IMPERIAL OIL LTD - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

x Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2003

o Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission file number 0-12014

Imperial Oil Limited

(Exact name of registrant as specified in its charter)


Canada (State or other jurisdiction of incorporation or organization)		98-0017682 (I.R.S. Employer Identification No.)

111 St. Clair Avenue West, Toronto, Ontario, Canada (Address of principal executive offices)		M5W 1K3 (Postal Code)

Registrant’s telephone number, including area code: 1-800-567-3776

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.


YES þ		NO o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).


YES þ		NO o

The number of common shares outstanding, as of September 30, 2003, was 367,920,688.

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INDEX


			PAGE

PART I — Financial Information

	Financial Statements:

		Consolidated Statement of Earnings — Three months ended September 30, 2003 and 2002 Nine months ended September 30, 2003 and 2002		3

		Consolidated Statement of Retained Earnings — Three months ended September 30, 2003 and 2002 Nine months ended September 30, 2003 and 2002		3

		Consolidated Statement of Cash Flows — Three months ended September 30, 2003 and 2002 Nine months ended September 30, 2003 and 2002		4

		Consolidated Balance Sheet — As at September 30, 2003 and December 31, 2002		5

		Notes to the Consolidated Financial Statements		6

	Management’s Discussion and Analysis of Financial Condition and Results of Operations			14

	Quantitative and Qualitative Disclosures about Market Risk			17

	Controls and Procedures			17

PART II — Other Information				18

SIGNATURES				18

In this report all dollar amounts are expressed in Canadian dollars. This report should be read in conjunction with the company’s Annual Report on Form 10-K for the year ended December 31, 2002, and Form 10-Q for the quarters ended March 31, 2003 and June 30, 2003.

Statements in this report regarding future events or conditions are forward-looking statements. Actual results could differ materially due to the impact of market conditions, changes in law or governmental policy, changes in operating conditions and costs, changes in project schedules, operating performance, demand for oil and gas, commercial negotiations or other technical and economic factors.

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

IMPERIAL OIL LIMITED
CONSOLIDATED STATEMENT OF EARNINGS
(unaudited)


						Nine months
		Third quarter				to September 30

millions of dollars		2003		2002		2003			2002

REVENUES
	Operating revenues		4,602		4,456		14,526			12,112
	Investment and other income		24		76		88			100

TOTAL REVENUES (2)			4,626		4,532		14,614			12,212

EXPENSES
	Exploration		33		5		44			20
	Purchases of crude oil and products		2,714		2,659		8,791			7,276
	Operating		483		447		1,508			1,409
	Selling and general		308		291		921			912
	Federal excise tax		328		327		942			924
	Depreciation and depletion		185		185		542			528
	Financing costs (4)		15		56		(99	)		28

TOTAL EXPENSES			4,066		3,970		12,649			11,097

EARNINGS BEFORE INCOME TAXES			560		562		1,965			1,115
INCOME TAXES			185		215		538			348

NET EARNINGS (2)			375		347		1,427			767

PER-SHARE INFORMATION — dollars
	Net earnings — basic and diluted (8)		1.01		0.91		3.81			2.02
	Dividends		0.22		0.21		0.65			0.63

IMPERIAL OIL LIMITED
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
(unaudited)


								Nine months
		Third quarter						to September 30

millions of dollars		2003			2002			2003			2002

RETAINED EARNINGS AT BEGINNING OF PERIOD			3,890			2,632			3,277			2,382
	Net earnings for the period		375			347			1,427			767
	Share purchases (8)		(187	)		—			(464	)		(11	)
	Dividends		(81	)		(79	)		(243	)		(238	)

RETAINED EARNINGS AT END OF PERIOD			3,997			2,900			3,997			2,900

The notes to the financial statements are part of these financial statements.

Certain figures for the prior year have been reclassified in the financial statements to conform with the current year’s presentation.

