FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Period Ended May 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 333-35083
UNITED REFINING COMPANY
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1411751
- ------------------------------------ ---------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15 Bradley Street
Warren, Pennsylvania 16365
- -------------------- -----
(address of principal (Zip Code)
executive office)
Registrant's telephone number, including area code 814-726-4674
------------
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
--- ---
Number of shares outstanding of Registrant's Common Stock as of July 15, 2003:
100.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
--- ---
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TABLE OF ADDITIONAL REGISTRANTS
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Primary Standard
State of Other Industrial IRS Employer
Jurisdiction of Classification Identification Commission File
Name Incorporation Number Number Number
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Kiantone Pipeline Corporation New York 4612 25-1211902 333-35083-01
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Kiantone Pipeline Company Pennsylvania 4600 25-1416278 333-35083-03
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United Refining Company of Pennsylvania Pennsylvania 5541 25-0850960 333-35083-02
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United Jet Center, Inc. Delaware 4500 52-1623169 333-35083-06
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Kwik Fill Corporation Pennsylvania 5541 25-1525543 333-35083-05
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Independent Gas and Oil Company of Rochester, Inc. New York 5170 06-1217388 333-35083-11
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Bell Oil Corp. Michigan 5541 38-1884781 333-35083-07
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PPC, Inc. Ohio 5541 31-0821706 333-35083-08
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Super Test Petroleum, Inc. Michigan 5541 38-1901439 333-35083-09
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Kwik-Fil, Inc. New York 5541 25-1525615 333-35083-04
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Vulcan Asphalt Refining Corporation Delaware 2911 23-2486891 333-35083-10
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2
PART I. FINANCIAL INFORMATION PAGE(S)
Item 1. Financial Statements
Consolidated Balance Sheets -
May 31, 2003 and August 31, 2002 4
Consolidated Statements of Operations -
Nine Months and Quarters Ended May 31, 2003 and 2002 5
Consolidated Statements of Comprehensive Income (Loss) -
Nine Months and Quarters Ended May 31, 2003 and 2002 6
Consolidated Statements of Cash Flows -
Nine Months Ended May 31, 2003 and 2002 7
Notes to Consolidated Financial Statements 8-17
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 18-27
Item 3. Quantitative and Qualitative Disclosures about Market Risk 28
Item 4. Controls and Procedures 29
PART II. OTHER INFORMATION 30
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 10.13 - Limited Waiver and Amendment No. 3 to Credit
Agreement dated as of March 24, 2003 by and among, URC, URCP,
KPC, Country Fair and the Banks thereto and PNC Bank, National
Association, as Agent (filed herewith).
(b) No reports on Forms 8-K have been filed for the quarter for
which this report is being filed.
UNITED REFINING COMPANY
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
- -----------------------------------------------------------------------------------------------
MAY 31,
2003 AUGUST 31,
(UNAUDITED) 2002
- -----------------------------------------------------------------------------------------------
ASSETS
CURRENT:
Cash and cash equivalents $ 9,049 $ 13,515
Accounts receivable, net 37,704 33,865
Inventories 98,399 93,567
Prepaid expenses and other assets 17,125 11,179
Refundable income taxes - 3,300
- ---------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 162,277 155,426
PROPERTY, PLANT AND EQUIPMENT, NET 186,034 189,894
INVESTMENT IN AFFILIATED COMPANY 2,316 1,707
DEFERRED FINANCING COSTS, NET 3,208 3,641
GOODWILL AND OTHER NON-AMORTIZABLE ASSETS 11,849 11,849
AMORTIZABLE INTANGIBLE ASSETS, NET 3,734 4,170
DEFERRED TURNAROUND COSTS AND OTHER ASSETS, NET 7,968 4,753
DEFERRED INCOME TAXES 2,265 -
- ---------------------------------------------------------------------------------------------
$379,651 $371,440
=============================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT:
Revolving credit facility $ 47,500 $ 24,314
Current installments of long-term debt 457 236
Accounts payable 30,496 50,647
Accrued liabilities 22,763 14,002
Sales, use and fuel taxes payable 18,422 18,517
Deferred income taxes 4,234 5,323
Amounts due to affiliated companies, net 1,588 140
- ---------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 125,460 113,179
LONG TERM DEBT: LESS CURRENT INSTALLMENTS 181,879 181,863
DEFERRED INCOME TAXES - 360
DEFERRED GAIN ON SETTLEMENT OF PENSION PLAN OBLIGATIONS 1,184 1,345
DEFERRED RETIREMENT BENEFITS 26,509 24,147
OTHER NONCURRENT LIABILITIES 1,787 2,350
- ---------------------------------------------------------------------------------------------
TOTAL LIABILITIES 336,819 323,244
- ---------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock, $.10 par value per share - shares authorized
100; issued and outstanding 100 - -
Additional paid-in capital 16,648 16,648
Retained earnings 26,274 31,638
Accumulated other comprehensive loss (90) (90)
- ---------------------------------------------------------------------------------------------
TOTAL STOCKHOLDER'S EQUITY 42,832 48,196
- ---------------------------------------------------------------------------------------------
$379,651 $371,440
=============================================================================================
See notes to consolidated financial statements.
4
UNITED REFINING COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - (UNAUDITED)
(IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31, MAY 31,
------------------------------------------------------
2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------------------------
NET SALES $331,124 $278,408 $935,858 $721,640
COSTS OF GOODS SOLD 303,434 244,739 838,640 657,433
- ----------------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 27,690 33,669 97,218 64,207
- ----------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Selling, general and administrative expenses 26,737 25,249 80,081 67,561
Depreciation and amortization expenses 3,304 3,222 9,910 9,180
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 30,041 28,471 89,991 76,741
- ----------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) (2,351) 5,198 7,227 (12,534)
- ----------------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest expense, net (5,431) (5,004) (15,894) (14,520)
Other, net (445) (189) (733) (983)
Equity in net earnings of affiliate 342 211 610 801
- ----------------------------------------------------------------------------------------------------------------------------
(5,534) (4,982) (16,017) (14,702)
- ----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT) (7,885) 216 (8,790) (27,236)
INCOME TAX EXPENSE (BENEFIT) (3,077) 87 (3,426) (10,893)
- ----------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (4,808) $ 129 $ (5,364) $(16,343)
=============================================================================================================================
See notes to consolidated financial statements.
5
UNITED REFINING COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) - (UNAUDITED)
(IN THOUSANDS)
- -----------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31, MAY 31,
---------------------------------------------
2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------
NET INCOME (LOSS) $(4,808) $129 $(5,364) $(16,343)
OTHER COMPREHENSIVE LOSS:
Minimum pension liability, net of taxes - - - -
- -----------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME (LOSS) $(4,808) $129 $(5,364) $(16,343)
===============================================================================================
See notes to consolidated financial statements.
