UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM10-Q

(Mark One)

For the quarterly period ended February 28,May 31, 2017

or

For the transition period from                      to                     

Commission FileNo. 001-06198

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

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  ☒    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 ofRegulation 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  ☒☐    No  ☐☒

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company, or an emerging growth company. See definitiondefinitions of “accelerated filer” “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “smaller reporting“emerging growth company” in Rule12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).    Yes  ☐    No  ☒

As of April 13,July 14, 2017, there were 100 shares of common stock, par value $.10 per share, of the Registrant outstanding.

TABLE OF ADDITIONAL REGISTRANTS

FORM10-Q – CONTENTS

PART I.

FINANCIAL INFORMATION

UNITED REFINING COMPANY AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands, except share amounts)

See accompanying notes to consolidated financial statements.

UNITED REFINING COMPANY AND SUBSIDIARIES

Consolidated Statements of Operations – (Unaudited)

(in thousands)

See accompanying notes to consolidated financial statements.

UNITED REFINING COMPANY AND SUBSIDIARIES

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

(in thousands)

See accompanying notes to consolidated financial statements.

UNITED REFINING COMPANY AND SUBSIDIARIES

Consolidated Statements of Cash Flows – (Unaudited)

(in thousands)

See accompanying notes to consolidated financial statements.

UNITED REFINING COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The consolidated financial statements include the accounts of United Refining Company (“URC”) 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 Form10-Q and Rule10-01 of RegulationS-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 28,May 31, 2017 are not necessarily indicative of the results that may be expected for the year ending August 31, 2017. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Form10-K for the fiscal year ended August 31, 2016.

Recent Accounting Pronouncements

In May, 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)No. 2014-09 “Revenue from Contracts with Customers,” which provides guidance for revenue recognition. The standard’s core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASUNo. 2015-14 which deferred the effective date of ASU2014-09. This guidance will now be effective for our financial statements infor the annual period beginning after December 15, 2017.fiscal year ending August 31, 2019 (including interim periods within that fiscal year). We are currently reviewing contracts and evaluating the effect of adopting this new accounting guidancestandard and do not expect adoption will have a materialits impact on our business processes, financial statements.statements and related disclosures.

In April 2015, the FASB issued ASU2015-03, “Simplifying the Presentation of Debt Issuance Costs,” which requires debt issuance costs related directly to notes payable be deducted from the face amount of that note and the amortization of such costs be classified as interest expense. Effective November 30, 2016, the Company adopted the accounting and reporting requirements included in ASU2015-03 and has applied these requirements retrospectively. Accordingly, the Company has included $5,150,000 of previously reported deferred financing cost assets in long-term debt, net of current installments in its August 31, 2016 consolidated balance sheet. The adoption of these accounting and reporting requirements resulted in an increase in interest expense and a decrease in other expense of $300,000 and $575,000 on the consolidated statements of operations for the previously reported three and six months ended February 29, 2016, respectively.

UNITED REFINING COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

decrease in other expense of $335,000 and $910,000 on the consolidated statements of operations for the previously reported three and nine months ended May 31, 2017, respectively.

In January 2016, the FASB issued ASUNo. 2016-01, “Financial Instruments – Overall (Subtopic825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”. The standard addresses certain aspects of recognition, measurements, presentation and disclosure of financial instruments. ASU2016-01 is effective for our fiscal years, andyear ending August 31, 2019 (including interim periods within those years, beginning after December 15, 2017 and early adoption is not permitted.that fiscal year). The Company expects to adopt this guidance when effective and adoption is not expected to have a material effect on the financial statements.

In February 2016, the FASB issuedASU-2016-02 “Leases,” which replaces the existing guidance in ASC 840. This new guidance is effective for our fiscal years, andyear ending August 31, 2020 (including interim periods within those years, beginning after December 15, 2018 with early adoption permitted.that fiscal year). The guidance requires a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing aright-of-use (ROU) asset and a corresponding lease liability. For finance leases the lessee would recognize interest expense and amortization of the ROU asset and for operating leases the lessee would recognize a straight-line total lease expense. The Company is currently assessing the impact that adoption of this guidance will have on its financial statements and footnote disclosures.

