Exhibit 99.3
Mobile Refinery and Logistics Assets
Combined Financial Statements
For the Years Ended December 31, 2019 and 2018
Table of Contents
| Combined Financial Statements | Page(s) |
| Independent Auditor’s Report | 1-2 |
| Combined Balance Sheets | 3 |
| Combined Statements of Operations | 4 |
| Combined Statements of Changes in Net Parent Investment | 5 |
| Combined Statements of Cash Flows | 6 |
| Notes to Combined Financial Statements | 7 – 20 |
To the Management of
Shell Oil Company
Report on the Financial Statements
We have audited the accompanying combined financial statements of Mobile Refinery and Logistics Assets (the Company), which comprise the combined balance sheets as of December 31, 2019 and 2018, the related combined statements of operations, changes in net parent investment and cash flows for the years then ended, and the related notes to the combined financial statements (collectively, the financial statements).
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these 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 audits to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Mobile Refinery and Logistics Assets as of December 31, 2019 and 2018, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
1
Emphasis of Matter - Carve-out Presentation
As discussed in Note 1, the accompanying combined financial statements reflect the assets, liabilities, revenue and expenses directly attributable to the carve out entity as well as allocations deemed reasonable by management, to present the financial position, results of operations, changes in net parent investment, and cash flows in the combined financial statements. Our opinion is not modified with respect to this matter.
Emphasis of Matter - Prior Period Restatement
As discussed in Note 3 to the combined the financial statements, the 2018 and 2019 financial statements have been restated to correct a misstatement. Our opinion is not modified with respect to this matter.
Houston, Texas
November 20, 2020, except for Notes 3 and 14, as to which the
date is September 8, 2021
2
Mobile Refinery and Logistics Assets
(in millions of dollars)
| As of December 31, | ||||||||||||
Notes | 2019 (As Restated) | 2018 (As Restated) | ||||||||||
| Assets | ||||||||||||
| Current assets | ||||||||||||
| Inventory | 6 | $ | 112.1 | $ | 99.8 | |||||||
| Accounts receivable - related parties | — | 124.5 | 131.4 | |||||||||
| Accounts receivable - third parties | — | 9.1 | 5.5 | |||||||||
| Environmental credits | 10 | 12.1 | 18.0 | |||||||||
| Prepaid expenses | — | 2.5 | 2.3 | |||||||||
| Taxes (other than income tax) receivable | — | 0.7 | 0.5 | |||||||||
| Total current assets | 261.0 | 257.5 | ||||||||||
| Property, plant, and equipment, net | 5 | 257.6 | 224.9 | |||||||||
| Total assets | $ | 518.6 | $ | 482.4 | ||||||||
| Liabilities | ||||||||||||
| Current liabilities | ||||||||||||
| Accounts payable - related parties | — | $ | 29.6 | $ | 30.5 | |||||||
| Accounts payable - third parties | — | 11.3 | 4.2 | |||||||||
| Accrued liabilities - related parties | 13 | 125.4 | 152.9 | |||||||||
| Accrued liabilities - third parties | 13 | 19.0 | 15.6 | |||||||||
| Environmental credits | 10 | 20.5 | 18.0 | |||||||||
| Taxes (other than income tax) payable | — | 4.1 | 4.7 | |||||||||
| Total current liabilities | 209.9 | 225.9 | ||||||||||
| Deferred tax liability, net | 11 | 25.8 | 30.7 | |||||||||
| Capital lease obligations | 12 | 5.8 | 8.5 | |||||||||
| Other non-current liabilities | 13 | 1.2 | 6.3 | |||||||||
| Total liabilities | 242.7 | 271.4 | ||||||||||
| Net parent investment | ||||||||||||
| Net parent investment | — | 275.9 | 211.0 | |||||||||
| Total net parent investment | 275.9 | 211.0 | ||||||||||
| Total liabilities and net parent investment | $ | 518.6 | $ | 482.4 | ||||||||
The accompanying notes are an integral part of the combined financial statements.
3
Mobile Refinery and Logistics Assets
Combined Statements of Operations
(in millions of dollars)
| Years Ended December 31, | ||||||||||||
| Notes | 2019 | 2018 | ||||||||||
| Revenue | — | $ | 1,968.7 | $ | 2,215.5 | |||||||
| Costs and expenses | ||||||||||||
Cost of sales | — | 1,864.0 | 2,119.1 | |||||||||
| Operations and maintenance expenses - related parties | — | 11.0 | 8.6 | |||||||||
| Operations and maintenance expenses - third parties | — | 46.8 | 47.9 | |||||||||
| General and administrative expenses - related parties | — | 23.0 | 22.8 | |||||||||
| General and administrative expenses - third parties | — | 14.7 | 16.7 | |||||||||
| Property and other taxes | — | 3.7 | 2.0 | |||||||||
| Depreciation and amortization | — | 21.8 | 21.7 | |||||||||
| Loss on disposal of non-current assets | 5 | 1.7 | — | |||||||||
| Operating loss | (18.0 | ) | (23.3 | ) | ||||||||
Interest expense | 12 | 0.6 | 0.7 | |||||||||
| Loss before taxes | (18.6 | ) | (24.0 | ) | ||||||||
| Income tax benefit | 11 | (4.9 | ) | (6.2 | ) | |||||||
| Net loss | $ | (13.7 | ) | $ | (17.8 | ) | ||||||
The accompanying notes are an integral part of the combined financial statements.