6
UNITED REFINING COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
(IN THOUSANDS)
- ----------------------------------------------------------------------------------------------
NINE MONTHS ENDED
MAY 31,
---------------------------
2003 2002
- ----------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,364) $(16,343)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 12,722 11,613
Equity in net earnings of affiliate (610) (801)
Change in deferred income taxes (3,714) (4,541)
Loss on asset dispositions 58 210
Cash used in working capital items (21,345) (20,043)
Change in operating assets and liabilities:
Deferred retirement benefits 2,362 1,634
Other, net (565) 159
- ----------------------------------------------------------------------------------------------
TOTAL ADJUSTMENTS (11,092) (11,769)
- ----------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (16,456) (28,112)
- ----------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of business, net of cash acquired - (16,900)
Additions to property, plant and equipment (5,260) (7,182)
Additions to deferred turnaround costs (5,506) (1,336)
Proceeds from asset dispositions - 3
- ----------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (10,766) (25,415)
- ----------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on revolving credit facility 23,186 29,000
Dividends - (2,130)
Deferred financing costs (250) (144)
Principal reductions of long-term debt (180) (93)
- ----------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 22,756 26,633
- ----------------------------------------------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (4,466) (26,894)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 13,515 35,224
- ----------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 9,049 $ 8,330
==============================================================================================
CASH PROVIDED BY (USED IN) WORKING CAPITAL ITEMS:
Accounts receivable, net $ (3,839) $ 9,980
Inventories (4,832) (35,412)
Prepaid expenses and other assets (5,946) (6,605)
Accounts payable (20,142) 7,437
Accrued liabilities 8,761 7,063
Amounts due to affiliated companies, net 1,448 (784)
Income taxes payable - (2,542)
Refundable income taxes 3,300 -
Sales, use and fuel taxes payable (95) 820
- ----------------------------------------------------------------------------------------------
CASH USED IN WORKING CAPITAL ITEMS $(21,345) $(20,043)
==============================================================================================
See notes to consolidated financial statements.
7
UNITED REFINING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
1. DESCRIPTION OF The consolidated financial statements include the
BUSINESS AND BASIS accounts of United Refining Company and its
OF PRESENTATION subsidiaries, United Refining Company of Pennsylvania
and its subsidiaries, and Kiantone Pipeline Corporation
(collectively, the "Company"). All significant
intercompany balances and transactions have been
eliminated in consolidation.
The Company is a petroleum refiner and marketer in its
primary market area of Western New York and Northwestern
Pennsylvania. Operations are organized into two business
segments: wholesale and retail.
The wholesale segment is responsible for the acquisition
of crude oil, petroleum refining, and the marketing of
petroleum products to wholesale and industrial
customers. The retail segment sells petroleum products
and convenience and grocery items through company owned
gasoline stations and convenience stores under the Kwik
Fill(R), Red Apple Food Mart(R) and Country Fair(R)
brand names.
United Refining Company is a wholly-owned subsidiary of
United Refining, Inc., a wholly-owned subsidiary of
United Acquisition Corporation, which in turn is a
wholly-owned subsidiary of Red Apple Group, Inc.
The accompanying unaudited consolidated financial
statements have been prepared in accordance with
accounting principles generally accepted in the United
States of America for interim financial information and
with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by accounting
principles generally accepted in the United States of
America for complete financial statements. In the
opinion of management, all adjustments (consisting of
only normal recurring accruals) considered necessary for
a fair presentation have been included. Operating
results for the three and nine month periods ended May
31, 2003 are not necessarily indicative of the results
that may be expected for the year ending August 31,
2003. For further information, refer to the consolidated
financial statements and footnotes thereto included in
the Company's Form 10-K filing dated November 27, 2002.
2. INTANGIBLE ASSETS Effective July 1, 2001, the Company adopted certain
AND GOODWILL provisions of Financial Accounting Standards Board
("FASB") No. 141, "Business Combinations," ("Statement
141") and effective September 1, 2002 the Company
adopted the full provisions of Statement 141 and
Statement No. 142, "Goodwill and Other Intangible
Assets" ("Statement 142"). Statement 141 requires the
use of the purchase method of accounting and prohibits
the use of the pooling-of-interests method of accounting
for business combinations initiated after June 30, 2001.
Statement 141 also requires that the Company recognize
acquired intangible assets apart from goodwill if the
acquired intangible assets meet certain criteria.
Statement 142 requires, among other things, that
companies no longer amortize goodwill and certain
indefinite lived intangible assets
8
UNITED REFINING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
but instead test goodwill and certain indefinite lived
intangible assets for impairment at least annually in
accordance with the guidance in Statement 142. In
addition, Statement 142 requires that the Company
identify reporting units for the purposes of assessing
potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible
assets, and cease amortization of goodwill and other
intangible assets with an indefinite useful life.
The Company acquired 100% of the operations and working
capital assets of County Fair, Inc. on December 21,
2001. The goodwill and certain intangible assets
acquired therewith were not subject to amortization in
accordance with Statement 142. Consequently, historic
earnings as previously reported were not affected by the
adoption of Statement 142 and no disclosures are
required pursuant to Accounting Principles Board ("APB")
Opinion No. 20, "Accounting Changes".
In conjunction with the implementation of Statement 142,
the Company has completed the transitional impairment
review. Statement 142 prescribes a two-step process for
impairment testing of goodwill. The first step of this
test, used to identify impairment, compares the fair
value of a reporting unit with its carrying amount
including goodwill. The second step (if necessary),
measures the amount of the impairment. Using the
guidance in Statement 142, the Company has determined
that its subsidiary, Country Fair, Inc. is a reporting
unit. The Company's transitional goodwill impairment
test indicated that the fair value of the reporting unit
exceeded the reporting unit's carrying amount;
accordingly, the second step was not necessary. The
Company has noted no subsequent indicators that would
require testing goodwill for impairment.
There were no changes in the carrying amount of goodwill
for the nine months ended May 31, 2003.
As of May 31, 2003 and August 31, 2002, the Company's
intangible assets and goodwill, included in the
Company's retail business, were as follows (in
thousands):
MAY 31, 2003 AUGUST 31, 2002
--------------------------------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
- --------------------------------------------------------------------------------
Amortizable intangible
assets:
Vendor contracts $ 2,600 $526 $ 2,600 $248
Deed restrictions 800 45 800 21
Non-compete agreement 400 113 400 53
Leasehold covenants 1,537 145 1,537 68
-------------------------------------------------
$ 5,337 $829 $ 5,337 $390
=================================================
Non-amortizable assets:
Trade name $10,500 $ -- $10,500 $ --
Goodwill 1,349 -- 1,349 --
-------------------------------------------------
$11,849 $ -- $11,849 $ --
=================================================
9
UNITED REFINING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
Amortization expense for the three and nine month
periods ended May 31, 2003 was $146,000 and $439,000,
respectively.
Amortization expense for intangible assets subject to
amortization for each of the years in the five year
period ending August 31, 2007 is estimated to be
$585,000 in 2003, 2004, and 2005, $582,000 in 2006, and
$499,000 in 2007.
3. RECENT ACCOUNTING In June 2001, the FASB issued Statement No. 143,
STANDARDS "Accounting for Obligations Associated with the
Retirement of Long-Lived Assets" ("Statement 143"). The
objective of Statement 143 is to establish an accounting
standard for the recognition and measurement of an asset
retirement obligation on certain long-lived assets. The
retirement obligation must be one that results from the
acquisition, construction or normal operation of a
long-lived asset. Statement 143 requires the legal
obligation associated with the retirement of a tangible
long-lived asset to be recognized at fair value as a
liability when incurred, and the cost to be capitalized
by increasing the carrying amount of the related
long-lived asset. Statement 143 was effective for the
Company's fiscal year beginning September 1, 2002.
The adoption of Statement 143 did not have a material
effect on the Company's financial position or results of
operations.
In October 2001, the FASB issued Statement No. 144,
"Accounting for the Impairment or Disposal of Long-Lived
Assets" ("Statement 144"). Statement 144 supersedes
Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be
Disposed of" ("Statement 121") and retains the basic
requirements of Statement 121 regarding when and how to
measure an impairment loss. Statement 144 provides
additional implementation guidance on accounting for an
impairment loss. Statement 144 is effective for all
fiscal years beginning after December 15, 2001.
The Company's adoption of Statement 144 did not have a
material effect on the Company's financial position or
results of operations.