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IMPERIAL OIL LIMITED
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)


								Nine months
		Third quarter						to September 30
inflow/(outflow)
millions of dollars		2003			2002			2003			2002

OPERATING ACTIVITIES
	Net earnings		375			347			1,427			767
	Depreciation and depletion		185			185			542			528
	(Gain)/loss on asset sales, after tax		—			—			1			(3	)
	Future income taxes and other		(5	)		(32	)		(247	)		(237	)

	Cash flow from earnings		555			500			1,723			1,055
	Accounts receivable		55			(59	)		75			(229	)
	Inventories and prepaids		62			(24	)		(199	)		(201	)
	Income taxes payable		67			184			188			(255	)
	Accounts payable and other		(254	)		(264	)		70			368

	Change in operating assets and liabilities		(70	)		(163	)		134			(317	)

CASH FROM OPERATING ACTIVITIES			485			337			1,857			738

INVESTING ACTIVITIES
	Additions to property, plant and equipment		(324	)		(386	)		(1,049	)		(995	)
	Proceeds from asset sales		16			6			38			50

CASH FROM (USED IN) INVESTING ACTIVITIES			(308	)		(380	)		(1,011	)		(945	)

CASH FLOW BEFORE FINANCING ACTIVITIES			177			(43	)		846			(207	)
FINANCING ACTIVITIES
	Short-term debt — net		—			—			—			(460	)
	Long-term debt issued (7)		272			—			818			500
	Repayment of long-term debt (7)		(272	)		—			(818	)		—
	Common shares purchased (8)		(207	)		—			(519	)		(13	)
	Dividends paid		(82	)		(79	)		(241	)		(239	)

CASH FROM (USED IN) FINANCING ACTIVITIES			(289	)		(79	)		(760	)		(212	)

INCREASE (DECREASE) IN CASH			(112	)		(122	)		86			(419	)
CASH AT BEGINNING OF PERIOD			964			575			766			872

CASH AT END OF PERIOD			852			453			852			453

The notes to the financial statements are part of these financial statements.

Certain figures for the prior year have been reclassified in the financial statements to conform with the current year’s presentation.

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IMPERIAL OIL LIMITED
CONSOLIDATED BALANCE SHEET
(unaudited)


		As at			As at
		Sept. 30			Dec. 31
millions of dollars		2003			2002

ASSETS
Current assets
	Cash		852			766
	Accounts receivable		1,273			1,348
	Inventories of crude oil and products		602			433
	Materials, supplies and prepaid expenses		140			110
	Future income tax assets		313			323

Total current assets			3,180			2,980
Investments and other long-term assets			93			134
Property, plant and equipment at cost			19,049			18,105
	less accumulated depreciation and depletion		(9,998	)		(9,553	)

Property, plant and equipment, net			9,051			8,552
Goodwill			204			204
Other intangible assets			21			24

TOTAL ASSETS			12,549			11,894

LIABILITIES
Current liabilities
	Short-term debt		72			72
	Accounts payable and accrued liabilities		2,167			2,114
	Income taxes payable		745			557
	Current portion of long-term debt		501			—

Total current liabilities			3,485			2,743
Long-term debt (7)			849			1,466
Other long-term obligations (5)			1,195			1,207
Future income tax liabilities			1,139			1,262

TOTAL LIABILITIES			6,668			6,678
SHAREHOLDERS’ EQUITY
	Common shares (8)		1,884			1,939
	Earnings retained and used in the business		3,997			3,277

TOTAL SHAREHOLDERS’ EQUITY			5,881			5,216

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY			12,549			11,894

The notes to the financial statements are part of these financial statements.

Certain figures for the prior year have been reclassified in the financial statements to conform with the current year’s presentation.

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IMPERIAL OIL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

In the opinion of the management, the accompanying unaudited consolidated financial statements reflect all known accruals and adjustments necessary for a fair presentation of the financial position of the company as at September 30, 2003, and December 31, 2002, and the results of operations and changes in cash flows for the nine months ending September 30, 2003, and 2002. All such adjustments are of a normal recurring nature.

The results for the nine months ending September 30, 2003, are not necessarily indicative of the operations to be expected for the full year.

All figures are in millions of Canadian dollars unless otherwise stated.

1. Adjustments under United States GAAP

The financial statements of the company have been prepared in accordance with generally accepted accounting principles (GAAP) in Canada. These principles conform in all material respects to those in the United States except for the following.


							Nine months
		Third quarter					to September 30

millions of dollars		2003		2002			2003			2002

Earnings as shown in financial statements (2)(a)			375		347			1,427			767
Impact of U.S. accounting principles (b)
	Capitalized interest		5		—			12			(2	)
	Enacted tax rate difference		—		(2	)		(59	)		(22	)
	Restatement to reflect accounting change (c)		—		(3	)		—			(11	)

Net earnings under U.S. GAAP before cumulative effect of accounting change (a)			380		342			1,380			732
Cumulative effect of accounting change (a)(c)			—		—			4			—

Net earnings under U.S. GAAP (a)			380		342			1,384			732
Other comprehensive income, net of tax (b):
	Minimum pension liability adjustment		—		—			—			—

Comprehensive income under U.S. GAAP			380		342			1,384			732

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IMPERIAL OIL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. Adjustments under United States GAAP (continued)

The adjustments, on the previous page, under United States GAAP result in changes to the Consolidated Balance Sheet of the company as follows.


