Note C – Discontinued Operations
Separation of U.S. Downstream Business
On August 30, 2013, Murphy Oil Corporation (the “Company”) distributed 100% of the outstanding common stock of Murphy USA Inc. (“MUSA”) to its shareholders in a generally tax-free spin-off for U.S. federal income tax purposes. After the close of the New York Stock Exchange on August 30, 2013, the Company’s shareholders of record as of 5:00 p.m. Eastern time on August 21, 2013 received one share of MUSA common stock for every four common shares of the Company held by such shareholders. Prior to the separation, MUSA held all of the Company’s U.S. downstream operations, including retail gasoline stations and other marketing assets, plus two ethanol production facilities. In connection with the separation, Murphy Oil USA, Inc., MUSA’s 100% owned primary operating subsidiary, distributed $650,000,000 to the Company in the form of a cash dividend. These funds were raised from the proceeds of $500,000,000 secured notes issued by Murphy Oil USA, Inc. plus $150,000,000 borrowed under credit facilities entered into by MUSA and Murphy Oil USA, Inc. in connection with the separation. The shares of MUSA common stock are traded on the New York Stock Exchange under the ticker symbol “MUSA.” The Company has no continuing involvement with MUSA operations. Accordingly, the operating results and the cash flows for these former U.S. downstream operations have been reported as discontinued operations for all periods presented in the consolidated financial statements. These operations were formerly reported as the U.S. refining and marketing segment in prior years’ financial statements.
In order to effect the separation and govern the Company’s relationship with MUSA after the separation, both parties entered into a series of agreements governing each party’s rights and obligations after the separation. Among such agreements, the Separation and Distribution Agreement governs the separation of the U.S. downstream business, the transfer of assets, cross-indemnities between the Company and MUSA, handling of claims subject to indemnification and related matters, and other matters related to the Company’s relationship with MUSA.
The Tax Matters Agreement governs the respective rights, responsibilities and obligations of the Company and MUSA with respect to taxes, tax attributes, tax returns, tax proceedings and certain other tax matters. In addition, the Tax Matters Agreement imposes certain restrictions on MUSA and its subsidiaries (including restrictions on share issuances, business combinations, sales of assets and similar transactions) that are designed to preserve the tax-free status of the distribution.
The Employee Matters Agreement governs the compensation and employee benefit obligations with respect to the current and former employees and non-employee directors of the Company and MUSA, and generally allocates liabilities and responsibilities relating to employee compensation, benefit plans and programs. The Employee Matters Agreement provides that employees of MUSA will no longer participate in benefit plans sponsored or maintained by the Company. In addition, the Employee Matters Agreement provides that each of the parties will be responsible for their respective current employees and compensation plans for such current employees, and that the Company will be responsible for liabilities relating to former employees who left prior to the separation. The Employee Matters Agreement sets forth the general principles relating to employee matters and also addresses any special circumstances during the transition period. The Employee Matters Agreement also provides that (i) the distribution does not constitute a change in control under existing plans, programs, agreements or arrangements, and (ii) the distribution and the assignment, transfer or continuation of the employment of employees with another entity will not constitute a severance event under the applicable plans, programs, agreements or arrangements.
The Transition Service Agreement sets forth the terms on which the Company and MUSA will provide certain services or functions to the other party. Transition services include administration, payroll, human resources, data processing, environmental health and safety, audit support, financial transaction support, and other support services, information technology systems and various other corporate services. The agreement provides for the provision of specified services, generally for a period of up to 18 months, with a possible extension of six months (an aggregate of 24 months), on a full cost basis.
Other Discontinued Operations
Additionally, the Company completed the sale of all of its U.K. oil and natural gas production assets during 2013. The Company recognized an after-tax gain of $216,147,000 on sale of these U.K. oil and gas assets during 2013. The results of the operations have also been reported as discontinued operations for all periods presented in these consolidated financial statements.
The Company has previously announced its intention to sell its U.K. refining and marketing operations. Beginning in 2013, the Company has accounted for the U.K. downstream business as discontinued operations for all periods presented, including a reclassification of all the prior years’ operating results for this business to discontinued operations. The U.K. downstream operations were formerly reported as a separate segment within the Company’s refining and marketing business. The sale process continues in 2014.
