================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 40-F
[_] Registration Statement pursuant to section 12 of the
Securities Exchange Act of 1934
[X] Annual report pursuant to section 13(a) or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 2006 Commission File Number:333-90736
WESTERN OIL SANDS INC.
(Exact name of Registrant as specified in its charter)
ALBERTA
(Province or other jurisdiction of incorporation or organization)
1311
(Primary Standard Industrial Classification Code Numbers)
NOT APPLICABLE
(I.R.S. Employer Identification Number (if applicable))
2400 ERNST & YOUNG TOWER, 440-2ND AVENUE S.W.,
CALGARY, ALBERTA, CANADA, T2P 5E9
TELEPHONE: (403) 233-1700
(Address and telephone number of Registrant's principal executive offices)
CT CORPORATION SYSTEM, 111-8TH AVENUE, NEW YORK, NEW YORK 10011
(212) 894-8940
(Name, address (including zip code) and telephone
number (including area code) of agent for
service in the United States)
SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF EACH CLASS: None
SECURITIES FOR WHICH THERE IS A REPORTING OBLIGATION PURSUANT TO SECTION 15(D)
OF THE ACT:
The Registrant is a "voluntary filer" and files annual reports on Form 40-F,
and furnishes information on Form 6-K to the Securities and Exchange
Commission, pursuant to its obligations under its indenture dated April 23,
2002 relating to its 8 3/8% Senior Secured
Notes due May 1, 2012
FOR ANNUAL REPORTS, INDICATE BY CHECK MARK THE INFORMATION FILED WITH THIS FORM:
[X] Annual information form [X] Audited annual financial statements
NUMBER OF OUTSTANDING SHARES OF EACH OF THE ISSUER'S CLASSES OF CAPITAL OR
COMMON STOCK AS OF THE CLOSE OF THE PERIOD COVERED BY THE ANNUAL REPORT.
161,378,399 Common Shares outstanding as of December 31, 2006
Indicate by check mark whether the Registrant is furnishing the information
contained in this Form to the Commission pursuant to Rule 12g3-2(b) under the
Securities Exchange Act of 1934 (the "Exchange Act"). If "Yes" is marked,
indicate the filing number assigned to the Registrant in connection with such
Rule.
Yes [_] No [X]
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the Registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days.
Yes [X] No [_]
================================================================================
PRINCIPAL DOCUMENTS
The following documents have been filed as part of this Annual Report on Form
40-F:
A. ANNUAL INFORMATION FORM
For the Annual Information Form of Western Oil Sands Inc. ("Western Oil Sands")
for the year ended December 31, 2006, see Exhibit 1 of this Annual Report on
Form 40-F.
B. AUDITED ANNUAL FINANCIAL STATEMENTS
For Western Oil Sands' consolidated audited financial statements for the year
ended December 31, 2006 and 2005, including the auditor's report with respect
thereto, see Exhibit 2 of this Annual Report on Form 40-F. The audit by
PricewaterhouseCoopers LLP ("PWC") of management's evaluation of the
effectiveness of internal control over financial reporting is set forth in
Exhibit 2 of this Annual Report on Form 40-F. For a reconciliation of important
differences between Canadian and United States generally accepted accounting
principles, see Note 21 of the Notes to the consolidated audited financial
statements for the year ended December 31, 2006.
C. MANAGEMENT'S DISCUSSION AND ANALYSIS
For Western Oil Sands' Management's Discussion and Analysis for the year ended
December 31, 2006, see Exhibit 3 of this Annual Report on Form 40-F.
CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS
As of December 31, 2006, an evaluation was carried out, under the supervision
of and with the participation of management, including the President and Chief
Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the
effectiveness of our disclosure controls and procedures as defined in Canada in
Multilateral Instrument 52-109, Certification of Disclosure in Issuers' Annual
and Interim Filings, and in the United States by Rule 13a-15(e) under the
SECURITIES AND EXCHANGE ACT OF 1934, as amended (the "Exchange Act"). Based on
that evaluation, the CEO and CFO concluded that the design and operation of our
disclosure controls and procedures were effective as at December 31, 2006 to
ensure that information required to be disclosed by us in reports that we file
under the Exchange Act, is gathered, reported, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commissions rules and forms and is accumulated and communicated to the
management of Western Oil Sands, including the CEO and CFO, to allow timely
decisions regarding required disclosure as specified under Canadian and U.S.
securities laws.
INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934, as amended and in Canada
as defined in Multilateral Instrument 52-109 - Certification of Disclosure in
Issuers' Annual and Interim Filings. Our internal control over financial
reporting is designed to provide reasonable assurance regarding the reliability
of our financial reporting and preparation of our financial statements for
external purposes in accordance with accounting principles generally accepted
in Canada. Our internal control over financial reporting includes those
policies and procedures that: pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect our transactions and
disposition of the assets; provide reasonable assurance that transactions are
recorded as necessary to permit preparation of our financial statements in
accordance with generally accepted accounting principles and that receipts and
expenditures of our assets are being made only in accordance with
authorizations of our management and directors; and provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of our assets that could have a material effect on our
financial statements. Because of its inherent limitations, internal control
over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
Our management, with the participation of our principal executive officer and
principal financial officer, evaluated the effectiveness of our internal
control over financial reporting as of December 31, 2006. In making this
evaluation, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework.
There was one exclusion from our evaluation. Our 20% undivided working interest
in the Alberta Oil Sands Project (the "AOSP"), was excluded from our evaluation
as we do not have the ability to dictate or modify this entity's internal
control over financial reporting, and we do not have the ability, in practice,
to assess those controls. However, we have assessed our internal control over
financial reporting with respect to the inclusion of our share of the AOSP and
its results of operations in our consolidated financial statements. For further
discussion of this exclusion from the scope of our evaluation see "Scope of
Management's Report on Internal Control over Financial Reporting" below.
Based on our evaluation, management concluded that our internal control over
financial reporting was effective as of December 31, 2006.
Our management's evaluation of the effectiveness of our internal control over
financial reporting as of December 31, 2006, has been audited by PWC, as stated
in their report in Exhibit 2 of this Annual Report on Form 40-F.
SCOPE OF MANAGEMENT'S EVALUATION OF INTERNAL CONTROL OVER FINANCIAL REPORTING
Western Oil Sands is the holder of a 20% undivided interest in the AOSP and
conducts the operation of the AOSP through a joint venture agreement (the
"Agreement") with Chevron Canada Limited, the other 20% interest holder, and
Shell Canada Limited ("Shell"), the 60% interest holder. The Agreement is
structured such that Shell, as the project administrator and controller of the
executive committee of the AOSP, is delegated all managerial responsibilities,
including the ability to control operations, create accounts and keep internal
controls over the AOSP. Shell charges us our proportionate share of the
expenditures and provides us with our proportionate share of saleable synthetic
crude which we market directly to third parties.
Pursuant to the Agreement, and as described below, we have the contractual
right to audit Shell's determination of our share of costs and outputs of the
AOSP. During our 2006 fiscal year, our 20% undivided working interest in the
AOSP comprised 96% of our total Property, Plant and Equipment, 100% of
Operating Expenses, 54% of Purchased Feedstock, and 64% of Research and
Business Development Expense as at and for the year ended December 31, 2006.
However, we do not have the right or ability to dictate or modify the internal
control over financial reporting of the AOSP, and we do not have the ability,
in practice, to evaluate those controls. Further, we are not able to influence
the control environment or control evaluations of the AOSP. As a result, we
have excluded the AOSP from our evaluation of internal control over financial
reporting relating to the AOSP.
Pursuant to the Agreement, we have a control structure which includes, among
other things, the following:
o the right to participate in the committee that grants the authority
under which all other committees operate including the approval of the
annual budget;
o the right to participate in the committee that reviews operations and
capital spending as well as the approval of certain spending and
contracts;
o the right to participate in quarterly accounting and audit committee
meetings; and
o the right to participate in other committees and work groups as
needed.
In addition, we have and we exercise our right to audit, on a routine basis,
Shell's determination of our share of costs as noted and outputs of the AOSP.
Although these activities do not provide the ability to evaluate the internal
control over financial reporting of the AOSP, the foregoing constitute a
control environment for the purposes of evaluating our internal control over
financial reporting. Accordingly, despite the exclusion of the AOSP from our
management's review, our management has evaluated our internal control over
financial reporting with respect to the inclusion of our share of the AOSP and
its results in our consolidated financial statements.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
No changes were made in our internal control over financial reporting during
the year ended December 31, 2006, that have materially affected, or are
reasonably likely to affect, our internal control over financial reporting.
AUDIT COMMITTEE FINANCIAL EXPERT
Western Oil Sands' Board of Directors has determined that Messrs. Robert
Puchniak, Randall Oliphant, Oyvind Hushovd and Fred Dyment (Mr. Dyment was
appointed to the Audit Committee on January 1, 2007) are audit committee
financial experts (as defined in paragraph 8(b) of General Instruction B to
Form 40-F) serving on its audit committee. Pursuant to paragraph 8(a)(2) of
General Instruction B to Form 40-F, the Board has applied the definition of
independence applicable to the audit committee members of the New York Stock
Exchange ("NYSE") listed companies. All above mentioned members are corporate
directors and meet the NYSE definition of independence. For a description of
the Audit Committee member's relevant experience in financial matters, see the
section "Directors and Officers" in the Registrant's Annual Information Form
for the year ended December 31, 2006, which is included as Exhibit 1 to this
Annual Report on Form 40-F.
