IMPERIAL OIL LTD - Quarter Report: 2005 March (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

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

For the quarterly period ended March 31, 2005

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

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 March 31, 2005, was 345,887,125.

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IMPERIAL OIL LIMITED

INDEX

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, 2004.

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

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IMPERIAL OIL LIMITED

PART I — FINANCIAL INFORMATION

Item 1.   Financial Statements.

CONSOLIDATED STATEMENT OF INCOME
(U.S. GAAP, unaudited)

The notes to the financial statements are part of these financial statements. Certain figures for the prior year have been reclassified in the financial statements to conform with the current year’s presentation.

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IMPERIAL OIL LIMITED

CONSOLIDATED STATEMENT OF CASH FLOWS
(U.S. GAAP, unaudited)
inflow/(outflow)

The notes to the financial statements are part of these financial statements. Certain figures for the prior year have been reclassified in the financial statements to conform with the current year’s presentation.

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IMPERIAL OIL LIMITED

CONSOLIDATED BALANCE SHEET
(U.S. GAAP, unaudited)

The notes to the financial statements are part of these financial statements. Certain figures for the prior year have been reclassified in the financial statements to conform with the current year’s presentation.

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IMPERIAL OIL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. Basis of financial statement preparation

These unaudited consolidated financial statements should be read in the context of the consolidated financial statements and notes thereto filed with the Securities and Exchange Commission in the company’s 2004 Annual Report on Form 10-K. In the opinion of the management, the information furnished herein reflects all known accruals and adjustments necessary for a fair presentation of the financial position of the company as at March 31, 2005, and December 31, 2004, and the results of operations and changes in cash flows for the three months ending March 31, 2005, and 2004. All such adjustments are of a normal recurring nature. The company’s exploration and production activities are accounted for under the “successful effort” method.

The results for the three months ending March 31, 2005, 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.

2. Accounting for purchases and sales of inventory with the same counterparty

At its November 2004 meeting, the Emerging Issues Task Force (EITF) began discussion of Issue No. 04-13, “Accounting for Purchases and Sales of Inventory with the Same Counterparty”. This issue addresses the question of when it is appropriate to measure purchases and sales of inventory at fair value and record them in cost of sales and revenues and when they should be recorded as exchanges measured at the book value of the item sold. The EITF did not reach consensus on this issue, but requested the FASB staff to further explore the alternative views. The issue is expected to be addressed at a future EITF meeting.

The company records certain crude oil, natural gas, petroleum product and chemical purchases and sales of inventory entered into contemporaneously with the same counterparty as cost of sales and revenues, measured at fair value as agreed upon by a willing buyer and a willing seller. These transactions occur under contractual arrangements that establish the agreement terms either jointly, in a single contract, or separately, in individual contracts. This accounting treatment is consistent with long-term, predominant industry practice based on the company’s knowledge of the industry (although the company understands that some companies in the oil and gas industry may be accounting for these transactions differently as nonmonetary exchanges). Should the EITF reach a consensus on the issue requiring these transactions to be recorded as exchanges measured at book value, the company’s reported amounts in “operating revenues” and “purchases of crude oil and products” on the consolidated statement of income would be lower by associated amounts with no impact on net income. All operating segments would be impacted by this change, but the largest effects are in the petroleum products segment.

In its 2004 Form 10-K, the company disclosed that it would provide estimates of these amounts in the second quarter of 2005 at the completion of a special effort to accumulate the information. This special effort was needed because it has not been necessary to identify these monetary transactions separately from the other monetary purchases and monetary sales. This effort has been completed and the purchase/sale amounts included in revenue for 2004, 2003 and 2002 are shown below along with total “operating revenues” to provide context.

The company’s net income would not be impacted if the EITF reached a consensus on use of an alternative accounting approach and the company was required to reduce “operating revenues” and “purchases of crude oil and products” by the above amounts.

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IMPERIAL OIL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued...)
(unaudited)

3. Business segments

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IMPERIAL OIL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued...)
(unaudited)

3. Business segments (continued...)

4. Investment and other income

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

5. Employee retirement benefits

The components of net benefit cost included in total expenses in the consolidated statement of earnings are as follows:

6. Headquarters relocation

On September 29, 2004, the company announced its intention to relocate its head office from Toronto, Ontario, to Calgary, Alberta. Completion of the move is expected by August 2005.

Expenses in connection with the headquarters relocation activity are expected to total approximately $85 million ($57 million, after tax) most of which are expected to be recognized in the second and third quarter of 2005 in conjunction with employee relocations and compensation payments for employees who choose not to move.

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IMPERIAL OIL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued...)
(unaudited)

7. Financing costs

8. Long-term debt

9. Common shares

In 1995 through 2003, the company purchased shares under nine 12-month normal course share purchase programs, as well as an auction tender. On June 23, 2004, another 12-month normal course program was implemented with an allowable purchase of up to 17.9 million shares (five percent of the total on June 21, 2004), less any shares purchased by the employee savings plan and company pension fund. The results of these activities are as shown below:

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

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IMPERIAL OIL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued...)
(unaudited)

9. Common shares (continued...)

The following table provides the calculation of basic and diluted net income per share:

If the provisions for expensing the value of employee stock options of Financial Accounting Standard No. 123, “Accounting for Stock-Based Compensation” had been adopted prior to January 1, 2003, the impact on compensation expense, net income and net income per share for the first quarter in 2004 would have been negligible. All expenses for employee stock options would have been recognized in net income as of December 31, 2004.

