Attached files
file | filename |
---|---|
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-99.3 - EX-99.3 - CVR ENERGY INC | y93739exv99w3.htm |
EX-99.2 - EX-99.2 - CVR ENERGY INC | y93739exv99w2.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 99.4
GARY-WILLIAMS
ENERGY CORPORATION AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2011 AND DECEMBER 31, 2010
(Unaudited)
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2011 AND DECEMBER 31, 2010
(Unaudited)
2011 | 2010 | |||||||
ASSETS
|
||||||||
CURRENT ASSETS:
|
||||||||
Cash and cash equivalents
|
$ | 28,956,508 | $ | 34,045,795 | ||||
Restricted cash
|
124,782 | 124,101 | ||||||
Investments
|
322,480 | 372,786 | ||||||
Accounts receivable:
|
||||||||
Tradenet of allowances of $839,183 and $203,964 in 2011
and 2010, respectively
|
137,287,860 | 63,732,241 | ||||||
Affiliates
|
197,815 | 174,543 | ||||||
Note receivablerelated-party
|
56,900 | 894 | ||||||
Inventories
|
177,212,978 | 169,756,197 | ||||||
Prepaid expenses and other
|
8,909,952 | 4,001,060 | ||||||
Total current assets
|
353,069,275 | 272,207,617 | ||||||
PROPERTY, PLANT, AND EQUIPMENTNet
|
280,353,633 | 279,236,570 | ||||||
DEFERRED TURNAROUND COSTSNet
|
14,208,158 | 24,044,574 | ||||||
INTANGIBLE ASSETSNet
|
1,090,146 | 1,139,906 | ||||||
OTHER ASSETSNet
|
3,495,150 | 9,910,006 | ||||||
TOTAL ASSETS
|
$ | 652,216,362 | $ | 586,538,673 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY
|
||||||||
CURRENT LIABILITIES:
|
||||||||
Accounts payable
|
$ | 197,723,074 | $ | 215,522,352 | ||||
Accrued liabilities and other
|
19,050,059 | 18,285,313 | ||||||
Derivative liabilities
|
7,435,210 | | ||||||
Tax dividend obligation to parent
|
30,371,000 | | ||||||
Long-term debtcurrent portionnet of discount
|
46,401,137 | 14,582,463 | ||||||
Total current liabilities
|
300,980,480 | 248,390,128 | ||||||
NONCURRENT LIABILITIES:
|
||||||||
Long-term debtnet of discount
|
53,823,116 | 129,676,133 | ||||||
Other
|
38,429 | 76,859 | ||||||
Total noncurrent liabilities
|
53,861,545 | 129,752,992 | ||||||
Total liabilities
|
354,842,025 | 378,143,120 | ||||||
COMMITMENTS AND CONTINGENCIES (Note 8)
|
||||||||
SHAREHOLDERS EQUITY:
|
||||||||
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 | 969 | ||||||
Contributed capital
|
36,357,640 | 36,357,640 | ||||||
Retained earnings
|
261,015,641 | 172,034,444 | ||||||
Accumulated other comprehensive income (loss)
|
87 | 2,500 | ||||||
Total shareholders equity
|
297,374,337 | 208,395,553 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
|
$ | 652,216,362 | $ | 586,538,673 | ||||
See accompanying notes to consolidated financial statements.
1
GARY-WILLIAMS
ENERGY CORPORATION AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(Unaudited)
2011 | 2010 | |||||||
OPERATING REVENUE
|
$ | 2,041,263,810 | $ | 1,541,973,414 | ||||
OPERATING EXPENSES
|
1,857,185,583 | 1,512,229,444 | ||||||
GROSS PROFIT
|
184,078,227 | 29,743,970 | ||||||
GENERAL AND ADMINISTRATIVE EXPENSES
|
13,903,449 | 12,055,151 | ||||||
OPERATING INCOME
|
170,174,778 | 17,688,819 | ||||||
OTHER INCOME (EXPENSE):
|
||||||||
Interest and investment income
|
88,990 | 29,508 | ||||||
Interest expense
|
(22,900,258 | ) | (16,647,608 | ) | ||||
Gain on disposal of assets
|
176,201 | 12,052 | ||||||
Other income (expense)net
|
(289,514 | ) | 726,651 | |||||
Total other expense
|
(22,924,581 | ) | (15,879,397 | ) | ||||
NET INCOME
|
$ | 147,250,197 | $ | 1,809,422 | ||||
See accompanying notes to consolidated financial statements.
