Table of Contents

 

 

 

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 February 28, 2010

 

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 No. 001-06198

 

 

 

		UNITED REFINING COMPANY (Exact name of registrant as specified in its charter)

 

Pennsylvania		25-1411751
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
15 Bradley Street
Warren, Pennsylvania		16365
(Address of principal executive office)		(Zip Code)

 

814-723-1500

(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  x    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  x

 

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 definition of “accelerated filer” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ¨						Accelerated filer  ¨
Non-accelerated filer  x (Do not check if  a smaller reporting company)						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  x

 

As of April 14, 2010, there were 100 shares of common stock, par value $.10 per share, of the Registrant outstanding.

 

 

 

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TABLE OF ADDITIONAL REGISTRANTS

 

Name		State of Other Jurisdiction of Incorporation		IRS Employer Identification Number		Commission File Number
Kiantone Pipeline Corporation		New York		25-1211902		333-35083-01
Kiantone Pipeline Company		Pennsylvania		25-1416278		333-35083-03
United Refining Company of Pennsylvania		Pennsylvania		25-0850960		333-35083-02
United Jet Center, Inc.		Delaware		52-1623169		333-35083-06
Kwik-Fill Corporation		Pennsylvania		25-1525543		333-35083-05
Independent Gas and Oil Company of Rochester, Inc.		New York		06-1217388		333-35083-11
Bell Oil Corp.		Michigan		38-1884781		333-35083-07
PPC, Inc.		Ohio		31-0821706		333-35083-08
Super Test Petroleum, Inc.		Michigan		38-1901439		333-35083-09
Kwik-Fil, Inc.		New York		25-1525615		333-35083-04
Vulcan Asphalt Refining Corporation		Delaware		23-2486891		333-35083-10
Country Fair, Inc.		Pennsylvania		25-1149799		333-35083-12

 

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Table of Contents

FORM 10-Q – CONTENTS

 

				PAGE(S)
PART I.		FINANCIAL INFORMATION		4
Item 1.		Financial Statements.		4
		Consolidated Balance Sheets – February 28, 2010 (unaudited) and August 31, 2009		4
		Consolidated Statements of Operations – Quarter and Six Months Ended February 28, 2010 and 2009 (unaudited)		5
		Consolidated Statements of Cash Flows – Six Months Ended February 28, 2010 and 2009 (unaudited)		6
		Notes to Consolidated Financial Statements (unaudited)		7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
Item 3.		Quantitative and Qualitative Disclosures about Market Risk		23
Item 4.		Controls and Procedures		23
PART II.		OTHER INFORMATION		24
Item 1.		Legal Proceedings		24
Item 1A.		Risk Factors		24
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		24
Item 3.		Defaults Upon Senior Securities		24
Item 4.		Submission of Matters to a Vote of Security Holders		24
Item 5.		Other Information		24
Item 6.		Exhibits		24
Signatures				25

 

 

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PART I.

FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS.

 

UNITED REFINING COMPANY AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

 

		February 28, 2010 (Unaudited)				August 31, 2009
Assets
Current:
Cash and cash equivalents		$	19,477			$	31,062
Accounts receivable, net			85,370				85,382
Inventories			199,025				237,541
Prepaid expenses and other assets			62,849				14,561
Amounts due from affiliated companies, net			—				809
Total current assets			366,721				369,355
Property, plant and equipment, net			257,224				252,048
Deferred financing costs, net			2,679				3,254
Goodwill			1,349				1,349
Tradename			10,500				10,500
Amortizable intangible assets, net			1,429				1,483
Deferred turnaround costs and other assets, net			5,199				7,452
Deferred income taxes			31,485				25,413
		$	676,586			$	670,854
Liabilities and Stockholder’s Equity
Current:
Revolving credit facility		$	98,000			$	—
Current installments of long-term debt			2,164				2,327
Accounts payable			45,171				83,497
Accrued liabilities			14,110				17,017
Income taxes payable			—				5,149
Sales, use and fuel taxes payable			15,765				22,134
Deferred income taxes			9,604				9,604
Amounts due to affiliated companies			155				—
Total current liabilities			184,969				139,728
Long term debt: less current installments			328,908				329,249
Deferred retirement benefits			134,777				131,059
Other noncurrent liabilities			—				4
Total liabilities			648,654				600,040
Commitments and contingencies Stockholder’s equity:
Common stock; $.10 par value per share – shares authorized 100; issued and outstanding 100			—				—
Additional paid-in capital			21,998				21,998
Retained earnings			49,710				94,365
Accumulated other comprehensive loss			(43,776	)			(45,549	)
Total stockholder’s equity			27,932				70,814
		$	676,586			$	670,854

 

See accompanying notes to consolidated financial statements.

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS – (Unaudited)

(in thousands)

 

		Three Months Ended February 28,								Six Months Ended February 28,
		2010				2009				2010				2009
Net sales		$	594,748			$	434,809			$	1,215,674			$	1,205,280
Costs and expenses:
Costs of goods sold (exclusive of depreciation and amortization)			585,622				388,916				1,187,962				1,102,323
Selling, general and administrative expenses			37,684				35,924				74,443				72,158
Depreciation and amortization expenses			5,487				5,737				10,968				11,536
			628,793				430,577				1,273,373				1,186,017
Operating (loss) income			(34,045	)			4,232				(57,699	)			19,263
Other income (expense):
Interest expense, net			(8,712	)			(9,094	)			(17,179	)			(18,473	)
Other, net			(206	)			(642	)			(812	)			(851	)
Equity in net earnings of affiliate			—				6				—				40
			(8,918	)			(9,730	)			(17,991	)			(19,284	)
Loss before income tax benefit			(42,963	)			(5,498	)			(75,690	)			(21	)
Income tax benefit			(17,618	)			(2,351	)			(31,035	)			(9	)
Net loss		$	(25,345	)		$	(3,147	)		$	(44,655	)		$	(12	)

 

 

 

See accompanying notes to consolidated financial statements.

