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COUNTRY FAIR INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

Forward Looking Statements

This Quarterly Report on Form 10-Q contains certain statements that constitute "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward looking statements may include, among other things, United Refining Company and its subsidiaries current expectations with respect to future operating results, future performance of its refinery and retail operations, capital expenditures and other financial items. Words such as "expects", "intends", "plans", "projects", "believes", "estimates", "may", "will", "should", "shall", "anticipates", "predicts", and similar expressions typically identify such forward looking statements in this Quarterly Report on Form 10-Q.

By their nature, all forward looking statements involve risk and uncertainties. All phases of the Company's operations involve risks and uncertainties, many of which are outside of the Company's control, and any one of which, or a combination of which, could materially affect the Company's results of operations and whether the forward looking statements ultimately prove to be correct. Actual results may differ materially from those contemplated by the forward looking statements for a number of reasons.

Although we believe our expectations are based on reasonable assumptions within the bounds of its knowledge, investors and prospective investors are cautioned that such statements are only projections and that actual events or results may differ materially depending on a variety of factors described in greater detail in the Company's filings with the SEC, including quarterly reports on Form 10-Q, annual reports on Form 10-K, current reports on Form 8-K, etc. In addition to the factors discussed elsewhere in this Quarterly Report on Form 10-Q, the Company's actual consolidated quarterly or annual operating results have been affected in the past, or could be affected in the future, by additional factors, including, without limitation:



  •   the demand for and supply of crude oil and refined products;




    •    the spread between market prices for refined products and market prices
         for crude oil;




  •   repayment of debt;




  •   general economic, business and market conditions;




    •    risks and uncertainties with respect to the actions of actual or potential
         competitive suppliers of refined petroleum products in our markets;




    •    the possibility of inefficiencies or shutdowns in refinery operations or
         pipelines;




  •   the availability and cost of financing to us;




  •   environmental, tax and tobacco legislation or regulation;




  •   volatility of gasoline prices, margins and supplies;




  •   merchandising margins;




  •   labor costs;




  •   level of capital expenditures;




  •   customer traffic;




  •   weather conditions;




  •   acts of terrorism and war;




  •   business strategies;




  •   expansion and growth of operations;




  •   future projects and investments;




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  •   future exposure to currency devaluations or exchange rate fluctuations;




    •    expected outcomes of legal and administrative proceedings and their
         expected effects on our financial position, results of operations and cash
         flows; and




  •   future operating results and financial condition.

All subsequent written and oral forward looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the foregoing. We undertake no obligation to update any information contained herein or to publicly release the results of any revisions to any such forward looking statements that may be made to reflect events or circumstances that occur, or which we become aware of, after the date of this Quarterly Report on Form 10-Q.

Recent Developments

The Company continues to be impacted by the volatility in petroleum markets in fiscal 2016. NYMEX crude prices decreased $5 per barrel or 9% from August 31, 2015 to November 30, 2015. This decrease in crude price is reflected in decreased selling prices and subsequent net sales for the Company.

The lagged 3-2-1 crackspread is measured by the difference between the prices of crude oil contracts traded on the NYMEX for the preceding month to the prices of NYMEX gasoline and heating oil contracts in the current trading month. The Company uses a lagged crackspread as a margin indicator as it reflects the margin during the time period between the purchase of crude oil and its delivery to the refinery for processing. The lagged crackspread for the first quarter of fiscal 2016 was $13.78. Through December 31, 2015 the indicated lagged crackspread for the second quarter ending February 29, 2016 was $12.70, a $1.08 decrease from the average for the first quarter of fiscal 2016.

Results of Operations

The Company is a petroleum refiner and marketer in its primary market area of

Western New York
and
Northwestern Pennsylvania
. Operations are organized into two business segments: wholesale and retail.

The wholesale segment is responsible for the acquisition of crude oil, petroleum refining, supplying petroleum products to the retail segment and the marketing of petroleum products to wholesale and industrial customers. The retail segment sells petroleum products under the Kwik Fill®, Citgo® and Keystone® brand names through a network of Company-operated retail units and convenience and grocery items through Company-owned gasoline stations and convenience stores under the Red Apple Food Mart® and Country Fair® brand names.

