e8vk
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): December 9, 2011
CVR ENERGY, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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001-33492
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61-1512186 |
(State or other
jurisdiction of
incorporation)
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(Commission File Number)
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(I.R.S. Employer
Identification Number) |
2277 Plaza Drive, Suite 500
Sugar Land, Texas 77479
(Address of principal executive offices,
including zip code)
Registrants telephone number, including area code: (281) 207-3200
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the
filing obligation of the registrant under any of the following provisions:
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Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
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Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
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Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b)) |
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Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c)) |
Item 7.01. Regulation FD Disclosure
On December 9,
2011, CVR Energy, Inc. (the Company)
announced that its wholly-owned subsidiaries, Coffeyville Resources, LLC (CRLLC) and
Coffeyville Finance Inc., have commenced a private offering (the Private Offering) of
$200,000,000 aggregate principal amount of first lien senior secured notes due 2015 (the
Notes). The Notes have not been registered under the Securities Act of 1933, as amended,
and may not be offered
or sold in the United States absent registration or an applicable exemption from registration requirements.
Portions of the summary and business sections of the offering memorandum the Company and CRLLC
prepared in connection with the Private Offering are attached hereto as Exhibit 99.1. The
information filed in this Current Report on Form 8-K pursuant to Item 7.01, including the
information contained in Exhibit 99.1, is neither an offer to sell nor a solicitation of
an offer to buy any of the Notes in the Private Offering.
In accordance with General Instruction B.2 of Form 8-K, the information in Item 7.01 of this
Current Report on Form 8-K and Exhibit 99.1 attached hereto are being furnished pursuant
to Item 7.01 of Form 8-K and will not, except to the extent required by applicable law or
regulation, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange
Act of 1934, as amended, or otherwise subject to the liabilities of that Section, nor will any of
such information or exhibits be deemed incorporated by reference into any filing under the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except as
expressly set forth by specific reference in such filing.
Item 8.01. Other Events
As previously announced, the Company and CRLLC have entered into a Stock Purchase and Sale
Agreement (the Purchase Agreement) with The Gary-Williams Company, Inc., a Delaware
corporation (Seller Parent), GWEC Holding Company, Inc., a Delaware corporation and a
wholly-owned subsidiary of Seller Parent (Seller), and Gary-Williams Energy Corporation,
a Delaware corporation and a wholly-owned subsidiary of Seller (GWEC), pursuant to which
CRLLC has agreed to acquire from Seller all of the issued and outstanding shares of GWEC, subject
to the terms and conditions contained therein, for a purchase price of $525,000,000 in cash (less a
$26,250,000 purchase price deposit already paid), plus an amount equal to GWECs working capital at
the closing, as of now estimated to be $69,000,000 (the Acquisition).
GWECs audited
consolidated financial statements and related notes (i) as of
and for the years
ended December 31, 2010 and 2009 and (ii) as of December 31,
2009 and for each of the years in the two-year period then ended are attached hereto as Exhibits 99.2 and 99.3,
respectively, and incorporated by reference herein. GWECs unaudited consolidated financial
statements as of September 30, 2011 and for the nine months ended September 30, 2011 and 2010 are
attached hereto as Exhibit 99.4, and incorporated by reference herein. In
addition, the Companys unaudited pro forma condensed consolidated financial statements as of and for
the nine months ended September 30, 2011 and for the year ended December 31, 2010, which give
effect to the Acquisition and related transactions, are attached hereto as Exhibit 99.5 and
incorporated by reference herein. Finally, certain risk factors related to the combined company are
attached hereto as Exhibit 99.6 and incorporated by reference herein.
Forward-Looking Statements
This Current Report on Form 8-K (including information included or incorporated by reference
herein) includes forward-looking statements within the meaning of the safe harbor provisions of
the United States Private Securities Litigation Reform Act of 1995. Such statements may include,
but are not limited to, statements about the benefits of the proposed acquisition of GWEC by the
Company, including future financial and operating results, the combined companys plans,
objectives, expectations and intentions and other statements that are not historical facts. Such
statements are based upon the current beliefs and expectations of the Companys management and are
subject to significant risks and uncertainties. Actual results may differ from those set forth in
the forward-looking statements.
The following factors, among others, could cause actual results to differ from those set forth
in the forward-looking statements: the failure to successfully integrate the businesses of the
Company and GWEC in the expected time frame; the substantial expenses incurred related to the
Acquisition and the integration of GWEC; a loss of management personnel and other key employees as
a result of uncertainties associated with the Acquisition; the failure of the unaudited pro forma
condensed consolidated financial information to be representative of the combined results of the
Company and GWEC after the consummation of the Acquisition; and unforeseen liabilities associated
with the Acquisition. The Company undertakes no obligation to publicly update any forward-looking
statement, whether as a result of new information, future events or otherwise.
Item 9.01. Financial Statements and Exhibits.
(d) Exhibits.
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Exhibit Number |
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Description |
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23.1
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Consent of Deloitte & Touche LLP, independent auditor for
GWEC |
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23.2
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Consent of KPMG LLP, independent auditor for GWEC |
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99.1
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Portions of the summary and business sections of the
offering memorandum dated December 9, 2011 prepared in
connection with the Private Offering |
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99.2
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GWEC audited consolidated financial statements and related
notes as of and for the years ended December 31, 2010 and 2009 |
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99.3 |
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GWEC audited consolidated financial statements and related
notes as of the year ended December 31, 2009 and for each of the
years in the two-year period then ended |
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99.4
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GWEC unaudited consolidated financial statements as
of September 30, 2011 and for the nine months ended
September 30, 2011 and 2010 |
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99.5
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Unaudited pro forma condensed consolidated financial statements
as of and for the nine months ended September 30, 2011 and
for the year ended December 31, 2010 |
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99.6
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Risk Factors |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Date: December 9, 2011
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CVR ENERGY, INC.
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By: |
/s/ Edward A. Morgan
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Edward A. Morgan |
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Chief Financial Officer and Treasurer |
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exv23w1
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement No. 333-151787 on Form
S-3 of CVR Energy, Inc., and in the Registration Statements Nos. 333-146907 and 333-148783 on Form
S-8 of CVR Energy, Inc., of our report dated March 31, 2011, related to the consolidated financial
statements of Gary-Williams Energy Corporation as of and for the year ended December 31, 2010,
which report appears in this Current Report on Form 8-K.
/s/ Deloitte & Touche LLP
Denver, Colorado
December 9, 2011
exv23w2
Exhibit 23.2
Consent of Independent Auditors
The Board of Directors
CVR Energy, Inc.
We consent to the incorporation by reference in the registration statements of CVR Energy,
Inc. (no. 333-151787) on Form S-3, and (nos. 333-146907 and 333-148783) on Form S-8, of our report
dated March 30, 2010, with respect to the consolidated balance sheet of Gary-Williams Energy
Corporation and subsidiaries as of December 31, 2009, and the related consolidated statements of
operations, changes in shareholders equity, comprehensive income (loss), and cash flows for each
of the years in the two-year period then ended, which report appears in this Current Report on Form
8-K.
/s/ KPMG LLP
Denver, Colorado
December 9, 2011
exv99w1
Exhibit 99.1
Our
Company
We are an independent petroleum refiner and marketer of high
value transportation fuels in the mid-continental United States.
In addition, we own the general partner and approximately 70% of
the common units of CVR Partners, LP, a publicly-traded limited
partnership that is an independent producer and marketer of
upgraded nitrogen fertilizers in the form of ammonia and urea
ammonia nitrate, or UAN.
Our petroleum business includes a 115,000-barrel per day, or
bpd, complex full coking medium-sour crude oil refinery in
Coffeyville, Kansas and, following consummation of the
Acquisition, a 70,000 bpd refinery in Wynnewood, Oklahoma.
In addition, we own and operate supporting businesses that
include:
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a crude oil gathering system, serving Kansas, Oklahoma, western
Missouri and southwestern Nebraska, that has gathered as much as
approximately 37,500 bpd in September 2011;
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a 145,000 bpd pipeline system that transports crude oil to
our Coffeyville refinery with 1.2 million barrels of
associated company-owned storage tanks and an additional
2.7 million barrels of leased storage capacity located at
Cushing, Oklahoma (with an additional 1.0 million barrels
of company-owned storage tanks in Cushing under construction,
which are expected to be completed in the first quarter of
2012); and
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a rack marketing division supplying product through tanker
trucks directly to customers located in close geographic
proximity to Coffeyville and to customers at throughput
terminals on refined products distribution systems run by
Magellan Midstream Partners L.P., or Magellan, and NuStar
Energy, LP, or NuStar.
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Our Coffeyville refinery is situated approximately
100 miles from Cushing, Oklahoma, one of the largest crude
oil trading and storage hubs in the United States, which
provides us with access to virtually any crude oil variety in
the world capable of being transported by pipeline. We sell our
products through rack sales (sales which are made at terminals
into third-party tanker trucks) and bulk sales (sales through
third-party pipelines) into the mid-continent region via
Magellan and into Colorado and other destinations utilizing the
product pipeline networks owned by Magellan, Enterprise Products
Operating, L.P., or Enterprise, and NuStar.
CVR Partners nitrogen fertilizer business operates a
dual-train coke gasifier plant that produces high-purity
hydrogen, most of which is subsequently converted to ammonia and
upgraded to urea ammonium nitrate, or UAN. The nitrogen
fertilizer business is the only operation in North America that
utilizes a pet coke gasification process to produce ammonia
(based on data provided by Blue, Johnson & Associates,
or Blue Johnson). The nitrogen fertilizer manufacturing facility
includes a 1,225
ton-per-day
ammonia unit, a 2,025
ton-per-day
UAN unit, and a gasifier complex with built-in redundancy having
a capacity of 84 million standard cubic feet per day. In
addition, CVR Partners is building 10,000 tons of UAN storage
tank capacity in Phillipsburg, Kansas which is expected to be
completed in the third quarter of 2012. A majority of the
ammonia which the nitrogen fertilizer business produces is
upgraded to higher margin UAN fertilizer, an aqueous solution of
urea and ammonium nitrate which has historically commanded a
premium price over ammonia. In 2010, the nitrogen fertilizer
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business produced 392,745 tons of ammonia, of which
approximately 60% was upgraded into 578,272 tons of UAN. During
the past five years, over 70% of the pet coke utilized by the
nitrogen fertilizer plant was produced and supplied by CVR
Energys crude oil refinery pursuant to a renewable
long-term agreement.
Gary-Williams
Energy Corporation (GWEC) Acquisition
On November 2, 2011, we entered into a Stock Purchase and
Sale Agreement (the Purchase Agreement) to acquire
all of the issued and outstanding shares of GWEC for
$525.0 million in cash, plus an adjustment for inventory
and other working capital on the closing date (currently
estimated to be $69.0 million as of the date hereof). GWEC owns
a 70,000 bpd refinery in Wynnewood, Oklahoma that includes
approximately 2.0 million barrels of company-owned storage
tanks. Located in the PADD II Group 3 distribution area, the
Wynnewood refinery is a dual crude unit facility that processes
a variety of crudes and produces high-value fuel products
(including gasoline, ultra-low sulfur diesel, jet fuel and
solvent) as well as liquefied petroleum gas and a variety of
asphalts.
We believe the acquisition of GWEC will provide us with the
following benefits:
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We are acquiring high quality, recently upgraded
assets. We believe the Wynnewood refinery is
in excellent operating condition after significant recent
capital improvements. Since January 1, 2007, GWEC has
invested over $250.0 million for maintenance projects and
improvements to the safety, complexity and operational
performance of the Wynnewood refinery. The Wynnewood refinery is
fully compliant with current ultra-low sulfur diesel and
gasoline regulations.
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The acquisition will increase our scale and operational
diversity. After the acquisition, we will
have 185,000 bpd of crude throughput capacity across two
facilities located in two different states.
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We expect to generate significant operating
synergies. We have identified over
$30.0 million in annual processing synergies that we expect
to generate from operating the two refineries together.
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The acquired business should contribute significant
operating cash flow. The GWEC acquisition is
also expected to contribute significant operating cash flow to
our combined business. We believe expanding our processing
capacity and diversifying our asset base will improve our credit
profile.
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Pro forma for the Acquisition debt financing and the GWEC Acquisition, we would
have had net sales, operating income, net income and Adjusted
EBITDA of $7,755.5 million, $826.3 million,
$382.2 million and $892.1 million for the twelve
months ended September 30, 2011 and ratios of pro forma net
debt to Adjusted EBITDA and Adjusted EBITDA to pro forma
interest expense of 0.95x and 11.41x, respectively, during such
period. See Summary Pro Forma Condensed Consolidated
Financial Information.
Key Market
Trends
We have identified several key factors that we believe influence
the long-term outlook for the refining and nitrogen fertilizer
industries generally and in the areas where we operate and sell
our products.
For the refining industry, these factors include the following:
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Reduced refining capacity. High capital
costs, historical excess refining capacity and incremental
regulatory requirements have limited the construction of new
refineries in
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the United States over the past 30 years. Although certain
regions in the U.S. continue to have excess capacity,
consolidation and closure of existing domestic and international
refineries accelerated beginning in 2009 and is expected to
continue, which we believe should reduce refining capacity as
compared to current levels.
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Higher Brent crude prices. Currently,
the spread between Brent crude oil and West Texas Intermediate,
or WTI crude oil, is in excess of historical norms. This higher
spread is caused by increasing Asian crude demand, global
political uncertainty and lower supplies of Brent crude oil,
which have driven up its price, as well as by increased Canadian
and US Bakken crude flowing to Cushing without pipeline access
to the U.S. Gulf Coast, which has put downward pressure on
WTI pricing. As refined products are priced off of a Brent crude
oil base, refined product margins for refineries that use WTI
crude and can capture the Brent-WTI differential, such as CVR
Energy, have increased. This trend may be mitigated in the
future as a result of Enbridges purchase of 50% of the
Seaway pipeline and intent to reverse the pipeline to make it
flow from Cushing to the U.S. Gulf Coast, as well as from
other potential projects planned for the coming years.
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Net importing of refined products in PADD II Group
3. Even in a cyclically low demand
environment, refining capacity in the mid-continent region where
both our existing refinery in Coffeyville, Kansas and
GWECs refinery in Wynnewood, Oklahoma operate is
insufficient to meet required product demand in this region. As
a result, the region has historically required U.S. Gulf
Coast imports to meet demand. We believe that this should result
in PADD II Group 3 refiners earning higher margins on
mid-continent product sales than their U.S. Gulf Coast
competitors by virtue of their lower transportation costs.
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Increasing demand for sweet
crude. Increasing demand for sweet crude oils
and higher incremental production of lower-cost sour crude are
expected to provide a cost advantage to sour crude processing
refiners.
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U.S. fuel
specifications. U.S. fuel
specifications, including reduced sulfur content and reduced
vapor pressure, which accommodates ethanol blending and reduces
fuel volatility, should benefit refiners who are able to
efficiently produce fuels that meet these specifications.
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For the nitrogen fertilizer industry, these factors include the
following:
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Increased global fertilizer and grain
demand. Global demand for fertilizers is
driven primarily by population growth, dietary changes in the
developing world and increased consumption of bio-fuels.
According to the International Fertilizer Industry Association,
or IFA, from 1972 to 2010, global fertilizer demand grew 2.1%
annually. Fertilizer use is projected to increase by 45% between
2005 and 2030 to meet global food demand, according to a study
funded by the Food and Agriculture Organization of the United
Nations. Additionally, over the five-year period ending
December 31, 2010, world grain demand increased 11%,
leading to a tight grain supply environment and significant
increases in grain prices, which is highly supportive of
fertilizer prices.
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U.S. demand for fertilizer. The
United States is the worlds largest exporter of coarse
grains, accounting for 46% of world exports and 31% of total
world production, according to the USDA. The United States is
also the worlds third largest consumer of nitrogen
fertilizer and historically the worlds largest importer of
nitrogen fertilizer, importing approximately 48% of its nitrogen
fertilizer needs. North American producers have a significant
and sustainable cost advantage over European producers that
export to the United States.
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Increased demand for UAN. The
convenience of UAN fertilizer has led to an 8.5% increase in its
consumption from 2000 through 2010 (estimated) on a nitrogen
content
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basis, whereas ammonia fertilizer consumption decreased by 2.4%
for the same period, according to data supplied by Blue Johnson.
Unlike ammonia and urea, UAN can be applied throughout the
growing season and can be applied in tandem with pesticides and
fungicides, providing farmers with flexibility and cost savings.
UAN is not widely traded globally because it is costly to
transport (it is approximately 68% water). As a result of these
factors, UAN commands a premium price to urea and ammonia, on a
nitrogen equivalent basis.
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Both of our businesses are cyclical and volatile and have
experienced downturns in the past. See Risk Factors
filed as Exhibit 99.6 to this Current Report on Form 8-K.
Our
Strengths
Regional Advantage and Supply/Demand
Imbalance. The Coffeyville and Wynnewood
refineries are both located in the PADD II Group 3 distribution
area. Because refined product demand in this area exceeds
production, the region has historically required U.S. Gulf
Coast imports to meet demand. We estimate that this favorable
supply/demand imbalance has allowed refineries in PADD II Group
3 to generate higher refining margins, measured by the
2-1-1 crack
spread, as compared to U.S. Gulf Coast refineries on
average during the last four years. The 2-1-1 crack spread is a
general industry standard that approximates the per barrel
refining margin resulting from processing two barrels of crude
oil to produce one barrel of gasoline and one barrel of heating
oil.
Access to Advantaged WTI Priced
Crudes. Refineries in the PADD II Group 3
region, where both the Coffeyville and Wynnewood refineries are
located, are advantaged over U.S. coastal refiners due to
their access to WTI benchmarked crudes. These crudes are
currently trading at a historically wide differential to coastal
or imported crudes such as Brent and LLS. This spread has
increased due to rising Asian crude demand, global political
uncertainty, and increased Canadian and U.S. Bakken crude
flowing to Cushing without similar pipeline access to the
U.S. Gulf Coast. As refined products are priced off of a
Brent crude oil base, refined product margins for refineries
that use WTI crude and can capture the Brent-WTI differential,
such as CVR Energy, have increased.
Access to and Ability to Process Multiple Crude
Oils. In recent years, CVR Energy has
significantly expanded the variety of crude grades processed in
any given month to optimize the profitability of and enhance
security of supply to the Coffeyville refinery. The Wynnewood
refinery has a complexity of 9.3 and is also capable of
processing a variety of crudes, including West Texas Sour, West
Texas Intermediate, sweet and sour Canadian and United States
Gulf Coast crudes. CVR Energy maintains capacity on the
Spearhead pipeline, which connects Chicago to the Cushing hub.
We maintain leased storage in Cushing to facilitate optimal
crude purchasing and blending and own and operate a crude
gathering system serving Kansas, Oklahoma, western Missouri and
southwestern Nebraska, which allows us to acquire quality crudes
at a discount to West Texas Intermediate crude oil, or WTI,
which is used as a benchmark for other crude oils. The
Coffeyville and Wynnewood refineries also have the ability to
receive crude oil directly by rail.
High Quality, Upgraded Refineries with Solid Track
Record. For the year ended December 31,
2010, approximately 89% of the Coffeyville and Wynnewood
refineries liquid production consisted of higher value
transportation fuels (gasoline and distillate). Substantial
investments have been made in both refineries to increase their
complexity, which is a measure of a refinerys ability to
process lower quality crude in an economic manner. From 2005
through September 2011, CVR Energy has invested over
$685.0 million to modernize the Coffeyville oil refinery
and to meet more stringent U.S. environmental, health and
safety requirements. As a result, the Coffeyville
refinerys complexity increased from approximately 10.0 in
2005 to its current complexity of 12.9, we significantly
improved our assets reliability
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and redundancy and we enhanced the profitability of the
Coffeyville refinery during periods of high crack spreads while
enabling the refinery to operate more profitably at lower crack
spreads than was previously possible. In addition, we achieved
significant increases in our refinerys total throughput,
from an average of approximately 98,300 bpd in June 2005 to
an average in excess of 120,000 bpd for the year ended
December 31, 2010. Similarly, in 2007 and 2008, the
Wynnewood refinery completed approximately $100.0 million
in capital projects and an approximately $60.0 million
four-year turnaround, which increased crude throughput capacity
27% to 70,000 bpd and sour crude processing capacity by
approximately 80%.
Nitrogen Fertilizer Cost Advantage Through Use of Pet Coke
Gasification Process. CVR Partners operates
the only nitrogen fertilizer production facility in North
America that uses pet coke gasification to produce nitrogen
fertilizer, which has historically given it a cost advantage
over competitors that use natural gas-based production methods.
Its costs are approximately 86% fixed and relatively stable,
which allows it to benefit directly from increases in nitrogen
fertilizer prices, and its variable costs consist primarily of
pet coke. Pet coke costs have historically remained relatively
stable, averaging $26 per ton since a pet coke supply and
pricing agreement was put in place between CVR Partners and CVR
Energy in October 2007, with an annual high of $31 per ton in
2008 and an annual low of $17 per ton in 2010. Third-party pet
coke is readily available, and CVR Partners has paid an average
cost of $43 per ton for third-party pet coke during the five
years ended September 30, 2011. Substantially all of the
nitrogen fertilizer business competitors use natural gas
as their primary raw material feedstock (with natural gas
constituting approximately
85-90% of
their production costs based on historical data) and are
therefore heavily impacted by changes in natural gas prices.
Fertilizer Business Transportation Cost
Advantage. The nitrogen fertilizer business
and other competitors located in the U.S. farm belt share a
transportation cost advantage when compared to
out-of-region
competitors in serving the U.S. farm belt agricultural
market. As a result, the nitrogen fertilizer business is able to
cost-effectively sell substantially all of its products in the
higher margin agricultural market, whereas, according to
publicly available information prepared by competitors, a
significant portion of the nitrogen fertilizer business
competitors revenues are derived from the lower margin
industrial market. Because the U.S. farm belt consumes more
nitrogen fertilizer than is produced in the region, it must
import nitrogen fertilizer from the U.S. Gulf Coast and
international producers. Accordingly, U.S. farm belt
producers may offer nitrogen fertilizers at prices that factor
in those
out-of-region
transportation costs without incurring such costs. In addition,
the nitrogen fertilizer business products leave the plant
either in trucks for direct shipment to customers (in which case
no transportation costs are incurred) or in railcars for
destinations located principally on the Union Pacific Railroad.
Accordingly, the nitrogen fertilizer business does not incur any
intermediate transfer, storage, barge freight or pipeline
freight charges.
Highly Reliable Pet Coke Gasification Fertilizer Plant
with Low Capital Requirements. The nitrogen
fertilizer plant was completed in 2000 and is the newest
fertilizer plant built in North America. Prior to the
plants construction in 2000, the last ammonia plant built
in the United States was constructed in 1977. The nitrogen
fertilizer facility was built with the dual objectives of being
low cost and reliable. It has low maintenance costs, with
maintenance capital expenditures ranging between approximately
$3 million and $9 million per year from 2007 through
2010, and has been configured to have a dual-train gasifier
complex to provide redundancy and improve reliability.
Experienced Management Team. Our senior
management team averages over 29 years of refining and
fertilizer industry experience and, in coordination with our
broader management team, has successfully improved the overall
reliability and production capabilities of our businesses. John
J. Lipinski, CVR Energys Chief Executive Officer and CVR
Partners Executive Chairman, has over 38 years of
experience in the refining and chemicals industries, and prior
to joining us in June 2005 was in charge of a 550,000 bpd
refining system and a multi-plant
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fertilizer system. Byron R. Kelley, CVR Partners Chief
Executive Officer, has over 41 years of experience in
energy-related companies, including executive, management and
engineering positions in natural gas and pipeline companies.
Stanley A. Riemann, our Chief Operating Officer, has over
37 years of experience, and prior to joining us in March
2004, was in charge of one of the largest fertilizer
manufacturing systems in the United States. Edward A. Morgan,
our Chief Financial Officer, has over 19 years of finance
experience, including 9 years in the energy industry, and
prior to joining us in May 2009, was the chief financial officer
of a New York Stock Exchange-listed downstream energy company.
CVR Partners is managed by CVR Energys management pursuant
to a services agreement and, other than Mr. Kelley, CVR
Energys management team divides its time between both
businesses.
Our
Strategy
The primary business objective for our refining business is to
strengthen our position as an independent refiner and marketer
of refined fuels in our markets by maximizing the throughput and
efficiency of our petroleum refining assets. In addition, the
primary business objective of the nitrogen fertilizer business
is to maximize the production and efficiency of its nitrogen
fertilizer facilities as well as to add complementary assets. We
intend to accomplish these objectives through the following
strategies:
Maintain and increase cash flow with minimal need for
significant capital expenditure projects. Our
Coffeyville refinery and the Wynnewood refinery are located in a
region of the United States in which refined product demand
exceeds production. In recent years, significant investments
have been made to modernize both refineries and to increase the
volume and quality of their output. In addition, there is high
demand for the products produced by the nitrogen fertilizer
business, which operates the newest fertilizer plant in North
America. We believe our significant capital expenditures to date
combined with demand for our products will allow us to maintain
a recurring stream of revenue with minimal need for significant
large capital projects. We continually evaluate likely levels of
future demand and will endeavor to make future capital
expenditures in order to increase future recurring revenues and
cash flow.
Capitalize on low operating cost
advantage. Increasing demand for sweet crude
oils and higher incremental production of lower-cost sour crude
are expected to provide a cost advantage to sour crude
processing refiners and the location of our Coffeyville refinery
and the Wynnewood refinery provides us or is expected to provide
us with a reliable supply of crude oil and a transportation cost
advantage over other refiners. In addition, we believe the
nitrogen fertilizer business is one of the lowest cost producers
and marketers of ammonia and UAN fertilizers in North America.
We continually review on an ongoing basis efficiency-based and
other projects that could reduce overall operating costs.
Continue productivity improvements and capacity
optimization. We continually strive to
improve our operating efficiency. We completed the greenfield
construction of a new continuous catalytic reformer in 2008 to
increase the profitability of our petroleum business through
increased refined product yields and the elimination of
scheduled downtime associated with the catalytic reformer that
was replaced. In addition, this project reduced the dependence
of our Coffeyville refinery on hydrogen supplied by the
fertilizer facility, thereby allowing the nitrogen fertilizer
business to generate higher margins by increasing its capacity
to produce ammonia and UAN rather than hydrogen.
We have increased utilization of our crude oil gathering system.
Our gathered barrels have increased from approximately
7,000 bpd in 2005 to approximately 37,500 bpd in
September 2011. This increased capacity has provided higher
margins and a base supply of feedstock for the Coffeyville
refinery that is an attractive and competitive supply of crude
oil. We plan to continue to increase the capacity of our crude
oil gathering system so that we may eventually
6
utilize this asset to provide crude oil to other buyers of crude
oil, including the Wynnewood refinery.
Increase UAN production at the nitrogen fertilizer
business. In 2011, the nitrogen fertilizer
business began a significant expansion project to increase its
UAN production capacity by approximately 400,000 tons, or 50%,
per year. Approximately $35.7 million had been spent on
this project through September 30, 2011, and we estimate an
additional $95.0 million will be spent through completion,
which is currently forecasted to occur by the end of 2012. This
project is expected to provide the flexibility to upgrade all of
CVR Partners ammonia production when market conditions
favor UAN. It is expected that this additional UAN production
capacity will improve fertilizer business margins, as UAN has
historically been a higher margin product than ammonia.
Focus on safe, reliable and environmentally responsible
operations. Our petroleum business, the
nitrogen fertilizer business and GWEC have all made substantial
investments in our respective facilities to improve their safety
and reduce their environmental impact. In addition, we
continually strive to maximize the production of our oil
refining and nitrogen fertilizer facilities in order to meet
demand, and we seek to minimize downtime at our facilities
through a diligent planning process that takes into account the
margin environment, the availability of resources to perform the
needed maintenance, feedstock logistics and other factors.
Provide high level of customer
service. We focus on providing our customers
with the highest level of service. Both refineries have
significantly expanded the variety of crude grades they can
process, allowing us to offer customers consistent and reliable
service across a wide range of products. The fertilizer plant
has demonstrated consistent levels of production while operating
at close to full capacity. Substantially all of the fertilizer
plants product shipments are targeted to freight
advantaged destinations located in the U.S. farm belt,
allowing the fertilizer business to quickly and reliably service
customer demand. We believe a continued focus on customer
service will allow us to maintain relationships with existing
customers and grow our business.
Selectively consider strategic
acquisitions. We intend to continue to
selectively consider strategic acquisitions within the energy
industry. We will seek acquisition opportunities in our existing
areas of operation that have the potential for operational
efficiencies. We may also examine opportunities in the energy
industry outside of our existing areas of operation and in new
geographic regions. In addition, working on behalf of the
Partnership, management may pursue strategic acquisitions within
the fertilizer industry, including opportunities in different
geographic regions, and where appropriate will seek to acquire
complementary assets divested by larger, diversified
enterprises. While we are continuously engaged in discussions
with respect to potential transactions, at the present time,
other than the GWEC acquisition, we have no agreements or
understandings with respect to any acquisitions.
7
Summary Pro Forma
Condensed Consolidated Financial Information
The summary pro forma condensed consolidated financial
information presented below for the year ended December 31,
2010 and the nine and twelve months ended September 30,
2011 and as of September 30, 2011 have been derived from
the pro forma condensed consolidated statements of operations
for the year ended December 31, 2010 and the nine and
twelve months ended September 30, 2011 and the pro forma
condensed consolidated balance sheet as of September 30,
2011 appearing elsewhere in Exhibit 99.5 to this Current Report on Form 8-K. The pro
forma statements of operations give effect to the Acquisition-related debt financing and
the Acquisition (including the acquisition of GWECs
working capital) as if they had occurred at the beginning of the
periods presented, and the pro forma balance sheet as of
September 30, 2011 gives effect to the Acquisition-related debt financing and the
Acquisition (including the acquisition of GWECs working
capital) as if they had occurred on September 30, 2011. The
pro forma adjustments are based upon available information and
certain assumptions that we believe are reasonable. The summary
pro forma condensed consolidated financial information is for
informational purposes only and does not purport to represent
what our results of operation or financial position actually
would have been if the Acquisition had occurred at any date, and
such data does not purport to project our financial position as
of any future date or our results of operations for any future
period. See Exhibit 99.5 for a complete description of the
adjustments and assumptions underlying this summary pro forma
consolidated financial information. The summary pro forma
consolidated financial information should be read in conjunction
with the financial statements and related notes of both CVR
Energy and GWEC and Managements Discussion and Analysis of Financial
Condition and Results of Operations for CVR Energy.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve
|
|
|
|
|
|
|
Months
|
|
|
Year Ended
|
|
Nine Months Ended
|
|
Ended
|
|
|
December 31,
|
|
September 30,
|
|
September 30,
|
|
|
2010
|
|
2011
|
|
2011
|
|
|
(in millions)
|
|
|
(Unaudited)
|
|
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
6,220.8
|
|
|
$
|
6,008.2
|
|
|
$
|
7,755.5
|
|
Cost of product sold
|
|
|
5,536.7
|
|
|
|
4,785.6
|
|
|
|
6,313.1
|
|
Direct operating expenses
|
|
|
329.9
|
|
|
|
284.3
|
|
|
|
372.0
|
|
Insurance recovery-business interruption
|
|
|
|
|
|
|
(3.4
|
)
|
|
|
(3.4
|
)
|
Selling, general and administrative expenses
|
|
|
106.9
|
|
|
|
82.1
|
|
|
|
129.1
|
|
Depreciation and amortization
|
|
|
117.0
|
|
|
|
88.8
|
|
|
|
118.4
|
|
Operating income
|
|
|
130.3
|
|
|
|
770.8
|
|
|
|
826.3
|
|
Other income (expense), net
|
|
|
1.3
|
|
|
|
0.6
|
|
|
|
0.5
|
|
Interest expense, net
|
|
|
(72.7
|
)
|
|
|
(58.9
|
)
|
|
|
(78.2
|
)
|
Loss on extinguishment of debt
|
|
|
(16.6
|
)
|
|
|
(2.1
|
)
|
|
|
(3.7
|
)
|
Gain (loss) on derivatives, net
|
|
|
(1.5
|
)
|
|
|
(85.9
|
)
|
|
|
(95.2
|
)
|
Income (loss) before income taxes and noncontrolling interest
|
|
|
40.8
|
|
|
|
624.5
|
|
|
|
649.7
|
|
Income tax (expense) benefit
|
|
|
(18.8
|
)
|
|
|
(232.7
|
)
|
|
|
(247.2
|
)
|
Net income attributable to noncontrolling interest
|
|
|
|
|
|
|
20.3
|
|
|
|
20.3
|
|
Net income (loss)
|
|
|
22.0
|
|
|
|
371.5
|
|
|
|
382.2
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve
|
|
|
|
|
|
|
Months
|
|
|
Year Ended
|
|
Nine Months Ended
|
|
Ended
|
|
|
December 31,
|
|
September 30,
|
|
September 30,
|
|
|
2010
|
|
2011
|
|
2011
|
|
|
(in millions)
|
|
|
(Unaudited)
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA (1)
|
|
$
|
241.7
|
|
|
$
|
837.3
|
|
|
$
|
892.7
|
|
Pro forma debt (2)
|
|
|
851.0
|
|
Pro forma interest expense (3)
|
|
|
78.2
|
|
Ratio of pro forma debt to Adjusted
EBITDA
|
|
|
0.95x
|
|
Ratio of Adjusted EBITDA to pro forma
interest expense
|
|
|
11.41x
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
|
2011
|
|
|
(in millions)
|
|
|
(Unaudited)
|
|
Balance Sheet Data:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
438.6
|
|
Working capital
|
|
|
729.2
|
|
Total assets
|
|
|
2,984.6
|
|
Total debt, including current portion
|
|
|
851.0
|
|
Noncontrolling interest
|
|
|
148.0
|
|
Total CVR Energy stockholders equity
|
|
|
1,076.7
|
|
|
|
|
(1)
|
|
For all periods presented, pro
forma Adjusted EBITDA is equal to the sum of (1) CVR
Energys historical Adjusted EBITDA plus
(2) GWECs historical Adjusted EBITDA plus
(3) costs associated with GWECs airplane that will
not be an ongoing expense as a result of the distribution of the
airplane to GWECs stockholders prior to the closing of the
Acquisition. See Summary
Consolidated Financial InformationCVR Energy, Inc.,
Summary Consolidated
Financial InformationGWEC, and the Unaudited Pro Forma
Condensed Consolidated Financial Statements filed as Exhibit 99.5
to this Current Report on Form 8-K.
|
|
(2)
|
|
Pro forma debt reflects CVR
Energys total debt as of September 30, 2011, as
adjusted to give pro forma effect to the debt financing and the
Acquisition (including the acquisition of GWECs working
capital).
|
|
(3)
|
|
Pro forma interest expense reflects
CVR Energys total cash interest expense as of
September 30, 2011, net of interest income, as adjusted to
give pro forma effect to the debt financing and the Acquisition
(including the acquisition of GWECs working capital).
|
9
Summary
Consolidated Financial InformationCVR Energy,
Inc.
This financial information should be read in conjunction with,
and is qualified in its entirety by reference to, CVR Energy's financial
statements and related notes and Managements Discussion
and Analysis of Financial Condition and Results of Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve
|
|
|
|
|
|
|
|
|
|
Months
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
(in millions, except for production data)
|
|
|
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
5,016.1
|
|
|
$
|
3,136.3
|
|
|
$
|
4,079.8
|
|
|
$
|
2,931.6
|
|
|
$
|
3,966.9
|
|
|
$
|
5,115.1
|
|
Cost of product sold (1)
|
|
|
4,461.8
|
|
|
|
2,547.7
|
|
|
|
3,568.1
|
|
|
|
2,584.4
|
|
|
|
3,086.2
|
|
|
|
4,069.9
|
|
Direct operating expenses (1)
|
|
|
237.5
|
|
|
|
226.0
|
|
|
|
240.8
|
|
|
|
176.5
|
|
|
|
209.3
|
|
|
|
273.6
|
|
Insurance recovery-business interruption
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3.4
|
)
|
|
|
(3.4
|
)
|
Selling, general and administrative expenses (1)
|
|
|
35.2
|
|
|
|
68.9
|
|
|
|
92.0
|
|
|
|
48.6
|
|
|
|
69.0
|
|
|
|
112.4
|
|
Net costs associated with flood (2)
|
|
|
7.9
|
|
|
|
0.6
|
|
|
|
(1.0
|
)
|
|
|
(1.0
|
)
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
82.2
|
|
|
|
84.9
|
|
|
|
86.8
|
|
|
|
64.8
|
|
|
|
66.1
|
|
|
|
88.1
|
|
Goodwill impairment (3)
|
|
|
42.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
148.7
|
|
|
$
|
208.2
|
|
|
$
|
93.1
|
|
|
$
|
58.3
|
|
|
$
|
539.7
|
|
|
$
|
574.5
|
|
Other income (expense), net (4)
|
|
|
(5.9
|
)
|
|
|
(0.1
|
)
|
|
|
(13.2
|
)
|
|
|
(12.7
|
)
|
|
|
(0.7
|
)
|
|
|
(1.2
|
)
|
Interest expense
|
|
|
(40.3
|
)
|
|
|
(44.2
|
)
|
|
|
(50.3
|
)
|
|
|
(36.6
|
)
|
|
|
(41.2
|
)
|
|
|
(54.9
|
)
|
Gain (loss) on derivatives, net
|
|
|
125.3
|
|
|
|
(65.3
|
)
|
|
|
(1.5
|
)
|
|
|
7.8
|
|
|
|
(25.1
|
)
|
|
|
(34.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and noncontrolling interest
|
|
$
|
227.8
|
|
|
$
|
98.6
|
|
|
$
|
28.1
|
|
|
|
16.8
|
|
|
|
472.7
|
|
|
|
484.0
|
|
Income tax (expense) benefit
|
|
|
(63.9
|
)
|
|
|
(29.2
|
)
|
|
|
(13.8
|
)
|
|
|
(4.8
|
)
|
|
|
(172.5
|
)
|
|
|
(181.5
|
)
|
Noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20.3
|
)
|
|
|
(20.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) (5)
|
|
$
|
163.9
|
|
|
$
|
69.4
|
|
|
|
14.3
|
|
|
|
12.0
|
|
|
|
279.9
|
|
|
|
282.2
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve
|
|
|
|
|
|
|
|
|
|
Months
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
(in millions, except for production data)
|
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flow provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
83.2
|
|
|
|
85.3
|
|
|
|
225.4
|
|
|
|
151.1
|
|
|
|
345.9
|
|
|
|
420.2
|
|
Investing activities
|
|
|
(86.5
|
)
|
|
|
(48.3
|
)
|
|
|
(31.3
|
)
|
|
|
(23.0
|
)
|
|
|
(43.8
|
)
|
|
|
(52.1
|
)
|
Financing activities
|
|
|
(18.3
|
)
|
|
|
(9.0
|
)
|
|
|
(31.0
|
)
|
|
|
(2.6
|
)
|
|
|
396.3
|
|
|
|
367.9
|
|
Capital expenditures for property, plant and equipment
|
|
|
86.5
|
|
|
|
48.8
|
|
|
|
32.4
|
|
|
|
23.0
|
|
|
|
46.6
|
|
|
|
56.0
|
|
Adjusted EBITDA (6)
|
|
|
220.1
|
|
|
|
212.4
|
|
|
|
193.8
|
|
|
|
142.7
|
|
|
|
603.5
|
|
|
|
657.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NYMEX 2-1-1 crack spread (dollars per barrel)
|
|
$
|
12.50
|
|
|
$
|
8.54
|
|
|
$
|
10.07
|
|
|
$
|
9.76
|
|
|
$
|
27.27
|
|
|
$
|
23.16
|
|
Coffeyville refinery total throughput (barrels per day)
|
|
|
117,719
|
|
|
|
120,239
|
|
|
|
123,715
|
|
|
|
121,316
|
|
|
|
112,741
|
|
|
|
117,264
|
|
Refining margin (per crude oil throughput barrel) (7)
|
|
|
8.39
|
|
|
|
10.65
|
|
|
|
8.84
|
|
|
|
7.63
|
|
|
|
23.77
|
|
|
|
20.71
|
|
Ammonia production (gross produced) (thousand tons)
|
|
|
359.1
|
|
|
|
435.2
|
|
|
|
392.7
|
|
|
|
322.9
|
|
|
|
310.4
|
|
|
|
380.3
|
|
Ammonia production (net available for sale) (thousand tons)
|
|
|
112.5
|
|
|
|
156.6
|
|
|
|
155.6
|
|
|
|
117.9
|
|
|
|
89.3
|
|
|
|
127.0
|
|
UAN Production (thousand tons)
|
|
|
599.2
|
|
|
|
677.7
|
|
|
|
578.3
|
|
|
|
500.5
|
|
|
|
535.8
|
|
|
|
613.6
|
|
Product Pricing (plant gate) (dollars per ton)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ammonia
|
|
$
|
557.0
|
|
|
$
|
314.0
|
|
|
$
|
361.0
|
|
|
$
|
305.0
|
|
|
$
|
569.0
|
|
|
$
|
540.0
|
|
UAN
|
|
$
|
303.0
|
|
|
$
|
198.0
|
|
|
$
|
179.0
|
|
|
$
|
180.0
|
|
|
$
|
266.0
|
|
|
$
|
255.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
8.9
|
|
|
$
|
36.9
|
|
|
$
|
200.0
|
|
|
$
|
162.4
|
|
|
$
|
898.5
|
|
|
$
|
898.5
|
|
Working capital
|
|
|
128.5
|
|
|
|
235.4
|
|
|
|
333.6
|
|
|
|
309.8
|
|
|
|
1,059.4
|
|
|
|
1,059.4
|
|
Total assets
|
|
|
1,610.5
|
|
|
|
1,614.5
|
|
|
|
1,740.2
|
|
|
|
1,684.1
|
|
|
|
2,508.3
|
|
|
|
2,508.3
|
|
Total debt, including current portion
|
|
|
495.9
|
|
|
|
491.3
|
|
|
|
477.0
|
|
|
|
506.1
|
|
|
|
591.8
|
|
|
|
591.8
|
|
Noncontrolling interest (8)
|
|
|
10.6
|
|
|
|
10.6
|
|
|
|
10.6
|
|
|
|
10.6
|
|
|
|
148.0
|
|
|
|
148.0
|
|
Total CVR Energy stockholders equity
|
|
|
579.5
|
|
|
|
653.8
|
|
|
|
689.6
|
|
|
|
671.0
|
|
|
|
1,083.6
|
|
|
|
1,083.6
|
|
|
|
|
(1)
|
|
Amounts are shown exclusive of
depreciation and amortization.
|
|
(2)
|
|
Represents the write-off of
approximate net costs associated with the June/July 2007 flood
and crude oil discharge that are not probable of recovery for
all periods presented other than the year ended
December 31, 2010, and a recovery of $1.0 million for
the year ended December 31, 2010.
|
|
(3)
|
|
Upon applying the goodwill
impairment testing criteria under existing accounting rules
during the fourth quarter of 2008, we determined that the
goodwill in the petroleum segment was impaired, which resulted
in a goodwill impairment loss of $42.8 million. This
represented a write-off of the entire balance of the petroleum
segments goodwill.
|
|
(4)
|
|
During the years ended
December 31, 2008, 2009 and 2010 we recognized losses of
$10.0 million, $2.1 million and $16.6 million
respectively, on early extinguishment of debt.
|
11
|
|
|
(5)
|
|
The following are certain charges
and costs incurred in each of the relevant periods that are
meaningful to understanding our net income and in evaluating our
performance due to their unusual or infrequent nature:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve
|
|
|
|
|
|
|
Months
|
|
|
Year Ended
|
|
Nine Months Ended
|
|
Ended
|
|
|
December 31,
|
|
September 30,
|
|
September 30,
|
|
|
2008
|
|
2009
|
|
2010
|
|
2010
|
|
2011
|
|
2011
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
(in millions)
|
|
Loss on extinguishment of debt (a)
|
|
$
|
10.0
|
|
|
$
|
2.1
|
|
|
$
|
16.6
|
|
|
$
|
15.1
|
|
|
$
|
2.1
|
|
|
$
|
3.6
|
|
Letter of credit expense and interest rate swap not included in
interest expense (b)
|
|
|
7.4
|
|
|
|
13.4
|
|
|
|
4.7
|
|
|
|
4.3
|
|
|
|
1.3
|
|
|
|
1.7
|
|
Major scheduled turnaround expense (c)
|
|
|
3.3
|
|
|
|
|
|
|
|
4.8
|
|
|
|
0.6
|
|
|
|
12.2
|
|
|
|
16.5
|
|
Unrealized (gain) loss from Cash Flow Swap
|
|
|
(253.2
|
)
|
|
|
40.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation (d)
|
|
|
(42.5
|
)
|
|
|
8.8
|
|
|
|
37.2
|
|
|
|
8.4
|
|
|
|
23.6
|
|
|
|
52.4
|
|
Goodwill impairment (e)
|
|
|
42.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Represents the write-off of:
(1) $10.0 million of deferred financing costs in
connection with the second amendment to our then-existing first
priority credit facility on December 22, 2008;
(2) $2.1 million of deferred financing costs in
connection with the reduction, effective June 1, 2009, and
eventual termination of the funded letter of credit facility on
October 15, 2009; and (3) $16.6 million for the
year ended December 31, 2010, made up of
(a) $9.6 million in premium paid and a
$5.4 million write-off of previously deferred costs
associated with the unscheduled payment of our tranche D
term loan, and (b) $1.6 million associated with a 3%
premium paid on a principal prepayment on our senior secured
notes along with a partial write-off of previously deferred
financing costs, underwriting discount and original issue
discount.
|
|
(b)
|
|
Consists of fees which are expensed
to selling, general and administrative expenses in connection
with the funded letter of credit facility issued in support of
certain swap agreements we entered into with J. Aron &
Company in June 2005 (the Cash Flow Swap) and other
letters of credit outstanding. We reduced the funded letter of
credit facility from $150.0 million to $60.0 million,
effective June 1, 2009. As a result of the termination of
the Cash Flow Swap effective October 8, 2009, we were able
to terminate the remaining $60.0 million funded letter of
credit facility effective October 15, 2009. Although not
included as interest expense in our Consolidated Statements of
Operations, these fees are treated as such in the calculation of
Adjusted EBITDA in our ABL Credit Facility and in the indentures
governing the notes and the existing second lien notes.
|
|
(c)
|
|
Represents expense associated with
major scheduled turnarounds.
|
|
(d)
|
|
Represents the impact of
share-based compensation awards.
|
|
(e)
|
|
Upon applying the goodwill
impairment testing criteria under existing accounting rules
during the fourth quarter of 2008, we determined that the
goodwill in the petroleum segment was impaired, which resulted
in a goodwill impairment loss of $42.8 million. This
represented a write-off of the entire balance of the petroleum
segments goodwill.
|
|
|
|
(6)
|
|
We define Adjusted EBITDA as CVR
Energy net income (loss) adjusted to eliminate (a) income
tax expense (benefit), (b) unfavorable (favorable) FIFO
impact, (c) interest expense, net, (d) depreciation
and amortization, (e) unrealized (gain) loss related to
hedging obligations, (f) charges relating to the 2007
flood, (g) share-based compensation, (h) goodwill
impairment and (i) other items of expense.
|
|
|
|
We present Adjusted EBITDA because
we believe it is a useful indicator of our operating
performance. We believe this for the following reasons:
|
|
|
|
|
|
Adjusted EBITDA is widely used by investors to measure a
companys operating performance without regard to items,
such as interest expense, income tax expense, and depreciation
and amortization, that can vary substantially from company to
company depending upon their financing and accounting methods,
the book value of their assets, their capital structures and the
method by which their assets were acquired;
|
|
|
|
securities analysts use Adjusted EBITDA as a supplemental
measure to evaluate the overall operating performance of a
company; and
|
12
|
|
|
|
|
Adjusted EBITDA measures our operational performance without
regard to certain non-recurring, non-cash
and/or
transaction-related expenses.
|
However, Adjusted EBITDA should not be considered as an
alternative to net income, cash flow from operations, or any
other measure of financial performance calculated and presented
in accordance with GAAP. Our Adjusted EBITDA may not be
comparable to similar measures reported by other companies
because other companies may not calculate Adjusted EBITDA in the
same manner as we do. Although we use Adjusted EBITDA as a
measure to assess the operating performance of our business,
Adjusted EBITDA has significant limitations as an analytical
tool because it excludes certain material costs. For example, it
does not include interest expense, which has been and will
continue to be a necessary element of our costs. Because we use
capital assets, depreciation expense is a necessary element of
our costs and our ability to generate revenue. In addition, the
omission of the amortization expense associated with our
intangible assets further limits the usefulness of this measure.
