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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

 

(Mark One)

 

x

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

 

For the quarterly period ended November 30, 2011

 

or

 

¨

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

 

For the transition period from                      to                     

 

Commission File No. 001-06198

 

 

 

LOGO

[LOGO] UNITED REFINING COMPANY

 

UNITED REFINING COMPANY

(Exact name of registrant as specified in its charter)

 

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

 

814-723-1500

(Registrant’s telephone number, including area code)

 

 

 

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

 

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

 

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

 

Large accelerated filer  ¨

  

Accelerated filer  ¨

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

  

Smaller reporting company  ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

 

As of January 17, 2012, there were 100 shares of common stock, par value $.10 per share, of the Registrant outstanding.

 

 

 


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   

 

2


Table of Contents

FORM 10-Q – CONTENTS

 

          PAGE(S)  

PART I.

  

FINANCIAL INFORMATION

     4   

Item 1.

  

Financial Statements.

     4   
  

Consolidated Balance Sheets – November 30, 2011 (unaudited) and August 31, 2011

     4   
  

Consolidated Statements of Operations – Three Months Ended November 30, 2011 and 2010 (unaudited)

     5   
  

Consolidated Statements of Cash Flows – Three Months Ended November 30, 2011 and 2010 (unaudited)

     6   
  

Notes to Consolidated Financial Statements (unaudited)

     7   

Item 2.

  

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

  

Item 3.

  

Quantitative and Qualitative Disclosures about Market Risk.

     16   

Item 4.

  

Controls and Procedures.

     23   

PART II.

  

OTHER INFORMATION

     23   

Item 1.

  

Legal Proceedings.

     24   

Item 1A.

  

Risk Factors.

     24   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds.

     24   

Item 3.

  

Defaults Upon Senior Securities.

     24   

Item 4.

  

(Removed and Reserved).

     24   

Item 5.

  

Other Information.

     24   

Item 6.

  

Exhibits.

     24   

Signatures.

     25   

 

3


Table of Contents

PART I.

FINANCIAL INFORMATION

 

Item 1.

Financial Statements.

 

UNITED REFINING COMPANY AND SUBSIDIARIES

 

Consolidated Balance Sheets

(in thousands, except share and per share amounts)

 

     November 30,
2011
(unaudited)
    August 31,
2011
 

Assets

    

Current:

    

Cash and cash equivalents

   $ 58,315      $ 16,660   

Accounts receivable, net

     104,296        111,426   

Derivative asset

     8,409        —     

Inventories

     155,161        171,880   

Prepaid expenses and other assets

     29,448        40,387   

Deferred income taxes

     —          14,458   

Amounts due from affiliated companies, net

     1,011        3,104   
  

 

 

   

 

 

 

Total current assets

     356,640        357,915   

Property, plant and equipment, net

     272,770        270,974   

Deferred financing costs, net

     9,728        10,148   

Goodwill

     1,349        1,349   

Tradename

     10,500        10,500   

Amortizable intangible assets, net

     1,243        1,270   

Deferred turnaround costs and other assets, net

     21,256        18,455   
  

 

 

   

 

 

 
   $ 673,486      $ 670,611   
  

 

 

   

 

 

 

Liabilities and Stockholder’s Equity

    

Current:

    

Current installments of long-term debt

   $ 1,077      $ 978   

Accounts payable

     66,316        79,946   

Derivative liability

     —          55,720   

Accrued liabilities

     26,348        15,358   

Income taxes payable

     12,276        2,627   

Sales, use and fuel taxes payable

     14,477        16,637   

Deferred income taxes

     9,825        —     
  

 

 

   

 

 

 

Total current liabilities

     130,319        171,266   

Revolving credit facility

     —          24,000   

Long term debt: less current installments

     356,802        356,109   

Deferred income taxes

     23,944        11,353   

Deferred retirement benefits

     69,623        87,130   
  

 

 

   

 

 

 

Total liabilities

     580,688        649,858   
  

 

 

   

 

 

 

Commitments and contingencies

    

Stockholder’s equity:

    

Common stock; $.10 par value per share – shares authorized 100; issued and outstanding 100

     —          —     

Additional paid-in capital

     24,789        24,789   

Retained earnings

     72,158        10,112   

Accumulated other comprehensive loss

     (4,149     (14,148
  

 

 

   

 

 

 

Total stockholder’s equity

     92,798        20,753   
  

 

 

   

 

 

 
   $ 673,486      $ 670,611   
  

 

 

   

 

 

 

 

See accompanying notes to consolidated financial statements.

 

4


Table of Contents

UNITED REFINING COMPANY AND SUBSIDIARIES

 

Consolidated Statements of Operations – (Unaudited)

(in thousands)

 

     Three Months Ended
November 30,
 
     2011     2010  

Net sales

   $ 944,031      $ 619,147   
  

 

 

   

 

 

 

Costs and expenses:

    

Costs of goods sold (exclusive of depreciation, amortization and gains on derivative contracts)

     832,712        580,837   

Gains on derivative contracts

     (51,291     —     

Selling, general and administrative expenses

     40,647        35,786   

Depreciation and amortization expenses

     5,973        5,636   
  

 

 

   

 

 

 
     828,041        622,259   
  

 

 

   

 

 

 

Operating income (loss)

     115,990        (3,112
  

 

 

   

 

 

 

Other income (expense):

    

Interest expense, net

     (10,253     (8,914

Other, net

     (577     (581
  

 

 

   

 

 

 
     (10,830     (9,495
  

 

 

   

 

 

 

Income (loss) before income tax expense (benefit)

     105,160        (12,607

Income tax expense (benefit)

     43,114        (4,518
  

 

 

   

 

 

 

Net income (loss)

   $ 62,046      $ (8,089
  

 

 

   

 

 

 

 

See accompanying notes to consolidated financial statements.

