Business Context and Reporting Period
Company: Green Plains Renewable Energy, Inc. (a development stage company)
Reporting Period: Quarterly period ended May 31, 2007 (Six months ended May 31, 2007)
Business Overview: The Company is constructing two dry mill, fuel-grade ethanol plants in Shenandoah and Superior, Iowa. Each plant has a name-plate capacity of 50 million gallons per year (mmgy). Construction on the Shenandoah plant began in April 2006, with first grind scheduled for late August 2007. Construction on the Superior plant began in August 2006, with completion anticipated in early 2008. The Company has generated no operating revenues to date.
Key Financial Metrics
| Metric | Six Months Ended May 31, 2007 | Six Months Ended May 31, 2006 |
|---|---|---|
| Revenues | $0 | $0 |
| Operating Expenses | $4,400,710 | $578,900 |
| Net Income (Loss) | $(2,908,689) | $121,865 |
| Net Cash Used in Operating Activities | $(1,724,213) | $(37,810) |
| Net Cash Used in Investing Activities | $(44,488,290) | $17,938,675 |
| Net Cash Provided by Financing Activities | $22,424,520 | $1,900,980 |
| Cash and Equivalents (End of Period) | $19,300,481 | $25,596,781 |
| Total Assets | $125,916,149 | $96,006,932 |
| Total Liabilities | $40,089,021 | $10,110,752 |
| Stockholders' Equity | $85,827,128 | $85,896,180 |
Debt: Total long-term debt (less current maturities) is $21,823,237. Current maturities of long-term debt are $1,260,000. The Company has secured $47 million in financing for the Shenandoah plant and $50 million for the Superior plant.
Material Changes vs. Prior Period
- Net Loss: The Company reported a net loss of $2.9 million for the six months ended May 31, 2007, compared to a net income of $121,865 in the prior year period. This reversal is primarily due to increased operating expenses and losses on derivative financial instruments.
- Operating Expenses: Expenses increased significantly to $4.4 million from $578,900. The primary driver was $2.8 million in non-cash stock-based compensation granted to directors and employees under the 2007 Equity Incentive Plan.
- Derivative Instruments: The Company recorded a gain of $404,054 on derivatives for the six-month period, compared to no activity in the prior year. However, the three-month period ended May 31, 2007, showed a loss of $1.28 million on derivatives.
- Capital Expenditures: Cash used for the purchase of property and equipment was $44.5 million, reflecting heavy construction activity on both plants. This compares to $6.8 million in the prior year.
- Debt Financing: The Company drew $22.7 million on the Shenandoah loan agreement during the period, increasing total debt significantly compared to the prior year.
Guidance, Outlook, and Risks
Outlook and Guidance:
- Shenandoah Plant: Expected to commence operations (first grind) in late August 2007. Total estimated cost is $85.3 million, including $7.5 million in working capital.
- Superior Plant: Expected to be completed in early 2008. Total estimated cost is $105.1 million, including $8.8 million in working capital.
- Liquidity: Management believes it has sufficient funds ($19.3 million cash plus $74.3 million available under committed loans) to complete construction and begin operations for both plants.
Risks and Contingencies:
- Construction Delays/Costs: Actual costs may vary due to contingencies such as steel prices, water treatment requirements, and natural gas service costs. Early completion bonuses may be payable to contractors.
- Commodity Price Risk: The business is sensitive to fluctuations in corn, ethanol, DDGS, and natural gas prices. A 10% adverse change in these prices could impact pre-tax income by approximately $23.8 million (net of hedges).
- Debt Covenants: The Company must maintain specific working capital, net worth, and debt service coverage ratios. While currently in compliance, future compliance is not assured.
- Acquisition: On June 1, 2007, the Company entered an agreement to purchase Essex Elevator, Inc. for $1.5 million, subject to due diligence.
Investor Verification Checklist
- Construction Progress: Verify the timeline for the Shenandoah plant's "first grind" (late August 2007) and the Superior plant's completion (early 2008).
- Stock-Based Compensation: Confirm the impact of the $2.8 million non-cash expense on future quarters and the valuation of the options granted to directors.
- Debt Covenants: Monitor compliance with working capital ($5M minimum) and net worth ($34M minimum) covenants as operations commence.
- Commodity Hedging: Review the effectiveness of corn and ethanol hedging strategies given the sensitivity analysis showing significant exposure to price volatility.
- Essex Elevator Acquisition: Track the closing of the $1.5 million acquisition and its impact on working capital requirements.