Adjusted EBITDA as presented herein is the Adjusted EBITDA of
CVR Energy. CVR Energy is not a guarantor of the new notes.
Because of these limitations management does not view Adjusted
EBITDA in isolation or as a primary performance measure and also
uses other measures, such as net income and sales, to measure
operating performance. Adjusted EBITDA as set forth herein is
not equal to Consolidated Cash Flow as calculated under the
indentures governing the notes and the existing second lien
notes.
The following table reconciles the consolidated net income
(loss) of CVR Energy to Adjusted EBITDA for the periods
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Months
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
Nine Months Ended September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
(in millions)
|
|
|
CVR Energy net income (loss)
|
|
$
|
163.9
|
|
|
$
|
69.4
|
|
|
$
|
14.3
|
|
|
$
|
12.0
|
|
|
$
|
279.9
|
|
|
$
|
282.2
|
|
Plus:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
|
63.9
|
|
|
|
29.2
|
|
|
|
13.8
|
|
|
|
4.8
|
|
|
|
172.5
|
|
|
|
181.5
|
|
Unfavorable (favorable) FIFO impact (a)
|
|
|
102.5
|
|
|
|
(67.9
|
)
|
|
|
(31.7
|
)
|
|
|
2.6
|
|
|
|
1.5
|
|
|
|
(30.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
37.6
|
|
|
|
42.5
|
|
|
|
48.1
|
|
|
|
34.9
|
|
|
|
40.6
|
|
|
|
53.8
|
|
Unrealized (gain) loss relating to derivative transactions
|
|
|
(253.8
|
)
|
|
|
42.8
|
|
|
|
2.2
|
|
|
|
(0.8
|
)
|
|
|
6.8
|
|
|
|
9.8
|
|
Depreciation and amortization
|
|
|
82.2
|
|
|
|
84.9
|
|
|
|
86.8
|
|
|
|
64.8
|
|
|
|
66.1
|
|
|
|
88.1
|
|
Net costs associated with flood (b)
|
|
|
7.9
|
|
|
|
0.6
|
|
|
|
(1.0
|
)
|
|
|
(1.0
|
)
|
|
|
|
|
|
|
|
|
Share-based compensation (c)
|
|
|
(42.5
|
)
|
|
|
8.8
|
|
|
|
37.2
|
|
|
|
8.4
|
|
|
|
23.6
|
|
|
|
52.4
|
|
Goodwill impairment (d)
|
|
|
42.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Major scheduled turnaround expense (e)
|
|
|
3.3
|
|
|
|
|
|
|
|
4.8
|
|
|
|
0.6
|
|
|
|
12.2
|
|
|
|
16.5
|
|
EBITDA adjustments included in non-controlling interest (f)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3.4
|
)
|
|
|
(3.4
|
)
|
Other expenses (g)
|
|
|
12.3
|
|
|
|
2.1
|
|
|
|
19.3
|
|
|
|
16.4
|
|
|
|
3.6
|
|
|
|
6.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
220.1
|
|
|
$
|
212.4
|
|
|
$
|
193.8
|
|
|
$
|
142.7
|
|
|
$
|
603.4
|
|
|
$
|
657.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
The Company uses the first in,
first out (FIFO) methodology as a basis to determine inventory
value in accordance with GAAP. Changes in crude oil prices can
cause fluctuations in inventory value of our crude oil, work in
process and finished goods, thereby resulting in favorable FIFO
impacts when crude prices increase and unfavorable FIFO impacts
when crude prices decrease. The FIFO impact is calculated based
upon inventory values at the beginning of the accounting period
and at the end of the accounting period.
|
|
(b)
|
|
Represents the write-off of
approximate net costs associated with the June/July 2007 flood
and crude oil discharge that are not probable of recovery for
all periods presented other than the year ended
December 31, 2010, and a recovery of $1.0 million for
the year ended December 31, 2010.
|
|
(c)
|
|
Represents the impact of all
share-based compensation awards.
|
|
(d)
|
|
Upon applying the goodwill
impairment testing criteria under existing accounting rules
during the fourth quarter of 2008, we determined that the
goodwill in the petroleum segment was impaired, which
|
13
|
|
|
|
|
resulted in a goodwill impairment
loss of $42.8 million. This represented a write-off of the
entire balance of the petroleum segments goodwill.
|
|
(e)
|
|
Represents expense associated with
major scheduled turnarounds.
|
|
(f)
|
|
Represents adjustments made to
EBITDA attributable to non-controlling interests.
|
|
(g)
|
|
Other expenses consists of the
following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve
|
|
|
|
|
|
|
|
|
|
Months
|
|
|
|
Year Ended
|
|
|
Nine Months Ended
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
Loss on extinguishment of debt
|
|
|
10.0
|
|
|
|
2.1
|
|
|
|
16.6
|
|
|
|
15.1
|
|
|
|
2.1
|
|
|
|
3.6
|
|
Loss on disposal of certain fixed assets
|
|
|
2.3
|
|
|
|
|
|
|
|
2.7
|
|
|
|
1.3
|
|
|
|
1.5
|
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses
|
|
|
12.3
|
|
|
|
2.1
|
|
|
|
19.3
|
|
|
|
16.4
|
|
|
|
3.6
|
|
|
|
6.5
|
|
The following table reconciles the operating income of the
petroleum and nitrogen fertilizer segments to Petroleum Adjusted
EBITDA and Fertilizer Adjusted EBITDA, respectively, for the
periods presented below (certain corporate activities and
intercompany transactions are not allocated to either of our two
segments and, therefore, CVR Energys Adjusted EBITDA
is not a sum of the operating results of the petroleum and
nitrogen fertilizer segments):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve
|
|
|
|
|
|
|
Months
|
|
|
|
Year Ended
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(in millions)
|
|
|
Petroleum Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Petroleum segment operating income
|
|
$
|
31.9
|
|
|
$
|
170.2
|
|
|
$
|
104.6
|
|
|
$
|
529.5
|
|
Plus:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FIFO impact (favorable) unfavorable
|
|
|
102.5
|
|
|
|
(67.9
|
)
|
|
|
(31.7
|
)
|
|
|
(30.4
|
)
|
Share-based compensation
|
|
|
(10.8
|
)
|
|
|
(3.7
|
)
|
|
|
11.5
|
|
|
|
17.1
|
|
Loss on disposal of fixed assets
|
|
|
|
|
|
|
|
|
|
|
1.3
|
|
|
|
1.5
|
|
Major scheduled turnaround
|
|
|
|
|
|
|
|
|
|
|
1.2
|
|
|
|
12.8
|
|
Realized gain (loss) on derivatives, net
|
|
|
(121.0
|
)
|
|
|
(21.0
|
)
|
|
|
0.7
|
|
|
|
(24.7
|
)
|
Goodwill impairment
|
|
|
42.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
62.7
|
|
|
|
64.4
|
|
|
|
66.4
|
|
|
|
67.8
|
|
Other income (expense)
|
|
|
1.0
|
|
|
|
0.3
|
|
|
|
0.7
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Petroleum Adjusted EBITDA
|
|
$
|
109.1
|
|
|
$
|
142.3
|
|
|
$
|
154.7
|
|
|
$
|
574.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nitrogen Fertilizer Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nitrogen Fertilizer segment operating income
|
|
$
|
116.8
|
|
|
$
|
48.9
|
|
|
$
|
20.4
|
|
|
$
|
84.0
|
|
Plus:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
(10.6
|
)
|
|
|
3.2
|
|
|
|
9.0
|
|
|
|
14.1
|
|
Loss on disposal of fixed assets
|
|
|
2.3
|
|
|
|
|
|
|
|
1.4
|
|
|
|
1.4
|
|
Major scheduled turnaround
|
|
|
3.3
|
|
|
|
|
|
|
|
3.5
|
|
|
|
3.5
|
|
Depreciation and amortization
|
|
|
18.0
|
|
|
|
18.7
|
|
|
|
18.5
|
|
|
|
18.5
|
|
Other income (expense)
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fertilizer Adjusted EBITDA
|
|
$
|
129.9
|
|
|
$
|
70.8
|
|
|
$
|
52.8
|
|
|
$
|
121.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7)
|
|
Refining margin is a measurement
calculated as the difference between net sales and cost of
product sold (exclusive of depreciation and amortization).
Refining margin is a non-GAAP measure that we believe is
|
14
|
|
|
|
|
important to investors in
evaluating our refinerys performance as a general
indication of the amount above our cost of product sold that we
are able to sell refined products. Each of the components used
in this calculation (net sales and cost of product sold
(exclusive of depreciation and amortization)) is taken directly
from our Statements of Operations. Our calculation of refining
margin may differ from similar calculations of other companies
in our industry, thereby limiting its usefulness as a
comparative measure. In order to derive the refining margin per
crude oil throughput barrel, we utilize the total dollar figures
for refining margin as derived above and divide by the
applicable number of crude oil throughput barrels for the
period. We believe that refining margin and refining margin per
crude oil throughput barrel is important to enable investors to
better understand and evaluate our ongoing operating results and
for greater transparency in the review of our overall business,
financial, operational and economic financial performance.
|
|
(8)
|
|
Noncontrolling interest at
December 31, 2008, 2009 and 2010 reflects Coffeyville
Acquisition IIIs interest in the Partnerships
then-existing incentive distribution rights (IDRs). In
connection with the Partnerships initial public offering
in April 2011, the IDRs were eliminated and the general partner
was sold to CRLLC.
|
15
Summary
Consolidated Financial InformationGWEC
This financial information should be read in conjunction with,
and is qualified in its entirety by reference to, GWEC's financial
statements and related notes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve
|
|
|
|
|
|
|
|
|
|
Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
Year Ended December 31,
|
|
|
Nine Months Ended September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
(in millions, other than production data)
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
$
|
2,142.8
|
|
|
$
|
1,649.6
|
|
|
$
|
2,141.0
|
|
|
$
|
1,542.0
|
|
|
$
|
2,041.3
|
|
|
$
|
2,640.3
|
|
Operating expenses
|
|
|
2,248.8
|
|
|
|
1,566.5
|
|
|
|
2,086.8
|
|
|
|
1,512.3
|
|
|
|
1,857.2
|
|
|
|
2,431.8
|
|
Gross Profit (loss)
|
|
|
(106.0
|
)
|
|
|
83.1
|
|
|
|
54.2
|
|
|
|
29.7
|
|
|
|
184.1
|
|
|
|
208.5
|
|
General and administrative expenses
|
|
|
20.6
|
|
|
|
17.9
|
|
|
|
15.7
|
|
|
|
12.0
|
|
|
|
13.9
|
|
|
|
17.6
|
|
Operating income (loss)
|
|
|
(126.6
|
)
|
|
|
65.2
|
|
|
|
38.5
|
|
|
|
17.7
|
|
|
|
170.2
|
|
|
|
190.9
|
|
Interest and investment income
|
|
|
1.0
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
|
|
0.1
|
|
Interest expense
|
|
|
(7.4
|
)
|
|
|
(13.0
|
)
|
|
|
(22.4
|
)
|
|
|
(16.6
|
)
|
|
|
(22.9
|
)
|
|
|
(28.6
|
)
|
Gain on disposal of assets
|
|
|
1.9
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
0.2
|
|
|
|
0.2
|
|
Fire-related gain (loss), net
|
|
|
2.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-net
|
|
|
0.1
|
|
|
|
0.3
|
|
|
|
|
|
|
|
0.7
|
|
|
|
(0.3
|
)
|
|
|
(1.0
|
)
|
Total other expense
|
|
|
(1.6
|
)
|
|
|
(12.4
|
)
|
|
|
(22.4
|
)
|
|
|
(15.9
|
)
|
|
|
(22.9
|
)
|
|
|
(29.3
|
)
|
Net income (loss) from continuing operations
|
|
|
(128.2
|
)
|
|
|
52.8
|
|
|
|
16.1
|
|
|
|
1.8
|
|
|
|
147.3
|
|
|
|
161.6
|
|
Net loss from discontinued operations
|
|
|
(1.6
|
)
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(129.8
|
)
|
|
|
52.5
|
|
|
|
16.1
|
|
|
$
|
1.8
|
|
|
$
|
147.3
|
|
|
$
|
161.6
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve
|
|
|
|
|
|
|
|
|
|
Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
Year Ended December 31,
|
|
|
Nine Months Ended September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
(in millions, other than production data)
|
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities (including discontinued operations)
|
|
$
|
(94.1
|
)
|
|
$
|
87.4
|
|
|
$
|
86.4
|
|
|
$
|
2.7
|
|
|
$
|
85.3
|
|
|
|
169.0
|
|
Investing activities
|
|
$
|
(30.9
|
)
|
|
$
|
(11.2
|
)
|
|
$
|
(43.7
|
)
|
|
$
|
(36.0
|
)
|
|
$
|
(13.5
|
)
|
|
|
(21.2
|
)
|
Financing activities
|
|
$
|
105.8
|
|
|
$
|
(71.8
|
)
|
|
$
|
(14.6
|
)
|
|
$
|
28.1
|
|
|
$
|
(77.0
|
)
|
|
|
(119.7
|
)
|
Capital expenditures: refinery and pipeline
|
|
$
|
(37.5
|
)
|
|
$
|
(49.4
|
)
|
|
$
|
(43.3
|
)
|
|
$
|
(36.5
|
)
|
|
$
|
(14.0
|
)
|
|
|
(20.8
|
)
|
Adjusted EBITDA (1)
|
|
$
|
(17.8
|
)
|
|
$
|
36.9
|
|
|
$
|
47.3
|
|
|
$
|
38.5
|
|
|
$
|
233.3
|
|
|
$
|
235.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NYMEX 2-1-1 crack spread (per barrel)
|
|
$
|
12.50
|
|
|
$
|
8.54
|
|
|
$
|
10.07
|
|
|
$
|
9.76
|
|
|
$
|
27.27
|
|
|
$
|
23.16
|
|
Wynnewood refinery crude oil throughput (barrels per day)
|
|
|
45,548
|
|
|
|
59,836
|
|
|
|
63,025
|
|
|
|
62,598
|
|
|
|
60,789
|
|
|
|
61,277
|
|
Refining margin (per crude oil throughput barrel)
|
|
$
|
0.89
|
|
|
$
|
$9.43
|
|
|
$
|
7.50
|
|
|
$
|
6.86
|
|
|
$
|
20.60
|
|
|
$
|
17.76
|
|
Operating expenses (per crude oil throughput barrel)
|
|
$
|
6.07
|
|
|
$
|
4.34
|
|
|
$
|
3.92
|
|
|
$
|
4.53
|
|
|
$
|
4.43
|
|
|
$
|
4.33
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
1.9
|
|
|
|
6.0
|
|
|
|
34.0
|
|
|
|
0.8
|
|
|
|
29.0
|
|
|
|
29.0
|
|
Total assets
|
|
|
429.9
|
|
|
|
531.9
|
|
|
|
586.5
|
|
|
|
564.8
|
|
|
|
652.2
|
|
|
|
652.2
|
|
Total liabilities
|
|
|
289.2
|
|
|
|
339.7
|
|
|
|
378.1
|
|
|
|
370.8
|
|
|
|
354.8
|
|
|
|
354.8
|
|
Total shareholders equity
|
|
|
140.7
|
|
|
|
192.2
|
|
|
|
208.4
|
|
|
|
194.0
|
|
|
|
297.4
|
|
|
|
297.4
|
|
|
|
|
(1)
|
|
We define Adjusted EBITDA as
GWECs net income (loss) plus (a) income tax expense
(benefit), (b) interest expense, (c) depreciation and
amortization, (d) unrealized (gain) loss related to hedging
obligations, (e) turnaround amortization, (f) non-cash
inventory (gain) loss and (g) other unusual items.
|
We present Adjusted EBITDA for GWEC because it is a useful
indicator of GWECs operating performance. We believe this
for the following reasons:
|
|
|
|
|
Adjusted EBITDA is widely used by investors to measure a
companys operating performance without regard to items,
such as interest expense, income tax expense, and depreciation
and amortization, that can vary substantially from company to
company depending upon their financing and accounting methods,
the book value of their assets, their capital structures and the
method by which their assets were acquired;
|
|
|
|
securities analysts use Adjusted EBITDA as a supplemental
measure to evaluate the overall operating performance of a
company; and
|
|
|
|
Adjusted EBITDA measures GWECs operational performance
without regard to certain non-recurring, non-cash
and/or
transaction-related expenses.
|
However, Adjusted EBITDA should not be considered as an
alternative to net income, cash flow from operations, or any
other measure of financial performance calculated and presented
in accordance with GAAP. Our Adjusted EBITDA may not be
comparable to similar measures reported by other companies
because other companies may not calculate Adjusted EBITDA in the
same manner as we do. Although we use Adjusted EBITDA as a
measure to assess the operating performance of our businesses,
Adjusted EBITDA has significant limitations as an analytical
tool because it excludes certain material costs. For example, it
does not include interest expense, which has been and will
continue to be a necessary element of our costs. Because we use
capital assets, depreciation expense is a necessary element of
our costs and our business ability to generate revenue. In
addition, the omission of the amortization expense associated
with our intangible assets further limits the usefulness of this
measure. Because of these limitations management does not view
Adjusted EBITDA in isolation or as a primary performance measure
and also uses other measures, such as net income and sales, to
measure operating performance.
17
The following table reconciles the consolidated net income
(loss) of GWEC to Adjusted EBITDA for the periods presented
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve
|
|
|
|
|
|
|
|
|
|
Months
|
|
|
|
Year Ended
|
|
|
Nine Months Ended
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
GWEC net income (loss)
|
|
$
|
(129.8
|
)
|
|
$
|
52.5
|
|
|
$
|
16.1
|
|
|
$
|
1.8
|
|
|
$
|
147.3
|
|
|
$
|
161.6
|
|
Plus:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
6.4
|
|
|
|
13.0
|
|
|
|
22.4
|
|
|
|
16.6
|
|
|
|
22.8
|
|
|
|
28.6
|
|
Depreciation and amortization
|
|
|
13.3
|
|
|
|
13.8
|
|
|
|
14.7
|
|
|
|
10.6
|
|
|
|
13.1
|
|
|
|
17.2
|
|
Unrealized (gain) loss related to hedging obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37.9
|
|
|
|
37.9
|
|
Amortization of turnaround costs
|
|
|
9.4
|
|
|
|
15.4
|
|
|
|
13.7
|
|
|
|
10.5
|
|
|
|
9.8
|
|
|
|
13.1
|
|
Non-cash inventory (gain) loss
|
|
|
82.6
|
|
|
|
(57.8
|
)
|
|
|
(19.6
|
)
|
|
|
(1.0
|
)
|
|
|
2.6
|
|
|
|
(23.1
|
)
|
Other unusual items (a)
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
(17.8
|
)
|
|
$
|
36.9
|
|
|
$
|
47.3
|
|
|
$
|
38.5
|
|
|
$
|
233.3
|
|
|
$
|
235.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Principally represents losses from discontinued operations and
gains on sales of assets.
|
18
History
Our refinery, which began operations in 1906, and the nitrogen
fertilizer plant, built in 2000, were operated as components of
Farmland Industries, Inc., or Farmland, an agricultural
cooperative, until March 3, 2004.
Coffeyville Resources, a subsidiary of Coffeyville Group
Holdings, LLC, which was owned by a private equity firm, won a
bankruptcy court auction for Farmlands petroleum business
and the nitrogen fertilizer plant and completed the purchase of
these assets on March 3, 2004. On June 24, 2005,
Coffeyville Acquisition, which was formed by certain funds
affiliated with Goldman, Sachs & Co. and
Kelso & Company acquired all of the subsidiaries of
Coffeyville Group Holdings, LLC. Coffeyville Acquisition
operated our business from June 24, 2005 until CVR
Energys initial public offering in October 2007.
CVR Energy was formed in September 2006 as a subsidiary of
Coffeyville Acquisition in order to consummate an initial public
offering of the businesses operated by Coffeyville Acquisition.
CVR Energys initial public offering was consummated in
October 2007 and CVR Energy currently trades on the New York
Stock Exchange under the ticker symbol CVI. Prior to
CVR Energys initial public offering it transferred the
nitrogen fertilizer business to the Partnership in exchange for
all of the partnership interests in the Partnership and sold all
of the interests of the general partner of the Partnership to an
entity owned by our controlling stockholders and senior
management at fair market value on the date of the transfer.
In April 2011, in connection with the Partnerships initial
public offering, CVR Partners was restructured, the
Partnerships general partner was sold back to CVR Energy,
and approximately 30.3% of the Partnerships common units
were sold to the public. CVR Partners initial
19
public offering was consummated in April 2011, and CVR Partners
currently trades on the New York Stock Exchange under the
ticker symbol UAN. CVR Energy owns the
Partnerships general partner and 69.7% of the
Partnerships common units, and its senior management
manages the Partnership pursuant to a services agreement. See
Certain Relationships and Related Party
TransactionsInitial Public Offering of CVR Partners,
LPIntercompany AgreementsAmended and Restated
Services Agreement in our most recent proxy statement.
Petroleum
Business
We operate a 115,000 bpd complex full coking medium-sour
crude oil refinery in Coffeyville, Kansas. Our refinerys
production capacity represents approximately 15% of our
regions output. The facility is situated on approximately
440 acres in southeast Kansas, approximately 100 miles
from Cushing, Oklahoma, a major crude oil trading and storage
hub.
For the year ended December 31, 2010, our refinerys
product yield included gasoline (mainly regular unleaded) (49%),
diesel fuel (primarily ultra low sulfur diesel) (41%), and pet
coke and other refined products such as NGC (propane, butane),
slurry, sulfur and gas oil (10%). Pro forma for the Acquisition,
during the twelve months ended September 30, 2011, our
product yield would have included gasoline (50%), diesel (36%)
and other (14%).
Our petroleum business also includes the following auxiliary
operating assets:
|
|
|
|
|
Crude Oil Gathering System. We own and operate
a crude oil gathering system serving Kansas, Oklahoma, western
Missouri and southwestern Nebraska. The system has field offices
in Bartlesville, Oklahoma and Plainville and Winfield, Kansas.
The system is comprised of approximately 300 miles of
feeder and trunk pipelines, 95 trucks, and associated storage
facilities for gathering sweet Kansas, Nebraska, Oklahoma and
Missouri crude oils purchased from independent crude oil
producers. We also lease a section of a pipeline from Magellan,
which is incorporated into our crude oil gathering system.
Gathered crude oil provides a base supply of feedstock for our
refinery and serves as an attractive and competitive supply of
crude oil. During the first nine months of 2011, we gathered an
average of approximately 35,000 bpd.
|
|
|
|
Pipelines and Storage Tanks. We own a
proprietary pipeline system capable of transporting
approximately 145,000 bpd of crude oil from Caney, Kansas
to our refinery. Crude oils sourced outside of our proprietary
gathering system are delivered by common carrier pipelines into
various terminals in Cushing, Oklahoma, where they are blended
and then delivered to Caney, Kansas via a pipeline owned by
Plains Pipeline L.P., or Plains. We also own associated crude
oil storage tanks with a capacity of approximately
1.2 million barrels located outside our refinery and lease
an additional 2.7 million barrels of storage capacity
located at Cushing, Oklahoma (with an additional
1.0 million barrels of company-owned storage tanks in
Cushing under construction, which are expected to be completed
in the first quarter of 2012).
|
Our refinerys complexity allows us to optimize the yields
(the percentage of refined product that is produced from crude
oil and other feedstocks) of higher value transportation fuels
(gasoline and diesel). Complexity is a measure of a
refinerys ability to process lower quality crude oil in an
economic manner. As a result of key investments in our refining
assets, our refinerys complexity score has increased to
12.9 from 12.2 at the beginning of 2010, and we have achieved
significant increases in our refinery crude oil throughput rate
over historical levels. Our higher complexity provides us the
flexibility to increase our refining margin over comparable
refiners with lower complexities.
20
Feedstocks
Supply
Our refinery has the capability to process blends of a variety
of crude oil ranging from heavy sour to light sweet crude oil.
Currently, our refinery processes crude oil from a broad array
of sources. We have access to foreign crude oil from Latin
America, South America, West Africa, the Middle East, the North
Sea and Canada. We purchase domestic crude oil from Kansas,
Oklahoma, Nebraska, Texas, North Dakota, Missouri, and offshore
deepwater Gulf of Mexico production. While crude oil has
historically constituted over 90% of our feedstock inputs during
the last five years, other feedstock inputs include normal
butane, natural gasoline, alky feed, naphtha, gas oil and vacuum
tower bottoms.
Crude oil is supplied to our refinery through our wholly-owned
gathering system and by pipeline. We have continued to increase
the number of barrels of crude oil supplied through our crude
oil gathering system. In September 2011, our gathering system
supplied approximately 37,500 bpd of crude oil to the
refinery. For the nine months ended September 30, 2011, the
gathering system supplied approximately 33% of the
refinerys crude oil demand. Locally produced crude oils
are delivered to the refinery at a discount to WTI, and although
slightly heavier and more sour, offer good economics to the
refinery. These crude oils are light and sweet enough to allow
us to blend higher percentages of lower cost crude oils such as
heavy sour Canadian crude oil while maintaining our target
medium sour blend with an API gravity of between 28 and 36
degrees and between 0.9% and 1.2% sulfur. Crude oils sourced
outside of our proprietary gathering system are delivered to
Cushing, Oklahoma by various pipelines including Seaway, Basin
and Spearhead and subsequently to Coffeyville via the Plains
pipeline and our own 145,000 bpd proprietary pipeline
system. Beginning in March 2011, crude oils were also delivered
through the Keystone pipeline. In November 2011, the owners of
the Seaway pipeline announced their intention to change the
pipelines direction so that the pipeline would flow from
the crude storage hub at Cushing, to the U.S. Gulf Coast.
For the nine months ended September 30, 2011, our crude oil
supply blend was comprised of approximately 80% light sweet
crude oil and 20% heavy sour crude oil. The light sweet crude
oil includes our locally gathered crude oil.
For the nine months ended September 30, 2011, we obtained
approximately 67% of the crude oil for our refinery under a
Crude Oil Supply Agreement, as amended (the Supply
Agreement) with Vitol Inc. (Vitol) that
expires on December 31, 2013. Under the Supply Agreement,
Vitol supplies us with crude oil and intermediation logistics,
which helps us reduce our inventory position and mitigate crude
oil pricing risk.
Pro forma for the Acquisition, during the twelve months ended
September 30, 2011, our feedstocks would have included
sweet crude (75%), sour crude (19%), and others (6%).
Marketing and
Distribution
We focus our petroleum product marketing efforts in the central
mid-continent and Rocky Mountain areas because of their relative
proximity to our refinery and their pipeline access. We engage
in rack marketing, which is the supply of product through tanker
trucks directly to customers located in close geographic
proximity to our Coffeyville refinery and to customers at
throughput terminals on Magellans and NuStars
refined products distribution systems. For the year ended
December 31, 2010, approximately 36% of the refinerys
products were sold through the rack system directly to retail
and wholesale customers while the remaining 64% was sold through
pipelines via bulk spot and term contracts. We make bulk sales
(sales into third-party pipelines) into the mid-continent region
via Magellan and into Colorado and other destinations utilizing
the product pipeline networks owned by Magellan, and NuStar.
21
Customers
Customers for our petroleum products include other refiners,
convenience store companies, railroads and farm cooperatives. We
have bulk term contracts in place with many of these customers,
which typically extend from a few months to one year in length.
For the year ended December 31, 2010, QuikTrip Corporation
and Growmark, Inc. accounted for approximately 14% and 11%,
respectively, of our petroleum business sales and approximately
66% of our petroleum sales were made to our ten largest
customers. We sell bulk products based on industry market
related indices such as Platts, Oil Price Information Service
(OPIS) or at a spot market price based on a Group 3
differential to the New York Mercantile Exchange
(NYMEX). Through our rack marketing division, the
rack sales are at daily posted prices which are influenced by
the NYMEX, competitor pricing and Group 3 spot market
differentials.
Competition
Our petroleum business competes primarily on the basis of price,
reliability of supply and availability of multiple grades of
products. The principal competitive factors affecting our
refining operations are cost of crude oil and other feedstock
costs, refinery complexity, refinery efficiency, refinery
product mix and product distribution and transportation costs.
The location of our refinery provides us with a reliable supply
of crude oil and a transportation cost advantage over other
refineries. We compete against refineries operated in the
mid-continent region, trading companies and other refineries
located outside the region that are linked to the mid-continent
region through an extensive product pipeline system. These
competitors include refineries located near the U.S. Gulf
Coast and the Texas panhandle region. Our refinery competition
also includes branded, integrated and independent oil refining
companies.
Seasonality
Our petroleum business experiences seasonal effects as demand
for gasoline products is generally higher during the summer
months than during the winter months due to seasonal increases
in highway traffic and road construction work. Demand for diesel
fuel during the winter months also decreases due to winter
agricultural work declines. As a result, our results of
operations for the first and fourth calendar quarters are
generally lower than for those for the second and third calendar
quarters. In addition, unseasonably cool weather in the summer
months
and/or
unseasonably warm weather in the winter months in the areas in
which we sell our petroleum products can impact the demand for
gasoline and diesel fuel.
Nitrogen
Fertilizer Business
The nitrogen fertilizer business operates the only nitrogen
fertilizer plant in North America that utilizes a pet coke
gasification process to produce nitrogen fertilizer. The
nitrogen fertilizer facility was built in 2000 with two separate
gasifiers to provide redundancy and reliability. It uses a
gasification process licensed from General Electric to convert
pet coke to high purity hydrogen for subsequent conversion to
ammonia. Following a turnaround completed in October 2010, the
nitrogen fertilizer plant is capable of processing approximately
1,300 tons per day of pet coke from CVR Energys crude oil
refinery and third-party sources such as other Midwestern
refineries or pet coke brokers and converting it into
approximately 1,200 tons per day of ammonia. A majority of the
ammonia is converted to approximately 2,000 tons per day of UAN.
Typically 0.41 tons of ammonia are required to produce one ton
of UAN.
Strategic
Location with Transportation Advantage
The nitrogen fertilizer business believes that selling products
to customers in close proximity to the UAN plant and reducing
transportation costs are keys to maintaining its profitability.
Due to the plants favorable location relative to end users
and high product
22
demand relative to production volume all of the product
shipments are targeted to freight advantaged destinations
located in the U.S. farm belt. The available ammonia
production at the nitrogen fertilizer plant is small and easily
sold into truck and rail delivery points. The products leave the
plant either in trucks for direct shipment to customers or in
railcars for principally Union Pacific Railroad destinations.
The nitrogen fertilizer business does not incur any intermediate
transfer, storage, barge freight or pipeline freight charges.
Consequently, because these costs are not incurred, we estimate
that the plant enjoys a distribution cost advantage over those
competitors who are U.S. Gulf Coast ammonia and UAN
importers, assuming in each case freight rates and pipeline
tariffs for U.S. Gulf Coast importers as recently in effect.
On-Stream
Factor
The on-stream factor is a measure of how long the units
comprising the nitrogen fertilizer facility have been
operational over a given period. We expect that efficiency of
the nitrogen fertilizer plant will continue to improve with
operator training, replacement of unreliable equipment, and
reduced dependence on contract maintenance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
Year Ended December 31,
|
|
Ended September 30,
|
|
|
2008 (1)
|
|
2009 (1)
|
|
2010 (1)
|
|
2011
|
|
Gasifier
|
|
|
87.8
|
%
|
|
|
97.4
|
%
|
|
|
89.0
|
%
|
|
|
99.5
|
%
|
Ammonia
|
|
|
86.2
|
%
|
|
|
96.5
|
%
|
|
|
87.7
|
%
|
|
|
98.0
|
%
|
UAN
|
|
|
83.4
|
%
|
|
|
94.1
|
%
|
|
|
80.8
|
%
|
|
|
95.9
|
%
|
|
|
|
(1)
|
|
On-stream factor is the total
number of hours operated divided by the total number of hours in
the reporting period. Excluding the turnaround performed in
2008, the on-stream factors would have been 91.7% for gasifier,
90.2% for ammonia and 87.4% for UAN for the year ended
December 31, 2008. Excluding the Linde air separation unit
outage in 2009, the on-stream factors would have been 99.3% for
gasifier, 98.4% for ammonia and 96.1% for UAN for the year ended
December 31, 2009. Excluding the impact of the Linde air
separation unit outage, the rupture of the high-pressure UAN
vessel and the major scheduled turnaround, the on-stream factors
for the year ended December 31, 2010 would have been 97.6%
for gasifier, 96.8% for ammonia and 96.1% for UAN.
|
Raw Material
Supply
The nitrogen fertilizer facilitys primary input is pet
coke. During the past five years, over 70% of the nitrogen
fertilizer business pet coke requirements on average were
supplied by our adjacent crude oil refinery. Historically the
nitrogen fertilizer business has obtained the remainder of its
pet coke requirements from third parties such as other
Midwestern refineries or pet coke brokers at spot prices. If
necessary, the gasifier can also operate on low grade coal as an
alternative, which provides an additional raw material source.
There are significant supplies of low grade coal within a
60-mile
radius of the nitrogen fertilizer plant.
Pet coke is produced as a by-product of the refinerys
coker unit process. In order to refine heavy or sour crude oils,
which are lower in cost and more prevalent than higher quality
crude oil, refiners use coker units which enable refiners to
further upgrade heavy crude oil.
The nitrogen fertilizer business plant is located in
Coffeyville, Kansas. Sales of pet coke in the Midwest are not
subject to the same level of pet coke price variability as is
the Texas Gulf Coast where daily production exceeds 40,000 tons
per day. Given the fact that the majority of the nitrogen
fertilizer business third-party pet coke suppliers are
located in the Midwest, the nitrogen fertilizer business
geographic location gives it (and other similarly located
producers) a transportation cost advantage over U.S. Gulf
Coast refineries. The nitrogen fertilizer business average
daily pet coke demand from
2008-2010
was less than 1,300 tons per day.
Linde, Inc., or Linde, owns, operates, and maintains the air
separation plant that provides contract volumes of oxygen,
nitrogen, and compressed dry air to the nitrogen fertilizer
plants
23
gasifiers for a monthly fee. The nitrogen fertilizer business
provides and pays for all utilities required for operation of
the air separation plant. The air separation plant has not
experienced any long-term operating problems. CVR Energy
maintains, for CVR Partners benefit, contingent business
interruption insurance coverage with a $50 million limit
for any interruption that results in a loss of production from
an insured peril. The agreement with Linde provides that if the
nitrogen fertilizer business requirements for liquid or
gaseous oxygen, liquid or gaseous nitrogen or clean dry air
exceed specified instantaneous flow rates by at least 10%, it
can solicit bids from Linde and third parties to supply
incremental product needs. It is required to provide notice to
Linde of the approximate quantity of excess product that it will
need and the approximate date by which it will need it; the
nitrogen fertilizer business and Linde will then jointly develop
a request for proposal for soliciting bids from third parties
and Linde. The bidding procedures may be limited under specified
circumstances. The agreement with Linde expires in 2020.
The nitrogen fertilizer business imports
start-up
steam for the nitrogen fertilizer plant from our crude oil
refinery, and then exports steam back to the crude oil refinery
once all units in the nitrogen fertilizer plant are in service.
Monthly charges and credits are recorded with steam valued at
the natural gas price for the month.
Nitrogen
Production and Plant Reliability
The nitrogen fertilizer plant was completed in 2000 and is the
newest nitrogen fertilizer plant built in North America. The
nitrogen fertilizer plant has two separate gasifiers to provide
redundancy and reliability. The plant uses a gasification
process to convert pet coke to high purity hydrogen for
subsequent conversion to ammonia. The nitrogen fertilizer plant
is capable of processing approximately 1,400 tons per day of pet
coke from our crude oil refinery and third-party sources and
converting it into approximately 1,225 tons per day of ammonia.
A majority of the ammonia is converted to approximately 2,025
tons per day of UAN. Typically 0.41 tons of ammonia is required
to produce one ton of UAN.
The nitrogen fertilizer business schedules and provides routine
maintenance to its critical equipment using its own maintenance
technicians. Pursuant to a Technical Services Agreement with
General Electric, which licenses the gasification technology to
the nitrogen fertilizer business, General Electric experts
provide technical advice and technological updates from their
ongoing research as well as other licensees operating
experiences. The pet coke gasification process is licensed from
General Electric pursuant to a license agreement that is fully
paid. The license grants the nitrogen fertilizer business
perpetual rights to use the pet coke gasification process on
specified terms and conditions.
Distribution,
Sales and Marketing
The nitrogen fertilizer business primarily sells its products in
Kansas, Missouri, Nebraska, Iowa, Illinois, Colorado and Texas.
The nitrogen fertilizer business markets its ammonia products to
industrial and agricultural customers and the UAN products to
agricultural customers. The demand for nitrogen fertilizers
occurs during three key periods. The highest level of ammonia
demand is traditionally in the spring pre-plant period, from
March through May. The second-highest period of demand occurs
during fall pre-plant period in late October and November. The
summer wheat pre-plant occurs in August and September. In
addition, smaller quantities of ammonia are sold in the
off-season to fill available storage at the dealer level.
Ammonia and UAN are distributed by truck or by railcar. If
delivered by truck, products are sold on a
freight-on-board
basis, and freight is normally arranged by the customer. The
nitrogen fertilizer business leases a fleet of railcars for use
in product delivery. The nitrogen fertilizer business also
negotiates with distributors that have their own leased railcars
to utilize these assets to deliver products. The nitrogen
fertilizer business owns all of the truck and rail
24
loading equipment at the nitrogen fertilizer facility. The
nitrogen fertilizer business operates two truck loading and four
rail loading racks for each of ammonia and UAN, with an
additional four rail loading racks for UAN.
The nitrogen fertilizer business markets agricultural products
to destinations that produce the best margins for the business.
UAN is often marketed near the Union Pacific Railroad lines or
destinations that can be supplied by truck and ammonia is
primarily marketed to locations near the Burlington Northern
Santa Fe or Kansas City Southern Railroad lines or
destinations that can be supplied by truck. By securing this
business directly, the nitrogen fertilizer business reduces its
dependence on distributors serving the same customer base, which
enables the nitrogen fertilizer business to capture a larger
margin and allows it to better control its product distribution.
Most of the agricultural sales are made on a competitive spot
basis. The nitrogen fertilizer business also offers products on
a prepay basis for in-season demand. The heavy in-season demand
periods are spring and fall in the Corn Belt and summer in the
wheat belt. The Corn Belt is the primary corn producing region
of the United States, which includes Illinois, Indiana, Iowa,
Minnesota, Missouri, Nebraska, Ohio and Wisconsin. The wheat
belt is the primary wheat producing region of the United States,
which includes Kansas, North Dakota, Oklahoma, South Dakota and
Texas. Some of the industrial sales are spot sales, but most are
on annual or multiyear contracts.
The nitrogen fertilizer business uses forward sales of
fertilizer products to optimize its asset utilization, planning
process and production scheduling. These sales are made by
offering customers the opportunity to purchase product on a
forward basis at prices and delivery dates that it proposes. The
nitrogen fertilizer business uses this program to varying
degrees during the year and between years depending on market
conditions and has the flexibility to increase or decrease
forward sales depending on managements view as to whether
price environments will be increasing or decreasing. Fixing the
selling prices of nitrogen fertilizer products months in advance
of their ultimate delivery to customers typically causes the
nitrogen fertilizer business reported selling prices and margins
to differ from spot market prices and margins available at the
time of shipment. Cash received as a result of prepayments is
recognized on the balance sheet upon receipt along with a
corresponding liability. Revenue, associated with prepaid sales,
is recognized at the time the product is delivered to the
customer.
Customers
The nitrogen fertilizer business sells ammonia to agricultural
and industrial customers. Based upon a three-year average, the
nitrogen fertilizer business has sold approximately 87% of the
ammonia it produces to agricultural customers primarily located
in the mid-continent area between North Texas and Canada, and
approximately 13% to industrial customers. Agricultural
customers include distributors such as MFA, United Suppliers,
Inc., Brandt Consolidated Inc., Gavilon Fertilizers LLC,
Transammonia, Inc., Agri Services of Brunswick, LLC, Interchem,
and CHS Inc. Industrial customers include Tessenderlo Kerley,
Inc., National Cooperative Refinery Association, and Dyno Nobel,
Inc. The nitrogen fertilizer business sells UAN products to
retailers and distributors. Given the nature of its business,
and consistent with industry practice, the nitrogen fertilizer
business does not have long-term minimum purchase contracts with
any of its customers.
