FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ ü ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2013
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
For the transition period from --- to ---
Commission file number 0-12014
IMPERIAL OIL LIMITED
(Exact name of registrant as specified in its charter)
(State or other jurisdiction
of incorporation or organization)
(I.R.S. Employer
Identification No.)
Registrant’s telephone number, including area code: 1-800-567-3776
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 91 days.
YES ü NO
The registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
The registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (see definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Securities Exchange Act of 1934).
The registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
YES NO ü
The number of common shares outstanding, as of September 30, 2013, was 847,599,011.
INDEX
PART I - Financial Information
Item 1 - Financial Statements.
Consolidated Statement of Income - Nine Months ended September 30, 2013 and 2012
Consolidated Statement of Comprehensive Income - Nine Months ended September 30, 2013 and 2012
Consolidated Balance Sheet - as at September 30, 2013 and December 31, 2012
Consolidated Statement of Cash Flows - Nine Months ended September 30, 2013 and 2012
Notes to the Consolidated Financial Statements
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results ofOperations.
Item 3 - Quantitative and Qualitative Disclosures about Market Risk.
Item 4 - Controls and Procedures.
PART II - Other Information
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds.
Item 6 - Exhibits.
SIGNATURES
In this report all dollar amounts are expressed in Canadian dollars unless otherwise stated. This report should be read in conjunction with the company’s Annual Report on Form 10-K for the year ended December 31, 2012.
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.
The term “project” as used in this release can refer to a variety of different activities and does not necessarily have the same meaning as under government payment transparency reports.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
CONSOLIDATED STATEMENT OF INCOME
REVENUES AND OTHER INCOME
Operating revenues (a) (b)
Investment and other income (note 3)
TOTAL REVENUES AND OTHER INCOME
EXPENSES
Exploration
Purchases of crude oil and products (c)
Production and manufacturing (d)
Selling and general
Federal excise tax (a)
Depreciation and depletion
Financing costs (note 5)
TOTAL EXPENSES
INCOME BEFORE INCOME TAXES
INCOME TAXES
NET INCOME
PER SHARE INFORMATION (Canadian dollars)
Net income per common share - basic (note 8)
Net income per common share - diluted (note 8)
Dividends per common share
(a)
Federal excise tax included in operating revenues
(b)
Amounts from related parties included in operating revenues
(c)
Amounts to related parties included in purchases of crude oil and products
(d)
Amounts to related parties included in production and manufacturing expenses
The information in the Notes to Consolidated Financial Statements is an integral part of these statements.
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CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Net income
Other comprehensive income, net of income taxes
Post-retirement benefit liability adjustment (excluding amortization)
Amortization of post-retirement benefit liability adjustment included in net periodic benefit costs
Total other comprehensive income/(loss)
Comprehensive income
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ASSETS
Current assets
Cash
Accounts receivable, less estimated doubtful accounts
Inventories of crude oil and products
Materials, supplies and prepaid expenses
Deferred income tax assets
Total current assets
Long-term receivables, investments and other long-term assets
Property, plant and equipment,
less accumulated depreciation and depletion
Property, plant and equipment, net
Goodwill
Other intangible assets, net
TOTAL ASSETS
LIABILITIES
Current liabilities
Notes and loans payable
Accounts payable and accrued liabilities (a) (note 7)
Income taxes payable
Total current liabilities
Long-term debt (b) (note 6)
Other long-term obligations (note 7)
Deferred income tax liabilities
TOTAL LIABILITIES
SHAREHOLDERS’ EQUITY
Common shares at stated value (c)
Earnings reinvested
Accumulated other comprehensive income (note 9)
TOTAL SHAREHOLDERS’ EQUITY
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
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OPERATING ACTIVITIES
Adjustment for non-cash items:
(Gain)/loss on asset sales (note 3)
Deferred income taxes and other
Changes in operating assets and liabilities:
Accounts receivable
Inventories, materials, supplies and prepaid expenses
Accounts payable and accrued liabilities
All other items - net (a)
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
INVESTING ACTIVITIES
Additions to property, plant and equipment and intangibles
Acquisition (note 10)
Proceeds from asset sales
Repayment of loan from equity company
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
FINANCING ACTIVITIES
Short-term debt - net
Long-term debt issued
Reduction in capitalized lease obligations
Issuance of common shares under stock option plan
Common shares purchased
Dividends paid
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
INCREASE (DECREASE) IN CASH
CASH AT BEGINNING OF PERIOD
CASH AT END OF PERIOD
(a) Included contribution to registered pension plans
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
These unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles of the United States of America and follow the same accounting policies and methods of computation as, and should be read in conjunction with, the most recent annual consolidated financial statements filed with the U.S. Securities and Exchange Commission in the company’s 2012 Annual Report on Form 10-K. In the opinion of the company, the information furnished herein reflects all known accruals and adjustments necessary for a fair statement of the results for the periods reported herein. All such adjustments are of a normal recurring nature. The company’s exploration and production activities are accounted for under the “successful efforts” method.
