Green Plains Renewable Energy, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; unaudited. Amounts below are in millions of dollars except per-share data and where noted.
Business context
Green Plains was a vertically integrated ethanol producer and marketer with nine plants and approximately 740 million gallons per year of expected ethanol capacity. Its operations also included corn oil production, agribusiness, and marketing and distribution. The company acquired the Otter Tail ethanol plant in March, added grain storage capacity, and bought the remaining 49% of Blendstar in July.
Financial performance and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $957.0 | $496.1 | $2,630.9 | $1,376.5 |
| Gross profit | $47.3 | $32.0 | $120.2 | $100.9 |
| Operating income | $29.0 | $16.9 | $66.8 | $59.3 |
| Net income attributable to Green Plains | $12.4 | $7.4 | $25.2 | $31.6 |
| Diluted EPS | $0.32 | $0.23 | $0.66 | $1.05 |
- Gross margin was approximately 4.9% in Q3 2011 versus 6.4% a year earlier; nine-month gross margin was 4.6% versus 7.3%. Operating margin was approximately 3.0% and 2.5%, respectively, compared with 3.4% and 4.3% in the prior-year periods.
- Q3 revenue rose 93% and operating income rose 71%, while nine-month revenue nearly doubled but net income fell 21%. Management attributed revenue growth mainly to acquired operations and higher commodity prices; higher interest expense and weaker ethanol-production margins weighed on year-to-date results.
- Q3 ethanol production segment operating income was $20.9 million versus $17.2 million; nine-month segment operating income fell to $52.2 million from $62.5 million. Corn oil production contributed $9.6 million of Q3 and $18.0 million of nine-month operating income. Marketing and distribution Q3 operating income declined to $1.9 million from $3.3 million.
- Cash provided by operations was $15.9 million for the first nine months, versus $20.6 million. Investing used $44.8 million, including $35.5 million of property and equipment purchases and $8.1 million for acquisitions. Financing used $86.5 million, including debt repayments and the stock repurchase. Cash and cash equivalents were $117.9 million at September 30, down from $233.2 million at year-end; restricted cash was an additional $36.5 million.
- Total debt was $678.2 million, compared with $669.0 million at year-end; $452.7 million was variable-rate. Current liabilities were $352.1 million against current assets of $556.9 million. The company reported $102.7 million of additional subsidiary borrowing availability, subject to borrowing-base and other restrictions; $527.2 million of subsidiary net assets were restricted from transfer to the parent.
- Interest expense was $9.4 million in Q3 and $27.4 million for nine months, compared with $6.5 million and $17.5 million. A 10% change in interest rates was estimated to affect annual net income by approximately $1.9 million.
Material changes, outlook and risks
- Acquisitions and expanded capacity increased sales volumes and asset scale. Corn oil extraction was operating at all nine plants by September 30. The company reported selling 32.7 million pounds of corn oil in Q3.
- Management said available credit and operating cash flow should support working capital, capital expenditures, and debt service for the foreseeable future, and expected covenant compliance over the next 12 months. It estimated approximately $6.5 million of capital spending for the remainder of 2011. These are expectations, not earnings guidance.
- In October 2011, Green Plains Grain entered a new $195 million revolving credit facility and $30 million term loan, replacing prior facilities and adding agribusiness working-capital capacity.
- Commodity-price volatility is a significant risk: corn costs increased sharply, and operating margins per gallon declined. Hedging may not fully offset market movements and can create liquidity demands through margin calls. Management estimated a 10% price change could affect ethanol-segment net income by $82.4 million for ethanol, $78.0 million for corn, $20.0 million for distillers grains, and $4.0 million for natural gas over the next 12 months; these are sensitivities, not forecasts.
- The $0.45-per-gallon federal blender’s tax credit was expected to expire December 31, 2011. The filing also discusses uncertainty around renewable-fuel mandates, ethanol demand, funding availability, and the economics of the algae joint venture. A proposed algae-farm expansion could require substantial additional investment if pursued.
- Aventine Renewable Energy alleged preferential or fraudulent transfers and breach of a termination agreement, seeking $24.4 million or, alternatively, $28.4 million, plus unspecified damages. Green Plains said the outcome was not predictable and that it would defend the claims.
- A subsidiary had a July working-capital covenant violation that lenders waived; Green Plains reported compliance at August 31 and September 30. The filing says all ethanol subsidiaries were compliant at quarter-end.
- On September 9, the company repurchased 3.5 million shares from a subsidiary of principal shareholder NTR plc for $8 per share. Half was paid at repurchase; a $14 million related-party note for the balance was due December 15. The company said it had no repurchase program and did not intend to retire the shares.
Most important facts for investors to verify
- Whether ethanol, corn, and distillers-grains prices and realized production margins support profitable operations after the reported margin compression.
- Cash availability at the parent versus subsidiaries, borrowing-base capacity, upcoming maturities, and compliance with debt covenants.
- Whether the October agribusiness refinancing provides sufficient working capital and how commodity-driven margin calls affect liquidity.
- The outcome and potential financial exposure of the Aventine litigation, and repayment of the $14 million related-party note.
- Whether the expected expiration of the blender’s credit or changes to renewable-fuel policy affect ethanol demand, prices, or operating results.