For the years ended December 31, 2008, 2009 and 2010, the
top five ammonia customers in the aggregate represented 54.7%,
43.9% and 44.2% of the nitrogen fertilizer business
ammonia sales, respectively, and the top five UAN customers in
the aggregate represented 37.2%, 44.2% and 43.3% of the nitrogen
fertilizer business UAN sales, respectively. Approximately
13%, 15% and 12% of our aggregate sales for the year ended
December 31, 2008, 2009 and 2010 respectively, were made to
Gavilon Fertilizers LLC.
25
Competition
Competition in the nitrogen fertilizer industry is dominated by
price considerations. However, during the spring and fall
application seasons, farming activities intensify and delivery
capacity is a significant competitive factor. The nitrogen
fertilizer business maintains a large fleet of leased rail cars
and seasonally adjusts inventory to enhance its manufacturing
and distribution operations.
Domestic competition, mainly from regional cooperatives and
integrated multinational fertilizer companies, is intense due to
customers sophisticated buying tendencies and production
strategies that focus on cost and service. Also, foreign
competition exists from producers of fertilizer products
manufactured in countries with lower cost natural gas supplies.
In certain cases, foreign producers of fertilizer who export to
the United States may be subsidized by their respective
governments.
Based on Blue Johnson data regarding total U.S. demand for
UAN and ammonia, we estimate that the nitrogen fertilizer
plants UAN production in 2010 represented approximately
5.1% of total U.S. UAN use and that the net ammonia
produced and marketed by the nitrogen fertilizer business
represented less than 1% of the total U.S. ammonia use.
Seasonality
Because the nitrogen fertilizer business primarily sells
agricultural commodity products, its business is exposed to
seasonal fluctuations in demand for nitrogen fertilizer products
in the agricultural industry. As a result, the nitrogen
fertilizer business typically generates greater net sales in the
first half of each calendar year, which we refer to as the
planting season, and our net sales tend to be lower during the
second half of each calendar year, which we refer to as the fill
season. In addition, the demand for fertilizers is affected by
the aggregate crop planting decisions and fertilizer application
rate decisions of individual farmers who make planting decisions
based largely on the prospective profitability of a harvest. The
specific varieties and amounts of fertilizer they apply depend
on factors like crop prices, farmers current liquidity,
soil conditions, weather patterns and the types of crops planted.
Gary-Williams
Energy Corporation
History
In 1945, Kerr-McGee Corporation acquired an oil refinery in
Wynnewood, Oklahoma that had been operating since the 1920s.
Kerr-McGee expanded the Wynnewood operations by adding a second
crude unit in 1976, boosting total refining capacity to
45,000 bpd. In 1995, the refinery was sold to the
Gary-Williams Energy Corporation, which promptly began
de-bottlenecking and other expansion projects at the refinery,
with production capacity increasing to 55,000 bpd in the
late 1990s and then to its current 70,000 bpd following the
completion of approximately $100.0 million in capital projects
and an approximately $60.0 million four-year turnaround in 2007
and 2008. On November 2, 2011, GWEC agreed to sell the
Wynnewood refinery to CVR Energy for a cash purchase price of
$525 million plus an adjustment for inventory and other
working capital (which, as of the date hereof, is estimated at $69.0 million).
Business
Description
The Wynnewood operations consist of a 70,000 bpd refinery
in Wynnewood, Oklahoma and supporting businesses including
approximately 2.0 million barrels of company-owned storage
tanks. Located in the PADD II Group 3 distribution area, the
Wynnewood refinery is a dual crude unit facility that processes
a variety of crudes and produces high-value fuel products
(including gasoline, ultra-low sulfur diesel, jet fuel and
solvent) as well as liquefied
26
petroleum gas and a variety of asphalts. The facility is
situated on approximately 400 acres located approximately
65 miles south of Oklahoma City, Oklahoma and approximately
130 miles from Cushing, Oklahoma, a major crude oil trading
and storage hub.
For the twelve months ended September 30, 2011, the
Wynnewood refinerys product yield included gasoline (54%),
diesel fuel (primarily ultra low sulfur diesel) (28%), asphalt
(2%), jet fuel (6%) and other products (10%).
Feedstocks
Supply
The Wynnewood refinery has the capability to process blends of a
variety of crude oil ranging from medium sour to light sweet
crude oil, although isobutane, gasoline components, and normal
butane are also typically used. Following the Acquisition, we
intend to move the Wynnewood refinery to a blended crude slate
reflecting higher crude differentials. Historically most of the
Wynnewood refinerys crude oil has been acquired
domestically, mainly from Texas and Oklahoma.
Crude oil is supplied to the Wynnewood refinery by two separate
pipelines, and received into storage tanks at terminals located
on or near the refinery. For the twelve months ended
September 30, 2011, Wynnewoods crude oil supply blend
was comprised of approximately 77% sweet crude oil, 18% sour
crude oil and 5% other (including butane, mixed butane and
isobutane).
Marketing and
Distribution
The Wynnewood refinery ships its finished product via pipeline,
rail car, and truck. Approximately 60% of the Wynnewood
refinerys finished products sold are distributed in
Oklahoma. Non-Oklahoma gasoline and ultra-low sulfur diesel
volumes are distributed throughout the Mid-Continent region via
the Magellan Pipeline. Wynnewood distributes approximately
12,000 bpd of gasoline and ultra-low sulfur diesel via the
refinerys truck rack, and Wynnewood has the ability to
distribute volumes via the NuStar Energy pipeline system to
South Dakota, Nebraska, Iowa, and Kansas. Wynnewood also sells
jet fuel to the U.S. Department of Defense via the truck
rack. In addition, Wynnewood maintains exchange agreements with
five refineries in nearby states.
Customers
Customers for Wynnewoods petroleum products include other
refiners, convenience store companies and, pursuant to a
4,000 bpd jet fuel contract that GWEC has maintained since
1996, the United States government. Wynnewoods active
customer base includes approximately 235 accounts, none of which
accounts for more than 9% of its sales. While GWEC has several
supply contracts that allow larger customers to realize volume
discounts if they maintain regular sales over predetermined
volumes, no supply contract is individually material to
Wynnewoods sales.
Environmental
Matters
The petroleum and nitrogen fertilizer businesses are subject to
extensive and frequently changing federal, state and local,
environmental and health and safety laws and regulations
governing the emission and release of hazardous substances and
other materials into the environment, the treatment and
discharge of waste water, the management and disposal of wastes,
the storage, handling, use and transportation of petroleum and
nitrogen products, and the characteristics and composition of
gasoline and diesel fuels. These laws and regulations,
27
their underlying regulatory requirements and the enforcement
thereof impact our petroleum business and operations and the
nitrogen fertilizer business and operations by imposing:
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restrictions on operations
and/or the
need to install enhanced or additional controls;
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the need to obtain and comply with permits and authorizations;
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liability for the investigation and remediation of contaminated
soil and groundwater at current and former facilities (if any)
and off-site waste disposal locations; and
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specifications for the products marketed by our petroleum
business and the nitrogen fertilizer business, primarily
gasoline, diesel fuel, UAN and ammonia.
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Our operations require numerous permits and authorizations.
Failure to comply with these permits or environmental laws
generally could result in fines, penalties or other sanctions or
a revocation of our permits. In addition, the laws and
regulations to which we are subject are often evolving and many
of them have become more stringent or have become subject to
more stringent interpretation or enforcement by federal or state
agencies. The ultimate impact on our business of complying with
evolving laws and regulations is not always clearly known or
determinable due in part to the fact that our operations may
change over time and certain implementing regulations for laws,
such as the federal Clean Air Act and the Clean Water Act, have
not yet been finalized, are under governmental or judicial
review or are being revised. These laws and regulations could
result in increased capital, operating and compliance costs.
The principal environmental risks associated with our businesses
are outlined below.
The Federal Clean
Air Act
The federal Clean Air Act and its implementing regulations, as
well as the corresponding state laws and regulations that
regulate emissions of pollutants into the air, affect our
petroleum operations and the nitrogen fertilizer business both
directly and indirectly. Direct impacts may occur through the
federal Clean Air Acts permitting requirements
and/or
emission control requirements relating to specific air
pollutants, as well as the requirement to maintain a risk
management program to help prevent accidental releases of
certain hazardous substances. The federal Clean Air Act
indirectly affects our petroleum operations and the nitrogen
fertilizer business by extensively regulating the air emissions
of sulfur dioxide
(SO2),
volatile organic compounds, nitrogen oxides and other
substances, including those emitted by mobile sources, which are
direct or indirect users of our products.
Some or all of the standards promulgated pursuant to the federal
Clean Air Act, or any future promulgations of standards, may
require the installation of controls or changes to our petroleum
operations or the nitrogen fertilizer facilities in order to
comply. If new controls or changes to operations are needed, the
costs could be significant. These new requirements, other
requirements of the federal Clean Air Act, or other presently
existing or future environmental regulations could cause us to
expend substantial amounts to comply
and/or
permit our facilities to produce products that meet applicable
requirements.
The regulation of air emissions under the federal Clean Air Act
requires that we obtain various construction and operating
permits and incur capital expenditures for the installation of
certain air pollution control devices at our petroleum and
nitrogen fertilizer operations when regulations change or we
modify or add new equipment. Various regulations specific to our
operations have been implemented, such as National Emission
Standard for Hazardous Air Pollutants, New Source Performance
Standards and Prevention of Significant Deterioration
(PSD). We have incurred, and expect to continue to
incur, substantial capital expenditures to maintain compliance
with these and other air emission regulations that have been
promulgated or may be promulgated or revised in the future.
28
In March 2004, CRRM and CRT entered into the Coffeyville Consent
Decree with the EPA and the KDHE to resolve air compliance
concerns raised by the EPA and KDHE related to Farmlands
prior ownership and operation of our crude oil refinery and now
closed Phillipsburg terminal facilities. As a result of an
agreement to install certain controls and implement certain
operational changes, the EPA and KDHE agreed not to impose civil
penalties, and provided a release from liability for
Farmlands alleged noncompliance with the issues addressed
by the Coffeyville Consent Decree. Under the Coffeyville Consent
Decree, CRRM agreed to install controls to reduce emissions of
SO2,
nitrogen oxides and particulate matter from its fluid catalytic
cracking unit (FCCU) by January 1, 2011. In
addition, pursuant to the Coffeyville Consent Decree, CRRM and
CRT assumed cleanup obligations at the Coffeyville refinery and
the Phillipsburg terminal facilities. The remaining costs of
complying with the Coffeyville Consent Decree are expected to be
approximately $49 million, of which approximately
$47 million is expected to be capital expenditures which
does not include the cleanup obligations for historic
contamination at the site that are being addressed pursuant to
administrative orders issued under the Resource Conservation and
Recovery Act (RCRA). To date, CRRM and CRT have
materially complied with the Coffeyville Consent Decree. On
June 30, 2009, CRRM submitted a force majeure notice to the
EPA and KDHE in which CRRM indicated that it may be unable to
meet the Coffeyville Consent Decrees January 1, 2011
deadline related to the installation of controls on the FCCU
because of delays caused by the June/July 2007 flood. In
February 2010, CRRM and the EPA agreed to a fifteen month
extension of the January 1, 2011, deadline for the
installation of controls which was approved by the court as a
material modification to the existing Coffeyville Consent
Decree. Pursuant to this agreement, CRRM would offset any
incremental emissions resulting from the delay by providing
additional controls to existing emission sources over a set
timeframe.
In the meantime, CRRM has been negotiating with the EPA and KDHE
to replace the current Coffeyville Consent Decree, including the
fifteen month extension, with a global settlement under the
EPAs National Petroleum Refining Initiative. Over the
course of the last decade, the EPA has embarked on a national
Petroleum Refining Initiative alleging industry-wide
noncompliance with four marquee issues under the
Clean Air Act: New Source Review, Flaring, Leak Detection and
Repair, and Benzene Waste Operations NESHAP. The National
Petroleum Refining Initiative has resulted in most
U.S. refineries entering into consent decrees that impose
civil penalties and require substantial expenditures for
pollution control and enhanced operating procedures. The EPA has
indicated that it will seek to have all U.S. refineries
enter into global settlements pertaining to all
marquee issues. The current Coffeyville Consent
Decree covers some, but not all, of the marquee
issues. CRRM has been negotiating with EPA about expanding the
existing Coffeyville Consent Decree obligations to include all
of the marquee issues under the National Petroleum
Refining Initiative and has reached an agreement in principle on
most of the issues, including an agreement to further delay the
installation of controls on its FCCU. Under the global
settlement, CRRM would be required to pay civil penalties in
excess of $100,000; however, CRRM does not anticipate that the
civil penalties will be material. In addition, under the global
settlement, CRRM would be required to perform an environmentally
beneficial project, but its incremental capital expenditures
would not be material and would be limited primarily to the
retrofit and replacement of heaters and boilers over a five to
seven year timeframe.
The Wynnewood refinery has not entered into a global settlement
with the EPA and the ODEQ under the National Petroleum Refining
Initiative, although it had discussions with the EPA and ODEQ
about doing so. Instead, the Wynnewood Consent Order (entered
into with ODEQ in August 2011) addresses some, but not all,
of the traditional marquee issues under the National Petroleum
Refining Initiative and addresses certain historic Clean Air Act
compliance issues that are generally beyond the scope of a
traditional global settlement. Under the Wynnewood Consent
Order, WRC agreed to pay a civil penalty of $950,000, install
certain controls, enhance certain compliance programs, and
undertake additional testing and auditing. The costs of
29
complying with the Wynnewood Consent Order, other than costs
associated with a planned turnaround, are expected to be
approximately $1.5 million. In consideration for entering
into the Wynnewood Consent Order, WRC received a broad release
from liability from ODEQ. The EPA may later request that WRC
enter into a global settlement which, if WRC agreed to do so,
would necessitate the payment of a civil penalty and the
installation of additional controls.
On September 23, 2011, the United States Department of
Justice (DOJ), acting on behalf of the EPA and the
United States Coast Guard, filed suit against CRRM in the United
States District Court for the District of Kansas seeking civil
penalties and injunctive relief related to alleged non
compliance with the Clean Air Acts Risk Management Program
(RMP) (in addition to other matters described below
(see Environmental Remediation). CRRM is
currently in settlement negotiations with the EPA and
anticipates that civil penalties associated with the proceeding
will exceed $100,000; however, CRRM does not anticipate that
civil penalties or any other costs associated with the
proceeding will be material.
The Federal Clean
Water Act
The federal Clean Water Act and its implementing regulations, as
well as the corresponding state laws and regulations that
regulate the discharge of pollutants into the water, affect our
petroleum operations and the nitrogen fertilizer business.
Direct impacts occur through the federal Clean Water Acts
permitting requirements, which establish discharge limitations
based on technology standards, water quality standards, and
restrictions on the total maximum daily load (TMDL)
of pollutants that may be released to a particular water body
based on its use. In addition, water resources are becoming and
in the future may become more scarce, and many refiners,
including WRC, are subject to restrictions on their ability to
use water in the event of low availability conditions.
The Wynnewood refinerys Clean Water Act permit
(OPDES permit) has expired and has not yet been
re-issued by ODEQ. The refinery currently operates under a
permit shield, which authorizes permittees to continue
discharging under an expired permit until the ODEQ re-issues the
permit. The permit renewal process has begun, and ODEQ has
requested public comment on proposed modifications to
Oklahomas Water Quality Management Plan for the Wynnewood
refinery. Capital costs or expenses, if any, related to changes
to the permit are not expected to be material.
WRC has entered into a series of Clean Water Act consent orders
with ODEQ. The latest Consent Order (the CWA Consent
Order), which supersedes other consent orders, became
effective in September 2011. The CWA Consent Order addresses
alleged noncompliance by WRC with its OPDES permit limits. The
CWA Consent Order requires WRC to take corrective action steps,
including undertaking studies to determine whether the Wynnewood
refinerys wastewater treatment plant capacity is
sufficient. The Wynnewood refinery may need to install
additional controls or make operational changes to satisfy the
requirements of the CWA Consent Order. The cost of additional
controls, if any, cannot be predicted at this time. However,
based on our experience with wastewater treatment and controls,
we do not believe that the costs of the potential corrective
actions would be material.
Release
Reporting
Our facilities periodically experience releases of hazardous
substances and extremely hazardous substances. If we fail to
properly report the release or if the release violates the law
or our permits, it could cause us to become the subject of a
government enforcement action or third-party claims. For
example, the nitrogen fertilizer facility periodically
experiences minor releases of hazardous and extremely hazardous
substances from our equipment. It experienced more significant
releases in August 2007 due to the failure of a high pressure
pump and in August and September 2010 due to a heat exchanger
leak and a UAN vessel rupture. Such
30
releases are reported to the relevant federal, state and local
agencies. Government enforcement or third-party claims relating
to releases of hazardous or extremely hazardous substances could
result in significant expenditures and liability.
The release of hazardous substances or extremely hazardous
substances into the environment is subject to release reporting
requirements under federal and state environmental laws. On
February 24, 2010, we received a letter from the DOJ on
behalf of the EPA seeking a $900,000 penalty under the
Comprehensive Environmental Response, Compensation, and
Liability Act and the Emergency Planning and Community Right to
Know Act related to alleged late and incomplete reporting of air
releases by CRRM that occurred between June 13, 2004 and
April 10, 2008. We have entered into a tolling agreement
relating to EPAs allegations and are currently in
settlement discussions with the EPA. We anticipate that CRRM
will be required to pay a penalty in excess of $100,000 in
connection with these allegations, but do not anticipate that
the penalty will be material. The penalty will be included in
the global settlement, described above in
BusinessEnvironmental MattersThe Federal Clean
Air Act.
Fuel
Regulations
Tier II, Low Sulfur Fuels. In
February 2000, the EPA promulgated the Tier II Motor
Vehicle Emission Standards Final Rule for all passenger
vehicles, establishing standards for sulfur content in gasoline
that were required to be met by 2006. In addition, in January
2001, the EPA promulgated its on-road diesel regulations, which
required a 97% reduction in the sulfur content of diesel sold
for highway use by June 1, 2006, with full compliance by
January 1, 2010. Our refineries are in compliance with the
EPAs low sulfur gasoline and diesel fuel standards. The
EPA is expected to propose Tier 3 sulfur
standards in early 2012. If the EPA were to propose a standard
at the level recently being discussed by the EPA, CRRM will need
to make modifications to its equipment in order to meet the
anticipated new standard. WRC would not appear to require
additional capital to meet the anticipated new standard. We do
not believe that costs associated with the EPAs proposed
Tier 3 rule would be material.
Mobile Source Air Toxic II
Emissions. In 2007, the EPA promulgated the
Mobile Source Air Toxic II (MSAT II) rule that
requires the reduction of benzene in gasoline by 2011. CRRM and
WRC each are considered to be small refiners under
the MSAT II rule and compliance with the rule is extended until
2015 for small refiners. The EPA has confirmed that
the Acquisition of GWEC will not affect the companies
small refiner status because the combination of two
previously approved small refiners does not result
in the loss of small refiner status. Capital
expenditures to comply with the rule are expected to be
approximately $10.0 million for CRRM and $20.5 million
for WRC.
Renewable Fuel Standards. In 2007, the
EPA promulgated the Renewable Fuel Standard (RFS),
which requires refiners to blend renewable fuels in
with their transportation fuels or purchase renewable energy
credits, known as renewable identification numbers
(RINs) in lieu of blending. The EPA is required to
determine and publish the applicable annual renewable fuel
percentage standards for each compliance year by November 30 for
the previous year. The percentage standards represent the ratio
of renewable fuel volume to gasoline and diesel volume. Thus, in
2011, about 8% of all fuel used will be renewable
fuel. In 2012, the EPA has proposed to raise the renewable
fuel percentage standards to about 9%. Beginning on
January 1, 2011, CRRM was required to blend renewable fuels
into its gasoline and diesel fuel or purchase RINs, in lieu of
blending. For the three and nine months ended September 30,
2011, CRRM incurred approximately $6.6 million and
$15.1 million, respectively, of expense associated with
purchasing RINs, which expense was included in cost of product
sold in the Condensed Consolidated Statements of Operations. To
achieve compliance with the renewable fuel standard for the
remainder of 2011, CRRM is able to blend a small amount of
ethanol into gasoline sold at its refinery loading rack, but
otherwise will have to purchase RINs
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to comply with the rule. CRRM has requested additional time to
comply in the form of hardship relief from the EPA
based on the disproportionate economic impact of the rule on
CRRM, but the EPA has not yet responded to CRRMs request.
WRC is a small refinery under the RFS and has received a two
year extension of time to comply. Therefore, WRC will have to
begin complying with the RFS in 2013 unless a further extension
is requested and granted.
Greenhouse Gas
Emissions
Various regulatory and legislative measures to address
greenhouse gas emissions (including
CO2,
methane and nitrous oxides) are in different phases of
implementation or discussion. In the aftermath of its 2009
endangerment finding that greenhouse gas emissions
pose a threat to human health and welfare, the EPA has begun to
regulate greenhouse gas emissions under the authority granted to
it under the Clean Air Act. In October 2009, the EPA finalized a
rule requiring certain large emitters of greenhouse gases to
inventory and report their greenhouse gas emissions to the EPA.
In accordance with the rule the refineries have begun monitoring
greenhouse gas emissions and reported the emissions to the EPA
beginning in 2011. In May 2010, the EPA finalized the
Greenhouse Gas Tailoring Rule, which established new
greenhouse gas emissions thresholds that determine when
stationary sources, such as the refineries and the nitrogen
fertilizer plant, must obtain permits under the PSD and
Title V programs of the federal Clean Air Act. The
significance of the permitting requirement is that, in cases
where a new source is constructed or an existing source
undergoes a major modification, the facility would need to
evaluate and install best available control technology
(BACT) for its greenhouse gas emissions. Beginning
in July 2011, a major modification resulting in a significant
increase in greenhouse gas emissions at our nitrogen fertilizer
plant or refineries may require the installation of BACT
controls. We do not believe that any currently anticipated
projects at our facilities will result in a significant increase
in greenhouse gas emissions triggering the need to install BACT
controls. The EPAs Greenhouse Gas Tailoring Rule and
certain other greenhouse gas emission rules have been challenged
and will likely be subject to extensive litigation. The EPA is
expected to revise certain existing New Source Performance
Standards (NSPS) applicable to refineries to include
performance standards for greenhouse gas emissions. The revised
regulations, under NSPS subpart J, are expected to be finalized
by November 2012.
At the federal legislative level, Congressional passage of
legislation adopting some form of federal mandatory greenhouse
gas emission reduction, such as a nationwide
cap-and-trade
program, does not appear likely at this time, although it could
be adopted at a future date. It is also possible that Congress
may pass alternative climate change bills that do not mandate a
nationwide
cap-and-trade
program and instead focus on promoting renewable energy and
energy efficiency.
In addition to potential federal legislation, a number of states
have adopted regional greenhouse gas initiatives to reduce
CO2
and other greenhouse gas emissions. In 2007, a group of
Midwestern states, including Kansas (where the Coffeyville
refinery and the nitrogen fertilizer facility are located),
formed the Midwestern Greenhouse Gas Reduction Accord, which
calls for the development of a
cap-and-trade
system to control greenhouse gas emissions and for the inventory
of such emissions. However, the individual states that have
signed on to the accord must adopt laws or regulations
implementing the trading scheme before it becomes effective, and
the timing and specific requirements of any such laws or
regulations in Kansas are uncertain at this time.
The implementation of EPA, state or regional regulations or
programs to reduce greenhouse gas emissions will result in
increased costs to (i) operate and maintain our facilities,
(ii) install new emission controls on our facilities and
(iii) administer and manage any greenhouse gas emissions
program. Increased costs associated with compliance with any
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current or future legislation or regulation of greenhouse gas
emissions, if it occurs, may have a material adverse effect on
our results of operations, financial condition and cash flows.
In addition, climate change legislation and regulations may
result in increased costs not only for our business but also
users of our refined and fertilizer products, thereby
potentially decreasing demand for our products. Decreased demand
for our products may have a material adverse effect on our
results of operations, financial condition and cash flows.
RCRA
Our operations are subject to the RCRA requirements for the
generation, transportation, treatment, storage and disposal of
solid and hazardous wastes. When feasible, RCRA-regulated
materials are recycled instead of being disposed of
on-site or
off-site. RCRA establishes standards for the management of solid
and hazardous wastes. Besides governing current waste disposal
practices, RCRA also addresses the environmental effects of
certain past waste disposal practices, the recycling of wastes
and the regulation of underground storage tanks containing
regulated substances.
Waste
Management.
There are two closed hazardous waste units at CRRM and eight
other waste units in the process of being closed pending state
agency approval. In addition, one closed interim status
hazardous waste landfarm located at the Phillipsburg terminal is
under long-term post closure care.
WRC has a RCRA Part B permit, which regulates the operation
of a hazardous waste storage tank and requires post-closure
groundwater monitoring of a closed stormwater retention pond.
The hazardous waste storage tank will require closure after use
of the unit is no longer necessary to facility operations.
Financial assurance is currently in place for closure of the
hazardous waste storage tank and post-closure monitoring of the
closed stormwater retention pond.
We have issued letters of credit of approximately
$0.2 million in financial assurance for
closure/post-closure care for hazardous waste management units
at the now closed Phillipsburg terminal and the Coffeyville
refinery. We will have approximately $0.3 million in
financial assurance exposure for closure and post-closure care
of the hazardous waste management units at the Wynnewood
refinery.
Impacts of Past
Manufacturing
The 2004 Coffeyville Consent Decree that CRRM signed with the
EPA and KDHE required CRRM to assume two RCRA corrective action
orders issued to Farmland. We are subject to a 1994 EPA
administrative order related to investigation of possible past
releases of hazardous materials to the environment at the
Coffeyville refinery. In accordance with the order, we have
documented existing soil and groundwater conditions, which
require investigation or remediation projects. The now-closed
Phillipsburg terminal is subject to a 1996 EPA administrative
order related to investigation of releases of hazardous
materials to the environment at the Phillipsburg terminal, which
operated as a refinery until 1991. Remediation at both sites, if
necessary, will be based on the results of the investigations.
The Wynnewood refinery is required to conduct investigations and
monitoring to address potential off-site migration of
contaminants from the west side of the property. Other known
areas of contamination have been partially addressed but
corrective action has not been completed and portions of the
refinery have not yet been investigated to determine whether
corrective action is necessary.
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The anticipated remediation costs through 2013 are estimated to
be as follows (in millions):
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Total
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Total O&M
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Estimated
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Site
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Costs
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Costs
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Investigation
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Capital
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Through
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Through
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Facility
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Costs
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Costs
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2013
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2013
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Coffeyville Refinery
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$
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0.2
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$
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$
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0.8
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$
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1.0
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Phillipsburg Terminal
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0.2
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1.0
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1.2
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Wynnewood Refinery
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0.1
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0.3
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0.4
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Total Estimated Costs
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$
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0.5
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$
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$
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2.1
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$
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2.6
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These estimates are based on current information and could go up
or down as additional information becomes available through our
ongoing remediation and investigation activities. At this point,
we have estimated that, over ten years starting in 2011, we will
spend $2.9 million to remedy impacts from past
manufacturing activity at the Coffeyville refinery and to
address existing soil and groundwater contamination at the
Phillipsburg terminal. We spent approximately $1.0 million
in 2010 associated with related remediation at the Coffeyville
refinery and Phillipsburg terminal. We have estimated that, over
ten years starting in 2011, we will spend $1.5 million to
remedy impacts from past manufacturing activity at the Wynnewood
refinery and to address existing soil and groundwater
contamination. It is possible that additional costs will be
required during or after this ten year period.
Financial
Assurance
We are required in the Coffeyville Consent Decree to establish
financial assurance to secure the projected
clean-up
costs posed by the Coffeyville and the now-closed Phillipsburg
facilities in the event we fail to fulfill our
clean-up
obligations. In accordance with the Coffeyville Consent Decree
as modified by a 2010 agreement between CRRM, CRT, the EPA and
the KDHE, this financial assurance is currently secured by a
bond in the amount of $5.0 million for
clean-up
obligations at the Phillipsburg terminal and additional
self-funded financial assurance of approximately
$1.7 million and $2.1 million for
clean-up
obligations at the Coffeyville refinery and Phillipsburg
terminal, respectively. Current RCRA financial assurance
requirements for the Wynnewood refinery total $0.3 million
for hazardous waste storage tank closure and post-closure
monitoring of a closed stormwater retention pond.
Environmental
Remediation
Under the Comprehensive Environmental Response, Compensation,
and Liability Act (CERCLA), RCRA, and related state
laws, certain persons may be liable for the release or
threatened release of hazardous substances. These persons
include the current owner or operator of property where a
release or threatened release occurred, any persons who owned or
operated the property when the release occurred, and any persons
who disposed of, or arranged for the transportation or disposal
of, hazardous substances at a contaminated property. Thus, in
addition to our currently owned and operated facilities, we
could be held liable for releases of hazardous substances at our
former facilities and third-party sites to which we sent our
waste. Liability under CERCLA is strict, retroactive and, under
certain circumstances, joint and several, so that any
responsible party may be held liable for the entire cost of
investigating and remediating the release of hazardous
substances. Similarly, the Oil Pollution Act of 1990
(OPA) subjects owners and operators of facilities to
strict, joint and several liability for all containment and
cleanup costs, natural resource damages, and potential
governmental oversight costs arising from oil spills into the
waters of the United States. On September 23, 2011, the
DOJ, acting on behalf of the EPA and the United States Coast
Guard, filed suit against CRRM in the United States District
Court for the District of Kansas seeking
34
(i) recovery from CRRM of EPAs alleged oversight
costs of approximately $1.8 million in connection with the
cleanup of the oil spill resulting from the June/July 2007 flood
at our Coffeyville refinery, (ii) civil penalties under the
Clean Water Act (as amended by the Oil Pollution Act), and
(iii) civil penalties and injunctive relief with respect to
certain RMP allegations, which are described above under
The Federal Clean Air Act; and unrelated
claims under the Clean Air Acts Risk Management program.
We are currently in settlement negotiations with the EPA and
anticipate that civil penalties associated with the proceeding
will exceed $100,000; however, we do not anticipate that civil
penalties or any other costs associated with the proceeding will
be material. As is the case with all companies engaged in
similar industries, depending on the underlying facts and
circumstances we face potential exposure from future claims and
lawsuits involving environmental matters, including soil and
water contamination, personal injury or property damage
allegedly caused by crude oil or hazardous substances that we
manufactured, handled, used, stored, transported, spilled,
disposed of or released. We cannot assure you that we will not
become involved in future proceedings related to releases of
hazardous or extremely hazardous substances or crude oil or
that, if we were held responsible for damages in any existing or
future proceedings, such costs would be covered by insurance or
would not be material.
Safety, Health
and Security Matters
We operate a comprehensive safety, health and security program,
involving active participation of employees at all levels of the
organization. We have developed comprehensive safety programs
aimed at preventing recordable incidents. Despite our efforts to
achieve excellence in our safety and health performance, there
can be no assurances that there will not be accidents resulting
in injuries or even fatalities. We routinely audit our programs
and consider improvements in our management systems.
The Wynnewood refinery has been the subject of a number of OSHA
inspections since 2006. As a result of these inspections, WRC
has entered into four OSHA settlement agreements in 2008,
pursuant to which it has agreed to undertake certain studies,
conduct abatement activities, and revise and enhance certain
OSHA compliance programs. The costs associated with these
studies, abatement activities and program revisions are expected
to be approximately $9.3 million over the next five years.
Process Safety Management. We maintain
a Process Safety Management (PSM) program. This
program is designed to address all facets associated with OSHA
requirements for developing and maintaining a PSM program. We
will continue to audit our programs and consider improvements in
our management systems and equipment.
Emergency Planning and Response. We
have an emergency response plan that describes the organization,
responsibilities and plans for responding to emergencies in our
facilities. We will continue to audit our programs and consider
improvements in our management systems and equipment.
Security. We have a security program to
protect our facilities from unauthorized entry and exit from our
facilities and potential acts of terrorism. Recent changes in
the U.S. Department of Homeland Security rules and
requirements may require enhancements and improvements to our
current program.
Employees
At September 30, 2011, 494 employees were employed in
our petroleum business, 126 were employed by the nitrogen
fertilizer business and 90 employees were employed by the
Company and CRLLC at our offices in Sugar Land, Texas and Kansas
City, Kansas.
35
As of September 30, 2011, approximately 61% of our
employees at the Coffeyville refinery were covered by a
collective bargaining agreement. These employees are affiliated
with six unions of the Metal Trades Department of the AFL-CIO
(Metal Trade Unions) and the United Steel,
Paper and Forestry, Rubber, Manufacturing, Energy, Allied
Industrial and Service Workers International Union, AFL-CIO-CLC
(United Steelworkers). The Metal Trade Unions
collective bargaining agreement (which covers union members who
work directly at the Coffeyville refinery) is effective through
March 2013, and the collective bargaining agreement with United
Steelworkers (which covers the balance of CVR Energys
unionized employees, who work in the terminalling and related
operations) is effective through March 2012, and automatically
renews on an annual basis thereafter unless a written notice is
received sixty days in advance of the relevant expiration date.
We believe that our relationship with our employees is good.
The Wynnewood refinery employs approximately 275 people,
about 65% of whom are represented by the International Union of
Operating Engineers. The collective bargaining agreement with
the International Union of Operating Engineers with respect to
the Wynnewood refinery expires in June 2012. GWEC employs
approximately 60 additional people in various other locations,
the majority of whom will not remain with us following the
Acquisition. GWEC believes that its relationship with its
employees is good.
Properties
The following table contains certain information regarding our
principal properties. Each of the properties listed below will
be mortgaged in favor of holders of the notes.
|
|
|
|
|
|
|
|
|
Location
|
|
Acres
|
|
Own/Lease
|
|
Use
|
|
Coffeyville, KS
|
|
|
440
|
|
|
Own
|
|
Coffeyville Resources: oil refinery and office buildings
Partnership: fertilizer plant
|
Phillipsburg, KS
|
|
|
200
|
|
|
Own
|
|
Terminal facility
|
Montgomery County, KS (Coffeyville Station)
|
|
|
20
|
|
|
Own
|
|
Crude oil storage
|
Montgomery County, KS (Broome Station)
|
|
|
20
|
|
|
Own
|
|
Crude oil storage
|
Bartlesville, OK
|
|
|
25
|
|
|
Own
|
|
Truck storage and office buildings
|
Winfield, KS
|
|
|
5
|
|
|
Own
|
|
Truck storage
|
Cowley County, KS (Hooser Station)
|
|
|
80
|
|
|
Own
|
|
Crude oil storage
|
Holdrege, NE
|
|
|
7
|
|
|
Own
|
|
Crude oil storage
|
Stockton, KS
|
|
|
6
|
|
|
Own
|
|
Crude oil storage
|
We also lease property for our executive office, which is
located at 2277 Plaza Drive in Sugar Land, Texas. Additionally,
other corporate office space is leased in Kansas City, Kansas.
As of December 31, 2010, we had storage capacity for
767,000 barrels of gasoline, 1,062,000 barrels of
distillates, 928,000 barrels of intermediates and
3,920,000 barrels of crude oil. The crude oil storage
consisted of 674,000 barrels of refinery storage capacity,
536,000 barrels of field storage capacity and
2,710,000 barrels of storage at Cushing, Oklahoma. We
expect that our current owned and leased facilities will be
sufficient for our needs over the next twelve months.
Additionally, we own 183 acres of land in Cushing, Oklahoma
upon which we are proceeding to build approximately an
additional 1,000,000 barrels of crude oil storage capacity.
Wynnewood Refining Company (WRC), a subsidiary of
GWEC, owns and operates an oil refinery and associated crude oil
storage tanks located on approximately 400 acres in Wynnewood,
Oklahoma. As part of such operation it leases certain
improvements, equipment,
36
infrastructure and fixtures located at the refinery and pursuant
to that certain lease agreement dated as of September 9,
2009 between WRC and Magellan Pipeline Terminals, L.P., which
may, but only if consent of lessor is obtained, be mortgaged in
favor of the holders of the notes. Prior to
the acquisition, GWECs headquarters was located in Denver,
Colorado in a building leased by GWECs parent company.
Following the closing of the acquisition of GWEC by CVR Energy,
back office operations will be transitioned to CVR Energys
existing offices.
Legal
Proceedings
We are, and will continue to be, subject to litigation from time
to time in the ordinary course of our business, including
matters such as those described above under
Environmental Matters. We also incorporate by
reference into this section the information regarding the two
lawsuits in Note 14, Commitments and Contingent
Liabilities to the Companys Consolidated Financial
Statements as set forth below. Included in this note is a
description of the Samson litigation and the TransCanada
litigation, as well as other legal proceedings. In accordance
with U.S. GAAP, we record a liability when it is both
probable that a liability has been incurred and the amount of
the loss can be reasonably estimated. These provisions are
reviewed at least quarterly and adjusted to reflect the impacts
of negotiations, settlements, rulings, advice of legal counsel,
and other information and events pertaining to a particular
case. Although we cannot predict with certainty the ultimate
resolution of lawsuits, investigations or claims asserted
against us, we do not believe that any currently pending legal
proceeding or proceedings to which we are a party will have a
material adverse effect on our business, financial condition or
results of operations.
GWEC is, and will continue to be, subject to litigation from
time to time in the ordinary course of business, including
matters such as those described under Environmental
Matters. Although one cannot predict with certainty the
ultimate resolution of lawsuits, investigations or claims
asserted against us, it is not believed that any currently
pending legal proceeding or proceedings to which GWEC is a party
will have a material adverse effect on GWECs financial
condition, liquidity or results of operations.
37
exv99w2
Exhibit 99.2
Independent
Auditors Report
To the Board of Directors and Shareholder of
Gary-Williams Energy Corporation
Denver, Colorado
We have audited the accompanying consolidated balance sheet of
Gary-Williams Energy Corporation (the Company) as of
December 31, 2010, and the related consolidated statements
of operations, changes in shareholders equity,
comprehensive income (loss), and cash flows for the year then
ended. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audit. The
consolidated financial statements of the Company for the year
ended December 31, 2009 were audited by other auditors
whose report, dated March 30, 2010, expressed an
unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes consideration
of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, such 2010 consolidated financial statements
present fairly, in all material respects, the financial position
of the Company as of December 31, 2010, and the results of
its operations and its cash flows for the year then ended in
conformity with accounting principles generally accepted in the
United States of America.
/s/ Deloitte & Touche LLP
Denver, Colorado
March 31, 2011
1
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company,
Inc.)
As of December 31, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
34,045,795
|
|
|
$
|
5,971,551
|
|
Restricted cash
|
|
|
124,101
|
|
|
|
308,481
|
|
Investments
|
|
|
372,786
|
|
|
|
341,317
|
|
Accounts receivable:
|
|
|
|
|
|
|
|
|
Tradenet of allowances of $203,964 and $2,946,415 in 2010
and 2009, respectively
|
|
|
63,732,241
|
|
|
|
54,265,176
|
|
Affiliates
|
|
|
174,543
|
|
|
|
163,877
|
|
Insurance recovery
|
|
|
|
|
|
|
303,335
|
|
Note receivable affiliate
|
|
|
894
|
|
|
|
3,958
|
|
Inventories
|
|
|
169,756,197
|
|
|
|
162,815,841
|
|
Prepaid expenses and other current assets
|
|
|
4,001,060
|
|
|
|
4,354,762
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
272,207,617
|
|
|
|
228,528,298
|
|
|
|
|
|
|
|
|
|
|
Property, plant, and equipmentnet
|
|
|
279,236,570
|
|
|
|
253,455,013
|
|
Deferred turnaround costsnet
|
|
|
24,044,574
|
|
|
|
37,790,336
|
|
Intangible assetsnet
|
|
|
1,139,906
|
|
|
|
392,041
|
|
Other assetsnet
|
|
|
9,910,006
|
|
|
|
11,759,028
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
586,538,673
|
|
|
$
|
531,924,716
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
(Continued)
2
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company,
Inc.)
Consolidated Balance Sheets
As of December 31, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
215,522,352
|
|
|
$
|
168,497,331
|
|
Accrued liabilities and other
|
|
|
18,285,313
|
|
|
|
18,151,441
|
|
Long-term debtcurrent portionnet of discount
|
|
|
14,582,463
|
|
|
|
11,739,262
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
248,390,128
|
|
|
|
198,388,034
|
|
|
|
|
|
|
|
|
|
|
Noncurrent liabilities:
|
|
|
|
|
|
|
|
|
Long-term debtnet of discount
|
|
|
129,676,133
|
|
|
|
141,163,405
|
|
Other
|
|
|
76,859
|
|
|
|
121,099
|
|
|
|
|
|
|
|
|
|
|
Total noncurrent liabilities
|
|
|
129,752,992
|
|
|
|
141,284,504
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
378,143,120
|
|
|
|
339,672,538
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 8)
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par valueauthorized 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
|
|
|
172,034,444
|
|
|
|
155,889,012
|
|
Accumulated other comprehensive income
|
|
|
2,500
|
|
|
|
4,557
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
208,395,553
|
|
|
|
192,252,178
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
586,538,673
|
|
|
$
|
531,924,716
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
(Concluded)
3
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company,
Inc.)
Consolidated
Statements of Operations
For the Years ended December 31, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Operating revenue
|
|
$
|
2,141,043,605
|
|
|
$
|
1,649,568,577
|
|
Operating expenses
|
|
|
2,086,819,478
|
|
|
|
1,566,500,099
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
54,224,127
|
|
|
|
83,068,478
|
|
General and administrative expenses
|
|
|
15,767,934
|
|
|
|
17,881,095
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
38,456,193
|
|
|
|
65,187,383
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Interest and investment income
|
|
|
40,623
|
|
|
|
144,607
|
|
Interest expense
|
|
|
(22,432,421
|
)
|
|
|
(13,104,572
|
)
|
Gain on disposal of assets
|
|
|
12,052
|
|
|
|
210,254
|
|
Othernet
|
|
|
68,985
|
|
|
|
278,438
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(22,310,761
|
)
|
|
|
(12,471,273
|
)
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
16,145,432
|
|
|
|
52,716,110
|
|
Net loss from discontinued operations
|
|
|
|
|
|
|
(253,242
|
)
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
16,145,432
|
|
|
$
|
52,462,868
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
4
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company,
Inc.)
For The Years ended December 31, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Common
|
|
|
Preferred
|
|
|
Preferred
|
|
|
Contributed
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Stock
|
|
|
Shares
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
BalanceDecember 31, 2008
|
|
|
96,900
|
|
|
$
|
969
|
|
|
|
3,673
|
|
|
$
|
37
|
|
|
$
|
36,357,603
|
|
|
$
|
104,326,189
|
|
|
$
|
(1,483
|
)
|
|
$
|
140,683,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiary stock dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(900,045
|
)
|
|
|
|
|
|
|
(900,045
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelation of preferred stock and capital contribution
|
|
|
|
|
|
|
|
|
|
|
(3,673
|
)
|
|
|
(37
|
)
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,462,868
|
|
|
|
|
|
|
|
52,462,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,040
|
|
|
|
6,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BalanceDecember 31, 2009
|
|
|
96,900
|
|
|
|
969
|
|
|
|
|
|
|
|
|
|
|
|
36,357,640
|
|
|
|
155,889,012
|
|
|
|
4,557
|
|
|
|
192,252,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,145,432
|
|
|
|
|
|
|
|
16,145,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,057
|
)
|
|
|
(2,057
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BalanceDecember 31, 2010
|
|
|
96,900
|
|
|
$
|
969
|
|
|
|
|
|
|
$
|
|
|
|
$
|
36,357,640
|
|
|
$
|
172,034,444
|
|
|
$
|
2,500
|
|
|
$
|
208,395,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
5
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company,
Inc.)
For the Years ended December 31, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Net income
|
|
$
|
16,145,432
|
|
|
$
|
52,462,868
|
|
Unrealized gain (loss) on investments
|
|
|
(2,057
|
)
|
|
|
6,040
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
16,143,375
|
|
|
$
|
52,468,908
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
6
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company,
Inc.)
