Imperial Oil - 10-Q quarterly report FY

 

Washington, D.C. 20549
 

For the transition period from                      to                     

Commission file number 0-12014

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: 1-800-567-3776

Large accelerated filer  þ           Accelerated filer  o           Non-accelerated filer  o

 

 

INDEX

Item 1.     Financial Statements.

CONSOLIDATED STATEMENT OF INCOME
(U.S. GAAP, unaudited)

The notes to the financial statements are part of these financial statements. Certain figures for the prior year have been reclassified in the financial statements to conform with the current year’s presentation.

The notes to the financial statements are part of these financial statements. Certain figures for the prior year have been reclassified in the financial statements to conform with the current year’s presentation.

The notes to the financial statements are part of these financial statements. Certain figures for the prior year have been reclassified in the financial statements to conform with the current year’s presentation.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1.      Basis of financial statement preparation
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 the context of, the consolidated financial statements and notes thereto filed with the Securities and Exchange Commission in the company’s 2005 Annual Report on Form 10-K. In the opinion of the management, the information furnished herein reflects all known accruals and adjustments necessary for a fair presentation of the financial position of the company as at March 31, 2006, and December 31, 2005, and the results of operations and changes in cash flows for the three months ending March 31, 2006 and 2005. 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 three months ending March 31, 2006, are not necessarily indicative of the operations to be expected for the full to be expected for the full year.

All amounts are in Canadian dollars unless otherwise indicated.

2.     Accounting change for Share-based Payments
Effective January 1, 2006, the company adopted the Financial Accounting Standards Board’s revised Statement of Financial Accounting Standards No. 123 (SFAS 123R), Share-based Payment. SFAS 123R requires compensation costs related to share-based payments to be recognized in the income statement over the requisite service period. The amount of the compensation costs is to be measured based on the grant-date fair value of the instrument issued. In addition, liability awards are to be remeasured each reporting period through settlement. SFAS 123R is effective for awards granted or modified after the date of adoption and for awards granted prior to that date that have not vested. In 2003, the company adopted a policy of expensing all share-based payments that is consistent with the provisions of SFAS 123R, and all prior years outstanding stock option awards have vested. SFAS 123R will therefore not materially change the company’s existing accounting practices or the amount of share-based compensation recognized in earnings.

The cumulative compensation expense associated with share-based payments made in 2003, 2004 and 2005 has been recognized in the income statement using the “nominal vesting period approach”. The full cost of awards given to employees who have retired before the end of the vesting period has been expensed. The use of a “non-substantive vesting period approach” based on the retirement eligibility age, is not significantly different from the nominal vesting period approach. The non-substantive vesting period approach is applicable to grants made after the adoption of SFAS 123R.

Incentive share units have value if the market price of the company’s common shares when the unit is exercised exceeds the market value when the unit was issued. The issue price of incentive share units is the closing price of the company’s shares on the Toronto Stock Exchange on the grant date. Up to 50 percent of the units may be exercised after one year from issuance; an additional 25 percent may be exercised after two years; and the remaining 25 percent may be exercised after three years. Incentive share units are eligible for exercise up to 10 years from issuance. The units may expire earlier if employment is terminated other than by retirement, death or disability.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued . . .)
(unaudited)

The deferred share unit plan is made available to selected executives and nonemployee directors. The selected executives can elect to receive all or part of their performance bonus compensation in units and the nonemployee directors can elect to receive all or part of their directors’ fees in units. The number of units granted to executives is determined by dividing the amount of the bonus elected to be received as deferred share units by the average of the closing prices of the company’s shares on the Toronto Stock Exchange for the five consecutive trading days immediately prior to the date that the bonus would have been paid. The number of units granted to a nonemployee director is determined at the end of each calendar quarter by dividing the amount of director’s fees for the calendar quarter that the nonemployee director elected to receive as deferred share units by the average closing price of the company’s shares for the five consecutive trading days immediately prior to the last day of the calendar quarter. Additional units are granted based on the cash dividend payable on the company’s shares divided by the average closing price immediately prior to the payment date for that dividend and multiplying the resulting number by the number of deferred share units held by the recipient.

