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IMPERIAL OIL LTD - Quarter Report: 2010 June (Form 10-Q)

Form 10-Q
Table of Contents

 

FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.   20549

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

OR

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from --- to ---

Commission file number 0-12014

IMPERIAL OIL LIMITED

(Exact name of registrant as specified in its charter)

 

CANADA        98-0017682

(State or other jurisdiction

of incorporation or organization)

      

(I.R.S. Employer

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 91 days.

YES  ü      NO     

The registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES  ü      NO     

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  ü    Accelerated filer       
Non-accelerated filer         Smaller reporting company       

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

YES          NO  ü

The number of common shares outstanding, as of June 30, 2010, was 847,599,011.


Table of Contents

IMPERIAL OIL LIMITED

 

 

INDEX

 

 

   PAGE
PART I - Financial Information   

Item 1 - Financial Statements.

  

    Consolidated Statement of Income -Six Months ended June 30, 2010 and 2009

   3

    Consolidated Balance Sheet - as at June 30, 2010 and December 31, 2009

   4

    Consolidated Statement of Cash Flows - Six Months ended June 30, 2010 and 2009

   5

    Notes to the Consolidated Financial Statements

   6

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

   11

Item 3 - Quantitative and Qualitative Disclosures about Market Risk.

   14

Item 4 - Controls and Procedures.

   14

PART II - Other Information

  

Item 1A - Risk Factors

   15

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds.

   15

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, 2009.

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)

 

    

    Second Quarter

    

     Six Months

     to June 30

millions of Canadian dollars    2010         2009                2010         2009  

REVENUES AND OTHER INCOME

                 

Operating revenues (a)(b)

   6,091      5,261        12,225      9,914  

Investment and other income (4)

   48      42        80      59  
           

TOTAL REVENUES AND OTHER INCOME

       6,139      5,303        12,305      9,973  
           

EXPENSES

                 

Exploration

   30      22        117      105  

Purchases of crude oil and products (c)

   3,636      3,131        7,297      5,451  

Production and manufacturing (d)(5)

   1,012      1,077        2,042      2,107  

Selling and general (5)

   265      271        515      601  

Federal excise tax (a)

   322      314        626      620  

Depreciation and depletion

   192      193        374      390  

Financing costs

   0      1        1      3  
           

TOTAL EXPENSES

   5,457      5,009        10,972      9,277  
           

INCOME BEFORE INCOME TAXES

   682      294        1,333      696  

INCOME TAXES

   165      85        340      198  
           

NET INCOME (3)

   517      209        993      498  
           

NET INCOME PER COMMON SHARE - BASIC (dollars) (7)

   0.61      0.25        1.17      0.59  

NET INCOME PER COMMON SHARE - DILUTED (dollars) (7)

   0.60      0.25        1.16      0.58  

DIVIDENDS PER COMMON SHARE (dollars)

   0.11      0.10        0.21      0.20  

(a)    Federal excise tax included in operating revenues

   322      314        626      620  

(b)    Amounts from related parties included in operating revenues

   439      452        1,047      766  

(c)    Amounts to related parties included in purchases of crude oil and products

   489      651        1,012      1,348  

(d)    Amounts to related parties included in production and manufacturing expenses

   67      52        122      111  

The information in the Notes to Consolidated Financial Statements is an integral part of these statements.

 

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IMPERIAL OIL LIMITED

 

 

CONSOLIDATED BALANCE SHEET

(U.S. GAAP, unaudited)

millions of Canadian dollars    As at 
        June 30 
2010 
     As at  
Dec.31  
2009  

ASSETS

       

Current assets

       

Cash

   64       513  

Accounts receivable, less estimated doubtful accounts

   1,776       1,714  

Inventories of crude oil and products

   630       564  

Materials, supplies and prepaid expenses

   301       247  

Deferred income tax assets

   457       467  
    

Total current assets

   3,228       3,505  

Long-term receivables, investments and other long-term assets

   750       854  

Property, plant and equipment,

   27,950       26,421  

less accumulated depreciation and depletion

   13,824       13,569  
    

Property, plant and equipment, net

   14,126       12,852  

Goodwill

   204       204  

Other intangible assets, net

   60       58  
    

TOTAL ASSETS

   18,368       17,473  
    

LIABILITIES

       

