IMPERIAL OIL LTD - Quarter Report: 2003 June (Form 10-Q)

e10vq

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended June 30, 2003

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		98-0017682

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

111 St. Clair Avenue West, Toronto, Ontario, Canada		M5W 1K3

(Address of principal executive offices)		(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 þ NO o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES þ NO o

The number of common shares outstanding, as of June 30, 2003, was 372,066,734.

IMPERIAL OIL LIMITED

INDEX


			PAGE

PART I — Financial Information

	Financial Statements:

		Consolidated Statement of Earnings — Three months ended June 30, 2003 and 2002 Six months ended June 30, 2003 and 2002	3

		Consolidated Statement of Retained Earnings — Three months ended June 30, 2003 and 2002 Six months ended June 30, 2003 and 2002	3

		Consolidated Statement of Cash Flows — Three months ended June 30, 2003 and 2002 Six months ended June 30, 2003 and 2002	4

		Consolidated Balance Sheet — As at June 30, 2003 and December 31, 2002	5

		Notes to the Consolidated Financial Statements	6

		Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

		Quantitative and Qualitative Disclosures about Market Risk	17

		Controls and Procedures	17

PART II — Other Information			18

SIGNATURES			18

In this report all dollar amounts are expressed in Canadian dollars. This report should be read in conjunction with the company’s Annual Report on Form 10-K for the year ended December 31, 2002, and Form 10-Q for the quarter ended March 31, 2003.

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

- 2 -

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

IMPERIAL OIL LIMITED

CONSOLIDATED STATEMENT OF EARNINGS
(unaudited)


								Six months
		Second quarter						to June 30

millions of dollars		2003			2002			2003			2002

REVENUES
	Operating revenues		4,472			4,179			9,924			7,656
	Investment and other income		38			16			64			24

TOTAL REVENUES (2)			4,510			4,195			9,988			7,680

EXPENSES
	Exploration		4			6			11			15
	Purchases of crude oil and products		2,655			2,561			6,077			4,617
	Operating, selling and general		804			805			1,638			1,583
	Federal excise tax		312			307			614			597
	Depreciation and depletion		177			170			357			343
	Financing costs (4)		(57	)		(38	)		(114	)		(28	)

TOTAL EXPENSES			3,895			3,811			8,583			7,127

EARNINGS BEFORE INCOME TAXES			615			384			1,405			553
INCOME TAXES (7)			101			74			353			133

NET EARNINGS (2)			514			310			1,052			420

PER-SHARE INFORMATION — dollars
	Net earnings — basic (9)		1.38			0.82			2.80			1.11
	Net earnings — diluted (9)		1.38			0.82			2.80			1.11
	Dividends		0.22			0.21			0.43			0.42

CONSOLIDATED STATEMENT OF RETAINED EARNINGS
(unaudited)


								Six months
		Second quarter						to June 30

millions of dollars		2003			2002			2003			2002

RETAINED EARNINGS AT BEGINNING OF PERIOD			3,610			2,401			3,277			2,382
	Net earnings for the period		514			310			1,052			420
	Share purchases (9)		(151	)		—			(277	)		(11	)
	Dividends		(83	)		(79	)		(162	)		(159	)

RETAINED EARNINGS AT END OF PERIOD			3,890			2,632			3,890			2,632

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

- 3 -

IMPERIAL OIL LIMITED

CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)


								Six months
		Second quarter						to June 30
inflow/(outflow)
millions of dollars		2003			2002			2003			2002

OPERATING ACTIVITIES
	Net earnings		514			310			1,052			420
	Depreciation and depletion		177			170			357			343
	(Gain)/loss on asset sales, after tax		1			(3	)		1			(3	)
	Future income taxes and other		(84	)		(119	)		(242	)		(205	)

	Cash flow from earnings		608			358			1,168			555
	Accounts receivable		294			14			20			(170	)
	Inventories and prepaids		(146	)		(30	)		(261	)		(177	)
	Income taxes payable		(22	)		(30	)		121			(439	)
	Accounts payable and other		(62	)		218			324			632

	Change in operating assets and liabilities		64			172			204			(154	)

CASH FROM OPERATING ACTIVITIES			672			530			1,372			401

INVESTING ACTIVITIES
	Additions to property, plant and equipment		(380	)		(359	)		(725	)		(609	)
	Proceeds from asset sales		17			32			22			44

