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Unaudited Consolidated Financial Statements for the second quarter ended June 30, 2014
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
Three months ended June 30 | Six months ended June 30 | ||||||||||
($ millions) | 2014 | 2013 | 2014 | 2013 | |||||||
Revenues and Other Income | |||||||||||
Operating revenues, net of royalties (note 3) | 10 446 | 9 648 | 20 788 | 19 491 | |||||||
Other income (note 4) | 203 | 66 | 338 | 239 | |||||||
10 649 | 9 714 | 21 126 | 19 730 | ||||||||
Expenses | |||||||||||
Purchases of crude oil and products | 4 649 | 4 439 | 8 350 | 8 498 | |||||||
Operating, selling and general | 2 543 | 2 335 | 5 057 | 4 606 | |||||||
Transportation | 201 | 208 | 428 | 368 | |||||||
Depreciation, depletion, amortization and impairment (note 5) | 2 690 | 1 029 | 3 830 | 2 028 | |||||||
Exploration | 131 | 79 | 257 | 209 | |||||||
Loss (gain) on disposal of assets | 4 | (1 | ) | 4 | (1 | ) | |||||
Project start-up costs | 1 | 9 | 1 | 10 | |||||||
Voyageur upgrader project charges (note 12) | — | — | — | 176 | |||||||
Financing (income) expenses (note 8) | (158 | ) | 445 | 313 | 774 | ||||||
10 061 | 8 543 | 18 240 | 16 668 | ||||||||
Earnings before Income Taxes | 588 | 1 171 | 2 886 | 3 062 | |||||||
Income Taxes | |||||||||||
Current | 649 | 352 | 1 460 | 892 | |||||||
Deferred | (272 | ) | 139 | (270 | ) | 396 | |||||
377 | 491 | 1 190 | 1 288 | ||||||||
Net Earnings | 211 | 680 | 1 696 | 1 774 | |||||||
Other Comprehensive (Loss) Income | |||||||||||
Items that may be subsequently reclassified to earnings | |||||||||||
Foreign currency translation adjustment | (161 | ) | 172 | 31 | 191 | ||||||
Items that will not be reclassified to earnings | |||||||||||
Actuarial gain (loss) on employee retirement benefit plans, net of income taxes | 4 | 329 | (56 | ) | 386 | ||||||
Other Comprehensive (Loss) Income | (157 | ) | 501 | (25 | ) | 577 | |||||
Total Comprehensive Income | 54 | 1 181 | 1 671 | 2 351 | |||||||
Per Common Share (dollars) (note 10) | |||||||||||
Net earnings – basic | 0.14 | 0.45 | 1.15 | 1.17 | |||||||
Net earnings – diluted | 0.14 | 0.45 | 1.15 | 1.17 | |||||||
Cash dividends | 0.23 | 0.20 | 0.46 | 0.33 | |||||||
See accompanying notes to the interim consolidated financial statements.
SUNCOR ENERGY INC. 2014 SECOND QUARTER 43
CONSOLIDATED BALANCE SHEETS
(unaudited)
($ millions) | June 30 2014 | Dec 31 2013 | |||||
Assets | |||||||
Current assets | |||||||
Cash and cash equivalents | 4 932 | 5 202 | |||||
Accounts receivable | 5 629 | 5 254 | |||||
Inventories | 4 661 | 3 944 | |||||
Income taxes receivable | 673 | 294 | |||||
Total current assets | 15 895 | 14 694 | |||||
Property, plant and equipment, net | 57 758 | 57 270 | |||||
Exploration and evaluation | 2 190 | 2 772 | |||||
Other assets | 473 | 422 | |||||
Goodwill and other intangible assets | 3 086 | 3 092 | |||||
Deferred income taxes | 50 | 65 | |||||
Total assets | 79 452 | 78 315 | |||||
Liabilities and Shareholders' Equity | |||||||
Current liabilities | |||||||
Short-term debt | 800 | 798 | |||||
Current portion of long-term debt | 460 | 457 | |||||
Accounts payable and accrued liabilities | 7 329 | 7 090 | |||||
Current portion of provisions | 756 | 998 | |||||
Income taxes payable | 1 395 | 1 263 | |||||
Total current liabilities | 10 740 | 10 606 | |||||
Long-term debt | 10 214 | 10 203 | |||||
Other long-term liabilities | 1 599 | 1 464 | |||||
Provisions | 4 484 | 4 078 | |||||
Deferred income taxes | 10 529 | 10 784 | |||||
Shareholders' equity | 41 886 | 41 180 | |||||
Total liabilities and shareholders' equity | 79 452 | 78 315 | |||||
See accompanying notes to the interim consolidated financial statements.
