ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“Management’s Discussion and Analysis” or "MD&A") is the Company’s analysis of its financial performance and of significant trends that may affect future performance. It should be read in conjunction with the consolidated financial statements and notes included in this Quarterly Report on Form 10-Q. It contains forward-looking statements including, without limitation, statements relating to the Company’s plans, strategies, objectives, expectations and intentions. The words “anticipate,” “estimate,” “believe,” “budget,” “continue,” “could,” “intend,” “may,” “plan,” “potential,” “predict,” “seek,” “should,” “will,” “would,” “expect,” “objective,” “projection,” “forecast,” “goal,” “guidance,” “outlook,” “effort,” “target” and similar expressions identify forward-looking statements. The Company does not undertake to update, revise or correct any of the forward-looking information unless required to do so under the federal securities laws. Readers are cautioned that such forward-looking statements should be read in conjunction with the Company’s disclosures under “Forward-Looking Statements” and “Risk Factors” included elsewhere in this Quarterly Report on Form 10-Q.
For purposes of this Management’s Discussion and Analysis, references to “Murphy USA”, the “Company”, “we”, “us” and “our” refer to Murphy USA Inc. and its subsidiaries on a consolidated basis.
Management’s Discussion and Analysis is organized as follows:
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Executive Overview
—This section provides an overview of our business and the results of operations and financial condition for the periods presented. It includes information on the basis of presentation with respect to the amounts presented in the Management’s Discussion and Analysis and a discussion of the trends affecting our business.
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Results of Operations
—This section provides an analysis of our results of operations, including the results of our operating segment for the
three and nine
months ended
September 30, 2018
and
2017
.
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Capital Resources and Liquidity
—This section provides a discussion of our financial condition and cash flows as of and for the
three and nine
months ended
September 30, 2018
and
2017
. It also includes a discussion of our capital structure and available sources of liquidity.
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Critical Accounting Policies
—This section describes the accounting policies and estimates that we consider most important for our business and that require significant judgment.
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Executive Overview
The following MD&A is intended to help the reader understand our results of operations and financial condition. This section is provided to supplement, and should be read in conjunction with, our consolidated financial statements and the accompanying notes to these financial statements contained elsewhere in this Quarterly Report on Form 10-Q, this MD&A section and the consolidated financial statements in our Annual Report on Form 10-K. Our Form 10-K contains a discussion of matters not included within this document, such as disclosures regarding critical accounting policies and estimates, and contractual obligations.
Our Business
We market refined products through a network of retail gasoline stations and to unbranded wholesale customers. Our owned retail stations are almost all located in close proximity to Walmart stores and use the brand name Murphy USA®. We also market gasoline and other products at standalone stations under the Murphy Express brand. At
September 30, 2018
, we had a total of
1,461
Company stations in
26
states, principally in the Southeast, Southwest and Midwest United States.
Basis of Presentation
Murphy USA was incorporated in March 2013, and until the separation from Murphy Oil Corporation was completed on August 30, 2013, it had not commenced operations and had no material assets, liabilities or commitments. The financial information presented in this Management’s Discussion and Analysis is derived from the consolidated financial statements of Murphy USA Inc. and its subsidiaries for all periods presented.
Trends Affecting Our Business
Our operations are significantly impacted by the gross margins we receive on our fuel sales. These gross margins are commodity-based, change daily and are volatile. While we expect our total fuel sales volumes to grow and the gross margins we realize on those sales to remain strong, these gross margins can change rapidly due to many factors. These factors include, but are not limited to, the price of refined products, interruptions in supply caused by severe weather, severe refinery mechanical failures for an extended period of time, and competition in the local markets in which we operate.
The cost of our main sales products, gasoline and diesel, is greatly impacted by the cost of crude oil in the United States. Generally, rising prices for crude oil increase the Company’s cost for wholesale fuel products purchased. When wholesale fuel costs rise, the Company is not always able to immediately pass these cost increases on to its retail customers at the pump, which in turn reduces the Company’s sales margin. Also, rising prices tend to cause our customers to reduce discretionary fuel consumption, which generally reduces our fuel sales volumes. Crude oil prices have ranged in price from June 2018's average monthly per barrel price of approximately $72 to September 2018's average monthly per barrel price of approximately $75. Total fuel contribution (retail fuel margin plus product supply and wholesale ("PS&W") results including Renewable Identification Numbers ("RINs") for the
third
quarter of 2018 was
16.2
cents per gallon, a
21.0%
decrease when compared to the 2017
third
quarter total fuel contribution of
20.5
cents per gallon.
