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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 June 30, 2017

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, 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            NO       

The number of common shares outstanding, as of June 30, 2017 was 844,312,999.


Table of Contents

IMPERIAL OIL LIMITED

 

 

Table of contents

 

          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 cash flows

     6  
  

Notes to the consolidated financial statements

     7  
Item 2.    Management’s discussion and analysis of financial condition and results of operations      14  
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      21  
SIGNATURES      22  

 

 

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, 2016. 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    2017     2016     2017          2016     

 

 

Revenues and other income

         

Operating revenues (a)

     6,985       6,225       13,943        11,399     

Investment and other income (note 3)

     48       23       246        71     

 

 

Total revenues and other income

     7,033       6,248       14,189        11,470     

 

 

Expenses

         

Exploration

     -       42       22        59     

Purchases of crude oil and products (b)

     4,642       4,041       8,975        7,027     

Production and manufacturing (c)

     1,525       1,310       2,900        2,581     

Selling and general (c)

     201       267       407        537     

Federal excise tax

     421       415       815        803     

Depreciation and depletion

     352       407       744        831     

Financing costs (note 5)

     17       18       31        33     

 

 

Total expenses

     7,158       6,500       13,894        11,871     

 

 

Income (loss) before income taxes

     (125     (252     295        (401)    

Income taxes

     (48     (71     39        (119)    

 

 

Net income (loss)

     (77     (181     256        (282)    

 

 

Per-share information (Canadian dollars)

         

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

     (0.09     (0.21     0.30        (0.33)    

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

     (0.09     (0.21     0.30        (0.33)    

Dividends per common share

     0.16       0.15       0.31        0.29     

 

 

(a)

  Amounts from related parties included in operating revenues.      1,008       446       2,045        1,009     

(b)

  Amounts to related parties included in purchases of crude oil and products.      706       286       1,315        917     

(c)

 

Amounts to related parties included in production and manufacturing,

and selling and general expenses.

     147       157       288        261     

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        2017         2016         2017          2016     

 

 

Net income (loss)

     (77     (181 )        256        (282)    

Other comprehensive income (loss), net of income taxes

         

Post-retirement benefits liability adjustment (excluding amortization)

     -       -       41        100     

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

     36       33       72        74     

 

 

Total other comprehensive income (loss)

     36       33       113        174     

 

 
         

 

 

Comprehensive income (loss)

     (41     (148 )         369        (108)    

 

 

The information in the notes to consolidated financial statements is an integral part of these statements.

 

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IMPERIAL OIL LIMITED

 

 

Consolidated balance sheet (U.S. GAAP, unaudited)

 

millions of Canadian dollars    As at
June 30
2017
    As at
Dec 31
2016
 
   

Assets

    

Current assets

    

Cash

     623       391  

Accounts receivable, less estimated doubtful accounts (a)

     1,599       2,023  

Inventories of crude oil and products

     1,044       949  

Materials, supplies and prepaid expenses

     490       468  
   

Total current assets

     3,756       3,831  

Investments and long-term receivables

     907       1,030  

Property, plant and equipment,

     53,734       53,515  

less accumulated depreciation and depletion

     (17,888     (17,182
   

Property, plant and equipment, net

     35,846       36,333  

Goodwill

     186       186  

Other assets, including intangibles, net

     410       274  
   

Total assets

     41,105       41,654  
   

Liabilities

    

Current liabilities

    

Notes and loans payable (b)

     203       202  

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

     2,962       3,193  

Income taxes payable

     40       488  
   

Total current liabilities

     3,205       3,883  

Long-term debt (c) (note 6)

     5,019       5,032  

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

     3,678       3,656  

Deferred income tax liabilities

     4,203       4,062  
   

Total liabilities

     16,105       16,633  
   

Shareholders’ equity

    

Common shares at stated value (e) (note 8)

     1,560       1,566  

Earnings reinvested (note 9)

     25,224       25,352  

Accumulated other comprehensive income (loss) (note 10)

