GPRE

Business Context and Reporting Period

Company: Green Plains Renewable Energy, Inc. (GPRE)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: February 28, 2007
Status: Development Stage Company
Operations: GPRE is constructing two 50 million-gallon-per-year dry mill ethanol plants in Shenandoah, Iowa (construction began April 2006) and Superior, Iowa (construction began August 2006). The company has no operating revenues from ethanol production as of the reporting date.

Key Financial Metrics

Note: Net income is primarily driven by non-operating items, specifically a $1,688,526 gain on derivative financial instruments and $456,918 in interest income.

Material Changes vs. Prior Period

• Profitability: Net income increased significantly from $11,828 to $777,243. This is not due to operational revenue but rather a $1.69 million unrealized gain on corn futures/options and higher interest income on cash reserves.
• Operating Expenses: Increased by approximately $730,000 (from $123,811 to $853,501) due to increased staffing (from 3 to 9 employees), professional fees, and general administrative costs associated with active construction management.
• Debt Financing: The company began drawing on its $47 million credit facility for the Shenandoah plant. Long-term debt increased from $330,000 to $8.38 million (excluding current maturities), with $10.46 million drawn as of February 28, 2007.
• Investing Activities: Significant cash outflow of $20.4 million for property and equipment purchases, reflecting accelerated construction on both plants.
• Derivatives: Derivative financial instruments (assets) increased from $397,875 to $2,596,213 due to favorable corn price movements.

Guidance, Outlook, and Risks

Management Commentary and Outlook

• Construction Progress: Shenandoah plant is proceeding on schedule with major components (elevators, dryers, fermentation tanks) installed. Superior plant construction is ongoing, with a revised completion target of late December 2007 or January 2008 due to contract renegotiations.
• Funding: Management believes it has sufficient funding ($84.7 million estimated for Shenandoah; $97.6 million for Superior) to complete both plants, utilizing cash reserves, equity proceeds, and debt facilities.
• Future Operations: The company expects to incur significant losses until plants are operational. Future profitability depends on ethanol and DDGS sales, corn costs, and natural gas prices.

Risks and Contingencies

• Commodity Price Risk: The company is exposed to fluctuations in corn and natural gas prices. A 10% adverse change in corn prices could result in an approximate pre-tax loss of $5.6 million on estimated usage.
• Construction Delays/Costs: Rising raw material costs (steel, cement) have increased the estimated cost of the Superior plant. Early completion bonuses may be payable to contractors.
• Debt Covenants: Loan agreements require specific working capital ($5M-$6M) and net worth ($31M-$34M) levels. Dividends are restricted to 40% of net profit and contingent on covenant compliance.
• Rail Line Reimbursement: $3.5 million paid for rail line renovation is recoverable only if specific volume thresholds are met; no assurance of full reimbursement exists.

Investor Verification Checklist

• Derivative Gains: Verify the sustainability of the $1.69 million gain on derivatives, as this is a non-recurring, market-dependent item masking operating losses.
• Construction Budgets: Confirm if the estimated project costs ($84.7M for Shenandoah, $97.6M for Superior) remain accurate given recent increases in steel and cement prices.
• Debt Covenants: Monitor compliance with working capital and net worth covenants, especially as the company transitions from construction to operations.
• Rail Reimbursement: Assess the likelihood of meeting the BNSF rail volume thresholds required to recover the $3.5 million renovation cost.
• Completion Dates: Track the revised completion timeline for the Superior plant (targeted Jan 2008) against the original contract date.