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 May 31, 2012

or

 

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

For the transition period from                      to                     

Commission File No. 001-06198

 

 

 

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

 

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

814-723-1500

(Registrant’s telephone number, including area code)

 

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  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 July 16, 2012, there were 100 shares of common stock, par value $.10 per share, of the Registrant outstanding.

 

 

 

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TABLE OF ADDITIONAL REGISTRANTS

 

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

 

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Table of Contents

FORM 10-Q – CONTENTS

 

				PAGE(S)
PART I.		FINANCIAL INFORMATION			4
Item 1.		Financial Statements			4
		Consolidated Balance Sheets – May 31, 2012 (unaudited) and August 31, 2011			4
		Consolidated Statements of Operations – Quarter and Nine Months Ended May 31, 2012 and 2011 (unaudited)			5
		Consolidated Statements of Cash Flows – Nine Months Ended May 31, 2012 and 2011 (unaudited)			6
		Notes to Consolidated Financial Statements (unaudited)			7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			17
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			25
Item 4.		Controls and Procedures			26
PART II.		OTHER INFORMATION			27
Item 1.		Legal Proceedings			27
Item 1A.		Risk Factors			27
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			27
Item 3.		Defaults Upon Senior Securities			27
Item 4.		Mine Safety Disclosures			27
Item 5.		Other Information			27
Item 6.		Exhibits			27
Signatures					28

 

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PART I.

FINANCIAL INFORMATION

 

Item 1.

Financial Statements.

UNITED REFINING COMPANY AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands, except share amounts)

 

		May 31, 2012 (Unaudited)				August 31, 2011
Assets
Current:
Cash and cash equivalents		$	51,228			$	16,660
Accounts receivable, net			122,323				111,426
Inventories			170,081				171,880
Prepaid expenses and other assets			44,884				40,387
Deferred income taxes			—				14,458
Amounts due from affiliated companies, net			—				3,104
Total current assets			388,516				357,915
Property, plant and equipment, net			273,230				270,974
Deferred financing costs, net			8,888				10,148
Goodwill			1,349				1,349
Tradename			10,500				10,500
Amortizable intangible assets, net			1,427				1,270
Deferred turnaround costs and other assets, net			20,341				18,455
		$	704,251			$	670,611
Liabilities and Stockholder’s Equity
Current:
Current installments of long-term debt		$	1,199			$	978
Accounts payable			41,688				79,946
Derivative liability			1,817				55,720
Accrued liabilities			22,257				15,358
Income taxes payable			26,290				2,627
Sales, use and fuel taxes payable			21,859				16,637
Deferred income taxes			5,632				—
Amounts due to affiliated companies, net			1,473				—
Total current liabilities			122,215				171,266
Revolving credit facility			—				24,000
Long term debt: less current installments			357,800				356,109
Deferred income taxes			27,309				11,353
Deferred retirement benefits			67,290				87,130
Total liabilities			574,614				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			109,014				10,112
Accumulated other comprehensive loss			(4,166	)			(14,148	)
Total stockholder’s equity			129,637				20,753
		$	704,251			$	670,611

See accompanying notes to consolidated financial statements.

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

Consolidated Statements of Operations – (Unaudited)

(in thousands)

 

		Three Months Ended May 31,								Nine Months Ended May 31,
		2012				2011				2012				2011
Net sales		$	935,798			$	808,115			$	2,728,673			$	2,119,541
Costs and expenses:
Costs of goods sold (exclusive of depreciation, amortization and losses/(gains) on derivative contracts)			762,810				738,305				2,378,062				1,958,983
Losses/(gains) on derivative contracts (See Note 3)			1,957				(1,337	)			(37,495	)			(1,337	)
Selling, general and administrative expenses			37,986				37,512				116,573				110,117
Depreciation and amortization expenses			6,132				5,256				18,069				16,243
			808,885				779,736				2,475,209				2,084,006
Operating income			126,913				28,379				253,464				35,535
Other income (expense):
Interest expense, net			(10,275	)			(11,761	)			(30,788	)			(29,570	)
Other, net			(1,053	)			(805	)			(2,333	)			(2,196	)
Loss on early extinguishment of debt			—				(1,245	)			—				(1,245	)
			(11,328	)			(13,811	)			(33,121	)			(33,011	)
Income before income tax expense			115,585				14,568				220,343				2,524
Income tax expense			47,484				5,259				90,433				950
Net income			68,101				9,309				129,910				1,574
Less net income attributable to non-controlling interest			—				218				—				311
Net income attributable to United Refining Company’s Stockholder		$	68,101			$	9,091			$	129,910			$	1,263

See accompanying notes to consolidated financial statements.

