EX-99 2 financialstatements.htm 2Q INTERIM FINANCIAL STATEMENTS Exploration and Operations Review



























INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD ENDING JUNE 30, 2006






Talisman Energy Inc.

Consolidated Balance Sheets

(unaudited)

    
  

June 30

 December 31

(millions of Canadian dollars)

 

2006

2005

Assets

  

(restated -

Current

  

see note 2)

   Cash and cash equivalents

 

132

130

   Accounts receivable

 

1,103

1,255

   Inventories

 

197

170

   Prepaid expenses

 

26

20

   Assets of discontinued operations (note 2)

 

28

56

  

1,486

1,631

    

Accrued employee pension benefit asset

 

55

57

Other assets

 

82

74

Goodwill (note 3)

 

1,507

1,474

Property, plant and equipment

 

15,638

14,565

Assets of discontinued operations (note 2)

 

377

538

  

17,659

16,708

Total assets

 

19,145

18,339

    
    

Liabilities

   

Current

   

   Accounts payable and accrued liabilities (notes 4, 6 and 7)

2,103

2,352

   Income and other taxes payable

 

647

649

   Current portion of long-term debt (note 8)

 

403

-  

   Liabilities of discontinued operations (note 2)

35

31

  

3,188

3,032

    

Deferred credits

 

72

74

Asset retirement obligations (note 4)

 

1,331

1,276

Other long-term obligations (notes 6 and 7)

 

136

217

Long-term debt (note 8)

 

3,552

4,263

Future income taxes

 

4,070

3,490

Liabilities of discontinued operations (note 2)

 

165

192

  

9,326

9,512

    

Non-controlling interest

 

-  

66

Contingencies and commitments (notes 9 and 12)

  

Shareholders' equity

   

Common shares (note 5)

 

2,606

2,609

Contributed surplus

 

69

69

Cumulative foreign currency translation

 

(114)

(265)

Retained earnings

 

4,070

3,316

  

6,631

5,729

Total liabilities and shareholders' equity

 

19,145

18,339

    

See accompanying notes.

   





Talisman Energy Inc.

Consolidated Statements of Income

(unaudited)

      
 

Three months ended

 

Six months ended

(millions of Canadian dollars

June 30

 

June 30

 except per share amounts)

2006

2005

 

2006

2005

  

(restated -

  

(restated -

Revenue

 

see note 2)

  

see note 2)

   Gross sales

2,396

2,027

 

5,180

3,951

   Hedging (gain) loss

(15)

18

 

(25)

33

   Gross sales, net of hedging

2,411

2,009

 

5,205

3,918

   Less royalties

459

346

 

912

659

   Net sales

1,952

1,663

 

4,293

3,259

   Other

49

38

 

93

74

Total revenue

2,001

1,701

 

4,386

3,333

      

Expenses

     

   Operating

450

348

 

872

662

   Transportation

48

43

 

109

94

   General and administrative

55

52

 

115

102

   Depreciation, depletion and amortization

505

427

 

1,043

855

   Dry hole

19

51

 

83

97

   Exploration

53

57

 

117

100

   Interest on long-term debt

43

41

 

87

83

   Stock-based compensation (note 6)

(46)

111

 

-  

277

   Other

48

(19)

 

72

5

Total expenses

1,175

1,111

 

2,498

2,275

Income from continuing operations before taxes

826

590

 

1,888

1,058

Taxes

     

   Current income tax

183

209

 

510

391

   Future income tax

(6)

23

 

461

22

   Petroleum revenue tax

65

32

 

153

74

 

242

264

 

1,124

487

Net income from continuing operations

584

326

 

764

571

Net income from discontinued operations (note 2)

102

14

 

119

27

Net income

686

340

 

883

598

      

Per common share (Canadian dollars)

     

   Net income from continuing operations

0.53

0.30

 

0.70

0.52

   Diluted net income from continuing operations

0.52

0.29

 

0.68

0.50

   Net income from discontinued operations

0.09

0.01

 

0.10

0.02

   Diluted net income from discontinued operations

0.09

0.01

 

0.10

0.03

   Net income

0.62

0.31

 

0.80

0.54

   Diluted net income

0.61

0.30

 

0.78

0.53

Average number of common shares outstanding (millions)

1,098

1,102

 

1,098

1,108

Diluted number of common shares outstanding (millions)

1,127

1,125

 

1,129

1,132

      

See accompanying notes.

