EXHIBIT 2
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MANAGEMENT'S REPORT
TO THE SHAREHOLDERS OF WESTERN OIL SANDS INC.,
The accompanying consolidated financial statements and all information in the
annual report including the Management's Discussion and Analysis are the
responsibility of Management. The consolidated financial statements have been
prepared by Management in accordance with the accounting policies described in
the notes to the consolidated financial statements. In the opinion of
Management, the consolidated financial statements have been prepared within
acceptable limits of materiality and are in accordance with Canadian generally
accepted accounting principles appropriate in the circumstances. The financial
information contained elsewhere in the annual report has been reviewed to
ensure consistency with that in the consolidated financial statements.
Management has developed and maintains systems of internal controls, policies
and procedures in order to provide reasonable assurance as to the reliability
of the financial records and the safeguard of assets.
PricewaterhouseCoopers LLP, independent external auditors appointed by the
shareholders of the Corporation, review Western's system of internal controls
and conduct their work to the extent they deem appropriate. They have examined
the consolidated financial statements and have expressed an opinion on the
statements. Their report is included with the consolidated financial
statements. Western also retains independent petroleum engineering consultants,
GLJ Petroleum Consultants Ltd., to conduct independent evaluations or audits of
the Corporation's oil and gas reserves.
The Board of Directors of the Corporation has established an Audit Committee
consisting of four non-management directors. The Audit Committee reviews with
Management and the external auditors any significant financial reporting
issues, the presentation and impact of significant risks and uncertainties, and
key estimates and judgments of Management that may be material for financial
reporting purposes. On an annual basis, the Audit Committee meets with the
independent petroleum consultants and reviews the Corporation's annual reserve
estimates. The Audit Committee meets quarterly to review and approve interim
consolidated financial statements prior to their release, as well as annually
to review Western's annual consolidated financial statements, Management's
Discussion and Analysis and Annual Information Form/Form 40-F, and recommend
their approval to the Board of Directors. The external auditors have
unrestricted access to the Corporation, the Audit Committee and the Board of
Directors.
/s/ James C. Houck /s/ David A. Dyck
- ---------------------------------- ----------------------------------
JAMES C. HOUCK DAVID A. DYCK
President and Chief Executive Officer Senior Vice President, Finance and
Chief Financial Officer
February 22, 2007
MANAGEMENT'S REPORT ON 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. Our internal
control over financial reporting is designed to provide reasonable assurance
regarding the reliability of our financial reporting and preparation of our
consolidated 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
consolidated 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 consolidated 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 per cent undivided working
interest in the Alberta Oil Sands Project ("AOSP"), representing 96 per cent of
our total Property, Plant and Equipment, 100 per cent of Operating Expenses, 54
percent of Purchased Feedstocks and Transportation, and 64 per cent of Research
and Business Development Expense as at and for the year ended December 31,
2006, was excluded from our evaluation as we do not have the ability to dictate
or modify this entity 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.
Based on our evaluation, our 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
PricewaterhouseCoopers LLP, independent auditors, as stated in their report.
/s/ James C. Houck /s/ David A. Dyck
- ---------------------------------- ----------------------------------
JAMES C. HOUCK DAVID A. DYCK
President and Chief Executive Officer Senior Vice President and Chief
Financial Officer
February 22, 2007
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS OF WESTERN OIL SANDS INC.,
We have completed an integrated audit of the consolidated financial statements
and internal control over financial reporting of Western Oil Sands Inc. as of
December 31, 2006 and an audit of its December 31, 2005 consolidated financial
statements. Our opinions, based on our audits, are presented below.
CONSOLIDATED FINANCIAL STATEMENTS
We have audited the accompanying consolidated balance sheets of Western Oil
Sands Inc. (the "Corporation") as at December 31, 2006 and 2005, and the
related consolidated statements of operations and retained earnings and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audit of the Corporation's consolidated financial statements
as at December 31, 2006 and for the year then ended in accordance with Canadian
generally accepted auditing standards and the standards of the Public Company
Accounting Oversight Board (United States). We conducted our audit of the
Corporation's consolidated financial statements as at December 31, 2005 and for
the year then ended in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit of consolidated financial statements
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. A consolidated financial
statement audit also includes assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
consolidated financial statement presentation.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Corporation as
at December 31, 2006 and 2005 and the results of its operations and its cash
flows for the year then ended in accordance with Canadian generally accepted
accounting principles.
INTERNAL CONTROL OVER FINANCIAL REPORTING
We have also audited management's assessment, included in the Management's
Report on Internal Control Over Financial Reporting, that the Corporation
maintained effective internal control over financial reporting as of December
31, 2006, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission ("COSO"). The Corporation's management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express opinions on management's assessment and on the
effectiveness of the Corporation's internal control over financial reporting
based on our audit.
We conducted our audit of internal control over financial reporting in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. An audit of
internal control over financial reporting includes obtaining an understanding
of internal control over financial reporting, evaluating management's
assessment, testing and evaluating the design and operating effectiveness of
internal control, and performing such other procedures as we consider necessary
in the circumstances. We believe that our audit provides a reasonable basis for
our opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of consolidated financial statements for external purposes
in accordance with generally accepted accounting principles. A company's
internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of consolidated financial
statements in accordance with generally accepted accounting principles, and
that receipts and expenditures of the company are being made only in accordance
with authorizations of management and directors of the company; and (iii)
provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company's assets that
could have a material effect on the consolidated 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.
As described in the Management's Report on Internal Control Over Financial
Reporting, management has excluded the Corporation's undivided working interest
in the Athabasca Oil Sands Project (the "AOSP") from its assessment of internal
control over financial reporting as of December 31, 2006 because the
Corporation does not have the ability to dictate or modify this entity's
control over financial reporting, and it does not have the ability, in
practice, to assess these controls. AOSP represented 96 per cent of the total
Property, Plant and Equipment, 100 per cent of Operating Expenses, 54 per cent
of Purchased Feedstocks and Transportation, and 64 per cent of Research and
Business Development Expense of the Corporation's financial statement amounts
as at and for the year ended December 31, 2006.
In our opinion, management's assessment that the Corporation maintained
effective internal control over financial reporting as at December 31, 2006 is
fairly stated, in all material respects, based on criteria established in
Internal Control - Integrated Framework issued by the COSO. Furthermore, in our
opinion, the Corporation maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2006 based on
criteria established in Internal Control - Integrated Framework issued by the
COSO.
/s/ PricewaterhouseCoopers LLP
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PRICEWATERHOUSECOOPERS LLP
Chartered Accountants
Calgary, Alberta
February 22, 2007
WESTERN OIL SANDS INC.
Consolidated Financial Statements
DECEMBER 31, 2006 AND 2005
(in thousands of dollars)
WESTERN OIL SANDS INC.
Consolidated Balance Sheets
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December 31 ($ THOUSANDS) 2006 2005
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ASSETS
Current Assets
Cash 3,139 5,590
Accounts Receivable 110,039 87,398
Inventory (NOTE 4) 21,761 21,083
Prepaid Expense 12,443 9,355
Current Portion of Risk Management (NOTE 18) 7,601 --
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154,983 123,426
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Property, Plant and Equipment (NOTE 5) 1,606,966 1,352,605
Risk Management (NOTE 18) 18,707 98,426
Deferred Charges (NOTE 6) 13,503 16,063
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1,639,176 1,467,094
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1,794,159 1,590,520
=====================
LIABILITIES
Current Liabilities
Accounts Payable and Accrued Liabilities 158,501 101,303
Current Portion of Lease Obligations (NOTE 8 ) 1,958 3,396
Current Portion of Option Premium Liability (NOTE 9) 24,966 --
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185,425 104,699
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Long-term Liabilities
Long-term Debt (NOTE 7) 601,385 565,655
Lease Obligations (NOTE 8) 57,480 55,809
Option Premium Liability (NOTE 9) 64,309 85,416
Asset Retirement Obligation (NOTE 10) 20,773 9,094
Future Income Taxes (NOTE 12) 73,113 56,445
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817,060 772,419
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1,002,485 877,118
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SHAREHOLDERS' EQUITY
Share Capital (NOTE 13) 554,233 548,747
Contributed Surplus (NOTE 14) 12,890 3,474
Retained Earnings 224,551 161,181
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791,674 713,402
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1,794,159 1,590,520
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Commitments and Contingencies (NOTE 19)
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
APPROVED BY THE BOARD OF DIRECTORS
/s/ Robert G. Puchniak /s/ Randall Oliphant
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ROBERT G. PUCHNIAK RANDALL OLIPHANT
Director Director
WESTERN OIL SANDS INC.
Consolidated Statements of Operations and Retained Earnings
- -------------------------------------------------------------------------------
Year ended December 31
($ THOUSANDS, EXCEPT AMOUNTS PER SHARE) 2006 2005
- -------------------------------------------------------------------------------
REVENUES (NOTE 18) 983,560 910,330
LESS PURCHASED FEEDSTOCKS AND TRANSPORTATION (353,522) (318,934)
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630,038 591,396
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EXPENSES
Royalties 4,064 4,005
Operating 286,325 250,389
Research and Business Development 34,863 10,657
General and Administrative (NOTE 15) 28,456 14,491
Insurance 11,497 7,995
Interest (NOTE 11) 50,017 58,165
Accretion on Asset Retirement Obligation (NOTE 10) 1,256 562
Depreciation, Depletion and Amortization (NOTE 5) 61,560 50,738
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478,038 397,002
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EARNINGS BEFORE OTHER INCOME (EXPENSE) AND INCOME TAXES 152,000 194,394
OTHER INCOME (EXPENSE)
Foreign Exchange Gain 49 15,561
Risk Management Gain (Loss) (NOTE 18) (72,118) 13,450
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EARNINGS BEFORE INCOME TAXES 79,931 223,405
Income Tax Expense (NOTE 12) 16,561 73,956
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NET EARNINGS 63,370 149,449
Retained Earnings at Beginning of Year 161,181 11,732
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RETAINED EARNINGS AT END OF YEAR 224,551 161,181
=====================
NET EARNINGS PER SHARE (NOTE 13)
Basic 0.39 0.93
Diluted 0.39 0.92
---------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
WESTERN OIL SANDS INC.
