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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

(Mark One)

 

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

For the quarterly period ended February 28, 2015

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 April 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

 

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FORM 10-Q – CONTENTS

 

				PAGE
PART I . FINANCIAL INFORMATION					4
Item 1.		Financial Statements.			4
		Consolidated Balance Sheets – February 28, 2015 (unaudited) and August 31, 2014			4
		Consolidated Statements of Income – Quarter and Six Months Ended February  28, 2015 and 2014 (unaudited)			5
		Consolidated Statements of Comprehensive Income – Quarter and Six Months Ended February 28, 2015 and 2014 (unaudited)			6
		Consolidated Statements of Cash Flows – Six Months Ended February  28, 2015 and 2014 (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.			22
Item 4.		Controls and Procedures.			22
Item 5.		Other Information.			22
PART II. OTHER INFORMATION					23
Item 1.		Legal Proceedings.			23
Item 1A.		Risk Factors.			23
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds.			23
Item 3.		Defaults Upon Senior Securities.			23
Item 4.		Mine Safety Disclosures.			23
Item 5.		Other Information.			23
Item 6.		Exhibits.			23
Signatures.					24

 

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PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements.

UNITED REFINING COMPANY AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands, except share amounts)

 

		February 28, 2015 (Unaudited)				August 31, 2014
Assets
Current:
Cash and cash equivalents		$	59,997			$	99,037
Accounts receivable, net			72,358				92,391
Refundable income taxes			—				6,000
Inventories, net			198,779				151,472
Prepaid income taxes			23,820				13,674
Prepaid expenses and other assets			29,021				67,168
Amounts due from affiliated companies, net			143				—
Total current assets			384,118				429,742
Property, plant and equipment, net			326,697				317,519
Deferred financing costs, net			2,961				3,575
Goodwill			1,349				1,349
Tradename			10,500				10,500
Amortizable intangible assets, net			831				951
Deferred integrity and replacement costs, net			61,775				64,916
Deferred turnaround costs and other assets, net			37,123				41,912
		$	825,354			$	870,464
Liabilities and Stockholder’s Equity
Current:
Current installments of long-term debt		$	1,540			$	1,551
Accounts payable			37,873				91,881
Accrued liabilities			14,471				18,691
Sales, use and fuel taxes payable			16,516				20,550
Deferred income taxes			2,810				2,810
Amounts due to affiliated companies, net			—				1,521
Total current liabilities			73,210				137,004
Long term debt: less current installments			238,071				237,974
Deferred income taxes			65,682				44,140
Deferred retirement benefits			64,380				67,121
Total liabilities			441,343				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			223,021				222,495
Accumulated other comprehensive loss			(9,936	)			(9,196	)
Total stockholder’s equity			384,011				384,225
		$	825,354			$	870,464

See accompanying notes to consolidated financial statements.

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

Consolidated Statements of Income – (Unaudited)

(in thousands)

 

		Three Months Ended February 28,								Six Months Ended February 28,
		2015				2014				2015				2014
Net sales		$	580,904			$	773,719			$	1,405,601			$	1,665,434
Costs and expenses:
Costs of goods sold (exclusive of depreciation and amortization)			518,629				622,961				1,255,797				1,461,126
Selling, general and administrative expenses			40,958				41,781				81,996				82,927
Depreciation and amortization expenses			10,525				7,140				20,877				14,130
			570,112				671,882				1,358,670				1,558,183
Operating income			10,792				101,837				46,931				107,251
Other expense:
Interest expense, net			(6,632	)			(6,569	)			(13,290	)			(13,103	)
Other, net			(1,549	)			(733	)			(2,157	)			(1,397	)
			(8,181	)			(7,302	)			(15,447	)			(14,500	)
Income before income tax expense			2,611				94,535				31,484				92,751
Income tax expense			1,008				36,865				12,267				36,168
Net income		$	1,603			$	57,670			$	19,217			$	56,583

See accompanying notes to consolidated financial statements.

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income – (Unaudited)

(in thousands)

 

		Three Months Ended February 28,								Six Months Ended February 28,
		2015				2014				2015				2014
Net income		$	1,603			$	57,670			$	19,217			$	56,583
Other comprehensive loss, net of taxes:
Unrecognized post retirement loss, net of taxes of $(237) and $(120) for the three months ended February 28, 2015 and 2014, respectively and $(474) and $(239) for the six months ended February 28, 2015 and 2014, respectively			(370	)			(171	)			(740	)			(343	)
Other comprehensive loss			(370	)			(171	)			(740	)			(343	)
Total comprehensive income		$	1,233			$	57,499			$	18,477			$	56,240

See accompanying notes to consolidated financial statements.

