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IMPERIAL OIL LTD - Quarter Report: 2002 November (Form 10-Q)


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FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



ý

Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2002

OR

o

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
(State or other jurisdiction of
incorporation or organization)
  98-0017682
(I.R.S. Employer
Identification No.)

111 St. Clair Avenue West,
Toronto, Ontario, Canada

(Address of principal executive offices)

 

M5W 1K3
(Postal Code)

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

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        The number of common shares outstanding, as of September 30, 2002, was 378,863,095.




IMPERIAL OIL LIMITED


INDEX

 
   
   
  PAGE
PART I   Financial Information:    

 

 

 

 

Consolidated Statement of Earnings—
Three months ended September 30, 2002 and 2001
Nine months ended September 30, 2002 and 2001

 

3

 

 

 

 

Consolidated Statement of Cash Flows—
Three months ended September 30, 2002 and 2001
Nine months ended September 30, 2002 and 2001

 

4

 

 

 

 

Consolidated Balance Sheet—
As at September 30, 2002 and December 31, 2001

 

5

 

 

 

 

Notes to the Consolidated Financial Statements

 

6

 

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

17

 

 

Quantitative and Qualitative Disclosures about Market Risk

 

19

 

 

Controls and Procedures

 

19

PART II

 

 

 

 

 

 
    Other Information   19

SIGNATURES

 

20

CERTIFICATIONS

 

21


In this report all dollar amounts are expressed in Canadian dollars. This report should be read in conjunction with the company's Annual Report on Form 10-K for the year ended December 31, 2001, and Form 10-Q for the quarters ended March 31, 2002 and June 30, 2002.

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

2




PART I—FINANCIAL INFORMATION

Item 1.  Financial Statements


IMPERIAL OIL LIMITED

CONSOLIDATED STATEMENT OF EARNINGS

(unaudited)

 
  Third quarter
  Nine months
to September 30

 
  2002
  2001
  2002
  2001
 
  millions of dollars

REVENUES                
  Operating revenues   4,456   4,165   12,112   13,647
  Investment and other income(3)   76   25   100   80
   
 
 
 
TOTAL REVENUES(2)   4,532   4,190   12,212   13,727
   
 
 
 

EXPENSES

 

 

 

 

 

 

 

 
  Exploration   5   12   20   23
  Purchases of crude oil and products   2,659   2,458   7,276   8,195
  Operating   744   780   2,340   2,323
  Federal excise tax   327   313   924   889
  Depreciation and depletion   184   175   526   546
  Financing costs(6)   56   69   28   131
   
 
 
 
TOTAL EXPENSES   3,975   3,807   11,114   12,107
   
 
 
 

EARNINGS BEFORE INCOME TAXES

 

557

 

383

 

1,098

 

1,620
INCOME TAXES   213   145   342   575
   
 
 
 
NET EARNINGS(2)   344   238   756   1,045
   
 
 
 

PER-SHARE INFORMATION—dollars

 

 

 

 

 

 

 

 
  Net earnings—basic(9)   0.91   0.61   2.00   2.64
  Net earnings—diluted(9)   0.91   0.61   2.00   2.64
  Dividends   0.210   0.210   0.630   0.615


CONSOLIDATED STATEMENT OF RETAINED EARNINGS

(unaudited)

 
  Third quarter
  Nine months
to September 30

 
 
  2002
  2001
  2002
  2001
 
 
  millions of dollars

 
RETAINED EARNINGS AT BEGINNING OF PERIOD   2,634   2,790   2,392   2,191  
  Net earnings for the period   344   238   756   1,045  
  Share purchases(10)     (334 ) (11 ) (381 )
  Dividends   (79 ) (82 ) (238 ) (243 )
   
 
 
 
 
RETAINED EARNINGS AT END OF PERIOD   2,899   2,612   2,899   2,612  
   
 
 
 
 

The notes to the financial statements are part of these financial statements.

3



IMPERIAL OIL LIMITED

CONSOLIDATED STATEMENT OF CASH FLOWS

(unaudited)

 
   
   
  Nine months
to September 30

 
 
  Third quarter
 
inflow/(outflow)

 
  2002
  2001
  2002
  2001
 
 
  millions of dollars

 
OPERATING ACTIVITIES                  
  Net earnings   344   238   756   1,045  
  Depreciation and depletion   184   175   526   546  
  (Gain)/loss on asset sales, after tax(3)     (1 ) (3 ) (3 )
  Future income taxes and other   (34 ) 22   (243 ) (63 )
   
 
 
 
 
  Cash flow from earnings   494   434   1,036   1,525  
 
Accounts receivable

 

(59

)

147

 

(229

)