     
      



Consolidated Statements of Retained Earnings

(unaudited)

      
 

Three months ended

 

Six months ended

 

June 30

 

June 30

(millions of Canadian dollars)

2006

2005

 

2006

2005

      

Retained earnings, beginning of period

3,513

2,186

 

3,316

2,170

Net income

686

340

 

883

598

Common share dividends

(82)

(62)

 

(82)

(62)

Purchase of common shares (note 5)

(47)

-  

 

(47)

(242)

Retained earnings, end of period

4,070

2,464

 

4,070

2,464

      

See accompanying notes.

     





Talisman Energy Inc.

Consolidated Statements of Cash Flows

(unaudited)

      
 

Three months ended

 

Six months ended

 

June 30

 

June 30

(millions of Canadian dollars)

2006

2005

 

2006

2005

  

(restated -

  

(restated -

Operating

 

see note 2)

  

see note 2)

Net income from continuing operations

584

326

 

764

571

Items not involving cash (note 11)

448

578

 

1,492

1,219

Exploration

53

57

 

117

100

 

1,085

961

 

2,373

1,890

Changes in non-cash working capital

(164)

88

 

(92)

-  

Cash provided by continued operations

921

1,049

 

2,281

1,890

Cash provided by discontinued operations

57

32

 

113

63

Cash provided by operating activities

978

1,081

 

2,394

1,953

Investing

     

Corporate acquisitions

-  

-  

 

(66)

-  

Capital expenditures

     

    Exploration, development and corporate

(1,012)

(670)

 

(2,224)

(1,423)

    Acquisitions

-  

(65)

 

(1)

(301)

Proceeds of resource property dispositions

-  

15

 

2

16

Changes in non-cash working capital

(151)

(76)

 

29

(52)

Discontinued operations

226

(1)

 

226

(1)

Cash used in investing activities

(937)

(797)

 

(2,034)

(1,761)

Financing

     

Long-term debt repaid

(773)

(937)

 

(3,448)

(1,009)

Long-term debt issued

568

790

 

3,250

1,281

Common shares issued (purchased) (note 5)

(54)

1

 

(53)

(298)

Common share dividends

(82)

(62)

 

(82)

(62)

Deferred credits and other

(7)

4

 

(34)

8

Changes in non-cash working capital

-  

(1)

 

-  

(3)

Cash used in financing activities

(348)

(205)

 

(367)

(83)

Effect of translation on foreign currency cash and cash equivalents

(5)

4

 

9

2

Net (decrease) increase in cash and cash equivalents

(312)

83

 

2

111

Cash and cash equivalents, beginning of period

444

66

 

130

38

Cash and cash equivalents, end of period

132

149

 

132

149

      

See accompanying notes.

     



NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(tabular amounts in millions of Canadian dollars (“$”) except as noted)




The Interim Consolidated Financial Statements of Talisman Energy Inc. (“Talisman” or the “Company”) have been prepared by management in accordance with Canadian generally accepted accounting principles.  Certain information and disclosures normally required to be included in notes to Annual Consolidated Financial Statements have been condensed or omitted.  The Interim Consolidated Financial Statements should be read in conjunction with the audited Annual Consolidated Financial Statements and the notes thereto in Talisman’s Annual Report Financial Review for the year ended December 31, 2005.


1.  Significant Accounting Policies


The Interim Consolidated Financial Statements have been prepared following the same accounting policies and methods of computation as the Consolidated Financial Statements for the year ended December 31, 2005, except for the following:


During the first quarter of 2006, changes were made to the reporting segments, with reclassifications made to the corresponding comparative period.  The United Kingdom and Scandinavia, which were reported in aggregate as the North Sea in 2005, are reported separately in 2006.  The reporting segment entitled “Other” for 2006 includes North Africa (Algeria and Tunisia) and Trinidad and Tobago, which were reported separately in 2005.