4
Mobile Refinery and Logistics Assets
Combined Statements of Changes in Net Parent Investment
(in millions of dollars)
| Years Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| (As Restated) | (As Restated) | |||||||
Balance, beginning of year | $ | 211.0 | $ | 200.4 | ||||
| Net loss | (13.7 | ) | (17.8 | ) | ||||
| Net contributions from Parent | 78.6 | 28.4 | ||||||
| Balance, end of year | $ | 275.9 | $ | 211.0 | ||||
The accompanying notes are an integral part of the combined financial statements.
5
Mobile Refinery and Logistics Assets
Combined Statements of Cash Flows
(in millions of dollars)
| Years Ended December 31, | ||||||||
| 2019 | 2018 (As Restated) | |||||||
| Operating activities | ||||||||
| Net loss | $ | (13.7 | ) | $ | (17.8 | ) | ||
| Adjustments to reconcile loss to net cash flows from operating activities: | ||||||||
| Depreciation and amortization | 21.8 | 21.7 | ||||||
| Deferred income tax benefit | (4.9 | ) | (6.2 | ) | ||||
| Loss on disposal of non-current assets | 1.7 | — | ||||||
| Changes in assets and liabilities: | ||||||||
| Inventory | (12.3 | ) | 26.2 | |||||
| Accounts receivable - related parties | 6.9 | (15.4 | ) | |||||
| Accounts receivable - third parties | (3.6 | ) | 8.5 | |||||
| Prepaid expenses | (0.2 | ) | (0.1 | ) | ||||
| Taxes (other than income tax) receivable | (0.2 | ) | — | |||||
| Environmental credits assets | 5.9 | 24.3 | ||||||
| Accounts payable - related parties | (0.9 | ) | (21.8 | ) | ||||
| Accounts payable - third parties | 0.1 | 0.7 | ||||||
| Accrued liabilities - related parties | (27.5 | ) | — | |||||
| Accrued liabilities - third parties | (0.1 | ) | (2.6 | ) | ||||
| Environmental credits obligations | 2.5 | (24.3 | ) | |||||
| Taxes (other than income tax) payable | (0.6 | ) | — | |||||
| Other non-current liabilities | (5.1 | ) | 5.3 | |||||
| Net cash used in operating activities | (30.2 | ) | (1.5 | ) | ||||
| Investing activities | ||||||||
| Capital expenditures | (45.8 | ) | (24.4 | ) | ||||
| Net cash used in investing activities | (45.8 | ) | (24.4 | ) | ||||
| Financing activities | ||||||||
| Repayment of capital lease obligations | (2.6 | ) | (2.5 | ) | ||||
| Net contributions from Parent | 78.6 | 28.4 | ||||||
| Net cash provided by financing activities | 76.0 | 25.9 | ||||||
| Net change in cash and cash equivalents | — | — | ||||||
| Cash and cash equivalents at beginning of year | — | — | ||||||
| Cash and cash equivalents at end of year | $ | — | $ | — | ||||
The accompanying notes are an integral part of the combined financial statements.
6
Mobile Refinery and Logistics Assets
Notes to Combined Financial Statements
(in millions of dollars)
| 1 | Nature of Operations and Basis of Presentation |
Nature of Operations - The Mobile Refinery and Logistics Assets (“carve-out operations,” “Asset Group,” “we,” “us,” or “our”) are a group of downstream assets that operate ten miles north of Mobile in Saraland, Alabama, which include the Mobile Refinery and the Blakely Island Terminal, as well as the related logistics infrastructure of the Mobile Truck Rack. We are owned and operated by subsidiaries of Shell Oil Company. The term “Parent” refers collectively to Royal Dutch Shell plc, Shell Oil Company, and their subsidiaries.
Our carve-out operations consist of the Mobile Refinery and the Blakely Island Terminal operations in Alabama, which process heavy and sour crude to produce heavy olefin feed, regular gasoline, premium gasoline, jet fuel, and diesel fuel. The carve-out operations also include the Mobile Truck Rack, which facilitates vehicle distribution and includes terminal capacity.
Basis of Presentation - The accompanying combined financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and reported in U.S. dollars, which is both the functional and reporting currency of the Asset Group.
The combined financial statements have been prepared on a historical cost basis. The accompanying combined financial statements were derived from the consolidated financial statements and accounting records of our Parent. These combined financial statements reflect the historical results of operations, financial position, and cash flows of the carve-out operations. All intercompany transactions and accounts between us and our Parent have been reflected as accounts receivable – related parties, accounts payable – related parties, and net parent investment in the accompanying combined balance sheets.
The accompanying combined statements of operations also includes expense allocations for certain functions historically performed by our Parent, including allocations of general corporate expenses related to finance, legal, information technology, human resources, communications, shared services, employee benefits and insurance. The portion of expenses specifically attributable to the carve-out operations is reflected in our combined financial statements in its entirety. Our management believes the assumptions underlying the combined financial statements, including the assumptions regarding allocation of expenses from the Parent, are reasonable. Nevertheless, the accompanying combined financial statements may not include all the expenses that would have been incurred or reflect our results of operations, financial position, and cash flows had we operated as a stand-alone company during the years presented.