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

Consolidated Statements of Cash Flows – (Unaudited)

(in thousands)

 

		Six Months Ended February 28,
		2015				2014
Cash flows from operating activities:
Net income		$	19,217			$	56,583
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			22,096				15,286
Deferred income taxes			22,016				1,786
Loss on asset dispositions			766				13
Cash used in working capital items			(28,569	)			(26,103	)
Change in operating assets and liabilities:
Other assets, net			137				338
Deferred retirement benefits			(3,955	)			(3,702	)
Total adjustments			12,491				(12,382	)
Net cash provided by operating activities			31,708				44,201
Cash flows from investing activities:
Additions to property, plant and equipment			(20,069	)			(20,353	)
Additions to deferred turnaround costs			(2,558	)			(3,124	)
Additions to deferred integrity and replacement costs			(28,630	)			—
Proceeds from asset dispositions			4				56
Net cash used in investing activities			(51,253	)			(23,421	)
Cash flows from financing activities:
Dividends to preferred shareholder and common stockholder			(18,691	)			(4,810	)
Proceeds from issuance of long-term debt			—				1,426
Principal reductions of long-term debt			(804	)			(1,000	)
Distribution to parent under the tax sharing agreement			—				(2,593	)
Net cash used in financing activities			(19,495	)			(6,977	)
Net (decrease) increase in cash and cash equivalents			(39,040	)			13,803
Cash and cash equivalents, beginning of year			99,037				158,537
Cash and cash equivalents, end of period		$	59,997			$	172,340
Cash provided by (used in) working capital items:
Accounts receivable, net		$	20,033			$	27,157
Refundable income taxes			6,000				20,890
Inventories, net			(47,307	)			(94,602	)
Prepaid income taxes			(10,146	)			—
Prepaid expenses and other assets			38,147				11,312
Amounts due from/to affiliated companies, net			(1,664	)			(353	)
Accounts payable			(25,378	)			(2,802	)
Accrued liabilities			(4,220	)			(3,427	)
Income taxes payable			—				16,317
Sales, use, and fuel taxes payable			(4,034	)			(595	)
Total change		$	(28,569	)		$	(26,103	)
Cash paid during the period for:
Interest		$	12,758			$	12,755
Income taxes		$	339			$	16,151
Non-cash investing activities:
Property additions & capital leases		$	285			$	241

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, 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 and six months ended February 28, 2015 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:

 

		February 28, 2015				August 31, 2014
		(in thousands)
Crude Oil		$	41,199			$	36,667
Petroleum Products			104,357				63,252
Total @ LIFO			145,556				99,919
Merchandise			24,221				23,983
Supplies			29,002				27,570
Total @ FIFO			53,223				51,553
Total Inventory		$	198,779			$	151,472

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

As of February 28, 2015 and August 31, 2014, the replacement cost of LIFO inventories exceeded their LIFO carrying values by approximately $7,308,000 and $109,711,000, respectively. In accordance with ASC 270, Interim Reporting, and ASC 330, Inventory, as of February 28, 2015 the Company has not recorded any reserve against its LIFO carrying values (which amounted to $8,629,000) as the current decline in market values is reasonably expected to be temporary and be restored in the current fiscal year.

 

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 February 28,								Six Months Ended February 28,
		2015				2014				2015				2014
Net Sales
Retail		$	298,666			$	392,756			$	677,822			$	806,484
Wholesale			282,238				380,963				727,779				858,950
		$	580,904			$	773,719			$	1,405,601			$	1,665,434
Intersegment Sales
Wholesale		$	116,350			$	203,890			$	296,606			$	417,591
Operating Income (Loss)
Retail		$	8,040			$	(5,915	)		$	17,799			$	(4,530	)
Wholesale			2,752				107,752				29,132				111,781
		$	10,792			$	101,837			$	46,931			$	107,251
Depreciation and Amortization
Retail		$	1,793			$	1,578			$	3,556			$	3,139
Wholesale			8,732				5,562				17,321				10,991
		$	10,525			$	7,140			$	20,877			$	14,130

 

		February 28, 2015				August 31, 2014
Total Assets		$	163,957			$	186,277
Retail			661,397				684,187
Wholesale		$	825,354			$	870,464

 

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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)

 

