10-Q
Table of Contents

FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

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   (I.R.S. Employer
of incorporation or organization)   Identification No.)
505 Quarry Park Boulevard S.E.  
Calgary, Alberta, Canada   T2C 5N1
(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        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        NO           

The registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act of 1934).

 

Large accelerated filer

              Smaller reporting company        

Non-accelerated filer

          Emerging growth company        

Accelerated filer

               

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.          

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

YES            NO       

The number of common shares outstanding, as of September 30, 2017 was 837,581,329.


Table of Contents

IMPERIAL OIL LIMITED

 

 

Table of contents

 

          Page  
PART I. FINANCIAL INFORMATION      3  
Item 1.    Financial statements      3  
  

Consolidated statement of income

     3  
  

Consolidated statement of comprehensive income

     4  
  

Consolidated balance sheet

     5  
  

Consolidated statement of cash flows

     6  
  

Notes to the consolidated financial statements

     7  
Item 2.    Management’s discussion and analysis of financial condition and results of operations      15  
Item 3.    Quantitative and qualitative disclosures about market risk      21  
Item 4.    Controls and procedures      21  
PART II. OTHER INFORMATION      22  
Item 2.    Unregistered sales of equity securities and use of proceeds      22  
Item 6.    Exhibits      23  
SIGNATURES      24  

 

 

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, 2016. Note that numbers may not add due to rounding.

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

In this report, unless the context otherwise indicates, reference to “the company” or “Imperial” includes Imperial Oil Limited and its subsidiaries.

 

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IMPERIAL OIL LIMITED

 

 

 

PART I. FINANCIAL INFORMATION

Item 1.   Financial statements

Consolidated statement of income (U.S. GAAP, unaudited)

 

            Third Quarter     

Nine Months

to September 30

 
millions of Canadian dollars    2017      2016      2017          2016     

 

 

Revenues and other income

           

Operating revenues (a)

     7,134        6,568        21,077        17,967     

Investment and other income (note 3)

     24        874        270        945     

 

 

Total revenues and other income

     7,158        7,442        21,347        18,912     

 

 

Expenses

           

Exploration

     7        16        29        75     

Purchases of crude oil and products (b)

     4,251        3,857        13,226        10,884     

Production and manufacturing (c)

     1,338        1,261        4,238        3,842     

Selling and general (c)

     219        275        626        812     

Federal excise tax

     438        434        1,253        1,237     

Depreciation and depletion

     391        398        1,135        1,229     

Financing costs (note 5)

     18        19        49        52     

 

 

Total expenses

     6,662        6,260        20,556        18,131     

 

 

Income (loss) before income taxes

     496        1,182        791        781     

Income taxes

     125        179        164        60     

 

 

Net income (loss)

     371        1,003        627        721     

 

 

Per-share information (Canadian dollars)

           

Net income (loss) per common share - basic (note 8)

     0.44        1.18        0.74        0.85     

Net income (loss) per common share - diluted (note 8)

     0.44        1.18        0.74        0.85     

Dividends per common share

     0.16        0.15        0.47        0.44     

 

 

(a)

 

Amounts from related parties included in operating revenues.

     756        448        2,801        1,457     

(b)

 

Amounts to related parties included in purchases of crude oil and products.

     604        623        1,919        1,540     

(c)

  Amounts to related parties included in production and manufacturing, and selling and general expenses.      127        133        415        394     

The information in the notes to consolidated financial statements is an integral part of these statements.

 

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IMPERIAL OIL LIMITED

 

 

 

Consolidated statement of comprehensive income (U.S. GAAP, unaudited)

 

     Third Quarter     

Nine Months

to September 30

 
millions of Canadian dollars    2017      2016          2017          2016     

 

 

Net income (loss)

     371        1,003        627        721     

Other comprehensive income (loss), net of income taxes

           

Post-retirement benefits liability adjustment (excluding amortization)

     -        -        41        100     

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

     34        34        106        108     

 

 

Total other comprehensive income (loss)

     34        34        147        208     

 

 
           

 

 

Comprehensive income (loss)

     405        1,037        774        929     

 

 

The information in the notes to consolidated financial statements is an integral part of these statements.

