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Unaudited Consolidated Financial Statements for the third quarter ended September 30, 2014
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
Three months ended September 30 | Nine months ended September 30 | ||||||||||
($ millions) | 2014 | 2013 | 2014 | 2013 | |||||||
Revenues and Other Income | |||||||||||
Operating revenues, net of royalties (note 3) | 10 175 | 10 288 | 30 963 | 29 779 | |||||||
Other income (note 4) | 98 | 85 | 436 | 324 | |||||||
10 273 | 10 373 | 31 399 | 30 103 | ||||||||
Expenses | |||||||||||
Purchases of crude oil and products | 4 642 | 4 603 | 12 992 | 13 101 | |||||||
Operating, selling and general | 2 345 | 2 321 | 7 403 | 6 937 | |||||||
Transportation | 200 | 205 | 628 | 573 | |||||||
Depreciation, depletion, amortization and impairment (note 5) | 1 110 | 1 089 | 4 940 | 3 117 | |||||||
Exploration | 57 | 38 | 314 | 247 | |||||||
Gain on disposal of assets (note 14) | (84 | ) | (133 | ) | (80 | ) | (134 | ) | |||
Voyageur upgrader project charges (note 13) | — | — | — | 176 | |||||||
Financing expenses (income) (note 8) | 571 | (65 | ) | 884 | 709 | ||||||
8 841 | 8 058 | 27 081 | 24 726 | ||||||||
Earnings before Income Taxes | 1 432 | 2 315 | 4 318 | 5 377 | |||||||
Income Taxes | |||||||||||
Current | 518 | 627 | 1 978 | 1 519 | |||||||
Deferred | (5 | ) | (6 | ) | (275 | ) | 390 | ||||
513 | 621 | 1 703 | 1 909 | ||||||||
Net Earnings | 919 | 1 694 | 2 615 | 3 468 | |||||||
Other Comprehensive Income (Loss) | |||||||||||
Items that may be subsequently reclassified to earnings | |||||||||||
Foreign currency translation adjustment | 176 | (55 | ) | 207 | 136 | ||||||
Unrealized gain on assets available for sale, net of income taxes of $13 (note 15) | 85 | — | 85 | — | |||||||
Items that will not be reclassified to earnings | |||||||||||
Actuarial (loss) gain on employee retirement benefit plans, net of income taxes | (166 | ) | (33 | ) | (222 | ) | 353 | ||||
Other Comprehensive Income (Loss) | 95 | (88 | ) | 70 | 489 | ||||||
Total Comprehensive Income | 1 014 | 1 606 | 2 685 | 3 957 | |||||||
Per Common Share (dollars) (note 10) | |||||||||||
Net earnings – basic | 0.63 | 1.13 | 1.78 | 2.30 | |||||||
Net earnings – diluted | 0.62 | 1.13 | 1.78 | 2.30 | |||||||
Cash dividends | 0.28 | 0.20 | 0.74 | 0.53 | |||||||
See accompanying notes to the interim consolidated financial statements.
42 SUNCOR ENERGY INC. 2014 THIRD QUARTER
CONSOLIDATED BALANCE SHEETS
(unaudited)
($ millions) | Sept 30 2014 | Dec 31 2013 | |||||
Assets | |||||||
Current assets | |||||||
Cash and cash equivalents | 5 351 | 5 202 | |||||
Accounts receivable | 4 865 | 5 254 | |||||
Inventories | 4 366 | 3 944 | |||||
Income taxes receivable | 452 | 294 | |||||
Total current assets | 15 034 | 14 694 | |||||
Property, plant and equipment, net | 58 582 | 57 270 | |||||
Exploration and evaluation | 2 220 | 2 772 | |||||
Other assets | 582 | 422 | |||||
Goodwill and other intangible assets | 3 084 | 3 092 | |||||
Deferred income taxes | 65 | 65 | |||||
Total assets | 79 567 | 78 315 | |||||
Liabilities and Shareholders' Equity | |||||||
Current liabilities | |||||||
Short-term debt | 840 | 798 | |||||
Current portion of long-term debt | 481 | 457 | |||||
Accounts payable and accrued liabilities | 6 926 | 7 090 | |||||
Current portion of provisions | 774 | 998 | |||||
Income taxes payable | 1 109 | 1 263 | |||||
Total current liabilities | 10 130 | 10 606 | |||||
Long-term debt | 10 603 | 10 203 | |||||
Other long-term liabilities | 1 875 | 1 464 | |||||
Provisions | 4 440 | 4 078 | |||||
Deferred income taxes | 10 536 | 10 784 | |||||
Shareholders' equity | 41 983 | 41 180 | |||||
Total liabilities and shareholders' equity | 79 567 | 78 315 | |||||
See accompanying notes to the interim consolidated financial statements.