In August 2016, the FASB issued ASU2016-15 which includes guidance to clarify how companies present and classify certain cash receipts and cash payments in the statement of cash flows, including contingent consideration payments made after a business acquisition and debt extinguishment costs. Specifically, cash payments to settle a contingent consideration liability which are not made soon after the acquisition date should be classified as cash used in financing activities up to the initial amount of contingent consideration recognized with the remaining amount classified as cash flows from operating activities. The guidance is effective for our fiscal years andyear ending August 31, 2019 (including interim periods beginning after December 15, 2017, with early adoption permitted.within that fiscal year). The Company expects to adopt this guidance when effective and adoption is not expected to have a material effect on the financial statements.

In January 2017, the FASB issued ASUNo. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” in which the guidance on testing for goodwill was updated by the elimination of Step 2 in the determination on whether goodwill should be considered impaired. The annual and/or interim assessments are still required to be completed. ASU2017-04 is effective for our fiscal yearsyear ending August 31, 2021 (including interim periods) beginning after December 15, 2019, with early adoption permitted.periods within that fiscal year). The adoption of ASU2017-04 is not expected to have an impact on the Company’s consolidated financial statements.

In March 2017, the FASB issued ASU2017-07, “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-Retirement Benefit Cost”. The changes to the standard require employers to report the service cost component in the same line item as other compensation costs arising from services rendered by employees during the reporting period. The other components of net benefit costs will be presented in the income statement separately from the service cost and outside of a subtotal of income from operations. In addition, only the service cost component may be eligible for capitalization where applicable. ASU2017-07 is effective for annualthe fiscal year ending August 31, 2019 (including interim periods beginning after December 15, 2017.within that fiscal year). The Company expects to adopt this guidance when effective and adoption is not expected to have a material effect on the financial statements.

UNITED REFINING COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Inventories are stated at the lower of cost or market (LCM), with cost being determined under theLast-in,First-out (LIFO) method for crude oil and petroleum product inventories and theFirst-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.

UNITED REFINING COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Inventories consist of the following:

As of February 28,May 31, 2017 and August 31, 2016, the replacement cost of LIFO inventories exceeded their LIFO carrying values on the balance sheets by approximately $4,241,000$3,063,000 and $4,718,000, respectively, which includes the LCM inventory write-down of $6,101,000$0 and $13,052,000, respectively, and a LIFO (decrease) increase of $1,860,000$(3,063,000) and $8,334,000, respectively.

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

On October 20, 2015 (the “Closing Date”), 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 base 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

UNITED REFINING COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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. As of February 28,May 31, 2017 the borrowings under the facility consisted of $7,000,000$30,000,000 of domestic base rate borrowings at 5.00%5.25%. Letters of credit totaling $7,400,000 and $8,753,000 were outstanding at February 28,May 31, 2017 and August 31, 2016, respectively.

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

UNITED REFINING COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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 aten-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 provisions, including dispositions in connection withnon-ordinary course asset sales, equity issuances and the incurrence of additional debt. Unless assets sold innon-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 of $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, awrite-off of unamortized net debt discount of $3,600,000 and awrite-off of deferred finance costs of $2,171,000.

Term Loan – due 2022

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 a bank, in the amount of $50,000,000

UNITED REFINING COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

$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. Under the terms of the agreement, the Company will make 84 monthly principal installments of approximately $129,000 with the remaining principal balance due on December 9, 2022. The loan is secured by a first lien mortgage on certain convenience store units owned by United Refining Company of Pennsylvania and contains various covenants applicable to the Borrower, which

UNITED REFINING COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

include, among others, maintaining a debt service coverage ratio. Payments due under a master lease between URC and the Borrower are guaranteed by the Company. Proceeds of the loan were used for general corporate purposes of the Company.

Term Loans – due 2023

On October 20, 2016 and December 30, 2016,Kwik-Fil, Inc. (as Borrower) and United Refining Company of Pennsylvania (as Fee Owner), entered into loan agreements with two banks totaling $50,000,000 which mature on October 20, 2023. Pursuant to the loan agreements, 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 greater of the Fixed Rate or 4.25% per annum. Under the terms of the agreements, the Company will make 83 monthly principal installments of approximately $83,000 on each loan with the remaining principal balances due on October 20, 2023. The loans are secured by a first lien mortgage on certain convenience store units owned by United Refining Company of Pennsylvania and contains various covenants applicable to the Borrower, which include, among others, maintaining a debt service coverage ratio. Payments due under a master lease between URC and the Borrower are guaranteed by the Company. Proceeds of the loanloans were used for general corporate purposes of the Company.