CASH FROM (USED IN) INVESTING ACTIVITIES			(363	)		(327	)		(703	)		(565	)

CASH FLOW BEFORE FINANCING ACTIVITIES			309			203			669			(164	)
FINANCING ACTIVITIES
	Short-term debt — net		—			(460	)		—			(460	)
	Long-term debt issued (8)		546			500			546			500
	Repayment of long-term debt (8)		(546	)		—			(546	)		—
	Common shares purchased (9)		(171	)		—			(312	)		(13	)
	Dividends paid		(80	)		(80	)		(159	)		(160	)

CASH FROM (USED IN) FINANCING ACTIVITIES			(251	)		(40	)		(471	)		(133	)

INCREASE (DECREASE) IN CASH			58			163			198			(297	)
CASH AT BEGINNING OF PERIOD			906			412			766			872

CASH AT END OF PERIOD			964			575			964			575

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

- 4 -

IMPERIAL OIL LIMITED

CONSOLIDATED BALANCE SHEET
(unaudited)


		As at			As at
		June 30			Dec. 31
millions of dollars		2003			2002

ASSETS
Current assets
	Cash		964			766
	Accounts receivable		1,328			1,348
	Inventories of crude oil and products		653			433
	Materials, supplies and prepaid expenses		151			110
	Future income tax assets		308			323

Total current assets			3,404			2,980
Investments and other long-term assets			121			134
Property, plant and equipment at cost			18,749			18,105
	less accumulated depreciation and depletion		(9,836	)		(9,553	)

Property, plant and equipment (net)			8,913			8,552
Goodwill			204			204
Other intangible assets			22			24

TOTAL ASSETS			12,664			11,894

LIABILITIES
Current liabilities
	Short-term debt		72			72
	Accounts payable and accrued liabilities		2,334			2,114
	Income taxes payable		678			557

Total current liabilities			3,084			2,743
Long-term debt (8)			1,342			1,466
Other long-term obligations (5)			1,301			1,207
Future income tax liabilities			1,142			1,262

TOTAL LIABILITIES			6,869			6,678
SHAREHOLDERS’ EQUITY
	Common shares (9)		1,905			1,939
	Earnings retained and used in the business		3,890			3,277

TOTAL SHAREHOLDERS’ EQUITY			5,795			5,216

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY			12,664			11,894

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 June 30, 2003, and December 31, 2002, and the results of operations and changes in cash flows for the six months ending June 30, 2003, and 2002. All such adjustments are of a normal recurring nature.

The results for the six months ending June 30, 2003, are not necessarily indicative of the operations to be expected for the full year.

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

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.


								Six months
		Second quarter						to June 30

millions of dollars		2003			2002			2003			2002

Earnings as shown in financial statements (2)(a)			514			310			1,052			420
Impact of U.S. accounting principles (b)
	Capitalized interest		5			(1	)		7			(2	)
	Enacted tax rate difference		(59	)		(20	)		(59	)		(20	)
	Restatement to reflect accounting change (c)		—			(4	)		—			(8	)

Net earnings under U.S. GAAP before cumulative effect of accounting change (a)			460			285			1,000			390
Cumulative effect of accounting change (a)(c)			—			—			4			—

Net earnings under U.S. GAAP (a)			460			285			1,004			390
Other comprehensive income, net of tax (b):
	Minimum pension liability adjustment		—			—			—			—

Comprehensive income under U.S. GAAP			460			285			1,004			390

- 6 -

IMPERIAL OIL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. Adjustments under United States GAAP (continued)

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						As at
		June 30, 2003						December 31, 2002

		As			U.S.			As			U.S.
millions of dollars		Reported			GAAP			Reported			GAAP

Current assets			3,096			3,096			2,657			2,657
Future income tax assets			308			514			323			530
Investments and other long-term assets			121			121			134			134
Property, plant and equipment — cost			18,749			18,874			18,105			18,157
Property, plant and equipment — accumulated depreciation and depletion			(9,836	)		(9,930	)		(9,553	)		(9,610	)
Goodwill			204			204			204			204
Other intangible assets			53			167			54			168
Other intangible assets — accumulated depreciation and depletion			(31	)		(31	)		(30	)		(30	)

