UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
Form 10-Q
For the quarterly period ended September 30, 2003
OR
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
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.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
The number of common shares outstanding, as of September 30, 2003, was 367,920,688.
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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 quarters ended March 31, 2003 and June 30, 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
IMPERIAL OIL LIMITEDCONSOLIDATED STATEMENT OF EARNINGS(unaudited)
IMPERIAL OIL LIMITEDCONSOLIDATED STATEMENT OF RETAINED EARNINGS(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.
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IMPERIAL OIL LIMITEDCONSOLIDATED STATEMENT OF CASH FLOWS(unaudited)
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IMPERIAL OIL LIMITEDCONSOLIDATED BALANCE SHEET(unaudited)
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IMPERIAL OIL LIMITEDNOTES 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 September 30, 2003, and December 31, 2002, and the results of operations and changes in cash flows for the nine months ending September 30, 2003, and 2002. All such adjustments are of a normal recurring nature.
The results for the nine months ending September 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.
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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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 nine months of 2003.
(d) The company makes limited use of derivatives. There were no significant derivatives outstanding at January 1 or September 30, 2003, nor were any significant derivatives undertaken during the first nine months of 2003.
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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 $16 million to $488 million as of September 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
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The company accounts for its incentive compensation programs, except for the incentive stock option plan issued prior to January 1, 2003, 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 purchased 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.
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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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IMPERIAL OIL LIMITED
OPERATING RESULTS
The company’s net earnings for the third quarter of 2003 were $375 million or $1.01 a share, compared with $347 million or $ 0.91 a share for the same quarter last year. Net earnings for the first nine months of 2003 were $1,427 million or $3.81 a share, the highest nine-month earnings on record, versus $767 million or $2.02 a share in the same period of 2002. Third quarter earnings increased primarily as a result of higher industry margins for petroleum products and higher prices for natural gas, partly offset by lower prices for Cold Lake bitumen and higher exploration and planned maintenance expenses. Earnings for the first nine months increased mainly because of higher prices for natural gas and crude oil and higher industry margins for petroleum products.
The negative impact of the higher Canadian dollar on resource and product prices was only partly offset by the favourable foreign exchange effects on the company’s U.S.-dollar-denominated debt. This has resulted in a net negative impact of about $70 million on earnings in the third quarter versus the same period of last year and about $140 million for the first nine months of this year compared with that of 2002.
Total revenues were $4,626 million in the third quarter and $14,614 million in the first nine months of 2003, versus $4,532 million and $12,212 million in the same periods last year.
Natural resources
During the third quarter of 2003, net earnings from natural resources were $257 million compared with $346 million in the same period last year. Earnings decreased mainly due to lower Cold Lake bitumen and crude oil prices, lower Syncrude production, and higher exploration and planned maintenance expenses, partly offset by higher prices for natural gas and higher Cold Lake bitumen volumes. Year-to-date net earnings were a record $947 million versus $741 million during the same period last year. Higher prices for natural gas and crude oil and higher production volumes of Cold Lake bitumen were the main reasons for the increased earnings in the first nine months of 2003 compared with last year.
Prices for natural gas averaged $6.12 a thousand cubic feet in the third quarter and $6.98 a thousand cubic feet in the first nine months of 2003, compared with $3.36 a thousand cubic feet and $3.61 a thousand cubic feet during the corresponding periods last year. Prices for conventional crude oil averaged $36.68 a barrel in the third quarter and $41.32 a barrel in the first nine months this year, compared with $40.06 a barrel and $35.76 a barrel, respectively, in the third quarter and first nine months of 2002. Average prices for Cold Lake bitumen in the third quarter of 2003 were about 20 percent lower than the average third quarter prices of 2002, and prices for the first nine months of 2003 were essentially unchanged from the previous year.
Gross production of natural gas during the third quarter of 2003 was 520 million cubic feet a day, compared with 527 million cubic feet a day during the same period last year. During the first nine months of the year, gross production was 499 million cubic feet a day, versus 538 million cubic feet a day in the first nine months of 2002. Lower production as a result of reservoir decline was partly offset by higher production from the recently completed facilities at Wizard Lake.
Total production of crude oil and natural gas liquids (NGLs) increased to 271 thousand barrels a day in the third quarter and 259 thousand barrels a day in the first nine months of 2003 from 258 thousand barrels a day and 244 thousand barrels a day in the corresponding periods of 2002.
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Gross production of conventional crude oil averaged 45 thousand barrels a day and 46 thousand barrels a day in the third quarter and first nine months of this year, compared with 49 thousand barrels a day and 51 thousand barrels a day during the corresponding periods in 2002. Natural reservoir decline in the Western Canadian Basin was the main reason for the reduced production. Production of NGLs available for sale was 28 thousand barrels a day in the third quarter and 27 thousand barrels a day during the first nine months of 2003, essentially unchanged from the corresponding periods of 2002.