In addition, our revenues are impacted by our ability to leverage our diverse supply infrastructure in pursuit of obtaining the lowest cost fuel supply available; for example, activities such as blending bulk fuel with ethanol and bio-diesel to capture and subsequently sell RINs. Under the Energy Policy Act of 2005, the Environmental Protection Agency (“EPA”) is authorized to set annual quotas establishing the percentage of motor fuels consumed in the United States that must be attributable to renewable fuels. Obligated parties are required to demonstrate that they have met any applicable quotas by submitting a certain amount of RINs to the EPA. RINs in excess of the set quota can be sold in a market for RINs at then-prevailing prices. The market price for RINs fluctuates based on a variety of factors, including but not limited to governmental and regulatory action. There are other market related factors that can impact the net benefit we receive from RINs on a company-wide basis either favorably or unfavorably. Revenue from the sales of RINs is included in “Other operating revenues” in the Consolidated Statements of Income. With continued uncertainty around the Renewable Fuel Standard ("RFS") program, RIN prices declined to a rate of $.19 by the end of 2018's
third
quarter.
As of
September 30, 2018
, we have
$800 million
of Senior Notes and
$77 million
of term loan outstanding. We believe that we will generate sufficient cash from operations to fund our ongoing operating requirements. We expect to use the credit facilities to provide us with available financing intended to meet any ongoing cash needs in excess of internally generated cash flows. To the extent necessary, we will borrow under these facilities to fund our ongoing operating requirements. At
September 30, 2018
, we have additional available capacity under the committed $450 million credit facilities (subject to the borrowing base), together with capacity under a $150 million incremental uncommitted facility. There can be no assurances, however, that we will generate sufficient cash from operations or be able to draw on the credit facilities, obtain commitments for our incremental facility and/or obtain and draw upon other credit facilities.
The Company currently anticipates total capital expenditures (including land for future developments) for the full year 2018 to range from approximately $225 million to $275 million depending on how many new sites are completed. We intend to fund the remainder of our capital program in 2018 primarily using operating cash flow but will supplement funding where necessary using borrowings available under credit facilities.
We believe that our business will continue to grow in the future as we expect to build additional locations chosen by our real estate development team that have the characteristics we look for in a strong site. The pace of this growth is continually monitored by our management, and these plans can be altered based on operating cash flows generated and the availability of credit facilities.
We currently estimate our ongoing effective tax rate to be between 20% and 23% for the fourth quarter.
Seasonality
Our business has inherent seasonality due to the concentration of our retail sites in certain geographic areas, as well as customer activity behaviors during different seasons. In general, sales volumes and operating incomes are typically highest in the second and third quarters during the summer-activity months and lowest during the winter months. As a result, operating results for the
three and nine
months ended
September 30, 2018
are not necessarily indicative of the results that may be expected for the year ending
December 31, 2018
.
Business Segment
The Company has one operating segment which is Marketing. This segment includes our retail marketing sites and product supply and wholesale assets.
For additional operating segment information, see Note 19 “Business Segments” in the audited combined financial statements for the year ended December 31, 2017 included with our Annual Report on Form 10-K and Note 13 “Business Segment” in the accompanying unaudited consolidated financial statements for the
three and nine
months ended
September 30, 2018
.
Results of Operations
Consolidated
Results
For the three month period ended
September 30, 2018
, the Company reported net income of
$45.0 million
, or
$1.38
per diluted share, on revenue of
$3.8 billion
. Net income was
$67.9 million
for the same period in
2017
, or
$1.90
per diluted share, on
$3.2 billion
in revenue. The decrease in net income was mainly due to lower total fuel contribution (retail fuel margin plus PS&W results including RINs) and higher payment fees, partially offset by improvements in merchandise margin and a lower effective income tax rate.
For the
nine
month period ended
September 30, 2018
, the Company reported net income of
$136.1 million
, or
$4.11
per diluted share, on revenue of
$10.9 billion
. Net income was
$120.4 million
for the same period in
2017
, or
$3.29
per diluted share, on
$9.4 billion
in revenue. The increase in net income for the
nine
months was largely the result of the net settlement proceeds of
$37.8
million (after tax), which was recognized in the first and second quarters of 2018 from the settlement of damages incurred in connection with the 2010 Deepwater Horizon oil spill and a lower effective income tax rate.
Three
Months
Ended
September 30, 2018
versus Three Months Ended
September 30, 2017
Quarterly revenues for
2018
increased
$551.7 million
, or
17.0%
, compared to the same quarter in
2017
. The higher revenues were related to higher retail prices, total retail volumes, and increased store count in 2018.
Total cost of sales increased
$583.5 million
, or
19.9%
, compared to
2017
. In the current year quarter, higher fuel purchase costs in all areas were driven by higher wholesale prices, higher fuel and merchandise sales volumes, and increased store count.
Station and other operating expenses increased
$9.3 million
, or
7.1%
, from
2017
. Increased store count and higher retail fuel and merchandise revenues generated greater total payment fees during the 2018 quarter, which along with higher repairs and maintenance expenses, contributed to the increase in station and other operating expenses.
Selling, general and administrative ("SG&A") expenses for
2018
increased
$1.1 million
, or
3.5%
, from
2017
. The increase in SG&A costs is primarily due to higher labor and benefit related costs.
