UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended SeptemberJune 30, 20172019
Commission File Number 001-32924
Green Plains Inc.
(Exact name of registrant as specified in its charter)
Iowa | 84-1652107 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1811 Aksarben Drive, Omaha, NE 68106 | (402) 884-8700 |
(Address of principal executive offices, including zip code) | (Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common Stock, par value $0.001 per share | GPRE | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒x Yes ☐o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
☒
x Yes ☐o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | Accelerated filer |
Non-accelerated filer | |
Smaller reporting company | Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐o Yes ☒x No
The number of shares of common stock, par value $0.001 per share, outstanding as of October 27, 2017, August 2, 2019, was 41,162,20438,186,133 shares.
Page | ||
Commonly Used Defined Terms | 2 | |
PART I – FINANCIAL INFORMATION | ||
Item 1. | Financial Statements | |
Consolidated Balance Sheets | 3 | |
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4 | ||
5 | ||
6 | ||
8 | ||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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PART II – OTHER INFORMATION | ||
Item 1. | 51 | |
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Item 1A. | 51 | |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
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1
1
The abbreviations, acronyms and industry terminology used in this quarterly report are defined as follows:
Green Plains Inc., Subsidiaries, and Subsidiaries:Partners:
Green Plains; the company | Green Plains Inc. and its subsidiaries |
BioProcess Algae | BioProcess Algae LLC |
Fleischmann’s Vinegar | Fleischmann’s Vinegar Company, Inc. |
Green Plains Cattle | Green Plains Cattle Company LLC |
Green Plains Grain | Green Plains Grain Company LLC |
Green Plains Partners; the partnership | Green Plains Partners LP |
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|
Green Plains Trade | Green Plains Trade Group LLC |
Accounting Defined Terms:
ASC | Accounting Standards Codification |
| Billion gallons per year |
EBITDA | Earnings before interest, income taxes, depreciation and amortization |
EPS | Earnings per share |
Exchange Act | Securities Exchange Act of 1934, as amended |
GAAP | U.S. Generally Accepted Accounting Principles |
LIBOR | London Interbank Offered Rate |
LTIP | Long-Term Incentive Plan |
R&D Credits | Research and development tax credits |
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| Securities and Exchange Commission |
Industry Defined Terms:
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|
Industry Defined Terms:
| Corporate Average Fuel Economy |
| District of Columbia |
E10 | Gasoline blended with up to 10% ethanol by volume |
E15 | Gasoline blended with up to 15% ethanol by volume |
E85 | Gasoline blended with up to 85% ethanol by volume |
EIA | U.S. Energy Information Administration |
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| U.S. Environmental Protection Agency |
| Million British Thermal Units |
Mmg | Million gallons |
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RFS II | Renewable Fuels Standard II |
| Renewable |
| Renewable volume obligation |
U.S. | United States |
USDA | U.S. Department of Agriculture |
2
PART I1 – FINANCIAL INFORMATION
Item 1. Financial StatementsStatements.
GREEN PLAINS INC. AND SUBSIDIARIES
(in thousands, except share amounts)
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| September 30, |
| December 31, | June 30, | December 31, | |||||
| (unaudited) |
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| (unaudited) | |||||
ASSETS | ASSETS | ASSETS | ||||||||
Current assets |
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Cash and cash equivalents | $ | 261,588 |
| $ | 304,211 | $ | 193,280 | $ | 251,683 | |
Restricted cash |
| 30,773 |
|
| 51,979 | 40,628 | 66,512 | |||
Accounts receivable, net of allowances of $234 and $266, respectively |
| 114,978 |
|
| 147,495 | |||||
Accounts receivable, net of allowances of $193 and $194, respectively | 108,700 | 100,361 | ||||||||
Income taxes receivable |
| 14,145 |
|
| 10,379 | 12,879 | 12,418 | |||
Inventories |
| 612,447 |
|
| 422,181 | 658,506 | 734,883 | |||
Prepaid expenses and other |
| 14,895 |
|
| 17,095 | 11,993 | 14,470 | |||
Derivative financial instruments |
| 51,563 |
|
| 47,236 | 60,202 | 26,315 | |||
Total current assets |
| 1,100,389 |
|
| 1,000,576 | 1,086,188 | 1,206,642 | |||
Property and equipment, net of accumulated depreciation of |
| 1,188,270 |
|
| 1,178,706 | |||||
Property and equipment, net of accumulated depreciation | 872,154 | 886,576 | ||||||||
Operating lease right-of-use assets | 58,092 | - | ||||||||
Goodwill |
| 182,879 |
|
| 183,696 | 34,689 | 34,689 | |||
Deferred income taxes | 3,582 | - | ||||||||
Other assets |
| 156,999 |
|
| 143,514 | 86,022 | 88,525 | |||
Total assets | $ | 2,628,537 |
| $ | 2,506,492 | $ | 2,140,727 | $ | 2,216,432 | |
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LIABILITIES AND STOCKHOLDERS' EQUITY | LIABILITIES AND STOCKHOLDERS' EQUITY | LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Current liabilities |
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Accounts payable | $ | 174,788 |
| $ | 192,275 | $ | 105,802 | $ | 156,901 | |
Accrued and other liabilities |
| 48,500 |
|
| 67,473 | 59,863 | 58,973 | |||
Derivative financial instruments |
| 12,004 |
|
| 8,916 | 9,670 | 24,776 | |||
Operating lease current liabilities | 16,667 | - | ||||||||
Short-term notes payable and other borrowings |
| 457,764 |
|
| 291,223 | 523,529 | 538,243 | |||
Current maturities of long-term debt |
| 6,486 |
|
| 35,059 | 1,225 | 54,807 | |||
Total current liabilities |
| 699,542 |
|
| 594,946 | 716,756 | 833,700 | |||
Long-term debt |
| 829,923 |
|
| 782,610 | 370,880 | 298,190 | |||
Deferred income taxes |
| 48,787 |
|
| 140,262 | 5,478 | 10,123 | |||
Operating lease long-term liabilities | 44,108 | - | ||||||||
Other liabilities |
| 35,892 |
|
| 9,483 | 8,931 | 11,430 | |||
Total liabilities |
| 1,614,144 |
|
| 1,527,301 | 1,146,153 | 1,153,443 | |||
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Commitments and contingencies (Note 13) |
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Stockholders' equity |
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Common stock, $0.001 par value; 75,000,000 shares authorized; |
| 46 |
|
| 46 | |||||
Common stock, $0.001 par value; 75,000,000 shares authorized; | 47 | 47 | ||||||||
Additional paid-in capital |
| 682,073 |
|
| 659,200 | 726,068 | 696,222 | |||
Retained earnings |
| 283,592 |
|
| 283,214 | 226,869 | 324,728 | |||
Accumulated other comprehensive loss |
| (13,607) |
|
| (4,137) | |||||
Treasury stock, 5,267,114 and 7,714,990 shares, respectively |
| (54,193) |
|
| (75,816) | |||||
Accumulated other comprehensive income (loss) | 24,177 | (16,016) | ||||||||
Treasury stock, 8,732,851 and 5,535,574 shares, respectively | (98,032) | (58,162) | ||||||||
Total Green Plains stockholders' equity |
| 897,911 |
|
| 862,507 | 879,129 | 946,819 | |||
Noncontrolling interests |
| 116,482 |
|
| 116,684 | 115,445 | 116,170 | |||
Total stockholders' equity |
| 1,014,393 |
|
| 979,191 | 994,574 | 1,062,989 | |||
Total liabilities and stockholders' equity | $ | 2,628,537 |
| $ | 2,506,492 | $ | 2,140,727 | $ | 2,216,432 |
See accompanying notes to the consolidated financial statements.
3
GREEN PLAINS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in thousands, except per share amounts)
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| Three Months Ended |
| Nine Months Ended | |||||||||||||||||||
| 2017 |
| 2016 |
| 2017 |
| 2016 | Three Months Ended | Six Months Ended | |||||||||||||
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| 2019 | 2018 | 2019 | 2018 | |||||||
Revenues |
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Product revenues | $ | 899,534 |
| $ | 839,786 |
| $ | 2,670,458 |
| $ | 2,472,741 | $ | 894,161 | $ | 985,217 | $ | 1,534,171 | $ | 2,028,876 | |||
Service revenues |
| 1,701 |
|
| 2,066 |
|
| 4,724 |
|
| 6,042 | 1,692 | 1,620 | 3,997 | 3,248 | |||||||
Total revenues |
| 901,235 |
|
| 841,852 |
|
| 2,675,182 |
|
| 2,478,783 | 895,853 | 986,837 | 1,538,168 | 2,032,124 | |||||||
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Costs and expenses |
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Cost of goods sold |
| 815,787 |
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| 758,883 |
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| 2,457,702 |
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| 2,293,094 | |||||||||||
Cost of goods sold (excluding depreciation and amortization expenses reflected below) | 888,257 | 910,625 | 1,523,832 | 1,898,960 | ||||||||||||||||||
Operations and maintenance expenses |
| 8,309 |
|
| 8,564 |
|
| 25,107 |
|
| 25,713 | 6,234 | 7,893 | 13,098 | 16,293 | |||||||
Selling, general and administrative expenses |
| 28,589 |
|
| 24,264 |
|
| 77,946 |
|
| 68,226 | 21,648 | 29,731 | 42,294 | 55,734 | |||||||
Depreciation and amortization expenses |
| 27,834 |
|
| 19,286 |
|
| 80,105 |
|
| 56,132 | 19,094 | 26,823 | 38,329 | 53,297 | |||||||
Total costs and expenses |
| 880,519 |
|
| 810,997 |
|
| 2,640,860 |
|
| 2,443,165 | 935,233 | 975,072 | 1,617,553 | 2,024,284 | |||||||
Operating income |
| 20,716 |
|
| 30,855 |
|
| 34,322 |
|
| 35,618 | |||||||||||
Operating income (loss) | (39,380) | 11,765 | (79,385) | 7,840 | ||||||||||||||||||
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Other income (expense) |
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Interest income |
| 383 |
|
| 484 |
|
| 1,061 |
|
| 1,263 | 923 | 709 | 2,186 | 1,346 | |||||||
Interest expense |
| (31,889) |
|
| (11,819) |
|
| (69,815) |
|
| (33,117) | (15,969) | (22,021) | (30,396) | (44,149) | |||||||
Other, net |
| 1,444 |
|
| (1,553) |
|
| 2,811 |
|
| (2,050) | (406) | 2,545 | 432 | 2,479 | |||||||
Total other expense |
| (30,062) |
|
| (12,888) |
|
| (65,943) |
|
| (33,904) | (15,452) | (18,767) | (27,778) | (40,324) | |||||||
Income (loss) before income taxes |
| (9,346) |
|
| 17,967 |
|
| (31,621) |
|
| 1,714 | |||||||||||
Income tax expense (benefit) |
| (48,775) |
|
| 5,083 |
|
| (60,905) |
|
| (4,339) | |||||||||||
Net income |
| 39,429 |
|
| 12,884 |
|
| 29,284 |
|
| 6,053 | |||||||||||
Loss before income taxes | (54,832) | (7,002) | (107,163) | (32,484) | ||||||||||||||||||
Income tax benefit | 14,653 | 10,753 | 29,113 | 16,780 | ||||||||||||||||||
Net income (loss) | (40,179) | 3,751 | (78,050) | (15,704) | ||||||||||||||||||
Net income attributable to noncontrolling interests |
| 5,035 |
|
| 4,956 |
|
| 14,853 |
|
| 14,072 | 5,163 | 4,745 | 10,091 | 9,407 | |||||||
Net income (loss) attributable to Green Plains | $ | 34,394 |
| $ | 7,928 |
| $ | 14,431 |
| $ | (8,019) | |||||||||||
Net loss attributable to Green Plains | $ | (45,342) | $ | (994) | $ | (88,141) | $ | (25,111) | ||||||||||||||
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Earnings per share: |
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Net income (loss) attributable to Green Plains - basic | $ | 0.83 |
| $ | 0.21 |
| $ | 0.36 |
| $ | (0.21) | |||||||||||
Net income (loss) attributable to Green Plains - diluted | $ | 0.74 |
| $ | 0.20 |
| $ | 0.48 |
| $ | (0.21) | |||||||||||
Net loss attributable to Green Plains - basic | $ | (1.13) | $ | (0.02) | $ | (2.19) | $ | (0.63) | ||||||||||||||
Net loss attributable to Green Plains - diluted | $ | (1.13) | $ | (0.02) | $ | (2.19) | $ | (0.63) | ||||||||||||||
Weighted average shares outstanding: |
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Basic |
| 41,348 |
|
| 38,282 |
|
| 40,008 |
|
| 38,301 | 40,081 | 40,194 | 40,200 | 40,168 | |||||||
Diluted |
| 50,647 |
|
| 39,136 |
|
| 50,693 |
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| 38,301 | 40,081 | 40,194 | 40,200 | 40,168 | |||||||
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Cash dividend declared per share | $ | 0.12 |
| $ | 0.12 |
| $ | 0.36 |
| $ | 0.36 | $ | 0.12 | $ | 0.12 | $ | 0.24 | $ | 0.24 | |||
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See accompanying notes to the consolidated financial statements.
4
GREEN PLAINS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited and in thousands)
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| Three Months Ended |
| Nine Months Ended | ||||||||
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
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Net income | $ | 39,429 |
| $ | 12,884 |
| $ | 29,284 |
| $ | 6,053 |
Other comprehensive income (loss), net of tax: |
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Unrealized gains (losses) on derivatives arising during period, net of tax (expense) benefit of $4,575, $(1,331), $5,633 and $762, respectively |
| (7,660) |
|
| 1,919 |
|
| (9,436) |
|
| (1,395) |
Reclassification of realized (gains) losses on derivatives, net of tax expense (benefit) of $(2,650), $(1,144), $21 and $(1,369), respectively |
| 4,453 |
|
| 2,150 |
|
| (34) |
|
| 2,506 |
Total other comprehensive income (loss), net of tax |
| (3,207) |
|
| 4,069 |
|
| (9,470) |
|
| 1,111 |
Comprehensive income |
| 36,222 |
|
| 16,953 |
|
| 19,814 |
|
| 7,164 |
Comprehensive income attributable to noncontrolling interests |
| 5,035 |
|
| 4,956 |
|
| 14,853 |
|
| 14,072 |
Comprehensive income (loss) attributable to Green Plains | $ | 31,187 |
| $ | 11,997 |
| $ | 4,961 |
| $ | (6,908) |
Three Months Ended | Six Months Ended | ||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||
Net income (loss) | $ | (40,179) | $ | 3,751 | $ | (78,050) | $ | (15,704) | |||
Other comprehensive income (loss), net of tax: | |||||||||||
Unrealized gains (losses) on derivatives arising during the period, net of tax benefit (expense) of ($9,884), $1,145, ($7,804) and ($3,971), respectively | 33,260 | (4,277) | 26,377 | 12,873 | |||||||
Reclassification of realized losses (gains) on derivatives, net of tax benefit (expense) of ($947), $185, ($4,087) and $365, respectively | 3,440 | (581) | 13,816 | (1,184) | |||||||
Total other comprehensive income (loss), net of tax | 36,700 | (4,858) | 40,193 | 11,689 | |||||||
Comprehensive loss | (3,479) | (1,107) | (37,857) | (4,015) | |||||||
Comprehensive income attributable to noncontrolling interests | 5,163 | 4,745 | 10,091 | 9,407 | |||||||
Comprehensive loss attributable to Green Plains | $ | (8,642) | $ | (5,852) | $ | (47,948) | $ | (13,422) |
See accompanying notes to the consolidated financial statements.
5
GREEN PLAINS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
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| Nine Months Ended | ||||
| 2017 |
| 2016 | ||
Cash flows from operating activities: |
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Net income | $ | 29,284 |
| $ | 6,053 |
Adjustments to reconcile net income to net cash provided (used) by operating activities: |
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Depreciation and amortization |
| 80,105 |
|
| 56,132 |
Amortization of debt issuance costs and debt discount |
| 11,222 |
|
| 7,588 |
Loss on exchange of 3.25% convertible notes due 2018 |
| 1,291 |
|
| - |
Gain on disposal of assets |
| (2,439) |
|
| - |
Write-off of deferred financing fees related to extinguishment of debt |
| 9,460 |
|
| - |
Deferred income taxes |
| (88,565) |
|
| (16,413) |
Other noncurrent assets and liabilities |
| 18,062 |
|
| - |
Stock-based compensation |
| 8,761 |
|
| 7,043 |
Undistributed equity in loss of affiliates |
| 120 |
|
| 2,067 |
Other |
| - |
|
| 57 |
Changes in operating assets and liabilities before effects of business combinations: |
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Accounts receivable |
| 32,267 |
|
| (36,431) |
Inventories |
| (168,788) |
|
| 46,126 |
Derivative financial instruments |
| (16,430) |
|
| 6,279 |
Prepaid expenses and other assets |
| 2,180 |
|
| (849) |
Accounts payable and accrued liabilities |
| (34,278) |
|
| (23,704) |
Current income taxes |
| (1,540) |
|
| 8,089 |
Other |
| 1,361 |
|
| 1,150 |
Change in restricted cash |
| (4,289) |
|
| - |
Net cash provided (used) by operating activities |
| (122,216) |
|
| 63,187 |
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Cash flows from investing activities: |
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Purchases of property and equipment, net |
| (36,475) |
|
| (35,658) |
Acquisition of a business, net of cash acquired |
| (61,727) |
|
| (252,488) |
Investments in unconsolidated subsidiaries |
| (12,033) |
|
| (1,388) |
Net cash used by investing activities |
| (110,235) |
|
| (289,534) |
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Cash flows from financing activities: |
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Proceeds from the issuance of long-term debt |
| 551,500 |
|
| 337,000 |
Payments of principal on long-term debt |
| (487,450) |
|
| (40,578) |
Proceeds from short-term borrowings |
| 3,301,630 |
|
| 2,969,034 |
Payments on short-term borrowings |
| (3,135,347) |
|
| (2,967,191) |
Cash payment for exchange of 3.25% convertible notes due 2018 |
| (8,523) |
|
| - |
Payments for repurchase of common stock |
| (5,733) |
|
| (6,005) |
Payments of cash dividends and distributions |
| (29,267) |
|
| (27,837) |
Payment penalty on early extinguishment of debt |
| (2,881) |
|
| - |
Change in restricted cash |
| 25,495 |
|
| (7,200) |
Payments of loan fees |
| (15,541) |
|
| (7,810) |
Payments related to tax withholdings for stock-based compensation |
| (4,105) |
|
| (2,206) |
Proceeds from exercise of stock options |
| 50 |
|
| 1,632 |
Net cash provided by financing activities |
| 189,828 |
|
| 248,839 |
|
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|
|
Net change in cash and cash equivalents |
| (42,623) |
|
| 22,492 |
Cash and cash equivalents, beginning of period |
| 304,211 |
|
| 384,867 |
Cash and cash equivalents, end of period | $ | 261,588 |
| $ | 407,359 |
6
|
Six Months Ended | |||||
2019 | 2018 | ||||
Cash flows from operating activities: | |||||
Net loss | $ | (78,050) | $ | (15,704) | |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | |||||
Depreciation and amortization | 38,329 | 53,297 | |||
Amortization of debt issuance costs and debt discount | 10,306 | 7,515 | |||
Gain from insurance proceeds | - | (2,624) | |||
Deferred income taxes | (27,543) | (23,061) | |||
Stock-based compensation | 4,809 | 5,435 | |||
Undistributed equity loss of affiliates | 109 | 239 | |||
Other | 1,328 | - | |||
Changes in operating assets and liabilities before effects of business combinations and dispositions: | |||||
Accounts receivable | (11,312) | 14,054 | |||
Inventories | 76,791 | 88,450 | |||
Derivative financial instruments | 3,088 | 1,513 | |||
Prepaid expenses and other assets | 2,830 | 2,797 | |||
Accounts payable and accrued liabilities | (51,901) | (96,295) | |||
Current income taxes | (2,137) | 10,540 | |||
Other | 1,144 | (297) | |||
Net cash provided by (used in) operating activities | (32,209) | 45,859 | |||
Cash flows from investing activities: | |||||
Purchases of property and equipment, net | (23,467) | (14,640) | |||
Proceeds from the sale of assets, net | 3,155 | - | |||
Acquisition of businesses, net of cash acquired | - | (1,629) | |||
Investments in unconsolidated subsidiaries | - | (2,253) | |||
Other investing activities | - | 7,500 | |||
Net cash used in investing activities | (20,312) | (11,022) | |||
Cash flows from financing activities: | |||||
Proceeds from the issuance of long-term debt | 147,700 | 42,300 | |||
Payments of principal on long-term debt | (45,125) | (43,370) | |||
Proceeds from short-term borrowings | 1,444,516 | 2,089,208 | |||
Payments on short-term borrowings | (1,518,008) | (2,158,274) | |||
Payments for repurchase of common stock | (39,870) | - | |||
Payments of cash dividends and distributions | (20,692) | (20,580) | |||
Proceeds from disgorgement of shareholder short-swing profits | 6,699 | - | |||
Payments of loan fees | (4,892) | (2,622) | |||
Payments related to tax withholdings for stock-based compensation | (2,094) | (3,013) | |||
Proceeds from exercise of stock options | - | 150 | |||
Net cash used in financing activities | (31,766) | (96,201) | |||
Net change in cash, cash equivalents and restricted cash | (84,287) | (61,364) | |||
Cash, cash equivalents and restricted cash, beginning of period | 318,195 | 312,360 | |||
Cash, cash equivalents and restricted cash, end of period | $ | 233,908 | $ | 250,996 | |
Continued on the following page |
7
6
GREEN PLAINS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
|
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|
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|
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|
|
Continued from the previous page |
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| Nine Months Ended | ||||
| 2017 |
| 2016 | ||
Non-cash financing activity: |
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|
|
|
Exchange of 3.25% convertible notes due 2018 for shares of | $ | 47,743 |
| $ | - |
Exchange of common stock held in treasury stock for 3.25% convertible notes due 2018 | $ | 27,356 |
| $ | - |
|
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|
|
|
Supplemental disclosures of cash flow: |
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Cash paid for income taxes | $ | 2,062 |
| $ | 3,348 |
Cash paid for interest | $ | 39,984 |
| $ | 24,280 |
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Supplemental investing and financing activities: |
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|
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Assets acquired in acquisitions and mergers, net of cash | $ | 62,209 |
| $ | 257,942 |
Less: liabilities assumed |
| (482) |
|
| (2,647) |
Less: allocation of noncontrolling interest in |
| - |
|
| (2,807) |
Net assets acquired | $ | 61,727 |
| $ | 252,488 |
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Continued from the previous page | |||||
Six Months Ended | |||||
2019 | 2018 | ||||
Reconciliation of total cash, cash equivalents and restricted cash: | |||||
Cash and cash equivalents | $ | 193,280 | $ | 235,133 | |
Restricted cash | 40,628 | 15,863 | |||
Total cash, cash equivalents and restricted cash | $ | 233,908 | $ | 250,996 | |
Non-cash financing activity: | |||||
Exchange of common stock held in treasury stock for 3.25% | $ | - | $ | 1 | |
Supplemental investing and financing activities: | |||||
Assets acquired in acquisitions, net of cash | $ | - | $ | 1,629 | |
Supplemental disclosures of cash flow: | |||||
Cash paid (refunded) for income taxes | $ | 564 | $ | (3,163) | |
Cash paid for interest | $ | 23,039 | $ | 36,923 |
See accompanying notes to the consolidated financial statements.
7
8
GREEN PLAINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
References to the Company
References to “Green Plains” or the “company” in the consolidated financial statements and in these notes to the consolidated financial statements refer to Green Plains Inc., an Iowa corporation, and its subsidiaries.
Consolidated Financial Statements
The consolidated financial statements include the company’s accounts and all significant intercompany balances and transactions are eliminated. Unconsolidated entities are included in the financial statements on an equity basis. TheThe company owns a 62.5%49.1% limited partner interest and a 2.0% general partner interest in Green Plains Partners LP. Public investors own the remaining 35.5%48.9% limited partner interest in the partnership. The company determined that the limited partners in the partnership with equity at risk lack the power, through voting rights or similar rights, to direct the activities that most significantly impact partnership’s economic performance; therefore, the partnership is considered a VIE.variable interest entity. The company, through its ownership of the general partner interest in the partnership, has the power to direct the activities that most significantly affect economic performance and the obligationis obligated to absorb losses orand has the right to receive benefits that could be potentially significant to the partnership; therefore,partnership. Therefore, the company is considered the primary beneficiary and consolidates the partnership.partnership in the company’s financial statements. The assets of the partnership cannot be used by the company for general corporate purposes. The partnership’s consolidated total assets as of SeptemberJune 30, 20172019 and December 31, 20162018, excluding intercompany balances, are $73.0$103.2 million and $75.0 $67.3million, respectively, and primarily consist of property and equipment, operating lease right-of-use assets and goodwill. The partnership’s consolidated total liabilities as of SeptemberJune 30, 20172019 and December 31, 20162018, excluding intercompany balances, are $155.8$196.6 million and $156.0$152.9 million, respectively, which primarily consist of long-term debt as discussed in Note 8 – Debt.Debt and operating lease liabilities. The liabilities recognized as a result of consolidating the partnership do not represent additional claims on our general assets. The partnership is consolidatedcompany also owns a 90.0% interest in the company’s financial statements. Effective April 1, 2016, the company increased its ownership of BioProcess Algae, a joint venture formed in 2008, to 82.8% and consolidated BioProcess Algaeconsolidates their results in its consolidated financial statements beginning on that date.statements.
The accompanying unaudited consolidated financial statements are prepared in accordance with GAAP for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Because they do not include all of the information and footnotesnotes required by GAAP, the consolidated financial statements should be read in conjunction with the company’s annual report on Form 10-K for the year ended December 31, 2016.2018, as filed with the SEC on February 20, 2019.
The unaudited financial information reflects adjustments, which are, in the opinion of management, necessary for a fair presentation of results of operations, financial position and cash flows for the periods presented. The adjustments are normal and recurring in nature, unless otherwise noted. Interim period results are not necessarily indicative of the results to be expected for the entire year.
Reclassifications
Certain prior year amounts were reclassified to conform to the current year presentation. These reclassifications did not affect total revenues, costs and expenses, net incomeloss or stockholders’ equity.
Use of Estimates in the Preparation of Consolidated Financial Statements
The preparation of the consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. The company bases its estimates on historical experience and assumptions it believes are proper and reasonable under the circumstances and regularly evaluates the appropriateness of its estimates and assumptions. Actual results could differ from those estimates. Key accounting policies, including but not limited to those relating to revenue recognition, depreciation of property and equipment, carrying value of intangible assets, operating leases, impairment of long-lived assets and goodwill, derivative financial instruments, and accounting for income taxes and assets acquired and
8
liabilities assumed in acquisitions, are impacted significantly by judgments, assumptions and estimates used in the preparation of the consolidated financial statements.
9
Description of Business
Green Plains is North America’s second largest consolidated owner of ethanol plants. The company operates within four business segments: (1) ethanol production, which includes the production of ethanol, distillers grains and corn oil, (2) agribusiness and energy services, which includes grain handling and storage, andcommodity marketing and merchant trading for company-produced and third-party ethanol, distillers grains, corn oil, natural gas and other commodities, (3) food and ingredients, which includes cattle feedlots, vinegar productionfeeding and food-grade corn oil operations and included vinegar production until the sale of Fleischmann’s Vinegar during the fourth quarter of 2018 and (4) partnership, which includes fuel storage and transportation services.
Cash and Cash Equivalents
Cash and cash equivalents includes bank deposits as well as short-term, highly liquid investments with original maturities of three months or less.
Restricted Cash
The company has restricted cash, which can only be used for funding letters of credit or for payment towards a revolving credit agreement. Restricted cash also includes cash margins and securities pledged to commodity exchange clearinghouses and at times, funds in escrow related to acquisition and disposition activities. To the degree these segregated balances are cash and cash equivalents, they are considered restricted cash on the consolidated statements of cash flows.
Revenue Recognition
The company recognizes revenue when obligations under the following criteriaterms of a contract with a customer are satisfied: persuasive evidence that an arrangement exists, titlesatisfied. Generally this occurs with the transfer of productcontrol of products or services. Revenue is measured as the amount of consideration expected to be received in exchange for transferring goods or providing services. Sales, value add, and risk of lossother taxes the company collects concurrent with revenue-producing activities are transferred to the customer, price is fixed and determinable and collectability is reasonably assured.excluded from revenue.
Sales of ethanol, distillers grains, corn oil, natural gas and other commodities by the company’s marketing business are recognized when titleobligations under the terms of product and riska contract with a customer are satisfied. Generally, this occurs with the transfer of loss are transferred to an external customer. control of products or services. Revenues related to marketing for third parties are presented on a gross basis whenas the company controls the product prior to the sale to the end customer, takes title of the product and assumes risk of loss.has inventory risk. Unearned revenue is recorded for goods in transit when the company has received payment but the titlecontrol has not yet been transferred to the customer. Revenues for receiving, storing, transferring and transporting ethanol and other fuels are recognized when the product is delivered to the customer.
The company routinely enters into fixed-price, physical-delivery energy commodity purchase and sale agreements. At times, the company settles these transactions by transferring its obligations to other counterparties rather than delivering the physical commodity. TheseEnergy trading transactions are reported net as a component of revenues.revenue. Revenues include net gains or losses from derivatives related to products sold while cost of goods sold includes net gains or losses from derivatives related to commodities purchased. Revenues also include realized gains and losses on related derivative financial instruments ineffectiveness on cash flow hedges and reclassifications of realized gains and losses on effective cash flow hedges from accumulated other comprehensive income or loss.
Sales of products, including agricultural commodities, cattle and vinegar, are recognized when titlecontrol of the product and risk of loss areis transferred to the customer, which depends on the agreed upon terms. The sales terms provide passage of title when shipment is made or the commodity is delivered.delivery terms. Revenues related to grain merchandising are presented gross and include shipping and handling, which is also a component of cost of goods sold. Revenues from grain storage are recognized when services are rendered.
A substantial portion of the partnership revenues are derived from fixed-fee commercial agreements for storage, terminal or transportation services. The partnership recognizes revenue upon transfer of control of product from its storage tanks and fuel terminals, when thererailcar volumetric capacity is evidence an arrangement exists, risk of lossprovided, and title transfer to the customer, the price is fixed or determinable, and collectability is reasonably ensured. Revenues from base storage, terminal oras truck transportation services are performed. To the extent shortfalls associated with minimum volume commitments in the previous four quarters continue to exist, volumes in excess of the minimum volume commitment are applied to those shortfalls. Remaining excess volumes generating operating lease revenue are recognized once these services are performed, which occurs whenas incurred.
9
Shipping and Handling Costs
The company accounts for shipping and handling activities related to contracts with customers as costs to fulfill its promise to transfer the product is delivered toassociated products. Accordingly, the customer.company records customer payments associated with shipping and handling costs as a component of revenue, and classifies such costs as a component of cost of goods sold.
Cost of Goods Sold
Cost of goods sold includes direct labor, materials, shipping and plant overhead costs. Direct labor includes all compensation and related benefits of non-management personnel involved in ethanol plant,production cattle feeding operations and vinegar and cattle feedlot operations.production until the sale of Fleischmann’s Vinegar during the fourth quarter of 2018. Grain purchasing and receiving costs, excluding labor costs for grain buyers and scale operators, are also included in cost of goods sold. Materials include the cost of corn feedstock, denaturant, process chemicals, cattle and veterinary supplies. Corn feedstock costs include unrealized gains and losses on related derivative financial instruments not designated as cash flow hedges, inbound freight charges, inspection costs and transfer costs, as well as realizedreclassifications of gains and losses on related derivative financial instruments, ineffectiveness on cash flow hedges and reclassifications of realized gains and losses on effective cash flow hedges from accumulated other comprehensive income or loss. Plant overhead consists primarily of plant and feedlot utilities, repairs and maintenance, yardfeedlot expenses and outbound freight charges. Shipping costs incurred by the company, including railcar costs, are also reflected in cost of goods sold.
