Form 10-Q

 

FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

[ü] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2013

OR

[    ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from --- to ---

Commission file number 0-12014

IMPERIAL OIL LIMITED

(Exact name of registrant as specified in its charter)

 

CANADA    98-0017682            

(State or other jurisdiction

of incorporation or organization)

  

(I.R.S. Employer   

Identification No.)

 

237 Fourth Avenue S.W.

Calgary, Alberta, Canada

   T2P 3M9                
(Address of principal executive offices)    (Postal Code)          

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

 

 

The registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 91 days.

YES  ü     NO      

The registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES  ü     NO      

The registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (see definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Securities Exchange Act of 1934).

Large accelerated filer ü                                    Accelerated filer     

Non-accelerated filer                                          Smaller reporting company     

The registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).

YES         NO  ü 

The number of common shares outstanding, as of June 30, 2013, was 847,599,011.


IMPERIAL OIL LIMITED

 

 
INDEX
   PAGE  

PART I - Financial Information

    

Item 1 - Financial Statements.

    

Consolidated Statement of Income - Six Months ended June 30, 2013 and 2012

   3  

Consolidated Statement of Comprehensive Income - Six Months ended June 30, 2013 and 2012

   4  

Consolidated Balance Sheet - as at June 30, 2013 and December 31, 2012

   5  

Consolidated Statement of Cash Flows - Six Months ended June 30, 2013 and 2012

   6  

Notes to the Consolidated Financial Statements

   7  

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

   14  

Item 3 - Quantitative and Qualitative Disclosures about Market Risk.

   17  

Item 4 - Controls and Procedures.

   17  

PART II - Other Information

    

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

   18  

Item 6 - Exhibits.

   19  

SIGNATURES

   19  

 

 

In this report all dollar amounts are expressed in Canadian dollars unless otherwise stated. This report should be read in conjunction with the company’s Annual Report on Form 10-K for the year ended December 31, 2012.

Statements in this report regarding future events or conditions are forward-looking statements. Actual results could differ materially due to the impact of market conditions, changes in law or governmental policy, changes in operating conditions and costs, changes in project schedules, operating performance, demand for oil and gas, commercial negotiations or other technical and economic factors.

The term “project” as used in this release can refer to a variety of different activities and does not necessarily have the same meaning as under government payment transparency reports.

 

2


IMPERIAL OIL LIMITED

 

CONSOLIDATED STATEMENT OF INCOME

(U.S. GAAP, unaudited)

     Second Quarter      Six Months
to June 30
 

millions of Canadian dollars

     2013         2012       2013     2012   

REVENUES AND OTHER INCOME

          

Operating revenues (a) (b)

     7,894         7,452       15,893     14,946   

Investment and other income (note 3)

     64         63       79     102   
  

 

 

    

 

 

TOTAL REVENUES AND OTHER INCOME

     7,958         7,515       15,972     15,048   
  

 

 

    

 

 

EXPENSES

          

Exploration

     21         18       44     46   

Purchases of crude oil and products (c)

     5,001         4,645       9,976     9,031   

Production and manufacturing (d)

     1,468         1,247       2,649     2,224   

Selling and general

     252         247       506     531   

Federal excise tax (a)

     330         340       656     656   

Depreciation and depletion

     452         178       637     368   

Financing costs (note 5)

     2         -       2     -   
  

 

 

    

 

 

TOTAL EXPENSES

     7,526         6,675       14,470     12,856   
  

 

 

    

 

 

INCOME BEFORE INCOME TAXES

     432         840       1,502     2,192   

INCOME TAXES

     105         205       377     542   
  

 

 

    

 

 

NET INCOME

     327         635       1,125     1,650   
  

 

 

    

 

 

PER SHARE INFORMATION (Canadian dollars)

          

Net income per common share - basic (note 8)

     0.39         0.75       1.33     1.95   

Net income per common share - diluted (note 8)

     0.38         0.75       1.32     1.94   

Dividends per common share

     0.12         0.12       0.24     0.24   

(a)    Federal excise tax included in operating revenues

     330         340       656     656   

(b)    Amounts from related parties included in operating revenues

     364         938       1,225     1,645   

(c)    Amounts to related parties included in purchases of crude oil and
    products

     1,283         1,022       2,526     1,555   

(d)    Amounts to related parties included in production and manufacturing
    expenses

     84         71       170     105   

The information in the Notes to Consolidated Financial Statements is an integral part of these statements.

 

3


IMPERIAL OIL LIMITED

 

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(U.S. GAAP, unaudited)

 

     Second Quarter      Six Months
to June 30
 

millions of Canadian dollars

     2013         2012       2013      2012   

Net income

     327         635       1,125      1,650   

Other comprehensive income, net of income taxes

           

Post-retirement benefit liability adjustment (excluding amortization)

     -         -       (102)      (117

Amortization of post-retirement benefit liability adjustment included in net periodic benefit costs

     51         51       102      99   
  

 

 

    

 

 

Total other comprehensive income/(loss)

     51         51       -      (18
  

 

 

    

 

 
           
  

 

 

    

 

 

Comprehensive income

     378         686       1,125      1,632   
  

 

 

    

 

 

The information in the Notes to Consolidated Financial Statements is an integral part of these statements.