44 SUNCOR ENERGY INC. 2014 SECOND QUARTER
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three months ended June 30 | Six months ended June 30 | ||||||||||
($ millions) | 2014 | 2013 | 2014 | 2013 | |||||||
Operating Activities | |||||||||||
Net earnings | 211 | 680 | 1 696 | 1 774 | |||||||
Adjustments for: | |||||||||||
Depreciation, depletion, amortization and impairment | 2 690 | 1 029 | 3 830 | 2 028 | |||||||
Deferred income taxes | (272 | ) | 139 | (270 | ) | 396 | |||||
Accretion | 51 | 50 | 102 | 98 | |||||||
Unrealized foreign exchange (gain) loss on U.S. dollar denominated debt | (326 | ) | 290 | 31 | 458 | ||||||
Change in fair value of derivative contracts | (69 | ) | 28 | (58 | ) | 88 | |||||
Loss (gain) on disposal of assets | 4 | (1 | ) | 4 | (1 | ) | |||||
Share-based compensation | 209 | 55 | 155 | (62 | ) | ||||||
Exploration | 58 | 14 | 80 | 51 | |||||||
Settlement of decommissioning and restoration liabilities | (88 | ) | (71 | ) | (198 | ) | (258 | ) | |||
Other | (62 | ) | 37 | (86 | ) | (38 | ) | ||||
(Increase) decrease in non-cash working capital | (123 | ) | 420 | (1 270 | ) | 710 | |||||
Cash flow provided by operating activities | 2 283 | 2 670 | 4 016 | 5 244 | |||||||
Investing Activities | |||||||||||
Capital and exploration expenditures | (1 763 | ) | (1 980 | ) | (3 253 | ) | (3 465 | ) | |||
Acquisitions (note 12) | — | — | — | (515 | ) | ||||||
Proceeds from disposal of assets | 14 | 2 | 30 | 6 | |||||||
Other investments | (26 | ) | (2 | ) | (35 | ) | (6 | ) | |||
Decrease (increase) in non-cash working capital | 85 | (170 | ) | 100 | (172 | ) | |||||
Cash flow used in investing activities | (1 690 | ) | (2 150 | ) | (3 158 | ) | (4 152 | ) | |||
Financing Activities | |||||||||||
Net change in short-term debt | (1 | ) | (176 | ) | (1 | ) | 14 | ||||
Net change in long-term debt | (5 | ) | 153 | (10 | ) | 149 | |||||
Issuance of common shares under share option plans | 150 | 3 | 203 | 44 | |||||||
Purchase of common shares for cancellation (note 7) | (271 | ) | (294 | ) | (655 | ) | (699 | ) | |||
Dividends paid on common shares | (338 | ) | (302 | ) | (676 | ) | (499 | ) | |||
Cash flow used in financing activities | (465 | ) | (616 | ) | (1 139 | ) | (991 | ) | |||
Increase (decrease) in Cash and Cash Equivalents | 128 | (96 | ) | (281 | ) | 101 | |||||
Effect of foreign exchange on cash and cash equivalents | (42 | ) | 35 | 11 | 44 | ||||||
Cash and cash equivalents at beginning of period | 4 846 | 4 591 | 5 202 | 4 385 | |||||||
Cash and Cash Equivalents at End of Period | 4 932 | 4 530 | 4 932 | 4 530 | |||||||
Supplementary Cash Flow Information | |||||||||||
Interest paid | 295 | 278 | 367 | 351 | |||||||
Income taxes paid | 543 | 127 | 1 668 | 684 | |||||||
See accompanying notes to the interim consolidated financial statements.
