EXHIBIT 99.1
------------
INTERIM REPORT FOR THE THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2007
MANAGEMENT'S DISCUSSION & ANALYSIS
THE FOLLOWING DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS WAS
PREPARED AS OF NOVEMBER 13, 2007 AND SHOULD BE READ IN CONJUNCTION WITH THE
INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIODS ENDED
SEPTEMBER 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 MARATHON OIL CANADA
CORPORATION (FORMERLY 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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------- ----------- ----------- ------------
2007 2006 2007 2006
- -----------------------------------------------------------------------------------------------------------------
OPERATING DATA (BBLS/D)
Bitumen Production 30,472 32,836 31,163 24,799
Synthetic Crude Sales 36,027 43,746 38,928 34,540
Operating Expense per Processed Barrel ($/bbl) (1) 25.47 22.38 24.80 32.38
FINANCIAL DATA ($ THOUSANDS, EXCEPT AS INDICATED)
Net Revenue 199,051 206,247 565,630 441,128
Realized Crude Oil Sales Price ($/bbl) (1) (2) 69.28 67.42 63.94 62.92
Turnaround Costs - 5,261 - 34,899
Net Earnings (3)((6)) 64,954 84,531 184,068 40,169
Net Earnings Per Share - Basic ($/Share) 0.40 0.52 1.14 0.25
- Diluted ($/Share) 0.40 0.52 1.13 0.25
Net Capital Expenditures (4) 210,862 96,402 537,825 187,561
Long-term Financial Liabilities (5) 752,812 670,925 752,812 670,925
Weighted Average Shares Outstanding - Basic 162,241,607 161,084,823 161,796,377 160,928,037
(Shares)
- -----------------------------------------------------------------------------------------------------------------
(1) PLEASE REFER TO PAGE 9 FOR THE DISCUSSION OF NON-GAAP FINANCIAL MEASURES.
1
(2) REALIZED CRUDE OIL SALES PRICE ($/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 3 FOR THE
CALCULATION.
(3) WESTERN HAS NOT PAID DIVIDENDS IN ANY OF THE ABOVE REFERENCED PERIODS.
(4) NET CAPITAL EXPENDITURES ARE CAPITAL EXPENDITURES NET OF ANY INSURANCE
PROCEEDS RECEIVED DURING THE PERIOD.
(5) LONG-TERM FINANCIAL LIABILITIES INCLUDES LONG-TERM DEBT, OPTION PREMIUM
LIABILITY AND LEASE OBLIGATIONS.
(6) AMOUNTS RESTATED TO REFLECT CHANGES IN ACCOUNTING TREATMENT FOR STOCK
BASED COMPENSATION UNDER EIC-162.
On October 18, 2007, all of the Corporation's outstanding shares were acquired
by an indirect subsidiary of Marathon Oil Corporation ("Marathon") through a
plan of arrangement. Western shareholders received cash of $3.8 billion
Canadian dollars and 34.3 million shares of Marathon common stock or securities
exchangeable for Marathon common stock. Western's outstanding debt was
approximately US $1.1 billion at closing. Effective October 18, 2007, Western
changed its name to Marathon Oil Canada Corporation.
In addition, as part of the Plan of Arrangement, WesternZagros Resources
Limited ("WesternZagros") was created to carry on Western's business in the
Kurdistan region of Iraq. Western's shareholders received 1 share of the common
stock and 1/10 of a purchase share warrant in WesternZagros. Each full purchase
warrant allows a holder to subscribe for 1 additional share of WesternZagros
common stock at $2.50.
Trading in Western common stock on the Toronto Stock Exchange terminated as of
the close of trading on October 19, 2007. WesternZagros common stock and
warrants commenced trading on the TSX-Ventures Exchange on October 22, 2007.
OPERATING RESULTS
PRODUCTION
During the third quarter of 2007, Western's net bitumen production averaged
30,472 barrels per day, a 7 per cent decrease from the average 32,836 barrels
per day recorded in the third quarter of 2006. Production was impacted during
the quarter as a result of planned maintenance at the upgrader and unplanned
maintenance at the Mine with respect to coarse tailings.
[GRAPHIC OMITTED - BAR CHART]
QUARTERLY PRODUCTION VOLUMES
(thousands
of
bbls/d)
Q3, 2005 33.0
Q4, 2005 35.6
Q1, 2006 25.9
Q2, 2006* 15.5
Q3, 2006* 32.8
Q4, 2006 35.5
Q1, 2007 32.3
Q2, 2007 30.7
Q3, 2007 30.5
*Reduced volumes due to full AOSP turnaround
2
REVENUE
- --------------------------------------------------------------------------------------------------------------
NET REVENUE THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------ ------------- ------------ ------------
($ thousands, except as indicated) 2007 2006 2007 2006
- --------------------------------------------------------------------------------------------------------------
REVENUE
Oil Sands (1) 229,648 271,992 680,657 594,442
Marketing and Transportation 103,718 50,183 298,427 101,220
------------ ------------- ------------ ------------
Total Revenue 333,366 322,175 979,084 695,662
============ ============= ============ ============
PURCHASED FEEDSTOCKS AND TRANSPORTATION
Oil Sands 30,785 65,750 116,072 153,859
Marketing and Transportation 103,530 50,178 297,382 100,675
------------ ------------- ------------ ------------
Total Purchased Feedstocks and Transportation 134,315 115,928 413,454 254,534
============ ============= ============ ============
NET REVENUE
Oil Sands (1) 198,863 206,242 564,585 440,583
Marketing and Transportation 188 5 1,045 545
------------ ------------- ------------ ------------
Total Net Revenue 199,051 206,247 565,630 441,128
============ ============= ============ ============
SYNTHETIC CRUDE SALES (BBLS/D) 36,027 43,746 38,928 34,540
------------ ------------- ------------ ------------
REALIZED CRUDE OIL SALES PRICE ($/BBL) (2) 69.28 67.42 63.94 62.92
============ ============= ============ ============
- --------------------------------------------------------------------------------------------------------------
(1) OIL SANDS REVENUE AND NET REVENUE ARE PRESENTED NET OF WESTERN'S HEDGING
ACTIVITIES.
