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, 2014

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 January 14, 2015, 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

 

2

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FORM 10-Q – CONTENTS

 

				PAGE
PART I. FINANCIAL INFORMATION					4
Item 1.		Financial Statements.			4
		Consolidated Balance Sheets – November 30, 2014 (unaudited) and August 31, 2014			4
		Consolidated Statements of Income – Three Months Ended November 30, 2014 and 2013 (unaudited)			5
		Consolidated Statements of Comprehensive Income (Loss) – Three Months Ended November 30, 2014 and 2013 (unaudited)			6
		Consolidated Statements of Cash Flows – Three Months Ended November 30, 2014 and 2013 (unaudited)			7
		Notes to Consolidated Financial Statements (unaudited)			8
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations.			14
Item 3.		Quantitative and Qualitative Disclosures about Market Risk.			20
Item 4.		Controls and Procedures.			21
PART II. OTHER INFORMATION					22
Item 1.		Legal Proceedings.			22
Item 1A.		Risk Factors.			22
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds.			22
Item 3.		Defaults Upon Senior Securities.			22
Item 4.		Mine Safety Disclosures.			22
Item 5.		Other Information.			22
Item 6.		Exhibits.			22
Signatures.					23

 

3

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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)

 

		November 30, 2014 (Unaudited)				August 31, 2014
Assets
Current:
Cash and cash equivalents		$	67,671			$	99,037
Accounts receivable, net			93,377				92,391
Refundable income taxes			6,000				6,000
Inventories, net			189,463				151,472
Prepaid income taxes			14,107				13,674
Prepaid expenses and other assets			47,802				67,168
Total current assets			418,420				429,742
Property, plant and equipment, net			323,038				317,519
Deferred financing costs, net			3,268				3,575
Goodwill			1,349				1,349
Tradename			10,500				10,500
Amortizable intangible assets, net			857				951
Deferred integrity and replacement costs, net			63,346				64,916
Deferred turnaround costs and other assets, net			39,898				41,912
		$	860,676			$	870,464
Liabilities and Stockholder’s Equity
Current:
Current installments of long-term debt		$	1,555			$	1,551
Accounts payable			53,079				91,881
Accrued liabilities			24,275				18,691
Sales, use and fuel taxes payable			19,026				20,550
Deferred income taxes			2,810				2,810
Amounts due to affiliated companies, net			1,068				1,521
Total current liabilities			101,813				137,004
Long term debt: less current installments			238,140				237,974
Deferred income taxes			55,639				44,140
Deferred retirement benefits			65,732				67,121
Total liabilities			461,324				486,239
Commitments and contingencies
Stockholder’s equity:
Common stock; $.10 par value per share – shares authorized 100; issued and outstanding 100			—				—
Series A Preferred stock; $1,000 par value per share – shares authorized 25,000; issued and outstanding 14,116			14,116				14,116
Additional paid-in capital			156,810				156,810
Retained earnings			237,992				222,495
Accumulated other comprehensive loss			(9,566	)			(9,196	)
Total stockholder’s equity			399,352				384,225
		$	860,676			$	870,464

See accompanying notes to consolidated financial statements.

 

4

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UNITED REFINING COMPANY AND SUBSIDIARIES

Consolidated Statements of Income – (Unaudited)

(in thousands)

 

		Three Months Ended November 30,
		2014				2013
Net sales		$	824,697			$	891,715
Costs and expenses:
Costs of goods sold (exclusive of depreciation and amortization)			737,168				838,165
Selling, general and administrative expenses			41,038				41,146
Depreciation and amortization expenses			10,352				6,990
			788,558				886,301
Operating income			36,139				5,414
Other expense:
Interest expense, net			(6,658	)			(6,534	)
Other, net			(608	)			(664	)
			(7,266	)			(7,198	)
Income (loss) before income tax expense (benefit)			28,873				(1,784	)
Income tax expense (benefit)			11,259				(697	)
Net income (loss)		$	17,614			$	(1,087	)

See accompanying notes to consolidated financial statements.

 

5

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UNITED REFINING COMPANY AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss) – (Unaudited)

(in thousands)

 

		Three Months Ended November 30,
		2014				2013
Net income (loss)		$	17,614			$	(1,087	)
Other comprehensive loss, net of taxes:
Unrecognized post retirement costs, net of taxes of $(237) and $(119) for the three months ended November 30, 2014 and 2013, respectively			(370	)			(172	)
Other comprehensive loss			(370	)			(172	)
Total comprehensive income (loss)		$	17,244			$	(1,259	)

See accompanying notes to consolidated financial statements.