Current liabilities

       

Notes and loans payable

   199       109  

Accounts payable and accrued liabilities (a)(6)

   3,196       2,811  

Income taxes payable

   617       848  
    

Total current liabilities

   4,012       3,768  

Capitalized lease obligations

   29       31  

Other long-term obligations (6)

   2,427       2,839  

Deferred income tax liabilities

   1,507       1,396  
    

TOTAL LIABILITIES

   7,975       8,034  
    

SHAREHOLDERS' EQUITY

       

Common shares at stated value (b)

   1,509       1,508  

Earnings reinvested

   10,064       9,252  

Accumulated other comprehensive income (8)

   (1,180)      (1,321) 
    

TOTAL SHAREHOLDERS' EQUITY

   10,393       9,439  
    

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   18,368       17,473  
    

 

(a) Accounts payable and accrued liabilities include amounts to related parties of $109 million (2009 - $59 million).
(b) Number of common shares authorized and outstanding were 1,100 million and 848 million, respectively (2009 - 1,100 million and 848 million, respectively).

The information in the Notes to Consolidated Financial Statements is an integral part of these statements.

 

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IMPERIAL OIL LIMITED

 

 

CONSOLIDATED STATEMENT OF CASH FLOWS

(U.S. GAAP, unaudited)

inflow/(outflow)

 

  Second Quarter

         

        Six Months

        to June 30

millions of Canadian dollars

    2010     2009                      2010     2009  

OPERATING ACTIVITIES

               

Net income

  517     209           993     498  

Adjustment for non-cash items:

               

Depreciation and depletion

  192     193           374     390  

(Gain)/loss on asset sales (4)

  (42)    (31)          (46)    (32) 

Deferred income taxes and other

  70     (71)          72     (43) 

Changes in operating assets and liabilities:

               

Accounts receivable

  118     (244)          (62)    (369) 

Inventories and prepaids

  14     107           (120)    (190) 

Income taxes payable

  (70)    (25)          (232)    (585) 

Accounts payable

  (260)    81           377     369  

All other items - net (a)

  (215)    43           (118)    (72) 
             

CASH FROM (USED IN) OPERATING ACTIVITIES

  324     262           1,238     (34) 
             

INVESTING ACTIVITIES

               

Additions to property, plant and equipment and intangibles

  (851)    (513)          (1,664)    (924) 

Proceeds from asset sales

  54     35           60     37  

Loans to equity company

     (1)             1  
             

CASH FROM (USED IN) INVESTING ACTIVITIES

  (797)    (479)          (1,604)    (886) 
             

FINANCING ACTIVITIES

               

Short Term Debt - net

  90     (1)          89     (2) 

Issuance of common shares under stock option plan

     0              0  

Common shares purchased

  (3)    (61)          (3)    (490) 

Dividends paid

  (85)    (86)          (170)    (172) 
             

CASH FROM (USED IN) FINANCING ACTIVITIES

     (148)          (83)    (664) 
             

INCREASE (DECREASE) IN CASH

  (470)    (365)          (449)    (1,584) 

CASH AT BEGINNING OF PERIOD

  534     755           513     1,974  
             

CASH AT END OF PERIOD

  64     390           64     390  
             

(a) Includes contribution to registered pension plans.

  (295)    (6)          (365)    (167) 

The information in the Notes to Consolidated Financial Statements is an integral part of these statements.

 

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IMPERIAL OIL LIMITED

 

 

NOTES TO 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 June 30, 2010, and December 31, 2009, and the results of operations and changes in cash flows for the six months ended June 30, 2010 and 2009. 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 2010 presentation.

