20140930 Q3 10Q

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

                        (Mark one)

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2014

 

OR

 

[  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR

15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______________ to _______________

 

 

Commission File Number 001-35914

 

MURPHY USA INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

 

Delaware

46-2279221

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

 

 

 

 

200 Peach Street

 

El Dorado, Arkansas

71730-5836

(Address of principal executive offices)

(Zip Code)

 

(870) 875-7600

(Registrant's telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes     No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes   No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ___Accelerated filer     Non-accelerated filer Smaller reporting company __

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

    Yes  No

Number of shares of Common Stock, $0.01 par value, outstanding at September 30, 2014 was 45,728,728.

 

 

 


 

 

 

 

 

 

MURPHY USA INC.

 

TABLE OF CONTENTS

 

 

 

 

 

Page

Part I – Financial Information 

 

 

 

 

Item 1.  Financial Statements (Unaudited) 

 

 

 

 

 

 

 

Consolidated  Balance Sheets as of September 30, 2014 (unaudited) and December 31, 2013

2

 

Consolidated and Combined Statements of Income and Comprehensive Income for the three months and nine months ended September 30, 2014 and 2013

3

 

Consolidated and Combined Statements of Cash Flows for the nine months ended September 30, 2014 and 2013

4

 

Consolidated and Combined Statements of Changes in Equity for the nine months ended September 30, 2014 and 2013

5

 

Notes to Consolidated and Combined Financial Statements

6

 

 

   Results of Operations and Financial Condition

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations 

34

Item 3.  Quantitative and Qualitative Disclosures About Market Risk 

49

Item 4.  Controls and Procedures 

49

 

 

Part II – Other Information 

 

Item 1.  Legal Proceedings 

50

Item 1A.  Risk Factors 

50

Item 6.  Exhibits 

50

Signatures 

51

 

 

1

 


 

 

 

ITEM 1.  FINANCIAL STATEMENTS

Murphy USA Inc.

Consolidated  Balance Sheets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

(Thousands of dollars)

 

2014

 

2013

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

294,264 

 

$

294,741 

Accounts receivable—trade, less allowance for doubtful accounts of $4,456 in 2014 and $4,456 in 2013

 

 

206,956 

 

 

193,181 

Inventories, at lower of cost or market

 

 

145,818 

 

 

179,055 

Prepaid expenses and other current assets

 

 

16,063 

 

 

15,439 

Total current assets

 

 

663,101 

 

 

682,416 

Property, plant and equipment, at cost less accumulated depreciation and amortization of $711,125 in 2014 and $655,360 in 2013

 

 

1,215,787 

 

 

1,190,723 

Other assets

 

 

17,462 

 

 

8,103 

Total assets

 

$

1,896,350 

 

$

1,881,242 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Current maturities of long-term debt

 

$

 —

 

$

14,000 

Trade accounts payable and accrued liabilities

 

 

458,614 

 

 

433,228 

Income taxes payable

 

 

37,027 

 

 

72,146 

Deferred income taxes

 

 

9,453 

 

 

7,143 

Total current liabilities

 

 

505,094 

 

 

526,517 

Long-term debt

 

 

492,227 

 

 

547,578 

Deferred income taxes

 

 

104,352 

 

 

114,932 

Asset retirement obligations

 

 

18,424 

 

 

17,130 

Deferred credits and other liabilities

 

 

17,713 

 

 

18,749 

Total liabilities

 

 

1,137,810 

 

 

1,224,906 

Stockholders' Equity

 

 

 

 

 

 

  Preferred Stock, par $0.01 (authorized 20,000,000 shares,

 

 

 

 

 

 

none outstanding)

 

 

 —

 

 

 —

  Common Stock, par $0.01 (authorized 200,000,000 shares,

 

 

 

 

 

 

46,767,164 issued and 46,743,633 shares issued and  

 

 

 

 

 

 

outstanding at 2014 and 2013, respectively)

 

 

468 

 

 

467 

Treasury stock (1,038,436 shares held at September 30, 2014)

 

 

(49,915)

 

 

 —

Additional paid in capital (APIC)

 

 

554,895 

 

 

548,293 

Retained earnings

 

 

253,092 

 

 

107,576 

Total stockholders' equity

 

 

758,540 

 

 

656,336 

Total liabilities and stockholders' equity

 

$

1,896,350 

 

$

1,881,242 

 

 

See notes to consolidated financial statements.

2

 


 

 

 

 

Murphy USA Inc.

Consolidated and Combined Statements of Income and Comprehensive Income

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

(Thousands of dollars except per share amounts)

 

2014

 

2013

 

2014

 

2013

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

Petroleum product sales (a)

 

$

4,035,406 

 

$

4,032,651 

 

$

11,751,447 

 

$

11,971,146 

Merchandise sales

 

 

560,993 

 

 

556,835 

 

 

1,611,975 

 

 

1,625,673 

Ethanol sales and other

 

 

82,376 

 

 

97,417 

 

 

237,636 

 

 

291,541 

Total revenues

 

 

4,678,775 

 

 

4,686,903 

 

 

13,601,058 

 

 

13,888,360 

Costs and operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

Petroleum product cost of goods sold (a)

 

 

3,866,413 

 

 

3,903,042 

 

 

11,309,893 

 

 

11,549,760 

Merchandise cost of goods sold

 

 

483,941 

 

 

483,513 

 

 

1,389,312 

 

 

1,414,772 

Ethanol cost of goods sold

 

 

37,684 

 

 

57,415 

 

 

117,221 

 

 

188,029 

Station and other operating expenses

 

 

131,887 

 

 

122,749 

 

 

387,587 

 

 

368,430 

Depreciation and amortization

 

 

19,629 

 

 

18,128 

 

 

58,975 

 

 

54,734 

Selling, general and administrative

 

 

30,105 

 

 

44,714 

 

 

87,874 

 

 

105,390 

Accretion of asset retirement obligations

 

 

300 

 

 

274 

 

 

897 

 

 

821 

Total costs and operating expenses

 

 

4,569,959 

 

 

4,629,835 

 

 

13,351,759 

 

 

13,681,936 

Income from operations

 

 

108,816 

 

 

57,068 

 

 

249,299 

 

 

206,424 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

13 

 

 

354 

 

 

41 

 

 

1,088 

Interest expense

 

 

(8,612)

 

 

(4,698)

 

 

(28,234)

 

 

(4,840)

Gain on sale of assets

 

 

 —

 