Consolidated Statements of Cash Flows
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Year ended December 31 ($ THOUSANDS) 2006 2005
- -------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN)
CASH FROM OPERATING ACTIVITIES
Net Earnings 63,370 149,449
Non-cash Items:
Stock-based Compensation (NOTE 15) 12,083 3,149
Accretion on Asset Retirement Obligations (NOTE 10) 1,256 562
Depreciation, Depletion and Amortization (NOTE 5) 61,560 50,738
Interest Expense on Option Premium Liability (NOTE 9) 3,801 1,278
Unrealized (Gain) Loss on Risk Management (NOTE 18) 72,118 (13,450)
Unrealized Foreign Exchange Gain (NOTE 7 AND NOTE 9) (212) (17,803)
Future Income Tax Expense (NOTE 12) 16,668 70,956
Cash Items:
Cash Settlement of Asset Retirement Obligation (NOTE 10) (91) (52)
Cash Settlement of Performance Share Unit Plan (NOTE 14) (2,104) (596)
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228,449 244,231
Increase in Non-cash Working Capital (NOTE 20) (59,436) (32,489)
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169,013 211,742
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CASH FROM (USED IN) FINANCING ACTIVITIES
Issue of Share Capital (NOTE 13) 4,923 2,724
Issuance (Repayment) of Long-term Debt, Net 36,000 (175,000)
Deferred Charges -- (216)
Repayment of Obligations Under Capital Lease (1,341) (1,340)
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39,582 (173,832)
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CASH INVESTED
Capital Expenditures (301,273) (69,350)
Insurance Proceeds (NOTE 19) -- 22,517
Decrease in Non-cash Working Capital (NOTE 20) 90,227 10,798
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(211,046) (36,035)
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INCREASE (DECREASE) IN CASH (2,451) 1,875
CASH AT BEGINNING OF YEAR 5,590 3,715
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CASH AT END OF YEAR 3,139 5,590
===================
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
1 BUSINESS OF THE CORPORATION
Western Oil Sands Inc. (the "Corporation") was incorporated on June 18,
1999 under the laws of the Province of Alberta. The Corporation holds an
undivided 20 per cent working interest in the Athabasca Oil Sands Project
("AOSP") located in the Athabasca region of northeastern Alberta. Shell
Canada Limited and Chevron Canada Limited hold the remaining 60 per cent
and 20 per cent interests, respectively. The AOSP consists of direct or
indirect participation in the design, construction and operation of
mining, extracting, transporting and upgrading of oil sands deposits. The
Corporation is also pursuing initiatives primarily related to in-situ oil
sands and technology development and downstream integration opportunities
regarding the processing of production from both mineable and in-situ oil
sands deposits. WesternZagros Limited ("WesternZagros"), a wholly-owned
subsidiary of the Corporation, is pursuing conventional oil and gas
opportunities in the Federal Region of Kurdistan in northern Iraq.
2 SUMMARY OF ACCOUNTING POLICIES
a) PRINCIPLES OF CONSOLIDATION
The Consolidated Financial Statements include the accounts of the
Corporation and its wholly-owned subsidiary corporations and limited
partnership. The Corporation's oil sands and certain in-situ
activities are conducted jointly with others. These financial
statements reflect only the Corporation's proportionate interest in
such activities.
b) USE OF ESTIMATES
The preparation of the Consolidated Financial Statements in
conformity with Canadian Generally Accepted Accounting Principles
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the Consolidated
Financial Statements and the reported amounts of revenues and
expenses during the reporting period. Such estimates relate to
unsettled transactions and events as of the date of the Consolidated
Financial Statements. Accordingly, actual results may differ from
these estimated amounts as future confirming events occur.
Significant estimates used in the preparation of the Consolidated
Financial Statements include, but are not limited to, the estimates
of crude oil reserves, recovery of exploration costs capitalized in
accordance with full cost accounting, risk management asset or
liability, asset retirement obligations, income taxes, royalties,
stock-based compensation and employee future benefits.
c) FOREIGN CURRENCY TRANSLATION
Accounts in foreign currencies and operations in foreign countries
that are integrated are translated into Canadian dollars using the
temporal method. Under this method, monetary assets and liabilities
denominated in foreign currencies are translated into Canadian
dollars at rates of exchange in effect at the end of the period.
Non-monetary assets and liabilities are translated into Canadian
dollars at exchange rates prevailing at the transaction dates.
Revenues and expenses are translated into Canadian dollars at the
monthly average exchange rates. Provisions for depreciation,
depletion and amortization are translated at the same rate as the
related items. The resulting exchange gains or losses are included
in the Consolidated Statements of Operations and Retained Earnings.
1
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
d) CASH
Cash presented in the Consolidated Financial Statements is comprised
of cash and cash equivalents and includes short-term investments
with a maturity of three months or less when purchased.
e) INVENTORY
Product Inventories and Parts, Supplies and Other Inventories are
valued at the lower of cost, at average cost basis, and net
realizable value. Product Inventory costs include direct and
indirect expenditures incurred in bringing an item or product to its
existing condition. Parts, Supplies and Other Inventory costs
represent the store stock held at the Mine and Upgrader.
f) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment ("PP&E") assets are recorded at cost
less accumulated provisions for depreciation, depletion and
amortization. Prior to the commencement of commercial operations,
interest costs of debt attributable to major development projects,
administrative overhead, operating costs and revenues are
capitalized.
The Corporation engages in research and development activities to
develop or improve processes and techniques to extract oil from oil
sands deposits. Research involves planned investigation with the
goal of attaining new knowledge. Development involves translating
that knowledge into a new technology or process. Research costs are
expensed as incurred. Development costs are capitalized once
technical feasibility is established and if the Corporation intends
to proceed with development. These costs are capitalized in PP&E
until the commencement of commercial operations or production.
Otherwise, development costs are expensed as incurred. Development
costs include pre-operating revenues and costs.
OIL SANDS MINING
Capitalized costs include costs specifically related to the
acquisition, exploration, development and construction of the AOSP
and other projects, including asset retirement obligations.
Development costs to expand capacity of existing mines are also
capitalized. Costs relating to a turnaround are expensed as
incurred. Oil Sands Mining assets are reviewed for impairment
annually or whenever events or conditions indicate that their net
carrying amount may not be recoverable from estimated future cash
flows. If an impairment is determined, the assets are written down
to the fair value.
Depletion on oil sands mining properties is provided over the life
of proved and probable reserves on a unit of production basis,
commencing when the facilities are substantially complete and after
commercial production has begun.
CONVENTIONAL CRUDE OIL AND IN-SITU OIL SANDS
The Corporation accounts for its crude oil and in-situ properties
and equipment in accordance with the Canadian Institute of Chartered
Accountants' guideline on full cost accounting in the oil and gas
industry. Under this method, all costs associated with the
acquisition of, exploration for and the development of crude oil and
in-situ reserves, including asset retirement obligations are
capitalized and accumulated within cost centres on a
country-by-country basis. Such costs include land acquisition,
geological and geophysical activity, drilling and testing of
productive and non-productive wells, carrying costs directly related
2
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
to unproved properties, major development projects and
administrative costs directly related to exploration and development
activities.
Once the Corporation commences commercial production from the cost
centres, capitalized costs accumulated within each cost centre are
depleted on the unit-of-production method based on the estimated
proved reserves of that country using estimated future prices and
costs. Proceeds from the disposal of properties are normally
deducted from the full cost pool without recognition of a gain or
loss unless that deduction would result in a change to the depletion
rate by 20 per cent or more, in which case, a gain or loss is
recorded.
In determining the depletion base, the Corporation includes
estimated future costs to be incurred in developing proved reserves
and excludes the cost of unproved properties and major development
projects. Costs of major development projects and costs of acquiring
and evaluating significant unproved properties are excluded, on a
cost centre basis, from costs subject to depletion until it is
determined whether or not proved reserves are attributable to the
properties, or impairment has occurred. To date, no depletion
related to the Corporation's conventional crude oil and in-situ
properties has been recorded as commercial operations have not
commenced.
The Corporation reviews the carrying amount of its conventional
crude oil in-situ properties relative to their recoverable amount
(the "ceiling test") for each cost centre at each annual balance
sheet date, or more frequently if circumstances or events indicate
impairment has occurred. The recoverable amount is calculated as the
sum of:
o the undiscounted cash flow from proved reserves using expected
future prices and costs;
o the cost of unproved properties; and
o the costs of major development projects less impairment.
If the carrying amount of the properties exceeds their recoverable
amount, an impairment loss is recognized in depletion equal to the
amount by which the carrying amount of the properties exceeds their
fair value. Fair value is calculated as the sum of:
o the cash flows from proved and probable reserves using
expected future prices and costs, discounted at a risk-free
interest rate; and
o the cost, less impairment, of unproved reserves and major
development projects that do not have probable reserves
attributable to them.
CORPORATE
Corporate PP&E assets are depreciated on a straight-line basis over
their useful lives ranging from three to five years.
g) DEFERRED CHARGES
Deferred charges primarily include debt financing costs incurred in
establishing the Corporation's various debt facilities. Deferred
charges are amortized over the life of the related debt facilities.
3
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
h) DERIVATIVE FINANCIAL INSTRUMENTS
The Corporation utilizes financial instruments to manage its
exposure to fluctuations in foreign currency exchange rates and
commodity prices. These derivative financial instruments are not
used for speculative purposes. The Corporation has policies and
procedures in place with respect to the required documentation and
approvals for the use of financial instruments and specifically ties
their use, in the case of commodities, to the mitigation of market
price risk associated with cash flows expected to be generated.
Where applicable, the Corporation identifies relationships between
financial instruments and anticipated transactions as well as its
risk management objectives and the strategy for undertaking the
economic hedge transaction. The Corporation assesses, both at
inception and on an ongoing basis, whether the financial instrument
used in the particular transaction is effective in offsetting
changes in fair values or cash flows of the transaction.
The fair values of these financial instruments are based on an
estimate of the amounts that would have been received or paid to
settle these instruments prior to maturity. The Corporation
considers all of these financial instruments to be effective
economic hedges. However, certain of the Corporation's financial
instruments do not qualify or have not been designated as hedges for
accounting purposes in accordance with Accounting Guideline 13.
In accordance with Emerging Issues Committee Abstract 128
("EIC-128") "Accounting for Trading, Speculative or Non-Hedging
Derivative Financial Instruments", financial instruments that do not
qualify as hedges or have not been designated as hedges are recorded
using the mark-to-market method of accounting, whereby instruments
are recorded in the Consolidated Balance Sheet as either an asset or
a liability with changes in fair value recognized in net earnings.
Financial instruments that do qualify as hedges under Accounting
Guideline 13 and are designated as hedges are not recognized on the
Consolidated Balance Sheet and gains and losses on the hedge are
deferred and recognized in revenues in the period the hedge sale
transaction occurs.
i) ASSET RETIREMENT OBLIGATION
The Corporation, in association with its 20 per cent working
interest in the AOSP and its conventional crude oil and in-situ
initiatives, recognizes an asset and a liability for asset
retirement obligations in the period in which they are incurred by
estimating the fair value of the obligation. The fair value is
determined by the Corporation by first estimating the expected
timing and amount of cash flows, using third-party costs, that will
be required for future dismantlement and site restoration, and then
calculating the present value of these future expenditures using a
credit-adjusted risk-free rate appropriate for the Corporation. Any
change in timing or amount of the cash flows subsequent to initial
recognition results in a change in the asset and liability. The
Corporation recognizes, over the estimated life of the asset and
liability, depletion on the asset and accretion on the liability.
Actual expenditures incurred are charged against the accumulated
obligation.
j) STOCK-BASED COMPENSATION PLANS
The Corporation maintains stock option, performance share unit and
deferred stock unit plans as described in note 15.
For the Corporation's stock option plan, compensation expense is
recorded in the Consolidated Statements of Operations as general and
administrative expense with a corresponding increase in Contributed
Surplus in the Consolidated Balance Sheets for all common share
options granted to employees and non-employee directors on or after
January 1, 2003. The expense is based on the fair values of the
options at the time of grant and is recognized in the Consolidated
Statements of Operations over the requisite service period of the
respective options on a straight-line basis. Fair values are
4
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
determined, at the grant date, using the Black-Scholes
option-pricing model. For common share options granted prior to
January 1, 2003 ("pre-2003 options"), compensation expense is not
recognized in the Consolidated Statement of Operations. The
Corporation continues to disclose the pro forma earnings impact of
related stock-based compensation expense for pre-2003 options.
Consideration paid to the Corporation on exercise of options is
credited to Share Capital and, if related to any stock options that
were granted subsequent to January 1, 2003, an amount equal to the
compensation expense recognized to that date is reclassified from
Contributed Surplus to Share Capital.
