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 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 third quarter of
fiscal 2016 was $23.33. Through July 1, 2016 the indicated lagged crackspread
for the fourth quarter ending August 31, 2016 was $15.94, a $7.39 decrease from
the average for the third 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 Nine Months Ended
May 31, May 31,
2016 2015 2016 2015
(dollars in thousands)
Net Sales
Petroleum $ 205,411 $ 251,640 $ 605,871 $ 798,590
Merchandise and other 70,227 69,100 204,976 199,972
Total Net Sales 275,638 320,740 810,847 998,562
Costs of goods sold 243,658 284,205 703,153 871,657
Selling, general and administrative expenses 36,204 35,963 106,394 104,978
Depreciation and amortization expenses 2,132 1,821 6,367 5,377
Segment Operating (Loss) Income $ (6,356 ) $ (1,249 )
$ (5,067 ) $ 16,550
Retail Operating Data:
Petroleum sales (thousands of gallons) 91,901 92,917
272,306 275,099
Petroleum margin (a) $ 13,188 $ 18,711 $ 53,381 $ 75,652
Petroleum margin ($/gallon) (b) .1435 .2014 .1960 .2750
Merchandise and other margins $ 18,898 $ 17,825 $ 54,419 $ 51,254
Merchandise margin (percent of sales) 26.9 % 25.8 % 26.6 % 25.6 %
(a) Includes the effect of intersegment purchases from the Company's wholesale
segment at prices which approximate market.
(b) Company management calculates petroleum margin per gallon by dividing
petroleum gross margin by petroleum sales volumes. Management uses fuel
margin per gallon calculations to compare profitability to other companies in
the industry. Petroleum margin per gallon may not be comparable to similarly
titled measures used by other companies in the industry.
Comparison of Fiscal Quarters Ended May 31, 2016 and 2015
Net Sales
Retail sales decreased during the fiscal quarter ended May 31, 2016 by $45.1
million or 14.1% from the comparable period in fiscal 2015 from $320.7 million
to $275.6 million. The decrease was due to a $46.2 million decrease in petroleum
sales offset by an increase in merchandise sales of $1.1 million. The petroleum
sales decrease resulted from a 17.5% decrease in retail selling prices per
gallon and a 1.0 million gallon or a 1.1% decrease in petroleum volume.
Costs of Goods Sold
Retail costs of goods sold decreased during the fiscal quarter ended May 31,
2016 by $40.6 million or 14.3% from the comparable period in fiscal 2015 from
$284.2 million to $243.6 million. The decrease was primarily due to decreases of
$38.8 million in petroleum purchase costs and fuel taxes of $1.9 million offset
by an increase of $.1 million in merchandise costs.
Selling, General and Administrative Expenses
Retail Selling, General and Administrative ("SG&A") expenses remained relatively constant during the fiscal quarters ended May 31, 2016 and 2015.
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Comparison of Nine Months Ended May 31, 2016 and 2015
Net Sales
Retail sales decreased during the nine months ended May 31, 2016 by $187.7
million or 18.8% from the comparable period in fiscal 2015 from $998.5 million
to $810.8 million. The decrease was primarily due to $192.7 million in petroleum
sales, offset by an increase of $5.0 million in merchandise sales. The petroleum
sales decrease resulted from a 23.4% decrease in retail selling prices per
gallon and a 2.8 million gallon or 1.0% decrease in sales volume.
Costs of Goods Sold
Retail costs of goods sold decreased during the nine months ended May 31, 2016
by $168.5 million or 19.3% from the comparable period in fiscal 2015 from $871.7
million to $703.2 million. The decrease was primarily due to decreases of $170.9
million in petroleum purchase costs and freight costs of $.1 million, offset by
increases in fuel taxes of $.7 million and merchandise costs of $1.8 million.
Selling, General and Administrative Expenses
Retail SG&A expenses remained relatively constant during the nine months ended
May 31, 2016 and 2015.