SUNCOR ENERGY INC. 2014 SECOND QUARTER 45
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(unaudited)
($ millions) | Share Capital | Contributed Surplus | Foreign Currency Translation | Cash Flow Hedges | Retained Earnings | Total | Number of Common Shares (thousands) | ||||||||
At December 31, 2012 | 19 945 | 579 | (223 | ) | 13 | 18 901 | 39 215 | 1 523 057 | |||||||
Net earnings | — | — | — | — | 1 774 | 1 774 | — | ||||||||
Foreign currency translation adjustment | — | — | 191 | — | — | 191 | — | ||||||||
Actuarial gain on employee retirement benefit plans, net of income taxes of $133 | — | — | — | — | 386 | 386 | — | ||||||||
Total comprehensive income | — | — | 191 | — | 2 160 | 2 351 | — | ||||||||
Issued under share option plans | 80 | (32 | ) | — | — | — | 48 | 2 333 | |||||||
Issued under dividend reinvestment plan | 12 | — | — | — | (12 | ) | — | — | |||||||
Purchase of common shares for cancellation | (295 | ) | — | — | — | (404 | ) | (699 | ) | (22 506 | ) | ||||
Change in liability for share purchase commitment | (88 | ) | — | — | — | (116 | ) | (204 | ) | — | |||||
Share-based compensation | — | 31 | — | — | — | 31 | — | ||||||||
Dividends paid on common shares | — | — | — | — | (499 | ) | (499 | ) | — | ||||||
At June 30, 2013 | 19 654 | 578 | (32 | ) | 13 | 20 030 | 40 243 | 1 502 884 | |||||||
At December 31, 2013 | 19 395 | 598 | 102 | 13 | 21 072 | 41 180 | 1 478 315 | ||||||||
Net earnings | — | — | — | — | 1 696 | 1 696 | — | ||||||||
Foreign currency translation adjustment | — | — | 31 | — | — | 31 | — | ||||||||
Actuarial loss on employee retirement benefit plans, net of income taxes of $18 | — | — | — | — | (56 | ) | (56 | ) | — | ||||||
Total comprehensive income | — | — | 31 | — | 1 640 | 1 671 | — | ||||||||
Issued under share option plans | 264 | (21 | ) | — | — | — | 243 | 6 473 | |||||||
Issued under dividend reinvestment plan | 13 | — | — | — | (13 | ) | — | — | |||||||
Purchase of common shares for cancellation (note 7) | (222 | ) | — | — | — | (433 | ) | (655 | ) | (16 919 | ) | ||||
Change in liability for share purchase commitment | 47 | — | — | — | 49 | 96 | — | ||||||||
Share-based compensation | — | 27 | — | — | — | 27 | — | ||||||||
Dividends paid on common shares | — | — | — | — | (676 | ) | (676 | ) | — | ||||||
At June 30, 2014 | 19 497 | 604 | 133 | 13 | 21 639 | 41 886 | 1 467 869 | ||||||||
See accompanying notes to the interim consolidated financial statements.
46 SUNCOR ENERGY INC. 2014 SECOND QUARTER
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. REPORTING ENTITY AND DESCRIPTION OF THE BUSINESS
Suncor Energy Inc. (Suncor or the company) is an integrated energy company headquartered in Canada. Suncor's operations include oil sands development and upgrading, onshore and offshore oil and gas production, petroleum refining, and product marketing primarily under the Petro-Canada brand. The consolidated financial statements of the company comprise the company and its subsidiaries and the company's interests in associates and jointly controlled entities.
The address of the company's registered office is 150 – 6th Avenue S.W., Calgary, Alberta, Canada, T2P 3E3.
(a) Statement of Compliance
These condensed interim consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS), specifically International Accounting Standard (IAS) 34Interim Financial Reporting as issued by the International Accounting Standards Board. They are condensed as they do not include all of the information required for full annual financial statements, and they should be read in conjunction with the consolidated financial statements for the year ended December 31, 2013.
The policies applied in these condensed interim consolidated financial statements are based on IFRS issued and outstanding as at July 30, 2014, the date the Audit Committee approved these statements on behalf of the Board of Directors.
(b) Basis of Measurement
The consolidated financial statements are prepared on a historical cost basis except as detailed in the accounting policies disclosed in the company's consolidated financial statements for the year ended December 31, 2013, except for the retrospective adoption of the following interpretation effective January 1, 2014:
International Financial Reporting Interpretation Committee 21Levies clarifies that an entity recognizes a liability for a levy when the activity that triggers payment, as identified by the relevant legislation, occurs. It also clarifies that a levy liability is accrued progressively only if the activity that triggers payment occurs over a period of time, and that a liability should not be recognized before the specified minimum threshold to trigger that liability is reached. The adoption of this interpretation did not have an impact to the company's condensed interim consolidated financial statements.
(c) Functional Currency and Presentation Currency
These consolidated financial statements are presented in Canadian dollars, which is the company's functional currency.