The Performance Share Unit Plan ("PSUP") is accounted for under the
fair value method. The compensation expense is based on the fair
values of the award at the time of grant and is recognized in the
Consolidated Statements of Operations as general and administrative
expense with a corresponding amount recognized in Contributed
Surplus in the Consolidated Balance Sheets, using the graded vesting
method for the respective grants. Fair values are determined, at the
grant date, using a Monte-Carlo Simulation pricing model.
The Deferred Share Unit Plan ("DSUP") is accounted for on a
mark-to-market basis whereby a liability and compensation expense
are recorded for each period based on the number of Deferred Share
Units ("DSUs") outstanding and the current market price of the
Corporation's shares.
The Corporation, as an owner in the AOSP, shares in any related
costs associated with the AOSP's stock-based compensation plans. The
AOSP's plans involve Stock Appreciation Rights (SARs) which may
require settlement with cash payments. During the vesting period,
compensation expense is recorded in the Consolidated Statements of
Operations as operating expense over the requisite service period on
a straight-line basis and is recognized at period end date using the
Black-Scholes option-pricing model. The Corporation's share of the
change in value of the SARs is recognized in operating expense in
the year the change occurs.
k) REVENUE RECOGNITION
The revenue associated with the sale of crude oil products is
recorded when title and other significant risks and rewards of
ownership are passed to the customer and delivery has occurred.
Crude oil products produced and sold by the Corporation below or
above our working interest share results in production underliftings
and overliftings. Overliftings are recorded as liabilities and
underliftings are recorded as assets.
l) INCOME TAXES
The Corporation follows the liability method of accounting for
income taxes. Under this method, future income taxes are recognized
based on the estimated tax effects of temporary differences in the
carrying value of assets and liabilities in the Consolidated
Financial Statements and their respective tax bases, using income
tax rates substantively enacted on the Consolidated Balance Sheet
date. The effect of a change in income tax rates on future income
tax assets and liabilities is recognized in earnings in the period
the change occurs.
m) NET EARNINGS PER SHARE
Basic net earnings per share are calculated by dividing the net
earnings available to common shareholders by the weighted-average
number of common shares outstanding during the period. Diluted net
earnings per share reflect the potential dilution that would occur
if stock options were exercised. The Corporation uses the treasury
stock method to determine the dilutive effect of stock options and
other dilutive instruments. The treasury stock method assumes that
5
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
proceeds received from the exercise of in-the-money stock options
are used to repurchase common shares at the average market price for
the period.
n) EMPLOYEE FUTURE BENEFITS
The Corporation has a defined contribution pension plan for its
direct employees and, as a result of the 20 per cent ownership in
the AOSP, has a defined benefit pension plan for employees of the
AOSP. For the defined contribution pension plan, the expense is
recognized as payments are made or entitlements are earned.
For the defined benefit pension plan, the costs are determined using
the projected benefit method prorated on length of service and
reflects the AOSP's best estimate of expected plan investment
performance, salary escalation, retirement ages of employees,
withdrawal rates and mortality rates. The expected return on plan
assets is based on the fair value of those assets and the obligation
is discounted using a market interest rate at the beginning of the
year based on high quality corporate debt instruments. Pension
expense includes the cost of pension benefits earned during the
current year, the interest cost on pension obligations, the expected
return on pension plan assets, the amortization of adjustments
arising from pension plan amendments and the excess of the net
actuarial gain or loss over ten per cent of the greater of the
benefits obligation and the fair value of plan assets. The
amortization period is over the expected average remaining service
lifetime of employees covered by the plans.
o) COMPARATIVE AMOUNTS
Certain comparative amounts have been reclassified to conform to the
current year's presentation.
3 CHANGES IN ACCOUNTING POLICIES
a) STOCK-BASED COMPENSATION FOR EMPLOYEES ELIGIBLE TO RETIRE BEFORE THE
VESTING DATE
For the year ending December 31, 2006, the Corporation retroactively
adopted Emerging Issues Committee Abstract 162 ("EIC-162"). EIC-162
requires the Corporation to recognize stock-based compensation
expense for awards granted to employees eligible for retirement
under stock-based compensation plans that contain provisions that
allow an employee to continue vesting in an award in accordance with
the stated vesting terms after the employee has retired.
Accordingly, stock-based compensation expense of $3.6 million has
been included in general and administrative expense, representing
the additional compensation expense recognized for employees
eligible for retirement during the vesting period. There is no
impact to the Consolidated Financial Statements as at December 31,
2005 as no such retirement provisions existed during this period.
The Corporation's stock option and PSU plans did not include
retirement provisions until 2006 when the plans were amended to
include retirement provisions.
b) NON-MONETARY TRANSACTIONS
On January 1, 2006, the Corporation prospectively adopted CICA
Handbook Section 3831, "Non-Monetary Transactions" which replaces
Section 3830, "Non-Monetary Transactions". Section 3831 establishes
standards for the measurement and disclosure of non-monetary
transactions. Section 3830 prescribes that exchanges of non-monetary
transactions should be measured based on the fair value of the
assets exchanged, while providing an exception for non-monetary
exchanges in transactions which do not result in the culmination of
the earnings process. Section 3831 eliminates this exception
provided in Section 3830 and replaces it with an exception for
exchanges of non-monetary assets that do not have commercial
substance. A transaction has commercial substance when the entity's
6
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
future cash flows are expected to change significantly as a result
of the transaction. There is no impact on the Consolidated Financial
Statements as the Corporation does not have exchanges of
non-monetary transactions after January 1, 2006 within the scope of
Section 3831.
c) IMPLICIT VARIABLE INTERESTS UNDER ACG-15
On January 1, 2006, the Corporation adopted Emerging Issues
Committee Abstract 157 ("EIC-157"). EIC-157 requires that a
reporting enterprise consider whether it holds an implicit variable
interest in the Variable Interest Entity ("VIE") or potential VIE.
The determination of whether an implicit variable interest exists
should also be based on whether the reporting enterprise may absorb
variability on the VIE or potential VIE. The Corporation has entered
into operating leases, as described in note 19(a), with a VIE. These
operating leases as structured do not meet the criteria for
consolidation by the Corporation and therefore, the adoption of this
accounting policy had no impact on the Corporation's Consolidated
Financial Statements.
d) CONDITIONAL ASSET RETIREMENT OBLIGATIONS
On January 1, 2006, the Corporation retroactively adopted Emerging
Issues Committee Abstract 159 ("EIC-159"). EIC-159 clarifies that
the term "conditional asset retirement obligation" as used in CICA
3110, "Asset Retirement Obligations" refers to a legal obligation to
perform an asset retirement activity in which the timing and (or)
method of settlement are conditional on a future event that may or
may not be within the control of the entity. EIC-159 requires a
liability to be recognized for the fair value of a conditional asset
retirement obligation if the fair value of the liability can be
reasonably estimated; an entity to apply expected present value
technique if certain conditions exist indicating sufficient
information to reasonably estimate conditional asset retirement
obligation; and that a liability should be recognized initially in
the period in which sufficient information becomes available to
estimate a conditional asset retirement obligations fair value.
There is no impact on the Consolidated Financial Statements of the
Corporation from the retroactive adoption of EIC-159.
4 INVENTORY
2006 2005
-------------------------------------------------------------------------
Product Inventory 9,938 11,262
Parts, Supplies and Other 11,823 9,821
-------------------------------------------------------------------------
21,761 21,083
=========================================================================
7
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
5 PROPERTY, PLANT AND EQUIPMENT
2006 Cost Accum. DD&A* Net
--------------------------------------------------------------------------
Athabasca Oil Sands Project
Producing Assets 1,414,560 (155,226) 1,259,334
Capital Leases 52,705 (5,914) 46,791
Asset Retirement Obligation 18,246 (1,145) 17,101
Expansion 225,599 -- 225,599
--------------------------------------------------------------------------
1,711,110 (162,285) 1,548,825
In-Situ Projects 25,842 -- 25,842
Kurdistan Exploration Project 23,954 -- 23,954
Corporate 15,726 (7,381) 8,345
--------------------------------------------------------------------------
1,776,632 (169,666) 1,606,966
==========================================================================
2005 Cost Accum. DD&A* Net
--------------------------------------------------------------------------
Athabasca Oil Sands Project
Producing Assets 1,342,704 (104,437) 1,238,267
Capital Leases 52,705 (4,294) 48,411
Asset Retirement Obligation 7,732 (573) 7,159
Expansion 38,235 -- 38,235
--------------------------------------------------------------------------
1,441,376 (109,304) 1,332,072
In-Situ Projects 797 -- 797
Kurdistan Exploration Project 8,962 -- 8,962
Corporate 12,136 (1,362) 10,774
--------------------------------------------------------------------------
1,463,271 (110,666) 1,352,605
==========================================================================
* ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION
Costs currently not subject to depreciation, depletion and amortization
include $225.6 million relating to the AOSP (2005 - $38.2 million). In
2005, $5.7 million relating to Corporate was not subject to depreciation,
depletion and amortization as the projects associated with these costs
were not substantially complete and there was no commercial production
associated with these projects.
All costs included in the Kurdistan Exploration Project and the In-Situ
Projects are excluded from depletion as they represent costs related to
properties incurred in cost centres that are considered to be in the
pre-production stage. Currently, there are no proved reserves in these
cost centres. All costs, net of any associated revenues, in these cost
centres have been capitalized. During the year ended December 31, 2006,
the Corporation capitalized $2.8 million (2005 - nil) in interest costs
relating to the expansion of the AOSP.
During the year ended December 31, 2006, assets included in AOSP
Producing Assets and Corporate with a carrying value of $9.4 million and
$5.6 million, respectively, were determined to be impaired. The capital
projects associated with these assets have been cancelled and,
8
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
consequently, the assets have no future economic benefit. Accordingly,
the Corporation has determined the carrying value of these projects to be
nil and has recognized, in Depreciation, Depletion and Amortization, an
impairment of $15 million.
6 DEFERRED CHARGES
2006 2005
--------------------------------------------------------------------------
Deferred Charges 28,712 28,712
Less: Amortization (15,209) (12,649)
--------------------------------------------------------------------------
13,503 16,063
==========================================================================
7 LONG-TERM DEBT
2006 2005
--------------------------------------------------------------------------
US$450 million Senior Secured Notes (a) 524,385 524,655
Revolving Credit Facility (b) 77,000 41,000
--------------------------------------------------------------------------
601,385 565,655
==========================================================================
a) The Senior Secured Notes (the "Notes") bear interest at 8.375 per
cent and have a maturity of May 1, 2012. The Notes provide the
holders with security over all the assets of the Corporation,
subordinated to the $340 million Revolving Credit Facility
("Revolving Credit Facility") described in note 7(b), until the
Corporation achieves an investment grade corporate credit rating, at
which time the Senior Secured Notes become unsecured.
