Green Plains Inc.
Green Plains Renewable Energy, Inc. (Form: 10-Q, Received: 11/01/2011 17:04:50)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

Quarterly Report Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

For the Quarterly Period Ended September 30, 2011

Commission File Number 001-32924

 

 

GREEN PLAINS RENEWABLE ENERGY, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Iowa   84-1652107

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

450 Regency Parkway, Suite 400,

Omaha, NE 68114

(Address of principal executive offices, including zip code)

(402) 884-8700

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x   Yes     ¨   No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

x   Yes     ¨   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨       Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

¨   Yes     x   No

The number of shares of common stock, par value $0.001 per share, outstanding as of October 31, 2011 was 32,904,882 shares.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

     Page  
PART I – FINANCIAL INFORMATION   

Item 1.

  Financial Statements   
 

Consolidated Balance Sheets

     2   
 

Consolidated Statements of Operations

     3   
 

Consolidated Statements of Cash Flows

     4   
 

Notes to Consolidated Financial Statements

     6   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      25   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      40   

Item 4.

  Controls and Procedures      42   
PART II – OTHER INFORMATION   

Item 1.

  Legal Proceedings      43   

Item 1A.

  Risk Factors      43   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      44   

Item 3.

  Defaults Upon Senior Securities      44   

Item 4.

  (Removed and Reserved)      44   

Item 5.

  Other Information      44   

Item 6.

  Exhibits      45   

Signatures

     46   

 

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GREEN PLAINS RENEWABLE ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

 

     September 30,     December 31,  
     2011     2010  
     (unaudited)        

ASSETS

  

Current assets

    

Cash and cash equivalents

   $ 117,928      $ 233,205   

Restricted cash

     36,507        27,783   

Accounts receivable, net of allowances of $243 and $121, respectively

     121,108        89,170   

Inventories

     182,668        184,888   

Prepaid expenses and other

     11,393        7,222   

Deferred income taxes

     20,643        8,463   

Deposits

     9,982        11,091   

Derivative financial instruments

     56,642        44,864   
  

 

 

   

 

 

 

Total current assets

     556,871        606,686   

Property and equipment, net of accumulated depreciation of $112,955 and $76,063, respectively

     783,639        747,421   

Investment in unconsolidated subsidiaries

     3,661        2,768   

Goodwill

     40,877        23,125   

Other assets

     16,763        17,779   
  

 

 

   

 

 

 

Total assets

   $ 1,401,811      $ 1,397,779   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities

    

Accounts payable

   $ 138,961      $ 151,112   

Accrued and other liabilities

     34,433        27,742   

Unearned revenue

     10,274        22,581   

Short-term notes payable and other borrowings

     93,394        89,183   

Current maturities of long-term debt

     74,993        51,885   
  

 

 

   

 

 

 

Total current liabilities

     352,055        342,503   

Long-term debt

     509,806        527,900   

Deferred income taxes

     47,726        25,079   

Other liabilities

     4,887        4,655   
  

 

 

   

 

 

 

Total liabilities

     914,474        900,137   
  

 

 

   

 

 

 

Stockholders’ equity

    

Common stock, $0.001 par value; 75,000,000 and 50,000,000 shares authorized; 36,414,508 and 35,793,501 shares issued, and 32.914,508 and 35,793,501 shares outstanding, respectively

     36        36   

Additional paid-in capital

     439,708        431,289   

Retained earnings

     82,495        57,343   

Accumulated other comprehensive loss

     (6,951     (420

Treasury stock, 3,500,000 and 0 shares, respectively

     (28,201     —     
  

 

 

   

 

 

 

Total Green Plains stockholders’ equity

     487,087        488,248   

Noncontrolling interests

     250        9,394   
  

 

 

   

 

 

 

Total stockholders’ equity

     487,337        497,642   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 1,401,811      $ 1,397,779   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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GREEN PLAINS RENEWABLE ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited and in thousands, except per share amounts)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  

Revenues

   $ 957,018      $ 496,149      $ 2,630,921      $ 1,376,499   

Cost of goods sold

     909,725        464,191        2,510,742        1,275,590   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     47,293        31,958        120,179        100,909   

Selling, general and administrative expenses

     18,248        15,016        53,350        41,580   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     29,045        16,942        66,829        59,329   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense)

        

Interest income

     59        97        222        223   

Interest expense

     (9,440     (6,544     (27,438     (17,452

Other, net

     (284     2        (470     (321
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

     (9,665     (6,445     (27,686     (17,550
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     19,380        10,497        39,143        41,779   

Income tax expense

     6,979        3,082        14,191        9,989   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     12,401        7,415        24,952        31,790   

Net (income) loss attributable to noncontrolling interests

     28        (49     200        (163
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Green Plains

   $ 12,429      $ 7,366      $ 25,152      $ 31,627   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share:

        

Income attributable to Green Plains stockholders - basic

   $ 0.35      $ 0.23      $ 0.70      $ 1.06   
        

Income attributable to Green Plains stockholders - diluted

   $ 0.32      $ 0.23      $ 0.66      $ 1.05   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding:

        

Basic

     35,624        31,369        36,075        29,769   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     42,151        31,584        42,611        30,080   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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GREEN PLAINS RENEWABLE ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited and in thousands)

 

     Nine Months Ended
September 30,
 
     2011     2010  

Cash flows from operating activities:

    

Net income

   $ 24,952      $ 31,790   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     36,848        26,383   

Amortization of debt issuance costs

     1,703        983   

Loss on sale or property and equipment

     106        —     

Deferred income taxes

     10,467        9,959   

Stock-based compensation expense

     2,743        2,300   

Undistributed equity in loss of affiliates

     470        321   

Allowance for doubtful accounts

     122        5   

Changes in operating assets and liabilities before effects of business combinations:

    

Accounts receivable

     (31,949     (16,566

Inventories

     7,210        (38,649

Deposits

     1,109        5,796   

Derivative financial instruments

     (16,543     (27,723

Prepaid expenses and other assets

     (3,433     2,699   

Accounts payable and accrued liabilities

     (5,994     22,736   

Unearned revenues

     (12,307     1,806   

Other

     444        (1,237
  

 