 

6

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UNITED REFINING COMPANY AND SUBSIDIARIES

Consolidated Statements of Cash Flows – (Unaudited)

(in thousands)

 

		Three Months Ended November 30,
		2014				2013
Cash flows from operating activities:
Net income (loss)		$	17,614			$	(1,087	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization			10,958				7,564
Deferred income taxes			11,736				(215	)
Loss on asset dispositions			500				5
Cash used in working capital items			(26,609	)			(27,563	)
Change in operating assets and liabilities:
Other assets, net			236				169
Deferred retirement benefits			(1,996	)			(2,579	)
Total adjustments			(5,175	)			(22,619	)
Net cash provided by (used in) operating activities			12,439				(23,706	)
Cash flows from investing activities:
Additions to property, plant and equipment			(10,924	)			(11,114	)
Additions to deferred turnaround costs			(1,723	)			(511	)
Additions to deferred integrity and replacement costs			(28,630	)			—
Proceeds from asset dispositions			3				38
Net cash used in investing activities			(41,274	)			(11,587	)
Cash flows from financing activities:
Dividends to preferred shareholder and common stockholder			(2,117	)			(2,234	)
Proceeds from issuance of long-term debt			—				1,426
Principal reductions of long-term debt			(414	)			(454	)
Distribution to parent under the tax sharing agreement			—				(2,593	)
Net cash used in financing activities			(2,531	)			(3,855	)
Net decrease in cash and cash equivalents			(31,366	)			(39,148	)
Cash and cash equivalents, beginning of year			99,037				158,537
Cash and cash equivalents, end of period		$	67,671			$	119,389
Cash provided by (used in) working capital items:
Accounts receivable, net		$	(986	)		$	22,164
Inventories, net			(37,991	)			(54,066	)
Prepaid income taxes			(433	)			—
Prepaid expenses and other assets			19,366				332
Amounts due to (from) affiliated companies, net			(453	)			(929	)
Accounts payable			(10,172	)			3,580
Accrued liabilities			5,584				5,520
Income taxes payable			—				(1,937	)
Sales, use, and fuel taxes payable			(1,524	)			(2,227	)
Total change		$	(26,609	)		$	(27,563	)
Cash paid during the period for:
Interest		$	163			$	156
Income taxes		$	30			$	1,455
Non-cash investing activities:
Property additions & capital leases		$	285			$	241

See accompanying notes to consolidated financial statements.

 

7

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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, United Biofuels, Inc. 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 months ended November 30, 2014 are not necessarily indicative of the results that may be expected for the year ending August 31, 2015. 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, 2014.

 

2.	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 the lower of cost or market or replacement cost and include various parts for the refinery operations.

Inventories consist of the following:

 

		November 30, 2014				August 31, 2014
		(in thousands)
Crude Oil		$	53,371			$	36,667
Petroleum Products			83,650				63,252
Total @ LIFO			137,021				99,919
Merchandise			24,928				23,983
Supplies			27,514				27,570
Total @ FIFO			52,442				51,553
Total Inventory		$	189,463			$	151,472

 

8

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UNITED REFINING COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

As of November 30, 2014 and August 31, 2014, the replacement cost of LIFO inventories exceeded their LIFO carrying values by approximately $77,917,000 and $109,711,000, respectively.

 

3.	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,
		2014				2013
Net Sales
Retail		$	379,156			$	413,728
Wholesale			445,541				477,987
		$	824,697			$	891,715
Intersegment Sales
Wholesale		$	180,256			$	213,701
Operating Income
Retail		$	9,759			$	1,385
Wholesale			26,380				4,029
		$	36,139			$	5,414
Depreciation and Amortization
Retail		$	1,763			$	1,561
Wholesale			8,589				5,429
		$	10,352			$	6,990

 

		November 30, 2014				August 31, 2014
Total Assets
Retail		$	180,754			$	186,277
Wholesale			679,922				684,187
		$	860,676			$	870,464

 

9

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UNITED REFINING COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

4.	Subsidiary Guarantors

All of the Company’s wholly-owned subsidiaries fully and unconditionally guarantee on an unsecured basis, on a joint and several basis, the Company’s 10.50% Senior Secured Notes due 2018. 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)

 

