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IMPERIAL OIL LTD - Quarter Report: 2008 September (Form 10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 September 30, 2008
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
  98-0017682
(State or other jurisdiction of
  (I.R.S. Employer
incorporation or organization)
  Identification No.)
 
   
237 Fourth Avenue S.W.
   
Calgary, Alberta, Canada
  T2P 3M9
(Address of principal executive offices)
  (Postal Code)
Registrant’s telephone number, including area code: 1-800-567-3776
 
The registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
     
YES   þ
  NO   o
The registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (see definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Securities Exchange Act of 1934).
Large accelerated filer   þ     Accelerated filer   o     Non-accelerated filer   o     Smaller reporting Company   o
The registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
     
YES   o
  NO   þ
The number of common shares outstanding, as of September 30, 2008, was 869,672,953.
 
 

 


 

IMPERIAL OIL LIMITED
 
INDEX
         
    PAGE  
 
       
PART I — Financial Information
       
 
       
Item 1 — Financial Statements.
       
 
       
Consolidated Statement of Income —
       
Three months ended September 30, 2008 and 2007
       
Nine months ended September 30, 2008 and 2007
    3  
 
       
Consolidated Statement of Cash Flows —
       
Three months ended September 30, 2008 and 2007
       
Nine months ended September 30, 2008 and 2007
    4  
 
       
Consolidated Balance Sheet —
       
As at September 30, 2008 and December 31, 2007
    5  
 
       
Notes to the Consolidated Financial Statements
    6  
 
       
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations.
    12  
 
       
Item 3 — Quantitative and Qualitative Disclosures about Market Risk.
    15  
 
       
Item 4 — Controls and Procedures.
    15  
 
       
PART II — Other Information
       
 
       
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds.
    16  
 
       
Item 6 — Exhibits.
    17  
 
       
SIGNATURES
    17  
 
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, 2007, and Form 10-Q for the quarters ended March 31, 2008 and June 30, 2008.
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

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IMPERIAL OIL LIMITED
 
PART I — FINANCIAL INFORMATION
Item 1.   Financial Statements.
CONSOLIDATED STATEMENT OF INCOME
(U.S. GAAP, unaudited)
                                 
                    Nine months
    Third quarter   to September 30
millions of Canadian dollars   2008     2007     2008     2007  
 
REVENUES AND OTHER INCOME
                               
Operating revenues (a)(b)
    9,478       6,306       25,327       18,372  
Investment and other income (4)
    37       124       310       331  
         
TOTAL REVENUES AND OTHER INCOME
    9,515       6,430       25,637       18,703  
         
 
                               
EXPENSES
                               
Exploration
    34       19       91       90  
Purchases of crude oil and products (c)
    5,727       3,519       15,535       10,142  
Production and manufacturing (5)(d)
    1,092       846       3,183       2,580  
Selling and general (5)
    175       298       794       969  
Federal excise tax (a)
    341       343       981       972  
Depreciation and depletion
    188       205       550       592  
Financing costs (6)(e)
    1       10       (2 )     33  
         
TOTAL EXPENSES
    7,558       5,240       21,132       15,378  
         
 
                               
INCOME BEFORE INCOME TAXES
    1,957       1,190       4,505       3,325  
 
                               
INCOME TAXES
    568       374       1,287       1,023  
         
 
                               
NET INCOME (3)
    1,389       816       3,218       2,302  
         
 
                               
NET INCOME PER COMMON SHARE — BASIC (dollars) (8)
    1.57       0.88       3.62       2.46  
NET INCOME PER COMMON SHARE — DILUTED (dollars) (8)
    1.57       0.88       3.60       2.45  
DIVIDENDS PER COMMON SHARE (dollars)
    0.10       0.09       0.28       0.26  
 
                               
(a)  Federal excise tax included in operating revenues
    341       343       981       972  
(b)  Amounts from related parties included in operating revenues
    637       431       1,856       1,277  
(c)  Amounts to related parties included in purchases of crude oil and products
    1,442       866       3,951       2,357  
(d)  Amounts to related parties included in production and manufacturing expenses
    48       55       138       148  
(e)  Amounts to related parties included in financing costs
          9       (1 )     26  
The notes to the financial statements are an integral part of these financial statements.