We did not maintain separate bank accounts for the carve-out operations. The cash generated and used by our operations is deposited to our Parent’s centralized account, which is commingled with the cash of other entities controlled by our Parent. Our Parent funds our operating and investing activities, as needed. Accordingly, we did not record any cash and cash equivalents held by our Parent on our behalf for the year presented. We reflected the cash generated by our operations and expenses paid by our Parent on behalf of our operations as accounts receivable – related parties, accounts payable – related parties, and net parent investment in the accompanying combined balance sheets, combined statements of changes in net parent investment, and net contributions from Parent in the accompanying combined statements of cash flows. Changes in current assets and current liabilities related to the Parent are reflected in the operating activities section of the combined statements of cash flows. The changes in net parent investment are reflected in the financing section of the combined statements of cash flows.
7
Mobile Refinery and Logistics Assets
Notes to Combined Financial Statements
(in millions of dollars)
Reclassification – Certain comparative figures have been reclassified to conform to the current year presentation with no effect to net loss or net parent investment.
| 2 | Summary of Significant Accounting Policies |
Revenue Recognition - Our revenues are generated through the sale of refined petroleum products and terminalling and storage services. We recognize revenue from product sales at prevailing market rates at the point in time in which the customer obtains ownership, title and/or risk of loss of the product. Terminalling and storage revenues are recognized as services are rendered, and our performance obligations have been satisfied once the product has been transferred back to the customer. These services are short-term in nature and the service fees charged to our customers are at prevailing market rates. The timing of our revenue recognition may differ from the timing of payment from our customers. A receivable is recorded when revenue is recognized prior to payment and we have unconditional right to payment. We record an allowance for doubtful accounts if the receivable no longer becomes probable of collecting, no allowances have been recorded for the periods presented.
Leases - We lease assets for use in our operations. All lease agreements are evaluated and classified as either an operating lease or a capital lease. A lease is classified as a capital lease if any of the following criteria are met: transfer of ownership to the lessee by the end of the lease term, the lease contains a bargain purchase option, the lease term is equal to 75% or greater of the asset’s useful economic life, or the present value of the future minimum lease payments is equal to or greater than 90% of the asset’s fair market value. Capital leases are recorded at the lower of the net present value of the total amount of rent payable under the leasing agreement (excluding finance charges) or fair market value of the leased asset. Capital lease assets are depreciated on a straight-line basis over a period consistent with our normal depreciation policy for tangible fixed assets, but not exceeding the lease term. Operating lease expense is recognized ratably over the entire lease term.
Net Parent Investment - In the accompanying combined balance sheets, net parent investment represents our Parent’s historical investment in us, our accumulated net earnings and the net effect of transactions with, and allocations from, our Parent.
Property, Plant, and Equipment - Property, plant, and equipment are initially recorded in the combined balance sheets at cost where it is probable that they will generate future economic benefits. Property, plant, and equipment are subsequently recognized at cost, less accumulated depreciation in the combined balance sheets. Cost of repairs from normal maintenance of property are expensed as incurred. Gains and losses on disposal of property, plant, and equipment are determined by comparing disposal proceeds with the carrying amounts of assets sold and recognized in the combined statements of operations as gain or loss on disposal of property, plant, and equipment.
8
Mobile Refinery and Logistics Assets
Notes to Combined Financial Statements
(in millions of dollars)
Depreciation - Refining facilities and related equipment are depreciated on a straight-line basis over their useful lives of two to 40 years. Where facilities and equipment, including major components, are significant in relation to the total cost of the assets and have differing useful lives, they are depreciated separately. Major inspection costs, overhaul, and turnaround activities are depreciated over the estimated period before the next planned major activity (two to nine years). Capital expenditures are not depreciated until assets are substantially complete and ready for their intended use.
Impairment of Assets - We evaluate long-lived assets of identifiable business activities for impairment when events or changes in circumstances indicate, in our management’s judgment, the carrying value of such assets may not be recoverable. These events include market declines that are believed to be other than temporary, changes in the way we intend to use a long-lived asset, decisions to sell an asset, and adverse changes in the legal or business environment, such as adverse actions by regulators. If an event occurs, which is a determination that involves judgment, we perform an impairment assessment by comparing our management’s estimate of forecasted undiscounted future cash flows associated with the asset to the asset’s net book value. If the net book value exceeds our estimate of forecasted undiscounted cash flows, an impairment is recorded, and the asset is remeasured to its fair value in accordance with the approaches prescribed in Accounting Standards Codification (“ASC”) 820. We did not recognize any asset impairments during the years ended December 31, 2019 and 2018.
Cost Classification - Cost of sales includes the purchase of material inputs into our refining process, utilities used in the refining process, and the cost of compliance with environmental regulations associated with our refining operations. Our operation and maintenance expenses include direct labor costs, repairs and maintenance, chemicals and catalysts, plant insurance, outside services, and some operational support services provided by our Parent.
Historically, our Parent and its related parties performed certain services, which directly and indirectly supported our operations. Personnel and operating costs incurred by our Parent on our behalf were charged to us and are included in either general and administrative expenses or operations and maintenance expenses, depending on the nature of the employee’s role in our operations in the accompanying combined statements of operations. Our Parent also performs certain general corporate functions for us related to finance, legal, information technology, human resources, communications, ethics and compliance, and other shared services. See “Note 7 – Related-Party Transactions” for further discussion on our related-party transactions.
