Attached files
file | filename |
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EX-23.2 - EX-23.2 - CVR ENERGY INC | y93739exv23w2.htm |
EX-23.1 - EX-23.1 - CVR ENERGY INC | y93739exv23w1.htm |
EX-99.1 - EX-99.1 - CVR ENERGY INC | y93739exv99w1.htm |
EX-99.2 - EX-99.2 - CVR ENERGY INC | y93739exv99w2.htm |
EX-99.4 - EX-99.4 - CVR ENERGY INC | y93739exv99w4.htm |
EX-99.5 - EX-99.5 - CVR ENERGY INC | y93739exv99w5.htm |
EX-99.6 - EX-99.6 - CVR ENERGY INC | y93739exv99w6.htm |
8-K - FORM 8-K - CVR ENERGY INC | y93739e8vk.htm |
Exhibit 99.3
Independent
Auditors Report
The Board of Directors and Shareholder
Gary-Williams Energy Corporation:
We have audited the accompanying consolidated balance sheet of
Gary-Williams Energy Corporation and subsidiaries (the Company)
as of December 31, 2009, and the related consolidated
statements of operations, changes in shareholders equity,
comprehensive income (loss), and cash flows for each of the
years of the two-year period then ended. These consolidated
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes consideration
of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Gary-Williams Energy Corporation and subsidiaries as
of December 31, 2009, and the results of their operations
and their cash flows for each of the years of the two-year
period then ended in conformity with accounting principles
generally accepted in the United States of America.
/s/ KPMG LLP
Denver, Colorado
March 30, 2010
1
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
December 31, 2009
2009 | ||||
Assets
|
||||
Current assets:
|
||||
Cash and cash equivalents
|
$ | 5,971,551 | ||
Restricted cash
|
308,481 | |||
Investments
|
341,317 | |||
Accounts receivable:
|
||||
Trade, net of allowances of $2,946,415
|
54,265,176 | |||
Affiliates
|
163,877 | |||
Insurance recovery
|
303,335 | |||
Note receivable affiliate
|
3,958 | |||
Inventories
|
162,815,841 | |||
Prepaid expenses and other current assets
|
4,354,762 | |||
Current assets of discontinued operations
|
| |||
Total current assets
|
228,528,298 | |||
Property, plant, and equipment, net
|
253,455,013 | |||
Deferred turnaround costs, net
|
37,790,336 | |||
Intangible assets, net
|
392,041 | |||
Other assets, net
|
11,759,028 | |||
Noncurrent assets of discontinued operations
|
| |||
Total assets
|
$ | 531,924,716 | ||
Liabilities and Shareholders Equity | ||||
Current liabilities:
|
||||
Accounts payable
|
$ | 168,497,331 | ||
Accrued liabilities and other
|
18,151,441 | |||
Note payable to parent
|
| |||
Long-term debtcurrent portion, net of discount
|
11,739,262 | |||
Current liabilities of discontinued operations
|
| |||
Total current liabilities
|
198,388,034 | |||
Noncurrent liabilities:
|
||||
Long-term debt, net of discount
|
141,163,405 | |||
Other
|
121,099 | |||
Total noncurrent liabilities
|
141,284,504 | |||
Total liabilities
|
339,672,538 | |||
Commitments and contingencies (note 8)
|
||||
Shareholders equity:
|
||||
Preferred stock, $0.01 par value
|
| |||
Common stock, $0.01 par value. Authorized 150,000 voting
shares; issued and outstanding 96,900 shares. Authorized
150,000 nonvoting shares; none issued
|
969 | |||
Contributed capital
|
36,357,640 | |||
Retained earnings
|
155,889,012 | |||
Accumulated other comprehensive income (loss)
|
4,557 | |||
Total shareholders equity
|
192,252,178 | |||
Total liabilities and shareholders equity
|
$ | 531,924,716 | ||
See accompanying notes to consolidated financial statements.
2
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
Years ended December 31, 2009 and 2008
2009 | 2008 | |||||||
Operating revenue
|
$ | 1,649,568,577 | $ | 2,142,815,015 | ||||
Operating expenses
|
1,566,500,099 | 2,248,855,202 | ||||||
Gross profit (loss)
|
83,068,478 | (106,040,187 | ) | |||||
General and administrative expenses
|
17,881,095 | 20,584,971 | ||||||
Operating income (loss)
|
65,187,383 | (126,625,158 | ) | |||||
Other income (expense):
|
||||||||
Interest and investment income
|
144,607 | 1,065,591 | ||||||
Interest expense
|
(13,104,572 | ) | (7,419,241 | ) | ||||
Gain on disposal of assets
|
210,254 | 1,900,377 | ||||||
Fire-related gain (loss), net
|
(40,962 | ) | 2,788,216 | |||||
Other, net
|
319,400 | 146,819 | ||||||
Total other expense
|
(12,471,273 | ) | (1,518,238 | ) | ||||
Net income (loss) from continuing operations
|
52,716,110 | (128,143,396 | ) | |||||
Net loss from discontinued operations
|
(253,242 | ) | (1,618,789 | ) | ||||
Net income (loss)
|
$ | 52,462,868 | $ | (129,762,185 | ) | |||
See accompanying notes to consolidated financial statements.
3
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
Years ended December 31, 2009 and 2008
Accumulated |
||||||||||||||||||||||||||||||||
Number of |
Number of |
Other |
Total |
|||||||||||||||||||||||||||||
Common |
Common |
Preferred |
Preferred |
Contributed |
Retained |
Comprehensive |
Shareholders |
|||||||||||||||||||||||||
Shares | Stock | Shares | Stock | Capital | Earnings | Income (loss) | Equity | |||||||||||||||||||||||||
Balance at December 31, 2007
|
96,900 | $ | 969 | 3,673 | $ | 37 | $ | 18,410,485 | $ | 234,088,374 | $ | (5,213 | ) | $ | 252,494,652 | |||||||||||||||||
Contributed capital
|
| | | | 17,947,118 | | | 17,947,118 | ||||||||||||||||||||||||
Net loss
|
| | | | | (129,762,185 | ) | | (129,762,185 | ) | ||||||||||||||||||||||
Other comprehensive income
|
| | | | | | 3,730 | 3,730 | ||||||||||||||||||||||||
Balance at December 31, 2008
|
96,900 | 969 | 3,673 | 37 | 36,357,603 | 104,326,189 | (1,483 | ) | 140,683,315 | |||||||||||||||||||||||
Subsidiary stock dividend
|
| | | | | (900,045 | ) | | (900,045 | ) | ||||||||||||||||||||||
Cancelation of preferred stock and capital contribution
|
| | (3,673 | ) | (37 | ) | 37 | | | | ||||||||||||||||||||||
Net income
|
| | | | | 52,462,868 | | 52,462,868 | ||||||||||||||||||||||||
Other comprehensive income
|
| | | | | | 6,040 | 6,040 | ||||||||||||||||||||||||
Balance at December 31, 2009
|
96,900 | $ | 969 | | $ | | $ | 36,357,640 | $ | 155,889,012 | $ | 4,557 | $ | 192,252,178 | ||||||||||||||||||
See accompanying notes to consolidated financial statements.
