EXHIBIT 99.1
------------
THIRD INTERIM REPORT FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
MESSAGE TO SHAREHOLDERS
Western Oil Sands Inc. ("Western") is pleased to present its third quarter 2004
results and to provide an operational update for the Athabasca Oil Sands Project
(the "Project" or the "AOSP"). For the third quarter of 2004 Western generated
net revenues of $104.1 million, EBITDAX of $47.8 million, net earnings of $42.4
million ($0.80 per share) and cash flow from operations of $32.5 million ($0.62
per share). This represents a significant increase over the second quarter of
2004 when Western generated net revenues of $93.3 million, EBITDAX of $35.5
million, net loss of $9.2 million ($0.17 per share) and cash flow from
operations of $19.4 million ($0.36 per share) and is the result of increased
production, decreased unit operating costs and increased realized crude sales
prices. The net earnings/loss includes the impact of unrealized foreign exchange
gains/losses on our US dollar denominated debt. During the third quarter of 2004
a $34.4 million gain ($28.7 million net of tax) was included in net earnings,
compared to a loss of $13.5 million ($11.2 million net of tax) for the second
quarter. Excluding the impact of Western's risk management activities EBITDAX
was $87.5 million and cash flow from operations was $72.2 million ($1.37 per
share) in the third quarter of 2004.
o During the third quarter of 2004, production averaged 154,300 barrels
per day (30,860 barrels per day - Western's share), an increase of
approximately nine per cent over the 142,000 barrels per day production
level in the second quarter of 2004. Stable production during the final
two months of the third quarter demonstrates the AOSP's ability to
produce at or above the stream day design rate for increasing periods
of time and to significantly improve on the availability factor.
o Unit operating costs were $17.67 per processed barrel in the third
quarter of 2004, a decrease of $2.44 per barrel over the $20.11 per
barrel reported for the second quarter of 2004. This decrease in unit
operating costs was the result of increased production in the third
quarter combined with relatively constant gross operating costs.
As announced on October 20, 2004, the AOSP has completed unscheduled maintenance
on the remaining two settlers in Train 2 of the froth treatment plant at the
Muskeg River Mine (the "Mine"). The AOSP also announced on this date that
unscheduled maintenance on one of the two residual hydro-cracker units at the
Scotford Upgrader (the "Upgrader") was to take place during the fourth quarter
of 2004. This unscheduled maintenance will impact Western's fourth quarter
production, unit operating costs and realized crude sales prices. The AOSP will
be utilizing this downtime at the Upgrader as an opportunity to accelerate
scheduled maintenance on Train 1 froth settlers at the Mine.
1
The AOSP continues to focus on growth. Over the next five years the AOSP intends
to increase production to 270,000 to 290,000 barrels per day through both
debottlenecking projects and the Muskeg River Mine Expansion (the "MRM
Expansion"). Debottlenecking projects are proposed at both the Mine and Upgrader
to increase production to between 180,000 to 200,000 barrels per day. The MRM
Expansion, to be completed over the 2006 to 2010 period, is expected to further
increase bitumen production by approximately 90,000 barrels per day at both the
Mine and Upgrader, bringing total production up to 270,000 to 290,000 barrels
per day.
Ultimately the AOSP intends to grow its production base to over 500,000 barrels
per day. These expansion opportunities include Jackpine Mine - Phase 1, which
has received both provincial and federal government cabinet approvals, and the
mining of oil sands resources on Leases 88, 89, 9 and 17. Planning for this
longer term expansion is currently focused on ways to integrate the development
of resources on Jackpine Mine - Phase 1 with operations at the current Mine and
the upgrading options to process this additional bitumen production.
Actual timing for these projects or expansions will depend on the outcome of the
regulatory process, market conditions, final project costs and approvals, and
sustainable development considerations.
On behalf of the Board of Directors Guy J. Turcotte
President and Chief
Executive Officer
October 25, 2004
2
MANAGEMENT'S DISCUSSION & ANALYSIS
THE FOLLOWING DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS WAS
PREPARED AS OF OCTOBER 25, 2004 AND SHOULD BE READ IN CONJUNCTION WITH THE
INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIODS ENDED
SEPTEMBER 30, 2004 AND 2003 AND THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS AT
DECEMBER 31, 2003 INCLUDED IN THE ANNUAL REPORT. IT OFFERS MANAGEMENT'S ANALYSIS
OF OUR FINANCIAL AND OPERATING RESULTS AND CONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS RELATING BUT NOT LIMITED TO OUR OPERATIONS, ANTICIPATED FINANCIAL
PERFORMANCE, BUSINESS PROSPECTS AND STRATEGIES. FORWARD-LOOKING INFORMATION
TYPICALLY CONTAINS STATEMENTS WITH WORDS SUCH AS "ANTICIPATE", "ESTIMATE",
"EXPECT", "POTENTIAL", "COULD", OR SIMILAR WORDS SUGGESTING FUTURE OUTCOMES. WE
CAUTION READERS TO NOT PLACE UNDUE RELIANCE ON FORWARD-LOOKING INFORMATION
BECAUSE IT IS POSSIBLE THAT PREDICTIONS, FORECASTS, PROJECTIONS AND OTHER FORMS
OF FORWARD-LOOKING INFORMATION MAY DIFFER MATERIALLY FROM ACTUAL RESULTS
ACHIEVED BY WESTERN. WESTERN DOES NOT MAINTAIN A POLICY NOR IS UNDER ANY
OBLIGATION TO UPDATE PUBLICLY OR REVISE ANY FORWARD-LOOKING INFORMATION
CONTAINED IN THE FOLLOWING DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS AS A RESULT OF NEW INFORMATION OR EVENTS.
BY ITS NATURE, OUR FORWARD-LOOKING INFORMATION INVOLVES NUMEROUS ASSUMPTIONS,
INHERENT RISKS AND UNCERTAINTIES. A CHANGE IN ANY ONE OF THESE FACTORS COULD
CAUSE ACTUAL EVENTS OR RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING INFORMATION. THESE FACTORS INCLUDE, BUT ARE NOT LIMITED TO, THE
FOLLOWING: MARKET CONDITIONS, LAW OR GOVERNMENT POLICY, OPERATING CONDITIONS AND
COSTS, PROJECT SCHEDULES, OPERATING PERFORMANCE, DEMAND FOR OIL, GAS, AND
RELATED PRODUCTS, PRICE AND EXCHANGE RATE FLUCTUATIONS, COMMERCIAL NEGOTIATIONS
OR OTHER TECHNICAL AND ECONOMIC FACTORS.
OVERVIEW
Western Oil Sands Inc. ("Western") is a Canadian oil sands corporation that
holds a 20 per cent undivided ownership interest in a multibillion dollar Joint
Venture that is exploiting the recoverable bitumen resources found in oil sands
deposits in the Athabasca region of Alberta, Canada. Shell Canada Limited and
Chevron Canada Limited hold the remaining 60 per cent and 20 per cent undivided
ownership interests, respectively, in the Joint Venture. The Athabasca Oil Sands
Project (the "AOSP" or the "Project"), which includes facilities owned by the
Joint Venture and third parties, uses established processes to mine oil sands
deposits, extract, and upgrade the bitumen into synthetic crude oil and vacuum
gas oil. Currently, apart from our interest in the Project, we have no other
material assets nor do we have any other ongoing operations. Western is,
however, actively pursuing other oil sands and related business opportunities.
