EXHIBIT 99.1
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WESTERN OIL SANDS 2007 INTERIM REPORT
for the three-month period ended June 30
TO OUR SHAREHOLDERS
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Western Oil Sands Inc. ("Western") announced today its financial and operating
results for the second quarter of 2007. Western generated net revenue of $187.3
million, EBITDAX of $98.4 million, cash flow from operations of $82.7 million
($0.51 per share) and net earnings of $87.5 million ($0.54 per share) in the
second quarter of 2007. Net earnings included $39.2 million ($32.3 million net
of tax) in net unrealized foreign exchange and risk management (mark-to-market)
gains.
For the second quarter of 2007, production averaged 30,652 barrels per day
compared to 15,540 barrels per day in the second quarter of 2006. This
significant year-over-year increase is due in part to the impact of the full
plant turnaround which occurred in the second quarter of 2006. Compared to the
prior year period, Western's financial performance during the second quarter of
2007 was positively impacted by an increase in production, offset in part by
lower crude oil price realizations stemming from an eight per cent drop in West
Texas Intermediate ("WTI") prices, the further strengthening of the Canadian
dollar relative to the US dollar and the widening of the heavy crude oil
differential offset in part by a lighter crude oil sales mix.
HIGHLIGHTS
o Western successfully closed a new $805 million Revolving Credit Facility
("Credit Facility"). The Credit Facility was arranged by RBC Capital
Markets with a syndicate of leading financial institutions and replaced
Western's existing $340 million Revolving Credit Facility. This Credit
Facility represents a fundamental component of Western's financing plan as
we execute on our growth strategy.
o Western was active with respect to in-situ lease acquisitions during the
quarter with the purchase of Leases 418 and 419, both of which are
contiguous to our existing in-situ leases. Western's operated in-situ
acreage position has now grown to approximately 26,000 acres and we will
continue to make opportunistic decisions to add to our asset base over
time. Over the balance of the year, Western will be assessing the resource
potential associated with our in-situ project as well as the Ells River
Project with the assistance of independent evaluators. These results will
be communicated as part of our year-end reporting requirements.
o The Joint Venture Owners continue to make progress on Expansion 1 of the
AOSP. Construction and engineering of both the upstream and downstream
components remain on budget and on schedule with first oil production
anticipated in the fall of 2010. Several of the large vessels have arrived
at the Scotford Upgrader site while key foundation and infrastructure
groundwork is well underway at the Mine.
o Effective August 1, 2007, Mr. Robert Theriault joins WesternZagros
Resources Inc. ("WesternZagros"), our wholly-owned subsidiary, as Senior
Vice President, Engineering and Operations. Robert will be instrumental in
overseeing engineering and operations in Kurdistan. He brings over 30
years of international and domestic experience in upstream and midstream
oil and gas operations, including senior management responsibilities for
exploration, production and development. With the addition of Robert and
other recent new employees in geophysical, geotechnical and operations
disciplines, Western has developed a stand-alone organization for its
Kurdistan initiative. This team will continue to be enhanced as
exploration and development activities progress.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion of financial condition and results of operations was
prepared as of July 24, 2007 and should be read in conjunction with the Interim
Unaudited Consolidated Financial Statements for the periods ended June 30, 2007
and 2006 and the Audited Consolidated Financial Statements at December 31, 2006
included in the Annual Report. It offers Management's analysis of the financial
and operating results of Western Oil Sands Inc. ("Western") and contains certain
forward-looking statements relating, but not limited, to our operations,
anticipated financial performance, business prospects and strategies.
Forward-looking information typically contains statements with words such as
"anticipate", "estimate", "expect", "potential", "could", or similar words
suggesting future outcomes. We caution readers and prospective investors of the
Company's securities not to place undue reliance on forward-looking information
as by its nature, it is based on current expectations regarding future events
that involve a number of assumptions, inherent risks and uncertainties, which
could cause actual results to differ materially from those anticipated by
Western. These risks include, but are not limited to, risks of commodity prices
in the marketplace for crude oil and natural gas; risks associated with the
extraction, treatment and upgrading of mineable oil sands deposits; size and
scope of expansions; risks surrounding the level and timing of capital
expenditures required to fulfill the Project's growth strategy; risks of
financing these growth initiatives at commercially attractive levels; risks of
being unable to participate in expansions and corresponding loss of voting
rights in the Athabasca Oil Sands Project ("AOSP"); risks relating to the
execution of the Project's optimization strategy; risks involving the
uncertainty of estimates involved in the reserve and resource estimation process
and ore body configuration/geometry, uncertainty in the assessment of asset
retirement obligations, uncertainty in the estimation of future income taxes,
uncertainty in the estimation of stock-based compensation and employee future
benefits and uncertainty in treatment of capital for royalty purposes; risks
surrounding health, safety and environmental matters; risk of foreign exchange
rate fluctuations; risks and uncertainties associated with securing the
necessary regulatory approvals for expansion initiatives; risks surrounding
major interruptions in operational performance; and risks associated with
identifying, negotiating and completing our other business development
activities, both those that relate to oil sands activities and those that do
not, either domestically or abroad. Risks associated with our international
initiatives include, but are not limited to, political and economic conditions
in the countries in which we intend to operate, risks associated with acts of
insurgency or terrorism, changes in market conditions, political risks,
including changes in law or government policy, the risks associated with
negotiating with foreign governments and risks generally associated with
international activity.
For additional information relating to the risks and uncertainties facing
Western, refer to Western's Annual Information Form for the year ended December
31, 2006 which is available on SEDAR at www.sedar.com.
HIGHLIGHTS
Three Months Ended June 30 Six Months Ended June 30
2007 2006 2007 2006
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Operating Data (bbls/d)
Bitumen Production 30,652 15,540 31,48 20,714
Synthetic Crude Sales 40,250 22,614 40,402 29,861
Operating Expense per Processed Barrel ($/bbl) 24.92 62.50 24.49 40.24
Financial Data ($ thousands, except as indicated)
Net Revenue 187,339 95,633 366,579 234,881
Realized Crude Oil Sales Price ($/bbl) (1)(2) 64.79 6 6.48 61.65 59.56
EBITDAX (1)(3) 98,428 (8,199) 179,512 53,901
Turnaround Costs - 34,899 - 34,899
Cash Flow from Operations (4) 82,737 (20,833) 145,728 26,887
Cash Flow per Share - Basic ($/Share) (1)(5) 0.51 (0.13) 0.90 0.17
Net Earnings (Loss) (6) 87,480 (22,962)(9) 119,114 (47,795)(9)
Net Earnings (Loss) Per Share - Basic ($/Share) 0.54 (0.14)(9) 0.74 (0.30)(9)
Diluted - ($/Share) 0.54 (0.14)(9) 0.73 (0.30)(9)
Net Capital Expenditures (7) 166,452 55,828 326,963 91,159
Long-term Financial Liabilities (8) 736,101 661,499 736,101 661,499
Weighted Average Shares Outstanding - Basic (Shares) 161,646,025 161,070,149 161,570,073 160,848,345
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(1) Please refer to page 14 for the discussion of Non-GAAP financial measures.
(2) Realized Crude Oil Sales Price ($/bbl) is calculated as Oil Sands Revenue
less any transportation costs, net of hedging activities, divided by total
Synthetic Crude Sales for the period. Please refer to page 4 for the
calculation.
(3) Earnings before interest, taxes, depreciation, depletion, amortization,
stock based compensation, accretion on asset retirement obligation, risk
management and foreign exchange as calculated on page 11.
(4) Cash flow from operations is expressed before changes in non-cash working
capital.
(5) Cash flow per share is calculated as cash flow from operations divided by
weighted average common shares outstanding, basic.
(6) Western has not paid dividends in any of the above referenced periods.
(7) Net Capital Expenditures are capital expenditures net of any insurance
proceeds received during the period.
(8) Long-term financial liabilities includes long-term debt, option premium
liability and lease obligations.
(9) Amounts restated to reflect changes in accounting treatment for stock
based compensation under EIC-162.
Operating Results
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Production
During the second quarter of 2007, Western's net bitumen production averaged
30,652 barrels per day, nearly double the average 15,540 barrels per day
recorded in the second quarter of 2006. This substantial increase is
predominantly due to the impact of ceasing the entire operation for the first
full plant turnaround which occurred in the second quarter of 2006. Compared to
the first quarter of 2007, second quarter production decreased by approximately
five per cent. This slight decrease is mainly due to planned and minor unplanned
outages during the quarter. Planned outages resulted from unit tie-ins including
the new closed loop water cooling plant at the Mine which is expected to
increase the operational efficiency. There was also a planned outage at the Mine
resulting from the power tie-in of another oil sands project to the electricity
grid.
Revenue
NET REVENUE
Three Months Ended June 30 Six Months Ended June 30
($ thousands, except as indicated) 2007 2006 2007 2006
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Revenue
Oil Sands (1) 237,451 137,095 451,009 322,450
Marketing and Transportation 103,978 28,632 194,709 51,037
Total Revenue 341,429 165,727 645,718 373,487
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Purchased Feedstocks and Transportation
Oil Sands 50,457 41,904 85,287 88,109
Marketing and Transportation 103,633 28,190 193,852 50,497
Total Purchased Feedstocks and Transportation 154,090 70,094 279,139 138,606
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Net Revenue
Oil Sands (1) 186,994 95,191 365,722 234,341
Marketing and Transportation 345 442 857 540
Total Net Revenue 187,339 95,633 366,579 234,881
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Synthetic Crude Sales (bbls/d) 40,250 22,614 40,402 29,861
Realized Crude Oil Sales Price ($/bbl) (2) 64.79 66.48 61.65 59.56
==================================================================================================================
(1) Oil Sands Revenue and Net Revenue are presented net of Western's hedging
activities.