 

5


Table of Contents

UNITED REFINING COMPANY AND SUBSIDIARIES

 

Consolidated Statements of Cash Flows – (Unaudited)

(in thousands)

 

     Three Months Ended
November 30,
 
     2011     2010  

Cash flows from operating activities:

    

Net income (loss)

   $ 62,046      $ (8,089

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

    

Depreciation and amortization

     6,856        5,718   

Unrealized gain on derivative contracts

     (59,638     —     

Deferred income taxes

     29,925        1,392   

Loss on asset dispositions

     296        2   

Cash provided by working capital items

     37,239        28,423   

Other, net

     1        1   

Change in operating assets and liabilities:

    

Additions to other assets, net

     (3,319     —     

Deferred retirement benefits

     (559     (1,285
  

 

 

   

 

 

 

Total adjustments

     10,801        34,251   
  

 

 

   

 

 

 

Net cash provided by operating activities

     72,847        26,162   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Additions to property, plant and equipment

     (6,097     (10,886

Additions to turnaround costs

     (820     (3,642

Proceeds from asset dispositions

     —          1   
  

 

 

   

 

 

 

Net cash used in investing activities

     (6,917     (14,527
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net reductions on revolving credit facility

     (24,000     (9,000

Principal reductions of long-term debt

     (275     (326
  

 

 

   

 

 

 

Net cash used in financing activities

     (24,275     (9,326
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     41,655        2,309   

Cash and cash equivalents, beginning of year

     16,660        17,170   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 58,315      $ 19,479   
  

 

 

   

 

 

 

Cash provided by (used in) working capital items:

    

Accounts receivable, net

   $ 7,130      $ (7,784

Derivative asset/liability

     (4,491     —     

Inventories

     16,719        63,008   

Prepaid expenses and other assets

     10,939        (10,645

Amounts due from affiliated companies, net

     2,093        (312

Accounts payable

     (13,630     (22,967

Accrued liabilities

     10,990        9,466   

Income taxes payable

     9,649        (552

Sales, use and fuel taxes payable

     (2,160     (1,791
  

 

 

   

 

 

 

Total change

   $ 37,239      $ 28,423   
  

 

 

   

 

 

 

Cash paid during the period for:

    

Interest

   $ 427      $ 662   

Income taxes

   $ 3,696      $ 291   
  

 

 

   

 

 

 

Non-cash investing activities:

    

Property additions & capital leases

   $ 605      $ 34   
  

 

 

   

 

 

 

 

See accompanying notes to consolidated financial statements.

 

6


Table of Contents

UNITED REFINING COMPANY AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

(Unaudited)

 

1.

Description of Business and Basis of Presentation

 

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

 

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

 

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

 

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

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended November 30, 2011 are not necessarily indicative of the results that may be expected for the year ending August 31, 2012. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Form 10-K for the fiscal year ended August 31, 2011.

 

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

 

2.

Recent Accounting Pronouncements

 

In May 2011, the FASB issued amended guidance on fair value measurement and related disclosures. The new guidance clarifies the concepts applicable for fair value measurement of non-financial assets and requires the disclosure of quantitative information about the unobservable inputs used in a fair value measurement. This guidance will be effective for reporting periods beginning after December 15, 2011, and will be applied prospectively. We do not anticipate that the adoption of this amended guidance will have a material impact on our consolidated financial statements.

 

In June 2011, the FASB issued amended guidance on the presentation of comprehensive income. The amended guidance eliminates one of the presentation options provided by current U.S. GAAP, that is, to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. In addition, it gives an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance will be effective for reporting periods beginning after December 15, 2011 and will be applied retrospectively. The adoption of this guidance will not have a material impact on our consolidated financial statements.

 

7


Table of Contents

UNITED REFINING COMPANY AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)

 

In September 2011, the FASB issued an accounting standard update that amends the accounting guidance on goodwill impairment testing. The amendments are intended to reduce complexity and costs by allowing an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of a reporting unit. The amendments also improve previous guidance by expanding upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The amendments in this accounting standard update are effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011. We do not anticipate that the adoption of this accounting standard update will have a material impact on our consolidated financial statements.

 

3.

Derivative 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, historically crude oil option contracts (puts) and crackspread option contracts have been 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. The Company includes the carrying amounts of the contracts in derivative asset or derivative liability in its Consolidated Balance Sheet.

 

At November 30, 2011, the Company had 3,353,000 barrels of heating oil and gasoline crackspread swaps outstanding as part of its risk management strategy. This represents approximately 26.7% of the Company’s scheduled motor gasoline production through March 2012 and approximately 43.0% of scheduled distillate production through December 2012. The remainder of the crackspread swap contracts expire sequentially beginning December 2011 through December 2012. These derivative instruments are being used by the Company to lock in margins on future sales by the Company of heating oil and gasoline.