		November 30, 2014																August 31, 2014
		United Refining Company				Guarantors				Eliminations				United Refining Company  & Subsidiaries				United Refining Company				Guarantors				Eliminations				United Refining Company  & Subsidiaries
Assets
Current:
Cash and cash equivalents		$	50,107			$	17,564			$	—			$	67,671			$	79,356			$	19,681			$	—			$	99,037
Accounts receivable, net			57,771				35,606				—				93,377				51,452				40,939				—				92,391
Refundable income taxes			6,000				—				—				6,000				6,000				—				—				6,000
Inventories, net			159,279				30,184				—				189,463				122,161				29,311				—				151,472
Prepaid income taxes			17,697				(3,590	)			—				14,107				16,918				(3,244	)			—				13,674
Prepaid expenses and other assets			43,630				4,172				—				47,802				62,889				4,279				—				67,168
Intercompany			121,106				(422	)			(120,684	)			—				127,105				1,116				(128,221	)			—
Total current assets			455,590				83,514				(120,684	)			418,420				465,881				92,082				(128,221	)			429,742
Property, plant and equipment, net			203,565				119,473				—				323,038				199,703				117,816				—				317,519
Deferred financing costs, net			3,268				—				—				3,268				3,575				—				—				3,575
Goodwill and other non-amortizable assets			—				11,849				—				11,849				—				11,849				—				11,849
Amortizable intangible assets, net			—				857				—				857				—				951				—				951
Deferred integrity and replacement costs, net			63,346				—				—				63,346				64,916				—				—				64,916
Deferred turnaround costs & other assets			36,233				3,665				—				39,898				39,302				2,610				—				41,912
Investment in subsidiaries			41,351				—				(41,351	)			—				35,811				—				(35,811	)			—
		$	803,353			$	219,358			$	(162,035	)		$	860,676			$	809,188			$	225,308			$	(164,032	)		$	870,464
Liabilities and Stockholder’s Equity
Current:
Current installments of long-term debt		$	540			$	1,015			$	—			$	1,555			$	519			$	1,032			$	—			$	1,551
Accounts payable			29,818				23,261				—				53,079				64,965				26,916				—				91,881
Accrued liabilities			16,968				7,307				—				24,275				12,315				6,376				—				18,691
Sales, use and fuel taxes payable			15,175				3,851				—				19,026				16,037				4,513				—				20,550
Deferred income taxes			3,770				(960	)			—				2,810				3,770				(960	)			—				2,810
Amounts due to affiliated companies, net			—				1,068				—				1,068				—				1,521				—				1,521
Intercompany			—				120,684				(120,684	)			—				—				128,221				(128,221	)			—
Total current liabilities			66,271				156,226				(120,684	)			101,813				97,606				167,619				(128,221	)			137,004
Long term debt: less current installments			233,358				4,782				—				238,140				232,946				5,028				—				237,974
Deferred income taxes			40,085				15,554				—				55,639				28,816				15,324				—				44,140
Deferred retirement benefits			64,287				1,445				—				65,732				65,595				1,526				—				67,121
Total liabilities			404,001				178,007				(120,684	)			461,324				424,963				189,497				(128,221	)			486,239
Commitment and contingencies
Stockholder’s equity
Common stock; $.10 par value per share – shares authorized 100; issued and outstanding 100			—				18				(18	)			—				—				18				(18	)			—
Series A Preferred stock; $1,000 par value share – shares authorized 25,000; issued and outstanding 14,116			14,116				—				—				14,116				14,116				—				—				14,116
Additional paid-in capital			156,810				16,626				(16,626	)			156,810				156,810				16,626				(16,626	)			156,810
Retained earnings			237,992				25,666				(25,666	)			237,992				222,495				20,143				(20,143	)			222,495
Accumulated other comprehensive loss			(9,566	)			(959	)			959				(9,566	)			(9,196	)			(976	)			976				(9,196	)
Total stockholder’s equity			399,352				41,351				(41,351	)			399,352				384,225				35,811				(35,811	)			384,225
		$	803,353			$	219,358			$	(162,035	)		$	860,676			$	809,188			$	225,308			$	(164,032	)		$	870,464

 

10

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UNITED REFINING COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Condensed Consolidating Statements of Income

(in thousands)

 