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IMPERIAL OIL LIMITED
 
CONSOLIDATED STATEMENT OF CASH FLOWS
(U.S. GAAP, unaudited)
                                 
                    Nine months
inflow/(outflow)   Third quarter   to September 30
millions of Canadian dollars   2008     2007     2008     2007  
 
OPERATING ACTIVITIES
                               
Net income
    1,389       816       3,218       2,302  
Adjustment for non-cash items:
                               
Depreciation and depletion
    188       205       550       592  
(Gain)/loss on asset sales (4)
    (4 )     (72 )     (236 )     (211 )
Deferred income taxes and other
    137       9       (105 )     98  
Changes in operating assets and liabilities:
                               
Accounts receivable
    128       (23 )     (636 )     (255 )
Inventories and prepaids
    (8 )     (51 )     (477 )     (249 )
Income taxes payable
    200       183       559       (225 )
Accounts payable
    (409 )     (80 )     654       400  
All other items — net (a)
    42       27       (110 )     (38 )
         
CASH FROM (USED IN) OPERATING ACTIVITIES
    1,663       1,014       3,417       2,414  
         
 
                               
INVESTING ACTIVITIES
                               
Additions to property, plant and equipment and intangibles
    (354 )     (226 )     (905 )     (598 )
Proceeds from asset sales
    19       82       260       268  
Loans to equity company
          1       (2 )      
         
CASH FROM (USED IN) INVESTING ACTIVITIES
    (335 )     (143 )     (647 )     (330 )
         
 
                               
FINANCING ACTIVITIES
                               
Short-term debt — net
          (1 )           404  
Repayment of long-term debt
          (250 )           (904 )
Long-term debt issued
          250             500  
Reduction in capitalized lease obligations
    (1 )     (1 )     (3 )     (2 )
Issuance of common shares under stock option plan
          1       6       10  
Common shares purchased (8)
    (610 )     (600 )     (1,806 )     (1,791 )
Dividends paid
    (79 )     (84 )     (242 )     (236 )
         
CASH FROM (USED IN) FINANCING ACTIVITIES
    (690 )     (685 )     (2,045 )     (2,019 )
         
 
                               
INCREASE (DECREASE) IN CASH
    638       186       725       65  
CASH AT BEGINNING OF PERIOD
    1,295       2,037       1,208       2,158  
         
CASH AT END OF PERIOD
    1,933       2,223       1,933       2,223  
         
 
                               
(a)  Includes contribution to registered pension plans
    (6 )     (5 )     (159 )     (158 )
The notes to the financial statements are an integral part of these financial statements.

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IMPERIAL OIL LIMITED
 
CONSOLIDATED BALANCE SHEET
(U.S. GAAP, unaudited)
                 
    As at     As at  
    Sept. 30     Dec. 31  
millions of Canadian dollars   2008     2007  
 
ASSETS
               
Current assets
               
Cash
    1,933       1,208  
Accounts receivable, less estimated doubtful accounts
    2,770       2,132  
Inventories of crude oil and products
    898       566  
Materials, supplies and prepaid expenses
    273       128  
Deferred income tax assets
    807       660  
     
Total current assets
    6,681       4,694  
 
               
Long-term receivables, investments and other long-term assets
    785       766  
 
               
Property, plant and equipment,
    23,709       22,962  
less accumulated depreciation and depletion
    12,812       12,401  
     
Property, plant and equipment, net
    10,897       10,561  
 
               
Goodwill
    204       204  
Other intangible assets, net
    60       62  
     
 
               
TOTAL ASSETS
    18,627       16,287  
     
 
               
LIABILITIES
               
Current liabilities
               
Short-term debt
    105       105  
Accounts payable and accrued liabilities (7)(a)
    3,995       3,335  
Income taxes payable
    2,057       1,498  
Current portion of capitalized lease obligations
    3       3  
     
Total current liabilities
    6,160       4,941  
 
               
Capitalized lease obligations
    35       38  
Other long-term obligations (7)
    1,879       1,914  
Deferred income tax liabilities
    1,503       1,471  
     
TOTAL LIABILITIES
    9,577       8,364  
 
               
SHAREHOLDERS’ EQUITY
               
Common shares at stated value (8)(b)
    1,546       1,600  
Earnings reinvested (9)
    8,294       7,071  
Accumulated other comprehensive income (10)
    (790 )     (748 )
     
TOTAL SHAREHOLDERS’ EQUITY
    9,050       7,923  
     
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
    18,627       16,287  
     
(a)  Accounts payable and accrued liabilities include amounts to related parties of $556 million (2007 — $260 million).
(b)  Number of common shares outstanding was 870 million (2007 — 903 million).
The notes to the financial statements are an integral part of these financial statements.