In April 2002, the FASB issued Statement No. 145,
"Rescission of Statements No. 4, 44 and 64, Amendment of
FASB Statement No. 13, and Technical Corrections"
("Statement 145"). Statement 145 eliminates
extraordinary accounting treatment for reporting gains
or losses on debt extinguishments, and amends other
existing authoritative pronouncements to make various
technical corrections, clarify meanings, or describe
their applicability under changed conditions. The
provisions of this Statement are effective for fiscal
years beginning after May 15, 2002; however, early
application of Statement 145 is encouraged. Debt
extinguishments reported as extraordinary items prior to
scheduled or early adoption of this Statement would be
reclassified to other income in most cases following
adoption.
10
UNITED REFINING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
The adoption of Statement 145 did not have a material
impact on the Company's financial position or results of
operations.
In June 2002, the FASB issued Statement No. 146,
"Accounting for Costs Associated with Exit or Disposal
Activities" ("Statement 146"), which changes the
accounting for costs such as lease termination costs and
certain employee severance costs that are associated
with a restructuring, discontinued operation, plant
closing, or other exit or disposal activity initiated
after December 31, 2002. The standard requires companies
to recognize the fair value of costs associated with
exit or disposal activities when they are incurred
rather than at the date of a commitment to an exit or
disposal plan.
The adoption of Statement 146 did not have an effect on
the Company's financial position or results of
operations as the Company did not exit, discontinue or
restructure any of its operations.
In November 2002, the FASB issued Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("Interpretation 45").
Interpretation 45 elaborates on the disclosures that a
guarantor should make in its interim and annual
financial statements regarding its obligations relating
to the issuance of certain guarantees. It also requires
a guarantor to recognize, at the inception of a
guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee.
Interpretation 45 provides specific guidance identifying
the characteristics of contracts that are subject to its
guidance and it also provides for scope exceptions from
the guidance in its entirety and from only the initial
recognition and measurement provisions.
The recognition and measurement provisions of
Interpretation 45 are effective on a prospective basis
for guarantees issued or modified after December 31,
2002, regardless of the guarantor's fiscal year end.
Interpretation 45 specifically prohibits the guarantor
to revise or restate its previous accounting for
guarantees issued prior to December 31, 2002.
The disclosure requirements of Interpretation 45 are
effective for interim and annual period financial
statements ending after December 15, 2002.
The adoption of Interpretation 45 did not have a
material impact on the Company's financial position or
results of operations.
In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities"
("Interpretation 46"). Interpretation 46 clarifies the
application of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements", to certain entities
in which equity investors do not have the
characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated
financial support from other parties. Interpretation 46
is applicable
11
UNITED REFINING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
immediately for variable interest entities created after
January 31, 2003. For variable interest entities created
prior to January 31, 2003, the provisions of
Interpretation 46 are applicable no later than July 31,
2003.
The Company is currently evaluating the effect of
implementing Interpretation 46 on its financial position
and results of operations.
4. INVENTORIES Inventories consist of the following (in thousands):
MAY 31, 2003 AUGUST 31, 2002
--------------------------------------------------------------
Crude Oil $18,581 $26,384
Petroleum Products 50,546 38,407
--------------------------------
Total @ LIFO 69,127 64,791
--------------------------------
Merchandise 15,438 15,362
Supplies 13,834 13,414
--------------------------------
Total @ FIFO 29,272 28,776
--------------------------------
Total Inventory $98,399 $93,567
================================
5. CREDIT FACILITY The Company and the participating banks amended the
credit facility on March 24, 2003, allowing for a
temporary increase in the credit facility commitment
from $50,000,000 to $70,000,000. From the effective date
of the amendment to and including July 31, 2003, the
credit facility commitment is $70,000,000. From August
1, 2003 through and including September 30, 2003, the
credit facility commitment is $60,000,000. The temporary
increase expires as of September 30, 2003. Additionally,
the amendment revised select covenant calculations,
including the fixed charge coverage ratio and redefined
select definitions.
6. SUBSIDIARY Certain of United Refining Company's (the "issuer")
GUARANTORS subsidiaries function as guarantors under the terms of
the $200,000,000 Senior Unsecured Note Indenture due
June 9, 2007. Financial information for the issuer and
its wholly owned subsidiary guarantors is as follows:
12
UNITED REFINING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
Condensed Consolidating Balance Sheets
(in thousands)
May 31, 2003 August 31, 2002
------------------------------------------------- -------------------------------------------------
Issue Guarantors Elimination Consolidated Issuer Guarantors Eliminations Consolidated
------------------------------------------------- -------------------------------------------------
Assets
Current:
Cash and cash equivalents $ 1,096 $ 7,953 $ -- $ 9,049 $ 4,254 $ 9,261 $ -- $ 13,515
Accounts receivable, net 26,578 11,126 -- 37,704 22,584 11,281 -- 33,865
Inventories 76,812 21,587 -- 98,399 71,939 21,628 -- 93,567
Prepaid expenses and
other assets 13,018 4,107 -- 17,125 8,574 2,605 -- 11,179
Refundable income taxes -- -- -- -- 3,300 -- -- 3,300
Intercompany 92,364 18,863 (111,227) -- 93,867 18,892 (112,759) --
----------------------------------------------- -----------------------------------------------
Total current assets 209,868 63,636 (111,227) 162,277 204,518 63,667 (112,759) 155,426
Property, plant and
equipment, net 116,567 69,467 -- 186,034 118,840 71,054 -- 189,894
Investment in affiliated
company 2,316 -- -- 2,316 1,707 -- -- 1,707
Deferred financing
costs, net 3,208 -- -- 3,208 3,641 -- -- 3,641
Goodwill and other
non-amortizable assets -- 11,849 -- 11,849 -- 11,849 -- 11,849
Amortizable intangible
assets, net -- 3,734 -- 3,734 -- 4,170 -- 4,170
Deferred turnaround
costs & other assets,
net 7,995 1,144 (1,171) 7,968 4,891 1,033 (1,171) 4,753
Deferred income taxes 6,892 (4,627) -- 2,265 -- -- -- --
----------------------------------------------- -----------------------------------------------
$346,846 $ 145,203 $(112,398) $379,651 $333,597 $151,773 $(113,930) $371,440
=============================================== ===============================================
Liabilities and
Stockholder's Equity
Current:
Revolving credit facility $ 47,500 $ -- $ -- $ 47,500 $ 24,314 $ -- $ -- $ 24,314
Current installments of
long-term debt 92 365 -- 457 86 150 -- 236
Accounts payable 17,422 13,074 -- 30,496 34,384 16,263 -- 50,647
Accrued liabilities 18,688 4,075 -- 22,763 10,083 3,919 -- 14,002
Sales, use and fuel
taxes payable 15,385 3,037 -- 18,422 15,228 3,289 -- 18,517
Deferred income taxes
Amounts due to 4,955 (721) -- 4,234 5,746 (423) -- 5,323
affiliated companies,
net 577 1,011 -- 1,588 (640) 780 -- 140
Intercompany -- 111,227 (111,227) -- -- 112,759 (112,759) --
--------------------------------------------------------------------------------------------------
Total current
liabilities 104,619 132,068 (111,227) 125,460 89,201 136,737 (112,759) 113,179
Long term debt: less
current installments 180,398 1,481 -- 181,879 180,462 1,401 -- 181,863
Deferred income taxes -- -- -- -- (3,227) 3,587 -- 360
Deferred gain on
settlement of pension
plan obligations 1,184 -- -- 1,184 1,345 -- -- 1,345
Deferred retirement benefits 24,815 1,694 -- 26,509 22,643 1,504 -- 24,147
Other noncurrent
liabilities -- 1,787 -- 1,787 -- 2,350 -- 2,350
----------------------------------------------- -----------------------------------------------
Total liabilities 311,016 137,030 (111,227) 336,819 290,424 145,579 (112,759) 323,244
----------------------------------------------- -----------------------------------------------
Commitment and
contingencies
Stockholder's equity
Common stock, $.10
par value per share
- shares authorized
100; issued and
outstanding 100 -- 18 (18) -- -- 18 (18) --
Additional paid-in
capital 7,150 10,651 (1,153) 16,648 7,150 10,651 (1,153) 16,648
Retained earnings 28,770 (2,496) -- 26,274 36,113 (4,475) -- 31,638
Accumulated other
comprehensive loss (90) -- -- (90) (90) -- -- (90)
--------------------------------------------------------------------------------------------------
Total stockholder's
equity 35,830 8,173 (1,171) 42,832 43,173 6,194 (1,171) 48,196
----------------------------------------------- -----------------------------------------------
$ 346,846 $145,203 $(112,398) $379,651 $333,597 $151,773 $(113,930) $371,440