During the second quarter of 2006, the Company made changes to the North America reporting segment, to include activities in Alaska, which previously had been included in the “Other” reporting segment.  Reclassifications have been made for all corresponding reported periods.


All references to common share data have been retroactively restated to reflect the impact of the Company’s three-for-one share split in May 2006.  See note 5.


2.  Discontinued Operations


United Kingdom

During the second quarter of 2006, the Company entered into agreements to dispose of certain non-core oil and gas producing assets in the United Kingdom for proceeds of US$414 million.  Operating results from these assets are included in net income from discontinued operations.  These agreements are expected to close in the fourth quarter of 2006.  Assets covered by these agreements are reported as assets of discontinued operations on the Consolidated Balance Sheets.  Gains on dispositions of assets will be recorded in net income from discontinued operations, when the transactions close later in 2006.


North America

During the second quarter of 2006, the Company entered into agreements to dispose of certain non-core oil and gas producing assets in Western Canada for proceeds of $379 million.  Operating results from these assets are included in net income from discontinued operations.  All but three of these agreements closed as of June 30, 2006, with the resulting gain on disposal of assets of $78 million included in net income from discontinued operations.  The three remaining agreements closed in July of 2006 for proceeds of approximately $145 million and a resulting gain on disposition of assets of approximately $65 million, net of tax, which will be recorded in the third quarter of 2006. Assets covered by all agreements not closed as at June 30, 2006 are reported as assets of discontinued operations on the Consolidated Balance Sheets.


Comparative periods for both North America and United Kingdom segments have been restated.


The results for discontinued operations are as follows:

  

For the three months ended June 30,

  

North America

 

United Kingdom

 

Total

 

 

2006

 

2005

 

2006

 

2005

 

2006

 

2005

    

 

   

 

    

Revenues, net of royalties

$

21

$

 29

$

64

$

18

$

85

$

47

Expenses

   

 

   

 

    

Operating, marketing and general

 

6

 

 7

 

7

 

 4

 

13

 

11

Interest

 

2

 

-

 

3

 

-

 

5

 

-

Depreciation, depletion and amortization

 

6

 

 8

 

15

 

 4

 

21

 

12

Income from discontinued operations before income taxes

$

7

$

14

$

39

$

10

$

46

$

24

Taxes

 

2

 

5

 

20

 

5

 

22

 

10

Gain on disposition, net of tax of $33

 

78

 

-

 

-

 

-

 

78

 

-

Net income from discontinued operations

$

83

$

9

$

19

$

5

$

102

$

14


  

For the six months ended June 30,

  

North America

 

United Kingdom

 

Total

 

 

2006

 

2005

 

2006

 

2005

 

2006

 

2005

    

 

   

 

    

Revenues, net of royalties

$

47

$

54

$

124

$

37

$

171

$

91

Expenses

   

 

   

 

    

Operating, marketing and general

 

12

 

12

 

17

 

9

 

29

 

21

Interest

 

6

 

-

 

7

 

-

 

13

 

-

Depreciation, depletion and amortization

 

13

 

16

 

37

 

9

 

50

 

25

Income from discontinued operations before income taxes

$

16

$

26

$

63

$

19

$

79

$

45

Taxes

 

5

 

9

 

33

 

9

 

38

 

18

Gain on disposition, net of tax of $33

 

78

 

-

 

-

 

-

 

78

 

-

Net income from discontinued operations

$

89

$

17

$

30

$

10

$

119

$

27


The impact of the discontinued operations in the Consolidated Balance Sheet is as follows:

   

 As at June 30, 2006

 

 As at December 31, 2005

   

North

 

United

 

 

 

North

 

United

 

 

   

America

 

Kingdom

 

Total

 

America

 

Kingdom

 

Total

Assets

      

 

      

Current assets

 

$

3

$

25

$

28 

$

14

$

42

$

56

Property, plant and equipment, net

  

44

 

308

 

 352

 

174

 

334

 

508

Goodwill

  

2

 

23

 

25

 

7

 

23

 

30

Total assets

 

$

 49

$

356 

$

 405

$

 195

$

 399

$

 594

       

