VULCAN ASPHALT REFINING CORP – 10-K – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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Forward Looking Statements

    This Annual Report on Form 10-K 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 Annual Report on Form 10-K.                                           20 

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  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 Annual Report 10-K, 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 effect of the current banking and credit crisis on the Company and our

        customers and suppliers;       •   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 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 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;    

• expected outcomes of legal and administrative proceedings and their

expected effects on our financial position, results of operations and cash

         flows;       •   future operating results and financial condition; and         •   the effectiveness of our disclosure controls and procedures and internal

        control over financial reporting.     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 Annual Report on Form 10-K.                                           21 

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Business Strategy and Overview

Our strategy is to strengthen our position as a leading producer and marketer of high quality refined petroleum products within our market area. We plan to accomplish this strategy through continued attention to optimizing our operations, resulting in the lowest possible crude and overhead costs, and continuing to improve and enhance our retail and wholesale positions. More specifically, we intend to:

• Maximize the favorable economic impact of our transportation cost advantage

by increasing our retail and wholesale market shares within our market

        area.    

• Optimize profitability by managing feedstock costs, product yields, and

        inventories through our refinery feedstock management program and our         system-wide distribution model.    

• Continue to investigate additional strategic acquisitions and capital

        improvements to our existing facilities.     Company Background    

Critical Accounting Policies

    The accompanying consolidated financial statements and supplementary information were prepared in accordance with accounting principles generally accepted in the United States of America. Significant accounting policies are discussed in Note 1 to the Consolidated Financial Statements, Item 8. Inherent in the application of many of these accounting policies is the need for management to make estimates and judgments in the determination of certain revenues, expenses, assets and liabilities. As such, materially different financial results can occur as circumstances change and additional information becomes known. The policies with the greatest potential effect on our results of operation and financial position include:    Revenue Recognition    Revenues for products sold by the wholesale segment are recorded upon delivery of the products to our customers, at which time title to those products is transferred and when payment has either been received or collection is reasonably assured. At no point do we recognize revenue from the sale of product prior to transfer of its title. Title to product is transferred to the customer at the shipping point, under predetermined contracts for sale at agreement upon or posted prices to customers of which collectibility is reasonably assured.    

Revenues for products sold by the retail segment are recognized immediately upon sale to the customer. Revenue derived from other sources including freight charges are recognized when the related product revenue is recognized.

Collectibility of Accounts Receivable

    For accounts receivable we estimate the net collectibility considering both historical and anticipated trends relating to our customers and the possibility of non-collection due to their financial position. While such non-collections have been historically within our expectations and the allowances the Company has established, the Company cannot guarantee that it will continue to experience non-collection rates that it has experienced in the past. A significant change in the financial position of our customers could have a material impact on the quality of our accounts receivable and our future operating results.    

Goodwill and Other Non-Amortizable Assets

In accordance with ACS 350, goodwill and intangible assets deemed to have indefinite lives are no longer amortized but are subject to annual impairment tests. We assess the impairment of goodwill and other indefinite-lived intangible assets annually.

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  The Company performed separate impairment tests on June 1, 2011 for its tradename and other intangible assets using discounted and undiscounted cash flow methods, respectively. The fair value of the tradename and other intangible assets exceeded their respective carrying values. The Company has noted no subsequent indication that would require testing the tradename and intangible assets for impairment.   

There were no material changes in the gross carrying amounts of goodwill, tradename, or other intangible assets for fiscal 2011.

   Long-Lived Assets    Whenever events or changes in circumstances indicate that the carrying value of any of these assets may not be recoverable, the Company will assess the recoverability of such assets based upon estimated undiscounted cash flow forecasts. When any such impairment exists, the related assets will be written down to fair value.    Value of Pension Assets    The Company maintains three noncontributory defined benefit retirement plans for substantially all its employees. The assets of the plans are invested with a financial institution that follows an investment policy drafted by the Company. The investment guidelines provide a percentage range for each class of assets to be managed by the financial institution. The historic performance of these asset classes supports the Company's expected return on the assets. The asset classes are rebalanced periodically should they fall outside the range allocations.    