2
GARY-WILLIAMS
ENERGY CORPORATION AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
CONSOLIDATED
STATEMENTS OF CHANGES IN RETAINED EARNINGS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(Unaudited)
2011 | 2010 | |||||||
BALANCE AT JANUARY 1,
|
$ | 172,034,444 | $ | 155,889,012 | ||||
NET INCOME
|
147,250,197 | 1,809,422 | ||||||
TAX DIVIDENDS DECLARED
|
(58,269,000 | ) | | |||||
BALANCE AT SEPTEMBER 30,
|
$ | 261,015,641 | $ | 157,698,434 | ||||
See accompanying notes to consolidated financial statements.
3
GARY-WILLIAMS
ENERGY CORPORATION AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(Unaudited)
2011 | 2010 | |||||||
NET INCOME
|
$ | 147,250,197 | $ | 1,809,422 | ||||
UNREALIZED LOSS ON INVESTMENTS
|
(2,413 | ) | (3,356 | ) | ||||
COMPREHENSIVE INCOME
|
$ | 147,247,784 | $ | 1,806,066 | ||||
See accompanying notes to consolidated financial statements.
4
GARY-WILLIAMS
ENERGY CORPORATION AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(Unaudited)
2011 | 2010 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net income
|
$ | 147,250,197 | $ | 1,809,422 | ||||
Adjustments to reconcile net income from continuing operations
to net cash used in operating activities:
|
||||||||
Depreciation and amortization
|
13,132,852 | 10,629,882 | ||||||
Amortization of turnaround costs
|
9,836,416 | 10,466,956 | ||||||
Amortization of deferred debt issuance costs and discount on debt
|
9,059,837 | 5,827,696 | ||||||
Gain on sale of assets
|
(176,201 | ) | (12,052 | ) | ||||
Realized gain on sale of investmentsnet
|
(11,152 | ) | (4,529 | ) | ||||
Provision for losses on accounts receivable
|
839,183 | | ||||||
Unrealized loss on derivative instrument
|
37,853,684 | | ||||||
Changes in operating assets and liabilities:
|
||||||||
Increase in accounts receivablenet
|
(74,394,802 | ) | (24,655,742 | ) | ||||
Increase in accounts receivableaffiliate
|
(23,272 | ) | (34,951 | ) | ||||
(Increase) decrease in inventories
|
(7,456,781 | ) | 2,345,728 | |||||
Increase in prepaid expenses and other
|
(2,530,038 | ) | (1,433,640 | ) | ||||
Decrease in accounts payable
|
(18,340,168 | ) | (15,659 | ) | ||||
Increase (decrease) in accrued liabilities
|
751,440 | (2,179,442 | ) | |||||
Decrease in derivative liabilities
|
(30,418,474 | ) | | |||||
Decrease in other liabilities
|
(25,124 | ) | (18,736 | ) | ||||
Net cash provided by operating activities
|
85,347,597 | 2,724,933 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Capital expendituresrefinery
|
(13,975,292 | ) | (36,453,656 | ) | ||||
Proceeds from sale of assetsnet
|
492,229 | 13,652 | ||||||
Proceeds from property insurance
|
| 117,984 | ||||||
Purchase of investments
|
(1,494 | ) | (321,034 | ) | ||||
Proceeds from sale of investmentsnet
|
60,539 | 320,023 | ||||||
Change in restricted cash
|
(681 | ) | 308,080 | |||||
Note receivablerelated-party
|
(56,900 | ) | | |||||
Note receivablerelated-party collection
|
894 | 2,298 | ||||||
Net cash used in investing activities
|
(13,480,705 | ) | (36,012,653 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Borrowings under long-term debt
|
$ | 315,100,000 | $ | 724,788,766 | ||||
Principal payments on long-term debt
|
(362,404,194 | ) | (693,465,195 | ) | ||||
Borrowings under notes payable to parent
|
89,000,000 | 31,100,000 | ||||||
Principal payments on notes payable to parent
|
(89,000,000 | ) | (31,100,000 | ) | ||||
Capital lease obligation payments
|
(346,708 | ) | (317,365 | ) | ||||
Payments of debt issuance costs
|
(1,407,277 | ) | (2,903,539 | ) | ||||
Tax dividend obligation distributed
|
(27,898,000 | ) | | |||||
Net cash (used in) provided by financing activities
|
(76,956,179 | ) | 28,102,667 | |||||
Net decrease in cash and cash equivalents
|
(5,089,287 | ) | (5,185,053 | ) | ||||
CASH AND CASH EQUIVALENTSBeginning of year
|
34,045,795 | 5,971,551 | ||||||
CASH AND CASH EQUIVALENTSEnd of period
|
$ | 28,956,508 | $ | 786,498 | ||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
|
||||||||
Cash paid during the year for interest and financing
expensesnet of amounts capitalized
|
$ | 15,580,293 | $ | 14,408,147 | ||||
SUPPLEMENTAL SCHEDULE OF NONCASH
|
||||||||
INVESTING AND FINANCING ACTIVITIES:
|
||||||||
Additions to construction projects in progress funded through
accounts payable
|
$ | 1,265,077 | $ | 3,515,073 | ||||
See accompanying notes to consolidated financial statements.
