FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
Commission file number 0-12014
IMPERIAL OIL LIMITED (Exact name of registrant as specified in its charter)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
The number of common shares outstanding, as of September 30, 2002, was 378,863,095.
IMPERIAL OIL LIMITED
INDEX
In this report all dollar amounts are expressed in Canadian dollars. This report should be read in conjunction with the company's Annual Report on Form 10-K for the year ended December 31, 2001, and Form 10-Q for the quarters ended March 31, 2002 and June 30, 2002.
Statements in this report regarding future events or conditions are forward-looking statements. Actual results could differ materially due to the impact of market conditions, changes in law or governmental policy, changes in operating conditions and costs, changes in project schedules, operating performance, demand for oil and gas, commercial negotiations or other technical and economic factors.
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PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
IMPERIAL OIL LIMITED CONSOLIDATED STATEMENT OF EARNINGS (unaudited)
CONSOLIDATED STATEMENT OF RETAINED EARNINGS (unaudited)
The notes to the financial statements are part of these financial statements.
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IMPERIAL OIL LIMITED CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)
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IMPERIAL OIL LIMITED CONSOLIDATED BALANCE SHEET (unaudited)
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IMPERIAL OIL LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
In the opinion of the management, the accompanying unaudited consolidated financial statements reflect all known accruals and adjustments necessary for a fair presentation of the financial position of the company as at September 30, 2002, and December 31, 2001, and the results of operations and changes in cash flows for the nine months ending September 30, 2002, and 2001. All such adjustments are of a normal recurring nature.
The results for the nine months ending September 30, 2002, are not necessarily indicative of the operations to be expected for the full year.
All figures are in millions of Canadian dollars unless otherwise stated.
1. Adjustments under United States GAAP
The financial statements of the company have been prepared in accordance with generally accepted accounting principles (GAAP) in Canada. These principles conform in all material respects to those in the United States except for the following.
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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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An explanation of these items is found on pages 16 to 19 of the company's annual report on Form 10-K for the year ended December 31, 2001.
As of January 1, 2002, the company adopted Financial Accounting Standards Board Statements of Financial Accounting Standards No.142 (FAS 142), "Goodwill and Other Intangible Assets" and FAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets".
FAS 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. Goodwill and certain intangibles with indefinite lives are no longer amortized but are subject to annual impairment tests. Intangible assets that have finite useful lives continue to be amortized over their useful lives. 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 4.
FAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The new standard retains the requirements of existing U.S. GAAP to recognize an impairment loss if the carrying amount exceeds undiscounted cash flows and to measure the impairment loss as the difference between the carrying amount and fair value of the asset. FAS 144 also retains the existing U.S. GAAP requirement to report separately discontinued operations, but extends that reporting to a component of the company that has been disposed of or is classified as held for sale. Adoption of FAS 144 did not have a material effect on the Company's operations or financial condition.
The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No.143 (FAS 143), "Accounting for Asset Retirement Obligations" in June 2001, and Statement of Financial Accounting Standards No. 146 (FAS 146), "Accounting for Costs Associated with Exit or Disposal Activities" in June 2002.
FAS 143, effective January 1, 2003, requires the fair value of a legal liability related to an asset retirement be recognized in the period in which it is incurred. The associated asset retirement costs must be capitalized as part of the carrying amount of the related long-lived asset and subsequently amortized to expense. Subsequent changes in the liability will result
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from the passage of time (interest cost) and revisions to cash flow estimates. The effect on the company of adopting FAS 143 is under evaluation.
FAS 146 applies to exit and disposal activities initiated after December 31, 2002. The Standard requires the fair value of a liability for a cost associated with an exit or disposal activity be recognized in the period in which the liability is incurred. The company is not engaged in any current exit or disposal activities.
2. Business segments
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3. Investment and other income
Investment and other income includes gains and losses on asset sales as follows:
4. Goodwill and other intangible assets
The new CICA standard dealing with accounting for goodwill and other intangible assets eliminates the amortization of goodwill. The standard does not permit retroactive application. On a pro forma basis, the impact of adopting the new goodwill accounting standard on prior period earnings is:
Total assets include amortized intangible assets, consisting primarily of acquired customer lists, as follows:
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The estimated annual amortization expense for intangible assets in each of the next five years is $4 million.
5. Foreign currency translation
The new CICA standard dealing with accounting for foreign currency translation eliminates the deferral and amortization of translation gains or losses. The new standard has been applied retroactively, and financial statements of prior periods have been restated. The impact of adopting the new foreign currency translation standard on the consolidated balance sheet and statement of earnings is:
Change in consolidated balance sheet
Change in consolidated statement of earnings
6. Financing costs
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7. Other long-term obligations
8. Incentive compensation programs
The company's incentive compensation programs include incentive share units that require settlement by cash payments and are recorded as compensation expense in the consolidated statement of earnings. Further details of the incentive share unit programs, including the company's accounting policy, are described in the 2001 annual report on Form 10-K.