 

4


IMPERIAL OIL LIMITED

 

CONSOLIDATED BALANCE SHEET

(U.S. GAAP, unaudited)

millions of Canadian dollars    As at
June 30
2013
    As at
Dec 31
2012
 

ASSETS

    

Current assets

    

Cash

     542        482   

Accounts receivable, less estimated doubtful accounts

     2,227        1,976   

Inventories of crude oil and products

     1,232        827   

Materials, supplies and prepaid expenses

     377        280   

Deferred income tax assets

     575        527   
  

 

 

 

Total current assets

     4,953        4,092   

Long-term receivables, investments and other long-term assets

     1,292        1,090   

Property, plant and equipment,

     43,874        38,765   

less accumulated depreciation and depletion

     (15,422     (14,843
  

 

 

 

Property, plant and equipment, net

     28,452        23,922   

Goodwill

     224        204   

Other intangible assets, net

     53        56   
  

 

 

 

TOTAL ASSETS

     34,974        29,364   
  

 

 

 

LIABILITIES

    

Current liabilities

    

Notes and loans payable

     1,506        472   

Accounts payable and accrued liabilities (a) (note 7)

     4,819        4,249   

Income taxes payable

     1,062        1,184   
  

 

 

 

Total current liabilities

     7,387        5,905   

Long-term debt (b) (note 6)

     3,566        1,175   

Other long-term obligations (note 7)

     4,196        3,983   

Deferred income tax liabilities

     2,527        1,924   
  

 

 

 

TOTAL LIABILITIES

     17,676        12,987   
  

 

 

 

SHAREHOLDERS’ EQUITY

    

Common shares at stated value (c)

     1,566        1,566   

Earnings reinvested

     18,187        17,266   

Accumulated other comprehensive income (note 9)

     (2,455     (2,455
  

 

 

 

TOTAL SHAREHOLDERS’ EQUITY

     17,298        16,377   
  

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

     34,974        29,364   
  

 

 

 

 

(a) Accounts payable and accrued liabilities included amounts receivable from related parties of $128 million (2012 - amounts receivable of $9 million).
(b) Long-term debt included amounts to related parties of $3,434 million (2012 - $1,040 million).
(c) Number of common shares authorized and outstanding were 1,100 million and 848 million, respectively (2012 - 1,100 million and 848 million, respectively).

The information in the Notes to Consolidated Financial Statements is an integral part of these statements.

 

5


IMPERIAL OIL LIMITED

 

CONSOLIDATED STATEMENT OF CASH FLOWS

(U.S. GAAP, unaudited)

inflow/(outflow)

millions of Canadian dollars

     Second Quarter       
 
Six Months
to June 30
  
  
   2013     2012     2013     2012  

OPERATING ACTIVITIES

        

Net income

     327        635        1,125        1,650   

Adjustment for non-cash items:

        

Depreciation and depletion

     452        178        637        368   

(Gain)/loss on asset sales (note 3)

     (51     (55     (55     (84

Deferred income taxes and other

     141        169        170        217   

Changes in operating assets and liabilities:

        

Accounts receivable

     5        (1     (217     139   

Inventories, materials, supplies and prepaid expenses

     (177     237        (497     (194

Income taxes payable

     45        29        (122     88   

Accounts payable and accrued liabilities

     113        155        508        226   

All other items - net (a)

     (117     (30     (214     (46
  

 

 

   

 

 

 

CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES

     738        1,317        1,335        2,364   
  

 

 

   

 

 

 

INVESTING ACTIVITIES

        

Additions to property, plant and equipment and intangibles

     (1,616     (1,290     (2,961     (2,435

Acquisition (note 10)

     -        -        (1,602     -   

Proceeds from asset sales

     54        61        62        139   

Repayment of loan from equity company

     -        5        4        8   
  

 

 

   

 

 

 

CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES

     (1,562     (1,224     (4,497     (2,288
  

 

 

   

 

 

 

FINANCING ACTIVITIES

        

Short-term debt - net

     348        -        1,035        -   

Long-term debt issued

     799        -        2,394        -   

Reduction in capitalized lease obligations

     (2     (1     (3     (2

Issuance of common shares under stock option plan

     -        21        -        43   

Common shares purchased

     -        (60     -        (128

Dividends paid

     (102     (102     (204     (195
  

 

 

   

 

 

 

CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES

     1,043        (142     3,222        (282
  

 

 

   

 

 

 

INCREASE (DECREASE) IN CASH

     219        (49     60        (206

CASH AT BEGINNING OF PERIOD

     323        1,045        482        1,202   
  

 

 

   

 

 

 

CASH AT END OF PERIOD

     542        996        542        996   
  

 

 

   

 

 

 

(a) Included contribution to registered pension plans

     (178     (147     (298     (244

The information in the Notes to Consolidated Financial Statements is an integral part of these statements.