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

Consolidated Statements of Cash Flows – (Unaudited)

(in thousands)

 

		Nine Months Ended May 31,
		2012				2011
Cash flows from operating activities:
Net income		$	129,910			$	1,263
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization			20,720				17,410
Unrealized gain on derivative contracts			(49,941	)			—
Deferred income taxes			29,108				(100	)
Non-cash portion of loss on early extinguishment of debt			—				330
(Gain) loss on asset dispositions			(1,517	)			239
Cash used in working capital items			(15,454	)			(29,995	)
Net income attributable to non-controlling interest			—				311
Change in operating assets and liabilities:
Additions to other assets, net			(3,257	)			(2	)
Deferred retirement benefits			(2,920	)			(2,649	)
Total adjustments			(23,261	)			(14,456	)
Net cash provided by (used in) operating activities			106,649				(13,193	)
Cash flows from investing activities:
Additions to property, plant and equipment			(15,653	)			(23,178	)
Additions to amortizable intangible assets			(240	)			—
Additions to deferred turnaround costs			(2,810	)			(14,702	)
Proceeds from asset dispositions			2,484				57
Net cash used in investing activities			(16,219	)			(37,823	)
Cash flows from financing activities:
Net (reductions) borrowings on revolving credit facilities			(24,000	)			29,900
Proceeds from issuance of common stock of non-controlling interest			—				15,000
Dividend to stockholder			(31,008	)			—
Proceeds from issuance of long term debt			—				352,021
Principal reductions of long term debt			(854	)			(324,809	)
Deferred financing costs			—				(10,556	)
Net cash (used in) provided by financing activities			(55,862	)			61,556
Net increase in cash and cash equivalents			34,568				10,540
Cash and cash equivalents, beginning of year			16,660				17,170
Cash and cash equivalents, end of period		$	51,228			$	27,710
Cash provided by (used in) working capital items:
Accounts receivable, net		$	(10,897	)		$	(58,992	)
Derivative asset / liability			(3,962	)			—
Refundable income taxes			—				36,390
Inventories			1,799				6,675
Prepaid expenses and other assets			(4,497	)			(14,772	)
Amounts due from affiliated companies, net			4,577				1,006
Accounts payable			(38,258	)			(10,605	)
Accrued liabilities			6,899				7,224
Income taxes payable			23,663				2,545
Sales, use and fuel taxes payable			5,222				534
Total change		$	(15,454	)		$	(29,995	)
Cash paid during the period for:
Interest		$	20,088			$	22,068
Income taxes		$	38,034			$	1,351
Non-cash investing activities:
Property additions & capital leases		$	1,375			$	212

See accompanying notes to consolidated financial statements.

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

1.	Description of Business and Basis of Presentation

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

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

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

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

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended May 31, 2012 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 was effective for interim and annual periods beginning after December 15, 2011, and was applied prospectively. The adoption of this amended guidance did not 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 was effective for annual reporting periods, and interim periods within those years, 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.

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(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 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, 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 May 31, 2012, the Company had 1,365,000 barrels of heating oil crackspread swaps outstanding as part of its risk management strategy. This represents approximately 43.0% of the Company’s scheduled distillate production through December 2012. These crackspread swap contracts expire sequentially beginning June 2012 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.

The fair value and balance sheet classification of our derivative instruments at May 31, 2012 and August 31, 2011 are as follows:

 

May 31, 2012

Notional Balance

Maturity Date

Derivative Liability

(in thousands)

Not designated as hedges under ASC 815

Heating oil crackspread swaps

1,365 barrels

Monthly June 2012 through December 2012

$

1,817

Total derivative instruments

1,365 barrels

$

1,817

August 31, 2011

Notional Balance

Maturity Date

Derivative Liability

(in thousands)

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

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

For the three months ended May 31, 2012, the Company recognized $(3,285,000) of realized losses and $1,328,000 unrealized gains in its Consolidated Statement of Operations, respectively. For the nine months ended May 31, 2012, the Company recognized $(12,445,000) of realized losses and $49,940,000 of unrealized gains in its Consolidated Statement of Operations, respectively.

For the three and nine month periods ended May 31, 2011, the Company recognized $440,000 and $897,000 of realized and unrealized gains in its Consolidated Statement of Operations, respectively.

 

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:

 

		May 31, 2012				August 31, 2011
		(in thousands)
Crude Oil		$	19,769			$	32,829
Petroleum Products			103,435				95,370
Total @ LIFO			123,204				128,199
Merchandise			21,581				21,408
Supplies			25,296				22,273
Total @ FIFO			46,877				43,681
Total Inventory		$	170,081			$	171,880

As of May 31, 2012 and August 31, 2011, the replacement cost of LIFO inventories exceeded their LIFO carrying values by approximately $81,504,000 and $92,059,000, respectively.

 

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

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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)

 