		As at						As at
		September 30, 2003						December 31, 2002

		As			U.S.			As			U.S.
millions of dollars		Reported			GAAP			Reported			GAAP

Current assets			2,867			2,867			2,657			2,657
Future income tax assets			313			519			323			530
Investments and other long-term assets			93			93			134			134
Property, plant and equipment — cost			19,049			19,183			18,105			18,157
Property, plant and equipment — accumulated depreciation and depletion			(9,998	)		(10,093	)		(9,553	)		(9,610	)
Goodwill			204			204			204			204
Other intangible assets — cost			53			167			54			168
Other intangible assets — accumulated depreciation and depletion			(32	)		(32	)		(30	)		(30	)

TOTAL ASSETS			12,549			12,908			11,894			12,210

Current liabilities			3,485			3,487			2,743			2,743
Long-term debt			849			849			1,466			1,466
Other long-term obligations			1,195			1,830			1,207			1,823
Future income tax liabilities			1,139			1,209			1,262			1,267
Shareholders’ equity			5,881			5,533			5,216			4,911

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY			12,549			12,908			11,894			12,210

Shareholders’ Equity:
Common shares at stated value
	At beginning		1,939			1,939			1,941			1,941
	Share purchases at stated value		(55	)		(55	)		(2	)		(2	)

	At end		1,884			1,884			1,939			1,939

Retained earnings
	At beginning		3,277			3,287			2,396			2,402
	Net earnings for the period		1,427			1,384			1,210			1,214
	Share purchases in excess of stated value		(464	)		(464	)		(11	)		(11	)
	Dividends		(243	)		(243	)		(318	)		(318	)

	At end		3,997			3,964			3,277			3,287

Accumulated other comprehensive income
	At beginning		—			(315	)		—			(77	)
	Other comprehensive income for the period		—			—			—			(238	)

	At end		—			(315	)		—			(315	)

Total shareholders’ equity			5,881			5,533			5,216			4,911

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IMPERIAL OIL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. Adjustments under United States GAAP (continued)

(a) Earnings per share — basic and diluted (dollars)


						Nine months
		Third quarter				to September 30

		2003		2002		2003		2002

Under accounting principles of
Canada			1.01		0.91		3.81		2.02
United States
	Earnings before cumulative effect of accounting change		1.03		0.90		3.69		1.93
	Cumulative effect of accounting change		—		—		0.01		—

	Net earnings		1.03		0.90		3.70		1.93

	Weighted average number of common shares outstanding (thousands of shares)		370,459		378,863		374,168		378,880

(b) Impact of accounting principles

An explanation of these items is found on pages 17 to 20 of the company’s annual report on Form 10-K for the year ended December 31, 2002.

As of January 1, 2003, the company adopted Financial Accounting Standards Board (FASB) Statements of Financial Accounting Standards No. 143 (SFAS No. 143), “Accounting for Asset Retirement Obligations”. The Canadian Institute of Chartered Accountants (CICA) adopted a similar standard that harmonizes Canadian GAAP with U.S. GAAP. Disclosures required by the new U.S. and Canadian accounting standards are described in note 3.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure — an amendment of FASB Statement No. 123”. The standard provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock based employee compensation. It also requires more prominent disclosures in the financial statements about the method of accounting for stock based employee compensation and the effect of the method used in reported results. Effective January 1, 2003, the company adopted for all stock based compensation granted after that date the fair value based recognition provisions as prescribed by SFAS No. 123 “Accounting for Stock Based Compensation” and complied with the disclosure requirements under SFAS No. 148. The company has not issued any new stock based employee compensation to its employees in the first nine months of 2003.

(d) The company makes limited use of derivatives. There were no significant derivatives outstanding at January 1 or September 30, 2003, nor were any significant derivatives undertaken during the first nine months of 2003.

