Firth- The Company has issued today a full update on the progress made on the Greater Stella Area development.KEY PROJECTS AND OPERATIONS UPDATEAthenaStart up of oil production from the Athena field was achieved in lateMay 2012. The early part of Q3 2012 was focused on completing andoptimising the post start-up activities required to deliver stable andefficient operations from the wells and the BW Athena FloatingProduction, Storage and Offloading vessel ("FPSO"). Well interventionactivities were performed on the "P1" well during the quarter toattempt to eliminate a blockage in the production tubing of the P1well. These operations, involving the pumping of fluids into the P1well, were partially successful and the well was put onstream inSeptember at a gross production rate of approximately 700 to 800barrels of oil gross per day ("bopd"). A decision was made by theAthena co-venturers not to perform a rig based workover on P1 to fullyremove the blockage as the reserves associated with the well areanticipated to be recovered by the existing wells on the field.Production from the field has stabilised at a gross daily rate ofbetween 10,000 and 11,000 bopd, 2,250 to 2,475 bopd net to Ithaca.Reservoir performance, including the continued production of dry oil,provides a positive signal for the longer term potential of the field.The timing of water breakthrough at the Athena wells, along with theefficiency of the sweep of oil through the reservoir assisted by waterinjection, will be key to predicting the ultimate field productionprofile and will be built into a range of production forecasts by theCompany.Greater Stella AreaSignificant progress has been made with delivery of the Company's GSAstrategy and execution of the Stella and Harrier development projectsince the Field Development Plan ("FDP") for the two fields wasapproved by the DECC in April 2012.An update on the progress made with the GSA development activities andschedule has today been issued by the Company. The key pointscontained in the release are:o The modifications contract for the "FPF-1" floating production unit has been awarded to the Remontowa shipyard in Gdansk, Poland. The FPF-1 is now located In Gdansk.o The Ensco 100 drilling rig is now forecast to commence the development drilling campaign in Q1-2013, due to delays in the completion of drilling programmes for other operators.o Four initial Stella wells are to be drilled over a period of approximately twelve months prior to the arrival of the FPF-1 for hook-up and commissioning, currently anticipated in H1-2014.o Detailed design has been completed for the subsea infrastructure that is to be installed in 2013 by Technip, a world leader in the execution of subsea projects. Fabrication of the required linepipe is underway.o A suite of gas transportation and processing agreements has been executed for export of gas processed on the FPF-1 via the Central Area Transmission System ("CATS") and Teeside Gas and Liquids Processing ("TGLP") terminal.o The Company's net share of remaining capital expenditure prior to first hydrocarbons from the GSA production hub is $395 million, which will be funded from existing financial resources.o The successful appraisal of the Hurricane discovery in Q3-2012 and the offer of Block 29/5e, adjacent to Hurricane, in the 27th UK Offshore License Round in October 2012 have further augmented the opportunity set for the GSA hub.HurricaneDuring the quarter, the Company successfully completed drilling of theHurricane appraisal well in Block 29/10b, which lies within the GSA.The well was drilled using the WilHunter semi-submersible rig, withApplied Drilling Technologies International ("ADTI"), a subsidiary ofTransocean, used to manage drilling operations under "turnkey" contractarrangements.The well identified hydrocarbons in two reservoir intervals, the EoceneRogaland sandstone and the Palaeocene Andrew reservoir. Pressure dataand fluid samples were recovered from both intervals and a drill stemtest ("DST") was performed on the Andrew reservoir. During the mainDST flow period, lasting approximately 24 hours, the Andrew interval-achieved an average gross flow rate of approximately 17 millionstandard cubic feet of gas per day ("MMscf/d") with associatedcondensate of 870 bopd (52degrees American Petroleum Institute "API"Gravity) from a half inch choke. A gross maximum flow rate ofapproximately 24 MMscf/d with associated condensate of 1,200 bopd froma 44/64-inch fixed choke was also achieved with the full productionpotential of the well being limited by surface equipment.The appraisal well has been suspended for future potential use as aproduction well for the Andrew reservoir, with the capability of alsobeing used for future production from the Rogaland reservoir.The Company is in the process of completing a comprehensive workprogramme to assess the ultimate recoverable volumes associated withthe field prior to integration of the data into the usual year endreserves evaluation that will be performed by the Company's independentreserves assessor, Sproule International Limited ("Sproule").OTHER DEVELOPMENTSCorporate eventsIn October, the Company announced that it had entered into agreementswith Noble Energy Capital Limited (a subsidiary of Noble Energy Inc.,NYSE: NBL) to acquire two wholly owned UK subsidiary companies thatwill hold non-operated interests in UK North Sea producing fields; a12.885% interest in the Cook field and a 14% interest in the MacCullochfield.The acquisition will result in the Company increasing its existing Cookfield interest from 28.46% to 41.345%, furthering its position as thefield's largest owner.Based on the independent reserves assessmentperformed by Sproule, effective as of 31 December 2011, remaining netproved and probable reserves associated with the additional 12.885%interest (as of that date) are 2.0 mmboe.The MacCulloch oil field, currently operated by ConocoPhillips, lies inBlocks 15/24b in the Central North Sea (transfer of field operatorshipto Endeavour Energy UK Limited is pending completion of a previouslyannounced transaction).The field is producing from four subsea wellstied back to the North Sea Producer FPSO, with processed oil and gasexported via pipelines to shore.Remaining net proved and probablereserves effective as of 31 December 2011 are estimated by Ithaca to beapproximately 1.4 mmboe.An assessment of the field reserves will beperformed by Sproule as part of the normal year end reserves evaluationexercise.The total acquisition consideration is $38.5 million, to be funded fromthe Company's existing cash resources.Completion of the transactionsis anticipated in early 2013 and is subject to normal regulatory andjoint venture approvals, including reaching agreement in respect ofdecommissioning cost security.Debt facilityIn October 2012 the Company agreed and signed a $430 million Facilitywith BNPP as Bookrunner and Mandated Lead Arranger. The syndicationprocess was oversubscribed, underlining the value of the Company'sexisting asset portfolio and development execution strategy.The seven banks participating in the facility syndicate are: - BNPP and Lloyds TSB Bank plc (as Bookrunners and Mandated Arrangers); - Bank of America N.A., Deutsche Bank AG, The Bank of Nova Scotia and The Royal Bank of Scotland (as Mandated Lead Arrangers); and, - NIBC Bank N.V. (as Manager).This Facility replaces the previous undrawn $140 million debt facilityand is on similar conventional oil and gas industry borrowing basefinancing terms, with a loan term of up to five years. The Facility isavailable to fund ongoing development activities and future assetacquisitions.27th Licensing RoundIn October, Ithaca was offered two operated licenses as part of the27th Licensing Round: Block 29/5e in the vicinity of the Company'sexisting GSA interests and Block 15/17b in the Outer Moray Firth. Thelicense offers are based on the completion of technical studies,leading to a drill or drop decision on each license within two years offormal license award.RESULTS OF OPERATIONSRevenueThree months ended September 30, 2012Revenue increased by $15.2 million in Q3 2012 to $41.6 million (Q3 2011$26.4 million). This movement mainly comprises an increase in oil salesvolumes, partially offset by a small decrease in average realized oilprices and a reduction in gas sales.Oil sales volumes increased primarily due to the inclusion of salesfrom the Athena field along with Broom field liftings in Q3 2012(acquired in Q4 2011). There was a small decrease in average realizedoil prices from $111.24 / bbl in Q3 2011 to $110.26 / bbl in Q3 2012 asthe Brent oil price benchmark weakened during the quarter. Thisreduction in price was more than offset by a realized hedging gain of$2.56/bbl.The decrease in gas sales in Q3 2012 compared to Q3 2011 was due to areduction in Anglia and Topaz gas volumes due to maintenance shutdowns,partly offset by a small increase in the average realized gas price.Nine months ended September 30, 2012Revenue increased by $43.8 million in the nine months to Q3 YTD 2012 to$118.0 million (Q3 YTD 2011 $74.2 million). This movement mainlycomprises an increase in oil sales volumes, partially offset by areduction in gas sales.The increase in oil sales volumes is primarily due to the inclusion ofproduction from Athena, Cook and Broom fields offset by naturaldeclines in the Beatrice and Jacky fields. The realized oil price wasrelatively consistent at just over $112/bbl before hedging.The increase in oil sales was partly offset by a decrease in gas salesin the period. This was due to a reduction in Anglia and Topaz gasvolumes, partially offset by the addition of Cook gas sales.Cost of SalesThree months ended September 30, 2012Cost of sales increased in Q3 2012 to $27.1 million (Q3 2011 $12.7million) due to increases in operating costs and depletion,depreciation and amortization ("DD&A"), partly offset by higher oilinventory.Operating costs increased in the period to $20.9 million (Q3 2011 $12.0million) primarily due to the inclusion of Athena, Cook and Broomoperating costs in Q3 2012 (Cook was acquired midway through Q3 2011and Broom in Q4 2011, with Athena commencing production in Q2 2012).Operating costs per boe have increased to $44.89 for Q3 2012 (Q3 2011:$36.11) primarily driven by maintenance shutdowns in the quarter onCook, Anglia and Topaz, along with natural declines in production onBeatrice and Jacky.DD&A expense for the quarter increased to $14.6 million (Q3 2011 $7.9million). This was primarily due to the addition of the Athena andBroom assets, as well as significant capital expenditure in the periodfrom Q3 2011 to Q3 2012 leading to increased DD&A rates on existingassets. The blended DD&A rate for Q3 2012 is $31.07/boe (Q3 2011:$23.50/boe) with Athena having a positive impact which partly mitigatesthe increase from other fields.An oil and gas inventory movement of $8.4 million was credited to costof sales in Q3 2012 (Q3 2011 credit of $7.2 million) primarily relatingto the build up of stock levels on Cook, Athena and Broom. Movements inoil inventory arise due to differences between barrels produced andsold with production being recorded as a credit to movement in oilinventory through cost of sales until oil has been sold. In Q3 2012more barrels of oil were produced (425k bbls) than sold (347k bbls)with volumes accounting for $8.1m of the movement. The remainder ofthe credit is due to the change in valuation of the opening inventorybarrels, which are valued to reflect each field's relevant salescontract, such movements generally following the trend in Brent price,with some skewing due to the mix by field.Nine months ended September 30, 2012Cost of sales increased in Q3 YTD 2012 to $83.1 million (Q3 YTD 2011$46.4 million) due to increases in operating costs and DD&A.Operating costs increased in the period to $52.0 million (Q3 YTD 2011$33.8 million) primarily due to the inclusion of Athena, Cook and Broomoperating costs in 2012 as noted above. Operating costs per barrel haveincreased to $42.73/boe in the period (Q3 YTD 2011: $41.04) due tomaintenance shutdown costs coupled with natural declines in production,partially offset by the positive impact of Cook and Athena on theblended rate per barrel.DD&A expense for the period increased to $39.0 million (Q3 YTD 2011$19.8 million). This was primarily due to the addition of the Athena,Cook and Broom assets as well as significant capital expenditure in theperiod from Q3 2011 to Q3 2012 leading to increased DD&A rates onexisting assets. The blended rate for the period has increased to$31.82 (Q3 YTD 2011 $23.73), with Cook and Athena having a positiveimpact which partly mitigates the increase from other fields.An oil and gas inventory movement of $8.0 million was credited to costof sales in the period (Q3 YTD 2011 credit of $7.2 million). As notedabove, this is due to the build up of inventory representing thedifference between barrels of oil produced and sold in the period, withmore barrels being produced than sold YTD.Administrative expenses and Exploration & Evaluation expensesThree months ended September 30, 2012Administrative expenses decreased in the quarter to $0.5 million (Q32011 $1.6 million) due to a reduction in share based payment expensesas a result of no options being granted at the end of 2011, coupledwith a change in the timewriting profile, with more capitalizedtimewriting in Q3 2012 primarily due to increased activities on thedevelopment of the Stella and Harrier fields.Exploration and evaluation expenses of $0.1 million were recorded inthe period (Q3 2011 $0.2 million) due to the expensing of previouslycapitalized costs relating to areas where exploration and evaluationactivities have ceased.Nine months ended September 30, 2012Administrative expenses decreased in the period to $3.0 million (Q3 YTD2011 $5.2 million) again due to no options being granted at the end of2011 and a change in the timewriting profile, with more capitalizedtimewriting in the nine months to September 2012.Exploration and evaluation expenses of $0.2 million (Q3 YTD 2011 $0.2million) were recorded in the period.Foreign exchange and Financial InstrumentsThree months ended September 30, 2012A foreign exchange gain of $0.7 million was recorded in Q3 2012 (Q32011 $2.4 million loss). The majority of the Corporation's revenue isUS dollar driven whilst costs are primarily incurred in British pounds.As such, general volatility in the USD:GBP exchange rate is the driverbehind the foreign exchange gains and losses, particularly on therevaluation of GBP bank accounts. This volatility was partly offset byforeign exchange hedges as described in the "Risks and Uncertainties"section below.The Corporation recorded a $12.0 million loss on financial instrumentsfor the three months ended September 30, 2012 (Q3 2011 $0.4 milliongain). The loss was predominantly due to a $13.6 million revaluation ofoil swaps and put options as a result of the September 30, 2012 oilspot price of $111.03 compared to the much lower price at June 30, 2012of $94.50 offset by a $0.9 million realized gain on oil swaps and $0.7million gain on the revaluation of other instruments. This losspartially reversed a gain recognized in Q2 2012 of $19.3 million as aresult of the lower oil price in Q2.Nine months ended September 30, 2012A foreign exchange gain of $0.9 million was recorded in Q3 YTD 2012 (Q3YTD 2011 $0.1 million gain). As above, general volatility in theUSD:GBP exchange rate was the driver behind the foreign exchange gains(USD:GBP at January 1, 2012: 1.55. USD:GBP at September 30, 2012: 1.62with fluctuations between 1.52 and 1.63 during the period).The Corporation recorded a $6.6 million gain on financial instrumentsfor the nine months ended September 30, 2012 (Q3 YTD 2011 $2.2 millionloss). The gain was predominantly due to a $3.2 million revaluation ofoil swaps and put options and a $2.6 million realized gain on commodityhedges, along with a $2.0 million gain on the revaluation of otherinstruments, partially offset by a $1.3 million loss on revaluation ofcontingent consideration liabilities, triggered by FDP approval,relating to the acquisition of the Stella field and Challenger Minerals(North Sea) Limited ("CMNSL").TaxationThree months ended September 30, 2012A deferred tax credit of $2.9 million was recognized in the quarterended September 30, 2012 (Q3 2011: less than $0.1 million credit). Thiscredit is a product of adjustments to the tax charge primarily relatingto the UK Ring Fence Expenditure Supplement and share based payments.As a result of the above factors, profit after tax increased to $4.9million (Q3 2011 $16.0 million).Nine months ended September 30, 2012A deferred tax credit of $10.6 million was recognized in the ninemonths ended September 30, 2012 (Q3 YTD 2011 $3.6 million charge). Thiscredit is a product of adjustments to the tax charge primarily relatingto the UK Ring Fence Expenditure Supplement, share based payments, andrelief claimed for the reinvestment of disposal proceeds relating tothe sale of assets to Petrofac GSA Limited and Dyas UK Limited.As a result of the above factors, profit after tax increased to $48.1million (Q3 YTD 2011 $22.5 million).No tax is expected to be paid in the mid-term future relating toupstream oil and gas activities.SUMMARY OF QUARTERLY RESULTSThe following table provides a summary of the quarterly results of theCorporation for the eight most recently completed quarters: Restated 30/09/ 30/06/ 31/03/ 31/12/ 30/09/ 30/06/ 31/03/ 31/12/ 12 2012 2012 2011 2011 2011 2011 2010 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000Revenue 41,579 35,779 40,553 54,870 26,415 16,724 31,050 34,260Profitafter tax 4,894 30,238 12,916 13,378 16,016 2,743 3,789 17,650Earnings per shareBasic 0.02 0.12 0.05 0.05 0.06 0.01 0.01 0.07Diluted 0.02 0.11 0.05 0.05 0.06 0.01 0.01 0.07The most significant factors to have affected the Corporation's resultsduring the above quarters are fluctuation in underlying commodityprices and movement in production volumes. The Corporation has utilizedforward sales contracts and foreign exchange contracts to takeadvantage of higher commodity prices while reducing the exposure toprice volatility. These contracts can cause volatility in profit aftertax as a result of unrealized gains and losses due to movements in theoil price and USD : GBP exchange rate.Each of the quarters from Q4 2010 to Q3 2011 has been restatedfollowing the Corporation's election to present all acquisitions sincethe IFRS transition date as business combinations in accordance withIFRS 3(R). Refer to the "Changes in Accounting Policies" below for moredetails.LIQUIDITY AND CAPITAL RESOURCESAs at September 30, 2012, Ithaca had working capital of $57.9 millionincluding a free cash balance of $56.8 million. Available cash hasbeen, and is currently, invested in money market deposit accounts withLloyds Banking Group ("Lloyds"). Management has received confirmationfrom the financial institution that these funds are available ondemand. The restricted cash of $20.6 million comprises $20.5 millioncurrently held by BNPP as decommissioning security provided as part ofthe acquisitions of the Anglia and Cook fields (with release / renewaldates of: February 28, 2013 ($10.9 million), and December 31, 2012($9.6 million)).At September 30, 2012, Ithaca has unused credit facilities currentlytotalling $430 million.During the three months ended September 30, 2012 there was a cashoutflow from operating, investing and financing activities of $55.0million (Q3 2011 outflow of $70.3 million). The net outflow was due toa cash outflow of $75.9 from investing activities, a cash outflow of$2.8 million from financing activities, partially offset by a cashinflow from operating activities of $22.8 million. The remainder of themovement was due to foreign exchange on non US Dollar denominated cashdeposits. This overall free cash inflow is predominantly the product ofcash generated from Athena, Beatrice, Jacky, Anglia, Topaz, Cook andBroom operations offset by development capital expenditure on theGreater Stella Area, including modification of the FPF-1, subsea designand fabrication works and appraisal well drilling on the Hurricanefield.A significant proportion of Ithaca's accounts receivable balance iswith customers in the oil and gas industry and is subject to normalindustry credit risks. The Corporation assesses partners' creditworthiness before entering into joint venture agreements. TheCorporation regularly monitors all customer receivable balancesoutstanding in excess of 90 days. As at September 30, 2012 over 99% ofthe accounts receivable is current, being defined as less than 90 days.In the past, the Corporation has not experienced credit loss in thecollection of accounts receivable.The Corporation continues to be fully funded, with more than sufficientfinancial resources to cover the anticipated level of developmentcapital expenditure commitments and to continue the pursuit ofadditional asset acquisition opportunities and exploration andappraisal activities on existing and newly acquired licenses throughits existing cash balance, forecast cashflow from operations and itsundrawn debt facility. No unusual trends or fluctuations are expectedoutside the ordinary course of business.COMMITMENTSThe Corporation has the following financial commitments: 1 year 2-5 years More than 5 years $'000 $'000 $'000Office lease 259 1,035 129Exploration license fees 665 - -Engineering 86,462 20,208 -Rig commitments 19,416 - -Total 106,802 21,243 129The engineering financial commitments relate to pre-developmentcommitted capital expenditure on the Stella and Harrier fields, as wellas ongoing capital and operating expenditure on existing producingfields. As stated above, these commitments are expected to be fundedthrough the Corporation's existing cash balance, forecast cashflow fromoperations and its undrawn debt facility.OUTSTANDING SHARE INFORMATIONAs at September 30, 2012 Ithaca had 259,346,128 common sharesoutstanding along with15,276,839 options outstanding to employees anddirectors to acquire common shares.In October 2012, the Board of Directors approved the grant of 5,645,000options at a price of C$1.99. Each of the options granted may beexercised over a period of four years from the grant date. One third ofthe options will vest at the end of the first, second and third yearsfrom the effective date of grant. A number of officers and employeesalso exercised 573,875 options at a price of C$1.80 per share inOctober.As at November 9, 2012, Ithaca had 259,920,003 common sharesoutstanding along with20,347,964 options outstanding to employees anddirectors to acquire common shares.CRITICAL ACCOUNTING ESTIMATESCertain accounting policies require that management make appropriatedecisions with respect to the formulation of estimates and assumptionsthat affect the reported amounts of assets, liabilities, revenues andexpenses. These accounting policies are discussed below and areincluded to aid the reader in assessing the critical accountingpolicies and practices of the Corporation and the likelihood ofmaterially different results being reported. Ithaca's managementreviews these estimates regularly. The emergence of new informationand changed circumstances may result in actual results or changes toestimated amounts that differ materially from current estimates.The following assessment of significant accounting policies andassociated estimates is not meant to be exhaustive. The Corporationmight realize different results from the application of new accountingstandards promulgated, from time to time, by various rule-makingbodies.Capitalized costs relating to the exploration and development of oiland gas reserves, along with estimated future capital expendituresrequired in order to develop proved and probable reserves aredepreciated on a unit-of-production basis, by asset, using estimatedproved and probable reserves as adjusted for production.A review is carried out each reporting date for any indication that thecarrying value of the Corporation's Development & Production ("D&P")assets may be impaired. For D&P assets where there are suchindications, an impairment test is carried out on the Cash GeneratingUnit ("CGU"). Each CGU is identified in accordance with IAS 36. TheCorporation's CGUs are those assets which generate largely independentcash flows and are normally, but not always, single developments orproduction areas. The impairment test involves comparing the carryingvalue with the recoverable value of an asset. The recoverable amount ofan asset is determined as the higher of its fair value less costs tosell and value in use, where the value in use is determined fromestimated future net cash flows. Any additional depreciation resultingfrom the impairment testing is charged to the Statement of Income.Goodwill is tested annually for impairment and also when circumstancesindicate that the carrying value may be at risk of being impaired.Impairment is determined for goodwill by assessing the recoverableamount of each CGU to which the goodwill relates. Where the recoverableamount of the CGU is less than its carrying amount, an impairment lossis recognized in the Statement of Income. Impairment losses relating togoodwill cannot be reversed in future periods.Recognition of decommissioning liabilities associated with oil and gaswells are determined using estimated costs discounted based on theestimated life of the asset. In periods following recognition, theliability and associated asset are adjusted for any changes in theestimated amount or timing of the settlement of the obligations. Theliability is accreted up to the actual expected cash outlay to performthe abandonment and reclamation. The carrying amounts of the associatedassets are depleted using the unit of production method, in accordancewith the depreciation policy for development and production assets.Actual costs to retire tangible assets are deducted from the liabilityas incurred.All financial instruments, other than those designated as effectivehedging instruments, are initially recognized at fair value on thebalance sheet. The Corporation's financial instruments consist of cash,restricted cash, accounts receivable, deposits, derivatives, accountspayable, accrued liabilities and the long term liability on theBeatrice