 

6


IMPERIAL OIL LIMITED

 

 

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 conjunction with, the most recent annual consolidated financial statements filed with the U.S. Securities and Exchange Commission in the company’s 2012 Annual Report on Form 10-K. In the opinion of the company, the information furnished herein reflects all known accruals and adjustments necessary for a fair statement of the results for the periods reported herein. All such adjustments are of a normal recurring nature. The company’s exploration and production activities are accounted for under the “successful efforts” method.

The results for the six months ended June 30, 2013, are not necessarily indicative of the operations to be expected for the full year.

All amounts are in Canadian dollars unless otherwise indicated.

 

7


IMPERIAL OIL LIMITED

 

 

 

2. Business Segments

 

Second Quarter        Upstream      Downstream      Chemical

millions of dollars

     2013         2012         2013         2012         2013       2012

REVENUES AND OTHER INCOME

                 

Operating revenues (a)

     1,383          1,073          6,197          6,032          314        347 

Intersegment sales

     1,018          948          412          594          86        69 

Investment and other income

     45          38          18          22               
  

 

 

    

 

 

    

 

 

     2,446          2,059          6,627          6,648          400        416 
  

 

 

    

 

 

    

 

 

EXPENSES

                 

Exploration

     21          18                               

Purchases of crude oil and products

     866          740          5,379          5,234          271        282 

Production and manufacturing (c)

     881          701          534          499          54        47 

Selling and general

                     216          222          15        16 

Federal excise tax

                     330          340               

Depreciation and depletion (c)

     147          119          299          52               

Financing costs

                                          
  

 

 

    

 

 

    

 

 

TOTAL EXPENSES

     1,917          1,578          6,760          6,347          343        349 
  

 

 

    

 

 

    

 

 

INCOME BEFORE INCOME TAXES

     529          481          (133)         301          57        67 

INCOME TAXES

     132          121          (36)         69          15        18 
  

 

 

    

 

 

    

 

 

NET INCOME

     397          360          (97)         232          42        49 
  

 

 

    

 

 

    

 

 

Cash flows from (used in) operating activities

     588          599          99          591          52        99 

CAPEX (b)

     1,569          1,272          50          30               
Second Quarter    Corporate and Other      Eliminations        Consolidated
millions of dollars    2013      2012      2013      2012      2013      2012

REVENUES AND OTHER INCOME

                 

Operating revenues (a)

                                     7,894        7,452 

Intersegment sales

                     (1,516)         (1,611)              

Investment and other income

                                     64        63 
  

 

 

    

 

 

    

 

 

                     (1,516)         (1,611)         7,958        7,515 
  

 

 

    

 

 

    

 

 

EXPENSES

                 

Exploration

                                     21        18 

Purchases of crude oil and products

                     (1,515)         (1,611)         5,001        4,645 

Production and manufacturing (c)

                     (1)                 1,468        1,247 

Selling and general

     19                                  252        247 

Federal excise tax

                                     330        340 

Depreciation and depletion (c)

                                     452        178 

Financing costs

                                          
  

 

 

    

 

 

    

 

 

TOTAL EXPENSES

     22          12          (1,516)         (1,611)         7,526        6,675 
  

 

 

    

 

 

    

 

 

INCOME BEFORE INCOME TAXES

     (21)         (9)                         432        840 

INCOME TAXES

     (6)         (3)                         105        205 
  

 

 

    

 

 

    

 

 

NET INCOME

     (15)         (6)                         327        635 
  

 

 

    

 

 

    

 

 

Cash flows from (used in) operating activities

     (1)         28                          738        1,317 

CAPEX (b)

     16                                  1,637        1,308 

 

(a) Includes export sales to the United States of $1,306 million (2012- $1,133 million). Export sales to the United States were recorded in all operating segments, with the largest effects in the Upstream segment.

 

(b) Capital and exploration expenditures (CAPEX) include exploration expenses, additions to property, plant, equipment and intangibles, additions to capital leases and acquisition.

 

(c) A second quarter 2013 charge in the Downstream segment of $355 million ($264 million, after-tax) associated with the company’s decision to convert the Dartmouth refinery to a terminal included the write-down of refinery plant and equipment not included in the terminal conversion of $245 million, reported as part of depreciation and depletion expenses, and decommissioning, environmental and employee-related costs of $110 million, reported as part of production and manufacturing expenses. Amounts incurred in the second quarter 2013 associated with decommissioning, environmental and employee-related costs were de-minimis.

