EXHIBIT 99.1
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WESTERN OIL SANDS
INTERIM REPORT FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 2006
MESSAGE TO SHAREHOLDERS
Western Oil Sands Inc. ("Western") announced today its financial and operating
results for the first quarter of 2006. Western generated net revenue of $139.2
million, EBITDAX of $62.1 million and cash flow from operations of $47.8
million ($0.30 per share) and a net loss of $21.6 million ($0.13 per share) in
the first quarter of 2006. By comparison, in the first quarter of 2005, Western
generated net revenue of $91.7 million, EBITDAX of $27.4million, cash flow from
operations of $10.8 million ($0.07 per share) and a net loss of $1.9 million
($0.01 per share). In the first quarter of 2006, our net loss included $68.3
million in unrealized foreign exchange and unrealized risk management losses
($45.2 million net of tax) compared to an unrealized foreign exchange loss of
$2.7 million ($2.2 million net of tax) for the first quarter of 2005. Excluding
the impact of risk management and foreign exchange losses each net of tax, net
earnings for the first quarter of 2006 would have equated to $23.6 million
compared to net earnings of $0.3 million for the prior year period.
Western's financial performance during the first quarter of 2006 was
positively impacted by a 27 per cent increase in West Texas Intermediate
("WTI") prices and the absence of production volumes subject to fixed-priced
swap contracts. However, wider light to heavy crude oil differentials, a
strengthening Canadian dollar relative to the US dollar compared to the first
quarter of 2005, and a production interruption associated with repairs to the
conveyor belt at the Mine had an adverse impact on our results.
HIGHLIGHTS
o During the first quarter of 2006, production averaged 25,945 barrels per
day net to Western compared to 26,503 barrels per day net to Western in the
first quarter of 2005. Production for the quarter was lower than anticipated
due to an unplanned slowdown at the Mine resulting from a longitudinal tear in
the conveyor belt that transports bitumen ore from the primary crushers at the
Mine to the Extraction Plant. Through the dedicated efforts of personnel at the
Mine, the Project operated at approximately one-third of stated design rates
while the replacement belt was prepared for installation. The installation
itself was flawlessly executed and completed ahead of schedule with production
interruptions limited to 22 days starting from February 24th. Full production
resumed earlier than anticipated and subsequent to this repair, rates have
exceeded stated design rate capacity averaging approximately 34,000 barrels per
day net to Western from the date of return to full operations to the end of the
quarter.
o Western announced a significant increase in its undeveloped land base as
part of its year-end disclosure. Over the course of the last year, the land
position held by Joint Venture Participants has increased to over 280,000
acres, of which 71 per cent represents mineable leases. As a result, Western's
rights with respect to its net undeveloped land acreage has more than doubled
to 60,000 acres.
o As previously disclosed, Western purchased Lease 353 during 2005 which may
be conducive to in-situ development. This lease acquisition directly aligns
with our long-term growth strategy to capture large hydrocarbon resources with
long-life potential and complements our existing asset base. It is estimated
that over 80 per cent of the oil sands resource in the Athabasca region is
in-situ and Western's lease acquisition represents the initial step of a more
comprehensive in-situ program. Over the past year, we have augmented our
technical team and expanded our core competencies to take advantage of
opportunities such as this, and this team has been instrumental in developing
our long-term in-situ participation and technical development strategy.
o As an entrepreneurial growth-oriented company focused on shareholder value
creation, Western's strategy includes opportunistically growing our business
and leveraging our strengths by taking our core competencies and skills and
applying them to new business opportunities. In this regard, we continue to
identify and evaluate new business opportunities related to large, long-life
resource capture and technology development. In addition, in response to the
wider light to heavy crude oil differentials currently being experienced in the
market, Western is independently evaluating different forms of upgrading and
refining in order to reduce the impact of heavy oil differentials. Moreover, we
continue to evaluate various downstream initiatives which vary in size and
scope, all of which are focused on the further upgrading of heavy oil products.
As a matter of policy, Western does not discuss any specific business
opportunity until such time as it has been fully considered, it is
contractually secured or it is material to Western.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion of financial condition and results of operations was
prepared as of April 26, 2006 and should be read in conjunction with the
Interim Unaudited Consolidated Financial Statements for the periods ended March
31, 2006 and 2005 and the Audited Consolidated Financial Statements at December
31, 2005 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 and prospective investors of the Company's securities to not place
undue reliance on forward-looking information as by its nature, it is based on
current expectations regarding future events that involve a number of
assumptions, inherent risks and uncertainties, which could cause actual results
to differ materially from those anticipated by Western. These risks include,
but are not limited to, risks of commodity prices in the marketplace for crude
oil and natural gas; risks associated with the extraction, treatment and
upgrading of mineable oil sands deposits; risks surrounding the level and
timing of capital expenditures required to fulfill the Project's growth
strategy; risks of financing these growth initiatives at commercially
attractive levels; risks of being unable to
participate in expansion and corresponding loss of voting rights in the AOSP;
risks relating to the execution of the Project's optimization strategy; risks
involving the uncertainty of estimates involved in the reserve and resource
estimation process and ore body configuration/geometry, uncertainty in the
assessment of asset retirement obligations, uncertainty in the estimation of
future income taxes, and uncertainty in treatment of capital for royalty
purposes; risks surrounding health, safety and environmental matters; risk of
foreign exchange rate fluctuations; risks and uncertainties associated with
securing the necessary regulatory approvals for expansion initiatives; risks
surrounding major interruptions in operational performance together with any
associated insurance proceedings thereto; and risks associated with
identifying, negotiating and completing our other business development
activities, both those that relate to oil sands activities and those that do
not, either domestically or abroad.
For additional information relating to the risks and uncertainties facing
Western, refer to Western's Annual Information Form for the year ended December
31, 2005 which is available on SEDAR at www.sedar.com.
Highlights
Three Months Ended March 31
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2006 2005
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Operating Data
Bitumen Production (bbls/d) 25,945 26,503
Synthetic Crude Sales (bbls/d) 37,188 34,488
Operating Expense per Processed Barrel ($/bbl) 26.12 25.46
Financial Data ($ thousands, except as indicated)
Net Revenue 139,248 91,743
Realized Crude Oil Sales Price - Oil Sands ($/bbl) (1) (2) 55.31 38.76
EBITDAX (1) (3) 62,100 27,416
Cash Flow from Operations (4) 47,770 10,770
Cash Flow per Share - Basic ($/Share) (1) (5) 0.30 0.07
Risk Management Loss (67,724) -
Net Loss (6) (21,575) (1,944)
Net Loss Per Share ($/Share)
Basic and Diluted (0.13) (0.01)
Net Capital Expenditures (7) 35,331 17,554
Long-term Financial Liabilities (8) 661,765 827,553
Long-term Debt 525,195 773,320
Weighted Average Shares Outstanding - Basic (Shares) 160,568,322 159,958,482
=====================================================================================================
(1) Please refer to page 11 for a discussion of Non-GAAP financial measures.