The results for the six months ended June 30, 2010, 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 change for variable-interest entitites

Effective January 1, 2010, the company adopted the authoritative guidance for variable-interest entities (VIEs). The guidance requires the enterprise to qualitatively assess if it is the primary beneficiary of the VIE and, if so, the VIE must be consolidated. The adoption did not have any impact on the company’s financial statements.

 

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IMPERIAL OIL LIMITED

 

 

 

3. Business Segments

 

Second Quarter            Upstream            Downstream         Chemical
millions of dollars    2010             2009          2010              2009           2010            2009  

REVENUES AND OTHER INCOME

                     

Operating revenues

           1,010         879       4,816          4,152        265        230  

Intersegment sales

   963         698       462          355        63        83  

Investment and other income

   11         19         34          23          3        (0) 
   1,984         1,596         5,312          4,530          331        313  

EXPENSES

                     

Exploration

   30         22       0                0        0  

Purchases of crude oil and products

   653         468       4,237          3,566        234        233  

Production and manufacturing

   573         630       389          400        50        47  

Selling and general

   1              225          234        16        19  

Federal excise tax

   0              322          314        0        0  

Depreciation and depletion

   131         129       56          59        3        3  

Financing costs

   0                0                  0        0  

TOTAL EXPENSES

   1,388         1,251         5,229          4,573          303        302  

INCOME BEFORE INCOME TAXES

   596         345       83          (43)       28        11  

INCOME TAXES

   150         93         15          (5)         6        3  

NET INCOME

   446         252         68          (38)         22        8  

Export sales to the United States

   412         422       326          322        161        111  

Cash from (used in) operating activities

   567         38       (223)        240        9        11  

CAPEX (a)

   832         471       46          61        2        2  
     Corporate               
Second Quarter    and Other        Eliminations            Consolidated    
millions of dollars    2010             2009         2010              2009          2010            2009  

REVENUES AND OTHER INCOME

                     

Operating revenues

   0              0                6,091        5,261  

Intersegment sales

   0              (1,488)        (1,136)       0        0  

Investment and other income

   0                0                  48        42  
   0                (1,488)        (1,136)         6,139        5,303  

EXPENSES

                     

Exploration

   0              0                30        22  

Purchases of crude oil and products

   0              (1,488)        (1,136)       3,636        3,131  

Production and manufacturing

   0              0                1,012        1,077  

Selling and general

   23         17       0                265        271  

Federal excise tax

   0              0                322        314  

Depreciation and depletion

   2              0                192        193  

Financing costs

   0                0                  0        1  

TOTAL EXPENSES

   25         19         (1,488)        (1,136)         5,457        5,009  

INCOME BEFORE INCOME TAXES

   (25)        (19)      0                682        294  

INCOME TAXES

   (6)        (6)        0                  165        85  

NET INCOME

   (19)        (13)        0                  517        209  

Export sales to the United States

   0               0                899        855  

Cash from (used in) operating activities

   (29)        (27)      0                324        262  

CAPEX (a)

   1              0         
      881        535  

 

(a) 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

 

 

 

Six Months to June 30    Upstream            Downstream                Chemical
millions of dollars    2010     2009          2010     2009          2010     2009  
 

REVENUES AND OTHER INCOME

                       

Operating revenues

   2,251     1,639        9,426     7,837        548     438  

Intersegment sales

   1,911     1,354        1,033     745        133     147  

Investment and other income

   31     23        45     31           0  
    
       4,193     3,016        10,504     8,613        684     585  
    

EXPENSES

                       

Exploration

   117     105                    0  

Purchases of crude oil and products

   1,440     832        8,424     6,433        510     432  

Production and manufacturing

   1,175             1,276        759     736        108     95  

Selling and general

            449     467        33     38  

Federal excise tax

            626     620           0  

Depreciation and depletion

   256     265        108     115           6  

Financing costs

                        0  
    

TOTAL EXPENSES

   2,991     2,481        10,366     8,372        657     571  
    

INCOME BEFORE INCOME TAXES

   1,202     535        138     241        27     14  

INCOME TAXES

   312     141        31     77           3  
    

NET INCOME

   890     394        107     164        21     11  
    

Export sales to the United States

   918     827        624     559        326     220  

Cash from (used in) operating activities

   1,309     (192)       (37)    194        13     (3) 

