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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-K

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE FISCAL YEAR ENDED AUGUST 31, 2010

 

¨ 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. 333-35083

 

 

 

LOGO

 

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.)

 

See Table of Additional Subsidiary Guarantor Registrants

 

15 Bradley Street, Warren, PA   16365-3299
(Address of principal executive offices)   (Zip Code)

 

(814) 723-1500

(Registrant’s telephone number, including area code)

 

 

 

Securities registered pursuant to Section 12 (b) of the Act:

None

 

Securities registered pursuant to Section 12 (g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

 

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 website, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a small reporting company. See definition of “large accelerated filer” “accelerated filer” and “small 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)  

Small 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 November 29, 2010, 100 shares of the Registrant’s common stock, $0.10 par value per share, were outstanding. All shares of common stock of the Registrant’s are held by an affiliate. Therefore, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant is zero.

 

DOCUMENTS INCORPORATED BY REFERENCE:    None

 

 


Table of Contents

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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FORM 10-K CONTENTS

 

          PAGE(S)  
Item 1.   

Business

     4   
Item 1A.   

Risk Factors

     14   
Item 1B.   

Unresolved Staff Comments

     17   
Item 2.   

Properties

     17   
Item 3.   

Legal Proceedings

     17   
Item 4.   

(Removed and Reserved)

     17   
Item 5.    Market for Registrant’s Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities      17   
Item 6.   

Selected Financial Data

     18   
Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      18   
Item 7A.   

Quantitative and Qualitative Disclosures about Market Risk

     29   
Item 8.   

Financial Statements and Supplementary Data

     31   
  

Report of Independence Registered Public Accounting Firm

     32   
  

Consolidated Financial Statements:

  
  

Balance Sheets

     33   
  

Statements of Operations

     34   
  

Statements of Comprehensive (Loss) Income

     35   
  

Statements of Stockholder’s Equity

     36   
  

Statements of Cash Flows

     37   
  

Notes to Consolidated Financial Statements

     38   
Item 9.    Changes in Disagreements with Accountants on Accounting and Financial Disclosure      61   
Item 9A.   

Controls and Procedures

     61   
Item 9B.   

Other Information

     62   
Item 10.   

Directors and Executive Officers of the Registrant

     62   
Item 11.   

Executive Compensation

     64   
Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      69   
Item 13.   

Certain Relationships and Related Transactions

     69   
Item 14.   

Principal Accounting Fees and Services

     70   
Item 15.   

Exhibits, Financial Statement Schedules

     71   
  

Signatures

     76   

 

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ITEM 1. BUSINESS.

 

Introduction

 

United Refining Company is a Pennsylvania Corporation that began business operations in 1902. We are the leading integrated refiner and marketer of petroleum products in our primary market area, which encompasses western New York and northwestern Pennsylvania. We own and operate a medium complexity 70,000 barrel per day (“bpd”) petroleum refinery in Warren, Pennsylvania where we produce a variety of products, including various grades of gasoline, ultra low sulfur diesel fuel, kerosene, No. 2 heating oil and asphalt. 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®, Keystone® and Country Fair® brand names at a network of Company-operated retail units and convenience and grocery items through convenience stores under the Red Apple Food Mart® and Country Fair® brand names. As of August 31, 2010, (sometimes referred to as “fiscal 2010”), we operated 366 units, of which, 184 units are owned, 120 units are leased, and the remaining stores are operated under a management agreement. Approximately 20% of the gasoline stations within this network are branded Citgo® pursuant to a license agreement granting us the right to use Citgo’s applicable brand names, trademarks and other forms of Citgo’s identification. For fiscal 2010 approximately 59% and 24% of our gasoline and distillate production, respectively, was sold through our retail network.

 

For fiscal 2010, we had total net sales of $2.7 billion, of which approximately 53% were derived from gasoline sales, approximately 37% were from sales of other petroleum products and 10% were from sales of merchandise and other revenue. Our capacity utilization rates have averaged 90% for the last five years.

 

We believe that the location of our 70,000 bpd refinery in Warren, Pennsylvania provides us with a transportation cost advantage over our competitors, which is significant within an approximately 100 mile radius of our refinery. For example, in Buffalo, New York over our last five fiscal years, and including fiscal 2010, we have experienced approximately 2.2 cents per gallon transportation cost advantage over those competitors who are required to ship gasoline by pipeline and truck from New York Harbor sources to Buffalo. We own and operate the Kiantone Pipeline, a 78-mile long crude oil pipeline which connects the refinery to Canadian, U.S. and world crude oil sources through the Enbridge Pipelines Inc. and affiliates (collectively, “Enbridge”) pipeline system. Utilizing the storage capability of the pipeline, we are able to blend various grades of crude oil from different suppliers, allowing us to efficiently schedule production while managing feedstock mix and product yields in order to optimize profitability.

 

It is our view that the high construction costs and the stringent regulatory requirements inherent in petroleum refinery operations make it uneconomical for new competing refineries to be constructed in our primary market area. The nearest fuels refinery is over 160 miles from Warren, Pennsylvania and we believe that no significant production from such refinery is currently shipped into our primary market area.

 

Our primary market area is western New York and northwestern Pennsylvania and our core market area encompasses our Warren County base and the eight contiguous counties in New York and Pennsylvania. Our retail gasoline and merchandise sales are split approximately 60% / 40% between rural and urban markets. Margins on gasoline sales are traditionally higher in rural markets, while gasoline sales volume is greater in urban markets. Our urban markets include Buffalo, Rochester and Syracuse, New York and Erie, Pennsylvania.

 

As of August 31, 2010, 168 of our retail units were located in New York, 185 in Pennsylvania and 13 in Ohio. In fiscal year 2010, approximately 59% of the refinery’s gasoline production was sold through our retail network. In addition to gasoline, all units sell convenience merchandise, 106 are Quick Serve Restaurants (“QSRs”) including franchise operations and eight of the units are full-service truck stops. Customers may pay

 

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for purchases with credit cards including our own Kwik Fill® credit card. In addition to this credit card, we maintain a fleet credit card catering to regional truck and automobile fleets. Sales of convenience products, which tend to have constant margins throughout the year, have served to reduce the effects of the seasonality inherent in gasoline retail margins.

 

Recent Developments

 

The Company continues to be impacted by the volatility in petroleum markets in fiscal year 2011. 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, have been negatively affected by consistently fluctuating petroleum prices. 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 month of September in fiscal year 2011 was $7.36 as compared to $10.46 for the fourth quarter of fiscal year 2010, a decrease of $3.10 or 30%. The lagged crackspread for October of fiscal year 2011 was $15.17, an increase of $4.71 or 45% as compared to the fourth quarter of fiscal year 2010.

 

In June 2010, the Company announced changes to the healthcare and pension plans provided to salaried employees. Effective September 1, 2010, postretirement medical benefits for new hires and active salaried employees retiring after September 1, 2010 were eliminated. Additionally, effective January 1, 2011, deductibles and co-payments will be added to the medical benefits plan for all plan participants. For salaried employees meeting certain age and service requirements, the Company will contribute a defined dollar amount towards the cost of retiree healthcare based upon the employee’s length of service. Similarly, effective August 31, 2010, benefits under the Company’s defined benefit pension plan were frozen for all salaried employees, including the Company’s Chief Executive Officer and Chief Financial Officer. The Company will provide an enhanced contribution under its defined contribution 401(k) plan for all eligible employees as well as a transition contribution for older employees.

 

On July 26, 2010, a rupture occurred in Line 6B pipeline on Enbridge’s Lakehead system in Michigan. The Company’s heavy crude oil purchases are shipped on Line 6B from western Canada. As a result, on August 5, 2010, the Company was forced to reduce production in its crude processing unit until such time as the Enbridge Line 6B could be repaired. As a result, during the month of August, crude run rates were reduced by approximately 41% from scheduled crude runs of 69,500 bbl per day to 40,900 bbl per day and further reduced in September to an average of 38,000 bbl per day. For the month of October, actual crude runs were reduced an additional 8,740 bbl per day due to the Enbridge’s pipeline disruption. The interruption of heavy crude deliveries via Line 6B also negatively affected asphalt production by 65% from the planned production of 656,000 bbl to actual production of 240,000 bbl at the peak of the asphalt selling season. The Company’s supply group maintained crude sourcing at a reduced rate for the refinery during the disruption to Line 6B through other Enbridge pipelines.

 

On September 28, 2010, Enbridge began a phased restart and return to service of Line 6B. Line 6B is currently operating at approximately 80% of the total capacity and meeting 100% of shipping demand.

 

The Company’s property insurance covering the refinery operation contains a provision for contingent business interruption, which limits of coverage are separate from the general limits applying to direct damage to the refinery. The Company has placed the insurers on notice of the Enbridge loss.

 

The Company is in the process of quantifying its resultant losses during the disruption, and intends to seek restitution from Enbridge for the losses it has incurred as a result of this pipeline rupture.

 

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Industry Overview

 

We are a regional refiner and marketer located primarily in Petroleum Administration for Defense Districts I (“PADD I”). As of January 1, 2010, there were 13 operable refineries operating in PADD I with a combined crude processing capacity of 1.4 million bpd, representing approximately 8% of U.S. refining capacity. Petroleum product consumption during calendar year 2009 in PADD I averaged 5.61 million bpd, representing approximately 30% of U.S. demand based on industry statistics reported by the Energy Information Administration (“EIA”). According to the EIA, prime supplier sales volume of gasoline in the region decreased by approximately 4.2% during the five-year period ending December 2009. Refined petroleum production in PADD I is insufficient to satisfy demand for such products in the region, making PADD I a net importer of such products. Domestic refinery capacity utilization decreased from 83% crude capacity utilization in 2008 to 82% in 2009 due to nationwide and global uncertainty.

 

Refining Operations

 

The Company’s refinery is located on a 92-acre site in Warren, Pennsylvania. The refinery has a nominal capacity of 70,000 bpd of crude oil processing and averaged saleable production of approximately 58,500 bpd during fiscal 2010.

 

See Item 1. Business – Recent Developments; for reduction in crude processing due to the Enbridge Pipeline rupture on Line 6B.

 

The annual shutdown of the reformer unit to regenerate its catalyst and shutdown of the gasoline and distillate hydrotreaters to replace their catalysts was completed during late February and early March, 2010. Shutdown durations were ten days for the reformer, eleven days for the gasoline hydrotreater, and sixteen days for the distillate hydrotreater. Crude oil throughput during this time was reduced to 37,000 barrels per day to manage intermediate product inventories.

 

Ethanol blending into gasoline began in August, 2010, and by September, 2010, the new ethanol storage and injection system was commissioned to blend ten percent ethanol into all gasoline production.

 

We believe our geographic location in the product short PADD I is a significant marketing advantage. Our refinery is located in northwestern Pennsylvania and is geographically distant from the majority of PADD I refining capacity. The nearest fuels refinery is over 160 miles from Warren, Pennsylvania and we believe that no significant production from such refinery is currently shipped into our primary market area.

 

Products

 

We produce three primary petroleum products: gasoline, middle distillates, and asphalt. We presently produce two grades of unleaded gasoline, 87-octane regular and 93-octane premium. We also blend our 87 and 93 octane gasoline to produce a mid-grade 89-octane. In fiscal year 2010, approximately 59% of our gasoline production was sold through our retail network and the remaining 41% of such production was sold to wholesale customers.

 

Middle distillates include kerosene, ultra low sulfur diesel fuel, and No. 2 heating oil. For fiscal 2010, approximately 76% of our distillate production was sold to wholesale customers and the remaining 24% through our retail network.

 

We optimize our bottom of the barrel processing by producing asphalt, a higher value alternative to residual fuel oil. Asphalt production as a percentage of all refinery production has exceeded 28% over the last five fiscal years due to our ability and decision to process a larger amount of less costly heavy higher sulfur content crude oil in order to realize higher overall refining margins.

 

Asphalt is a residual product of the crude oil refining process, which is used primarily for construction and maintenance of roads and highways and as a component of roofing shingles. Distribution of asphalt is localized,

 

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usually within a distance of 150 miles from a refinery or terminal, and demand is influenced by levels of federal, state, and local government funding for highway construction and maintenance and by levels of roofing construction activities. We believe that an ongoing need for highway maintenance and domestic economic growth will sustain asphalt demand.

 

Refining Process

 

Our production of petroleum products from crude oil involves many complex steps, which are briefly summarized below.

 

We seek to maximize refinery profitability by selecting crude oil and other feedstocks taking into account factors including product demand and pricing in our market areas as well as price, quality and availability of various grades of crude oil. We also consider product inventory levels and any planned turnarounds of refinery units for maintenance. The combination of these factors is optimized by a sophisticated proprietary linear programming computer model, which selects the most profitable feedstock and product mix. The linear programming model is continuously updated and improved to reflect changes in the product market place and in the refinery’s processing capability.

 

Blended crude is stored in a tank farm near the refinery, which has a capacity of approximately 200,000 barrels. The blended crude is then brought into the refinery where it is first distilled at low pressure into its component streams in the crude and preflash unit. This yields the following intermediate products: light products consisting of fuel gas components (methane and ethane) and LPG (propane and butane), naphtha or gasoline, kerosene, diesel or heating oil, heavy atmospheric distillate, and crude tower bottoms which are further distilled under vacuum conditions to yield light and heavy vacuum distillates and asphalt. The present capacity of the crude unit is 70,000 bpd.

 

The intermediate products are then processed in downstream units and blended to produce finished products. A naphtha hydrotreater treats naphtha and FCC light catalytic naptha with hydrogen across a fixed bed catalyst to remove sulfur before further treatment. The treated naphtha is then distilled into light and heavy naphtha at a prefractionator. Light naphtha is then sent to an isomerization unit and heavy naphtha is sent to a reformer, in each case for octane enhancement. The isomerization unit converts the light naphtha catalytically into a gasoline component with 83 octane. The reformer unit converts the heavy naphtha into another gasoline component with up to 94 octane depending upon the desired octane requirement for the grade of gasoline to be produced. The reformer also produces as a co-product all the hydrogen needed to operate hydrotreating units in the refinery.

 

Raw kerosene is treated with hydrogen at a distillate hydrotreater to remove sulfur to make finished kerosene. A distillate hydrotreater built in 1993 and modified in 2006 also treats raw distillates to produce ultra low sulfur diesel fuel.

 

The long molecular chains of the heavy atmospheric and vacuum distillates are broken or “cracked” in the FCC unit and separated and recovered in the gas concentration unit to produce fuel gas, propylene, butylene, LPG, light and heavy catalytic naptha gasoline, light cycle oil and clarified oil. Fuel gas is burned within the refinery, propylene is fed to a polymerization unit which polymerizes its molecules into a larger chain to produce an 87 octane gasoline component, butylene is fed into an alkylation unit to produce a gasoline component and LPG is treated to remove trace quantities of water and then sold. Clarified oil is burned in the refinery or sold. Various refinery gasoline components are blended together in refinery tankage to produce 87 octane and 93 octane finished gasoline. Likewise, light cycle oil is blended with other distillates to produce No. 2 heating oil. FCC light and heavy catalytic naptha is hydrotreated in order to meet new more stringent legally mandated limits on gasoline sulfur content which took effect January 1, 2008, and a portion of the light cycle oil is hydrotreated in order to meet new more stringent legally mandated limits on diesel fuel sulfur content which took effect June 1, 2006.

 

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Our refining configuration allows the processing of a wide variety of crude oil inputs. During the past five years our inputs have been of Canadian origin and range from light low sulfur (38 degrees API, 0.5% sulfur) to high sulfur heavy asphaltic (21 degrees API, 3.5% sulfur). Our ability to market asphalt on a year round basis enables us to purchase selected heavier crude oils at higher differentials and thus at a lower cost.

 

Supply of Crude Oil

 

Substantially all of our crude supply is sourced from Canada through the Enbridge pipeline. We are however, not dependent on this source alone. While not utilized during the closure of the Enbridge 6B pipeline because of the anticipated length of the disruption we could within 90 days, shift up to 70% of our crude oil requirements to some combination of domestic and offshore crude. With additional time, 100% of our crude requirements could be obtained from non-Canadian sources. This change in crude supply could result in a different crude slate and alter product yields and product mix and could affect refinery profitability. Sixty seven percent of our term contracts with our crude suppliers are on a month-to-month evergreen basis, with 60-to-90 day cancellation provisions; 33% of our term crude contracts are on an annual basis (with month to month pricing provisions). As of August 31, 2010, we had supply contracts with 14 major suppliers for an aggregate of 54,200 bpd of crude oil. We have contracts with three suppliers amounting to 48% of daily crude oil supply (none more than 12,000 barrels per day). None of the remaining suppliers accounted for more than 10% of our crude oil supply.