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS – (Unaudited)

(in thousands)

 

		Six Months Ended February 28,
		2010				2009
Cash flows from operating activities:
Net loss		$	(44,655	)		$	(12	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			11,135				11,701
Equity in net earnings of affiliate			—				(40	)
Deferred income taxes			(7,303	)			(344	)
Loss on asset dispositions			265				261
Cash used in working capital items			(61,547	)			(20,882	)
Other, net			(1	)			(1	)
Change in operating assets and liabilities:
Other assets			—				(492	)
Deferred retirement benefits			6,721				2,807
Other noncurrent liabilities			(4	)			(7	)
Total adjustments			(50,734	)			(6,997	)
Net cash used in operating activities			(95,389	)			(7,009	)
Cash flows from investing activities:
Additions to property, plant and equipment			(13,026	)			(15,878	)
Additions to deferred turnaround costs			(275	)			(98	)
Proceeds from asset dispositions			5				79
Net cash used in investing activities			(13,296	)			(15,897	)
Cash flows from financing activities:
Net borrowings on revolving credit facility			98,000				9,000
Proceeds from issuance of long term debt			—				318
Principal reductions of long term debt			(900	)			(770	)
Deferred financing costs			—				(225	)
Net cash provided by financing activities			97,100				8,323
Net decrease in cash and cash equivalents			(11,585	)			(14,583	)
Cash and cash equivalents, beginning of year			31,062				32,447
Cash and cash equivalents, end of period		$	19,477			$	17,864
Cash provided by (used in) working capital items:
Accounts receivable, net		$	12			$	66,397
Refundable income taxes			—				7,251
Inventories			38,516				(88,080	)
Prepaid expenses and other assets			(48,288	)			5,283
Amounts due from affiliated companies, net			964				(575	)
Accounts payable			(38,326	)			(4,354	)
Accrued liabilities			(2,907	)			(2,926	)
Income taxes payable			(5,149	)			—
Sales, use and fuel taxes payable			(6,369	)			(3,878	)
Total change		$	(61,547	)		$	(20,882	)
Cash paid during the period for:
Interest		$	17,488			$	19,067
Income taxes		$	5,531			$	21
Non-cash investing activities:
Property additions & capital leases		$	805			$	846

 

See accompanying notes to consolidated financial statements.

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.	Description of Business and Basis of Presentation

 

The consolidated financial statements include the accounts of United Refining Company and its subsidiaries, United Refining Company of Pennsylvania and its subsidiaries, and Kiantone Pipeline Corporation (collectively, the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation.

 

The Company is a petroleum refiner and marketer in its primary market area of Western New York and Northwestern Pennsylvania. Operations are organized into two business segments: wholesale and retail.

 

The wholesale segment is responsible for the acquisition of crude oil, petroleum refining, supplying petroleum products to the retail segment and the marketing of petroleum products to wholesale and industrial customers. The retail segment sells petroleum products under the Kwik Fill^®, Citgo^® and Keystone^® brand names at a network of Company-operated retail units and convenience and grocery items through Company-owned gasoline stations and convenience stores under the Red Apple Food Mart^® and Country Fair^® brand names.

 

The Company is a wholly-owned subsidiary of United Refining, Inc., a wholly-owned subsidiary of United Acquisition Corp., which in turn is a wholly-owned subsidiary of Red Apple Group, Inc. (the “Parent”).

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended February 28, 2010 are not necessarily indicative of the results that may be expected for the year ending August 31, 2010. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Form 10-K for the fiscal year ended August 31, 2009.

 

Certain items have been reclassified to conform to current period presentation.

 

2.	Recent Accounting Pronouncements

 

In June 2009, the Financial Accounting Standards Board (“FASB”) established the FASB Accounting Standards Codification (the “Codification” or “ASC”) as the exclusive authoritative source for nongovernmental U.S. GAAP, except for SEC rules and interpretive releases. The Codification is a compilation of U.S. GAAP previously issued by several standard setters. Future FASB accounting standards will update the Codification and will be referred to as “Accounting Standards Updates”. The Codification became effective for the Company for the period ended November 30, 2009 and its adoption did not impact our financial position or results of operations.

 

On September 1, 2009, we adopted a standard that expanded the framework and disclosures for measuring fair value to nonfinancial assets and nonfinancial liabilities, including impaired property, plant and equipment, goodwill and the initial recognition of asset retirement obligations. The adoption of this standard did not impact our financial position or results of operations.

 

As of August 31, 2009, we adopted a standard that requires fair value disclosures of financial instruments in interim and annual financial statements. The adoption of this standard did not impact our financial position or results of operations.

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

In June 2009, the FASB issued a standard that amends previous guidance on variable interest entities. The standard modifies the criteria for determining the primary beneficiary of a variable interest entity and requires ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity and an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity. This standard is effective as of September 1, 2010 and will not impact our financial position or results of operations.

 

3.	Inventories

 

Inventories are stated at the lower of cost or market, with cost being determined under the Last-in, First-out (LIFO) method for crude oil and petroleum product inventories and the First-in, First-out (FIFO) method for merchandise. Supply inventories are stated at either lower of cost or market or replacement cost and include various parts for the refinery operations.

 

Inventories consist of the following:

 

		February, 28 2010				August 31, 2009
		(in thousands)
Crude Oil		$	38,854			$	92,972
Petroleum Products			122,973				110,573
Lower of cost of market reserve			(1,462	)			(6,104	)
Total @ LIFO			160,365				197,441
Merchandise			18,199				18,597
Supplies			20,461				21,503
Total @ FIFO			38,660				40,100
Total Inventory		$	199,025			$	237,541

 

Inventories at the lower of last-in, first-out (“LIFO”) cost or market reflect a market valuation reserve of $1,462,000 and $6,104,000 at February 28, 2010 and August 31, 2009, respectively. As of February 28, 2010 and August 31, 2009, the replacement cost of LIFO inventories exceeded their LIFO carrying values by approximately $35,416,000 and $5,278,000, respectively.

