IMPERIAL OIL LTD - Quarter Report: 2019 June (Form 10-Q)

(State or other jurisdiction

of incorporation or organization)

(I.R.S. Employer Identification No.)

505 Quarry Park Boulevard S.E. Calgary, Alberta, Canada

(Address of principal executive offices)

(Postal Code)

10-Q

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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

June 30, 2019

[

]

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)

Registrant’s telephone number, including area code:

1-800-567-3776

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading symbol	Name of each exchange on which registered
None		None

The registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES

✓

The registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).

YES

✓

The registrant is a large accelerated filer, an accelerated filer, a

non-accelerated

filer, smaller reporting company, or an emerging growth company. See the definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule

12b-2

of the Exchange Act of 1934).


Large accelerated filer	✓	Smaller reporting company	___ _
Non-accelerated filer	____	Emerging growth company	____
Accelerated filer	____

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

The registrant is a shell company (as defined in Rule

12b-2

of the Exchange Act of 1934).

YES

✓

The number of common shares outstanding, as of June 30, 2019 was

762,773,619

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IMPERIAL OIL LIMITED

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Page


PART I. FINANCIAL INFORMATION			3
Item 1. Financial statements			3
Consolidated statement of income			3
Consolidated statement of comprehensive income			4
Consolidated balance sheet			5
Consolidated statement of shareholders’ equity			6
Consolidated statement of cash flows			7
Notes to the consolidated financial statements			8
Item 2. Management’s discussion and analysis of financial condition and results of operations			19
Item 3. Quantitative and qualitative disclosures about market risk			25
Item 4. Controls and procedures			25

PART II. OTHER INFORMATION			26
Item 2. Unregistered sales of equity securities and use of proceeds			26
Item 6. Exhibits			27

SIGNATURES			28

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, 2018. Note that numbers may not add due to rounding.

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.

In this report, unless the context otherwise indicates, reference to “the company” or “Imperial” includes Imperial Oil Limited and its subsidiaries.

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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	2019			2018		2019			2018
Revenues and other income
Revenues (a)		9,228			9,516		17,193			17,416
Investment and other income (note 4)		33			27		50			61
Total revenues and other income		9,261			9,543		17,243			17,477

Expenses
Exploration		5			1		38			9
Purchases of crude oil and products (b)		5,662			6,537		10,557			11,317
Production and manufacturing (c)		1,715			1,646		3,310			3,077
Selling and general (c)		236			273		449			467
Federal excise tax and fuel charge		463			412		857			809
Depreciation and depletion		392			358		782			735
Non-service pension and postretirement benefit		36			26		72			53
Financing (d) (note 6)		23			26		51			49
Total expenses		8,532			9,279		16,116			16,516

Income (loss) before income taxes		729			264		1,127			961

Income taxes		(483	)		68		(378	)		249

Net income (loss)		1,212			196		1,505			712

Per share information (Canadian dollars)
Net income (loss) per common share - basic (note 11)		1.58			0.24		1.95			0.86
Net income (loss) per common share - diluted (note 11)		1.57			0.24		1.94			0.86

(a) Amounts from related parties included in revenues.		2,234			1,769		3,956			3,142

(b) Amounts to related parties included in purchases of crude oil and products.		908			1,374		1,636			2,266

(c) Amounts to related parties included in production and manufacturing, and selling and general expenses.		161			156		322			297

(d) Amounts to related parties included in financing, (note 6).		24			22		52			42

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)


	Second Quarter				Six Months to June 30
millions of Canadian dollars	2019		2018		2019		2018
Net income (loss)		1,212		196		1,505		712

Other comprehensive income (loss), net of income taxes
Postretirement benefits liability adjustment (excluding amortization)		-		-		18		(19	)
Amortization of postretirement benefits liability adjustment included in net periodic benefit costs		28		33		55		67
Total other comprehensive income (loss)		28		33		73		48

Comprehensive income (loss)		1,240		229		1,578		760

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 June 30			As at Dec 31
millions of Canadian dollars	2019			2018
Assets
Current assets
Cash		1,087			988
Accounts receivable, less estimated doubtful accounts (a)		3,134			2,529
Inventories of crude oil and products		1,228			1,297
Materials, supplies and prepaid expenses		631			541
Total current assets		6,080			5,355
Investments and long-term receivables (b)		894			857
Property, plant and equipment,		54,263			53,944
less accumulated depreciation and depletion		(20,025	)		(19,719	)
Property, plant and equipment, net		34,238			34,225
Goodwill		186			186
Other assets, including intangibles, net		531			833
Total assets		41,929			41,456

Liabilities
Current liabilities
Notes and loans payable (c)		200			202
Accounts payable and accrued liabilities (a) (note 9)		3,985			3,688
Income taxes payable		28			65
Total current liabilities		4,213			3,955
Long-term debt (d) (note 7)		4,968			4,978
Other long-term obligations (e) (note 9)		3,076			2,943
Deferred income tax liabilities		4,650			5,091
Total liabilities		16,907			16,967

Shareholders’ equity
Common shares at stated value (f) (note 11)		1,410			1,446
Earnings reinvested		25,056			24,560
Accumulated other comprehensive income (loss) (note 12)		(1,444	)		(1,517	)
Total shareholders’ equity		25,022			24,489

Total liabilities and shareholders’ equity		41,929			41,456

(a)	Accounts receivable, less estimated doubtful accounts included net amounts receivable from related parties of $1,200 million (2018 - $666 million).