254

 
  Inventories and prepaids   (24 ) (83 ) (201 ) (221 )
  Income taxes payable   184   (30 ) (255 ) (201 )
  Accounts payable and other   (258 ) (157 ) 387   364  
   
 
 
 
 
  Change in operating assets and liabilities   (157 ) (123 ) (298 ) 196  
   
 
 
 
 
CASH FROM OPERATING ACTIVITIES   337   311   738   1,721  
   
 
 
 
 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 
  Additions to property, plant and equipment   (386 ) (289 ) (995 ) (653 )
  Proceeds from asset sales(3)   6   11   50   33  
   
 
 
 
 
CASH FROM(USED IN) INVESTING ACTIVITIES   (380 ) (278 ) (945 ) (620 )
   
 
 
 
 

CASH FLOW BEFORE FINANCING ACTIVITIES

 

(43

)

33

 

(207

)

1,101

 

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 
  Short-term debt—net     309   (460 ) 309  
  Long-term debt issued       500    
  Repayment of long-term debt     (308 )   (308 )
  Common shares purchased(10)     (379 ) (13 ) (433 )
  Dividends paid   (79 ) (84 ) (239 ) (240 )
   
 
 
 
 
CASH FROM(USED IN) FINANCING ACTIVITIES   (79 ) (462 ) (212 ) (672 )
   
 
 
 
 

INCREASE(DECREASE) IN CASH

 

(122

)

(429

)

(419

)

429

 
CASH AT BEGINNING OF PERIOD   575   1,878   872   1,020  
   
 
 
 
 
CASH AT END OF PERIOD   453   1,449   453   1,449  
   
 
 
 
 

The notes to the financial statements are part of these financial statements.

4



IMPERIAL OIL LIMITED

CONSOLIDATED BALANCE SHEET

(unaudited)

 
  As at
Sept. 30
2002

  As at
Dec. 31
2001

 
 
  millions of dollars
 
ASSETS          
Current assets          
  Cash   453   872  
  Accounts receivable   1,221   992  
  Inventories of crude oil and products   616   478  
  Materials, supplies and prepaid expenses   179   116  
  Future income tax assets   338   227  
   
 
 
Total current assets   2,807   2,685  
Investments and other long-term assets   136   139  

Property, plant and equipment at cost

 

17,539

 

16,756

 
  less accumulated depreciation and depletion   (9,388 ) (9,047 )
   
 
 
Property, plant and equipment (net)   8,151   7,709  

Goodwill

 

204

 

204

 
Other intangible assets(4)   25   24  
   
 
 
TOTAL ASSETS   11,323   10,761  
   
 
 

LIABILITIES

 

 

 

 

 
Current liabilities          
  Short-term debt     460  
  Accounts payable and accrued liabilities   2,115   1,791  
  Income taxes payable   527   774  
   
 
 
Total current liabilities   2,642   3,025  

Long-term debt

 

1,541

 

1,029

 
Other long-term obligations(7)   1,127   1,063  
Future income tax liabilities   1,175   1,311  
   
 
 
TOTAL LIABILITIES   6,485   6,428  

SHAREHOLDERS' EQUITY

 

 

 

 

 
  Common shares(10)   1,939   1,941  
  Earnings retained and used in the business   2,899   2,392  
   
 
 
TOTAL SHAREHOLDERS' EQUITY   4,838   4,333  
   
 
 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY   11,323   10,761  
   
 
 

The notes to the financial statements are part of these financial statements.

5



IMPERIAL OIL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

        In the opinion of the management, the accompanying unaudited consolidated financial statements reflect all known accruals and adjustments necessary for a fair presentation of the financial position of the company as at September 30, 2002, and December 31, 2001, and the results of operations and changes in cash flows for the nine months ending September 30, 2002, and 2001. All such adjustments are of a normal recurring nature.

        The results for the nine months ending September 30, 2002, are not necessarily indicative of the operations to be expected for the full year.

        All figures are in millions of Canadian dollars unless otherwise stated.

1.    Adjustments under United States GAAP

        The financial statements of the company have been prepared in accordance with generally accepted accounting principles (GAAP) in Canada. These principles conform in all material respects to those in the United States except for the following.

 
  Third quarter
  Nine months
to September 30

 
 
  2002
  2001
  2002
  2001
 
 
  millions of dollars

 
Earnings as shown in financial statements(2)(a)   344   238   756   1,045  
Impact of U.S. accounting principles(b)                  
  Capitalized interest     (1 ) (2 ) (3 )
  Enacted tax rate difference   (2 ) 1   (22 ) (12 )
   
 
 
 
 
Net earnings under U.S. GAAP(a)   342   238   732   1,030  

Other comprehensive income, net of tax(b):

 

 

 

 

 

 

 

 

 
  Minimum pension liability adjustment (net of nil tax expense in 2002 and $2 million tax benefit in 2001)     (3 )   (2 )
   
 
 
 
 
Comprehensive income under U.S. GAAP   342   235   732   1,028  
   
 
 
 
 

6


        The adjustments, on the previous page, under United States GAAP result in changes to the Consolidated Balance Sheet of the company as follows.

