FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[✓] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
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)
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 ✓ 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, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule12b-2 of the Exchange Act of 1934).
Large accelerated filer
Non-accelerated filer
Accelerated filer
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
The registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act of 1934).
YES NO ✓
The number of common shares outstanding, as of March 31, 2018 was 824,036,825.
Table of contents
PART I. FINANCIAL INFORMATION
Item 1.
Consolidated statement of income
Consolidated statement of comprehensive income
Consolidated balance sheet
Consolidated statement of cash flows
Notes to the consolidated financial statements
Item 2.
Item 3.
Item 4.
PART II. OTHER INFORMATION
Item 6.
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, 2017. Note that numbers may not add due to rounding.
The term “project” as used in this report can refer to a variety of different activities and does not necessarily have the same meaning as in any government payment transparency reports.
In this report, unless the context otherwise indicates, reference to “the company” or “Imperial” includes Imperial Oil Limited and its subsidiaries.
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Item 1. Financial statements
Consolidated statement of income (U.S. GAAP, unaudited)
Revenues and other income
Revenues (a)
Investment and other income (note 5)
Expenses
Exploration
Purchases of crude oil and products (b)
Production and manufacturing (c)
Selling and general (c)
Federal excise tax
Depreciation and depletion
Non-service pension and postretirement benefit (d)
Financing (note 7)
Total expenses
Income (loss) before income taxes
Income taxes
Net income (loss)
Per share information (Canadian dollars)
Net income (loss) per common share - basic (note 10)
Net income (loss) per common share - diluted (note 10)
Dividends per common share
(a)
Amounts from related parties included in revenues.
(b)
Amounts to related parties included in purchases of crude oil and products.
(c)
(d)
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 (U.S. GAAP, unaudited)
Other comprehensive income (loss), net of income taxes
Postretirement benefits liability adjustment (excluding amortization)
Amortization of postretirement benefits liability adjustmentincluded in net periodic benefit costs
Total other comprehensive income (loss)
Comprehensive income (loss)
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Consolidated balance sheet (U.S. GAAP, unaudited)
As at
Mar 312018
Dec 312017
Assets
Current assets
Cash
Accounts receivable, less estimated doubtful accounts (a)
Inventories of crude oil and products
Materials, supplies and prepaid expenses
Total current assets
Investments and long-term receivables (b)
Property, plant and equipment,
less accumulated depreciation and depletion
Property, plant and equipment, net
Goodwill
Other assets, including intangibles, net (note 9)
Total assets
Liabilities
Current liabilities
Notes and loans payable (c)
Accounts payable and accrued liabilities (a)(note 9)
Income taxes payable
Total current liabilities
Long-term debt (d) (note 8)
Other long-term obligations (e) (note 9)
Deferred income tax liabilities
Total liabilities
Shareholders’ equity
Common shares at stated value (f) (note 10)
Earnings reinvested (note 11)
Accumulated other comprehensive income (loss) (note 12)
Total shareholders’ equity
Total liabilities and shareholders’ equity
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Consolidated statement of cash flows (U.S. GAAP, unaudited)
Operating activities
Adjustments for non-cash items:
(Gain) loss on asset sales (note 5)
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) (b)
Cash flows from (used in) operating activities
Investing activities
Additions to property, plant and equipment (b)
Proceeds from asset sales (note 5)
Loans to equity company
Cash flows from (used in) investing activities
Financing activities
Reduction in capitalized lease obligations (note 8)
Dividends paid
Common shares purchased (note 10)
Increase (decrease) in cash
Cash at beginning of period
Cash at end of period (c)
(a) Included contribution to registered pension plans.
(b) The impact of carbon emission programs are included in additions to property, plant and equipment, and all other items, net.
(c) Cash is composed of cash in bank and cash equivalents at cost. Cash equivalents are all highly liquid securities with maturity of three months or less when purchased.
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Notes to consolidated financial statements (unaudited)
1. Basis of financial statement preparation
These unaudited consolidated financial statements have been prepared in accordance with United States Generally Accepted Accounting Principles (GAAP) 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 (SEC) in the company’s 2017 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. Prior year’s data has been reclassified in certain cases to conform to the current presentation basis.
The company’s exploration and production activities are accounted for under the “successful efforts” method.