 

   

 

 

 

Net cash provided by operating activities

     15,948        20,603   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of property and equipment

     (35,526     (11,862

Investment in unconsolidated subsidiaries

     (1,363     (333

Acquisition of businesses, net of cash acquired

     (8,115     (22,388

Other

     239        —     
  

 

 

   

 

 

 

Net cash used by investing activities

     (44,765     (34,583
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from the issuance of long-term debt

     110,088        39,622   

Payments of principal on long-term debt

     (160,732     (61,714

Proceeds from short-term borrowings

     2,640,404        1,401,152   

Payments on short-term borrowings

     (2,648,963     (1,369,298

Proceeds from issuance of common stock

     —          79,732   

Payments for repurchase of common stock

     (14,201     —     

Acquisition of noncontrolling interest in Blendstar

     (3,125     —     

Change in restricted cash

     (8,724     740   

Payments of loan fees

     (1,702     (847

Other

     495        —     
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (86,460     89,387   
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     (115,277     75,407   

Cash and cash equivalents, beginning of period

     233,205        89,779   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 117,928      $ 165,186   
  

 

 

   

 

 

 

Continued on the following page

 

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GREEN PLAINS RENEWABLE ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited and in thousands)

 

     Nine Months Ended
September 30,
 
     2011     2010  

Supplemental disclosures of cash flow:

    

Cash paid for income taxes

   $ 955      $ 69   
  

 

 

   

 

 

 

Cash paid for interest

   $ 26,078      $ 19,629   
  

 

 

   

 

 

 

Supplemental noncash investing and financing activities:

    

Assets acquired in acquisitions and mergers

   $ 62,686      $ 28,213   

Less: liabilities assumed

     (54,571     (5,825
  

 

 

   

 

 

 

Net assets acquired

   $ 8,115      $ 22,388   
  

 

 

   

 

 

 

Short-term note payable issued to acquire treasury stock

   $ 14,000      $ —     
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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GREEN PLAINS RENEWABLE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

References to the Company

References to “we,” “us,” “our,” “Green Plains” or the “Company” in the consolidated financial statements and in these notes to the consolidated financial statements refer to Green Plains Renewable Energy, Inc., an Iowa corporation, and its subsidiaries.

Consolidated Financial Statements

The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and entities which it controls. Intercompany balances and transactions are eliminated on a consolidated basis for reporting purposes. Unconsolidated entities are included in the financial statements on an equity basis. Results for the interim periods presented are not necessarily indicative of results to be expected for the entire year.

The accompanying unaudited consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles, or GAAP, for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The financial statements should be read in conjunction with the Company’s annual report filed on Form 10-K for the year ended December 31, 2010, as amended.

The unaudited financial information reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the results of operations, financial position and cash flows for the periods presented. The adjustments are of a normal recurring nature, except as otherwise noted.

Use of Estimates in the Preparation of Consolidated Financial Statements

The preparation of consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Reclassifications

Certain amounts previously reported within the consolidated financial statements have been reclassified to conform to the current year presentation. The Company previously reported margin deposits required for exchange-traded activity as deposits in the consolidated balance sheet. The liabilities associated with this exchange-traded activity were previously reported as a derivative financial instrument liability. Since this activity has a right of offset, the Company reclassified cash deposits of approximately $43.4 million at December 31, 2010, and derivative liabilities of approximately $32.1 million at December 31, 2010, to derivative financial instruments in current assets.

Description of Business

Green Plains is North America’s fourth largest ethanol producer. The Company markets and distributes approximately one billion gallons of ethanol on an annual basis, including 740 million gallons per year, or mmgy, of expected production from its nine ethanol plants. The Company also markets corn oil and distillers grains produced at its ethanol plants. Additionally, the Company owns and operates grain handling and storage assets and provides complementary agronomy services to local grain producers through its agribusiness segment. The Company owns and operates nine blending and terminaling facilities with approximately 495 mmgy of total throughput capacity. The Company is a partner in a joint venture that was formed to commercialize advanced photo-bioreactor technologies for the growing and harvesting of algal biomass.

 

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Revenue Recognition

The Company recognizes revenue when all of the following criteria are satisfied: persuasive evidence of an arrangement exists; risk of loss and title transfer to the customer; the price is fixed and determinable; and collectability is reasonably assured.

For sales of ethanol, distillers grains and corn oil, revenue is recognized when title to the product and risk of loss transfer to an external customer. Revenues related to the Company’s marketing operations for third parties are recorded on a gross basis in the consolidated financial statements, as the Company takes title to the product and assumes risk of loss. Unearned revenue is reflected on the consolidated balance sheet for goods in transit for which the Company has received payment and title has not been transferred to the customer. Revenues from the Company’s ethanol transload and splash blending services are recognized as these services are rendered.

The Company routinely enters into fixed-price, physical-delivery ethanol sales agreements. In certain instances, the Company expects that the agreements will be settled in cash rather than by product delivery. These transactions are reported net as a component of revenues. Revenues also include related realized gains and losses on derivative financial instruments, ineffectiveness on cash flow hedges, and reclassifications of realized gains and losses on effective cash flow hedges from accumulated other comprehensive income (loss).

Sales of agricultural commodities, fertilizers and other similar products are recognized when title to the product and risk of loss transfer to the customer, which is dependent on the agreed upon sales terms with the customer. These sales terms provide for passage of title either at the time shipment is made or at the time the commodity has been delivered to its destination and final weights, grades and settlement prices have been agreed upon with the customer. Shipping and handling costs are presented gross in the statements of operations with amounts billed included in revenues and also as a component of cost of goods sold. Revenues from grain storage are recognized as services are rendered. Revenues related to grain merchandising are presented gross.