CAPEX (a)

   1,687     918        84     103           6  

Total assets as at June 30

   11,866     9,583        6,293     6,524        423     433  
     Corporate                                 
Six Months to June 30    and Other            Eliminations                Consolidated    
millions of dollars    2010     2009          2010     2009          2010     2009  
 

REVENUES AND OTHER INCOME

                       

Operating revenues

                     12,225     9,914  

Intersegment sales

            (3,077)        (2,246)          0  

Investment and other income

                     80     59  
    
            (3,077)    (2,246)       12,305     9,973  
    

EXPENSES

                       

Exploration

                     117     105  

Purchases of crude oil and products

            (3,077)    (2,246)       7,297     5,451  

Production and manufacturing

                     2,042           2,107  

Selling and general

   30     94                 515     601  

Federal excise tax

                     626     620  

Depreciation and depletion

                     374     390  

Financing costs

                        3  
    

TOTAL EXPENSES

   35     99        (3,077)    (2,246)       10,972     9,277  
    

INCOME BEFORE INCOME TAXES

   (34)            (94)                1,333     696  

INCOME TAXES

   (9)    (23)                340     198  
    

NET INCOME

   (25)    (71)                993     498  
    

Export sales to the United States

                     1,868     1,606  

Cash from (used in) operating activities

   (47)    (33)                1,238     (34) 

CAPEX (a)

                     1,781     1,029  

Total assets as at June 30

   100     412        (314)    (289)       18,368     16,663  

 

(a) 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

 

 

 

4.

Investment and other income

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

 

     Second Quarter                Six Months
  to June 30
millions of dollars    2010     2009          2010     2009 
 

Proceeds from asset sales

   54                  35        60                  37 

Book value of assets sold

   12          4        14     
            

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

   42      31        46      32 
            

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

           36      25                40      26 
            

 

(a)    The second quarter of 2010 included a gain of $37 million ($31 million, after tax) from the sale of a non-operating real estate 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:

     Second Quarter              Six Months
to June 30
millions of dollars    2010     2009          2010     2009 
 

Pension benefits:

            

Current service cost

   26      14        51      40 

Interest cost

   76      79        153      152 

Expected return on plan assets

   (69   (66)       (137   (134)

Amortization of prior service cost

   4            8     

Recognized actuarial loss

   35      28        69      56 
            

Net benefit cost

   72      60        144      123 
            

Other post-retirement benefits:

            

Current service cost

   2            3     

Interest cost

   6            12      13 

Amortization of prior service cost

   (1         (1  

Recognized actuarial loss/(gain)

   0      (1)       0      (1)
            

Net benefit cost

   7            14      14 
            

 

6.     Other long-term obligations

 

millions of dollars          As at 
June 30 
2010 
              As at 
Dec. 31 
2009 
 

Employee retirement benefits (a)

     1,252          1,682 

Asset retirement obligations and other environmental liabilities (b)

     799          806 

Share-based incentive compensation liabilities

     168          144 

Other obligations

     208          207 
                

Total other long-term obligations

     2,427          2,839 
                

 

 

(a) Total recorded employee retirement benefits obligations also include $47 million in current liabilities (December 31, 2009 - $47 million).
(b) Total asset retirement obligations and other environmental liabilities also include $112 million in current liabilities (December 31, 2009 - $114 million).

Subsequent to the end of the second quarter, to support the commercial paper program, the company entered into an unsecured committed bank credit facility in the amount of $200 million that matures in July 2012.