=============================================== ===============================================
13
UNITED REFINING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
Condensed Consolidating Statements of Operations
(in thousands)
Three Months Ended May 31, 2003 Three Months Ended May 31, 2002
------------------------------------------------- -------------------------------------------------
Issue Guarantors Elimination Consolidated Issuer Guarantors Eliminations Consolidated
------------------------------------------------- -------------------------------------------------
Net sales $207,072 $183,698 $(59,646) $331,124 $167,307 $161,608 $(50,507) $278,408
Costs of goods sold 209,256 153,824 (59,646) 303,434 157,557 137,689 (50,507) 244,739
----------------------------------------------- -----------------------------------------------
Gross profit (2,184) 29,874 -- 27,690 9,750 23,919 -- 33,669
----------------------------------------------- -----------------------------------------------
Expenses:
Selling, general
and administrative
expenses 4,090 22,647 -- 26,737 3,712 21,537 -- 25,249
Depreciation and
amortization
expenses 2,170 1,134 -- 3,304 2,060 1,162 -- 3,222
----------------------------------------------- -----------------------------------------------
Total operating
expenses 6,260 23,781 -- 30,041 5,772 22,699 -- 28,471
----------------------------------------------- -----------------------------------------------
Operating income
(loss) (8,444) 6,093 -- (2,351) 3,978 1,220 -- 5,198
----------------------------------------------- -----------------------------------------------
Other income (expense):
Interest expense, net (4,368) (1,063) -- (5,431) (3,906) (1,098) -- (5,004)
Other, net (651) 206 -- (445) (415) 226 -- (189)
Equity in net earnings
of affiliate 342 -- -- 342 211 -- -- 211
----------------------------------------------- -----------------------------------------------
(4,677) (857) -- (5,534) (4,110) (872) -- (4,982)
----------------------------------------------- -----------------------------------------------
Income (loss) before
income tax expense
(benefit) (13,121) 5,236 -- (7,885) (132) 348 -- 216
Income tax expense
(benefit) (5,212) 2,135 -- (3,077) (53) 140 -- 87
----------------------------------------------- -----------------------------------------------
Net income (loss) $ (7,909) $ 3,101 $ -- $ (4,808) $ (79) $ 208 $ -- $ 129
=============================================== ===============================================
14
UNITED REFINING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
Condensed Consolidating Statements of Operations
(in thousands)
Nine Months Ended May 31, 2003 Nine Months Ended May 31, 2002
------------------------------------------------- -------------------------------------------------
Issue Guarantors Elimination Consolidated Issuer Guarantors Eliminations Consolidated
------------------------------------------------- -------------------------------------------------
Net sales $581,352 $531,664 $(177,158) $935,858 $450,661 $403,101 $(132,122) $721,640
Costs of goods sold 561,621 454,177 (177,158) 838,640 445,315 344,240 (132,122) 657,433
----------------------------------------------- -----------------------------------------------
Gross profit (loss) 19,731 77,487 -- 97,218 5,346 58,861 -- 64,207
----------------------------------------------- -----------------------------------------------
Expenses:
Selling, general
and administrative
expenses 12,207 67,874 -- 80,081 12,321 55,240 -- 67,561
Depreciation and
amortization
expenses 6,510 3,400 -- 9,910 6,180 3,000 -- 9,180
----------------------------------------------- -----------------------------------------------
Total operating
expenses 18,717 71,274 -- 89,991 18,501 58,240 -- 76,741
----------------------------------------------- -----------------------------------------------
Operating income
(loss) 1,014 6,213 -- 7,227 (13,155) 621 -- (12,534)
----------------------------------------------- -----------------------------------------------
Other income (expense):
Interest expense, net (12,699) (3,195) -- (15,894) (11,505) (3,015) -- (14,520)
Other, net (1,256) 523 -- (733) (1,382) 399 -- (983)
Equity in net earnings
of affiliate 610 -- -- 610 801 -- -- 801
----------------------------------------------- -----------------------------------------------
(13,345) (2,672) -- (16,017) (12,086) (2,616) -- (14,702)
----------------------------------------------- -----------------------------------------------
Income (loss) before
income tax expense
(benefit) (12,331) 3,541 -- (8,790) (25,241) (1,995) -- (27,236)
Income tax expense
(benefit) (4,988) 1,562 -- (3,426) (10,110) (783) -- (10,893)
----------------------------------------------- -----------------------------------------------
Net income (loss) $ (7,343) $ 1,979 $ -- $ (5,364) $(15,131) $ (1,212) $ -- $(16,343)
=============================================== ===============================================
15
UNITED REFINING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
Condensed Consolidating Statements of Cash Flows
(in thousands)
Nine Months Ended May 31, 2003 Nine Months Ended May 31, 2002
---------------------------------------- ------------------------------------------
Guaran- Elimin- Consoli- Guaran- Elimin- Consoli-
Issuer tors ation dated Issuer tors ation dated
---------------------------------------- ------------------------------------------
Net cash provided by (used in) operating
activities $(16,477) $ 21 $-- $(16,456) $(30,122) $ 2,010 $-- $(28,112)
---------------------------------------- ------------------------------------------
Cash flows from investing activities:
Purchase of business, net of cash
acquired -- -- -- -- (17,281) 381 -- (16,900)
Additions to property, plant and
equipment (4,235) (1,025) -- (5,260) (4,185) (2,997) -- (7,182)
Additions to deferred turnaround
costs (5,315) (191) -- (5,506) (772) (564) -- (1,336)
Proceeds from asset dispositions -- -- -- -- -- 3 -- 3
---------------------------------------- ------------------------------------------
Net cash used in investing
activities (9,550) (1,216) -- (10,766) (22,238) (3,177) -- (25,415)
---------------------------------------- ------------------------------------------
Cash flows from financing activities:
Net borrowings on revolving credit
facility 23,186 -- -- 23,186 29,000 -- -- 29,000
Dividends -- -- -- -- (2,130) -- -- (2,130)
Deferred financing costs (250) -- -- (250) (144) -- -- (144)
Principal reductions of long-term debt (67) (113) -- (180) -- (93) -- (93)
---------------------------------------- ------------------------------------------
Net cash provided by (used in)
financing activities 22,869 (113) -- 22,756 26,726 (93) -- 26,633
---------------------------------------- ------------------------------------------
Net decrease in cash and cash equivalents (3,158) (1,308) -- (4,466) (25,634) (1,260) -- (26,894)
Cash and cash equivalents, beginning of
year 4,254 9,261 -- 13,515 29,197 6,027 -- 35,224
---------------------------------------- ------------------------------------------
Cash and cash equivalents, end of period $ 1,096 $ 7,953 $-- $ 9,049 $ 3,563 $ 4,767 $-- $ 8,330
======================================== ==========================================
16
UNITED REFINING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
7. SEGMENTS OF BUSINESS
Intersegment revenues are calculated using estimated 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
MAY 31, MAY 31,
-----------------------------------------------------------------------------
2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------------------
Net Sales
Retail $ 182,494 $ 160,405 $ 528,408 $ 399,613
Wholesale 148,630 118,003 407,450 322,027
-----------------------------------------------------------------------------
$ 331,124 $ 278,408 $ 935,858 $ 721,640
=============================================================================
Intersegment Sales
Wholesale $ 58,442 $ 49,304 $ 173,902 $ 128,634
=============================================================================
Operating Income (Loss)
Retail $ 6,214 $ 610 $ 5,886 $ (77)
Wholesale (8,565) 4,588 1,341 (12,457)
-----------------------------------------------------------------------------
$ (2,351) $ 5,198 $ 7,227 $ (12,534)
=============================================================================
Depreciation and Amortization
Retail $ 1,072 $ 1,112 $ 3,214 $ 2,850
Wholesale 2,232 2,110 6,696 6,330
-----------------------------------------------------------------------------
$ 3,304 $ 3,222 $ 9,910 $ 9,180
=============================================================================
MAY 31, 2003 AUGUST 31, 2002
--------------------------------------------------------------------------------------
Total Assets
Retail $120,400 $127,712
Wholesale 259,251 243,728
----------------------------------
$379,651 $371,440
==================================
Capital Expenditures (including non-cash)
Retail $ 1,078 $ 4,552
Wholesale 4,590 5,747
----------------------------------
$ 5,668 $ 10,299
==================================
8. CRUDE OIL OPTIONS CONTRACTS
In anticipation of the war in Iraq and consequent volatility of crude
costs, the Company hedged approximately 700,000 barrels of May crude from March
7 through March 20, 2003. As a result of this strategy, the Company benefited
from a gain of approximately $1.6 million, which is included as a reduction of
costs of goods sold.