SUNCOR ENERGY INC. 2014 THIRD QUARTER 43
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three months ended September 30 | Nine months ended September 30 | ||||||||||
($ millions) | 2014 | 2013 | 2014 | 2013 | |||||||
Operating Activities | |||||||||||
Net earnings | 919 | 1 694 | 2 615 | 3 468 | |||||||
Adjustments for: | |||||||||||
Depreciation, depletion, amortization and impairment | 1 110 | 1 089 | 4 940 | 3 117 | |||||||
Deferred income taxes | (5 | ) | (6 | ) | (275 | ) | 390 | ||||
Accretion | 49 | 50 | 151 | 148 | |||||||
Unrealized foreign exchange loss (gain) on U.S. dollar denominated debt | 456 | (157 | ) | 487 | 301 | ||||||
Change in fair value of derivative contracts | (56 | ) | (151 | ) | (114 | ) | (63 | ) | |||
Gain on disposal of assets | (84 | ) | (133 | ) | (80 | ) | (134 | ) | |||
Share-based compensation | (37 | ) | 195 | 118 | 133 | ||||||
Exploration | 16 | 8 | 96 | 59 | |||||||
Settlement of decommissioning and restoration liabilities | (83 | ) | (84 | ) | (281 | ) | (342 | ) | |||
Other | (5 | ) | 23 | (91 | ) | (15 | ) | ||||
Decrease (increase) in non-cash working capital | 625 | (8 | ) | (645 | ) | 702 | |||||
Cash flow provided by operating activities | 2 905 | 2 520 | 6 921 | 7 764 | |||||||
Investing Activities | |||||||||||
Capital and exploration expenditures | (1 808 | ) | (1 539 | ) | (5 061 | ) | (5 004 | ) | |||
Acquisitions (note 12) | (121 | ) | — | (121 | ) | (515 | ) | ||||
Proceeds from disposal of assets | 180 | 904 | 210 | 910 | |||||||
Other investments | (13 | ) | (9 | ) | (48 | ) | (15 | ) | |||
Decrease (increase) in non-cash working capital | 109 | (12 | ) | 209 | (184 | ) | |||||
Cash flow used in investing activities | (1 653 | ) | (656 | ) | (4 811 | ) | (4 808 | ) | |||
Financing Activities | |||||||||||
Net change in short-term debt | 1 | (42 | ) | — | (28 | ) | |||||
Net change in long-term debt | (4 | ) | — | (14 | ) | 149 | |||||
Repayment of long-term debt | — | (312 | ) | — | (312 | ) | |||||
Issuance of common shares under share option plans | 34 | 36 | 237 | 80 | |||||||
Purchase of common shares for cancellation (note 7) | (523 | ) | (426 | ) | (1 178 | ) | (1 125 | ) | |||
Dividends paid on common shares | (409 | ) | (299 | ) | (1 085 | ) | (798 | ) | |||
Cash flow used in financing activities | (901 | ) | (1 043 | ) | (2 040 | ) | (2 034 | ) | |||
Increase in Cash and Cash Equivalents | 351 | 821 | 70 | 922 | |||||||
Effect of foreign exchange on cash and cash equivalents | 68 | (11 | ) | 79 | 33 | ||||||
Cash and cash equivalents at beginning of period | 4 932 | 4 530 | 5 202 | 4 385 | |||||||
Cash and Cash Equivalents at End of Period | 5 351 | 5 340 | 5 351 | 5 340 | |||||||
Supplementary Cash Flow Information | |||||||||||
Interest paid | 72 | 70 | 439 | 421 | |||||||
Income taxes paid | 604 | 399 | 2 272 | 1 083 | |||||||
See accompanying notes to the interim consolidated financial statements.