 

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IMPERIAL OIL LIMITED

 

 

 

Consolidated balance sheet (U.S. GAAP, unaudited)

 

millions of Canadian dollars   

As at

Sept 30
2017

   

As at

Dec 31
2016

 
   

Assets

    

Current assets

    

Cash

     833       391  

Accounts receivable, less estimated doubtful accounts (a)

     1,896       2,023  

Inventories of crude oil and products

     989       949  

Materials, supplies and prepaid expenses

     441       468  
   

Total current assets

     4,159       3,831  

Investments and long-term receivables

     931       1,030  

Property, plant and equipment,

     53,844       53,515  

less accumulated depreciation and depletion

     (18,248     (17,182
   

Property, plant and equipment, net

     35,596       36,333  

Goodwill

     186       186  

Other assets, including intangibles, net

     498       274  
   

Total assets

     41,370       41,654  
   

Liabilities

    

Current liabilities

    

Notes and loans payable (b)

     202       202  

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

     3,041       3,193  

Income taxes payable

     59       488  
   

Total current liabilities

     3,302       3,883  

Long-term debt (c) (note 6)

     5,013       5,032  

Other long-term obligations (d) (note 7)

     3,698       3,656  

Deferred income tax liabilities

     4,336       4,062  
   

Total liabilities

     16,349       16,633  
   

Shareholders’ equity

    

Common shares at stated value (e) (note 8)

     1,547       1,566  

Earnings reinvested (note 9)

     25,224       25,352  

Accumulated other comprehensive income (loss) (note 10)

     (1,750     (1,897
   

Total shareholders’ equity

     25,021       25,021  
   

Total liabilities and shareholders’ equity

     41,370       41,654  
   
(a) Accounts receivable, less estimated doubtful accounts included net amounts receivable from related parties of $87 million (2016 - $172 million).
(b) Notes and loans payable included amounts to related parties of $75 million (2016 - $75 million).
(c) Long-term debt included amounts to related parties of $4,447 million (2016 - $4,447 million).
(d) Other long-term obligations included amounts to related parties of $71 million (2016 - $104 million).
(e) Number of common shares authorized and outstanding were 1,100 million and 838 million, respectively (2016 - 1,100 million and 848 million, respectively).

The information in the notes to consolidated financial statements is an integral part of these statements.

 

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IMPERIAL OIL LIMITED

 

 

 

Consolidated statement of cash flows (U.S. GAAP, unaudited)

 

Inflow (outflow)    Third Quarter    

    Nine Months

    to September 30

 
millions of Canadian dollars    2017     2016     2017     2016  

 

 

Operating activities

        

Net income (loss)

     371       1,003       627       721  

Adjustments for non-cash items:

        

Depreciation and depletion

     391       398       1,135       1,229  

(Gain) loss on asset sales (note 3)

     (6     (909     (219     (952

Deferred income taxes and other

     131       215       294       35  

Changes in operating assets and liabilities:

        

Accounts receivable

     (297     275       127       (121

Inventories, materials, supplies and prepaid expenses

     104       (7     (13     112  

Income taxes payable

     19       (13     (429     -  

Accounts payable and accrued liabilities

     81       (241     (159     (59

All other items - net (a)

     43       51       320       299  

 

 

Cash flows from (used in) operating activities

     837       772       1,683       1,264  

 

 

Investing activities

        

Additions to property, plant and equipment

     (241     (189     (683     (893

Proceeds from asset sales (note 3)

     8       1,194       230       1,244  

Additional investments

     (1     -       (1     (1

 

 

Cash flows from (used in) investing activities

     (234     1,005       (454     350  

 

 

Financing activities

        

Short-term debt - net

     -       (1,591     -       (1,679

Long-term debt - additions (note 6)

     -       -       -       495  

Reduction in capitalized lease obligations (note 6)

     (7     (6     (20     (21

Dividends paid

     (136     (127     (390     (364

Common shares purchased (note 8)

     (250     -       (377     -  

 

 

Cash flows from (used in) financing activities

     (393     (1,724     (787     (1,569

 

 

Increase (decrease) in cash

     210       53       442       45  

Cash at beginning of period

     623       195       391       203  

 

 

Cash at end of period (b)

     833       248       833       248  

 

 

(a)   Included contribution to registered pension plans.

     (78     (44 )      (176     (120 ) 
(b) Cash is composed of cash in bank and cash equivalents at cost. Cash equivalents are all highly liquid securities with maturity of three months or less when purchased.

The information in the notes to consolidated financial statements is an integral part of these statements.

 

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IMPERIAL OIL LIMITED

 

 

 

Notes to 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 (GAAP) and follow the same accounting policies and methods of computation as, and should be read in conjunction with, the most recent annual consolidated financial statements filed with the U.S. Securities and Exchange Commission (SEC) in the company’s 2016 annual report on Form 10-K. In the opinion of the company, the information furnished herein reflects all known accruals and adjustments necessary for a fair statement of the results for the periods reported herein. All such adjustments are of a normal recurring nature. Prior data has been reclassified in certain cases to conform to the current presentation basis.