(2) Realized Crude Oil Sales Price ($/bbl) is calculated as Oil Sands Revenue
less any transportation costs divided by total Synthetic Crude Sales for
the period. For the three months ended June 30, 2007, $0.1 million (Q2-2006
-$0.3 million) has been incurred for transportation costs related to Oil
Sands.
Western more than doubled its crude oil sales revenue to $341.4 million in
the second quarter of 2007 compared to $165.7 million in the prior year period.
Crude oil sales revenue during the quarter included $237.5 million from the sale
of proprietary production compared to $137.1 million in the second quarter of
2006. The significant increase in revenue compared to the prior year period is a
result of lower production levels associated with the full plant turnaround
which in turn impacted revenue, offset in part by lower per barrel realized
sales prices due to a widening of the heavy crude oil differential and a
strengthening of the Canadian dollar relative to the US dollar by over two
cents.
Western generated net revenue of $187.3 million in the second quarter of
2007, after considering the impact of purchased feedstocks and transportation
costs downstream of Edmonton. By comparison, net revenue of $95.6 million was
recorded in the second quarter of 2006. Feedstocks are crude oil products
introduced into the hydrocracking/hydrotreating process and blendstocks
introduced into synthetic crude oil products. The cost of these feedstocks
varies with world oil markets and the spread between heavy and light crude oil
prices.
Oil sands sales volumes, which include bitumen and purchased feedstocks,
averaged 40,250 barrels per day in the second quarter of 2007 compared to 22,614
barrels per day in the second quarter of 2006. This significant increase is
largely due to the lower activity in the second quarter of 2006 due to the full
plant turnaround.
During the second quarter of 2007, WTI crude oil averaged US$65.03 per
barrel, representing a 12 per cent increase over the first quarter of 2007 but
an eight per cent decrease compared to the prior year period. Edmonton PAR
prices increased seven per cent in the second quarter of 2007 compared to the
first quarter of 2007. This increase corresponds to a similar increase in WTI
prices over the comparable time period, however, not to the same magnitude due
to the strengthening of the Canadian dollar relative to the US dollar. As
Western measures its blended differential to Edmonton PAR, the strengthening of
the US/Cdn exchange rate reduces overall sales price realizations.
Western's blended realized crude oil sales price was $64.79 per barrel in
the second quarter of 2007 compared to $66.48 per barrel in the prior year
period. Sales price realizations increased by $6.30 per barrel from the first
quarter of 2007. Compared to the prior year period, the heavy crude oil
differential as a percentage of WTI widened to approximately 33 per cent
(US$21.00) from 26 per cent (US$18.00). Consequently, Western received a lower
netback on its share of heavy crude oil production from the Project. The heavy
crude oil differential as a percentage of WTI narrowed in the prior year period
as a result of reduced demand for Canadian heavy crude oil by US refineries as
many of them were undertaking normal maintenance programs and turnarounds;
however, the heavy crude oil differential remained relatively unchanged compared
to the first quarter of 2007.
The impact of the wider heavy crude oil differential on Western's blended
sales price differential was more than offset by the production of a lighter
overall sales mix. Over the last several quarters, the Project has continued to
make improvements on the conversion process at the Upgrader as capital is
deployed to improve efficiency and availability. This results is a narrower
Western sales price differential. Combined with external market forces which
increased the price Western receives on its Premium Albian Synthetic ("PAS")
stream, Western achieved its lowest blended differential as a percentage of
Edmonton PAR since the commencement of operations.
Operating Costs
Western reported cash operating costs of $24.92 per processed barrel for the
second quarter of 2007. Unit operating costs in the quarter reflect the combined
effect of lower production volumes relative to the first quarter of 2007 as well
as decreased natural gas prices. In addition, higher expenditures on contract
services for maintenance at the Mine and wage escalation also contributed to
higher operating costs during the quarter. By comparison, operating costs were
$24.07 per processed barrel for the first quarter of 2007 and $39.44 for the
second quarter of 2006 excluding the costs of the turnaround, but considering
significantly lower volumes. Approximately 70 to 75 percent of the operating
cost structure is fixed for the AOSP, therefore, volume variances account for
significant fluctuations in reported unit costs.
Compared to the first quarter of 2007, unit operating costs remained
relatively consistent as decreases in natural gas prices were essentially offset
by lower economies of scale caused by lower production levels.
OPERATING COSTS
Three Months Ended June 30 Six Months Ended June 30
($ thousands, except as indicated) 2007 2006 2007 2006
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Operating Expenses For Bitumen Sold
Operating Expense - Income Statement 69,229 54,588 139,507 118,518
Operating Expense - Inventoried 4,449 5,114 4,688 3,483
Turnaround Costs - Income Statement - 34,899 - 34,899
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Total Operating Expenses For Bitumen Sold 73,678 94,601 144,195 156,900
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Sales (barrels per day)
Total Synthetic Crude Sales 40,250 22,614 40,402 29,861
Purchased Upgrader Blend Stocks (7,760) (5,980) (7,878) (8,321)
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Synthetic Crude Sales Excluding Blend Stocks 32,490 16,634 32,524 21,540
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Operating Expenses Per Processed Barrel ($/bbl) (1) 24.92 62.50 24.49 40.24
Operating Expenses Per Processed Barrel
Excluding Turnaround Costs ($/bbl) (2) 24.92 39.44 24.29 31.29
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(1) Operating Expenses Per Processed Barrel ($/bbl) is calculated as Total
Operating Expenses For Bitumen Sold divided by Synthetic Crude Sales
Excluding Blend Stocks.
The above table calculates operating expenses per processed barrel on the
basis of the operating costs that are associated with the synthetic crude sales,
excluding purchased blendstocks, for the relevant period. The calculation
recognizes that, intrinsic in the Project's operations, bitumen production from
the Mine receives an approximate three per cent uplift as a result of the
hydrotreating/hydroconversion process, which is included in synthetic crude
sales excluding blendstocks.
Royalties
Royalties of $1.2 million were recorded in the second quarter of 2007 compared
to $0.7 million in the second quarter of 2006. This year-over-year increase was
due to the lower production associated with the full turnaround in the second
quarter of 2006 offset in part by lower deemed bitumen royalty prices. Compared
to the first quarter of 2007, royalty expenditures are comparable as lower
production levels were offset by higher deemed bitumen prices.
Royalties are calculated at one per cent of the gross revenue from the
bitumen produced (based on its deemed value prior to upgrading) until recovery
of all capital costs associated with the Muskeg River Mine, together with a
return on capital equal to the Government of Canada's federal long-term bond
rate. After full Muskeg River Mine capital cost recovery, the royalty is
calculated as the greater of one per cent of the gross revenue on the bitumen
produced or 25 per cent of the net revenue on the bitumen produced based on
deemed bitumen prices.
Western anticipates a conversion to the 25 per cent of net bitumen revenues
in July 2007 until such time as the AOSP's Expansion 1 royalties submission is
reviewed and ruled upon. Should the royalty submission be successful then
retroactive adjustment to the royalty rate will be made. Ultimately, Western
assumes that additional capital incurred to construct future expansions will be
added to the capital base for royalty purposes, extending our royalty horizon in
the absence of any legislative amendments to the royalty regime.
The Alberta government announced a review of the oil and gas royalties
including oil sands. A panel has been selected and recommendations will be
submitted to the government by August 31, 2007. Western, along with industry
through their representation in the Canadian Association of Petroleum Producers
("CAPP"), is actively participating in the review process in order to present
the opportunities, challenges, and economics associated with oil sands
development today and in the future.
Corporate Results
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Research, Business Development and Other Expense
Western incurred $11.7 million in research, business development and other
expenses in the second quarter of 2007, $6.3 million of which relates
specifically to AOSP-related research and development projects. The $11.7
million compares to $7.7 million recorded for the prior year period. The
increase is the result of additional efforts in research and business
development surrounding heavy minerals and field upgrading technologies in
addition to increased allocations of corporate general and administrative
expenses associated with business teams focused on our Kurdistan oil opportunity
and in-situ (Western-operated and Chevron Ells River) initiatives.
General and Administrative Expense
General and administrative expenses ("G&A") were $5.6 million for the second
quarter of 2007, net of allocations to Kurdistan and in-situ divisions, compared
to $5.3 million (restated for EIC-162 treatment for stock-based compensation)
for the second quarter of 2006. G&A reported for the second quarter of 2006 was
restated by $2.1 million with the adoption of EIC 162. Moderate increases in G&A
levels are due to inflationary pressures. Western allocates a portion of its G&A
expenses that are directly related to our Kurdistan opportunity and in-situ
initiatives to Research and Business Development, as explained above.
Insurance Expense
Insurance expenses were $3.3 million in the second quarter of 2007 compared to
$2.7 million in the second quarter of 2006. Insurance expenses were higher
compared to the prior year period due to additional premiums associated with
increased levels of coverage, offset by the strengthening of the US/Cdn exchange
rate as the premiums are paid in US dollars but reported for financial statement
purposes in Canadian dollars.
Interest Expense
During the second quarter of 2007, financing charges totaled $15.1 million, of
which $8.1 million represents capitalized interest relating to Expansion 1.
Capitalized interest will increase in the future as we expect to employ a
combination of cash flow and debt financing to fund our share of the capital
costs of Expansion1. Total financing charges represents a 20 per cent increase
from the $12.5 million incurred for financing charges in the second quarter of
2006. Interest expense for the three months ended June 30, 2007 is comprised of
$12.9 million (Q2-2006 - $10.9 million) related to interest charges on debt
obligations, $0.7 million (Q2-2006 - $0.6 million) on capital lease obligations,
$0.9 million (Q2-2006 - $0.9 million) on the option premium liability and $0.6
million (Q2-2006 - nil) for amortization of debt financing costs. The option
premium liability relates to Western's strategic crude oil risk management
program implemented in the third quarter of 2005, and the deferral of the
premiums associated with the put and call options purchased and sold,
respectively. Imbedded in the prices of the deferred options is a financing
charge which is reported as interest expense.
