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 29,May 31, 2016

or

 

¨

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

For the transition period from                      to                     

Commission File No. 001-06198

 

 

 

LOGO  

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 ofRegulationS-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, anon-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,July 15, 2016, there were 100 shares of common stock, par value $.10 per share, of the Registrant outstanding.


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  

FORM 10-Q – CONTENTS

 

      PAGE 

PART I. FINANCIAL INFORMATION

   4  

Item 1.

  

Financial Statements

   4  
  

Consolidated Balance Sheets – February 29,May 31, 2016 (unaudited) and August 31, 2015

   4  
  

Consolidated Statements of Operations – Quarter and SixNine Months Ended February 29,May  31, 2016 and February 28, 2015 (unaudited)

   5  
  

Consolidated Statements of Comprehensive Income (Loss) – Quarter and SixNine Months Ended February 29,May 31, 2016 and February 28, 2015 (unaudited)

   6  
  

Consolidated Statements of Cash Flows – SixNine Months Ended February 29,May  31, 2016 and February 28, 2015 (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  

PART II. OTHER INFORMATION

   24  

Item 1.

  

Legal Proceedings

   24  

Item 1A.

  

Risk Factors

   24  

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

   24  

Item 3.

  

Defaults Upon Senior Securities

   24  

Item 4.

  

Mine Safety Disclosures

   24  

Item 5.

  

Other Information

   24  

Item 6.

  

Exhibits

   24  

Signatures

   25  

PART I.

FINANCIAL INFORMATION

 

Item 1.

Financial Statements.

UNITED REFINING COMPANY AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands, except share amounts)

 

  February 29,
2016
(Unaudited)
 August 31,
2015
   May 31,
2016
(Unaudited)
 August 31,
2015
 

Assets

      

Current:

      

Cash and cash equivalents

  $80,635   $117,028    $78,909   $117,028  

Accounts receivable, net

   50,915    81,567     67,324    81,567  

Refundable income taxes

   4,200    —       4,200    —    

Inventories, net

   133,544    206,066     164,112    206,066  

Prepaid income taxes

   15,174    —       5,147    —    

Prepaid expenses and other assets

   14,612    28,000     19,368    28,000  

Amounts due from affiliated companies, net

   2,151    393     3,315    393  
  

 

  

 

   

 

  

 

 

Total current assets

   301,231    433,054     342,375    433,054  

Property, plant and equipment, net

   380,042    347,757     393,558    347,757  

Deferred financing costs, net

   5,514    2,667     5,379    2,667  

Goodwill

   1,349    1,349     1,349    1,349  

Tradename

   10,500    10,500     10,500    10,500  

Amortizable intangible assets, net

   870    869     839    869  

Deferred integrity and replacement costs, net

   119,695    58,634     116,307    58,634  

Deferred turnaround costs and other assets, net

   24,289    30,636     21,404    30,636  
  

 

  

 

   

 

  

 

 
  $843,490   $885,466    $891,711   $885,466  
  

 

  

 

   

 

  

 

 

Liabilities and Stockholder’s Equity

      

Current:

      

Current installments of long-term debt

  $28,082   $1,556    $28,103   $1,556  

Accounts payable

   44,425    44,833     59,276    44,833  

Accrued liabilities

   14,244    17,911     16,215    17,911  

Income taxes payable

   —      7,397     —      7,397  

Sales, use and fuel taxes payable

   14,416    23,373     22,410    23,373  

Deferred income taxes

   5,822    5,822     5,822    5,822  
  

 

  

 

   

 

  

 

 

Total current liabilities

   106,989    100,892     131,826    100,892  

Long term debt: less current installments

   272,902    239,111     266,710    239,111  

Deferred income taxes

   52,548    55,921     58,376    55,921  

Deferred retirement benefits

   68,836    71,800     67,479    71,800  
  

 

  

 

   

 

  

 

 

Total liabilities

   501,275    467,724     524,391    467,724  
  

 

  

 

   

 

  

 

 

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     14,116    14,116  

Additional paid-in capital

   156,846    156,846     156,846    156,846  

Retained earnings

   188,957    263,464     214,581    263,464  

Accumulated other comprehensive loss

   (17,704  (16,684   (18,223  (16,684
  

 

  

 

   

 

  

 

 

Total stockholder’s equity

   342,215    417,742     367,320    417,742  
  

 

  

 

   

 

  

 

 
  $843,490   $885,466    $891,711   $885,466  
  

 

  

 

   

 

  

 

 

See accompanying notes to consolidated financial statements.

UNITED REFINING COMPANY AND SUBSIDIARIES

Consolidated Statements of Operations – (Unaudited)

(in thousands)

 

  Three Months Ended Nine Months Ended 
  Three Months Ended Six Months Ended   May 31, May 31, 
  February 29,
2016
 February 28,
2015
 February 29,
2016
 February 28,
2015
   2016 2015 2016 2015 

Net sales

  $438,374   $580,904   $1,013,315   $1,405,601    $497,982   $602,877   $1,511,297   $2,008,478  
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Costs and expenses:

        

Costs of goods sold (exclusive of depreciation and amortization)

   419,831    518,629    924,603    1,255,797     395,531    485,906    1,320,134    1,741,703  

Selling, general and administrative expenses

   41,510    40,958    84,099    81,996     43,591    42,073    127,690    124,069  

Depreciation and amortization expenses

   12,802    10,525    24,504    20,877     12,175    10,444    36,679    31,321  
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 
   474,143    570,112    1,033,206    1,358,670     451,297    538,423    1,484,503    1,897,093  
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Operating (loss) income

   (35,769  10,792    (19,891  46,931  

Operating income

   46,685    64,454    26,794    111,385  
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Other expense:

        

Interest expense, net

   (2,514  (6,632  (7,412  (13,290   (2,383  (6,639  (9,795  (19,929

Other, net

   (2,365  (1,549  (2,941  (2,157   (254  (907  (3,195  (3,064

Loss on extinguishment of debt

   —      —      (19,316  —       —      —      (19,316  —    
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 
   (4,879  (8,181  (29,669  (15,447   (2,637  (7,546  (32,306  (22,993
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

(Loss) income before income tax (benefit) expense

   (40,648  2,611    (49,560  31,484  

Income tax (benefit) expense

   (15,052  1,008    (18,352  12,267  

Income (loss) before income tax expense (benefit)

   44,048    56,908    (5,512  88,392  

Income tax expense (benefit)

   16,307    22,201    (2,045  34,468  
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Net (loss) income

  $(25,596 $1,603   $(31,208 $19,217  

Net income (loss)

  $27,741   $34,707   $(3,467 $53,924  
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

See accompanying notes to consolidated financial statements.