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

4.	Subsidiary Guarantors

 

All the Company’s wholly-owned subsidiaries fully and unconditionally guarantee, on a joint and several basis, the Company’s $350,000,000 Senior Unsecured Note Indenture due August 15, 2012. There are no restrictions within the consolidated group on the ability of the Company or any of its subsidiaries to obtain loans from or pay dividends to other members of the consolidated group. Financial information of the Company’s wholly-owned subsidiary guarantors is as follows:

 

CONDENSED CONSOLIDATING BALANCE SHEETS

(in thousands)

 

		February 28, 2010																August 31, 2009
		Issuer				Guarantors				Eliminations				Consolidated				Issuer				Guarantors				Eliminations				Consolidated
Assets
Current:
Cash and cash equivalents		$	5,376			$	14,101			$	—			$	19,477			$	21,265			$	9,797			$	—			$	31,062
Accounts receivable, net			53,396				31,974				—				85,370				52,726				32,656				—				85,382
Inventories			170,672				28,353				—				199,025				209,729				27,812				—				237,541
Prepaid expenses and other assets			55,013				7,836				—				62,849				8,733				5,828				—				14,561
Amounts due from affiliated companies			—				—				—				—				1,728				(919	)			—				809
Intercompany			125,648				16,501				(142,149	)			—				106,025				15,527				(121,552	)			—
Total current assets			410,105				98,765				(142,149	)			366,721				400,206				90,701				(121,552	)			369,355
Property, plant and equipment, net			179,402				77,822				—				257,224				174,629				77,419				—				252,048
Deferred financing costs, net			2,679				—				—				2,679				3,254				—				—				3,254
Goodwill and other non-amortizable assets			—				11,849				—				11,849				—				11,849				—				11,849
Amortizable intangible assets, net			—				1,429				—				1,429				—				1,483				—				1,483
Deferred turnaround costs & other assets			4,413				786				—				5,199				6,577				875				—				7,452
Deferred income taxes			35,847				(4,362	)			—				31,485				29,658				(4,245	)			—				25,413
Investment in subsidiaries			8,636				—				(8,636	)			—				9,872				—				(9,872	)			—
		$	641,082			$	186,289			$	(150,785	)		$	676,586			$	624,196			$	178,082			$	(131,424	)		$	670,854
Liabilities and Stockholder’s Equity
Current:
Revolving credit facility		$	98,000			$	—			$	—			$	98,000			$	—			$	—			$	—			$	—
Current installments of long-term debt			1,417				747				—				2,164				1,350				977				—				2,327
Accounts payable			23,346				21,825				—				45,171				62,789				20,708				—				83,497
Income taxes payable			—				—				—				—				(4,861	)			10,010				—				5,149
Accrued liabilities			8,787				5,323				—				14,110				10,864				6,153				—				17,017
Sales, use and fuel taxes payable			12,465				3,300				—				15,765				17,703				4,431				—				22,134
Deferred income taxes			9,538				66				—				9,604				9,538				66				—				9,604
Amounts due to affiliated companies			—				155				—				155				—				—				—				—
Intercompany			—				142,149				(142,149	)			—				—				121,552				(121,552	)			—
Total current liabilities			153,553				173,565				(142,149	)			184,969				97,383				163,897				(121,552	)			139,728
Long term debt: less current installments			326,793				2,115				—				328,908				326,822				2,427				—				329,249
Deferred retirement benefits			132,804				1,973				—				134,777				129,177				1,882				—				131,059
Other noncurrent liabilities			—				—				—				—				—				4				—				4
Total liabilities			613,150				177,653				(142,149	)			648,654				553,382				168,210				(121,552	)			600,040
Commitment and contingencies
Stockholder’s equity
Common stock, $.10 par value per share – shares authorized 100; issued and outstanding 100			—				18				(18	)			—				—				18				(18	)			—
Additional paid-in capital			21,998				10,651				(10,651	)			21,998				21,998				10,651				(10,651	)			21,998
Retained earnings			49,710				(1,090	)			1,090				49,710				94,365				210				(210	)			94,365
Accumulated other comprehensive loss			(43,776	)			(943	)			943				(43,776	)			(45,549	)			(1,007	)			1,007				(45,549	)
Total stockholder’s equity			27,932				8,636				(8,636	)			27,932				70,814				9,872				(9,872	)			70,814
		$	641,082			$	186,289			$	(150,785	)		$	676,586			$	624,196			$	178,082			$	(131,424	)		$	670,854

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

(in thousands)

 

		Three Months Ended February 28, 2010																Three Months Ended February 28, 2009
		Issuer				Guarantors				Eliminations				Consolidated				Issuer				Guarantors				Eliminations				Consolidated
Net sales		$	426,301			$	319,746			$	(151,299	)		$	594,748			$	284,189			$	237,528			$	(86,908	)		$	434,809
Costs and expenses:
Costs of goods sold (exclusive of depreciation and amortization)			446,158				290,763				(151,299	)			585,622				271,402				204,422				(86,908	)			388,916
Selling, general and administrative expenses			5,864				31,820				—				37,684				6,014				29,910				—				35,924
Depreciation and amortization expenses			3,972				1,515				—				5,487				4,288				1,449				—				5,737
			455,994				324,098				(151,299	)			628,793				281,704				235,781				(86,908	)			430,577
Operating (loss) income			(29,693	)			(4,352	)			—				(34,045	)			2,485				1,747				—				4,232
Other income (expense):
Interest expense, net			(8,392	)			(320	)			—				(8,712	)			(8,703	)			(391	)			—				(9,094	)
Other, net			(668	)			462				—				(206	)			(835	)			193				—				(642	)
Equity in net earnings of affiliate			—				—				—				—				6				—				—				6
Equity in net (loss) income of subsidiaries			(2,510	)			—				2,510				—				888				—				(888	)			—
			(11,570	)			142				2,510				(8,918	)			(8,644	)			(198	)			(888	)			(9,730	)
(Loss) income before income tax (benefit) expense			(41,263	)			(4,210	)			2,510				(42,963	)			(6,159	)			1,549				(888	)			(5,498	)
Income tax (benefit) expense			(15,918	)			(1,700	)			—				(17,618	)			(3,012	)			661				—				(2,351	)
Net (loss) income		$	(25,345	)		$	(2,510	)		$	2,510			$	(25,345	)		$	(3,147	)		$	888			$	(888	)		$	(3,147	)