 

5,972 

 

 

170 

 

 

5,980 

Other nonoperating income

 

 

115 

 

 

50 

 

 

1,121 

 

 

74 

Total other income (expense)

 

 

(8,484)

 

 

1,678 

 

 

(26,902)

 

 

2,302 

Income before income taxes

 

 

100,332 

 

 

58,746 

 

 

222,397 

 

 

208,726 

Income tax expense

 

 

37,681 

 

 

22,765 

 

 

77,662 

 

 

81,873 

Income from continuing operations

 

 

62,651 

 

 

35,981 

 

 

144,735 

 

 

126,853 

Income from discontinued operations, net of taxes

 

 

 —

 

 

5,748 

 

 

781 

 

 

14,551 

Net Income

 

$

62,651 

 

$

41,729 

 

$

145,516 

 

$

141,404 

Earnings per share - basic:

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

1.37 

 

$

0.77 

 

$

3.13 

 

$

2.72 

Income from discontinued operations

 

 

 —

 

 

0.12 

 

 

0.02 

 

 

0.31 

Net Income - basic

 

$

1.37 

 

$

0.89 

 

$

3.15 

 

$

3.03 

Earnings per share - diluted:

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

1.36 

 

$

0.77 

 

$

3.11 

 

$

2.71 

Income from discontinued operations

 

 

 —

 

 

0.12 

 

 

0.02 

 

 

0.31 

Net Income - diluted

 

$

1.36 

 

$

0.89 

 

$

3.13 

 

$

3.02 

Weighted-average shares outstanding (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

45,726 

 

 

46,743 

 

 

46,233 

 

 

46,743 

Diluted

 

 

46,090 

 

 

46,759 

 

 

46,500 

 

 

46,759 

Supplemental information:

 

 

 

 

 

 

 

 

 

 

 

 

(a) Includes excise taxes of:

 

$

501,859 

 

$

483,576 

 

$

1,430,345 

 

$

1,419,073 

 

 

See notes to consolidated and combined financial statements.

3

 


 

 

 

 

Murphy USA Inc.

Consolidated and Combined Statements of Cash Flows

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 30,

(Thousands of dollars)

 

2014

 

2013

Operating Activities

 

 

 

 

 

 

Net income

 

$

145,516 

 

$

141,404 

Adjustments to reconcile net income to net cash provided by operating activities

 

 

 

 

 

 

Income from discontinued operations, net of taxes

 

 

(781)

 

 

(14,551)

Depreciation and amortization

 

 

58,975 

 

 

54,734 

Amortization of deferred major repair costs

 

 

752 

 

 

400 

Deferred and noncurrent income tax credits

 

 

(10,580)

 

 

(13,357)

Accretion on discounted liabilities

 

 

897 

 

 

821 

Pretax gains from sale of assets

 

 

(170)

 

 

(5,980)

Net decrease in noncash operating working capital

 

 

10,722 

 

 

158,555 

Other operating activities-net

 

 

10,985 

 

 

11,897 

Net cash provided by continuing operations

 

 

216,316 

 

 

333,923 

Net cash provided by discontinued operations

 

 

134 

 

 

36,033 

Net cash provided by operating activities

 

 

216,450 

 

 

369,956 

Investing Activities

 

 

 

 

 

 

Property additions

 

 

(84,687)

 

 

(121,595)

Proceeds from sale of assets

 

 

279 

 

 

6,074 

Expenditures for major repairs

 

 

(1,340)

 

 

(780)

Purchase of intangible assets

 

 

(10,631)

 

 

 —

Other investing activities-net

 

 

 —

 

 

52 

Investing activities of discontinued operations

 

 

 

 

 

 

Sales proceeds

 

 

1,097 

 

 

 —

Other

 

 

 —

 

 

(754)

Net cash required by investing activities

 

 

(95,282)

 

 

(117,003)

Financing Activities

 

 

 

 

 

 

Purchase of treasury stock

 

 

(50,021)

 

 

 —

Repayments of long-term debt

 

 

(70,000)

 

 

(34)

Additions to long-term debt

 

 

 —

 

 

641,250 

Cash dividend to former parent

 

 

 —

 

 

(650,000)

Debt issuance costs

 

 

(950)

 

 

(6,649)

Amounts related to share-based compensation

 

 

(674)

 

 

 —

Net distributions to parent

 

 

 —

 

 

(32,394)

Net cash required by financing activities

 

 

(121,645)

 

 

(47,827)

Net increase (decrease) in cash and cash equivalents

 

 

(477)

 

 

205,126 

Cash and cash equivalents at January 1

 

 

294,741 

 

 

57,373 

Cash and cash equivalents at September 30

 

$

294,264 

 

$

262,499 

 

See notes to consolidated and combined financial statements.

4

 


 

 

 

 

Murphy USA Inc.

Consolidated and Combined Statements of Changes in Equity

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

(Thousands of dollars, except share amounts)

 

Shares

 

Par

 

Treasury Stock

 

APIC

 

Net Parent Investment

 

Retained Earnings

 

Total

Balance as of December 31, 2012

 

 —

$

 —

$

 —

$

 —

$

1,104,451 

$

 —

$

1,104,451 

Net income

 

 —

 

 —

 

 —

 

 —

 

127,457 

 

13,947 

 

141,404 

Dividend paid to former parent

 

 —

 

 —

 

 —

 

 —

 

(650,000)

 

 —

 

(650,000)

Net transfers to/between former parent

 

 —

 

 —

 

 —

 

 —

 

(32,847)

 

 —

 

(32,847)

Issuance of stock at the separation and distribution

 

46,743,316 

 

467 

 

 —

 

(467)

 

 —

 

 —

 

 —

Reclassification of net parent investment to APIC

 

 —

 

 —

 

 —

 

549,061 

 

(549,061)

 

 —

 

 —

Share-based compensation expense

 

 —

 

 —

 

 —

 

460 

 

 —

 

 —

 

460 

Balance as of September 30, 2013

 

46,743,316 

$

467 

$

 —

$

549,054 

$

 —

$

13,947 

$

563,468 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

(Thousands of dollars, except share amounts)

 

Shares

 

Par

 

Treasury Stock

 

APIC

 

Net Parent Investment

 

Retained Earnings

 

Total

Balance as of December 31, 2013

 

46,743,633 

$

467 

$

 —

$

548,293 

$

 —

$

107,576 

$

656,336 

Net income

 

 —

 

 —

 

 —

 

 —

 

 —

 

145,516 

 

145,516 

Purchase of treasury stock

 

 —

 

 —

 

(50,021)

 

 —

 

 —

 

 —

 

(50,021)

Issuance of common stock

 

23,531 

 

 

 —

 

 —

 

 —

 

 —

 

Issuance of treasury stock

 

 —

 

 —

 

106 

 

(106)

 

 —

 

 —

 

 —

Shares withheld to satisfy tax withholdings

 

 —

 

 —

 

 —

 

(676)

 

 —

 

 —

 

(676)

Share-based compensation expense

 

 —

 

 —

 

 —

 

7,384 

 

 —

 

 —

 

7,384 

Balance as of September 30, 2014

 

46,767,164 

$

468 

$

(49,915)

$

554,895 

$

 —

$

253,092 

$

758,540 

 

 

See notes to consolidated and combined financial statements.