IDENTIFICATION OF THE AUDIT COMMITTEE
Western Oil Sands has a separately designated standing audit committee
established in accordance with section 3(a)(58)(A) of the Exchange Act. The
members of the Audit Committee are Messrs. Robert G. Puchniak, Randall Oliphant
and Oyvind Hushovd . Mr. Puchniak chairs the Audit Committee.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
PWC have been the auditors of Western Oil Sands since Western Oil Sands'
inception. The aggregate amounts billed by PWC for each of the last two fiscal
years for audit fees, audit-related fees, tax fees and all other fees,
including expenses, are set forth below.
AUDIT FEES: The aggregate fees billed for each of the last two fiscal
years of Western Oil Sands ending December 31, 2006 and December 31, 2005, for
professional services rendered by PWC for the audit of its consolidated audited
financial statements, review of the Annual Information Form, Management
Discussion and Analysis, completion of limited reviews of quarterly financial
information and for services that are normally provided by PWC in connection
with debt and equity financings for those fiscal years were $136,529 and
$146,396, respectively. The aggregate fees billed for each of the last two
fiscal years of Western Oil Sands ending December 31, 2006 and December 31,
2005, for professional services rendered by PWC for costs related to the 2006
audit (first year of adoption) of Western Oil Sands' internal control over
financial reporting were $160,000 and nil, respectively.
TAX FEES: The aggregate fees billed for each of the last two fiscal
years of Western Oil Sands, ending December 31, 2006 and December 31, 2005, for
professional services rendered by PWC for tax-related services consisting of
advice and assistance with tax filings and tax audits were nil and $133,108,
respectively. Western Oil Sands' Audit Committee approved all of the noted
services.
ALL OTHER FEES: There were no other fees billed for each of the last
two fiscal years of Western Oil Sands ending December 31, 2005 and December 31,
2004.
AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES
Western Oil Sands has not yet established set policies and procedures for
pre-approval of audit and non-audit related services conducted by the
Registrant's accountant. At the present time, all such services are approved by
the Chair of the Audit Committee before an engagement is executed.
OFF-BALANCE SHEET ARRANGEMENTS
Western Oil Sands has no off-balance sheet arrangements that require disclosure.
CONTRACTUAL OBLIGATIONS
Western Oil Sands has assumed various contractual obligations in the normal
course of its operations. Summarized below are significant contractual
obligations that are known as of December 31, 2006, and which represent future
cash payments that Western Oil Sands will be required to make under existing
contractual agreements that it has entered into either directly, or as a
partner in the AOSP. The following information can also be found in Western Oil
Sands' Management Discussion and Analysis attached as Exhibit 3.
Payments Due By Period (in Thousands)
<1 Year 1-3 Years 4-5 Years After5 Years Total
- ---------------------------------------------------------------------------------------------------------
US$450 Million Senior Secured Notes $ - $ - $ - $ 524,385 $ 524,385
Revolving Credit Facility (1) - - - 77,000 77,000
Obligations Under Capital Lease 1,341 2,680 2,680 42,227 48,928
Option Premium Liability 25,971 69,775 - - 95,426
Feedstocks 106,352 39,612 20,726 58,727 225,417
Pipelines and Utilities 33,300 78,801 86,347 558,641 757,089
Mobile Equipment Lease 5,242 32,174 8,625 - 46,041
Exploration Work 8,728 500 - - 9,228
- ---------------------------------------------------------------------------------------------------------
Total Contractual Obligations $ 180,434 $ 223,542 $ 118,378 $ 1,260,980 $ 1,783,334
- ---------------------------------------------------------------------------------------------------------
(1) THE REVOLVING CREDIT FACILITY IS A 3-YEAR BANK FACILITY MATURING ON
OCTOBER 31, 2009, EXTENDABLE ANNUALLY AT THE LENDERS' DISCRETION.
MANAGEMENT CONSIDERS THIS TO BE PART OF OUR LONG-TERM CAPITAL STRUCTURE.
(2) IN ADDITION, WE HAVE AN OBLIGATION TO FUND WESTERN'S SHARE OF THE
PROJECT'S PENSION FUND AND HAVE MADE COMMITMENTS RELATED TO OUR RISK
MANAGEMENT PROGRAM: SEE NOTES 17 AND 18, RESPECTIVELY, OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
CODE OF ETHICS
The Board has adopted a written Code of Ethics and Business Conduct (the
"Code") for directors, officers and employees of Western Oil Sands and its
subsidiaries. A copy of the Code was filed on November 24, 2006 and is
accessible through SEDAR at www.sedar.com. A copy of the Code may also be
obtained upon request by contacting Western Oil Sands at Suite 2400, Ernst &
Young Tower, 440 Second Avenue S.W., Calgary, Alberta, T2P 5E9, telephone:
(403) 233-1700.
