EXHIBIT 99.1
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MANAGEMENT'S DISCUSSION AND ANALYSIS AND INTERIM UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED JUNE 30, 2002
MESSAGE TO SHAREHOLDERS
Western Oil Sands Inc. reports continued progress in construction of the
Athabasca Oil Sands Project ("AOSP") during the second quarter of 2002.
Western's share of capital spending in the quarter totaled $133.2 million.
Western incurred a loss in the quarter of $24.7 million ($0.51 per share) being
comprised entirely of corporate expenses and an amount of $22.8 million
representing the one-time write-off of previously deferred financing costs
relating to credit facilities replaced by the US$450 million bond offering
completed in April 2002. Consistent with prior periods, Western does not and
will not have any operating revenues until project start-up.
Construction of the AOSP is now over 90 per cent complete. Construction activity
peaked during the second quarter and is moving into its final stages.
Commissioning and start-up activities are well under way at both the Muskeg
River Mine and the Scotford Upgrader and construction workforces have started to
demobilize. The project has achieved several important milestones during recent
months while maintaining world-class safety performance. Diluent was delivered
to the mine site via the new Corridor Pipeline. At the Scotford site, the
Sulphur Recovery and Hydrogen Manufacturing Units were handed over to Operations
and the Scotford refinery modifications, which will enable the refinery to
accept feedstock from the upgrader, were successfully completed.
Despite improved availability of skilled labour, construction productivity has
remained below expectations, negatively impacting costs. AOSP costs have also
been impacted by problems with the quality of engineering work and equipment in
some areas, resulting in additional fieldwork. In spite of these difficulties,
the quality of finished construction work has been meeting expectations and
progress on the upgrader was excellent during the second quarter. The cost
estimate for Western's share of the AOSP has now been revised to $1.087 billion
(this includes the Muskeg River Mine and the Scotford Upgrader). This revised
estimate is approximately a 13 per cent increase over Western's previous
estimate of $961.6 million.
It was our stated intention to replace our existing credit facility with
long-term debt financing. In the second quarter of 2002 we completed this
process, with the placement of US$450 million senior secured 10-year notes
bearing interest at 8.375%. This financing, combined with our other sources of
financing provides all of the necessary funding to satisfy our obligations for
the estimated remaining costs to complete the Project and fulfils our objective
to establish a stable long-term debt capital base for Western. We now have
combined debt and equity resources of over $1.3 billion.
We look forward to bringing this construction project to a close later this year
and moving into our operating phase, as production of our long-term, stable
reserve base commences. We are also proceeding with the regulatory process
related to the Jackpine Mine expansion.
On behalf of the Board of Directors
/s/ Guy J. Turcotte
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Guy J. Turcotte
President and Chief
Executive Officer
July 30, 2002
MANAGEMENT'S DISCUSSION & ANALYSIS
The following discussion of financial condition and results of operations should
be read in conjunction with the Interim Unaudited Consolidated Financial
Statements for the periods ended June 30, 2002 and 2001.
OPERATIONS
Since the Project is in the development phase, Western does not have operating
revenue or expenses. Western expects to move into its operating phase early in
2003 following Project start-up, which continues to be scheduled for the fourth
quarter of 2002.
During the quarter, Western incurred a loss of $24.7 million ($0.51 per share)
compared to a loss of $1.4 million ($0.03 per share) in the comparative period
last year. This loss is comprised of Western's corporate expenses and an amount
of $22.8 million representing the one-time write-off of deferred finance costs
related to credit facilities that were replaced by the US$450 million Senior
Secured Notes offering. Excluding the write-off, Western incurred a loss of $1.9
million ($0.04 per share) arising entirely from corporate expenses. Corporate
expenses are higher during the current year primarily due to the addition of
three new employees and increased general expenses in line with the growth in
Western's corporate activities. Federal Large Corporations Tax also increased
from $212,000 for the second quarter of 2001 to $423,000 for the second quarter
of 2002, commensurate with Western's larger capital base.