 

5

 


 

Murphy USA Inc.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

Note 1 — Description of Business and Basis of Presentation

 

Description of business — The business of Murphy USA Inc. (“Murphy USA” or the “Company”) and its subsidiaries primarily consists of the U.S. retail marketing business that was separated from its former parent company, Murphy Oil Corporation (“Murphy Oil” or “Parent”), plus an ethanol production facility and other assets, liabilities and operating expenses of Murphy Oil that were associated with supporting the activities of the U.S. retail marketing operations.  The separation was approved by the Murphy Oil board of directors on August 7, 2013, and was completed on August 30, 2013 through the distribution of 100% of the outstanding capital stock of Murphy USA to holders of Murphy Oil common stock on the record date of August 21, 2013. Murphy Oil stockholders of record received one share of Murphy USA common stock for every four shares of Murphy Oil common stock. The spin-off was completed in accordance with a separation and distribution agreement entered into between Murphy Oil and Murphy USA. Following the separation, Murphy USA is an independent, publicly traded company, and Murphy Oil retains no ownership interest in Murphy USA.

 

Murphy USA markets refined products through a network of retail gasoline stations and unbranded wholesale customers. Murphy USA’s owned retail stations are almost all located in close proximity to Walmart stores in 23 states and use the brand name Murphy USA®. Murphy USA also markets gasoline and other products at standalone stations under the Murphy Express brand. At September 30, 2014, Murphy USA had a total of 1,239 Company stations. In October 2009, Murphy USA acquired an ethanol production facility located in Hankinson, North Dakota, which was subsequently sold in December 2013 and is reflected as discontinued operations for all periods presented.  The Company also acquired a partially constructed ethanol production facility in Hereford, Texas, in late 2010. The Hereford facility is designed to produce 105 million gallons of corn-based ethanol per year, and it began operations near the end of the first quarter of 2011.

 

The contributed assets of Murphy Oil included in the Company’s financial statements also include buildings, real estate, an airplane and computer equipment and software that are used to support the operating activities of Murphy USA.

 

Basis of Presentation — Murphy USA was incorporated in March 2013 and, in connection with its incorporation, Murphy USA issued 100 shares of common stock, par value $0.01 per share, to Murphy Oil for $1.00. Murphy USA was formed solely in contemplation of the separation and until the separation was completed on August 30, 2013, it had not commenced operations and had no material assets, liabilities, or commitments.  Accordingly the accompanying consolidated and combined financial statements reflect the combined historical results of operations, financial position and cash flows of the Murphy Oil subsidiaries and certain assets, liabilities and operating expenses of Murphy Oil that comprise Murphy USA, as described above, as if such companies and accounts had been combined for all periods presented prior to August 30, 2013. All significant intercompany transactions and accounts within the combined financial statements have been eliminated.  

 

The assets and liabilities in these consolidated and combined financial statements at September 30, 2014 have been reflected on a historical basis.   Any periods presented that include dates prior to August 30, 2013 are periods when all of the assets and liabilities shown were 100 percent owned by Murphy Oil and represented operations of Murphy USA prior to the separation.  For the period prior to separation, the consolidated and combined statements of income also include expense allocations for certain corporate functions historically performed by Murphy Oil, including allocations of general corporate expenses related to executive oversight, accounting, treasury, tax, legal, procurement and information technology. These allocations are based primarily on specific identification, headcount or computer utilization. Murphy USA’s management believes the assumptions underlying the consolidated and combined financial statements, including the assumptions regarding the allocation of general corporate expenses from Murphy Oil, are reasonable. However, these consolidated and combined financial statements may not include all of the actual expenses that would have been incurred had the Company been a stand-alone company during the period prior to separation and may not reflect the combined results of operations, financial position and cash flows had the Company been a stand-alone company during the entirety of the periods presented.

6

 


 

Murphy USA Inc.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

Actual costs that would have been incurred if Murphy USA had been a stand-alone company for the period prior to separation would depend upon multiple factors, including organizational structure and strategic decisions made in various areas, including information technology and infrastructure.

 

In preparing the financial statements of Murphy USA in conformity with accounting principles generally accepted in the United States, management has made a number of estimates and assumptions related to the reporting of assets, liabilities, revenues, expenses and the disclosure of contingent assets and liabilities. Actual results may differ from these estimates.

 

Interim Financial Information — The interim period financial information presented in these consolidated and combined financial statements is unaudited and includes all known accruals and adjustments, in the opinion of management, necessary for a fair presentation of the consolidated and combined financial position of Murphy USA and its results of operations and cash flows for the periods presented. All such adjustments are of a normal and recurring nature.

 

These interim consolidated and combined financial statements should be read together with our audited financial statements for the years ended December 31, 2013, 2012 and 2011, included in our Annual Report on Form 10-K (File No. 001-35914), as filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934 on February 28, 2014.

 

The accompanying financial statements for the period ended September 30, 2013 have been revised to correct an error in presentation related to cash and cash equivalents.  At September 30, 2013, the amount shown as “Marketable securities” of $198,152,000 should have been reflected as “Cash and cash equivalents”.  This resulted in a misclassification in the cash flow statement related to the same issue as “purchases of marketable securities” for $198,152,000 was shown as a use of proceeds in the investing section.  This amount should not have been shown in the September 30, 2013 cash flow statement.  The balance of cash and cash equivalents that should have been reflected in the September 30, 2013 balance sheet and cash flow statement was $262,499,000.  This misclassification had no impact on the income statement or statement of changes in equity.  The company does not believe the error was material to the previously issued September 30, 2013 financial statements.