(b)	Investments and long-term receivables included amounts from related parties of $249 million (2018 - $146 million).

(c)	Notes and loans payable included amounts to related parties of $75 million (2018 - $75 million).

(d)	Long-term debt included amounts to related parties of $4,447 million (2018 - $4,447 million).

(e)	Other long-term obligations included amounts to related parties of $0 million (2018 - $15 million).

(f)	Number of common shares authorized and outstanding were 1,100 million and 763 million, respectively (2018 - 1,100 million and 783 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 shareholders’ equity (U.S. GAAP, unaudited)


	Second Quarter						Six Months to June 30
millions of Canadian dollars	2019			2018			2019			2018
Common shares at stated value (note 11)
At beginning of period		1,427			1,523			1,446			1,536
Issued under the stock option plan		-			-			-			-
Share purchases at stated value		(17	)		(40	)		(36	)		(53	)
At end of period		1,410			1,483			1,410			1,483

Earnings reinvested
At beginning of period		24,364			24,861			24,560			24,714
Net income (loss) for the period		1,212			196			1,505			712
Share purchases in excess of stated value		(351	)		(853	)		(693	)		(1,090	)
Dividends declared		(169	)		(155	)		(316	)		(287	)
At end of period		25,056			24,049			25,056			24,049

Accumulated other comprehensive income (loss) (note 12)
At beginning of period		(1,472	)		(1,800	)		(1,517	)		(1,815	)
Other comprehensive income (loss)		28			33			73			48
At end of period		(1,444	)		(1,767	)		(1,444	)		(1,767	)

Shareholders’ equity at end of period		25,022			23,765			25,022			23,765

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	2019			2018			2019			2018
Operating activities
Net income (loss)		1,212			196			1,505			712
Adjustments for non-cash items:
Depreciation and depletion		392			358			782			735
(Gain) loss on asset sales (note 4)		(11	)		(9	)		(6	)		(19	)
Deferred income taxes and other		(471	)		24			(475	)		209
Changes in operating assets and liabilities:
Accounts receivable		99			(340	)		(605	)		87
Inventories, materials, supplies and prepaid expenses		(40	)		40			(21	)		(177	)
Income taxes payable		(9	)		16			(37	)		32
Accounts payable and accrued liabilities		(175	)		439			728			24
All other items - net (a) (b)		29			135			158			241
Cash flows from (used in) operating activities		1,026			859			2,029			1,844

Investing activities
Additions to property, plant and equipment (b)		(394	)		(357	)		(825	)		(728	)
Proceeds from asset sales (note 4)		14			9			36			21
Loan to equity company		(49	)		(31	)		(103	)		(37	)
Cash flows from (used in) investing activities		(429	)		(379	)		(892	)		(744	)

Financing activities
Reduction in finance lease obligations (note 8)		(6	)		(7	)		(13	)		(13	)
Dividends paid		(147	)		(132	)		(296	)		(266	)
Common shares purchased (note 11)		(368	)		(893	)		(729	)		(1,143	)
Cash flows from (used in) financing activities		(521	)		(1,032	)		(1,038	)		(1,422	)

Increase (decrease) in cash		76			(552	)		99			(322	)
Cash at beginning of period		1,011			1,425			988			1,195
Cash at end of period (c)		1,087			873			1,087			873
(a) Included contribution to registered pension plans.		(57	)		(57	)		(98	)		(101	)

(b) The impact of carbon emission programs are included in additions to property, plant and equipment, and all other items, net.

(c) Cash is composed of cash in bank and cash equivalents at cost. Cash equivalents are all highly liquid securities with maturity of three months or less when purchased.

Non-cash transaction

The company removed $570 million of assets and corresponding liabilities associated with the Government of Ontario’s revocation of its cap and trade legislation. The impact of this removal was not reflected in “Accounts payable and accrued liabilities” and “All other items - net” lines on the Consolidated statement of cash flows as it was not a cash transaction.

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 United States Generally Accepted Accounting Principles (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 2018 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 six months ended June 30, 2019, are not necessarily indicative of the operations to be expected for the full year.

All amounts are in Canadian dollars unless otherwise indicated.

2. Accounting changes

Effective January 1, 2019, Imperial adopted the Financial Accounting Standards Board’s standard,

Leases (Topic 842)

, as amended. The standard requires all leases to be recorded on the balance sheet as a right of use asset and a lease liability. The company used a transition method that applies the new lease standard at January 1, 2019. The company applied a policy election to exclude short-term leases from the balance sheet recognition and also elected certain practical expedients at adoption. As permitted, Imperial did not reassess whether existing contracts are or contain leases, the lease classification for any existing leases, initial direct costs for any existing lease and whether existing land easements and right of way, which were not previously accounted for as leases, are or contain a lease. At adoption of the lease accounting change, on January 1, 2019, an operating lease liability of $298 million was recorded and the operating lease right of use asset was $298 million. There was no cumulative earnings effect adjustment.

