GPRE

Business Context and Reporting Period

Company: Green Plains Renewable Energy, Inc. (Green Plains)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: Green Plains is a vertically-integrated producer of ethanol, operating across the value chain from agronomy and grain handling to ethanol production and marketing. The company operates six ethanol plants with a total capacity of approximately 480 million gallons per year (mmgy) in Indiana, Iowa, Nebraska, and Tennessee. It also manages agribusiness operations (bulk grain, agronomy, petroleum) and a marketing/distribution segment that includes a majority interest in Blendstar, LLC.

Key Financial Metrics

Segment Performance (2009 Operating Income):

• Ethanol Production: $40.4 million
• Agribusiness: $7.7 million
• Marketing and Distribution: $2.8 million

Material Changes vs. Prior Period

The company reported a significant turnaround from a net loss in the prior period to net income in 2009, driven by the following factors:

• Acquisitions and Capacity Expansion: The 2009 results include a full year of operations for the Bluffton, Obion, Shenandoah, and Superior plants, plus approximately five months of activity from the Central City and Ord plants acquired in July 2009. The prior period (nine months ended Dec 31, 2008) included limited activity for these facilities due to the October 2008 reverse merger with VBV, LLC.
• Revenue Growth: Consolidated revenues increased by approximately $1.1 billion, primarily due to increased production volumes and the inclusion of third-party marketing activities.
• Margin Improvement: Gross profit increased by $69.1 million. Management attributed this to improved margins between input costs (corn, natural gas) and output prices (ethanol, distillers grains), alongside a 10% decrease in average corn costs compared to the prior period.
• Interest Expense: Interest expense increased by $14.1 million due to additional debt incurred for acquisitions and the inclusion of three additional months of activity in the 2009 period.

Guidance, Outlook, Risks, and Contingencies

Outlook and Strategy: Management intends to continue strengthening its vertically-integrated platform by acquiring strategically located grain elevators and ethanol plants. The company plans to expand third-party marketing volumes and invest in next-generation biofuel opportunities, specifically a joint venture in algae production (BioProcessAlgae).

Key Risks:

• Commodity Price Volatility: Profitability is highly dependent on the spread between corn/natural gas costs and ethanol/distillers grains prices. The company utilizes hedging strategies to lock in margins but remains exposed to market fluctuations.
• Debt Covenants: The company carries significant debt ($457 million) with restrictive covenants regarding working capital, net worth, and debt service coverage. While in compliance as of year-end, the company noted that loan agreements for certain subsidiaries were amended in 2009 to reduce covenants, and future compliance is not guaranteed.
• Regulatory Dependence: The business relies heavily on federal mandates (Renewable Fuel Standard) and tax incentives (Blender's Tax Credit), which is set to expire on December 31, 2010, though management expects an extension.
• Liquidity and Margin Calls: Sudden changes in commodity prices may require cash deposits (margin calls) for derivative positions. Management believes it has sufficient liquidity to cover these calls.

Unusual Items: The 2009 results included a one-time charge of $4.6 million related to the cancellation of third-party ethanol marketing arrangements. Additionally, the company reversed a valuation allowance for deferred income tax assets, resulting in a tax benefit.

Investor Verification Checklist

• Debt Covenant Compliance: Verify the company's ability to maintain minimum working capital and net worth covenants across its six ethanol plant subsidiaries, particularly given the recent amendments to loan agreements.
• Commodity Spreads: Monitor the "crush spread" (ethanol price vs. corn and natural gas costs) to assess the sustainability of operating margins without hedging.
• Regulatory Status: Track the status of the Volumetric Ethanol Excise Tax Credit (VEETC) and the EPA's decision on the E15 blending waiver, both critical to demand and pricing.
• Acquisition Integration: Review the operational performance of the Central City and Ord plants (acquired July 2009) to ensure they meet projected capacity and margin targets.
• Liquidity Position: Assess the availability of the $36.4 million in borrowing base capacity and the impact of potential margin calls on cash flow.