Attached files
file | filename |
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8-K/A - FORM 8-K/A - Calumet Specialty Products Partners, L.P. | h84526e8vkza.htm |
EX-23.1 - EX-23.1 - Calumet Specialty Products Partners, L.P. | h84526exv23w1.htm |
EX-99.2 - EX-99.2 - Calumet Specialty Products Partners, L.P. | h84526exv99w2.htm |
Exhibit 99.1
SUPERIOR REFINING BUSINESS
Index to Financial Statements
Superior Refining Business audited financial statements:
Report of KPMG LLP, independent auditors |
2 | |||
Balance sheets as of December 31, 2010 and 2009 |
3 | |||
Statements of income and comprehensive income for the years ended December 31, 2010, 2009 and 2008 |
4 | |||
Statements of changes in net parent investment for the years ended December 31, 2010, 2009 and 2008 |
5 | |||
Statements of cash flows for the years ended December 31, 2010, 2009 and 2008 |
6 | |||
Notes to audited financial statements |
7 |
Superior Refining Business unaudited financial statements:
Balance sheets as of June 30, 2011 and December 31, 2010 (audited) |
18 | |||
Unaudited statements of income and comprehensive income for the six months ended June 30, 2011 and 2010 |
19 | |||
Unaudited statements of changes in net parent investment for the six months ended June 30, 2011 |
20 | |||
Unaudited statements of cash flows for the six months ended June 30, 2011 and 2010 |
21 | |||
Notes to unaudited financial statements |
22 |
1
SUPERIOR REFINING
BUSINESS
The Board of Directors
Murphy Oil USA, Inc.:
We have audited the accompanying balance sheets of the Superior
Refining Business as of December 31, 2010 and 2009, and the
related statements of income and comprehensive income, changes
in net parent investment, and cash flows for each of the years
in the three-year period ended December 31, 2010. These
financial statements are the responsibility of management of the
Superior Refining Business. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes consideration
of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Superior Refining Business
internal control over financial reporting. Accordingly, we
express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of the Superior Refining Business as of December 31, 2010
and 2009, and the results of its operations and its cash flows
for each of the years in the three-year period ended
December 31, 2010, in conformity with U.S. generally
accepted accounting principles.
/s/ KPMG LLP
June 29, 2011
2
SUPERIOR REFINING
BUSINESS
(Thousands of dollars)
December 31, | ||||||||
2010 | 2009 | |||||||
Assets
|
||||||||
Current assets
|
||||||||
Accounts receivable, less allowance for doubtful accounts of
$630 in 2010 and $730 in 2009
|
$ | 49,613 | $ | 35,622 | ||||
Inventories, at lower of cost or market
|
||||||||
Crude oil and blend stocks
|
23,089 | 8,890 | ||||||
Finished products
|
41,329 | 32,200 | ||||||
Materials and supplies
|
9,597 | 8,247 | ||||||
Prepaid expenses
|
328 | 335 | ||||||
Deferred income taxes
|
6,557 | | ||||||
Total current assets
|
130,513 | 85,294 | ||||||
Property, plant and equipment, at cost
|
346,299 | 312,025 | ||||||
Less accumulated depreciation
|
(187,713 | ) | (175,375 | ) | ||||
Net property, plant and equipment
|
158,586 | 136,650 | ||||||
Deferred turnaround costs
|
13,271 | 17,262 | ||||||
Deferred charges and other assets
|
663 | 892 | ||||||
Total assets
|
$ | 303,033 | $ | 240,098 | ||||
Liabilities and Net Parent Investment
|
||||||||
Current liabilities
|
||||||||
Accounts payable and accrued liabilities
|
105,679 | 64,370 | ||||||
Deferred income taxes
|
| 5,748 | ||||||
Total current liabilities
|
105,679 | 70,118 | ||||||
Deferred income taxes
|
33,258 | 23,887 | ||||||
Deferred credits and other liabilities
|
3,096 | 3,450 | ||||||
Net parent investment
|
161,000 | 142,643 | ||||||
Total liabilities and net parent investment
|
$ | 303,033 | $ | 240,098 | ||||
See accompanying notes to financial statements.
3
SUPERIOR REFINING
BUSINESS
(Thousands of dollars)
Years Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Revenues
|
||||||||||||
Sales and other operating revenues:
|
||||||||||||
Related parties
|
$ | 790,228 | $ | 577,236 | $ | 752,175 | ||||||
Third parties
|
299,213 | 233,012 | 261,361 | |||||||||
Other income
|
1,744 | 1,298 | 3,419 | |||||||||
Total revenues
|
1,091,185 | 811,546 | 1,016,955 | |||||||||
Costs and expenses
|
||||||||||||
Crude oil and product purchases:
|
||||||||||||
Related parties
|
159,207 | 85,285 | 114,084 | |||||||||
Third parties
|
783,674 | 585,158 | 775,176 | |||||||||
Operating expenses
|
85,233 | 92,367 | 97,324 | |||||||||
General and administrative expenses
|
13,412 | 12,044 | 11,559 | |||||||||
Depreciation expense
|
12,362 | 12,728 | 12,767 | |||||||||
Interest expense
|
10 | 296 | 19 | |||||||||
Total costs and expenses
|
1,053,898 | 787,878 | 1,010,929 | |||||||||
Income before income taxes
|
37,287 | 23,668 | 6,026 | |||||||||
Income tax expense
|
||||||||||||
Federal
|
11,542 | 8,084 | 2,033 | |||||||||
State
|
1,871 | 1,106 | 281 | |||||||||
Total income tax expense
|
13,413 | 9,190 | 2,314 | |||||||||
Net income and comprehensive income
|
$ | 23,874 | $ | 14,478 | $ | 3,712 | ||||||
See accompanying notes to financial statements.
4
SUPERIOR REFINING
BUSINESS
(Thousands of dollars)
Balance as of January 1, 2008
|
$ | 74,696 | ||
Net income
|
3,712 | |||
Change in amount owed to/from Parent
|
71,419 | |||
Balance as of December 31, 2008
|
149,827 | |||
Net income
|
14,478 | |||
Change in amount owed to/from Parent
|
(21,662 | ) | ||
Balance as of December 31, 2009
|
142,643 | |||
Net income
|
23,874 | |||
Change in amount owed to/from Parent
|
(5,517 | ) | ||
Balance as of December 31, 2010
|
$ | 161,000 | ||
See accompanying notes to financial statements.
5
SUPERIOR REFINING
BUSINESS
(Thousands of dollars)
Years Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Operating activities
|
||||||||||||
Net income
|
$ | 23,874 | $ | 14,478 | $ | 3,712 | ||||||
Adjustments to reconcile net income to net cash provided
(required) by operating activities
|
||||||||||||
Depreciation expense
|
12,362 | 12,728 | 12,767 | |||||||||
Amortization of deferred major repair costs
|
6,356 | 7,055 | 5,900 | |||||||||
Deferred income taxes
|
(2,934 | ) | 6,885 | 1,317 | ||||||||
Decreases (increases) in operating working capital:
|
||||||||||||
Accounts receivable trade
|
(13,991 | ) | (15,549 | ) | 19,162 | |||||||
Inventories
|
(24,678 | ) | (1,233 | ) | (2,861 | ) | ||||||
Prepaid expenses
|
7 | 205 | 424 | |||||||||
Accounts payable and accrued liabilities
|
41,309 | 27,704 | (65,423 | ) | ||||||||
Other operating activities net
|
(126 | ) | (161 | ) | 254 | |||||||
Net cash provided (required) by operating activities
|
42,179 | 52,112 | (24,748 | ) | ||||||||
Investing activities
|
||||||||||||
Property additions
|
(34,297 | ) | (30,450 | ) | (22,860 | ) | ||||||
Expenditures for major repairs
|
(2,365 | ) | | (23,811 | ) | |||||||
Net cash required by investing activities
|
(36,662 | ) | (30,450 | ) | (46,671 | ) | ||||||
Financing activities
|
||||||||||||
Net change in amount owed to (due from) parent
|
(5,517 | ) | (21,662 | ) | 71,419 | |||||||
Net cash provided (required) by financing activities
|
(5,517 | ) | (21,662 | ) | 71,419 | |||||||
Net increase (decrease) in cash and cash equivalents
|
| | | |||||||||
Cash and cash equivalents at beginning of year
|
| | | |||||||||
Cash and cash equivalents at end of year
|
$ | | $ | | $ | | ||||||
Supplemental cash flow disclosures
|
||||||||||||
Cash paid during the year for interest
|
$ | 2 | $ | 273 | $ | 18 |
See accompanying notes to financial statements.
6
SUPERIOR REFINING
BUSINESS
NOTES TO FINANCIAL STATEMENTS
December 31, 2010 and 2009
(Thousands of dollars)
NOTES TO FINANCIAL STATEMENTS
December 31, 2010 and 2009
(Thousands of dollars)
A. | Business Description |
The Superior Refining Business (the Business)
includes the operations of the Superior, Wisconsin Refinery (the
Refinery) and the major related marketing assets.
The Business is owned by Murphy Oil USA, Inc.
(MOUSA), a wholly owned subsidiary of Murphy Oil
Corporation (Murphy or Parent). Murphy
acquired the Refinery in 1958.
The Refinery has a rated throughput capacity of
35,000 barrels of crude oil per stream day. The Refinery is
located adjacent to the Interprovincial Pipeline (IPL) that
originates in Alberta, Canada. The Refinery utilizes the IPL to
obtain most of its crude oil feedstock, which includes light,
sweet synthetic and conventional crude oils as well as heavy
asphaltic type crude oil. In addition to a crude unit, the
Refinerys other units include vacuum distillation, fluid
catalytic cracking, naphtha hydrotreating, catalytic reforming,
and gasoline and distillate hydrotreating.