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IMPERIAL OIL LIMITED

3. Business segments


Second Quarter	Upstream				Downstream		Chemical
millions of Canadian dollars	2019		2018		2019	2018	2019	2018
Revenues and other income
Revenues (a)	2,587		2,318		6,375	6,870	266	328
Intersegment sales	1,116		650		487	332	48	74
Investment and other income (note 4)	4		3		19	19	-	-
	3,707		2,971		6,881	7,221	314	402
Expenses
Exploration	5		1		-	-	-	-
Purchases of crude oil and products	1,802		1,573		5,338	5,803	171	216
Production and manufacturing	1,171		1,106		474	488	70	52
Selling and general	-		-		201	197	23	23
Federal excise tax and fuel charge	-		-		463	412	-	-
Depreciation and depletion	338		300		46	49	3	4
Non-service pension and postretirement benefit	-		-		-	-	-	-
Financing (note 6)	-		-		-	-	-	-
Total expenses	3,316		2,980		6,522	6,949	267	295
Income (loss) before income taxes	391		(9	)	359	272	47	107
Income taxes	(594	)	(3	)	101	71	9	29
Net income (loss)	985		(6	)	258	201	38	78
Cash flows from (used in) operating activities	585		(10	)	423	776	52	116
Capital and exploration expenditures (b)	301		183		111	88	6	7

Second Quarter	Corporate and other				Eliminations				Consolidated
millions of Canadian dollars	2019		2018		2019		2018		2019		2018
Revenues and other income
Revenues (a)	-		-		-		-		9,228		9,516
Intersegment sales	-		-		(1,651	)	(1,056	)	-		-
Investment and other income (note 4)	10		5		-		-		33		27
	10		5		(1,651	)	(1,056	)	9,261		9,543
Expenses
Exploration	-		-		-		-		5		1
Purchases of crude oil and products	-		-		(1,649	)	(1,055	)	5,662		6,537
Production and manufacturing	-		-		-		-		1,715		1,646
Selling and general	14		54		(2	)	(1	)	236		273
Federal excise tax and fuel charge	-		-		-		-		463		412
Depreciation and depletion	5		5		-		-		392		358
Non-service pension and postretirement benefit	36		26		-		-		36		26
Financing (note 6)	23		26		-		-		23		26
Total expenses	78		111		(1,651	)	(1,056	)	8,532		9,279
Income (loss) before income taxes	(68	)	(106	)	-		-		729		264
Income taxes	1		(29	)	-		-		(483	)	68
Net income (loss)	(69	)	(77	)	-		-		1,212		196
Cash flows from (used in) operating activities	(34	)	(23	)	-		-		1,026		859
Capital and exploration expenditures (b)	11		6		-		-		429		284

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IMPERIAL OIL LIMITED

(a)	Included export sales to the United States of $ 2,152 million (2018 - $ 1,561 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 finance leases, additional investments and acquisitions. CAPEX excludes the purchase of carbon emission credits.

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IMPERIAL OIL LIMITED


Six Months to June 30	Upstream				Downstream				Chemical
millions of Canadian dollars	2019		2018		2019		2018		2019		2018
Revenues and other income
Revenues (a)	4,827		4,307		11,849		12,477		517		632
Intersegment sales	2,064		1,307		935		694		120		147
Investment and other income (note 4)	4		4		29		41		-		-
	6,895		5,618		12,813		13,212		637		779
Expenses
Exploration	38		9		-		-		-		-
Purchases of crude oil and products	3,388		2,947		9,920		10,097		364		418
Production and manufacturing	2,327		2,118		855		856		128		103
Selling and general	-		-		380		370		44		44
Federal excise tax and fuel charge	-		-		857		809		-		-
Depreciation and depletion	672		618		92		100		7		7
Non-service pension and postretirement benefit	-		-		-		-		-		-
Financing (note 6)	-		-		-		-		-		-
Total expenses	6,425		5,692		12,104		12,232		543		572
Income (loss) before income taxes	470		(74	)	709		980		94		207
Income taxes	(573	)	(24	)	194		258		22		56
Net income (loss)	1,043		(50	)	515		722		72		151
Cash flows from (used in) operating activities	865		327		1,155		1,366		100		199
Capital and exploration expenditures (b)	673		389		240		145		23		11
Total assets as at June 30 (c) (d)	35,059		34,781		5,041		5,090		451		408