Cost of Goods Sold

Cost of goods sold includes costs for direct labor, materials and certain plant overhead costs. Direct labor includes all compensation and related benefits of non-management personnel involved in the operation of the Company’s ethanol plants. Grain purchasing and receiving costs, other than labor costs for grain buyers and scale operators, are also included in cost of goods sold. Direct materials consist of the costs of corn feedstock, denaturant and process chemicals. Corn feedstock costs include unrealized gains and losses on related derivative financial instruments not designated as cash flow hedges, inbound freight charges, inspection costs and internal transfer costs. Corn feedstock costs also include related realized gains and losses on derivative financial instruments, ineffectiveness on cash flow hedges, and reclassifications of realized gains and losses on effective cash flow hedges from accumulated other comprehensive income (loss). Plant overhead costs primarily consist of plant utilities, plant depreciation and outbound freight charges. Shipping costs incurred directly by the Company, including railcar lease costs, are also reflected in cost of goods sold.

The Company uses exchange-traded futures and options contracts to minimize the effects of changes in the prices of agricultural commodities on the agribusiness segment’s grain inventories and forward purchase and sales contracts. Exchange-traded futures and options contracts are valued at quoted market prices. Commodity inventories, forward purchase contracts and forward sale contracts in the agribusiness segment are valued at market prices, where available, or other market quotes adjusted for differences, primarily transportation, between the exchange-traded market and the local markets on which the terms of the contracts are based. Changes in the market value of grain inventories, forward purchase and sale contracts, and exchange-traded futures and options contracts in the agribusiness segment, are recognized in earnings as a component of cost of goods sold. These contracts are predominantly settled in cash. The Company is exposed to loss in the event of non-performance by the counter-party to forward purchase and forward sales contracts.

Derivative Financial Instruments

To minimize the risk and the effects of the volatility of commodity price changes primarily related to corn, natural gas and ethanol, the Company uses various derivative financial instruments, including exchange-traded futures, and exchange-traded and over-the-counter options contracts. The Company monitors and manages this exposure as part of its overall risk management policy. As such, the Company seeks to reduce the potentially adverse effects that the volatility of these markets may have on its operating results. The Company may take hedging positions in these commodities as one way to mitigate risk. While the Company attempts to link its hedging activities to purchase and sales activities, there are situations where these hedging activities can themselves result in losses.

 

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By using derivatives to hedge exposures to changes in commodity prices, the Company has exposures on these derivatives to credit and market risk. The Company is exposed to credit risk that the counterparty might fail to fulfill its performance obligations under the terms of the derivative contract. The Company minimizes its credit risk by entering into transactions with high quality counterparties, limiting the amount of financial exposure it has with each counterparty and monitoring the financial condition of its counterparties. Market risk is the risk that the value of the financial instrument might be adversely affected by a change in commodity prices or interest rates. The Company manages market risk by incorporating monitoring parameters within its risk management strategy that limit the types of derivative instruments and derivative strategies the Company uses, and the degree of market risk that may be undertaken by the use of derivative instruments.

The Company evaluates its contracts that involve physical delivery to determine whether they may be deemed “normal purchases or normal sales” that are expected to be used or sold over a reasonable period in the normal course of business. Any contracts that do not meet the normal purchase or normal sales criteria are recorded at fair value with the change in fair value recorded in operating income unless the contracts qualify for, and the Company elects, hedge accounting treatment.

Certain qualifying derivatives within the ethanol production segment are designed as cash flow hedges. Prior to entering into cash flow hedges the Company evaluates the derivative instrument to ascertain its effectiveness. For cash flow hedges, any ineffectiveness is recognized in current period results, while other unrealized gains and losses are reflected in accumulated other comprehensive income/loss until gains and losses from the underlying hedged transaction are realized. In the event that it becomes probable that a forecasted transaction will not occur, the Company would discontinue cash flow hedge treatment, which would affect earnings. These derivative financial instruments are recognized in other current assets or liabilities at fair value.

Recent Accounting Pronouncements

Effective January 1, 2011, the Company adopted the second phase of the amended guidance in Accounting Standards Codification (ASC) Topic 820, Fair Value Measurements and Disclosures, which requires the Company to disclose information in the reconciliation of recurring Level 3 measurements regarding purchases, sales, issuances and settlements on a gross basis, with a separate reconciliation for assets and liabilities. The Company did not experience an impact from the additional disclosure requirements.

Effective January 1, 2012, the Company will be required to adopt the third phase of amended guidance in ASC Topic 820, Fair Value Measurements and Disclosures. The purpose of the amendment is to achieve common fair value measurement and disclosure requirements by improving comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with GAAP and those prepared in conformity with International Financial Reporting Standards, or IFRS. The amended guidance clarifies the application of existing fair value measurement requirements and requires additional disclosure for Level 3 measurements regarding the sensitivity of fair value to changes in unobservable inputs and any interrelationships between those inputs. The Company currently would not be impacted by the additional disclosure requirements as the Company does not have any recurring Level 3 measurements.

Effective January 1, 2012, the Company will be required to adopt the amended guidance in ASC Topic 220, Comprehensive Income . This accounting standards update, which helps to facilitate the convergence of GAAP and IFRS, is aimed at increasing the prominence of other comprehensive income in the financial statements by eliminating the option to present other comprehensive income in the statement of stockholders’ equity, and rather requiring that net income and other comprehensive income be presented in either a single continuous statement or in two separate but consecutive statements. The Company has determined that the changes to the accounting standards will affect the presentation of consolidated financial information but will not have a material effect on the Company’s financial position or results of operations.

Amended guidance in ASC Topic 350, Intangibles – Goodwill and Other is effective for the Company beginning January 1, 2012, although early adoption is permitted . The amended guidance permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. The Company has determined that the changes to the accounting standards will not impact its disclosure or reporting requirements.