The percentage of total asset allocation range is as follows:

                    Asset Class                 Minimum        Maximum                  Equity                            55 %           75 %                  Fixed Income                      20 %           30 %                  Alternative Investments            0 %           12 %                  Cash or Cash Equivalents           0 %           10 %     The discount rate utilized in valuing the benefit obligations of the plans was derived from the rate of return on high quality bonds as of August 31, 2011. Similarly, the rate of compensation utilizes historic increases granted by the Company and the industry as well as future compensation policies. See Note 10 to "Consolidated Financial Statements, Item 8".    

Environmental Remediation and Litigation Reserve Estimations

    Management also makes judgments and estimates in recording liabilities for environmental cleanup and litigation. Liabilities for environmental remediation are subject to change because of matters such as changes in laws, regulations and their interpretation; the effect of additional information on the extent and nature of site contamination; and improvements in technology. Likewise, actual litigation costs can vary from estimates based on the facts and circumstance and application of laws in individual cases.    The above assessment of critical accounting policies is not meant to be an all-inclusive discussion of the uncertainties to financial results that occur from the application of the full range of the Company's accounting policies. Materially different financial results could occur in the application of other accounting policies as well. Likewise, materially different results can occur upon the adoption of new accounting standards promulgated by the various rule-making bodies.                                           23 

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  Table of Contents  General    The Company is engaged in the refining and marketing of petroleum products. In fiscal 2011, approximately 68% and 25% of the Company's gasoline and distillate production, respectively, was sold through the Company's network of service stations and truck stops. The balances of the Company's refined products were sold to wholesale customers. In addition to transportation and heating fuels, primarily gasoline and distillate, the Company is a major regional wholesale marketer of asphalt. The Company also sells convenience merchandise at convenience stores located at most of its service stations. The Company's profitability is influenced by fluctuations in the market prices of crude oils and refined products. Although the Company's product sales mix helps to reduce the impact of large short-term variations in crude oil price, net sales and costs of goods sold can fluctuate widely based upon fluctuations in crude oil prices. Specifically, the margins on wholesale gasoline and distillate tend to decline in periods of rapidly declining crude oil prices, while margins on asphalt, retail gasoline and distillate tend to improve. During periods of rapidly rising crude oil prices, margins on wholesale gasoline and distillate tend to improve, while margins on asphalt and retail gasoline and distillate tend to decline. Gross margins on the sale of convenience merchandise averaged 25.3% for fiscal 2011 and have been between 25.2% and 27.1% for the last five years and are essentially unaffected by variations in crude oil and petroleum products prices.    The Company includes in costs of goods sold operating expenses incurred in the refining process. Therefore, operating expenses reflect only selling, general and administrative expenses, including all expenses of the retail network, and depreciation and amortization.    Recent Developments    The Company continues to be impacted by the volatility in petroleum markets in fiscal year 2012. The lagged 3-2-1 crackspread as measured by the difference between the price of crude oil contracts traded on the NYMEX for the proceeding month to the prices of NYMEX gasoline and heating oil contracts in the current trading month, have been positively affected through October. The Company uses a lagged crackspread as a margin indicator as it reflects the time period between the purchase of crude oil and its delivery to the refinery for processing. The lagged crackspread in September, the first month of fiscal 2012 averaged $31.04 as compared to an average of $24.31, for August, 2011, an increase of $6.73 or 28%. The lagged crackspread in October weakened slightly as compared to an average of $30.89, for September, a decrease of $.015 or .5%. As it continued to weaken, the lagged crackspread for the month of November, calculated on November 28, 2011 was $25.50.    Through November 28th, the indicated lagged crackspread for the first quarter of fiscal 2012 was $29.14, a $2.20 or 8% increase over the average for the fourth quarter of fiscal 2011. The indicated lagged crackspread for our second quarter ending February 29, 2012, calculated as of November 28 was $14.81 a 42% decrease from the projection for the first quarter of fiscal 2012. The impact of any decrease in crackspreads for the second quarter of 2012 will be mitigated by the Company's crackspread derivative program. However, there can be no assurance that the indicated average crackspreads for the second quarter of fiscal 2012 will result in the actual crackspreads for that quarter.    As of November 17, 2011, the mark to market valuation over the remaining term of the crackspread swap contracts changed $52,606,541 from an unrealized loss position of $51,414,000 as of August 31, 2011 to an unrealized gain position of $1,192,541. See also Note 1 to the "Company's Consolidated Financial Statements".    The Company has reached an early settlement agreement with its refinery employees represented by the International Union of Operating Engineers, Local 95. The contract is effective February 1, 2010 and expires February 1, 2017. The agreement generally provides for improvement in wages, as well as changes to active and retiree healthcare, pension benefits and the defined contribution plan for the bargaining unit. These changes to the healthcare and pension plans are the same as the healthcare and pension plans provided to salaried employees effective September, 2010.                                           24 

