SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
Form 10-Q
x Quarterly Report pursuant to Section 13 or 15(d)of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2003
OR
o Transition Report pursuant to Section 13 or 15(d)of the Securities Exchange Act of 1934For the transition period from to
Commission file number 0-12014
Imperial Oil Limited(Exact name of registrant as specified in its charter)
Registrant’s telephone number, including area code: 1-800-567-3776
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES þ NO o
The number of common shares outstanding, as of June 30, 2003, was 372,066,734.
IMPERIAL OIL LIMITED
INDEX
In this report all dollar amounts are expressed in Canadian dollars. This report should be read in conjunction with the company’s Annual Report on Form 10-K for the year ended December 31, 2002, and Form 10-Q for the quarter ended March 31, 2003.
Statements in this report regarding future events or conditions are forward-looking statements. Actual results could differ materially due to the impact of market conditions, changes in law or governmental policy, changes in operating conditions and costs, changes in project schedules, operating performance, demand for oil and gas, commercial negotiations or other technical and economic factors.
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PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED STATEMENT OF EARNINGS(unaudited)
CONSOLIDATED STATEMENT OF RETAINED EARNINGS(unaudited)
The notes to the financial statements are part of these financial statements.
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CONSOLIDATED STATEMENT OF CASH FLOWS(unaudited)
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CONSOLIDATED BALANCE SHEET(unaudited)
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(unaudited)
In the opinion of the management, the accompanying unaudited consolidated financial statements reflect all known accruals and adjustments necessary for a fair presentation of the financial position of the company as at June 30, 2003, and December 31, 2002, and the results of operations and changes in cash flows for the six months ending June 30, 2003, and 2002. All such adjustments are of a normal recurring nature.
The results for the six months ending June 30, 2003, are not necessarily indicative of the operations to be expected for the full year.
All figures are in millions of Canadian dollars unless otherwise stated.
1. Adjustments under United States GAAP
The financial statements of the company have been prepared in accordance with generally accepted accounting principles (GAAP) in Canada. These principles conform in all material respects to those in the United States except for the following.
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1. Adjustments under United States GAAP (continued)
The adjustments, on the previous page, under United States GAAP result in changes to the Consolidated Balance Sheet of the company as follows.
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(a) Earnings per share — basic and diluted (dollars)
(b) Impact of accounting principles
An explanation of these items is found on pages 17 to 20 of the company’s annual report on Form 10-K for the year ended December 31, 2002.
(c) Accounting change
As of January 1, 2003, the company adopted Financial Accounting Standards Board (FASB) Statements of Financial Accounting Standards No.143 (SFAS No.143), “Accounting for Asset Retirement Obligations”. The Canadian Institute of Chartered Accountants (CICA) adopted a similar standard that harmonizes Canadian GAAP with U.S. GAAP. Disclosures required by the new U.S. and Canadian accounting standards are described in note 3.
In December 2002, the FASB issued SFAS No.148, “Accounting for Stock-Based Compensation - Transition and Disclosure — an amendment of FASB Statement No.123”. The standard provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock based employee compensation. It also requires more prominent disclosures in the financial statements about the method of accounting for stock based employee compensation and the effect of the method used in reported results. Effective January 1, 2003, the company adopted for all stock based compensation granted after that date the fair value based recognition provisions as prescribed by SFAS No.123 “Accounting for Stock Based Compensation” and complied with the disclosure requirements under SFAS No.148. The company has not issued any new stock based employee compensation to its employees in the first half of 2003.
(d) The company makes limited use of derivatives. There were no significant derivatives outstanding at January 1 or June 30, 2003, nor were any significant derivatives undertaken during the first six months of 2003.
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2. Business segments
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2. Business segments (continued)
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3. Reporting change
The new CICA standard dealing with accounting for asset retirement obligations changes the method of accruing for certain site-restoration costs. Under the new standard, the fair values of asset retirement obligations are recorded as liabilities on a discounted basis when they are incurred, which is typically at the time the related assets are installed. Amounts recorded for the related assets are increased by the amount of these obligations. Over time the liabilities will be accreted for the change in their present value and the initial capitalized costs will be depreciated over the useful lives of the related assets. There are no asset retirement liabilities set up for those assets which have an indeterminate useful life.
Estimated cash flows have been discounted at six percent. Implementation of the new standard has reduced site-restoration liabilities by $4 million to $506 million as of June 30, 2003. The total undiscounted amount of the estimated cash flows required to settle the obligations is $895 million. Payments to settle the obligations occur on an ongoing basis and will continue over the lives of the operating assets, which can exceed more than 25 years. This change in accounting standard has no impact on the cash flow profile of the company. The new standard has been applied retroactively, and the financial statements of prior periods have been restated.