 
  As at

September 30, 2002

  As at
December 31, 2001

 
 
  As

Reported

  U.S.
GAAP

  As
Reported

  U.S.
GAAP

 
Current assets   2,469   2,469   2,458   2,458  
Future income tax assets   338   389   227   277  
Investments and other long-term assets   136   136   139   139  
Property, plant and equipment—cost   17,539   17,639   16,756   16,857  
Property, plant and equipment—accumulated depreciation and depletion   (9,388 ) (9,478 ) (9,047 ) (9,133 )
Goodwill   204   204   204   204  
Other intangible assets(4)   25   137   24   136  
   
 
 
 
 
TOTAL ASSETS   11,323   11,496   10,761   10,938  
   
 
 
 
 
Current liabilities   2,642   2,651   3,025   3,025  
Long-term debt   1,541   1,541   1,029   1,029  
Other long-term obligations   1,127   1,366   1,063   1,303  
Future income tax liabilities   1,175   1,191   1,311   1,315  
Shareholders' equity   4,838   4,747   4,333   4,266  
   
 
 
 
 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY   11,323   11,496   10,761   10,938  
   
 
 
 
 
Shareholders' Equity:                  
Common shares at stated value                  
  At beginning   1,941   1,941   2,039   2,039  
  Share purchases at stated value   (2 ) (2 ) (98 ) (98 )
   
 
 
 
 
  At end   1,939   1,939   1,941   1,941  
   
 
 
 
 
Retained earnings                  
  At beginning   2,392   2,402   2,191   2,217  
  Net earnings for the period   756   732   1,239   1,223  
  Share purchases in excess of stated value   (11 ) (11 ) (714 ) (714 )
  Dividends   (238 ) (238 ) (324 ) (324 )
   
 
 
 
 
  At end   2,899   2,885   2,392   2,402  
   
 
 
 
 
Accumulated other comprehensive income                  
  At beginning     (77 )   (25 )
  Other comprehensive income for the period         (52 )
   
 
 
 
 
  At end     (77 )   (77 )
   
 
 
 
 
Total shareholders' equity   4,838   4,747   4,333   4,266  
   
 
 
 
 

7


    (a)
    Earnings per share (dollars)(9)

 
  Third quarter
  Nine months
 
  2002
  2001
  2002
  2001
                            Under accounting principles of                
                                Canada—basic   0.91   0.61   2.00   2.64
                                             —diluted   0.91   0.61   2.00   2.64
                                United States—basic   0.90   0.61   1.93   2.60
                                                         —diluted   0.90   0.61   1.93   2.60
    (b)
    Impact of accounting principles

      An explanation of these items is found on pages 16 to 19 of the company's annual report on Form 10-K for the year ended December 31, 2001.

    (c)
    Accounting changes

      As of January 1, 2002, the company adopted Financial Accounting Standards Board Statements of Financial Accounting Standards No.142 (FAS 142), "Goodwill and Other Intangible Assets" and FAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets".

      FAS 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. Goodwill and certain intangibles with indefinite lives are no longer amortized but are subject to annual impairment tests. Intangible assets that have finite useful lives continue to be amortized over their useful lives. The Canadian Institute of Chartered Accountants (CICA) adopted a similar standard that harmonizes Canadian GAAP with U.S. GAAP. Disclosures required by the new U.S. and Canadian accounting standards are described in note 4.

      FAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The new standard retains the requirements of existing U.S. GAAP to recognize an impairment loss if the carrying amount exceeds undiscounted cash flows and to measure the impairment loss as the difference between the carrying amount and fair value of the asset. FAS 144 also retains the existing U.S. GAAP requirement to report separately discontinued operations, but extends that reporting to a component of the company that has been disposed of or is classified as held for sale. Adoption of FAS 144 did not have a material effect on the Company's operations or financial condition.

    (d)
    Recently issued Statement of Financial Accounting Standard

      The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No.143 (FAS 143), "Accounting for Asset Retirement Obligations" in June 2001, and Statement of Financial Accounting Standards No. 146 (FAS 146), "Accounting for Costs Associated with Exit or Disposal Activities" in June 2002.

      FAS 143, effective January 1, 2003, requires the fair value of a legal liability related to an asset retirement be recognized in the period in which it is incurred. The associated asset retirement costs must be capitalized as part of the carrying amount of the related long-lived asset and subsequently amortized to expense. Subsequent changes in the liability will result

8



      from the passage of time (interest cost) and revisions to cash flow estimates. The effect on the company of adopting FAS 143 is under evaluation.