(d) Use of Estimates and Judgment
The timely preparation of financial statements requires that management make estimates and assumptions and use judgment. Accordingly, actual results may differ from estimated amounts as future confirming events occur. Significant estimates and judgment used in the preparation of the financial statements are described in the company's consolidated financial statements for the year ended December 31, 2013.
SUNCOR ENERGY INC. 2014 SECOND QUARTER 47
The company's operating segments are reported based on the nature of their products and services and management responsibility.
Intersegment sales of crude oil and natural gas are accounted for at market values and are included, for segmented reporting, in revenues of the segment making the transfer and expenses of the segment receiving the transfer. Intersegment amounts are eliminated on consolidation.
Three months ended June 30 | Oil Sands | Exploration and Production | Refining and Marketing | Corporate, Energy Trading and Eliminations | Total | |||||||||||||||||
($ millions) | 2014 | 2013 | 2014 | 2013 | 2014 | 2013 | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Revenues and Other Income | ||||||||||||||||||||||
Gross revenues | 2 861 | 1 971 | 1 183 | 1 682 | 6 772 | 6 395 | 23 | 28 | 10 839 | 10 076 | ||||||||||||
Intersegment revenues | 1 017 | 734 | 60 | — | 36 | 54 | (1 113 | ) | (788 | ) | — | — | ||||||||||
Less: Royalties | (252 | ) | (93 | ) | (141 | ) | (335 | ) | — | — | — | — | (393 | ) | (428 | ) | ||||||
Operating revenues, net of royalties | 3 626 | 2 612 | 1 102 | 1 347 | 6 808 | 6 449 | (1 090 | ) | (760 | ) | 10 446 | 9 648 | ||||||||||
Other income (expenses) | (5 | ) | 6 | 178 | 7 | 4 | 4 | 26 | 49 | 203 | 66 | |||||||||||
3 621 | 2 618 | 1 280 | 1 354 | 6 812 | 6 453 | (1 064 | ) | (711 | ) | 10 649 | 9 714 | |||||||||||
Expenses | ||||||||||||||||||||||
Purchases of crude oil and products | 106 | 54 | 132 | 123 | 5 526 | 5 099 | (1 115 | ) | (837 | ) | 4 649 | 4 439 | ||||||||||
Operating, selling and general | 1 514 | 1 455 | 139 | 196 | 618 | 560 | 272 | 124 | 2 543 | 2 335 | ||||||||||||
Transportation | 122 | 105 | 22 | 39 | 68 | 75 | (11 | ) | (11 | ) | 201 | 208 | ||||||||||
Depreciation, depletion, amortization and impairment | 1 934 | 562 | 559 | 311 | 169 | 125 | 28 | 31 | 2 690 | 1 029 | ||||||||||||
Exploration | 5 | 15 | 126 | 64 | — | — | — | — | 131 | 79 | ||||||||||||
Loss (gain) on disposal of assets | 5 | — | — | — | (1 | ) | (1 | ) | — | — | 4 | (1 | ) | |||||||||
Project start-up costs | 1 | 9 | — | — | — | — | — | — | 1 | 9 | ||||||||||||
Voyageur upgrader project charges | — | — | — | — | — | — | — | — | — | — | ||||||||||||
Financing (income) expenses | 33 | 34 | 8 | 27 | 4 | (1 | ) | (203 | ) | 385 | (158 | ) | 445 | |||||||||
3 720 | 2 234 | 986 | 760 | 6 384 | 5 857 | (1 029 | ) | (308 | ) | 10 061 | 8 543 | |||||||||||
Earnings (Loss) before Income Taxes | (99 | ) | 384 | 294 | 594 | 428 | 596 | (35 | ) | (403 | ) | 588 | 1 171 | |||||||||
Income Taxes | ||||||||||||||||||||||
Current | 281 | — | 379 | 262 | 121 | 80 | (132 | ) | 10 | 649 | 352 | |||||||||||
Deferred | (304 | ) | 90 | (48 | ) | 31 | 1 | 84 | 79 | (66 | ) | (272 | ) | 139 | ||||||||
(23 | ) | 90 | 331 | 293 | 122 | 164 | (53 | ) | (56 | ) | 377 | 491 | ||||||||||
Net Earnings (Loss) | (76 | ) | 294 | (37 | ) | 301 | 306 | 432 | 18 | (347 | ) | 211 | 680 | |||||||||
Capital and Exploration Expenditures | 986 | 1 487 | 461 | 315 | 246 | 165 | 70 | 13 | 1 763 | 1 980 | ||||||||||||
48 SUNCOR ENERGY INC. 2014 SECOND QUARTER
