EXHIBIT 99.1
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[LOGO - WESTERN OIL SANDS]
NEWS RELEASE - COMMUNIQUE
WESTERN OIL SANDS INC. ANNOUNCES 2004 YEAR-END RESULTS
CALGARY, AB - March 1, 2005 - Western Oil Sands Inc. is pleased to report its
annual financial results for the year ended December 31, 2004.
2004 Highlights
2004 2003 2002
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OPERATING DATA (bbls/d)
Bitumen Production 27,108 23,596 --
Synthetic Crude Sales 36,210 32,207 --
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FINANCIAL DATA ($ thousands, except as indicated)
Revenues 636,911 281,093 --
Realized Crude Oil Sales Price - Oil Sands ($/bbl) 34.60 32.81 --
Cash Flow from Operations (1) 23,044 5,803 (8,603)
Cash Flow per Share - Basic ($/Share) (1) 0.44 0.12 (0.18)
Net Earnings (Loss) Attributable to
Common Shareholders 19,452 15,003 (10,286)
Net Earnings (Loss) per Share ($/Share)
Basic 0.37 0.30 (0.21)
Diluted 0.37 0.29 (0.21)
EBITDAX (2) 87,587 47,615 (5,698)
Net Capital Expenditures 39,968 148,473 527,541
Total Assets 1,470,870 1,458,424 1,359,638
Long-Term Financial Liabilities 662,620 860,580 775,820
Weighted Average Shares Outstanding - Basic (Shares) 52,308,838 50,344,332 48,330,320
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(1) CASH FLOW PER SHARE IS CALCULATED AS CASH FLOW FROM OPERATIONS DIVIDED BY
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, BASIC. CASH FLOW FROM
OPERATIONS IS EXPRESSED BEFORE CHANGES IN NON-CASH WORKING CAPITAL.
(2) EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION, DEPLETION, AMORTIZATION,
STOCK BASED COMPENSATION, ACCRETION ON ASSET RETIREMENT OBLIGATION AND
FOREIGN EXCHANGE. 2003 HAS BEEN RESTATED TO EXCLUDE $0.3 MILLION OF STOCK
BASED COMPENSATION.
(3) THIS ADDITIONAL INFORMATION SHOULD NOT BE CONSIDERED IN ISOLATION OR AS A
SUBSTITUTE FOR MEASURES OF PERFORMANCE PREPARED IN ACCORDANCE WITH GAAP.
OIL SANDS PROJECT UPDATE
With a complete fiscal year of production in 2004, the AOSP's average production
rate equalled 135,542 barrels per day, or 87 per cent of calendar day design
rate. In doing so, several records were established including record monthly
production (182,000 barrels per day), record daily production (197,000 barrels),
and over 40 days of continuous production in excess of 155,000 barrels per day.
Fiscal 2004 was a year not without challenges, however, as we struggled with
unplanned repairs during the fouth quarter. Up to the end of the third quarter,
sequential gains in production rates along with sequential reductions in unit
costs were achieved in 2004. The unplanned outages in the fourth quarter were
systematically addressed and the education obtained from these events will be
leveraged to ensure greater reliability and sustainability of operations during
the course of fiscal 2005. Production rates in 2005 will also experience the
early benefits of a three-year staged de-bottlenecking program as well as
benefits attributed to introducing certain process aides at the Mine site.
Clearly, the Project has moved beyond the start-up phase as the Project now
turns its attention to significant expansion developments.
FINANCIAL RESULTS
REVENUE
Western earned $636.9 million (2003 - $281.1 million) in crude oil sales revenue
in 2004, including $458.5 million (2003 - $226.2 million) from proprietary
production at an average realized price of $34.60 per barrel (2003 - $32.81 per
barrel). Gross revenues include the effects of risk management activities which
reduced revenue and cash flow by $131.4 million (2003 - $8.3 million),
dramatically dropping the average realized price by $9.92 per barrel during
2004. Western generated net revenue of $321.0 million in 2004 compared to $163.5
million in 2003 or a 96 per cent increase. Net revenue subtracts the amount
recorded for purchased feedstocks and transportation costs downstream of
Edmonton. Feedstocks are crude products introduced at the Upgrader. Some are
introduced into the hydrocracking/hydrotreating process and some are used as
blendstock to create various qualities 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.
NET EARNINGS
Our net earnings attributable to common shareholders totaled $19.5 million
($0.37 per share) in 2004 compared with $15.0 million ($0.30 per share) in 2003.
Earnings for the 2004 period reflect $40.0 million ($33.5 million net of tax) of
unrealized foreign exchange gains on our US$450 million Senior Secured Notes and
a future income tax recovery of $7.1 million. Earnings before interest, taxes,
depreciation, depletion and amortization, stock-based compensation, accretion on
asset retirement obligations and foreign exchange were $87.6 million. Cash flow
from operations for 2004, before changes in non-cash working capital, was $23.0
million ($0.44 per share) which includes interest charges of $61.2 million and
hedging losses of $131.4 million compared to cash flow from operations of $5.8
million ($0.12 per share) in 2003. Western has a much lower level of volumes
hedged for 2005.
OPERATING COSTS
Our share of Project operating costs totaled $213.0 million in 2004 compared to
$106.8 million in 2003. Included in this total are the costs associated with
removing overburden at the Mine and the costs of transporting bitumen from the
Mine to the Upgrader. This equates to unit operating costs of $21.17 per
processed barrel of bitumen for 2004 based on average synthetic crude sales
excluding blend stocks of 135,490 barrels per day (27,098 barrels per day net to
Western). This compares to a unit operating cost of $20.71 (restated) per
processed barrel of bitumen for the seven-month operating period in 2003 based
on average synthetic crude sales excluding blend stocks of 120,980 barrels per
day (24,196 barrels per day net to Western). The higher per unit operating cost
compared to 2003 is largely attributable to the production interruptions we
experienced throughout the fourth quarter. Unit operating costs during the
fourth quarter equalled $28.22 per processed barrel which materially skewed our
operating costs of $19.32 per processed barrel up to the end of September.
CAPITAL EXPENDITURES
Our gross capital expenditures totaled $46.4 million in 2004 (2003 - $148.5
million) and includes $36.4 million (2003 - $122.6 million) of project related
expenditures, $3.6 million (2003 - $1.7 million) of capitalized insurance costs,
$2.6 million (2003 - $2.2 million) of diluent purchases, and $3.8 million (2003
- - $3.0 million) in other assets. Included in the project related expenditures
were $23.2 million for our share of profitability & de-bottlenecking and growth
initiatives and $13.2 million for sustaining capital for the Project. Insurance
proceeds of $6.4 million were applied against gross capital expenditures to
equal $40.0 million in net capital expenditures.
CORPORATE
FINANCING
In April 2004, Western issued 2,000,000 Class A shares ("Common Shares") at a
price of $34.00 per share for gross proceeds of $68 million (net proceeds of
approximately $65.1 million) pursuant to Western's previously announced public
offering. The Common Shares were offered to the public on a bought-deal basis
through a syndicate of Canadian underwriters. Net proceeds from the issue were
used for general corporate purposes and for expansion opportunities. Western
applied a portion of these net proceeds to temporarily reduce its indebtedness.
In 2004, we maintained our $240 million Revolving Credit Facility that was
established in October 2003 and the $100 million Senior Credit Facility to
provide long-term working capital to sustain us through operations. The $100
million Senior Credit Facility matures in April 2005 and will be refinanced
prior to the end of the first quarter. In total, at December 31, 2004, $216.0
million (2003 - $279.0 million) had been drawn under these facilities. The $100
million senior credit facility matures in April 2005 and as such has been
classified as a current liability at December 31, 2004.