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

(in thousands)

 

		Six Months Ended February 28, 2010																Six Months Ended February 28, 2009
		Issuer				Guarantors				Eliminations				Consolidated				Issuer				Guarantors				Eliminations				Consolidated
Net sales		$	870,275			$	644,441			$	(299,042	)		$	1,215,674			$	857,520			$	599,978			$	(252,218	)		$	1,205,280
Costs and expenses:
Costs of goods sold (exclusive of depreciation and amortization)			906,138				580,866				(299,042	)			1,187,962				842,641				511,900				(252,218	)			1,102,323
Selling, general and administrative expenses			11,705				62,738				—				74,443				11,701				60,457				—				72,158
Depreciation and amortization expenses			7,945				3,023				—				10,968				8,577				2,959				—				11,536
			925,788				646,627				(299,042	)			1,273,373				862,919				575,316				(252,218	)			1,186,017
Operating (loss) income			(55,513	)			(2,186	)			—				(57,699	)			(5,399	)			24,662				—				19,263
Other income (expense):
Interest expense, net			(16,524	)			(655	)			—				(17,179	)			(17,168	)			(1,305	)			—				(18,473	)
Other, net			(1,484	)			672				—				(812	)			(1,358	)			507				—				(851	)
Equity in net earnings of affiliate			—				—				—				—				40				—				—				40
Equity in net (loss) earnings of subsidiaries			(1,300	)			—				1,300				—				14,293				—				(14,293	)			—
			(19,308	)			17				1,300				(17,991	)			(4,193	)			(798	)			(14,293	)			(19,284	)
(Loss) income before income tax (benefit) expense			(74,821	)			(2,169	)			1,300				(75,690	)			(9,592	)			23,864				(14,293	)			(21	)
Income tax (benefit) expense			(30,166	)			(869	)			—				(31,035	)			(9,580	)			9,571				—				(9	)
Net (loss) income		$	(44,655	)		$	(1,300	)		$	1,300			$	(44,655	)		$	(12	)		$	14,293			$	(14,293	)		$	(12	)

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

(in thousands)

 

		Six Months Ended February 28, 2010															Six Months Ended February 28, 2009
		Issuer				Guarantors				Eliminations			Consolidated				Issuer				Guarantors				Eliminations			Consolidated
Net cash (used in) provided by operating activities		$	(103,660	)		$	8,271			$	—		$	(95,389	)		$	1,503			$	(8,512	)		$	—		$	(7,009	)
Cash flows from investing activities:
Additions to property, plant and equipment			(9,651	)			(3,375	)			—			(13,026	)			(13,881	)			(1,997	)			—			(15,878	)
Additions to deferred turnaround costs			(224	)			(51	)			—			(275	)			(87	)			(11	)			—			(98	)
Proceeds from asset dispositions			5				—				—			5				—				79				—			79
Net cash used in investing activities			(9,870	)			(3,426	)			—			(13,296	)			(13,968	)			(1,929	)			—			(15,897	)
Cash flows from financing activities:
Net borrowings on revolving credit facility			98,000				—				—			98,000				9,000				—				—			9,000
Proceeds from issuance of long-term debt			—				—				—			—				—				318				—			318
Principal reductions of long-term debt			(359	)			(541	)			—			(900	)			(304	)			(466	)			—			(770	)
Deferred financing costs			—				—				—			—				(225	)			—				—			(225	)
Net cash provided by (used in) financing activities			97,641				(541	)			—			97,100				8,471				(148	)			—			8,323
Net (decrease) increase in cash and cash equivalents			(15,889	)			4,304				—			(11,585	)			(3,994	)			(10,589	)			—			(14,583	)
Cash and cash equivalents, beginning of year			21,265				9,797				—			31,062				11,358				21,089				—			32,447
Cash and cash equivalents, end of period		$	5,376			$	14,101			$	—			19,477				7,364				10,500				—			17,864

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

5.	Segments of Business

 

Intersegment revenues are calculated using market prices and are eliminated upon consolidation. Summarized financial information regarding the Company’s reportable segments is presented in the following tables (in thousands):

 

		Three Months Ended February 28,							Six Months Ended February 28,
		2010				2009			2010				2009
Net Sales
Retail		$	318,689			$	236,318		$	642,318			$	597,577
Wholesale			276,059				198,491			573,356				607,703
		$	594,748			$	434,809		$	1,215,674			$	1,205,280
Intersegment Sales
Wholesale		$	150,242			$	85,878		$	296,919			$	249,817
Operating (Loss) Income
Retail		$	(4,250	)		$	3,325		$	(2,321	)		$	29,883
Wholesale			(29,795	)			907			(55,378	)			(10,620	)
		$	(34,045	)		$	4,232		$	(57,699	)		$	19,263
Depreciation and Amortization
Retail		$	1,334			$	1,281		$	2,662			$	2,626
Wholesale			4,153				4,456			8,306				8,910
		$	5,487			$	5,737		$	10,968			$	11,536

 

		February 28, 2010			August 31, 2009
Total Assets
Retail		$	156,771		$	150,082
Wholesale			519,815			520,772
		$	676,586		$	670,854
Capital Expenditures (including non-cash)
Retail		$	3,320		$	5,161
Wholesale			10,511			19,988
		$	13,831		$	25,149

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

6.	Employee Benefit Plans

 

For the periods ended February 28, 2010 and 2009, net pension and other postretirement benefit costs were comprised of the following:

 

		Pension Benefits
		Three Months Ended February 28,								Six Months Ended February 28,
		2010				2009				2010				2009
		(in thousands)
Service cost		$	918			$	734			$	1,806			$	1,425
Interest cost on benefit obligation			1,482				1,395				2,916				2,707
Expected return on plan assets			(1,016	)			(1,164	)			(2,000	)			(2,258	)
Amortization and deferral of net loss			849				206				1,744				469
Net periodic benefit cost		$	2,233			$	1,171			$	4,466			$	2,343
		Other Post-Retirement Benefits
		Three Months Ended February 28,								Six Months Ended February 28,
		2010				2009				2010				2009
		(in thousands)
Service cost		$	891			$	669			$	1,732			$	1,339
Interest cost on benefit obligation			1,258				1,116				2,445				2,232
Amortization of transition obligation			—				149				149				298
Amortization and deferral of net loss			488				244				948				487
Net periodic benefit cost		$	2,637			$	2,178			$	5,274			$	4,356

 

As of February 28, 2010, $1,164,000 of contributions have been made to the Company pension plans for the fiscal year ending August 31, 2010.

