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IMPERIAL OIL LTD - Quarter Report: 2016 September (Form 10-Q)

10-Q
Table of Contents

FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016

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       (I.R.S. Employer
of incorporation or organization)       Identification No.)
505 Quarry Park Boulevard S.E.    
Calgary, Alberta, Canada       T2C 5N1
(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          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          NO           

The registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer (see the definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act of 1934).

 

Large accelerated filer           Accelerated filer          
Non-accelerated filer               Smaller reporting company          

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

YES              NO         

The number of common shares outstanding, as of September 30, 2016 was 847,599,011.


Table of Contents

IMPERIAL OIL LIMITED

 

 

Table of contents

 

         Page  

PART I.

 

FINANCIAL INFORMATION

       

Item 1.

 

Financial statements

       
 

Consolidated statement of income

       
 

Consolidated statement of comprehensive income

       
 

Consolidated balance sheet

       
 

Consolidated statement of cash flows

       
 

Notes to the consolidated financial statements

       

Item 2.

 

Management’s discussion and analysis of financial condition and results of operations

     15    

Item 3.

 

Quantitative and qualitative disclosures about market risk

     19    

Item 4.

 

Controls and procedures

     19    

PART II.

 

OTHER INFORMATION

     20    

Item 1.

 

Legal proceedings

     20    

Item 2.

 

Unregistered sales of equity securities and use of proceeds

     20    

Item 6.

 

Exhibits

     20    

SIGNATURES

     21    

 

 

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, 2015.

The term “project” as used in this report can refer to a variety of different activities and does not necessarily have the same meaning as in any government payment transparency reports.

 

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IMPERIAL OIL LIMITED

 

 

 

PART I.  FINANCIAL INFORMATION

Item 1.   Financial statements

 Consolidated statement of income (U.S. GAAP, unaudited)

 

        Third Quarter       

    Nine Months 

    to September 30 

 
 millions of Canadian dollars    2016      2015        2016      2015    

 

 

 Revenues and other income

             

Operating revenues (a) (b)

     6,568         7,111           17,967         20,553     

Investment and other income (note 3)

     874         44           945         106     

 

 

 Total revenues and other income

     7,442         7,155           18,912         20,659     

 

 

 Expenses

             

Exploration (note 11)

     16         19           75         52     

Purchases of crude oil and products (c)

     3,857         4,053           10,884         11,653     

Production and manufacturing (d)

     1,261         1,351           3,842         4,105     

Selling and general (d)

     275         267           812         803     

Federal excise tax (a)

     434         416           1,237         1,180     

Depreciation and depletion

     398         400           1,229         1,052     

Financing costs (note 5)

     19         12           52         20     

 

 

 Total expenses

     6,260         6,518           18,131         18,865     

 

 

 Income (loss) before income taxes

     1,182         637           781         1,794     

 Income taxes

     179         158           60         774     

 

 

 Net income (loss)

     1,003         479           721         1,020     

 

 

 Per-share information (Canadian dollars)

  

  

 Net income (loss) per common share - basic (note 8)

     1.18         0.56           0.85         1.20     

 Net income (loss) per common share - diluted (note 8)

     1.18         0.56           0.85         1.20     

 Dividends per common share

     0.15         0.14           0.44         0.40     

 

 

 (a)    Federal excise tax included in operating revenues.

     434         416           1,237         1,180     

 (b)    Amounts from related parties included in operating revenues.*

     448         856           1,457         2,399     

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

     623         663           1,540         2,046     

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

         and selling and general expenses.

     133         106           394         333     

*Note: Restated 2015.

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 comprehensive income (U.S. GAAP, unaudited)

 

        Third Quarter       

Nine Months 

 

to September 30 

 
 millions of Canadian dollars   

 

2016

     2015        2016      2015    

 

 

 Net income (loss)

     1,003         479           721         1,020     

 Other comprehensive income (loss), net of income taxes

             

Post-retirement benefit liability adjustment (excluding amortization)

     -         -           100         (176)    

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

     34         42           108         126     

 

 

 Total other comprehensive income (loss)

     34         42           208         (50)    

 

 
             

 

 

 Comprehensive income (loss)

     1,037         521           929         970     

 

 

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)

 

    

As at 

Sept 30

     As at  
Dec 31  
 
 millions of Canadian dollars    2016      2015    

 

 

 Assets

     

 Current assets

     

Cash

     248         203     

Accounts receivable, less estimated doubtful accounts (a)

     1,702         1,581     

Inventories of crude oil and products

     941         1,190     

Materials, supplies and prepaid expenses

     547         424     

Deferred income tax assets (b)

     -         272     

 

 

 Total current assets

     3,438         3,670     

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

     1,224         1,414     

 Property, plant and equipment,

     53,626         54,203     

less accumulated depreciation and depletion

     (16,884      (16,404)    

 

 

 Property, plant and equipment, net

     36,742         37,799     

 Goodwill

     186         224     

 Other assets, including intangibles, net (b)