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  Table of Contents  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 at 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 (See Item 8), together with the following information, are intended to supply investors with a reasonable basis for evaluating the Company's operations, but should not serve as the only criteria for predicting the Company's future performance.    Retail Operations:                                                             Fiscal Year Ended August 31,                                                    2011              2010              2009                                                                 (in thousands) Net Sales Petroleum                                       $ 1,360,106       $ 1,100,399       $   974,419 Merchandise and other                               263,662           258,647           239,127  Total Net Sales                                 $ 1,623,768       $ 1,359,046       $ 1,213,546 Costs of Goods Sold                             $ 1,485,264       $

1,221,079 $ 1,053,081 Selling, general and administrative expenses 132,475 128,017

           121,581 Depreciation an amortization expenses                 5,340             5,480             5,273  Segment Operating Income/(Loss)                 $       689       $     

4,470 $ 33,611

  Retail Operating Data: Petroleum Sales (thousands of gallons)              396,273           393,831           390,843 Petroleum margin (a)                            $    71,843       $    72,692       $    98,807 Petroleum margin ($/gallon) (b)                       .1813             .1846             .2528 Merchandise and other margins                   $    66,661       $    65,275       $    61,658 Merchandise margin (percent of sales)                  25.3 %            25.2 %            25.8 %    

(a) Includes the effect of intersegment purchases from our wholesale segment at

prices which approximate market.

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

petroleum gross profit 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.     Net Sales    2011 vs. 2010    Retail sales increased during fiscal 2011 by $264.7 million or 19.5% for the comparable period in fiscal 2010 from $1,359.1 million to $1,623.8 million. The increase was primarily due to $259.7 million in petroleum sales and $5.0 million in merchandise sales. The petroleum sales increase resulted from a 22.8% increase in retail selling prices per gallon, and a 2.4 million gallon or .6% increase in retail petroleum volume. The merchandise                                           25

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sales increase is primarily due to increased prepared food and beverages due to promotional campaigns and increased selling prices.

   2010 vs. 2009    Retail sales increased during fiscal 2010 by $145.5 million or 12.0% for the comparable period in fiscal 2009 from $1,213.6 million to $1,359.1 million. The increase was primarily due to $126.0 million in petroleum sales and $19.5 million in merchandise sales. The petroleum sales increase resulted from a 12.1% increase in retail selling prices per gallon, and a 3.0 million gallon or .8% increase in retail petroleum volume. The merchandise sales increase is primarily due to increased prepared food, beverages and cigarette sales due to promotional campaigns and increased selling prices.    Costs of Goods Sold    2011 vs. 2010    Retail costs of goods sold increased during fiscal 2011 by $264.2 million or 21.6% for the comparable period in fiscal 2010 from $1,221.0 million to $1,485.2 million. The increase was primarily due to $248.2 million in petroleum purchase prices, merchandise cost of $3.7 million, inventory costs of $4.9, fuel tax of $5.7 million, and freight cost of $1.7 million.    2010 vs. 2009    Retail costs of goods sold increased during fiscal 2010 by $167.9 million or 15.9% for the comparable period in fiscal 2009 from $1,053.1 million to $1,221.0 million. The increase was primarily due to $143.4 million in petroleum purchase prices, merchandise cost of $15.9 million, inventory costs of $4.8, fuel tax of $3.1 million, and freight cost of $.7 million