The Senior Secured Notes are recorded in Canadian dollars at the
exchange rate in effect at the balance sheet date. An unrealized
foreign exchange gain totalling $0.3 million was recognized for the
year ended December 31, 2006 (2005 - $17 million) as a result of
changes in the foreign exchange rate between the US and Canadian
dollars. As at December 31, 2006, a total of $184.5 million of
unrealized foreign exchange gains were recognized since the
inception of the Notes, approximately $92 million of which has been
capitalized as the unrealized gains occurred prior to commercial
operations.
b) The Revolving Credit Facility bears interest at the lenders' prime
lending rate, the bankers' acceptance rate or the LIBOR rate plus
applicable margins ranging from nil to 225 basis points. The
Revolving Credit Facility provides the banks with security over all
of the assets of the Corporation, with the exception of certain
intercompany notes and note guarantees in connection with the Notes
detailed in note 7(a), and have certain financial covenants,
including a limit on the amount available for drawdown. At December
31, 2006, the limit available for drawdown was $340 million (2005 -
$299 million), of which $77 million (2005 - $41 million) had been
drawn and $9.6 million (2005 - $8.9 million) had been issued in
letters of credit. The Revolving Credit Facility contains a three
year revolving maturity, extendible annually at the lending
institutions' discretion.
9
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
9 LEASE OBLIGATIONS
2006 2005
-------------------------------------------------------------------------
Obligations Under Capital Lease (a) 48,928 50,266
Operating Lease Guarantee Obligation (b) 10,510 8,939
-------------------------------------------------------------------------
59,438 59,205
Less: Current Portion 1,958 3,396
-------------------------------------------------------------------------
57,480 55,809
=========================================================================
a) The capital lease obligation relates to the Corporation's share of
capital costs for the hydrogen-manufacturing unit within the AOSP.
Repayment of the principal obligation was $1.3 million in 2006 and
is scheduled to remain at that level until fully repaid.
b) Under the Mobile Equipment Lease, described in note 19(a), the
Corporation is committed to pay its 20 per cent share of an amount
equal to 85 per cent of the original cost of the equipment to the
lessor at the end of the terms of the lease. Accordingly, the
Corporation recognizes, as a liability, a portion of this future
payment as it relates to the service life of the equipment that has
passed. For the year ended December 31, 2006, the Corporation paid
$1.1 million (2005 - $2.3 million) in regards to this obligation.
9 OPTION PREMIUM LIABILITY
The Corporation deferred payment and receipt of the premiums associated
with the options described in note 18(a)(i) until the settlement of the
option contracts between 2007 and 2009. The total net undiscounted
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 per cent to 4.50 per
cent. For the year ended December 31, 2006, $3.8 million of interest
expense was recognized (2005 - $1.3 million).
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 year ended December 31, 2006 was $0.1 million (2005 - $0.8
million unrealized foreign exchange gain).
The following table reconciles the change in the net option premium
liability:
2006 2005
--------------------------------------------------------------------------
Option Premium Liability at Beginning of Year 85,416 --
Net Premiums -- 84,976
Interest Expense 3,801 1,278
Unrealized Foreign Exchange (Gain) Loss 58 (838)
--------------------------------------------------------------------------
Option Premium Liability at End of Year 89,275 85,416
Less: Current Portion 24,966 --
--------------------------------------------------------------------------
64,309 85,416
==========================================================================
10
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
10 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 costs and
site restoration costs in the mining, extracting and upgrading
activities. The Corporation's share of the total undiscounted amount of
estimated cash flows required to settle the obligations at December 31,
2006 was approximately $85.1 million (2005 - $39.2 million). The increase
in the total undiscounted cash flows during the year was the result of an
anticipated increase to inflation associated with the Fort McMurray area,
increasing future reclamation costs for land disturbed prior to 2006 and
the costs associated with reclaiming land disturbed during 2006.
The obligations will be settled on an ongoing basis over the useful lives
of the operating assets, which may extend up to approximately 30 years in
the future with the majority to be settled at the end of this time
period. In determining the fair value of the Asset Retirement Obligation,
the estimated cash flows have been discounted using credit-adjusted
risk-free rates between 6 per cent and 7 per cent. Considering the
increased anticipated inflation and changes in the anticipated timing of
certain reclamation activities, the Corporation has revised the asset
retirement obligation liability by $10.3 million. In addition, the AOSP's
Upgrader has retirement obligations for which fair value cannot be
reasonably determined because the asset currently has an indeterminate
life. The asset retirement obligation for these assets will be recorded
in the first period in which the lives of the assets are determinable.
The following table presents the reconciliation of the Asset Retirement
Obligation from the beginning of each respective period until the end of
that period:
2006 2005
-------------------------------------------------------------------------
Asset Retirement Obligations at Beginning of Year 9,094 8,191
Liabilities Incurred 259 393
Liabilities Settled (91) (52)
Accretion on Asset Retirement Obligation 1,256 562
Revision of Estimates 10,255 --
-------------------------------------------------------------------------
Asset Retirement Obligations at End of Year 20,773 9,094
=========================================================================
The Corporation currently does not have asset retirement obligations
associated with In-Situ Projects or the Kurdistan Exploration Project as
these projects are in the early stages of development.
11 INTEREST EXPENSE
2006 2005
-------------------------------------------------------------------------
Interest on Long-term Debt 46,190 54,325
Interest on Obligations Under Capital Lease 2,823 2,562
Interest on Option Premium Liability 3,799 1,278
-------------------------------------------------------------------------
Total Financing Charges 52,812 58,165
Less: Capitalized Interest for AOSP Expansion 2,795 --
-------------------------------------------------------------------------
Interest Expense 50,017 58,165
=========================================================================
Cash interest paid for the year ended December 31, 2006 was $49.3 million
(2005 - $57.4 million). Cash interest received for the year ended
December 31, 2006 was $0.3 million (2005 - $0.2 million).
11
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
12 INCOME TAXES
2006 2005
-------------------------------------------------------------------------
Large Corporations (Recovery) Tax (107) 3,000
Future Income Tax Expense 16,668 70,956
-------------------------------------------------------------------------
Income Tax Expense 16,561 73,956
=========================================================================
Cash taxes paid during the year ended December 31, 2006 were $0.8 million
(2005 - $2.5 million).
At December 31, the future income tax liability consists of:
2006 2005
-------------------------------------------------------------------------
Future Income Tax Assets
Unrealized Loss on Risk Management 19,375 --
Net Losses Carried Forward 2,908 4,707
Share Issue Costs 510 973
Impairment of Long-lived Assets 686 796
Future Income Tax Liabilities
Capital Assets in Excess of Tax Values (79,824) (39,924)
Unrealized Foreign Exchange Gain (13,409) (15,500)
Unrealized Gain on Risk Management -- (4,374)
Debt Issue Costs (3,359) (3,123)
-------------------------------------------------------------------------
Net Future Income Tax Liability (73,113) (56,445)
=========================================================================
The following table reconciles income taxes calculated at the Canadian
statutory rate of 34.5 per cent (2005 - 37.62 per cent) with actual
income taxes:
2006 2005
-------------------------------------------------------------------------
Net Earnings Before Income Taxes 79,931 223,405
Income Tax Expense at Statutory Rate 27,576 84,045
Effect of Tax Rate Changes and Timing of Use (13,877) (267)
Non-taxable Portion of Foreign Exchange Gain (54) (3,530)
Non-deductible Expenses 326 --
Resource Allowance (236) (10,792)
Provision to Actual (510) 642
Stock-based Compensation 3,443 858
Large Corporations Tax (107) 3,000
-------------------------------------------------------------------------
Income Tax Expense 16,561 73,956
=========================================================================
At December 31, 2006, the Corporation had approximately $1.4 billion of
tax pools available. Included in the tax pools are $9 million of
non-capital tax loss carry forward balances as estimated at December 31,
2006, with expiry dates ranging from 2007 to 2014, the benefit of which
has been recognized in the accounts.
12
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
13 SHARE CAPITAL
a) AUTHORIZED
The Corporation is authorized to issue an unlimited number of Class
A shares ("Common Shares"), an unlimited number of non-voting
Convertible Class B Equity Shares ("Class B Shares"), an unlimited
number of non-voting Class C Preferred Shares and an unlimited
number of Class D Preferred Shares, issuable in series.
The Common Shares are without nominal or par value.
b) SHARE SPLIT
The Corporation's shareholders approved a subdivision or share split
of its issued and outstanding Common Shares on a three-for-one basis
at the Corporation's Annual and Special Meeting held on May 11,
2005. All Common Share and per Common Share amounts have been
restated to retroactively reflect the share split.
c) ISSUED AND OUTSTANDING
NUMBER OF
SHARES AMOUNT
-------------------------------------------------------------------------------------
COMMON SHARES
Balance at December 31, 2004 159,836,286 545,699
Issued on Exercise of Employee Stock Options 681,755 2,724
Exercise of Stock Options Previously Recognized -- 324
-------------------------------------------------------------------------------------
Balance at December 31, 2005 160,518,041 548,747
Issued on Exercise of Employee Stock Options 860,358 4,923
Exercise of Stock Options Previously Recognized -- 563
-------------------------------------------------------------------------------------
Balance at December 31, 2006 161,378,399 554,233
=====================================================================================
d) NET EARNINGS PER SHARE
The following table summarizes the Common Shares used in calculating
Net Earnings per Common Share:
2006 2005
--------------------------------------------------------------------------------------
Weighted Average Common Shares Outstanding - Basic 160,991,406 160,169,887
Effect of Stock Options 2,163,883 2,739,179
--------------------------------------------------------------------------------------
Weighted Average Common Shares Outstanding - Diluted 163,155,289 162,909,066
======================================================================================
13
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
14 CONTRIBUTED SURPLUS
The following table presents the reconciliation of Contributed Surplus
for the year ended December 31:
2006 2005
-------------------------------------------------------------------------------------------------------------
Contributed Surplus Beginning of Period 3,474 1,245
Stock-based Compensation Expense 12,083 3,149
Cash Settlement of Performance Share Unit Plan (2,104) (596)
Exercise of Stock Options Previously Recognized (563) (324)
-------------------------------------------------------------------------------------------------------------
Contributed Surplus End of Period 12,890 3,474
=============================================================================================================
15 STOCK-BASED COMPENSATION
The number of Common Share options outstanding reflects the share split
of the Corporation's Common Shares as described in note 13(b).
a) STOCK OPTION PLAN
The Corporation has established a Stock Option Plan for the issuance
of options to purchase Common Shares to directors, officers and
employees of the Corporation and its subsidiaries. Options granted
under the Stock Option Plan generally vest on an annual basis over
four years. The stock options expire five years from each vesting
date.
2006 2005
-------------------------------------------------------------------------------------------------------------
Weighted Weighted
Average Average
Number of Exercise Price Number of Exercise Price
Options $ Options $
-------------------------------------------------------------------------------------------------------------
Outstanding at Beginning of Year 3,527,932 8.72 3,766,938 6.51
Granted 966,540 30.59 443,670 20.23
Exercised (860,358) 3.10 (681,755) 4.00
Forfeited (850) 33.62 (921) 9.07
-------------------------------------------------------------------------------------------------------------
Outstanding at End of Year 3,633,264 15.79 3,527,932 8.72
=============================================================================================================
Options Exercisable at End of Year 2,234,308 8.06 2,212,647 6.24
=============================================================================================================
14
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
The following table summarizes Stock Options outstanding and
exercisable under the Stock Option Plan at December 31, 2006:
Options Outstanding Options Exercisable
-----------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Number of Remaining Exercise Price Number of Exercise Price
Exercise Price Options Life (Years) $ Options $
-----------------------------------------------------------------------------------------------------------
$2.83 - $10.00 1,985,075 3.17 7.11 1,967,575 7.09
$10.01 - $20.00 592,499 5.58 15.83 244,233 14.19
$20.01 - $30.00 222,000 6.76 26.44 22,500 26.18
$30.01 - $35.40 833,690 6.68 33.60 -- --
-----------------------------------------------------------------------------------------------------------
3,633,264 4.59 15.79 2,234,308 8.06
===========================================================================================================
The number of Common Shares reserved for issuance under the Stock
Option Plan was 5,796,187 at December 31, 2006 (2005 - 6,656,545).