		May 31, 2012																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		$	41,114			$	10,114			$	—			$	51,228			$	5,927			$	10,733			$	—			$	16,660
Accounts receivable, net			79,921				42,402				—				122,323				66,758				44,668				—				111,426
Inventories			145,375				24,706				—				170,081				145,713				26,167				—				171,880
Prepaid expenses and other assets			40,159				4,725				—				44,884				36,731				3,656				—				40,387
Deferred income taxes			—				—				—				—				13,120				1,338				—				14,458
Amounts due from affiliated companies			—				—				—				—				2,586				518				—				3,104
Intercompany			117,026				18,994				(136,020	)			—				121,933				20,882				(142,815	)			—
Total current assets			423,595				100,941				(136,020	)			388,516				392,768				107,962				(142,815	)			357,915
Property, plant and equipment, net			196,206				77,024				—				273,230				196,521				74,453				—				270,974
Deferred financing costs, net			8,888				—				—				8,888				10,148				—				—				10,148
Goodwill and other non-amortizable assets			—				11,849				—				11,849				—				11,849				—				11,849
Amortizable intangible assets, net			—				1,427				—				1,427				—				1,270				—				1,270
Deferred turnaround costs & other assets			18,346				1,995				—				20,341				17,803				652				—				18,455
Investment in subsidiaries			12,235				—				(12,235	)			—				9,267				—				(9,267	)			—
		$	659,270			$	193,236			$	(148,255	)		$	704,251			$	626,507			$	196,186			$	(152,082	)		$	670,611
Liabilities and Stockholder’s Equity
Current:
Current installments of long-term debt		$	945			$	254			$	—			$	1,199			$	654			$	324			$	—			$	978
Accounts payable			22,064				19,624				—				41,688				58,246				21,700				—				79,946
Derivative liability			1,817				—				—				1,817				55,720				—				—				55,720
Accrued liabilities			16,727				5,530				—				22,257				8,726				6,632				—				15,358
Income taxes payable			25,145				1,145				—				26,290				3,181				(554	)			—				2,627
Sales, use and fuel taxes payable			17,597				4,262				—				21,859				12,322				4,315				—				16,637
Deferred income taxes			6,970				(1,338	)			—				5,632				—				—				—				—
Amounts due to affiliated companies, net			(1,851	)			3,324				—				1,473				—				—				—				—
Intercompany			—				136,020				(136,020	)			—				—				142,815				(142,815	)			—
Total current liabilities			89,414				168,821				(136,020	)			122,215				138,849				175,232				(142,815	)			171,266
Revolving credit facility			—				—				—				—				24,000				—				—				24,000
Long term debt: less current installments			356,082				1,718				—				357,800				354,264				1,845				—				356,109
Deferred income taxes			18,122				9,187				—				27,309				3,245				8,108				—				11,353
Deferred retirement benefits			66,015				1,275				—				67,290				85,396				1,734				—				87,130
Total liabilities			529,633				181,001				(136,020	)			574,614				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			109,014				2,539				(2,539	)			109,014				10,112				(354	)			354				10,112
Accumulated other comprehensive loss			(4,166	)			(973	)			973				(4,166	)			(14,148	)			(1,048	)			1,048				(14,148	)
Total stockholder’s equity			129,637				12,235				(12,235	)			129,637				20,753				9,267				(9,267	)			20,753
		$	659,270			$	193,236			$	(148,255	)		$	704,251			$	626,507			$	196,186			$	(152,082	)		$	670,611

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Condensed Consolidating Statements of Operations

(in thousands)

 

		Three Months Ended May 31, 2012
		United Refining Company				Guarantors				Eliminations				United Refining Company & Subsidiaries
Net sales		$	722,897			$	458,135			$	(245,234	)		$	935,798
Costs and expenses:
Costs of goods sold (exclusive of depreciation, amortization and losses on derivative contracts)			590,847				417,197				(245,234	)			762,810
Losses on derivative contracts			1,957				—				—				1,957
Selling, general and administrative expenses			5,203				32,783				—				37,986
Depreciation and amortization expenses			4,590				1,542				—				6,132
			602,597				451,522				(245,234	)			808,885
Operating income			120,300				6,613				—				126,913
Other income (expense):
Interest expense, net			(10,145	)			(130	)			—				(10,275	)
Other, net			(1,234	)			181				—				(1,053	)
Equity in net income of subsidiaries			3,985				—				(3,985	)			—
			(7,394	)			51				(3,985	)			(11,328	)
Income before income tax expense			112,906				6,664				(3,985	)			115,585
Income tax expense			44,805				2,679				—				47,484
Net income		$	68,101			$	3,985			$	(3,985	)		$	68,101

 

		Three Months Ended May 31, 2011
		United Refining Company				Guarantors				Eliminations				United Refining Company & Subsidiaries				United Refining Asphalt, Inc				Eliminations				United Refining Company Consolidated
Net sales		$	605,334			$	445,692			$	(240,683	)		$	810,343			$	23,620			$	(25,848	)		$	808,115
Costs and expenses:
Costs of goods sold (exclusive of depreciation, amortization and gains on derivative contracts)			576,603				405,284				(240,683	)			741,204				22,949				(25,848	)			738,305
Gains on derivative contracts			(1,337	)			—				—				(1,337	)			—				—				(1,337	)
Selling, general and administrative expenses			4,129				33,380				—				37,509				3				—				37,512
Depreciation and amortization expenses			3,704				1,552				—				5,256				—				—				5,256
			583,099				440,216				(240,683	)			782,632				22,952				(25,848	)			779,736
Operating income			22,235				5,476				—				27,711				668				—				28,379
Other income (expense):
Interest expense, net			(11,333	)			(277	)			—				(11,610	)			(151	)			—				(11,761	)
Other, net			(936	)			278				—				(658	)			(147	)			—				(805	)
Loss on early extinguishment of debt			(1,245	)			—				—				(1,245	)			—				—				(1,245	)
Equity in net income of subsidiaries			2,978				—				(2,978	)			—				—				—				—
			(10,536	)			1				(2,978	)			(13,513	)			(298	)			—				(13,811	)
Income before income tax expense			11,699				5,477				(2,978	)			14,198				370				—				14,568
Income tax expense			2,608				2,499				—				5,107				152				—				5,259
Net income			9,091				2,978				(2,978	)			9,091				218				—				9,309
Less net income attributable to non-controlling interest			—				—				—				—				—				218				218
Net income attributable to United Refining Company’s Stockholder		$	9,091			$	2,978			$	(2,978	)		$	9,091			$	218			$	(218	)		$	9,091