In April 2002, shareholders approved an incentive stock-option plan to replace the company's current incentive share unit plan. Under the new stock-option plan, a total of 3,210,200 options were granted on April 30, 2002, 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. Shares available for granting under the incentive stock-option plan were 20 million at September 30, 2002.
The company 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, net income and earnings per share (on both a basic and diluted basis) would have been reduced by $6 million or $0.02 per share in the third quarter and $10 million or $0.03 per share in the first nine months of 2002. The average fair value of each option granted during 2002 was $12.70. The fair value was estimated at the grant date using an option-pricing model with the following weighted average assumptions: risk-free interest rate of 5.7 percent; expected life of five years; volatility of 25 percent and a dividend yield of 1.9 percent.
The company expects to purchase shares on the market to fully offset the dilutive effects from the exercise of stock options.
The company's accounting policy for its incentive compensation programs complies with the new CICA standard that became effective January 1, 2002. Consequently, there was no impact on the recorded expense or liability upon adoption of the new accounting standard.
9. Earnings per share
There is no significant dilutive effect on basic net earnings per share from the outstanding incentive stock options described in note 8.
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10. Common shares
In 1995 through 2001, the company purchased shares under seven 12-month normal course share-purchase programs, as well as an auction tender. On June 21, 2002, another 12-month normal course program was implemented with an allowable purchase of 18.9 million shares (five percent of the total on June 19, 2002), 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.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
OPERATING RESULTS
The company's net earnings for the third quarter of 2002 were $344 million or $0.91 a share, compared with $238 million or $0.61 a share for the same period last year. Earnings increased as a result of higher prices for crude oil, partly offset by lower petroleum products margins. Net earnings for the first three quarters of 2002 were $756 million or $2 a share, compared with $1,045 million or $2.64 a share for nine months ending September 30, 2001. Earnings decreased as a result of lower prices for natural gas, lower production volumes for crude oil and much weaker petroleum products markets.
Total revenues were $4,532 million in the third quarter and $12,212 million in the first nine months of 2002, compared with $4,190 million and $13,727 million in the corresponding periods last year.
Natural resources
During the third quarter of 2002, net earnings from natural resources were $343 million, the second-best quarterly performance on record, compared with $231 million during the third quarter of 2001. Third quarter earnings increased on improved heavy oil markets and higher prices for conventional crude oil. Net earnings for the first nine months of 2002 were $730 million compared with $821 million during the same nine-month period last year. Earnings declined primarily because of lower prices for natural gas. Improved heavy oil markets more than offset reduced production of crude oil and lower prices for conventional oil.
Prices for natural gas averaged $3.36 a thousand cubic feet in the third quarter and $3.61 a thousand cubic feet in the first nine months of 2002, compared with $3.57 a thousand cubic feet during the third quarter and $6.60 in the first nine months last year. Prices for conventional crude oil averaged $40.06 a barrel in the third quarter and $35.76 a barrel in the first nine months this year, compared with $37.01 a barrel and $38.32 a barrel during the corresponding periods in 2001.
Gross production of natural gas during the third quarter of 2002 was 527 million cubic feet a day, compared with 550 million cubic feet a day during the same period last year. Nine-month average gross production was 538 million cubic feet a day in 2002, versus 581 million cubic feet a day during the first nine months of 2001. The decrease was mainly due to natural production decline.
During the third quarter and nine months ended September 30, 2002, gross production of conventional crude oil averaged 49 thousand barrels a day and 51 thousand barrels a day, respectively, compared with 55 thousand barrels a day during the corresponding periods in 2001. Natural reservoir decline was the main reason for the reduced production. Production of natural gas liquids (NGLs) available for sale was 27 thousand barrels a day in both the third quarter and the first nine months of 2002, versus 26 thousand barrels a day and 28 thousand barrels a day in the corresponding periods last year.
The company's share of Syncrude's gross production was 65 thousand barrels a day in the third quarter and averaged 56 thousand barrels a day in the first nine months of 2002, compared with 53 thousand barrels a day and 55 thousand barrels a day during the corresponding periods last year. Higher volumes of production during the third quarter of 2002 were attributable to the lower scheduled turnaround maintenance and sustained operations during the period.
Cold Lake bitumen production was 117 thousand barrels a day during the third quarter and 110 thousand barrels a day in the first nine months of 2002, versus 127 thousand barrels a day and 132 thousand barrels a day in the corresponding periods of 2001. The decrease in production was mainly due to the timing of the steaming cycles.