 

We access crude through the Kiantone Pipeline, which connects with the Enbridge pipeline system in West Seneca, New York, which is near Buffalo. The Enbridge pipeline system provides access to most North American and foreign crude oils through three primary routes: (i) Canadian crude oils are transported eastward from Alberta and other points in Canada, (ii) foreign crude oils unloaded at the Louisiana Offshore Oil Port are transported north via the Capline and Chicap pipelines which connect to the Enbridge pipeline system at Mokena, Illinois, and (iii) foreign crude unloaded at Portland, Maine shipped to Montreal then shipped on Enbridge’s line 9 to Sarnia, Ontario.

 

The Kiantone Pipeline, a 78-mile Company-owned and operated pipeline, connects our West Seneca, New York terminal at the pipeline’s northern terminus to the refinery’s tank farm at its southern terminus. We completed construction of the Kiantone Pipeline in 1971 and have operated it continuously since then. We are the sole shipper on the Kiantone Pipeline, and can currently transport up to 70,000 bpd along the pipeline. Our right to maintain the pipeline is derived from approximately 265 separate easements, right-of-way agreements, licenses, permits, leases and similar agreements.

 

The pipeline operation is monitored by a computer at the refinery. Shipments of crude arriving at the West Seneca terminal are separated and stored in one of the terminal’s three storage tanks, which have an aggregate storage capacity of 485,000 barrels. The refinery tank farm has two additional crude storage tanks with a total capacity of 200,000 barrels. An additional 35,000 barrels of crude can be stored at the refinery.

 

Refinery Turnarounds

 

Turnaround cycles vary for different refinery units. A planned turnaround of each of the two major refinery units (the crude unit and the FCC) is conducted approximately every three to five years, during which time such units are shutdown for internal inspection and repair. The most recent turnarounds occurred in March and April 2007 at our crude unit and its related processing equipment, and in October and November 2007 at our FCC unit and its related processing equipment. A turnaround, which generally takes two to four weeks to complete in the case of the two major refinery units, consists of a series of moderate to extensive maintenance exercises. Turnarounds are planned and accomplished in a manner that allows for reduced production during maintenance instead of a complete plant shutdown. We defer the cost of turnarounds when incurred and amortized on a straight-line basis over the period of benefit, which ranges from 3 to 10 years (for tank turnarounds). Thus, we charge costs to production over the period most clearly benefited by the turnarounds.

 

The west end of the refinery consisting of the FCC unit and related units were shutdown October 4, 2010 for a scheduled 28 day turnaround. The major activity during the turnaround in addition to normal shutdown maintenance was upgrading of the regenerator, flue gas line and electrostatic precipitator at the FCC Unit. A 28 day maintenance turnaround is scheduled for the Crude unit beginning at the end of March 2011.

 

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The scheduled maintenance turnarounds result in an inventory build of petroleum products to meet minimum sales demand during the maintenance shutdown period.

 

Marketing and Distribution

 

General

 

We have a long history of service within our market area. Our first retail service station was established in 1927 near the Warren, Pennsylvania refinery, and we have steadily expanded our distribution network over the years.

 

We maintain an approximate 60% / 40% split between sales at our rural and urban units. We believe this to be advantageous, balancing the higher gross margins and lower volumes often achievable due to decreased competition in rural areas with higher volumes and lower gross margins in urban areas. We believe that our network of rural convenience store units provide an important alternative to traditional grocery store formats. In fiscal year 2010, approximately 59% and 24% of our gasoline and distillate production, respectively, was sold through this retail network.

 

We deliver asphalt from the refinery to end user contractors by truck or railcar in addition to re-supplying our asphalt terminals in Rochester, New York and Pittsburgh, Pennsylvania.

 

Retail Operations

 

As of August 31, 2010, we operated a retail-marketing network (including those stores operated under a management agreement) that includes 366 retail units, of which 168 are located in western New York, 185 in northwestern Pennsylvania and 13 in eastern Ohio. We own 184 of these units. The retail segment sells petroleum products under the Kwik Fill®, Citgo® and Keystone® brand names and grocery items under the Red Apple Food Mart® and Country Fair® brand names. We believe that Red Apple Food Mart®, Kwik Fill®, Country Fair®, Keystone® and Citgo® are well-recognized names in our marketing areas. Approximately 20% of the gasoline stations within this network are branded Citgo® pursuant to a license agreement granting us the right to use Citgo’s applicable brand names, trademarks and other forms of Citgo’s identification. We believe that the Company operation of our retail units provides us with a significant advantage over competitors that operate wholly or partly through dealer arrangements because we have greater control over pricing and operating expenses.

 

We classify our retail stores into four categories: convenience stores, limited gasoline stations, truck stop facilities, and other stores. Convenience stores sell a wide variety of foods, snacks, cigarettes and beverages and also provide self-service gasoline. One hundred and six of our 366 retail outlets include QSRs where food is prepared on the premises for retail sales and also distribution to our other nearby units that do not have in-store delicatessens. Limited gasoline stations sell gasoline, cigarettes, oil and related car care products and provide full service for gasoline customers. Truckstop facilities sell gasoline and diesel fuel on a self-service and full-service basis. All truckstops include either a full or mini convenience store.

 

Total merchandise sales for fiscal year 2010 were $258.6 million, with a gross profit of approximately $65.3 million. Gross margins on the sale of convenience merchandise averaged 25.2% for fiscal 2010 and have been relatively constant at 25.8% for the last three years. Merchandise sales have shown continued positive growth.

 

Merchandise Supply

 

Tripifoods, Buffalo, New York is our primary wholesale grocery supplier for our entire chain. During fiscal year 2010, we purchased approximately 76.0% of our convenience merchandise from this vendor. Tripifoods supplies us with products including tobacco, candy, deli, grocery, health and beauty products, and sundry items.

 

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We also purchase coffee, dairy products, beer, soda, snacks, and novelty goods from direct store vendors for resale. We annually review our suppliers’ costs and services versus those of alternate suppliers. We believe that alternative sources of merchandise supply at competitive prices are readily available.

 

Location Performance Tracking

 

We maintain a store tracking mechanism to collect operating data including sales and inventory levels for our retail network. Data transmissions are made using personal computers, which are available at each location. Once verified, the data interfaces with a variety of retail accounting systems, which support daily, weekly, and monthly performance reports. These different reports are then provided to both the field management and administrative personnel. Upon completion of a capital project, management tracks “before and after” performance, to evaluate the return on investment which has resulted from the improvements.

 

Wholesale Marketing and Distribution

 

In fiscal 2010, we sold on a wholesale basis approximately 38,800 bpd of gasoline, distillate and asphalt products to distributor, commercial, and government accounts. In addition, we sell approximately 1,000 bpd of propane to liquefied petroleum gas marketers. In fiscal year 2010, our production of gasoline, distillate, and asphalt sold at wholesale was 41%, 76%, and 100%, respectively. We sell approximately 98% of our wholesale gasoline and distillate products from our refinery in Warren, Pennsylvania, and our Company-owned and operated product terminals. The remaining 2% are sold through third-party exchange terminals.

 

Our wholesale gasoline customer base includes 40 branded dealer/distributor units operating under our proprietary “Keystone®” and “Kwik Fill®” brand names. Long-term dealer/distributor contracts accounted for approximately 19% of our wholesale gasoline sales in fiscal 2010. Supply contracts generally range from three to five years in length, with branded prices based on our prevailing wholesale rack price in Warren.

 

We believe that the location of our refinery provides us with a transportation cost advantage over our competitors, which is significant within an approximately 100-mile radius of our refinery. For example, in Buffalo, New York over our last five fiscal years, including fiscal 2010, we have experienced an approximately 2.2 cents per gallon transportation cost advantage over those competitors who are required to ship gasoline by pipeline and truck from New York Harbor sources to Buffalo.

 

Our ability to market asphalt is critical to the performance of our refinery. The timing and a consistent marketing effort enables the refinery to process lower cost higher sulfur content crude oils, which in turn affords us higher refining margins. Sales of paving asphalt generally occur during the period May 1 through October 31 based on weather conditions. In order to maximize our in season asphalt sales, we have made substantial investments to increase our asphalt storage capacity through the installation of additional tankage, as well as through the purchase or lease of outside terminals. Partially mitigating the seasonality of the asphalt paving business is our ability to sell asphalt year-round to roofing shingle manufacturers. In fiscal year 2010, we sold 6.7 million barrels of asphalt.

 

We have a significant share of the asphalt market in southwestern New York and western and central Pennsylvania as well as in the greater metro areas of Pittsburgh, Pennsylvania and Rochester and Buffalo, New York. We distribute asphalt from the refinery by railcar and truck transport to our owned and leased asphalt terminals in such cities or their suburbs. Asphalt can be purchased or exchanged in the Gulf Coast area and delivered by barge to third party or Company-owned terminals near Pittsburgh.

 

We use a network of six terminals to store and distribute refined products. This network provides distillate, and asphalt storage capacities, of approximately 1,217,000 barrels, as of August 31, 2010.

 

During fiscal 2010, approximately 93% of our refined products were transported from the refinery via truck transports, with the remaining 7% transported by rail. The majority of our wholesale and retail gasoline distribution is handled by common carrier trucking companies at competitive rates. We also operate a fleet of ten tank trucks that supply approximately 22% of our Kwik Fill® retail stations.

 

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Product distribution costs to both retail and wholesale accounts are minimized through product exchanges. Through these exchanges, we have access to product supplies at approximately 18 sources located throughout our retail marketing area. We seek to minimize retail distribution costs through the use of a system wide distribution model.

 

Environmental Considerations

 

General

 

We are subject to extensive federal, state and local laws and regulations relating to fuel quality, pollution control and protection of the environment, such as those governing releases of certain materials to the air and water and the storage, treatment, transportation, disposal and clean-up of wastes located on land. As with the industry in general, compliance with existing and anticipated environmental laws and regulations increases the overall cost of business, including capital costs to construct, maintain and upgrade equipment and facilities.

 

Gasoline, Diesel Fuel, and Heating Oil Manufacturing Standards

 

Mandatory fuel regulations will continue to affect our operations including renewable fuel obligations, benzene reduction in gasoline, and future sulfur reductions in home heating oil.

 

In March of 2010 the United States Environmental Protection Agency (“USEPA”) implemented changes to the Renewable Fuels Standard (“RFS1”). The revision better known as RFS2 specifies the volume of cellulosic biofuel, biomass-based diesel, advanced biofuel, and total renewable fuel that must be used in our transportation fuels. To fulfill our renewable volume obligation (“RVO”) our projections show we will be required to blend 2% biodiesel in all our diesel fuel as well as add 10% ethanol to all of our gasoline starting January 1, 2011. Even though RFS 2 went into effect July 1, 2010, United qualified for a “small refinery” exemption that extends until December 31, 2010.

 

We started blending 2% biodiesel into all our diesel fuel sold in the state of Pennsylvania to comply with the PA Biofuels Development and In–State Production Incentive Act 78 of 2008. This Act requires all on-road diesel fuel sold in Pennsylvania to contain a minimum of 2% biodiesel starting May 1, 2010.

 

The cost for the projects associated with all renewable fuels legislation is $19 million, of which $1.5 million is for biodiesel and $17.5 million for ethanol.

 

The USEPA finalized another rule on February 26, 2007 under the Clean Air Act (“CAA”) known as the Mobile Source Air Toxics Rule No. 2 (“MSAT II”) intended to reduce emissions of benzene by, among other things, regulating gasoline quality. The rule requires us to reduce the amount of benzene in gasoline from a current average level of about 2.5% down to 0.62% starting January 2011. The estimated cost of the project to reduce the benzene content is $5 million and is scheduled to be completed in December of 2010.

 

On July 20, 2010 New York Governor David Paterson signed into law a Low-Sulfur Heating Oil mandate that requires all heating oil sold in the state of New York not to contain more than 15 parts per million (ppm) sulfur beginning July 1, 2012. Pennsylvania is also discussing lowering the sulfur content which currently has a maximum of 5,000 ppm. This project to reduce the sulfur content in heating oil is presently being reviewed by our engineering department. The cost estimate for the project is $4 million to be completed by the 2nd quarter of 2011.

 

We are also monitoring closely all climate change and Greenhouse Gas (“GHG”) legislation, better known as Cap and Trade which is currently being debated in Congress. The proposals vary and the final form of legislation, if any, is not yet certain. The core of the proposals generally require the capture and reporting of CO2 emissions data, leading to a baseline followed by mandatory CO2 emission reductions over time and the purchase

 

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of carbon credits under certain circumstances. On September 22, 2009 the U.S. Environmental Protection Agency adopted regulations governing the measurement and reporting GHG emissions commencing January 1, 2010. The Company believes compliance costs with these regulations will not be material. The ultimate cost of GHG reduction mandates and their effect on our business are, however, unknown until a more definitive proposal has been crafted by Congress and implementing regulations proposed.

 

Retail Gasoline Stations

 

We currently operate gasoline stations in three states with underground petroleum product storage tanks and in the past have operated gasoline stations that are now closed. Federal and state statutes and regulations govern the installation, operation and removal from service of these underground storage tanks and associated piping and product dispensing systems. The operation of underground storage tanks and systems carries the risk of contamination to soil and groundwater with petroleum products. We manage this risk by promptly responding to actual and suspected leaks and spills and implementing remedial action plans meeting regulatory requirements. In addition to prompt response and remediation, we receive reimbursement for response costs associated with leaks and spills in the Commonwealth of Pennsylvania through the Underground Storage Tank Indemnification Fund.

 

Competition

 

Petroleum refining and marketing is highly competitive. Our major retail gasoline c-store competitors include British Petroleum, Amerada Hess, Exxon-Mobil, Sunoco, Sheetz, Delta Sonic, Valero and Giant Eagle/GetGo. With respect to wholesale gasoline and distillate sales, we compete with Sunoco, Inc., Exxon-Mobil, and other refiners via their pipeline system. We primarily compete with Marathon Petroleum in the asphalt market, both in New York and Pennsylvania. Many of our principal competitors are integrated multinational oil companies that are substantially larger and better known than us. Because of their diversity, integration of operations, larger capitalization and greater resources, these major oil companies may be better able to withstand volatile market conditions, compete on the basis of price and more readily obtain crude oil in times of shortages.

 

The principal competitive factors affecting our refining operations are crude oil and other feedstock costs, refinery efficiency, refinery product mix and product distribution and transportation costs. Certain of our larger competitors have refineries, which are larger and more complex and, as a result, could have lower per barrel costs or higher margins per barrel of throughput. We have no crude oil reserves and are not engaged in exploration. We believe that we will continue to be able to obtain adequate crude oil and other feedstocks at generally competitive prices for the foreseeable future.

 

The principal competitive factors affecting our retail marketing network are location, product price, overall appearance and cleanliness of stores and brand identification. Competition from large, integrated oil companies, supermarkets, and “big box” convenience store chains such as Wal-Mart and Sam’s Club, is expected to be ongoing. The principal competitive factors affecting our wholesale marketing business are the price and quality of our products, as well as the reliability and availability of supply and the location of multiple distribution points.

 

Employees

 

As of August 31, 2010, we had approximately 4,434 employees; 1,920 full-time and 2,514 part-time employees. Approximately 3,861 persons were employed at our retail units, 368 persons at our refinery, Kiantone Pipeline and at terminals operated by us, with the remainder at our office in Warren, Pennsylvania. We have entered into collective bargaining agreements with International Union of Operating Engineers Local No. 95, United Steel Workers of America Local No. 2122-A and General Teamsters Local Union No. 397 covering 252, 6, and 21 employees, respectively. The agreements expire on February 1, 2012, January 31, 2012 and July 31, 2011, respectively. We believe that our relationship with our employees is good.

 

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Intellectual Property

 

We own various federal and state service and trademarks used by us, including Kwik Fill®, United®, Country Fair®, SuperKwik®, Keystone®, SubFare® and PizzaFare®. Our subsidiary, Country Fair, and we have licensing agreements with Citgo Petroleum Corporation (“Citgo”) for the right to use Citgo’s applicable brand names, trademarks and other forms of Citgo’s identification for petroleum products purchased under a distributor franchise agreement.