The Code provides that directors, officers and employees must, among
other things: (a) avoid situations that may result in a conflict or perceived
conflict between personal interests of directors, officers and employees and
the interests of Western Oil Sands; (b) provide full disclosure of any actual
or potential conflicts of interest in accordance with applicable legislation;
(c) at all times comply fully with applicable law and avoid any situation which
could be perceived as improper or unethical; (d) maintain the confidentiality
of all non-public information relating to Western Oil Sands; (e) protect the
property of Western Oil Sands and use such property only for authorized
business purposes; and (f) not hold any significant financial interest, either
directly or indirectly, in an organization which has a relationship with
Western Oil Sands.
Compliance with the Code is monitored by the Board. Where a director
or officer has any interest in or a perceived conflict involving a contract or
business relationship with Western Oil Sands, that director or officer is
excluded from all discussions and deliberations regarding the contract or
relationship and such director abstains from voting in respect thereof. Members
of the Board and executive officers have disclosed to Western Oil Sands all
directorships held by such member and the existence and nature of any interests
that could result in a conflict situation with Western Oil Sands.
The Board has also adopted a policy relating to the reporting of
inappropriate activity to encourage and promote a culture of ethical business
conduct. This policy is intended to encourage and facilitate the reporting of
(a) questionable accounting, internal accounting controls and/or auditing
matters, (b) the reporting of fraudulent financial information to shareholders,
regulatory authorities and the financial markets, and (c) conduct which results
in a violation of law by Western Oil Sands or in substantial mismanagement of
Western Oil Sands' resources that, if proven, would constitute a criminal
offence or reasonable grounds for dismissal of the person engaging in this
conduct, without the fear of recrimination, retaliation or harassment. Since
the adoption of the Code, there have not been any amendments to the Code or
waivers, including implicit waivers, from any provisions in the Code. In
addition, to the knowledge of the Board, there have been no departures from the
Code during the year ended December 31, 2006 that would require the filing of a
material change report under Canadian security laws.
UNDERTAKING AND CONSENT TO SERVICE OF PROCESS
UNDERTAKING
Western Oil Sands undertakes to make available, in person or by telephone,
representatives to respond to inquiries made by the Commission staff, and to
furnish promptly, when requested to do so by the Commission staff, information
relating to: the securities registered pursuant to Form 40-F; the securities in
relation to which the obligation to file an annual report on Form 40-F arises;
or transactions in said securities.
CONSENT TO SERVICE OF PROCESS
The Company has previously filed a Form F-X in connection with the class of
securities in relation to which the obligation to file this report arises.
Any change to the name or address of the agent for service of process of
Western Oil Sands shall be communicated promptly to the Commission by an
amendment to the Form F-X referencing the file number of the relevant
registration statement.
SIGNATURES
Pursuant to the requirements of the Exchange Act, Western Oil Sands Inc.
certifies that it meets all of the requirements for filing on Form 40-F and has
duly caused this Annual Report to be signed on its behalf by the undersigned,
thereto duly authorized.
Dated this 22nd day of February, 2007.
WESTERN OIL SANDS INC.
By: /s/ David A. Dyck
------------------------------
Name: David A. Dyck
Title: Senior Vice President,
Finance, and Chief
Financial Officer
Documents filed as part of this report:
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- -----------
1. Annual Information Form for the fiscal year ended December 31, 2006.
2. Consolidated Financial Statements for the fiscal years ended December 31,
2006 and 2005 including U.S. GAAP reconciliation note, together with the
auditors' report thereon.
3. Management's Discussion and Analysis for the fiscal year ended December
31, 2006.
4. Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or
15d-14 of the Securities Exchange Act of 1934.
5. Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or
15d-14 of the Securities Exchange Act of 1934.
6. Certification of Chief Executive Officer pursuant to Rule 13(a)-14(b) and
Section 1350 of Chapter 63 of Title 18 of the United States Code (18
U.S.C. 1350).
7. Certification of Chief Financial Officer pursuant to Rule 13(a)-14(b) and
Section 1350 of Chapter 63 of Title 18 of the United States Code (18
U.S.C. 1350).
8. Consent of PricewaterhouseCoopers LLP, independent chartered accountants.
9. Consent of GLJ Petroleum Consultants Ltd., independent petroleum
engineering consultants.
10. Consent of Norwest Corporation, independent mining engineering
consultants.