     (1,784     (1,897
   

Total shareholders’ equity

     25,000       25,021  
   

Total liabilities and shareholders’ equity

     41,105       41,654  
   
(a) Accounts receivable, less estimated doubtful accounts included net amounts receivable from related parties of $126 million (2016 - $172 million).
(b) Notes and loans payable included amounts to related parties of $75 million (2016 - $75 million).
(c) Long-term debt included amounts to related parties of $4,447 million (2016 - $4,447 million).
(d) Other long-term obligations included amounts to related parties of $82 million (2016 - $104 million).
(e) Number of common shares authorized and outstanding were 1,100 million and 844 million, respectively (2016 - 1,100 million and 848 million, respectively).

The information in the notes to consolidated financial statements is an integral part of these statements.

 

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IMPERIAL OIL LIMITED

 

 

Consolidated statement of cash flows (U.S. GAAP, unaudited)

 

Inflow (outflow)    Second Quarter     Six Months
to June 30
 
millions of Canadian dollars        2017         2016     2017     2016     

 

 

Operating activities

        

Net income (loss)

     (77     (181     256       (282)    

Adjustments for non-cash items:

        

Depreciation and depletion

     352       407       744       831     

(Gain) loss on asset sales (note 3)

     (31     (13     (213     (43)    

Deferred income taxes and other

     (37     (98     163       (180)    

Changes in operating assets and liabilities:

        

Accounts receivable

     146       (338     424       (396)    

Inventories, materials, supplies and prepaid expenses

     (45     151       (117     119     

Income taxes payable

     16       22       (448     13     

Accounts payable and accrued liabilities

     (30     371       (240     182     

All other items - net (a)

     198       122       277       248     

 

 

Cash flows from (used in) operating activities

     492       443       846       492     

 

 

Investing activities

        

Additions to property, plant and equipment

     (320     (313     (442     (704)    

Proceeds from asset sales (note 3)

     39       17       222       50     

Additional investments

     -       (1     -       (1)    

 

 

Cash flows from (used in) investing activities

     (281     (297     (220     (655)    

 

 

Financing activities

        

Short-term debt - net

     -       20       -       (88)    

Long-term debt - additions (note 6)

     -       -       -       495     

Reduction in capitalized lease obligations

     (6     (8     (13     (15)    

Dividends paid

     (127     (118     (254     (237)    

Common shares purchased (note 8)

     (127     -       (127     -     

 

 

Cash flows from (used in) financing activities

     (260     (106     (394     155     

 

 

Increase (decrease) in cash

     (49     40       232       (8)    

Cash at beginning of period

     672       155       391       203     

 

 

Cash at end of period (b)

     623       195       623       195     

 

 

(a)    Included contribution to registered pension plans.

     (58     (45     (98     (76)    

(b)    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.

     

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 2016 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. Prior data has been reclassified in certain cases to conform to the current presentation basis.

The company’s exploration and production activities are accounted for under the “successful efforts” method.

The results for the six months ended June 30, 2017, 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

 

Second Quarter          Upstream         Downstream      Chemical  
millions of Canadian dollars   2017     2016      2017     2016     2017     2016   

 

 

Revenues and other income

           

Operating revenues (a)

    1,787       1,403        4,909       4,559       289       263   

Intersegment sales

    289       328        242       211       62       54   

Investment and other income (note 3)

    5             42       20       (2)        

 

 
    2,081       1,733        5,193       4,790       349       317   

 

 

Expenses

           

Exploration

    -       42        -       -       -        

Purchases of crude oil and products

    1,026       905        4,014       3,555       193       171   

Production and manufacturing

    1,051       838        426       421       48       51   

Selling and general

    (7)       (3)       185       253       19       19   

Federal excise tax

    -             421       415       -        

Depreciation and depletion

    298       350        47       51       3        

Financing costs (note 5)

    -       (1)       -       -       -        

 

 