 

7.	Fair Value Measurements

 

The FASB Accounting Standards Codification (ASC) 820-10 delayed the effective date of fair value measurements and disclosures for all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until the beginning of our first quarter beginning September 1, 2009. These include goodwill and other non-amortizable intangible assets and long-lived assets. The effect of the September 1, 2009 end of the delay for any required fair value measurements of the Company’s non-financial assets and liabilities did not have a significant impact on our consolidated financial statements.

 

The carrying values of all financial instruments classified as a current asset or current liability approximate fair value because of the short maturity of these instruments. The carrying value exceeded the fair value of the instruments at February 28, 2010 and August 31, 2009 by $10,097,000 and $63,950,000, respectively.

 

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

Forward Looking Statements

 

This Quarterly Report on Form 10-Q contains certain statements that constitute “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward looking statements may include, among other things, United Refining Company and its subsidiaries current expectations with respect to future operating results, future performance of its refinery and retail operations, capital expenditures and other financial items. Words such as “expects”, “intends”, “plans”, “projects”, “believes”, “estimates”, “may”, “will”, “should”, “shall”, “anticipates”, “predicts”, and similar expressions typically identify such forward looking statements in this Quarterly Report on Form 10-Q.

 

By their nature, all forward looking statements involve risk and uncertainties. All phases of the Company’s operations involve risks and uncertainties, many of which are outside of the Company’s control, and any one of which, or a combination of which, could materially affect the Company’s results of operations and whether the forward looking statements ultimately prove to be correct. Actual results may differ materially from those contemplated by the forward looking statements for a number of reasons.

 

Although we believe our expectations are based on reasonable assumptions within the bounds of its knowledge, investors and prospective investors are cautioned that such statements are only projections and that actual events or results may differ materially depending on a variety of factors described in greater detail in the Company’s filings with the SEC, including quarterly reports on Form 10-Q, annual reports on Form 10-K, reports on Form 8-K, etc. In addition to the factors discussed elsewhere in this Quarterly Report on Form 10-Q, the Company’s actual consolidated quarterly or annual operating results have been affected in the past, or could be affected in the future, by additional factors, including, without limitation:

 

•

the demand for and supply of crude oil and refined products;

 

•

the spread between market prices for refined products and market prices for crude oil;

 

•

repayment of debt;

 

•

general economic, business and market conditions;

 

•

risks and uncertainties with respect to the actions of actual or potential competitive suppliers of refined petroleum products in our markets;

 

•

the possibility of inefficiencies or shutdowns in refinery operations or pipelines;

 

•

the availability and cost of financing to us;

 

•

environmental, tax and tobacco legislation or regulation;

 

•

volatility of gasoline prices, margins and supplies;

 

•

merchandising margins;

 

•

labor costs;

 

•

level of capital expenditures;

 

•

customer traffic;

 

•

weather conditions;

 

•

acts of terrorism and war;

 

•

business strategies;

 

•

expansion and growth of operations;

 

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•

future projects and investments;

 

•

future exposure to currency devaluations or exchange rate fluctuations;

 

•

expected outcomes of legal and administrative proceedings and their expected effects on our financial position, results of operations and cash flows;

 

•

future operating results and financial condition; and

 

•

the effectiveness of our disclosure controls and procedures and internal control over financial reporting.

 

All subsequent written and oral forward looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the foregoing. We undertake no obligation to update any information contained herein or to publicly release the results of any revisions to any such forward looking statements that may be made to reflect events or circumstances that occur, or which we become aware of, after the date of this Quarterly Report on Form 10-Q.

 

Recent Developments

 

The Company continues to be impacted by the volatility of the petroleum market in fiscal year 2010. Crude prices in the second quarter of fiscal year 2010 have risen as compared to the first quarter of fiscal year 2010. The average NYMEX crude price for the third fiscal quarter based on values published on March 31, 2010 was $80.50/bbl, a $3.45/bbl or 4.5% higher than the average price for the second fiscal quarter of 2010 which was $77.05/bbl.

 

The lagged 3-2-1 crackspread, as measured by the difference between the price of crude oil contracts traded on the NYMEX for the proceeding month to the prices of NYMEX gasoline and heating oil contracts in the current trading month, benefited from the rising crude market. The Company uses a lagged crackspread as a margin indicator as it reflects the time period between the purchase of crude oil and its delivery to the refinery for processing. The lagged crackspread for the third quarter of fiscal year 2010 based on values as of March 31, 2010, was $11.41/bbl, a $4.45/bbl or a 64.0% improvement over the lagged crackspread for the second quarter of fiscal year 2010 which was $6.96/bbl.

 

Results of Operations

 

The Company is a petroleum refiner and marketer in its primary market area of Western New York and Northwestern Pennsylvania. Operations are organized into two business segments: wholesale and retail.

 

The wholesale segment is responsible for the acquisition of crude oil, petroleum refining, supplying petroleum products to the retail segment and the marketing of petroleum products to wholesale and industrial customers. The retail segment sells petroleum products under the Kwik Fill^®, Citgo^® and Keystone^® brand names through a network of Company-operated retail units and convenience and grocery items through gasoline stations and convenience stores under the Red Apple Food Mart^® and Country Fair^® brand names.