Deferred share units cannot be exercised until after termination of employment with the company or resignation as a director and must be exercised no later than December 31 of the year following termination or resignation. On the exercise date, the cash value to be received for the units is determined based on the average closing price of the company’s shares for the five consecutive trading days immediately prior to the date of exercise.

Under the restricted stock unit plan, each unit entitles the recipient to the conditional right to receive from the company, upon exercise, an amount equal to the closing price of the company’s common shares on the Toronto Stock Exchange on the exercise dates. Fifty percent of the units are exercised three years following the grant date, and the remainder are exercised seven years following the grant date.

All units require settlement by cash payments with one exception. The restricted stock unit program was amended for units granted in 2003 and future years by providing that the recipient may receive one common share of the company per unit or elect to receive the cash payment for the units to be exercised on the seventh anniversary of the grant date.

In accordance with SFAS 123R, the company accounts for these units by using the fair-value-based method, which is the same method of accounting as under SFAS 123. The fair value of awards in the form of incentive share, deferred share and restricted stock units is the market price of the stock. Under this method, compensation expense related to the units of these programs is measured each reporting period based on the company’s current share price and is recorded in the consolidated statement of income over the vesting period.

The following table summarizes information about these units for the three months ended March 31, 2006:

The compensation expense that has been charged against income for these programs was $74 million and $147 million for the first quarter of 2006 and 2005, respectively. The total income tax benefit recognized in income related to this compensation expense was $26 million and $49 million for the first quarter of 2006 and 2005, respectively.

As of March 31, 2006, there was $250 million of total before-tax unrecognized compensation expenses related to nonvested restricted stock units based on the company’s share price at the end of the current reporting period. The weighted-average vesting period of nonvested restricted stock units is 3.5 years. All units under the incentive share and deferred share programs have vested as of March 31, 2006.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued . . .)
(unaudited)

In April 2002, incentive stock options were granted for the purchase of the company’s common shares at an exercise price of $46.50 per share. Up to 50 percent of the options may be exercised on or after January 1, 2003, a further 25 percent may be exercised on or after January 1, 2004, and the remaining 25 percent may be exercised on or after January 1, 2005. Any unexercised options expire after April 29, 2012. The company has not issued incentive stock options since 2002 and has no plans to issue incentive stock options in the future.

The company has purchased shares on the market to fully offset the dilutive effects from the exercise of stock options. The practice is expected to continue.

As permitted by SFAS 123, the company continues to apply the intrinsic-value-based method of accounting for the incentive stock options granted in April 2002. Under this method, compensation expense is not recognized on the issuance of stock options as the exercise price is equal to the market value at the date of grant. All incentive stock options have vested as of January 1, 2005.

The following table summarizes information about stock options for the three months ended March 31, 2006:

No compensation expense and no income tax benefit related to stock options were recognized for stock options in the three months ended March 31, 2006, and 2005. Cash received from stock option exercises for the three months ended March 31, 2006, was $1 million. The aggregate intrinsic value of stock options exercised in the three months ended March 31, 2006, was $1 million, and for the balance of outstanding stock options is $160 million.

3.     Accounting change for purchases and sales of inventory with the same counterparty
Effective January 1, 2006, the company adopted the Emerging Issues Task Force (EITF) consensus on Issue No. 04-13, Accounting for Purchases and Sales of Inventory with the Same Counterparty. The EITF concluded that purchases and sales of inventory with the same counterparty that are entered into in contemplation of one another should be combined and recorded as exchanges measured at the book value of the item sold. In prior periods, the company recorded certain crude oil, natural gas, petroleum product and chemical sales and purchases contemporaneously negotiated with the same counterparty as revenues and purchases. As a result of the EITF consensus, the company’s accounts “operating revenue” and “purchases of crude oil and products” on the consolidated statement of income will be reduced by associated amounts with no impact on net income. All operating segments are affected by this change, with the largest impact in the petroleum products segment.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued . . .)
(unaudited)

4.     Business segments

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued . . .)
(unaudited)

5.     Investment and other income

Investment and other income includes gains and losses on asset sales as follows:

6.     Employee retirement benefits

The components of net benefit cost included in total expenses in the consolidated statement of earnings are as follows:

7.     Financing costs

8.     Long-term debt

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued . . .)
(unaudited)

9.     Other long-term obligations

10.     Common shares

On February 2, 2006, the company proposed to subdivide the common shares of the company on a three-for-one basis. The proposed stock split is subject to shareholder approval at the company’s annual meeting on May 2, 2006 and regulatory approvals.