HEDGING
Western maintained the hedges that were in place as at the end of 2003 and did
not execute additional hedging activity in 2004. The number of barrels subject
to fixed price contracts in the first quarter of 2005 is 14,000 barrels (16,000
barrels previously reported) at a blended price of $26.06 per barrel. Previous
disclosure of 7,000 barrels at a blended price of $26.87 per barrel for April 1,
2005, to December 31, 2005, remains unchanged. Western continues to assess its
risk management policy such that fixed cost obligations can be satisfied through
cash flow.
INSURANCE
Arbitration proceedings have been initiated to resolve the disputes with
insurers surrounding the claims for payment pursuant to our Cost Overrun and
Project Delay Insurance Policy. We have filed insurance claims for the full $200
million limit of the policy, and will also be seeking interest and other
damages. The arbitration panel has now been constituted and we anticipate
proceedings will commence in the fourth quarter of 2005. In order to preserve
Western's rights with regard to the policy, we have filed a Statement of Claim
in the Court of Queen's Bench of Alberta against such parties in an amount
exceeding $200 million. Aggravated and punitive damages totaling $650 million
have also been claimed against the insurers. The Statement of Claim will only be
served on the defendants and pursued in the courts in the event that resolution
procedures cannot otherwise be agreed to on a timely basis.
During the year, the Joint Venture also submitted claims under the insurance
coverage provided in our Joint Venture construction policies, in respect of the
fire that occurred in January 2003 at the Muskeg River Mine Extraction Plant.
The Joint Venture has extensive insurance coverage in place and is seeking to
recover from the insurers the full amount of the costs incurred for repairs. A
total of $16.1 million has been received by Western as of December 31, 2004 for
property damages. Insurers involved in the Cost Overrun and Delay Insurance
dispute with Western have withheld insurance proceeds payable to Western for
damages related to the January fire. With the exception of the amounts withheld,
these claims have now been resolved. The Joint Venture has also filed a $500
million claim ($100 million for our share) in respect of loss of profits due to
production delays from the fire.
No amounts, other than those collected at December 31, 2004, have been
recognized in these statements relating to these insurance policies nor will an
amount be recognized until the proceeds are received due to the uncertainty in
the timing of receipt of these payments.
EXPANSIONS
As announced in September 2004, expansion initiatives were outlined for the
Muskeg River Mine. Increased production levels ranging from 90,000 to 100,000
barrels per day associated with the $4 to $4.5 billion capital program ($800 to
$900 million net to Western) are anticipated to commence in 2009. Expansion
initiatives include mining plans, additional mining recovery equipment and an
additional train for bitumen extraction and froth treatment processing.
Expansion also entails the addition of a third hydro-conversion unit and
associated utilities at the Scotford Upgrader. The AOSP also received both
federal and provincial cabinet approval for Phase 1 of the Jackpine Mine which
could add 200,000 barrels per day (40,000 barrels net to Western) by 2013.
Concurrent with these plans, the Joint Venture partners are examining the
feasibility to execute multiple 90,000 to 100,000 barrel per day single train
projects, back-to-back on an accelerated basis leading to ultimate production in
the range of 500,000 to 600,000 barrels per day (100,000 to 120,000 barrels per
day net to Western) by 2014 to 2015. Estimated capital associated with this
strategy is between $15 to $17 billion on a Joint Venture basis ($3.0 billion to
$3.4 billion net to Western). Construction is expected to take place in a
continuous manner over the next 8 to 10 years. This strategy would avoid the
unnecessary costs associated with repeatedly mobilizing and demobilizing large
teams of human resources in addition to achieving economies of scale in many
areas including engineering costs, logistics, owner's costs and volume
purchasing in these very large scale projects. Western expects this concept to
evolve during 2005 together with its Joint Venture partners.
OUTLOOK
Continued focus on plant reliability and de-bottlenecking will remain a major
initiative for 2005 consistent with our objective last year. Increased
reliability will lead to production rates at or above design capacity rates for
a greater proportion of the year. Given that a large portion of our cost
structure is predominantly fixed in nature, - we anticipate unit operating costs
to improve as non-recurring challenges typically associated with a start-up of
this magnitude are systematically addressed. We continue to hold that unit
operating costs of $12-14 per barrel are attainable by the end of 2007. We
anticipate unit operating costs to range between $17 to $19 for 2005. Fiscal
2005 was originally planned to be a full plant turnaround year but the Joint
Venture accelerated certain turnaournd activities into 2004 as a result of the
unplanned downtime in the fourth quarter. Minor turnaround
activities are now planned for 2005. Our capital expenditure program in 2005 is
estimated at $110 million (2004 - $46 million), comprised of $58 million for
de-bottlenecking and profitability projects, $35 million for growth initiatives
inclusive of the Muskeg River Expansion project and $17 million for sustaining
capital. With the continued efforts towards de-bottlenecking over the next 3
years, Western anticipates production from the AOSP to total 180,000 to 200,000
barrels per day (36,000 to 40,000 barrels per day net to Western) by the end of
2007. Excess free cash flow will be applied to reduce our credit facilities. As
previously announced, for 2005 we are forecasting cash flow from operations of
$3.00 per share (basic) with EBITDAX of $4.19 per share (basic). We have assumed
a WTI price of US$40 combined with a gas cost of US$6.67/MCF and an $0.82 CDN/US
exchange rate for the purposes of this 2005 guidance.
WESTERN OIL SANDS INC.
CONSOLIDATED BALANCE SHEETS
December 31 2004 2003
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(THOUSANDS)
ASSETS
Current Assets
Cash $ 3,715 $ 3,770
Accounts Receivable 62,564 57,994
Inventory (Note 4) 14,186 9,100
Prepaid Expense 5,771 7,033
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86,236 77,897
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Capital Assets (Note 5) 1,351,745 1,353,317
Deferred Charges (Note 6) 18,378 20,903
Future Income Taxes (Note 12) 14,511 6,307
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1,384,634 1,380,527
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$ 1,470,870 $ 1,458,424
=============================================================================================
LIABILITIES
Current Liabilities
Accounts Payable and Accrued Liabilities $ 87,679 $ 65,949
Current Portion of Long-term Debt (Note 8) 95,000 --
Current Portion of Lease Obligations (Note 9) 5,230 1,340
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187,909 67,289
Long-term Liabilities ,
Long-term Debt (Note 8) 662,620 860,580
Lease Obligations (Note 9) 53,474 54,193
Asset Retirement Obligation (Note 10) 8,191 7,137
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724,285 921,910
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912,194 989,199
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SHAREHOLDERS' EQUITY
Share Capital (Note 13) 545,699 476,667
Contributed Surplus 1,245 278
Retained Earnings (Deficit) 11,732 (7,720)
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558,676 469,225
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$ 1,470,870 $ 1,458,424
=============================================================================================
Commitments and Contingencies (Note 18)
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Approved by the Board of Directors:
/s/ Robert G. Puchniak" /s/ Mac Van Wielingen"
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Robert G. Puchniak Mac Van Wielingen
Director Director
WESTERN OIL SANDS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT)
Year ended December 31 2004 2003
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(THOUSANDS, EXCEPT AMOUNTS PER SHARE)
REVENUES:
Revenue (Note 17) $ 636,911 $ 281,093
Less Purchased Feedstocks and Transportation 315,926 117,580
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320,985 163,513
EXPENSES:
Operating 212,993 106,825
Royalties 2,954 1,151
General and Administrative 8,101 6,261
Insurance 9,350 1,661
Interest (Note 11) 61,154 38,429
Stock-based Compensation (Note 14) 967 278
Accretion on Asset Retirement Obligation (Note 10) 471 471
Depreciation, Depletion and Amortization 44,515 27,531
Impairment of Long-lived Asset (Note 5) 4,733 --
Foreign Exchange Gain (38,350) (34,976)
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14,097 15,882
NET EARNINGS BEFORE INCOME TAXES
Income Tax Recovery (Note 12) (5,355) (1,251)
================================================================================================================
19,452 17,133
NET EARNINGS
Charge for Convertible Notes (Note 7) -- 2,130
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$ 19,452 $ 15,003
NET EARNINGS ATTRIBUTABLE TO COMMON SHAREHOLDERS