(2) Realized Crude Oil Sales Price ($/bbl) is calculated as Oil Sands Revenue
less any transportation costs, net of hedging activities, divided by total
Synthetic Crude Sales for the period. Please refer to page 4 for
calculation.
(3) Earnings before interest, taxes, depreciation, depletion, amortization,
stock based compensation, accretion on asset retirement obligation, risk
management and foreign exchange as calculated on page 9.
(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) Long-term financial liabilities includes long-term debt, option premium
liability and lease obligations.
OPERATING RESULTS
Production
During the first quarter of 2006, Western's net bitumen production averaged
25,945 barrels per day compared to 26,503 barrels per day in the first quarter
of 2005. Unplanned operational outages impacted production in both the first
quarter of 2006 and 2005. First quarter 2006 production was predominantly
impacted by the unplanned outage and subsequent replacement of the conveyor
belt at the Mine which transports bitumen ore from the primary crushers to the
Extraction Plant. In the first quarter of 2005, production was interrupted due
to completion of repairs stemming from unplanned outages at the Upgrader in the
fourth quarter of 2004. During the second quarter of 2006, the Athabasca Oil
Sands Project ("AOSP") is undertaking a full planned turnaround of the entire
Project. Considerable care and planning has been directed to this effort to
ensure an expeditious return to full production in mid-2006. It is anticipated
the turnaround activities will span an eight-week time period, where a portion
of this schedule will be associated with an operational slowdown prior to the
shutdown and a subsequent ramp-up period to full production.
Net Revenue Three Months Ended March 31
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($ thousands, except as indicated) 2006 2005
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Revenue
Oil Sands (1) 185,355 120,309
Marketing and Transportation 22,405 45,823
Total Revenue 207,760 166,132
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Purchased Feedstocks and Transportation
Oil Sands 46,205 27,565
Marketing and Transportation 22,307 46,824
Total Purchased Feedstocks and Transportation 68,512 74,389
================================================================================================
Net Revenue
Oil Sands (1) 139,150 92,744
Marketing and Transportation 98 (1,001)
Total Net Revenue 139,248 91,743
Synthetic Crude Sales (bbls/d) 37,188 34,488
Realized Crude Oil Sales Price ($/bbl) (2) 55.31 38.76
================================================================================================
(1) Oil Sands Revenue and Net Revenue are presented net of Western's hedging
activities.
(2) Realized Crude Oil Sales Price ($/bbl) is calculated as Oil Sands Revenue
less any transportation costs divided by total Synthetic Crude Sales for
the period. For the three months ended March 31, 2006, $0.2 million
(Q1-2005 - nil) has been incurred for transportation costs related to Oil
Sands.
Revenue
Western recorded crude oil sales revenue of $207.8 million in the first quarter
of 2006, including $185.4 million from the sale of proprietary production,
compared to $166.1 million in the first quarter of 2005, including
$120.3million from the sale of proprietary production. This year-over-year
increase is largely the result of a higher realized selling price per barrel
due to higher underlying WTI prices, combined with the absence of production
volumes subject to fixed price swap contracts compared to the prior year
period, partially offset by a strengthening of the Canadian dollar relative to
the US dollar and wider heavy crude oil differentials. Should crude oil prices
maintain their present levels, Western anticipates materially higher realized
crude sales prices over the remainder of fiscal 2006 relative to the comparable
prior year period as a result of the expiry of the fixed price hedging program
on December 31, 2005. Western does not have any 2006 production volumes subject
to risk management activities at the present time.
Oil sands sales volumes, which include bitumen and purchased feedstocks,
averaged 37,188 barrels per day in the first quarter of 2006 compared to
34,488 barrels per day in the first quarter of 2005. Sales volumes in the first
quarter of 2006 were approximately 10 per cent higher compared to first quarter
of 2005 and were adversely impacted by an unplanned repair and replacement of
the conveyer belt at the Mine, resulting in reduced saleable product volumes
ultimately produced from the Upgrader.
The first quarter of 2006 was characterized by continued strength in
commodity prices with WTI averaging US$63.48 per barrel for the quarter, a six
per cent increase over the fourth quarter of 2005 and a 27 per cent increase
compared to the prior year period. Western's realized price increased to $55.31
per barrel in the first quarter of 2006 as compared to $38.76 per barrel the
prior year period. Sales price realizations increased by $4.66 per barrel from
the fourth quarter of 2005. During these same time periods, heavy oil
differentials, which are correlated to the price of WTI, widened. With heavy
oil products in the overall sales mix, absolute commodity prices and heavy oil
market differentials affect average synthetic crude oil price realizations.
Western's price differential widened compared to the prior year period as a
result of broader market forces which caused heavy oil differentials to widen
to 46 per cent of WTI compared to 40 per cent of WTI in the first quarter of
2005 or, in absolute dollar terms, approximately US$29.00 per barrel in the
first quarter of 2006 compared to approximately US$20.00 per barrel in the
prior year period. This represents a 47 per cent increase in the last 12
months. This was partially offset by marginally lower heavy volumes in
percentage terms in the overall sales mix. Subsequent to the end of the first
quarter, the light to heavy differential narrowed considerably as a result of
several factors, the most significant of which include: seasonal asphalt demand
causing refiners to process additional volumes of available heavy crude oil and
the opening of new incremental markets for Canadian heavy crude oil into the
United States.
Western generated net revenue of $139.2 million in the first quarter of
2006, after considering the impact of purchased feedstocks and transportation
costs downstream of Edmonton. By comparison, net revenue of $91.7 million was
recorded in the first quarter of 2005. Feedstocks are crude oil 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 depends on world
oil markets and the spread between heavy and light crude oil prices.
Operating Costs
Western's unit cash operating costs were $26.12 per processed barrel for the
first quarter of 2006 compared to $25.44 (restated) per processed barrel for
the first quarter of 2005 and $23.44 per processed barrel for the fourth
quarter of 2005. Compared to the first quarter of 2005, this increase is
largely attributable to operational outages predominantly stemming from the
conveyor belt repair at the Mine during the first quarter. As the majority of
our operating costs are fixed in nature, lower than anticipated production
results in a higher unit operating cost as fixed costs are allocated over fewer
barrels. Higher operating costs compared to the same time period last year also
reflect higher natural gas costs.
Compared to the fourth quarter of 2005, unit operating costs increased
$2.68 per processed barrel in the first quarter of 2006. This increase was
largely due to decreased bitumen production during the first quarter of 2006
which occurred as a result of the unplanned repair and replacement of the
conveyor belt, somewhat offset by reduced natural gas costs during the repair
period.