(2) REALIZED CRUDE OIL SALES PRICE ($/BBL) IS CALCULATED AS OIL SANDS REVENUE,
NET OF HEDGING ACTIVITIES, LESS ANY TRANSPORTATION COSTS DIVIDED BY TOTAL
SYNTHETIC CRUDE SALES FOR THE PERIOD. FOR THE THREE MONTHS ENDED SEPTEMBER
30, 2007, $0.03 MILLION (Q3-2006 -$0.7 MILLION) HAS BEEN INCURRED FOR
TRANSPORTATION COSTS RELATED TO OIL SANDS.
Western recorded crude oil sales revenue of $333.4 million in the third quarter
of 2007, including $229.6 million from the sale of proprietary production
compared to $322.2 million in the third quarter of 2006, which included $272.0
million from the sale of proprietary production. This 3 per cent increase
year-over-year is due to an increase in the average realized crude oil sales
price per barrel, partially offset by a decrease in sales volumes.
Synthetic crude oil sales volumes, which include bitumen and purchased
feedstocks, averaged 36,027 barrels per day in the third quarter of 2007
compared to 43,746 barrels per day in the third quarter of 2006. This decrease
is largely due to the decrease in bitumen production discussed above as well as
a decrease in feedstock purchases for the third quarter of 2007.
Western generated net revenue of $199.1 million in the third quarter of 2007,
after considering the impact of purchased feedstocks and transportation costs
downstream of Edmonton. By comparison, net revenue of $206.2 million was
recorded in the third quarter of 2006. Feedstocks are crude oil products
introduced into the hydrocracking/hydrotreating process and blendstocks
introduced into synthetic crude oil products. The cost of these feedstocks
varies with world oil markets and the spread between heavy and light crude oil
prices.
3
[GRAPHIC OMITTED - BAR CHART]
SALES PRICE REALIZATIONS
Realized Differential
Crude Hedging to
Oil Price Activities Edmonton PAR Total
-------------- ---------- ------------ --------
($ per BBL)
Q3, 2005 $58.79 $6.99 $11.26 $77.04
-----------------------------------------------------------------
Q4, 2005 $50.65 $5.70 $15.26 $71.61
-----------------------------------------------------------------
Q1, 2006 $55.31 $14.11 $69.42
-----------------------------------------------------------------
Q2, 2006 $66.48 $12.54 $79.02
-----------------------------------------------------------------
Q3, 2006 $67.42 $12.30 $79.72
-----------------------------------------------------------------
Q4, 2006 $55.08 $10.08 $65.16
-----------------------------------------------------------------
Q1, 2007 $58.49 $ 9.25 $67.74
-----------------------------------------------------------------
Q2, 2007 $64.79 $ 7.73 $72.52
-----------------------------------------------------------------
Q3, 2007 $69.28 $11.26 $80.54
-----------------------------------------------------------------
Western's blended realized synthetic crude oil sales price increased to $69.28
per barrel in the third quarter of 2007 compared to $67.42 per barrel in the
prior year period. This increase is predominately due to the increase in
underlying WTI prices. Edmonton PAR prices (above) increased 1 per cent in the
third quarter of 2007 compared to the third quarter of 2006. 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.
OPERATING COSTS
Western reported cash operating costs of $25.47 per processed barrel for the
third quarter of 2007 compared to $22.38 for the third quarter of 2006. Unit
operating costs in the quarter reflect the combined effect of reduced
production volumes relative to the third quarter of 2006 partially offset by
decreased natural gas prices. In addition, higher expenditures on contract
services for maintenance at the Mine and wage escalation also contributed to
higher operating costs during the quarter. Approximately 70 to 75 percent of
the operating cost structure is fixed for the AOSP, therefore, volume variances
account for significant fluctuations in reported unit costs.
4
- -----------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------- -------------- -------------- -------------
($ thousands, except as indicated) 2007 2006 2007 2006
=================================================================================================================
OPERATING EXPENSES FOR BITUMEN SOLD
Operating Expense - Income Statement 72,872 61,192 212,379 179,710
Operating Expense - Inventoried (2,985) 2,136 1,703 5,619
Turnaround Costs - Income Statement - 5,261 - 40,160
=============== ============== ============== =============
Total Operating Expenses For Bitumen Sold 69,887 68,589 214,082 225,489
=============== ============== ============== =============
SALES (BARRELS PER DAY)
Total Synthetic Crude Sales 36,027 43,746 38,928 34,540
Purchased Upgrader Blend Stocks 6,200 10,437 7,312 9,034
--------------- -------------- -------------- -------------
Synthetic Crude Sales Excluding Blend Stocks 29,827 33,309 31,616 25,506
=============== ============== ============== =============
OPERATING EXPENSES PER PROCESSED BARREL ($/BBL) (1) 25.47 22.38 24.80 32.38
- -----------------------------------------------------------------------------------------------------------------
(1) OPERATING EXPENSES PER PROCESSED BARREL ($/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 3 per cent uplift as a result of the
hydrotreating/hydroconversion process, which is included in synthetic crude
sales excluding blendstocks.
