S-1 1 d246705ds1.htm FORM S-1 Form S-1
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Index to Financial Statements

As filed with the Securities and Exchange Commission on December 13, 2011

Registration No. 333-            

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

 

 

Northern Tier Energy, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   2911  

80-0763623

(State or other jurisdiction of incorporation or organization)   (Primary Standard Industrial Classification Code Number)   (I.R.S. Employer Identification No.)

38C Grove Street, Suite 100

Ridgefield, Connecticut 06877

(203) 244-6550

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Peter T. Gelfman

Vice President, General Counsel and Secretary

38C Grove Street, Suite 100

Ridgefield, Connecticut 06877

(203) 244-6550

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Douglas E. McWilliams

Brenda K. Lenahan

Vinson & Elkins L.L.P.

1001 Fannin, Suite 2500

Houston, Texas 77002-6760

(713) 758-2222

 

Michael J. Volkovitsch

Cleary Gottlieb Steen & Hamilton LLP

One Liberty Plaza

New York, New York 10006

(212) 225-2000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box: ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ¨    Accelerated filer  ¨    Non-accelerated filer x

(Do not check if a smaller reporting company)

    Smaller reporting company ¨   

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of Securities to Be Registered   Proposed Maximum Aggregate
Offering Price (1)(2)
  Amount of Registration
Fee (2)

Class A Common Stock, par value $0.01 per share

  $200,000,000   $22,920

 

 

(1) Includes shares of Class A common stock issuable upon exercise of the underwriters’ option to purchase additional shares of Class A common stock.
(2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933.

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any state where the offer or sale is not permitted.

 

Subject to Completion, Dated December 13, 2011

             Shares

LOGO

Northern Tier Energy, Inc.

CLASS A COMMON STOCK

 

 

This is an initial public offering of the Class A common stock of Northern Tier Energy, Inc.

Prior to this offering, there has been no public market for our Class A common stock. We anticipate that the initial public offering price of our Class A common stock will be between $         and $         per share. We intend to apply to list our Class A common stock on the New York Stock Exchange under the symbol “NTI.”

 

 

See “Risk Factors” on page 21 to read about factors you should consider before buying shares of the Class A common stock.

 

 

Neither the Securities and Exchange Commission nor any state securities regulators has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per Share      Total  

Initial public offering price

   $                    $                

Underwriting discount

   $                    $                

Proceeds, before expenses, to Northern Tier Energy, Inc.

   $                    $                

To the extent that the underwriters sell more than          shares of Class A common stock, the underwriters have the option to purchase up to an additional          shares of our Class A common stock at the initial public offering price less the underwriting discount.

The underwriters expect to deliver the shares against payment in New York, New York on or about                     , 2012.

 

Goldman, Sachs & Co.
  BofA Merrill Lynch
    Deutsche Bank Securities
                J.P. Morgan
      Macquarie Capital  

 

 

Prospectus dated                     , 2012.


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LOGO    LOGO

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TABLE OF CONTENTS

 

Prospectus Summary

     1   

Risk Factors

     21   

Cautionary Note Regarding Forward-Looking Statements

     52   

Organizational Structure

     54   

Use of Proceeds

     59   

Dividend Policy

     60   

Capitalization

     61   

Dilution

     62   

Unaudited Pro Forma Condensed Consolidated Financial Information

     63   

Selected Historical and Unaudited Pro Forma Condensed Consolidated Financial Data

     73   

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

     75   

Business

     118   

Management

     145   

Compensation Discussion and Analysis

     152   

Certain Relationships and Related Person Transactions

     168   

Principal Stockholders

     176   

Description of Capital Stock

     181   

Shares Eligible for Future Sale

     185   

Material U.S. Federal Income and Estate Tax Considerations to Non-U.S. Holders of Our Class A Common Stock

     187   

Underwriting

     191   

Legal Matters

     194   

Experts

     196   

Where You Can Find More Information

     196   

Index to Financial Statements

     F-1   

Glossary of Industry Terms Used in this Prospectus

     A-1   

Through and including                     , 2012 (the 25th day after the date of this prospectus), all dealers effecting transactions in our Class A common stock, whether or not participating in this offering, may be required to deliver a prospectus. This requirement is in addition to the dealers’ obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

We have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

 

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Industry and Market Data

This prospectus includes industry data and forecasts that we obtained from industry publications and surveys, public filings and internal company sources. Industry publications and surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but there can be no assurance as to the accuracy or completeness of the included information. Statements as to our ranking, market position and market estimates are based on independent industry publications, government publications, third-party forecasts and management’s estimates and assumptions about our markets and our internal research. We have not independently verified such third party information nor have we ascertained the underlying economic assumptions relied upon in those sources, and we can not assure you of the accuracy or completeness of such information contained in this prospectus. While we are not aware of any misstatements regarding our market, industry or similar data presented herein, such data involve risks and uncertainties and are subject to change based on various factors, including those discussed under the headings “Cautionary Statement Regarding Forward-Looking Statements” and “Risk Factors” in this prospectus.

This prospectus contains certain information regarding refinery complexity as measured by the Nelson Complexity Index, which is calculated on an annual basis by the Oil and Gas Journal. Certain data presented in this prospectus is from the Oil and Gas Journal Report dated January 1, 2010.

Trademarks and Trade Names

We own or have rights to various trademarks, service marks and trade names that we use in connection with the operation of our business. This prospectus may also contain trademarks, service marks and trade names of third parties, which are the property of their respective owners. Our use or display of third parties’ trademarks, service marks, trade names or products in this prospectus is not intended to, and does not imply a relationship with, or endorsement or sponsorship by us. Solely for convenience, the trademarks, service marks and trade names referred to in this prospectus may appear without the ®, TM or SM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks, service marks and trade names.

 

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PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus and is qualified in its entirety by the more detailed information and financial statements and notes thereto included elsewhere in this prospectus. Because it is abbreviated, this summary is not complete and does not contain all of the information that you should consider before investing in our Class A common stock. You should read the entire prospectus carefully before making an investment decision, including the information presented under the headings “Risk Factors,” “Cautionary Note Regarding Forward-Looking Statements,” “Organizational Structure” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and the notes thereto included elsewhere in this prospectus. Unless otherwise indicated, the information presented in this prospectus assumes (i) an initial public offering price of $             per share, which represents the midpoint of the price range set forth on the cover of this prospectus, and (ii) that the underwriters’ option to purchase additional shares of our Class A common stock is not exercised. We have provided definitions for certain terms used in this prospectus in the “Glossary of Industry Terms Used in this Prospectus” beginning on page A-1 of this prospectus.

Unless the context otherwise requires, the terms “we,” “us,” “our,” “Successor” and “Company,” when used in the context of the period (i) prior to the completion of the transactions described in “Organizational Structure,” refer to Northern Tier Investors, LLC and its subsidiaries and (ii) after the completion of the transactions described in “Organizational Structure,” refer to Northern Tier Energy, Inc. and its subsidiaries. References to “ACON Refining” and “TPG Refining” refer to ACON Refining Partners, L.L.C. and its affiliates and TPG Refining, L.P. and its affiliates, respectively. References to “Marathon Oil” refer to Marathon Oil Corporation, references to “Marathon Petroleum” refer to Marathon Petroleum Corporation, a wholly owned subsidiary of Marathon Oil until June 30, 2011, and references to “Marathon” refer to Marathon Petroleum Company LP, an indirect, wholly owned subsidiary of Marathon Petroleum, and certain affiliates of Marathon Petroleum Company LP. References to the “Marathon Acquisition” refer to the acquisition by us of our St. Paul Park, Minnesota refinery, a 17% interest in the Minnesota Pipe Line Company, our convenience stores and related assets from Marathon, completed in December 2010. We refer to the assets acquired in the Marathon Acquisition as the “Marathon Assets.” The Marathon Acquisition is described in greater detail, including certain related transactions in “—Marathon Acquisition.”

Our Company

We are an independent downstream energy company with refining, retail and pipeline operations that serve the PADD II region of the United States. We operate our assets in two business segments: the refining business and the retail business. For the nine months ended September 30, 2011, we had total revenues of $3.2 billion, operating income of $347.1 million, a net loss of $264.4 million and Adjusted EBITDA of $364.2 million. For the year ended December 31, 2010, on a pro forma basis for the Marathon Acquisition, total revenues were $3.5 billion, operating income was $169.7 million, net earnings were $63.0 million and Adjusted EBITDA was $213.1 million. For a definition, and reconciliation, of Adjusted EBITDA to net (loss) earnings, see “—Summary Historical and Unaudited Pro Forma Condensed Consolidated Financial and Other Data.”

Refining Business

Our refining business primarily consists of a 74,000 barrels per calendar day (“bpd”) (84,500 barrels per stream day) refinery located in St. Paul Park, Minnesota. Our refinery has a Nelson complexity index of 11.5, which refers to the ability of a refinery to produce finished products based on

 

 

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its investment intensity and cost relative to other refineries. We are one of only two refineries in Minnesota and one of four refineries in the Upper Great Plains area within the PADD II region. Of the 27 operable refineries in the PADD II region, only three have a Nelson complexity index higher than ours. Our strategic location allows us direct access, primarily via the Minnesota Pipeline, to crude oils from Western Canada and North Dakota, as well as the ability to distribute our refined products throughout the midwestern United States. Our refinery produces a broad slate of refined products including gasoline, diesel, jet fuel and asphalt, which are then marketed to resellers and consumers primarily in the PADD II region. Approximately 79% and 78% of our total refinery production for the nine months ended September 30, 2011 and the year ended December 31, 2010, respectively, comprised higher value, light refined products, including gasoline and distillates.

We also own various storage and transportation assets, including a light products terminal, a heavy products terminal, storage tanks, rail loading/unloading facilities and a Mississippi river dock. Approximately 80% and 75% of our gasoline and diesel volumes for the nine months ended September 30, 2011 and the year ended December 31, 2010, respectively, were sold via our light products terminal to our company-operated and franchised SuperAmerica branded convenience stores, Marathon branded convenience stores and other resellers. We have a contract with Marathon to supply substantially all of the gasoline and diesel requirements for 90 independently owned and operated Marathon branded convenience stores.

Our refining business also includes our 17% interest in the Minnesota Pipe Line Company LLC (the “Minnesota Pipe Line Company”), which owns and operates the Minnesota Pipeline, a 455,000 bpd crude oil pipeline system that transports crude oil (primarily from Western Canada and North Dakota) for approximately 300 miles from the Enbridge pipeline hub at Clearbrook, Minnesota to our refinery. The Minnesota Pipeline has historically supplied the majority of the crude oil used and processed in our refinery.

Retail Business

As of September 30, 2011, our retail business operated 166 convenience stores under the SuperAmerica brand and also supported 67 franchised convenience stores, which are also operated under the SuperAmerica brand. These convenience stores are located primarily in Minnesota and Wisconsin and sell various grades of gasoline and diesel, tobacco products and immediately consumable items such as non-alcoholic beverages, beer, prepared food and a large variety of snacks and prepackaged items. Our refinery supplied substantially all of the gasoline and diesel sold in our company-operated and franchised convenience stores for the nine months ended September 30, 2011 and the year ended December 31, 2010.

We also own and operate SuperMom’s Bakery, which prepares and distributes baked goods and other prepared food items for sale in our company-operated and franchised convenience stores and other third party locations.

Refining Industry Overview

Crude oil refining is the process of separating the hydrocarbons present in crude oil for the purpose of converting them into marketable finished, or refined, petroleum products such as gasoline, diesel, jet fuel, asphalt and other products. Refining is primarily a margin-based business where both the feedstock (primarily crude oil) and the refined products are commodities with fluctuating prices. In order to increase profitability, it is important for a refinery to maximize the yields of high value finished products and to minimize the costs of feedstock and operating expenses.

 

 

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According to the Energy Information Administration (the “EIA”), as of January 1, 2011, there were 137 oil refineries operating in the United States, with the 15 smallest each having a refining capacity of 14,000 bpd or less, and the 10 largest having capacities ranging from 330,000 bpd to 560,640 bpd.

High capital costs, historical excess capacity and environmental regulatory requirements have limited the construction of new refineries in the United States over the past 30 years. According to the EIA, domestic operating refining capacity has increased approximately 5% between January 1982 and January 2011 from 16.1 million bpd to 16.9 million bpd. Much of this increase in capacity is generally the result of efficiency measures and moderate expansions at various refineries, known as “capacity creep,” but some significant expansions at existing refineries have occurred as well. During this same time period, more than 110 generally smaller and less efficient refineries that had limited access to a wide variety of crude oils or were unable to profitably process feedstock into a marketable product mix were closed.

According to the EIA, total demand for refined products in PADD II, which is the region in which we operate, has represented approximately 26% of total U.S. refined products demand from 2006 to 2010. Within PADD II, refined product production capacity is currently insufficient to meet demand. For example, according to the EIA, due to product supply shortfalls within PADD II, net receipts of gasoline, distillate and jet fuel/kerosene from domestic sources outside of PADD II comprised approximately 19%, 17% and 16%, respectively, of demand for these products. Refining capacity in the PADD II region has decreased approximately 5% between January 1982 and January 2011 from approximately 3.8 million bpd to approximately 3.6 million bpd, while more than 25 refineries in the PADD II region have ceased operations. The refined product volumes that are necessary to satisfy the demand in excess of PADD II production are primarily sourced from domestic refineries located outside of PADD II, specifically from the U.S. Gulf Coast.

Our Business Strategy

The primary components of our business strategy are:

 

  Ÿ  

Focus on Optimizing Crude Oil Supply.    We are focused on optimizing our crude oil purchases for our refining operations and minimizing our crude oil feedstock costs. Our strategic location and the refinery’s complexity allow us to receive and process a variety of light, heavy, sweet and sour crude oils from Western Canada and the United States, many of which have historically priced at a discount to the West Texas Intermediate crude oil (“NYMEX WTI”) price benchmark.

 

  Ÿ  

Maintain Significant Liquidity in Our Business.    We rely on cash from operating activities, existing cash balances and our revolving credit facility as sources of liquidity to provide us with financial flexibility during periods of volatile commodity prices. We manage our operations prudently with a focus on maintaining ample liquidity to meet unforeseen capital needs. During December 2010, we entered into a five-year crude oil supply and logistics agreement with J.P. Morgan Commodities Canada Corporation (“JPM CCC”) to supply our refinery’s crude oil feedstock requirements, which helps reduce the amount of working capital required in our refinery operations. On a pro forma basis for this offering, as of September 30, 2011, we estimate that we would have had approximately $         million of available liquidity comprised of cash on hand and amounts available for borrowing under our $300 million revolving credit facility. Our actual available liquidity may vary from our estimated amount depending on several factors, including fluctuations in inventory and accounts receivable values as well as cash balances.

 

 

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Reduce Reliance on Wholesale Market by Growing Our Retail Business.    We intend to emphasize the development and growth of our dedicated SuperAmerica branded retail business to which we supply transportation fuels directly from our refining operations. We expect our near-term growth to be driven by an expansion of our SuperAmerica franchise business. In the long term, we anticipate increasing the number of company-operated convenience stores in select areas.

 

  Ÿ  

Selectively Engage in Hedging Activities to Mitigate Gross Margin Volatility.    We seek to mitigate the variability of commodity price exposure by selectively engaging in hedging strategies that are intended to protect our refining gross margins and operating cash flows. Our hedging policy establishes that we systematically evaluate the merits of entering into commodity derivatives contracts to hedge our crack spread risk with respect to a portion of our expected gasoline and diesel production on a rolling basis. Crack spread measures the difference between the price received from the sale of light products and the price paid for crude oil. For example, the 3:2:1 crack spread is a general industry standard that approximates the per barrel refining margin resulting from processing three barrels of crude oil to produce two barrels of gasoline and one barrel of distillates, which generally includes diesel, jet fuel or kerosene. Commodity derivatives contracts that we enter into are either exchange-traded contracts in the form of futures contracts or over-the-counter contracts in the form of commodity price swaps that reference benchmark indices. As of September 30, 2011, we hedged through 2012 approximately 22 million barrels of future gasoline and distillate production under commodity derivatives contracts.

 

  Ÿ  

Selectively Consider Acquisition Opportunities.    We intend to selectively consider strategic acquisitions within the refining and retail marketing industry. In selecting acquisitions within the refining industry, we will consider the following criteria: (i) performance through the refining cycle, (ii) advantageous access to crude oil supplies, (iii) attractive refined products market fundamentals and (iv) access to distribution and logistics infrastructure. In our existing areas of operation, we will seek acquisition opportunities that have the potential for operational efficiencies. We may also evaluate opportunities in the energy industry outside of our existing areas of operation and in new geographic regions to expand our operating footprint.

Our Competitive Strengths

We have a number of competitive strengths that we believe will help us to successfully execute our business strategy:

 

  Ÿ  

Strategically Located Refinery with Advantageous Access to Crude Oil Supply.    Our refinery is located on approximately 170 acres along the Mississippi River in a strategically advantageous area within the PADD II region. The refinery has the ability to source a variety of crude oils, including heavy Canadian crude oils and light North Dakota crude oils, primarily via the Minnesota Pipeline. Our refinery also has access to crude oils from Cushing, Oklahoma, the U.S. Gulf Coast and other foreign markets. The ability to source and process multiple types of crude oil enables us to capitalize on changing market conditions and, we believe, increase our profitability. For the nine months ended September 30, 2011, 52% of the crude oil processed at the refinery was Canadian crude oil, with the remainder comprised of locally produced U.S. crude oils, mostly from the Bakken Shale in North Dakota. Historically, we have purchased our crude oil at a discount to NYMEX WTI as a result of our close proximity to plentiful sources of crude oil in Western Canada and North Dakota. Over the five years ended September 30, 2011, we realized an average discount of $1.95 per barrel of crude oil purchased for our refinery when compared to the average NYMEX WTI price per barrel over the same period. More recently, the increase of the discount at which a barrel of NYMEX WTI traded relative to a barrel of benchmark Brent crude oil (“Brent”) has allowed refineries, such as ours, that are

 

 

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capable of sourcing and utilizing crude oil that is priced more in line with NYMEX WTI, to realize relatively lower feedstock costs and benefit from the higher refined product prices resulting from higher Brent prices.

 

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Attractive Regional Refined Products Supply/Demand Dynamics.    In recent years, demand for refined products in the PADD II region has exceeded regional production, resulting in a need for imports from other regions, specifically from the U.S. Gulf Coast region. Our inland location means that foreign and coastal domestic refiners seeking to access our marketing area would incur additional transportation costs. Over the five years ended September 30, 2011, our refinery has realized an average price premium of $3.35 per barrel for its gasoline and distillates production relative to the prices used in calculating the U.S. Gulf Coast 3:2:1 crack spread and an average price premium of $1.86 per barrel relative to the benchmark PADD II Group 3 3:2:1 crack spread (the “Group 3 3:2:1 crack spread”), in each case assuming a comparable rate of two barrels of gasoline and one barrel of distillate (see footnote 4 in “—Summary Historical and Unaudited Pro Forma Condensed Consolidated Financial and Other Data”).

 

  Ÿ  

Substantial Refinery Operating Flexibility.    Since 2006, approximately $213 million (including $194 million from January 2006 through November 2010 and $19 million from our inception date of August 10, 2010 through September 2011) has been invested in upgrades and capital projects to modernize the St. Paul Park refinery, improve its operating flexibility, increase its complexity and meet U.S. environmental, health and safety requirements, including revamping the gas oil hydrotreater in 2006 to allow for the production of ultra low sulfur diesel. As a result of these capital expenditures, we believe that we will be able to comply with known prospective fuel quality requirements without incurring significant capital costs or substantially increased operating costs. In addition, we have significant redundancies in our refining assets, which include two crude oil distillation and vacuum towers, two reformers, two sulfur recovery units and five hydrotreating units. These redundancies allow us to continue to receive and process crude oil and other feedstocks in the event a unit goes out of service and allows for increased maintenance flexibility as a redundant unit may be used without having to shut down the entire refinery in the case of a major unit turnaround.

Our refinery has a Nelson complexity index of 11.5. Of the 27 operable refineries in the PADD II region, only three have a Nelson complexity index higher than ours. Our refinery’s complexity means we can process lower cost crude oils into higher value light refined products, including transportation fuels, such as gasoline and distillates. Gasoline and distillates comprised approximately 79% and 78% of our total refinery production for the nine months ended September 30, 2011 and the year ended December 31, 2010, respectively.

 

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Strong Refinery Operating and Safety Track Record.    Our refinery has a strong operating and safety track record as evidenced by our high mechanical availability and low recordable incidents. This performance is due to, among other things, the periodic upgrades and maintenance performed at our refinery. We measure our safety track record primarily through the use of injury frequency rates as determined by the Occupational Safety and Health Administration (“OSHA”). Our refinery recorded an average of 0.62 and 0.41 recordable incidents during the nine months ended September 30, 2011 and the year ended December 31, 2010, respectively.

 

  Ÿ  

Integrated Refining and Retail Distribution Operations.    Our business is an integrated refining operation with significant storage assets and a retail distribution network comprising, as of September 30, 2011, 166 company-operated and 67 franchised convenience stores, all of which are operated under the SuperAmerica brand. For the nine months ended September 30, 2011 and the year ended December 31, 2010, we sold approximately 80% and 75%, respectively, of our gasoline and diesel volumes via our eight-bay bottom-loading light products

 

 

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terminal located at the refinery, primarily to our retail distribution network and, to a lesser extent, other resellers. Our refinery supplied substantially all of the gasoline and diesel sold in our company-operated and franchised convenience stores during these periods. We also have a contract with Marathon to supply substantially all of the gasoline and diesel requirements of 90 independently owned and operated Marathon branded convenience stores. In addition, we also have (i) a seven-bay heavy products terminal located on the refinery property, (ii) rail facilities for shipping liquefied petroleum gases and asphalt and for receiving butane, isobutane, crude oil and ethanol and (iii) a barge dock on the Mississippi River used primarily for shipping vacuum residuals and slurry.

 

  Ÿ  

Experienced, Proven and Incentivized Management Team.    Our management team is led by our Chief Executive Officer, Mario E. Rodriguez, formerly a managing director in the global energy investment banking division of Citigroup Global Markets, who has approximately 20 years of experience in the energy and finance industries. Our President and Chief Operating Officer, Hank Kuchta, has over 30 years of industry experience and was formerly President and Chief Operating Officer of Premcor Inc. Premcor operated four refineries in the United States with approximately 750,000 bpd of refining capacity at the time of its sale to Valero Energy Corporation in April 2005. Prior to Premcor, Mr. Kuchta served in various management positions at Phillips 66 Company, Tosco Corporation and Exxon Corporation. Our President of refinery operations, Greg Mullins, previously worked at Marathon for over 30 years and has extensive experience in all aspects of refinery operations and management as well as major project development and project management. Several members of our management team, including our President and Chief Operating Officer; our Vice President, Marketing; our Vice President, Supply; our Vice President, Human Resources; and our Vice President, Chief Information Officer, have experience working together as a management team at Premcor. In addition, our management team will have a significant ownership interest in us immediately following the completion of this offering, which we believe provides significant incentives to grow the value of our business for the benefit of all of our stockholders.