4
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
Years ended December 31, 2009 and 2008
2009 | 2008 | |||||||
Net income (loss)
|
$ | 52,462,868 | $ | (129,762,185 | ) | |||
Unrealized gain on securities
|
6,040 | 3,730 | ||||||
Comprehensive income (loss)
|
$ | 52,468,908 | $ | (129,758,455 | ) | |||
See accompanying notes to consolidated financial statements.
5
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
Years ended December 31, 2009 and 2008
2009 | 2008 | |||||||
Cash flows from operating activities:
|
||||||||
Net income (loss)
|
$ | 52,462,868 | $ | (129,762,185 | ) | |||
Net loss from discontinued operations
|
253,242 | 1,618,789 | ||||||
Net income (loss) from continuing operations
|
52,716,110 | (128,143,396 | ) | |||||
Adjustments to reconcile net income (loss) from continuing
operations to net cash provided by operating activities:
|
||||||||
Depreciation and amortization
|
13,765,339 | 13,280,570 | ||||||
Amortization of turnaround costs
|
15,401,851 | 9,420,376 | ||||||
Amortization of deferred financing costs and discount on debt
|
4,606,802 | 292,783 | ||||||
Gain on sale of assets
|
(210,254 | ) | (1,900,377 | ) | ||||
Realized gain on sale of investments, net
|
(13 | ) | (3,594 | ) | ||||
Impairment of assets
|
| 566,619 | ||||||
Provision for losses on accounts receivable
|
673,255 | 2,273,160 | ||||||
Other
|
2,404 | | ||||||
Changes in operating assets and liabilities:
|
||||||||
Decrease in accounts receivable, net
|
12,472,505 | 10,058,278 | ||||||
Decrease in accounts receivableaffiliate
|
9,032 | 276,070 | ||||||
(Increase) decrease in inventories
|
(83,542,851 | ) | 147,649,806 | |||||
(Increase) decrease in prepaid expenses
|
(378,266 | ) | 645,371 | |||||
Increase in deferred turnaround costs
|
(3,008,930 | ) | (54,193,091 | ) | ||||
Decrease in other assets
|
37,323 | | ||||||
Increase (decrease) in accounts payable
|
70,842,159 | (85,463,402 | ) | |||||
Increase (decrease) in accrued liabilities
|
4,025,705 | (8,860,971 | ) | |||||
Decrease in deferred revenue and other
|
(7,658 | ) | (9,115 | ) | ||||
Net cash provided by (used in) operating activities
|
87,404,513 | (94,110,913 | ) | |||||
Cash flows from investing activities:
|
||||||||
Capital expendituresrefinery and pipeline
|
(49,444,657 | ) | (37,471,979 | ) | ||||
Proceeds from sale of assets, net
|
4,244,856 | 4,206,983 | ||||||
Proceeds from property insurance
|
2,525,000 | 1,838,747 | ||||||
Proceeds from sale-leaseback of pipeline
|
31,830,451 | | ||||||
Purchase of investments
|
(2,384 | ) | (15,222 | ) | ||||
Proceeds from sale of investments
|
1,744 | 254,365 | ||||||
Note receivablecollection
|
| 65,077 | ||||||
Note receivablerelated-party
|
(250,000 | ) | (7,000 | ) | ||||
Note receivablerelated-party collection
|
250,638 | 300,000 | ||||||
Change in restricted cash
|
(308,481 | ) | | |||||
Net cash used in investing activities
|
(11,152,833 | ) | (30,829,029 | ) | ||||
Cash flows from financing activities:
|
||||||||
Borrowings under long-term debt
|
923,000,000 | 883,485,000 | ||||||
Principal payments on long-term debt
|
(972,449,903 | ) | (775,359,716 | ) | ||||
Principal payments on notes payable to parent
|
(7,770,000 | ) | (1,000,000 | ) | ||||
Capital lease obligation payments
|
(102,735 | ) | (26,723 | ) | ||||
Payments of debt issuance costs
|
(14,450,766 | ) | (1,300,285 | ) | ||||
Payments of offering costs
|
| (40,202 | ) | |||||
Capital contributed by parent
|
| 17,947,117 | ||||||
Tax dividends distributed to parent
|
| (17,947,117 | ) | |||||
Net cash (used in) provided by financing activities
|
(71,773,404 | ) | 105,758,074 | |||||
Net increase (decrease) in cash and cash
equivalentscontinuing operations
|
4,478,276 | (19,181,868 | ) | |||||
Change in cash and cash equivalentsdiscontinued operations:
|
||||||||
Net cash used in operating activities
|
(219,307 | ) | (1,623,856 | ) | ||||
Net cash used in investing activities
|
(224,079 | ) | (30,487 | ) | ||||
Net increase (decrease) in cash and cash equivalents
|
4,034,890 | (20,836,211 | ) | |||||
Cash and cash equivalents at beginning of year
|
1,936,661 | 22,772,872 | ||||||
Cash and cash equivalents at end of year
|
$ | 5,971,551 | $ | 1,936,661 | ||||
Supplemental disclosures of cash flow information:
|
||||||||
Cash paid during the year for interest and financing expenses,
net of amounts capitalized
|
$ | 22,501,293 | $ | 8,163,933 | ||||
Supplemental schedule of noncash investing and financing
activities:
|
||||||||
Additions (deletions) to construction projects in progress
funded through accounts payable, net
|
$ | (1,245,880 | ) | $ | 5,808,655 | |||
Capital lease acquisition
|
557,602 | |
See accompanying notes to consolidated financial statements.