 

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2. ACQUISITIONS

Acquisition of Global Ethanol, LLC

In October 2010, the Company acquired Global Ethanol, LLC, or Global, which owned two operating ethanol plants with an expected combined annual production capacity of approximately 160 million gallons. The Company valued the transaction at approximately $174.2 million, including approximately $147.6 million for the ethanol production facilities and the balance in working capital. The value of the transaction includes the assumption of outstanding debt, which totaled approximately $97.7 million at that time. Upon closing, Global was renamed Green Plains Holdings II LLC, or Holdings II. At closing of the transaction, all outstanding units of Global were exchanged for aggregate consideration consisting of 4,386,027 shares of restricted Company common stock valued at $53.9 million, warrants to purchase 700,000 shares of restricted Company common stock, valued at $3.1 million and $19.5 million in cash. The warrants, recorded as a component of additional paid-in capital, are not transferable, except in certain limited circumstances, and are exercisable for a period of three years from the closing date at a price of $14.00. In conjunction with the transaction, Holdings II entered into an amendment to its existing credit agreement and the Company contributed $10.0 million of cash equity to Holdings II, $6.0 million of which was utilized to reduce outstanding debt. The operating results of Holdings II have been included in the Company’s consolidated financial statements since October 22, 2010.

 

Amounts of identifiable assets acquired
and liabilities assumed
(in thousands)

 

Inventory

   $ 12,749   

Other current assets

     15,005   

Property and equipment, net

     133,970   

Current liabilities

     (11,143

Other, net

     (110
     

 

 

 

Total identifiable net assets

     150,471   

Goodwill

     23,734   
     

 

 

 

Purchase price

   $ 174,205   
     

 

 

 

During the second quarter of 2011, the purchase price allocation for the acquisition was finalized. The revisions to the allocation resulted in a reduction of net property and equipment and an increase in goodwill of $15.2 million. Depreciation expense for the three months ended June 30, 2011 has been reduced by approximately $462 thousand for the cumulative effect of previously-recorded depreciation expense based on the preliminary purchase price allocation relating to the period from date of acquisition through March 31, 2011. The effect of prospectively recognizing the finalized purchase price allocation in the consolidated financial statements is not material to the current or any prior periods. Goodwill related to the acquisition is tax deductible and results largely from economies of scale expected to be realized in the Company’s operations.

Acquisition of Otter Tail

In March 2011, the Company acquired an ethanol plant with an expected annual production capacity of 60 mmgy and certain other assets near Fergus Falls, Minnesota from Otter Tail Ag Enterprises, LLC, or Otter Tail, for $59.7 million. Consideration included $19.2 million of indebtedness to MMCDC New Markets Fund II, LLC, valued at $18.8 million, and $35.0 million in financing from a group of nine lenders, led by AgStar Financial Services, with the remaining $5.9 million paid in cash. The operating results of Otter Tail have been included in the Company’s consolidated financial statements since March 24, 2011.

 

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Amounts of identifiable assets acquired
and liabilities assumed
(in thousands)

 

Inventory

   $ 4,986   

Other current assets

     738   

Property and equipment, net

     51,925   

Current liabilities

     (409

Other

     (138
     

 

 

 

Total identifiable net assets

     57,102   

Goodwill

     2,600   
     

 

 

 

Purchase price

   $ 59,702   
     

 

 

 

During the third quarter of 2011, the purchase price allocation, including the values of net property and equipment, current liabilities, goodwill and assumed long-term debt, for the acquisition were finalized. There were not any significant changes made to the preliminary purchase price allocation. Goodwill related to the acquisition is tax deductible and results largely from economies of scale expected to be realized in the Company’s operations.

Consolidated pro forma revenue and operating income, had the acquisitions of the Global and Otter Tail ethanol plants occurred on January 1, 2010, would have been $2.7 billion and $67.0 million, respectively, for the nine months ended September 30, 2011; $1.0 billion and $29.0 million, respectively, for the three months ended September 30, 2011; $1.7 billion and $80.8 million, respectively, for the nine months ended September 30, 2010; and $0.6 billion and $23.1 million, respectively, for the three months ended September 30, 2010. This unaudited information is based on historical results of operations and is not necessarily indicative of the results that would have been achieved had the acquisitions occurred on such date.

Acquisition of Remaining Interest in Blendstar

In January 2009, the Company acquired a 51% ownership interest in Blendstar, LLC, which operates nine blending and terminaling facilities with approximately 495 mmgy of total throughput capacity in seven states in the south central U.S. On July 19, 2011, the Company acquired the remaining 49% of Blendstar from the noncontrolling holders. Blendstar’s operations are included in the marketing and distribution segment.

3. FAIR VALUE DISCLOSURES

The following methods, assumptions and valuation techniques were used in estimating the fair value of the Company’s financial instruments:

Level 1 – unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Level 1 unrealized gains and losses on commodity derivatives relate to exchange-traded open trade equity and option values in the Company’s brokerage accounts.

Level 2 – directly or indirectly observable inputs such as quoted prices for similar assets or liabilities in active markets other than quoted prices included within Level 1; quoted prices for identical or similar assets in markets that are not active; and other inputs that are observable or can be substantially corroborated by observable market data by correlation or other means. Grain inventories held for sale in the agribusiness segment are valued at nearby futures values, plus or minus nearby basis levels.

Level 3 – unobservable inputs that are supported by little or no market activity and that are a significant component of the fair value of the assets or liabilities. The Company currently does not have any recurring Level 3 financial instruments.

There have been no changes in valuation techniques and inputs used in measuring fair value. On September 30, 2011, exchange-traded futures for corn were classified as a Level 2 measurement to reflect the price limit set by the exchange for that day.

 

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Table of Contents

The following tables set forth the Company’s assets and liabilities by level that were accounted for the periods indicated (in thousands):

 

     Fair Value Measurements at
September 30, 2011
 
     Quoted Prices in
Active Markets for
Identical Assets
     Significant Other
Observable Inputs
     Reclassification for
Balance Sheet
       
     (Level 1)      (Level 2)      Presentation     Total  

Assets

          

Cash and cash equivalents

   $ 117,928       $ —         $ —        $ 117,928   

Restricted cash

     38,707         —           —          38,707   

Margin deposits

     34,044         —           —          34,044   

Inventories carried at market

     —           47,553         —          47,553   

Unrealized gains on derivatives

     44,518         19,123         (41,043     22,598   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total assets measured at fair value

   $ 235,197       $ 66,676       $ (41,043   $ 260,830   
  

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities

          

Unrealized losses on derivatives

   $ 885       $ 53,691       $ (41,043   $ 13,533   

Inventory financing arrangements

   $ —           8,805         —          8,805   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities measured at fair value