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IMPERIAL OIL LIMITED
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
1.   Basis of financial statement presentation
These unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles of the United States of America and follow the same accounting policies and methods of computation as, and should be read in conjunction with, the most recent annual consolidated financial statements. 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 September 30, 2008, and December 31, 2007, and the results of operations and changes in cash flows for the nine months ending September 30, 2008 and 2007. All such adjustments are of a normal recurring nature. The company’s exploration and production activities are accounted for under the “successful efforts” method. Certain reclassifications to the prior year have been made to conform to the 2008 presentation.
The results for the nine months ending September 30, 2008, are not necessarily indicative of the operations to be expected for the full year.
All amounts are in Canadian dollars unless otherwise indicated.
2.   Accounting changes
Uncertainty in income taxes
As of January 1, 2007, the company adopted the Financial Accounting Standards Board (FASB) Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes”. The cumulative adjustment for the accounting change reported in the first quarter of 2007 was an after-tax gain of $14 million.
Fair value measurements
Effective January 1, 2008, the company adopted the Financial Accounting Standards Board’s (FASB) Statement No. 157 (SFAS 157), “Fair Value Measurements” for financial assets and liabilities that are measured at fair value and nonfinancial assets and liabilities that are remeasured at fair value on a recurring basis. SFAS 157 defines fair value, establishes a framework for measuring fair value when an entity is required to use a fair value measure for recognition or disclosure purposes and expands the disclosures about fair value measurements. The initial application of SFAS 157 had no impact on the company’s financial statements.
On January 1, 2009, the company will adopt SFAS 157 for nonfinancial assets and liabilities that are not remeasured at fair value on a recurring basis. The application of SFAS 157 to the company’s nonfinancial assets and liabilities will mostly be limited to the recognition and measurement of nonmonetary exchange transactions, asset retirement obligations and asset impairments. The company does not expect the adoption to have a material impact on the company’s financial statements.

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IMPERIAL OIL LIMITED
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
3.  Business segments
                                                 
Third quarter   Upstream     Downstream     Chemical
millions of dollars   2008     2007     2008     2007     2008     2007  
 
REVENUES AND OTHER INCOME
                                               
External sales (a)
    1,692       1,028       7,393       4,934       393       344  
Intersegment sales
    1,682       1,227       747       552       132       74  
Investment and other income
    5       85       18       14              
             
 
    3,379       2,340       8,158       5,500       525       418  
             
EXPENSES
                                               
Exploration (b)
    34       19                          
Purchases of crude oil and products
    1,134       817       6,759       4,243       395       312  
Production and manufacturing
    671       479       369       321       52       46  
Selling and general
    2       2       256       251       19       19  
Federal excise tax
                341       343              
Depreciation and depletion
    124       141       57       59       4       4  
Financing costs
    1                                
             
TOTAL EXPENSES
    1,966       1,458       7,782       5,217       470       381  
             
INCOME BEFORE INCOME TAXES
    1,413       882       376       283       55       37  
INCOME TAXES
    414       275       106       92       17       13  
             
NET INCOME
    999       607       270       191       38       24  
             
 
                                               
Export sales to the United States
    984       490       682       200       250       212  
Cash flows from (used in) operating activities
    1,534       760       93       184       32       60  
CAPEX (b)
    316       184       67       50       3       2  
                                                 
    Corporate              
Third quarter   and Other     Eliminations     Consolidated
millions of dollars   2008     2007     2008     2007     2008     2007  
 
REVENUES AND OTHER INCOME
                                               
External sales (a)
                            9,478       6,306  
Intersegment sales
                (2,561 )     (1,853 )            
Investment and other income
    14       25                   37       124  
             