acquisition. Measurement in subsequent periods is dependent onthe classification of the respective financial instrument.In order to recognize share based payment expense, the Corporationestimates the fair value of stock options granted using assumptionsrelated to interest rates, expected life of the option, volatility ofthe underlying security and expected dividend yields. These assumptionsmay vary over time.The determination of the Corporation's income and other tax liabilities/ assets requires interpretation of complex laws and regulations. Taxfilings are subject to audit and potential reassessment after the lapseof considerable time. Accordingly, the actual income tax liability maydiffer significantly from that estimated and recorded on the financialstatements.The accrual method of accounting will require management to incorporatecertain estimates of revenues, production costs and other costs as at aspecific reporting date. In addition, the Corporation must estimatecapital expenditures on capital projects that are in progress orrecently completed where actual costs have not been received as of thereporting date.OFF-BALANCE SHEET ARRANGEMENTSThe Corporation has certain lease agreements and rig commitments whichwere entered into in the normal course of operations, all of which aredisclosed under the heading "Commitments", above. Leases are treatedas either operating leases or finance leases based on the extent towhich risks and rewards incidental to ownership lie with the lessor orthe lessee under IAS 17. No asset or liability value has been assignedto any leases on the balance sheet as at September 30, 2012.RELATED PARTY TRANSACTIONSA director of the Corporation is a partner of Burstall Winger LLP whoacts as counsel for the Corporation. The amount of fees paid toBurstall Winger LLP in Q3 2012 was $nil (Q3 2011 $0.1 million). Thesetransactions are in the normal course of business and are conducted onnormal commercial terms with consideration comparable to those chargedby third parties.As at September 30, 2012 the Corporation had a loan receivable fromFPF-1 Ltd, an associate of the Corporation, for $21.6 million (Q3 2011$Nil) as a result of the completion of the GSA transactions.RISKS AND UNCERTAINTIESThe business of exploring for, developing and producing oil and naturalgas reserves is inherently risky. There is substantial risk that themanpower and capital employed will not result in the finding of newreserves in economic quantities. There is a risk that the sale ofreserves may be delayed due to processing constraints, lack of pipelinecapacity or lack of markets.The Corporation is dependent upon the production rates and oil price tofund the current development program. In order to mitigate theCorporation's risk to fluctuations in oil price, the Corporation hastaken out a number of commodity derivatives. In April 2012, theCorporation entered into two put options: to sell 190,000 bbls of theCorporation's May 2012 - February 2013 forecast production at a fixedprice of $120.50/bbl and 200,000 bbls at a fixed price of $120/bbl. InFebruary 2012, the Corporation entered into two swap options: to sell268,800 bbls of the Corporation's March 2012 - December 2012 forecastproduction at a fixed price of $121.32/bbl; and to sell 500,000 bblsof the Corporation's forecast July 2012 - June 2013 production at$113.25 / bbl.In August 2012 the Corporation entered into further derivatives for theperiod October 2012 to December 2013, being swaps of 503,800 bbls ofoil at a weighted average price of $108.67 and put options, at marketprice, for 300,300 bbls of oil at a weighted average oil price floor of$111.34 / bbl.The Corporation is exposed to financial risks including financialmarket volatility, fluctuation in interest rates and various foreignexchange rates. Given the increasing development expenditure andoperating costs in currencies other than the United States dollar, theBoard of Directors of the Corporation has a hedging policy to mitigateforeign exchange rate risk on committed expenditure. In November 2011,the Corporation entered into a forward extra plus contract with Lloydsto hedge part of its forecast GBP 2012 operating costs, includinggeneral and administrative expenses. The hedge amounts to $4 millionper month (total $48 million) at a USD:GBP rate of no worse than $1.60/GBP1.0 while benefiting in any improvement of the rate down to a triggerrate of $1.40/GBP1.00. If the trigger rate is reached in any month theconversion rate realized for that month is $1.58/GBP1.00.A further risk relates to the Corporation's ability to meet theconditions precedent for a full drawdown on the Corporation's Facilitywith BNPP. Ability to drawdown the Facility is based on the Corporationmeeting certain covenants including coverage ratio tests, liquiditytests and development funding tests which are determined by a detailedeconomic model of the Corporation.There can be no assurance that the Corporation will satisfy such testsin order to have access to the full amount of the Facility, however atpresent the Corporation believes that there are no circumstancespresent that result in failure to meet those tests and can thereforedraw down upon its Facility.In addition, the Facility contains the aforementioned covenants thatrequire the Corporation to meet certain financial tests and thatrestrict, among other things, the ability of Ithaca to incur additionaldebt or dispose of assets. To the extent the cash flow from operationsis ever deemed not adequate to fund Ithaca's cash requirements,external financing may be required. Lack of timely access to suchadditional financing, or which may not be on favorable terms, couldlimit the future growth of the business of Ithaca. To the extent thatexternal sources of capital, including public and private markets,become limited or unavailable, Ithaca's ability to make the necessarycapital investments to maintain or expand its current business and tomake necessary principal payments under the Facility may be impaired.At present the Corporation believes that there are no circumstancespresent that result in failure to meet those certain financial tests.A failure to access adequate capital to continue its expenditureprogram may require that the Corporation meet any liquidity shortfallsthrough the selected divestment of its portfolio or delays to existingdevelopment programs. As is standard to a credit facility, theCorporation's and Ithaca Energy (UK) Limited's ("Ithaca UK") assetshave been pledged as collateral and are subject to foreclosure in theevent the Corporation or Ithaca UK defaults. At present the Corporationbelieves that there are no circumstances present that would lead toselected divestment, delays to existing programs or a default relatingto the Facility.The Corporation is and may in the future be exposed to third-partycredit risk through its contractual arrangements with its current andfuture joint venture partners, marketers of its petroleum productionand other parties. The Corporation extends unsecured credit to theseparties, and therefore, the collection of any receivables may beaffected by changes in the economic environment or other conditions.Management believes the risk is mitigated by the financial position ofthe parties. All of the Corporation's oil production from the Beatrice,Jacky and Athena fields is sold to BP Oil International Limited. Oilproduction from Cook and Broom is sold to Shell Trading InternationalLtd. Anglia and Topaz gas production is sold through contracts to RWENPower PLC and Hess Energy Gas Power (UK) Ltd. Cook gas is sold toShell UK Ltd. and Esso Exploration & Production UK Ltd. The Corporationhas not experienced any material credit loss in the collection ofaccounts receivable to date.The Corporation's properties will be generally held in the form oflicenses, concessions, permits and regulatory consents("Authorizations"). The Corporation's activities are dependent upon thegrant and maintenance of appropriate Authorizations, which may not begranted; may be made subject to limitations which, if not met, willresult in the termination or withdrawal of the Authorization; or may beotherwise withdrawn. Also, in the majority of its licenses, theCorporation is often a joint interest-holder with another third partyover which it has no control. An Authorization may be revoked by therelevant regulatory authority if the other interest-holder is no longerdeemed to be financially credible. There can be no assurance that anyof the obligations required to maintain each Authorization will be met.Although the Corporation believes that the Authorizations will berenewed following expiry or granted (as the case may be), there can beno assurance that such Authorizations will be renewed or granted or asto the terms of such renewals or grants. The termination or expirationof the Corporation's Authorizations may have a material adverse effecton the Corporation's results of operations and business.In addition, the areas covered by the Authorizations are or may besubject to agreements with the proprietors of the land. If suchagreements are terminated, found void or otherwise challenged, theCorporation may suffer significant damage through the loss ofopportunity to identify and extract oil or gas.The Corporation is also subject to the risks associated with owning oiland natural gas properties, including environmental risks associatedwith air, land and water. The Corporation takes out market insurance tomitigate many of these operational, construction and environmentalrisks. In all areas of the Corporation's business there is competitionwith entities that may have greater technical and financial resources.There are numerous uncertainties in estimating the Corporation'sreserve base due to the complexities in estimating the magnitude andtiming of future production, revenue, expenses and capital. All of theCorporation's operations are conducted offshore in the UKCS; as suchIthaca is exposed to operational risk associated with weather delaysthat can result in a material delay in project execution. Thirdparties operate some of the assets in which the Corporation hasinterests. As a result, the Corporation may have limited ability toexercise influence over the operations of these assets and theirassociated costs. The success and timing of these activities may beoutside the Corporation's control.For additional detail regarding the Corporation's risks anduncertainties, refer to the Corporation's most recent AIF filed onSEDAR at www.sedar.com.CONTROL ENVIRONMENTIthaca has established disclosure controls, procedures and corporatepolicies so that its consolidated financial results are presentedaccurately, fairly and on a timely basis. The Chief Executive Officerand Chief Financial Officer have designed, or have caused such internalcontrols over financial reporting to be designed under theirsupervision, to provide reasonable assurance regarding the reliabilityof financial reporting and preparation of the Company's financialstatements in accordance with IFRS with no material weaknessesidentified.Based on their inherent limitations, disclosure controls and proceduresand internal controls over financial reporting may not prevent ordetect misstatements and even those options determined to be effectivecan provide only reasonable assurance with respect to financialstatement preparation and presentation.As of September 30, 2012, there were no changes in our internal controlover financial reporting that occurred during the period endedSeptember 30, 2012 that have materially affected, or are reasonablylikely to materially affect, our internal control over financialreporting.CHANGES IN ACCOUNTING POLICIESOn January 1, 2011, the Corporation adopted IFRS using a transitiondate of January 1, 2010. The financial statements for the three monthsended September 30, 2012, including required comparative information,have been prepared in accordance with IFRS and with InternationalAccounting Standard ("IAS") 34, Interim Financial Reporting, as issuedby the International Accounting Standards Board ("IASB").Following the introduction of IFRS the Corporation initially accountedfor the acquisitions of the non-operated interests in the Cook fieldand of CMNSL as asset acquisitions. In Q4 2011 the Company subsequentlyelected to present all acquisitions since the IFRS transition date asbusiness combinations in accordance with IFRS 3(R). This has resultedin a restatement of the original accounting for the Cook acquisition(in Q3 2011) and the acquisition of gas assets from GDF (in Q4 2010) asshown in previous interim statements during 2011.One impact of accounting for acquisitions as business combinations isthe recognition of asset values, upon which the DD&A rate is calculatedas pre-tax fair values and the recognition of a deferred tax liabilityon estimated future cash flows. With current tax rates at 62% thisincreases the DD&A charge for such assets. A partially offsettingreduction is recognized in the deferred tax charged through theconsolidated statement of income.IMPACT OF FUTURE ACCOUNTING CHANGESIn May 2011, the IASB issued the following standards: IFRS 10,Consolidated Financial Statements ("IFRS 10"), IFRS 11, JointArrangements ("IFRS 11"), IFRS 12, Disclosure of Interests in OtherEntities ("IFRS 12"), IAS 27, Separate Financial Statements ("IAS 27"),IFRS 13, Fair Value Measurement ("IFRS 13") and amended IAS 28,Investments in Associates and Joint Ventures ("IAS 28"). Each of thenew standards is effective for annual periods beginning on or afterJanuary 1, 2013 with early adoption permitted. The Corporation hasdecided not to early adopt any of the new requirements.FINANCIAL INSTRUMENTS AND OTHER INSTRUMENTSAll financial instruments, other than those designated as effectivehedging instruments, are initially measured in the balance sheet atfair value. Subsequent measurement of the financial instruments isbased on their classification. The Corporation has classified eachfinancial instrument into one of these categories: held-for-trading,held-to-maturity investments, loans and receivables, or other financialliabilities. Loans and receivables, held-to-maturity investments andother financial liabilities are measured at amortized cost using theeffective interest rate method. For all financial assets and financialliabilities that are not classified as held-for-trading, thetransaction costs that are directly attributable to the acquisition orissue of a financial asset or financial liability are adjusted to thefair value initially recognized for that financial instrument. Thesecosts are expensed using the effective interest rate method and arerecorded within interest expense. Held-for-trading financial assetsare measured at fair value and changes in fair value are recognized innet income.All derivative instruments are recorded in the balance sheet at fairvalue unless they qualify for the expected purchase, sale and usageexemption. All changes in their fair value are recorded in incomeunless cash flow hedge accounting is used, in which case changes infair value are recorded in other comprehensive income until the hedgedtransaction is recognized in net earnings.The Corporation has classified its cash and cash equivalents,restricted cash, derivatives, commodity hedge and long term liabilityas held-for-trading, which are measured at fair value with changesbeing recognized in net income. Accounts receivable are classified asloans and receivables; operating bank loans, accounts payable andaccrued liabilities are classified as other liabilities, all of whichare measured at amortized cost. The classification of all financialinstruments is the same at inception and at September 30, 2012.The table below presents the total gain / (loss) on financialinstruments that has been disclosed through the statement ofcomprehensive income: Three months ended Sept 30 Nine months ended Sept 30 2012 2011 2012 2011 $'000 $'000 $'000 $'000Revaluation forex 166 - 707 -forward contractsRevaluation of 610 2,315 1,368 3,339gas contractRevaluation of (86) 332 (115) 478other longterm liabilityRevaluation of (13,617) (2,250) 3,241 (5,477)commodity hedgesTotal revaluation (12,927) 397 5,201 (1,660)gain / (loss)Realized gain/ 888 - 2,597 (493)(loss)on commodityhedgesRealized gain on 50 - 118 -forex forwardcontractsTotal realized 938 - 2,715 (493)gain/(loss)Total realize (11,989) 397 7,916 (2,153)/ revaluationgain/(loss)Contingent - - (1,295) -considerationTotal gain/ (11,989) 397 6,621 (2,153)(loss) on financialinstrumentsFORWARD-LOOKING INFORMATIONThis MD&A and any documents incorporated by reference herein containcertain forward-looking statements and forward-looking informationwhich are based on the Corporation's internal expectations, estimates,projections, assumptions and beliefs as at the date of such statementsor information, including, among other things, assumptions with respectto production, future capital expenditures and cash flow. The readeris cautioned that assumptions used in the preparation of suchinformation may prove to be incorrect. The use of any of the words"anticipate", "continue", "estimate", "expect", "may", "will","project", "plan", "should", "believe", "could", "scheduled","targeted" and similar expressions are intended to identifyforward-looking statements and forward-looking information. Thesestatements are not guarantees of future performance and involve knownand unknown risks, uncertainties and other factors that may causeactual results or events to differ materially from those anticipated insuch forward-looking statements or information. The Corporationbelieves that the expectations reflected in those forward-lookingstatements and information are reasonable but no assurance can be giventhat these expectations, or the assumptions underlying theseexpectations, will prove to be correct and such forward-lookingstatements and information included in this MD&A and any documentsincorporated by reference herein should not be unduly relied upon.Such forward-looking statements and information speak only as of thedate of this MD&A and any documents incorporated by reference hereinand the Corporation does not undertake any obligation to publiclyupdate or revise any forward-looking statements or information, exceptas required by applicable laws.In particular, this MD&A and any documents incorporated by referenceherein, contains specific forward-looking statements and informationpertaining to the following:- the quality of and future net revenues from the Corporation's reserves;- oil, natural gas liquids ("NGLs") and natural gas production levels;- commodity prices, foreign currency exchange rates and interest rates;- capital expenditure programs and other expenditures;- the sale, farming in, farming out or development of certain exploration properties using third party resources;- supply and demand for oil, NGLs and natural gas;- the Corporation's ability to raise capital;- the Corporation's acquisition strategy, the criteria to be considered in connection therewith and the benefits to be derived therefrom;- the Corporation's ability to continually add to reserves;- schedules and timing of certain projects and the Corporation's strategy for growth;- the Corporation's future operating and financial results;- the ability of the Corporation to optimize operations and reduce operational expenditures;- treatment under governmental and other regulatory regimes and tax, environmental and other laws;- production rates;- targeted production levels; and- timing and cost of the development of the Corporation's reserves.With respect to forward-looking statements contained in this MD&A andany documents incorporated by reference herein, the Corporation hasmade assumptions regarding, among other things:- Ithaca's ability to obtain additional drilling rigs and other equipment in a timely manner, as required;- access to third party hosts and associated pipelines can be negotiated and accessed within the expected timeframe;- FDP approval and operational construction and development is obtained within expected timeframes;- the Corporation's development plan for the Stella and Harrier discoveries will be implemented as planned;- reserves volumes assigned to Ithaca's properties;- ability to recover reserves volumes assigned to Ithaca's properties;- revenues do not decrease below anticipated levels and operating costs do not increase significantly above anticipated levels;- future oil, NGLs and natural gas production levels from Ithaca's properties and the prices obtained from the sales of such production;- the level of future capital expenditure required to exploit and develop reserves;- Ithaca's ability to obtain financing on acceptable terms, in particular, the Corporation's ability to access the Facility;- Ithaca's reliance on partners and their ability to meet commitments under relevant agreements; and- the state of the debt and equity markets in the current economic environment.The Corporation's actual results could differ materially from thoseanticipated in these forward-looking statements and information as aresult of assumptions proving inaccurate and of both known and unknownrisks, including the risk factors set forth in this MD&A and under theheading "Risk Factors" in the AIF and the documents incorporated byreference herein, and those set forth below:- risks associated with the exploration for and development of oil and natural gas reserves in the North Sea;- risks associated with offshore development and production including transport facilities;- operational risks and liabilities that are not covered by insurance;- volatility in market prices for oil, NGLs and natural gas;- the ability of the Corporation to fund its substantial capital requirements and operations;- risks associated with ensuring title to the Corporation's properties;- changes in environmental, health and safety or other legislation applicable to the Corporation's operations, and the Corporation's ability to comply with current and future environmental, health and safety and other laws;- the accuracy of oil and gas reserve estimates and estimated production levels as they are affected by the Corporation's exploration and development drilling and estimated decline rates;- the Corporation's success at acquisition, exploration, exploitation and development of reserves;- the Corporation's reliance on key operational and management personnel;- the ability of the Corporation to obtain and maintain all of its required permits and licenses;- competition for, among other things, capital, drilling equipment, acquisitions of reserves, undeveloped lands and skilled personnel;- changes in general economic, market and business conditions in Canada, North America, the United Kingdom, Europe and worldwide;- actions by governmental or regulatory authorities including changes in income tax laws or changes in tax laws, royalty rates and incentive programs relating to the oil and gas industry including any increase in UK taxes;- adverse regulatory rulings, orders and decisions; and- risks associated with the nature of the common shares.Statements relating to reserves are deemed to be forward-lookingstatements, as they involve the implied assessment, based on certainestimates and assumptions, that the reserves described can beprofitably produced in the future. Many of these risk factors, otherspecific risks, uncertainties and material assumptions are discussed infurther detail throughout the AIF and in the MD&A. Readers arespecifically referred to the risk factors described in the AIF under"Risk Factors" and in other documents the Corporation files from timeto time with securities regulatory authorities. Copies of thesedocuments are available without charge from Ithaca or electronically onthe internet on Ithaca's SEDAR profile at www.sedar.com.Consolidated Statement of IncomeFor the three and nine months ended 30 September 2012 and 2011(unaudited) Restated Restated Three months ended Nine months ended 30 Sept 30 Sept 2012 2011 2012 2011 Note US$'000 US$'000 US$'000 US$'000Revenue 4 41,579 26,415 117,912 74,189Cost of Sales 5 (27,096) (12,603) (83,082) (46,292)Gross Profit 14,483 13,812 34,830 27,897Exploration and evaluation 10 (112) (174) (191) (140)expensesAdministrative expenses 6 (524) (1,648) (2,967) (5,161)Operating Profit 13,847 11,990 31,672 22,596Foreign Exchange 748 (2,415) 851 147(Loss) / gain on financial 23 (11,989) 397 6,621 (2,153)instrumentsGain on asset disposal 11 - - 205 -Negative goodwill - 6,647 - 6,467Profit Before Interest and 2,606 16,439 39,349 27,057TaxFinance costs 7 (697) (527) (2,068) (1,275)Interest income 61 89 195 362Profit Before Tax 1,970 16,001 37,476 26,144Taxation - Deferred tax 21 2,924 15 10,575 (3,597)Profit After Tax 4,894 16,016 48,051 22,547Earnings per shareBasic 20 0.02 0.06 0.19 0.09Diluted 20 0.02 0.06 0.18 0.09The accompanying notes on pages 7 to 25 are an integral part of thefinancial statements.Consolidated Statement of Financial Position(unaudited) 30 September 31 December 2012 2011 US$'000 US$'000ASSETSCurrent assetsCash and cash equivalents 56,843 95,545Restricted cash 8 20,560 16,510Accounts receivable 147,349 80,960Deposits, prepaid expenses and other 6,593 8,793Inventory 9 17,274 8,836Derivative financial instruments 24 8,580 - 257,199 210,644Non current assetsLong-term receivable 26 21,551 -Investment in associate 13 18,337 -Exploration and evaluation assets 10 41,440 22,689Property, plant & equipment 11 591,774 570,356Goodwill 12 985 985 674,087 594,030Total assets 931,286 804,674LIABILITIES AND EQUITYCurrent liabilitiesTrade and other payables 199,334 102,136 199,334 102,136Non current liabilitiesDecommissioning liabilities 15 51,702 39,382Other long term liabilities 16 2,901 2,785Contingent consideration 17 4,000 24,580Derivative financial instruments 24 - 1,846Deferred tax liability 115,345 126,534 173,948 195,127Net assets 558,004 507,411Equity attributable to shareholdersShare capital 18 429,752 429,502Share based payment reserve 19 19,610 17,318Retained earnings 108,642 60,591Shareholders' equity 558,004 507,411The financial statements were approved by the Board of Directors on 9November 2012 and signed on its behalf by:"Jay Zammit"Director"John Summers"DirectorThe accompanying notes on pages 7 to 25 are an integral part of thefinancial statements.Consolidated