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Condensed Consolidating Statements of Operations

(in thousands)

 

		Nine Months Ended May 31, 2012
		United Refining Company				Guarantors				Eliminations				United Refining Company & Subsidiaries
Net sales		$	2,122,791			$	1,280,800			$	(674,918	)		$	2,728,673
Costs and expenses:
Costs of goods sold (exclusive of depreciation, amortization and gains on derivative contracts)			1,880,948				1,172,032				(674,918	)			2,378,062
Gains on derivative contracts			(37,495	)			—				—				(37,495	)
Selling, general and administrative expenses			17,294				99,279				—				116,573
Depreciation and amortization expenses			13,411				4,658				—				18,069
			1,874,158				1,275,969				(674,918	)			2,475,209
Operating income			248,633				4,831				—				253,464
Other income (expense):
Interest expense, net			(30,427	)			(361	)			—				(30,788	)
Other, net			(2,963	)			630				—				(2,333	)
Equity in net income of subsidiaries			2,893				—				(2,893	)			—
			(30,497	)			269				(2,893	)			(33,121	)
Income before income tax expense			218,136				5,100				(2,893	)			220,343
Income tax expense			88,226				2,207				—				90,433
Net income		$	129,910			$	2,893			$	(2,893	)		$	129,910

 

		Nine Months Ended May 31, 2011
		United Refining Company				Guarantors				Eliminations				United Refining Company & Subsidiaries				United Refining Asphalt, Inc				Eliminations				United Refining Company Consolidated
Net sales		$	1,569,734			$	1,163,498			$	(611,718	)		$	2,121,514			$	23,875			$	(25,848	)		$	2,119,541
Costs and expenses:
Costs of goods sold (exclusive of depreciation, amortization and gains on derivative contracts)			1,507,485				1,066,115				(611,718	)			1,961,882				22,949				(25,848	)			1,958,983
Gains on derivative contracts			(1,337	)			—				—				(1,337	)			—				—				(1,337	)
Selling, general and administrative expenses			12,701				97,411				—				110,112				5				—				110,117
Depreciation and amortization expenses			11,519				4,724				—				16,243				—				—				16,243
			1,530,368				1,168,250				(611,718	)			2,086,900				22,954				(25,848	)			2,084,006
Operating income (loss)			39,366				(4,752	)			—				34,614				921				—				35,535
Other income (expense):
Interest expense, net			(28,707	)			(690	)			—				(29,397	)			(173	)			—				(29,570	)
Other, net			(2,656	)			681				—				(1,975	)			(221	)			—				(2,196	)
Loss on early extinguishment of debt			(1,245	)			—				—				(1,245	)			—				—				(1,245	)
Equity in net loss of subsidiaries			(3,546	)			—				3,546				—				—				—				—
			(36,154	)			(9	)			3,546				(32,617	)			(394	)			—				(33,011	)
Income (loss) before income tax expense (benefit)			3,212				(4,761	)			3,546				1,997				527				—				2,524
Income tax expense (benefit)			1,949				(1,215	)			—				734				216				—				950
Net income (loss)			1,263				(3,546	)			3,546				1,263				311				—				1,574
Less net income attributable to non-controlling interest			—				—				—				—				—				311				311
Net income (loss) attributable to United Refining Company’s Stockholder		$	1,263			$	(3,546	)		$	3,546			$	1,263			$	311			$	(311	)		$	1,263

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Condensed Consolidating Statements of Cash Flows

(in thousands)

 

		Nine Months Ended May 31, 2012
		United Refining Company				Guarantors				Eliminations				United Refining Company & Subsidiaries
Net cash provided by operating activities		$	100,173			$	6,476			$	—			$	106,649
Cash flows from investing activities:
Additions to property, plant and equipment			(8,106	)			(7,547	)			—				(15,653	)
Additions to amortizable intangible assets			—				(240	)			—				(240	)
Additions to deferred turnaround costs			(1,325	)			(1,485	)			—				(2,810	)
Proceeds from asset dispositions			40				2,444				—				2,484
Net cash used in investing activities			(9,391	)			(6,828	)			—				(16,219	)
Cash flows from financing activities:
Net reductions on revolving credit facility			(24,000	)			—				—				(24,000	)
Dividend to stockholder			(31,008	)			—				—				(31,008	)
Principal reductions of long-term debt			(587	)			(267	)			—				(854	)
Net cash used in financing activities			(55,595	)			(267	)			—				(55,862	)
Net increase (decrease) in cash and cash equivalents			35,187				(619	)			—				34,568
Cash and cash equivalents, beginning of year			5,927				10,733				—				16,660
Cash and cash equivalents, end of period		$	41,114			$	10,114			$	—			$	51,228

