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COMMITMENTS AND CONTINGENCIES
 9 Months Ended
Sep. 30, 2012
COMMITMENTS AND CONTINGENCIES  
COMMITMENTS AND CONTINGENCIES

14.  COMMITMENTS AND CONTINGENCIES

 

We have issued the following guarantees that are not recorded on our accompanying balance sheet (dollars in thousands):

 

 

 

Term

 

Maximum Potential
Undiscounted
Payments as of
September 30, 2012

 

Performance guarantees through letters of credit(1)

 

2012-2016

 

$

252,474

 

Standby letters of credit

 

2012-2013

 

14,248

 

Commercial letters of credit

 

2012-2013

 

608

 

Bid bonds and performance bonds(1)

 

2012-2018

 

92,007

 

Maximum potential undiscounted payments

 

 

 

$

359,337

 

 

(1)       We have issued guarantees to third parties to ensure performance of our obligations, some of which may be fulfilled by third parties.

 

As part of an acquisition in 2001, we may be required to make contingent payments of up to $46 million to the seller, depending on our realization of certain U.S. federal tax benefits through the year 2015. To date, we have not realized any such benefits that would require a payment and we do not anticipate realizing any such benefits that would require a payment before the year 2016.

 

See Note 2 and Note 6 for a discussion of our gain contingencies related to assets that were expropriated in Venezuela.

 

The Texas Legislature enacted changes related to the appraisal of natural gas compressors for ad valorem taxes by expanding the definitions of “Heavy Equipment Dealer” and “Heavy Equipment.” Under the revised statute, we believe we are a Heavy Equipment Dealer and that our natural gas compressors are Heavy Equipment and are, therefore, required to file the 2012 property tax renditions under this new methodology. As a result of filing as a Heavy Equipment Dealer in Texas counties, a number of Appraisal Review Boards have denied our position and we are currently filing petitions for review in district courts.

 

Our ad valorem tax expense (which is reflected on our condensed consolidated statements of operations as a component of Cost of goods sold (excluding depreciation and amortization expense)) includes a benefit of $1.7 million and $5.1 million for the three months and nine months ended September 30, 2012, respectively, as a result of the new methodology. The total benefit for 2012 is expected to  be $6.8 million, of which approximately $1.3 million has been agreed to by a number of Appraisal Review Boards.

 

In addition to federal and state income taxes, we are subject to a number of state and local taxes that are not income-based. Many of these taxes are subject to audit by the taxing authorities, and therefore, it is possible that an audit could result in our making additional tax payments. We accrue for such additional tax payments resulting from an audit when we determine that it is probable that we have incurred a liability and we can reasonably estimate the amount of the liability. We do not believe that such payments would be material to our consolidated financial position but cannot provide assurance that the resolution of an audit would not be material to our results of operations or cash flows for the period in which the resolution occurs.

 

Our business can be hazardous, involving unforeseen circumstances such as uncontrollable flows of natural gas or well fluids and fires or explosions. As is customary in our industry, we review our safety equipment and procedures and carry insurance against some, but not all, risks of our business. Our insurance coverage includes property damage, general liability and commercial automobile liability and other coverage we believe is appropriate. In addition, we have a minimal amount of insurance on our offshore assets. We believe that our insurance coverage is customary for the industry and adequate for our business; however, losses and liabilities not covered by insurance would increase our costs.

 

Additionally, we are substantially self-insured for workers’ compensation and employee group health claims in view of the relatively high per-incident deductibles we absorb under our insurance arrangements for these risks. Losses up to the deductible amounts are estimated and accrued based upon known facts, historical trends and industry averages.

 

In the ordinary course of business, we are involved in various pending or threatened legal actions. While management is unable to predict the ultimate outcome of these actions, we believe that any ultimate liability arising from these actions will not have a material adverse effect on our consolidated financial position, results of operations or cash flows. Because of the inherent uncertainty of litigation, however, we cannot provide assurance that the resolution of any particular claim or proceeding to which we are a party will not have a material adverse effect on our consolidated financial position, results of operations or cash flows for the period in which the resolution occurs.