The 20 per cent increase in total financing charges compared to the second
quarter of 2006 is primarily a function of Western carrying larger balances in
its Revolving Credit Facility associated with funding our share of capital costs
for Expansion 1. This increase was partially offset by the strengthening of the
US/Cdn exchange rate, thereby reducing interest charges on our US denominated
Notes which are reported in Canadian dollars. Financing charges increased by
$0.5 million in the second quarter of 2007 compared to the first quarter of 2007
due to higher levels of debt partially offset by a strengthening of the US/Cdn
exchange rate. Western's total interest charges will increase over the balance
of 2007, and over the next several years, as we continue to fund our share of
the anticipated capital costs through a combination of cash flow from operations
and incremental borrowings. Western will continue to assess our funding
requirements for our capital programs and revise our financing plan accordingly
as part of our normal course business. Western's new $805 million Revolving
Credit Facility (the "Credit Facility") represents a key component of our
financing plan for Expansion 1 as well as future AOSP expansions and other key
initiatives. Interest rates charged pursuant to the Credit Facility are a
function of external credit rating agencies' assessment of the Credit Facility
with spreads ranging from nil to 145 basis points.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization ("DD&A") totaled $12.7 million for the
second quarter of 2007 compared to $6.8 million in the second quarter of 2006.
Since the majority of DD&A depends on production levels, the second quarter of
2006 was lower due to the impact of the full plant turnaround. Incremental
reserves associated with Expansion 1 will not be included in the depreciation
rate until the assets associated with this expansion commence operations which
is anticipated in 2010.
Foreign Exchange
During the second quarter of 2007, Western reported a foreign exchange gain of
$41.4 million compared to a gain of $25.8 million in the second quarter of 2006.
This gain is the result of a strong Canadian dollar relative to the US dollar at
the end of the quarter compared to the month-end rate at the end of the first
quarter of 2007, and it results in a lower Canadian equivalent amount on
Western's US$450 million long-term debt and deferred option premium liability.
Over the quarter, the Canadian dollar has appreciated over seven cents relative
to the US dollar. As reference points, the noon-day foreign exchange rate on
June30, 2007 was $0.9404 US/Cdn compared to $0.8674 US/Cdn on March 31, 2007 and
$0.8969 US/Cdn on June 30, 2006. The average rate for the second quarter of 2007
was $0.9106 US/Cdn compared to $0.8912 US/Cdn for the prior year period and
$0.8537 US/Cdn for the first quarter of 2007.
Risk Management Activities
Western paid $5.9 million in option premiums during the second quarter of 2007
associated with its strategic crude oil hedging program implemented in the fall
of 2005. In the second quarter crude oil traded within the band of US$52.42 to
US$92.41 per barrel established by the pay-collar structure and therefore no
additional amounts were paid or received. Premiums are funded by cash flow from
operations and incurred on a monthly basis as a result of Western's decision to
defer the premiums at the time of the original execution.
Western is not utilizing hedge accounting treatment under Canadian GAAP for
this program and, as a result, certain mark-to-market adjustments flow through
our financial statements. These adjustments are created from the changes in the
fair market value of the financial instruments employed over the time period in
question. For the quarter ended June 30, 2007, Western's risk management assets
decreased in value from the amount recorded as at March 31, 2007. This resulted
in a mark-to-market loss of $6.4 million ($8.0 million net of tax) primarily due
to the strengthening in WTI prices during the quarter partially offset with less
time value associated with the options as they approach maturity. This loss does
not impact stated cash flow from operations.
Three Months Ended June 30 Six Months Ended June 30
(Unaudited) ($ thousands) 2007 2006 2007 2006
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Risk Management Asset - Beginning of Period 7,151 30,702 26,308 98,426
Decrease in Fair Value (6,438) (44,478) 25,595 (112,202)
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Risk Management Asset (Liability) - End of Period 713 (13,776) 713 (13,776)
Less: Current Portion (1) 1,654 (1,644) 1,654 (1,644)
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Risk Management Liability - Long-term Portion (941) (12,132) (941) (12,132)
==================================================================================================================
(1) Current portion represents the fair value of the risk management program
that expires within the next 12 months.
Income Taxes
In the second quarter of 2007, Western recorded income tax expense of $23.8
million compared to an income tax recovery of $25.5 million during the same
period last year. The recovery in the second quarter of 2006 largely resulted
from the turnaround and risk management losses. The expense for the second
quarter of 2007 was primarily the result of increased profitability due to
increased production levels and the absence of turnaround costs partially offset
by the federal income tax rate reduction passed by the House of Commons on June
12, 2007.
During the first quarter of 2007, the Canadian Federal Government announced
its intent to phase out the Accelerated Capital Cost Allowance ("ACCA") which
previously allowed oil sands companies to claim a higher amount against taxable
income than normally permitted for assets of this nature. Western anticipates
that capital associated with base operations and Expansion 1 will be included in
the ACCA pool with the ability to claim in excess of 25 per cent, subject to the
extent of taxable income from that operation. The impact of tax classification
with respect to ACCA for Expansions 2 and beyond is uncertain at thistime.
Net Earnings
During the second quarter of 2007, Western reported net earnings of $87.5
million ($0.54 per share) compared to a net loss of $23.0 million ($0.14 per
share) in the second quarter of 2006. Net earnings in the second quarter of 2007
included the impact of $6.4 million ($8.0 million net of tax including the
impact of removing $5.9 million of tax deductible option premiums paid in the
quarter) in risk management losses, in addition to $41.4 million ($37.4 million
net of tax) in foreign exchange gains on our US dollar denominated debt and
option premium liability.
Three Months Ended June 30 Six Months Ended June 30
($ thousands) 2007 2006 2007 2006
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Net Earnings (Loss) 87,480 (22,962) 119,114 (47,795)
After Tax Impact of:
Add (Deduct):
Unrealized Risk Management Loss 7,960 33,683 23,210 78,386
Unrealized Foreign Exchange Gain (40,232) (24,001) (44,518) (23,472)
Net Earnings Excluding Unrealized Gain (Loss) 55,208 (13,280) 97,806 7,119
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Net Earnings Excluding Unrealized Gain (Loss)
Per Share ($)
Basic 0.34 (0.08) 0.60 0.04
Diluted 0.34 (0.08) 0.60 0.04
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The following table provides the reconciliation between Net Earnings
(Loss), Cash Flow from Operations (before changes in non-cash working capital)
and EBITDAX:
RECONCILIATION: NET EARNINGS (LOSS) TO EBITDAX
Three Months Ended June 30 Six Months Ended June 30
($ thousands) 2007 2006 2007 2006
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(restated) (restated)
Net Earnings (Loss) Attributable to Common Shareholders 87,480 (22,962) 119,114 (47,795)
Add (Deduct):
Depreciation, Depletion and Amortization 12,712 6,820 25,762 17,366
Accretion on Asset Retirement Obligation 339 156 677 311
Amortization of Financing Charges 553 - 1,289 -
Stock-based Compensation 2,044 2,068 4,132 7,117
Unrealized Foreign Exchange Gain (45,602) (27,310) (51,917) (26,674)
Unrealized Risk Management Loss 6,438 44,478 25,595 112,202
Future Income Tax Expense (Recovery) 23,790 (24,948) 35,541 (35,331)
Interest Expense on Option Premium Liability 867 934 1,517 1,886
Cash Settlement on Performance Share Units - (28) (3,806) (2,104)
Cash Settlement on Option Premium Liability (5,884) - (12,176) -
Cash Settlement on Asset Retirement Obligation - (91) - (91)
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Cash Flow From Operations,
Before Changes in Non-Cash Working Capital 82,737 (20,883) 145,728 26,887
Add: Interest (excluding interest on Option Premium Liability,
Capitalized Interest and amortization of financing costs) 5,590 11,598 13,151 23,675
Realized Foreign Exchange Loss (Gain) 4,217 1,551 4,754 1,285
Realized Risk Management Gain - - (120) -
Current Taxes - (584) 17 (141)
Cash Settlement on Performance Share Units - 28 3,806 2,104
Cash Settlement on Option Premium Liability 5,884 - 12,176 -
Cash Settlement on Asset Retirement Obligation - 91 - 91
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EBITDAX 98,428 (8,199) 179,512 53,901
==============================================================================================================================
EBITDAX (Earnings before Interest, Taxes, Depreciation, Depletion,
Amortization, Stock-based Compensation, Accretion on Asset Retirement
Obligation, Foreign Exchange and Risk Management) was $98.4 million for the
second quarter of 2007, representing a thirteen-fold increase over the $8.2
million EBITDAX loss recorded for the second quarter of 2006. This increase is
due in large part to the impact of the full plant turnaround during the second
quarter of 2006. Second quarter 2007 EBITDAX increased $17.3 million compared to
the first quarter of 2007 and is largely the result of improved sales price
realizations from the prior quarter, partially offset by lower production
stemming from planned maintenance events.
Cash flow from operations before changes in non-cash working capital ("cash
flow from operations") was $82.7 million for the second quarter of 2007 compared
to a cash use of $20.9 million in the prior year period. Second quarter 2007
cash flow from operations increased $19.7 million over the first quarter of
2007. This increase is again the result of higher sales price realizations due
to higher over WTI prices together with the production of a lighter sales mix
partially offset by lower production levels.