 

We have obtained the right to use the Red Apple Food Mart® service mark to identify our retail units under a royalty-free, nonexclusive, nontransferable license from Red Apple Supermarkets, Inc., a corporation which is indirectly wholly owned by John A. Catsimatidis, the indirect sole stockholder, Chairman of the Board and Chief Executive Officer of the Company. The license is for an indefinite term. The licensor has the right to terminate this license in the event that we fail to maintain quality acceptable to the licensor. We license the right to use the Keystone® trademark to approximately 44 independent distributors on a non-exclusive royalty-free basis.

 

We currently do not own any material patents. Management believes that the Company does not infringe upon the patent rights of others, nor does our lack of patent ownership impact our business in any material manner.

 

Governmental Approvals

 

We believe we have obtained all necessary governmental approvals, licenses, and permits to operate the refinery and convenience stores.

 

Financing

 

In November, 2008, we increased the limit of our revolving credit facility with PNC Bank, N.A., as Agent Bank (the “Revolving Credit Facility”) from $100,000,000 to $130,000,000. This amendment provides the Company greater flexibility relative to its cash flow requirements in light of market fluctuations, particularly involving crude oil prices and seasonal business cycles. The improved liquidity resulting from the expansion of the facility will assist the Company in meeting its working capital, ongoing capital expenditure needs and for general corporate purposes. The term of the agreement will expire on November 27, 2011. The amendment to the Revolving Credit Facility affected certain terms and provisions thereof, including an increase in the interest rate and a modification to the Net Worth covenant. Under the new amendment to the Revolving Credit Facility effective November 21, 2008, the applicable margin will continue to be 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 .5% to 0%; 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 applicable margin varies with our facility leverage ratio calculation. The Agent Bank’s prime rate at August 31, 2010 was 3.25%.

 

During May 2007, the Company sold an additional $125,000,000 of 10 1/2% Senior Unsecured Notes due 2012 (the “Additional Notes”) for $130,312,500 resulting in a debt premium of $5,312,500 which is being amortized over the life of the Additional Notes using the effective interest method. These Additional Notes were issued under an indenture, dated as of August 6, 2004 (the “Indenture”), pursuant to which $200,000,000 of Notes of the same series were issued in August 2004 and an additional $25,000,000 in February 2005. The net proceeds of the offering were used and will continue to be used for capital expenditures and general corporate purposes. Additional Notes are hereinafter collectively called “the Senior Unsecured Notes” and are fully and unconditionally guaranteed on a senior unsecured basis by all of the Company’s subsidiaries (see Notes 9 and 16 to Consolidated Financial Statements, Item 8).

 

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 outstanding letters of credit of $4,433,000 and approximately $42,567,000 unused and available under the Revolving Credit Facility as of August 31, 2010.

 

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ITEM 1A. RISK FACTORS.

 

Risks Relating to the Business

 

Substantial Leverage and Ability to Service and Refinance Debt

 

Our ability to pay interest and principal on the Senior Unsecured Notes and to satisfy our other debt obligations will depend upon our future operating performance, which will be affected by prevailing economic conditions and financial, business and other factors, most of which are beyond our control. We anticipate that our operating cash flow, together with borrowings under the Revolving Credit Facility, will be sufficient to meet our operating expenses and capital expenditures, to sustain operations and to service our interest requirements as they become due.

 

The Company’s 10 1/2% Senior Unsecured Notes mature on August 15, 2012, at which time the Company will either have to pay the principal amount in full or refinance the Notes.

 

We use our Revolving Credit Facility to finance a portion of our operations. These on-balance sheet financial instruments, to the extent they provide for variable rates, expose us to interest rate risks resulting from changes in the PNC Prime rate, the Federal Funds rate or the LIBOR rate.

 

If we are unable to generate sufficient cash flow to service our indebtedness and fund our capital expenditures, we will be forced to adopt an alternative strategy that may include reducing or delaying capital expenditures, selling assets, restructuring or refinancing our indebtedness (including the notes) or seeking additional equity capital. There can be no assurance that any of these strategies could be affected on satisfactory terms, if at all. Our ability to meet our debt service obligations will be dependent upon our future performance which, in turn, is subject to future economic conditions and to financial, business and other factors, many of which are beyond our control.

 

Volatility of Crude Oil Prices and Refining Margins

 

We are engaged primarily in the business of refining crude oil and selling refined petroleum products. Our earnings and cash flows from operations are dependent upon us realizing refining and marketing margins at least sufficient to cover our fixed and variable expenses. The cost of crude oil and the prices of refined products depend upon numerous factors beyond our control, such as the supply of and demand for crude oil, gasoline and other refined products, which are affected by, among other things, changes in domestic and foreign economies, political events, and instability or armed conflict in oil producing regions, production levels, weather, the availability of imports, the marketing of gasoline and other refined petroleum products by our competitors, the marketing of competitive fuels, the impact of energy conservation efforts, and the extent of domestic and foreign government regulation and taxation. A large, rapid increase in crude oil prices would adversely affect our operating margins if the increased cost of raw materials could not be passed to our customers on a timely basis, and would adversely affect our sales volumes if consumption of refined products, particularly gasoline, were to decline as a result of such price increases. A sudden drop in crude oil prices would adversely affect our operating margins since wholesale prices typically decline promptly in response thereto, while we will be paying the higher crude oil prices until our crude supply at such higher prices is processed. The prices which we may obtain for our refined products are also affected by regional factors, such as local market conditions and the operations of competing refiners of petroleum products as well as seasonal factors influencing demand for such products. In addition, our refinery throughput and operating costs may vary due to scheduled and unscheduled maintenance shutdowns.

 

We do not manage the price risk related to all of our inventories of crude oil and refined products with a permanent hedging program; however, we do manage the risk exposure by managing inventory levels and by selectively applying hedging activities. At August 31, 2010, the Company had no open futures positions of crude oil puts.

 

At August 31, 2010, we were exposed to the risk of market price declines with respect to a substantial portion of our crude oil and refined product inventories.

 

Competition

 

Many of our competitors are fully integrated companies engaged on a national and/or international basis in many segments of the petroleum business, including exploration, production, transportation, refining and

 

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marketing, on scales much larger than ours. Large oil companies, because of the diversity and integration of their operations, larger capitalization and greater resources, may be better able to withstand volatile market conditions, compete on the basis of price, and more readily obtain crude oil in times of shortages.

 

We face strong competition in our market for the sale of refined petroleum products, including gasoline. Such competitors have in the past and may in the future engage in marketing practices that result in profit margin deterioration for us for periods of time, causing an adverse impact on us.

 

Concentration of Refining Operations

 

All of our refinery activities are conducted at our facility in Warren, Pennsylvania. We currently obtain substantially all of our crude oil supply through pipelines owned and operated by Enbridge Energy Partner (“Enbridge Pipeline”), and our owned and operated Kiantone Pipeline. While the Company does have the ability to shift its sources of supply over a 90 to 120 day period, any prolonged disruption to the operations of our refinery, the Enbridge Pipeline or the Kiantone Pipeline, whether due to labor difficulties, destruction of or damage to such facilities, severe weather conditions, interruption of utilities service or other reasons, would have a material adverse effect on our business, results of operations or financial condition. In order to minimize the effects of any such incident, we maintain a full schedule of insurance coverage which includes, but is not limited to, property and business interruption insurance. The property insurance policy has a combined loss limit for a property loss and business interruption at our refinery of $500 million, with various sub-limit accounts for specialized risks. A deductible of $5 million applies to physical damage claims, with a 45-day wait period and a $5 million deductible for business interruption. We believe that our coverage limits are adequate. However, there can be no assurance that the proceeds of any such insurance would be paid in a timely manner or be in an amount sufficient to meet our needs if such an event were to occur.

 

Impact of Environmental Regulation; Government Regulation

 

Our operations and properties are subject to increasingly more stringent environmental laws and regulations, such as those governing the use, storage, handling, generation, treatment, transportation, emission, release, discharge and disposal of certain materials, substances and wastes, remediation of areas of contamination and the health and safety of employees. These laws may impose strict, and under certain circumstances, joint and several, liability for remediation costs and also can impose responsibility for natural resource damages. Failure to comply, including failure to obtain required permits, can also result in significant fines and penalties, as well as potential claims for personal injury and property damage.

 

We cannot predict the nature, scope or effect of environmental legislation or regulatory requirements that could be imposed or how existing or future laws or regulations will be administered or interpreted. The nature of our operations and previous operations by others at certain of our facilities exposes us to the risk of claims under those laws and regulations. There can be no assurance that material costs or liabilities will not be incurred in connection with such claims, including potential claims arising from discovery of currently unknown conditions.

 

We are also monitoring closely all climate change and Greenhouse Gas (“GHG”) legislation, better known as Cap and Trade which is currently being debated in Congress. The proposals vary and the final form of legislation, if any, is not yet certain. The core of the proposals generally require the capture and reporting of CO2 emissions data, leading to a baseline followed by mandatory CO2 emission reductions over time and the purchase of carbon credits under certain circumstances. On September 22, 2009 the U.S. Environmental Protection Agency adopted regulations governing the measurement and reporting GHG emissions commencing January 1, 2010. The Company believes compliance costs with these regulations will not be material. The ultimate cost of GHG reduction mandates and their effect on our business are, however, unknown until a more definitive proposal has been crafted by Congress and implementing regulations proposed.

 

Taxes

 

Our operations and products will be subject to taxes imposed by federal, state and local governments, which taxes have generally increased over time. There can be no certainty of the effect that increases in these taxes, or the imposition of new taxes, could have on us, or whether such taxes could be passed on to our customers.

 

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Nature of Demand for Asphalt

 

In fiscal 2010, asphalt sales represented 17% of our total revenues. Over the same period, approximately 89% of our asphalt was produced for use in paving or repaving roads and highways. The level of paving activity is, in turn, dependent upon funding available from federal, state and local governments. Funding for paving has been affected in the past, and may be affected in the future, by budget difficulties at the federal, state or local levels. A decrease in demand for asphalt could cause us to sell asphalt at significantly lower prices or to curtail production of asphalt by processing more costly lower sulfur content crude oil which would adversely affect refining margins. In addition, paving activity in our marketing area generally ceases in the winter months. Therefore, much of our asphalt production during the winter must be stored until warmer weather arrives, resulting in delayed revenue recognition and inventory buildups each year.

 

Controlling Stockholder

 

John A. Catsimatidis indirectly owns all of our outstanding voting stock. By virtue of such stock ownership, Mr. Catsimatidis has the power to control all matters submitted to our stockholders and to elect all of our directors.

 

Restrictions Imposed by Terms of Indebtedness

 

The terms of the Revolving Credit Facility, the Indenture and the other agreements governing our indebtedness impose operating and financing restrictions on us and our subsidiaries. Such restrictions affect, and in many respects limit or prohibit, among other things, our ability and our subsidiaries’ ability to incur additional indebtedness, create liens, sell assets, or engage in mergers or acquisitions. These restrictions could limit our ability to plan for or react to market conditions or meet extraordinary capital needs or otherwise could restrict corporate activities. There can be no assurance that such restrictions will not adversely affect our ability to finance our future operations or capital needs or to engage in other business activities which will be in our interest.

 

Our Pension Plans are Currently Underfunded

 

Substantially all of our employees are covered by three noncontributory defined benefit pension plans. As of August 31, 2010, as measured under ASC 715 (which is not the same as the measure used for purposes of calculating required contributions and potential liability to the Pension Benefit Guaranty Corporation, or PBGC), the aggregate accumulated benefit obligation under our pension plans was approximately $97.3 million and the value of the assets of the plans was approximately $54.5 million. In fiscal 2010, we contributed $4.1 million to the three plans, and we have made additional contributions to our pension plans of $2.2 million in fiscal year 2011. If the performance of the assets in our pension plans does not meet our expectations or if other actuarial assumptions are modified, our contributions for future years could be higher than we expect.

 

In June 2010, the Company announced changes to the healthcare and pension plans provided to salaried employees. Effective September 1, 2010, postretirement medical benefits for new hires and active salaried employees retiring after September 1, 2010 were eliminated. Additionally, effective January 1, 2011, deductibles and co-payments will be added to the medical benefits plan for all active and retired employees. For salaried employees meeting certain age and service requirements, the Company will contribute a defined dollar amount towards the cost of retiree healthcare based upon the employee’s length of service. Similarly, effective August 31, 2010, benefits under the Company’s defined benefit pension plan were frozen for all salaried employees, including the Company’s Chief Executive Officer and Chief Financial Officer. The Company will provide an enhanced contribution under its defined contribution 401(k) plan as well as a transition contribution for older employees.

 

Our pension plans are subject to the Employee Retirement Income Security Act of 1974, or ERISA. Under ERISA, the PBGC generally has the authority to terminate an underfunded pension plan if the possible long-run loss of the PBGC with respect to the plan may reasonably be expected to increase unreasonably if the plan is not terminated. In the event our pension plans are terminated for any reason while the plans are underfunded, we will incur a liability to the PBGC that may be equal to the entire amount of the underfunding.

 

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ITEM 1B. UNRESOLVED STAFF COMMENTS.

 

Not Applicable.

 

ITEM 2. PROPERTIES.

 

We own a 92-acre site in Warren, Pennsylvania upon which we operate our refinery. The site also contains an office building housing our principal executive office.

 

We own various real property in the states of Pennsylvania, New York, Ohio, and Alabama, upon which, as of August 31, 2010, we operated 184 retail units and two crude oil and six refined product storage terminals. We also own the 78-mile long Kiantone Pipeline, a pipeline which connects our crude oil storage terminal to the refinery’s tank farm. Our right to maintain the pipeline is derived from approximately 265 separate easements, right-of-way agreements, leases, permits, and similar agreements. We also have easements, right-of-way agreements, leases, permits, and similar agreements that would enable us to build a second pipeline on property contiguous to the Kiantone Pipeline.

 

As of August 31, 2010, we also lease an aggregate of 183 sites in Pennsylvania, New York, and Ohio upon which we operate retail units.

 

ITEM 3. LEGAL PROCEEDINGS.

 

The Company and its subsidiaries are from time to time parties to various legal proceedings that arise in the ordinary course of their respective business operations. These proceedings include various administrative actions relating to federal, state and local environmental laws and regulations as well as civil matters before various courts seeking money damages. The Company believes that if the legal proceedings in which it is currently involved were determined against the Company, there would be no material adverse effect on the Company’s operations or its consolidated financial condition. In the opinion of management, all such matters are adequately covered by insurance, or if not so covered, are without merit or are of such kind, or involve such amounts that an unfavorable disposition would not have a material adverse effect on the consolidated operations or financial position of the Company.

 

ITEM 4. (REMOVED AND RESERVED).

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

 

None.

 

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ITEM 6. SELECTED FINANCIAL DATA.

 

The following table sets forth certain historical financial and operating data (the “Selected Information”) as of the end of and for each of the years in the five-year period ended August 31, 2010. The selected income statement, balance sheet, financial and ratio data as of and for each of the five-years ended August 31, 2010 has been derived from our audited consolidated financial statements. The operating information for all periods presented has been derived from our accounting and financial records. The Selected Information set forth below should be read in conjunction with, and is qualified by reference to, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and our Consolidated Financial Statements and Notes thereto in Item 8 and other financial information included elsewhere herein.

 

     Year Ended August 31,  
     2010     2009     2008     2007     2006  
     (in thousands)  

Income Statement Data:

          

Net sales

   $ 2,654,401      $ 2,387,171      $ 3,208,012      $ 2,405,063      $ 2,437,052   

Refining operating expenses (1)

     131,370        123,171        152,521        130,164        145,117   

Selling, general and administrative expenses

     150,825        144,943        145,770        136,474        129,522   

Operating income (loss)

     (78,091     91,468        (52,595     168,394        130,597   

Interest expense

     35,177        (36,006     (36,934     (28,178     (24,645

Interest income

     6        134        4,966        4,384        750   

Other, net

     (1,518     (1,471     (3,706     (825     (429

Equity in net earnings of affiliate

     —          41        2,879        1,611        2,190   

Gain on early extinguishment of debt

     —          10,096        —          —          —     

Income (loss) before income tax expense (benefit)

     (114,780     64,262        (85,390     145,386        108,463   

Income tax expense (benefit)

     (38,646     26,235        (35,485     59,680        44,449   

Net income (loss)

     (76,134     38,027        (49,905     85,706        64,014   

Balance Sheet Data (at end of period):

          

Total assets

     637,103        670,854        601,793        731,566        516,771   

Total debt

     413,053        331,576        367,291        358,952        228,014   

Total stockholder’s equity

     26,237        70,814        58,058        142,910        91,853   

 

(1) Refinery operating expenses include refinery fuel produced and consumed in refinery operations.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

Forward Looking Statements

 

This Annual Report on Form 10-K 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 Annual Report on Form 10-K.