The major marketing assets of the Business include several owned
or leased refined product terminals, including:
Superior, Wisconsin light products, asphalt
Duluth, Minnesota light products
Duluth Marine, Minnesota marine bunker fuels
Rhinelander, Wisconsin asphalt
Crookston, Minnesota asphalt
Grand Island, Nebraska (leased) asphalt
Tooele, Utah (leased) asphalt
The Business includes the crude oil supply activities of the
Refinery. Amounts owed for purchases of crude oil from third
parties are included in accounts payable and accrued liabilities.
The Superior terminal is adjacent to the Refinery. Product is
shipped to the Duluth light products terminal by pipeline.
Asphalt is trucked to Rhinelander and Crookston and is
transported by rail to Grand Island and Tooele. Marine bunker
fuels are shipped via truck to the Duluth marine terminal, which
is located on Lake Superior.
B. | Significant Accounting Policies |
Basis of Presentation These financial
statements have been prepared in accordance with applicable
United States generally accepted accounting principles (GAAP).
Although the Business is operated as a component of an
integrated U.S. refining and marketing (R&M)
operation, these financial statements are presented as if the
Business was operated as a stand-alone entity separate from an
integrated R&M operation.
Significant considerations in preparing these financial
statements include:
| use of MOUSAs historical cost basis in the Business. | |
| the Business sells a significant portion of its refined products to related parties, primarily the marketing division of MOUSA. The transfer price used for these product sales is based primarily on the Platts Group III Mean posted price for the month the sale to the related party occurred. |
7
SUPERIOR REFINING
BUSINESS
NOTES TO FINANCIAL STATEMENTS (Contd.)
December 31, 2010 and 2009
(Thousands of dollars)
NOTES TO FINANCIAL STATEMENTS (Contd.)
December 31, 2010 and 2009
(Thousands of dollars)
| the Business purchases certain crude oil feedstock from affiliates of Murphy. The purchase price has been established for this crude oil based on NYMEX WTI calendar month average plus/minus a differential. | |
| the Business does not have its own financing facilities. The Business relies on Murphy and its subsidiaries to provide credit and financing as needed to operate. | |
| allocations and estimates of general and administrative costs attributable to operations of the Business have been made as determined by management in accordance with SEC Staff Accounting Bulletin (SAB) Topic 1-B Allocation of expenses and related disclosures in financial statements of subsidiaries, divisions or lesser business components of another entity. This includes allocation for MOUSA and Murphy overhead as deemed appropriate. |
The historical results are not necessarily indicative of the
results to be expected in future periods.
Use of Estimates In preparing the financial
statements of the Business in conformity with U.S. GAAP,
management has made a number of estimates and assumptions
related to the reporting of assets, liabilities, revenues, and
expenses and the disclosure of contingent assets and
liabilities. Actual results may differ from the estimates.
Revenue Recognition Revenues associated with
sales of refined products are recorded when deliveries have
occurred and legal ownership of the commodity transfers to the
customer, which may include related party sales to other
components of MOUSA. Title transfers for bulk refined products
generally occur at pipeline custody points or upon truck loading
at product terminals.
The Business enters into buy/sell and similar arrangements when
crude oil and other petroleum products are held at one location
but are needed at a different location. The Business often pays
or receives funds related to the buy/sell arrangement based on
location or quality differences. The Business accounts for such
transactions on a net basis in its Statements of Income.
Taxes Collected From Customers and Remitted to Government
Authorities Excise and other taxes collected on
sales of refined products and remitted to governmental agencies
are excluded from revenues and costs and expenses in the
Statements of Income. Excise taxes collected and remitted were
$45,173 in 2010, $42,335 in 2009, and $40,815 in 2008.
Cash and Cash Equivalents Short-term
investments, which include government securities and other
instruments with government securities as collateral, that have
a maturity of three months or less from the date of purchase are
classified as cash equivalents. The Business, similar to all
MOUSA businesses, participates in Murphys consolidated
U.S. cash management system. Therefore, all cash inflows
and outflows of the Business are managed by Murphy and accounted
for as a change in Net Parent Investment. See also Net Parent
Investment section of this note and Note L.
Accounts Receivable The Business
accounts receivable include certain direct sales to third
parties from the Refinery and sales from terminals. The
receivables are recorded at the invoiced amount and do not bear
interest. The allowance for doubtful accounts is
managements best estimate of the amount of probable credit
losses on these receivables. Management reviews this allowance
at least quarterly and bases its assessment on a combination of
current information about its customers and historical write-off
experience.
8
SUPERIOR REFINING
BUSINESS
NOTES TO FINANCIAL STATEMENTS (Contd.)
December 31, 2010 and 2009
(Thousands of dollars)
NOTES TO FINANCIAL STATEMENTS (Contd.)
December 31, 2010 and 2009
(Thousands of dollars)
Inventories Inventories of crude oil, other
blend stocks and finished products are valued at the lower of
cost, applied on a
last-in,
first-out (LIFO) basis, or market. Materials and supplies are
valued at the lower of average cost or estimated value.
Property, Plant and Equipment Refineries and
certain marketing facilities are depreciated primarily using the
straight-line method with depreciable lives ranging from 16 to
25 years. Gains and losses on disposals or retirements are
included in income as a separate component of revenues.
Management evaluates impairment of long-lived assets on a
specific asset basis or in groups of similar assets, as
applicable. An impairment is recognized when the estimated
undiscounted future net cash flows of an asset are less than its
carrying value.
The Business has not recorded an asset retirement obligation
(ARO) for its refining and certain of its marketing assets
because sufficient information is presently not available to
estimate a range of potential settlement dates for the
obligation. These assets are consistently being upgraded and are
expected to be operational into the foreseeable future. An ARO
liability will be recorded in the period in which sufficient
information exists to estimate the liability. An insignificant
ARO liability for the Duluth Marine terminal has been recorded
in the Business Balance Sheets within deferred credits and
other liabilities for all years presented.
Turnarounds for major processing units are scheduled at four to
five year intervals at the Refinery. Turnaround work associated
with various other less significant units at the Refinery will
vary depending on operating requirements and events. The
Business defers turnaround costs incurred and amortizes such
costs through Operating Expenses over the period until the next
scheduled turnaround. All other maintenance and repairs are
expensed as incurred. Renewals and betterments are capitalized.
Environmental Liabilities A liability for
environmental matters is established when it is probable that an
environmental obligation exists and the cost can be reasonably
estimated. If there is a range of reasonably estimated costs,
the most likely amount will be recorded, or if no amount is most
likely, the minimum of the range is used. Related expenditures
are charged against the liability. Environmental remediation
liabilities have not been discounted for the time value of
future expected payments. Environmental expenditures that have
future economic benefit are capitalized.
Income Taxes The Business accounts for income
taxes using the asset and liability method. Under this method,
income taxes are provided for amounts currently payable and for
amounts deferred as tax assets and liabilities based on
differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. Deferred
income taxes are measured using the enacted tax rates that are
in effect when the differences are expected to reverse.
The Business results of operations are included in the
consolidated federal income tax return of Murphy, while in most
cases, these results have been included in the various state tax
returns of MOUSA. For these financial statements, federal and
state income taxes have been computed and recorded as if the
Business filed separate federal and state income tax returns.
Federal and state income tax benefits of operating losses
generated are recognized to the extent that they could be
expected to reduce federal income tax expense for the Business
via a carryback to a previous year or carried forward for use in
a subsequent year. The calculations of current and deferred
income taxes, therefore, require use of certain assumptions,
allocations and estimates that management believes are
reasonable to reflect the Business income taxes as a
stand-alone taxpayer. The Business has elected to classify any
interest expense and penalties related to the underpayment of
income taxes in Interest Expense in the Statements of Income.
9
SUPERIOR REFINING
BUSINESS
NOTES TO FINANCIAL STATEMENTS (Contd.)
December 31, 2010 and 2009
(Thousands of dollars)
NOTES TO FINANCIAL STATEMENTS (Contd.)
December 31, 2010 and 2009
(Thousands of dollars)
Derivative Instruments and Hedging Activities
The fair value of a derivative instrument is allocated as an
asset or liability in the Business Balance Sheets as the
derivative provides an effective economic hedge to identified
risks associated with the Business. Upon entering into a
derivative contract, management may designate the derivative as
either a fair value hedge or a cash flow hedge, or decide that
the contract is not a hedge, and thenceforth, recognize changes
in the fair value of the contract in earnings. Management
documents the relationship between the derivative instrument
designated as a hedge and the hedged items as well as its
objective for risk management and strategy for use of the
hedging instrument to manage the risk. Derivative instruments
designated as fair value or cash flow hedges are linked to
specific assets and liabilities or to specific firm commitments
or forecasted transactions. Management assesses at inception and
on an ongoing basis whether a derivative instrument used as a
hedge is highly effective in offsetting changes in the fair
value or cash flows of the hedged item. A derivative that is not
a highly effective hedge does not qualify for hedge accounting.
Changes in the fair value of a qualifying fair value hedge are
recorded in earnings along with the gain or loss on the hedged
item. Changes in the fair value of a qualifying cash flow hedge
are recorded in other comprehensive loss until the hedged item
is recognized in earnings. When the income effect of the
underlying cash flow hedged item is recognized in the Statements
of Income, the fair value of the associated cash flow hedge is
reclassified from other comprehensive income or loss into
earnings. Ineffective portions of a cash flow hedge
derivatives change in fair value are recognized currently
in earnings. If a derivative instrument no longer qualifies as a
cash flow hedge and the underlying forecasted transaction is no
longer probable of occurring, hedge accounting is discontinued
and the gain or loss recorded in other comprehensive or loss is
recognized immediately in earnings. See Note H for further
information about the Business derivative instruments.