Six Months to June 30	Corporate and other				Eliminations				Consolidated
millions of Canadian dollars	2019		2018		2019		2018		2019		2018
Revenues and other income
Revenues (a)	-		-		-		-		17,193		17,416
Intersegment sales	-		-		(3,119	)	(2,148	)	-		-
Investment and other income (note 4)	17		16		-		-		50		61
	17		16		(3,119	)	(2,148	)	17,243		17,477
Expenses
Exploration	-		-		-		-		38		9
Purchases of crude oil and products	-		-		(3,115	)	(2,145	)	10,557		11,317
Production and manufacturing	-		-		-		-		3,310		3,077
Selling and general	29		56		(4	)	(3	)	449		467
Federal excise tax and fuel charge	-		-		-		-		857		809
Depreciation and depletion	11		10		-		-		782		735
Non-service pension and postretirement benefit	72		53		-		-		72		53
Financing (note 6)	51		49		-		-		51		49
Total expenses	163		168		(3,119	)	(2,148	)	16,116		16,516
Income (loss) before income taxes	(146	)	(152	)	-		-		1,127		961
Income taxes	(21	)	(41	)	-		-		(378	)	249
Net income (loss)	(125	)	(111	)	-		-		1,505		712
Cash flows from (used in) operating activities	(91	)	(48	)	-		-		2,029		1,844
Capital and exploration expenditures (b)	22		13		-		-		958		558
Total assets as at June 30 (c) (d)	1,822		1,438		(444	)	(327	)	41,929		41,390

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(a)	Included export sales to the United States of $ 3,816 million (2018 - $ 2,768 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 finance leases, additional investments and acquisitions. CAPEX excludes the purchase of carbon emission credits.

(c)

Effective January 1, 2019, Imperial adopted the Financial Accounting Standards Board’s standard,

Leases (Topic 842)

, as amended. As at June 30, 2019, Total assets include operating lease right of use assets of $

261

million. An election was made not to restate prior periods. See note 8 for additional details.

(d)	The company removed $570 million from Total assets and corresponding liabilities associated with the Government of Ontario’s revocation of its cap and trade legislation.

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IMPERIAL OIL LIMITED

4. Investment and other income

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


	Second Quarter				Six Months to June 30
millions of Canadian dollars	2019		2018		2019		2018
Proceeds from asset sales		14		9		36		21
Book value of asset sales		3		-		30		2
Gain (loss) on asset sales, before tax		11		9		6		19
Gain (loss) on asset sales, after tax		10		8		6		15

5. Employee retirement benefits

The components of net benefit cost were as follows:


	Second Quarter						Six Months to June 30
millions of Canadian dollars	2019			2018			2019			2018
Pension benefits:
Current service cost		57			60			114			120
Interest cost		81			75			162			151
Expected return on plan assets		(88	)		(100	)		(175	)		(201	)
Amortization of prior service cost		-			1			-			2
Amortization of actuarial loss (gain)		38			43			75			87
Net periodic benefit cost		88			79			176			159

Other postretirement benefits:
Current service cost		4			4			8			8
Interest cost		6			6			11			11
Amortization of actuarial loss (gain)		(1	)		1			(1	)		3
Net periodic benefit cost		9			11			18			22

6. Financing and additional notes and loans payable information


	Second Quarter						Six Months to June 30
millions of Canadian dollars	2019			2018			2019			2018
Debt-related interest		34			32			73			62
Capitalized interest		(11	)		(6	)		(22	)		(13	)
Net interest expense		23			26			51			49
Other interest		-			-			-			-
Total financing		23			26			51			49

7. Long-term debt


	As at June 30		As at Dec 31
millions of Canadian dollars	2019		2018
Long-term debt		4,447		4,447
Finance leases (a)		521		531
Total long-term debt		4,968		4,978

(a)	Maturity analysis of finance lease liabilities is disclosed in note 8.

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IMPERIAL OIL LIMITED

8. Leases

The company generally purchases the property, plant and equipment used in operations, but there are situations where assets are leased, primarily rail cars, marine vessels, storage tanks and other moveable equipment. Right of use assets and lease liabilities are established on the balance sheet for leases with an expected term greater than one year, by discounting the amounts fixed in the lease agreement for the duration of the lease which is reasonably certain, considering the probability of exercising any early termination and extension options. The portion of the fixed payment related to service costs for long-term transportation agreements is excluded from the calculation of right of use assets and lease liabilities. Usually, assets are leased only for a portion of their useful lives and are accounted for as operating leases. In limited situations assets are leased for nearly all of their useful lives and are accounted for as finance leases. In general, leases are capitalized using the company’s incremental borrowing rate.

Variable payments under these lease agreements are not significant. Residual value guarantees, restrictions, or covenants related to leases, and transactions with related parties are also not significant. The company’s activities as a lessor are not material.

At adoption of the lease accounting change (see note 2), on January 1, 2019, an operating lease liability of $

298

million was recorded and the operating lease right of use asset was $

298

million. There was no cumulative earnings effect adjustment.

The table below summarizes the total lease cost incurred:


	Second Quarter 2019				Six Months to June 30 2019

millions of Canadian dollars	Operating leases		Finance leases		Operating leases		Finance leases
Operating lease cost		37				74
Short-term and other (net of sublease rental income)		25				40

Amortization of right of use assets				14				27
Interest on lease liabilities				10				20
Total lease cost		62		24		114		47

The following table summarizes the amounts related to operating leases and finance leases recorded on the Consolidated balance sheet:


	As at June 30 2019

millions of Canadian dollars	Operating leases		Finance leases
Right of use assets
Included in Other assets, including intangibles, net		261
Included in Property, plant and equipment, net				574
Total right of use assets		261		574

Lease liability due within one year
Included in Accounts payable and accrued liabilities		118		38
Included in Notes and loans payable				25
Long-term lease liability
Included in Other long-term obligations		141		-
Included in Long-term debt				521
Total lease liability		259		584