The company uses exchange-traded futures and options contracts and forward purchase and sales contracts to attempt to minimize the effect of price changes on ethanol, grain, natural gas and cattle inventories and forward purchase and sales contracts.inventories. Exchange-traded futures and options contracts are valued at quoted market prices and settled predominantly in cash. The company is exposed to loss when counterparties default on forward purchase and sale contracts. Grain inventories held for sale and forward purchase and sale contracts are valued at market prices when available or other market quotes adjusted for differences, primarily in transportation, between the exchange-traded market and local market where the terms of the contract is based. Changes in the fair value of grain
10
inventories held for sale, forward purchase and sale contracts and exchange-traded futures and options contracts are recognized as a component of cost of goods sold.
Operations and Maintenance Expenses
In the partnership segment, transportation expenses represent the primary component of operations and maintenance expenses. Transportation expenses includesinclude railcar leases, freight and shipping of the company’s ethanol and co-products, as well as costs incurred storing ethanol at destination terminals.
Derivative Financial Instruments
The company uses various derivative financial instruments, including exchange-traded futures and exchange-traded and over-the-counter options contracts, to attempt to minimize risk and the effect of commodity price changes relatedincluding but not limited to, corn, ethanol, cattle, natural gas and crude oil. The company monitors and manages this exposure as part of its overall risk management policy to reduce the adverse effect market volatility may have on its operating results. The company may hedge these commodities as one way to mitigate risk,risk; however, there may be situations when these hedging activities themselves result in losses.
By using derivatives to hedge exposures to changes in commodity prices, the company is exposed to credit and market risk. The company’s exposure to credit risk includes the counterparty’s failure to fulfill its performance obligations under the terms of the derivative contract. The company minimizes its credit risk by entering into transactions with high quality counterparties, limiting the amount of financial exposure it has with each counterparty and monitoring their financial condition. Market risk is the risk that the value of the financial instrument might be adversely affected by a change in commodity prices or interest rates. The company manages market risk by incorporating parameters to monitor exposure within its risk management strategy, which limits the types of derivative instruments and strategies the company can use and the degree of market risk it can take using derivative instruments.
The company evaluates its physical delivery contracts to determine if they qualify for normal purchase or sale exemptions which are expected to be used or sold over a reasonable period in the normal course of business. Contracts that do not meet the normal purchase or sale criteria are recorded at fair value. Changes in fair value are recorded in operating income unless the contracts qualify for, and the company elects, cash flow hedge accounting treatment.
Certain qualifying derivatives related to ethanol production, agribusiness and energy services, and food and ingredients segments are designated as cash flow hedges. The company evaluates the derivative instrument to ascertain its effectiveness
10
prior to entering into cash flow hedges. Ineffectiveness is recognized in current period results, while other unrealizedUnrealized gains and losses are reflected in accumulated other comprehensive income or loss until the gain or loss from the underlying hedged transaction is realized. When it becomes probable a forecasted transaction will not occur, the cash flow hedge treatment is discontinued, which affects earnings. These derivative financial instruments are recognized in current assets or other current liabilities at fair value.
At times, the company hedges its exposure to changes in the value of inventoriesinventory values and designates qualifying derivatives as fair value hedges. The carrying amount of the hedged inventory is adjusted in the current period results for changes in fair value. Ineffectiveness of the hedges is recognized in the current period results to the extent the change in fair value of the inventory is not offset by the change in fair value of the derivative.
Recent Accounting Pronouncements
Effective January 1, 2017,2019, the company adopted the amended guidance in ASC Topic 330, Inventory: Simplifying842, Leases. Please refer to Note 13 – Commitments and Contingencies for further details.
2. REVENUE
Revenue Recognition
Revenue is recognized when obligations under the Measurementterms of Inventory, which requires inventorya contract with a customer are satisfied. Generally this occurs with the transfer of control of products or services. Revenue is measured as the amount of consideration expected to be measured at lower of costreceived in exchange for transferring goods or net realizable value. Net realizableproviding services. Sales, value is the estimated selling prices during the ordinary course of business, less reasonably predictable costs of completion, disposaladd, and transportation. The amended guidance was applied prospectively.
Effective January 1, 2017,other taxes the company adopted the amended guidance in ASC Topic 718, Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting, which requires all income tax effects related to awards to be recognized in the income statement when the awards vest or settle. collects concurrent with revenue-producing activities are excluded from revenue.
Revenue by Source
The amended guidance also allows an employer to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting and make a policy election to account for forfeitures as they occur. The amended guidance requiring recognition of excess tax benefits and tax deficiencies in the income statement was applied prospectively. The amended guidance related to the timing of when excess tax benefits are recognized, did not have an impact on the consolidated financial statements. The amended guidance related to the presentation of employee taxes paid on the statement of cash flows was applied retrospectively. This change resulted in a $2.2 million increase in cash flows from operating activities and a decrease in cash flows from financing
11
activitiesfollowing tables disaggregate revenue by major source for the ninethree and six months ended SeptemberJune 30, 2016. The company has elected to account2019 and 2018 (in thousands):
Three Months Ended June 30, 2019 | |||||||||||||||||
Ethanol Production | Agribusiness & Energy Services | Food & Ingredients | Partnership | Eliminations | Total | ||||||||||||
Revenues: | |||||||||||||||||
Revenues from contracts with customers under ASC 606: | |||||||||||||||||
Ethanol | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | |||||
Distillers grains | 12,315 | - | - | - | - | 12,315 | |||||||||||
Cattle | - | - | 270,971 | - | - | 270,971 | |||||||||||
Service revenues | - | - | - | 1,608 | - | 1,608 | |||||||||||
Other | 1,773 | 442 | - | - | - | 2,215 | |||||||||||
Intersegment revenues | 1,435 | - | 38 | 1,843 | (3,316) | - | |||||||||||
Total revenues from contracts with customers | 15,523 | 442 | 271,009 | 3,451 | (3,316) | 287,109 | |||||||||||
Revenues from contracts accounted for as derivatives under ASC 815 (1): | |||||||||||||||||
Ethanol | 355,385 | 136,225 | - | - | - | 491,610 | |||||||||||
Distillers grains | 64,069 | 8,833 | - | - | - | 72,902 | |||||||||||
Corn oil | 12,993 | 10,463 | - | - | - | 23,456 | |||||||||||
Grain | - | 17,987 | - | - | - | 17,987 | |||||||||||
Cattle | - | - | (85) | - | - | (85) | |||||||||||
Other | 903 | 1,887 | - | - | - | 2,790 | |||||||||||
Intersegment revenues | 2,070 | 9,131 | - | - | (11,201) | - | |||||||||||
Total revenues from contracts accounted for as derivatives | 435,420 | 184,526 | (85) | - | (11,201) | 608,660 | |||||||||||
Leasing revenues under ASC 842 (2): | - | - | - | 17,374 | (17,290) | 84 | |||||||||||
Total Revenues | $ | 450,943 | $ | 184,968 | $ | 270,924 | $ | 20,825 | $ | (31,807) | $ | 895,853 |
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Six Months Ended June 30, 2019 | |||||||||||||||||
Ethanol Production | Agribusiness & Energy Services | Food & Ingredients | Partnership | Eliminations | Total | ||||||||||||
Revenues: | |||||||||||||||||
Revenues from contracts with customers under ASC 606: | |||||||||||||||||
Ethanol | $ | 620 | $ | - | $ | - | $ | - | $ | - | $ | 620 | |||||
Distillers grains | 29,993 | - | - | - | - | 29,993 | |||||||||||
Cattle | - | - | 493,875 | - | - | 493,875 | |||||||||||
Service revenues | - | - | - | 3,691 | - | 3,691 | |||||||||||
Other | 2,008 | 620 | - | - | - | 2,628 | |||||||||||
Intersegment revenues | 1,463 | - | 76 | 3,221 | (4,760) | - | |||||||||||
Total revenues from contracts with customers | 34,084 | 620 | 493,951 | 6,912 | (4,760) | 530,807 | |||||||||||
Revenues from contracts accounted for as derivatives under ASC 815 (1): | |||||||||||||||||
Ethanol | 556,543 | 213,302 | - | - | - | 769,845 | |||||||||||
Distillers grains | 98,715 | 24,242 | - | - | - | 122,957 | |||||||||||
Corn oil | 21,607 | 17,434 | 1,451 | - | - | 40,492 | |||||||||||
Grain | - | 38,736 | - | - | - | 38,736 | |||||||||||
Cattle | - | - | (15,941) | - | - | (15,941) | |||||||||||
Other | 6,668 | 44,298 | - | - | - | 50,966 | |||||||||||
Intersegment revenues | 4,159 | 15,544 | - | - | (19,703) | - | |||||||||||
Total revenues from contracts accounted for as derivatives | 687,692 | 353,556 | (14,490) | - | (19,703) | 1,007,055 | |||||||||||
Leasing revenues under ASC 842 (2): | - | - | - | 35,000 | (34,694) | 306 | |||||||||||
Total Revenues | $ | 721,776 | $ | 354,176 | $ | 479,461 | $ | 41,912 | $ | (59,157) | $ | 1,538,168 |
Three Months Ended June 30, 2018 | |||||||||||||||||
Ethanol Production | Agribusiness & Energy Services | Food & Ingredients | Partnership | Eliminations | Total | ||||||||||||
Revenues: | |||||||||||||||||
Revenues from contracts with customers under ASC 606: | |||||||||||||||||
Ethanol | $ | 634 | $ | - | $ | - | $ | - | $ | - | $ | 634 | |||||
Distillers grains | 62,657 | - | - | - | - | 62,657 | |||||||||||
Cattle and vinegar | - | - | 222,059 | - | - | 222,059 | |||||||||||
Service revenues | - | - | - | 1,229 | - | 1,229 | |||||||||||
Other | 1,201 | 806 | - | - | - | 2,007 | |||||||||||
Intersegment revenues | 875 | - | 38 | - | (913) | - | |||||||||||
Total revenues from contracts with customers | 65,367 | 806 | 222,097 | 1,229 | (913) | 288,586 | |||||||||||
Revenues from contracts accounted for as derivatives under ASC 815 (1): | |||||||||||||||||
Ethanol | 451,083 | 106,117 | - | - | - | 557,200 | |||||||||||
Distillers grains | 49,940 | 32,706 | - | - | - | 82,646 | |||||||||||
Corn oil | 19,132 | 3,488 | 5,350 | - | - | 27,970 | |||||||||||
Grain | 337 | 22,843 | - | - | - | 23,180 | |||||||||||
Cattle and vinegar | - | - | (1,522) | - | - | (1,522) | |||||||||||
Other | 4,272 | 4,114 | - | - | - | 8,386 | |||||||||||
Intersegment revenues | 3,344 | 14,128 | - | 2,517 | (19,989) | - | |||||||||||
Total revenues from contracts accounted for as derivatives | 528,108 | 183,396 | 3,828 | 2,517 | (19,989) | 697,860 | |||||||||||
Leasing revenues under ASC 840 (2): | - | - | - | 22,094 | (21,703) | 391 | |||||||||||
Total Revenues | $ | 593,475 | $ | 184,202 | $ | 225,925 | $ | 25,840 | $ | (42,605) | $ | 986,837 |
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Six Months Ended June 30, 2018 | |||||||||||||||||
Ethanol Production | Agribusiness & Energy Services | Food & Ingredients | Partnership | Eliminations | Total | ||||||||||||
Revenues: | |||||||||||||||||
Revenues from contracts with customers under ASC 606: | |||||||||||||||||
Ethanol | $ | 3,100 | $ | - | $ | - | $ | - | $ | - | $ | 3,100 | |||||
Distillers grains | 119,902 | - | - | - | - | 119,902 | |||||||||||
Cattle and vinegar | - | - | 489,475 | - | - | 489,475 | |||||||||||
Service revenues | - | - | - | 2,447 | - | 2,447 | |||||||||||
Other | 1,332 | 1,483 | - | - | - | 2,815 | |||||||||||
Intersegment revenues | 1,537 | - | 80 | - | (1,617) | - | |||||||||||
Total revenues from contracts with customers | 125,871 | 1,483 | 489,555 | 2,447 | (1,617) | 617,739 | |||||||||||
Revenues from contracts accounted for as derivatives under ASC 815 (1): | |||||||||||||||||
Ethanol | 893,656 | 228,658 | - | - | - | 1,122,314 | |||||||||||
Distillers grains | 90,401 | 53,918 | - | - | - | 144,319 | |||||||||||
Corn oil | 35,602 | 12,158 | 7,637 | - | - | 55,397 | |||||||||||
Grain | 470 | 37,129 | - | - | - | 37,599 | |||||||||||
Cattle and vinegar | - | - | 6,884 | - | - | 6,884 | |||||||||||
Other | 8,556 | 38,515 | - | - | - | 47,071 | |||||||||||
Intersegment revenues | 4,635 | 25,557 | - | 4,689 | (34,881) | - | |||||||||||
Total revenues from contracts accounted for as derivatives | 1,033,320 | 395,935 | 14,521 | 4,689 | (34,881) | 1,413,584 | |||||||||||
Leasing revenues under ASC 840 (2): | - | - | - | 44,589 | (43,788) | 801 | |||||||||||
Total Revenues | $ | 1,159,191 | $ | 397,418 | $ | 504,076 | $ | 51,725 | $ | (80,286) | $ | 2,032,124 |
(1)Revenues from contracts accounted for forfeitures as they occur. This change did not have a material impact onderivatives represent physically settled derivative sales that are outside the financial statements.
Effective January 1, 2018, the company will adopt the amended guidance inscope of ASC Topic 230, Statement of Cash Flows: Restricted Cash, which requires amounts generally described as restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amended guidance will be applied retrospectively.
Effective January 1, 2018, the company will adopt the amended guidance in ASC Topic 606, Revenue from Contracts with Customers. (ASC Topic606), where the company recognizes revenue when control of the inventory is transferred within the meaning of ASC 606 is designedas required by ASC 610-20, Gains and Losses from the Derecognition of Nonfinancial Assets.
(2)Leasing revenues do not represent revenues recognized from contracts with customers under ASC 606, and are accounted for under ASC 842, Leases for 2019 and ASC 840, Leases for 2018.
Payment Terms
The company has standard payment terms, which vary depending upon the nature of the services provided, with the majority falling within 10 to create improved30 days after transfer of control or completion of services. In instances where the timing of revenue recognition and disclosure comparability in financial statements. The provisionsdiffers from the timing of ASC Topic 606invoicing, the company has determined that contracts generally do not include a five-step process by which an entity will determinesignificant financing component.
Contract Liabilities
The company records unearned revenue recognition, depicting the transfer ofwhen consideration is received, or such consideration is unconditionally due, from a customer prior to transferring goods or services to customersthe customer under the terms of service and lease agreements. Unearned revenue from service agreements, which represents a contract liability, is recorded for fees that have been charged to the customer prior to the completion of performance obligations. Unearned revenue is generally recognized in amounts which reflect the payment an entitysubsequent quarter and is not material to the company. The company expects to be entitled to in exchange for goods or services. The new guidance requiresrecognize all of the company to apply the following steps: (1) identify the contractunearned revenue associated with the customer; (2) identify the performance obligationsservice agreements as of June 30, 2019, in the contract; (3) determinesubsequent quarter when the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the company satisfies the performance obligation. In addition, ASC Topic 606 requires certain disclosures about contracts with customers and provides comprehensive guidance for transactions such as service revenue, contract modifications and multiple-element arrangements. The new standardinventory is effective for fiscal years and interim periods within those years, beginning after December 15, 2017, and allows for early adoption.
The company completed a comparison of the current revenue recognition policies to ASC Topic 606 requirements for each of the company’s major revenue categories. Results indicate that the amended guidance will not materially change the amount or timing of revenues recognized by the company and the majority of the company's contracts will continue to be recognized at a point in time and that the number of performance obligations and the accounting for variable consideration are not expected to be significantly different from current practice. In addition, many of the company's sales contracts are considered derivatives under ASC Topic 815, Derivatives and Hedging, and are therefore excludedwithdrawn from the scope of Topic 606. ASC Topic 606 also requires disclosure of significant changes in contract asset and contract liability balances between periods and the amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied as of the end of the reporting period, when applicable. ASC Topic 606 may be adopted retrospectively to each prior reporting period presented or as a cumulative-effect adjustment as of the date of adoption. The company anticipates adopting the amended guidance using the modified retrospective transition method.partnership’s tank storage.
Effective January 1, 2018, the company will adopt the amended guidance in ASC Topic 740, Income Taxes: Intra-Entity Transfers of Assets other than Inventory, which requires the recognition of current and deferred income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amended guidance will be applied on a modified retrospective basis, with a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption.
Effective January 1, 2018, the company will adopt the amended guidance in ASC Topic 805, Business Combinations: Clarifying the Definition of a Business, which clarifies the definition of a business with the objective of adding guidance to assist companies and other reporting organizations with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The amended guidance will be applied prospectively.3. ACQUISITIONS AND DISPOSITIONS
Effective January 1, 2019, the company will adopt the amended guidance in ASC Topic 842, Leases, which aims to make leasing activities more transparent and comparable, requiring substantially all leases to be recognized by lessees on the balance sheet as a right-of-use asset and corresponding lease liability, including leases currently accounted for as operating leases. The new standard is effective for fiscal years beginning after December 15, 2018 and interim periods within those years, and allows for early adoption. The company has established an implementation team to evaluate the impact of the new standard. The new standard will significantly increase right-of-use assets and lease liabilities on the company’s consolidated balance sheet, primarily due to operating leases that are currently not recognized on the balance sheet. The company anticipates adopting the amended guidance using the modified retrospective transition method.ACQUISITIONS
Effective January 1, 2019, the amended guidance in ASC Topic 815, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities, becomes effective. ASC Topic 815 is designed to improve the alignment of risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedging results. The provisions of Topic 815 expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. For cash flow and net investment hedges existing at the date of adoption, an entity should apply a cumulative-effect adjustment related to
12
eliminating the separate measurement of ineffectiveness to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year that an entity adopts the amendments in this update. Early adoption is permitted and the amended presentation and disclosure guidance is required only prospectively. Based on the company’s initial assessment, no material changes are anticipated and the company intends to implement the amended guidance in ASC Topic 815 in either the fourth quarter of fiscal 2017 or the first quarter of fiscal 2018.
Effective January 1, 2020, the company will adopt the amended guidance in ASC Topic 350, Intangibles – Goodwill and Other: Simplifying the Test for Goodwill Impairment, which simplifies the measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The annual goodwill impairment test will be performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge equal to the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that reporting unit, would be recognized. The amended guidance will be applied prospectively.
2. ACQUISITIONS
Acquisition of Cattle FeedlotsFeeding Operations – Bartlett Cattle Company, L.P.
On May 16, 2017,August 1, 2018, the company acquired two cattle-feeding operations from CargillBartlett Cattle Feeders, LLCCompany, L.P. for $57.7$16.2 million, including certainplus working capital adjustments.of approximately $106.6 million primarily consisting of work-in-process inventory. The transaction included the feed yards located in Leoti,Sublette, Kansas and Yuma, Colorado,Tulia, Texas, which added combined feedlot capacity of 155,00097,000 head of cattle to the company’s operations. The transaction was financed using cash on hand. hand and proceeds from the Green Plains Cattle senior secured asset-based revolving credit facility. There were no material acquisition costs recorded for the acquisition.
As part of the transaction, the company also entered into a long-term cattle supply agreement with Cargill Meat Solutions Corporation. Under the cattle supply agreement, all cattle placed in the Leoti, Yuma and the company’s existing Kismet, Kansas feedlots will be sold exclusively to Cargill Meat Solutions under an agreed upon pricing arrangement.
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The purchase price allocation is based on the preliminary results of internal valuations. The purchase price and purchase price allocation are preliminary until contractual post-closing working capital adjustments and valuations are finalized.
The following is a summary of the preliminary purchase price of assets acquired and liabilities assumed (in thousands):
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Amounts of Identifiable Assets Acquired and Liabilities Assumed | ||||
Accounts receivable | $ | 1,897 | ||
Inventory | 104,809 | |||
Property and equipment, net | 16,190 | |||
Current liabilities | (118) | |||
Total identifiable net assets | $ | 122,778 |
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Acquisition of Fleischmann’s Vinegar Company
On October 3, 2016, the company acquired all of the issued and outstanding stock of SCI Ingredients Holdings, Inc., the holding company of Fleischmann’s Vinegar Company, Inc., for $258.3 million in cash. A portion of the purchase price was used to repay existing debt. Fleischmann’s Vinegar is one of the world’s largest producers of food-grade industrial vinegar.
The following is a summary of assets acquired and liabilities assumed (in thousands):
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The amounts above reflect the final purchase price allocation. As of September 30, 2017, based on the final valuations, assets acquired and liabilities assumed were adjusted from the prior quarter to reflect an increase in the fair value of property and equipment of $6.2 million, a decrease in accumulated depreciation of $0.5 million, a decrease in the fair value of intangible assets of $4.0 million, a decrease in accumulated amortization of $0.3 million, a decrease in the fair value of goodwill of $0.8 million, a decrease of $0.1 million in income taxes payable and an increase in deferred tax liabilities of $1.5 million.
As of September 30, 2017, based on the final valuations, the company’s customer relationship intangible asset recognized in connection with the Fleischmann’s acquisition is $74.7 million, net of $5.3 million of accumulated amortization, and has a remaining 14-year weighted-average amortization period. As of September 30, 2017, the company also has an indefinite-lived trade name intangible asset of $10.5 million. The company recognized $1.1 million and $3.9 million of amortization expense associated with the amortizing customer relationship intangible asset during the three and nine months ended September 30, 2017, respectively, and expects estimated amortization expense for the next five years of $5.6 million per annum. The excess purchase price over the intangibles fair values was allocated to goodwill, none of which is expected to be deductible for tax purposes. The goodwill is primarily attributable to the synergies expected to arise after the acquisition.
Acquisition of Ethanol Plants
On September 23, 2016, the company acquired three ethanol plants located in Madison, Illinois, Mount Vernon, Indiana, and York, Nebraska from subsidiaries of Abengoa S.A. for approximately $234.9 million for the ethanol plant assets, and $19.1 million for working capital acquired and liabilities assumed. These ethanol facilities have a combined annual production capacity of approximately 230 mmgy.
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The following is a summary of assets acquired and liabilities assumed (in thousands):
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The amounts above reflect the final purchase price allocation, which did not change materiallyincluded working capital true-up payments by the company of $0.9 million made during the third quarter of 2018.
DISPOSITIONS
Disposition of Fleischmann’s Vinegar
On November 27, 2018, the company and Green Plains II LLC, an indirect wholly-owned subsidiary of the company, completed the sale of Fleischmann’s Vinegar Company, Inc. to Kerry Holding Co. (“Kerry”). The company received as net consideration from the initial allocation.
Concurrently withKerry $353.7 million in cash and restricted cash, including net working capital adjustments. The divested assets were reported within the company’s acquisitionfood and ingredients segment. The company recorded a pre-tax gain on the sale of Fleischmann’s Vinegar of $58.2 million, including offsetting related transaction costs of $7.4 million within the Abengoacorporate segment.
The assets and liabilities of Fleischmann’s Vinegar at closing on November 27, 2018 were as follows (in thousands):
Amounts of Identifiable Assets Disposed and Liabilities Relinquished | ||||
Cash | $ | 2,107 | ||
Accounts receivable, net | 15,935 | |||
Inventory | 15,167 | |||
Prepaid expenses and other | 853 | |||
Property and equipment | 64,552 | |||
Other assets | 79,389 | |||
Current liabilities | (8,587) | |||
Deferred tax liabilities | (26,617) | |||
Total identifiable net assets | 142,799 | |||
Goodwill | 142,002 | |||
Net assets disposed | $ | 284,801 |
The amounts above reflect the preliminary working capital true-up payments made to and received from Kerry.
Disposition of Bluffton, Lakota and Riga Ethanol Plants
On November 15, 2018, the company completed the sale of three ethanol plants on September 23, 2016,located in Bluffton, Indiana, Lakota, Iowa, and Riga, Michigan, and certain related assets from subsidiaries, to Valero Renewable Fuels Company, LLC (“Valero”) for the sale price of $323.2 million, including net working capital and other adjustments. Correspondingly, the partnership’s storage assets located adjacent to such plants were sold to Green Plains Inc. for $120.9 million. The company received as consideration from Valero approximately $323.2 million, while the partnership acquired the storage assets of the Abengoa ethanol plantsreceived as consideration from the company 8.7 million partnership units and a portion of the general partner interest equating to 0.2 million equivalent limited partner units to maintain the general partner’s 2% interest. In addition, the partnership also received additional consideration of approximately $2.7 million from Valero for $90.0the assignment of certain railcar operating leases. The divested assets were reported within the company’s ethanol production, agribusiness and energy services and partnership segments. The company recorded a pre-tax gain on the sale of the three ethanol plants of $92.2 million, in a transfer between entities under common controlof which $89.5 million was recorded within the corporate segment and entered into amendments to$2.7 million was recorded within the related commercial agreements with Green Plains Trade. partnership segment, including offsetting transaction costs of $4.2 million, of which $3.7 million were recorded within the corporate segment and $0.5 million were recorded within the partnership segment.
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3.The assets and liabilities of the Bluffton, Lakota and Riga ethanol plants are as follows (in thousands):
Amounts of Identifiable Assets Disposed and Liabilities Relinquished | ||||
Inventory | $ | 36,812 | ||
Prepaid expenses and other | 189 | |||
Property and equipment | 184,970 | |||
Other assets | 1,717 | |||
Current liabilities | (746) | |||
Other liabilities | (4,706) | |||
Total identifiable net assets | 218,236 | |||
Goodwill | 6,188 | |||
Net assets disposed | $ | 224,424 |
The amounts above reflect the final working capital true-up payments by Valero of $3.4 million received during the first quarter of 2019.
4. FAIR VALUE DISCLOSURES
The following methods, assumptions and valuation techniques were used to estimatein estimating the fair value of the company’s financial instruments:
Level 1 – unadjusted quoted prices in active markets for identical assets or liabilities the company can access at the measurement date. Level 1 unrealized gains and losses on commodity derivatives relate to exchange-traded open trade equity and option values in the company’s brokerage accounts.
Level 2 – directly or indirectly observable inputs such as quoted prices for similar assets or liabilities in active markets other than quoted prices included within Level 1, quoted prices for identical or similar assets in markets that are not active, and other inputs that are observable or can be substantially corroborated by observable market data through correlation or other means. Grain inventories held for sale in the agribusiness and energy services segment are valued at nearby futures values, plus or minus nearby basis.
Level 3 – unobservable inputs that are supported by little or no market activity and comprise a significant component of the fair value of the assets or liabilities. The company currently does not have any recurring Level 3 financial instruments.
Derivative contracts include exchange-traded commodity futures and options contracts and forward commodity purchase and sale contracts. Exchange-traded futures and options contracts are valued based on unadjusted quoted prices in active markets and are classified in Level 1. The majority of the company’s exchange-traded futures and options contracts are cash-settled on a daily basis.
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There have been no changes in valuation techniques and inputs used in measuring fair value. The company’s assets and liabilities by level are as follows (in thousands):
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| Fair Value Measurements at September 30, 2017 | ||||||||||||||||||
| Quoted Prices in Active Markets for Identical Assets |
| Significant Other |
| Reclassification for |
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| Fair Value Measurements at June 30, 2019 | ||||||||||
| (Level 1) |
| (Level 2) |
| Presentation |
| Total | Quoted Prices in | Significant Other | ||||||||||
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| (Level 1) | (Level 2) | Total | |||||
Assets: |
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Cash and cash equivalents | $ | 261,588 |
| $ | - |
| $ | - |
| $ | 261,588 | $ | 193,280 | $ | - | $ | 193,280 | ||
Restricted cash |
| 30,773 |
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| - |
|
| - |
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| 30,773 | 40,628 | - | 40,628 | |||||
Margin deposits |
| 52,527 |
|
| - |
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| (52,527) |
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| - | ||||||||
Inventories carried at market |
| - |
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| 114,410 |
|
| - |
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| 114,410 | - | 36,459 | 36,459 | |||||
Unrealized gains on derivatives |
| 14,690 |
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| 5,061 |
|
| 31,812 |
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| 51,563 | - | 15,924 | 15,924 | |||||
Other assets |
| 115 |
|
| - |
|
| - |
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| 115 | 113 | 1 | 114 | |||||
Total assets measured at fair value | $ | 359,693 |
| $ | 119,471 |
| $ | (20,715) |
| $ | 458,449 | $ | 234,021 | $ | 52,384 | $ | 286,405 | ||
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Liabilities: |
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Accounts payable (1) | $ | - |
| $ | 31,377 |
| $ | - |
| $ | 31,377 | $ | - | $ | 7,263 | $ | 7,263 | ||
Unrealized losses on derivatives |
| 20,715 |
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| 12,004 |
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| (20,715) |
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| 12,004 | - | 9,670 | 9,670 | |||||
Other |
| - |
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| 15 |
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| - |
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| 15 | ||||||||
Total liabilities measured at fair value | $ | 20,715 |
| $ | 43,396 |
| $ | (20,715) |
| $ | 43,396 | $ | - | $ | 16,933 | $ | 16,933 |
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| Fair Value Measurements at December 31, 2016 | ||||||||||||||||||
| Quoted Prices in Active Markets for Identical Assets |
| Significant Other |
| Reclassification for |
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| Fair Value Measurements at December 31, 2018 | ||||||||||
| (Level 1) |
| (Level 2) |
| Presentation |
| Total | Quoted Prices in | Significant Other | ||||||||||
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| (Level 1) | (Level 2) | Total | |||||
Assets: |
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Cash and cash equivalents | $ | 304,211 |
| $ | - |
| $ | - |
| $ | 304,211 | $ | 251,683 | $ | - | $ | 251,683 | ||
Restricted cash |
| 51,979 |
|
| - |
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| - |
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| 51,979 | 66,512 | - | 66,512 | |||||
Margin deposits |
| 50,601 |
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| - |
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| (50,601) |
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| - | ||||||||
Inventories carried at market (2) |
| - |
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| 154,022 |
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| - |
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| 154,022 | ||||||||
Inventories carried at market | - | 111,960 | 111,960 | ||||||||||||||||
Unrealized gains on derivatives |
| 8,272 |
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| 14,818 |
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| 24,146 |
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| 47,236 | - | 9,976 | 9,976 | |||||
Other assets |
| 116 |
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| - |
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| - |
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| 116 | 114 | 1 | 115 | |||||
Total assets measured at fair value | $ | 415,179 |
| $ | 168,840 |
| $ | (26,455) |
| $ | 557,564 | $ | 318,309 | $ | 121,937 | $ | 440,246 | ||
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Liabilities: |
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Accounts payable (1) | $ | - |
| $ | 35,288 |
| $ | - |
| $ | 35,288�� | $ | - | $ | 16,573 | $ | 16,573 | ||
Unrealized losses on derivatives |
| 26,455 |
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| 8,916 |
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| (26,455) |
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| 8,916 | - | 7,852 | 7,852 | |||||
Other liabilities |
| - |
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| 81 |
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| - |
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| 81 | - | 2 | 2 | |||||
Total liabilities measured at fair value | $ | 26,455 |
| $ | 44,285 |
| $ | (26,455) |
| $ | 44,285 | $ | - | $ | 24,427 | $ | 24,427 |
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(1)Accounts payable is generally stated at historical amounts with the exception of $7.3 million and $16.6 million at June 30, 2019 and December 31, 2018, respectively, related to certain delivered inventory for which the payable fluctuates based on changes in commodity prices. These payables are hybrid financial instruments for which the company has elected the fair value option.