Recently Issued Accounting Standards In April 2014, the FASB issued ASU No. 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity," which changes the requirements for reporting discontinued operations under Accounting Standards Codification Topic 205. Under ASU No. 2014-08, a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has, or will have, a major effect on an entity’s operations and financial results. The standard states that a strategic shift could include a disposal of (i) a major geographical area of operations, (ii) a major line of business, (iii) a major equity method investment or (iv) other major parts of an entity. ASU No. 2014-08 no longer precludes presentation as a discontinued operation if (i) there are operations and cash flows of the component that have not been eliminated from the reporting entity’s ongoing operations or (ii) there is significant continuing involvement with a component after its disposal. Additional disclosures about discontinued operations will also be required. The guidance is effective for annual periods beginning on or after December 15, 2014, and is to be applied prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date. The Company expects to adopt ASU No. 2014-08 on a prospective basis beginning January 1, 2015.

 

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers," which supersedes the revenue recognition requirements in the Accounting Standards Codification ("Codification") Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the Codification. The core principle of the new ASU No. 2014-09 is for companies to recognize revenue from the transfer of goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard also will result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively (for example, service revenue and contract modifications) and improve guidance for multiple-element arrangements. The guidance is effective for

7

 


 

Murphy USA Inc.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

annual and interim periods beginning after December 15, 2016, with early adoption prohibited. The Company expects to adopt ASU No. 2014-09 beginning January 1, 2017 and is in the process of assessing the impact that the new guidance will have on the Company's results of operations, financial condition and disclosures.

 

In August 2014, the FASB issued ASU No. 2014-15, “Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern,” which requires management to assess, at each interim and annual reporting period, whether substantial doubt exists about the Company's ability to continue as a going concern.  The new standard substantially aligns the accounting requirements with current auditing requirements (except that the auditing standards require a one-year assessment from the balance sheet date rather than the financial statement issuance date).   The new standard is effective for all entities for the first annual period ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. 

 

Note 2 — Related Party Transactions

 

Related party transactions of the Company include the allocation of certain general and administrative costs from Murphy Oil to the Company and receipt of interest income from Murphy Oil for intercompany payables balances for the periods prior to separation from Murphy Oil.  

 

General and administrative costs were charged by Murphy Oil to the Company based on management’s determination of such costs attributable to the operations of the Company. However, such related-party transactions cannot be presumed to be carried out on an arm’s length basis as the requisite conditions of competitive, free-market dealings may not exist.

 

Prior to the separation Murphy Oil provided cash management services to the Company. As a result, the Company generally remitted funds received to Murphy Oil, and Murphy Oil paid all operating and capital expenditures on behalf of the Company. Such cash transactions were reflected in the change in the Net Investment by Parent.

 

The Consolidated and Combined Statements of Income include expense allocations for certain functions provided to the Company by Murphy Oil prior to the separation. If possible, these allocations were made on a specific identification basis. Otherwise, the expenses related to services provided to the Company by Murphy Oil were allocated to Murphy USA based on relative percentages, as compared to Murphy Oil’s other businesses, of headcount or other appropriate methods depending on the nature of each item of cost to be allocated.

 

Charges for functions historically provided to the Company by Murphy Oil were primarily attributable to Murphy Oil’s performance of many shared services that the Company benefitted from, such as treasury, tax, accounting, risk management, legal, internal audit, procurement, human resources, investor relations and information technology. Murphy USA also participated in certain Murphy Oil insurance, benefit and incentive plans. The Consolidated and Combined Statements of Income reflect charges from Murphy Oil and its other subsidiaries for these services of $0 and $16,421,000 for the three months ended September 30, 2014 and 2013, respectively, and $0 and $53,161,000 for the nine months ended September 30, 2014 and 2013, respectively. Included in the charges above are amounts recognized for stock-based compensation expense (Note 8), as well as net periodic benefit expense associated with the Parent’s retirement plans (Note 9). 

 

Included in Interest income in the Consolidated and Combined Statements of Income for the three months ended September 30, 2014 and 2013 was interest income from affiliates of $0 and $353,000, respectively.  For the nine months ended September 30, 2014 and 2013 interest income from affiliates was $0 and $1,080,000, respectively.  These amounts were paid on balances that were previously intercompany prior to the separation from Murphy Oil and were settled in full at the separation date. 

 

 

8

 


 

Murphy USA Inc.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

Transition Services Agreement

 

In conjunction with the separation, we entered into a Transition Services Agreement with Murphy Oil on August 30, 2013.  This Transition Services Agreement sets forth the terms on which Murphy Oil provides to us, and we provide to Murphy Oil, on a temporary basis, certain services or functions that the companies have historically shared.  Transition services include administrative, payroll, human resources, information technology and network transition services, tax, treasury and other support and corporate services.  The Transition Services Agreement provides for the provision of specified transition services generally for a period of up to eighteen months, with a possible extension of six months, on a cost basis.  We record the fee Murphy Oil charges us for these services as a component of general and administrative expenses.

 

We believe that the operating expenses and general and administrative expenses allocated to us prior to the separation and included in the accompanying consolidated and combined statements of income were a reasonable approximation of the costs related to Murphy USA’s operations.  However, such related-party transactions cannot be presumed to be carried out on an arm’s-length basis as the terms were negotiated while Murphy USA was still a subsidiary of Murphy Oil.  At September 30, 2014, Murphy USA had a current receivable from Murphy Oil of $102,000 and a payable to Murphy Oil of $921,000 related to the Transition Services Agreement. 

 

Note 3 – Discontinued Operations

 

In November 2013, the Company announced that it had entered into negotiations to sell its Hankinson, North Dakota ethanol production facility as part of management’s strategic plan to exit non-core businesses. On December 19, 2013, the Company sold its wholly-owned subsidiary Hankinson Renewable Energy, LLC which owned and operated an ethanol manufacturing facility in Hankinson, North Dakota, and its related assets for $170,000,000 plus working capital adjustments of approximately $3,118,000. During January 2014, the final adjustments to working capital were made and the Company received an additional $1.1 million in sales proceeds which has been included in discontinued operations for the period.  The Company has accounted for all operations related to Hankinson Renewable, LLC as discontinued operations for all periods presented. The after-tax gain from disposal of the subsidiary (including associated inventories) was $52,542,000 in 2013 with an additional $781,000 in 2014 related to the final working capital adjustment.  