 

8


IMPERIAL OIL LIMITED

 

 

 

Six Months to June 30    Upstream      Downstream      Chemical
millions of dollars    2013      2012      2013      2012      2013      2012

REVENUES AND OTHER INCOME

                 

Operating revenues (a)

     2,606         2,468         12,651         11,787         636       691

Intersegment sales

     1,947         2,042         1,188         1,388         144       151

Investment and other income

     47         41         30         55         -       -
  

 

 

    

 

 

    

 

 

     4,600         4,551         13,869         13,230         780       842
  

 

 

    

 

 

    

 

 

EXPENSES

                 

Exploration

     44         46         -         -         -       -

Purchases of crude oil and products

     1,723         1,761         10,999         10,255         531       596

Production and manufacturing

     1,628         1,292         916         840         107       92

Selling and general

     3         2         434         463         32       33

Federal excise tax

     -         -         656         656         -       -

Depreciation and depletion

     275         248         351         108         6       7

Financing costs

     -         -         2         -         -       -
  

 

 

    

 

 

    

 

 

TOTAL EXPENSES

     3,673         3,349         13,358         12,322         676       728
  

 

 

    

 

 

    

 

 

INCOME BEFORE INCOME TAXES

     927         1,202         511         908         104       114

INCOME TAXES

     230         300         130         221         27       30
  

 

 

    

 

 

    

 

 

NET INCOME

     697         902         381         687         77       84
  

 

 

    

 

 

    

 

 

Cash flows from (used in) operating activities

     464         1,486         735         778         115       46

CAPEX (b)

     4,507         2,417         77         53         3       2

Total assets as at June 30

     27,870         19,146         6,391         6,633         379       368
Six Months to June 30    Corporate and Other      Eliminations      Consolidated
millions of dollars    2013      2012      2013      2012      2013      2012

REVENUES AND OTHER INCOME

                 

Operating revenues (a)

     -         -         -         -         15,893       14,946

Intersegment sales

     -         -         (3,279)         (3,581)         -       -

Investment and other income

     2         6         -         -         79       102
  

 

 

    

 

 

    

 

 

     2         6         (3,279)         (3,581)         15,972       15,048
  

 

 

    

 

 

    

 

 

EXPENSES

                 

Exploration

     -         -         -         -         44       46

Purchases of crude oil and products

     -         -         (3,277)         (3,581)         9,976       9,031

Production and manufacturing

     -         -         (2)         -         2,649       2,224

Selling and general

     37         33         -         -         506       531

Federal excise tax

     -         -         -         -         656       656

Depreciation and depletion

     5         5         -         -         637       368

Financing costs

     -         -         -         -         2       -
  

 

 

    

 

 

    

 

 

TOTAL EXPENSES

     42         38         (3,279)         (3,581)         14,470       12,856
  

 

 

    

 

 

    

 

 

INCOME BEFORE INCOME TAXES

     (40)         (32)         -         -         1,502       2,192

INCOME TAXES

     (10)         (9)         -         -         377       542
  

 

 

    

 

 

    

 

 

NET INCOME

     (30)         (23)         -         -         1,125       1,650
  

 

 

    

 

 

    

 

 

Cash flows from (used in) operating activities

     21         54         -         -         1,335       2,364

CAPEX (b)

     26         9         -         -         4,613       2,481

Total assets as at June 30

     798         1,221         (464)         (127)         34,974       27,241

 

(a) Includes export sales to the United States of $2,691 million (2012- $2,038 million). Export sales to the United States were recorded in all operating segments, with the largest effects in the Upstream segment.

 

(b) Capital and exploration expenditures (CAPEX) include exploration expenses, additions to property, plant, equipment and intangibles, additions to capital leases and acquisition.

 

9


IMPERIAL OIL LIMITED

 

 

 

3. Investment and other income

 

Investment and other income included gains and losses on asset sales as follows:
     Second Quarter      Six Months
to June 30
millions of dollars    2013      2012      2013      2012

Proceeds from asset sales

     54         61         62       139

Book value of assets sold

     3         6         7       55
  

 

 

    

 

 

Gain/(loss) on asset sales, before tax

     51         55         55       84
  

 

 

    

 

 

Gain/(loss) on asset sales, after tax

     38         46         41       70
  

 

 

    

 

 

 

4. Employee retirement benefits

 

The components of net benefit cost were as follows:

 

     Second Quarter      Six Months
to June 30
millions of dollars    2013     2012      2013     2012

Pension benefits:

         

Current service cost

     45        41         90      80

Interest cost

     70        72         140      144

Expected return on plan assets

     (81     (72      (163   (144)

Amortization of prior service cost

     5        6         11      11

Amortization of actuarial loss

     61        61         121      118
  

 

 

    

 

 

Net benefit cost

     100        108         199      209
  

 

 

    

 

 

Other post-retirement benefits:

         

Current service cost

     2        2         5      4

Interest cost

     6        6         11      11

Amortization of actuarial loss

     2        2         5      4
  

 

 

    

 

 

Net benefit cost

     10        10         21      19
  

 

 

    

 

 

 

10


IMPERIAL OIL LIMITED

 

 

 

5. Financing costs

 

           Six Months  
     Second Quarter     to June 30  
millions of dollars    2013     2012     2013     2012  

Debt related interest

     16        5        26        9   

Capitalized interest

     (16     (5     (26     (9
  

 

 

   

 

 

 

Net interest expense

     -        -        -        -   

Other interest

     2        -        2        -   
  

 

 

   

 

 

 

Total financing costs

     2        -        2        -   
  

 

 

   

 

 

 

 

6. Long-term debt

 

     As at      As at  
     June 30      Dec 31  
millions of dollars    2013      2012  

Long-term debt

     3,434         1,040   

Capital leases

     132         135   
  

 

 

    

 

 

 

Total long-term debt

     3,566         1,175   
  

 

 

    

 

 

 

In the second quarter of 2013, the company increased its long-term debt by $799 million by drawing on its existing facility with an affiliated company of Exxon Mobil Corporation and increased short-term debt by $348 million by issuing additional commercial paper.