Consolidated
Statements of Cash Flows
Years ended December 31, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
16,145,432
|
|
|
$
|
52,462,868
|
|
Net loss from discontinued operations
|
|
|
|
|
|
|
253,242
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
16,145,432
|
|
|
|
52,716,110
|
|
Adjustments to reconcile net income from continuing operations
to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
14,728,920
|
|
|
|
13,765,339
|
|
Amortization of turnaround costs
|
|
|
13,745,762
|
|
|
|
15,401,851
|
|
Amortization of deferred financing costs and discount on debt
|
|
|
7,744,411
|
|
|
|
4,606,802
|
|
Gain on sale of assets
|
|
|
(12,052
|
)
|
|
|
(210,254
|
)
|
Realized gain on sale of investments, net
|
|
|
(4,534
|
)
|
|
|
(13
|
)
|
Provision for losses on accounts receivable
|
|
|
|
|
|
|
673,255
|
|
Other
|
|
|
|
|
|
|
2,404
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase) decrease in accounts receivablenet
|
|
|
(9,303,930
|
)
|
|
|
12,472,505
|
|
(Increase) decrease in accounts receivableaffiliate
|
|
|
(10,666
|
)
|
|
|
9,032
|
|
Increase in inventories
|
|
|
(6,940,356
|
)
|
|
|
(83,542,851
|
)
|
Decrease (increase) in prepaid expenses
|
|
|
353,702
|
|
|
|
(378,266
|
)
|
Increase in deferred turnaround costs
|
|
|
|
|
|
|
(3,008,930
|
)
|
(Increase) decrease in other assets
|
|
|
(22,923
|
)
|
|
|
37,323
|
|
Increase in accounts payable
|
|
|
49,856,043
|
|
|
|
70,842,159
|
|
Increase in accrued liabilities
|
|
|
114,169
|
|
|
|
4,025,705
|
|
Decrease in deferred revenue and other
|
|
|
(24,537
|
)
|
|
|
(7,658
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
86,369,441
|
|
|
|
87,404,513
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital expendituresrefinery and pipeline
|
|
|
(43,310,966
|
)
|
|
|
(49,444,657
|
)
|
Processing license expenditure
|
|
|
(780,000
|
)
|
|
|
|
|
Proceeds from sale of assets, net
|
|
|
13,652
|
|
|
|
4,244,856
|
|
Proceeds from property insurance
|
|
|
117,984
|
|
|
|
2,525,000
|
|
Proceeds from sale-leaseback of pipeline
|
|
|
|
|
|
|
31,830,451
|
|
Purchase of investments
|
|
|
(327,412
|
)
|
|
|
(2,384
|
)
|
Proceeds from sale of investments
|
|
|
320,635
|
|
|
|
1,744
|
|
Note receivablerelated-party
|
|
|
|
|
|
|
(250,000
|
)
|
Note receivablerelated-party collection
|
|
|
3,064
|
|
|
|
250,638
|
|
Change in restricted cash
|
|
|
308,080
|
|
|
|
(308,481
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(43,654,963
|
)
|
|
|
(11,152,833
|
)
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
(Continued)
7
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company,
Inc.)
Consolidated Statements of Cash Flows
Years ended December 31, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Borrowings under long-term debt
|
|
$
|
950,888,046
|
|
|
$
|
923,000,000
|
|
Principal payments on long-term debt
|
|
|
(962,198,607
|
)
|
|
|
(972,449,903
|
)
|
Borrowings under notes payable to parent
|
|
|
22,600,000
|
|
|
|
|
|
Principal payments on notes payable to parent
|
|
|
(22,600,000
|
)
|
|
|
(7,770,000
|
)
|
Capital lease obligation payments
|
|
|
(426,134
|
)
|
|
|
(102,735
|
)
|
Payments of debt issuance costs
|
|
|
(2,903,539
|
)
|
|
|
(14,450,766
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(14,640,234
|
)
|
|
|
(71,773,404
|
)
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalentscontinuing
operations
|
|
|
28,074,244
|
|
|
|
4,478,276
|
|
Change in cash and cash equivalentsdiscontinued operations:
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
|
|
|
|
(219,307
|
)
|
Net cash used in investing activities
|
|
|
|
|
|
|
(224,079
|
)
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
28,074,244
|
|
|
|
4,034,890
|
|
Cash and cash equivalentsBeginning of year
|
|
|
5,971,551
|
|
|
|
1,936,661
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalentsEnd of year
|
|
$
|
34,045,795
|
|
|
$
|
5,971,551
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the year for interest and financing
expensesnet of amounts capitalized
|
|
$
|
17,869,056
|
|
|
$
|
22,501,293
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of noncash investing and financing
activities:
|
|
|
|
|
|
|
|
|
Additions to construction projects in progress funded through
accounts payable
|
|
$
|
724,185
|
|
|
$
|
(1,245,880
|
)
|
|
|
|
|
|
|
|
|
|
Capital lease acquisition
|
|
$
|
|
|
|
$
|
557,602
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
(Concluded)
8
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company,
Inc.)
Notes to
Consolidated Financial Statements
As of and for the Years ended December 31, 2010 and 2009
|
|
1.
|
Background And
Organization
|
Gary-Williams Energy Corporation (GWEC) is
incorporated in Delaware. GWEC became a wholly owned subsidiary
of GWEC Holding Company, Inc. (the Holding Company)
on October 30, 2009 when The Gary-Williams Company
(TGWC), its then parent company, contributed all of
its common shares of GWEC to the Holding Company and canceled
its outstanding preferred stock. GWECs primary activities
are purchasing refinery feedstocks, marketing petroleum
products, and providing management and support services to its
subsidiaries.
Wynnewood Refining Company (WRC), a wholly owned
subsidiary of GWEC, is incorporated in Delaware. WRCs
primary activity is operating a refinery in Wynnewood, Oklahoma
that has a capacity of approximately 70,000 barrels per day.
Wynnewood Insurance Corporation (WIC), a wholly
owned subsidiary of GWEC, is incorporated in Hawaii. WICs
primary activity is to provide a portion of the insurance
coverage required by WRC.
Through April 30, 2009, GWEC owned all of the stock of
Gary-Williams Production Company (GWPC). GWPC is
engaged in the exploration, development, and operation of oil
and gas properties located in the United States. On May 1,
2009, the Company spun-off GWPC to TGWC by declaring a dividend
of all of its stock in GWPC. Prior year consolidated financial
statements have been restated to present the operations of GWPC
as a discontinued operation.
References to the Company are to GWEC and its
subsidiaries, collectively.
|
|
2.
|
Summary Of
Significant Accounting Policies
|
Basis of PresentationThe accompanying
consolidated financial statements include the accounts of its
wholly owned subsidiaries and have been prepared in accordance
with United States generally accepted accounting principles
(US GAAP). 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 March 31,
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. Nevertheless,
actual results may differ significantly from the estimates. Any
effects on the
9
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company,
Inc.)
Notes to
Consolidated Financial Statements
As of and for the Years ended December 31, 2010 and
2009(Continued)
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 December 31, 2010 and 2009, the Company had short-term
restricted cash of $124,101 and $308,481, respectively. At
December 31, 2009, the Company had long-term restricted
cash of $123,700 included in other long-term assets. The
restricted cash held at December 31, 2010 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
$203,964 and $2,946,415 at December 31, 2010 and 2009,
respectively. For the year ended December 31, 2009, the
Company recorded provisions for bad debts of $673,255.
Futures ContractsThe Company periodically
enters into futures contracts to hedge certain of its exposures
to price fluctuations on raw materials and refined products. The
purpose of these activities, as defined by the Companys
Risk Management Policy, is to enhance overall profits from
WRCs refining operations and to identify opportunities to
generate a profit outside the refining operations in the Group
III, Gulf Coast, and NYMEX markets. Other provisions in the Risk
Management Policy set forth quantity limits, authorization
requirements, and exposure limits for speculative positions.
In all instances, the Company has decided not to designate its
derivative activities as hedges. As a result, the gains or
losses from the changes in fair value of the derivative
instruments have been recognized as a component of operating
expense; however, the underlying hedged items have not been
marked to market. The increases or decreases in the fair value
of the underlying hedged items ultimately result in increases or
decreases to operating revenue or operating expense at the time
of sale. These changes are generally offset by the gains or
losses from the changes in fair value of the derivative
instruments and may increase earnings volatility. The Company
had no futures contracts outstanding as of December 31,
2010 and 2009.
Derivative Financial InstrumentInterest rate
cap agreements are used to reduce the potential impact of
increases in interest rates on floating-rate long-term debt. At
December 31,
10
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company,
Inc.)
Notes to
Consolidated Financial Statements
As of and for the Years ended December 31, 2010 and
2009(Continued)
2010, the Company was a party to an interest rate cap agreement
covering 50% of its Term Loan balance or $48,125,000. The
agreement entitles the Company to receive from the bank the
amount, if any, by which the three month LIBOR interest rate
exceeds 4% of the notional amount. The interest rate cap
agreement is not designated as a cash flow hedge under
applicable accounting standards and as such the change in fair
value is recorded as adjustments to interest expense. The
Company paid a premium of $47,000 for the interest rate cap and
is amortizing this amount to interest expense over the term of
the agreement. Unamortized premiums are included in noncurrent
other assets on the consolidated balance sheets. The agreement
expires on December 31, 2011.
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.
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 December 31, 2010 and
2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Refined, unrefined, and intermediate products
|
|
$
|
100,025,660
|
|
|
$
|
97,161,983
|
|
Crude oil
|
|
|
64,537,833
|
|
|
|
61,060,706
|
|
Materials and supplies
|
|
|
5,192,704
|
|
|
|
4,593,152
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
169,756,197
|
|
|
$
|
162,815,841
|
|
|
|
|
|
|
|
|
|
|
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
capital leases and leasehold improvements are amortized using
the straight-line method over the lease term and are included in
depreciation expense.
11
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company,
Inc.)
Notes to
Consolidated Financial Statements
As of and for the Years ended December 31, 2010 and
2009(Continued)
At December 31, 2010 and 2009, property, plant, and
equipment, with the range of useful lives, are comprised of the
following:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Refinery property, plant, and equipment (3 to 30 years)
|
|
$
|
318,737,295
|
|
|
$
|
245,991,380
|
|
Pipeline and copiers under capital lease (5 to 20 years)
|
|
|
641,743
|
|
|
|
641,743
|
|
Airplane (6 years)
|
|
|
7,808,376
|
|
|
|
7,250,900
|
|
Furniture, fixtures, and equipment (1 to 15 years)
|
|
|
6,303,688
|
|
|
|
6,117,585
|
|
Precious metals, land, and other non-depreciable assets
|
|
|
3,663,655
|
|
|
|
3,457,371
|
|
Catalyst (5 years)
|
|
|
7,484,385
|
|
|
|
6,419,188
|
|
Vehicles (2 to 3 years)
|
|
|
1,162,311
|
|
|
|
1,136,199
|
|
Construction in progress
|
|
|
7,179,785
|
|
|
|
41,502,929
|
|
|
|
|
|
|
|
|
|
|
Property, plant, and equipmentat cost
|
|
|
352,981,238
|
|
|
|
312,517,295
|
|
Less accumulated depreciation and amortization (including
accumulated depreciation under capital lease of $119,912 and
$75,203, respectively)
|
|
|
(73,744,668
|
)
|
|
|
(59,062,282
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant, and equipmentnet
|
|
$
|
279,236,570
|
|
|
$
|
253,455,013
|
|
|
|
|
|
|
|
|
|
|
Construction in progress consists of projects primarily related
to additions and expansions to refinery processing units and
replacements to the refinery plant and equipment. When the
project is completed and placed in service, the costs are
depreciated over their estimated life.
Major construction projects qualify for interest capitalization
until the asset is ready for service. Capitalized interest is
calculated by multiplying the Companys weighted average
interest rate from long-term debt by the amount of qualifying
costs. As major construction projects are completed, the
associated capitalized interest is amortized over the useful
life of the asset with the underlying cost of the asset. For the
years ended December 31, 2010 and 2009, the Company
capitalized interest of $7,356,717 and $2,037,342, respectively.
Depreciation and amortization expense for the years ended
December 31, 2010 and 2009 was $14,696,785 and $13,740,046,
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 years
ended December 31, 2010 and 2009 was $32,135 and $25,293,
respectively.
12
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company,
Inc.)
Notes to
Consolidated Financial Statements
As of and for the Years ended December 31, 2010 and
2009(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 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
Processing licensesulfur recovery unit
|
|
$
|
480,566
|
|
|
$
|
(88,525
|
)
|
|
$
|
392,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
480,566
|
|
|
$
|
(88,525
|
)
|
|
$
|
392,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated amortization expense for succeeding years are as
follows:
|
|
|
|
|
|
|
Amortization
|
|
Year
|
|
Expense
|
|
|
2011
|
|
$
|
66,346
|
|
2012
|
|
|
66,346
|
|
2013
|
|
|
66,346
|
|
2014
|
|
|
66,346
|
|
2015
|
|
|
66,346
|
|
Thereafter
|
|
|
808,176
|
|
|
|
|
|
|
Total
|
|
$
|
1,139,906
|
|
|
|
|
|
|
Debt Issuance CostsDebt issuance costs
represent loan origination fees paid to the lender and related
professional service fees. Unamortized debt issuance costs are
included in noncurrent other assets on the consolidated balance
sheets. For the years ended December 31, 2010 and 2009, the
Company capitalized $2,903,539 and $14,450,766, respectively, of
costs incurred in connection with debt refinancing and
amendments. These costs are being amortized over the terms of
their respective financings and are included in interest
expense. Costs associated with revolving debt are amortized on a
straight-line basis and costs associated with debt agreements
having scheduled payoffs are amortized using the effective
interest method. The amortization of deferred debt issuance
costs were $4,651,785 and $4,063,812 for the years ended
December 31, 2010 and 2009, respectively.
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 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
13
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company,
Inc.)
Notes to
Consolidated Financial Statements
As of and for the Years ended December 31, 2010 and
2009(Continued)
of the asset exceeds the forecast of discounted expected future
cash flows. The Company recorded no impairments during the years
ended December 31, 2010 and 2009, 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. Although the Company performed the
majority of its turnaround activities in the second quarter of
2008, the Company performed additional turnaround work on four
of its refinery units in April 2009. In total, during the year
ended December 31, 2009, the Company incurred turnaround
costs of $3,008,930. As of December 31, 2010 and 2009,
deferred turnaround costs amounted to $24,044,574 and
$37,790,336, net of accumulated amortization of $37,830,459 and
$24,084,697, respectively. Amortization expense for the years
ended December 31, 2010 and 2009 was $13,745,762 and
$15,401,851, 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.
14
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company,
Inc.)
Notes to
Consolidated Financial Statements
As of and for the Years ended December 31, 2010 and
2009(Continued)
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 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.
15
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company,
Inc.)
Notes to
Consolidated Financial Statements
As of and for the Years ended December 31, 2010 and
2009(Continued)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Term loandue November 2014
|
|
$
|
96,250,000
|
|
|
$
|
107,250,000
|
|
Finance obligationdue September 2029
|
|
|
19,828,228
|
|
|
|
19,964,693
|
|
Capital lease obligationdue September 2029
|
|
|
30,804,621
|
|
|
|
31,213,642
|
|
Airplane loandue March 2014
|
|
|
4,734,717
|
|
|
|
4,898,518
|
|
Other notesdue February 2011
|
|
|
5,412
|
|
|
|
32,824
|
|
Less discount on term loan
|
|
|
(7,364,382
|
)
|
|
|
(10,457,010
|
)
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
144,258,596
|
|
|
|
152,902,667
|
|
Less obligations due in one year
|
|
|
(14,582,463
|
)
|
|
|
(11,739,262
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
129,676,133
|
|
|
$
|
141,163,405
|
|
|
|
|
|
|
|
|
|
|
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 are
repayable quarterly starting December 31, 2009, with 10% of
the principal payable in years one and two, 20% payable in
years three and four, and 40% payable in year five. The
last scheduled payment is September 30, 2014. At
December 31, 2010, the Company had $96,250,000 outstanding.
RevolverGWEC, WRC, and the Holding Company
collectively, entered into a three-year $150,000,000 secured
revolving credit facility (the Revolver) dated
November 13, 2009 (as amended) with a syndicate of
financial institutions. The Company can borrow
and/or issue
letters of credit, which in the aggregate, cannot exceed the
lesser of the borrowing base or $150,000,000. The borrowing base
is limited by the balances of cash, accounts receivable,
inventory, exchange balances, and outstanding letters of credit
for which no payable yet exists. The borrowing base was
$150,000,000 at December 31, 2010. Borrowings under this
facility accrue interest based on LIBOR or base rate options
plus a margin based on the Companys fixed charge coverage
ratio. Borrowings are repayable at expiration of the revolving
facility on November 12, 2012. There was no outstanding
Revolver balance at December 31, 2010.
Letters of credit are primarily obtained by the Company for its
routine purchases of crude oil. Letters of credit totaling
$30,624,143 and $34,273,000 had been issued as of
December 31, 2010 and 2009, respectively.
The Term Loan and Revolver are secured by substantially all of
GWECs and WRCs assets and are subject to various
financial and nonfinancial covenants that limit distributions,
dividends, acquisitions, capital expenditures, disposals and
debt and require minimum debt service coverage, net worth, and
working capital requirements. The Company was in compliance with
its financial covenants and ratios at December 31, 2010.
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
16
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company,
Inc.)
Notes to
Consolidated Financial Statements
As of and for the Years ended December 31, 2010 and
2009(Continued)
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 December 31, 2010 was $4,734,717.
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
December 31, 2010 was $19,828,228.
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
December 31, 2010 was $30,804,621.
Other NotesIn February 2006, the Company
entered into a financing agreement and a capital lease
arrangement for office copiers which expire in February 2011.
The obligations are payable in monthly installments. Amounts
outstanding under these arrangements at December 31, 2010
were $5,412.
Letters of credit fees, bond fees, unused commitment fees,
amortization of deferred financing 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).
17
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company,
Inc.)
Notes to
Consolidated Financial Statements
As of and for the Years ended December 31, 2010 and
2009(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
|
|
|
Commercial &
|
|
|
Finance
|
|
|
Capital
|
|
|
|
|
December 31
|
|
Loan
|
|
|
Loan
|
|
|
Other Notes
|
|
|
Obligation
|
|
|
Lease
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
$
|
13,750,000
|
|
|
$
|
174,267
|
|
|
$
|
5,412
|
|
|
$
|
191,850
|
|
|
$
|
4,380,000
|
|
|
$
|
18,501,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
22,000,000
|
|
|
|
185,403
|
|
|
|
|
|
|
|
253,518
|
|
|
|
4,392,000
|
|
|
|
26,830,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
27,500,000
|
|
|
|
197,250
|
|
|
|
|
|
|
|
322,103
|
|
|
|
4,380,000
|
|
|
|
32,399,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
33,000,000
|
|
|
|
4,177,797
|
|
|
|
|
|
|
|
398,302
|
|
|
|
4,380,000
|
|
|
|
41,956,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
482,881
|
|
|
|
4,380,000
|
|
|
|
4,862,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,179,574
|
|
|
|
60,357,058
|
|
|
|
78,536,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
96,250,000
|
|
|
$
|
4,734,717
|
|
|
$
|
5,412
|
|
|
$
|
19,828,228
|
|
|
|
82,269,058
|
|
|
|
203,087,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less amount representing executory costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,589,808
|
)
|
|
|
(4,589,808
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net minimum lease payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77,679,250
|
|
|
|
198,497,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less amount representing interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46,874,629
|
)
|
|
|
(46,874,629
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of net minimum lease payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
30,804,621
|
|
|
$
|
151,622,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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%, 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
shareholders equity. 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 $1,643,600 and $1,486,246 were expensed for the years ended
December 31, 2010 and 2009, respectively.
Substantially all of the Companys accounts receivable at
December 31, 2010 and 2009 results from the sale of refined
products to companies in the retail and wholesale distribution
18
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company,
Inc.)
Notes to
Consolidated Financial Statements
As of and for the Years ended December 31, 2010 and
2009(Continued)
market. This concentration of customers may impact the
Companys overall credit risk, either positively or
negatively, in that these entities may be similarly affected by
industry-wide changes in economic and other conditions. Such
receivables are generally not collateralized. However, the
Company performs credit evaluations on its customers to minimize
the exposure to credit risk. No single customer accounted for
more than 10% of product sales for the years ended
December 31, 2010 and 2009, respectively. No single
customer accounted for more than 10% of gross accounts
receivable at December 31, 2010 and 2009, respectively.
In March 2010 and 2009, the Company was awarded contracts to
sell approximately 58,000,000 gallons, per contract year, of jet
fuel to the United States Defense Energy Support Center
(DESC) for the period April 1 through March 31 of
the following year, plus a
30-day
carryover which gives the DESC the option to take deliveries for
one month after the stated contract period. Pricing is variable,
calculated based on market prices, as specified in the contract.
For the years ended December 31, 2010 and 2009, product
sales to this customer approximated 5%, in each respective year,
of total operating revenue.
In addition, substantially all of the Companys raw
materials purchased for refinery production and refined products
purchased for resale are from companies in the oil and gas
exploration and production industry in the United States. This
concentration of suppliers may impact the Companys overall
costs and/or
profitability, either positively or negatively, in that these
entities may be similarly affected by industry-wide changes in
economic and other conditions. For the years ended
December 31, 2010 and 2009, three vendors accounted for 41%
and 47%, respectively, of total raw material and refined
purchases.
Approximately 51% of the Companys labor force is covered
by a collective bargaining agreement that is subject to review
and renewal on a regular basis. The current collective
bargaining agreement is due to expire in June 2012.
|
|
7.
|
Related-Party
Transactions
|
GWEC has an agreement with an affiliate, as amended and renewed
in May 2008, to sublease a hangar for the Company aircraft.
Terms of the sublease provide for annual rentals of $87,000
until June 30, 2011.
On a monthly basis, the Company charges certain general and
administrative support costs to its affiliates. At
December 31, 2010 and 2009, the affiliated accounts
receivable balance was $174,543 and $163,877, 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 December 31, 2010 and 2009, respectively.
|
|
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
19
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company,
Inc.)
Notes to
Consolidated Financial Statements
As of and for the Years ended December 31, 2010 and
2009(Continued)
or in the aggregate, will have a material adverse 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 has
determined that the settlement will include both corrective
actions and payment of civil penalties, which could be material.
As of December 31, 2010, the Company has $1,000,000 accrued
to cover the penalties. Actual penalties could exceed this
amount, however, management does not anticipate that the
ultimate outcome of this matter will have a material adverse
impact on the Companys financial position, liquidity, or
results of operations.
The Federal Clean Air Act authorizes the EPA to require
modifications in the formulation of the refined transportation
fuel products manufactured in order to limit the emissions
associated with their final use. In December 1999, the EPA
promulgated national regulations limiting the amount of sulfur
to be allowed in gasoline at future dates. The EPA believes such
limits are necessary to protect new automobile emission control
systems that may be inhibited by sulfur in the fuel. The new
regulations required the phase-in of gasoline sulfur standards
beginning in 2004, with the final reduction to the sulfur
content of gasoline to an annual average level of 30
parts-per-million
(ppm), and a per gallon maximum of 80 ppm to be
completed by June 2006. As a small refiner, WRC became a party
to the Waiver and Compliance Plan with the EPA that extended the
implementation deadline for low sulfur gasoline to 2011. In
return for the extension, WRC was required to produce 95% of the
diesel fuel at the refinery with a sulfur content of 15 ppm
or less starting June 1, 2006. WRC has complied with this
requirement in 2010 and anticipates meeting the new regulations
effective on January 1, 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 years
ended December 31, 2010 and 2009 was $898,385 and
$1,025,689, respectively.
20
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company,
Inc.)
Notes to
Consolidated Financial Statements
As of and for the Years ended December 31, 2010 and
2009(Continued)
The aggregate minimum rental commitments under noncancelable
leases for the periods shown at December 31, 2010, are as
follows:
|
|
|
|
|
Year
|
|
Annual Rent
|
|
|
2011
|
|
$
|
577,297
|
|
2012
|
|
|
547,102
|
|
2013
|
|
|
273,551
|
|
|
|
|
|
|
|
|
$
|
1,397,950
|
|
|
|
|
|
|
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 years ended December 31, 2010 and 2009 were $6,939,940
and $10,166,013, respectively. At December 31, 2010, the
minimum commitments under the throughput and deficiency
agreement are as follows:
|
|
|
|
|
|
|
Transportation
|
|
Year
|
|
Obligation
|
|
|
2011
|
|
$
|
3,942,000
|
|
2012
|
|
|
3,952,800
|
|
2013
|
|
|
3,942,000
|
|
2014
|
|
|
3,942,000
|
|
2015
|
|
|
3,942,000
|
|
Thereafter
|
|
|
17,074,800
|
|
|
|
|
|
|
|
|
$
|
36,795,600
|
|
|
|
|
|
|
******
21
exv99w3
Exhibit 99.3
Independent
Auditors Report
The Board of Directors and Shareholder
Gary-Williams Energy Corporation:
We have audited the accompanying consolidated balance sheet of
Gary-Williams Energy Corporation and subsidiaries (the Company)
as of December 31, 2009, and the related consolidated
statements of operations, changes in shareholders equity,
comprehensive income (loss), and cash flows for each of the
years of the two-year period then ended. These consolidated
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes consideration
of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Gary-Williams Energy Corporation and subsidiaries as
of December 31, 2009, and the results of their operations
and their cash flows for each of the years of the two-year
period then ended in conformity with accounting principles
generally accepted in the United States of America.
/s/ KPMG LLP
Denver, Colorado
March 30, 2010
1
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company,
Inc.)
December 31, 2009
|
|
|
|
|
|
|
2009
|
|
|
Assets
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,971,551
|
|
Restricted cash
|
|
|
308,481
|
|
Investments
|
|
|
341,317
|
|
Accounts receivable:
|
|
|
|
|
Trade, net of allowances of $2,946,415
|
|
|
54,265,176
|
|
Affiliates
|
|
|
163,877
|
|
Insurance recovery
|
|
|
303,335
|
|
Note receivable affiliate
|
|
|
3,958
|
|
Inventories
|
|
|
162,815,841
|
|
Prepaid expenses and other current assets
|
|
|
4,354,762
|
|
Current assets of discontinued operations
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
228,528,298
|
|
Property, plant, and equipment, net
|
|
|
253,455,013
|
|
Deferred turnaround costs, net
|
|
|
37,790,336
|
|
Intangible assets, net
|
|
|
392,041
|
|
Other assets, net
|
|
|
11,759,028
|
|
Noncurrent assets of discontinued operations
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
531,924,716
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Accounts payable
|
|
$
|
168,497,331
|
|
Accrued liabilities and other
|
|
|
18,151,441
|
|
Note payable to parent
|
|
|
|
|
Long-term debtcurrent portion, net of discount
|
|
|
11,739,262
|
|
Current liabilities of discontinued operations
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
198,388,034
|
|
|
|
|
|
|
Noncurrent liabilities:
|
|
|
|
|
Long-term debt, net of discount
|
|
|
141,163,405
|
|
Other
|
|
|
121,099
|
|
|
|
|
|
|
Total noncurrent liabilities
|
|
|
141,284,504
|
|
|
|
|
|
|
Total liabilities
|
|
|
339,672,538
|
|
|
|
|
|
|
Commitments and contingencies (note 8)
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
Preferred stock, $0.01 par value
|
|
|
|
|
Common stock, $0.01 par value. Authorized 150,000 voting
shares; issued and outstanding 96,900 shares. Authorized
150,000 nonvoting shares; none issued
|
|
|
969
|
|
Contributed capital
|
|
|
36,357,640
|
|
Retained earnings
|
|
|
155,889,012
|
|
Accumulated other comprehensive income (loss)
|
|
|
4,557
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
192,252,178
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
531,924,716
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
2
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company,
Inc.)
Years ended December 31, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Operating revenue
|
|
$
|
1,649,568,577
|
|
|
$
|
2,142,815,015
|
|
Operating expenses
|
|
|
1,566,500,099
|
|
|
|
2,248,855,202
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
83,068,478
|
|
|
|
(106,040,187
|
)
|
General and administrative expenses
|
|
|
17,881,095
|
|
|
|
20,584,971
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
65,187,383
|
|
|
|
(126,625,158
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Interest and investment income
|
|
|
144,607
|
|
|
|
1,065,591
|
|
Interest expense
|
|
|
(13,104,572
|
)
|
|
|
(7,419,241
|
)
|
Gain on disposal of assets
|
|
|
210,254
|
|
|
|
1,900,377
|
|
Fire-related gain (loss), net
|
|
|
(40,962
|
)
|
|
|
2,788,216
|
|
Other, net
|
|
|
319,400
|
|
|
|
146,819
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(12,471,273
|
)
|
|
|
(1,518,238
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
|
52,716,110
|
|
|
|
(128,143,396
|
)
|
Net loss from discontinued operations
|
|
|
(253,242
|
)
|
|
|
(1,618,789
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
52,462,868
|
|
|
$
|
(129,762,185
|
)
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
3
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company,
Inc.)
Years ended December 31, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
Common
|
|
|
Common
|
|
|
Preferred
|
|
|
Preferred
|
|
|
Contributed
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Shareholders
|
|
|
|
Shares
|
|
|
Stock
|
|
|
Shares
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income (loss)
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
96,900
|
|
|
$
|
969
|
|
|
|
3,673
|
|
|
$
|
37
|
|
|
$
|
18,410,485
|
|
|
$
|
234,088,374
|
|
|
$
|
(5,213
|
)
|
|
$
|
252,494,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributed capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,947,118
|
|
|
|
|
|
|
|
|
|
|
|
17,947,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(129,762,185
|
)
|
|
|
|
|
|
|
(129,762,185
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,730
|
|
|
|
3,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
96,900
|
|
|
|
969
|
|
|
|
3,673
|
|
|
|
37
|
|
|
|
36,357,603
|
|
|
|
104,326,189
|
|
|
|
(1,483
|
)
|
|
|
140,683,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiary stock dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(900,045
|
)
|
|
|
|
|
|
|
(900,045
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelation of preferred stock and capital contribution
|
|
|
|
|
|
|
|
|
|
|
(3,673
|
)
|
|
|
(37
|
)
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,462,868
|
|
|
|
|
|
|
|
52,462,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,040
|
|
|
|
6,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
96,900
|
|
|
$
|
969
|
|
|
|
|
|
|
$
|
|
|
|
$
|
36,357,640
|
|
|
$
|
155,889,012
|
|
|
$
|
4,557
|
|
|
$
|
192,252,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
4
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company,
Inc.)
Years ended December 31, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Net income (loss)
|
|
$
|
52,462,868
|
|
|
$
|
(129,762,185
|
)
|
Unrealized gain on securities
|
|
|
6,040
|
|
|
|
3,730
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
52,468,908
|
|
|
$
|
(129,758,455
|
)
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
5
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company,
Inc.)
Years ended December 31, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
52,462,868
|
|
|
$
|
(129,762,185
|
)
|
Net loss from discontinued operations
|
|
|
253,242
|
|
|
|
1,618,789
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
|
52,716,110
|
|
|
|
(128,143,396
|
)
|
Adjustments to reconcile net income (loss) from continuing
operations to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
13,765,339
|
|
|
|
13,280,570
|
|
Amortization of turnaround costs
|
|
|
15,401,851
|
|
|
|
9,420,376
|
|
Amortization of deferred financing costs and discount on debt
|
|
|
4,606,802
|
|
|
|
292,783
|
|
Gain on sale of assets
|
|
|
(210,254
|
)
|
|
|
(1,900,377
|
)
|
Realized gain on sale of investments, net
|
|
|
(13
|
)
|
|
|
(3,594
|
)
|
Impairment of assets
|
|
|
|
|
|
|
566,619
|
|
Provision for losses on accounts receivable
|
|
|
673,255
|
|
|
|
2,273,160
|
|
Other
|
|
|
2,404
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease in accounts receivable, net
|
|
|
12,472,505
|
|
|
|
10,058,278
|
|
Decrease in accounts receivableaffiliate
|
|
|
9,032
|
|
|
|
276,070
|
|
(Increase) decrease in inventories
|
|
|
(83,542,851
|
)
|
|
|
147,649,806
|
|
(Increase) decrease in prepaid expenses
|
|
|
(378,266
|
)
|
|
|
645,371
|
|
Increase in deferred turnaround costs
|
|
|
(3,008,930
|
)
|
|
|
(54,193,091
|
)
|
Decrease in other assets
|
|
|
37,323
|
|
|
|
|
|
Increase (decrease) in accounts payable
|
|
|
70,842,159
|
|
|
|
(85,463,402
|
)
|
Increase (decrease) in accrued liabilities
|
|
|
4,025,705
|
|
|
|
(8,860,971
|
)
|
Decrease in deferred revenue and other
|
|
|
(7,658
|
)
|
|
|
(9,115
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
87,404,513
|
|
|
|
(94,110,913
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital expendituresrefinery and pipeline
|
|
|
(49,444,657
|
)
|
|
|
(37,471,979
|
)
|
Proceeds from sale of assets, net
|
|
|
4,244,856
|
|
|
|
4,206,983
|
|
Proceeds from property insurance
|
|
|
2,525,000
|
|
|
|
1,838,747
|
|
Proceeds from sale-leaseback of pipeline
|
|
|
31,830,451
|
|
|
|
|
|
Purchase of investments
|
|
|
(2,384
|
)
|
|
|
(15,222
|
)
|
Proceeds from sale of investments
|
|
|
1,744
|
|
|
|
254,365
|
|
Note receivablecollection
|
|
|
|
|
|
|
65,077
|
|
Note receivablerelated-party
|
|
|
(250,000
|
)
|
|
|
(7,000
|
)
|
Note receivablerelated-party collection
|
|
|
250,638
|
|
|
|
300,000
|
|
Change in restricted cash
|
|
|
(308,481
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(11,152,833
|
)
|
|
|
(30,829,029
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Borrowings under long-term debt
|
|
|
923,000,000
|
|
|
|
883,485,000
|
|
Principal payments on long-term debt
|
|
|
(972,449,903
|
)
|
|
|
(775,359,716
|
)
|
Principal payments on notes payable to parent
|
|
|
(7,770,000
|
)
|
|
|
(1,000,000
|
)
|
Capital lease obligation payments
|
|
|
(102,735
|
)
|
|
|
(26,723
|
)
|
Payments of debt issuance costs
|
|
|
(14,450,766
|
)
|
|
|
(1,300,285
|
)
|
Payments of offering costs
|
|
|
|
|
|
|
(40,202
|
)
|
Capital contributed by parent
|
|
|
|
|
|
|
17,947,117
|
|
Tax dividends distributed to parent
|
|
|
|
|
|
|
(17,947,117
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(71,773,404
|
)
|
|
|
105,758,074
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash
equivalentscontinuing operations
|
|
|
4,478,276
|
|
|
|
(19,181,868
|
)
|
Change in cash and cash equivalentsdiscontinued operations:
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(219,307
|
)
|
|
|
(1,623,856
|
)
|
Net cash used in investing activities
|
|
|
(224,079
|
)
|
|
|
(30,487
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
4,034,890
|
|
|
|
(20,836,211
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
1,936,661
|
|
|
|
22,772,872
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
5,971,551
|
|
|
$
|
1,936,661
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the year for interest and financing expenses,
net of amounts capitalized
|
|
$
|
22,501,293
|
|
|
$
|
8,163,933
|
|
Supplemental schedule of noncash investing and financing
activities:
|
|
|
|
|
|
|
|
|
Additions (deletions) to construction projects in progress
funded through accounts payable, net
|
|
$
|
(1,245,880
|
)
|
|
$
|
5,808,655
|
|
Capital lease acquisition
|
|
|
557,602
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
6
|
|
(1)
|
Background and
Organization
|
Gary-Williams Energy Corporation (GWEC) is incorporated in
Delaware. GWEC became a wholly owned subsidiary of GWEC Holding
Company, Inc. (the Holding Company) on October 30, 2009
when The Gary-Williams Company (TGWC), its then parent company,
contributed all of its common shares of GWEC to the Holding
Company and canceled its outstanding preferred stock.
GWECs primary activities are purchasing refinery
feedstocks, marketing petroleum products, and providing
management and support services to its subsidiaries.
Wynnewood Refining Company (WRC), a wholly owned subsidiary of
GWEC, is incorporated in Delaware. WRCs primary activity
is operating a refinery in Wynnewood, Oklahoma that has a
capacity of approximately 70,000 barrels per day.
Wynnewood Insurance Corporation (WIC), a wholly owned subsidiary
of GWEC, is incorporated in Hawaii. WICs primary activity
is to provide a portion of the insurance coverage required by
WRC.
Through April 30, 2009, GWEC owned all of the stock of
Gary-Williams Production Company (GWPC). GWPC is engaged in the
exploration, development, and operation of oil and gas
properties located in the United States. On May 1, 2009,
the Company spun-off GWPC to TGWC by declaring a dividend of all
of its stock in GWPC. Prior year consolidated financial
statements have been restated to present the operations of GWPC
as a discontinued operation.
References to the Company are to GWEC and its
subsidiaries, collectively.
|
|
(2)
|
Summary of
Significant Accounting Policies
|
|
|
(a)
|
Basis of
Presentation
|
The accompanying consolidated financial statements include the
accounts of its wholly owned subsidiaries and have been prepared
in accordance with United States generally accepted accounting
principles (U.S. GAAP). Intercompany balances and
transactions have been eliminated.
The Company evaluates events and transactions that occur after
the balance sheet date but before the financial statements are
issued. The Company evaluated such events and transactions
through March 30, 2010, which is the day the financial
statements were available to be issued.
Certain reclassifications of prior period information have been
made to conform to the current period presentation, including
the presentation of GWPC as a discontinued operation.
The preparation of financial statements in conformity with
U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the consolidated
7
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
Notes to Consolidated Financial Statements
December 31, 2009 and 2008(Continued)
financial statements and the reported amounts of revenues and
expenses during the reporting period. Some of the most
significant areas in which management uses estimates and
assumptions are in determining impairments of long-lived assets,
in establishing estimated useful lives for long-lived assets,
provision for uncollectible accounts receivable, in valuing
inventory, and in the determination of liabilities, if any, for
legal contingencies.
The Company evaluates these estimates on an ongoing basis using
historical experience and other methods the Company considers
reasonable based on the particular circumstances. Nevertheless,
actual results may differ significantly from the estimates. Any
effects on the financial position or results of operations from
revisions to these estimates are recorded in the period when the
facts that give rise to the revision become known.
|
|
(e)
|
Cash, Cash
Equivalents, and Investments
|
For purposes of these statements, the Company considers liquid
investments purchased with an original maturity of three months
or less to be cash equivalents. Investments having an original
maturity of more than three months, but less than 12, are
included in investments as a current asset in the accompanying
consolidated balance sheets. Cash equivalents and investments
consist of equity securities, domestic and international bond
funds, and money market funds.
Restricted cash includes cash balances which are legally or
contractually restricted to use. At December 31, 2009, the
Company had short-term restricted cash of $308,481 and long-term
restricted cash of $123,700 included in other long-term assets.
These amounts are primarily being held in trust in accordance
with certain financial regulations set by the United States
Environmental Protection Agency (EPA).
|
|
(g)
|
Allowance for
Doubtful Accounts
|
The Company establishes an allowance for doubtful accounts on
accounts receivable based on the expected ultimate recovery of
these receivables. The Company establishes or adjusts the
allowance as necessary using the specific identification method.
The Company considers many factors including historical customer
collection experience, general and specific economic trends, and
known specific issues related to individual customers that might
impact collectibility. The allowance for doubtful accounts was
$2,946,415 at December 31, 2009. For the years ended
December 31, 2009 and 2008, the Company recorded provisions
for bad debts of $673,255 and $2,273,160, respectively.
The Company periodically enters into futures contracts to hedge
certain of its exposures to price fluctuations on raw materials
and refined products. The purpose of these activities, as
defined by the Companys Risk Management Policy, is to
enhance overall profits from WRCs refining operations and
to identify opportunities to generate a profit outside the
refining operations in the Group III, Gulf Coast, and NYMEX
markets. Other provisions in the Risk
8
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
Notes to Consolidated Financial Statements
December 31, 2009 and 2008(Continued)
Management Policy set forth quantity limits, authorization
requirements, and exposure limits for speculative positions.
In all instances, the Company has decided not to designate its
derivative activities as hedges. As a result, the gains or
losses from the changes in fair value of the derivative
instruments have been recognized as a component of operating
expense; however, the underlying hedged items have not been
marked to market. The increases or decreases in the fair value
of the underlying hedged items ultimately result in increases or
decreases to operating revenue or operating expense at the time
of sale. These changes are generally offset by the gains or
losses from the changes in fair value of the derivative
instruments and may increase earnings volatility. The Company
had no futures contracts outstanding as of December 31,
2009.
|
|
(i)
|
Financial
Instruments
|
The Companys financial instruments consist of cash,
investments, accounts receivable, a note receivable, accounts
payable, other current liabilities, and long-term debt. Except
for long-term debt, the carrying amounts of financial
instruments approximate their fair value due to their short
maturities. The fair value of long-term debt is estimated
differently based upon the type of loan. For variable rate
loans, carrying value approximates fair value. For fixed rate
loans, the carrying value of long-term debt (see
note 3) approximates fair value because the interest
rate on this debt approximates market yields for similar debt
instruments.
Inventories are valued at the lower of
first-in,
first-out cost or market. Write-downs to market are charged to
operating expense. Inventories at December 31, 2009 are as
follows:
|
|
|
|
|
|
|
2009
|
|
|
Refined, unrefined, and intermediate products
|
|
$
|
97,161,983
|
|
Crude oil
|
|
|
61,060,706
|
|
Materials and supplies
|
|
|
4,593,152
|
|
|
|
|
|
|
Inventories
|
|
$
|
162,815,841
|
|
|
|
|
|
|
|
|
(k)
|
Property,
Plant, and Equipment
|
The initial purchase and additions to property, plant, and
equipment, including capitalized interest and certain costs
allocable to construction, are recorded at cost. Ordinary
maintenance and repairs are expensed as incurred. Depreciation
is provided using the straight-line method based on estimated
useful lives ranging from 1 to 30 years. Gains or losses on
sales or other dispositions of property appear in gain (loss) on
disposal of assets in the consolidated statements of operations.
Property, plant, and equipment under capital leases and related
obligations is recorded at an amount equal to the present value
of future minimum lease payments computed on the basis of the
Companys incremental borrowing rate or, when known, the
interest rate implicit in the lease. Assets acquired under
capital leases and leasehold improvements are amortized using
the straight-line method over the lease term and
9
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
Notes to Consolidated Financial Statements
December 31, 2009 and 2008(Continued)
are included in depreciation expense. At December 31, 2009,
property, plant, and equipment, with the range of useful lives,
is comprised of the following:
|
|
|
|
|
|
|
2009
|
|
|
Refinery property, plant, and equipment (3 to 30 years)
|
|
$
|
245,991,380
|
|
Pipeline under capital lease (5 to 20 years)
|
|
|
641,743
|
|
Airplane (6 years)
|
|
|
7,250,900
|
|
Furniture, fixtures, and equipment (1 to 15 years)
|
|
|
6,117,585
|
|
Precious metals, land, and other nondepreciable assets
|
|
|
3,457,371
|
|
Catalyst (5 years)
|
|
|
6,419,188
|
|
Vehicles (2 to 3 years)
|
|
|
1,136,199
|
|
Construction in progress
|
|
|
41,502,929
|
|
|
|
|
|
|
Property, plant, and equipment, at cost
|
|
|
312,517,295
|
|
Less accumulated depreciation and amortization
|
|
|
(59,062,282
|
)
|
|
|
|
|
|
Property, plant, and equipment, net
|
|
$
|
253,455,013
|
|
|
|
|
|
|
Construction in progress consists of projects primarily related
to additions and expansions to refinery processing units and
replacements to the refinery plant and equipment. When the
project is completed and placed in service the costs are
depreciated over their estimated life.
Major construction projects qualify for interest capitalization
until the asset is ready for service. Capitalized interest is
calculated by multiplying the Companys weighted average
interest rate from long-term debt by the amount of qualifying
costs. As major construction projects are completed, the
associated capitalized interest is amortized over the useful
life of the asset with the underlying cost of the asset. For the
years ended December 31, 2009 and 2008, the Company
capitalized interest of $2,037,342 and $136,648, respectively.
Depreciation and amortization expense for the years ended
December 31, 2009 and 2008 was $13,740,046 and $13,272,057,
respectively.
Intangible assets consist of the cost of a processing license of
$480,566 for a new sulfur recovery unit, which is subject to
amortization. Amortization is provided using the straight-line
method based on an estimated useful life of 19 years.
Amortization for the intangible asset was $25,293 of both years
ended December 31, 2009 and 2008. Accumulated amortization
totaled $88,525 at December 31, 2009. The estimated
aggregate amortization expense is approximately $25,293 per year
for the years ending December 31, 2010 through 2024 and
$12,646 for the year ending December 31, 2025.
Debt issuance costs represent loan origination fees paid to the
lender and related professional service fees. Unamortized debt
issuance costs are included in noncurrent other assets on the
consolidated balance sheets. For the year ended
December 31, 2009, the Company capitalized $14,450,766, of
costs incurred in connection with debt refinancing and
10
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
Notes to Consolidated Financial Statements
December 31, 2009 and 2008(Continued)
amendments. These costs are being amortized over the terms of
their respective financings and are included in interest
expense. Costs associated with revolving debt are amortized on a
straight-line basis and costs associated with debt agreements
having scheduled payoffs are amortized using the effective
interest method. The amounts of amortization and the write-off
of previous deferred debt issuance costs were $4,063,812 and
$292,783 for the years ended December 31, 2009 and 2008,
respectively.
|
|
(n)
|
Debt Issued at
a Discount
|
Debt issued at a discount to the face amount is accreted up to
its face amount utilizing the effective interest method over the
term of the note and recorded as a component of interest expense
on the consolidated statements of operations.