[GRAPHIC OMITTED - BAR CHART]
OPERATING EXPENSES PER PROCESSED BARREL
Other
Operating Natural Turnaround
Expense Gas Costs Total
--------- ------- ---------- -------
($ per BBL)
Q3, 2005 $15.44 $5.14 $20.58
--------------------------------------------------------------
Q4, 2005 $17.53 $5.91 $23.44
--------------------------------------------------------------
Q1, 2006 $21.09 $5.03 $26.12
--------------------------------------------------------------
Q2, 2006* $35.09 $4.35 $23.06 $62.50
--------------------------------------------------------------
Q3, 2006* $17.44 $3.23 $ 1.71 $22.38
--------------------------------------------------------------
Q4, 2006 $16.10 $4.02 $20.12
--------------------------------------------------------------
Q1, 2007 $19.27 $4.80 $24.07
--------------------------------------------------------------
Q2, 2007 $21.00 $3.92 $24.92
--------------------------------------------------------------
Q3, 2007 $22.51 $2.96 $25.47
--------------------------------------------------------------
* Operating costs per processed barrel impacted
by full plant turnaround
ROYALTIES
Royalties of $13.1 million were recorded in the third quarter of 2007 compared
to $1.5 million in the third quarter of 2006. Royalties were calculated at 1
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. In July 2007 full capital
cost recovery of the Muskeg River Mine was reached and therefore, the royalty
is now calculated as the greater of 1 per cent of the gross revenue on the
bitumen produced or 25 per cent of the annual net revenue on the bitumen
produced based on deemed bitumen prices.
5
On October 25, 2007, the Alberta government responded to the recommendations of
the Alberta Royalty Review Panel with changes to the Alberta royalty regime.
The royalty changes are to be effective January 1, 2009 and no grandfathering
of existing projects will be allowed. The new regime will change the current 1
per cent "pre-payout" royalty on oil sand projects to a sliding scale ranging
from 1 per cent at WTI prices at or below $55 per barrel and increasing to 9
per cent at a WTI price of $120 or higher. The royalty rate for "post-payout"
projects will also change from the current 25 per cent to a sliding scale
ranging from 25 per cent at WTI prices at or below $55 per barrel and
increasing to 40 per cent at a WTI price of $120 or higher.
The Alberta government has also indicated that a formula based approach will be
developed and adopted for the valuation of bitumen in all non-arm's length
transactions and the province has provided for an option to take their
royalties in-kind. Under the provincial income tax regime, Alberta has
eliminated the Accelerated Capital Cost Allowance (ACCA) under the same phase
out policy as released by the Federal government.
The Alberta Government has not yet proposed the detailed legislation to
implement its new royalty regime and several details need to be finalized to
understand the total impact to Western's business.
CORPORATE RESULTS
RESEARCH, BUSINESS DEVELOPMENT AND OTHER EXPENSE
Western incurred $11.6 million in research, business development and other
expenses in the third quarter of 2007, $4.8 million of which relates
specifically to AOSP-related research and development projects. The $11.6
million compares to $8.3 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 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 $13.9 million for the third
quarter of 2007, excluding expenses associated with our Kurdistan oil
opportunity and in-situ initiatives, compared to $5.9 million (restated for
EIC-162 treatment for stock-based compensation) for the third quarter of 2006.
G&A reported for the third quarter of 2006 was restated by $0.2 million for a
total restated stock-based compensation expense of $2.1 million with the
adoption of EIC 162. The increase in G&A over the prior period is due to
additional costs relating to the corporate transaction with Marathon. General
and administrative expenses that are directly related to our Kurdistan
opportunity and in-situ initiatives are reflected as Research and Business
Development, as explained above.
INSURANCE EXPENSE
Insurance expenses were $3.2 million in the third quarter of 2007 compared to
$2.6 million in the third quarter of 2006. Insurance expenses were higher than
the prior year period due to additional premiums associated with increased
levels of coverage, partially offset by the strengthening of the Canadian
dollar as the premiums are paid in US dollars.
INTEREST EXPENSE
During the third quarter of 2007, financing charges totaled $16.1 million, of
which interest expense represents $5.6 million and $10.5 million represents
capitalized interest relating to Expansion 1. Total financing charges
represents an 18 per cent increase from the $13.6 million incurred for
financing charges in the third quarter of 2006. This increase 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 Canadian dollar,
thereby reducing interest charges on our US dollar denominated Notes.
6
Financing charges for the three months ended September 30, 2007 are comprised
of $14.1 million (Q3-2006 - $11.9 million) related to interest charges on debt
obligations, $0.7 million (Q3-2006 - $0.7 million) on capital lease
obligations, $0.8 million (Q3-2006 - $0.9 million) on the option premium
liability and $0.5 million (Q3-2006 - 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.
DEPRECIATION, DEPLETION AND AMORTIZATION
Depreciation, depletion and amortization ("DD&A") totaled $13.0 million for the
third quarter of 2007 compared to $20.5 million in the third quarter of 2006.
Included in the $20.5 million is $6.6 million, representing Western's share of
certain AOSP capital initiatives designed to enhance the performance and
reliability of the upstream operations which the Joint Venture determined to
have no future economic benefit. As such these initiatives were expensed.
Incremental reserves associated with Expansion 1 will not be included in the
depreciation rate until the assets associated with this expansion commence
operations.
FOREIGN EXCHANGE
During the third quarter of 2007, Western reported a foreign exchange gain of
$29.5 million compared to a loss of $0.4 million in the third 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 exchange rate at the end of the
second quarter of 2007, and it results in a lower Canadian dollar equivalent
amount for Western's US$450 million Notes and deferred option premium
liability. For reference, the noon-day foreign exchange rate on September 30,
2007 was $1.0037 US/Cdn compared to $0.8966 US/Cdn on September 29, 2006. The
average rate for the third quarter of 2007 was $0.9573 US/Cdn compared to
$0.8921 US/Cdn for the prior year period.
RISK MANAGEMENT ACTIVITIES
Western paid $5.7 million in option premiums during the third quarter of 2007
associated with its strategic crude oil hedging program implemented in the fall
of 2005. In the third 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 Generally
Accepted Accounting Principles ("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 September 30, 2007, Western's risk management assets decreased in
value from the amount recorded as at September 30, 2006. This resulted in a
mark-to-market loss of $9.5 million ($9.7 million net of tax) for the third
quarter of 2007 primarily due to the strengthening in WTI prices during the
quarter partially offset with less time value associated with the options as
they approach maturity. This loss does not impact stated cash flow from
operations.