 
    14       25       (2,561 )     (1,853 )     9,515       6,430  
             
EXPENSES
                                               
Exploration (b)
                            34       19  
Purchases of crude oil and products
                (2,561 )     (1,853 )     5,727       3,519  
Production and manufacturing
                            1,092       846  
Selling and general
    (102 )     26                   175       298  
Federal excise tax
                            341       343  
Depreciation and depletion
    3       1                   188       205  
Financing costs
          10                   1       10  
             
TOTAL EXPENSES
    (99 )     37       (2,561 )     (1,853 )     7,558       5,240  
             
INCOME BEFORE INCOME TAXES
    113       (12 )                 1,957       1,190  
INCOME TAXES
    31       (6 )                 568       374  
             
NET INCOME
    82       (6 )                 1,389       816  
             
 
                                               
Export sales to the United States
                            1,916       902  
Cash flows from (used in) operating activities
    4       10                   1,663       1,014  
CAPEX (b)
    2       9                   388       245  
(a)   Includes crude oil sales made by Downstream in order to optimize refining operations.
 
(b)   Capital and exploration expenditures (CAPEX) include exploration expenses, additions to property, plant, equipment and intangibles and additions to capital leases.

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IMPERIAL OIL LIMITED
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
3.  Business segments (continued)
                                                 
Nine months to September 30   Upstream     Downstream     Chemical
millions of dollars   2008     2007     2008     2007     2008     2007  
 
REVENUES AND OTHER INCOME
                                               
External sales (a)
    4,977       3,377       19,223       14,016       1,127       979  
Intersegment sales
    4,528       2,977       2,418       1,609       374       247  
Investment and other income
    14       225       260       38       1        
             
 
    9,519       6,579       21,901       15,663       1,502       1,226  
             
EXPENSES
                                               
Exploration (b)
    91       90                          
Purchases of crude oil and products
    3,480       2,241       18,202       11,821       1,173       913  
Production and manufacturing
    1,927       1,515       1,097       925       159       140  
Selling and general
    5       6       732       728       56       54  
Federal excise tax
                981       972              
Depreciation and depletion
    359       399       175       180       10       9  
Financing costs
    1       3       (5 )     1              
             
TOTAL EXPENSES
    5,863       4,254       21,182       14,627       1,398       1,116  
             
INCOME BEFORE INCOME TAXES
    3,656       2,325       719       1,036       104       110  
INCOME TAXES
    1,069       695       180       333       32       36  
             
NET INCOME
    2,587       1,630       539       703       72       74  
             
 
                                               
Export sales to the United States
    2,635       1,512       1,275       702       701       576  
Cash flows from (used in) operating activities
    3,075       1,702       336       656       42       1  
CAPEX (b)
    821       495       162       133       7       8  
Total assets as at September 30
    8,790       7,923       7,820       6,889       516       499  
                                                 
    Corporate              
Nine months to September 30   and Other     Eliminations     Consolidated  
millions of dollars   2008     2007     2008     2007     2008     2007  
 
REVENUES AND OTHER INCOME
                                               
External sales (a)
                            25,327       18,372  
Intersegment sales
                (7,320 )     (4,833 )            
Investment and other income
    35       68                   310       331  
             
 
    35       68       (7,320 )     (4,833 )     25,637       18,703  
             
EXPENSES
                                               
Exploration (b)
                            91       90  
Purchases of crude oil and products
                (7,320 )     (4,833 )     15,535       10,142  
Production and manufacturing
                            3,183       2,580  
Selling and general
    1       181                   794       969  
Federal excise tax
                            981       972  
Depreciation and depletion
    6       4                   550       592  
Financing costs
    2       29                   (2 )     33  
             
TOTAL EXPENSES
    9       214       (7,320 )     (4,833 )     21,132       15,378  
             
INCOME BEFORE INCOME TAXES
    26       (146 )                 4,505       3,325  
INCOME TAXES
    6       (41 )                 1,287       1,023  
             
NET INCOME
    20       (105 )                 3,218       2,302  
             
 
                                               
Export sales to the United States
                            4,611       2,790  
Cash flows from (used in) operating activities
    (36 )     55                   3,417       2,414  
CAPEX (b)
    6       25                   996       661  
Total assets as at September 30
    1,956       2,256       (455 )     (314 )     18,627       17,253  
(a)   Includes crude oil sales made by Downstream in order to optimize refining operations.
 