17
UNITED REFINING COMPANY
AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
FORWARD LOOKING STATEMENTS
This document includes statements that constitute "forward looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 and that are intended to come
within the safe harbor protection provided by those sections. By their nature,
all forward looking statements involve risk and uncertainties. Actual results
may differ materially from those contemplated by the forward looking statements
for a number of reasons.
Although the Company believes that its 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 from those expressed in
any such forward-looking statements. In addition to the factors discussed
elsewhere in this report, 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, 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 the Company's markets, 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, the possibility of inefficiencies or shutdowns in
refinery operations or pipelines, the availability and cost of financing to the
Company, environmental, tax and tobacco legislation or regulation; volatility of
gasoline prices, margins and supplies; merchandising margins; customer traffic;
weather conditions; labor costs and the level of capital expenditures.
RECENT DEVELOPMENTS
Fiscal third quarter 2003 worldwide crude oil prices, as indicated by
prices of crude oil contracts on the New York Mercantile Exchange (NYMEX),
decreased from the peak in March of $35.73/BBL to $28.14/BBL in May 2003 or by
about 21%. Crude oil prices appear to have peaked in mid March for April crude
delivery just before the start of the Iraqi war before dropping after the start
of the Iraqi war. For the recent quarter compared to the prior year quarter,
crude prices have increased about 36% from $23.82/BBL to $32.34/BBL.
NYMEX Crude oil prices appear to have hit a low point for May through
June at slightly over $28/BBL before increasing to about $30/BBL for July
through August. Industry experts have noted that despite the fact that the
market remains "well supplied", oil prices have maintained an upward trend since
late April attributing the trend to "the slower-than-anticipated recovery in
Iraqi oil production, coupled with unusually low stock levels." Analysts expect
crude oil prices to remain near $30/BBL due to low global inventories, the
expectation of no immediate surge in Iraqi exports, OPEC's proven ability to
manage its price band, and a forecast demand growth of about 1% this year.
The Company's results were positively influenced by the improved
discounts on heavy sour crude oils. The discount for the recent quarter
represents the highest discount since the first quarter of fiscal 2002 yet it is
still significantly lower compared to fiscal 2001 and early fiscal 2002. Since
the refinery crude supply is comprised of approximately equal proportions of
sour and sweet crude, the difference between their prices ("sweet-sour
differential") impacts the costs of goods sold and hence gross profit. For the
recent quarter compared to the prior year quarter, the Company realized a 66%
increase in the "sweet-sour" crude price differential.
The future trend for this differential is somewhat uncertain given
world turmoil in key oil areas, availability of foreign crude to US traders,
weak refining margins, refinery turnarounds and unplanned downtime for
refineries that process heavy, sour crude. The continuing strong NYMEX crude oil
futures
18
UNITED REFINING COMPANY
AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
prices have pushed the trans-Atlantic arbitrage to a level making it
economical to ship crude across the Atlantic to the US. Strong US prices and
weaker demand in Asia has led to an inflow of foreign crude to the US.
The Company's monthly crude oil pricing is typically determined
approximately 30 days in advance of the pricing of products produced from crude.
Thus, the steady decrease in the Company's purchased crude cost during the third
fiscal quarter, due primarily to the decline in the NYMEX crude price, had the
effect of decreasing refinery gross margins as products were produced from more
expensive crude oil purchased at prior month crude prices.
Refining margins in the third fiscal quarter have slipped from the
strong second fiscal quarter margins when the cold weather, and the loss of
crude and product exports from key US supplier Venezuela boosted refining
margins. The Company expects crude prices to remain flat for the remainder of
the calendar year and there are indications that margins may improve slightly in
the fourth fiscal quarter. The outlook for the next few months is critically
dependent on the US summer driving season.
Although crude and product stocks are at historically low levels,
near-term concerns for refiners include rising product stocks and high refinery
throughput. In fact, refiners may set a throughput record during the second
calendar quarter that has contributed to a build in gasoline inventory. Product
inventories have been building faster than crude inventories. If this trend
continues, this would not be a favorable indicator for refining margins.
In addition, since the beginning of the summer driving season starting
Memorial Day weekend, gasoline demand has not been as strong as many analysts
were expecting. As of mid June, gasoline demand remained weak because of the
cold and rainy weather on the East Coast which was present for most of the
spring. Aside from the weather, high oil and natural gas prices have translated
into higher energy bills for US consumers. These higher energy costs combined
with a sluggish economy has dented consumer spending which results in less
traffic on the streets and less gasoline demand.
Continued high natural gas prices for refineries, weak gasoline demand
in what is normally a high gasoline demand period, and the rapid decline in
distillate margins have contributed to lower earnings projections for the
near-term. Looking forward to the second half of the calendar year, some
industry analysts expect margins to rebound as gasoline demand increases as the
driving season continues, gasoline imports moderate, crude prices decline, and
distillate stocks build ahead of winter.
RESULTS OF OPERATIONS
The following table reflects the Company's financial and operating
highlights for the three and nine month periods ended May 31, 2003 and 2002 (in
thousands).
19
UNITED REFINING COMPANY
AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31, MAY 31,
--------------------------- ------------------------
2003 2002 2003 2002
--------------------------- ------------------------
Net Sales
Retail $182,494 $160,405 $528,408 $399,613
Wholesale 148,630 118,003 407,450 322,027
--------------------------- ------------------------
$331,124 $278,408 $935,858 $721,640
=========================== ========================
Costs of Goods Sold
Retail $152,654 $137,232 $451,715 $341,857
Wholesale 150,780 107,507 386,925 315,576
--------------------------- ------------------------
$303,434 $244,739 $838,640 $657,433
=========================== ========================
Gross Profit / (Loss)
Retail $ 29,840 $ 23,173 $ 76,693 $ 57,756
Wholesale (2,150) 10,496 20,525 6,451
--------------------------- ------------------------
$ 27,690 $ 33,669 $ 97,218 $ 64,207
=========================== ========================
Operating Expenses
Retail $ 23,626 $ 22,563 $ 70,807 $ 57,833
Wholesale 6,415 5,908 19,184 18,908
--------------------------- ------------------------
$ 30,041 $ 28,471 $ 89,991 $ 76,741
=========================== ========================
Operating Income / (Loss)
Retail $ 6,214 $ 610 $ 5,886 $ (77)
Wholesale (8,565) 4,588 1,341 (12,457)
--------------------------- ------------------------
$ (2,351) $ 5,198 $ 7,227 $(12,534)
=========================== ========================
All percentage amounts referred to below were derived using underlying data in
thousands.