Wholesale Operations:
Three Months Ended Nine Months Ended
May 31, May 31,
2016 2015 2016 2015
(dollars in thousands)
Net Sales (a) $ 222,344 $ 282,137 $ 700,450 $ 1,009,916
Costs of goods sold (exclusive of
depreciation and amortization) 151,873 201,701 616,981 870,046
Selling, general and administrative
expenses 7,387 6,110 21,296 19,091
Depreciation and amortization expenses 10,043 8,623 30,312 25,944
Segment Operating Income $ 53,041 $ 65,703 $ 31,861 $ 94,835
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Key Wholesale Operating Statistics:
Three Months Ended Nine Months Ended
May 31, May 31,
2016 2015 2016 2015
Refinery Product Yield (thousands of
barrels)
Gasoline and gasoline blendstock 2,603 2,421 8,184 7,613
Distillates 1,409 1,306 4,161 3,937
Asphalt 1,791 1,698 5,457 5,286
Butane, propane, residual products,
internally produced fuel and other
("Other") 710 682 1,765 1,896
Total Product Yield 6,513 6,107 19,567 18,732
% Heavy Crude Oil of Total Refinery
Throughput (b) 60 % 61 % 61 % 61 %
Crude throughput (thousand barrels per
day) 65.6 61.0 65.5 62.5
Product Sales (thousand of barrels) (a)
Gasoline and gasoline blendstock 1,723 1,430 5,312 4,598
Distillates 1,214 1,017 3,512 3,201
Asphalt 1,696 1,639 5,276 4,746
Other 173 146 498 499
Total Product Sales Volume 4,806 4,232 14,598 13,044
Product Sales (dollars in thousands) (a)
Gasoline and gasoline blendstock $ 99,050 $ 105,247 $ 288,106 $ 361,379
Distillates 67,098 82,421 190,911 293,101
Asphalt 54,109 91,104 214,574 337,626
Other 2,087 3,365 6,859 17,810
Total Product Sales $ 222,344 $ 282,137 $ 700,450 $ 1,009,916
(a) Sources of total product sales include products manufactured at the refinery
located in Warren, Pennsylvania and products purchased from third parties.
(b) The Company defines "heavy" crude oil as crude oil with an American Petroleum
Institute specific gravity of 26 or less.
Comparison of Fiscal Quarters Ended May 31, 2016 and 2015
Net Sales
Wholesale sales decreased during the quarter ended May 31, 2016 by $59.8 million
or 21.2% from the comparable period in fiscal 2015 from $282.1 million to $222.3
million. The decrease was due primarily to a 30.6% decrease in wholesale prices
offset by an increase of 13.6% in wholesale volume.
Costs of Goods Sold (exclusive of depreciation and amortization)
Wholesale costs of goods sold decreased during the quarter ended May 31, 2016 by
$49.8 million or 24.7% from the comparable period in fiscal 2015 from $201.7
million to $151.9 million. The decrease in wholesale costs of goods sold during
this period was primarily due to a decrease in cost of raw materials.
Selling, General and Administrative Expenses
Wholesale SG&A expenses remained relatively constant during the quarter ended May 31, 2016 and 2015.
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Comparison of Nine Months Ended May 31, 2016 and 2015
Net Sales
Wholesale sales decreased during the nine months ended May 31, 2016 by $309.5
million or 30.6% from the comparable period in fiscal 2015 from $1,009.9 million
to $700.4 million. The decrease was due to a 38.0% decrease in wholesale prices
offset by an 11.9% increase in wholesale volume.
Costs of Goods Sold (exclusive of depreciation and amortization)
Wholesale costs of goods sold decreased during the nine months ended May 31,
2016 by $253.1 million or 29.1% from the comparable period in fiscal 2015 from
$870.1 million to $617.0 million. The decrease in wholesale costs of goods sold
was primarily due to a decrease in the cost of raw materials.
Selling, General and Administrative Expenses
Wholesale SG&A expenses remained relatively constant during the nine months ended May 31, 2016 and 2015.