Total expenses

    2,368       2,131        5,093       4,695       263       243   

 

 

Income (loss) before income taxes

    (287)       (398)       100       95       86       74   

Income taxes

    (86)       (108)       22       24       22       19   

 

 

Net income (loss)

    (201)       (290)       78       71       64       55   

 

 

Cash flows from (used in) operating activities

    117       82        302       295       100       72   

Capital and exploration expenditures (b)

    91       250        39       64       3        

 

 
Second Quarter           Corporate and Other         Eliminations      Consolidated  
millions of Canadian dollars   2017     2016      2017     2016     2017     2016   

 

 

Revenues and other income

           

Operating revenues (a)

    -             -       -       6,985       6,225   

Intersegment sales

    -             (593)       (593)       -        

Investment and other income (note 3)

    3             -       -       48       23   

 

 
    3             (593)       (593)       7,033       6,248   

 

 

Expenses

           

Exploration

    -             -       -       -       42   

Purchases of crude oil and products

    -             (591)       (590)       4,642       4,041   

Production and manufacturing

    -             -       -       1,525       1,310   

Selling and general

    6             (2)       (3)       201       267   

Federal excise tax

    -             -       -       421       415   

Depreciation and depletion

    4             -       -       352       407   

Financing costs (note 5)

    17       19        -       -       17       18   

 

 

Total expenses

    27       24        (593)       (593)       7,158       6,500   

 

 

Income (loss) before income taxes

    (24)       (23)       -       -       (125)       (252)  

Income taxes

    (6)       (6)       -       -       (48)       (71)  

 

 

Net income (loss)

    (18)       (17)       -       -       (77)       (181)  

 

 

Cash flows from (used in) operating activities

    (27)       (6)       -       -       492       443   

Capital and exploration expenditures (b)

    10       13        -       -       143       335   

 

 
(a) Included export sales to the United States of $1,045 million (2016 - $966 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

 

 

 

Six Months to June 30           Upstream          Downstream       Chemical  
millions of Canadian dollars    2017      2016       2017      2016      2017      2016   

 

 

Revenues and other income

                 

Operating revenues (a)

     3,498        2,383         9,883        8,499        562        517   

Intersegment sales

     907        807         551        436        129        98   

Investment and other income (note 3)

     10        21         233        49        (1)         

 

 
     4,415        3,211         10,667        8,984        690        615   

 

 

Expenses

                 

Exploration

     22        59         -        -        -         

Purchases of crude oil and products

     2,142        1,723         8,023        6,312        394        330   

Production and manufacturing

     2,024        1,747         775        736        101        98   

Selling and general

     (4)        (2)        373        491        41        41   

Federal excise tax

     -               815        803        -         

Depreciation and depletion

     634        707         95        112        6         

Financing costs (note 5)

     4        (4)        -        -        -         

 

 

Total expenses

     4,822        4,230         10,081        8,454        542        473   

 

 

Income (loss) before income taxes

     (407)        (1,019)        586        530        148        142   

Income taxes

     (120)        (281)        128        139        39        38   

 

 

Net income (loss)

     (287)        (738)        458        391        109        104   

 

 

Cash flows from (used in) operating activities

     425        (400)        358        764        77        132   

Capital and exploration expenditures (b)

     194        596         73        107        7        14   

Total assets as at June 30

     35,527        37,166         4,334        5,239        384        393   

 

 
Six Months to June 30            Corporate and Other          Eliminations       Consolidated  
millions of Canadian dollars    2017      2016       2017      2016      2017      2016   

 

 

Revenues and other income

                 

Operating revenues (a)

     -               -        -        13,943        11,399   

Intersegment sales

     -               (1,587)        (1,341)        -         

Investment and other income (note 3)

     4               -        -        246        71   

 

 
     4               (1,587)        (1,341)        14,189        11,470   

 

 

Expenses

                 