TOTAL ASSETS			12,664			13,015			11,894			12,210

Current liabilities			3,084			3,086			2,743			2,743
Long-term debt			1,342			1,342			1,466			1,466
Other long-term obligations			1,301			1,936			1,207			1,823
Future income tax liabilities			1,142			1,209			1,262			1,267
Shareholders’ equity			5,795			5,442			5,216			4,911

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY			12,664			13,015			11,894			12,210

Shareholders’ Equity:
Common shares at stated value
	At beginning		1,939			1,939			1,941			1,941
	Share purchases at stated value		(34	)		(34	)		(2	)		(2	)

	At end		1,905			1,905			1,939			1,939

Retained earnings
	At beginning		3,277			3,287			2,396			2,402
	Net earnings for the period		1,052			1,004			1,210			1,214
	Share purchases in excess of stated value		(277	)		(277	)		(11	)		(11	)
	Dividends		(162	)		(162	)		(318	)		(318	)

	At end		3,890			3,852			3,277			3,287

Accumulated other comprehensive income
	At beginning		—			(315	)		—			(77	)
	Other comprehensive income for the period		—			—			—			(238	)

	At end		—			(315	)		—			(315	)

Total shareholders’ equity			5,795			5,442			5,216			4,911

- 7 -

IMPERIAL OIL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. Adjustments under United States GAAP (continued)

(a) Earnings per share — basic and diluted (dollars)


						Six months
		Second quarter				to June 30

		2003		2002		2003		2002

Under accounting principles of
Canada			1.38		0.82		2.80		1.11
United States
	Earnings before cumulative effect of accounting change		1.23		0.75		2.66		1.03
	Cumulative effect of accounting change		—		—		0.01		—

	Net earnings		1.23		0.75		2.67		1.03

	Weighted average number of common shares outstanding (thousands of shares)		374,194		378,863		376,022		378,888

(b) Impact of accounting principles

An explanation of these items is found on pages 17 to 20 of the company’s annual report on Form 10-K for the year ended December 31, 2002.

As of January 1, 2003, the company adopted Financial Accounting Standards Board (FASB) Statements of Financial Accounting Standards No.143 (SFAS No.143), “Accounting for Asset Retirement Obligations”. The Canadian Institute of Chartered Accountants (CICA) adopted a similar standard that harmonizes Canadian GAAP with U.S. GAAP. Disclosures required by the new U.S. and Canadian accounting standards are described in note 3.

In December 2002, the FASB issued SFAS No.148, “Accounting for Stock-Based Compensation - Transition and Disclosure — an amendment of FASB Statement No.123”. The standard provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock based employee compensation. It also requires more prominent disclosures in the financial statements about the method of accounting for stock based employee compensation and the effect of the method used in reported results. Effective January 1, 2003, the company adopted for all stock based compensation granted after that date the fair value based recognition provisions as prescribed by SFAS No.123 “Accounting for Stock Based Compensation” and complied with the disclosure requirements under SFAS No.148. The company has not issued any new stock based employee compensation to its employees in the first half of 2003.

(d) The company makes limited use of derivatives. There were no significant derivatives outstanding at January 1 or June 30, 2003, nor were any significant derivatives undertaken during the first six months of 2003.

- 8 -

IMPERIAL OIL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

2. Business segments


		Resources				Products				Chemicals
Second quarter
millions of dollars		2003		2002		2003		2002		2003		2002

REVENUES
	Operating revenues (a)		792		630		3,433		3,311		247		238
	Intersegment sales (b)		573		523		327		270		62		53
	Investment and other income		19		6		11		7		—		—

TOTAL REVENUES			1,384		1,159		3,771		3,588		309		291

EXPENSES
	Exploration (c)		4		6		—		—		—		—
	Purchases (b)		580		444		2,796		2,750		234		213
	Operating, selling & general (b)		290		286		462		459		59		56
	Federal excise tax		—		—		312		307		—		—
	Depreciation and depletion		122		115		49		50		6		5
	Financing costs		—		1		—		1		—		—

TOTAL EXPENSES			996		852		3,619		3,567		299		274

EARNINGS BEFORE INCOME TAXES			388		307		152		21		10		17
INCOME TAXES			37		56		50		6		3		6

NET EARNINGS			351		251		102		15		7		11

EXPORT SALES TO THE UNITED STATES			305		265		158		138		147		125
CASH FLOW FROM EARNINGS			386		325		222		25		13		16
CAPEX (c)			232		221		144		142		13		2