COMPARISON OF FISCAL QUARTERS ENDED MAY 31, 2003 AND MAY 31, 2002
NET SALES
Retail sales increased during 2003 by $22.1 million, or 14% from $160.4
million to $182.5 million. The retail sales increase was primarily due to a $3.7
million increase in merchandise sales and a $18.4 million increase in petroleum
sales. The petroleum sales increase results from a 16.2% increase in retail
selling prices (on a same store basis and including the Country Fair locations)
offset by a .6% decrease in retail petroleum volume (on a same store basis and
including the Country Fair locations).
Wholesale sales increased during 2003 by $30.6 million or 26% from
$118.0 million to $148.6 million. The wholesale sales increase was due to a
32.0% increase in wholesale prices offset by a 4.6% decrease in wholesale
volume.
20
UNITED REFINING COMPANY
AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
COSTS OF GOODS SOLD
Retail costs of goods sold increased during 2003 by $15.5 million or
11% from $137.2 million to $152.7 million. The increase in retail costs of goods
sold results from a $12.5 million or 11.6% increase in petroleum costs and a
$3.0 million or 10.0% increase in merchandise costs. The increased merchandise
costs coincide with the $3.8 million increase in merchandise sales. Increased
petroleum costs are due primarily to increased crude oil prices.
Wholesale costs of goods sold increased during 2003 by $43.3 million or
40% from $107.5 million to $150.8 million. The increase in wholesale costs of
goods was primarily due to a 31.7% increase in the Company's average crude oil
purchase price for the three months ended May 31, 2003 as compared to the prior
year period. Worldwide crude oil prices, as indicated by NYMEX crude oil
contract prices, increased 35.8% as compared to the prior year period.
Offsetting costs of goods sold was a .5% reduction in crude runs for the three
months ended May 31, 2003 as compared to the prior year period. For the three
months ended May 31, 2003, costs of goods sold was negatively impacted by an
approximate $5.3 million decrease in the value of the Company's working
inventories on a market valuation basis, which increased costs of goods sold.
The Company has experienced increased refinery energy costs due to higher
natural gas prices. Costs of goods sold also include a gain of approximately
$1.6 million from various crude oil options contracts used to hedge crude oil
purchases and inventory.
GROSS PROFIT/(LOSS)
Retail gross profit increased during 2003 by $6.6 million or 28% from
$23.2 million to $29.8 million. Inclusive of Country Fair, the Company increased
its petroleum margins by $5.9 million and its merchandise margin by $.7 million.
These margin increases were a result of $3.8 million in increased merchandise
sales, offset by a reduction in sales volume of .6 million gallons.
Wholesale gross profit decreased $12.7 million from $10.5 million to
$(2.2) million for the three months ended May 31, 2002 and 2003, respectively.
This decrease was primarily due to the increase in crude costs, increased fuel
consumed expense and a 4.6% decrease in wholesale volume.
OPERATING EXPENSES
Retail operating expenses increased during 2003 by $1.1 million or 5%.
The increases to operating expenses were due to increased payroll and payroll
costs of $.4 million, increased pension/post retirement costs of $.2 million,
increased credit/customer service costs of $.2 million, increased rent expense
of $.2 million and increased insurance/utilities of $.1 million.
Wholesale operating expenses increased $.5 million for the three months
ended May 31, 2003 versus the three months ended May 31, 2002. Operating
expenses increased $.2 million due to increased payroll and payroll costs, $.2
million in increased pension/post retirement costs and all other remaining costs
increased by $.1 million.
21
UNITED REFINING COMPANY
AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
INTEREST EXPENSE, NET
Net interest expense (interest expense less interest income) increased
$0.4 million from $5.0 million for the fiscal quarter ended May 31, 2002 to $5.4
million for the fiscal quarter ended May 31, 2003, primarily due to increased
borrowings on the Company's revolving credit facility.
INCOME TAX EXPENSE/(BENEFIT)
The Company's effective tax rate for the fiscal quarter ended May 31,
2002 was approximately 40.3% compared to a rate of 39.0% for the fiscal quarter
ended May 31, 2003, due to the relationship of permanent differences to book
income before tax.
COMPARISON OF THE NINE MONTHS ENDED MAY 31, 2003 AND MAY 31, 2002
NET SALES
Retail sales increased during 2003 by $128.8 million, or 32% from
$399.6 million to $528.4 million. The retail sales increase was primarily due to
a $32.1 million increase in merchandise sales and a $96.7 million increase in
petroleum sales. The petroleum sales increase results from an 11.0% increase in
retail petroleum volume (on a same store basis and including the Country Fair
locations) and a 19.1% increase in retail selling prices (on a same store basis
and including the Country Fair locations).
On December 21, 2001 the Company acquired 100% of the operations and
working capital assets of Country Fair. The nine months ended May 31, 2003 was
positively impacted by the additional sales from Country Fair for the entire
period versus the nine months ended May 31, 2002 in which Country Fair sales
were only included from the acquisition date of December 21, 2001.
Wholesale sales increased during 2003 by $85.5 million or 27% from
$322.0 million to $407.5 million. The wholesale sales increase was due to a
35.3% increase in wholesale prices offset by a 6.5% decrease in wholesale
volume.
COSTS OF GOODS SOLD
Retail costs of goods sold increased during 2003 by $109.9 million or
32% from $341.8 million to $451.7 million. The increase in retail costs of goods
sold results from a $86.8 million or 32.2% increase in petroleum costs and a
$23.1 million or 31.7% increase in merchandise costs. On December 21, 2001 the
Company acquired 100% of the operation and working capital assets of Country
Fair. The nine months ended May 31, 2003 was impacted by the additional sales
from Country Fair for the entire period versus the nine months ended May 31,
2002 in which Country Fair sales were only included from the acquisition date of
December 21, 2001.
Wholesale costs of goods sold increased during 2003 by $71.3 million or
23% from $315.6 million to $386.9 million. The increase in wholesale costs of
goods was primarily due to a 32.3% increase in the Company's average crude oil
purchase price for the nine months ended May 31, 2003 as compared to the prior
year period. Worldwide crude oil prices, as indicated by NYMEX crude oil
contract prices, increased 32.4% as compared to the prior year period.
Offsetting costs of goods sold was a 7% reduction in crude runs for the nine
months ended May 31, 2003 as compared to the prior year period. The refinery
throughput decrease for the nine months ended May 31, 2003 was due to a
scheduled maintenance turnaround resulting in a 21 day shutdown of units at the
refinery. For the nine months ended May 31,
22
UNITED REFINING COMPANY
AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
2003 costs of goods sold was positively impacted by an approximate $1.0 million
increase in the value of the Company's working inventories on a market valuation
basis, which decreased costs of goods sold. The Company recorded a reduction in
the LIFO reserve, which increased the value of the Company's total inventories
by $.6 million. In the prior year period, LIFO exceeded market; thus,
inventories were valued at net realizable value. The Company has experienced
increased refinery energy costs due to higher natural gas prices. Costs of goods
sold also include a gain of approximately $1.6 million from various crude oil
options contracts used to hedge crude oil purchases and inventory.
GROSS PROFIT/(LOSS)
Retail gross profit increased during 2003 by $18.9 million or 33% from
$57.8 million to $76.7 million. Inclusive of Country Fair, the Company increased
its petroleum margins by $9.9 million and its merchandise margin by $9.0
million. These margin increases were a result of 25.7 million gallons of
additional volume sold and $32.5 million in increased merchandise sales.