 

The fair value and balance sheet classification of our derivative instruments at November 30, 2011 and August 31, 2011 are as follows:

 

      November 30, 2011  
      Notional
Balance
     Maturity
Date
     Derivative
Asset
 
     (in thousands)  

Designated as hedges under
ASC 815

        

None

     —           —         $ —     

Not designated as hedges under ASC 815

        

Heating oil and gasoline crackspread swaps

     3,353 barrels         Monthly December 2011 through December 2012         8,409   
  

 

 

       

 

 

 

Total derivative instruments

     3,353 barrels          $ 8,409   
  

 

 

       

 

 

 

 

8


Table of Contents

UNITED REFINING COMPANY AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)

 

      August 31, 2011  
      Notional
Balance
     Maturity
Date
     Derivative
Liability
 
     (in thousands)  

Designated as hedges under
ASC 815

        

None

     —           —         $ —     

Not designated as hedges under ASC 815

        

Heating oil and gasoline crackspread swaps

     4,575 barrels         Monthly September 2011 through December 2012         55,720   
  

 

 

       

 

 

 

Total derivative instruments

     4,575 barrels          $ 55,720   
  

 

 

       

 

 

 

 

During the three months ended November 30, 2011 and 2010, the Company recognized $51,291,000 and $0 of gains in costs and expenses in its Consolidated Statement of Operations, respectively.

 

At November 30, 2010, the Company had no derivative financial instruments outstanding and did not recognize any gains or losses from its risk management strategy for the period then ended.

 

4.

Inventories

 

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

 

Inventories consist of the following:

 

     November 30,
2011
     August 31,
2011
 
     (in thousands)  

Crude Oil

   $ 38,403       $ 32,829   

Petroleum Products

     72,294         95,370   
  

 

 

    

 

 

 

Total @ LIFO

     110,697         128,199   
  

 

 

    

 

 

 

Merchandise

     21,991         21,408   

Supplies

     22,473         22,273   
  

 

 

    

 

 

 

Total @ FIFO

     44,464         43,681   
  

 

 

    

 

 

 

Total Inventory

   $ 155,161       $ 171,880   
  

 

 

    

 

 

 

 

As of November 30, 2011 and August 31, 2011, the replacement cost of LIFO inventories exceeded their LIFO carrying values by approximately $96,089,000 and $92,059,000, respectively.

 

9


Table of Contents

UNITED REFINING COMPANY AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)

 

5.

Subsidiary Guarantors

 

All the Company’s wholly-owned subsidiaries fully and unconditionally guarantee on an unsecured basis, on a joint and several basis, the Company’s Senior Secured Notes. There are no restrictions within the consolidated group on the ability of the Company or any of its subsidiaries to obtain loans from or pay dividends to other members of the consolidated group. Financial information of the Company’s wholly-owned subsidiary guarantors is as follows:

 

Condensed Consolidating Balance Sheets

(in thousands, except share and per share amounts)

 

    November 30, 2011     August 31, 2011  
    United
Refining
Company
    Guarantors     Eliminations     United
Refining
Company &
Subsidiaries
    United
Refining
Company
    Guarantors     Eliminations     United
Refining

Company  &
Subsidiaries
 

Assets

               

Current:

               

Cash and cash equivalents

  $ 48,637      $ 9,678      $ —        $ 58,315      $ 5,927      $ 10,733      $ —        $ 16,660   

Accounts receivable, net

    65,663        38,633        —          104,296        66,758        44,668        —          111,426   

Derivative asset

    8,409        —          —          8,409        —          —          —          —     

Inventories

    128,308        26,853        —          155,161        145,713        26,167        —          171,880   

Prepaid expenses and other assets

    24,679        4,769        —          29,448        36,731        3,656        —          40,387   

Deferred income taxes

    —          —          —          —          13,120        1,338        —          14,458   

Amounts due from affiliated companies

    1,851        (840     —          1,011        2,586        518        —          3,104   

Intercompany

    111,154        20,200        (131,354     —          121,933        20,882        (142,815     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    388,701        99,293        (131,354     356,640        392,768        107,962        (142,815     357,915   

Property, plant and equipment, net

    197,677        75,093        —          272,770        196,521        74,453        —          270,974   

Deferred financing costs, net

    9,728        —          —          9,728        10,148        —          —          10,148   

Goodwill and other non-amortizable assets

    —          11,849        —          11,849        —          11,849        —          11,849   

Amortizable intangible assets, net

    —          1,243        —          1,243        —          1,270        —          1,270   

Deferred turnaround costs & other assets

    19,847        1,409        —          21,256        17,803        652        —          18,455   

Investment in subsidiaries

    13,156        —          (13,156     —          9,267        —          (9,267     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 629,109      $ 188,887      $ (144,510   $ 673,486      $ 626,507      $ 196,186      $ (152,082   $ 670,611   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

10


Table of Contents

UNITED REFINING COMPANY AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)

 

    November 30, 2011     August 31, 2011  
    United
Refining
Company
    Guarantors     Eliminations     United
Refining
Company &
Subsidiaries
    United
Refining
Company
    Guarantors     Eliminations     United
Refining

Company  &
Subsidiaries
 

Liabilities and Stockholder’s Equity

               

Current:

               

Current installments of long-term debt

  $ 766      $ 311      $ —        $ 1,077      $ 654      $ 324      $ —        $ 978   

Accounts payable

    45,218        21,098        —          66,316        58,246        21,700        —          79,946   

Derivative liability

    —          —          —          —          55,720        —          —          55,720   

Accrued liabilities

    19,534        6,814        —          26,348        8,726        6,632        —          15,358   

Income taxes payable

    10,496        1,780        —          12,276        3,181        (554     —          2,627   

Sales, use and fuel taxes payable

    10,716        3,761        —          14,477        12,322        4,315        —          16,637   