UNITED REFINING COMPANY AND SUBSIDIARIES

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

(in thousands)

 

   Three Months Ended  Six Months Ended 
   February 29,
2016
  February 28,
2015
  February 29,
2016
  February 28,
2015
 

Net (loss) income

  $(25,596 $1,603   $(31,208 $19,217  

Other comprehensive loss, net of taxes:

     

Unrecognized post retirement costs, net of taxes of $(305) and $(237) for the three months ended February 29, 2016 and February 28, 2015, respectively and $(626) and $(474) for the six months ended February 29, 2016 and February 28, 2015, respectively

   (518  (370  (1,020  (740
  

 

 

  

 

 

  

 

 

  

 

 

 

Other comprehensive loss

   (518  (370  (1,020  (740
  

 

 

  

 

 

  

 

 

  

 

 

 

Total comprehensive (loss) income

  $(26,114 $1,233   $(32,228 $18,477  
  

 

 

  

 

 

  

 

 

  

 

 

 
   Three Months Ended  Nine Months Ended 
   May 31,  May 31, 
   2016  2015  2016  2015 

Net income (loss)

  $27,741   $34,707   $(3,467 $53,924  

Other comprehensive loss, net of taxes:

   

Unrecognized post retirement costs, net of taxes of $(304) and $(236) for the three months ended May 31, 2016 and 2015, respectively and $(930) and $(710) for the nine months ended May 31, 2016 and 2015, respectively

   (519  (371  (1,539  (1,111
  

 

 

  

 

 

  

 

 

  

 

 

 

Other comprehensive loss

   (519  (371  (1,539  (1,111
  

 

 

  

 

 

  

 

 

  

 

 

 

Total comprehensive income (loss)

  $27,222   $34,336   $(5,006 $52,813  
  

 

 

  

 

 

  

 

 

  

 

 

 

See accompanying notes to consolidated financial statements.

UNITED REFINING COMPANY AND SUBSIDIARIES

Consolidated Statements of Cash Flows – (Unaudited)

(in thousands)

 

  Nine Months Ended 
  Six Months Ended   May 31, 
  February 29,
2016
 February 28,
2015
   2016 2015 

Cash flows from operating activities:

      

Net (loss) income

  $(31,208 $19,217    $(3,467 $53,924  

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

      

Depreciation and amortization

   25,270    22,096     37,780    33,163  

Deferred income taxes

   (2,747  22,016     3,385    23,604  

Noncash portion of loss on extinguishment of debt

   5,771    —       5,771    —    

Loss on asset dispositions

   845    766     840    771  

Cash provided by (used in) working capital items

   75,001    (28,569

Cash provided by working capital items

   56,947    27,631  

Change in operating assets and liabilities:

      

Other assets, net

   335    137     406    306  

Deferred retirement benefits

   (4,610  (3,955   (6,790  (6,079
  

 

  

 

   

 

  

 

 

Total adjustments

   99,865    12,491    ��98,339    79,396  
  

 

  

 

   

 

  

 

 

Net cash provided by operating activities

   68,657    31,708     94,872    133,320  
  

 

  

 

   

 

  

 

 

Cash flows from investing activities:

      

Additions to property, plant and equipment

   (44,924  (20,069   (64,389  (31,202

Additions to amortizable assets

   (60  —    

Additions to amortizable intangible assets

   (60  (100

Additions to deferred turnaround costs

   (1,261  (2,558   (1,362  (3,318

Additions to deferred integrity and replacement costs

   (66,572  (28,630   (66,572  (28,630

Proceeds from asset dispositions

   133    4     246    7  
  

 

  

 

   

 

  

 

 

Net cash used in investing activities

   (112,684  (51,253   (132,137  (63,243
  

 

  

 

   

 

  

 

 

Cash flows from financing activities:

      

Dividends to preferred shareholder and stockholder

   (43,299  (18,691   (45,416  (21,610

Proceeds from issuance of long-term debt

   300,996    —       301,948    —    

Principal reductions of long-term debt

   (244,470  (804   (251,593  (1,245

Deferred financing costs

   (5,593  —       (5,793  —    
  

 

  

 

   

 

  

 

 

Net cash provided by (used in) financing activities

   7,634    (19,495

Net cash used in financing activities

   (854  (22,855
  

 

  

 

   

 

  

 

 

Net decrease in cash and cash equivalents

   (36,393  (39,040

Net (decrease) increase in cash and cash equivalents

   (38,119  47,222  

Cash and cash equivalents, beginning of year

   117,028    99,037     117,028    99,037  
  

 

  

 

   

 

  

 

 

Cash and cash equivalents, end of period

  $80,635   $59,997    $78,909   $146,259  
  

 

  

 

   

 

  

 

 

Cash provided by (used in) working capital items:

      

Accounts receivable, net

  $30,652   $20,033    $14,243   $17,690  

Refundable income taxes

   (4,200  6,000     (4,200  (4,912

Inventories, net

   72,522    (47,307   41,954    (37,528

Prepaid income taxes

   (15,174  (10,146   (5,147  13,674  

Prepaid expenses and other assets

   13,388    38,147     8,632    45,158  

Amounts due from affiliated companies, net

   (1,758  (1,664   (2,922  (1,162

Accounts payable

   (408  (25,378   14,443    (19,486

Accrued liabilities

   (3,667  (4,220   (1,696  3,350  

Income taxes payable

   (7,397  —       (7,397  7,646  

Sales, use, and fuel taxes payable

   (8,957  (4,034   (963  3,201  
  

 

  

 

   

 

  

 

 

Total change

  $75,001   $(28,569  $56,947   $27,631  
  

 

  

 

   

 

  

 

 

Cash paid during the period for:

      

Interest

  $6,625   $12,758    $9,160   $12,893  

Income taxes

  $11,166   $339    $11,314   $396  
  

 

  

 

   

 

  

 

 

Non-cash investing activities:

      

Property additions & capital leases

  $—     $285    $—     $285  
  

 

  

 

   

 

  

 

 

See accompanying notes to consolidated financial statements.