Risk Factors

Investing in our Class A common stock involves risks that include the volatility of crude oil and other refinery feedstocks, competition and other material factors. For a discussion of these risks and other considerations that could negatively affect us, including risks related to this offering and our Class A common stock, see “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.”

Marathon Acquisition

We commenced operations in December 2010 through the acquisition of our St. Paul Park, Minnesota refinery, a 17% interest in the Minnesota Pipe Line Company, our convenience stores and related assets from Marathon for $554 million, which included cash and the issuance to Marathon of $80 million of a noncontrolling preferred interest in one of our subsidiaries. In addition, we are required to pay Marathon additional contingent consideration, or earn-out payments, if our annual consolidated EBITDA, adjusted for certain agreed items (the “Agreement Adjusted EBITDA”), exceeds $165 million during any year in each of the eight years following the Marathon Acquisition. Under the terms of the agreement, we will be required to pay Marathon 40% of the amount by which the Agreement Adjusted EBITDA exceeds $165 million, subject to certain reductions, in any year in the eight years following the Marathon Acquisition. Total payments to Marathon under this agreement are not to exceed $125 million over the eight years following the Marathon Acquisition. Conversely, Marathon is required to

 

 

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pay us up to $30 million per year if the Agreement Adjusted EBITDA is below $145 million, subject to certain reductions, in either of the twelve-month periods ending November 30, 2011 and 2012. Any such payments made by Marathon will increase the maximum amount that we may be required to pay Marathon over the earn-out period as described above.

In connection with the Marathon Acquisition, certain additional transactions were consummated and we entered into certain agreements with respect to our operations, including the following:

 

  Ÿ  

Senior Secured Notes.    We issued $290 million of 10.5% senior secured notes due December 1, 2017. We pay interest on the senior secured notes on June 1 and December 1 of each year. The net proceeds from the sale of the senior secured notes were used to fund part of the Marathon Acquisition. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Description of Our Indebtedness—Senior Secured Notes.”

 

  Ÿ  

Asset-Based Revolving Credit Facility.    We entered into a $300 million senior secured asset-based revolving credit facility, which is subject to a borrowing base. We did not draw on the revolving credit facility to fund the Marathon Acquisition, other than to the extent utilized through the issuance of letters of credit. The revolving credit facility is available through December 1, 2015. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Description of Our Indebtedness—Senior Secured Asset-Based Revolving Credit Facility.”

 

  Ÿ  

Sale-Leaseback Arrangement.    Marathon sold certain real property interests, including the land underlying 135 of the SuperAmerica convenience stores associated with our retail business and SuperMom’s Bakery, to Realty Income Properties 3 LLC (“Realty Income”), a third party equity real estate investment trust. In connection with the closing of the Marathon Acquisition, Realty Income leased those properties to us on a long-term basis.

 

  Ÿ  

Crude Oil Inventory Purchase Agreement.    JPM CCC purchased substantially all of the crude oil inventory associated with operations of the refinery directly from Marathon pursuant to an inventory purchase agreement with Marathon.

 

  Ÿ  

Crude Oil Supply and Logistics Agreement.    We entered into a five-year crude oil supply and logistics agreement with JPM CCC that expires December 2015. JPM CCC assists us in the purchase of the crude oil requirements of our refinery and provides transportation and other logistical services for delivery of the crude oil to our storage tanks at Cottage Grove, Minnesota, which are approximately two miles from our refinery. We pay the price of the crude oil (determined as of the closing price one day subsequent to the delivery date) plus certain agreed fees and expenses. We believe this crude oil supply and logistics agreement significantly reduces our need to maintain crude oil inventories and allows us to take title to and price our crude oil at the refinery, as opposed to the crude oil origination point, reducing the time we are exposed to market fluctuations before the finished product output is sold. For more information, see “Business—Crude Oil Supply.”

 

  Ÿ  

Transition Services Agreement.    Marathon agreed to provide us with administrative and support services pursuant to a transition services agreement, including finance and accounting, human resources and information systems services, as well as support services in connection with our transition from being a part of Marathon’s systems and infrastructure to having our own systems and infrastructure. We ended a substantial portion of the Marathon transition services in October 2011. For more information, see “Certain Relationships and Related Person Transactions—Transactions with Marathon.”

 

 

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Index to Financial Statements

Organization

Northern Tier Energy, Inc. was incorporated on October 21, 2011 pursuant to the laws of the State of Delaware to become a holding company for Northern Tier Investors, LLC (“NTI LLC”). Following this offering, Northern Tier Energy, Inc.’s sole material asset will be an equity interest in NTI LLC. Northern Tier Energy, Inc., as sole managing member of NTI LLC, will operate and control all of the business and affairs and consolidate the financial results of NTI LLC and its subsidiaries. The financial statements of Northern Tier Energy, Inc. have not been presented elsewhere in this prospectus as it is a newly incorporated entity, has had no business transactions or activities to date and has no (or nominal) assets or liabilities.

Prior to this offering, NTI LLC was a wholly owned subsidiary of Northern Tier Investors, L.P. (“NTI LP”). NTI LP and NTI LLC were organized by ACON Refining and TPG Refining to act as holding companies of the companies that own and operate the business and assets acquired in the Marathon Acquisition. As described below and in “Organizational Structure,” NTI LP will merge into NTI LLC, pursuant to which we anticipate that the general partner interest in NTI LP will be canceled in exchange for $1,000, and all of the classes of limited partner interests in NTI LP, currently held by its existing owners, including ACON Refining, TPG Refining and entities controlled by certain members of our management (which we collectively refer to in this prospectus as the “Existing Owners”), will be converted into a single new class of units in NTI LLC that we refer to in this prospectus as “NTI LLC Units.” In connection with these transactions, a portion of the NTI LLC Units held by certain Existing Owners will be exchanged with Northern Tier Energy, Inc. (the “Existing Owner Exchange”) for shares of Northern Tier Energy, Inc. Class A common stock, cash and rights to payments under tax receivable agreements Northern Tier Energy, Inc. will enter into upon the closing of this offering (the “Tax Receivable Agreements”) with the Existing Owners, including ACON Refining and TPG Refining.

The Tax Receivable Agreements generally provide for the payment by Northern Tier Energy, Inc. of 85% of the cash savings, if any, in U.S. federal, state and local income tax or franchise tax that Northern Tier Energy, Inc. actually realizes (or is deemed to realize in certain circumstances) in periods after this offering as a result of (i) the increase in tax basis in NTI LLC’s assets that arose from the Marathon Acquisition, (ii) the basis increase resulting from the distribution of offering proceeds to the Existing Owners, (iii) the basis increases resulting from the exchanges of NTI LLC Units (along with the corresponding shares of Class B common stock) for shares of Northern Tier Energy, Inc. Class A common stock, (iv) additional deductions allocated to Northern Tier Energy, Inc. pursuant to Section 704(c) of the Internal Revenue Code of 1986, as amended (the “Code”), to reflect the difference between the fair market value and the adjusted tax basis of NTI LLC’s assets as of the closing of this offering, (v) imputed interest deemed to be paid by Northern Tier Energy, Inc. as a result of, and additional tax basis arising from, payments under the Tax Receivable Agreements, and (vi) any net operating losses available to Northern Tier Energy, Inc. as a result of the Existing Owner Exchange. Northern Tier Energy, Inc. will retain the benefit of the remaining 15% of these cash savings. See “Certain Relationships and Related Person Transactions—Tax Receivable Agreements.”

Northern Tier Energy, Inc. will contribute a portion of the proceeds from this offering, as well as a noncontrolling preferred interest in a subsidiary of NTI LLC that Northern Tier Energy, Inc. will purchase with a portion of the proceeds from this offering, to NTI LLC in exchange for NTI LLC Units. Of the cash received by NTI LLC from Northern Tier Energy, Inc., $         million will be distributed by NTI LLC to the Existing Owners and the remainder will be used for general corporate purposes. See “Use of Proceeds.” After giving effect to these transactions and the Existing Owner Exchange, Northern Tier Energy, Inc. will own an approximate     % (or     % if the underwriters’ option to purchase additional shares is exercised in full) interest in NTI LLC. Following completion of this offering, the

 

 

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Index to Financial Statements

remaining     % (or     % if the underwriters’ option to purchase additional shares is exercised in full) interest in NTI LLC will be owned by the Existing Owners.

In connection with these transactions, the Existing Owners will be issued one share of Northern Tier Energy, Inc. Class B common stock for each NTI LLC Unit that they hold. The Class B common stock will not have any economic rights, but it will entitle its holders to vote together with the Class A common stock as a single class on all matters presented to Northern Tier Energy, Inc. stockholders for their vote. Under the terms of the amended and restated limited liability company agreement of NTI LLC (the “LLC Agreement”), holders of NTI LLC Units will have the right to exchange NTI LLC Units (together with a corresponding number of shares of Class B common stock) for shares of Northern Tier Energy, Inc. Class A common stock on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications.

 

 

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The diagram below depicts Northern Tier Energy, Inc.’s organizational structure immediately following this offering assuming that the underwriters’ option to purchase additional shares is not exercised.

LOGO

 

 

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Index to Financial Statements

 

(1) Based on an assumed initial public offering price equal to the midpoint of the price range set forth on the cover of this prospectus. Immediately following the offering, the Existing Owners will have an aggregate economic interest in Northern Tier Energy, Inc. and NTI LLC equal to     %. However, the portion of such percentage that constitutes NTI LLC Units or Class A common stock will depend on the initial public offering price. As discussed under “Organizational Structure,” the allocation of NTI LLC Units among the Existing Owners will be determined pursuant to the distribution provisions of the existing amended and restated limited partnership agreement of NTI LP based upon the liquidation value of NTI LP, which will be implied by the initial public offering price of the shares of Class A common stock in this offering. A deviation in the initial public offering price from the assumed initial public offering price will impact the allocation of equity interests among the Existing Owners, including those who intend to exchange their NTI LLC Units for our Class A common stock in connection with this offering. Accordingly, any such deviation in the initial public offering price will impact the number of NTI LLC Units and shares of Class A common stock and Class B common stock held by the Existing Owners. For example, an offering price of $         per share would result in the Existing Owners owning     % of the NTI LLC Units,              shares of Class A common stock and              shares of Class B common stock. Likewise, an offering price of $         per share would result in the Existing Owners owning     % of the NTI LLC Units,              shares of Class A common stock and              shares Class B common stock.

Our Relationship with ACON Refining and TPG Refining

Following this offering, ACON Refining and TPG Refining will own NTI LLC Units and Class A common stock and Class B common stock of Northern Tier Energy, Inc., which in the aggregate will represent approximately     % of the economic interests in, and     % of the voting power of, Northern Tier Energy, Inc. (approximately     % and     %, respectively, if the underwriters’ option to purchase additional shares is exercised in full), based on an assumed initial offering price equal to the midpoint of the price range set forth on the cover of this prospectus.

ACON Investments, L.L.C., an affiliate of ACON Refining, and other of its affiliates (“ACON Investments”) manage private equity funds and special purpose investment partnerships. ACON Investments has executed investments in upstream and midstream oil and gas companies as well as in energy infrastructure and energy services. TPG Capital, L.P., an affiliate of TPG Refining (“TPG Capital”), is a leading private investment firm with $48 billion of assets under management. TPG Capital has extensive global experience with investments in the energy sector. We believe we will benefit from ACON Investments’ and TPG Capital’s collective experience in the energy industry.

General Corporate Information

Northern Tier Energy, Inc. was recently incorporated pursuant to the laws of the State of Delaware to become a holding company for NTI LLC. NTI LLC was formed as a Delaware limited liability company on August 10, 2010.

Our principal executive offices are located at 38C Grove Street, Suite 100, Ridgefield, Connecticut 06877 and our telephone number at that address is (203) 244-6550. Our website is located at www.ntenergy.com. We expect to make our periodic reports and other information with filed or furnished to the Securities and Exchange Commission (“SEC”), available free of charge through our website as soon as reasonably practicable after those reports and other information are electronically filed with or furnished to the SEC. Information on our website or any other website is not incorporated by reference herein and does not constitute a part of this prospectus.

 

 

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Index to Financial Statements

The Offering

 

Class A common stock offered by us

  

             shares.

Option to purchase additional shares

   We have granted the underwriters a 30-day option to purchase up to an aggregate of              additional shares of our Class A common stock.

Class A common stock to be outstanding after the offering

  

             shares (             shares if the underwriters’ option to purchase additional shares is exercised in full). If all outstanding NTI LLC Units held by the Existing Owners were exchanged (along with a corresponding number of shares of our Class B common stock) for newly-issued shares of Class A common stock on a one-for-one basis,              shares would be outstanding (             shares if the underwriters’ option to purchase additional shares is exercised in full).

Class B common stock outstanding after giving effect to this offering

  

             shares, or one share for each NTI LLC Unit held by the Existing Owners immediately following this offering. Shares of our Class B common stock have voting but no economic rights. When an NTI LLC Unit is exchanged for a share of Class A common stock, a share of Class B common stock held by such exchanging member will be cancelled.

Voting power of Class A common stock after giving effect to this offering

  

    % (or 100% if all outstanding NTI LLC Units held by the Existing Owners were exchanged (along with a corresponding number of shares of our Class B common stock) for newly-issued shares of Class A common stock on a one-for-one basis).

Voting power of Class B common stock after giving effect to this offering

  

    % (or 0% if all outstanding NTI LLC Units held by the Existing Owners were exchanged (along with a corresponding number of shares of our Class B common stock) for newly-issued shares of Class A common stock on a one-for-one basis).

Use of proceeds

   We expect to receive approximately $         million of net proceeds from the sale of the Class A common stock offered by us, based upon the assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus), after deducting underwriting discounts and commissions of $         million (or $         million if the underwriters exercise in full their option to purchase additional shares of Class A common

 

 

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Index to Financial Statements
  

stock) and estimated offering expenses of $         million. Each $1.00 increase (decrease) in the public offering price would increase (decrease) our net proceeds by approximately $         million (assuming no exercise of the underwriters’ option to purchase additional shares).

 

We intend to use $         million of the net proceeds to purchase a noncontrolling preferred interest in one of our subsidiaries from Marathon.

 

We intend to pay $         million of the net proceeds to certain of the Existing Owners pursuant to the Existing Owner Exchange.

 

We intend to contribute the remaining $         million of the net proceeds, as well as the noncontrolling preferred interest in one of our subsidiaries that we will purchase from Marathon, to NTI LLC in exchange for NTI LLC Units. NTI LLC will distribute $         million to the Existing Owners and will retain $         million for general corporate purposes.

Voting rights

  

Each share of our Class A common stock entitles its holder to one vote on all matters to be voted on by stockholders generally.

 

Each share of our Class B common stock entitles its holder to one vote on all matters to be voted on by stockholders generally.

 

Holders of our Class A common stock and Class B common stock vote together as a single class on all matters presented to our stockholders for their vote or approval, except as otherwise required by applicable law. See “Description of Capital Stock.”

Dividend policy

   We do not anticipate paying any cash dividends on our Class A common stock. See “Dividend Policy.”

Exchange rights of holders of NTI LLC Units

   Under the LLC Agreement, holders of NTI LLC Units may exchange their NTI LLC Units (along with a corresponding number of shares of our Class B common stock) for shares of our Class A common stock on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications.

Risk factors

   You should carefully read and consider the information set forth under “Risk Factors” and all other information set forth in this prospectus before deciding to invest in our Class A common stock.

Listing and trading symbol

   We intend to apply to list our Class A common stock on the New York Stock Exchange under the symbol “NTI.”

 

 

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Index to Financial Statements

Summary Historical and Unaudited Pro Forma Condensed Consolidated Financial and Other Data

The following tables present certain summary historical and unaudited pro forma condensed consolidated financial and other data. The combined financial statements for the years ended December 31, 2008 and 2009, the eleven months ended November 30, 2010 and the nine months ended September 30, 2010 represent a carve-out financial statement presentation of several operating units of Marathon, which we refer to as “Predecessor.” For more information on the carve-out presentation, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Predecessor Carve-Out Financial Statements” and our financial statements and the notes thereto included elsewhere in this prospectus. The historical combined financial data for periods prior to December 1, 2010 presented below do not reflect the consummation of the Marathon Acquisition and the transactions related thereto or our capital structure following the Marathon Acquisition and the transactions related thereto. NTI LLC was formed on August 10, 2010 and entered into certain agreements with Marathon on October 6, 2010 to acquire the Marathon Assets. At the closing of the Marathon Acquisition on December 1, 2010, NTI LLC acquired the Marathon Assets. NTI LLC had no operating activities between its inception date and the closing date of the Marathon Acquisition, although it incurred various transaction and formation costs which have been included in the period August 10, 2010 (inception date) through December 31, 2010 (the “2010 Successor Period”).

The summary historical financial data as of December 31, 2009 and 2010, for the years ended December 31, 2008 and 2009, for the eleven months ended November 30, 2010 and for the 2010 Successor Period are derived from audited financial statements and the notes thereto included elsewhere in this prospectus. The summary historical combined balance sheet data as of December 31, 2008 and November 30, 2010 were derived from audited financial statements and the notes thereto that are not included in this prospectus.

The summary historical financial data as of September 30, 2011 and for the nine months ended September 30, 2010 and 2011 are derived from unaudited financial statements and the notes thereto included elsewhere in this prospectus. The summary historical combined balance sheet data as of September 30, 2010 was derived from unaudited financial statements and the notes thereto that are not included in this prospectus. The unaudited financial statements have been prepared on a basis consistent with the audited financial statements. In our opinion, such unaudited financial statements reflect all adjustments, consisting only of normal and recurring adjustments, necessary for a fair statement of the results for those periods. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full fiscal year.

The historical financial and other data presented below are not necessarily indicative of the results to be expected for any future period.

The summary unaudited pro forma condensed consolidated statements of operations data and other data presented below for the year ended December 31, 2010 and for the nine months ended September 30, 2010 give effect only to the Marathon Acquisition and the transactions related thereto as if they had occurred on January 1, 2010. The pro forma adjustments are based upon available information and certain assumptions that we believe are reasonable. There have been no pro forma adjustments made to the summary unaudited pro forma condensed consolidated financial data presented below to give effect to the reorganization and offering transactions described in “Organizational Structure.” The summary unaudited pro forma condensed consolidated financial data are for informational purposes only and do not purport to represent what our results actually would

 

 

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Index to Financial Statements

have been if the relevant transactions had occurred at any date, and such data do not purport to project our results for any future period or any future date. See “Unaudited Pro Forma Condensed Consolidated Financial Information” for a complete description of the adjustments and assumptions underlying the summary unaudited pro forma financial data.

You should read the tables along with “Risk Factors,” “Use of Proceeds,” “Capitalization,” “Selected Historical and Unaudited Pro Forma Condensed Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and our financial statements and the notes thereto included elsewhere in this prospectus.

 

    Predecessor          Successor          Pro Forma
Marathon
Acquisition
    Predecessor          Pro Forma
Marathon
Acquisition
    Successor  
    Year Ended
December 31,
    Eleven
Months
Ended
November 30,
2010
         August 10,
2010

(inception
date) –
December 31,
2010
         Year Ended
December 31,
2010
    Nine
Months
Ended

September 30,
2010
         Nine
Months
Ended
September  30,
2010
    Nine
Months
Ended
September  30,
2011
 
    2008     2009                    
    (Dollars in millions, except per barrel/gallon data)  

Consolidated and combined statements of operations data:

                           

Total revenue

  $ 4,122.4      $ 2,940.5      $ 3,195.2          $ 344.9          $ 3,540.1      $ 2,582.3          $ 2,582.3      $ 3,192.0   

Costs, expenses and other:

                           

Cost of sales

    3,659.0        2,507.9        2,697.9            307.5            3,005.4        2,193.8            2,193.8        2,573.8   

Direct operating expenses

    252.7        238.3        227.0            21.4            265.1        183.4            197.1        194.8   

Turnaround and related expenses

    3.7        0.6        9.5                       9.5        8.2            8.2        22.5   

Depreciation and amortization

    39.2        40.2        37.3            2.2            29.5        30.0            22.5        22.3   

Selling, general and administrative expenses

    67.7        64.7        59.6            6.4            66.0        47.0            47.0        65.4   

Formation costs

                             24.3                                     6.1   

Contingent consideration income

                                                                 (37.6

Other (income) expense, net

    1.2        (1.1     (5.4         0.1            (5.1     (4.3         (4.1     (2.4
 

 

 

   

 

 

   

 

 

       

 

 

       

 

 

   

 

 

       

 

 

   

 

 

 

Operating income (loss)

  $ 98.9      $ 89.9      $ 169.3          $ (17.0       $ 169.7      $ 124.2          $ 117.8      $ 347.1   
     

Realized losses from derivative activities

                                                                 (246.4

Unrealized losses from derivative activities

                  (40.9         (27.1         (68.0                       (334.5

Bargain purchase gain

                             51.4                                       

Interest expense

    (0.5     (0.4     (0.3         (3.2         (38.7     (0.2         (29.1 )     (30.6
 

 

 

   

 

 

   

 

 

       

 

 

       

 

 

   

 

 

       

 

 

   

 

 

 

Earnings (loss) before income taxes

    98.4        89.5        128.1            4.1            63.0        124.0            88.7        (264.4

Income tax provision

    (39.8     (34.8     (67.1                           (49.2                  
 

 

 

   

 

 

   

 

 

       

 

 

       

 

 

   

 

 

       

 

 

   

 

 

 

Net earnings (loss)

  $ 58.6      $ 54.7      $ 61.0          $ 4.1          $ 63.0      $ 74.8          $ 88.7      $ (264.4

Less: net earnings attributable to noncontrolling preferred interest

                             0.6            7.2                   5.4        5.5   
 

 

 

   

 

 

   

 

 

       

 

 

       

 

 

   

 

 

       

 

 

   

 

 

 

Net earnings (loss) available to members

  $ 58.6      $ 54.7      $ 61.0          $ 3.5          $ 55.8      $ 74.8          $ 83.3      $ (269.9
 

 

 

   

 

 

   

 

 

       

 

 

       

 

 

   

 

 

       

 

 

   

 

 

 

 

 

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Index to Financial Statements
    Predecessor          Successor          Pro Forma
Marathon
Acquisition
    Predecessor          Pro Forma
Marathon
Acquisition
    Successor  
    Year Ended
December 31,
    Eleven
Months
Ended
November 30,
2010
         August 10,
2010

(inception
date) –
December 31,
2010
         Year Ended
December 31,
2010
    Nine
Months
Ended

September 30,
2010
         Nine
Months
Ended
September  30,
2010
    Nine
Months
Ended
September  30,
2011
 
    2008     2009                    
    (Dollars in millions, except per barrel/gallon data)  
     

Consolidated and combined statements of cash flow data:

                           

Net cash provided by (used in):

                           

Operating activities

  $ 47.1      $ 129.4      $ 145.4          $ (18.5         $ 73.5            $ 194.3   

Investing activities

    (84.6     (25.0     (29.3         (363.3           (21.1           (140.2

Financing activities

    34.5        (103.9     (115.4         456.1              (52.3           (1.5

Capital expenditures

    (45.0     (29.0     (29.8         (2.5           (21.6           (27.4
     

Consolidated and combined balance sheets data (at period end):

                           