The company believes the fair value of its debt was approximately $1.3 billion compared with aapproximated book value, of $1.3 billionwhich was $895.6 million at SeptemberJune 30, 2017,2019 and approximately $1.1 billion compared with a book value of $1.1 billion$891.2 million at December 31, 2016.2018. The company estimated the fair value of its outstanding debt using Level 2 inputs. The company believes the fair values of its accounts receivable approximated book value, which was $115.0$108.7 million and $147.5$100.4 million at SeptemberJune 30, 2017,2019 and December 31, 2016,2018, respectively.
Although the company currently does not have any recurring Level 3 financial measurements, the fair values of tangible assets and goodwill acquired and the equity component of convertible debt issued represent Level 3 measurements thatwhich were
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derived using a combination of the income approach, market approach and cost approach for the specific assets or liabilities being valued.
4.
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5. SEGMENT INFORMATION
As a result of acquisitions during 2016, theThe company implemented organizational segment changes during the fourth quarter of 2016, whereby the company management now reports the financial and operating performance infor the following four operating segments: (1) ethanol production, which includes the production of ethanol, distillers grains and corn oil, (2) agribusiness and energy services, which includes grain handling and storage, andcommodity marketing and merchant trading for company-produced and third-party ethanol, distillers grains, corn oil natural gas and other commodities, (3) food and ingredients, which includes cattle feedlots, vinegar productionfeeding and food-grade corn oil operations and included vinegar production until the sale of Fleischmann’s Vinegar during the fourth quarter of 2018 and (4) partnership, which includes fuel storage and transportation services. Prior periods have been reclassified to conform to the revised segment presentation.
The company has re-evaluated the profitability measure of its reportable segments’ operating performance and has determined that segment EBITDA (earnings before interest, taxes, depreciation and amortization) is primarily used by the company’s management to evaluate segment operating activities, and therefore is a more meaningful profitability measure than the previously reported segment operating income. In addition, EBITDA is a financial measure that is widely used by analysts and investors in the company’s industries. As a result, the company is now including segment EBITDA as a performance measure.
Corporate activities include selling, general and administrative expenses, consisting primarily of compensation, professional fees and overhead costs not directly related to a specific operating segment.
During the normal course of business, the operating segments conduct business with each other. For example, the agribusiness and energy services segment procures grain and natural gas and sells products, including ethanol, distillers grains and corn oil for the ethanol production segment. The partnership segment provides fuel storage and transportation services for the agribusiness and energy servicesethanol production segment. These intersegment activities are treated like third-party transactions with origination, marketing and storage fees charged at estimated market values. Consequently, these transactions affect segment performance; however, they do not impact the company’s consolidated results since the revenues and corresponding costs are eliminated.
The following tables set forth certain financial data for the company’s operating segments (in thousands):
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| Three Months Ended |
| Nine Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||
| 2017 |
| 2016 |
| 2017 |
| 2016 | 2019 | 2018 | 2019 | 2018 | |||||||||||
Revenues: |
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Ethanol production: |
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Revenues from external customers | $ | 620,180 |
| $ | 586,988 |
| $ | 1,857,356 |
| $ | 1,710,484 | $ | 447,438 | $ | 589,256 | $ | 716,154 | $ | 1,153,019 | |||
Intersegment revenues |
| 3,579 |
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| - |
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| 6,624 |
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| - | 3,505 | 4,219 | 5,622 | 6,172 | |||||||
Total segment revenues |
| 623,759 |
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| 586,988 |
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| 1,863,980 |
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| 1,710,484 | 450,943 | 593,475 | 721,776 | 1,159,191 | |||||||
Agribusiness and energy services: |
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Revenues from external customers |
| 164,604 |
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| 168,143 |
|
| 483,670 |
|
| 531,445 | 175,837 | 170,074 | 338,632 | 371,861 | |||||||
Intersegment revenues |
| 14,406 |
|
| 8,936 |
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| 33,679 |
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| 24,934 | 9,131 | 14,128 | 15,544 | 25,557 | |||||||
Total segment revenues |
| 179,010 |
|
| 177,079 |
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| 517,349 |
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| 556,379 | 184,968 | 184,202 | 354,176 | 397,418 | |||||||
Food and ingredients: |
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Revenues from external customers |
| 114,750 |
|
| 84,655 |
|
| 329,432 |
|
| 230,812 | 270,886 | 225,887 | 479,385 | 503,996 | |||||||
Intersegment revenues |
| 38 |
|
| 37 |
|
| 113 |
|
| 112 | 38 | 38 | 76 | 80 | |||||||
Total segment revenues |
| 114,788 |
|
| 84,692 |
|
| 329,545 |
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| 230,924 | 270,924 | 225,925 | 479,461 | 504,076 | |||||||
Partnership: |
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Revenues from external customers |
| 1,701 |
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| 2,066 |
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| 4,724 |
|
| 6,042 | 1,692 | 1,620 | 3,997 | 3,248 | |||||||
Intersegment revenues |
| 24,748 |
|
| 24,139 |
|
| 74,019 |
|
| 69,445 | 19,133 | 24,220 | 37,915 | 48,477 | |||||||
Total segment revenues |
| 26,449 |
|
| 26,205 |
|
| 78,743 |
|
| 75,487 | 20,825 | 25,840 | 41,912 | 51,725 | |||||||
Revenues including intersegment activity |
| 944,006 |
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| 874,964 |
|
| 2,789,617 |
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| 2,573,274 | 927,660 | 1,029,442 | 1,597,325 | 2,112,410 | |||||||
Intersegment eliminations |
| (42,771) |
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| (33,112) |
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| (114,435) |
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| (94,491) | (31,807) | (42,605) | (59,157) | (80,286) | |||||||
Revenues as reported | $ | 901,235 |
| $ | 841,852 |
| $ | 2,675,182 |
| $ | 2,478,783 | $ | 895,853 | $ | 986,837 | $ | 1,538,168 | $ | 2,032,124 |
Refer to Note 2 - Revenue, for further disaggregation of revenue by operating segment.
Three Months Ended | Six Months Ended | ||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||
Cost of goods sold: | |||||||||||
Ethanol production | $ | 483,352 | $ | 581,613 | $ | 776,839 | $ | 1,146,172 | |||
Agribusiness and energy services | 176,214 | 165,174 | 335,840 | 366,886 | |||||||
Food and ingredients | 259,906 | 206,440 | 465,979 | 466,205 | |||||||
Partnership | - | - | - | - | |||||||
Intersegment eliminations | (31,215) | (42,602) | (54,826) | (80,303) | |||||||
$ | 888,257 | $ | 910,625 | $ | 1,523,832 | $ | 1,898,960 |
17
17
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
| Three Months Ended |
| Nine Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||
| 2017 |
| 2016 |
| 2017 |
| 2016 | 2019 | 2018 | 2019 | 2018 | |||||||||||
Cost of goods sold: |
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Operating income (loss): | ||||||||||||||||||||||
Ethanol production | $ | 590,904 |
| $ | 549,705 |
| $ | 1,802,688 |
| $ | 1,649,641 | $ | (53,885) | $ | (17,214) | $ | (98,077) | $ | (44,743) | |||
Agribusiness and energy services |
| 168,735 |
|
| 163,643 |
|
| 487,239 |
|
| 518,135 | 4,341 | 12,166 | 9,645 | 19,230 | |||||||
Food and ingredients |
| 98,854 |
|
| 78,792 |
|
| 281,898 |
|
| 219,087 | 7,260 | 12,981 | 5,828 | 25,566 | |||||||
Partnership |
| - |
|
| - |
|
| - |
|
| - | 13,156 | 16,129 | 25,707 | 31,489 | |||||||
Intersegment eliminations |
| (42,706) |
|
| (33,257) |
|
| (114,123) |
|
| (93,769) | (528) | 144 | (4,205) | 212 | |||||||
Corporate activities | (9,724) | (12,441) | (18,283) | (23,914) | ||||||||||||||||||
| $ | 815,787 |
| $ | 758,883 |
| $ | 2,457,702 |
| $ | 2,293,094 | $ | (39,380) | $ | 11,765 | $ | (79,385) | $ | 7,840 |
Three Months Ended | Six Months Ended | ||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||
EBITDA: | |||||||||||
Ethanol production | $ | (38,737) | $ | 3,362 | $ | (67,240) | $ | (3,733) | |||
Agribusiness and energy services | 4,899 | 12,796 | 10,761 | 20,498 | |||||||
Food and ingredients | 8,906 | 19,044 | 9,163 | 35,041 | |||||||
Partnership | 14,017 | 17,138 | 27,788 | 33,761 | |||||||
Intersegment eliminations | (528) | 144 | (4,205) | 212 | |||||||
Corporate activities | (8,326) | (10,642) | (14,705) | (20,817) | |||||||
$ | (19,769) | $ | 41,842 | $ | (38,438) | $ | 64,962 |
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
| Three Months Ended |
| Nine Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||
| 2017 |
| 2016 |
| 2017 |
| 2016 | 2019 | 2018 | 2019 | 2018 | |||||||||||
EBITDA: |
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Depreciation and amortization: | ||||||||||||||||||||||
Ethanol production | $ | 25,570 |
| $ | 30,155 |
| $ | 38,521 |
| $ | 39,164 | $ | 15,437 | $ | 20,559 | $ | 30,777 | $ | 40,995 | |||
Agribusiness and energy services |
| 5,150 |
|
| 6,310 |
|
| 15,910 |
|
| 21,246 | 552 | 618 | 1,101 | 1,248 | |||||||
Food and ingredients |
| 13,272 |
|
| 5,465 |
|
| 39,741 |
|
| 10,430 | 1,583 | 3,444 | 3,194 | 6,848 | |||||||
Partnership |
| 17,589 |
|
| 16,620 |
|
| 51,549 |
|
| 47,241 | 771 | 1,105 | 1,756 | 2,286 | |||||||
Intersegment eliminations |
| 8 |
|
| (39) |
|
| (147) |
|
| (1,174) | |||||||||||
Corporate activities |
| (11,212) |
|
| (9,439) |
|
| (27,275) |
|
| (25,944) | 751 | 1,097 | 1,501 | 1,920 | |||||||
| $ | 50,377 |
| $ | 49,072 |
| $ | 118,299 |
| $ | 90,963 | $ | 19,094 | $ | 26,823 | $ | 38,329 | $ | 53,297 |
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended | ||||||||
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Depreciation and amortization: |
|
|
|
|
|
|
|
|
|
|
|
Ethanol production | $ | 20,959 |
| $ | 15,725 |
| $ | 61,443 |
| $ | 46,655 |
Agribusiness and energy services |
| 1,457 |
|
| 628 |
|
| 2,776 |
|
| 1,882 |
Food and ingredients |
| 3,139 |
|
| 257 |
|
| 9,259 |
|
| 802 |
Partnership |
| 1,280 |
|
| 1,515 |
|
| 3,781 |
|
| 4,220 |
Corporate activities |
| 999 |
|
| 1,161 |
|
| 2,846 |
|
| 2,573 |
| $ | 27,834 |
| $ | 19,286 |
| $ | 80,105 |
| $ | 56,132 |
The following table reconciles net income (loss) to EBITDA for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
| Three Months Ended |
| Nine Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||
| 2017 |
| 2016 |
| 2017 |
| 2016 | 2019 | 2018 | 2019 | 2018 | |||||||||||
Net income | $ | 39,429 |
| $ | 12,884 |
| $ | 29,284 |
| $ | 6,053 | |||||||||||
Net income (loss) | $ | (40,179) | $ | 3,751 | $ | (78,050) | $ | (15,704) | ||||||||||||||
Interest expense |
| 31,889 |
|
| 11,819 |
|
| 69,815 |
|
| 33,117 | 15,969 | 22,021 | 30,396 | 44,149 | |||||||
Income tax expense (benefit) |
| (48,775) |
|
| 5,083 |
|
| (60,905) |
|
| (4,339) | |||||||||||
Income tax benefit | (14,653) | (10,753) | (29,113) | (16,780) | ||||||||||||||||||
Depreciation and amortization |
| 27,834 |
|
| 19,286 |
|
| 80,105 |
|
| 56,132 | 19,094 | 26,823 | 38,329 | 53,297 | |||||||
EBITDA | $ | 50,377 |
| $ | 49,072 |
| $ | 118,299 |
| $ | 90,963 | $ | (19,769) | $ | 41,842 | $ | (38,438) | $ | 64,962 |
(1)Excludes the amortization of operating lease right-of-use assets and amortization of debt issuance costs.
18
The following table sets forth third-party revenues by product line (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended | ||||||||
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
Ethanol | $ | 625,787 |
| $ | 550,724 |
| $ | 1,830,887 |
| $ | 1,622,168 |
Distillers grains |
| 97,136 |
|
| 129,345 |
|
| 303,527 |
|
| 357,070 |
Corn oil |
| 33,678 |
|
| 49,844 |
|
| 121,166 |
|
| 111,727 |
Grain |
| 19,338 |
|
| 30,003 |
|
| 73,860 |
|
| 145,800 |
Food and ingredients |
| 112,697 |
|
| 70,012 |
|
| 305,211 |
|
| 201,423 |
Service revenues |
| 1,701 |
|
| 2,066 |
|
| 4,724 |
|
| 6,042 |
Other |
| 10,898 |
|
| 9,858 |
|
| 35,807 |
|
| 34,553 |
| $ | 901,235 |
| $ | 841,852 |
| $ | 2,675,182 |
| $ | 2,478,783 |
The following table sets forth total assets by operating segment (in thousands):
|
|
|
|
|
| |||||
| September 30, |
| December 31, | June 30, | December 31, | |||||
Total assets (1): |
|
|
|
|
| |||||
Ethanol production | $ | 1,137,903 |
| $ | 1,206,155 | $ | 853,906 | $ | 872,845 | |
Agribusiness and energy services |
| 467,955 |
|
| 579,977 | 390,846 | 399,633 | |||
Food and ingredients |
| 691,663 |
|
| 406,429 | 559,879 | 552,459 | |||
Partnership |
| 72,965 |
|
| 74,999 | 103,210 | 67,297 | |||
Corporate assets |
| 272,844 |
|
| 257,652 | 247,751 | 334,236 | |||
Intersegment eliminations |
| (14,793) |
|
| (18,720) | (14,865) | (10,038) | |||
| $ | 2,628,537 |
| $ | 2,506,492 | $ | 2,140,727 | $ | 2,216,432 |
|
|
5.(1)Asset balances by segment exclude intercompany balances.
6. INVENTORIES
Inventories are carried at the lower of cost or net realizable value, except for commoditiesgrain held for sale and fair-value hedged inventories. Commodities held for sale are reported at market value. As of June 30, 2019, the company recorded a $3.2 million lower of cost or market inventory adjustment reflected in cost of goods sold within the ethanol production segment.
The components of inventories are as follows (in thousands):
June 30, | December 31, | ||||
Finished goods | $ | 99,075 | $ | 99,765 | |
Commodities held for sale | 31,744 | 62,980 | |||
Raw materials | 56,511 | 119,014 | |||
Work-in-process | 440,410 | 423,840 | |||
Supplies and parts | 30,766 | 29,284 | |||
$ | 658,506 | $ | 734,883 |
|
|
|
|
|
|
| September 30, |
| December 31, | ||
Finished goods | $ | 123,860 |
| $ | 99,009 |
Commodities held for sale |
| 42,783 |
|
| 65,926 |
Raw materials |
| 128,072 |
|
| 135,516 |
Work-in-process |
| 283,936 |
|
| 91,093 |
Supplies and parts |
| 33,796 |
|
| 30,637 |
| $ | 612,447 |
| $ | 422,181 |
6. GOODWILL
Changes in carrying amount of goodwill attributable to each business segment for the nine months ended September 30, 2017, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
| Ethanol Production |
| Food and Food |
|
|
|
| ||||
| Production |
| Ingredients |
| Partnership |
| Total | ||||
Balance, December 31, 2016 | $ | 30,279 |
| $ | 142,819 |
| $ | 10,598 |
| $ | 183,696 |
Adjustment to preliminary Fleischmann's Vinegar Valuation |
| - |
|
| (817) |
|
| - |
|
| (817) |
Balance, September 30, 2017 | $ | 30,279 |
| $ | 142,002 |
| $ | 10,598 |
| $ | 182,879 |
As of September 30, 2017, based on the final valuations in connection with the Fleischmann’s acquisition, the fair value of goodwill was reduced by $0.8 million.
19
7. DERIVATIVE FINANCIAL INSTRUMENTS
At SeptemberJune 30, 2017,2019, the company’s consolidated balance sheet reflected unrealized lossesgains of $13.6$24.2 million, net of tax, in accumulated other comprehensive loss.income. The company expects these lossesgains will be reclassified inas operating income over the next 12 months as a result of hedged transactions that are forecasted to occur. The amount realized in operating income will differ as commodity prices change.
19
Fair Values of Derivative Instruments
The fair values of the company’s derivative financial instruments and the line items on the consolidated balance sheets where they are reported are as follows (in thousands):
Asset Derivatives' | Liability Derivatives' | ||||||||||||
Fair Value | Fair Value | ||||||||||||
June 30, | December 31, | June 30, | December 31, | ||||||||||
Derivative financial instruments | $ | 15,924 | (1) | $ | 9,976 | (2) | $ | 9,670 | $ | 7,852 | (3) | ||
Other assets | 1 | 1 | - | - | |||||||||
Other liabilities | - | - | - | 2 | |||||||||
Total | $ | 15,925 | $ | 9,977 | $ | 9,670 | $ | 7,854 |
(1)At June 30, 2019, derivative financial instruments, as reflected on the balance sheet, includes net unrealized gains on exchange traded futures and options contracts of $44.3 million, which include $33.0 million of net unrealized gains on derivative financial instruments designated as cash flow hedging instruments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Asset Derivatives' |
| Liability Derivatives' | ||||||||
|
| Fair Value |
| Fair Value | ||||||||
|
| September 30, |
| December 31, |
| September 30, |
| December 31, | ||||
Derivative financial instruments (1) |
| $ | 5,061 |
| $ | 14,818 | (3) | $ | - |
| $ | - |
Accrued and other liabilities |
|
| - |
|
| - |
|
| 18,029 | (2) |
| 27,099 |
Other liabilities |
|
| - |
|
| - |
|
| 15 |
|
| 81 |
Total |
| $ | 5,061 |
| $ | 14,818 |
| $ | 18,044 |
| $ | 27,180 |
|
|
|
|
|
|
(2)At December 31, 2018, derivative financial instruments, as reflected on the balance sheet, includes net unrealized gains on exchange traded futures and options contracts of $16.3 million.
(3)At December 31, 2018, derivative financial instruments, as reflected on the balance sheet, includes net unrealized losses on exchange traded futures and options contracts of $16.9 million, which included $16.5 million of net unrealized losses on derivative financial instruments designated as cash flow hedging instruments.
Refer to Note 34 - Fair Value Disclosures, which contains fair value information related to derivative financial instruments.
Effect of Derivative Instruments on Consolidated Balance Sheets, Consolidated Statements of Operations and Consolidated Statements of Stockholders’ Equity and Comprehensive Income
The gains or losses recognized in income and other comprehensive income (loss) related to the company’s derivative financial instruments and the line items on the consolidated financial statements where they are reported are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (Losses) on Derivative Instruments Not |
| Three Months Ended |
| Nine Months Ended | ||||||||
Designated in a Hedging Relationship |
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Revenues |
| $ | 2,863 |
| $ | (1,084) |
| $ | (7,400) |
| $ | 6,187 |
Cost of goods sold |
|
| 2,036 |
|
| (39) |
|
| 17,256 |
|
| (8,740) |
Net increase (decrease) recognized in earnings before tax |
| $ | 4,899 |
| $ | (1,123) |
| $ | 9,856 |
| $ | (2,553) |
Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income | ||||||||||||
Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income | Three Months Ended | Six Months Ended | ||||||||||
into Income | 2019 | 2018 | 2019 | 2018 | ||||||||
Revenues | $ | (4,352) | $ | (313) | $ | (17,711) | $ | 1,448 | ||||
Cost of goods sold | (35) | 1,079 | (192) | 101 | ||||||||
Net gain (loss) recognized in loss before tax | $ | (4,387) | $ | 766 | $ | (17,903) | $ | 1,549 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (Losses) Due to Ineffectiveness |
| Three Months Ended |
| Nine Months Ended | ||||||||
of Cash Flow Hedges |
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Revenues |
| $ | (48) |
| $ | 34 |
| $ | (229) |
| $ | (5) |
Cost of goods sold |
|
| (213) |
|
| 96 |
|
| (213) |
|
| (65) |
Net increase (decrease) recognized in earnings before tax |
| $ | (261) |
| $ | 130 |
| $ | (442) |
| $ | (70) |
Gain or (Loss) Recognized in Other Comprehensive Income on Derivatives | ||||||||||||
Gain (Loss) Recognized in Other | Three Months Ended | Six Months Ended | ||||||||||
Comprehensive Income on Derivatives | 2019 | 2018 | 2019 | 2018 | ||||||||
Commodity contracts | $ | 43,144 | $ | (5,422) | $ | 34,181 | $ | 16,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (Losses) Reclassified from Accumulated Other Comprehensive Income (Loss) |
| Three Months Ended September 30, |
| Nine Months Ended September 30, | ||||||||
into Net Income |
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Revenues |
| $ | (5,242) |
| $ | 25,254 |
| $ | 1,734 |
| $ | 12,029 |
Cost of goods sold |
|
| (1,861) |
|
| (28,548) |
|
| (1,679) |
|
| (15,904) |
Net increase (decrease) recognized in earnings before tax |
| $ | (7,103) |
| $ | (3,294) |
| $ | 55 |
| $ | (3,875) |
Amount of Gain or (Loss) | ||||||||||||||
Recognized in Income on Derivatives | ||||||||||||||
Derivatives Not Designated | Location of Gain or (Loss) Recognized in | Three Months Ended | Six Months Ended | |||||||||||
as Hedging Instruments | Income on Derivatives | 2019 | 2018 | 2019 | 2018 | |||||||||
Commodity contracts | Revenues | $ | (7,381) | $ | 7,027 | $ | (22,702) | $ | 7,963 | |||||
Commodity contracts | Costs of goods sold | (9,071) | 7,121 | (8,905) | 123 | |||||||||
Net gain (loss) recognized in loss before tax | $ | (16,452) | $ | 14,148 | $ | (31,607) | $ | 8,086 |
20
20
The following amounts were recorded on the consolidated balance sheets related to cumulative basis adjustments for the fair value hedged items (in thousands):
June 30, 2019 | December 31, 2018 | |||||||||||
Line Item in the Consolidated Balance Sheet in Which the Hedged Item is Included | Carrying Amount of the Hedged Assets | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets | Carrying Amount of the Hedged Assets | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets | ||||||||
Inventories | $ | 22,010 | $ | (1,924) | $ | 89,188 | $ | 2,430 |
Effect of Cash Flow and Fair Value Hedge Accounting on the Statements of Operations
The effect of cash flow and fair value hedges and the line items on the consolidated statements of operations where they are reported are as follows (in thousands):
Location and Amount of Gain or (Loss) Recognized in | |||||||||||
Income on Cash Flow and Fair Value Hedging Relationships | |||||||||||
for the Three Months Ended June 30, | |||||||||||
2019 | 2018 | ||||||||||
Revenue | Cost of | Revenue | Cost of | ||||||||
Gain (loss) on cash flow hedging relationships: | |||||||||||
Commodity contracts: | |||||||||||
Amount of gain (loss) reclassified from accumulated other comprehensive income into income | $ | (4,352) | $ | (35) | $ | (313) | $ | 1,079 | |||
Gain (loss) on fair value hedging relationships: | |||||||||||
Commodity contracts: | |||||||||||
Hedged item | - | 723 | - | 1,103 | |||||||
Derivatives designated as hedging instruments | - | 571 | - | (446) | |||||||
Total amounts of income and expense line items presented in the statement of operations in which the effects of cash flow or fair value hedges are recorded | $ | (4,352) | $ | 1,259 | $ | (313) | $ | 1,736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Portion of Cash Flow Hedges Recognized in |
| Three Months Ended |
| Nine Months Ended | ||||||||
Other Comprehensive Income (Loss) |
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Commodity Contracts |
| $ | (12,235) |
| $ | 3,250 |
| $ | (15,069) |
| $ | (2,157) |
21
Location and Amount of Gain Recognized in | |||||||||||
Income on Cash Flow and Fair Value Hedging Relationships | |||||||||||
for the Six Months Ended June 30, | |||||||||||
2019 | 2018 | ||||||||||
Revenue | Cost of | Revenue | Cost of | ||||||||
Gain (loss) on cash flow hedging relationships: | |||||||||||
Commodity contracts: | |||||||||||
Amount of gain reclassified from accumulated other comprehensive income into income | $ | (17,711) | $ | (192) | $ | 1,448 | $ | 101 | |||
Gain (loss) on fair value hedging relationships: | |||||||||||
Commodity contracts: | |||||||||||
Hedged item | - | (831) | - | 10,496 | |||||||
Derivatives designated as hedging instruments | - | 4,431 | - | (8,878) | |||||||
Total amounts of income and expense line items presented in the statement of operations in which the effects of cash flow or fair value hedges are recorded | $ | (17,711) | $ | 3,408 | $ | 1,448 | $ | 1,719 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (Losses) from Fair Value |
| Three Months Ended |
| Nine Months Ended | ||||||||
Hedges of Inventory |
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Revenues (effect of change in inventory value) |
| $ | 61 |
| $ | (40) |
| $ | 1,451 |
| $ | 1,379 |
Cost of goods sold (effect of change in inventory value) |
|
| (1,775) |
|
| (470) |
|
| (6,229) |
|
| 7,712 |
Revenues (effect of fair value hedge) |
|
| (61) |
|
| 40 |
|
| (1,734) |
|
| (1,379) |
Cost of goods sold (effect of fair value hedge) |
|
| 3,085 |
|
| 918 |
|
| 8,530 |
|
| (7,648) |
Ineffectiveness recognized in earnings before tax |
| $ | 1,310 |
| $ | 448 |
| $ | 2,018 |
| $ | 64 |
There were no gains or losses from discontinuing cash flow or fair value hedge treatment during the three and ninesix months ended SeptemberJune 30, 20172019 and 2016.2018.
The open commodity derivative positions as of SeptemberJune 30, 2017,2019, are as follows (in thousands):
Exchange Traded (1) | Non-Exchange Traded (2) | |||||||||
Derivative | Net Long & | Long | (Short) | Unit of | Commodity | |||||
Futures | (46,875) | Bushels | Corn, Soybeans and Wheat | |||||||
Futures | 2,445 | (3) | Bushels | Corn | ||||||
Futures | (1,310) | (4) | Bushels | Corn | ||||||
Futures | (41,805) | Gallons | Ethanol | |||||||
Futures | 1,670 | MmBTU | Natural Gas | |||||||
Futures | (8,140) | (4) | MmBTU | Natural Gas | ||||||
Futures | (8,400) | Pounds | Cattle | |||||||
Futures | (411,440) | (3) | Pounds | Cattle | ||||||
Options | 4,858 | Bushels | Corn and Soybeans | |||||||
Options | (11,424) | Gallons | Ethanol | |||||||
Options | 2,349 | MmBTU | Natural Gas | |||||||
Options | (35,023) | Pounds | Cattle | |||||||
Options | 3 | Barrels | Crude Oil | |||||||
Forwards | 49,542 | (1,086) | Bushels | Corn and Soybeans | ||||||
Forwards | 14,391 | (310,836) | Gallons | Ethanol | ||||||
Forwards | 148 | (453) | Tons | DDG | ||||||
Forwards | 5,184 | (78,529) | Pounds | Corn Oil | ||||||
Forwards | 14,616 | (5,525) | MmBTU | Natural Gas |
|
|
|
|
|
|
|
|
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September 30, 2017 | ||||||||||
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| Exchange Traded |
| Non-Exchange Traded |
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Derivative |
| Net Long & (Short) (1) |
| Long (2) |
| (Short) (2) |
| Unit of |
| Commodity |
|
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|
|
|
|
|
|
|
|
Futures |
| (39,030) |
|
|
|
|
| Bushels |
| Corn, Soybeans and Wheat |
Futures |
| 67,775 | (3) |
|
|
|
| Bushels |
| Corn |
Futures |
| (13,175) | (4) |
|
|
|
| Bushels |
| Corn |
Futures |
| 9,828 |
|
|
|
|
| Gallons |
| Ethanol |
Futures |
| (285,852) | (3) |
|
|
|
| Gallons |
| Ethanol |
Futures |
| 1,745 |
|
|
|
|
| MmBTU |
| Natural Gas |
Futures |
| (13,753) | (4) |
|
|
|
| MmBTU |
| Natural Gas |
Futures |
| (7,200) |
|
|
|
|
| Pounds |
| Livestock |
Futures |
| (336,300) | (3) |
|
|
|
| Pounds |
| Livestock |
Futures |
| 40 |
|
|
|
|
| Barrels |
| Crude Oil |
Futures |
| (293) | (4) |
|
|
|
| Barrels |
| Crude Oil |
Futures |
| (420) |
|
|
|
|
| Pounds |
| Soybean Oil |
Futures |
| 5,838 | (3) |
|
|
|
| Gallons |
| Natural Gasoline |
Options |
| (1,010) |
|
|
|
|
| Bushels |
| Corn, Soybeans and Wheat |
Options |
| 2,156 |
|
|
|
|
| Gallons |
| Ethanol |
Options |
| (3,456) |
|
|
|
|
| Pounds |
| Livestock |
Options |
| (1,032) |
|
|
|
|
| Pounds |
| Soybean Oil |
Options |
| 29 |
|
|
|
|
| Barrels |
| Crude Oil |
Forwards |
|
|
| 17,166 |
| (247) |
| Bushels |
| Corn and Soybeans |
Forwards |
|
|
| 53,872 |
| (336,067) |
| Gallons |
| Ethanol |
Forwards |
|
|
| 173 |
| (375) |
| Tons |
| Distillers Grains |
Forwards |
|
|
| 14,367 |
| (92,344) |
| Pounds |
| Corn Oil |
Forwards |
|
|
| 14,862 |
| (1,036) |
| MmBTU |
| Natural Gasoline |
Forwards |
|
|
| 712 |
| (412) |
| Barrels |
| Crude Oil |
|
|
|
|
|
|
|
|
|
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(1)Exchange traded futures and options are presented on a net long and (short) position basis. Options are presented on a delta-adjusted basis.
(2)Non-exchange traded forwards are presented on a gross long and (short) position basis including both fixed-price and basis contracts.
(3)Futures used for cash flow hedges.
(4)Futures or non-exchange traded forwards used for fair value hedges.
Energy trading contracts that do not involve physical delivery are presented net in revenues on the consolidated statements of operations. Included in revenues are net gains on energy trading contracts of $3.1$0.8 million and $18.3$9.3 million for the three and ninesix months ended SeptemberJune 30, 2017,2019, respectively and net gains on energy trading contracts of $2.7$4.1 million and $5.7$10.8 million for the three and ninesix months ended SeptemberJune 30, 2016,2018, respectively.