Wholesale gross profit increased $14.1 million or 220% from $6.4
million to $20.5 million for the nine months ended May 31, 2002 and 2003,
respectively. This increase was primarily due to the increase in wholesale
selling prices offset by a decrease in wholesale volume. Also contributing to
the decline in gross profit were the higher natural gas prices and higher
general insurance premiums.
OPERATING EXPENSES
Retail operating expenses increased during 2003 by $13.0 million or
22%. Retail operations for the nine months ended May 31, 2003 included Country
Fair for the entire period versus the nine months ended May 31, 2002 in which
Country Fair operations were only included from the acquisition date of December
21, 2001 which resulted in increased operating expenses of $10.5 million. The
remaining increases to operating expenses were due to increased payroll and
payroll costs of $1.1 million, increased pension/post retirement costs of $.4
million, increased credit/customer service costs of $.5 million, increased
maintenance costs of $.4 million, increased depreciation and amortization of $.3
million offset by lower advertising costs of $.2 million.
Wholesale operating expenses increased $.3 million for the nine months
ended May 31, 2003 versus the nine months ended May 31, 2002.
INTEREST EXPENSE, NET
Net interest expense (interest expense less interest income) increased
$1.4 million from $14.5 million for the nine months ended May 31, 2002 to $15.9
million for the nine months ended May 31, 2003. The increased net interest
expense was due to a $.3 million reduction in interest income earned, $0.9
million increased interest expense for borrowings on the Company's revolving
credit facility, $.1 million increased interest expense for capitalized lease
obligations and $.1 million for other obligations.
INCOME TAX EXPENSE/(BENEFIT)
The Company's effective tax rate for the nine months ended May 31, 2002
was approximately 40.0% compared to a rate of 38.9% for the nine months ended
May 31, 2003, primarily due to the relationship of permanent differences to book
income before tax.
23
UNITED REFINING COMPANY
AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
Working capital (current assets minus current liabilities) at May 31,
2003 was $36.8 million and at August 31, 2002 was $42.2 million. The Company's
current ratio (current assets divided by current liabilities) was 1.3:1 at May
31, 2003 and 1.4:1 at August 31, 2002.
Net cash used in operating activities totaled $16.5 million and $28.1
million for the nine months ended May 31, 2003 and 2002, respectively. The net
cash used in operating activities for the nine months ended May 31, 2003 results
from a net loss of ($5.4) million, a change in deferred income taxes of ($3.7)
million, cash used in working capital items of ($21.4) million, a change in
other, net of ($.5) million, equity in net earnings of affiliate of ($.6)
million, offset by a change in deferred retirement benefits of $2.4 million and
depreciation and amortization of $12.7 million.
Net cash used in investing activities totaled $10.8 million and $25.4
million for the nine months ended May 31, 2003 and 2002, respectively. Purchases
of property, plant and equipment totaled $5.3 million for the nine months ended
May 31, 2003. Additions to deferred turnaround costs and other assets totaled
$5.5 million.
The Company reviews its capital expenditures on an ongoing basis.
Maintenance and normal repair capital expenditures have averaged approximately
$4 million annually over the last three years for the refining and marketing
operations. Management does not foresee any increase in maintenance and
non-discretionary capital expenditures during fiscal 2003. The Company
anticipates spending approximately $5 million as part of its Tier 2 Gasoline
Sulfur Program under 40 CFR Part 80, Subpart H during fiscal year 2003. Since
the bulk of this anticipated expenditure is near the fiscal year end, it is
possible a portion of this $5 million could actually occur during fiscal 2004.
Net cash provided by financing activities totaled $22.8 million for the
nine months ended May 31, 2003 due from borrowings of $23.2 million on the
Company's revolving credit facility offset by $.2 deferred financing costs and
$.2 in reduction of long-term debt.
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. The Company expects
to be able to meet its 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 the Company's secured
revolving credit facility (the "credit facility") with PNC Bank, N.A. as Agent
Bank. This is a $50,000,000 revolving credit facility (subject to temporary
increases described below), which was renewed for five years on July 12, 2002
and amended on November 27, 2002 and February 19 and March 24, 2003. At May 31,
2003, there was approximately $21,650,000 unused and available on the credit
facility.
The credit facility is secured by certain cash accounts, accounts
receivable, and inventory. The interest rate on borrowings varies with the
Company's earnings and is based on the higher of the bank's prime rate or
Federal funds rate for base rate borrowings and the LIBOR rate for Euro-Rate
borrowings. The Company and the participating banks amended the credit facility
on March 24, 2003, allowing for a temporary increase in the credit facility
commitment from $50,000,000 to $70,000,000. From the effective date of the
amendment to and including July 31, 2003, the credit facility commitment is
$70,000,000. From August 1, 2003 through and including September 30, 2003, the
credit facility commitment is $60,000,000. The temporary increase expires as of
September 30, 2003. Additionally, the amendment revised select covenant
calculations, including the fixed charge coverage ratio and redefined select
definitions.
24
UNITED REFINING COMPANY
AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
In addition to these obligations, the Company had outstanding letters
of credit of $850,000 as of May 31, 2003.
Although the Company is not aware of any pending circumstances which
would change its 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. The Company continues to investigate
strategic acquisitions and capital improvements to its existing facilities.
Federal, state and local laws and regulations relating to the
environment affect nearly all the operations of the Company. As is the case with
all the companies engaged in similar industries, the Company faces 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. The Company
cannot predict what additional environmental legislation or regulations will be
enacted or become effective in the future or how existing or future laws or
regulations will be administered or interpreted with respect to products or
activities to which they have not been previously applied.
SEASONAL FACTORS
Seasonal factors affecting the Company's business may cause variation
in the prices and margins of some of the Company's products. For example, demand
for gasoline tends to be highest in spring and summer months, while demand for
home heating oil and kerosene tends to be highest in winter months.
INFLATION
The effect of inflation on the Company has not been significant during
the last five fiscal years.
25
UNITED REFINING COMPANY
AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
RECENT ACCOUNTING STANDARDS
In June 2001, the FASB issued Statement No. 143, "Accounting for
Obligations Associated with the Retirement of Long-Lived Assets" ("Statement
143"). The objective of Statement 143 is to establish an accounting standard for
the recognition and measurement of an asset retirement obligation on certain
long-lived assets. The retirement obligation must be one that results from the
acquisition, construction or normal operation of a long-lived asset. Statement
143 requires the legal obligation associated with the retirement of a tangible
long-lived asset to be recognized at fair value as a liability when incurred,
and the cost to be capitalized by increasing the carrying amount of the related
long-lived asset. Statement 143 was effective for the Company's fiscal year
beginning September 1, 2002.
The adoption of Statement 143 did not have a material effect on the
Company's financial position or results of operations.
In October 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("Statement 144"). Statement 144
supersedes Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" ("Statement 121") and
retains the basic requirements of Statement 121 regarding when and how to
measure an impairment loss. Statement 144 provides additional implementation
guidance on accounting for an impairment loss. Statement 144 is effective for
all fiscal years beginning after December 15, 2001.
The Company's adoption of Statement 144 did not have a material effect
on the Company's financial position or results of operations.
In April 2002, the FASB issued Statement No. 145, "Rescission of
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" ("Statement 145"). Statement 145 eliminates extraordinary
accounting treatment for reporting gains or losses on debt extinguishments, and
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. The provisions of this Statement are effective for fiscal years
beginning after May 15, 2002; however, early application of Statement 145 is
encouraged. Debt extinguishments reported as extraordinary items prior to
scheduled or early adoption of this Statement would be reclassified to other
income in most cases following adoption.