		Corporate						Consolidated
Second quarter
millions of dollars		2003			2002			2003			2002

REVENUES
	Operating revenues (a)		—			—			4,472			4,179
	Intersegment sales (b)		—			—			—			—
	Investment and other income		8			3			38			16

TOTAL REVENUES			8			3			4,510			4,195

EXPENSES
	Exploration (c)		—			—			4			6
	Purchases (b)		—			—			2,655			2,561
	Operating, selling & general (b)		—			4			804			805
	Federal excise tax		—			—			312			307
	Depreciation and depletion		—			—			177			170
	Financing costs		(57	)		(40	)		(57	)		(38	)

TOTAL EXPENSES			(57	)		(36	)		3,895			3,811

EARNINGS BEFORE INCOME TAXES			65			39			615			384
INCOME TAXES			11			6			101			74

NET EARNINGS			54			33			514			310

EXPORT SALES TO THE UNITED STATES			—			—			610			528
CASH FLOW FROM EARNINGS			(13	)		(8	)		608			358
CAPEX (c)			—			—			389			365

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

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


	2003		2002

Purchases		955		846
Operating expenses		7		—

Total intersegment sales		962		846

(c)

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

- 9 -

IMPERIAL OIL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

2. Business segments (continued)


		Resources				Products					Chemicals
Six months to June 30
millions of dollars		2003		2002		2003		2002			2003		2002

REVENUES
	Operating revenues (a)		1,796		1,140		7,601		6,052			527		464
	Intersegment sales (b)		1,208		979		705		471			127		98
	Investment and other income		31		5		19		12			—		—

TOTAL REVENUES			3,035		2,124		8,325		6,535			654		562

EXPENSES
	Exploration (c)		11		15		—		—			—		—
	Purchases (b)		1,313		816		6,296		4,943			501		405
	Operating, selling & general (b)		571		535		953		927			121		115
	Federal excise tax		—		—		614		597			—		—
	Depreciation and depletion		241		227		103		105			13		11
	Financing costs		1		1		—		1			—		—

TOTAL EXPENSES			2,137		1,594		7,966		6,573			635		531

EARNINGS BEFORE INCOME TAXES			898		530		359		(38	)		19		31
INCOME TAXES			208		135		118		(16	)		6		11

NET EARNINGS			690		395		241		(22	)		13		20

EXPORT SALES TO THE UNITED STATES			657		405		406		318			295		249
CASH FLOW FROM EARNINGS			811		543		355		(3	)		17		29
CAPEX (c)			459		407		264		213			21		4
TOTAL ASSETS AS AT June 30 (b)			6,172		5,565		5,455		4,871			390		373
CAPITAL EMPLOYED AS AT June 30			3,510		3,065		2,575		2,275			176		155


		Corporate						Consolidated
Six months to June 30
millions of dollars		2003			2002			2003			2002

REVENUES
	Operating revenues (a)		—			—			9,924			7,656
	Intersegment sales (b)		—			—			—			—
	Investment and other income		14			7			64			24

TOTAL REVENUES			14			7			9,988			7,680

EXPENSES
	Exploration (c)		—			—			11			15
	Purchases (b)		—			—			6,077			4,617
	Operating, selling & general (b)		—			7			1,638			1,583
	Federal excise tax		—			—			614			597
	Depreciation and depletion		—			—			357			343
	Financing costs		(115	)		(30	)		(114	)		(28	)

TOTAL EXPENSES			(115	)		(23	)		8,583			7,127

EARNINGS BEFORE INCOME TAXES			129			30			1,405			553
INCOME TAXES			21			3			353			133

NET EARNINGS			108			27			1,052			420

EXPORT SALES TO THE UNITED STATES			—			—			1,358			972
CASH FLOW FROM EARNINGS			(15	)		(14	)		1,168			555
CAPEX (c)			—			—			744			624
TOTAL ASSETS AS AT June 30 (b)			964			576			12,664			11,138
CAPITAL EMPLOYED AS AT June 30			1,006			613			7,267			6,108

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

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


	2003		2002

Purchases		2,033		1,547
Operating expenses		7		1

Total intersegment sales		2,040		1,548

Intersegment receivables and payables		317		247

(c)

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

- 10 -

IMPERIAL OIL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

3. Reporting change

The new CICA standard dealing with accounting for asset retirement obligations changes the method of accruing for certain site-restoration costs. Under the new standard, the fair values of asset retirement obligations are recorded as liabilities on a discounted basis when they are incurred, which is typically at the time the related assets are installed. Amounts recorded for the related assets are increased by the amount of these obligations. Over time the liabilities will be accreted for the change in their present value and the initial capitalized costs will be depreciated over the useful lives of the related assets. There are no asset retirement liabilities set up for those assets which have an indeterminate useful life.