 

The results of operations associated with the Hankinson discontinued operations for the 2013 period are presented in the following table.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Thousands of dollars)

 

Three Months Ended September 30, 2013

 

Nine Months Ended September 30, 2013

Revenues

 

$

98,837 

 

$

297,149 

Income (loss) from operations before income taxes

 

 

8,774 

 

 

22,317 

Gain on sale before income taxes

 

 

 —

 

 

 —

Total income (loss) from discontinued operations before taxes

 

 

8,774 

 

 

22,317 

Provision for income taxes

 

 

3,026 

 

 

7,766 

Income (loss) from discontinued operations

 

$

5,748 

 

$

14,551 

 

 

 

 

 

 

 

9

 


 

Murphy USA Inc.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

 

Note 4 — Inventories

 

Inventories consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

(Thousands of dollars)

 

2014

 

2013

Finished products - FIFO basis

 

$

314,059 

 

$

372,531 

Less LIFO reserve - finished products

 

 

(284,267)

 

 

(307,706)

Finished products - LIFO basis

 

 

29,792 

 

 

64,825 

Store merchandise for resale

 

 

97,055 

 

 

97,058 

Corn based products

 

 

13,829 

 

 

12,447 

Materials and supplies

 

 

5,142 

 

 

4,725 

Total inventories

 

$

145,818 

 

$

179,055 

 

At September 30, 2014 and December 31, 2013, the replacement cost (market value) of last-in, first-out (LIFO) inventories exceeded the LIFO carrying value by $284,267,000 and $307,706,000, respectively. Corn based products consisted primarily of corn, dried distillers grains with solubles (DDGS) and wet distillers grains with solubles (WDGS), and were all valued on a first-in, first-out (FIFO) basis.    

 

In the first quarter of 2014, the Company recognized a benefit of $17,781,000 related to a LIFO decrement that existed at that date that is not expected to be restored at year-end.  

 

Note 5 — Long-Term Debt

 

Long-term debt consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

(Thousands of dollars)

 

2014

 

2013

6% senior notes due 2023 (net of unamortized discount of $7,773 at September 2014 and $8,422 at December 2013)

 

$

492,227 

 

$

491,578 

Term loan due 2016 (effective rate of 3.71% at December 31, 2013)

 

 

 —

 

 

70,000 

Less current maturities

 

 

 —

 

 

(14,000)

Total long-term debt

 

$

492,227 

 

$

547,578 

 

Senior Notes

 

On August 14, 2013, Murphy Oil USA, Inc., our primary operating subsidiary, issued 6.00% Senior Notes due 2023 (the “Senior Notes”) in an aggregate principal amount of $500 million. The Senior Notes are fully and unconditionally guaranteed by Murphy USA, and are guaranteed by certain 100% owned subsidiaries that guarantee our credit facilities. The indenture governing the Senior Notes contains restrictive covenants that limit, among other things, the ability of Murphy USA, Murphy Oil USA, Inc. and the restricted subsidiaries to incur additional indebtedness or liens, dispose of assets, make certain restricted payments or investments, enter into transactions with affiliates or merge with or into other entities.

 

The Senior Notes and the guarantees rank equally with all of our and the guarantors’ existing and future senior unsecured indebtedness and effectively junior to our and the guarantors’ existing and future secured indebtedness (including indebtedness with respect to the credit facilities) to the extent of the value of the assets securing such indebtedness.  The Senior Notes are structurally subordinated to all of the existing and future third-party liabilities, including trade payables, of our existing and future subsidiaries that do not guarantee the notes.

10

 


 

Murphy USA Inc.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

 

We used the net proceeds of the Senior Notes, together with borrowings under the credit facilities, to finance a cash dividend of $650 million from Murphy Oil USA, Inc. to Murphy Oil paid in connection with the separation.

 

On June 17, 2014, we closed an exchange offer for our Senior Notes to make them eligible for public resale, as required by a registration rights agreement entered into in connection with the issuance of the Senior Notes.  All of the Senior Notes were tendered for exchange. 

 

Credit Facilities


On August 30, 2013, we entered into a credit agreement in connection with the separation from Murphy Oil. The credit agreement provides for a committed $450 million asset-based loan (ABL) facility (with availability subject to the borrowing base described below) and provided for a $150 million term facility. It also provides for a $200 million uncommitted incremental facility. On August 30, 2013, Murphy Oil USA, Inc. borrowed $150 million under the term facility, the proceeds of which were used, together with the net proceeds of the offering of the Senior Notes, to finance a $650 million cash dividend from Murphy Oil USA, Inc. to Murphy Oil. The term facility was repaid in full in May 2014.  On September 2, 2014, we amended the credit agreement to extend the maturity date to September 2, 2019 and amend the terms of various covenants

 

The borrowing base is expected, at any time of determination, to be an amount (net of reserves) equal to the sum of:

 

      100% of eligible cash at such time, plus

 

      90% of eligible credit card receivables at such time, plus

 

      90% of eligible investment grade accounts, plus

 

      85% of eligible other accounts, plus

 

      80% of eligible product supply/wholesale refined products inventory at such time, plus

 

      75% of eligible retail refined products inventory at such time, plus

 

the lesser of (i) 70% of the average cost of eligible retail merchandise inventory at such time and (ii) 85% of the net orderly liquidation value of eligible retail merchandise inventory at such time.

 

The ABL facility includes a $75 million sublimit on swingline loans and a $200 million sublimit for the issuance of letters of credit. Swingline loans and letters of credit issued under the ABL facility reduce availability under the ABL facility.

 

Interest payable on the credit facilities is based on either:

 

•    the London interbank offered rate, adjusted for statutory reserve requirements (the “Adjusted LIBO Rate”); or

 

the Alternate Base Rate, which is defined as the highest of (a) the prime rate, (b) the federal funds effective rate from time to time plus 0.50% per annum and (c) the one-month Adjusted LIBO Rate plus 1.00% per annum,

 

plus, (A) in the case of Adjusted LIBO Rate borrowings, (i) with respect to the ABL facility, spreads ranging from 1.50% to 2.00% per annum depending on the average availability under the ABL facility or (ii) with respect to the term facility, spreads ranging from 2.75% to 3.00% per annum depending on a secured debt to EBITDA ratio and (B) in the case of Alternate Base Rate borrowings, (i) with respect to

11

 


 

Murphy USA Inc.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

the ABL facility, spreads ranging from 0.50% to 1.00% per annum depending on the average availability under the ABL facility or (ii) with respect to the term facility, spreads ranging from 1.75% to 2.00% per annum depending on a secured debt to EBITDA ratio.