 

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.

 

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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, current reports on Form 8-K, etc. In addition to the factors discussed elsewhere in this Annual Report 10-K, 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 effect of the current banking and credit crisis on the Company and our customers and suppliers;

 

   

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 demand for and supply of crude oil and refined products;

 

   

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

 

   

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;

 

   

future projects and investments;

 

   

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 Annual Report on Form 10K.

 

Business Strategy and Overview

 

Our strategy is to strengthen our position as a leading producer and marketer of high quality refined petroleum products within our market area. We plan to accomplish this strategy through continued attention to

 

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optimizing our operations, resulting in the lowest possible crude and overhead costs, and continuing to improve and enhance our retail and wholesale positions. More specifically, we intend to:

 

   

Maximize the favorable economic impact of our transportation cost advantage by increasing our retail and wholesale market shares within our market area.

 

   

Optimize profitability by managing feedstock costs, product yields, and inventories through our refinery feedstock management program and our system-wide distribution model.

 

   

Continue to investigate additional strategic acquisitions and capital improvements to our existing facilities.

 

Company Background

 

Critical Accounting Policies

 

The accompanying consolidated financial statements and supplementary information were prepared in accordance with accounting principles generally accepted in the United States of America. Significant accounting policies are discussed in Note 1 to the Consolidated Financial Statements, Item 8. Inherent in the application of many of these accounting policies is the need for management to make estimates and judgments in the determination of certain revenues, expenses, assets and liabilities. As such, materially different financial results can occur as circumstances change and additional information becomes known. The policies with the greatest potential effect on our results of operation and financial position include:

 

Revenue Recognition

 

Revenues for products sold by the wholesale segment are recorded upon delivery of the products to our customers, at which time title to those products is transferred and when payment has either been received or collection is reasonably assured. At no point do we recognize revenue from the sale of product prior to transfer of its title. Title to product is transferred to the customer at the shipping point, under predetermined contracts for sale at agreement upon or posted prices to customers of which collectibility is reasonably assured.

 

Revenues for products sold by the retail segment are recognized immediately upon sale to the customer. Revenue derived from other sources including freight charges are recognized when the related product revenue is recognized.

 

Collectibility of Accounts Receivable

 

For accounts receivable we estimate the net collectibility considering both historical and anticipated trends relating to our customers and the possibility of non-collection due to their financial position. While such non-collections have been historically within our expectations and the allowances the Company has established, the Company cannot guarantee that it will continue to experience non-collection rates that it has experienced in the past. A significant change in the financial position of our customers could have a material impact on the quality of our accounts receivable and our future operating results.

 

Goodwill and Other Non-Amortizable Assets

 

In accordance with ACS 350 , goodwill and intangible assets deemed to have indefinite lives are no longer amortized but are subject to annual impairment tests. We assess the impairment of goodwill and other indefinite-lived intangible assets annually.

 

The Company performed separate impairment tests on June 1, 2010 for its tradename and other intangible assets using discounted and undiscounted cash flow methods, respectively. The fair value of the tradename and other intangible assets exceeded their respective carrying values. The Company has noted no subsequent indication that would require testing the tradename and intangible assets for impairment.

 

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There were no material changes in the gross carrying amounts of goodwill, tradename, or other intangible assets for fiscal 2010.

 

Long-Lived Assets

 

Whenever events or changes in circumstances indicate that the carrying value of any of these assets may not be recoverable, the Company will assess the recoverability of such assets based upon estimated undiscounted cash flow forecasts. When any such impairment exists, the related assets will be written down to fair value.

 

Value of Pension Assets

 

The Company maintains three noncontributory defined benefit retirement plans for substantially all its employees. The assets of the plans are invested with a financial institution that follows an investment policy drafted by the Company. The investment guidelines provide a percentage range for each class of assets to be managed by the financial institution. The historic performance of these asset classes supports the Company’s expected return on the assets. The asset classes are rebalanced periodically should they fall outside the range allocations.

 

The percentage of total asset allocation range is as follows:

 

Asset Class

   Minimum     Maximum  

Equity

     55     75

Fixed Income

     25     35

Cash or Cash Equivalents

     0     10

 

The discount rate utilized in valuing the benefit obligations of the plans was derived from the rate of return on high quality bonds as of August 31, 2010. Similarly, the rate of compensation utilizes historic increases granted by the Company and the industry as well as future compensation policies. See Note 10 to Consolidated Financial Statements, Item 8.

 

Environmental Remediation and Litigation Reserve Estimations

 

Management also makes judgments and estimates in recording liabilities for environmental cleanup and litigation. Liabilities for environmental remediation are subject to change because of matters such as changes in laws, regulations and their interpretation; the effect of additional information on the extent and nature of site contamination; and improvements in technology. Likewise, actual litigation costs can vary from estimates based on the facts and circumstance and application of laws in individual cases.

 

The above assessment of critical accounting policies is not meant to be an all-inclusive discussion of the uncertainties to financial results that occur from the application of the full range of the Company’s accounting policies. Materially different financial results could occur in the application of other accounting policies as well. Likewise, materially different results can occur upon the adoption of new accounting standards promulgated by the various rule-making bodies.

 

General

 

The Company is engaged in the refining and marketing of petroleum products. In fiscal 2010, approximately 59% and 24% of the Company’s gasoline and distillate production, respectively, was sold through the Company’s network of service stations and truck stops. The balances of the Company’s refined products were sold to wholesale customers. In addition to transportation and heating fuels, primarily gasoline and distillate, the Company is a major regional wholesale marketer of asphalt. The Company also sells convenience merchandise at convenience stores located at most of its service stations. The Company’s profitability is influenced by fluctuations in the market prices

 

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of crude oils and refined products. Although the Company’s product sales mix helps to reduce the impact of large short-term variations in crude oil price, net sales and costs of goods sold can fluctuate widely based upon fluctuations in crude oil prices. Specifically, the margins on wholesale gasoline and distillate tend to decline in periods of rapidly declining crude oil prices, while margins on asphalt, retail gasoline and distillate tend to improve. During periods of rapidly rising crude oil prices, margins on wholesale gasoline and distillate tend to improve, while margins on asphalt and retail gasoline and distillate tend to decline. Gross margins on the sale of convenience merchandise averaged 25.2% for fiscal 2010 and have been between 25.2% and 27.4% for the last five years and are essentially unaffected by variations in crude oil and petroleum products prices.

 

The Company includes in costs of goods sold operating expenses incurred in the refining process. Therefore, operating expenses reflect only selling, general and administrative expenses, including all expenses of the retail network, and depreciation and amortization.

 

Recent Developments

 

The Company continues to be impacted by the volatility in petroleum markets in fiscal year 2011. 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, have been negatively affected by consistently fluctuating petroleum prices. 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 month of September in fiscal year 2011 was $7.36 as compared to $10.46 for the fourth quarter of fiscal year 2010, a decrease of $3.10 or 30%. The lagged crackspread for October of fiscal year 2011 was $15.17, an increase of $4.71 or 45% as compared to the fourth quarter of fiscal year 2010.

 

In June 2010, the Company announced changes to the healthcare and pension plans provided to salaried employees. Effective September 1, 2010, postretirement medical benefits for new hires and active salaried employees retiring after September 1, 2010 were eliminated. Additionally, effective January 1, 2011, deductibles and co-payments will be added to the medical benefits plan for all plan participants. For salaried employees meeting certain age and service requirements, the Company will contribute a defined dollar amount towards the cost of retiree healthcare based upon the employee’s length of service. Similarly, effective August 31, 2010, benefits under the Company’s defined benefit pension plan were frozen for all salaried employees, including the Company’s Chief Executive Officer and Chief Financial Officer. The Company will provide an enhanced contribution under its defined contribution 401(k) plan for all eligible employees as well as a transition contribution for older employees.

 

On July 26, 2010, a rupture occurred in Line 6B pipeline on Enbridge’s Lakehead system in Michigan. The Company’s heavy crude oil purchases are shipped on Line 6B from western Canada. As a result, on August 5, 2010, the Company was forced to reduce production in its crude processing unit until such time as the Enbridge Line 6B could be repaired. As a result, during the month of August, crude run rates were reduced by approximately 41% from scheduled crude runs of 69,500 bbl per day to 40,900 bbl per day and further reduced in September to an average of 38,000 bbl per day. For the month of October, actual crude runs were reduced an additional 8,740 bbl per day due to the Enbridge Pipeline disruption. The interruption of heavy crude deliveries via Line 6B also negatively affected asphalt production by 65% from the planned production of 656,000 bbl to actual production of 240,000 bbl at the peak of the asphalt selling season. The Company’s supply group maintained crude sourcing at a reduced rate for the refinery during the disruption to Line 6B through other Enbridge pipelines.

 

On September 28, 2010, Enbridge began a phased restart and return to service of Line 6B. Line 6B is currently operating at approximately 80% of the total capacity and meeting 100% of shipping demand.

 

The Company’s property insurance covering the refinery operation contains a provision for contingent business interruption, which limits of coverage are separate from the general limits applying to direct damage to the refinery. The Company has placed the insurers on notice of the Enbridge loss.

 

The Company is in the process of quantifying its resultant losses during the disruption, and intends to seek restitution from Enbridge for the losses it has incurred as a result of this pipeline rupture.

 

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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 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.

 

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 (see Item 8), 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.

 

Retail Operations:

 

     Fiscal Year Ended August 31,  
     2010     2009     2008  
     (in thousands)  

Net Sales

      

Petroleum

   $ 1,100,399      $ 974,419      $ 1,328,832   

Merchandise and other

     258,647        239,127        220,723   
                        

Total Net Sales

   $ 1,359,046      $ 1,213,546      $ 1,549,555   

Costs of Goods Sold

   $ 1,221,079      $ 1,053,081      $ 1,424,629   

Selling, general and administrative expenses

     128,017        121,581        121,097   

Depreciation an amortization expenses

     5,480        5,273        5,044   
                        

Segment Operating Income/(Loss)

   $ 4,470      $ 33,611      $ (1,215
                        

Retail Operating Data:

      

Petroleum Sales (thousands of gallons)

     393,831        390,843        380,285   

Petroleum margin (a)

   $ 72,692      $ 98,807      $ 66,522   

Petroleum margin ($/gallon) (b)

     .1846        .2528        .1749   

Merchandise and other margins

   $ 65,275      $ 61,658      $ 58,404   

Merchandise margin (percent of sales)

     25.2     25.8     26.5

 

(a) Includes the effect of intersegment purchases from our wholesale segment at prices which approximate market.
(b) Company management calculates petroleum margin per gallon by dividing petroleum gross profit 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.

 

Net Sales

 

2010 vs. 2009

 

Retail sales increased during fiscal 2010 by $145.5 million or 12.0% for the comparable period in fiscal 2009 from $1,213.6 million to $1,359.1 million. The increase was primarily due to $145.5 million in petroleum

 

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sales and $19.5 million in merchandise sales. The petroleum sales increase resulted from a 12.1% increase in retail selling prices per gallon, and a 3.0 million gallon or .8% 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.

 

2009 vs. 2008

 

Retail sales decreased during fiscal 2009 by $336.0 million, or 21.7%, for the comparable period in fiscal 2008 from $1,549.6 million to $1,213.6. The retail sales decrease was a result of a $354.4 million decrease in petroleum sales, offset by an $18.4 million increase in merchandise sales. The petroleum sales decrease was due to a 28.7% decrease in retail selling price per gallon, offset by an increase of 10.6 million gallons or 2.8% in volume. The decrease in price generally reflects the decline in world wide petroleum prices. 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

 

2010 vs. 2009

 

Retail costs of goods sold increased during fiscal 2010 by $167.9 million or 15.9% for the comparable period in fiscal 2009 from $1,053.1 million to $1,221.0 million. The increase was primarily due to $143.4 million in petroleum purchase prices, merchandise cost of $15.9 million, inventory costs of $4.8, fuel tax of $3.1 million, and freight cost of $.7 million.

 

2009 vs. 2008

 

Retail costs of goods sold decreased during fiscal 2009 by $371.5 million, or 26.1%, for the comparable period in fiscal 2008 from $1,424.6 million to $1,053.1 million. This was primarily due to decreases in: petroleum purchase prices of $377.9 million, inventory pricing of $10.1 million and freight of $.5 million offset by increases in: merchandise costs of $15.2 million and fuel tax of $1.8 million.

 

Selling, General and Administrative Expenses

 

2010 vs. 2009

 

Retail Selling, General and Administrative (“SG&A”) expenses increased during fiscal 2010 by $6.4 million or 5.3% for the comparable period in fiscal 2009 from $121.6 million to $128.0 million. The increase was primarily due to payroll costs of $3.7 million, credit/customer service costs of $.8 million, pension/post retirement costs of $1.1 million, maintenance costs of $.3 million, advertising costs of $.3 million and insurance/utilities/taxes of $.2 million.

 

2009 vs. 2008

 

Retail Selling, General and Administrative (“SG&A”) expenses increased during fiscal 2009 by $.5 million or .4% for the comparable period in fiscal 2008 from $121.1 million to $121.6 million. Retail operating expenses remained relatively constant during fiscal 2009 and fiscal 2008 due to the Company’s effort to keep overheads at the previous year level.

 

Wholesale Operations:

 

     Fiscal Year Ended August 31,  
     2010     2009      2008  
     (in thousands)  

Net Sales (a)

   $ 1,295,355      $ 1,173,625       $ 1,658,457   

Costs of Goods Sold (exclusive of depreciation and amortization)

     1,338,794        1,074,829         1,668,252   

Selling, general and administrative expenses

     22,808        23,362         24,673   

Depreciation and amortization expenses

     16,314        17,577         16,912   
                         

Segment Operating Income (Loss)

   $ (82,561   $ 57,857       $ (51,380
                         

 

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Key Wholesale Operating Statistics:

 

     Fiscal Year Ended August 31,  
     2010     2009     2008  

Refinery Product Yield (thousands of barrels)

      

Gasoline and gasoline blendstock

     9,139        9,363        8,990   

Distillates

     4,959        5,387        5,446   

Asphalt

     6,203        6,791        6,535   

Butane, propane, residual products, internally produced fuel and other

     2,328        2,381        2,559   
                        

Total Product Yield

     22,628        23,922        23,530   
                        

% Heavy Crude Oil of Total Refinery Throughput (b)

     58     61     60

Crude throughput (thousand barrels per day)

     58.3        61.9        59.6   

Product Sales (thousand of barrels) (a)

      

Gasoline and gasoline blendstock

     5,325        5,556        5,568   

Distillates

     3,831        4,289        4,351   

Asphalt

     6,684        6,724        7,592   

Other

     1,137        807        824   
                        

Total Product Sales Volume

     16,977        17,376        18,335   
                        

Product Sales (dollars in thousands) (a)

      

Gasoline and gasoline blendstock

   $ 453,641      $ 389,226      $ 620,983   

Distillates

     338,480        331,284        577,743   

Asphalt

     447,122        425,538        407,708   

Other

     56,112        27,577        52,023   
                        

Total Product Sales

   $ 1,295,355      $ 1,173,625      $ 1,658,457   
                        

 

(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.

 

Net Sales

 

2010 vs. 2009

 

Wholesale sales increased during fiscal 2010 by $121.7 million or 10.4% for the comparable period in fiscal 2009 from $1,173.6 million to $1,295.3 million. The increase was due to a 10.4% increase in wholesale prices offset by a 2.3% decrease in wholesale volume.

 

2009 vs. 2008

 

Wholesale sales decreased during fiscal 2009 by $484.8 million, or 29.2%, for the comparable period in fiscal 2008 from $1,658.5 million to $1,173.6 million. The wholesale sales decrease was due to a 25.4% decrease in wholesale prices and a 5.2% decrease in wholesale volume.

 

Costs of Goods Sold

 

2010 vs. 2009

 

Wholesale costs of goods sold increased during fiscal 2010 by $264.0 million or 24.6% for the comparable period in fiscal 2009 from $1,074.8 million to $1,338.8 million. The increase in wholesale costs of goods sold during this period was primarily due to an increase in cost of raw materials.