Deferred income taxes

    11,163        (1,338     —          9,825        —          —          —          —     

Intercompany

    —          131,354        (131,354     —          —          142,815        (142,815     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    97,893        163,780        (131,354     130,319        138,849        175,232        (142,815     171,266   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revolving credit facility

    —          —          —          —          24,000        —          —          24,000   

Long term debt: less current installments

    354,970        1,832        —          356,802        354,264        1,845        —          356,109   

Deferred income taxes

    15,506        8,438        —          23,944        3,245        8,108        —          11,353   

Deferred retirement benefits

    67,942        1,681        —          69,623        85,396        1,734        —          87,130   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    536,311        175,731        (131,354     580,688        605,754        186,919        (142,815     649,858   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commitment and contingencies

               

Stockholder’s equity

               

Common stock, $.10 par value per share – shares authorized 100; issued and outstanding 100

    —          18        (18     —          —          18        (18     —     

Additional paid-in capital

    24,789        10,651        (10,651     24,789        24,789        10,651        (10,651     24,789   

Retained earnings

    72,158        3,510        (3,510     72,158        10,112        (354     354        10,112   

Accumulated other comprehensive loss

    (4,149     (1,023     1,023        (4,149     (14,148     (1,048     1,048        (14,148
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholder’s equity

    92,798        13,156        (13,156     92,798        20,753        9,267        (9,267     20,753   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 629,109      $ 188,887      $ (144,510   $ 673,486      $ 626,507      $ 196,186      $ (152,082   $ 670,611   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

UNITED REFINING COMPANY AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)

 

Condensed Consolidating Statements of Operations

(in thousands)

 

    Three Months Ended November 30, 2011     Three Months Ended November 30, 2010  
    United
Refining
Company
    Guarantors     Eliminations     United
Refining
Company &
Subsidiaries
    United
Refining
Company
    Guarantors     Eliminations     United
Refining

Company  &
Subsidiaries
 

Net sales

  $ 738,229      $ 421,598      $ (215,796   $ 944,031      $ 445,144      $ 351,981      $ (177,978   $ 619,147   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses:

               

Costs of goods sold (exclusive of depreciation, amortization and gains on derivative contracts)

    668,168        380,340        (215,796     832,712        438,483        320,332        (177,978     580,837   

Gains on derivative contracts

    (51,291     —          —          (51,291     —          —          —          —     

Selling, general and administrative expenses

    7,308        33,339        —          40,647        4,224        31,562        —          35,786   

Depreciation and amortization expenses

    4,410        1,563        —          5,973        4,051        1,585        —          5,636   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    628,595        415,242        (215,796     828,041        446,758        353,479        (177,978     622,259   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    109,634        6,356        —          115,990        (1,614     (1,498     —          (3,112
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

               

Interest expense, net

    (10,135     (118     —          (10,253     (8,715     (199     —          (8,914

Other, net

    (863     286        —          (577     (807     226        —          (581

Equity in net income (loss) of subsidiaries

    3,864        —          (3,864     —          (996     —          996        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    (7,134     168        (3,864     (10,830     (10,518     27        996        (9,495
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax expense (benefit)

    102,500        6,524        (3,864     105,160        (12,132     (1,471     996        (12,607

Income tax expense (benefit)

    40,454        2,660        —          43,114        (4,043     (475     —          (4,518
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 62,046      $ 3,864      $ (3,864   $ 62,046      $ (8,089   $ (996   $ 996      $ (8,089
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)

 

Condensed Consolidating Statements of Cash Flows

(in thousands)

 

    Three Months Ended November 30, 2011     Three Months Ended November 30, 2010  
    Issuer     Guarantors     Eliminations     Consolidated     Issuer     Guarantors     Eliminations     Consolidated  

Net cash provided by operating activities

  $ 70,642      $ 2,205      $ —        $ 72,847      $ 22,781      $ 3,381      $ —        $ 26,162   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

               

Additions to property, plant and equipment

    (3,741     (2,356     —          (6,097     (9,598     (1,288     —          (10,886

Additions to deferred turnaround costs

    (12     (808     —          (820     (3,642     —          —          (3,642

Proceeds from asset dispositions

    —          —          —          —          —          1        —          1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

    (3,753     (3,164     —          (6,917     (13,240     (1,287     —          (14,527
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

               

Net reductions on revolving credit facility

    (24,000     —          —          (24,000     (9,000     —          —          (9,000

Principal reductions of long-term debt

    (179     (96     —          (275     (154     (172     —          (326
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

    (24,179     (96     —          (24,275     (9,154     (172     —          (9,326
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

    42,710        (1,055     —          41,655        387        1,922        —          2,309   

Cash and cash equivalents, beginning of year

    5,927        10,733        —          16,660        7,765        9,405        —          17,170   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

  $ 48,637      $ 9,678      $ —        $ 58,315      $ 8,152      $ 11,327      $ —        $ 19,479   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)

 

6.