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8. DEBT
The components of long-term debt are as follows (in thousands):
June 30, | December 31, | ||||
Corporate: | |||||
3.25% convertible notes due 2019 | $ | - | $ | 53,457 | |
4.125% convertible notes due 2022 | 145,906 | 142,708 | |||
4.00% convertible notes due 2024 | 73,886 | - | |||
Green Plains Partners: | |||||
$200.0 million revolving credit facility | 132,200 | 134,000 | |||
$8.1 million promissory note | 8,100 | 8,100 | |||
Other | 17,251 | 17,922 | |||
Total face value of long-term debt | 377,343 | 356,187 | |||
Unamortized debt issuance costs | (5,238) | (3,190) | |||
Less: current portion of long-term debt | (1,225) | (54,807) | |||
Total long-term debt | $ | 370,880 | $ | 298,190 |
|
|
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|
|
| September 30, |
| December 31, | ||
Corporate: |
|
|
|
|
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$500.0 million term loan | $ | 487,440 |
| $ | - |
$120.0 million convertible notes due 2018 |
| 60,241 |
|
| 108,817 |
$170.0 million convertible notes due 2022 |
| 131,752 |
|
| 127,239 |
Green Plains Partners: |
|
|
|
|
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$155.0 million revolving credit facility |
| 129,000 |
|
| 129,000 |
Green Plains Processing: |
|
|
|
|
|
$345.0 million term loan |
| - |
|
| 294,011 |
Fleischmann's Vinegar: |
|
|
|
|
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$130.0 million term loan |
| - |
|
| 125,609 |
$15.0 million revolving credit facility |
| - |
|
| 4,000 |
Other |
| 27,976 |
|
| 28,993 |
Total long-term debt |
| 836,409 |
|
| 817,669 |
Less: current portion of long-term debt |
| (6,486) |
|
| (35,059) |
Long-term debt | $ | 829,923 |
| $ | 782,610 |
Short-termThe components of short-term notes payable and other borrowings at September 30, 2017, include working capital revolvers at Green Plains Cattle, Green Plains Grain and Green Plains Trade with outstanding balances of $246.7 million, $64.0 million and $143.3 million, respectively. Green Plains Grain also had $3.7 million in outstanding short-term inventory financing arrangements at September 30, 2017. Short-term notes payable and other borrowings at December 31, 2016, include working capital revolvers at Green Plains Cattle, Green Plains Grain and Green Plains Trade with outstanding balances of $63.5 million, $102.0 million and $125.7 million, respectively.are as follows:
June 30, | December 31, | ||||
Green Plains Cattle: | |||||
$500.0 million revolver | $ | 334,698 | $ | 374,492 | |
Green Plains Grain: | |||||
$100.0 million revolver | 42,000 | 41,000 | |||
$50.0 million inventory financing | - | - | |||
Green Plains Trade: | |||||
$300.0 million revolver | 132,346 | 108,485 | |||
Green Plains Commodity Management: | |||||
$20.0 million hedge line | 14,485 | 14,266 | |||
$ | 523,529 | $ | 538,243 |
Corporate Activities
During the three months ended June 30, 2019, the company issued $105.0 million of 4.00% convertible senior notes due in 2024, or the 4.00% notes. The company used approximately $57.8 million of the net proceeds to repurchase the $56.8 million outstanding principal amount of its 3.25% convertible senior notes due October 1, 2019 in cash, including accrued and unpaid interest, in privately negotiated transactions concurrently with this offering.
At issuance, the company separately accounted for the liability and equity components of the 3.25% convertible notes by bifurcating the gross proceeds between the indebtedness, or liability component, and the embedded conversion option, or equity component, by estimating an effective interest rate on the date of issuance for similar notes. The embedded conversion option was recorded in stockholders’ equity. Since the company did not exercise the embedded conversion option associated with the notes, pursuant to the guidance within ASC 470, Debt, the company recorded a loss upon extinguishment of $1.6 million, measured by the difference between the fair value and carrying value of the liability portion of the notes. As a result, the company recorded a charge to interest expense in the consolidated financial statements of approximately $1.6 million during the three months ended June 30, 2019. This charge included $0.1 million of unamortized debt issuance costs related to the principal balance extinguished. The remaining settlement consideration transferred was allocated to the reacquisition of the embedded conversion option and recognized as a reduction of additional paid-in capital.
The 4.00% notes are senior, unsecured obligations of the company, with interest payable on January 1 and July 1 of each year, beginning January 1, 2020, at a rate of 4.00% per annum. The 4.00% notes will mature on July 1, 2024, unless earlier converted, redeemed or repurchased. The 4.00% notes will be convertible, at the option of the holders, into consideration consisting of, at the company’s election, cash, shares of the company’s common stock, or a combination of cash and shares of the company’s common stock until the close of business on the scheduled trading day immediately
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preceding the maturity date. However, before January 1, 2024, the 4.00% notes will not be convertible unless certain conditions are satisfied. The initial conversion rate is 64.1540 shares of common stock per $1,000 of principal, which is equal to a conversion price of approximately $15.59 per share. The conversion rate will be subject to adjustment upon the occurrence of certain events. In addition, the company may be obligated to increase the conversion rate for any conversion that occurs in connection with certain corporate events, including the company’s calling the 4.00% notes for redemption.
On and after July 1, 2022, and prior to the maturity date, the company may redeem all, but not less than all, of the 4.00% notes for cash if the sale price of the company’s common stock equals or exceeds 140% of the applicable conversion price for a specified time period ending on the trading day immediately prior to the date the company delivers notice of the redemption. The redemption price will equal 100% of the principal amount of the 4.00% notes to be redeemed, plus any accrued and unpaid interest to, but excluding, the redemption date. In addition, upon the occurrence of a fundamental change, holders of the 4.00% notes will have the right, at their option, to require the company to repurchase the 4.00% notes in cash at a price equal to 100% of the principal amount of the 4.00% notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
In August 2016, the company issued $170.0 million of 4.125% convertible senior notes due 2022.in 2022, or the 4.125% notes. The 4.125% notes are senior, unsecured obligations of the company, with interest payable on March 1 and September 1 of each year. The company may settle the 4.125% notes in cash, common stock or a combination of cash and common stock.
Prior to March 1, 2022, the 4.125% notes are not convertible unless certain conditions are satisfied. The conversion rate is subject to adjustment upon the occurrence of certain events, including when the quarterly cash dividend exceeds $0.12 per share and upon redemption of the 4.125% notes. The initial conversion rate is 35.7143 shares of common stock per $1,000 of principal, which is equal to a conversion price of approximately $28.00 per share. The conversion rate is subject to adjustment upon the occurrence of certain events, including upon redemption of the 4.125% notes.
The company may redeem all, but not less than all, of the 4.125% notes at any time on or after September 1, 2020, if the company’s common stock equals or exceeds 140% of the applicable conversion price for a specified time period ending on the trading day immediately prior to the date the company delivers notice of the redemption. The redemption price will equal 100% of the principal plus any accrued and unpaid interest. Holders of the 4.125% notes have the option to require the company to repurchase the 4.125% notes in cash at a price equal to 100% of the principal plus accrued and unpaid interest when there is a fundamental change, such as change in control. If an event of default occurs, it could result in the 4.125% notes being declared due and payable.
In September 2013, the company issued $120.0 million of 3.25% convertible senior notes due October 1, 2018. The 3.25% notes are senior, unsecured obligations of the company, with interest payable on April 1 and October 1 of each year. The company may settle the 3.25% notes in cash, common stock or a combination of cash and common stock.
Prior to April 1, 2018, the 3.25% notes are not convertible unless certain conditions are satisfied. The conversion rate is subject to adjustment when the quarterly cash dividend exceeds $0.04 per share. The conversion rate was recently adjusted to 49.9981 shares of common stock per $1,000 of principal, which is equal to a conversion price of approximately $20.00 per share. The company may be obligated to increase the conversion rate in certain events, including redemption of the 3.25% notes.
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The company may redeem all of the 3.25% notes at any time, if the company’s common stock equals or exceeds 140% of the applicable conversion price for a specified time period ending on the trading day immediately prior to the date the company delivers notice of the redemption. The redemption price will equal 100% of the principal plus any accrued and unpaid interest. Holders of the 3.25% notes have the option to require the company to repurchase the 3.25% notes in cash at a price equal to 100% of the principal plus accrued and unpaid interest when there is a fundamental change, such as change in control. If an event of default occurs, it could result in the 3.25% notes being declared due and payable.
During the second quarter of 2017, the company entered into several privately negotiated agreements with holders, on behalf of certain beneficial owners of the company’s 3.25% notes. Under these agreements, 2,783,725 shares of the company’s common stock and approximately $8.5 million in cash plus accrued but unpaid interest on the 3.25% notes, were exchanged for approximately $56.3 million in aggregate principal amount of the 3.25% notes. Common stock held as treasury shares were exchanged for the 3.25% notes. Following the closings of the agreements, $63.7 million aggregate principal amount of the 3.25% notes remain outstanding.
At issuance, the company separately accounted for the liability and equity components of the convertible notes by bifurcating the gross proceeds between the indebtedness, or liability component, and the embedded conversion option, or equity component. This bifurcation was done by estimating an effective interest rate on the date of issuance for similar notes. The embedded conversion option was recorded in stockholders’ equity. Since the company did not exercise the embedded conversion option associated with the notes, pursuant to the guidance within ASC Topic 470, Debt, the company recorded a loss upon extinguishment measured by the difference between the fair value and carrying value of the liability portion of the notes. As a result, the company recorded a charge to interest expense in the consolidated financial statements of approximately $1.3 million during the three months ended June 30, 2017. This charge included $0.6 million of unamortized debt issuance costs related to the principal balance extinguished. The remaining settlement consideration transferred was allocated to the reacquisition of the embedded conversion option and recognized as a reduction of additional paid-in capital.
On August 29, 2017, the company entered into a $500.0 million term loan agreement, which matures on August 29, 2023, to refinance approximately $405.0 million of total debt outstanding issued by Green Plains Processing and Fleischmann’s Vinegar Company, pay associated fees and expenses and for general corporate purposes. The term loan is guaranteed by the company and substantially all of its subsidiaries, but not Green Plains Partners and certain other entities, and secured by substantially all of the assets of the company, including 17 ethanol production facilities, vinegar production facilities and a second priority lien on the assets secured under the revolving credit facilities at Green Plains Trade, Green Plains Cattle and Green Plains Grain.
The credit agreement contains certain customary representations and warranties, affirmative covenants, negative covenants, financial covenants and events of default. The negative covenants include restrictions on the ability to incur additional indebtedness, acquire and sell assets, create liens, make investments, make distributions and enter into transactions with affiliates. At the end of each fiscal quarter, the covenants of the credit agreement require the company to maintain a maximum term debt to total term capitalization of not more than 55% and a minimum interest coverage ratio of not less than 1.25x, as defined in the credit agreement. Beginning in 2018, the credit facility also has a provision requiring the company to make special annual payments of 50% or 75% of its available free cash flow, subject to certain limitations. Voluntary term loan prepayments are subject to prepayment fees of 1.0% if prepaid before the eighteen month anniversary of the credit agreement. Beginning in the fourth quarter of 2017, scheduled principal payments are $1.25 million until maturity. The term loan bears interest at a floating rate of a base rate plus a margin of 4.50% or LIBOR plus a margin of 5.50%.
Ethanol Production Segment
Green Plains Processing had a $345.0 million senior secured credit facility, which was guaranteed by theThe company has small equipment financing loans, finance leases on equipment or facilities, and certain subsidiariesother forms of Green Plains Processing and secured by the stock and substantially all of the assets of Green Plains Processing. The interest rate was LIBOR, subject to a 1.00% floor, plus 5.50% and was scheduled to mature on June 30, 2020. The terms of the credit facility required the borrower to maintain a maximum total leverage ratio of 4.00x at the end of each quarter, decreasing to 3.25x over the life of the credit facility, and a minimum fixed charge coverage ratio of 1.25x. This senior secured credit facility was extinguished in full on August 29, 2017 with the proceeds from the new $500.0 million secured term loan facility. In connection with the extinguishment of the senior secured credit facility, the company wrote off deferred financing fees of $5.9 million which were recorded as interest expense in the consolidated statement of operations during the three months ended September 30, 2017.debt financing.
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Agribusiness and Energy Services Segment
Green Plains Grain has a $125.0 million senior secured asset-based revolving credit facility, which was amended on June 28, 2019, to financeextend the existing maturity date from July 26, 2019 to June 28, 2022 and lower the maximum commitment from $125.0 million to $100.0 million. The credit facility finances working capital up to the maximum commitment based on eligible collateral equal to the sum of percentages of eligible cash, receivables and inventories, less miscellaneous adjustments. The credit facility matures on July 26, 2019. Advances are subject to an interest rate equal to LIBOR plus 3.00% or the lenders’ base rate plus 2.00%. The credit facility also includes an accordion feature that enables the facility to be increased by up to $75.0 million with agent approval. The credit facility can also be increased by up to $50.0 million for seasonal borrowings. Total commitments outstanding cannot exceed $250.0$225.0 million. The total unused portion of the $100.0 million revolving credit facility is also subject to a commitment fee ranging from 0.375% to 0.50% per annum depending on utilization.
Lenders receive a first priority lien on certain cash, inventory, accounts receivable and other assets owned by Green Plains Grain as security on the credit facility.Grain. The terms impose affirmative and negative covenants for Green Plains Grain, including maintaining minimum working capital to be the greater of $20.0 million (i) $18,000,000 and (ii) 18% of the sum of the then total commitment plus the aggregate seasonal line commitments. Minimum tangible net worth is required to be greater than 21% of $26.3 million for 2017.the sum of the then total commitment plus the aggregate seasonal line commitments. The credit facility also requires the company to maintain a maximum annual leverage of 6.00 to 1.00. Capital expenditures are limited to $8.0 million per year under the credit facility, plus equity contributions from the company and unused amounts of up to $8.0 million from the previous year. In addition, if the company has long-term indebtedness on the date of calculation of greater than $10.0 million, the credit facility requires
24
the company to maintain a minimum fixed charge coverage ratio of 1.25 to 1.00 and a maximum annual leverage ratiolong term debt capitalization of 6.00 to 1.00 at the end of each quarter. The fixed charge coverage ratio and long-term capitalization ratio apply only if Green Plains Grain has long-term indebtedness on the date of calculation.40%. As of SeptemberJune 30, 2017,2019, Green Plains Grain had no long-term indebtedness. The credit facility also contains restrictions on distributions related to capital stock, with exceptions for distributions up to 50% of net profit before tax, subject to certain conditions.
Green Plains Trade has a $300.0 million senior secured asset-based revolving credit facility which was amended on July 28, 2017, to increase the maximum commitment from $150 million to $300 million and extend the maturity date to July 28, 2022. The revolving credit facility financesfinance working capital for marketing and distribution activities based on eligible collateral equal to the sum of percentages of eligible receivables and inventories, less miscellaneous adjustments. The amended $300 million maximum commitmentcredit facility matures on July 28, 2022 and consists of a $285 million credit facility and a $15 million first-in-last-out (FILO) credit facility. The amended credit facility, alsoand includes an accordion feature that enables the credit facility to be increased by up to $70.0 million with agent approval. Advances are subject to variable interest rates equal to daily LIBOR plus 2.25% on the credit facility and daily LIBOR plus 3.25% on the FILO credit facility. The total unused portion of the $300 million revolving credit facility is also subject to a commitment fee of 0.375% per annum.
The terms impose affirmative and negative covenants for Green Plains Trade, including maintaining a minimum fixed charge coverage ratio of 1.15x.1.15 to 1.00. Capital expenditures are limited to $1.5 million per year under the credit facility. The credit facility also restricts distributions related to capital stock, with an exception for distributions up to 50% of net income if, on a pro forma basis, (a) availability has been greater than $10.0 million for the last 30 days and (b) the borrower would be in compliance with the fixed charge coverage ratio on the distribution date.
At September 30, 2017, Green Plains TradeGrain has entered into short-term inventory financing agreements with a financial institution. The company has accounted for the agreements as short-term notes, rather than sales, and has elected the fair value option to offset fluctuations in market prices of the inventory. The company had restricted cash no short-term notes payable related to these inventory financing agreements as of $9.5June 30, 2019.
Green Plains Commodity Management has an uncommitted $20.0 million on the consolidated balance sheet, the use ofrevolving credit facility which was restricted for repayment towards the outstanding loan balance. matures April 30, 2023 to finance margins related to its hedging programs. Advances are subject to variable interest rates equal to LIBOR plus 1.75%.
Food and Ingredients Segment
Green Plains Cattle has a $300.0$500.0 million senior secured asset-based revolving credit facility, which matures on April 30, 2020, to finance working capital for the cattle feedlotfeeding operations up to the maximum commitment based on eligible collateral equal to the sum of percentages of eligible receivables, inventories and other current assets, less miscellaneous adjustments. Advances as amended, are subject to variable interest rates equal to LIBOR plus 2.00% to 3.00%, or the base rate plus 1.00% to 2.00%, depending upon the preceding three months’ excess borrowing availability. The amended credit facility also includes an accordion feature that enables the credit facility to be increased by up to $100.0 million with agent approval. The unused portion of the credit facility is also subject to a commitment fee of 0.20% to 0.30% per annum, depending on the preceding three months’ excess borrowing availability.
Lenders receive a first priority lien on certain cash, inventory, accounts receivable, property and equipment and other assets owned by Green Plains Cattle as security on the credit facility.. The amended terms impose affirmative and negative covenants, including maintaining a minimum working capital of 15% of the commitment amount, minimum tangible net worth of 20% of the commitment amount, plus 50% of net profit from the previous year, and a maximum total debt to tangible net worth ratio of 3.50x.3.50 to 1.00. Capital expenditures are limited to $10.0 million per year under the credit facility, plus $10.0 million per year if funded by a contribution from parent, plus any unused amounts from the previous year.
Fleischmann’s Vinegar had a $130.0 million senior secured term loan and a $15.0 million senior secured revolving credit facility, which was used to finance the purchase of Fleischmann’s Vinegar and to fund working capital for its vinegar
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manufacturing operations, and were scheduled to mature on October 3, 2022. Beginning January 1, 2017, the term loan was subject to mandatory prepayments based on the preceding fiscal year’s excess cash flow. Term loan prepayments were generally subject to prepayment fees of 1.0% to 2.0% if prepaid before the second anniversary of the credit agreement. The term loan and loans under the revolving credit facility each bore interest at a floating rate based on the consolidated total net leverage ratio, adjusted quarterly beginning September 30, 2017, to either a base rate plus an applicable margin of 5.0% to 6.0% or to LIBOR plus an applicable margin of 6.0% to 7.0%. The unused portion of the revolving credit facility was also subject to a commitment fee of 0.5% per annum.
This senior secured credit term loan and senior secured revolving credit facility were extinguished in full on August 29, 2017 with the proceeds from the new $500.0 million secured term loan facility. In connection with the extinguishment of the senior secured credit facility, the company wrote off deferred financing fees of $3.5 million and paid a prepayment penalty of $2.9 million. These expenses are recorded as interest expense in the consolidated statement of operations during the three months ended September 30, 2017.
Partnership Segment
Green Plains Partners, through a wholly owned subsidiary, has a $155.0$200.0 million revolving credit facility, as amended, which matures on July 1, 2020, to fund working capital, acquisitions, distributions, capital expenditures and other general partnership purposes. Advances under the credit facility are subject to a floating interest rate based on the preceding fiscal quarter’s consolidated leverage ratio at a base rate plus 1.25% to 2.00% or LIBOR plus 2.25% to 3.00%. The credit facility maycan be increased up to $100.0by an additional $20.0 million without the consent of the lenders. The unused portion of the credit facility is also subject to a commitment fee of 0.35% to 0.50%, depending on the preceding fiscal quarter’s consolidated leverage ratio.
The partnership’s obligations under the credit facility are secured by a first priority lien on (i) the capital stock of the partnership’s present and future subsidiaries, (ii) all of the partnership’s present and future personal property, such as investment property, general intangibles and contract rights, including rights under agreements with Green Plains Trade, and (iii) all proceeds and products of the equity interests of the partnership’s present and future subsidiaries and its personal property. The terms impose affirmative and negative covenants including restricting the partnership’s ability to incur additional debt, acquire and sell assets, create liens, invest capital, pay distributions and materially amend the partnership’s
25
commercial agreements with Green Plains Trade. The credit facility also requires the partnership to maintain a maximum consolidated net leverage ratio of no more than 3.50x and a minimum consolidated interest coverage ratio of no less than 2.75x, each of which is calculated on a pro forma basis with respect to acquisitions and divestitures occurring during the applicable period. The consolidated leverage ratio is calculated by dividing total funded indebtedness minus the lesser of cash in excess of $5.0 million or $30.0 million by the sum of the four preceding fiscal quarters’ consolidated EBITDA. The consolidated interest coverage ratio is calculated by dividing the sum of the four preceding fiscal quarters’ consolidated EBITDA by the sum of the four preceding fiscal quarters’ interest charges.
The partnership, through a wholly owned subsidiary, has promissory notes payable of $8.1 million, which is recorded in long-term debt, and a note receivable of $8.1 million, which is recorded in other assets, to execute a New Markets Tax Credit transaction related to the Birmingham, Alabama terminal. Beginning in March 2020, the promissory notes and note receivable each require quarterly principal and interest payments of approximately $0.2 million. The partnership retains the right to call $8.1 million of the promissory notes in 2020. The promissory notes payable and note receivable will be fully amortized upon maturity in September 2031. Income tax credits were generated for the lender, which the company has guaranteed over their statutory life of seven years in the event the credits are recaptured or reduced. At the time of the transaction, the income tax credits were valued at $5.0 million. The partnership has not established a liability in connection with the guarantee because it believes the likelihood of recapture or reduction is remote.
Covenant Compliance
The company was in compliance with its debt covenants as of SeptemberJune 30, 2017.2019.
Capitalized Interest
The company had $16 thousand and $39 thousand of capitalized interest during the three and nine months ended September 30, 2017, respectively, and $483 thousand and $1.4 million during the three and nine months ended September 30, 2016, respectively.
Restricted Net Assets
At SeptemberJune 30, 2017,2019, there were approximately $124.5$174.8 million of net assets at the company’s subsidiaries that could not be transferred to the parent company in the form of dividends, loans or advances due to restrictions contained in the credit facilities of these subsidiaries.
9. STOCK-BASED COMPENSATION
The company has an equity incentive plan that reserves 4,110,000 shares of common stock for issuance to its directors and employees. The plan provides for shares, including options to purchase shares of common stock, stock appreciation rights tied to the value of common stock, restricted stock, performance shares, and restricted and deferred stock unit awards, to be granted to eligible employees, non-employee directors and consultants. The company measures stock-based compensation at fair value on the grant date.date, with no adjustments for estimated forfeitures. The company records noncash compensation expense related to equity awards in its consolidated financial statements over the requisite period on a straight-line basis. Substantially all
Restricted Stock Awards and Deferred Stock Units
The non-vested stock award and deferred stock unit activity for the six months ended June 30, 2019, is as follows:
Non-Vested | Weighted- | Weighted-Average | ||||
Non-Vested at December 31, 2018 | 882,288 | $ | 19.12 | |||
Granted | 497,118 | 15.40 | ||||
Forfeited | (80,521) | 17.60 | ||||
Vested | (440,891) | 18.28 | ||||
Non-Vested at June 30, 2019 | 857,994 | $ | 17.54 | 1.9 | ||
Performance Shares
On February 19, 2019 and March 19, 2018, the board of directors granted performance shares to be awarded in the form of common stock to certain participants of the existing stock-based compensation has been equity awards.plan. Performance shares vest based on the company’s average return on net assets (RONA) and the company’s total shareholder return (TSR), as further described herein. The performance shares vest on the third anniversary of the grant, if the RONA and TSR criteria are achieved and the participant is then employed by the company. Fifty percent of the performance shares vest based upon the company’s ability to achieve a predetermined RONA
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25
during the three year performance period. The activity relatedremaining fifty percent of the performance shares vest based upon the company’s total TSR during the three year performance period relative to that of the company’s performance peer group.
The performance shares were granted at a target of 100%, but each performance share will reduce or increase depending on results for the performance period for the company's RONA, and the company’s TSR relative to that of the performance peer group. If the company’s RONA and TSR achieve the maximum goals, the maximum amount of shares available to be issued pursuant to the 2018 and 2019 awards are 482,234 performance shares or 150% of the 321,489 performance shares which remain outstanding. The actual number of performance shares that will ultimately vest is based on the actual percentile ranking of the company’s RONA, and the company’s TSR compared to the peer performance at the end of the performance period.
The company used the Monte Carlo valuation model to estimate the fair value of the performance shares on the date of the grant. The weighted average assumptions used by the company in applying the Monte Carlo valuation model for performance share grants are illustrated in the following table:
FY 2019 Performance Awards | FY 2018 Performance Awards | ||||||
Risk-free interest rate | 2.45 | % | 2.44 | % | |||
Dividend yield | 3.13 | % | 2.64 | % | |||
Expected volatility | 41.69 | % | 45.11 | % | |||
Monte Carlo valuation | 99.62 | % | 97.39 | % | |||
Closing stock price on the date of grant | $ | 15.34 | $ | 18.15 |
The non-vested performance share award activity for the six months ended June 30, 2019, is as follows:
Performance | Weighted- | Weighted-Average | ||||
Non-Vested at December 31, 2018 | 134,022 | $ | 17.92 | |||
Granted | 216,703 | 15.43 | ||||
Forfeited | (29,236) | 16.23 | ||||
Non-Vested at June 30, 2019 | 321,489 | $ | 16.39 | 2.3 |
Stock Options
There remains 128,750 exercisable stock options outstanding at June 30, 2019, with a weighted-average exercise price of $12.72. The weighted average exercise price for options exercisable at June 30, 2019 was above the nine months ended Septembercompany’s stock price at June 30, 2017, is as follows:2019. The weighted-average remaining contractual term of exercisable options was 0.5 years at June 30, 2019.
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| Shares |
| Weighted-Average |
| Weighted-Average Remaining Contractual Term (in years) |
| Aggregate Intrinsic Value | ||
|
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|
|
|
|
|
|
|
|
Outstanding at December 31, 2016 | 148,750 |
| $ | 12.36 |
| 2.8 |
| $ | 2,305 |
Granted | - |
|
| - |
| - |
|
| - |
Exercised | (5,000) |
|
| 10.00 |
| - |
|
| 78 |
Forfeited | - |
|
| - |
| - |
|
| - |
Expired | - |
|
| - |
| - |
|
| - |
Outstanding at September 30, 2017 | 143,750 |
| $ | 12.44 |
| 2.1 |
| $ | 1,109 |
Exercisable at September 30, 2017 (1) | 143,750 |
| $ | 12.44 |
| 2.1 |
| $ | 1,109 |
|
|
Option awards allow employees to exercise options through cash payment for the shares of common stock or simultaneous broker-assisted transactions in which the employee authorizes the exercise and immediate sale of the optionsshares in the open market. The company uses newly issued shares of common stock to satisfy its stock-based payment obligations.
The non-vested stock award and deferred stock unit activity for the nine months ended September 30, 2017, is as follows:
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|
|
| Non-Vested Shares and Deferred Stock Units |
| Weighted- |
| Weighted-Average Remaining Vesting Term (in years) | |
|
|
|
|
|
|
|
Non-Vested at December 31, 2016 | 1,139,560 |
| $ | 17.65 |
|
|
Granted | 566,165 |
|
| 24.03 |
|
|
Forfeited | (42,430) |
|
| 19.08 |
|
|
Vested | (542,764) |
|
| 18.37 |
|
|
Non-Vested at September 30, 2017 | 1,120,531 |
| $ | 20.47 |
| 2.0 |
Green Plains Partners
Green Plains Partners has adopted the LTIP, ana long-term incentive plan (LTIP) intended to promote the interests of the partnership, its general partner and affiliates by providing unit-based incentive compensation based on unitsawards to employees, consultants and directors to encourage superior performance. The incentive planLTIP reserves 2,500,000 common limited partner units for issuance in the form ofoptions, restricted units, phantom units, distributabledistribution equivalent rights, substitute awards, unit appreciation rights, unit awards, profitsprofit interest units or other unit-based awards. The partnership measures unit-based compensation at fair value on the grant date, with no adjustments for estimated forfeitures. The partnership records noncash compensation expense related to equitythe awards in its consolidated financial statements over the requisite service period on a straight-line basis.
The non-vested unit-based awards activity for the ninesix months ended SeptemberJune 30, 2017,2019, is as follows:
27
|
|
|
|
|
|
|
| Non-Vested Shares and Deferred Stock Units |
| Weighted- |
| Weighted-Average Remaining Vesting Term (in years) | |
|
|
|
|
|
|
|
Non-Vested at December 31, 2016 | 15,009 |
| $ | 15.99 |
|
|
Granted | 12,834 |
|
| 18.70 |
|
|
Forfeited | (4,278) |
|
| 18.70 |
|
|
Vested | (15,009) |
|
| 15.99 |
|
|
Non-Vested at September 30, 2017 | 8,556 |
| $ | 18.70 |
| 0.8 |
Non-Vested | Weighted- | Weighted-Average | ||||
Non-Vested at December 31, 2018 | 18,582 | $ | 16.96 | |||
Vested | (18,582) | 16.96 | ||||
Non-Vested at June 30, 2019 | - | $ | - | 0.0 | ||
Stock-Based and Unit-Based Compensation Expense
Compensation costs for stock-based and unit-based payment plans during the three and ninesix months ended SeptemberJune 30, 2017,2019 were approximately $3.3$2.3 million and $8.8$4.8 million, respectively, and $2.4$3.0 million and $7.0$5.4 million during the three and ninesix months ended SeptemberJune 30, 2016, respectively.2018. At SeptemberJune 30, 2017,2019, there was $16.2$15.9 million of
26
unrecognized compensation costs from stock-based and unit-based compensation related to non-vested awards. This compensation is expected to be recognized over a weighted-average period of approximately 2.0 years. The potential potential tax benefit related to stock-based payment is approximately 37.7%25.0% of these expenses.expenses.
10. EARNINGS PER SHARE
Basic earnings per share, or EPS, is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period.
During 2016, diluted EPS was computed using the treasury stock method for the convertible debt instruments, by dividing net income by the weighted average number of common shares outstanding during the period, adjusted for the dilutive effect of the convertible debt instruments and any other outstanding dilutive securities. During the first quarter of 2017, the company changed its method for calculating dilutive EPS related to its convertible debt instruments from the treasury stock method to the if-converted method, as the company changed its financial strategy with respect to cash settlement of these instruments. As such, theThe company computed diluted EPS for 2017 by dividing net income on an if-converted basis, adjusted to add back net interest expense related to the convertible debt instruments, by the weighted average number of common shares outstanding during the period, adjusted to include the shares that would be issued if the convertible debt instruments were converted to common shares and the effect of any outstanding dilutive securities.
The basic and diluted EPS are calculated as follows (in thousands):
|
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|
|
| Three Months Ended |
| Nine Months Ended | ||||||||
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Basic EPS: |
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|
|
|
Net income (loss) attributable to Green Plains | $ | 34,394 |
| $ | 7,928 |
| $ | 14,431 |
| $ | (8,019) |
Weighted average shares outstanding - basic |
| 41,348 |
|
| 38,282 |
|
| 40,008 |
|
| 38,301 |
EPS - basic | $ | 0.83 |
| $ | 0.21 |
| $ | 0.36 |
| $ | (0.21) |
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|
Diluted EPS: |
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|
|
|
|
|
|
Net income (loss) attributable to Green Plains | $ | 34,394 |
| $ | 7,928 |
| $ | 14,431 |
| $ | (8,019) |
Interest and amortization on convertible debt, net of tax effect: |
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|
|
|
|
|
|
|
|
3.25% notes |
| 840 |
|
| - |
|
| 3,582 |
|
| - |
4.125% notes |
| 2,050 |
|
| - |
|
| 6,089 |
|
| - |
Net income (loss) attributable to Green Plains - diluted | $ | 37,284 |
| $ | 7,928 |
| $ | 24,102 |
| $ | (8,019) |
|
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|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic |
| 41,348 |
|
| 38,282 |
|
| 40,008 |
|
| 38,301 |
Effect of dilutive convertible debt: |
|
|
|
|
|
|
|
|
|
|
|
3.25% notes |
| 3,178 |
|
| 760 |
|
| 4,551 |
|
| - |
4.125% notes |
| 6,071 |
|
| - |
|
| 6,071 |
|
| - |
Effect of dilutive stock-based compensation awards |
| 50 |
|
| 94 |
|
| 63 |
|
| - |
Weighted average shares outstanding - diluted |
| 50,647 |
|
| 39,136 |
|
| 50,693 |
|
| 38,301 |
|
|
|
|
|
|
|
|
|
|
|
|
EPS - diluted | $ | 0.74 |
| $ | 0.20 |
| $ | 0.48 |
| $ | (0.21) |
Three Months Ended | Six Months Ended | ||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||
Basic EPS: | |||||||||||
Net loss attributable to Green Plains | $ | (45,342) | $ | (994) | $ | (88,141) | $ | (25,111) | |||
Weighted average shares outstanding - basic | 40,081 | 40,194 | 40,200 | 40,168 | |||||||
EPS - basic | $ | (1.13) | $ | (0.02) | $ | (2.19) | $ | (0.63) | |||
EPS - diluted | $ | (1.13) | $ | (0.02) | $ | (2.19) | $ | (0.63) |
For the nine months ended September 30, 2016, 108 thousandThe anti-dilutive effect of 7.4 million and 7.0 million shares related to the company’s convertible debt and stock-based compensation awards and convertible debt werehave been excluded from the computation of diluted EPS for the three and six months ended June 30, 2019, respectively and 10.2 million and 10.1 million sharesfor the three and six months ended June 30, 2018, respectively, as the inclusion of these shares would have been antidilutive.