5
GARY-WILLIAMS
ENERGY CORPORATION AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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
(bpd).
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.
References to the Company are to GWEC and its
subsidiaries, collectively.
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Basis of PresentationThe accompanying unaudited
consolidated financial statements include the accounts of GWEC
and its wholly owned subsidiaries and have been prepared in
accordance with United States generally accepted accounting
principles (US GAAP) for interim financial
information. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. However, except as
disclosed herein, there has been no material change in the
information disclosed in the notes to the consolidated financial
statements included in the Companys consolidated financial
statements for the year ended December 31, 2010. Operating
results for the nine months ended September 30, 2011, are
not necessarily indicative of the results that may be expected
for the year ending December 31, 2011, or for any other
period.
Intercompany balances and transactions have been eliminated.
Subsequent EventsThe 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 December 6, 2011, which is
the day the consolidated financial statements were available to
be issued.
Use of EstimatesThe preparation of financial
statements in conformity with US 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 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.
6
GARY-WILLIAMS
ENERGY CORPORATION AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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.
Cash, Cash Equivalents, and InvestmentsFor purposes
of these statements, the Company considers liquid investments
purchased with an original maturity of three months or less to
be cash equivalents. Investments, accounted for as
available-for-sale,
having an original maturity of more than three months, but less
than 12, are recorded as a current asset in the accompanying
consolidated balance sheets. Cash equivalents consist of money
market funds and investments consist of equity securities and
domestic and international bond funds.
Restricted CashRestricted cash includes cash
balances which are legally or contractually restricted to use.
At September 30, 2011 and December 31, 2010 the
Company had short-term restricted cash of $124,782 and $124,101,
respectively. The restricted cash is being held in a certificate
of deposit as collateral on a bond that was initially set up to
secure a right of way obligation on properties the Company
previously owned. The Company is in the process of canceling the
bond and releasing the restriction on the cash.
Allowance for Doubtful AccountsThe 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
$839,183 and $203,964 at September 30, 2011 and
December 31, 2010, respectively. For the nine months ended
September 30, 2011, the Company recorded provisions for bad
debts of $839,183.
Commodity Derivative InstrumentsThe Company
periodically enters into commodity swaps to reduce commodity
price uncertainty and enhance the predictability of cash flows
relating to the purchase of raw materials and the marketing of
refined products. Provisions in the Companys Risk
Management Policy set forth quantity limits, authorization
requirements, and exposure limits.
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. Generally, the Company incurs accounting losses on
derivatives during periods where net margins are rising and
gains during periods where net margins are falling, which may
cause significant fluctuations in the Companys
consolidated balance sheets and consolidated statements of
operations. At September 30, 2011, the Company had a
derivative liability of $7,435,210 net of a collateral
balance of $31,200,000 held by its counterparty. For the nine
months ended September 30, 2011, the Company recognized a
realized loss of $22,897,515 and an unrealized loss of
$37,853,684 in operating expense for commodity swaps.
7
GARY-WILLIAMS
ENERGY CORPORATION AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
At September 30, 2011 the Company had the following
commodity swap positions:
Weighted |
Weighted |
|||||||||||||||
Volume |
Average |
Average |
Fair |
|||||||||||||
Period
|
(bpd) | Fixed Price | Fair Value Price | Value | ||||||||||||
October 1, 2011 through December 31, 2011
|
24,000 | $ | 11.59 | $ | 28.74 | $ | (37,853,684 | ) | ||||||||
Total
|
$ | (37,853,684 | ) | |||||||||||||
The information presented above shows the daily volume of West
Texas intermediate crude oil contracted for purchase for the
specified period. There is an offsetting equal daily volume of
refined products contracted for sale for that same period. The
weighted average fixed price represents the net margin between
the crude purchase prices and the product sales prices. Quoted
market prices, from trading counterparties, are used to value
commodity derivative instruments at fair value.