 

      

Liabilities

      

 

      

Current liabilities

 

$

1

$

34

$

35

$

5

$

26

$

31

Asset retirement obligation

  

4

 

29

 

33

 

17

 

27

 

44

Future income taxes

  

-

 

126

 

 126

 

-

 

142

 

142

Other long-term liabilities

  

-

 

6

 

6

 

-

 

6

 

6

Total liabilities

 

$

 5

$

195

$

200

$

22

$

 201

$

 223

       

 

      

Net assets of Discontinued Operations

 

$

 44

$

161

$

 205

$

 173

$

 198

$

371


3.  Goodwill


Changes in carrying amount of the Company’s goodwill are as follows:


 

  6 months ended

June 30, 2006

               12 months ended

December 31, 2005

Opening balance

$1,474

$459

Acquired during the period

-

1,075

Foreign currency translation effect

33

(60)

Closing balance

$1,507

$1,474


In January of 2006, the Company completed its acquisition of the remaining 2% of the voting common shares of Paladin Resources plc (Paladin), an oil and gas exploration and development company, for a total of 100%.


During the second quarter of 2006, the Company reached agreements to sell assets in the UK and North America, and consequently $25 million (December 31, 2005 - $30 million) has been reclassified to discontinued operations.


4.  Asset Retirement Obligations (ARO)


Changes in carrying amounts of the Company’s asset retirement obligations associated with our property, plant and equipment are as follows:


 

    6 months ended

June 30, 2006

 12 months ended

December 31, 2005

ARO liability, beginning of period1

$1,304

$1,261

Liabilities incurred during period

-

275

Liabilities settled during period

(19)

(32)

Accretion expense

36

74

Revisions in estimated future cash flows

11

(118)

Foreign currency translation

27

(156)

ARO liability, end of period1

$1,359

$1,304

1   Included in June 30, 2006 and December 31, 2005 liabilities are $28 million of short-term reclamation costs recorded in accounts payable on the balance sheet for a net long-term ARO liability of $1,331 and $1,276 respectively.


During the second quarter of 2006, the Company reached agreements to sell assets in the UK and North America, and consequently $33 million (December 31, 2005 - $44 million) has been reclassified to long-term liabilities of discontinued operations.


5.  Share Capital


In May 2006 the Company implemented a three-for-one share split of its issued and outstanding common shares. All references to net income per share, diluted net income per share, weighted-average number of common shares outstanding, common shares issued and outstanding and options and cash units granted, exercised and forfeited have been retroactively restated to reflect the impact of the Company’s three-for-one share split.


Talisman’s authorized share capital consists of an unlimited number of common shares without nominal or par value and first and second preferred shares.  No preferred shares have been issued.




Continuity of common shares

6 months ended

June 30, 2006

12 months ended

December 31, 2005

 

Shares

Amount

Shares

Amount

Balance, beginning of period

1,098,783,945

$2,609

1,125,555,870

$2,666

Issued on exercise of options

192,675

4

495,375

8

Purchased during the period

(3,000,000)

(7)

(27,267,300)

(65)

Balance, end of period

1,095,976,620

$2,606

1,098,783,945

$2,609

Subsequent to June 30, 2006, 65,400 stock options were exercised for shares resulting in 1,096,042,020 common shares outstanding as at July 24, 2006.


Pursuant to a normal course issuer bid renewed in March 2006, Talisman may repurchase up to 54,940,200 of its common shares representing 5% of the outstanding common shares of the Company at the time the normal course issuer bid was renewed (on a post share split basis).  During the first six months of 2006 the Company repurchased 3,000,000 common shares for $54 million (2005 – 24,049,200 common shares for $299 million). All 3,000,000 common share repurchases in the 2006 have been made under the normal course issuer bid renewed in March 2006.