Cash and cash equivalents

  $ 5.5      $ 6.0      $ 6.7          $ 74.3            $ 6.1            $ 126.9   

Total assets

    708.2        710.1        717.8            932.1              696.1              992.5   

Total long-term debt

                             314.5                           314.5   

Total liabilities

    292.7        343.9        405.4            647.9              306.8              973.1   

Total noncontrolling preferred interest in subsidiary

                             80.6                           86.1   

Total equity (deficit) (1)

  $ 415.5      $ 366.2      $ 312.4          $ 203.6            $ 389.3            $ (66.7
     

Other data:

                           

Adjusted EBITDA (2)

  $ 145.3      $ 135.2      $ 220.1          $ 9.9          $ 213.1      $ 165.5          $ 151.6      $ 364.2   
     

Refinery segment data:

                           

Refinery feedstocks (bpd):

                           

Light and intermediate crude

    61,637        59,112        55,402            59,872              55,002              54,914   

Heavy crude

    11,169        15,427        18,693            14,777              18,379              21,915   

Other feedstocks/ blendstocks

    7,986        7,024        5,971            6,487              5,865              3,865   
 

 

 

   

 

 

   

 

 

       

 

 

         

 

 

         

 

 

 

Total throughput

    80,792        81,563        80,066            81,136              79,246              80,694   
 

 

 

   

 

 

   

 

 

       

 

 

         

 

 

         

 

 

 

Refinery product yields (bpd):

                           

Gasoline

    41,140        42,674        41,080            42,485              40,798              40,238   

Distillates

    24,264        22,876        22,201            26,258              21,409              23,851   

Asphalt

    6,499        7,688        9,532            9,099              9,313              11,169   

Other

    9,622        8,888        8,145            4,011              8,523              5,915   
 

 

 

   

 

 

   

 

 

       

 

 

         

 

 

         

 

 

 

Total production

    81,525        82,126        80,958            81,853              80,043              81,173   
 

 

 

   

 

 

   

 

 

       

 

 

         

 

 

         

 

 

 

 

 

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Table of Contents
Index to Financial Statements
    Predecessor          Successor          Pro Forma
Marathon
Acquisition
  Predecessor          Pro Forma
Marathon
Acquisition
  Successor  
    Year Ended
December 31,
    Eleven
Months
Ended
November 30,
2010
         August 10,
2010

(inception
date) –
December 31,
2010
         Year Ended
December 31,
2010
  Nine
Months
Ended

September 30,
2010
         Nine
Months
Ended
September  30,
2010
  Nine
Months
Ended
September  30,
2011
 
    2008     2009                       
    (Dollars in millions, except per barrel/gallon data)  

Refinery gross product margin per barrel of throughput(3)

  $ 10.22      $ 9.36      $ 12.86          $ 9.94            $ 12.22            $ 22.31   

SPP Refinery 3:2:1 crack spread (per barrel) (4)

  $ 13.75      $ 10.35      $ 15.12          $ 13.85            $ 15.06            $ 30.53   

Group 3 3:2:1 crack spread (per barrel) (4)

  $ 10.92      $ 7.94      $ 9.34          $ 9.88            $ 9.53            $ 26.90   
     

Retail segment data:

                           

Gallons sold (in millions)

    340.6        335.7        316.0            29.1              259.0              245.8   

Retail fuel margin per gallon (for company-operated stores) (5)

  $ 0.17      $ 0.14      $ 0.17          $ 0.16            $ 0.16            $ 0.20   

 

(1) Total equity for the Predecessor represents a net balance reflecting Marathon’s investment and the effect of participation in Marathon’s centralized cash management programs. All cash receipts were remitted to, and all cash disbursements were funded by, Marathon. Other transactions affecting the net investment include general, administrative and overhead costs incurred by Marathon that were allocated to the Predecessor. There are no terms of settlement or interest charges associated with the net investment balance.

 

(2) EBITDA is defined as net (loss) earnings before interest expense (income), income taxes and depreciation and amortization. Adjusted EBITDA is defined as EBITDA before turnaround and related expenses, stock-based compensation expense, gains (losses) from derivative activities, contingent consideration, formation costs, bargain purchase gain and adjustments to reflect proportionate EBITDA from the Minnesota Pipeline operations. We believe Adjusted EBITDA is an important measure of operating performance and provides useful information to investors because it highlights trends in our business that may not otherwise be apparent when relying solely on GAAP measures and because it eliminates items that have less bearing on our operating performance.

 

     Adjusted EBITDA, as presented herein, is a supplemental measure of our performance that is not required by, or presented in accordance with, GAAP. We use non-GAAP financial measures as supplements to our GAAP results in order to provide a more complete understanding of the factors and trends affecting our business. Adjusted EBITDA is a measure of operating performance that is not defined by GAAP and should not be considered a substitute for net (loss) earnings as determined in accordance with GAAP.

 

     Set forth below is additional detail as to how we use Adjusted EBITDA as a measure of operating performance, as well as a discussion of the limitations of Adjusted EBITDA as an analytical tool.

 

     Operating Performance.    Management uses Adjusted EBITDA in a number of ways to assess our combined financial and operating performance, and we believe this measure is helpful to management and investors in identifying trends in our performance. We use Adjusted EBITDA as a measure of our combined operating performance exclusive of income and expenses that relate to the financing, derivative activities, income taxes and capital investments of the business, adjusted to reflect EBITDA from the Minnesota Pipeline operations. In addition, Adjusted EBITDA helps management identify controllable expenses and make decisions designed to help us meet our current financial goals and optimize our financial performance. Accordingly, we believe this metric measures our financial performance based on operational factors that management can impact in the short-term, namely the cost structure and expenses of the organization.

 

     Limitations.    Other companies, including other companies in our industry, may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure. Adjusted EBITDA also has limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations include that Adjusted EBITDA:

 

   

does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;

 

   

does not reflect changes in, or cash requirements for, our working capital needs;

 

 

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does not reflect our interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;

 

   

does not reflect the equity income in our Minnesota Pipe Line Company investment, but includes 17% of the calculated EBITDA of Minnesota Pipe Line Company;

 

   

does not reflect realized and unrealized gains and losses from hedging activities;

 

   

does not reflect certain other non-cash income and expenses; and

 

   

excludes income taxes that may represent a reduction in available cash.

 

     The following table shows the reconciliation of net (loss) earnings, the most directly comparable GAAP measure, to EBITDA and Adjusted EBITDA for the years ended December 31, 2008 and 2009, for the eleven months ended November 30, 2010, for the 2010 Successor Period, for the nine months ended September 30, 2010 and 2011, and pro forma for the Marathon Acquisition for the year ended December 31, 2010 and the nine months ended September 30, 2010:
    Predecessor          Successor          Pro Forma
Marathon
Acquisition
    Predecessor          Pro Forma
Marathon
Acquisition
    Successor  
  Year Ended
December 31,
    Eleven
Months
Ended
November 30,
2010
         August 10,
2010
(inception
date) -
December 31,

2010
         Year Ended
December 31,
2010
    Nine
Months
Ended
September  30,
2010
         Nine
Months
Ended
September  30,
2010
    Nine
Months
Ended
September  30,
2011
 
    2008     2009                    
    (In millions)  

Net (loss) earnings

  $ 58.6      $ 54.7      $ 61.0          $ 4.1          $ 63.0      $ 74.8          $ 88.7      $ (264.4

Adjustments:

                           

Interest expense

    0.5        0.4        0.3            3.2            38.7        0.2            29.1        30.6   

Depreciation and amortization

    39.2        40.2        37.3            2.2            29.5        30.0            22.5        22.3   

Income tax provision

    39.8        34.8        67.1                              49.2                     
 

 

 

   

 

 

   

 

 

       

 

 

       

 

 

   

 

 

       

 

 

   

 

 

 

EBITDA subtotal

    138.1        130.1        165.7            9.5            131.2        154.2            140.3        (211.5

Minnesota Pipe Line Company proportionate EBITDA

    3.2        4.2        3.7            0.3            4.0        2.9            2.9        2.7   

Turnaround and related expenses

    3.7        0.6        9.5                       9.5        8.2            8.2        22.5   

Stock-based compensation expense

    0.3        0.3        0.3            0.1            0.4        0.2            0.2        1.1   

Unrealized losses on derivative activities

                  40.9            27.1            68.0                          334.5   

Contingent consideration income

                                                                 (37.6

Formation costs

                             24.3                                     6.1   

Bargain purchase gain

                             (51.4                                    

Realized losses on derivative activities

                                                                 246.4   
 

 

 

   

 

 

   

 

 

       

 

 

       

 

 

   

 

 

       

 

 

   

 

 

 

Adjusted EBITDA

  $ 145.3      $ 135.2      $ 220.1          $ 9.9          $ 213.1      $ 165.5          $ 151.6      $ 364.2   
 

 

 

   

 

 

   

 

 

       

 

 

       

 

 

   

 

 

       

 

 

   

 

 

 

 

(3) Refinery gross product margin per barrel of throughput is a per barrel measurement calculated by subtracting refinery costs of sales from total refinery revenues and dividing the difference by the total throughput for the respective periods presented. Refinery gross product margin per barrel of throughput is a non-GAAP performance measure that we believe is important to investors in evaluating our refinery performance as a general indication of the amount above our cost of products that we are able to sell refined products. Each of the components used in this calculation (revenues and cost of sales) can be reconciled directly to our statements of operations. Our calculation of refinery gross product margin per barrel of throughput may differ from similar calculations of other companies in our industry, thereby limiting its usefulness as a comparative measure.

 

 

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     The following table shows the reconciliation of refining gross product margin per barrel of throughput for the years ended December 31, 2008 and 2009, for the eleven months ended November 30, 2010, for the 2010 Successor Period and for the nine months ended September 30, 2010 and 2011:

 

    Predecessor          Successor          Pro Forma
Marathon
Acquisition
  Predecessor          Pro Forma
Marathon
Acquisition
  Successor  
  Year Ended
December 31,
    Eleven
Months
Ended
November 30,
2010
         August 10,
2010
(inception
date)—
December 31,
2010
         Year Ended
December 31,
2010
  Nine
Months
Ended

September 30,
2010
         Nine
Months
Ended

September 30,
2010
  Nine
Months
Ended
September  30,

2011
 
  2008     2009                    
  (In millions except per gallon data)  

Refinery revenue

  $ 3,719.2      $ 2,530.7      $ 2,799.8          $ 312.2            $ 2,260.2            $ 2,857.7   

Refinery costs of sales

    3,417.1        2,252.1        2,455.9            287.2              1,995.8              2,366.3   
 

 

 

   

 

 

   

 

 

       

 

 

         

 

 

         

 

 

 

Refinery gross product margin

  $ 302.1      $ 278.6      $ 343.9          $ 25.0            $ 264.4            $ 491.4   
 

 

 

   

 

 

   

 

 

       

 

 

         

 

 

         

 

 

 

Throughput (barrels)

    29.6        29.8        26.8            2.5              21.6              22.0   
 

 

 

   

 

 

   

 

 

       

 

 

         

 

 

         

 

 

 

Refinery gross product margin per barrel of throughput

  $ 10.22      $ 9.36      $ 12.86          $ 9.94            $ 12.22            $ 22.31   
 

 

 

   

 

 

   

 

 

       

 

 

         

 

 

         

 

 

 

 

(4) We use the Group 3 3:2:1 crack spread as a benchmark for our refinery. The Group 3 3:2:1 crack spread is expressed in dollars per barrel and is a proxy for the per barrel margin that a sweet crude oil refinery would earn assuming it produced and sold at PADD II Group 3 prices the benchmark production of two barrels of gasoline and one barrel of ultra low sulfur diesel for every three barrels of light, sweet crude oil input. For more information about the Group 3 3:2:1 crack spread see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Major Influences on Results of Operations.”

 

     Our SPP Refinery 3:2:1 crack spread is derived using a similar methodology as the Group 3 3:2:1 crack spread and is calculated by taking the sum of (i) two times our weighted average per barrel price received for our gasoline products plus (ii) our average per barrel price received for distillate, divided by three; then subtracting from that sum our weighted average cost of crude oil supply per barrel. The SPP Refinery 3:2:1 crack spread is not a full representation of our realized refinery gross product margin because the Group 3 3:2:1 crack spread is composed only of gasoline and distillate, whereas our refinery gross product margin is calculated using all of our refined products including asphalt and other lower margin products.

 

(5) Retail fuel margin per gallon is calculated by dividing retail fuel gross margin by the fuel gallons sold at company-operated stores. Retail fuel gross margin is a non-GAAP performance measure that we believe is important to investors in evaluating our retail performance. Our calculation of retail fuel gross margin may differ from similar calculations of other companies in our industry, thereby limiting its usefulness as a comparative measure.

 

 

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     The following table shows the reconciliation of retail fuel gross margin and merchandise margin to retail segment operating income for the years ended December 31, 2008 and 2009, for the eleven months ended November 30, 2010, for the 2010 Successor Period and for the nine months ended September 30, 2010 and 2011:

 

    Predecessor          Successor          Pro Forma
Marathon
Acquisition
  Predecessor          Pro Forma
Marathon
Acquisition
  Successor  
  Year Ended
December 31,
    Eleven
Months
Ended
November 30,
2010
         August 10,
2010
(inception
date)

December 31,
2010
         Year Ended
December 31,
2010
  Nine
Months
Ended

September 30,
2010
         Nine Months
Ended
September 30,
2010
  Nine
Months
Ended
September  30,
2011
 
    2008     2009                    
     

Retail gross margin:

                           

Fuel margin

  $ 58.7      $ 47.1      $ 54.3          $ 4.7            $ 42.1            $ 49.0   

Merchandise margin

    102.6        106.9        99.1            7.8              82.0              77.8   
 

 

 

   

 

 

   

 

 

       

 

 

         

 

 

         

 

 

 

Retail gross margin

    161.3        154.0        153.4            12.5              124.1              126.8   

Expenses:

                           

Direct operating expenses

    105.2        100.0        94.9            10.2              76.9              98.4   

Depreciation and amortization

    14.8        14.2        12.4            0.5              10.1              6.0   

Selling, general and administrative

    20.1        20.5        19.6            1.3              15.8              12.8   
 

 

 

   

 

 

   

 

 

       

 

 

         

 

 

         

 

 

 

Retail segment operating income

  $ 21.2      $ 19.3      $ 26.5          $ 0.5            $ 21.3            $ 9.6   
 

 

 

   

 

 

   

 

 

       

 

 

         

 

 

         

 

 

 

 

 

20


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RISK FACTORS

Investing in our Class A common stock involves a high degree of risk. You should carefully consider the risks described below together with the other information set forth in this prospectus before making an investment decision. Our business, financial condition or results of operations could be materially adversely affected by the occurrence of any of the following risks. Additionally, the trading price of our Class A common stock could decline due to the occurrence of any of these risks, and you may lose all or part of your investment. The risks discussed below are not the only risks we face. We may experience additional risks and uncertainties not currently known to us, or as a result of developments occurring in the future. Conditions that we currently deem to be immaterial may also materially and adversely affect our business, financial condition, cash flows and results of operations.

Risks Related to Our Business and Industry

General Business and Industry Risks

Our arrangements with Marathon expose us to Marathon related credit and performance risk.

We have a contract with Marathon under which we will continue to supply substantially all of the gasoline and diesel requirements for the 90 independently owned and operated Marathon branded stores in our marketing area. In addition, the acquisition agreements entered into in connection with the Marathon Acquisition include a margin support component that requires Marathon to pay us up to $30 million in cash to the extent that certain financial metrics are not achieved in either of the twelve-month periods ending November 30, 2011 and 2012, resulting in up to a maximum of $60 million potentially being payable to us. In addition, Marathon has indemnification obligations to us pursuant to the agreements entered into in connection with the Marathon Acquisition. Marathon’s indemnification obligation resulting from any breach of representations and warranties generally are limited by an indemnification deductible of $25 million and an indemnification ceiling of $100 million and are guaranteed by Marathon Petroleum.

Marathon Petroleum has guaranteed the performance of all of Marathon’s obligations under all of the acquisition agreements entered into in connection with the Marathon Acquisition, including the obligations discussed above. Nevertheless, relying on Marathon’s ability to honor its margin support obligations, fuel requirements purchase obligations and indemnity obligations, and on Marathon Petroleum’s ability to honor its guaranty obligations, will expose us to Marathon’s and Marathon Petroleum’s respective credit and business risks. In addition, there can be no assurance that claims resulting from any breach of Marathon’s representations and warranties under the acquisition agreements entered into in connection with the Marathon Acquisition will not exceed the $100 million indemnification ceiling. Moreover, selling products to Marathon under the supply contract and relying on Marathon’s ability to honor its margin support obligations can expose us to Marathon’s credit and general business risks. An adverse change in Marathon’s or Marathon Petroleum’s business, results of operations or financial condition could adversely affect their respective ability to perform each of these obligations, which could consequently have a material adverse effect on our business, results of operations or liquidity.

Our historical financial statements may not be indicative of future performance.

The historical financial statements for periods prior to December 1, 2010 presented in this prospectus reflect carve-out financial statements of several operating units of Marathon, which, except for certain assets that were not acquired (e.g., cash other than in-store cash at our convenience stores and receivables and assets sold to third parties) and certain liabilities (e.g., accounts payable, payroll and benefits payable and deferred taxes) that were not assumed in connection with the Marathon Acquisition, represent the assets and liabilities that were transferred to us upon the closing of the Marathon Acquisition. We now own the assets and operate them as a standalone business. Prior to the closing of the Marathon

 

21


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Index to Financial Statements

Acquisition, we had no history of operating these assets, and they were never operated as a standalone business, thus the historical results presented in the financial statements for the periods prior to the Marathon Acquisition are not necessarily comparable to our financial statements following the Marathon Acquisition or indicative of the results for any future period. Additionally, we entered into certain arrangements at the closing of the Marathon Acquisition, including our crude oil supply and logistics agreement with JPM CCC and a lease arrangement with Realty Income, that resulted in our working capital needs and operating costs varying from those affecting the assets that we acquired from Marathon. The pre-Marathon Acquisition historical financial information reflects intercompany allocations of expenses which may not be indicative of the actual expenses that would have been incurred had the combined businesses been operating as a company independent from Marathon for the periods presented. In addition, our results of operations for periods subsequent to the closing of this offering may not be comparable to our results of operations for periods prior to the closing of this offering as a result of certain transactions undertaken in connection with this offering and the reorganization described in “Organizational Structure.” See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Comparability of Historical Results” for a discussion of factors that affect comparability. As a result, it is difficult to evaluate our historical results of operations to assess our future prospects and viability.

Our liquidity may be adversely affected by a reduction in third party credit.

We rely on third party credit for a significant portion of our crude oil and other feedstock purchases. We pay for domestic crude oil purchases on the 20th of the month following the month of delivery and for Canadian crude oil purchases on the 25th of the month following the month of delivery. If our suppliers who sell crude oil and other feedstocks to us on trade credit were to reduce or eliminate our credit lines, we would be required to fund our purchases through our revolving credit facility or our crude oil supply and logistics agreement with JPM CCC, which would have a negative impact on our liquidity.

We may have capital needs for which our internally generated cash flows and other sources of liquidity may not be adequate.

If we cannot generate sufficient cash flows or otherwise secure sufficient liquidity to support our short-term and long-term capital requirements, we may not be able to meet our payment obligations under the agreements entered into in connection with the Marathon Acquisition or our future debt obligations, comply with certain deadlines related to environmental regulations and standards or pursue our business strategies, any of which could have a material adverse effect on our results of operations or liquidity. We have substantial short-term capital needs and may have substantial long-term capital needs. Our short-term working capital needs are primarily related to financing our refined product inventory. Our long-term needs for cash include those to support ongoing capital expenditures for equipment maintenance and upgrades during turnarounds at our refinery and to complete our routine and normally scheduled maintenance, regulatory and security expenditures. In addition, from time to time, we are required to spend significant amounts for repairs when one or more processing units experiences temporary shutdowns. We continue to utilize significant capital to upgrade equipment, improve facilities, and reduce operational, safety and environmental risks. We may incur substantial compliance costs in connection with any new environmental, health and safety regulations. Additionally, we may be required to pay up to $125 million to Marathon in contingent consideration for the Marathon Acquisition over the next seven years. Our liquidity will affect our ability to satisfy any of these needs.

Competition from companies having greater financial and other resources than we do could materially and adversely affect our business and results of operations.

Our refining operations compete with domestic refiners and marketers in the PADD II region of the United States, as well as with domestic refiners in other PADD regions and foreign refiners that import products into the United States. In addition, we compete with producers and marketers in other

 

22


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industries that supply alternative forms of energy and fuels to satisfy the requirements of our industrial, commercial and individual customers. Certain of our competitors have larger, more complex refineries, and may be able to realize lower per-barrel costs or higher margins per barrel of throughput. Several of our principal competitors are integrated national or international oil companies that are larger and have substantially greater resources than we do and have access to proprietary sources of controlled crude oil production. Unlike these competitors, we obtain substantially all of our feedstocks from unaffiliated sources. Because of their integrated operations and larger capitalization, these companies may be more flexible in responding to volatile industry or market conditions, such as shortages of crude oil supply and other feedstocks or intense price fluctuations.

Newer or upgraded refineries will often be more efficient than our refinery, which may put us at a competitive disadvantage. While we have taken significant measures to maintain and upgrade units in our refinery by installing new equipment and repairing equipment to improve our operations, these actions involve significant uncertainties, since upgraded equipment may not perform at expected throughput levels, the yield and product quality of new equipment may differ from design specifications and modifications may be needed to correct equipment that does not perform as expected. Any of these risks associated with new equipment, redesigned older equipment or repaired equipment could lead to lower revenues or higher costs or otherwise have an adverse effect on future results of operations and financial condition. Over time, our refinery may become obsolete, or be unable to compete, because of the construction of new, more efficient facilities by our competitors.

Our retail operations compete with numerous convenience stores, gasoline service stations, supermarket chains, drug stores, fast food operations and other retail outlets. Increasingly, national high-volume grocery and dry-goods retailers are entering the gasoline retailing business. Many of these competitors are substantially larger than we are. Because of their diversity, integration of operations and greater resources, these companies may be better able to withstand volatile market conditions or levels of low or no profitability. In addition, these retailers may use promotional pricing or discounts, both at the pump and in the store, to encourage in-store merchandise sales. These activities by our competitors could adversely affect our profit margins. Additionally, our convenience stores could lose market share, relating to both gasoline and merchandise, to these and other retailers, which could adversely affect our business, results of operations and cash flows. Our convenience stores compete in large part based on their ability to offer convenience to customers. Consequently, changes in traffic patterns and the type, number and location of competing stores could result in the loss of customers and reduced sales and profitability at affected stores.

Difficult conditions resulting from the ongoing U.S. and worldwide financial and credit crisis, and potential further deteriorating conditions in the United States and globally, may materially adversely affect our business, results of operations and financial condition.

Continual volatility and disruption in worldwide capital and credit markets and potential further deteriorating conditions in the United States and globally could affect our revenues and earnings negatively and could have a material adverse effect on our business, results of operations and financial condition. We are indirectly exposed to risks faced by our suppliers, customers and other business partners. The impact on these constituencies of the risks posed by continued economic turmoil have included, or can include, interruptions or delays in the performance by counterparties to our contracts, reductions and delays in customer purchases, delays in or the inability of customers to obtain financing to purchase our products and the inability of customers to pay for our products. All of these events may significantly adversely impact our business, results of operations and financial condition.