		February 28, 2015																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		$	47,174			$	12,823			$	—			$	59,997			$	79,356			$	19,681			$	—			$	99,037
Accounts receivable, net			46,832				25,526				—				72,358				51,452				40,939				—				92,391
Refundable income taxes			—				—				—				—				6,000				—				—				6,000
Inventories, net			171,007				27,772				—				198,779				122,161				29,311				—				151,472
Prepaid income taxes			28,865				(5,045	)			—				23,820				16,918				(3,244	)			—				13,674
Prepaid expenses and other assets			22,659				6,362				—				29,021				62,889				4,279				—				67,168
Amounts due from affiliated companies, net			—				143				—				143				—				—				—				—
Intercompany			107,494				(3,677	)			(103,817	)			—				127,105				1,116				(128,221	)			—
Total current assets			424,031				63,904				(103,817	)			384,118				465,881				92,082				(128,221	)			429,742
Property, plant and equipment, net			204,973				121,724				—				326,697				199,703				117,816				—				317,519
Deferred financing costs, net			2,961				—				—				2,961				3,575				—				—				3,575
Goodwill and other non-amortizable assets			—				11,849				—				11,849				—				11,849				—				11,849
Amortizable intangible assets, net			—				831				—				831				—				951				—				951
Deferred integrity and replacement costs, net			61,775				—				—				61,775				64,916				—				—				64,916
Deferred turnaround costs & other assets			32,571				4,552				—				37,123				39,302				2,610				—				41,912
Investment in subsidiaries			45,759				—				(45,759	)			—				35,811				—				(35,811	)			—
		$	772,070			$	202,860			$	(149,576	)		$	825,354			$	809,188			$	225,308			$	(164,032	)		$	870,464
Liabilities and Stockholder’s Equity
Current:
Current installments of long-term debt		$	523			$	1,017			$	—			$	1,540			$	519			$	1,032			$	—			$	1,551
Accounts payable			17,728				20,145				—				37,873				64,965				26,916				—				91,881
Accrued liabilities			8,246				6,225				—				14,471				12,315				6,376				—				18,691
Sales, use and fuel taxes payable			12,519				3,997				—				16,516				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			—				—				—				—				—				1,521				—				1,521
Intercompany			—				103,817				(103,817	)			—				—				128,221				(128,221	)			—
Total current liabilities			42,786				134,241				(103,817	)			73,210				97,606				167,619				(128,221	)			137,004
Long term debt: less current installments			233,539				4,532				—				238,071				232,946				5,028				—				237,974
Deferred income taxes			48,767				16,915				—				65,682				28,816				15,324				—				44,140
Deferred retirement benefits			62,967				1,413				—				64,380				65,595				1,526				—				67,121
Total liabilities			388,059				157,101				(103,817	)			441,343				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 per 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			223,021				30,057				(30,057	)			223,021				222,495				20,143				(20,143	)			222,495
Accumulated other comprehensive loss			(9,936	)			(942	)			942				(9,936	)			(9,196	)			(976	)			976				(9,196	)
Total stockholder’s equity			384,011				45,759				(45,759	)			384,011				384,225				35,811				(35,811	)			384,225
		$	772,070			$	202,860			$	(149,576	)		$	825,354			$	809,188			$	225,308			$	(164,032	)		$	870,464

 

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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 February 28, 2015																Three Months Ended February 28, 2014
		United Refining Company				Guarantors				Eliminations				United Refining Company  & Subsidiaries				United Refining Company				Guarantors				Eliminations				United Refining Company & Subsidiaries
Net sales		$	398,588			$	299,837			$	(117,521	)		$	580,904			$	584,853			$	393,881			$	(205,015	)		$	773,719
Costs and expenses:
Costs of goods sold (exclusive of depreciation and amortization)			380,799				255,351				(117,521	)			518,629				464,875				363,101				(205,015	)			622,961
Selling, general and administrative expenses			6,036				34,922				—				40,958				6,473				35,308				—				41,781
Depreciation and amortization expenses			8,481				2,044				—				10,525				5,306				1,834				—				7,140
			395,316				292,317				(117,521	)			570,112				476,654				400,243				(205,015	)			671,882
Operating income (loss)			3,272				7,520				—				10,792				108,199				(6,362	)			—				101,837
Other income (expense):
Interest expense, net			(6,402	)			(230	)			—				(6,632	)			(6,331	)			(238	)			—				(6,569	)
Other, net			(1,744	)			195				—				(1,549	)			(872	)			139				—				(733	)
Equity in net income (loss) of subsidiaries			4,391				—				(4,391	)			—				(3,742	)			—				3,742				—
			(3,755	)			(35	)			(4,391	)			(8,181	)			(10,945	)			(99	)			3,742				(7,302	)
(Loss) income before income tax (benefit) expense			(483	)			7,485				(4,391	)			2,611				97,254				(6,461	)			3,742				94,535
Income tax (benefit) expense			(2,086	)			3,094				—				1,008				39,584				(2,719	)			—				36,865
Net (loss) income		$	1,603			$	4,391			$	(4,391	)		$	1,603			$	57,670			$	(3,742	)		$	3,742			$	57,670

 

		Six Months Ended February 28, 2015																Six Months Ended February 28, 2014
		United Refining Company				Guarantors				Eliminations				United Refining Company  & Subsidiaries				United Refining Company				Guarantors				Eliminations				United Refining Company  & Subsidiaries
Net sales		$	1,024,385			$	680,183			$	(298,967	)		$	1,405,601			$	1,276,541			$	808,887			$	(419,994	)		$	1,665,434
Costs and expenses:
Costs of goods sold (exclusive of depreciation and amortization)			964,754				590,010				(298,967	)			1,255,797				1,140,600				740,520				(419,994	)			1,461,126
Selling, general and administrative expenses			12,753				69,243				—				81,996				13,004				69,923				—				82,927
Depreciation and amortization expenses			16,776				4,101				—				20,877				10,479				3,651				—				14,130
			994,283				663,354				(298,967	)			1,358,670				1,164,083				814,094				(419,994	)			1,558,183
Operating income (loss)			30,102				16,829				—				46,931				112,458				(5,207	)			—				107,251
Other income (expense):
Interest expense, net			(12,815	)			(475	)			—				(13,290	)			(12,629	)			(474	)			—				(13,103	)
Other, net			(2,517	)			360				—				(2,157	)			(1,720	)			323				—				(1,397	)
Equity in net income (loss) of subsidiaries			9,914				—				(9,914	)			—				(3,076	)			—				3,076				—
			(5,418	)			(115	)			(9,914	)			(15,447	)			(17,425	)			(151	)			3,076				(14,500	)
Income (loss) before income tax expense (benefit)			24,684				16,714				(9,914	)			31,484				95,033				(5,358	)			3,076				92,751
Income tax expense (benefit)			5,467				6,800				—				12,267				38,450				(2,282	)			—				36,168
Net income (loss)		$	19,217			$	9,914			$	(9,914	)		$	19,217			$	56,583			$	(3,076	)		$	3,076			$	56,583