6
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
(1) | Background and Organization |
Gary-Williams Energy Corporation (GWEC) is incorporated in
Delaware. GWEC became a wholly owned subsidiary of GWEC Holding
Company, Inc. (the Holding Company) on October 30, 2009
when The Gary-Williams Company (TGWC), its then parent company,
contributed all of its common shares of GWEC to the Holding
Company and canceled its outstanding preferred stock.
GWECs primary activities are purchasing refinery
feedstocks, marketing petroleum products, and providing
management and support services to its subsidiaries.
Wynnewood Refining Company (WRC), a wholly owned subsidiary of
GWEC, is incorporated in Delaware. WRCs primary activity
is operating a refinery in Wynnewood, Oklahoma that has a
capacity of approximately 70,000 barrels per day.
Wynnewood Insurance Corporation (WIC), a wholly owned subsidiary
of GWEC, is incorporated in Hawaii. WICs primary activity
is to provide a portion of the insurance coverage required by
WRC.
Through April 30, 2009, GWEC owned all of the stock of
Gary-Williams Production Company (GWPC). GWPC is engaged in the
exploration, development, and operation of oil and gas
properties located in the United States. On May 1, 2009,
the Company spun-off GWPC to TGWC by declaring a dividend of all
of its stock in GWPC. Prior year consolidated financial
statements have been restated to present the operations of GWPC
as a discontinued operation.
References to the Company are to GWEC and its
subsidiaries, collectively.
(2) | Summary of Significant Accounting Policies |
(a) | Basis of Presentation |
The accompanying consolidated financial statements include the
accounts of its wholly owned subsidiaries and have been prepared
in accordance with United States generally accepted accounting
principles (U.S. GAAP). Intercompany balances and
transactions have been eliminated.
(b) | Subsequent Events |
The Company evaluates events and transactions that occur after
the balance sheet date but before the financial statements are
issued. The Company evaluated such events and transactions
through March 30, 2010, which is the day the financial
statements were available to be issued.
(c) | Reclassification |
Certain reclassifications of prior period information have been
made to conform to the current period presentation, including
the presentation of GWPC as a discontinued operation.
(d) | Use of Estimates |
The preparation of financial statements in conformity with
U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the consolidated
7
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
Notes to Consolidated Financial Statements
December 31, 2009 and 2008(Continued)
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
Notes to Consolidated Financial Statements
December 31, 2009 and 2008(Continued)
financial statements and the reported amounts of revenues and
expenses during the reporting period. Some of the most
significant areas in which management uses estimates and
assumptions are in determining impairments of long-lived assets,
in establishing estimated useful lives for long-lived assets,
provision for uncollectible accounts receivable, in valuing
inventory, and in the determination of liabilities, if any, for
legal contingencies.
The Company evaluates these estimates on an ongoing basis using
historical experience and other methods the Company considers
reasonable based on the particular circumstances. Nevertheless,
actual results may differ significantly from the estimates. Any
effects on the financial position or results of operations from
revisions to these estimates are recorded in the period when the
facts that give rise to the revision become known.
(e) | Cash, Cash Equivalents, and Investments |
For purposes of these statements, the Company considers liquid
investments purchased with an original maturity of three months
or less to be cash equivalents. Investments having an original
maturity of more than three months, but less than 12, are
included in investments as a current asset in the accompanying
consolidated balance sheets. Cash equivalents and investments
consist of equity securities, domestic and international bond
funds, and money market funds.
(f) | Restricted Cash |
Restricted cash includes cash balances which are legally or
contractually restricted to use. At December 31, 2009, the
Company had short-term restricted cash of $308,481 and long-term
restricted cash of $123,700 included in other long-term assets.
These amounts are primarily being held in trust in accordance
with certain financial regulations set by the United States
Environmental Protection Agency (EPA).
(g) | Allowance for Doubtful Accounts |
The Company establishes an allowance for doubtful accounts on
accounts receivable based on the expected ultimate recovery of
these receivables. The Company establishes or adjusts the
allowance as necessary using the specific identification method.
The Company considers many factors including historical customer
collection experience, general and specific economic trends, and
known specific issues related to individual customers that might
impact collectibility. The allowance for doubtful accounts was
$2,946,415 at December 31, 2009. For the years ended
December 31, 2009 and 2008, the Company recorded provisions
for bad debts of $673,255 and $2,273,160, respectively.
(h) | Futures Contracts |
The Company periodically enters into futures contracts to hedge
certain of its exposures to price fluctuations on raw materials
and refined products. The purpose of these activities, as
defined by the Companys Risk Management Policy, is to
enhance overall profits from WRCs refining operations and
to identify opportunities to generate a profit outside the
refining operations in the Group III, Gulf Coast, and NYMEX
markets. Other provisions in the Risk
8
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
Notes to Consolidated Financial Statements
December 31, 2009 and 2008(Continued)
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
Notes to Consolidated Financial Statements
December 31, 2009 and 2008(Continued)
Management Policy set forth quantity limits, authorization
requirements, and exposure limits for speculative positions.
In all instances, the Company has decided not to designate its
derivative activities as hedges. As a result, the gains or
losses from the changes in fair value of the derivative
instruments have been recognized as a component of operating
expense; however, the underlying hedged items have not been
marked to market. The increases or decreases in the fair value
of the underlying hedged items ultimately result in increases or
decreases to operating revenue or operating expense at the time
of sale. These changes are generally offset by the gains or
losses from the changes in fair value of the derivative
instruments and may increase earnings volatility. The Company
had no futures contracts outstanding as of December 31,
2009.
(i) | Financial Instruments |
The Companys financial instruments consist of cash,
investments, accounts receivable, a note receivable, accounts
payable, other current liabilities, and long-term debt. Except
for long-term debt, the carrying amounts of financial
instruments approximate their fair value due to their short
maturities. The fair value of long-term debt is estimated
differently based upon the type of loan. For variable rate
loans, carrying value approximates fair value. For fixed rate
loans, the carrying value of long-term debt (see
note 3) approximates fair value because the interest
rate on this debt approximates market yields for similar debt
instruments.