The adoption of Statement 145 did not have a material impact on the
Company's financial position or results of operations.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("Statement 146"), which changes
the accounting for costs such as lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity initiated after
December 31, 2002. The standard requires companies to recognize the fair value
of costs associated with exit or disposal activities when they are incurred
rather than at the date of a commitment to an exit or disposal plan.
The adoption of Statement 146 did not have an effect on the Company's
financial position or results of operations as the Company did not exit,
discontinue or restructure any of its operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("Interpretation 45"). Interpretation 45
elaborates on the disclosures that a guarantor should make in its interim and
annual financial statements regarding its obligations relating to the issuance
of certain
26
UNITED REFINING COMPANY
AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
guarantees. It also requires a guarantor to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. Interpretation 45 provides specific guidance identifying
the characteristics of contracts that are subject to its guidance and it also
provides for scope exceptions from the guidance in its entirety and from only
the initial recognition and measurement provisions.
The recognition and measurement provisions of Interpretation 45 are
effective on a prospective basis for guarantees issued or modified after
December 31, 2002, regardless of the guarantor's fiscal year end. Interpretation
45 specifically prohibits the guarantor to revise or restate its previous
accounting for guarantees issued prior to December 31, 2002.
The disclosure requirements of Interpretation 45 are effective for
interim and annual period financial statements ending after December 15, 2002.
The adoption of Interpretation 45 did not have a material impact on the
Company's financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("Interpretation 46"). Interpretation 46
clarifies the application of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements", to certain entities in which equity investors do not have
the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. Interpretation 46
is applicable immediately for variable interest entities created after January
31, 2003. For variable interest entities created prior to January 31, 2003, the
provisions of Interpretation 46 are applicable no later than July 31, 2003.
The Company is currently evaluating the effect of implementing
Interpretation 46 on its financial position and results of operations.
27
UNITED REFINING COMPANY
AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------------------
The Company uses its revolving credit facility to finance a portion of
its operations. These on-balance sheet financial instruments, to the extent they
provide for variable rates, expose the Company to interest rate risk resulting
from changes in the PNC Prime rate, the Federal Funds or LIBOR rate.
The Company has exposure to price fluctuations of crude oil and refined
products. The Company does not manage the price risk related to all of its
inventories of crude oil and refined products with a permanent formal hedging
program, but does manage its risk exposures by managing inventory levels. In
anticipation of the war in Iraq and consequent volatility of crude costs, the
Company hedged approximately 700,000 bbls of May crude from March 7 through
March 20, 2003. As a result of this strategy, the Company benefited from a gain
of approximately $1.6 million. The Company has since exited from this strategy,
but it remains available should management deem it necessary at a later date. At
May 31, 2003, the Company was exposed to the risk of market price declines with
respect to a substantial portion of its crude oil and refined product
inventories.
28
UNITED REFINING COMPANY
AND SUBSIDIARIES
ITEM 4. CONTROLS AND PROCEDURES
- --------------------------------------------------------------------------------
Pursuant to Exchange Act Rules 13a-15 and 15d-15, within the 90 days
prior to the date of this report, the Company carried out an evaluation, under
the supervision and with the participation of our management, including our
principal executive officer and principal financial officer, of the
effectiveness of the design and operations of the Company's disclosure controls
and procedures. Based upon that evaluation, the principal executive officer and
principal financial officer concluded that the Company's disclosure controls and
procedures are effective. There have not been any significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of evaluation.
29
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 10.13 - Limited Waiver and Amendment No. 3 to Credit
Agreement dated as of March 24, 2003 by and among, URC, URCP,
KPC, Country Fair and the Banks thereto and PNC Bank,
National Association, as Agent (filed herewith).
(b) No reports on Forms 8-K have been filed for the quarter for
which this report is being filed.
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: July 15, 2003
UNITED REFINING COMPANY
-------------------------------------------
(Registrant)
/s/ Myron L. Turfitt
-------------------------------------------
Myron L. Turfitt
President
/s/ James E. Murphy
-------------------------------------------
James E. Murphy
Chief Financial Officer
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: July 15, 2003
KIANTONE PIPELINE CORPORATION
-------------------------------------------
(Registrant)
/s/ Myron L. Turfitt
-------------------------------------------
Myron L. Turfitt
President
/s/ James E. Murphy
-------------------------------------------
James E. Murphy
Chief Financial Officer
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: July 15, 2003
UNITED REFINING COMPANY OF PENNSYLVANIA
-------------------------------------------
(Registrant)
/s/ Myron L. Turfitt
-------------------------------------------
Myron L. Turfitt
President
/s/ James E. Murphy
-------------------------------------------
James E. Murphy
Chief Financial Officer
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: July 15, 2003
KIANTONE PIPELINE COMPANY
-------------------------------------------
(Registrant)
/s/ Myron L. Turfitt
-------------------------------------------
Myron L. Turfitt
President
/s/ James E. Murphy
-------------------------------------------
James E. Murphy
Chief Financial Officer
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: July 15, 2003
UNITED JET CENTER, INC.
-------------------------------------------
(Registrant)
/s/ Myron L. Turfitt
-------------------------------------------
Myron L. Turfitt
President
/s/ James E. Murphy
-------------------------------------------
James E. Murphy
Chief Financial Officer
35
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: July 15, 2003
KWIK FILL CORPORATION
-------------------------------------------
(Registrant)
/s/ Myron L. Turfitt
-------------------------------------------
Myron L. Turfitt
President
/s/ James E. Murphy
-------------------------------------------
James E. Murphy
Chief Financial Officer
36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: July 15, 2003
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
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: July 15, 2003
BELL OIL CORP.
-------------------------------------------
(Registrant)
/s/ Myron L. Turfitt
-------------------------------------------
Myron L. Turfitt
President
/s/ James E. Murphy
-------------------------------------------
James E. Murphy
Chief Financial Officer
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: July 15, 2003
PPC, INC.
-------------------------------------------
(Registrant)
/s/ Myron L. Turfitt
-------------------------------------------
Myron L. Turfitt
President
/s/ James E. Murphy
-------------------------------------------
James E. Murphy
Chief Financial Officer
39
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: July 15, 2003
SUPER TEST PETROLEUM, INC.
-------------------------------------------
(Registrant)
/s/ Myron L. Turfitt
-------------------------------------------
Myron L. Turfitt
President
/s/ James E. Murphy
-------------------------------------------
James E. Murphy
Chief Financial Officer
40
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: July 15, 2003
KWIK-FIL, INC.
-------------------------------------------
(Registrant)
/s/ Myron L. Turfitt
-------------------------------------------
Myron L. Turfitt
President
/s/ James E. Murphy
-------------------------------------------
James E. Murphy
Chief Financial Officer
41
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: July 15, 2003
VULCAN ASPHALT REFINING CORPORATION
-------------------------------------------
(Registrant)
/s/ Myron L. Turfitt
-------------------------------------------
Myron L. Turfitt
President
/s/ James E. Murphy
-------------------------------------------
James E. Murphy
Chief Financial Officer
42
CERTIFICATION
Pursuant to 18 U.S.C. Section 1350,
As adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, John A. Catsimatidis certify that:
1. I have reviewed this quarterly report on Form 10-Q of United Refining
Company (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared:
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
registrant's board of directors:
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: July 15, 2003 Signature: /s/ John A. Catsimatidis
---------------- ---------------------------
Principal Executive Officer
43
CERTIFICATION
Pursuant to 18 U.S.C. Section 1350,
As adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, James E. Murphy certify that:
1. I have reviewed this quarterly report on Form 10-Q of United Refining
Company (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared:
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
registrant's board of directors:
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: July 15, 2003 Signature: /s/ James E. Murphy
---------------- ---------------------------
Principal Financial Officer
44