      FAS 146 applies to exit and disposal activities initiated after December 31, 2002. The Standard requires the fair value of a liability for a cost associated with an exit or disposal activity be recognized in the period in which the liability is incurred. The company is not engaged in any current exit or disposal activities.

    (e)
    The company makes limited use of derivatives. There were no significant derivatives outstanding at January 1 or September 30, 2002, nor were any significant derivatives undertaken during the first nine months of 2002.

2.    Business segments

 
  Resources
  Products
  Chemicals
Third quarter

  2002
  2001
  2002
  2001
  2002
  2001
 
  millions of dollars

REVENUES                        
  Operating revenues(a)   648   685   3,556   3,257   252   223
  Intersegment sales(b)   647   573   273   296   54   63
  Investment and other income   68   2   6   5    
   
 
 
 
 
 
TOTAL REVENUES   1,363   1,260   3,835   3,558   306   286
   
 
 
 
 
 
EXPENSES                        
  Exploration(c)   5   12        
  Purchases(b)   438   544   2,986   2,635   209   210
  Operating(b)   245   235   442   484   56   58
  Federal excise tax       327   313    
  Depreciation and depletion   130   115   48   54   6   6
  Financing costs         1    
   
 
 
 
 
 
TOTAL EXPENSES   818   906   3,803   3,487   271   274
   
 
 
 
 
 
EARNINGS BEFORE INCOME TAXES   545   354   32   71   35   12
INCOME TAXES   202   123   11   29   13   5
   
 
 
 
 
 
NET EARNINGS   343   231   21   42   22   7
   
 
 
 
 
 
EXPORT SALES TO THE UNITED STATES   246   278   152   207   137   125
CASH FLOW FROM EARNINGS   436   324   38   95   25   15
CAPEX(c)   242   205   136   89   13   7

9


 
  Corporate
  Consolidated
Third quarter

  2002
  2001
  2002
  2001
 
  millions of dollars

REVENUES                
  Operating revenues(a)       4,456   4,165
  Intersegment sales(b)        
  Investment and other income   2   18   76   25
   
 
 
 
TOTAL REVENUES   2   18   4,532   4,190
   
 
 
 
EXPENSES                
  Exploration(c)       5   12
  Purchases(b)       2,659   2,458
  Operating(b)   1   4   744   780
  Federal excise tax       327   313
  Depreciation and depletion       184   175
  Financing costs   56   68   56   69
   
 
 
 
TOTAL EXPENSES   57   72   3,975   3,807
   
 
 
 
EARNINGS BEFORE INCOME TAXES   (55 ) (54 ) 557   383
INCOME TAXES   (13 ) (12 ) 213   145
   
 
 
 
NET EARNINGS   (42 ) (42 ) 344   238
   
 
 
 
EXPORT SALES TO THE UNITED STATES       535   610
CASH FLOW FROM EARNINGS   (5 )   494   434
CAPEX(c)       391   301

    (a)
    Includes crude sales made by Products in order to optimize refining operations.

    (b)
    Consolidated amounts exclude intersegment transactions, as follows:
 
  2002
  2001
                            Purchases   974   931
                            Operating expenses     1
   
 
                            Total intersegment sales   974   932
   
 

10


    (c)
    Capital and exploration expenditures (CAPEX) include exploration expenses and additions to property, plant and equipment.

 
  Resources
  Products
  Chemicals
Nine months to September 30

  2002
  2001
  2002
  2001
  2002
  2001
 
  millions of dollars

REVENUES                        
  Operating revenues(a)   1,788   2,634   9,608   10,277   716   736
  Intersegment sales(b)   1,626   1,714   744   1,088   152   203
  Investment and other income   73   9   18   16    
   
 
 
 
 
 
TOTAL REVENUES   3,487   4,357   10,370   11,381   868   939
   
 
 
 
 
 
EXPENSES                        
  Exploration(c)   20   23        
  Purchases(b)   1,254   2,013   7,929   8,450   614   736
  Operating(b)   793   760   1,369   1,386   171   164
  Federal excise tax       924   889    
  Depreciation and depletion   356   349   153   180   17   17
  Financing costs   1   1   1   2    
   
 
 
 
 
 
TOTAL EXPENSES   2,424   3,146   10,376   10,907   802   917
   
 
 
 
 
 
EARNINGS BEFORE INCOME TAXES   1,063   1,211   (6 ) 474   66   22
INCOME TAXES   333   390   (5 ) 196   24   8
   
 
 
 
 
 
NET EARNINGS   730   821   (1 ) 278   42   14
   
 
 
 
 
