Investment In And Loans To Dynamic Fuels, LLC

9 Months Ended

Sep. 30, 2011

Investment In And Loans To Dynamic Fuels, LLC [Abstract]

Investment In And Loans To Dynamic Fuels, LLC

5.     Investment in and Loans to Dynamic Fuels, LLC

On June 22, 2007, we entered into definitive agreements with Tyson to form Dynamic Fuels, to construct and operate facilities in the United States using our Bio-Synfining™ Technology. Dynamic Fuels is organized and operated pursuant to the provisions of its Limited Liability Company Agreement between the Company and Tyson (the "LLC Agreement").

The LLC Agreement provides for management and control of Dynamic Fuels to be exercised jointly by representatives of the Company and Tyson equally with no LLC member exercising control. This entity is accounted for under the equity method and is not required to be consolidated in our financial statements; however, our share of the Dynamic Fuels net income or loss is reflected in the Consolidated Statements of Operations. Dynamic Fuels has a different fiscal year than us. The Dynamic Fuels fiscal year ends on September 30 and we report our share of Dynamic Fuels results of operations on a three month lag. Our carrying value in Dynamic Fuels is reflected in "Investment in and Loans to Dynamic Fuels, LLC" in our Consolidated Balance Sheets. As of September 30, 2011, Syntroleum's total estimate of maximum exposure to loss as a result of its relationships with this entity was approximately $37,915,000, which represents our equity investment in and loans to this entity in the amount of $35,737,000 and accounts receivable from this entity in the amount of $2,178,000, which fluctuates from time to time with certain operating activities.

Dynamic Fuels, LLC Quarter Ended June 30, 2011 Unaudited Financials (in thousands):

	June 30,
Balance Sheet	2011
Cash and Receivables	$11,654      11,654
Inventory	18,430
Property, Plant and Equipment and Other Assets	150,014
Total Assets	$   180,098
Current Liabilities	$      9,285
Notes and Accounts Payable to Related Parties	35,781
Long-Term Liabilities	100,038
Total Liabilities	145,104
Total Members' Equity	34,994
Total Liabilities and Members' Equity	$  180,098

Statement of Operations	For the Quarter Ended June 30, 2011	For the Nine Months Ended June 30, 2011
Revenue	$                 35,003	$          63,101
Operating Expenses	45,622	86,087
Loss from Operations	(10,619)	(22,986)
Other Income (Expense)	(730)	(2.034)
Net Loss	$              (11,349)	$       (25,020)

The losses generated by Dynamic Fuels during their nine months ended June 30, 2011, relate to plant commissioning with limited production, of approximately 14.0 million gallons or approximately 25% of plant design, and additional expenses for materials and labor to address mechanical reliability issues with key pieces of equipment. Approximately 13.0 million gallons of renewable products were sold during the nine months ended June 30, 2011.

Dynamic Fuels began commercial operations in November of 2010 and produced over approximately 29.4 million gallons of products by the end of October, 2011. Specifically, plant production was approximately 14.0 million gallons from the start of plant operations in October 2010 through June 2011 and 5.4, 4.6, 1.9 and 3.4 million gallons in July, August, September and October, respectively. The plant's design production rate is 75 million gallons per year or 6.25 million gallons per month.

Over the past year since start-up began in October 2010, stable production has been interrupted by mechanical reliability issues with certain key pieces of rotating equipment and third party supply of hydrogen, electricity and feedstock.  In July, August and September the plant continued to demonstrate improved reliability with all five major pieces of rotating equipment, pumps and compressors.    On October 24^th, the plant experienced failure on a critical pump due to excessive vibration.  The pump has been removed for repair and the plant was in hot standby for the remainder of October.  

 In September, the plant was taken down for a 14 day turnaround focused on servicing the plant's HDO reactors.  Turnaround service is scheduled for these reactors to change out catalyst and catalyst related materials and to remove the buildup of particulates and contaminants, as is typical industry practice for process reactors such as these.  Subsequent to the turnaround, the plant experienced three separate events in October causing production to be decreased.  First, the plant experienced excessive amounts of solids in a large batch of feedstock, causing decreased production due to additional filtering of the feedstock.  The plant has a system of strainers and filters designed to remove solids.  The plant has ongoing feedstock qualification with suppliers. Second, the plant experienced a failure in an acid injection pump.  Third, the plant experienced excessive vibration with the solvent recycle pump, a critical piece of equipment for plant production.  The pump was disassembled and taken to the vendor for a new rotor assembly and is expected to be reinstalled in November.   As a result of these events in October, the members will be required to make an additional $1.0 million working capital loan each in November.   

During the nine months ended September 30, 2011 and 2010, we recognized revenue associated with our technical services agreement between us and Dynamic Fuels in the amount of $1,449,000 and $1,276,000 respectively.  This revenue is reported in "Technical services from Dynamic Fuels, LLC" and "Royalties from Dynamic Fuels Plant Production" in the Consolidated Statement of Operations.  We had a receivable from Dynamic Fuels of $2,178,000 and $729,000 as of September 30, 2011 and December 31, 2010, respectively.    For the nine months ended September 30, 2011, Syntroleum and Tyson each contributed an additional $4,500,000 in the form of working capital loans to the entity.  We provided $2,500,000 in the form of a working capital loan in October.   The total amount of working capital loans of $12,000,000 each will be repaid to each member upon Dynamic Fuels generating sufficient working capital from fuel sales in excess of required capital projects.