     60         63     

 Assets held for sale (note 10)

     444         -     

 

 

 Total assets

     42,094         43,170     

 

 

 Liabilities

     

 Current liabilities

     

Notes and loans payable (c)

     271         1,952     

Accounts payable and accrued liabilities (a) (b) (note 7)

     2,898         2,989     

Income taxes payable

     452         452     

 

 

 Total current liabilities

     3,621         5,393     

 Long-term debt (d) (note 6)

     7,039         6,564     

 Other long-term obligations (e) (note 7)

     3,444         3,597     

 Deferred income tax liabilities (b)

     4,008         4,191     

 

 

 Total liabilities

     18,112         19,745     

 

 

 Shareholders’ equity

     

 Common shares at stated value (f)

     1,566         1,566     

 Earnings reinvested

     24,036         23,687     

 Accumulated other comprehensive income (loss) (note 9)

     (1,620      (1,828)    

 

 

 Total shareholders’ equity

     23,982         23,425     

 

 

 Total liabilities and shareholders’ equity

     42,094         43,170     

 

 
(a) Accounts payable and accrued liabilities included amounts payable to related parties of $83 million (2015 - accounts receivable, less estimated doubtful accounts included amounts receivable from related parties of $129 million).
(b) Deferred tax assets and liabilities have been prospectively classified as non-current. Prior periods were not restated (note 12).
(c) Notes and loans payable included amounts to related parties of $75 million (2015 - $75 million).
(d) Long-term debt included amounts to related parties of $6,447 million (2015 - $5,952 million).
(e) Other long-term obligations included amounts to related parties of $114 million (2015 - $146 million).
(f) Number of common shares authorized and outstanding were 1,100 million and 848 million, respectively (2015 - 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)

 

                               Nine Months  
 Inflow (outflow)        Third Quarter              to September 30  
 millions of Canadian dollars      2016        2015        2016        2015  

 Operating activities

                   

 Net income (loss)

       1,003           479           721           1,020   

 Adjustments for non-cash items:

                   

Depreciation and depletion

       398           400           1,229           1,052   

(Gain) loss on asset sales (note 3)

       (909        (29        (952        (80

Deferred income taxes and other

       215           86           35           358   

 Changes in operating assets and liabilities:

                   

Accounts receivable

       275           403           (121        (163

Inventories, materials, supplies and prepaid expenses

       (7        (65        112           (228

Income taxes payable

       (13        58           -           390   

Accounts payable and accrued liabilities

       (241        (271        (59        (634

All other items - net (a)

       51           43           299           47   

 Cash flows from (used in) operating activities

       772           1,104           1,264           1,762   

 Investing activities

                   

 Additions to property, plant and equipment

       (189        (647        (893        (2,431

 Proceeds from asset sales (note 3)

       1,194           28           1,244           118   

 Additional investments

       -           -           (1        (32

 Cash flows from (used in) investing activities

       1,005           (619        350           (2,345

 Financing activities

                   

 Short-term debt - net

       (1,591        (30        (1,679        (29

 Long-term debt issued (note 6)

       -           -           495           1,106   

 Reduction in capitalized lease obligations

       (6        (7        (21        (13

 Dividends paid

       (127        (110        (364        (330

 Cash flows from (used in) financing activities

       (1,724        (147        (1,569        734   

 Increase (decrease) in cash

       53           338           45           151   

 Cash at beginning of period

       195           28           203           215   

 Cash at end of period (b)

       248           366           248           366   

 (a)       Included contribution to registered pension plans.

       (44        (46        (120        (178
 (b) Cash is composed of cash in bank and cash equivalents at cost. Cash equivalents are all highly liquid securities with the maturity of three months or less when purchased.

 NON-CASH TRANSACTIONS

 In 2015, a capital lease of approximately $480 million was not included in “Additions to property, plant and equipment” or “Long-term debt issued” lines

 on the consolidated statement of cash flows.

 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 consolidated financial statements (unaudited)

1.  Basis of financial statement preparation

These unaudited consolidated financial statements have been prepared in accordance with Generally Accepted Accounting Principles of the United States of America (GAAP) 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 filed with the U.S. Securities and Exchange Commission (SEC) in the company’s 2015 annual report on Form 10-K. In the opinion of the company, the information furnished herein reflects all known accruals and adjustments necessary for a fair statement of the results for the periods reported herein. All such adjustments are of a normal recurring nature. The company’s exploration and production activities are accounted for under the “successful efforts” method.

The results for the nine months ended September 30, 2016, are not necessarily indicative of the operations to be expected for the full year.

All amounts are in Canadian dollars unless otherwise indicated.