The impact of adopting the new accounting for asset retirement obligations standard on the consolidated balance sheet and statement of earnings is:
Change in consolidated balance sheet
Change in consolidated statement of earnings
4. Financing costs
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5. Other long-term obligations
6. Incentive compensation programs
The company accounts for its incentive compensation programs, except for the incentive stock option plan, by using the fair-value-based method. Under this method, compensation expense related to the units of these programs is recorded in the consolidated statement of earnings over the vesting period. The company accounts for its incentive stock option plan by using the intrinsic-value-based method and does not recognize compensation expense on the issuance of stock options because the exercise price is equal to the market value at the date of grant. If the fair-value-based method of accounting had been adopted to account for the incentive stock option plan, the impact on net earnings and earnings per share would have been negligible.
The company expects to purchase shares on the market to fully offset the dilutive effects from the exercise of incentive stock options. The company does not plan to issue stock options in the future.
7. Income taxes
During the second quarter of 2003, tax rate reduction enacted by the Federal government and the provincial government of Alberta and settlement of various tax matters benefited results, mainly in the resources segment, by $109 million. In the second quarter of 2002, tax settlement and income tax rate changes benefited earnings by $53 million.
8. Long-term debt
(a) During the second quarter of 2003, the company redeemed $400 million (U.S.) of its variable-rate U.S.-dollar debt for $546 million (Cdn) and retired the remaining $200 million (U.S.) for $272 million (Cdn) on July 11, 2003. To replace the debt repaid in the second quarter, the company borrowed $546 million (Cdn) variable-rate loans from Exxon Overseas Corporation at interest equivalent to Canadian market rates.
(b) The $500 million (Cdn) medium-term notes’ initial maturity date is May 7, 2004. The company intends to refinance these notes beyond the initial maturity date under the existing one-billion-dollar Medium Term Notes Program.
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9. Common shares
In 1995 through 2002, the company purchased shares under eight 12-month normal course share purchase programs, as well as an auction tender. On June 23, 2003, another 12-month normal course program was implemented with an allowable purchase up to 18.6 million shares (five percent of the total on June 19, 2003), less any shares purchased by the employee savings plan and company pension fund. The results of these activities are as shown below:
Exxon Mobil Corporation’s participation in the above maintained its ownership interest in Imperial at 69.6 percent.
The excess of the purchase cost over the stated value of shares purchased has been recorded as a distribution of retained earnings.
There is no significant dilutive effect on basic net earnings per share from the outstanding incentive stock options described in note 6.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
OPERATING RESULTS
The company’s net earnings for the second quarter of 2003 were $514 million or $1.38 a share, compared with $310 million or $0.82 a share for the same quarter last year. Net earnings for the first six months of 2003 were $1,052 million or $2.80 a share, the highest six-month earnings on record, versus $420 million or $1.11 a share for the first half of 2002. Second quarter earnings increased primarily as a result of higher margins for petroleum products, higher prices for natural gas and increased production of crude oil. Earnings for the first six months increased mainly because of higher prices for natural gas and crude oil, and higher margins for petroleum products.
Benefits from income tax rate reductions and favourable foreign exchange effects on the company’s U.S.-dollar-denominated debt also contributed positively to both the second quarter and year-to-date earnings. However, the foreign exchange benefits were more than offset in both periods by the negative impact of the higher Canadian dollar on resource and product prices.
Total revenues were $4,510 million in the second quarter and $9,988 million in the first half of 2003, versus $4,195 million and $7,680 million in the same periods last year.
Natural resources
During the second quarter of 2003, net earnings from natural resources were $351 million compared with $251 million in the same period last year. Earnings increased due to higher prices for natural gas and higher Cold Lake bitumen and Syncrude volumes partly offset by lower natural gas volumes. Reduced federal and provincial income tax rates and settlement of various tax matters in the second quarter also contributed favourably to earnings. Year-to-date net earnings were a record $690 million versus $395 million during the same six-month period last year. Higher prices for crude oil and natural gas and higher production volumes of Cold Lake bitumen were the main reasons for the increased earnings in the first half of 2003 compared with last year.