At times the Companys commodity derivative contracts
under master netting arrangements include both asset and
liability positions. The Company has elected to offset the fair
value amount recognized for multiple similar derivative
instruments executed with the same counterparty, including any
related cash collateral asset or obligation.
Commodity swaps expose the Company to counterparty credit risk.
The Companys commodity derivative instruments are
currently with a highly rated market participant, and the
Company controls its level of financial exposure. The commodity
derivative contracts are executed under master agreements which
allow the Company to elect early termination of all contracts
with the counterparty. If the Company chooses to elect early
termination, all asset and liability positions with the
counterparty would be net settled at the time of election.
Financial InstrumentsThe 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.
Fair Value MeasurementsA fair value hierarchy
(Level 1, Level 2, or Level 3) is used to
categorize fair value amounts based on the quality of inputs
used to measure fair value. Accordingly, fair values determined
by Level 1 inputs utilize quoted prices in active markets
for identical assets or liabilities. Fair values determined by
Level 2 inputs are based on quoted prices for similar
assets and liabilities in active markets, and inputs other than
quoted prices that are observable for the asset or liability.
Level 3 inputs are unobservable inputs for the asset or
liability, and include situations where there is little, if any,
market activity for the asset or liability.
The tables below present information about the Companys
financial assets and liabilities measured and recorded at fair
value on a reoccurring basis and indicate the fair value
8
GARY-WILLIAMS
ENERGY CORPORATION AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
hierarchy of the inputs utilized by the Company to determine the
fair values as of September 30, 2011 and December 31,
2010.
Quoted Prices in |
Significant Other |
Counterparty and |
Total |
|||||||||||||
Active Markets |
Observable Inputs |
Cash Collateral |
September 30, |
|||||||||||||
(Level 1) | (Level 2) | Netting | 2011 | |||||||||||||
Assets
|
||||||||||||||||
Investments
|
$ | 322,480 | $ | | $ | 322,480 | ||||||||||
Liabilities
|
||||||||||||||||
Commodity derivative contracts
|
$ | | $ | 37,853,684 | $ | (31,200,000 | )* | $ | 6,653,684 | ** |
Quoted Prices in |
Significant Other |
Total |
||||||||||
Active Markets |
Observable Inputs |
December 31, |
||||||||||
(Level 1) | (Level 2) | 2010 | ||||||||||
Assets
|
||||||||||||
Investments
|
$ | 372,786 | $ | | $ | 372,786 |
* | Amount represents the effect of legally enforceable master netting arrangements between the reporting entity and its counterparty and the receivable for cash collateral held by the same counterparty. | |
** | Amount does not agree to the derivative liabilities in the consolidated balance sheet because it excludes the September 2011 settlement of $781,526. |
The valuation methods used to measure financial instruments at
fair value are as follows:
| Commodity derivative contracts, consisting of swaps, are measured at fair value using the market approach. Quoted market prices, from trading counterparties, are used to value commodity derivative instruments. | |
| Investments are measured at fair value using a market approach based on quotations from national securities exchanges. |
InventoriesInventories are valued at the lower of
first-in,
first-out cost or market. Write-downs to market are charged to
operating expense. Inventories at September 30, 2011 and
December 31, 2010 are as follows:
2011 | 2010 | |||||||
Refined, unrefined, and intermediate products
|
$ | 121,272,478 | $ | 100,025,660 | ||||
Crude oil
|
48,891,206 | 64,537,833 | ||||||
Materials and supplies (valued at average cost)
|
7,049,294 | 5,192,704 | ||||||
Inventories
|
$ | 177,212,978 | $ | 169,756,197 | ||||
Property, Plant, and EquipmentThe 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
9
GARY-WILLIAMS
ENERGY CORPORATION AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
capital leases and leasehold improvements are amortized using
the straight-line method over the lease term and are included in
depreciation expense.