Exploration

     -               -        -        22        59   

Purchases of crude oil and products

     -               (1,584)        (1,338)        8,975        7,027   

Production and manufacturing

     -               -        -        2,900        2,581   

Selling and general

     -        10         (3)        (3)        407        537   

Federal excise tax

     -               -        -        815        803   

Depreciation and depletion

     9               -        -        744        831   

Financing costs (note 5)

     27        37         -        -        31        33   

 

 

Total expenses

     36        55         (1,587)        (1,341)        13,894        11,871   

 

 

Income (loss) before income taxes

     (32)        (54)        -        -        295        (401)  

Income taxes

     (8)        (15)        -        -        39        (119)  

 

 

Net income (loss)

     (24)        (39)        -        -        256        (282)  

 

 

Cash flows from (used in) operating activities

     (14)        (4)        -        -        846        492   

Capital and exploration expenditures (b)

     22        26         -        -        296        743   

Total assets as at June 30

     1,071        662         (211)        (216)        41,105        43,244   

 

 
(a) Included export sales to the United States of $1,944 million (2016 - $1,763 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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3. 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    2017        2016        2017        2016    
   

  Proceeds from asset sales

     39          17          222          50    

  Book value of assets sold

     9          4          10          7    
   

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

     31          13          213          43    
   

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

     28          10          186          34    
   
(a) The six months ended June 30, 2017 included a gain of $174 million ($151 million after tax) for the sale of a surplus property in Ontario.

 

4. Employee retirement benefits

The components of net benefit cost were as follows:

     Second Quarter     Six Months
to June 30
 
  millions of Canadian dollars    2017      2016      2017      2016   
   

  Pension benefits:

        

Current service cost

     54       51       109       102  

Interest cost

     79       79       158       158  

Expected return on plan assets

     (101     (100     (202     (199

Amortization of prior service cost

     2       3       5       5  

Amortization of actuarial loss (gain)

     45       41       89       82  
   

Net periodic benefit cost

     79       74       159       148  
   

  Other post-retirement benefits:

        

Current service cost

     4       4       8       8  

Interest cost

     6       6       12       13  

Amortization of actuarial loss (gain)

     2       4       4       7  
   

Net periodic benefit cost

     12       14       24       28  
   

The company expects to make contributions in 2017 of about $281 million to funded registered pension plans, an increase of $64 million from the year-end 2016 estimate of $217 million.

 

5. Financing costs and additional notes and loans payable information

 

     Second Quarter     Six Months
to June 30
 
  millions of Canadian dollars    2017     2016     2017     2016  
   

  Debt-related interest

     27       32       49       63  

  Capitalized interest

     (10     (13     (22     (26
   

  Net interest expense

     17       19       27       37  

  Other interest

     -       (1     4       (4
   

  Total financing costs

     17       18       31       33  
   

 

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6. Long-term debt

 

         As at  
June 30  
     As at 
Dec 31 
 
millions of Canadian dollars    2017        2016   
   

Long-term debt

     4,447          4,447   

Capital leases

     572          585   
   

Total long-term debt

     5,019          5,032   
   

 

7. Other long-term obligations

 

         As at  
June 30  
     As at 
Dec 31 
 
millions of Canadian dollars    2017        2016   
   

Employee retirement benefits (a)

     1,468          1,645   

Asset retirement obligations and other environmental liabilities (b)

     1,588          1,544   

Share-based incentive compensation liabilities

     124          139   

Other obligations

     498          328   
   

Total other long-term obligations

     3,678          3,656   

 

 
(a) Total recorded employee retirement benefits obligations also included $58 million in current liabilities (2016 - $58 million).
(b) Total asset retirement obligations and other environmental liabilities also included $108 million in current liabilities (2016 - $108 million).