Segments of Business

 

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

 

     Three Months Ended
November 30,
 
     2011      2010  

Net Sales

     

Retail

   $ 420,319       $ 351,219   

Wholesale

     523,712         267,928   
  

 

 

    

 

 

 
   $ 944,031       $ 619,147   
  

 

 

    

 

 

 

Intersegment Sales

     

Wholesale

   $ 214,517       $ 177,216   
  

 

 

    

 

 

 

Operating Income (Loss)

     

Retail

   $ 6,220       $ (1,273

Wholesale

     109,770         (1,839
  

 

 

    

 

 

 
   $ 115,990       $ (3,112
  

 

 

    

 

 

 

Depreciation and Amortization

     

Retail

   $ 1,401       $ 1,413   

Wholesale

     4,572         4,223   
  

 

 

    

 

 

 
   $ 5,973       $ 5,636   
  

 

 

    

 

 

 

Capital Expenditures (including non-cash)

     

Retail

   $ 2,403       $ 1,142   

Wholesale

     4,299         9,778   
  

 

 

    

 

 

 
   $ 6,702       $ 10,920   
  

 

 

    

 

 

 

 

     November 30, 2011      August 31, 2011  

Total Assets

     

Retail

   $ 159,905       $ 167,359   

Wholesale

     513,581         503,252   
  

 

 

    

 

 

 
   $ 673,486       $ 670,611   
  

 

 

    

 

 

 

 

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Table of Contents

UNITED REFINING COMPANY AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)

 

7.

Employee Benefit Plans

 

For the periods ended November 30, 2011 and 2010, net pension and other postretirement benefit costs were comprised of the following:

 

     Pension Benefits     Other Post-Retirement Benefits  
     Three Months Ended
November 30,
    Three Months Ended
November 30,
 
             2011                     2010             2011     2010  
     (in thousands)  

Service cost

   $ 423      $ 447      $ 466      $ 377   

Interest cost on benefit obligation

     1,318        1,244        748        630   

Expected return on plan assets

     (1,179     (1,135     —          —     

Amortization and deferral of net loss

     376        509        (264     (282
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 938      $ 1,065      $ 950      $ 725   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

As of November 30, 2011, $1,642,000 of contributions have been made to the Company pension plans for the fiscal year ending August 31, 2012.

 

In November 2011, the Company reached an agreement with the International Union of Operating Engineers Local 95, which represents the employees operating the refinery. The new agreement will be effective February 1, 2012 and expires on February 1, 2017. Under the new collective bargaining agreement (Agreement), changes were made to healthcare and pension benefits provided by the Company. Effective February 1, 2012, medical benefits in retirement for new hires and active employees covered under the Agreement were eliminated. For employees covered under the Agreement 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 February 1, 2012, benefits under the Company’s defined benefit pension plan sponsored for employees covered under the agreement were frozen. The Company will provide an enhanced contribution under its defined contribution 401 (k) plan as well as a transition contribution for older employees. Additionally, deductibles and co-payments will be added to the medical benefits for employees covered under the Agreement.

 

As a result of the November, 2011 agreement and related plan design changes, a remeasurement of fiscal year 2012 expense pursuant to ASC 715-30 and ASC 715-60 was required, resulting in plan curtailments. As a result of such curtailments during the quarter ended November 30, 2011, the pension liability was reduced by $4,743,000 with a credit to accumulated other comprehensive loss (AOCL) of $4,552,000 and a credit to income of $191,000. Further, the postretirement welfare plan liability was reduced by $12,161,000 and AOCL credited for $12,298,000, with a charge to income of $137,000. The activity in AOCL was recorded net of related income tax effects.

 

The Company accrues post-retirement benefits other than pensions, during the years that the employees render the necessary service, of the expected cost of providing those benefits to an employee and the employee’s beneficiaries and covered dependents.

 

8.

Fair Value Measurements

 

The carrying values of all financial instruments classified as a current asset or current liability approximate fair value because of the short maturity of these instruments. The fair value of marketable securities is determined by available market prices. The fair value (was less than) exceeded the carrying value of the senior notes at November 30, 2011 and August 31, 2011 by $(21,552,000) and $6,684,000, respectively.

 

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Table of Contents

Item 2.

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

 

Forward Looking Statements

 

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

 

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

 

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

 

 

 

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

 

 

 

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

 

 

 

repayment of debt;

 

 

 

general economic, business and market conditions;

 

 

 

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

 

 

 

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

 

 

 

the availability and cost of financing to us;

 

 

 

environmental, tax and tobacco legislation or regulation;

 

 

 

volatility of gasoline prices, margins and supplies;

 

 

 

merchandising margins;

 

 

 

labor costs;

 

 

 

level of capital expenditures;

 

 

 

customer traffic;

 

 

 

weather conditions;

 

 

 

acts of terrorism and war;

 

 

 

business strategies;

 

 

 

expansion and growth of operations;

 

 

 

future projects and investments;

 

16


Table of Contents
 

 

future exposure to currency devaluations or exchange rate fluctuations;

 

 

 

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

 

 

 

future operating results and financial condition; and

 

 

 

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

 

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

 

Recent Developments

 

The Company continues to be impacted by the volatility of the petroleum market in fiscal year 2012. The average NYMEX crude price for the second fiscal quarter based on values published on January 6, 2012 was $99.10/bbl, a $12.92/bbl or 15.0% increase from the average price for the first fiscal quarter of 2012 which was $86.18/bbl.

 

The lagged 3-2-1 crackspread, as measured by the difference between the price of crude oil contracts traded on the NYMEX for the preceding month to the prices of NYMEX gasoline and heating oil contracts in the current trading month, benefited from the rising petroleum market. The Company uses a lagged crackspread as a margin indicator as it reflects the time period between the purchase of crude oil and its delivery to the refinery for processing. The lagged crackspread for the second quarter of fiscal year 2012 based on values as of January 6, 2012, was $18.83/bbl or a 37.6% decrease from the lagged crackspread for the first quarter of fiscal year 2012 which was $30.18/bbl.