At September 30, 2011 and December 31, 2010, property,
plant, and equipment, with the range of useful lives, are
comprised of the following:
2011 | 2010 | |||||||
Refinery property, plant, and equipment (3 to 30 years)
|
$ | 329,744,106 | $ | 318,737,295 | ||||
Pipeline and copiers under capital lease (5 to 20 years)
|
557,602 | 641,743 | ||||||
Airplane (6 years)
|
8,345,920 | 7,808,376 | ||||||
Furniture, fixtures, and equipment (1 to 15 years)
|
6,768,280 | 6,303,688 | ||||||
Precious metals, land, and other non-depreciable assets
|
4,052,526 | 3,663,655 | ||||||
Catalyst (5 years)
|
7,450,553 | 7,484,385 | ||||||
Vehicles (2 to 3 years)
|
1,297,583 | 1,162,311 | ||||||
Construction in progress
|
8,880,683 | 7,179,785 | ||||||
Property, plant, and equipmentat cost
|
367,097,253 | 352,981,238 | ||||||
Less accumulated depreciation and amortization (including
accumulated depreciation under capital lease of $58,084 and
$119,912, respectively)
|
(86,743,620 | ) | (73,744,668 | ) | ||||
Property, plant, and equipmentnet
|
$ | 280,353,633 | $ | 279,236,570 | ||||
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
nine months ended September 30, 2011 and 2010, the Company
capitalized interest of $832,663 and $5,718,092, respectively.
Depreciation and amortization expense for the nine months ended
September 30, 2011 and 2010 was $13,083,093 and
$10,610,912, respectively.
Intangible AssetsIntangible assets consist of the
cost of two processing licenses obtained for two refinery units,
which are subject to amortization. Amortization is provided
using the straight-line method based on an estimated useful life
of 19 years. Amortization expense for the nine months ended
September 30, 2011 and 2010 was $49,759 and $18,970,
respectively.
10
GARY-WILLIAMS
ENERGY CORPORATION AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The gross carrying amount and accumulated amortization totals
related to the Companys intangible assets are as follows:
Gross Carry |
Accumulated |
Net Carrying |
||||||||||
Value | Amortization | Value | ||||||||||
As of September 30, 2011
|
||||||||||||
Processing licensesulfur recovery unit
|
$ | 480,566 | $ | (132,788 | ) | $ | 347,778 | |||||
Processing licensegasoline hydrotreater
|
780,000 | (37,632 | ) | 742,368 | ||||||||
Total
|
$ | 1,260,566 | $ | (170,420 | ) | $ | 1,090,146 | |||||
As of December 31, 2010
|
||||||||||||
Processing licensesulfur recovery unit
|
$ | 480,566 | $ | (113,818 | ) | $ | 366,748 | |||||
Processing licensegasoline hydrotreater
|
780,000 | (6,842 | ) | 773,158 | ||||||||
Total
|
$ | 1,260,566 | $ | (120,660 | ) | $ | 1,139,906 | |||||
Estimated amortization expense for succeeding years are as
follows:
Amortization |
||||
Year
|
Expense | |||
2011
|
$ | 16,586 | ||
2012
|
66,346 | |||
2013
|
66,346 | |||
2014
|
66,346 | |||
2015
|
66,346 | |||
Thereafter
|
808,176 | |||
Total
|
$ | 1,090,146 | ||
Debt Issuance CostsThe Company capitalizes direct
costs incurred to issue or modify debt agreements. Unamortized
debt issuance costs are included in noncurrent or current other
assets on the consolidated balance sheets. For the nine months
ended September 30, 2011 and 2010, the Company capitalized
$1,407,277 and $2,903,539, respectively, of costs incurred in
connection with debt amendments. These costs are being amortized
over the expected term 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. For the nine months ended
September 30, 2011, total interest expense from deferred
debt issuance costs was $5,443,280, of which $2,208,617
represented a write off of a portion of unamortized debt
issuance costs from amending and prepaying debt. For the nine
months ended September 30, 2010, the Company amortized
deferred debt issuance costs of $3,483,830.
Debt Issued at a DiscountDebt issued at a discount
to the face amount is accreted up to its face amount utilizing
the effective interest method over the expected term of the note
and recorded as a component of interest expense on the
consolidated statements of operations.
ImpairmentThe 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
11
GARY-WILLIAMS
ENERGY CORPORATION AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
of the asset exceeds the forecast of discounted expected future
cash flows. The Company recorded no impairments during the nine
months ended September 30, 2011 and 2010, respectively.
Asset Retirement ObligationThe 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.