The results for the nine months ended September 30, 2013, are not necessarily indicative of the operations to be expected for the full year.
All amounts are in Canadian dollars unless otherwise indicated.
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Operating revenues (a)
Intersegment sales
Investment and other income
Purchases of crude oil and products
Production and manufacturing
Federal excise tax
Financing costs
Cash flows from (used in) operating activities
CAPEX (b)
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Production and manufacturing (c)
Depreciation and depletion (c)
Total assets as at September 30
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Investment and other income included gains and losses on asset sales as follows:
Book value of assets sold
Gain/(loss) on asset sales, before tax
Gain/(loss) on asset sales, after tax
The components of net benefit cost were as follows:
Pension benefits:
Current service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost
Amortization of actuarial loss
Net benefit cost
Other post-retirement benefits:
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Debt related interest
Capitalized interest
Net interest expense
Other interest
Total financing costs
Long-term debt
Capital leases
Total long-term debt
In the third quarter of 2013, the company increased its long-term debt by $819 million by drawing on its existing facility with an affiliated company of Exxon Mobil Corporation and increased short-term debt by $325 million by issuing additional commercial paper.
Subsequent to the third quarter of 2013, the company increased its total debt outstanding by $123 million by drawing on existing facilities. The increased debt was used to finance normal operations and major projects.
In the first quarter of 2013, the company increased the amount of its existing stand-by long term bank credit facility from $300 million to $500 million. In the third quarter of 2013, the company extended the maturity date of this facility to August 2015. The company has not drawn on the facility.
In the first quarter of 2013, to further support the commercial paper program, the company entered into an unsecured committed bank credit facility in the amount of $250 million that matures in March 2014. In the second quarter, the amount of this facility increased to $500 million. The company has not drawn on the facility.
Employee retirement benefits (a)
Asset retirement obligations and other environmental liabilities (b)
Share-based incentive compensation liabilities
Other obligations
Total other long-term obligations
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Net income per common share - basic
Net income (millions of dollars)
Weighted average number of common shares outstanding (millions of shares)
Net income per common share (dollars)
Net income per common share - diluted
Effect of share-based awards (millions of shares)
Weighted average number of common shares outstanding, assuming dilution (millions of shares)
Changes in accumulated other comprehensive income:
Balance at January 1
Post-retirement benefits liability adjustment:
Current period change excluding amounts reclassified from accumulated other comprehensive income
Amounts reclassified from accumulated other comprehensive income
Balance at September 30
Amounts reclassified out of accumulated other comprehensive income -
before-tax income/(expense):
Amortization of post-retirement benefit liability adjustment included in net periodic benefit cost (a)
Income tax expense/(credit) for components of other comprehensive income:
Post-retirement benefits liability adjustments:
Post-retirement benefits liability adjustment (excluding amortization)
Amortization of post-retirement benefit liability adjustment included in net periodic benefit cost
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Description of the Transaction: On February 26, 2013, ExxonMobil Canada acquired Celtic Exploration Ltd. (“Celtic”). Immediately following the acquisition, Imperial acquired a 50-percent interest in Celtic’s assets and liabilities from ExxonMobil Canada for $1,608 million, financed by a combination of related party and third party debt (see note 6 for further details). Concurrently, a general partnership was formed to hold and operate the assets of Celtic. The name of the general partnership was changed to XTO Energy Canada (“XTO Canada”). XTO Canada is involved in the exploration for, production of, and transportation and sale of natural gas and crude oil, condensate and natural gas liquids.