Selling, General and Administrative Expenses

   2011 vs. 2010    Retail Selling, General and Administrative ("SG&A") expenses increased during fiscal 2011 by $4.5 million or 3.5% for the comparable period in fiscal 2010 from $128.0 million to $132.5 million. The increase was primarily due to credit/customer service costs of $2.6 million, maintenance costs of $1.4 million, payroll costs of $1.3 million, environmental costs of $.6 million and insurance/utilities/taxes of $.5 million offset by a decrease in pension/post retirement costs of $1.9 million. The decrease was primarily due to changes made in pension/post retirement benefits. Effective September 1, 2010, postretirement medical benefits for new hires and active salaried employees retiring after September 1, 2010 were eliminated. Additionally, effective January 1, 2011, deductibles and co-payments were added to the medical benefits plan for all plan participants. For salaried employees meeting certain age and service requirements, the Company will contribute a defined dollar amount towards the cost of retiree healthcare based upon the employee's length of service. Similarly, effective September 1, 2010, benefits under the Company's defined benefit pension plan were frozen for all salaried employees, including the Company's Chief Executive Officer and Chief Financial Officer. The Company will provide an enhanced contribution under its defined contribution 401(k) plan for all eligible employees as well as a transition contribution for older employees.    2010 vs. 2009    Retail SG&A expenses increased during fiscal 2010 by $6.4 million or 5.3% for the comparable period in fiscal 2009 from $121.6 million to $128.0 million. The increase was primarily due to payroll costs of $3.7 million, credit/customer service costs of $.8 million, pension/post retirement costs of $1.1 million, maintenance costs of $.3 million, advertising costs of $.3 million and insurance/utilities/taxes of $.2 million.                                           26

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  Table of Contents  Wholesale Operations:                                                            Fiscal Year Ended August 31,                                                  2011              2010               2009                                                                (in thousands) Net Sales (a)                                 $ 1,543,108       $ 1,295,355        $ 1,173,625 Costs of Goods Sold (exclusive of depreciation and amortization and losses on derivative contracts)                        1,417,994         1,338,794 

1,074,829

 Losses on derivative contracts                     58,733                -                  - Selling, general and administrative expenses                                           16,981            22,808             23,362 Depreciation and amortization expenses             16,757            16,314             17,577  Segment Operating Income (Loss)               $    32,643       $   (82,561 )      $    57,857     

Key Wholesale Operating Statistics:

                                                           Fiscal Year Ended August 31,                                                  2011               2010               2009 Refinery Product Yield (thousands of barrels) Gasoline and gasoline blendstock                    8,241              9,139              9,363 Distillates                                         4,765              4,959              5,387 Asphalt                                             5,243              6,203              6,791 Butane, propane, residual products, internally produced fuel and other                  2,361              2,328              2,381  Total Product Yield                                20,610             22,629             23,922  % Heavy Crude Oil of Total Refinery Throughput (b)                                         51 %               58 %               61 % Crude throughput (thousand barrels per day)                                                 52.4               58.3               61.9  Product Sales (thousand of barrels) (a) Gasoline and gasoline blendstock                    5,425              5,325              5,556 Distillates                                         3,804              3,831              4,289 Asphalt                                             5,508              6,684              6,724 Other                                                 758              1,137                807  Total Product Sales Volume                         15,495             16,977             17,376  Product Sales (dollars in thousands) (a) Gasoline and gasoline blendstock              $   613,499        $   453,641        $   389,226 Distillates                                       458,099            338,480            331,284 Asphalt                                           425,046            447,122            425,538 Other                                              46,464             56,112             27,577  Total Product Sales                           $ 1,543,108        $ 1,295,355        $ 1,173,625     

(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.                                            27 