 

8. Common shares

 

         As of  
June 30  
     As of  
Dec 31  
 
thousands of shares    2017        2016    

 

 

Authorized

     1,100,000          1,100,000    

Common shares outstanding

     844,313          847,599    

 

 

From 1995 through June 2017, the company purchased shares under a series of 12-month normal course issuer bid share purchase programs, as well as an auction tender. Exxon Mobil Corporation’s participation in these programs, including its participation in concurrent programs outside the normal course issuer bids, maintained its ownership interest in Imperial at approximately 69.6 percent. On June 22, 2017, the company announced another 12-month normal course issuer bid program and will continue its existing share purchase program. The program enables the company to purchase up to a maximum of 25,395,927 common shares (3 percent of the total shares on June 13, 2017) 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 results of these activities are as shown below:

 

year    Purchased shares  
thousands  
     Millions of  
dollars  
 

 

 

1995 - 2015

     906,544          15,708    

2016 - Second quarter

     -          -    

         - Full year

     1          -    

2017 - Second quarter

     3,286          127    

         - Year-to-date

     3,286          127    

 

 

Cumulative purchase to date

     909,831          15,835    

 

 

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

 

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The following table provides the calculation of net income per common share:

 

     Second Quarter     Six Months
to June 30
 
     2017     2016     2017      2016  
   

Net income (loss) per common share - basic

         

Net income (loss) (millions of Canadian dollars)

     (77     (181     256        (282

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

     847.0       847.6       847.3        847.6  

Net income (loss) per common share (dollars)

     (0.09     (0.21     0.30        (0.33
   

Net income (loss) per common share - diluted

         

Net income (loss) (millions of Canadian dollars)

     (77     (181     256        (282

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

     847.0       847.6       847.3        847.6  

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

     2.9       3.0       2.8        2.9  
   

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

     849.9       850.6       850.1        850.5  

Net income (loss) per common share (dollars)

     (0.09     (0.21     0.30        (0.33
   

 

9. Earnings reinvested

 

     Second Quarter     Six Months
to June 30
 

millions of Canadian dollars

     2017       2016       2017       2016  
   

Earnings reinvested at beginning of period

     25,558       23,467       25,352       23,687  

Net income (loss) for the period

     (77     (181     256       (282

Share purchases in excess of stated value

     (121     -       (121     -  

Dividends declared

     (136     (127     (263     (246

Earnings reinvested at end of period

     25,224       23,160       25,224       23,160  
   

 

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10. Other comprehensive income (loss) information

 

Changes in accumulated other comprehensive income (loss):              
millions of Canadian dollars    2017        2016    

 

 

Balance at January 1

     (1,897)         (1,828)   

Post-retirement benefits liability adjustment:

     

Current period change excluding amounts reclassified from accumulated other comprehensive income

     41          100    

Amounts reclassified from accumulated other comprehensive income

     72          74    

 

 

Balance at June 30

     (1,784)         (1,654)   

 

 

 

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

 

     Second Quarter     Six Months
to June 30
 
millions of Canadian dollars    2017     2016     2017     2016  
   

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

     (49     (48     (98     (94
   

(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):

 

     Second Quarter      Six Months
to June 30
 
millions of Canadian dollars    2017      2016      2017      2016  
   

Post-retirement benefits liability adjustments:

           

Post-retirement benefits liability adjustment (excluding amortization)

     -        -        16        37  

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

     13        15        26        20  
   

Total

     13        15        42        57  
   

 

11. 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 is required to be adopted beginning January 1, 2018. The company expects to adopt the standard using the modified retrospective method, under which prior years’ results are not restated, but supplemental information on the impact of the new standard is provided for in the 2018 results. Imperial continues to evaluate other areas of the standard. The impact from the standard is not expected to have a material 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 a lease 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 and plans to adopt it in 2019.

In March 2017, the FASB issued an Accounting Standards Update, 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The update requires the service cost component of net benefit costs to be reported in the same line in the income statement as other compensation costs and the other components of net benefit costs to be presented separately from the service cost component. Additionally, only the service cost component of net benefit costs will be eligible for capitalization. The update is required to be adopted beginning January 1, 2018. 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 2017 vs. second quarter 2016

The company’s net loss for the second quarter of 2017 was $77 million or $0.09 per-share on a diluted basis, compared to the net loss of $181 million or $0.21 per-share for the same period last year.