The company’s exploration and production activities are accounted for under the “successful efforts” method.

The results for the nine months ended September 30, 2017, are not necessarily indicative of the operations to be expected for the full year.

All amounts are in Canadian dollars unless otherwise indicated.

 

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IMPERIAL OIL LIMITED

 

 

 

2. Business segments

 

Third Quarter               Upstream       Downstream        Chemical  
millions of Canadian dollars    2017     2016      2017     2016     2017      2016   

 

 

Revenues and other income

             

Operating revenues (a)

     1,668       1,316       5,204       4,971       262        281  

Intersegment sales

     587       709       241       253       62        58  

Investment and other income (note 3)

     7       1       15       870       -        1  

 

 
     2,262       2,026       5,460       6,094       324        340  

 

 

Expenses

             

Exploration

     7       16       -       -       -         

Purchases of crude oil and products

     947       861       4,014       3,827       179        188  

Production and manufacturing

     893       887       394       323       51        51  

Selling and general

     5       (1     167       238       19        22  

Federal excise tax

     -             438       434       -         

Depreciation and depletion

     330       346       53       46       3        2  

Financing costs (note 5)

     1       (2     -       -       -         

 

 

Total expenses

     2,183       2,107       5,066       4,868       252        263  

 

 

Income (loss) before income taxes

     79       (81     394       1,226       72        77  

Income taxes

     17       (55     102       224       20        21  

 

 

Net income (loss)

     62       (26     292       1,002       52        56  

 

 

Cash flows from (used in) operating activities

     479       432       268       264       99        73  

Capital and exploration expenditures (b)

     92       149       55       38       5        7  

 

 
Third Quarter            Corporate and Other        Eliminations      Consolidated  
millions of Canadian dollars    2017     2016      2017     2016     2017      2016   

 

 

Revenues and other income

             

Operating revenues (a)

     -             -       -       7,134        6,568  

Intersegment sales

     -             (890     (1,020     -         

Investment and other income (note 3)

     2       2       -       -       24        874  

 

 
     2       2       (890     (1,020     7,158        7,442  

 

 

Expenses

             

Exploration

     -             -       -       7        16  

Purchases of crude oil and products

     -             (889     (1,019     4,251        3,857  

Production and manufacturing

     -             -       -       1,338        1,261  

Selling and general

     29       17       (1     (1     219        275  

Federal excise tax

     -             -       -       438        434  

Depreciation and depletion

     5       4       -       -       391        398  

Financing costs (note 5)

     17       21       -       -       18        19  

 

 

Total expenses

     51       42       (890     (1,020     6,662        6,260  

 

 

Income (loss) before income taxes

     (49     (40     -       -       496        1,182  

Income taxes

     (14     (11     -       -       125        179  

 

 

Net income (loss)

     (35     (29     -       -       371        1,003  

 

 

Cash flows from (used in) operating activities

     (9     3       -       -       837        772  

Capital and exploration expenditures (b)

     7       11       -       -       159        205  

 

 
(a) Included export sales to the United States of $1,080 million (2016 - $941 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 and equipment, additions to capital leases, additional investments and acquisitions.

 

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IMPERIAL OIL LIMITED

 

 

 

Nine Months to September 30                Upstream         Downstream      Chemical  
millions of Canadian dollars    2017     2016     2017     2016     2017     2016   

 

 

Revenues and other income

            

Operating revenues (a)

     5,166       3,699       15,087       13,470       824       798   

Intersegment sales

     1,494       1,516       792       689       191       156   

Investment and other income (note 3)

     17       22       248       919       (1      

 

 
     6,677       5,237       16,127       15,078       1,014       955   

 

 

Expenses

            

Exploration

     29       75       -       -       -        

Purchases of crude oil and products

     3,089       2,584       12,037       10,139       573       518   

Production and manufacturing

     2,917       2,634       1,169       1,059       152       149   

Selling and general

     1       (3     540       729       60       63   

Federal excise tax

     -       -       1,253       1,237       -        

Depreciation and depletion

     964       1,053       148       158       9        

Financing costs (note 5)

     5       (6     -       -       -        

 

 

Total expenses

     7,005       6,337       15,147       13,322       794       736   

 

 

Income (loss) before income taxes

     (328     (1,100     980       1,756       220       219   

Income taxes

     (103     (336     230       363       59       59   

 

 

Net income (loss)

     (225     (764     750       1,393       161       160   

 

 

Cash flows from (used in) operating activities

     904       32       626       1,028       176       205   

Capital and exploration expenditures (b)