The weighted average grant-date fair value of the 966,540 options
granted during 2006 was $15.14 using the Black-Scholes option
pricing model. During 2005, 443,670 options were granted at a
weighted average fair value of $8.22. The following table sets out
the assumptions used in applying the Black-Scholes model:
2006 2005
-----------------------------------------------------------------------------------------------------
Risk Free Interest Rate 3.95 - 4.49% 3.72 - 4.06%
Expected Life (In Years) 4 - 6 6
Expected Volatility 33 - 43% 26 - 44%
Dividend Per Share -- --
=====================================================================================================
b) PERFORMANCE SHARE UNIT PLAN
The Corporation has established a Performance Share Unit Plan
("PSUP") for issuance of awards to directors, officers, employees
and consultants of the Corporation and its subsidiaries. Awards
under PSUP will be in the form of performance share units ("PSU"),
with each PSU entitling the holder to receive one Common Share of
the Corporation for no additional consideration and subject to
certain restrictions. Each PSU award will vest at a rate of one
third of the PSUs awarded thereunder annually over a three-year
period, conditional on the Corporation achieving an acceptable total
shareholder return against a peer group. If total shareholder return
at a particular vesting date is in the bottom 25 per cent of the
peer group, none of the PSUs otherwise eligible to vest with respect
to such PSU will vest. If total shareholder return at a particular
vesting date is in the top 25 per cent of the peer group, 150 per
cent of the PSUs eligible to vest on such date will vest. If total
shareholder return at a particular vesting date is in the middle 50
per cent of the peer group, all of the PSUs eligible to vest on such
date will vest.
15
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
The following table presents the reconciliation of the number of
PSUs for the year ended December 31:
2006 2005
--------------------------------------------------------------------
Outstanding at Beginning of Year 160,128 99,291
Granted 149,530 113,880
Vested (63,969) (33,093)
Forfeited (8,019) (19,950)
--------------------------------------------------------------------
Outstanding at End of Year 237,670 160,128
====================================================================
During the year ended December 31, 2006, the Corporation settled
63,969 PSUs for cash through the purchase and distribution of its
shares to holders of the PSUs of $2.1 million. During 2005, the
Corporation settled 33,093 PSUs for cash through the purchase and
distribution of its shares to holders of the PSUs of $0.6 million.
The weighted average grant-date fair value of the 149,530 PSUs
granted during 2006 was $32.96 using the Monte-Carlo Simulation
pricing model (2005 - 113,880 PSUs at $21.71).
c) DEFERRED SHARE UNIT PLAN
In October 2005, the Corporation initiated a Deferred Share Unit
Plan ("DSUP"), whereby directors, officers and employees of the
Corporation can elect to receive all or a portion of their annual
cash compensation in the form of Deferred Stock Units ("DSU"). Under
the DSUP, notional share units are issued for the elected amount
which is based on the then current market price of the Corporation's
common shares. Upon ceasing directorship, termination of employment
or retirement, the units are settled in cash or common shares of the
Corporation as determined by the Corporation. Final DSU redemption
amounts are subject to change, depending on the Corporation's share
price at the time of exercise. Accordingly, the Corporation revalues
the DSUs on each reporting date with any changes in value recorded
as an adjustment to compensation expense in the period. For the year
ended December 31, 2006, $0.6 million in compensation expense
relating to the DSUs was recorded (2005 - $0.1 million) in General
and Administrative Expenses and no DSUs were redeemed for cash or
shares of the Corporation. The Corporation had 19,852 DSUs
outstanding at December 31, 2006 (2005 - 2,261).
d) AOSP STOCK APPRECIATION RIGHTS PLANS
The AOSP implemented two stock-based compensation plans in 2004 that
awarded Stock Appreciation Rights (SARs) to certain employees.
Accordingly, the Corporation, as a 20 per cent owner in the AOSP,
shares in the costs of these SARs. Under the first plan, SARs were
granted to employees of the AOSP that entitle the holders to a cash
payment once exercised, if the composite value of the
weighted-average stock price of certain AOSP owners' shares at the
time of exercise exceeds the issue price of the SARs. The SARs vest
evenly over three years and expire ten years after grant.
16
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
The following table presents the reconciliation, at the AOSP level,
of the number of SARs under the first plan for the year ended
December 31:
2006 2005
--------------------------------------------------------------------
Outstanding at Beginning of Year 251,280 153,210
Granted 157,760 163,110
Exercised (41,390) --
Forfeited -- (65,040)
--------------------------------------------------------------------
Outstanding at End of Year 367,650 251,280
====================================================================
Under the second plan, SARs were granted to employees of the AOSP
that entitle the holders to a cash payment at the end of a
three-year period if the composite value of the weighted-average
stock price of certain AOSP owners' shares at the time of exercise
exceeds the issue price of the SARs and if certain performance
measures are met.
The following table presents the reconciliation, at the AOSP level,
of the number of SARs under the second plan for the year ended
December 31:
2006 2005
--------------------------------------------------------------------
Outstanding at Beginning of Year 135,300 79,950
Granted 91,100 79,950
Exercised -- --
Forfeited (33,840) (24,600)
--------------------------------------------------------------------
Outstanding at End of Year 192,560 135,300
====================================================================
For the year ended December 31, 2006, $0.8 million in compensation
expense was recorded in operating expense for these two plans (2005
- $0.7 million).
e) STOCK-BASED COMPENSATION
For the year ended December 31, 2006, the Corporation recognized
$12.1 million (2005 - $3.1 million) in compensation expense related
to stock-based compensation issued subsequent to January 1, 2003.
This is the portion of stock-based compensation that is related to
2006 services rendered and is comprised of $7.8 million (2005 - $1.4
million) in respect to the Corporation's stock option plan and $4.3
million (2005 - $1.7 million) in respect to the Corporation's
Performance Share Unit Plan.
17
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
No compensation expense has been recognized for stock options
granted before January 1, 2003, in accordance with note 2(j). Had
compensation expense been determined based on the fair value method
for awards made after December 31, 2001, but before January 1, 2003,
the Corporation's net earnings attributable to common shareholders
and earnings per share would have been adjusted to the pro forma
amounts indicated below:
2006 2005
--------------------------------------------------------------------
Net Earnings - As reported 63,370 149,449
Less: Compensation Expense 133 891
--------------------------------------------------------------------
Net Earnings - Pro Forma 63,237 148,558
====================================================================
Basic Earnings Per Share
As Reported 0.39 0.93
Pro Forma 0.39 0.93
Diluted Earnings Per Share
As Reported 0.39 0.92
Pro Forma 0.39 0.91
====================================================================
16 SHAREHOLDERS' RIGHTS PLAN
The Corporation has a shareholders' rights plan (the "Plan"). Under the
Plan, one right will be issued with each Common Share issued. The rights
remain attached to the Common Share and are not exercisable or separable
unless one or more of certain specified events occur. If a person or
group acting in concert acquires 20 per cent or more of the Common Shares
of the Corporation, the rights will entitle the holders thereof (other
than the acquiring person or group) to purchase Common Shares of the
Corporation at a 50 per cent discount from the then market price. The
rights are not triggered by a "Permitted Bid", as defined in the Plan.
17 EMPLOYEE FUTURE BENEFITS
The Corporation has a defined contribution pension plan for its direct
employees and as a result of the 20 per cent ownership in the AOSP, has a
defined benefit pension plan for employees of the AOSP. All of the
information pertaining to the defined benefit pension plan in this note
represents the Corporation's 20 per cent ownership in the AOSP. The
Corporation uses its fiscal year-end as the measurement date for both of
these pension plans.
a) DEFINED CONTRIBUTION PENSION PLAN
For the year ended December 31, 2006, the total expense recognized
for the Corporation's defined contribution pension plan was $0.5
million (2005 - $0.3 million).
b) DEFINED BENEFIT PENSION PLAN
For the year ended December 31, 2006, the total expense recognized
for the Corporation's 20 per cent ownership interest in the AOSP's
defined benefit pension plan was $1.3 million (2005 - $0.8 million).
As at December 31, 2006, the Corporation's share of the funded
status of the defined benefit pension plan was in a deficit position
of $0.5 million (2005 - $0.7 million deficit). Additional
18
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
information for the Corporation's 20 per cent ownership interest in
the AOSP's defined benefit pension plan is as follows:
2006 2005
-----------------------------------------------------------------------------
Accrued Benefit Obligation, Beginning of Year 3,478 1,860
Current Service Cost 1,268 821
Interest Cost 240 161
Actuarial (Gain) Loss (395) 821
Plan Amendments -- (115)
Benefits Paid (95) (70)
-----------------------------------------------------------------------------
Accrued Benefit Obligation, End of Year 4,496 3,478
=============================================================================
Fair Value of Plan Assets, Beginning of Year 2,730 1,866
Employer Contributions 931 810
Actual Return on Plan Assets 418 124
Benefits Paid (95) (70)
-----------------------------------------------------------------------------
Fair Value of Plan Assets, End of Year 3,984 2,730
=============================================================================
Funded Status - Plan Deficit (512) (747)
Unamortized Past Service Costs (106) (115)
Unamortized Net Actuarial Loss 493 1,145
Unamortized Transitional Asset (10) (11)
-----------------------------------------------------------------------------
Accrued Benefit Asset (Liability) (135) 272
=============================================================================
Components of Net Periodic Pension Cost
Current Service Cost 1,268 821
Interest Cost 240 161
Actual Return on Plan Assets (418) (124)
Actuarial (Gain) Loss on Accrued Benefit Obligation (395) 821
-----------------------------------------------------------------------------
Costs Arising in the Period 695 1,679
Differences in Costs Arising and Costs
Recognized in the Period in Respect of:
Return on Plan Assets 196 (32)
Actuarial Gain (Loss) 456 (812)
Transitional Asset (10) (1)
-----------------------------------------------------------------------------
Net Periodic Pension Cost Recognized 1,337 834
=============================================================================
19
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
The significant actuarial assumptions used to determine the periodic
expense and accrued benefit obligations are as follows:
2006 2005
---------------------------------------------------------------------
Discount Rate - Expense 5.10% 6.10%
Discount Rate - Year-end Disclosure 5.40% 5.10%
Expected Long-term Rate of Return on Plan Assets 7.00% 7.00%
Rate of Compensation Increase 4.25% 4.25%
=====================================================================
The investment strategy for the defined benefit pension plan assets
is to utilize a diversified mix of global public and private equity
portfolios, together with public and private fixed income
portfolios, to earn long-term investment returns that enable the
plan to meet its obligations. Active management strategies are
utilized within the plan in an effort to realize investment returns
in excess of market indices. The weighted-average asset allocation
for our defined benefit pension plan at December 31, 2006 was as
follows:
ACTUAL Target
--------------------------------------------------------------------
Domestic Equities 31% 33%
Foreign Equities 29% 25%
Fixed Income Securities 36% 37%
Money Market 4% 5%
--------------------------------------------------------------------
100% 100%
====================================================================
18 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Corporation's financial instruments that are included in the
Consolidated Balance Sheets are comprised of cash and cash equivalents,
accounts receivable, risk management activities, accounts payable and
accrued liabilities, option premium liability and long-term borrowings.
a) COMMODITY PRICE RISK
The Corporation has entered into various commodity pricing
agreements designed to mitigate the exposure to the volatility of
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 are accounted for as hedges, as they qualify 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.