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




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Retail Operations:



                                                        Three Months Ended
                                                           November 30,
                                                        2015            2014
                                                      (dollars in thousands)
     Net Sales
     Petroleum                                      $    220,968      $ 310,965
     Merchandise and other                                69,809         68,191

     Total Net Sales                                     290,777        379,156

     Costs of goods sold                                 249,583        333,427
     Selling, general and administrative expenses         35,577         34,207
     Depreciation and amortization expenses                2,109          1,763

     Segment Operating Income                       $      3,508      $   9,759

     Retail Operating Data:
     Petroleum sales (thousands of gallons)               93,353         92,470

     Petroleum margin (a)                           $     22,784      $  28,331
     Petroleum margin ($/gallon) (b)                       .2441          .3064

     Merchandise and other margins                  $     18,409      $  17,398
     Merchandise margin (percent of sales)                    26 %           26 %




(a) Includes the effect of intersegment purchases from the Company's wholesale

segment at prices which approximate market.

(b) Company management calculates petroleum margin per gallon by dividing

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

Comparison of Fiscal Quarters Ended November 30, 2015 and 2014

Net Sales

Retail sales decreased during the fiscal quarter ended November 30, 2015 by $88.4 million or 23.3% from the comparable period in fiscal 2015 from $379.2 million to $290.8 million. The decrease was due to a $90.0 million decrease in petroleum sales offset by an increase in merchandise sales of $1.6 million. The petroleum sales decrease resulted from a 29.6% decrease in retail selling prices per gallon offset by a .9 million gallon or a 1% increase in petroleum volume.

Costs of Goods Sold

Retail costs of goods sold decreased during the fiscal quarter ended November 30, 2015 by $83.8 million or 25.1% from the comparable period in fiscal 2015 from $333.4 million to $249.6 million. The decrease was primarily due to $88.2 million in petroleum purchase costs and offset by an increase of $.6 million in merchandise costs and fuel taxes of $3.8 million.

Selling, General and Administrative Expenses

Retail Selling, General and Administrative ("SG&A") expenses remained relatively constant during the fiscal quarters ended November 30, 2015 and 2014.




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Wholesale Operations:



                                                                    Three Months Ended
                                                                       November 30,
                                                                    2015            2014
                                                                  (dollars in thousands)
Net Sales (a)                                                   $    284,164      $ 445,541

Costs of goods sold (exclusive of depreciation, amortization) 255,189 403,741 Selling, general and administrative expenses

                           7,012          6,831
Depreciation and amortization expenses                                 9,593          8,589

Segment Operating Income                                        $     12,370      $  26,380



Key Wholesale Operating Statistics:



                                                                 Three Months Ended
                                                                    November 30,
                                                                2015            2014
Refinery Product Yield (thousands of barrels)
Gasoline and gasoline blendstock                                  2,752           2,533
Distillates                                                       1,336           1,372
Asphalt                                                           1,842           1,837

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

                                            517             654

Total Product Yield                                               6,447           6,396

% Heavy Crude Oil of Total Refinery Throughput (b)                   61 %            62 %
Crude throughput (thousand barrels per day)                        64.6            64.1

Product Sales (thousand of barrels) (a)
Gasoline and gasoline blendstock                                  1,754           1,571
Distillates                                                       1,101           1,087
Asphalt                                                           1,987           1,760
Other                                                               164             192

Total Product Sales Volume                                        5,006           4,610

Product Sales (dollars in thousands) (a)
Gasoline and gasoline blendstock                              $ 103,337       $ 154,238
Distillates                                                      69,334         121,186
Asphalt                                                         108,834         160,452
Other                                                             2,659           9,665

Total Product Sales                                           $ 284,164       $ 445,541




(a) Sources of total product sales include products manufactured at the refinery

located in

Warren, Pennsylvania
and products purchased from third parties.