Income Taxes - The Asset Group has never filed a separate state or federal return. For the purpose of preparing a tax provision for these combined financial statements, we used the separate return method to calculate the estimated tax impact. We follow the asset and liability method of accounting for income taxes, whereby deferred income taxes are recorded for the effect of differences between the accounting and income tax basis of an asset or liability. Deferred income tax assets and liabilities are measured using enacted or substantively enacted income tax rates as of the balance sheet date that are anticipated to apply to taxable income in the years in which temporary differences are anticipated to be recovered or settled.
9
Mobile Refinery and Logistics Assets
Notes to Combined Financial Statements
(in millions of dollars)
We review our deferred tax assets, including net operating loss carryovers, for recoverability and a valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset may not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the temporary differences become deductible. Among other items, we consider the scheduled reversal of deferred tax liabilities, projected future taxable income and available tax planning strategies. Based on the scheduled reversal of deferred tax liabilities, we believe that we will be able to realize our deferred tax assets in the future.
Pension and Other Postretirement Benefits - We participate in employee benefit programs sponsored by our Parent, consisting of a defined benefit pension plan and other postretirement benefits, including certain health care and life insurance benefits, for its retired employees and eligible surviving dependents. The estimated future cost of providing defined benefit pension and other postretirement benefits to all members of the program is determined by the Parent using its best estimate of demographic and financial assumptions.
For presentation of the accompanying combined financial statements, our portion of employee benefit plan costs have been allocated as a charge to us by Shell Oil Company. Shell Oil Company sponsors various employee pension and postretirement health and life insurance plans. We participate in the following defined benefit plans: Shell Oil Pension Plan, Shell Benefit Restoration Pension Plan, Alliance Restoration Plan, Shell Oil Company Comprehensive Welfare Benefits Plan, and Pennzoil-Quaker State Retiree Medical & Life Insurance. As a participant in multiemployer benefit plans, we recognize as expense an allocation from Shell Oil Company, and we do not recognize any employee benefit plan assets, liabilities, or other comprehensive income or loss. Pension expenses are included in general and administrative expenses in the accompanying combined statements of operations.
Inventories - Inventories of crude oil, feedstocks, and refined products are valued at the lower of cost or net realizable value, using the first-in, first-out method. Costs include direct expenditures incurred in bringing an item or product to its existing condition and location. Materials and supplies are valued at the lower of cost or net realizable value. Net realizable value is the estimate of the selling price in the ordinary course of business, less selling expenses. See “Note 6 – Inventory” for additional information.
Commitments and Contingencies - We are subject to litigation and regulatory proceedings as the result of our business operations and transactions. We utilize both internal and external counsel in evaluating our potential exposure to adverse outcomes from orders, judgments, or settlements. In general, we expense legal costs as incurred. When we identify specific litigation that is expected to continue for a significant period, is reasonably possible to occur and may require substantial expenditures, we identify a range of possible costs expected to be required to litigate the matter to a conclusion or reach an acceptable settlement, and we accrue for the best estimate in the range. To the extent actual outcomes differ from our estimates, or additional facts and circumstances cause us to revise our estimates, our earnings will be affected. See “Note 9 – Commitments and Contingencies” for additional information.
10
Mobile Refinery and Logistics Assets
Notes to Combined Financial Statements
(in millions of dollars)
Environmental Compliance Activities - We are subject to federal, state, and local environmental laws and regulations. Environmental expenditures are expensed or capitalized depending on their economic benefit. We expense costs, such as permits, compliance with existing environmental regulations, remedial investigations, soil sampling, and testing and monitoring costs to meet applicable environmental laws and regulations, where prudently incurred or determined to be reasonably possible in the ordinary course of business. We record environmental liabilities when environmental assessments and/or remedial efforts are probable, and we can reasonably estimate the costs. If we determine that a loss is probable and the loss or range of loss can be estimated, we disclose the possible loss in the notes to the combined financial statements. We recognize receivables for anticipated associated insurance recoveries when such recoveries are deemed to be probable. See “Note 10 – Environmental Compliance Activities” for a full breakdown of environmental activities.
As our refinery resides within the United States, we are subject to biofuel requirements under the Renewable Fuels Standards (“RFS”) that requires us to purchase renewable identification numbers (“RINs”) credits to meet our obligation. Our refinery is also subject to the Environmental Protection Agency’s (“EPA”) Mobile Source Air Toxics (“MSAT”) gasoline fuel program, which requires us to meet an annual average gasoline benzene and sulfur content standard. See “Note 10 – Environmental Compliance Activities” for a breakdown of our liabilities and assets related to environmental compliance.
We account for the inventory and associated liabilities of our environmental credits on a gross basis. Our Asset Group generates Sulfur credits which are issued by the EPA. Benzene and RINs credits are either transferred from our Parent or purchased within the open market. The inventory is recorded once we obtain legal title of the credits and is recorded at historical cost. The obligations and associated expenses are accrued for during the fiscal year in which the obligation is incurred, and the liability is subsequently relinquished once the credits are surrendered to the EPA. The cost of the accrued expense is valued based upon the cost of the inventory and recognized on a First In, First Out (“FIFO”) basis. For the years ended December 31, 2019 and 2018, the cost of the obligation and associated expenses were based on actual known purchase of inventory or future purchase commitments.