 

Results of Operations

 

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

 

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

 

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

 

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Table of Contents

Retail Operations:

 

     Three Months Ended
November 30,
 
     2011     2010  
     (dollars in thousands)  

Net Sales

    

Petroleum

   $ 351,865      $ 286,481   

Merchandise and other

     68,454        64,738   
  

 

 

   

 

 

 

Total Net Sales

     420,319        351,219   

Costs of goods sold

     379,481        319,625   

Selling, general and administrative expenses

     33,217        31,454   

Depreciation and amortization expenses

     1,401        1,413   
  

 

 

   

 

 

 

Segment Operating Income (Loss)

   $ 6,220      $ (1,273
  

 

 

   

 

 

 

Retail Operating Data:

    

Petroleum sales (thousands of gallons)

     97,500        99,111   

Petroleum margin (a)

   $ 23,541      $ 15,105   

Petroleum margin ($/gallon) (b)

     .2414        .1524   

Merchandise and other margins

   $ 17,298      $ 16,489   

Merchandise margin (percent of sales)

     25.3     25.5

 

(a)

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

(b)

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

 

Comparison of Fiscal Quarters Ended November 30, 2011 and 2010

 

Net Sales

 

Retail sales increased during the fiscal quarter ended November 30, 2011 by $69.1 million or 19.7% from the comparable period in fiscal 2011 from $351.2 million to $420.3 million. The increase was due to $65.4 million in petroleum sales and $3.7 million in merchandise sales. The petroleum sales increase resulted from a 24.9% increase in retail selling prices per gallon, offset by a 1.6 million gallon or 1.6% decrease in retail petroleum volume due in part to flooding in our eastern most markets of Pennsylvania and New York and retail station underground product line replacements. The merchandise sales increase is primarily due to increased prepared food, beverages and cigarette sales due to promotional campaigns and increased selling prices.

 

Costs of Goods Sold

 

Retail costs of goods sold increased during the fiscal quarter ended November 30, 2011 by $59.9 million or 18.7% from the comparable period in fiscal 2011 from $319.6 million to $379.5 million. The increase was due to $55.2 million in petroleum cost, merchandise cost of $2.9 million, freight cost of $1.4 and fuel tax of $.4 million.

 

Selling, General and Administrative Expenses

 

Retail Selling, General and Administrative (“SG&A”) expenses increased during the fiscal quarter ended November 30, 2011 by $1.8 million or 5.6% from the comparable period in fiscal 2011 from $31.4 million to $33.2 million. The increase was primarily due to payroll costs of $.3 million, credit/customer service costs of $.6 million, maintenance cost of $.3 million, and advertising cost of $.2 million, supplies cost of $.1 million and other of $.3 million.

 

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Table of Contents

Wholesale Operations:

 

     Three Months Ended
November 30,
 
     2011     2010  
     (dollars in thousands)  

Net Sales (a)

   $ 523,712      $ 267,928   

Costs of goods sold (exclusive of depreciation, amortization and gains on derivative contracts)

     453,231        261,212   

Gains on derivate contracts

     (51,291     —     

Selling, general and administrative expenses

     7,430        4,332   

Depreciation and amortization expenses

     4,572        4,223   
  

 

 

   

 

 

 

Segment Operating Income (Loss)

   $ 109,770      $ (1,839
  

 

 

   

 

 

 

 

Key Wholesale Operating Statistics:

 

     Three Months Ended
November 31,
 
     2011     2010  

Refinery Product Yield (thousands of barrels)

    

Gasoline and gasoline blendstock

     2,627        1,629   

Distillates

     1,450        1,131   

Asphalt

     1,937        632   

Butane, propane, residual products, internally produced fuel and other (“Other”)

     478        768   
  

 

 

   

 

 

 

Total Product Yield

     6,492        4,160   
  

 

 

   

 

 

 

% Heavy Crude Oil of Total Refinery Throughout (b)

     59     22

Crude throughput (thousand barrels per day)

     67.5        40.5   
  

 

 

   

 

 

 

Product Sales (thousand of barrels) (a)

    

Gasoline and gasoline blendstock

     2,808        1,092   

Distillates

     1,415        908   

Asphalt

     2,121        1,075   

Other

     228        124   
  

 

 

   

 

 

 

Total Product Sales Volume

     6,572        3,199   
  

 

 

   

 

 

 

Product Sales (dollars in thousands) (a)

    

Gasoline and gasoline blendstock

   $ 196,229      $ 98,392   

Distillates

     143,095        88,964   

Asphalt

     170,599        74,362   

Other

     13,789        6,210   
  

 

 

   

 

 

 

Total Product Sales

   $ 523,712      $ 267,928   
  

 

 

   

 

 

 

 

(a)

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

(b)

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

 

Comparison of Fiscal Quarters Ended November 30, 2011 and 2010

 

Refinery volumes increased in the three months ended November 30, 2011 due to the recovery from the Enbridge pipeline disruption and the 21-day scheduled maintenance turnaround that incurred in the comparable

 

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period in fiscal 2011. Crude throughputs increased by 27.0 thousand barrels per day (bpd) or 66.7% from 40.5 bpd to 67.5 bpd, and refinery product yields increased 2.3 million barrels or 56.0% from 4.2 to 6.5 million barrels during the same comparable period.

 

Net Sales

 

Wholesale sales increased during the three months ended November 30, 2011 by $255.8 million or 95.5% from the comparable period in fiscal 2011 from $267.9 million to $523.7 million. This was due to a 105.5% increase in wholesale volume offset by a 4.8% decrease in wholesale prices.