Stock-Based Compensation The fair value of
awarded stock options and restricted stock units is determined
based on a combination of management assumptions and the market
value of Murphys common stock. Management uses the
Black-Scholes option pricing model for computing the fair value
of stock options. The primary assumptions made by management
include the expected life of the stock option award and the
expected volatility of Murphys common stock prices.
Management uses both historical data and current information to
support its assumptions. Stock option expense is recognized on a
straight-line basis over the respective vesting period of two or
three years. Management uses a Monte Carlo valuation model to
determine the fair value of performance-based restricted stock
units and expense is recognized over the three-year vesting
period. Management estimates the number of stock options and
performance-based restricted stock units that will not vest and
adjusts its compensation expense accordingly. Differences
between estimated and actual vested amounts are accounted for as
an adjustment to expense when known. See note G for a
discussion of the basis of allocation of such costs.
Net Parent Investment The Net Parent
Investment represents a net balance reflecting Murphys
initial investment in the Business and subsequent adjustments
resulting from the operations of the Business and various
transactions between the Business and Murphy. The balance is the
result of the Business participation in Murphys
centralized cash management program under which all the
Business cash receipts are remitted to and all cash
disbursements are funded by Murphy. The net balance includes
amounts due from or owed to Parent. Other transactions affecting
the Net Parent Investment include general and administrative
expenses incurred by Murphy and allocated to the Business. There
are no terms of settlement or interest charges associated with
the Net Parent Investment balance. Changes in amounts owed to or
due from Parent are included in financing activities in the
Statements of Cash Flows.
10
SUPERIOR REFINING
BUSINESS
NOTES TO FINANCIAL STATEMENTS (Contd.)
December 31, 2010 and 2009
(Thousands of dollars)
NOTES TO FINANCIAL STATEMENTS (Contd.)
December 31, 2010 and 2009
(Thousands of dollars)
C. | Inventories |
Inventories accounted for under the LIFO method totaled $64,418
at December 31, 2010 and $41,090 at December 31, 2009.
These amounts were $104,163 and $84,218, respectively, less than
such inventories would have been valued using the FIFO method.
There were no substantial liquidations of LIFO inventory layers
for the year ended December 31, 2010. During the years
ended December 31, 2009 and 2008, the Business incurred
liquidations of LIFO inventory layers that resulted in
(losses)/gains in income before income taxes of $(3,425) and
$7,130, respectively.
D. | Property, Plant and Equipment |
Investment in property, plant and equipment at December 31,
2010 and 2009 is shown below.
2010 | 2009 | |||||||||||||||
Cost | Net | Cost | Net | |||||||||||||
Refining
|
$ | 322,110 | 149,126 | 288,545 | 126,784 | |||||||||||
Other
|
24,189 | 9,460 | 23,480 | 9,866 | ||||||||||||
$ | 346,299 | 158,586 | 312,025 | 136,650 | ||||||||||||
E. | Income Taxes |
The components of income tax expense (benefit) for the three
years ended December 31, 2010 were as follows.
2010 | 2009 | 2008 | ||||||||||
Federal Current
|
$ | 14,092 | $ | 2,016 | $ | 873 | ||||||
Deferred
|
(2,550) | 6,068 | 1,160 | |||||||||
11,542 | 8,084 | 2,033 | ||||||||||
State current and deferred
|
1,871 | 1,106 | 281 | |||||||||
Total income tax expense
|
$ | 13,413 | $ | 9,190 | $ | 2,314 | ||||||
The following table reconciles income taxes based on the
U.S. statutory tax rate to the Companys income tax
expense.
2010 | 2009 | 2008 | ||||||||||
Income tax expense based on the U.S. statutory tax rate
|
$ | 13,050 | $ | 8,284 | $ | 2,109 | ||||||
State income taxes, net of federal benefit
|
1,216 | 718 | 182 | |||||||||
Qualified production activities deduction
|
(899) | (129) | (56) | |||||||||
Other, net
|
46 | 317 | 79 | |||||||||
Total
|
$ | 13,413 | $ | 9,190 | $ | 2,314 | ||||||
An analysis of the Companys deferred tax assets and
deferred tax liabilities at December 31, 2010 and 2009,
showing the tax effects of significant temporary differences
follows.
11
SUPERIOR REFINING
BUSINESS
NOTES TO FINANCIAL STATEMENTS (Contd.)
December 31, 2010 and 2009
(Thousands of dollars)
NOTES TO FINANCIAL STATEMENTS (Contd.)
December 31, 2010 and 2009
(Thousands of dollars)
2010 | 2009 | |||||||
Deferred tax assets
|
||||||||
Inventory valuation
|
$ | 6,057 | $ | | ||||
Liabilities for dismantlements
|
137 | 229 | ||||||
Other deferred tax assets
|
1,221 | 1,378 | ||||||
Total deferred tax assets
|
7,415 | 1,607 | ||||||
Deferred tax liabilities
|
||||||||
Accumulated depreciation
|
(26,949 | ) | (16,057) | |||||
Deferred turnaround costs
|
(4,645 | ) | (6,042) | |||||
Inventory valuation
|
| (6,371) | ||||||
Other
|
(2,522 | ) | (2,772) | |||||
Total deferred tax liabilities
|
(34,116 | ) | (31,242) | |||||
Net deferred tax liabilities
|
$ | (26,701 | ) | $ | (29,635) | |||
In managements judgment, the deferred tax assets in the
preceding table will more likely than not be realized as
reductions of future taxable income of the Business. There were
no valuation allowances for deferred tax assets at the end of
either year.
Under U.S. GAAP the financial statement recognition of the
benefit for a tax position is dependent upon the benefit being
more likely than not to be sustainable upon audit by the
applicable taxing authority. If this threshold is met, the tax
benefit is then measured and recognized at the largest amount
that is greater than 50 percent likely of being realized
upon ultimate settlement. The Business has not recorded any
effect for unrecognized income tax benefits for either of the
years reported.
Murphys tax returns in multiple jurisdictions that include
the Business are subject to audit by taxing authorities. These
audits often take years to complete and settle. As of
December 31, 2010, the earliest year remaining open for
audit and/or
settlement in the United States is 2007. Although management
believes that recorded liabilities for unsettled issues are
adequate, gains or losses could occur in future years from
resolution of outstanding matters.
F. | Employee and Retiree Benefit Plans |
Pension and Other Postretirement Plans Murphy
sponsors noncontributory defined benefit pension plans for union
employees at the Refinery. In addition, Murphy has
noncontributory defined benefit pension plans that cover most
full-time non-union employees of the Business. The activities of
these plans are allocated by Murphys consulting actuary to
the various operations of Murphy, which includes the Business.
Murphys tax qualified plans meet the funding requirements
of federal laws and regulations. Murphy also sponsors a plan
that provides health care and life insurance benefits, which are
not funded, for most retired employees. The health care benefits
are contributory; the life insurance benefits are
noncontributory. For purposes of these financial statements, the
Business is considered to be participating in multi-employer
benefit plans of Murphy due to commingling of various plan
assets of Murphy.
The Business allocated share of the Parents employee
pension and postretirement plan expenses was $2,374, $2,133, and
$1,736 for the years ended December 31 2010, 2009, and
12
SUPERIOR REFINING
BUSINESS
NOTES TO FINANCIAL STATEMENTS (Contd.)
December 31, 2010 and 2009
(Thousands of dollars)
NOTES TO FINANCIAL STATEMENTS (Contd.)
December 31, 2010 and 2009
(Thousands of dollars)
2008, respectively. Employee benefit plan expenses incurred by
the Business are included in operating expenses with the related
payroll costs.
Thrift Plans Most full-time employees of the
Business may participate in thrift plans by allotting up to a
specified percentage of their base pay. Murphy matches
contributions at a stated percentage of each employees
allotment based on years of participation in the plans. Amounts
charged to expense for these plans were $432 in 2010, $423 in
2009 and $459 in 2008.
G. | Stock-Based Compensation |
Costs resulting from all share-based payment transactions are
allocated and recognized as an expense in the financial
statements using a fair value-based measurement method over the
periods that the awards vest. Certain employees of Murphy have
received annual grants in the form of Murphy stock options
and/or
restricted stock units. Accordingly, the Business has recorded
compensation expense for these plans in accordance with
SAB Topic 1-B. All compensation expense related to these
plans for full-time employees of the Business has been allocated
100% to the Business. For employees whose services cover both
the Business and other Murphy entities, the Business records
share-based compensation based on the estimated percentage of
time spent by each management member providing services to the
Business applied to the total share-based compensation of each
employee. Amounts recognized in the financial statements by the
Business with respect to Murphys share-based plans are as
follows.
2010 | 2009 | 2008 | ||||||||||
Compensation charged against income before income tax benefit
|
$ | 1,670 | $ | 1,288 | $ | 1,390 | ||||||
Related income tax benefit recognized in income
|
585 | 451 | 487 |
These amounts recognized have been allocated based on similar
methods to other compensation related expenses (i.e. salaries
and other benefits).
As of December 31, 2010, there was $946 in compensation
costs to be expensed over approximately the next two years
related to unvested share-based compensation arrangements
granted to employees of the Business.
Stock Options Murphys Executive
Compensation Committee (the Committee) fixes the option price of
each option granted at no less than fair market value (FMV) of
Murphy common stock on the date of the grant and fixes the
option term at seven years from such date. One-half of each
grant is exercisable after two years and the remainder after
three years. The fair value of each option award is estimated on
the date of grant using the Black-Scholes pricing model.