Term Loan – due 2027

On March 16, 2017, United Store Holdings, Inc. (as Borrower) and United Refining Company of Pennsylvania (as Fee Owner), entered into a loan agreement with a bank in the amount of $10,000,000 which matures on March 16, 2027. Pursuant to the loan agreement, interest is calculated as follows: (a) for Floating Rate Loans, at either the LIBOR plus 2.50% or the Prime Rate and (b) for Fixed Rate Loans, at (i) the greater of 4.25% or the Five-Year ICE Swap Rate plus 3% or (ii) the greater of 4.50% or the Seven Year ICE Swap Rate plus 3%. Under the terms of the agreement, the Company will make 120 monthly principal installments of approximately $33,000 with the remaining principal balance due on March 16, 2027. The loan is secured by a first lien mortgage on certain convenience store units owned by United Refining Company of Pennsylvania and contains various covenants applicable to the Borrower, which include, among others, maintaining a debt service coverage ratio. Payments due under a master lease between URC and the Borrower are guaranteed by the Company. Proceeds of the loan were used for general corporate purposes of the Company.

UNITED REFINING COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

A summary of long-term debt is as follows:

UNITED REFINING COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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):

UNITED REFINING COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

For the periods ended February 28,May 31, 2017 and February 29, 2016, net pension and other post-retirement benefit costs (income) were comprised of the following:

As of February 28,May 31, 2017, $1,535,000$2,294,000 of contributions have been made to the Company pension plans for the fiscal year ending August 31, 2017.

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.

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 the long-term debt was less than its carrying value at February 28,May 31, 2017 and August 31, 2016 by $837,000$1,486,000 and $220,000, respectively.

On July 31, 2014, URC and Kiantone (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 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”). The Carriers actual expenses with respect to the integrity costs will be recorded against Integrity Costs paid for any subsequent year, as well as against any Replacement Costs, which are defined and discussed below.

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 2.25%. 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 (as defined and discussed below), the Company will repay the Carriers the 50% of the Replacement Costs they funded over a10-year period.

On April 8, 2015 (the “Execution Date”), the Company entered into the Put and Call Option Agreement with each of the Enbridge LP (the “U.S. Agreement”) and Enbridge Inc (the “Canadian Agreement”, and together with the U.S. Agreement, the “Put and Call Options Agreement”), which agreements are substantially similar. Pursuant to the Put and Call Agreement; the Company was granted a right to purchase and the Company gave the Carriers a right to put to the Company 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”).

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 Put and Call 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 Company considered whether the Put and Call Agreement should be separated from the host contract in accordance with ASC 815 embedded derivative guidance and concluded that it doesn’t meet the criteria for separation. The Company determined that the Put and Call Agreement is interdependent with the Line 10 Agreement, and therefore is not freestanding and is accounted for as part of the Line 10 Agreement. As such we concluded that there is no separate accounting impact of the Put and Call Agreement until it becomes probable that it will be exercised. As of February 28,May 31, 2017, neither the Company nor the Carriers have exercised their rights under the Put and Call Agreement.

On March 16, 2017, United Store Holdings, Inc. (as Borrower) and United Refining Company of Pennsylvania (as Fee Owner), entered into a loan agreement with a bank in the amount of $10,000,000 which matures on March 16, 2027. Pursuant to the loan agreement, interest is calculated as follows: (a) for Floating

UNITED REFINING COMPANY AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Rate Loans, at either the LIBOR plus 2.50% or the Prime Rate and (b) for Fixed Rate Loans, at (i) the greater of 4.25% or the Five Year ICE Swap Rate plus 3% or (ii) the greater of 4.50% or the Seven Year ICE Swap Rate plus 3%. Under the terms of the agreement, the Company will make 120 monthly principal installments of approximately $33,000 with the remaining principal balance due on March 16, 2027. The loan is secured by a first lien mortgage on certain convenience store units owned by United Refining Company of Pennsylvania and contains various covenants applicable to the Borrower, which include, among others, maintaining a debt service coverage ratio. Payments due under a master lease between URC and the Borrower are guaranteed by the Company. Proceeds of the loan were used for general corporate purposes of the Company.

Item 2.