Three Months Ended Nine Months Ended
September 30 September 30
- ------------------------------------------------------------------------------------------------------------------
(Unaudited) ($ thousands) 2007 2006 2007 2006
- ------------------------------------------------------------------------------------------------------------------
Risk Management Asset - Beginning of Period 713 (13,776) 26,308 98,426
Decrease in Fair Value (9,482) 33,252 (35,077) (79,950)
- ------------------------------------------------------------------------------------------------------------------
Risk Management Asset (Liability) - End of Period (8,769) 19,476 (8,769) 19,476
Less: Current Portion(1) (1,964) 4,645 (1,964) 4,645
- ------------------------------------------------------------------------------------------------------------------
Risk Management Liability - Long-term Portion (6,805) 14,831 (6,805) 14,831
==================================================================================================================
(1) Current portion represents the fair value of the risk management program
that expires within the next 12 months.
7
INCOME TAXES
In the third quarter of 2007, Western recorded income tax expense of $20.4
million compared to income tax expense of $35.5 million during the same period
last year. The expense for the third quarter of 2007 was lower due to decreased
earnings compared to the prior period.
On October 30, 2007, the Federal Government announced a reduction in the
Federal tax rate from 22.12 per cent in 2007 to 15 per cent by 2012. Combined
with the Alberta tax rate, the combined income tax rate for Western will reduce
from 32.12 per cent in 2007 to 25 per cent by 2012. The motion passed first
reading by the House of Commons on October 31, 2007, however at the date of
this report, was not substantially enacted. It is anticipated that the tax rate
reduction will provide a future tax benefit to be booked upon substantial
enactment.
NET EARNINGS
During the third quarter of 2007, Western reported net earnings of $65.0
million ($0.40 per share) compared to net earnings of $84.5 million ($0.52 per
share) in the third quarter of 2006.
FINANCIAL POSITION
BANK DEBT
During the quarter, Western drew an additional $55.0 million on its credit
facilities, bringing the outstanding drawn balance to $269.0 million as at
September 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 September 30, 2007, the undrawn
capacity of the Credit Facility totaled $536.0 million, excluding amounts
allocated to letters of credit.
CAPITAL EXPENDITURES
Western's capital expenditures totaled $210.9 million in the third quarter of
2007 compared to $96.4 million for the comparable period in 2006. Capital
expenditures in the third quarter of 2007 included $8.9 million for base
operations, $1.0 million for sustaining capital, $175.9 million for expansion
related capital including capitalized interest, $11.7 million related to
Kurdistan, $4.1 million for Western's in-situ initiatives and $9.3 million for
other minor corporate expenditures. Corporate expenditures primarily relate to
capitalized legal costs associated with Western's Section IV insurance
arbitration proceedings (discussed below).
ANALYSIS OF CASH RESOURCES
Cash balances totaled $3.9 million at September 30, 2007 compared to $2.5
million at September 30, 2006. Cash inflows included: $72.1 million in cash
flow from operations, $55.0 million from Credit Facility drawdowns and $10.3
million from the exercise of employee stock options. Cash outflows included:
capital expenditures of $210.9 million and $0.3 million repayment of
obligations under capital lease.
INSURANCE CLAIMS
In September, formal arbitration proceedings commenced with respect to
Western's claim for Cost Overrun and Project Delay coverage in connection with
start-up of the Muskeg River Mine. This claim has been made pursuant to Section
IV "Non-Traditional Coverage" of its insurance policy. Amounts owing under all
Western's insurance claims total $244 million as of September 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
8
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 $19.5 million in 2002. Western has yet to be formally reassessed and
continues to work with the other Joint Venture Owners to seek resolution of
this potential challenge. If the CRA is successful in assessing a change in the
characterization of these expenditures, the resulting reduction would impact
Western's obligations under the indemnity provisions in the subscription
agreements for the flow-through shares and, in turn, would impact Western's
reported results.
BUSINESS AND FINANCIAL RISKS
Western is subject to a number of business and financial risks that are typical
given the nature of Western's operations. These risks are described in
Western's previous public disclosures, including the 2006 Annual Report and
Annual Information Form, which are available on the Company's website and
SEDAR.
NON-GAAP FINANCIAL MEASURES
Western includes certain per barrel information, such as realized crude oil
sales price, to provide per unit numbers that can be compared against industry
benchmarks, such as the Edmonton PAR benchmark. The additional information
should not be considered in isolation or as a substitute for measures of
operating performance prepared in accordance with Canadian GAAP. Non-GAAP
financial measures do not have any standardized meaning prescribed by Canadian
GAAP and are therefore unlikely to be comparable to similar measures presented
by other issuers.
CHANGES IN ACCOUNTING POLICIES
Except as described in Note 1 of the interim consolidated financial statements
for the three and nine months ended September 30, 2007, the same accounting
policies and methods of computation have been used as the 2006 Annual Report.