6.  Stock Option Plans



Continuity of stock options

6 months ended              

June 30, 2006

12 months ended              

December 31, 2005

 

Number of

Weighted-average

Number of

Weighted-average

 

Options

exercise price ($)

options

exercise price ($)

Outstanding, beginning of period

64,485,717

8.71

62,365,125

6.53

   Granted during the period

9,744,795

19.70

17,763,390

14.05

   Exercised for common shares

(192,675)

6.57

(495,375)

5.52

   Exercised for cash payment

(6,131,906)

6.14

(14,496,327)

5.89

   Forfeited

(615,360)

14.12

(651,096)

10.29

Outstanding, end of period

67,290,571

10.50

64,485,717

8.71

Exercisable, end of period

30,408,961

6.32

17,621,862

5.79

During July of 2006, 452,340 stock options were exercised for cash, 65,400 stock options were exercised for shares, 527,990 stock options were granted and 56,325 were cancelled, with 67,244,496 stock options outstanding at July 24, 2006.


All options issued by the Company permit the holder to purchase one common share of the Company at the stated exercise price or to receive a cash payment equal to the appreciated value of the stock option.



NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(tabular amounts in millions of Canadian dollars (“$”) except as noted)




Cash Unit Plans

In addition to the Company’s stock option plans Talisman’s subsidiaries issue stock appreciation rights under the cash unit plans. Cash units are similar to stock options except that the holder does not have a right to purchase the underlying share of the Company.


Continuity of cash units

6 months ended              

June 30, 2006

12 months ended              

December 31, 2005

 

Number

Weighted-average

Number

Weighted-average

 

of units

exercise price ($)

of units

exercise price ($)

Outstanding, beginning of period

7,351,065

9.89

4,579,920

7.11

   Granted during the period

1,933,515

19.70

2,991,930

14.07

   Exercised

(696,372)

6.60

(29,700)

6.60

   Forfeited

(24,675)

13.32

(191,085)

9.21

Outstanding, end of period

8,563,533

12.37

7,351,065

9.89

Exercisable, end of period

2,662,473

6.79

-

-


Subsequent to June 30, 2006, 132,900 cash units were granted, and 53,575 cash units were exercised, with 8,642,858 cash units outstanding at July 24, 2006.

Stock-based Compensation

For the three months ended June 30, 2006 the Company recorded stock-based compensation recovery of $46 million (2005 - $111 million expense) relating to its stock option and cash unit plans. This $46 million balance is the aggregate of the $40 million cash payment to employees in settlement for fully accrued option liabilities on options exercised, offset by a non-cash mark-to market adjustment of $(86) million resulting from the 6% decrease in the Company’s share price.  For the three months ended June 30, 2005 the non-cash expense of $79 million was primarily the result of the 11% increase in the Company’s share price during the period. In addition the Company reduced its capitalized stock-based compensation by $1 million (2005 - $nil).

For the six months ended June 30, 2006 the Company recorded stock-based compensation expense of $nil (2005 - $277 million) relating to its stock option and cash unit plans. This $nil balance is the aggregate of the $108 million cash payment to employees in settlement for fully accrued option liabilities on options exercised, offset by a non-cash mark-to market adjustment of $(108) million resulting from the 5% decrease in the Company’s share price. For the six months ended June 30, 2005 the non-cash expense of $210 million was primarily the result of the 42% increase in the Company’s share price during the period. In addition the Company reduced its capitalized stock based compensation by $2 million (2005 - $nil).

 

 Three months ended June 30

Six  months ended June 30

 

2006

2005

2006

2005

 Average exercise price

$21.80

$15.17

$21.97

$14.14

 Average grant price

$6.36

$6.11

$6.19

$5.87

 Average gain per exercise

$15.44

$9.06

$15.78

$8.27

 Number of options and cash units exercised

2,106,788

3,468,690

6,828,278

8,093,916

 Cash expense ($millions)

40

32

108

67


Of the combined mark-to-market liability for stock option and cash unit plans of $600 million as at June 30, 2006 (December 31, 2005 - $713 million), $576 million (December 31, 2005 - $630 million) is included in accounts payable and accrued liabilities.

7. Other Long-Term Obligations


The balance in other long-term obligations consists of the following:


 

June 30, 2006

December 31, 2005

Pensions and other post retirement benefits

43

40

Mark-to-market liability for stock-based compensation

24

83

Fair value of commodity price derivatives acquired1

22

47

Discounted obligations on capital leases2

37

40

Other

10

7

Closing balance, end of period

136

217

1

The fair value of derivatives acquired is amortized over the remaining life of the underlying derivative contracts. In addition to the balance in other long-term obligations, $55 million (December 31, 2005 - $84 million) is included in accounts payable and accrued liabilities.