Recording of Assets Acquired and Liabilities Assumed: Imperial used the acquisition method of accounting to record its pro-rata share of the assets acquired and liabilities assumed. This method requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The following table summarizes the assets acquired and liabilities assumed:
Property, plant and equipment (a)
Goodwill (b)
Total assets acquired
Deferred income tax liabilities (c)
Other long-term obligations
Total liabilities assumed
Net assets acquired
Property, plant and equipment
Total deferred income tax liabilities
Asset retirement obligations
Other
Total deferred income tax assets
Net deferred income tax liabilities
Actual and Pro Forma Impact of the Acquisition:
Revenues for XTO Canada from the acquisition date included in the company’s consolidated financial statement of income for the nine months ended September 30, 2013 were $53 million. After-tax earnings for XTO Canada from the acquisition date through September 30, 2013 were de minimis.
Transaction costs related to the acquisition were expensed as incurred and were de minimis in the nine months ended September 30, 2013.
Pro forma revenues, earnings and basic and diluted earnings per share information as if the acquisition had occurred at the beginning of 2013 or the comparable prior reporting period is not presented, since the effect on Imperial’s consolidated third quarter 2013 and the nine months ended September 30, 2013 financial results or the comparable prior reporting periods, would not have been material.
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OPERATING RESULTS
Third quarter 2013 vs. third quarter 2012
The company’s net income for the third quarter of 2013 was $647 million or $0.76 per share on a diluted basis, compared with $1,040 million or $1.22 per share for the same period last year.
Upstream net income in the third quarter was $604 million, $106 million higher than the same period of 2012. Earnings increased primarily due to higher liquids realizations of about $350 million. This was partially offset by lower volumes and higher costs at Syncrude, mainly as a result of planned maintenance activities, totalling about $150 million and higher royalty costs of about $85 million.
The price differential between Brent crude oil, the benchmark for Atlantic basin markets, and West Texas Intermediate (WTI), a common benchmark for mid-continent North American oil markets, narrowed to $4.54 per barrel in U.S. dollars in the third quarter of 2013, compared to $17.37 per barrel in the corresponding period last year. As discounts for WTI crude oil decreased, the company’s average realizations in Canadian dollars on sales of conventional and synthetic crude oils increased about 21 and 26 percent, respectively. The company’s average bitumen realizations in Canadian dollars in the third quarter of 2013 also increased by about 36 percent to $81.21 per barrel as the price spread between light crude oil and bitumen narrowed. The company’s average realizations on natural gas sales of $2.66 per thousand cubic feet in the third quarter of 2013 were higher by about $0.48 per thousand cubic feet versus the same period in 2012. The significant narrowing of the price differential between Brent and WTI also adversely impacted industry refining margins and Downstream earnings.
Gross production of Cold Lake bitumen averaged 147,000 barrels per day versus 152,000 barrels in the same period last year. Lower volumes were primarily due to the cyclic nature of steaming and associated production at Cold Lake.
The company’s share of Syncrude’s gross production in the third quarter was 57,000 barrels per day, down from 78,000 barrels in the third quarter of 2012. The planned maintenance activities were completed, and the impacted coker unit returned to normal operations in the quarter.
The company’s share of gross production from the Kearl initial development contributed 23,000 barrels per day. Throughout the quarter we continued to address ongoing improvements in equipment reliability. Gross production averaged 11,000, 43,000 and 45,000 barrels per day in July, August and September, respectively. From September 22 through October 8, the plant was shut down to address ongoing improvements in equipment reliability and prepare for potential weather-related challenges in our first winter season of operation. Post restart, rates have averaged 80,000 barrels per day gross with current production of 100,000 barrels per day. Production is expected to reach 110,000 barrels per day gross (78,000 Imperial’s share) by the end of the year. As previously announced, diluted bitumen sales began in the third quarter, and Kearl diluted bitumen has been run at the company’s and ExxonMobil’s refineries and is performing as expected.