 

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IMPERIAL OIL LIMITED

 

 

 

2. Business segments

 

 Third Quarter    Upstream           Downstream         Chemical        
 millions of Canadian dollars    2016     2015     2016     2015     2016      2015  

 Revenues and other income

             

 Operating revenues (a)

     1,316        1,467        4,971              5,344        281         300   

 Intersegment sales

     709        610        253        239        58         60   

 Investment and other income

     1        4        870        40        1         -   
       2,026        2,081        6,094        5,623        340         360   

 Expenses

             

 Exploration

     16        19        -        -        -         -   

 Purchases of crude oil and products

     861        879        3,827        3,906        188         176   

 Production and manufacturing

     887        923        323        377        51         51   

 Selling and general

     (1     1        238        256        22         23   

 Federal excise tax

     -        -        434        416        -         -   

 Depreciation and depletion

     346        333        46        61        2         3   

 Financing costs (note 5)

     (2     2        -        -        -         -   

 Total expenses

     2,107        2,157               4,868        5,016        263         253   

 Income (loss) before income taxes

     (81     (76     1,226        607        77         107   

 Income taxes

     (55     (24     224        153        21         29   

 Net income (loss)

     (26     (52     1,002        454        56         78   

 Cash flows from (used in) operating activities

     432        696        264        313        73         109   

 Capital and exploration expenditures (b)

     149        1,050        38        55        7         17   
 Third Quarter    Corporate and Other     Eliminations         Consolidated      
 millions of Canadian dollars    2016     2015     2016     2015     2016      2015  

 Revenues and other income

             

 Operating revenues (a)

     -        -        -        -        6,568         7,111   

 Intersegment sales

     -        -        (1,020     (909     -         -   

 Investment and other income

     2        -        -        -        874         44   
       2        -        (1,020     (909           7,442         7,155   

 Expenses

             

 Exploration

     -        -        -        -        16         19   

 Purchases of crude oil and products

     -        -        (1,019     (908     3,857               4,053   

 Production and manufacturing

     -        -        -        -        1,261         1,351   

 Selling and general

     17        (12     (1     (1     275         267   

 Federal excise tax

     -        -        -        -        434         416   

 Depreciation and depletion

     4        3        -        -        398         400   

 Financing costs (note 5)

     21        10        -        -        19         12   

 Total expenses

     42        1        (1,020     (909     6,260         6,518   

 Income (loss) before income taxes

     (40     (1     -        -        1,182         637   

 Income taxes

     (11     -        -        -        179         158   

 Net income (loss)

     (29     (1     -        -        1,003         479   

 Cash flows from (used in) operating activities

     3        (14     -        -        772         1,104   

 Capital and exploration expenditures (b)

     11        20        -        -        205         1,142   
(a) Included export sales to the United States of $941 million (2015 - $1,168 million). Export sales to the United States were recorded in all operating segments, with the largest effects in the Upstream segment.
(b) Capital and exploration expenditures (CAPEX) include exploration expenses, additions to property, plant and equipment, additions to capital leases, additional investments and acquisitions.

 

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 Nine Months to September 30        Upstream            Downstream          Chemical  
 millions of Canadian dollars    2016        2015        2016        2015      2016        2015  

 Revenues and other income

                         

Operating revenues (a)

     3,699           4,462           13,470           15,191         798           900   

Intersegment sales

     1,516           1,926           689           763         156           182   

Investment and other income

     22           22           919           83         1           -   
       5,237           6,410           15,078           16,037         955           1,082   

 Expenses

                         

Exploration

     75           52           -           -         -           -   

Purchases of crude oil and products

     2,584           2,787           10,139           11,172         518           563   

Production and manufacturing

     2,634           2,826           1,059           1,125         149           154   

Selling and general

     (3        -           729           720         63           65   

Federal excise tax

     -           -           1,237           1,180         -           -   

Depreciation and depletion

     1,053           865           158           169         6           8   

Financing costs (note 5)

     (6        5           -           -         -           -   

 Total expenses

     6,337           6,535           13,322           14,366         736           790   

 Income (loss) before income taxes

     (1,100        (125        1,756           1,671         219           292   

 Income taxes

     (336        290           363           437         59           79   

 Net income (loss)

     (764        (415        1,393           1,234         160           213   

 Cash flows from (used in) operating activities

     32           181           1,028           1,368         205           269   

 Capital and exploration expenditures (b)

     745           2,644           145           276         21           33   

 Total assets as at September 30

     36,975           36,817           4,403           5,645         379           386   
 Nine Months to September 30    Corporate and Other            Eliminations          Consolidated  
 millions of Canadian dollars    2016        2015        2016        2015      2016        2015  

 Revenues and other income

                         

Operating revenues (a)

     -           -           -           -         17,967           20,553   

Intersegment sales

     -           -           (2,361        (2,871      -           -   

Investment and other income

     3           1           -           -         945           106   
       3           1           (2,361        (2,871      18,912           20,659   

 Expenses

                         

Exploration

     -           -           -           -         75           52   

Purchases of crude oil and products

     -           -           (2,357        (2,869      10,884           11,653   

Production and manufacturing

     -           -           -           -         3,842           4,105   

Selling and general

     27           20           (4        (2      812           803   

Federal excise tax

     -           -           -           -         1,237           1,180   

Depreciation and depletion

     12           10           -           -         1,229           1,052   

Financing costs (note 5)