WESTERN OIL SANDS - Q3 2007
WESTERN OIL SANDS INTERIM Q3 2007 REPORT - 1
Consolidated Balance Sheets
AS AT SEPTEMBER 30 As at December 31
(Unaudited) ($ thousands) 2007 2006
- -----------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash 3,937 3,139
Accounts Receivable 96,042 110,039
Inventory 30,467 21,761
Prepaid Expense 3,967 12,443
Current Portion of Risk Management (NOTE 12) - 7,601
--------- ---------
134,413 154,983
--------- ---------
Property, Plant and Equipment (NOTE 2) 2,108,346 1,606,966
Risk Management (NOTE 12) - 18,707
Deferred Charges (NOTE 1) 3,241 13,503
--------- ---------
2,111,587 1,639,176
--------- ---------
2,246,000 1,794,159
--------- ---------
LIABILITIES
Current Liabilities
Accounts Payable and Accrued Liabilities 265,222 158,501
Current Portion of Lease Obligations (NOTE 4) 48,540 1,958
Current Portion of Risk Management (NOTE 12) 1,964 -
Current Portion of Option Premium Liability (NOTE 5) 28,882 24,966
--------- ---------
344,608 185,425
--------- ---------
Long-term Liabilities
Long-term Debt (NOTE 3) 707,537 601,385
Lease Obligations (NOTE 4) 12,044 57,480
Option Premium Liability (NOTE 5) 33,231 64,309
Risk Management (NOTE 12) 6,805 -
Asset Retirement Obligation (NOTE 6) 21,789 20,773
Future Income Tax (NOTE 11) 128,722 73,113
--------- ---------
910,128 817,060
--------- ---------
1,254,736 1,002,485
--------- ---------
SHAREHOLDERS' EQUITY
Share Capital (NOTE 8) 569,674 554,233
Contributed Surplus (NOTE 10) 13,716 12,890
Retained Earnings 407,874 224,551
--------- ---------
991,264 791,674
--------- ---------
2,246,000 1,794,159
--------- ---------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Operations and Retained Earnings
Three Months Ended Nine Months Ended
September 30 September 30
(Unaudited) ($ thousands, except amounts per share) 2007 2006 2007 2006
- -------------------------------------------------------------------------------------------------------------------
REVENUES 333,366 322,175 979,084 695,662
LESS PURCHASED FEEDSTOCKS AND TRANSPORTATION 134,315 115,928 413,454 254,534
--------------------- ----------------------
199,051 206,247 565,630 441,128
--------------------- ----------------------
EXPENSES
Royalties 13,100 1,536 15,444 2,894
Operating 72,872 66,453 212,379 219,870
Research, Business Development and Other 11,645 8,294 41,614 22,036
General and Administrative 13,921 5,877 26,026 16,663
Insurance 3,220 2,618 10,494 7,979
Interest (NOTE 7) 5,608 13,582 21,565 39,143
Accretion on Asset Retirement Obligation (NOTE 6) 339 155 1,016 466
Depreciation, Depletion and Amortization 13,015 20,470 38,777 37,836
--------------------- ----------------------
133,720 118,985 367,315 346,887
--------------------- ----------------------
EARNINGS BEFORE OTHER INCOME (EXPENSE)
AND INCOME TAXES 65,331 87,262 198,315 94,241
OTHER INCOME (EXPENSE)
Foreign Exchange Gain (Loss) 29,525 (441) 76,688 24,948
Risk Management Gain (Loss) (NOTE 12) (9,482) 33,252 (34,957) (78,950)
--------------------- ----------------------
EARNINGS BEFORE INCOME TAXES 85,374 120,073 240,046 40,239
Income Tax Expense (NOTE 11) 20,420 35,542 55,978 70
--------------------- ----------------------
NET EARNINGS 64,954 84,531 184,068 40,169
Retained Earnings at Beginning of Period 342,920 116,819 224,551 161,181
Settlement of Performance Share Unit Plan (NOTE 10) - - (745) -
--------------------- ----------------------
RETAINED EARNINGS AT END OF PERIOD 407,874 201,350 407,874 201,350
--------------------- ----------------------
NET EARNINGS PER SHARE (NOTE 9)
Basic 0.40 0.52 1.14 0.25
Diluted 0.40 0.52 1.13 0.25
--------------------- ----------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Cash Flows
Three Months Ended Nine Months Ended
September 30 September 30
(Unaudited) ($ thousands) 2007 2006 2007 2006
- -------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN)
CASH FROM OPERATING ACTIVITIES
Net Earnings 64,954 84,531 184,068 40,169
Non-cash Items:
Stock-based Compensation (NOTE 10) 2,072 1,972 6,204 5,656
Accretion on Asset Retirement Obligation (NOTE 6) 339 155 1,016 466
Depreciation, Depletion and Amortization 13,015 20,470 38,777 37,836
Amortization of Financing Charges (NOTE 3) 457 - 1,746 -
Interest Expense on Option Premium Liability (NOTE 5) 770 944 2,287 2,830
Unrealized Loss (Gain) on Risk Management (NOTE 12) 9,482 (33,252) 35,077 78,950
Unrealized Foreign Exchange (Gain) Loss (NOTE 3 AND 5) (33,717) 152 (85,634) (26,522)
Future Income Tax Expense (NOTE 11) 20,420 35,528 55,961 197
Cash Items:
Cash Settlement of Option Premium Liability (NOTE 5) (5,730) - (17,906) -
Cash Settlement of Asset Retirement Obligation (NOTE 6) - - - (91)
Cash Settlement of Performance Share Unit Plan (NOTE 10) - - (3,806) (2,104)
-------------------- --------------------
72,062 110,500 217,790 137,387
(Increase) Decrease in Non-cash Working Capital (NOTE 13) 42,595 (39,863) 43,644 (9,425)
-------------------- --------------------
114,657 70,637 261,434 127,962
-------------------- --------------------
Cash From (Used In) Financing Activities
Issue of Share Capital (NOTE 8) 10,258 83 12,772 2,664
Issue of Long-term Debt, Net (NOTE 3) 55,000 14,000 192,000 4,000
Deferred Charges (NOTE 4) - - (3,422) -
Repayment of Obligations Under Capital Lease (335) (334) (1,005) (1,006)
-------------------- --------------------
64,923 13,749 200,345 5,658
-------------------- --------------------
Cash Invested
Capital Expenditures (210,862) (96,402) (537,825) (187,561)
Decrease in Non-cash Working Capital (NOTE 13) 30,854 8,490 76,844 50,863
-------------------- --------------------
(180,008) (87,912) (460,981) (136,698)
-------------------- --------------------
(Decrease) Increase in Cash (428) (3,526) 798 (3,078)
Cash at Beginning of Period 4,365 6,038 3,139 5,590
-------------------- --------------------
Cash at End of Period 3,937 2,512 3,937 2,512
-------------------- --------------------
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 Note 1.