 

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7. Net income per share

 

   Second Quarter          Six Months        

    to June 30        

     2010        2009           2010             2009  

Net income per common share - basic

                 

Net income (millions of dollars)

   517        209         993           498  

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

   847.6        847.8         847.6           851.9  

Net income per common share (dollars)

   0.61        0.25         1.17           0.59  

Net income per common share - diluted

                 

Net income (millions of dollars)

   517        209         993           498  

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

   847.6        847.8         847.6           851.9  

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

   6.9        7.1         6.7           6.9  
            

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

   854.5        854.9         854.3           858.8  

Net income per common share (dollars)

   0.60        0.25         1.16           0.58  

8.     Comprehensive income

                 
   Second Quarter          Six Months        

    to June 30        

millions of dollars

   2010                2009           2010             2009  

Net income

   517        209         993           498  

Post-retirement benefit liability adjustment (excluding amortization)

   0        (25)        84           (25) 

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

   29        24         57           47  
            

Other comprehensive income (net of income taxes)

   29        (1)        141           22  
            

Total comprehensive income

           546        208             1,134           520  
            

 

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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 second quarter of 2010 was $517 million or $0.60 a share on a diluted basis, compared with $209 million or $0.25 a share for the same period last year. Net income for the first six months of 2010 was $993 million or $1.16 a share on a diluted basis, versus $498 million or $0.58 a share for the first half of 2009.

Earnings in the second quarter were higher than the same quarter in 2009 with improvements in all operating segments. Earnings increased primarily due to the impacts of higher crude oil prices of about $150 million, higher Syncrude volumes of about $150 million, lower refinery and Syncrude maintenance of about $85 million and improved downstream margins of about $40 million. These factors were partially offset by the unfavourable foreign exchange effects of a higher Canadian dollar of about $115 million and higher royalty costs due to higher commodity prices of about $70 million. Earnings in the second quarter of 2010 also included a gain of about $30 million from the sale of a non-operating real estate property.

For the first six months, earnings increased primarily due to the impacts of higher crude oil prices of about $700 million, higher Syncrude volumes of about $150 million and lower refinery and upstream maintenance activities of about $115 million. These factors were partially offset by the unfavourable effects of a higher Canadian dollar of about $260 million, higher royalty costs due to higher commodity prices of about $250 million, and lower overall downstream margins of about $90 million. Earnings in the first half of 2010 also included a gain of about $30 million from the sale of a non-operating real estate property.

Upstream

Net income in the second quarter was $446 million, $194 million higher than the same period of 2009. Higher crude oil commodity prices in the second quarter of 2010 increased revenues, contributing to higher earnings of about $150 million. Earnings were also positively impacted by higher Syncrude volumes of about $150 million and lower Syncrude maintenance costs of about $30 million. These factors were partially offset by the unfavourable foreign exchange effects of a higher Canadian dollar of about $90 million and higher royalties due to higher commodity prices of about $70 million.

Net income for the first six months was $890 million versus $394 million during the same period last year. Higher crude oil commodity prices in 2010 increased revenues, contributing to higher earnings of about $700 million. Earnings were also positively impacted by higher Syncrude volumes of about $150 million and lower overall maintenance costs of about $50 million. These factors were partially offset by higher royalty costs due to higher commodity prices of about $250 million and the impact of a higher Canadian dollar of about $200 million.

The average price of Brent crude oil in U.S. dollars, a common benchmark for world oil markets, was $78.27 a barrel in the second quarter and $77.30 a barrel in the first half of 2010, up about 33 percent and 50 percent from the corresponding periods last year. The company’s average realizations on sales of Canadian conventional crude oil and synthetic crude oil from Syncrude production also increased.

Gross production of Cold Lake bitumen averaged 140 thousand barrels a day during the second quarter, versus 139 thousand barrels in the same quarter last year. For the first six months, gross production was 144 thousand barrels a day this year, compared with 143 thousand barrels in the same period of 2009.

 

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The company’s share of Syncrude’s gross production in the second quarter was 81 thousand barrels a day, versus 51 thousand barrels in the second quarter of 2009. During the first half of the year, the company’s share of gross production from Syncrude averaged 74 thousand barrels a day, up from 60 thousand barrels in 2009. Increased production in the second quarter and first half of 2010 was due to lower maintenance activities.