44 SUNCOR ENERGY INC. 2014 THIRD QUARTER
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(unaudited)
($ millions) | Share Capital | Contributed Surplus | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Total | Number of Common Shares (thousands) | |||||||
At December 31, 2012 | 19 945 | 579 | (210 | ) | 18 901 | 39 215 | 1 523 057 | ||||||
Net earnings | — | — | — | 3 468 | 3 468 | — | |||||||
Foreign currency translation adjustment | — | — | 136 | — | 136 | — | |||||||
Actuarial gain on employee retirement benefit plans, net of income taxes of $121 | — | — | — | 353 | 353 | — | |||||||
Total comprehensive income | — | — | 136 | 3 821 | 3 957 | — | |||||||
Issued under share option plans | 124 | (35 | ) | — | — | 89 | 3 745 | ||||||
Issued under dividend reinvestment plan | 22 | — | — | (22 | ) | — | — | ||||||
Purchase of common shares for cancellation | (453 | ) | — | — | (672 | ) | (1 125 | ) | (34 560 | ) | |||
Change in liability for share purchase commitment | (86 | ) | — | — | (162 | ) | (248 | ) | — | ||||
Share-based compensation | — | 42 | — | — | 42 | — | |||||||
Dividends paid on common shares | — | — | — | (798 | ) | (798 | ) | — | |||||
At September 30, 2013 | 19 552 | 586 | (74 | ) | 21 068 | 41 132 | 1 492 242 | ||||||
At December 31, 2013 | 19 395 | 598 | 115 | 21 072 | 41 180 | 1 478 315 | |||||||
Net earnings | — | — | — | 2 615 | 2 615 | — | |||||||
Foreign currency translation adjustment | — | — | 207 | — | 207 | — | |||||||
Unrealized gain on assets available for sale, net of income taxes of $13 | — | — | 85 | — | 85 | — | |||||||
Actuarial loss on employee retirement benefit plans, net of income taxes of $76 | — | — | — | (222 | ) | (222 | ) | — | |||||
Total comprehensive income | — | — | 292 | 2 393 | 2 685 | — | |||||||
Issued under share option plans | 313 | (28 | ) | — | — | 285 | 7 515 | ||||||
Issued under dividend reinvestment plan | 25 | — | — | (25 | ) | — | — | ||||||
Purchase of common shares for cancellation (note 7) | (382 | ) | — | — | (796 | ) | (1 178 | ) | (28 911 | ) | |||
Change in liability for share purchase commitment | 28 | — | — | 33 | 61 | — | |||||||
Share-based compensation | — | 35 | — | — | 35 | — | |||||||
Dividends paid on common shares | — | — | — | (1 085 | ) | (1 085 | ) | — | |||||
At September 30, 2014 | 19 379 | 605 | 407 | 21 592 | 41 983 | 1 456 919 | |||||||
See accompanying notes to the interim consolidated financial statements.
SUNCOR ENERGY INC. 2014 THIRD QUARTER 45
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 October 29, 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. The company retrospectively adopted International Financial Reporting Interpretation Committee 21Levies (IFRIC 21) effective January 1, 2014.
IFRIC 21 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.