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The maturity analysis of the company’s lease liabilities, weighted average remaining lease term and weighted average discount rates applied are summarized below:


	As at June 30 2019

millions of Canadian dollars, unless noted	Operating leases			Finance leases
Maturity analysis of lease liabilities
2019 remaining months		68			55
2020		94			71
2021		46			50
2022		15			49
2023		13			48
2024		11			47
2025 and beyond		30			1,086
Total lease payments		277			1,406

Discount to present value		(18	)		(822	)
Total lease liability		259			584

Weighted average remaining lease term (years)		4			41
Weighted average discount rate (percent)		2.7			7.5

In addition to the operating lease liabilities in the table immediately above, at June 30, 2019, additional undiscounted commitments for leases not yet commenced totalled $1 million.

The table below summarizes the cash paid for amounts included in the measurement of lease liabilities and the right of use assets obtained in exchange for new lease liabilities:

Second Quarter

2019

Six Months

to June 30

2019

millions of Canadian dollars

Operating
leases

Finance
leases

Operating
leases

Finance
leases

Cash paid for amounts included in the measurement of lease liabilities

Cash flows from operating activities

Cash flows from financing activities

Non-cash right of use assets recorded for lease liabilities

For January 1 adoption of

Leases (Topic 842)

298

In exchange for new lease liabilities during the period

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At December 31, 2018, the company held

non-cancelable

operating leases covering primarily storage tanks, rail cars and marine vessels, with minimum undiscounted lease commitments totaling $291 million as indicated in the following table:


millions of Canadian dollars	As at Dec 31 2018
Payments due by period
2019		130
2020		82
2021		43
2022		13
2023		11
2024 and beyond		12
Total lease payments under minimum commitments (a)		291

(a)	Net rental cost under cancelable and non-cancelable operating leases incurred in 2018 was $ 221 million (2017 - $ 206 million, 2016 - $ 253 million). Related rental income was not material.

9. Other long-term obligations


	As at		As at
	June 30		Dec 31
millions of Canadian dollars	2019		2018
Employee retirement benefits (a)		1,153		1,195
Asset retirement obligations and other environmental liabilities (b)		1,446		1,435
Share-based incentive compensation liabilities		95		78
Operating lease liability (c)		141		-
Other obligations		241		235
Total other long-term obligations		3,076		2,943

(a)	Total recorded employee retirement benefits obligations also included $ 55 million in current liabilities (2018 - $ 55 million).

(b)	Total asset retirement obligations and other environmental liabilities also included $ 118 million in current liabilities (2018 - $ 118 million).

(c)

Effective January 1, 2019, Imperial adopted the Financial Accounting Standards Board’s standard,

Leases (Topic 842)

, as amended. The standard requires all leases to be recorded on the balance sheet as a right of use asset and liability. The long-term lease liability for operating leases is included in Other long-term obligations (see note 8).

10. Financial instruments

The fair value of the company’s financial instruments is determined by reference to various market data and other appropriate valuation techniques. There are no material differences between the fair value of the company’s financial instruments and the recorded carrying value. At June 30, 2019 and December 31, 2018 the fair value of long-term debt ($

4,447

million, excluding finance lease obligations) was primarily a level 2 measurement.

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11. Common shares


thousands of shares	As of June 30 2019		As of Dec 31 2018
Authorized		1,100,000		1,100,000
Common shares outstanding		762,774		782,565

The

12-month

normal course issuer bid program that was in place during the second quarter of 2019 came into effect in June 27, 2018. The program enabled the company to purchase up to a maximum of 40,391,196 common shares (

percent of the total shares on June 13, 2018), which included shares purchased under the normal course issuer bid and from Exxon Mobil Corporation concurrent with, but outside of the normal course issuer bid. Exxon Mobil Corporation participated to maintain its ownership percentage in Imperial at approximately 69.6 percent.

The current

12-month

normal course issuer bid program came into effect June 27, 2019, under which Imperial will continue its existing share purchase program. The program enables the company to purchase up to a maximum of 38,211,086 common shares (5 percent of the total shares on June 13, 2019) which includes shares purchased under the normal course issuer bid and from Exxon Mobil Corporation concurrent with, but outside of the normal course issuer bid. As in the past, Exxon Mobil Corporation has advised the company that it intends to participate to maintain its ownership percentage at approximately 69.6 percent.

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

The company’s common share activities are summarized below:


	Thousands of shares			Millions of dollars
Balance as at December 31, 2017		831,242			1,536
Issued under employee share-based awards		2			-
Purchases at stated value		(48,679	)		(90	)
Balance as at December 31, 2018		782,565			1,446
Issued under employee share-based awards		-			-
Purchases at stated value		(19,791	)		(36	)
Balance as at June 30, 2019		762,774			1,410

The following table provides the calculation of basic and diluted earnings per common share and the dividends declared by the company on its outstanding common shares:


	Second Quarter				Six Months to June 30
	2019		2018		2019		2018
Net income (loss) per common share - basic
Net income (loss) (millions of Canadian dollars)		1,212		196		1,505		712
Weighted average number of common shares outstanding (millions of shares)		767.4		816.1		772.5		822.6
Net income (loss) per common share (dollars)		1.58		0.24		1.95		0.86