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At Cold Lake, construction of phases 11 to 13 of bitumen production remains essentially on schedule and on budget for a start-up before the end of 2002. At Syncrude, engineering and construction work on the Aurora site and upgrader expansion is progressing on schedule.
Since September, the company, on behalf of the Mackenzie Delta Producers Group, has opened offices in Fort Simpson, Norman Wells and Inuvik to advance public consultation on the Mackenzie Gas Project. The Producers Group also received non-binding expressions of interest in pipeline capacity from potential shippers. The information is being used in preliminary engineering and development of regulatory applications.
Petroleum products
Net earnings from petroleum products were $21 million in the third quarter of 2002, compared with net earnings of $42 million during the same quarter last year. In the nine months ending September 30, 2002, petroleum products had a net loss of $1 million, compared with record earnings of $278 million in the first nine months of 2001. The decline was caused by reduced industry margins.
Net petroleum products sales volumes averaged 70.1 million litres a day in third quarter and 68.1 million litres a day for the first nine months of 2002, respectively, compared with 71.5 million litres a day and 69.1 million litres a day during the corresponding periods last year.
In August, the company confirmed plans to construct a 90-megawatt cogeneration facility at its Sarnia refining and petrochemical complex. The new unit, to cost about $120 million, will use natural-gas-fired turbines to simultaneously produce electricity and steam, using approximately 50 percent less energy than conventional methods. Detailed engineering for the project is underway with construction scheduled to begin in late 2002 and start-up planned for April 2004.
Chemicals
Net earnings from chemical operations were $22 million in the third quarter and $42 million in the first nine months of 2002, compared with $7 million and $14 million during the corresponding periods of 2001. Improved margins principally due to lower feedstock cost and higher sales of polyethylene were the main factors for the increase in earnings.
Corporate and other
Net earnings from corporate and other operations were negative $42 million in the third quarter, unchanged from the same period last year. Earnings for the first nine months of 2002 were negative $15 million, compared with negative $68 million during the same period of 2001. Favourable foreign exchange effects on the company's U.S.-dollar denominated debt and lower interest expense contributed to the improvement.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operating activities was $337 million during the third quarter of 2002, compared with $311 million in the same period last year. Increased cash flow was mainly due to improved earnings. Cash flow from operating activities for the first nine months of 2002 was $738 million, versus $1,721 million during same period of 2001. The decline was mainly due to lower earnings and changes in working capital as a result of the effects of commodity prices on receivable balances.
During the three months ended September 30, 2002, total investing activities used $380 million of cash, up from $278 million in the same quarter last year. During the first nine-month period of 2002, investing activities used $945 million, compared with $620 million in the first three quarters of 2001.
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Capital and exploration expenditures were $391 million in the third quarter and $1,015 million in the first nine months of 2002, compared with $301 million and $676 million in the corresponding periods last year. For the resources segment, the additional capital and exploration expenditures were used mainly on projects at Syncrude and Cold Lake to maintain and expand oil production capacity. Petroleum products increased its capital expenditures mainly on projects to reduce the sulphur content of gasoline and to enhance the company's marketing network.
The company did not repurchase any shares in the third quarter of 2002 under the current 12-month normal course issuer bid that became effective on June 21, 2002. During the first six months of 2002, the company repurchased 296 thousand shares for $13 million under the 12-month normal course issuer bid that began on June 21, 2001 and expired on June 20, 2002.
Total cash dividends of $239 million were paid in the first three quarters of 2002. This compared with $240 million during the same period last year.
The above factors led to a decrease in the company's balance of cash and marketable securities to $453 million at September 30, 2002, from $872 million at the end of 2001.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Information about market risks for the three months ended September 30, 2002 does not differ materially from that discussed in Item 7A on pages 23 and 24 in the company's annual report on Form 10-K for the year ended December 31, 2001.
Item 4. Controls and Procedures
As indicated in the certifications on pages 21 and 22 of this report, the company's principal executive officer and principal financial officer have evaluated the company's disclosure controls and procedures as of a date within 90 days prior to the filing of this report. Based on that evaluation, these officers have concluded that the company's disclosure controls and procedures are appropriate and effective for the purpose of ensuring that material information relating to the company, including its consolidated subsidiaries, is made known to them by others within those entities, particularly during the period in which this quarterly report is being prepared.
There have not been significant changes in the company's internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation.
PART II — OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Except for a report on Form 8-K dated August 13, 2002, 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 August 13, 2002, the company submitted to the Securities and Exchange Commission written certifications by each of the chief executive officer and the chief financial officer of the company for purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the company's report on Form 10-Q for the quarter ended June 30, 2002.
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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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IMPERIAL OIL LIMITED CERTIFICATIONS
I, Timothy J. Hearn, certify that:
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I, Paul A. Smith, certify that:
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