Upstream recorded a net loss in the second quarter of $201 million, compared to a net loss of $290 million in the same period of 2016. Results in the second quarter of 2017 reflected the impact of higher Canadian crude oil realizations of about $140 million and favorable foreign exchange impacts, partially offset by higher energy costs of about $50 million and higher operating costs of about $50 million, primarily at Syncrude.

West Texas Intermediate (WTI) averaged US$48.20 per barrel in the second quarter of 2017, up from US$45.64 per barrel in the same quarter of 2016. Western Canada Select (WCS) averaged US$37.18 per barrel and US$32.36 per barrel respectively for the same periods. The WTI / WCS differential narrowed to 23 percent in the second quarter of 2017, from 29 percent in the same period of 2016.

The Canadian dollar averaged US$0.74 in the second quarter of 2017, a decrease of US$0.04 from the second quarter of 2016.

Imperial’s average Canadian dollar realizations for bitumen and synthetic crudes increased generally in line with the North American benchmarks, adjusted for changes in exchange rates and transportation costs. Bitumen realizations averaged $38.22 per barrel for the second quarter of 2017, an increase of $8.77 per barrel versus the second quarter of 2016. Synthetic crude realizations averaged $65.07 per barrel, an increase of $6.49 per barrel for the same period of 2016.

Gross production of Cold Lake bitumen averaged 160,000 barrels per day in the second quarter, compared to 163,000 barrels per day in the same period last year.

Gross production of Kearl bitumen averaged 171,000 barrels per day in the second quarter (121,000 barrels Imperial’s share) up from 155,000 barrels per day (110,000 barrels Imperial’s share) during the second quarter of 2016. Higher production was mainly due to the absence of the Alberta wildfires. In the second quarter of 2017, Kearl production was impacted by planned turnaround activities of about 38,000 barrels per day (27,000 barrels Imperial’s share).

The company’s share of gross production from Syncrude averaged 27,000 barrels per day, up from 18,000 barrels per day in the second quarter of 2016. Syncrude second quarter 2017 production was impacted by the fire at the Syncrude Mildred Lake upgrader that occurred in mid-March and by planned maintenance. Higher production was the result of the absence of the Alberta wildfires and lower planned maintenance compared with the same period of 2016.

Downstream net income was $78 million in the second quarter, up from $71 million in the same period of 2016. Earnings increased mainly due to reduced planned turnaround activity of about $130 million and lower marketing expenses, partly offset by lower marketing margins of about $80 million, including the impact of the retail divestment and lower industry margins, as well as lower refining margins of about $70 million, mainly due to crude supply disruption associated with the Syncrude fire at its Mildred Lake upgrader in March.

Refinery throughput averaged 358,000 barrels per day, up from 246,000 barrels per day in the second quarter of 2016. Increased throughput reflects reduced turnaround activity in the second quarter 2017, compared to the same period of 2016.

Petroleum product sales were 486,000 barrels per day, up from 470,000 barrels per day in the second quarter of 2016. Sales growth continues to be driven by strong collaboration across our downstream value chain and the expansion of Imperial’s retail, wholesale, industrial and commercial networks.

 

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Chemical net income was $64 million in the second quarter, up from $55 million in the same quarter of 2016.

Net income effects from Corporate and Other were negative $18 million in the second quarter, compared to negative $17 million in the same period of 2016.

 

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Six months 2017 vs. six months 2016

Net income in the first six months of 2017 was $256 million, or $0.30 per-share on a diluted basis versus a net loss of $282 million or $0.33 per-share in the first six months of 2016.