 

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2009 vs. 2008

 

Wholesale costs of goods sold decreased during fiscal 2009 by $593.5 million, or 35.6%, for the comparable period in fiscal 2008 from $1,668.3 million to $1,074.8 million. The decrease in wholesale costs of goods sold was primarily due to the 31% decrease in the cost of purchased crude.

 

Selling, General and Administrative Expenses

 

2010 vs. 2009

 

Wholesale SG&A expenses decreased during fiscal 2010 by $.5 million or 2.4% for the comparable period in fiscal 2009 from $23.3 million or 2.0% of net wholesale to $22.8 million or 1.8% of net wholesale sales.

 

2009 vs. 2008

 

Wholesale SG&A expenses remained relatively constant during fiscal 2008 and fiscal 2009 due to the Company’s effort to keep overheads at the previous years level. Fiscal 2009 SG&A was $23.4 million, or 2.0% of net wholesale sales, compared to $24.7 million or 1.5% of net wholesale sales for fiscal 2008.

 

Interest Expense, Net

 

Net interest expense (interest expense less interest income) decreased during fiscal 2010 by $.7 million for the comparable period for fiscal 2009 from $35.9 million to $35.2 million. The decrease was due to lower interest expense as a result of the buy back of notes in fiscal 2009.

 

Net interest expense (interest expense less interest income) increased during fiscal 2009 by $3.9 million from $32.0 million for fiscal 2008 to $35.9 million for fiscal 2009. The increase was due to a decrease in interest income due to lower interest rates.

 

Income Tax Expense / (Benefit)

 

Our fiscal 2010 effective tax rate of approximately 34% was a decrease from the relatively consistent tax rate of approximately 41% for fiscal 2009 and 2008, due to the accounting recognition of anticipated expiration of state net operating loss carry forwards.

 

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 Company has temporarily postponed its efforts to construct a Coker Facility for use in the refinery. To date the Company has spent approximately $29,719,000, relating to, among other things, the design of the facility as well as materials to be used in construction. These costs are currently capitalized in construction-in-progress within Property Plant and Equipment, net. The Company presently believes that the Coker Facility will be constructed and consequently the costs incurred to date will be realizable.

 

The following table summarizes selected measures of liquidity and capital sources:

 

     August 31,
2010
     August 31,
2009
 
     (in thousands)  

Cash and cash equivalents

   $ 17,170       $ 31,062   

Working capital

   $ 164,422       $ 229,627   

Current ratio

     1.9         2.6   

Debt

   $ 413,053       $ 331,576   

 

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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. We continuously evaluate our capital budget; however, management does not foresee any significant increase in maintenance and non-discretionary capital expenditures during fiscal 2011 that would impact future liquidity or capital resources. Maintenance and non-discretionary capital expenditures have averaged approximately $6 million annually over the last three years for the refining and marketing operations and management currently projects this capital expenditure to be approximately $5 million for fiscal 2011.

 

In addition, the Company expects to receive a federal tax refund of approximately $38 million by March 2011.

 

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. During fiscal 2010, significant uses of cash are summarized in the following table:

 

     Fiscal Year Ended  
     August 31, 2010  
     (in millions)  

Significant uses of cash

  

Investing activities:

  

Additions to refinery turnaround costs

   $ (1.5

Property, plant and equipment

  

Other general capital items (tank repairs, refinery piping, etc)

     (5.2

Retail maintenance (blacktop, roof, HVAC, rehab)

     (3.0

FCC

     (2.7

Properties purchased

     (1.2

Computers and equipment upgrade

     (1.3

Retail petroleum upgrade

     (1.1

#4 Boiler upgrade

     (0.4

Asbestos abatement

     (0.4

State and federal mandates:

  

Renewable fuels—cost estimates

     (7.8

Reduction of benzene and gasoline

     (2.2

Biodiesel blending

     (0.7

Refinery greenhouse gas reporting

     (0.2

Reduction of gasoline RVP

     (0.3
        

Total property, plant and equipment

   $ (26.5
        

Net cash (used in) investing activities

   $ (28.0
        

Financing activities:

  

Principal reductions of long-term debt

   $ (1.7

Net reductions borrowings on revolving credit facility

     83.0   

Distribution (to) parent under the tax sharing agreement

     .5   
        

Net cash provided by financing activities

   $ 81.8   
        

Working capital items:

  

Decrease in inventory

   $ 30.7   

Accounts receivable decrease

     21.2   

Refundable income taxes increase

     (36.4

Accounts payable decrease

     (17.9

Prepaid expense increase

     (13.3

Income taxes payable decrease

     (4.6

Sales use and fuel taxes payable decrease

     (3.7

Amounts due to affiliated companies, net increase

     (2.2

Accrued liabilities decrease

     (1.4
        

Cash (used in) working capital items

   $ (27.6
        

 

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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.

 

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. In November, 2008, we increased the limit of our revolving credit facility with PNC Bank, N.A., as Agent Bank (the “Revolving Credit Facility”) from $100,000,000 to $130,000,000. This amendment provides the Company greater flexibility relative to its cash flow requirements in light of market fluctuations, particularly involving crude oil prices and seasonal business cycles. The improved liquidity resulting from the expansion of the facility will assist the Company in meeting its working capital, ongoing capital expenditure needs and for general corporate purposes. The term of the agreement will expire on November 27, 2011. The amendment to the Revolving Credit Facility affected certain terms and provisions thereof, including an increase in the interest rate and a modification to the Net Worth covenant. Under the new amendment to the Revolving Credit Facility effective November 21, 2008, the applicable margin will continue to be 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 .5% to 0%; 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 applicable margin varies with our facility leverage ratio calculation. The Agent Bank’s prime rate at August 31, 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 outstanding letters of credit of $4,433,000 as of August 31, 2010. As of August 31, 2010, we had $83,000,000 of outstanding borrowings under the Revolving Credit Facility resulting in net availability of $42,567,000.

 

The Company’s 10 1/2% Senior Unsecured Notes mature on August 15, 2012, at which time the Company will either have to pay the principal amount in full or refinance the Notes.

 

The following is a summary of our significant contractual cash obligations for the periods indicated that existed as of August 31, 2010 and is based on information appearing in the Notes to the Consolidated Financial Statements in Item 8:

 

    Payments due by period  

Contractual Obligations

  Total     Less Than
1 Year
    1 – 3
Years
    3 – 5
Years
    More than 5
Years
 
    (in thousands)  

Long-term debt

  $ 328,453        1,070        325,494        1,270        619   

Operating leases

    82,047        11,899        20,383        14,834        34,931   

Interest on 10.5% Senior Notes due 8/15/2012 (a) (b)

    66,541        34,016        32,525        —          —     
                                       

Total contractual cash obligations (c)

  $ 477,041        46,985        378,402        16,104        35,550   
                                       

 

(a) Amounts do not reflect amortization of debt discount of $2.7 million, debt premium of $.8 million and debt premium of $5.3 million, respectively, on $200 million of Senior Unsecured Notes issued August 6, 2004, $25 million of Senior Unsecured Notes issued February 15, 2005, and $125 million of Senior Unsecured Notes issued May 4, 2007, respectively, which will be amortized over the life of the notes using the effective interest method (see Note 9 to Consolidated Financial Statements, Item 8).
(b)

Does not include interest on the Revolving Credit Facility. The applicable margin varies with our facility leverage ratio calculation. Under the amended Revolving Credit Facility, for base rate borrowings, interest is calculated at the greater of the Agent Bank’s prime rate less an applicable margin of 0% to .5% or federal funds rate plus 1%. For Euro-Rate borrowings, interest is calculated at the LIBOR rate plus an applicable

 

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margin of 1.25% to 1.75%. The applicable margin varies with our facility’s average unused availability calculation (see Notes 8 and 9 to Consolidated Financial Statements, Item 8).

(c) Pension obligations are not included since payments are not known.

 

Although we are not aware of any pending circumstances which would change our expectations, 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.

 

Related Party Transactions

 

See Item 13, Certain Relationships and Related Transactions.

 

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.

 

Recent Accounting Pronouncements

 

In June 2009, the FASB issued ASC 810-10-15, which requires a company to determine whether the Company’s variable interest or interests give it a controlling financial interest in a variable interest entity. Additionally, ASC 810-10-15 requires ongoing reassessment of whether it is the primary beneficiary of a variable interest entity and is effective for fiscal years beginning after November 15, 2009, and interim periods within that fiscal year. The Company believes that the adoption of ASC 810-10-15 will not have a significant effect on the Company’s consolidated financial position.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

We use our Revolving Credit Facility to finance a portion of our operations. These on-balance sheet financial instruments, to the extent they provide for variable rates, expose us to interest rate risk resulting from changes in the PNC Prime rate, the Federal Funds rate or the LIBOR rate.

 

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We have exposure to price fluctuations of crude oil and refined products. We do not manage the price risk related to all of our inventories of crude oil and refined products with a permanent formal hedging program, but we do manage our risk exposure by managing inventory levels and by selectively applying hedging activities. At August 31, 2010, the Company had no future positions.

 

At August 31, 2010, we were exposed to the risk of market price declines with respect to a substantial portion of our crude oil and refined product inventories.

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

 

INDEX TO FINANCIAL STATEMENTS

 

     Page  

Report of Independent Registered Public Accounting Firm

     32   

Consolidated Financial Statements:

  

Balance Sheets

     33   

Statements of Operations

     34   

Statements of Comprehensive (Loss) Income

     35   

Statements of Stockholder’s Equity

     36   

Statements of Cash Flows

     37   

Notes to Consolidated Financial Statements

     38   

 

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Report of Independent Registered Public Accounting Firm

 

The Board of Directors and Stockholder

United Refining Company

Warren, Pennsylvania

 

We have audited the accompanying consolidated balance sheets of United Refining Company and subsidiaries as of August 31, 2010 and 2009, and the related consolidated statements of operations, comprehensive (loss) income , stockholder’s equity and cash flows for each of the three years in the period ended August 31, 2010. These consolidated financial statements are the responsibility of the management of United Refining Company and its subsidiaries. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of United Refining Company and subsidiaries as of August 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended August 31, 2010, in conformity with accounting principles generally accepted in the United States of America.

 

/s/ BDO USA, LLP

 

New York, New York

November 29, 2010

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

 

     August 31,  
     2010     2009  

Assets

    

Current:

    

Cash and cash equivalents

   $ 17,170      $ 31,062   

Accounts receivable, net

     64,192        85,382   

Refundable income taxes

     36,390        —     

Inventories

     206,838        237,541   

Prepaid expenses and other assets

     27,941        14,561   

Amounts due from affiliated companies, net

     2,972        809   
                

Total current assets

     355,503        369,355   

Property, plant and equipment, net

     261,775        252,048   

Deferred financing costs, net

     2,114        3,254   

Goodwill

     1,349        1,349   

Tradename

     10,500        10,500   

Amortizable intangible assets, net

     1,376        1,483   

Deferred turnaround costs and other assets, net

     3,894        7,452   

Deferred income taxes

     592        25,413   
                
   $ 637,103      $ 670,854   
                

Liabilities and Stockholder’s Equity

    

Current:

    

Revolving credit facility

   $ 83,000      $ —     

Current installments of long-term debt

     1,888        2,327   

Accounts payable

     65,620        83,497   

Accrued liabilities

     15,569        17,017   

Income taxes payable

     552        5,149   

Sales, use and fuel taxes payable

     18,455        22,134   

Deferred income taxes

     5,997        9,604   
                

Total current liabilities

     191,081        139,728   

Long term debt: less current installments

     328,165        329,249   

Deferred retirement benefits

     91,620        131,059   

Other noncurrent liabilities

     —          4   
                

Total liabilities

     610,866        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

     22,500        21,998   

Retained earnings

     18,231        94,365   

Accumulated other comprehensive loss

     (14,494     (45,549
                

Total stockholder’s equity

     26,237        70,814   
                
   $ 637,103      $ 670,854   
                

 

See accompanying notes to consolidated financial statements.

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)

 

     Year Ended August 31,  
     2010     2009     2008  

Net sales

   $ 2,654,401      $ 2,387,171      $ 3,208,012   
                        

Costs and expenses:

      

Costs of goods sold (exclusive of depreciation and amortization)

     2,559,873        2,127,910        3,092,881   

Selling, general and administrative expenses

     150,825        144,943        145,770   

Depreciation and amortization expenses

     21,794        22,850        21,956   
                        
     2,732,492        2,295,703        3,260,607   
                        

Operating (loss) income

     (78,091     91,468        (52,595
                        

Other income (expense):

      

Interest expense, net

     (35,171     (35,872     (31,968

Other, net

     (1,518     (1,471     (3,706

Equity in net earnings of affiliate

     —          41        2,879   

Gain on extinguishment of debt

     —          10,096        —     
                        
     (36,689     (27,206     (32,795
                        

(Loss) income before income tax (benefit) expense

     (114,780     64,262        (85,390
                        

Income tax (benefit) expense:

      

Current

     (38,280     17,455        (28,274

Deferred

     (366     8,780        (7,211
                        
     (38,646     26,235        (35,485
                        

Net (loss) income

   $ (76,134   $ 38,027      $ (49,905
                        

 

 

See accompanying notes to consolidated financial statements.

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(in thousands)

 

     Year Ended August 31,  
     2010     2009     2008  

Net (loss) income

   $ (76,134   $ 38,027      $ (49,905

Other comprehensive (loss) income, net of taxes:

      

Unrecognized post retirement income (costs) gains, net of taxes of $10,072, $31,652 and $15,945 for the years ended August 31, 2010, 2009 and 2008, respectively.

     31,055        (22,604     (2,269
                        

Other comprehensive (loss) income

     31,055        (22,604     (2,269
                        

Total comprehensive (loss) income

   $ (45,079   $ 15,423      $ (52,174
                        

 

 

 

See accompanying notes to consolidated financial statements.

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY

(in thousands, except share data)

 

     Common Stock      Additional
Paid-In
Capital
    Retained
Earnings
    Accumulated
Other

Comprehensive
(Loss) Income
    Total
Stockholder’s
Equity
 
           
     Shares      Amount           

Balance at August 31, 2007

     100       $ —         $ 22,031      $ 141,555      $ (20,676   $ 142,910   

Dividends to stockholder

     —           —           —          (35,312     —          (35,312

Other comprehensive loss

     —           —           —          —          (2,269     (2,269

Contribution from Parent under the Tax Sharing Agreement

     —           —           2,634        —          —          2,634   

Net loss

     —           —           —          (49,905     —          (49,905
                                                  

Balance at August 31, 2008

     100         —           24,665        56,338        (22,945     58,058   

Other comprehensive loss

     —           —           —          —          (22,604     (22,604

Distribution to Parent under the Tax Sharing Agreement

     —           —           (2,667     —          —          (2,667

Net income

     —           —           —          38,027        —          38,027   
                                                  

Balance at August 31, 2009

     100         —           21,998        94,365        (45,549     70,814   

Other comprehensive income

     —           —           —          —          31,055        31,055   

Contribution from Parent under the Tax Sharing Agreement

     —           —           502        —          —          502   

Net loss

     —           —           —          (76,134     —          (76,134
                                                  

August 31, 2010

     100       $ —         $ 22,500      $ 18,231      $ (14,494   $ 26,237   
                                                  

 

 

See accompanying notes to consolidated financial statements.

