WESTERN OIL SANDS INC.
September 9, 2005
Ms. Jill S. Davis
Branch Chief
United States
Securities and Exchange Commission
100 F Street, NE
Washington, D.C. 20549-7010
Form 40-F (File No. 333-90736)
Dear Ms. Davis,
Reference is made to comments to the Form 40-F (the "FORM 40-F") of
Western Oil Sands Inc., a Canadian corporation (the "COMPANY"), for the fiscal
year ended December 31, 2004 received from the Staff (the "STAFF") of the
Securities and Exchange Commission (the "COMMISSION") in a letter from the
Division of Corporation Finance, dated August 25, 2005 (the "COMMENT LETTER").
The discussion below is presented in the order of the numbered comments in the
Comment Letter and we have reproduced the comments for ease of reference.
Certain capitalized terms in this letter are used as defined in the Form 40-F.
The Company's responses to the Staff's comments are as follows:
FORM 40-F FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT),
PAGE 3
1. WE HAVE READ YOUR RESPONSE TO PRIOR COMMENT THREE WHEREIN YOU
INDICATE THAT YOU SEPARATE FEEDSTOCKS AND TRANSPORTATION COSTS
INCURRED FROM REVENUES EARNED BECAUSE YOU BELIEVE THAT YOUR
SHAREHOLDERS ARE INTERESTED IN REVENUES BEING GENERATED BY
YOUR BITUMEN RESERVES. YOU ALSO INDICATE THAT YOU DO NOT
CONSIDER FEEDSTOCKS AND TRANSPORTATION TO BE OPERATING SINCE
THESE TYPES OF COSTS ARE "INCURRED TO EITHER MINE OR UPGRADE
THE BITUMEN INTO A SALEABLE PRODUCT". PLEASE PROVIDE AN
ANALYSIS THAT EXPLAINS HOW YOU HAVE CONSIDERED THE GUIDANCE IN
EIC 123 - REPORTING REVENUE GROSS AS A PRINCIPAL VERSUS NET AS
AN AGENT.
Response to Comment 1:
The presentation on the face of the Company's Consolidated Statements
of Operations and Retained Earnings (Deficit) is as follows:
-----------------------------------------------------------------------
YEAR ENDED DECEMBER 31
(THOUSANDS, EXCEPT AMOUNTS PER SHARE) 2004 2003
-----------------------------------------------------------------------
REVENUES
Revenue (Note 17) $ 636,911 $ 281,093
Less Purchased Feedstocks and Transportation 315,236 117,580
----------------------
320,985 163,513
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Under EIC 123 revenue is required to be reported gross when the
following conditions are met:
o The enterprise is the primary obligor in the arrangement.
o The enterprise has general inventory risk (before customer order
is placed or upon customer return).
o The enterprise has latitude in establishing price.
o The enterprise changes the product or performs part of the
service.
o The enterprise has discretion in supplier selection.
o The enterprise is involved in the determination of product or
service specifications.
o The enterprise has physical loss inventory risk (after customer
order or during shipping).
o The enterprise has credit risk.
The Company has determined that its revenue stream, as described under
the caption Revenue (Note 17), is to be reported gross as required
under EIC 123 when circumstances agree to the above conditions. EIC 123
does not, nor does any further Canadian Generally Accepted Accounting
Principles, ("Canadian GAAP") preclude a sub-total being presented on
the face of the Consolidated Statement of Operations and Retained
Earnings (Deficit) which deducts certain amounts from gross revenue, as
long as the gross number is presented. This was considered when the
Company included both revenue and purchased feedstocks and
transportation on the face of the Consolidated Statements of Operations
and Retained Earnings (Deficit) in gross dollars, instead of netting
the two and displaying only a single line on the face of the
financials.
Operating expenses are different from purchased feedstocks as operating
expenses are costs incurred to either mine or upgrade bitumen into a
saleable product. These costs include, but are not limited to, labour,
fuel, natural gas, maintenance, electricity, catalysts, chemicals and
property taxes. Purchased feedstocks are crude products that are
introduced at the Upgrader, either into the hydrocracking/hydrotreating
process or as a blendstock to create various qualities of synthetic
crude oil products. The cost of feedstocks depends on world oil
markets. The Company does not generate significant economic
resources from the purchase of these feedstocks and the ultimate sale
of these feedstocks as a portion of our synthetic crude oil.
The transportation component of purchased feedstocks and transportation
are the cost to get the Company's upgraded products from Edmonton to
the final sales destination, which can be at a number of destinations
in Canada and the United States. When the Company does sell its
upgraded product downstream of Edmonton the sales price for that
product is adjusted to reflect the additional costs and is therefore
also included in revenue. The Company includes these costs in purchased
feedstocks and transportation and displays a sub-total reflecting the
difference between these costs and the revenue to provide a relevant
presentation to the investor, as the sub-total better reflects the
increase in economic resources to the Company as a result of its
business operations, which is the mining, upgrading and sale of its
bitumen resource from the Athabasca Oil Sands Project. The revenue
caption does not provide this alone, as it can fluctuate depending on
the cost of feedstocks and the geographic location where the Company
sells its products.