 

		Nine Months Ended May 31, 2011
		United Refining Company				Guarantors				Eliminations				United Refining Company & Subsidiaries				United Refining Asphalt, Inc				Eliminations				United Refining Company Consolidated
Net cash provided by (used in) by operating activities		$	1,950			$	9,369			$	—			$	11,319			$	(24,512	)		$	—			$	(13,193	)
Cash flows from investing activities:
Additions to property, plant and equipment			(19,544	)			(3,634	)			—				(23,178	)			—				—				(23,178	)
Additions to deferred turnaround costs			(14,702	)			—				—				(14,702	)			—				—				(14,702	)
Proceeds from asset dispositions			56				1				—				57				—				—				57
Net cash used in investing activities			(34,190	)			(3,633	)			—				(37,823	)			—				—				(37,823	)
Cash flows from financing activities:
Net borrowings on revolving credit facilities			19,000				—				—				19,000				10,900				—				29,900
Proceeds from issuance of common stock of non-controlling interest			—				—				—				—				15,000				—				15,000
Proceeds from issuance of long term debt			352,021				—				—				352,021				—				—				352,021
Principal reductions of long-term debt			(324,413	)			(396	)			—				(324,809	)			—				—				(324,809	)
Deferred financing costs			(10,141	)			—				—				(10,141	)			(415	)			—				(10,556	)
Net cash provided by (used in) financing activities			36,467				(396	)			—				36,071				25,485				—				61,556
Net increase in cash and cash equivalents			4,227				5,340				—				9,567				973				—				10,540
Cash and cash equivalents, beginning of year			7,765				9,405				—				17,170				—				—				17,170
Cash and cash equivalents, end of period		$	11,992			$	14,745			$	—			$	26,737			$	973			$	—			$	27,710

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(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 May 31,								Nine Months Ended May 31,
		2012				2011				2012				2011
Net Sales
Retail		$	457,005			$	444,800			$	1,277,162			$	1,160,800
Wholesale			478,793				363,315				1,451,511				958,741
		$	935,798			$	808,115			$	2,728,673			$	2,119,541
Intersegment Sales
Wholesale		$	244,104			$	239,791			$	671,280			$	609,020
Operating Income (Loss)
Retail		$	6,514			$	4,078			$	4,698			$	(6,274	)
Wholesale			120,399				24,301				248,766				41,809
		$	126,913			$	28,379			$	253,464			$	35,535
Depreciation and Amortization
Retail		$	1,385			$	1,380			$	4,183			$	4,207
Wholesale			4,747				3,876				13,886				12,036
		$	6,132			$	5,256			$	18,069			$	16,243
Capital Expenditures (including non-cash)
Retail		$	3,273			$	1,264			$	6,773			$	3,197
Wholesale			3,050				3,906				10,255				20,193
		$	6,323			$	5,170			$	17,028			$	23,390

 

		May 31, 2012				August 31, 2011
Total Assets
Retail		$	164,228			$	167,359
Wholesale			540,023				503,252
		$	704,251			$	670,611

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

7.	Employee Benefit Plans

For the periods ended May 31, 2012 and 2011, net pension and other postretirement benefit costs were comprised of the following:

 

		Pension Benefits
		Three Months Ended May  31,								Nine Months Ended May 31,
		2012				2011				2012				2011
		(in thousands)
Service cost		$	215			$	447			$	978			$	1,342
Interest cost on benefit obligation			914				1,245				4,904				3,734
Expected return on plan assets			(860	)			(1,135	)			(4,582	)			(3,405	)
Amortization and deferral of net loss			124				508				549				1,523
Net periodic benefit cost		$	393			$	1,065			$	1,849			$	3,194
		Other Post-Retirement Benefits
		Three Months Ended May  31,								Nine Months Ended May  31,
		2012				2011				2012				2011
		(in thousands)
Service cost		$	249			$	377			$	866			$	1,131
Interest cost on benefit obligation			543				630				1,886				1,889
Amortization and deferral of net loss			(149	)			(282	)			(515	)			(846	)
Net periodic benefit cost		$	643			$	725			$	2,237			$	2,174

As of May 31, 2012, $4,534,000 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 was 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.

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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 exceeded the carrying value of the 10.50% Senior Secured Notes at May 31, 2012 and August 31, 2011 by $7,566,000 and $6,684,000, respectively.

 

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Item 2.

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

Forward Looking Statements

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

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

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

 

•

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

 

•

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

 

•

repayment of debt;

 

•

general economic, business and market conditions;

 

•

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

 

•

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

 

•

the availability and cost of financing to us;

 

•

environmental, tax and tobacco legislation or regulation;

 

•

volatility of gasoline prices, margins and supplies;

 

•

merchandising margins;

 

•

labor costs;

 

•

level of capital expenditures;

 

•

customer traffic;

 

•

weather conditions;

 

•

acts of terrorism and war;

 

•

business strategies;

 

•

expansion and growth of operations;

 

•

future projects and investments;

 

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•

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; and

 

•

future operating results and financial condition.