3
HIGHLIGHTS
- ----------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------------------------------
2004 2003 2004 2003 (9)
- ----------------------------------------------------------------------------------------------------------------
OPERATING DATA (BBLS/D)
Bitumen Production 30,862 23,265 28,827 21,760
Synthetic Crude Sales 42,546 31,395 38,014 28,250
FINANCIAL DATA ($ THOUSANDS, EXCEPT AS INDICATED)
Net Revenue 104,105 73,016 280,064 89,171
Realized Crude Oil Sales Price ($/bbl) (1) (2) 38.63 34.14 36.58 34.32
EBITDAX(1) (3) 47,847 27,410 109,047 27,245
Cash Flow from Operations (4) 32,528 9,575 60,945 2,359
Cash Flow per Share - Basic ($/Share) (1) (5) 0.62 0.19 1.17 0.05
Net Earnings (Loss) Attributable to
Common Shareholders (6) 42,378 (1,515) 27,516 (2,615)
Net Earnings (Loss) Per Share - Basic ($/Share) 0.80 (0.03) 0.52 (0.05)
Net Capital Expenditures (7) 13,456 3,281 26,175 140,770
Long-term Liabilities (8) 705,239 913,826 705,239 913,826
Weighted Average Shares Outstanding - Basic
(Shares) 52,742,201 50,578,895 51,985,136 50,260,719
- ----------------------------------------------------------------------------------------------------------------
(1) PLEASE REFER TO PAGE 17 FOR A DISCUSSION OF NON-GAAP FINANCIAL MEASURES.
(2) THE REALIZED CRUDE OIL SALES PRICE IS THE REVENUE DERIVED FROM THE SALE OF
WESTERN'S SHARE OF THE PROJECT'S SYNTHETIC CRUDE OIL, NET OF THE RISK
MANAGEMENT ACTIVITIES, DIVIDED BY THE CORRESPONDING VOLUME. PLEASE REFER TO
PAGE 6 FOR CALCULATION.
(3) EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION, DEPLETION, AMORTIZATION,
STOCK BASED COMPENSATION, ACCRETION ON ASSET RETIREMENT OBLIGATION AND
FOREIGN EXCHANGE AS CALCULATED ON PAGE 12.
(4) CASH FLOW FROM OPERATIONS IS EXPRESSED BEFORE CHANGES IN NON-CASH WORKING
CAPITAL.
(5) CASH FLOW PER SHARE IS CALCULATED AS CASH FLOW FROM OPERATIONS DIVIDED BY
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, BASIC.
(6) WESTERN HAS NOT PAID DIVIDENDS IN ANY OF THE ABOVE REFERENCED PERIODS.
(7) NET CAPITAL EXPENDITURES ARE CAPITAL EXPENDITURES NET OF ANY INSURANCE
PROCEEDS RECEIVED DURING THE PERIOD.
(8) SEPTEMBER 30, 2003 LONG-TERM LIABILITIES HAVE BEEN RESTATED TO REFLECT THE
ADOPTION OF ASSET RETIREMENT OBLIGATION.
(9) THE NINE MONTHS ENDED SEPTEMBER 30, 2003 PRESENTED ABOVE REPRESENT
WESTERN'S OPERATIONS FROM JUNE 1, 2003, THE DATE COMMERCIAL OPERATIONS
COMMENCED.
OPERATING RESULTS
Effective June 1, 2003, the Company commenced reporting operations on a
commercial basis. The nine months ended September 30, 2003 includes only four
months of operating information, and as a result comparisons for the nine months
ended September 30 are not provided. Where appropriate, management has provided
comparisons to the second quarter of 2004.
4
PRODUCTION
During the third quarter of 2004, production from the Mine averaged 154,300
barrels per day of bitumen. This represents an increase of approximately nine
per cent or 12,300 barrels per day over production in the second quarter of
2004. The Mine is designed to produce at an average rate of 155,000 barrels per
day. This is derived from a design stream day or daily rate of 182,000 barrels
per day with an expected on-stream factor or availability rate of approximately
85 per cent. Production during the final two months of the third quarter was
well above the design rate, demonstrating the AOSP's ability to produce at or
above the stream day design rate for increasing periods of time and to
significantly improve on the availability factor. The high rate of production in
these two months offset the lower production in July, when production was
impacted by the unscheduled maintenance on one of the settlers in the froth
treatment plant.
As previously announced, the AOSP will be completing certain unscheduled
maintenance on the remaining two settlers in Train 2 of the froth treatment
plant at the Mine and on one of the two residual hydro-cracker units at the
Upgrader during the fourth quarter of 2004. This unscheduled maintenance will
impact Western's fourth quarter production, unit operating costs and realized
crude sales prices. The AOSP will be utilizing this downtime at the Upgrader as
an opportunity to accelerate scheduled maintenance on Train 1 froth settlers at
the Mine.
[GRAPHIC OMITTED]
[BAR CHART]
QUARTERLY PRODUCTION VOLUMES
(thousands of bbls/d)
Q1 2003 Q2 2003* Q3 2003 Q4 2003 Q1 2004 Q2 2004 Q3 2004
------- -------- ------- ------- ------- ------- -------
AOSP (100%) -- 85.7 116.3 130.0 135.9 142.0 154.3
Western (20%) -- 17.1 23.3 26.0 27.2 28.4 30.9
* from June 1, 2003
5
REVENUE
- --------------------------------------------------------------------------------------------------------------------------
NET REVENUE THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------------------------
($ thousands, except as indicated) 2004 2003 2004 2003
- --------------------------------------------------------------------------------------------------------------------------
REVENUE
Oil Sands (1) 151,193 98,609 380,963 118,297
Marketing 53,291 23,887 98,045 29,129
Transportation 452 -- 1,266 --
----------------------------------------------------
Total Revenue 204,936 122,496 480,274 147,426
====================================================
PURCHASED FEEDSTOCKS AND TRANSPORTATION
Oil Sands 47,339 25,212 100,966 28,811
Marketing 53,032 23,869 97,598 29,045
Transportation 460 399 1,646 399
----------------------------------------------------
Total Purchased Feedstocks and Transportation 100,831 49,480 200,210 58,255
====================================================
NET REVENUE
Oil Sands (1) 103,854 73,397 279,997 89,486
Marketing 259 18 447 84
Transportation (8) (399) (380) (399)
----------------------------------------------------
Total Net Revenue 104,105 73,016 280,064 89,171
====================================================
SYNTHETIC CRUDE SALES (BBLS/D) 42,546 31,395 38,014 28,250
----------------------------------------------------
REALIZED CRUDE OIL SALES PRICE ($/BBL) (3) 38.63 34.14 36.58 34.32
====================================================
(1) OIL SANDS REVENUE AND NET REVENUE ARE PRESENTED NET OF WESTERN'S RISK
MANAGEMENT ACTIVITIES.
(2) THE NINE MONTHS ENDED SEPTEMBER 30, 2003 PRESENTED ABOVE REPRESENT
WESTERN'S OPERATIONS FROM JUNE 1, 2003, THE DATE COMMERCIAL OPERATIONS
COMMENCED.
(3) REALIZED CRUDE OIL SALES PRICE ($/BBL) IS CALCULATED AS OIL SANDS REVENUE
DIVIDED BY TOTAL SYNTHETIC CRUDE SALES FOR THE PERIOD.
Western recorded $204.9 million in crude oil sales revenue in the third quarter
of 2004, which included $151.2 million from proprietary production, compared to
$122.5 million in revenues in the third quarter of 2003, $98.6 million of which
was from proprietary production. The increase in crude oil sales revenue in the
third quarter of 2004 from the third quarter of 2003 is a result of increased
sales volume, a higher realized selling price per barrel and increased marketing
activities.
Oil Sands sales volumes, which include both bitumen and purchased feedstocks,
averaged 42,546 barrels per day in the third quarter of 2004, a 36 per cent
increase over the same period in 2003 and a 19 per cent increase over the second
quarter of 2004. The increased sales volumes reflect increased production, both
at the Mine and Upgrader.