================================================================================================================
Deficit at Beginning of Year (7,720) (22,723)
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Retained Earnings (Deficit) at End of Year $ 11,732 $ (7,720)
================================================================================================================
Net Earnings Per Share (Note 13):
Basic $ 0.37 $ 0.30
Diluted $ 0.37 $ 0.29
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SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
WESTERN OIL SANDS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31 2004 2003
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(THOUSANDS)
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Net Earnings $ 19,452 $ 17,133
Non-cash items:
Stock Based Compensation (Note 14) 967 278
Accretion on Asset Retirement Obligation (Note 10) 471 471
Depreciation, Depletion and Amortization 44,515 27,531
Impairment of Long-lived Assets (Note 5) 4,733 --
Unrealized Foreign Exchange Gain (Note 8) (39,960) (35,280)
Future Income Tax Recovery (Note 12) (7,104) (4,330)
Cash Settlements of Asset Retirement Obligation (Note 10) (30) --
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23,044 5,803
CASH FROM OPERATIONS
Decrease (Increase) in Non-Cash Working Capital (Note 19) 16,393 (7,133)
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39,437 (1,330)
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FINANCING ACTIVITIES
Issue of Share Capital (Note 13) 70,866 51,682
Share Issue Expenses (Note 13) (2,934) (2,211)
(Repayment) Issue of Long-term Debt (63,000) 214,000
Deferred Charges (56) (1,017)
Repaymentof Convertible Notes -- (88,000)
Charge for Convertible Notes (Note 7) -- (3,640)
Repayment of Other Long-term Liabilities (1,343) (470)
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CASH GENERATED 3,533 170,344
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INVESTING ACTIVITIES
Capital Expenditures (46,399) (158,153)
Insurance Proceeds (Note 18) 6,431 9,680
Increase in Non-Cash Working Capital (Note 19) (3,057) (31,199)
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CASH INVESTED (43,025) (179,672)
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Decrease in Cash (55) (10,658)
Cash at Beginning of Year 3,770 14,428
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CASH AT END OF YEAR $ 3,715 $ 3,770
================================================================================================
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
WESTERN OIL SANDS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR DOLLAR AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
(1) BUSINESS OF THE CORPORATION
Western Oil Sands Inc. (the "Corporation") was incorporated on June 18,
1999 under the laws of the Province of Alberta. The Corporation holds an
undivided 20 per cent working interest in an oil sands project in the
Athabasca region of northeast Alberta (the "Project"). Shell Canada Limited
and Chevron Canada Limited hold the remaining 60 per cent and 20 per cent
interests, respectively. The Project consists of direct or indirect
participation in the design, construction and operation of mining,
extracting, transporting and upgrading of oil sands deposits. The
Corporation is also actively pursuing other oil sands and related business
opportunities.
(2) SUMMARY OF ACCOUNTING POLICIES
(a) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Corporation and its wholly-owned subsidiary corporations and limited
partnership. The Corporation's oil sands activities are conducted jointly
with others. These financial statements reflect only the Corporation's
proportionate interest in such activities.
(b) COMMENCEMENT OF COMMERCIAL OPERATIONS
Effective June 1, 2003, the Corporation commenced commercial operations, as
determined by management, as all aspects of the facilities became fully
operational and the Project achieved 50 per cent of the stated design
capacity of 155,000 barrels per day. Accordingly, the Corporation has
recorded revenues and expenses related to the Corporation's share of
operations of the Project from that date. Prior to June 1, 2003, all
revenues, operating costs and interest were capitalized as part of the
costs of the Project, and no depreciation, depletion and amortization
expensed.
(d) MEASUREMENT UNCERTAINTY
The preparation of financial statements in conformity with Canadian
Generally Accepted Accounting Principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Such
estimates relate to unsettled transactions and events as of the date of the
Consolidated Financial Statements. Actual results may differ from these
estimated amounts as future events occur.
Specifically amounts recorded for Depreciation, Depletion and Amortization
are based on estimates of crude oil reserves, Asset Retirement Obligation
amounts are based on assumptions of the future costs to dismantle the
assets and restore the site of the Project and Future Income Tax amounts
are based on assumptions of the timing and at which tax rates temporary
differences are expected to reverse. These estimates of reserves and
assumptions of future costs and timing of tax pool use are subject to
measurement uncertainty, and the impact to the Consolidated Financial
Statements of future periods could be material.
(d) FOREIGN CURRENCY TRANSLATION
Transactions in foreign currencies are translated into Canadian dollars at
exchange rates prevailing at the transaction dates. Monetary assets and
liabilities denominated in a foreign currency are translated into Canadian
dollars at rates of exchange in effect at the end of the period, with the
resulting unrealized gain or loss being recorded in the Consolidated
Statements of Operations and Retained Earnings (Deficit), after the
commencement of operations. Prior to the commencement of operations these
unrealized gains and losses were capitalized.
(e) CASH
Cash presented in the Consolidated Financial Statements is comprised of
cash and cash equivalents and includes short-term investments with a
maturity of three months or less when purchased.
(f) INVENTORY
Product and Parts, Supplies and Other inventories are stated at the lower
of average cost and net realizable value.
(g) CAPITAL ASSETS
Capital assets are recorded at cost less accumulated provisions for
depreciation, depletion and amortization. Capitalized costs include costs
specifically related to the acquisition, exploration, development and
construction of the related project. This includes interest, which is
capitalized during the construction and start-up phase for each project.
Capital assets are reviewed for impairment whenever events or conditions
indicate that their net carrying amount may not be recoverable from
estimated future cash flows. If an impairment is determined the assets are
written down to the fair market value.
Depletion on the Project is provided over the life of proved and probable
reserves on a unit of production basis, commencing when the facilities were
substantially complete and after commercial production had begun. Other
capital assets are depreciated on a straight-line basis over their useful
lives, except for lease acquisition costs and certain mine assets, which
are amortized and depreciated over the life of proved and probable
reserves. The estimated useful lives of depreciable capital assets are as
follows:
Leasehold Improvements 5 years
Furniture and Fixtures 5 years
Computers 3 years
(h) ASSET RETIREMENT OBLIGATION
Effective January 1, 2003, the Corporation early adopted CICA 3110 "Asset
Retirement Obligations". The new standard requires that the Corporation
recognize an asset and a liability for any existing asset retirement
obligations, which is determined by estimating the fair value of this
commitment at the balance sheet date. The fair value is determined by the
Corporation by first estimating the expected timing and amount of cash
flows, using third party costs, that will be required for future
dismantlement and site restoration, and then present valuing these future
payments using a credit adjusted risk free rate appropriate for the
Corporation. Any change in timing or amount of the cash flows subsequent to
initial recognition results in a change in the asset and liability. Over
the estimated life of the asset and liability the Corporation recognizes
depletion on the asset and accretion on the liability.
(i) CONVERTIBLE NOTES
Amounts drawn under the Note Purchase Facility were deemed to consist of
both an equity and a liability component in accordance with Canadian GAAP.
The initial carrying amounts recognized for the equity and debt component
are adjusted for accretion to bring the equity component to the stated
principal amount of the Note Purchase Facility at maturity and to remove
the debt component. Accretion is charged directly to Retained Earnings
(Deficit). Upon maturity of the Note Purchase Facility the equity component
amount was refinanced by the Corporation under the Revolving Credit
Facility, see note 8(c).
(j) STOCK-BASED COMPENSATION PLANS
The Corporation has a stock-based compensation plan, which is described in
Note 14(a). Effective January 1, 2002, the Corporation adopted CICA 3870
"Stock-based Compensation and Other Stock-based Payments". CICA 3870 is
applied 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. CICA 3870 is applied to all grants of stock
options on or after January 1, 2002.