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 extreme volatility of daily pricing changes in the petroleum market in fiscal year 2012. Average crude prices for the fourth quarter of fiscal year 2012 have fallen as compared to the third quarter of fiscal year 2012. The average NYMEX price for crude oil in the fourth quarter of fiscal year 2012 was $87.19 per barrel as measured on July 6, 2012, a $16.75 decrease from the third quarter average of $103.94 per barrel.

The lagged 3-2-1 crackspread in the fourth fiscal quarter of 2012, as measured by the difference between the price of crude oil contracts traded on the NYMEX for the proceeding month to the prices for NYMEX gasoline and heating oil contracts in the current trading month, has decreased as compared to the third quarter of fiscal year 2012. The lagged 3-2-1 crackspread in the fourth quarter of fiscal 2012 as measured on July 6, 2012, was $24.69 as compared to $28.57 for the third fiscal quarter of 2012, a $3.88 or 13.6% reduction.

The average light/heavy differential for the third quarter was $27.79 per barrel while the fourth quarter average has declined to an expected $19.76 per barrel.

Results of Operations

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

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

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

 

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Retail Operations:

 

		Three Months Ended May 31,								Nine Months Ended May 31,
		2012				2011				2012				2011
		(dollars in thousands)
Net Sales
Petroleum		$	386,768			$	380,032			$	1,075,015			$	971,733
Merchandise and other			70,237				64,768				202,147				189,067
Total Net Sales			457,005				444,800				1,277,162				1,160,800
Costs of goods sold			416,432				406,067				1,169,340				1,065,794
Selling, general and administrative expenses			32,674				33,275				98,941				97,073
Depreciation and amortization expenses			1,385				1,380				4,183				4,207
Segment Operating (Loss) Income		$	6,514			$	4,078			$	4,698			$	(6,274	)
Retail Operating Data:
Petroleum sales (thousands of gallons)			98,765				99,042				290,635				292,543
Petroleum margin (a)		$	22,946			$	22,257			$	56,964			$	47,032
Petroleum margin ($/gallon) (b)			.2323				.2247				.1960				.1608
Merchandise and other margins		$	17,625			$	16,476			$	50,858			$	47,974
Merchandise margin (percent of sales)			25.1	%			25.4	%			25.2	%			25.4	%

 

(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 May 31, 2012 and 2011

Net Sales

Retail sales increased during the fiscal quarter ended May 31, 2012 by $12.2 million or 2.7% from the comparable period in fiscal 2011 from $444.8 million to $457.0 million. The increase was primarily due to $6.7 million in petroleum sales and $5.5 million in merchandise sales. The petroleum sales increase resulted from a 2.1% increase in retail selling prices per gallon, offset by a .3 million gallon or .3% decrease in retail petroleum volume. The merchandise sales increase is primarily due to increased sales of prepared food and beverages and increased selling prices.

Costs of Goods Sold

Retail costs of goods sold increased during the fiscal quarter ended May 31, 2012 by $10.3 million or 2.6% from the comparable period in fiscal 2011 from $406.1 million to $416.4 million. The increase was primarily due to $4.5 million in petroleum purchase prices, fuel tax of $.3 million, freight cost of $1.2 million and merchandise cost of $4.3 million.

Selling, General and Administrative Expenses

Retail Selling, General and Administrative (“SG&A”) expenses decreased during the fiscal quarter ended May 31, 2012 by $.6 million or 1.8% from the comparable period in fiscal 2011 from $33.3 million to $32.7 million. This decrease was primarily due to a sale of fixed assets offset by an increase in payroll costs and credit card processing fees due to increased credit card usage

 

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Comparison of Nine Months Ended May 31, 2012 and 2011

Net Sales

Retail sales increased during the nine months ended May 31, 2012 by $116.4 million or 10.0% from the comparable period in fiscal 2011 from $1,160.8 million to $1,277.2 million. The increase was primarily due to $103.3 million in petroleum sales, and $13.1 million in merchandise sales. The petroleum sales increase resulted from an 11.4% increase in retail selling prices per gallon offset by a decrease of 1.9 million gallon or .7% decrease in sales volume. The merchandise sales increase is primarily due to increased sales of prepared food and beverages and increased selling prices.

Costs of Goods Sold

Retail costs of goods sold increased during the nine months ended May 31, 2012 by $103.5 million or 9.7% from the comparable period in fiscal 2011 from $1,065.8 million to $1,169.3 million. The increase was primarily due to $88.6 million in petroleum purchase prices, merchandise costs of $10.2 million, fuel taxes of $1.3 million and freight costs of $3.4 million.

Selling, General and Administrative Expenses

Retail SG&A expenses increased during the nine months ended May 31, 2012 by $1.8 million or 1.8% from the comparable period in fiscal 2011 from $97.1 million to $98.9 million. The increase was primarily due to payroll costs and credit card processing fees for increased credit card usage, offset by a sale of fixed assets.