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

     Year Ended August 31,  
     2010     2009     2008  

Cash flows from operating activities:

      

Net (loss) income

   $ (76,134   $ 38,027      $ (49,905

Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:

      

Depreciation and amortization

     22,127        23,180        22,165   

Equity in net earnings of affiliate

     —          (41     (2,879

Dissolution proceeds from affiliate

     —          6,430        —     

Gain on extinguishment of debt

     —          (10,096     —     

Deferred income taxes

     (366     8,780        (7,211

Loss on asset dispositions

     1,030        1,012        1,967   

Cash used in working capital items

     (27,641     (21,816     (70,794

Other, net

     —          2        (1

Change in operating assets and liabilities:

      

Other assets

     —          375        (28

Deferred retirement benefits

     13,196        6,535        4,994   

Other noncurrent liabilities

     (4     (14     (28
                        

Total adjustments

     8,342        14,347        (51,815
                        

Net cash (used in) provided by operating activities

     (67,792     52,374        (101,720
                        

Cash flows from investing activities:

      

Additions to property, plant and equipment

     (26,471     (23,970     (42,143

Proceeds from sale of marketable securities

     —          —          75,854   

Additions to turnaround costs

     (1,498     (1,246     (10,077

Proceeds from asset dispositions

     25        17        9   
                        

Net cash (used in) provided by investing activities

     (27,944     (25,199     23,643   
                        

Cash flows from financing activities:

      

Distribution from (to) Parent under the Tax Sharing Agreement

     502        (2,667     2,634   

Proceeds from issuance of long-term debt

     —          318        178   

Principal reductions of long-term debt

     (1,648     (16,986     (1,309

Net borrowings (reductions) on revolving credit facility

     83,000        (9,000     9,000   

Dividends to stockholder

     —          —          (35,312

Deferred financing costs

     (10     (225     (108
                        

Net cash provided by (used in) financing activities

     81,844        (28,560     (24,917
                        

Net decrease in cash and cash equivalents

     (13,892     (1,385     (102,994

Cash and cash equivalents, beginning of year

     31,062        32,447        135,441   
                        

Cash and cash equivalents, end of year

   $ 17,170      $ 31,062      $ 32,447   
                        

Cash provided by (used in) working capital items:

      

Accounts receivable, net

   $ 21,190      $ 38,640      $ (44,319

Refundable income taxes

     (36,390     35,913        (35,913

Inventories

     30,703        (142,833     71,316   

Prepaid expenses and other assets

     (13,380     6,743        (4,347

Accounts payable

     (17,877     36,652        (22,894

Accrued liabilities

     (1,448     640        734   

Income taxes payable

     (4,597     5,149        (36,514

Sales, use and fuel taxes payable

     (3,679     680        729   

Amounts due affiliated companies

     (2,163     (3,400     414   
                        

Total change

   $ (27,641   $ (21,816   $ (70,794
                        

Cash paid during the period for:

      

Interest

   $ 35,809      $ 36,598      $ 37,582   

Income taxes

   $ 5,765      $ 12,339      $ 42,320   
                        

Non-cash investing and financing activities:

      

Property additions and capital leases

   $ 942      $ 1,179      $ 1,245   
                        

 

See accompanying notes to consolidated financial statements.

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. Description of Business and Summary of Significant Accounting Policies

 

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”).

 

Cash and Cash Equivalents

 

For purposes of the consolidated statements of cash flows, the Company considers all highly liquid investment securities with maturities of three months or less at date of acquisition to be cash equivalents.

 

Derivative Financial Instruments

 

From time to time the Company uses derivatives to reduce its exposure to fluctuations in crude oil purchase costs and refining margins. Derivative products, specifically crude oil option contracts and crack spread option contracts are used to hedge the volatility of these items. The Company does not enter such contracts for speculative purposes. The Company accounts for changes in the fair value of its contracts by marking them to market and recognizing any resulting gains or losses in its statement of operations. During the fiscal years ended August 31, 2010, 2009, and 2008, the Company realized net losses from its trading activities of $0, $0, and $3,518,000, respectively, which is included as an increase to costs of goods sold. The Company includes the carrying amounts of the contracts in prepaid expenses and other assets in the Consolidated Balance Sheet.

 

At August 31, 2010 and 2009, the Company had no open future positions.

 

Inventories and Exchanges

 

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. If the cost of inventories exceeds their market value, provisions are made currently for the difference between the cost and the market value.

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Property, Plant and Equipment

 

Property, plant and equipment is stated at cost and depreciated by the straight-line method over the respective estimated useful lives. Routine current maintenance, repairs and replacement costs are charged against income. Expenditures which materially increase values expand capacities or extend useful lives are capitalized. A summary of the principal useful lives used in computing depreciation expense is as follows:

 

     Estimated Useful
Lives (Years)
 

Refining

     20-30   

Marketing

     15-30   

Transportation

     20-30   

 

Leases

 

The Company leases land, buildings, and equipment under long-term operating and capital leases and accounts for the leases in accordance with ASC 360-10-30-8. Lease expense for operating leases is recognized on a straight-line basis over the expected lease term. The lease term begins on the date the Company has the right to control the use of the leased property pursuant to the terms of the lease.

 

Deferred Maintenance Turnarounds

 

The cost of maintenance turnarounds, which consist of complete shutdown and inspection of significant units of the refinery at intervals of two or more years for necessary repairs and replacements, are deferred when incurred and amortized on a straight-line basis over the period of benefit, which ranges from 2 to 10 years. As of August 31, 2010 and 2009, deferred turnaround costs included in Deferred Turnaround Costs and Other Assets, amounted to $3,228,000 and $6,786,000, net of accumulated amortization of $17,588,000 and $13,738,000, respectively. Amortization expense included in costs of goods sold for the fiscal years ended August 31, 2010, 2009 and 2008 amounted to $5,056,000, $6,539,000, and $6,239,000, respectively.

 

Amortizable Intangible Assets

 

The Company amortizes identifiable intangible assets such as brand names, non-compete agreements, leasehold covenants and deed restrictions on a straight line basis over their estimated useful lives which range from 5 to 25 years.

 

Revenue Recognition

 

Revenues for products sold by the wholesale segment are recorded upon delivery of the products to our customers, at which time title to those products is transferred and when payment has either been received or collection is reasonably assured. At no point do we recognize revenue from the sale of products prior to the transfer of its title. Title to product is transferred to the customer at the shipping point, under pre-determined contracts for sale at agreed upon or posted prices to customers of which collectibility is reasonably assured. Revenues for products sold by the retail segment are recognized immediately upon sale to the customer. Included in Net Sales and Costs of Goods Sold are consumer excise taxes of $218,811,000, $215,670,000 and $213,829,000 for the years ended August 31, 2010, 2009 and 2008, respectively.

 

Cost Classifications

 

Our Cost of goods sold (which excludes depreciation and amortization on property, plant and equipment) includes Refining Cost of Products Sold and related Refining Operating expenses.

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Refining Cost of Products Sold includes cost of crude oil, other feedstocks, blendstocks, the cost of purchased finished products, amortization of turnaround costs, transportation costs and distribution costs. Retail cost of products sold includes cost for motor fuels and for merchandise. Motor fuel cost of products sold represents net cost for purchased fuel. Merchandise cost of products sold includes merchandise purchases, net of merchandise rebates and inventory shrinkage. Wholesale cost of products sold includes the cost of fuel and lubricants, transportation and distribution costs and labor.

 

Income Taxes

 

The Company accounts for income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

The Company’s results of operations are included in the consolidated Federal Income tax return of the Parent and separately in various state jurisdictions. Income taxes are calculated on a separate return basis with consideration of the Tax Sharing Agreement between the Parent and its subsidiaries. The Company is open to examination for tax years 2002 through 2009 and there is a federal tax audit in process for the tax years 2006 through 2008. There are currently no state tax audits in process and there are no unsettled income tax assessments outstanding. The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax positions as a component of interest expense, net and other, net, respectively. No amounts of such expenses are currently accrued.

 

Post-Retirement Healthcare and Pension Benefits

 

The Company provides post-retirement healthcare benefits to salaried and certain hourly employees that retired prior to September 1, 2010. The benefits provided are hospitalization and medical coverage for the employee and spouse until age 65. Benefits continue until the death of the retiree, which results in the termination of benefits for all dependent coverage. If an employee leaves the Company as a terminated vested member of a pension plan prior to normal retirement age, the person is not entitled to any post-retirement healthcare benefits. Benefits payable under this program are secondary to any benefits provided by Medicare or any other governmental programs.

 

In June 2010, the Company announced changes to the healthcare and pension plans provided to salaried employees. Effective September 1, 2010, postretirement medical benefits for new hires and active salaried employees retiring after September 1, 2010 were eliminated. Additionally, effective January 1, 2011, deductibles and co-payments will be added to the medical benefits plan for all active and retired employees. For salaried employees meeting certain age and service requirements, the Company will contribute a defined dollar amount towards the cost of retiree healthcare based upon the employee’s length of service. Similarly, effective August 31, 2010, benefits under the Company’s defined benefit pension plan were frozen for all salaried employees, including the Company’s Chief Executive Officer and Chief Financial Officer. The Company will provide an enhanced contribution under its defined contribution 401(k) plan as well as a transition contribution for older employees.

 

The Company accrues post-retirement benefits other than pensions, during the years that the employee renders the necessary service, of the expected cost of providing those benefits to an employee and the employee’s beneficiaries and covered dependents. The Company has elected to amortize the transition obligation of approximately $12,000,000 on a straight-line basis over a 20-year period.

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Allowance for Doubtful Accounts

 

The Company records an allowance for doubtful accounts based on specifically identified amounts that we believe to be uncollectible. The Company also recorded additional allowances based on historical collection experience and its assessment of the general financial conditions affecting the customer base. Senior management reviews accounts receivable on a weekly basis to determine if any receivables will potentially be uncollectible. After all attempts to collect a receivable have failed, the receivable is written off against the allowance.

 

Concentration Risks

 

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments.

 

The Company places its temporary cash investments with quality financial institutions. At times, such investments were in excess of FDIC insurance limits. The Company has not experienced any losses in such accounts.

 

The Company purchased approximately 12% of its cost of goods sold from one vendor during the year ended August 31, 2010 and approximately 33% from three vendors during the year ended August 31, 2009. The Company is not obligated to purchase from these vendors, and, if necessary, there are other vendors from which the Company can purchase crude oil and other petroleum based products. The Company had approximately $0 and $24,194,000 in accounts payable for the years ended August 31, 2010 and 2009 to these respective vendors.

 

Environmental Matters

 

The Company expenses environmental expenditures related to existing conditions resulting from past or current operations and from which no current or future benefit is discernible. Expenditures, which extend the life of the related property or mitigate or prevent future environmental contamination are capitalized. The Company determines its liability on a site by site basis and records a liability at the time when it is probable and can be reasonably estimated. The Company’s estimated liability is reduced to reflect the anticipated participation of other potentially responsible parties in those instances where it is probable that such parties are legally responsible and financially capable of paying their respective shares of the relevant costs. The estimated liability of the Company is not reduced for possible recoveries from insurance carriers and is recorded in accrued liabilities.

 

Goodwill and Other Non-Amortizable Assets

 

In accordance with ASC 350, goodwill and intangible assets deemed to have indefinite lives are no longer amortized but are subject to annual impairment tests in accordance with ASC 350. Other intangible assets continue to be amortized over their estimated useful lives.

 

The Company performed separate impairment tests for its goodwill and tradename using the discounted cash flow method. The fair value of the goodwill and tradename exceeded their respective carrying values. The Company has noted no subsequent indication that would require testing its goodwill and tradename for impairment.

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Long-Lived Assets

 

Whenever events or changes in circumstances indicate that the carrying value of any of these assets (other than goodwill and tradename) may not be recoverable, the Company will assess the recoverability of such assets based upon estimated undiscounted cash flow forecasts. When any such impairment exists, the related assets will be written down to fair value.

 

Other Comprehensive (Loss) Income

 

The Company reports comprehensive (loss) income in accordance with ASC 220-10. ASC 220-10 establishes guidelines for the reporting and display of comprehensive (loss) income and its components in financial statements. Comprehensive (loss) income includes charges and credits to equity that is not the result of transactions with the shareholder. Included in other comprehensive loss for the Company is a charge for unrecognized post retirement costs, which is net of taxes in accordance with ASC 715.

 

Recent Accounting Pronouncements

 

In June 2009, the FASB issued ASC 810-10-15, which requires a company to determine whether the Company’s variable interest or interests give it a controlling financial interest in a variable interest entity. Additionally, ASC 810-10-15 requires ongoing reassessment of whether it is the primary beneficiary of a variable interest entity and is effective for fiscal years beginning after November 15, 2009, and interim periods within that fiscal year. The Company believes that the adoption of ASC 810-10-15 will not have a significant effect on the Company’s consolidated financial position.

 

Reclassification

 

Certain amounts in the prior year’s consolidated financial statements have been reclassified to conform with the presentation in the current year.

 

2. Accounts Receivable, Net

 

As of August 31, 2010 and 2009, accounts receivable were net of allowance for doubtful accounts of $2,050,000 and $2,525,000, respectively.

 

3. Inventories

 

Inventories consist of the following:

 

     August 31,  
     2010      2009  
     (in thousands)  

Crude Oil

   $ 78,165       $ 92,972   

Petroleum Products

     86,993         110,573   

Lower of cost or market reserve

     —           (6,104
                 

Total @ LIFO

     165,158         197,441   
                 

Merchandise

     20,403         18,597   

Supplies

     21,277         21,503   
                 

Total @ FIFO

     41,680         40,100   
                 

Total Inventory

   $ 206,838       $ 237,541   
                 

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Included in petroleum product inventories are exchange balances either held for or due from other petroleum marketers. These balances are not significant.

 

The Company does not own sources of crude oil and depends on outside vendors for its needs.

 

Inventories at the lower of last-in, first-out (“LIFO”) cost or market reflect a market valuation reserve of $0 and $6,104,000 at August 31, 2010 and 2009, respectively. As of August 31, 2010 and 2009, the replacement cost of LIFO inventories exceeded their LIFO carrying values by approximately $50,265,000 and $5,278,000, respectively. For the fiscal years ended August 31, 2010 and 2009, the Company recorded an additional charge to cost of sales from a LIFO layer liquidation of $13,748,000 and $0, respectively.

 

4. Property, Plant and Equipment

 

Property, plant and equipment is summarized as follows:

 

     August 31,  
     2010      2009  
     (in thousands)  

Refinery equipment

   $ 271,641       $ 263,867   

Marketing (i.e. retail outlets)

     104,374         101,915   

Transportation

     13,449         13,303   

Construction-in-progress

     47,662         34,337   
                 
     437,126         413,422   

Less: Accumulated depreciation

     175,351         161,374   
                 
   $ 261,775       $ 252,048   
                 

 

The Company has temporarily postponed its efforts to construct a Coker Facility for use in the refinery. To date the Company has spent approximately $29,719,000, relating to, among other things, the design of the facility as well as materials to be used in construction. These costs are currently capitalized in construction-in-progress within Property Plant and Equipment, net. The Company presently believes that the Coker Facility will be constructed and consequently the costs incurred to date will be realizable.

 

5. Goodwill and Intangible Assets

 

As of August 31, 2010 and 2009, the Company’s intangible assets and goodwill, included in the Company’s retail segment, were as follows:

 

     Weighted
Average
Remaining
Life
     August 31, 2010      August 31, 2009  
         Gross
Carrying
Amount
     Accumulated
Amortization
     Gross
Carrying
Amount
     Accumulated
Amortization
 
     (in thousands)  

Amortizable intangible assets:

              

Deed restrictions

     16 yrs.       $ 800       $ 277       $ 800       $ 245   

Leasehold covenants

     13 yrs.         1,490         637         1,490         562   
                                      
      $ 2,290       $ 914       $ 2,290       $ 807   
                                      

Non-amortizable assets:

              

Tradename

      $ 10,500       $   —         $ 10,500       $   —     

Goodwill

      $ 1,349       $ —         $ 1,349       $ —     

 

Amortization expense for the fiscal years ended August 31, 2010, 2009, and 2008 amounted to $107,000, $230,000 and $478,000, respectively.

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Amortization expense for intangible assets subject to amortization for each of the years in the five-year period ending August 31, 2015 is estimated to be $106,000 in 2011, $106,000 in 2012, $106,000 in 2013, $106,000 in 2014, and $106,000 in 2015.

 

6. Accrued Liabilities

 

Accrued liabilities include the following:

 

     August 31,  
     2010      2009  
     (in thousands)  

Interest

   $ 1,662       $ 1,476   

Payrolls and benefits

     12,202         13,615   

Other

     1,705         1,926   
                 
   $ 15,569       $ 17,017   
                 

 

7. Leases

 

The Company occupies premises, primarily retail gas stations and convenience stores and office facilities under long-term leases which require minimum annual rents plus, in certain instances, the payment of additional rents based upon sales. The leases generally are renewable for one to three five-year periods.

 

As of August 31, 2010 and 2009, capitalized lease obligations, included in long-term debt, amounted to $1,078,000 and $1,282,000, respectively, inclusive of current portion of $160,000 and $205,000, respectively. The related assets (retail gas stations and convenience stores) as of August 31, 2010 and 2009 amounted to $769,000 and $936,000, net of accumulated amortization of $1,051,000 and $1,278,000, respectively. Lease amortization amounting to $167,000, $168,000, and $169,000 for the years ended August 31, 2010, 2009, and 2008, respectively, is included in depreciation and amortization expense.