The results for the three months ended March 31, 2018, 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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2. Accounting changes
Effective January 1, 2018, Imperial adopted the Financial Accounting Standards Board’s standard, Revenue from Contracts with Customers, as amended. The standard establishes a single revenue recognition model for all contracts with customers, eliminates industry and transaction specific requirements, and expands disclosure requirements. The standard was adopted using the modified retrospective method, under which prior year results are not restated, but supplemental information is provided for any material impacts of the standard on 2018 results. The adoption of the standard did not have a material impact on any of the lines reported in the company’s consolidated financial statements. The cumulative effect of adoption of the new standard was de minimis. The company did not elect any practical expedients that require disclosure. See note 4 for additional details.
Effective January 1, 2018, Imperial adopted the Financial Accounting Standards Board’s standard update, Compensation – Retirement Benefits (Topic 715):Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The update requires separate presentation of the service cost component from other components of net benefit costs. The other components are reported in a new line on the company’s consolidated statement of income, “Non-service pension and postretirement benefit”. Imperial elected to use the practical expedient to use the amounts disclosed in the pension and other postretirement benefit plan note for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements, as it is impracticable to determine the amounts capitalized in those periods. Beginning in 2018, the other components of net benefit costs are included in the Corporate and other expenses. The “Non-service pension and postretirement benefit” line reflects the non-service costs, which primarily includes interest costs, expected return on plan assets, and amortization of actuarial gains and losses, that were previously included in “Production and manufacturing” and “Selling and general” expenses. Additionally, only the service cost component of net benefit costs is eligible for capitalization in situations where it is otherwise appropriate to capitalize employee costs in connection with the construction or production of an asset.
The impact of the retrospective presentation change on Imperial’s consolidated statement of income for the period ended March 31, 2018, is shown below.
Three Months to
March 31, 2017
Production and manufacturing
Selling and general
Non-service pension and postretirement benefit
Effective January 1, 2018, Imperial adopted the Financial Accounting Standards Board’s standard update, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The standard requires investments in equity securities other than consolidated subsidiaries and equity method investments to be measured at fair value, with changes in the fair value recognized through net income. The company elected a modified approach for equity securities that do not have a readily determinable fair value. This modified approach measures investments at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. There was no cumulative effect related to the adoption of this standard. The carrying value of equity securities without readily determinable fair values as at March 31, 2018 were not significant to Imperial.
The standard also expanded disclosures related to financial statements. The company’s only notable financial instrument is long-term debt ($4,447 million, excluding capitalized lease obligations), where the difference between fair value and carrying value was de minimis. The fair value of long-term debt was primarily a level 2 measurement.
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3. Business segments
Intersegment sales
Purchases of crude oil and products
Production and manufacturing (b)
Selling and general (b)
Non-service pension and postretirement benefit (b)
Capital and exploration expenditures (c)
Total assets as at March 31
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4. Accounting policy for revenue recognition
Imperial generally sells crude oil, natural gas and petroleum and chemical products under short-term agreements at prevailing market prices. In some cases, products may be sold under long-term agreements, with periodic price adjustments to reflect market conditions.
Revenue is recognized at the amount the company expects to receive when the customer has taken control, which is typically when title transfers and the customer has assumed the risks and rewards of ownership. The prices of certain sales are based on price indexes that are sometimes not available until the next period. In such cases, estimated realizations are accrued when the sale is recognized, and are finalized when final information is available. Such adjustments to revenue from performance obligations satisfied in previous periods are not significant. Payment for revenue transactions is typically due within 30 days. Future volume delivery obligations that are unsatisfied at the end of the period are expected to be fulfilled through ordinary production or purchases. These performance obligations are based on market prices at the time of the transaction and are fully constrained due to market price volatility.
“Revenues” and “Accounts receivable, less estimated doubtful accounts” primarily arise from contracts with customers. Long-term receivables are primarily from non-customers. Contract assets are mainly from marketing assistance programs and are not significant. Contract liabilities are mainly customer prepayments, loyalty programs and accruals of expected volume discounts, and are not significant.