Net income (loss) per common share - diluted
Net income (loss) (millions of Canadian dollars)		1,212		196		1,505		712
Weighted average number of common shares outstanding (millions of shares)		767.4		816.1		772.5		822.6
Effect of employee share-based awards (millions of shares)		2.5		2.7		2.4		2.6
Weighted average number of common shares outstanding, assuming dilution (millions of shares)		769.9		818.8		774.9		825.2
Net income (loss) per common share (dollars)		1.57		0.24		1.94		0.86

Dividends per common share - declared (dollars)		0.22		0.19		0.41		0.35

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12. Other comprehensive income (loss) information

Changes in accumulated other comprehensive income (loss):


millions of Canadian dollars	2019			2018
Balance at January 1		(1,517	)		(1,815	)
Postretirement benefits liability adjustment:
Current period change excluding amounts reclassified from accumulated other comprehensive income		18			(19	)
Amounts reclassified from accumulated other comprehensive income		55			67
Balance at June 30		(1,444	)		(1,767	)

Amounts reclassified out of accumulated other comprehensive income (loss) -

before-tax

income (expense):


	Second Quarter						Six Months to June 30
millions of Canadian dollars	2019			2018			2019			2018
Amortization of postretirement benefits liability adjustment included in net periodic benefit cost (a)		(37	)		(46	)		(74	)		(92	)

(a)	This accumulated other comprehensive income component is included in the computation of net periodic benefit cost, (note 5).

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


	Second Quarter				Six Months to June 30
millions of Canadian dollars	2019		2018		2019		2018
Postretirement benefits liability adjustments:
Postretirement benefits liability adjustment (excluding amortization)		-		-		7		(7	)
Amortization of postretirement benefits liability adjustment included in net periodic benefit cost		9		13		19		25
Total		9		13		26		18

13. Recently issued accounting standards

Effective January 1, 2020, Imperial will adopt the Financial Accounting Standards Board’s update,

Financial Instruments - Credit Losses (Topic 326)

, as amended. The standard requires a valuation allowance for credit losses be recognized for certain financial assets that reflects the current expected credit loss over the asset’s contractual life. The valuation allowance considers the risk of loss, even if remote and considers past events, current conditions and expectations of the future. Imperial is evaluating the standard and its effect on the company’s financial statements.

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Item 2.

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

Operating results

Second quarter 2019 vs. second quarter 2018

The company’s net income for the second quarter of 2019 was $1,212 million or $1.57 per share on a diluted basis, up from net income of $196 million or $0.24 per share in the same period of 2018. Second quarter 2019 results include a favourable impact, largely

non-cash,

of $662 million associated with the Alberta corporate income tax rate decrease. On June 28, 2019, the Alberta government enacted a 4 percent decrease in the provincial tax rate, from 12 percent to 8 percent by 2022.

Upstream net income was $985 million in the second quarter, reflecting the favourable impact associated with the decreased Alberta corporate income tax rate of $689 million. Excluding this impact, second quarter 2019 net income was $296 million, an increase of $302 million compared to a net loss of $6 million in the same period of 2018. Improved results reflect higher volumes of about $310 million, primarily at Syncrude, Kearl and Norman Wells, as well as the impact of higher Canadian crude oil realizations of about $80 million. Results were negatively impacted by higher operating expenses of about $60 million and higher royalties of about $50 million.

West Texas Intermediate (WTI) averaged US$59.91 per barrel in the second quarter of 2019, down from US$67.91 per barrel in the same quarter of 2018. Western Canada Select (WCS) averaged US$49.31 per barrel and US$48.81 per barrel for the same periods. The WTI / WCS differential narrowed during the second quarter of 2019 to average approximately US$11 per barrel for the quarter, compared to around US$19 per barrel in the same period of 2018.

The Canadian dollar averaged US$0.75 in the second quarter of 2019, a decrease of US$0.03 from the second quarter of 2018.

Imperial’s average Canadian dollar realizations for bitumen increased in the quarter, supported primarily by lower diluent costs. Bitumen realizations averaged $57.19 per barrel in the second quarter of 2019, up from $48.90 per barrel in the second quarter of 2018. The company’s average Canadian dollar realizations for synthetic crude declined generally in line with WTI in the quarter, adjusted for changes in exchange rates and transportation costs. Synthetic crude realizations averaged $79.96 per barrel in the second quarter of 2019, compared to $86.31 per barrel in the same period of 2018.

Gross production of Cold Lake bitumen averaged 135,000 barrels per day in the second quarter, up from 133,000 barrels per day in the same period of 2018.

Gross production of Kearl bitumen averaged 207,000 barrels per day in the second quarter (147,000 barrels Imperial’s share), up from 180,000 barrels per day (128,000 barrels Imperial’s share) in the second quarter of 2018. Higher production was mainly due to improved reliability.

The company’s share of gross production from Syncrude averaged 80,000 barrels per day, up from 50,000 barrels per day in the second quarter of 2018. Higher production was mainly due to the absence of turnaround activities and impacts from the 2018 power disruption.