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Condensed Consolidating Statements of Cash Flows

(in thousands)

 

		Six Months Ended February 28, 2015																Six Months Ended February 28, 2014
		United Refining Company				Guarantors				Eliminations				United Refining Company and Subsidiaries				United Refining Company				Guarantors				Eliminations				United Refining Company and Subsidiaries
Net cash provided by operating activities		$	27,712			$	3,996			$	—			$	31,708			$	40,636			$	3,565			$	—			$	44,201
Cash flows from investing activities:
Additions to property, plant and equipment			(11,739	)			(8,330	)			—				(20,069	)			(12,798	)			(7,555	)			—				(20,353	)
Additions to deferred turnaround costs			(543	)			(2,015	)			—				(2,558	)			(3,014	)			(110	)			—				(3,124	)
Additions to deferred integrity and replacement costs			(28,630	)			—				—				(28,630	)			—				—				—				—
Proceeds from asset dispositions			2				2				—				4				56				—				—				56
Net cash used in investing activities			(40,910	)			(10,343	)			—				(51,253	)			(15,756	)			(7,665	)			—				(23,421	)
Cash flows from financing activities:
Dividends to preferred shareholder and common stockholder			(18,691	)			—				—				(18,691	)			(4,810	)			—				—				(4,810	)
Proceeds from issuance of long-term debt			—				—				—				—				—				1,426				—				1,426
Principal reductions of long-term debt			(293	)			(511	)			—				(804	)			(467	)			(533	)			—				(1,000	)
Distribution to parent under the tax sharing agreement			—				—				—				—				(2,593	)			—				—				(2,593	)
Net cash (used in) provided by financing activities			(18,984	)			(511	)			—				(19,495	)			(7,870	)			893				—				(6,977	)
Net (decrease) increase in cash and cash equivalents			(32,182	)			(6,858	)			—				(39,040	)			17,010				(3,207	)			—				13,803
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		$	47,174			$	12,823			$	—			$	59,997			$	158,396			$	13,944			$	—			$	172,340

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

5.	Employee Benefit Plans

For the periods ended February 28, 2015 and 2014, net pension and other postretirement benefit costs were comprised of the following:

 

		Pension Benefits
		Three Months Ended February 28,								Six Months Ended February 28,
		2015				2014				2015				2014
		(in thousands)
Service cost		$	156			$	149			$	313			$	298
Interest cost on benefit obligation			1,212				1,311				2,425				2,622
Expected return on plan assets			(1,587	)			(1,403	)			(3,175	)			(2,806	)
Amortization and deferral of net loss			181				176				361				351
Net periodic benefit cost		$	(38	)		$	233			$	(76	)		$	465

 

		Other Post-Retirement Benefits
		Three Months Ended February 28,								Six Months Ended February 28,
		2015				2014				2015				2014
		(in thousands)
Service cost		$	(151	)		$	193			$	(302	)		$	387
Interest cost on benefit obligation			(413	)			518				(826	)			1,036
Amortization and deferral of net loss			786				(465	)			1,572				(930	)
Net periodic benefit cost		$	222			$	246			$	444			$	493

As of February 28, 2015, $2,142,000 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 February 28, 2015 and August 31, 2014 by $17,812,000 and $28,041,000, respectively.

 

7.	Subsequent Events

On April 8, 2015 (the “Execution Date”), the Company entered into a Put and Call Option Agreement with each of Enbridge Energy Limited Partnership (“Enbridge LP”) and Enbridge Pipelines Inc. (“Enbridge Inc.” and, together with Enbridge LP, the “Carriers”). The Put and Call Option Agreement entered into with Enbridge LP (the “U.S. Agreement”) is substantially similar to the Put and Call Option Agreement entered into with Enbridge Inc. (the “Canadian Agreement” and, together with the U.S. Agreement, the “Put and Call Agreement”). The Put

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

and Call Agreement was contemplated in that certain Letter Agreement, originally executed on July 31, 2014 and last amended on April 8, 2015 (the “Letter Agreement”), between the Company and the Carriers relating to approximately 88.85 miles of pipeline owned by the Carriers, which transports crude oil from Canada to the Company’s Kiantone Pipeline in West Seneca, New York, and serves the Company’s refinery in Warren, Pennsylvania (“Line 10”). The Letter Agreement related to the parties’ agreement concerning funding certain integrity and replacement costs for Line 10. The Letter Agreement also contemplated that the parties would enter into a put and call agreement relating to the sale of Line 10 from the Carriers to the Company.