The Company also notes that the Auditor's Report that is attached to
its financial statements states that "these consolidated financial
statements present fairly, in all material respects, the financial
position of Western Oil Sands Inc. as at December 31, 2004 and 2003 and
the results of operations and its cash flows for the years then ended
in accordance with Canadian Generally Accepted Accounting Principles",
which would be inclusive of EIC 123.
In light of the Staff's comment, the Company would be willing to modify
its presentation of revenue and purchased feedstocks and transportation
in its future quarterly and annual financial statements. The proposed
presentation would remove the caption, Revenues, and instead have
Revenue and Purchased Feedstocks and Transportation as separate
captions, as displayed below:
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YEAR ENDED DECEMBER 31
(THOUSANDS, EXCEPT AMOUNTS PER SHARE) 2004 2003
-----------------------------------------------------------------------
REVENUE (NOTE 17) $ 636,911 $ 281,093
LESS PURCHASED FEEDSTOCKS AND TRANSPORTATION 315,236 117,580
-------------------------
320,985 163,513
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CONSOLIDATED STATEMENT OF CASH FLOWS, PAGE 4
2. WE HAVE REVIEWED YOUR RESPONSE TO PRIOR COMMENT NUMBER FOUR
AND ARE UNABLE TO AGREE WITH YOU CONCLUSION. AS PREVIOUSLY
NOTED, THE ILLUSTRATIVE EXAMPLE IN CICA 1540 PRESENTS A
SUBTOTAL THAT DOES NOT INCLUDE NET INCOME OR LOSS, AND ONLY
INCLUDES "ITEMS NOT EFFECTING CASH". ACCORDINGLY, WE REISSUE
OUR PRIOR COMMENT IN ITS ENTIRETY.
WE NOTE IN YOUR RECONCILIATION OF NET EARNINGS TO NET CASH
PROVIDED BY OPERATING ACTIVITIES THAT YOU PRESENT A SUBTOTAL
OF NET INCOME AND VARIOUS CHARGES AND CREDITS ABOVE TOTAL NET
CASH FROM OPERATING ACTIVITIES. SUPPORT YOUR DISCLOSURE OF
THIS SUBTOTAL UNDER CANADIAN GAAP AS THERE DOES NOT APPEAR TO
BE A PROVISION WITHIN CICA 1540 FOR THIS PRESENTATION.
Response to Comment 2:
The example provided in CICA 1540 is provided as an illustrative
example and not as authoritative guidance. In the Company's view
Canadian GAAP requires that the companies utilizing the indirect method
for presenting cash flow from operating activities present a total
including the effects of any change in non-cash working capital.
However Canadian GAAP does not prohibit the presentation of a sub-total
that does not include the effect of any change in non-cash working
capital.
The Company also notes that Canadian GAAP has guiding financial
statement concepts to be considered when preparing financial statements
and these principles are described in CICA 1000. Firstly, CICA 1000
discusses the need for financial statements to be comparable between
periods and between users. The Company believes the presentation of
this sub-total assists in achieving this concept. The sub-total
presented, as well as the total for operating activities, are included
in the consolidated statement of cash flows to provide two reference
points for comparability, instead of one. This enables the users of our
financial statements to determine what our cash flow from operations
are before any further investment in working capital, as well as after
any investment in working capital. It also enables users of our
financial statements to better compare our financial statements
directly with other Canadian public companies, whose Canadian GAAP
financial statements include this sub-total. These Canadian public
companies include, but are not limited to, Suncor Energy Inc.,
Petro-Canada, Shell Canada Limited, Talisman Energy Inc. and Encana
Corporation. Four of these five companies are listed on the New York
Stock Exchange and file periodic and current reports with the
Commission.
Secondly, CICA 1000 discusses the need for relevance, in particular to
predictive value and feedback value. The Company believes that this
sub-total provides additional information in both of these regards, as
it again provides two reference points to evaluate cash flow, one
before and one after changes in non-cash working capital. This enables
the user of our financial statements to predict and evaluate our cash
flow before and after any timing of payments or receipts
considerations, and the user's of our financial statements request this
information.
In light of the Staff's comment, the Company would be willing in future
US GAAP reconciliation notes to its annual financial statements to
disclose that the presentation of cash flow from operations or cash
flow from operating activities before changes in non-cash working
capital does not comply with the requirements under US GAAP.
The Company hereby acknowledges that:
o the Company is responsible for the adequacy and accuracy of the
disclosure in its filings, including the Form 40-F;
o Staff comments or changes to disclosure in response to Staff
comments do not foreclose the Commission from taking any action
with respect to the Company's filings, including the Form 40-F;
and
o the Company may not assert Staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
If you have any questions concerning the above responses, please do not hesitate
to contact the undersigned at (403) 233-1707.
Yours truly,
WESTERN OIL SANDS INC.
/s/ David Dyck
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David Dyck
Senior Vice President &
Chief Financial Officer