EXHIBIT 99.1
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MESSAGE TO SHAREHOLDERS
Western Oil Sands Inc. is pleased to present its third quarter results and to
provide an update on the construction progress of the Athabasca Oil Sands
Project ("AOSP"). Western's share of capital spending in the quarter totaled
$145.3 million. Western incurred a loss in the quarter of $1.8 million ($0.04
per share) being comprised entirely of corporate expenses. Consistent with prior
periods, Western does not and will not have any operating revenues until
production of synthetic crude begins in early 2003.
Construction of the AOSP is now well over 95 per cent complete. During the
quarter construction activities were focused on the froth cleaning circuit at
the Muskeg River Mine and the primary processing unit at the Scotford Upgrader.
Construction on these units nears completion as heat-treating and insulating
activities progress. All other units have been turned over to operations for
commissioning and startup. A major effort is underway to de-mobilize the
construction work force as construction activities wind down. The cost estimate
for Western's share of the AOSP remains at $1.087 billion (this includes the
Muskeg River Mine and the Scotford Upgrader).
Commissioning and start-up activities are progressing well and are a key step in
preparations towards the commencement of operations. During the third quarter,
the AOSP achieved a number of critical milestones. At the Muskeg River Mine the
facilities were handed over to operations and first ore was mined and processed
through the primary extraction facilities, producing bitumen froth. Another
milestone achieved in the third quarter was the delivery of the first mining
truck and hydroelectric shovel that will be used in the mining operations. The
AOSP will ultimately have a mining fleet consisting of 23 400-ton mining trucks
and five hydroelectric shovels. At the Upgrader the Sulfur Recovery and Hydrogen
Manufacturing Units have been successfully tested. The expectation is that by
year-end the primary distillation units will be operational and commissioning of
the synthetic crude units will be well under way.
Throughout the quarter safety and environmental performance continue to be a key
measure of success for the Project. The AOSP boasts one of the best safety and
environmental records of any project of this magnitude anywhere in the world.
We look forward to bringing this construction project to a close and moving into
our operating phase, as production from our long-term, stable reserve base
commences. In anticipation of moving into operations, Western has initiated its
hedging program by locking in crude oil prices on approximately 15% of its first
year's production at Cdn$39.72 per barrel and approximately 10% of its
production for the twelve months starting April 2004 at Cdn$37.26 per barrel.
On behalf of the Board of Directors /s/ Guy J. Turcotte
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Guy J. Turcotte
President and Chief
Executive Officer
October 23, 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 SEPTEMBER 30, 2002 AND 2001.
OPERATIONS
Since the Project is in the development phase, Western does not have operating
revenue or expenses. During the fourth quarter it is expected that first bitumen
production will begin to fill the pipeline and storage tanks and delivery to the
Upgrader initiated, with first production of synthetic crude still expected to
start early in 2003.
During the quarter, Western incurred a loss of $1.8 million ($0.04 per share)
compared to a loss of $1.6 million ($0.04 per share) in the comparative period
last year. This loss is comprised solely of Western's corporate expenses.
Corporate expenses are higher for the third quarter of 2002 primarily due to the
addition of new employees and increased expenses in line with the growth in
Western's corporate activities.
The first purchase of diluent inventory for the AOSP occurred during the
quarter, with Western's share being $3.1 million. This diluent will be used in
the froth cleaning circuit at the Muskeg River Mine as well to transport bitumen
from the Muskeg River Mine to the Scotford Upgrader via the Corridor Pipeline
system. The diluent is re-cycled and returned to the mine for re-use and has
been accounted for as inventory.
CAPITAL EXPENDITURES
During the third quarter of 2002, Western's share of capital expenditures
totaled $145.3 million. These expenditures included $129.5 million of
construction costs for the AOSP together with direct capitalized costs of $15.0
million, and $0.8 million of expansion pre-feasibility costs and corporate
expenditures. The direct 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.
Consistent with prior periods, Western capitalized $3.4 million during the third
quarter of 2002 ($4.5 million in third quarter of 2001) relating to its share of
costs for construction of the hydrogen manufacturing unit at the Upgrader. These
costs are being financed under a long-term capital lease. To date a total of
$49.2 million of costs have been incurred and capitalized for Western's share of
the Hydrogen Manufacturing Unit.
Western has US$450 million of Senior Secured Notes. As a result of fluctuations
in the exchange rate of US to Canadian dollars from June 30, 2002 to September
30, 2002, Western recorded and capitalized an unrealized foreign exchange loss
of $30.2 million during the third quarter. The cumulative effect of exchange
rate fluctuations on these notes from issuance until September 30, 2002 is a
loss of $4.8 million, all of which has been capitalized consistent with our
policy of capitalizing exchange gains or losses during the construction period.
Construction of the Project is over 95 per cent complete with most of the
systems at both sites in the hands of operations. Intensive efforts continue to
bring production online in early 2003. The cost estimate for Western's share of
the AOSP remains at $1.087 billion (this includes the Muskeg River Mine and the
Scotford Upgrader). Western's share of construction costs on the AOSP since
inception of the Project through to the end of September 2002 total $982.8
million.
LIQUIDITY AND CAPITAL RESOURCES
In the third quarter of 2002, Western commenced draw downs on its $88 million
bridge note purchase facility, which is due October 2003. At September 30, 2002
an amount of $78 million had been drawn on this facility.
The Company maintains its $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 has not
drawn upon this facility to date.