6
[GRAPHIC OMITTED]
[BAR CHART]
SALES PRICE REALIZATIONS
Q2,2003 Q3,2003 Q4,2003 Q1,2004 Q2,2004 Q3,2004
------- ------- ------- ------- ------- -------
($ per BBL)
Realized Crude Oil Price $ 35.26 $ 34.14 $ 31.30 $ 34.61 $ 36.07 $ 38.63
Risk Management 0.38 0.92 1.56 5.33 8.40 10.14
Differential to Edmonton PAR 6.98 6.27 7.09 6.16 6.57 7.86
------- ------- ------- ------- ------- -------
Total $ 42.62 $ 41.33 $ 39.95 $ 46.10 $ 51.04 $ 56.63
During the third quarter, West Texas Intermediate ("WTI") continued to rise to
an average price of US$43.88 per barrel for the quarter; an increase of US$5.56
per barrel from the second quarter of 2004 and an increase of US$13.67 compared
to the third quarter of 2003. Correspondingly the posted Edmonton PAR benchmark
price averaged $56.63 per barrel during the quarter, an increase of $5.59 per
barrel compared to the second quarter of 2004 and an increase of $15.30 per
barrel over the third quarter of 2003. During the third quarter the heavy oil
differential widened by approximately US$1.00 per barrel compared to the second
quarter of 2004 and approximately US$4.00 per barrel compared to the third
quarter of 2003.
Based on these overall market movements, Western's price realizations before the
consideration of risk management activities during the third quarter of 2004
compared to the same period of 2003 improved by $13.71 per barrel. This was
primarily due to the increase in Edmonton PAR offset by a slight increase or
widening in our average synthetic crude oil quality differential.
Western's differential for the third quarter of 2004 was $7.86 per barrel,
compared to $6.27 per barrel in the third quarter of 2003. This increase was the
result of the widening in the market heavy oil
7
differential, partially offset by an increased percentage of Western's sales
comprised of light synthetic oil, which commands a higher price, compared to
heavy synthetic oil.
Comparing the third quarter of 2004 to the second quarter of 2004, Western's
realized price before consideration of risk management activities improved by
$4.30 per barrel. This increase was the result of the increase to Edmonton PAR,
partially offset by a $1.29 per barrel widening in our differential
Western generated net revenue of $104.1 million in the third quarter of 2004,
after considering the impact of purchased feedstocks and transportation costs
downstream of Edmonton and risk management activities, compared to net revenue
of $73.0 million in the third quarter of 2003 and $93.3 million in the second
quarter of 2004. Feedstocks are crude products introduced at the Upgrader. Some
are introduced into the hydrocracking/hydrotreating process and some are used to
create various blends of synthetic crude oil products. The cost of these
feedstocks is dependent upon world oil markets and the spread between heavy and
light crude oil prices.
During the third quarter of 2004 risk management activities resulted in an
overall decrease to net revenues of $39.7 million or $10.14 per barrel, compared
to $2.7 million or $0.92 per barrel in the third quarter of 2003 and compared to
$27.3 million or $8.40 per barrel in the second quarter of 2004. For the nine
months ended September 30, 2004 risk management activities have resulted in an
overall decrease in revenues of $84.3 million or $8.09 per barrel. Risk
management activities are more fully discussed in the Financial Risks section of
this MD&A.
Our price realizations continue to reflect a greater discount from Edmonton PAR
than our long-term target of $1.75 to $2.75 per barrel due to wider than
anticipated heavy oil price differentials and higher than anticipated ratios of
heavy synthetic product in the overall sales mix. However, our differentials are
expected to improve as our operations stabilize, our products become more
established in the marketplace and further Upgrader optimization initiatives are
undertaken. Modifications are proposed at the Upgrader to enable the processing
of the heaviest product stream into lighter, higher value crude blend
components.
OPERATING COSTS
Western's unit cash operating costs were $17.67 per barrel for the third quarter
of 2004 compared to $19.95 per barrel for the third quarter of 2003 (restated to
conform with the presentation adopted during the second quarter of 2004), a
decrease of $2.28 per barrel. This decrease in unit operating
8
costs was mainly the result of increased bitumen production relative to the same
period a year ago. Excluding the impact of natural gas these unit cash operating
costs were $14.34 per barrel in the third quarter of 2004, a $1.85 per barrel
decrease from unit costs of $16.19 per barrel in the third quarter of 2003.
Compared to the second quarter of 2004 unit operating costs decreased $2.44 per
barrel in the third quarter of 2004. This decrease was the result of increased
bitumen production providing better coverage of fixed operating costs in the
quarter. Gross expenditures on one time start up related issues have slowed
considerably as we approach design capacity and production rates have
stabilized. Natural gas prices in the third quarter of 2004 average $6.53 per
MCF as compared to $6.74 per MCF in the second quarter of 2004, which resulted
in the decrease in the natural gas costs on a per barrel basis.
The AOSP is dedicated to achieving a continuous improvement in the operational
performance of the facilities, which will result in a corresponding decrease in
unit operating costs. This will be achieved through a combination of increased
reliability and efficiency at the Mine, growth in production through
debottlenecking as well as other growth activities and constant cost management.
- -------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------------------------------
($ thousands, except as indicated) 2004 2003 2004 2003 (1)
- -------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES FOR BITUMEN SOLD
Operating Expense - Income Statement 50,766 44,121 155,419 57,002
Operating Expense - Inventoried 875 194 (1,758) (1,080)
-------------------------------------------------------------
Total Operating Expenses For Bitumen Sold 51,641 44,315 153,661 55,922
=============================================================
SALES (BARRELS PER DAY)
Total Synthetic Crude Sales 42,546 31,395 38,014 28,250
Purchased Upgrader Blend Stocks 10,786 7,251 9,096 6,425
-------------------------------------------------------------
Synthetic Crude Sales Excluding Blend Stocks 31,760 24,144 28,918 21,825
=============================================================
OPERATING EXPENSES PER PROCESSED BARREL ($/BBL) (2) 17.67 19.95 19.39 21.00
=============================================================
(1) THE NINE MONTHS ENDED SEPTEMBER 30, 2003 PRESENTED ABOVE REPRESENT
WESTERN'S OPERATIONS FROM JUNE 1, 2003, THE DATE COMMERCIAL OPERATIONS
COMMENCED.
(2) OPERATING EXPENSES PER PROCESSED BARREL ($/BBL) IS CALCULATED AS TOTAL
OPERATING EXPENSES FOR BITUMEN SOLD DIVIDED BY SYNTHETIC CRUDE SALES
EXCLUDING BLEND STOCKS.
The above table calculates operating expenses per processed barrel on the basis
of the operating costs that are associated with the synthetic crude sales
excluding purchased blend stocks, for the relevant period. This calculation
recognizes that, intrinsic in the Project's operations, bitumen production from
the Mine receives an approximate 3 per cent uplift as a result of the
hydrotreating/hydroconversion process, which is included in synthetic crude
sales excluding blendstocks.
9
[GRAPHIC OMITTED]
[BAR CHART]
OPERATING EXPENSES PER PROCESSED BARREL
Q2,2003 Q3,2003 Q4,2003 Q1,2004 Q2,2004 Q3,2004
------- ------- ------- ------- ------- -------
($ per BBL)
Natural Gas $ 5.24 $ 3.76 $ 3.81 $ 4.47 $ 4.73 $ 3.33
Other Operating Expenses 21.05 16.19 16.60 16.23 15.38 14.34
------- ------- ------- ------- ------- -------
Total $ 26.29 $ 19.95 $ 20.41 $ 20.70 $ 20.11 $ 17.67
ROYALTIES
Royalties were $1.0 million in the third quarter, up from $0.5 million from the
third quarter of 2003. The increase in royalties is due to increases in both
production volumes and deemed bitumen royalty prices. Compared to the second
quarter of 2004 royalties increased $0.2 million in the third quarter of 2004,
again as a result of increases in both production volumes and deemed bitumen
royalty prices.
CORPORATE RESULTS
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses ("G&A") were $1.9 million for the third
quarter of 2004, compared to $1.0 million for the third quarter of 2003.
Recruitment costs, a growth in the number of head office personnel, and
increased corporate expenses all contributed to this increase. Compared to the
second quarter of 2004 G&A of $1.8 million, G&A expenses were relatively
unchanged in the third quarter of 2004.