46 SUNCOR ENERGY INC. 2014 THIRD QUARTER
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 September 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 | 2 943 | 2 588 | 858 | 1 336 | 6 951 | 7 057 | 19 | 24 | 10 771 | 11 005 | ||||||||||||
Intersegment revenues | 1 012 | 1 316 | 95 | 166 | 52 | 26 | (1 159 | ) | (1 508 | ) | — | — | ||||||||||
Less: Royalties | (431 | ) | (392 | ) | (165 | ) | (325 | ) | — | — | — | — | (596 | ) | (717 | ) | ||||||
Operating revenues, net of royalties | 3 524 | 3 512 | 788 | 1 177 | 7 003 | 7 083 | (1 140 | ) | (1 484 | ) | 10 175 | 10 288 | ||||||||||
Other income (expenses) | 37 | 4 | 4 | 31 | 43 | (5 | ) | 14 | 55 | 98 | 85 | |||||||||||
3 561 | 3 516 | 792 | 1 208 | 7 046 | 7 078 | (1 126 | ) | (1 429 | ) | 10 273 | 10 373 | |||||||||||
Expenses | ||||||||||||||||||||||
Purchases of crude oil and products | 50 | 87 | 119 | 158 | 5 659 | 5 803 | (1 186 | ) | (1 445 | ) | 4 642 | 4 603 | ||||||||||
Operating, selling and general | 1 522 | 1 347 | 140 | 183 | 576 | 596 | 107 | 195 | 2 345 | 2 321 | ||||||||||||
Transportation | 117 | 111 | 18 | 29 | 75 | 75 | (10 | ) | (10 | ) | 200 | 205 | ||||||||||
Depreciation, depletion, amortization and impairment | 723 | 652 | 194 | 274 | 152 | 136 | 41 | 27 | 1 110 | 1 089 | ||||||||||||
Exploration | 2 | 7 | 55 | 31 | — | — | — | — | 57 | 38 | ||||||||||||
Gain on disposal of assets | (2 | ) | — | (82 | ) | (130 | ) | — | (3 | ) | — | — | (84 | ) | (133 | ) | ||||||
Voyageur upgrader project charges | — | — | — | — | — | — | — | — | — | — | ||||||||||||
Financing expenses (income) | 52 | 32 | 27 | (8 | ) | (4 | ) | 2 | 496 | (91 | ) | 571 | (65 | ) | ||||||||
2 464 | 2 236 | 471 | 537 | 6 458 | 6 609 | (552 | ) | (1 324 | ) | 8 841 | 8 058 | |||||||||||
Earnings (Loss) before Income Taxes | 1 097 | 1 280 | 321 | 671 | 588 | 469 | (574 | ) | (105 | ) | 1 432 | 2 315 | ||||||||||
Income Taxes | ||||||||||||||||||||||
Current | 258 | 209 | 75 | 418 | 204 | 245 | (19 | ) | (245 | ) | 518 | 627 | ||||||||||
Deferred | 66 | 120 | 48 | (193 | ) | (42 | ) | (126 | ) | (77 | ) | 193 | (5 | ) | (6 | ) | ||||||
324 | 329 | 123 | 225 | 162 | 119 | (96 | ) | (52 | ) | 513 | 621 | |||||||||||
Net Earnings (Loss) | 773 | 951 | 198 | 446 | 426 | 350 | (478 | ) | (53 | ) | 919 | 1 694 | ||||||||||
Capital and Exploration Expenditures | 975 | 898 | 465 | 418 | 291 | 202 | 77 | 21 | 1 808 | 1 539 | ||||||||||||
SUNCOR ENERGY INC. 2014 THIRD QUARTER 47
Nine months ended September 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 | 8 504 | 6 681 | 3 270 | 4 674 | 20 465 | 19 973 | 68 | 83 | 32 307 | 31 411 | ||||||||||||
Intersegment revenues | 3 219 | 2 971 | 367 | 282 | 106 | 140 | (3 692 | ) | (3 393 | ) | — | — | ||||||||||
Less: Royalties | (875 | ) | (658 | ) | (469 | ) | (974 | ) | — | — | — | — | (1 344 | ) | (1 632 | ) | ||||||
Operating revenues, net of royalties | 10 848 | 8 994 | 3 168 | 3 982 | 20 571 | 20 113 | (3 624 | ) | (3 310 | ) | 30 963 | 29 779 | ||||||||||
Other income | 41 | 10 | 184 | 71 | 54 | 11 | 157 | 232 | 436 | 324 | ||||||||||||
10 889 | 9 004 | 3 352 | 4 053 | 20 625 | 20 124 | (3 467 | ) | (3 078 | ) | 31 399 | 30 103 | |||||||||||
Expenses | ||||||||||||||||||||||
Purchases of crude oil and products | 210 | 261 | 403 | 409 | 16 008 | 15 698 | (3 629 | ) | (3 267 | ) | 12 992 | 13 101 | ||||||||||