5. Investment and other income
Investment and other income included gains and losses on asset sales as follows:
Proceeds from asset sales
Book value of asset sales
Gain (loss) on asset sales, before tax (a)
Gain (loss) on asset sales, after tax (a)
6. Employee retirement benefits
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 (gain)
Net periodic benefit cost
Other postretirement benefits:
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7. Financing and additional notes and loans payable information
Debt-related interest
Capitalized interest
Net interest expense
Other interest
Total financing
8. Long-term debt
Long-term debt
Capital leases
Total long-term debt
9. Other long-term obligations
Employee retirement benefits (a)
Asset retirement obligations and other environmental liabilities(b)
Share-based incentive compensation liabilities
Other obligations (c)
Total other long-term obligations
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10. Common shares
As of
Mar 31
Dec 31
Authorized
Common shares outstanding
The 12-month normal course issuer bid program that was in place throughout the first quarter of 2018 came into effect in June of 2017. The program enabled the company to purchase up to a maximum of 25,395,927 common shares (3 percent of the total shares on June 13, 2017), which included shares purchased under the normal course issuer bid and from Exxon Mobil Corporation concurrent with, but outside of the normal course issuer bid. As in the past, Exxon Mobil Corporation participated to maintain its ownership percentage at approximately 69.6 percent. The excess of the purchase cost over the stated value of shares purchased has been recorded as a distribution of earnings reinvested.
On April 27, 2018, the company announced an amendment to its normal course issuer bid to increase the number of common shares that it may purchase. Under the amendment, the number of common shares that may be purchased will increase to a maximum of 42,326,545 common shares (5 percent of the total shares on June 13, 2017) during the period June 27, 2017 to June 26, 2018, which includes shares purchased under the normal course issuer bid and from Exxon Mobil Corporation concurrent with, but outside of the normal course issuer bid. No other provisions of the normal course issuer bid have changed.
The company’s common share activities are summarized below:
Balance as at December 31, 2016
Issued under employee share-based awards
Purchases at stated value
Balance as at December 31, 2017
Balance as at March 31, 2018
The following table provides the calculation of basic and diluted earnings per common share:
Net income (loss) per common share - basic
Net income (loss) (millions of Canadian dollars)
Weighted average number of common shares outstanding (millions of shares)
Net income (loss) per common share (dollars)
Net income (loss) per common share - diluted
Effect of employee share-based awards (millions of shares)
Weighted average number of common shares outstanding,assuming dilution(millions of shares)
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11. Earnings reinvested
Earnings reinvested at beginning of period
Net income (loss) for the period
Share purchases in excess of stated value
Dividends declared
Earnings reinvested at end of period
12. Other comprehensive income (loss) information
Changes in accumulated other comprehensive income (loss):
Balance at January 1
Postretirement benefits liability adjustment:
Current period change excluding amounts reclassifiedfrom accumulated other comprehensive income
Amounts reclassified from accumulated other comprehensive income
Balance at March 31
Amounts reclassified out of accumulated other comprehensive income (loss) - before tax income (expense):
Three Months
to March 31
Amortization of postretirement benefits liability adjustmentincluded in net periodic benefit cost (a)
(a) This accumulated other comprehensive income component is included in the computation of net periodic benefit cost (note 6).
Income tax expense (credit) for components of other comprehensive income (loss):
Postretirement benefits liability adjustments:
Amortization of postretirement benefits liability adjustmentincluded in net periodic benefit cost
Total
13. Recently issued accounting standards
Effective January 1, 2019, Imperial will adopt the Financial Accounting Standards Board’s standard, Leases, as amended. The standard requires all leases with an initial term greater than one year be recorded on the balance sheet as an asset and a lease liability. Imperial is gathering and evaluating data, and recently acquired a system to facilitate implementation. The company continues to progress an assessment of the magnitude of the effect on the company’s financial statements.
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Operating results
First quarter 2018 vs. first quarter 2017
The company’s net income for the first quarter of 2018 was $516 million or $0.62 per share on a diluted basis, an increase of $183 million compared to the net income of $333 million or $0.39 per share, for the same period last year.
Upstream recorded a net loss in the first quarter of $44 million compared to a net loss of $86 million in the same period of 2017. The results reflect the impact of higher Canadian crude oil realizations of about $90 million, partially offset by unfavourable foreign exchange effects.
West Texas Intermediate (WTI) averaged US$62.89 per barrel in the first quarter of 2018, up from US$51.78 per barrel in the same quarter of 2017. Western Canada Select (WCS) averaged US$38.67 per barrel and US$37.26 per barrel respectively for the same periods. The WTI / WCS differential widened significantly to 39 percent in the first quarter of 2018, from 28 percent in the same period of 2017.
The Canadian dollar averaged US$0.79 in the first quarter of 2018, an increase of US$0.03 from the first quarter of 2017.