2

Of the total discounted liability of $42 million (December 31, 2005 - $46 million), $5 million (December 31, 2005 - $6 million) is included in accounts payable and accrued liabilities.


8. Long-Term Debt

 

June 30, 2006

December 31, 2005

Bank Credit Facilities


338


43

Acquisition Credit Facility (US$ denominated) 1


403


1,848

Debentures and Notes (unsecured)


 


 

    US$ denominated (US$1,919 million, 2005 – US$1,125 million) 2


2,140


1,312

    Canadian $ denominated


559


559

    £ denominated (£250 million)


515


501

 


3,955


4,263

Less current portion


403


-

 

$

3,552

$

4,263

1

At June 30, 2006 the Acquisition Credit Facility had a balance of US$361 million and has been reclassified to current portion of long-term debt, at December 31, 2005 the Facility had balances of, £183 million and US$1,272 million.

2

The 2006 balance includes $350 million CDN debt that has been swapped to US$304 million.


During the first quarter the Company completed a US$500 million offering of 5.85% notes due February 1, 2037 and a $350 million offering of 4.44% notes due January 27, 2011.  Interest on both types of notes is payable semi-annually. The proceeds were used to repay a portion of the outstanding acquisition credit facility. The $350 million notes were immediately swapped into the Company’s functional currency (USD) as described in note 9.


During the first quarter, the Paladin US$600 million senior credit facility was repaid and cancelled.


During the second quarter, the Company entered into a new revolving credit facility with Export Development Corporation in the amount of US$100 million. The Company also repaid $10 million of its US$ denominated notes.




NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(tabular amounts in millions of Canadian dollars (“$”) except as noted)




Under the acquisition credit facility agreement, all proceeds received above an aggregate of $100 million on property dispositions must be used towards repayment of the facility.  Consequently, the balance outstanding under the acquisition credit facility as at June 30, 2006, has been reported as a current liability.


9. Financial Instruments and Physical Commodity Contracts


Commodity based sales contracts

The Company’s outstanding commodity price derivative contracts have been designated as hedges of the Company’s anticipated future commodity sales. The following tables summarize the commodity price derivative contracts and fixed price sales contracts outstanding at June 30, 2006:

Crude oil derivatives

     

Fixed price swaps

Hedge type

Term

(bbls/d)

US$/bbl

 

Dated Brent oil index

Cash flow

 2006 Jul-Dec

6,522

32.32

 

Dated Brent oil index

Cash flow

 2007 Jan-Jun

5,801

41.02

 

Dated Brent oil index

Cash flow

 2007 Jul-Dec

5,707

40.31

 

Dated Brent oil index

Cash flow

 2008 Jan-Jun

2,473

59.63

 

Dated Brent oil index

Cash flow

 2008 Jul-Dec

815

60.00

 
      

Natural gas derivatives

     

Forward sales

Hedge type

Term

mcf/d

£/mcf

 

Fixed price swaps (IPE/Heren index)

Cash flow

 2006 Jul-Sep

2,419

3.22

 
      

Two-way collars

Hedge type

Term

mcf/d

Floor

Ceiling

CDN$/mcf

CDN$/mcf

Two-way collars (AECO index)

Cash flow

2006 July-Oct

64,220

10.47

13.05

Two-way collars (AECO index)

Cash flow

2006 Nov-Mar 07

59,633

11.41

14.24

Two-way collars (AECO index)

Cash flow

2007 Apr-Oct

41,284

8.81

11.53


Physical natural gas contracts (North America)

      

Fixed price sales

2006

2007

2008

2009

2010

2011

 Volumes                         (mcf/d)

14,650

12,800

3,552

3,552

3,552

3,552

 Weighted-average price  ($/mcf)

3.78

3.89

3.17

3.26

3.35

3.46


During the first quarter of 2006, the Company settled fixed price oil swaps for a notional 820 bbls/d covering the period April 1, 2006 to December 31, 2007 for a loss of $5 million. These contracts were designated as a hedge of anticipated future oil sales and consequently the loss has been deferred and will be recognized over the period ending December 31, 2007.