The effective income tax rate was approximately
21.1%
for the
third
quarter of
2018
versus
37.5%
for the same period of
2017
. The reduction in the effective tax rate is primarily due to the Federal tax reform that became effective in 2018 combined with discrete tax items and excess tax benefits related to share-based payments.
Nine
Months
Ended
September 30, 2018
versus
Nine
Months Ended
September 30, 2017
Year-to-date revenues for
2018
increased
$1.4 billion
, or
15.0%
, compared to the same
nine month
period in
2017
. The higher revenues were mainly caused by higher petroleum product revenues and increased store count in 2018.
Total cost of sales increased
$1.4 billion
, or
16.6%
, compared to
2017
. This increase is primarily due to higher fuel purchase costs in all areas that were driven by higher wholesale prices combined with higher merchandise costs and increased store count.
Station and other operating expenses increased
$17.3 million
, or
4.5%
, from
2017
. Increased store count and higher retail fuel prices generated greater total payment fees during the 2018 period and were the primary reasons for higher station and other operating expenses. Excluding payment fees, station and other operating expenses on an average per store month ("APSM") basis were slightly lower year-over-year.
Selling, general and administrative ("SG&A") expenses for
2018
increased slightly year-over-year by
1.2%
, or
$1.2 million
, from
2017
.
Net settlement proceeds for the first
nine months
of 2018 were
$50.4
million (before tax), which represented the net settlement of damages incurred in connection with the 2010 Deepwater Horizon oil spill.
The effective income tax rate was approximately
21.5%
for the first
nine months
of
2018
and
36.2%
for the
2017
period. The current year rate is favorable compared to the estimated effective tax rate of 25% due to benefits related to the settlement of prior year state uncertain tax positions and excess tax benefits related to share-based payments. The year-over-year reduction in the effective tax rate is primarily due to Federal tax reform that is benefiting 2018.
Segment
Results
A summary of the Company’s earnings by business segment follows:
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Three Months Ended
September 30,
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Nine Months Ended
September 30,
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(Millions of dollars)
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2018
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2017
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2018
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2017
|
Marketing
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$
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54.6
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|
$
|
75.9
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|
$
|
126.1
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$
|
140.1
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Corporate and other assets
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(9.6
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)
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(8.0
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)
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10.0
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|
(19.7
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)
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Net Income
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$
|
45.0
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$
|
67.9
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|
$
|
136.1
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$
|
120.4
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Three
Months
Ended
September 30, 2018
versus Three Months Ended
September 30, 2017
Net income for the three months ended
September 30, 2018
decreased compared to the same period in
2017
primarily due to:
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Lower total fuel contribution
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Higher station and other operating expenses
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Increased depreciation expense due to higher store count
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The items below partially offset the decrease in earnings in the current period:
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Higher retail fuel volumes
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Higher merchandise margins
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Lower effective income tax rate
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Nine
Months
Ended
September 30, 2018
versus
Nine
Months Ended
September 30, 2017
Net income for the
nine
months ended
September 30, 2018
increased compared to the same period in
2017
primarily due to:
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Net settlement proceeds of
$37.8
million (after tax) from the 2010 Deepwater Horizon oil spill recorded in Corporate and other assets
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Higher PS&W margin including RINs
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•
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Higher merchandise margins
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•
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Lower effective income tax rate
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The items below partially offset the increase in earnings in the current year:
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Lower retail fuel margins
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•
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Increased depreciation expense due to higher store count
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Higher interest expense related to the issuance of the 2027 Senior Notes in April 2017
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•
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Higher station and other operating expenses
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(Millions of dollars, except revenue per store month (in thousands) and store counts)
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Three Months Ended
September 30,
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Nine Months Ended
September 30,
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Marketing Segment
|
2018
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2017
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2018
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2017
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Operating Revenues
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Petroleum product sales
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$
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3,151.5
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$
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2,580.9
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$
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8,982.8
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$
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7,550.9
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Merchandise sales
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623.7
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|
605.6
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|
1,807.5
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|
1,777.1
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Other operating revenues
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12.8
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|
49.8
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|
70.4
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|
118.8
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Total operating revenues
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3,788.0
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|
3,236.3
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|
10,860.7
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|
9,446.8
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Operating expenses
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Petroleum products cost of goods sold
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2,991.3
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|
2,419.1
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|
8,584.9
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|
7,161.6
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Merchandise cost of goods sold
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519.2
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|
|
507.9
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|
1,509.2
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|
1,492.9
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Station and other operating expenses
|
139.7
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|
|
130.4
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|
|
401.9
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|