Consolidated Expenses:
Depreciation and Amortization
Depreciation and amortization increased during the three months ended May 31,
2016 by $1.7 million from the comparable period in fiscal 2015 from $10.5
million to $12.2 million. The increase was primarily due to increases of $1.8
million in amortization of integrity and replacement costs and miscellaneous
depreciation costs of $.6 million offset by a reduction in amortization of
turnaround expense of $.7 million.
Depreciation and amortization increased during the nine months ended May 31,
2016 by $5.4 million from the comparable period in fiscal 2015 from $31.3
million to $36.7 million. The increase was primarily due to increases of $4.2
million in amortization of integrity and replacement costs and miscellaneous
depreciation costs of $1.9 million offset by a reduction in amortization of
turnaround expense of $.7 million.
Interest Expense, net
Net interest expense (interest expense less interest income) decreased during
the three months ended May 31, 2016 by $4.2 million from the comparable period
in fiscal 2015. The decrease was primarily due to early redemption of Senior
Notes due 2018 and the lower interest rate on the Term Loan outstanding.
Net interest expense (interest expense less interest income) decreased during
the nine months ended May 31, 2016 by $10.0 million from the comparable period
in fiscal 2015. The decrease was primarily due to early redemption of Senior
Notes due 2018 and the lower interest rate on the Term Loan outstanding.
Income Tax Expense (Benefit)
The Company's effective tax rate was 37% and 39% for the three months and nine months ended May 31, 2016 and 2015, respectively.
Liquidity and Capital Resources
We operate in an environment where our liquidity and capital resources are
impacted by changes in the price of crude oil and refined petroleum products,
availability of credit, market uncertainty and a variety of additional factors
beyond our control. Included in such factors are, among others, the level of
customer product demand,
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weather conditions, governmental regulations, worldwide political conditions and overall market and economic conditions.
The following table summarizes selected measures of liquidity and capital resources (in thousands):
May 31, 2016
Cash and cash equivalents $ 78,909
Working capital $ 210,549
Current ratio 2.6
Debt $ 294,813
Primary sources of liquidity have been cash and cash equivalents, and borrowing
availability under our revolving credit facility (the "Amended and Restated
Revolving Credit Facility") with PNC Bank, N.A. as Administrator (the "Agent
Bank"). We believe available capital resources are adequate to meet our working
capital, debt service, and capital expenditure requirements for existing
operations.
Our cash and cash equivalents consist of bank balances and investments in money
market funds. These investments have staggered maturity dates, none of which
exceed three months. They have a high degree of liquidity since the securities
are traded in public markets.
Significant Uses of Cash
The changes in cash for the nine months ended May 31, 2016 are described below.
The cash provided by working capital is shown below:
Nine Months Ended
May 31, 2016
(in millions)
Cash provided by (used in) working capital items:
Inventory decrease $
42.0
Accounts payable increase
14.4
Accounts receivable decrease
14.2
Prepaid expense decrease
8.6
Income taxes payable decrease
(7.4 )
Prepaid income taxes increase
(5.1 )
Refundable income taxes increase
(4.2 )
Amounts due from affiliated companies, net increase
(2.9 )
Accrued liabilities decrease
(1.7 )
Sales, use and fuel taxes payable decrease (1.0 )
Total change $ 56.9
Available cash on hand decreased by $38.1 million. Other cash uses included:
• Fund capital expenditures and deferred turnaround costs of $65.8 million
• Fund dividends to preferred shareholder and common stockholder of $45.4
million
• Fund deferred integrity and replacement costs of $66.6 million
• Fund principal reductions of long-term debt $251.6 million
• Fund deferred financing costs $5.8 million
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We require a substantial investment in working capital which is susceptible to
large variations during the year resulting from purchases of inventory and
seasonal demands. Inventory purchasing activity is a function of sales activity
and turnaround cycles for the different refinery units.