(j) | Inventories |
Inventories are valued at the lower of
first-in,
first-out cost or market. Write-downs to market are charged to
operating expense. Inventories at December 31, 2009 are as
follows:
2009 | ||||
Refined, unrefined, and intermediate products
|
$ | 97,161,983 | ||
Crude oil
|
61,060,706 | |||
Materials and supplies
|
4,593,152 | |||
Inventories
|
$ | 162,815,841 | ||
(k) | Property, Plant, and Equipment |
The initial purchase and additions to property, plant, and
equipment, including capitalized interest and certain costs
allocable to construction, are recorded at cost. Ordinary
maintenance and repairs are expensed as incurred. Depreciation
is provided using the straight-line method based on estimated
useful lives ranging from 1 to 30 years. Gains or losses on
sales or other dispositions of property appear in gain (loss) on
disposal of assets in the consolidated statements of operations.
Property, plant, and equipment under capital leases and related
obligations is recorded at an amount equal to the present value
of future minimum lease payments computed on the basis of the
Companys incremental borrowing rate or, when known, the
interest rate implicit in the lease. Assets acquired under
capital leases and leasehold improvements are amortized using
the straight-line method over the lease term and
9
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
Notes to Consolidated Financial Statements
December 31, 2009 and 2008(Continued)
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
Notes to Consolidated Financial Statements
December 31, 2009 and 2008(Continued)
are included in depreciation expense. At December 31, 2009,
property, plant, and equipment, with the range of useful lives,
is comprised of the following:
2009 | ||||
Refinery property, plant, and equipment (3 to 30 years)
|
$ | 245,991,380 | ||
Pipeline under capital lease (5 to 20 years)
|
641,743 | |||
Airplane (6 years)
|
7,250,900 | |||
Furniture, fixtures, and equipment (1 to 15 years)
|
6,117,585 | |||
Precious metals, land, and other nondepreciable assets
|
3,457,371 | |||
Catalyst (5 years)
|
6,419,188 | |||
Vehicles (2 to 3 years)
|
1,136,199 | |||
Construction in progress
|
41,502,929 | |||
Property, plant, and equipment, at cost
|
312,517,295 | |||
Less accumulated depreciation and amortization
|
(59,062,282 | ) | ||
Property, plant, and equipment, net
|
$ | 253,455,013 | ||
Construction in progress consists of projects primarily related
to additions and expansions to refinery processing units and
replacements to the refinery plant and equipment. When the
project is completed and placed in service the costs are
depreciated over their estimated life.
Major construction projects qualify for interest capitalization
until the asset is ready for service. Capitalized interest is
calculated by multiplying the Companys weighted average
interest rate from long-term debt by the amount of qualifying
costs. As major construction projects are completed, the
associated capitalized interest is amortized over the useful
life of the asset with the underlying cost of the asset. For the
years ended December 31, 2009 and 2008, the Company
capitalized interest of $2,037,342 and $136,648, respectively.
Depreciation and amortization expense for the years ended
December 31, 2009 and 2008 was $13,740,046 and $13,272,057,
respectively.
(l) | Intangible Assets |
Intangible assets consist of the cost of a processing license of
$480,566 for a new sulfur recovery unit, which is subject to
amortization. Amortization is provided using the straight-line
method based on an estimated useful life of 19 years.
Amortization for the intangible asset was $25,293 of both years
ended December 31, 2009 and 2008. Accumulated amortization
totaled $88,525 at December 31, 2009. The estimated
aggregate amortization expense is approximately $25,293 per year
for the years ending December 31, 2010 through 2024 and
$12,646 for the year ending December 31, 2025.
(m) | Debt Issuance Costs |
Debt issuance costs represent loan origination fees paid to the
lender and related professional service fees. Unamortized debt
issuance costs are included in noncurrent other assets on the
consolidated balance sheets. For the year ended
December 31, 2009, the Company capitalized $14,450,766, of
costs incurred in connection with debt refinancing and
10
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
Notes to Consolidated Financial Statements
December 31, 2009 and 2008(Continued)
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
Notes to Consolidated Financial Statements
December 31, 2009 and 2008(Continued)
amendments. These costs are being amortized over the terms of
their respective financings and are included in interest
expense. Costs associated with revolving debt are amortized on a
straight-line basis and costs associated with debt agreements
having scheduled payoffs are amortized using the effective
interest method. The amounts of amortization and the write-off
of previous deferred debt issuance costs were $4,063,812 and
$292,783 for the years ended December 31, 2009 and 2008,
respectively.
(n) | Debt Issued at a Discount |
Debt issued at a discount to the face amount is accreted up to
its face amount utilizing the effective interest method over the
term of the note and recorded as a component of interest expense
on the consolidated statements of operations.
(o) | Impairment |
The Companys long-lived assets are periodically reviewed
for impairment whenever events or changes in circumstances
indicate the carrying amount may not be recoverable.
Impairments, if any, are measured as the amount by which the
carrying amount of the asset exceeds the forecast of discounted
expected future cash flows. The Company recorded no impairments
during the year ended December 31, 2009. During the year
ended December 31, 2008, the Company recorded an impairment
charge of $528,119 to operating expenses for the loss in value
of its precious metals.
(p) | Asset Retirement Obligation |
The Company evaluates legal obligations associated with the
retirement of long-lived assets that result from the
acquisition, construction, development,
and/or the
normal operation of a long-lived asset, and recognizes a
liability equal to the estimated fair value of the asset
retirement obligation in the period in which it is incurred, if
a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying
amount of the long-lived asset. The asset retirement liability
is accreted over time as an operating expense using a systematic
and rational method.
The Company has asset retirement obligations with respect to
certain of its refinery assets due to various legal obligations
to clean
and/or
dispose of various component parts of the refinery at the time
they are retired. However, these component parts can be used for
extended and indeterminate periods of time as long as they are
properly maintained
and/or
upgraded. It is the Companys practice and current intent
to maintain the refinery assets and continue making improvements
to those assets based on technological advances. As a result,
management believes that the refinery has an indeterminate life
for purposes of estimating asset retirement obligations because
dates or ranges of dates upon which the Company would retire
refinery assets cannot reasonably be estimated at this time.
When a date or range of dates can reasonably be estimated for
the retirement of any component part of the refinery, a
liability will be recorded based on the estimated cost to
perform the asset retirement activity at the fair value of those
costs using established present value techniques. The Company
will continue to monitor and evaluate its potential asset
retirement obligations.