   $ 885       $ 62,496       $ (41,043   $ 22,338   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

     Fair Value Measurements at
December 31, 2010
 
     Quoted Prices in
Active Markets for
Identical Assets
     Significant Other
Observable Inputs
     Reclassification for
Balance Sheet
       
     (Level 1)      (Level 2)      Presentation     Total  

Assets

          

Cash and cash equivalents

   $ 233,205       $ —         $ —        $ 233,205   

Restricted cash

     32,183         —           —          32,183   

Margin deposits

     43,394         —           —          43,394   

Inventories carried at market

     —           96,916         —          96,916   

Unrealized gains on derivatives

     3,303         30,663         (32,087     1,879   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total assets measured at fair value

   $ 312,085       $ 127,579       $ (32,087   $ 407,577   
  

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities

          

Unrealized losses on derivatives

   $ 32,317       $ 2,569       $ (32,087   $ 2,799   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities measured at fair value

   $ 32,317       $ 2,569       $ (32,087   $ 2,799   
  

 

 

    

 

 

    

 

 

   

 

 

 

The Company believes the fair value of its debt approximates book value, which was $678.2 million and $669.0 million at September 30, 2011 and December 31, 2010, respectively. The Company also believes the fair value of its accounts receivable and accounts payable approximate book value, which were $121.1 million and $139.0 million, respectively, at September 30, 2011 and $89.2 million and $151.1 million, respectively, at December 31, 2010.

Although the Company currently does not have any recurring Level 3 financial measurements, the fair values of the tangible assets and goodwill acquired in the Global and Otter Tail acquisitions represent Level 3 measurements and were derived using a combination of the income approach, the market approach and the cost approach as considered appropriate for the specific assets being valued.

 

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4. SEGMENT INFORMATION

Company management reviews financial and operating performance in the following four separate operating segments: (1) production of ethanol and distillers grains, collectively referred to as ethanol production, (2) corn oil production, (3) grain warehousing and marketing, as well as sales and related services of agronomy and petroleum products, collectively referred to as agribusiness, and (4) marketing and distribution of Company-produced and third-party ethanol, distillers grains and corn oil, collectively referred to as marketing and distribution. Selling, general and administrative expenses, primarily consisting of compensation of corporate employees, professional fees and overhead costs not directly related to a specific operating segment, are reflected in the table below as corporate activities.

In the second quarter of 2011, the Company redefined its operating segments to include corn oil production as a reportable segment. Corn oil production, which the Company initiated in October 2010, was previously reported as a component of the marketing and distribution segment. The Company added the corn oil production segment to reflect the manner in which the Company’s executive management currently manages, allocates resources, and measures performance of its businesses. Prior period segment results have been reclassified to reflect this change.

During the normal course of business, the Company enters into transactions between segments. Examples of these intersegment transactions include, but are not limited to, the ethanol production segment selling ethanol to the marketing and distribution segment, the corn oil production segment selling corn oil to the marketing and distribution segment and the agribusiness segment selling grain to the ethanol production segment. These intersegment activities are recorded by each segment at prices approximating market and treated as if they are third-party transactions. Consequently, these transactions impact segment performance. However, revenues and corresponding costs are eliminated in consolidation and do not impact the Company’s consolidated results.

The following are certain financial data for the Company’s operating segments for the periods indicated (in thousands):

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
       2011     2010     2011     2010  

Revenues:

        

Ethanol production

        

Revenue from external customers

   $ 35,077      $ 11,168      $ 97,377      $ 43,298   

Intersegment revenue

     551,987        239,253        1,501,031        698,040   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total segment revenue

     587,064        250,421        1,598,408        741,338   

Corn oil production

        

Revenue from external customers

     393        —          1,464        —     

Intersegment revenue

     15,115        —          28,886        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total segment revenue

     15,508        —          30,350        —     

Agribusiness

        

Revenue from external customers

     95,065        65,309        233,959        128,610   

Intersegment revenue

     48,863        33,039        149,676        75,062   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total segment revenue

     143,928        98,348        383,635        203,672   

Marketing and distribution

        

Revenue from external customers

     826,483        419,672        2,298,121        1,204,591   

Intersegment revenue

     98        99        375        227   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total segment revenue

     826,581        419,771        2,298,496        1,204,818   

Revenue including intersegment activity

     1,573,081        768,540        4,310,889        2,149,828   

Intersegment eliminations

     (616,063     (272,391     (1,679,968     (773,329
  

 

 

   

 

 

   

 

 

   

 

 

 

Revenue as reported

   $ 957,018      $ 496,149      $ 2,630,921      $ 1,376,499   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
0,00,000 0,00,000 0,00,000 0,00,000
     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  

Gross profit:

        

Ethanol production

   $   24,846      $     19,856      $        63,880      $      70,372   

Corn oil production

     9,642        —          18,098        —     

Agribusiness

     8,223        5,998        20,425        14,916   

Marketing and distribution

     5,069        6,227        17,332        15,646   

Intersegment eliminations

     (487     (123     444        (25
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 47,293      $ 31,958      $ 120,179      $ 100,909   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income:

        

Ethanol production

   $ 20,941      $ 17,215      $ 52,184      $ 62,480   

Corn oil production

     9,632        —          18,040        —     

Agribusiness

     2,151        421        3,934        1,313   

Marketing and distribution

     1,923        3,271        7,078        7,056   

Intersegment eliminations

     (481     (123     474        (26

Corporate activities

     (5,121     (3,842     (14,881     (11,494
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 29,045      $ 16,942      $ 66,829      $ 59,329   
  

 

 

   

 

 

   

 

 

   

 

 

 

The following table sets forth revenues by product line for the periods indicated (in thousands):

 

0,00,000 0,00,000 0,00,000 0,00,000
     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2011      2010      2011      2010  

Revenues

           