(b)   Capital and exploration expenditures (CAPEX) include exploration expenses, additions to property, plant, equipment and intangibles and additions to capital leases.

- 8 -


 

IMPERIAL OIL LIMITED
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
4.  Investment and other income
Investment and other income includes gains and losses on asset sales as follows:
                                 
                    Nine months
    Third quarter     to September 30
millions of dollars   2008     2007     2008     2007  
 
Proceeds from asset sales
    19       82       260       268  
Book value of assets sold
    15       10       24       57  
         
Gain/(loss) on asset sales, before tax (a)
    4       72       236       211  
         
Gain/(loss) on asset sales, after tax (a)
    2       51       203       152  
         
(a)   Third quarter of 2007 included a gain of $71 million ($51 million, after tax) from the sale of the company’s interest in the Willesden Green producing property.
5.  Employee retirement benefits
The components of net benefit cost included in production and manufacturing and selling and general expenses in the consolidated statement of income are as follows:
                                 
                    Nine months
    Third quarter     to September 30
millions of dollars   2008     2007     2008     2007  
 
Pension benefits:
                               
Current service cost
    24       25       71       75  
Interest cost
    67       62       203       185  
Expected return on plan assets
    (82 )     (83 )     (247 )     (247 )
Amortization of prior service cost
    5       5       14       15  
Recognized actuarial loss
    22       19       68       57  
         
Net benefit cost
    36       28       109       85  
         
 
                               
Other post-retirement benefits:
                               
Current service cost
    2       1       5       4  
Interest cost
    7       5       19       17  
Recognized actuarial loss
    1       2       4       5  
         
Net benefit cost
    10       8       28       26  
         
6.  Financing costs
                                 
                    Nine months
    Third quarter     to September 30
millions of dollars   2008     2007     2008     2007  
 
Debt related interest
    2       18       6       51  
Capitalized interest
    (2 )     (9 )     (6 )     (25 )
         
Net interest expense
          9             26  
Other interest
    1       1       (2 )     7  
         
Total financing costs
    1       10       (2 )     33  
         

- 9 -


 

IMPERIAL OIL LIMITED
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
7.  Other long-term obligations
                 
    As at     As at  
    Sept. 30     Dec. 31  
millions of dollars   2008     2007  
 
Employee retirement benefits (a)
    904       954  
Asset retirement obligations and other environmental liabilities (b)
    516       522  
Share-based incentive compensation liabilities
    253       210  
Other obligations
    206       228  
     
Total other long-term obligations
    1,879       1,914  
     
(a)   Total recorded employee retirement benefits obligations also include $59 million in current liabilities
(December 31, 2007 — $59 million).
 
(b)   Total asset retirement obligations and other environmental liabilities also include $74 million in current liabilities
(December 31, 2007 — $74 million).
8.  Common shares
                 
    As at     As at  
    Sept. 30     Dec. 31  
thousands of shares   2008     2007  
 
Authorized
    1,100,000       1,100,000  
Common shares outstanding
    869,673       903,263  
From 1995 through 2007, the company purchased shares under thirteen 12-month normal course issuer bid share repurchase programs, as well as an auction tender. On June 25, 2008, another 12-month normal course issuer bid program was implemented with an allowable purchase of 44.2 million shares (five percent of the total on June 24, 2008), less shares purchased from Exxon Mobil Corporation and 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 - 2006
    795.6       10,453  
 
               
2007 - Third quarter
    12.8       600  
- Full year
    50.5       2,358  
 
               
2008 - Third quarter
    12.4       610  
- Year-to-date
    34.0       1,806  
 
               
Cumulative purchases to date
    880.1       14,617  
Exxon Mobil Corporation’s participation in the above share repurchase 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 earnings reinvested.