The Companys long-lived assets are periodically reviewed
for impairment whenever events or changes in circumstances
indicate the carrying amount may not be recoverable.
Impairments, if any, are measured as the amount by which the
carrying amount of the asset exceeds the forecast of discounted
expected future cash flows. The Company recorded no impairments
during the year ended December 31, 2009. During the year
ended December 31, 2008, the Company recorded an impairment
charge of $528,119 to operating expenses for the loss in value
of its precious metals.
|
|
(p)
|
Asset
Retirement Obligation
|
The Company evaluates legal obligations associated with the
retirement of long-lived assets that result from the
acquisition, construction, development,
and/or the
normal operation of a long-lived asset, and recognizes a
liability equal to the estimated fair value of the asset
retirement obligation in the period in which it is incurred, if
a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying
amount of the long-lived asset. The asset retirement liability
is accreted over time as an operating expense using a systematic
and rational method.
The Company has asset retirement obligations with respect to
certain of its refinery assets due to various legal obligations
to clean
and/or
dispose of various component parts of the refinery at the time
they are retired. However, these component parts can be used for
extended and indeterminate periods of time as long as they are
properly maintained
and/or
upgraded. It is the Companys practice and current intent
to maintain the refinery assets and continue making improvements
to those assets based on technological advances. As a result,
management believes that the refinery has an indeterminate life
for purposes of estimating asset retirement obligations because
dates or ranges of dates upon which the Company would retire
refinery assets cannot reasonably be estimated at this time.
When a date or range of dates can reasonably be estimated for
the retirement of any component part of the refinery, a
liability will be recorded based on the estimated cost to
perform the asset retirement activity at the fair value of those
costs using established present value techniques. The Company
will continue to monitor and evaluate its potential asset
retirement obligations.
11
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
Notes to Consolidated Financial Statements
December 31, 2009 and 2008(Continued)
|
|
(q)
|
Deferred
Turnaround Costs
|
Refinery turnaround costs are incurred in connection with
planned shutdown and inspections of the refinerys major
units to perform necessary repairs and replacements. Refinery
turnaround costs are deferred when incurred and amortized on a
straight-line basis over that period of time estimated to lapse
until the next planned turnaround occurs, generally four years.
Refinery turnaround costs include, among other things, the cost
to repair, restore, refurbish, or replace refinery equipment
such as tanks, reactors, piping, rotating equipment,
instrumentation, electrical equipment, heat exchangers, and
fired heaters. A major turnaround was performed in the second
quarter of 2008 and the next major turnaround is scheduled to be
performed in the second quarter of 2012. Although the Company
performed the majority of its turnaround activities in the
second quarter of 2008, the Company performed additional
turnaround work on a few of its refinery units in April 2009. In
total, during the years ended December 31, 2009 and 2008,
the Company incurred turnaround costs of $3,008,930 and
$54,193,091, respectively. As of December 31, 2009,
deferred turnaround costs amounted to $37,790,336, net of
accumulated amortization of $24,084,697. Amortization expense
for the years ended December 31, 2009 and 2008 was
$15,401,851 and $9,420,376, respectively.
The Company generates revenue primarily from the sale of refined
products produced at the Companys refinery and refined
products purchased directly from outside sources. In general,
the Company enters into spot and short-term agreements that
stipulate the terms and conditions of the sales. Revenue is
recorded as products are delivered to customers, which is the
point at which title and risk of loss are transferred.
The Company also engages in trading activities, whereby the
Company enters into agreements to purchase and sell refined
products with third parties. The Company acts as principle in
these transactions, taking title to the products in purchases
from counterparties, and accepting the risks and rewards of
ownership. The Company records revenue for the gross amount of
the sales transactions, and records cost of purchases as an
operating expense in the accompanying financial statements.
Sales tax, motor fuel tax, and other taxes invoiced to customers
and payable to government agencies are recorded on a net basis
with the tax portion of a sales invoice directly credited to a
liability account.
|
|
(s)
|
Comprehensive
Income (Loss)
|
Comprehensive income (loss) includes net income (loss) and other
comprehensive income (loss), which includes unrealized gains and
losses from
available-for-sale
securities.
The Company records gains from insurance recoveries and a
corresponding receivable when the Company determines that
recovery is probable and management can reasonably estimate the
amount of a particular recovery.
12
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
Notes to Consolidated Financial Statements
December 31, 2009 and 2008(Continued)
|
|
(u)
|
Environmental
Costs and Other Contingencies
|
Environmental Costs. The Company records an
undiscounted liability on the consolidated balance sheet as
other current and long-term liabilities when environmental
assessments indicate that remediation efforts are probable and
the costs can be reasonably estimated. Estimates of the
liabilities are based on currently available facts, existing
technology, and presently enacted laws and regulations taking
into consideration the likely effects of other societal and
economic factors, and include estimates of associated legal
costs. These amounts also consider prior experience in
remediating contaminated sites, other companies
clean-up
experience, and data released by the EPA or other organizations.
The estimates are subject to revision in future periods based on
actual costs or new circumstances.
Other Contingencies. The Company recognizes a
liability for other contingencies when the Company has an
exposure that, when fully analyzed, indicates it is both
probable that a liability has been incurred and the amount of
the loss can be reasonably estimated. Where the most likely
outcome can be estimated, the Company accrues a liability for
that amount. Where the most likely outcome cannot be estimated,
range of potential losses is established and if no one amount in
that range is more likely than any other, the low end of the
range is accrued.
|
|
|
|
|
|
|
December 31
|
|
|
|
2009
|
|
|
Term loan, due May 2012
|
|
$
|
|
|
Term loan, due November 2014
|
|
|
107,250,000
|
|
Revolver credit facility, due May 2011
|
|
|
|
|
Finance obligation, due September 2029
|
|
|
19,964,693
|
|
Capital lease obligation, due September 2029
|
|
|
31,213,642
|
|
Airplane loan, due March 2014
|
|
|
4,898,518
|
|
Other notes, due February 2011
|
|
|
32,824
|
|
Less discount on term loan
|
|
|
(10,457,010
|
)
|
|
|
|
|
|
Total debt
|
|
|
152,902,667
|
|
Less obligations due in one year
|
|
|
(11,739,262
|
)
|
|
|
|
|
|
Long-term debt
|
|
$
|
141,163,405
|
|
|
|
|
|
|
Refinancing
On November 13, 2009, the Company refinanced its existing
revolver and term loan facility into two separate facilities
with longer maturities. Through the refinancing, the Company
entered into a new asset-based revolving facility (the Revolver)
which provides commitments of up to $150,000,000 and a maturity
date of November 12, 2012. The Company also entered into a
new $110,000,000 discounted term loan facility (the Term Loan)
due November 12, 2014. The proceeds from the refinancing
were used to repay all of the outstanding amounts due under the
Companys previously existing term and revolver credit
facility.
13
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
Notes to Consolidated Financial Statements
December 31, 2009 and 2008(Continued)
Term
Loan
On November 13, 2009, GWEC, WRC, and the Holding Company
collectively entered into a secured five-year $110,000,000
discounted Term Loan with a syndicate of financial institutions.
Borrowings under the Term Loan accrue interest based on an
interest floor of 9.75% and includes LIBOR or base rate options.
Borrowings are repayable quarterly starting December 31,
2009, with 10% of the principal payable in years one and
two, 20% payable in years three and four, and 40% payable
in year five. The last scheduled payment is September 30,
2014. At December 31, 2009, the Company had $107,250,000
outstanding.
Revolver
GWEC, WRC, and the Holding Company collectively entered into a
three-year $150,000,000 secured Revolver with a syndicate of
financial institutions on November 13, 2009. The Revolver
replaces the previous $150,000,000 revolving credit facility
dated March 9, 2004. Similar to the previous facility, the
Company can borrow
and/or issue
letters of credit, which in the aggregate, cannot exceed the
lesser of the borrowing base or $150,000,000. The borrowing base
is limited by the balances of cash, accounts receivable,
inventory, exchange balances, and outstanding letters of credit
for which no payable yet exists. The borrowing base was
$150,000,000 at December 31, 2009. Borrowings under this
facility accrue interest based on LIBOR or base rate options
plus a margin based on the Companys fixed charge coverage
ratio. Borrowings are repayable at expiration of the revolving
facility on November 12, 2012. There was no outstanding
Revolver balance at December 31, 2009.
Letters of credit and bonds are primarily obtained by the
Company for its routine purchases of crude oil. Letters of
credit totaling $34,273,000 had been issued as of
December 31, 2009.
The Term Loan and Revolver are secured by substantially all of
GWECs and WRCs assets and are subject to various
financial and nonfinancial covenants that limit distributions,
dividends, acquisitions, capital expenditures, disposals and
debt and require minimum debt service coverage, net worth, and
working capital requirements. The Company was in compliance or
obtained a waiver for its financial covenants and ratios at
December 31, 2009.
Airplane
Loan
GWEC has a $5,300,000 loan with a bank. Under
the agreement, interest is payable at a fixed rate for the first
three years and at a variable rate based on the
30-day LIBOR
for the remaining four years. The loan is to be repaid over
seven years with principal payments based on a
20-year
amortization period and a balloon payment at the end of the
seventh year in 2014. The loan is secured by the airplane.
Finance
Obligation
On September 9, 2009, WRC sold its bulk terminal and
loading facility for $20,000,000. WRC, in turn, agreed to lease
back those same assets for 10 years with two five year
renewal options. Under the terms of the lease agreement, WRC is
required to support the operations of the terminal and loading
facility at its own risk and GWEC has guaranteed WRCs
lease payments. Due to these various forms of continuing
involvement, the transaction was recorded
14
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
Notes to Consolidated Financial Statements
December 31, 2009 and 2008(Continued)
under the finance method of accounting. Accordingly, the value
of the terminal and loading facility remain on the
Companys books and are continuing to be depreciated over
their remaining useful lives. The proceeds received have been
recorded as a finance obligation. The obligation is payable in
monthly installments and bears interest at 9%.
Capital
Lease
On September 9, 2009, WRC entered into a sale-leaseback
transaction where WRC sold a 49 mile pipeline for
$32,000,000 and leased back the same pipeline for a term of
20 years. Due to the lack of continuing involvement on the
part of WRC, the transaction was recorded using sale-leaseback
accounting. As a result, the Company has recorded the pipeline
as a capital lease. The gain of $30,741,039 is being deferred as
an offset to the leased pipeline and is being amortized in
proportion to the leased pipeline over the term of the lease.
The lease is payable in monthly installments and bears interest
at 12%.
Other
Notes
In February 2006, the Company entered into a financing agreement
and a capital lease arrangement for office copiers which expire
in February 2011. The obligations are payable in monthly
installments and bear interest at 5.75%. Amounts outstanding
under these arrangements at December 31, 2009 was $32,824.
Letters of credit fees, bond fees, unused commitment fees,
amortization of deferred financing costs, accretion of discount
on debt, and interest from borrowings under the various
agreements are included in interest expense in the accompanying
consolidated statements of operations (net of amounts
capitalized).
Subsequent
Event
Effective February 18, 2010, GWEC, WRC, and the Holding
Company entered into the First Amendment to the Term Loan. Under
the amendment, the financial institutions waived the
Companys violation of its debt covenant at
December 31, 2009 and modified the covenants for 2010.
The minimum remaining principal payments under the loan
agreements and minimum lease payments under capital lease
obligations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term
|
|
|
Airplane
|
|
|
Other
|
|
|
Finance
|
|
|
Capital
|
|
|
|
|
|
|
Loan
|
|
|
Loan
|
|
|
Notes
|
|
|
Obligation
|
|
|
Lease
|
|
|
Total
|
|
|
Year ending December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
$
|
11,000,000
|
|
|
$
|
163,801
|
|
|
$
|
29,975
|
|
|
$
|
136,465
|
|
|
$
|
4,419,274
|
|
|
$
|
15,749,515
|
|
2011
|
|
|
13,750,000
|
|
|
|
174,267
|
|
|
|
2,849
|
|
|
|
191,850
|
|
|
|
4,380,000
|
|
|
|
18,498,966
|
|
2012
|
|
|
22,000,000
|
|
|
|
185,403
|
|
|
|
|
|
|
|
253,518
|
|
|
|
4,392,000
|
|
|
|
26,830,921
|
|
2013
|
|
|
27,500,000
|
|
|
|
197,250
|
|
|
|
|
|
|
|
322,103
|
|
|
|
4,380,000
|
|
|
|
32,399,353
|
|
2014
|
|
|
33,000,000
|
|
|
|
4,177,797
|
|
|
|
|
|
|
|
398,302
|
|
|
|
4,380,000
|
|
|
|
41,956,099
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,662,455
|
|
|
|
64,365,058
|
|
|
|
83,027,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
107,250,000
|
|
|
$
|
4,898,518
|
|
|
$
|
32,824
|
|
|
$
|
19,964,693
|
|
|
|
86,316,332
|
|
|
|
218,462,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
Notes to Consolidated Financial Statements
December 31, 2009 and 2008(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term
|
|
|
Airplane
|
|
|
Other
|
|
|
Finance
|
|
|
Capital
|
|
|
|
|
|
|
Loan
|
|
|
Loan
|
|
|
Notes
|
|
|
Obligation
|
|
|
Lease
|
|
|
Total
|
|
|
Less amount representing executory costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,813,933
|
)
|
|
|
(4,813,933
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net minimum lease payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81,502,399
|
|
|
|
213,648,434
|
|
Less amount representing interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50,288,757
|
)
|
|
|
(50,288,757
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of net minimum lease payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
31,213,642
|
|
|
$
|
163,359,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4)
|
Tax Dividend
Obligation to Parent
|
GWEC and its subsidiaries are S Corporations for income tax
purposes. In general, as an S Corporation, GWEC and its
subsidiaries are not taxable, and taxable income and deductions
flow from GWEC and its subsidiaries to TGWC, where the income is
taxed. Prior to October 1, 2009, the Company reimbursed
TGWC for the computed state and federal income taxes based on
the Companys net income and a combined rate of
approximately 33%. On November 13, 2009, with the creation
of the Holding Company, a new tax agreement (effective
October 1, 2009) was entered into between the Holding
Company, its subsidiaries, and TGWC. Pursuant to this agreement,
GWEC reimburses the Holding Company for the computed state and
federal income taxes based on GWECs net taxable income and
a combined rate of 40% that GWEC would pay if it determined its
tax liability as a standalone C Corporation. These amounts are
reflected as tax dividends declared in the consolidated
statements of changes in shareholders equity. Each of the
GWECs subsidiaries reimburses GWEC on the same basis. When
GWEC recognizes a net loss, such loss multiplied by 40% reduces
its tax reimbursement liability in future years.
|
|
(5)
|
Employee Benefit
Plans
|
The Company has two profit sharing plans (defined contribution
plans), one covering certain nonunion employees and one covering
union employees. The employees must meet eligibility
requirements as to age and length of service. Contributions to
the plans are determined annually by the Company. Contributions
of $1,486,246 and $1,357,075 were expensed for the years ended
December 31, 2009 and 2008, respectively.
Substantially all of the Companys accounts receivable at
December 31, 2009 results from the sale of refined products
to companies in the retail distribution market. This
concentration of customers may impact the Companys overall
credit risk, either positively or negatively, in that these
entities may be similarly affected by industry-wide changes in
economic and other conditions. Such receivables are generally
not collateralized. However, the Company performs credit
evaluations on its customers to minimize the exposure to credit
risk. No single customer accounted for more than 10% of product
sales for the years ended December 31, 2009 and 2008,
respectively. No single customer accounted for more than 10% of
gross accounts receivable at December 31, 2009.
16
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
Notes to Consolidated Financial Statements
December 31, 2009 and 2008(Continued)
In March 2009 and 2008, the Company was awarded contracts to
sell approximately 58,000,000 and 59,000,000 gallons of jet fuel
to the United States Defense Energy Support Center (DESC) for
the period April 1, 2008 through March 31, 2010, plus
a 30-day
carryover which gives the DESC the option to take deliveries for
one month after the stated contract period. Pricing is variable,
calculated based on market prices, as specified in the contract.
For the years ended December 31, 2009 and 2008, product
sales to this customer approximated 5% and 6%, respectively, of
total operating revenue.
In addition, substantially all of the Companys raw
materials purchased for refinery production and refined products
purchased for resale are from companies in the oil and gas
exploration and production industry in the United States. This
concentration of suppliers may impact the Companys overall
costs and/or
profitability, either positively or negatively, in that these
entities may be similarly affected by industry-wide changes in
economic and other conditions. For the years ended
December 31, 2009 and 2008, three vendors accounted for 47%
and 37%, respectively, of total raw material and refined
purchases.
Approximately 51% of the Companys labor force is covered
by a collective bargaining agreement that is subject to review
and renewal on a regular basis. The current collective
bargaining agreement is due to expire in June 2012.
|
|
(7)
|
Related-Party
Transactions
|
GWEC has an agreement with an affiliate, as amended and renewed
in May 2008, to sublease a hangar for the Company aircraft.
Terms of the sublease provide for annual rentals of $87,000
until June 30, 2011.
On a monthly basis, the Company charges certain general and
administrative support costs to its affiliates. At
December 31, 2009, the affiliated accounts receivable
balance was $163,877.
GWEC entered into a promissory note in November 2008, with TGWC,
where by GWEC promised to pay TGWC the principal sum of
$20,000,000 or such lesser amount the borrower shall borrow from
the lender. Interest on the unpaid principal balance is computed
daily based on the prime rate. All amounts borrowed, together
with interest, are to be paid no later than five business days
after the funds are advanced. The note is due on
January 31, 2010. During 2009, GWEC paid the balance due on
the note of $7,770,000.
|
|
(8)
|
Commitments and
Contingencies
|
Fire
Contingencies and Insurance Reimbursement
Alky
Fire
On May 12, 2006, a fire took place at the Companys
refinery in Wynnewood, Oklahoma. The fire occurred in an
alkylation unit, which is used in the production of high octane,
low sulfur gasoline blend stocks. The fire resulted in damage to
the alkylation unit and surrounding equipment, wiring, and
instrumentation systems.
The Company is insured for losses related to its refinery
property and business interruption. At the time of the fire, the
Companys refinery property insurance coverage was subject
to a $1,000,000 per claim deductible and the business
interruption insurance coverage was
17
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
Notes to Consolidated Financial Statements
December 31, 2009 and 2008(Continued)
subject to a
45-day
business interruption waiting period with a $1,000,000 minimum
and a $10,000,000 maximum deductible.
In the years ended December 31, 2009 and 2008, the Company
expensed $40,324 and $997,886, to fire-related loss to cover
professional services fees, penalties, and other fire-related
costs. Through December 31, 2009, the Company has incurred
testing, refurbishment, and replacement costs of $33,473,402,
which has been capitalized in property, plant and equipment,
net. Initially, in 2006, the Company recorded an asset
impairment charge of $649,478 to fire-related loss.
In addition to the property damage, through December 31,
2009, the Company also sustained business interruption losses
associated with the fire of approximately $51,000,000, net of a
deductible of $10,000,000. These losses include lost income
related to the loss of use of the alkylation unit, the extra
transportation costs incurred for transporting product from the
unit while it is out of service, and the reduced volumes of
hydrocarbons that could be processed. These costs have been
expensed as incurred.
As a result of the property damage and business interruption
losses associated with the fire, the Company has submitted, net
of a deductible of $11,000,000, approximately $81,000,000 in
claims to its insurance carriers under its insurance policies.
As of December 31, 2007, the insurance providers approved
and the Company collected $42,832,697 of these costs,
$25,179,697 to cover business interruption and $17,653,000 for
property damage. Of the total amount recovered, $2,832,697 was
recorded during the year ended December 31, 2007,
$2,653,000 as fire-related gain and $179,697 as a reduction to
operating expense to cover business interruption. During 2006,
the Company recorded $15,000,000 as fire-related gain and
$25,000,000 as a reduction to operating expense for business
interruption.
In the fourth quarter of 2007, the Company initiated legal
action against its insurance carriers as a result of the
insurance carriers refusal to honor their insurance
coverage obligation to pay the remaining balance on the claim.
The Company settled with the insurance carriers in January 2009
for $21,167,253. As a result, in December 2008 the Company
recognized $2,525,000 as fire-related gain and $18,642,253 as a
reduction to operating expense to cover business interruption.
Lightning
Fire
On April 27, 2007, the Companys refinery in
Wynnewood, Oklahoma was shut down after lightning caused a fire
in a product storage tank, which then spread to a second tank in
the same dike. The Company lost both tanks and the products in
the tanks. The Company recorded an insurance recovery gain of
$6,000,000, a $5,151,740 expense from lost inventory, and fire
response and clean up expenditures of $270,957. Through
December 31, 2009, the Company also incurred testing,
refurbishment, and replacement costs of $3,776,613, which has
been capitalized as property, plant, and equipment, net.
For the year ended December 31, 2009, the Company
recognized a fire-related expense of $638 for professional
service fees. For the year ended December 31, 2008, the
Company recognized a net fire-related gain of $1,261,102. The
Company recognized an insurance recovery gain of $1,283,712 and
professional service fees of $22,610. During the year ended
December 31, 2007, the Company recorded a net fire-related
gain of $577,941.
18
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
Notes to Consolidated Financial Statements
December 31, 2009 and 2008(Continued)
As of December 31, 2009, the insurance providers have
approved $7,283,712 and the Company has collected $6,980,377 of
these costs. At December 31, 2009, the Companys
receivable for recoveries from insurance carriers was $303,335.
Legal
Matters
In the ordinary course of business, the Company is a party to
various other legal matters. In the opinion of management, none
of these matters, either individually or in the aggregate, will
have a material adverse effect on the Companys financial
condition, liquidity, or results of operations.
Health,
Safety, and Environmental Matters
The Company is subject to certain environmental, safety, and
other regulations primarily administered by the EPA and various
state agencies. In addition, the EPA requires that the Company
provide assurance of its financial wherewithal regarding certain
future closure costs of the facility. Except as discussed below,
management of the Company believes it has complied with all
material aspects associated with these regulations.
By letter dated October 26, 2005, WRC received a
Finding of Violation (FOV) from the EPA, Region 6,
purportedly pursuant to Section 113 of the Federal Clean
Air Act. The FOV alleged certain violations of New Source
Performance Standards and National Emission Standards for
Hazardous Air Pollutants. WRC has provided the EPA with
explanatory and exculpatory information in response to the EPA
FOV. Based on discussions with the EPA, the Company has
determined that the settlement will include both corrective
actions and payment of civil penalties, which could be material.
As of December 31, 2009, the Company has $1,000,000 accrued
to cover the penalties. Actual penalties could exceed this
amount, however, management does not anticipate that the
ultimate outcome of this matter will have a material adverse
impact on the Companys financial position, liquidity, or
results of operations.
The Federal Clean Air Act authorizes the EPA to require
modifications in the formulation of the refined transportation
fuel products manufactured in order to limit the emissions
associated with their final use. In December 1999, the EPA
promulgated national regulations limiting the amount of sulfur
to be allowed in gasoline at future dates. The EPA believes such
limits are necessary to protect new automobile emission control
systems that may be inhibited by sulfur in the fuel. The new
regulations required the phase-in of gasoline sulfur standards
beginning in 2004, with the final reduction to the sulfur
content of gasoline to an annual average level of 30
parts-per-million
(ppm), and a per gallon maximum of 80 ppm to be completed
by June 2006. As a small refiner, WRC became a party to the
Waiver and Compliance Plan with the EPA that extended the
implementation deadline for low sulfur gasoline to 2011. In
return for the extension, WRC is required to produce 95% of the
diesel fuel at the refinery with a sulfur content of 15 ppm
or less starting June 1, 2006. WRC has complied with this
requirement and anticipates meeting the requirement in
subsequent years.
Other
Matters
TGWC entered into a
10-year
lease agreement extension for office space in June 2003. The
Company pays all rent and occupancy costs in exchange for its
use of the office space. The
19
GARY-WILLIAMS
ENERGY CORPORATION
AND SUBSIDIARIES
(A Wholly Owned Subsidiary of GWEC Holding Company, Inc.)
Notes to Consolidated Financial Statements
December 31, 2009 and 2008(Continued)
Company has guaranteed the performance of TGWCs
obligations, under which the Company could be legally obligated
to pay annual rent, as scheduled below, and annual occupancy
costs of $307,000 with provisions for escalation based on actual
expenses. The monthly rent is expensed on a straight-line basis
over the term of the office lease. Rent expense, including
occupancy costs, for the years ended December 31, 2009 and
2008 was $1,025,689 and $949,997, respectively. Currently, TGWC
is subleasing a portion of the office space to two
related-parties for which the Company is reimbursed. Such
amounts were not significant for the years ended
December 31, 2009 and 2008.
The aggregate minimum rental commitments under noncancelable
leases for the periods shown at December 31, 2009, are as
follows:
|
|
|
|
|
Year
|
|
Annual Rent
|
|
|
2010
|
|
$
|
825,605
|
|
2011
|
|
|
800,986
|
|
2012
|
|
|
776,366
|
|
2013
|
|
|
388,183
|
|
|
|
|
|
|
|
|
$
|
2,791,140
|
|
|
|
|
|
|
The Company currently has three
take-or-pay
purchase agreements, two that expire in 2010 and one that
expires in 2020. The purchase agreements are with different
suppliers. Under the terms of the agreements, the Company is
obligated to purchase a minimum daily volume of crude or else
pay for any deficiencies. The amounts purchased under
take-or-pay
obligations for the years ended December 31, 2009 and 2008
were $10,166,013 and $11,605,923, respectively. At
December 31, 2009, the minimum commitments under the
take-or-pay
purchase agreements are as follows:
|
|
|
|
|
|
|
Take-or-pay
|
|
Year
|
|
Obligation
|
|
|
2010
|
|
$
|
7,529,028
|
|
2011
|
|
|
3,942,000
|
|
2012
|
|
|
3,952,800
|
|
2013
|
|
|
3,942,000
|
|
2014
|
|
|
3,942,000
|
|
Thereafter
|
|
|
20,055,600
|
|
|
|
|
|
|
|
|
$
|
43,363,428
|
|
|
|
|
|
|
In February 2009, the Company entered into a fixed price
engineering, procurement, and construction contract with an
engineering and consulting firm to construct a gasoline
hydrotreater unit, which will enable the Company to meet the new
EPA requirements limiting the amount of sulfur in gasoline
starting in 2011. Through December 31, 2009, the Company
has incurred $31,231,711 of costs related to this project, which
has been capitalized in property, plant, and equipment, net. The
project will be completed in 2010 and the estimated total
project cost is expected to be approximately $55,000,000.
20
exv99w4
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:
|
|
|
|
|
|
|
|
|
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.)
|
|
|
|
|
|
|
|
|
|
|
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 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
|
|
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)
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)
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)
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)
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)
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)
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)
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)
ASU 2011-04
to have a material effect on its results of operations,
financial condition, or cash flows.
|
|
|
|
|
|
|
|
|
|
|
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)
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)
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)
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)
|
|
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)
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
|
|
|
|
|
|
|
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
exv99w5
Exhibit 99.5
CVR ENERGY,
INC.
Introduction
Presented below are our pro forma condensed consolidated
statements of operations for the year ended December 31,
2010 and the nine and twelve months ended September 30,
2011 and the pro forma condensed consolidated balance sheet as
of September 30, 2011. The pro forma condensed consolidated
statements of operations give effect to this offering and the
Acquisition (including the acquisition of GWECs working
capital) as if they had occurred at the beginning of the periods
presented, and the pro forma condensed consolidated balance
sheet as of September 30, 2011 gives effect to this
offering and the Acquisition (including the acquisition of
GWECs working capital) as if they had occurred on
September 30, 2011. We describe the assumptions underlying
the pro forma adjustments in the accompanying notes, which
should be read in conjunction with these unaudited pro forma
condensed consolidated financial statements.
The pro forma adjustments are based upon available information
and certain assumptions that we believe are reasonable. The pro
forma adjustments described in the accompanying notes will be
made as of the closing date of the Acquisition and may differ
from those reflected in these unaudited pro forma condensed
consolidated financial statements. Revisions to the pro forma
adjustments which may be required by final purchase price
allocations
and/or
pre-closing or post-closing price adjustments, if any, may have
a significant impact on the total assets, total liabilities and
stockholders equity, depreciation and amortization and
interest expense. The unaudited pro forma condensed consolidated
financial information is for informational purposes only and
does not purport to represent what our results of operation or
financial position actually would have been if the Acquisition
had occurred at any date, and such data does not purport to
project our financial position as of any future date or our
results of operations for any future period. The unaudited pro
forma condensed consolidated financial information should be
read in conjunction with the financial statements and related
notes of GWEC and CVR Energy and the Managements Discussion and
Analysis of Financial Condition and Results of Operations
for CVR Energy.
1
CVR ENERGY,
INC.
UNAUDITED
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER
30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
|
|
|
|
|
|
|
Historical
|
|
|
Historical
|
|
|
for the
|
|
|
Total
|
|
|
|
CVR Energy
|
|
|
GWEC
|
|
|
Transactions
|
|
|
Pro Forma
|
|
|
|
(in thousands, except share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
898,456
|
|
|
$
|
28,956
|
|
|
$
|
209,000
|
(a)
|
|
$
|
438,581
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,200
|
) (b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,900
|
) (c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,600
|
) (d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(602,794
|
) (e)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,000
|
) (f)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(151
|
) (g)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50,070
|
) (h)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
255
|
(i)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30,371
|
) (j)
|
|
|
|
|
Restricted cash
|
|
|
|
|
|
|
125
|
|
|
|
|
|
|
|
125
|
|
Accounts receivable, net of allowance for doubtful accounts of
$912 for CVR Energy, $839 for GWEC and $912 on a pro forma basis
|
|
|
83,370
|
|
|
|
137,288
|
|
|
|
|
|
|
|
220,658
|
|
Accounts receivable, affiliates
|
|
|
|
|
|
|
198
|
|
|
|
(198
|
) (i)
|
|
|
|
|
Note receivablerelated party
|
|
|
|
|
|
|
57
|
|
|
|
(57
|
) (i)
|
|
|
|
|
Investments
|
|
|
|
|
|
|
322
|
|
|
|
|
|
|
|
322
|
|
Inventories
|
|
|
308,929
|
|
|
|
177,213
|
|
|
|
19,500
|
(k)
|
|
|
516,819
|
|
|
|
|
|
|
|
|
|
|
|
|
11,177
|
(l)
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
45,723
|
|
|
|
8,910
|
|
|
|
1,600
|
(b)
|
|
|
54,580
|
|
|
|
|
|
|
|
|
|
|
|
|
700
|
(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,353
|
) (m)
|
|
|
|
|
Deferred income taxes
|
|
|
17,643
|
|
|
|
|
|
|
|
|
|
|
|
17,643
|
|
Income taxes receivable
|
|
|
9,340
|
|
|
|
|
|
|
|
|
|
|
|
9,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,363,461
|
|
|
|
353,069
|
|
|
|
(458,462
|
)
|
|
|
1,258,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant, and equipment, net of accumulated depreciation
|
|
|
1,079,601
|
|
|
|
280,354
|
|
|
|
308,198
|
(n)
|
|
|
1,654,601
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,709
|
) (o)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(666
|
) (p)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,177
|
) (l)
|
|
|
|
|
Deferred turnaround costs, net
|
|
|
|
|
|
|
14,208
|
|
|
|
(14,208
|
) (p)
|
|
|
|
|
Intangible assets, net
|
|
|
320
|
|
|
|
1,090
|
|
|
|
|
|
|
|
1,410
|
|
Goodwill
|
|
|
40,969
|
|
|
|
|
|
|
|
|
|
|
|
40,969
|
|
Deferred financing costs, net
|
|
|
15,194
|
|
|
|
|
|
|
|
3,600
|
(b)
|
|
|
20,846
|
|
|
|
|
|
|
|
|
|
|
|
|
1,900
|
(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,495
|
(q)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,343
|
)(m)
|
|
|
|
|
Insurance receivable
|
|
|
4,076
|
|
|
|
|
|
|
|
|
|
|
|
4,076
|
|
Other assets, net
|
|
|
|
|
|
|
3,495
|
|
|
|
(3,495
|
)(q)
|
|
|
|
|
Other long-term assets
|
|
|
4,674
|
|
|
|
|
|
|
|
|
|
|
|
4,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,508,295
|
|
|
$
|
652,216
|
|
|
$
|
(175,867
|
)
|
|
$
|
2,984,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
CVR ENERGY,
INC.
UNAUDITED PRO
FORMA CONDENSED CONSOLIDATED BALANCE SHEET(Continued)
AS OF SEPTEMBER
30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
|
|
|
|
|
|
|
Historical
|
|
|
Historical
|
|
|
for the
|
|
|
Total
|
|
|
|
CVR Energy
|
|
|
GWEC
|
|
|
Transactions
|
|
|
Pro Forma
|
|
|
|
(in thousands, except share data)
|
|
|
|
LIABILITIES AND EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
|
|
|
|
|
46,401
|
|
|
|
(45,647
|
) (h)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(754
|
) (r)
|
|
|
|
|
Note payable and capital lease obligations, current portion
|
|
|
165
|
|
|
|
|
|
|
|
754
|
(r)
|
|
|
919
|
|
Accounts payable
|
|
|
185,553
|
|
|
|
197,723
|
|
|
|
|
|
|
|
383,276
|
|
Personnel accruals
|
|
|
16,260
|
|
|
|
|
|
|
|
3,479
|
(s)
|
|
|
19,739
|
|
Accrued taxes other than income taxes
|
|
|
20,399
|
|
|
|
|
|
|
|
14,491
|
(t)
|
|
|
34,890
|
|
Tax dividend obligation to parent
|
|
|
|
|
|
|
30,371
|
|
|
|
(30,371
|
) (j)
|
|
|
|
|
Deferred revenue
|
|
|
20,565
|
|
|
|
|
|
|
|
|
|
|
|
20,565
|
|
Derivative liabilities
|
|
|
|
|
|
|
7,435
|
|
|
|
(7,435
|
) (u)
|
|
|
|
|
Other current liabilities
|
|
|
61,148
|
|
|
|
19,050
|
|
|
|
(151
|
) (g)
|
|
|
69,512
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,479
|
) (s)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,491
|
) (t)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,435
|
(u)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
304,090
|
|
|
|
300,980
|
|
|
|
(76,169
|
)
|
|
|
528,901
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current portion and discount
|
|
|
591,662
|
|
|
|
53,823
|
|
|
|
209,000
|
(a)
|
|
|
800,662
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,423
|
) (h)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(49,400
|
) (r)
|
|
|
|
|
Note payable and capital lease obligations
|
|
|
|
|
|
|
|
|
|
|
49,400
|
(r)
|
|
|
49,400
|
|
Accrued environmental liabilities, net of current portion
|
|
|
1,600
|
|
|
|
|
|
|
|
|
|
|
|
1,600
|
|
Deferred income taxes
|
|
|
360,122
|
|
|
|
|
|
|
|
|
|
|
|
360,122
|
|
Other long-term liabilities
|
|
|
19,256
|
|
|
|
38
|
|
|
|
|
|
|
|
19,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
972,640
|
|
|
|
53,861
|
|
|
|
204,577
|
|
|
|
1,231,078
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CVR stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock $0.01 par value per share,
350,000,000 shares authorized, 86,634,651 shares issued
|
|
|
866
|
|
|
|
1
|
|
|
|
(1
|
) (v)
|
|
|
866
|
|
Additional
paid-in-capital
|
|
|
584,339
|
|
|
|
36,358
|
|
|
|
(36,358
|
) (v)
|
|
|
584,339
|
|
Retained earnings
|
|
|
500,997
|
|
|
|
261,016
|
|
|
|
(3,900
|
) (c)
|
|
|
494,097
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,000
|
) (f)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,696
|
) (m)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,874
|
) (p)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(238,737
|
) (v)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,709
|
) (o)
|
|
|
|
|
Treasury stock, 61,153 at cost
|
|
|
(1,605
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,605
|
)
|
Accumulated other comprehensive income, net of tax
|
|
|
(1,016
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,016
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total CVR stockholders equity
|
|
|
1,083,581
|
|
|
|
297,375
|
|
|
|
(304,275
|
)
|
|
|
1,076,681
|
|
Noncontrolling interest
|
|
|
147,984
|
|
|
|
|
|
|
|
|
|
|
|
147,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
1,231,565
|
|
|
|
297,375
|
|
|
|
(304,275
|
)
|
|
|
1,224,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
2,508,295
|
|
|
$
|
652,216
|
|
|
$
|
(175,867
|
)
|
|
$
|
2,984,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited
pro forma condensed consolidated financial statements.
3
CVR ENERGY,
INC.
UNAUDITED PRO
FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR
ENDED DECEMBER 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
|
|
|
|
|
|
|
Historical
|
|
|
Historical
|
|
|
for the
|
|
|
Total
|
|
|
|
CVR Energy
|
|
|
GWEC
|
|
|
Transactions
|
|
|
Pro Forma
|
|
|
|
(in thousands except share data)
|
|
|
Net sales
|
|
$
|
4,079,768
|
|
|
$
|
2,141,043
|
|
|
$
|
|
|
|
$
|
6,220,811
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
2,086,819
|
|
|
|
(2,086,819
|
) (a)
|
|
|
|
|
Cost of product sold (exclusive of depreciation and amortization)
|
|
|
3,568,118
|
|
|
|
|
|
|
|
1,968,559
|
(a)
|
|
|
5,536,677
|
|
Direct operating expenses (exclusive of depreciation and
amortization)
|
|
|
239,791
|
|
|
|
|
|
|
|
118,260
|
(a)
|
|
|
329,895
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,716
|
) (b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,440
|
) (c)
|
|
|
|
|
Insurance recoverybusiness interruption
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses (exclusive of
depreciation and amortization)
|
|
|
92,034
|
|
|
|
15,768
|
|
|
|
(289
|
) (c)
|
|
|
106,897
|
|
|
|
|
|
|
|
|
|
|
|
|
(616
|
) (d)
|
|
|
|
|
Depreciation and amortization
|
|
|
86,761
|
|
|
|
|
|
|
|
30,263
|
(c)
|
|
|
117,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
3,986,704
|
|
|
|
2,102,587
|
|
|
|
1,202
|
|
|
|
6,090,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
93,064
|
|
|
|
38,456
|
|
|
|
(1,202
|
)
|
|
|
130,318
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense and other financing costs
|
|
|
(50,268
|
)
|
|
|
(22,432
|
)
|
|
|
(2,218
|
) (e)
|
|
|
(74,918
|
)
|
Interest income
|
|
|
2,211
|
|
|
|
41
|
|
|
|
|
|
|
|
2,252
|
|
Gain (loss) on derivatives, net
|
|
|
(1,505
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,505
|
)
|
Loss on extinguishment of debt
|
|
|
(16,647
|
)
|
|
|
|
|
|
|
|
|
|
|
(16,647
|
)
|
Other income, net
|
|
|
1,218
|
|
|
|
80
|
|
|
|
|
|
|
|
1,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(64,991
|
)
|
|
|
(22,311
|
)
|
|
|
(2,218
|
)
|
|
|
(89,520
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
28,073
|
|
|
|
16,145
|
|
|
|
(3,420
|
)
|
|
|
40,798
|
|
Income tax expense
|
|
|
13,783
|
|
|
|
|
|
|
|
5,049
|
(f)
|
|
|
18,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
14,290
|
|
|
|
16,145
|
|
|
|
(8,469
|
)
|
|
|
21,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net income attributable to noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to CVR Energy stockholders
|
|
$
|
14,290
|
|
|
$
|
16,145
|
|
|
$
|
(8,469
|
)
|
|
$
|
21,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited
pro forma condensed consolidated financial statements.
4
CVR ENERGY,
INC.
UNAUDITED PRO
FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
|
|
|
|
|
|
|
Historical
|
|
|
Historical
|
|
|
for the
|
|
|
Total
|
|
|
|
CVR Energy
|
|
|
GWEC
|
|
|
Transactions
|
|
|
Pro Forma
|
|
|
|
(in thousands, except share data)
|
|
|
Net sales
|
|
$
|
3,966,945
|
|
|
$
|
2,041,264
|
|
|
|
|
|
|
$
|
6,008,209
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
1,857,186
|
|
|
|
(1,857,186
|
) (a)
|
|
|
|
|
Cost of product sold (exclusive of depreciation and amortization)
|
|
|
3,086,237
|
|
|
|
|
|
|
|
1,699,329
|
(a)
|
|
|
4,785,566
|
|
Direct operating expenses (exclusive of depreciation and
amortization)
|
|
|
209,256
|
|
|
|
|
|
|
|
97,106
|
(a)
|
|
|
284,288
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,200
|
) (b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,874
|
) (c)
|
|
|
|
|
Insurance recoverybusiness interruption
|
|
|
(3,360
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,360
|
)
|
Selling, general and administrative expenses (exclusive of
depreciation and amortization)
|
|
|
69,017
|
|
|
|
13,903
|
|
|
|
(259
|
) (c)
|
|
|
82,102
|
|
|
|
|
|
|
|
|
|
|
|
|
(559
|
) (d)
|
|
|
|
|
Depreciation and amortization
|
|
|
66,079
|
|
|
|
|
|
|
|
22,697
|
(c)
|
|
|
88,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
3,427,229
|
|
|
|
1,871,089
|
|
|
|
(60,946
|
)
|
|
|
5,237,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
539,716
|
|
|
|
170,175
|
|
|
|
60,946
|
|
|
|
770,837
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense and other financing costs
|
|
|
(41,152
|
)
|
|
|
(22,900
|
)
|
|
|
4,455
|
(e)
|
|
|
(59,597
|
)
|
Interest income
|
|
|
578
|
|
|
|
89
|
|
|
|
|
|
|
|
667
|
|
Gain (loss) on derivatives, net
|
|
|
(25,099
|
)
|
|
|
|
|
|
|
(60,751
|
) (a)
|
|
|
(85,850
|
)
|
Loss on extinguishment of debt
|
|
|
(2,078
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,078
|
)
|
Other income, net
|
|
|
720
|
|
|
|
(114
|
)
|
|
|
|
|
|
|
606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(67,031
|
)
|
|
|
(22,925
|
)
|
|
|
(56,296
|
)
|
|
|
(146,252
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
472,685
|
|
|
|
147,250
|
|
|
|
4,650
|
|
|
|
624,585
|
|
Income tax expense
|
|
|
172,460
|
|
|
|
|
|
|
|
60,274
|
(f)
|
|
|
232,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
300,225
|
|
|
|
147,250
|
|
|
|
(55,624
|
)
|
|
|
391,851
|
|
Less: Net income attributable to noncontrolling interest
|
|
|
20,307
|
|
|
|
|
|
|
|
|
|
|
|
20,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to CVR Energy stockholders
|
|
$
|
279,918
|
|
|
$
|
147,250
|
|
|
$
|
(55,624
|
)
|
|
$
|
371,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited
pro forma condensed consolidated financial statements.
5
CVR ENERGY,
INC.