UNITED REFINING COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

1.

Description of Business and Basis of Presentation

The consolidated financial statements include the accounts of United Refining Company and its subsidiaries, United Refining Company of Pennsylvania and its subsidiaries and Kiantone Pipeline Corporation and its subsidiary (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 sixnine months ended February 29,May 31, 2016 are not necessarily indicative of the results that may be expected for the year ending August 31, 2016. 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, 2015.

 

2.

Inventories

Inventories are stated at the lower of cost or market (LCM), 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 LCM or replacement cost and include various parts for the refinery operations.

Inventories consist of the following:

 

  February 29,
2016
   August 31,
2015
   May 31,
2016
   August 31,
2015
 
  (in thousands)   (in thousands) 

Crude Oil

  $20,223    $60,209    $33,920    $60,209  

Petroleum Products

   58,018     92,452     72,943     92,452  
  

 

   

 

   

 

   

 

 

Total @ Lower of LIFO Cost or Market

   78,241     152,661     106,863     152,661  
  

 

   

 

   

 

   

 

 

Merchandise

   23,452     24,277     23,906     24,277  

Supplies

   31,851     29,128     33,343     29,128  
  

 

   

 

   

 

   

 

 

Total @ FIFO

   55,303     53,405     57,249     53,405  
  

 

   

 

   

 

   

 

 

Total Inventory

  $133,544    $206,066    $164,112    $206,066  
  

 

   

 

   

 

   

 

 

UNITED REFINING COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

As of February 29,May 31, 2016 and August 31, 2015, the replacement cost of LIFO inventories (FIFO) (was less than) exceeded their LIFO carrying values (LCM) on the balance sheets by approximately $2,390,000$(5,843,000) and $6,201,000, which includes the LCM inventory writedown of $58,613,000$36,455,000 and $0, respectively, and a LIFO increase (decrease) of $56,223,000$42,298,000 and $(6,201,000), respectively.

 

3.

Amended, Restated and Consolidated Revolving Credit, Term Loan and Security Agreement

On October 20, 2015, URC, United Refining Company of Pennsylvania, Kiantone Pipeline Corporation (“Kiantone”), United Refining Company of New York Inc., United Biofuels, Inc., Country Fair, Inc. and Kwik-Fill Corporation (collectively, the “Borrowers”) entered into an Amended, Restated and Consolidated Revolving Credit, Term Loan and Security Agreement (“Credit Agreement”) with a group of lenders led by PNC Bank, National Association, as Administrative Agent (the “Agent”), and PNC Capital Markets LLC, as Sole Lead Arranger and Bookrunner. The Credit Agreement amends and restates the Amended and Restated Credit Agreement, dated May 18, 2011 and last amended June 18, 2013, by and between the Company and certain subsidiaries and PNC Bank, National Association, as Administrative Agent (the “Existing Credit Facility”). The Credit Agreement will terminate on October 19, 2020 (the “Expiration Date”). Until the Expiration Date, the Company may borrow on the New Revolving Credit Facility (as defined below) on a borrowing base formula set forth in the Credit Agreement.

Pursuant to the Credit Agreement, the Company increased its existing senior secured revolving credit facility from $175,000,000 to $225,000,000. The New Revolving Credit Facility may be increased by an amount not to exceed $50,000,000 without additional approval from the lenders named in the Credit Agreement if existing lenders agree to increase their commitments or additional lenders commit to fund such increase. Interest under the New Revolving Credit Facility is calculated as follows: (a) for domestic rate borrowings, at (i) the greater of the Agent’s prime rate, federal funds rate plus .5% or the daily LIBOR rate plus 1%, plus (ii) an applicable margin of 1.25% to 1.75%, and (b) for euro-rate borrowings, at the LIBOR rate plus an applicable margin of 2.25% to 2.75%. The applicable margin will vary depending on a formula calculating the Company’s average unused availability under the facility. In addition, pursuant to the Credit Agreement, the Company entered into a term loan in the amount of $250,000,000, which was made in a single drawing on the Closing Date (“Term Loan” and, together with the New Revolving Credit Facility, the “Credit Obligations”). Under the Term Loan, interest is calculated as follows: (a) for domestic rate borrowings, at (i) the greater of the Agent’s prime rate, federal funds rate plus .5% or the daily LIBOR rate plus 1%, plus (ii) an applicable margin of 1.75% to 2.25%, and (b) for euro-rate borrowings, at the LIBOR rate plus an applicable margin of 2.75% to 3.25%. The applicable margin will vary depending on a formula calculating the Company’s average unused availability under the facility. The Term Loan is prepayable in whole or in part at any time without premium or penalty. The Term Loan shall be paid in full on or prior to the Expiration Date and shall be paid in equal quarterly amounts based on a ten-year straight line amortization schedule.

The Credit Obligations are secured by a first priority security interest in certain cash accounts, accounts receivable, inventory, the refinery, including a related tank farm, and the capital stock of Kiantone. At such time as the Term Loan is repaid in full, and provided no event of default exists, the security interest in the refinery and the equity interest in Kiantone shall be released.

The Credit Agreement requires minimum undrawn availability of $15,000,000 at all times prior to the repayment of the Term Loan and the greater of 12.5% of the maximum New Revolving Credit Facility or $25,000,000 after the repayment of the Term Loan. The Company is also required to maintain a consolidated net worth of no less than $100,000,000. The Credit Agreement includes customary mandatory prepayment

UNITED REFINING COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

provisions, including in connection with non-ordinary course asset sales, equity issuances and the incurrence of additional debt. Unless assets sold in non-ordinary course transactions were included in the borrowing base for the New Revolving Credit Facility, mandatory prepayments shall be applied first to the repayment of the Term Loan and then the New Revolving Credit Facility. The Credit Agreement also includes customary affirmative and negative covenants, including, among other things, covenants related to the fixed charge coverage ratio, payment of fees, conduct of business, maintenance of existence and assets, payment of indebtedness and the incurrence of additional indebtedness, intercompany obligations, affiliate transactions, amendments to organizational documents, and financial statements.