During the fourth quarter of 2003, effective for January 1, 2003, the
Corporation began prospectively recognizing compensation expense for
options granted under the plan in accordance with the fair value method.
Under the transitional provisions in CICA 3870 the Corporation is required
only to apply the fair value based method, and record compensation expense
and Contributed Surplus, to awards granted, modified or settled on or after
the beginning of the fiscal year, in which the Corporation adopts the fair
value method for those awards. Accordingly, only awards issued from January
1, 2003, require compensation expense to be recognized in accordance with
CICA 3870. Compensation expense for options granted subsequent to 2003 is
determined based on the fair values at the time of grant and are recognized
over the estimated vesting periods of the respective options. For options
granted prior to January 1, 2003, the Corporation continues to disclose the
pro forma net earnings impact of the related compensation expense. Pro
forma compensation-related earnings impacts are determined on the same
basis as the 2003 options.
Consideration received on the exercise of stock options granted is credited
to share capital, and if related to any stock options that were granted
during the year ended December 31, 2003, then an amount equal to the
compensation expense recognized to that date is reclassified from
Contributed Surplus to Common Shares.
The Corporation has a Performance Share Unit Plan, which is described in
note 14(b). 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.
The Corporation as an owner in the Project (the "Project") shares in any
related costs associated with the Project's stock-based compensation plans.
The Project's plans involve Stock Appreciation Rights (SARs), which may
require settlement with cash payments. During the vesting period,
compensation expense is recognized using the graded vesting approach when
the value of the SARs exceeds the award value. The Corporation's share of
the change in value of the SARs is recognized in operating expense in the
year the change occurs.
(k) REVENUE RECOGNITION
The revenue associated with the sale of crude oil products is recorded as
title and other significant risks and rewards of ownership are passed to
the customer.
(l) NET EARNINGS PER SHARE
The Corporation uses the treasury stock method to determine the dilutive
effects of stock options and other dilutive instruments.
(m) DERIVATIVE FINANCIAL INSTRUMENTS
Financial instruments are used by the Corporation to hedge its exposure to
market risks relating to commodity prices and foreign currency exchange
rates. The Corporation's policy is not to utilize financial instruments for
speculative purposes.
The Corporation formally documents all relationships between hedging
instruments and hedged items as well as its risk management objectives and
strategies for undertaking various hedge transactions. This process
includes linking all derivatives to specific assets and liabilities on the
balance sheet or to specific firm commitments or forecasted transactions.
The Corporation also assesses, both at the hedges' inception and on an
ongoing basis, whether the derivatives that are used in hedging
transactions are highly effective in offsetting changes in fair values or
cash flows of hedged items.
The Corporation enters into hedges with respect to a portion of its oil
production to achieve a more predictable cash flow by reducing its exposure
to price and currency fluctuations. These transactions are entered into
with major Canadian financial institutions. Gains and losses from these
financial instruments are recognized in oil revenues as the hedge sale
transactions occur.
(n) EMPLOYEE FUTURE BENEFITS
The Corporation has a defined contribution pension plan for its direct
employees and as a result of the 20 per cent ownership in the Project has a
defined benefit pension plan for employees of the Project. For the defined
contribution pension plan the expense is recognized as payments are made or
entitlements are earned.
For the defined benefit pension plan the costs are determined using the
projected benefit method prorated on length of service and reflects the
Project's best estimate of expected plan investment performance, salary
escalation, retirement ages of employees, withdrawal rates and mortality
rates. The expected return on plan assets is based on the fair value of
those assets and the obligation is discounted using a market interest rate
at the beginning of the year based on high quality corporate debt
instruments. Pension expense includes the cost of pension benefits earned
during the current year, the interest cost on pension obligations, the
expected return on pension plan assets, the amortization of adjustments
arising from pension plan amendments and the excess of the net actuarial
gain or loss over ten per cent of the greater of the benefits obligation
and the fair value of plan assets. The amortization period covers the
expected average remaining service lifetime of employees covered by the
plans.
(o) COMPARATIVE AMOUNTS
Certain comparative amounts have been reclassified to conform to the
current year's presentation.
(3) RECENTLY ISSUED CANADIAN ACCOUNTING STANDARDS
In 2003, Canadian Accounting Guideline 15 (AcG 15), "Consolidation of
Variable Interest Entities" (VIE) was issued. Effective January 1, 2005 AcG
15 requires consolidation of a VIE where a company will absorb a majority
of a VIE's losses, receive a majority of its returns, or both. The
Corporation has entered into operating leases, as described in note 18(a),
with a VIE. These operating leases, as currently structured, do not meet
the AcG 15 criteria for consolidation by the Corporation.
(4) INVENTORY
2004 2003
--------------------------------------------------------------------------------------------------------
Product Inventory $ 8,314 $ 3,381
Parts, Supplies and Other 5,872 5,719
--------------------------------------------------------------------------------------------------------
$ 14,186 $ 9,100
--------------------------------------------------------------------------------------------------------
(5) CAPITAL ASSETS
2004
--------------------------------------------------------------------------------------------------------
ACCUM
COST DD&A* NET
Oil Sands Project $ 1,341,395 $ (58,955) $ 1,282,440
Oil Sands Project Assets Under Capital Lease 52,705 (2,439) 50,266
Other Assets 20,105 (1,066) 19,039
--------------------------------------------------------------------------------------------------------
$ 1,413,205 $ (62,460) $ 1,351,745
========================================================================================================
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
During 2004 an asset with an aggregate cost of $4.7 million was written
off, after the Corporation determined it to be impaired. The asset related
to certain activities the Corporation was pursuing regarding hydrogen
production technology. The asset was determined to be impaired after the
Corporation received a negative preliminary technical analysis of the
technology.
(6) DEFERRED CHARGES
2004 2003
--------------------------------------------------------------------------
Deferred Charges $ 28,496 $ 28,440
Less: Amortization (10,118) (7,537)
--------------------------------------------------------------------------
$ 18,378 $ 20,903
==========================================================================
Deferred charges include primarily debt financing costs that have been
incurred in establishing the Corporation's various debt facilities. These
amounts are being amortized over the term of the related debt facilities
following start-up of the Project.
(7) CONVERTIBLE NOTES
On October 25, 2001, the Corporation established an $88 million two-year
Note Purchase Facility (the "Note Purchase Facility") with a Canadian
chartered bank. Borrowings under the Note Purchase Facility bore interest
at the bank's prime lending rate, the bankers' acceptance rate or the LIBOR
rate plus applicable margins ranging from 125 to 225 basis points. The
notes issuable pursuant to draws on the Note Purchase Facility were
convertible, at maturity at the option of the Corporation and in the event
of a default at the option of the bank, into Common Shares of the
Corporation. The Convertible Notes matured on October 25, 2003, and the
Corporation refinanced these Convertible Notes using availability that it
had under its Revolving Credit Facility (see Note 8 (c)). For the year
ended December 31, 2003, the Corporation accreted $3.6 million ($2.1
million net of tax) in respect to the interest paid on the Note Purchase
Facility.
(8) LONG-TERM DEBT
2004 2003
---------------------------------------------------------------------------------------------------------------
US$450 million Senior Secured Notes (a) $ 541,620 $ 581,580
Senior Credit Facility (b) 95,000 91,000
Revolving Credit Facility (c) 121,000 188,000
---------------------------------------------------------------------------------------------------------------
757,620 860,580
Less: Current Portion of Long-term Debt (B) (95,000) --
---------------------------------------------------------------------------------------------------------------
$662,620 $860,580
===============================================================================================================
(a) The Senior Secured Notes (the "Notes") bear interest at 8.375 per cent and
have a maturity of May 1, 2012. The Notes provide the holders with security
over all the assets of the Corporation, subordinated to the Senior Credit
Facility, until the Corporation achieves an investment grade corporate
credit rating, at which time the Senior Secured Notes become unsecured.