UNAUDITED PRO
FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE TWELVE
MONTHS ENDED SEPTEMBER 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
|
|
|
|
Adjustments
|
|
|
|
|
|
|
|
|
|
CVR
|
|
|
Historical
|
|
|
for the
|
|
|
|
|
|
Total Pro
|
|
|
|
Energy
|
|
|
GWEC
|
|
|
Transactions
|
|
|
|
|
|
Forma
|
|
|
|
(in thousands except share data)
|
|
|
Net sales
|
|
$
|
5,115,129
|
|
|
$
|
2,640,334
|
|
|
$
|
|
|
|
|
|
|
|
$
|
7,755,463
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
2,431,776
|
|
|
|
(2,431,776
|
) (a)
|
|
|
|
|
|
|
|
|
Cost of product sold (exclusive of depreciation and amortization)
|
|
|
4,069,963
|
|
|
|
|
|
|
|
2,243,141
|
(a)
|
|
|
|
|
|
|
6,313,104
|
|
Direct operating expenses (exclusive of depreciation and
amortization)
|
|
|
273,472
|
|
|
|
|
|
|
|
127,884
|
(a)
|
|
|
|
|
|
|
371,992
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,468
|
) (b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,896
|
) (c)
|
|
|
|
|
|
|
|
|
Insurance recoverybusiness interruption
|
|
|
(3,360
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,360
|
)
|
Selling, general and administrative expenses (exclusive of
depreciation and amortization)
|
|
|
112,467
|
|
|
|
17,616
|
|
|
|
(336
|
) (c)
|
|
|
|
|
|
|
129,113
|
|
|
|
|
|
|
|
|
|
|
|
|
(634
|
) (d)
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
88,084
|
|
|
|
|
|
|
|
30,263
|
(c)
|
|
|
|
|
|
|
118,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
4,540,626
|
|
|
|
2,449,392
|
|
|
|
(60,822
|
)
|
|
|
|
|
|
|
6,929,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
574,503
|
|
|
|
190,942
|
|
|
|
60,822
|
|
|
|
|
|
|
|
826,267
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense and other financing costs
|
|
|
(54,869
|
)
|
|
|
(28,684
|
)
|
|
|
4,083
|
(e)
|
|
|
|
|
|
|
(79,470
|
)
|
Interest income
|
|
|
1,181
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
1,281
|
|
Gain (loss) on derivatives, net
|
|
|
(34,419
|
)
|
|
|
|
|
|
|
(60,751
|
) (a)
|
|
|
|
|
|
|
(95,170
|
)
|
Loss on extinguishment of debt
|
|
|
(3,673
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,673
|
)
|
Other income, net
|
|
|
1,237
|
|
|
|
(772
|
)
|
|
|
|
|
|
|
|
|
|
|
465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(90,543
|
)
|
|
|
(29,356
|
)
|
|
|
(56,668
|
)
|
|
|
|
|
|
|
(176,567
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
483,960
|
|
|
|
161,586
|
|
|
|
4,154
|
|
|
|
|
|
|
|
649,700
|
|
Income tax expense
|
|
|
181,441
|
|
|
|
|
|
|
|
65,765
|
(f)
|
|
|
|
|
|
|
247,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
302,519
|
|
|
|
161,586
|
|
|
|
(61,611
|
)
|
|
|
|
|
|
|
402,494
|
|
Less: Net income attributable to noncontrolling interest
|
|
|
20,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to CVR Energy stockholders
|
|
$
|
282,212
|
|
|
$
|
161,586
|
|
|
$
|
(61,611
|
)
|
|
|
|
|
|
$
|
382,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited
pro forma condensed consolidated financial statements.
6
CVR ENERGY,
INC.
NOTES TO THE
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED
FINANCIAL STATEMENTS
|
|
(1)
|
Organization and
Basis of Presentation
|
The unaudited pro forma condensed consolidated financial
statements have been prepared based upon the audited and
unaudited historical consolidated financial statements of CVR
Energy, Inc. and Gary-Williams Energy Corporation.
The unaudited pro forma condensed consolidated balance sheets
give effect to the following, as if they had occurred at the end
of the respective reporting period:
|
|
|
|
|
the consummation of the Acquisition, including the payment of
$525.0 million plus working capital to the Seller;
|
|
|
|
adjustments to the fair value of the tangible and intangible
assets;
|
|
|
|
our issuance of $200.0 million of aggregate principal
amount of notes offered hereby, including the estimated payment
of associated deferred financing fees of $5.2 million;
|
|
|
|
the payment of approximately $6.5 million for fees
associated with a bridge loan commitment and the
$150.0 million increase to the ABL Credit Facility;
|
|
|
|
the distribution by GWEC to its shareholders, prior to the
consummation of the Acquisition, of the airplane owned by it and
the associated debt;
|
|
|
|
the repayment of the GWECs historical term debt and
associated accrued interest prior to the consummation of the
Acquisition;
|
|
|
|
the payment of approximately $3.0 million of fees
associated with the Acquisition; and
|
|
|
|
conformity of presentation of GWECs consolidated financial
statements to CVR Energys consolidated financial
statements.
|
The unaudited pro forma condensed consolidated statement of
operations give effect to the following, as if they had occurred
at the beginning of the respective reporting period:
|
|
|
|
|
adjustments to depreciation and amortization based upon the
estimated fair value of tangible and intangible property
acquired;
|
|
|
|
adjustments to reflect (1) the estimated tax impact of the
pro forma adjustments and (2) the effect of income tax on
the historical net income of GWEC (which was not subject to
income tax), in both cases at the statutory rate of
approximately 39.7% during the period presented; and
|
|
|
|
conformity of presentation of GWECs consolidated financial
statements to CVR Energys consolidated financial
statements.
|
The Acquisition will be accounted for under the purchase method
of accounting as described in Accounting Standards Codification
(ASC) Topic 805, Business Combinations.
As part of the preparation of the unaudited pro forma condensed
consolidated financial statements, we have performed a
preliminary review of tangible and intangible assets to be
acquired in the Acquisition, and we have based certain
assumptions upon that preliminary review. A formal valuation
will be completed following the consummation of the Acquisition
to assist us in identifying and valuing all tangible and
intangible assets and their respective lives. We have not fully
identified all of the adjustments that would result from
conforming GWECs critical accounting policies to those of
CVR Energy. Accordingly, actual results will differ from
7
CVR ENERGY,
INC.
NOTES TO THE
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED
FINANCIAL STATEMENTS(Continued)
those reflected in the unaudited pro forma condensed
consolidated financial statements once we have determined the
final purchase price for GWEC, completed the valuation analyses
necessary to finalize the required purchase price allocations
and identified all necessary conforming accounting changes and
other acquisition-related adjustments. There can be no assurance
that such finalization will not result in material changes to
the unaudited pro forma condensed consolidated financial
statements.
We expect the Acquisition to generate annual cost savings
associated with synergies by combining overlapping corporate
functions, optimizing purchasing of crude oil, and through
greater economies of scale of other procurement and purchasing
functions.
However, the unaudited pro forma condensed consolidated
financial statements do not reflect any cost savings from
operating efficiencies or synergies.
We expect to incur significant costs to integrate the
businesses, including costs in conjunction with the Transition
Services Agreement entered into with GWEC. The unaudited pro
forma condensed consolidated financial statements do not reflect
anticipated future costs associated with the integration of the
businesses or the costs expected under the Transition Services
Agreement. The effect of the cost of integrating the businesses
could materially impact the pro forma financial statements.
|
|
(2)
|
Pro Forma Balance
Sheet Adjustments and Assumptions
|
(a) Reflects the issuance of $200.0 million principal
amount of new notes at a premium. These are recorded at their
face amount, adjusted for the premium received.
(b) Reflects the estimated deferred financing costs,
including professional fees incurred, of approximately
$5.2 million associated with the issuance of the new notes.
(c) Reflects fees and associated financing costs of
approximately $3.9 million associated with the bridge loan
that was committed but undrawn. These amounts are immediately
expensed and not deferred.
(d) Reflects deferred financing fees of approximately
$2.6 million associated with the $150.0 million
incremental ABL facility.
(e) Reflects the payment for the stock of GWEC at a
purchase price of $525.0 million plus working capital.
(f) Reflects an approximate $3.0 million decrease to
cash and retained earnings to reflect the estimated transaction
costs associated with the Acquisition. These represent estimated
legal, audit, and other professional fees. Additionally, these
costs are not included in the Unaudited Pro Forma Condensed
Consolidated Statement of Operations as they are nonrecurring
expenses.
(g) Reflects the elimination of accrued interest associated
with historical debt that is being repaid by GWEC prior to the
closing of the Acquisition.
(h) Reflects the elimination of historical debt of GWEC
that is being repaid by GWEC prior to closing the Acquisition.
(i) Reflects the settlement of affiliate receivables and
note receivables prior to the closing of the Acquisition.
8
CVR ENERGY,
INC.
NOTES TO THE
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED
FINANCIAL STATEMENTS(Continued)
(j) Reflects the tax distribution made by GWEC to its
parent prior to the closing of the Acquisition.
(k) GWEC inventory will be purchased by CVR Energy at
market value. The inventory has historically been carried at the
lower of
first-in,
first-out (FIFO) cost, or market. The estimated
increase in crude oil and refined products inventory value of
approximately $19.5 million is reflected to adjust to
estimated pro forma inventories to the initial market value at
acquisition.
(l) Reflects the reclassification of GWECs catalysts
and precious metals to conform the presentation in GWECs
consolidated financial statements to the presentation in CVR
Energys consolidated financial statements.
(m) Reflects the elimination of the deferred financing fees
associated with the historical debt of GWEC that is being repaid
prior to closing.
(n) Pro forma Adjustment to record the estimated fair value
of GWECs owned properties, plant and equipment including
property and equipment recorded under capital leases. This
estimated value is preliminary and is subject to further
adjustments based on the final fair value determination to be
completed subsequent to the acquisition closing date.
(o) Reflects the distribution of GWECs airplane and
the associated airplane hangar sublease prior to the closing.
(p) GWECs deferred turnaround costs are eliminated as
these costs previously incurred by GWEC relate to periodic
overhauls and refurbishments to GWECs Wynnewood refinery.
These costs are implicit in the estimated fair value assigned to
GWECs refining facilities as they contribute to the
physical and operating condition of the refineries and have been
factored into the estimated fair value of the GWECs
refinery. Approximately $14.2 million relates to the 2008
turnaround and approximately $0.7 million eliminated from
property, plant and equipment related to costs incurred for the
upcoming turnaround in 2012. Also, CVR Energys expenses
turnaround costs as they are incurred. This adjustment also is
to conform accounting methods of GWEC to CVR Energy.
(q) Reflects the reclassification of GWECs deferred
financing fees to conform the presentation in GWECs
consolidated financial statements to the presentation in CVR
Energys consolidated financial statements.
(r) Reflects reclassification of GWECs presentation
of current and long-term capital leases to conform the
presentation in GWECs consolidated financial statements to
the presentation in CVR Energys consolidated financial
statements.
(s) Reflects reclassification of GWECs presentation
of personnel accruals to conform the presentation in GWECs
consolidated financial statements to the presentation in CVR
Energys consolidated financial statements.
(t) Reflects reclassification of GWECs presentation
of accrued taxes other than income taxes to conform the
presentation in GWECs consolidated financial statements to
the presentation in CVR Energys consolidated financial
statements.
(u) Reflects reclassification of GWECs presentation
of derivative liabilities to conform the presentation in
GWECs consolidated financial statements to the
presentation in CVR Energys consolidated financial
statements.
(v) Reflects the elimination of all of GWECs
stockholders equity.
9
CVR ENERGY,
INC.
NOTES TO THE
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED
FINANCIAL STATEMENTS(Continued)
|
|
(3)
|
Pro Forma
Statement of Operations Adjustments and Assumptions
|
(a) Reflects the reclassification of operating
expenses, cost of product sold, and gain (loss) on derivatives,
net from operating expenses to conform GWECs consolidated
financial statement presentation to CVR Energys
consolidated financial statement presentation.
(b) To eliminate the turnaround expense for GWEC as
amortized in 2010 and to expense deferred turnaround expense
incurred during the period associated with the 2012 turnaround.
This adjustment conforms the accounting method of GWEC to CVR
Energys accounting method of expensing as incurred.
(c) Depreciation and amortization has been increased to
reflect the estimated additional depreciation expense related to
the increase in property, plant, and equipment based on the
estimated fair market value of the acquired assets. The
estimated incremental depreciation expense for the twelve months
ended December 31, 2010, nine months ended
September 30, 2011, and twelve months ended
September 30, 2011 is approximately $15.5 million,
$9.6 million and $13.0 million respectively, based
upon average lives of 19 years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
Twelve Months
|
|
|
|
Year Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2011
|
|
|
2011
|
|
|
|
(in millions)
|
|
|
Pro forma depreciation and amortization expense
|
|
$
|
30,263
|
|
|
$
|
22,697
|
|
|
$
|
30,263
|
|
Elimination of depreciation and amortization of GWEC
|
|
|
(14,729
|
)
|
|
|
(13,133
|
)
|
|
|
(17,232
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated incremental annual increase to depreciation and
amortization
|
|
$
|
15,534
|
|
|
$
|
9,564
|
|
|
$
|
13,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GWEC recorded depreciation and amortization of approximately
$14.4 million and $0.3 million in operating
expenses and selling, general and administrative expenses
(SG&A), respectively for the twelve months ended
December 31, 2010; depreciation and amortization of
approximately $12.9 million and $0.3 million in cost
of operating expenses, and SG&A, respectively for
the nine months ended September 30, 2011; and amortization
of approximately $16.9 million and $0.3 million in
operating expenses and SG&A expenses, respectively
for the twelve months ended September 30, 2011. CVR Energy
records cost of product sold, operating expenses and
SG&A expenses, exclusive of depreciation and amortization.
The pro forma adjustment conforms the classification.
(d) Reflects the annual costs of the airplane that will not
be ongoing expenses as the airplane will be distributed to
GWECs stockholders prior to the close of the Acquisition
(exclusive of depreciation).
(e) GWECs historical interest expense for its term
debt has been eliminated, and this adjustment adds interest in
respect of the additional borrowings of CVR Energy to fund the
Acquisition. The amortization of debt issuance costs is
$2.3 million, $1.7 million, and $2.3 million
respectively for the year ended December 31, 2010, nine
months ended September 30, 2011, and twelve months ended
September 30, 2011.
10
CVR ENERGY,
INC.
NOTES TO THE
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED
FINANCIAL STATEMENTS(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months
|
|
|
|
Year Ended
|
|
|
Nine Months Ended
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2011
|
|
|
2011
|
|
|
|
(in millions)
|
|
|
Elimination of interest, amortization of deferred financing
fees, on historical GWEC debt, excluding the capital lease and
financing obligation
|
|
$
|
(16,828
|
)
|
|
$
|
(18,740
|
)
|
|
$
|
(23,129
|
)
|
Estimated net interest on additional borrowings to fund the
Acquisition
|
|
|
15,300
|
|
|
|
11,475
|
|
|
|
15,300
|
|
Amortization of new debt issuance costs
|
|
|
2,256
|
|
|
|
1,692
|
|
|
|
2,256
|
|
Additional annual commitment fees estimated under the current
ABL of CVR
|
|
|
1,490
|
|
|
|
1,118
|
|
|
|
1,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustment to interest expense
|
|
$
|
2,218
|
|
|
$
|
(4,455
|
)
|
|
$
|
(4,083
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(f) Income tax has been adjusted (1) to reflect the
effect of income tax on the GWECs financials (as GWEC was
an entity not subject to income tax) and (2) to reflect the
tax impact of the pro forma adjustments at the statutory rate of
approximately 39.7% during the period presented.
11
exv99w6
Exhibit
99.6
RISK
FACTORS
You should carefully consider each of the following risks and
all of the information included or incorporated by reference
into our public filings before deciding to invest in our
securities. If any of the following risks and uncertainties develops
into actual events, our business, financial condition or results
of operations could be materially adversely affected.
Risks Related to
Our Petroleum Business
The price
volatility of crude oil, other feedstocks and refined products
may have a material adverse effect on our earnings,
profitability and cash flows.
Our petroleum business financial results are primarily
affected by the relationship, or margin, between refined product
prices and the prices for crude oil and other feedstocks. When
the margin between refined product prices and crude oil and
other feedstock prices tightens, our earnings, profitability and
cash flows are negatively affected. Refining margins
historically have been volatile and are likely to continue to be
volatile, as a result of a variety of factors including
fluctuations in prices of crude oil, other feedstocks and
refined products. Continued future volatility in refining
industry margins may cause a decline in our results of
operations, since the margin between refined product prices and
feedstock prices may decrease below the amount needed for us to
generate net cash flow sufficient for our needs. Although an
increase or decrease in the price for crude oil generally
results in a similar increase or decrease in prices for refined
products, there is normally a time lag in the realization of the
similar increase or decrease in prices for refined products. The
effect of changes in crude oil prices on our results of
operations therefore depends in part on how quickly and how
fully refined product prices adjust to reflect these changes. A
substantial or prolonged increase in crude oil prices without a
corresponding increase in refined product prices, or a
substantial or prolonged decrease in refined product prices
without a corresponding decrease in crude oil prices, could have
a significant negative impact on our earnings, results of
operations and cash flows.
Our profitability is also impacted by the ability to purchase
crude oil at a discount to benchmark crude oils, such as WTI, as
we do not produce any crude oil and must purchase all of the
crude oil we refine. These crude oils include, but are not
limited to, crude oil from our gathering system that we use at
the Coffeyville refinery and crude oils that we intend to
purchase in support of the Wynnewood refinery in the future.
Crude oil differentials can fluctuate significantly based upon
overall economic and crude oil market conditions. Declines in
crude oil differentials can adversely impact refining margins,
earnings and cash flows.
Refining margins are also impacted by domestic and global
refining capacity. Continued downturns in the economy impact the
demand for refined fuels and, in turn, generate excess capacity.
In addition, the expansion and construction of refineries
domestically and globally can increase refined fuel production
capacity. Excess capacity can adversely impact refining margins,
earnings and cash flows.
During the current year, favorable crack spreads and access to a
variety of price advantaged crude oils have resulted in EBITDA
and cash flow generation that is higher than usual. We cannot
assure you that these trends will continue and, in fact, crack
spreads, refining margins and crude oil prices could decline,
possibly materially, at any time. In particular, this trend may
be mitigated in the future as a result of Enbridges
purchase of 50% of the Seaway pipeline and intent to reverse the
pipeline to make it flow from Cushing to the U.S. Gulf
Coast. Any such decline would have a material adverse effect on
our earnings, results of operations and cash flows. Volatile
prices for natural gas and electricity also affect our
manufacturing and operating costs. Natural gas and electricity
prices have been, and will continue to be, affected by supply
and demand for fuel and utility services in both local and
regional markets.
1
If we are
required to obtain our crude oil supply without the benefit of a
crude oil supply agreement, our exposure to the risks associated
with volatile crude oil prices may increase and our liquidity
may be reduced. We currently have no crude oil intermediation
agreement in place with respect to the Wynnewood
Refinery.
We currently obtain the majority of our crude oil supply for the
Coffeyville refinery through the Supply Agreement with Vitol,
which was entered into on March 30, 2011 to replace an
existing supply agreement with Vitol. The Supply Agreement,
whose initial term expires on December 31, 2013, minimizes
the amount of in-transit inventory and mitigates crude oil
pricing risks by ensuring pricing takes place extremely close to
the time when the crude oil is refined and the yielded products
are sold. If we were required to obtain our crude oil supply
without the benefit of an intermediation agreement, our exposure
to crude oil pricing risks may increase, despite any hedging
activity in which we may engage, and our liquidity would be
negatively impacted due to the increased inventory and the
negative impact of market volatility.
In addition, there is currently no crude oil supply
intermediation agreement in place with respect to the Wynnewood
refinery. Although we may choose to enter into such an agreement
in the future, or seek to expand our existing crude oil supply
intermediation agreement with Vitol to cover the Wynnewood
refinery, there can be no assurance that we will be able to do
so on commercially reasonable terms or at all.
Disruption of our
ability to obtain an adequate supply of crude oil could reduce
our liquidity and increase our costs.
For the Coffeyville refinery, in addition to the crude oil we
gather locally in Kansas, Oklahoma, Missouri, and Nebraska, we
purchase an additional 80,000 to 90,000 bpd of crude oil to
be refined into liquid fuels. Although GWEC has historically
acquired most of its crude oil from Texas and Oklahoma, it also
purchases crude oil from other regions. Coffeyville obtains a
portion of its non-gathered crude oil, approximately 16% in
2010, from foreign sources and Wynnewood obtained a small amount
from foreign sources as well. The majority of these foreign
sourced crude oil barrels were derived from Canada. In addition
to Canadian crude oil, we have access to crude oils from Latin
America, South America, the Middle East, West Africa and the
North Sea. The actual amount of foreign crude oil we purchase is
dependent on market conditions and will vary from year to year.
We are subject to the political, geographic, and economic risks
attendant to doing business with suppliers located in those
regions. Disruption of production in any of such regions for any
reason could have a material impact on other regions and our
business.
In the event that one or more of our traditional suppliers
becomes unavailable to us, we may be unable to obtain an
adequate supply of crude oil, or we may only be able to obtain
our crude oil supply at unfavorable prices. As a result, we may
experience a reduction in our liquidity and our results of
operations could be materially adversely affected.
Severe weather, including hurricanes along the U.S. Gulf
Coast, have in the past and could in the future interrupt our
supply of crude oil. Supplies of crude oil to our refinery are
periodically shipped from U.S. Gulf Coast production or
terminal facilities, including through the Seaway Pipeline from
the U.S. Gulf Coast to Cushing, Oklahoma. U.S. Gulf
Coast facilities could be subject to damage or production
interruption from hurricanes or other severe weather in the
future which could interrupt or materially adversely affect our
crude oil supply. If our supply of crude oil is interrupted, our
business, financial condition and results of operations could be
materially adversely impacted.
2
If our access to
the pipelines on which we rely for the supply of our feedstock
and the distribution of our products is interrupted, our
inventory and costs may increase and we may be unable to
efficiently distribute our products.
If one of the pipelines on which either of the Coffeyville or
Wynnewood refineries rely for supply of crude oil becomes
inoperative, we would be required to obtain crude oil for our
refineries through alternative pipelines or from additional
tanker trucks, which could increase our costs and result in
lower production levels and profitability. Similarly, if a major
refined fuels pipeline becomes inoperative, we would be required
to keep refined fuels in inventory or supply refined fuels to
our customers through an alternative pipeline or by additional
tanker trucks from the refinery, which could increase our costs
and result in a decline in profitability.
If sufficient
Renewable Identification Numbers (RINs) are unavailable for
purchase or if we have to pay a significantly higher price for
RINs, or if we are otherwise unable to meet the EPAs
Renewable Fuels Standard mandates, our business, financial
condition and results of operations could be materially
adversely affected.
Pursuant to the Energy Independence and Security Act of 2007,
the U.S. Environmental Protection Agency, or the EPA, has
promulgated the Renewable Fuel Standard, or RFS, which requires
refiners to blend renewable fuels, such as ethanol,
with their petroleum fuels or purchase renewable energy credits,
known as renewable identification numbers, or RINs, in lieu of
blending. Annually, the EPA establishes the volume of renewable
fuels that refineries must blend into their finished petroleum
fuels. Beginning in 2011, our Coffeyville refinery was required
to blend renewable fuels into its gasoline and diesel fuel or
purchase RINs in lieu of blending. We have requested additional
time to comply in the form of hardship relief from
the EPA based on the disproportionate impact of the rule on our
Coffeyville refinery, but the EPA has not yet responded to our
request. The Wynnewood refinery is a small refinery under the
RFS and has received a two year extension of time to comply. If
we are unable to pass the costs of compliance with RFS on to our
customers, our profits would be significantly lower. Moreover,
if sufficient RINs are unavailable for purchase or if we have to
pay a significantly higher price for RINs, or if we are
otherwise unable to meet the EPAs RFS mandates, our
business, financial condition and results of operations could be
materially adversely affected.
Our petroleum
business financial results are seasonal and generally
lower in the first and fourth quarters of the year.
Demand for gasoline products is generally higher during the
summer months than during the winter months due to seasonal
increases in highway traffic and road construction work. As a
result, our results of operations for the first and fourth
calendar quarters are generally lower than for those for the
second and third quarters. Further, reduced agricultural work
during the winter months somewhat depresses demand for diesel
fuel in the winter months. In addition to the overall
seasonality of the petroleum business, unseasonably cool weather
in the summer months
and/or
unseasonably warm weather in the winter months in the areas in
which we sell our petroleum products could have the effect of
reducing demand for gasoline and diesel fuel which could result
in lower prices and reduce operating margins.
We face
significant competition, both within and outside of our
industry. Competitors who produce their own supply of
feedstocks, have extensive retail outlets, make alternative
fuels or have greater financial resources than we do may have a
competitive advantage over us.
The refining industry is highly competitive with respect to both
feedstock supply and refined product markets. We may be unable
to compete effectively with our competitors within and outside
of our industry, which could result in reduced profitability. We
compete with numerous other companies for available supplies of
crude oil and other feedstocks and for
3
outlets for our refined products. We are not engaged in the
petroleum exploration and production business and therefore we
do not produce any of our crude oil feedstocks. We do not have a
retail business and therefore are dependent upon others for
outlets for our refined products. We do not have any long-term
arrangements (those exceeding more than a twelve-month period)
for much of our output. Many of our competitors in the United
States obtain significant portions of their feedstocks from
company-owned production and have extensive retail outlets.
Competitors that have their own production or extensive retail
outlets with brand-name recognition are at times able to offset
losses from refining operations with profits from producing or
retailing operations, and may be better positioned to withstand
periods of depressed refining margins or feedstock shortages.
A number of our competitors also have materially greater
financial and other resources than us. These competitors may
have a greater ability to bear the economic risks inherent in
all aspects of the refining industry. An expansion or upgrade of
our competitors facilities, price volatility,
international political and economic developments and other
factors are likely to continue to play an important role in
refining industry economics and may add additional competitive
pressure on us.
In addition, we compete with other industries that provide
alternative means to satisfy the energy and fuel requirements of
our industrial, commercial and individual consumers. The more
successful these alternatives become as a result of governmental
incentives or regulations, technological advances, consumer
demand, improved pricing or otherwise, the greater the negative
impact on pricing and demand for our products and our
profitability. There are presently significant governmental
incentives and consumer pressures to increase the use of
alternative fuels in the United States.
Changes in our
credit profile may affect our relationship with our suppliers,
which could have a material adverse effect on our liquidity and
our ability to operate our refineries at full
capacity.
Changes in our credit profile may affect the way crude oil
suppliers view our ability to make payments and may induce them
to shorten the payment terms for our purchases or require us to
post security prior to payment. Given the large dollar amounts
and volume of our crude oil and other feedstock purchases, a
burdensome change in payment terms may have a material adverse
effect on our liquidity and our ability to make payments to our
suppliers. This, in turn, could cause us to be unable to operate
our refineries at full capacity. A failure to operate our
refineries at full capacity could adversely affect our
profitability and cash flows.
The adoption of
derivatives legislation by the U.S. Congress could have an
adverse effect on our ability to hedge risks associated with our
petroleum business.
The U.S. Congress has adopted the Dodd-Frank Act,
comprehensive financial reform legislation that establishes
federal oversight and regulation of the
over-the-counter
derivatives market and entities that participate in that market,
and requires the Commodities Futures Trading Commission, or
CFTC, to institute broad new position limits for futures and
options traded on regulated exchanges. The Dodd-Frank Act
requires the CFTC and the SEC to promulgate rules and
regulations implementing the new legislation. The rulemaking
process is still ongoing, and we cannot predict the ultimate
outcome of the rulemakings. New regulations in this area may
result in increased costs and cash collateral for derivative
instruments we may use to hedge and otherwise manage our
financial risks related to volatility in oil and gas commodity
prices.
4
Risks Related to
the Nitrogen Fertilizer Business
The nitrogen
fertilizer business is, and nitrogen fertilizer prices are,
cyclical and highly volatile, and the nitrogen fertilizer
business has experienced substantial downturns in the past.
Cycles in demand and pricing could potentially expose the
nitrogen fertilizer business to significant fluctuations in its
operating and financial results and have a material adverse
effect on our earnings, profitability and cash flows.
The nitrogen fertilizer business is exposed to fluctuations in
nitrogen fertilizer demand in the agricultural industry. These
fluctuations historically have had and could in the future have
significant effects on prices across all nitrogen fertilizer
products and, in turn, our results of operations, financial
condition and cash flows.
Nitrogen fertilizer products are commodities, the price of which
can be highly volatile. The prices of nitrogen fertilizer
products depend on a number of factors, including general
economic conditions, cyclical trends in end-user markets, supply
and demand imbalances, and weather conditions, which have a
greater relevance because of the seasonal nature of fertilizer
application. If seasonal demand exceeds the projections on which
the nitrogen fertilizer business bases production, customers may
acquire nitrogen fertilizer products from competitors, and the
profitability of the nitrogen fertilizer business will be
negatively impacted. If seasonal demand is less than expected,
the nitrogen fertilizer business will be left with excess
inventory that will have to be stored or liquidated.
Demand for nitrogen fertilizer products is dependent on demand
for crop nutrients by the global agricultural industry.
Nitrogen-based fertilizers are currently in high demand, driven
by a growing world population, changes in dietary habits and an
expanded use of corn for the production of ethanol. Supply is
affected by available capacity and operating rates, raw material
costs, government policies and global trade. A decrease in
nitrogen fertilizer prices would have a material adverse effect
on our results of operations, financial condition and cash flows.
The costs
associated with operating the nitrogen fertilizer plant are
largely fixed. If nitrogen fertilizer prices fall below a
certain level, the nitrogen fertilizer business may not generate
sufficient revenue to operate profitably or cover its
costs.
The nitrogen fertilizer plant has largely fixed costs compared
to natural gas-based nitrogen fertilizer plants. As a result,
downtime, interruptions or low productivity due to reduced
demand, adverse weather conditions, equipment failure, a
decrease in nitrogen fertilizer prices or other causes can
result in significant operating losses. Declines in the price of
nitrogen fertilizer products could have a material adverse
effect on our results of operations and financial condition.
Unlike its competitors, whose primary costs are related to the
purchase of natural gas and whose costs are therefore largely
variable, the nitrogen fertilizer business has largely fixed
costs that are not dependent on the price of natural gas because
it uses pet coke as the primary feedstock in its nitrogen
fertilizer plant.
A decline in
natural gas prices could impact the nitrogen fertilizer
business relative competitive position when compared to
other nitrogen fertilizer producers.
Most nitrogen fertilizer manufacturers rely on natural gas as
their primary feedstock, and the cost of natural gas is a large
component of the total production cost for natural gas-based
nitrogen fertilizer manufacturers. The dramatic increase in
nitrogen fertilizer prices in recent years has not been the
direct result of an increase in natural gas prices, but rather
the result of increased demand for nitrogen-based fertilizers
due to historically low stocks of global grains and a surge in
the prices of corn and wheat, the primary crops in the nitrogen
fertilizer
5
business region. This increase in demand for
nitrogen-based fertilizers has created an environment in which
nitrogen fertilizer prices have disconnected from their
traditional correlation with natural gas prices. A decrease in
natural gas prices would benefit the nitrogen fertilizer
business competitors and could disproportionately impact
our operations by making the nitrogen fertilizer business less
competitive with natural gas-based nitrogen fertilizer
manufacturers. A decline in natural gas prices could impair the
nitrogen fertilizer business ability to compete with other
nitrogen fertilizer producers who utilize natural gas as their
primary feedstock, and therefore have a material adverse impact
on the cash flows of the nitrogen fertilizer business. In
addition, if natural gas prices in the United States were to
decline to a level that prompts those U.S. producers who
have permanently or temporarily closed production facilities to
resume fertilizer production, this would likely contribute to a
global supply/demand imbalance that could negatively affect
nitrogen fertilizer prices and therefore have a material adverse
effect on our results of operations, financial condition and
cash flows.
Any decline in
U.S. agricultural production or limitations on the use of
nitrogen fertilizer for agricultural purposes could have a
material adverse effect on the sales of nitrogen fertilizer, and
on our results of operations, financial condition and cash
flows.
Conditions in the U.S. agricultural industry significantly
impact the operating results of the nitrogen fertilizer
business. The U.S. agricultural industry can be affected by
a number of factors, including weather patterns and field
conditions, current and projected grain inventories and prices,
domestic and international demand for U.S. agricultural
products and U.S. and foreign policies regarding trade in
agricultural products.
State and federal governmental policies, including farm and
biofuel subsidies and commodity support programs, as well as the
prices of fertilizer products, may also directly or indirectly
influence the number of acres planted, the mix of crops planted
and the use of fertilizers for particular agricultural
applications. Developments in crop technology, such as nitrogen
fixation, the conversion of atmospheric nitrogen into compounds
that plants can assimilate, could also reduce the use of
chemical fertilizers and adversely affect the demand for
nitrogen fertilizer. In addition, from time to time various
state legislatures have considered limitations on the use and
application of chemical fertilizers due to concerns about the
impact of these products on the environment.
A major factor
underlying the current high level of demand for nitrogen-based
fertilizer products is the expanding production of ethanol. A
decrease in ethanol production, an increase in ethanol imports
or a shift away from corn as a principal raw material used to
produce ethanol could have a material adverse effect on our
results of operations, financial condition and cash
flows.
A major factor underlying the current high level of demand for
nitrogen-based fertilizer products produced by the nitrogen
fertilizer business is the expanding production of ethanol in
the United States and the expanded use of corn in ethanol
production. Ethanol production in the United States is highly
dependent upon a myriad of federal and state legislation and
regulations, and is made significantly more competitive by
various federal and state incentives. Such incentive programs
may not be renewed, or if renewed, they may be renewed on terms
significantly less favorable to ethanol producers than current
incentive programs. Studies showing that expanded ethanol
production may increase the level of greenhouse gases in the
environment may reduce political support for ethanol production.
The elimination or significant reduction in ethanol incentive
programs, such as the 45 cents per gallon ethanol tax credit and
the 54 cents per gallon ethanol import tariff, could have a
material adverse effect on our results of operations, financial
condition and cash flows.
Further, most ethanol is currently produced from corn and other
raw grains, such as milo or sorghumespecially in the
Midwest. The current trend in ethanol production research is to
6
develop an efficient method of producing ethanol from
cellulose-based biomass, such as agricultural waste, forest
residue, municipal solid waste and energy crops (plants grown
for use to make biofuels or directly exploited for their energy
content). This trend is driven by the fact that cellulose-based
biomass is generally cheaper than corn, and producing ethanol
from cellulose-based biomass would create opportunities to
produce ethanol in areas that are unable to grow corn. Although
current technology is not sufficiently efficient to be
competitive, new conversion technologies may be developed in the
future. If an efficient method of producing ethanol from
cellulose-based biomass is developed, the demand for corn may
decrease significantly, which could reduce demand for nitrogen
fertilizer products and have a material adverse effect on our
results of operations, financial condition and cash flows.
Nitrogen
fertilizer products are global commodities, and the nitrogen
fertilizer business faces intense competition from other
nitrogen fertilizer producers.
The nitrogen fertilizer business is subject to intense price
competition from both U.S. and foreign sources, including
competitors operating in the Persian Gulf, the Asia-Pacific
region, the Caribbean, Russia and the Ukraine. Fertilizers are
global commodities, with little or no product differentiation,
and customers make their purchasing decisions principally on the
basis of delivered price and availability of the product.
Furthermore, in recent years the price of nitrogen fertilizer in
the United States has been substantially driven by pricing in
the global fertilizer market. The nitrogen fertilizer business
competes with a number of U.S. producers and producers in
other countries, including state-owned and government-subsidized
entities. Some competitors have greater total resources and are
less dependent on earnings from fertilizer sales, which makes
them less vulnerable to industry downturns and better positioned
to pursue new expansion and development opportunities. The
nitrogen fertilizer business competitive position could
suffer to the extent it is not able to expand its resources
either through investments in new or existing operations or
through acquisitions, joint ventures or partnerships. An
inability to compete successfully could result in a loss of
customers, which could adversely affect the sales, profitability
and the cash flows of the nitrogen fertilizer business and
therefore have a material adverse effect on our results of
operations, financial condition and cash flows.
Adverse weather
conditions during peak fertilizer application periods may have a
material adverse effect on our results of operations, financial
condition and cash flows, because the agricultural customers of
the nitrogen fertilizer business are geographically
concentrated.
The nitrogen fertilizer business sales to agricultural
customers are concentrated in the Great Plains and Midwest
states and are seasonal in nature. For example, the nitrogen
fertilizer business generates greater net sales and operating
income in the first half of the year, which is referred to
herein as the planting season, compared to the second half of
the year. Accordingly, an adverse weather pattern affecting
agriculture in these regions or during the planting season could
have a negative effect on fertilizer demand, which could, in
turn, result in a material decline in the nitrogen fertilizer
business net sales and margins and otherwise have a
material adverse effect on our results of operations, financial
condition and cash flows. The nitrogen fertilizer business
quarterly results may vary significantly from one year to the
next due largely to weather-related shifts in planting schedules
and purchase patterns. As a result, it is expected that the
nitrogen fertilizer business distributions to holders of
its common units (including us) will be volatile and will vary
quarterly and annually.
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The nitrogen
fertilizer business is seasonal, which may result in it carrying
significant amounts of inventory and seasonal variations in
working capital. Our inability to predict future seasonal
nitrogen fertilizer demand accurately may result in excess
inventory or product shortages.
The nitrogen fertilizer business is seasonal. Farmers tend to
apply nitrogen fertilizer during two short application periods,
one in the spring and the other in the fall. The strongest
demand for nitrogen fertilizer products typically occurs during
the planting season. In contrast, the nitrogen fertilizer
business and other nitrogen fertilizer producers generally
produce products throughout the year. As a result, the nitrogen
fertilizer business and its customers generally build
inventories during the low demand periods of the year in order
to ensure timely product availability during the peak sales
seasons. The seasonality of nitrogen fertilizer demand results
in sales volumes and net sales being highest during the North
American spring season and working capital requirements
typically being highest just prior to the start of the spring
season.
If seasonal demand exceeds projections, the nitrogen fertilizer
business will not have enough product and its customers may
acquire products from its competitors, which would negatively
impact profitability. If seasonal demand is less than expected,
the nitrogen fertilizer business will be left with excess
inventory and higher working capital and liquidity requirements.
The degree of seasonality of the nitrogen fertilizer business
can change significantly from year to year due to conditions in
the agricultural industry and other factors. As a consequence of
such seasonality, it is expected that the distributions we
receive from the nitrogen fertilizer business will be volatile
and will vary quarterly and annually.
The nitrogen
fertilizer business operations are dependent on
third-party suppliers, including Linde, which owns an air
separation plant that provides oxygen, nitrogen and compressed
dry air to its gasifiers, and the City of Coffeyville, which
supplies the nitrogen fertilizer business with electricity. A
deterioration in the financial condition of a third-party
supplier, a mechanical problem with the air separation plant, or
the inability of a third-party supplier to perform in accordance
with its contractual obligations could have a material adverse
effect on our results of operations, financial condition and
cash flows.
The operations of the nitrogen fertilizer business depend in
large part on the performance of third-party suppliers,
including Linde for the supply of oxygen, nitrogen and
compressed dry air, and the City of Coffeyville for the supply
of electricity. With respect to Linde, operations could be
adversely affected if there were a deterioration in Lindes
financial condition such that the operation of the air
separation plant located adjacent to the nitrogen fertilizer
plant was disrupted. Additionally, this air separation plant in
the past has experienced numerous short-term interruptions,
causing interruptions in gasifier operations. With respect to
electricity, the nitrogen fertilizer business recently settled
litigation with the City of Coffeyville regarding the price they
sought to charge the nitrogen fertilizer business for
electricity and entered into an amended and restated electric
services agreement which gives the nitrogen fertilizer business
an option to extend the term of such agreement through
June 30, 2024. Should Linde, the City of Coffeyville or any
of its other third-party suppliers fail to perform in accordance
with existing contractual arrangements, operations could be
forced to halt. Alternative sources of supply could be difficult
to obtain. Any shutdown of operations at the nitrogen fertilizer
plant, even for a limited period, could have a material adverse
effect on our results of operations, financial condition and
cash flows.
8
The nitrogen
fertilizer business results of operations, financial
condition and cash flows may be adversely affected by the supply
and price levels of pet coke.
The profitability of the nitrogen fertilizer business is
directly affected by the price and availability of pet coke
obtained from our Coffeyville refinery pursuant to a long-term
agreement and pet coke purchased from third parties, both of
which vary based on market prices. Pet coke is a key raw
material used by the nitrogen fertilizer business in the
manufacture of nitrogen fertilizer products. If pet coke costs
increase, the nitrogen fertilizer business may not be able to
increase its prices to recover these increased costs, because
market prices for nitrogen fertilizer products are not
correlated with pet coke prices.
The nitrogen fertilizer business may not be able to maintain an
adequate supply of pet coke. In addition, it could experience
production delays or cost increases if alternative sources of
supply prove to be more expensive or difficult to obtain. The
nitrogen fertilizer business currently purchases 100% of the pet
coke the refinery produces. Accordingly, if the nitrogen
fertilizer business increases production, it will be more
dependent on pet coke purchases from third-party suppliers at
open market prices. There is no assurance that the nitrogen
fertilizer business would be able to purchase pet coke on
comparable terms from third parties or at all.
The nitrogen
fertilizer business relies on third-party providers of
transportation services and equipment, which subjects it to
risks and uncertainties beyond its control that may have a
material adverse effect on our results of operations, financial
condition and cash flows.
The nitrogen fertilizer business relies on railroad and trucking
companies to ship finished products to its customers. The
nitrogen fertilizer business also leases railcars from railcar
owners in order to ship its finished products. These
transportation operations, equipment and services are subject to
various hazards, including extreme weather conditions, work
stoppages, delays, spills, derailments and other accidents and
other operating hazards.
These transportation operations, equipment and services are also
subject to environmental, safety and other regulatory oversight.
Due to concerns related to terrorism or accidents, local, state
and federal governments could implement new regulations
affecting the transportation of the nitrogen fertilizer
business finished products. In addition, new regulations
could be implemented affecting the equipment used to ship its
finished products.
Any delay in the nitrogen fertilizer business ability to
ship its finished products as a result of these transportation
companies failure to operate properly, the implementation
of new and more stringent regulatory requirements affecting
transportation operations or equipment, or significant increases
in the cost of these services or equipment could have a material
adverse effect on our results of operations, financial condition
and cash flows.
The nitrogen
fertilizer business results of operations are highly
dependent upon and fluctuate based upon business and economic
conditions and governmental policies affecting the agricultural
industry. These factors are outside of our control and may
significantly affect our profitability.
The nitrogen fertilizer business results of operations are
highly dependent upon business and economic conditions and
governmental policies affecting the agricultural industry, which
we cannot control. The agricultural products business can be
affected by a number of factors. The most important of these
factors in the United States are:
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weather patterns and field conditions (particularly during
periods of traditionally high nitrogen fertilizer consumption);
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quantities of nitrogen fertilizers imported to and exported from
North America;
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current and projected grain inventories and prices, which are
heavily influenced by U.S. exports and world-wide grain
markets; and
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U.S. governmental policies, including farm and biofuel
policies, which may directly or indirectly influence the number
of acres planted, the level of grain inventories, the mix of
crops planted or crop prices
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International market conditions, which are also outside of the
nitrogen fertilizer business control, may also
significantly influence its operating results. The international
market for nitrogen fertilizers is influenced by such factors as
the relative value of the U.S. dollar and its impact upon
the cost of importing nitrogen fertilizers, foreign agricultural
policies, the existence of, or changes in, import or foreign
currency exchange barriers in certain foreign markets, changes
in the hard currency demands of certain countries and other
regulatory policies of foreign governments, as well as the laws
and policies of the United States affecting foreign trade and
investment.
Ammonia can be
very volatile and extremely hazardous. Any liability for
accidents involving ammonia that cause severe damage to property
or injury to the environment and human health could have a
material adverse effect on our results of operations, financial
condition and cash flows. In addition, the costs of transporting
ammonia could increase significantly in the future.
The nitrogen fertilizer business manufactures, processes,
stores, handles, distributes and transports ammonia, which can
be very volatile and extremely hazardous. Major accidents or
releases involving ammonia could cause severe damage or injury
to property, the environment and human health, as well as a
possible disruption of supplies and markets. Such an event could
result in civil lawsuits, fines, penalties and regulatory
enforcement proceedings, all of which could lead to significant
liabilities. Any damage to persons, equipment or property or
other disruption of the ability of the nitrogen fertilizer
business to produce or distribute its products could result in a
significant decrease in operating revenues and significant
additional cost to replace or repair and insure its assets,
which could have a material adverse effect on our results of
operations, financial condition and cash flows. The nitrogen
fertilizer facility periodically experiences minor releases of
ammonia related to leaks from its equipment. It experienced more
significant ammonia releases in August 2007 due to the failure
of a high-pressure pump and in August and September 2010 due to
a heat exchanger leak and a UAN vessel rupture. Similar events
may occur in the future.
In addition, the nitrogen fertilizer business may incur
significant losses or costs relating to the operation of
railcars used for the purpose of carrying various products,
including ammonia. Due to the dangerous and potentially toxic
nature of the cargo, in particular ammonia, onboard railcars, a
railcar accident may result in fires, explosions and pollution.
These circumstances may result in sudden, severe damage or
injury to property, the environment and human health. In the
event of pollution, the nitrogen fertilizer business may be held
responsible even if it is not at fault and it complied with the
laws and regulations in effect at the time of the accident.
Litigation arising from accidents involving ammonia may result
in the nitrogen fertilizer business or us being named as a
defendant in lawsuits asserting claims for large amounts of
damages, which could have a material adverse effect on our
results of operations, financial condition and cash flows.
Given the risks inherent in transporting ammonia, the costs of
transporting ammonia could increase significantly in the future.