Prices for natural gas averaged $6.80 a thousand cubic feet in the second quarter and $7.45 a thousand cubic feet in the first half of 2003, compared with $4.22 a thousand cubic feet and $3.73 a thousand cubic feet during the corresponding periods last year. Prices for conventional crude oil averaged $38.53 a barrel in the second quarter and $43.20 a barrel in the first six months this year, compared with $36.93 a barrel and $33.68 a barrel, respectively, in the second quarter and first half of 2002. Average prices for Cold Lake bitumen in the second quarter of 2003 were about 10 percent lower than last year’s second quarter prices, but bitumen prices for the first six months of 2003 averaged about 15 percent higher than the prices of the same period last year.
Gross production of natural gas during the second quarter of 2003 was 489 million cubic feet a day, compared with 532 million cubic feet a day during the same period last year. During the first half of the year, gross production was 488 million cubic feet a day, versus 544 million cubic feet a day in the first six months of 2002. The decrease was mainly due to reservoir decline. At the end of June, construction of facilities to increase production from Wizard Lake was nearing completion, with production expected to begin in the third quarter.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued .....)
Total production of crude oil and natural gas liquids (NGLs) increased to 262 thousand barrels a day in the second quarter and 252 thousand barrels a day in the first six months of 2003 from 234 thousand barrels a day and 238 thousand barrels a day during the corresponding periods of 2002.
In the second quarter and first six months of this year, gross production of conventional crude oil averaged 47 thousand barrels a day, compared with 51 thousand barrels a day and 52 thousand barrels a day during the corresponding periods in 2002. Production of NGLs available for sale was 25 thousand barrels a day in the second quarter and 26 thousand barrels a day during the first half of 2003, versus 26 thousand barrels a day and 28 thousand barrels a day in the corresponding periods last year. Natural reservoir decline in the Western Canadian Basin was the main reason for the reduced production.
The company’s share of Syncrude’s gross production was 53 thousand barrels a day in the second quarter compared with 44 thousand barrels a day during the same period a year ago. Lower maintenance activity was the main reason for the higher production in the second quarter of this year. During the first six months of 2003, the company’s share of Syncrude production was 50 thousand barrels a day, compared with 51 thousand barrels a day in the first six months of 2002.
Gross production of Cold Lake bitumen averaged 137 thousand barrels a day during the second quarter and 129 thousand barrels a day in the first six months of 2003, versus 113 thousand barrels a day and 107 thousand barrels a day in the corresponding periods of 2002. Higher production was a result of increased volume from newly completed phases 11 to 13 offset in part by lower production from existing operations due to the cyclic nature of production at Cold Lake.
On June 3, 2003, the company hosted the official opening of its plant and field facilities for the phases 11 to 13 of Cold Lake operations. The $650-million project was completed on budget and on schedule at the end of 2002 and has been in production since that time. Construction of the project began in November 2000 and over four million work hours were carried out without a single lost-time incident for both employees and contractors.
On June 5, 2003, the company awarded the contract for drilling services for an exploration well on its deepwater acreage on the Scotian Slope. The prospect well, known as Balvenie, is located about 300 kilometers southeast of Halifax, Nova Scotia and is situated on one of two exploration licenses held by the company in the area. Drilling operations for the well began in early July and are expected to last two to three months.
On June 18, 2003, the company announced that financing agreements among all the participants of the Mackenzie Gas Project had been reached and the Preliminary Information Package (PIP) for the Mackenzie Gas Project was submitted to relevant regulatory authorities. On June 30 the regulatory agencies overseeing the project announced the PIP was complete and issued their Plan for Public Involvement. This document describes the opportunities available to the public to review and comment on the pipeline project. The company would lead the construction and operation of the proposed 1,300-kilometre pipeline to deliver natural gas produced in the Mackenzie Delta region to southern markets. The company owns the Taglu field, the largest of the three anchor fields in the project.
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Petroleum products
Net earnings from petroleum products were $102 million in the second quarter and a record $241 million in the first half of 2003, compared with net earnings of $15 million and a net loss of $22 million during the corresponding periods last year. Second quarter earnings increased due to higher petroleum product margins. Year-to-date earnings improved as a result of the strengthening of petroleum product margins and higher sales of petroleum products. The increased petroleum product volumes were principally due to higher demand for diesel, heating oil and gasoline.
At the end of the second quarter, the company achieved mechanical completion of the Dartmouth refinery low-sulphur motor gasoline facilities, ahead of schedule and without a safety incident.
Chemicals
Net earnings from chemical operations were $7 million in the second quarter and $13 million in the first half of 2003, compared with $11 million and $20 million during the corresponding periods of 2002. Reduced margins on sales of polyethylene as a result of higher feedstock costs and lower volumes were the main reasons for the decrease in earnings.