     286       745       128       145       12       21   

Total assets as at September 30

     35,387       36,975       4,671       4,403       365       379   
   
Nine Months to September 30                Corporate and Other         Eliminations      Consolidated  
millions of Canadian dollars    2017     2016     2017     2016     2017     2016   

 

 

Revenues and other income

            

Operating revenues (a)

     -       -       -       -       21,077       17,967   

Intersegment sales

     -       -       (2,477     (2,361     -        

Investment and other income (note 3)

     6       3       -       -       270       945   

 

 
     6       3       (2,477     (2,361     21,347       18,912   

 

 

Expenses

            

Exploration

     -       -       -       -       29       75   

Purchases of crude oil and products

     -       -       (2,473     (2,357     13,226       10,884   

Production and manufacturing

     -       -       -       -       4,238       3,842   

Selling and general

     29       27       (4     (4     626       812   

Federal excise tax

     -       -       -       -       1,253       1,237   

Depreciation and depletion

     14       12       -       -       1,135       1,229   

Financing costs (note 5)

     44       58       -       -       49       52   

 

 

Total expenses

     87       97       (2,477     (2,361     20,556       18,131   

 

 

Income (loss) before income taxes

     (81     (94     -       -       791       781   

Income taxes

     (22     (26     -       -       164       60   

 

 

Net income (loss)

     (59     (68     -       -       627       721   

 

 

Cash flows from (used in) operating activities

     (23     (1     -       -       1,683       1,264   

Capital and exploration expenditures (b)

     29       37       -       -       455       948   

Total assets as at September 30

     1,283       674       (336     (337     41,370       42,094   

 

 
(a) Included export sales to the United States of $3,024 million (2016 - $2,704 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 and equipment, additions to capital leases, additional investments and acquisitions.

 

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3. Investment and other income

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

 

     Third Quarter     

Nine Months

to September 30

 
  millions of Canadian dollars    2017        2016        2017        2016    
   

  Proceeds from asset sales

     8          1,194          230          1,244    

  Book value of asset sales

     2          285          12          292    
   

  Gain (loss) on asset sales, before tax (a) (b)

     6          909          219          952    
   

  Gain (loss) on asset sales, after tax (a) (b)

     5          774          191          808    
   
(a) The nine months ended September 30, 2017 included a gain of $174 million ($151 million after tax) for the sale of a surplus property in Ontario.
(b) Third quarter and nine months ended September 30, 2016, included gains of $0.8 billion ($0.7 billion, after tax) from the sale of company-owned Esso retail sites in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, Nova Scotia and Newfoundland.

 

4. Employee retirement benefits

The components of net benefit cost were as follows:

 

     Third Quarter     Nine Months
to September 30
 
  millions of Canadian dollars    2017     2016     2017     2016  
   

  Pension benefits:

        

Current service cost

     54       50       163       152  

Interest cost

     77       82       235       240  

Expected return on plan assets

     (104     (101     (306     (300

Amortization of prior service cost

     2       2       7       7  

Amortization of actuarial loss (gain)

     43       39       132       121  
   

Net periodic benefit cost

     72       72       231       220  
   

  Other post-retirement benefits:

        

Current service cost

     4       4       12       12  

Interest cost

     6       7       18       20  

Amortization of actuarial loss (gain)

     2       3       6       10  
   

Net periodic benefit cost

     12       14       36       42  
   

 

5. Financing costs and additional notes and loans payable information

 

     Third Quarter      Nine Months
to September 30
 
  millions of Canadian dollars    2017       2016       2017       2016   
   

  Debt-related interest

     24         32         73         95   

  Capitalized interest

     (7)        (11)        (29)        (37)  
   

  Net interest expense

     17         21         44         58   

  Other interest

            (2)               (6)  
   

  Total financing costs

     18         19         49         52   
   

 

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6. Long-term debt

 

         As at
Sept 30
     As at
Dec 31
 
millions of Canadian dollars    2017      2016  
   

Long-term debt

     4,447        4,447  

Capital leases

     566        585  
   

Total long-term debt

     5,013        5,032  
   

 

7. Other long-term obligations

 

         As at
Sept 30
     As at
Dec 31
 
millions of Canadian dollars    2017      2016  
   

Employee retirement benefits (a)

     1,410        1,645  

Asset retirement obligations and other environmental liabilities (b)

     1,577        1,544  

Share-based incentive compensation liabilities

     138        139  

Other obligations

     573        328  
   

Total other long-term obligations

     3,698        3,656  

 

 
(a) Total recorded employee retirement benefits obligations also included $58 million in current liabilities (2016 - $58 million).
(b) Total asset retirement obligations and other environmental liabilities also included $108 million in current liabilities (2016 - $108 million).