10
INSURANCE EXPENSES
Insurance expenses were $2.6 million for the third quarter of 2004, compared to
$0.01 million in the third quarter of 2003. However, insurance expenses for the
third quarter of 2003 did not include operational insurance as coverage
commenced on November 1, 2003. Compared to the second quarter of 2004 insurance
expense increased by $0.2 million in the third quarter of 2004, reflecting the
payment of corporate insurance programs.
INTEREST EXPENSE
Interest expense totaled $14.9 million in the third quarter of 2004, down $2.0
million from the third quarter of 2003. This decrease in interest expense is a
result of the Canadian dollar strengthening against the US dollar during this
period, thereby reducing interest charges on our US denominated Notes which are
reported in Canadian dollars. Compared to the second quarter of 2004 interest
expense decreased by $1.2 million in the third quarter of 2004, reflecting the
strengthening of the Canadian dollar against the US dollar and a reduction in
the balance drawn on the Revolving Credit Facility.
DEPRECIATION, DEPLETION AND AMORTIZATION
Depreciation, depletion and amortization ("DD&A") totaled $13.1 million for the
third quarter of 2004 compared to $12.4 million in DD&A for the third quarter of
2003. The increase in DD&A a result of increased bitumen production, partially
offset by a reduction in the amortization of deferred charges, as certain of
these deferred charges became fully amortized subsequent to the third quarter of
2003.
FOREIGN EXCHANGE
During the third quarter of 2004 Western reported a foreign exchange gain of
$34.3 million (third quarter of 2003 - $2.0 million). The strengthening of the
Canadian dollar against the US dollar during this period resulted in an
unrealized foreign exchange gain of $34.4 million (2003 - $2.2 million) on the
conversion of the US denominated Senior Secured Notes into Canadian dollars. The
cumulative unrealized foreign exchange gain for the nine months ended September
30, 2004 is $12.8 million (2003 - $103.2 million, of which $94.0 million was
capitalized as part of the costs of the Oil Sands Project and $9.2 million was
recognized as an unrealized foreign exchange gain).
11
INCOME TAXES
For the three months ended September 30, 2004 Western had a future income tax
expense of $11.2 million (third quarter 2003 -$0.05 million recovery). This
future income tax expense reflects the utilization of non-capital loss
carryforwards and other tax balances, and the future income tax expense related
to the unrealized foreign exchange gain on the US denominated Senior Secured
Notes.
NET EARNINGS
During the third quarter of 2004, Western's net earnings attributable to common
shareholders was $42.4 million ($0.80 per share) compared to a net loss
attributable to common shareholders of $1.5 million ($0.03 per share) in the
third quarter of 2003. Western's net earnings/losses include the impact of
unrealized foreign exchange gains or losses on our US dollar denominated debt.
In the third quarter of 2004, there was an unrealized foreign exchange gain of
$34.4 million compared to an unrealized gain of $2.2 million in the third
quarter of 2003.
The following table provides the reconciliation between Net Earnings (Loss)
Attributable to Common Shareholders, Cash Flow from Operations (before changes
in non-cash working capital) and EBITDAX:
RECONCILIATION: NET EARNINGS (LOSS) TO EBITDAX
- ----------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------------------------------
($ thousands) 2004 2003 2004 2003 (1)
- ----------------------------------------------------------------------------------------------------------------
NET EARNINGS (LOSS) ATTRIBUTABLE TO
COMMON SHAREHOLDERS 42,378 (1,515) 27,516 (2,615)
Add (Deduct):
Depreciation, Depletion and Amortization 13,092 12,367 35,424 15,734
Accretion on Asset Retirement Obligation 124 235 374 235
Stock-based Compensation 189 78 733 170
Unrealized Foreign Exchange Gain (34,425) (2,205) (12,825) (9,180)
Future Income Tax Expense (Recovery) 11,170 (46) 9,723 (4,115)
Charge for Convertible Notes -- 661 -- 2,130
- ----------------------------------------------------------------------------------------------------------------
CASH FLOW FROM OPERATIONS, BEFORE CHANGES
IN NON-CASH WORKING CAPITAL 32,528 9,575 60,945 2,359
Add:
Interest 14,908 16,896 46,830 22,429
Realized Foreign Exchange Loss 155 164 291 146
Large Corporations Tax 256 775 981 2,311
- ----------------------------------------------------------------------------------------------------------------
EBITDAX 47,847 27,410 109,047 27,245
- ----------------------------------------------------------------------------------------------------------------
(1) THE NINE MONTHS ENDED SEPTEMBER 30, 2003 PRESENTED ABOVE REPRESENT
WESTERN'S OPERATIONS FROM JUNE 1, 2003, THE DATE COMMERCIAL OPERATIONS
COMMENCED.
EBITDAX (Earnings before Interest, Taxes, Depreciation, Depletion, Amortization,
Stock-based Compensation, Accretion on Asset Retirement Obligation and Foreign
Exchange) was $47.8 million for the three-month period ended September 30, 2004
reflecting a 74 per cent increase over the $27.4
12
million recorded for the third quarter of 2003. Excluding the impact of
Western's risk management activities EBITDAX was $87.5 million for the third
quarter of 2004, compared to $27.6 million for the third quarter of 2003, an
increase of 217 per cent. Third quarter 2004 EBITDAX increased $12.3 million or
35 per cent over second quarter EBITDAX. Excluding the impact of risk management
activities, third quarter 2004 EBITDAX improved $24.7 million or 39 per cent
compared to second quarter 2004. The improvement in EBITDAX, both from the
previous years comparative quarter and the previous quarter, are mainly the
result of increases in bitumen production, an increase in the average synthetic
crude sales price and a reduction in the unit operating costs of the Project.
Cash flow from operations before changes in non-cash working capital ("cash flow
from operations") was $32.5 million for the three-month period ended September
30, 2004 reflecting a 239 per cent increase over the $9.6 million of cash flow
from operations recorded in the third quarter of 2003. Third quarter 2004 cash
flow from operations increased $13.1 million or 68 per cent over second quarter
levels. The improvement in cash flow from operations again reflected the
increase in bitumen production, an increase in the average synthetic crude sales
price, the reduction in unit operating costs of the Project and a decrease in
interest expense.
FINANCIAL POSITION
BANK DEBT
During the third quarter of 2004 excess free cash flow allowed Western to reduce
its borrowings on its credit facilities by $42 million leaving a balance of $70
million outstanding on its long term bank credit facility as at September 30,
2004. Western intends to increase its $240 million Revolving Credit Facility by
$100 million to refinance the Senior Credit Facility that is scheduled to mature
in April 2005, either through the addition of other financial institutions or
increasing the commitments of the current syndicate participants. Once
completed, the $95.0 million outstanding balance of the Senior Credit Facility
will be reclassified to long-term debt.
CAPITAL EXPENDITURES
Western's capital expenditures totaled $32.6 million for the nine-month period
ending September 30, 2004. This included $9.7 million for debottlenecking and
AOSP project capital, $15.9 million for sustaining capital, $5.4 million for
growth and new venture investments and $1.6 million for other corporate
purposes.
13
ANALYSIS OF CASH RESOURCES
Cash balances decreased by $0.5 million over the three-month period ended
September 30, 2004 to $2.0 million. Cash inflows included: $32.5 million cash
flow from operations, $21.8 million decrease in non-cash working capital, and
$1.1 million from the exercise of employee stock options and warrants. Outflows
included: $42.0 million repayment of long-term debt, $13.5 million of capital
expenditures and $0.3 million in repayment of obligations under capital lease
and deferred charges.