 

Future minimum lease payments as of August 31, 2010 are summarized as follows:

 

Year ended August 31,

   Capital
Leases
     Operating
Leases
 
     (in thousands)  

2011

   $ 275       $ 11,899   

2012

     195         11,132   

2013

     155         9,251   

2014

     161         8,222   

2015

     152         6,612   

Thereafter

     819         34,931   
                 

Total minimum lease payments

     1,757         82,047   

Less: Minimum sublease rents

     —           127   
                 

Net minimum sublease payments

     1,757       $ 81,920   
           

Less: Amount representing interest

     679      
           

Present value of net minimum lease payments

   $ 1,078      
           

 

Net rent expense for operating leases amounted to $12,107,000, $11,342,000, and $11,564,000, for the years ended August 31, 2010, 2009 and 2008, respectively.

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

8. Credit Facility

 

In November 2006, the Company extended the term of its $100,000,000 Revolving Credit Facility from May 9, 2007 to November 27, 2011. In November 2008, the Company amended its Revolving Credit Facility to increase the maximum facility commitment from $100,000,000 to $130,000,000 on a permanent basis and amended certain terms and provisions thereof, including an increase in the interest rate and a modification to the Net Worth Covenant. Under the amended Revolving Credit Facility, interest is calculated as follows: (a) for base rate borrowings, at the greater of the Agent Bank’s prime rate plus an applicable margin of .5% to 0% or, the Federal Funds Open Rate plus .5% or the Daily LIBOR rate plus 1%; and (b) for euro-rate based borrowings, at the LIBOR Rate plus an applicable margin of 2.35% to 1.75%. The applicable margin will vary depending on a formula calculating our average unused availability under the facility. The Revolving Credit Facility is secured primarily by certain cash accounts, accounts receivable and inventory which amounted to $253,000,000 as of August 31, 2010. Until maturity, the Company may borrow on a borrowing base formula as set forth in the facility.

 

As of August 31, 2010, $33,000,000 of Base-Rate borrowings and $50,000,000 of Euro-Rate borrowings were outstanding under the agreement. As of August 31, 2009, no Base-Rate borrowing and no Euro-Rate borrowings were outstanding under the agreement. $4,433,000 and $3,233,000 of letters of credit were outstanding under the agreement at August 31, 2010 and 2009, respectively. The weighted average interest rate for Base-Rate borrowing for the years ended August 31, 2010 and 2009 was 3.4% and 3.8%, respectively. The weighted average interest rate for Euro-Rate borrowings for the years ended August 31, 2010 and 2009 was 2.3% and 0%, respectively. The Company pays a commitment fee of 3/8% per annum on the unused balance of the facility. All bank related charges are included in Other, net in the Consolidated Statements of Operations.

 

9. Long-Term Debt

 

During May 2007, the Company sold an additional $125,000,000 of 10 1/2% Senior Unsecured Notes (the “Senior Unsecured Notes”) due 2012 for $130,312,500, resulting in a debt premium of $5,312,500 which is being amortized over the life of the notes using the interest method. These additional notes were issued under an indenture, dated as of August 6, 2004, pursuant to which $200,000,000 of notes of the same series were issued in August 2004. The net proceeds of the offering were used for capital expenditures and general corporate purposes.

 

During February 2005, the Company sold an additional $25,000,000 of 10 1/2% Senior Unsecured Notes due 2012 for $25,750,000, resulting in a debt premium of $750,000 which is being amortized over the life of the notes using the interest method. These additional notes were issued under an indenture, dated as of August 6, 2004, pursuant to which $200,000,000 of notes of the same series were issued in August 2004. The net proceeds of the offering were used to pay down a portion of the Company’s outstanding indebtedness under its existing revolving credit facility.

 

During August 2004, the Company sold $200,000,000 of 10 1/2% Senior Unsecured Notes due 2012 for $197,342,000, resulting in debt discount of $2,658,000 which is being amortized over the life of the notes using the interest method.

 

Such notes are fully and unconditionally guaranteed on a senior unsecured basis by all of the Company’s subsidiaries (see Footnote 16 to Consolidated Financial Statements).

 

Both the Indenture of the Senior Unsecured Notes and the facility (See Footnote 8 to Consolidated Financial Statements) require that the Company maintain certain financial covenants. The facility requires the Company to meet certain financial covenants, as defined in the facility, a minimum Fixed Charge Coverage Ratio and a minimum Consolidated Net Worth. In addition, the facility limits the amount the Company can distribute for capital and operating leases. Both the facility and the Indenture of the Senior Unsecured Notes restrict the amount of dividends payable and the incurrence of additional Indebtedness. As of August 31, 2010 the Company is in compliance with covenants under the facility and the Indenture.

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

During the year ended August 31, 2009, the Company acquired $26,040,000 of its 10 1/2% Senior Unsecured Notes due 2012 at an average price of $59.38, resulting in a gain from extinguishment of debt of $10,096,000, which is net of $346,000 of deferred financing costs and $136,000 of debt discount.

 

A summary of long-term debt is as follows:

 

     August 31,  
     2010      2009  
     (in thousands)  

Long-term debt:

     

10.50% Senior Unsecured Notes due August 15, 2012

   $ 325,560       $ 326,378   

Other long-term debt

     4,493         5,198   
                 
     330,053         331,576   

Less: Current installments of long-term debt, net of unamortized premium

     1,888         2,327   
                 

Total long-term debt, less current installments

   $ 328,165       $ 329,249   
                 

 

The principal amount of long-term debt matures as follows:

 

         Year ended August 31,  
         (in thousands)  
2011      $ 1,070   
2012        324,799   
2013        695   
2014        549   
2015        721   
Thereafter        619   
               
       328,453   

Unamortized premium, net

     1,600   
          
Total      $ 330,053   
               

 

The following financing costs have been deferred and are being amortized to expense over the term of the related debt:

 

     August 31,  
     2010      2009  
     (in thousands)  

Beginning balance

   $ 8,431       $ 8,552   

Current year additions

     10         225   
                 

Total financing costs

     8,441         8,777   

Less:

     

Deferred financing costs associated with debt retirement

     —           346   

Accumulated amortization

     6,327         5,177   
                 
   $ 2,114       $ 3,254   
                 

 

Amortization expense for the fiscal years ended August 31, 2010, 2009 and 2008 amounted to $1,150,000, $1,169,000, and $1,199,000, respectively.

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

10. Employee Benefit Plans

 

Substantially all employees of the Company are covered by three noncontributory defined benefit retirement plans. The benefits are based on each employee’s years of service and compensation. Effective August 31, 2010 benefits under the Company’s defined benefit pension plan were frozen for all salaried employees, including the Company’s Chief Executive Officer and Chief Financial Officer. The Company will provide enhanced contribution under its defined contribution 401(k) plan as well as a transition contribution for older employees. The Company’s policy is to contribute the minimum amounts required by the Employee Retirement Income Security Act of 1974 (ERISA), as amended, and any additional amounts for strategic financial purposes or to meet other goals relating to plan funded status. The assets of the plans are invested in an investment trust fund and consist of interest-bearing cash, separately managed accounts and bank common/collective trust funds.

 

In addition to the above, the Company provides certain post-retirement healthcare benefits to salaried and certain hourly employees that retired prior to September 1, 2010. These post-retirement benefit plans are unfunded and the costs are paid by the Company from general assets.

 

Net periodic pension cost and post-retirement healthcare benefit cost consist of the following components for the years ended August 31, 2010, 2009, and 2008:

 

     Pension Benefits     Other Post-Retirement
Benefits
 
     2010     2009     2008     2010      2009      2008  
     (in thousands)  

Service cost

   $ 3,563      $ 2,738      $ 2,639      $ 3,364       $ 2,642       $ 2,588   

Interest cost on benefit obligation

     5,724        5,205        4,542        4,740         4,487         4,085   

Expected return on plan assets

     (3,924     (4,362     (4,786     —           —           —     

Curtailment effect

     436        —          —          —           —           —     

Amortization of transition obligation

     2        2        65        597         597         597   

Amortization and deferrals

     3,566        1,104        360        1,842         978         1,299   
                                                  

Net periodic benefit cost

   $ 9,367      $ 4,687      $ 2,820      $ 10,543       $ 8,704       $ 8,569   
                                                  

 

The Company adopted ASC 715-30-25 effective August 31, 2007. ASC 715-30-25 requires an employer to recognize the funded status of each of its defined pension and postretirement benefit plans as a net asset or liability in its statement of financial position with an offsetting amount in accumulated other comprehensive income, and to recognize changes in that funded status in the year in which changes occur through comprehensive income.

 

Other changes in plan assets and benefit obligation recognized in Other Comprehensive Income consist of the following for the fiscal years ending August 31, 2010 and 2009 (in thousands):

 

     Pension Benefits     Other Post-Retirement
Benefits
 
     2010     2009     2010     2009  

Curtailment

   $ (9,599   $ —        $ —        $ —     

Current year actuarial (gain) / loss

     (55     28,094        16,619        12,898   

Amortization of actuarial gain / (loss)

     (3,287     (826     (1,842     (978

Current year prior service (credit) / cost

     —          —          (51,366     —     

Amortization of prior service credit / (cost)

     (715     (278     —          —     

Amortization of transition asset / (obligation)

     (2     (2     (2,387     (597
                                

Total recognized in other comprehensive income

   $ (13,658   $ 26,988      $ (38,976   $ 11,323   
                                

Total recognized in net periodic benefit cost and other comprehensive income

   $ (4,290   $ 31,675      $ (28,433   $ 20,027   
                                

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The following table summarizes the change in benefit obligations and fair values of plan assets for the years ended August 31, 2010 and 2009:

 

     Pension Benefits     Other Post-Retirement
Benefits
 
     2010     2009     2010     2009  
     (in thousands)  

Change in benefit obligation:

        

Benefit obligation @ beginning of year

   $ 100,450      $ 76,542      $ 82,571      $ 65,464   

Service cost

     3,563        2,738        3,364        2,642   

Interest cost

     5,724        5,205        4,740        4,487   

Plan amendments

     —          —          (53,156     —     

Curtailment

     (9,599     —          —          —     

Medicare act subsidy effect

     —          —          195        67   

Actuarial (gains) / losses

     (180     18,364        16,619        12,897   

Benefits paid

     (2,642     (2,399     (3,206     (2,986
                                

Benefit obligation @ end of year

     97,316        100,450        51,127        82,571   
                                

Change in plan assets:

        

Fair values of plan assets @ beginning of year

     49,223        53,501        —          —     

Actual return on plan assets

     3,797        (5,367     —          —     

Company contributions

     4,125        3,488        3,011        2,919   

Benefits paid

     (2,642     (2,399     (3,206     (2,986

Medicare act subsidy effect

     —          —          195        67   
                                

Fair values of plan assets @ end of year

     54,503        49,223        —          —     
                                

Unfunded status

   $ 42,813      $ 51,227      $ 51,127      $ 82,571   
                                

Amounts recognized in the balance sheet consist of:

        

Current liability

   $ —        $ —        $ 2,641      $ 3,095   

Noncurrent liability

     42,813        51,227        48,486        79,476   
                                

Net amount recognized

   $ 42,813      $ 51,227      $ 51,127      $ 82,571   
                                

Note: For plans with assets less than the accumulated benefit obligation (ABO), the aggregate ABO is $91,766,000 while the aggregate asset value is $54,503,000.

        

 

Amounts recognized in Accumulated Other Comprehensive Income:

 

     Pension Benefits     Other Post-Retirement
Benefits
 
     2010     2009     2010     2009  
     (in thousands)  

Accumulated net actuarial loss

   $ (30,191   $ (43,133   $ (45,424   $ (30,647

Accumulated prior service cost

     (315     (1,029     51,366        —     

Accumulated transition obligation

     (3     (5     —          (2,387
                                

Net amount recognized, before tax effect

   $ (30,509   $ (44,167   $ 5,942      $ (33,034
                                

 

The preceding table presents two measures of benefit obligations for the pension plans. Accumulated benefit obligation (ABO) generally measures the value of benefits earned to date. Projected benefit obligation (PBO)

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

also includes the effect of assumed future compensation increases for plans in which benefits for prior service are affected by compensation changes. Each of the three pension plans, whose information is aggregated above, have asset values less than these measures. Plan funding amounts are calculated pursuant to ERISA and Internal Revenue Code rules. The postretirement benefits are not funded.

 

Weighted average assumptions:

   Pension Benefits      Other Post-Retirement
Benefits
 
     2010      2009          2010              2009      

Discount rate

     4.75% - 5.15%         5.15% - 5.65%         4.90%         5.60%   
                       

Expected return on plan assets

     8.00%         8.00%         

Rate of compensation increase

     4.00%         4.00%         
                       

 

The discount rate assumptions at August 31, 2010 and 2009 were determined independently for each plan. A yield curve was produced for a universe containing the majority of U.S.-issued Aa-graded corporate bonds, all of which were non-callable (or callable with make-whole provisions). For each plan, the discount rate was developed as the level equivalent rate that would produce the same present value as that using spot rates aligned with the projected benefit payments.

 

     Pension Benefits      Other Post-Retirement
Benefits
 
     2010      2009          2010              2009      

Discount rate

     5.15% - 5.65%         6.40% - 6.70%         5.60%         6.70%   

Expected return on plan assets

     8.00%         8.00%         N/A         N/A   

Rate of compensation increase

     4.00%         4.00%         N/A         N/A   

Health care cost trend rate

           

—Initial trend

     N/A         N/A         8.00%         8.00%   

—Ultimate trend

     N/A         N/A         5.00%         5.00%   

—Year ultimate reached

     N/A         N/A         2016         2015   

 

For measurement purposes, the assumed annual rate of increase in the per capita cost of covered medical and dental benefits was 8% and 5% for 2010 and 2009, respectively. The rates were assumed to decrease gradually to 5% for medical benefits until 2016 and remain at that level thereafter. The healthcare cost trend rate assumption has a significant effect on the amounts reported. To illustrate, a 1 percentage point change in the assumed healthcare cost trend rate would have the following effects:

 

     1% Point
Increase
     1% Point
Decrease
 
     (in thousands)  

Effect on total of service and interest cost components

   $ 1,483       $ (1,191

Effect on post-retirement benefit obligation

     5,227         (4,348

 

The expected return on plan assets is a long-term assumption established by considering historical and anticipated returns of the asset classes invested in by the pension plans and the allocation strategy currently in place among those classes.

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

A reconciliation of the above accrued benefit costs to the consolidated amounts reported on the Company’s balance sheets follows:

 

     August 31,  
     2010     2009  
     (in thousands)  

Accrued pension benefits

   $ 42,813      $ 51,227   

Accrued other post-retirement benefits

     51,127        82,571   
                
     93,940        133,798   

Current portion of above benefits, included in payrolls and benefits in accrued liabilities

     (2,641     (3,095

Supplemental pension and other deferred compensation benefits

     321        356   
                

Deferred retirement benefits

   $ 91,620      $ 131,059   
                

 

Fair Value of Plan Assets

 

Our Defined Benefit plans’ assets fall into any of three fair value classifications as defined in ASC 820-10. Level 1 assets are valued based on observable prices for identical assets in active markets such as national security exchanges. Level 2 assets are valued based on a) quoted prices of similar assets in active markets, b) quoted prices for similar assets in inactive markets, c) other than quoted prices that are observable for the asset, or d) values that are derived principally from or corroborated by observable market data by correlation or other means. There are no Level 3 assets held by the plans as defined by ASC 820-10.

 

Asset Category

  August 31, 2010     Level 1     Level 2     Level 3  

Cash Equivalents

  $ 1,328,000      $ —        $ 1,328,000      $   —     

Mutual Funds

    18,397,000        18,397,000        —        $ —     

Equities

    28,715,000        28,715,000        —        $ —     

Fixed Income

    6,062,000        2,999,000        3,063,000      $ —     
                               

Total

  $ 54,503,000      $ 50,112,000      $ 4,391,000      $ —     
                               

 

During the year, the Pension Plans liquidated two funds classified as Level 3 assets. The table below reconciles the disposition of those funds.

 

Level 3 Assets

   Asset Values  

Level 3 Assets as of 8/31/09

   $ 20,923,000   

Asset Appreciation

     2,253,000   

Proceeds from Sale of Assets

     (23,177,000
        

Level 3 Assets as of 8/31/10

   $ —     
        

 

The pension plans weighted-average target allocation for the year ended August 31, 2011 and strategic asset allocation matrix as of August 31, 2010 and 2009 are as follows:

 

     Target
Allocation
    Plan Assets @ 8/31  

Asset Category

   2010         2010             2009      

Equity Securities

     55 – 75     68     69

Debt Securities

     25 – 35     31     31

Cash/Cash Equivalents

     0 – 10     1     —     
                  
       100     100
                  

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The investment policy for the plans is formulated by the Company’s Pension Plan Committee (the “Committee”). The Committee is responsible for adopting and maintaining the investment policy, managing the investment of plan assets and ensuring that the plans’ investment program is in compliance with all provisions of ERISA, as well as the appointment of any investment manager who is responsible for implementing the plans’ investment process.