Financial Position
- --------------------------------------------------------------------------------
Bank Debt
During the second quarter of 2007, Western successfully implemented a new $805
million Revolving Credit Facility which replaces the $340 million Revolving
Credit Facility. The term of the new Credit Facility is initially five years
which can be extended annually at the discretion of the lenders. It has been
rated BBB by Standard & Poor's ("S&P") and Ba2 by Moody's Investor Services
("Moody's"). S&P had previously upgraded the rating on Western's US$450 million
Notes ("Notes") to BBB, while Moody's upgraded the Notes to Ba2 as part of their
rating of the Credit Facility. Western's improved credit profile is reflected in
these upgraded ratings as we continue to move towards a corporate investment
grade classification.
During the quarter, Western drew an additional $85 million on its credit
facilities, bringing the outstanding drawn balance to $214 million as at June
30, 2007. Additional amounts drawn were used to partially fund Western's share
of capital expenditures for Expansion 1 during the quarter. With the new Credit
Facility in place, as at June 30, 2007, the undrawn capacity of the Credit
Facility totaled $591 million, excluding amounts allocated to letters of credit.
Western's debt to total capitalization as at June 30, 2007 decreased
slightly to 47 per cent from 49 per cent largely due to the benefit associated
with a significant strengthening of the US/Cdn exchange rate. Western
anticipates the extent of leverage will increase as we continue to fund our
share of capital expenditures for Expansion 1, together with our other key
growth initiatives, through a combination of cash flow from operations and
incremental borrowings.
Capital Expenditures
Western's capital expenditures totaled $166.5 million in the second quarter of
2007 compared to $55.8 million for the comparable period in 2006. Capital
expenditures in the second quarter of 2007 included $11.4 million for base
operations, $5.0 million for sustaining capital, $134.9 million for expansion
related capital including capitalized interest, $6.0 million related to
Kurdistan, $4.3 million for Western's in-situ initiatives and $4.9 million for
other minor corporate expenditures. Corporate expenditures primarily relate to
capitalized legal costs associated with Western's Section IV insurance
arbitration proceedings.
Analysis of Cash Resources
Cash balances totaled $4.4 million at June 30, 2007 compared to $6.0 million at
June 30, 2006. Cash inflows included: $82.7 million in cash flow from
operations, $85.0 million from Credit Facility drawdowns and $1.3 million from
the exercise of employee stock options. Cash outflows included: capital
expenditures of $166.5 million, $3.4 million for deferred charges and $0.3
million repayment of obligations under capital lease.
There was a negligible change in working capital during the second quarter
of 2007. Reductions to working capital included a $3.8 million increase in
accounts receivable and a $2.4 million reduction in accounts payable. These
changes were essentially offset by a $4.1 million reduction in inventory and a
$2.1million decrease in prepaid expenses. The increase in accounts receivable is
the result of higher sales price realizations. The reduction in accounts payable
primarily relates to only two months of accrued interest on Western's US dollar
long-term notes being included at June 30, 2007 versus five months of accrued
interest at March 31, 2007.
Insurance Claims
There were no new significant developments during the second quarter of 2007
with respect to Western's ongoing arbitration proceedings concerning the Cost
Overrun and Project Delay insurance policy, known as Section IV. Western
anticipates that formal arbitration hearings will commence in September 2007.
Amounts owing under all Western's insurance claims total $244 million as of June
30, 2007 not including interest and ongoing costs which could add significantly
to the balance to be considered by the arbitration panel.
Flow-Through Shares
As communicated during 2006, the Canada Revenue Agency ("CRA") proposed to
challenge the characterization of certain expenditures capitalized as Canadian
Exploration Expense ("CEE") which were incurred in 2001 and 2002 and renounced
to subscribers of the flow-through share offerings equaling $29.2 million in
2001 and $19.5 million in 2002. Western has yet to be formally reassessed and
continues to work with the other Joint Venture Owners to seek resolution of this
potential challenge. If the CRA is successful in assessing a change in the
characterization of these expenditures, the resulting reduction would impact
Western's obligations under the indemnity provisions in the subscription
agreements for the flow-through shares and, in turn, would impact Western's
reported results.
Outlook for the Remainder of 2007
- --------------------------------------------------------------------------------
Western anticipates its share of production from the AOSP to average
approximately 31,000 to 34,000 barrels per day in 2007 based on production
performance for the first half of 2007.
Western will continue to make opportunistic business decisions to add to
our oil sands lease position over time. This initiative, combined with the
AOSP's existing lease position, provides a strong platform for Western's future
growth. Western continues to pursue downstream integration opportunities to
maximize value from our oil sands resources and undeveloped acreage position.
Western's advisors, Goldman, Sachs & Co. and TD Securities Inc., are assisting
in these activities under the oversight of an ad hoc committee of independent
directors of the Board. Western's Board and management team remain committed to
maximizing the value of its Canadian oil sands position.
WesternZagros, our wholly-owned subsidiary, continues to advance its
opportunity in the Federal Region of Kurdistan. A seismic program has been
initiated with over 350 kilometres completed to date of an initial 650 kilometre
program. In addition, WesternZagros continues to augment its organizational
capabilities in order to support this initiative.
AOSP Expansion 1 Update
Engineering, procurement and construction activity continues to proceed on plan.
Detailed engineering at the Mine is well over 50 per cent complete. During the
quarter, key Mine construction efforts were focused on the completion of the
Albian Village and the Primary Separation Cell foundation, progression of the
deep undergrounds and commencement of structural erection works. At the
Upgrader, engineering, construction and procurement activities are following
plan. A key milestone for the Upgrader during the quarter was the arrival of
three of the five large reactor vessels fabricated in Italy, with the remaining
two reactors arriving in July 2007. The Corridor Pipeline expansion also is
progressing with a significant amount of pipe already completed. The Project
Owners are closely monitoring the ongoing labour negotiations with the building
trades. To this point, there have been no labour disruptions at either
construction site and the Joint Venture Owners look forward to working with the
various trade unions to ensure a peaceful labour environment on our Project.
Clearly, we would be disappointed with any labour disruption. In terms of
safety, the Project has surpassed seven million man hours without one lost-time
incident.
Western's recently closed Credit Facility represents a fundamental
component of our financing strategy for Expansion 1. As previously communicated,
we believe our share of the capital expenditures associated with Expansion 1 can
be funded through a combination of cash flow from operations and incremental
borrowings. Further financing efforts will be required to round out our
comprehensive financing plan which will position Western to meet our ongoing
commitments for this first 100,000 barrel per day expansion.
Business and Financial Risks
- --------------------------------------------------------------------------------
Western is subject to a number of business and financial risks that are typical
given the nature of Western's operations. These risks are described in Western's
previous public disclosures, including the 2006 Annual Report and Annual
Information Form, which are available on the Company's website and SEDAR.
Non-GAAP Financial Measures
- --------------------------------------------------------------------------------
Western includes cash flow from operations per share, cash flow from operations
excluding hedging activities, earnings before interest, taxes, depreciation,
depletion and amortization, stock-based compensation, accretion on asset
retirement obligation, foreign exchange gains and gains or losses on risk
management activities ("EBITDAX"), EBITDAX excluding hedging activities and net
earnings excluding hedging activities as investors may use this information to
better analyze our operating performance. We also include certain per barrel
information, such as realized crude oil sales price, to provide per unit numbers
that can be compared against industry benchmarks, such as the Edmonton PAR
benchmark. The additional information should not be considered in isolation or
as a substitute for measures of operating performance prepared in accordance
with Canadian Generally Accepted Accounting Principles ("GAAP"). Non-GAAP
financial measures do not have any standardized meaning prescribed by Canadian
GAAP and are therefore unlikely to be comparable to similar measures presented
by other issuers. Management believes that, in addition to Net Earnings per
Share and Net Earnings Attributable to Common Shareholders (both Canadian GAAP
measures), cash flow from operations per share and EBITDAX provide a better
basis for evaluating our operating performance, as they both exclude
fluctuations on the US dollar denominated Senior Secured Notes and certain other
non-cash items, such as depreciation, depletion and amortization, and future
income tax recoveries. In addition, EBITDAX provides a useful indicator of our
ability to fund our financing costs and any future capital requirements.
Changes in Accounting Policies
- --------------------------------------------------------------------------------
Stock-based Compensation for Employees Eligible to Retire Before the Vesting
Date
For the year ending December 31, 2006, Western retroactively adopted Emerging
Issues Committee Abstract 162 ("EIC-162"). EIC-162 required Western 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 for the three and six month periods ended June 30, 2006 was
increased by $0.2 million and $3.4 million, respectively, included in general
and administrative expense, representing the additional compensation expense
recognized for employees eligible for retirement during the vesting period.
Financial Instruments
On January 1, 2007, Western adopted the CICA Handbook sections 3855 "Financial
Instruments - Recognition and Measurement," 3862 "Financial Instruments -
Disclosures," 3863 "Financial Instruments - Presentation," 3865 "Hedges," 1530
"Comprehensive Income," and 3251 "Equity." Other than the effect on Deferred
Charges as described under Financial Instruments below, the adoption of the
financial instruments standards have not affected the current or comparative
period balances on the consolidated financial statements as all financial
instruments identified have been fair valued.
Section 3855 requires that all financial assets be classified as
held-for-trading, available-for-sale, held-to-maturity, or loans and receivables
and that all financial liabilities must be classified as held-for-trading or
other. Financial assets and financial liabilities classified as held-for-trading
are measured at fair value with changes in those fair values recognized in
earnings. Financial assets held-to-maturity, loans and receivables, and other
financial liabilities are measured at amortized cost using the effective
interest method of amortization. Available-for-sale financial assets are
measured at fair value with unrealized gains and losses, including changes in
foreign exchange rates, being recognized in other comprehensive income.
Investments in equity instruments classified as available-for-sale that do not
have a quoted market price in an active market are measured at cost.