Three Months Ended March 31
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($ thousands, except as indicated) 2006 2005
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Operating Expenses For Bitumen Sold
Operating Expense - Income Statement 63,930 59,143 (2)
Operating Expense - Inventoried (1,631) 788
Total Operating Expenses For Bitumen Sold 62,296 59,931
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Sales (barrels per day)
Total Synthetic Crude Sales 37,188 34,488
Purchased Upgrader Blend Stocks 10,687 8,314
Synthetic Crude Sales Excluding Blend Stocks 26,501 26,174
Operating Expenses Per Processed Barrel ($/bbl) (1) 26.12 25.44 (2)
=================================================================================================
(1) Operating Expenses Per Processed Barrel ($/bbl) is calculated as Total
Operating Expenses For Bitumen Sold divided by Synthetic Crude Sales
Excluding Blend Stocks.
(2) Amount restated to reflect $45 thousand reclassified to Research and
Business Development previously accounted for as operating expenses.
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. The
calculation recognizes that, intrinsic in the Project's operations, bitumen
production from the Mine receives an approximate three per cent uplift as a
result of the hydrotreating/hydroconversion process, which is included in
synthetic crude sales excluding blendstocks.
Royalties
Royalties of $0.6 million in the first quarter of 2006 remained unchanged from
the first quarter of 2005. Year-over-year amounts are consistent as a result of
higher deemed bitumen royalty prices, offset by lower production volumes.
Compared to the fourth quarter of 2005, royalties decreased $0.4 million in the
first quarter of 2006, primarily the result of a decrease in production volumes
partially offset by higher deemed bitumen prices.
CORPORATE RESULTS
Research and Business Development Expense
Western incurred $6.0 million in research and business development expenses in
the first quarter of 2006, $3.8million of which relates specifically to
AOSP-related research and development projects. This compares to $0.7 million
recorded for research and business development expenses in the first quarter of
2005. The increase is the result of additional efforts in research and business
development.
General and Administrative Expense
General and administrative expenses ("G&A") were $3.9 million for the first
quarter of 2006 compared to $1.9 million (restated to reflect $0.7 million
reclassified to Research and Business Development) for the first quarter of
2005. This increase is due to the increased number of employees within Western,
together with additional consulting costs for various corporate initiatives.
Insurance Expense
Insurance expenses were $2.7 million for the first quarter of 2006 compared to
$1.9 million in the first quarter of 2005. Insurance expenses were higher
compared to the prior year period due to additional premiums associated with
increased levels of coverage, partially offset by the strengthening of the
Canadian dollar as the premiums are paid in US dollars but reported for
financial statement purposes in Canadian dollars.
Interest Expense
Interest expense totaled $13.0 million in the first quarter of 2006 compared to
$15.1 million in the first quarter of 2005. First quarter 2006 interest expense
is comprised of $11.3 million related to interest charges on debt obligations
(Q1-2005 - $14.5 million), $0.7 million (Q1-2005 - $0.5 million) on capital
lease obligations and $1.0 million (Q1-2005 - nil) on the option premium
liability. The option premium liability relates to Western's strategic crude
oil risk management program implemented in the third quarter of 2005, and the
decision to defer the premiums associated with the put and call options
purchased and sold, respectively. Imbedded in the prices of the deferred
options is a financing charge which is reported as interest expense.
The 14 per cent decrease in total interest expense compared to the first
quarter of 2005 is largely the result of the Canadian dollar strengthening
against the US dollar during this period compared to the prior year period,
thereby reducing interest charges on our US denominated Notes which are
reported in Canadian dollars, and the significant reduction in the Revolving
Credit Facility over the comparable period. Interest expense decreased by $0.8
million in the first quarter of 2006 compared to the fourth quarter of 2005 due
to a further decrease in the balance drawn on the Revolving Credit Facility,
together with lower negotiated interest rates on the Revolving Credit Facility,
partially offset by a marginal weakening of the Canadian dollar during the
first quarter against the US dollar.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization ("DD&A") totaled $10.5 million for the
first quarter of 2006 and was equivalent to the first quarter of 2005.
Year-over-year amounts are comparable due to similar production levels over
both time periods, together with reasonably similar reserve bases used in
calculating the unit of depletion.
Foreign Exchange
During the first quarter of 2006, Western reported a foreign exchange loss of
$0.4 million compared to a loss of $2.9 million in the first quarter of 2005.
This loss is as a result of the marginal weakening of the Canadian dollar
against the US dollar compared to the previous quarter's month-end noon-day
rate. Western's long-term notes and option premium liability are converted at
the month-end noon-day rate. As reference points, the noon-day closing foreign
exchange rate on March 31, 2006 was $0.8568 US/Cdn compared to $0.8577 US/Cdn
on December 31, 2005 and $0.7631 US/Cdn on March 31, 2005. The average rate for
the first quarter of 2006 was $0.8659 US/Cdn compared to $0.8155 US/Cdn for the
prior year period and $0.8524 US/Cdn for the fourth quarter of 2005.
Risk Management Activities
Western's initial fixed price hedging program expired on December 31, 2005.
Western has no risk management activities associated with fiscal 2006 and, as
such, crude oil price realizations in the first quarter of 2006 were not
impacted by risk management activities. Realizations in the first quarter of
2005 were negatively impacted by $11.85 per barrel due to risk management
activities.
Three Months Ended March 31
(Unaudited) 2006 2005
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Decrease in Revenue ($ thousands) - 36,794
Decrease in Revenue ($/bbl) - 11.85
=========================================================================================
In the third quarter of 2005, Western implemented strategic crude oil
hedges in order to provide greater cash flow certainty during those years where
significant AOSP expansion capital expenditures are expected. Western employed
a collar strategy whereby a series of put and call options were purchased and
sold with a number of major financial institutions. The program established a
weighted average floor price of US$52.42 on 20,000 barrels per day and a
ceiling price of US$92.41 on an average 13,333 barrels per day for the period
January 2007 through to December2009.
Western is not utilizing hedge accounting treatment under Canadian GAAP
for this program and, as a result, certain mark-to-market adjustments will flow
through our financial statements. These adjustments are created from the
changes in the fair market value of the financial instruments employed over the
time period in question. For the period ended March 31, 2006, Western's risk
management assets decreased significantly in value from the amount recorded as
at December 31, 2005, resulting in a mark-to-market loss of $67.7 million
($44.7 million net of tax) primarily due to the significant strengthening in
WTI prices during the quarter. This loss does not impact stated cash flow from
operations.
Three Months Ended March 31
(Unaudited) ($ thousands) 2006 2005
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Risk Management Asset - Beginning of Period 98,426 -
Net Premium - -
Decrease in Fair Value 67,724 -
Risk Management Asset - End of Period 30,702 -
=========================================================================================
Income Taxes
For the first quarter of 2006, Western had an income tax recovery of $9.9
million compared to an expense of $0.06million for the same period last year.
This reflects the tax recovery largely generated from the risk management loss
partially reduced by the future income tax expense from Western's other net
earnings.