		Three Months Ended November 30, 2014																Three Months Ended November 30, 2013
		United Refining Company				Guarantors				Eliminations				United Refining Company  & Subsidiaries				United Refining Company				Guarantors				Eliminations				United Refining Company  & Subsidiaries
Net sales		$	625,797			$	380,346			$	(181,446	)		$	824,697			$	691,688			$	415,006			$	(214,979	)		$	891,715
Costs and expenses:
Costs of goods sold (exclusive of depreciation and amortization)			583,955				334,659				(181,446	)			737,168				675,725				377,419				(214,979	)			838,165
Selling, general and administrative expenses			6,717				34,321				—				41,038				6,531				34,615				—				41,146
Depreciation and amortization expenses			8,295				2,057				—				10,352				5,173				1,817				—				6,990
			598,967				371,037				(181,446	)			788,558				687,429				413,851				(214,979	)			886,301
Operating income			26,830				9,309				—				36,139				4,259				1,155				—				5,414
Other income (expense):
Interest expense, net			(6,413	)			(245	)			—				(6,658	)			(6,298	)			(236	)			—				(6,534	)
Other, net			(773	)			165				—				(608	)			(848	)			184				—				(664	)
Equity in net income of subsidiaries			5,523				—				(5,523	)			—				666				—				(666	)			—
			(1,663	)			(80	)			(5,523	)			(7,266	)			(6,480	)			(52	)			(666	)			(7,198	)
Income (loss) before income tax expense (benefit)			25,167				9,229				(5,523	)			28,873				(2,221	)			1,103				(666	)			(1,784	)
Income tax expense (benefit)			7,553				3,706				—				11,259				(1,134	)			437				—				(697	)
Net income (loss)		$	17,614			$	5,523			$	(5,523	)		$	17,614			$	(1,087	)		$	666			$	(666	)		$	(1,087	)

 

11

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UNITED REFINING COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Condensed Consolidating Statements of Cash Flows

(in thousands)

 

		Three Months Ended November 30, 2014																Three Months Ended November 30, 2013
		United Refining Company				Guarantors				Eliminations				United Refining Company and Subsidiaries				United Refining Company				Guarantors				Eliminations				United Refining Company and Subsidiaries
Net cash provided by (used in) operating activities		$	9,206			$	3,233			$	—			$	12,439			$	(26,209	)		$	2,503			$	—			$	(23,706	)
Cash flows from investing activities:
Additions to property, plant and equipment			(7,004	)			(3,920	)			—				(10,924	)			(6,607	)			(4,507	)			—				(11,114	)
Additions to deferred turnaround costs			(554	)			(1,169	)			—				(1,723	)			(401	)			(110	)			—				(511	)
Additions to deferred integrity and replacement costs			(28,630	)			—				—				(28,630	)			—				—				—				—
Proceeds from asset dispositions			1				2				—				3				38				—				—				38
Net cash used in investing activities			(36,187	)			(5,087	)			—				(41,274	)			(6,970	)			(4,617	)			—				(11,587	)
Cash flows from financing activities:
Dividends to preferred shareholder and common stockholder			(2,117	)			—				—				(2,117	)			(2,234	)			—				—				(2,234	)
Proceeds from issuance of long-term debt			—				—				—				—				—				1,426				—				1,426
Principal reductions of long-term debt			(151	)			(263	)			—				(414	)			(232	)			(222	)			—				(454	)
Distribution to parent under the tax sharing agreement			—				—				—				—				(2,593	)			—				—				(2,593	)
Net cash (used in) provided by financing activities			(2,268	)			(263	)			—				(2,531	)			(5,059	)			1,204				—				(3,855	)
Net decrease in cash and cash equivalents			(29,249	)			(2,117	)			—				(31,366	)			(38,238	)			(910	)			—				(39,148	)
Cash and cash equivalents, beginning of year			79,356				19,681				—				99,037				141,386				17,151				—				158,537
Cash and cash equivalents, end of period		$	50,107			$	17,564			$	—			$	67,671			$	103,148			$	16,241			$	—			$	119,389

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

5.	Employee Benefit Plans

For the periods ended November 30, 2014 and 2013, 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,
		2014				2013				2014				2013
		(in thousands)
Service cost		$	157			$	149			$	(151	)		$	194
Interest cost on benefit obligation			1,213				1,311				(413	)			518
Expected return on plan assets			(1,588	)			(1,403	)			—				—
Amortization and deferral of net loss			180				175				786				(465	)
Net periodic benefit cost		$	(38	)		$	232			$	222			$	247

As of November 30, 2014, $1,138,000 of contributions have been made to the Company pension plans for the fiscal year ending August 31, 2015.