 

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The geographic concentration of our refinery and retail assets creates a significant exposure to the risks of the local economy and other local adverse conditions. The location of our refinery also creates the risk of significantly increased transportation costs should the supply/demand balance shift in our region such that regional supply exceeds regional demand for refined products.

As our refinery and a significant number of our stores are located in Minnesota, Wisconsin and South Dakota, we primarily market our refined and retail products in a single, relatively limited geographic area. As a result, we are more susceptible to regional economic conditions than the operations of more geographically diversified competitors, and any unforeseen events or circumstances that affect our operating area could also materially adversely affect our revenues and profitability. These factors include, among other things, changes in the economy, weather conditions, demographics and population.

Should the supply/demand balance shift in our region as a result of changes in the local economy discussed above, an increase in refining capacity or other reasons, resulting in supply in the PADD II region exceeding demand, we would have to deliver refined products to customers outside of the region and thus incur considerably higher transportation costs, resulting in lower refining margins, if any. Changes in market conditions could have a material adverse effect on our business, financial condition and results of operations.

Our operating results are seasonal and generally lower in the first and fourth quarters of the year for our refining business and in the first quarter of the year for our retail business. We depend on favorable weather conditions in the spring and summer months.

Demand for gasoline is generally higher during the summer months than during the winter months due to seasonal increases in highway traffic. Decreased demand during the winter months can lead to lower gasoline prices. As a result, our operating results of our refining business for the first and fourth calendar quarters are generally lower than those for the second and third calendar quarters of each year.

Seasonal fluctuations in traffic also affect sales of motor fuels and merchandise in our retail fuel and convenience stores. As a result, our operating results of our retail business are generally lower for the first quarter of the year. Weather conditions in our operating area also have a significant effect on our retail operating results. Customers are more likely to purchase higher profit margin items at our retail fuel and convenience stores, such as fast foods, fountain drinks and other beverages and more gasoline during the spring and summer months, thereby typically generating higher revenues and gross margins for us in these periods. Unfavorable weather conditions during these months and a resulting lack of the expected seasonal upswings in traffic and sales could have a material adverse effect on our business, financial condition and results of operations.

Weather conditions and natural disasters could materially and adversely affect our business and operating results.

The effects of weather conditions and natural disasters can lead to volatility in the costs and availability of energy and raw materials or negatively impact our operations or those of our customers and suppliers, which could have a significant adverse effect on our business and results of operations.

 

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We may not be able to successfully execute our strategy of growth within the refining and retail industry through acquisitions.

A component of our growth strategy is to selectively consider strategic acquisitions within the refining industry and retail market based on performance through the refining cycle, advantageous access to crude oil supplies, attractive refined products market fundamentals and access to distribution and logistics infrastructure. Our ability to do so will be dependent upon a number of factors, including our ability to identify acceptable acquisition candidates, consummate acquisitions on favorable terms, successfully integrate acquired assets and obtain financing to fund acquisitions and to support our growth and many other factors beyond our control. Risks associated with acquisitions include those relating to:

 

  Ÿ  

diversion of management time and attention from our existing business;

 

  Ÿ  

challenges in managing the increased scope, geographic diversity and complexity of operations;

 

  Ÿ  

difficulties in integrating the financial, technological and management standards, processes, procedures and controls of an acquired business with those of our existing operations;

 

  Ÿ  

liability for known or unknown environmental conditions or other contingent liabilities not covered by indemnification or insurance;

 

  Ÿ  

greater than anticipated expenditures required for compliance with environmental, safety or other regulatory standards or for investments to improve operating results;

 

  Ÿ  

our inability to offer competitive terms to our franchisees to grow our franchise business;

 

  Ÿ  

difficulties in achieving anticipated operational improvements; and

 

  Ÿ  

incurrence of additional indebtedness to finance acquisitions or capital expenditures relating to acquired assets.

We may not be successful in acquiring additional assets, and any acquisitions that we do consummate may not produce the anticipated benefits or may have adverse effects on our business and operating results.

Our business may suffer if any of our key senior executives or other key employees discontinues employment with us. Furthermore, a shortage of skilled labor or disruptions in our labor force may make it difficult for us to maintain labor productivity.

Our future success depends to a large extent on the services of our senior executives and other key employees and on our continuing ability to recruit, train and retain highly qualified employees in all areas of our operations, including accounting, business operations, finance and other key back-office and mid-office personnel. Furthermore, our operations require skilled and experienced employees with proficiency in multiple tasks. The competition for these employees is intense, and the loss of these executives or employees could harm our business. If any of these executives or other key personnel resign or become unable to continue in their present roles and are not adequately replaced, our business could be materially adversely affected. We do not maintain, nor do we plan to obtain, any insurance against the loss of any of these individuals.

Our operations could be disrupted if our information systems fail, causing increased expenses and loss of sales.

Our business is highly dependent on financial, accounting and other data processing systems and other communications and information systems, including our enterprise resource planning tools. We process a large number of transactions on a daily basis and rely upon the proper functioning of computer systems. If a key system were to fail or experience unscheduled downtime for any reason,

 

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even if only for a short period, our operations and financial results could be affected adversely. During the fourth quarter of 2011, we are transitioning from the finance and accounting information services provided by Marathon pursuant to a transition services agreement to our own stand-alone systems. While the initial transition occurred without significant issues, we have not yet had sufficient time and experience operating these systems to evaluate their efficacy in practice. Our systems could also be damaged or interrupted by a security breach, fire, flood, power loss, telecommunications failure or similar event. Our formal disaster recovery plan may not prevent delays or other complications that could arise from an information systems failure. Further, our business interruption insurance may not compensate us adequately for losses that may occur.

We may incur significant liability under, or costs and capital expenditures to comply with, environmental, health and safety regulations, which are complex and change frequently.

Our refinery, pipelines and retail operations are subject to federal, state and local laws regulating, among other things, the generation, storage, handling, use and transportation of petroleum and hazardous substances, the emission and discharge of materials into the environment, waste management, characteristics and composition of gasoline and diesel and other matters otherwise relating to the protection of the environment. Our operations are also subject to various laws and regulations relating to occupational health and safety. Compliance with the complex array of federal, state and local laws relating to the protection of the environment, health and safety is difficult and likely will require us to make significant expenditures. Moreover, our business is inherently subject to accidental spills, discharges or other releases of petroleum or hazardous substances into the environment including at neighboring areas or third party storage, treatment or disposal facilities. For example, we have performed remediation of known soil and groundwater contamination beneath certain of our retail locations primarily as a result of leaking underground storage tanks, and we will continue to perform remediation of this known contamination until the appropriate regulatory standards have been achieved. Certain environmental laws impose joint and several liability without regard to fault or the legality of the original conduct in connection with the investigation and cleanup of such spills, discharges or releases. As such, we may be required to pay more than our fair share of such investigation or cleanup. We may not be able to operate in compliance with all applicable environmental, health and safety laws, regulations and permits at all times. Violations of applicable legal or regulatory requirements could result in substantial fines, criminal sanctions, permit revocations, injunctions and/or facility shutdowns. We may also be required to make significant capital expenditures or incur increased operating costs to achieve compliance with applicable standards.

We cannot predict what additional environmental, health and safety 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 our operations. Many of these laws and regulations are becoming increasingly stringent, and the cost of compliance with these requirements can be expected to increase over time. Expenditures or costs for environmental, health and safety compliance could have a material adverse effect on our results of operations, financial condition and profitability.

We could incur significant costs in cleaning up contamination at our refinery, terminal and convenience stores.

Our refinery site has been used for refining activities for many years. Petroleum hydrocarbons and various substances have been released on or under our refinery site. Marathon performed remediation of known soil and groundwater contamination beneath the refinery for many years, and we will continue to perform remediation of this known contamination until the appropriate regulatory standards have been achieved. These redemption efforts are being overseen by the Minnesota Pollution Control Agency (“MPCA”) pursuant to a remediation settlement agreement entered into by Marathon and MPCA in 2007. Releases of petroleum hydrocarbons have also occurred at several of

 

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our convenience stores, and we have performed and will continue to perform remediation of this known contamination until the applicable regulatory standards are met. Costs for such remediation activities are often unpredictable, and there can be no assurance that the future costs will not be material. It is possible that we may identify additional contamination in the future, which could result in additional remediation obligations and expenses.

We are subject to strict laws and regulations regarding employee and business process safety, and failure to comply with these laws and regulations could have a material adverse effect on our results of operations and financial condition.

We are subject to the requirements of OSHA and comparable state statutes that regulate the protection of the health and safety of workers. In addition, OSHA requires that we maintain information about hazardous materials used or produced in our operations and that we provide this information to employees, state and local governmental authorities, and local residents. Failure to comply with OSHA requirements, including general industry standards, process safety standards and control of occupational exposure to regulated substances, could subject us to significant fines or cause us to spend significant amounts on compliance, which could have a material adverse effect on our results of operations, financial condition and the cash flows of the business.

Compliance with and changes in tax laws could adversely affect our performance.

We are subject to extensive tax liabilities, including federal, state and transactional taxes such as excise, sales/use, payroll, franchise, withholding and ad valorem taxes. New tax laws and regulations and changes in existing tax laws and regulations are continuously being enacted or proposed that could result in increased expenditures for tax liabilities in the future. Certain of these liabilities are subject to periodic audits by the respective taxing authority, which could increase our tax liabilities. Subsequent changes to our tax liabilities as a result of these audits may also subject us to interest and penalties.

Our insurance policies may be inadequate or expensive.

Our insurance coverage does not cover all potential losses, costs or liabilities. We could suffer losses for uninsurable or uninsured risks or in amounts in excess of our existing insurance coverage. Our ability to obtain and maintain adequate insurance may be affected by conditions in the insurance market over which we have no control. In addition, if we experience insurable events, our annual premiums could increase further or insurance may not be available at all or if it is available, on restrictive coverage items. The occurrence of an event that is not fully covered by insurance or the loss of insurance coverage could have a material adverse effect on our business, financial condition, and results of operations.

Our level of indebtedness may increase and reduce our financial flexibility.

In the future, we may incur significant indebtedness in order to make future acquisitions or to develop our properties. Our level of indebtedness could affect our operations in several ways, including the following:

 

  Ÿ  

a significant portion of our cash flows could be used to service our indebtedness;

 

  Ÿ  

a high level of debt would increase our vulnerability to general adverse economic and industry conditions;

 

  Ÿ  

the covenants contained in the agreements governing our outstanding indebtedness will limit our ability to borrow additional funds, dispose of assets, pay dividends and make certain investments;

 

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  Ÿ  

a high level of debt may place us at a competitive disadvantage compared to our competitors that are less leveraged and therefore, may be able to take advantage of opportunities that our indebtedness would prevent us from pursuing;

 

  Ÿ  

our debt covenants may also affect our flexibility in planning for, and reacting to, changes in the economy and in our industry;

 

  Ÿ  

a high level of debt may make it more likely that a reduction in our borrowing base following a periodic redetermination could require us to repay a portion of our then-outstanding bank borrowings; and

 

  Ÿ  

a high level of debt may impair our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate or other purposes.

A high level of indebtedness increases the risk that we may default on our debt obligations. Our ability to meet our debt obligations and to reduce our level of indebtedness depends on our future performance. General economic conditions and financial, business and other factors affect our operations and our future performance. Many of these factors are beyond our control. We may not be able to generate sufficient cash flows to pay the interest on our debt, and future working capital, borrowings or equity financing may not be available to pay or refinance such debt. Factors that will affect our ability to raise cash through an offering of our capital stock or a refinancing of our debt include financial market conditions, the value of our assets and our performance at the time we need capital.

In addition, our bank borrowing base is subject to periodic redeterminations. We could be forced to repay a portion of our bank borrowings due to redeterminations of our borrowing base. If we are forced to do so, we may not have sufficient funds to make such repayments. If we do not have sufficient funds and are otherwise unable to negotiate renewals of our borrowings or arrange new financing, we may have to sell significant assets. Any such sale could have a material adverse effect on our business and financial results.

Increased costs of capital could adversely affect our business.

Our business and operating results can be harmed by factors such as the availability, terms and cost of capital, increases in interest rates or a reduction in credit rating. Changes in any one or more of these factors could cause our cost of doing business to increase, limit our access to capital, limit our ability to pursue acquisition opportunities, reduce our cash flows and place us at a competitive disadvantage. Recent and continuing disruptions and volatility in the global financial markets may lead to an increase in interest rates or a contraction in credit availability impacting our ability to finance our operations. We require continued access to capital. A significant reduction in the availability of credit could materially and adversely affect our ability to achieve our planned growth and operating results.

Our revolving credit facility contains certain covenants that may inhibit our ability to make certain investments, incur certain additional indebtedness and engage in certain other transactions, which could adversely affect our ability to meet our future goals.

Our revolving credit facility includes certain covenants that, among other things, restrict us or our subsidiaries from:

 

  Ÿ  

making certain loans and investments;

 

  Ÿ  

incurring certain additional indebtedness or prepaying certain debt;

 

  Ÿ  

granting liens, other than liens created pursuant to the revolving credit facility and certain permitted liens;

 

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  Ÿ  

entering into certain mergers, consolidations and sales of all or a substantial part of our business or properties;

 

  Ÿ  

disposing of certain assets (other than production sold in the ordinary course of business);

 

  Ÿ  

declaring dividends;

 

  Ÿ  

deviating from certain financial ratios, such as leverage ratios; and

 

  Ÿ  

modifying certain material agreements and organizational documents relating to, or changing the business we conduct.

In addition, we are further subject to limitations on our ability to engage in actions other than those of a holding company.

All of these restrictive covenants may limit our ability to expand or pursue our business strategies. Our ability to comply with these and other provisions of our revolving credit facility may be impacted by changes in economic or business conditions, results of operations or events beyond our control. The breach of any of these covenants could result in a default under our revolving credit facility, in which case, depending on the actions taken by the lenders thereunder or their successors or assignees, such lenders could elect to declare all amounts borrowed under our revolving credit facility, together with accrued interest, to be due and payable. If we were unable to repay such borrowings or interest, our lenders could proceed against their collateral. If any such indebtedness under our revolving credit facility were to be accelerated, our assets may not be sufficient to repay in full such indebtedness.

Risks Primarily Related to Our Refining Business

The price volatility of crude oil, other feedstocks, refined products and fuel and utility services may have a material adverse effect on our earnings, profitability, cash flows and liquidity.

Our refining and retail earnings, profitability, cash flows and liquidity from operations depend primarily on the margin above operating expenses (including the cost of refinery feedstocks, such as crude oil and natural gas liquids that are processed and blended into refined products) at which we are able to sell refined products. Refining is primarily a margin-based business and, to increase profitability, it is important to maximize the yields of high value finished products while minimizing the costs of feedstock and operating expenses. When the margin between refined product prices and crude oil and other feedstock costs contracts, our earnings, profitability and cash flows are negatively affected. Refining margins historically have been volatile, and are likely to continue to be volatile, as a result of a variety of factors, including fluctuations in the prices of crude oil, other feedstocks, refined products and fuel and utility services. For example, from January 2005 to January 2011, the price for NYMEX WTI crude oil fluctuated between $33.87 and $145.29 per barrel, while the price for U.S. Gulf Coast unleaded gasoline fluctuated between $31.33 per barrel and $200.30 per barrel. While an increase or decrease in the price of crude oil may result in a similar increase or decrease in prices for refined products, there may be a time lag in the realization of the similar increase or decrease in prices for refined products. The effect of changes in crude oil prices on our refining margins therefore depends in part on how quickly and how fully refined product prices adjust to reflect these changes.

In addition, the nature of our business requires us to maintain substantial refined product inventories. Because refined products are commodities, we have no control over the changing market value of these inventories. Our refined product inventory is valued at the lower of cost or market value under the last-in, first-out (“LIFO”), inventory valuation methodology. If the market value of our refined product inventory were to decline to an amount less than our LIFO cost, we would record a write-down of inventory and a non-cash charge to cost of sales.

 

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

 

  Ÿ  

changes in global and local economic conditions;

 

  Ÿ  

domestic and foreign demand for fuel products, especially in the United States, China and India;

 

  Ÿ  

worldwide political conditions, particularly in significant oil producing regions such as the Middle East, West Africa and Latin America;

 

  Ÿ  

the level of foreign and domestic production of crude oil and refined products and the volume of crude oil, feedstock and refined products imported into the United States;

 

  Ÿ  

availability of and access to transportation infrastructure;

 

  Ÿ  

utilization rates of United States refineries;

 

  Ÿ  

the ability of the members of the Organization of Petroleum Exporting Countries (“OPEC”) to affect oil prices and maintain production controls;

 

  Ÿ  

development and marketing of alternative and competing fuels;

 

  Ÿ  

commodities speculation;

 

  Ÿ  

natural disasters (such as hurricanes and tornadoes), accidents, interruptions in transportation, inclement weather or other events that can cause unscheduled shutdowns or otherwise adversely affect our refineries;

 

  Ÿ  

federal and state government regulations and taxes; and

 

  Ÿ  

local factors, including market conditions, weather conditions and the level of operations of other refineries and pipelines in our markets.

Our direct operating expense structure also impacts our profitability. Our major direct operating expenses include employee and contract labor, maintenance and energy costs. Our predominant variable direct operating cost is energy, which is comprised primarily of fuel and other utility services. The volatility in costs of fuel, principally natural gas, and other utility services, principally electricity, used by our refinery and other operations affect our operating costs. Fuel and utility prices have been, and will continue to be, affected by factors outside our control, such as supply and demand for fuel and utility services in both local and regional markets. Natural gas prices have historically been volatile and, typically, electricity prices fluctuate with natural gas prices. Future increases in fuel and utility prices may have a negative effect on our earnings, profitability and cash flows. Fuel and other utility services costs constituted approximately 13.1% and 13.7% of our total direct operating expenses included in cost of revenues for the nine months ended September 30, 2011 and the year ended December 31, 2010, respectively.

Volatility in refined product prices also affects our borrowing base under our revolving credit facility. A decline in prices of our refined products reduces the value of our refined product inventory collateral, which, in turn, may reduce the amount available for us to borrow under our revolving credit facility.

 

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Our profitability is affected by crude oil differentials, which may fluctuate substantially.

Our profitability is affected by crude oil differentials, which may fluctuate substantially. Refined product prices have been more correlated to Brent prices since 2010 than to NYMEX WTI, the traditional U.S. crude oil benchmark, as the discount to which a barrel of NYMEX WTI traded relative to a barrel of Brent widened. The widening differential in the spring and summer of 2011 between Brent and NYMEX WTI may be attributed to several factors, including geopolitical events in the Middle East, the suspension of crude oil exports from Libya and limited pipeline and other infrastructure to transport crude oil from Cushing, Oklahoma, where NYMEX WTI is settled, to alternative markets. Between December 1, 2010 and September 30, 2011, the discount at which a barrel of NYMEX WTI traded relative to a barrel of Brent increased from $2.37 to $25.62. The widening of this price differential benefited refineries, such as ours, that are capable of sourcing and utilizing crude oil that is priced more in line with NYMEX WTI. These refineries not only realized relatively lower feedstock costs but also were able to sell refined products at prices that had been pushed upward by higher Brent prices. Conversely, the recent narrowing of the discount to which NYMEX WTI trades relative to Brent (to $10.46 as of November 30, 2011) has adversely affected the prices at which we sell our refined products relative to our cost of crude oil, and therefore has caused a reduction in our refining margins relative to the margins we experienced in the second and third quarter of 2011. Further narrowing of the differential may have a material adverse effect on our business and results of operation.

The dangers inherent in our operations could cause disruptions and could expose us to potentially significant losses, costs or liabilities and reduce our liquidity. We are particularly vulnerable to disruptions in our operations because all of our refining operations are conducted at a single facility.

Our operations are subject to significant hazards and risks inherent in refining operations and in transporting and storing crude oil, intermediate products and refined products. These hazards and risks include, but are not limited to, natural disasters, fires, explosions, pipeline ruptures and spills, third party interference and mechanical failure of equipment at our facilities, any of which could result in production and distribution difficulties and disruptions, pollution (such as oil spills, etc.), personal injury or wrongful death claims and other damage to our properties and the property of others. For example, in December 2007, a fuel oil tank roof caught on fire at our refinery when an operator was attempting to thaw a level gauge. The tank’s roof was destroyed and the operator was fatally injured during the fire.

There is also risk of mechanical failure and equipment shutdowns both in the normal course of operations and following unforeseen events. In such situations, undamaged refinery processing units may be dependent on, or interact with, damaged process units and, accordingly, are also subject to being shut down.

Because all of our refining operations are conducted at a single refinery, any of such events at our refinery could significantly disrupt our production and distribution of refined products, including the supply of our refined products to our convenience stores, which receive substantially all of their supply of gasoline and diesel from the refinery. Any disruption in our ability to supply our convenience stores would increase the cost of purchasing refined products for our retail business. Any sustained disruption would have a material adverse effect on our business, financial condition, results of operations and cash flows.

We are subject to interruptions of supply and distribution as a result of our reliance on pipelines for transportation of crude oil, blendstocks and refined products.

Our refinery receives most of its crude oil and delivers a portion of its refined products through pipelines. The Minnesota Pipeline system is our primary supply route for crude oil and has supplied substantially all of the crude oil used at our refinery. We also distribute a portion of our transportation

 

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fuels through pipelines owned and operated by Magellan Pipeline Company, L.P. (“Magellan”), including the Aranco Pipeline, which Magellan leases from us. We could experience an interruption of supply or delivery, or an increased cost of receiving crude oil and delivering refined products to market, if the ability of these pipelines to transport crude oil, blendstocks or refined products is disrupted because of accidents, weather interruptions, governmental regulation, terrorism, other third party action or any of the types of events described in the preceding risk factor. For example, there was a leak in 2006 prior to the completion of the expansion of the Minnesota Pipeline and the refinery was temporarily shut off from any receipts from the Minnesota Pipeline other than crude oil that was already in the tanks at Cottage Grove, Minnesota. At that time, the only alternative to receive crude oil was the Wood River Pipeline, a pipeline extending from Wood River, Illinois to a connection with the Minnesota Pipeline near Pine Bend, Minnesota, which had limited capacity to meet the refinery’s needs. While the refinery can receive crude oil deliveries from the Wood River Pipeline if the Minnesota Pipeline system experiences another disruption, this would result in an increase in the cost of crude oil and therefore lower refining margins.

In addition, due to the common carrier regulatory obligation applicable to interstate oil pipelines, capacity must be prorated among shippers in an equitable manner in accordance with the tariff then in effect in the event there are nominations in excess of capacity. Therefore, nominations by new shippers or increased nominations by existing shippers may reduce the capacity available to us. Any prolonged interruption in the operation or curtailment of available capacity of the pipelines that we rely upon for transportation of crude oil and refined products could have a material adverse effect on our business, financial condition, results of operations and cash flows.

We must make substantial capital expenditures on our operating facilities to maintain their reliability and efficiency. If we are unable to complete capital projects at their expected costs and/or in a timely manner, or if the market conditions assumed in our project economics deteriorate, our financial condition, results of operations or cash flows could be materially and adversely affected.