Upstream recorded a net loss of $287 million in the first six months of 2017, compared to a net loss of $738 million from the same period of 2016. Results reflected the impact of higher Canadian crude oil realizations of about $740 million, partially offset by higher royalties of about $100 million and energy costs of about $80 million, higher operating expenses at Syncrude of about $70 million and lower volumes of about $70 million, including the absence of production at Norman Wells.

West Texas Intermediate averaged US$49.96 per barrel in the first six months of 2017, up from US$39.78 per barrel in the same period of 2016. Western Canada Select averaged US$37.22 per barrel and US$25.88 per barrel respectively for the same periods. The WTI / WCS differential narrowed to 26 percent in the first six months of 2017, from 35 percent in the same period of 2016.

The Canadian dollar averaged US$0.75 in the first six months of 2017, essentially unchanged from the same period of 2016.

Imperial’s average Canadian dollar realizations for bitumen and synthetic crudes increased generally in line with the North American benchmarks, adjusted for changes in the exchange rate and transportation costs. Bitumen realizations averaged $37.21 per barrel for the first six months of 2017, an increase of $16.45 per barrel versus the same period of 2016. Synthetic crude realizations averaged $67.00 per barrel, an increase of $18.41 per barrel from the same period of 2016.

Gross production of Cold Lake bitumen averaged 159,000 barrels per day in the first six months of 2017, compared to 164,000 barrels per day from the same period of 2016. Lower volumes were primarily due to the timing of steam cycles.

Gross production of Kearl bitumen averaged 177,000 barrels per day in the first six months of 2017 (125,000 barrels Imperial’s share) up from 175,000 barrels per day (124,000 barrels Imperial’s share) from the same period of 2016.

During the first six months of 2017, the company’s share of gross production from Syncrude averaged 46,000 barrels per day, compared to 49,000 barrels per day from the same period of 2016. Syncrude year to date production was impacted by the March 2017 fire at the Syncrude Mildred Lake upgrader and planned maintenance. In 2016, production was impacted by the Alberta wildfires and planned maintenance.

Downstream net income was $458 million, up from $391 million from the same period of 2016. Earnings increased mainly due to a gain of $151 million from the sale of a surplus property and reduced planned turnaround activity of about $130 million. This was partially offset by lower marketing margins of approximately $140 million, including the impact of the retail divestment and lower industry margins, as well as lower refining margins of about $50 million, partly due to crude supply disruption associated with the fire at Syncrude’s Mildred Lake upgrader in March.

Refinery throughput averaged 378,000 barrels per day in the first six months of 2017, up from 323,000 barrels per day from the same period of 2016. Capacity utilization increased to 90 percent from 77 percent in the same period of 2016, reflecting reduced turnaround activity.

Petroleum product sales were 486,000 barrels per day in the first six months of 2017, up from 469,000 barrels per day from the same period of 2016. Sales growth continues to be driven by strong collaboration across our downstream value chain and the expansion of Imperial’s retail, wholesale, industrial and commercial networks.

Chemical net income was $109 million, up from $104 million from the same period of 2016.

For the first six months of 2017, net income effects from Corporate and Other were negative $24 million, versus negative $39 million from the same period of 2016.

 

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Liquidity and capital resources

Cash flow generated from operating activities was $492 million in the second quarter, compared with $443 million in the corresponding period in 2016.

Investing activities used net cash of $281 million in the second quarter, compared with $297 million used in the same period of 2016.

Cash used in financing activities was $260 million in the second quarter, compared with $106 million in the second quarter of 2016. Dividends paid in the second quarter of 2017 were $127 million. The per-share dividend paid in the second quarter was $0.15, up from $0.14 in the same period of 2016. In the second quarter of 2017, Imperial resumed share purchases under its share buyback program. The company purchased about 3.3 million shares for approximately $127 million.

The company’s cash balance was $623 million at June 30, 2017, versus $195 million at the end of the second quarter of 2016.

Cash flow generated from operating activities was $846 million in the first six months of 2017, compared with $492 million in 2016, reflecting higher earnings partially offset by unfavourable working capital effects.