(b) The Company defines "heavy" crude oil as crude oil with an American Petroleum

Institute specific gravity of 26 or less.

Comparison of Fiscal Quarters Ended November 30, 2015 and 2014

Net Sales

Wholesale sales decreased during the three months ended November 30, 2015 by $161.4 million or 36.2% from the comparable period in fiscal 2015 from $445.5 million to $284.1 million. The decrease was due primarily to a 41.3% decrease in wholesale prices offset by an increase of 8.6% in wholesale volume.




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Costs of Goods Sold (exclusive of depreciation and amortization)

Wholesale costs of goods sold decreased during the three months ended November 30, 2015 by $148.5 million or 36.8% from the comparable period in fiscal 2015 from $403.7 million to $255.2 million. The decrease in wholesale costs of goods sold during this period was primarily due to a decrease in cost of raw materials.

Selling, General and Administrative Expenses

Wholesale SG&A expenses remained relatively constant during the three months ended November 30, 2015 and 2014.

Depreciation and Amortization

Depreciation, amortization increased during the three months ended November 30, 2015 by $1.3 million for the comparable period for fiscal 2015 from $10.4 million to $11.7 million. The increase was primarily due to increases of $.7 million in amortization of integrity and replacement costs and miscellaneous depreciation costs of $.6 million.

Interest Expense, net

Net interest expense (interest expense less interest income) decreased during the three months ended November 30, 2015 and 2014 by $1.8 million. The decrease was primarily due to early redemption of Senior Notes due 2018 and the lower interest rate on the Term Loan outstanding.

Income Tax Expense

The Company's effective tax rate was 37% and 39% for the three months ended November 30, 2015 and 2014.

Liquidity and Capital Resources

We operate in an environment where our liquidity and capital resources are impacted by changes in the price of crude oil and refined petroleum products, availability of credit, market uncertainty and a variety of additional factors beyond our control. Included in such factors are, among others, the level of customer product demand, weather conditions, governmental regulations, worldwide political conditions and overall market and economic conditions.

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



                                              November 30, 2015
                 Cash and cash equivalents   $           100,852
                 Working capital             $           243,984
                 Current ratio                               2.9
                 Debt                        $           257,277


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

Our cash and cash equivalents consist of bank balances and investments in money market funds. These investments have staggered maturity dates, none of which exceed three months. They have a high degree of liquidity since the securities are traded in public markets.




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Significant Uses of Cash

The changes in cash for the three months ended November 30, 2015 are described below.

The cash provided by working capital is shown below:



                                                     Three Months Ended
                                                      November 30, 2015
                                                        (in millions)
        Cash provided by working capital items:
        Inventory decrease                           $              51.8
        Accounts receivable decrease                                14.9
        Accounts payable increase                                    2.5
        Accrued liabilities increase                                  .3
        Prepaid expense increase                                   (13.9 )
        Refundable income taxes increase                            (4.2 )
        Income taxes payable decrease                               (2.0 )
        Amounts due from affiliated companies, net                  (1.9 )
        Sales, use and fuel taxes payable decrease                   (.5 )

        Total change                                 $              47.0


Available cash on hand decreased by $16.2 million. Other cash uses included:



  •   Fund capital expenditures and deferred turnaround costs of $19.7 million




    •    Fund dividends to preferred shareholder and common stockholder of $2.1
         million




  •   Fund deferred integrity and replacement costs of $53.7 million




  •   Fund principal reductions of long-term debt $237.7 million




  •   Fund deferred financing costs $4.6 million

We require a substantial investment in working capital which is susceptible to large variations during the year resulting from purchases of inventory and seasonal demands. Inventory purchasing activity is a function of sales activity and turnaround cycles for the different refinery units.

Maintenance and non-discretionary capital expenditures have averaged approximately $6.0 million annually over the last three years for the refining and marketing operations. Management does not foresee any increase in these maintenance and non-discretionary capital expenditures during fiscal year 2016 at this time.