Delays or cost increases related to the engineering, procurement and construction of new facilities (or improvements and repairs to our existing facilities and equipment) could have a material adverse effect on our business, financial condition or results of operations. Such delays or cost increases may arise as a result of unpredictable factors in the marketplace, many of which are beyond our control, including:

 

  Ÿ  

denial or delay in issuing regulatory approvals and/or permits;

 

  Ÿ  

unplanned increases in the cost of construction materials or labor;

 

  Ÿ  

disruptions in transportation of modular components and/or construction materials;

 

  Ÿ  

severe adverse weather conditions, natural disasters or other events (such as equipment malfunctions, explosions, fires or spills) affecting our facilities, or those of our vendors and suppliers;

 

  Ÿ  

shortages of sufficiently skilled labor, or labor disagreements resulting in unplanned work stoppages;

 

  Ÿ  

market-related increases in a project’s debt or equity financing costs; and/or

 

  Ÿ  

nonperformance or force majeure by, or disputes with, our vendors, suppliers, contractors or sub-contractors.

Our refinery consists of many processing units, a number of which have been in operation for many years. Equipment, even if properly maintained, may require significant capital expenditures and expenses to keep it operating at optimum efficiency. For example, as part of installing safety

 

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instrumentation systems throughout the refinery to improve operational and safety performance, approximately $17.5 million was spent from 2006 through September 2011, and we have budgeted for additional related expenditures through 2013 to complete the instrumentation project. One or more of the units may require unscheduled downtime for unanticipated maintenance or repairs that may be more frequent than our scheduled turnarounds for such units. Scheduled and unscheduled maintenance could reduce our revenues during the period of time that the units are not operating.

Any one or more of these occurrences could have a significant impact on our business. If we were unable to make up the delays or to recover the related costs, or if market conditions change, it could materially and adversely affect our financial position, results of operations or cash flows.

A portion of our workforce is unionized, and we may face labor disruptions that would interfere with our operations.

Approximately 170 of our employees associated with the operations of our refining business are covered by a collective bargaining agreement that expires in December 2013. In addition, 20 of our employees associated with the operations of our retail business are covered by a collective bargaining agreement that expires in August 2012. We may not be able to renegotiate our collective bargaining agreements on satisfactory terms or at all when such agreements expire. A failure to do so may increase our costs associated with our workforce. Other employees of ours who are not presently represented by a union may become so represented in the future as well. In 2006, the unionized refinery employees conducted a strike when Marathon sought to revise certain working terms and conditions. Another work stoppage resulting from, among other things, a dispute over a term or condition of a collective bargaining agreement that covers employees who work at our refinery or in our retail business, could cause disruptions in our business and negatively impact our profitability.

Product liability claims and litigation could adversely affect our business and results of operations.

Product liability is a significant commercial risk. Substantial damage awards have been made in certain jurisdictions against manufacturers and resellers based upon claims for injuries caused by the use of or exposure to various products. Failure of our products to meet required specifications could result in product liability claims from our shippers and customers arising from contaminated or off-specification commingled pipelines and storage tanks and/or defective quality fuels. There can be no assurance that product liability claims against us would not have a material adverse effect on our business or results of operations.

Laws and regulations restricting emissions of greenhouse gases could force us to incur increased capital and operating costs and could have a material adverse effect on our results of operations and financial condition.

In December 2009, the U.S. Environmental Protection Agency (“EPA”) determined that emissions of carbon dioxide, methane and other “greenhouse gases” (“GHGs”) endanger public health and the environment because emissions of such gases are, according to the EPA, contributing to warming of the earth’s atmosphere and other climatic changes. Based on these findings, the EPA has begun adopting and implementing regulations to restrict emissions of GHGs under existing provisions of the federal Clean Air Act (“CAA”). The EPA recently adopted two sets of rules regulating GHG emissions under the CAA, one of which requires a reduction in emissions of GHGs from motor vehicles and the other of which regulates emissions of GHGs from certain large stationary sources, both of which were effective January 2, 2011. The EPA’s rules relating to emissions of GHGs from large stationary sources of emissions are currently subject to a number of legal challenges, but the federal courts have thus far declined to issue any injunctions to prevent the EPA from implementing or requiring state environmental agencies to implement the rules. The EPA has also adopted rules requiring the

 

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reporting of GHG emissions from specified large GHG emission sources in the United States, including petroleum refineries, on an annual basis, beginning in 2011 for emissions occurring after January 1, 2010.

In addition, the U.S. Congress has from time to time considered adopting legislation to reduce emissions of GHGs, and almost one-half of the states have already taken legal measures to reduce emissions of GHGs primarily through the planned development of GHG emission inventories and/or regional GHG cap and trade programs. These cap and trade programs generally work by requiring major sources of emissions, such as electric power plants, or major producers of fuels, such as refineries and gas processing plants, to acquire and on an annual basis surrender emission allowances. The number of allowances available for purchase is reduced over time in an effort to achieve the overall GHG emission reduction goal. Minnesota is a participant in the Midwest Regional GHG Reduction Accord, a non-binding resolution that could lead to the creation of a regional GHG cap-and-trade program if the Minnesota legislature and the legislatures of other participating states enact implementing legislation.

The adoption of legislation or regulatory programs to reduce emissions of GHGs could require us to incur increased operating costs, such as costs to purchase and operate emissions control systems, to acquire emissions allowances or comply with new regulatory or reporting requirements. Any such legislation or regulatory programs could also increase the cost of consuming, and thereby reduce demand for, the refined products that we produce. Consequently, legislation and regulatory programs to reduce emissions of GHGs could have an adverse effect on our business, financial condition and results of operations.

In addition, some scientists have concluded that increasing concentrations of GHGs in the Earth’s atmosphere may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, droughts, floods and other climatic events. If any such events were to occur, they could have an adverse effect on our business, financial condition and results of operations.

Renewable fuels mandates may reduce demand for the petroleum fuels we produce, which could have a material adverse effect on our results of operation and financial condition.

Pursuant to the Energy Policy Act of 2005 and the Energy Independence and Security Act of 2007, the EPA has issued Renewable Fuels Standards (“RFS”) implementing mandates to blend renewable fuels into the petroleum fuels produced and sold in the United States. Under RFS, the volume of renewable fuels that obligated refineries like us must blend into their finished petroleum fuels increases annually over time until 2022. We currently purchase renewable identification number credits (“RINS”) for some fuel categories on the open market, as well as waiver credits for cellulosic biofuels from the EPA, in order to comply with the RFS. In the future, we may be required to purchase additional RINS on the open market and waiver credits from the EPA to comply with the RFS. We cannot currently predict the future prices of RINS or waiver credits, but the costs to obtain the necessary number of RINS and waiver credits could be material. Additionally, Minnesota law currently requires that all diesel sold in the state for use in internal combustion engines must contain at least 5% biodiesel. Under this statute, if certain preconditions are met, the minimum biodiesel content in diesel sold in the state will increase to 10% beginning on May 1, 2012, and to 20% beginning on May 1, 2015. Minnesota law also currently requires, with limited exceptions, that all gasoline sold or offered for sale in the state must contain the maximum amount of ethanol allowed under federal law for use in all gasoline-powered motor vehicles. On October 13, 2010, the EPA raised the maximum amount of ethanol allowed under federal law from 10% to 15% for cars and light trucks manufactured since 2007, and on January 21, 2011, EPA extended the maximum allowable ethanol content of 15% to apply to cars and light trucks manufactured since 2001. The maximum amount allowed under federal law

 

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currently remains at 10% ethanol for all other vehicles. Existing laws and regulations could change, and the minimum volumes of renewable fuels that must be blended with refined petroleum fuels may increase. Because we do not produce renewable fuels, increasing the volume of renewable fuels that must be blended into our products displaces an increasing volume of our refinery’s product pool, potentially resulting in lower earnings and profitability.

Our pipeline interests are subject to federal and/or state rate regulation, which could reduce our profitability.

Our transportation activities are subject to regulation by multiple governmental agencies, and compliance with such regulation increases our cost of doing business and affects our profitability. Additional proposals and proceedings that affect the oil industry are regularly considered by Congress, the states, the Federal Energy Regulatory Commission (“FERC”) and the courts. We cannot predict when or whether any such proposals may become effective or what impact such proposals may have. Projected expenditures related to the Minnesota Pipeline reflect the recurring costs resulting from compliance with these regulations, and these costs may increase due to future acquisitions, changes in regulation, changes in use, ongoing expenditures to maintain reliability and efficiency or discovery of existing but unknown compliance issues. In addition, if the current lease with Magellan of the Aranco Pipeline were terminated and we were to operate the Aranco Pipeline or, if the Cottage Grove pipelines were required to comply with these regulations, we would incur similar costs.

The Minnesota Pipeline is a common carrier pipeline providing interstate transportation service, which is subject to regulation by FERC under the Interstate Commerce Act (“ICA”). The ICA requires that tariff rates for interstate petroleum pipelines transportation service be just and reasonable and that the rates and terms of service of such pipelines not be unduly discriminatory or unduly preferential. The tariff rates are generally set by the board of managers of the Minnesota Pipe Line Company, which we do not control. Because we currently do not operate the Minnesota Pipeline or control the board of managers of the Minnesota Pipe Line Company, we do not control how the Minnesota Pipeline’s tariff is applied, including the tariff provisions governing the allocation of capacity, or control of decision-making with respect to tariff changes for the pipeline.

FERC can investigate the pipeline’s rates and certain terms of service on its own initiative. In addition, shippers may file with FERC protests against new tariff rates and/or terms and conditions of service or complaints against existing tariff rates and/or terms and conditions of services. Under certain circumstances, FERC could limit the Minnesota Pipe Line Company’s ability to set rates based on its costs, or could order the Minnesota Pipe Line Company to reduce its rates and could require the payment of reparations to complaining shippers for up to two years prior to the complaint or refunds to all shippers in the context of a protest proceeding. If it found the Minnesota Pipeline’s rates or terms of service to be contrary to statutory requirements, FERC could impose conditions it considers appropriate and/or impose penalties. Further, FERC could declare pipeline-related facilities to be common carrier facilities and require that common carrier access be provided or otherwise alter the terms of service and/or rates of such facilities, to the extent applicable. Rate regulation or a successful challenge to the rates the Minnesota Pipeline charges could adversely affect its financial position, cash flows, or results of operations and, thus, our financial position, cash flows or results of operations. Conversely, reduced rates on the Minnesota Pipeline would reduce the rates for transportation of crude oil into our refinery.

FERC currently allows petroleum pipelines to change their rates within prescribed ceiling levels that are tied to an inflation index. The Minnesota Pipeline currently bases its rates on the indexing methodology. If the Minnesota Pipeline were to attempt to increase rates beyond the maximum allowed by the indexing methodology, it would be required to file a cost-of-service justification, obtain approval from an unaffiliated party that intends to ship on the pipeline (with respect to initial rates for any new

 

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service), obtain approval from all current shippers (i.e., settlement), or obtain prior approval to file market-based rates. FERC’s indexing methodology is subject to review every five years. In an order issued in December 2010, FERC announced that, effective July 1, 2011, the index would equal the change in the producer price index for finished goods plus 2.65 percent (previously, the index was equal to the change in the producer price index for finished goods plus 1.3 percent). This index is to be in effect through July 2016. If the changes in the index are not large enough to fully reflect actual increases to our costs, our financial condition could be adversely affected. If the index results in a rate increase that is substantially in excess of the pipeline’s actual cost increases, or it results in a rate decrease that is substantially less than the pipeline’s actual cost decrease, the rates may be protested, and, if successful, result in the lowering of the pipeline’s rates. FERC’s rate-making methodologies may limit the pipeline’s ability to set rates based on our true costs and may delay or limit the use of rates that reflect increased costs of providing transportation service.

If we were to operate the Aranco Pipeline to provide transportation of crude oil or petroleum products in interstate commerce, we would expect to also be regulated by FERC as an interstate oil pipeline and the Aranco Pipeline would be subject to the same regulatory risks discussed above.

Terrorist attacks and other acts of violence or war may affect the market for our common stock, the industry in which we conduct our operations and our profitability.

Terrorist attacks may harm our business results of operations. We cannot provide assurance that there will not be further terrorist attacks against the U.S. or U.S. businesses. Such attacks or armed conflicts may directly impact our refinery, properties or the securities markets in general. More generally, any of these events could cause consumer confidence and spending to decrease or result in increased volatility in the U.S. and worldwide financial markets and economy. Adverse economic conditions could harm the demand for our products or the securities markets in general, which could harm our operating results and revenues.

While we have insurance that provides some coverage against terrorist attacks, such insurance has become increasingly expensive and difficult to obtain. As a result, insurance providers may not continue to offer this coverage to us on terms that we consider affordable, or at all.

Some of our operations are conducted with partners, which may decrease our ability to manage risks associated with those operations.

We sometimes enter into arrangements to conduct certain business operations, such as pipeline transportation, with partners in order to share risks associated with those operations. However, these arrangements may also decrease our ability to manage risks and costs associated with those operations, particularly where we are not the operator. We could have limited influence over and control of the behaviors and performance of these operations. This could affect our operational performance, financial position and reputation.

We own 17% of the outstanding common interests of the Minnesota Pipe Line Company and 17% of the outstanding preferred shares of MPL Investments, Inc. which owns 100% of the preferred units of the Minnesota Pipe Line Company. The Minnesota Pipe Line Company owns the Minnesota Pipeline, a crude oil pipeline system in Minnesota that transports crude oil to the Twin Cities area and which consistently supplies most of our crude oil input. The remaining interests in the Minnesota Pipe Line Company are held by a subsidiary of Koch Industries, Inc., which operates the system and is an affiliate of the only other refinery owner in Minnesota, with a 74.16% interest, and TROF Inc. with an 8.84% interest. For more information about the economic effect of our investments in the Minnesota Pipe Line Company and MPL Investments, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” and “—Results of Operations.” Because of our limited investment in the Minnesota Pipe Line Company and MPL

 

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Investments, we do not have significant influence over or control of the performance of the Minnesota Pipe Line Company’s operations or the impact it could have on our operational performance, financial position and reputation.

If we are required to obtain our crude oil supply without the benefit of the crude oil supply and logistics agreement with JPM CCC or similar agreement, our exposure to the risks associated with volatile crude oil prices may increase.

Because we purchase crude oil supply in advance of the time it is delivered, we are exposed to crude oil pricing risks while the crude oil inventory is in transit to us. In connection with the closing of the Marathon Acquisition, we entered into a crude oil supply and logistics agreement with JPM CCC for an initial term of five years. While the crude oil supply and logistics agreement minimizes the amount of our in-transit inventory and reduces crude pricing risks by ensuring pricing takes place one day subsequent to the day crude oil is delivered to the refinery, if we were required to obtain our crude oil supply without the benefit of the crude oil supply and logistics agreement or similar agreement, our exposure to crude oil pricing risks may increase as the number of days between when we pay for the crude oil and when the crude oil is delivered to us increases. Such increased exposure could negatively impact our liquidity position due to our increased working capital needs as a result of the increase in the value of crude oil inventory we would have to carry on our balance sheet.

Our suppliers source a substantial amount of our crude oil from the Bakken Shale of North Dakota and may experience interruptions of supply from that region.

Our suppliers source a substantial amount of our crude oil from the Bakken Shale of North Dakota. As a result, we may be disproportionately exposed to the impact of delays or interruptions of supply from that region caused by transportation capacity constraints, curtailment of production, unavailability of equipment, facilities, personnel or services, significant governmental regulation, natural disasters, adverse weather conditions, plant closures for scheduled maintenance or interruption of transportation of oil or natural gas produced from the wells in that area.

Our commodity derivative contracts may limit our potential gains, exacerbate potential losses and involve other risks.

We entered into commodity derivatives contracts to hedge our crack spread risk with respect to a portion of our expected gasoline and diesel production for 2011 and 2012. We entered into these hedging arrangements with the intent to secure a minimum fixed cash flow stream on the volume of products hedged during the hedge term and to protect against volatility in commodity prices. However, our hedging arrangements may fail to fully achieve these objectives for a variety of reasons, including our failure to have adequate hedging contracts, if any, in effect at any particular time and the failure of our hedging arrangements to produce the anticipated results. We may not be able to procure adequate hedging arrangements due to a variety of factors. Moreover, while intended to reduce the adverse effects of fluctuations in crude oil and refined product prices, such transactions may limit our ability to benefit from favorable changes in margins. In addition, our hedging activities may expose us to the risk of financial loss in certain circumstances, including instances in which:

 

  Ÿ  

the volumes of our actual use of crude oil or production of the applicable refined products is less than the volumes subject to the hedging arrangement;

 

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accidents, interruptions in feedstock transportation, inclement weather or other events cause unscheduled shutdowns or otherwise adversely affect our refinery, or those of our suppliers or customers;

 

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the counterparties to our futures contracts fail to perform under the contracts; or

 

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a sudden, unexpected event materially impacts the commodity or crack spread subject to the hedging arrangement.

 

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As a result, the effectiveness of our hedging strategy could have a material adverse impact on our financial results. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosure About Market Risk.”

In addition, these hedging activities involve basis risk. Basis risk in a hedging arrangement occurs when the price of the commodity we hedge is more or less variable than the index upon which the hedged commodity is based, thereby making the hedge less effective. For example, a NYMEX index used for hedging certain volumes of crude oil or refined products may have more or less variability than the cost or price for such crude oil or refined products. We do not expect to hedge the basis risk inherent in our derivatives contracts.

Our commodity derivative activities could result in period-to-period earnings volatility.

We do not apply hedge accounting to our commodity derivative contracts and, as a result, unrealized gains and losses are charged to our earnings based on the increase or decrease in the market value of the unsettled position. These gains and losses are reflected in our income statement in periods that differ from when the underlying hedged items (i.e., gross margins) are reflected in our income statement. Such derivative gains or losses in earnings may produce significant period-to-period earnings volatility that is not necessarily reflective of our underlying operational performance.

Derivatives regulation included in current financial reform legislation could impede our ability to manage business and financial risks by restricting our use of derivative instruments as hedges against fluctuating commodity prices.

Last year, the U.S. Congress adopted the Dodd-Frank Wall Street Reform and Consumer Protection Act, which contains comprehensive financial reform legislation that establishes federal oversight and regulation of the over-the-counter derivatives market and entities, such as us, that participate in that market. The new legislation was signed into law by the President on July 21, 2010 and requires the Commodity Futures Trading Commission (“CFTC”) and the SEC to promulgate rules and regulations implementing the new legislation within 360 days from the date of enactment. In June 2011, this deadline was extended to December 31, 2011. The CFTC has proposed regulations to set position limits for certain futures and option contracts in the major energy markets and to establish minimum capital requirements, although it is not possible at this time to predict whether or when the CFTC will adopt those rules or include comparable provisions in its rulemaking under the Dodd-Frank Act. The Dodd-Frank Act may also require compliance with margin requirements and with certain clearing and trade-execution requirements in connection with certain derivative activities, although the application of those provisions is uncertain at this time. The legislation may also require the counterparties to our commodity derivative contracts to spinoff some of their derivatives activities to a separate entity, which may not be as creditworthy as the current counterparty, or cause the entity to comply with the capital requirements, which could result in increased costs to counterparties such as us.

The new legislation and any new regulations could significantly increase the cost of some commodity derivative contracts (including through requirements to post collateral, which could adversely affect our available liquidity), materially alter the terms of some commodity derivative contracts, reduce the availability of some derivatives to protect against risks we encounter, reduce our ability to monetize or restructure our existing commodity derivative contracts and potentially increase our exposure to less creditworthy counterparties. If we reduce our use of derivatives as a result of the new legislation and regulations, our results of operations may become more volatile and our cash flows may be less predictable, which could adversely affect our ability to plan for and fund capital expenditures. Increased volatility may make us less attractive to certain types of investors. Finally, the Dodd-Frank Act was intended, in part, to reduce the volatility of oil and natural gas prices, which some

 

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legislators attributed to speculative trading in derivatives and commodity instruments related to oil and natural gas. If the new legislation and regulations result in lower commodity prices, our revenues could be adversely affected. Any of these consequences could adversely affect our business, financial condition and results of operations.

Risks Primarily Related to Our Retail Business

Our retail business depends on one principal supplier for a substantial portion of its merchandise inventory. A change of merchandise suppliers, a disruption in merchandise supply, a significant change in our relationship with our principal merchandise supplier or material changes in the payment terms or availability of trade credit provided by our merchandise suppliers could have a material adverse effect on our retail business and results of operations or liquidity.

Eby-Brown Company (“Eby-Brown”) is a wholesale grocer that has been the primary supplier of general merchandise, including most tobacco and grocery items, for all our retail stores since 1993. For each of the nine months ended September 30, 2011 and the year ended December 31, 2010, our retail business purchased approximately 80% of its convenience store inside merchandise requirements from Eby-Brown. Our retail business also purchases a variety of merchandise, including soda, beer, bread, dairy products, ice cream and snack foods, directly from a number of manufacturers and their wholesalers. A change of merchandise suppliers, a disruption in merchandise supply or a significant change in our relationship with Eby-Brown could have a material adverse effect on our retail business and results of operations. In addition, our retail business is impacted by the availability of trade credit to fund merchandise purchases. Any material changes in the payments terms, including payment discounts, or availability of trade credit provided by our merchandise suppliers could adversely affect our liquidity or results of operations.

If the locations of our current convenience stores become unattractive to customers and attractive alternative locations are not available for a reasonable price, then our ability to maintain and grow our retail business will be adversely affected.

We believe that the success of any retail store depends in substantial part on its location. There can be no assurance that the locations of our retail stores will continue to be attractive to customers as demographic patterns change. Neighborhood or economic conditions where retail stores are located could decline in the future, resulting in potentially reduced sales in these locations. If we cannot obtain desirable locations at reasonable prices, our ability to maintain and grow our retail business could be adversely affected, which could have an adverse effect on our business, financial condition or results of operations.

The growth of our retail business depends in part on our ability to open and profitably operate new convenience stores and to successfully integrate acquired sites and businesses in the future.

We may not be able to open new convenience stores and any new stores we open may be unprofitable. Additionally, acquiring sites and businesses in the future involves risks that could cause our actual growth or operating results to be lower than expected. If these events were to occur, each would have a material adverse impact on our financial results. There are several factors that could affect our ability to open and profitably operate new stores or to successfully integrate acquired sites and businesses. These factors include:

 

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competition in targeted market areas;

 

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difficulties during the acquisition process in discovering certain liabilities of the businesses that we acquire;

 

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  Ÿ  

the inability to identify and acquire suitable sites or to negotiate acceptable leases for such sites;

 

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difficulties associated with the growth of our financial controls, information systems, management resources and human resources needed to support our future growth;

 

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difficulties with hiring, training and retaining skilled personnel, including store managers;

 

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difficulties in adapting distribution and other operational and management systems to an expanded network of stores;

 

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the potential inability to obtain adequate financing to fund our expansion;

 

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limitations on investments contained in our revolving credit facility and other debt instruments;

 

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difficulties in obtaining governmental and other third-party consents, permits and licenses needed to operate additional stores;

 

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difficulties in obtaining any cost savings and financial improvements anticipated from future acquired stores or their integration; and

 

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challenges associated with the consummation and integration of any future acquisition.