The proceeds of the Credit Agreement were used to (i) repay and satisfy in full those certain 10.500% senior secured notes due 2018 (the “Senior Secured Notes due 2018”), (ii) provide for the Company’s general corporate needs, including working capital requirements and capital expenditures and (iii) pay the fees and expenses associated with the Credit Agreement.

In connection with the redemption of all its Senior Secured Notes due 2018, the Company recorded a loss $19,316,000 on the early extinguishment of debt consisting of a redemption premium of $7,009,000, a consent payment of $6,536,000, a write-off of unamortized net debt discount of $3,600,000 and a write-off of deferred finance costs of $2,171,000.

 

4.

Other Long Term Debt

On December 9, 2015, United Refining Company of New York Inc. (as Borrower) and United Refining Company of Pennsylvania (as Fee Owner), entered into a Loan Agreement with Signature Bank (as Administrative Agent), in the amount of $50,000,000 which matures on December 9, 2022. Pursuant to the Loan Agreement, interest is calculated as follows: (a) for LIBOR Loans, at either the LIBOR plus 2.50% or the Prime Rate, (b) for Reference Rate Loans, the Prime Rate and (c) for Fixed Rate Loans, at the Fixed Rate. Loans are secured by a first lien mortgage on certain convenience store units owned by United Refining Company of Pennsylvania.

UNITED REFINING COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

5.

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 Nine Months Ended 
  Three Months Ended   Six Months Ended   May 31, May 31, 
  February 29,
2016
 February 28,
2015
   February 29,
2016
 February 28,
2015
   2016 2015 2016 2015 

Net Sales

        

Retail

  $244,432   $298,666    $535,209   $677,822    $275,638   $320,740   $810,847   $998,562  

Wholesale

   193,942    282,238     478,106    727,779     222,344    282,137    700,450    1,009,916  
  

 

  

 

   

 

  

 

   

 

  

 

  

 

  

 

 
  $438,374   $580,904    $1,013,315   $1,405,601    $497,982   $602,877   $1,511,297   $2,008,478  
  

 

  

 

   

 

  

 

   

 

  

 

  

 

  

 

 

Intersegment Sales

        

Wholesale

  $77,817   $116,350    $182,670   $296,606    $99,092   $134,881   $281,762   $431,487  
  

 

  

 

   

 

  

 

   

 

  

 

  

 

  

 

 

Operating (Loss) Income

        

Retail

  $(2,219 $8,040    $1,289   $17,799    $(6,356 $(1,249 $(5,067 $16,550  

Wholesale

   (33,550  2,752     (21,180  29,132     53,041    65,703    31,861    94,835  
  

 

  

 

   

 

  

 

   

 

  

 

  

 

  

 

 
  $(35,769 $10,792    $(19,891 $46,931    $46,685   $64,454   $26,794   $111,385  
  

 

  

 

   

 

  

 

   

 

  

 

  

 

  

 

 

Depreciation and Amortization

        

Retail

  $2,126   $1,793    $4,235   $3,556    $2,132   $1,821   $6,367   $5,377  

Wholesale

   10,676    8,732     20,269    17,321     10,043    8,623    30,312    25,944  
  

 

  

 

   

 

  

 

   

 

  

 

  

 

  

 

 
  $12,802   $10,525    $24,504   $20,877    $12,175   $10,444   $36,679   $31,321  
  

 

  

 

   

 

  

 

   

 

  

 

  

 

  

 

 

 

  February 29,
2015
   August 31,
2015
   May 31,
2016
   August 31,
2015
 

Total Assets

        

Retail

  $175,934    $178,200    $191,809    $178,200  

Wholesale

   667,556     707,266     699,902     707,266  
  

 

   

 

   

 

   

 

 
  $843,490    $885,466    $891,711    $885,466  
  

 

   

 

   

 

   

 

 

UNITED REFINING COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

6.

Employee Benefit Plans

For the periods ended February 29,May 31, 2016 and February 28, 2015, net pension and other postretirement benefit costs (income) were comprised of the following:

 

   Pension Benefits 
   Three Months Ended  Six Months Ended 
   February 29,
2016
  February 28,
2015
  February 29,
2016
  February 28,
2015
 
   (in thousands) 

Service cost

  $169   $156   $337   $313  

Interest cost on benefit obligation

   1,356    1,212    2,712    2,425  

Expected return on plan assets

   (1,509  (1,587  (3,017  (3,175

Amortization and deferral of net loss

   317    181    635    361  
  

 

 

  

 

 

  

 

 

  

 

 

 

Net periodic benefit cost (income)

  $333   $(38 $667   $(76
  

 

 

  

 

 

  

 

 

  

 

 

 

  Pension Benefits 
  Three Months Ended Nine Months Ended 
  May 31, May 31, 
  2016 2015 2016 2015 
  (in thousands) 

Service cost

  $168   $157   $505   $470  

Interest cost on benefit obligation

   1,356    1,213    4,068    3,638  

Expected return on plan assets

   (1,508  (1,588  (4,525  (4,763

Amortization and deferral of net loss

   318    180    953    541  
  

 

  

 

  

 

  

 

 

Net periodic benefit cost (income)

  $334   $(38 $1,001   $(114
  

 

  

 

  

 

  

 

 
  Other Post-Retirement Benefits 
  Other Post-Retirement Benefits   Three Months Ended Nine Months Ended 
  Three Months Ended Six Months Ended   May 31, May 31, 
  February 29,
2016
 February, 28,
2015
 February 29,
2016
 February 28,
2015
   2016 2015 2016 2015 
  (in thousands)   (in thousands) 

Service cost

  $109   $151   $218   $302    $109   $151   $327   $453  

Interest cost on benefit obligation

   385    413    770    826     386    413    1,156    1,239  

Amortization and deferral of net income

   (1,136  (786  (2,272  (1,572   (1,137  (786  (3,409  (2,358
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Net periodic benefit income

  $(642 $(222 $(1,284 $(444  $(642 $(222 $(1,926 $(666
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

As of February 29,May 31, 2016, $2,428,000$3,592,000 of contributions have been made to the Company pension plans for the fiscal year ending August 31, 2016.

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.

 

7.