With first production of synthetic crude expected in the first quarter of 2003,
additional funding from revenue and cash flow 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 a second 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 previous public
disclosures, which are available on the Company's website.
In October 2002, the Company entered into various commodity hedge agreements,
designed to enhance shareholder value by mitigating the exposure to the
volatility of crude oil prices. The agreements are summarized as follows:
o An amount of 4,500 barrels per day of crude oil under swap
contracts at an average WTI equivalent of Cdn$39.72 per barrel
for the period April 1, 2003 to March 31, 2004.
o An amount of 3,500 barrels per day of crude oil under swap
contracts at an average WTI equivalent of Cdn$37.26 per barrel
for the period April 1, 2004 to March 31, 2005.
This Quarterly Report contains forward-looking statements that involve risks and
uncertainties. Actual results may differ materially from those contained in such
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which reflect management's analysis only as at
the date hereof.
WESTERN OIL SANDS INC.
CONSOLIDATED BALANCE SHEETS
AS AT SEPTEMBER 30 As at December 31
2002 2001
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($ thousands) (Unaudited)
ASSETS
Current Assets
Cash $ 81,207 $ 52,973
Accounts receivable 4,200 7,228
Inventory 3,119 --
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88,526 60,201
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Capital Assets 1,194,552 761,939
Deferred Charges 26,949 32,254
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1,221,501 794,193
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$ 1,310,027 $ 854,394
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LIABILITIES
Current Liabilities
Accounts payable $ 61,005 $ 51,222
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61,005 51,222
Long-term Liabilities
Long-term debt (Note 4) 791,610 279,481
Other 49,152 88,825
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840,762 368,306
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901,767 419,528
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SHAREHOLDERS' EQUITY
Share Capital (Note 2) 448,954 447,303
Deficit (40,694) (12,437)
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408,260 438,866
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$ 1,310,027 $ 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 9 MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 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 $ 1,344 $ 1,160 $ 4,085 $ 3,265
Large Corporations Tax 428 420 1,278 845
Depreciation 49 43 135 128
Write-off of deferred financing costs -- -- 22,759 --
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NET LOSS 1,821 1,623 28,257 4,238
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Deficit at Beginning of Period 38,873 8,037 12,437 5,422
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Deficit at End of Period $40,694 $ 9,660 $40,694 $ 9,660
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Net Loss per Share - basic and diluted $ 0.04 $ 0.04 $ 0.59 $ 0.10
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See accompanying Notes to the Consolidated Financial Statements
WESTERN OIL SANDS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
3 MONTHS ENDED 9 MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
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2002 2001 2002 2001
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($ thousands, except per share amounts) (Unaudited) (Unaudited)
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net loss $ (1,821) $ (1,623) $ (28,257) $ (4,238)
Non-cash items:
Write-off of deferred financing costs -- -- 22,759 --
Depreciation 49 43 135 128
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CASH FROM OPERATIONS (1,772) (1,580) (5,363) (4,110)
Inventory (3,119) -- (3,119) --
Decrease in non-cash working capital 3,119 -- 3,119 --
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(1,772) (1,580) (5,363) (4,110)
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FINANCING ACTIVITIES
Issue of share capital 283 57,502 1,651 82,928
Increase in long-term debt, net of repayments 78,000 86,919 507,358 197,764
Debt issue and deferred charges (288) (2,151) (17,454) (9,100)
Repayment of long-term liabilities -- (541) (53,688) (1,487)
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CASH GENERATED 77,995 141,729 437,867 270,105
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INVESTING ACTIVITIES
Capital expenditures (145,348) (117,447) (413,963) (312,753)
Restricted cash -- (290) -- (331)
(Increase) decrease in non-cash working capital 12,881 (9,333) 9,693 (7,040)
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CASH INVESTED (132,467) (127,070) (404,270) (320,124)
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Increase (decrease) in Cash (56,244) 13,079 28,234 (54,129)
Cash at Beginning of Period 137,451 26,903 52,973 94,111
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Cash at End of Period $ 81,207 $ 39,982 $ 81,207 $ 39,982
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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 nine-month period ended September 30, 2002 are
48,354,038 and 48,307,315 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 190,500 1,648
Share issue costs recovery 3
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Balance at September 30, 2002 47,704,471 $ 436,991
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CLASS D PREFERRED SHARES, SERIES A
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Balance at December 31, 2001 and September 30, 2002 666,667 $ 11,963
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TOTAL ISSUED SHARE CAPITAL AT SEPTEMBER 30, 2002 48,371,138 $ 448,954
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OUTSTANDING:
Class A Warrants 494,224
Stock Options 1,348,500
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Diluted shares at September 30, 2002 50,213,862
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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 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. In addition, there are 5,629,641
call obligations outstanding, which could be exercised at the sole discretion of
the Company up to and including March 31, 2003, for equity proceeds of $48.9
million, if required.
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 Nine months ended
September 30, 2002 September 30, 2002
Net loss for the period - as reported $ 1,821 $28,257
Net loss for the period - proforma $ 2,035 $28,755
Basic Loss per share - as reported $ 0.04 $ 0.59
Basic Loss per share - proforma $ 0.04 $ 0.60
The proforma amounts exclude the effect of stock options granted prior to
January 1, 2002. There were no options granted during the three months ended
September 30, 2002. The following table sets out the assumptions used in
applying the Black-Scholes model:
Three months ended
September 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
Long-term debt consists of:
September 30, 2002
US$450 million Senior Secured Notes $ 713,610
Bridge Note Facility $ 78,000
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$ 791,610
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