 
EXPORT SALES TO THE UNITED STATES   651   856   470   572   386   400
CASH FLOW FROM EARNINGS   966   1,025   35   482   54   30
CAPEX(c)   649   476   349   179   17   21
TOTAL ASSETS AS AT SEPT. 30(b)   5,770   5,287   5,039   4,711   396   414
CAPITAL EMPLOYED AS AT SEPT. 30   3,229   2,312   2,472   2,072   178   183

11


 
  Corporate
  Consolidated
Nine months to September 30

  2002
  2001
  2002
  2001
 
  millions of dollars

REVENUES                
  Operating revenues(a)       12,112   13,647
  Intersegment sales(b)        
  Investment and other income   9   55   100   80
   
 
 
 
TOTAL REVENUES   9   55   12,212   13,727
   
 
 
 
EXPENSES                
  Exploration(c)       20   23
  Purchases(b)       7,276   8,195
  Operating(b)   8   14   2,340   2,323
  Federal excise tax       924   889
  Depreciation and depletion       526   546
  Financing costs   26   128   28   131
   
 
 
 
TOTAL EXPENSES   34   142   11,114   12,107
   
 
 
 
EARNINGS BEFORE INCOME TAXES   (25 ) (87 ) 1,098   1,620
INCOME TAXES   (10 ) (19 ) 342   575
   
 
 
 
NET EARNINGS   (15 ) (68 ) 756   1,045
   
 
 
 
EXPORT SALES TO THE UNITED STATES       1,507   1,828
CASH FLOW FROM EARNINGS   (19 ) (12 ) 1,036   1,525
CAPEX(c)       1,015   676
TOTAL ASSETS AS AT SEPT. 30(b)   453   1,450   11,323   11,616
CAPITAL EMPLOYED AS AT SEPT. 30   500   1,480   6,379   6,047

    (a)
    Includes crude sales made by Products in order to optimize refining operations.

    (b)
    Consolidated amounts exclude intersegment transactions, as follows:

 
  2002
  2001
                            Purchases   2,521   3,004
                            Operating expenses   1   1
   
 
                            Total intersegment sales   2,522   3,005
   
 
                            Intersegment receivables and payables   335   246
   
 
    (c)
    Capital and exploration expenditures (CAPEX) include exploration expenses and additions to property, plant and equipment.

12


3.    Investment and other income

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

 
  Third quarter
  Nine months
 
  2002
  2001
  2002
  2001
 
  millions of dollars

Proceeds from asset sales   6   11   50   33
Assets and liabilities disposed of(a)   6   10   47   28
   
 
 
 
Gain/(loss) on asset sales, before tax     1   3   5
   
 
 
 
Gain/(loss) on asset sales, after tax     1   3   3
   
 
 
 

    (a)
    Assets sold did not include cash.

4.    Goodwill and other intangible assets

        The new CICA standard dealing with accounting for goodwill and other intangible assets eliminates the amortization of goodwill. The standard does not permit retroactive application. On a pro forma basis, the impact of adopting the new goodwill accounting standard on prior period earnings is:

 
  Third quarter
  Nine months
 
  2002
  2001
  2002
  2001
 
  millions of dollars

Net earnings   344   238   756   1,045
Add back: goodwill amortization     7     21
   
 
 
 
Adjusted net earnings   344   245   756   1,066
   
 
 
 
Per share—basic and diluted (dollars)                
Net earnings   0.91   0.61   2.00   2.64
Goodwill amortization     0.01     0.05
   
 
 
 
Net earnings as adjusted   0.91   0.62   2.00   2.69
   
 
 
 

        Total assets include amortized intangible assets, consisting primarily of acquired customer lists, as follows:

 
  Nine months
 
 
  2002
  2001
 
 
  millions of dollars

 
Cost   54   48  
Accumulated amortization   (29 ) (24 )
   
 
 
Net intangible assets   25   24  
   
 
 
Amortization expense   3   3  
Customer lists acquired   4   9  

13


        The estimated annual amortization expense for intangible assets in each of the next five years is $4 million.

5.    Foreign currency translation

        The new CICA standard dealing with accounting for foreign currency translation eliminates the deferral and amortization of translation gains or losses. The new standard has been applied retroactively, and financial statements of prior periods have been restated. The impact of adopting the new foreign currency translation standard on the consolidated balance sheet and statement of earnings is:


Change in consolidated balance sheet

 
  As at Sept. 30
 
 
  2002
  2001
 
 
  millions of dollars—increase/(decrease)

 
Long-term debt   89   127  
Future income tax liabilities   (19 ) (26 )
Retained earnings   (70 ) (101 )
   
 
 
Total liabilities and shareholders' equity      
   
 
 


Change in consolidated statement of earnings

 
  Third quarter
  Nine months
 
 
  2002
  2001
  2002
  2001
 
 
  millions of dollars—increase/(decrease)