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.
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 nine month periods ended September 30, 2006 was
increased by $0.2 million and $3.6 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 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 nine month periods ended September 30,
2007, $0.5 million and $1.7 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 nine month periods ended
September 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 Shareholders' 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 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.
2. PROPERTY, PLANT AND EQUIPMENT
SEPTEMBER 30, 2007 COST ACCUM. DD&A* NET
- --------------------------------------------------------------------------------------------------------------------
ATHABASCA OIL SANDS PROJECT
Producing Assets 1,466,091 (191,030) 1,275,061
Capital Leases 52,705 (7,255) 45,450
Asset Retirement Obligation 18,246 (1,624) 16,622
Expansion 1 650,499 - 650,499
- --------------------------------------------------------------------------------------------------------------------
2,187,541 (199,909) 1,987,632
IN-SITU PROJECTS 55,968 - 55,968
KURDISTAN EXPLORATION PROJECT 49,997 - 49,997
CORPORATE 23,102 (8,353) 14,749
- --------------------------------------------------------------------------------------------------------------------
2,316,608 (208,262) 2,108,346
====================================================================================================================
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 September 30, 2007, costs not currently subject to depreciation, depletion
and amortization included $650.5 million (September 30, 2006 - $132.8 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 nine month periods ended September 30, 2007, the
Corporation capitalized $10.5 million and $24.2 million, respectively
(September 30, 2006 - $nil million) in interest costs relating to Expansion 1.
As at September 30, 2007, a total of $27.0 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 that are considered to be in the pre-production stage. Currently,
there are no proved reserves for these properties. All such costs, net of any
associated revenues, have been capitalized.
3. LONG-TERM DEBT
SEPTEMBER 30, 2007 December 31, 2006
- ----------------------------------------------------------------------------------------------------------
Senior Secured Notes
US$450 Million - 8.375%, Due May 1, 2012 (a) 438,537 524,385
Revolving Credit Facilities (b) 269,000 77,000
- ----------------------------------------------------------------------------------------------------------
707,537 601,385
==========================================================================================================
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, transaction costs of US$11.6 million were
reclassified against the Notes. As at September 30, 2007, transaction
costs were US$9.8 million, net of amortization. During the three and nine
month periods ended September 30, 2007, transaction costs of $0.5 million
and $1.7 million, respectively, have been recognized as interest expense
under the effective interest method.
For the three and nine month periods ended September 30, 2007, the
unrealized foreign exchange gain arising on the Notes was $25.8 million
and $70.5 million, respectively (September 30, 2006 - $0.1 million loss
and $22.8 million gain, respectively). As at September 30, 2007, a total
of $254.9 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 entered 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 US 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 September 30, 2007, $269.0 million was drawn on the Revolving Credit
Facility in Canadian dollars and letters of credit totaled $170 million in
Canadian dollars.
4. LEASE OBLIGATIONS
SEPTEMBER 30, 2007 December 31, 2006
- ---------------------------------------------------------------------------------------------------------
Obligations Under Capital Lease 47,923 48,928
Operating Lease Guarantee Obligation 12,661 10,510
- ---------------------------------------------------------------------------------------------------------
60,584 59,438
Less: Current Portion 48,540 1,958
- ---------------------------------------------------------------------------------------------------------
12,044 57,480
=========================================================================================================
The Obligations Under Capital Lease relate 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 September 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 nine month periods ended
September 30, 2007, no payments were made in regard to this obligation
(September 30, 2006 - nil and $0.6 million, respectively).
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 nine month periods ended
September 30, 2007, $5.7 million and $17.9 million, respectively, was paid in
respect to the settlement of the option contracts maturing during the period
(September 30, 2006 - nil). The remaining total net premiums payable by the
Corporation are US$5.5 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 nine month periods ended September 30, 2007 was
$0.8 million and $2.3 million, respectively (September 30, 2006 - $0.9 million
and $2.8 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 nine month periods ended September 30, 2007 was
$4.3 million and $11.5 million, respectively (September 30, 2006 - $0.02
million loss and $3.8 million gain, respectively).
The following table presents the reconciliation of the net Option Premium
Liability:
Three Months Ended Nine Months Ended
September 30 September 30
2007 2006 2007 2006
- ---------------------------------------------------------------------------------------------------------------------
Option Premium Liability at Beginning of Period 71,373 83,533 89,275 85,416
Interest Expense 770 944 2,287 2,830
Unrealized Foreign Exchange Gain (4,300) 17 (11,543) (3,752)
Settlement of Option Premium Liability (5,730) - (17,906) -
- ---------------------------------------------------------------------------------------------------------------------
Option Premium Liability at End of Period 62,113 84,494 62,113 84,494
Less: Current Portion 28,882 17,774 28,882 17,774
- ---------------------------------------------------------------------------------------------------------------------
33,231 66,720 33,231 66,720
=====================================================================================================================
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 Nine Months Ended
September 30 September 30
2007 2006 2007 2006
- ---------------------------------------------------------------------------------------------------------------------
Asset Retirement Obligation at Beginning of Period 21,450 9,314 20,773 9,094
Liabilities Settled - - - (91)
Accretion on Asset Retirement Obligation 339 155 1,016 466
- ---------------------------------------------------------------------------------------------------------------------
Asset Retirement Obligation at End of Period 21,789 9,469 21,789 9,469
=====================================================================================================================
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.