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

Forward Looking Statements

This Quarterly Report on Form10-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 Form10-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 our 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 Form10-Q, annual reports on Form10-K, current reports on Form8-K, etc. In addition to the factors discussed elsewhere in this Quarterly Report on Form10-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.

Prices of crude oil, other feedstocks and refined products depend on numerous factors beyond our control, including the supply of and demand for crude oil, other feedstocks, gasoline, diesel, asphalt and other refined products. Such supply and demand are affected by, among other things:

Our direct operating expense structure also impacts our earnings. Our major direct operating expenses include employee and contract labor, maintenance and energy costs. Our predominant variable direct operating

cost is energy, which is comprised primarily of fuel and other utility services. The volatility in costs of fuel, principally natural gas, and other utility services, principally electricity, used by our refinery and other operations affect our operating costs. Fuel and utility prices have been, and will continue to be, affected by factors outside our control, such as supply and demand for fuel and utility services in both local and regional markets. Natural gas prices have historically been volatile and, typically, electricity prices fluctuate with natural gas prices. Future increases in fuel and utility prices may have a negative effect on our earnings and cash flows.

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 Form10-Q.

Recent Developments

The lagged3-2-1 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 2017 averaged $16.64/$15.88/barrel (“bbl”). Through March 31,June 30, 2017 the indicated lagged crackspread for the thirdfourth quarter ending MayAugust 31, 2017 averaged $18.42/$14.94/bbl, a $1.78 increase$.94 decrease from the average for the secondthird quarter of fiscal 2017.

NYMEX crude fluctuated during the secondthird quarter of fiscal 2017 from a low of $49.77/$45.52/bbl to a high of $54.45/$53.83/bbl and closed on March 31,June 30, 2017 at $50.60/$46.04/bbl.

Results of Operations

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

The wholesale segment is responsible for the acquisition of crude oil, petroleum refining, supplying petroleum products to the retail segment and the marketing of petroleum products to wholesale and industrial customers. The retail segment sells petroleum products under the Kwik Fill^®, Citgo^® and Keystone^® brand names through a network of Company-operated retail units and convenience and grocery items through 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 interested parties with a reasonable basis for evaluating the Company’s operations, but does not serve to predict the Company’s future performance.

Retail Operations:Operations:

Comparison of Fiscal Quarters Ended February 28,May 31, 2017 and February 29, 2016

Net Sales

Retail sales increased during the fiscal quarter ended February 28,May 31, 2017 by $36.5$31.8 million or 14.9%11.5% from the comparable period in fiscal 2016 from $244.4$275.6 million to $280.9$307.4 million. The increase was due to a $37.1$31.6 million increase in petroleum sales offset by a $.6and $.2 million decrease in merchandise sales. The petroleum sales increase resulted from a 19.8%12.9% increase in retail selling prices per gallon and .6a 2.0 million gallon or a .7%2.2% increase in petroleum volume.

Costs of Goods Sold

Retail costs of goods sold increased during the fiscal quarter ended February 28,May 31, 2017 by $41.1$22.5 million or 19.6%9.2% from the comparable period in fiscal 2016 from $209.9$243.6 million to $251.0$266.1 million. The increase was primarily due to increases of $39.0$17.1 million in petroleum purchase costs, fuel taxes of $2.8$5.3 million and freight costs of $.1$.2 million offset by $.8$.1 million decrease in merchandise costs.

Selling, General and Administrative Expenses

Retail Selling, General and Administrative (“SG&A”) expenses increasedremained relatively constant during the quarter ended February 28,May 31, 2017 by $1.9 million or 5.5% for the comparable period in fiscal 2016 from $34.6 million to $36.5 million. The increase was due in part to an increase in payroll costs of $.8 million, environmental costs of $.2 million, maintenance costs of $.4 million, credit costs of $.4 million and other costs of $.1 million.2016.

Comparison of SixNine Months Ended February 28,May 31, 2017 and February 29, 2016

Net Sales

Retail sales increased during the sixnine months ended February 28,May 31, 2017 by $37.6$69.4 million or 7.0%8.6% from the comparable period in fiscal 2016 from $535.2$810.8 million to $572.8$880.2 million. The increase was primarily due to $36.8$68.5 million in petroleum sales and $.8$.9 million in merchandise sales. The petroleum sales increase resulted from an 8.3%a 9.9% increase in retail selling prices per gallon and a 1.53.5 million gallon or .8%1.3% increase in sales volume.