28
27
11. STOCKHOLDERS’ EQUITY
Components of stockholders’ equity for the three and six months ended June 30, 2019 and 2018 are as follows (in thousands):
Accum. | Total | |||||||||||||||||
Additional | Other | Green Plains | Non- | Total | ||||||||||||||
Common Stock | Paid-in | Retained | Comp. | Treasury Stock | Stockholders' | Controlling | Stockholders' | |||||||||||
Shares | Amount | Capital | Earnings | Income | Shares | Amount | Equity | Interests | Equity | |||||||||
Balance, January 1, 2019 | 46,638 | $ | 47 | $ | 696,222 | $ | 324,728 | $ | (16,016) | 5,536 | $ | (58,162) | $ | 946,819 | $ | 116,170 | $ | 1,062,989 |
Net income (loss) | - | - | - | (42,799) | - | - | - | (42,799) | 4,928 | (37,871) | ||||||||
Cash dividends and | - | - | - | (4,847) | - | - | - | (4,847) | (5,487) | (10,334) | ||||||||
Other comprehensive loss | - | - | - | - | (6,883) | - | - | (6,883) | - | (6,883) | ||||||||
Amounts reclassified from | - | - | - | - | 10,376 | - | - | 10,376 | - | 10,376 | ||||||||
Other comprehensive income, | - | - | - | - | 3,493 | - | - | 3,493 | - | 3,493 | ||||||||
Proceeds from disgorgement of shareholders short-swing profits, net (1) | - | - | 5,023 | - | - | - | - | 5,023 | - | 5,023 | ||||||||
Stock-based compensation | 284 | - | 428 | - | - | - | - | 428 | 79 | 507 | ||||||||
Balance, March 31, 2019 | 46,922 | 47 | 701,673 | 277,082 | (12,523) | 5,536 | (58,162) | 908,117 | 115,690 | 1,023,807 | ||||||||
Net income (loss) | - | - | - | (45,342) | - | - | - | (45,342) | 5,163 | (40,179) | ||||||||
Cash dividends and | - | - | - | (4,871) | - | - | - | (4,871) | (5,487) | (10,358) | ||||||||
Other comprehensive loss | - | - | - | - | 33,260 | - | - | 33,260 | - | 33,260 | ||||||||
Amounts reclassified from | - | - | - | - | 3,440 | - | - | 3,440 | - | 3,440 | ||||||||
Other comprehensive income, | - | - | - | - | 36,700 | - | - | 36,700 | - | 36,700 | ||||||||
Issuance of 4.00% convertible notes due 2024, net of tax | - | - | 22,537 | - | - | - | - | 22,537 | - | 22,537 | ||||||||
Settlement of 3.25% convertible | - | - | (271) | - | - | - | - | (271) | - | (271) | ||||||||
Repurchase of common stock | - | - | - | - | - | 3,197 | (39,870) | (39,870) | - | (39,870) | ||||||||
Stock-based compensation | (3) | - | 2,129 | - | - | - | - | 2,129 | 79 | 2,208 | ||||||||
Balance, June 30, 2019 | 46,919 | $ | 47 | $ | 726,068 | $ | 226,869 | $ | 24,177 | 8,733 | $ | (98,032) | $ | 879,129 | $ | 115,445 | $ | 994,574 |
29
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| |
|
|
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|
|
| Accum. |
| Total |
|
| ||||||||
|
| Additional |
|
| Other |
| Green Plains | Non- | Total | |||||||||
| Common Stock | Paid-in | Retained | Comp. | Treasury Stock | Stockholders' | Controlling | Stockholders' | ||||||||||
| Shares | Amount | Capital | Earnings | Loss | Shares | Amount | Equity | Interests | Equity | ||||||||
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|
Balance, December 31, 2016 | 46,079 | $ | 46 | $ | 659,200 | $ | 283,214 | $ | (4,137) | 7,715 | $ | (75,816) | $ | 862,507 | $ | 116,684 | $ | 979,191 |
Net income | - |
| - |
| - |
| 14,431 |
| - | - |
| - |
| 14,431 |
| 14,853 |
| 29,284 |
Cash dividends and | - |
| - |
| - |
| (14,053) |
| - | - |
| - |
| (14,053) |
| (15,214) |
| (29,267) |
Other comprehensive loss | - |
| - |
| - |
| - |
| (9,436) | - |
| - |
| (9,436) |
| - |
| (9,436) |
Amounts reclassified from accumulated other comprehensive loss | - |
| - |
| - |
| - |
| (34) | - |
| - |
| (34) |
| - |
| (34) |
Other comprehensive loss, | - |
| - |
| - |
| - |
| (9,470) | - |
| - |
| (9,470) |
| - |
| (9,470) |
Repurchase of common stock | - |
| - |
| - |
| - |
| - | 336 |
| (5,733) |
| (5,733) |
| - |
| (5,733) |
Exchange of 3.25% convertible notes due 2018 | - |
| - |
| 18,326 |
| - |
| - | (2,784) |
| 27,356 |
| 45,682 |
| - |
| 45,682 |
Stock-based compensation | 346 |
| - |
| 4,497 |
| - |
| - | - |
| - |
| 4,497 |
| 159 |
| 4,656 |
Stock options exercised | 5 |
| - |
| 50 |
| - |
| - | - |
| - |
| 50 |
| - |
| 50 |
Balance, September 30, 2017 | 46,430 | $ | 46 | $ | 682,073 | $ | 283,592 | $ | (13,607) | 5,267 | $ | (54,193) | $ | 897,911 | $ | 116,482 | $ | 1,014,393 |
Accum. | Total | |||||||||||||||||
Additional | Other | Green Plains | Non- | Total | ||||||||||||||
Common Stock | Paid-in | Retained | Comp. | Treasury Stock | Stockholders' | Controlling | Stockholders' | |||||||||||
Shares | Amount | Capital | Earnings | Income | Shares | Amount | Equity | Interests | Equity | |||||||||
Balance, December 31, 2017 | 46,410 | $ | 46 | $ | 685,019 | $ | 325,411 | $ | (13,110) | 5,326 | $ | (55,184) | $ | 942,182 | $ | 116,954 | $ | 1,059,136 |
Reclassification of certain | - | - | - | 2,787 | (2,787) | - | - | - | - | - | ||||||||
Balance, January 1, 2018 | 46,410 | 46 | 685,019 | 328,198 | (15,897) | 5,326 | (55,184) | 942,182 | 116,954 | 1,059,136 | ||||||||
Net income (loss) | - | - | - | (24,117) | - | - | - | (24,117) | 4,662 | (19,455) | ||||||||
Cash dividends and | - | - | - | (4,831) | - | - | - | (4,831) | (5,420) | (10,251) | ||||||||
Other comprehensive income | - | - | - | - | 17,150 | - | - | 17,150 | - | 17,150 | ||||||||
Amounts reclassified from | - | - | - | - | (603) | - | - | (603) | - | (603) | ||||||||
Other comprehensive income | - | - | - | - | 16,547 | - | - | 16,547 | - | 16,547 | ||||||||
Stock-based compensation | 284 | 1 | (512) | - | - | - | - | (511) | 60 | (451) | ||||||||
Stock options exercised | 5 | - | 50 | - | - | - | - | 50 | - | 50 | ||||||||
Balance, March 31, 2018 | 46,699 | $ | 47 | $ | 684,557 | $ | 299,250 | $ | 650 | 5,326 | $ | (55,184) | $ | 929,320 | $ | 116,256 | $ | 1,045,576 |
Net income (loss) | - | - | - | (994) | - | - | - | (994) | 4,745 | 3,751 | ||||||||
Cash dividends and | - | - | - | (4,851) | - | - | - | (4,851) | (5,478) | (10,329) | ||||||||
Other comprehensive income | - | - | - | - | (4,277) | - | - | (4,277) | - | (4,277) | ||||||||
Amounts reclassified from | - | - | - | - | (581) | - | - | (581) | - | (581) | ||||||||
Other comprehensive income | - | - | - | - | (4,858) | - | - | (4,858) | - | (4,858) | ||||||||
Exchange of 3.25% convertible | - | - | - | - | - | - | 1 | 1 | - | 1 | ||||||||
Stock-based compensation | 52 | - | 2,812 | - | - | - | - | 2,812 | 60 | 2,872 | ||||||||
Stock options exercised | 10 | - | 100 | - | - | - | - | 100 | - | 100 | ||||||||
Balance, June 30, 2018 | 46,761 | $ | 47 | $ | 687,469 | $ | 293,405 | $ | (4,208) | 5,326 | $ | (55,183) | $ | 921,530 | $ | 115,583 | $ | 1,037,113 |
(1)During the three months ended March 31, 2019, the company received $6.7 million from a shareholder of the company for disgorgement of shareholder short-swing profits under Section 16(b) under the Exchange Act. The amount was recorded as an increase to additional paid-in capital, net of tax.
(2)Effective January 1, 2018, the company early adopted the amended guidance in ASC 220, Income Statement – Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The amendment eliminates the stranded tax effects resulting from the Tax Cuts and Jobs Act and is intended to improve the usefulness of information reported. As a result, the company recorded a $2.8 million reclassification from accumulated other comprehensive income to retained earnings during the first quarter of 2018.
Amounts reclassified from accumulated other comprehensive income (loss) are as follows (in thousands):
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| |||||||||||||
| Three Months Ended |
| Nine Months Ended |
| Statements of | Three Months Ended | Six Months Ended | Statements of | ||||||||||||||||||
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| Classification | 2019 | 2018 | 2019 | 2018 | Classification | ||||||||||||
Gains on cash flow hedges: |
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| |||||||||||||
Gains (losses) on cash flow hedges: | ||||||||||||||||||||||||||
Commodity derivatives | $ | (5,242) |
| $ | 25,254 |
| $ | 1,734 |
| $ | 12,029 |
| Revenues | $ | (4,352) | $ | (313) | $ | (17,711) | $ | 1,448 | Revenues | ||||
Commodity derivatives |
| (1,861) |
|
| (28,548) |
|
| (1,679) |
|
| (15,904) |
| Cost of goods sold | (35) | 1,079 | (192) | 101 | Cost of goods sold | ||||||||
Total |
| (7,103) |
|
| (3,294) |
|
| 55 |
|
| (3,875) |
| Income (loss) before | (4,387) | 766 | (17,903) | 1,549 | Loss before income taxes | ||||||||
Income tax expense (benefit) |
| (2,650) |
|
| (1,144) |
|
| 21 |
|
| (1,369) |
| Income tax | (947) | 185 | (4,087) | 365 | Income tax benefit | ||||||||
Amounts reclassified from accumulated | $ | (4,453) |
| $ | (2,150) |
| $ | 34 |
| $ | (2,506) |
|
| |||||||||||||
Amounts reclassified from accumulated | $ | (3,440) | $ | 581 | $ | (13,816) | $ | 1,184 |
12. INCOME TAXES
The company records actual income tax expense or benefit during interim periods rather than on an annual effective tax rate method. Certain items are given discrete period treatment and the tax effect of those items are reported in full in the relevant interim period. Green Plains Partners is a limited partnership, which is treated as a flow-through entity for federal
30
income tax purposes and is not subject to federal income taxes. As a result, the consolidated financial statements do not reflect such income taxes on pre-tax income or loss attributable to the noncontrolling interest in the partnership.
The 2017company recorded income tax benefit of $14.7 million and $29.1 million for the three and six months ended June 30, 2019, compared with $10.8 million and $16.8 million for the same periods in 2018.The amount of unrecognized tax benefits for uncertain tax positions was $51.6 million as of June 30, 2019 and December 31, 2018.
The 2019 effective tax rate can be affected by variances amongin the estimates and amounts of taxable income among the various states, entities and activity types, realization of tax credits, adjustments from resolution of tax matters under review, valuation allowances and the company’s assessment of its liability for uncertain tax positions.
Income tax benefit was $48.8 million13. COMMITMENTS AND CONTINGENCIES
Adoption of ASC 842
On January 1, 2019, the company adopted the amended guidance in ASC 842, Leases, and all related amendments (“new lease standard”) and applied it to all leases using the optional transition method which requires the amended guidance to be applied at the date of adoption. The standard does not require the guidance to be applied to the earliest comparative period presented in the financial statements. As such, comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The new lease standard had a material impact on the company’s consolidated balance sheets, increasing total assets and total liabilities by $60.9 million upon adoption. It did not have an impact on the consolidated statement of operations for the six months ended June 30, 2019.
The impact on the consolidated balance sheet as of December 31, 2018 for the adoption of the new lease standard was as follows (in thousands):
Balance at | Adjustments | Balance at | |||||||
December 31, | Due to | January 1, | |||||||
2018 | ASC 842 | 2019 | |||||||
(audited) | |||||||||
Assets | |||||||||
Operating lease right-of-use assets | $ | - | $ | 61,268 | $ | 61,268 | |||
Other assets | 365 | (365) | - | ||||||
Liabilities | |||||||||
Accounts payable | 196 | (196) | - | ||||||
Operating lease current liabilities | - | 18,315 | 18,315 | ||||||
Operating lease long-term liabilities | - | 46,024 | 46,024 | ||||||
Other liabilities | 3,240 | (3,240) | - |
The company’s leases do not specify an implicit interest rate. Therefore, the incremental borrowing rate was used based on information available at commencement date to determine the present value of future payments.
Practical Expedients
Under the new lease standard, companies may elect various practical expedients upon adoption. The company elected the package of practical expedients related to transition, which states that an entity need not reassess initial direct costs for existing leases, the lease classification for any expired or existing leases, and whether any expired or existing contracts are or contain leases.
The company elected to utilize a portfolio approach for lease classification, which allows for an entity to group together leases with similar characteristics provided that its application does not create a material difference when compared to accounting for the leases at a contract level. For railcar leases, the company elected to combine the railcars within each rider and account for each rider as an individual lease.
The company also elected the practical expedient for lessees to include both the lease and non-lease components as a single component and account for them as a lease. Certain of the company’s railcar agreements provide for maintenance costs to be the responsibility of the company as incurred or charged by the lessor. This maintenance cost is a non-lease component that the company elected to combine with the monthly rental payment and account for the total cost as operating lease
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expense. In addition, the company has a land lease that contains a non-lease component for the handling and unloading services the landlord provides. The company elected to combine the cost of services with the land lease cost and account for the total as operating lease expense.
A lessee may elect not to apply the recognition requirements in the new lease standard for short-term leases. Instead, the lease payments may be recognized into profit or loss on a straight-line basis over the lease term. The company has elected to use this short-term lease exemption, and therefore will not record a lease liability or right-of-use asset for leases with a term of one year or less. The company did not incur any short-term lease expense for the three and ninesix months ended SeptemberJune 30, 2017, respectively, compared with income tax expense of $5.1 million and income tax benefit of $4.3 million for the three and nine months ended September 30, 2016, respectively. The variation in tax expense was due primarily to the company’s recognition of tax benefits related to R&D Credits. 2019.
A study was conducted to determine whether certain activities the company performs qualify for the R&D credit allowed Lease Expense
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by the Internal Revenue Code Section 41. As a result of this study, the company concluded these activities do qualify for the credit and determined it was appropriate to claim the benefit of these credits for all open tax years.
During the quarter ended September 30, 2017, the company recognized a net tax benefit of $49.5 million for federal and state R&D Credits relating to tax years 2013 to 2016 as well as an estimated year-to-date tax benefit for federal and state R&D Credits for the 2017 tax year. Of this amount, $9.0 million ($5.9 million net) in refundable credits not dependent upon taxable income was recorded as a reduction of cost of goods sold and $43.6 million was recorded as an income tax benefit.
The amount of unrecognized tax benefits for uncertain tax positions was $27.3 million as of September 30, 2017, and $0.2 million as of December 31, 2016. Recognition of these benefits would have a favorable impact on the company’s effective tax rate.
13. COMMITMENTS AND CONTINGENCIES
Operating Leases
The company leases certain facilities, equipment and parcels of land, under agreements that expire at various dates. For accounting purposes, rent expense is basedand equipment, with remaining terms ranging from less than one year to 18.3 years. The land and facility leases include renewal options. The renewal options are included in the lease term only for those sites or locations in which they are reasonably certain to be renewed. Equipment renewals are not considered reasonably certain to be exercised as they typically renew with significantly different underlying terms.
The company may sublease certain of its railcars to third parties on a short-term basis. The subleases are classified as operating leases, with the associated sublease income being recognized on a straight-line amortizationbasis over the lease term.
The components of lease expense are as follows (in thousands):
Three Months Ended | Six Months Ended | |||||
June 30, 2019 | June 30, 2019 | |||||
Lease expense | ||||||
Operating lease expense | $ | 5,406 | $ | 10,955 | ||
Variable lease expense (1) | 242 | 393 | ||||
Total lease expense | $ | 5,648 | $ | 11,348 |
(1)Represents amounts incurred in excess of the totalminimum payments required overfor the lease. The company incurredhandling and unloading of railcars for a certain land lease, expenses offset by railcar lease abatements provided by the lessor when railcars are out of $11.2 million and $33.4 million service during the three and nine months ended September 30, 2017, respectively, and $9.1 million and $27.2 million during the three and nine months ended September 30, 2016, respectively.periods of maintenance or upgrade.
Supplemental cash flow information related to operating leases is as follows (in thousands):
Three Months Ended | Six Months Ended | |||||
June 30, 2019 | June 30, 2019 | |||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||
Operating cash flows from operating leases | $ | 5,386 | $ | 10,936 | ||
Right-of-use assets obtained in exchange for lease obligations: | ||||||
Operating leases | $ | 6,207 | $ | 6,207 |
Supplemental balance sheet information related to operating leases is as follows:
June 30, 2019 | |||
Weighted average remaining lease term | 6.7 years | ||
Weighted average discount rate | 5.45% |
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Aggregate minimum lease payments under thesethe operating lease agreements for the remainder of 20172019 and in future years are as follows (in thousands):
|
|
|
| |||
Year Ending December 31, |
| Amount | Amount | |||
2017 |
| $ | 10,168 | |||
2018 |
|
| 28,976 | |||
2019 |
|
| 19,544 | $ | 10,143 | |
2020 |
|
| 13,160 | 18,297 | ||
2021 |
|
| 6,444 | 10,349 | ||
2022 | 8,324 | |||||
2023 | 4,747 | |||||
Thereafter |
|
| 22,105 | 22,024 | ||
Total |
| $ | 100,397 | 73,884 | ||
Less: Present value discount | (13,109) | |||||
Lease liabilities | $ | 60,775 |
CommoditiesAggregate minimum lease payments remaining under the operating lease agreements under ASC 840, Leases as of December 31, 2018 are as follows (in thousands):
Year Ending December 31, | Amount | ||
2019 | $ | 23,552 | |
2020 | 17,473 | ||
2021 | 9,812 | ||
2022 | 7,325 | ||
2023 | 3,594 | ||
Thereafter | 28,542 | ||
Total | $ | 90,298 |
Lease Revenue
As described in Note 2 – Revenue, the majority of the partnership’s segment revenue is generated though their storage and throughput services and rail transportation services agreements with Green Plains Trade and are accounted for as lease revenue. Leasing revenues do not represent revenues recognized from contracts with customers under ASC 606, and are accounted for under ASC 842, Leases. Lease revenue associated with agreements with Green Plains Trade are eliminated upon consolidation. The remaining lease revenue is not material to the company.
Refer to Note 2 – Revenue for further discussion on lease revenue.
Commodities
As of SeptemberJune 30, 2017,2019, the company had contracted future purchases of grain, corn oil, natural gas, crude oil, ethanol, distillers grains and cattle, valued at approximately $454.4$433.9 million.
Legal
In November 2013, the company acquired two ethanol plants located in Fairmont, Minnesota and Wood River, Nebraska. There is ongoing litigation related to the consideration for this acquisition. On August 19, 2016, the Delaware Superior Court granted Green Plains’ motion for summary judgment in part and held that the seller’s attempt to disclaim liability for certain shortfall amounts through the use of a disclaimer provision was ineffective. Based on the court order, the company determined that previously accrued contingent liabilities of approximately $6.3 million no longer represented probable losses. These accruals were reversed as a reduction of cost of goods sold during the year ended December 31, 2016, because the adjustment relates to a reduction in the cost of inventory purchased in the acquisitions. The court has directed the company and the seller to work together to determine the precise shortfall amount due to Green Plains. The company believes the remaining amount due to Green Plains is approximately $5.5 million; however, the seller has the right to dispute the details of the calculation and appeal the underlying Superior Court order. Accordingly, the total amount Green Plains may receive is yet to be determined. The remaining amount due to the company represents a gain contingency which will not be recorded until all contingencies are resolved.
In addition to the above-described proceeding, the company is currently involved in litigation that has arisen induring the ordinary course of business, but does not believe any pending litigation will have a material adverse effect on its financial position, results of operations or cash flows.
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14. RELATED PARTY TRANSACTIONS
Commercial Contracts
Three subsidiaries of the company have executed separate financing agreements for equipment with Amur Equipment Finance. Gordon Glade, a member of the company’s board of directors, is a shareholder of Amur Equipment Finance. Balances of approximately $638 thousand and $808 thousand related to these financing arrangements were included in debt at September 30, 2017, and December 31, 2016, respectively. Payments, including principal and interest, totaled $69 thousand and $207 thousand during each of the three and nine months ended September 30, 2017 and 2016, respectively. The weighted average interest rate for the financing agreements with Amur Equipment Finance was 6.8%.
Aircraft Leases
Effective AugustJanuary 1, 2017,2015, the company entered into two agreements with an entity controlled by Wayne Hoovestol for the lease of two aircrafts, replacing the prior agreements.aircrafts. Mr. Hoovestol is chairman of the company’s board of directors. The company agreed to pay $11,589$9,766 per month for the combined use of up to 125 hours per year of the aircrafts. Flight time in excess of 125 hours per year will incur additional hourly charges. charges. Payments related to these leases totaled $39$35 thousand and $141$69 thousand during the three and ninesix months ended SeptemberJune 30, 2017, 2019, respectively, and $49$30 thousand and $137$87 thousand during the three and ninesix months ended SeptemberJune 30, 2016,2018, respectively. The company had $2 thousand in outstanding payables related to these agreements at Septemberas of June 30, 2017,2019 and no outstanding payables related to these agreements atas of December 31, 2016.2018.
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15. SUBSEQUENT EVENTS
On October 27, 2017,July 19, 2019, the partnership upsized its revolving credit facility by $40 million, from $155 million to $195 million, by accessing a portioncompany closed on the issuance of the $100additional $10.0 million incremental commitmentaggregate principal amount of the 4.00% convertible notes due in place2024 under the previously announced private offering which closed on June 21, 2019 (the “Option Notes”) to the facility.initial purchasers. The Option Notes resulted in net proceeds to the company, after deducting commissions and the company’s offering expenses, of approximately $9.5 million. The company intends to use the additional proceeds for general corporate purposes. After the issuance of the Option Notes, total aggregate principal of the 4.00% notes was $115.0 million.
The Option Notes will have the same terms as the 4.00% notes issued on June 21, 2019, and will be issued under the same Indenture dated as of June 21, 2019 between the company and Wilmington Trust, National Association, as trustee. For additional information related to the 4.00% notes, see Note 8 – Debt included as part of the notes to consolidated financial statements.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
General
The following discussion and analysis provides information we believe is relevant to understand our consolidated financial condition and results of operations. This discussion should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements contained in this report together with our annual report on Form 10-K for the year ended December 31, 2016.2018.
Cautionary Information Regarding Forward-Looking Statements
Forward-looking statements are made in accordance with safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations that involve a number of risks and uncertainties and do not relate strictly to historical or current facts, but rather to plans and objectives for future operations. These statements may be identified by words such as “anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,” “outlook,” “plan,” “predict,” “may,” “could,” “should,” “will” and similar expressions, as well as statements regarding future operating or financial performance or guidance, business strategy, environment, key trends and benefits of actual or planned acquisitions.
Factors that could cause actual results to differ from those expressed or implied in the forward-looking statements include, but are not limited to, those discussed in Part I, Item 1A – Risk Factors of our annual report on Form 10-K for the year ended December 31, 2016,2018, or incorporated by reference. Specifically, we may experience significant fluctuations in future operating results due to a number of economic conditions, including: competition in the ethanol industry and other industries in which we operate; commodity market risks, including those that may result from weather conditions; financial market risks; counterparty risks; risks associated with changes to government policy or regulation, including changes to tax laws; risks related to acquisitionsacquisition and disposition activities and achieving anticipated results; risks associated with merchant trading, cattle feeding operations vinegar production and other risk factors detailed in reports filed with the SEC. Additional risks related to Green Plains Partners LP include compliance with commercial contractual obligations, potential tax consequences related to our investment in the partnership and risks disclosed in the partnership’s SEC filings associated with the operation of the partnership as a separate, publicly traded entity.
We believe our expectations regarding future events are based on reasonable assumptions; however, these assumptions may not be accurate or account for all risks and uncertainties. Consequently, forward-looking statements are not guaranteed. Actual results may vary materially from those expressed or implied in our forward-looking statements. In addition, we are not obligated norand do wenot intend to update our forward-looking statements as a result of new information unless it is required by applicable securities laws. We caution investors not to place undue reliance on forward-looking statements, which represent management’s views as of the date of this report or documents incorporated by reference.
Overview
Green Plains is a diversified commodity-processing business with operations related to ethanol production, grain handling and storage, cattle feedlots, food ingredients, and commodity marketing and logistics services. We are focused on generating stable operating margins through our diversified business segments and risk management strategy. Green Plains Partners LP is our primary downstream logistics provider, storing and delivering the ethanol we produce. We own a 62.5%49.1% limited partner interest, a 2.0% general partner interest and all of the partnership’s incentive distribution rights. The public owns the remaining 35.5%48.9% limited partner interest. The partnership is consolidated in our financial statements.
We are currently undergoing a number of project initiatives to improve margins. Through our Project 24 initiative, we anticipate reductions in operating expense per gallon across our non-ICM plants as a result of these investments. In addition, through our high-protein initiative, we expect to achieve increased margins per gallon as a result of the ability to produce various high protein animal feed products. The first installation is expected to be completed at our Shenandoah plant by the end of 2019, with the remaining locations being completed over the course of the next three years.
Recent Developments
4.00% Convertible Notes due in 2024
On June 21, 2019, we issued $105.0 million of 4.00% convertible senior notes due in 2024, or the 4.00% notes. We used approximately $57.8 million of the net proceeds to repurchase the $56.8 million outstanding principal amount of our 3.25%
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convertible senior notes due October 1, 2019, including accrued and unpaid interest, in privately negotiated transactions concurrently with the offering.
The 4.00% notes are senior, unsecured obligations, with interest payable on January 1 and July 1 of each year, beginning January 1, 2020, at a rate of 4.00% per annum. The initial conversion rate is 64.1540 shares of common stock per $1,000 of principal, which is equal to a conversion price of approximately $15.59 per share. The conversion rate will be subject to adjustment upon the occurrence of certain events. In addition, we may be obligated to increase the conversion rate for any conversion that occurs in connection with certain corporate events, including the calling of the 4.00% notes for redemption. We may settle the 4.00% notes in cash, common stock or a combination of cash and common stock. At June 30, 2019, the outstanding principal balance was $73.9 million on the 4.00% notes. For additional information related to the 4.00% notes, see Note 8 – Debt included as part of the notes to consolidated financial statements.
On July 28, 2017,19, 2019, we amended our closed on the issuance of the additional $10.0 million aggregate principal amount of the 4.00% notes to the initial purchasers. The Option Notes provided us with net proceeds, after deducting commissions and the company’s offering expenses, of approximately $9.5 million. The Option Notes have the same terms as the 4.00% notes issued on June 21, 2019, and were issued under the same Indenture dated as of June 21, 2019. After the issuance of the Option Notes, total aggregate principal of the 4.00% notes was $115.0 million.
Extension of Offer Period – JGP Energy Partners
Effective June 30, 2019, we agreed with the partnership to extend the offer period related to the potential purchase of the Green Plains Tradeinterest in the JGP Energy Partners Beaumont, Texas terminal until September 30, 2019.
Ninth Amendment to Credit Agreement – Green Plains Grain Company LLC
On June 28, 2019, we entered into an amendment of our senior secured asset-based revolving credit facility. This Ninth Amendment to the Credit Agreement was completed to renew and extend the existing maturity date from July 26, 2019 to June 28, 2022 and lowered the senior secured asset-based revolving credit facility to increase the maximum commitment from $150.0$125.0 million to $300.0 million$100.0 million.
Suspension of Quarterly Cash Dividend
On June 18, 2019, we announced that our board of directors has decided to suspend our quarterly cash dividend in order to retain and extendredirect cash flow to our Project 24 operating expense equalization plan, the maturity date to July 28, 2022. The amended credit facility increases advance ratesdeployment of high-protein technology and modifies the eligible inventory definitions to include additional commodities and locations. Advances are subject to variable interest rates equal to a daily LIBOR rate plus 2.25% or the base rate plus 1.25%. The unused portion of the credit facility is also subject to a commitment fee of 0.375% per annum.our stock repurchase program.
On August 29, 2017, the company entered into a $500.0 million term loan agreement which matures on August 29, 2023, to refinance approximately $405.0 million of total debt outstanding issued by Green Plains Processing and Fleischmann’s Vinegar Company, pay associated fees and expenses and for general corporate purposes. The term loan is guaranteed by the company and substantially all of its subsidiaries, but not Green Plains Partners and certain other entities, and secured by substantially all of the assets of the company, including 17 ethanol production facilities, vinegar production facilities and a
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second priority lien on the assets secured under the revolving credit facilities at Green Plains Trade, Green Plains Cattle and Green Plains Grain.
In November of 2017, we anticipate completion of the Phase I development of intermodal export and import fuels terminal at Jefferson Gulf Coast Energy Partner’s existing Beaumont, Texas terminal. We anticipate offering our interest in the joint venture to the partnership once all phases of commercial development are completed.
Results of Operations
During the thirdsecond quarter of 2017,2019, we resumedcontinued to experience a weak margin environment. Our operating strategy, including the operating cost savings initiative, is to increase utilization rates aligned with historic levels following idledand efficiency while reducing operating expenses to achieve improved margins in the current environment. As a result, capacity at several plants in response to the weak margin environment during the previous quarter. We operated our ethanol production facilities at approximately 83.7%utilization increased from an average of 56.0% of capacity resulting in ethanolthe first quarter to 80.0% of capacity in the second quarter. Ethanol production of 313.6was 224.0 mmg for the thirdsecond quarter of 2017,2019, compared with 292.2296.3 mmg or 92.5% of capacity, for the same quarter last year. Ethanol production capacity was increased withWe expect to continue to run at higher average utilization rates to achieve the cost savings anticipated. Additionally, overall performance at our acquisitions of the Madison, Illinois, Mount Vernon, Indiana,ethanol plants and York, Nebraska plants, acquired on September 23, 2016.