Derivative instruments are always carried at fair value and reported as
assets where they have a positive fair value and as liabilities where they have
a negative fair value. Derivatives may be embedded in other financial
instruments. Under the new Financial Instrument standards, derivatives embedded
in other financial instruments are valued as separate derivatives when their
economic characteristics and risks are not clearly and closely related to those
of the host contract; the terms of the embedded derivative are the same as those
of a free standing derivative; and the combined contract is not held for
trading. When an entity is unable to measure the fair value of the embedded
derivative separately, the combined contract is treated as a financial asset or
liability that is held-for-trading and measured at fair value with changes
therein recognized in the earnings.
The fair value of a financial instrument on initial recognition is normally
the transaction price, i.e. the fair value of the consideration given or
received. Subsequent to initial recognition, fair values are based on quoted
market prices where available from active markets, otherwise fair values are
estimated based upon market prices at reporting date for other similar assets or
liabilities with similar terms and conditions, or by discounting future payments
of interest and principal at estimated interest rates that would be available to
Western at the reporting date.
Transaction costs are expensed as incurred for financial instruments
classified or designated as held-for-trading. Transaction costs related to other
financial instruments are generally capitalized and are then amortized over the
expected life of the instrument using the effective interest method.
Accordingly, the Deferred Charges balance of $13.5 million, consisting of
transaction costs relating to the Senior Secured Notes, was reclassified against
Long-term Debt effective January 1, 2007 under prospective application. For the
three month period ended June 30, 2007, $0.6 million of these costs were
included in interest expense under the effective interest method.
Emerging Issues Committee Abstract 101 ("EIC-101") states that transaction
costs relating to line of credit and revolving debt arrangements are excluded
from Section 3855. Transaction costs of $3.4 million relating to the new $805
million Revolving Credit Facility are being amortized using the straight-line
method over the five year term of the Revolving Credit Facility.
Hedges
Section 3865 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. Western does not have any derivative instruments that are subject to
hedge accounting.
Comprehensive Income
Section 1530 establishes new standards for reporting the display of
comprehensive income, consisting of net income and Other Comprehensive Income
("OCI"). OCI is the change in equity (net assets) of an enterprise during a
reporting period from transactions and other events from non-owner sources and
excludes those resulting from investments by owners and distributions to owners.
Western has no such transaction and events which would require the disclosure of
OCI for the three and six month periods ended June 30, 2007. Any changes in
these items would be presented in a consolidated statement of comprehensive
income.
Equity
Section 3251 replaces Section 3250, "Surplus" and establishes standards for the
presentation of equity and changes in equity during a reporting period,
including changes in Accumulated Other Comprehensive Income ("Accumulated OCI").
Any cumulative changes in OCI would be included in Accumulated OCI and be
presented as a new category of Shareholder's Equity on the consolidated balance
sheets.
Accounting Changes
On January 1, 2007, Western adopted CICA Handbook Section 1506, "Accounting
Changes", which revises and replaces former Section 1506, "Accounting Changes".
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.
Determining the Variability to be Considered in Applying AcG-15
On January 1, 2007, Western prospectively adopted the Emerging Issues Committee
issued Abstract163, "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".
The adoption of this standard has not affected the current or comparative period
balances on the consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
As at As at
June 30 December 31
(Unaudited) ($ thousands) 2007 2006
- --------------------------------------------------------------------------------------------------
Assets
Current Assets
Cash 4,365 3,139
Accounts Receivable 108,252 110,039
Inventory 24,804 21,761
Prepaid Expense 7,108 12,443
Current Portion of Risk Management (note 12) 1,654 7,601
146,183 154,983
- --------------------------------------------------------------------------------------------------
Property, Plant and Equipment (note 2) 1,909,604 1,606,966
Risk Management (note 12) - 18,707
Deferred Charges (note 1) 3,413 13,503
1,913,017 1,639,176
- --------------------------------------------------------------------------------------------------
2,059,200 1,794,159
==================================================================================================
Liabilities
Current Liabilities
Accounts Payable and Accrued Liabilities 201,461 158,501
Current Portion of Lease Obligations (note 4) 48,875 1,958
Current Portion of Option Premium Liability (note 5) 28,090 24,966
278,426 185,425
- --------------------------------------------------------------------------------------------------
Long-term Liabilities
Long-term Debt (note 3) 681,497 601,385
Lease Obligations (note 4) 11,321 57,480
Option Premium Liability (note 5) 43,283 64,309
Risk Management (note 12) 941 -
Asset Retirement Obligation (note 6) 21,450 20,773
Future Income Tax (note 11) 108,302 73,113
866,794 817,060
1,145,220 1,002,485
- --------------------------------------------------------------------------------------------------
Shareholders' Equity
Share Capital (note 8) 557,239 554,233
Contributed Surplus (note 10) 13,821 12,890
Retained Earnings 342,920 224,551
913,980 791,674
- --------------------------------------------------------------------------------------------------
2,059,200 1,794,159
==================================================================================================
See Accompanying Notes to the Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
Three Months Ended June 30 Six Months Ended June 30
(Unaudited) ($ thousands, except amounts per share) 2007 2006 2007 2006
- ---------------------------------------------------------------------------------------------------------------------------
Revenues 341,429 165,727 645,718 373,487
Less Purchased Feedstocks and Transportation 154,090 70,094 279,139 138,606
187,339 95,633 366,579 234,881
- ---------------------------------------------------------------------------------------------------------------------------
Expenses
Royalties 1,152 718 2,344 1,358
Operating 69,229 89,487 139,507 153,417
Research, Business Development and Other 11,651 7,720 29,969 13,742
General and Administrative 5,639 5,278 12,105 14,219
Insurance 3,284 2,697 7,274 5,361
Interest (note 7) 7,010 12,532 15,957 25,561
Accretion on Asset Retirement Obligation (note 6) 339 156 677 311
Depreciation, Depletion and Amortization 12,712 6,820 25,762 17,366
111,016 125,408 233,595 231,335
- ---------------------------------------------------------------------------------------------------------------------------
Earnings (Loss) Before Other Income (Expense)
and Income Taxes 76,323 (29,775) 132,984 3,546
Other Income (Expense)
Foreign Exchange Gain 41,385 25,759 47,163 25,389
Risk Management Loss (note 12) (6,438) (44,478) (25,475) (112,202)
- ---------------------------------------------------------------------------------------------------------------------------
Earnings (Loss) Before Income Taxes 111,270 (48,494) 154,672 (83,267)
Income Tax Expense (Recovery) (note 11) 23,790 (25,532) 35,558 (35,472)
- ---------------------------------------------------------------------------------------------------------------------------
Net Earnings (Loss) 87,480 (22,962) 119,114 (47,795)
Retained Earnings at Beginning of Period 255,440 136,348 224,551 161,181
Settlement of Performance Share Unit Plan (note 10) - - (745) -
- ---------------------------------------------------------------------------------------------------------------------------
Retained Earnings at End of Period 342,920 113,386 342,920 113,386
===========================================================================================================================
Net Earnings (Loss) Per Share (note 9)
Basic 0.54 (0.14) 0.74 (0.30)
Diluted 0.54 (0.14) 0.73 (0.30)
===========================================================================================================================
See Accompanying Notes to the Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended June 30 Six Months Ended June 30
(Unaudited) ($ thousands) 2007 2006 2007 2006
- -----------------------------------------------------------------------------------------------------------------------------
Cash Provided By (Used In)
Cash From Operating Activities
Net Earnings (Loss) 87,480 (22,962) 119,114 (47,795)
Non-cash Items:
Stock-based Compensation (note 10) 2,044 2,068 4,132 7,117
Accretion on Asset Retirement Obligation (note 6) 339 156 677 311
Depreciation, Depletion and Amortization 12,712 6,820 25,762 17,366
Amortization of Financing Charges (note 3) 553 - 1,289 -
Interest Expense on Option Premium Liability (note 5) 867 934 1,517 1,886
Unrealized Loss on Risk Management (note 12) 6,438 44,478 25,595 112,202
Unrealized Foreign Exchange Gain (note 3 and 5) (45,602) (27,310) (51,917) (26,674)
Future Income Tax Expense (Recovery) (note 11) 23,790 (24,948) 35,541 (35,331)
Cash Items:
Cash Settlement of Option Premium Liability (note 5) (5,884) - (12,176) -
Cash Settlement of Asset Retirement Obligation (note 6) - (91) - (91)
Cash Settlement of Performance Share Unit Plan (note 10) - (28) (3,806) (2,104)
- -----------------------------------------------------------------------------------------------------------------------------
82,737 (20,883) 145,728 26,887
Decrease (Increase) in Non-cash Working Capital (note 13) (14,378) 17,070 1,049 30,438
68,359 (3,813) 146,777 57,325
- -----------------------------------------------------------------------------------------------------------------------------
Cash From (Used In) Financing Activities
Issue of Share Capital (note 8) 1,250 - 2,514 2,581
Issue (Repayment) of Long-term Debt, Net 85,000 31,000 137,000 (10,000)
Deferred Charges (3,422) - (3,422) -
Repayment of Obligations Under Capital Lease (335) (336) (670) (672)
82,493 30,664 135,422 (8,091)
- -----------------------------------------------------------------------------------------------------------------------------
Cash Invested
Capital Expenditures (166,452) (55,828) (326,963) (91,159)
Decrease in Non-cash Working Capital (note 13) 14,472 19,269 45,990 42,373
(151,980) (36,559) (280,973) (48,786)
- -----------------------------------------------------------------------------------------------------------------------------
(Decrease) Increase in Cash (1,128) (9,708) 1,226 448
Cash at Beginning of Period 5,493 15,746 3,139 5,590
- -----------------------------------------------------------------------------------------------------------------------------
Cash at End of Period 4,365 6,038 4,365 6,038
=============================================================================================================================
See Accompanying Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Tabular amounts in $ thousands, except for share amounts)
The interim consolidated financial statements include the accounts of Western
Oil Sands Inc. and its subsidiaries (the "Corporation"), and are presented in
accordance with Canadian Generally Accepted Accounting Principles. The interim
consolidated financial statements have been prepared using the same accounting
policies and methods of computation as the audited consolidated financial
statements for the year ended December 31, 2006, except as described in Note1.