     58           15           -           -         52           20   

 Total expenses

     97           45           (2,361        (2,871      18,131           18,865   

 Income (loss) before income taxes

     (94        (44        -           -         781           1,794   

 Income taxes

     (26        (32        -           -         60           774   

 Net income (loss)

     (68        (12        -           -         721           1,020   

 Cash flows from (used in) operating activities

     (1        (56        -           -         1,264           1,762   

 Capital and exploration expenditures (b)

     37           58           -           -         948           3,011   

 Total assets as at September 30

     674           777           (337        (173      42,094           43,452   
(a) Included export sales to the United States of $2,704 million (2015 - $3,331 million). Export sales to the United States were recorded in all operating segments, with the largest effects in the Upstream segment.
(b) Capital and exploration expenditures (CAPEX) include exploration expenses, additions to property, plant and equipment, additions to capital leases, additional investments and acquisitions.

 

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IMPERIAL OIL LIMITED

 

 

 

3.  Investment and other income

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

 

         Third Quarter      Nine Months    
to September 30
 
 millions of Canadian dollars    2016         2015      2016      2015  

 Proceeds from asset sales

     1,194        28         1,244         118   

 

 Book value of assets sold (a)

     285        (1      292         38   

 Gain (loss) on asset sales, before tax (b)

     909           29         952         80   

 Gain (loss) on asset sales, after tax (b)

     774        26         808         65   
(a) Third quarter ended September 30, 2015, included a post close adjustment relating to conventional assets divested in 2014.
(b) Third quarter and nine months ended September 30, 2016, included gains of $0.8 billion ($0.7 billion, after tax) from the sale of company-owned Esso retail sites in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, Nova Scotia and Newfoundland. The sale and transition of the company’s remaining sites are anticipated to close by year-end 2016 (note 10).

Subsequent to the quarter, on November 1, 2016, the company completed the sale of its general aviation business and converted to an unbranded wholesaler operating model for approximately $177 million, having an approximate net book value of $18 million.

4.  Employee retirement benefits

The components of net benefit cost were as follows:

 

         Third Quarter      Nine Months    
to September 30
 
 millions of Canadian dollars    2016         2015      2016      2015  

 Pension benefits:

          

Current service cost

          50        56            152         158   

Interest cost

     82        77         240         231   

Expected return on plan assets

     (101     (101      (300      (294

Amortization of prior service cost

     2        4         7         12   

Amortization of actuarial loss

     39        50         121         149   

Net benefit cost

     72        86         220         256   

 Other post-retirement benefits:

          

Current service cost

     4        4         12         12   

Interest cost

     7        7         20         19   

Amortization of actuarial loss

     3        3         10         9   

Net benefit cost

     14        14         42         40   

5.  Financing costs and additional notes and loans payable information

 

         Third Quarter      Nine Months    
to September 30
 
 millions of Canadian dollars    2016         2015      2016      2015  

 Debt-related interest

          32           30              95            73   

 Capitalized interest

     (11     (20      (37      (58

 Net interest expense

     21        10         58         15   

 Other interest

     (2     2         (6      5   

 Total financing costs

     19        12         52         20   

In March 2016, the company extended the maturity date of its existing $500 million 364-day short-term unsecured committed bank credit facility to March 2017. The company has not drawn on the facility.

 

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6.   Long-term debt

 millions of Canadian dollars   

As at

Sept 30

2016

    

As at 

Dec 31 

2015 

 

 

 

 Long-term debt

     6,447         5,952    

 Capital leases

     592         612    

 

 

 Total long-term debt

     7,039               6,564    

 

 

In August 2016, the company extended the maturity date of its existing $500 million stand-by long-term bank credit facility to October 31, 2017.

Subsequent to September 30, 2016, in October 2016, the company reduced the amount of its existing $500 million stand-by long-term bank credit facility to $250 million and extended the maturity date to November 30, 2018.

In the nine months ended September 30, 2016, the company increased its long-term debt by $495 million by drawing on an existing facility with an affiliated company of Exxon Mobil Corporation. The increased debt was used to supplement normal operations and capital projects.

In July 2015, the company entered into a long-term capital lease related to the Woodland pipeline for approximately $480 million. A commitment related to this obligation was previously reported as a firm capital commitment in the company’s 2014 Form 10-K.

7.   Other long-term obligations

 millions of Canadian dollars   

As at

Sept 30

2016

    

As at 

Dec 31 

2015 

 

 

 

 Employee retirement benefits (a)

     1,255         1,470    

 

 Asset retirement obligations and other environmental liabilities (b)

     1,682         1,628    

 

 Share-based incentive compensation liabilities

     154         134    

 

 Other obligations

     353         365    

 

 

 Total other long-term obligations

     3,444               3,597    

 

 
(a) Total recorded employee retirement benefits obligations also included $58 million in current liabilities (2015 - $59 million).
(b) Total asset retirement obligations and other environmental liabilities also included $117 million in current liabilities (2015 - $116 million).