 

A discussion and analysis of the factors contributing to the Company’s results of operations are presented below. The accompanying Consolidated Financial Statements and related Notes, together with the following information, are intended to supply investors with a reasonable basis for evaluating the Company’s operations, but should not serve as the only criteria for predicting the Company’s future performance.

 

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Retail Operations:

 

		Three Months Ended February 28,								Six Months Ended February 28,
		2010				2009				2010				2009
		(dollars in thousands)
Net Sales
Petroleum		$	260,100			$	183,440			$	521,442			$	488,105
Merchandise and other			58,589				52,878				120,876				109,472
Total Net Sales		$	318,689			$	236,318			$	642,318			$	597,577
Costs of goods sold		$	289,983			$	201,959			$	579,619			$	504,909
Selling, general and administrative expenses			31,622				29,753				62,358				60,159
Depreciation and amortization expenses			1,334				1,281				2,662				2,626
Segment Operating (Loss) Income		$	(4,250	)		$	3,325			$	(2,321	)		$	29,883
Retail Operating Data:
Petroleum sales (thousands of gallons)			93,972				93,159				191,426				190,487
Petroleum margin (a)		$	14,176			$	20,716			$	32,208			$	64,139
Petroleum margin ($/gallon) (b)			.1509				.2223				.1683				.3367
Merchandise and other margins		$	14,530			$	13,643			$	30,491			$	28,529
Merchandise margin (percent of sales)			24.8	%			25.8	%			25.2	%			26.1	%

 

(a)	Includes the effect of intersegment purchases from the Company’s wholesale segment at prices which approximate market.

(b)

Company management calculates petroleum margin per gallon by dividing petroleum gross margin by petroleum sales volumes. Management uses fuel margin per gallon calculations to compare profitability to other companies in the industry. Petroleum margin per gallon may not be comparable to similarly titled measures used by other companies in the industry.

 

Comparison of Fiscal Quarters Ended February 28, 2010 and 2009

 

Net Sales

 

Retail sales increased during the fiscal quarter ended February 28, 2010 by $82.4 million or 34.9% for the comparable period in fiscal 2009 from $236.3 million to $318.7 million. The increase was primarily due to $76.7 million in petroleum sales and $5.7 million in merchandise sales. The petroleum sales increase resulted from a 40.6% increase in retail selling prices per gallon, and a .8 million gallon or .9% increase in retail petroleum volume. The merchandise sales increase is primarily due to increased prepared food, beverages and cigarette sales due to promotional campaigns and increased selling prices.

 

Costs of Goods Sold

 

Retail costs of goods sold increased during the fiscal quarter ended February 28, 2010 by $88.0 million or 44.7% for the comparable period in fiscal 2009 from $202.0 million to $290.0 million. The increase was primarily due to $82.3 million in petroleum purchase prices, fuel tax of $1.5 million and merchandise cost of $4.8 million offset by a decrease in freight cost of $.6 million.

 

Selling, General and Administrative Expenses

 

Retail Selling, General and Administrative (“SG&A”) expenses increased during the fiscal quarter ended February 28, 2010 by $1.9 million or 6.3% for the comparable period in fiscal 2009 from $29.7 million to $31.6 million. The increase was primarily due to payroll costs of $1.0 million, credit/customer service costs of $.6

 

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million, environmental costs of $.4 million, and pension/post retirement costs of $.3 million, offset by a reduction in maintenance costs of $.1 million, insurance/utilities/taxes of $.1 million, advertising costs of $.1 million and other of $.1 million.

 

Comparison of Six Months Ended February 28, 2010 and 2009

 

Net Sales

 

Retail sales increased during the six months ended February 28, 2010 by $44.7 million or 7.5% for the comparable period in fiscal 2009 from $597.6 million to $642.3 million. The increase was primarily due to $33.3 million in petroleum sales, and $11.4 million in merchandise sales. The petroleum sales increase resulted from a 6.3% increase in retail selling prices per gallon and a .9 million gallon or .5% increase in sales volume. The merchandise sales increase is primarily due to increased prepared food, beverages and cigarette sales due to promotional campaigns and increased selling prices.

 

Costs of Goods Sold

 

Retail costs of goods sold increased during the six months ended February 28, 2010 by $74.7 million or 14.8% for the comparable period in fiscal 2009 from $504.9 million to $579.6 million. The increase was primarily due to $64.7 million in petroleum purchase prices, fuel taxes of $1.3 million and merchandise costs of $9.4 million offset by a decrease in freight costs of $.7 million.

 

Selling, General and Administrative Expenses

 

Retail SG&A expenses increased during the six months ended February 28, 2010 by $2.2 million or 3.7% for the comparable period in fiscal 2009 from $60.2 million to $62.4 million. The increase was due to payroll costs of $1.9 million, credit/customer service costs of $.5 million, pension/post retirement costs of $.5 million and environmental costs of $.2 million, offset by a reduction in maintenance costs of $.3 million, advertising of $.2 million, insurance/utilities/taxes of $.2 million and other of $.2 million.

 

Wholesale Operations:

 

		Three Months Ended February 28,							Six Months Ended February 28,
		2010				2009			2010				2009
		(dollars in thousands)
Net Sales (a)		$	276,059			$	198,491		$	573,356			$	607,703
Costs of goods sold (exclusive of depreciation and amortization)			295,639				186,957			608,343				597,414
Selling, general and administrative expenses			6,062				6,171			12,085				11,999
Depreciation and amortization expenses			4,153				4,456			8,306				8,910
Segment Operating (Loss) Income		$	(29,795	)		$	907		$	(55,378	)		$	(10,620	)

 

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Key Wholesale Operating Statistics:

 