CAPITAL EXPENDITURES
During the second quarter of 2002, Western's share of capital expenditures
totaled $133.2 million. These include $134.3 million of construction activities
at the Muskeg River Mine and at the Scotford Upgrader, together with direct
capitalized costs of $18.6 million and $5.7 million related to expansion
pre-feasibility and technology development costs, less an unrealized foreign
exchange gain of $25.4 million. The unrealized foreign exchange gain arises
mainly due to a stronger Canadian dollar between the date of issue of Western's
US$450 million Senior Secured Notes and the exchange rate in effect on June 30,
2002. The capitalized costs are primarily comprised of interest accrued on the
Senior Secured Notes, bank stand-by fees and other interest expenses that are
being capitalized during the construction period.
In addition, Western capitalized $5.8 million during the quarter related to its
share of costs for construction of the Hydrogen Manufacturing Unit at the
Upgrader, which costs are being financed under a long-term capital lease.
While construction of the Project is now over 90 per cent complete, construction
productivity has remained below expectations, negatively impacting costs. AOSP
costs have also been impacted by problems with the quality of engineering work
and equipment in some areas, resulting in additional fieldwork. The cost
estimate for Western's share of the AOSP has now been revised to $1.087 billion
(this includes the Muskeg River Mine and the Scotford Upgrader). This revised
estimate is approximately a 13 per cent increase over Western's previous
estimate of $961.6 million. In spite of these difficulties, the quality of
finished construction work has been meeting expectations and progress on the
Upgrader was excellent during the second quarter. Cost and schedule pressures
will continue to receive close attention during the final stages of
construction. At the same time, maximum efforts continue in order to deliver a
successful start-up of the Project.
LIQUIDITY AND CAPITAL RESOURCES
In the second quarter of 2002, Western successfully completed the issuance of
US$450 million of Senior Secured Notes, bearing interest at 8.375%, and maturing
on May 1, 2012 (the "Offering"). The net proceeds of the Offering were used to
repay all amounts outstanding under the existing senior credit facility and
repay all amounts due to Shell Canada Limited, with the balance of the proceeds
placed in a trust account to be used for funding the Company's share of
remaining construction costs for the oil sands project. The $535 million Senior
Credit Facility was cancelled upon repayment.
In conjunction with the Offering, the Company established a new $100 million
credit facility with a Canadian chartered bank, $75 million of which will
primarily be used to fund the first year's debt service under the Offering as
well as construction completion costs; the remaining $25 million is for letter
of credit requirements. Western maintains its $88 million bridge note purchase
facility, due October 2003, with a Canadian chartered bank, though it has not
drawn upon this facility to date.
With first production of synthetic crude expected very early in 2003, additional
funding from revenue and cashflow will be generated for Project operating costs
and to fund Western's interest and corporate expenses. The above facilities,
together with available working capital, provide sufficient financial resources
for Western to continue to meet all of its financial obligations to the Project
and to fund the Project to completion.
During the quarter, Western submitted the first interim claim under its $200
million cost overrun/project delay insurance policy. No amounts have been
reflected in the financial statements in respect of this potential recovery.
This insurance policy will be an effective mitigant for cost increases on the
Project. Western believes it will be able to recover a significant portion of
the costs incurred beyond the initial project budget of $709 million (Western's
share) pursuant to the terms of the insurance policy.
BUSINESS RISKS
Western is subject to a number of risks that are typical given the nature of
Western's operations. These risks are described in the Company's 2001 Annual
Report, which is available on the Company's website.
This Quarterly Report contains forward-looking statements that involve risks and
uncertainties. Actual results may differ materially from those contained in such
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which reflect management's analysis only as at
the date hereof.
WESTERN OIL SANDS INC.