 

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8.   Net income (loss) per-share

     Third Quarter     

     Nine Months

     to September 30

 
     2016          2015                2016          2015    

 

 

 Net income (loss) per common share - basic

           

 Net income (loss) (millions of Canadian dollars)

     1,003         479           721         1,020     

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

     847.6         847.6           847.6         847.6     

 Net income (loss) per common share (dollars)

     1.18         0.56           0.85         1.20     

 

 

 Net income (loss) per common share - diluted

           

 Net income (loss) (millions of Canadian dollars)

     1,003         479           721         1,020     

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

     847.6         847.6           847.6         847.6     

 Effect of share-based awards (millions of shares)

     3.2         3.3           3.0         3.1     

 

 

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

     850.8         850.9           850.6         850.7     

 Net income (loss) per common share (dollars)

     1.18         0.56           0.85         1.20     

 

 

9.   Other comprehensive income (loss) information

Changes in accumulated other comprehensive income (loss):

 

 millions of Canadian dollars            2016         2015    

 

 

 Balance at January 1

     (1,828     (2,059)    

 Post-retirement benefits liability adjustment:

    

Current period change excluding amounts reclassified from accumulated other
comprehensive income

     100        (176)    

Amounts reclassified from accumulated other comprehensive income

     108        126     

 

 

 Balance at September 30

     (1,620     (2,109)    

 

 

Amounts reclassified out of accumulated other comprehensive income (loss) - before-tax income (expense):

 

     Third Quarter    

     Nine Months

     to September 30

 
 millions of Canadian dollars    2016         2015             2016         2015    

 

 

 Amortization of post-retirement benefits liability adjustment included in net periodic benefit cost (a)

     (44     (57     (138     (170)    

 

 
 (a) This accumulated other comprehensive income component is included in the computation of net periodic benefit cost (note 4).

Income tax expense (credit) for components of other comprehensive income (loss):

 

     Third Quarter     

     Nine Months

     to September 30

 
 millions of Canadian dollars    2016          2015              2016          2015    

 

 

 Post-retirement benefits liability adjustments:

           

Post-retirement benefits liability adjustment (excluding amortization)

     -         -         37         (61)    

Amortization of post-retirement benefits liability adjustment included in net periodic benefit cost

     10         15         30         44     

 

 

 Total

     10         15         67         (17)    

 

 

 

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10.  Assets held for sale

On March 8, 2016, the company announced that it had entered into agreements which will result in the sale and transition of its remaining company-owned Esso retail stations to a branded wholesaler operating model for approximately $2.8 billion. Under the branded wholesaler model, Imperial supplies fuel to independent third parties who own and/or operate the sites in alignment with Esso brand standards. The company’s gain on sale, which is subject to final closing adjustments, is anticipated to be in the range of $2.0 billion to $2.1 billion ($1.7 billion to $1.8 billion after tax).

During the third quarter, the company completed the sale of a number of sites in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, Nova Scotia and Newfoundland for approximately $1.2 billion (note 3). Subsequent to the quarter, the company completed the sale of additional sites in British Columbia, Alberta, Ontario and Quebec for approximately $1.6 billion, having an approximate net book value of $0.4 billion. The remaining transactions are anticipated to close by year-end 2016.

The major classes of assets classified as held for sale within the Downstream segment at September 30, 2016, were as follows:

 millions of Canadian dollars   

As at 

Sept 30 

2016  

 

 

 

 Assets held for sale

  

Accounts receivable and prepaid expenses

     3     

Inventories

     11     

Net property, plant and equipment

     411     

Goodwill

     19     

 

 

 Total assets held for sale

     444     

 

 

11.  Accounting for suspended exploratory well costs

For the category of exploratory well costs at year-end 2015 that were capitalized for a period greater than 12 months, a total of $24 million was expensed in the first nine months of 2016.

 

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12. Recently issued accounting standards

In May 2014, the Financial Accounting Standards Board (FASB) issued a new standard, Revenue from Contracts with Customers. The standard establishes a single revenue recognition model for all contracts with customers, eliminates industry specific requirements and expands disclosure requirements. The standard will be adopted beginning January 1, 2018. Imperial continues to evaluate the standard and its effect on the company’s financial statements.

In February 2016, the FASB issued a new standard, Leases. The standard requires all leases with an initial term greater than one year be recorded on the balance sheet as an asset and lease liability. The standard is required to be adopted beginning January 1, 2019. Imperial is evaluating the standard and its effect on the company’s financial statements.

Effective September 30, 2016, Imperial early adopted Accounting Standards Update (ASU) no. 2015-17 Income Taxes (Topic 740): Balance sheet classification of deferred taxes, on a prospective basis. This update eliminates the requirement to classify deferred tax assets and liabilities as current and non-current, and instead requires all deferred tax assets and liabilities to be classified as non-current.