Deferred Turnaround CostsRefinery turnaround costs
are incurred in connection with planned shutdown and inspections
of the refinerys major units to perform planned major
maintenance. 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 fourth quarter of 2012. As of
September 30, 2011 and December 31, 2010, deferred
turnaround costs amounted to $14,208,158 and $24,044,574, net of
accumulated amortization of $47,666,875 and $37,830,459,
respectively. Amortization expense for the nine months ended
September 30, 2011 and 2010 was $9,836,416 and $10,466,956,
respectively.
Revenue RecognitionThe 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. Nonmonetary product exchanges and
certain buy/sell crude oil transactions which are entered into
in the normal course of business are included on a net cost
basis in operating expenses on the consolidated statements of
operations.
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
12
GARY-WILLIAMS
ENERGY CORPORATION AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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 consolidated
financial statements.
Excise tax, motor fuel tax, sales 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.
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.
Environmental
Costs and Other Contingencies
Environmental CostsThe Company records an
undiscounted liability on the consolidated balance sheets 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 United States Environmental
Protection Agency (EPA) or other organizations. The
estimates are subject to revision in future periods based on
actual costs or new circumstances.
Other ContingenciesThe 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. Alternatively, where the most likely outcome cannot
be estimated, a 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.
Recent Accounting PronouncementsIn June 2011, the
Financial Accounting Standards Board (FASB) issued
Accounting Standards Update (ASU)
No. 2011-05,
Comprehensive Income (Topic 220)Presentation of
Comprehensive Income. ASU
2011-05
requires entities to present net income and other comprehensive
income in either a single continuous statement or in two
separate, but consecutive, statements of net income and other
comprehensive income. ASU
2011-05 is
effective for fiscal years and interim periods beginning after
December 15, 2011. The Company does not expect the adoption
of ASU
2011-05 to
have a material impact on its results of operations, financial
condition, or cash flows.
In May 2011, the FASB issued ASU
No. 2011-04
that amends Accounting Standards Codification (ASC)
820Fair Value Measurement regarding fair value
measurements and disclosure requirements. ASC 820 provides
a framework for how companies should measure fair value when
used in financial reporting, and sets out required disclosures.
The amendments are intended to clarify how fair value should be
measured, converge the U.S. guidance with International
Financial Reporting Standards, and expand the disclosures that
are required. The amendments are effective during interim and
annual periods beginning after December 15, 2011 and are to
be applied prospectively. The Company does not expect that the
adoption of
13
GARY-WILLIAMS
ENERGY CORPORATION AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
ASU 2011-04
to have a material effect on its results of operations,
financial condition, or cash flows.
3. | LONG-TERM DEBT |
September 30, |
December 31, |
|||||||
2011 | 2010 | |||||||
Term loandue November 2014
|
$ | 49,212,121 | $ | 96,250,000 | ||||
Finance obligationdue September 2029
|
19,693,658 | 19,828,228 | ||||||
Capital lease obligationdue September 2029
|
30,461,266 | 30,804,621 | ||||||
Airplane loandue March 2014
|
4,605,033 | 4,734,717 | ||||||
Other notesdue February 2011
|
| 5,412 | ||||||
Less discount on term loan
|
(3,747,825 | ) | (7,364,382 | ) | ||||
Total debt
|
100,224,253 | 144,258,596 | ||||||
Less obligations due in one year
|
(46,401,137 | ) | (14,582,463 | ) | ||||
Long-term debt
|
$ | 53,823,116 | $ | 129,676,133 | ||||
Term LoanGWEC, WRC, and the Holding Company,
collectively, are a party to a secured five-year $110,000,000
discounted term loan facility (the Term Loan) dated
November 13, 2009 (as amended) with a syndicate of
financial institutions. Borrowings under the Term Loan accrue
interest on floating rates based on LIBOR or the agents
prime rate at the Companys option. Borrowings were
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, with
the last scheduled payment due on September 30, 2014. The
term loan allows for prepayment and is also subject to mandatory
prepayment requirements with respect to certain asset sales,
excess cash flow (as defined in the agreement), and certain
other events. Prepayments are applied pro rata to the remaining
scheduled term loan principal payments. The Company voluntarily
prepaid $40,000,000 in the third quarter of 2011. The Company
estimates a mandatory prepayment of $43,060,606 will be due on
March 30, 2012 with respect to the year ended
December 31, 2011 excess cash flow provision. At
September 30, 2011, the Company had $49,212,121 outstanding
under the facility.