Industry Trendscattle feeding operations were negatively impacted by severe weather and Factors Affecting our Results of Operations
Seasonal summer driving demand was met by increased ethanol productionassociated flooding in areas where we transport products during the third quarterfirst half of 2017. 2019. The weather also drove corn prices up, negatively impacting margins.
U.S. Ethanol Supply and Demand
According to the EIA, average daily domestic ethanol production was 1.03 million barrels per day during the third quarter of 2017, up slightly from 1.00averaged 1.05 million barrels per day during the second quarter of 2017. Average daily production increased 4% year-to-date compared with2019, which was 1% higher than the same period1.04 million barrels for the second quarter of last year due to incremental expansion by existing facilities to optimize production. Weekly refineryear. Refiner and blender input volume which is linked to consumer demand, also increased 1% year-to-dateto 938 thousand barrels per day for the second quarter of 2019, compared with 930 thousand barrels per day for the same quarter last year. Gasoline demand for the first quarter of 2019 increased slightly by 11 thousand barrels per day, or 0.1% compared to the same quarter last year. U.S. domestic ethanol ending stocks increased by approximately 0.9 million barrels, or 4%, to 22.8 million barrels for the second quarter of 2019. At the end of May 2019, the EPA finalized regulatory changes to apply the 1 pound per square inch Reid Vapor Pressure (RVP) waiver that currently applies to E10 during the summer months so that it applies to E15 as well. This removes a significant barrier to wider sales of E15 in the summer months, thus expanding the market for ethanol in transportation fuel. As of July 12, 2019, there were approximately 1,826 retail stations selling E15 in 31 states, up from 1,700 at the beginning of the year, according to Growth Energy.
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Global Ethanol Supply and Demand
According to the USDA Foreign Agriculture Service, domestic ethanol exports for the first five months of 2019 were approximately 631.5 mmgy, down 19% from 776.2 mmgy for the same period last year, helpedof 2018. Brazil remained the largest export destination for U.S. ethanol, which accounted for 30% of domestic ethanol export volume despite the 20% tariff on U.S. ethanol imports in excess of 150 million liters, or 39.6 million gallons per quarter, imposed in September 2017 by Brazil’s Chamber of Foreign Trade, or CAMEX. Canada, India and South Korea accounted for 18%, 15% and 7%, respectively, of U.S. ethanol exports.
On April 1, 2018, China announced it would add an additional 15% tariff to the growing numberexisting 30% tariff it had earlier imposed on ethanol imports from the United States and Brazil. China later raised the tariff further to 70% as the trade war escalated. There continues to be negotiations between the U.S. and China with no certainty of retail gasoline stations offering higher ethanol blendswhen a trade agreement may be reached.
The cost to consumers. According to Growth Energy, 1,043 retail stations were selling E15produce the equivalent amount of starch found in sugar from $3.50-per-bushel corn is 7 cents per pound. The average price of sugar remained at October 5, 2017, up from 431 stations at December 31, 2016. Average daily gasoline demand was flatapproximately 13 cents per pound during the thirdsecond quarter of 2017, slowing by 1.5% for the nine months ended September 30, 2017, compared with the same periods in 2016. Ethanol futures traded at an average discount of $0.11 to RBOB during the third quarter. At September 30, 2017, domestic ethanol inventory of 21.5 million barrels was 1.4 million barrels higher than the ending stocks at the same time last year. Increased export volumes have partially offset the difference between increased production and blending volumes year over year.
2019. We currently estimate that net ethanol exports will reach between 1.11.4 billion gallons and 1.31.5 billion gallons in 2017. Year-to-date domestic ethanol exports through August 30, 2017, were 906.5 mmg, up 53%2019 based on historical demand from a variety of countries and certain countries who seek to improve their air quality and eliminate MTBE from their own fuel supplies.
Co-Product Supply and Demand
During the comparable period in 2016. Brazil accountedsecond quarter of 2019, the market sentiment for 37%cattle feeding remained positive on strong forward margins, while worries around feed cost have tempered some expectations due to the late planting of the domestic ethanolcorn crop. Feeder supplies remain robust as a wet winter and spring have allowed stocker operations to expand. Domestic beef consumption per capita in 2019 is projected to increase 0.4 pounds to 57.6 pounds compared with 2018. Export demand for beef is forecasted to decrease approximately 0.3% in 2019 compared with 2018 according to the USDA.
Cow-calf operations continue to be profitable, which has supported a period of expansion. Excellent pasture conditions after a wet winter and spring will help to promote herd expansion, but supplemental feed cost could be a headwind in the near future. Year-to-date domestic cattle on feed increased 1.6% to 11.74 million head through June 1, 2019, compared to the same period last year.
Packer demand was driven by strong margins during the second quarter of 2019. Total fed cattle marketings through the end of May 2019 increased 0.8% compared with the first five months of 2018. Slaughter capacity constraints, primarily due to labor shortages, have limited the packers’ ability to increase slaughter rates at the same pace as cattle on feed inventories, resulting in higher packer margins. However, these higher margins should incentivize the packers to increase slaughter capacity, which will be crucial for cattle feeding margins moving forward.
The U.S. looks poised to grow its global market share for animal protein while Australia continues to struggle with drought conditions, and African Swine Fever (“ASF”) issues in China should result in larger world export volumes, whiledemand for animal protein from the U.S.
Year-to-date U.S. distillers grains exports through May 31, 2019, were 4.4 million metric tons, or 5.3% lower than the same period last year, according to the USDA Foreign Agriculture Service. Mexico, South Korea, Vietnam, Indonesia, Turkey, Canada India, the Philippines and United Arab EmiratesJapan accounted for 24%approximately 69% of total U.S. distillers export volumes.
While ASF may have a positive impact on animal protein demand from the U.S., 11%, 5%it may have a negative impact on distillers grains exports and 4%, respectively.domestic usage. ASF may depress soybean meal demand in China which could make the animal feed more price competitive to distillers grains and allow for substitution of high-protein soybean meal worldwide.
Legislation and Regulation
We are sensitive to government programs and policies that affect the supply and demand for ethanol and other fuels, which in turn may impact the volume of ethanol and other fuels we handle. Various bills have been discussed in the House and Senate which would eliminate the RFS entirely, eliminate the corn based ethanol portion of the mandate, or make it more
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difficult to sell fuel blends with higher levels of ethanol. However, we believe it is unlikely any of these bills will be passed in a divided Congress.
Federal mandates supporting the use of renewable fuels are a significant driver of ethanol demand in the U.S. Ethanol policies are influenced by environmental concerns, diversifying our fuel supply, and an interest in reducing the country’s dependence on foreign oil. Consumer acceptance of flex-fuel vehicles and higher ethanol blends of ethanol in non-flex-fuel vehicles may be necessary before ethanol can achieve further growth in U.S. market share. Congress first enacted Corporate Average Fuel Economy (CAFE) in 1975 to reduce energy consumption by increasing the fuel economy of cars and light trucks. It provides a 54% efficiency bonus to flexible-fuel vehicles, which can operate on ethanol blends up to E85.
Another important factor is a waiver in the Clean Air Act, known as the One-Pound Waiver, which allows E10 to be sold year-round, even though it exceeds the Reid Vapor Pressure limitation of nine pounds per square inch. At the end of May 2019, the EPA finalized a rule which extended the One-Pound Waiver to E15 expanding it beyond flex-fuel vehicles during the June 1 to September 15 summer driving season. This rule is being challenged in an action filed in Federal District Court for the DC Circuit. However, the One-Pound Waiver is in effect, and E15 is being sold during the summer driving season.
When the RFS II was passed in 2007 and rulemaking finalized in October 2010, the required volume of conventional renewable fuel to be blended with gasoline was to increase each year until it reached 15.0 billion gallons in 2015. In November 2018, the EPA announced it would maintain the 15.0 billion gallon mandate for conventional ethanol in 2019. On July 5, 2019, the EPA released an annual proposal for RFS volumes, which included 15.0 billion gallons for conventional renewable fuel in 2020.
The EPA has the authority to waive the mandates in whole or in part if there is inadequate domestic renewable fuel supply or the requirement severely harms the economy or environment. According to the RFS II, if mandatory renewable fuel volumes are reduced by at least 20% for two consecutive years, the EPA is required to modify, or reset, statutory volumes through 2022. While conventional ethanol maintained 15 billion gallons, 2019 is the second year that the total proposed RVOs are more than 20% below statutory volumes levels. Thus, the EPA Administrator has directed his staff to initiate a reset rulemaking, wherein the EPA will modify statutory volumes through 2022, based on the same factors used to set the RVOs post-2022. These factors include environmental impact, domestic energy security, expected production, infrastructure impact, consumer costs, job creation, price of agricultural commodities, food prices, and rural economic development.
The EPA assigns individual refiners, blenders, and importers the volume of renewable fuels they are obligated to use based on their percentage of total domestic transportation fuel sales. Obligated parties use RINs to show compliance with RFS-mandated volumes. Ethanol producers assign RINs to renewable fuels and the RINs are detached when the renewable fuel is blended with transportation fuel domestically. Market participants can trade the detached RINs in the open market. The market price of detached RINs affects the price of ethanol in certain markets and influences the purchasing decisions by obligated parties.
The EPA can, in consultation with the Department of Energy, waive the obligation for individual refineries that are suffering “disproportionate economic hardship” due to compliance with the RFS. To qualify, the refineries must be under total throughput of 75,000 barrels per day and state their case for an exemption in an application to the EPA each year.
The Trump administration waived the obligation for 19 of 20 applicants for compliance year 2016, totaling 790 million gallons, and 35 of 37 for compliance year 2017, totaling 1.82 billion gallons. These waivers effectively reduce the annual RVO by that amount, since the EPA does not reallocate the waived gallons to other obligated parties. The resulting surplus of RINs in the market has brought values down significantly to under $0.20. Since higher RIN values help to make higher blends of ethanol more cost competitive, lower RIN values could hinder or at least slow retailer and consumer adoption of E15 and higher blends. We believe there are 38 waiver applications pending for compliance year 2018, which could represent approximately 2 billion gallons of renewable fuel obligations.
Biofuels groups and biofuels opposition groups each have filed lawsuits related to RFS II. In addition to the E15 litigation discussed previously, biofuels groups have filed in the U.S. Federal District Court for the D.C. Circuit, challenging the 2019 RVO rule over the EPA’s failure to address small refinery exemptions in the rulemaking. Biofuel opposition groups have filed also in the DC Circuit, with such action consolidated with similar cases, to review the EPA’s 2018 RVO rulemaking. Biofuel groups have filed an action in the DC Circuit to compel EPA to produce information under the Freedom of Information Act related to small refinery exemptions. Certain biofuel groups have further filed suit in the Tenth Circuit Court of Appeals challenging small refinery exemption. Numerous other suits on related RFS II matters are also pending, namely involving RVOs and small refinery exemptions.
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In 2017, the D.C. Circuit ruled in favor of biofuel groups against the EPA related to its decision to lower the 2016 volume requirements by 500 million gallons. As a result, the Court remanded to the EPA to make up for the 500 million gallons. Despite this, in the July 2019 proposed RVO rulemaking, the EPA stated it does not intend to make up the 500 million gallons as the court directed, citing potential burden on obligated parties. It is anticipated that litigation will ensue from this matter.
Government actions abroad can significantly impact the demand for U.S. ethanol. In September 13, 2017, China’s National Development and Reform Commission, the National Energy Board and 15 other state departments issued a joint plan to expand the use and production of biofuels containing up to 10% ethanol by 2020. China, the number three importer of U.S. ethanol in 2016, has imported negligible volumes year-to-dateduring fiscal year 2018 due to a 30% tariff imposed on U.S. and Brazil fuel ethanol, which took effect on January 1, 2017, and thereincreased to 70% in early 2018. There is no assurance the recently issuedthat China’s joint plan will lead to increased imports of U.S. ethanol. On September 1, 2017, Brazil’s Chamberethanol in the near term. Our exports also face tariffs, rate quotas, countervailing duties, and other hurdles in Brazil, the European Union, India, Peru, and elsewhere, which limits our ability to compete in some markets.
In Brazil, the Secretary of Foreign Trade or CAMEX, issued an official written resolution, imposing a 20% tariff on U.S. ethanol imports in excess of 150 million liters, or 39.6 million gallons per quarter.quarter in September 2017. The ruling is valid for two years. years, and is set to expire at the end of August 2019. It remains unclear if Brazil will apply the 20% tariff to all gallons after that date, if they will expand the gallons they allow in duty free, or if they will reduce the tariff for all gallons.
In Mexico, four lawsuits challenging the June 2017, decision by the Energy Regulatory Commission of Mexico (CRE) to approveapproved the use of 10% ethanol blends, which was challenged by ten lawsuits. Four cases were dismissed. A fifth lawsuit was allowedThe six remaining cases follow one of two tracks: 1) to proceed for judicial review, despite precedent set bydetermine the Mexico Supreme Court for dismissal. The CRE is expected to defend its position before the judge makes a final decision. Should the judge rule in favorconstitutionality of the plaintiff,CRE regulation, or 2) to determine the case will gobenefits, or lack thereof, of introducing E10 to Mexico. An injunction was granted in October 2017, preventing the Supreme Court.blending and selling of E10, but was overturned by a higher court in June 2018 making it legal to blend and sell E10 by PEMEX throughout Mexico except for its three largest metropolitan areas. U.S. ethanol exports to Mexico totaled 2929.4 mmg in 2016.2018.
On July 5, 2017, the EPA proposed maintaining the RVOs for conventional ethanol at 15.0 billion gallons while lowering the volume obligations for advanced alternatives, reducing the overall biofuel target to 19.24 billion gallons for 2018. On September 26, 2017, the EPA issued a Notice of Data Availability for comment, proposing to further reduce the 2018 advanced biofuel volume requirement by 315 mmg, to 3.77 billion gallons, and the total renewable fuel requirement to 18.77 billion gallons, leaving conventional ethanol at 15.0 billion gallons. According to RFS II, if mandatory renewable fuel volumes are reduced by at least 20% for two consecutive years, the EPA is required to modify, or reset, statutory volumes through 2022. Since 2018 is the first year the total proposed RVOs are more than 20% below statutory levels, the EPA Administrator directed his staff to initiate the required technical analysis to perform any future reset consistent with the reset rules. If 2019 RVOs are also more than 20% below statutory levels, the RVO reset will be triggered under RFS II and the EPA will be required to modify statutory volumes through 2022 within one year of the trigger event, based on the same factors used to set the RVOs post-2022.
32
The U.S. Federal District Court for the D.C. Circuit ruled on July 28, 2017, in favor of the Americans for Clean Energy and its petitioners against the EPA related to its decision to lower the 2016 volume requirements. The Court concluded the EPA erred in how it interpreted the “inadequate domestic supply” waiver provision of RFS II, which authorizes the EPA to consider supply-side factors affecting the volume of renewable fuel available to refiners, blenders, and importers to meet the statutory volume requirements. The waiver provision does not allow the EPA to consider the volume of renewable fuel available to consumers or the demand-side constraints that affect the consumption of renewable fuel by consumers. As a result, the Court vacated the EPA’s decision to reduce the total renewable fuel volume requirements for 2016 through its waiver authority, which the EPA is expected to address. We believe this decision will benefit the industry overall, with the EPA’s waiver analysis now limited to supply considerations only, and expect the primary impact will be on the RINs market.
Year-to-date U.S. distillers grains exports through August 30, 2017, were 7.3 million metric tons, approximately 4% lower than year-to-date distillers grains exports for the same period last year. Mexico, Turkey, South Korea, Canada, Thailand and Indonesia accounted for 62% of total U.S. distillers export volumes, according to the EIA. On September 1, 2017, the Minister of Agriculture and Rural Development of Vietnam lifted the suspension which blocked imports of U.S. dried distillers grains since January 2017.
On October 19, 2017, the EPA Administrator reiterated his commitment to the text and spirit of the RFS II. In a letter to seven Senators from the Midwestern states, he stated the EPA will meet the November 30, 2017, deadline for issuing RVOs and the EPA’s preliminary analysis suggests that final RVOs should be set at amounts at or greater than those provided on July 5, 2017. Moreover, the EPA is actively exploring its authority to issue an RVP waiver and will be pursuing action on RINs involving ethanol exports.
On October 25, 2017, the Master Limited Partnership Parity Act was introduced in the Senate and House of Representatives (H.R. 4118), proposing to expand the definition of qualified sources of income to include clean energy resources, such as ethanol production, and infrastructure projects by publicly traded partnerships. Currently, qualifying income includes the transportation and storage of ethanol and certain specific alternative fuels.
World demand for U.S. beef has risen as diets continue to improve worldwide to include increased animal protein. In June of 2017, the U.S. resumed exporting beef to China, following a 13-year ban the Trump Administration lifted as part of a new bilateral agreement between the countries.
Comparability of our Financial Results
As a result of acquisitions during 2016, we implemented segment organizational changes during the fourth quarter of 2016, whereby we nowWe report the financial and operating performance infor the following four operating segments: (1) ethanol production, which includes the production of ethanol and distillers grains, and recovery of corn oil, (2) agribusiness and energy services, which includes grain handling and storage, andcommodity marketing and merchant trading for company-produced and third-party ethanol, distillers grains, corn oil, natural gas and other commodities, (3) food and ingredients, which includes cattle feedlots, vinegar productionfeeding and food-grade corn oil operations and included vinegar production until the sale of Fleischmann’s Vinegar during the fourth quarter of 2018 and (4) partnership, which includes fuel storage and transportation services. Prior periods have been reclassified to conform to
The three and six months ended June 30, 2019 do not include operations of the revised segment presentation.
We have re-evaluatedBluffton, Lakota, Hopewell and Riga ethanol plants which were either permanently closed or sold during the profitability measurefourth quarter of our reportable segments’ operating performance2018. Additionally, the three and have determined that segment EBITDA (earnings before interest, taxes, depreciation and amortization) is primarily used by our management to evaluate segment operating activities, and therefore is a more meaningful profitability measure than the previously reported segment operating income. In addition, EBITDA is a financial measure that is widely used by analysts and investors in our industries. As a result, we are now including segment EBITDA as a performance measure.
Effective April 1, 2016, we increased our ownership of BioProcess Algae, a joint venture formed in 2008, to 82.8% and currently own approximately 90.0%. Beginning April 1, 2016, we consolidate the financial results of BioProcess Algae, and record a noncontrolling interest for the economic interestsix months ended June 30, 2019 do not include Fleischmann’s Vinegar operations, which was also sold in the joint venture held by others.fourth quarter of 2018.
On September 23, 2016, we acquired three ethanol production facilities located in Madison, Illinois, Mount Vernon, Indiana, and York, Nebraska, with combined annual production capacity of approximately 230 mmgy.
On October 3, 2016, we acquired Fleischmann’s Vinegar, one of the world’s largest producers of food-grade industrial vinegar which includes seven production facilities and four distribution warehouses.
On March 16, 2017, we acquired the assets of a cattle-feeding operation located in Hereford, Texas, which added a feedlot capacity of 30,000 head of cattle to our operations.
33
On May 16, 2017, we acquired the assets of two cattle-feeding operations located in Leoti, Kansas and Yuma, Colorado, which added a combined feedlot capacity of 155,000 head of cattle to our operations.
During the quarter ended September 30, 2017, the company recognized a net tax benefit of $49.5 million for federal and state R&D Credits relating to tax years 2013 to 2016 as well as an estimated year-to-date tax benefit for federal and state R&D Credits for the 2017 tax year. Of this amount, $9.0 million ($5.9 million net) in refundable credits not dependent upon taxable income was recorded as a reduction of cost of goods sold and $43.6 million was recorded as an income tax benefit.
Corporate activities include selling, general and administrative expenses, consisting primarily of compensation, professional fees and overhead costs not directly related to a specific operating segment.
During the normal course of business, our operating segments do business with each other. For example, our agribusiness and energy services segment procures grain and natural gas and sells products, including ethanol, distillers grains and corn oil of our ethanol production segment. Our partnership segment provides fuel storage and transportation services for our agribusiness and energy services segment. These intersegment activities are treated like third-party transactions with origination, marketing and storage fees charged at estimated market values. Consequently, these transactions affect segment performance; however, they do not impact our consolidated results since the revenues and corresponding costs are eliminated.
We,Corporate activities include selling, general and administrative expenses, consisting primarily of compensation, professional fees and overhead costs not directly related to a specific operating segment. When we evaluate segment performance, we review the following segment information as well as earnings before interest, income taxes, depreciation and amortization, excluding amortization of operating lease right-of-use assets and amortization of debt issuance costs, or EBITDA.
The company also owns a 90.0% interest in BioProcess Algae, a joint venture formed in 2008. Beginning April 1, 2016, we consolidate the financial results of BioProcess Algae, and record a noncontrolling interest for the economic interest in the joint venture held by others.
39
As of June 30, 2019, we, together with our subsidiaries, own a 62.5%49.1% limited partner interest and a 2.0% general partner interest in the partnership and own all of the partnership’s incentive distribution rights, with the remaining 35.5%48.9% limited partner interest owned by public common unitholders. We consolidate the financial results of the partnership, and record a noncontrolling interest for the economic interest in the partnership held by the public common unitholders.
Segment Results
The selected operating segment financial information are as follows (in thousands):
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| Three Months Ended |
| % |
| Nine Months Ended |
| % | Three Months Ended | % | Six Months Ended | % | |||||||||||||||||||
| 2017 |
| 2016 |
| Variance |
| 2017 |
| 2016 |
| Variance | 2019 | 2018 | Variance | 2019 | 2018 | Variance | |||||||||||||
Revenues: |
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Ethanol production: |
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Revenues from external customers | $ | 620,180 |
| $ | 586,988 |
| 5.7% |
| $ | 1,857,356 |
| $ | 1,710,484 |
| 8.6% | $ | 447,438 | $ | 589,256 | (24.1%) | $ | 716,154 | $ | 1,153,019 | (37.9%) | |||||
Intersegment revenues |
| 3,579 |
|
| - |
| * |
|
| 6,624 |
|
| - |
| * | 3,505 | 4,219 | (16.9) | 5,622 | 6,172 | (8.9) | |||||||||
Total segment revenues |
| 623,759 |
|
| 586,988 |
| 6.3 |
|
| 1,863,980 |
|
| 1,710,484 |
| 9.0 | 450,943 | 593,475 | (24.0) | 721,776 | 1,159,191 | (37.7) | |||||||||
Agribusiness and energy services: |
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Revenues from external customers |
| 164,604 |
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| 168,143 |
| (2.1) |
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| 483,670 |
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| 531,445 |
| (9.0) | 175,837 | 170,074 | 3.4 | 338,632 | 371,861 | (8.9) | |||||||||
Intersegment revenues |
| 14,406 |
|
| 8,936 |
| 61.2 |
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| 33,679 |
|
| 24,934 |
| 35.1 | 9,131 | 14,128 | (35.4) | 15,544 | 25,557 | (39.2) | |||||||||
Total segment revenues |
| 179,010 |
|
| 177,079 |
| 1.1 |
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| 517,349 |
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| 556,379 |
| (7.0) | 184,968 | 184,202 | 0.4 | 354,176 | 397,418 | (10.9) | |||||||||
Food and ingredients: |
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Revenues from external customers |
| 114,750 |
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| 84,655 |
| 35.6 |
|
| 329,432 |
|
| 230,812 |
| 42.7 | 270,886 | 225,887 | 19.9 | 479,385 | 503,996 | (4.9) | |||||||||
Intersegment revenues |
| 38 |
|
| 37 |
| 2.7 |
|
| 113 |
|
| 112 |
| 0.9 | 38 | 38 | 0.0 | 76 | 80 | (5.0) | |||||||||
Total segment revenues |
| 114,788 |
|
| 84,692 |
| 35.5 |
|
| 329,545 |
|
| 230,924 |
| 42.7 | 270,924 | 225,925 | 19.9 | 479,461 | 504,076 | (4.9) | |||||||||
Partnership: |
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Revenues from external customers |
| 1,701 |
|
| 2,066 |
| (17.7) |
|
| 4,724 |
|
| 6,042 |
| (21.8) | 1,692 | 1,620 | 4.4 | 3,997 | 3,248 | 23.1 | |||||||||
Intersegment revenues |
| 24,748 |
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| 24,139 |
| 2.5 |
|
| 74,019 |
|
| 69,445 |
| 6.6 | 19,133 | 24,220 | (21.0) | 37,915 | 48,477 | (21.8) | |||||||||
Total segment revenues |
| 26,449 |
|
| 26,205 |
| 0.9 |
|
| 78,743 |
|
| 75,487 |
| 4.3 | 20,825 | 25,840 | (19.4) | 41,912 | 51,725 | (19.0) | |||||||||
Revenues including intersegment activity |
| 944,006 |
|
| 874,964 |
| 7.9 |
|
| 2,789,617 |
|
| 2,573,274 |
| 8.4 | 927,660 | 1,029,442 | (9.9) | 1,597,325 | 2,112,410 | (24.4) | |||||||||
Intersegment eliminations |
| (42,771) |
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| (33,112) |
| 29.2 |
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| (114,435) |
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| (94,491) |
| 21.1 | (31,807) | (42,605) | (25.3) | (59,157) | (80,286) | (26.3) | |||||||||
Revenues as reported | $ | 901,235 |
| $ | 841,852 |
| 7.1% |
| $ | 2,675,182 |
| $ | 2,478,783 |
| 7.9% | $ | 895,853 | $ | 986,837 | (9.2%) | $ | 1,538,168 | $ | 2,032,124 | (24.3%) |
Three Months Ended | % | Six Months Ended | % | ||||||||||||
2019 | 2018 | Variance | 2019 | 2018 | Variance | ||||||||||
Cost of goods sold: | |||||||||||||||
Ethanol production | $ | 483,352 | $ | 581,613 | (16.9%) | $ | 776,839 | $ | 1,146,172 | (32.2%) | |||||
Agribusiness and energy services | 176,214 | 165,174 | 6.7 | 335,840 | 366,886 | (8.5) | |||||||||
Food and ingredients | 259,906 | 206,440 | 25.9 | 465,979 | 466,205 | (0.0) | |||||||||
Partnership | - | - | * | - | - | * | |||||||||
Intersegment eliminations | (31,215) | (42,602) | (26.7) | (54,826) | (80,303) | (31.7) | |||||||||
$ | 888,257 | $ | 910,625 | (2.5%) | $ | 1,523,832 | $ | 1,898,960 | (19.8%) |
34
Three Months Ended | % | Six Months Ended | % | ||||||||||||
2019 | 2018 | Variance | 2019 | 2018 | Variance | ||||||||||
Operating income (loss): | |||||||||||||||
Ethanol production | $ | (53,885) | $ | (17,214) | (213.0%) | $ | (98,077) | $ | (44,743) | (119.2%) | |||||
Agribusiness and energy services | 4,341 | 12,166 | (64.3) | 9,645 | 19,230 | (49.8) | |||||||||
Food and ingredients | 7,260 | 12,981 | (44.1) | 5,828 | 25,566 | (77.2) | |||||||||
Partnership | 13,156 | 16,129 | (18.4) | 25,707 | 31,489 | (18.4) | |||||||||
Intersegment eliminations | (528) | 144 | * | (4,205) | 212 | * | |||||||||
Corporate activities | (9,724) | (12,441) | 21.8 | (18,283) | (23,914) | 23.5 | |||||||||
$ | (39,380) | $ | 11,765 | * | $ | (79,385) | $ | 7,840 | * |
40
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| Three Months Ended | % | Six Months Ended | % | |||||||||||
| Three Months Ended |
| % |
| Nine Months Ended |
| % | 2019 | 2018 | Variance | 2019 | 2018 | Variance | |||||||||||||||||
| 2017 |
| 2016 |
| Variance |
| 2017 |
| 2016 |
| Variance | |||||||||||||||||||
Cost of goods sold: |
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EBITDA: | ||||||||||||||||||||||||||||||
Ethanol production | $ | 590,904 |
| $ | 549,705 |
| 7.5% |
| $ | 1,802,688 |
| $ | 1,649,641 |
| 9.3% | $ | (38,737) | $ | 3,362 | * | $ | (67,240) | $ | (3,733) | * | |||||
Agribusiness and energy services |
| 168,735 |
|
| 163,643 |
| 3.1 |
|
| 487,239 |
|
| 518,135 |
| (6.0) | 4,899 | 12,796 | (61.7) | 10,761 | 20,498 | (47.5) | |||||||||
Food and ingredients |
| 98,854 |
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| 78,792 |
| 25.5 |
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| 281,898 |
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| 219,087 |
| 28.7 | 8,906 | 19,044 | (53.2) | 9,163 | 35,041 | (73.9) | |||||||||
Partnership |
| - |
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| - |
| * |
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| - |
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| - |
| * | 14,017 | 17,138 | (18.2) | 27,788 | 33,761 | (17.7) | |||||||||
Intersegment eliminations |
| (42,706) |
|
| (33,257) |
| 28.4 |
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| (114,123) |
|
| (93,769) |
| 21.7 | (528) | 144 | * | (4,205) | 212 | * | |||||||||
Corporate activities | (8,326) | (10,642) | 21.8 | (14,705) | (20,817) | 29.4 | ||||||||||||||||||||||||
| $ | 815,787 |
| $ | 758,883 |
| 7.5% |
| $ | 2,457,702 |
| $ | 2,293,094 |
| 7.2% | $ | (19,769) | $ | 41,842 | * | $ | (38,438) | $ | 64,962 | * |
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| Three Months Ended |
| % |
| Nine Months Ended |
| % | ||||||||
| 2017 |
| 2016 |
| Variance |
| 2017 |
| 2016 |
| Variance | ||||
Operating income (loss): |
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Ethanol production | $ | 3,107 |
| $ | 14,334 |
| (78.3%) |
| $ | (25,950) |
| $ | (7,673) |
| (238.2%) |
Agribusiness and energy services |
| 3,686 |
|
| 7,241 |
| (49.1) |
|
| 13,138 |
|
| 20,744 |
| (36.7) |
Food and ingredients |
| 10,132 |
|
| 5,199 |
| 94.9 |
|
| 30,472 |
|
| 9,594 |
| 217.6 |
Partnership |
| 16,290 |
|
| 15,084 |
| 8.0 |
|
| 47,707 |
|
| 42,958 |
| 11.1 |
Intersegment eliminations |
| 8 |
|
| 181 |
| (95.6) |
|
| (147) |
|
| (612) |
| (76.0) |
Corporate activities |
| (12,507) |
|
| (11,184) |
| 11.8 |
|
| (30,898) |
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| (29,393) |
| 5.1 |
| $ | 20,716 |
| $ | 30,855 |
| (32.9%) |
| $ | 34,322 |
| $ | 35,618 |
| (3.6%) |
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| Three Months Ended September 30, |
| % |
| Nine Months Ended September 30, |
| % | ||||||||
| 2017 |
| 2016 |
| Variance |
| 2017 |
| 2016 |
| Variance | ||||
EBITDA: |
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Ethanol production | $ | 25,570 |
| $ | 30,155 |
| (15.2%) |
| $ | 38,521 |
| $ | 39,164 |
| (1.6%) |
Agribusiness and energy services |
| 5,150 |
|
| 6,310 |
| (18.4) |
|
| 15,910 |
|
| 21,246 |
| (25.1) |
Food and ingredients |
| 13,272 |
|
| 5,465 |
| 142.9 |
|
| 39,741 |
|
| 10,430 |
| 281.0 |
Partnership |
| 17,589 |
|
| 16,620 |
| 5.8 |
|
| 51,549 |
|
| 47,241 |
| 9.1 |
Intersegment eliminations |
| 8 |
|
| (39) |
| 120.5 |
|
| (147) |
|
| (1,174) |
| 87.5 |
Corporate activities |
| (11,212) |
|
| (9,439) |
| 18.8 |
|
| (27,275) |
|
| (25,944) |
| 5.1 |
| $ | 50,377 |
| $ | 49,072 |
| 2.7% |
| $ | 118,299 |
| $ | 90,963 |
| 30.1% |
* Percentage variance not considered meaningful.