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.

 

6.	Fair Value Measurements

The carrying values of all financial instruments classified as a current asset or a 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 long term debt at November 30, 2014 and August 31, 2014 by $21,889,000 and $19,960,000, 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, current 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 volatility in petroleum markets in fiscal 2015. The lagged 3-2-1 crackspread is measured by the difference between the prices 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. The Company uses a lagged crackspread as a margin indicator as it reflects the margin during the time period between the purchase of crude oil and its delivery to the refinery for processing. The lagged crackspread for the first quarter of fiscal 2015 was $9.03. Through December 31, 2014 the indicated lagged crackspread for the second quarter ending February 28, 2015 was $6.50, a $2.53 decrease from the average for the first quarter of fiscal 2015.

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 Company-owned gasoline stations and convenience stores under the Red Apple Food Mart^® and Country Fair^® brand names.

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

 

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Retail Operations:

 

		Three Months Ended November 30,
		2014				2013
		(dollars in thousands)
Net Sales
Petroleum		$	310,965			$	345,712
Merchandise and other			68,191				68,016
Total Net Sales			379,156				413,728
Costs of goods sold			333,427				376,277
Selling, general and administrative expenses			34,207				34,505
Depreciation and amortization expenses			1,763				1,561
Segment Operating Income		$	9,759			$	1,385
Retail Operating Data:
Petroleum sales (thousands of gallons)			92,470				97,473
Petroleum margin (a)		$	28,331			$	20,392
Petroleum margin ($/gallon) (b)			.3064				.2092
Merchandise and other margins		$	17,398			$	17,058
Merchandise margin (percent of sales)			26	%			25	%

 

(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, 2014 and 2013

Net Sales

Retail sales decreased during the fiscal quarter ended November 30, 2014 by $34.6 million or 8.4% from the comparable period in fiscal 2014 from $413.7 million to $379.1 million. The decrease was due to a $34.6 million decrease in petroleum sales. The petroleum sales decrease resulted from a 5.0 million gallon or a 5.1% decrease in retail petroleum volume and a 5.2% decrease in retail selling prices per gallon.

Costs of Goods Sold

Retail costs of goods sold decreased during the fiscal quarter ended November 30, 2014 by $42.9 million or 11.4% from the comparable period in fiscal 2014 from $376.3 million to $333.4 million. The decrease was primarily due to $44.9 million in petroleum purchases, $.2 million in freight costs and $.2 million in merchandise costs offset by an increase in fuel taxes of $2.4 million.

Selling, General and Administrative Expenses

Retail Selling, General and Administrative (“SG&A”) expenses remained relatively constant during the fiscal quarters ended November 30, 2014 and 2013.

 

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Wholesale Operations:

 

		Three Months Ended November 30,
		2014				2013
		(dollars in thousands)
Net Sales (a)		$	445,541			$	477,987
Costs of goods sold (exclusive of depreciation, amortization)			403,741				461,888
Selling, general and administrative expenses			6,831				6,641
Depreciation and amortization expenses			8,589				5,429
Segment Operating Income		$	26,380			$	4,029

Key Wholesale Operating Statistics:

 

		Three Months Ended November 30,
		2014				2013
Refinery Product Yield (thousands of barrels)
Gasoline and gasoline blendstock			2,533				2,712
Distillates			1,372				1,401
Asphalt			1,837				1,990
Butane, propane, residual products, internally produced fuel and other (“Other”)			654				548
Total Product Yield			6,396				6,651
% Heavy Crude Oil of Total Refinery Throughput (b)			62	%			62	%
Crude throughput (thousand barrels per day)			64.1				67.2
Product Sales (thousand of barrels) (a)
Gasoline and gasoline blendstock			1,571				1,451
Distillates			1,087				1,076
Asphalt			1,760				1,930
Other			192				267
Total Product Sales Volume			4,610				4,724
Product Sales (dollars in thousands) (a)
Gasoline and gasoline blendstock		$	154,238			$	162,894
Distillates			121,186				140,281
Asphalt			160,452				158,409
Other			9,665				16,403
Total Product Sales		$	445,541			$	477,987

 

(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, 2014 and 2013

Net Sales

Wholesale sales decreased during the three months ended November 30, 2014 by $32.4 million or 6.8% from the comparable period in fiscal 2014 from $477.9 million to $445.5 million. The decrease was due primarily to a 2.3% decrease in wholesale volume and a 4.6% decrease in wholesale prices.