Ethanol

   $ 732,061       $ 389,660       $ 2,050,683       $ 1,123,971   

Corn oil

     15,508         —           30,350         —     

Distillers grains

     109,168         39,434         302,393         115,535   

Grain

     84,416         57,559         189,403         93,086   

Agronomy products

     9,027         6,669         40,174         31,834   

Other

     6,838         2,827         17,918         12,073   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 957,018       $ 496,149       $ 2,630,921       $ 1,376,499   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following are total assets for our operating segments for the periods indicated (in thousands):

 

     September 30,
2011
    December 31,
2010
 

Total assets:

    

Ethanol production

   $ 900,661      $ 850,049   

Corn oil production

     23,721        7,204   

Agribusiness

     165,716        239,595   

Marketing and distribution

     223,277        169,148   

Corporate assets

     111,537        142,666   

Intersegement eliminations

     (23,101     (10,883
  

 

 

   

 

 

 
   $ 1,401,811      $ 1,397,779   
  

 

 

   

 

 

 

 

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5. INVENTORIES

Inventories are carried at the lower of cost or market, except grain held for sale, which is valued at market value. The components of inventories are as follows (in thousands):

 

     September 30,      December 31,  
     2011      2010  

Finished goods

   $ 59,704       $ 38,231   

Grain held for sale

     47,553         96,916   

Raw materials

     35,112         23,306   

Petroleum & agronomy items held for sale

     17,960         9,011   

Work-in-process

     13,180         9,408   

Supplies and parts

     9,159         8,016   
  

 

 

    

 

 

 
   $ 182,668       $ 184,888   
  

 

 

    

 

 

 

6. GOODWILL

Changes in the carrying amount of goodwill attributable to each business segment during the nine-month period ended September 30, 2011were as follows (in thousands):

 

     Ethanol
Production
     Marketing and
Distribution
     Total  

Balance, December 31, 2010

   $ 12,527       $ 10,598       $ 23,125   

Adjustment to Global purchase price allocation

     15,152         —           15,152   

Acquisition of Otter Tail

     2,600         —           2,600   
  

 

 

    

 

 

    

 

 

 

Balance, September 30, 2011

   $ 30,279       $ 10,598       $ 40,877   
  

 

 

    

 

 

    

 

 

 

7. DERIVATIVE FINANCIAL INSTRUMENTS

At September 30, 2011, the Company’s consolidated balance sheet reflects unrealized losses, net of tax, of $7.0 million in accumulated other comprehensive loss. The Company expects all of the deferred losses at September 30, 2011 will be reclassified into income over the next 12 months as a result of hedged transactions that are forecasted to occur. The amount ultimately realized in income, however, will differ as commodity prices change.

Fair Values of Derivative Instruments

The following table provides information about the fair values of our derivative financial instruments and the line items in the consolidated balance sheets in which the fair values are reflected.

 

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Table of Contents
     Asset Derivatives     Liability Derivatives  

Derivative Instruments

   Fair Value at     Fair Value at  

Consolidated Balance Sheet Location

   September  30,
2011
    December  31,
2010
    September  30,
2011
     December  31,
2010
 
         

Derivative financial instruments (1)

   $ 22,598 (2)    $ 1,470 (3)    $ —         $ —     

Financing costs and other

     —          409        —           —     

Accrued and other liabilities

     —          —          13,157         2,570   

Other liabilities

     —          —          376         229   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total

   $ 22,598      $ 1,879      $ 13,533       $ 2,799   
  

 

 

   

 

 

   

 

 

    

 

 

 

 

(1) Derivative financial instruments per the balance sheet include margin deposits of $34.0 million and $43.4 million at September 30, 2011 and December 31, 2010, respectively.
(2) Balance at September 30, 2011, includes $15.4 million of net unrealized losses on derivative financial instruments designated as cash flow hedging instruments.
(3) Balance at December 31, 2010, includes $477 thousand of net unrealized gains on derivative financial instruments designated as cash flow hedging instruments.

Refer to Note 3—Fair Value Disclosures , which also contains fair value information related to derivative financial instruments.

Effect of Derivative Instruments on Consolidated Statements of Operations and Consolidated Statements of Stockholders’ Equity and Comprehensive Income

The following tables provide information about the gain or loss recognized in income and other comprehensive income on our derivative financial instruments and the line items in the financial statements in which such gains and losses are reflected.

 

Gains (Losses) on Derivative Instruments Not

Designated in a Hedging Relationship

   Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

Consolidated Statements of Operations Location

   2011     2010     2011     2010  

Revenue

   $ 1,535      $ (114   $ 617      $ 375   

Cost of goods sold

     (9,718     (13,817     (29,831     (4,161
  

 

 

   

 

 

   

 

 

   

 

 

 

Net decrease recognized in earnings

   $ (8,183   $ (13,931   $ (29,214   $ (3,786
  

 

 

   

 

 

   

 

 

   

 

 

 

Locations of Gain (Loss) Due to Ineffectiveness

of Cash Flow Hedges

   Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

Consolidated Statements of Operations Location

   2011     2010     2011     2010  

Revenue

     340      $ (35   $ 320      $ (35

Cost of goods sold

     (576     114        (1,231     123   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net decrease recognized in earnings

   $ (236   $ 79      $ (911   $ 88   
  

 

 

   

 

 

   

 

 

   

 

 

 

Location of Gains (Losses) Reclassified
from Accumulated Other Comprehensive
Income (Loss) into Net Income

   Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

Consolidated Statements of Operations Location

   2011     2010     2011     2010  

Revenue

     (9,608   $ (377     (31,097     (377

Cost of goods sold

     (5,342     (39     8,649        (39
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) recognized in earnings

     (14,950   $ (416     (22,448     (416
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Effective Portion of Cash Flow Hedges

Recognized in
Other Comprehensive Income (Loss)

   Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
   2011     2010      2011     2010  

Commodity Contracts

   $ (16,806   $       107       $ (33,031   $       284   
  

 

 

   

 

 

    

 

 

   

 

 

 

There were no gains or losses due to the discontinuance of cash flow hedge treatment during the nine months ended September 30, 2011.