Gross production of conventional crude oil averaged 22,000 barrels per day in the third quarter, versus 19,000 barrels in the corresponding period in 2012.
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Gross production of natural gas during the third quarter of 2013 was 211 million cubic feet per day, up from 188 million cubic feet in the same period last year. The higher production volume reflected the contributions from the Celtic (XTO Energy Canada) acquisition earlier in the year and the Horn River pilot which more than offset normal field decline.
Downstream net income was $46 million in the third quarter, $490 million lower than the third quarter of 2012. Earnings decreased primarily due to significantly lower industry refining margins of about $565 million. This was partially offset by favourable impacts of improved refinery operations and an increase in marketing margins.
Chemical net income was $39 million in the third quarter, in line with $37 million in the same quarter last year.
Net income effects from Corporate and Other were negative $42 million in the third quarter, versus negative $31 million in the same period of 2012 due to changes in share-based compensation charges.
Nine months 2013 vs. nine months 2012
Net income in the first nine months of 2013 was $1,772 million or $2.08 per share on a diluted basis, versus $2,690 million or $3.16 per share for the first three quarters of 2012.
Earnings decreased primarily due to significantly lower industry refining margins of about $720 million, higher Kearl start-up and operating costs of about $175 million, and lower production and higher maintenance costs at Syncrude totalling about $150 million. First nine months earnings in 2013 also included an after tax charge of $264 million associated with the conversion of the Dartmouth refinery to a terminal. These factors were partially offset by higher liquids realizations of about $210 million, improved refinery operations and lower refinery maintenance activities totalling about $115 million and lower royalty costs of about $110 million due to higher cost recovery for capital investments.
Upstream net income for the first nine months of 2013 was $1,301 million versus $1,400 million in 2012. Earnings decreased primarily due to higher Kearl costs of about $175 million as third quarter production contribution was more than offset by year-to-date start-up and operating costs, lower volumes and higher maintenance costs at Syncrude totalling about $150 million, and lower bitumen production and higher maintenance costs at Cold Lake totalling about $85 million. These factors were partially offset by higher liquids realizations of about $210 million and lower royalty costs of about $110 million due to higher cost recovery for capital investments.
The price differential between Brent crude oil, the benchmark for Atlantic basin markets, and West Texas Intermediate (WTI), a common benchmark for mid-continent North American oil markets, narrowed to $10.20 per barrel in U.S. dollars in the first nine months of 2013, compared to $15.91 per barrel in the corresponding period last year. As discounts for WTI crude oil decreased, the company’s average realizations in Canadian dollars on sales of conventional and synthetic crude oils increased about eight and 11 percent, respectively. The company’s average bitumen realizations in Canadian dollars in the first nine months of 2013 also increased by about five percent to $63.86 per barrel. The company’s average realizations on natural gas sales of $3.21 per thousand cubic feet in the first three quarters of 2013 were higher by $1.09 per thousand cubic feet versus the same period in 2012.
Gross production of Cold Lake bitumen was 152,000 barrels per day, compared with 154,000 barrels in the same period of 2012. Lower volumes were primarily due to the cyclic nature of steaming and associated production at Cold Lake.
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During the first nine months of the year, the company’s share of gross production from Syncrude averaged 63,000 barrels per day, down from 70,000 barrels in 2012. Planned maintenance activities in the third quarter of 2013 were the main contributor to the lower volumes.
The company’s share of gross production of Kearl initial development was 9,000 barrels per day on a 2013 year-to-date basis.
Gross production of conventional crude oil averaged 21,000 barrels per day in the first nine months of the year, versus 20,000 barrels in the corresponding period in 2012.
Gross production of natural gas during the first nine months of 2013 was 201 million cubic feet per day, up from 194 million cubic feet in the same period in 2012. The higher production volumes reflected the contributions from the Celtic acquisition and the Horn River pilot, which more than offset normal field decline.