(i) Fair Value Accounting
During 2005, the Corporation purchased 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
20
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
premium liability. Payment of the net premium liability is deferred
until the settlement of the option contracts between 2007 and 2009.
As at December 31, 2006, the Corporation had the following put and
call options outstanding:
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 year ended December 31, 2006, the Corporation recognized
an unrealized loss of $72.1 million on the Risk Management Asset,
marking it to the fair value at the end of the period (2005 - $13.5
million unrealized gain). The following table reconciles the
movement in the fair value of these option contracts that have not
been designated as hedges:
2006 2005
---------------------------------------------------------------------
Risk Management Asset at Beginning of Year 98,426 --
Net Premium -- 84,976
Unrealized Gain (Loss) on Risk Management Asset (72,118) 13,450
---------------------------------------------------------------------
Risk Management Asset at End of Year 26,308 98,426
Less: Current Portion 7,601 --
---------------------------------------------------------------------
18,707 98,426
=====================================================================
(ii) Hedge Accounting
As at December 31, 2006, there were no crude oil swap positions in
place. For the year ended December 31, 2005, the Corporation's
revenues were reduced by $110.4 million from crude oil price hedging
losses.
b) CREDIT RISK
A significant portion of the Corporation's accounts receivable is
with customers in the oil and gas industry, and is subject to normal
industry credit risks. The Corporation manages this risk through
management review of credit ratings and potential exposure to
individual counterparties on a regular basis. Where appropriate, the
Corporation ensures that netting arrangements and, where required,
letters of credit are in place to minimize the impact in the event
of customer default.
The counterparties of all of the Corporation's put and call options
are major financial institutions in Canada and the United States,
all with investment grade credit ratings, thereby partially
mitigating the credit risk associated with these financial
instruments.
21
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
c) INTEREST RATE RISK
At December 31, 2006, the increase or decrease in net earnings for
each one per cent change in the interest rates on floating debt
amounts to $1.3 million (2005 - $0.4 million).
d) FOREIGN CURRENCY RISK
Foreign currency risk is the risk that a variation in exchange rates
between the Canadian dollar and foreign currencies will affect the
Corporation's operating and financial results. The Corporation has
transactions in foreign currencies, and has US dollar denominated
Risk Management Assets, Senior Secured Notes and Option Premium
Liabilities, as described in note 18(a), note 7(a) and note 9,
respectively.
e) FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES
The fair values of financial instruments that are included in the
Consolidated Balance Sheets, other than long-term borrowings,
approximate their carrying amount due to the relatively short period
to maturity of these instruments or have interest rates that
approximate their fair value.
The estimated fair values of long-term borrowings have been
determined based upon market prices at December 31 for other similar
liabilities with similar terms and conditions, or by discounting
future payments of interest and principal at estimated interest
rates that would be available to the Corporation at year-end.
2006 2005
--------------------------------------------------------------------------------------------------
Balance Sheet Balance Sheet
Amount Fair Value Amount Fair Value
--------------------------------------------------------------------------------------------------
Floating Rate Debt
Revolving Credit 77,000 77,000 41,000 41,000
Lease Obligation 57,480 57,480 59,205 59,205
Fixed Rate Debt
US Senior Secured Notes 524,385 584,034 524,655 591,549
--------------------------------------------------------------------------------------------------
Long-term Borrowings 658,865 718,514 624,860 691,754
==================================================================================================
22
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
19 COMMITMENTS AND CONTINGENCIES
a) COMMITMENTS
The following table summarizes the Corporation's operating commitments at
December 31, 2006:
2007 2008 2009 2010 2011 Thereafter Total
-------------------------------------------------------------------------------------------------
Feedstocks (1) 106,352 29,159 10,453 10,393 10,333 58,727 225,417
Pipelines and Utilities (1) 33,300 35,417 43,384 43,195 43,152 558,641 757,089
Mobile Equipment
Lease (2) 5,242 12,322 19,852 8,625 -- -- 46,041
Exploration Work
Commitments (3) 8,728 500 -- -- -- -- 9,228
-------------------------------------------------------------------------------------------------
153,622 77,398 73,689 62,213 53,485 617,368 1,037,775
=================================================================================================
(1) The Corporation and the other owners of the AOSP have entered into
long-term third party agreements to purchase certain feedstocks on a
take-or-pay basis. This commitment has been measured based on
December 31, 2006 market prices. In addition, the Corporation and
the other owners of the AOSP have executed long-term third party
agreements to provide for pipeline transportation of bitumen and
upgraded products, electrical and thermal energy, production and
supply of hydrogen and transportation of natural gas. Under the
terms of certain of these agreements, the Corporation is committed
to pay for these utilities and services on a long-term basis,
regardless of the extent that such services and utilities are
actually used. If due to project delay, suspension, shutdown or
other reason, the Corporation fails to meet its commitment under
these agreements, the Corporation may incur substantial costs and
may, in some circumstances, be obligated to purchase the facilities
constructed by the third parties for a purchase price in excess of
the fair market value of the facilities.
(2) The Corporation and the other owners of the AOSP have entered into
long-term operating lease obligations for certain equipment related
to the AOSP. The term of the lease obligations is between three and
seven years. A guarantee has been provided to the lessor in order to
secure attractive leasing terms and is payable when the equipment is
returned to the lessor. At December 31, 2006, the Corporation's
share of the maximum payable under the guarantee was $33.9 million.
However, any proceeds received from the sale of the equipment would
be used to offset the payment required under the guarantee. At
December 31, 2006, the Corporation's share of committed lease
payments amounted to $46 million. The estimate of lease interest
obligations, excluding any committed payments, is $4.7 million for
2007, $4.5 million for 2008, $2.4 million for 2009 and $0.4 million
for 2010.
(3) Included in Exploration Work Commitments are amounts committed by
the Corporation relating to the Corporation's operated in-situ
project and Kurdistan Exploration Project, as well as an in-situ
project operated by one of the other owners of the AOSP.
The Corporation, through WesternZagros, negotiated the initial form
of an Exploration and Production Sharing Agreement ("EPSA") with the
Kurdistan Regional Government ("KRG") subject to finalization of key
terms and ratification by the KRG to comply with expected federal
petroleum legislation. The EPSA provides for the exploration of
conventional oil and gas in the Federal Region of Kurdistan in
northern Iraq. WesternZagros continues to work towards ratification
23
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
of an EPSA with the KRG which is expected to include the
finalization of terms including its contract area and the
corresponding work program commitments.
In the fourth quarter of 2006, the Corporation and the other AOSP Owners
formally sanctioned Expansion 1 of the AOSP. The budget for Expansion 1
is $2.2 billion with $207.7 million incurred to date net to the
Corporation.
The Corporation has future commitments related to its Option Premium
Liability as described in note 9.
b) CONTINGENCIES
(i) INSURANCE CLAIMS
At the end of 2006, the Corporation had one claim outstanding,
namely, the $200 million claim pursuant to the Corporation's cost
overrun and project delay claim, commonly referred to as Section IV
and two settled claims, Section I and III, however, a portion of
these settled claims continue to be outstanding. In the second
quarter of 2005, the AOSP was successful in settlement proceedings
with the named insurers on Section III, a loss of profits claim
stemming from the fire at the Muskeg River Mine ("Mine") on January
6, 2003, in the amount of $220 million ($44 million net to the
Corporation). To date, the Corporation has received $19.4 million of
its share of this settlement amount as certain insurers on Section
III are also named insurers on Section IV, and they have withheld
insurance proceeds payable to the Corporation. In 2003 and 2004, the
Corporation received $16.1 million in respect to the coverage
provided under Section I, a physical property damage claim stemming
from the above mentioned fire at the Mine. However, certain insurers
that were involved in the Section IV claim again withheld their
portion of the Section I claim totalling $19.4 million. The
Corporation anticipates that it will receive the outstanding
settlement amount from both Section I and Section III of $19.4
million and $24.6 million, respectively, in the event that it is
successful in the Section IV arbitration proceedings.
Arbitration proceedings under the terms of Section IV of the
Corporation's cost overrun and project delay insurance policy
continue with formal hearings expected to commence during 2007. A
judgment is expected subsequent to this process, although the
Corporation makes no representations as to the timing or results of
this arbitration. In preparation of the arbitration process, several
examinations for discovery have been conducted with key individuals
over the last several months. In order to preserve the Corporation's
rights regarding this policy, the Corporation has filed a Statement
of Claim for the full limit of the policy, namely $200 million, and
the Corporation will also be seeking interest and punitive and
aggravated damages.
During the year ended December 31, 2005, the Corporation received
$3.1 million in respect of an errors and omission insurance
settlement that was negotiated by the AOSP. This errors and omission
insurance policy related to initial construction and as such these
proceeds have been applied against the cost of the AOSP. The related
settlements of both the Section I, Section III and the errors and
omission insurance policy have been credited to capital, as these
claims relate to costs that were capitalized as part of the
construction of the AOSP, or 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, 2006, 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
24
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
to the tax payable by the subscribers if such renunciations are
reduced under the INCOME TAX ACT (Canada). Discussions between the
AOSP and the Canada Revenue Agency are ongoing with respect to the
proper characterizations of certain expenditures included in the
Canadian exploration expenses in those years. If the Canada Revenue
Agency 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.