Subsequent to the second quarter of 2013, the company increased its total debt outstanding by $494 million by drawing on existing facilities. The increased debt was used to finance normal operations and major projects.

Also in the second quarter of 2013, the company increased the amount of its existing $250 million unsecured committed bank credit facility to $500 million with the maturity date unchanged in March 2014. The company has not drawn on the facility.

 

7. Other long-term obligations

 

     As at      As at  
     June 30      Dec 31  
millions of dollars    2013      2012  

Employee retirement benefits (a)

     2,593         2,717   

Asset retirement obligations and other environmental liabilities (b)

     1,248         957   

Share-based incentive compensation liabilities

     144         117   

Other obligations

     211         192   
  

 

 

    

 

 

 

Total other long-term obligations

     4,196         3,983   
  

 

 

    

 

 

 

 

(a) Total recorded employee retirement benefits obligations also included $52 million in current liabilities (December 31, 2012 - $52 million).
(b) Total asset retirement obligations and other environmental liabilities also included $168 million in current liabilities (December 31, 2012 - $168 million).

 

11


IMPERIAL OIL LIMITED

 

 

 

8. Net income per share

 

     Second Quarter      Six Months
to June 30
 
     2013      2012      2013      2012  
                                     

Net income per common share - basic

           

Net income (millions of dollars)

     327         635         1,125         1,650   

Weighted average number of common shares outstanding (millions of shares)

     847.6         848.0         847.6         847.9   

Net income per common share (dollars)

     0.39         0.75         1.33         1.95   

Net income per common share - diluted

           

Net income (millions of dollars)

     327         635         1,125         1,650   

Weighted average number of common shares outstanding (millions of shares)

     847.6         848.0         847.6         847.9   

Effect of share-based awards (millions of shares)

     3.2         3.6         3.1         3.5   
  

 

 

    

 

 

 

Weighted average number of common shares outstanding, assuming dilution (millions of shares)

     850.8         851.6         850.7         851.4   

Net income per common share (dollars)

     0.38         0.75         1.32         1.94   

 

9. Other comprehensive income information

Changes in accumulated other comprehensive income:

 

millions of dollars    2013     2012  

Balance at January 1

     (2,455     (2,238

Post-retirement benefits liability adjustment:

    

Current period change excluding amounts reclassified from accumulated other comprehensive income

     (102     (117

Amounts reclassified from accumulated other comprehensive income

     102        99   
  

 

 

 

Balance at June 30

     (2,455     (2,256
  

 

 

 

Amounts reclassified out of accumulated other comprehensive income -

before-tax income/(expense):

 

           Six Months  
     Second Quarter     to June 30  
millions of dollars    2013     2012     2013     2012  

Amortization of post-retirement benefit liability adjustment included in net periodic benefit cost (a)

     (68     (69     (137     (133

 

(a) This accumulated other comprehensive income component is included in the computation of net periodic benefit cost (note 4).

Income tax expense/(credit) for components of other comprehensive income:

 

            Six Months  
     Second Quarter      to June 30  
millions of dollars    2013      2012      2013     2012  

Post-retirement benefits liability adjustments:

          

Post-retirement benefits liability adjustment (excluding amortization)

     -         -         (35     (40

Amortization of post-retirement benefit liability adjustment included in net periodic benefit cost

     17         18         35        34   
  

 

 

    

 

 

 
     17         18         -        (6
  

 

 

    

 

 

 

 

12


IMPERIAL OIL LIMITED

 

 

 

10. Acquisition

Description of the Transaction: On February 26, 2013, ExxonMobil Canada acquired Celtic Exploration Ltd. (“Celtic”). Immediately following the acquisition, Imperial acquired a 50-percent interest in Celtic’s assets and liabilities from ExxonMobil Canada for $1,608 million, financed by a combination of related party and third party debt (see note 6 for further details). Concurrently, a general partnership was formed to hold and operate the assets of Celtic. The name of the general partnership was changed to XTO Energy Canada (“XTO Canada”). XTO Canada is involved in the exploration for, production of, and transportation and sale of natural gas and crude oil, condensate and natural gas liquids.

