Green Plains Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. The unaudited consolidated results include Green Plains Partners LP, which Green Plains continued to control after the partnership’s July 1 IPO. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $742.8 | $833.9 | $2,225.7 | $2,405.7 |
| Operating income | $19.8 | $75.1 | $48.3 | $212.3 |
| Net income | $10.0 | $41.7 | $14.5 | $117.3 |
| Net income attributable to Green Plains | $6.2 | $41.7 | $10.7 | $117.3 |
| Green Plains diluted EPS | $0.16 | $1.03 | $0.27 | $2.90 |
| Operating cash flow | Not separately presented | Not separately presented | $(7.5) | $225.6 |
| EBITDA (company-defined) | $36.3 | $91.9 | $95.2 | $261.3 |
Operating margin was approximately 2.7% in Q3, versus 9.0% in Q3 2014; for the nine-month period it was 2.2%, versus 8.8%. Q3 revenue declined 10.9% year over year and nine-month revenue declined 7.5%. Management attributed the earnings deterioration mainly to lower realized ethanol and distillers-grains prices and weaker ethanol production margins. Ethanol production operated at about 83.8% of daily average capacity in Q3 and 90.0% year to date.
Q3 product revenue declines included ethanol and distillers grains; cattle, natural gas and grain revenue increased. For the nine months, ethanol and distillers-grains revenue fell, while cattle, natural gas and grain revenue rose. Green Plains cited lower commodity prices and, in some operations, lower volumes. Segment results were mixed: ethanol production operating income fell to $5.5 million from $72.8 million in Q3; marketing and distribution rose to $9.4 million from $8.4 million; agribusiness earned $0.4 million versus $1.1 million; and partnership reported $11.0 million versus a $5.3 million loss, reflecting new agreements effective July 1.
Cash, debt and liquidity
- At September 30, cash and cash equivalents were $495.9 million, plus $16.7 million of restricted cash. Cash increased from $425.5 million at December 31, 2014.
- Total debt, including short-term borrowings and current maturities, was approximately $647.6 million, versus $672.8 million at year-end 2014. Long-term debt was $443.4 million and short-term notes and other borrowings were $199.7 million.
- Net cash used in operations was $7.5 million for the first nine months, compared with $225.6 million provided a year earlier. The filing attributes the change to lower operating profits and working-capital outflows, including a reduction in accounts payable and accrued liabilities. Investing cash outflow was $47.8 million; financing provided $125.6 million, including partnership IPO proceeds.
- Management reported $275.3 million available under revolving credit agreements, subject to restrictions and lending conditions. Approximately $711 million of subsidiary net assets were restricted from transfer to the parent. The company was in compliance with debt covenants at September 30.
- Variable-rate debt was $515.9 million. A 10% interest-rate change was estimated to affect annual interest cost by approximately $2.7 million.
Material changes, outlook and risks
- Partnership IPO: Green Plains Partners sold 11.5 million public common units at $15 each and received net proceeds of approximately $157.4 million. It distributed $155.3 million to Green Plains and retained the balance for fees and partnership purposes. Green Plains retained a 62.5% limited-partner interest, a 2.0% general-partner interest and all incentive distribution rights; public holders owned 35.5%. The partnership is consolidated, with public ownership reflected as noncontrolling interest.
- Capital plans: Green Plains said it had added 35 million gallons of annual ethanol capacity by October 1, 2015, at a cost of $19.6 million. It expected to add another 30 million gallons in Q1 2016 and 20 million in Q2 2016, at an estimated cost of approximately $30.4 million. Capital expenditures for the remainder of 2015 were estimated at $29.5 million.
- Post-quarter acquisitions: Green Plains acquired the Hopewell, Virginia plant for approximately $18.3 million on October 26; production was expected to resume by year-end. On October 28, it signed an agreement to acquire the Hereford, Texas facility for approximately $93.8 million, subject to closing conditions and regulatory approvals. The company expected to offer both plants’ logistics assets to the partnership.
- Distributions and repurchases: Green Plains declared a quarterly dividend of $0.12 per share, a 50% increase from the prior dividend. The partnership declared a $0.40-per-unit distribution for Q3, payable November 13, 2015; the partnership has no legal or contractual obligation to pay distributions. Green Plains repurchased 191,700 shares for about $4.0 million during Q3.
- Operating and market risks: Results remain highly sensitive to corn, ethanol, distillers-grains and natural-gas prices, which can move independently and compress margins. Green Plains may reduce or cease production at plants in weak-margin periods. Commodity derivatives can create cash margin-call needs and timing differences between derivative and physical-contract accounting.
- Other exposures: New rail-car safety rules may require upgrades or replacement of the partnership’s approximately 2,200 leased railcars; Green Plains may bear related costs under its agreements. The company also cited regulatory and renewable-fuel-policy uncertainty, acquisition execution risks, and partnership distribution, tax, governance and related-party risks. Management said ordinary-course litigation was not expected to have a material adverse effect.
- Unusual items and controls: The IPO created noncontrolling interest and changed the reported tax rate; the nine-month effective tax rate was 13.0%, versus 36.9% in 2014. Derivative gains and losses were material to reported results and accumulated other comprehensive income; the company expected $4.6 million of net-of-tax accumulated derivative gains to be reclassified to operating income over the next 12 months, subject to market changes. Management reported effective disclosure controls.
Management expected to maintain covenant compliance based on its forecasts and current margin environment, while cautioning that results could differ from forecasts. It stated that sustained unprofitable operations could strain liquidity. The filing does not provide a specific consolidated earnings or revenue forecast.
Important facts for investors to verify
- Whether ethanol margins, production rates and operating cash flow improve after the weak first nine months of 2015.
- Available borrowing capacity, subsidiary covenant headroom, restrictions on moving cash to the parent and near-term debt obligations.
- Actual costs and timing of planned capacity expansions, and the closing, restart and expected contribution of the Hopewell and Hereford plants.
- Whether the partnership’s fee-based agreements, minimum-volume and take-or-pay commitments support distributions, and the effect of rail-car compliance costs.
- The magnitude and timing of derivative gains and losses, margin-call requirements, and the sensitivity of results to commodity and interest-rate changes.
- Whether declared dividends and partnership distributions remain supported by cash generation, capital needs and debt covenants.