Net Loss
During the first quarter of 2006, Western reported a net loss of $21.6 million
($0.13 per share) compared to a net loss of $1.9 million ($0.01 per share) in
the first quarter of 2005. The net loss in the first quarter of 2006 includes
the impact of $67.7 million ($44.7 million net of tax) in risk management
losses, in addition to $0.6 million ($0.5million net of tax) in foreign
exchange losses on our US dollar denominated debt and option premium liability.
The following table provides the reconciliation between Net Loss, Cash
Flow from Operations (before changes in non-cash working capital) and EBITDAX:
Reconciliation: Net Loss to EBITDAX Three Months Ended March 31
($ thousands) 2006 2005
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Net Loss (21,575) (1,944)
Add (Deduct):
Depreciation, Depletion and Amortization 10,546 10,498
Accretion on Asset Retirement Obligation 155 141
Stock-based Compensation 1,791 641
Unrealized Foreign Exchange Loss 636 2,700
Unrealized Risk Management Loss 67,724 -
Future Income Tax Recovery (10,383) (648)
Interest Expense on Option Premium Liability 952 -
Cash Settlement on Performance Share Units (2,076) (596)
Cash Settlement on Asset Retirement Obligation - (22)
Cash Flow From Operations, Before Changes in Non-Cash Working Capital 47,770 10,770
Add (Deduct):
Interest (excluding interest on Option Premium Liability) 12,077 15,086
Realized Foreign Exchange Loss (Gain) (266) 234
Large Corporations Tax 443 708
Cash Settlement on Performance Share Units 2,076 596
Cash Settlement on Asset Retirement Obligation - 22
EBITDAX 62,100 27,416
=====================================================================================================
EBITDAX (Earnings before Interest, Taxes, Depreciation, Depletion,
Amortization, Stock-based Compensation, Accretion on Asset Retirement
Obligation, Foreign Exchange and Risk Management) was $62.1 million for the
first quarter of 2006, reflecting a 127 per cent increase over the $27.4
million recorded for the first quarter of 2005. First quarter 2006 EBITDAX
decreased $22.4 million compared to the fourth quarter of 2005. The improvement
in EBITDAX from the previous year's comparative quarter is mainly the result of
the increase in the average synthetic crude oil sales price due to higher WTI
prices and the absence of fixed priced swaps, offset by one-time charges
associated with the repairs to address the operational issues encountered
during the first quarter, along with higher variable costs which are correlated
to higher WTI prices. The decrease in EBITDAX from the prior quarter is
primarily the result of lower than anticipated production, partially offset by
higher realized sales prices and the expiry of the fixed price hedging program
in December 2005.
Cash flow from operations before changes in non-cash working capital
("cash flow from operations") was $47.8million for the first quarter of 2006
compared to $10.8 million in the first quarter of 2005. First quarter 2006 cash
flow from operations decreased $22.6 million over the fourth quarter of 2005.
This decrease is the result of lower bitumen production, partially offset by an
increase in the average synthetic crude oil sales price.
FINANCIAL POSITION
Bank Debt
During the first quarter of 2006, Western repaid $41 million on its $340
million Revolving Credit Facility (the "Revolving Credit Facility") bringing
the amount outstanding to nil as a result of positive cash flow from operations
during the quarter.
Western has previously communicated that the total capacity of the
Revolving Credit Facility was limited to $299million based on certain
covenants. This ceiling is a function of the before tax net present value of
Western's share of the proved reserves associated with the Project based on a
constant price discounted at 10 per cent. As a result of Western's most recent
independent appraisal of the value associated with our proved reserves, we have
access to the full $340 million capacity under the Revolving Credit Facility.
Western's debt to total capitalization as at March 31, 2006 equaled 49 per cent
compared to 60 per cent as at March 31, 2005.
Capital Expenditures
Western's capital expenditures totaled $35.3 million in the first quarter of
2006 compared to $17.6 million in the first quarter of 2005. Capital
expenditures in the first quarter of 2006 included $10.9 million for production
optimization programs and AOSP project capital, $3.2 million for sustaining
capital, $19.2 million for expansion related capital, $0.8 million for new
business development and $1.2 million for other corporate expenditures.
Analysis of Cash Resources
Cash balances totaled $15.7 million at March 31, 2006 compared to $5.7 million
at March 31, 2005. During the quarter, Western repaid the entire outstanding
balance under its Revolving Credit Facility and, as a result, excess free cash
flow will be accumulated on the balance sheet to fund the upcoming turnaround
in the short term. Longer term, excess free cash flow will be applied to future
capital commitments relating to the first expansion phase. Cash inflows
included: $47.8 million in cash flow from operations and $2.6 million from the
exercise of employee stock options and a $36.5 million increase in non-cash
working capital. Cash outflows included: capital expenditures of $35.3 million,
long-term debt repayment of $41.0 million and repayment of obligations under
capital lease and deferred charges of $0.3 million.
During the first quarter of 2006, the increase in non-cash working capital
was the result of a $25.7 million decrease in accounts receivable, a $21.0
million increase in accounts payable and a $0.7 million decrease in prepaid
expenses, offset by a $10.9 million increase in inventory. The decrease in
accounts receivable is the result of decreased sales volumes stemming from the
unplanned outage during the quarter. The increase in accounts payable reflects
an additional three months of accrued interest on the US denominated debt and
increased accruals related to both oil sands and marketing feedstocks costs.
Inventory is higher as a result of additional barrels of finished product in
inventory, together with higher production costs associated with these barrels.
Insurance Claims
There were no new developments during the first quarter of 2006 with respect to
Western's ongoing arbitration proceedings concerning the Cost Overrun and
Project Delay insurance policy, known as Section IV. Western anticipates that
formal arbitration hearings will commence during 2007.
Flow-Through Shares
Related to the issuance of flow-through shares in 2001 and 2002, Western
renounced Canadian exploration expenses in the aggregate amount of $29.2
million and $19.5 million, respectively. Under the mechanics of renouncing
qualifying expenditures pursuant to flow-through shares, individual
shareholders can reduce their income subject to personal income taxes.
Commencing in the latter part of the year, discussions were held between the
AOSP and the Canada Revenue Agency ("CRA") regarding the proper
characterization of certain expenditures included in the Canadian exploration
expenses in those years. If the CRA successfully asserts a change in the
characterization of these expenditures, any resulting reduction in the
renunciations could impact Western's obligations under the indemnity provisions
in the subscription agreements and, in turn, will impact Western's reported
results. The subscription agreements for such flow through shares stipulate
that Western has indemnified subscribers for an amount equal to the tax payable
and any associated interest by the subscribers if such renunciations are
reduced under the Income Tax Act (Canada).
OUTLOOK FOR THE REMAINDER OF 2006
As evidenced by record production levels set during 2005 and rates achieved
following the replacement of the conveyer belt, the AOSP is already seeing the
benefits of numerous production optimization initiatives completed to date.
