Note C – Discontinued Operations

Separation of U.S. Downstream Business

On August 30, 2013, Murphy Oil Corporation (the “Company”) distributed 100% of the outstanding common stock of Murphy USA Inc. (“MUSA”) to its shareholders in a generally tax-free spin-off for U.S. federal income tax purposes. After the close of the New York Stock Exchange on August 30, 2013, the Company’s shareholders of record as of 5:00 p.m. Eastern time on August 21, 2013 received one share of MUSA common stock for every four common shares of the Company held by such shareholders. Prior to the separation, MUSA held all of the Company’s U.S. downstream operations, including retail gasoline stations and other marketing assets, plus two ethanol production facilities. In connection with the separation, Murphy Oil USA, Inc., MUSA’s 100% owned primary operating subsidiary, distributed $650,000,000 to the Company in the form of a cash dividend. The shares of MUSA common stock are traded on the New York Stock Exchange under the ticker symbol “MUSA.” The Company has no continuing involvement with MUSA operations. Accordingly, the operating results and the cash flows for these former U.S. downstream operations have been reported as discontinued operations for all periods presented in the consolidated financial statements. These operations were formerly reported as the U.S. refining and marketing segment in prior years’ financial statements.

In order to effect the separation and govern the Company’s relationship with MUSA after the separation, both parties entered into a series of agreements governing each party’s rights and obligations after the separation. Among such agreements, the Separation and Distribution Agreement governs the separation of the U.S. downstream business, the transfer of assets, cross-indemnities between the Company and MUSA, handling of claims subject to indemnification and related matters, and other matters related to the Company’s relationship with MUSA.

The Tax Matters Agreement governs the respective rights, responsibilities and obligations of the Company and MUSA with respect to taxes, tax attributes, tax returns, tax proceedings and certain other tax matters. In addition, the Tax Matters Agreement imposes certain restrictions on MUSA and its subsidiaries (including restrictions on share issuances, business combinations, sales of assets and similar transactions) that are designed to preserve the tax-free status of the distribution.

The Employee Matters Agreement governs the compensation and employee benefit obligations with respect to the current and former employees and non-employee directors of the Company and MUSA, and generally allocates liabilities and responsibilities relating to employee compensation, benefit plans and programs. The Employee Matters Agreement provides that employees of MUSA will no longer participate in benefit plans sponsored or maintained by the Company. In addition, the Employee Matters Agreement provides that each of the parties will be responsible for their respective current employees and compensation plans for such current employees, and that the Company will be responsible for liabilities relating to former employees who left prior to the separation. The Employee Matters Agreement sets forth the general principles relating to employee matters and also addresses any special circumstances during the transition period. The Employee Matters Agreement also provides that (i) the distribution does not constitute a change in control under existing plans, programs, agreements or arrangements, and (ii) the distribution and the assignment, transfer or continuation of the employment of employees with another entity will not constitute a severance event under the applicable plans, programs, agreements or arrangements.

The Transition Service Agreement sets forth the terms on which the Company and MUSA will provide certain services or functions to the other party. Transition services include administration, payroll, human resources, data processing, environmental health and safety, audit support, financial transaction support, and other support services, information technology systems and various other corporate services. The agreement provides for the provision of specified services, generally for a period of up to 18 months, with a possible extension of six months (an aggregate of 24 months), on a full cost basis.

Other Discontinued Operations

The Company sold all of its U.K. oil and natural gas production assets during 2013, and recognized an after-tax gain of $216,147,000 on sale of these assets. The results of these operations have been reported as discontinued operations for all periods presented in these consolidated financial statements.

On September 30, 2014, the Company sold its U.K. retail marketing operations and associated inventories with total proceeds of $211,965,000. The Company was unable to sell the Milford Haven, Wales, refinery after an extensive marketing effort proved unsuccessful. The refinery ceased processing crude oil in May 2014, and the refinery portion of the Milford Haven facility is in the process of being decommissioned. The Company is marketing for sale the products terminal portion of the Milford Haven facility along with three U.K. inland product terminals. The Company has accounted for this U.K. downstream business as discontinued operations for all periods presented.