 

In drafting a strategic asset allocation policy, the primary objective is to invest assets in a prudent manner to meet the obligations of the plans to the Company’s employees, their spouses and other beneficiaries, when the obligations come due. The stability and improvement of the plans’ funded status is based on the various reasons for which money is funded. Other factors that are considered include the characteristics of the plans’ liabilities and risk-taking preferences.

 

The asset classes used by the plan are the United States equity market, the international equity market, the United States fixed income or bond market and cash or cash equivalents. Plan assets are diversified to minimize the risk of large losses. Cash flow requirements are coordinated with the custodian trustees and the investment manager to minimize market timing effects. The asset allocation guidelines call for a maximum and minimum range for each broad asset class as noted above.

 

The target strategic asset allocation and ranges established under the asset allocation represents a long-term perspective. The Committee will rebalance assets to ensure that divergences outside of the permissible allocation ranges are minimal and brief as possible.

 

The net of investment manager fee asset return objective is to achieve a return earned by passively managed market index funds, weighted in the proportions identified in the strategic asset allocation matrix. Each investment manager is expected to perform in the top one-third of funds having similar objectives over a full market cycle.

 

The investment policy is reviewed by the Committee at least annually and confirmed or amended as needed.

 

Under ASC 715-30-25 beginning at Fiscal Year Ended August 31, 2007, the transition obligation, prior service costs, and actuarial (gains)/losses are recognized in Accumulated Other Comprehensive Income each August 31 or any interim measurement date, while amortization of these amounts through net periodic benefit cost will occur in accordance with ASC 715-30 and ASC 715-60. The estimated amounts that will be amortized in 2011 follow:

 

Estimated 2011 Amortization

   Pension
Benefits
     Other
Post-Retirement
Benefits
 
     (in thousands)  

Transition obligation amortization

   $ 2       $ —     

Prior service cost (credit) amortization

     149         (4,840

Net loss amortization

     1,883         3,712   
                 

Total

   $ 2,034       $ (1,128
                 

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The following contributions and benefit payments, which reflect expected future service, as appropriate, are expected to be paid:

 

     Pension
Benefits
     Other Post-Retirement Benefits  

Employer Contributions

          Gross            (Subsidy receipts)    
     (in thousands)  

FYE 8/31/2011 (expected)

   $ 6,401       $ 2,816       $ (245

Expected Benefit Payments for FYE 8/31

        

2011

   $ 3,804       $ 2,885       $ (245

2012

     4,160         3,174         (279

2013

     4,391         3,503         (317

2014

     4,749         3,808         (357

2015

     5,009         4,124         (392

2016 - 2020

     30,502         17,494         (2,610
                          

 

The pension plan contributions are deposited into a trust, and the pension plan benefit payments are made from trust assets. For the postretirement benefit plan, the contributions and the benefit payments are the same and represent expected benefit amounts, which are paid from general assets.

 

The Company’s postretirement benefit plan is likely to be affected by The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”). Beginning in 2006, the Act provides a Federal subsidy payment to companies providing benefit plans that meet certain criteria regarding their generosity. The Company expects to receive those subsidy payments. The Company has accounted for the Act in accordance with ASC 715-60-05-8, which requires, in the Company’s case, recognition on August 31, 2004. The benefit obligation as of that date reflects the effect of the federal subsidy, and this amount is identified in the table reconciling the change in benefit obligation above. The estimated effect of the subsidy on cash flow is shown in the accompanying table of expected benefit payments above. The expected subsidy reduced net periodic postretirement benefit cost by $939,000, as compared with the amount calculated without considering the effects of the subsidy.

 

The Company also contributes to voluntary employee savings plans through regular monthly contributions equal to various percentages of the amounts invested by the participants. The Company’s contributions to these plans amounted to $932,000, $894,000, and $1,011,000 for the years ended August 31, 2010, 2009 and 2008, respectively.

 

11. Income Taxes

 

Income tax expense (benefit) consists of:

 

     Year Ended August 31,  
     2010     2009      2008  
     (in thousands)  

Federal:

       

Current

   $ (38,570   $ 14,393       $ (28,379

Deferred

     (3,184     5,469         1,271   
                         
     (41,754     19,862         (27,108
                         

State:

       

Current

     290        3,062         105   

Deferred

     2,818        3,311         (8,482
                         
     3,108        6,373         (8,377
                         
   $ (38,646   $ 26,235       $ (35,485
                         

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Reconciliation of the differences between income taxes computed at the Federal statutory rate and the provision for income taxes attributable to income before income tax expense (benefit) is as follows:

 

     Year Ended August 31,  
     2010     2009     2008  
     (in thousands)  

U. S. federal income taxes (benefits) at the statutory rate

   $ (40,171   $ 22,494      $ (29,877

State income taxes (benefits), net of Federal benefit

     2,002        4,124        (5,443

Domestic production activity deduction

     (52     (700     (169

Permanent items

     (214     300        564   

Other

     (211     17        (560
                        

Income tax attributable to income before income tax expense

   $ (38,646   $ 26,235      $ (35,485
                        

 

Deferred income tax liabilities (assets) are comprised of the following:

 

     August 31,  
     2010     2009  
     (in thousands)  

Current deferred income tax liabilities (assets):

    

Inventory valuation

   $ 9,094      $ 11,001   

Accounts receivable allowance

     (850     (1,036

Accrued liabilities

     (2,182     (3,603

Other

     (65     3,242   
                
     5,997        9,604   
                

Deferred income tax liabilities (assets):

    

Property, plant and equipment

     39,793        38,254   

Accrued liabilities

     (37,369     (54,232

Federal carryforwards

     (181     —     

State net operating loss carryforwards

     (15,429     (8,607

Valuation allowance

     8,971        —     

Other

     3,623        (828
                
     (592     (25,413
                

Net deferred income tax (asset) liability

   $ 5,405      $ (15,809
                

 

The Company’s results of operations are included in the consolidated Federal tax return of the Parent (See Footnote 13 to Consolidated Financial Statements). The Company has a Federal net operating loss for regular tax purposes of $104,015,000 which will be carried back and fully utilized against prior year’s taxable income and, accordingly, is included in refundable income taxes at the Federal statutory rate. For state purposes, two entities have Pennsylvania net operating loss carry forwards of $164,000,000 and $46,000,000, respectively, which will expire between fiscal year 2019 and 2030. Pennsylvania limits the amount of net operating loss carry forwards which can be used to offset Pennsylvania taxable income to the greater of $3,000,000 or 20% of Pennsylvania taxable income prior to the net operating loss deduction. Due to these limitations, the Company has recognized valuation allowances, net of a federal benefit, of $8,971,000 and $0 at August 31, 2010 and 2009, respectively, for Pennsylvania net operating loss carry forwards not anticipated to be realized before expiration.

 

12. Disclosures About Fair Value of Financial Instruments

 

The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value.

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The carrying amount of cash and cash equivalents, trade accounts receivable, the revolving credit facility and current liabilities approximate fair value because of the short maturity of these instruments. The fair value of marketable securities is determined by available market prices.

 

The fair value of long-term debt (See Footnote 9 to Consolidated Financial Statements) was determined using the fair market value of the individual debt instruments. As of August 31, 2010, the carrying amount and estimated fair value of these debt instruments approximated $330,053,000 and $300,207,000, respectively.

 

13. Transactions with Affiliated Companies

 

On December 21, 2001, the Company acquired the operations and working capital assets of Country Fair. The fixed assets of Country Fair were acquired by related entities controlled by John A. Catsimatidis, the indirect sole shareholder of the Company. These assets are being leased to the Company at an annual aggregate rental which management, based on an independent third party valuation believes is fair, over a period ranging from 10 to 20 years. During the fiscal years ended August 31, 2010, 2009 and 2008, $5,102,000, $5,102,000, and $5,102,000 of rent payments were made to these related entities. The Company is not a guarantor on the underlying mortgages on the properties.

 

Concurrent with the above acquisition of Country Fair, the Company entered into a management agreement with a non-subsidiary affiliate to operate and manage 18 of the retail units owned by the non-subsidiary affiliate on a turn-key basis. For the years ended August 31, 2010, 2009 and 2008, the Company billed the affiliate $1,243,000, $1,219,000, and $1,147,000 for management fees and overhead expenses incurred in the management and operation of the retail units which amount was deducted from expenses. As of August 31, 2010 and 2009, the Company had a payable to the affiliate of $138,000 and $306,000, respectively, under the terms of the agreement, which is included in Amounts Due from Affiliated Companies, Net.

 

Effective June 1, 2001, the Company entered into a 50% joint venture with an unrelated entity for the marketing of asphalt products. The joint venture was accounted for using the equity method of accounting. As of July 31, 2008 the joint venture ceased operations due to the insolvency of the joint venture partner. For the years ended August 31, 2010, 2009 and 2008, net sales to the joint venture amounted to $0, $0, and $15,419,000, respectively. As of August 31, 2010 and 2009, the Company had no (payable) receivable (to) from the joint venture.

 

On September 29, 2000, the Company sold 42 retail units to an affiliate for $23,870,000. Concurrent with this asset sale, the Company terminated the leases on 8 additional retail locations which it had previously leased from a non-subsidiary affiliate. The Company has entered into a management agreement with the non-subsidiary affiliate to operate and manage the retail units owned by the non-subsidiary affiliate on a turnkey basis. For the years ended August 31, 2010, 2009 and 2008, the Company billed the affiliate $2,099,000, $2,245,000, and $2,037,000, respectively, for management fees and overhead expenses incurred in the management and operation of the 50 retail units, which amount was deducted from expenses. For the fiscal years ended August 31, 2010, 2009 and 2008, net sales to the affiliate amounted to $140,277,000, $112,878,000, and $173,190,000, respectively. As of August 31, 2010 and 2009, the Company had a payable to the affiliate of $344,000 and $614,000, respectively, under the terms of the agreement.

 

The Company paid a service fee relating to certain costs incurred by its Parent for the Company’s New York office. During the years ended August 31, 2010, 2009 and 2008, such fees amounted to approximately $2,000,000, $2,000,000, and $2,000,000, respectively, which is included in Selling, General and Administrative Expenses.

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The Company joins with the Parent and the Parent’s other subsidiaries in filing a Federal income tax return on a consolidated basis. Income taxes are calculated on a separate return basis with consideration of the Tax Sharing Agreement between the Parent and its subsidiaries. Amounts related to the Tax Sharing Agreement for the utilization by the Company of certain tax attributes of the Parent and other subsidiaries related to the tax years ended August 31, 2010 and 2009 amounted to $502,000 and $(2,667,000), respectively and have been recorded as a capital contribution (distribution). As of August 31, 2010 and 2009, the Company had a receivable from the Parent of $3,455,000 and $1,728,000, respectively, under the terms of the Tax Sharing Agreement.

 

During the years ended August 31, 2010, 2009 and 2008, the Company incurred $372,000 in each year as its share of occupancy expenses for our offices in New York that it shares with affiliates of the Company. Such offices are located in a building owned by John Catsimatidis.

 

During the years ended August 31, 2010, 2009, and 2008, the Company shared certain costs with an affiliate of the Company for aircraft owned by another affiliate of the Company and incurred $0, $0 and $180,000, respectively, as its share of such costs.

 

14. Environmental Matters and Other Contingencies

 

The Company is subject to federal, state and local laws and regulations relating to pollution and protection of the environment such as those governing releases of certain materials into the environment and the storage, treatment, transportation, disposal and clean-up of wastes, including, but not limited to, the Federal Clean Water Act, as amended, the Clean Air Act, as amended, the Resource Conservation and Recovery Act of 1976, as amended, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, and analogous state and local laws and regulations.

 

Due to the nature of the Company’s business, the Company is and will continue to be subject to various environmental claims, legal actions and actions by regulatory authorities. In the opinion of management, all current matters are without merit or are of such kind or involve such amounts that an unfavorable disposition would not have a material adverse effect on the consolidated financial condition or operations of the Company.

 

The management of the Company believes that remediation and related environmental response costs incurred during the normal course of business, including contractual obligations as well as activities required under applicable law and regulation, will not have a material adverse effect on its consolidated financial condition or operations.

 

In addition to the foregoing proceedings, the Company and its subsidiaries are parties to various legal proceedings that arise in the ordinary course of their respective business operations. In the opinion of management, all such matters are adequately covered by insurance, or if not so covered, are without merit or are of such kind, or involve such amounts that unfavorable dispositions would not have a material adverse effect on the consolidated financial position or results of operations of the Company.

 

We are also monitoring closely all climate change and Greenhouse Gas (“GHG”) legislation, better known as Cap and Trade which is currently being debated in Congress. The proposals vary and the final form of legislation, if any, is not yet certain. The core of the proposals generally require the capture and reporting of CO2 emissions data, leading to a baseline followed by mandatory CO2 emission reductions over time and the purchase of carbon credits under certain circumstances. On September 22, 2009 the U.S. Environmental Protection Agency adopted regulations governing the measurement and reporting GHG emissions commencing January 1, 2010. The Company believes compliance costs with these regulations will not be material. The ultimate cost of GHG reduction mandates and their effect on our business are, however, unknown until a more definitive proposal has been crafted by Congress and implementing regulations proposed.

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

15. Segments of Business

 

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 accounting policies of the reportable segments are the same as those described in Footnote 1 to Consolidated Financial Statements. 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 table.

 

     Year Ended August 31,  
     2010     2009      2008  
     (in thousands)  

Net Sales

       

Retail

   $ 1,359,046      $ 1,213,546       $ 1,549,555   

Wholesale

     1,295,355        1,173,625         1,658,457   
                         
   $ 2,654,401      $ 2,387,171       $ 3,208,012   
                         

Intersegment Sales

       

Wholesale

   $ 639,397      $ 512,384       $ 829,577   
                         

Operating Income (Loss)

       

Retail

   $ 4,470      $ 33,611       $ (1,215

Wholesale

     (82,561     57,857         (51,380
                         
   $ (78,091   $ 91,468       $ (52,595
                         

Total Assets

       

Retail

   $ 146,932      $ 150,082       $ 179,119   

Wholesale

     490,171        520,772         422,674   
                         
   $ 637,103      $ 670,854       $ 601,793   
                         

Depreciation and Amortization

       

Retail

   $ 5,480      $ 5,273       $ 5,044   

Wholesale

     16,314        17,577         16,912   
                         
   $ 21,794      $ 22,850       $ 21,956   
                         

Capital Expenditures (including non-cash portion)

       

Retail

   $ 5,180      $ 5,161       $ 8,359   

Wholesale

     22,233        19,988         35,029   
                         
   $ 27,413      $ 25,149       $ 43,388   
                         

 

16. Subsidiary Guarantors

 

All of 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 for the Company’s wholly-owned subsidiary guarantors is as follows:

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

CONDENSED CONSOLIDATING BALANCE SHEETS

(in thousands)

 

     August 31, 2010     August 31, 2009  
     Issuer     Guarantors     Eliminations     Consolidated     Issuer     Guarantors     Eliminations     Consolidated  

Assets

                

Current:

                

Cash and cash equivalents

   $ 7,765      $ 9,405      $ —        $ 17,170      $ 21,265      $ 9,797      $ —        $ 31,062   

Accounts receivable, net

     30,266        33,926        —          64,192        52,726        32,656        —          85,382   

Refundable income taxes

     37,921        (1,531     —          36,390        —          —          —          —     

Inventories

     176,748        30,090        —          206,838        209,729        27,812        —          237,541   

Prepaid expenses and other assets

     22,461        5,480        —          27,941        8,733        5,828        —          14,561   

Amounts due from affiliated companies

     3,455        (483     —          2,972        1,728        (919     —          809   

Intercompany

     111,228        16,374        (127,602     —          106,025        15,527        (121,552     —     
                                                                

Total current assets

     389,844        93,261        (127,602     355,503        400,206        90,701        (121,552     369,355   
                                                                

Property, plant and equipment, net

     185,349        76,426        —          261,775        174,629        77,419        —          252,048   

Deferred financing costs, net

     2,