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  Table of Contents  Net Sales    2011 vs. 2010    Wholesale sales increased during fiscal 2011 by $247.8 million or 19.1% for the comparable period in fiscal 2010 from $1,295.3 million to $1,543.1 million. The increase was due to a 30.5% increase in wholesale prices offset by a 8.7% decrease in wholesale volume.    2010 vs. 2009    Wholesale sales increased during fiscal 2010 by $121.7 million or 10.4% for the comparable period in fiscal 2009 from $1,173.6 million to $1,295.3 million. The increase was due to a 10.4% increase in wholesale prices offset by a 2.3% decrease in wholesale volume.    Costs of Goods Sold    2011 vs. 2010    Wholesale costs of goods sold increased during fiscal 2011 by $79.2million or 5.9% for the comparable period in fiscal 2010 from $1,338.8 million to $1,418.0 million. The increase in wholesale costs of goods sold during this period was primarily due to an increase in cost of raw materials.    2010 vs. 2009    Wholesale costs of goods sold increased during fiscal 2010 by $264.0 million or 24.6% for the comparable period in fiscal 2009 from $1,074.8 million to $1,338.8 million. The increase in wholesale costs of goods sold during this period was primarily due to an increase in cost of raw materials.    Loss on Derivative Contracts    During fiscal year 2011, the Company recognized a $58.7 million charge to costs and expenses which was attributed to losses resulting from fair value changes of the Company's derivative instruments. Of the $58.7 million charge, $7.3 million was realized and $51.4 million unrealized (non-cash). See also Item 7A "Quantitative and Qualitative Disclosures about Market Risk".    As of November 17, 2011, the mark to market valuation over the remaining term of the crackspread swap contracts changed $52,606,541 from an unrealized loss position of $51,414,000 as of August 31, 2011 to an unrealized gain position of $1,192,541. See also Note 1 to the "Company's Consolidated Financial Statements".    

Selling, General and Administrative Expenses

   2011 vs. 2010   

Wholesale SG&A expenses decreased during fiscal 2011 by $5.8 million or 25.5% for the comparable period in fiscal 2010 from $22.8 million or 1.8% of net wholesale to $17.0 million or 1.1% of net wholesale sales. The decrease as primarily due to changes made in pension and post retirement benefits as discussed above.

    2010 vs. 2009    Wholesale SG&A expenses decreased during fiscal 2010 by $.5 million or 2.4% for the comparable period in fiscal 2009 from $23.3 million or 2.0% of net wholesale to $22.8 million or 1.8% of net wholesale sales.                                           28

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  Table of Contents  Interest Expense, Net    2011 vs. 2010    Net interest expense (interest expense less interest income) increased during fiscal 2011 by $5.4 million for the comparable period for fiscal 2010 from $35.2 million to $40.6 million. The increase was due to increasing the credit facility. In conjunction with the Company's debt refinancing of the Senior Notes due 2012, the Company paid consent payments for early redemption of these notes in the amount of $5.6 million. These consent payments are included in interest expense, net for fiscal 2011.    2010 vs. 2009    Net interest expense (interest expense less interest income) decreased during fiscal 2010 by $.7 million for the comparable period for fiscal 2009 from $35.9 million to $35.2 million. The decrease was due to lower interest expense as a result of the buy back of notes in fiscal 2009.    

Income Tax Expense / (Benefit)

Our fiscal 2011 and 2010 effective tax rates of approximately 33% and 34%, respectively, were a decrease from the relatively consistent tax rate of approximately 41% for fiscal 2009 and 2008, due to prior period audit adjustments and the accounting recognition of anticipated expiration of state net operating loss carry forwards.

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 Company has temporarily postponed its efforts to construct a Coker Facility for use in the refinery. To date the Company has spent approximately $29,719,000, relating to, among other things, the design of the facility as well as materials to be used in construction. These costs are currently capitalized in construction-in-progress within Property Plant and Equipment, net. The Company presently believes that the Coker Facility will be constructed and consequently the costs incurred to date will be realizable. The Company continues to monitor the financial markets for an opportunity which will allow the Company to seek favorable financing to fund the remainder of the project.    The following table summarizes selected measures of liquidity and capital sources:                                          August 31, 2011       August 31, 2010                                                  (in thousands)          Cash and cash equivalents   $          16,660     $          17,170          Working capital             $         186,585     $         164,422          Current ratio                             2.1                   1.9          Debt                        $         381,087     $         413,053      Primary sources of liquidity have been cash and cash equivalents, cash flows from operations and borrowing availability under a revolving line of credit. We believe available capital resources will be adequate to meet our working capital, debt service, and capital expenditure requirements for existing operations. We continuously evaluate our capital budget; however, management does not foresee any significant increase in maintenance and non-discretionary capital expenditures during fiscal 2012 that would impact future liquidity or capital resources. Maintenance and non-discretionary capital expenditures have averaged approximately $6 million annually over the last three years for the refining and marketing operations and management currently projects this capital expenditure to be approximately $8 - $10 million for fiscal 2012.                                           29