- 8 -

IMPERIAL OIL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

2. Business segments


		Resources				Products				Chemicals
Third quarter
millions of dollars		2003		2002		2003		2002		2003		2002

REVENUES
	Operating revenues (a)		796		648		3,576		3,556		230		252
	Intersegment sales (b)		552		647		288		273		55		54
	Investment and other income		3		68		14		6		—		—

TOTAL REVENUES			1,351		1,363		3,878		3,835		285		306

EXPENSES
	Exploration (c)		33		5		—		—		—		—
	Purchases (b)		525		438		2,874		2,986		207		209
	Operating (b)		269		237		185		182		32		28
	Selling and general		7		2		272		260		29		28
	Federal excise tax		—		—		328		327		—		—
	Depreciation and depletion		129		131		51		48		5		6
	Financing costs		—		—		1		—		—		—

TOTAL EXPENSES			963		813		3,711		3,803		273		271

EARNINGS BEFORE INCOME TAXES			388		550		167		32		12		35
INCOME TAXES			131		204		52		11		4		13

NET EARNINGS			257		346		115		21		8		22

EXPORT SALES TO THE UNITED STATES			337		246		185		152		134		137
CASH FLOW FROM EARNINGS			364		442		186		38		13		25
CAPEX (c)			250		242		102		136		9		13


		Corporate						Consolidated
Third quarter
millions of dollars		2003			2002			2003		2002

REVENUES
	Operating revenues (a)		—			—			4,602		4,456
	Intersegment sales (b)		—			—			—		—
	Investment and other income		7			2			24		76

TOTAL REVENUES			7			2			4,626		4,532

EXPENSES
	Exploration (c)		—			—			33		5
	Purchases (b)		—			—			2,714		2,659
	Operating (b)		—			—			483		447
	Selling and general		—			1			308		291
	Federal excise tax		—			—			328		327
	Depreciation and depletion		—			—			185		185
	Financing costs		14			56			15		56

TOTAL EXPENSES			14			57			4,066		3,970

EARNINGS BEFORE INCOME TAXES			(7	)		(55	)		560		562
INCOME TAXES			(2	)		(13	)		185		215

NET EARNINGS			(5	)		(42	)		375		347

EXPORT SALES TO THE UNITED STATES			—			—			656		535
CASH FLOW FROM EARNINGS			(8	)		(5	)		555		500
CAPEX (c)			—			—			361		391

(a)		Includes crude sales made by Products in order to optimize refining operations.

(b)		Consolidated amounts exclude intersegment transactions, as follows:


	2003		2002

Purchases		892		974
Operating expense		3		—

Total intersegment sales		895		974

(c) Capital and exploration expenditures (CAPEX) include exploration expenses, additions to property, plant and equipment and additions to capital leases.

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IMPERIAL OIL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

2. Business segments (continued)


		Resources				Products					Chemicals
Nine months to September 30
millions of dollars		2003		2002		2003		2002			2003		2002

REVENUES
	Operating revenues (a)		2,592		1,788		11,177		9,608			757		716
	Intersegment sales (b)		1,760		1,626		993		744			182		152
	Investment and other income		34		73		33		18			—		—

TOTAL REVENUES			4,386		3,487		12,203		10,370			939		868

EXPENSES
	Exploration (c)		44		20		—		—			—		—
	Purchases (b)		1,838		1,254		9,170		7,929			708		614
	Operating (b)		831		765		592		559			95		86
	Selling and general		16		9		818		810			87		85
	Federal excise tax		—		—		942		924			—		—
	Depreciation and depletion		370		358		154		153			18		17
	Financing costs		1		1		1		1			—		—

TOTAL EXPENSES			3,100		2,407		11,677		10,376			908		802

EARNINGS BEFORE INCOME TAXES			1,286		1,080		526		(6	)		31		66
INCOME TAXES			339		339		170		(5	)		10		24

NET EARNINGS			947		741		356		(1	)		21		42

EXPORT SALES TO THE UNITED STATES			994		651		591		470			429		386
CASH FLOW FROM EARNINGS			1,175		985		541		35			30		54
CAPEX (c)			709		649		366		349			30		17
TOTAL ASSETS AS AT Sept. 30 (b)			6,212		5,788		5,361		5,039			415		396
CAPITAL EMPLOYED AS AT Sept. 30			3,562		3,230		2,707		2,472			193		178


		Corporate						Consolidated
Nine months to September 30
millions of dollars		2003			2002			2003			2002

REVENUES
	Operating revenues (a)		—			—			14,526			12,112
	Intersegment sales (b)		—			—			—			—
	Investment and other income		21			9			88			100