CONSOLIDATED BALANCE SHEETS
AS AT JUNE 30 As at December 31
2002 2001
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($ thousands) (Unaudited)
ASSETS
Current Assets
Cash $ 137,451 $ 52,973
Accounts receivable 4,931 7,228
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142,382 60,201
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Capital Assets 1,015,641 761,939
Deferred Charges 26,661 32,254
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1,042,302 794,193
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$ 1,184,684 $ 854,394
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LIABILITIES
Current Liabilities
Accounts payable $ 45,736 $ 51,222
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45,736 51,222
Long-term Liabilities
Long-term debt (Note 4) 683,415 279,481
Other 45,735 88,825
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729,150 368,306
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774,886 419,528
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SHAREHOLDERS' EQUITY
Share Capital (Note 2) 448,671 447,303
Deficit (38,873) (12,437)
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409,798 438,866
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$ 1,184,684 $ 854,394
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See accompanying Notes to the Consolidated Financial Statements
WESTERN OIL SANDS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
3 MONTHS ENDED 6 MONTHS ENDED
JUNE 30 JUNE 30
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2002 2001 2002 2001
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($ thousands, except per share amounts) (Unaudited) (Unaudited)
CORPORATE EXPENSES
General and administrative $1,456 $1,099 $2,741 $2,105
Large Corporations Tax 423 212 850 425
Depreciation 43 43 86 85
Write-off of deferred financing costs (Note 4c) 22,759 - 22,759 -
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NET LOSS 24,681 1,354 26,436 2,615
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Deficit at Beginning of Period 14,192 6,683 12,437 5,422
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Deficit at End of Period $38,873 $8,037 $38,873 $8,037
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Net Loss per Share - basic and diluted $0.51 $0.03 $0.55 $0.06
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See accompanying Notes to the Consolidated Financial Statements
WESTERN OIL SANDS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
3 MONTHS ENDED 6 MONTHS ENDED
JUNE 30 JUNE 30
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2002 2001 2002 2001
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($ thousands) (Unaudited) (Unaudited)
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net loss $(24,681) $ (1,354) $(26,436) $(2,615)
Non-cash items:
Write-off of deferred financing costs 22,759 - 22,759 -
Depreciation 43 43 86 85
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(1,879) (1,311) (3,591) (2,530)
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FINANCING ACTIVITIES
Issue of share capital 298 9,902 1,368 25,427
Increase in long-term debt, net of repayments 264,919 107,045 403,933 110,845
Debt issue and deferred charges (17,018) (2,007) (17,166) (6,949)
Repayment of long-term liabilities (53,688) - (53,688) -
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CASH GENERATED 194,511 114,940 334,447 129,323
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INVESTING ACTIVITIES
Capital expenditures (133,212) (117,426) (243,190) (195,307)
Restricted cash - 220 - (40)
(Increase) decrease in non-cash working capital 7,792 2,038 (3,188) 1,346
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CASH INVESTED (125,420) (115,168) (246,378) (194,001)
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Increase (decrease) in Cash 67,212 (1,539) 84,478 (67,208)
Cash at Beginning of Period 70,239 28,442 52,973 94,111
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Cash at End of Period $137,451 $26,903 $137,451 $26,903
===============================================================================================================
See accompanying Notes to the Consolidated Financial Statements
WESTERN OIL SANDS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Tabular dollar amounts in thousands)
The interim consolidated financial statements include the accounts of Western
Oil Sands Inc. and its subsidiaries, and are presented in accordance with
Canadian generally accepted accounting principles. The interim consolidated
financial statements have been prepared using the same accounting policies and
methods of computation as the consolidated financial statements for the year
ended December 31, 2001. The disclosures provided below are incremental to those
included in the annual consolidated financial statements. The interim
consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto in the Company's annual
report for the year ended December 31, 2001.
1. ACCOUNTING POLICY
a. The weighted average number of shares for the three-month
period and the six-month period ended June 30, 2002 are
48,319,259 and 48,276,969 respectively. Due to a loss for the
periods, zero incremental shares are included for the diluted
earnings per share weighted average number because the effect
would be anti-dilutive.
b. Effective January 1, 2002, the Company adopted CICA 3870
"Stock-based Compensation and Other Stock-based Payments". The
new standard is applied prospectively to all stock-based
payments to non-employees, and to employee awards that are
direct awards of stock, stock appreciation rights and similar
awards to be settled in cash. The new standard is applied to
all grants of stock options on or after January 1, 2002.
c. Certain comparative amounts have been reclassified to conform
to the current year's presentation.