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 (was less than) exceeded the carrying value of the long term debt at February 29,May 31, 2016 and August 31, 2015 by $1,436,000$(775,000) and $16,636,000, respectively.

 

8.

Enbridge Agreements

On July 31, 2014, URC and Kiantone Pipeline Corporation (together the “Company Parties”), on the one hand, and Enbridge Energy Limited Partnership (“EEPL”) and Enbridge Pipelines Inc. (“EPI” and, together with EEPL, the “Carriers”), on the other hand, entered into a letter agreement (the “Letter Agreement”) with respect to approximately 88.85 miles of pipeline owned by the Carriers, which transports crude oil from Canada to the

UNITED REFINING COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Company’s Kiantone Pipeline in West Seneca, New York and serves the Company’s refinery in Warren, Pennsylvania (“Line 10”).

UNITED REFINING COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Pursuant to the Letter Agreement, the Company agreed to fund certain integrity costs necessary to maintain Line 10 (the “Integrity Costs”). Pursuant to the Letter Agreement the Carriers agreed to reconcile their actual expenses for the integrity maintenance and refund any excess payments made by the Company. The parties agreed to apply any credit to the Company as a result of such reconciliation to amounts owed by the Company for Subsequent Year Pipe Replacement Costs (as defined below). For each subsequent calendar year through the earlier of the expiration or closing of the purchase rights granted to the Company pursuant to the Put and Call Agreement (which is defined and discussed below), the Carriers will provide the Company with an invoice for the Integrity Costs for such calendar year (“Subsequent Year Integrity Costs”). The Carriers’ actual expenses with respect to the integrity maintenance and pipe replacement will be reconciled against the Subsequent Year Integrity and Pipe Replacement Costs for each fiscal year.

In addition, the Company agreed to pay for half the cost of replacing certain portions of Line 10 in accordance with a plan agreed to between the Company Parties and the Carriers. The Company will pay 50% of the estimated expenses of the replacement project for each segment of Line 10 to be replaced (the “Replacement Costs”) within 30 days of its receipt of an invoice for the same, along with a project management fee of 2 1/4% 1/4%. Each Carrier will initially fund the remaining 50% of the Replacement Costs during construction, provided that the Company will reimburse the Carriers for their actual cost of funds during the construction process. Once construction is complete and each replaced segment of Line 10 is put into service, and assuming the Company has not exercised its rights to purchase Line 10 pursuant to the Put and Call Agreement, the Company will repay the Carriers the 50% of the Replacement Costs they funded over a 10 year period.

On January 20, 2016, pursuant to the Letter Agreement, the Company made payments to the Carriers in the amount of $14,476,000 for Integrity Costs, which amount includes credits received by the Company upon reconciliation of the Integrity Costs funded in fiscal 2014-2015 of $3,430,000. Kiantone, as the owner of Kiantone Pipeline, has agreed to guaranty any and all payments due by the Company pursuant to the Letter Agreement.

Pursuant to the Letter Agreement, the Company and the Carriers agreed to negotiate the terms and conditions of a put and call option agreement for Line 10 (the “Put and Call Option Agreement” and, together with the Letter Agreement, the “Enbridge Agreement”). On AprilJuly 8, 2015 (the “Execution Date”), the Company entered into the Put and Call Option Agreement with the Carriers as called for in the Letter Agreement. 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 Carriers own 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 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 expiration dates identified in the Put and Call Agreement. 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. The Company has assessed the accounting impact of the Put and Call Agreement and determined there is no impact until the time when it becomes probable that the Put or Call will be exercised.

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;

 

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 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 secondthird quarter of fiscal 2016 was $8.92.$23.33. Through AprilJuly 1, 2016 the indicated lagged crackspread for the thirdfourth quarter ending MayAugust 31, 2016 was $20.58, an $11.66 increase$15.94, a $7.39 decrease from the average for the secondthird quarter of fiscal 2016.

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.

Retail Operations:

 

  Three Months Ended Nine Months Ended 
  Three Months Ended Six Months Ended   May 31, May 31, 
  February 29,
2016
 February 28,
2015
 February 29,
2016
 February 28,
2015
   2016 2015 2016 2015 
  (dollars in thousands)   (dollars in thousands) 

Net Sales

          

Petroleum

  $179,493   $235,985   $400,461   $546,950    $205,411   $251,640   $605,871   $798,590  

Merchandise and other

   64,939    62,681    134,748    130,872     70,227    69,100    204,976    199,972  
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Total Net Sales

   244,432    298,666    535,209    677,822     275,638    320,740    810,847    998,562  

Costs of goods sold

   209,912    254,025    459,495    587,452     243,658    284,205    703,153    871,657  

Selling, general and administrative expenses

   34,613    34,808    70,190    69,015     36,204    35,963    106,394    104,978  

Depreciation and amortization expenses

   2,126    1,793    4,235    3,556     2,132    1,821    6,367    5,377  
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Segment Operating (Loss) Income

  $(2,219 $8,040   $1,289   $17,799    $(6,356 $(1,249 $(5,067 $16,550  
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Retail Operating Data:

          

Petroleum sales (thousands of gallons)

   87,052    89,712    180,405    182,182     91,901    92,917    272,306    275,099  

Petroleum margin (a)

  $17,408   $28,610   $40,193   $56,941    $13,188   $18,711   $53,381   $75,652  

Petroleum margin ($/gallon) (b)

   .2000    .3189    .2228    .3126     .1435    .2014    .1960    .2750  

Merchandise and other margins

  $17,112   $16,031   $35,521   $33,429    $18,898   $17,825   $54,419   $51,254  

Merchandise margin (percent of sales)

   26.4  25.6  26.4  25.5   26.9  25.8  26.6  25.6
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

 

(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 29,May 31, 2016 and February 28, 2015

Net Sales

Retail sales decreased during the fiscal quarter ended February 29,May 31, 2016 by $54.2$45.1 million or 18.2%14.1% from the comparable period in fiscal 2015 from $298.6$320.7 million to $244.4$275.6 million. The decrease was due to a $56.5$46.2 million decrease in petroleum sales offset by an increase in merchandise sales of $2.3$1.1 million. The petroleum sales decrease resulted from a 21.6%17.5% decrease in retail selling prices per gallon and a 2.71.0 million gallon or a 3%1.1% decrease in petroleum volume.