Six months ended June 30 | Oil Sands | Exploration and Production | Refining and Marketing | Corporate, Energy Trading and Eliminations | Total | |||||||||||||||||
($ millions) | 2014 | 2013 | 2014 | 2013 | 2014 | 2013 | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Revenues and Other Income | ||||||||||||||||||||||
Gross revenues | 5 561 | 4 093 | 2 412 | 3 338 | 13 514 | 12 916 | 49 | 59 | 21 536 | 20 406 | ||||||||||||
Intersegment revenues | 2 207 | 1 655 | 272 | 116 | 54 | 114 | (2 533 | ) | (1 885 | ) | — | — | ||||||||||
Less: Royalties | (444 | ) | (266 | ) | (304 | ) | (649 | ) | — | — | — | — | (748 | ) | (915 | ) | ||||||
Operating revenues, net of royalties | 7 324 | 5 482 | 2 380 | 2 805 | 13 568 | 13 030 | (2 484 | ) | (1 826 | ) | 20 788 | 19 491 | ||||||||||
Other income | 4 | 6 | 180 | 40 | 11 | 16 | 143 | 177 | 338 | 239 | ||||||||||||
7 328 | 5 488 | 2 560 | 2 845 | 13 579 | 13 046 | (2 341 | ) | (1 649 | ) | 21 126 | 19 730 | |||||||||||
Expenses | ||||||||||||||||||||||
Purchases of crude oil and products | 160 | 174 | 284 | 251 | 10 349 | 9 895 | (2 443 | ) | (1 822 | ) | 8 350 | 8 498 | ||||||||||
Operating, selling and general | 3 043 | 2 852 | 292 | 357 | 1 257 | 1 103 | 465 | 294 | 5 057 | 4 606 | ||||||||||||
Transportation | 262 | 190 | 48 | 68 | 139 | 132 | (21 | ) | (22 | ) | 428 | 368 | ||||||||||
Depreciation, depletion, amortization and impairment | 2 603 | 1 107 | 858 | 615 | 321 | 245 | 48 | 61 | 3 830 | 2 028 | ||||||||||||
Exploration | 80 | 89 | 177 | 120 | — | — | — | — | 257 | 209 | ||||||||||||
Loss (gain) on disposal of assets | 5 | — | — | — | (1 | ) | (1 | ) | — | — | 4 | (1 | ) | |||||||||
Project start-up costs | 1 | 10 | — | — | — | — | — | — | 1 | 10 | ||||||||||||
Voyageur upgrader project charges | — | 176 | — | — | — | — | — | — | — | 176 | ||||||||||||
Financing expenses | 61 | 66 | 17 | 34 | 6 | — | 229 | 674 | 313 | 774 | ||||||||||||
6 215 | 4 664 | 1 676 | 1 445 | 12 071 | 11 374 | (1 722 | ) | (815 | ) | 18 240 | 16 668 | |||||||||||
Earnings (Loss) before Income Taxes | 1 113 | 824 | 884 | 1 400 | 1 508 | 1 672 | (619 | ) | (834 | ) | 2 886 | 3 062 | ||||||||||
Income Taxes | ||||||||||||||||||||||
Current | 579 | 1 | 707 | 682 | 406 | 184 | (232 | ) | 25 | 1 460 | 892 | |||||||||||
Deferred | (289 | ) | 203 | (80 | ) | 63 | 9 | 274 | 90 | (144 | ) | (270 | ) | 396 | ||||||||
290 | 204 | 627 | 745 | 415 | 458 | (142 | ) | (119 | ) | 1 190 | 1 288 | |||||||||||
Net Earnings (Loss) | 823 | 620 | 257 | 655 | 1 093 | 1 214 | (477 | ) | (715 | ) | 1 696 | 1 774 | ||||||||||
Capital and Exploration Expenditures | 1 897 | 2 523 | 905 | 675 | 351 | 243 | 100 | 24 | 3 253 | 3 465 | ||||||||||||
SUNCOR ENERGY INC. 2014 SECOND QUARTER 49
Other income consists of the following:
Three months ended June 30 | Six months ended June 30 | ||||||||||
($ millions) | 2014 | 2013 | 2014 | 2013 | |||||||
Energy trading activities | |||||||||||
Change in fair value of contracts | (6 | ) | 86 | 106 | 117 | ||||||
Gains (losses) on inventory valuation | 6 | (52 | ) | 11 | 35 | ||||||
Risk management activities | (8 | ) | (2 | ) | (14 | ) | (3 | ) | |||
Reserves redetermination(1) | 145 | — | 145 | — | |||||||
Investment and interest income | 35 | 15 | 62 | 40 | |||||||
Renewable energy grants | 11 | 17 | 17 | 24 | |||||||
Change in value of pipeline commitments and other | 20 | 2 | 11 | 26 | |||||||
203 | 66 | 338 | 239 | ||||||||
- (1)
- Other income of $145 million ($32 million after-tax) is for the reserves redetermination of 1.2 million barrels of oil receivable related to an interest in a Norwegian asset that Suncor previously owned.