Recording of Assets Acquired and Liabilities Assumed: Imperial used the acquisition method of accounting to record its pro-rata share of the assets acquired and liabilities assumed. This method requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The following table summarizes the assets acquired and liabilities assumed:

 

millions of dollars       

Cash

     6   

Accounts receivable

     38   

Materials, supplies and prepaid expenses

     5   

Property, plant and equipment (a)

     2,045   

Goodwill (b)

     20   
  

 

 

 

Total assets acquired

     2,114   
  

 

 

 

Accounts payable and accrued liabilities

     62   

Deferred income tax liabilities (c)

     377   

Other long-term obligations

     67   
  

 

 

 

Total liabilities assumed

     506   
  

 

 

 

Net assets acquired

     1,608   
  

 

 

 

 

(a) Property, plant and equipment were measured primarily using an income approach. The fair value measurements of the oil and gas assets were based, in part, on significant inputs not observable in the market and thus represent a Level 3 measurement. The significant inputs included Celtic resources, assumed future production profiles, commodity prices (mainly based on observable market inputs), risk adjusted discount rate of 10 percent, inflation of 2 percent and assumptions on the timing and amount of future development and operating costs. The property, plant and equipment additions were segmented to the Upstream business, with all of the assets in Canada.

 

(b) Goodwill was the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Goodwill was recognized in the Upstream reporting unit. Goodwill is not amortized and is not deductible for tax purposes.

 

(c) Deferred income taxes reflect the future tax consequences on the temporary differences between the amount of assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes. The deferred income taxes recorded as part of the acquisition were:

 

millions of dollars       

Property, plant and equipment

     414   
  

 

 

 

Total deferred income tax liabilities

     414   
  

 

 

 

Asset retirement obligations

     (17

Other

     (20
  

 

 

 

Total deferred income tax assets

     (37
  

 

 

 

Net deferred income tax liabilities

     377   
  

 

 

 

Actual and Pro Forma Impact of the Acquisition:

Revenues for XTO Canada from the acquisition date included in the company’s consolidated financial statement of income for the six months ended June 30, 2013 were $31 million. After-tax earnings for XTO Canada from the acquisition date through June 30, 2013 were de minimis.

Transaction costs related to the acquisition were expensed as incurred and were de minimis in the six months ended June 30, 2013.

Pro forma revenues, earnings and basic and diluted earnings per share information as if the acquisition had occurred at the beginning of 2013 or the comparable prior reporting period is not presented, since the effect on Imperial’s consolidated second quarter 2013 financial results or the comparable prior reporting period, would not have been material.

 

13


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

OPERATING RESULTS

The company’s net income for the second quarter of 2013 was $327 million or $0.38 a share on a diluted basis, compared with $635 million or $0.75 a share for the second quarter of 2012, a decrease of 49 percent. Net income in the first six months of 2013 was $1,125 million or $1.32 a share on a diluted basis, versus $1,650 million or $1.94 a share for the first half of 2012. Earnings in both the second quarter and first half of 2013 included a non-cash after tax charge of $264 million associated with the conversion of the Dartmouth refinery to a fuels terminal.

Other factors contributing to lower second quarter earnings included lower industry refining margins of about $285 million, higher start-up related operating costs at Kearl of about $90 million and lower bitumen production and higher maintenance costs at Cold Lake totalling about $80 million. These factors were partially offset by favourable impacts of about $220 million associated with improved refinery operations and lower maintenance activities, higher liquids realizations of about $130 million and higher volumes at Syncrude of about $45 million.

For the six months, other factors contributing to lower earnings included lower industry refining margins of about $155 million, higher start-up related operating costs at Kearl of about $145 million, lower liquids realizations of about $140 million and lower bitumen production and higher maintenance costs at Cold Lake totalling about $85 million. These factors were partially offset by lower royalty costs of about $195 million and improved refinery operations and lower refinery maintenance activities totalling about $105 million.

Upstream

Net income in the second quarter was $397 million, $37 million higher than the same period of 2012. Earnings increased primarily due to higher liquids realizations of about $130 million, higher volumes at Syncrude of about $45 million and lower royalty costs of about $35 million due to higher cost recovery for capital investments. These factors were partially offset by higher start-up related operating costs at Kearl of about $90 million. Sales of Kearl diluted bitumen continue to be expected in the third quarter of 2013. Earnings were also negatively impacted by lower bitumen production and higher costs at Cold Lake totalling about $80 million due to planned maintenance activities.

Net income for the six months of 2013 was $697 million, $205 million lower than the same period of 2012. Earnings decreased primarily due to higher start-up related operating costs at Kearl of about $145 million, lower liquids realizations of about $140 million and lower bitumen production and higher maintenance costs at Cold Lake totalling about $85 million. These factors were partially offset by lower royalty costs of about $195 million.

The price differential between Brent crude oil, the benchmark for Atlantic basin markets, and West Texas Intermediate (WTI), a common benchmark for mid-continent North American oil markets, narrowed to $8.27 a barrel in U.S. dollars in the second quarter of 2013 and to $13.15 a barrel in U.S. dollars in the first six months of 2013, compared to $14.86 and $15.19 a barrel, respectively, in the corresponding periods last year. As discounts for WTI crude oil decreased, the company’s average realizations in Canadian dollars on sales of conventional and synthetic crude oils increased about seven and 12 percent, respectively, in the second quarter of 2013 and about one and four percent, respectively, in the first six months of 2013. The company’s average bitumen realizations in Canadian dollars in the second quarter of 2013 also increased about 15 percent to $65.66 a barrel as the price spread between light crude oil and Cold Lake bitumen narrowed. However, in the first six months of 2013, the company’s average bitumen realizations in Canadian dollars were still down about 12 percent at $54.03 a barrel. The company’s average realization on natural gas sales of $3.50 a thousand cubic feet for both second quarter and first six months of 2013 was higher by about $1.70 and $1.41 a thousand cubic feet, respectively, versus the same periods in 2012.