11
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
Notes to Consolidated Financial Statements
December 31, 2009 and 2008(Continued)
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
Notes to Consolidated Financial Statements
December 31, 2009 and 2008(Continued)
(q) | Deferred Turnaround Costs |
Refinery turnaround costs are incurred in connection with
planned shutdown and inspections of the refinerys major
units to perform necessary repairs and replacements. Refinery
turnaround costs are deferred when incurred and amortized on a
straight-line basis over that period of time estimated to lapse
until the next planned turnaround occurs, generally four years.
Refinery turnaround costs include, among other things, the cost
to repair, restore, refurbish, or replace refinery equipment
such as tanks, reactors, piping, rotating equipment,
instrumentation, electrical equipment, heat exchangers, and
fired heaters. A major turnaround was performed in the second
quarter of 2008 and the next major turnaround is scheduled to be
performed in the second quarter of 2012. Although the Company
performed the majority of its turnaround activities in the
second quarter of 2008, the Company performed additional
turnaround work on a few of its refinery units in April 2009. In
total, during the years ended December 31, 2009 and 2008,
the Company incurred turnaround costs of $3,008,930 and
$54,193,091, respectively. As of December 31, 2009,
deferred turnaround costs amounted to $37,790,336, net of
accumulated amortization of $24,084,697. Amortization expense
for the years ended December 31, 2009 and 2008 was
$15,401,851 and $9,420,376, respectively.
(r) | Revenue Recognition |
The Company generates revenue primarily from the sale of refined
products produced at the Companys refinery and refined
products purchased directly from outside sources. In general,
the Company enters into spot and short-term agreements that
stipulate the terms and conditions of the sales. Revenue is
recorded as products are delivered to customers, which is the
point at which title and risk of loss are transferred.
The Company also engages in trading activities, whereby the
Company enters into agreements to purchase and sell refined
products with third parties. The Company acts as principle in
these transactions, taking title to the products in purchases
from counterparties, and accepting the risks and rewards of
ownership. The Company records revenue for the gross amount of
the sales transactions, and records cost of purchases as an
operating expense in the accompanying financial statements.
Sales tax, motor fuel tax, and other taxes invoiced to customers
and payable to government agencies are recorded on a net basis
with the tax portion of a sales invoice directly credited to a
liability account.
(s) | Comprehensive Income (Loss) |
Comprehensive income (loss) includes net income (loss) and other
comprehensive income (loss), which includes unrealized gains and
losses from
available-for-sale
securities.
(t) | Insurance Recoveries |
The Company records gains from insurance recoveries and a
corresponding receivable when the Company determines that
recovery is probable and management can reasonably estimate the
amount of a particular recovery.
12
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
Notes to Consolidated Financial Statements
December 31, 2009 and 2008(Continued)
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
Notes to Consolidated Financial Statements
December 31, 2009 and 2008(Continued)
(u) | Environmental Costs and Other Contingencies |
Environmental Costs. The Company records an
undiscounted liability on the consolidated balance sheet as
other current and long-term liabilities when environmental
assessments indicate that remediation efforts are probable and
the costs can be reasonably estimated. Estimates of the
liabilities are based on currently available facts, existing
technology, and presently enacted laws and regulations taking
into consideration the likely effects of other societal and
economic factors, and include estimates of associated legal
costs. These amounts also consider prior experience in
remediating contaminated sites, other companies
clean-up
experience, and data released by the EPA or other organizations.
The estimates are subject to revision in future periods based on
actual costs or new circumstances.
Other Contingencies. The Company recognizes a
liability for other contingencies when the Company has an
exposure that, when fully analyzed, indicates it is both
probable that a liability has been incurred and the amount of
the loss can be reasonably estimated. Where the most likely
outcome can be estimated, the Company accrues a liability for
that amount. Where the most likely outcome cannot be estimated,
range of potential losses is established and if no one amount in
that range is more likely than any other, the low end of the
range is accrued.
(3) | Long-Term Debt |
December 31 | ||||
2009 | ||||
Term loan, due May 2012
|
$ | | ||
Term loan, due November 2014
|
107,250,000 | |||
Revolver credit facility, due May 2011
|
| |||
Finance obligation, due September 2029
|
19,964,693 | |||
Capital lease obligation, due September 2029
|
31,213,642 | |||
Airplane loan, due March 2014
|
4,898,518 | |||
Other notes, due February 2011
|
32,824 | |||
Less discount on term loan
|
(10,457,010 | ) | ||
Total debt
|
152,902,667 | |||
Less obligations due in one year
|
(11,739,262 | ) | ||
Long-term debt
|
$ | 141,163,405 | ||
Refinancing
On November 13, 2009, the Company refinanced its existing
revolver and term loan facility into two separate facilities
with longer maturities. Through the refinancing, the Company
entered into a new asset-based revolving facility (the Revolver)
which provides commitments of up to $150,000,000 and a maturity
date of November 12, 2012. The Company also entered into a
new $110,000,000 discounted term loan facility (the Term Loan)
due November 12, 2014. The proceeds from the refinancing
were used to repay all of the outstanding amounts due under the
Companys previously existing term and revolver credit
facility.
13
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
Notes to Consolidated Financial Statements
December 31, 2009 and 2008(Continued)
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
Notes to Consolidated Financial Statements
December 31, 2009 and 2008(Continued)
Term
Loan
On November 13, 2009, GWEC, WRC, and the Holding Company
collectively entered into a secured five-year $110,000,000
discounted Term Loan with a syndicate of financial institutions.
Borrowings under the Term Loan accrue interest based on an
interest floor of 9.75% and includes LIBOR or base rate options.
Borrowings are repayable quarterly starting December 31,
2009, with 10% of the principal payable in years one and
two, 20% payable in years three and four, and 40% payable
in year five. The last scheduled payment is September 30,
2014. At December 31, 2009, the Company had $107,250,000
outstanding.
Revolver
GWEC, WRC, and the Holding Company collectively entered into a
three-year $150,000,000 secured Revolver with a syndicate of
financial institutions on November 13, 2009. The Revolver
replaces the previous $150,000,000 revolving credit facility
dated March 9, 2004. Similar to the previous facility, the
Company can borrow
and/or issue
letters of credit, which in the aggregate, cannot exceed the
lesser of the borrowing base or $150,000,000. The borrowing base
is limited by the balances of cash, accounts receivable,
inventory, exchange balances, and outstanding letters of credit
for which no payable yet exists. The borrowing base was
$150,000,000 at December 31, 2009. Borrowings under this
facility accrue interest based on LIBOR or base rate options
plus a margin based on the Companys fixed charge coverage
ratio. Borrowings are repayable at expiration of the revolving
facility on November 12, 2012. There was no outstanding
Revolver balance at December 31, 2009.