 

Costs of Goods Sold (exclusive of depreciation and amortization and gains on derivative contracts)

 

Wholesale costs of goods sold increased during the three months ended November 30, 2011 by $192.0 million or 73.5% from the comparable period in fiscal 2011 from $261.2 million to $453.2 million. The increase in wholesale costs of goods sold during this period was primarily due to an increase in cost of raw materials and volume.

 

Gain on Derivative Contracts

 

During the three months ended November 30, 2011 and 2010, the Company recognized $51,291,000 and $0 of gains in costs and expenses in its Consolidated Statement of Operations, respectively.

 

At November 30, 2010, the Company had no derivative financial instruments outstanding and did not recognize any gains or losses from its risk management strategy for the period then ended. See also Note 3 to the Company’s Consolidated Financial Statements.

 

Selling, General and Administrative Expenses

 

Wholesale SG&A expenses increased during the three months ended November 30, 2011 by $3.1 million or 71.5% from the comparable period in fiscal 2011 from $4.3 million or 1.6% of net wholesale sales to $7.4 million or 1.4% of net wholesale sales. The increase was due primarily to additional payroll costs and professional fees.

 

Consolidated Expenses:

 

Interest Expense, net

 

Net interest expense (interest expense less interest income) for the three months ended November 30, 2011 increased $1.3 million or 15.0% from the comparable period in fiscal 2011 from $8.9 million to $10.2 million. In March 2011, the Company refinanced its outstanding Senior Note principal balance of $324.0 million due 2012 with Senior Notes due 2018 with a principal amount of $365.0 million. The increased interest expense incurred between first fiscal quarter 2011 and 2012 is due to the increased principal amount of the notes outstanding.

 

Income Tax Expense / (Benefit)

 

The Company’s effective tax rate for the three months ended November 30, 2011 and 2010 was approximately 41% and 36% respectively. The lower effective tax rate in the prior period was due to the Company recording a valuation allowance for Pennsylvania Net Operating tax losses.

 

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

 

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factors beyond our control. Included in such factors are, among others, the level of customer product demand, weather conditions, governmental regulations, worldwide political conditions and overall market and economic conditions.

 

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

 

     November 30, 2011  

Cash and cash equivalents

   $ 58,315   

Working capital

   $ 226,321   

Current ratio

     2.7   

Debt

   $ 357,879   

 

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

 

Our cash and cash equivalents consist of bank balances and investments in money market funds.

 

     Three Months Ended
November 30, 2011
 
     (in millions)  

Significant uses of cash

  

Investing activities:

  

Additions to deferred turnaround costs

   $ (.8

Property, plant and equipment

  

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

     (2.3

DHT2 second reactor

     (2.0

Retail petroleum upgrade

     (.8

Retail maintenance (blacktop, roof, HVAC, rehab, piping)

     (.8

Environmental

     (.1

State and federal mandates:

  

Renewable fuels

     (.1
  

 

 

 

Total property, plant and equipment

   $ (6.1
  

 

 

 

Net cash used in investing activities

   $ (6.9
  

 

 

 

Financing activities:

  

Net reductions on revolving credit facility

   $ (24.0

Principal reductions of long term debt

     (.3
  

 

 

 

Net cash provided by financing activities

   $ (24.3
  

 

 

 

Working capital items:

  

Decrease in inventory

   $ 16.7   

Accrued liabilities increase

     11.0   

Prepaid expense decrease

     10.9   

Income taxes payable increase

     9.6   

Accounts receivable decrease

     7.1   

Amounts due from affiliated companies, net decrease

     2.1   

Accounts payable decrease

     (13.6

Derivative asset/liability

     (4.5

Sales, use and fuel taxes payable increase

     (2.1
  

 

 

 

Cash provided by working capital items

   $ 37.2   
  

 

 

 

 

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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.

 

Maintenance and non-discretionary capital expenditures have averaged approximately $6.0 million annually over the last three years for the refining and retail operations. Management does not foresee any increase in these maintenance and non-discretionary capital expenditures during fiscal year 2012.

 

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 $175,000,000 Amended and Restated Revolving Credit Facility. This provides the Company with flexibility relative to its cash flow requirements in light of market fluctuations, particularly involving crude oil prices and seasonal business cycles and will assist the Company in meeting its working capital, ongoing capital expenditure needs and for general corporate purposes. The agreement expires on May 18, 2016.

 

Under the Amended and Restated Revolving Credit Facility, the applicable margin is calculated on the average unused availability as follows: (a) for base rate borrowing, at the greater of the Agent Bank’s prime rate the Federal Funds Open Rate plus 1.5%; or the Daily LIBOR rate plus 3%; plus an applicable margin of 0% to .5%; (b) for euro-rate based borrowings, at the LIBOR Rate plus an applicable margin of 2.75% to 3.25%. The Agent Bank’s prime rate at November 30, 2011 was 3.25%. The Amended and Restated Revolving Credit Facility is secured primarily by certain cash accounts, accounts receivable and inventory. Until maturity, we may borrow on a borrowing base formula as set forth in the facility. We had standby letters of credit of $6.5 million as of November 30, 2011 and there were no outstanding borrowings under the Amended and Restated Revolving Credit Facility resulting in net availability of $168.5 million. As of January 11, 2012, there were no outstanding borrowings on the $175 million Amended and Restated Revolving Credit Facility and standby letters of credit in the amount of $6.5 million, resulting in a net availability of $168.5 million and the Company had full access to it. The Company’s working capital ratio was 2.7 as of November 30, 2011.