In 1995 through 2004, the company purchased shares under ten 12-month normal course share purchase programs, as well as an auction tender. On June 23, 2005, another 12-month normal course program was implemented with an allowable purchase of up to 17.1 million shares (five percent of the total on June 21, 2005), 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.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued ...) (unaudited)

     The following table provides the calculation of basic and diluted net income per share:

11.     Earnings reinvested

12.     Nonowner changes in shareholders’ equity

Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The company’s net income for the first quarter of 2006 was $591 million or $1.78 a share on a diluted basis compared with $393 million or $1.12 a share for the same period last year.

The main contributing factors for increased earnings were higher natural resources realizations and stronger refining and marketing margins, which combined for a positive impact of about $260 million. Continued solid operational performance contributed to strong production volumes in the quarter. Partially offsetting these factors were higher energy costs of about $55 million and a stronger Canadian dollar of about $55 million. Stock-related compensation expenses were lower in the quarter by about $50 million.

Total operating revenues were $5,786 million in the first quarter versus $5,940 million in the corresponding period last year.

Natural resources
During the first quarter of 2006, net income from natural resources was $397 million, up $121 million from the first quarter in 2005. Earnings increased primarily due to improved realizations for natural gas, Cold Lake bitumen and crude oil of about $185 million and higher Syncrude volumes of about $45 million. Volume performance of Cold Lake bitumen and natural gas were also strong. These positive impacts on earnings were partially offset by the negative impact of the higher Canadian dollar of about $35 million and lower conventional crude oil and natural gas liquids (NGL) volumes of about $30 million. Energy costs were also higher than last year by about $40 million.

While Brent crude oil prices in U.S. dollars averaged 30 percent higher in the first quarter compared with the same period last year, Canadian dollar realizations for conventional crude oil increased only 9 percent, partly due to a stronger Canadian dollar. US-dollar realizations for Cold Lake bitumen improved by 39 percent in the first quarter of 2006 from the first quarter of 2005. Realizations for natural gas averaged $9.40 a thousand cubic feet in the first quarter, up from $7.02 a thousand cubic feet in the same quarter last year.

Total gross production of crude oil and NGL was 263 thousand barrels a day, up from 260 thousand barrels in the first quarter of 2005.

Gross production of Cold Lake bitumen averaged 150 thousand barrels a day during the quarter, slightly lower than 152 thousand barrels from the first quarter last year.

The company’s share of Syncrude’s gross production was 51 thousand barrels a day in the first quarter in 2006 compared with 39 thousand barrels during the same period a year ago. Higher production volumes were primarily due to lower maintenance activities in the first quarter of 2006.

During the first three months of the year, gross production of conventional crude oil averaged 33 thousand barrels a day compared with 40 thousand barrels during the corresponding period in 2005. The impact of divested producing properties and the natural reservoir decline in the Western Canadian Basin were the main reasons for the reduced production.

Gross production of NGL available for sale was 29 thousand barrels a day in the first quarter, unchanged from the same quarter last year.

Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations. (continued . . .)

For the first quarter, gross production of natural gas averaged 580 million cubic feet a day, essentially flat compared with the same period last year.

Timing for completion of the upgrader expansion portion of the Syncrude Stage 3 project remains unchanged, with production of higher quality synthetic crude oil expected on stream by mid-2006. The company’s share of the project costs is not expected to change significantly from the previous estimate of about $2.1 billion.

Public hearings by the National Energy Board and Joint Review Panel on the Mackenzie Gas Project began in January and are expected to continue through 2006.

Petroleum products
Net income from petroleum products was $199 million in the first quarter of 2006, compared with $166 million in the same period a year ago. Higher earnings were mainly due to stronger refining and marketing margins, which were partially offset by the impact of a stronger Canadian dollar of about $20 million and higher energy costs of about $15 million. Lower product sales volume, primarily due to weaker industry demand, had limited impact on earnings.