The following table presents the carrying value of the major categories of assets and liabilities of discontinued operations reflected on the Company’s consolidated balance sheets at December 31, 2013 and 2012:
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(Millions of dollars) |
2013 | 2012 | ||||||
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Current assets |
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Held for sale assets of U.K. downstream operations: |
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Cash |
$ | 301,302 | 0 | |||||
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Accounts receivable |
302,059 | 0 | ||||||
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Inventories |
254,240 | 0 | ||||||
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Other |
86,131 | 0 | ||||||
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Held for sale assets of U.K. oil and gas operations |
0 | 15,119 | ||||||
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Total current assets held for sale |
$ | 943,732 | 15,119 | |||||
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Non-current assets |
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Held for sale assets of U.K. downstream operations: |
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Property, plant and equipment, net |
$ | 360,347 | 0 | |||||
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Other |
21,057 | 0 | ||||||
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Held for sale assets of U.K. oil and gas operations: |
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Property, plant and equipment |
0 | 205,746 | ||||||
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Other |
0 | 2,422 | ||||||
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Total non-current assets held for sale |
$ | 381,404 | 208,168 | |||||
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Current liabilities |
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Current liabilities associated with held for sale properties of U.K. downstream operations: |
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Accounts payable |
$ | 637,432 | 0 | |||||
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Other |
1,708 | 0 | ||||||
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Current liabilities associated with held for sale properties of U.K. oil and gas operations: |
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Accounts payable |
0 | 27,578 | ||||||
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Income taxes payable |
0 | 19,893 | ||||||
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Total current liabilities associated with assets held for sale |
$ | 639,140 | 47,471 | |||||
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Non-current liabilities |
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Non-current liabilities associated with held for sale properties of U.K. downstream operations: |
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Deferred income taxes payable |
$ | 68,096 | 0 | |||||
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Deferred credits and other liabilities |
27,448 | 0 | ||||||
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Non-current liabilities associated with held for sale properties of U.K. oil and gas operations: |
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Deferred income taxes payable |
0 | 87,893 | ||||||
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Asset retirement obligations |
0 | 53,284 | ||||||
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Total non-current liabilities associated with assets held for sale |
$ | 95,544 | 141,177 | |||||
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As described above, the Company separated its U.S. downstream operations in 2013. The major categories of assets and liabilities for MUSA were included in the Company’s consolidated balance sheet at December 31, 2012 as follows:
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(Millions of dollars) |
2012 | |||
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Current assets |
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Accounts receivable |
$ | 525,936 | ||
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Inventories |
217,393 | |||
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Other current assets |
8,685 | |||
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Total current assets |
$ | 752,014 | ||
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Non-current assets |
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Property, plant and equipment, net |
$ | 1,163,748 | ||
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Other assets |
498 | |||
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Total non-current assets |
$ | 1,164,246 | ||
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Current liabilities |
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Accounts payable |
$ | 612,755 | ||
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Income taxes payable |
16,851 | |||
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Other taxes payable |
65,349 | |||
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Other current liabilities |
38,798 | |||
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Total current liabilities |
$ | 733,753 | ||
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Non-current liabilities |
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Long-term debt |
$ | 1,123 | ||
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Deferred income taxes |
89,946 | |||
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Asset retirement obligations |
15,401 | |||
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Deferred credits and other liabilities |
87,600 | |||
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Total non-current liabilities |
$ | 194,070 | ||
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In 2013, the Company wrote down its net investment in the held for sale U.K. refining and marketing assets by $73,000,000. This charge has been included in discontinued operations for 2013. The write down was based on an assessment of the fair value of these assets based on the status of the ongoing sale process.
At year-end 2012, the Company wrote down its net investment in the ethanol production facility in Hereford, Texas, taking an impairment charge of $60,988,000 in discontinued operations. The write down was required based on expected weak ethanol production margins at the plant in future periods. Fair value was determined using a discounted cash flow model for three years, plus an estimated terminal value based on a multiple of the last year’s cash flow. Certain key assumptions used in the cash flow model included use of available futures prices for corn and ethanol products. Additional key assumptions included estimated future ethanol and distillers grain production levels, estimated future operating expenses, and estimated sales prices for distillers grain.
In July 2012, the United Kingdom enacted tax changes that limited tax relief on oil and gas decommissioning costs to 50%, a reduction from the 62% tax relief previously allowed for these costs. This tax rate change led to a net reduction of income from discontinued operations of $5,523,000 in 2012. In July 2011, the United Kingdom enacted a supplemental tax rate increase for oil and gas companies effective retroactive to March 2011. The total U.K. tax rate increased from 50% to 62% for oil and gas companies. The supplemental tax rate change reduced income from discontinued operations by $14,461,000 for 2011.
On September 30, 2011, the Company sold the Superior, Wisconsin refinery and related assets for $214,000,000, plus certain capital expenditures between July 25, 2011, and the date of closing and the fair value of all associated hydrocarbon inventories at these locations. On October 1, 2011, the Company sold its Meraux, Louisiana refinery and related assets for $325,000,000, plus the fair value of associated hydrocarbon inventories. The Company has accounted for the results of the Superior, Wisconsin and Meraux, Louisiana refineries and associated marketing assets as discontinued operations. The after-tax gain in 2011 from disposal of the two refineries netted to $18,724,000, made up of a gain on the Superior refinery (including associated inventories) of $77,585,000 and a loss on the Meraux refinery (including associated inventories) of $58,861,000. The gain on disposal in 2011 was based on refinery selling prices, plus the sale of all associated inventories at fair value, which was significantly above the last-in, first-out cost method. The net gain on sale of the refineries included an after-tax benefit of $179,152,000 from liquidation of inventories formerly carried primarily under the last-in, first-out cost method. The U.S. refineries sold were formerly reported in the U.S. manufacturing segment.
The results of operations associated with all discontinued operations are presented in the following table.
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(Thousands of dollars) |
2013 | 2012 | 2011 | |||||||||
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Revenues |
$ | 17,586,236 | 24,156,748 | 27,310,300 | ||||||||
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Income from operations before income taxes |
$ | 119,984 | 330,048 | 571,339 | ||||||||
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Gain on sale before income taxes |
130,991 | 0 | 12,684 | |||||||||
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Total income from discontinued operations before taxes |
250,975 | 330,048 | 584,023 | |||||||||
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Provision for income taxes |
15,639 | 165,666 | 250,519 | |||||||||
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Income from discontinued operations |
$ | 235,336 | 164,382 | 333,504 | ||||||||
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