Operating, selling and general | 4 566 | 4 209 | 432 | 540 | 1 833 | 1 699 | 572 | 489 | 7 403 | 6 937 | ||||||||||||
Transportation | 379 | 301 | 66 | 97 | 214 | 207 | (31 | ) | (32 | ) | 628 | 573 | ||||||||||
Depreciation, depletion, amortization and impairment | 3 326 | 1 759 | 1 052 | 889 | 473 | 381 | 89 | 88 | 4 940 | 3 117 | ||||||||||||
Exploration | 82 | 96 | 232 | 151 | — | — | — | — | 314 | 247 | ||||||||||||
Loss (Gain) on disposal of assets | 3 | — | (82 | ) | (130 | ) | (1 | ) | (4 | ) | — | — | (80 | ) | (134 | ) | ||||||
Voyageur upgrader project charges | — | 176 | — | — | — | — | — | — | — | 176 | ||||||||||||
Financing expenses | 113 | 98 | 44 | 26 | 2 | 2 | 725 | 583 | 884 | 709 | ||||||||||||
8 679 | 6 900 | 2 147 | 1 982 | 18 529 | 17 983 | (2 274 | ) | (2 139 | ) | 27 081 | 24 726 | |||||||||||
Earnings (Loss) before Income Taxes | 2 210 | 2 104 | 1 205 | 2 071 | 2 096 | 2 141 | (1 193 | ) | (939 | ) | 4 318 | 5 377 | ||||||||||
Income Taxes | ||||||||||||||||||||||
Current | 837 | 210 | 782 | 1 100 | 610 | 429 | (251 | ) | (220 | ) | 1 978 | 1 519 | ||||||||||
Deferred | (223 | ) | 323 | (32 | ) | (130 | ) | (33 | ) | 148 | 13 | 49 | (275 | ) | 390 | |||||||
614 | 533 | 750 | 970 | 577 | 577 | (238 | ) | (171 | ) | 1 703 | 1 909 | |||||||||||
Net Earnings (Loss) | 1 596 | 1 571 | 455 | 1 101 | 1 519 | 1 564 | (955 | ) | (768 | ) | 2 615 | 3 468 | ||||||||||
Capital and Exploration Expenditures | 2 872 | 3 421 | 1 370 | 1 093 | 642 | 445 | 177 | 45 | 5 061 | 5 004 | ||||||||||||
48 SUNCOR ENERGY INC. 2014 THIRD QUARTER
Other income consists of the following:
Three months ended September 30 | Nine months ended September 30 | ||||||||||
($ millions) | 2014 | 2013 | 2014 | 2013 | |||||||
Energy trading activities | |||||||||||
Change in fair value of contracts | (2 | ) | 106 | 104 | 223 | ||||||
Gains (losses) on inventory valuation | 15 | (61 | ) | 26 | (26 | ) | |||||
Risk management activities | 47 | (14 | ) | 33 | (17 | ) | |||||
Reserves redetermination(1) | — | — | 145 | — | |||||||
Investment and interest income | 16 | 17 | 78 | 57 | |||||||
Renewable energy grants | 8 | 13 | 25 | 37 | |||||||
Change in value of pipeline commitments and other | 14 | 24 | 25 | 50 | |||||||
98 | 85 | 436 | 324 | ||||||||
- (1)
- Other income of $145 million ($32 million after-tax) is for the reserves redetermination of 1.2 million barrels of oil received 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
In the second quarter of 2014, 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 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.
Exploration and Production
Libya
During the second quarter of 2014, as a result of shut-in production due to the 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. This resulted in the company recognizing 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).
An expected cash flow approach was used based on 2013 year-end reserves data updated for current price forecasts and the current production plans, with three scenarios representing i) resumption of operations in six months, ii) resumption of
SUNCOR ENERGY INC. 2014 THIRD QUARTER 49
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 a 5% decrease in price each would increase the after-tax impairment charge by approximately $65 million.
The following table summarizes the share-based compensation expense recorded for all plans within Operating, Selling and General expense.