Costs of Goods Sold

Retail costs of goods sold decreased during the fiscal quarter ended February 29, 2015May 31, 2016 by $44.1$40.6 million or 17.4%14.3% from the comparable period in fiscal 2015 from $254.0$284.2 million to $209.9$243.6 million. The decrease was primarily due to $43.9decreases of $38.8 million in petroleum purchase costs and fuel taxes of $1.3 million and freight costs of $.1$1.9 million offset by an increase of $1.2$.1 million in merchandise costs.

Selling, General and Administrative Expenses

Retail Selling, General and Administrative (“SG&A”) expenses remained relatively constant during the fiscal quarters ended February 29,May 31, 2016 and February 28, 2015.

Comparison of SixNine Months Ended February 29,May 31, 2016 and February 28, 2015

Net Sales

Retail sales decreased during the sixnine months ended February 29,May 31, 2016 by $142.6$187.7 million or 21.0%18.8% from the comparable period in fiscal 2015 from $677.8$998.5 million to $535.2$810.8 million. The decrease was primarily due to $146.5$192.7 million in petroleum sales, offset by an increase of $3.9$5.0 million in merchandise sales. The petroleum sales decrease resulted from a 26.1%23.4% decrease in retail selling prices per gallon and a 1.82.8 million gallon or 1.0% decrease in sales volume.

Costs of Goods Sold

Retail costs of goods sold decreased during the sixnine months ended February 29,May 31, 2016 by $128.0$168.5 million or 21.8%19.3% from the comparable period in fiscal 2015 from $587.5$871.7 million to $459.5$703.2 million. The decrease was primarily due to $132.2decreases of $170.9 million in petroleum purchase pricescosts and freight costs of $.1 million, offset by an increaseincreases in fuel taxes of $2.5$.7 million and merchandise costs of $1.8 million.

Selling, General and Administrative Expenses

Retail SG&A expenses remained relatively constant during the sixnine months ended February 29,May 31, 2016 and February 28, 2015.

Wholesale Operations:Operations:

 

  Three Months Ended   Nine Months Ended 
  Three Months Ended   Six Months Ended   May 31,   May 31, 
  February 29,
2016
 February 28,
2015
   February 29,
2016
 February 28,
2015
   2016   2015   2016   2015 
  (dollars in thousands)   (dollars in thousands) 

Net Sales (a)

  $193,942   $282,238    $478,106   $727,779    $222,344    $282,137    $700,450    $1,009,916  

Costs of goods sold (exclusive of depreciation and amortization)

   209,919    264,604     465,108    668,345     151,873     201,701     616,981     870,046  

Selling, general and administrative expenses

   6,897    6,150     13,909    12,981     7,387     6,110     21,296     19,091  

Depreciation and amortization expenses

   10,676    8,732     20,269    17,321     10,043     8,623     30,312     25,944  
  

 

  

 

   

 

  

 

   

 

   

 

   

 

   

 

 

Segment Operating (Loss) Income

  $(33,550 $2,752    $(21,180 $29,132  

Segment Operating Income

  $53,041    $65,703    $31,861    $94,835  
  

 

  

 

   

 

  

 

   

 

   

 

   

 

   

 

 

Key Wholesale Operating Statistics:

 

  Three Months Ended Nine Months Ended 
  Three Months Ended Six Months Ended   May 31, May 31, 
  February 29,
2016
 February 28,
2015
 February 29,
2016
 February 28,
2015
   2016 2015 2016 2015 

Refinery Product Yield (thousands of barrels)

          

Gasoline and gasoline blendstock

   2,828    2,659    5,580    5,192     2,603    2,421    8,184    7,613  

Distillates

   1,416    1,259    2,752    2,631     1,409    1,306    4,161    3,937  

Asphalt

   1,824    1,751    3,667    3,588     1,791    1,698    5,457    5,286  

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

   539    560    1,055    1,214     710    682    1,765    1,896  
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Total Product Yield

   6,607    6,229    13,054    12,625     6,513    6,107    19,567    18,732  
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

% Heavy Crude Oil of Total Refinery Throughput (b)

   61  61  61  62   60  61  61  61

Crude throughput (thousand barrels per day)

   65.7    61.8    65.1    63.0     65.6    61.0    65.5    62.5  
  

 

  

 

  

 

  

 

 
  

 

  

 

  

 

  

 

 

Product Sales (thousand of barrels) (a)

          

Gasoline and gasoline blendstock

   1,835    1,596    3,589    3,167     1,723    1,430    5,312    4,598  

Distillates

   1,197    1,097    2,298    2,184     1,214    1,017    3,512    3,201  

Asphalt

   1,593    1,347    3,580    3,108     1,696    1,639    5,276    4,746  

Other

   161    161    325    353     173    146    498    499  
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Total Product Sales Volume

   4,786    4,201    9,792    8,812     4,806    4,232    14,598    13,044  
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Product Sales (dollars in thousands) (a)

          

Gasoline and gasoline blendstock

  $85,718   $101,894   $189,055   $256,131    $99,050   $105,247   $288,106   $361,379  

Distillates

   54,479    89,494    123,812    210,680     67,098    82,421    190,911    293,101  

Asphalt

   51,631    86,069    160,465    246,522     54,109    91,104    214,574    337,626  

Other

   2,114    4,781    4,774    14,446     2,087    3,365    6,859    17,810  
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Total Product Sales

  $193,942   $282,238   $478,106   $727,779    $222,344   $282,137   $700,450   $1,009,916  
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

 

(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 29,May 31, 2016 and February 28, 2015

Net Sales

Wholesale sales decreased during the three monthsquarter ended February 29,May 31, 2016 by $88.3$59.8 million or 31.3%21.2% from the comparable period in fiscal 2015 from $282.2$282.1 million to $193.9$222.3 million. The decrease was due primarily to a 39.7%30.6% decrease in wholesale prices offset by an increase of 13.9%13.6% in wholesale volume.

Costs of Goods Sold (exclusive of depreciation and amortization)

Wholesale costs of goods sold decreased during the three monthsquarter ended February 29,May 31, 2016 by $54.7$49.8 million or 20.7%24.7% from the comparable period in fiscal 2015 from $264.6$201.7 million to $209.9$151.9 million. The decrease in wholesale costs of goods sold during this period was primarily due to a decrease in cost of raw materials.