Estimated cash flows have been discounted at six percent. Implementation of the new standard has reduced site-restoration liabilities by $4 million to $506 million as of June 30, 2003. The total undiscounted amount of the estimated cash flows required to settle the obligations is $895 million. Payments to settle the obligations occur on an ongoing basis and will continue over the lives of the operating assets, which can exceed more than 25 years. This change in accounting standard has no impact on the cash flow profile of the company. The new standard has been applied retroactively, and the financial statements of prior periods have been restated.

The impact of adopting the new accounting for asset retirement obligations standard on the consolidated balance sheet and statement of earnings is:

Change in consolidated balance sheet


	As at June 30

millions of dollars - increase/(decrease)	2003			2002

Property, plant and equipment		25			19

Total assets		25			19

Other long-term obligations		(4	)		22
Future income tax liabilities		9			(1	)
Retained earnings		20			(2	)

Total liabilities and shareholders’ equity		25			19

Change in consolidated statement of earnings


							Six months
	Second quarter						to June 30

millions of dollars - increase/(decrease)	2003			2002			2003			2002

Operating, selling and general expense		(12	)		(7	)		(24	)		(13	)
Depreciation and depletion expense		1			1			1			1

Total expenses		(11	)		(6	)		(23	)		(12	)
Income taxes		3			2			7			4

Net earnings		8			4			16			8

Earnings per share — basic (dollars)		0.02			0.01			0.04			0.02
Earnings per share — diluted (dollars)		0.02			0.01			0.04			0.02

4. Financing costs


							Six months
	Second quarter						to June 30

millions of dollars	2003			2002			2003			2002

Debt related interest		8			11			16			19
Other interest		1			1			2			2

Total interest expense		9			12			18			21
Foreign exchange expense (gain) on long-term debt		(66	)		(50	)		(132	)		(49	)

Total financing costs		(57	)		(38	)		(114	)		(28	)

- 11 -

IMPERIAL OIL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

5. Other long-term obligations


	As at		As at
	June 30		Dec. 31
millions of dollars	2003		2002

Employee retirement benefits		760		671
Site restoration		456		454
Other obligations		85		82

Total other long-term obligations		1,301		1,207

6. Incentive compensation programs

The company accounts for its incentive compensation programs, except for the incentive stock option plan, by using the fair-value-based method. Under this method, compensation expense related to the units of these programs is recorded in the consolidated statement of earnings over the vesting period. The company accounts for its incentive stock option plan by using the intrinsic-value-based method and does not recognize compensation expense on the issuance of stock options because the exercise price is equal to the market value at the date of grant. If the fair-value-based method of accounting had been adopted to account for the incentive stock option plan, the impact on net earnings and earnings per share would have been negligible.

The company expects to purchase shares on the market to fully offset the dilutive effects from the exercise of incentive stock options. The company does not plan to issue stock options in the future.

7. Income taxes

During the second quarter of 2003, tax rate reduction enacted by the Federal government and the provincial government of Alberta and settlement of various tax matters benefited results, mainly in the resources segment, by $109 million. In the second quarter of 2002, tax settlement and income tax rate changes benefited earnings by $53 million.

8. Long-term debt


			As at		As at
		Interest	June 30		Dec. 31
Issued	Maturity date	rate	2003		2002

1989	September 1, 2004 (2002 — $600 million (U.S.); 2003 — $200 million (U.S.)) (a)	Variable		268		946
2002	May 7, 2004 (b)	Variable		500		500
2003	May 26, 2005 (a)	Variable		500		—
2003	January 19, 2006 (a)	Variable		46		—

Long-term debt (at period-end exchange rate)				1,314		1,446
Capital leases				28		20

Total long-term debt				1,342		1,466

(a) During the second quarter of 2003, the company redeemed $400 million (U.S.) of its variable-rate U.S.-dollar debt for $546 million (Cdn) and retired the remaining $200 million (U.S.) for $272 million (Cdn) on July 11, 2003. To replace the debt repaid in the second quarter, the company borrowed $546 million (Cdn) variable-rate loans from Exxon Overseas Corporation at interest equivalent to Canadian market rates.