 
Total expenses   35   26   (32 ) 12  
Income taxes   (6 ) (5 ) 6   (2 )
   
 
 
 
 
Net earnings   (29 ) (21 ) 26   (10 )
   
 
 
 
 
Earnings per share—basic and diluted (dollars)   (0.08 ) (0.06 ) 0.07   (0.03 )

6.    Financing costs

 
  Third quarter
  Nine months
 
  2002
  2001
  2002
  2001
 
  millions of dollars

Debt related interest   10   19   29   66
Other interest     1   2   3
   
 
 
 
Total interest expense   10   20   31   69
Foreign exchange expense (gain) on long-term debt   46   49   (3 ) 62
   
 
 
 
Total financing costs   56   69   28   131
   
 
 
 

14


7.    Other long-term obligations

 
  As at
Sept. 30
2002

  As at
Dec. 31
2001

 
  millions of dollars

Employee retirement benefits   608   560
Site restoration   433   415
Other obligations   86   88
   
 
Total other long-term obligations   1,127   1,063
   
 

8.    Incentive compensation programs

        The company's incentive compensation programs include incentive share units that require settlement by cash payments and are recorded as compensation expense in the consolidated statement of earnings. Further details of the incentive share unit programs, including the company's accounting policy, are described in the 2001 annual report on Form 10-K.

        In April 2002, shareholders approved an incentive stock-option plan to replace the company's current incentive share unit plan. Under the new stock-option plan, a total of 3,210,200 options were granted on April 30, 2002, for the purchase of the company's common shares at an exercise price of $46.50 per share. Up to 50 percent of the options may be exercised on or after January 1, 2003, a further 25 percent may be exercised on or after January 1, 2004, and the remaining 25 percent may be exercised on or after January 1, 2005. Any unexercised options expire after April 29, 2012. Shares available for granting under the incentive stock-option plan were 20 million at September 30, 2002.

        The company does not recognize compensation expense on the issuance of stock options because the exercise price is equal to the market value at the date of grant. If the fair value based method of accounting had been adopted, net income and earnings per share (on both a basic and diluted basis) would have been reduced by $6 million or $0.02 per share in the third quarter and $10 million or $0.03 per share in the first nine months of 2002. The average fair value of each option granted during 2002 was $12.70. The fair value was estimated at the grant date using an option-pricing model with the following weighted average assumptions: risk-free interest rate of 5.7 percent; expected life of five years; volatility of 25 percent and a dividend yield of 1.9 percent.

        The company expects to purchase shares on the market to fully offset the dilutive effects from the exercise of stock options.

        The company's accounting policy for its incentive compensation programs complies with the new CICA standard that became effective January 1, 2002. Consequently, there was no impact on the recorded expense or liability upon adoption of the new accounting standard.

9.    Earnings per share

        There is no significant dilutive effect on basic net earnings per share from the outstanding incentive stock options described in note 8.

15



10.  Common shares

 
  As at
Sept. 30
2002

  As at
Dec. 31
2001

 
  thousands of shares

Authorized   450,000   450,000
Common shares outstanding   378,863   379,159

        In 1995 through 2001, the company purchased shares under seven 12-month normal course share-purchase programs, as well as an auction tender. On June 21, 2002, another 12-month normal course program was implemented with an allowable purchase of 18.9 million shares (five percent of the total on June 19, 2002), less any shares purchased by the employee savings plan and company pension fund. The results of these activities are as shown below:

 
  millions of
Year

  Shares
  Dollars
1995 - 2000   183.3   4,344

2001 - Third quarter

 

9.0

 

379
          Full year   19.1   812

2002 - Third quarter

 


 

          Year to date   0.3   13

Cumulative purchases to date

 

202.7

 

5,169

        Exxon Mobil Corporation's participation in the above maintained its ownership interest in Imperial at 69.6 percent.

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

16




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

OPERATING RESULTS

        The company's net earnings for the third quarter of 2002 were $344 million or $0.91 a share, compared with $238 million or $0.61 a share for the same period last year. Earnings increased as a result of higher prices for crude oil, partly offset by lower petroleum products margins. Net earnings for the first three quarters of 2002 were $756 million or $2 a share, compared with $1,045 million or $2.64 a share for nine months ending September 30, 2001. Earnings decreased as a result of lower prices for natural gas, lower production volumes for crude oil and much weaker petroleum products markets.

        Total revenues were $4,532 million in the third quarter and $12,212 million in the first nine months of 2002, compared with $4,190 million and $13,727 million in the corresponding periods last year.