Statement of Changes in Equity(unaudited) Share Share Warrants Retained Total Capital Based Issue Earnings Payment Reserve US$'000 US$'000 US$'000 US$'000 US$'000Balance, 1 Jan 2011 422,373 11,427 311 24,997 459,108Net income for the - - - 22,547 22,547periodTotal comprehensive 422,373 11,427 311 47,544 481,655incomeShare based payment - 4,833 - - 4,833Options exercised 1,032 (460) - - 572Warrants exercised 6,097 - (311) - 5,786Balance, 30 September 429,502 15,800 - 47,544 492,8462011Balance, 1 Jan 2012 429,502 17,318 - 60,591 507,411Net income for the - - - 48,051 48,051PeriodTotal comprehensive 429,502 17,318 - 108,642 555,642incomeShare based payment - 2,399 - - 2,399Options exercised 250 (107) - - 143Balance, 30 September 429,752 19,610 - 108,642 558,0042012The accompanying notes on pages 7 to 25 are an integral part of thefinancial statements.Consolidated Statement of Cash FlowFor the three and nine months ended 30 September 2012 and 2011(unaudited) Three months ended Nine months ended 30 Sept 30 Sept 2012 2011 2012 2011 US$'000 US$'000 US$'000 US$'000CASH PROVIDED BY (USED IN):Operating activitiesProfit Before Tax 1,970 16,001 37,476 26,144Adjustments for:Depletion, depreciation and 14,563 7,861 39,040 19,790amortisationExploration and evaluation 112 174 191 2,140expensesShare based payment 62 603 401 1,132Loan fee amortisation - 78 494 746Revaluation of financial 12,927 (397) (5,201) 1,851instrumentsRevaluation of contingent - - 1,295 (2,000)considerationGain on disposal - - (205) -Movement in goodwill - (6,467) - (6,467)Accretion 453 217 1,272 571Cashflow from operations 30,087 18,070 74,763 43,907Changes in inventory, debtors (7,255) (6,709) 3,092 669and creditors relating tooperating activitiesNet cash from operating 22,832 11,361 77,855 44,576activitiesInvesting activitiesCapital expenditure (60,456) (88,469) (114,745) (154,891)Investment in associate - - (18,337) -Expenditure on - (358) - (358)decommissioningLoan to associate - - (21,551) -Proceeds on disposal - - 44,878 -Settlement of contingent - - (15,700) -considerationChanges in debtors and (15,409) 17,580 15,444 25,050creditors relatinginvesting activitiesNet cash used in investing (75,865) (71,247) (110,011) (130,199)activitiesFinancing activitiesProceeds from issuance of - 371 143 6,357shares(Increase) / decrease in (340) (9,082) (4,049) (10,370)restricted cashDerivatives (2,485) - (2,485) (6,508)Net cash used in financing (2,825) (8,711) (6,391) (10,521)activitiesCurrency translation 816 (1,705) (155) (769)differences relating to cashIncrease / (decrease) in cash (55,042) (70,302) (38,702) (96,913)and cash equiv.Cash and cash equivalents, 111,885 168,970 95,545 195,581beginning of periodCash and cash equivalents, 56,843 98,668 56,843 98,668end of periodThe accompanying notes on pages 7 to 25 are an integral part of thefinancial statements.1. NATURE OF OPERATIONSIthaca Energy Inc. (the "Corporation" or "Ithaca"), incorporated anddomiciled in Alberta, Canada on 27 April 2004, is a publicly tradedcompany involved in the exploration, development and production of oiland gas in the North Sea. The Corporation's registered office is 1600,333 - 7th Avenue S.W., Calgary, Alberta, Canada, T2P 2Z1. As of 1November 2011 the Corporation's shares have traded on the Toronto StockExchange in Canada (previously the TSX Venture Exchange). TheCorporation's shares continue to trade on AIM in the United Kingdomunder the symbol "IAE". Ithaca has three wholly-owned subsidiaries,Ithaca Energy (Holdings) Limited ("Ithaca Holdings"), incorporated inBermuda, Ithaca Energy (UK) Limited ("Ithaca UK") and Ithaca Minerals(North Sea) Limited ("Ithaca Minerals"), which was acquired on 19October 2011, both incorporated in Scotland. Ithaca also has twoassociates, FPU Services Limited ("FPU Services") and FPF-1 Limited("FPF-1"), both incorporated in Jersey.2. BASIS OF PREPARATIONThese interim consolidated financial statements have been prepared inaccordance with International Financial Reporting Standards (IFRS)applicable to the preparation of interim financial statements,including IAS 34 Interim Financial Reporting. These interimconsolidated financial statements do not include all the necessaryannual disclosures in accordance with IFRS.The Company has elected to present all acquisitions since the IFRStransition date as business combinations in accordance with IFRS 3(R).This has resulted in a restatement of the acquisition of gas assetsfrom GDF (in 4Q 2010) as shown in previous interim statements during2011.The policies applied in these condensed interim consolidated financialstatements are based on IFRS issued and outstanding as of 9 November2012, the date the Board of Directors approved the statements. Anysubsequent changes to IFRS that are given effect in the Corporation'sannual consolidated financial statements for the year ending 31December 2012 could result in restatement of these interim consolidatedfinancial statements.The condensed interim consolidated financial statements should be readin conjunction with the Corporation's annual financial statements forthe year ended 31 December 2011.3. SIGNIFICANT ACCOUNTING POLICIES, JUDGEMENTS AND ESTIMATION UNCERTAINTYBasis of measurementThe consolidated financial statements have been prepared under thehistorical cost convention, except for the revaluation of certainfinancial assets and financial liabilities to fair value, includingderivative instruments.Basis of consolidationThe consolidated financial statements of the Corporation include theaccounts of Ithaca Energy Inc. and the wholly-owned subsidiaries IthacaEnergy (UK) Ltd, Ithaca Minerals (North Sea) Ltd and Ithaca Energy(Holdings) Ltd. All inter-company transactions and balances have beeneliminated on consolidation.A subsidiary is an entity (including special purpose entities) whichthe Corporation controls by having the power to govern the financialand operating policies. The existence and effect of potential votingrights that are currently exercisable or convertible are consideredwhen assessing whether Ithaca controls another entity. A subsidiary isfully consolidated from the date on which control is obtained by Ithacaand is de-consolidated from the date that control ceases.InvestmentsInterests in entities over which Ithaca has significant influence, butnot control or joint control, are accounted for using the equitymethod. Ithaca's share of equity investments is recorded in theconsolidated statement of income.Business CombinationsBusiness combinations are accounted for using the acquisition method.The cost of an acquisition is measured as the fair value of the assetsacquired, equity instruments issued and liabilities incurred or assumedat the date of completion of the acquisition. Acquisition costsincurred are expensed and included in administrative expenses.Identifiable assets acquired and liabilities and contingent liabilitiesassumed in a business combination are measured initially at their fairvalues at the acquisition date. The excess of the cost of acquisitionover the fair value of the Corporation's share of the identifiable netassets acquired is recorded as goodwill. If the cost of the acquisitionis less than the Corporation's share of the net assets required, thedifference is recognised directly in the statement of income.GoodwillCapitalisationGoodwill acquired through business combinations is initially measuredat cost, being the excess of the aggregate of the considerationtransferred and the amount recognised as the fair value of theCorporation's share of the identifiable net assets acquired andliabilities assumed. If this consideration is lower than the fair valueof the identifiable assets acquired, the difference is recognised inthe statement of income.ImpairmentGoodwill is tested annually for impairment and also when circumstancesindicate that the carrying value may be at risk of being impaired.Impairment is determined for goodwill by assessing the recoverableamount of each cash generating unit ("CGU") to which the goodwillrelates. Where the recoverable amount of the CGU is less than itscarrying amount, an impairment loss is recognised in the statement ofincome. Impairment losses relating to goodwill cannot be reversed infuture periods.Foreign currency translationItems included in the financial statements are measured using thecurrency of the primary economic environment in which the Corporationand its subsidiary operate (the 'functional currency'). Theconsolidated financial statements are presented in United StatesDollars, which is the Corporation's functional and presentationcurrency.Foreign currency transactions are translated into the functionalcurrency using the exchange rates prevailing at the dates of thetransactions. Foreign exchange gains and losses resulting from thesettlement of such transactions and from the translation at year endexchange rates of monetary assets and liabilities denominated inforeign currencies are recognised in the statement of income.Share based paymentsThe Corporation has a share based payment plan as described in note 18(c). The Corporation's proportionate share of expense is recorded inthe statement of income or capitalised for all options granted in theyear, with the gross increase recorded in the share based paymentreserve. Compensation costs are based on the estimated fair values atthe time of the grant and the expense or capitalised amount isrecognised over the vesting period of the options. Upon the exercise ofthe stock options, consideration paid together with the amountpreviously recognised in the share based payment reserve is recorded asan increase in share capital. In the event that vested optionsexpire unexercised, previously recognised compensation expenseassociated with such stock options is not reversed. In the event thatunvested options are forfeited or expired, previously recognisedcompensation expense associated with the unvested portion of such stockoptions is reversed.Cash and Cash EquivalentsFor the purpose of cash flow statements, cash and cash equivalentsinclude investments with an original maturity of three months or less.Restricted CashCash that is held for security for bank guarantees is reported in thebalance sheet and cash flow statements separately. If the expectedduration of the restriction is less than twelve months then it is shownin current assets.Financial InstrumentsAll financial instruments, other than those designated as effectivehedging instruments, are initially recognised at fair value in thestatement of financial position. The Corporation's financialinstruments consist of cash, restricted cash, accountsreceivable, deposits, derivatives, accounts payable, accruedliabilities, contingent consideration and the long term liability onthe Beatrice acquisition. The Corporation classifies its financialinstruments into one of the following categories: held-for-tradingfinancial assets and financial liabilities; held-to-maturityinvestments; loans and receivables; and other financial liabilities.All financial instruments are required to be measured at fair value oninitial recognition. Measurement in subsequent periods is dependent onthe classification of the respective financial instrument.Held-for-trading financial instruments are subsequently measured atfair value with changes in fair value recognised in net earnings. Allother categories of financial instruments are measured at amortisedcost using the effective interest method. Cash and cash equivalents areclassified as held-for-trading and are measured at fair value. Accountsreceivable are classified as loans and receivables. Accounts payable,accrued liabilities, certain other long-term liabilities, and long-termdebt are classified as other financial liabilities. Although theCorporation does not intend to trade its derivative financialinstruments, they are classified as held-for-trading for accountingpurposes.Transaction costs that are directly attributable to the acquisition orissue of a financial asset or liability and original issue discounts onlong-term debt have been included in the carrying value of the relatedfinancial asset or liability and are amortised to consolidated netearnings over the life of the financial instrument using the effectiveinterest method.The Corporation may designate financial instruments as a hedginginstrument for accounting purposes. Hedge accounting requires thedesignation of a hedging relationship, including a hedged and a hedgingitem, identification of the risk exposure being hedged and anexpectation that the hedging relationship will be highly effectivethroughout its term.The Corporation assesses, both at the hedge's inception and on anongoing basis, whether the derivative financial instruments designatedas hedges are highly effective in offsetting changes in cash flows ofthe hedged items. The effective portion of the gains and losses on cashflow hedges is recorded in Other Comprehensive Income until the hedgedtransaction is recognised in net earnings. Any hedge ineffectiveness isimmediately recognised in net earnings. When the hedged transaction isrecognised in net earnings, the fair value of the associated cash flowhedging item is reclassified from