The decrease in non-cash working capital during the third quarter was the result
of a $29.0 million increase in accounts payable and a $3.2 million decrease in
prepaid expenses, offset by a $9.6 million increase in accounts receivable and a
$0.8 million increase in inventory. The increase in accounts payable reflects an
additional three months of accrued interest on the US denominated debt,
increased accruals related to both Oil Sands and Marketing feedstocks costs, and
the increased accrual on risk management activities. The increase in accounts
receivable is the result of both increased sales volumes and increased commodity
prices.
INSURANCE CLAIMS
The Joint Venture achieved a satisfactory final settlement with insurers for
recovery of costs resulting from the January 2003 fire and related freezing
damage at the Mine site. However, certain insurers also involved in the Cost
Overrun and Delay Insurance dispute with Western continue to withhold insurance
proceeds payable to Western for these damages. These amounts being withheld are
approximately equal to the amounts recovered. During the third quarter we
received no insurance proceeds, and the total recovered to date under the
insurance coverage provided in our Joint Venture construction policies remained
at $16.1 million for our share.
Western and its Joint Venture partners have filed a joint arbitration notice
with the insurers in respect of the $500 million delay in start-up claim related
to the fire at the Muskeg River Mine on January 6, 2003. This arbitration notice
has been filed in an attempt to expedite collection of insurance proceeds on
this claim. In addition, arbitration proceedings have commenced for Western's
limits claim on its $200 million Cost Overrun and Delay Insurance policy. The
arbitration panel has established a schedule for the arbitration hearings to
commence in May or June of 2005. Following these arbitration hearings we would
expect to receive a binding decision from the panel with respect to our claims.
14
FINANCIAL RISKS
The objective of Western's hedging program is to mitigate exposure to the
volatility of crude oil prices, thereby stabilizing current and future cash flow
from the sale of our synthetic crude products, protecting the base capital
program and ensuring the funding of debt obligations. To this end, Western has
entered into the following contracts, summarized below as at September 30, 2004:
HEDGING SUMMARY
- -------------------------------------------------------------------------------------------------------------------
Instrument Notional Volume Hedge Period Swap Price Unrealized Decrease
(bbls/d) (US$/bbl) to Future Revenue
(Cdn $ Thousands)
- -------------------------------------------------------------------------------------------------------------------
WTI Swaps 20,000 October 1 to December 31, 2004 US$27.14 $ (50,407)
WTI Swaps 16,000 January 1, 2005 to March 31, 2005 US$26.17 (37,420)
WTI Swaps 7,000 April 1, 2005 to December 31, US$26.87 (39,460)
2005
- -------------------------------------------------------------------------------------------------------------------
$ (127,287)
===================================================================================================================
The strengthening in the price of crude oil since this program was initiated
resulted in Western not participating in Edmonton PAR increases to the extent of
our hedged volumes. The impact of this program on Western's revenue is described
in the following table:
Three months ended Nine months ended
September 30, September 30,
- -------------------------------------------------------------------------------------------------------------------
(Unaudited) 2004 2003 2004 2003
- -------------------------------------------------------------------------------------------------------------------
Decrease in Revenue - $ thousands 39,682 2,657 84,305 2,866
Decrease in Revenue - $/bbl 10.14 0.92 8.09 0.83
===================================================================================================================
OUTLOOK
OPERATING
As discussed, production in the fourth quarter of 2004 will be affected by
unscheduled maintenance to the froth settlers in Train 2 of the froth treatment
plant at the Mine as well as unscheduled maintenance on one of the residual
hydro-cracker units at the Upgrader. The AOSP will be utilizing this downtime at
the Upgrader as an opportunity to accelerate scheduled maintenance on Train 1
froth settlers at the Mine. Western plans to provide more concrete guidance for
fiscal 2005 once certain internal procedures and analyses are concluded.
15
EXPANSIONS
Over the next three years, a number of debottlenecking projects are proposed at
the Mine and the Scotford Upgrader (the "Upgrader") to increase the bitumen
production rate between 180,000 and 200,000 barrels per day. Modifications are
also proposed at the Upgrader to enable the processing of the heaviest product
stream into lighter, higher value crude blend components.
Over the 2006 to 2010 period, planned expansions at the Mine and the Upgrader
are expected to further increase bitumen throughputs by approximately 90,000
barrels per day, taking total expected AOSP production to between 270,000 and
290,000 barrels per day. Expansion of the Muskeg River Mine would include mining
plans and additional mining equipment to recover resources from additional areas
located on Lease 13 and from Lease 90, and an additional train for bitumen
extraction and froth treatment processing. Expansion of the Upgrader would
include the addition of a third hydro-conversion unit and associated utilities.
The preliminary capital cost estimate for these expansion projects is in the
range of $4.0 billion.
Additional growth projects could follow over the longer term, including the
mining of oil sands resources on the eastern part of Lease 13 and Leases 88, 89,
9 and 17 to increase total bitumen production to over 500,000 barrels per day.
Planning is currently focused on ways to integrate the development of resources
on the east side of Lease 13 (the Jackpine Mine development) with operations at
the Mine. Upgrading options to process this additional bitumen production are
also currently under review.
Actual timing for these projects will depend on the outcome of the regulatory
process, market conditions, final project costs and approvals, and sustainable
development considerations.
BUSINESS RISKS
Western is subject to a number of business risks that are typical given the
nature of Western's operations. These risks are described in Western's previous
public disclosures, including the 2003 Annual Report, which are available on the
Company's website.
16
NON-GAAP FINANCIAL MEASURES
Western includes cash flow from operations per share and earnings before
interest, taxes, depreciation, depletion and amortization, stock based
compensation, accretion on asset retirement obligation and foreign exchange
gains ("EBITDAX") as investors may use this information to better analyze our
operating performance. We also include certain per barrel information, such as
realized crude oil sales price, to provide per unit numbers that can be compared
against industry benchmarks, such as the Edmonton PAR benchmark. The additional
information should not be considered in isolation or as a substitute for
measures of operating performance prepared in accordance with Canadian Generally
Accepted Accounting Principles ("GAAP"). Non-GAAP financial measures do not have
any standardized meaning prescribed by Canadian GAAP and are therefore unlikely
to be comparable to similar measures presented by other issuers. Management
believes that, in addition to Net Earnings (Loss) per Share and Net Earnings
(Loss) Attributable to Common Shareholders (both Canadian GAAP measures), cash
flow from operations per share and EBITDAX provide a better basis for evaluating
our operating performance, as they both exclude fluctuations on the US dollar
denominated Senior Secured Notes and certain other non-cash items, such as
depreciation, depletion and amortization, and future income tax recoveries. In
addition, EBITDAX provides a useful indicator of our ability to fund our
financing costs and any future capital requirements.
17
WESTERN OIL SANDS INC.