Natural resources

        During the third quarter of 2002, net earnings from natural resources were $343 million, the second-best quarterly performance on record, compared with $231 million during the third quarter of 2001. Third quarter earnings increased on improved heavy oil markets and higher prices for conventional crude oil. Net earnings for the first nine months of 2002 were $730 million compared with $821 million during the same nine-month period last year. Earnings declined primarily because of lower prices for natural gas. Improved heavy oil markets more than offset reduced production of crude oil and lower prices for conventional oil.

        Prices for natural gas averaged $3.36 a thousand cubic feet in the third quarter and $3.61 a thousand cubic feet in the first nine months of 2002, compared with $3.57 a thousand cubic feet during the third quarter and $6.60 in the first nine months last year. Prices for conventional crude oil averaged $40.06 a barrel in the third quarter and $35.76 a barrel in the first nine months this year, compared with $37.01 a barrel and $38.32 a barrel during the corresponding periods in 2001.

        Gross production of natural gas during the third quarter of 2002 was 527 million cubic feet a day, compared with 550 million cubic feet a day during the same period last year. Nine-month average gross production was 538 million cubic feet a day in 2002, versus 581 million cubic feet a day during the first nine months of 2001. The decrease was mainly due to natural production decline.

        During the third quarter and nine months ended September 30, 2002, gross production of conventional crude oil averaged 49 thousand barrels a day and 51 thousand barrels a day, respectively, compared with 55 thousand barrels a day during the corresponding periods in 2001. Natural reservoir decline was the main reason for the reduced production. Production of natural gas liquids (NGLs) available for sale was 27 thousand barrels a day in both the third quarter and the first nine months of 2002, versus 26 thousand barrels a day and 28 thousand barrels a day in the corresponding periods last year.

        The company's share of Syncrude's gross production was 65 thousand barrels a day in the third quarter and averaged 56 thousand barrels a day in the first nine months of 2002, compared with 53 thousand barrels a day and 55 thousand barrels a day during the corresponding periods last year. Higher volumes of production during the third quarter of 2002 were attributable to the lower scheduled turnaround maintenance and sustained operations during the period.

        Cold Lake bitumen production was 117 thousand barrels a day during the third quarter and 110 thousand barrels a day in the first nine months of 2002, versus 127 thousand barrels a day and 132 thousand barrels a day in the corresponding periods of 2001. The decrease in production was mainly due to the timing of the steaming cycles.

17



        At Cold Lake, construction of phases 11 to 13 of bitumen production remains essentially on schedule and on budget for a start-up before the end of 2002. At Syncrude, engineering and construction work on the Aurora site and upgrader expansion is progressing on schedule.

        Since September, the company, on behalf of the Mackenzie Delta Producers Group, has opened offices in Fort Simpson, Norman Wells and Inuvik to advance public consultation on the Mackenzie Gas Project. The Producers Group also received non-binding expressions of interest in pipeline capacity from potential shippers. The information is being used in preliminary engineering and development of regulatory applications.

Petroleum products

        Net earnings from petroleum products were $21 million in the third quarter of 2002, compared with net earnings of $42 million during the same quarter last year. In the nine months ending September 30, 2002, petroleum products had a net loss of $1 million, compared with record earnings of $278 million in the first nine months of 2001. The decline was caused by reduced industry margins.

        Net petroleum products sales volumes averaged 70.1 million litres a day in third quarter and 68.1 million litres a day for the first nine months of 2002, respectively, compared with 71.5 million litres a day and 69.1 million litres a day during the corresponding periods last year.

        In August, the company confirmed plans to construct a 90-megawatt cogeneration facility at its Sarnia refining and petrochemical complex. The new unit, to cost about $120 million, will use natural-gas-fired turbines to simultaneously produce electricity and steam, using approximately 50 percent less energy than conventional methods. Detailed engineering for the project is underway with construction scheduled to begin in late 2002 and start-up planned for April 2004.

Chemicals

        Net earnings from chemical operations were $22 million in the third quarter and $42 million in the first nine months of 2002, compared with $7 million and $14 million during the corresponding periods of 2001. Improved margins principally due to lower feedstock cost and higher sales of polyethylene were the main factors for the increase in earnings.

Corporate and other

        Net earnings from corporate and other operations were negative $42 million in the third quarter, unchanged from the same period last year. Earnings for the first nine months of 2002 were negative $15 million, compared with negative $68 million during the same period of 2001. Favourable foreign exchange effects on the company's U.S.-dollar denominated debt and lower interest expense contributed to the improvement.

LIQUIDITY AND CAPITAL RESOURCES

        Cash flow from operating activities was $337 million during the third quarter of 2002, compared with $311 million in the same period last year. Increased cash flow was mainly due to improved earnings. Cash flow from operating activities for the first nine months of 2002 was $738 million, versus $1,721 million during same period of 2001. The decline was mainly due to lower earnings and changes in working capital as a result of the effects of commodity prices on receivable balances.