Our retail store franchisees are independent business operators that could take actions that harm our brand, reputation or goodwill, which could adversely affect our business, results of operations, financial condition or cash flows.

Our retail store franchisees are independent business operators, not employees, and, as such, we cannot control their operations. These franchisees could hire and fail to train unqualified sales associates and other employees, or operate the franchised retail stores in a manner inconsistent with our operating standards. If our retail store franchisees provide diminished quality of service to customers, or if they engage or are accused of engaging in unlawful or tortious acts, such as sexual harassment or discriminatory practices in violation of applicable laws, then our brand, reputation or goodwill could be harmed, which could have an adverse effect on our business, results of operations, financial condition or cash flows.

Additionally, as independent business operators, our retail store franchisees could occasionally disagree with us or with our strategies regarding our retail business or with our interpretation of the rights and obligations set forth under our retail franchise agreement. This could lead to disputes with our retail store franchisees, which we expect to occur from time to time in the future as we continue to offer and sell retail store franchises. To the extent we have such disputes, the attention of our management and our retail store franchisees could be diverted, which could have an adverse effect on our business, results of operations, financial condition or cash flows.

Credit and debit card data loss, litigation and/or liability could significantly harm our reputation and adversely impact our business.

In connection with credit and debit card sales at our retail stores, we transmit confidential credit and debit card information securely over public networks. Third parties may have the technology or know-how to breach the security of this customer information, and our security measures may not effectively prohibit others from obtaining improper access to this information. If a person is able to circumvent our security measures, he or she could destroy or steal valuable information or disrupt our operations. Any security breach could expose us to risks of data loss, litigation and liability and could seriously disrupt our operations and any resulting negative publicity could significantly harm our reputation

 

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Our failure or inability to enforce our current and future trademarks and trade names could adversely affect our efforts to establish brand equity and expand our retail franchising business.

Our ability to successfully expand our retail franchising business will depend on our ability to establish brand equity through the use of our current and future trademarks, service marks, trade dress and other proprietary intellectual property, including our name and logos. Some or all of these intellectual property rights may not be enforceable, even if registered, against any prior users of similar intellectual property or our competitors who seek to use similar intellectual property in areas where we operate or intend to conduct operations. If we fail to enforce any of our intellectual property rights, then we may be unable to capitalize on our efforts to establish brand equity.

We could encounter claims from prior users of similar intellectual property in areas where we operate or intend to conduct operations, which could result in additional expenditures and divert our management’s time and attention from our operations. Conversely, competing businesses, including any of our former retail store franchisees, could infringe on our intellectual property, which would necessarily require us to defend our intellectual property possibly at a significant cost to us.

Our retail business is vulnerable to changes in consumer preferences, economic conditions and other trends and factors that could harm our business, results of operations, financial condition or cash flows.

Our retail business is affected by consumer preferences, national, regional and local economic conditions, demographic trends and consumer confidence in the economy. Factors such as traffic patterns, weather conditions, local demographics and the number and locations of competing retail service stations and convenience stores also affect the performance of our retail stores. In addition, we cannot ensure that our retail customers will continue to frequent our retail stores or that we will be able to find new retail store franchisees or encourage our existing retail store franchisees to grow their franchised business or renew their franchise rights. Adverse changes in any of these trends or factors could reduce our retail customer traffic or sales, or impose limits on our pricing, which could adversely affect our business, results of operations, financial condition or cash flows.

We face the risk of litigation in connection with our retail operations.

We are from time to time the subject of complaints or litigation from our consumers alleging illness, injury or other health or operational concerns. Adverse publicity resulting from these allegations may materially adversely affect us and our brand, regardless of whether the allegations are valid or whether we are liable. In addition, employee claims against us based on, among other things, discrimination, harassment or wrongful termination, or labor code violations may divert financial and management resources that would otherwise be used to benefit our future performance. There is also a risk of litigation from our franchisees. We have been subject to a variety of these and other claims from time to time and a significant increase in the number of these claims or the number that are successful could materially adversely affect our business, prospects, financial condition, operating results or cash flows.

Failure of our retail business to comply with state and local laws regulating the sale of alcohol and tobacco products could result in the loss of necessary licenses and the imposition of fines and penalties on us, which could have a material adverse effect on our business, liquidity and results of operations.

State and local laws regulate the sale of alcohol and tobacco products. In certain areas where our stores are located, state or local laws limit the hours of operation for the sale of alcohol, or prohibit the sale of alcohol, and permit the sale of alcohol and tobacco products only to persons older than a

 

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certain age. State and local regulatory agencies have the authority to approve, revoke, suspend or deny applications for, and renewals of, permits and licenses relating to the sale of alcohol and tobacco products and to issue fines to stores for the improper sale of alcohol and tobacco products. Most jurisdictions, in their permit and license applications, require an applicant to disclose past denials, suspensions, or revocations of permits or licenses relating to the sale of alcohol and tobacco products in any jurisdiction. Thus, if we experience a denial, suspension, or revocation in one jurisdiction, then it could have an adverse affect on our ability to obtain permits and licenses relating to the sale of alcohol and tobacco products in other jurisdictions. In addition, the failure of our retail business to comply with state and local laws regulating the sale of alcohol and tobacco products could result in the loss of necessary licenses and the imposition of fines and penalties on us. Such a loss or imposition could have a material adverse effect on our business, liquidity and results of operations.

Risks Related to Our Organizational Structure

We are a holding company and our sole material asset after completion of this offering will be our equity interest in NTI LLC, and we are accordingly dependent upon distributions from NTI LLC to pay taxes, make payments under the Tax Receivable Agreements, and pay dividends.

We will be a holding company and will have no material assets other than our equity interest in NTI LLC. See “Organizational Structure.” We have no independent means of generating revenue. We intend to cause NTI LLC to make distributions to its unitholders, including us, in an amount sufficient to cover all applicable taxes at assumed tax rates, payments under the Tax Receivable Agreements we intend to enter into with certain of the Existing Owners and dividends, if any, declared by us, but are limited in our ability to cause NTI LLC and its subsidiaries to make these and other distributions to us due to the terms of their outstanding indebtedness. To the extent that we need funds and NTI LLC or its subsidiaries is restricted from making such distributions under applicable law or regulation or under the terms of their financing arrangements, or is otherwise unable to provide such funds, it could materially adversely affect our liquidity and financial condition.

ACON Refining and TPG Refining hold a majority of the combined voting power of our Class A and Class B common stock

Immediately following this offering, ACON Refining and TPG Refining will hold approximately     % of the combined voting power of our Class A and Class B common stock (or     % if the underwriters exercise their option to purchase additional shares in full). Accordingly, ACON Refining and TPG Refining will have the ability to elect all of the members of our board of directors, and thereby to control our management and affairs. In addition, they will be able to determine the outcome of all matters requiring stockholder approval, including mergers and other material transactions, and will be able to cause or prevent a change in the composition of our board of directors or a change in control of our company that could deprive our stockholders of an opportunity to receive a premium for their Class A common stock as part of a sale of our company. So long as ACON Refining and TPG Refining continue to own a significant amount of the outstanding shares of our common stock, even if such amount is less than 50%, they will continue to be able to strongly influence all matters requiring stockholder approval, regardless of whether or not other stockholders believe that the transaction is in their own best interests.

Pursuant to a registration rights and shareholders’ agreement entered into by the Existing Owners and us, ACON Refining and TPG Refining, each has the right to participate in certain dispositions of our capital stock by the other party. ACON Refining and TPG Refining are also restricted for certain periods of time from transferring Class A and Class B common stock without the consent of the other party. Furthermore, each of ACON Refining and TPG Refining has the right to elect              directors to our board of directors so long as it beneficially owns             % or more of the

 

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outstanding common stock and one director so long as it owns             % or more of the common stock. The agreement also provides that as long as we remain a “controlled company” under the rules of the NYSE, ACON Refining and TPG Refining will be entitled to designate up to two additional              independent directors. See “Certain Relationships and Related Person Transactions—Registration Rights and Shareholders’ Agreement.” As our largest stockholders, ACON Refining and TPG Refining together are able to exercise significant control over all matters requiring stockholder approval, including the election of directors, amendment of our certificate of incorporation and approval of significant corporate transactions and have significant control over our management and policies. The interests of these stockholders may not be consistent with the interests of other stockholders. The existence of significant stockholders may also have the effect of deterring hostile takeovers, delaying or preventing changes in control or changes in management, or limiting the ability of our other stockholders to approve transactions that they may deem to be in the best interests of our company. In addition, our certificate of incorporation provides that the provisions of Section 203 of the Delaware General Corporation Law (“DGCL”), which relate to business combinations with interested stockholders, do not apply to us.

The Existing Owners, including ACON Refining, TPG Refining and certain members of our management, may have interests that conflict with holders of shares of our Class A common stock.

Immediately following this offering, the Existing Owners will own     % of the NTI LLC Units. Because they hold a portion of their ownership interest in our business through NTI LLC, rather than through the public company, the Existing Owners may have conflicting interests with holders of shares of our Class A common stock. For example, the Existing Owners may have different tax positions from us which could influence their decisions regarding whether and when to cause us to dispose of assets, whether and when to cause us to incur new or refinance existing indebtedness, especially in light of the existence of the Tax Receivable Agreements that we intend to enter into in connection with this offering. In addition, the structuring of future transactions may take into consideration ACON Refining’s and TPG Refining’s tax or other considerations even where no similar benefit would accrue to us. See “Certain Relationships and Related Person Transactions—Tax Receivable Agreements.”

Furthermore, conflicts of interest could arise in the future between us, on the one hand, and ACON Refining and TPG Refining, including their portfolio companies, on the other hand, concerning among other things, potential competitive business activities or business opportunities. Each of ACON Refining’s and TPG Refining’s existing and future portfolio companies which they control may compete with us for investment or business opportunities. These conflicts of interest may not be resolved in our favor.

Because of our relationship with ACON Refining and TPG Refining, we have also renounced our interest in certain business opportunities. See “Risks Relating to the Offering and our Class A Common Stock—Our certificate of incorporation contains a provision renouncing our interest and expectancy in certain corporate opportunities, which could adversely affect our business or prospects.”

We will be required to pay the Existing Owners, including ACON Refining and TPG Refining, for certain tax benefits we may claim arising in connection with the Marathon Acquisition and this offering and related transactions, and the amounts we may pay could be significant.

We intend to enter into the Tax Receivable Agreements with the Existing Owners, including ACON Refining and TPG Refining. These agreements generally provide for the payment by us of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that we actually realize (or are deemed to realize in certain circumstances) in periods after this offering as a result of (i) the increase in tax basis in NTI LLC’s assets that arose from the Marathon Acquisition,

 

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(ii) the basis increase resulting from the distribution of offering proceeds to the Existing Owners, (iii) the basis increases resulting from the exchanges of NTI LLC Units (along with the corresponding shares of our Class B common stock) for shares of our Class A common stock, (iv) additional deductions allocated to us pursuant to Section 704(c) of the Code, to reflect the difference between the fair market value and the adjusted tax basis of NTI LLC’s assets as of the date of this offering, (v) imputed interest deemed to be paid by us as a result of, and additional tax basis arising from, payments under the Tax Receivable Agreements, and (vi) any net operating losses available to us as a result of the Existing Owner Exchange. In addition, the Tax Receivable Agreements will provide for interest earned from the due date (without extensions) of the corresponding tax return to the date of payment specified by the Tax Receivable Agreements.

The payment obligations under both of the Tax Receivable Agreements are our obligations and are not obligations of NTI LLC. For purposes of the Tax Receivable Agreements, cash savings in tax generally are calculated by comparing our actual income tax liability to the amount we would have been required to pay had we not been able to utilize any of the tax benefits subject to the Tax Receivable Agreements. In order to calculate the amount we would have been required to pay, we will need to determine the tax basis in certain assets in effect prior to the Marathon Acquisition. This determination will be made in our sole judgment based on information received from Marathon in connection with the Marathon Acquisition and consistent with NTI LLC’s current tax reporting. This information will not be subject to verification by any third party, and there thus can be no assurance that the historic tax basis as determined by us will be accurate and that payments by us under the Tax Receivable Agreements will not exceed 85% of the cash savings that we actually realize. The term of the Tax Receivable Agreements will commence upon the completion of this offering and will continue until all such tax benefits have been utilized or expired, unless we exercise our right to terminate the Tax Receivable Agreements.

Estimating the amount of payments that may be made under the Tax Receivable Agreements is by its nature imprecise, insofar as the calculation of amounts payable depends on a variety of factors. The actual increase in tax basis, as well as the amount and timing of any payments under the Tax Receivable Agreements, will vary depending upon a number of factors, including the timing of exchanges, the price of shares of our Class A common stock at the time of the exchange, the extent to which such exchanges are taxable, the amount and timing of the taxable income we realize in the future and the tax rate then applicable, our use of loss carryovers and the portion of our payments under the Tax Receivable Agreements constituting imputed interest or depreciable or amortizable basis. We expect that the payments that we will be required to make under the Tax Receivable Agreements will be substantial. Assuming no material changes in the relevant tax law and that we earn sufficient taxable income to realize all tax benefits that are subject to the Tax Receivable Agreements, we expect that future payments under the Tax Receivable Agreements associated with (i) the existing tax basis in NTI LLC’s assets that arose from the Marathon Acquisition, (ii) the basis increase resulting from the distribution of offering proceeds to the Existing Owners, (iii) additional deductions allocated to us pursuant to Section 704(c) of the Code to reflect the difference between the fair market value and the adjusted tax basis of NTI LLC’s assets as of the date of this offering and (iv) the use of any net operating losses available to us as a result of the Existing Owner Exchange will aggregate $         million and will range from approximately $         million to $         million per year over the next 15 years. The foregoing numbers are merely estimates — the actual payments could differ materially. Furthermore, these amounts reflect only the cash savings attributable to current tax attributes resulting from the four items described above. It is possible that future transactions or events could increase or decrease the actual tax benefits realized and the corresponding Tax Receivable Agreement payments. Future payments to the Existing Owners in respect of subsequent exchanges of NTI LLC Units would be in addition to these amounts and are expected to be substantial. There may be a substantial negative impact on our liquidity if, as a result of timing discrepancies or otherwise, (i) the payments under the Tax Receivable Agreements exceed the actual benefits we realize in respect of the tax

 

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attributes subject to the Tax Receivable Agreements and/or (ii) distributions to us by NTI LLC are not sufficient to permit us to make payments under the Tax Receivable Agreements subsequent to the payment of our taxes and other obligations. The payments under the Tax Receivable Agreements will not be conditioned upon a holder of rights under a Tax Receivable Agreement having a continued ownership interest in either NTI LLC or us.

See “Certain Relationships and Related Person Transactions—Tax Receivable Agreements.”

In certain cases, payments under the Tax Receivable Agreements to the Existing Owners, including ACON Refining and TPG Refining, may be accelerated and/or significantly exceed the actual benefits, if any, we realize in respect of the tax attributes subject to the Tax Receivable Agreements.

The Tax Receivable Agreements provide that upon certain mergers or other changes of control, obligations under the Tax Receivable Agreements (with respect to all NTI LLC Units, whether or not such units have been exchanged or acquired before or after such transaction) will continue based on certain assumptions, including that we would have sufficient taxable income to fully utilize the deductions arising from the increased tax basis and other benefits subject to the Tax Receivable Agreements. As a result, we could be required to make payments under the Tax Receivable Agreements that are greater than the specified percentage of the actual benefits, if any, we realize in respect of the tax attributes subject to the Tax Receivable Agreements. If we elect to terminate the Tax Receivable Agreements early, we would be required to make an immediate payment equal to the present value of the anticipated future tax benefits assuming that we have sufficient taxable income to fully utilize such benefits, which payment may be made significantly in advance of the actual realization, if any, of such future benefits. In these situations, our obligations under the Tax Receivable Agreements could have a substantial negative impact on our liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combinations or other changes of control. There can be no assurance that we will be able to finance our obligations under the Tax Receivable Agreements.

Payments under the Tax Receivable Agreements will be based on the tax reporting positions that we will determine. Although we are not aware of any issue that would cause the Internal Revenue Service (the “IRS”) to challenge a tax basis increase or other benefits arising under the Tax Receivable Agreements, the holders of rights under the Tax Receivable Agreements will not reimburse us for any payments previously made under the Tax Receivable Agreements if such basis increases or other benefits are subsequently disallowed, except that excess payments made to any such holder will be netted against payments otherwise to be made, if any, to such holder after our determination of such excess. As a result, in such circumstances, we could make payments that are greater than our actual cash tax savings, if any, and may not be able to recoup those payments, which could adversely affect our liquidity.

 

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Risks Relating to the Offering and our Class A Common Stock

The initial public offering price of our Class A common stock may not be indicative of the market price of our Class A common stock after this offering. In addition, an active, liquid and orderly trading market for our Class A common stock may not develop or be maintained and our stock price may be volatile.

Prior to this offering, our Class A common stock was not traded on any market. An active, liquid and orderly trading market for our Class A common stock may not develop or be maintained after this offering. Active, liquid and orderly trading markets usually result in less price volatility and more efficiency in carrying out investors’ purchase and sale orders. The market price of our Class A common stock could vary significantly as a result of a number of factors, some of which are beyond our control. In the event of a drop in the market price of our Class A common stock, you could lose a substantial part or all of your investment in our Class A common stock. The initial public offering price will be negotiated between us and representatives of the underwriters, based on numerous factors which we discuss in the “Underwriting” section of this prospectus, and may not be indicative of the market price of our Class A common stock after this offering. Consequently, you may not be able to sell shares of our Class A common stock at prices equal to or greater than the price paid by you in this offering.

The following factors could affect our stock price:

 

  Ÿ  

our operating and financial performance;

 

  Ÿ  

quarterly variations in the rate of growth of our financial indicators, such as net (loss) earnings per share, net earnings and revenues;

 

  Ÿ  

strategic actions by our competitors;

 

  Ÿ  

changes in revenue or earnings estimates, or changes in recommendations or withdrawal of research coverage, by equity research analysts;

 

  Ÿ  

speculation in the press or investment community;

 

  Ÿ  

sales of our Class A common stock by us or other stockholders, or the perception that such sales may occur;

 

  Ÿ  

changes in accounting principles;

 

  Ÿ  

additions or departures of key management personnel;

 

  Ÿ  

actions by our stockholders;

 

  Ÿ  

general market conditions, including fluctuations in commodity prices; and

 

  Ÿ  

domestic and international economic, legal and regulatory factors unrelated to our performance.

The stock markets in general have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our Class A common stock. Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of a company’s securities. Such litigation, if instituted against us, could result in very substantial costs, divert our management’s attention and resources and harm our business, operating results and financial condition.

 

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Investors in this offering will experience immediate and substantial dilution of $             per share.

Based on an assumed initial public offering price of $             per share, purchasers of our Class A common stock in this offering will experience an immediate and substantial dilution of $             per share in the as adjusted net tangible book value per share of Class A common stock from the initial public offering price, and our as adjusted net tangible book value as of September 30, 2011 after giving effect to this offering would be $             per share. This dilution is due in large part to the Existing Owners having paid substantially less than the initial public offering price when they purchased their interests in NTI LP. In addition, if the underwriters exercise their option to purchase additional shares from us, investors in this offering will experience additional dilution. See “Dilution” for additional information.

We have broad discretion in the use of our net proceeds from this offering and may not use them effectively.

Our management will have broad discretion in the application of the net proceeds from this offering and could spend the proceeds in ways that do not improve our operating results or enhance the value of our Class A common stock. Our stockholders may not agree with the manner in which our management chooses to allocate and spend the net proceeds. The failure by our management to apply these funds effectively could result in financial losses that could have a material adverse effect on our business and cause the price of our Class A common stock to decline. Pending their use, we may invest our net proceeds from this offering in a manner that does not produce income or that loses value. See “Use of Proceeds.”

We will incur increased legal, accounting, and other costs as a result of being a public company.

As a public company, we will need to comply with new laws, regulations and requirements of the SEC and the NYSE and certain provisions of the Sarbanes-Oxley Act of 2002, with which we are not required to comply as a private company. Complying with these laws, regulations and requirements will occupy a significant amount of time of our board of directors and management and will significantly increase our costs and expenses.

In addition, we also expect that being a public company subject to these rules and regulations will require us to accept less director and officer liability insurance coverage than we desire or to incur substantial costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors or as qualified executive officers.

Our new stand-alone finance and accounting information systems may fail to operate effectively or as intended, which could adversely affect the reliability of our financial statements.

Pursuant to a transition services agreement, Marathon agreed to provide us with, among other things, administrative and support services, including finance and accounting and information system services, for up to 18 months following the closing of the Marathon Acquisition to allow us time to build the infrastructure required to operate these functions independently. Since the beginning of the fourth quarter of 2011, we have been transitioning the finance and accounting information system services to our own stand-alone information systems. We have not yet had sufficient time and experience operating these systems to evaluate their efficacy. Furthermore, the audit of our 2011 financial statements will be the first opportunity our independent auditors will have to audit the financial information generated by our new stand-alone systems. It is possible that we will discover material

 

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shortcomings in our new stand-alone finance and accounting information systems, including those that may represent significant deficiencies or material weaknesses in our internal control over financial reporting, that are not currently known to us. Any such defects could adversely affect the reliability of our financial statements.

If, after this offering, we are unable to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, or our internal control over financial reporting are not effective, the reliability of our financial statements may be questioned, and our share price may suffer.

Section 404 of the Sarbanes-Oxley Act requires any company subject to the reporting requirements of the U.S. securities laws to perform a comprehensive evaluation of its and its subsidiaries’ internal controls. To comply with these requirements, we will be required to document and test our internal control procedures, our management will be required to assess and issue a report concerning our internal control over financial reporting, and, under the Sarbanes-Oxley Act, our independent auditors will be required to issue an opinion on management’s assessment and the effectiveness of our internal control over financial reporting. Our compliance with Section 404 of the Sarbanes-Oxley Act will first be reported on in connection with the filing of our second Annual Report on Form 10-K. The rules governing the standards that must be met for management to assess our internal control over financial reporting are complex and require significant documentation, testing and possible remediation. During the course of its testing, our management may identify material weaknesses, which may not be remedied in time to meet the deadline imposed by the SEC rules implementing Section 404. If our management cannot favorably assess the effectiveness of our internal control over financial reporting, or our auditors identify material weaknesses in our internal control, investor confidence in our financial results may weaken, and the price of shares of our Class A common stock may suffer.

We do not intend to pay, and we are currently restricted from paying, dividends on our Class A common stock and, consequently, your only opportunity to achieve a return on your investment is if the price of our Class A common stock appreciates.

We do not anticipate declaring or paying any cash dividends to holders of our Class A common stock in the foreseeable future. We currently intend to retain future earnings, if any, to finance the expansion of our business. Our future dividend policy is within the discretion of our board of directors and will depend upon then-existing conditions, including our results of operations and financial condition, capital requirements, business prospects, statutory and contractual restrictions on our ability to pay dividends, including restrictions contained in our revolving credit facility, and other factors our board of directors may deem relevant. Consequently, your only opportunity to achieve a return on your investment in us will be if you sell your Class A common stock at a price greater than you paid for it. There is no guarantee that the price of our Class A common stock that will prevail in the market will ever exceed the price that you pay in this offering.