Selling, General and Administrative Expenses

Wholesale SG&A expenses remained relatively constant during the three monthsquarter ended February 29,May 31, 2016 and February 28, 2015.

Comparison of SixNine Months Ended February 29,May 31, 2016 and February 28, 2015

Net Sales

Wholesale sales decreased during the sixnine months ended February 29,May 31, 2016 by $249.7$309.5 million or 34.3%30.6% from the comparable period in fiscal 2015 from $727.8$1,009.9 million to $478.1$700.4 million. The decrease was due to a 40.9%38.0% decrease in wholesale prices offset by an 11.1%11.9% increase in wholesale volume.

Costs of Goods Sold (exclusive of depreciation and amortization)

Wholesale costs of goods sold decreased during the sixnine months ended February 29,May 31, 2016 by $203.2$253.1 million or 30.4%29.1% from the comparable period in fiscal 2015 from $668.3$870.1 million to $465.1$617.0 million. The decrease in wholesale costs of goods sold was primarily due to a decrease in the cost of raw materials.

Selling, General and Administrative Expenses

Wholesale SG&A expenses remained relatively constant during the sixnine months ended February 29,May 31, 2016 and February 28, 2015.

Consolidated Expenses:

Depreciation and Amortization

Depreciation and amortization increased during the three months ended February 29,May 31, 2016 by $2.3$1.7 million forfrom the comparable period forin fiscal 2015 from $10.5 million to $12.8$12.2 million. The increase was primarily due to increases of $1.7$1.8 million in amortization of integrity and replacement costs and miscellaneous depreciation costs of $.6 million offset by a reduction in amortization of turnaround expense of $.7 million.

Depreciation and amortization increased during the sixnine months ended February 29,May 31, 2016 by $3.6$5.4 million forfrom the comparable period forin fiscal 2015 from $20.9$31.3 million to $24.5$36.7 million. The increase was primarily due to increases of $2.4$4.2 million in amortization of integrity and replacement costs and miscellaneous depreciation costs of $1.2$1.9 million offset by a reduction in amortization of turnaround expense of $.7 million.

Interest Expense, net

Net interest expense (interest expense less interest income) decreased during the three months ended February 29,May 31, 2016 and February 28, 2015 by $4.1 million.$4.2 million from the comparable period in fiscal 2015. The decrease was primarily due to early redemption of Senior Notes due 2018 and the lower interest rate on the Term Loan outstanding.

Net interest expense (interest expense less interest income) decreased during the sixnine months ended February 29,May 31, 2016 and February 28, 2015 by $5.9 million.$10.0 million from the comparable period in fiscal 2015. The decrease was primarily due to early redemption of Senior Notes due 2018 and the lower interest rate on the Term Loan outstanding.

Income Tax Expense (Benefit) Expense

The Company’s effective tax rate was 37% and 39% for the three months and sixnine months ended February 29,May 31, 2016 and February 28, 2015, respectively.

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 resources (in thousands):

 

  February 29, 2016   May 31, 2016 

Cash and cash equivalents

  $80,635    $78,909  

Working capital

  $194,242    $210,549  

Current ratio

   2.8     2.6  

Debt

  $300,984    $294,813  
  

 

   

 

 

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 sixnine months ended February 29,May 31, 2016 are described below.

The cash provided by working capital is shown below:

 

  Six Months Ended
February 29, 2016
   Nine Months Ended
May 31, 2016
 
  (in millions)   (in millions) 

Cash provided by working capital items:

  

Cash provided by (used in) working capital items:

  

Inventory decrease

  $72.5    $42.0  

Accounts payable increase

   14.4  

Accounts receivable decrease

   30.7     14.2  

Prepaid expense decrease

   13.4     8.6  

Income taxes payable decrease

   (7.4

Prepaid income taxes increase

   (15.2   (5.1

Refundable income taxes increase

   (4.2

Amounts due from affiliated companies, net increase

   (2.9

Accrued liabilities decrease

   (1.7

Sales, use and fuel taxes payable decrease

   (8.9   (1.0

Income taxes payable decrease

   (7.4

Refundable income taxes increase

   (4.2

Accrued liabilities decrease

   (3.7

Amounts due from affiliated companies, net

   (1.8

Accounts payable decrease

   (.4
  

 

   

 

 

Total change

  $75.0    $56.9  
  

 

   

 

 

Available cash on hand decreased by $36.4$38.1 million. Other cash uses included:

 

Fund capital expenditures and deferred turnaround costs of $46.2$65.8 million

 

Fund dividends to preferred shareholder and common stockholder of $43.3$45.4 million

 

Fund deferred integrity and replacement costs of $66.6 million

 

Fund principal reductions of long-term debt $244.5$251.6 million

 

Fund deferred financing costs $5.6$5.8 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 2016 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 Credit Agreement of $225,000,000. 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.

On October 20, 2015, URC, United Refining Company of Pennsylvania, Kiantone, United Refining Company of New York Inc., United Biofuels, Inc., Country Fair, Inc. and Kwik-Fill Corporation (collectively, the “Borrowers”) entered into the Credit Agreement with a group of lenders led by PNC Bank, National Association, and PNC Capital Markets LLC, as Sole Lead Arranger and Bookrunner. The Credit Agreement amends and restates the Existing Credit Facility. The Credit Agreement will terminate on October 19, 2020. Until the Expiration Date, the Company may borrow on the New Revolving Credit Facility (as defined below) on a borrowing base formula set forth in the Credit Agreement.