The Carriers own the pipeline facilities generally identified as Line 10, including real property interests through and under which Line 10 passes, the Carriers’ assignable permits related to the ownership and operation of Line 10, as well as personal property, contract rights, records and incidental rights held solely in connection with Line 10 (collectively, the “Assets”). Pursuant to the Put and Call Agreement, the Carriers granted the Company a right (the “Call Option”) to purchase all of the Assets and the Company granted the Carriers the right to put all the Assets to the Company (the “Put Option” and, together with the Call Option, the “Purchase Options”) subject to the terms and conditions of the Put and Call Agreement.

The Carrier’s Put Option is exercisable beginning on the date that is the earlier of (a) January 1, 2026 and (b) the date that is 30 days after the latest of (i) the date on which the Carriers give notice that the Line 10 replacement work performed pursuant to the Letter Agreement is sufficiently completed (as contemplated in the Call and Put Agreement) and (ii) the ninth (9^th) anniversary of the Execution Date (the “Put Option Commencement Date”). The Put Option terminates on the date that is 24 months after either (a) the Put Option Commencement Date if such date is the first of a month or (b) the first day of the calendar month immediately following the Put Option Commencement Date if it is not the first day of the month (the “Put/Call Option Expiry Date”). The Company’s Call Option is exercisable at any time beginning on the Execution Date and ending on the Put/Call Option Expiry Date.

The purchase price of the Assets (the “Purchase Price”) shall be calculated as follows: the sum of (a) 70% of the book value of the Assets as of July 31, 2014 minus annual depreciation, (b) 100% of total replacement costs for any segment replacements on the Pipeline commenced by the Carrier, whether completed or ongoing on the date of Asset sale is consummated (the “Closing Date”), minus any of such expenses paid by the Company and (c) 100% of the total regulatory requirements costs for any regulatory work commenced by the Carrier, whether completed or ongoing at the Closing Date, minus any of such expenses paid by the Company. The Purchase Price shall be subject to adjustment pursuant to the Agreement with respect to certain work ongoing at the Closing Date.

Among other customary conditions to closing, Carrier’s obligation to close the sale of the Assets is conditioned on the Company’s payment of all obligations outstanding pursuant to the Put and Call Agreement and the Letter Agreement. In addition, the sale of Assets pursuant to the U.S. Agreement shall close concurrently with the sale of the Assets pursuant to the Canadian Agreement.

The Company and the Carrier agreed that certain work must be undertaken in order to carve out portions of Line 10 in Canada from the Enbridge mainline system and allow it to operate independently. In the event any work is required to similarly separate the U.S. portion of Line 10 from the Enbridge mainline system (the “Carve-Out Work”), a plan to perform such Carve-Out Work that would result in expenses greater than $38.5 million will require the approval of the Company.

In the event any of the maintenance, regulatory requirement, or replacement work contemplated in the Letter Agreement or the Put and Call Agreement (collectively, the “Work”) is outstanding at the Closing Date,

 

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UNITED REFINING COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

concurrently with the closing of the Asset sale, the Company and the Carriers will enter into an operating agreement (the “Operating Agreement”) pursuant to which the Carriers will provide certain operational and administrative services (the “Services”) while the Work is ongoing and complete such Work. As payment for the Services and completion of the Work, the Carriers shall be: (i) reimbursed for all expenses of providing the Services, (ii) paid a fixed fee of on an annual basis, which shall be subject to a 2% increase for each successive year following the first year of the Operating Agreement, and (ii) paid for all expenses of the Work not previously paid, as well as a 2.25% construction management fee.

The Put and Call Agreement may be terminated by the mutual consent of the Company and the Carriers and shall automatically terminate if neither Purchase Option is exercised prior to the Put/Call Option Expiry Date. Moreover, either the Company or a Carrier may terminate the Put and Call Agreement if a closing of the Asset sale shall not have occurred on or before December 31, 2028 assuming the terminating party is not then in breach of the Put and Call Agreement and if a party has breached a representation, such breach has not been cured within the time periods allotted by the Put and Call Agreement. Finally, the Company may terminate the Put and Call Agreement by notifying the Carriers to cease the replacement work contemplated in the Letter Agreement.

 

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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;

 

•

future exposure to currency devaluations or exchange rate fluctuations;

 

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•

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. NYMEX crude prices decreased $55 per barrel or 54% from August 31, 2014 to February 28, 2015. This decrease in crude price is reflected in decreased selling prices and subsequent net sales for the Company.

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 second quarter of fiscal 2015 was $8.04. Through April 2, 2015 the indicated lagged crackspread for the third quarter ending May 31, 2015 was $24.67, a $16.63 increase from the average for the second 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 February 28,								Six Months Ended February 28,
		2015				2014				2015				2014
		(dollars in thousands)
Net Sales
Petroleum		$	235,985			$	330,749			$	546,950			$	676,461
Merchandise and other			62,681				62,007				130,872				130,023
Total Net Sales		$	298,666			$	392,756			$	677,822			$	806,484
Costs of goods sold		$	254,025			$	361,878			$	587,452			$	738,155
Selling, general and administrative expenses			34,808				35,215				69,015				69,720
Depreciation and amortization expenses			1,793				1,578				3,556				3,139
Segment Operating Income (Loss)		$	8,040			$	(5,915	)		$	17,799			$	(4,530	)
Retail Operating Data:
Petroleum sales (thousands of gallons)			89,712				91,657				182,182				189,131
Petroleum margin (a)		$	28,610			$	15,363			$	56,941			$	35,756
Petroleum margin ($/gallon) (b)			.3189				.1676				.3126				.1891
Merchandise and other margins		$	16,031			$	15,515			$	33,429			$	32,573
Merchandise margin (percent of sales)			25.6	%			25.0	%			25.5	%			25.1	%