Our share price may decline because of the ability of ACON Refining, TPG Refining and others to sell our Class A common stock.

Sales of substantial amounts of our Class A common stock after this offering, or the possibility of those sales, could adversely affect the market price of our Class A common stock and impede our ability to raise capital through the issuance of equity securities. See “Shares Eligible for Future Sale.”

The shares of our Class A common stock sold in this offering will be freely tradable without restriction in the United States, except for any shares acquired by an affiliate of our company, which can be sold under Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”), subject to various volume and other limitations. Subject to limited exceptions, we, our executive officers

 

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and directors, and ACON Refining and TPG Refining have agreed not to sell, dispose of, or hedge any shares of our Class A common stock or any securities convertible into, or exchangeable for, our Class A common stock for 180 days after the date of this prospectus without the prior written consent of the underwriters, who may waive this restriction at any time without public notice. After the expiration of the 180-day lock-up period, our executive officers, directors, and ACON Refining and TPG Refining could dispose of all or any part of their shares of our Class A common stock through a public offering, sales under Rule 144, or another transaction.

In addition, subject to certain limitations and exceptions, pursuant to the terms of the LLC Agreement holders of NTI LLC Units may exchange NTI LLC Units for shares of our Class A common stock on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications. Upon consummation of this offering, the Existing Owners will beneficially own approximately              NTI LLC Units, all of which will be exchangeable for shares of our Class A common stock. The shares of Class A common stock we issue upon such exchanges would be “restricted securities” as defined in Rule 144 of the Securities Act. However, we will enter into one or more registration rights agreements with the Existing Owners that will require us to register under the Securities Act these shares of Class A common stock. See “Shares Eligible for Future” and “Certain Relationships and Related Person Transactions—Registration Rights and Shareholders’ Agreement.”

In the future, we may also issue additional Class A common stock for a number of reasons, including to finance our operations and business strategy, to adjust our ratio of debt to equity, or to provide incentives pursuant to certain executive compensation arrangements. Such future issuances of equity securities, or the expectation that they will occur, could cause the market price for our Class A common stock to decline. The price of our Class A common stock also could be affected by hedging or arbitrage trading activity that may exist or develop involving our Class A common stock. Any sale by the Existing Owners or us of shares of our Class A common stock in the public market, or the perception that sales could occur, could adversely affect prevailing market prices for our Class A common stock.

Delaware law and some provisions of our organizational documents make a takeover of our company more difficult.

Provisions of our certificate of incorporation and bylaws may have the effect of delaying, deferring or preventing a change in control of our company. A change of control could be proposed in the form of a tender offer or takeover proposal that might result in a premium over the market price for our Class A common stock. In addition, these provisions could make it more difficult to bring about a change in the composition of our board of directors, which could result in entrenchment of current management. For example, our certificate of incorporation and bylaws will:

 

  Ÿ  

permit us to establish a classified board of directors so that not all members of our board of directors are elected at one time;

 

  Ÿ  

require that the number of directors be determined, and any vacancy or new board seat be filled, only by the board;

 

  Ÿ  

not permit stockholders to act by written consent (except for ACON Refining and TPG Refining, as long as either owns at least 50% of our outstanding common stock);

 

  Ÿ  

not permit stockholders to call a special meeting (except for ACON Refining and TPG Refining, as long as either owns at least 50% of our outstanding common stock);

 

  Ÿ  

permit the bylaws to be amended by a majority of the board without shareholder approval, and require that a bylaw amendment proposed by stockholders be approved by 66 2/3% of all outstanding shares;

 

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  Ÿ  

establish advance notice requirements for nominations for elections to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings; and

 

  Ÿ  

authorize the issuance of undesignated preferred stock, or “blank check” preferred stock, by our board of directors without shareholder approval.

These and other provisions of our organizational documents and Delaware law may have the effect of delaying, deferring or preventing changes of control or changes in management of our company, even if such transactions or changes would have significant benefits for our stockholders. As a result, these provisions could limit the price some investors might be willing to pay in the future for shares of our Class A common stock.

Our certificate of incorporation contains a provision renouncing our interest and expectancy in certain corporate opportunities, which could adversely affect our business or prospects.

Our certificate of incorporation provides that, to the fullest extent permitted by applicable law, we renounce any interest or expectancy in, or in being offered an opportunity to participate in, any business opportunity that may be from time to time presented to ACON Refining, TPG Refining, or their respective affiliates or any of their respective officers, directors, agents, shareholders, members, partners, affiliates and subsidiaries (other than us and our subsidiaries) or business opportunities that such parties participate in or desire to participate in, even if the opportunity is one that we might reasonably have pursued or had the ability or desire to pursue if granted the opportunity to do so, and no such person shall be liable to us for breach of any fiduciary or other duty, as a director or officer or controlling stockholder or otherwise, by reason of the fact that such person pursues or acquires any such business opportunity, directs any such business opportunity to another person or fails to present any such business opportunity, or information regarding any such business opportunity, to us unless, in the case of any such person who is our director or officer, any such business opportunity is expressly offered to such director or officer solely in his or her capacity as our director or officer.

As a result, ACON Refining, TPG Refining or their affiliates may become aware, from time to time, of certain business opportunities, such as acquisition opportunities, and may direct such opportunities to other businesses in which they have invested, in which case we may not become aware of or otherwise have the ability to pursue such opportunity. Further, such businesses may choose to compete with us for these opportunities. As a result, our renouncing our interest and expectancy in any business opportunity that may be from time to time presented to ACON Refining, TPG Refining, and their affiliates could adversely impact our business or prospects if attractive business opportunities are procured by such parties for their own benefit rather than for ours.

We will be a “controlled company” within the meaning of the NYSE rules and, as a result, will qualify for and will rely on exemptions from certain corporate governance requirements.

Upon completion of this offering we will be a “controlled company” within the meaning of the NYSE corporate governance standards. Under the NYSE rules, a company of which more than 50% of the voting power is held by a person or group of persons acting together is a “controlled company” and may elect not to comply with certain NYSE corporate governance requirements, including the requirements that:

 

  Ÿ  

a majority of the board of directors consist of independent directors;

 

  Ÿ  

the nominating and corporate governance committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

 

  Ÿ  

the compensation committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

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  Ÿ  

there be an annual performance evaluation of the nominating and corporate governance and compensation committees.

Following this offering, we intend to elect to be treated as a controlled company and utilize these exemptions, including the exemption for a board of directors composed of a majority of independent directors. In addition, although we will have adopted charters for our audit, nominating and corporate governance and compensation committees and intend to conduct annual performance evaluations for these committees, none of these committees will be composed entirely of independent directors immediately following the completion of this offering. We will rely on the phase-in rules of the SEC and the NYSE with respect to the independence of our audit committee. These rules permit us to have an audit committee that has one member that is independent by the date that our Class A common stock first trades on the NYSE, a majority of members that are independent within 90 days of the effectiveness of the registration statement of which this prospectus forms a part (the “effective date”) and all members that are independent within one year of the effective date. Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of the NYSE corporate governance requirements.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus includes “forward-looking statements.” The words “believe,” “expect,” “anticipate,” “plan,” “intend,” “foresee,” “should,” “would,” “could,” “attempt,” “appears,” “forecast,” “outlook,” “estimate,” “project,” “potential,” “may,” “will,” “are likely” or other similar expressions are intended to identify forward-looking statements, which are generally not historical in nature. These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effect on us. While management believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we anticipate and any and all of our forward-looking statements in this prospectus may turn out to be inaccurate.

Forward-looking statements appear in a number of places in this prospectus, including “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” and “Business,” and include statements with respect to, among other things:

 

  Ÿ  

our business strategy and prospects;

 

  Ÿ  

technology;

 

  Ÿ  

our cash flows and liquidity;

 

  Ÿ  

our financial strategy, budget, projections and operating results;

 

  Ÿ  

the amount, nature and timing of capital expenditures;

 

  Ÿ  

the availability and terms of capital;

 

  Ÿ  

competition and government regulations;

 

  Ÿ  

general economic conditions and trends in the refining industry;

 

  Ÿ  

effectiveness of our risk management activities;

 

  Ÿ  

our environmental liabilities;

 

  Ÿ  

our counterparty credit risk;

 

  Ÿ  

governmental regulation and taxation of the refining industry; and

 

  Ÿ  

developments in oil-producing and natural gas-producing countries.

Our forward-looking statements involve significant risks and uncertainties (some of which are beyond our control) and assumptions that could cause actual results to differ materially from our historical experience and our present expectations or projections. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, those summarized below:

 

  Ÿ  

the overall demand for specialty hydrocarbon products, fuels and other refined products;

 

  Ÿ  

our ability to produce products and fuels that meet our customers’ unique and precise specifications;

 

  Ÿ  

the impact of fluctuations and rapid increases or decreases in crude oil, refined products, fuel and utility services prices and crack spreads, including the impact of these factors on our liquidity;

 

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fluctuations in refinery capacity;

 

  Ÿ  

accidents or other unscheduled shutdowns affecting our refineries, machinery, or equipment, or those of our suppliers or customers;

 

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  Ÿ  

changes in the cost or availability of transportation for feedstocks and refined products;

 

  Ÿ  

the results of our hedging and other risk management activities;

 

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our ability to comply with covenants contained in our debt instruments;

 

  Ÿ  

labor relations;

 

  Ÿ  

relationships with our partners and franchisees;

 

  Ÿ  

successful integration and future performance of acquired assets, businesses or third-party product supply and processing relationships;

 

  Ÿ  

our access to capital to fund expansions, acquisitions and our working capital needs and our ability to obtain debt or equity financing on satisfactory terms;

 

  Ÿ  

currently unknown liabilities in connection with the Marathon Acquisition;

 

  Ÿ  

environmental liabilities or events that are not covered by an indemnity, insurance or existing reserves;

 

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dependence on one principal supplier for merchandise;

 

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maintenance of our credit ratings and ability to receive open credit lines from our suppliers;

 

  Ÿ  

the effects of competition;

 

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continued creditworthiness of, and performance by, counterparties;

 

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the impact of current and future laws, rulings and governmental regulations, including guidance related to the Dodd-Frank Wall Street Reform and Consumer Protection Act;

 

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shortages or cost increases of power supplies, natural gas, materials or labor;

 

  Ÿ  

weather interference with business operations;

 

  Ÿ  

seasonal trends in the industries in which we operate;

 

  Ÿ  

fluctuations in the debt markets;

 

  Ÿ  

potential product liability claims and other litigation;

 

  Ÿ  

accidents or other unscheduled shutdowns or disruptions; and

 

  Ÿ  

changes in economic conditions, generally, and in the markets we serve, consumer behavior, and travel and tourism trends.

These factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could have material adverse effects on our future results. Our future results will depend upon various other risks and uncertainties, including those described elsewhere in this prospectus under the heading, “Risk Factors.” Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise. All forward-looking statements attributable to us are qualified in their entirety by this cautionary statement.

 

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ORGANIZATIONAL STRUCTURE

The diagram below depicts our organizational structure immediately following this offering assuming that the underwriters’ option to purchase additional shares is not exercised.

LOGO

 

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(1) Based on an assumed initial public offering price equal to the midpoint of the price range set forth on the cover of this prospectus. Immediately following the offering, the Existing Owners will have an aggregate economic interest in Northern Tier Energy, Inc. and NTI LLC equal to     %. However, the portion of such percentage that constitutes NTI LLC Units or Class A common stock will depend on the initial public offering price. As discussed below, the allocation of NTI LLC Units among the Existing Owners will be determined pursuant to the distribution provisions of the existing amended and restated limited partnership agreement of NTI LP based upon the liquidation value of NTI LP, which will be implied by the initial public offering price of the shares of Class A common stock in this offering. A deviation in the initial public offering price from the assumed initial public offering price will impact the allocation of equity interests to the Existing Owners, including those who intend to exchange their NTI LLC Units for our Class A common stock in connection with this offering. Accordingly, any such deviation in the initial public offering price will impact the number of NTI LLC Units and shares of Class A common stock and Class B Common Stock held by the Existing Owners. For example, an offering price of $             per share would result in the Existing Owners owning     % of the NTI LLC Units,              shares of Class A common stock and              shares of Class B common stock. Likewise, an offering price of $             per share would result in the Existing Owners owning     % of the NTI LLC Units,              shares of Class A common stock and              shares of Class B common stock.

Reorganization Transactions

NTI LP and NTI LLC were organized by ACON Refining and TPG Refining to act as holding companies of the operating companies that own and operate the business and assets acquired in the Marathon Acquisition. Immediately prior to this offering, NTI LP will merge into NTI LLC. In connection with such merger, the LLC Agreement will be amended and restated to, among other things, designate the NTI LLC Units as a single new class of units in NTI LLC that are exchangeable for shares of Class A common stock, as described below, and to designate Northern Tier Energy, Inc. as the sole managing member of NTI LLC.

Currently, the capital structure of NTI LP consists of a general partner interest and certain classes of limited partner interests, each of which has different capital accounts and different aggregate distribution thresholds above which its holders share in future distributions. Pursuant to the merger of NTI LP into NTI LLC, we anticipate that the general partner interest in NTI LP will be canceled in exchange for $1,000, and all of the classes of limited partner interests in NTI LP, currently held by the Existing Owners, will be converted into a single class of units, the NTI LLC Units. The allocation of NTI LLC Units among the Existing Owners will be determined pursuant to the distribution provisions of the existing amended and restated limited partnership agreement of NTI LP based upon the liquidation value of NTI LP, which will be implied by the initial public offering price of the shares of Class A common stock sold in this offering.

Interests in certain of the Existing Owners held by certain members of management subject to vesting requirements will remain subject to such vesting requirements following this offering. See “Compensation Discussion and Analysis—Components of Executive Compensation—Long-Term Equity-Based Incentives.”

Under the terms of the LLC Agreement, holders of NTI LLC Units will have the right to exchange NTI LLC Units (together with a corresponding number of shares of Class B common stock) for shares of Class A common stock on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications.

 

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Incorporation of Northern Tier Energy, Inc.

Northern Tier Energy, Inc. was incorporated as a Delaware corporation on October 21, 2011. Prior to this offering Northern Tier Energy, Inc. has not engaged in any business or other activities except in connection with its formation. Following this offering, Northern Tier Energy, Inc. will be a holding company and its sole material asset will be an equity interest in NTI LLC. Northern Tier Energy, Inc., as sole managing member of NTI LLC, will operate and control all of the business and affairs of NTI LLC and consolidate the financial results of NTI LLC and its subsidiaries.

The certificate of incorporation of Northern Tier Energy, Inc. authorizes two classes of common stock, Class A common stock and Class B common stock, each having the terms described in “Description of Capital Stock.” Each share of Class B common stock has no economic rights but entitles its holder to one vote on all matters to be voted on by stockholders generally. Holders of our Class A common stock and Class B common stock will vote together as a single class on all matters presented to our stockholders for their vote or approval, except as otherwise required by applicable law.

At the time of this offering, Northern Tier Energy, Inc. will issue and contribute to NTI LLC a number of shares of Class B common stock equal to the number of outstanding NTI LLC Units (other than those units held by us). NTI LLC will then distribute to each Existing Owner a number of shares of Class B common stock equal to the number of NTI LLC Units held by such Existing Owner.

Offering Transactions

At the time of this offering, in addition to the contribution of Class B common stock described above, Northern Tier Energy, Inc. will contribute a portion of the net proceeds of this offering, as well as a noncontrolling preferred interest in a subsidiary of NTI LLC that it will purchase from Marathon with a portion of the proceeds from this offering to NTI LLC, in exchange for              NTI LLC Units. If the underwriters’ option to purchase additional shares is exercised in full, Northern Tier Energy, Inc. will purchase from NTI LLC additional NTI LLC Units at a purchase price per unit equal to the initial public offering price per share of Class A common stock in this offering less any underwriting discounts and commissions.

Of the cash received by NTI LLC from Northern Tier Energy, Inc., $         million will be distributed by NTI LLC to the Existing Owners and the remainder will be used as described in “Use of Proceeds.” Northern Tier Energy, Inc. will be treated for U.S. federal income tax purposes as having used the distributed portion of the proceeds of this offering to directly purchase NTI LLC Units from the Existing Owners.

At the time of this offering, certain of the Existing Owners will exchange approximately              NTI LLC Units for approximately              shares of Class A common stock and              for an aggregate of $         million in cash pursuant to the Existing Owner Exchange. In addition, pursuant to the terms of the LLC Agreement, the Existing Owners have the right to exchange their NTI LLC Units (together with a corresponding number of shares of Class B common stock) for shares of Class A common stock on a one-for-one basis. Furthermore, we intend to enter into the Tax Receivable Agreements with the Existing Owners. See “Certain Relationships and Related Person Transactions—Tax Receivable Agreements.”

In connection with its acquisition of NTI LLC Units as part of this offering, Northern Tier Energy, Inc. will become the sole managing member of NTI LLC and, through NTI LLC and its subsidiaries, operate our business. Accordingly, although Northern Tier Energy, Inc. will initially have a minority economic interest in NTI LLC, Northern Tier Energy, Inc. will have 100% of the voting power in, and control the management of, NTI LLC.

 

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As a result of the transactions described above:

 

  Ÿ  

the investors in this offering will collectively own              shares of our Class A common stock (or              shares of Class A common stock if the underwriters exercise in full their option to purchase additional shares of Class A common stock), and Northern Tier Energy, Inc. will hold approximately NTI LLC Units (or approximately              NTI LLC Units if the underwriters exercise in full their option to purchase additional shares of Class A common stock);

 

  Ÿ  

Existing Owners will hold              NTI LLC Units (and a corresponding number of shares of Class B common stock) and              shares of Class A common stock;

 

  Ÿ  

the investors in this offering will collectively have     % of the voting power in Northern Tier Energy, Inc. (or     % if the underwriters exercise in full their option to purchase additional shares of Class A common stock);

 

  Ÿ  

Existing Owners, through their holdings of our Class A and Class B common stock, will have     % of the voting power in Northern Tier Energy, Inc. (or     % if the underwriters exercise in full their option to purchase additional shares of Class A common stock); and

 

  Ÿ  

the NTI LLC Units held by the Existing Owners (together with a corresponding number of shares of our Class B common stock) may be exchanged for shares of our Class A common stock on a one-for-one basis.

Holding Company Structure

Following this offering, Northern Tier Energy, Inc. will be a holding company, and its sole material asset will be an equity interest in NTI LLC. As the sole managing member of NTI LLC, Northern Tier Energy, Inc. will operate and control all of the business and affairs of NTI LLC and will consolidate the financial results of NTI LLC and its subsidiaries. The ownership interest of the Existing Owners in NTI LLC will be reflected as a non-controlling interest in Northern Tier Energy, Inc.’s consolidated financial statements.

Our post-offering organizational structure will allow the Existing Owners to retain their equity ownership in NTI LLC, an entity that is classified as a partnership for U.S. federal income tax purposes, in the form of NTI LLC Units. Investors in this offering will, by contrast, hold their equity ownership in Northern Tier Energy, Inc., a Delaware corporation that is a domestic corporation for U.S. federal income tax purposes, in the form of shares of Class A common stock. We believe that the Existing Owners generally find it advantageous to hold their equity interests in an entity that is not taxable as a corporation for U.S. federal income tax purposes. The Existing Owners, like Northern Tier Energy, Inc., will incur U.S. federal, state and local income taxes on their proportionate share of any taxable income of NTI LLC.

Pursuant to the LLC Agreement, and subject to the discussion in the following paragraph, Northern Tier Energy, Inc. has the right to determine when distributions will be made to the holders of NTI LLC Units and the amount of any such distributions. If Northern Tier Energy, Inc. authorizes a distribution, such distribution will be made to the holders of NTI LLC Units on a pro rata basis in accordance with their respective percentage ownership of NTI LLC Units.

The holders of NTI LLC Units, including Northern Tier Energy, Inc., will incur U.S. federal, state and local income taxes on their proportionate share of any taxable income of NTI LLC. Net profits and net losses of NTI LLC will generally be allocated to its members (including Northern Tier Energy, Inc.) on a pro rata basis in accordance with their respective percentage ownership of NTI LLC Units. The LLC Agreement will provide for cash distributions to the holders of NTI LLC Units if Northern Tier Energy, Inc. determines that the taxable income of NTI LLC will give rise to taxable income for such

 

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holders. In accordance with the LLC Agreement, Northern Tier Energy, Inc. intends to cause NTI LLC to make cash distributions to the holders of NTI LLC Units for purposes of funding their tax obligations in respect of the income of NTI LLC that is allocated to them. Generally, these tax distributions will be computed based on Northern Tier Energy, Inc.’s estimate of the taxable income of NTI LLC allocable to such holder of NTI LLC Units multiplied by an assumed tax rate equal to the highest effective marginal combined U.S. federal, state and local income tax rate prescribed for an individual or corporate resident in New York, New York (taking into account the nondeductibility of certain expenses and the character of Northern Tier Energy, Inc.’s income).

See “Certain Relationships and Related Person Transactions—Limited Liability Company Agreement—NTI LLC.”

 

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USE OF PROCEEDS

We expect to receive net proceeds of approximately $         million from the sale of the Class A common stock offered by us, assuming an initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus) and after deducting underwriting discounts and commissions of approximately $         million and estimated offering expenses of approximately $         million. If the underwriters’ option to purchase additional shares is exercised in full, we estimate that the net proceeds to us will be approximately $         million. An increase or decrease in the initial public offering price of $1.00 per share of Class A common stock would cause the net proceeds that we will receive from the offering, after deducting underwriting discounts and commissions and estimated offering expenses, to increase or decrease by approximately $         million (assuming no exercise of the option to purchase additional shares by the underwriters).

We intend to use $         million of the net proceeds to purchase a noncontrolling preferred interest in one of our subsidiaries owned by Marathon.

We intend to pay $         million of the net proceeds to certain of the Existing Owners pursuant to the Existing Owner Exchange.

We intend to contribute the remaining $         million of the net proceeds, as well as the noncontrolling preferred interest in one of our subsidiaries that we will purchase from Marathon, to NTI LLC in exchange for              NTI LLC Units. NTI LLC will distribute $         million to the Existing Owners and will retain $         million for general corporate purposes. We will have broad discretion as to the application of the proceeds to be used for general corporate purposes. Prior to the application, such proceeds may be held in cash or invested in short-term securities or investments. See “Organizational Structure—Offering Transactions” and “Principal Stockholders” for information regarding the proceeds from this offering that will be paid to our directors and executive officers.

 

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DIVIDEND POLICY

We do not anticipate declaring or paying any cash dividends to holders of our Class A common stock in the foreseeable future. We currently intend to retain future earnings, if any, to finance the expansion of our business. Our future dividend policy is within the discretion of our board of directors and will depend upon then-existing conditions, including our results of operations and financial condition, capital requirements, business prospects, statutory and contractual restrictions on our ability to pay dividends, including restrictions contained in our revolving credit facility, and other factors our board of directors may deem relevant.

 

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CAPITALIZATION

The following table sets forth cash and cash equivalents and capitalization as of September 30, 2011,

 

  Ÿ  

on an actual basis for NTI LLC; and

 

  Ÿ  

on a pro forma basis for Northern Tier Energy, Inc. after giving effect to the reorganization and this offering and the application of the net proceeds as set forth under “Use of Proceeds.”