Corporate and other
Net earnings from corporate and other operations were $54 million in the second quarter and $108 million in the first half of 2003, versus $33 million and $27 million in the corresponding periods last year. Favourable foreign exchange effects on the company’s U.S.-dollar-denominated debt contributed to the improvement.
During June and July of this year, the company replaced its entire U.S.-dollar-denominated debt with long-term Canadian-dollar loans. The company realized foreign exchange currency gains of $110 million in the first half of this year.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operating activities was $672 million during the second quarter of 2003, compared with $530 million in the same period last year. The higher cash inflow was a result of increased earnings partly offset by higher working capital primarily due to timing of seasonal inventory builds. Year-to-date cash flow from operating activities was $1,372 million, versus $401 million during the first half of 2002. The increased cash inflow was mainly due to higher earnings and the timing of scheduled income tax payments. Total investing activities used $363 million of cash in the second quarter and $703 million in the first half of 2003, compared with $327 million and $565 million used during the corresponding periods last year.
Capital and exploration expenditures were $389 million in the second quarter and $744 million in the first six months of 2003, versus $365 million and $624 million in the corresponding periods a year ago. For the resources segment, the additional capital and exploration expenditures were used mainly on projects at Syncrude to maintain and expand oil production capacity. Petroleum products increased its capital expenditures mainly in projects to reduce the sulphur content of gasoline and to improve operating efficiency.
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During the second quarter, the company redeemed $400 million (U.S.) of its variable-rate U.S.-dollar debt for $546 million (Cdn). To replace the debt repaid in the second quarter, the company borrowed $546 million (Cdn) of variable-rate loans from Exxon Overseas Corporation. The company retired the remaining $200 million (U.S.) debt as of July 11, 2003 and replaced it with a similar variable-rate Canadian-dollar loan from Exxon Overseas Corporation.
On June 19, 2003, the company announced that it had received final acceptance from the Toronto Stock Exchange for a new normal course issuer bid to continue its existing share repurchase program that expired on June 20, 2003. The new share-purchase program enables the company to repurchase up to 18.6 million shares during the period from June 23, 2003, to June 22, 2004. During the first half of 2003, the company repurchased about 7 million shares for $312 million.
Cash dividends of $159 million were paid in the first six months of 2003. This compared with dividends of $160 million in the comparable period of 2002. Increased repurchase of shares reduced the number of shares outstanding and total dividend payments. On May 20, 2003, the company declared a quarterly dividend of 22 cents a share, an increase of one cent a share or about five percent, from the previous quarter, payable on July 1, 2003.
The above factors led to an increase in the company’s balance of cash and marketable securities to $964 million at June 30, 2003, from $575 million at the same time last year.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Information about market risks for the three months ended June 30, 2003 does not differ materially from that discussed in Item 7A on page 25 in the company’s annual report on Form 10-K for the year ended December 31, 2002.
Item 4. Controls and Procedures
The company’s principal executive officer and principal financial officer have evaluated the company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, these officers have concluded that, as of the end of the period covered by this quarterly report, the company’s disclosure controls and procedures are effective for the purpose of ensuring that information required to be disclosed by the company in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.
There has not been any change in the company’s internal control over financial reporting during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) A letter agreement dated July 11, 2003 confirming the termination of the Term Loan Agreement dated as of July 13, 1989, relating to the borrowing of $2 billion (U.S.), is Exhibit (4).
Certifications by each of the principal executive officer and principal financial officer of the company pursuant to Rule 13a-4(a) are Exhibits (31.1) and (31.2).
Certifications by each of the chief executive officer and the chief financial officer of the company pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350 are Exhibits (32.1) and (32.2).
(b) Reports on Form 8-K
Except for reports on Form 8-K dated April 24, 2003 and May 12, 2003, no other reports on Form 8-K have been filed during the quarter for which this report is filed.
By the report on Form 8-K dated April 24, 2003, the company submitted to the Securities and Exchange Commission a press release dated April 22, 2003 and a speech by the company’s chairman, president and chief executive officer at the company’s annual meeting of shareholders on April 22, 2003 which disclosed information relating to the company’s financial condition and results of operations for the fiscal quarter ended March 31, 2003.
By the report on Form 8-K dated May 12, 2003, the company submitted to the Securities and Exchange Commission written certifications by each of the chief executive officer and the chief financial officer of the company for purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002, of the company’s quarterly report on Form 10-Q for the quarter ended March 31, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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INDEX TO EXHIBITS
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