Over the course of 2006, Western will continue to allocate capital to
production optimization initiatives as the Project works towards achieving
reliable and sustainable production volumes.
The AOSP will undertake its first full plant turnaround during the second
quarter of 2006. It is anticipated that production will quickly return to
levels achieved leading up to the turnaround which were well above stated
design rates. In addition, we look forward to potentially benefiting from
additional production optimization resulting from the full plant turnaround.
Consequently, Western is maintaining its production guidance of 29,000 to
30,000 barrels per day for 2006.
AOSP Expansion Update
The AOSP continues to make solid progress on the first expansion phase. We are
moving methodically towards completing the third and final gate of the gating
process, the culmination of which will be a final investment decision. This
final gate more narrowly defines the scope of the expansion, in addition to
estimating the capital cost to a higher degree of certainty. In the third
quarter of 2006, it is anticipated that Western will seek final Board approval
of the first expansion phase and, at that time, we will be in a position to
book additional reserves associated with the east side of Lease13.
Resources
Western recently outlined the total land base in the Athabasca region in which
we have rights to participate. This land position represents acreage with
unevaluated land, resources and reserves. As Western moves closer to the
extraction of bitumen resources on the various leases, further delineation and
classification of the recoverable barrels will ensue. Western's right to
participate in the mineable oil sands leases held by Shell (namely leases 13,
90, 88, 89 and 9), and excluding those acquired in 2005, has not changed
materially in total; however, the barrels associated with specific leases has
been adjusted to reflect certain property swaps to ensure a contiguous land
position in order to facilitate a viable mining plan. Additional core hole
drilling to further understand the quality and extent of the ore and changes in
evaluation processes and procedures used to define in-place resources has also
provided a refinement of the resource potential.
Business and Financial Risks
Western is subject to a number of business and financial risks that are typical
given the nature of Western's operations. These risks are described in
Western's previous public disclosures, including the 2005 Annual Report and
Annual Information Form, which are available on the Company's website.
Non-GAAP Financial Measures
Western includes cash flow from operations per share, cash flow from operations
excluding hedging activities, earnings before interest, taxes, depreciation,
depletion and amortization, stock-based compensation, accretion on asset
retirement obligation, foreign exchange gains and gains or losses on risk
management activities ("EBITDAX"), EBITDAX excluding hedging activities and net
earnings excluding hedging activities 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 per Share and Net Earnings 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.
BALANCE SHEETS
As at March 31, As at December 31,
(Unaudited) ($ thousands) 2006 2005
- -----------------------------------------------------------------------------------------------------
Assets
Current Assets
Cash 15,746 5,590
Accounts Receivable 61,713 87,398
Inventory 31,982 21,083
Prepaid Expense 8,686 9,355
Risk Management (note 12) 1,933 -
120,060 123,426
Property, Plant and Equipment (note 1) 1,378,524 1,352,605
Risk Management (note 12) 28,769 98,426
Deferred Charges 15,423 16,063
1,422,716 1,467,094
1,542,776 1,590,520
=====================================================================================================
Liabilities
Current Liabilities
Accounts Payable and Accrued Liabilities 122,320 101,303
Current Portion of Lease Obligations (note 3) 3,192 3,396
Current Portion of Option Premium Liability (note 4) 6,065 -
131,577 104,699
Long-term Liabilities
Long-term Debt (note 2) 525,195 565,655
Lease Obligations (note 3) 56,171 55,809
Option Premium Liability (note 4) 80,399 85,416
Asset Retirement Obligation (note 5) 9,249 9,094
Future Income Tax (note 10) 46,062 56,445
717,076 772,419
848,653 877,118
Shareholders' Equity
Share Capital (note 6) 551,742 548,747
Contributed Surplus (note 9) 2,775 3,474
Retained Earnings 139,606 161,181
694,123 713,402
1,542,776 1,590,520
=====================================================================================================
Commitments and Contingencies (note 11)
See Accompanying Notes to the Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
Three Months Ended March 31
(Unaudited) ($ thousands, except amounts per share) 2006 2005
- -----------------------------------------------------------------------------------------------------
Revenues (note 12) 207,760 166,132
Less Purchased Feedstocks and Transportation 68,512 74,389
139,248 91,743
Expenses
Operating 63,930 59,143
Research and Business Development 6,022 687
Royalties 640 661
General and Administrative 3,892 1,939
Insurance 2,664 1,897
Interest (note 8) 13,029 15,086
Stock-based Compensation (note 9) 1,791 641
Accretion on Asset Retirement Obligation (note 5) 155 141
Depreciation, Depletion and Amortization 10,546 10,498
102,669 90,693
Net Earnings Before Other Income and Income Taxes 36,579 1,050
Other Expense
Foreign Exchange Loss 370 2,934
Risk Management Loss (note 12) 67,724 -
Net Loss Before Income Taxes (31,515) (1,884)
Income Tax (Recovery) Expense (note 10) (9,940) 60
Net Loss (21,575) (1,944)
Retained Earnings at Beginning of Period 161,181 11,732
Retained Earnings at End of Period 139,606 9,788
Net Loss Per Share (note 7)
Basic and Diluted (0.13) (0.01)
=====================================================================================================
See Accompanying Notes to the Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31
(Unaudited) ($ thousands) 2006 2005
- -----------------------------------------------------------------------------------------------------
Cash Provided by (Used In)
Cash From Operating Activities
Net Loss (21,575) (1,944)
Non-cash Items
Stock-based Compensation (note 9) 1,791 641
Accretion on Asset Retirement Obligation (note 5) 155 141
Depreciation, Depletion and Amortization 10,546 10,498
Interest Expense on Option Premium Liability (note 4) 952 -
Unrealized Loss on Risk Management (note 12) 67,724 -
Unrealized Foreign Exchange Loss (notes 2 and 4) 636 2,700
Future Income Tax Recovery (note 10) (10,383) (648)
Cash Items
Cash Settlement of Asset Retirement Obligation (note 5) - (22)
Cash Settlement of Performance Share Unit Plan (note 9) (2,076) (596)
Cash Flow From Operations 47,770 10,770
Decrease (Increase) in Non-cash Working Capital (note 13) 13,368 (5,443)
61,138 5,327
Cash From (Used In) Financing Activities
Issue of Share Capital (note 6) 2,581 801
(Repayment) Issue of Long-term Debt, Net (41,000) 13,000
Repayment of Obligations Under Capital Lease (336) (335)
(38,755) 13,466
Cash Invested
Capital Expenditures (35,331) (17,554)
Decrease in Non-cash Working Capital (note 13) 23,104 725
(12,227) (16,829)
Increase in Cash 10,156 1,964
Cash at Beginning of Period 5,590 3,715
Cash at End of Period 15,746 5,679
=====================================================================================================
See Accompanying Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Tabular amounts in $ thousands, except for share amounts)
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, 2005. 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, 2005.