Three months ended September 30 | Nine months ended September 30 | ||||||||
($ millions) | 2014 | 2013 | 2014 | 2013 | |||||
Equity-settled plans | 8 | 11 | 35 | 42 | |||||
Cash-settled plans | (43 | ) | 195 | 285 | 262 | ||||
(35 | ) | 206 | 320 | 304 | |||||
Pursuant to Suncor's normal course issuer bid (the 2013 NCIB) that commenced in the third quarter of 2013, Suncor repurchased a total of 45.6 million common shares for total consideration of $1.7 billion, of which 4.3 million common shares were repurchased in the third quarter of 2014 for total consideration of $192 million.
On August 5, 2014, Suncor renewed the 2013 NCIB to continue to purchase shares under its previously announced buyback program (the 2014 NCIB) through the facilities of the Toronto Stock Exchange, New York Stock Exchange and/or alternative trading platforms. Pursuant to the 2014 NCIB, Suncor may purchase for cancellation up to approximately $1.1 billion worth of its common shares between August 5, 2014 and August 4, 2015. In the third quarter of 2014, the company repurchased 7.7 million common shares under the 2014 NCIB at an average price of $42.82 per share, for a total repurchase cost of $331 million.
The following table summarizes the share repurchase activities during the period:
Three months ended September 30 | Nine months ended September 30 | |||||||||
($ millions, except as noted) | 2014 | 2013 | 2014 | 2013 | ||||||
Share repurchase activities(thousands of common shares) | ||||||||||
Shares repurchased | 11 992 | 12 054 | 28 911 | 34 560 | ||||||
Amounts charged to | ||||||||||
Share capital | 159 | 158 | 382 | 453 | ||||||
Retained earnings | 364 | 268 | 796 | 672 | ||||||
Share repurchase cost | 523 | 426 | 1 178 | 1 125 | ||||||
50 SUNCOR ENERGY INC. 2014 THIRD QUARTER
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) | Sept 30 2014 | Dec 31 2013 | ||||
Amounts charged to | ||||||
Share capital | 80 | 108 | ||||
Retained earnings | 165 | 198 | ||||
Liability for share purchase commitment | 245 | 306 | ||||
8. FINANCING EXPENSES (INCOME)
Three months ended September 30 | Nine months ended September 30 | ||||||||||
($ millions) | 2014 | 2013 | 2014 | 2013 | |||||||
Interest on debt | 181 | 176 | 543 | 525 | |||||||
Capitalized interest | (103 | ) | (99 | ) | (324 | ) | (299 | ) | |||
Interest expense | 78 | 77 | 219 | 226 | |||||||
Interest on pension and other post-retirement benefits | 15 | 17 | 41 | 51 | |||||||
Accretion | 49 | 50 | 151 | 148 | |||||||
Foreign exchange loss (gain) on U.S. dollar denominated debt | 456 | (157 | ) | 487 | 301 | ||||||
Foreign exchange and other | (27 | ) | (52 | ) | (14 | ) | (17 | ) | |||
571 | (65 | ) | 884 | 709 | |||||||
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 provided security to the CRA for approximately $490 million.
In October, the company received the NORs from Quebec and Ontario for approximately $42 million and $100 million, respectively. The last provincial NOR (Alberta) is expected in the fourth quarter.
If the company is unsuccessful in defending its tax filing position, it could be subject to an earnings and cash impact of up to $1.2 billion.
SUNCOR ENERGY INC. 2014 THIRD QUARTER 51
Three months ended September 30 | Nine months ended September 30 | |||||||||
($ millions) | 2014 | 2013 | 2014 | 2013 | ||||||
Net earnings | 919 | 1 694 | 2 615 | 3 468 | ||||||
Dilutive impact of accounting for awards as equity-settled(1) | (13 | ) | — | — | — | |||||
Net earnings – diluted | 906 | 1 694 | 2 615 | 3 468 | ||||||
(millions of common shares) | ||||||||||
Weighted average number of common shares | 1 461 | 1 497 | 1 467 | 1 507 | ||||||
Dilutive securities: | ||||||||||
Effect of share options | 5 | 1 | 3 | 1 | ||||||
Weighted average number of diluted common shares | 1 466 | 1 498 | 1 470 | 1 508 | ||||||
(dollars per common share) | ||||||||||
Basic earnings per share | 0.63 | 1.13 | 1.78 | 2.30 | ||||||
Diluted earnings per share | 0.62 | 1.13 | 1.78 | 2.30 | ||||||
- (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 three months ended September 30, 2014.