The balance sheet classification of deferred income tax asset / (liability) is shown below.

 millions of Canadian dollars   

As at

Sept 30

2016

    

As at 

    Dec 31 

2015 

 

 

 

 Deferred income tax asset

     -         272    

 Other assets, including intangibles, net

     35           

 Accounts payable and accrued liabilities

     -         (41)    

 Deferred income tax liabilities

     (4,008)         (4,191)    

 

 

 Net deferred tax liabilities

     (3,973)         (3,960)    

 

 

 

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Item 2. Management’s discussion and analysis of financial condition and results of operations

Operating results

Third quarter 2016 vs. third quarter 2015

The company’s net income for the third quarter of 2016 was $1,003 million or $1.18 per-share on a diluted basis, compared to net income of $479 million or $0.56 per-share for the same period last year. Third quarter 2016 results included a $716 million ($0.84 per-share) gain from the sale of retail sites.

Upstream recorded a net loss in the third quarter of $26 million, compared to a net loss of $52 million in the same period of 2015. Results in the third quarter of 2016 mainly reflect the impact of higher Syncrude volumes of about $90 million and lower operating expenses, partially offset by lower realizations of about $90 million.

West Texas Intermediate (WTI) averaged US$44.94 per barrel in the third quarter of 2016, down from US$46.57 per barrel in the same quarter of 2015. Western Canada Select (WCS) averaged US$31.43 per barrel and US$33.38 per barrel respectively for the same periods. The WTI / WCS differential widened to 30 percent in the third quarter of 2016, from 28 percent in the same period of 2015.

The Canadian dollar averaged US$0.77 in the third quarter of 2016 and was essentially unchanged versus the same period of 2015.

Imperial’s average Canadian dollar realizations for bitumen and synthetic crudes declined essentially in line with the North American benchmarks, adjusted for changes in the exchange rate and transportation costs. Bitumen realizations averaged $30.16 per barrel for the third quarter of 2016, a decrease of $2.45 per barrel versus the third quarter of 2015. Synthetic crude realizations averaged $58.97 per barrel, a decrease of $2.24 per barrel for the same period of 2015.

Gross production of Cold Lake bitumen averaged 157,000 barrels per day in the third quarter, compared to 166,000 barrels in the same period last year. The lower production was mainly due to the timing of steam cycles.

Gross production of Kearl bitumen averaged 159,000 barrels per day in the third quarter (113,000 barrels Imperial’s share) compared to 181,000 barrels per day (128,000 barrels Imperial’s share) during the third quarter of 2015. Lower production was the result of planned and unplanned maintenance activities.

The company’s share of gross production from Syncrude averaged 85,000 barrels per day, up from 59,000 barrels in the third quarter of 2015. Increased production reflects ongoing efforts to improve the reliability of operations.

Downstream net income was $1,002 million in the third quarter, compared to $454 million in the same period of 2015. Earnings increased mainly due to a gain of $716 million from the sale of retail sites, improved refinery operations of $80 million and higher marketing sales volumes of $50 million, partially offset by lower industry margins of about $300 million.

Refinery throughput averaged 407,000 barrels per day, up from 390,000 barrels in the third quarter of 2015. Increased throughput reflects lower maintenance activities than in the same period of 2015.

Petroleum product sales were 505,000 barrels per day, up from 495,000 barrels per day in the third quarter of 2015, with growth concentrated in the higher value commercial and retail channels.

Chemical net income was $56 million in the third quarter, compared to $78 million in the same quarter of 2015.

 

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Net income effects from Corporate and Other were negative $29 million in the third quarter, compared to negative $1 million in the same period of 2015.

Nine months 2016 vs. nine months 2015

Net income in the first nine months of 2016 was $721 million, or $0.85 per-share on a diluted basis, including a gain of $719 million ($0.85 per-share) from the sale of retail sites, versus net income of $1,020 million or $1.20 per-share for the first nine months of 2015.

Upstream recorded a net loss of $764 million for the first nine months of 2016, compared to a net loss of $415 million for the same period last year. The loss in 2016 reflected lower realizations of about $970 million, the impact of the northern Alberta wildfires of about $155 million and higher depreciation expense of about $90 million. These factors were partially offset by higher volumes of about $230 million, the impact of a weaker Canadian dollar of about $130 million, the favourable impact of lower royalties of about $90 million and lower energy cost of about $60 million. Earnings in 2015 reflected the impact associated with the Alberta corporate income tax rate increase of about $327 million.

West Texas Intermediate averaged US$41.54 per barrel in the first nine months of 2016, down from US$51.03 per barrel in the same period last year. Western Canada Select averaged US$27.74 per barrel and US$37.89 per barrel respectively for the same periods. The WTI/WCS differential widened to 33 percent in the first nine months of 2016, up from 26 percent in the same period of 2015.

During the first nine months of 2016, the Canadian dollar weakened relative to the U.S. dollar versus the same period of 2015. The Canadian dollar averaged US$0.76 in the first nine months of 2016, a decrease of almost US$0.04 from the same period of 2015.