1. PROPERTY, PLANT AND EQUIPMENT
Accum.
March 31, 2006 Cost DD&A* Net
- --------------------------------------------------------------------------------
Athabasca Oil Sands Project
Producing Assets 1,366,110 (114,456) 1,251,654
Capital Leases 52,705 (4,670) 48,035
Expansions 57,431 - 57,431
1,476,246 (119,126) 1,357,120
Corporate and Other 22,850 (1,446) 21,404
1,499,096 (120,572) 1,378,524
================================================================================
Accum.
December 31, 2005 Cost DD&A* Net
- --------------------------------------------------------------------------------
Athabasca Oil Sands Project
Producing Assets 1,350,436 (105,010) 1,245,426
Capital Leases 52,705 (4,294) 48,411
Expansions 38,235 - 38,235
1,441,376 (109,304) 1,332,072
Corporate and Other 21,895 (1,362) 20,533
1,463,271 (110,666) 1,352,605
================================================================================
* Accumulated Depreciation, Depletion and Amortization
At March 31, 2006, the Producing Assets in the Athabasca Oil Sands Project (the
"AOSP") include asset retirement costs of $7.1 million ($7.0 million - 2005).
Costs not currently subject to depreciation, depletion and amortization include
$62.6 million relating to the AOSP and $16.3 million relating to Corporate and
Other, as the projects associated with these costs were not substantially
complete and there has been no commercial production associated with these
projects.
2. LONG-TERM DEBT
March 31, December 31,
2006 2005
- --------------------------------------------------------------------------------
US $450 million Senior Secured Notes 525,195 524,655
Revolving Credit Facility - 41,000
525,195 565,655
================================================================================
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 month
period ended March 31, 2006 was $0.5 million (March 31, 2005 - $2.7 million
unrealized foreign exchange loss). As at March 31, 2006, a total of $183.7
million of unrealized foreign exchange gains had been recognized from the
inception of the Notes, approximately $92 million of which has been capitalized
as the unrealized gains were recognized prior to commercial operations.
Under the terms of the Notes, there is a limit on the amount available for
drawdown on the Revolving Credit Facility. This limit is determined as a
function of the net present value of future cash flows before income taxes
discounted at 10 per cent from the Corporation's proved reserves determined on
a constant pricing basis by the independent reserve evaluators. As a result of
the reserves evaluation, the amount available for drawdown for general
corporate purposes increased from $299 million to the full $340 million limit.
3. LEASE OBLIGATIONS
March 31, December 31,
2006 2005
- --------------------------------------------------------------------------------
Obligations Under Capital Lease 49,933 50,266
Operating Lease Guarantee Obligation 9,430 8,939
59,363 59,205
Less: Current Portion (3,192) (3,396)
56,171 55,809
================================================================================
The capital lease obligation relates to the Corporation's share of capital
costs for the hydrogen-manufacturing unit within the AOSP. Repayments of the
principal obligation are $1.3 million per year and are scheduled to remain at
that level until repaid.
Under the Operating Lease for Mobile Equipment, 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. During the three month period ended March 31, 2006, the Corporation
paid $0.2 million, in regard to this obligation (March 31, 2005 - $1.4
million).
4. OPTION PREMIUM LIABILITY
The Corporation deferred payment and receipt of the premiums associated with
the options described in Note 12(b) until the settlement of the option
contracts between 2007 and 2009. The total net premiums payable by the
Corporation are US$21.9 million for 2007, US$32.4 million for 2008 and US$27.8
million for 2009. On the dates that the option contracts were entered, a net
liability was recognized on the consolidated balance sheet at the estimated
present value of the net premiums payable. Subsequent to the inception dates of
the option contracts, interest expense is recognized, with a corresponding
increase to the liability, at annual rates ranging from 4.25% to 4.50%. During
the three month period ended March 31, 2006, $1.0 million of interest expense
was recognized (March 31, 2005 - nil). The option premium liability is
denominated in US dollars and is translated into Canadian dollars at the period
end exchange rate. The unrealized foreign exchange loss arising on the option
premium liability for the three months ended March 31, 2006 was $0.1 million
(March 31, 2005 - nil).
The following table presents the reconciliation of the net Option Premium
Liability:
Three Months Ended March 31 2006 2005
- -------------------------------------------------------------------------------
Option Premium Liability at Beginning of Period 85,416 -
Interest Expense 952 -
Unrealized Foreign Exchange Loss 96 -
Option Premium Liability at End of Period 86,464 -
Less: Current Portion (6,065) -
80,399 -
===============================================================================
5. ASSET RETIREMENT OBLIGATION
The Corporation, in association with its 20 per cent working interest in the
AOSP, is responsible for its share of future dismantlement and site restoration
costs in the mining, extracting and upgrading activities. The following table
presents the reconciliation of the Asset Retirement Obligation:
Three Months Ended March 31 2006 2005
- -------------------------------------------------------------------------------
Asset Retirement Obligations at Beginning of Period 9,094 8,191
Liabilities Settled - (22)
Accretion on Asset Retirement Obligation 155 141
Asset Retirement Obligations at End of Period 9,249 8,310
===============================================================================
6. SHARE CAPITAL
The number of common shares and stock options outstanding reflect a
three-for-one split of the Corporation's common shares on May 30, 2005.
Issued and Outstanding
Number of
Shares Amount
- -------------------------------------------------------------------------------
Common Shares
Balance at December 31, 2005 160,518,041 548,747
Issued for Cash 552,108 2,581
Exercise of Stock Options Previously Recognized - 414
Total Share Capital at March 31, 2006 161,070,149 551,742
===============================================================================
Outstanding
Stock Options 3,762,514
- -------------------------------------------------------------------------------
Diluted Shares at March 31, 2006 164,832,663
===============================================================================
7. NET EARNINGS PER SHARE
The basic and diluted weighted average number of common shares outstanding,
both current and prior period, reflect a three-for-one stock split of the
Corporation's common shares on May 30, 2005. The basic weighted average number
of common shares for the three month period ended March 31, 2006 is 160,568,322
(March 31, 2005 - 159,958,482). Due to a loss for the three month period ended
March 31, 2006 and 2005, no incremental shares were included for the diluted
earnings per share weighted average number because the effect would be
anti-dilutive.
8. INTEREST EXPENSE
Three Months Ended March 31 2006 2005
- -------------------------------------------------------------------------------
Interest on Long-term Debt 11,331 14,539
Interest on Obligations Under Capital Lease 746 547
Interest on Option Premium Liability 952 -
13,029 15,086
===============================================================================
Cash interest paid for the three month period ended March 31, 2006 was $1.3
million (March 31, 2005 - $5.0 million). Cash interest received for the three
month period ended March 31, 2006 was $0.1 million (March 31, 2005 - nil).