10. Other long-term obligations

11. Earnings reinvested

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IMPERIAL OIL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued...)
(unaudited)

12. Nonowner changes in shareholders’ equity

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IMPERIAL OIL LIMITED

OPERATING RESULTS

The company’s net income for the first quarter of 2005 was $393 million or $1.12 a share on a diluted basis, versus $466 million or $1.29 a share for the same period last year.

Lower earnings were mainly due to the negative impact of about $130 million from lower volumes and higher maintenance costs associated with a major coker turnaround at Syncrude. The company’s excellent 2004 operating performance continued into the first quarter of 2005 with strong performances at Cold Lake, downstream and chemical facilities more than offsetting the natural decline in conventional crude oil and natural gas operations.

Strong light crude oil and natural gas prices and industry refining and petrochemical margins totalling about $250 million were favourable compared to the first quarter of 2004, but their positive impact on earnings were moderated by lower Cold Lake bitumen realizations of about $50 million and the impact of a higher Canadian dollar of about $80 million. The lower earnings were also due to higher stock-related compensation expenses of about $80 million primarily as a result of the significant increase in the company’s share price. Recognizing stock-related compensation expenses in earnings, on the basis of market prices of the company’s shares, has been a long-standing, transparent accounting practice of the company.

Total revenues were $5,958 million in the first quarter versus $5,067 million in the corresponding period last year.

Natural resources
During the first quarter of 2005, net income from natural resources was $242 million compared with $319 million in the same period last year. Earnings decreased due to lower production and higher maintenance costs at Syncrude, lower Cold Lake bitumen realizations, lower conventional crude oil and natural gas liquids (NGLs) volumes and the negative impact of a higher Canadian dollar totalling $270 million. These factors were partly offset by higher realizations for light crude oil and natural gas, and higher Cold Lake bitumen volumes totalling $220 million. Increased stock-related compensation expenses also contributed to the decline.

While U.S. dollar Brent crude oil prices averaged about 50 percent higher in the first quarter, the company’s Canadian dollar realizations for conventional crude oil at $58.28 a barrel, compared with $42.70 a barrel in the same period last year, were 36 percent higher mainly because of a stronger Canadian dollar. Average realizations for Cold Lake bitumen in the first quarter of 2005 were about 25 percent lower than those of the same period in 2004, reflecting a significant widening of price spread between light crude oil and Cold Lake bitumen. The company’s realizations for natural gas were slightly higher, averaging $7.02 a thousand cubic feet in the first quarter of 2005, compared with $6.58 during the same period last year.

In the first quarter, total gross production of crude oil and natural gas liquids (NGLs) was 260 thousand barrels a day versus 263 thousand barrels in the same period last year.

Gross production of Cold Lake bitumen was higher, averaging 152 thousand barrels a day during the first quarter of 2005 versus 121 thousand barrels in the first quarter of 2004, due to the cyclic nature of production at Cold Lake.

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IMPERIAL OIL LIMITED

Gross production from the company’s share of Syncrude decreased to 39 thousand barrels a day from 63 thousand barrels in the first quarter of 2004. Advancing the originally planned second-quarter coker turnaround into the first quarter and higher unplanned maintenance to other processing units were the main reasons for lower production volumes. The turnaround was completed in early April and all processing units returned to normal operation.

During the first three months this year, gross production of conventional crude oil averaged 40 thousand barrels a day versus 44 thousand barrels a day in the first quarter of 2004. Natural reservoir decline in the Western Canadian Basin was the main reason for the reduced production.

Gross production of NGLs available for sale decreased to 29 thousand barrels a day in the first quarter of 2005 from 35 thousand barrels last year, mainly due to declining NGL content of Wizard Lake gas production.

For the first quarter, gross production of natural gas averaged 585 million cubic feet a day, essentially flat compared to last year.

Effective April 1, 2005, the company and an affiliate of Exxon Mobil Corporation in Canada have agreed to combine their respective Western Canada production organizations into one single organization. Under the consolidation, Imperial will operate all Western Canada properties. There are no asset ownership changes. The consolidation is expected to result in efficiencies from a streamlined organization.

On April 28, 2005, the company, on behalf of the Mackenzie Gas Project coventurers, announced a decision to halt the project execution activities due to insufficient progress on key areas critical to the project — the finalization of benefits and access agreements and the establishment of a clear regulatory process, including timeliness. However, the project proponents are continuing all work associated with advancing the regulatory review process, which is currently focused on providing regulators with the information they require.

Petroleum products
The net income from petroleum products was $112 million in the first quarter of 2005, compared with $135 million during the same period a year ago. Lower earnings were mainly due to the unfavourable impact of a higher Canadian dollar, higher stock-related compensation expenses, partly offset by stronger industry refining margins.