- 10 -


 

IMPERIAL OIL LIMITED
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
The following table provides the calculation of net income per common share:
                                 
                    Nine months
    Third quarter     to September 30
    2008     2007     2008     2007  
 
Net income per common share — basic
                               
Net income (millions of dollars)
    1,389       816       3,218       2,302  
 
                               
Weighted average number of common shares outstanding (millions of shares)
    877.3       922.0       888.4       935.0  
 
                               
Net income per common share (dollars)
    1.57       0.88       3.62       2.46  
Net income per common share — diluted
                               
Net income (millions of dollars)
    1,389       816       3,218       2,302  
 
                               
Weighted average number of common shares outstanding (millions of shares)
    877.3       922.0       888.4       935.0  
Effect of employee share-based awards (millions of shares)
    6.5       5.9       6.4       5.7  
         
Weighted average number of common shares outstanding, assuming dilution (millions of shares)
    883.8       927.9       894.8       940.7  
 
                               
Net income per common share (dollars)
    1.57       0.88       3.60       2.45  
9.  Earnings reinvested
                                 
                    Nine months  
    Third quarter     to September 30  
millions of dollars   2008     2007     2008     2007  
 
Earnings reinvested at beginning of period
    7,581       6,659       7,071       6,462  
Cumulative effect of accounting change (2)
                      14  
Net income for the period
    1,389       816       3,218       2,302  
Share purchases in excess of stated value
    (588 )     (577 )     (1,746 )     (1,721 )
Dividends
    (88 )     (83 )     (249 )     (242 )
         
Earnings reinvested at end of period
    8,294       6,815       8,294       6,815  
         
10.  Comprehensive income
                                 
                    Nine months  
    Third quarter     to September 30
millions of dollars   2008     2007     2008     2007  
 
Net income
    1,389       816       3,218       2,302  
 
                               
Post-retirement benefit liability adjustment (excluding amortization)
                (105 )     (28 )
Amortization of post retirement benefit liability adjustment included in net periodic benefit costs
    21       18       63       53  
         
Other comprehensive income (net of income taxes)
    21       18       (42 )     25  
         
Total comprehensive income
    1,410       834       3,176       2,327  
         

- 11 -


 

IMPERIAL OIL LIMITED
 
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.
OPERATING RESULTS
The company’s net income for the third quarter of 2008 was a record $1,389 million or $1.57 a share on a diluted basis, compared with $816 million or $0.88 a share for the same period last year. Net income for the first nine months of 2008 was $3,218 million or $3.60 a share on a diluted basis, versus $2,302 million or $2.45 a share for the first nine months of 2007.
Earnings in the third quarter were higher than the same quarter of 2007 as earnings improved in all segments. In the Upstream, higher crude oil and natural gas commodity prices were partially offset by the negative impacts of lower volumes, higher royalties, and higher energy and planned maintenance costs. Higher Downstream earnings were primarily due to stronger margins. Chemical earnings benefited from higher margins for polyethylene products. Lower share-based compensation costs also contributed to higher earnings.
For the first nine months, earnings increased primarily due to higher crude oil and natural gas commodity prices. Improved upstream realizations were partially offset by the negative impacts of lower upstream volumes, higher royalties, lower overall downstream margins and a stronger Canadian dollar.
Upstream
Net income in the third quarter was a record $999 million, $392 million higher than the same period in 2007. Increased earnings were primarily due to higher crude oil and natural gas commodity prices totaling about $960 million. Improved realizations were partially offset by the negative impacts of higher royalties of about $150 million, lower conventional volumes from expected reservoir decline of about $95 million, lower cyclical Cold Lake heavy oil production of about $85 million and lower Syncrude volumes of about $70 million. Earnings were also negatively impacted by higher energy and planned Syncrude maintenance costs totaling about $120 million and lower gains from asset divestments of about $50 million.
Net income for the first nine months was $2,587 million versus $1,630 million during the same period last year. Crude oil and natural gas commodity prices were stronger by about $2,500 million. Their positive impact on earnings was partially offset by lower conventional volumes of about $375 million, lower Syncrude volumes of about $130 million and lower cyclical Cold Lake heavy oil production of about $70 million. Earnings were also negatively impacted by higher royalties of about $425 million, a stronger Canadian dollar of about $180 million, higher energy, Syncrude maintenance, and other production costs totaling about $240 million and lower gains from asset divestments of about $140 million.
Gross production of Cold Lake heavy oil averaged 143 thousand barrels a day during the third quarter, versus 160 thousand barrels in the same quarter last year. For the first nine months, gross production was 147 thousand barrels a day this year, compared with 152 thousand barrels in the same period of 2007. Lower production volumes in the third quarter and nine months of 2008 were due to the cyclic nature of production at Cold Lake.
The company’s share of Syncrude’s gross production in the third quarter was 79 thousand barrels a day compared with 87 thousand barrels during the same period a year ago. Lower volumes were attributed to planned maintenance of a coker unit which began in the third quarter. During the nine-month period, the company’s share of gross production from Syncrude averaged 71 thousand barrels a day, down from 76 thousand barrels in 2007. Lower volumes were due primarily to unplanned shutdowns in the first quarter and planned maintenance activities in the second and third quarters of 2008.