9. STOCK-BASED COMPENSATION (a) Stock Option Plan
Under the Corporation's stock-based compensation plan, 787,540 options were
granted during the three month period ended March 31, 2006 at an average
exercise price of $33.62 (March 31, 2005 - 191,670 options at an average
exercise price of $19.78). 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 Corporation uses sources such as Bloomberg L.P. to
determine certain assumptions. The weighted-average fair values of the options
and the assumptions used in their determination are as follows:
Three Months Ended March 31 2006 2005
- -------------------------------------------------------------------------------
Granted 787,540 191,670
Weighted-average Fair Value $ 16.00 $ 6.85
Risk Free Interest Rate 4.11% 4.06%
Expected Life (in Years) 6.00 6.00
Expected Volatility 43% 26%
Dividend Per Share - -
===============================================================================
(b) Performance Share Unit Plan
Under the Performance Share Unit Plan ("PSUP"), 63,111 units vested during the
three months ended March 31, 2005 (March 31, 2005 - 33,093) and the required
common shares were distributed to the PSUP unit holders. The common shares were
acquired from the secondary market at an average price of $32.89 per share
(March 31, 2005 - $17.75).
The following table presents the reconciliation of the number of PSUs:
Three Months Ended March 31 2006 2005
- -------------------------------------------------------------------------------
Outstanding at Beginning of Period 160,128 99,291
Granted 122,645 113,880
Exercised (63,111) (33,093)
Cancelled (160) (16,746)
Outstanding at End of Period 219,502 163,332
===============================================================================
(c) Deferred Share Unit Plan
Under the Deferred Share Unit Plan ("DSUP"), $0.1 million in compensation
expense was recorded for the three month period ended March 31, 2006 (March 31,
2005 - nil) in General and Administrative Expenses. No Deferred Share Units
("DSU") were redeemed for cash or shares of the Corporation for the three month
period ended March 31, 2006 and 2005. The Corporation had 5,462 DSUs
outstanding at March 31, 2006 (March 31, 2005 - nil).
(d) Stock-Based Compensation
For the three month period ended March 31, 2006, the Corporation recognized
$1.8 million (March 31, 2005 - $0.6million) in compensation expense related to
stock-based compensation issued subsequent to January 1, 2003. The compensation
expense is comprised of $0.8 million (March 31, 2005 - $0.2 million) in respect
to the Corporation's stock option plan and $1.0 million (March 31, 2005 - $0.4
million) in respect to the Corporation's Performance Share Unit Plan. Under
CICA 3870, no compensation expense is required to be recognized for stock
options granted before January1, 2003. Had compensation expense been determined
based on the fair value method for awards granted on or after December 31, 2001
but before January 1, 2003, the Corporation's net earnings and net earnings per
share would have been adjusted to the proforma amounts indicated below:
Three Months Ended March 31 2006 2005
- -------------------------------------------------------------------------------
Net Loss - As Reported (21,575) (1,944)
Compensation Expense 135 220
Net Loss - Pro Forma (21,710) (2,164)
- -------------------------------------------------------------------------------
Basic Loss Per Share
As Reported (0.13) (0.01)
Pro Forma (0.14) (0.01)
===============================================================================
(e) Contributed Surplus
The following table presents the reconciliation of Contributed Surplus:
Three Months Ended March 31 2006 2005
- -------------------------------------------------------------------------------
Contributed Surplus Beginning of Period 3,474 1,245
Stock-based Compensation Expense 1,791 641
Cash Settlement of Performance Share Unit Plan (2,076) (596)
Exercise of Stock Options Previously Recognized (414) -
Contributed Surplus End of Period 2,775 1,290
===============================================================================
10. INCOME TAX
Three Months Ended March 31 2006 2005
- -------------------------------------------------------------------------------
Large Corporations Tax 443 708
Future Income Tax Recovery (10,383) (648)
Income Tax (Recovery) Expense (9,940) 60
===============================================================================
The future income tax liability consists of:
March 31, December 31,
2006 2005
- -------------------------------------------------------------------------------
Future Income Tax Assets
Unrealized Loss on Risk Management 18,747 -
Net Losses Carried Forward 3,606 4,707
Share Issue Costs 869 973
Impairment of Long-lived Assets 796 796
Future Income Tax Liabilities
Capital Assets in Excess of Tax Values (51,386) (39,924)
Unrealized Foreign Exchange Gain (15,409) (15,500)
Unrealized Gain on Risk Management - (4,374)
Debt Issue Costs (3,285) (3,123)
Net Future Income Tax Liability (46,062) (56,445)
===============================================================================
The following table reconciles income taxes calculated at the Canadian
statutory rate of 35.62% (2005 - 37.62%) with actual income taxes:
Three Months Ended March 31 2006 2005
- -------------------------------------------------------------------------------
Net Loss Before Income Taxes (31,515) (1,884)
Income Tax Recovery at Statutory Rate (11,226) (709)
Effect of Tax Rate Changes and Timing of Use 665 433
Non-taxable Portion of Foreign Exchange Loss 101 562
Non-deductible Expenses 196 -
Resource Allowance (23) (934)
Stock-based Compensation (96) -
Large Corporations Tax 443 708
Income Tax (Recovery) Expense (9,940) 60
===============================================================================
11. COMMITMENTS AND CONTINGENCIES
(i) Insurance Claims
The Corporation has various outstanding claims under the insurance coverage
provided in its Joint Venture construction policies. These claims include a
loss of profits claim stemming from the fire at the Muskeg River Mine (the
"Mine") on January 6, 2003, commonly referred to as Section III; a physical
property damage claim stemming from the same fire at the Mine, commonly
referred to as Section I; and a cost overrun and project delay claim, commonly
referred to as Section IV. During the year ended December 31, 2005, the AOSP
reached a settlement in respect of the insurance coverage provided under
Section III. The Corporation received $19.4 million as part of this settlement
and has also finalized the terms of a contingent settlement for its remaining
share of the settlement proceeds in the amount of $24.6 million from those
insurance underwriters that also subscribed to the Section IV. The Corporation
had previously received $16.1 million in respect to the coverage provided under
Section I. However, those insurance underwriters that were involved in the
Section IV claim again withheld their portion of the Section I claim totaling
$19.4 million. The remaining settlement that has not been received under either
Section I or III would become payable to the Corporation in the event that it
is successful in the arbitration proceedings that are presently ongoing against
these Section IV insurance underwriters. Arbitration proceedings under Section
IV of the Policy have been initiated to resolve the disputes with insurers
surrounding this claim for payment. Following these arbitration hearings, the
Corporation would expect to receive a binding decision from the panel with
respect to the claim. In order to preserve its rights under the Policy, the
Corporation filed a Statement of Claim in the Court of Queen's Bench of Alberta
against the defendant insurance underwriters and the broker for the full limit
of the Policy, namely $200 million, and is also seeking interest and aggravated
and punitive damages.
