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)
| | | | | | | | | |
| | | 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: | | | | | | | | |
| Trade—net 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 receivable—related-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 EQUIPMENT—Net | | | 280,353,633 | | | | 279,236,570 | |
| DEFERRED TURNAROUND COSTS—Net | | | 14,208,158 | | | | 24,044,574 | |
| INTANGIBLE ASSETS—Net | | | 1,090,146 | | | | 1,139,906 | |
| OTHER ASSETS—Net | | | 3,495,150 | | | | 9,910,006 | |
| | | | | | | | | |
| TOTAL ASSETS | | $ | 652,216,362 | | | $ | 586,538,673 | |
| | | | | | | | | |
LIABILITIES AND SHAREHOLDER’S 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 debt—current portion—net of discount | | | 46,401,137 | | | | 14,582,463 | |
| | | | | | | | | |
| Total current liabilities | | | 300,980,480 | | | | 248,390,128 | |
| | | | | | | | | |
| NONCURRENT LIABILITIES: | | | | | | | | |
| Long-term debt—net 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) | | | | | | | | |
| SHAREHOLDER’S 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 shareholder’s equity | | | 297,374,337 | | | | 208,395,553 | |
| | | | | | | | | |
| TOTAL LIABILITIES AND SHAREHOLDER’S 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.)
| | | | | | | | | |
| | | 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.)
| | | | | | | | | |
| | | 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.)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
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.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
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 investments—net | | | (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 receivable—net | | | (74,394,802 | ) | | | (24,655,742 | ) |
| Increase in accounts receivable—affiliate | | | (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 expenditures—refinery | | | (13,975,292 | ) | | | (36,453,656 | ) |
| Proceeds from sale of assets—net | | | 492,229 | | | | 13,652 | |
| Proceeds from property insurance | | | — | | | | 117,984 | |
| Purchase of investments | | | (1,494 | ) | | | (321,034 | ) |
| Proceeds from sale of investments—net | | | 60,539 | | | | 320,023 | |
| Change in restricted cash | | | (681 | ) | | | 308,080 | |
| Note receivable—related-party | | | (56,900 | ) | | | — | |
| Note receivable—related-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 EQUIVALENTS—Beginning of year | | | 34,045,795 | | | | 5,971,551 | |
| | | | | | | | | |
| CASH AND CASH EQUIVALENTS—End of period | | $ | 28,956,508 | | | $ | 786,498 | |
| | | | | | | | | |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | | | | | | | | |
| Cash paid during the year for interest and financing expenses—net 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
| |
| 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. GWEC’s 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. WRC’s 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. WIC’s 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 Presentation—The 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 Company’s 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 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 December 6, 2011, which is the day the consolidated financial statements were available to be issued.
Use of Estimates—The 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)
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 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, accounted for asavailable-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 Cash—Restricted 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 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 $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 Instruments—The 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 Company’s 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 Company’s 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)
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 Company’s 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 Company’s 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 Instruments—The Company’s 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 Measurements—A 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 Company’s 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)
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. |
Inventories—Inventories are valued at the lower offirst-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 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 Company’s 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)
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 equipment—at 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 equipment—net | | $ | 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 Company’s 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 Assets—Intangible 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)
The gross carrying amount and accumulated amortization totals related to the Company’s intangible assets are as follows:
| | | | | | | | | | | | | |
| | | Gross Carry
| | | Accumulated
| | | Net Carrying
| |
| | | Value | | | Amortization | | | Value | |
| |
As of September 30, 2011 | | | | | | | | | | | | |
| Processing license—sulfur recovery unit | | $ | 480,566 | | | $ | (132,788 | ) | | $ | 347,778 | |
| Processing license—gasoline hydrotreater | | | 780,000 | | | | (37,632 | ) | | | 742,368 | |
| | | | | | | | | | | | | |
| Total | | $ | 1,260,566 | | | $ | (170,420 | ) | | $ | 1,090,146 | |
| | | | | | | | | | | | | |
As of December 31, 2010 | | | | | | | | | | | | |
| Processing license—sulfur recovery unit | | $ | 480,566 | | | $ | (113,818 | ) | | $ | 366,748 | |
| Processing license—gasoline 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 Costs—The 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 Discount—Debt 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.
Impairment—The Company’s 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)
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 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 cleanand/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 maintainedand/or upgraded. It is the Company’s 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 Costs—Refinery turnaround costs are incurred in connection with planned shutdown and inspections of the refinery’s 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 Recognition—The Company generates revenue primarily from the sale of refined products produced at the Company’s 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)
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 fromavailable-for-sale securities.
Environmental Costs and Other Contingencies
Environmental Costs—The 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 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. 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 Pronouncements—In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)No. 2011-05,Comprehensive Income (Topic 220)—Presentation of Comprehensive Income. ASU2011-05 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. ASU2011-05 is effective for fiscal years and interim periods beginning after December 15, 2011. The Company does not expect the adoption of ASU2011-05 to have a material impact on its results of operations, financial condition, or cash flows.
In May 2011, the FASB issued ASUNo. 2011-04 that amends Accounting Standards Codification (“ASC”) 820—Fair Value Measurementregarding 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)
ASU2011-04 to have a material effect on its results of operations, financial condition, or cash flows.
| | | | | | | | | |
| | | September 30,
| | | December 31,
| |
| | | 2011 | | | 2010 | |
| |
| Term loan—due November 2014 | | $ | 49,212,121 | | | $ | 96,250,000 | |
| Finance obligation—due September 2029 | | | 19,693,658 | | | | 19,828,228 | |
| Capital lease obligation—due September 2029 | | | 30,461,266 | | | | 30,804,621 | |
| Airplane loan—due March 2014 | | | 4,605,033 | | | | 4,734,717 | |
| Other notes—due 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 Loan—GWEC, 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 agent’s prime rate at the Company’s option. Borrowings were repayable quarterly starting December 31, 2009, with 10% of the principal payable in year’s one and two, 20% payable in year’s 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.
Revolver—GWEC, 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 borrowand/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 Company’s 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 GWEC’s and WRC’s 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)
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 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 the30-day LIBOR for the remaining four years. The loan is to be repaid over seven years with principal payments based on a20-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 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 WRC’s 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 Company’s 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 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. 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)
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 Company’s 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 GWEC’s 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 GWEC’s 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)
Substantially all of the Company’s 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 Company’s 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 Company’s 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 Company’s overall costsand/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 Company’s 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)
| |
| 8. | COMMITMENTS AND CONTINGENCIES |
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 effect on the Company’s 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 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 Matters—TGWC entered into a10-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 TGWC’s 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)
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 a15-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 Company’s 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 Company’s 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 | |
| | | | | |
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.
******
19