TOTAL REVENUES			21			9			14,614			12,212

EXPENSES
	Exploration (c)		—			—			44			20
	Purchases (b)		—			—			8,791			7,276
	Operating (b)		—			—			1,508			1,409
	Selling and general		—			8			921			912
	Federal excise tax		—			—			942			924
	Depreciation and depletion		—			—			542			528
	Financing costs		(101	)		26			(99	)		28

TOTAL EXPENSES			(101	)		34			12,649			11,097

EARNINGS BEFORE INCOME TAXES			122			(25	)		1,965			1,115
INCOME TAXES			19			(10	)		538			348

NET EARNINGS			103			(15	)		1,427			767

EXPORT SALES TO THE UNITED STATES			—			—			2,014			1,507
CASH FLOW FROM EARNINGS			(23	)		(19	)		1,723			1,055
CAPEX (c)			—			—			1,105			1,015
TOTAL ASSETS AS AT Sept. 30 (b)			852			453			12,549			11,341
CAPITAL EMPLOYED AS AT Sept. 30			899			500			7,361			6,380

(a)		Includes crude sales made by Products in order to optimize refining operations.

(b)		Consolidated amounts exclude intersegment transactions, as follows:


	2003		2002

Purchases		2,925		2,521
Operating expense		10		1

Total intersegment sales		2,935		2,522

Intersegment receivables and payables		291		335

(c) Capital and exploration expenditures (CAPEX) include exploration expenses, additions to property, plant and equipment and additions to capital leases.

- 10 -

IMPERIAL OIL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

3. Reporting change

The new CICA standard dealing with accounting for asset retirement obligations changes the method of accruing for certain site-restoration costs. Under the new standard, the fair values of asset retirement obligations are recorded as liabilities on a discounted basis when they are incurred, which is typically at the time the related assets are installed. Amounts recorded for the related assets are increased by the amount of these obligations. Over time the liabilities will be accreted for the change in their present value and the initial capitalized costs will be depreciated over the useful lives of the related assets. There are no asset retirement liabilities set up for those assets which have an indeterminate useful life.

Estimated cash flows have been discounted at six percent. Implementation of the new standard has reduced site-restoration liabilities by $16 million to $488 million as of September 30, 2003. The total undiscounted amount of the estimated cash flows required to settle the obligations is $895 million. Payments to settle the obligations occur on an ongoing basis and will continue over the lives of the operating assets, which can exceed more than 25 years. This change in accounting standard has no impact on the cash flow profile of the company. The new standard has been applied retroactively, and the financial statements of prior periods have been restated.

The impact of adopting the new accounting for asset retirement obligations standard on the consolidated balance sheet and statement of earnings is:

Change in consolidated balance sheet


	As at Sept. 30

millions of dollars - increase/(decrease)	2003			2002

Property, plant and equipment		24			18

Total assets		24			18

Other long-term obligations		(16	)		16
Future income tax liabilities		13			1
Retained earnings		27			1

Total liabilities and shareholders’ equity		24			18

Change in consolidated statement of earnings


							Nine months
	Third quarter						to September 30

millions of dollars - increase/(decrease)	2003			2002			2003			2002

Operating expense		(12	)		(6	)		(36	)		(19	)
Depreciation and depletion expense		1			1			2			2

Total expenses		(11	)		(5	)		(34	)		(17	)
Income taxes		4			2			11			6

Net earnings		7			3			23			11

Earnings per share — basic and diluted (dollars)		0.02			0.01			0.06			0.03

4. Financing costs


					Nine months
	Third quarter				to September 30

millions of dollars	2003		2002		2003			2002

Debt related interest		11		10		27			29
Other interest		1		—		3			2

Total interest expense		12		10		30			31
Foreign exchange expense (gain) on long-term debt		3		46		(129	)		(3	)

Total financing costs		15		56		(99	)		28

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IMPERIAL OIL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

5. Other long-term obligations


	As at		As at
	Sept. 30		Dec. 31
millions of dollars	2003		2002

Employee retirement benefits		683		671
Site restoration (a)		438		454
Other obligations		74		82

Total other long-term obligations		1,195		1,207

(a)

Total site restoration also includes $50 million in current liabilities ($71 million at December 31, 2002).

6. Incentive compensation programs

The company accounts for its incentive compensation programs, except for the incentive stock option plan issued prior to January 1, 2003, by using the fair-value-based method. Under this method, compensation expense related to the units of these programs is recorded in the consolidated statement of earnings over the vesting period. The company accounts for its incentive stock option plan by using the intrinsic-value-based method and does not recognize compensation expense on the issuance of stock options because the exercise price is equal to the market value at the date of grant. If the fair-value-based method of accounting had been adopted to account for the incentive stock option plan, the impact on net earnings and earnings per share would have been negligible.

