Green Plains Renewable Energy, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Unless otherwise noted, amounts below are in millions of dollars. The company operated nine ethanol plants with approximately 740 million gallons per year of capacity, alongside corn oil production, agribusiness, and marketing and distribution operations.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $947.4 | $957.0 | $2,593.2 | $2,630.9 |
| Gross profit | $27.9 | $47.3 | $54.8 | $120.2 |
| Operating income (loss) | $8.6 | $29.0 | $(3.6) | $66.8 |
| Net income (loss) attributable to Green Plains | $(1.0) | $12.4 | $(21.2) | $25.2 |
| Diluted EPS | $(0.03) | $0.32 | $(0.70) | $0.66 |
| EBITDA, as defined by management | $21.7 | $41.6 | $34.7 | $103.4 |
Gross margin was approximately 2.9% in Q3 2012, versus 4.9% a year earlier; for the first nine months it was approximately 2.1%, versus 4.6%. Revenue declined modestly, but sharply lower gross profit and operating income reflected weak ethanol production margins. EBITDA is a non-GAAP measure and may not be comparable with similarly titled measures at other companies.
- Cash flow: Operating activities used $15.5 million in the first nine months, compared with $15.9 million provided in 2011. Investing activities used $31.9 million, primarily for capital expenditures and the increased BioProcess Algae ownership stake. Financing activities provided $12.6 million.
- Liquidity: Cash and equivalents were $140.2 million at September 30, down from $175.0 million at December 31, 2011. Restricted cash was $19.6 million on the balance sheet. The company reported up to $154.5 million available under subsidiary revolvers, subject to borrowing-base and other restrictions; significant subsidiary assets were restricted from transfer to the parent.
- Debt: Total debt was $689.0 million, up from $636.8 million at year-end; $157.9 million was classified as short-term borrowings and $73.1 million as current maturities. Long-term debt was $458.0 million. Of total debt, $492.6 million was variable-rate; management estimated a 10% interest-rate change would affect annual interest cost by about $2.0 million.
- Balance sheet: Total assets were $1,416.5 million and total stockholders’ equity was $472.3 million. The current ratio was approximately 1.4, based on reported current assets and liabilities.
Material changes and operating drivers
- Ethanol production was the principal pressure point: segment operating loss was $7.5 million in Q3 and $32.4 million for the nine months, compared with operating income of $20.9 million and $52.2 million, respectively, in 2011. Management attributed the deterioration to compressed margins amid high corn prices and lower ethanol prices, and reduced production in response.
- Q3 ethanol production was 160.8 million gallons, about 87% of capacity, versus 185.9 million gallons a year earlier. Nine-month production was 508.4 million gallons, about 92% of capacity, versus 540.7 million.
- Other segments partly offset the weakness. Nine-month operating income increased in corn oil production ($25.0 million versus $18.0 million), agribusiness ($8.9 million versus $3.9 million), and marketing and distribution ($10.5 million versus $7.1 million). Marketing and distribution included new crude-oil transactions and railcar leasing.
- Cash used in operations reflected the net loss and working-capital movements, including grain purchases and reduced unearned revenue. Short-term borrowings and inventory financing increased to support working capital.
- The company repurchased 3.7 million shares from NTR plc for $37.2 million in March, paying $10.0 million in cash and issuing a $27.2 million secured note due March 9, 2013. The company said it had no share repurchase program and did not intend to retire the shares.
Outlook, risks, and unusual items
- Planned asset sale: On October 26, 2012, the company agreed to sell 12 grain elevators representing about 83% of reported grain-storage capacity, plus all agronomy and retail petroleum operations. Estimated net cash proceeds, including working-capital liquidation, were approximately $103.8 million; the company expected a pretax gain of about $46 million. The transaction was subject to customary closing conditions and regulatory approvals, with closing expected in Q4 2012. These were estimates, not completed results as of the filing.
- Management said the Q4 2012 margin environment was improving, but remained exposed to corn and ethanol supply-demand conditions. It expected approximately $5 million of capital spending for the remainder of 2012, including grain-storage work; a Birmingham terminal was expected to become operational in Q4.
- All subsidiaries were in covenant compliance at September 30. Management nevertheless anticipated that certain ethanol subsidiaries might need parent-company capital injections to maintain compliance during the remainder of 2012. It warned that forecast shortfalls could lead to defaults and accelerated debt repayment; no obligation existed to provide subsidiary support.
- Commodity-price volatility, drought-related corn costs, production margins, derivative and counterparty exposure, access to capital, and changes to renewable-fuel mandates were significant risks. EPA consideration of drought-related waiver requests was pending, with a decision expected by November 13, 2012; management believed a waiver was unlikely but said it could adversely affect operations if granted.
- The company recorded a $2.7 million lower-of-cost-or-market inventory adjustment in ethanol production during the first nine months. A negotiated Aventine settlement resulted in a $2.4 million after-tax charge for the nine months. The company’s interim goodwill review found no impairment, but it planned its annual review in Q4.
- Other litigation arose in the ordinary course; management did not believe pending matters would materially affect financial position, results, or cash flows. The filing also disclosed approximately $457.5 million of contracted future grain purchases and $33.1 million of other commodity purchase contracts.
Important facts for investors to verify
- Whether the grain, agronomy, and petroleum asset sale closed on schedule, and whether final proceeds, debt reduction, and the gain matched estimates.
- Whether ethanol margins and plant utilization improved after Q3, and how drought-driven corn prices affected subsequent results.
- Subsidiary covenant headroom, any required parent capital support, and refinancing plans for facilities with near-term maturities, including the March 2013 NTR note.
- Whether operating cash flow and available liquidity were sufficient to fund working capital, margin calls, capital spending, and debt obligations.
- How EPA decisions or legislative changes affected renewable-fuel requirements, and whether the Q4 goodwill impairment test identified any impairment.