Asset Retirement Obligations - We record a liability, which is referred to as an asset retirement obligation, at fair value for the estimated cost to retire a tangible long-lived asset at the time we incur that liability, which is generally when the asset is purchased, constructed, or leased. We record the liability when we have a legal obligation to incur costs to retire the asset and when a reasonable estimate of the fair value of the liability can be made. If a reasonable estimate cannot be made at the time the liability is incurred, we record the liability when sufficient information is available to estimate the liability’s fair value.
We have obligations with respect to certain owned assets to clean and/or dispose of various component parts at the time the assets 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 our practice and current intent to maintain all our assets and continue making improvements to those assets based on technological advances. As a result, we believe that our assets have indeterminate lives for purposes of estimating asset retirement obligations because dates, or ranges of dates, upon which we would retire such assets cannot reasonably be estimated at this time. We will recognize a liability at such time when sufficient information exists to estimate a date, or range of potential settlement dates, that is needed to employ a present value technique to estimate fair value.
11
Mobile Refinery and Logistics Assets
Notes to Combined Financial Statements
(in millions of dollars)
Use of Estimates - The preparation of combined financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the accompanying combined financial statements and notes. While management believes current estimates are reasonable and appropriate, actual results could differ from those estimates.
Estimates and judgments are continually evaluated by management and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.
| 3 | Restatement of Previously Reported Combined Financial Statements |
Subsequent to the issuance of the Asset Group’s 2018 and 2019 financial statements, we discovered that there were unsettled balances between the Asset Group and one of its affiliates, Shell Trading (US) Company (“STUSCO”), for crude purchases in 2018. On a monthly basis, STUSCO bills the Asset Group for crude purchased during the month based on the provisional prices. In the following month, STUSCO performs an actual to estimate analysis over its accounts receivable based on the actual prices of crude sold. However, the resulting difference between estimate and actual crude prices in 2018 were not billed to the Asset Group until November 2020.
We have concluded that the effect of the error described above on the Asset Group’s previously reported combined financial statements is material. As such, the combined financial statements as of December 31, 2019, and 2018 and for the years ended December 31, 2019, and 2018, and accompanying notes thereto have been restated from the amounts previously reported to give effect to the correction of this error.
The section below discloses the impact of the restatement matter on the combined financial statements for each of the years ended December 31, 2019 and 2018.
Combined Balance Sheet
| As of December 31, 2018 (in million $) | ||||||||||||
Previously Reported |
Adjustments |
As Restated | ||||||||||
| Accounts payable - related parties | 24.8 | 5.7 | 30.5 | |||||||||
| Deferred tax liability, net | 32.1 | (1.4 | ) | 30.7 | ||||||||
| Net Parent Investment | 215.3 | (4.3 | ) | 211.0 | ||||||||
| Combined Balance Sheet | ||||||||||||
| As of December 31, 2019 (in million $) | ||||||||||||
Previously Reported |
Adjustments |
As Restated | ||||||||||
| Accounts payable - related parties | 23.9 | 5.7 | 29.6 | |||||||||
| Deferred tax liability, net | 27.2 | (1.4 | ) | 25.8 | ||||||||
| Net Parent Investment | 280.2 | (4.3 | ) | 275.9 | ||||||||
12
Mobile Refinery and Logistics Assets
Notes to Combined Financial Statements
(in millions of dollars)
Combined Statement of Operations
| For the Year Ended December 31, 2018 (in million $) | ||||||||||||
| Previously Reported | Adjustments | As Restated | ||||||||||
| Cost of sales | 2,113.4 | 5.7 | 2,119.1 | |||||||||
| Operating loss | (17.6 | ) | (5.7 | ) | (23.3 | ) | ||||||
| Loss before taxes | (18.3 | ) | (5.7 | ) | (24.0 | ) | ||||||
| Income tax benefit | (4.8 | ) | (1.4 | ) | (6.2 | ) | ||||||
| Net loss | (13.5 | ) | (4.3 | ) | (17.8 | ) | ||||||
Combined Statement of Changes in Net Parent Investment
| For the Year Ended December 31, 2018 (in million $) | ||||||||||||
| Previously Reported | Adjustments | As Restated | ||||||||||
| Net loss | (13.5 | ) | (4.3 | ) | (17.8 | ) | ||||||
| Balance, end of year | 215.3 | (4.3 | ) | 211.0 | ||||||||
Combined Statement of Changes in Net Parent Investment
| For the Year Ended December 31, 2018 (in million $) | ||||||||||||
| Previously Reported | Adjustments | As Restated | ||||||||||
| Net loss | 215.3 | (4.3 | ) | 211.0 | ||||||||
| Balance, end of year | 280.2 | (4.3 | ) | 275.9 | ||||||||
13
Mobile Refinery and Logistics Assets
Notes to Combined Financial Statements
(in millions of dollars)
Combined Statement of Cash Flows
| For the Year Ended December 31, 2018 (in million $) | ||||||||||||
| Previously Reported | Adjustments | As Restated | ||||||||||
| Operating activities | ||||||||||||
| Net loss | (13.5 | ) | (4.3 | ) | (17.8 | ) | ||||||
| Adjustments to reconcile loss to net cash flows from operating activities: | ||||||||||||
| Deferred income tax benefit | (4.8 | ) | (1.4 | ) | (6.2 | ) | ||||||
| Changes in assets and liabilities: | ||||||||||||
| Accounts payable - related parties | (27.5 | ) | 5.7 | (21.8 | ) | |||||||
| Net cash used in operating activities | (1.5 | ) | — | (1.5 | ) | |||||||
| 4 | Recent Accounting Pronouncements |
ASC Topic 606, Revenue from Contracts with Customers - On January 1, 2018, we adopted the provisions of ASC Topic 606, Revenue from Contracts with Customers. This standard clarifies the principles for recognizing revenue and supersedes previous revenue recognition requirements under Topic 605, Revenue Recognition. We adopted the provisions of Topic 606 using the modified retrospective method of adoption, as permitted by the standard. Under this method, the cumulative effect of initially applying the standard is recognized as an adjustment to the opening balance of Net parent investment and revenues reported in the periods prior to the date of adoption are not changed. We elected to apply the transition guidance for Topic 606 only to contracts that were not completed as of the date of adoption. There was no material impact to our combined financial position as a result of adopting Topic 606; therefore, there was no cumulative-effect adjustment to Net parent investment as of January 1, 2018, and there was no material impact to our combined financial statements as of and for the year ended December 31, 2018. Our revenue recognition accounting policy described above has been updated in conjunction with our adoption of Topic 606, but our previous policy has been omitted because the adoption of Topic 606 had no material impact to us as previously described.