The Senior Secured Notes are recorded in Canadian dollars at the exchange
rate in effect at the balance sheet date. An unrealized foreign exchange
gain totaling $40.0 million was recognized for the year ended December 31,
2004, as a result of changes in the foreign exchange rate between the US
and Canadian dollars. An unrealized foreign exchange gain totaling $129.3
million was recognized for the year ended December 31, 2003, of which $94.0
million was capitalized as it occurred prior to commercial operations and
the balance of $35.3 million was recognized as an unrealized foreign
exchange gain in the Statement of Operations and Deficit.
(b) The $100 million Senior Credit Facility (the "Senior Credit Facility")
bears interest at the lenders' prime lending rate, the bankers' acceptance
rate or the LIBOR rate plus applicable margins ranging from 100 to 200
basis points. The Senior Credit Facility matures and is repayable on April
23, 2005. The Corporation is currently in the process of refinancing the
Senior Credit Facility through the assumption of the full $100 million into
the $240 million Revolving Credit Facility described in note 8(c). The
Corporation expects this to be completed by the end of the first quarter of
2005. The ability to roll the amount was specifically structured under the
Revolving Credit Facility at its inception. 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 is classified as a current liability.
The Senior Credit Facility contains certain covenants and other provisions,
which restrict the Corporation's ability to incur additional indebtedness,
pay dividends or make distributions of any kind, undertake an expansion of
the Project, dispose of its interest in the Project, or change the nature
of its business. The Senior Credit Facility provides the banks with
security over all of the assets of the Corporation, with the exception of
certain intercompany notes and note guarantees issued in connection with
the Notes detailed in Note 8(a). At December 31, 2004, an amount of $95
million ($91 million - 2003) had been drawn under this Senior Credit
Facility and no letters of credit had been issued ($7.1 million - 2003).
(c) The $240 million Revolving Credit Facility ("Revolving Credit Facility")
bears interest at the lenders' prime lending rate, the bankers' acceptance
rate or the LIBOR rate plus applicable margins ranging from 100 to 200
basis points. The Revolving Credit Facility provides the banks with
security over all of the assets of the Corporation, with the exception of
certain intercompany notes and note guarantees in connection with the Notes
detailed in Note 8(a), and has certain financial covenants, including a
limit on the amount available for drawdown. At December 31, 2004, the limit
available for drawdown was $181 million ($215.0 million - 2003), of which
$121 million ($188 million - 2003) had been drawn and $8.1 million ($0.5
million - 2003) had been issued in letters of credit. The Revolving
Facility contains a two-year term-out provision should the facility not be
renewed.
(9) LEASE OBLIGATIONS
2004 2003
---------------------------------------------------------------------------
Obligations Under Capital Lease $ 51,609 $ 52,950
Operating Lease Guarantee Obligation 7,095 2,583
---------------------------------------------------------------------------
58,704 55,533
Less: Current Portion (5,230) (1,340)
---------------------------------------------------------------------------
$ 53,474 $ 54,193
===========================================================================
The capital lease obligation relates to the Corporation's share of capital
costs for the hydrogen-manufacturing unit within the Project. Repayment of
the principal obligation was $1.3 million in 2004 and is scheduled to
remain at that level until fully repaid.
Under the Mobile Equipment Lease, described in note 18(a), the Corporation
is committed to pay its 20 per cent share of an amount equal to 85 per cent
of the original cost of the equipment to the lessor at the end of the terms
of the lease. Accordingly, the Corporation recognizes, as a liability, a
portion of this future payment as it relates to the service life of the
equipment that has passed.
(10) ASSET RETIREMENT OBLIGATION
The Corporation, in association with its 20 per cent working interest in
the Project, is also responsible for its share of future dismantlement
costs and site restoration costs in the mining, extracting and upgrading
activities. The Corporation currently estimates that the total undiscounted
amount of its share of these costs to be approximately $192.5 million
($184.1 million - 2003) with the majority of that amount to be paid at the
end of the current reserves for the Project. The Corporation has assumed a
credit adjusted risk free rate of 6.0 per cent to discount these payments
(7.0 per cent - 2003). The following table presents the reconciliation of
the Asset Retirement Obligation from the beginning of each respective
period until the end of that period:
2004 2003
---------------------------------------------------------------------------
Asset Retirement Obligation at Beginning of Year $ 7,137 $ 6,342
Liabilities Incurred 613 386
Liabilities Settled (30) (62)
Accretion on Asset Retirement Obligation 471 471
---------------------------------------------------------------------------
Asset Retirement Obligation at End of Year 8,191 7,137
===========================================================================
(11) INTEREST EXPENSE
2004 2003
---------------------------------------------------------------------------
Interest on Long-term Debt $ 59,118 $ 60,522
Capitalized Interest in Oil Sands Project -- (23,479)
---------------------------------------------------------------------------
Interest Expense, Net 59,118 37,043
Interest on Obligations Under Capital Lease 2,036 1,386
---------------------------------------------------------------------------
$ 61,154 $ 38,429
===========================================================================
It is the Corporation's policy to capitalize carrying costs including
interest expense for capital assets acquired, constructed or developed over
time. As at December 31, 2003, $87.1 million had been capitalized as part
of the cost of the Project, representing the interest expense from
inception to June 1, 2003, the date the Corporation commenced commercial
operations.
On a cash basis interest paid for the year ended December 31, 2004, was
$61.0 million (December 31, 2003 - $63.8 million). Cash interest received
for the year ended December 31, 2004, was $0.1 million (December 31, 2003 -
$0.2 million).
(12) INCOME TAXES
2004 2003
--------------------------------------------------------------------------
Large Corporations Tax $ 1,749 $ 3,079
Future Income Tax Recovery (7,104) (4,330)
--------------------------------------------------------------------------
INCOME TAX RECOVERY (5,355) (1,251)
==========================================================================
Cash taxes paid during the year ended December 31, 2004, were $1.7 million
(December 31, 2003 - $4.5 million) and related solely to Large Corporations
Tax.
AT DECEMBER 31, THE FUTURE INCOME TAX LIABILITY CONSISTS OF:
2004 2003
--------------------------------------------------------------------------
Future Income Tax Assets
Net Losses Carried Forward $ 61,697 $ 49,682
Share Issue Costs 1,355 1,723
Impairment of Long-lived Assets 796 --
Future Income Tax Liabilities
Capital Assets in Excess of Tax Values (34,242) (38,860)
Unrealized Foreign Exchange Gain (12,648) (6,209)
Debt Issue Costs (2,447) (29)
--------------------------------------------------------------------------
NET FUTURE INCOME TAX ASSET 14,511 6,307
--------------------------------------------------------------------------
The following table reconciles income taxes calculated at the Canadian
statutory rate of 38.87 per cent (2003 - 41.12 per cent) with actual income
taxes:
2004 2003
--------------------------------------------------------------------------
Net Earnings (Loss) Before Income Taxes $ 14,097 $ 15,882
Income Tax Expense (Recovery) at Statutory Rate 5,480 6,531
Effect of Tax Rate Changes and Timing of Use (4,826) 1,851
Non-Taxable Portion of Foreign Exchange Gain (8,815) (8,298)
Non-Taxable Portion of Impairment of Long-lived Assets 1,044 -
Resource Allowance (5,012) (4,414)
Provision to Actual 5,025 -
Large Corporations Tax 1,749 3,079
--------------------------------------------------------------------------
INCOME TAX RECOVERY $ (5,355) $ (1,251)
--------------------------------------------------------------------------
At December 31, 2004, the Corporation had approximately $1.5 billion of tax
pools available. Included in the tax pools are $163.8 million of tax loss
carry forward balances as estimated at December 31, 2004, with expiry dates
as follows:
YEAR CREATED AMOUNT EXPIRY
-------------------------------------------------------------
2000 $ 10.3 million 2007
2001 $ 8.8 million 2008
2002 $ 24.7 million 2009
2003 $ 118.8 million 2010
2004 $ 1.2 million 2011
-------------------------------------------------------------
(13) SHARE CAPITAL
(a) AUTHORIZED
The Corporation is authorized to issue an unlimited number of Class A
shares ("Common Shares"), an unlimited number of non-voting Convertible
Class B Equity Shares ("Class B Shares"), an unlimited number of non-voting
Class C Preferred Shares and an unlimited number of Class D Preferred
Shares, issuable in series.