Costs of Goods Sold

Retail costs of goods sold increased during the sixnine months ended February 28,May 31, 2017 by $48.1$70.6 million or 10.5%10.0% from the comparable period in fiscal 2016 from $459.5$703.1 million to $507.6$773.7 million. The increase was primarily due to $45.2$62.3 million in petroleum purchase prices, freight costs of $.3$.4 million, and fuel taxes of $2.8$8.2 million offset by a decrease in merchandise costs of $.2$.3 million.

Selling, General and Administrative Expenses

Retail SG&A expenses increased during the sixnine months ended February 28,May 31, 2017 by $2.7$2.8 million or 3.8% for2.7% from the comparable period in fiscal 2016 from $70.2$106.4 million to $72.9$109.2 million. The increase was due in part to an increase in payroll costs of $2.2$2.4 million, maintenance costs of $.3$.1 million, credit costs of $.5$1.0 million, legal and professional costs of $.5 million, and advertising costs of $.3$.6 million offset by a decrease in supplies costs of $.2 million, environmental costs of $1.1$.9 million and other miscellaneous costs of $.2 million.

Wholesale Operations:Operations:

Comparison of Fiscal Quarters Ended February 28,May 31, 2017 and February 29, 2016

Net Sales

Wholesale sales increased during the quarter ended February 28,May 31, 2017 by $56.1$42.8 million or 28.9%19.3% from the comparable period in fiscal 2016 from $193.9$222.3 million to $250.0$265.1 million. The increase was due primarily to a 35.0%36.0% increase in wholesale prices offset by a 4.5%12.4% decrease in wholesale volume.

Costs of Goods Sold (exclusive of depreciation and amortization)

Wholesale costs of goods sold increased during the quarter ended February 28,May 31, 2017 by $14.0$92.1 million or 6.7%60.6% from the comparable period in fiscal 2016 from $209.9$151.9 million to $223.9$244.0 million. The increase in wholesale costs of goods sold during this period was primarily due to an increase in cost of raw materials.

Selling, General and Administrative Expenses

Wholesale SG&A expenses remained relatively constant during the quarter ended February 28,May 31, 2017 and February 29, 2016.

Comparison of Fiscal QuartersNine Months Ended February 28,May 31, 2017 and February 29, 2016

Net Sales

Wholesale sales decreasedincreased during the sixnine months ended February 28,May 31, 2017 by $6.5$36.3 million or 1.4%5.2% from the comparable period in fiscal 2016 from $478.1$700.4 million to $471.6$736.7 million. The decreaseincrease was due primarily to a decrease of 8.7%16.7% increase in wholesale volumeprices offset by a 8.0% increasedecrease of 9.9% in wholesale prices.volume.

Costs of Goods Sold (exclusive of depreciation and amortization)

Wholesale costs of goods sold decreasedincreased during the sixnine months ended February 28,May 31, 2017 by $30.9$61.2 million or 6.6%9.9% from the comparable period in fiscal 2016 from $465.1$617.0 million to $434.2$678.2 million. The decreaseincrease in wholesale costs of goods sold during this period was primarily due to a decreasean increase in cost of raw materials.

Selling, General and Administrative Expenses

Wholesale SG&A expenses remained relatively constant during the sixnine months ended February 28,May 31, 2017 and February 29, 2016.

Consolidated Expenses:

Depreciation and Amortization

Depreciation and amortization decreased during the quarterthree months ended February 28,May 31, 2017 by $1.0$.7 million from the comparable period in fiscal 2016 from $12.8$12.2 million to $11.8$11.5 million. The decrease was primarily due to a reduction in amortization of turnaround expense of $1.5$1.0 million offset by an increase of $.2$.1 million in amortization of integrity and replacement costs and miscellaneous depreciation costs of $.3$.2 million

Depreciation and amortization decreased during the sixnine months ended February 28,May 31, 2017 by $.5$1.2 million from the comparable period in fiscal 2016 from $24.5$36.7 million to $24.0$35.5 million. The decrease was primarily due to a reduction in amortization of turnaround expense of $2.4$3.4 million offset by increases of $1.3$1.4 million in amortization of integrity and replacement costs and miscellaneous depreciation costs of $.6$.8 million.