ASC Subtopic 825-10, Recognition and Measurement of Financial Assets and Financial Liabilities - On December 15, 2018, we adopted the provisions of Accounting Standards Update (“ASU”) No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This ASU enhances the reporting model for financial instruments regarding certain aspects of recognition, measurement, presentation, and disclosure. We adopted the provisions of this ASU using the cumulative-effect method of adoption, as required by the ASU. The adoption of this ASU did not impact our combined financial position or our results of operations as of or for the year ended December 31, 2018, but resulted in reduced disclosures, as it eliminated the requirement to disclose the methods and significant assumptions used to estimate the fair value of financial instruments.
14
Mobile Refinery and Logistics Assets
Notes to Combined Financial Statements
(in millions of dollars)
ASC Topic 842, Leases - In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU to Topic 842, which requires lessees to recognize assets and liabilities for leases with lease terms greater than 12 months in the statement of financial position. This update also requires improved disclosures to help users of financial statements better understand the amount, timing, and uncertainty of cash flows arising from leases. In April 2020, the FASB issued an update to extend the effective date to fiscal years beginning after December 31, 2021. We do not intend to early adopt this accounting standard for these combined financial statements. We are currently evaluating the effect that adopting this new standard will have on our combined financial statements and related disclosures.
ASC Topic 326, Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments - In June 2016, the FASB issued ASU to Topic 326 that changes the impairment model for trade receivables, net investments in leases, debt securities, loans and certain other instruments. The standard requires the use of a forward-looking "expected loss" model as opposed to the current "incurred loss" model. This standard is effective for us in fiscal years beginning after December 15, 2022 and will be adopted on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the adoption period. Early adoption is permitted starting January 2019. We do not intend to early adopt this accounting standard for these combined financial statements. We are currently evaluating the effect that adopting this new standard will have on our combined financial statements and related disclosures.
| 5 | Property, Plant, and Equipment, net |
Property, plant, and equipment, net consisted of the following:
| As of December 31, | ||||||||
| 2019 | 2018 | |||||||
| Refinery machinery and equipment | $ | 476.1 | $ | 434.0 | ||||
| Leased assets | 30.4 | 30.4 | ||||||
| Assets under construction | 9.4 | 11.7 | ||||||
| Land | 5.9 | 5.9 | ||||||
| Others | 6.6 | 6.8 | ||||||
| Property, plant, and equipment at cost | 528.4 | 488.8 | ||||||
| Accumulated depreciation and amortization | (270.8 | ) | (263.9 | ) | ||||
| Property, plant, and equipment, net | $ | 257.6 | $ | 224.9 | ||||
We recorded a loss on disposal of non-current assets of $1.7 million during the year ended December 31, 2019 related to refinery equipment retired in December 2019. No such losses were incurred during the year ended December 31, 2018.
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Mobile Refinery and Logistics Assets
Notes to Combined Financial Statements
(in millions of dollars)
| 6 | Inventory |
Inventory consisted of the following:
| As of December 31, | ||||||||
| 2019 | 2018 | |||||||
| Refined products | $ | 60.7 | $ | 55.6 | ||||
| Crude and other feedstocks | 47.7 | 40.5 | ||||||
| Materials and supplies | 3.7 | 3.7 | ||||||
| Total Inventory | $ | 112.1 | $ | 99.8 | ||||
During the year ended December 31, 2019 we recorded a net realizable value adjustment of $2.6 million to refined products. No such adjustment was recorded for the year ended December 31, 2018.
| 7 | Related-Party Transactions |
Cash Management Program - We participate in our Parent’s centralized cash management and funding system. Our working capital and capital expenditure requirements have historically been part of the corporate-wide cash management program for our Parent. As part of this program, our Parent maintains all cash generated by our operations and cash required to meet our operating and investing needs is provided by our Parent, as necessary.