        During the three months ended September 30, 2002, total investing activities used $380 million of cash, up from $278 million in the same quarter last year. During the first nine-month period of 2002, investing activities used $945 million, compared with $620 million in the first three quarters of 2001.

18



        Capital and exploration expenditures were $391 million in the third quarter and $1,015 million in the first nine months of 2002, compared with $301 million and $676 million in the corresponding periods last year. For the resources segment, the additional capital and exploration expenditures were used mainly on projects at Syncrude and Cold Lake to maintain and expand oil production capacity. Petroleum products increased its capital expenditures mainly on projects to reduce the sulphur content of gasoline and to enhance the company's marketing network.

        The company did not repurchase any shares in the third quarter of 2002 under the current 12-month normal course issuer bid that became effective on June 21, 2002. During the first six months of 2002, the company repurchased 296 thousand shares for $13 million under the 12-month normal course issuer bid that began on June 21, 2001 and expired on June 20, 2002.

        Total cash dividends of $239 million were paid in the first three quarters of 2002. This compared with $240 million during the same period last year.

        The above factors led to a decrease in the company's balance of cash and marketable securities to $453 million at September 30, 2002, from $872 million at the end of 2001.


Item 3.  Quantitative and Qualitative Disclosures about Market Risk

        Information about market risks for the three months ended September 30, 2002 does not differ materially from that discussed in Item 7A on pages 23 and 24 in the company's annual report on Form 10-K for the year ended December 31, 2001.


Item 4.  Controls and Procedures

    (a)
    Evaluation of disclosure control and procedures

      As indicated in the certifications on pages 21 and 22 of this report, the company's principal executive officer and principal financial officer have evaluated the company's disclosure controls and procedures as of a date within 90 days prior to the filing of this report. Based on that evaluation, these officers have concluded that the company's disclosure controls and procedures are appropriate and effective for the purpose of ensuring that material information relating to the company, including its consolidated subsidiaries, is made known to them by others within those entities, particularly during the period in which this quarterly report is being prepared.

    (b)
    Changes in internal controls

      There have not been significant changes in the company's internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation.

PART II — OTHER INFORMATION

Item 6.  Exhibits and Reports on Form 8-K

    (b)
    Reports on Form 8-K.

      Except for a report on Form 8-K dated August 13, 2002, no other reports on Form 8-K have been filed during the quarter for which this report is filed. By the report on Form 8-K dated August 13, 2002, the company submitted to the Securities and Exchange Commission written certifications by each of the chief executive officer and the chief financial officer of the company for purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the company's report on Form 10-Q for the quarter ended June 30, 2002.

19



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:  November 6, 2002

 

/s/  
PAUL A. SMITH      
(Signature)
Paul A. Smith
Controller and senior vice-president,
finance and administration
(Principal Accounting Officer)

Date:  November 6, 2002

 

/s/  
JOHN ZYCH      
(Signature)
John Zych
Corporate Secretary

20



IMPERIAL OIL LIMITED
CERTIFICATIONS

        I, Timothy J. Hearn, certify that:

    1.
    I have reviewed this quarterly report on Form 10-Q of Imperial Oil Limited;

    2.
    Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

    3.
    Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

    4.
    The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

    a)
    designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

    b)
    evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

    c)
    presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

    5.
    The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

    a)
    all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

    b)
    any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

    6.
    The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:  November 6, 2002

 

/s/  
T.J. HEARN      
Timothy J. Hearn
Chairman of the Board,
President and chief executive officer
(Principal Executive Officer)

21



IMPERIAL OIL LIMITED
CERTIFICATIONS

        I, Paul A. Smith, certify that:

    1.
    I have reviewed this quarterly report on Form 10-Q of Imperial Oil Limited;

    2.
    Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

    3.
    Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

    4.
    The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

    a)
    designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

    b)
    evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

    c)
    presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

    5.
    The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

    a)
    all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

    b)
    any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

    6.
    The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:  November 6, 2002

 

/s/  
PAUL A. SMITH      
Paul A. Smith
Controller and senior vice-president,
finance and administration
(Principal Financial Officer)

22




QuickLinks

INDEX
PART I—FINANCIAL INFORMATION
IMPERIAL OIL LIMITED CONSOLIDATED STATEMENT OF EARNINGS (unaudited)
CONSOLIDATED STATEMENT OF RETAINED EARNINGS (unaudited)
IMPERIAL OIL LIMITED CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)
IMPERIAL OIL LIMITED CONSOLIDATED BALANCE SHEET (unaudited)
IMPERIAL OIL LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
SIGNATURES
IMPERIAL OIL LIMITED CERTIFICATIONS
IMPERIAL OIL LIMITED CERTIFICATIONS