The disclosures provided below are incremental to those included in the annual
consolidated financial statements. The interim consolidated financial statements
should be read in conjunction with the consolidated financial statements and the
notes thereto in the Corporation's annual report for the year ended December 31,
2006.
Note 1. Changes in Accounting Policies
- --------------------------------------------------------------------------------
a) Stock-based Compensation for Employees Eligible to Retire Before the
Vesting Date
For the year ended December 31, 2006, the Corporation retroactively adopted
Emerging Issues Committee Abstract 162 ("EIC-162"). EIC-162 required 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 for the three and six month
periods ended June 30, 2006 was increased by $0.2 million and $3.4 million,
respectively, included in general and administrative expense, representing the
additional compensation expense recognized for employees eligible for retirement
during the vesting period.
b) Financial Instruments
On January 1, 2007, the Corporation adopted the CICA Handbook sections 3855
"Financial Instruments - Recognition and Measurement," 3862 "Financial
Instruments - Disclosures," 3863 "Financial Instruments - Presentation," 3865
"Hedges," 1530 "Comprehensive Income," and 3251 "Equity." Other than the effect
on Deferred Charges as described under Financial Instruments below, the adoption
of the financial instruments standards has not affected the current or
comparative period balances on the consolidated financial statements as all
financial instruments identified have been fair valued.
Financial Instruments
Section 3855 requires that all financial assets be classified as
held-for-trading, available-for-sale, held-to-maturity, or loans and receivables
and that all financial liabilities must be classified as held-for-trading or
other. Financial assets and financial liabilities classified as held-for-trading
are measured at fair value with changes in those fair values recognized in
earnings. Financial assets held-to-maturity, loans and receivables, and other
financial liabilities are measured at amortized cost using the effective
interest method of amortization. Available-for-sale financial assets are
measured at fair value with unrealized gains and losses, including changes in
foreign exchange rates, being recognized in other comprehensive income.
Investments in equity instruments classified as available-for-sale that do not
have a quoted market price in an active market are measured at cost.
Derivative instruments are always carried at fair value and reported as
assets where they have a positive fair value and as liabilities where they have
a negative fair value. Derivatives may be embedded in other financial
instruments. Under the new Financial Instrument standards, derivatives embedded
in other financial instruments are valued as separate derivatives when their
economic characteristics and risks are not clearly and closely related to those
of the host contract, the terms of the embedded derivative are the same as those
of a free standing derivative, and the combined contract is not held for
trading. When an entity is unable to measure the fair value of the embedded
derivative separately, the combined contract is treated as a financial asset or
liability that is held-for-trading and measured at fair value with changes
therein recognized in the earnings.
The fair value of a financial instrument on initial recognition is normally
the transaction price, i.e. the fair value of the consideration given or
received. Subsequent to initial recognition, fair values are based on quoted
market prices where available from active markets, otherwise fair values are
estimated based upon market prices at reporting date for other similar assets or
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 the reporting date.
Transaction costs are expensed as incurred for financial instruments
classified or designated as held-for-trading. Transaction costs related to other
financial instruments are generally capitalized and are then amortized over the
expected life of the instrument using the effective interest method.
Accordingly, the Deferred Charges balance of $13.5 million at December 31, 2006,
consisting of transaction costs relating to the Senior Secured Notes, was
reclassified against Long-term Debt effective January 1, 2007 under prospective
application. For the three and six month periods ended June 30, 2007, $0.6
million and $1.3 million, respectively, of these costs were included in interest
expense under the effective interest method.
Emerging Issues Committee Abstract 101 ("EIC-101") states that transaction
costs relating to line of credit and revolving debt arrangements are excluded
from Section 3855. Transaction costs of $3.4 million relating to the new $805
million Revolving Credit Facility are being amortized using the straight-line
method over the five year term of the Revolving Credit Facility.
Hedges
Section 3865 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. The Corporation does not have any derivative instruments
that have been designated as hedges.
Comprehensive Income
Section 1530 establishes new standards for reporting the display of
comprehensive income, consisting of Net Income and Other Comprehensive Income
("OCI"). OCI is the change in equity (net assets) of an enterprise during a
reporting period from transactions and other events from non-owner sources and
excludes those resulting from investments by owners and distributions to owners.
The Corporation has no such transactions and events which would require the
disclosure of OCI for the three and six month periods ended June 30, 2007. Any
changes in these items would be presented in a consolidated statement of
comprehensive income.
Equity
Section 3251 replaces Section 3250, "Surplus" and establishes standards for
the presentation of equity and changes in equity during a reporting period,
including changes in Accumulated Other Comprehensive Income ("Accumulated OCI").
Any cumulative changes in OCI would be included in Accumulated OCI and be
presented as a new category of Shareholder's Equity on the consolidated balance
sheets.
c) Accounting Changes
On January 1, 2007, the Corporation adopted CICA Handbook Section 1506,
"Accounting Changes", which revises and replaces former Section 1506,
"Accounting Changes". 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.
d) Determining the Variability to be Considered in Applying AcG-15
On January 1, 2007, the Corporation prospectively adopted 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". The adoption of this standard has not affected the current
or comparative period balances on the consolidated financial statements.
Note 2. Property, Plant and Equipment
- -----------------------------------------------------------------------------------------------
June 30, 2007 Cost Accum. DD&A* Net
- -----------------------------------------------------------------------------------------------
Athabasca Oil Sands Project
Producing Assets 1,445,875 (179,113) 1,266,762
Capital Leases 52,705 (6,813) 45,892
Asset Retirement Obligation 18,246 (1,466) 16,780
Expansion 1 474,813 - 474,813
- -----------------------------------------------------------------------------------------------
1,991,639 (187,392) 1,804,247
In-Situ Projects 51,862 - 51,862
Kurdistan Exploration Project 38,291 - 38,291
Corporate 23,231 (8,027) 15,204
- -----------------------------------------------------------------------------------------------
2,105,023 (195,419) 1,909,604
===============================================================================================
December 31, 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 1 225,599 - 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
===============================================================================================
* Accumulated Depreciation, Depletion and Amortization
At June 30, 2007, costs not currently subject to depreciation, depletion and
amortization included $474.8 million (June30, 2006 - $87.4 million) relating to
the Athabasca Oil Sands Project ("AOSP") Expansion 1 as it has not been
substantially completed and commercial production has not yet commenced. During
the three and six month periods ended June 30, 2007, the Corporation capitalized
$8.1 million and $13.7 million, respectively (June 30, 2006 - nil) in interest
costs relating to Expansion 1. As at June 30, 2007, a total of $16.5 million of
interest costs has been capitalized relating to Expansion 1.
All costs included in the In-Situ Projects and the Kurdistan Exploration Project
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.
Note 3. Long-term Debt
- -----------------------------------------------------------------------------------------------
June 30, 2007 December 31, 2006
- -----------------------------------------------------------------------------------------------
Senior Secured Notes
US$450 Million - 8.375%, Due May 1, 2012 (a) 467,497 524,385
Revolving Credit Facilities (b) 214,000 77,000
- -----------------------------------------------------------------------------------------------
681,497 601,385
===============================================================================================
a) The Corporation's US dollar denominated Senior Secured Notes (the "Notes")
are translated into Canadian dollars at the period end exchange rate. Effective
January 1, 2007, transactions costs of US$11.6 million were reclassified against
the Notes. As at June 30, 2007, transactions costs were US$10.5 million, net of
amortization. During the three and six month periods ended June 30, 2007,
transaction costs of $0.6 million and $1.3 million, respectively, have been
recognized as interest expense under the effective interest method.
For the three and six month periods ended June 30, 2007, the unrealized foreign
exchange gain arising on the Notes was $39.2 million and $44.7 million,
respectively (June 30, 2006 - $23.4 million and $22.9 million, respectively). As
at June 30, 2007, a total of $230.3 million of unrealized foreign exchange gains
had been recognized from the inception of the Notes, approximately $92 million
of which has been capitalized as the unrealized gains were recognized prior to
commercial operations.
b) The Corporation closed a new $805 million Revolving Credit Facility on June
22, 2007 replacing the existing $340 million Revolving Credit Facility. The new
$805 million Revolving Credit Facility has an initial term of five years,
maturing June 22, 2012 and is extendible annually at the discretion of the
lenders. The Corporation can draw on the Revolving Credit Facility either in
Canadian or United States dollars in the form of prime rate loans, bankers
acceptances, US base rate loans, LIBOR loans or letters of credit, as
applicable. Margins on amounts drawn range from nil to 145 basis points. The
Revolving Credit Facility is secured by the Corporation's interest in the
mineable oil sands deposits of the AOSP. As at June 30, 2007, $214 million was
drawn on the Revolving Credit Facility in Canadian dollars with a further $17
million for issued letters of credit in Canadian dollars. As at June 30, 2006,
$31 million was drawn with a further $9.6 million issued as letters of credit
under the previous $340 million Revolving Credit Facility.