 

8. Common shares

 

         As of
Sept 30
     As of
Dec 31
 
thousands of shares    2017      2016  

 

 

Authorized

     1,100,000        1,100,000  

Common shares outstanding

     837,581        847,599  

 

 

From 1995 through September 2017, the company had a series of 12-month normal course issuer bid share purchase programs. Cumulatively, 916,563 thousand shares were purchased under these programs. Exxon Mobil Corporation’s participation in these programs, including concurrent programs outside the normal course issuer bids, maintained its ownership interest in Imperial at approximately 69.6 percent.

The current 12-month normal course issuer bid program was announced on June 22, 2017, under which Imperial plans to continue its share purchase program. The program enables the company to purchase up to a maximum of 25,395,927 common shares (3 percent of the total shares on June 13, 2017), which includes shares purchased under the normal course issuer bid and from Exxon Mobil Corporation concurrent with, but outside of the normal course issuer bid. As in the past, Exxon Mobil Corporation has advised the company that it intends to participate to maintain its ownership percentage at approximately 69.6 percent. The results of these activities are as shown below:

 

year    Purchased shares
thousands
     Millions of
dollars
 

 

 

1995 - 2015

     906,544        15,708  

2016 - Third quarter

     -        -  

         - Full year

     1        -  

2017 - Third quarter

     6,732        250  

         - Year-to-date

     10,018        377  

 

 

Cumulative purchase to date

     916,563        16,085  

 

 

 

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The excess of the purchase cost over the stated value of shares purchased has been recorded as a distribution of earnings reinvested.

The following table provides the calculation of net income per common share:

 

            Nine Months  
         Third Quarter      to September 30  
     2017      2016      2017      2016  
   

Net income (loss) per common share - basic

           

Net income (loss) (millions of Canadian dollars)

     371        1,003        627        721  

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

     841.8        847.6        845.5        847.6  

Net income (loss) per common share (dollars)

     0.44        1.18        0.74        0.85  
                                     

Net income (loss) per common share - diluted

           

Net income (loss) (millions of Canadian dollars)

          371          1,003             627             721  

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

     841.8        847.6        845.5        847.6  

Effect of employee share-based awards (millions of shares)

     3.1        3.2        2.9        3.0  
                                     

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

     844.9        850.8        848.4        850.6  

Net income (loss) per common share (dollars)

     0.44        1.18        0.74        0.85  
                                     

 

9. Earnings reinvested

 

           Nine Months  
         Third Quarter     to September 30  
millions of Canadian dollars    2017     2016     2017     2016  
                                  

Earnings reinvested at beginning of period

     25,224       23,160       25,352       23,687  

Net income (loss) for the period

     371       1,003       627       721  

Share purchases in excess of stated value

     (237     -       (358     -  

Dividends declared

     (134     (127     (397     (373

Earnings reinvested at end of period

     25,224       24,036       25,224       24,036  
                                  

 

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10. Other comprehensive income (loss) information

Changes in accumulated other comprehensive income (loss):

 

millions of Canadian dollars    2017     2016  

 

 

Balance at January 1

     (1,897     (1,828

Post-retirement benefits liability adjustment:

    

Current period change excluding amounts reclassified from accumulated other comprehensive
income

     41       100  

Amounts reclassified from accumulated other comprehensive income

     106       108  

 

 

Balance at September 30

     (1,750     (1,620

 

 

Amounts reclassified out of accumulated other comprehensive income (loss) - before-tax income (expense):

 

     Third Quarter     Nine Months
to September 30
 
millions of Canadian dollars    2017     2016     2017     2016  
   

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

     (47     (44     (145     (138
   

(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 (loss):

 

     Third Quarter      Nine Months
to September 30
 
millions of Canadian dollars    2017      2016      2017      2016  
   

Post-retirement benefits liability adjustments:

           

Post-retirement benefits liability adjustment (excluding amortization)

     -        -        16        37  

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

     13        10        39        30  
   

Total

     13        10        55        67  
   

 

11. Recently issued accounting standards

In May 2014, the Financial Accounting Standards Board (FASB) issued a new standard, Revenue from Contracts with Customers. The standard establishes a single revenue recognition model for all contracts with customers, eliminates industry specific requirements and expands disclosure requirements. The standard is required to be adopted beginning January 1, 2018. The company expects to adopt the standard using the modified retrospective method, under which prior years’ results are not restated, but supplemental information on the impact of the new standard will be included in the 2018 results. The impact from the standard is not expected to have a material effect on the company’s financial statements.