The table below summarizes the volumes of open commodity derivative positions as of September 30, 2011 (in thousands):

 

     September 30, 2011

Derivative

Instruments

   Exchange Traded     Non-Exchange Traded           
   Net Long &
(Short) (1)
    Long (2)      (Short) (2)     Unit of
Measure
   Commodity

Futures

     (16,498        Bushels    Corn, Soybeans and Wheat

Futures

     42,715 (3)         Bushels    Corn

Futures

     (22,050        Gallons    Ethanol

Futures

     (143,304 )(3)         Gallons    Ethanol

Options

     691           Bushels    Corn

Options

     (2,796        Gallons    Ethanol

Options

     448           mmBTU    Natural Gas

Options

     (840 )(4)         Pounds    Soybean Oil

Forwards

       21,753         (8,174   Bushels    Corn, Soybeans and Wheat

Forwards

       11,768         (93,827   Gallons    Ethanol

Forwards

       40         (118   Tons    Distillers Grains

 

(1) Exchange traded futures and options are presented on a net long and (short) position basis.
     Options are presented on a delta-adjusted basis.
(2) Non-exchange traded forwards are presented on a gross long and (short) position basis.
(3) Futures used for cash flow hedges.
(4) Soybean oil options are used to hedge corn oil.

Energy trading contracts that do not involve physical delivery are presented net in revenues on the consolidated statements of operations. Revenues and cost of goods sold under such contracts are summarized in the table below for the periods indicated (in thousands).

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2011      2010      2011      2010  

Revenue

   $ 83,909       $ 8,792       $ 107,721       $ 22,912   

Cost of goods sold

   $ 82,703       $ 9,095       $ 105,502       $ 22,817   

 

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Table of Contents

8. DEBT

The principal balances of the components of debt are as follows (in thousands):

 

     September 30,     December 31,  
     2011     2010  

Green Plains Bluffton:

    

$70.0 million term loan

   $ 49,768      $ 56,000   

$20.0 million revolving term loan

     20,000        20,000   

$22.0 million revenue bond

     19,120        20,615   

Green Plains Central City:

    

$55.0 million term loan

     47,787        52,200   

$30.5 million revolving term loan

     28,645        30,500   

$11.0 million revolver

     10,094        6,239   

Equipment financing loan

     186        230   

Green Plains Holdings II:

    

$34.1 million term loan

     29,414        34,136   

$42.6 million revolving term loan

     38,359        42,214   

$15.0 million revolver

     15,000        15,000   

Other

     387        387   

Green Plains Obion:

    

$60.0 million term loan

     28,070        40,930   

$37.4 million revolving term loan

     36,200        36,200   

Note payable

     95        124   

Equipment financing loan

     482        591   

Economic development grant

     1,447        1,514   

Green Plains Ord:

    

$25.0 million term loan

     21,862        23,800   

$13.0 million revolving term loan

     12,151        13,000   

$5.0 million revolver

     3,349        2,500   

Green Plains Otter Tail:

    

$30.3 million term loan

     28,500        —     

$4.7 million revolver

     4,675        —     

$19.2 million note payable

     18,854        —     

Capital lease payable

     193        —     

Green Plains Shenandoah:

    

$30.0 million term loan

     7,268        13,368   

$17.0 million revolving term loan

     17,000        17,000   

Economic development loan

     —          45   

Green Plains Superior:

    

$40.0 million term loan

     22,125        26,250   

$10.0 million revolving term loan

     10,000        10,000   

Equipment financing loan

     172        219   

Green Plains Grain:

    

$20.0 million term loan

     17,500        19,000   

$100.0 million revolving loans

     9,421        68,004   

Inventory financing arrangements

     8,805        —     

Equipment financing loans

     429        915   

Notes payable

     2,000        3,288   

Green Plains Trade:

    

$70.0 million revolving loan

     61,169        21,179   

Corporate:

    

$90.0 million convertible notes

     90,000        90,000   

Note payable to related party

     14,000        —     

Other

     3,666        3,520   
  

 

 

   

 

 

 

Total debt

     678,193        668,968   

Less: current portion of long-term debt

     (74,993     (51,885

Less: short-term notes payble and other

     (93,394     (89,183
  

 

 

   

 

 

 

Long-term debt

   $ 509,806      $ 527,900   
  

 

 

   

 

 

 

 

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Table of Contents

Ethanol Production Segment

 

   

Term Loans

  o Scheduled principal payments (plus interest) are as follows:

 

¡         Green Plains Bluffton

   $0.6 million per month

¡         Green Plains Central City

   $0.6 million per month

¡         Green Plains Holdings II

   $1.5 million per quarter

¡         Green Plains Obion

   $2.4 million per quarter

¡         Green Plains Ord

   $0.3 million per month

¡         Green Plains Otter Tail

   $0.5 million per month

¡         Green Plains Shenandoah

   $1.2 million per quarter

¡         Green Plains Superior

   $1.4 million per quarter

 

  o Final maturity dates (at the latest) are as follows:

 

¡         Green Plains Bluffton

   November 19, 2013

¡         Green Plains Central City

   July 1, 2016

¡         Green Plains Holdings II

   January 1, 2015

¡         Green Plains Obion

   August 20, 2014

¡         Green Plains Ord

   July 1, 2016

¡         Green Plains Otter Tail

   September 1, 2018

¡         Green Plains Shenandoah

   May 20, 2014

¡         Green Plains Superior

   July 20, 2015

 

   

Revolving Term Loans – The revolving term loans are generally available for advances throughout the life of the commitment, subject to borrowing base restrictions. Allowable advances under the Green Plains Shenandoah loan agreement are reduced by $2.4 million each six-month period commencing on the first day of the month beginning approximately six months after repayment of the term loan, but in no event later than November 1, 2014. Allowable advances under the Green Plains Superior loan agreement are reduced by $2.5 million each six-month period commencing on the first day of the month beginning approximately six months after repayment of the term loan, but in no event later than January 1, 2016. Interest-only payments are due each month on all revolving term loans until the final maturity date for the Green Plains Bluffton, Green Plains Central City, Green Plains Ord, Green Plains Otter Tail, Green Plains Shenandoah, and Green Plains Superior loan agreements. The Green Plains Obion loan agreement requires additional semi-annual payments of $4.675 million beginning March 1, 2015. The Green Plains Holdings II loan agreement requires semi-annual payments of $2.7 million.