Ammonia is most typically transported by pipeline and railcar. A
number of initiatives are underway in the railroad and chemical
industries that may result in changes to railcar design in order
to minimize railway accidents involving hazardous materials. In
addition, in the future, laws may more severely restrict or
eliminate our ability to transport ammonia via railcar. If any
railcar design changes are implemented, or if accidents
10
involving hazardous freight increase the insurance and other
costs of railcars, freight costs of the nitrogen fertilizer
business could significantly increase.
Environmental
laws and regulations on fertilizer end-use and application and
numeric nutrient water quality criteria could have a material
adverse impact on fertilizer demand in the future.
Future environmental laws and regulations on the end-use and
application of fertilizers could cause changes in demand for the
nitrogen fertilizer business products. In addition, future
environmental laws and regulations, or new interpretations of
existing laws or regulations, could limit the ability of the
nitrogen fertilizer business to market and sell its products to
end users. From time to time, various state legislatures have
proposed bans or other limitations on fertilizer products. In
addition, a number of states have adopted or proposed numeric
nutrient water quality criteria that could result in decreased
demand for fertilizer products in those states. Similarly, a new
final rule of the EPA establishing numeric nutrient criteria for
certain Florida water bodies may require farmers to implement
best management practices, including the reduction of fertilizer
use, to reduce the impact of fertilizer on water quality. Any
such laws, regulations or interpretations could have a material
adverse effect on our results of operations, financial condition
and cash flows.
If licensed
technology were no longer available, the nitrogen fertilizer
business may be adversely affected.
The nitrogen fertilizer business has licensed, and may in the
future license, a combination of patent, trade secret and other
intellectual property rights of third parties for use in its
business. In particular, the gasification process it uses to
convert pet coke to high purity hydrogen for subsequent
conversion to ammonia is licensed from General Electric. The
license, which is fully paid, grants the nitrogen fertilizer
business perpetual rights to use the pet coke gasification
process on specified terms and conditions and is integral to the
operations of the nitrogen fertilizer facility. If this, or any
other license agreements on which the nitrogen fertilizer
business operations rely were to be terminated, licenses
to alternative technology may not be available, or may only be
available on terms that are not commercially reasonable or
acceptable. In addition, any substitution of new technology for
currently-licensed technology may require substantial changes to
manufacturing processes or equipment and may have a material
adverse effect on our results of operations, financial condition
and cash flows.
The nitrogen
fertilizer business may face third-party claims of intellectual
property infringement, which if successful could result in
significant costs.
Although there are currently no pending claims relating to the
infringement of any third-party intellectual property rights, in
the future the nitrogen fertilizer business may face claims of
infringement that could interfere with its ability to use
technology that is material to its business operations. Any
litigation of this type, whether successful or unsuccessful,
could result in substantial costs and diversions of resources,
which could have a material adverse effect on our results of
operations, financial condition and cash flows. In the event a
claim of infringement against the nitrogen fertilizer business
is successful, it may be required to pay royalties or license
fees for past or continued use of the infringing technology, or
it may be prohibited from using the infringing technology
altogether. If it is prohibited from using any technology as a
result of such a claim, it may not be able to obtain licenses to
alternative technology adequate to substitute for the technology
it can no longer use, or licenses for such alternative
technology may only be available on terms that are not
commercially reasonable or acceptable. In addition, any
substitution of new technology for currently licensed technology
may require the nitrogen fertilizer business to make substantial
changes to its manufacturing
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processes or equipment or to its products, and could have a
material adverse effect on our results of operations, financial
condition and cash flows.
There can be no
assurance that the transportation costs of the nitrogen
fertilizer business competitors will not
decline.
The nitrogen fertilizer plant is located within the
U.S. farm belt, where the majority of the end users of its
nitrogen fertilizer products grow their crops. Many of its
competitors produce fertilizer outside of this region and incur
greater costs in transporting their products over longer
distances via rail, ships and pipelines. There can be no
assurance that competitors transportation costs will not
decline or that additional pipelines will not be built, lowering
the price at which competitors can sell their products, which
would have a material adverse effect on our results of
operations, financial condition, and cash flows.
Risks Related to
Our Entire Business
Instability and
volatility in the capital, credit and commodity markets in the
global economy could negatively impact our business, financial
condition, results of operations and cash flows.
The global capital and credit markets experienced extreme
volatility and disruption in 2009 and 2010. Our business,
financial condition and results of operations could be
negatively impacted by difficult conditions and extreme
volatility in the capital, credit and commodities markets and in
the global economy. These factors, combined with volatile oil
prices, declining business and consumer confidence and increased
unemployment, precipitated an economic recession in the
U.S. and globally during 2009 and 2010. The difficult
conditions in these markets and the overall economy affect us in
a number of ways. For example:
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Although we believe we will have sufficient liquidity under our
ABL Credit Facility following the exercise of the
$150.0 million incremental facility to operate both the
Coffeyville and Wynnewood refineries, and that the nitrogen
fertilizer business will have sufficient liquidity under its
credit facility to run the nitrogen fertilizer business, under
extreme market conditions there can be no assurance that such
funds would be available or sufficient, and in such a case, we
may not be able to successfully obtain additional financing on
favorable terms, or at all.
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Market volatility could exert downward pressure on our stock
price, which may make it more difficult for us to raise
additional capital and thereby limit our ability to grow.
Similarly, market volatility could exert downward pressure on
the price of the Partnerships common units, which may make
it more difficult for the Partnership to raise additional
capital and thereby limit its ability to grow.
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Our ABL Credit Facility, the indentures governing the notes, and the
nitrogen fertilizer business credit facility contain
various covenants that must be complied with, and if we or the
Partnership are not in compliance, there can be no assurance
that we or the Partnership would be able to successfully amend
the agreement in the future. Further, any such amendment could
be very expensive.
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Market conditions could result in our significant customers
experiencing financial difficulties. We are exposed to the
credit risk of our customers, and their failure to meet their
financial obligations when due because of bankruptcy, lack of
liquidity, operational failure or other reasons could result in
decreased sales and earnings for us.
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Our refineries
and the nitrogen fertilizer facility face operating hazards and
interruptions, including unscheduled maintenance or downtime. We
could face potentially significant costs to the extent these
hazards or interruptions cause a material decline in production
and are not fully covered by our existing insurance coverage.
Insurance companies that currently insure companies in the
energy industry may cease to do so, may change the coverage
provided or may substantially increase premiums in the
future.
Our operations are subject to significant operating hazards and
interruptions. If any of our facilities, including our
Coffeyville or Wynnewood refineries or the nitrogen fertilizer
plant, experiences a major accident or fire, is damaged by
severe weather, flooding or other natural disaster, or is
otherwise forced to significantly curtail its operations or shut
down, we could incur significant losses which could have a
material adverse effect on our results of operations, financial
condition and cash flows. Conducting the majority of our
refining operations and all of our fertilizer manufacturing at a
single location compounds such risks.
Operations at either or both of our refineries and the nitrogen
fertilizer plant could be curtailed or partially or completely
shut down, temporarily or permanently, as the result of a number
of circumstances, most of which are not within our control, such
as:
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unscheduled maintenance or catastrophic events such as a major
accident or fire, damage by severe weather, flooding or other
natural disaster;
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labor difficulties that result in a work stoppage or slowdown;
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environmental proceedings or other litigation that compel the
cessation of all or a portion of the operations; and
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increasingly stringent environmental regulations.
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The magnitude of the effect on us of any shutdown will depend on
the length of the shutdown and the extent of the plant
operations affected by the shutdown. Our refineries require a
scheduled maintenance turnaround every four to five years for
each unit, and the nitrogen fertilizer plant requires a
scheduled maintenance turnaround every two years. A major
accident, fire, flood, or other event could damage our
facilities or the environment and the surrounding community or
result in injuries or loss of life. For example, the flood that
occurred during the weekend of June 30, 2007 shut down our
Coffeyville refinery for seven weeks, shut down the nitrogen
fertilizer facility for approximately two weeks and required
significant expenditures to repair damaged equipment. In
addition, the nitrogen fertilizer business UAN plant was
out of service for approximately six weeks after the rupture of
a high pressure vessel in September 2010, which required
significant expenditures to repair. Our Coffeyville refinery
experienced an equipment malfunction and small fire in
connection with its fluid catalytic cracking unit in
December 28, 2010, which led to reduced crude throughput
for approximately one month and required significant
expenditures to repair. Similarly, the Wynnewood refinery
experienced a small explosion and fire in its hydrocracker
process unit due to metal failure also in December 2010.
Scheduled and unscheduled maintenance could reduce our net
income and cash flows during the period of time that any of our
units is not operating. Any unscheduled future downtime could
have a material adverse effect on our results of operations,
financial condition and cash flows.
If we experience significant property damage, business
interruption, environmental claims or other liabilities, our
business could be materially adversely affected to the extent
the damages or claims exceed the amount of valid and collectible
insurance available to us. CVR Energys property and
business interruption insurance policies (which also cover the
Partnership) have a $1.0 billion limit, with a
$2.5 million deductible for physical damage and a 45- to
60-day
waiting period (depending on the insurance carrier) before
losses resulting from business interruptions are recoverable. We
are fully exposed to all losses in excess of the
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applicable limits and
sub-limits
and for losses due to business interruptions of fewer than 45 to
60 days. GWEC has in place property and business
interruption insurance policies with an $800.0 million
limit, with a $10.0 million deductible for physical damage
and a 75-day
waiting period. We expect these policies to remain in place
immediately after closing. The policies also contain exclusions
and conditions that could have a materially adverse impact on
our ability to receive indemnification thereunder, as well as
customary
sub-limits
for particular types of losses. For example, CVR Energys
current property policy contains a specific
sub-limit of
$150.0 million for damage caused by flooding.
The energy and nitrogen fertilizer industries are highly capital
intensive, and the entire or partial loss of individual
facilities can result in significant costs to both industry
participants, such as us, and their insurance carriers. In
recent years, several large energy industry claims have resulted
in significant increases in the level of premium costs and
deductible periods for participants in the energy industry. For
example, during 2005, Hurricanes Katrina and Rita caused
significant damage to several petroleum refineries along the
U.S. Gulf Coast, in addition to numerous oil and gas
production facilities and pipelines in that region. As a result
of large energy industry insurance claims, insurance companies
that have historically participated in underwriting energy
related facilities could discontinue that practice or demand
significantly higher premiums or deductibles to cover these
facilities. Although we currently maintain significant amounts
of insurance, insurance policies are subject to annual renewal.
If significant changes in the number or financial solvency of
insurance underwriters for the energy industry occur, we may be
unable to obtain and maintain adequate insurance at a reasonable
cost or we might need to significantly increase our retained
exposures.
Environmental
laws and regulations could require us to make substantial
capital expenditures to remain in compliance or to remediate
current or future contamination that could give rise to material
liabilities.
Our operations are subject to a variety of federal, state and
local environmental laws and regulations relating to the
protection of the environment, including those governing the
emission or discharge of pollutants into the environment,
product specifications and the generation, treatment, storage,
transportation, disposal and remediation of solid and hazardous
waste and materials. Violations of these laws and regulations or
permit conditions can result in substantial penalties,
injunctive orders compelling installation of additional
controls, civil and criminal sanctions, permit revocations
and/or
facility shutdowns.
In addition, new environmental laws and regulations, new
interpretations of existing laws and regulations, increased
governmental enforcement of laws and regulations or other
developments could require us to make additional unforeseen
expenditures. Many of these laws and regulations are becoming
increasingly stringent, and the cost of compliance with these
requirements can be expected to increase over time. The
requirements to be met, as well as the technology and length of
time available to meet those requirements, continue to develop
and change. These expenditures or costs for environmental
compliance could have a material adverse effect on our results
of operations, financial condition and profitability.
Our facilities operate under a number of federal and state
permits, licenses and approvals with terms and conditions
containing a significant number of prescriptive limits and
performance standards in order to operate. Our facilities are
also required to comply with prescriptive limits and meet
performance standards specific to refining
and/or
chemical facilities as well as to general manufacturing
facilities. All of these permits, licenses, approvals and
standards require a significant amount of monitoring, record
keeping and reporting in order to demonstrate compliance with
the underlying permit, license, approval or standard. Incomplete
documentation of compliance status may result in the imposition
of fines, penalties and injunctive relief. Additionally, due to
the nature of our manufacturing and refining processes, there
may be times when we are unable to meet the standards and terms
and conditions of
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these permits and licenses due to operational upsets or
malfunctions, which may lead to the imposition of fines and
penalties or operating restrictions that may have a material
adverse effect on our ability to operate our facilities and
accordingly our financial performance.
Our businesses are subject to the occurrence of accidental
spills, discharges or other releases of petroleum or hazardous
substances into the environment. Past or future spills related
to any of our current or former operations, including our
refineries, pipelines, product terminals, fertilizer plant or
transportation of products or hazardous substances from those
facilities, may give rise to liability (including strict
liability, or liability without fault, and potential cleanup
responsibility) to governmental entities or private parties
under federal, state or local environmental laws, as well as
under common law. For example, we could be held strictly liable
under the Comprehensive Environmental Response, Compensation and
Liability Act, or CERCLA, and similar state statutes for past or
future spills without regard to fault or whether our actions
were in compliance with the law at the time of the spills.
Pursuant to CERCLA and similar state statutes, we could be held
liable for contamination associated with facilities we currently
own or operate (whether or not such contamination occurred prior
to our acquisition thereof), facilities we formerly owned or
operated (if any) and facilities to which we transported or
arranged for the transportation of wastes or byproducts
containing hazardous substances for treatment, storage, or
disposal.
The potential penalties and cleanup costs for past or future
releases or spills, liability to third parties for damage to
their property or exposure to hazardous substances, or the need
to address newly discovered information or conditions that may
require response actions could be significant and could have a
material adverse effect on our results of operations, financial
condition and cash flows. In addition, we may incur liability
for alleged personal injury or property damage due to exposure
to chemicals or other hazardous substances located at or
released from our facilities. We may also face liability for
personal injury, property damage, natural resource damage or for
cleanup costs for the alleged migration of contamination or
other hazardous substances from our facilities to adjacent and
other nearby properties.
In March 2004, Coffeyville Resources Refining &
Marketing, LLC, or CRRM, and Coffeyville Resources Terminal,
LLC, or CRT entered into a Consent Decree, or the Coffeyville
Consent Decree, with the EPA and the Kansas Department of Health
and Environment, or the KDHE, to address certain allegations of
Clean Air Act violations by Farmland (the prior owner) at our
Coffeyville refinery and now-closed Phillipsburg terminal
facility in order to address the alleged violations and
eliminate liabilities going forward. The remaining costs of
complying with the Coffeyville Consent Decree are expected to be
approximately $49 million, which does not include the
cleanup obligations for historic contamination at the site that
are being addressed pursuant to administrative orders issued
under the Resource Conservation and Recovery Act, or RCRA, and
described in BusinessEnvironmental
MattersRCRAImpacts of Past Manufacturing. To
date, we have materially complied with the Consent Decree and
have not had to pay any stipulated penalties, which are required
to be paid for failure to comply with various terms and
conditions of the Coffeyville Consent Decree. As described in
BusinessEnvironmental MattersThe Federal Clean
Air Act, we and the EPA agreed to extend the
refinerys deadline under the Coffeyville Consent Decree to
install certain air pollution controls on its FCCU due to delays
caused by the June/July 2007 flood. Pursuant to this agreement,
we would offset any incremental emissions resulting from the
delay by providing additional controls to existing emission
sources over a set timeframe. We have been negotiating with the
EPA and KDHE to replace the current Coffeyville Consent Decree,
including the fifteen month extension, with a global settlement
under the national Petroleum Refining Initiative.
The Wynnewood Refining Company , or WRC, entered into a consent
order, or the Wynnewood Consent Order, with the Oklahoma
Department of Environmental Quality, or ODEQ, in August 2011
addressing some, but not all of the traditional marquee issues
under the EPAs National Petroleum Refining Initiative and
addressing certain historic Clean Air Act
15
compliance issues that are generally beyond the scope of a
traditional global settlement. Under the Wynnewood Consent
Order, WRC agreed to pay a civil penalty, install certain
controls, enhance certain compliance programs, and undertake
additional testing and auditing. The costs of complying with the
Wynnewood Consent Order, other than costs associated with a
planned turnaround, are expected to be approximately
$1.5 million. A number of factors could affect our ability
to meet the requirements imposed by either the Coffeyville
Consent Decree or the Wynnewood Consent Order and could have a
material adverse effect on our results of operations, financial
condition and profitability.
Three of our facilities, including our Coffeyville refinery, the
now-closed Phillipsburg terminal (which operated as a refinery
until 1991), and the Wynnewood refinery have environmental
contamination. We have assumed Farmlands responsibilities
under certain RCRA administrative orders related to
contamination at or that originated from the Coffeyville
refinery (which includes portions of the nitrogen fertilizer
plant) and the Phillipsburg terminal. The Wynnewood refinery is
required to conduct investigations to address potential off-site
migration of contaminants from the west side of the property.
Other known areas of contamination at the Wynnewood refinery
have been partially addressed but corrective action has not been
completed, and portions of the Wynnewood refinery have not yet
been investigated to determine whether corrective action is
necessary. If significant unknown liabilities are identified at
any of our facilities, that liability could have a material
adverse effect on our results of operations and financial
condition and may not be covered by insurance.
We may incur future costs relating to the off-site disposal of
hazardous wastes. Companies that dispose of, or arrange for the
transportation or disposal of, hazardous substances at off-site
locations may be held jointly and severally liable for the costs
of investigation and remediation of contamination at those
off-site locations, regardless of fault. We could become
involved in litigation or other proceedings involving off-site
waste disposal and the damages or costs in any such proceedings
could be material.
We may be unable
to obtain or renew permits necessary for our operations, which
could inhibit our ability to do business.
We hold numerous environmental and other governmental permits
and approvals authorizing operations at our facilities. Future
expansion of our operations is also predicated upon securing the
necessary environmental or other permits or approvals. A
decision by a government agency to deny or delay issuing a new
or renewed material permit or approval, or to revoke or
substantially modify an existing permit or approval, could have
a material adverse effect on our ability to continue operations
and on our financial condition, results of operations and cash
flows.
Climate change
laws and regulations could have a material adverse effect on our
results of operations, financial condition, and cash
flows.
Various regulatory and legislative measures to address
greenhouse gas emissions (including
CO2,
methane and nitrous oxides) are in different phases of
implementation or discussion. In the aftermath of its 2009
endangerment finding that greenhouse gas emissions
pose a threat to human health and welfare, the EPA has begun to
regulate greenhouse gas emissions under the authority granted to
it under the Clean Air Act. In October 2009, the EPA finalized a
rule requiring certain large emitters of greenhouse gases to
inventory and annually report their greenhouse gas emissions to
the EPA. In accordance with the rule, we have begun monitoring
our greenhouse gas emissions and have already reported the
emissions to the EPA for the year ended 2010. In May 2010, the
EPA finalized the Greenhouse Gas Tailoring Rule,
which established new greenhouse gas emissions thresholds that
determine when stationary sources, such as the refineries and
the nitrogen fertilizer plant, must obtain permits under
Prevention of Significant Deterioration, or PSD, and
Title V programs of the federal Clean Air Act. The
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significance of the permitting requirement is that, in cases
where a new source is constructed or an existing source
undergoes a major modification, the facility would need to
evaluate and install best available control technology, or BACT,
to control greenhouse gas emissions. Beginning in July 2011, a
major modification resulting in a significant increase in
greenhouse gas emissions at our nitrogen fertilizer plant or
refineries may require the installation of BACT controls. We do
not believe that any currently anticipated projects at our
facilities will result in a significant increase in greenhouse
gas emissions triggering the need to install BACT controls. The
EPAs endangerment finding, Greenhouse Gas Tailoring Rule
and certain other greenhouse gas emission rules have been
challenged and will likely be subject to extensive litigation.
In the meantime, in December 2010, the EPA reached a settlement
agreement with numerous parties under which it agreed to
promulgate final decisions on New Source Performance Standards
for petroleum refineries by November 2012.
At the federal legislative level, Congressional passage of
legislation adopting some form of federal mandatory greenhouse
gas emission reduction, such as a nationwide
cap-and-trade
program, does not appear likely at this time, although it could
be adopted at a future date. It is also possible that Congress
may pass alternative climate change bills that do not mandate a
nationwide
cap-and-trade
program and instead focus on promoting renewable energy and
energy efficiency.
In addition to potential federal legislation, a number of states
have adopted regional greenhouse gas initiatives to reduce
CO2
and other greenhouse gas emissions. In 2007, a group of Midwest
states, including Kansas (where our Coffeyville refinery and the
nitrogen fertilizer facility are located), formed the Midwestern
Greenhouse Gas Reduction Accord, which calls for the development
of a
cap-and-trade
system to control greenhouse gas emissions and for the inventory
of such emissions. However, the individual states that have
signed on to the accord must adopt laws or regulations
implementing the trading scheme before it becomes effective, and
the timing and specific requirements of any such laws or
regulations in Kansas are uncertain at this time.
The implementation of EPA greenhouse gas regulations or
potential federal, state or regional programs to reduce
greenhouse gas emissions will result in increased costs to
(i) operate and maintain our facilities, (ii) install
new emission controls on our facilities and
(iii) administer and manage any greenhouse gas emissions
program. Increased costs associated with compliance with any
future legislation or regulation of greenhouse gas emissions, if
it occurs, may have a material adverse effect on our results of
operations, financial condition and cash flows.
In addition, climate change legislation and regulations may
result in increased costs not only for our business but also for
users of our refined and fertilizer products, thereby
potentially decreasing demand for our products. Decreased demand
for our products may have a material adverse effect on our
results of operations, financial condition and cash flows.
We are subject to
strict laws and regulations regarding employee and process
safety, and failure to comply with these laws and regulations
could have a material adverse effect on our results of
operations, financial condition and profitability.
We are subject to the requirements of the federal Occupational
Safety and Health Act, or OSHA, and comparable state statutes
that regulate the protection of the health and safety of
workers. In addition, OSHA and certain environmental regulations
require that we maintain information about hazardous materials
used or produced in our operations and that we provide this
information to employees and state and local governmental
authorities. Failure to comply with these requirements,
including general industry standards, record keeping
requirements and monitoring and control of occupational exposure
to regulated substances, could have a material adverse effect on
our results of operations, financial condition and cash flows if
we are subjected to significant fines or compliance costs.
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\
Both the
petroleum and nitrogen fertilizer businesses depend on
significant customers and the loss of one or several significant
customers may have a material adverse impact on our results of
operations and financial condition.
The petroleum and nitrogen fertilizer businesses both have a
high concentration of customers. The five largest customers of
the Coffeyville refinery represented 47.6% of our petroleum
sales for the year ended December 31, 2010, and the five
largest customers of the Wynnewood refinery represented
approximately 34% of GWECs sales for the year ended
December 31, 2010. Further in the aggregate, the top five
ammonia customers of the nitrogen fertilizer business
represented 44.2% of its ammonia sales for the year ended
December 31, 2010 and the top five UAN customers of the
nitrogen fertilizer business represented 43.3% of its UAN sales
for the same period. Several significant petroleum, ammonia and
UAN customers each account for more than 10% of sales of
petroleum, ammonia and UAN, respectively. Given the nature of
our business, and consistent with industry practice, we do not
have long-term minimum purchase contracts with any of our
customers. The loss of one or several of these significant
customers, or a significant reduction in purchase volume by any
of them, could have a material adverse effect on our results of
operations, financial condition and cash flows.
The acquisition
and expansion strategy of our petroleum business and the
nitrogen fertilizer business involves significant
risks.
Both our petroleum business and the nitrogen fertilizer business
will consider pursuing acquisitions and expansion projects in
order to continue to grow and increase profitability. However,
acquisitions and expansions involve numerous risks and
uncertainties, including intense competition for suitable
acquisition targets, the potential unavailability of financial
resources necessary to consummate acquisitions and expansions,
difficulties in identifying suitable acquisition targets and
expansion projects or in completing any transactions identified
on sufficiently favorable terms and the need to obtain
regulatory or other governmental approvals that may be necessary
to complete acquisitions and expansions. In addition, any future
acquisitions and expansions may entail significant transaction
costs and risks associated with entry into new markets and lines
of business.
The nitrogen fertilizer business is in the process of expanding
its nitrogen fertilizer plant using a portion of the proceeds
from the Partnerships April 2011 initial public offering,
which is expected to allow it the flexibility to upgrade all of
its ammonia production to UAN. This expansion is premised in
large part on the historically higher margin that it has
received for UAN compared to ammonia. If the premium that UAN
currently earns over ammonia decreases, this expansion project
may not yield the economic benefits and accretive effects that
are currently anticipated.
In addition to the risks involved in identifying and completing
acquisitions described above, even when acquisitions are
completed, integration of acquired entities can involve
significant difficulties, such as:
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unforeseen difficulties in the acquired operations and
disruption of the ongoing operations of our petroleum business
and the nitrogen fertilizer business;
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failure to achieve cost savings or other financial or operating
objectives with respect to an acquisition;
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strain on the operational and managerial controls and procedures
of our petroleum business and the nitrogen fertilizer business,
and the need to modify systems or to add management resources;
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difficulties in the integration and retention of customers or
personnel and the integration and effective deployment of
operations or technologies;
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assumption of unknown material liabilities or regulatory
non-compliance issues;
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amortization of acquired assets, which would reduce future
reported earnings;
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possible adverse short-term effects on our cash flows or
operating results; and
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diversion of managements attention from the ongoing
operations of our business.
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In addition, in connection with any potential acquisition or
expansion project involving the nitrogen fertilizer business,
the nitrogen fertilizer business will need to consider whether
the business it intends to acquire or expansion project it
intends to pursue could affect the nitrogen fertilizer
business tax treatment as a partnership for federal income
tax purposes. If the nitrogen fertilizer business is otherwise
unable to conclude that the activities of the business being
acquired or the expansion project would not affect the
Partnerships treatment as a partnership for federal income
tax purposes, the nitrogen fertilizer business may elect to seek
a ruling from the Internal Revenue Service, or the IRS. Seeking
such a ruling could be costly or, in the case of competitive
acquisitions, place the nitrogen fertilizer business in a
competitive disadvantage compared to other potential acquirers
who do not need to seek such a ruling. If the nitrogen
fertilizer business is unable to conclude that an activity would
not affect its treatment as a partnership for federal income tax
purposes, and is unable or unwilling to obtain an IRS ruling,
the nitrogen fertilizer business may choose to acquire such
business or develop such expansion project in a corporate
subsidiary, which would subject the income related to such
activity to entity-level taxation.
Failure to manage these acquisition and expansion growth risks
could have a material adverse effect on our results of
operations, financial condition and cash flows. There can be no
assurance that we will be able to consummate any acquisitions or
expansions, successfully integrate acquired entities, or
generate positive cash flow at any acquired company or expansion
project.
We are a holding
company and depend upon our subsidiaries for our cash
flow.
CRLLC is a holding company, and its subsidiaries conduct all of
our operations and own substantially all of our assets.
Consequently, our cash flow and our ability to meet our
obligations in the future will depend upon the cash flow of our
subsidiaries and the payment of funds by our subsidiaries to us
in the form of dividends, tax sharing payments or otherwise.
Furthermore, in future periods, as a result of the April 2011
initial public offering of the Partnership, public unitholders
will be entitled to approximately 30% of the available cash
generated by the nitrogen fertilizer business. The ability of
our subsidiaries (including the Partnership) to make any
payments to us will depend on their earnings, the terms of their
indebtedness, tax considerations and legal restrictions. In
particular, the Partnerships credit facility currently
imposes significant limitations on its ability to make
distributions to us to pay principal and interest on the notes.
Our internally
generated cash flows and other sources of liquidity may not be
adequate for our capital needs.
If we cannot generate adequate cash flow or otherwise secure
sufficient liquidity to meet our working capital needs or
support our short-term and long-term capital requirements, we
may be unable to meet our debt obligations, pursue our business
strategies or comply with certain environmental standards, which
would have a material adverse effect on our business and results
of operations. As of September 30, 2011, we had cash and
cash equivalents of $898.5 million and $223.8 million
available under our ABL Credit Facility (net of
$26.2 million of outstanding letters of credit). Crude oil price volatility can significantly impact working capital on a
week-to-week
and
month-to-month
basis.
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A substantial
portion of our workforce is unionized and we are subject to the
risk of labor disputes and adverse employee relations, which may
disrupt our business and increase our costs.
As of September 30, 2011, approximately 61% of the
employees at the Coffeyville refinery and 65% of the employees
at the Wynnewood refinery were represented by labor unions under
collective bargaining agreements. At Coffeyville, the collective
bargaining agreement with six Metal Trades Unions (which covers
union members who work directly at the Coffeyville refinery) is
effective through March 2013, and the collective bargaining
agreement with United Steelworkers (which covers the
balance of CVR Energys unionized employees, who work in
the terminalling and related operations) is effective through
March 2012, and automatically renews on an annual basis
thereafter unless a written notice is received sixty days in
advance of the relevant expiration date. The collective
bargaining agreement with the International Union of Operating
Engineers with respect to the Wynnewood refinery expires in June
2012. We may not be able to renegotiate our collective
bargaining agreements when they expire on satisfactory terms or
at all. A failure to do so may increase our costs. In addition,
our existing labor agreements may not prevent a strike or work
stoppage at any of our facilities in the future, and any work
stoppage could negatively affect our results of operations and
financial condition.
Our business may
suffer if any of our key senior executives or other key
employees discontinues employment with us. Furthermore, a
shortage of skilled labor or disruptions in our labor force may
make it difficult for us to maintain labor
productivity.
Our future success depends to a large extent on the services of
our key senior executives and key senior employees, including
new employees as a result of the Acquisition. Our business
depends on our continuing ability to recruit, train and retain
highly qualified employees in all areas of our operations,
including accounting, business operations, finance and other key
back-office and mid-office personnel. Furthermore, our
operations require skilled and experienced employees with
proficiency in multiple tasks. In particular, the nitrogen
fertilizer facility relies on gasification technology that
requires special expertise to operate efficiently and
effectively. The competition for these employees is intense, and
the loss of these executives or employees could harm our
business. If any of these executives or other key personnel
resign or become unable to continue in their present roles and
are not adequately replaced, our business operations could be
materially adversely affected. We do not maintain any key
man life insurance for any executives.
New regulations
concerning the transportation of hazardous chemicals, risks of
terrorism and the security of chemical manufacturing facilities
could result in higher operating costs.
The costs of complying with regulations relating to the
transportation of hazardous chemicals and security associated
with the refining and nitrogen fertilizer facilities may have a
material adverse effect on our results of operations, financial
condition and cash flows. Targets such as refining and chemical
manufacturing facilities may be at greater risk of future
terrorist attacks than other targets in the United States. As a
result, the petroleum and chemical industries have responded to
the issues that arose due to the terrorist attacks on
September 11,
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2001 by starting new initiatives relating to the security of
petroleum and chemical industry facilities and the
transportation of hazardous chemicals in the United States.
Future terrorist attacks could lead to even stronger, more
costly initiatives. Simultaneously, local, state and federal
governments have begun a regulatory process that could lead to
new regulations impacting the security of refinery and chemical
plant locations and the transportation of petroleum and
hazardous chemicals. Our business could be materially adversely
affected by the cost of complying with new regulations.
Compliance with
and changes in the tax laws could adversely affect our
performance.
We are subject to extensive tax liabilities, including United
States and state income taxes and transactional taxes such as
excise, sales/use, payroll, franchise and withholding taxes. New
tax laws and regulations are continuously being enacted or
proposed that could result in increased expenditures for tax
liabilities in the future.
Risks Related to
Our Indebtedness
Our significant
indebtedness may affect our ability to operate our business, and
may have a material adverse effect on our financial condition
and results of operations.
As of September 30, 2011, we had outstanding
$247.1 million of existing first lien notes,
$222.8 million of existing second lien notes, and
$26.2 million of issued but undrawn letters of credit
(leaving borrowing availability of $223.8 million under the
ABL Credit Facility), and Coffeyville Resources Nitrogen
Fertilizers, our consolidated subsidiary that operates the
nitrogen fertilizer plant, had $125.0 million in
outstanding term loan borrowings and borrowing availability of
$25.0 million under its revolving credit facility.
We and our subsidiaries may be able to incur significant
additional indebtedness in the future. If new indebtedness is
added to our current indebtedness, the risks described below
could increase. Our high level of indebtedness could have
important consequences, such as:
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limiting our ability to obtain additional financing to fund our
working capital needs, capital expenditures, debt service
requirements, acquisitions or for other purposes;
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limiting our ability to use operating cash flow in other areas
of our business because we must dedicate a substantial portion
of these funds to service debt;
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limiting our ability to compete with other companies who are not
as highly leveraged, as we may be less capable of responding to
adverse economic and industry conditions;
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restricting us from making strategic acquisitions, introducing
new technologies or exploiting business opportunities;
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restricting the way in which we conduct our business because of
financial and operating covenants in the agreements governing
our and our subsidiaries existing and future indebtedness,
including, in the case of certain indebtedness of subsidiaries,
certain covenants that restrict the ability of subsidiaries to
pay dividends or make other distributions to us;
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exposing us to potential events of default (if not cured or
waived) under financial and operating covenants contained in our
or our subsidiaries debt instruments that could have a
material adverse effect on our business, financial condition and
operating results;
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increasing our vulnerability to a downturn in general economic
conditions or in pricing of our products; and
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limiting our ability to react to changing market conditions in
our industry and in our customers industries.
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In addition, borrowings under the ABL Credit Facility and the
Partnerships credit facility bear interest at variable
rates. If market interest rates increase, such variable-rate
debt will create higher debt service requirements, which could
adversely affect our cash flow.
Furthermore, changes in our credit ratings may affect the way
crude oil and feedstock suppliers view our ability to make
payments and may induce them to shorten the payment terms of
their invoices. Given the large dollar amounts and volume of our
feedstock purchases, a change in payment terms may have a
material adverse effect on the amount of our liabilities and our
ability to make payments to our suppliers.
In addition to our debt service obligations, our operations
require substantial investments on a continuing basis. Our
ability to make scheduled debt payments, to refinance our
obligations with respect to our indebtedness and to fund capital
and non-capital expenditures necessary to maintain the condition
of our operating assets, properties and systems software, as
well as to provide capacity for the growth of our business,
depends on our financial and operating performance, which, in
turn, is subject to prevailing economic conditions and
financial, business, competitive, legal and other factors.
In addition, we are and will be subject to covenants contained
in agreements governing our present and future indebtedness.
These covenants include, and will likely include, restrictions
on certain payments, the granting of liens, the incurrence of
additional indebtedness, dividend restrictions affecting
subsidiaries, asset sales, transactions with affiliates and
mergers and consolidations. Any failure to comply with these
covenants could result in a default under the ABL Credit
Facility and the Partnerships credit facility. Upon a
default, unless waived, the lenders under the ABL Credit
Facility and the Partnerships credit facility would have
all remedies available to a secured lender, and could elect to
terminate their commitments, cease making further loans,
institute foreclosure proceedings against our or our
subsidiaries assets, and force us and our subsidiaries
into bankruptcy or liquidation, subject to the intercreditor
agreements. In addition, any defaults could trigger cross
defaults under other or future credit agreements. Our operating
results may not be sufficient to service our indebtedness or to
fund our other expenditures and we may not be able to obtain
financing to meet these requirements.
We may not be
able to generate sufficient cash to service all of our
indebtedness, including the notes, and may be forced to take
other actions to satisfy our obligations under our indebtedness
that may not be successful.
Our ability to satisfy our debt obligations will depend upon,
among other things:
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our future financial and operating performance, which will be
affected by prevailing economic conditions and financial,
business, regulatory and other factors, many of which are beyond
our control; and
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our future ability to borrow under the ABL Credit Facility, the
availability of which depends on, among other things, our
complying with the covenants in the ABL Credit Facility.
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We cannot assure you that our business will generate sufficient
cash flow from operations, or that we will be able to draw under
the ABL Credit Facility or otherwise, in an amount sufficient to
fund our liquidity needs. In addition, our board of directors may
in the future elect to pay a special or regular dividend, engage in
share repurchases or pursue other strategic options including
acquisitions of other business or asset purchases, which would reduce cash
available to service our debt obligations.
22
If our cash flows and capital resources are insufficient to
service our indebtedness, we may be forced to reduce or delay
capital expenditures, sell assets, seek additional capital or
restructure or refinance our indebtedness, including the notes.
These alternative measures may not be successful and may not
permit us to meet our scheduled debt service obligations. Our
ability to restructure or refinance our debt will depend on the
condition of the capital markets and our financial condition at
such time. Any refinancing of our debt could be at higher
interest rates and may require us to comply with more onerous
covenants, which could further restrict our business operations.
In addition, the terms of existing or future debt agreements may
restrict us from adopting some of these alternatives. In the
absence of such operating results and resources, we could face
substantial liquidity problems and might be required to dispose
of material assets or operations, sell equity,
and/or
negotiate with our lenders to restructure the applicable debt,
in order to meet our debt service and other obligations. We may
not be able to consummate those dispositions for fair market
value or at all. The ABL Credit Facility and the indentures
governing the notes may
restrict, or market or business conditions may limit, our
ability to avail ourselves of some or all of these options.
Furthermore, any proceeds that we could realize from any such
dispositions may not be adequate to meet our debt service
obligations then due. Neither CVR Energys shareholders nor
any of their respective affiliates has any continuing obligation
to provide us with debt or equity financing.
The borrowings under the ABL Credit Facility and CRNFs
credit facility bear interest at variable rates and other debt
we incur could likewise be variable-rate debt. If market
interest rates increase, variable-rate debt will create higher
debt service requirements, which could adversely affect our cash
flow. While we may enter into agreements limiting our exposure
to higher interest rates, any such agreements may not offer
complete protection from this risk.
Our debt
agreements contain restrictions that will limit our flexibility
in operating our business.
The ABL Credit Facility and the indentures governing the notes
contain, and any instruments governing future indebtedness of ours would likely contain, a
number of covenants that will impose significant operating and
financial restrictions on us, including restrictions on the
Issuers and the guarantors ability to, among other
things:
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incur additional indebtedness or issue certain preferred shares;
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pay dividends on or make distributions in respect of our capital
stock or make other restricted payments;
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make certain payments on debt that is subordinated or secured on
a junior basis;
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make certain investments;
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sell certain assets;
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create liens on certain assets;
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consolidate, merge, sell or otherwise dispose of all or
substantially all of our assets;
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enter into certain transactions with our affiliates; and
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designate our subsidiaries as unrestricted subsidiaries.
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Any of these restrictions could limit our ability to plan for or
react to market conditions and could otherwise restrict
corporate activities. Any failure to comply with these covenants
could result in a default under the ABL Credit Facility and the
indentures governing the notes. Upon a default, unless waived, the lenders under the ABL
Credit Facility would have all remedies available to a secured
lender, and could elect to terminate their commitments, cease
making further loans, institute foreclosure proceedings
23
against our assets, and force us into bankruptcy or liquidation,
subject to the intercreditor agreements. Holders of the
notes would also have the ability ultimately to foreclose
against our assets and force us into bankruptcy or liquidation,
subject to the intercreditor agreements. In addition, a default
under the ABL Credit Facility or the indentures governing the
notes would trigger a cross default under our other agreements and could trigger a cross
default under the agreements governing our future indebtedness.
Our operating results may not be sufficient to service our
indebtedness or to fund our other expenditures and we may not be
able to obtain financing to meet these requirements.
Despite our
substantial indebtedness, we may still be able to incur
significantly more debt, including secured indebtedness. This
could intensify the risks described above.
We may be able to incur substantially more debt in the future,
including secured indebtedness. Although the indentures
governing the notes and the
ABL Credit Facility contain restrictions on our incurrence of
additional indebtedness, these restrictions are subject to a
number of qualifications and exceptions and, under certain
circumstances, indebtedness incurred in compliance with these
restrictions could be substantial. In particular, we can incur
additional indebtedness so long as our fixed charge coverage
ratio (as defined in the indentures) exceeds 2:1. Also,
these restrictions may not prevent us from incurring obligations
that do not constitute indebtedness. To the extent such new debt
or new obligations are added to our existing indebtedness, the
risks described above could substantially increase.
If we default on
our obligations to pay our other indebtedness, we may not be
able to make payments on the notes.
Any default under the agreements governing our indebtedness, that is not
waived by the required holders of such indebtedness, could leave
us unable to pay principal, premium, if any, or interest on the
notes and could substantially decrease the market value of the
notes. If we are unable to generate sufficient cash flow and are
otherwise unable to obtain funds necessary to meet required
payments of principal, premium, if any, or interest on such
indebtedness, or if we otherwise fail to comply with the various
covenants, including financial and operating covenants, in the
instruments governing our indebtedness, we could be in default under the terms of the agreements
governing such indebtedness. In the event of such default, the
holders of such indebtedness could elect to declare all the
funds borrowed thereunder to be due and payable, together with
any accrued and unpaid interest, the lenders under the ABL
Credit Facility could elect to terminate their commitments,
cease making further
24
loans and institute foreclosure proceedings against the assets
securing such facilities and we could be forced into bankruptcy
or liquidation. If our operating performance declines, we may in
the future need to seek waivers from the required lenders under
the ABL Credit Facility and holders of the existing second lien
notes to avoid being in default. If we breach our covenants
under the ABL Credit Facility and the indenture governing the
existing second lien notes and seek waivers, we may not be able
to obtain waivers from the required lenders thereunder.
We may not have
access to the assets of our non-guarantor subsidiaries,
including CVR Partners, LP and its subsidiary, which could
adversely affect our ability to make payments on the
notes.
CVR Partners, LP and its subsidiary which directly owns the
nitrogen fertilizer business are not guarantors of the notes,
and the notes may not be guaranteed by certain of our other
future subsidiaries, including any future
non-U.S. subsidiaries
and certain non-wholly owned domestic subsidiaries. Our
non-guarantor subsidiaries have no obligation to pay any amounts
due on the notes. The creditors of our non-guarantor
subsidiaries, including their trade creditors and holders of any
of their indebtedness (including, in the case of CVR Partners,
LP and its subsidiary, their term loan and revolving credit
facility indebtedness), will generally be entitled to payment of
their claims from the assets of those subsidiaries before any
assets are made available for distribution to us or our
creditors, including the holders of the notes and lenders under the ABL Credit Facility.
Accordingly, claims of holders of the notes and the ABL Credit Facility lenders are effectively
subordinated to the claims of creditors of our non-guarantor
subsidiaries, including trade creditors, which could adversely
affect their ability to be repaid. All obligations of CVR
Partners, LP and its subsidiary and any other non-guarantor
subsidiaries must be satisfied before any of the assets of such
subsidiaries would be available for distribution, upon a
liquidation or otherwise, to the Issuers or a guarantor of the
notes.
The indentures governing the notes and the ABL Credit Agreement permit non-guarantor
subsidiaries to incur certain additional debt, including secured
debt, and do not limit the ability of non-guarantor subsidiaries
to incur other liabilities that are not considered indebtedness
under the indenture. CVR Partners, LP and its subsidiary are
specifically excluded from the definition of subsidiary for
purposes of the indentures governing the notes and the ABL Credit Agreement. Accordingly,
these assets do not constitute collateral for the notes, and
none of the indentures governing the notes or the ABL Credit Agreement place any
restriction on the ability of CVR Partners, LP and its
subsidiary to incur indebtedness.
A portion of the
collateral securing the notes is subject to first-priority liens
securing our indebtedness under the ABL Credit Facility and, in
the event of a default, will be used first to repay lenders
under the ABL Credit Facility. There can be no assurance that
any proceeds from such collateral will remain to repay the
holders of the notes.
The first lien notes and guarantees are secured on a
(i) first-priority lien basis by the Note Priority
Collateral and (ii) on a second-priority lien basis by the
ABL Priority Collateral and the second lien notes and guarantees
are secured on a (i) second-priority lien basis by the Note
Priority Collateral and (ii) a third-party lien basis by the ABL
Priority Collateral. The notes and the guarantees are
effectively subordinated in right of payment to all of our and
the guarantors secured indebtedness under the ABL Credit
Facility with respect to the ABL Priority Collateral that
secures the indebtedness under the ABL Credit Facility on a
first-priority lien basis. The effect of this subordination is
that upon a default in payment on, or the acceleration of, any
indebtedness under the ABL Credit Facility or other indebtedness
secured by the ABL Priority Collateral on a first-priority
basis, or in the event of bankruptcy, insolvency, liquidation,
dissolution, reorganization or similar proceeding of us or any
of the subsidiary guarantors of the ABL Credit Facility or of
such other secured debt, the proceeds from the sale of assets
securing the ABL Credit Facility or such other indebtedness
secured on a first-priority basis will
25
be available to pay obligations on the notes only after all
indebtedness under the ABL Credit Facility or such other secured
debt has been paid in full. There may be no ABL Priority
Collateral remaining after claims of the lenders under the ABL
Credit Facility or such other secured debt have been satisfied
in full that may be applied to satisfy the second-priority
claims of holders of the notes.