Investing activities used net cash of $220 million in the first six months of 2017, compared with $655 million from the same period of 2016, reflecting lower additions to property, plant and equipment, and higher proceeds from asset sales.

Cash used in financing activities was $394 million in the first six months of 2017, compared with cash provided by financing activities of $155 million from the same period of 2016, reflecting the absence of debt issuance in the current year. Dividends paid in the first six months of 2017 were $254 million. The per-share dividend paid in the first six months of 2017 was $0.30, up from $0.28 for the same period of 2016. In 2017, the company resumed share purchases under its share buyback program. The company purchased about 3.3 million shares for approximately $127 million.

On June 22, 2017, 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 buyback program. The program enables the company to purchase up to a maximum of 25,395,927 common shares during the period June 27, 2017 to June 26, 2018, 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 program will end should the company purchase the maximum allowable number of shares, or on June 26, 2018.

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 is required to be adopted beginning January 1, 2018. The company expects to adopt the standard using the modified retrospective method, under which prior years’ results are not restated, but supplemental information on the impact of the new standard is provided for in the 2018 results. Imperial continues to evaluate other areas of the standard. The impact from the standard is not expected to have a material 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 a lease 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 and plans to adopt it in 2019.

 

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In March 2017, the FASB issued an Accounting Standards Update, 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The update requires the service cost component of net benefit costs to be reported in the same line in the income statement as other compensation costs and the other components of net benefit costs to be presented separately from the service cost component. Additionally, only the service cost component of net benefit costs will be eligible for capitalization. The update is required to be adopted beginning January 1, 2018. Imperial is evaluating the standard and its effect on the company’s financial statements.

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 six months ended June 30, 2017, 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, 2016.

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, 2017. 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 May 31, 2017, Imperial was charged by the Ontario Crown in the Ontario Court of Justice with committing the offence of discharging or causing or permitting the discharge of a contaminant, namely coker stabilizer thermocracked gas and coker stabilizer thermocracked gas condensate, from Imperial’s refinery 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 June 11, 2015. No determination of impact can be made at this time.

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) (b)

April 2017

(Apr 1 – Apr 30)

   -    -    -    3,286,012 (c)

May 2017

(May 1 – May 31)

   -    -    -    3,286,012 (c)

June 2017

(June 1 – June 26) (a)

(June 27 – June 30) (b)

  

 

3,286,012

-

  

 

38.56

-

  

 

3,286,012

-

  

 

-

25,395,927 (d)

(a) On June 22, 2016, the company announced by news release that it had received final approval from the Toronto Stock Exchange for a normal course issuer bid and continuation of its share purchase program. This program enabled the company to purchase up to a maximum of 1,000,000 common shares during the period June 27, 2016 to June 26, 2017. The company was also permitted to purchase additional shares from Exxon Mobil Corporation concurrent with, but outside of the normal course issuer bid, to maintain its shareholding at approximately 69.6 percent. The program ended when the company purchased the maximum allowable number of shares, on June 21, 2017.
(b) On June 22, 2017, 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 25,395,927 common shares during the period June 27, 2017 to June 26, 2018, 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 program will end should the company purchase the maximum allowable number of shares, or on June 26, 2018.
(c) Includes shares that may be purchased under the normal course issuer bid, plus shares that may be purchased concurrently with, but outside the normal course issuer bid, from Exxon Mobil Corporation to maintain its shareholding at approximately 69.6 percent.
(d) In its most recent quarterly earnings release, the company stated that third quarter 2017 share purchases are anticipated to equal approximately $250 million. 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.

 

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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 1, 2017   

/s/ Beverley A. Babcock

 

  
   (Signature)   
   Beverley A. Babcock   
   Senior Vice-President, Finance and Administration and Controller   
   (Principal Accounting Officer)   
Date: August 1, 2017   

/s/ Cathryn Walker

 

  
   (Signature)   
   Cathryn Walker   
   Assistant Corporate Secretary   

 

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