2. SHARE CAPITAL
ISSUED AND OUTSTANDING:
Number of Shares Amount
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COMMON SHARES
Balance at December 31, 2001 47,513,971 $ 435,340
Issued on exercise of employee
options 158,500 1,365
Share issue costs recovery 3
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Balance at June 30, 2002 47,672,471 $ 436,708
CLASS D PREFERRED SHARES, SERIES A
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Balance at December 31, 2001 and
June 30, 2002 666,667 $ 11,963
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TOTAL ISSUED SHARE CAPITAL AT
JUNE 30, 2002 48,339,138 $ 448,671
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OUTSTANDING:
Class A Warrants 494,224
Stock Options 1,365,500
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Diluted shares at June 30, 2002 50,198,862
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The Class D Preferred Shares, Series A are entitled to vote at meetings of
shareholders and can be converted into Common Shares prior to redemption on a
one-for-one basis. The Class D Preferred
Shares, Series A are redeemable by the Company at a price equal to their issue
price plus a cumulative dividend of 12 per cent per annum compounded
semi-annually until January 1, 2007, from which date the dividend increases by 3
per cent per quarter to a maximum of 24 per cent per annum. Cash dividends are
not paid on the Class D Preferred Shares.
The Company has 5,629,641 call obligations outstanding, which could be exercised
at the sole discretion of the Company, for equity proceeds of $48.9 million, if
required. In addition, there are 494,224 Class A Warrants outstanding. Each
Class A Warrant entitles the holder to purchase one Common Share at $2.50 per
share until five years after start-up of the oil sands project.
3. STOCK-BASED COMPENSATION
No compensation expense has been recognized when stock options are granted, in
accordance with Note 1(b). Had compensation expense been determined based on the
fair value method for awards made after December 31, 2001, the Company's net
income and earnings per share would have been adjusted to the proforma amounts
indicated below:
Three months ended Six months ended
June 30, 2002 June 30, 2002
Net loss for the period - as reported $ 24,681 $26,436
Net loss for the period - proforma $ 24,889 $26,721
Basic Loss per share - as reported $ 0.51 $ 0.55
Basic Loss per share - proforma $ 0.52 $ 0.55
The proforma amounts exclude the effect of stock options granted prior to
January 1, 2002. The weighted average fair value of the 17,500 options granted
during the three months ended June 30, 2002, was $10.44 using the Black-Scholes
option pricing model. The following table sets out the assumptions used in
applying the Black-Scholes model:
Three months ended
June 30, 2002
Risk free interest rate 4.95%
Expected life (in years) 5.00
Expected volatility 0.30
Dividend per share -
4. LONG-TERM DEBT
a. On April 23, 2002, the Company issued US$450 million of Senior
Secured Notes, bearing interest at 8.375%, with a maturity of
May 1, 2012 (the "Offering"). The net proceeds of the Offering
were used to repay all amounts outstanding under the Company's
$535 million Senior Credit Facility and repay all amounts due
to Shell Canada Limited, with the balance of the proceeds
placed in a trust account to be used for funding the Company's
share of remaining construction costs for the oil sands
project. The $535 million Senior Credit Facility was cancelled
upon repayment.
b. In conjunction with the Offering, the Company established a
new $100 million credit facility with a Canadian chartered
bank, $75 million of which will be used to fund the first
year's debt service under the Offering and construction
completion costs; the remaining $25 million is for letter of
credit requirements. Borrowings under the facility bear
interest at the lenders' prime lending rate plus a margin of
100 basis points, or at the bankers' acceptance rate plus a
margin of 200 basis points. Repayment of any amounts drawn is
due by April 23, 2005.
c. It is Company policy, in accordance with GAAP, to defer and
amortize all issue costs and finance charges relating to the
Company's existing debt facilities. Upon completion of the
Offering, $22.8 million of such finance charges, representing
amounts not related to the Offering, the new $100 million
credit facility or the remaining $88 million bridge note
purchase facility, were expensed immediately.
5. SUBSEQUENT EVENT
On July 24, 2002, the Company approved a second amendment to the
original AFE for the Athabasca Oil Sands Project ("AOSP"). The amendment
increases Western's commitment to the AOSP to a total of $1.087 billion, of
which $850.7 million had been incurred to June 30, 2002.