other reserves into net earnings.Hedge accounting is discontinued on a prospective basis when thehedging relationship no longer qualifies for hedge accounting.Analysis of the fair values of financial instruments and furtherdetails as to how they are measured are provided in notes 23 to 25.InventoryInventories of materials and product inventory supplies, other than oiland gas inventories, are stated at the lower of cost and net realisablevalue. Cost is determined on the first-in, first-out method. Oil andgas inventories are stated at fair value less cost to sell.Property, plant and equipmentOil and gas expenditure - exploration and evaluation assetsCapitalisationPre-acquisition costs on oil and gas assets are recognised in thestatement of income when incurred. Costs incurred after rights toexplore have been obtained, such as geological and geophysical surveys,drilling and commercial appraisal costs and other directly attributablecosts of exploration and evaluation including technical andadministrative costs are capitalised as intangible exploration andevaluation ("E&E") assets.E&E costs are not amortised prior to the conclusion of evaluationactivities. At completion of evaluation activities, if technicalfeasibility is demonstrated and commercial reserves are discoveredthen, following development sanction, the carrying value of the E&Easset is reclassified as a development and production ("D&P") asset,but only after the carrying value is assessed for impairment and whereappropriate its carrying value adjusted. If after completion ofevaluation activities in an area, it is not possible to determinetechnical feasibility and commercial viability or if the legal right toexplore expires or if the Corporation decides not to continueexploration and evaluation activity, then the costs of suchunsuccessful exploration and evaluation is written off to the statementof income in the period the relevant events occur.ImpairmentThe Corporation's oil and gas assets are analysed into cash generatingunits ("CGU") for impairment review purposes, with E&E asset impairmenttesting being performed at a grouped CGU level. The current E&E CGUconsists of the Corporation's whole E&E portfolio. E&E assets arereviewed for impairment when circumstances arise which indicate thatthe carrying value of an E&E asset exceeds the recoverable amount. Whenreviewing E&E assets for impairment, the combined carrying value of thegrouped CGU is compared with the grouped CGU's recoverable amount. Therecoverable amount of a grouped CGU is determined as the higher of itsfair value less costs to sell and value in use. Impairment lossesresulting from an impairment review are written off to the IncomeStatement.Oil and gas expenditure - development and production assetsCapitalisationCosts of bringing a field into production, including the cost offacilities, wells and sub-sea equipment together with E&E assetsreclassified in accordance with the above policy, are capitalised as aD&P asset. Normally each individual field development will form anindividual D&P asset but there may be cases, such as phaseddevelopments, or multiple fields around a single production facilitywhen fields are grouped together to form a single D&P asset.DepreciationAll costs relating to a development are accumulated and not depreciateduntil the commencement of production. Depreciation is calculated on aunit of production basis based on the proved and probable reserves ofthe asset. Any re-assessment of reserves affects the depreciation rateprospectively. Significant items of plant and equipment will normallybe fully depreciated over the life of the field. However, these itemsare assessed to consider if their useful lives differ from the expectedlife of the D&P asset and should this occur a different depreciationrate would be charged.ImpairmentA review is carried out each reporting date for any indication that thecarrying value of the Corporation's D&P assets may be impaired. For D&Passets where there are such indications, an impairment test is carriedout on the CGU. Each CGU is identified in accordance with IAS 36. TheCorporation's CGUs are those assets which generate largely independentcash flows and are normally, but not always, single developments orproduction areas. The impairment test involves comparing the carryingvalue with the recoverable value of an asset. The recoverable amount ofan asset is determined as the higher of its fair value less costs tosell and value in use, where the value in use is determined fromestimated future net cash flows. Any additional depreciation resultingfrom the impairment testing is charged to the statement of income.Non Oil and Natural Gas OperationsComputer and office equipment is recorded at cost and depreciated overits estimated useful life on a straight-line basis over three years.Furniture and fixtures are recorded at cost and depreciated over theirestimated useful lives on a straight-line basis over five years.Decommissioning liabilitiesThe Corporation records the present value of legal obligationsassociated with the retirement of long term tangible assets, such asproducing well sites and processing plants, in the period in which theyare incurred with a corresponding increase in the carrying amount ofthe related long term asset. The obligation generally arises when theasset is installed or the ground/environment is disturbed at the fieldlocation. In subsequent periods, the asset is adjusted for any changesin the estimated amount or timing of the settlement of the obligations.The carrying amounts of the associated assets are depleted using theunit of production method, in accordance with the depreciation policyfor development and production assets. Actual costs to retire tangibleassets are deducted from the liability as incurred.Contingent considerationContingent consideration is accounted for as a financial liability andmeasured at fair value at the date of acquisition with any subsequentremeasurements recognised either in the statement of income or in othercomprehensive income in accordance with IAS 39.TaxationCurrent income taxCurrent income tax assets and liabilities are measured at the amountexpected to be recovered from or paid to the taxation authorities. Thetax rates and tax laws used to compute the amounts are those that areenacted or substantively enacted by the reporting date.Deferred income taxDeferred tax is recognised for all deductible temporary differences andthe carry-forward of unused tax losses. Deferred tax assets andliabilities are measured using enacted or substantively enacted incometax rates expected to apply to taxable income in the years in whichtemporary differences are expected to be recovered or settled. Theeffect on deferred tax assets and liabilities of a change in rates isincluded in earnings in the period of the enactment date. Deferred taxassets are recorded in the consolidated financial statements ifrealisation is considered more likely than not.Recent accounting pronouncementsIn May 2011, the IASB issued the following standards: IFRS 10,Consolidated Financial Statements ("IFRS 10"), IFRS 11, JointArrangements ("IFRS 11"), IFRS 12, Disclosure of Interests inOther Entities ("IFRS 12"), IAS 27, Separate Financial Statements("IAS 27"), IFRS 13, Fair Value Measurement ("IFRS 13") and amended IAS28, Investments in Associates and Joint Ventures ("IAS 28"). Each ofthe new standards is effective for annual periods beginning on or after1 January 2013 with early adoption permitted. The Corporation has notyet assessed the impact that the new and amended standards will have onits financial statements or whether to early adopt any of the newrequirements.Significant accounting judgements and estimation uncertaintiesThe preparation of financial statements in conformity with IFRSrequires management to make estimates and assumptions regarding certainassets, liabilities, revenues and expenses. Such estimates must oftenbe made based on unsettled transactions and other events and a precisedetermination of many assets and liabilities is dependent upon futureevents. Actual results may differ from estimated amounts.The amounts recorded for depletion, depreciation of property andequipment, long-term liability, share based payment, contingentconsideration, decommissioning liabilities, derivatives, warrants, anddeferred taxes are based on estimates. The depreciation charge and anyimpairment tests are based on estimates of proved and probablereserves, production rates, prices, future costs and other relevantassumptions. By their nature, these estimates are subject tomeasurement uncertainty and the effect on the financial statements ofchanges in such estimates in future periods could be material.4. REVENUE Three months ended 30 Sept Nine months ended 30 Sept 2012 2011 2012 2011 US$'000 US$'000 US$'000 US$'000Oil sales 38,227 23,006 107,328 61,385Gas sales 2,040 2,780 6,620 9,543Condensate sales 98 223 405 799Other income 1,214 406 3,559 2,462Total 41,579 26,415 117,912 74,1895. COST OF SALES Restated Restated Three months ended Nine months ended 30 Sept 30 Sept 2012 2011 2012 2011 US$'000 US$'000 US$'000 US$'000Operating costs (20,903) (11,925) (52,031) (33,723)Movement in oil and gas 8,370 7,183 7,989 7,221inventoryDepletion, depreciation and (14,563) (7,861) (39,040) (19,790)amortisation (27,096) (12,603) (83,082) (46,292)The above includes 2011 business combination restatements in accordancewith IFRS 3(R). Refer to note 2 for further details.6. ADMINISTRATIVE EXPENSES Three months ended 30 Nine months ended 30 Sept Sept 2012 2011 2012 2011 US$'000 US$'000 US$'000 US$'000General & (462) (1,045) (2,566) (3,324)administrativeShare based payment (62) (603) (401) (1,837) (524) (1,648) (2,967) (5,161)7. FINANCE COSTS Three months ended 30 Nine months ended 30 Sept Sept 2012 2011 2012 2011 US$'000 US$'000 US$'000 US$'000Accretion (453) (217) (1,272) (572)Bank charges (219) (232) (264) (470)Non-operated asset finance (25) - (38) -feesLoan fee amortisation - (78) (494) (233) (697) (527) (2,068) (1,275)8. RESTRICTED CASH 30 Sept 31 Dec 2012 2011 US$'000 US$'000Decommissioning security 20,560 16,167Other security - 343 20,560 16,510Restricted cash of $20.6 million is held by Bank BNP Paribas ("BNPP")as decommissioning security in respect of the Corporation's interestsin the Anglia and Cook fields with release dates of 28 February 2013($11.0 million) and 31 December 2012 ($9.6 million).9. INVENTORY 30 Sept 31 Dec 2012 2011 US$'000 US$'000Crude oil inventory 17,260 8,823Materials inventory 14 13 17,274 8,83610. EXPLORATION AND EVALUATION ASSETS US$'000At 1 January 2011 17,832Additions 7,752Write offs/relinquishments (2,791)Disposals (104)At 31 December 2011 22,689Additions 28,168Disposals (9,226)Write offs/relinquishments (191)At 30 September 2012 41,440Following completion of geotechnical evaluation activity, certainlicences were declared unsuccessful and certain prospects were declarednon-commercial and therefore the related expenditure of $0.2 millionwas expensed in the three and nine months to 30 September 2012.Disposals in the period reflect the sale of assets to Petrofac GSALimited and Dyas UK Limited as detailed per note 11.The above includes 2011 business combination restatements in accordancewith IFRS 3(R). Refer to note 2 for further details.11. PROPERY, PLANT AND EQUIPMENT Development & Production Other fixed Oil and Gas Assets assets Total US$'000 US$'000 US$'000CostAt 1 January 2011 281,411 1,587 282,998Additions 342,138 705 342,843At 31 December 2011 623,549 2,292 625,841Additions 98,311 60 98,371Disposals (37,912) - (37,912)At 30 September 2012 683,948 2,352 686,300DD&AAt 1 January 2011 (22,934) (1,104) (24,038)Charge for the period (31,054) (393) (31,447)At 31 December 2011 (53,988) (1,497) (55,485)Charge for the period (38,743) (298) (39,041)At 30 September 2012 (92,731) (1,795) (94,526)NBV at 1 January 2011 258,477 483 258,960NBV at 1 January 2012 569,561 795 570,356NBV at 30 September 2012 591,217 557 591,774Disposals in the period reflect the sale of assets to Petrofac GSALimited ("Petrofac") and Dyas UK Limited ("Dyas") on completion of theSale and Purchase Agreements ("SPAs") relating to the Greater StellaArea.An overall pre-tax gain on disposal of $205k is shown through theconsolidated statement of income for the nine months ended 30 September2012.The above includes 2011 business combination restatements in accordancewith IFRS 3(R). Refer to note 2 for further details.12. GOODWILL US$'000CostAt 1 January 2011, 31 December 2011 & 30 September 2012 985$1.0 million represents goodwill recognised on the acquisition of gasassets from GDF in December 2010.13. INVESTMENT IN ASSOCIATES 30 Sept 31 Dec 2012 2011 US$'000 US$'000Investments in FPF-1 and FPU services 18,337 -Investment in associates comprises shares, acquired by Ithaca Holdings,in FPF-1 and FPU Services as part of the completion of the GreaterStella Area transactions.14. LOAN FACILITYOn 29 June 2012, the Corporation executed a Senior Secured BorrowingBase Facility agreement (the "Facility") for up to $430 million, beingprovided by BNPP as Lead Arranger. The loan term is up to five yearsand will attract interest at