Wholesale Operations:

 

		Three Months Ended May 31,								Nine Months Ended May 31,
		2012				2011				2012				2011
		(dollars in thousands)
Net Sales (a)		$	478,793			$	363,315			$	1,451,511			$	958,741
Costs of goods sold (exclusive of depreciation and amortization and losses/gains on derivative contracts)			346,378				332,238				1,208,722				893,189
Losses/(Gains) on derivative contracts			1,957				(1,337	)			(37,495	)			(1,337	)
Selling, general and administrative expenses			5,312				4,237				17,632				13,044
Depreciation and amortization expenses			4,747				3,876				13,886				12,036
Segment Operating Income		$	120,399			$	24,301			$	248,766			$	41,809

 

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Key Wholesale Operating Statistics:

 

		Three Months Ended May 31,								Nine Months Ended May 31,
		2012				2011				2012				2011
Refinery Product Yield (thousands of barrels)
Gasoline and gasoline blendstock			2,353				1,774				7,568				5,724
Distillates			1,248				975				4,127				3,322
Asphalt			1,664				1,323				5,372				3,443
Butane, propane, residual products, internally produced fuel and other (“Other”)			570				411				1,727				1,718
Total Product Yield			5,835				4,483				18,794				14,207
% Heavy Crude Oil of Total Refinery Throughput (b)			58	%			60	%			60	%			49	%
Crude throughput (thousand barrels per day)			59.0				46.6				63.8				47.7
Product Sales (thousand of barrels) (a)
Gasoline and gasoline blendstock			1,455				1,277				4,627				3,711
Distillates			1,056				727				3,291				2,619
Asphalt			1,568				1,215				5,190				3,284
Other			188				123				559				441
Total Product Sales Volume			4,267				3,342				13,667				10,055
Product Sales (dollars in thousands) (a)
Gasoline and gasoline blendstock		$	183,785			$	164,048			$	549,574			$	402,431
Distillates			139,001				99,469				428,119				302,020
Asphalt			143,461				91,412				438,572				228,847
Other			12,546				8,386				35,246				25,443
Total Product Sales		$	478,793			$	363,315			$	1,451,511			$	958,741

 

(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 May 31, 2012 and 2011

During the three months ended May 31, 2012, we had a 15-day catalyst regeneration and added a second reactor to the DHT2 to expand hydrotreating capacity. This regeneration was different than the 24-day scheduled maintenance turnaround of the crude unit during the comparable period of Fiscal 2011 that required us to shut down the entire refinery. Refinery crude throughput increased 12.4 thousand barrels per day (bpd) or 26.6% over the comparable period in fiscal 2011 from 46.6 bpd to 59.0 bpd. Refinery product yields increased 1.4 thousand barrels or 30.2% over the comparable period in fiscal 2011 from 4,483 to 5,835 thousand barrels.

Net Sales

Wholesale sales increased during the three months ended May 31, 2012 by $115.5 million or 31.8% from the comparable period in fiscal 2011 from $363.3 million to $478.8 million. The increase was due to a 3.2% increase in wholesale prices and a 27.7% increase in wholesale volume.

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

Wholesale costs of goods sold increased during the three months ended May 31, 2012 by $14.1 million or 4.3% from the comparable period in fiscal 2011 from $332.2 million to $346.3 million. The increase in wholesale costs of goods sold during this period was primarily due to an increase in cost and volume of raw materials.

 

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Losses / (Gains) on Derivative Contracts

For the three months ended May 31, 2012 the Company recognized $3.3 million of realized losses and $1.3 million of unrealized gains in its Consolidated Statement of Operations, respectively. See also Footnote 3 to the Company’s Consolidated Financial Statements.

Selling, General and Administrative Expenses

Wholesale SG&A expenses increased during the three months ended May 31, 2012 by $1.1 million or 25.4% from the comparable period in fiscal 2011 from $4.2 million or 1.2% of net wholesale sales to $5.3 million or 1.1% of net wholesale sales. The increase was primarily due to payroll costs and professional services.

Comparison of Nine Months Ended May 31, 2012 and 2011

During the nine months of fiscal 2011, crude runs and wholesale sales were negatively impacted by the Enbridge Pipeline disruption and the 30-day scheduled refinery maintenance turnaround in October 2010 and the 21-day scheduled crude unit turnaround in the spring. These events resulted in the Company running an average crude throughput of 63,800 bpd for the nine months of fiscal 2012, versus 47,700 bpd during the comparable period in fiscal 2011. Refinery crude throughput increased 16.1 thousand bpd or 33.8% over the comparable period in fiscal 2011 from 47.7 bpd to 63.8 bpd. Refinery product yields increased 4.6 thousand barrels or 32.3% over the comparable period in fiscal 2011 from 14,207 to 18,794 thousand barrels.

Net Sales

Wholesale sales increased during the nine months ended May 31, 2012 by $492.8 million or 51.4% from the comparable period in fiscal 2011 from $958.7 million to $1,451.5 million. The increase was due to a 11.4% increase in wholesale prices and a 35.9% increase in wholesale volume.