The company purchased shares on the market to fully offset the dilutive effects from the exercise of incentive stock options. The company does not plan to issue stock options in the future.

7. Long-term debt


			As at	As at
		Interest	Sept. 30	Dec. 31
Issued	Maturity date	rate	2003	2002

1989	September 1, 2004 (2002 — $600 million (U.S.)) (a)	Variable	—		946
2002	May 7, 2004 (b)	Variable	—		500
2003	$250 million due May 26, 2005 and $250 million due August 26, 2005	Variable	500		—
2003	January 19, 2006 (a)	Variable	318		—

Long-term debt (at period-end exchange rate)			818		1,446
Capital leases			31		20

Total long-term debt			849		1,466

(a)		In July this year, the company redeemed the remaining $200 million (U.S.) of its variable-rate U.S.-dollar debt for $272 million (Cdn). To replace the debt repaid in the third quarter, the company borrowed $272 million (Cdn) variable-rate loans from Exxon Overseas Corporation at interest equivalent to Canadian market rates.

(b)		Medium-term notes ($500 million) have been reclassified to the current portion of long-term debt in the balance sheet. The company intends to refinance these notes beyond the initial maturity date under the existing Medium Term Notes Program.

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IMPERIAL OIL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

8. Common shares


	As at		As at
	Sept. 30		Dec. 31
thousands of shares	2003		2002

Authorized		450,000		450,000
Common shares outstanding		367,921		378,863

In 1995 through 2002, the company purchased shares under eight 12-month normal course share purchase programs, as well as an auction tender. On June 23, 2003, another 12-month normal course program was implemented with an allowable purchase up to 18.6 million shares (five percent of the total on June 19, 2003), less any shares purchased by the employee savings plan and company pension fund. The results of these activities are as shown below:


	millions of

Year	Shares		Dollars

1995 - 2001		202.4		5,156
2002 - - Third quarter		—		—
Full year		0.3		13
2003 - Third quarter		4.2		207
Year-to-date		11.0		519
Cumulative purchases to date		213.7		5,688

Exxon Mobil Corporation’s participation in the above maintained its ownership interest in Imperial at 69.6 percent.

The excess of the purchase cost over the stated value of shares purchased has been recorded as a distribution of retained earnings.

There is no significant dilutive effect on basic net earnings per share from the outstanding incentive stock options described in note 6.

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IMPERIAL OIL LIMITED

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

OPERATING RESULTS

The company’s net earnings for the third quarter of 2003 were $375 million or $1.01 a share, compared with $347 million or $ 0.91 a share for the same quarter last year. Net earnings for the first nine months of 2003 were $1,427 million or $3.81 a share, the highest nine-month earnings on record, versus $767 million or $2.02 a share in the same period of 2002. Third quarter earnings increased primarily as a result of higher industry margins for petroleum products and higher prices for natural gas, partly offset by lower prices for Cold Lake bitumen and higher exploration and planned maintenance expenses. Earnings for the first nine months increased mainly because of higher prices for natural gas and crude oil and higher industry margins for petroleum products.

The negative impact of the higher Canadian dollar on resource and product prices was only partly offset by the favourable foreign exchange effects on the company’s U.S.-dollar-denominated debt. This has resulted in a net negative impact of about $70 million on earnings in the third quarter versus the same period of last year and about $140 million for the first nine months of this year compared with that of 2002.

Total revenues were $4,626 million in the third quarter and $14,614 million in the first nine months of 2003, versus $4,532 million and $12,212 million in the same periods last year.

Natural resources

During the third quarter of 2003, net earnings from natural resources were $257 million compared with $346 million in the same period last year. Earnings decreased mainly due to lower Cold Lake bitumen and crude oil prices, lower Syncrude production, and higher exploration and planned maintenance expenses, partly offset by higher prices for natural gas and higher Cold Lake bitumen volumes. Year-to-date net earnings were a record $947 million versus $741 million during the same period last year. Higher prices for natural gas and crude oil and higher production volumes of Cold Lake bitumen were the main reasons for the increased earnings in the first nine months of 2003 compared with last year.