Letters of credit and bonds are primarily obtained by the
Company for its routine purchases of crude oil. Letters of
credit totaling $34,273,000 had been issued as of
December 31, 2009.
The Term Loan and Revolver are secured by substantially all of
GWECs and WRCs assets and are subject to various
financial and nonfinancial covenants that limit distributions,
dividends, acquisitions, capital expenditures, disposals and
debt and require minimum debt service coverage, net worth, and
working capital requirements. The Company was in compliance or
obtained a waiver for its financial covenants and ratios at
December 31, 2009.
Airplane
Loan
GWEC has a $5,300,000 loan with a bank. Under
the agreement, interest is payable at a fixed rate for the first
three years and at a variable rate based on the
30-day LIBOR
for the remaining four years. The loan is to be repaid over
seven years with principal payments based on a
20-year
amortization period and a balloon payment at the end of the
seventh year in 2014. The loan is secured by the airplane.
Finance
Obligation
On September 9, 2009, WRC sold its bulk terminal and
loading facility for $20,000,000. WRC, in turn, agreed to lease
back those same assets for 10 years with two five year
renewal options. Under the terms of the lease agreement, WRC is
required to support the operations of the terminal and loading
facility at its own risk and GWEC has guaranteed WRCs
lease payments. Due to these various forms of continuing
involvement, the transaction was recorded
14
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
Notes to Consolidated Financial Statements
December 31, 2009 and 2008(Continued)
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
Notes to Consolidated Financial Statements
December 31, 2009 and 2008(Continued)
under the finance method of accounting. Accordingly, the value
of the terminal and loading facility remain on the
Companys books and are continuing to be depreciated over
their remaining useful lives. The proceeds received have been
recorded as a finance obligation. The obligation is payable in
monthly installments and bears interest at 9%.
Capital
Lease
On September 9, 2009, WRC entered into a sale-leaseback
transaction where WRC sold a 49 mile pipeline for
$32,000,000 and leased back the same pipeline for a term of
20 years. Due to the lack of continuing involvement on the
part of WRC, the transaction was recorded using sale-leaseback
accounting. As a result, the Company has recorded the pipeline
as a capital lease. The gain of $30,741,039 is being deferred as
an offset to the leased pipeline and is being amortized in
proportion to the leased pipeline over the term of the lease.
The lease is payable in monthly installments and bears interest
at 12%.
Other
Notes
In February 2006, the Company entered into a financing agreement
and a capital lease arrangement for office copiers which expire
in February 2011. The obligations are payable in monthly
installments and bear interest at 5.75%. Amounts outstanding
under these arrangements at December 31, 2009 was $32,824.
Letters of credit fees, bond fees, unused commitment fees,
amortization of deferred financing costs, accretion of discount
on debt, and interest from borrowings under the various
agreements are included in interest expense in the accompanying
consolidated statements of operations (net of amounts
capitalized).
Subsequent
Event
Effective February 18, 2010, GWEC, WRC, and the Holding
Company entered into the First Amendment to the Term Loan. Under
the amendment, the financial institutions waived the
Companys violation of its debt covenant at
December 31, 2009 and modified the covenants for 2010.
The minimum remaining principal payments under the loan
agreements and minimum lease payments under capital lease
obligations are as follows:
Term |
Airplane |
Other |
Finance |
Capital |
||||||||||||||||||||
Loan | Loan | Notes | Obligation | Lease | Total | |||||||||||||||||||
Year ending December 31:
|
||||||||||||||||||||||||
2010
|
$ | 11,000,000 | $ | 163,801 | $ | 29,975 | $ | 136,465 | $ | 4,419,274 | $ | 15,749,515 | ||||||||||||
2011
|
13,750,000 | 174,267 | 2,849 | 191,850 | 4,380,000 | 18,498,966 | ||||||||||||||||||
2012
|
22,000,000 | 185,403 | | 253,518 | 4,392,000 | 26,830,921 | ||||||||||||||||||
2013
|
27,500,000 | 197,250 | | 322,103 | 4,380,000 | 32,399,353 | ||||||||||||||||||
2014
|
33,000,000 | 4,177,797 | | 398,302 | 4,380,000 | 41,956,099 | ||||||||||||||||||
Thereafter
|
| | | 18,662,455 | 64,365,058 | 83,027,513 | ||||||||||||||||||
Total minimum lease payments
|
$ | 107,250,000 | $ | 4,898,518 | $ | 32,824 | $ | 19,964,693 | 86,316,332 | 218,462,367 | ||||||||||||||
15
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
Notes to Consolidated Financial Statements
December 31, 2009 and 2008(Continued)
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
Notes to Consolidated Financial Statements
December 31, 2009 and 2008(Continued)
Term |
Airplane |
Other |
Finance |
Capital |
||||||||||||||||||||
Loan | Loan | Notes | Obligation | Lease | Total | |||||||||||||||||||
Less amount representing executory costs
|
(4,813,933 | ) | (4,813,933 | ) | ||||||||||||||||||||
Net minimum lease payments
|
81,502,399 | 213,648,434 | ||||||||||||||||||||||
Less amount representing interest
|
(50,288,757 | ) | (50,288,757 | ) | ||||||||||||||||||||
Present value of net minimum lease payments
|
$ | 31,213,642 | $ | 163,359,677 | ||||||||||||||||||||
(4) | Tax Dividend Obligation to Parent |
GWEC and its subsidiaries are S Corporations for income tax
purposes. In general, as an S Corporation, GWEC and its
subsidiaries are not taxable, and taxable income and deductions
flow from GWEC and its subsidiaries to TGWC, where the income is
taxed. Prior to October 1, 2009, the Company reimbursed
TGWC for the computed state and federal income taxes based on
the Companys net income and a combined rate of
approximately 33%. On November 13, 2009, with the creation
of the Holding Company, a new tax agreement (effective
October 1, 2009) was entered into between the Holding
Company, its subsidiaries, and TGWC. Pursuant to this agreement,
GWEC reimburses the Holding Company for the computed state and
federal income taxes based on GWECs net taxable income and
a combined rate of 40% that GWEC would pay if it determined its
tax liability as a standalone C Corporation. These amounts are
reflected as tax dividends declared in the consolidated
statements of changes in shareholders equity. Each of the
GWECs subsidiaries reimburses GWEC on the same basis. When
GWEC recognizes a net loss, such loss multiplied by 40% reduces
its tax reimbursement liability in future years.
