Note 7—Commitments and contingencies

Environmental matters

We have been named as a defendant for certain environmental sites pursuant to governmental laws and private actions, including waste disposal sites and facilities currently or previously owned, operated or used by us. These proceedings seek cleanup costs, damages for personal injury or property damage and/or damages for injury to natural resources. Additionally, KSW's facilities are subject to regulatory oversight and enforcement activities. These activities may identify compliance violations which may result in penalties. Certain of these proceedings involve claims for substantial amounts.

On a quarterly basis, we evaluate the potential range of our liability at sites where we have been named a defendant by analyzing and estimating the range of reasonably possible costs to us. At December 31, 2011, the upper end of the range of reasonably possible costs to us for sites where we have been named a defendant is approximately $2.1 million, including our recorded accrual of $.4 million. Our cost estimates have not been discounted to present value due to the uncertainty of the timing of the pay out. At each balance sheet date, we make an estimate of the amount of our accrued environmental costs that will be paid out over the subsequent twelve months, and we classify such amount as a current liability. We classify the remainder of the accrued environmental costs as noncurrent liabilities. See Note 8.

It is possible our actual costs could differ materially from the amounts we have accrued or the upper end of the estimated range for the sites where we have been named a defendant. Our ultimate liability may be affected by a number of factors, including the imposition of more stringent standards or requirements under environmental laws or regulations, new developments or changes in remedial alternatives and costs or a determination that we are potentially responsible for the release of hazardous substances at other sites. Although we believe our comprehensive general liability insurance policies provide indemnification for certain costs that we incur with respect to our environmental remediation obligations, we do not currently have receivables recorded for any such recoveries.

Issues Outstanding at December 31, 2011

Prior to one of our subsidiaries' 1996 acquisition of DeSoto, Inc. ("DeSoto"), DeSoto was notified by the Texas Natural Resource Conservation Commission (now called the Texas Commission on Environmental Quality or "TCEQ") that there were certain deficiencies in prior reports to the TCEQ relative to one of DeSoto's non-operating facilities located in Gainesville, Texas. During 1999, that subsidiary entered into the TCEQ's Voluntary Cleanup Program as it relates to that facility. We are currently pursuing a Municipal Setting Designation ("MSD") for this site which would eliminate the need for long-term groundwater remediation and monitoring. We estimate the cost of future remediation under an MSD at approximately $.1 million. If we are not successful in obtaining an MSD, remediation activities at this site would likely continue for another two to three years and could cost as much as $1.7 million.

In February 2009, we received a Notice of Violation ("NOV") from the United States Environmental Protection Agency (the "U.S. EPA") regarding alleged air permit issues at KSW. The U.S. EPA alleges KSW (i) is exceeding its sulfur dioxide emission limits set forth in its permits, (ii) failed to apply for a permit that would be issued under the U.S. Clean Air Act and the Illinois Environmental Protection Act in connection with the installation of certain equipment in its melt shop, and (iii) failed to monitor pH readings of an air scrubber in the wire galvanizing area of the plant. We disagree with the U.S. EPA's assertions and we were in discussions with the U.S. EPA throughout 2009. On December 31, 2009, we were notified the case had been referred to the Department of Justice (the "DOJ") for review and follow-up. During the first quarter of 2010, we submitted letters to the DOJ regarding our perspective on the matter. During the second quarter of 2010, the U.S. EPA requested additional information regarding the alleged permit issues and we submitted such information in May 2010.

In July 2011, we received a Notice and Finding of Violation ("NOV/FOV") from the U.S. EPA alleging KSW failed to properly control air emissions and install a baghouse in accordance with terms and conditions of its Prevention of Significant Deterioration ("PSD") construction permit issued on June 1, 2000.