The related settlements of both Section I and Section III have been
credited to property, plant and equipment, as these claims relate to costs that
were capitalized in association with repairing the assets damaged by the fire
or those capitalized prior to the commercial operations.
No amounts, other than those collected at December 31, 2005, have been
recognized in these statements relating to insurance policies nor will an
amount be recognized until the proceeds are received.
(ii) Flow-Through Shares
In connection with the issuance of flow through shares in 2001 and 2002, the
Corporation renounced Canadian exploration expenses in the aggregate amount of
$29.2 million and $19.5 million, respectively. Under the subscription
agreements for such flow-through shares, the Corporation has agreed to
indemnify subscribers for an amount equal to the tax payable and any associated
interest by the subscribers if such renunciations are reduced under the Income
Tax Act (Canada). Discussions between the AOSP and the Canada Revenue Agency
("CRA") are ongoing with respect to the proper characterizations of certain
expenditures included in the Canadian exploration expenses in those years. If
the CRA successfully asserts a change in the characterization of these
expenditures, any resulting reduction in the renunciations could impact the
Corporation's obligations under the indemnity provisions in these subscription
agreements.
(iii) Other
The Corporation, in association with its 20 per cent ownership of the AOSP, 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.
12. 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,
thereby providing greater certainty of future cash flow from the sale of the
Corporation's synthetic crude oil products. This risk management strategy is
intended to protect the Corporation's base and future capital programs and
ensure the funding of debt obligations. Certain of these commodity-pricing
agreements were accounted for as hedges, as they qualified for hedge accounting
under Accounting Guideline 13 and were designated as hedges, while other
commodity-pricing agreements are accounted for under fair value accounting as
they did not qualify or have not been designated as hedges for accounting
purposes.
(a) Hedge Accounting
There were no crude swap positions in place during the three months ended March
31, 2006 as the crude oil swaps were completed in 2005. For the three month
period ended March 31, 2005, the Corporation's revenues were reduced by $36.8
million from crude oil price hedging losses.
(b) Fair Value Accounting
The Corporation has put options at strike prices ranging from US$50.00 to
US$55.00 per barrel, averaging US$52.42 per barrel for the three year period
beginning January 1, 2007. The premiums for the purchased put options were
partially offset through the sale of call options at strike prices ranging from
US$90.00 to US$95.00 per barrel, averaging US$92.41 per barrel for the three
year period beginning January 1, 2007, resulting in a net premium liability.
Payment of the net premium liability is deferred until the settlement of the
option contracts between 2007 and 2009. As at March 31, 2006, the Corporation
had outstanding the following put and call options:
2007 2008 2009
- ------------------------------------------------------------------------------
Barrels Per Day
Put Options Purchased 20,000 20,000 20,000
Call Options Sold 10,000 15,000 15,000
US$ Per Barrel
Average Put Strike Price US$52.50 US$54.25 US$50.50
Average Call Strike Price US$92.50 US$94.25 US$90.50
==============================================================================
The fair value of the option contracts was recognized on the consolidated
balance sheet on the dates they were entered into. During the three month
period ended March 31, 2006, the Corporation recognized an unrealized loss of
$67.7million (March 31, 2005 - nil) on the Risk Management Asset, marking it to
the fair value at the end of the period. The counterparties to these put and
call options have investment grade credit ratings, thereby partially mitigating
the credit risk associated with these financial instruments.
The following table presents the reconciliation of the Risk Management
Asset:
Three Months Ended March 31 2006 2005
- -------------------------------------------------------------------------------
Risk Management Asset at Beginning of Period 98,426 -
Decrease in Fair Value (67,724) -
Risk Management Asset at End of Period 30,702 -
Less: Current Portion (1,933) -
28,769 -
===============================================================================
13. CHANGES IN NON-CASH WORKING CAPITAL
Three Months Ended March 31 2006 2005
- -------------------------------------------------------------------------------
Source/(Use)
Operating Activities
Accounts Receivable 25,685 (7,320)
Inventory (10,899) (11,362)
Prepaid Expense 669 (655)
Accounts Payable and Accrued Liabilities (2,087) 13,894
13,368 (5,443)
===============================================================================
Investing Activities
Accounts Payable and Accrued Liabilities 23,104 725
===============================================================================
CORPORATE INFORMATION
OFFICERS
James C. Houck
President and Chief Executive Officer
Steve D. L. Reynish
Executive Vice President and
Chief Operating Officer
David A. Dyck
Senior Vice President, Finance and
Chief Financial Officer
Charles W. Berard
Corporate Secretary
SENIOR MANAGEMENT
John Frangos
Corporate Development
M. Simon Hatfield
Vice President and Managing Director,
Oil &Gas
Jack D. Jenkins
Vice President, Corporate Planning
& Human Resources
Gerry Luft
Vice President, Downstream
Ray Morley
Vice President, Business Development
Guy J. Turcotte
Chairman of the Board,
Western Oil Sands Inc.
Calgary, Alberta
Geoffrey A. Cumming
Lead Director
Vice Chairman,
Gardiner Group Capital Limited
Toronto, Ontario
Deputy Chairman,
Emerald Capital Limited
Auckland, New Zealand
David J. Boone
President and Director,
Escavar Energy
Calgary, Alberta
Tullio Cedraschi
President and Chief Executive Officer,
CN Investment Division
Montreal, Quebec
James C. Houck
President and Chief Executive Officer,
Western Oil Sands Inc.
Calgary, Alberta
Oyvind Hushovd
Chairman,
Gabriel Resources Limited
Kristiansand, Norway
John W. Lill
Executive Vice President and Chief Operating Officer,
Dynatec Corporation
Richmond Hill, Ontario
Randall Oliphant
Chairman and Chief Executive Officer,
Rockcliff Group Limited
Toronto, Ontario
Robert G. Puchniak
Executive Vice President and Chief Financial Officer,
James Richardson & Sons Limited
Winnipeg, Manitoba
Mac H. Van Wielingen
Co-Chairman,
ARC Financial Corporation
Calgary, Alberta
HEAD OFFICE
Suite 2400, Ernst & Young Tower
440 - 2nd Avenue S.W.
Calgary, Alberta T2P 5E9
Phone: (403) 233-1700
Fax: (403) 296-0122
WEBSITE
www.westernoilsands.com
AUDITORS
PricewaterhouseCoopers LLP
Calgary, Alberta
LEGAL COUNSEL
Macleod Dixon LLP
Calgary, Alberta
Paul, Weiss, Rifkind, Wharton & Garrison LLP
Washington, D.C., USA
INDEPENDENT EVALUATORS
GLJ Petroleum Consultants Ltd.
Calgary, Alberta
Norwest Corporation
Calgary, Alberta
REGISTRAR AND
TRANSFER AGENT
Valiant Trust Company
Calgary, Alberta
STOCK EXCHANGE LISTING
The Toronto Stock Exchange
Trading Symbol:WTO