 

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

(b)

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

Comparison of Fiscal Quarters Ended February 28, 2015 and 2014

Net Sales

Retail sales decreased during the fiscal quarter ended February 28, 2015 by $94.1 million or 24.0% from the comparable period in fiscal 2014 from $392.8 million to $298.7 million. The decrease was due to a $94.8 million decrease in petroleum sales offset by an increase in merchandise sales of $.7 million. The petroleum sales decrease resulted from a 1.9 million gallon or a 2.1% decrease in retail petroleum volume and a 27.1% decrease in retail selling prices per gallon.

Costs of Goods Sold

Retail costs of goods sold decreased during the fiscal quarter ended February 28, 2015 by $107.9 million or 29.8% from the comparable period in fiscal 2014 from $361.9 million to $254.0 million. The decrease was primarily due to $111.6 million in petroleum purchase costs and $.1 million in freight costs offset by an increase of $.1 million in merchandise costs and fuel taxes of $3.7 million.

 

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Selling, General and Administrative Expenses

Retail Selling, General and Administrative (“SG&A”) expenses remained relatively constant during the fiscal quarters ended February 28, 2015 and 2014.

Comparison of Six Months Ended February 28, 2015 and 2014

Net Sales

Retail sales decreased during the six months ended February 28, 2015 by $128.7 million or 16.0% from the comparable period in fiscal 2014 from $806.5 million to $677.8 million. The decrease was primarily due to $129.5 million in petroleum sales, offset by an increase of $.8 million in merchandise sales. The petroleum sales decrease resulted from a 16.1% decrease in retail selling prices per gallon and a 6.9 million gallon or 3.7% decrease in sales volume.

Costs of Goods Sold

Retail costs of goods sold decreased during the six months ended February 28, 2015 by $150.7 million or 20.4% from the comparable period in fiscal 2014 from $738.2 million to $587.5 million. The decrease was primarily due to $156.5 million in petroleum purchase prices and freight costs of $.3 million, offset by an increase in fuel taxes of $6.1 million.

Selling, General and Administrative Expenses

Retail Selling, General and Administrative (“SG&A”) expenses remained relatively constant during the six months ended February 28, 2015 and 2014.

Wholesale Operations:

 

		Three Months Ended February 28,								Six Months Ended February 28,
		2015				2014				2015				2014
		(dollars in thousands)
Net Sales (a)		$	282,238			$	380,963			$	727,779			$	858,950
Costs of goods sold (exclusive of depreciation, amortization)			264,604				261,083				668,345				722,971
Selling, general and administrative expenses			6,150				6,566				12,981				13,207
Depreciation and amortization expenses			8,732				5,562				17,321				10,991
Segment Operating Income		$	2,752			$	107,752			$	29,132			$	111,781

 

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Key Wholesale Operating Statistics:

 

		Three Months Ended February 28,								Six Months Ended February 28,
		2015				2014				2015				2014
Refinery Product Yield (thousands of barrels)
Gasoline and gasoline blendstock			2,659				2,420				5,192				5,132
Distillates			1,259				1,236				2,631				2,637
Asphalt			1,751				1,697				3,588				3,687
Butane, propane, residual products, internally produced fuel and other (“Other”)			560				642				1,214				1,190
Total Product Yield			6,229				5,995				12,625				12,646
% Heavy Crude Oil of Total Refinery Throughput (b)			61	%			61	%			62	%			62	%
Crude throughput (thousand barrels per day)			61.8				59.7				63.0				63.5
Product Sales (thousand of barrels) (a)
Gasoline and gasoline blendstock			1,596				1,346				3,167				2,785
Distillates			1,097				880				2,184				1,969
Asphalt			1,347				1,295				3,108				3,226
Other			161				199				353				464
Total Product Sales Volume			4,201				3,720				8,812				8,444
Product Sales (dollars in thousands) (a)
Gasoline and gasoline blendstock		$	101,894			$	152,000			$	256,131			$	314,894
Distillates			89,494				119,896				210,680				260,177
Asphalt			86,069				96,190				246,522				254,599
Other			4,781				12,877				14,446				29,280
Total Product Sales		$	282,238			$	380,963			$	727,779			$	858,950

 

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

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

Comparison of Fiscal Quarters Ended February 28, 2015 and 2014

Net Sales

Wholesale sales decreased during the three months ended February 28, 2015 by $98.7 million or 25.9% from the comparable period in fiscal 2014 from $380.9 million to $282.2 million. The decrease was due primarily to a 25.9% decrease in wholesale prices offset by an increase of 12.9% in wholesale volume.