384.6
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Depreciation and amortization
|
31.5
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|
27.4
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|
92.4
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|
78.7
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Selling, general and administrative
|
32.6
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|
31.5
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|
102.3
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|
101.1
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Accretion of asset retirement obligations
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0.5
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|
0.4
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|
1.5
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|
1.3
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Total operating expenses
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3,714.8
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|
3,116.7
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|
10,692.2
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|
9,220.2
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Gain (loss) on sale of assets
|
(0.5
|
)
|
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—
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(0.7
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)
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|
(3.4
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)
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Income (loss) from operations
|
72.7
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|
|
119.6
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|
167.8
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|
223.2
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Other income (expense)
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Interest expense
|
—
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|
(0.1
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)
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—
|
|
|
(0.1
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)
|
Other nonoperating income (expense)
|
—
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3.0
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|
0.1
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|
3.2
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Total other income (expense)
|
—
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2.9
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|
0.1
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3.1
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Income (loss) before income taxes
|
72.7
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|
|
122.5
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|
|
167.9
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|
226.3
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Income tax expense (benefit)
|
18.1
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|
46.6
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|
41.8
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|
|
86.2
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Income (loss) from operations
|
$
|
54.6
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|
$
|
75.9
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|
$
|
126.1
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|
|
$
|
140.1
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(Millions of dollars, except revenue per store month (in thousands) and store counts)
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Three Months Ended
September 30,
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Nine Months Ended
September 30,
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Marketing Segment
|
2018
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2017
|
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2018
|
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2017
|
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Total tobacco sales revenue per store month
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$
|
103.6
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$
|
104.4
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$
|
99.8
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$
|
103.5
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Total non-tobacco sales revenue per store month
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40.5
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38.5
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39.5
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37.7
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Total merchandise sales revenue per store month
|
$
|
144.1
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$
|
142.9
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$
|
139.3
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|
$
|
141.2
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Store count at end of period
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1,461
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1,423
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1,461
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1,423
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Total store months during the period
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4,327
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|
4,237
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|
|
12,974
|
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|
12,588
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Three Months Ended
September 30, 2018
versus Three Months Ended
September 30, 2017
Net income in the Marketing segment for
2018
decreased
$21.3 million
compared to the
2017
period. The primary driver was the
21.0%
decrease in total fuel contribution to
16.2
cpg in
2018
. Partially offsetting the decrease was merchandise gross margin which increased
7.0%
to
$104.5 million
.
Total revenues for the Marketing segment were approximately
$3.8 billion
for
2018
compared to
$3.2 billion
for
2017
. The primary cause of the increase in revenues was a
$0.39
per gallon increase in retail fuel price in the
2018
quarter. Revenues included excise taxes collected and remitted to government authorities of
$464.1 million
in
2018
and
$488.8 million
in
2017
. On January 1, 2018, the Company adopted ASU 2014-09 using the modified retrospective method. Under previous revenue recognition guidance, the revenues related to excise and sales tax collected and remitted to government authorities would have been
$515.9 million
for the current-year quarter.
Total fuel sales volumes on a same store sales ("SSS") basis increased
1.0%
to
243.7 thousand
gallons per store in the
2018
period from
241.5 thousand
gallons per store in
2017
. Retail fuel margin decreased
8.4%
in the
2018
quarter to
14.2
cpg compared to
15.5
cpg in the prior-year quarter. Retail fuel margins continued to decrease in
third
quarter
2018
as wholesale product price averages increased quarter-over-quarter.
Total PS&W margin dollars, excluding RINs, were
$9.7 million
in the
2018
period compared to
$3.6 million
in
2017
. The improvement in the current period was largely attributable to timing and inventory benefits due to rising wholesale prices, along with continued improvement in the spot-to-rack differential.
The
2018
quarter includes the sale of RINs of
$11.6 million
compared to
$48.7 million
in
2017
. During the
2018
quarter,
57 million
RINs were sold at an average selling price of
$0.20
per RIN while the prior-year quarter had sales of
59 million
RINs at an average price of
$0.83
per RIN.
Total merchandise sales increased
3.0%
to
$623.7 million
in
2018
from
$605.6 million
in
2017
and was primarily due to an increase in non-tobacco sales of
3.6%
and in tobacco products sales of
0.3%
, on a SSS basis. Quarterly merchandise margins in
2018
were
7.0%
higher than
2017
. The increase in gross margin dollars in the current period was due primarily to timing of rebates and improved promotion of non-tobacco merchandise in the current year. As a result, total unit margins were up by
70
basis points from
16.1%
in the prior period to
16.8%
in the current quarter, a new quarterly record.
Station and other operating expenses increased
$9.3 million
in the current period compared to
2017
levels. Total operating expenses in
2018
were higher, reflecting increased payment fees, new store additions, and higher repairs and maintenance expenses. On an APSM basis, expenses applicable to retail excluding payment fees increased
2.8%
, primarily because of higher repair and maintenance expenses.
Depreciation expense increased
$4.1 million
in the
2018
period, an increase of
15.0%
over the prior period. This increase was primarily caused by more stores operating in the
2018
period compared to the prior year period.
Selling, general and administrative (SG&A) expenses increased
$1.1 million
, or
3.5%
, in
2018
. This increase was primarily due to higher labor and employee related costs and incentive plan expenses.