Performance-Based Restricted Stock Units
Restricted stock units were granted in 2008 through 2010 under
Murphys 2007 Long-Term Incentive Plan. Each grant will
vest if Murphy achieves specific objectives based on market
conditions at the end of the designated performance period.
Additional shares may be awarded if objectives are exceeded, but
some or all shares may be forfeited if objectives are not met.
The performance conditions generally include a measure of
Murphys total shareholder return over the performance
period compared to an industry peer group of companies. No
dividends are paid or voting rights exist on awards of
restricted stock units; however, if these restricted stock units
ultimately vest, past dividends from the date of award will also
accrue. During the performance period, restricted stock units
are subject to transfer restrictions and are subject to
forfeiture if a grantee terminates employment. The fair
13
SUPERIOR REFINING
BUSINESS
NOTES TO FINANCIAL STATEMENTS (Contd.)
December 31, 2010 and 2009
(Thousands of dollars)
NOTES TO FINANCIAL STATEMENTS (Contd.)
December 31, 2010 and 2009
(Thousands of dollars)
value of the performance units granted from 2008 through 2010
was estimated on the date of grant using a Monte Carlo valuation
model. If performance goals are not met, shares will not be
awarded, but recognized compensation cost associated with the
stock award would not be reversed.
H. | Financial Instruments and Risk Management |
Derivative Instruments The Business makes
limited use of derivative instruments to manage certain risks
related to commodity prices. The use of derivative instruments
for risk management is covered by operating policies and is
closely monitored by senior management. The Business does not
hold any derivatives for speculative purposes and it does not
use derivatives with leveraged or complex features. Derivative
instruments are traded primarily with creditworthy major
financial institutions or over national exchanges such as the
New York Mercantile Exchange (NYMEX). To qualify for hedge
accounting, the changes in the market value of a derivative
instrument must historically have been, and would be expected to
continue to be, highly effective at offsetting changes in the
prices of the hedged item. To the extent that the change in fair
value of a derivative instrument has less than perfect
correlation with the change in the fair value of the hedged
item, a portion of the change in fair value of the derivative
instrument is considered ineffective and would normally be
recorded in earnings during the affected period.
Fair Value The fair value of a financial
instrument is the amount at which the instrument could be
exchanged in a current transaction between willing parties. Cash
and cash equivalents, accounts receivable, investments and
noncurrent receivables included in other assets, accounts
payable and accrued liabilities all had fair values
approximating carrying amounts. The fair value of letters of
credit, which represents fees associated with obtaining the
instruments, was nominal.
Crude Oil Purchase Price Risks The Business
purchases crude oil as feedstock and is therefore subject to
commodity price risk. Short-term derivative instruments were
outstanding at December 31, 2010 to manage the purchase of
118,000 barrels of crude oil at the Refinery. Total pretax
charges from marking these contracts to market for 2010 were
$335.
At December 31, 2010, the fair value of derivative
instruments not designated as hedging instruments are presented
in the following table.
December 31, 2010 | ||||||||||||||
Asset Derivatives | Liability Derivatives | |||||||||||||
Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | |||||||||||
Commodity derivative contracts
|
| $ | |
Accounts payable and accrued liabilities |
$ | 335 |
No commodity derivative contracts were outstanding as of
December 31, 2009.
14
SUPERIOR REFINING
BUSINESS
NOTES TO FINANCIAL STATEMENTS (Contd.)
December 31, 2010 and 2009
(Thousands of dollars)
NOTES TO FINANCIAL STATEMENTS (Contd.)
December 31, 2010 and 2009
(Thousands of dollars)
For the three-year period ended December 31, 2010, the
gains and losses recognized in the Statements of Income for
commodity derivative contracts not designated as hedging
instruments are presented in the following table.
Location of Gain (Loss) Recognized |
Amount of Gain (Loss) Recognized |
|||||||
Year Ended | in Income on Derivative | in Income on Derivative | ||||||
December 31, 2010
|
Crude oil and product purchases | $ | (721 | ) | ||||
December 31, 2009
|
Crude oil and product purchases | (8,656 | ) | |||||
December 31, 2008
|
Crude oil and product purchases | 576 |
Credit Risks The primary credit risks for the
Business are associated with trade accounts receivable and
derivative instruments. Trade receivables arise mainly from
sales of petroleum products to a large number of customers who
are geographically dispersed in the United States. The credit
history and financial condition of potential customers are
reviewed before credit is extended, security is obtained when
deemed appropriate based on a potential customers
financial condition, and routine
follow-up
evaluations are made. The combination of these evaluations and
the large number of customers tends to limit the risk of credit
concentration to an acceptable level.
I. | Commitments |
Commitments for capital expenditures were approximately $19,003
at December 31, 2010 for projects at the Refinery.
J. | Contingencies |
The operations and earnings of the Business have been and may be
affected by various forms of governmental action. Examples of
such governmental action include, but are by no means limited
to: tax increases and retroactive tax claims; import and export
controls; price controls; currency controls; allocation of
supplies of crude oil and petroleum products, corn and other
goods; laws and regulations intended for the promotion of safety
and the protection
and/or
remediation of the environment; governmental support for other
forms of energy; and laws and regulations affecting the Business
relationships with employees, suppliers, customers, stockholders
and others. Because governmental actions are often motivated by
political considerations, may be taken without full
consideration of their consequences, and may be taken in
response to actions of other governments, it is not practical to
predict the likelihood of such actions, the form the actions may
take or the effect such actions may have on the Business.
Environmental and Safety Matters The Business
and other companies in the oil and gas industry are subject to
numerous federal, state and local laws and regulations dealing
with the environment. Violation of federal or state
environmental laws, regulations and permits can result in the
imposition of significant civil and criminal penalties,
injunctions and construction bans or delays. A discharge of
hazardous substances into the environment could, to the extent
such event is not insured, subject the Business to substantial
expense, including both the cost to comply with applicable
regulations and claims by neighboring landowners and other third
parties for any personal injury and property damage that might
result.
The Business currently owns or leases, and has in the past owned
or leased, properties at which hazardous substances have been or
are being handled. Although the Business has used operating and
disposal practices that were standard in the industry at the
time, hazardous
15
SUPERIOR REFINING
BUSINESS
NOTES TO FINANCIAL STATEMENTS (Contd.)
December 31, 2010 and 2009
(Thousands of dollars)
NOTES TO FINANCIAL STATEMENTS (Contd.)
December 31, 2010 and 2009
(Thousands of dollars)
substances may have been disposed of or released on or under the
properties owned or leased by the Business or on or under other
locations where these wastes have been taken for disposal. In
addition, many of these properties have been operated by third
parties whose treatment and disposal or release of hydrocarbons
or other wastes were not under the control of the Business.
Under existing laws, the Business could be required to remove or
remediate previously disposed wastes (including wastes disposed
of or released by prior owners or operators), and to clean up
contaminated property (including contaminated groundwater).
While some of these historical properties are in various stages
of negotiation, investigation,
and/or
cleanup, the Business is investigating the extent of any such
liability and the availability of applicable defenses and
believes costs related to these sites will not have a material
adverse affect on the Business future net income,
financial condition or liquidity.
There is the possibility that environmental expenditures could
be required at currently unidentified sites, and new or revised
regulations could require additional expenditures at the known
site. However, based on information currently available, the
amount of future remediation costs incurred at known or
currently unidentified sites is not expected to have a material
adverse effect on the Business future net income, cash
flows or liquidity.
Legal Matters The Business and Murphy are
engaged in a number of other legal proceedings, all of which
management considers routine and incidental to its business.
Based on information currently available, the ultimate
resolution of environmental and legal matters referred to in
this note is not expected to have a material adverse effect on
the Business net income, financial condition or liquidity
in a future period.
K. | Assets and Liabilities Measured at Fair Value |
The Business adopted the FASBs fair value measurements
rule on January 1, 2008. The portion of the rule applicable
to nonrecurring nonfinancial assets and liabilities was adopted
on January 1, 2009. The rule establishes a fair value
hierarchy based on the quality of inputs used to measure fair
value, with Level 1 being the highest quality and
Level 3 being the lowest quality. Level 1 inputs are
quoted prices in active markets for identical assets or
liabilities. Level 2 inputs are observable inputs other than
quoted prices included within Level 1. Level 3 inputs
are unobservable inputs which reflect assumptions about pricing
by market participants.
The Business carries certain liabilities at fair value in its
Balance Sheet. The fair value measurements for these assets at
December 31, 2010 are presented in the following table.
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Quoted Prices in |
||||||||||||||||
Active Markets for |
Significant |
|||||||||||||||
Identical Assets |
Significant Other |
Unobservable |
||||||||||||||
Fair Value at |
(Liabilities) |
Observable Inputs |
Inputs |
|||||||||||||
December 31, 2010 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Liabilities
|
||||||||||||||||
Commodity derivatives
|
$ | (335) | | (335) | | |||||||||||
There were no assets or liabilities measured at fair value as of
December 31, 2009.
The fair value of commodity derivative was determined based on
market quotes for West Texas Intermediate crude contracts at the
balance sheet date. The change in fair value of commodity
derivatives is recorded in Crude Oil and Product Purchases in
the Statements of Income. The
16
SUPERIOR REFINING
BUSINESS
NOTES TO FINANCIAL STATEMENTS (Contd.)
December 31, 2010 and 2009
(Thousands of dollars)
NOTES TO FINANCIAL STATEMENTS (Contd.)
December 31, 2010 and 2009
(Thousands of dollars)
carrying value of the Business Accounts Receivable and
Accounts Payable approximates fair value.
L. | Related Party Transactions |
Related-party transactions of the Business include the sale of
refined products by the Business to MOUSA, the purchases of
crude oil and natural gas by the Business from Murphy, and the
allocation of certain general and administrative costs from
Murphy to the Business.