Downstream net income was $258 million in the second quarter, up from $201 million in the second quarter of 2018. Earnings increased primarily due to lower net turnaround impacts of about $150 million partially offset by reliability events of about $70 million, including the Sarnia tower incident.

Refinery throughput averaged 344,000 barrels per day, compared to 363,000 barrels per day in the second quarter of 2018. Capacity utilization was 81 percent, compared to 86 percent in the second quarter of 2018. Reduced throughput was mainly due to the impact of a planned turnaround and the tower incident at Sarnia, partially offset by the absence of the 2018 planned turnaround at Strathcona.

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Petroleum product sales were 477,000 barrels per day, compared to 510,000 barrels per day in the second quarter of 2018. Lower petroleum product sales were mainly due to lower refinery throughput.

Chemical net income was $38 million in the second quarter, compared to $78 million from the same quarter of 2018, primarily reflecting lower margins.

Corporate and other expenses were $69 million in the second quarter, compared to $77 million in the same period of 2018.

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Six months 2019 vs. six months 2018

Net income in the first six months of 2019 was $1,505 million, or $1.94 per share on a diluted basis, up from net income of $712 million or $0.86 per share in the first six months of 2018. 2019 results include a favourable impact, largely

non-cash,

Upstream net income was $1,043 million for the first six months of the year, reflecting the favourable impact associated with the decreased Alberta corporate income tax rate of $689 million. Excluding this impact, 2019 net income was $354 million, an increase of $404 million compared to a net loss of $50 million in the same period of 2018. Improved results reflect higher volumes of about $330 million, primarily at Syncrude, Kearl and Norman Wells, as well as the impact of higher Canadian crude oil realizations of about $260 million and favourable foreign exchange impacts of about $60 million. Results were negatively impacted by higher operating expenses of about $180 million and higher royalties of about $80 million.

West Texas Intermediate averaged US$57.45 per barrel in the first six months of 2019, down from US$65.44 per barrel in the same period of 2018. Western Canada Select averaged US$45.88 per barrel and US$43.74 per barrel for the same periods. The WTI / WCS differential narrowed to average approximately US$12 per barrel in the first six months of 2019, from around US$22 per barrel in the same period of 2018.

The Canadian dollar averaged US$0.75 in the first six months of 2019, a decrease of $0.03 from the same period in 2018.

Imperial’s average Canadian dollar realizations for bitumen increased in the first six months of 2019, supported primarily by lower diluent costs and an increase in WCS. Bitumen realizations averaged $53.20 per barrel, up from $41.84 per barrel from the same period in 2018. The company’s average Canadian dollar realizations for synthetic crude declined generally in line with WTI, adjusted for changes in exchange rates and transportation costs. Synthetic crude realizations averaged $74.77 per barrel, compared to $81.24 per barrel from the same period in 2018.

Gross production of Cold Lake bitumen averaged 140,000 barrels per day in the first six months of 2019, compared to 143,000 barrels per day in the same period of 2018.

Gross production of Kearl bitumen averaged 193,000 barrels per day in the first six months of 2019 (137,000 barrels Imperial’s share) up from 181,000 barrels per day (128,000 barrels Imperial’s share) in the same period of 2018. Higher production was mainly due to improved reliability.

During the first six months of 2019, the company’s share of gross production from Syncrude averaged 79,000 barrels per day, up from 57,000 barrels per day in the same period of 2018. Higher production was mainly due to the absence of turnaround activities and impacts from the 2018 power disruption.

Downstream net income was $515 million for the first six months of 2019, compared to $722 million for the same period of 2018. Earnings were negatively impacted by lower margins of about $210 million, reliability events of about $130 million, including the Sarnia tower incident, and lower sales volumes of about $70 million. These factors were partially offset by lower net turnaround impacts of about $150 million and favourable foreign exchange effects of about $70 million.

Refinery throughput averaged 364,000 barrels per day in the first six months of 2019, compared to 386,000 barrels per day in the same period of 2018. Capacity utilization was 86 percent, compared to 91 percent in the same period of 2018. Reduced throughput was mainly due to the impact of a planned turnaround and the tower incident at Sarnia, partially offset by the absence of the 2018 planned turnaround at Strathcona.

Petroleum product sales were 477,000 barrels per day in the first six months of 2019, compared to 494,000 barrels per day in the same period of 2018. Lower petroleum product sales were mainly due to lower refinery throughput.

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Chemical net income was $72 million in the first six months of 2019, compared to $151 million in the same period of 2018, primarily reflecting lower margins.

Corporate and other expenses were $125 million in the first six months of 2019, compared to $111 million in the same period of 2018.

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Liquidity and capital resources

Cash flow generated from operating activities was $1,026 million in the second quarter, up from $859 million in the corresponding period in 2018, reflecting higher earnings partially offset by working capital effects.

Investing activities used net cash of $429 million in the second quarter, compared with $379 million used in the same period of 2018.

Cash used in financing activities was $521 million in the second quarter, compared with $1,032 million used in the second quarter of 2018. Dividends paid in the second quarter of 2019 were $147 million. The per share dividend paid in the second quarter was $0.19, up from $0.16 in the same period of 2018. During the second quarter, the company, under its share purchase program, purchased about 9.8 million shares for $368 million, including shares purchased from Exxon Mobil Corporation. In the second quarter of 2018, the company purchased about 21.4 million shares for $893 million following the increase of its share purchase program.