The Common Shares are without nominal or par value. The Class D Preferred
Shares, Series A, which have been issued, were converted into Common Shares
at the holders' options prior to redemption on a one-for-one basis.
(b) ISSUED AND OUTSTANDING
NUMBER
COMMON SHARES OF SHARES AMOUNT
-------------------------------------------------------------------------------------------------
Balance at December 31, 2002 47,742,471 $ 414,312
Issued for Cash 2,050,000 50,225
Issued on Exercise of Employee Stock Options 163,800 1,457
Share Issue Costs, Net of Tax -- (1,290)
-------------------------------------------------------------------------------------------------
Balance at December 31, 2003 49,956,271 464,704
Issued for Cash 2,000,000 68,000
Issued on Exercise of Employee Stock Options 161,600 1,630
Issued on Exercise of Warrants 494,224 1,236
Conversion of Class D Preferred Shares 666,667 11,963
Share Issue Costs, Net of Tax -- (1,834)
-------------------------------------------------------------------------------------------------
Balance at December 31, 2004 53,278,762 545,699
CLASS D PREFERRED SHARES
Balance at December 31, 2003 666,667 11,963
Conversion of Class D Preferred Shares (666,667) (11,963)
-------------------------------------------------------------------------------------------------
Balance at December 31, 2004 -- --
=================================================================================================
TOTAL SHARE CAPITAL 53,278,762 $ 545,699
=================================================================================================
(c) ISSUANCES
On February 7, 2003, the Corporation completed a public offering for the
issuance of 2,050,000 Common Shares for aggregate proceeds of $50.2
million, before consideration of share issue costs of $2.2 million ($1.3
million net of tax). This offering was underwritten by a syndicate of
Canadian underwriters and undertaken through the filing of a short form
prospectus. Proceeds of this offering were used to pay down certain amounts
that had been drawn on the bank debt and to fund capital expenditures.
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.
The Common Shares were offered to the public on a bought-deal basis through
a syndicate of Canadian underwriters. Proceeds of this offering were used
to pay down certain amounts that had been drawn on the bank debt, for
general corporate purposes and for expansion opportunities.
(d) WARRANTS
The Corporation had 494,224 Class A Warrants outstanding at December 31,
2003. During the year ended December 31, 2004, the Class A Warrants were
exercised for total proceeds of $1.2 million. 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 Project.
(e) CLASS D PREFERRED SHARES
The Corporation had 666,667 Class D Preferred Shares, Series A outstanding.
The Class D Preferred Shares, Series A, were converted on December 31,
2004, into Common Shares at the holders' option prior to redemption on a
one-for-one basis. If not converted, they were redeemable at the option of
the Corporation at any time at a price equal to their issue price, plus a
cumulative dividend of 12 per cent per year compounded semi-annually until
January 1, 2007, from which date the dividend would have increased by three
per cent per quarter to a maximum of 24 per cent per year. Cash dividends
were not paid on the Class D Preferred Shares.
(f) CALL OBLIGATIONS
The Corporation entered into call obligation agreements with certain
shareholders, which obligated the holders of the obligations to purchase up
to 3,040,000 Class B Shares for $5.00 per share. The Corporation was
entitled to require the subscriber to exercise their call obligations at
its discretion upon the satisfaction of certain conditions. These call
obligations were to have expired on December 31, 2001, but were extended
until March 31, 2003 at which time they expired unexercised. An additional
2,589,641 call obligations were entered into in July 2001, whereby each
call obligation is exercisable into one Class B Share and one warrant to
purchase a Class B Share upon the payment of $13.00 per call obligation.
These call obligations were exercisable until March 31, 2003 and the
underlying warrant was exercisable at the then market price for a period of
four years after the call obligation exercise. These obligations expired
unexercised.
(g) NET EARNINGS PER SHARE
The following table summarizes the Common Shares used in calculating Net
Earnings per Common Share:
2004 2003
-----------------------------------------------------------------------------------------------------
Weighted Average Common Shares Outstanding - Basic 52,308,838 50,344,332
Effect of Stock Options and Warrants 943,294 965,308
-----------------------------------------------------------------------------------------------------
Weighted Average Common Shares Outstanding - Diluted 53,252,132 51,309,640
=====================================================================================================
(14) STOCK OPTIONS
(a) STOCK OPTION PLAN
The Corporation has established a Stock Option Plan for the issuance of
options to purchase Common Shares to directors, officers and employees of
the Corporation and its subsidiaries. Options granted under the Stock
Option Plan generally vest on an annual basis over four years. The stock
options expire five years from each vesting date.
2004 2003
-------------------------------------------------------------------------------------------------------------
Weighted Weighted
Number of Average Number of Average
Options Exercise Price Options Exercise Price
-------------------------------------------------------------------------------------------------------------
Outstanding at Beginning of Year 1,344,700 $ 17.25 1,329,500 $ 14.40
106,183 34.82 233,000 25.72
(161,600) 10.09 (163,800) 8.90
Cancelled (33,637) 21.54 (54,000) 9.13
-------------------------------------------------------------------------------------------------------------
Outstanding at End of Year 1,255,646 $ 19.54 1,344,700 $ 17.25
=============================================================================================================
Exercisable at End of Year 740,325 $ 15.05 660,700 $ 11.46
=============================================================================================================
The following table summarizes Stock Options outstanding and exercisable
under the Stock Option Plan at December 31, 2004:
Options Outstanding Options Exercisable
--------------------------------------------------------------------------------------------------------------
Weighted Weighted
Average Average Weighted
Number Remaining Exercise Number of Average Exercise
Exercise Price of Options Life Price Options Price
--------------------------------------------------------------------------------------------------------------
(years)
$ 8.50 - $12.00 372,50 4.0 $ 8.59 372,500 $ 8.59
$12.01 - $16.00 143,250 5.6 14.78 104,125 14.79
$20.01 - $24.00 406,500 6.2 23.85 203,250 23.85
$24.01 - $28.00 181,300 7.3 25.07 47,950 25.01
$28.01 - $32.00 50,000 8.0 28.22 12,500 28.22
$32.01 - $36.00 72,096 8.2 32.86 -- --
$37.80 - $41.80 30,000 8.9 39.87 -- --
--------------------------------------------------------------------------------------------------------------
1,255,646 5.9 $ 19.54 740,325 $ 15.05
--------------------------------------------------------------------------------------------------------------
The number of Common Shares reserved for issuance under the Stock Option
Plan was 2,446,100 at December 31, 2004 (2,607,700 at December 31, 2003).
(b) PERFORMANCE SHARE UNIT PLAN
In February 2004 the Corporation initiated 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 per cent 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 2004 the Corporation granted 38,679 unit awards, of
this 5,582 were cancelled during the year and 33,097 remain at December 31,
2004.
(d) STOCK-BASED COMPENSATION
During 2004, the Corporation recognized $1.0 million ($0.3 - 2003) in
compensation expense related to stock-based compensation issued subsequent
to January 1, 2003. This is the portion of stock based compensation that is
related to 2004 employee services rendered and is comprised of $0.7 million
($0.3 - 2003) in respect to the Corporation's stock option plan and $0.3
million (nil - 2003) in respect to the Corporation's Performance Share Unit
Plan.