		Three Months Ended February 28,								Six Months Ended February 28,
		2010				2009				2010				2009
Refinery Product Yield (thousands of barrels)
Gasoline and gasoline blendstock			2,228				2,573				4,509				4,907
Distillates			1,105				1,455				2,244				2,851
Asphalt			1,525				1,652				3,081				3,502
Butane, propane, residual products, internally produced fuel and other (“Other”)			554				534				1,080				1,026
Total Product Yield			5,412				6,214				10,914				12,286
% Heavy Crude Oil of Total Refinery Throughput (b)			60	%			58	%			61	%			61	%
Crude throughput (thousand barrels per day)			56.5				64.7				56.5				64.0
Product Sales (thousand of barrels) (a)
Gasoline and gasoline blendstock			1,269				1,360				2,532				2,772
Distillates			841				1,139				1,692				2,205
Asphalt			1,291				1,264				3,231				2,879
Other			294				218				545				425
Total Product Sales Volume			3,695				3,981				8,000				8,281
Product Sales (dollars in thousands) (a)
Gasoline and gasoline blendstock		$	107,782			$	65,057			$	210,311			$	191,464
Distillates			73,318				70,535				143,631				187,119
Asphalt			78,629				57,595				191,875				212,507
Other			16,330				5,304				27,539				16,613
Total Product Sales		$	276,059			$	198,491			$	573,356			$	607,703

 

(a)	Sources of total product sales include products manufactured at the refinery located in Warren, Pennsylvania and products purchased from third parties.

(b)	The Company defines “heavy” crude oil as crude oil with an American Petroleum Institute specific gravity of 26 or less.

 

Comparison of Fiscal Quarters Ended February 28, 2010 and 2009

 

Net Sales

 

Wholesale sales increased during the three months ended February 28, 2010 by $77.6 million or 39.1% for the comparable period in fiscal 2009 from $198.5 million to $276.1 million. The increase was due to a 49.8% increase in wholesale prices offset by a 7.2% decrease in wholesale volume.

 

Costs of Goods Sold (exclusive of depreciation and amortization)

 

Wholesale costs of goods sold increased during the three months ended February 28, 2010 by $108.7 million or 58.1% for the comparable period in fiscal 2009 from $186.9 million to $295.6 million. The increase in wholesale costs of goods sold during this period was primarily due to an increase in cost of raw materials.

 

Selling, General and Administrative Expenses

 

Wholesale SG&A expenses decreased during the three months ended February 28, 2010 by $.1 million or 1.8% for the comparable period in fiscal 2009 from $6.2 million or 3.1% of net wholesale to $6.1 million or 2.2% of net wholesale sales.

 

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Comparison of Six Months Ended February 28, 2010 and 2009

 

Net Sales

 

Wholesale sales decreased during the six months ended February 28, 2010 by $34.3 million or 5.7% for the comparable period in fiscal 2009 from $607.7 million to $573.4 million. The decrease was due to a 2.4% decrease in wholesale prices and a 3.4% decrease in wholesale volume.

 

Costs of Goods Sold (exclusive of depreciation and amortization)

 

Wholesale costs of goods sold increased during the six months ended February 28, 2010 by $10.9 million or 1.8% for the comparable period in fiscal 2009 from $597.4 million to $608.3 million. The increase in wholesale costs of goods sold was primarily due to an increase in the costs of raw material.

 

Selling, General and Administrative Expenses

 

Wholesale SG&A expenses increased during the six months ended February 28, 2010 by $.1 million or .7% for the comparable period in fiscal 2009 from $12.0 million or 2.0% of net wholesale to $12.1 million or 2.1% of net wholesale sales.

 

Consolidated Expenses:

 

Interest Expense, net

 

Net interest expense (interest expense less interest income) for the three months ended February 28, 2010 decreased $.4 million or 4.4% for the comparable period in fiscal 2009 from $9.1 million to $8.7 million. The decrease was due in part to the Company acquiring $26.0 million of its 10  ¹/2% Senior Unsecured Notes due 2012 during the third and fourth quarters of fiscal 2009.

 

Net interest expense (interest expense less interest income) for the six months ended February 28, 2010 decreased $1.3 million or 7.0% for the comparable period in fiscal 2009 from $18.5 million to $17.2 million. The decrease was due in part to the Company acquiring $26.0 million of its 10  ¹/2% Senior Unsecured Notes due 2012 during the third and fourth quarters of fiscal 2009.

 

Income Tax Expense/(Benefit)

 

The Company’s effective tax rate for the three and six months ended February 28, 2010 and 2009 remained relatively constant at approximately 41%.

 

Liquidity and Capital Resources

 

We operate in an environment where our liquidity and capital resources are impacted by changes in the price of crude oil and refined petroleum products, availability of credit, market uncertainty and a variety of additional factors beyond our control. Included in such factors are, among others, the level of customer product demand, weather conditions, governmental regulations, worldwide political conditions and overall market and economic conditions.

 

The following table summarizes selected measures of liquidity and capital sources (in thousands):

 

		February 28, 2010
Cash and cash equivalents		$	19,477
Working capital		$	181,752
Current ratio			2.0
Debt		$	429,072

 

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Primary sources of liquidity have been cash and cash equivalents, cash flows from operations and borrowing availability under a revolving line of credit. We believe available capital resources will be adequate to meet our working capital, debt service, and capital expenditure requirements for existing operations.

 

Our cash and cash equivalents consist of bank balances and investments in money market funds. These investments have staggered maturity dates, none of which exceed three months. They have a high degree of liquidity since the securities are traded in public markets.

 

		Six Months Ended February 28, 2010
		(in millions)
Significant uses of cash Investing activities:
Additions to deferred turnaround costs			(.3	)
Property, plant and equipment
FCC Feed Hydrotreater			(1.8	)
Retail Maintenance (black top, roof, HVAC, rehab)			(1.7	)
Properties Purchased			(.9	)
Retail Petroleum Upgrade			(.7	)
Computers and Equipment Upgrade			(.6	)
#4 Boiler Upgrade			(.4	)
Asbestos Abatement			(.3	)
Environmental Instruments Upgrade			(.1	)
Other General Capital Items (tank repairs, refinery piping, etc)			(3.0	)
State and Federal Mandates:
Renewable Fuels – Cost Estimates			(2.2	)
Biodiesel Blending			(.7	)
Reduction of Benzene and Gasoline			(.5	)
Reduction of Gasoline RVP			(.1	)
Total property, plant and equipment			(13.0	)
Net cash used in investing activities			(13.3	)
Financing activities:
Net borrowings on revolving credit facility			98.0
Principal reductions of long term debt			(.9	)
Net cash provided by financing activities		$	97.1
Working capital items:
Decrease in inventory			38.5
Amounts due from affiliated companies, net increase			1.0
Accounts receivable decrease			—
Prepaid expense increase			(48.3	)
Accounts payable decrease			(38.3	)
Sales, use and fuel taxes payable decrease			(6.4	)
Income taxes payable decrease			(5.2	)
Accrued liabilities decrease			(2.9	)
Cash used in working capital items		$	(61.6	)

 

We require a substantial investment in working capital which is susceptible to large variations during the year resulting from purchases of inventory and seasonal demands. Inventory purchasing activity is a function of sales activity and turnaround cycles for the different refinery units.