Imperial’s average Canadian dollar realizations for bitumen and synthetic crudes moved generally in line with the North American benchmarks, adjusted for changes in exchange rates and transportation costs. Bitumen realizations averaged $35.61 per barrel for the first quarter of 2018, a decrease of $0.60 per barrel versus the first quarter of 2017. Synthetic crude realizations averaged $77.26 per barrel, an increase of $9.47 per barrel for the same period of 2017.
Gross production of Cold Lake bitumen averaged 153,000 barrels per day in the first quarter, compared to 158,000 barrels per day in the same period last year. Lower production was mainly due to a number of small operational constraints.
Gross production of Kearl bitumen averaged 182,000 barrels per day in the first quarter (129,000 barrels Imperial’s share) unchanged from the first quarter of 2017.
The company’s share of gross production from Syncrude averaged 65,000 barrels per day, compared to 66,000 barrels per day in the first quarter of 2017.
Downstream net income was $521 million in the first quarter, up from $380 million in the first quarter of 2017. Earnings increased mainly due to stronger margins of about $310 million, partially offset by the absence of the $151 million gain on the sale of a surplus property in 2017.
Refinery throughput averaged 408,000 barrels per day, up from 398,000 barrels per day in the first quarter of 2017. Capacity utilization increased to 96 percent.
Petroleum product sales were 478,000 barrels per day, compared to 486,000 barrels per day in the first quarter of 2017.
Chemical net income was $73 million in the first quarter, up from $45 million in the same quarter of 2017, primarily due to stronger margins.
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Corporate and other expenses were $34 million in the first quarter, compared with $6 million in the same period of 2017. As part of the implementation of the Financial Accounting Standards Board’s update, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, beginning January 1, 2018, Corporate and other includes all non-service pension and postretirement benefit expenses. Prior to 2018, the majority of these costs were allocated to the operating segments.
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Liquidity and capital resources
Cash flow generated from operating activities was $985 million in the first quarter, an increase of $631 million from the corresponding period in 2017, reflecting higher earnings and working capital effects.
Investing activities used net cash of $365 million in the first quarter, compared with $61 million cash generated from investing activities in the same period in 2017, reflecting higher additions to property, plant and equipment, and lower proceeds from asset sales.
Cash used in financing activities was $390 million in the first quarter, compared with $134 million in the first quarter of 2017. Dividends paid in the first quarter of 2018 were $134 million. The per share dividend paid in the first quarter was $0.16, up from $0.15 in the same period of 2017. During the first quarter, the company purchased about 7.2 million shares for approximately $250 million.
The company’s cash balance was $1,425 million at March 31, 2018, versus $672 million at the end of first quarter 2017.
On April 27, 2018, the company announced by news release that it had received final approval from the Toronto Stock Exchange for an amendment to its normal course issuer bid to increase the number of common shares that it may purchase. Under the amendment, the number of common shares that may be purchased will increase to a maximum of 42,326,545 common shares during the period June 27, 2017 to June 26, 2018, which includes shares purchased under the normal course issuer bid and from Exxon Mobil Corporation concurrent with, but outside of the normal course issuer bid. No other provisions of the normal course issuer bid have changed.
Recently issued accounting standards
Forward-looking statements
Statements in this report regarding future events or conditions are forward-looking statements. Actual future financial and operating 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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Item 3. Quantitative and qualitative disclosures about market risk
Information about market risks for the three months ended March 31, 2018, does not differ materially from that discussed on page 24 of the company’s annual report on Form 10-K for the year ended December 31, 2017.
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
March 31, 2018. 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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Item 1. Legal proceedings
On April 5, 2018, Imperial was charged by the Ontario Crown in the Ontario Court of Justice with committing the offence of discharging or causing or permitting the discharge of wastewater with a low pH from Imperial’s refinery in Sarnia, Ontario into the St. Clair River, which may impair the quality of the water contrary to section 30(1) of the Ontario Water Resources Act, R.S.O. 1990, c. O.40, as amended, which offence was alleged to have occurred on April 19, 2016. No determination of impact can be made at this time.
Item 2. Unregistered sales of equity securities and use of proceeds
Issuer purchases of equity securities
Average price paidper share
(Canadian dollars)
January 2018
(January 1 - January 31)
February 2018
(February 1 - February 28)
March 2018
(March 1 - March 31)
The company will continue to evaluate its share purchase program in the context of its overall capital activities.
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(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 of the company pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350.
(32.2)Certification by the chief financial officer of the company pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350.
(101) Interactive data files.
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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.
Imperial Oil Limited
(Registrant)
/s/ Daniel E. Lyons
/s/ Cathryn Walker
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