Sales of refined products from the Business to MOUSA are
recorded at intercompany transfer prices which are market prices
adjusted by quality, location, and other differentials on the
date of the sale. Purchases of crude oil and natural gas by the
Business from Murphy are recorded at market prices. General and
administrative costs are charged by Murphy to the Business based
on managements determination of such costs attributable to
the operations of the Business. However, such related-party
transactions cannot be presumed to be carried out on an
arms length basis as the requisite conditions of
competitive, free-market dealings may not exist. For purposes of
these financial statements, payables and receivables related to
transactions between the Business and MOUSA are included as a
component of the Net Parent Investment.
Murphy provides cash management services to the Business. As a
result, the Business generally remits funds received to Murphy,
and Murphy pays all operating and capital expenditures on behalf
of the Business. Such cash transactions are reflected in the
change in the Net Parent Investment.
During 2010, 2009, and 2008, Murphy provided the Business with
certain general and administrative services, including
centralized corporate functions of legal, accounting, treasury,
environmental, engineering, information technology, and human
resources. For these services, Murphy charged the Business a
portion of its total general and administrative expenses
incurred in the United States, with this allocation based on one
or more of (a) percentage of direct costs incurred,
(b) Refinery throughput, and (c) employee headcount.
The amounts allocated were $12,756, $11,477, and $11,026 for the
years ended December 31, 2010, 2009, and 2008, respectively.
Management believes that the assumptions, estimates and
allocations used to prepare the financial statements of the
Business are reasonable. The revenues, costs and expenses
reflected in the financial statements may have been different
had the Business operated as a separate entity.
M. | Operating Expenses |
Operating expenses in 2008 included $4,791 for write-off of
work-in-progress
costs for an ultra-low sulfur diesel hydrotreater unit that was
abandoned.
N. | Subsequent Events |
Management has evaluated subsequent events through the date of
issuance of these financial statements (June 29, 2011). In
certain cases, events that occur after the balance sheet date
lead to recognition
and/or
disclosure in the financial statements.
17
SUPERIOR REFINING
BUSINESS
(Thousands of
dollars)
June 30, 2011 | December 31, 2010 | |||||||
(Unaudited) | ||||||||
Assets
|
||||||||
Current assets
|
||||||||
Accounts receivable, less allowance for doubtful accounts of
$862 in 2011 and $630 in 2010
|
$ | 80,906 | $ | 49,613 | ||||
Inventories, at lower of cost or market
|
||||||||
Crude oil and blend stocks
|
23,192 | 23,089 | ||||||
Finished products
|
81,907 | 41,329 | ||||||
Materials and supplies
|
14,175 | 9,597 | ||||||
Prepaid expenses
|
940 | 328 | ||||||
Deferred income taxes
|
6,563 | 6,557 | ||||||
Total current assets
|
207,683 | 130,513 | ||||||
Property, plant and equipment, at cost
|
362,863 | 346,299 | ||||||
Less accumulated depreciation
|
(194,934 | ) | (187,713 | ) | ||||
Net property, plant and equipment
|
167,929 | 158,586 | ||||||
Deferred turnaround costs
|
10,261 | 13,271 | ||||||
Deferred charges and other assets
|
669 | 663 | ||||||
Total assets
|
$ | 386,542 | $ | 303,033 | ||||
Liabilities and Net Parent Investment
|
||||||||
Current liabilities
|
||||||||
Accounts payable and accrued liabilities
|
112,792 | 105,679 | ||||||
Total current liabilities
|
112,792 | 105,679 | ||||||
Deferred income taxes
|
32,274 | 33,258 | ||||||
Deferred credits and other liabilities
|
2,943 | 3,096 | ||||||
Net parent investment
|
238,533 | 161,000 | ||||||
Total liabilities and net parent investment
|
$ | 386,542 | $ | 303,033 | ||||
See accompanying notes to financial statements.
18
SUPERIOR REFINING
BUSINESS
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Thousands of dollars)
(Unaudited)
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Thousands of dollars)
(Unaudited)
Six Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
Revenues
|
||||||||
Sales and other operating revenues:
|
||||||||
Related parties
|
$ | 527,793 | $ | 372,735 | ||||
Third parties
|
140,852 | 97,600 | ||||||
Other income
|
383 | 477 | ||||||
Total revenues
|
669,028 | 470,812 | ||||||
Costs and expenses
|
||||||||
Crude oil and product purchases:
|
||||||||
Related parties
|
94,711 | 40,305 | ||||||
Third parties
|
475,772 | 373,145 | ||||||
Operating expenses
|
52,283 | 40,267 | ||||||
General and administrative expenses
|
7,982 | 6,286 | ||||||
Depreciation expense
|
7,252 | 5,973 | ||||||
Interest expense
|
| 2 | ||||||
Total costs and expenses
|
638,000 | 465,978 | ||||||
Income before income taxes
|
31,028 | 4,834 | ||||||
Income tax expense
|
||||||||
Federal
|
9,622 | 1,500 | ||||||
State
|
1,548 | 243 | ||||||
Total income tax expense
|
11,170 | 1,743 | ||||||
Net income and comprehensive income
|
$ | 19,858 | $ | 3,091 | ||||
See accompanying notes to financial statements.
19
SUPERIOR REFINING
BUSINESS
STATEMENTS OF CHANGES IN NET PARENT INVESTMENT
(Thousands of dollars)
(Unaudited)
STATEMENTS OF CHANGES IN NET PARENT INVESTMENT
(Thousands of dollars)
(Unaudited)
2011 | ||||
Balance as of January 1
|
$ | 161,000 | ||
Net income
|
19,858 | |||
Change in amount owed to/from Parent
|
57,675 | |||
Balance as of June 30
|
$ | 238,533 | ||
See accompanying notes to financial statements
20
Six Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
Operating activities
|
||||||||
Net income
|
$ | 19,858 | $ | 3,091 | ||||
Adjustments to reconcile net income to net cash provided
(required) by operating activities:
|
||||||||
Depreciation expense
|
7,252 | 5,973 | ||||||
Amortization of deferred major repair costs
|
3,013 | 3,349 | ||||||
Deferred income taxes
|
(990 | ) | (126 | ) | ||||
Decreases (increases) in operating working capital:
|
||||||||
Accounts receivable trade
|
(31,293 | ) | (48,831 | ) | ||||
Inventories
|
(45,259 | ) | (45,078 | ) | ||||
Prepaid expenses
|
(612 | ) | 172 | |||||
Accounts payable and accrued liabilities
|
7,113 | 26,965 | ||||||
Other operating activities net
|
(159 | ) | (113 | ) | ||||
Net cash required by operating activities
|
(41,077 | ) | (54,598 | ) | ||||
Investing activities
|
||||||||
Property additions
|
(16,595 | ) | (19,721 | ) | ||||
Expenditures for major repairs
|
(3 | ) | (2,317 | ) | ||||
Net cash required by investing activities
|
(16,598 | ) | (22,038 | ) | ||||
Financing activities
|
||||||||
Net change in amount owed to (due from) parent
|
57,675 | 76,636 | ||||||
Net cash required by financing activities
|
57,675 | 76,636 | ||||||
Net change in cash and cash equivalents
|
| | ||||||
Cash and cash equivalents at beginning of year
|
| | ||||||
Cash and cash equivalents at end of year
|
$ | | $ | | ||||
Supplemental cash flow disclosures
|
||||||||
Cash paid during the year for interest
|
$ | | $ | 2 |
See accompanying notes to financial statements.
21
SUPERIOR REFINING
BUSINESS
NOTES TO FINANCIAL STATEMENTS
June 30, 2011 and 2010
(Thousands of dollars)
(Unaudited)
NOTES TO FINANCIAL STATEMENTS
June 30, 2011 and 2010
(Thousands of dollars)
(Unaudited)
A. | BUSINESS DESCRIPTION |
The Superior Refining Business (the Business)
includes the operations of the Superior, Wisconsin Refinery (the
Refinery) and the major related marketing assets.
The Business is owned by Murphy Oil USA, Inc.
(MOUSA), a wholly-owned subsidiary of Murphy Oil
Corporation (Murphy or Parent). Murphy
acquired the Refinery in 1958.
The Refinery has a rated throughput capacity of
35,000 barrels of crude oil per stream day. The Refinery is
located adjacent to the Interprovincial Pipeline (IPL) that
originates in Alberta, Canada. The Refinery utilizes the IPL to
obtain most of its crude oil feedstock, which includes light,
sweet synthetic and conventional crude oils as well as heavy
asphaltic type crude oil. In addition to a crude unit, the
Refinerys other units include vacuum distillation, fluid
catalytic cracking, naphtha hydrotreating, catalytic reforming,
and gasoline and distillate hydrotreating.
The major marketing assets of the Business include several owned
or leased refined product terminals, including:
Superior, Wisconsin light products, asphalt
Duluth, Minnesota light products
Duluth Marine, Minnesota marine bunker fuels
Rhinelander, Wisconsin asphalt
Crookston, Minnesota asphalt
Grand Island, Nebraska (leased) asphalt
Tooele, Utah (leased) asphalt
The Business includes the crude oil supply activities of the
Refinery. Amounts owed for purchases of crude oil from third
parties are included in accounts payable and accrued liabilities.
The Superior terminal is adjacent to the Refinery. Product is
shipped to the Duluth light products terminal by pipeline.
Asphalt is trucked to Rhinelander and Crookston and is
transported by rail to Grand Island and Tooele. Marine bunker
fuels are shipped via truck to the Duluth marine terminal, which
is located on Lake Superior.
B. | SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation These financial
statements have been prepared in accordance with applicable
United States generally accepted accounting principles (GAAP).