Operating performance in the company’s refining businesses remained strong through the first quarter of 2005. Refinery utilization was 96 percent and total refinery throughput was more than 76 million litres a day.

Chemicals
Net income in the first quarter of 2005 from chemical operations was $34 million, compared with $12 million during the same period last year. Earnings increased because of higher margins and volumes for polyethylene and benzene as a result of increased industry demand.

Corporate and other
Net income from corporate and other operations was positive $5 million in the first quarter of 2005, compared with nil in the same period last year. Earnings increased mainly due to interest income on a higher average cash balance.

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IMPERIAL OIL LIMITED

LIQUIDITY AND CAPITAL RESOURCES

Cash flow from operating activities was negative $57 million during the first quarter of 2005, compared with $398 million in the same period last year. The decrease in cash inflow was mainly due to the timing of scheduled income tax payments, additional funding contribution to the employee pension plan and lower net income.

During the first quarter of 2005, capital and exploration expenditures were $325 million, compared with $353 million during the corresponding period a year ago. For the resources segment, capital and exploration expenditures were used mainly at Syncrude to maintain and expand production capacity. Capital expenditures for the products segment were used on the project to reduce sulphur content in diesel fuels.

During the first quarter, the company continued its share-purchase program and bought 3.7 million shares for $323 million under a normal course issuer bid that began on June 23, 2004, which has an allowable maximum purchase of 17.9 million shares. The maximum number of shares that may yet be purchased under the current program is about six million.

Total cash dividends of $77 million were paid in the first quarter of 2005, down from $80 million paid in the same period last year as a result of the company’s share-purchase program. Per-share dividends paid in the first quarter were $0.22, unchanged from the same quarter last year.

The above factors led to a decrease in the company’s balance of cash and marketable securities to $537 million at March 31, 2005, from $1,279 million at the end of 2004.

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IMPERIAL OIL LIMITED

Information about market risks for the three months ended March 31, 2005 does not differ materially from that discussed on page 26 in the company’s annual report on Form 10-K for the year ended December 31, 2004, except for the following sensitivity:

The sensitivity of net income to changes in the Canadian dollar versus the U.S. dollar increased from 2004 year-end by about $18 million (after tax) for each one-cent difference. This is primarily due to the increase in crude oil prices and industry refining margins.

(a)  The amount quoted to illustrate the impact of the sensitivity represents a change of about 10 percent in the value of the commodity at the end of the first quarter 2005. The sensitivity calculation shows the impact on annual net income that results from a change in one factor, after tax and royalties and holding all other factors constant. While the sensitivity is applicable under current conditions, it may not apply proportionately to larger fluctuations.

The 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.

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IMPERIAL OIL LIMITED

PART II — OTHER INFORMATION

During the period January 1, 2005 to March 31, 2005, the company issued 254,400 common shares for $46.50 per share as a result of the exercise of stock options by the holders of the stock options, who are all employees or former employees of the company, in sales of those common shares outside the U.S.A. which were not registered under the Securities Act in reliance on Regulation S thereunder.

Issuer Purchases of Equity Securities (1)

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IMPERIAL OIL LIMITED

At the annual meeting of shareholders on April 21, 2005, all of the management’s nominee directors were elected to hold office until the close of the next annual meeting. The votes for the directors were: B.J. Fischer 306,821,599 shares for and 288,434 shares withheld, T.J. Hearn 306,809,615 shares for and 300,418 shares withheld, J.M. Mintz 306,824,990 shares for and 285,043 shares withheld, R. Phillips 306,874,883 shares for and 235,150 shares withheld, J.F. Shepard 306,875,050 shares for and 234,983 shares withheld, P.A. Smith 306,820,315 shares for and 289,718 shares withheld, S.D. Whittaker 306,860,504 shares for and 249,529 shares withheld, J.M. Yeager 306,805,978 shares for and 304,055 shares withheld, and V.L. Young 306,873,377 shares for and 236,656 shares withheld.

At the same annual meeting of shareholders, PricewaterhouseCoopers LLP were reappointed as the auditors by a vote of 306,761,075 shares for and 314,985 shares withheld from the reappointment of the auditors.

There were two shareholders’ proposals voted on at the annual meeting of shareholders.

A shareholder’s proposal that the company’s board of directors prepare a report to shareholders by October 2005 (at reasonable cost and omitting proprietary information) verified by an independent third party with professional competency in this area, on potential risks and liabilities to the company arising from the range of climate changes and their effects (as reported by the IPCC), and an assessment of the strategies and initiatives that may be undertaken by the company to address those risks and liabilities, was defeated by a vote of 299,799,809 shares against and 2,809,745 shares for.

A shareholder’s proposal that the company’s board of directors prepare a report by September 2005 (at reasonable cost and omitting proprietary information) to describe how the company could promote and participate in the growing market in wind, solar, and other renewable sources of energy, particularly within Canada, was defeated by a vote of 300,943,049 shares against and 1,663,246 shares for.

Certifications by each of the principal executive officer and principal financial officer of the company pursuant to Rule 13a-14(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).

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IMPERIAL OIL LIMITED

SIGNATURES

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

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