The following table presents the carrying value of the major categories of assets and liabilities of discontinued operations associated with U.K. refining and marketing operations that are reflected on the Company’s consolidated balance sheets at December 31, 2014 and 2013:



(Millions of dollars)	2014		2013
Current assets
Cash	$	200,512		301,302
Accounts receivable		97,568		302,059
Inventory		42,161		254,240
Other		35,889		86,131
Total current assets held for sale	$	376,130		943,732

Non-current assets
Property, plant and equipment, net	$	50,947		360,347
Other		13		21,057
Total non-current assets held for sale	$	50,960		381,404

Current liabilities
Accounts payable	$	59,023		484,082
Other accrued taxes payable		40,653		130,028
Accrued compensation and severance		30,872		17,020
Refinery decommissioning cost		21,000		–
Other		–		8,010
Total current liabilities associated with assets held for sale	$	151,548		639,140

Non-current liabilities
Deferred income taxes payable	$	3,873		68,096
Deferred credits and other liabilities		4,437		27,448
Total non-current liabilities associated with assets held for sale	$	8,310		95,544

In 2014 and 2013, the Company wrote down its net investment in the held for sale U.K. refining and marketing assets by $269,200,000 and $73,000,000, respectively. The 2014 writedown was based on estimated salvage value of remaining refining and terminal assets as of the end of the year. The 2013 write down was based on an assessment of the fair value of these assets based on the status of the ongoing sale process at that time. The Company benefited in 2014 from a LIFO inventory liquidation credit of $209,600,000 and a gain on sale of the U.K. retail marketing assets of $101,700,000. These charges and benefits have been included in the results of discontinued operations.

Discontinued operations inventories accounted for under the LIFO method totaled $10,954,000 and $318,628,000 at December 31, 2014 and 2013, respectively, and these amounts were $44,881,000 and $268,608,000 less than such inventories would have been valued using the FIFO method. These inventories are carried in Current Assets Held for Sale in the Consolidated Balance Sheets at December 31, 2014 and 2013. In association with the shutdown of the Milford Haven, Wales, refinery in 2014, most crude oil inventories and a large portion of the refinery’s finished products were liquidated at market values. This reduction in LIFO inventory reserve benefited discontinued operating results in 2014 as noted above.

As of December 31, 2014, the Company has recorded an Asset Retirement Obligation (ARO) for its refining assets in the U.K. that are being decommissioned. The ARO estimate for the U.K. assets is based on professional judgment associated with abandonment of major industrial assets, but is subject to change based on the availability of additional information in subsequent periods. The ARO associated with the U.K. refinery abandonment of $21,000,000 is included in Other Current Liabilities Associated with Assets Held for Sale in the Consolidated Balance Sheet at December 31, 2014.

At year-end 2012, the Company wrote down its net investment in the ethanol production facility in Hereford, Texas, taking an impairment charge of $60,988,000 in discontinued operations. The write down was required based on expected weak ethanol production margins at the plant in future periods. Fair value was determined using a discounted cash flow model for three years, plus an estimated terminal value based on a multiple of the last year’s cash flow. Certain key assumptions used in the cash flow model included use of available futures prices for corn and ethanol products. Additional key assumptions included estimated future ethanol and distillers grain production levels, estimated future operating expenses, and estimated sales prices for distillers grain.

In July 2012, the United Kingdom enacted tax changes that limited tax relief on oil and gas decommissioning costs to 50%, a reduction from the 62% tax relief previously allowed for these costs. This tax rate change led to a net reduction of income from discontinued operations of $5,523,000 in 2012.

The results of operations associated with all discontinued operations are presented in the following table.



(Thousands of dollars)	2014		2013	2012
Revenues	$	2,786,394	17,586,236	24,156,748

Income (loss) from operations before income taxes	$	(261,873)	119,984	330,048
Gain on sale before income taxes		101,684	130,991	–
Total income (loss) from discontinued operations before taxes		(160,189)	250,975	330,048
Income tax expense (benefit)		(40,827)	15,639	165,666
Income (loss) from discontinued operations	$	(119,362)	235,336	164,382