(b) The $500 million (Cdn) medium-term notes’ initial maturity date is May 7, 2004. The company intends to refinance these notes beyond the initial maturity date under the existing one-billion-dollar Medium Term Notes Program.

- 12 -

IMPERIAL OIL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

9. Common shares


	As at		As at
	June 30		Dec. 31
thousands of shares	2003		2002

Authorized		450,000		450,000
Common shares outstanding		372,067		378,863

In 1995 through 2002, the company purchased shares under eight 12-month normal course share purchase programs, as well as an auction tender. On June 23, 2003, another 12-month normal course program was implemented with an allowable purchase up to 18.6 million shares (five percent of the total on June 19, 2003), less any shares purchased by the employee savings plan and company pension fund. The results of these activities are as shown below:


	millions of

Year	Shares		Dollars

1995 - 2001		202.4		5,156
2002 - Second quarter		—		—
Full year		0.3		13
2003 - Second quarter		3.8		171
Year-to-date		6.8		312
Cumulative purchases to date		209.5		5,481

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

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

There is no significant dilutive effect on basic net earnings per share from the outstanding incentive stock options described in note 6.

- 13 -

IMPERIAL OIL LIMITED

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

OPERATING RESULTS

The company’s net earnings for the second quarter of 2003 were $514 million or $1.38 a share, compared with $310 million or $0.82 a share for the same quarter last year. Net earnings for the first six months of 2003 were $1,052 million or $2.80 a share, the highest six-month earnings on record, versus $420 million or $1.11 a share for the first half of 2002. Second quarter earnings increased primarily as a result of higher margins for petroleum products, higher prices for natural gas and increased production of crude oil. Earnings for the first six months increased mainly because of higher prices for natural gas and crude oil, and higher margins for petroleum products.

Benefits from income tax rate reductions and favourable foreign exchange effects on the company’s U.S.-dollar-denominated debt also contributed positively to both the second quarter and year-to-date earnings. However, the foreign exchange benefits were more than offset in both periods by the negative impact of the higher Canadian dollar on resource and product prices.

Total revenues were $4,510 million in the second quarter and $9,988 million in the first half of 2003, versus $4,195 million and $7,680 million in the same periods last year.

Natural resources

During the second quarter of 2003, net earnings from natural resources were $351 million compared with $251 million in the same period last year. Earnings increased due to higher prices for natural gas and higher Cold Lake bitumen and Syncrude volumes partly offset by lower natural gas volumes. Reduced federal and provincial income tax rates and settlement of various tax matters in the second quarter also contributed favourably to earnings. Year-to-date net earnings were a record $690 million versus $395 million during the same six-month period last year. Higher prices for crude oil and natural gas and higher production volumes of Cold Lake bitumen were the main reasons for the increased earnings in the first half of 2003 compared with last year.

Prices for natural gas averaged $6.80 a thousand cubic feet in the second quarter and $7.45 a thousand cubic feet in the first half of 2003, compared with $4.22 a thousand cubic feet and $3.73 a thousand cubic feet during the corresponding periods last year. Prices for conventional crude oil averaged $38.53 a barrel in the second quarter and $43.20 a barrel in the first six months this year, compared with $36.93 a barrel and $33.68 a barrel, respectively, in the second quarter and first half of 2002. Average prices for Cold Lake bitumen in the second quarter of 2003 were about 10 percent lower than last year’s second quarter prices, but bitumen prices for the first six months of 2003 averaged about 15 percent higher than the prices of the same period last year.

Gross production of natural gas during the second quarter of 2003 was 489 million cubic feet a day, compared with 532 million cubic feet a day during the same period last year. During the first half of the year, gross production was 488 million cubic feet a day, versus 544 million cubic feet a day in the first six months of 2002. The decrease was mainly due to reservoir decline. At the end of June, construction of facilities to increase production from Wizard Lake was nearing completion, with production expected to begin in the third quarter.

- 14 -

IMPERIAL OIL LIMITED

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

Total production of crude oil and natural gas liquids (NGLs) increased to 262 thousand barrels a day in the second quarter and 252 thousand barrels a day in the first six months of 2003 from 234 thousand barrels a day and 238 thousand barrels a day during the corresponding periods of 2002.