Oil Sands
Joslyn Mining Project
During the second quarter of 2014, the company recognized an after-tax impairment charge of $718 million related to the company's interest in the project, charged against Property, Plant and Equipment ($318 million) and Exploration and Evaluation assets ($400 million).
Total E&P Canada Ltd. (Total E&P), the operator of the Joslyn mining project, together with the company and the other co-owners of the project, agreed to scale back certain development activities in order to focus on engineering studies to further optimize the project development plan. As a result of the company's assessment of expected future net cash flows and the uncertainty of the project, including the timing of the development plans, the company performed an impairment test using a fair value less cost of disposal methodology, with a discounted cash flow approach, based on the latest estimate of lease-wide contingent resources and a risk-adjusted discount rate of 9% (Level 3 fair value inputs). Relevant market transactions were also considered. The calculation of the recoverable amount is sensitive to the likelihood and timing of expected first oil, discount rate and capital construction costs.
Other
Following a review of repurpose options for assets that have been constructed for projects that have since been cancelled or deferred, the company recognized an after-tax impairment charge of $223 million during the second quarter of 2014 for certain Oil Sands assets, including a pipeline and related compressor, as well as steam generator components, as management does not anticipate using these assets in the manner initially intended.
Exploration and Production
Libya
During the second quarter of 2014, the company recognized an after-tax impairment charge of $297 million related to its Libyan assets, charged against Property, Plant and Equipment ($129 million) and Exploration and Evaluation assets ($168 million).
As a result of shut-in production due to the continued closure of certain Libyan export terminals and the company's production plans for the remaining term of the Exploration and Production Sharing Agreements, the company performed an impairment test on its Libyan assets using a fair value less cost of disposal methodology. An expected cash flow approach was used based on 2013 year-end reserves data updated for current price forecasts and the current production
50 SUNCOR ENERGY INC. 2014 SECOND QUARTER
plans, with three scenarios representing i) resumption of operations in six months, ii) resumption of operations in 18 months, and iii) suspension of all activity at the end of 2015. The first two scenarios were equally weighted at 45% each and the final scenario was assigned a weighting of 10%. All scenarios were present valued using a risk-adjusted discount rate of 17%, and an average price of approximately US$103.00 per barrel through 2016-2021 escalated at an average of 2% per year thereafter (Level 3 fair value inputs). The calculation of the recoverable amount is sensitive to the discount rate and prices. A 2% increase in discount rate and 5% decrease in price each would increase the after-tax impairment charge by approximately $65 million.
The remaining carrying value of the company's net assets in Libya as at June 30, 2014 was approximately $300 million.
The following table summarizes the share-based compensation expense recorded for all plans within Operating, Selling and General expense.
Three months ended June 30 | Six months ended June 30 | ||||||||
($ millions) | 2014 | 2013 | 2014 | 2013 | |||||
Equity-settled plans | 9 | 10 | 27 | 31 | |||||
Cash-settled plans | 227 | 47 | 328 | 67 | |||||
236 | 57 | 355 | 98 | ||||||
On February 21, 2014, the company amended its Normal Course Issuer Bid that commenced on August 5, 2013 (the 2013 NCIB) to allow for an additional $1.0 billion worth of its common shares to be repurchased. Pursuant to the 2013 NCIB, Suncor is permitted to purchase for cancellation a total of approximately $2.8 billion worth of its common shares between August 5, 2013 and August 4, 2014. As at June 30, 2014, the company had repurchased a total of 41.3 million common shares for a total consideration of $1.5 billion.