The company’s cash balance was $1,087 million at June 30, 2019, versus $873 million at the end of second quarter 2018.

Cash flow generated from operating activities was $2,029 million in the first six months of 2019, up from $1,844 million in the same period of 2018, primarily reflecting higher earnings.

Investing activities used net cash of $892 million in the first six months of 2019, compared with $744 million used in 2018, primarily reflecting higher additions to property, plant and equipment.

Cash used in financing activities was $1,038 million in the first six months of 2019, compared with $1,422 million used in the same period of 2018. Dividends paid in the first six months of 2019 were $296 million. The per share dividend paid in the first six months of 2019 was $0.38, up from $0.32 in the same period of 2018. During the first six months of 2019, the company, under its share purchase program, purchased about 19.8 million shares for $729 million, including shares purchased from Exxon Mobil Corporation. In the first six months of 2018, the company purchased about 28.6 million shares for $1,143 million following the increase of its share purchase program.

On June 21, 2019, 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 existing share purchase program. The program enables the company to purchase up to a maximum of 38,211,086 common shares during the period June 27, 2019 to June 26, 2020. This maximum includes shares purchased under the normal course issuer bid and from Exxon Mobil Corporation concurrent with, but outside of the normal course issuer bid. As in the past, Exxon Mobil Corporation has advised the company that it intends to participate to maintain its ownership percentage at approximately 69.6 percent. The program will end should the company purchase the maximum allowable number of shares, or on June 26, 2020.

Recently issued accounting standards

Effective January 1, 2020, Imperial will adopt the Financial Accounting Standards Board’s update,

Financial Instruments - Credit Losses (Topic 326)

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Forward-looking statements

Statements of future events or conditions in this report, including projections, targets, expectations, estimates, and business plans are forward-looking statements. Disclosure related to the share purchase program and capital activities constitute forward-looking statements. Forward-looking statements are based on the company’s current expectations, estimates, projections and assumptions at the time the statements are made. Actual future financial and operating results, including expectations and assumptions concerning demand growth and energy source, supply and mix; commodity prices and foreign exchange rates; production rates, growth and mix; applicable laws and government policies; financing sources; and capital and environmental expenditures could differ materially depending on a number of factors. These factors include changes in the supply of and demand for crude oil, natural gas, and petroleum and petrochemical products and resulting price and margin impacts; transportation for accessing markets; political or regulatory events, including changes in law or government policy; environmental risks inherent in oil and gas exploration and production activities; environmental regulation; currency exchange rates; availability and allocation of capital; unanticipated operational disruptions; project management and schedules; operational hazards and risks; cybersecurity incidents; disaster response preparedness; and other factors discussed in Item 1A risk factors and Item 7 management’s discussion and analysis of financial condition and results of operations of Imperial Oil Limited’s most recent annual report on Form

10-K.

Forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties, some that are similar to other oil and gas companies and some that are unique to Imperial. Imperial’s actual results may differ materially from those expressed or implied by its forward-looking statements and readers are cautioned not to place undue reliance on them. Imperial undertakes no obligation to update any forward-looking statements contained herein, except as required by applicable law.

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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Item 3.

Quantitative and qualitative disclosures about market risk

Information about market risks for the six months ended June 30, 2019, does not differ materially from that discussed on page 25 of the company’s annual report on Form

10-K

for the year ended December 31, 2018.

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, 2019. 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 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 (Canadian 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) (b)

April 2019
(April 1 - April 30)		3,378,870		38.43		3,378,870		6,436,046
May 2019
(May 1 - May 31)		3,539,821		37.63		3,539,821		2,896,225
June 2019
(June 1 - June 26) (a)		2,896,225		36.42		2,896,225		-
(June 27 - June 30) (b)		-		-		-		38,211,086	(c)

(a)

The

12-month

normal course issuer bid program that was in place during the second quarter of 2019, came into effect on June 27, 2018. The program enabled the company to purchase up to a maximum of 40,391,196 common shares (5 percent of the total shares on June 13, 2018), which included shares purchased under the normal course issuer bid and from Exxon Mobil Corporation concurrent with, but outside of the normal course issuer bid. Exxon Mobil Corporation participated to maintain its ownership percentage at approximately 69.6 percent.

The program ended on June 26, 2019. Upon expiration, the company had purchased the maximum 40,391,196 shares allowed under the program.

(b)

(c)	In its most recent quarterly earnings release, the company stated that it currently anticipates exercising its share purchases uniformly over the duration of the program. Purchase plans may be modified at any time without prior notice.

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 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.

(101) Interactive data files.

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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)

Date: August 7, 2019				/s/ Daniel E. Lyons ---------------------------------------------------
				(Signature)
				Daniel E. Lyons
				Senior vice-president, finance and administration, and controller (Principal accounting officer)



Date: August 7, 2019				/s/ Cathryn Walker ---------------------------------------------------
				(Signature)
				Cathryn Walker
				Assistant corporate secretary