 

The interest rate period with respect to the Adjusted LIBO Rate interest rate option can be set at one,  two,  three, or six months as selected by us in accordance with the terms of the credit agreement.

We were obligated to make quarterly principal payments on the outstanding principal amount of the term facility beginning on the first anniversary of the effective date of the credit agreement in amounts equal to 10% of the term loans made on such effective date, with the remaining balance payable on the scheduled maturity date of the term facility. Borrowings under the credit facilities are prepayable at our option without premium or penalty. We were also required to prepay the term facility with the net cash proceeds of certain asset sales or casualty events, subject to certain exceptions. The credit agreement also includes certain customary mandatory prepayment provisions with respect to the ABL facility.

 

The credit agreement contains certain covenants that limit, among other things, the ability of us and our subsidiaries to incur additional indebtedness or liens, to make certain investments, to enter into sale-leaseback transactions, to make certain restricted payments, to enter into consolidations, mergers or sales of material assets and other fundamental changes, to transact with affiliates, to enter into agreements restricting the ability of subsidiaries to incur liens or pay dividends, or to make certain accounting changes. In addition, the credit agreement requires us to maintain a fixed charge coverage ratio of a minimum of 1.0 to 1.0 when availability for at least three consecutive business days is less than the greater of (a) 17.5% of the lesser of the aggregate ABL facility commitments and the borrowing base and (b) $70,000,000 (including as of the most recent fiscal quarter end on the first date when availability is less than such amount).  As of September 30, 2014, our fixed charge coverage ratio was 1.00Prior to the repayment of the term loan, we were also subject to a maximum secured debt to EBITDA ratio of 4.5 to 1.0 at any time when term facility commitments or term loans thereunder were outstanding.     

 

After giving effect to the applicable restrictions on certain payments, which could include dividends under the credit agreement (which restrictions are only applicable when availability under the credit agreement does not exceed the greater of 25% of the lesser of the revolving commitments and the borrowing base and $100 million (and if availability under the credit agreement does not exceed the greater of 40% of the lesser of the revolving commitments and the borrowing base and $150 million, then our fixed charge coverage ratio must be at least 1.0 to 1.0) and the indenture, and subject to compliance with applicable law.  As of December 31, 2013, the Company had approximately $26.7 million of its net income and retained earnings free of such restrictions.

 

All obligations under the credit agreement are guaranteed by Murphy USA and the subsidiary guarantors party thereto, and all obligations under the credit agreement, including the guarantees of those obligations, are secured by certain assets of Murphy USA, Murphy Oil USA, Inc. and the guarantors party thereto.

 

Note 6 — Asset Retirement Obligations (ARO)

The majority of the ARO recognized by the Company at September 30, 2014 and December 31, 2013 related to the estimated costs to dismantle and abandon certain of its retail gasoline stations. The Company has not recorded an ARO for 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. In these cases, the obligation will be initially recognized in the period in which sufficient information exists to estimate the obligation.

A reconciliation of the beginning and ending aggregate carrying amount of the ARO is shown in the following table.

 

 

 

12

 


 

Murphy USA Inc.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

(Thousands of dollars)

 

2014

 

2013

Balance at beginning of period

 

$

17,130 

 

$

15,401 

Accretion expense

 

 

897 

 

 

1,096 

Liabilities incurred

 

 

397 

 

 

633 

Balance at end of period

 

$

18,424 

 

$

17,130 

 

The estimation of future ARO is based on a number of assumptions requiring professional judgment. The Company cannot predict the type of revisions to these assumptions that may be required in future periods due to the lack of availability of additional information.

 

Note 7— Income Taxes

 

The effective tax rate is calculated as the amount of income tax expense divided by income before income tax expense. For the three month and nine month periods ended September 30, 2014 and 2013, the Company’s effective tax rates were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2014

 

 

2013

 

Three months ended September 30

 

37.6% 

 

 

38.8% 

 

Nine months ended September 30

 

34.9% 

 

 

39.2% 

 

 

The effective tax rate for the three months ended September 30, 2014 and 2013 and the nine months ended September 30, 2013 exceeded the U.S. Federal tax rate of 35% primarily due to U.S. state tax expense.    The effective tax rate for the nine month period ended September 30, 2014 was lower than the U.S. Federal statutory rate due to a tax benefit recorded in the period to lower the effective state tax rate.  This adjustment to a lower state tax rate generated a benefit of $6.8 million that was recorded during the second quarter of 2014. 

 

The Company was included in Murphy Oil’s tax returns for the periods prior to the separation in multiple jurisdictions that remain subject to audit by taxing authorities. These audits often take years to complete and settle. As of September 30, 2014, the earliest year remaining open for audit and/or settlement in the United States is 2011Although the Company believes that recorded liabilities for unsettled issues are adequate, additional gains or losses could occur in future periods from resolution of outstanding unsettled matters.

 

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 Company has not recorded any effect for unrecognized income tax benefits for the periods reported.

 

Note 8 — Incentive Plans

Prior to the separation and distribution, our employees participated in the Murphy Oil 2007 Long-Term Incentive Plan (the “2007 Plan”) and the Murphy Oil 2012 Long-Term Incentive Plan (the “2012 Plan”) and received Murphy Oil restricted stock awards and options to purchase shares of Murphy Oil common stock. While participating in these two plans, costs resulting from share-based payment transactions were allocated and recognized as an expense in the financial statements using a fair value-based measurement method over the periods that the awards vested. Certain employees of the Company have received annual grants in the form of Murphy Oil stock options, restricted stock units and other forms of share based payments prior to the separation and distribution. Accordingly, the Company has accounted for expense for these plans in accordance with SAB Topic 1-B for periods prior to the separation and distribution. 

13

 


 

Murphy USA Inc.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

 

2013 Long-Term Incentive Plan

Effective August 30, 2013, certain of our employees participate in the Murphy USA 2013 Long-Term Incentive Plan which was subsequently amended and restated effective as of February 12, 2014 (the “MUSA 2013 Plan”). The MUSA 2013 Plan authorizes the Executive Compensation Committee of our Board of Directors (“the Committee”) to grant non-qualified or incentive stock options, stock appreciation rights, stock awards (including restricted stock and restricted stock unit awards), cash awards, and performance awards to our employees. No more than 5.5 million shares of MUSA common stock may be delivered under the MUSA 2013 Plan and no more than 1 million shares of common stock may be awarded to any one employee, subject to adjustment for changes in capitalization. The maximum cash amount payable pursuant to any “performance-based” award to any participant in any calendar year is $5 million.