20 NET CHANGE IN NON-CASH WORKING CAPITAL
Source/(Use) 2006 2005
--------------------------------------------------------------------------
OPERATING ACTIVITIES
Accounts Receivable (22,641) (24,834)
Inventory (678) (6,897)
Prepaid Expense (3,088) (3,584)
Accounts Payable and Accrued Liabilities (33,029) 2,826
--------------------------------------------------------------------------
(59,436) (32,489)
==========================================================================
INVESTING ACTIVITIES
Accounts Receivable -- --
Accounts Payable and Accrued liabilities 90,227 10,798
--------------------------------------------------------------------------
30,791 10,798
==========================================================================
25
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
21 UNITED STATES ACCOUNTING PRINCIPLES AND REPORTING
The Consolidated Financial Statements have been prepared in Canadian
dollars in accordance with accounting principles generally accepted in
Canada ("Canadian GAAP"). The application of accounting principles
generally accepted in the United States ("US GAAP") would have the
following measurement differences on the Consolidated Financial
Statements:
RECONCILIATION OF NET EARNINGS AND RETAINED EARNINGS (DEFICIT) UNDER
CANADIAN GAAP TO US GAAP
Year Ended December 31 Notes 2006 2005
------------------------------------------------------------------------------------------
Net Earnings - Canadian GAAP 63,370 149,449
Impact of US GAAP
Revenue vii -- 10,202
Depreciation, Depletion & Amortization iv, v 5,679 23
Research and Business Development v (959) (34,503)
Deferred Income Tax iii (5,657) 7,125
------------------------------------------------------------------------------------------
Net Earnings - US GAAP 62,433 132,296
Retained Earnings (Deficit) at Beginning of Year - US GAAP 127,930 (4,366)
------------------------------------------------------------------------------------------
Retained Earnings at End of Year - US GAAP 190,363 127,930
==========================================================================================
Net Earnings Per Share - US GAAP
Basic 0.39 0.83
Diluted 0.38 0.81
==========================================================================================
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Year Ended December 31 Notes 2006 2005
------------------------------------------------------------------------------------------
Net Earnings - US GAAP 62,433 132,296
Pension Liability, Net of Deferred Income Tax viii (364) --
Change in Realized and Unrealized Losses ix -- 31,756
------------------------------------------------------------------------------------------
Other Comprehensive Income 62,069 164,052
==========================================================================================
26
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
CONSOLIDATED STATEMENT OF CASH FLOWS - US GAAP
Year Ended December 31 Notes 2006 2005
----------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN)
Operating Activities - Canadian GAAP 169,013 211,742
Research and Business Development Expense v (959) (34,503)
----------------------------------------------------------------------------------------------
Operating Activities - US GAAP 168,054 177,239
----------------------------------------------------------------------------------------------
Financing Activities - Canadian and US GAAP 39,582 (173,832)
----------------------------------------------------------------------------------------------
Investing Activities - Canadian GAAP (211,046) (36,035)
Research and Business Development Expense v 959 34,503
----------------------------------------------------------------------------------------------
Investing Activities - US GAAP (210,087) (1,532)
----------------------------------------------------------------------------------------------
Increase (Decrease) in Cash (2,451) 1,875
==============================================================================================
CONSOLIDATED BALANCE SHEET
As at December 31 2006 2005
------------------------------------------------------------------------------------------------
Notes As Reported US GAAP As Reported US GAAP
------------------------------------------------------------------------------------------------
ASSETS
Current Assets 154,983 154,983 123,426 123,426
Property, Plant and Equipment i 1,606,966 1,567,956 1,352,605 1,309,080
Risk Management 18,707 18,707 98,426 98,426
Deferred Charges iv 13,503 12,927 16,063 15,282
------------------------------------------------------------------------------------------------
1,794,159 1,754,573 1,590,520 1,546,214
================================================================================================
LIABILITIES
Current Liabilities viii 185,425 185,937 104,699 104,699
Long-term Debt 601,385 601,385 565,655 565,655
Lease Obligations 57,480 57,480 55,809 55,809
Option Premium Liability 64,309 64,309 85,416 85,416
Asset Retirement Obligations 20,773 20,773 9,094 9,094
Deferred Income Taxes iii 73,113 48,262 56,445 26,085
------------------------------------------------------------------------------------------------
1,002,485 978,146 877,118 846,758
SHAREHOLDERS' EQUITY
Share Capital vi 554,233 573,538 548,747 568,052
Contributed Surplus 12,890 12,890 3,474 3,474
Retained Earnings 224,551 190,363 161,181 127,930
Accumulated Other Comprehensive
Income ix -- (364) -- --
------------------------------------------------------------------------------------------------
1,794,159 1,754,573 1,590,520 1,546,214
================================================================================================
27
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
i) PROPERTY, PLANT AND EQUIPMENT
2006 Notes Cost Accum. DD&A* Net
--------------------------------------------------------------------------------------------------
As Reported - Canadian GAAP 1,776,632 (169,666) 1,606,966
Borrowing Costs and
The End of Pre-operating Period iv 7,935 (2,618) 5,317
Pre-feasibility v (49,931) 5,604 (44,327)
--------------------------------------------------------------------------------------------------
Property Plant and Equipment - US GAAP 1,734,636 (166,680) 1,567,956
==================================================================================================
2005
--------------------------------------------------------------------------------------------------
As Reported - Canadian GAAP 1,463,271 (110,666) 1,352,605
Borrowing Costs and
The End of Pre-operating Period iv 7,935 (2,488) 5,447
Pre-feasibility v (48,972) -- (48,972)
--------------------------------------------------------------------------------------------------
Property Plant and Equipment - US GAAP 1,422,234 (113,154) 1,309,080
==================================================================================================
* ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION
ii) STOCK-BASED COMPENSATION
The Corporation accounts for its stock-based compensation plans under
CICA 3870, under which no compensation expense was recognized in the
Consolidated Financial Statements for stock options granted between
January 1, 2002 and December 31, 2002. If compensation expense had been
recorded in accordance with Statement of Financial Accounting Standard
("SFAS") No. 123R, the Corporation's net earnings (loss) and net earnings
(loss) per share would approximate the following pro forma amounts:
Year Ended December 31 2006 2005
-------------------------------------------------------------------------------------------------
Net Earnings As Reported - US GAAP 62,433 132,296
Less: Compensation Expense 133 891
-------------------------------------------------------------------------------------------------
Net Earnings Pro Forma - US GAAP 62,300 131,405
-------------------------------------------------------------------------------------------------
Basic Earnings Per Share
As Reported - US GAAP 0.39 0.83
Pro Forma 0.39 0.82
Diluted Earnings Per Share
As Reported - US GAAP 0.38 0.81
Pro Forma 0.38 0.81
=================================================================================================
28
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
iii) INCOME TAXES
Under US GAAP, the net deferred income tax liability as at December 31
consists of:
Year Ended December 31 2006 2005
-------------------------------------------------------------------------
Future Income Tax Assets
Unrealized Loss on Risk Management 19,375 --
Net Losses Carried Forward 2,908 4,707
Share Issue Costs 510 973
Impairment of Long-lived Assets 686 796
Pension Liability 148 --
Tax Values in Excess of Book Capital Assets -- 5,634
Future Income Tax Liabilities
Capital Assets in Excess of Tax Values (41,953) --
Unrealized Foreign Exchange Gain (26,745) (30,961)
Unrealized Gain on Risk Management -- (4,374)
Debt Issue Costs (3,191) (2,860)
-------------------------------------------------------------------------
Net Future Income Liability - US GAAP (48,262) (26,085)
=========================================================================
The following table reconciles income taxes calculated at the Canadian
statutory rate of 34.50 per cent (2004 - 37.62 per cent) with actual
income taxes:
Year Ended December 31 2006 2005
-------------------------------------------------------------------------
Net Earnings Before Income Taxes - Canadian GAAP 79,931 223,405
US GAAP Adjustments 4,720 (24,278)
-------------------------------------------------------------------------
Net Earnings Before Income Taxes - US GAAP 84,651 199,127
-------------------------------------------------------------------------
Expected Income Tax 29,205 74,912
Effect of Tax Rate Changes and Timing of Use (9,849) 1,741
Non-taxable Portion of Foreign Exchange Gain (54) (3,530)
Non-deductible Expenses 326 --
Resource Allowance (236) (10,792)
Provision to Actual (510) 642
Stock-based Compensation 3,443 858
Large Corporations Tax (Recovery) (107) 3,000
-------------------------------------------------------------------------
Income Tax Expense - US GAAP 22,218 66,831
=========================================================================
iv) THE END OF PRE-OPERATING PERIOD AND BORROWING COSTS
Under Canadian GAAP, the Corporation is deemed to have ended its
pre-operating period upon commencement of commercial production, which
occurred on June 1, 2003. Until that time, revenues, training and
start-up costs, interest and foreign exchange gains associated with the
AOSP during the pre-operating period were deferred and capitalized as
29
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
part of the AOSP. Under US GAAP, the Corporation is deemed to have ended
its pre-operating period upon mechanical completion of the AOSP, which
occurred on December 1, 2002, such that these pre-operating items are
expensed thereafter. Consistent with the December 1, 2002 end of the
pre-operating period, depreciation, depletion and amortization of the
Corporation's Property, Plant and Equipment and Deferred Charges should
have also commenced at that time under US GAAP.
Under Canadian GAAP, during the pre-operating period, standby fees and
foreign exchange gains or losses associated with borrowing facilities can
be deferred. Under US GAAP, during the pre-operating period, these costs
would be expensed as incurred.
The following table summarizes the cumulative impact of these
differences:
Year Ended December 31 2006 2005
---------------------------------------------------------------------------------------------
Income Statement:
Decrease Depreciation, Depletion and Amortization Expense 75 23
Increase Deferred Income Tax Expense (21) (8)
---------------------------------------------------------------------------------------------
54 15
=============================================================================================
Balance Sheet:
Assets:
Increase Property, Plant and Equipment - Cost 7,935 7,935
Increase Property, Plant and Equipment - Accumulated Depreciation (2,618) (2,488)
Increase Deferred Charges - Accumulated Depreciation (576) (781)
---------------------------------------------------------------------------------------------
4,741 4,666
---------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity:
Decrease Deferred Income Tax Liability (18,764) (18,785)
Increase Retained Earnings 23,505 23,451
---------------------------------------------------------------------------------------------
4,741 4,666
=============================================================================================
v) PRE-FEASIBILITY
Under Canadian GAAP, costs associated with projects that have yet to be
determined to be technically feasible can be capitalized as part of PP&E
if certain criteria are met. Under US GAAP, costs associated with
projects that have not yet been determined to be technically feasible
must be expensed. During 2006, the Corporation had expenditures of $1
million (2005 - $34.5 million) relating to projects that have not yet
been determined to be technically feasible. The effect of this difference
is to increase Research and Business Development expense $1 million (2005
- $34.5 million) and increase Deferred Income Tax expense by $0.3 million
(2005 - $11.6 million). The cumulative effect of this difference is to
reduce PP&E Cost by $49.9 million (2005 - $48.9 million), reduce the
Deferred Future Income Tax Liability by $16.8 million (2005 - $16.5
million) and reduce Retained Earnings by $33.1 million (2005 - $32.4
million).
During 2006 the Corporation, for Canadian reporting purposes, determined
that certain costs previously capitalized were impaired and accordingly
included in Depreciation, Depletion and Amortization are impairment of
$5.6 million. These costs had been previously expensed for US reporting
purposes as they relate to projects that had not been determined to be
30
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
technically feasible. The effect of this difference is to reduce
Depreciation, Depletion and Amortization expense by $5.6 million and
increase Deferred Income Tax expense by $1.6 million. The cumulative
effect of this difference is to reduce PP&E Accumulated Depreciation by
$5.6 million, increase Deferred Income Tax Liability by $1.6 million and
increase Retained Earnings by $4 million.
vi) FLOW-THROUGH SHARES
Under Canadian GAAP, flow-through shares are recorded at their face value
within share capital. When the expenditures are renounced and the tax
deductions transferred to the shareholders, future income tax liabilities
will increase and the share capital will be reduced. Under US GAAP, when
the shares are issued the proceeds are allocated between the offering of
the shares and the sale of tax benefits. The allocation is made based on
the difference between the quoted price of the existing shares and the
amount the investor pays for the flow-through shares (given no other
differences between the securities). A liability is recognized for this
difference. The liability is reversed when tax benefits are renounced and
a deferred tax liability is recognized at that time. Income tax expense
is the difference between the amount of the deferred tax liability and
the liability recognized on issuance. At December 31, 2002, the
Corporation had recognized all renouncements of the tax deductions to the
investors. The effect of this difference is to increase share capital by
$19.3 million and increase deferred income tax expense by $19.3 million.
vii) CRUDE OIL SWAPS
Under Canadian GAAP, the crude oil swaps qualify for hedge accounting and
the payments or receipts on these contracts are recognized in earnings
concurrently with the hedged transaction and changes in the fair values
of the contracts are not reflected in the Consolidated Financial
Statements. US GAAP requires that all derivative financial instruments be
recorded on the balance sheet as either assets or liabilities at their
fair values and that changes in the derivative's fair value be recorded
in other comprehensive income, with any ineffective portion of the hedge
recorded in earnings for the period. Under US GAAP the derivative
financial instruments described in note 18(a)(i) as hedges would be
recognized as a liability. The effect of this difference in 2005 was to
increase Revenue by $10.2 million, to increase Deferred Income Tax
expense by $3.8 million and to decrease the Opening Deficit by $6.4
million as previously determined under US GAAP.
viii) DEFINED BENEFIT PENSION
FASB issued Statement of Financial Accounting No 158 Employer's
Accounting for Defined Benefit Pension and Other Post-retirement Plans in
September 2006. Statement 158 requires public companies to fully
recognize, on a prospective basis, an asset or liability for the
over-funded or under-funded status of their benefit plans in their
consolidated financial statements. The pension asset or liability equals
the difference between the fair value of the plan's assets and its
benefit obligation. The Corporation as a result of the 20 per cent
ownership in the AOSP, has a defined benefit pension plan for employees
of the AOSP as described in note 17(b). As at December 31, 2006, the
Corporation's share of the under-funded pension liability was $0.5
million. The effect of this difference is to increase Current Liabilities
by $0.5 million, decrease the Deferred Income Tax Liability by $0.1
million and decrease Other Comprehensive Income by $0.4 million.
ix) OTHER COMPREHENSIVE INCOME
Comprehensive income is measured in accordance with SFAS 130 "Reporting
Comprehensive Income". This Standard defines comprehensive income as all
changes in equity other than those resulting from investments by owners
and distributions to owners. At December 31, 2006, the Corporation has a
balance of $0.4 million as Other Comprehensive Income representing the
31
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
after tax balance of the Corporation's 20 per cent share of under funded
pension liability which has been recognized by the Corporation adopting
FAS 158. The Corporation had other comprehensive income arising due to
unrealized losses on derivative financial instruments designated as hedge
transactions for year ended 2005 (2005 -$31.8 million gain net of tax).
22. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
CANADIAN
FINANCIAL INSTRUMENTS
The CICA issued Section 3855, "Financial Instruments - Recognition and
Measurement", which prescribes when a financial instrument is to be
recognized on the balance sheet and at what amount - sometimes using fair
value, other times using cost-based measures. This Section also specifies
how financial instrument gains and losses are to be presented. A
financial instrument is any contract that gives rise to a financial asset
of one party and a financial liability or equity instrument of another
party. These may include loans and notes receivable and payable,
investments in debt and equity securities and derivative contracts such
as forwards, swaps and options. Other significant accounting implications
arising on adoption of Section 3855 include the initial recognition of
certain financial guarantees at fair value on the balance sheet and the
requirement to expense or use of the effective interest rate method of
amortization for any transaction costs or fees, premiums or discounts
earned or incurred for financial instruments measured at amortized cost.
This Section applies to interim and annual financial statements relating
to fiscal years beginning on or after October 31, 2006. The Corporation
will adopt this Section on January 1, 2007. The Corporation does not
expect there to be any material impact to the Consolidated Financial
Statements upon adoption of the standard on January 1, 2007.
HEDGES
The CICA issued Section 3865, "Hedges", which replaces the guidance
formerly in Section 1650, "Foreign Currency Translation" and Accounting
Guideline 13, "Hedging Relationships" by specifying how hedge accounting
is applied and what disclosures are necessary when it is applied. This
Section applies to interim and annual financial statements relating to
fiscal years beginning on or after October 31, 2006. Retroactive
application is not permitted. Earlier adoption is permitted only as at
the beginning of a fiscal year ending on or after December 31, 2004. The
Corporation plans to adopt this Section on January 1, 2007. The
Corporation does not expect there to be any material impact on the
Consolidated Financial Statements upon adoption of the standard on
January 1, 2007.
FINANCIAL INSTRUMENTS - DISCLOSURES AND PRESENTATIONS
The CICA issued Section 3862, "Financial Instruments - Disclosures",
which modifies the disclosure requirements of Section 3861, "Financial
Instruments - Disclosures and Presentation" and Section 3863, "Financial
Instruments - Presentations", which carries forward unchanged the
presentation requirements for financial instruments of Section 3861.
Section 3862 requires entities to provide disclosures in their financial
statements that enable users to evaluate the significance of financial
instruments on the entity's financial position and its performance, and
the nature and extent of risks arising from financial instruments to
which the entity is exposed during the period and at the balance sheet
date, and how the entity manages those risks. Section 3863 establishes
standards for presentation of financial instruments and non-financial
derivatives. It deals with the classification of financial instruments,
from the perspective of the issuer, between liabilities and equities, the
classification of related interest, dividends, losses and gains, and
circumstances in which financial assets and financial liabilities are
offset. These Sections apply to interim and annual financial statements
relating to fiscal years beginning on or after October 1, 2007. Early
adoption is permitted at the same time an entity adopts other standards
relating to the accounting for financial instruments. The Corporation
plans to adopt this Section on January 1, 2007. The Corporation does not
expect there to be any material impact on the Consolidated Financial
Statements upon adoption of the standard on January 1, 2007.
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(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
COMPREHENSIVE INCOME
The CICA issued Section 1530, "Comprehensive Income", which established
new standards for reporting the display of comprehensive income.
Comprehensive income is the change in equity (net assets) of an
enterprise during a reporting period from transactions and other events
and circumstances from non-owner sources. It includes all changes in
equity during the period except those resulting from investments by
owners and distributions to owners. This Section applies to interim and
annual financial statements relating to fiscal years beginning on or
after October 31, 2006. Earlier adoption is permitted only as at the
beginning of a fiscal year ending on or after December 31, 2004. The
Corporation plans to adopt this Section on January 1, 2007. Financial
statements for prior periods are required to be restated for certain
comprehensive income items, which at this time are not applicable to the
Corporation. The Corporation does not expect there to be any material
impact on the Consolidated Financial Statements upon adoption of the
standard on January 1, 2007.
EQUITY
The CICA issued Section 3251, "Equity", which replaces Section 3250,
"Surplus". It establishes standards for the presentation of equity and
changes in equity during a reporting period. This Section applies to
interim and annual financial statements relating to fiscal years
beginning on or after October 31, 2006. Earlier adoption is permitted
only as at the beginning of a fiscal year ending on or after December 31,
2004. The Corporation plans to adopt this Section on January 1, 2007.
Financial statements of prior periods are required to be restated for
specific items which are not applicable to the Corporation at this time.
The Corporation does not expect there to be any material impact on the
Consolidated Financial Statements upon adoption of the standard on
January 1, 2007.
ACCOUNTING CHANGES
The CICA issued Section 1506, "Accounting Changes", which replaces former
Section 1506. The Section establishes criteria for changing accounting
policies, together with the accounting treatment and disclosure of
changes in accounting policies and estimates, and correction of errors.
This Section applies to interim and annual financial statements relating
to fiscal years beginning on or after January 1, 2007. The Corporation
plans to adopt this Section on January 1, 2007. The Corporation does not
expect there to be any material impact on the Consolidated Financial
Statements upon adoption of the standard on January 1, 2007.
DETERMINING THE VARIABILITY TO BE CONSIDERED IN APPLYING ACG-15
The Emerging Issues Committee issued Abstract 163, "Determining the
Variability to be Considered in Applying AcG-15", which addresses how an
enterprise should determine the variability to be considered in applying
AcG-15, "Consolidation of Variable Interest Entities". This Abstract
applies to all entities (including newly created entities) with which
that enterprise first becomes involved, and to all entities previously
required to be analyzed under AcG-15 when a reconsideration event has
occurred pursuant to paragraph 11 of AcG-15, beginning the first day of
the interim or annual reporting period beginning on or after January 1,
2007. Retrospective application to the date of the initial application of
AcG-15, is permitted but not required. The Corporation plans to adopt
this Section on January 1, 2007. The Corporation does not expect there to
be any material impact on the Consolidated Financial Statements upon
adoption of the standard on January 1, 2007.
CAPITAL DISCLOSURES
The CICA issued Section 1535, "Capital Disclosures", which establishes
new standards for disclosing information about an entity's capital and
how it is managed. It requires the disclosure of information about an
entity's objectives, policies and processes for managing capital. This
Section applies to interim and annual financial statements relating to
fiscal years beginning on or after October 1, 2007. The Corporation plans
to adopt this Section on January 1, 2008 for the Consolidated Financial
Statements.
33
UNITED STATES
ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES
In June 2006, the FASB issued FIN 48, "Accounting for Uncertainty in
Income Taxes - an interpretation of FASB Statement No. 109." This
interpretation requires that an entity recognize in the financial
statements, the impact of a tax position, if that position is more likely
than not to be sustained on examination by the taxing authorities, based
on technical merits of the position. Tax benefits resulting from such a
position should be measured as the amount that is more likely than not on
a cumulative basis to be sustained on examination. FIN 48 also provides
guidance on de-recognition, classification, interest and penalties on
income taxes and accounting in interim periods. The provisions of FIN 48
are effective for fiscal years beginning after December 15, 2006, with
the cumulative effect of the change in accounting principle recorded as
an adjustment to the January 1, 2007 opening retained earnings. The
Corporation does not expect there to be any material impact on the
Consolidated Financial Statements upon adoption of the standard.
FAIR VALUE MEASUREMENT
FASB issued statement of Financial Accounting No. 157 Fair Value
Measurement, this statement is effective for financial statements issued
for fiscal years beginning after November 15, 2007 and interim periods
within those fiscal years. Early adoption is permitted. The standard
provides enhanced guidance for using fair value to measure assets and
liabilities, the information used to measure fair value, and the effect
of fair value measurement on earnings. The standard applies whenever
other standards require (or permit) assets or liabilities to be measured
at fair value. It does not expand the use of fair value in any new
circumstances. The Corporation does not expect there to be any material
impact on the Consolidated Financial Statements upon adoption of the
standard.
ACCOUNTING FOR CERTAIN HYBRID FINANCIAL INSTRUMENTS
On February 16, 2006, FASB issued FASB Statement No. 155, Accounting for
Certain Hybrid Instruments - an amendment of FASB Statement No. 133 and
140 (FAS 155), which allows an entity to elect to measure certain hybrid
financial instruments at fair value in their entirety, with changes in
fair value recognized in earnings. The fair value election will eliminate
the need to separately recognize certain derivatives embedded in hybrid
financial instruments under FASB Statement No. 133, Accounting for
Derivative Instruments & Hedging Activities. This statement is effective
for financial statements issued for fiscal years beginning after
September 15, 2006. The Corporation does not expect there to be any
material impact on the Consolidated Financial Statements upon adoption.
ACCOUNTING FOR PURCHASES AND SALES OF INVENTORY WITH THE SAME COUNTERPARTY
On September 15, 2005, the Emerging Issues Task Force (EITF) issued EITF
No. 04-13 Accounting for Purchases and Sales of Inventory with the Same
Counterparty. EITF issued EITF No. 04-13 requiring that the treatment of
purchases and sales of inventory with the same counterparty be combined
as one transaction for applying Opinion 29. This is effective for
financial statements issued for fiscal years and interim periods
beginning after March 15, 2006. The Corporation does not expect there to
be any material impact on the Consolidated Financial Statements upon
adoption.
ACCOUNTING FOR TAXES COLLECTED AND REMITTED TO GOVERNMENT AUTHORITIES
On June 28, 2006, the EITF issued No. 06-03 How Taxes Collected from
Customers and Remitted to Governmental Authorities Should be Presented in
the Income Statement. EITF issued EITF no 06-03 requiring that companies
disclose in their policies whether taxes that are collected from
customers and remitted to governmental authorities are included in the
income statement on a net or gross basis, and require companies that
present on a gross basis to disclose the amount of taxes included. This
is effective for financial statements issued for fiscal years beginning
after December 15, 2006.
34