(5) | Employee Benefit Plans |
The Company has two profit sharing plans (defined contribution
plans), one covering certain nonunion employees and one covering
union employees. The employees must meet eligibility
requirements as to age and length of service. Contributions to
the plans are determined annually by the Company. Contributions
of $1,486,246 and $1,357,075 were expensed for the years ended
December 31, 2009 and 2008, respectively.
(6) | Concentrations |
Substantially all of the Companys accounts receivable at
December 31, 2009 results from the sale of refined products
to companies in the retail distribution market. This
concentration of customers may impact the Companys overall
credit risk, either positively or negatively, in that these
entities may be similarly affected by industry-wide changes in
economic and other conditions. Such receivables are generally
not collateralized. However, the Company performs credit
evaluations on its customers to minimize the exposure to credit
risk. No single customer accounted for more than 10% of product
sales for the years ended December 31, 2009 and 2008,
respectively. No single customer accounted for more than 10% of
gross accounts receivable at December 31, 2009.
16
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
Notes to Consolidated Financial Statements
December 31, 2009 and 2008(Continued)
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
Notes to Consolidated Financial Statements
December 31, 2009 and 2008(Continued)
In March 2009 and 2008, the Company was awarded contracts to
sell approximately 58,000,000 and 59,000,000 gallons of jet fuel
to the United States Defense Energy Support Center (DESC) for
the period April 1, 2008 through March 31, 2010, plus
a 30-day
carryover which gives the DESC the option to take deliveries for
one month after the stated contract period. Pricing is variable,
calculated based on market prices, as specified in the contract.
For the years ended December 31, 2009 and 2008, product
sales to this customer approximated 5% and 6%, respectively, of
total operating revenue.
In addition, substantially all of the Companys raw
materials purchased for refinery production and refined products
purchased for resale are from companies in the oil and gas
exploration and production industry in the United States. This
concentration of suppliers may impact the Companys overall
costs and/or
profitability, either positively or negatively, in that these
entities may be similarly affected by industry-wide changes in
economic and other conditions. For the years ended
December 31, 2009 and 2008, three vendors accounted for 47%
and 37%, respectively, of total raw material and refined
purchases.
Approximately 51% of the Companys labor force is covered
by a collective bargaining agreement that is subject to review
and renewal on a regular basis. The current collective
bargaining agreement is due to expire in June 2012.
(7) | Related-Party Transactions |
GWEC has an agreement with an affiliate, as amended and renewed
in May 2008, to sublease a hangar for the Company aircraft.
Terms of the sublease provide for annual rentals of $87,000
until June 30, 2011.
On a monthly basis, the Company charges certain general and
administrative support costs to its affiliates. At
December 31, 2009, the affiliated accounts receivable
balance was $163,877.
GWEC entered into a promissory note in November 2008, with TGWC,
where by GWEC promised to pay TGWC the principal sum of
$20,000,000 or such lesser amount the borrower shall borrow from
the lender. Interest on the unpaid principal balance is computed
daily based on the prime rate. All amounts borrowed, together
with interest, are to be paid no later than five business days
after the funds are advanced. The note is due on
January 31, 2010. During 2009, GWEC paid the balance due on
the note of $7,770,000.
(8) | Commitments and Contingencies |
Fire
Contingencies and Insurance Reimbursement
Alky
Fire
On May 12, 2006, a fire took place at the Companys
refinery in Wynnewood, Oklahoma. The fire occurred in an
alkylation unit, which is used in the production of high octane,
low sulfur gasoline blend stocks. The fire resulted in damage to
the alkylation unit and surrounding equipment, wiring, and
instrumentation systems.
The Company is insured for losses related to its refinery
property and business interruption. At the time of the fire, the
Companys refinery property insurance coverage was subject
to a $1,000,000 per claim deductible and the business
interruption insurance coverage was
17
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
Notes to Consolidated Financial Statements
December 31, 2009 and 2008(Continued)
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
Notes to Consolidated Financial Statements
December 31, 2009 and 2008(Continued)
subject to a
45-day
business interruption waiting period with a $1,000,000 minimum
and a $10,000,000 maximum deductible.
In the years ended December 31, 2009 and 2008, the Company
expensed $40,324 and $997,886, to fire-related loss to cover
professional services fees, penalties, and other fire-related
costs. Through December 31, 2009, the Company has incurred
testing, refurbishment, and replacement costs of $33,473,402,
which has been capitalized in property, plant and equipment,
net. Initially, in 2006, the Company recorded an asset
impairment charge of $649,478 to fire-related loss.
In addition to the property damage, through December 31,
2009, the Company also sustained business interruption losses
associated with the fire of approximately $51,000,000, net of a
deductible of $10,000,000. These losses include lost income
related to the loss of use of the alkylation unit, the extra
transportation costs incurred for transporting product from the
unit while it is out of service, and the reduced volumes of
hydrocarbons that could be processed. These costs have been
expensed as incurred.
As a result of the property damage and business interruption
losses associated with the fire, the Company has submitted, net
of a deductible of $11,000,000, approximately $81,000,000 in
claims to its insurance carriers under its insurance policies.
As of December 31, 2007, the insurance providers approved
and the Company collected $42,832,697 of these costs,
$25,179,697 to cover business interruption and $17,653,000 for
property damage. Of the total amount recovered, $2,832,697 was
recorded during the year ended December 31, 2007,
$2,653,000 as fire-related gain and $179,697 as a reduction to
operating expense to cover business interruption. During 2006,
the Company recorded $15,000,000 as fire-related gain and
$25,000,000 as a reduction to operating expense for business
interruption.
In the fourth quarter of 2007, the Company initiated legal
action against its insurance carriers as a result of the
insurance carriers refusal to honor their insurance
coverage obligation to pay the remaining balance on the claim.
The Company settled with the insurance carriers in January 2009
for $21,167,253. As a result, in December 2008 the Company
recognized $2,525,000 as fire-related gain and $18,642,253 as a
reduction to operating expense to cover business interruption.