Gross production of Cold Lake bitumen averaged 144 thousand barrels a day during the second quarter of 2013, down eight thousand barrels a day from the same period last year. Lower volumes were primarily due to the largest-ever preventive maintenance of the Mahkeses facilities. The maintenance activities have been successfully completed, and the plant has returned to normal operations. For the six months, gross production averaged 154 thousand barrels a day, compared with 155 thousand barrels in the first half of 2012.

 

14


The company’s share of Syncrude’s gross production in the second quarter was 68 thousand barrels a day, up from 60 thousand barrels in the second quarter of 2012. Increased production was due to lower maintenance activities partially offset by the negative impact of weather on mine operations in mid-June. Planned maintenance activities of one of the three cokers originally scheduled for later in the year was advanced into June and is scheduled to complete by early August. During the first six months of 2013, the company’s share of Syncrude’s gross production was 67 thousand barrels a day essentially unchanged from the same period in 2012.

Gross production of conventional crude oil averaged 22 thousand barrels a day in the second quarter, versus 20 thousand barrels in the corresponding period in 2012. Gross production averaged 20 thousand barrels a day in the first half of 2013, unchanged from the same period in 2012.

Gross production of natural gas during the second quarter of 2013 was 204 million cubic feet a day, up from 195 million cubic feet in the same period last year. Higher production volumes reflected the contributions from XTO Canada (formerly Celtic) and the Horn River pilot which more than offset normal field decline. Gross production of natural gas during the six months of 2013 was 195 million cubic feet a day, essentially unchanged from 197 million cubic feet in the same period last year.

On April 26, production from the first of three proprietary paraffinic froth treatment trains began at the Kearl initial development. The process is producing pipeline quality bitumen as planned. For the quarter, Kearl’s production volume contribution was low, at four thousand barrels a day as synchronizing facilities and working toward stable operations was the focus. Line-fill operations are advanced, and diluted bitumen sales are expected to begin in the third quarter. We expect to reach 110,000 barrels a day (78,000 barrels a day Imperial’s share) later in 2013.

Downstream

Net income was negative $97 million in the second quarter versus $232 million in the second quarter of 2012. Earnings in the second quarter of 2013 included a non-cash after tax charge of $264 million associated with the conversion of the Dartmouth refinery to a fuels terminal. Earnings were also negatively impacted by lower industry refining margins of about $285 million resulting from the narrowing price differential between Brent and WTI crude oils. These factors were partially offset by favourable impacts of about $220 million associated with improved refinery operations and lower refinery maintenance activities.

Six months net income was $381 million, a decrease of $306 million over the same period in 2012. Earnings in the first half of 2013 included a non-cash after tax charge of $264 million associated with the conversion of the Dartmouth refinery to a fuels terminal. Earnings were also negatively impacted by lower industry refining margins of about $155 million resulting from the narrowing price differential between Brent and WTI crude oils. These factors were partially offset by favourable impacts of about $105 million associated with improved refinery operations and lower refinery maintenance activities.

Chemical

Net income was $42 million in the second quarter versus $49 million in the same quarter last year. Lower sales volumes for chemical products were partially offset by higher polyethylene margins. Six months net income was $77 million, down $7 million over the same period in 2012.

Corporate and Other

Net income effects from Corporate and Other were negative $15 million in the second quarter, versus negative $6 million in the same period of 2012. For the six months of 2013, net income effects from Corporate & Other were negative $30 million, versus negative $23 million last year.

 

15


LIQUIDITY AND CAPITAL RESOURCES

Cash flow generated from operating activities was $738 million in the second quarter, versus $1,317 million in the corresponding period in 2012. Lower cash flow was primarily associated with inventory build as a result of lower pipeline apportionment and the start-up of Kearl initial development, versus an inventory draw during the same period in 2012 following planned refinery maintenance. Year-to-date cash flow generated from operating activities was $1,335 million, compared with $2,364 million in the same period last year. Lower cash flow was primarily due to lower net income and working capital effects.

Investing activities used net cash of $1,562 million in the second quarter, compared with $1,224 million in the same period of 2012. Additions to property, plant and equipment were $1,616 million in the second quarter, compared with $1,290 million during the same quarter 2012. Expenditures during the quarter were primarily directed towards the advancement of Kearl expansion and Cold Lake Nabiye projects. The Kearl expansion is expected to bring on additional production of 110,000 barrels of bitumen a day, before royalties, of which the company’s share would be about 78,000 barrels a day. Start-up is expected late 2015. The Nabiye expansion at Cold Lake is expected to bring on additional production of more than 40,000 barrels of bitumen a day, before royalties. Start-up is expected to be late 2014.