Future liquidity, both short and long-term, will continue to be primarily dependent on realizing a refinery margin sufficient to cover fixed and variable expenses, including planned capital expenditures. We expect to be able to meet our working capital, capital expenditure, contractual obligations, letter of credit and debt service requirements out of cash flow from operations, cash on hand and borrowings under our Credit Agreement of $225,000,000. This provides the Company with flexibility relative to its cash flow requirements in light of market fluctuations, particularly involving crude oil prices and seasonal business cycles and will assist the Company in meeting its working capital, ongoing capital expenditure needs and for general corporate purposes.

On October 20, 2015, URC, United Refining Company of

Pennsylvania
,
Kiantone
, United Refining Company of New York Inc., United Biofuels, Inc., Country Fair, Inc. and Kwik-Fill Corporation (collectively, the "Borrowers") entered into the Credit Agreement with a group of lenders led by PNC Bank, National Association, and PNC Capital Markets LLC, as Sole Lead Arranger and Bookrunner. The Credit Agreement amends and restates the Existing Credit Facility. The Credit Agreement will terminate on October 19, 2020. Until



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the Expiration Date, the Company may borrow on the New Revolving Credit Facility (as defined below) on a borrowing base formula set forth in the Credit Agreement.

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

The Credit Obligations are secured by a first priority security interest in certain cash accounts, accounts receivable, inventory, the refinery, including a related tank farm, and the capital stock of

Kiantone
. At such time as the Term Loan is repaid in full, and provided no event of default exists, the security interest in the refinery and the equity interests in
Kiantone
shall be released.

Until maturity, we may borrow on a borrowing base formula as set forth in the facility. We had standby letters of credit of $8.8 million as of November 30, 2015 and there were no outstanding borrowings under the Credit Agreement resulting in net availability of $216.2 million. As of January 14, 2016, there were no outstanding borrowings under the Credit Agreement and there were standby letters of credit in the amount of $8.8 million, resulting in a net availability of $216.2 million and the Company had full access to it.

Although we are not aware of any pending circumstances which would change our expectation, changes in the tax laws, the imposition of and changes in federal and state clean air and clean fuel requirements and other changes in environmental laws and regulations may also increase future capital expenditure levels. Future capital expenditures are also subject to business conditions affecting the industry. We continue to investigate strategic acquisitions and capital improvements to our existing facilities.

Federal, state and local laws and regulations relating to the environment affect nearly all of our operations. As is the case with all the companies engaged in similar industries, we face significant exposure from actual or potential claims and lawsuits involving environmental matters. Future expenditures related to environmental matters cannot be reasonably quantified in many circumstances due to the uncertainties as to required remediation methods and related clean-up cost estimates. We cannot predict what additional environmental legislation or regulations will be enacted or become effective in the future or how existing or future laws or regulations will be administered or interpreted with respect to products or activities to which they have not been previously applied.

On December 9, 2015, United Refining Company of New York Inc. (as Borrower) and United Refining Company of

Pennsylvania
(as Fee Owner), entered into a Loan Agreement with Signature Bank (as Administrative Agent), in the amount of $50,000,000 which matures on December 9, 2022. Pursuant to the



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Loan Agreement, interest is calculated as follows: (a) for LIBOR Loans, at either the LIBOR plus 2.50% or the Prime Rate, (b) for Reference Rate Loans, the Prime Rate and (c) for Fixed Rate Loans, at the Fixed Rate. Loans are secured by a first lien mortgage on certain convenience store units owned by United Refining Company of

Pennsylvania
.

Seasonal Factors

Seasonal factors affecting the Company's business may cause variation in the prices and margins of some of the Company's products. For example, demand for gasoline tends to be highest in spring and summer months, while demand for home heating oil and kerosene tends to be highest in winter months.

As a result, the margin on gasoline prices versus crude oil costs generally tends to increase in the spring and summer, while margins on home heating oil and kerosene tend to increase in the winter.

Inflation

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

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer


Source: Equities.com News (January 14, 2016 - 6:07 AM EST)

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