Note 4. Lease Obligations
- -------------------------------------------------------------------------------------------
June 30, 2007 December 31, 2006
- -------------------------------------------------------------------------------------------
Obligations Under Capital Lease 48,258 48,928
Operating Lease Guarantee Obligation 11,938 10,510
- -------------------------------------------------------------------------------------------
60,196 59,438
Less: Current Portion 48,875 1,958
- -------------------------------------------------------------------------------------------
11,321 57,480
===========================================================================================
The Obligations Under Capital Lease relates to the Corporation's share of
capital costs for the hydrogen-manufacturing unit within the AOSP and have been
classified as a current liability as at June 30, 2007 as the underlying credit
facility supporting the capital lease will terminate on June 30, 2008. The
extension of the underlying credit requires unanimous approval of the AOSP Joint
Venture Owners. The Corporation remains the only Joint Venture Owner with
obligations under the credit facility as the other Joint Venture Owners have
fully repaid their respective obligations. The Corporation will be refinancing
its Obligations Under Capital Lease as part of its overall financing strategy.
The Operating Lease Guarantee Obligation relates to the Mobile Equipment Leases.
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 leases. Accordingly, the Corporation recognized, as a
liability, a portion of this future payment as it relates to the service life of
the equipment that has passed. During the three and six month periods ended
June 30, 2007, no payments were made in regard to this obligation (June 30, 2006
- - $0.4 million and $0.6 million, respectively).
Note 5. Option Premium Liability
- --------------------------------------------------------------------------------
The Corporation deferred payment and receipt of the premiums associated with the
options described in Note 12(a) until the settlement of the option contracts
between 2007 and 2009. During the three and six month periods ended June 30,
2007, $5.9 million and $12.2 million, respectively, was paid in respect to the
settlement of the option contracts maturing during the period (June 30, 2006 -
nil). The remaining total net premiums payable by the Corporation are US$11.0
million for the remainder of 2007, US$32.4 million for 2008 and US$27.8 million
for 2009.
On the dates that the option contracts were entered into, a net liability was
recognized on the consolidated balance sheet at the estimated present value of
the net premiums payable. Subsequent to the inception dates of the option
contracts, interest expense is recognized, with a corresponding increase to the
liability, at annual rates ranging from 4.25% to 4.50%. Interest expense
recognized for the three and six month periods ended June 30, 2007 was $0.9
million and $1.5 million, respectively (June 30, 2006 - $0.9 million and $1.9
million, respectively). 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 gain arising on the option premium liability for
the three and six month periods ended June 30, 2007 was $6.4 million and $7.2
million, respectively (June 30, 2006 - $3.9 million and $3.8 million,
respectively).
The following table presents the reconciliation of the net Option Premium
Liability:
Three Months Ended June 30 Six Months Ended June 30
2007 2006 2007 2006
- -------------------------------------------------------------------------------------------------------
Option Premium Liability at Beginning of Period 82,753 86,464 89,275 85,416
Interest Expense 867 934 1,517 1,886
Unrealized Foreign Exchange Gain (6,363) (3,865) (7,243) (3,769)
Settlement of Option Premium Liability (5,884) - (12,176) -
- -------------------------------------------------------------------------------------------------------
Option Premium Liability at End of Period 71,373 83,533 71,373 83,533
Less: Current Portion 28,090 11,717 28,090 11,717
- -------------------------------------------------------------------------------------------------------
43,283 71,816 43,283 71,816
=======================================================================================================
Note 6. Asset Retirement Obligation
- --------------------------------------------------------------------------------
The Corporation, in association with its 20 per cent working interest in the
AOSP, is responsible for its share of future dismantlement and site restoration
costs in the mining, extracting and upgrading activities. The following table
presents the reconciliation of the Asset Retirement Obligation:
Three Months Ended June 30 Six Months Ended June 30
2007 2006 2007 2006
- -------------------------------------------------------------------------------------------------------
Asset Retirement Obligation at Beginning of Period 21,111 9,249 20,773 9,094
Liabilities Settled - (91) - (91)
Accretion on Asset Retirement Obligation 339 156 677 311
- -------------------------------------------------------------------------------------------------------
Asset Retirement Obligation at End of Period 21,450 9,314 21,450 9,314
=======================================================================================================
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 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.
Note 7. Interest Expense
- -------------------------------------------------------------------------------------------------------
Three Months Ended June 30 Six Months Ended June 30
2007 2006 2007 2006
- -------------------------------------------------------------------------------------------------------
Interest on Long-term Debt (1) 13,541 10,888 26,842 22,219
Interest on Obligations Under Capital Lease 694 710 1,310 1,456
Interest on Option Premium Liability 867 934 1,517 1,886
- -------------------------------------------------------------------------------------------------------
Total Financing Charges 15,102 12,532 29,669 25,561
Less: Capitalized Interest for AOSP Expansion 1 8,092 - 13,712 -
- -------------------------------------------------------------------------------------------------------
Interest Expense 7,010 12,532 15,957 25,561
=======================================================================================================
(1) Interest on Long-term Debt includes amortization of transaction costs of
$0.6 million and $1.3 million, respectively, for the three and six month
periods (June 30, 2006 - nil).
Cash interest paid for the three and six month periods ended June 30, 2007 was
$24.9 million and $27.2 million, respectively (June 30, 2006 - $22.8 million and
$24.1 million, respectively). Cash interest received for the three and six month
periods ended June 30, 2007 was $0.1 million (June 30, 2006 - $0.1 million).
Note 8. Share Capital
- -------------------------------------------------------------------------------------------------------
Issued and Outstanding
Number of
Shares Amount
- -------------------------------------------------------------------------------------------------------
Common Shares
Balance at December 31, 2006 161,378,399 554,233
Issued on Exercise of Employee Stock Options 327,096 2,514
Exercise of Stock Options Previously Recognized - 492
- -------------------------------------------------------------------------------------------------------
Total Share Capital at June 30, 2007 161,705,495 557,239
- -------------------------------------------------------------------------------------------------------
Outstanding
Stock Options 3,362,258
- -------------------------------------------------------------------------------------------------------
Diluted Shares at June 30, 2007 165,067,753
=======================================================================================================
Note 9. Net Earnings Per Share
- --------------------------------------------------------------------------------
Basic weighted average number of common shares for the three and six month
periods ended June 30, 2007 was 161,646,025 and 161,570,073, respectively (June
30, 2006 - 161,070,149 and 160,848,345, respectively). Diluted weighted average
number of shares for the three and six month periods ended June 30, 2007 were
163,302,147 and 163,270,988, respectively. Due to a loss for the three and six
month periods ended June 30, 2006, no incremental shares were included in the
diluted earnings per weighted average number as the effect would have been
anti-dilutive.
Note 10. Stock-based Compensation
- --------------------------------------------------------------------------------
a) Stock Option Plan
Under the Corporation's Stock Option Plan, 37,500 options were granted during
the three month period ended June 30, 2007 at an average exercise price of
$36.72 per share (June 30, 2006 - 10,000 options at an average exercise price of
$35.40 per share). The fair values of all options granted during the period are
estimated as at the grant date using the Black-Scholes option-pricing model. The
weighted-average fair values of the options and the assumptions used in their
determination are as follows:
Three Months Ended June 30 Six Months Ended June 30
2007 2006 2007 2006
- -------------------------------------------------------------------------------------------------------
Granted 37,500 10,000 121,360 797,540
Weighted-average Fair Value $12.52 $14.49 $11.92 $15.98
Risk Free Interest Rate 4.43% 4.49% 4.22% 4.30%
Expected Life (In Years) 4 6 4 - 6 6
Expected Volatility 35% 33% 34 - 36% 33 - 43%
Dividend Per Share - - - -
=======================================================================================================
b) Performance Share Unit Plan
Under the Performance Share Unit Plan ("PSUP"), the Corporation granted nil and
116,700 units during the three and six month periods ending June 30, 2007,
respectively (June 30, 2006 - 10,550 and 133,195 units, respectively). During
the three and six month periods ended June 30, 2007, no units vested and 109,557
units vested, respectively (June 30, 2006 - nil and 63,111 units, respectively)
and the required common shares were acquired and distributed to the PSUP unit
holders. The common shares were acquired from the secondary market for $3.8
million, at an average price of $34.74 per share. The Corporation had previously
recognized compensation of $2.7 million, with the excess of the amount paid of
$1.1 million ($0.7 million net of tax) charged to retained earnings. During
2006, common shares were acquired from the secondary market for $2.1 million, at
an average price of $32.89 per share. The following table presents the
reconciliation of the number of Performance Share Units:
Three Months Ended June 30 Six Months Ended June 30
2007 2006 2007 2006
- -------------------------------------------------------------------------------------------------------
Outstanding at Beginning of Period 243,433 219,502 237,670 160,128
Granted - 10,550 116,700 133,195
Exercised - - (109,557) (63,111)
Forfeited - - (1,380) (160)
- -------------------------------------------------------------------------------------------------------
Outstanding at End of Period 243,433 230,052 243,433 230,052
=======================================================================================================
c) Deferred Share Unit Plan
Under the Deferred Share Unit Plan ("DSUP"), for the three and six month periods
ended June 30, 2007, the Corporation recognized $0.1 million and $0.4 million,
respectively, (June 30, 2006 - $1.9 million and $3.7 million, respectively) as
compensation expense in General and Administrative Expenses. No Deferred Share
Units ("DSU") were redeemed for cash or shares of the Corporation for the three
and six month periods ended June 30, 2007 (June 30, 2006 - nil). The Corporation
had 30,106 DSUs outstanding at June 30, 2007 (June 30, 2006 - 8,923). As at June
30, 2007, the Corporation had $1.1 million recorded in Accounts Payable and
Accrued Liabilities associated with the DSUP.