CONSOLIDATED BALANCE SHEETS
AS AT SEPTEMBER 30, As at December 31,
($ thousands) 2004 2003
- ------------------------------------------------------------------------------------------------------------
(UNAUDITED)
ASSETS
Current Assets
Cash $ 2,018 $ 3,770
Accounts Receivable 75,445 57,994
Inventory 17,582 9,100
Prepaid Expense 1,896 7,033
- ------------------------------------------------------------------------------------------------------------
96,941 77,897
- ------------------------------------------------------------------------------------------------------------
Capital Assets (note 2) 1,349,479 1,353,317
Deferred Charges 19,018 20,903
Future Income Taxes (note 9) -- 6,307
- ------------------------------------------------------------------------------------------------------------
1,368,497 1,380,527
- ------------------------------------------------------------------------------------------------------------
$ 1,465,438 $ 1,458,424
============================================================================================================
LIABILITIES
Current Liabilities
Accounts Payable and Accrued Liabilities $ 98,063 $ 65,949
Current Portion Long-term Debt 95,000 --
Obligations Under Capital Lease 1,340 1,340
- ------------------------------------------------------------------------------------------------------------
194,403 67,289
Long-term Liabilities
Long-term Debt (note 3) 638,755 860,580
Obligations Under Capital Lease 50,604 51,610
Other (note 4) 13,564 9,720
Future Income Taxes (note 9) 2,316 --
- ------------------------------------------------------------------------------------------------------------
705,239 921,910
- ------------------------------------------------------------------------------------------------------------
899,642 989,199
- ------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Share Capital (note 5) 544,989 476,667
Contributed Surplus 1,011 278
Retained Earnings (Deficit) 19,796 (7,720)
- ------------------------------------------------------------------------------------------------------------
565,796 469,225
- ------------------------------------------------------------------------------------------------------------
$ 1,465,438 $ 1,458,424
============================================================================================================
Commitments and Contingencies (note 10)
See accompanying Notes to the Consolidated Financial Statements
18
WESTERN OIL SANDS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(Unaudited - $ thousands, except per share amounts) 2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------------------------
REVENUES:
Revenues (note 11) $ 204,936 $ 122,496 $ 480,274 $ 147,426
Purchased Feedstocks and Transportation 100,831 49,480 200,210 58,255
- ---------------------------------------------------------------------------------------------------------------------
Net Revenue 104,105 73,016 280,064 89,171
- ---------------------------------------------------------------------------------------------------------------------
EXPENSES:
Operating 50,766 44,121 155,419 57,002
Royalties 1,019 513 2,467 651
General and Administrative 1,874 959 5,669 4,018
Insurance 2,599 13 7,462 255
Interest (note 7) 14,908 16,896 46,830 22,429
Stock-based Compensation (note 8) 189 78 733 170
Accretion on Asset Retirement Obligation 124 235 374 235
Depreciation, Depletion and Amortization 13,092 12,367 35,424 15,734
Foreign Exchange Gain (34,270) (2,041) (12,534) (9,034)
- ---------------------------------------------------------------------------------------------------------------------
50,301 73,141 241,844 91,460
- ---------------------------------------------------------------------------------------------------------------------
NET EARNINGS (LOSS) BEFORE INCOME TAXES 53,804 (125) 38,220 (2,289)
Income Tax Expense (Recovery) (note 9) 11,426 729 10,704 (1,804)
- ---------------------------------------------------------------------------------------------------------------------
NET EARNINGS (LOSS) 42,378 (854) 27,516 (485)
Charge for Convertible Notes (net of tax) -- 661 -- 2,130
- ---------------------------------------------------------------------------------------------------------------------
NET EARNINGS (LOSS) ATTRIBUTABLE TO
COMMON SHAREHOLDERS 42,378 (1,515) 27,516 (2,615)
Deficit at Beginning of Period (22,582) (23,823) (7,720) (22,723)
- ---------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS (DEFICIT) AT END OF PERIOD $ 19,796 $ (25,338) $ 19,796 $ (25,338)
=====================================================================================================================
NET EARNINGS (LOSS) PER SHARE (NOTE 6):
Basic $ 0.80 $ (0.03) $ 0.52 $ (0.05)
Diluted $ 0.79 $ (0.03) $ 0.52 $ (0.05)
=====================================================================================================================
See accompanying Notes to the Consolidated Financial Statements
19
WESTERN OIL SANDS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(Unaudited - $ thousands) 2004 2003 2004 2003
- -------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net Earnings (Loss) $ 42,378 $ (854) $ 27,516 $ (485)
Non-cash Items:
Depreciation, Depletion and Amortization 13,092 12,367 35,424 15,734
Accretion on Asset Retirement Obligation 124 235 374 235
Stock-based Compensation (note 8) 189 78 733 170
Unrealized Foreign Exchange
Gain (note 3) (34,425) (2,205) (12,825) (9,180)
Future Income Tax Expense
(Recovery) (note 9) 11,170 (46) 9,723 (4,115)
- -------------------------------------------------------------------------------------------------------------------
CASH FROM OPERATIONS 32,528 9,575 60,945 2,359
Decrease in Non-Cash Working
Capital (note 12) 18,002 7,554 12,052 19,879
- -------------------------------------------------------------------------------------------------------------------
50,530 17,129 72,997 22,238
- -------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Issue of Share Capital (note 5) 1,052 152 70,156 51,362
Share Issue Expenses (69) (18) (2,934) (2,209)
(Repayment) Issue of Long-term Debt (42,000) (14,000) (114,000) 92,000
Deferred Charges (30) (22) (56) (375)
Charge for Convertible Notes -- (1,123) -- (3,640)
Repayment of Obligations Under
Capital Lease (335) (46) (1,006) (73)
- -------------------------------------------------------------------------------------------------------------------
CASH GENERATED (41,382) (15,057) (47,840) 137,065
- -------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital Expenditures (13,456) (7,241) (32,606) (148,690)
Insurance Proceeds (note 10) -- 3,960 6,431 7,920
Decrease (Increase) in Non-Cash
Working Capital (note 12) 3,801 1,659 (734) (29,986)
- -------------------------------------------------------------------------------------------------------------------
CASH INVESTED (9,655) (1,622) (26,909) (170,756)
- -------------------------------------------------------------------------------------------------------------------
(Decrease) Increase in Cash (507) 450 (1,752) (11,453)
Cash at Beginning of Period 2,525 2,525 3,770 14,428
- -------------------------------------------------------------------------------------------------------------------
CASH AT END OF PERIOD $ 2,018 $ 2,975 $ 2,018 $ 2,975
===================================================================================================================
See accompanying Notes to the Consolidated Financial Statements
20
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 (the "Corporation"), 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, 2003. 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 Corporation's
annual report for the year ended December 31, 2003.
Effective June 1, 2003 the Corporation commenced commercial operations and
accordingly has only recorded revenues and expenses related to the Corporation's
share of operations of the Oil Sands Project since that date.
1. CHANGE IN ACCOUNTING POLICY
(a) ASSET RETIREMENT OBLIGATION
In the fourth quarter of 2003, the Corporation early-adopted the new
Canadian accounting standard for asset retirement obligations effective
for January 1, 2003. Under the new accounting policy, the Corporation
recognizes asset retirement obligations in the period in which they are
incurred if a reasonable estimate of fair value can be determined. The
liability is measured at fair value and is adjusted to its present
value in subsequent periods as accretion expense is recorded. The
associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset and the asset is depreciated
over the estimated useful life, which for the Oil Sands Project is the
life of the associated proved and probable reserves. The adoption of
this standard required that the comparative three-month period ended
September 30, 2003 be restated by $235,000 in respect to the necessary
accretion of the liability and by $43,000 (nine-month period ended
September 30, 2003 - $53,000) for additional depletion for the asset
retirement obligation.
(b) STOCK-BASED COMPENSATION
In the fourth quarter of 2003, the Corporation expensed stock options
on a prospective basis effective January 1, 2003. Prospective adoption
requires the fair value of compensation cost related to stock options
granted in 2003 be expensed in the consolidated statement of operations
over the vesting period, with a corresponding amount being recorded as
contributed surplus on the consolidated balance sheet. The adoption of
this standard required that the comparative three and nine-month
periods ending September 30, 2003 be restated by $78,000 and $170,000
respectively for stock-based compensation expense.
During the first quarter of 2004, the Board of Directors approved a
Performance Share Unit Plan, which is described in note 8. The
Corporation, under CICA 3870 "Stock-based Compensation and Other
Stock-based Payments", is required to recognize compensation expense,
and contributed surplus, related to this plan in accordance with the
fair value method. During the three and nine-month periods ending
September 30, 2004 the Corporation recognized $35,000 and $244,000
respectively in compensation expense related to this plan.