In February 2016, the FASB issued a new standard, Leases. The standard requires all leases with an initial term greater than one year be recorded on the balance sheet as a lease asset and lease liability. The standard is required to be adopted beginning January 1, 2019. Imperial is evaluating the standard and its effect on the company’s financial statements and plans to adopt it in 2019.

 

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In March 2017, the FASB issued an Accounting Standards Update 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The update requires that the service cost component of net benefit costs be reported in the same line in the income statement as other compensation costs and that the other components of net benefit costs be presented separately from the service cost component. Additionally, only the service cost component of net benefit costs will be eligible for capitalization. Imperial will adopt the update beginning January 1, 2018. As a result of Imperial’s adoption of the update, the company expects to add a new line Non-service pension and other postretirement benefit expense to its consolidated statement of income. This line would reflect the other components of net benefit costs as described in the Accounting Standards Update and would include amounts that were previously included in Production and manufacturing expenses, and Selling and general expenses. As of January 1, 2018, these costs will no longer be considered for capitalization. The impact from this change on the company’s net income is not expected to be material. Furthermore, as part of the adoption of the update, the company expects it will include all of these costs in its Corporate and Other expenses.

 

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Item 2. Management’s discussion and analysis of financial condition and results of operations

Operating results

Third quarter 2017 vs. third quarter 2016

The company’s net income for the third quarter of 2017 was $371 million or $0.44 per-share on a diluted basis, compared to the net income of $1,003 million or $1.18 per-share for the same period last year. Third quarter 2016 results included a $716 million gain from the sale of retail sites.

Upstream recorded net income in the third quarter of $62 million, compared to a net loss of $26 million in the same period of 2016. Results in the third quarter of 2017 reflected the impact of higher Canadian crude oil realizations of about $190 million and higher Kearl volumes of about $50 million. These impacts were partially offset by lower Syncrude and conventional volumes of about $80 million, including the absence of production at Norman Wells, and higher royalties of about $50 million.

West Texas Intermediate (WTI) averaged US$48.23 per barrel in the third quarter of 2017, up from US$44.94 per barrel in the same quarter of 2016. Western Canada Select (WCS) averaged US$38.29 per barrel and US$31.43 per barrel respectively for the same periods. The WTI / WCS differential narrowed to 21 percent in the third quarter of 2017, from 30 percent in the same period of 2016.

The Canadian dollar averaged US$0.80 in the third quarter of 2017, an increase of US$0.03 from the third quarter of 2016.

Imperial’s average Canadian dollar realizations for bitumen and synthetic crudes increased generally in line with the North American benchmarks, adjusted for changes in exchange rates and transportation costs. Bitumen realizations averaged $39.02 per barrel for the third quarter of 2017, an increase of $8.86 per barrel versus the third quarter of 2016. Synthetic crude realizations averaged $61.14 per barrel, an increase of $2.17 per barrel for the same period of 2016.

Gross production of Cold Lake bitumen averaged 163,000 barrels per day in the third quarter, up from 157,000 barrels per day in the same period last year. The higher production was mainly due to the timing of the steam cycles.

Gross production of Kearl bitumen averaged 182,000 barrels per day in the third quarter (129,000 barrels Imperial’s share) up from 159,000 barrels per day (113,000 barrels Imperial’s share) during the third quarter of 2016. Higher production was mainly the result of improved reliability.

The company’s share of gross production from Syncrude averaged 74,000 barrels per day, compared to 85,000 barrels per day in the third quarter of 2016. Repairs associated with the Syncrude Mildred Lake upgrader fire were completed in late July. Lower third quarter volumes reflect the impact of the fire on operations, when compared to the same quarter in 2016.

Downstream net income was $292 million in the third quarter, compared to $1,002 million in the same period of 2016. Earnings decreased mainly due to the absence of a $716 million gain from the sale of company-owned retail sites and higher refining turnaround activity of about $100 million. These factors were partly offset by higher refining margins of about $140 million.

Refinery throughput averaged 385,000 barrels per day, compared to 407,000 barrels per day in the third quarter of 2016. Reduced throughput reflects increased turnaround activity associated with the Nanticoke refinery in the third quarter 2017.

Petroleum product sales were 500,000 barrels per day, compared to 505,000 barrels per day in the third quarter of 2016.

 

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Chemical net income was $52 million in the third quarter, compared to $56 million in the same quarter of 2016.

Net income effects from Corporate and Other were negative $35 million in the third quarter, compared to negative $29 million in the same period of 2016.

 

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Nine months 2017 vs. nine months 2016

Net income in the first nine months of 2017 was $627 million, or $0.74 per-share on a diluted basis versus net income of $721 million or $0.85 per-share in the first nine months of 2016.