In the second quarter and first six months of this year, gross production of conventional crude oil averaged 47 thousand barrels a day, compared with 51 thousand barrels a day and 52 thousand barrels a day during the corresponding periods in 2002. Production of NGLs available for sale was 25 thousand barrels a day in the second quarter and 26 thousand barrels a day during the first half of 2003, versus 26 thousand barrels a day and 28 thousand barrels a day in the corresponding periods last year. Natural reservoir decline in the Western Canadian Basin was the main reason for the reduced production.

The company’s share of Syncrude’s gross production was 53 thousand barrels a day in the second quarter compared with 44 thousand barrels a day during the same period a year ago. Lower maintenance activity was the main reason for the higher production in the second quarter of this year. During the first six months of 2003, the company’s share of Syncrude production was 50 thousand barrels a day, compared with 51 thousand barrels a day in the first six months of 2002.

Gross production of Cold Lake bitumen averaged 137 thousand barrels a day during the second quarter and 129 thousand barrels a day in the first six months of 2003, versus 113 thousand barrels a day and 107 thousand barrels a day in the corresponding periods of 2002. Higher production was a result of increased volume from newly completed phases 11 to 13 offset in part by lower production from existing operations due to the cyclic nature of production at Cold Lake.

On June 3, 2003, the company hosted the official opening of its plant and field facilities for the phases 11 to 13 of Cold Lake operations. The $650-million project was completed on budget and on schedule at the end of 2002 and has been in production since that time. Construction of the project began in November 2000 and over four million work hours were carried out without a single lost-time incident for both employees and contractors.

On June 5, 2003, the company awarded the contract for drilling services for an exploration well on its deepwater acreage on the Scotian Slope. The prospect well, known as Balvenie, is located about 300 kilometers southeast of Halifax, Nova Scotia and is situated on one of two exploration licenses held by the company in the area. Drilling operations for the well began in early July and are expected to last two to three months.

On June 18, 2003, the company announced that financing agreements among all the participants of the Mackenzie Gas Project had been reached and the Preliminary Information Package (PIP) for the Mackenzie Gas Project was submitted to relevant regulatory authorities. On June 30 the regulatory agencies overseeing the project announced the PIP was complete and issued their Plan for Public Involvement. This document describes the opportunities available to the public to review and comment on the pipeline project. The company would lead the construction and operation of the proposed 1,300-kilometre pipeline to deliver natural gas produced in the Mackenzie Delta region to southern markets. The company owns the Taglu field, the largest of the three anchor fields in the project.

- 15 -

IMPERIAL OIL LIMITED

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

Petroleum products

Net earnings from petroleum products were $102 million in the second quarter and a record $241 million in the first half of 2003, compared with net earnings of $15 million and a net loss of $22 million during the corresponding periods last year. Second quarter earnings increased due to higher petroleum product margins. Year-to-date earnings improved as a result of the strengthening of petroleum product margins and higher sales of petroleum products. The increased petroleum product volumes were principally due to higher demand for diesel, heating oil and gasoline.

At the end of the second quarter, the company achieved mechanical completion of the Dartmouth refinery low-sulphur motor gasoline facilities, ahead of schedule and without a safety incident.

Chemicals

Net earnings from chemical operations were $7 million in the second quarter and $13 million in the first half of 2003, compared with $11 million and $20 million during the corresponding periods of 2002. Reduced margins on sales of polyethylene as a result of higher feedstock costs and lower volumes were the main reasons for the decrease in earnings.

Corporate and other

Net earnings from corporate and other operations were $54 million in the second quarter and $108 million in the first half of 2003, versus $33 million and $27 million in the corresponding periods last year. Favourable foreign exchange effects on the company’s U.S.-dollar-denominated debt contributed to the improvement.

During June and July of this year, the company replaced its entire U.S.-dollar-denominated debt with long-term Canadian-dollar loans. The company realized foreign exchange currency gains of $110 million in the first half of this year.

LIQUIDITY AND CAPITAL RESOURCES

Cash flow from operating activities was $672 million during the second quarter of 2003, compared with $530 million in the same period last year. The higher cash inflow was a result of increased earnings partly offset by higher working capital primarily due to timing of seasonal inventory builds. Year-to-date cash flow from operating activities was $1,372 million, versus $401 million during the first half of 2002. The increased cash inflow was mainly due to higher earnings and the timing of scheduled income tax payments. Total investing activities used $363 million of cash in the second quarter and $703 million in the first half of 2003, compared with $327 million and $565 million used during the corresponding periods last year.