Cash from financing activities was $1,043 million in the second quarter, compared with cash used in financing activities of $142 million in the second quarter of 2012. In the second quarter, the company increased its long-term debt level by $799 million by drawing on an existing facility and issued additional commercial paper which increased short-term debt by $348 million. Subsequent to the second quarter of 2013, the company increased its total debt outstanding by $494 million by drawing on existing facilities. The increased debt was used to finance normal operations and major projects.

The above factors led to an increase in the company’s balance of cash to $542 million at June 30, 2013, from $482 million at the end of 2012.

Subsequent to the second quarter, the company has entered into additional long-term pipeline transportation agreements to ship heavy crude oil blend. These agreements, which have a total commitment of about $3 billion, will support the company’s long-term growth in oil sands production. The company expects to fulfill these commitments in the normal course of business.

 

16


Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Information about market risks for the six months ended June 30, 2013 does not differ materially from that discussed on page 23 in the company’s Annual Report on Form 10-K for the year ended December 31, 2012 and Form 10-Q for the quarter ended March 31, 2013 except for the following:

 

Earnings sensitivity (a)

millions of dollars after tax

           

Nine dollars (U.S.) a barrel change in crude oil prices

   + (-)            390            

Nine cents decrease (increase) in the value of the Canadian dollar versus the U.S. dollar

   + (-)            575            

 

(a) The amount quoted to illustrate the impact of the sensitivity represents a change of about 10 percent in the value of the rate at the end of the second quarter 2013. The sensitivity calculation shows the impact on annual net income that results from a change in one factor, after tax and royalties and holding all other factors constant. While the sensitivity is applicable under current conditions, it may not apply proportionately to larger fluctuations.

The sensitivity of net income to changes in crude oil prices increased from the first quarter of 2013 by about $6 million (after tax) a year for each one U.S. dollar change. The sensitivity of net income to changes in the Canadian dollar versus the U.S. dollar increased from the first quarter of 2013 by about $7 million (after tax) a year for each one-cent change. The increase in both areas was primarily a result of the impact of production from the Kearl initial development which began in the second quarter of 2013.

 

Item 4. Controls and Procedures.

As indicated in the certifications in Exhibit 31 of this report, the company’s principal executive officer and principal financial officer have evaluated the company’s disclosure controls and procedures as of June 30, 2013. Based on that evaluation, these officers have concluded that the company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to them in a manner that allows for timely decisions regarding required disclosures and are effective in ensuring that such information is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There has not been any change in the company’s internal control over financial reporting during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting.

 

17


PART II - OTHER INFORMATION

 

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

Issuer Purchases of Equity Securities (1) (2)

 

         
Period  

(a) Total

number of

shares (or

units)

purchased

 

(b) Average

price paid

per share (or

unit)

 

(c) Total

number of
shares (or

units)

purchased

as part of

publicly

announced

plans or

programs

 

(d) Maximum

number (or

approximate

dollar value) of

shares (or units)
that may yet be
purchased

under the plans

or programs

April 2013

(Apr 1- Apr 30)

 

               0                            0                            0                       41,508,309         

May 2013

(May 1 – May 31)

 

  0   0   0   41,411,918

June 2013

(June 1 – June 30)

 

  0   0   0   41,310,354

 

(1) On June 21, 2012, the company announced by news release that it had received final approval from the Toronto Stock Exchange for a new normal course issuer bid and will continue its share repurchase program. The new program enables the company to repurchase up to a maximum of 42,379,951 common shares, including common shares purchased for the company’s employee savings plan, the company’s employee retirement plan and from Exxon Mobil Corporation during the period June 25, 2012 to June 24, 2013. The program ended on June 24, 2013.
(2) On June 21, 2013, the company announced by news release that it had received final approval from the Toronto Stock Exchange for a new normal course issuer bid and will continue its share repurchase program. The new program enables the company to repurchase up to a maximum of 1,000,000 common shares, including common shares purchased for the company’s employee savings plan, the company’s employee retirement plan and from Exxon Mobil Corporation during the period June 25, 2013 to June 24, 2014. If not previously terminated, the program will end on June 24, 2014.

The company will continue to evaluate its share-purchase program in the context of its overall capital activities.

 

18


Item 6. Exhibits.

(31.1) Certification by the principal executive officer of the company pursuant to Rule 13a-14(a).

(31.2) Certification by the principal financial officer of the company pursuant to Rule 13a-14(a).

(32.1) Certification by the chief executive officer and of the company pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350.

(32.2) Certification by the chief financial officer and of the company pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350.

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.

 

      IMPERIAL OIL LIMITED
      (Registrant)
      /s/ Paul J. Masschelin
Date:     August 6, 2013       -------------------------------------------------
      (Signature)
      Paul J. Masschelin
     

Senior Vice-President, Finance and Administration

and Controller

      (Principal Accounting Officer)

 

      /s/ Brent A. Latimer
Date:     August 6, 2013       -------------------------------------------------
      (Signature)
      Brent A. Latimer
      Assistant Secretary

 

19