LIBOR plus 3-4.5%. This Facility replacesthe previous undrawn $140 million debt facility with Lloyds BankingGroup.The Corporation is subject to financial and operating covenants relatedto the Facility. Failure to meet the terms of one or more of thesecovenants may constitute an event of default as defined in the Facilityagreement, potentially resulting in accelerated repayment of the debtobligations.The Corporation is in compliance with its financial and operatingcovenants.No funds were drawn down under the Facility as at 30 September 2012.15. DECOMMISSIONING LIABILITIES 30 Sept 31 Dec 2012 2011 US$'000 US$'000Balance, beginning of period 39,382 23,652Additions 9,613 15,250Accretion 1,272 858Revision to estimates 1,435 (20)Utilisation - (358)Balance, end of period 51,702 39,382The total future decommissioning liability was calculated by managementbased on its net ownership interest in all wells and facilities,estimated costs to reclaim and abandon wells and facilities and theestimated timing of the costs to be incurred in future periods. TheCorporation uses a risk free rate of 3.9 percent (31 December 2011: 3.9percent) and an inflation rate of 2 percent (31 December 2011: 2percent) over the varying lives of the assets to calculatethe present value of the decommissioning liabilities. These costsare expected to be incurred at various intervals over the next 15years.The economic life and the timing of the obligations are dependent onGovernment legislation, commodity price and the future productionprofiles of the respective production and development facilities. Notethat upon the acquisition of the Beatrice Field in November 2008, theCorporation did not assume the decommissioning liabilities.16. OTHER LONG TERM LIABILITIES 30 Sept 31 Dec 2012 2011 US$'000 US$'000Balance, beginning of period 2,785 2,872Revaluation in the period 116 (87)Balance, end of period 2,901 2,785On completion of the acquisition of the Beatrice Facilities on 10November 2008 there were 75,000 barrels of oil in an oil storage tankat the Nigg Terminal. This volume of oil is required to be in thestorage tank when the Beatrice Facilities are retransferred. Thisvolume of oil is valued at the price on the forward oil price curve atthe expected date of re-transfer and discounted. The liability issubject to revaluation at each financial period end. The expected dateof re-transfer is likely to be more than three years in the future.17. CONTINGENT CONSIDERATION 30 Sept 31 Dec 2012 2011US$'000 US$'000Balance, beginning of period 24,580 12,976Additions - 13,604Revision to estimates 1,295 (2,000)Release (21,875) -Balance, end of period 4,000 24,580The contingent consideration at the end of the period relates to theacquisition of the Stella field and is payable upon first oil.The release of $21.9m reflects the consideration paid upon Stella andHarrier Field Development Plan approval as well as a transfer of partof the liability to Petrofac on completion of the Greater Stella Areatransactions (see note 11).18. SHARE CAPITAL No. of ordinary AmountAuthorised share capital 000 US$'000At 31 December 2011 and 30 September 2012 Unlimited -(a) IssuedThe issued share capital is as follows:Issued Number of common Amount shares US$'000Balance 1 January 2011 255,789,464 422,373Issued for cash - options exercised 874,997 572Issued for cash - warrants exercised 2,500,000 5,786Transfer from Share based payment reserve on - 460options exercisedTransfer from Warrants issued on warrants - 311exercisedBalance 1 January 2012 259,164,461 429,502Issued for cash - options exercised 181,667 250Balance 30 September 2012 259,346,128 429,752Capital ManagementThe Corporation's objectives when managing capital are:- to safeguard the Corporation's ability to continue as a going concern;- to maintain balance sheet strength and optimal capital structure, while ensuring the Corporation's strategicobjectives are met; and- to provide an appropriate return to shareholders relative to the risk of the Corporation's underlying assets.Capital is defined as shareholders' equity. Shareholders' equityincludes share capital, share based payment reserve, warrants issued,retained earnings or deficit and other comprehensive income. 30 Sept 31 Dec 2012 2011 US$'000 US$'000Share capital 429,752 429,502Share based payment reserve 19,610 17,318Warrants issued - -Retained earnings 108,642 60,591Shareholders' Equity 558,004 507,411The Corporation maintains and adjusts its capital structure based onchanges in economic conditions and the Corporation's plannedrequirements. The Board of Directors reviews the Corporation's capitalstructure and monitors requirements. The Corporation may adjust itscapital structure by issuing new equity and/or debt, selling and/oracquiring assets, and controlling capital expenditure programs.The Corporation monitors its capital structure using the debt-to-equityratio and other benchmark measures at the consolidated group level. 30 Sept 31 Dec 2012 2011 US$'000 US$'000Debt - -Equity 558,004 507,411Debt as a % of equity N/A N/A(b) Stock optionsIn the quarter ended 30 September 2012, the Corporation's Board ofDirectors did not grant any new options.In the quarter ended 31 March 2012, the Corporation's Board ofDirectors granted 400,000 options at a weighted average exercise priceof $2.28 (C$2.31).The Corporation's stock options and exercise prices are denominated inCanadian Dollars when granted. As at 30 September 30 2012, 15,276,839stock options to purchase common shares were outstanding, having anexercise price range of $0.20 to $2.70 (C$0.25 to C$2.69) per share anda vesting period of up to 3 years in the future.Changes to the Corporation's stock options are summarised as follows: 30 September 2012 31 December 2011 Wt. Avg Wt. Avg No. of Exercise No. of Exercise Options Price- Options Price-Balance, beginning of 17,506,839 $1.66 20,146,003 $1.61periodGranted 400,000 $2.28 260,000 $1.99Forfeited / expired (2,448,333) $3.42 (2,024,167) $2.29Exercised (181,667) $0.75 (874,997) $0.61Options 15,276,839 $2.52 17,506,839 $1.66- The weighted average exercise price has been converted into U.S.dollars based on the foreign exchange rate in effect at the date ofissuance.The following is a summary of stock options as at 30 September 2012 Options OutstandingRange of Exercise No. of Wt. Avg Wt. AvgPrice Options Life Exercise (Years) Price-$2.22-$2.70 (C$2.25-C$2.69)5,350,0002.3 $2.23$1.49-$1.80 (C$1.54-C$1.85)5,136,6671.3 $1.55$0.20-$0.81 (C$0.25-C$0.87)4,790,1721.0 $0.55 15,276,839 1.6 $1.48 Options ExercisableRange of Exercise No. of Wt. Avg Wt. AvgPrice Options Life Exercise (Years) Price-$2.22-$2.70 (C$2.25-C$2.69)1,649,9972.2$2.23$1.49-$1.80 (C$1.54-C$1.85)3,496,6701.2$1.54$0.20-$0.81 (C$0.25-C$0.87)4,720,1721.0$0.49 9,866,8391.3$1.22The following is a summary of stock options as at 31 December 2011 Options OutstandingRange of Exercise No. of Wt. Avg Wt. AvgPrice Options Life Exercise (Years) Price-$3.65 (C$3.65)$2.22-$2.70 2,165,000 0.1$3.65(C$2.25-C$2.69)$1.49-$1.79 5,050,000 3.0$2.23(C$1.54-C$1.85)$0.20-$0.81 5,311,667 2.0$1.55(C$0.25-C$0.87) 4,980,172 1.8$0.56 17,506,839 0.5$1.72 Options ExercisableRange of Exercise No. of Wt. Avg Wt. AvgPrice Options Life Exercise (Years) Price-$3.65 (C$3.65) 2,165,000 0.1 $3.65$2.22-$2.86 1,663,330 3.0 $2.22(C$2.25-C$2.70)$1.49-$1.79 2,048,329 1.8 $1.57(C$1.54-C$1.85)$0.20-$0.81 3,904,548 1.8 $0.49(C$0.25-C$0.87) 9,781,207 1.6 $1.71(c) Share based paymentsOptions granted are accounted for using the fair value method. Thecompensation cost during the three months and nine months ended 30September 2012 for total stock options granted was $0.8 million and$2.4 million respectively (Q3 2011: $1.6 million, Q3 YTD: $4.8million). $0.1 million and $0.4 million were charged through the incomestatement for share based payment for the three and nine months ended30 September 2012 respectively, being the Corporation's share of sharebased payment chargeable through the income statement. The remainder ofthe Corporation's share of share based payment has been capitalised.The fair value of each stock option granted was estimated at the dateof grant, using the Black-Scholes option pricing model with thefollowing assumptions: For the three months ended 30 For the year ended 31 September 2012 December 2011Risk free 0.50% 1.20%interest rateExpected stock 81% 97%volatilityExpected life of 3 years 3 yearsoptionsWeighted Average $1.22 $1.68Fair Value(d) Gemini AgreementIn September 2006 Gemini Oil & Gas Fund 11 L.P. ("Gemini") providednon-recourse funding of $6 million. Further to a supplemental agreemententered into in August 2008, the loan was fully repaid. Under thesupplemental agreement Gemini retained rights, under certaincircumstances relating to the Athena Field, to elect to receivewarrants to acquire up to 3,000,000 common shares at $3.00 per shareand to receive payments connected to asset sales of interests inAthena.On 20 September 2010, a further agreement was entered into with Geminiwhereby in exchange for and in consideration of Gemini's waiver of anyright to proceeds from the disposal of equity interest in the Athenadiscovery and in substitution for any previously awarded or agreedwarrants, Ithaca Energy Inc. granted Gemini warrants to acquire up to2,500,000 common shares in Ithaca Energy Inc. The warrants wereexercised at C$2.25 per share on 3 March 2011. The agreement terminatesall rights that Gemini has in respect of the Corporation's interests.The total fair value attributed to warrants issued in 2010 was $0.3million.19. SHARE BASED PAYMENT RESERVE 30 Sept 31 Dec 2012 2011US$'000 US$'000Balance, beginning of period 17,318 11,427Share based payment cost 2,399 6,351Transfer to share capital on exercise of options (107) (460)Balance, end of period 19,610 17,31820. EARNINGS PER SHAREThe calculation of basic earnings per share is based on the profitafter tax and the weighted average number of common shares in issueduring the period. The calculation of diluted earnings per share isbased on the profit after tax and the weighted average number ofpotential common shares in issue during the period. Three months ended 30 Nine months ended 30 Sept Sept 2012 2011 2012 2011Weighted average number 259,346,128 258,535,295 259,236,730 257,691,879of common shares(basic)Weighted average 264,573,365 263,211,406 264,632,244 262,979,178numbers of commonshares (diluted)21. TAXATION Restated Restated Three months ended 30 Sept Nine months ended 30 Sept 2012 2011 2012 2011 US$'000 US$'000 US$'000 US$'000Deferred tax 2,924 15 10,575 (3,597)The above includes 2011 business combination restatements in accordancewith IFRS 3(R). Refer to note 2 for further details.22. COMMITMENTSOperating lease commitments 30 Sept 31 Dec 2012 2011 US$'000 US$'000Within one year 259 247Two to five years 1,035 989More than five years 129 309Capital commitments 30 Sept 31 Dec 2012 2011 US$'000 US$'000Capital commitments incurred jointly with other 126,751 82,521ventures (Ithaca's share)23. FINANCIAL INSTRUMENTSTo estimate fair value of financial instruments, the Corporation usesquoted market prices when available, or industry accepted third-partymodels and valuation methodologies that utilise observable market data.In addition to market information, the Corporation incorporatestransaction specific details that market participants would utilise ina fair value measurement, including the impact of non-performance risk.The Corporation characterises inputs used in determining fair valueusing a hierarchy that prioritises inputs depending on the degree towhich they are observable. However, these fair value estimates may notnecessarily be indicative of the amounts that could be realised orsettled in a current market transaction. The three levels of the fairvalue hierarchy are as follows:- Level 1 - inputs represent quoted prices in active markets foridentical assets or liabilities (for example, exchange-traded commodityderivatives). Active markets are those in which transactions occur insufficient frequency and volume to provide pricing information on anongoing basis.- Level 2 - inputs other than quoted prices included within Level 1that are observable, either directly or indirectly, as of the reportingdate. Level 2 valuations are based on inputs, including quoted forwardprices for commodities, market interest rates, and volatility factors,which can be observed or corroborated in the marketplace. TheCorporation obtains information from sources such as the New YorkMercantile Exchange and independent price publications.