Prices for natural gas averaged $6.12 a thousand cubic feet in the third quarter and $6.98 a thousand cubic feet in the first nine months of 2003, compared with $3.36 a thousand cubic feet and $3.61 a thousand cubic feet during the corresponding periods last year. Prices for conventional crude oil averaged $36.68 a barrel in the third quarter and $41.32 a barrel in the first nine months this year, compared with $40.06 a barrel and $35.76 a barrel, respectively, in the third quarter and first nine months of 2002. Average prices for Cold Lake bitumen in the third quarter of 2003 were about 20 percent lower than the average third quarter prices of 2002, and prices for the first nine months of 2003 were essentially unchanged from the previous year.

Gross production of natural gas during the third quarter of 2003 was 520 million cubic feet a day, compared with 527 million cubic feet a day during the same period last year. During the first nine months of the year, gross production was 499 million cubic feet a day, versus 538 million cubic feet a day in the first nine months of 2002. Lower production as a result of reservoir decline was partly offset by higher production from the recently completed facilities at Wizard Lake.

Total production of crude oil and natural gas liquids (NGLs) increased to 271 thousand barrels a day in the third quarter and 259 thousand barrels a day in the first nine months of 2003 from 258 thousand barrels a day and 244 thousand barrels a day in the corresponding periods of 2002.

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IMPERIAL OIL LIMITED

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued .....)

Gross production of conventional crude oil averaged 45 thousand barrels a day and 46 thousand barrels a day in the third quarter and first nine months of this year, compared with 49 thousand barrels a day and 51 thousand barrels a day during the corresponding periods in 2002. Natural reservoir decline in the Western Canadian Basin was the main reason for the reduced production. Production of NGLs available for sale was 28 thousand barrels a day in the third quarter and 27 thousand barrels a day during the first nine months of 2003, essentially unchanged from the corresponding periods of 2002.

Gross production of Cold Lake bitumen averaged 137 thousand barrels a day during the third quarter and 132 thousand barrels a day in the first nine months of 2003, versus 117 thousand barrels a day and 110 thousand barrels a day in the corresponding periods of 2002. Higher production was a result of increased volume from newly completed phases 11 to 13 offset in part by lower production from existing operations due to the cyclic nature of production at Cold Lake.

The company’s share of Syncrude’s gross production was 61 thousand barrels a day in the third quarter compared with 65 thousand barrels a day during the same period a year ago. Higher planned maintenance activity was the main reason for lower production in the third quarter of 2003. During the first nine months of 2003, the company’s share of Syncrude production was 54 thousand barrels a day, compared with 56 thousand barrels a day in the first nine months of last year.

In early October, a primary upgrading unit at Syncrude was taken down for an unscheduled maintenance turnaround. This is expected to reduce Syncrude’s fourth quarter production.

In September 2003, the company concluded drilling operations on a deepwater well on the Scotian Slope without encountering hydrocarbons in commercial quantities. Drilling began on the prospect called Balvenie, located about 300 kilometers southeast of Halifax, Nova Scotia, in approximately 1,800 meters of water in early July 2003. Exploration costs related to the Balvenie well were reflected in the third quarter earnings.

The company continues to work toward a regulatory application for the Mackenzie Gas Project. In September, it met with energy companies interested in shipping gas through the proposed pipeline to discuss nomination commitments.

Petroleum products

Net earnings from petroleum products were $115 million in the third quarter and a record $356 million in the first nine months of 2003, compared with net earnings of $21 million and a net loss of $1 million during the corresponding periods last year. Third quarter earnings increased mainly due to higher industry petroleum product margins. The effective response to external events such as the August power outage in Ontario contained the negative impact of these events on earnings. Year-to-date earnings improved as a result of the strengthening of industry petroleum product margins and higher sales of petroleum products. The increased petroleum product volumes were principally due to higher demand for diesel, gasoline and heating oil.

The company opened low-sulphur gasoline production units at its Strathcona and Dartmouth refineries, reducing the sulphur content of gasoline produced by over 90 per cent. All of the company’s operations are expected to be producing gasoline averaging less than 30 part per million of sulphur by the fourth quarter of this year, more than a year in advance of the legislated requirement.

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IMPERIAL OIL LIMITED

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued .....)

Chemicals

Net earnings from chemical operations were $8 million in the third quarter and $21 million in the first nine months of 2003, compared with $22 million and $42 million during the corresponding periods of 2002. Reduced industry margins on sales of polyethylene as a result of higher feedstock costs was the main reason for the decrease in earnings.

Corporate and other

Net earnings from corporate and other operations were negative $5 million in the third quarter and positive $103 million in the first nine months of 2003, versus negative $42 million and negative $15 million in the corresponding periods last year. Favourable foreign exchange effects on the company’s U.S.-dollar-denominated debt contributed to the year-to-date performance.