Imperial’s average Canadian dollar realizations for bitumen and synthetic crudes declined essentially in line with the North American benchmarks, adjusted for changes in the exchange rate and transportation costs. Bitumen realizations averaged $23.77 (US$18.18) for the first nine months of 2016, a decrease of $12.71 per barrel versus the same period of 2015. Synthetic crude realizations averaged $53.45 (US$40.33) per barrel, a decrease of $9.58 per barrel for the same period of 2015.

Gross production of Cold Lake bitumen averaged 162,000 barrels per day in the first nine months, up from 160,000 barrels from the same period last year. Production from the expansion project offset the impacts from cycle timing.

Gross production of Kearl bitumen averaged 169,000 barrels per day in the first nine months of 2016 (120,000 barrels Imperial’s share) compared to 136,000 barrels per day (96,000 barrels Imperial’s share) for the same period of 2015. The increase was the result of start-up of the expansion project and improved reliability of the initial development.

During the first nine months of 2016, the company’s share of gross production from Syncrude averaged 61,000 barrels per day, consistent with the same period of 2015.

Downstream net income was $1,393 million, up from $1,234 million from the same period of 2015. Earnings increased mainly due to a gain of $719 million from the sale of retail sites, the impact of a weaker Canadian dollar of about $130 million, higher marketing sales volumes of $70 million and lower fuels marketing operating costs of about $50 million, partially offset by lower downstream margins of about $780 million.

Refinery throughput averaged 351,000 barrels per day in the first nine months of 2016, compared to 385,000 barrels in the same period of 2015. Capacity utilization decreased to 83 percent from 92 percent in the same period of 2015, reflecting the more significant scope of turnaround maintenance activity in the current year.

Petroleum product sales were 481,000 barrels per day in the first nine months of 2016, compared to 482,000 barrels per day in the same period of 2015.

Chemical net income was $160 million, compared to $213 million in the same period of 2015.

 

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For the first nine months of 2016, net income effects from Corporate and Other were negative $68 million, versus negative $12 million in 2015, primarily due to lower capitalized interest and the absence of the impact from the Alberta tax rate increase in 2015.

Liquidity and capital resources

Cash flow generated from operating activities was $772 million in the third quarter, compared with $1,104 million in the corresponding period in 2015, reflecting lower earnings, excluding the gain on the sale of retail sites.

Investing activities generated net cash of $1,005 million in the third quarter, compared with cash used in investing activities of $619 million in the same period of 2015, reflecting proceeds from asset sales in 2016 and the completion of major upstream growth projects.

Cash used in financing activities was $1,724 million in the third quarter, compared with $147 million in the third quarter of 2015. Cash from operating activities and proceeds from asset sales were mainly used in the third quarter of 2016 to reduce outstanding short-term debt. Dividends paid in the third quarter of 2016 were $127 million. The per-share dividend paid in the third quarter was $0.15, up from $0.13 in the same period of 2015.

The company’s cash balance was $248 million at September 30, 2016, versus $366 million at the end of the third quarter of 2015.

Cash flow generated from operating activities was $1,264 million in the first nine months of 2016, compared with $1,762 million in the same period of 2015, reflecting lower earnings, excluding the gain on retail sites.

Investing activities generated net cash of $350 million in the first nine months of 2016, compared with cash used in investing activities of $2,345 million in the same period of 2015, reflecting proceeds from asset sales and the completion of major upstream growth projects.

Cash used in financing activities was $1,569 million in the first nine months of 2016, compared with cash provided by financing activities of $734 million in the same period of 2015. Cash from operating activities and proceeds from the asset sales were used to reduce outstanding short-term debt. Dividends paid in the first nine months of 2016 were $364 million. The per-share dividend paid in the first nine months was $0.43, up from $0.39 in the same period of 2015.

Oil and gas reserves

As disclosed in the 2015 Form 10-K, low crude and natural gas prices can impact Imperial’s reserves as reported under the Securities and Exchange Commissions (SEC) rules. Average year-to-date crude prices have been significantly affected by the very low prices experienced during the first quarter of 2016, but have recovered considerably since that time. If the average prices seen during the first nine months of 2016 persist for the remainder of the year, under the SEC definition of proved reserves, certain quantities of oil, such as those associated with all or part of the oil sands operations at Kearl and Cold Lake will not qualify as proved reserves at year-end 2016. Quantities that could be required to be de-booked as proved reserves on an SEC basis amount to approximately 2.6 billion barrels of bitumen at Kearl and approximately 0.4 billion barrels at Cold Lake, and will be determined once the price and costs have been finalized at year-end. Among the factors that would result in these reserves being re-booked as proved reserves at some point in the future are a recovery in average price levels, a further decline in costs, and / or operating efficiencies. Under the terms of government royalty regimes, lower prices can also increase proved reserves attributable to Imperial. The company does not expect the de-booking of reported proved reserves under the SEC definitions to affect the operation of the underlying projects or to alter our outlook for future production volumes.