21
2. CAPITAL ASSETS
September 30, 2004 Cost Accum. DD&A* Net Book Value
- --------------------------------------------------------------------------------------------------------------------
(Unaudited)
Oil Sands Project $ 1,327,059 $ (50,917) $ 1,276,142
Oil Sands Project Assets Under Capital Lease 52,744 (2,100) 50,644
Other Assets 23,685 (992) 22,693
- --------------------------------------------------------------------------------------------------------------------
$ 1,403,488 $ (54,009) $ 1,349,479
====================================================================================================================
December 31, 2003
- --------------------------------------------------------------------------------------------------------------------
Oil Sands Project $ 1,304,460 $ (18,954) $ 1,285,506
Oil Sands Project Assets Under Capital Lease 52,744 (795) 51,949
Other Assets 16,639 (777) 15,862
- --------------------------------------------------------------------------------------------------------------------
$ 1,373,843 $ (20,526) $ 1,353,317
====================================================================================================================
* Accumulated Depreciation, Depletion and Amortization
3. LONG -TERM DEBT
September 30, 2004 December 31, 2003
- --------------------------------------------------------------------------------------------------------------------
(Unaudited)
US$450 million Senior Secured Notes $ 568,755 $ 581,580
Senior Credit Facility 95,000 91,000
Revolving Credit Facility 70,000 188,000
- --------------------------------------------------------------------------------------------------------------------
733,755 860,580
Less: Current Portion of Long-term Debt (95,000) --
- --------------------------------------------------------------------------------------------------------------------
$ 638,755 $ 860,580
=====================================================================================================================
The $100 million Senior Credit Facility, which was used to fund the first year's
debt service on the Senior Secured Notes and construction completion costs,
matures and is repayable on April 23, 2005. The Corporation, anticipating the
requirement to refinance this agreement, included a clause that would enable it
to increase the $240 million Revolving Credit Facility by $100 million to
complete this refinancing. This $100 million increase would be completed by the
addition of other financial institutions or by increasing the commitments of the
current syndicate, after receiving their consent. Under Canadian Generally
Accepted Accounting Principles the Corporation does not meet all of the required
criteria to classify the Senior Credit Facility as long-term. As such the amount
has been classified as current.
The Corporation's US dollar denominated Senior Secured Notes (the "Notes") are
translated into Canadian dollars at the period end exchange rate. The unrealized
foreign exchange gain arising on the Notes for the three and nine-month periods
ending September 30, 2004 was $34.4 million and $12.8 million respectively. For
the three month period ended September 30, 2003 the unrealized foreign exchange
gain arising on the Notes was $2.2 million. For the nine month period ended
September 30, 2003 the unrealized foreign exchange gain arising on the Notes was
$103.2 million, of which $94.0 million was capitalized as part of the costs of
the Oil Sands Project, representing the unrealized foreign exchange gain before
commercial operations commenced on June 1, 2003.
22
4. OTHER LONG -TERM LIABILITIES
September 30, 2004 December 31, 2003
- --------------------------------------------------------------------------------------------------------------------
(Unaudited)
Operating Lease Guarantee Obligation $ 6,052 $ 2,583
Asset Retirement Obligation 7,512 7,137
- --------------------------------------------------------------------------------------------------------------------
$ 13,564 $ 9,720
- --------------------------------------------------------------------------------------------------------------------
5. SHARE CAPITAL
ISSUED AND OUTSTANDING:
(Unaudited) Number of Shares Amount
- --------------------------------------------------------------------------------------------------------------------
COMMON SHARES
Balance at December 31, 2003 49,956,271 $ 464,704
Issued on Exercise of Employee Stock Options 145,100 1,460
Issued on Exercise of Class A Warrants 278,224 696
Issued for Cash 2,000,000 68,000
Share Issue Costs, Net of Tax -- (1,834)
- --------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 2004 52,379,595 533,026
====================================================================================================================
CLASS D PREFERRED SHARES, SERIES A
Balance at December 31, 2003 and September 30, 2004 666,667 11,963
- --------------------------------------------------------------------------------------------------------------------
TOTAL ISSUED SHARE CAPITAL AT SEPTEMBER 30, 2004 53,046,262 $ 544,989
=========================
OUTSTANDING:
Class A Warrants 216,000
Stock Options 1,242,146
- -------------------------------------------------------------------------------------------
DILUTED SHARES AT SEPTEMBER 30, 2004 54,504,408
===========================================================================================
On April 8, 2004, the Corporation completed a public offering for the issuance
of 2,000,000 Common Shares for total proceeds of $68.0 million, before
consideration of the share issue costs of $2.9 million ($1.8 million net of
tax). The offering was underwritten by a syndicate of Canadian underwriters and
undertaken through the filing of a short form prospectus. Net proceeds from the
issue will be used for general corporate purposes and for expansion
opportunities. In addition, Western will consider the acquisition of additional
oil sands leases in the Athabasca oil sands area. Western applied a portion of
the net proceeds to temporarily reduce its indebtedness.
At December 31, 2003, the Corporation had 494,224 Class A Warrants outstanding.
Each Class A Warrant entitled the holder to purchase one Common Share at $2.50
per share until five years after start-up of the Oil Sands Project. During the
three months ended September 30, 2004, 278,224 Class A Warrants were exercised
for total proceeds of $0.7 million. At September 30, 2004, 216,000 Class A
Warrants remained outstanding. Subsequently, on October 4, 2004, the remainder
of the Class A Warrants were exercised for total proceeds of $0.5 million.
23
6. NET EARNINGS (LOSS) PER SHARE
The basic weighted average number of shares for the three and nine-month periods
ended September 30, 2004 are 52,742,201 and 51,985,136 respectively (September
30, 2003 - 50,578,895 and 50,260,719 respectively). The diluted weighted average
number of shares for the three and nine month periods ended September 30, 2004
are 53,754,773 and 53,012,609 respectively. Due to a loss for the three and nine
month periods ended September 30, 2003, zero incremental shares are included for
the diluted earnings per share weighted average number because the effect would
be anti-dilutive.
7. INTEREST EXPENSE
Three months ended Nine months ended
September 30, September 30,
(Unaudited) 2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------------------
Interest on Long-term Debt $ 14,415 $ 16,015 $ 45,381 $ 45,045
Capitalized Interest in Oil Sands Project -- -- -- (23,497)
- ------------------------------------------------------------------------------------------------------------------
Interest Expense, Net 14,415 16,015 45,381 21,548
Interest on Obligations Under Capital Lease 493 881 1,449 881
- ------------------------------------------------------------------------------------------------------------------
$ 14,908 $ 16,896 $ 46,830 $ 22,429
==================================================================================================================
It is the Corporation's policy to capitalize carrying costs including interest
expense for capital assets acquired, constructed or developed over time up until
the point in time when the assets are substantially complete and after
commercial production has begun. As the Corporation commenced reporting
commercial operations on June 1, 2003, interest is no longer being capitalized.
At June 1, 2003 a total of $87.1 million of net interest expense had been
capitalized as part of the Oil Sands Project.
Cash interest paid for the three and nine-month periods ending September 30,
2004 was $2.6 million and $33.8 million respectively (September 30, 2003 - $2.7
million and $33.5 million respectively). Cash interest received for the three
and nine-month periods ending September 30, 2004 was nil and $0.1 million
(September 30, 2003 - nil and $0.1 million).
8. STOCK-BASED COMPENSATION
In February 2004 the Board of Directors approved a Performance Share Unit Plan
("PSUP"). Awards under PSUP will be in the form of units ("Unit Awards"), with
each unit entitling the holder to receive one Common Share of the Corporation
for no additional consideration and subject to certain restrictions. Each Unit
Award will vest at a rate of one third of the units awarded thereunder annually
over a three-year period, conditional on the Corporation achieving an acceptable
total shareholder return against a peer group. If total shareholder return at a
particular vesting date is in the bottom 25 per cent of the peer group, none of
the units otherwise eligible to vest with respect to such Unit Award will vest.
If total shareholder return at a particular vesting date is in the top 25 per
cent of the peer group, 150 percent of the units eligible to vest on such date
will vest. If total shareholder return at a particular vesting date is in the
middle 50 per cent of the peer group, all of the units eligible to vest on such
date will vest. During the three and nine-month periods ended September 30, 2004
$35,000 and $244,000 respectively has been recognized as compensation expense
for the 38,679 Unit Awards granted, based upon the Corporation's middle 50 per
cent performance relative to its peer group.