The weighted average fair value of the 106,183 options granted during 2004
was $12.52 using the Black-Scholes option pricing model. In 2003 there were
233,000 options granted at a weighted average fair value of $9.08. The
following table sets out the assumptions used in applying the Black-Scholes
model:
2004 2003
------------------------------------------------------------------------
Risk Free Interest Rate, Average For Year 4.34% 4.54%
Expected Life (in Years) 6.00 5.00
Expected Volatility 26-30% 30%
Dividend Per Share -- --
------------------------------------------------------------------------
No compensation expense has been recognized for stock options granted
before January 1, 2003, in accordance with Note 2(j). Had compensation
expense been determined based on the fair value method for awards made
after December 31, 2001 but before January 1, 2003, the Company's net
earnings attributable to common shareholders and earnings per share would
have been adjusted to the proforma amounts indicated below:
-----------------------------------------------------------------------------------------------------
2004 2003
-----------------------------------------------------------------------------------------------------
Net Earnings Attributable to Common Shareholders - As Reported $ 19,452 $ 15,003
Compensation Expense 894 1,177
-----------------------------------------------------------------------------------------------------
Net Earnings Attributable to Common Shareholders - Proforma $ 18,558 $ 13,826
=====================================================================================================
Basic Earnings Per Share:
As Reported $ 0.37 $ 0.30
Proforma $ 0.35 $ 0.27
Diluted Earnings Per Share:
As Reported $ 0.37 $ 0.29
Proforma $ 0.35 $ 0.27
=====================================================================================================
(d) OIL SANDS PROJECT STOCK APPRECIATION RIGHTS PLANS
During 2004, the Project implemented stock-based compensation plans which
awarded Stock Appreciation Rights (SARs) to certain employees. Accordingly,
the Corporation as a 20 per cent owner in the Project shares in the costs
of these SARs. Under the first plan SARs were granted to employees of the
Project that entitle the holders to a cash payment once exercised, if the
composite value of the weighted-average stock price of certain joint
venture owners' shares at the time of exercise exceeds the issue price of
the SARs. The SARs vest evenly over three years and expire ten years after
grant. On December 31, 2004 a total of 51,100 SARs were granted in respect
to this plan. Under the second plan SARs were granted to employees of the
Project that entitle the holders to a cash payment at the end of a
three-year period if the composite value of the weighted-average stock
price of certain Joint Venture owners' shares at the time of exercise
exceeds the issue price of the SARs and if certain performance measures are
met. On December 31, 2004, a total of 21,679 SARs were granted in respect
to this plan. During 2004, no compensation expense was recorded in
operating expense for these two plans.
(15) SHAREHOLDERS' RIGHTS PLAN
The Corporation has a shareholders' rights plan (the "Plan"). Under the
Plan, one right will be issued with each Common Share issued. The rights
remain attached to the Common Share and are not exercisable or separable
unless one or more of certain specified events occur. If a person or group
acting in concert acquires 20 per cent or more of the Common Shares of the
Corporation, the rights will entitle the holders thereof (other than the
acquiring person or group) to purchase Common Shares of the Corporation at
a 50 per cent discount from the then market price. The rights are not
triggered by a "Permitted Bid", as defined in the Plan.
(16) EMPLOYEE FUTURE BENEFITS
The Corporation has a defined contribution pension plan for its direct
employees and as a result of the 20 per cent ownership in the Project has a
defined benefit pension plan for employees of the Project. All of the
information pertaining to the defined benefit pension plan in this note
represents the Corporation's 20 per cent ownership in the Project. The
Corporation uses its fiscal year-end as measurement date for both of these
pension plans.
(a) DEFINED CONTRIBUTION PENSION PLAN
The total expense for the year ended December 31, 2004, for the
Corporation's defined contribution plan was $0.3 million (December 31, 2003
- $0.2 million).
(b) DEFINED BENEFIT PENSION PLAN
Information for the defined benefit pension plan is as follows:
2004 2003
-------------------------------------------------------------------------------------------------------------
Accrued Benefit Obligation, Beginning of Year $ 1,084 $ --
Current Service Cost 638 824
Interest Cost 110 88
Other 96 200
Benefits Paid (68) (28)
-------------------------------------------------------------------------------------------------------------
Accrued Benefit Obligation, End of Year $ 1,860 $ 1,084
=============================================================================================================
Fair Value of Plan Assets, Beginning of Year $ 1,131 $ --
Employer Contributions 732 1,078
Actual Return on Plan Assets 71 81
Benefits Paid (68) (28)
-------------------------------------------------------------------------------------------------------------
Fair Value of Plan Assets, End of Year $ 1,866 $ 1,131
=============================================================================================================
Funded Status - Plan Surplus $ 6 $ 47
Other 289 165
-------------------------------------------------------------------------------------------------------------
Accrued Benefit Asset $ 295 $ 212
=============================================================================================================
Components of Net Periodic Pension Cost
Current Service Cost $ 638 $ 824
Interest Cost 110 88
Actual Return on Plan Assets (71) (81)
Actuarial Loss (Gain) on Accrued Benefit Obligation 96 --
-------------------------------------------------------------------------------------------------------------
Costs Arising in the Period 773 831
Differences in Costs Arising and Costs Recognized in the Period in
Respect of:
Return on Plan Assets (32) 11
Other (92) 8
-------------------------------------------------------------------------------------------------------------
Net Periodic Pension Cost Recognized $ 649 $ 850
=============================================================================================================
The significant actuarial assumptions used to determine the periodic
expense and accrued benefit obligations are as follows:
2004 2003
---------------------------------------------------------------------------
Discount Rate - Expense 6.50% 6.90%
Discount Rate - Year End Disclosure 6.10% 6.50%
Expected Long-term Rate of Return on Plan Assets 7.00% 7.00%
Rate of Compensation Increase 4.25% 4.25%
--------------------------------------------------------------------------
The investment strategy for the defined benefit pension plan assets is to
utilize a diversified mix of global public and private equity portfolios,
together with public and private fixed income portfolios, to earn long-term
investment returns that enable the plan to meet its obligations. Active
management strategies are utilized within the plan in an effort to realize
investment returns in excess of market indices. The weighted-average asset
allocation for our defined benefit pension plan at December 31, 2004 was as
follows:
ACTUAL TARGET
-------------------------------------------------------------------
Domestic Equities 44% 33%
Foreign Equities 19% 25%
Fixed Income Securities 35% 37%
Money Market 2% 5%
-------------------------------------------------------------------
100 % 100 %
(17) FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Corporation's financial instruments that are included in the
Consolidated Balance Sheets are comprised of cash, accounts receivable,
accounts payable and accrued liabilities, and long-term borrowings.
(a) COMMODITY PRICE RISK
The Corporation has entered into various commodity pricing agreements
designed to mitigate the exposure to the volatility of future crude oil
prices. As at December 31, 2004, the agreements are summarized as follows:
Notional Average
Volume Swap Price Unrealized Decrease To
Instrument (bbls/d) Hedge Period ($/bbl) Future Revenue (Cdn $)
--------------------------------------------------------------------------------------------------------------
WTI Swaps 14,000 January to March 2005 US$26.06 $ (26,333)
WTI Swaps 7,000 April to June 2005 US$26.87 (12,141)
WTI Swaps 7,000 July to September 2005 US$26.87 (11,609)
WTI Swaps 7,000 October to December 2005 US$26.87 (11,027)
--------------------------------------------------------------------------------------------------------------
$ (61,110)
==============================================================================================================
The Corporation, in accordance with Note 2(m), includes any settlement of
these risk management activities in revenue. The following summarizes the
impact of these risk management activities:
2004 2003
-------------------------------------------------------------------------
Decrease to Revenue $ 131,428 $ 8,307
-------------------------------------------------------------------------
(b) CREDIT RISK
A significant portion of the Corporation's accounts receivable is with
customers in the oil and gas industry, and is subject to normal industry
credit risks.
The Corporation's crude oil swap agreements are all with major financial
institutions in Canada.
