Business Context and Reporting Period
Company: Green Plains Renewable Energy, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2010
Business Overview: A vertically-integrated producer, marketer, and distributor of ethanol. Operations span the value chain from agronomy and grain handling to ethanol production (approx. 500 million gallons per year capacity as of Sept 30, 2010) and downstream marketing/distribution. The company operates three segments: Ethanol Production, Agribusiness, and Marketing & Distribution.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sept 30, 2010 |
Nine Months Ended Sept 30, 2010 |
Nine Months Ended Sept 30, 2009 |
|---|---|---|---|
| Revenues | $496,299 | $1,376,132 | $867,460 |
| Gross Profit | $32,005 | $100,151 | $38,164 |
| Operating Income | $16,989 | $58,569 | $7,751 |
| Net Income (Attributable to Green Plains) | $7,366 | $31,627 | $(3,260) |
| Diluted EPS | $0.23 | $1.05 | $(0.13) |
| Cash from Operating Activities | N/A | $20,603 | $12,113 |
| Total Debt (Principal) | $469,960 | $469,960 | $456,963 |
| Cash & Equivalents | $165,186 | $165,186 | $64,459 |
Margins (Nine Months 2010): Gross Margin approx. 7.3%; Operating Margin approx. 4.3%.
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased $508.9 million (58.7%) for the nine months ended Sept 30, 2010, compared to the prior year. This was driven by the inclusion of full operations from Central City and Ord ethanol plants (acquired July 2009) and new agribusiness assets in western Tennessee (acquired April 2010).
- Profitability Turnaround: The company reported net income of $31.6 million for the nine months ended Sept 30, 2010, compared to a net loss of $3.3 million in the same period of 2009. The 2009 loss was impacted by a $4.6 million one-time charge for terminating legacy marketing agreements and operational issues at two plants.
- Segment Performance:
- Ethanol Production: Operating income increased $49.7 million due to higher volumes and improved margins.
- Agribusiness: Revenues increased $53.8 million due to the Tennessee acquisition, though operating income decreased $2.1 million due to lower fertilizer margins.
- Marketing & Distribution: Operating income increased $5.8 million driven by higher volumes of ethanol and distillers grains marketed.
- Balance Sheet: Cash and cash equivalents increased significantly to $165.2 million from $64.5 million in the prior year, bolstered by a $79.7 million equity offering in March 2010.
Guidance, Outlook, Risks, and Unusual Items
- Subsequent Event (Acquisition): On October 22, 2010, the company acquired Global Ethanol, LLC for approximately $169.2 million (including assumption of $98.7 million debt). This acquisition adds 157 million gallons of annual production capacity, bringing total capacity to approx. 657 million gallons.
- Strategic Initiatives: The company is implementing corn oil extraction technology at six plants (expected completion Q2 2011) to create a higher-value co-product. Construction on a grain storage expansion in Iowa is underway.
- Liquidity and Debt Covenants: The company maintains compliance with debt covenants but noted that recent grain price increases have led to larger margin calls. The company is seeking to expand short-term borrowing capacity for its Green Plains Grain subsidiary. Approximately $371.9 million of net assets at subsidiaries are restricted from transfer to the parent company.
- Regulatory Risks: The federal blender's tax credit (VEETC) is set to expire on December 31, 2010. While management does not anticipate a material effect, uncertainty remains regarding its extension. The company is also subject to evolving greenhouse gas regulations.
- Market Risk: Operations are highly sensitive to commodity price volatility (corn, ethanol, natural gas, distillers grains). A 10% change in ethanol prices could impact pre-tax income by approximately $96.5 million (excluding hedging effects).
Investor Verification Checklist
- Debt Covenant Compliance: Verify continued compliance with restrictive covenants across multiple subsidiaries, particularly Green Plains Grain, given the volatility in grain prices and margin call requirements.
- Global Ethanol Integration: Monitor the integration of the Global Ethanol acquisition (closed Oct 2010) and the ability of the acquired entity (Holdings II) to meet its amended loan covenants.
- Blender's Credit Status: Track legislative developments regarding the extension or modification of the federal blender's tax credit expiring Dec 31, 2010.
- Corn Oil Extraction ROI: Assess the operational success and economic returns of the new corn oil extraction technology as it rolls out through 2011.
- Commodity Hedging Effectiveness: Review the impact of derivative financial instruments on earnings, noting that unrealized gains/losses on derivatives can significantly affect reported margins in volatile markets.