Lightning
Fire
On April 27, 2007, the Companys refinery in
Wynnewood, Oklahoma was shut down after lightning caused a fire
in a product storage tank, which then spread to a second tank in
the same dike. The Company lost both tanks and the products in
the tanks. The Company recorded an insurance recovery gain of
$6,000,000, a $5,151,740 expense from lost inventory, and fire
response and clean up expenditures of $270,957. Through
December 31, 2009, the Company also incurred testing,
refurbishment, and replacement costs of $3,776,613, which has
been capitalized as property, plant, and equipment, net.
For the year ended December 31, 2009, the Company
recognized a fire-related expense of $638 for professional
service fees. For the year ended December 31, 2008, the
Company recognized a net fire-related gain of $1,261,102. The
Company recognized an insurance recovery gain of $1,283,712 and
professional service fees of $22,610. During the year ended
December 31, 2007, the Company recorded a net fire-related
gain of $577,941.
18
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
Notes to Consolidated Financial Statements
December 31, 2009 and 2008(Continued)
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
Notes to Consolidated Financial Statements
December 31, 2009 and 2008(Continued)
As of December 31, 2009, the insurance providers have
approved $7,283,712 and the Company has collected $6,980,377 of
these costs. At December 31, 2009, the Companys
receivable for recoveries from insurance carriers was $303,335.
Legal
Matters
In the ordinary course of business, the Company is a party to
various other legal matters. In the opinion of management, none
of these matters, either individually or in the aggregate, will
have a material adverse effect on the Companys financial
condition, liquidity, or results of operations.
Health,
Safety, and Environmental Matters
The Company is subject to certain environmental, safety, and
other regulations primarily administered by the EPA and various
state agencies. In addition, the EPA requires that the Company
provide assurance of its financial wherewithal regarding certain
future closure costs of the facility. Except as discussed below,
management of the Company believes it has complied with all
material aspects associated with these regulations.
By letter dated October 26, 2005, WRC received a
Finding of Violation (FOV) from the EPA, Region 6,
purportedly pursuant to Section 113 of the Federal Clean
Air Act. The FOV alleged certain violations of New Source
Performance Standards and National Emission Standards for
Hazardous Air Pollutants. WRC has provided the EPA with
explanatory and exculpatory information in response to the EPA
FOV. Based on discussions with the EPA, the Company has
determined that the settlement will include both corrective
actions and payment of civil penalties, which could be material.
As of December 31, 2009, the Company has $1,000,000 accrued
to cover the penalties. Actual penalties could exceed this
amount, however, management does not anticipate that the
ultimate outcome of this matter will have a material adverse
impact on the Companys financial position, liquidity, or
results of operations.
The Federal Clean Air Act authorizes the EPA to require
modifications in the formulation of the refined transportation
fuel products manufactured in order to limit the emissions
associated with their final use. In December 1999, the EPA
promulgated national regulations limiting the amount of sulfur
to be allowed in gasoline at future dates. The EPA believes such
limits are necessary to protect new automobile emission control
systems that may be inhibited by sulfur in the fuel. The new
regulations required the phase-in of gasoline sulfur standards
beginning in 2004, with the final reduction to the sulfur
content of gasoline to an annual average level of 30
parts-per-million
(ppm), and a per gallon maximum of 80 ppm to be completed
by June 2006. As a small refiner, WRC became a party to the
Waiver and Compliance Plan with the EPA that extended the
implementation deadline for low sulfur gasoline to 2011. In
return for the extension, WRC is required to produce 95% of the
diesel fuel at the refinery with a sulfur content of 15 ppm
or less starting June 1, 2006. WRC has complied with this
requirement and anticipates meeting the requirement in
subsequent years.
Other
Matters
TGWC entered into a
10-year
lease agreement extension for office space in June 2003. The
Company pays all rent and occupancy costs in exchange for its
use of the office space. The
19
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
Notes to Consolidated Financial Statements
December 31, 2009 and 2008(Continued)
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
Notes to Consolidated Financial Statements
December 31, 2009 and 2008(Continued)
Company has guaranteed the performance of TGWCs
obligations, under which the Company could be legally obligated
to pay annual rent, as scheduled below, and annual occupancy
costs of $307,000 with provisions for escalation based on actual
expenses. The monthly rent is expensed on a straight-line basis
over the term of the office lease. Rent expense, including
occupancy costs, for the years ended December 31, 2009 and
2008 was $1,025,689 and $949,997, respectively. Currently, TGWC
is subleasing a portion of the office space to two
related-parties for which the Company is reimbursed. Such
amounts were not significant for the years ended
December 31, 2009 and 2008.
The aggregate minimum rental commitments under noncancelable
leases for the periods shown at December 31, 2009, are as
follows:
Year
|
Annual Rent | |||
2010
|
$ | 825,605 | ||
2011
|
800,986 | |||
2012
|
776,366 | |||
2013
|
388,183 | |||
$ | 2,791,140 | |||
The Company currently has three
take-or-pay
purchase agreements, two that expire in 2010 and one that
expires in 2020. The purchase agreements are with different
suppliers. Under the terms of the agreements, the Company is
obligated to purchase a minimum daily volume of crude or else
pay for any deficiencies. The amounts purchased under
take-or-pay
obligations for the years ended December 31, 2009 and 2008
were $10,166,013 and $11,605,923, respectively. At
December 31, 2009, the minimum commitments under the
take-or-pay
purchase agreements are as follows:
Take-or-pay |
||||
Year
|
Obligation | |||
2010
|
$ | 7,529,028 | ||
2011
|
3,942,000 | |||
2012
|
3,952,800 | |||
2013
|
3,942,000 | |||
2014
|
3,942,000 | |||
Thereafter
|
20,055,600 | |||
$ | 43,363,428 | |||
In February 2009, the Company entered into a fixed price
engineering, procurement, and construction contract with an
engineering and consulting firm to construct a gasoline
hydrotreater unit, which will enable the Company to meet the new
EPA requirements limiting the amount of sulfur in gasoline
starting in 2011. Through December 31, 2009, the Company
has incurred $31,231,711 of costs related to this project, which
has been capitalized in property, plant, and equipment, net. The
project will be completed in 2010 and the estimated total
project cost is expected to be approximately $55,000,000.
20