Costs of Goods Sold (exclusive of depreciation and amortization)

Wholesale costs of goods sold increased during the three months ended February 28, 2015 by $3.5 million or 1.3% from the comparable period in fiscal 2014 from $261.1 million to $264.6 million. The increase in wholesale costs of goods sold during this period was primarily due to an increase in volume of raw materials.

Selling, General and Administrative Expenses

Wholesale SG&A expenses remained relatively constant during the three months ended February 28, 2015 and 2014.

 

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Depreciation and Amortization

Depreciation, amortization increased during the three months ended February 28, 2015 by $3.2 million for the comparable period for fiscal 2014 from $5.5 million to $8.7 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.

Comparison of Six Months Ended February 28, 2015 and 2014

Net Sales

Wholesale sales decreased during the six months ended February 28, 2015 by $131.2 million or 15.3% from the comparable period in fiscal 2014 from $859.0 million to $727.8 million. The decrease was due to a 15.3% decrease in wholesale prices offset by a 4.4% increase in wholesale volume.

Costs of Goods Sold (exclusive of depreciation and amortization)

Wholesale costs of goods sold decreased during the six months ended February 28, 2015 by $54.6 million or 7.6% from the comparable period in fiscal 2014 from $723.0 million to $668.4 million. The decrease in wholesale costs of goods sold was primarily due to a decrease in the cost and volume of raw materials.

Selling, General and Administrative Expenses

Wholesale SG&A expenses remained relatively constant during the six months ended February 28, 2015 and 2014.

Depreciation and Amortization

Depreciation, amortization increased during the three months ended February 28, 2015 by $6.3 million for the comparable period for fiscal 2014 from $11.0 million to $17.3 million. The increase was primarily due to increases of $3.2 million in turnaround cost amortization and $3.1 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 and six months ended February 28, 2015 and 2014.

Income Tax Expense

The Company’s effective tax rate remained approximately 39% for the three and six months ended February 28, 2015 and 2014.

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.

 

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

 

		February 28, 2015
Cash and cash equivalents		$	59,997
Working capital		$	310,908
Current ratio			5.2
Debt		$	239,611

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.

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 six months ended February 28, 2015 are described below.

The cash used in working capital is shown below:

 

		Six Months Ended February 28, 2015
		(in millions)
Cash used in working capital items:
Prepaid expense decrease		$	38.1
Accounts receivable decrease			20.0
Refundable income taxes decrease			6.0
Inventory increase			(47.3	)
Accounts payable decrease			(25.4	)
Prepaid income taxes increase			(10.1	)
Accrued liabilities decrease			(4.2	)
Sales, use and fuel taxes payable decrease			(4.0	)
Amounts due from affiliated companies, net			(1.7	)
Total change		$	(28.6	)

Available cash on hand decreased by $39.0 million. Other cash uses included:

 

•

Fund operating activities used in working capital items of $28.6 million

 

•

Fund capital expenditures and deferred turnaround costs of $22.6 million

 

•

Dividends to preferred shareholder and common stockholder of $18.7 million

 

•

Scheduled long-term debt repayments of $.8 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.

 

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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 November 29, 2017. 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 .75%; or the Daily LIBOR rate plus 2.75%; plus an applicable margin of 0% to .5%; (b) for euro-rate based borrowings, at the LIBOR Rate plus an applicable margin of 2.25% to 3.25%. The Agent Bank’s prime rate at February 28, 2015 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 February 28, 2015 and there were no outstanding borrowings under the Amended and Restated Revolving Credit Facility resulting in net availability of $166.2 million. As of April 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 5.2 as of February 28, 2015.

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.

 

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Inflation

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

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk.

The Company uses its Amended and Restated Revolving Credit Facility to finance a portion of its operations. 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 April 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.

 

Item 4.

Controls and Procedures.

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of February 28, 2015. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of February 28, 2015, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

There have not been any changes in the Company’s internal controls over financial reporting that occurred during the Company’s fiscal quarter ended February 28, 2015 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.

On April 8, 2015 (the “Execution Date”), the Company entered into a Put and Call Option Agreement with each of Enbridge Energy Limited Partnership (“Enbridge LP”) and Enbridge Pipelines Inc. (“Enbridge Inc.” and, together with Enbridge LP, the “Carriers”). The Put and Call Option Agreement entered into with Enbridge LP (the “U.S. Agreement”) is substantially similar to the Put and Call Option Agreement entered into with Enbridge Inc. (the “Canadian Agreement” and, together with the U.S. Agreement, the “Put and Call Agreement”). The Put and Call Agreement was contemplated in that certain Letter Agreement, originally executed on July 31, 2014 and last amended on April 8, 2015 (the “Letter Agreement”), between the Company and the Carriers relating to approximately 88.85 miles of pipeline owned by the Carriers, which transports crude oil from Canada to the Company’s Kiantone Pipeline in West Seneca, New York, and serves the Company’s refinery in Warren, Pennsylvania (“Line 10”). The Letter Agreement related to the parties’ agreement concerning funding certain integrity and replacement costs for Line 10. The Letter Agreement also contemplated that the parties would enter into a put and call agreement relating to the sale of Line 10 from the Carriers to the Company.