Gross production of conventional crude oil averaged 24 thousand barrels a day in both the second quarter and six months of 2010, and was slightly lower when compared to corresponding periods in 2009 due to natural reservoir decline.

Gross production of natural gas during the second quarter of 2010 at 289 million cubic feet a day was essentially unchanged from the same period last year. In the first half of the year, gross production was 281 million cubic feet a day, down from 296 million cubic feet in the first six months of 2009. The lower production volume was primarily a result of maintenance activities and natural reservoir decline.

Downstream

Net income was $68 million in the second quarter of 2010, compared with negative $38 million in the same period a year ago. Favourable impacts of about $55 million associated with lower refinery maintenance activities and stronger overall margins of about $40 million were the main contributors to higher earnings. Second quarter earnings also benefited from a gain of about $25 million from the sale of a non-operating real estate property. These factors were partially offset by the unfavourable foreign exchange effects of a higher Canadian dollar of about $25 million.

Six-month net income was $107 million, compared with $164 million in 2009. Lower earnings were primarily due to lower overall margins of about $90 million and the unfavourable effects of a higher Canadian dollar of about $55 million. These factors were partially offset by the favourable impacts of about $65 million associated with lower refinery maintenance activities and gain from sale of non-operating assets.

Chemical

Net income was $22 million in the second quarter, $14 million higher than the same quarter last year. Improved industry margins were partially offset by lower sales volumes for polyethylene products and higher costs due to planned maintenance activities on the Sarnia ethylene cracker. Six-month net income was $21 million, up $10 million from the same period in 2009. Improved industry margins were partially offset by lower sales volumes for polyethylene products and higher costs due to planned maintenance activities.

Corporate and other

Net income effects were negative $19 million in the second quarter, compared with negative $13 million in the same period of 2009. For the six months of 2010, net income was negative $25 million, versus negative $71 million last year. The changes in both periods were primarily due to the earnings effects from share-based compensation charges.

LIQUIDITY AND CAPITAL RESOURCES

Cash flow generated from operating activities was $324 million during the second quarter of 2010, compared with $262 million in the same period last year. Higher cash flow was primarily driven by higher earnings partially offset by funding contributions of $295 million to the company’s registered pension plan in the second quarter of 2010. Year-to-date cash flow generated from operating activities was $1,238 million, compared with cash flow used in operating activities of $34 million in the same period last year. Higher cash flow was primarily due to higher earnings. The timing of scheduled income tax payments and other working capital effects also contributed to higher cash flow. The above factors were partially offset by higher funding contributions to the company’s registered pension plan in 2010.

 

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Investing activities used net cash of $797 million in the second quarter, an increase of $318 million from the corresponding period in 2009. Additions to property, plant and equipment were $851 million in the second quarter, compared with $513 million during the same quarter 2009. For the Upstream segment, expenditures during the quarter were primarily for advancing the Kearl oil sands project. Other investments included development drilling at Cold Lake, exploration drilling at Horn River and environmental and other projects at Syncrude. The Downstream segment’s capital expenditures were focused mainly on refinery projects to improve reliability, feedstock flexibility, energy efficiency and air emissions.

Cash from financing activities was $3 million in the second quarter, compared with cash used in financing activities of $148 million in the second quarter of 2009. The company issued additional commercial paper which increased short term debt by $90 million to $199 million at the end of the second quarter 2010. Subsequent to the end of the second quarter, to support the commercial paper program, the company entered into an unsecured committed bank credit facility in the amount of $200 million that matures in July 2012.

In June, the company received approval from the Toronto Stock Exchange for a new normal course issuer bid to replace its existing share-purchase program that expired on June 24, 2010. The new share-purchase program enables the company to repurchase up to about 42 million shares during the period from June 25, 2010, to June 24, 2011, including shares purchased for the company’s employee savings plan, the company’s employee retirement plan and from ExxonMobil. During the second quarter of 2010, the company did not make any share repurchases outside of those to offset the dilutive effects from the exercise of stock options, as cash flow from operations was used to fund growth projects such as Kearl. The company will continue to evaluate its share-purchase program in the context of its overall capital project activities.