RevolverGWEC, WRC, and the Holding Company,
collectively, entered into a $150,000,000 secured revolving
credit facility (the Revolver) dated
November 13, 2009 with a syndicate of
financial institutions. On August 19, 2011, the credit
facility was amended to extend the term to August 19, 2016,
increase the borrowing base to
$175,000,000, and reduce the interest rates. The Company can borrow
and/or issue
letters of credit, which in the aggregate, cannot exceed the
lesser of the borrowing base or $175,000,000. 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
$175,000,000 at September 30, 2011. 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 August 19, 2016. There was no outstanding
Revolver balance at September 30, 2011.
Letters of credit are primarily obtained by the Company for its
routine purchases of crude oil. Letters of credit totaling
$26,397,012 and $30,624,143 had been issued as of
September 30, 2011 and December 31, 2010, respectively.
The Term Loan and Revolver are secured by substantially all of
GWECs and WRCs assets and are subject to various
financial and non-financial covenants that limit distributions,
14
GARY-WILLIAMS
ENERGY CORPORATION AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
dividends, acquisitions, capital expenditures, disposals and
debt and require minimum debt service coverage, net worth, and
working capital requirements. The Company was in compliance with
its financial covenants and ratios at September 30, 2011.
Airplane LoanGWEC 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. The
outstanding balance at September 30, 2011 was $4,605,033.
Finance ObligationOn 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 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. The outstanding balance at
September 30, 2011 was $19,693,658.
Capital LeaseOn 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. The transaction was recorded using
sale-leaseback accounting. 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. The
outstanding balance at September 30, 2011 was $30,461,266.
Letters of credit fees, bond fees, unused commitment fees,
amortization of deferred debt issuance costs, write off of
deferred debt issuance costs, accretion of discount on debt,
amortization of premium on interest rate cap, and interest from
borrowings under the various agreements are included in interest
expense in the accompanying consolidated statements of
operations (net of amounts capitalized).
15
GARY-WILLIAMS
ENERGY CORPORATION AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The minimum remaining principal payments under the loan
agreements and minimum lease payments under capital lease
obligations are as follows:
Year Ending |
Term |
Airplane |
Finance |
Capital |
||||||||||||||||
December 31,
|
Loan | Loan | Obligation | Lease | Total | |||||||||||||||
2011
|
$ | 3,075,758 | $ | 44,583 | $ | 57,281 | $ | 1,092,000 | $ | 4,269,622 | ||||||||||
2012
|
46,136,363 | 185,403 | 253,518 | 4,392,000 | 50,967,284 | |||||||||||||||
2013
|
| 197,250 | 322,103 | 4,380,000 | 4,899,353 | |||||||||||||||
2014
|
| 4,177,797 | 398,302 | 4,380,000 | 8,956,099 | |||||||||||||||
2015
|
| | 482,881 | 4,380,000 | 4,862,881 | |||||||||||||||
Thereafter
|
| | 18,179,573 | 60,357,058 | 78,536,631 | |||||||||||||||
Total minimum lease payments
|
$ | 49,212,121 | $ | 4,605,033 | $ | 19,693,658 | 78,981,058 | 152,491,870 | ||||||||||||
Less amount representing executory costs
|
(4,406,433 | ) | (4,406,433 | ) | ||||||||||||||||
Net minimum lease payments
|
74,574,625 | 148,085,437 | ||||||||||||||||||
Less amount representing interest
|
(44,113,359 | ) | (44,113,359 | ) | ||||||||||||||||
Present value of net minimum lease payments
|
$ | 30,461,266 | $ | 103,972,078 | ||||||||||||||||
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 at the shareholder level. 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%, the rate that GWEC
would pay if it determined its tax liability as a stand alone C
Corporation. These amounts are reflected as tax dividends
declared in the consolidated statements of changes in retained
earnings. Each of 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 $1,974,412 and $1,226,786 were expensed for the nine months
ended September 30, 2011 and 2010, respectively.
16
GARY-WILLIAMS
ENERGY CORPORATION AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
6. | CONCENTRATIONS |
Substantially all of the Companys accounts receivable at
September 30, 2011 and December 31, 2010 results from
the sale of refined products to companies in the retail and
wholesale 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 nine months ended September 30, 2011 and 2010,
respectively. One customer accounted for more than 10% of gross
accounts receivable at September 30, 2011 and no single
customer accounted for more than 10% of gross accounts
receivable at December 31, 2010.