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  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. During fiscal 2011, significant uses of cash are summarized in the following table:                                                                      Fiscal Year Ended                                                                    August 31, 2011                                                                     (in millions) Significant uses of cash Investing activities: Proceeds from asset disposition                                             

.7

 Additions to refinery turnaround costs                                         (18.9 ) Property, plant and equipment Other general capital items (tank repairs, refinery piping, etc)                                                                   (13.3 ) Environmental                                                                   (2.9 ) Retail maintenance (blacktop, roof, HVAC, rehab)                                (2.3 ) Retail petroleum upgrade                                                        (1.2 ) Computers and equipment upgrade                                                  (.8 ) State and federal mandates: Renewable fuels-cost estimates                                                  (4.2 ) Reduction of benzene and gasoline                                           

(3.2 )

  Total property, plant and equipment                                         

(27.9 )

<pre> Net cash (used in) investing activities

(46.1 )

  Financing activities: Proceeds from issuance of common stock of non-controlling interest                                                    

15.0

 Deconsolidation of non-controlling interest                                    (15.0 ) Deferred financing cost                                                        (11.3 ) Proceeds from issuance of long-term debt                                    

352.0

 Principal reductions of long-term debt                                        (325.1 ) Net reductions borrowings on revolving credit facility                         (59.0 ) Distribution from parent under the tax sharing agreement                                                                   

2.3

  Net cash (used in) financing activities                                        (41.1 )  Working capital items: Accounts receivable increase                                                   (47.2 ) Prepaid expense increase                                                       (12.5 ) Sales use and fuel taxes payable decrease                                       (1.8 ) Accrued liabilities decrease                                                     (.2 ) Amounts due to affiliated companies, net increase                                (.1 ) Derivative liability increase                                               

55.7

 Refundable income taxes decrease                                                36.4 Increase in inventory                                                           34.9 Accounts payable increase                                                       14.3 Income taxes payable increase                                                    2.1  Cash provided by working capital items                                          81.6      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.                                           30

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  Accounts receivables increased during fiscal 2011 by $47.2 million or 73.5% for the comparable period in fiscal 2010 from $64.2 million to $111.4 million due primarily to increases in wholesale and retail sales during the fourth quarter of fiscal 2011.    Current liabilities increased during fiscal 2011 by $63.2 million or 58.5% from the comparable period in fiscal 2010 from $108.1 million to $171.3 million. This increase was primarily due to a $21.5 million increase in crude payable attributable to increased crude costs and a $55.7 million increase for recording current liabilities for the fair value of the crackspread derivative contracts. These increases were offset by approximately $14 million decrease of other current liabilities including $.9 million reduction in current installments of long term debt, $1.8 million of sales use and fuel taxes payable and $6.0 million of deferred income taxes payable.    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 Amended and Restated Revolving Credit Facility is $175,000,000. 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. The agreement expires on May 18, 2016. Under the Amended and Restated Revolving Credit Facility, the applicable margin is calculated on the average unused availability as follows: (a) for base rate borrowing, at the greater of the Agent Bank's prime rate the Federal Funds Open Rate plus 1.5%; or the Daily LIBOR rate plus 3%; plus an applicable margin of 0% to .5%; (b) for euro-rate based borrowings, at the LIBOR Rate plus an applicable margin of 2.75% to 3.25%. The Agent Bank's prime rate at August 31, 2011 was 4.75%.    The Revolving Credit Facility is secured primarily by certain cash accounts, accounts receivable and inventory. Until maturity, we may borrow on a borrowing base formula as set forth in the facility.    