24
Under the Corporation's stock-based compensation plan 10,000 options were
granted during the three-month period ended September 30, 2004 at an average
exercise price of $35.20. The fair values of all options granted during the
period are estimated as at the grant date using the Black-Scholes option-pricing
model. The weighted-average fair values of the options and the assumptions used
in their determination are as follows:
- --------------------------------------------------------------------------------
Three Months Ended September 30, 2004
- --------------------------------------------------------------------------------
(Unaudited)
Weighted-average Fair Value $ 13.61
Risk Free Interest Rate 4.48%
Expected Life (in years) 6.00
Expected Volatility 0.30
Dividend Per Share $ --
================================================================================
During 2003, the Corporation adopted CICA 3870 "Stock-based Compensation and
Other Stock-based Payments" which results in the recognition of compensation
expense for any options granted on or after January 1, 2003 under the fair value
method. Accordingly, for the three and nine-month periods ended September 30,
2004, $154,000 and $489,000 respectively have been recognized (September 30,
2003 - $78,000 and $170,000 respectively) in compensation expense by the
Corporation in accordance with the options granted since that date. Under CICA
3870 no compensation expense is required to be recognized for stock options
granted before January 1, 2003. Had compensation expense been determined based
on the fair value method for awards made on or after January 1, 2002 but before
January 1, 2003, the Corporation's net earnings (loss) and net earnings (loss)
per share would have been adjusted to the proforma amounts indicated below:
Three months ended Nine months ended
September 30, September 30,
- --------------------------------------------------------------------------------------------------------------------
(Unaudited) 2004 2003 2004 2003
- --------------------------------------------------------------------------------------------------------------------
Compensation Expense $ 220 $ 223 $ 669 $ 672
Net Earnings (Loss) Attributable to
Common Shareholders - as Reported 42,378 (1,515) 27,516 (2,615)
- --------------------------------------------------------------------------------------------------------------------
Net Earnings (Loss) Attributable to
Common Shareholders - Proforma $ 42,158 $ (1,738) $ 26,847 $ (3,287)
====================================================================================================================
Basic Net Earnings (Loss) per share:
- as Reported $ 0.80 $ (0.03) $ 0.52 $ (0.05)
====================================================================================================================
- Proforma $ 0.80 $ (0.03) $ 0.52 $ (0.07)
====================================================================================================================
Diluted Net Earnings (Loss) per share:
- as Reported $ 0.79 $ (0.03) $ 0.52 $ (0.05)
====================================================================================================================
- Proforma $ 0.79 $ (0.03) $ 0.51 $ (0.07)
====================================================================================================================
25
9. INCOME TAX
Three months ended Nine months ended
September 30, September 30,
(Unaudited) 2004 2003 2004 2003
- --------------------------------------------------------------------------------------------------------------------
Large Corporations Tax $ 256 $ 775 $ 981 $ 2,311
Future Income Tax 11,170 (46) 9,723 (4,115)
- --------------------------------------------------------------------------------------------------------------------
Income Tax (Recovery) Expense $ 11,426 $ 729 $ 10,704 $ (1,804)
- --------------------------------------------------------------------------------------------------------------------
The future income tax asset (liability) consists of:
September 30, 2004 December 31, 2003
- --------------------------------------------------------------------------------------------------------------------
(Unaudited)
Future Income Tax Assets:
Net Losses Carried Forward $ 47,829 $ 49,682
Share Issue Costs 1,823 1,723
Future Income Tax Liabilities:
Capital Assets in Excess of Tax Values (42,090) (38,860)
Unrealized Foreign Exchange Gain (8,038) (6,209)
Debt Issue Costs (1,840) (29)
- --------------------------------------------------------------------------------------------------------------------
NET FUTURE INCOME TAX (LIABILITY) ASSET $ (2,316) $ 6,307
====================================================================================================================
The following table reconciles income taxes calculated at the Canadian statutory
rate of 38.87% (2003 - 41.12%) with actual income taxes:
Three months ended Nine months ended
September 30, September 30,
- --------------------------------------------------------------------------------------------------------------------
(Unaudited) 2004 2003 2004 2003
- --------------------------------------------------------------------------------------------------------------------
Earnings (Loss) Before Income Taxes $ 53,804 $ (125) $ 38,220 $ (2,289)
- --------------------------------------------------------------------------------------------------------------------
Income Tax Expense (Recovery) at
Statutory Rate 20,914 (51) 14,856 (941)
Effect of Tax Rate Changes 1,016 692 323 137
Non-taxable Portion of
Foreign Exchange Loss (Gain) (7,530) (486) (2,765) (2,128)
Impact of Resource Allowance (3,230) (347) (7,234) (1,371)
Provision to Actual -- -- 4,764 --
Other -- 146 (221) 188
Large Corporations Tax 256 775 981 2,311
- --------------------------------------------------------------------------------------------------------------------
INCOME TAX EXPENSE (RECOVERY) $ 11,426 $ 729 $ 10,704 $ (1,804)
====================================================================================================================
26
10. COMMITMENTS AND CONTINGENCIES
During the nine months ended September 30, 2004 the Corporation received $6.4
million in respect of the insurance coverage provided in our Joint Venture
construction policies for the fire that occurred in January 2003 at the Muskeg
River Mine Extraction Plant. The Corporation has received a total of $16.1
million for these property damages as of September 30, 2004. No further amounts,
other than those collected at September 30, 2004, have been recognized in these
statements relating to this insurance policy or the Corporation's other
insurance policies, nor will an amount be recognized until the proceeds are
received.
11. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Corporation has entered into various commodity-pricing agreements designed
to mitigate the exposure to the volatility of crude oil prices in US dollars.
The agreements are summarized as follows at September 30, 2004:
- --------------------------------------------------------------------------------------------------------------------
Instrument Notional Volume Hedge Period Swap Price Unrealized Decrease
(bbls/d) (US$/bbl) to Future Revenue
(Cdn $'s)
- --------------------------------------------------------------------------------------------------------------------
WTI Swaps 20,000 October 1 to December 31, 2004 US$27.14 $ (50,407)
WTI Swaps 16,000 January 1, 2005 to March 31, 2005 US$26.17 (37,420)
WTI Swaps 7,000 April 1, 2005 to December 31, 2005 US$26.87 (39,460)
- --------------------------------------------------------------------------------------------------------------------
$ (127,287)
====================================================================================================================
The Corporation, in accordance with its accounting policy for derivative
financial instruments, includes any settlement of these risk management
activities in revenue. The following summarizes the impact of these risk
management activities:
Three months ended Nine months ended
September 30, September 30,
- ------------------------------------------------------------------------------------------------------------------
(Unaudited) 2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------------------
Decrease to Revenue $ 39,682 $ 2,657 $ 84,305 $ 2,866
- ------------------------------------------------------------------------------------------------------------------
27
12. CHANGES IN NON-CASH WORKING CAPITAL
Three months ended Nine months ended
September 30, September 30,
- ------------------------------------------------------------------------------------------------------------------
(Unaudited) 2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------------------
Source (Use):
Operating Activities
Accounts Receivable $ (9,624) $ (7,443) $ (18,065) $ (37,613)
Inventory (770) 501 (8,482) (7,906)
Prepaid Expense 3,212 -- 5,137 --
Accounts Payable and Accrued Liabilities
25,184 14,496 33,462 65,398
- ------------------------------------------------------------------------------------------------------------------
$ 18,002 $ 7,554 $ 12,052 $ 19,879
- ------------------------------------------------------------------------------------------------------------------
Investing Activities
Accounts Receivable $ -- $ 1,240 $ 614 $ 2,553
Accounts Payable and Accrued Liabilities
3,801 419 (1,348) (32,539)
- ------------------------------------------------------------------------------------------------------------------
$ 3,801 $ 1,659 $ (734) $ (29,986)
==================================================================================================================
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