Upstream recorded a net loss of $225 million in the first nine months of 2017, compared to a net loss of $764 million from the same period of 2016. Results reflected the impact of higher Canadian crude oil realizations of about $940 million and higher Kearl volumes of about $50 million. These impacts were partially offset by higher royalties of about $150 million, lower Syncrude and conventional volumes of about $130 million, including the absence of production at Norman Wells, higher energy costs of about $90 million, and higher operating expenses at Syncrude of about $90 million.

West Texas Intermediate averaged US$49.40 per barrel in the first nine months of 2017, up from US$41.54 per barrel in the same period of 2016. Western Canada Select averaged US$37.57 per barrel and US$27.74 per barrel respectively for the same periods. The WTI / WCS differential narrowed to 24 percent in the first nine months of 2017, from 33 percent in the same period of 2016.

During the first nine months of 2017, the Canadian dollar strengthened relative to the US dollar versus the same period of 2016. The Canadian dollar averaged US$0.77 in the first nine months of 2017, an increase of about US$0.01 from the same period of 2016.

Imperial’s average Canadian dollar realizations for bitumen and synthetic crudes increased generally in line with the North American benchmarks, adjusted for changes in the exchange rate and transportation costs. Bitumen realizations averaged $37.82 per barrel for the first nine months of 2017, an increase of $14.05 per barrel versus the same period of 2016. Synthetic crude realizations averaged $64.37 per barrel, an increase of $10.92 per barrel from the same period of 2016.

Gross production of Cold Lake bitumen averaged 161,000 barrels per day in the first nine months of 2017, compared to 162,000 barrels per day from the same period of 2016.

Gross production of Kearl bitumen averaged 179,000 barrels per day in the first nine months of 2017 (127,000 barrels Imperial’s share) up from 169,000 barrels per day (120,000 barrels Imperial’s share) from the same period of 2016. Increased 2017 production reflects improved reliability associated with the mining and ore preparation operations.

During the first nine months of 2017, the company’s share of gross production from Syncrude averaged 56,000 barrels per day, compared to 61,000 barrels per day from the same period of 2016. Syncrude year to date production was impacted by the March 2017 fire at the Syncrude Mildred Lake upgrader and planned maintenance. In 2016, production was impacted by the Alberta wildfires and planned maintenance.

Downstream net income was $750 million, compared to $1,393 million from the same period of 2016. Earnings decreased mainly due to the absence of a $719 million gain from the sale of company-owned retail sites and lower marketing margins of approximately $170 million associated with the impact of the retail divestment. These factors were partially offset by a gain of $151 million from the sale of a surplus property and higher industry refining margins of about $90 million.

Refinery throughput averaged 381,000 barrels per day in the first nine months of 2017, up from 351,000 barrels per day from the same period of 2016. Capacity utilization increased to 90 percent from 83 percent in the same period of 2016, reflecting reduced turnaround maintenance activity.

Petroleum product sales were 492,000 barrels per day in the first nine months of 2017, up from 481,000 barrels per day from the same period of 2016. Sales growth continues to be driven by strong collaboration across our downstream value chain and the expansion of Imperial’s wholesale, industrial and commercial networks.

Chemical net income was $161 million, up from $160 million from the same period of 2016.

 

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For the first nine months of 2017, net income effects from Corporate and Other were negative $59 million, versus negative $68 million from the same period of 2016.

 

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Liquidity and capital resources

Cash flow generated from operating activities was $837 million in the third quarter, compared with $772 million in the corresponding period in 2016.

Investing activities used net cash of $234 million in the third quarter, compared with $1,005 million cash generated from investing activities in the same period of 2016, reflecting lower proceeds from asset sales.

Cash used in financing activities was $393 million in the third quarter, compared with $1,724 million in the third quarter of 2016, reflecting the absence of debt repayments. Dividends paid in the third quarter of 2017 were $136 million. The per-share dividend paid in the third quarter was $0.16, up from $0.15 in the same period of 2016. In the second quarter of 2017, Imperial resumed share purchases under its share buyback program. During the third quarter, the company purchased about 6.7 million shares for approximately $250 million.

The company’s cash balance was $833 million at September 30, 2017, versus $248 million at the end of the third quarter of 2016.

Cash flow generated from operating activities was $1,683 million in the first nine months of 2017, compared with $1,264 million in 2016, reflecting higher earnings, excluding the impact of asset sales, partially offset by unfavourable working capital effects.

Investing activities used net cash of $454 million in the first nine months of 2017, compared with cash generated from investing activities of $350 million from the same period of 2016, reflecting lower proceeds from asset sales partially offset by lower additions to property, plant and equipment.