In March 2010, the Company was awarded contracts to sell
approximately 58,000,000 gallons of jet fuel to the United
States Defense Energy Support Center (DESC) for the
period April 1, 2010 through March 31, 2011. This
agreement was subsequently amended to run through May 31,
2011. In May 2011, the Company was awarded contracts to sell
approximately 17,955,000 gallons of jet fuel to the DESC for the
period June 1, 2011 through September 30, 2011.
Pricing is variable, calculated based on market prices, as
specified in the contract. For the nine months ended
September 30, 2011 and 2010, product sales to this customer
approximated 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 nine months ended
September 30, 2011 and 2010, three vendors accounted for
39% and 44%, respectively, of total raw material and refined
purchases.
Approximately 50% 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 2011, to sublease a hangar for the Company aircraft.
Terms of the sublease provide for annual rentals of $87,000
until June 30, 2013.
On a monthly basis, the Company charges certain general and
administrative support costs to its affiliates. At
September 30, 2011 and December 31, 2010, the
affiliated accounts receivable balance was $197,815 and
$174,543, respectively.
GWEC entered into a promissory note in February 2010 with TGWC,
whereby GWEC promised to pay TGWC the principal sum of
$10,000,000 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 ten business days
after the funds are advanced. The note is due on
January 31, 2012. There was no outstanding balance under
the note at September 30, 2011 and December 31, 2010,
respectively.
17
GARY-WILLIAMS
ENERGY CORPORATION AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
8. | COMMITMENTS AND CONTINGENCIES |
Legal MattersIn 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 effect on
the Companys financial condition, liquidity, or results of
operations.
Health, Safety, and Environmental MattersThe
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 determined
that the settlement would include both corrective actions and
payment of civil penalties. The Company initially accrued
$1,000,000 to cover the penalties. The EPA delegated settlement
authority to the Oklahoma Department of Environmental Quality
(ODEQ). The Company and the ODEQ entered into a
consent order on August 1, 2011. The consent included a
penalty of $950,000, which was paid in August 2011.
Other MattersTGWC 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 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 $356,918 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 nine
months ended September 30, 2011 and 2010 was $637,114 and
$649,849, respectively.
The aggregate minimum rental commitments under non-cancelable
leases for the periods shown at September 30, 2011, are as
follows:
Year
|
Annual Rent | |||
2011
|
$ | 158,526 | ||
2012
|
634,102 | |||
2013
|
317,051 | |||
$ | 1,109,679 | |||
The Company currently has one throughput and deficiency
agreement that expires in 2020. Under the terms of the
agreement, the Company is obligated to pay a tariff fee on a
minimum daily volume of crude or else pay for any deficiencies.
The fees paid under throughput and deficiency obligations for
the nine months ended September 30, 2011 and 2010 were
$2,948,400 and $6,114,228, respectively.
18
GARY-WILLIAMS
ENERGY CORPORATION AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
At September 30, 2011, the minimum commitments under the
throughput and deficiency agreement are as follows:
Transportation |
||||
Year
|
Obligation | |||
2011
|
$ | 993,600 | ||
2012
|
3,952,800 | |||
2013
|
3,942,000 | |||
2014
|
3,942,000 | |||
2015
|
3,942,000 | |||
Thereafter
|
17,074,800 | |||
$ | 33,847,200 | |||
On March 14, 2011, WRC and GWEC, collectively, entered into
a 15-year
sulfur processing agreement with a third party. Under the terms
of the agreement, the third party will process and remove sulfur
from specified acid gas, sour water stripper gas and other
streams containing hydrogen sulfide or other forms of sulfur
that are generated as a byproduct of the operation of the
Companys refinery for a guaranteed minimum monthly
processing fee of $200,000. The payment of the monthly
processing fee will start after the third party installs their
proprietary equipment at the Companys refinery, which the
Company estimates to be November 1, 2012.
Assuming operability of the proprietary equipment on
November 1, 2012, the aggregate minimum commitments under
the operating agreement for the periods shown at
September 30, 2011 are as follows:
Processing |
||||
Year
|
Obligation | |||
2011
|
$ | | ||
2012
|
400,000 | |||
2013
|
2,400,000 | |||
2014
|
2,400,000 | |||
2015
|
2,400,000 | |||
Thereafter
|
28,400,000 | |||
$ | 36,000,000 | |||
9. | SUBSEQUENT EVENT |
On November 2, 2011, the Holding Company entered into an
agreement to sell its stock to Coffeyville Resources, LLC for
$525,000,000, plus working capital on the closing date. The
Company expects the transaction to close by the end of the
fourth quarter of 2011.
******
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