7. INTEREST EXPENSE
Three Months Ended Nine Months Ended
September 30 September 30
2007 2006 2007 2006
- ---------------------------------------------------------------------------------------------------------------------
Interest on Long-term Debt (1) 14,615 11,921 41,457 34,140
Interest on Obligations Under Capital Lease 695 717 2,005 2,173
Interest on Option Premium Liability 770 944 2,287 2,830
- ---------------------------------------------------------------------------------------------------------------------
Total Financing Charges 16,080 13,582 45,749 39,143
Less: Capitalized Interest for AOSP Expansion 1 10,472 - 24,184 -
- ---------------------------------------------------------------------------------------------------------------------
Interest Expense 5,608 13,582 21,565 39,143
=====================================================================================================================
(1) Interest on Long-term Debt includes amortization of transaction costs of
$0.5 million and $1.7 million, respectively, for the three and nine month
periods ended September 30, 2007 (September 30, 2006 - nil).
Cash interest paid for the three and nine month periods ended September 30,
2007 was $4.7 million and $31.9 million, respectively (September 30, 2006 -
$1.5 million and $25.6 million, respectively). Cash interest received for the
three and nine month periods ended September 30, 2007 was $0.1 million and $0.2
million (September 30, 2006 - $0.1 million and $0.2 million).
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 1,298,286 12,772
Exercise of Stock Options Previously Recognized - 2,669
- --------------------------------------------------------------------------------------------------------
TOTAL SHARE CAPITAL AT SEPTEMBER 30, 2007 162,676,685 569,674
========================================================================================================
OUTSTANDING
Stock Options 2,410,058
- --------------------------------------------------------------------------------------
DILUTED SHARES AT SEPTEMBER 30, 2007 165,086,743
======================================================================================
9. NET EARNINGS PER SHARE
Basic weighted average number of common shares for the three and nine month
periods ended September 30, 2007 was 162,241,607 and 161,796,377, respectively
(September 30, 2006 - 161,084,823 and 160,928,037). Diluted weighted average
number of shares for the three and nine month periods ended September 30, 2007
were 163,667,587 and 163,590,591, respectively (September 30, 2006 -
162,923,641 and 163,496,679).
10. STOCK-BASED COMPENSATION
(a) STOCK OPTION PLAN
Under the Corporation's Stock Option Plan, 20,000 options were granted during
the three month period ended September 30, 2007 at an average exercise price of
$36.60 per share (September 30, 2006 - 102,000 options at an average exercise
price of $26.80 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 Nine Months Ended
September 30 September 30
2007 2006 2007 2006
- -------------------------------------------------------------------------------------------------------
Granted 20,000 102,000 141,360 899,540
Weighted-average Fair Value $12.56 $11.92 $12.01 $15.52
Risk Free Interest Rate 4.40% 4.12% 4.28% 4.24%
Expected Life (In Years) 4 6 4-6 6
Expected Volatility 36% 34% 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 nine month periods ended September 30, 2007,
respectively (September 30, 2006 - 16,335 and 149,530 units, respectively).
During the three and nine month periods ended September 30, 2007, no units
vested and 109,557 units vested, respectively (September 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 expense 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 Nine Months Ended
September 30 September 30
2007 2006 2007 2006
- --------------------------------------------------------------------------------------------------------
Outstanding at Beginning of Period 243,433 230,052 237,670 160,128
Granted - 16,335 116,700 149,530
Exercised - - (109,557) (63,111)
Forfeited (370) (858) (1,750) (1,018)
- --------------------------------------------------------------------------------------------------------
Outstanding at End of Period 243,063 245,529 243,063 245,529
========================================================================================================
(c) DEFERRED SHARE UNIT PLAN
Under the Deferred Share Unit Plan ("DSUP"), for the three and nine month
periods ended September 30, 2007, the Corporation recognized $0.1 million and
$0.5 million, respectively, (September 30, 2006 - $0.04 million and $0.2
million, respectively) as compensation expense in General and Adminstrative
Expenses. No Deferred Share Units ("DSU") were redeemed for cash or shares of
the Corporation for the three and nine month periods ended September 30, 2007
(September 30, 2006 - nil). The Corporation had 27,292 DSUs outstanding at
September 30, 2007 (September 30, 2006 - 25,299). As at September 30, 2007, the
Corporation had $1.1 million recorded in Accounts Payable and Accrued
Liabilites associated with the DSUP.
(d) STOCK-BASED COMPENSATION
For the three and nine month periods ended September 30, 2007, the Corporation
recognized $2.1 million and $6.2 million, respectively, (September 30, 2006 -
$2.0 million and $5.7 million, respectively) in compensation expense related to
stock-based compensation in General and Administrative Expenses. For the three
month period ended September 30, 2007, the compensation expense was comprised
of $0.9 million (September 30, 2006 - $1.4 million) in respect to the
Corporation's stock option plan and $1.2 million (September 30, 2006 - $0.7
million) in respect to the Corporation's Performance Share Unit Plan. For the
nine month period ended September 30, 2007, the compensation expense is
comprised of $2.5 million (September 30, 2006 - $3.8 million) in respect to the
Corporation's Stock Option Plan and $3.7 million (September 30, 2006 - $2.4
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 Nine Months Ended
September 30 September 30
2007 2006 2007 2006
- -------------------------------------------------------------------------------------------------------
Contributed Surplus at Beginning of Period 13,821 4,640 12,890 3,474
Stock-based Compensation Expense 2,072 1,972 6,204 5,656
Settlement of Performance Share Unit Plan - - (2,709) (2,104)
Exercise of Stock Options Previously Recognized (2,177) - (2,669) (414)
- -------------------------------------------------------------------------------------------------------
Contributed Surplus at End of Period 13,716 6,612 13,716 6,612
=======================================================================================================
11. INCOME TAX
Three Months Ended Nine Months Ended
September 30 September 30
2007 2006 2007 2006
- -------------------------------------------------------------------------------------------------------
Current Income Tax Expense (Recovery) - 14 17 (127)
Future Income Tax Expense 20,420 35,528 55,961 197
