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FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 2007

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8. Discontinued Operations

 

In December 2007, Swift agreed to sell substantially all of our New Zealand assets for approximately $87.8 million. Accordingly, the New Zealand operations have been classified as discontinued operations in the consolidated statements of income and cash flows and the assets and associated liabilities have been classified as held for sale in the consolidated balance sheets. We began a strategic review of our New Zealand assets in the second quarter of 2007 which culminated in the agreement to sell substantially all of these assets, with an expected closing towards the end of the first quarter of 2008. Proceeds from the New Zealand assets sale will most likely be used to pay down a portion of our credit facility.

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets” (“SFAS 144”), the results of operations and the non-cash asset write-down for the New Zealand operations have been excluded from continuing operations and reported as discontinued operations for the current and prior periods. Furthermore, the assets included as part of this divestiture have been reclassified as held for sale in the Balance Sheet for prior periods. During the fourth quarter of 2007, the Company assessed its long-lived assets in New Zealand based on the selling price and terms of the sales agreement and recorded a non-cash asset write-down of $143.2 million related to these assets. This write-down is recorded in “Income (loss) from discontinued operations, net of taxes” on the accompanying statements of income.

We expect to sell our remaining permit in New Zealand sometime in 2008. The remaining book value for this permit is approximately $0.5 million which we believe is less than the current fair value of the property. If net proceeds from the sale of this permit exceed $0.5 million then a gain on sale of property will be recorded. If net proceeds from the sale of this permit are less than $0.5 million then a loss on sale of property will be recorded.

The following table summarizes the amounts included in income (loss) from discontinued operations for all periods presented. These revenues and expenses were historically reported under our New Zealand operating segment, and are now reported in discontinued operations (in thousands except per share amounts):

   
2007
    
2006
    
2005
  
Oil and gas sales
   $ 42,394     $ 64,039     $ 67,894  
Other revenues
     1,221       862       999  
Total revenues
     43,615       64,901       68,893  
                         
Depreciation, depletion, and amortization
     23,147       30,051       26,354  
Other operating expenses
     22,491       20,872       20,230  
Non-cash write-down of property and equipment
     143,152       ---       ---  
Total expenses
     188,790       50,923       46,584  
                         
Income (loss) from discontinued operations before income taxes
     (145,175 )     13,978       22,309  
Income tax expense (benefit)
     (13,874 )     3,487       4,412  
Income (loss) from discontinued operations, net of taxes
   $ (131,301 )   $ 10,491     $ 17,898  
                         
Earnings per common share from discontinued operations-diluted
   $ (4.29 )   $ 0.35     $ 0.61  
Annual sales volumes (MBoe)
     1,387       2,252       2,758  
Total assets
   $ 110,585     $ 235,997     $ 241,943  
Cash flow provided by operating activities
   $ 25,620     $ 41,680     $ 48,543  
Capital expenditures
   $ 9,466     $ 56,707     $ 50,844  

 

For the years 2007, 2006, and 2005, our capitalized general and administrative expenses totaled $4.2 million, $4.1 million, and $4.3 million.

Total income taxes differed from the amount computed by applying the statutory income tax rate to income from discontinued operations. The sources of these differences are as follows (in thousands):
   
2007
    
2006
    
2005
  
Income (loss) before tax from discontinued operations
   $ (145,175 )   $ 13,978     $ 22,309  
                         
Income taxes computed at U.S. statutory rate (35%)
   $ (50,811 )   $ 4,892     $ 7,809  
Effect of foreign operations
     6,336       (293 )     (452 )
Currency exchange impact on foreign tax calculation
     (1,659 )     (1,346 )     (2,769 )
Valuation allowance
     33,502       ---       ---  
Other
     (1,242 )     234       (176 )
                         
Total income tax expense related to discontinued operations
   $ (13,874 )   $ 3,487     $ 4,412  
Effective tax rate
     9.6 %     24.9 %     19.8 %

 

The tax effects of temporary differences that give rise to significant portions of the deferred assets (liabilities) associated with assets held for sale at December 31, 2007 and 2006 are as follows (in thousands):
   
2007
    
2006
  
Non-Current deferred tax assets
            
Loss carryover items net of valuation allowance
   $ —     $ (55,197 )
Other
     —       (1,204 )
                 
Total deferred tax assets
     —       (56,401 )
                 
Non-current deferred tax liabilities
                
Oil and gas exploration and development costs
     —       68,910  
                 
Total deferred tax liabilities
     —       68,910  
                 
Net Deferred tax liabilities
   $ —     $ 12,509  

 

The 2007 write-down of properties held for sale resulted in an estimated net deferred tax asset balance of $33.5 million, calculated using the New Zealand tax rate of 30%. This estimated net asset is attributable to New Zealand tax loss carryovers in excess of the amounts that will be utilized to offset the proceeds from the $87.8 million asset sale. As of December 31, 2007, management assessed that the probability of generating additional taxable income to utilize these loss carryovers was less than more likely than not. Accordingly, the provision for income tax for discontinued operations includes a valuation allowance charge for the full amount of the deferred tax asset. If the Company’s remaining assets are sold in excess of tax basis, these loss carryovers will be available to offset such a gain.

Until the decision was made to sell the Company’s New Zealand assets, no provision had been made for U.S. income tax on New Zealand earnings. Management had maintained a plan to reinvest earnings from New Zealand indefinitely. Because of the losses on liquidation, we anticipate that the distribution of sales proceeds to the U.S. will be deemed a return of capital for U.S. income tax purposes. Accordingly, no provision has been made for U.S. income tax.

The following presents the main classes of assets and liabilities associated with the New Zealand operations that are held for sale as of December 31, 2007 and 2006 (in thousands).
   
2007
    
2006
  
ASSETS
            
Property and equipment, net
   $ 96,549     $ ---  
Total Current assets held for sale
   $ 96,549     $ ---  
Property and equipment, net
     ---     $ 252,380  
Total Long-term assets held for sale
   $ ---     $ 252,380  
LIABILITIES
                
Asset retirement obligation
   $ 8,066     $ ---  
Deferred income taxes
     —       ---  
Total Current liabilities associated with assets held for sale
   $ 8,066     $ ---  
Asset retirement obligation
   $ —     $ 5,666  
Deferred income taxes
     —       12,509  
Total Long-term liabilities associated with assets held for sale
   $ —     $ 18,175  

 
 
 

This page was last updated on Wednesday, March 05, 2008 , at 04:53:23 PM .

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