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Special Purpose Entities | 9 Months Ended
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Oct. 31, 2013
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Special Purpose Entities | NOTE 2 – SPECIAL PURPOSE ENTITIES The Moxie Project Variable Interest Entities Moxie Energy, LLC (“Moxie”), a Delaware limited liability company, has sponsored the development of two natural gas-fired power plants. The strategy of Moxie is to build these power plants (the “Moxie Projects,” both of which were formed as wholly-owned limited liability companies of Moxie) in the Marcellus Shale region of Pennsylvania near the natural gas source, eliminating the need to transport natural gas via pipelines over long distances to supply the power production plants. The Moxie Project entities have been engaged in the lengthy process of planning, obtaining permits and arranging financing for the construction, ownership and operation of the power plants. Under a development agreement with Moxie, as amended and restated, Gemma Power, Inc. (“GPI,” an affiliate included in the GPS group of companies and wholly owned by Argan) supported the development of these two projects with loans that were made in order to cover most of the costs of the development efforts. GPI was authorized by the Company’s board of directors to extend loans to the Moxie Projects that could total up to $10 million, as currently contemplated. Moxie supported the arrangement by providing GPI with a first priority lien and security interest in all of the assets of the Moxie Projects, limited recourse guarantees of all of the obligations of the projects, and first priority liens on its membership interests in the two projects. The admission of any additional investor that would change the control of Moxie or either of the Moxie Projects required the prior approval of GPI. Pursuant to the development agreement, Moxie provided GPI with the right to receive development success fees and granted GPS the right to provide construction services for the two projects under engineering, procurement and construction contracts. Primarily due to the Moxie Projects not having sufficient equity investment to permit the entities to finance their activities without additional financial support, these entities were considered to be variable interest entities (“VIEs”). Despite not having an ownership interest in the Moxie Projects, GPI was the primary beneficiary of these VIEs due substantially to the significance of GPI’s loans to the entities, the risk that GPI could absorb significant losses if the development projects were not successful, the opportunity for GPI to receive development success fees and the intent of the parties for GPS to be awarded large contracts for the construction of the two power plants. Accordingly, the Company included the accounts of the Moxie Project VIEs in its consolidated financial statements for the year ended January 31, 2013. The operating loss associated with the Moxie Projects (before corresponding income tax benefit) incurred prior to the deconsolidation of the entities described below, and therefore included in the consolidated results of operations for the nine months ended October 31, 2013, was $101,000. Operating losses associated with both Moxie Project entities (before corresponding income tax benefit) and included in the consolidated results of operations for the three and nine months ended October 31, 2012 were $369,000 and $783,000, respectively. Moxie Liberty In March 2013, Moxie reached an agreement for the purchase of its membership interest in one of the Moxie Projects, Moxie Liberty LLC (“Moxie Liberty”), by an affiliate of Panda Power Funds (“Panda”). The consummation of the purchase of Moxie Liberty was contingent upon Panda securing permanent financing for the project. In order to support the continuing progress of this project, Panda 1) provided collateral supporting Moxie Liberty’s securing the right to connect to the electricity grid, 2) made equipment deposit payments to the manufacturer of the natural gas-fired turbines, and 3) commenced payments to GPS under the corresponding engineering, procurement and construction contact after Moxie Liberty issued a limited notice-to-proceed. The equipment deposit funding was provided by Panda under secured loans. The membership interest purchase agreement required Moxie Liberty to continue to conduct the remaining development activities. However, the rights of Moxie Liberty to conduct any activities that deviated from the development plan were subject to the approval of Panda. Also in March 2013, GPI consented to Moxie Liberty’s secured lending arrangement with Panda and agreed to equal priority regarding claims (neither party had a priority of payment over or was subordinate to the other) and the method for sharing the proceeds of any debt payments made by Moxie Liberty. In addition, GPS and Moxie Liberty entered into an engineering, procurement and construction contract for the Liberty Generating Station (the “Liberty EPC Contract”). In August 2013, Panda completed the purchase and permanent financing of Moxie Liberty, now named Panda Liberty LLC (“Panda Liberty”). In connection with the closing, GPI received cash from Panda Liberty in the approximate aggregate amount of $19,373,000 including the receipt of the development success fee related to the Panda Liberty project in the amount of $14,245,000 which has been included in the net revenues of the power industry services segment for the three and nine months ended October 31, 2013, and the repayment of notes receivable and accrued interest in the amount of $5,128,000. Also, GPS received a full notice-to-proceed with the engineering, procurement and construction efforts pursuant to the Liberty EPC Contract. As GPI was not relieved of its responsibility to provide working capital funding for Moxie Liberty (the primary responsibility of GPI under the related development agreement) until the closing of its purchase by Panda, and as Moxie Liberty did not have the means to pay development success fees until the financial