Nine
Months Ended
September 30, 2018
versus
Nine
Months Ended
September 30, 2017
Net income in the Marketing segment for
2018
decreased
$14.0 million
compared to the
2017
period. The total fuel contribution of
14.9
cpg in
2018
was a decrease of
1.4
cpg from the same prior-year period but was offset by an increase in merchandise gross margin of
5.0%
to
$298.3 million
.
Total revenues for the Marketing segment were approximately
$10.9 billion
for
2018
and
$9.4 billion
for
2017
. The primary cause of the increase in revenues was a
$0.36
per gallon increase in retail fuel price and an increase in gallons sold of
41.8 million
in the
2018
period. Revenues included excise taxes collected and remitted to government authorities of
$1.4 billion
in
2018
and
$1.5 billion
in
2017
. On January 1, 2018, the Company adopted ASU 2014-09 using the modified retrospective method. Under previous revenue recognition guidance, the revenues related to excise and sales tax collected and remitted to government authorities would have been
$1.5 billion
in the current year.
Total fuel sales volumes on a SSS basis were down
1.5%
to
241.4 thousand
gallons per store in the
2018
period from
245.0 thousand
gallons per store in
2017
. This decline was primarily due to the impacts of winter storms throughout the Company's operating areas during the first quarter of 2018.
Retail fuel margin decreased
15.6%
in
2018
to
11.9
cpg compared to
14.1
cpg in the prior year period. Retail fuel margins declined as rising wholesale product prices throughout the period created an environment less favorable to retail than in first
nine
months of
2017
.
Total PS&W margin dollars, excluding RINs, were positive
$24.7 million
in the
2018
period compared to negative
$45.6 million
in
2017
. The improvement in the current period was largely attributable to timing and inventory benefits due to rising wholesale prices and to a considerable improvement in the spot-to-rack differential.
The
2018
period includes the sale of RINs of
$67.3 million
compared to
$114.4 million
in
2017
. During the
2018
quarter,
177 million
RINs were sold at an average selling price of
$0.38
per RIN while the prior-year period had sales of
172 million
RINs at an average price of
$0.66
per RIN.
Total merchandise sales were relatively flat year-over-year at approximately
$1.8 billion
. Year-to-date merchandise margins in
2018
were
5.0%
higher than
2017
. The increase in gross margin dollars in the current period was due primarily to
continual turnover to new, high-demand products and enhanced tobacco programs and initiatives. As a result, total unit margins were up by
50
basis points from
16.0%
in the prior period to
16.5%
in the current year.
Station and other operating expenses increased
$17.3 million
in the current period compared to
2017
levels. Total operating expenses in
2018
were higher, reflecting increased payment fees and new store additions. On an APSM basis, expenses applicable to retail excluding payment fees declined
0.4%
.
Depreciation expense increased
$13.7 million
in the
2018
period, an increase of
17.4%
over the prior period. This increase was primarily caused by more stores operating in the
2018
period compared to the prior year period.
Selling, general and administrative (SG&A) expenses increased
$1.2 million
, when compared to 2017. The increase was primarily due to higher labor and employee related costs and incentive plan expenses.
Same store sales comparison
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance from prior year
|
|
Variance from prior year
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
September 30, 2018
|
|
September 30, 2018
|
|
|
SSS
|
|
APSM
|
|
SSS
|
|
APSM
|
Fuel gallons per month
|
|
1.0
|
%
|
|
1.3
|
%
|
|
(1.5
|
)%
|
|
(1.7
|
)%
|
|
|
|
|
|
|
|
|
|
Merchandise sales
|
|
1.2
|
%
|
|
0.9
|
%
|
|
(0.7
|
)%
|
|
(1.3
|
)%
|
Tobacco sales
|
|
0.3
|
%
|
|
(0.8
|
)%
|
|
(2.3
|
)%
|
|
(3.5
|
)%
|
Non-tobacco sales
|
|
3.6
|
%
|
|
5.2
|
%
|
|
3.8
|
%
|
|
4.8
|
%
|
|
|
|
|
|
|
|
|
|
Merchandise margin
|
|
5.5
|
%
|
|
4.8
|
%
|
|
2.8
|
%
|
|
1.8
|
%
|
Tobacco margin
|
|
6.9
|
%
|
|
5.1
|
%
|
|
3.5
|
%
|
|
1.5
|
%
|
Non-tobacco margin
|
|
3.7
|
%
|
|
4.4
|
%
|
|
1.7
|
%
|
|
2.3
|
%
|
Historically, the Company has used the APSM metric to represent certain data on a per site basis. The APSM metric includes all stores open through the date of the calculation. Other retailers have used SSS as their metric. The preceding table shows the comparison of APSM to SSS for 3 specific items. In most cases, the SSS metric is more favorable than the APSM metric. The primary reason for this is that SSS does not include new stores that have been opened a short time and are still developing their customer base. The difference between the APSM and SSS results highlights the impact of our growing mix of small store formats (e.g. 1200 sq. ft.) which have a higher mix of non-tobacco sales and a ramp up period on tobacco sales.