Pursuant to the Credit Agreement, the Company increased its existing senior secured revolving credit facility from $175,000,000 to $225,000,000. The New Revolving Credit Facility may be increased by an amount not to exceed $50,000,000 without additional approval from the lenders named in the Credit Agreement if existing lenders agree to increase their commitments or additional lenders commit to fund such increase. Interest under the New Revolving Credit Facility is calculated as follows: (a) for domestic rate borrowings, at (i) the greater of the Agent’s prime rate, federal funds rate plus .5% or the daily LIBOR rate plus 1%, plus (ii) an applicable margin of 1.25% to 1.75%, and (b) for euro-rate borrowings, at the LIBOR rate plus an applicable margin of 2.25% to 2.75%. The applicable margin will vary depending on a formula calculating the Company’s average unused availability under the facility. In addition, pursuant to the Credit Agreement, the Company entered into a term loan in the amount of $250,000,000, which was made in a single drawing on the Closing Date (“Term Loan” and, together with the New Revolving Credit Facility, the “Credit Obligations”). Under the Term Loan, interest is calculated as follows: (a) for domestic rate borrowings, at (i) the greater of the Agent’s prime rate, federal funds rate plus .5% or the daily LIBOR rate plus 1%, plus (ii) an applicable margin of 1.75% to 2.25%, and (b) for euro-rate borrowings, at the LIBOR rate plus an applicable margin of 2.75% to 3.25%. The applicable margin will vary depending on a formula calculating the Company’s average unused availability under the facility. The Term Loan is prepayable in whole or in part at any time without premium or penalty. The Term Loan shall be paid in full on or prior to the Expiration Date and shall be paid in equal quarterly amounts based on a ten-year straight line amortization schedule. Prepayment of the Term Loan in whole or in part may be made at any time without premium or penalty.

The Credit Obligations are secured by a first priority security interest in certain cash accounts, accounts receivable, inventory, the refinery, including a related tank farm, and the capital stock of Kiantone. At such time as the Term Loan is repaid in full, and provided no event of default exists, the security interest in the refinery and the equity interests in Kiantone shall be released.

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 29,May 31, 2016 and there were no outstanding borrowings under the Credit Agreement resulting in net availability of $216.2 million. As of AprilJuly 15, 2016, there were no outstanding

borrowings under the Credit Agreement and there were standby letters of credit in the amount of $8.8 million, resulting in a net availability of $216.2 million and the Company had full access to it.

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.

On December 9, 2015, United Refining Company of New York Inc. (as Borrower) and United Refining Company of Pennsylvania (as Fee Owner), entered into a Loan Agreement with Signature Bank (as Administrative Agent), in the amount of $50,000,000 which matures on December 9, 2022. Pursuant to the Loan Agreement, interest is calculated as follows: (a) for LIBOR Loans, at either the LIBOR plus 2.50% or the Prime Rate, (b) for Reference Rate Loans, the Prime Rate and (c) for Fixed Rate Loans, at the Fixed Rate. Loans are secured by a first lien mortgage on certain convenience store units owned by United Refining Company of Pennsylvania.

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 AprilJuly 15, 2016, 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.Operations. There has been no derivative activity in fiscal 2016.

 

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 29,May 31, 2016. 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 theis 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 29,May 31, 2016, 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 29,May 31, 2016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

Part II.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, 2015.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

None.

 

Item 3.

Defaults Upon Senior Securities.

None.

 

Item 4.

Mine Safety Disclosures.

Not applicable.

 

Item 5.

Other Information.

None.

 

Item 6.

Exhibits.

 

Exhibit 31.1

  

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

Exhibit 31.2

  

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

Exhibit 32.1

  

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

Exhibit 101

  

Interactive XBRL Data

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,July 15, 2016

 

UNITED REFINING COMPANY

(Registrant)

/s/ Myron L. Turfitt

Myron L. Turfitt

President

/s/ James E. Murphy

James E. Murphy

Chief Financial Officer

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:AprilJuly 15, 2016

 

KIANTONE PIPELINE CORPORATION

(Registrant)

/s/ Myron L. Turfitt

Myron L. Turfitt

President

/s/ James E. Murphy

James E. Murphy

Chief Financial Officer

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:AprilJuly 15, 2016

 

UNITED REFINING COMPANY OF PENNSYLVANIA

(Registrant)

/s/ Myron L. Turfitt

Myron L. Turfitt

President

/s/ James E. Murphy

James E. Murphy

Chief Financial Officer

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:AprilJuly 15, 2016

 

KIANTONE PIPELINE COMPANY

(Registrant)

/s/ Myron L. Turfitt

Myron L. Turfitt

President

/s/ James E. Murphy

James E. Murphy

Chief Financial Officer

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:AprilJuly 15, 2016

 

UNITED JET CENTER, INC.

(Registrant)

/s/ Myron L. Turfitt

Myron L. Turfitt

President

/s/ James E. Murphy

James E. Murphy

Chief Financial Officer

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:AprilJuly 15, 2016

 

KWIK-FILL CORPORATION

(Registrant)

/s/ Myron L. Turfitt

Myron L. Turfitt

President

/s/ James E. Murphy

James E. Murphy

Chief Financial Officer

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:AprilJuly 15, 2016

 

INDEPENDENT GASOLINE AND OIL COMPANY OF ROCHESTER, INC.

(Registrant)

/s/ Myron L. Turfitt

Myron L. Turfitt

President

/s/ James E. Murphy

James E. Murphy

Chief Financial Officer

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:AprilJuly 15, 2016

 

BELL OIL CORP.

(Registrant)

/s/ Myron L. Turfitt

Myron L. Turfitt

President

/s/ James E. Murphy

James E. Murphy

Chief Financial Officer

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:AprilJuly 15, 2016

 

PPC, INC.

(Registrant)

/s/ Myron L. Turfitt

Myron L. Turfitt

President

/s/ James E. Murphy

James E. Murphy

Chief Financial Officer

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:AprilJuly 15, 2016

 

SUPER TEST PETROLEUM, INC.

(Registrant)

/s/ Myron L. Turfitt

Myron L. Turfitt

President

/s/ James E. Murphy

James E. Murphy

Chief Financial Officer

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:AprilJuly 15, 2016

 

KWIK-FIL, INC.

(Registrant)

/s/ Myron L. Turfitt

Myron L. Turfitt

President

/s/ James E. Murphy

James E. Murphy

Chief Financial Officer

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:AprilJuly 15, 2016

 

VULCAN ASPHALT REFINING CORPORATION

(Registrant)

/s/ Myron L. Turfitt

Myron L. Turfitt

President

/s/ James E. Murphy

James E. Murphy

Chief Financial Officer

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:AprilJuly 15, 2016

 

COUNTRY FAIR, INC.

(Registrant)

/s/ Myron L. Turfitt

Myron L. Turfitt

President and Chief Operating Officer

/s/ James E. Murphy

James E. Murphy

Vice President Finance

 

37