While we continue to dispute certain of the U.S. EPA's underlying assertions about these alleged violations contained in the February 2009 NOV and the July 2011 NOV/FOV, we have already undertaken corrective actions to address others and have worked diligently to reach resolution of the matters. KSW met with EPA Region V and the DOJ during August 2011 and February 2012 to discuss both the February 2009 NOV and the July 2011 NOV/FOV. To date, a formal complaint from the DOJ has not been issued. Settlement discussions cannot proceed until a formal complaint has been filed by the DOJ. Therefore, we cannot estimate any potential costs to us to resolve these matters and we can make no assurance our efforts will be successful or that we can avoid any enforcement action or resulting fines from these alleged violations.

Closure of Waste Management Units During 2009

Since September 1992, we had been involved in the closure of inactive waste management units (the "WMUs") at KSW's Peoria, Illinois facility pursuant to a Consent Order (the "Consent Order") and a closure plan approved by the IEPA. The closure involved a six-phase remediation plan, with each phase requiring separate final approval from the IEPA. In July 2009, we received final approval from the IEPA for the completion of the soil portion of the plan for all of the WMUs. The amount of remediation we were ultimately required to undertake pursuant to such approval was not as extensive as we had estimated in prior years, and accordingly we reduced our accrual for this matter by $4.2 million during 2009.

As part of the Consent Order, we established a trust fund (the "Trust Fund") in which monies were deposited to create a cash reserve for the corrective action work and for the potential of third party claims. Through a modification of the Consent Order in 2005, we were then permitted to withdraw funds from the Trust Fund as we incurred costs related to the remediation. In connection with the IEPA's final approval of the soil portion of the WMUs, the IEPA released approximately $2.0 million of the escrowed funds to us during 2009.

Current litigation

From time-to-time, we are involved in various environmental, contractual, product liability, patent (or intellectual property), employment and other claims and disputes incidental to our operations. In certain cases, we have insurance coverage for these items. We currently believe the disposition of all claims and disputes, individually or in the aggregate, should not have a material adverse effect on our consolidated financial position, results of operations or liquidity beyond the accruals we have already provided.

Lease commitments

At December 31, 2011, we are obligated under certain operating leases through 2016. Future commitments under these leases are summarized below.


	Lease commitment
	(In thousands)

2012	$	736
2013		385
2014		203
2015		150
2016		75

Total	$	1,549

Product supply agreements

In 1996, we entered into a fifteen-year product supply agreement with a vendor whereby the vendor constructed a plant at KSW's Peoria, Illinois facility and, subsequently provided us with all, subject to certain limitations, of our gaseous oxygen and nitrogen needs through 2011. In addition to specifying rates to be paid by us, including a minimum facility fee of approximately $1.5 million per year, the supply agreement also specified provisions for adjustments to the rates and term of the supply agreement. During November 2011, a similar ten-year product supply agreement was executed detailing quantities of delivery, specific rates and provisions for adjustments to those rates, including a minimum facility fee of approximately $1.4 million per year. Purchases made pursuant to the supply agreement during 2009, 2010 and 2011 amounted to $3.1 million, $3.3 million and $3.1 million, respectively.

We also have a product supply agreement with a vendor that processes certain by-products of our electric arc furnace mini-mill under which we are required to pay a fixed monthly fee aggregating $.9 million a year through 2016. Purchases, including the fixed monthly fee, pursuant to the supply agreement during 2009, 2010 and 2011 amounted to $2.6 million, $2.2 million and $2.6 million, respectively.

Income taxes

We have agreed to a policy with Contran providing for the allocation of tax liabilities and tax payments as described in Note 1. Under applicable law, we, as well as every other member of the Contran Tax Group, are each jointly and severally liable for the aggregate federal income tax liability of Contran and the other companies included in the Contran Tax Group for all periods in which we are included in the Contran Tax Group. Contran has agreed, however, to indemnify us for any liability for income taxes of the Contran Tax Group in excess of our tax liability previously computed and paid by us in accordance with the tax allocation policy.

Concentration of credit risk

We perform ongoing credit evaluations of our customers' financial condition and, generally, require no collateral from our customers. Our segments are not dependent upon a single customer or a few customers, and the loss of any one, or a few, would not have a material adverse effect on our business. No single customer represented 10% or more of our consolidated sales during 2011.