Downstream net income was $427 million, versus $1,223 million over the same period in 2012. Earnings were negatively impacted by significantly lower industry refining margins of about $720 million resulting from the narrowing pricing differential between Brent and WTI crude oils. Earnings in the first nine months of 2013 also included an after tax charge of $264 million associated with the conversion of the Dartmouth refinery to a fuels terminal. These factors were partially offset by the favourable impacts of about $115 million associated with improved refinery operations and lower refinery maintenance activities.
Chemical net income was $116 million, versus $121 million in 2012.
For the first nine months of 2013, net income effects from Corporate and Other were negative $72 million, versus negative $54 million last year primarily due to changes in share based compensation charges.
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LIQUIDITY AND CAPITAL RESOURCES
Cash flow generated from operating activities was $298 million in the third quarter, versus $669 million in the corresponding period in 2012. Lower cash flow was primarily attributable to lower earnings. Third quarter 2013 cash flow was lower than earnings primarily due to the timing of income tax payments.
Investing activities used net cash of $1,804 million in the third quarter, compared with $1,318 million in the same period of 2012. Additions to property, plant and equipment were $1,810 million in the third quarter, compared with $1,388 million during the same quarter 2012. Expenditures during the quarter were primarily directed towards the advancement of Kearl expansion and Nabiye projects. The Kearl expansion is expected to bring on additional gross production of 110,000 barrels of bitumen per day, before royalties, of which the company’s share would be about 78,000 barrels. Start-up is expected by late 2015. The Nabiye expansion at Cold Lake is expected to bring on additional production of 40,000 barrels of bitumen per day, before royalties. Start-up is expected by late 2014.
Cash from financing activities was $1,040 million in the third quarter, compared with $122 million in the third quarter of 2012. In the third quarter, the company increased its long-term debt level by $819 million by drawing on an existing facility and issued additional commercial paper which increased short-term debt by $325 million. Subsequent to the third quarter of 2013, the company increased its total debt outstanding by $123 million by drawing on existing facilities. The increased debt was used to finance normal operations and major projects.
The above factors led to a decrease in the company’s cash balance to $76 million at September 30, 2013, from $482 million at the end of 2012.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Information about market risks for the nine months ended September 30, 2013 does not differ materially from that discussed on page 23 in the company’s Annual Report on Form 10-K for the year ended December 31, 2012 and Form 10-Q for the quarters ended March 31, 2013 and June 30, 2013.
Item 4. Controls and Procedures.
As indicated in the certifications in Exhibit 31 of this report, the company’s principal executive officer and principal financial officer have evaluated the company’s disclosure controls and procedures as of September 30, 2013. Based on that evaluation, these officers have concluded that the company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to them in a manner that allows for timely decisions regarding required disclosures and are effective in ensuring that such information 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 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer Purchases of Equity Securities (1)
Period
(a) Totalnumber of shares (orunits)purchased
(b) Averageprice paidper share (or unit)
(c) Totalnumber of shares (orunits)purchasedas part ofpubliclyannouncedplans orprograms
(d) Maximumnumber (orapproximatedollar value) ofshares (or units) that may yet bepurchased
under the plans
or programs
July 2013
(July 1- July 31)
August 2013
(Aug 1 – Aug 31)
September 2013
(Sept 1 – Sept 30)
On June 21, 2013, the company announced by news release that it had received final approval from the Toronto Stock Exchange for a new normal course issuer bid and will continue its share repurchase program. The new program enables the company to repurchase up to a maximum of 1,000,000 common shares, including common shares purchased for the company’s employee savings plan, the company’s employee retirement plan and from Exxon Mobil Corporation during the period June 25, 2013 to June 24, 2014. If not previously terminated, the program will end on June 24, 2014.
The company will continue to evaluate its share purchase program in the context of its overall capital activities.
Item 6. Exhibits.
(31.1) Certification by the principal executive officer of the company pursuant to Rule 13a-14(a).
(31.2) Certification by the principal financial officer of the company pursuant to Rule 13a-14(a).
(32.1) Certification by the chief executive officer and of the company pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350.
(32.2) Certification by the chief financial officer and of the company pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350.
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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.
/s/ Paul J. Masschelin
-------------------------------------------------------------
Senior Vice-President, Finance and
Administration and Controller
/s/ Brent A. Latimer
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