 



NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(tabular amounts in millions of Canadian dollars (“$”) except as noted)




Interest rate and foreign exchange derivative contracts

In conjunction with the C$350 million notes issued during the first quarter, the Company entered into a cross currency interest rate swap in order to hedge the foreign exchange exposure on this Canadian dollar denominated liability. As a result, the Company is effectively paying interest semi-annually at a rate of 5.05% on a notional amount of US$304 million.

10. Employee Benefits


The Company’s net pension benefit plan expense is as follows:

 

Three months ended

June 30

Six months ended

June 30

 

2006

2005

2006

2005

Current service cost

3

2

5

5

Interest cost

2

3

5

5

Expected return on assets

(3)

(3)

(6)

(6)

Expected net actuarial loss

-

1

1

2

Amortization of net transitional asset

-

(1)

-

(1)

Defined contribution expense

3

2

5

4

 

5

4

10

9


For the six months ended June 30, 2006, there were no contributions to the defined benefit pension plans.

11. Selected Cash Flow Information

 

Three months ended

June 30

Six months ended

June 30

 

2006

2005

2006

2005

Net income from continuing operations

584

326

764

571

Items not involving cash

    

   Depreciation, depletion and amortization

505

427

1,043

855

   Property impairments

-

3

-

26

   Dry hole

19

51

83

97

   Net gain on asset disposals

6

(2)

4

(3)

   Stock-based (recovery) compensation (note 6)

(86)

79

(108)

210

   Future taxes and deferred petroleum revenue tax

(14)

21

452

29

   Other

18

(1)

18

5

 

448

578

1,492

1,219

Exploration

53

57

117

100

 

1,085

961

2,373

1,890

Changes in non-cash working capital

(164)

88

(92)

-

Cash provided by continuing operations

921

1,049

2,281

1,890

Cash provided by discontinued operations

57

32

113

63

Cash provided by operating activities

978

1,081

2,349

1,953




NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(tabular amounts in millions of Canadian dollars (“$”) except as noted)




The cash interest and taxes paid were as follows:

 

Three months ended

June 30

Six months ended

June 30

 

2006

2005

2006

2005

Interest paid

44

42

74

68

Income taxes paid

307

156

549

330


12.  Contingencies and commitments


Talisman continues to be subject to a lawsuit brought by the Presbyterian Church of Sudan and others commenced in November 2001 under the Alien Tort Claims Act in the United States District Court for the Southern District of New York (the Court). The lawsuit alleges that the Company conspired with, or aided and abetted, the Government of Sudan to commit violations of international law in connection with the Company's now disposed of interest in oil operations in Sudan. The plaintiffs have twice attempted to certify the lawsuit as a class action. In March 2005 and in September 2005, the Court rejected the plaintiffs' effort to certify two different classes (or groups) of plaintiffs. On July 19, 2006, the Second Circuit Court of Appeals denied the plaintiffs' request to appeal the Court's refusal to certify the lawsuit as a class action. On April 28, 2006 the Company filed a Motion for Summary Judgment, requesting the Court to dismiss the lawsuit or, alternatively, to restrict the plaintiffs' claims to factual disputes supported by admissible evidence. Talisman believes the lawsuit is entirely without merit and is continuing to vigorously defend itself. Talisman does not expect the lawsuit to have a material adverse effect on it.



















Talisman Energy Inc.

Consolidated Financial Ratios

June 30, 2006

    
    

The following financial ratio is provided in connection with the Company's shelf prospectus, filed with

 

Canadian and US securities regulatory authorities, and is based on the Company's Consolidated

 

Financial Statements that are prepared in accordance with accounting principles generally accepted in Canada.

    
    

The interest coverage ratio is for the 12 month period ended June 30, 2006.

  
    

Interest coverage (times)

  

    Income (1)

 

17.21

    

(1) Net income plus income taxes and interest expense; divided by the sum of interest expense and capitalized interest.