 

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

 

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

 

Seasonal Factors

 

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

 

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

 

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Inflation

 

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

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk.

 

The Company uses its Amended and Restated Revolving Credit Facility to finance a portion of its operations. These on-balance sheet financial instruments, to the extent they provide for variable rates, expose the Company to interest rate risk resulting from changes in the PNC Prime rate, the Federal Funds or LIBOR rate. As of January 11, 2012, there were no outstanding borrowings under the Amended and Restated Revolving Credit Facility.

 

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 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 quarter ended November 30, 2011, the Company had 3,353,000 barrels of heating oil and gasoline crackspread swaps outstanding as part of its risk management strategy. The crackspread swaps expire sequentially beginning December 2011 through December 2012. These derivative instruments are being used by the Company to lock in margins on future sales of diesel fuel and gasoline. See also Footnote 3 in the Company’s Consolidated Financial Statements.

 

Item 4.

Controls and Procedures.

 

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of November 30, 2011. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of November 30, 2011, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

 

There have not been any changes in the Company’s internal controls over financial reporting that occurred during the Company’s fiscal quarter ended November 30, 2011 that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

 

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Part II

OTHER INFORMATION

 

Item 1.

Legal Proceedings.

 

None.

 

Item 1A.

Risk Factors.

 

There have been no material changes in our Risk Factors disclosed in the Form 10-K for the year ended August 31, 2011.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3.

Defaults Upon Senior Securities.

 

None.

 

Item 4.

(Removed and Reserved).

 

Item 5.

Other Information.

 

None.

 

Item 6.

Exhibits.

 

Exhibit 31.1

  

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 31.2

  

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 32.1

  

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

Exhibit 101

  

Interactive XBRL Data

 

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SIGNATURES

 

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

 

Date: January 17, 2012

 

UNITED REFINING COMPANY

(Registrant)

/s/ Myron L. Turfitt

Myron L. Turfitt

President

/s/ James E. Murphy

James E. Murphy

Chief Financial Officer

 

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SIGNATURES

 

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

 

Date: January 17, 2012

 

KIANTONE PIPELINE CORPORATION

(Registrant)

/s/ Myron L. Turfitt

Myron L. Turfitt

President

/s/ James E. Murphy

James E. Murphy

Chief Financial Officer

 

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SIGNATURES

 

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

 

Date: January 17, 2012

 

UNITED REFINING COMPANY OF

PENNSYLVANIA

(Registrant)

/s/ Myron L. Turfitt

Myron L. Turfitt

President

/s/ James E. Murphy

James E. Murphy

Chief Financial Officer

 

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SIGNATURES

 

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

 

Date: January 17, 2012

 

KIANTONE PIPELINE COMPANY

(Registrant)

/s/ Myron L. Turfitt

Myron L. Turfitt

President

/s/ James E. Murphy

James E. Murphy

Chief Financial Officer

 

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SIGNATURES

 

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

 

Date: January 17, 2012

 

UNITED JET CENTER, INC.

(Registrant)

/s/ Myron L. Turfitt

Myron L. Turfitt

President

/s/ James E. Murphy

James E. Murphy

Chief Financial Officer

 

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SIGNATURES

 

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

 

Date: January 17, 2012

 

KWIK-FILL CORPORATION

(Registrant)

/s/ Myron L. Turfitt

Myron L. Turfitt

President

/s/ James E. Murphy

James E. Murphy

Chief Financial Officer

 

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SIGNATURES

 

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

 

Date: January 17, 2012

 

INDEPENDENT GASOLINE AND OIL COMPANY OF ROCHESTER, INC.

(Registrant)

/s/ Myron L. Turfitt

Myron L. Turfitt

President

/s/ James E. Murphy

James E. Murphy

Chief Financial Officer

 

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SIGNATURES

 

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

 

Date: January 17, 2012

 

BELL OIL CORP.

(Registrant)

/s/ Myron L. Turfitt

Myron L. Turfitt

President

/s/ James E. Murphy

James E. Murphy

Chief Financial Officer

 

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SIGNATURES

 

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

 

Date: January 17, 2012

 

PPC, INC.

(Registrant)

/s/ Myron L. Turfitt

Myron L. Turfitt

President

/s/ James E. Murphy

James E. Murphy

Chief Financial Officer

 

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SIGNATURES

 

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

 

Date: January 17, 2012

 

SUPER TEST PETROLEUM, INC.

(Registrant)

/s/ Myron L. Turfitt

Myron L. Turfitt

President

/s/ James E. Murphy

James E. Murphy

Chief Financial Officer

 

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SIGNATURES

 

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

 

Date: January 17, 2012

 

KWIK-FIL, INC.

(Registrant)

/s/ Myron L. Turfitt

Myron L. Turfitt

President

/s/ James E. Murphy

James E. Murphy

Chief Financial Officer

 

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SIGNATURES

 

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

 

Date: January 17, 2012

 

VULCAN ASPHALT REFINING CORPORATION

(Registrant)

/s/ Myron L. Turfitt

Myron L. Turfitt

President

/s/ James E. Murphy

James E. Murphy

Chief Financial Officer

 

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SIGNATURES

 

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

 

Date: January 17, 2012

 

COUNTRY FAIR, INC.

(Registrant)

/s/ Myron L. Turfitt

Myron L. Turfitt

President and Chief Operating Officer

/s/ James E. Murphy

James E. Murphy

Vice President - Finance

 

37