In July 2014, the Toronto Stock Exchange (TSX) accepted a notice filed by the company of its intention to renew its normal course issuer bid (the 2014 NCIB) to continue to purchase shares under its previously announced buyback program, through the facilities of the TSX, New York Stock Exchange and/or alternative trading platforms. The notice provides that the company may purchase for cancellation up to approximately $1.1 billion worth of its common shares beginning August 5, 2014 and ending August 4, 2015.
The following table summarizes the share repurchase activities during the period:
Three months ended June 30 | Six months ended June 30 | |||||||||
($ millions, except as noted) | 2014 | 2013 | 2014 | 2013 | ||||||
Share repurchase activities(thousands of common shares) | ||||||||||
Shares repurchased | 6 465 | 9 666 | 16 919 | 22 506 | ||||||
Amounts charged to | ||||||||||
Share capital | 85 | 127 | 222 | 295 | ||||||
Retained earnings | 186 | 167 | 433 | 404 | ||||||
Share repurchase cost | 271 | 294 | 655 | 699 | ||||||
SUNCOR ENERGY INC. 2014 SECOND QUARTER 51
Under an automatic repurchase plan agreement with an independent broker, the company has recorded the following liability for share repurchases that may take place during its internal blackout period:
($ millions) | Jun 30 2014 | Dec 31 2013 | ||||
Amounts charged to | ||||||
Share capital | 61 | 108 | ||||
Retained earnings | 149 | 198 | ||||
Liability for share purchase commitment | 210 | 306 | ||||
8. FINANCING (INCOME) EXPENSES
Three months ended June 30 | Six months ended June 30 | ||||||||||
($ millions) | 2014 | 2013 | 2014 | 2013 | |||||||
Interest on debt | 179 | 172 | 362 | 349 | |||||||
Capitalized interest | (113 | ) | (104 | ) | (221 | ) | (200 | ) | |||
Interest expense | 66 | 68 | 141 | 149 | |||||||
Interest on pension and other post-retirement benefits | 12 | 17 | 26 | 34 | |||||||
Accretion | 51 | 50 | 102 | 98 | |||||||
Foreign exchange (gain) loss on U.S. dollar denominated debt | (326 | ) | 290 | 31 | 458 | ||||||
Foreign exchange and other | 39 | 20 | 13 | 35 | |||||||
(158 | ) | 445 | 313 | 774 | |||||||
Pursuant to the previously disclosed 2013 proposal letter from the Canada Revenue Agency (CRA), the company received a Notice of Reassessment (NOR) from the CRA during the second quarter of 2014, regarding the income tax treatment of realized losses in 2007 on the settlement of certain derivative contracts. The total amount of the NOR including tax, penalty and interest was approximately $920 million. The company strongly disagrees with the CRA's position and continues to firmly believe it will be able to successfully defend its original filing position and will take the appropriate actions to resolve this matter.
The company has provided security to the CRA for $460 million (50% of the NOR amount).
The company also expects to receive NORs from certain provincial tax authorities related to this matter for approximately $280 million in the second half of 2014.
If the company is unsuccessful in defending its tax filing position, it could be subject to an earnings and cash impact of up to $1.2 billion.
52 SUNCOR ENERGY INC. 2014 SECOND QUARTER
Three months ended June 30 | Six months ended June 30 | ||||||||||
($ millions) | 2014 | 2013 | 2014 | 2013 | |||||||
Net earnings | 211 | 680 | 1 696 | 1 774 | |||||||
Dilutive impact of accounting for awards as equity-settled(1) | — | — | — | (10 | ) | ||||||
Net earnings – diluted | 211 | 680 | 1 696 | 1 764 | |||||||
(millions of common shares) | |||||||||||
Weighted average number of common shares | 1 468 | 1 506 | 1 470 | 1 512 | |||||||
Dilutive securities: | |||||||||||
Effect of share options | 4 | 1 | 3 | 2 | |||||||
Weighted average number of diluted common shares | 1 472 | 1 507 | 1 473 | 1 514 | |||||||
(dollars per common share) | |||||||||||
Basic earnings per share | 0.14 | 0.45 | 1.15 | 1.17 | |||||||
Diluted earnings per share | 0.14 | 0.45 | 1.15 | 1.17 | |||||||
- (1)
- Cash payment alternatives are accounted for as cash-settled plans. As these awards can be exchanged for common shares of the company, they are considered potentially dilutive and are included in the calculation of the company's diluted net earnings per share if they have a dilutive impact in the period. Accounting for these awards as equity-settled was determined to have a dilutive impact for the six months ended June 30, 2013.