You should read the following table in conjunction with “Organizational Structure,” “Use of Proceeds,” “Unaudited Pro Forma Condensed Consolidated Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes thereto appearing elsewhere in this prospectus.

 

     As of
September 30, 2011
 
     NTI LLC      Northern Tier
Energy, Inc.
 
     Actual      Pro Forma  
     (in millions)  

Cash and cash equivalents(1)

   $ 126.9       $     
  

 

 

    

 

 

 

Long-term debt, including current maturities:

     

Senior secured notes

   $ 290.0       $     

Revolving credit facility(2)

          

Lease financing obligation(3)

     24.5      
  

 

 

    

 

 

 

Total long-term debt

     314.5      
  

 

 

    

 

 

 

Noncontrolling preferred interest in subsidiary

     86.1      

Member’s interest / stockholders’ equity:

     

Member’s interest (deficit)

     (66.7)           

Class A common stock, $0.01 par value; no shares authorized, issued and outstanding (actual);              shares authorized and shares issued and outstanding (pro forma)

          

Class B common stock, $0.01 par value; no shares authorized, issued and outstanding (actual); shares authorized and             shares issued and outstanding (pro forma)

          

Additional paid-in capital

          

Retained earnings (accumulated loss)

          
  

 

 

    

 

 

 

Total member’s interest (deficit) / stockholders’ equity (deficit)

     (66.7)      
  

 

 

    

 

 

 

Total capitalization

   $ 333.9       $                
  

 

 

    

 

 

 

 

(1) As of November 30, 2011, cash and cash equivalents were $100 million.
(2) As of November 30, 2011, we had no borrowings outstanding under our revolving credit facility, and had $62 million in outstanding letters of credit.
(3) Relates to specific properties that did not qualify for operating lease treatment under the sale leaseback of 135 SuperAmerica convenience stores with Realty Income, a third party equity real estate investment trust.

 

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DILUTION

If you invest in our Class A common stock in this offering, you will experience immediate and substantial dilution in the net tangible book value per share of the Class A common stock for accounting purposes. Our net tangible book value as of September 30, 2011, after giving pro forma effect to the transactions described under “Organizational Structure,” was approximately $         million, or $         per share of Class A common stock. Pro forma net tangible book value per share is determined by dividing our pro forma net tangible book value (tangible assets less total liabilities) by the total number of outstanding shares of Class A common stock that will be outstanding immediately prior to the closing of this offering and after reflecting our corporate reorganization. After giving effect to the issuance by us of the shares in this offering and further assuming the receipt of the estimated net proceeds (after deducting estimated underwriting discounts and commissions and expenses of this offering), our adjusted pro forma net tangible book value as of September 30, 2011 would have been approximately $         million, or $         per share. This represents an immediate increase in the net tangible book value of $         per share to our existing stockholders and an immediate dilution (i.e., the difference between the offering price and the adjusted pro forma net tangible book value after this offering) to new investors purchasing shares in this offering of $         per share. The following table illustrates the per share dilution to new investors purchasing shares in this offering (assuming the underwriters’ option to purchase additional shares is not exercised in full):

 

Assumed initial public offering price per share

      $                

Pro forma net tangible book value per share as of September 30, 2011 (after giving effect to our corporate reorganization)

   $                   

Increase per share attributable to new investors in this offering

     
  

 

 

    

As adjusted pro forma net tangible book value per share after giving effect to our corporate reorganization and this offering

     
     

 

 

 

Dilution in pro forma net tangible book value per share to new investors in this offering

      $                
     

 

 

 

The following table summarizes, on a pro forma basis as of September 30, 2011, the total number of shares of Class A common stock owned by existing stockholders and to be owned by new investors, the total consideration paid, and the average price per share paid by our existing stockholders and to be paid by new investors in this offering at $        , the midpoint of the range of the initial public offering prices set forth on the cover page of this prospectus, calculated before deduction of estimated underwriting discounts and commissions (assuming the underwriters’ option to purchase additional shares is not exercised in full):

 

     Shares Acquired     Total Consideration     Average
Price Per
Share
 
     Number    Percent     Amount      Percent    

Existing stockholders

               $                             $                

New investors

                          
  

 

  

 

 

   

 

 

    

 

 

   

 

 

 

Total

               $                             $                
  

 

  

 

 

   

 

 

    

 

 

   

 

 

 

 

 

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

The following unaudited pro forma condensed consolidated financial information has been derived by applying pro forma adjustments to historical audited and unaudited financial statements and the notes included thereto, included elsewhere in this prospectus. The unaudited pro forma condensed consolidated financial information should be read in conjunction with the financial statements and related notes and other financial information appearing elsewhere in this prospectus, including under “Prospectus Summary—Summary Historical and Unaudited Pro Forma Condensed Consolidated Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Organizational Structure” and “Use of Proceeds.”

The unaudited pro forma condensed consolidated balance sheet as of September 30, 2011 and the unaudited pro forma condensed consolidated statements of operations for the year ended December 31, 2010 and the nine months ended September 30, 2011 and 2010 give effect to the following adjustments relating to our reorganization, this offering and the use of the proceeds from this offering (the “Offering Adjustments”), as if they had occurred on September 30, 2011 for the unaudited pro forma condensed consolidated balance sheet and January 1, 2010 for the unaudited pro forma condensed consolidated statements of operations:

 

  Ÿ  

the reorganization transactions described in “Organizational Structure—Reorganization Transactions;”

 

  Ÿ  

the issuance of              shares of Class A common stock and              shares of Class B common stock to the Existing Owners, based on an assumed initial offering price of $        per share;

 

  Ÿ  

the establishment of the Tax Receivable Agreements with the Existing Owners; and

 

  Ÿ  

the sale of            shares of Class A common stock in this offering and the use of proceeds from this offering, as described in “Use of Proceeds.”

The unaudited pro forma condensed consolidated financial information presented assumes no exercise by the underwriters of the option to purchase up to              additional shares of Class A common stock from us and that the shares of Class A common stock to be sold in this offering are sold at $         per share, which is the midpoint of the price range indicated on the front cover of this prospectus.

The unaudited pro forma condensed consolidated statements of operations for the year ended December 31, 2010 and the nine months ended September 30, 2011 and 2010 also give effect to the following adjustments associated with the Marathon Acquisition and corresponding financing (the “Marathon Acquisition Adjustments”) as if they had occurred on January 1, 2010:

 

  Ÿ  

the Marathon Acquisition;

 

  Ÿ  

the financing of the Marathon Acquisition, including the issuance of the 10.5% senior secured notes, as described in “Prospectus Summary—Marathon Acquisition;”

 

  Ÿ  

the sale by Marathon of certain real property interests, including the land underlying 135 of the SuperAmerica convenience stores associated with our retail business and SuperMom’s Bakery, to Realty Income and the lease of those properties to us on a long-term basis; and

 

  Ÿ  

the change in depreciation and amortization expense associated with the change in carrying value of the tangible and intangible assets acquired as part of the Marathon Acquisition.

The Marathon Acquisition was accounted for using the acquisition method of accounting in accordance with the FASB Accounting Standards Codification (“ASC”) Topic 805, “Business

 

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Combinations,” and, accordingly, resulted in the recognition of assets acquired and liabilities assumed at their respective fair values as of the closing date of the Marathon Acquisition. The audited and unaudited historical financial information includes the allocation of purchase price, based upon management’s estimates of the fair values of assets acquired and liabilities assumed, based on available information and assumptions which we believe to be reasonable as of the closing date of the Marathon Acquisition which, among other things, led us to conclude that the Marathon Acquisition gave rise to a bargain purchase for accounting purposes.

The pro forma adjustments and their underlying assumptions are described in the accompanying notes, which should be read in conjunction with the unaudited pro forma condensed consolidated financial information. The unaudited pro forma condensed consolidated balance sheet gives effect to adjustments that (i) are directly attributable to this offering and (ii) are factually supportable regardless of whether they have a continuing impact on us or are non-recurring. The unaudited pro forma condensed consolidated statements of operations give effect to adjustments that are (i) directly attributable to this offering and the Marathon Acquisition, (ii) are factually supportable and (iii) are expected to have a continuing impact on us. The unaudited pro forma condensed consolidated financial information does not purport to represent what our results of operations or financial condition would have been had this offering and the Marathon Acquisition actually occurred on the dates indicated, and it does not purport to project our results of operations or financial condition for any future period or any future date.

The unaudited pro forma condensed consolidated statements of operations data have been adjusted for non-recurring charges or gains that were recorded in connection with the Marathon Acquisition. These estimated non-recurring items include estimated direct expenses incurred in connection with the Marathon Acquisition and a bargain purchase gain associated with the excess of the fair value of net assets acquired over total purchase consideration (see note (f) to the unaudited pro forma condensed consolidated statements of operations). During October 2010, Marathon entered into derivatives contracts at our request hedging a portion of our estimated gasoline and distillate production for 2011 and 2012, and contributed these contracts to us at the closing of the Marathon Acquisition. The changes in fair value for these derivative contracts are reflected in the unaudited historical statement of operations from the date in which they were entered. The unaudited pro forma condensed consolidated statements of operations have not been adjusted to reflect these derivative contracts for the period from January 1, 2010 through the date they were entered into, as the amounts are not factually supportable.

Our historical financial information for the period prior to the Marathon Acquisition has been prepared on a combined basis using historical results of operations and bases of assets and liabilities acquired from Marathon and do not necessarily reflect what their results of operations or financial position would have been had the business been operated independently from Marathon during the periods presented, including as a result of changes in operations that resulted from the separation of the businesses from Marathon. The historical financial information for the periods prior to the Marathon Acquisition date reflects intercompany allocations of expenses which may not be indicative of the actual expenses that would have been incurred had the combined business been operating as a company independent from Marathon for the periods presented. In addition, the historical financial statements for the period prior to the Marathon Acquisition may not be comparable to our financial statements following consummation of the Marathon Acquisition. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Comparability of Historical Results.”

See “Organizational Structure” to see how certain aspects of the offering transactions would be affected by an initial public offering price that is different from the assumed price or if the underwriters’ option to purchase additional shares of Class A common stock is exercised in full.

 

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Northern Tier Energy, Inc.

Unaudited Pro Forma Condensed Consolidated Balance Sheet

September 30, 2011

(in millions)

 

     NTI LLC
Historical(a)
    Offering
Adjustments
    Pro Forma
Northern Tier
Energy, Inc.
 

ASSETS

      

CURRENT ASSETS

      

Cash and cash equivalents

   $ 126.9      $      (b)    $                

Receivables, less allowance for doubtful accounts

     103.3       

Inventories

     152.8       

Deferred income taxes

                 (c)   

Other current assets

     42.5       
  

 

 

   

 

 

   

 

 

 

Total current assets

     425.5       

NONCURRENT ASSETS

      

Equity method investment

     90.5       

Property, plant and equipment, net

     391.8       

Intangible assets, net

     35.4       

Other assets

     49.3       
  

 

 

   

 

 

   

 

 

 

Total Assets

   $ 992.5      $                   $                
  

 

 

   

 

 

   

 

 

 

LIABILITIES, PREFERRED INTEREST AND EQUITY

      

CURRENT LIABILITIES

      

Accounts payable

   $ 181.5      $                   $                

Amounts payable under Tax Receivable Agreements

                 (d)   

Accrued liabilities

     29.0       

Derivative liability

     346.2       
  

 

 

   

 

 

   

 

 

 

Total current liabilities

     556.7       

NONCURRENT LIABILITIES

      

Long-term debt

     290.0       

Deferred income taxes

                 (c)   

Lease financing obligation

     24.5       

Derivative liability

     56.5       

Amounts payable under Tax Receivable Agreements - net of current portion

                 (d)   

Other liabilities

     45.4       
  

 

 

   

 

 

   

 

 

 

Total liabilities

     973.1       
  

 

 

   

 

 

   

 

 

 

Commitments and contingencies

      

Noncontrolling preferred interest in subsidiary

     86.1             (e)   

EQUITY

      

Common Stock / Additional paid in capital

                 (f)   

Member’s interest

     (66.7          (g)   
  

 

 

   

 

 

   

 

 

 

Total equity attributable to controlling interest

     (66.7    
  

 

 

   

 

 

   

 

 

 

Noncontrolling interest in NTI LLC

                 (h)   
  

 

 

   

 

 

   

 

 

 

Total Liabilities, Noncontrolling Interest and Equity

   $ 992.5      $                   $                
  

 

 

   

 

 

   

 

 

 

See Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet

 

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Northern Tier Energy, Inc.

Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet

 

(a) Represents the historical unaudited balance sheet for NTI LLC as of September 30, 2011.

 

(b) Represents the net adjustment to cash and cash equivalents primarily related to the sources and uses of proceeds of this offering, calculated as follows:

 

     (in millions)  

Proceeds from this offering

   $                

Use of proceeds

  
  

 

 

 

Net adjustment to cash and cash equivalents

   $     
  

 

 

 

 

(c) Represents the net adjustments to deferred income taxes, calculated as follows:

 

     (In millions)  

Adjustment associated with the change in tax paying status(i)

     $               

Adjustments associated with the Tax Receivable Agreements(ii)

  

Adjustment associated with the redemption of the noncontrolling preferred interest(iii)

  
  

 

 

 

Net Adjustment to Deferred income taxes—Asset

   $                
  

 

 

 

Adjustment associated with the change in tax paying status(i)

   $     

Adjustments associated with the Tax Receivable Agreements(ii)

  

Adjustment associated with the redemption of the noncontrolling preferred interest(iii)

  
  

 

 

 

Net Adjustment to Deferred income taxes—Liability

   $                
  

 

 

 

 

  (i) Adjustment related to Northern Tier Energy, Inc. becoming subject to U.S. federal, state and local income taxes with respect to its allocable share of any taxable income of NTI LLC and taxed at the prevailing corporate tax rates after the closing of this offering.
  (ii) Adjustments to record tax assets and liabilities associated with the Tax Receivable Agreements. See footnote (d) for further discussions related to the Tax Receivable Agreements.
  (iii) Adjustment to reflect the deferred tax impact of the redemption of the noncontrolling preferred interest.

 

(d) Represents an adjustment to record assets and liabilities associated with the Tax Receivable Agreements. Pursuant to the Tax Receivable Agreements, we generally will be required to pay certain of the Existing Owners 85% of the applicable cash savings, if any, in U.S. federal, state and local income tax or franchise tax that we actually realize as a result of (i) the increase in tax basis in NTI LLC’s assets that arose from the Marathon Acquisition, (ii) the basis increase resulting from the distribution of offering proceeds to the Existing Owners, (iii) the basis increases resulting from the exchanges of NTI LLC Units (along with the corresponding shares of our Class B common stock) for shares of our Class A common stock, (iv) additional deductions allocated to us pursuant to Section 704(c) of the Code, to reflect the difference between the fair market value and the adjusted tax basis of NTI LLC’s assets as of the date of this offering, (v) imputed interest deemed to be paid by us as a result of, and additional tax basis arising from, payments under the Tax Receivable Agreements, and (vi) any net operating losses available to us as a result of the Existing Owner Exchange. We will record 85% of the estimated tax benefit as an increase to amounts payable under the Tax Receivable Agreements, as a liability.

 

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(e) Represents the adjustment to eliminate the noncontrolling preferred interest as part of the uses of proceeds from the offering.

 

(f) Reflects the net adjustments to common stock and additional paid in capital, calculated as follows:

 

     (In millions)  

Proceeds from this offering(i)

   $                

Equity reclass(ii)

  
  

 

 

 

Net Adjustment to Capital—Additional paid in capital

   $     
  

 

 

 

 

  (i) Adjustment to reflect the transaction proceeds from the sale of Class A common stock in connection with this offering, and
  (ii) Adjustment to reflect the reclassification of equity to common stock.

 

(g) Reflects the net adjustment to Member’s interest, calculated as follows:

 

     (In millions)  

Proceeds from this offering(i)

   $                

Equity reclass(ii)

  
  

 

 

 

Net Adjustment to Capital—Additional paid in capital

   $     
  

 

 

 

 

  (i) Adjustment to reflect the impacts of the Tax Receivable Agreements.
  (ii) Adjustment to reflect the reclassification of equity to common stock.

 

(h) Represents the net adjustment to noncontrolling interest in NTI LLC.

 

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Northern Tier Energy, Inc.

Unaudited Pro Forma Condensed Consolidated Statement of Operations

For the Nine Months Ended September 30, 2011

(in millions)

 

    NTI LLC
Historical(a)
    Marathon
Acquisition
Adjustments
          Pro Forma
Marathon
Acquisition
    Offering
Adjustments
          Pro Forma
Northern Tier
Energy, Inc.
 

REVENUE

  $ 3,192.0      $        $ 3,192.0      $                     $                

COSTS, EXPENSES AND OTHER

             

Costs of sales

    2,573.8                 2,573.8         

Direct operating expenses

    194.8                 194.8         

Turnaround and related expenses

    22.5                 22.5         

Depreciation and amortization

    22.3                 22.3         

Selling, general and administrative

    65.4                 65.4         

Formation costs

    6.1        (6.1     (d             

Contingent consideration income

    (37.6              (37.6      

Other (income) expense, net

    (2.4              (2.4      
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

OPERATING INCOME

  $ 347.1      $ 6.1        $ 353.2      $          $     

Realized losses from derivative activities

    (246.4              (246.4      

Unrealized losses from derivative activities

    (334.5              (334.5      

Interest expense

    (30.6              (30.6      
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

EARNINGS (LOSS) BEFORE INCOME TAXES

  $ (264.4   $ 6.1        $ (258.3   $          $     

Income tax (provision) benefit

                             (i  
 

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

NET (LOSS) EARNINGS

  $ (264.4   $ 6.1        $ (258.3   $          $     
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

NET (LOSS) EARNINGS ATTRIBUTABLE TO NONCONTROLLING INTEREST

    5.5                 5.5          (j  
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

NET (LOSS) EARNINGS ATTRIBUTABLE TO CONTROLLING INTEREST

  $ (269.9   $ 6.1        $ (263.8   $          $     
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

NET (LOSS) EARNINGS PER SHARE

             

Basic

             
 

 

 

             

 

 

 

Diluted

             
 

 

 

             

 

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING

             

Basic

             
 

 

 

             

 

 

 

Diluted

             
 

 

 

             

 

 

 

See Notes to Unaudited Pro Forma Condensed Consolidated Statements of Operations

 

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Index to Financial Statements

Northern Tier Energy, Inc.

Unaudited Pro Forma Condensed Consolidated Statement of Operations

For The Nine Months Ended September 30, 2010

(in millions, except per share data)

 

    Predecessor
Historical(a)
    Marathon
Acquisition
Adjustments
          Pro Forma
Marathon
Acquisition
    Offering
Adjustments
          Pro Forma
Northern Tier
Energy, Inc.
 

REVENUE

  $ 2,582.3      $        $ 2,582.3      $                     $                

COSTS, EXPENSES AND OTHER

             

Costs of sales

    2,193.8                 2,193.8         

Direct operating expenses

    183.4        13.7        (b     197.1         

Turnaround and related expenses

    8.2                 8.2         

Depreciation and amortization

    30.0        (7.5     (c     22.5         

Selling, general and administrative

    47.0                 47.0         

Formation costs

                            

Contingent consideration income

                            

Other (income) expense, net

    (4.3     0.2        (e     (4.1      
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

OPERATING INCOME

  $ 124.2      $ (6.4     $ 117.8      $          $     

Realized losses from derivative activities

                            

Unrealized losses from derivative activities

                            

Interest expense

    (0.2     (28.9     (g     (29.1      
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

EARNINGS (LOSS) BEFORE INCOME TAXES

  $ 124.0      $ (35.3     $ 88.7      $          $     

Income tax (provision) benefit

    (49.2     49.2        (h              (i  
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

NET EARNINGS

  $ 74.8      $ 13.9        $ 88.7      $          $     
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

NET EARNINGS ATTRIBUTABLE TO NONCONTROLLING INTEREST

           5.4        (j     5.4          (j  
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

NET EARNINGS ATTRIBUTABLE TO CONTROLLING INTEREST

  $ 74.8      $ 8.5        $ 83.3      $          $     
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

NET EARNINGS PER SHARE

             

Basic

             
 

 

 

             

 

 

 

Diluted

             
 

 

 

             

 

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING

             

Basic

             
 

 

 

             

 

 

 

Diluted

             
 

 

 

             

 

 

 

See Notes to Unaudited Pro Forma Condensed Consolidated Statements of Operations

 

69


Table of Contents
Index to Financial Statements

Northern Tier Energy, Inc.

Unaudited Pro Forma Condensed Consolidated Statement of Operations

For The Year Ended December 31, 2010

(in millions, except per share data)

 

    Predecessor     Successor                                            
    Eleven
Months
Ended
November 30,
2010
    August  10,
2010
(inception
date)

through
December 31,
2010
    Year
Ended
December 31,
2010
    Marathon
Acquisition
Adjustments
          Pro Forma
Marathon
Acquisition
    Offering
Adjustments
          Pro Forma
Northern
Tier
Energy, Inc.
 

REVENUE

  $ 3,195.2      $ 344.9      $ 3,540.1      $        $ 3,540.1      $                     $                

COSTS, EXPENSES AND OTHER

                 

Costs of sales

    2,697.9        307.5        3,005.4                 3,005.4         

Direct operating expenses

    227.0        21.4        248.4        16.7        (b     265.1         

Turnaround and related expenses

    9.5               9.5                 9.5         

Depreciation and amortization

    37.3        2.2        39.5        (10.0     (c     29.5         

Selling, general and administrative

    59.6        6.4        66.0                 66.0         

Formation costs

           24.3        24.3        (24.3     (d             

Other (income) expense, net

    (5.4     0.1        (5.3     0.2        (e     (5.1      
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

OPERATING (LOSS) INCOME

  $ 169.3      $ (17.0   $ 152.3      $ 17.4        $ 169.7      $          $     

Unrealized losses from derivative activities

    (40.9     (27.1     (68.0         (68.0      

Bargain purchase gain

           51.4        51.4        (51.4     (f             

Interest expense

    (0.3     (3.2     (3.5     (35.2     (g     (38.7      
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

EARNINGS (LOSS) BEFORE INCOME TAXES

  $ 128.1      $ 4.1      $ 132.2      $ (69.2     $ 63.0      $          $     

Income tax (provision) benefit

    (67.1            (67.1     67.1        (h           

 

(i

 
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

NET (LOSS) EARNINGS

  $ 61.0      $ 4.1      $ 65.1      $ (2.1     $ 63.0      $          $     
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

NET (LOSS) EARNINGS ATTRIBUTABLE TO NONCONTROLLING INTEREST

           0.6        0.6        6.6        (j     7.2          (j  
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

NET (LOSS) EARNINGS ATTRIBUTABLE TO CONTROLLING INTEREST

  $ 61.0      $ 3.5      $ 64.5      $ (8.7     $ 55.8      $          $     
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

NET EARNINGS PER SHARE

                 

Basic

                 
     

 

 

             

 

 

 

Diluted

                 
     

 

 

             

 

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING

                 

Basic

                 
     

 

 

             

 

 

 

Diluted