Capital and exploration expenditures were $389 million in the second quarter and $744 million in the first six months of 2003, versus $365 million and $624 million in the corresponding periods a year ago. For the resources segment, the additional capital and exploration expenditures were used mainly on projects at Syncrude to maintain and expand oil production capacity. Petroleum products increased its capital expenditures mainly in projects to reduce the sulphur content of gasoline and to improve operating efficiency.

- 16 -

IMPERIAL OIL LIMITED

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

During the second quarter, the company redeemed $400 million (U.S.) of its variable-rate U.S.-dollar debt for $546 million (Cdn). To replace the debt repaid in the second quarter, the company borrowed $546 million (Cdn) of variable-rate loans from Exxon Overseas Corporation. The company retired the remaining $200 million (U.S.) debt as of July 11, 2003 and replaced it with a similar variable-rate Canadian-dollar loan from Exxon Overseas Corporation.

On June 19, 2003, the company announced that it had received final acceptance from the Toronto Stock Exchange for a new normal course issuer bid to continue its existing share repurchase program that expired on June 20, 2003. The new share-purchase program enables the company to repurchase up to 18.6 million shares during the period from June 23, 2003, to June 22, 2004. During the first half of 2003, the company repurchased about 7 million shares for $312 million.

Cash dividends of $159 million were paid in the first six months of 2003. This compared with dividends of $160 million in the comparable period of 2002. Increased repurchase of shares reduced the number of shares outstanding and total dividend payments. On May 20, 2003, the company declared a quarterly dividend of 22 cents a share, an increase of one cent a share or about five percent, from the previous quarter, payable on July 1, 2003.

The above factors led to an increase in the company’s balance of cash and marketable securities to $964 million at June 30, 2003, from $575 million at the same time last year.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Information about market risks for the three months ended June 30, 2003 does not differ materially from that discussed in Item 7A on page 25 in the company’s annual report on Form 10-K for the year ended December 31, 2002.

Item 4. Controls and Procedures

The company’s principal executive officer and principal financial officer have evaluated the company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, these officers have concluded that, as of the end of the period covered by this quarterly report, the company’s disclosure controls and procedures are effective for the purpose of ensuring that information required to be disclosed by the company in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

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

- 17 -

IMPERIAL OIL LIMITED

PART II – OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

(a) A letter agreement dated July 11, 2003 confirming the termination of the Term Loan Agreement dated as of July 13, 1989, relating to the borrowing of $2 billion (U.S.), is Exhibit (4).

Certifications by each of the principal executive officer and principal financial officer of the company pursuant to Rule 13a-4(a) are Exhibits (31.1) and (31.2).

Certifications by each of the chief executive officer and the chief financial officer of the company pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350 are Exhibits (32.1) and (32.2).

(b) Reports on Form 8-K

Except for reports on Form 8-K dated April 24, 2003 and May 12, 2003, no other reports on Form 8-K have been filed during the quarter for which this report is filed.

By the report on Form 8-K dated April 24, 2003, the company submitted to the Securities and Exchange Commission a press release dated April 22, 2003 and a speech by the company’s chairman, president and chief executive officer at the company’s annual meeting of shareholders on April 22, 2003 which disclosed information relating to the company’s financial condition and results of operations for the fiscal quarter ended March 31, 2003.

By the report on Form 8-K dated May 12, 2003, 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 quarterly report on Form 10-Q for the quarter ended March 31, 2003.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		IMPERIAL OIL LIMITED (Registrant)



Date: August 12, 2003		/s/ Paul A. Smith (Signature) Paul A. Smith Controller and Senior Vice-President, Finance and Administration (Principal Accounting Officer)



Date: August 12, 2003		/s/ John Zych (Signature) John Zych Corporate Secretary

- 18 -

INDEX TO EXHIBITS


Exhibit No.		Description

(4)		A letter agreement dated July 11, 2003 confirming the termination of the Term Loan Agreement dated as of July 13, 1989, relating to the borrowing of $2 billion (U.S.)

(31.1)		Certification by principal executive officer of Periodic Financial Report pursuant to Rule 13a-14(a)

(31.2)		Certification by principal financial officer of Periodic Financial Report pursuant to Rule 13a-14(a)

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

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

- 19 -