LIQUIDITY AND CAPITAL RESOURCES

Cash flow from operating activities increased to $485 million during the third quarter of 2003 from $337 million in the same period last year. Changes in working capital as a result of seasonal inventory draws and the effects of commodity prices on receivable balances, and higher earnings contributed to the increase. Cash flow from operating activities was $1,857 million for the nine months of 2003, versus $738 million in the corresponding period of 2002. The increased cash inflow was mainly due to higher earnings and the timing of scheduled income tax payments. Total investing activities used $308 million of cash in the third quarter and $1,011 million in the first nine months of 2003, compared with $380 million and $945 million during the corresponding periods last year.

Capital and exploration expenditures were $357 million in the third quarter and $1,093 million in the first nine months of 2003, versus $391 million and $1,015 million in the corresponding periods a year ago. For the resources segment, the additional capital and exploration expenditures were used mainly on projects at Syncrude to maintain and expand oil production capacity. Petroleum products increased its capital expenditures mainly in projects to reduce the sulphur content of gasoline and to improve operating efficiency.

In the third quarter, the company redeemed $200 million (U.S.), the remaining balance of its variable-rate U.S.-dollar debt for $272 million (Cdn), and replaced it with a similar variable-rate Canadian-dollar loan from Exxon Overseas Corporation.

During the third quarter and first nine months of 2003, the company repurchased about 4 million shares for $207 million and 11 million shares for $519 million, respectively.

Following an independent actuarial evaluation of the registered pension plan that will be completed in the fourth quarter, the company plans to meet any additional funding requirements from operating cash flows. Current or future funding requirements are not expected to affect the company’s existing capital investment plans or its ability to pursue new investment opportunities.

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IMPERIAL OIL LIMITED

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued .....)

Cash dividends of $241 million were paid in the first nine months of 2003, compared with dividends of $239 million in the comparable period of 2002. An increase in the per share dividend payment since the second quarter was partly offset by the lower number of outstanding shares resulting from the company’s share repurchase program. The dividend increase represented the ninth consecutive year of dividend growth. On August 13, 2003, the company declared a quarterly dividend of 22 cents a share, payable on October 1, 2003.

The above factors led to an increase in the company’s balance of cash and marketable securities to $852 million at September 30, 2003, from $453 million at the same time last year.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Information about market risks for the nine months ended September 30, 2003 does not differ materially from that discussed in Item 7A on page 25 in the company’s annual report on Form 10-K for the year ended December 31, 2002.

Item 4. Controls and Procedures

The company’s principal executive officer and principal financial officer have evaluated the company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, these officers have concluded that, as of the end of the period covered by this quarterly report, the company’s disclosure controls and procedures are effective for the purpose of ensuring that information required to be disclosed by the company in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There has not been any change in the company’s internal control over financial reporting during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting.

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IMPERIAL OIL LIMITED

PART II — OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

(a) Certifications by each of the principal executive officer and principal financial officer of the company pursuant to Rule 13a-4(a) are Exhibits (31.1) and (31.2).

Certifications by each of the chief executive officer and the chief financial officer of the company pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350 are Exhibits (32.1) and (32.2).

(b) Reports on Form 8-K

Except for reports on Form 8-K dated July 28, 2003, no other reports on Form 8-K have been filed during the quarter for which this report is filed.

By the report on Form 8-K dated July 28, 2003, the company submitted to the Securities and Exchange Commission a press release dated July 23, 2003 which disclosed information relating to the company’s financial condition and results of operations for the fiscal quarter ended June 30, 2003.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		IMPERIAL OIL LIMITED (Registrant)


Date: November 12, 2003		/s/ Paul A. Smith
		(Signature)
		Paul A. Smith
		Controller and Senior Vice-President,
		Finance and Administration
		(Principal Accounting Officer)


Date: November 12, 2003		/s/ John Zych
		(Signature)
		John Zych
		Corporate Secretary

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INDEX TO EXHIBITS


Exhibit No.		Description

(31.1)		Certification by principal executive officer of Periodic Financial Report pursuant to Rule 13a-14(a)

(31.2)		Certification by principal financial officer of Periodic Financial Report pursuant to Rule 13a-14(a)

(32.1)		Certification by chief executive officer of Periodic Financial Report pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350

(32.2)		Certification by chief financial officer of Periodic Financial Report pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350

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