-12-


 

IMPERIAL OIL LIMITED
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued ....)
 
In both the third quarter and nine months of 2008, gross production of conventional crude oil averaged 27 thousand barrels a day and was essentially the same when compared to corresponding periods in 2007.
Gross production of natural gas during the third quarter of 2008 decreased to 309 million cubic feet a day from 430 million cubic feet in the same period last year. In the first nine months of the year, gross production was 315 million cubic feet a day, down from 482 million in the first nine months of 2007. The lower production volume was primarily due to the decline, as expected, in production from the Wizard Lake gas cap blowdown, which is largely complete.
Gross production of natural gas liquids (NGLs) available for sale was 9 thousand barrels a day in the third quarter, down from 16 thousand barrels in the same quarter last year. During the first nine months of 2008, gross production of NGLs available for sale decreased to 11 thousand barrels a day, from 17 thousand barrels in 2007. The lower production volumes in the third quarter and the first nine months of 2008 were mainly due to the expected decline in production from Wizard Lake.
Downstream
Net income was $270 million in the third quarter of 2008, compared with $191 million in the same period a year ago. Earnings were higher mainly due to stronger margins in the quarter. Also contributing to higher earnings was increased throughput at the refineries, with refinery utilization averaging 93 percent in the third quarter.
Nine-month net income was $539 million compared with $703 million in 2007. Earnings decreased primarily due to lower overall downstream margins of about $285 million and the negative impact of a stronger Canadian dollar of about $50 million. These factors were partially offset by a gain of $187 million from the sale of the company’s equity investment in Rainbow Pipe Line Co. Ltd. in the second quarter of 2008.
Chemical
Net income was $38 million in the third quarter, compared with $24 million in the same quarter last year. Higher earnings in the third quarter were primarily due to higher margins for polyethylene products partially offset by lower overall sales volumes. Nine-month net income was $72 million, compared with $74 million in 2007. Lower margins for intermediate and other chemical products were essentially offset by higher margins for polyethylene products.
Corporate and other
Net income effects were $82 million in the third quarter, compared with negative $6 million in the same period of 2007. For the nine months of 2008, net income effects were $20 million, versus negative $105 million last year. Favourable earnings effects in the third quarter and the first nine months of 2008 were primarily due to lower share-based compensation charges.

-13-


 

IMPERIAL OIL LIMITED
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued .....)
 
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operating activities was $1,663 million during the third quarter of 2008, $649 million higher than the same period last year. Year-to-date cash flow from operating activities was $3,417 million, an increase of $1,003 million from the first nine months of 2007. Higher cash flow in the third quarter and the nine months of 2008 were primarily due to higher earnings.
Investing activities used net cash of $335 million in the third quarter and $647 million in the nine months of 2008, compared to $143 million and $330 million in the corresponding periods in 2007. Additions to property, plant and equipment were $354 million in the third quarter, compared with $226 million during the same quarter of 2007, and $905 million in the first nine months, compared with $598 million in the first nine months of 2007. For the Upstream segment, capital and exploration expenditures included ongoing development drilling at Cold Lake to maintain and expand production capacity, advancing the Kearl oil sands project, investments in facilities improvement at Syncrude, drilling at conventional fields in Western Canada and a 3-D seismic program in the Beaufort Sea. The Downstream segment’s capital expenditures were focused mainly on reducing air emissions and improving refinery reliability and utilization. Proceeds from asset sales were $260 million in the nine months of 2008 compared with $268 million in the corresponding period of 2007.
During the third quarter and the first nine months of 2008, the company repurchased about 12 million shares for $610 million and about 34 million shares for $1,806 million, respectively. Under the current share repurchase program, which began on June 25, 2008, the company has purchased about 14 million shares, including shares purchased from ExxonMobil.
Cash dividends of $242 million were paid in the first nine months of 2008 compared with dividends of $236 million in the same period of 2007. On July 31, 2008, the company declared a quarterly dividend of ten cents a share, an increase of one cent a share from the previous quarter, payable on October 1, 2008. Per-share dividends declared in the first three quarters of 2008 totaled $0.28, up from $0.26 in the same period of 2007.
The above factors led to an increase in the company’s balance of cash to $1,933 million at September 30, 2008, from $1,208 million at the end of 2007.