Although the Business is operated as a component of an
integrated U.S. refining and marketing (R&M)
operation, these financial statements are presented as if the
Business was operated as a stand-alone entity separate from an
integrated R&M operation.
In the opinion of the Business management, the unaudited
financial statements presented herein include all accruals
necessary to present fairly the Business financial
position at June 30, 2011, and the results of operations,
cash flows and changes in net parent investment for the
six-month periods ended June 30, 2011 and 2010, in
conformity with accounting principles generally accepted in the
United States.
22
SUPERIOR REFINING
BUSINESS
NOTES TO FINANCIAL STATEMENTS (Contd.)
June 30, 2011 and 2010
(Thousands of dollars)
(Unaudited)
NOTES TO FINANCIAL STATEMENTS (Contd.)
June 30, 2011 and 2010
(Thousands of dollars)
(Unaudited)
Significant considerations in preparing these financial
statements include:
| use of MOUSA s historical cost basis in the Business. | |
| the Business sells a significant portion of its refined products to related parties, primarily the marketing division of MOUSA. The transfer price used for these product sales is based primarily on the Platts Group Ill Mean posted price for the month the sale to the related party occurred. | |
| the Business purchases certain crude oil feedstock from affiliates of Murphy. The purchase price has been established for this crude oil, based on NYMEX WTI calendar month average plus/minus a differential. | |
| the Business does not have its own financing facilities. The Business relies on Murphy and its subsidiaries to provide credit and financing as needed to operate. | |
| allocations and estimates of general and administrative costs attributable to operations of the Business have been made as determined by management in accordance with SEC Staff Accounting Bulletin (SAB) Topic 1-B Allocation of expenses and related disclosures in financial statements of subsidiaries, divisions or lesser business components of another entity. This includes allocation for MOUSA and Murphy overhead as deemed appropriate. |
The historical results are not necessarily indicative of the
results to be expected in future periods.
Use of Estimates In preparing the financial
statements of the Business in conformity with U.S. GAAP,
management has made a number of estimates and assumptions
related to the reporting of assets, liabilities, revenues, and
expenses and the disclosure of contingent assets and
liabilities. Actual results may differ from the estimates.
Revenue Recognition Revenues associated with
sales of refined products are recorded when deliveries have
occurred and legal ownership of the commodity transfers to the
customer, which may include related party sales to other
components of MOUSA. Title transfers for bulk refined products
generally occur at pipeline custody points or upon truck loading
at product terminals.
The Business enters into buy/sell and similar arrangements when
crude oil and other petroleum products are held at one location
but are needed at a different location. The Business often pays
or receives funds related to the buy/sell arrangement based on
location or quality differences. The Business accounts for such
transactions on a net basis in its Statements of Income.
Taxes Collected From Customers and Remitted to Government
Authorities Excise and other taxes collected on
sales of refined products and remitted to governmental agencies
are excluded from revenues and costs and expenses in the
Statements of Income. Excise taxes collected and remitted were
$19,446 and $18,376 in the six-month periods ended June 30,
2011 and 2010, respectively.
Cash and Cash Equivalents Short-term
investments, which include government securities and other
instruments with government securities as collateral, that have
a maturity of three months or less from the date of purchase are
classified as cash equivalents. The Business, similar to all
MOUSA businesses, participates in Murphys consolidated
U.S. cash management system. Therefore, all cash inflows
and outflows of the Business are managed by Murphy and accounted
for as a change in Net Parent Investment. See also Net Parent
Investment section of this note and Note K.
23
SUPERIOR REFINING
BUSINESS
NOTES TO FINANCIAL STATEMENTS (Contd.)
June 30, 2011 and 2010
(Thousands of dollars)
(Unaudited)
NOTES TO FINANCIAL STATEMENTS (Contd.)
June 30, 2011 and 2010
(Thousands of dollars)
(Unaudited)
Accounts Receivable The Business
accounts receivable include certain direct sales to third
parties from the Refinery and sales from terminals. The
receivables are recorded at the invoiced amount and do not bear
interest. The allowance for doubtful accounts is
managements best estimate of the amount of probable credit
losses on these receivables. Management reviews this allowance
at least quarterly and bases its assessment on a combination of
current information about its customers and historical write-off
experience.
Inventories Inventories of crude oil, other
blend stocks and finished products are valued at the lower of
cost, applied on a
last-in,
first-out (LIFO) basis, or market. Materials and supplies are
valued at the lower of average cost or estimated value.
Property, Plant and Equipment Refineries and
certain marketing facilities are depreciated primarily using the
straight-line method with depreciable lives ranging from 16 to
25 years. Gains and losses on disposals or retirements are
included in income as a separate component of revenues.
Management evaluates impairment of long-lived assets on a
specific asset basis or in groups of similar assets, as
applicable. An impairment is recognized when the estimated
undiscounted future net cash flows of an asset are less than its
carrying value.
The Business has not recorded an asset retirement obligation
(ARO) for its refining and certain of its marketing assets
because sufficient information is presently not available to
estimate a range of potential settlement dates for the
obligation. These assets are consistently being upgraded and are
expected to be operational into the foreseeable future. An ARO
liability will be recorded in the period in which sufficient
information exists to estimate the liability. An insignificant
ARO liability for the Duluth Marine terminal has been recorded
in the Business Balance Sheets within deferred credits and
other liabilities for all periods presented.
Turnarounds for major processing units are scheduled at four to
five year intervals at the Refinery. Turnaround work associated
with various other less significant units at the Refinery will
vary depending on operating requirements and events. The
Business defers turnaround costs incurred and amortizes such
costs through Operating Expenses over the period until the next
scheduled turnaround. All other maintenance and repairs are
expensed as incurred. Renewals and betterments are capitalized.
Environmental Liabilities A liability for
environmental matters is established when it is probable that an
environmental obligation exists and the cost can be reasonably
estimated. If there is a range of reasonably estimated costs,
the most likely amount will be recorded, or if no amount is most
likely, the minimum of the range is used. Related expenditures
are charged against the liability. Environmental remediation
liabilities have not been discounted for the time value of
future expected payments. Environmental expenditures that have
future economic benefit are capitalized.
Income Taxes The Business accounts for income
taxes using the asset and liability method. Under this method,
income taxes are provided for amounts currently payable and for
amounts deferred as tax assets and liabilities based on
differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. Deferred
income taxes are measured using the enacted tax rates that are
in effect when the differences are expected to reverse.
The Business results of operations are included in the
consolidated federal income tax return of Murphy, while in most
cases, these results have been included in the various state tax
returns of MOUSA. For these financial statements, federal and
state income taxes have been computed and recorded as if the
Business filed separate federal and state income tax returns.
Federal and state
24
SUPERIOR REFINING
BUSINESS
NOTES TO FINANCIAL STATEMENTS (Contd.)
June 30, 2011 and 2010
(Thousands of dollars)
(Unaudited)
NOTES TO FINANCIAL STATEMENTS (Contd.)
June 30, 2011 and 2010
(Thousands of dollars)
(Unaudited)
income tax benefits of operating losses generated are recognized
to the extent that they could be expected to reduce federal
income tax expense for the Business via a carryback to a
previous year or carried forward for use in a subsequent year.
The calculations of current and deferred income taxes,
therefore, require use of certain assumptions, allocations and
estimates that management believes are reasonable to reflect the
Business income taxes as a stand-alone taxpayer. The
Business has elected to classify any interest expense and
penalties related to the underpayment of income taxes in
Interest Expense in the Statements of Income.
Derivative Instruments and Hedging Activities
The fair value of a derivative instrument is allocated as an
asset or liability in the Business Balance Sheets as the
derivative provides an effective economic hedge to identified
risks associated with the Business. Upon entering into a
derivative contract, management may designate the derivative as
either a fair value hedge or a cash flow hedge, or decide that
the contract is not a hedge, and thenceforth, recognize changes
in the fair value of the contract in earnings. Management
documents the relationship between the derivative instrument
designated as a hedge and the hedged items as well as its
objective for risk management and strategy for use of the
hedging instrument to manage the risk. Derivative instruments
designated as fair value or cash flow hedges are linked to
specific assets and liabilities or to specific firm commitments
or forecasted transactions. Management assesses at inception and
on an ongoing basis whether a derivative instrument used as a
hedge is highly effective in offsetting changes in the fair
value or cash flows of the hedged item. A derivative that is not
a highly effective hedge does not qualify for hedge accounting.
Changes in the fair value of a qualifying fair value hedge are
recorded in earnings along with the gain or loss on the hedged
item. Changes in the fair value of a qualifying cash flow hedge
are recorded in other comprehensive loss until the hedged item
is recognized in earnings. When the income effect of the
underlying cash flow hedged item is recognized in the Statements
of Income, the fair value of the associated cash flow hedge is
reclassified from other comprehensive income or loss into
earnings. Ineffective portions of a cash flow hedge
derivatives change in fair value are recognized currently
in earnings. If a derivative instrument no longer qualifies as a
cash flow hedge and the underlying forecasted transaction is no
longer probable of occurring, hedge accounting is discontinued
and the gain or loss recorded in other comprehensive or loss is
recognized immediately in earnings. See Note H for further
information about the Business derivative instruments.
Stock-Based Compensation The fair value of
awarded stock options and restricted stock units is determined
based on a combination of management assumptions and the market
value of Murphys common stock. Management uses the
Black-Scholes option pricing model for computing the fair value
of stock options. The primary assumptions made by management
include the expected life of the stock option award and the
expected volatility of Murphys common stock prices.