Cash dividends of $85 million were paid in the second quarter of 2010 compared with dividends of $86 million in the same period of 2009. On April 28, 2010, the company declared a quarterly dividend of 11 cents a share, an increase of one cent a share from the previous quarter, payable on July 1, 2010. Per-share dividends declared in the first two quarters of 2010 totaled $0.21, up from $0.20 in the same period of 2009.

The above factors led to a decrease in the company’s balance of cash to $64 million at June 30, 2010, from $513 million at the end of 2009.

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Information about market risks for the six months ended June 30, 2010 does not differ materially from that discussed on pages 23 in the company’s annual report on Form 10-K for the year ended December 31, 2009. Additional discussion of risk is highlighted in Part II, Item 1A, Risk Factors, on page 15 of this Form 10-Q for the quarterly period ended June 30, 2010.

 

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 June 30, 2010. Based on that evaluation, these officers have concluded that the company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to them in a manner that allows for timely decisions regarding required disclosures and are effective in ensuring that such information is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

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

 

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PART II - OTHER INFORMATION

 

Item 1A. Risk Factors

Information about risk factors does not differ materially from the discussion found in Item 1A of the company’s Annual Report on Form 10-K for 2009. The company’s activities in deep water oil and gas exploration are currently limited to a 15% interest in one non-operated exploration well in the Orphan basin. However, there are operational risks inherent in oil and gas exploration and production activities, as well as the potential to incur substantial financial liabilities if those risks are not effectively managed. The ability to insure such risks is limited by the capacity of the applicable insurance markets, which may not be sufficient to cover the likely cost of a major adverse operating event such as a deepwater well blowout. Accordingly, the company’s primary focus is on prevention, including through our rigorous Operations Integrity Management System. Our future results will depend on the continued effectiveness of these efforts.

Future changes to laws and regulations may have the effect of increasing the cost of, and reducing available opportunities for, offshore exploration and production.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

During the period April 1, 2010 to June 30, 2010, the company issued 62,949 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)(2)

 

 

Period

 

 

(a) Total

number of

shares (or

units)

purchased

 

 

(b) Average
price paid per
share (or unit)

 

 

(c) Total

number of

shares (or

units)

purchased as

part of

publicly

announced

plans or

programs

 

 

(d) Maximum

number (or
approximate
dollar value) of
shares (or units)

that may yet be
purchased

under the plans
or programs

April 2010

(April 1- April 30)

 

  0   N/A   0   41,477,416

May 2010

(May 1 – May 31)

 

  54,699   $40.56   54,699   41,333,989

June 2010

(June 1 – June 30)

 

  8,250   $41.47   8,250   42,363,767

 

(1)

On June 23, 2009, 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 42,380,326 common shares, including common shares purchased for the company’s employee savings plan, the company’s employee retirement

 

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plan and from Exxon Mobil Corporation during the period June 25, 2009 to June 24, 2010. The program ended on June 24, 2010.

 

(2)

On June 23, 2010, 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 42,380,333 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, 2010 to June 24, 2011. If not previously terminated, the program will end on June 24, 2011.

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

 

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Item 6. Exhibits.

(31.1) Certification by the principal executive officer of the company pursuant to Rule 13a-14(a).

(31.2) Certification by the principal financial officer of the company pursuant to Rule 13a-14(a).

(32.1) Certification by the chief executive officer 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:    August 4, 2010    

/s/ Paul J. Masschelin

 
   

 

(Signature)

 
   

Paul J. Masschelin

Senior Vice-President, Finance and

Administration and Treasurer

(Principal Accounting Officer)

 
Date:    August 4, 2010    

/s/ Brent A. Latimer

 
   

 

(Signature)

 
   

Brent A. Latimer

Assistant Secretary

 

 

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