 

On February 11, 2014, the Committee granted nonqualified stock options for 127,400 shares at an exercise price of $39.46 per share under the terms of the MUSA 2013 Plan.  The Black-Scholes valuation for these awards is $11.44 per option.  The Committee also awarded time-based restricted stock units and performance-based restricted stock units (performance units) to certain employees on the same date.   There were 39,250 time-based restricted units granted at a grant date fair value of $39.46 along with 78,500 performance units.  Half of the performance units vest based on a 3-year return on average capital employed (ROACE) calculation and the other half vest based on a 3-year total shareholder return (TSR) calculation that compares MUSA to a group of 17 peer companies.  The portion of the awards that vest based on TSR qualify as a market condition and must be valued using a Monte Carlo valuation model.  For the TSR portion of the awards, the fair value was determined to be $43.41 per unit.  For the ROACE portion of the awards, the valuation will be based on the grant date fair value of $39.46 per unit and the number of awards will be periodically assessed to determine the probability of vesting. 

 

On March 3, 2014, the Committee also granted 53,475 time-based restricted stock units granted to certain employees with a grant date fair value of $40.00 per unit. 

 

2013 Stock Plan for Non-employee Directors

 

Effective August 8, 2013, Murphy USA adopted the 2013 Murphy USA Stock Plan for Non-employee Directors (the “Directors Plan”).  The directors for Murphy USA are compensated with a mixture of cash payments and equity-based awards.  Awards under the Directors Plan may be in the form of restricted stock, restricted stock units, stock options, or a combination thereof.  An aggregate of 500,000 shares of common stock shall be available for issuance of grants under the Directors Plan. 

 

During the first quarter of 2014, the Company issued 22,437 restricted stock units to its non-employee directors at a weighted average grant date fair value of $39.07 per share.  These shares vest in three years from the grant date. 

 

For the nine months ended September 30, 2014 and 2013, share based compensation was $7.4 million and $6.9 million, respectively.  For the nine months ended September 30, 2014 and 2013, cash received from options exercised under all share-based payment arrangements was not material.  The related income tax benefit realized for the tax deductions from options exercised for the nine months ended September 30, 2014 and 2013, was not material. 

 

As of September 30, 2014, unrecognized compensation cost related to stock option awards was $2.4 million, which is expected to be recognized over a weighted average period of 1.6 years. Unrecognized compensation cost related to restricted stock awards was $13.6 million, which is expected to be recognized over a weighted average period of 2.8 years.

 

 

 

 

14

 


 

Murphy USA Inc.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

 

Note 9 — Employee and Retiree Benefit Plans

 

PENSION AND POSTRETIREMENT PLANS — Murphy Oil has defined benefit pension plans that are principally noncontributory and cover most full-time employees. Upon separation from Murphy Oil, all amounts for these plans related to Murphy USA were frozen and retained by Murphy Oil. Therefore, the assets and liabilities related to Murphy USA employees in these plans are not included in these financial statements as Murphy USA is considered to be participating in multiple employer benefit plans due to co-mingling of various plan assets. However, the periodic benefit expense for each period includes the expense of the U.S. benefit plans. All U.S. tax qualified plans meet the funding requirements of federal laws and regulations. Murphy Oil also sponsors health care and life insurance benefit plans, which are not funded, that cover most retired U.S. employees. The health care benefits are contributory; the life insurance benefits are noncontributory. Murphy USA does not expect to have similar pension or post-retirement plans for its employees.

 

The table that follows provides the components of net periodic benefit expense associated with Company employees for the three months and nine months ended September 30, 2013 as there was no comparable expense for the three months and nine months ended September 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

 

 

 

 

 

 

 

Other Postretirement

 

 

Pension Benefits

 

Benefits

(Thousands of dollars)

 

2014

 

2013

 

2014

 

2013

Service cost

 

$

 —

 

$

801 

 

$

 —

 

$

369 

Interest cost

 

 

 —

 

 

762 

 

 

 —

 

 

249 

Expected return on plan assets

 

 

 —

 

 

(805)

 

 

 —

 

 

 —

Amortization of prior service cost (benefits)

 

 

 —

 

 

14 

 

 

 —

 

 

(2)

Recognized actuarial loss

 

 

 —

 

 

592 

 

 

 —

 

 

92 

Net periodic benefit expense

 

$

 —

 

$

1,364 

 

$

 —

 

$

708 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

Other Postretirement

 

 

Pension Benefits

 

Benefits

(Thousands of dollars)

 

2014

 

2013

 

2014

 

2013

Service cost

 

$

 —

 

$

3,401 

 

$

 —

 

$

1,447 

Interest cost

 

 

 —

 

 

2,717 

 

 

 —

 

 

983 

Expected return on plan assets

 

 

 —

 

 

(2,794)

 

 

 —

 

 

 —

Amortization of prior service cost (benefits)

 

 

 —

 

 

53 

 

 

 —

 

 

(7)

Recognized actuarial loss

 

 

 —

 

 

2,108 

 

 

 —

 

 

363 

Net periodic benefit expense

 

$

 —

 

$

5,485 

 

$

 —

 

$

2,786 

 

U.S. Health Care Reform — In March 2010, the United States Congress enacted a health care reform law. Along with other provisions, the law (a) eliminated the tax free status of federal subsidies to companies with qualified retiree prescription drug plans that are actuarially equivalent to Medicare Part D plans beginning in 2013; (b) imposes a 40% excise tax on high-cost health plans as defined in the law beginning in 2018; (c) eliminated lifetime or annual coverage limits and required coverage for preventative health services beginning in September 2010; and (d) imposed a fee of $2 (subsequently adjusted for inflation) for each person covered by a health insurance policy beginning in September 2010. The new law did not significantly affect the Company’s consolidated and combined financial statements as of September 30, 2014 and December 31, 2013 and for the three month or nine month periods ended September 30, 2014 and 2013.

 

Note 10— Financial Instruments and Risk Management

 

DERIVATIVE INSTRUMENTS — The Company makes limited use of derivative instruments to manage certain risks related to commodity prices. The use of derivative instruments for risk management is

15

 


 

Murphy USA Inc.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

covered by operating policies and is closely monitored by the Company’s senior management. The Company 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.