Maintenance and non-discretionary capital expenditures have averaged
approximately $6.0 million annually over the last three years for the refining
and marketing operations. Management does not foresee any increase in these
maintenance and non-discretionary capital expenditures during fiscal year 2016
at this time.
Future liquidity, both short and long-term, will continue to be primarily
dependent on realizing a refinery margin sufficient to cover fixed and variable
expenses, including planned capital expenditures. We expect to be able to meet
our working capital, capital expenditure, contractual obligations, letter of
credit and debt service requirements out of cash flow from operations, cash on
hand and borrowings under our Credit Agreement of $225,000,000. This provides
the Company with flexibility relative to its cash flow requirements in light of
market fluctuations, particularly involving crude oil prices and seasonal
business cycles and will assist the Company in meeting its working capital,
ongoing capital expenditure needs and for general corporate purposes.
On October 20, 2015, URC, United Refining Company of Pennsylvania, Kiantone,
United Refining Company of New York Inc., United Biofuels, Inc., Country Fair,
Inc. and Kwik-Fill Corporation (collectively, the "Borrowers") entered into the
Credit Agreement with a group of lenders led by PNC Bank, National Association,
and PNC Capital Markets LLC, as Sole Lead Arranger and Bookrunner. The Credit
Agreement amends and restates the Existing Credit Facility. The Credit Agreement
will terminate on October 19, 2020. Until the Expiration Date, the Company may
borrow on the New Revolving Credit Facility (as defined below) on a borrowing
base formula set forth in the Credit Agreement.
Pursuant to the Credit Agreement, the Company increased its existing senior
secured revolving credit facility from $175,000,000 to $225,000,000. The New
Revolving Credit Facility may be increased by an amount not to exceed
$50,000,000 without additional approval from the lenders named in the Credit
Agreement if existing lenders agree to increase their commitments or additional
lenders commit to fund such increase. Interest under the New Revolving Credit
Facility is calculated as follows: (a) for domestic rate borrowings, at (i) the
greater of the Agent's prime rate, federal funds rate plus .5% or the daily
LIBOR rate plus 1%, plus (ii) an applicable margin of 1.25% to 1.75%, and
(b) for euro-rate borrowings, at the LIBOR rate plus an applicable margin of
2.25% to 2.75%. The applicable margin will vary depending on a formula
calculating the Company's average unused availability under the facility. In
addition, pursuant to the Credit Agreement, the Company entered into a term loan
in the amount of $250,000,000, which was made in a single drawing on the Closing
Date ("Term Loan" and, together with the New Revolving Credit Facility, the
"Credit Obligations"). Under the Term Loan, interest is calculated as
follows: (a) for domestic rate borrowings, at (i) the greater of the Agent's
prime rate, federal funds rate plus .5% or the daily LIBOR rate plus 1%, plus
(ii) an applicable margin of 1.75% to 2.25%, and (b) for euro-rate borrowings,
at the LIBOR rate plus an applicable margin of 2.75% to 3.25%. The applicable
margin will vary depending on a formula calculating the Company's average unused
availability under the facility. The Term Loan is prepayable in whole or in part
at any time without premium or penalty. The Term Loan shall be paid in full on
or prior to the Expiration Date and shall be paid in equal quarterly amounts
based on a ten-year straight line amortization schedule. Prepayment of the Term
Loan in whole or in part may be made at any time without premium or penalty.
The Credit Obligations are secured by a first priority security interest in
certain cash accounts, accounts receivable, inventory, the refinery, including a
related tank farm, and the capital stock of Kiantone. At such time as the Term
Loan is repaid in full, and provided no event of default exists, the security
interest in the refinery and the equity interests in Kiantone shall be released.
Until maturity, we may borrow on a borrowing base formula as set forth in the
facility. We had standby letters of credit of $8.8 million as of May 31, 2016
and there were no outstanding borrowings under the Credit Agreement resulting in
net availability of $216.2 million. As of July 15, 2016, there were no
outstanding
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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.
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.
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