We have the
ability to sell, assign, transfer, convey, lease or dispose of all or a portion of the common units that we own
in CVR Partners, LP, which owns the nitrogen fertilizer
business. If we sell, assign, transfer, convey, lease or dispose
of the common units and your notes are not
purchased pursuant to the Fertilizer Business Event offer
required by the indenture governing the notes, they will remain
outstanding and we may not be able to generate sufficient cash
to service the notes.
The nitrogen fertilizer business generated net sales of
$263.0 million, $208.4 million and
$180.5 million, and operating income of
$116.8 million, $48.9 million and $20.4 million
for the years ended December 31, 2008, 2009 and 2010,
respectively. The indentures governing the notes provides us with
the ability to sell, assign, transfer, convey, lease or dispose
of all or a portion of the nitrogen fertilizer business
(including the common units we own in CVR Partners, LP). If we
sell, assign, transfer, convey, lease or dispose of the Partnerships common units, we may be required to
offer to buy back a certain portion of the notes outstanding on such date at a
price equal to 103% of the principal amount thereof, together
with accrued and unpaid interest, if any, to the date of
repurchase. In connection with the Partnerships April 2011
initial public offering, we made an offer to repurchase
$100.0 million of the notes and the existing second lien
notes; approximately $2.7 million aggregate principal
amount of notes were tendered as
a result of this offer. Pursuant to the terms of the indentures,
any future Fertilizer Business Event Repurchase Offer obligation
shall be credited by an amount equal to the amount of any prior
offer to repurchase. As a result, we may not be required to make an offer to
repurchase the notes in the event of future sales of the
Partnerships common units. Any of your notes not
repurchased pursuant to such Fertilizer Business Event offer
will remain outstanding and we cannot assure you that we will be
able to generate sufficient cash to service the notes.
We may not have
the ability to raise the funds necessary to finance the change
of control offer, the asset sale offer or the Fertilizer
Business Event offer required by the indentures governing the
notes.
Upon the occurrence of a change of control, as
defined in the indentures governing the notes, we must offer to buy back the notes at a price equal to 101% of the
principal amount, together with accrued and unpaid interest, if
any, to the date of the repurchase. Similarly, we must offer to
buy back the notes (or repay other indebtedness in certain
circumstances) at a price equal to 100% of the principal amount
of the notes (or other debt) purchased, together with accrued
and unpaid interest, if any, to the date of repurchase, with the
proceeds of certain asset sales (as defined in the indentures).
Furthermore, upon the occurrence of a Fertilizer Business
Event, as defined in the indentures governing the notes, we
may be required to offer to buy back a certain portion of the
notes outstanding on such date at a price equal to 103% of the
principal amount thereof, together with accrued and unpaid
interest, if any, to the date of the repurchase. Our failure to
purchase, or give notice of purchase of, the notes would be a
default under the indentures governing the notes, which would
also trigger a cross default under the ABL Credit Facility.
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A change of control would also
trigger a default under the ABL Credit Facility. In order to
satisfy our obligations, we could seek to refinance the
indebtedness under the ABL Credit Facility and the indentures
governing the notes or obtain a waiver from the lenders or holders
of the notes. We cannot assure
you that we would be able to obtain a waiver or refinance our
indebtedness on terms acceptable to us, if at all. Any failure
to make the required change of control offer, asset sale offer
or Fertilizer Business Event offer would result in an event of
default under the indentures.
Certain
restrictive covenants in the indentures governing the notes will
be suspended if such notes achieve investment grade
ratings.
Most of the restrictive covenants in the indentures governing the
notes will not apply for so long as the notes achieve investment
grade ratings from Moodys Investors Service, Inc. and
Standard & Poors Rating Services, and no default
or event of default has occurred. If these restrictive covenants
cease to apply, we may take actions, such as incurring
additional debt or making certain dividends or distributions
that would otherwise be prohibited under the indentures. Ratings
are given by these rating agencies based upon analyses that
include many subjective factors. We cannot assure you that the
notes will achieve investment grade ratings, nor can we assure
you that investment grade ratings, if granted, will reflect all
of the factors that would be important to holders of the notes.
The value of the
collateral may not be sufficient to repay holders of the notes
in full.
The obligations under the ABL Credit Facility and related
guarantees are secured on a first-priority lien basis by the ABL
Priority Collateral and a second-priority lien basis, together
with the second lien notes and related guarantees, on the Notes
Priority Collateral. The obligations under the first lien notes and related
guarantees are secured, subject to certain exceptions, on a
first-priority lien basis by the Note Priority Collateral and on
a second priority-lien basis by the ABL Priority Collateral and
the obligations under the second lien notes and related guarantees are
secured, subject to certain exceptions, on a second-priority basis by
the Notes Priority Collateral and a third priority basis by the ABL
Priority Collateral. The
indentures governing the notes and the ABL Credit Facility permit us to share both the ABL
Priority Collateral and the Note Priority Collateral with future
creditors, subject to limitations.
Accordingly, any proceeds received upon a realization in respect
of ABL Priority Collateral will first be applied to the ABL
Credit Facility and any other obligations secured by the ABL
Priority Collateral on a first lien basis before any amounts
will be available to pay the holders of notes and other
indebtedness permitted to be secured by the ABL Priority
Collateral on a second lien basis or third lien basis, and any proceeds received
upon a realization in respect of Note Priority Collateral will
be applied equally in respect of the first lien notes and other
indebtedness permitted to be secured by the Note Priority
Collateral on a first priority basis, then to the ABL Credit
Facility and then to the second lien notes. As a
result, if there is a default, the value of the collateral may
not be sufficient to repay our obligations under the notes.
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The rights of
holders of notes to the collateral securing the notes may be
adversely affected by the failure to perfect security interests
in the collateral and other issues generally associated with the
realization of security interests in collateral.
Applicable law requires that a security interest in certain
tangible and intangible assets can only be properly perfected
and its priority retained through certain actions undertaken by
the secured party. The liens in the collateral securing the
notes may not be perfected with respect to the claims of the
notes if the first lien collateral trustee is not able to take
the actions necessary to perfect any of these liens. In
addition, applicable law requires that certain property and
rights acquired after the grant of a general security interest,
such as real property, can only be perfected at the time such
property and rights are acquired and identified and additional
steps to perfect in such property and rights are taken. We will
have limited obligations to perfect the security interest of the
holders of the notes in specified collateral. There can be no
assurance that the trustee and the collateral trustees
for the notes will monitor, or that we will inform such trustee
and collateral trustee of, the future acquisition of property
and rights that constitute collateral, and that the necessary
action will be taken to properly perfect the security interest
in such after-acquired collateral. The trustee and collateral
trustees for the notes have no obligation to monitor
the acquisition of additional property or rights that constitute
collateral or the perfection of any security interest. Such
failure may result in the loss of the security interest in the
collateral or the priority of the security interest in favor of
the notes against third parties.
In addition, the security interest of the collateral
trustees will be subject to practical challenges generally
associated with the realization of security interests in
collateral. For example, the collateral trustees may
need to obtain the consent of third parties and make additional
filings. If we are unable to obtain these consents or make these
filings, the security interests may be invalid and the holders
of the notes will not be entitled to the collateral or any
recovery with respect thereto. We cannot assure you that we or
the collateral trustees will be able to obtain any
such consent. We also cannot assure you that the consents of any
third parties will be given when required to facilitate a
foreclosure on such assets. Accordingly, the collateral trustees may not have the ability to foreclose upon
those assets and the value of the collateral may significantly
decrease.
In the event of
our bankruptcy, the ability of the holders of the notes to
realize upon the collateral will be subject to certain
bankruptcy law limitations.
The ability of holders of the notes to realize upon the
collateral will be subject to certain bankruptcy law limitations
in the event of our bankruptcy. Under federal bankruptcy law,
secured creditors are prohibited from repossessing their
security from a debtor in a bankruptcy case, or from disposing
of security repossessed from such a debtor, without bankruptcy
court approval, which may not be given. Moreover, applicable
federal bankruptcy laws generally permit the debtor to continue
to use and expend collateral, including cash collateral, and to
provide liens senior to the first lien collateral trustee for
the notes liens to secure indebtedness incurred after the
commencement of a bankruptcy case, provided that the secured
creditor either consents or is given adequate
protection. Adequate protection could include
cash payments or the granting of additional security, if and at
such times as the presiding court in its discretion determines,
for any diminution in the value of the collateral as a result of
the stay of repossession or disposition of the collateral during
the pendency of the bankruptcy case, the use of collateral
(including cash collateral) and the incurrence of such senior
indebtedness. In view of the broad discretionary powers of a
bankruptcy court, it is impossible to predict how long payments
under the notes could be delayed following commencement of a
bankruptcy case, whether or when the first lien collateral
trustee would repossess or dispose of the collateral, or whether
or to what extent holders of the notes would be compensated for
any delay in payment of loss of value of the collateral through
the requirements of adequate
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protection. Furthermore, in the event the bankruptcy court
determines that the value of the collateral is not sufficient to
repay all amounts due on the notes, the ABL Credit Facility and
any other first lien or pari passu debt secured by the
collateral, the indebtedness under the notes would be
undersecured and the holders of the notes would have
unsecured claims as to the difference. Federal bankruptcy laws
do not permit the payment or accrual of interest, costs, and
attorneys fees on undersecured indebtedness during the
debtors bankruptcy case.
The value of the
collateral securing the notes may not be sufficient to secure
post-petition
interest. Should our obligations under the notes equal or exceed
the fair market value of the collateral securing the notes, the
holders of the notes may be deemed to have an unsecured
claim.
In the event of a bankruptcy, liquidation, dissolution,
reorganization or similar proceeding against the Issuers or the
Guarantors, holders of the notes will be entitled to
post-petition interest under the U.S. Bankruptcy Code only
if the value of their security interest in the collateral is
greater than their pre-bankruptcy claim. Holders of the notes
may be deemed to have an unsecured claim if the Issuers
obligation under the notes equals or exceeds the fair market
value of the collateral securing the notes. Holders of the notes
that have a security interest in the collateral with a value
equal to or less than their pre-bankruptcy claim will not be
entitled to post-petition interest under the
U.S. Bankruptcy Code. The bankruptcy trustee, the
debtor-in-possession
or competing creditors could possibly assert that the fair
market value of the collateral with respect to the notes on the
date of the bankruptcy filing was less than the then-current
principal amount of the notes. Upon a finding by a bankruptcy
court that the notes are under-collateralized, the claims in the
bankruptcy proceeding with respect to the notes would be
bifurcated between a secured claim and an unsecured claim, and
the unsecured claim would not be entitled to the benefits of
security in the collateral. Other consequences of a finding of
under-collateralization would be, among other things, a lack of
entitlement on the part of holders of the notes to receive
post-petition interest and a lack of entitlement on the part of
the unsecured portion of the notes to receive other
adequate protection under U.S. federal
bankruptcy laws. In addition, if any payments of post-petition
interest were made at the time of such a finding of
under-collateralization, such payments could be re-characterized
by the bankruptcy court as a reduction of the principal amount
of the secured claim with respect to notes. No appraisal of the
fair market value of the collateral securing the notes has been
prepared and,
therefore, the value of the first lien collateral trustees
interests in the collateral may not equal or exceed the
principal amount of the notes. We cannot assure you that there
will be sufficient collateral to satisfy our and the
Guarantors obligations under the notes.
There may not be
sufficient collateral to repay all or any of the notes,
especially if we incur additional senior secured indebtedness,
which will dilute the value of the collateral securing the
notes.
No appraisal of the value of the collateral securing the notes has been made, and the fair market value is
subject to fluctuations based on factors that include, among
others, changing economic conditions, competition and other
future trends. The fair market value of the collateral is
subject to fluctuations based on factors that include, among
others, the condition of the markets and sectors in which we
operate, the ability to sell the collateral in an orderly sale,
the condition of the national and local economies, the
availability of buyers and other similar factors. The value of
the assets pledged as collateral for the notes also could be
impaired in the future as a result of our failure to implement
our business strategy, competition, or other future trends.
In the event of foreclosure on the collateral, the proceeds from
the sale of the collateral may not be sufficient to satisfy in
full our obligations under the ABL Credit Facility and the
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notes or any additional
permitted secured indebtedness. The amount to be received upon
such a sale would be dependent on numerous factors, including
but not limited to the timing and the manner of the sale. In
addition, the book value of the collateral should not be relied
on as a measure of realizable value for such assets. By its
nature, portions of the collateral may be illiquid and may have
no readily ascertainable market value. Accordingly, there can be
no assurance that the collateral can be sold in a short period
of time in an orderly manner. A significant portion of the
collateral includes assets that may only be usable, and thus
retain value, as part of the existing operating business.
Accordingly, any such sale of the collateral separate from the
sale of certain of our operating businesses may not be feasible
or of significant value.
To the extent that pre-existing liens, liens relating to the ABL
Credit Facility, liens permitted under the indentures and other
rights, encumber any of the collateral securing the notes and
the guarantees, holders of such liens may exercise rights and
remedies with respect to the collateral that could adversely
affect the value of the collateral and the ability of the first
lien collateral trustee, the trustee under the indenture or the
holders of the notes to realize or foreclose on the collateral.
In particular, GWEC granted Excel Pipeline, LLC a mortgage and
security interests in certain real property and certain personal
property thereon in connection with its sale of the portion of
the Excel Pipeline System running from Duncan, Oklahoma to the
Wynnewood refinery to Excel Pipeline, LLC in 2009. These
security interests are senior in priority to the security
interests in favor of the notes in respect of such property, and
prohibit us from granting any liens on such property without the
consent of Excel Pipeline, LLC, which consent may not be
obtained. Consequently, liquidating the collateral securing the
notes may not result in proceeds in an amount sufficient to pay
any amounts due under the notes after satisfying the obligations
to pay any creditors with equal or prior liens. If the proceeds
of any sale of collateral are not sufficient to repay all
amounts due on the notes, the holders of the notes (to the
extent not repaid from the proceeds of the sale of the
collateral) would have only an unsecured, unsubordinated claim
against our and the Guarantors remaining assets.
The Issuers or any Guarantor may incur additional secured
indebtedness under the indentures governing the notes, including (1) the issuance of
additional first lien notes or the incurrence of other forms of
indebtedness secured equally and ratably with the first lien notes,
(2) the issuance of additional second lien notes or other
forms of indebtedness secured equally and ratably with the
second lien notes,
and/or
(3) borrowings under the ABL Credit Facility or other
facilities which are secured equally and ratably with the ABL
Credit Facility. Any such
incurrence could dilute the value of the collateral securing the
notes and guarantees.
In addition, not all of our assets secure the notes and
guarantees. None of the assets of the Partnership, including the
nitrogen fertilizer business, constitute part of the collateral.
In addition, the collateral will not include, among other
things, any intellectual property if the grant of a security
interest therein would result in the abandonment or invalidation
of such intellectual property and any contract or agreement if
the grant of a security interest therein would result in a
breach or termination of any such contract or agreement.
The collateral
securing the notes is subject to casualty risks.
We intend to maintain insurance or otherwise insure against
hazards in a manner appropriate and customary for our business.
There are, however, certain losses that may be either
uninsurable or not economically insurable, in whole or in part.
Insurance proceeds may not compensate us fully for our losses.
If there is a complete or partial loss of any of the collateral,
the insurance proceeds may not be sufficient to satisfy payment
of the notes.
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With respect to
the real properties underlying our pipeline system that were
mortgaged as security for the notes, title insurance was not
required to be delivered. Therefore, there will be no
independent assurance that the mortgages with respect to such
real properties securing the notes are encumbering the correct
real properties or that there are no liens other than those
permitted by the indentures encumbering such real
properties.
In connection with the April 2010 notes offering, we were not
required to obtain title insurance with respect to the real
properties underlying our pipeline system intended to constitute
collateral. As a result, there is no independent assurance that,
among other things, (i) we have the rights to such real
properties that we purport to have in the mortgages encumbering
such real properties and that our title to such real properties
is not encumbered by liens not permitted by the indenture, and
(ii) such mortgages have the priority intended and
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described in this offering memorandum. We did, however,
represent that (i) we had the rights to such real
properties that we purport to have in the mortgage and that our
title to such real property is not encumbered by liens not
permitted by the indenture, and (ii) the mortgages have the
priority intended and described in the offering memorandum.
Surveys were not
provided with respect to the real properties underlying our
pipeline system that were mortgaged as security for the notes.
As a result, there is no independent assurance that all
properties underlying our pipeline system were mortgaged and
that there will be no liens encumbering such real property
interests other than those permitted by the indenture.
In connection with the April 2010 notes offering, we were not
required to provide surveys with respect to the real properties
underlying our pipeline system (which is comprised of
approximately 300 miles of feeder and trunk pipelines and
associated storage facilities) intended to constitute collateral
for the notes. As a result, there is no independent assurance
that, among other things, (i) such real properties
encumbered by each mortgage encumbering such properties includes
the property owned by us or the subsidiary guarantors that was
intended to be mortgaged and (ii) no encroachments, adverse
possession claims, zoning or other restrictions exist with
respect to such real properties which could result in a material
adverse effect on the value or utility of such real properties.
Federal and state
statutes allow courts, under specific circumstances, to void
notes and guarantees and require holders of the notes to return
payments received.
If we or any guarantor become a debtor in a case under the
U.S. Bankruptcy Code or encounter other financial
difficulty, under federal or state fraudulent transfer law, a
court may
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void, subordinate or otherwise decline to enforce the notes or
the guarantees. A court might do so if it found that when we
issued the notes or the guarantor entered into its guarantee, or
in some states when payments became due under the notes or the
guarantees, we or the guarantor received less than reasonably
equivalent value or fair consideration and either:
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was insolvent or rendered insolvent by reason of such
incurrence; or
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was left with inadequate capital to conduct its business; or
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believed or reasonably should have believed that it would incur
debts beyond its ability to pay.
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The court might also void an issuance of notes or a guarantee
without regard to the above factors, if the court found that we
issued the notes or the applicable guarantor entered into its
guarantee with actual intent to hinder, delay or defraud its
creditors.
A court would likely find that we or a guarantor did not receive
reasonably equivalent value or fair consideration for the notes
or its guarantee, if we or a guarantor did not substantially
benefit directly or indirectly from the issuance of the notes.
If a court were to void the issuance of the notes or guarantees
you would no longer have any claim against us or the applicable
guarantor. Sufficient funds to repay the notes may not be
available from other sources, including the remaining obligors,
if any. In addition, the court might direct you to repay any
amounts that you already received from us or a guarantor.
The measures of insolvency for purposes of these fraudulent
transfer laws will vary depending upon the law applied in any
proceeding to determine whether a fraudulent transfer has
occurred. Generally, however, a guarantor would be considered
insolvent if:
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the sum of its debts, including contingent liabilities, was
greater than the fair saleable value of all of its
assets; or
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if the present fair saleable value of its assets was less than
the amount that would be required to pay its probable liability
on its existing debts, including contingent liabilities, as they
become absolute and mature; or
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it could not pay its debts as they become due.
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On the basis of historical financial information, recent
operating history and other factors, we believe that each
guarantor, after giving effect to its guarantee of the notes,
will not be insolvent, will not have unreasonably small capital
for the business in which it is engaged and will not have
incurred debts beyond its ability to pay such debts as they
mature. We cannot assure you, however, as to what standard a
court would apply in making these determinations or that a court
would agree with our conclusions in this regard.
Any future note
guarantees or additional liens on collateral provided after the
notes are issued could also be avoided by a trustee in
bankruptcy.
The indentures governing the notes provides that certain of our
future subsidiaries will guarantee the notes and secure their
note guarantees with liens on their assets. The indentures
governing the notes also requires the Issuers and the guarantors
to grant liens on certain assets that they acquire after the
notes are issued. Any future note guarantee or additional lien
in favor of the collateral trustee for the benefit of the
holders of the notes might be avoidable by the grantor (as
debtor-in-possession)
or by its trustee in bankruptcy or other third parties if
certain events or circumstances exist or occur. For instance, if
the entity granting the future note guarantee or additional lien
were insolvent at the time of the grant and if such grant was
made within 90 days before that entity commenced a
bankruptcy proceeding (or one year before commencement of a
bankruptcy proceeding if the creditor that benefited from the
note guarantee or lien is an insider under the
U.S. Bankruptcy Code), and the granting of the
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future note guarantee or additional lien enabled the holders of
the notes to receive more than they would if the grantor were
liquidated under chapter 7 of the U.S. Bankruptcy
Code, then such note guarantee or lien could be avoided as a
preferential transfer.
Risks Related to
the Limited Partnership Structure Through Which
We Currently Hold Our Interest in the Nitrogen Fertilizer
Business
The board of
directors of the Partnerships general partner has adopted
a policy to distribute all of the available cash the nitrogen
fertilizer business generates each quarter, which could limit
its ability to grow and make acquisitions.
The board of directors of the Partnerships general partner
has adopted a policy to distribute all of the available cash the
Partnership generates each quarter to its unitholders. As a
result, the Partnerships general partner will rely
primarily upon external financing sources, including commercial
bank borrowings and the issuance of debt and equity securities,
to fund acquisitions and expansion capital expenditures at the
nitrogen fertilizer business. To the extent it is unable to
finance growth externally, the Partnerships cash
distribution policy will significantly impair its ability to
grow. As of the date hereof, we owned
approximately 70% of the Partnerships outstanding common
units, and public unitholders owned the remaining 30% of the
Partnerships common units.
34
In addition, because the board of directors of the
Partnerships general partner will adopt a policy to
distribute all of the available cash it generates each quarter,
growth may not be as fast as that of businesses that reinvest
their available cash to expand ongoing operations. To the extent
the Partnership issues additional units in connection with any
acquisitions or expansion capital expenditures, the payment of
distributions on those additional units will decrease the amount
the Partnership distributes on each outstanding unit. There are
no limitations in the partnership agreement on the
Partnerships ability to issue additional units, including
units ranking senior to the common units that we own. The
incurrence of additional commercial borrowings or other debt to
finance the Partnerships growth strategy would result in
increased interest expense, which, in turn, would reduce the
available cash that the Partnership has to distribute to
unitholders, including us.
The Partnership
may not have sufficient available cash to pay any quarterly
distribution on its common units. Furthermore, the Partnership
is not required to make distributions to holders of its common
units on a quarterly basis or otherwise, and may elect to
distribute less than all of its available cash.
The Partnership may not have sufficient available cash each
quarter to pay any distributions to its common unitholders,
including us. Furthermore, the partnership agreement does not
require it to pay distributions on a quarterly basis or
otherwise. Although the Partnerships general
partners board has adopted a policy to distribute all
available cash each quarter, the board may at any time, for any
reason, change this policy nor decide not to make any
distribution. The amount of cash the Partnership will be able to
distribute on its common units principally depends on the amount
of cash it generates from operations, which is directly
dependent upon operating margins, which have been volatile
historically. Operating margins at the nitrogen fertilizer
business are significantly affected by the market-driven UAN and
ammonia prices it is able to charge customers and pet coke-based
gasification production costs, as well as seasonality, weather
conditions, governmental regulation, unscheduled maintenance or
downtime at the nitrogen fertilizer plant and global and
domestic demand for nitrogen fertilizer products, among other
factors. In addition:
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The Partnerships credit facility, and any credit facility
or other debt instruments it may enter into in the future, may
limit the distributions that the Partnership can make. The
credit facility provides that the Partnership can make
distributions to holders of common units only if it is in
compliance with leverage ratio and interest coverage ratio
covenants on a pro forma basis after giving effect to any
distribution, and there is no default or event of default under
the facility. In addition, any future credit facility may
contain other financial tests and covenants that must be
satisfied. Any failure to comply with these tests and covenants
could result in the lenders prohibiting Partnership
distributions.
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The amount of available cash for distribution to unitholders
depends primarily on cash flow, and not solely on the
profitability of the nitrogen fertilizer business, which is
affected by non-cash items. As a result, the Partnership may
make distributions during periods when it records losses and may
not make distributions during periods when it records net income.
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The actual amount of available cash will depend on numerous
factors, some of which are beyond the Partnerships
control, including UAN and ammonia prices, operating costs,
global and domestic demand for nitrogen fertilizer products,
fluctuations in working capital needs, and the amount of fees
and expenses incurred by us.
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If the
Partnership were to be treated as a corporation, rather than as
a partnership, for U.S. federal income tax purposes or if the
Partnership were otherwise subject to entity-level taxation, the
Partnerships cash available for distribution to its common
unitholders, including to us, and the value of the
Partnerships common units, including the common units held
by us, could be substantially reduced.
During 2011, and in each taxable year thereafter, current law
requires the Partnership to derive at least 90% of its annual
gross income from certain specified activities in order to
continue to be treated as a partnership, rather than as a
corporation, for U.S. federal income tax purposes. The
Partnership may not find it possible to meet this qualifying
income requirement, or may inadvertently fail to meet this
qualifying income requirement. If the Partnership were to be
treated as a corporation for U.S. federal income tax
purposes, it would pay U.S. federal income tax on all of
its taxable income at the corporate tax rate, which is currently
a maximum of 35%, it would likely pay additional state and local
income taxes at varying rates, and distributions to the
Partnerships common unitholders, including to us, would
generally be taxed as corporate distributions.
In addition, current U.S. federal income tax treatment of
publicly traded partnerships, including the Partnership, may be
modified at any time by legislation, administrative rulings or
judicial authority. Any such change may cause the Partnership to
be treated as a corporation for U.S. federal income tax
purposes or otherwise subject the Partnership to entity-level
taxation. For example, members of Congress have considered
substantive changes to the existing U.S. federal income tax
laws that affect publicly traded partnerships. Any modification
to the U.S. federal income tax laws or interpretations
thereof may or may not be applied retroactively and could make
it more difficult or impossible for the Partnership to be
treated as a partnership for U.S. federal income tax
purposes. We are unable to predict whether any of these changes
or other proposals will ultimately be enacted.
If the Partnership were to be treated as a corporation, rather
than as a partnership, for U.S. federal income tax purposes
or if the Partnership were otherwise subject to entity-level
taxation, the Partnerships cash available for distribution
to its common unitholders, including to us, and the value of the
Partnerships common units, including the common units held
by us, could be substantially reduced.
Increases in
interest rates could adversely impact the Partnerships
unit price and the Partnerships ability to issue
additional equity to make acquisitions, incur debt or for other
purposes.
We expect that the price of the Partnerships common units
will be impacted by the level of the Partnerships
quarterly cash distributions and implied distribution yield. The
distribution yield is often used by investors to compare and
rank related yield-oriented securities for investment
decision-making purposes. Therefore, changes in interest rates
may affect the yield requirements of investors who invest in the
Partnerships common units, and a rising interest rate
environment could have a material adverse impact on the
Partnerships unit price (and therefore the value of our
investment in the Partnership) as well as the Partnerships
ability to issue additional equity to make acquisitions or to
incur debt.
We may have
liability to repay distributions that are wrongfully distributed
to us.
Under certain circumstances, we may, as a holder of common units
in the Partnership, have to repay amounts wrongfully returned or
distributed to us. Under the Delaware Revised Uniform Limited
Partnership Act, the Partnership may not make a distribution to
unitholders if the distribution would cause its liabilities to
exceed the fair value of its assets. Delaware law provides that
for a period of three years from the date of an impermissible
distribution, limited
36
partners who received the distribution and who knew at the time
of the distribution that it violated Delaware law will be liable
to the company for the distribution amount.
Public investors
own approximately 30% of the nitrogen fertilizer business as a
result of the Partnerships April 2011 initial public
offering. Although we own the majority of the Partnerships
common units and the nitrogen fertilizer business general
partner, the general partner owes a duty of good faith to public
unitholders, which could cause it to manage the nitrogen
fertilizer business differently than if there were no public
unitholders.
As a result of the initial public offering of the
Partnerships common units which closed in April 2011,
public investors own approximately 30% of the nitrogen
fertilizer business common units. As a result of this
offering, we are no longer entitled to receive all of the cash
generated by the nitrogen fertilizer business or freely borrow
money from the nitrogen fertilizer business to finance
operations at the refinery, as we have in the past. Furthermore,
although we own the Partnerships general partner and
continue to own the majority of the Partnerships common
units, the Partnerships general partner is subject to
certain fiduciary duties, which may require the general partner
to manage the nitrogen fertilizer business in a way that may
differ from our best interests.
CVR Energy cannot
own or operate a fertilizer business other than the Partnership
without the consent of the Partnerships general
partner.
CVR Energy and the Partnership have entered into an agreement in
order to clarify and structure the division of corporate
opportunities. Under this agreement, CVR Energy has agreed not
to engage in the production, transportation or distribution, on
a wholesale basis, of fertilizers in the contiguous United
States, subject to limited exceptions (fertilizer restricted
business) without the consent of the Partnerships general
partner.
The Partnership
is managed by the executive officers of its general partner,
most of whom are employed by and serve as part of the senior
management team of CVR Energy and its affiliates.
Conflicts of interest could arise as a result of this
arrangement.
The Partnership is managed by the executive officers of its
general partner, most of whom are employed by and serve as part
of the senior management team of CVR Energy. Furthermore, although the Partnership has
entered into a services agreement with CVR Energy under which it
compensates CVR Energy for the services of its management, CVR
Energys management is not required to devote any specific
amount of time to the nitrogen fertilizer business and may
devote a substantial majority of their time to the business of
CVR Energy. Moreover, following the one year anniversary of
the Partnerships initial public offering (which will occur in
April 2012), CVR Energy will be able to terminate the services agreement at any
time, subject to a
180-day
notice period. In addition, the executive officers of CVR
Energy, including its chief operating officer, chief financial
officer and general counsel, will face conflicts of interest if
decisions arise in which the Partnership and CVR Energy have conflicting
points of view or interests.
37
The
Partnerships general partner has limited its liability in
the partnership agreement and replaced default fiduciary duties
with contractual corporate governance standards set forth
therein, thereby restricting the remedies available to
unitholders, including us, for actions that, without such
replacement, might constitute breaches of fiduciary
duty.
CVR Partners, LPs partnership agreement contains
provisions that restrict the remedies available to its
unitholders, including CVR Energy, for actions that might
otherwise constitute breaches of fiduciary duty. For example,
the partnership agreement:
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permits the general partner to make a number of decisions in its
individual capacity, as opposed to its capacity as general
partner, thereby entitling it to consider only the interests and
factors that it desires, and imposes no duty or obligation on
the general partner to give any consideration to any interest
of, or factors affecting, any limited partner;
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provides that the general partner shall not have any liability
to unitholders for decisions made in its capacity as general
partner so long as it acted in good faith, meaning it believed
that the decision was in the best interests of the Partnership;
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generally provides that affiliated transactions and resolutions
of conflicts of interest not approved by the conflicts committee
of the board of directors of the general partner and not
involving a vote of unitholders must be on terms no less
favorable to the Partnership than those generally being provided
to or available from unrelated third parties or be fair
and reasonable to the Partnership, as determined by its
general partner in good faith, and that, in determining whether
a transaction or resolution is fair and reasonable,
the general partner may consider the totality of the
relationships between the parties involved, including other
transactions that may be particularly advantageous or beneficial
to affiliated parties, including us;
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provides that the general partner and its officers and directors
will not be liable for monetary damages to common unitholders,
including us, for any acts or omissions unless there has been a
final and non-appealable judgment entered by a court of
competent jurisdiction determining that the general partner or
its officers or directors acted in bad faith or engaged in fraud
or willful misconduct or, in the case of a criminal matter,
acted with knowledge that the conduct was criminal; and
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provides that in resolving conflicts of interest, it will be
presumed that in making its decision, the general partner or its
conflicts committee acted in good faith, and in any proceeding
brought by or on behalf of any holder of common units, the
person bringing or prosecuting such proceeding will have the
burden of overcoming such presumption.
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With respect to the common units that we own, we have agreed to
become bound by the provisions in our partnership agreement,
including the provisions discussed above.
The Partnership
may issue additional common units and other equity interests
without the approval of its common unitholders, which would
dilute the existing ownership interests and rights to receive
distributions from the Partnership.
Under the Partnerships partnership agreement, the
Partnership is authorized to issue an unlimited number of
additional interests without a vote of the unitholders. The
issuance of additional common units or other equity interests of
equal or senior rank will have the following effects:
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our proportionate ownership interest will decrease;
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the amount of cash distributions on each common unit will
decrease;
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the ratio of our taxable income to distributions may increase;
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the relative voting strength of each previously outstanding unit
will be diminished; and
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the market price of the common units may decline.
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In addition, the Partnerships partnership agreement does
not prohibit the issuance by our subsidiaries of equity
interests, which may effectively rank senior to the common units
that we own.
The nitrogen
fertilizer business will incur increased costs as a result of
being a publicly traded partnership.
As a publicly traded partnership, the nitrogen fertilizer
business will incur significant legal, accounting and other
expenses that it did not incur prior to any such offering. As a
result of CVR Partners initial public offering, which
closed in April 2011, the nitrogen fertilizer business is now
subject to the public reporting requirements of Exchange Act.
These requirements will increase legal and financial compliance
costs and will make compliance activities more time-consuming
and costly. For example, the Partnership will be required to
adopt policies regarding internal controls and disclosure
controls and procedures, including the preparation of reports on
internal control over financial reporting. In addition, the
Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act of 2010, as
well as rules implemented by the SEC and the New York Stock
Exchange, require, or will require, publicly traded entities to
adopt various corporate governance practices that will further
increase its costs. Before the Partnership is able to make
distributions to us, it must first pay its expenses, including
the costs of being a public company and other operating
expenses. As a result, the amount of cash it has available for
distribution to us will be affected by its expenses, including
the costs associated with being a publicly traded partnership.
As a stand-alone
public company, the nitrogen fertilizer business will be exposed
to risks relating to evaluations of controls required by
Section 404 of the Sarbanes-Oxley Act.
The nitrogen fertilizer business is in the process of evaluating
its internal controls systems to allow management to report on,
and our independent auditors to audit, its internal control over
financial reporting. It will be performing the system and
process evaluation and testing (and any necessary remediation)
required to comply with the management certification and auditor
attestation requirements of Section 404 of the
Sarbanes-Oxley Act, and under current rules will be required to
comply with Section 404 for the year ended
December 31, 2012. Upon of this process, the nitrogen
fertilizer business may identify control deficiencies of varying
degrees of severity under applicable SEC and Public Company
Accounting Oversight Board, or PCAOB, rules and regulations that
remain unremediated. Although the nitrogen fertilizer business
produces financial statements in accordance with
U.S. Generally Accepted Accounting Principles
(GAAP), internal accounting controls may not
currently meet all standards applicable to companies with
publicly traded securities. As a publicly traded partnership, it
will be required to report, among other things, control
deficiencies that constitute a material weakness or
changes in internal controls that, or that are reasonably likely
to, materially affect internal control over financial reporting.
A material weakness is a deficiency, or a
combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a
material misstatement of the annual or interim financial
statements will not be prevented or detected on a timely basis.
If the nitrogen fertilizer business fails to implement the
requirements of Section 404 in a timely manner, it might be
subject to sanctions or investigation by regulatory authorities
such as the SEC. If it does not implement improvements to its
disclosure controls and procedures or to its internal controls
in a timely manner, its independent registered public accounting
firm may not be able to certify as to the effectiveness of its
internal control over financial reporting
39
pursuant to an audit of its internal control over financial
reporting. This may subject the nitrogen fertilizer business to
adverse regulatory consequences or a loss of confidence in the
reliability of its financial statements. It could also suffer a
loss of confidence in the reliability of its financial
statements if its independent registered public accounting firm
reports a material weakness in its internal controls, if it does
not develop and maintain effective controls and procedures or if
it is otherwise unable to deliver timely and reliable financial
information. Any loss of confidence in the reliability of its
financial statements or other negative reaction to its failure
to develop timely or adequate disclosure controls and procedures
or internal controls could result in a decline in the price of
its common units, which would reduce the value of our investment
in the nitrogen fertilizer business. In addition, if the
nitrogen fertilizer business fails to remedy any material
weakness, its financial statements may be inaccurate, it may
face restricted access to the capital markets and the price of
its common units may be adversely affected, which would reduce
the value of our investment in the nitrogen fertilizer business.
Risks Related to
the Acquisition
Challenges in
operating the acquired business and/or newly enlarged combined
business or difficulties in successfully integrating the
businesses of CVR Energy and GWEC within the expected time frame
would adversely affect our companys future results
following the Acquisition.
As a result of the Acquisition of GWEC, we are doubling our
number of refineries from one to two and increasing our refining
throughput capacity by over 50%. The success of the Acquisition
will depend, in large part, on our ability to successfully
expand the scale and geographic scope of our operations across
state lines and to realize the anticipated benefits, including
synergies, cost savings, innovation and operational
efficiencies, from combining the businesses of CVR Energy and
GWEC. To realize these anticipated benefits, the business of
GWEC must be must be successfully integrated into CVR Energy.
This integration will be complex and time-consuming.
The failure to integrate successfully and to manage successfully
the challenges presented by the integration process may result
in the combined company not achieving the anticipated benefits
of the merger. Potential difficulties that may be encountered in
the integration process include the following:
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the inability to successfully integrate the business of GWEC
into CVR Energy in a manner that permits the combined company to
achieve the full revenue and cost savings anticipated to result
from the merger;
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complexities associated with managing the larger, more complex,
combined business;
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integrating personnel from the two companies while maintaining
focus on providing consistent, high-quality service;
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potential unknown liabilities and unforeseen expenses, delays or
regulatory conditions associated with the Acquisition;
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performance shortfalls at one or both of the companies as a
result of the diversion of managements attention caused by
completing the Acquisition and integrating the companies
operations;
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difficulty retaining key personnel of GWEC and CVR Energy
following the Acquisition; and
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the disruption of, or the loss of momentum in, each
companys ongoing business or inconsistencies in standards,
controls, procedures and policies.
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Even if CVR Energy is able to successfully integrate the
business operations of GWEC, there can be no assurance that this
integration will result in the realization of the full benefits
of the expected synergies, cost savings, innovation and
operational efficiencies or that these benefits will be achieved
within the anticipated time frame.
The future
results of the combined company will suffer if CVR Energy does
not effectively manage its expanded operations following the
Acquisition.
Following the Acquisition, the size of CVR Energys
business will increase significantly and our existing management
and operational infrastructure will be responsible for operating
two refineries located in different states. The combined
companys future success depends, in part, upon its ability
to manage this expanded business, which will pose substantial
challenges for management, including challenges related to the
management and monitoring of new operations and associated
increased costs and complexity. There can be no assurances that
the combined company will be successful or that it will realize
the expected operating efficiencies, cost savings, revenue
enhancements and other benefits currently anticipated from the
Acquisition.
CVR Energy is
expected to incur substantial expenses related to the
Acquisition and the integration of GWEC.
CVR Energy is expected to incur substantial expenses in
connection with the Acquisition and the integration of GWEC.
There are a large number of processes, policies, procedures,
operations, technologies and systems that must be integrated,
including purchasing, accounting and finance, sales, billing,
payroll, pricing, revenue management, maintenance, marketing and
benefits. While CVR Energy has assumed that a certain level of
expenses would be incurred, there are many factors beyond its
control that could affect the total amount or the timing of the
integration expenses. Moreover, many of the expenses that will
be incurred are, by their nature, difficult to estimate
accurately. These expenses could, particularly in the near term,
exceed the savings that the combined company expects to achieve
from the elimination of duplicative expenses and the realization
of economies of scale and cost savings. These integration
expenses likely will result in the combined company taking
significant charges against earnings following the completion of
the Acquisition, and the amount and timing of such charges are
uncertain at present.
Uncertainties
associated with the Acquisition may cause a loss of management
personnel and other key employees, which could adversely affect
the future business and operations of the combined
company.
CVR Energy and GWEC are dependent on the experience and industry
knowledge of their officers and other key employees to execute
their business plans. The combined companys success after
the merger will depend in part upon the ability of CVR Energy
and GWEC to retain key management personnel and other key
employees. Current and prospective employees of CVR Energy and
GWEC employees may experience uncertainty about their roles
within the combined company following the Acquisition, which may
have an adverse effect on the ability of each of CVR Energy and
GWEC to attract or retain key management and other key
personnel. Accordingly, no assurance can be given that the
combined company will be able to attract or retain key
management personnel and other key employees of CVR Energy and
GWEC to the same extent that CVR Energy and GWEC have previously
been able to attract or retain their own employees.
41
There are risks
associated with U.S. government contracts that differ from the
risks associated with typical commercial contracts. These risks
could have a material adverse effect on our business.
Since 1996, GWEC has been party to a contract (renewed annually)
with the United States government to sell jet fuel to
Mid-Continent Air Force bases. This contract accounted for 5% of
GWECs sales in 2010. U.S. government contracts
contain provisions and are subject to laws and regulations that
provide the government with rights and remedies not typically
found in commercial contracts. In the event that GWEC is found
to have violated certain laws or regulations, GWEC could be
subject to penalties and sanctions, including, in the most
serious cases, potential suspension or debarment from conducting
future business with the U.S. government. As a result of
the need to comply with these laws and regulations, GWEC could
also be subject to increased risks of governmental
investigations, civil fraud actions, criminal prosecutions,
whistleblower law suits and other enforcement actions. By way of
example, civil False Claims Act actions could subject us to
treble penalties, and we could be subject to fines of up to
$12,000 for each claim submitted to the U.S. government.
U.S. government contracts are subject to modification,
curtailment or termination by the U.S. government with
little notice, either for convenience or for default as a result
of GWECs failure to perform under the applicable contract.
If the U.S. government terminates this contract as a result
of GWECs default, GWEC could be liable for additional
costs the U.S. government incurs in acquiring undelivered
goods or services from another source and any other damages it
suffers. Additionally, GWEC cannot assign prime
U.S. government contracts without the prior consent of the
U.S. government contracting officer, and GWEC is required
to register with the Central Contractor Registration Database.
There can be no assurance that GWEC will maintain this jet fuel
contract with the United States Government in the future.
The preliminary unaudited pro
forma condensed consolidated financial information included
elsewhere in this Current Report on Form 8-K may not be representative
of the combined results of CVR Energy and GWEC after the
consummation of the Acquisition.
CVR Energy and GWEC currently operate as separate companies. We
have had no prior history as an integrated entity and our
operations have not previously been managed on an integrated
basis. The unaudited pro forma condensed consolidated financial
information is presented for illustrative purposes only and may
not be indicative of the combined companys financial
position or results of operations that would have actually
occurred had the Acquisition been completed at or as of the
dates indicated, nor is it indicative of our future operating
results or financial position. For example, the unaudited pro
forma condensed consolidated financial information has been
derived from our historical financial statements and GWECs
historical financial statements, and certain adjustments and
assumptions have been made regarding the combined company after
giving effect to the Acquisition. The information upon which
these adjustments and assumptions have been made is preliminary,
and these kinds of adjustments and assumptions are difficult to
make with accuracy. In particular, the unaudited pro forma
condensed consolidated financial information reflects
adjustments, which are based upon preliminary estimates, to
allocate the purchase price to GWECs net assets, whereas
the final allocation of the purchase price will be based upon
the actual purchase price and the fair value of the assets and
liabilities of GWEC as of the date of the completion of the
Acquisition. The preliminary purchase price estimates underlying
the pro forma financial information may be adjusted for up to
one year following the closing of the Acquisition, and the final
purchase price adjustments may be materially different from the
pro forma adjustments presented herein. Additionally, the
unaudited pro forma condensed consolidated financial information
does not reflect future non-recurring charges resulting from the
Acquisition or future events that may occur after the
Acquisition, including the potential costs or savings related to
the
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planned integration of GWEC such as investments in
environmental, health and safety matters that we intend to make
following the Acquisition, and does not consider potential
impacts of current market conditions on revenues or expense
efficiencies.
The pro forma financial information presented in this Current
Report on Form 8-K is based in part on certain assumptions regarding the
Acquisition that we believe are reasonable under the
circumstances. We cannot assure you that our assumptions will
prove to be accurate over time.
We may not
uncover all risks associated with the Acquisition and a
significant liability may arise after closing.
We may become responsible for unexpected liabilities that we
failed or were unable to discover in the course of performing
due diligence in connection with the Acquisition. We have
required the seller to indemnify us under certain circumstance.
However our rights to indemnification are limited and we cannot
assure you that the indemnification, even if obtained, will be
enforceable, collectible or sufficient in amount, scope or
duration to fully offset the possible liabilities associated
with the business or property acquired. Any of these
liabilities, individually or in the aggregate, could have a
material adverse effect on our business, financial condition and
results of operations.
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