Fair Value Hierarchy
The following table presents the company's financial instruments measured at fair value for each hierarchy level as at June 30, 2014.
($ millions) | Level 1 | Level 2 | Level 3 | Total Fair Value | ||||||
Accounts receivable | 314 | 35 | — | 349 | ||||||
Accounts payable | (384 | ) | (47 | ) | — | (431 | ) | |||
(70 | ) | (12 | ) | — | (82 | ) | ||||
During the second quarter of 2014, there were no transfers between Level 1 and Level 2 fair value measurements, and no transfers into and out of Level 3 fair value measurements.
At June 30, 2014, the carrying value of fixed-term debt accounted for using the amortized cost method was $9.6 billion (December 31, 2013 – $9.6 billion) and the fair value was $11.7 billion (December 31, 2013 – $11.2 billion). The estimated fair value of long-term debt is based on pricing sourced from market data, which is considered Level 2 fair value inputs.
Effective March 27, 2013, the company acquired Total E&P's interest in Voyageur Upgrader Limited Partnership (VULP) for $515 million and gained full control over the partnership assets. The transaction was accounted for as a business combination.
As VULP was in the development stage and therefore had no revenues and the majority of costs were capitalized, no significant net earnings were generated.
SUNCOR ENERGY INC. 2014 SECOND QUARTER 53
The fair value of consideration transferred and the assets acquired and liabilities assumed at the date of acquisition are summarized below:
($ millions) | ||||
Total purchase price | 515 | |||
Allocation of purchase price: | ||||
Property, plant and equipment | 374 | |||
Deferred income taxes | 312 | |||
Decommissioning and restoration provisions | (81 | ) | ||
Contracts and liabilities acquired | (90 | ) | ||
Net assets acquired | 515 | |||
The fair value attributed to the property, plant and equipment acquired was based on an expected future cash flow approach for assets expected to be retained, with a risk-adjusted discount rate of 10%. For assets expected to be sold, the fair value was determined based on management's best estimate of the recoverable amount.
The fair value of the decommissioning and restoration provisions was determined based on management's best estimate of the costs to complete the reclamation activities, the timing of cash outflows, method of reclamation, the discount rate and management's anticipated use of the area in the future.
Following the acquisition, the company announced that it was not proceeding with the Voyageur upgrader project. The decision was a result of a joint strategic and economic review launched by the company and its co-owner, Total E&P, in response to a change in market conditions that challenged the economics of the project. As a result, a charge of $176 million was recorded to net earnings during the first quarter of 2013 related to not proceeding with the upgrading portion of the project. In the fourth quarter of 2013, an adjustment of $94 million was recorded to reduce the previously estimated costs, resulting in a net charge of $82 million for 2013.
13. SALE OF NATURAL GAS BUSINESS
During the third quarter of 2013, the company sold a significant portion of its natural gas business for $1.0 billion before closing adjustments and other closing costs. An after-tax gain of $130 million was recorded in the Exploration and Production segment upon closing of the sale.
During the six months ended June 30, 2014, the company increased its commitments by approximately $1.1 billion in support of the company's market access strategy, activities to expand its storage and logistics network, and exploration drilling activities.
On July 17, 2014, the company completed an acquisition of a sulphur extraction business for a purchase price of $120 million in its Refining and Marketing segment, subject to closing adjustments.
On July 30, 2014, the company's Board of Directors approved an increase to the company's quarterly dividend to $0.28 per common share beginning in the third quarter of 2014.
54 SUNCOR ENERGY INC. 2014 SECOND QUARTER
Unaudited Consolidated Financial Statements for the second quarter ended June 30, 2014
1. REPORTING ENTITY AND DESCRIPTION OF THE BUSINESS
2. BASIS OF PREPARATION
3. SEGMENTED INFORMATION
4. OTHER INCOME
5. ASSET IMPAIRMENT
6. SHARE-BASED COMPENSATION
7. NORMAL COURSE ISSUER BID
8. FINANCING (INCOME) EXPENSES
9. INCOME TAXES
10. EARNINGS PER COMMON SHARE
11. FINANCIAL INSTRUMENTS
12. VOYAGEUR UPGRADER PROJECT
13. SALE OF NATURAL GAS BUSINESS
14. COMMITMENTS
15. SUBSEQUENT EVENTS