Gross production of Cold Lake bitumen averaged 137 thousand barrels a day during the third quarter and 132 thousand barrels a day in the first nine months of 2003, versus 117 thousand barrels a day and 110 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.
The company’s share of Syncrude’s gross production was 61 thousand barrels a day in the third quarter compared with 65 thousand barrels a day during the same period a year ago. Higher planned maintenance activity was the main reason for lower production in the third quarter of 2003. During the first nine months of 2003, the company’s share of Syncrude production was 54 thousand barrels a day, compared with 56 thousand barrels a day in the first nine months of last year.
In early October, a primary upgrading unit at Syncrude was taken down for an unscheduled maintenance turnaround. This is expected to reduce Syncrude’s fourth quarter production.
In September 2003, the company concluded drilling operations on a deepwater well on the Scotian Slope without encountering hydrocarbons in commercial quantities. Drilling began on the prospect called Balvenie, located about 300 kilometers southeast of Halifax, Nova Scotia, in approximately 1,800 meters of water in early July 2003. Exploration costs related to the Balvenie well were reflected in the third quarter earnings.
The company continues to work toward a regulatory application for the Mackenzie Gas Project. In September, it met with energy companies interested in shipping gas through the proposed pipeline to discuss nomination commitments.
Petroleum products
Net earnings from petroleum products were $115 million in the third quarter and a record $356 million in the first nine months of 2003, compared with net earnings of $21 million and a net loss of $1 million during the corresponding periods last year. Third quarter earnings increased mainly due to higher industry petroleum product margins. The effective response to external events such as the August power outage in Ontario contained the negative impact of these events on earnings. Year-to-date earnings improved as a result of the strengthening of industry petroleum product margins and higher sales of petroleum products. The increased petroleum product volumes were principally due to higher demand for diesel, gasoline and heating oil.
The company opened low-sulphur gasoline production units at its Strathcona and Dartmouth refineries, reducing the sulphur content of gasoline produced by over 90 per cent. All of the company’s operations are expected to be producing gasoline averaging less than 30 part per million of sulphur by the fourth quarter of this year, more than a year in advance of the legislated requirement.
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Chemicals
Net earnings from chemical operations were $8 million in the third quarter and $21 million in the first nine months of 2003, compared with $22 million and $42 million during the corresponding periods of 2002. Reduced industry margins on sales of polyethylene as a result of higher feedstock costs was the main reason for the decrease in earnings.
Corporate and other
Net earnings from corporate and other operations were negative $5 million in the third quarter and positive $103 million in the first nine months of 2003, versus negative $42 million and negative $15 million in the corresponding periods last year. Favourable foreign exchange effects on the company’s U.S.-dollar-denominated debt contributed to the year-to-date performance.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operating activities increased to $485 million during the third quarter of 2003 from $337 million in the same period last year. Changes in working capital as a result of seasonal inventory draws and the effects of commodity prices on receivable balances, and higher earnings contributed to the increase. Cash flow from operating activities was $1,857 million for the nine months of 2003, versus $738 million in the corresponding period of 2002. The increased cash inflow was mainly due to higher earnings and the timing of scheduled income tax payments. Total investing activities used $308 million of cash in the third quarter and $1,011 million in the first nine months of 2003, compared with $380 million and $945 million during the corresponding periods last year.
Capital and exploration expenditures were $357 million in the third quarter and $1,093 million in the first nine months of 2003, versus $391 million and $1,015 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.
In the third quarter, the company redeemed $200 million (U.S.), the remaining balance of its variable-rate U.S.-dollar debt for $272 million (Cdn), and replaced it with a similar variable-rate Canadian-dollar loan from Exxon Overseas Corporation.
During the third quarter and first nine months of 2003, the company repurchased about 4 million shares for $207 million and 11 million shares for $519 million, respectively.
Following an independent actuarial evaluation of the registered pension plan that will be completed in the fourth quarter, the company plans to meet any additional funding requirements from operating cash flows. Current or future funding requirements are not expected to affect the company’s existing capital investment plans or its ability to pursue new investment opportunities.
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Cash dividends of $241 million were paid in the first nine months of 2003, compared with dividends of $239 million in the comparable period of 2002. An increase in the per share dividend payment since the second quarter was partly offset by the lower number of outstanding shares resulting from the company’s share repurchase program. The dividend increase represented the ninth consecutive year of dividend growth. On August 13, 2003, the company declared a quarterly dividend of 22 cents a share, payable on October 1, 2003.
The above factors led to an increase in the company’s balance of cash and marketable securities to $852 million at September 30, 2003, from $453 million at the same time last year.
Information about market risks for the nine months ended September 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.
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
(a) 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 July 28, 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 July 28, 2003, the company submitted to the Securities and Exchange Commission a press release dated July 23, 2003 which disclosed information relating to the company’s financial condition and results of operations for the fiscal quarter ended June 30, 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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