 

The Company is subject to commodity price risk related to corn that it will purchase in the future for feedstock and WDGS that it will sell in the future at its remaining ethanol production facility.  At September 30, 2014 and 2013, the Company had open physical delivery commitment contracts for purchase of approximately 8.0 million and 10.6 million bushels of corn, respectively, for processing at its ethanol plants. For the nine month period ended September 30, 2014 and 2013, the Company had open physical delivery commitment contracts for sale of approximately 0.6 million and 5.0 million equivalent bushels, respectively, of DDGS and WDGS. To manage the price risk associated with certain of these physical delivery commitments which have fixed prices, at September 30, 2014 and 2013, the Company had outstanding derivative contracts with a net short volume of 2.3 million and net long volume of 2.2 million bushels, respectively, that mature at future prices in effect on the expected date of delivery under the physical delivery commitment contracts.   Additionally, at September 30, 2014 and 2013, the Company had outstanding derivative contracts with net short volumes of 2.8 million and 1.1 million bushels of corn, respectively, to buy back when certain corn inventories are expected to be processed. The impact of marking to market these commodity derivative contracts decreased income before taxes by $0.6 million and increased income before taxes by $0.1 million for the nine months ended September 30, 2014 and 2013, respectively.

 

At September 30, 2014 and December 31, 2013, the fair value of derivative instruments not designated as hedging instruments are presented in the following table.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2014

 

December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Thousands of dollars)

 

Balance Sheet Location

 

Fair Value

 

Balance Sheet Location

 

Fair Value

 

Balance Sheet Location

 

Fair Value

 

Balance Sheet Location

 

Fair Value

Commodity derivative contracts

 

Accounts Receivable

 

$

1,132 

 

Accounts Payable

 

$

1,722 

 

Accounts Receivable

 

$

224 

 

Accounts Payable

 

$

291 

 

For the three month and nine month periods ended September 30, 2014 and 2013, the gains and losses recognized in the consolidated and combined Statements of Income for derivative instruments not designated as hedging instruments are presented in the following table.  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain (Loss)

(Thousands of dollars)

 

Statement of Income

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

Type of Derivative Contract

 

Location

 

2014

 

2013

 

2014

 

2013

Commodity

 

Fuel and ethanol costs of goods sold

 

$

2,438 

 

$

2,550 

 

$

3,057 

 

$

2,104 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Company offsets certain assets and liabilities related to derivative contracts when the legal right of offset exists. Derivative assets and liabilities which have offsetting positions at September 30, 2014 and December 31, 2013 are presented in the following tables: 

 

 

 

 

16

 


 

Murphy USA Inc.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Amounts

 

Net Amounts of

 

 

Gross Amounts

 

Offset in the

 

Assets Presented in

 

 

of Recognized

 

Consolidated

 

the Consolidated

(Thousands of dollars)

 

Assets

 

Balance Sheet

 

Balance Sheet

At September 30, 2014

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

$

1,174 

 

$

(42)

 

$

1,132 

At December 31, 2013

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

$

233 

 

$

(9)

 

$

224 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Amounts

 

Net Amounts of

 

 

Gross Amounts

 

Offset in the

 

Liabilities Presented

 

 

of Recognized

 

Consolidated

 

in the Consolidated

 

 

Liabilities

 

Balance Sheet

 

Balance Sheet

At September 30, 2014

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

$

1,764 

 

$

(42)

 

$

1,722 

At December 31, 2013

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

$

300 

 

$

(9)

 

$

291 

 

All commodity derivatives above are corn-based contracts associated with the Company’s Hereford plant as all positions related to Hankinson were assumed by the buyer in conjunction with the sale. Net derivative assets are included in Accounts Receivable presented in the table on the prior page and are included in Accounts Receivable on the Consolidated Balance Sheets; likewise, net derivative liabilities in the above table are included in Accounts Payable in the table above and are included in Accounts Payable and Accrued Liabilities on the Consolidated Balance Sheets. These contracts permit net settlement and the Company generally avails itself of this right to settle net. At September 30, 2014 and December 31, 2013, cash deposits of $3.2 million and $2.9 million related to commodity derivative contracts were reported in Prepaid Expenses in the Consolidated Balance Sheets, respectively. These cash deposits have not been used to reduce the reported net liabilities on the corn-based derivative contracts at September 30, 2014 or December 31, 2013.

 

Note 11 – Earnings Per Share

 

Basic earnings per common share is computed by dividing net income available to common stockholders by the weighted average of common shares outstanding during the period.  Diluted earnings per common share adjusts basic earnings per common share for the effects of stock options and restricted stock in the periods where such items are dilutive. 

 

On August 30, 2013, 46,743,316 shares of our common stock were distributed to the shareholders of Murphy Oil in connection with the separation and distribution.  For comparative purposes, we have assumed this amount to be outstanding as of the beginning of each prior period prior to the separation and distribution presented in the calculation of weighted average shares outstanding. 

 

During May 2014, the Company executed a share repurchase program that was approved by the Board of Directors for approximately $50 million worth of common stock of the Company.   At the completion of this plan, the Company had acquired 1,040,636 shares of common stock for an average price of $48.07 per share including brokerage fees. 

 

The following table provides a reconciliation of basic and diluted earnings per share computations for the three months and nine months ended September 30, 2014 and 2013 (in thousands, except per share amounts):

 

 

 

17

 


 

Murphy USA Inc.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to common stockholders

 

$

62,651 

 

$

41,729 

 

$

145,516 

 

$

141,404 

Weighted average common shares outstanding (in thousands)

 

 

45,726 

 

 

46,743 

 

 

46,233 

 

 

46,743 

Total earnings per share

 

$

1.37 

 

$

0.89 

 

$

3.15 

 

$

3.03 

Earnings per common share - assuming dilution:

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to common stockholders

 

$

62,651 

 

$

41,729 

 

$

145,516 

 

$

141,404 

Weighted average common shares outstanding (in thousands)

 

 

45,726 

 

 

46,743 

 

 

46,233 

 

 

46,743 

Common equivalent shares:

 

 

 

 

 

 

 

 

 

 

 

 

Dilutive options

 

 

364 

 

 

16 

 

 

267 

 

 

16 

Weighted average common shares outstanding - assuming dilution (in thousands)

 

 

46,090 

 

 

46,759 

 

 

46,500 

 

 

46,759 

Earnings per share - assuming dilution

 

$

1.36 

 

$

0.89 

 

$

3.13 

 

$

3.02