Related-Party Sales and Purchases - The Asset Group enters into transactions with related parties in the normal course of business, which includes purchases of crude oil, distribution of refined products, and sale of refined products and byproducts. A summary of the significant related-party transactions for the years ended December 31, 2019 and 2018, were as follows:
| Years Ended December 31, | ||||||||
2019 (As Restated) | 2018 (As Restated) | |||||||
| Sales | $ | 1,760.5 | $ | 1,958.5 | ||||
| Purchases | 1,797.3 | 2,011.7 | ||||||
Related-Party Services - Historically, our Parent and its related parties performed certain services that directly and indirectly supported our operations. Expenses related to these services for the years ended December 31, 2019 and 2018, were $29.2 million and $26.9 million, respectively.
We are covered by the insurance policies of our Parent. For the years ended December 31, 2019 and 2018, our allocated prepaid insurance balance was $2.5 million and $2.3 million, respectively. Our insurance expense was $4.8 million and $4.5 million for the years ended December 31, 2019 and 2018, respectively, which was included within operations and maintenance expenses in the accompanying combined statements of operations.
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Mobile Refinery and Logistics Assets
Notes to Combined Financial Statements
(in millions of dollars)
Employees who directly or indirectly support our operations participate in the pension, postretirement health and life insurance, and defined contribution benefit plans sponsored by our Parent, which includes other Parent subsidiaries. Our share of pension and postretirement health and life insurance costs for the years ended December 31, 2019 and 2018, were $4.1 million and $3.9 million, respectively. Our share of defined contribution plan costs for the years ended December 31, 2019 and 2018, were $2.2 million and $1.8 million, respectively. Pension and defined contribution benefit plan expenses are included in either general and administrative expenses or operations and maintenance expenses in the accompanying combined statements of operations, depending on the nature of the employee’s role in our operations.
| 8 | Transaction with Major Customers and Concentration of Credit Risk |
Our Parent and our Parent’s affiliates accounted for substantially all of our total revenues for the years ended December 31, 2019 and 2018. As such, no third-party customer-generated revenue is greater than 10% of total revenues in 2019 or 2018.
No third-party customer accounted for accounts receivable greater than 10% of accounts receivable for the years ended December 31, 2019 and 2018.
| 9 | Commitments and Contingencies |
Our Parent and certain affiliates are named defendants in lawsuits and governmental proceedings that arise in the ordinary course of our business. For each of our outstanding legal matters, we evaluate the merits of the case, our exposure to the matter, possible legal or settlement strategies, and the likelihood of an unfavorable outcome. Actual liability with respect to these lawsuits is not determinable. Our management believes, based on legal counsels’ opinion, that any potential liability will not materially impact our combined financial position, operating results, or cash flows.
Environmental Matters - We accrue for losses associated with environmental remediation obligations when such losses are probable and reasonably estimable. The liability represents the expected costs of remediating contaminated soil and groundwater at the site. Costs of future expenditures for environmental remediation obligations are discounted to their present value. Our environmental remediation obligations consisted of the following:
| As of December 31, | ||||||||
2019 | 2018 | |||||||
| Environmental obligations - current (see Note 13) | $ | 0.1 | $ | 0.1 | ||||
| Environmental obligations - non-current (see Note 13) | 1.2 | 1.0 | ||||||
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| 10 | Environmental Compliance Activities |
RINs Credits - We are required to comply with federal ethanol standards, and we recognize the related costs as part of our cost of sales. Our costs related to RFS compliance using RINs for the years ending December 31, 2019 and 2018 were $12.1 million and $18.0 million, respectively. Our environmental credits obligations and assets related to RFS compliance using RINs consisted of the following:
| As of December 31, | ||||||||
2019 | 2018 | |||||||
| Environmental credits asset - current | $ | 12.1 | $ | 18.0 | ||||
| Environmental credits obligation - current | 12.1 | 18.0 | ||||||
Benzene Credits - We are required to comply with the federal benzene and sulfur standards for gasoline that is produced and sold within the United States. We recognize the related compliance costs as part of our cost of sales. Our costs related to MSAT standards compliance for the years ended December 31, 2019 and 2018 were $2.8 million and $5.0 million, respectively. Our environmental credits obligation and asset related to MSAT standards compliance consisted of the following:
| As of December 31, | ||||||||
2019 | 2018 | |||||||
| Environmental credits obligation - current | $ | 8.4 | $ | — | ||||
| Environmental credits obligation - non-current (see Note 13) | — | 5.3 | ||||||
| 11 | Income Taxes |
Components of deferred income tax benefit related to our operations were as follows:
| Years Ended December 31, | ||||||||
| 2019 | 2018 (As Restated) | |||||||
| Federal | $ | (3.7 | ) | $ | (4.6 | ) | ||
| State | (1.2 | ) | (1.6 | ) | ||||
| Income tax benefit | $ | (4.9 | ) | $ | (6.2 | ) | ||
Our reconciliation of effective tax rate is as follows: | ||||||||
| Years Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| (As Restated) | ||||||||
| Loss before tax | (18.6 | ) | (24.0 | ) | ||||
| Federal tax rate | 21 | % | 21 | % | ||||
| Expected income tax benefit | $ | (3.9 | ) | $ | (5.0 | ) | ||
| Effect on income tax of State tax benefit | (1.0 | ) | (1.2 | ) | ||||
| Income tax benefit | $ | (4.9 | ) | $ | (6.2 | ) | ||
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Mobile Refinery and Logistics Assets
Notes to Combined Financial Statements
(in millions of dollars)
The tax effects of significant temporary differences representing deferred tax assets and liabilities were as follows:
| As of December 31, | ||||||||
| 2019 (As Restated) | 2018 (As Restated) | ||||||
| Deferred income tax assets | ||||||||
| Net operating losses | $ | 17.9 | $ | 6.9 | ||||
| Environmental obligations | 0.3 | 0.3 | ||||||
| Other | 0.3 | 0.1 | ||||||
| Total deferred income tax assets | 18.5 | 7.3 | ||||||
| Deferred income tax liabilities Property, plant, and equipment, net | 44.3 | 38.0 | ||||||
| Total deferred income tax liabilities | 44.3 | 38.0 | ||||||
| Non-current deferred tax liability, net | $ | 25.8 | $ | 30.7 | ||||
| 12 | Leases |
We have capital lease obligations for a hydrogen facility and an office building that mature in 2022, both of which support our refining operations. In August 2019, a capital lease obligation matured for an office building that supported our refinery. We have operating lease obligations related to storage and cargo leases.