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

Wholesale costs of goods sold increased during the nine months ended May 31, 2012 by $315.5 million or 35.3% from the comparable period in fiscal 2011 from $893.2 million to $1,208.7 million. The increase in wholesale costs of goods sold was primarily due to an increase in the costs and volume of product purchased and refinery expenses.

Losses / (Gains) on Derivative Contracts

For the nine months ended May 31, 2012, the Company recognized $12.4 million of realized losses and $49.9 million of unrealized gains in its Consolidated Statement of Operations, respectively. See also Footnote 3 to the Company’s Consolidated Financial Statements.

Selling, General and Administrative Expenses

Wholesale SG&A expenses increased during the nine months ended May 31, 2012 by $4.6 million or 35.2% from the comparable period in fiscal 2011 from $13.0 million or 1.4% of net wholesale sales to $17.6 million or 1.2% of net wholesale sales. The increase was primarily due to additional payroll costs and professional services.

Consolidated Expenses:

Interest Expense, net

Net interest expense (interest expense less interest income) for the three months ended May 31, 2012 decreased $1.5 million or 13.0% from the comparable period in fiscal 2011 from $11.8 million to $10.3 million. This was due to decreased borrowing on our revolving credit facility.

 

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Net interest expense (interest expense less interest income) for the nine months ended May 31, 2012 increased $1.2 million or 4.0% from the comparable period in fiscal 2011 from $29.6 million to $30.8 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 senior notes outstanding.

Income Tax Expense / (Benefit)

The Company’s effective tax rate for the three months ended May 31, 2012 and 2011 was approximately 41% and 36% respectively and for the nine month periods was approximately 41% and 38%, respectively. This change is primarily due to recording valuation allowances for state Net Operating Losses recorded in fiscal 2011.

Liquidity and Capital Resources

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

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

 

		May 31, 2012
Cash and cash equivalents		$	51,228
Working capital		$	266,301
Current ratio			3.2
Debt		$	358,999

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

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

 

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		Nine Months Ended May 31, 2012
		(in millions)
Significant uses of cash
Investing activities:
Additions to amortizable intangible assets		$	(.2	)
Proceeds from asset dispositions			2.5
Additions to deferred turnaround costs			(2.8	)
Property, plant and equipment
Other general capital items (tank repairs, refinery piping, etc)			(6.2	)
DHT 2 second reactor			(3.0	)
Retail petroleum upgrade			(2.7	)
Retail maintenance (blacktop, roof, HVAC, rehab)			(1.8	)
Non refinery capital equipment			(1.2	)
Environmental			(.4	)
State and federal mandates:
Renewable fuels			(.4	)
Total property, plant and equipment		$	(15.7	)
Net cash used in investing activities		$	(16.2	)
Financing activities:
Dividend to stockholder		$	(31.0	)
Net reductions on revolving credit facility			(24.0	)
Principal reductions of long term debt			(.9	)
Net cash used in financing activities		$	(55.9	)
Working capital items:
Income taxes payable increase		$	23.7
Accrued liabilities increase			6.9
Sales, use and fuel taxes payable increase			5.2
Amounts due from affiliated companies, net			4.6
Decrease in inventory			1.8
Accounts payable decrease			(38.3	)
Accounts receivable increase			(10.9	)
Prepaid expense increase			(4.5	)
Derivative asset/liability			(4.0	)
Cash used in working capital items		$	(15.5	)

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

Maintenance and non-discretionary capital expenditures have averaged approximately $6.0 million annually over the last three years for the refining and marketing operations. Management does not foresee any increase in these maintenance and non-discretionary capital expenditures during fiscal year 2011.

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 Amended and Restated Revolving Credit Facility of $175,000,000. This provides the Company with flexibility relative to its cash flow requirements in light of market fluctuations, particularly involving crude oil prices and seasonal business cycles

 

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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 May 31, 2012 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 May 31, 2012 and there were no outstanding borrowings under the Amended and Restated Revolving Credit Facility resulting in net availability of $168.5 million. As of July 16, 2012, there were no outstanding borrowings under the $175 million Amended and Restated Revolving Credit Facility and there were 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 3.2 as of May 31, 2012.

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

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

Seasonal Factors

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

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

Inflation

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

 

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 July 16, 2012, there were no outstanding borrowings under the Amended and Restated Revolving Credit Facility.

 

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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.

At the quarter ended May 31, 2012, the Company had 1,365,000 barrels of heating oil crackspread swaps outstanding as part of its risk management strategy. The crackspread swaps expire sequentially beginning June 2012 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. 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 May 31, 2012. 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 May 31, 2012, 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 May 31, 2012 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.

Mine Safety Disclosures.

Not applicable.

 

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: July 16, 2012

 

 

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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: July 16, 2012

 

 

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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: July 16, 2012

 

 

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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: July 16, 2012

 

 

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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: July 16, 2012

 

 

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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: July 16, 2012

 

 

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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: July 16, 2012

 

 

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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: July 16, 2012

 

 

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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: July 16, 2012

 

 

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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: July 16, 2012

 

 

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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: July 16, 2012

 

 

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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: July 16, 2012

 

 

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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: July 16, 2012

 

 

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