We use EBITDA as a segment measure of profitability to compare the financial performance of our reportable segments and manage those segments. We believe EBITDA is a useful measure to compare our performance against other companies. EBITDA should not be considered an alternative to, or more meaningful than, net income, which is prepared in accordance with GAAP. EBITDA calculations may vary from company to company. Accordingly, our computation of EBITDA may not be comparable with a similarly titled measure of other companies.
The following table reconciles net income (loss) to EBITDA for the periods indicated (in thousands):
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| Three Months Ended |
| Nine Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||
| 2017 |
| 2016 |
| 2017 |
| 2016 | 2019 | 2018 | 2019 | 2018 | |||||||||||
Net income | $ | 39,429 |
| $ | 12,884 |
| $ | 29,284 |
| $ | 6,053 | |||||||||||
Net income (loss) | $ | (40,179) | $ | 3,751 | $ | (78,050) | $ | (15,704) | ||||||||||||||
Interest expense |
| 31,889 |
|
| 11,819 |
| 69,815 |
|
| 33,117 | 15,969 | 22,021 | 30,396 | 44,149 | ||||||||
Income tax expense (benefit) |
| (48,775) |
|
| 5,083 |
| (60,905) |
|
| (4,339) | ||||||||||||
Income tax benefit | (14,653) | (10,753) | (29,113) | (16,780) | ||||||||||||||||||
Depreciation and amortization |
| 27,834 |
|
| 19,286 |
|
| 80,105 |
|
| 56,132 | 19,094 | 26,823 | 38,329 | 53,297 | |||||||
EBITDA | $ | 50,377 |
| $ | 49,072 |
| $ | 118,299 |
| $ | 90,963 | $ | (19,769) | $ | 41,842 | $ | (38,438) | $ | 64,962 |
(1)Excludes the amortization of operating lease right-of-use assets and amortization of debt issuance costs.
35
Three Months Ended SeptemberJune 30, 2017, compared2019 Compared with the Three Months Ended SeptemberJune 30, 20162018
Consolidated Results
Consolidated revenues increased $59.4decreased $91.0 million for the three months ended SeptemberJune 30, 2017,2019 compared with the same period in 2016. Revenues were impacted by an increase in2018 primarily due to the disposition of three ethanol volumes sold, plusplants and the additionssale of Fleischmann’s Vinegar during the fourth quarter of 2016 and2018, offset by increased cattle volumes due to the acquisition of two cattle feedlots duringfeed lots in the first and second quartersthird quarter of 2017.2018.
Operating income decreased $10.1$51.1 million and EBITDA decreased $61.6 million for the three months ended SeptemberJune 30, 2017,2019 compared with the same period last year primarily due to decreased margins on ethanol production partially offset byas well as the disposition of Fleischmann’s Vinegar andduring the cattle feedlot acquisitions. EBITDA increased $1.3fourth quarter of 2018. Interest expense decreased $6.1 million for the three months ended SeptemberJune 30, 2017,2019, compared with the same period in 2018, primarily due to the repayment of the $500 million senior secured term loan during the fourth quarter of 2018. Income tax benefit was $14.7 million for the three months ended June 30, 2019 compared with $10.8 million for the same period in 2018.
41
The following discussion provides greater detail about our second quarter segment performance.
Ethanol Production Segment
Key operating data for our ethanol production segment is as follows:
Three Months Ended | ||||||
2019 | 2018 | % Variance | ||||
Ethanol sold | ||||||
(thousands of gallons) | 224,023 | 296,282 | (24.4) | |||
Distillers grains sold | ||||||
(thousands of equivalent dried tons) | 586 | 739 | (20.7) | |||
Corn oil sold | ||||||
(thousands of pounds) | 53,040 | 75,556 | (29.8) | |||
Corn consumed | ||||||
(thousands of bushels) | 77,963 | 103,147 | (24.4) |
Revenues in our ethanol production segment decreased $142.5 million for the three months ended June 30, 2019 compared with the same period in 2018 primarily due to the disposition of three ethanol plants during the fourth quarter of 2018 as well as lower average realized prices for ethanol and distillers grains.
Cost of goods sold for our ethanol production segment decreased $98.3 million for the three months ended June 30, 2019 compared with the same period last year primarily due to the Fleischmann’s Vinegar acquisitiondisposition of three ethanol plants. As a result of the factors identified above, operating income decreased $36.7 million and additional cattle margins, partially offset byEBITDA decreased margins in ethanol production. Interest expense increased $20.1$42.1 million for the three months ended SeptemberJune 30, 2017,2019 compared with the same period in 2016, primarily due to $12.3 million in2018. Depreciation and amortization expense associated withfor the termination of previous credit facilities and higher average debt outstanding and borrowing costs. Income tax benefitsegment was $48.8$15.4 million for the three months ended SeptemberJune 30, 2017,2019 compared with $20.6 million for the same period last year, primarily due to the disposition of three ethanol plants during the fourth quarter of 2018.
Agribusiness and Energy Services Segment
Revenues in our agribusiness and energy services segment increased $0.8 million while operating income decreased by $7.8 million and EBITDA decreased by $7.9 million for the three months ended June 30, 2019 compared with the same period in 2018. The increase in revenues was primarily due to an increase in ethanol and corn oil trading activity, offset by a decrease in distillers grain and grain trading activity and lower average realized prices for ethanol. Operating income and EBITDA decreased primarily as a result of decreased margins.
Food and Ingredients Segment
Revenues in our food and ingredients segment increased $45.0 million for the three months ended June 30, 2019 compared with the same period in 2018. The increase in revenues was primarily due to the Bartlett acquisition which increased the number of cattle volumes sold during the three months ended June 30, 2019 partially offset by the sale of Fleischmann’s Vinegar during the fourth quarter of 2018. Cattle head sold for the three months ended June 30, 2019 and 2018 was approximately 164,000 and 118,000, respectively.
Operating income decreased by $5.7 million and EBITDA decreased $10.1 million for the three months ended June 30, 2019 compared with the same period in 2018 primarily due to the sale of Fleischmann’s Vinegar during the fourth quarter of 2018 as well as decreased margins in our cattle feeding operations during the second quarter of 2019.
Partnership Segment
Revenues generated by our partnership segment decreased $5.0 million for the June 30, 2019 compared to the same period of 2018, primarily due to lower storage and throughput volumes due to disposition of three ethanol plants during the fourth quarter of 2018 as well as lower revenues generated from rail transportation services due to the assignment of various railcar operating leases as part of the disposition. Operating income decreased $3.0 million and EBITDA decreased $3.1 million for the June 30, 2019 compared with the same period in 2018 primarily due to the factors described above.
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Intersegment Eliminations
Intersegment eliminations of revenues decreased by $10.8 million for the three months ended June 30, 2019 compared with the same period in 2018 due to a decrease in storage and throughput fees paid to the partnership segment due to the disposition of the three ethanol plants during the further quarter of 2018 as well as decreased intersegment corn purchases and marketing fees within the agribusiness and energy services segment.
Corporate Activities
Operating income was impacted by a decrease in operating expenses for corporate activities of $2.7 million for the three months ended June 30, 2019 compared with the same period in 2018 primarily as a result of a workforce reduction which occurred as part of our portfolio optimization program in the last half of 2018.
Income Taxes
We recorded income tax expensebenefit of $5.1$14.7 million for the three months ended June 30, 2019, compared with $10.8 million for the same period in 20162018. The change in income tax benefit was due to a higher loss before income taxes for the three months ended June 30, 2019, and R&D credits recorded during the same period in 2018.
Six Months Ended June 30, 2019 Compared with the Six Months Ended June 30, 2018
Consolidated Results
Consolidated revenues decreased $494.0 million for the six months ended June 30, 2019 compared with the same period in 2018 primarily due to the company’s recognitiondisposition of three ethanol plants and the sale of Fleischmann’s Vinegar during the fourth quarter of 2018 as well as lower production volumes at our remaining plants.
Operating income decreased $87.2 million and EBITDA decreased $103.4 million for the six months ended June 30, 2019 compared with the same period last year primarily due to lower volume and decreased margins on ethanol production and cattle as well as the disposition of Fleischmann’s Vinegar during the fourth quarter of 2018. Interest expense decreased $13.8 million for the six months ended June 30, 2019 compared with the same period in 2018, primarily due to the repayment of the $500 million senior secured term loan during the fourth quarter of 2018. Income tax benefits related to R&D Credits.benefit was $29.1 million for the six months ended June 30, 2019 compared with $16.8 million for the same period in 2018.
The following discussion provides greater detail about our third quarteryear-to-date segment performance.
Ethanol Production Segment
Key operating data for our ethanol production segment is as follows:
|
|
|
|
|
|
| ||||||
|
| Three Months Ended |
|
| Six Months Ended | |||||||
|
| 2017 |
| 2016 |
| % Variance | 2019 | 2018 | % Variance | |||
|
|
|
|
|
|
| ||||||
Ethanol produced |
|
|
|
|
|
| ||||||
(thousands of gallons) |
| 313,642 |
| 292,238 |
| 7.3% | 379,063 | 576,692 | (34.3) | |||
Distillers grains produced |
|
|
|
|
|
| ||||||
(thousands of equivalent dried tons) |
| 817 |
| 790 |
| 3.4 | 984 | 1,468 | (33.0) | |||
Corn oil produced |
|
|
|
|
|
| ||||||
(thousands of pounds) |
| 75,440 |
| 72,176 |
| 4.5 | 88,023 | 144,690 | (39.2) | |||
Corn consumed |
|
|
|
|
|
| ||||||
(thousands of bushels) |
| 109,544 |
| 102,113 |
| 7.3 | 132,004 | 200,430 | (34.1) |
Revenues in our ethanol production segment increased $36.8decreased $437.4 million for the threesix months ended SeptemberJune 30, 2017,2019 compared with the same period in 20162018 primarily due to increased ethanol volumes sold. Ethanol production capacity increased due to the acquisition of the Madison, Mount Vernon and York ethanol plants.
Cost of goods sold for the ethanol production segment increased $41.2 million for the three months ended September 30, 2017, compared with the same period last year due to decreased margins in ethanol production. As a result of decreased margins, EBITDA decreased $4.6 million for the three months ended September 30, 2017, compared with the same period in 2016. Depreciation and amortization expense for the segment was $21.0 million for the three months ended September 30, 2017, compared with $15.7 million for the same period last year.
Agribusiness and Energy Services Segment
Revenues in our agribusiness and energy services segment increased $1.9 million while EBITDA decreased by $1.2 million for the three months ended September 30, 2017, compared with the same period in 2016. The increase in revenues was primarily due to higher average realized prices for distillers grains and increased intersegment distillers grain and corn revenues, while EBITDA decreased primarily as a result of decreased margins on trading activity. Depreciation expense increased by $0.8 million for the three months ended September 30, 2017, primarily as a result of accelerated depreciation related to the disposition of fixed assets at our St. Edward, Nebraska location.
Food and Ingredients Segment
Revenues in our food and ingredients segment increased $30.1 million for the three months ended September 30, 2017, compared with the same period in 2016. The increase in revenues was primarily due to the acquisitions of Fleischmann’s
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Vinegar and the cattle feedlots. The daily average company-owned cattle on feed for the three months ended September 30, 2017 and 2016, was approximately 148,000 and 68,000 head, respectively, and the daily average third-party owned cattle on feed for the three months ended September 30, 2017 and 2016, was approximately 70,000 and 1,100, respectively.
EBITDA increased by $7.8 million for the three months ended September 30, 2017, compared with the same period in 2016 primarily due to the acquisition of Fleischmann’s Vinegar, as well as increased cattle margins.
Partnership Segment
Revenues generated by our partnership segment increased $0.2 million for the three months ended September 30, 2017 compared to the same period of 2016. Revenues generated from the partnership’s storage and throughput agreement with Green Plains Trade increased $0.8 million primarily due to higher throughput volumes related to ethanol storage assets acquired in September 2016. Other revenue increased $0.3 million due to expansion of our truck fleet. These increases were partially offset by revenues generated from the partnership’s rail transportation services agreement with Green Plains Trade, which decreased $0.5 million due to lower average rates charged for railcar volumetric capacity provided, and revenues generated from the partnership’s terminal services agreements, which decreased $0.4 million due to lower throughput volumes at the Birmingham facility and other terminals. EBITDA increased $1.0 million for the three months ended September 30, 2017, compared with the same period in 2016 due to the increased storage and throughput revenues.
Intersegment Eliminations
Intersegment eliminations of revenues increased by $9.7 million for the three months ended September 30, 2017, compared with the same period in 2016 due primarily to increased intersegment distillers grain revenues paid to the ethanol production segment and increased intersegment corn revenues paid to the agribusiness and energy services segment.
Corporate Activities
EBITDA decreased by $1.8 million for the three months ended September 30, 2017, compared with the same period in 2016 due to increases in selling, general and administrative expenses primarily driven by salaries, insurance, rent, utilities and property taxes as a result of the Fleischmann’s Vinegar and cattle feedlot acquisitions.
Income Taxes
The income tax benefit for the three months ended September 30, 2017 was $48.8 million compared to income tax expense of $5.1 million for the three months ended September 30, 2016. The change in income taxes for the three months ended September 30, 2017 was primarily due to the company’s recognition of tax benefits related to R&D Credits.
A study was conducted to determine whether certain activities the company performs qualify for the R&D credit allowed by the Internal Revenue Code Section 41. As a result of this study, the company concluded these activities do qualify for the credit and determined it was appropriate to claim the benefit of these credits for all open tax years. The company recognized these credits during the third quarter of 2017, along with an estimate of the credit for qualified activities year-to-date. The company will continue to evaluate eligibility for R&D credits on a regular basis.
Nine Months Ended September 30, 2017, compared with the Nine Months Ended September 30, 2016
Consolidated Results
Consolidated revenues increased $196.4 million for the nine months ended September 30, 2017, compared with the same period in 2016. Revenues were impacted by an increase in ethanol, corn oil, and cattle volumes sold. In addition, we acquired Fleischmann’s Vinegarplants during the fourth quarter of 20162018 as well as lower production volumes of ethanol, distillers grains and cattle feedlots duringcorn oil due to the first and second quarters of 2017. This was partially offset by a decrease in grain trading activity volumesdepressed margin environment and lower average realized prices for grain,ethanol and distillers grains and cattle. grains.
Operating incomeCost of goods sold for our ethanol production segment decreased $1.3$369.3 million for the ninesix months ended SeptemberJune 30, 2017, compared with the same period last year primarily due to a decrease in ethanol margins as well as a decrease in grain trading activity, partially offset by the acquisitions of Fleischmann’s Vinegar and the cattle feedlots. EBITDA increased $27.3 million for the nine months ended September 30, 2017,2019 compared with the same period last year primarily due to the acquisitionsdisposition of Fleischmann’s Vinegarthree ethanol plants in addition to lower
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production volumes. As a result of the factors identified above, operating income decreased $53.3 million and the cattle feedlots, partially offset byEBITDA decreased ethanol margins as well as decreased grain trading activity. Interest expense increased $36.7$63.5 million for the ninesix months ended SeptemberJune 30, 2017,2019 compared with the same period in 2016, primarily due to higher average debt outstanding and borrowing costs, $12.3 million in expense associated with the termination of
37
previous credit facilities, and a $1.3 million charge related to the extinguishment of a portion of the 3.25% convertible notes. Income tax benefit was $60.9 million for the nine months ended September 30, 2017, compared with $4.3 million for the same period in 2016 primarily due to the company’s recognition of tax benefits related to the R&D Credits.
The following discussion provides greater detail about our segment performance for the first nine months of 2017.
Ethanol Production Segment
Key operating data for our ethanol production segment is as follows:
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|
|
|
|
|
|
| Nine Months Ended |
|
| ||
|
| 2017 |
| 2016 |
| % Variance |
|
|
|
|
|
|
|
Ethanol produced |
|
|
|
|
|
|
(thousands of gallons) |
| 915,607 |
| 813,464 |
| 12.6% |
Distillers grains produced |
|
|
|
|
|
|
(thousands of equivalent dried tons) |
| 2,421 |
| 2,170 |
| 11.6 |
Corn oil produced |
|
|
|
|
|
|
(thousands of pounds) |
| 216,482 |
| 196,530 |
| 10.2 |
Corn consumed |
|
|
|
|
|
|
(thousands of bushels) |
| 318,709 |
| 284,282 |
| 12.1 |
Revenues in our ethanol production segment increased $153.5 million for the nine months ended September 30, 2017, compared with the same period in 2016 primarily due to higher volumes of ethanol, distillers grains and corn oil produced, partially offset by lower average distillers grains prices realized. The increase in volumes produced was primarily due to the acquisition of the Madison, Mount Vernon and York ethanol plants.
Cost of goods sold for the ethanol production segment increased $153.0 million for the nine months ended September 30, 2017, compared with the same period last year due to higher production volumes associated with the acquisition of the Madison, Mount Vernon and York ethanol plants as well as decreased margins on ethanol production. EBITDA decreased $0.6 million for the nine months ended September 30, 2017, compared with the same period in 2016 due to decreased margins in ethanol production.2018. Depreciation and amortization expense for the segment was $61.4$30.8 million for the ninethree months ended September 30, 2017,March 31, 2019 compared with $46.7$41.0 million for the same period last year.year, primarily due to the disposition of three ethanol plants during the fourth quarter of 2018.
Agribusiness and Energy Services Segment
Revenues in our agribusiness and energy services segment decreased $39.0$43.2 million while operating income decreased by $9.6 million and EBITDA decreased by $5.3$9.7 million for the ninesix months ended SeptemberJune 30, 2017,2019 compared with the same period in 2016.2018. The decrease in revenues was primarily due to a decrease in ethanol, distillers grain and corn oil production and trading activity, volumes, partially offset by higheras well as lower average realized prices for distillers grainethanol. Operating income and increased intersegment distillers grain, marketing and corn revenues. EBITDA decreased primarily as a result of decreased trading activity. Depreciation expense increased by $0.9 million for the nine months ended September 30, 2017, primarily as a result of accelerated depreciation related to the disposition of fixed assets at our St. Edward, Nebraska location.margins.
Food and Ingredients Segment
Revenues in our food and ingredients segment increased $98.6decreased $24.6 million for the ninesix months ended SeptemberJune 30, 2017,2019 compared with the same period in 2016.2018. The increasedecrease in revenues was primarily due to the acquisitionssale of Fleischmann’s Vinegar andduring the fourth quarter of 2018, partially offset by an increase in cattle feedlots. The daily average company-owned cattle on feedvolumes sold during the six months ended June 30, 2019. Cattle head sold for the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018 was approximately 100,000291,000 and 65,000 head, respectively,255,000 respectively.
Operating income decreased by $19.7 million and the daily average third-party owned cattle on feed for the nine months ended September 30, 2017 and 2016, was approximately 59,000 and 1,400, respectively.
EBITDA increased by $29.3decreased $25.9 million for the ninesix months ended SeptemberJune 30, 2017,2019 compared with the same period in 20162018 primarily due to the acquisitionsale of Fleischmann’s Vinegar during the fourth quarter of 2018, as well as increasedoverall performance at our cattle margins. feeding operations, which was negatively impacted by severe winter weather and an abnormally negative basis during the first quarter of 2019.
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Partnership Segment
Revenues generated by our partnership segment increased $3.3decreased $9.8 million for the ninesix months ended SeptemberJune 30, 20172019 compared to the same period of 2016,2018, primarily due to higherlower storage and throughput volumes partially offset by a decrease indue to disposition of three ethanol plants during the average rate charged for the railcar volumetric capacity related to the rail transportation services agreement with Green Plains Trade,fourth quarter of 2018 as well as lower throughput volumes underproduction at our remaining plants and lower revenues generated from rail transportation services due to the terminal services agreements.assignment of various railcar operating leases as part of the disposition. Operating income decreased $5.8 million and EBITDA increased $4.3decreased $6.0 million for the ninesix months ended SeptemberJune 30, 2017,2019 compared with the same period in 20162018 primarily due to the increased storage and throughput revenues, as well as a decrease in operations and maintenance expenses of $0.6 million during the nine months ended September 30, 2017 compared with the same period of 2016.factors described above.
Intersegment Eliminations
Intersegment eliminations of revenues increaseddecreased by $19.9$21.1 million for the ninesix months ended SeptemberJune 30, 2017,2019 compared with the same period in 20162018 due to increased intersegment distillers grain and corn revenues paid to the ethanol production and agribusiness and energy services segments and the increasea decrease in storage and throughput fees paid to the partnership segment as well as decreased intersegment corn purchases and marketing fees within the agribusiness and energy services segment.
Corporate Activities
EBITDA decreasedOperating income was impacted by $1.3a decrease in operating expenses for corporate activities of $5.6 million for the ninesix months ended SeptemberJune 30, 2017,2019 compared with the same period in 2016 due to increases in selling, general and administrative expenses2018 primarily driven by salaries, insurance, rent, utilities and property taxes as a result of a workforce reduction which occurred as part of our portfolio optimization program in the Fleischmann’s Vinegar and cattle feedlot acquisitions.last half of 2018.
Income Taxes
TheWe recorded income tax benefit for the nine months ended September 30, 2017 was $60.9 million compared to $4.3of $29.1 million for the ninesix months ended SeptemberJune 30, 2016.2019, compared with $16.8 million for the same period in 2018. The change in income tax benefit was due to a higher loss before income taxes for the ninesix months ended SeptemberJune 30, 2017 was primarily due to the company’s recognition of tax benefits related to2019, and R&D Credits.
A study was conducted to determine whether certain activities the company performs qualify for the R&D credit allowed by the Internal Revenue Code Section 41. As a result of this study, the company concluded these activities do qualify for the credit and determined it was appropriate to claim the benefit of these credits for all open tax years. The company recognized these creditsrecorded during the third quarter of 2017, along with an estimate of the credit for qualified activities year-to-date. The company will continue to evaluate eligibility for R&D credits on a regular basis.same period in 2018.
Liquidity and Capital Resources
Our principal sources of liquidity include cash generated from operating activities and bank credit facilities. We fund our operating expenses and service debt primarily with operating cash flows. Capital resources for maintenance and growth expenditures are funded by a variety of sources, including cash generated from operating activities, borrowings under bank credit facilities, or issuance of senior notes or equity. Our ability to access capital markets for debt under reasonable terms depends on our financial condition, credit ratings and market conditions. We believe that our ability to obtain financing at
44
reasonable rates and history of consistent cash flow from operating activities provide a solid foundation to meet our future liquidity and capital resource requirements.
On SeptemberJune 30, 2017,2019, we had $261.6$193.3 million in cash and equivalents, excluding restricted cash, consistingconsisting of $201.3$133.6 million available toheld at our parent company and the remainder held at our subsidiaries. Additionally, we had $40.6 million in restricted cash at June 30, 2019. We also had $297.0$458.8 million available under our committed revolving credit agreements, some of which were subject to restrictions or other lending conditions. Funds at certain subsidiaries are generally required for their ongoing operational needs and restricted from distribution. At SeptemberJune 30, 2017,2019, our subsidiaries had approximately $124.5$174.8 million of net assets that were not available to us in the form of dividends, loans or advances due to restrictions contained in their credit facilities. As a result of the August 29, 2017 $500 million term loan agreement and related debt extinguishment at Green Plains Processing and Fleischmann’s Vinegar, we no longer consider certain subsidiaries to have restrictions on cash and asset distributions.
Net cash used byin operating activities was $122.2$32.2 million for the ninesix months ended SeptemberJune 30, 2017,2019 compared with net cash provided by operating activities of $63.2$45.9 million for the same period in 2016.2018. Operating activities compared to the prior year were primarily affected by an increasechanges in inventories and derivative financial instruments andworking capital as well as decreases in deferredoperating income taxes and accounts payable and accrued liabilities, partially offset by decreases in accounts receivable and increases in noncurrent assets and liabilities forwhen compared to the nine months ended September 30, 2017. The changes in deferred income taxes and noncurrent asset and liabilities were driven bysame period of the R&D credits recognized during the third quarter of 2017.prior year. Net cash used by
39
in investing activities was $110.2$20.3 million for the ninesix months ended SeptemberJune 30, 2017,2019 compared with $11.2 million for the same period in 2018, due primarily to acquisitions of the cattle feedlots, as well asincreased capital expenditures at our existing ethanol plants and our vinegar operations.partially offset by cash received from other investing activities in 2018. Net cash provided byused in financing activities was $189.8$31.8 million for the ninesix months ended SeptemberJune 30, 2017,2019 compared with $248.8$96.2 million for the same period in 2016.2018, with the decrease in cash used resulting from an increase in net borrowings offset by payments for the repurchase of common stock.
Additionally, Green Plains Trade, Green Plains Cattle and Green Plains Grain use revolving credit facilities to finance working capital requirements. We frequently draw from and repay these facilities which results in significant cash movements reflected on a gross basis within financing activities as proceeds from and payments on short-term borrowings.
We incurred capital expenditures of $37.7$23.5 million in the first nine monthshalf of 20172019 primarily for a high-protein expansion project at one of our ethanol plants, and for various maintenance and expansion projects. Capital spending for the remainder of 20172019 is expected to be between approximately $11.9$55.0 million and $65.0 million for various projects, and investments in joint ventures are expected to be approximately $7.4 million, which are expected to be financed with available borrowings under our credit facilities and cash provided by operating activities.
Our business is highly sensitive to the price of commodities, particularly for corn, ethanol, distillers grains, corn oil, natural gas and cattle. We use derivative financial instruments to reduce the market risk associated with fluctuations in commodity prices. Sudden changes in commodity prices may require cash deposits with brokers for margin calls or significant liquidity with little advanced notice to meet margin calls, depending on our open derivative positions. On September 30, 2017, we had $52.5 million in deposits for broker margin requirements. We continuously monitor our exposure to margin calls and believe we will continue to maintain adequate liquidity to cover margin calls from our operating results and borrowings.
We have paid a quarterly cash dividend since August 2013 and anticipate declaring a cash dividend in future quarters on a regular basis. Future declarations of dividends, however, are subject to board approval and may be adjusted as our liquidity, business needs or market conditions change. On August 16, 2017,May 8, 2019, our board of directors declared a quarterly cash dividend of $0.12 per share. The dividend was paid on September 15, 2017,June 14, 2019, to shareholders of record at the close of business on August 28, 2017.May 24, 2019. On June 18, 2019, the company announced that its board of directors has decided to suspend its future quarterly cash dividend following the June 14, 2019 dividend payment, in order to retain and redirect cash flow to the company’s Project 24 operating expense equalization plan, the deployment of high-protein technology and its stock repurchase program.
For each calendar quarter commencing with the quarter ended September 30, 2015, the partnership agreement requires the partnership to distribute all available cash, as defined, to its partners, including us, within 45 days after the end of each calendar quarter. Available cash generally means all cash and cash equivalents on hand at the end of that quarter less cash reserves established by our general partner plus all or any portion of the cash on hand resulting from working capital borrowings made subsequent to the end of that quarter. On October 19, 2017,July 18, 2019, the board of directors of the general partner of the partnership declared a cash distribution of $0.46$0.475 per unit on outstanding common and subordinated units. The distribution is payable on November 10, 2017,August 9, 2019, to unitholders of record at the close of business on November 3, 2017.August 2, 2019.
In August 2014, we announced a share repurchase program of up to $100 million of our common stock. Under the program, we may repurchase shares in open market transactions, privately negotiated transactions, accelerated share buyback programs, tender offers or by other means. The timing and amount of repurchase transactions are determined by our management based on market conditions, share price, legal requirements and other factors. The program may be suspended, modified or discontinued at any time without prior notice. WeDuring the three months ended June 30, 2019, we purchased a total of 3,197,277 shares of our common stock for approximately $39.9 million. To date, we have repurchased 335,849 shares4,316,626 of common stock for approximately $5.7$59.6 million under the program during the third quarter of 2017. To date, we have repurchased 850,839 shares of common stock for approximately $15.7 million under the program.
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We believe we have sufficient working capital for our existing operations. Furthermore, our liquidity position was improved as a result of the sale of three of our ethanol plants as well as the sale of Fleischmann’s Vinegar during the fourth quarter of 2018. The majority of net cash proceeds from the sales, net of fees and taxes, was used to pay off the outstanding term loan balance. A continued sustained period of unprofitable operations, however, may strain our liquidity making it difficult to maintain compliance with our financing arrangements. We may sell additional assets or equity or borrow capital to improve or preserve our liquidity, expand our business or build additional or acquire existing businesses. We cannot provide assurance that we will be able to secure funding necessary for additional working capital or these projects at reasonable terms, if at all.
Debt
For additional information related to our debt, see Note 8 – Debt included as part of the notes to consolidated financial statements and Note 1112 – Debt included as part of the notes to consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2016.2018.
We were in compliance with our debt covenants at SeptemberJune 30, 2017.2019. Based on our forecasts, and the current margin environment, we believe we will maintain compliance at each of our subsidiaries for the next twelve months or have sufficient liquidity available on a consolidated basis to resolve noncompliance. We cannot provide assurance that actual results will approximate our forecasts or that we will inject the necessary capital into a subsidiary to maintain compliance with its respective covenants. In the event a subsidiary is unable to comply with its debt covenants, the subsidiary’s lenders
40
may determine that an event of default has occurred, and following notice, the lenders may terminate the commitment and declare the unpaid balance due and payable.
Corporate Activities
On August 29, 2017, the company and substantially all of the company’s subsidiaries, but not including Green Plains Partners andAs outlined in Note 8 - Debt, we use LIBOR as a reference rate for certain other entities as guarantors, entered into a $500 million term loan agreement (the “Term Loan Agreement”) with BNP Paribas, as administrative agent and collateral agent (the “Term Loan Agent”) and certain other financial institutions, which matures on August 29, 2023, and mayrevolving credit facilities. LIBOR is currently set to be prepaid at any time without premium or penalty other than customary breakage costs with respect to Eurodollar-based loans or certain other limited circumstances in which event a 1.0% prepayment premium would be due.
The Term Loan Agreement requires principal payments of $1.25 million on the last day of each quarter, beginning on December 31, 2017, with a final installment payable on August 29, 2023, equal to the unpaid principal and interest balances of the Term Loan Agreement. Beginningphased out at the end of 2018, mandatory prepayments must2021. At this time, it is not possible to predict the effect of this change or the alternative reference rate to be madeused. We will need to renegotiate certain credit facilities to determine the interest rate to replace LIBOR with the new standard that is established. As such, the potential effect of any such event on interest expense cannot yet be determined.
Corporate Activities
On June 21, 2019, we issued $105.0 million of 4.00% convertible senior notes due in 2024, or the 4.00% notes. We used approximately $57.8 million of the net proceeds to repurchase the outstanding $56.8 million outstanding principal amount of our 3.25% convertible senior notes due October 1, 2019, including accrued and unpaid interest, in privately negotiated transactions concurrently with this offering. We used approximately $39.9 million of the net proceeds from the offering to repurchase approximately 3.2 million shares of common stock concurrently with the offering in privately negotiated transactions. The remaining proceeds will be used for general corporate purposes.
The 4.00% notes are senior, unsecured obligations, with interest payable on January 1 and July 1 of each year, beginning January 1, 2020, at a rate of 4.00% per annum. The initial conversion rate will be 64.1540 shares of our common stock per $1,000 principal amount of the 4.00% notes, which is equivalent to an annual basis at various percentagesinitial conversion price of excessapproximately $15.59 per share of our common stock. The conversion rate will be subject to adjustment upon the occurrence of certain events. In addition, we may be obligated to increase the conversion rate for any conversion that occurs in connection with certain corporate events, including our calling the 4.00% notes for redemption. We may settle the 4.00% notes in cash, flow dependingcommon stock or a combination of cash and common stock. At June 30, 2019, the outstanding principal balance was $73.9 million on the total first lien leverage ratio as defined in4.00% notes.