Management uses both historical data and current information to
support its assumptions. Stock option expense is recognized on a
straight-line basis over the respective vesting period of two or
three years. Management uses a Monte Carlo valuation model to
determine the fair value of performance-based restricted stock
units and expense is recognized over the three-year vesting
period. Management estimates the number of stock options and
performance-based restricted stock units that will not vest and
adjusts its compensation expense accordingly. Differences
between estimated and actual vested amounts are accounted for as
an adjustment to expense when known. See Note G for a
discussion of the basis of allocation of such costs.
Net Parent Investment The Net Parent
Investment represents a net balance reflecting Murphys
initial investment in the Business and subsequent adjustments
resulting from the operations
25
SUPERIOR REFINING
BUSINESS
NOTES TO FINANCIAL STATEMENTS (Contd.)
June 30, 2011 and 2010
(Thousands of dollars)
(Unaudited)
NOTES TO FINANCIAL STATEMENTS (Contd.)
June 30, 2011 and 2010
(Thousands of dollars)
(Unaudited)
of the Business and various transactions between the Business
and Murphy. The balance is the result of the Business
participation in Murphys centralized cash management
program under which all the Business cash receipts are
remitted to and all cash disbursements are funded by Murphy. The
net balance includes amounts due from or owed to Parent. Other
transactions affecting the Net Parent Investment include general
and administrative expenses incurred by Murphy and allocated to
the Business. There are no terms of settlement or interest
charges associated with the Net Parent Investment balance.
Changes in amounts owed to or due from Parent are included in
financing activities in the Statements of Cash Flows.
C. | INVENTORIES |
Inventories accounted for under the LIFO method totaled $105,099
at June 30, 2011 and $64,418 at December 31, 2010.
These amounts were $153,124 and $104,163, respectively, less
than such inventories would have been valued using the FIFO
method.
D. | PROPERTY, PLANT AND EQUIPMENT |
Investment in property, plant and equipment is shown below.
June 30, 2011 | December 31, 2010 | |||||||||||||||
Cost | Net | Cost | Net | |||||||||||||
Refining
|
$ | 337,866 | 158,134 | 322,110 | 149,126 | |||||||||||
Other
|
24,997 | 9,795 | 24,189 | 9,460 | ||||||||||||
$ | 362,863 | 167,929 | 346,299 | 158,586 | ||||||||||||
E. | INCOME TAXES |
The following table reconciles income taxes based on the
U.S. statutory tax rate to the Companys income tax
expense.
Six Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
Income tax expense based on the U.S. statutory tax rate
|
$ | 10,860 | 1,692 | |||||
State income taxes, net of federal benefit
|
1,006 | 158 | ||||||
Qualified production activities deduction
|
(671 | ) | (105 | ) | ||||
Other, net
|
(25 | ) | (2 | ) | ||||
Total
|
$ | 11,170 | 1,743 | |||||
In managements judgment, the deferred tax assets will more
likely than not be realized as reductions of future taxable
income of the Business. There were no valuation allowances for
deferred tax assets as of June 30, 2011 and 2010.
Under U.S. GAAP the financial statement recognition of the
benefit for a tax position is dependent upon the benefit being
more likely than not to be sustainable upon audit by the
applicable taxing authority. If this threshold is met, the tax
benefit is then measured and recognized at the largest
26
SUPERIOR REFINING
BUSINESS
NOTES TO FINANCIAL STATEMENTS (Contd.)
June 30, 2011 and 2010
(Thousands of dollars)
(Unaudited)
NOTES TO FINANCIAL STATEMENTS (Contd.)
June 30, 2011 and 2010
(Thousands of dollars)
(Unaudited)
amount that is greater than 50 percent likely of being
realized upon ultimate settlement. The Business has not recorded
any effect for unrecognized income tax benefits for either of
the periods reported.
Murphys tax returns in multiple jurisdictions that include
the Business are subject to audit by taxing authorities. These
audits often take years to complete and settle. As of
June 30, 2011, the earliest year remaining open for audit
and/or
settlement in the United States is 2007. Although management
believes that recorded liabilities for unsettled issues are
adequate, gains or losses could occur in future years from
resolution of outstanding matters.
F. | EMPLOYEE AND RETIREE BENEFIT PLANS |
Pension and Other Postretirement Plans Murphy
sponsors noncontributory defined benefit pension plans for union
employees at the Refinery. In addition, Murphy has
noncontributory defined benefit pension plans that cover most
full-time non-union employees of the Business. The activities of
these plans are allocated by Murphys consulting actuary to
the various operations of Murphy, which includes the Business.
Murphys tax qualified plans meet the funding requirements
of federal laws and regulations. Murphy also sponsors a plan
that provides health care and life insurance benefits, which are
not funded, for most retired employees. The health care benefits
are contributory; the life insurance benefits are
noncontributory. For purposes of these financial statements, the
Business is considered to be participating in multi-employer
benefit plans of Murphy due to commingling of various plan
assets of Murphy.
The Business allocated share of the Parents employee
pension and postretirement plan expenses was $1,257 and $1,103
for the six-month periods ended June 30, 2011 and 2010,
respectively. Employee benefit plan expenses incurred by the
Business are included in operating expenses with the related
payroll costs.
Thrift Plans Most full-time employees of the
Business may participate in thrift plans by allotting up to a
specified percentage of their base pay. Murphy matches
contributions at a stated percentage of each employees
allotment based on years of participation in the plans. Amounts
charged to expense for these plans for the six-month periods
ended June 30, 2011 and 2010 were $213 and $219,
respectively.
G. | STOCK-BASED COMPENSATION |
Costs resulting from all share-based payment transactions are
allocated and recognized as an expense in the financial
statements using a fair value-based measurement method over the
periods that the awards vest. Certain employees of Murphy have
received annual grants in the form of Murphy stock options
and/or
restricted stock units. Accordingly, the Business has recorded
compensation expense for these plans in accordance with
SAB Topic 1-B. All compensation expense related to these
plans for full-time employees of the Business has been allocated
100% to the Business. For employees whose services cover both
the Business and other Murphy entities, the Business records
share-based compensation based on the estimated percentage of
time spent by each management member providing services to the
Business applied to the total share-based
27
SUPERIOR REFINING
BUSINESS
NOTES TO FINANCIAL STATEMENTS (Contd.)
June 30, 2011 and 2010
(Thousands of dollars)
(Unaudited)
NOTES TO FINANCIAL STATEMENTS (Contd.)
June 30, 2011 and 2010
(Thousands of dollars)
(Unaudited)
compensation of each employee. Amounts recognized in the
financial statements by the Business with respect to
Murphys share-based plans are as follows.
Six Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
Compensation charged against income before income tax benefit
|
$ | 772 | 826 | |||||
Related income tax benefit recognized in income
|
270 | 289 |
These amounts recognized have been allocated based on similar
methods to other compensation related expenses (i.e. salaries
and other benefits).
As of June 30, 2011, there was $828 in compensation costs
to be expensed over approximately the next two and a half years
related to unvested share-based compensation arrangements
granted to employees of the Business.
Stock Options Murphys Executive
Compensation Committee (the Committee) fixes the option price of
each option granted at no less than fair market value (FMV) of
Murphy common stock on the date of the grant and fixes the
option term at seven years from such date. One-half of each
grant is exercisable after two years and the remainder after
three years. The fair value of each option award is estimated on
the date of grant using the Black-Scholes pricing model.
Performance-Based Restricted Stock Units
Restricted stock units were granted in 2010 and 2011 under
Murphys 2007 Long-Term Incentive Plan, Each grant will
vest if Murphy achieves specific objectives based on market
conditions at the end of the designated performance period.
Additional shares may be awarded if objectives are exceeded, but
some or all shares may be forfeited if objectives are not met.
The performance conditions generally include a measure of
Murphys total shareholder return over the performance
period compared to an industry peer group of companies. No
dividends are paid or voting rights exist on awards of
restricted stock units; however, if these restricted stock units
ultimately vest, past dividends from the date of award will also
accrue. During the performance period, restricted stock units
are subject to transfer restrictions and are subject to
forfeiture if a grantee terminates employment. The fair value of
the performance units granted was estimated on the date of grant
using a Monte Carlo valuation model. If performance goals are
not met, shares will not be awarded, but recognized compensation
cost associated with the stock award would not be reversed.
H. | FINANCIAL INSTRUMENTS AND RISK MANAGEMENT |
Derivative Instruments The Business makes
limited use of derivative instruments to manage certain risks
related to commodity prices. The use of derivative instruments
for risk management is covered by operating policies and is
closely monitored by senior management. The Business does not
hold any derivatives for speculative purposes and it does not
use derivatives with leveraged or complex features. Derivative
instruments are traded primarily with creditworthy major
financial institutions or over national exchanges such as the
New York Mercantile Exchange (NYMEX). To qualify for hedge
accounting, the changes in the market value of a derivative
instrument must historically have been, and would be expected to
continue to be, highly effective at offsetting changes in the
prices of the hedged item. To the extent that the change in fair
value of a derivative instrument has less than perfect
correlation with the change in the fair value of the hedged
item, a portion of the
28
SUPERIOR REFINING
BUSINESS
NOTES TO FINANCIAL STATEMENTS (Contd.)
June 30, 2011 and 2010
(Thousands of dollars)
(Unaudited)
NOTES TO FINANCIAL STATEMENTS (Contd.)
June 30, 2011 and 2010
(Thousands of dollars)
(Unaudited)
change in fair value of the derivative instrument is considered
ineffective and would normally be recorded in earnings during
the affected period.
Fair Value The fair value of a financial
instrument is the amount at which the instrument could be
exchanged in a current transaction between willing parties. Cash
and cash equivalents, accounts receivable, investments and
noncurrent receivables included in other assets, accounts
payable and accrued liabilities all had fair values
approximating carrying amounts. The fair value of letters of
credit, which represents fees associated with obtaining the
instruments, was nominal.