closing occurred, the Company did not consider the development success fee related to Moxie Liberty to be earned or realizable until GPI received the payment of the fee at the closing of the Panda purchase. The earnings process related to the development success fee for Moxie Liberty was completed on the closing date. Accordingly, GPI recognized the fee related to Moxie Liberty at that time. Moxie Patriot In May 2013, Moxie entered into an agreement with a third party investor for the purchase of Moxie’s membership interest in Moxie Patriot LLC (“Moxie Patriot”). In addition, GPI entered into a consent and inter-creditor agreement in connection with the design and construction of the related gas-fired power plant that is planned to be built in Lycoming County, Pennsylvania. The investor agreed to provide advances for certain preconstruction costs related to this project. The consummation of the purchase of Moxie Patriot is contingent upon the third party investor securing permanent financing for the project which is not expected to occur until late in the current fiscal year. Should the third party investor consummate the purchase of Moxie Patriot, GPS would design and build the plant under an engineering, procurement and construction contract. Also, GPI would receive a development success fee and repayment of the working capital advances plus accrued interest from the proceeds of the sale. To achieve consistency based on a similar set of circumstances, the Company does not intend to record the development success fee related to Moxie Patriot until it is received. On July 31, 2013, GPS and Moxie Patriot entered into an engineering, procurement and construction contract for the Patriot Generating Station (the “Patriot EPC Contract”), providing a limited notice-to-proceed and confirming the commitment of the investor to make preconstruction payments on behalf of Moxie Patriot in a manner similar to the preconstruction payments made for Moxie Liberty. Deconsolidations of the Variable Interest Entities During the nine months ended October 31, 2013, the power to direct the economic activities of the Moxie Projects that most affect their economic performance shifted with the completion of the agreements described above. GPI is no longer the primary beneficiary of either of the Moxie Project VIEs. Each project’s investor became the primary source of financial support for the pre-construction phase of the related project, providing significant financing in order to secure connection to the electricity grid and to pay for the natural gas-fired turbines, the most significant equipment components of the power plants. Through the Liberty and Patriot EPC Contracts, GPS has transitioned into its typical role of engineering, procurement and construction contractor where it is subject to the direction of the owners of the projects, and where the investor has made payments directly to GPS in order to cover certain costs incurred under the Liberty and Patriot EPC Contracts. Further, in a manner similar to Moxie Liberty, the identification of sources and structuring of the permanent financing for Moxie Patriot are activities being directed and completed primarily by the investor. As a result, the Company ceased the consolidations of Moxie Liberty and Moxie Patriot in the first and second quarters of the current year, respectively. The elimination of the accounts of Moxie Liberty from the Company’s consolidated financial statements, including the accumulated net loss of this VIE, resulted in a pre-tax gain which was recorded in the first quarter in the amount of $1,120,000. The elimination of the accounts of Moxie Patriot from the Company’s consolidated financial statements, including the accumulated net loss of this VIE, resulted in a pre-tax gain which was recorded in the second quarter in the amount of $1,324,000. The balance for GPI’s note receivable from Moxie Patriot and the corresponding accrued interest amount (totaling $4,498,000 and $937,000, respectively) was not eliminated in the consolidation accounting as of October 31, 2013. Accordingly, the total amount of $5,435,000, which approximates the Company’s amount of maximum exposure to loss related to Moxie Patriot as of October 31, 2013, was included in the accompanying condensed consolidated balance sheet. This balance, along with any development success fee, shall be paid to GPI upon the successful closing of the corresponding membership purchase agreement. Construction Joint Ventures During the current year, GPS assigned the Liberty and Patriot EPC Contracts to separate joint ventures that were formed in order to perform the work for the applicable project and to spread the bonding risk of each project. The joint venture partner for both projects is a large, heavy civil contracting firm. The joint venture agreements provide that GPS has the majority interest in any profits, losses, assets and liabilities that may result from the performance of the Liberty and Patriot EPC Contracts. However, if the joint venture partner is unable to pay its share of any losses, GPS would be fully liable for those losses incurred under both the Liberty and Patriot EPC Contracts. GPS has no significant commitments under these arrangements beyond those related to the completion of the Liberty and Patriot EPC Contracts. The joint venture partners will dedicate resources that are necessary to complete the projects and will be reimbursed for their costs. GPS expects to perform most of the activities of both the Liberty and Patriot EPC Contracts. The accounts of the joint ventures were included in the condensed consolidated financial statements for the three and nine months ended October 31, 2013. The amounts of the net revenues of the consolidated construction joint ventures for the three and nine month periods ended October 31, 2013 were $17,486,000 and $20,589,000, respectively. The amounts of income attributable to the noncontrolling interests of the joint venture partner for the three and nine months ended October 31, 2013 were $521,000 and $601,000, respectively.

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