Fair Value Hierarchy
The following table presents the company's financial instruments measured at fair value for each hierarchy level as at September 30, 2014.
($ millions) | Level 1 | Level 2 | Level 3 | Total Fair Value | |||||||
Energy Trading | |||||||||||
Accounts receivable | 197 | 62 | — | 259 | |||||||
Accounts payable | (236 | ) | (47 | ) | — | (283 | ) | ||||
Risk Management | |||||||||||
Accounts payable | (2 | ) | — | — | (2 | ) | |||||
Assets Held for Sale | |||||||||||
Other Assets | — | 183 | — | 183 | |||||||
(41 | ) | 198 | — | 157 | |||||||
During the third 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.
As a result of the third party agreement to sell the company's share of its assets of Pioneer Energy, Suncor increased the fair value of its investment in Pioneer Energy by $98 million in the third quarter of 2014 based on the agreed upon selling price.
At September 30, 2014, the carrying value of fixed-term debt accounted for under amortized cost was $10 billion (December 31, 2013 – $9.6 billion) and the fair value was $12.3 billion (December 31, 2013 – $11.2 billion). The estimated fair value of long-term debt is based on pricing sourced from market data.
52 SUNCOR ENERGY INC. 2014 THIRD QUARTER
On July 17, 2014, the company completed a business combination of a sulphur recovery facility in its Refining and Marketing segment.
The preliminary purchase price allocation is based on management's best estimates of the fair value of the acquired assets and assumed liabilities. Upon finalization, adjustments to the initial estimates may be required.
The aggregate consideration for this business combination was allocated as follows:
($ millions) | ||||
Total purchase price | 121 | |||
Preliminary allocation of purchase price: | ||||
Property, plant and equipment | 161 | |||
Net working capital | (1 | ) | ||
Deferred tax liabilities | (39 | ) | ||
Net assets acquired | 121 | |||
All acquisition and transaction costs for this business combination were expensed.
Effective March 27, 2013, the company acquired Total E&P's interest in Voyageur Upgrader Limited Partnership (VULP) for $515 million and gained full control over the partnership assets. The transaction was accounted for as a business combination.
As VULP was in the development stage and therefore had no revenues and the majority of costs were capitalized, no significant net earnings were generated.
The fair value of consideration transferred and the assets acquired and liabilities assumed at the date of acquisition are summarized below:
($ 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
SUNCOR ENERGY INC. 2014 THIRD QUARTER 53
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.
During the third quarter of 2014, the company sold its Wilson Creek assets in central Alberta for $168.5 million before closing adjustments and other closing costs, with an effective date of July 1, 2014 and a closing date of September 30, 2014. The sale of these assets resulted in an after-tax gain of $61 million in the Exploration and Production segment.
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 third quarter of 2014, the company announced that, along with The Pioneer Group Inc., it had reached an agreement to sell certain assets and liabilities of Pioneer Energy, including retail gas stations in Ontario and Manitoba. The company, as a 50% owner of Pioneer Energy, will receive $182.5 million before closing adjustments for its share of the assets and liabilities. The transaction is expected to close in the first quarter of 2015 and is subject to closing conditions including regulatory approval under the Competition Act. An after-tax adjustment of $85 million was recorded to Other Comprehensive Income during the third quarter of 2014.
During the nine months ended September 30, 2014, the company increased its commitments by approximately $1.2 billion in support of the company's market access strategy, activities to expand its storage and logistics network, and drilling exploration activities.
54 SUNCOR ENERGY INC. 2014 THIRD QUARTER
Unaudited Consolidated Financial Statements for the third quarter ended September 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 EXPENSES (INCOME)
9. INCOME TAXES
10. EARNINGS PER COMMON SHARE
11. FINANCIAL INSTRUMENTS
12. ACQUISITION
13. VOYAGEUR UPGRADER PROJECT
14. NATURAL GAS DISPOSITIONS
15. PIONEER DISPOSITION
16. COMMITMENTS