The same store sales comparison includes aggregated individual store results for all stores open throughout both periods presented. For all periods presented, the store must have been open for the entire calendar year to be included in the comparison. Remodeled stores that remained open or were closed for just a very brief time (less than a month) during the period being compared remain in the same store sales calculation. If a store is replaced, either at the same location (raze and rebuild) or relocated to a new location, it will typically be excluded from the calculation. Newly constructed sites, including raze-and-rebuilds do not enter the calculation until they are open for each full calendar year for the periods being compared (open by January 1, 2017 for the sites being compared in the
2018
versus
2017
calculations).
Corporate and other assets
Three
Months
Ended
September 30, 2018
versus Three Months Ended
September 30, 2017
After-tax results for Corporate and other assets declined in the recently completed quarter, experiencing a loss of
$9.6 million
compared to a loss of
$8.0 million
in the
third
quarter of
2017
. The increase was primarily due to higher depreciation expense and lower capitalized interest.
Nine
Months
Ended
September 30, 2018
versus
Nine
Months Ended
September 30, 2017
After-tax results for Corporate and other assets improved in the recently completed quarter, experiencing a profit of
$10.0 million
compared to a loss of
$19.7 million
in the same period of
2017
. The improvement was due to recording net settlement proceeds of
$37.8 million
(after tax) from the 2010 Deepwater Horizon oil spill. Interest expense was higher in the current-year period by
$5.8 million
due primarily to the addition of the $300 million senior notes on April 25, 2017 and lower interest capitalized,
partially offset by lower interest cost related to the term loan. Depreciation expense for 2018 was $1.8 million higher than the prior year.
Non-GAAP Measures
The following table sets forth the Company’s Adjusted EBITDA for the
three and nine
months ended
September 30, 2018
and
2017
. EBITDA means net income (loss) plus net interest expense, plus income tax expense, depreciation and amortization, and Adjusted EBITDA adds back (i) other non-cash items (e.g., impairment of properties and accretion of asset retirement obligations) and (ii) other items that management does not consider to be meaningful in assessing our operating performance (e.g., (income) from discontinued operations, net settlement proceeds, (gain) loss on sale of assets and other non-operating (income) expense. EBITDA and Adjusted EBITDA are not measures that are prepared in accordance with U.S. generally accepted accounting principles (GAAP).
We use this Adjusted EBITDA in our operational and financial decision-making, believing that the measure is useful to eliminate certain items in order to focus on what we deem to be a more reliable indicator of ongoing operating performance and our ability to generate cash flow from operations. Adjusted EBITDA is also used by many of our investors, research analysts, investment bankers, and lenders to assess our operating performance.
We believe that the presentation of Adjusted EBITDA provides useful information to investors because it allows understanding of a key measure that we evaluate internally when making operating and strategic decisions, preparing our annual plan, and evaluating our overall performance.
However, non-GAAP measures are not a substitute for GAAP disclosures, and EBITDA and Adjusted EBITDA may be prepared differently by us than by other companies using similarly titled non-GAAP measures.
The reconciliation of net income (loss) to EBITDA and Adjusted EBITDA is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
(Millions of dollars)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
45.0
|
|
|
$
|
67.9
|
|
|
$
|
136.1
|
|
|
$
|
120.4
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
12.0
|
|
|
40.8
|
|
|
37.3
|
|
|
68.4
|
|
Interest expense, net of interest income
|
|
13.0
|
|
|
12.3
|
|
|
38.8
|
|
|
33.0
|
|
Depreciation and amortization
|
|
34.2
|
|
|
29.0
|
|
|
99.0
|
|
|
83.5
|
|
EBITDA
|
|
104.2
|
|
|
150.0
|
|
|
311.2
|
|
|
305.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net settlement proceeds
|
|
—
|
|
|
—
|
|
|
(50.4
|
)
|
|
—
|
|
Accretion of asset retirement obligations
|
|
0.5
|
|
|
0.4
|
|
|
1.5
|
|
|
1.3
|
|
(Gain) loss on sale of assets
|
|
0.5
|
|
|
—
|
|
|
0.7
|
|
|
3.4
|
|
Other nonoperating (income) expense
|
|
—
|
|
|
(3.0
|
)
|
|
(0.1
|
)
|
|
(3.2
|
)
|
Adjusted EBITDA
|
|
$
|
105.2
|
|
|
$
|
147.4
|
|
|
$
|
262.9
|
|
|
$
|
306.8
|
|
Capital Resources and Liquidity
Significant Sources of Capital
We continue to have a
committed
$450 million asset based loan facility (the “ABL facility”), which is subject to the remaining borrowing capacity of
$344 million
at
September 30, 2018
(which can be utilized for working capital and other general corporate purposes, including supporting our operating model as described herein) and a $200 million term loan facility, as well as a $150 million incremental uncommitted facility. As of
September 30, 2018
, we had
$77 million
outstanding under our term loan and no amounts outstanding under our ABL. See “Debt – Credit Facilities” below for the calculation of our borrowing base.