d) Stock-based Compensation
For the three and six month periods ended June 30, 2007, the Corporation
recognized $2.0 million and $4.1 million, respectively, (June 30, 2006 - $2.1
million and $7.1 million, respectively) in compensation expense related to
stock-based compensation in General and Administrative Expenses. For the three
month period ended June 30, 2007, the compensation expense was comprised of $1.2
million (June 30, 2006 - $1.4 million) in respect to the Corporation's stock
option plan and $0.9 million (June 30, 2006 -$0.7 million) in respect to the
Corporation's Performance Share Unit Plan. For the six month period ended June
30, 2007, the compensation expense is comprised of $2.5 million (June 30, 2006 -
$5.4 million) in respect to the Corporation's stock option plan and $1.7 million
(June 30, 2006 - $1.7 million) in respect to the Corporation's Performance Share
Unit Plan.
e) Contributed Surplus
The following table presents the reconciliation of Contributed Surplus:
Three Months Ended June 30 Six Months Ended June 30
2007 2006 2007 2006
- -------------------------------------------------------------------------------------------------------
Contributed Surplus at Beginning of Period 12,009 6,033 12,890 3,474
Stock-based Compensation Expense 2,044 2,068 4,132 7,117
Settlement of Performance Share Unit Plan - (28) (2,709) (2,104)
Exercise of Stock Options Previously Recognized (232) - (492) (414)
- -------------------------------------------------------------------------------------------------------
Contributed Surplus at End of Period 13,821 8,073 13,821 8,073
=======================================================================================================
Note 11. Income Tax
- -------------------------------------------------------------------------------------------------------
Three Months Ended June 30 Six Months Ended June 30
2007 2006 2007 2006
- -------------------------------------------------------------------------------------------------------
Current Income Tax Expense - (584) 17 (141)
Future Income Tax Expense (Recovery) 23,790 (24,948) 35,541 (35,331)
- -------------------------------------------------------------------------------------------------------
Income Tax Expense (Recovery) 23,790 (25,532) 35,558 (35,472)
- -------------------------------------------------------------------------------------------------------
The future income tax liability consists of:
June 30, 2007 December 31, 2006
- -------------------------------------------------------------------------------------------------------
Future Income Tax Assets
Unrealized Loss on Risk Management 21,760 19,375
Net Losses Carried Forward 5 2,908
Impairment of Long-lived Assets 674 686
Share Issue Costs 325 510
Future Income Tax Liabilities
Capital Assets in Excess of Tax Values (108,262) (79,824)
Unrealized Foreign Exchange Gain and Debt Issue Cost (22,804) (16,768)
- -------------------------------------------------------------------------------------------------------
Net Future Income Tax Liability (108,302) (73,113)
=======================================================================================================
The following table reconciles income taxes calculated at the Canadian statutory
rate of 32.12% (June 30, 2006 - 34.50%) with actual income taxes:
Three Months Ended June 30 Six Months Ended June 30
2007 2006 2007 2006
- -------------------------------------------------------------------------------------------------------
Net Earnings Before Income Taxes 111,270 (48,494) 154,672 (83,267)
Income Tax Expense at Statutory Rate 35,740 (16,341) 49,680 (28,727)
Effect of Tax Rate Changes and Timing of Use (4,265) (5,006) (5,290) (4,341)
Non-taxable Portion of Foreign Exchange Gain (9,123) (4,682) (10,141) (4,581)
Non-deductible Expenses 76 130 152 326
Resource Allowance - 26 - 3
Stock-based Compensation 657 693 457 1,757
Provision to Actual 705 232 683 232
Current Income Tax Expense (Recovery) - (584) 17 (141)
- -------------------------------------------------------------------------------------------------------
Income Tax Expense (Recovery) 23,790 (25,532) 35,558 (35,472)
=======================================================================================================
Note 12. Financial Instruments and Risk Management
- --------------------------------------------------------------------------------
The Corporation's financial instruments that are included in the Consolidated
Balance Sheet are comprised of cash and cash equivalents, accounts receivable,
risk management activities, accounts payables and accrued liabilities, option
premium liability and long-term borrowings.
a) Commodity-pricing Agreements
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. These 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.
The Corporation has put options at strike prices ranging from US$50.00 to
US$55.00 per barrel, averaging US$52.42 per barrel for the three year period
beginning January 1, 2007. The premiums for the purchased put options were
partially offset through the sale of call options at strike prices ranging from
US$90.00 to US$95.00 per barrel, averaging US$92.41 per barrel for the three
year period beginning January 1, 2007, resulting in a net premium liability.
Payment of the net premium liability is deferred until the settlement of the
option contracts between 2007 and 2009.
As at June 30, 2007, the Corporation had the following put and call options
outstanding:
2007 2008 2009
- -------------------------------------------------------------------------------------------------------
Barrels Per Day
Put Options Purchased 20,000 20,000 20,000
Call Options Sold 10,000 15,000 15,000
US$ 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. The counterparties to these
put and call options have investment grade credit ratings, thereby partially
mitigating the credit risk associated with these financial instruments. The
following table presents the reconciliation of the Risk Management Asset
(Liability):
Three Months Ended June 30 Six Months Ended June 30
2007 2006 2007 2006
- -------------------------------------------------------------------------------------------------------
Risk Management Asset at Beginning of Period 7,151 30,702 26,308 98,426
Unrealized Loss on Risk Management (6,438) (44,478) (25,595) (112,202)
- -------------------------------------------------------------------------------------------------------
Risk Management Asset (Liability) at End of Period 713 (13,776) 713 (13,776)
Less: Current Portion 1,654 (1,644) 1,654 (1,644)
- -------------------------------------------------------------------------------------------------------
(941) (12,132) (941) (12,132)
=======================================================================================================
The following table presents the net losses from risk management activities:
Three Months Ended June 30 Six Months Ended June 30
2007 2006 2007 2006
- -------------------------------------------------------------------------------------------------------
Realized Gain on Risk Management - - 120 -
Unrealized Loss on Risk Management (6,438) (44,478) (25,595) (112,202)
- -------------------------------------------------------------------------------------------------------
Risk Management Loss (6,438) (44,478) (25,475) (112,202)
=======================================================================================================
b) 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.
June 30, 2007 December 31, 2006
- ---------------------------------------------------------------------------------------------------
Balance Sheet Balance Sheet
Amount Fair Value Amount Fair Value
- ---------------------------------------------------------------------------------------------------
Floating Rate Debt
Revolving Credit 214,000 214,000 77,000 77,000
Lease Obligation 60,196 60,196 59,438 59,438
Fixed Rate Debt
US Senior Secured Notes 467,497 508,842 524,385 584,034
- ---------------------------------------------------------------------------------------------------
Long-term Borrowings 741,693 783,038 660,823 720,472
===================================================================================================
Note 13. Changes in Non-cash Working Capital
- -------------------------------------------------------------------------------------------------------
Three Months Ended June 30 Six Months Ended June 30
Source/(Use) 2007 2006 2007 2006
- -------------------------------------------------------------------------------------------------------
Operating Activities
Accounts Receivable (3,805) 21,975 1,787 47,660
Inventory 4,146 6,219 (3,043) (4,680)
Prepaid Expense 2,144 2,138 5,335 2,807
Accounts Payable and Accrued Liabilities (16,863) (13,262) (3,030) (15,349)
- -------------------------------------------------------------------------------------------------------
(14,378) 17,070 1,049 30,438
=======================================================================================================
Investing Activities
Accounts Payable and Accrued Liabilities 14,472 19,269 45,990 42,373
=======================================================================================================
CORPORATE INFORMATION
Officers
JAMES C. HOUCK
President and Chief Executive Officer
JOANNE L. ALEXANDER
Vice President and General Counsel
DAVID A. DYCK
Senior Vice President, Finance and Chief Financial Officer
STEVE D. L. REYNISH
Executive Vice President and Chief Operating Officer
Senior Management
JOHN FRANGOS
President, Western Oil Development Inc.
M. SIMON HATFIELD
Vice President and Managing Director, Oil & Gas
JACK D. JENKINS
Vice President, Corporate Planning & Human Resources
GERRY LUFT
Vice President, Downstream
RAY MORLEY
Vice President, Business Development
GRAIG RITCHIE
Vice President, Oil Sands
Directors
GUY J. TURCOTTE
Chairman of the Board,
Western Oil Sands Inc.
Calgary, Alberta
DAVID J. BOONE
President and Director,
Escavar Energy
Calgary, Alberta
FRED J. DYMENT
Independent Businessman
Calgary, Alberta
JAMES C. HOUCK
President and Chief Executive Officer,
Western Oil Sands Inc.
Calgary, Alberta
OYVIND HUSHOVD
Corporate Director
Kristiansand, Norway
JOHN W. LILL
Executive Vice President and Chief Operating Officer,
Dynatec Corporation
Richmond Hill, Ontario
RANDALL OLIPHANT
Chairman and Chief Executive Officer,
Rockcliff Group Limited
Toronto, Ontario
MAC H. VAN WIELINGEN
Co-Chairman,
ARC Financial Corporation
Calgary, Alberta
Head Office
Suite 2400, Ernst & Young Tower
440 - 2nd Avenue S.W.
Calgary, Alberta T2P 5E9
Phone: (403) 233-1700
Fax: (403) 234-9156
Website
www.westernoilsands.com
Auditors
PRICEWATERHOUSECOOPERS LLP
Calgary, Alberta
Legal Counsel
MACLEOD DIXON LLP
Calgary, Alberta
PAUL, WEISS, RIFKIND, WHARTON
& GARRISON LLP
Washington, D.C., USA
Independent Evaluators
GLJ PETROLEUM CONSULTANTS LTD.
Calgary, Alberta
NORWEST CORPORATION
Calgary, Alberta
Registrar and Transfer Agent
VALIANT TRUST COMPANY
Calgary, Alberta
Stock Exchange Listing
THE TORONTO STOCK EXCHANGE
Trading Symbol: WTO
Code of Conduct
Western's Code of Conduct is available on our website in the Governance section.