Operating performance of the company’s four refineries was solid in the first quarter. Refinery utilization was a record 97 percent and total refinery throughput was more than 77 million litres a day.

Chemicals
Net income in the first quarter from chemicals was $39 million, compared with $44 million in the first quarter of 2005. The earnings reduction was primarily due to lower sales volume as a result of industry demand.

Corporate and other
Net income from corporate and other was negative $44 million in the first quarter versus negative $93 million in the first quarter of 2005. Earnings improved mainly due to lower stock-related compensation expenses.

LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operating activities was negative $38 million during the first quarter of 2006, compared with negative $57 million in the same period last year. The favourable impact of lower accounts receivable balances, higher earnings and timing of income tax payments was essentially offset by greater seasonal inventory builds and the impact of timing of expenditures on accounts payable balances.

Capital and exploration expenditures were $322 million in the first quarter, versus $325 million during the same quarter of 2005. For the resources segment, capital and exploration expenditures were used mainly at Syncrude and Cold Lake to maintain and expand production capacity. The petroleum products segment capital expenditures were mainly on projects which reduce the sulphur content of diesel fuel, improve operating efficiency and upgrade the network of Esso retail outlets.

Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations. (continued . . .)

During the quarter, the company repurchased more than 4.7 million shares for $542 million. Under the current share-repurchase program, which began on June 23, 2005, the company has repurchased about 14 million shares, and can purchase about another 3 million shares before June 22, 2006 when the current program expires.

Cash dividends of $80 million were paid in the first quarter of 2006, compared with $77 million in the first quarter of 2005. Per-share dividends paid in the first quarter were $0.24, up from $0.22 in the first quarter of 2005.

The above factors led to a decrease in the company’s balance of cash and marketable securities to $715 million at March 31, 2006, from $1,661 million at the end of 2005.

On February 2, 2006, the company proposed to subdivide the common shares of the company on a three-for-one basis. The proposed stock split is subject to shareholder approval at the company’s annual meeting on May 2, 2006 and regulatory approvals.

Item 3.     Quantitative and Qualitative Disclosures about Market Risk.

Information about market risks for the three months ended March 31, 2006 does not differ materially from that discussed on page 31 in the company’s annual report on Form 10-K for the year ended December 31, 2005, except for the following sensitivity:

The sensitivity of net income to changes in the Canadian dollar versus the U.S. dollar decreased from 2005 year-end by about $8 million (after tax) for each one-cent difference. This is primarily due to the decrease in natural gas prices and industry refining margins.

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.

Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds.

During the period January 1 to March 31, 2006, the company issued 19,175 common shares to employees or former employees outside the U.S.A. for $46.50 per share upon the exercise of stock options. These issuances were not registered under the Securities Act in reliance on Regulation S thereunder.

Item 4.     Submission of Matters to a Vote of Security Holders.

At the annual meeting of shareholders on May 2, 2006, all of the management’s nominee directors were elected to hold office until the close of the next annual meeting. The votes for the directors were: R.L. Broiles 280,148,724 shares for and 188,000 shares withheld, T.J. Hearn 280,102,895 shares for and 233,829 shares withheld, J.M. Mintz 279,895,784 shares for and 440,940 shares withheld, R. Phillips 279,918,966 shares for and 417,758 shares withheld, J.F. Shepard 279,911,886 shares for and 424,838 shares withheld, P.A. Smith 280,106,705 shares for and 230,019 shares withheld, S.D. Whittaker 279,898,227 shares for and 438,497 shares withheld, and V.L. Young 279,703,080 shares for and 633,624 shares withheld.

At the same annual meeting of shareholders, PricewaterhouseCoopers LLP were reappointed as the auditors by a vote of 279,930,895 shares for and 405,697 shares withheld from the reappointment of the auditors.

At the same annual meeting of shareholders, the shareholders approved a special resolution to divide the issued common shares on a three-for-one basis and increase the maximum number of authorized common shares to 1.1 billion by a vote of 279,821,464 shares for and 142,704 shares against.

Item 6.     Exhibits.

(a)  Certifications by each of the principal executive officer and principal financial officer of the company pursuant to Rule 13a-14(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).

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.