- Level 3 - inputs that are less observable, unavailable or where theobservable data does not support the majority of the instrument's fairvalue.In forming estimates, the Corporation utilises the most observableinputs available for valuation purposes. If a fair value measurementreflects inputs of different levels within the hierarchy, themeasurement is categorised based upon the lowest level of input that issignificant to the fair value measurement. The valuation ofover-the-counter financial swaps and collars is based on similartransactions observable in active markets or industry standard modelsthat primarily rely on market observable inputs. Substantially all ofthe assumptions for industry standard models are observable in activemarkets throughout the full term of the instrument. These arecategorised as Level 2.The following table presents the Corporation's material financialinstruments measured at fair value for each hierarchy level as of 30September 2012: Total Fair Level 1 Level 2 Level 3 Value US$'000 US$'000 US$'000 US$'000Derivative financial instrument - 8,580 - 8,580assetsLong term liability on Beatrice - - (2,901) (2,901)acquisitionContingent consideration - (4,000) - (4,000)The table below presents the total gain / (loss) on financialinstruments that has been disclosed through the statement of net andcomprehensive income: Three months ended Nine months ended 30 Sept 30 Sept 2012 2011 2012 2011 US$'000 US$'000 US$'000 US$'000Revaluation of forex forward 166 - 707 -contractsRevaluation of gas contract 610 2,315 1,368 3,339Revaluation of other long term (86) 332 (115) 478liabilityRevaluation of commodity hedges (13,617) (2,250) 3,241 (5,477) (12,927) 397 5,201 (1,660)Realised gain/(loss) on 888 - 2,597 (493)commodity hedgesRealised gain on forex forward 50 - 118 -contracts 938 - 2,715 (493)Contingent consideration - - (1,295) -Total gain/(loss) on financial (11,989) 397 6,621 (2,153)instrumentsThe Corporation has identified that it is exposed principally to theseareas of market risk.i) Commodity RiskThe table below presents the total gain / (loss) on commodity hedgesthat has been disclosed through the statement of net and comprehensiveincome: Three months ended 30 Sept 2012 2011 US$'000 US$'000Revaluation of commodity hedges (13,617) (2,250)Realised gain on commodity hedges 888 -Total (loss) on commodity hedges (12,729) (2,250)Commodity price risk related to crude oil prices is the Corporation'smost significant market risk exposure. Crude oil prices and qualitydifferentials are influenced by worldwide factors such as OPEC actions,political events and supply and demand fundamentals. The Corporation isalso exposed to natural gas price movements on uncontracted gas sales.Natural gas prices, in addition to the worldwide factors noted above,can also be influenced by local market conditions. The Corporation'sexpenditures are subject to the effects of inflation, and pricesreceived for the product sold are not readily adjustable to cover anyincrease in expenses from inflation. The Corporation may periodicallyuse different types of derivative instruments to manage its exposure toprice volatility, thus mitigating fluctuations in commodity-relatedcash flows.In Q1 2011 the Corporation purchased a put option with a floor price of$105 / barrel for 804,500 barrels of oil for the period March toDecember 2011. The option delivers a minimum price on the specifiedvolume of oil and allows the Corporation to benefit from any upsideabove $105 / barrel.In Q2 2011 the Corporation purchased a put option with a floor price of$115 / barrel for 300,000 barrels of 2011 production. The optiondelivers a minimum price on the specified volume of oil and allows theCorporation to benefit from any upside above $115 / barrel.In February 2012, the Corporation entered into two swap options: tosell 268,800 bbls of the Corporation's March 2012 -December 2012forecast production at a fixed price of $121.32/bbl; and to sell500,000 bbls of the Corporation's forecast July 2012 - June 2013production at $113.25 per barrel.In April 2012, the Corporation entered into two put options: to sell190,000 bbls of the Corporation's May 2012 - February 2013 forecastproduction at a fixed price of $120.50/bbl and 200,000 bbls at a fixedprice of $120/bbl.In August 2012 the Corporation entered into further derivatives for theperiod October 2012 to December 2013, being swaps of 503,800 bbls ofoil at a weighted average price of $108.67 and put options, at marketprice, for 300,300 bbls of oil at a weighted average oil price floor of$111.34 / bbl.ii) Interest RiskCalculation of interest payments for the Senior Secured Borrowing BaseFacility agreement with BNP Paribas that was signed on 29 June 2012incorporates LIBOR. The Corporation will therefore be exposed tointerest rate risk to the extent that LIBOR may fluctuate. TheCorporation will evaluate its annual forward cash flow requirements ona rolling monthly basis. No funds are currently drawn down under thefacility.iii) Foreign Exchange Rate RiskThe table below presents the total (loss) on foreign exchange financialinstruments that has been disclosed through the statement of net andcomprehensive income: Three months ended 30 Sept 2012 2011 US$'000 US$'000Revaluation of foreign exchange forward contracts 166 -Realised gain on foreign exchange forward contracts 50 -Total gain on forex forward contracts 216 -The Corporation is exposed to foreign exchange risks to the extent ittransacts in various currencies, while measuring and reporting itsresults in US Dollars. Since time passes between the recording of areceivable or payable transaction and its collection or payment, theCorporation is exposed to gains or losses on non USD amounts and onbalance sheet translation of monetary accounts denominated in non USDamounts upon spot rate fluctuations from quarter to quarter.On 29 November 2011, the Corporation entered into a contract withLloyds Banking Group to hedge its forecast British Pounds Sterling 2012operating costs, including general and administrative expenses. Thehedge amounts to $4 million per month (total $48 million) at a US$/GBPrate of no worse than USD1.60/GBP1.0 and a trigger rate of USD1.40/GBP1.00. The contract expires in December 2012.iv) Credit RiskThe Corporation's accounts receivable with customers in the oil and gasindustry are subject to normal industry credit risks and are unsecured.All of its oil production from the Beatrice, Jacky and Athena fields issold to BP Oil International Limited. Oil production from Cook andBroom is sold to Shell Trading International Ltd. Anglia and Topaz gasproduction is currently sold through three contracts to RWE NPower PLCand Hess Energy Gas Power (UK) Ltd. Cook gas is sold to Shell UK Ltdand Esso Exploration & Production UK Ltd.The Corporation assesses partners' credit worthiness before enteringinto farm-in or joint venture agreements. In the past, the Corporationhas not experienced credit loss in the collection of accountsreceivable. As the Corporation's exploration, drilling and developmentactivities expand with existing and new joint venture partners, theCorporation will assess and continuously update its management ofassociated credit risk and related procedures.The Corporation regularly monitors all customer receivable balancesoutstanding in excess of 90 days. As at 30 September 2012 99% ofaccounts receivables are current, being defined as less than 90 days.The Corporation has no allowance for doubtful accounts as at 30September 2012 (31 December 2011: $Nil).The Corporation may be exposed to certain losses in the event thatcounterparties to derivative financial instruments are unable to meetthe terms of the contracts. The Corporation's exposure is limited tothose counterparties holding derivative contracts with positive fairvalues at the reporting date. As at 30 September 2012, exposure is $8.6million (31 December 2011: $Nil).The Corporation also has credit risk arising from cash and cashequivalents held with banks and financial institutions. The maximumcredit exposure associated with financial assets is the carryingvalues.v) Liquidity RiskLiquidity risk includes the risk that as a result of its operationalliquidity requirements the Corporation will not have sufficient fundsto settle a transaction on the due date. The Corporation managesliquidity risk by maintaining adequate cash reserves, bankingfacilities, and by considering medium and future requirements bycontinuously monitoring forecast and actual cash flows. The Corporationconsiders the maturity profiles of its financial assets andliabilities. As at 30 September substantially all accounts payable arecurrent.The following table shows the timing of cash outflows relating to tradeand other payables. Within 1 year 1 to 5 years US$'000 US$'000Accounts payable and accrued liabilities 199,334 -Other long term liabilities - 2,901 199,334 2,90124. DERIVATIVE FINANCIAL INSTRUMENTS 30 Sept 31 December 2012 2011 US$'000 US$'000Oil swaps 2,054 -Put options 6,338 -Embedded derivative - (1,336)Foreign exchange forward contract 188 (510) 8,580 (1,846)In August 2012 the Corporation entered into derivatives for the periodOctober 2012 to December 2013, being swaps of 503,800 bbls of oil at aweighted average price of $108.67 and put options, at market price, for300,300 bbls of oil at a weighted average oil price floor of $111.34 /bbl.In February 2012, the Corporation entered into two swap options: tosell 268,800 bbls of the Corporation's March 2012 -December 2012forecast production at a fixed price of $121.32/bbl; and to sell500,000 bbls of the Corporation's forecast July 2012 - June 2013production at $113.25 per barrel.In April 2012, the Corporation entered into two put options: to sell190,000 bbls of the Corporation's May 2012 - February 2013 forecastproduction at a fixed price of $120.50/bbl and 200,000 bbls at a fixedprice of $120/bbl.In Q1 2011 the Corporation entered into a 'put' option to sell 804,500barrels of the Corporation's 2011 forecast production at $105 / bbl.This is recognised at its fair value in the financial statements. Fairvalue represents the difference between the contract price and theperiod end market price for the contracted volumes.In Q2 2011 the Corporation entered into a further 'put' option to sell300,000 barrels of the Corporation's 2011 forecast production at $115 /bbl. This is recognised at its fair value in the financial statements.Fair value represents the difference between the contract price and theperiod end market price for the contracted volumes.In Q4 2010, the Corporation acquired an embedded derivative within anAnglia gas sales contract. This is recognised at its fair value in thefinancial statements. Fair value represents the difference between thecontract price and the period end market price for the contractedvolumes.25. FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIESFinancial instruments of the Corporation consist mainly of cash andcash equivalents, receivables, payables, loans and financial derivativecontracts, all of which are included in these financial statements. At30 September 2012, the classification of financial instruments and thecarrying amounts reported on the balance sheet and their estimated fairvalues are as follows: 30 September 2012 31 December 2011 US$'000 US$'000Classification Carrying Fair Carrying Fair Amount Value Amount ValueCash and cash equivalents (Held for 56,843 56,843 95,545 95,545trading)Restricted cash 20,560 20,560 16,510 16,510Derivative financial instruments 8,580 8,580 - -(Held for trading)Accounts receivable (Loans and 147,349 147,349 80,960 80,960Receivables)Deposits 6,593 6,593 8,793 8,793Contingent consideration 4,000 4,000 24,580 24,580Derivative financial instruments - - 1,846 1,846(Held for trading)Other long term liabilities 2,901 2,901 2,785 2,785Accounts payable (Other financial 199,334 199,334 102,136 102,136liabilities)26. RELATED PARTY TRANSACTIONSThe consolidated financial statements include the financial statementsof Ithaca Energy Inc and the subsidiaries listed in the followingtable: Country of % equity interest at incorporation 30 Sept 2012 2011Ithaca Energy (UK) Limited Scotland 100% 100%Ithaca Minerals (North Sea) Scotland 100% NilLimitedIthaca Energy (Holdings) Bermuda 100% NilLimitedTransactions between subsidiaries are eliminated on consolidation.The following table provides the total amount of transactions that havebeen entered into with related parties during the nine month periodending 30 September 2012 and 30 September 2011, as well as balanceswith related parties as of 30 September 2012 and 31 December 2011: Sales Purchases Accounts Accounts receivable payable US$'000 US$'000 US$'000 US$'000Burstall Winger 2012 - 138 - -LLP 2011 - 186 - -Loans to related parties Amounts owed from related parties 30 Sept 31 Dec 2012 2011 US$'000 US$'000FPF-1 Limited 2012 21,551 -27. SEASONALITYThe effect of seasonality on the Corporation's financial results forany individual quarter is not material.28. POST BALANCE SHEET EVENTSIn October the Company announced that it had entered into agreementswith Noble Energy Capital Limited (a subsidiary of Noble Energy Inc.,NYSE: NBL) to acquire two wholly owned UK subsidiary companies thatwill hold non-operated interests in UK North Sea producing fields; a12.885% interest in the Cook field and a 14% interest in the MacCullochfield.Completion of the transactions is anticipated in early 2013 and issubject to normal regulatory and joint venture approvals, includingreaching agreement in respect of decommissioning cost security.The Company anticipates that the resulting net cash considerationpayable at completion will be under $30 million, based on the January1, 2012 effective date and assuming completion occurs in early 2013. 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