-14-


 

IMPERIAL OIL LIMITED
 
Item 3.   Quantitative and Qualitative Disclosures about Market Risk.
Information about market risks for the nine months ended September 30, 2008 does not differ materially from that discussed on page 29 in the company’s annual report on Form 10-K for the year ended December 31, 2007 and Form 10-Q for the quarters ended March 31, 2008 and June 30, 2008 except for the following:
                     
 
Earnings sensitivity (a)
millions of dollars after tax
                 
 
Nine cents decrease (increase) in the value of the Canadian dollar
versus the U.S. dollar
     
+ (-)
       
600
   
 
The sensitivity of net income to changes in the Canadian dollar versus the U.S. dollar decreased from the second quarter of 2008 by about $5 million (after tax) for each one-cent difference. This was primarily due to the decrease in crude oil prices partially offset by the impacts of narrowing price spread between light crude oil and Cold Lake heavy oil and higher 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 third quarter 2008. 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.
Item 4.   Controls and Procedures.
As indicated in the certifications in Exhibit 31 of this report, the company’s principal executive officer and principal financial officer have evaluated the company’s disclosure controls and procedures as of September 30, 2008. Based on that evaluation, these officers have concluded that the company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to them in a manner that allows for timely decisions regarding required disclosures and are effective in ensuring that such information is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
There has not been any change in the company’s internal control over financial reporting during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting.

-15-


 

PART II — OTHER INFORMATION
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds.
During the period July 1, 2008 to September 30, 2008, the company issued 12,210 common shares to employees or former employees outside the U.S.A. for $15.50 per share upon the exercise of stock options. These issuances were not registered under the Securities Act in reliance on Regulation S thereunder.
Issuer Purchases of Equity Securities (1)
                                             
 
                            (c) Total        
                            number of     (d) Maximum  
                            shares (or     number (or  
                            units)     approximate  
                            purchased     dollar value) of  
        (a) Total               as part of     shares (or units)  
        number of     (b) Average     publicly     that may yet be  
        shares (or     price paid     announced     purchased  
        units)     per share (or     plans or     under the plans  
  Period     purchased     unit)     programs     or programs  
 
July 2008
(July 1- July 31)
      1,478,944       $ 53.52         1,478,944         41,473,215    
 
August 2008
(August 1 — August 31)
      5,190,375       $ 50.89         5,190,375         36,223,864    
 
September 2008
(September 1 - September 30)
      5,742,545       $ 46.39         5,742,545         30,417,719    
 
(1)   On June 23, 2008, the company announced by news release that it had received final approval from the Toronto Stock Exchange for a new normal course issuer bid and will continue its share repurchase program. The new program enables the company to repurchase up to a maximum of 44,194,961 common shares, including common shares purchased for the company’s employee savings plan, the company’s employee retirement plan and from Exxon Mobil Corporation during the period June 25, 2008 to June 24, 2009. If not previously terminated, the program will end on June 24, 2009.

-16-


 

Item 6.   Exhibits.
(31.1)   Certification by the principal executive officer of the company pursuant to Rule 13a-14(a).
(31.2)   Certification by the principal financial officer of the company pursuant to Rule 13a-14(a).
(32.1)   Certification by the chief executive officer and of the company pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350.
(32.2)   Certification by the chief financial officer and of the company pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  IMPERIAL OIL LIMITED
(Registrant)

 
 
Date: October 30, 2008 /s/ Paul. A. Smith    
  (Signature)   
  Paul A. Smith
Senior Vice-President, Finance and
Administration and Treasurer
(Principal Accounting Officer) 
 
 
     
Date: October 30, 2008  /s/ Brent. A. Latimer    
  (Signature)   
  Brent A. Latimer
Assistant Secretary 
 
 

-17-