Crude Oil Purchase Price Risks The Business
purchases crude oil as feedstock and is therefore subject to
commodity price risk. Short-term derivative instruments were
outstanding at June 30, 2011 and 2010 to manage the
purchase of 0.1 million barrels of crude oil in each period
at the Refinery. The total impact of marking to market
derivative contracts in the six-month periods ended
June 30, 2011 and 2010 decreased income before taxes by
$121 and increased income before taxes by $249, respectively.
At June 30, 2011 and December 31, 2010, the fair value
of derivative instruments not designated as hedging instruments
are presented in the following table.
June 30, 2011 | December 31, 2010 | |||||||||||
Asset (Liability) Derivatives | Asset (Liability) Derivatives | |||||||||||
Type of Contracts | Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | ||||||||
Commodity Derivative
|
Accounts receivable | $ | 1,857 | Accounts payable and accrued liabilities | $ | (335 | ) |
For the six-month periods ended June 30, 2011 and 2010, the
gains recognized in the Statements of Income for commodity
derivative contracts not designated as hedging instruments are
presented in the following table.
Location of Gain |
Amount of Gain |
|||||||
Recognized in |
Recognized in |
|||||||
Six Months Ended | Income on Derivative | Income on Derivative | ||||||
June 30, 2011
|
Crude oil and product purchases | $ | 388 | |||||
June 30, 2010
|
Crude oil and product purchases | 579 |
Credit Risks The primary credit risks for the
Business are associated with trade accounts receivable and
derivative instruments. Trade receivables arise mainly from
sales of petroleum products to a large number of customers who
are geographically dispersed in the United States. The credit
history and financial condition of potential customers are
reviewed before credit is extended, security is obtained when
deemed appropriate based on a potential customers
financial condition, and routine
follow-up
evaluations are made. The combination of these evaluations and
the large number of customers tends to limit the risk of credit
concentration to an acceptable level.
I. | CONTINGENCIES |
The operations and earnings of the Business have been and may be
affected by various forms of governmental action. Examples of
such governmental action include, but are by no means limited
to: tax increases and retroactive tax claims; import and export
controls; price controls; currency controls; allocation of
supplies of crude oil and petroleum products, corn and other
goods; laws and regulations
29
SUPERIOR REFINING
BUSINESS
NOTES TO FINANCIAL STATEMENTS (Contd.)
June 30, 2011 and 2010
(Thousands of dollars)
(Unaudited)
NOTES TO FINANCIAL STATEMENTS (Contd.)
June 30, 2011 and 2010
(Thousands of dollars)
(Unaudited)
intended for the promotion of safety and the protection
and/or
remediation of the environment; governmental support for other
forms of energy; and laws and regulations affecting the Business
relationships with employees, suppliers, customers, stockholders
and others. Because governmental actions are often motivated by
political considerations, may be taken without full
consideration of their consequences, and may be taken in
response to actions of other governments, it is not practical to
predict the likelihood of such actions, the form the actions may
take or the effect such actions may have on the Business.
Environmental and Safety Matters The Business
and other companies in the oil and gas industry are subject to
numerous federal, state and local laws and regulations dealing
with the environment. Violation of federal or state
environmental laws, regulations and permits can result in the
imposition of significant civil and criminal penalties,
injunctions and construction bans or delays. A discharge of
hazardous substances into the environment could, to the extent
such event is not insured, subject the Business to substantial
expense, including both the cost to comply with applicable
regulations and claims by neighboring landowners and other third
parties for any personal injury and property damage that might
result.
The Business currently owns or leases, and has in the past owned
or leased, properties at which hazardous substances have been or
are being handled. Although the Business has used operating and
disposal practices that were standard in the industry at the
time, hazardous substances may have been disposed of or released
on or under the properties owned or leased by the Business or on
or under other locations where these wastes have been taken for
disposal. In addition, many of these properties have been
operated by third parties whose treatment and disposal or
release of hydrocarbons or other wastes were not under the
control of the Business. Under existing laws, the Business could
be required to remove or remediate previously disposed wastes
(including wastes disposed of or released by prior owners or
operators), and to clean up contaminated property (including
contaminated groundwater). While some of these historical
properties are in various stages of negotiation, investigation,
and/or
cleanup, the Business is investigating the extent of any such
liability and the availability of applicable defenses and
believes costs related to these sites will not have a material
adverse affect on the Business future net income,
financial condition or liquidity.
There is the possibility that environmental expenditures could
be required at currently unidentified sites, and new or revised
regulations could require additional expenditures at the known
site. However, based on information currently available, the
amount of future remediation costs incurred at known or
currently unidentified sites is not expected to have a material
adverse effect on the Business future net income, cash
flows or liquidity.
Legal Matters The Business and Murphy are
engaged in a number of other legal proceedings, all of which
management considers routine and incidental to its business.
Based on information currently available, the ultimate
resolution of environmental and legal matters referred to in
this note is not expected to have a material adverse effect on
the Business net income, financial condition or liquidity
in a future period.
J. | ASSETS AND LIABILITIES MEASURED AT FAIR VALUE |
The FASBs fair value measurements rule establishes a fair
value hierarchy based on the quality of inputs used to measure
fair value, with Level 1 being the highest quality and
Level 3 being the lowest quality. Level 1 inputs are
quoted prices in active markets for identical assets or
liabilities.
30
SUPERIOR REFINING
BUSINESS
NOTES TO FINANCIAL STATEMENTS (Contd.)
June 30, 2011 and 2010
(Thousands of dollars)
(Unaudited)
NOTES TO FINANCIAL STATEMENTS (Contd.)
June 30, 2011 and 2010
(Thousands of dollars)
(Unaudited)
Level 2 inputs are observable inputs other than quoted
prices included within Level 1. Level 3 inputs are
unobservable inputs which reflect assumptions about pricing by
market participants.
The Business carries certain assets and liabilities at fair
value in its Balance Sheet. The fair value measurements for
these assets and liabilities at June 30, 2011 and
December 31, 2010 are presented in the following table.
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Quoted Prices in |
||||||||||||||||
Active Markets for |
||||||||||||||||
Identical Assets |
Significant Other |
Significant |
||||||||||||||
(Liabilities) |
Observable Inputs |
Unobservable |
||||||||||||||
Fair Value | (Level 1) | (Level 2) | Inputs (Level 3) | |||||||||||||
Assets (Liabilities)
|
||||||||||||||||
Commodity Derivatives
|
||||||||||||||||
June 30, 2011
|
$ | 1,857 | | 1,857 | | |||||||||||
December 31, 2010
|
$ | (335 | ) | | (335 | ) | |
The fair value of commodity derivative was determined based on
market quotes for West Texas Intermediate crude contracts at the
balance sheet date. The change in fair value of commodity
derivatives is recorded in Crude Oil and Product Purchases in
the Statements of Income. The carrying value of the
Business Accounts Receivable and Accounts Payable
approximates fair value.
K. | RELATED-PARTY TRANSACTIONS |
Related-party transactions of the Business include the sale of
refined products by the Business to MOUSA, the purchases of
crude oil and natural gas by the Business from Murphy, and the
allocation of certain general and administrative costs from
Murphy to the Business.
Sales of refined products from the Business to MOUSA are
recorded at intercompany transfer prices which are market prices
adjusted by quality, location, and other differentials on the
date of the sale. Purchases of crude oil and natural gas by the
Business from Murphy are recorded at market prices. General and
administrative costs are charged by Murphy to the Business based
on managements determination of such costs attributable to
the operations of the Business. However, such related-party
transactions cannot be presumed to be carried out on an
arms length basis as the requisite conditions of
competitive, free-market dealings may not exist. For purposes of
these financial statements, payables and receivables related to
transactions between the Business and MOUSA are included as a
component of the Net Parent Investment.
Murphy provides cash management services to the Business. As a
result, the Business generally remits funds received to Murphy,
and Murphy pays all operating and capital expenditures on behalf
of the Business. Such cash transactions are reflected in the
change in the Net Parent Investment.
During 2011 and 2010, Murphy provided the Business with certain
general and administrative services, including centralized
corporate functions of legal, accounting, treasury,
environmental, engineering, information technology, and human
resources. For these services, Murphy charged the Business a
portion of its total general and administrative expenses
incurred in the United States, with this allocation based on one
or more of (a) percentage of direct costs incurred,
(b) Refinery throughput, and (c) employee headcount.
The amounts allocated were $7,543 and $6,013 for the six-month
periods ended June 30, 2011 and 2010, respectively.
31
SUPERIOR REFINING
BUSINESS
NOTES TO FINANCIAL STATEMENTS (Contd.)
June 30, 2011 and 2010
(Thousands of dollars)
(Unaudited)
NOTES TO FINANCIAL STATEMENTS (Contd.)
June 30, 2011 and 2010
(Thousands of dollars)
(Unaudited)
Management believes that the assumptions, estimates and
allocations used to prepare the financial statements of the
Business are reasonable. The revenues, costs and expenses
reflected in the financial statements may have been different
had the Business operated as a separate entity.
L. | SUBSEQUENT EVENTS |
Management has evaluated subsequent events through the date of
issuance of these financial statements (August 25, 2011).
In certain cases, events that occur after the balance sheet date
lead to recognition
and/or
disclosure in the financial statements.
In July 2010, Murphy announced that its Board of Directors had
approved plans to exit the U.S. refining and U.K. refining
and marketing businesses. These operations include the Business.
On July 25, 2011, Murphy announced that MOUSA had entered into
an agreement to sell the Business for $214 million. As part
of this agreement, liquid inventories at these locations will
also be sold at fair value.
32