(c) INTEREST RATE RISK
At December 31, 2004, the increase or decrease in net earnings for each one
per cent change in the interest rates on floating debt amounts to $2.2
million (2003 - $2.8 million).
(d) FOREIGN CURRENCY RISK
Foreign currency risk is the risk that a variation in exchange rates
between the Canadian dollar and foreign currencies will affect the
Corporation's operating and financial results. The Corporation has revenue
and expenses transacted in US dollars, and has US dollar denominated Senior
Secured Notes, as described in Note 8(a).
(e) FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES
The fair values of financial instruments that are included in the
Consolidated Balance Sheets, other than long-term borrowings, approximate
their carrying amount due to the relatively short period to maturity of
these instruments.
The estimated fair values of long-term borrowings have been determined
based upon market prices at December 31 for other similar liabilities with
similar terms and conditions, or by discounting future payments of interest
and principal at estimated interest rates that would be available to the
Corporation at year-end.
2004 2003
---------------------------------------------------------------------------------------------------------------
Balance Sheet Balance Sheet
Amount Fair Value Amount Fair Value
---------------------------------------------------------------------------------------------------------------
Floating Rate Debt:
Revolving Credit and Term Loan
Borrowings $ 216,000 $ 216,000 $ 279,000 $ 279,000
Other Long-term Liabilities 66,671 66,671 62,670 62,670
Fixed Rate Debt:
US Senior Secured Notes 541,620 628,979 581,580 661,547
---------------------------------------------------------------------------------------------------------------
Long-term Borrowings $ 824,291 $ 911,650 $ 923,250 $1,003,217
---------------------------------------------------------------------------------------------------------------
(18) COMMITMENTS AND CONTINGENCIES
(a) COMMITMENTS
The Corporation and the other owners of the oil sands Joint Venture have
entered into long-term third party agreements to purchase certain
feedstocks on a take-or-pay basis. This commitment has been measured based
on December 31, 2004 market prices. The Corporation and the other owners of
the oil sands Joint Venture have executed long-term third party agreements
to provide for pipeline transportation of bitumen and upgraded products,
electrical and thermal energy, production and supply of hydrogen and
transportation of natural gas. Under the terms of certain of these
agreements, the Corporation is committed to pay for these utilities and
services on a long-term basis, regardless of the extent that such services
and utilities are actually used. If due to project delay, suspension, shut
down or other reason, the Corporation fails to meet its commitment under
these agreements, the Corporation may incur substantial costs and may, in
some circumstances, be obligated to purchase the facilities constructed by
the third parties for a purchase price in excess of the fair market value
of the facilities.
The Corporation and the other owners of the oil sands Joint Venture have
entered into long-term operating lease obligations for certain equipment
related to the Project. The term of the lease obligations is between three
and seven years. The Corporation anticipates its share of the final value
of the leased equipment will total between $40 to $60 million. A guarantee
has been provided to the lessor in order to secure attractive leasing terms
and is payable when the equipment is returned to the lessor. At December
31, 2004, the Corporation's share of the maximum payable under the
guarantee was $39.5 million. However, any proceeds received from the sale
of the equipment would be used to offset against the payment required under
the guarantee. At December 31, 2004, the Corporation's share of committed
lease payments amounted to $48.4 million. The estimate of lease interest
obligations, excluding any committed payments, is $2.1 million for 2005,
$2.0 million for 2006, $1.9 million for 2007, $1.8 million for 2008, $0.9
million for 2009 and $0.2 million for 2010.
The following table summarizes the Corporation's operating commitments at
December 31, 2004:
MOBILE EQUIPMENT
FEEDSTOCKS UTILITIES LEASE TOTAL
----------------------------------------------------------------------------------------------------------
2005 $ 79,437 $ 31,807 $ 5,960 $ 117,204
2006 108,611 32,357 2,940 143,908
2007 111,757 33,333 3,340 148,430
2008 80,704 34,744 9,800 125,248
2009 87,816 34,769 17,640 140,225
Thereafter 62,117 590,377 8,700 661,194
----------------------------------------------------------------------------------------------------------
Total $ 530,442 $ 757,387 $ 48,380 $ 1,336,209
==========================================================================================================
b) CONTINGENCIES
The Corporation under the insurance coverage provided in our Joint Venture
construction policies has submitted claims in respect of the fire that
occurred in January 2003 at the Muskeg River Mine extraction plant. The
Corporation at December 31, 2004 has received a total of $16.1 million in
respect to this claim, $6.4 million of which was received during the year
ended December 31, 2004 with the remainder received during 2003. However,
certain insurers also involved in the Cost Overrun and Start Up Delay
Insurance dispute with the Corporation continue to withhold insurance
proceeds payable to the Corporation for these damages. These amounts being
withheld are approximately equal to the amounts recovered. The Joint
Venture has also filed a joint arbitration notice with the insurers in
respect to the $500 million delay in start-up claim ($100 million for the
Corporation's share) related to this fire. The arbitration notice has been
filed in an attempt to expedite collection of insurance proceeds on this
claim.
Arbitration proceedings under the terms of the Cost Overrun and Start Up
Delay Insurance policy have been initiated to resolve the disputes with
insurers surrounding these claims for payment. Following these arbitration
hearings we would expect to receive a binding decision from the panel with
respect to our claims. The Corporation has filed a Statement of Claim,
against the parties involved in placing and issuing the Cost Overrun and
Start Up Delay insurance policy, in an amount exceeding $200 million.
Aggravated and punitive damages totaling $650 million have also been
claimed against the insurers. The Statement of Claim will only be served on
the insurers and pursued in the courts in the event that resolution
procedures cannot otherwise be agreed to on a timely basis.
No amounts, other than those collected at December 31, 2004, have been
recognized in these statements relating to these insurance policies nor
will an amount be recognized until the proceeds are received.
The Corporation, in association with its 20 per cent ownership in the
Project, is a joint defendant and plaintiff in a number of legal actions
that arise in the normal course of business. The Corporation believes that
any liabilities that might arise pertaining to such matters would not have
a material effect on its consolidated financial position.
(19) NET CHANGE IN NON-CASH WORKING CAPITAL
SOURCE/(USE) 2004 2003
-------------------------------------------------------------------------
Operating Activities
Accounts Receivable $ (5,184) $ (53,309)
Inventory (5,086) (4,925)
Prepaid Expense 1,262 (7,033)
Accounts Payable and Accrued Liabilities 25,401 58,134
-------------------------------------------------------------------------
$ 16,393 $ (7,133)
-------------------------------------------------------------------------
Investing Activities
Accounts Receivable $ 614 $ 1,939
Accounts Payable and Accrued Liabilities (3,671) (33,138)
-------------------------------------------------------------------------
$ (3,057) $ (31,199)
=========================================================================
Western Oil Sands Inc. is a Canadian oil sands corporation which holds a 20
percent undivided interest in the Athabasca Oil Sands Project together with its
partners Shell Canada Limited (60 per cent) and ChevronTexaco Canada Limited (20
per cent). The Common Shares of Western are listed on the Toronto Stock Exchange
under the symbol "WTO". For additional information on Western Oil Sands, please
visit WWW.WESTERNOILSANDS.COM.
FOR FURTHER INFORMATION PLEASE CONTACT:
Guy J. Turcotte David A. Dyck
President Vice-President, Finance
and Chief Executive Officer and Chief Financial Officer
(403) 233-1700 (403) 233-1700
This information includes "forward looking statements" based upon current
expectations, estimates and projections of future production, project start-ups
and future capital spending, that involve a number of risks and uncertainties
which could cause actual results to differ materially from those anticipated by
the Corporation. These risks and uncertainties include, but are not limited to,
changes in; 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.
NOT FOR DISTRIBUTION TO U.S. NEWSWIRE SERVICES
OR DISSEMINATION IN THE UNITED STATES