The Carriers own the pipeline facilities generally identified as Line 10, including real property interests through and under which Line 10 passes, the Carriers’ assignable permits related to the ownership and operation of Line 10, as well as personal property, contract rights, records and incidental rights held solely in connection with Line 10 (collectively, the “Assets”). Pursuant to the Put and Call Agreement, the Carriers granted the Company a right (the “Call Option”) to purchase all of the Assets and the Company granted the Carriers the right to put all the Assets to the Company (the “Put Option” and, together with the Call Option, the “Purchase Options”) subject to the terms and conditions of the Put and Call Agreement.

The Carrier’s Put Option is exercisable beginning on the date that is the earlier of (a) January 1, 2026 and (b) the date that is 30 days after the latest of (i) the date on which the Carriers give notice that the Line 10 replacement work performed pursuant to the Letter Agreement is sufficiently completed (as contemplated in the Call and Put Agreement) and (ii) the ninth (9^th) anniversary of the Execution Date (the “Put Option Commencement Date”). The Put Option terminates on the date that is 24 months after either (a) the Put Option Commencement Date if such date is the first of a month or (b) the first day of the calendar month immediately following the Put Option Commencement Date if it is not the first day of the month (the “Put/Call Option Expiry Date”). The Company’s Call Option is exercisable at any time beginning on the Execution Date and ending on the Put/Call Option Expiry Date.

 

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The purchase price of the Assets (the “Purchase Price”) shall be calculated as follows: the sum of (a) 70% of the book value of the Assets as of July 31, 2014 minus annual depreciation, (b) 100% of total replacement costs for any segment replacements on the Pipeline commenced by the Carrier, whether completed or ongoing on the date of Asset sale is consummated (the “Closing Date”), minus any of such expenses paid by the Company and (c) 100% of the total regulatory requirements costs for any regulatory work commenced by the Carrier, whether completed or ongoing at the Closing Date, minus any of such expenses paid by the Company. The Purchase Price shall be subject to adjustment pursuant to the Agreement with respect to certain work ongoing at the Closing Date.

Among other customary conditions to closing, Carrier’s obligation to close the sale of the Assets is conditioned on the Company’s payment of all obligations outstanding pursuant to the Put and Call Agreement and the Letter Agreement. In addition, the sale of Assets pursuant to the U.S. Agreement shall close concurrently with the sale of the Assets pursuant to the Canadian Agreement.

The Company and the Carrier agreed that certain work must be undertaken in order to carve out portions of Line 10 in Canada from the Enbridge mainline system and allow it to operate independently. In the event any work is required to similarly separate the U.S. portion of Line 10 from the Enbridge mainline system (the “Carve-Out Work”), a plan to perform such Carve-Out Work that would result in expenses greater than $38.5 million will require the approval of the Company.

In the event any of the maintenance, regulatory requirement, or replacement work contemplated in the Letter Agreement or the Put and Call Agreement (collectively, the “Work”) is outstanding at the Closing Date, concurrently with the closing of the Asset sale, the Company and the Carriers will enter into an operating agreement (the “Operating Agreement”) pursuant to which the Carriers will provide certain operational and administrative services (the “Services”) while the Work is ongoing and complete such Work. As payment for the Services and completion of the Work, the Carriers shall be: (i) reimbursed for all expenses of providing the Services, (ii) paid a fixed fee of on an annual basis, which shall be subject to a 2% increase for each successive year following the first year of the Operating Agreement, and (ii) paid for all expenses of the Work not previously paid, as well as a 2.25% construction management fee.

The Put and Call Agreement may be terminated by the mutual consent of the Company and the Carriers and shall automatically terminate if neither Purchase Option is exercised prior to the Put/Call Option Expiry Date. Moreover, either the Company or a Carrier may terminate the Put and Call Agreement if a closing of the Asset sale shall not have occurred on or before December 31, 2028 assuming the terminating party is not then in breach of the Put and Call Agreement and if a party has breached a representation, such breach has not been cured within the time periods allotted by the Put and Call Agreement. Finally, the Company may terminate the Put and Call Agreement by notifying the Carriers to cease the replacement work contemplated in the Letter Agreement.

 

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Item 6.

Exhibits.

 

Exhibit 10.1		Amendment, dated January 30, 2015, to letter agreement between Enbridge Energy Limited Partnership and Enbridge Pipeline, Inc. and United Refining Company and Kiantone Pipeline Corporation
Exhibit 10.2		Amendment, dated February 12, 2015, to letter agreement between Enbridge Energy Limited Partnership and Enbridge Pipeline, Inc. and United Refining Company and Kiantone Pipeline Corporation
Exhibit 10.3		Amendment, dated February 19, 2015, to letter agreement between Enbridge Energy Limited Partnership and Enbridge Pipeline, Inc. and United Refining Company and Kiantone Pipeline Corporation
Exhibit 10.4		Amendment, dated March 13, 2015, to letter agreement between Enbridge Energy Limited Partnership and Enbridge Pipeline, Inc. and United Refining Company and Kiantone Pipeline Corporation
Exhibit 10.5		Amendment, dated March 27, 2015, 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: April 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: April 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: April 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: April 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: April 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: April 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: April 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: April 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: April 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: April 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: April 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: April 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: April 14, 2015

 

 

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