We believe our short-term and long-term liquidity is adequate to fund not only our operations, but also our anticipated near-term and long-term funding requirements, including capital spending programs, execution of announced share repurchase programs, potential dividend payments, repayment of debt maturities and other amounts that may ultimately be paid in connection with contingencies.
Operating Activities
Net cash provided by operating activities was
$241.4 million
for the
nine
months ended
September 30, 2018
and was
$166.3 million
for the comparable period in
2017
. The increase was due to the net settlement proceeds received combined with changes in accounts payable and accrued liabilities.
Net income increased
$15.7 million
in 2018
compared to the corresponding period in
2017
due primarily to net settlement proceeds received in the current year, combined with a lower effective income tax rate.
I
nvesting Activities
For the
nine
months ended
September 30, 2018
, cash required by investing activities was
$167.7 million
compared to
$205.4 million
in
2017
. The lower investing cash use in the current period was primarily due to timing of capital expenditure spending in the current year, as well as sales proceeds from our current-period like-kind exchange transaction. Other investing activities required an additional $1.3 million in cash during 2018 when compared to 2017.
Financing Activities
Financing activities in the
nine
months
ended
September 30, 2018
required
cash of
$168.3 million
compared to cash provided of
$54.3 million
in the
nine
months
ended
September 30, 2017
. The current period included the repurchase of common shares of
$144.4 million
, which was a decrease of
$7.6 million
from the prior-year period. The Company had net repayments of borrowing of
$15.9 million
the current year compared to net borrowings of
$212.6 million
in the first
nine
months of 2017. Amounts related to share-based compensation required $2.8 million more in cash during 2018 than in 2017. There were no debt issuance costs in 2018 compared to $1.1 million in 2017.
Share Repurchase Program
Upon the completion of the most recent repurchase plan authorized by the Murphy USA Inc. Board of Directors in December 2017, the Company publicly stated in the fourth quarter 2017 Earnings Release that it expected to continue to conduct share repurchases under quarterly allocations in line with our past practice. We remain committed to share repurchases under quarterly allocations in line with our past practice, subject to market conditions and cash availability. There were no share repurchases during the third quarter of 2018 but
1,994,632
shares for
$144.4 million
have been repurchased year-to-date in 2018.
Debt
Our long-term debt at
September 30, 2018
and December 31, 2017 are as set forth below:
|
|
|
|
|
|
|
|
|
|
(Millions of dollars)
|
|
September 30,
2018
|
|
December 31,
2017
|
6.00% senior notes due 2023 (net of unamortized discount of $4.3 at September 30, 2018 and $5.0 at December 2017)
|
|
$
|
495.7
|
|
|
$
|
495.0
|
|
5.625% senior notes due 2027 (net of unamortized discount of $3.2 at September 30, 2018 and $3.5 at December 2017)
|
|
296.8
|
|
|
296.5
|
|
Term loan due 2020 (effective interest rate of 4.72% at September 30, 2018)
|
|
77.0
|
|
|
92.0
|
|
Capitalized lease obligations, vehicles, due through 2021
|
|
2.4
|
|
|
2.5
|
|
Less unamortized debt issuance costs
|
|
(4.1
|
)
|
|
(5.2
|
)
|
Total notes payable, net
|
|
867.8
|
|
|
880.8
|
|
Less current maturities
|
|
21.2
|
|
|
19.9
|
|
Total long-term debt
|
|
$
|
846.6
|
|
|
$
|
860.9
|
|
Senior Notes
On August 14, 2013, Murphy Oil USA, Inc., our primary operating subsidiary, issued
6.00%
Senior Notes due 2023 (the “2023 Senior Notes”) in an aggregate principal amount of
$500 million
. The 2023 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 2023 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.
On April 25, 2017, Murphy Oil USA, Inc., our primary operating subsidiary, issued
$300 million
of
5.625%
Senior Notes due 2027 (the "2027 Senior Notes") under its existing shelf registration statement. The 2027 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 2027 Senior Notes contains restrictive covenants that are essentially identical to the covenants for the 2023 Senior Notes.
The 2023 and 2027 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 2023 and 2027 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.
Credit Facilities and Term Loan
In March 2016, we amended and extended our existing credit agreement. The credit agreement provides for a committed
$450 million
ABL facility (with availability subject to the borrowing base described below) and a
$200 million
term loan facility.
It also provides for a
$150 million
uncommitted incremental facility.
On March 10, 2016,
Murphy Oil USA, Inc. borrowed
$200 million
under the term loan facility that has a
four
-year term with a current outstanding principal of
$77 million
. As of
September 30, 2018
, we have
zero
outstanding under our ABL facility.
The borrowing base is, at any time of determination, the 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
$200 million
sublimit for the issuance of letters of credit. 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 a total debt to EBITDA ratio under the ABL facility or (ii) with respect to the term loan facility, spreads ranging from
2.50%
to
2.75%
per annum depending on a total debt to EBITDA ratio and (B) in the case of Alternate Base Rate borrowings, (i) with respect to the ABL facility, spreads ranging from
0.50%
to
1.00%
per annum depending on a total debt to EBITDA ratio or (ii) with respect to the term loan facility, spreads ranging from
1.50%
to
1.75%
per annum depending on a total 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.