 

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Impact of oil and gas reserves and prices and margins on testing for impairment

In light of continued weakness in the upstream industry environment during 2016, and as part of Imperial’s annual planning and budgeting process which is currently in progress, the company will perform an assessment of its major long-lived assets, similar to the exercise undertaken in late 2015. The assessment reflects crude and natural gas price outlooks consistent with those that management uses to evaluate investment opportunities and generally consistent with the long-term price forecasts published by third-party industry and government experts. Development of future undiscounted cash flow estimates requires significant management judgement, particularly in cases where an asset’s life is expected to extend decades into the future. An asset group would be impaired if its estimated undiscounted cash flows were less than the asset’s carrying value, and impairment would be measured by the amount by which the carrying value exceeds fair value. Imperial will complete its asset recoverability assessment and analyze the conclusions of that assessment in connection with the preparation and review of the company’s year-end financial statements for inclusion in its 2016 Form 10-K. Until these activities are complete, it is not practicable to reasonably estimate the existence or range of potential future impairments related to the company’s long-lived assets.

Recently issued accounting standards

In May 2014, the Financial Accounting Standards Board (FASB) issued a new standard, Revenue from Contracts with Customers. The standard establishes a single revenue recognition model for all contracts with customers, eliminates industry specific requirements and expands disclosure requirements. The standard will be adopted beginning January 1, 2018. Imperial continues to evaluate the standard and its effect on the company’s financial statements.

In February 2016, the FASB issued a new standard, Leases. The standard requires all leases with an initial term greater than one year be recorded on the balance sheet as an asset and lease liability. The standard is required to be adopted beginning January 1, 2019. Imperial is evaluating the standard and its effect on the company’s financial statements.

Effective September 30, 2016, Imperial early adopted Accounting Standards Update (ASU) no. 2015-17 Income Taxes (Topic 740): Balance sheet classification of deferred taxes, on a prospective basis. This update eliminates the requirement to classify deferred tax assets and liabilities as current and non-current, and instead requires all deferred tax assets and liabilities to be classified as non-current.

The balance sheet classification of deferred income tax asset / (liability) is shown below.

 

 millions of Canadian dollars   

As at

Sept 30
2016

       As at
Dec 31
2015
 

 

 

 Deferred income tax asset

     -           272   

 

 Other assets, including intangibles, net

     35           -   

 

 Accounts payable and accrued liabilities

     -           (41)   

 

 Deferred income tax liabilities

     (4,008)           (4,191)   

 

 

 Net deferred tax liabilities

     (3,973)           (3,960)   

 

 

Forward-looking statements

Statements in this report regarding future events or conditions are forward-looking statements. Actual future financial and operating 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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Item 3.  Quantitative and qualitative disclosures about market risk

Information about market risks for the nine months ended September 30, 2016, does not differ materially from that discussed on page 22 of the company’s annual report on Form 10-K for the year ended December 31, 2015 and Form 10-Q for the quarters ended March 31, 2016 and June 30, 2016.

Reference is made to Item 2. Management’s discussion and analysis of financial condition and results of operations, sections entitled Oil and gas reserves and Impact of oil and gas reserves and prices and margins on testing for impairment, for discussion on the risks associated with the current pricing environment.

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, 2016. 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 1.  Legal proceedings

On September 19, 2016, Imperial entered a guilty plea with respect to a charge involving the discharging or causing or permitting the discharge of a contaminant, namely coker stabilizer thermocracked gas, from Imperial’s chemical plant in Sarnia, into the natural environment that caused or was likely to have caused an adverse effect contrary to section 14(1) of the Environmental Protection Act, R.S.O. 1990, c. E.19, as amended, which offence was alleged to have occurred on February 7, 2014. Imperial agreed to pay $650,000 plus a 25 percent victim fine surcharge.

Item 2.  Unregistered sales of equity securities and use of proceeds

Issuer purchases of equity securities

 

    

Total number of

  shares purchased   

 

Average price

      paid per share      

(dollars)

 

 

Total number of 

  shares purchased   

as part of publicly 

announced plans 

or programs 

  

  Maximum number

  of shares that may

  yet be purchased

  under the plans or
  programs 
(a)

 

July 2016

(July 1 – July 31)

 

  -   -   -    1,000,000

 

August 2016

(Aug 1 – Aug 31)

 

  -   -   -    1,000,000

 

September 2016

(Sept 1 – Sept 30)

 

  -   -   -    1,000,000
(a) On June 22, 2016, 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 1,000,000 common shares during the period June 27, 2016 to June 26, 2017. The program will end when the company has purchased the maximum allowable number of shares, or on June 26, 2017.

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

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 of the company pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350.

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

 

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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)  
    /s/ Beverley A. Babcock  
Date:    November 1, 2016     -------------------------------------------------  
    (Signature)  
    Beverley A. Babcock  
   

Senior Vice-President, Finance and

Administration and Controller

 
    (Principal Accounting Officer)  
    /s/ Cathryn Walker  
Date:    November 1, 2016     -------------------------------------------------  
    (Signature)  
    Cathryn Walker  
    Assistant Corporate Secretary  

 

 

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