We had outstanding letters of credit of $4,433,000 as of August 31, 2011. As of August 31, 2011, we had $24,000,000 of outstanding borrowings under the Revolving Credit Facility resulting in net availability of $146,567,000.

    The Company's 10.5% First Senior Secured Notes mature in 2018, at which time the Company will either have to pay the principal amount in full or refinance the Notes.    The following is a summary of our significant contractual cash obligations for the periods indicated that existed as of August 31, 2011 and is based on information appearing in the Notes to the Consolidated Financial Statements in Item 8:                                                                    Payments due by period                                                         Less Than       1 - 3        3 - 5        More than 5

Contractual Obligations                    Total         1 Year         Years        Years           Years                                                                     (in thousands) Long-term debt                           $ 369,139             978        1,520        1,003           365,638 Operating leases                            75,432          11,694       19,692       14,595            29,451 Interest on 10.5% Senior Notes due 8/15/2018 (a) (b)                          268,275          38,325       76,650       76,650            76,650  

Total contractual cash obligations (c) $ 712,846 50,997 97,862 92,248

           471,739      

(a) On March 8, 2011, the Company sold $365,000,000 of the Senior Secured Notes

due 2018 for $352,020,600, resulting in original issue discount of

$12,979,400, which will be amortized over the life of the Senior Secured

Notes due 2018 using the interest method and is not reflected in this table.

The net proceeds of the offering of $344,249,000 were used to fund the tender

offer for all of its outstanding Senior Notes due 2012, pay accrued interest

of $3,400,000 there on and a redemption premium related thereto. See Note 9

    to "Consolidated Financial Statements, Item 8".                                            31 

--------------------------------------------------------------------------------   Table of Contents (b) The above does not reflect our long term Amended and Restated Revolving 

Credit Facility, which had a balance of $24,000,000 as of August 31, 2011.

The Company has paid down the facility to $0 during the first quarter of the

2012 fiscal year. Also does not include interest on the Revolving Credit

Facility. The applicable margin varies with our facility leverage ratio

calculation. Under the amended and restated Revolving Credit Facility, for

base rate borrowings, interest is calculated at the greater of the Agent's

prime rate, federal funds open rate plus 0.5% or the daily LIBOR rate plus

1.0% plus the applicable margin of 1.25% to 1.75%. For Euro-Rate borrowings,

interest is calculated at the LIBOR rate plus an applicable margin of 2.75%

to 3.25%. The applicable margin varies with our facility's average unused

availability calculation See Notes 8 and 9 to "Consolidated Financial

Statements, Item 8".

(c) Pension obligations are not included since payments are not known.

     Although we are not aware of any pending circumstances which would change our expectations, 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.    Related Party Transactions   

See Item 13, Certain Relationships and Related Transactions.

   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 winter.

   Inflation   

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

Recent Accounting Pronouncements

    In May 2011, the FASB issued amended guidance on fair value measurement and related disclosures. The new guidance clarified the concepts applicable for fair value measurement of non-financial assets and requires the disclosure of quantitative information about the unobservable inputs used in a fair value measurement. This guidance will be effective for reporting periods beginning after December 15, 2011, and will be applied prospectively. We do not anticipate that the adoption of this amended guidance will have a material impact on our consolidated financial statements.    In June 2011, the FASB issued amended guidance on the presentation of comprehensive income. The amended guidance eliminates one of the presentation options provided by current U.S. GAAP that is to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. In                                           32 

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  addition, it gives an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance will be effective for reporting periods beginning after December 15, 2011 and will be applied retrospectively. The adoption of this guidance will not have a material impact on our consolidated financial statements.    In September 2011, the FASB issued an accounting standard update that amends the accounting guidance on goodwill impairment testing. The amendments are intended to reduce complexity and costs by allowing an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of a reporting unit. The amendments also improve previous guidance by expanding upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The amendments in this accounting standard update are effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011. We do not anticipate that the adoption of this accounting standard update will have a material impact on our consolidated financial statements. 

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