Future minimum lease payments for capital and noncancelable operating leases as of December 31, 2019, are as follows:
| Years ending December 31, | Capital Leases | Operating Leases | ||||||
| 2020 | $ | 3.1 | $ | 13.8 | ||||
| 2021 | 3.1 | 4.5 | ||||||
| 2022 | 3.1 | — | ||||||
| Total minimum lease payments | 9.3 | $ | 18.3 | |||||
| Less interest | (0.8 | ) | ||||||
| Total | $ | 8.5 | ||||||
During the years ended December 31, 2019 and 2018, we recognized capital lease obligations of $8.5 million and $11.1 million, respectively, which is inclusive of accrued interest. We recognized net capital lease assets of $6.1 million and $8.3 million as of December 31, 2019 and 2018, respectively. All interest expense recognized in 2019 and 2018 was related to capital lease obligations.
During the years ended December 31, 2019 and 2018, we recognized operating lease expenses of $29.1 million and $24.5 million, respectively.
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Mobile Refinery and Logistics Assets
Notes to Combined Financial Statements
(in millions of dollars)
| 13 | Other Liabilities |
Accrued liabilities – third parties consisted of the following:
| As of December 31, | ||||||||
| 2019 | 2018 | |||||||
| Capital expenditure accruals | $ | 7.7 | $ | 4.3 | ||||
| Utility cost accruals | 2.8 | 3.2 | ||||||
| Capital lease obligations (see Note 12) | 2.7 | 2.6 | ||||||
| Transportation cost accruals | 2.0 | 1.9 | ||||||
| Salaries and wages payable | 0.1 | 0.6 | ||||||
| Environmental obligations (see Note 9) | 0.1 | 0.1 | ||||||
| Other liabilities | 3.6 | 2.9 | ||||||
| Total accrued liabilities - third parties | $ | 19.0 | $ | 15.6 | ||||
Accrued liabilities – related parties consisted of accruals for purchases of inventory.
Other non-current liabilities consisted of the following:
| As of December 31, | ||||||||
| 2019 | 2018 | |||||||
| Environmental obligations (see Note 9) | $ | 1.2 | $ | 1.0 | ||||
| Environmental credits obligation (see Note 10) | — | 5.3 | ||||||
| Other non-current liabilities | $ | 1.2 | $ | 6.3 | ||||
| 14 | Subsequent Events |
We have performed an evaluation of subsequent events through September 8, 2021, which is the date the combined financial statements were issued.
On January 30, 2020, the World Health Organization declared the coronavirus outbreak a "Public Health Emergency of International Concern" and on March 10, 2020, declared it to be a pandemic. Actions taken around the world to help mitigate the spread of the coronavirus include restrictions on travel, and quarantines in certain areas, and forced closures for certain types of public places and businesses. The coronavirus and actions taken to mitigate it have had and are expected to continue to have an adverse impact on the economies and financial markets of many countries, including the geographical area in which we operate. It is unknown how long these conditions will last and what the complete financial effect will be to the Asset Group.
On May 26, 2021, Vertex Energy Operating LLC (“Vertex Operating”), a wholly-owned subsidiary of Vertex Energy Inc. entered into a definitive Sale and Purchase Agreement to acquire from the Parent the Mobile, Alabama refinery, certain real property associated therewith, and related assets, including all inventory at the refinery as of closing and certain equipment, rolling stock, and other personal property associated with the Mobile refinery. The initial base purchase price for the assets is $75 million. In addition, Vertex Operating will also pay for the hydrocarbon inventory located at the Mobile refinery, as valued at closing. The purchase price is subject to other customary purchase price adjustments and reimbursement for certain capital expenditures and those relating to a turnaround at the Mobile refinery that is slated to occur in fourth quarter of 2021. In addition to refining assets, the transaction will include the acquisition by Vertex Operating of approximately 3.2 million barrels of inventory and product storage, logistics and distribution assets, together with more than 800 acres of developed and undeveloped land.
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