Cash used in financing activities was $787 million in the first nine months of 2017, compared with $1,569 million from the same period of 2016, reflecting the absence of debt repayments. Dividends paid in the first nine months of 2017 were $390 million. The per-share dividend paid in the first nine months of 2017 was $0.46, up from $0.43 for the same period of 2016.

During the first nine months of 2017 the company purchased about 10 million shares for $377 million, including shares purchased from Exxon Mobil Corporation.

Recently issued accounting standards

In May 2014, the Financial Accounting Standards Board (FASB) issued a new standard, Revenue from Contracts with Customers. The standard establishes a single revenue recognition model for all contracts with customers, eliminates industry specific requirements and expands disclosure requirements. The standard is required to be adopted beginning January 1, 2018. The company expects to adopt the standard using the modified retrospective method, under which prior years’ results are not restated, but supplemental information on the impact of the new standard will be included in the 2018 results. The impact from the standard is not expected to have a material effect on the company’s financial statements.

In February 2016, the FASB issued a new standard, Leases. The standard requires all leases with an initial term greater than one year be recorded on the balance sheet as a lease asset and lease liability. The standard is required to be adopted beginning January 1, 2019. Imperial is evaluating the standard and its effect on the company’s financial statements and plans to adopt it in 2019.

 

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In March 2017, the FASB issued an Accounting Standards Update 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The update requires that the service cost component of net benefit costs be reported in the same line in the income statement as other compensation costs and that the other components of net benefit costs be presented separately from the service cost component. Additionally, only the service cost component of net benefit costs will be eligible for capitalization. Imperial will adopt the update beginning January 1, 2018. As a result of Imperial’s adoption of the update, the company expects to add a new line Non-service pension and other postretirement benefit expense to its consolidated statement of income. This line would reflect the other components of net benefit costs as described in the Accounting Standards Update and would include amounts that were previously included in Production and manufacturing expenses, and Selling and general expenses. As of January 1, 2018, these costs will no longer be considered for capitalization. The impact from this change on the company’s net income is not expected to be material. Furthermore, as part of the adoption of the update, the company expects it will include all of these costs in its Corporate and Other expenses.

Forward-looking statements

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

 

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Item 3. Quantitative and qualitative disclosures about market risk

Information about market risks for the nine months ended September 30, 2017, does not differ materially from that discussed on page 22 of the company’s annual report on Form 10-K for the year ended December 31, 2016.

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 September 30, 2017. Based on that evaluation, these officers have concluded that the company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to them in a manner that allows for timely decisions regarding required disclosures and are effective in ensuring that such information is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

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

 

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PART II.  OTHER INFORMATION

Item 2.  Unregistered sales of equity securities and use of proceeds

Issuer purchases of equity securities

 

     

  Total number of
      shares purchased    

  

    Average price    
  paid per share    
(dollars)

  

Total number of
  shares purchased    
  as part of publicly    
  announced plans    
or programs

  

    Maximum number    
of shares that may
  yet be purchased  
under the plans or
programs (a)

July 2017

(Jul 1 – Jul 31)

   -    -    -    25,395,927

August 2017

(Aug 1 – Aug 31)

   3,876,648    36.42    3,876,648    21,519,279

September 2017

(Sept 1 – Sept 30)

   2,855,022    38.10    2,855,022        18,664,257 (b)
(a) On June 22, 2017, 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 existing share purchase program. The program enables the company to purchase up to a maximum of 25,395,927 common shares during the period June 27, 2017 to June 26, 2018, which includes shares purchased under the normal course issuer bid and from Exxon Mobil Corporation concurrent with, but outside of the normal course issuer bid. As in the past, Exxon Mobil Corporation has advised the company that it intends to participate to maintain its ownership percentage at approximately 69.6 percent. The program will end should the company purchase the maximum allowable number of shares, or on June 26, 2018.
(b) In its most recent quarterly earnings release, the company stated that fourth quarter 2017 share purchases are anticipated to equal approximately $250 million. Purchase plans may be modified at any time without prior notice.

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

 

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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 of the company pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350.

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

 

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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.

 

  

Imperial Oil Limited

(Registrant)

  
Date: October 31, 2017   

/s/ Beverley A. Babcock

  
   (Signature)   
   Beverley A. Babcock   
   Senior Vice-President, Finance and Administration and Controller   
   (Principal Accounting Officer)   
Date: October 31, 2017   

/s/ Cathryn Walker

  
   (Signature)   
   Cathryn Walker   
   Assistant Corporate Secretary   

 

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