 

Maintenance and non-discretionary capital expenditures have averaged approximately $6.0 million annually over the last three years for the refining and marketing operations. Management does not foresee any increase in these maintenance and non-discretionary capital expenditures during fiscal year 2010.

 

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Future liquidity, both short and long-term, will continue to be primarily dependent on realizing a refinery margin sufficient to cover fixed and variable expenses, including planned capital expenditures. We expect to be able to meet our working capital, capital expenditure, contractual obligations, letter of credit and debt service requirements out of cash flow from operations, cash on hand and borrowings under our Revolving Credit Facility with PNC Bank, N.A. as Agent Bank. Our revolving credit facility with PNC Bank, N.A., as Agent Bank (the “Revolving Credit Facility”) is $130,000,000. This provides the Company with flexibility relative to its cash flow requirements in light of market fluctuations, particularly involving crude oil prices and seasonal business cycles and will assist the Company in meeting its working capital, ongoing capital expenditure needs and for general corporate purposes. The agreement expires on November 27, 2011. Under the Revolving Credit Facility, the applicable margin is calculated on the average unused availability as follows: (a) for base rate borrowing, at the greater of the Agent Bank’s prime rate plus an applicable margin of 0% to .5%; the Federal Funds Open Rate plus .5%; or the Daily LIBOR rate plus 1%; (b) for euro-rate based borrowings, at the LIBOR Rate plus an applicable margin of 2.35% to 1.75%. The Agent Bank’s prime rate at February 28, 2010 was 3.25%.

 

The Revolving Credit Facility is secured primarily by certain cash accounts, accounts receivable and inventory. Until maturity, we may borrow on a borrowing base formula as set forth in the facility. We had standby letters of credit of $4.4 million as of February 28, 2010 and there were outstanding borrowings under the Revolving Credit Facility in the amount of $98.0 million resulting in net availability of $27.6 million. As of April 14, 2010 there was $72.0 million outstanding on the $130 million Revolving Credit Facility and standby letters of credit in the amount of $4.4 million, resulting in a net availability of $53.6 million and the Company had full access to it. The Company’s working capital ratio was 2.0 as of February 28, 2010.

 

Although we are not aware of any pending circumstances which would change our expectation, changes in the tax laws, the imposition of and changes in federal and state clean air and clean fuel requirements and other changes in environmental laws and regulations may also increase future capital expenditure levels. Future capital expenditures are also subject to business conditions affecting the industry. We continue to investigate strategic acquisitions and capital improvements to our existing facilities.

 

Federal, state and local laws and regulations relating to the environment affect nearly all of our operations. As is the case with all the companies engaged in similar industries, we face significant exposure from actual or potential claims and lawsuits involving environmental matters. Future expenditures related to environmental matters cannot be reasonably quantified in many circumstances due to the uncertainties as to required remediation methods and related clean-up cost estimates. We cannot predict what additional environmental legislation or regulations will be enacted or become effective in the future or how existing or future laws or regulations will be administered or interpreted with respect to products or activities to which they have not been previously applied.

 

Seasonal Factors

 

Seasonal factors affecting the Company’s business may cause variation in the prices and margins of some of the Company’s products. For example, demand for gasoline tends to be highest in spring and summer months, while demand for home heating oil and kerosene tends to be highest in winter months.

 

As a result, the margin on gasoline prices versus crude oil costs generally tends to increase in the spring and summer, while margins on home heating oil and kerosene tend to increase in winter.

 

Inflation

 

The effect of inflation on the Company has not been significant during the last five fiscal years.

 

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ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

The Company uses its revolving credit facility to finance a portion of its operations. As of April 14, 2010, there was $72.0 million outstanding under the revolving line of credit. These on-balance sheet financial instruments, to the extent they provide for variable rates, expose the Company to interest rate risk resulting from changes in the PNC Prime rate, the Federal Funds or LIBOR rate.

 

The Company has exposure to price fluctuations of crude oil and refined products. The Company does not manage the price risk related to all of its inventories of crude oil and refined products with a permanent formal hedging program, but does manage its risk exposures by managing inventory levels. The Company had no open future positions at February 28, 2010.

 

See also Recent Developments section of Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

ITEM 4.

CONTROLS AND PROCEDURES.

 

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of February 28, 2010. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of February 28, 2010, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

 

There have not been any changes in the Company’s internal controls over financial reporting that occurred during the Company’s fiscal quarter ended February 28, 2010 that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

 

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PART II

OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS.

 

None.

 

ITEM 1A.

RISK FACTORS.

 

There have been no material changes in our Risk Factors disclosed in the Form 10-K for the year ended August 31, 2009.

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

None.

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

 

None.

 

ITEM 5.

OTHER INFORMATION.

 

None.

 

ITEM 6.

EXHIBITS.

 

Exhibit 31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: April 14, 2010

 

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: April 14, 2010

 

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: April 14, 2010

 

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: April 14, 2010

 

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: April 14, 2010

 

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: April 14, 2010

 

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: April 14, 2010

 

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: April 14, 2010

 

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: April 14, 2010

 

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: April 14, 2010

 

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: April 14, 2010

 

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: April 14, 2010

 

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: April 14, 2010

 

 

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