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 minimum 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 million
(including as of the most recent fiscal quarter end on the first date when availability is less than such amount), as well as a maximum secured total debt to EBITDA ratio of
4.5
to 1.0 at any time when the term loans are outstanding. As of
September 30, 2018
, our fixed charge coverage ratio was
0.81
; however, we had more than
$100 million
of availability under the ABL facility at that date so the fixed charge coverage ratio currently has no impact on our operations or liquidity. Our secured debt to EBITDA ratio as of
September 30, 2018
was
0.19
to 1.0.
The credit agreement contains restrictions on certain payments, including dividends, when availability under the credit agreement is less than or equal to the greater of
$100 million
and
25%
of the lesser of the revolving commitments and the borrowing base and our fixed charge coverage ratio is less than 1.0 to 1.0 (unless availability under the credit agreement is greater than
$100 million
and
40%
of the lesser of the revolving commitments and the borrowing base). As of
September 30, 2018
, our ability to make restricted payments was not limited as our availability under the borrowing base was more than
$100 million
, while our fixed charge coverage ratio under our credit agreement was less than
1.0
to 1.0. As of
December 31, 2017
, we had a shortfall of approximately
$206.9 million
of our net income and retained earnings subject to such restrictions before the fixed charge coverage ratio under our credit agreement would exceed
1.0
to 1.0.
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.
Capital Spending
Capital spending and investments in our Marketing segment relate primarily to the acquisition of land and the construction of new Company stations. Our Marketing capital is also deployed to improve our existing sites, which we refer to as sustaining capital. We also use sustaining capital in this business as needed to ensure reliability and continued performance of our sites. We also invest in our Corporate and other assets segment.
The following table outlines our capital spending and investments by segment for the
three and nine
month periods ended
September 30, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
(Millions of dollars)
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Marketing:
|
|
|
|
|
|
|
|
Company stores
|
$
|
49.7
|
|
|
$
|
53.8
|
|
|
$
|
110.4
|
|
|
$
|
152.5
|
|
Terminals
|
0.3
|
|
|
1.0
|
|
|
0.4
|
|
|
1.7
|
|
Sustaining capital
|
9.4
|
|
|
8.7
|
|
|
26.4
|
|
|
28.6
|
|
Corporate and other assets
|
2.5
|
|
|
10.9
|
|
|
15.3
|
|
|
29.7
|
|
Total
|
$
|
61.9
|
|
|
$
|
74.4
|
|
|
$
|
152.5
|
|
|
$
|
212.5
|
|
We currently expect capital expenditures for the full year
2018
to range from approximately $
225 million to $275 million, including $175 million for retail growth, approximately $40 million for maintenance capital, with the
remaining funds earmarked for other corporate investments, including various corporate initiatives, and completion of our home office remodel. See Note 16 “Commitments” in the audited consolidated financial statements for the year ended
December 31, 2017
included in our Annual Report on
Form 10-K for more information.
Critical Accounting Policies
There has been no material update to our critical accounting policies since our Annual Report on Form 10-K for the year ended
December 31, 2017. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies” in the Form 10-K.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains
certain statements or may suggest “forward-looking” information (as defined in the Private Securities Litigation Reform Act of 1995) that involve risk and uncertainties, including, but not limited to anticipated store openings, fuel margins, merchandise margins, sales of RINs and trends in our operations. Such statements are based upon the current beliefs and expectations of the Company’s management and are subject to significant risks and uncertainties. Actual future results may differ materially from historical results or current expectations depending upon factors including, but not limited to: our ability to continue to maintain a good business relationship with Walmart; successful execution of our growth strategy, including our ability to realize the anticipated benefits from such growth initiatives, and the timely completion of construction associated with our newly planned stores which may be impacted by the financial health of third parties; our ability to effectively manage our inventory, disruptions in our supply chain and our ability to control costs; the impact of severe weather events, such as hurricanes, floods and earthquakes; the impact of any systems failures, cybersecurity and/or security breaches, including any security breach that results in theft, transfer or unauthorized disclosure of customer, employee or company information or our compliance with information security and privacy laws and regulations in the event of such an incident; successful execution of our information technology strategy; future tobacco or e-cigarette legislation and any other efforts that make purchasing tobacco products more costly or difficult could hurt our revenues and impact gross margins; efficient and proper allocation of our capital resources; compliance with debt covenants; availability and cost of credit; and changes in interest rates. Our public filings, including our Annual Report on our Form 10-K for the year ended December 31, 2017 contains other information on these and other factors that could affect our financial results and cause actual results to differ materially from any forward-looking information we may provide. The Company undertakes no obligation to update or revise any forward-looking statements to reflect subsequent events, new information or future circumstances.