- -------------------------------------------------------------------------------------------------------
INCOME TAX EXPENSE 20,420 35,542 55,978 70
=======================================================================================================
The future income tax liability consists of:
SEPTEMBER 30, 2007 December 31, 2006
- ---------------------------------------------------------------------------------------------------------
Future Income Tax Assets
Unrealized Loss on Risk Management 21,568 19,375
Net Losses Carried Forward 5 2,908
Impairment of Long-lived Assets 674 686
Share Issue Costs 242 510
Future Income Tax Liabilities
Capital Assets in Excess of Tax Values (124,942) (79,824)
Unrealized Foreign Exchange Gain and Debt Issue Cost (26,269) (16,768)
- ---------------------------------------------------------------------------------------------------------
NET FUTURE INCOME TAX LIABILITY (128,722) (73,113)
=========================================================================================================
The following table reconciles income taxes calculated at the Canadian
statutory rate of 32.12% (September 30, 2006 - 34.50%) with actual income
taxes:
Three Months Ended Nine Months Ended
September 30 September 30
2007 2006 2007 2006
- ----------------------------------------------------------------------------------------------------------
Net Earnings Before Income Taxes 85,374 120,073 240,046 40,239
Income Tax Expense at Statutory Rate 27,422 41,425 77,102 13,882
Effect of Tax Rate Changes and Timing of Use (2,941) (6,186) (8,230) (10,527)
Non-taxable Portion of Foreign Exchange Gain (2,455) 40 (12,597) (4,541)
Non-deductible Expenses 76 - 228 326
Resource Allowance - 98 - 101
Stock-based Compensation 665 653 1,122 1,226
Provision to Actual (2,347) (502) (1,664) (270)
Current Income Tax Expense (Recovery) - 14 17 (127)
- ----------------------------------------------------------------------------------------------------------
INCOME TAX EXPENSE (RECOVERY) 20,420 35,542 55,978 70
==========================================================================================================
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$92.41 per barrel for the three
year period beginning January 1, 2007, resulting in a net premium liability.
Payment of the net premium liability is deferred until the settlement of the
option contracts between 2007 and 2009.
As at September 30, 2007, the Corporation had the following put and call
options outstanding:
2007 2008 2009
- ------------------------------------------------------------------------------------------------------------
Barrels Per Day
Put Options Purchased 20,000 20,000 20,000
Call Options Sold 10,000 15,000 15,000
US$ 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 Nine Months Ended
September 30 September 30
2007 2006 2007 2006
- ------------------------------------------------------------------------------------------------------------
Risk Management Asset (Liability) at Beginning of 713 26,308
Period (13,776) 98,426
Unrealized Gain (Loss) on Risk Management (9,482) 33,252 (35,077) (78,950)
- ------------------------------------------------------------------------------------------------------------
Risk Management Asset (Liability) at End of Period (8,769) 19,476 (8,769) 19,476
Less: Current Portion (1,964) 4,645 (1,964) 4,645
- ------------------------------------------------------------------------------------------------------------
(6,805) 14,831 (6,805) 14,831
============================================================================================================
The following table presents the net losses from risk management activities:
Three Months Ended Nine Months Ended
September 30 September 30
2007 2006 2007 2006
- ------------------------------------------------------------------------------------------------------------
Realized Gain on Risk Management - - 120 -
Unrealized Gain (Loss) on Risk Management (9,482) 33,252 (35,077) (78,950)
- ------------------------------------------------------------------------------------------------------------
Risk Management Loss (9,482) 33,252 (34,957) (78,950)
============================================================================================================
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.
SEPTEMBER 30, 2007 December 31, 2006
- ----------------------------------------------------------------------------------------------------------
Balance Sheet Balance Sheet
Amount Fair Value Amount Fair Value
- -----------------------------------------------------------------------------------------------------------
Floating Rate Debt
Revolving Credit 269,000 269,000 77,000 77,000
Lease Obligation 60,584 60,584 59,438 59,438
Fixed Rate Debt
US Senior Secured Notes 438,537 491,671 524,385 584,034
- -----------------------------------------------------------------------------------------------------------
Long-term Borrowings 768,121 821,255 660,823 720,472
===========================================================================================================
13. CHANGES IN NON-CASH WORKING CAPITAL
Three Months Ended Nine Months Ended
September 30 September 30
2007 2006 2007 2006
- ------------------------------------------------------------------------------------------------------------
Source/(Use)
OPERATING ACTIVITIES
Accounts Receivable 12,210 (49,618) 13,997 (1,958)
Inventory (5,663) 2,306 (8,706) (2,374)
Prepaid Expense 3,141 3,156 8,476 5,963
Accounts Payable and Accrued Liabilities 32,907 4,293 29,877 (11,056)
- ------------------------------------------------------------------------------------------------------------
42,595 (39,863) 43,644 (9,425)
- ------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Accounts Payable and Accrued Liabilities 30,854 8,490 76,844 50,863
============================================================================================================
14. SUBSEQUENT EVENT
On October 18, 2007, all of the Corporation's outstanding shares were acquired
by an indirect subsidiary of Marathon Oil Corporation ("Marathon") through a
plan of arrangement. Western shareholders received cash of $3.8 billion
Canadian dollars and 34.3 million shares of Marathon common stock or securities
exchangeable for Marathon common stock. Western's outstanding debt was
approximately US $1.1 billion at closing. Effective October 18, 2007, Western
changed its name to Marathon Oil Canada Corporation.
In addition, as part of the Plan of Arrangement, WesternZagros Resources
Limited ("WesternZagros") was created to carry on Western's business in the
Kurdistan region of Iraq. Western's shareholders received 1 share of the common
stock and 1/10 of a purchase share warrant in WesternZagros. Each full purchase
warrant allows a holder to subscribe for 1 additional share of WesternZagros
common stock at $2.50.
Trading in Western common stock on the Toronto Stock Exchange terminated as of
the close of trading on October 19, 2007. WesternZagros common stock and
warrants commenced trading on the TSX-Ventures Exchange on October 22, 2007.