On July 19, 2019, we closed on the Term Loan Agreement. The Term Loan Agreement will bear interest at a variable rate per annum at the Company’s election, equal to (a) the applicable LIBOR rate, subject to a 1.00% floor, plus 5.50% or (b) a base rate equal to 4.50% plus the greater of (i) the Federal Funds Rate plus 0.50%, (ii) the Prime Rate, or (iii) one month LIBOR plus 1.00%.
The Term Loan Agreement is guaranteed by the Company and the Term Loan Obligors, and secured by substantially allissuance of the assetsadditional $10.0 million aggregate principal amount of the Company4.00% notes to the initial purchasers. The Option Notes provided us with net proceeds, after deducting commissions and the Term Loan Obligors, including 17 ethanol production facilities with annual capacityour offering expenses, of approximately 1.5 billion gallons, as well$9.5 million. The Option Notes will have the same terms as the vinegar production facilities. The covenants4.00% notes issued on June 21, 2019, and will be issued under the same Indenture dated as of June 21, 2019. After the issuance of the Term Loan Agreement requireOption Notes, total aggregate principal of the Company to maintain a maximum term debt to total term capitalization, each as defined in the Term Loan Agreement, at the end of each fiscal quarter of not more than 55.0% and a minimum interest coverage ratio, as defined, at the end of each fiscal quarter of not less than 1.25 to 1.0.4.00% notes was $115.0 million.
The Term Loan Agreement provides for customary events of default, which include (subject in certain cases to customary grace and cure periods), among others, the following: nonpayment of principal or interest; breach of covenants or other agreements in the Term Loan Agreement; defaults in failure to pay certain other indebtedness; and certain events of bankruptcy or insolvency. If any event of default occurs, the remaining principal balance and accrued interest on the Term Loan Agreement will become immediately due and payable.
In August 2016, we issued $170.0 million of 4.125% convertible senior notes due in 2022, or 4.125% notes, which are senior, unsecured obligations with interest payable on March 1 and September 1 of each year. Prior to March 1, 2022, the 4.125% notes are not convertible unless certain conditions are satisfied. The initial conversion rate is 35.7143 shares of common stock per $1,000 of principal which is equal to a conversion price of approximately $28.00 per share. The conversion rate is subject to adjustment upon the occurrence of certain events, including when the quarterly cash dividend exceeds $0.12 per share. We may settle the 4.125% notes in cash, common stock or a combination of cash and common stock.
In September 2013, we issued $120.0 At June 30, 2019, the outstanding principal balance was $145.9 million of 3.25% convertible senior notes due in 2018, or 3.25% notes, which are senior, unsecured obligations with interest payable on April 1 and October 1 of each year. Prior to April 1, 2018, the 3.25% notes are not convertible unless certain conditions are satisfied. The conversion rate is subject to adjustment upon the occurrence of certain events, including when the quarterly cash dividend exceeds $0.04 per share. The conversion rate was recently adjusted as of September 30, 2017 to 49.9981 shares of common stock per $1,000 of principal, which is equal to a conversion price of approximately $20.00 per share. We may settle the 3.25% notes in cash, common stock or a combination of cash and common stock.
During the second quarter of 2017, we entered into several privately negotiated agreements with holders, on behalf of certain beneficial owners of our 3.25% notes. Under these agreements, 2,783,725 shares of our common stock and approximately $8.5 million in cash plus accrued but unpaid interest on the 3.25% notes, were exchanged for approximately $56.3 million in aggregate principal amount of the 3.25%4.125% notes. Common stock held as treasury shares were exchanged for the 3.25% notes. Following the closings of the agreements, $63.7 million aggregate principal amount of the 3.25% notes remain outstanding.
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At issuance, we separately accounted for the liability and equity components of the convertible notes by bifurcating the gross proceeds between the indebtedness, or liability component, and the embedded conversion option, or equity component. This bifurcation was done by estimating an effective interest rate on the date of issuance for similar notes. The embedded
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conversion option was recorded in stockholders’ equity. Since we did not exercise the embedded conversion option associated with the notes, pursuant to the guidance within ASC Topic 470, Debt, we recorded a loss upon extinguishment measured by the difference between the fair value and carrying value of the liability portion of the notes. As a result, we recorded a charge to interest expense in the consolidated financial statements of approximately $1.3 million during the three months ended June 30, 2017. This charge also included $0.6 million of unamortized debt issuance costs related to the principal balance extinguished. The remaining settlement consideration transferred was allocated to the reacquisition of the embedded conversion option and recognized as a reduction of additional paid-in capital.
Ethanol Production Segment
We have small equipment financing loans, capitalfinance leases on equipment or facilities, and other forms of debt financing.
Agribusiness and Energy Services Segment
Green Plains Grain has a $125.0$100.0 million senior secured asset-based revolving credit facility to finance working capital up to the maximum commitment based on eligible collateral. The facilitycollateral, which matures in JulyJune of 2019.2022. This facility can be increased by up to $75.0 million with agent approval and up to $50.0 million for seasonal borrowings. Total commitments outstanding under the facility cannot exceed $250.0$225.0 million. On June 28, 2019, the company amended the credit facility to extend the existing maturity date from July 26, 2019 to June 28, 2022 and lower the maximum commitment from $125.0 million to $100.0 million. At SeptemberJune 30, 2017,2019, the outstanding principal balance was $64.0$42.0 million on the facility and the interest rate was 6.25%6.76%.
Green Plains Grain has entered into short-term inventory financing agreements with a financial institution. The company has accounted for the agreements as short-term notes, rather than sales, and has elected the fair value option to offset fluctuations in market prices of the inventory. The company had no short-term notes payable related to these inventory financing agreements as of June 30, 2019.
Green Plains Trade has a $300.0 million senior secured asset-based revolving credit facility to finance working capital up to the maximum commitment based on eligible collateral. The facilitycollateral, which matures in July of 2022. This facility can be increased by up to $70.0 million with agent approval. At September 30, 2017, the outstanding principal balance was $143.3 million on the facility and the interest rate was 3.52%.
On July 28, 2017, we amended the credit facility, to increase the maximum commitment from $150.0 million to $300.0 million and extend the maturity date to July 28, 2022. The amended credit facility increases advance rates and modifies the eligible inventory definitions to include additional commodities and locations. Advances are subject to variable interest rates equal to a daily LIBOR rate plus 2.25% or the base rate plus 1.25%. The unused portion of the credit facility is also subject to a commitment fee of 0.375% per annum. At June 30, 2019, the outstanding principal balance was $132.3 million on the facility and the interest rate was 4.69%.
Green Plains Commodity Management has an uncommitted $20.0 million revolving credit facility which matures April 30, 2023 to finance margins related to its hedging programs. Advances are subject to variable interest rates equal to LIBOR plus 1.75%. At June 30, 2019, the outstanding principal balance was $14.5 million on the facility and the interest rate was 4.12%.
Food and Ingredients Segment
Green Plains Cattle has a $300.0$500.0 million senior secured asset-based revolving credit facility to finance working capital up to the maximum commitment based on eligible collateral. The facilitycollateral, which matures in April of 2020. This facility can be increaseincreased by up to $100.0 million with agent approval.approval and includes a swing-line sublimit of $20.0 million. At SeptemberJune 30, 2017,2019, the outstanding principal balance was $246.7$334.7 million on the facility and our interest rate was 3.83%4.91%.
On April 28, 2017, we amended the credit facility to fund the additional working capital requirements related to the acquisition of two cattle feedlots located in Leoti, Kansas and Yuma, Colorado. The amendment increased the maximum commitment from $100.0 million to $200.0 million until July 31, 2017, at which time it increased to $300.0 million. The maturity date was extended from October 31, 2017 to April 30, 2020.
Advances under the revolving credit facility as amended, are subject to variable interest rates equal to LIBOR plus 2.0% to 3.0% or the base rate plus 1.0% to 2.0%, depending on the preceding three months’ excess borrowing availability. The amended credit facility also includes an accordion feature that enables the credit facility to be increased by up to $100.0 million with agent approval. The unused portion of the credit facility is also subject to a commitment fee of 0.20% to 0.30% per annum, depending on the preceding three months’ excess borrowing availability. Interest is payable as required, but not less than quarterly in arrears and principal is due upon maturity.
The amended terms impose affirmative and negative covenants, including maintaining working capital of 15% of the commitment amount, tangible net worth of 20% of the commitment amount and a total debt to tangible net worth ratio of 3.50x. Capital expenditures are limited to $10.0 million per year under the credit facility, plus $10.0 million per year if funded by a contribution from the parent, plus unused amounts from the previous year.
Partnership Segment
Green Plains Partners, through a wholly owned subsidiary, has a $155.0$200.0 million secured revolving credit facility, which matures on July 1, 2020, to fund working capital, acquisitions, distributions, capital expenditures and other general partnership purposes as of September 30, 2017. purposes. The credit facility can be increased by up to $100.0an additional $20.0 million without the consent of the lenders. The facility matures in July of
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2020. At SeptemberJune 30, 2017,2019, the outstanding principal balance was $129.0 million onof the facility was $132.2 million and an averageour interest rate was 3.74%5.41%.
On October 27, 2017, the partnership upsized its revolving credit facility by $40 million, from $155 million to $195 million, by accessing a portion of the $100 million incremental commitment in place on the facility. For more information related to our debt, see Note 8 – Debt to the consolidated financial statements in this report.
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Contractual Obligations
Contractual obligations as of SeptemberJune 30, 2017,2019, were as follows (in thousands):
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Contractual Obligations |
| Total |
| Less Than |
| 1-3 Years |
| 3-5 Years |
| More Than | Total | Less Than | 1-3 Years | 3-5 Years | More Than | |||||||||||||
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Long-term and short-term debt obligations (1) | $ | 1,348,440 |
| $ | 464,250 |
| $ | 204,787 |
| $ | 12,012 |
| $ | 667,391 | $ | 956,081 | $ | 524,754 | $ | 134,285 | $ | 171,997 | $ | 125,045 | ||||
Interest and fees on debt obligations (2) |
| 349,038 |
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| 78,153 |
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| 113,564 |
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| 102,467 |
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| 54,854 | 90,326 | 45,965 | 24,776 | 11,820 | 7,765 | |||||||||
Operating lease obligations (3) |
| 100,397 |
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| 32,247 |
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| 36,837 |
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| 12,887 |
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| 18,426 | 73,884 | 19,224 | 23,495 | 10,675 | 20,490 | |||||||||
Other |
| 9,042 |
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| 2,722 |
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| 1,403 |
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| 2,398 |
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| 2,519 | 20,799 | 2,849 | 7,251 | 2,351 | 8,348 | |||||||||
Purchase obligations: |
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Forward grain purchase contracts (4) |
| 212,750 |
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| 199,622 |
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| 9,961 |
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| 2,000 |
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| 1,167 | 291,754 | 288,150 | 2,187 | 1,417 | - | |||||||||
Other commodity purchase contracts (5) |
| 241,695 |
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| 230,687 |
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| 11,008 |
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| - |
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| - | 142,160 | 132,752 | 8,348 | 1,060 | - | |||||||||
Other |
| 490 |
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| 331 |
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| 159 |
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| - |
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| - | 41 | 41 | - | - | - | |||||||||
Total contractual obligations | $ | 2,261,852 |
| $ | 1,008,012 |
| $ | 377,719 |
| $ | 131,764 |
| $ | 744,357 | $ | 1,575,045 | $ | 1,013,735 | $ | 200,342 | $ | 199,320 | $ | 161,648 | ||||
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(1)Includes the current portion of long-term debt and future finance lease obligations and excludes the effect of any debt discounts and issuance costs.
(2)Interest amounts are calculated over the terms of the loans using current interest rates, assuming scheduled principal and interest amounts are paid pursuant to the debt agreements. Includes administrative and/or commitment fees on debt obligations.
(3)Operating lease costs are primarily for railcars and office space.
(4)Purchase contracts represent index-priced and fixed-price contracts. Index purchase contracts are valued at current quarter-end prices.
(5)Includes fixed-price ethanol, dried distillers grains and natural gas purchase contracts.
Critical Accounting Policies and Estimates
Key accounting policies, including but not limited to, those relating to revenue recognition, depreciation of property and equipment, asset retirement obligations,carrying value of intangible assets, impairment of long-lived assets and goodwill, derivative financial instruments, and accounting for income taxes, are impacted significantly by judgments, assumptions and estimates used in the preparation of the consolidated financial statements. Information about our critical accounting policies and estimates are included in our annual report on Form 10-K for the year ended December 31, 2016.2018.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements other than the operating leases, which are entered into during the ordinary course of business and disclosed in the Contractual Obligations section above.arrangements.
Item 3. Quantitative and Qualitative and Quantitative Disclosures aboutAbout Market Risk.
We use various financial instruments to manage and reduce our exposure to various market risks, including changes in commodity prices and interest rates. We conduct all of our business in U.S. dollars and are not currently exposed to foreign currency risk.
Interest Rate Risk
We are exposed to interest rate risk through our loans which bear interest at variable rates. Interest rates on our variable-rate debt are based on the market rate for the lender’s prime rate or LIBOR. A 10% increase in interest rates would affect our interest cost by approximately $6.7$3.3 million per year. At SeptemberJune 30, 2017,2019, we had $1.3 billion$895.6 million in debt, $1.1 billion$655.7 million of which had variable interest rates.
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For additional information related to our debt, see Note 8 – Debt included as part of the notes to consolidated financial statements and Note 1112 – Debt included as part of the notes to consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2016.2018.
Commodity Price Risk
Our business is highly sensitive to commodity price risk, particularly for ethanol, corn, distillers grains, corn oil, corn, natural gas, and cattle. Ethanol prices are sensitive to world crude oil supply and demand, the price of crude oil, gasoline and corn,
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the price of substitute fuels, refining capacity and utilization, government regulation and consumer demand for alternative fuels. Corn prices are affected by weather conditions, yield, changes in domestic and global supply and demand, and government programs and policies. Distillers grains prices are impacted by livestock numbers on feed, prices for feed alternatives and supply, which is associated with ethanol plant production. Natural gas prices are influenced by severe weather in the summer and winter and hurricanes in the spring, summer and fall. Other factors include North American energy exploration and production, and the amount of natural gas in underground storage during injection and withdrawal seasons. Ethanol prices are sensitive to world crude oil supply and demand, the price of crude oil, gasoline and corn, the price of substitute fuels, refining capacity and utilization, government regulation and consumer demand for alternative fuels. Distillers grains prices are impacted by livestock numbers on feed, prices for feed alternatives and supply, which is associated with ethanol plant production. Cattle prices are impacted by weather conditions, overall economic conditions and government regulations.regulations and packer processing disruptions.
To reduce the risk associated with fluctuations in the price of ethanol, corn, natural gas, ethanol, distillers grains, corn oil, natural gas and cattle, at times we use forward fixed-price physical contracts and derivative financial instruments, such as futures and options executed on the Chicago Board of Trade, and the New York Mercantile Exchange and the Chicago Mercantile Exchange. We focus on locking in favorable operating margins, when available, using a model that continually monitors market prices for corn, natural gas and other inputs relative to the price for ethanol and distillers grains at each of our production facilities. We create offsetting positions using a combination of forward fixed-price purchases, sales contracts and derivative financial instruments. As a result, we frequently have gains on derivative financial instruments that are offset by losses on forward fixed-price physical contracts or inventories and vice versa. Our results are impacted by a mismatch of gains or losses associated with the derivative instrument during a reporting period when the physical commodity purchases or sale has not yet occurred. During the three and nine six months ended SeptemberJune 30, 2017,2019, revenues included net losses of $2.5$11.7 million and $7.6$40.4 million, respectively, and cost of goods sold included net gainslosses of $3.0$8.5 million and $23.9$4.7 million, respectively, associated with derivative financial instruments.
Ethanol Production Segment
In the ethanol production segment, net gains and losses from settled derivative instruments are offset by physical commodity purchases or sales to achieve the intended operating margins. To reduce commodity price risk caused by market fluctuations, we enter into exchange-traded futures and options contracts that serve as economic hedges.
Our exposure to market risk, which includes the impact of our risk management activities resulting from our fixed-price purchase and sale contracts and derivatives, is based on the estimated net income effect resulting from a hypothetical 10% change in price for the next 12 months starting on SeptemberJune 30, 2017, are2019, which is as follows (in thousands):
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Commodity |
| Estimated Total Volume Requirements for the Next 12 Months (1) |
| Unit of |
| Net Income Effect of Approximate 10% Change in Price | Estimated Total Volume | Unit of | Net Income Effect of | |||||
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Ethanol |
| 1,470,000 |
| Gallons |
| $ | 118,305 | 1,123,000 | Gallons | $ | 129,109 | |||
Corn |
| 524,000 |
| Bushels |
| $ | 121,574 | 387,000 | Bushels | $ | 129,632 | |||
Distillers grains |
| 4,100 |
| Tons (2) |
| $ | 23,993 | 2,900 | Tons (2) | $ | 29,573 | |||
Corn Oil |
| 340,000 |
| Pounds |
| $ | 6,487 | |||||||
Corn oil | 292,000 | Pounds | $ | 5,117 | ||||||||||
Natural gas |
| 41,700 |
| MmBTU |
| $ | 5,900 | 31,200 | MmBTU | $ | 4,341 | |||
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(1) Estimated volumes reflect anticipated expansion of production capacity at our ethanol plants and assumesassume production at full capacity.
(2) Distillers grains quantities are stated on an equivalent dried ton basis.
Agribusiness and Energy Services Segment
In the agribusiness and energy services segment, our inventories, physical purchase and sale contracts and derivatives are marked to market. To reduce commodity price risk caused by market fluctuations for purchase and sale commitments of grain and grain held in inventory, we enter into exchange-traded futures and options contracts that serve as economic hedges.
The market value of exchange-traded futures and options used for hedging are highly correlated with the underlying market value of grain inventories and related purchase and sale contracts for grain. The less correlated portion of inventory
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and purchase and sale contract market values, known as basis, is much less volatile than the overall market value of exchange-traded futures and tends to follow historical patterns. We manage this less volatile risk by constantly monitoring our position relative to the price changes in the market. Inventory values are affected by the month-to-month spread in the futures markets. These spreads are also less volatile than overall market value of our inventory and tend to follow historical patterns, but cannot be mitigated directly. Our accounting policy for futures and options, as well as the underlying inventory
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held for sale and purchase and sale contracts, is to reflect their current market values and include gains and losses in the consolidated statement of operations.
Our daily net commodity position consists of inventories related to purchase and sale contracts and exchange-traded contracts. The fair value of our position subject to market risk was approximately $0.4$0.7 million for grain based on market prices at SeptemberJune 30, 2017.2019. Our market risk at that date, based on the estimated net income effect resulting from a hypothetical 10% change in price, was approximately $26$50 thousand.
Food and Ingredients Segment
In the food and ingredients segment, our physical cattle purchase and sale contracts and derivatives are marked to market. To reduce commodity price risk caused by market fluctuations for purchase and sale commitments of cattle, we enter into exchange-traded futures and options contracts that serve as economic hedges.
The market value of exchange-traded futures and options used for hedging are highly correlated with the underlying market value of purchase and sale contracts for cattle. The less correlated portion of inventory and purchase and sale contract market values, known as basis, is much less volatile than the overall market value of exchange-traded futures and tends to follow historical patterns. We manage this less volatile risk by constantly monitoring our position relative to the price changes in the market. Inventory values are affected by the month-to-month spread in the futures markets. These spreads are also less volatile than overall market value of our inventory and tend to follow historical patterns, but cannot be mitigated directly. Our accounting policy for futures and options, as well as the underlying inventory held for sale and purchase and sale contracts, is to reflect their current market values and include gains and losses in the consolidated statement of operations.
Our daily net commodity position consists of inventories related to purchase and sale contracts and exchange-traded contracts. The fair value of our position subject to market risk was approximately $3.5$6.7 million for cattle based on market prices at SeptemberJune 30, 2017.2019. Our market risk at that date, based on the estimatedestimated net income effect resulting from a hypothetical 10% change in price, was approximately $0.2$0.5 million.
Our daily net commodity position consists of inventories related to purchase and sale contracts and exchange-traded contracts. The fair value of our position subject to market risk was approximately $17.8$13.3 million for gaingrain and other cattle feed based on market prices at SeptemberJune 30, 2017.2019. Our market risk at that date, based on the estimatedestimated net income effect resulting from a hypothetical 10% change in price, was approximately $1.1$1.0 million.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure information that must be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, as appropriate, to allow timely decisions regarding required financial disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Under the supervision of and participation of our chief executive officer and chief financial officer, management carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of SeptemberJune 30, 2017,2019, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act and concluded that our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
Management is responsible for establishing and maintaining effective internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our consolidated financial statements for external purposes in accordance with U.S. generally accepted accounting principles. There were no material changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
We are currently involved in litigation that has arisen during the ordinary course of business. We do not believe this litigation will have a material adverse effect on our financial position, results of operations or cash flows.
Investors should carefully consider the discussion of risks and the other information in our annual report on Form 10-K for the year ended December 31, 2016,2018, in Part I, Item 1A, “Risk Factors,” and the discussion of risks and other information in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under “Cautionary Information Regarding Forward-Looking Statements,” of this report. Investors should also carefully consider the discussion of risks with the partnership under the heading “Risk Factors” and other information in their annual report on Form 10-K for the year ended December 31, 2016.2018. Although we have attempted to discuss key factors, our investors need to be aware that other risks may prove to be important in the future. New risks may emerge at any time and we cannot predict such risks or estimate the extent to which they may affect our financial performance. The following risk factor supplementsfactors supplement and/or updates risk factors previously disclosed and should be considered in conjunction with the other information included in, or incorporated by reference in, this quarterly report on Form 10-Q.
Government mandates affecting ethanol usage could changeOur risk management and impact the ethanol market.
Our operationscommodity trading strategies could be adversely impacted by legislationineffective and expose us to decreased liquidity.
As market conditions warrant, we use forward contracts to sell some of our ethanol, distillers grains, corn oil, and live cattle or EPA actions, as set forth belowbuy some of the corn, natural gas, or otherwise, that may reduce the RFS II mandate. Similarly, should federal mandates regarding oxygenated gasoline be repealed, the marketfeeder cattle we need to partially offset commodity price volatility. We also engage in other hedging transactions and other commodity trading involving exchange-traded futures contracts for domesticcorn, natural gas, cattle and ethanol could be adversely impacted. Economic incentives to blend basedand other agricultural commodities. The financial impact of these activities depends on the relative value of gasoline versus ethanol, taking into consideration the octane value of ethanol, environmental requirements and the RFS II mandate, may affect future demand. A significant increase in supply beyond the RFS II mandate could have an adverse impact on ethanol prices. Moreover, changes to RFS II could negatively impact the price of ethanol the commodities involved and/or cause imported sugarcane ethanolour ability to become more economical than domestic ethanol.physically receive or deliver the commodities.
Flexible-fuel vehicles, which are designedHedging arrangements expose us to runrisk of financial loss when the counterparty defaults on a mixture of fuels such as E85, are eligible for vehicle manufacturer incentivesits contract or, in the formcase of CAFE credits. Flexible-fuel vehicle credits have been decreasing since 2014exchange-traded contracts, when the expected differential between the price of the underlying and physical commodity changes. Hedging activities can result in losses when a position is purchased in a declining market or sold in a rising market. Hedging losses may be offset by a decreased cash price for corn, natural gas and feeder cattle and an increased cash price for ethanol, distillers grains, live cattle and corn oil. We vary the amount of hedging and other risk mitigation strategies we undertake and sometimes choose not to engage in hedging transactions at all. We cannot provide assurance that our risk management and commodity trading strategies and decisions will be completely phased outprofitable or effectively offset commodity price volatility. If they are not our results of operations and financial position may be adversely affected.
The use of derivative financial instruments frequently involves cash deposits with brokers, or margin calls. Sudden changes in commodity prices may require additional cash deposits immediately. Depending on our open derivative positions, we may need additional liquidity with little advance notice to cover margin calls. While we continuously monitor our exposure to margin calls, we cannot guarantee we will be able to maintain adequate liquidity to cover margin calls in the future.
The interest rates under our revolving credit facility may be impacted by 2020, which may impact manufacturers’ willingness to continue building flexible-fuel vehicles and ultimately result in slower E85 growth and lower ethanol prices.the phase-out of LIBOR.
UnderLIBOR is the provisionsbasic rate of the EISA, Congress establishedinterest widely used as a mandatereference for setting the minimum volume of renewable fuelsinterest rates on loans globally. We use LIBOR as a reference rate for our revolving credit facilities. In 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that must be blended with gasoline under the RFS II, which affects the domestic market for ethanol. The EPA has the authorityit intends to waive the requirements, in whole or in part, if there is inadequate domestic renewable fuel supply or the requirement severely harms the economy or the environment. After 2022, volumes shall be determinedphase out LIBOR by the EPA in coordination with the Secretariesend of Energy and Agriculture, taking into account such factors as impact on environment, energy security, future rates2021. It is unclear if LIBOR will cease to exist at that time or if new methods of production, cost to consumers, infrastructure, and other factors such as impact on commodity prices, job creation, rural economic development, or impact on food prices.
On July 5, 2017, the EPA proposed maintaining the RVOs for conventional ethanol at 15.0 billion gallons while lowering the volume obligations for advanced alternatives, reducing the overall biofuel target to 19.24 billion gallons for 2018. On September 26, 2017, the EPA issued a Notice of Data Availability for comment, proposing to further reduce the 2018 advanced biofuel volume requirement by 315 mmg, to 3.77 billion gallons, and the total renewable fuel requirement to 18.77 billion gallons, leaving conventional ethanol at 15.0 billion gallons. According to RFS II, if mandatory renewable fuel volumes are reduced by at least 20% for two consecutive years, the EPA is required to modify, or reset, statutory volumes through 2022. Since 2018 is the first year the total proposed RVOs are more than 20% below statutory levels, the EPA Administrator directed his staff to initiate the required technical analysis to perform any future reset consistent with the reset rules. If 2019 RVOs are also more than 20% below statutory levels, the RVO resetcalculating LIBOR will be triggered under RFS II and the EPA will be requiredestablished such that it continues to modify statutory volumes through 2022 within one year of the trigger event, based on the same factors used to set the RVOs post-2022.
exist after 2021. The U.S. Federal District Court forReserve, in conjunction with the D.C. Circuit ruled on July 28, 2017, in favorAlternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S. dollar LIBOR with a new index, the Secured Overnight Financing Rate (“SOFR”), calculated using short-term repurchase agreements backed by Treasury securities. We are evaluating the potential impact of the Americans for Clean Energy and its petitioners againsteventual replacement of the EPA relatedLIBOR benchmark interest rate, however, we are not able to its decisionpredict whether LIBOR will cease to lowerbe available after 2021, whether SOFR will become a widely accepted benchmark in place of LIBOR, or what the 2016 volume requirements. The Court concluded the EPA erred in how it interpreted the “inadequate domestic supply” waiver provisionimpact of RFS II, which authorizes the EPAsuch a possible transition to consider supply-side factors affecting the volume of renewable fuel available to refiners, blenders, and importers to meet the
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statutory volume requirements. The waiver provision does not allow the EPA to consider the volume of renewable fuel available to consumers or the demand-side constraints that affect the consumption of renewable fuel by consumers. As a result, the Court vacated the EPA’s decision to reduce the total renewable fuel volume requirements for 2016 through its waiver authority, which the EPA is expected to address. We believe this decision will benefit the industry overall, with the EPA's waiver analysis now limited to supply considerations only, and expect the primary impact willSOFR may be on the RINs market.our business, financial condition, and results of operations.
On October 19, 2017, EPA Administrator Pruitt issued letter to seven Senators from Midwestern States reiterating his commitment to the text and spirit of the RFS. He stated that the EPA will meet the November 30, 2017 deadline for issuing RVOs, that the EPA’s preliminary analysis suggests that final RVOs should be set at amounts at or greater than those provided on July 5, 2017, that EPA is actively exploring its authority to issue an RVP waiver and EPA will be pursuing action on RINs that involves ethanol exports.
On October 25, 2017, the Master Limited Partnership Parity Act was introduced in the Senate and House of Representatives (H.R. 4118), proposing to expand the definition of qualified sources of income to include clean energy resources, such as ethanol production, and infrastructure projects by publicly traded partnerships. Currently, qualifying income includes the transportation and storage of ethanol and certain specific alternative fuels.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Employees surrender shares when restricted stock grants are vested to satisfy statutory minimum required payroll tax withholding obligations.
The following table lists the shares that were surrendered during the thirdsecond quarter of 2017.2019:
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|
|
|
|
|
Period |
| Total Number of Shares Withheld for Employee Awards |
| Average Price | |
July 1 - July 31 |
| - |
| $ | - |
August 1 - August 30 |
| 1,565 |
|
| 17.07 |
September 1 - September 30 |
| 15,022 |
|
| 18.49 |
Total |
| 16,587 |
| $ | 18.36 |
Period | Total Number of | Average Price | |||
April 1 - April 30 | - | $ | - | ||
May 1 - May 31 | 6,750 | 16.17 | |||
June 1 - June 30 | - | - | |||
Total | 6,750 | $ | 16.17 |
In August 2014, we announced a share repurchase program of up to $100 million of our common stock. Under this program, we may repurchase shares in open market transactions, privately negotiated transactions, accelerated buyback programs, tender offers or by other means. The timing and amount of the transactions are determined by management based on its evaluation of market conditions, share price, legal requirements and other factors. The program may be suspended, modified or discontinued at any time, without prior notice.
The following table lists the shares repurchased under the share repurchase program during the thirdsecond quarter of 2017.2019.
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|
|
|
|
|
|
|
|
|
|
Period |
| Number of Shares Repurchased |
| Average Price |
| Total Number of Shares Repurchased as Part of Repurchase Program |
| Approximate Dollar Value of Shares that may yet be Repurchased under the Program (in thousands) | ||
July 1 - July 31 |
| - |
| $ | - |
| 514,990 |
| $ | 89,993 |
August 1 - August 30 |
| 285,849 |
|
| 17.10 |
| 800,839 |
|
| 85,097 |
September 1 - September 30 |
| 50,000 |
|
| 16.70 |
| 850,839 |
|
| 84,260 |
Total |
| 335,849 |
| $ | 17.04 |
| 850,839 |
| $ | 84,260 |
Period | Number of | Average Price | Total Number of Shares | Approximate Dollar Value of | ||||||
April 1 - April 30 | - | $ | - | 1,119,349 | $ | 80,290 | ||||
May 1 - May 31 | - | - | 1,119,349 | 80,290 | ||||||
June 1 - June 30 | 3,197,277 | 12.47 | 4,316,626 | 40,420 | ||||||
Total | 3,197,277 | $ | 12.47 | 4,316,626 | $ | 40,420 |
Since inception, the company has repurchased 4,316,626 shares of common stock for approximately $59.6 million under the program.
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Item 3. Defaults uponUpon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Revolving Credit Facility UpsizingNone.
On October 27, 2017, the partnership upsized its revolving credit facility by $40 million, from $155 million to $195 million, accessing a portion of the $100 million incremental commitment in place on the facility. The credit increase is in accordance with the Incremental Joinder Agreement, which is filed as Exhibit 10.8 to this Quarterly Report on Form 10-Q and incorporated herein by reference.
4952
Exhibit Index
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| Description of Exhibit |
4.1 | |
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| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
|
50
| |
| |
| |
31.2 | |
32.1 | |
32.2 | |
101 | The following information from Green Plains Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended |
104 | The cover page from Green Plains Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2019, formatted in iXBRL. |
5153
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| |||
| GREEN PLAINS INC. (Registrant) | ||
| By: | /s/ Todd A. Becker_ | |
Todd A. Becker | |||
| (Principal Executive Officer) | ||
|
| ||
| By: | /s/ | |
| |||
G. Patrich Simpkins Jr. | |||
(Principal Financial Officer) |
5254