 

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Costs of Goods Sold (exclusive of depreciation and amortization)

Wholesale costs of goods sold decreased during the three months ended November 30, 2014 by $58.2 million or 12.6% from the comparable period in fiscal 2014 from $461.9 million to $403.7 million. The decrease in wholesale costs of goods sold during this period was primarily due to a decrease in cost and volume of raw materials.

Selling, General and Administrative Expenses

Wholesale SG&A expenses remained relatively constant during the three months ended November 30, 2014 and 2013.

Depreciation and Amortization

Depreciation, amortization increased during the three months ended November 30, 2014 by $3.2 million for the comparable period for fiscal 2014 from $5.4 million to $8.6 million. The increase was primarily due to increases of $1.6 million in turnaround cost amortization and $1.6 million amortization of integrity and replacement costs.

Consolidated Expenses:

Interest Expense, net

Net interest expense (interest expense less interest income) remained relatively constant during the three months ended November 30, 2014 and 2013.

Income Tax Expense

The Company’s effective tax rate remained approximately 39% for the three months ended November 30, 2014 and 2013.

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):

 

		November 30, 2014
Cash and cash equivalents		$	67,671
Working capital		$	316,607
Current ratio			4.1
Debt		$	239,695

Primary sources of liquidity have been cash and cash equivalents, and borrowing availability under our revolving credit facility (the “Amended and Restated Revolving Credit Facility”) with PNC Bank, N.A. as Administrator (the “Agent Bank”). We believe available capital resources are adequate to meet our working capital, debt service, and capital expenditure requirements for existing operations.

 

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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.

Significant Uses of Cash

The changes in cash for the three months ended November 30, 2014 are described below.

The cash used in working capital is shown below:

 

		Three Months Ended November 30, 2014
		(in millions)
Cash used in working capital items:
Prepaid expense decrease		$	19.4
Accrued liabilities increase			5.6
Inventory increase			(38.0	)
Accounts payable decrease			(10.2	)
Sales, use and fuel taxes payable decrease			(1.5	)
Accounts receivable increase			(1.0	)
Amounts due from affiliated companies, net			(.5	)
Prepaid income taxes increase			(.4	)
Total change		$	(26.6	)

Available cash on hand decreased by $31.4 million. Other cash uses included:

 

•

Fund operating activities used in working capital items of $26.6 million

 

•

Fund capital expenditures and deferred turnaround costs of $12.6 million

 

•

Dividends to preferred stockholder and common stockholder of $2.1 million

 

•

Scheduled long-term debt repayments of $.4 million

 

•

Fund deferred integrity and replacement costs of $28.6 million

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 2015 at this time.

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 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 or the Federal Funds Open Rate plus 1.5%; or the Daily

 

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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, 2014 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 $8.8 million as of November 30, 2014 and there were no outstanding borrowings under the Amended and Restated Revolving Credit Facility resulting in net availability of $166.2 million. As of January 14, 2015, there were no outstanding borrowings under the Amended and Restated Revolving Credit Facility and there were standby letters of credit in the amount of $8.8 million, resulting in a net availability of $166.2 million and the Company had full access to it. The Company’s working capital ratio was 4.1 as of November 30, 2014.

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 the 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. This on-balance sheet financial instrument, to the extent it provides for variable rates, exposes the Company to interest rate risk resulting from changes in the Agent Bank’s Prime rate, the Federal Funds or LIBOR rate. As of January 14, 2015, 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 Consolidated Statements of Income. There has been no derivative activity in fiscal 2015.

 

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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, 2014. 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, 2014, 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, 2014 that have materially affected, or are 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, 2014.

 

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 10.1		Amendment, dated December 16, 2014, to letter agreement between Enbridge Energy Limited Partnership and Enbridge Pipeline, Inc. and United Refining Company and Kiantone Pipeline Corporation
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 14, 2015

 

 

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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 14, 2015

 

 

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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 14, 2015

 

 

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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 14, 2015

 

 

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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 14, 2015

 

 

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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 14, 2015

 

 

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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 14, 2015

 

 

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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 14, 2015

 

 

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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 14, 2015

 

 

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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 14, 2015

 

 

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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 14, 2015

 

 

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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 14, 2015

 

 

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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 14, 2015

 

 

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