Business Context and Reporting Period
Company: Green Plains Renewable Energy, Inc. (Green Plains)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and nine months ended August 31, 2008
Business Overview: Green Plains operates dry mill, fuel-grade ethanol production facilities in Shenandoah and Superior, Iowa. Following the April 2008 acquisition of Great Lakes Cooperative, the Company operates two segments: Ethanol (production and marketing) and Agribusiness (grain warehousing, marketing, and sales of agricultural inputs). The Company is pursuing a vertical integration strategy to manage commodity price risks.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Aug 31, 2008 |
Nine Months Ended Aug 31, 2008 |
Nine Months Ended Aug 31, 2007 |
|---|---|---|---|
| Total Revenues | $105,944 | $219,066 | $9 |
| Gross Profit | $7,834 | $39,043 | $(11) |
| Operating Income | $161 | $22,025 | $(6,162) |
| Net Income (Loss) | $(882) | $13,677 | $(5,292) |
| Diluted EPS | $(0.11) | $1.81 | $(0.88) |
| Cash and Equivalents | $3,693 | (Balance Sheet Data) | |
| Total Debt (Current + Long-term) | $140,712 | ||
| Working Capital | $35,766 | (Current Assets $90,485 - Current Liab. $54,719) |
Segment Performance (Nine Months Ended Aug 31, 2008):
- Ethanol: Revenues of $119.5 million; Operating Income of $20.6 million.
- Agribusiness: Revenues of $99.6 million; Operating Income of $1.5 million.
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased from $9,000 in the prior year nine-month period to $219.1 million, driven by the full operation of the Shenandoah plant, the start-up of the Superior plant in July 2008, and the inclusion of Great Lakes Cooperative (Agribusiness) results since April 2008.
- Profitability: The Company transitioned from a net loss of $5.3 million in the prior year to a net income of $13.7 million. This includes a $2.8 million benefit from the removal of a valuation allowance on deferred tax assets.
- Debt Levels: Total debt increased significantly from $73.1 million (Nov 30, 2007) to $140.7 million (Aug 31, 2008) to fund the Great Lakes acquisition and working capital requirements.
- Inventory: Inventories surged from $6.9 million to $61.9 million, primarily due to the acquisition of Great Lakes grain inventories and increased corn storage for ethanol production.
Guidance, Outlook, Risks, and Unusual Items
Merger with VBV LLC: The Company entered into a definitive merger agreement with VBV LLC (owner of Indiana Bio-Energy and Ethanol Grain Processors). The transaction is structured as a reverse merger, with VBV equity holders receiving approximately 11.1 million shares of Green Plains stock. A concurrent $60 million equity investment by VBV holders is expected to close in October 2008.
Liquidity and Covenants:
- Superior Ethanol: As of August 31, 2008, working capital was below the required covenant level. A waiver was obtained in September 2008 following capital contributions by the parent company.
- GP Grain: The Fixed Charge Ratio was below the required 1.10x due to grain market volatility. A waiver was obtained in September 2008.
- Capital Needs: Management believes a revolving credit facility of up to $80 million is necessary for Agribusiness seasonal needs, compared to the current $35 million limit.
Risks and Market Exposure:
- Commodity Volatility: Operations are highly sensitive to corn, ethanol, and natural gas prices. A 10% adverse change in corn prices could reduce pre-tax income by approximately $23 million (before hedging adjustments).
- Political Risk: Potential changes to federal Renewable Fuel Standards (RFS) or blender's credits could adversely impact demand and pricing.
- Credit Risk: Concentrations of credit risk exist with third-party brokers and large commercial grain buyers.
Investor Verification Checklist
- Merger Completion: Verify the closing of the VBV LLC merger and the receipt of the $60 million equity investment.
- Covenant Compliance: Monitor ongoing compliance with debt covenants for Superior Ethanol and GP Grain, specifically regarding working capital and fixed charge ratios.
- Commodity Hedging: Review the effectiveness of hedging strategies given the volatility in corn and ethanol prices.
- Superior Plant Ramp-up: Assess the operational efficiency and cost structure of the Superior plant as it moves from start-up to full capacity.
- Debt Refinancing: Evaluate the Company's ability to secure additional credit facilities for Agribusiness working capital needs in a tight credit market.