 

  o Final maturity dates (at the latest) are as follows:

 

¡         Green Plains Bluffton

   November 19, 2013

¡         Green Plains Central City

   July 1, 2016

¡         Green Plains Holdings II

   April 1, 2016

¡         Green Plains Obion

   September 1, 2018

¡         Green Plains Ord

   July 1, 2016

¡         Green Plains Otter Tail

   March 23, 2012

¡         Green Plains Shenandoah

   November 1, 2017

¡         Green Plains Superior

   July 1, 2017

Green Plains Bluffton also received $22.0 million in Subordinate Solid Waste Disposal Facility Revenue Bond funds from the City of Bluffton, Indiana. The revenue bond requires: (1) semi-annual principal and interest payments of approximately $1.5 million during the period commencing on March 1, 2010 through March 1, 2019, and (2) a final principal and interest payment of $3.745 million on September 1, 2019. At September 30, 2011, Green Plains Bluffton had $2.5 million of cash that was restricted as to use for payment towards the current maturity and interest of the revenue bond. Such cash is presented as restricted cash on the consolidated balance sheet.

Green Plains Holdings II, under its Amended and Restated Loan and Security Agreement, is required to maintain monthly working capital in an amount not less than ($2.5) million. As of July 31, 2011, the actual working capital was ($3.4) million. The identified covenant violation was waived by the lenders and the default did not affect other debt agreements of the Company. The Company believes that it will be able to comply with the covenant for the next twelve months and was in

 

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compliance at August 31, 2011 and September 30, 2011. The Company is in the process of amending the Amended and Restated Loan and Security Agreement and once finalized, anticipated in 2011, the Company expects to consistently maintain compliance with this covenant in the future.

During the nine months ended September 30, 2011, amendments were made to the Green Plains Bluffton, Green Plains Central City, Green Plains Holdings II, Green Plains Obion, Green Plains Ord, Green Plains Shenandoah and Green Plains Superior agreements. None of the amendments resulted in material changes to the agreements. All of the Company’s ethanol production subsidiaries were in compliance with their debt covenants as of September 30, 2011.

Agribusiness Segment

The Green Plains Grain loan, amended in May 2011, is comprised of a $20.0 million amortizing term loan, a $45.0 million revolving term loan, a $20.0 million seasonal revolver and a $42.0 million bulge seasonal revolver. Scheduled payments under the term loan of $0.5 million are due on the first business day of each calendar quarter, with any remaining amount payable at expiration on August 1, 2013. The bulge seasonal revolver was reduced from a $42.0 million facility to a $35.0 million facility on April 1, 2011 and matures on November 1, 2011. The revolving term loan and the seasonal revolver were to mature on November 1, 2011. However, in October 2011, Green Plains Grain entered into a new $30.0 million amortizing term loan and a new $195.0 million revolving credit facility that provide the Company’s agribusiness operations with additional working capital funding. Outstanding amounts under the prior $20.0 million term loan and the $100.0 million revolving facilities were repaid. As of September 30, 2011, Green Plains Grain was in compliance with all debt covenants.

On August 15, 2011, the Company entered into two short-term inventory financing arrangements with a financial institution. Under the terms of the financing agreements, the Company sold quantities of grain totaling $10.0 million, issued warehouse receipts to the financial institution and simultaneously entered into agreements to repurchase the grain in future periods. The agreements mature on January 11, 2012 and February 10, 2012. The Company has accounted for the agreements as short-term notes, rather than sales, and has elected the fair value option to offset fluctuations in market prices of the inventory At September 30, 2011, grain inventory and the short-term note payable were valued at $8.8 million and were measured using Level 2 inputs.

Marketing and Distribution Segment

The Green Plains Trade loan is comprised of a senior secured revolving credit facility. Under the loan agreement, as amended in January 2011, the lender will loan up to $70.0 million, subject to a borrowing base equal to 85% of eligible receivables. At September 30, 2011, Green Plains Trade had $36.1 million cash that was restricted as to use for payment towards the loan agreement. Such cash is presented as restricted cash on the consolidated balance sheet. The amended revolving credit facility expires on March 31, 2014. As of September 30, 2011, Green Plains Trade was in compliance with all debt covenants.

Corporate Activities

In November 2010, the Company issued $90.0 million of 5.75% Convertible Senior Notes due 2015, or Notes. The Notes represent senior, unsecured obligations of the Company, with interest payable on May 1 and November 1 of each year. The Notes may be converted into shares of the Company’s common stock and cash in lieu of fractional shares of the common stock based on a conversion rate initially equal to 69.7788 shares of the common stock per $1,000 principal amount of Notes, which is equal to an initial conversion price of $14.33 per share. The conversion rate is subject to adjustment upon the occurrence of specified events. The Company may redeem for cash all, but not less than all, of the Notes at any time on and after November 1, 2013, if the last reported sale price of the Company’s common stock equals or exceeds 140% of the applicable conversion price for a specified time period, at a redemption price equal to 100% of the principal amount of the Notes, plus accrued and unpaid interest.

In conjunction with the purchase of treasury stock on September 16, 2011, the Company signed a promissory note in the amount of $14.0 million to a subsidiary of NTR plc. The balance and interest charges, if any, are due on December 15, 2011.

 

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Capitalized Interest

The Company had no capitalized interest during the quarterly and nine-month periods ended September 30, 2011 and 2010.

Restricted Net Assets

At September 30, 2011, there were approximately $527.2 million of net assets at the Company’s subsidiaries that were not available to be transferred to the parent company in the form of dividends, loans, or advances due to restrictions contained in the credit facilities of these subsidiaries.

Other Information

For further information on the debt obligations of the Company, refer to Note 11, Long-Term Debt, in the consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2010, as amended.

9. STOCK-BASED COMPENSATION

The Company has 2007 and 2009 Equity Incentive Plans which reserve a combined total of 3.5 million shares of common stock for issuance pursuant to the terms of the plans. The plans provide for the granting of shares of stock, including options to purchase shares of common stock, stock appreciation rights tied to the value of common stock, non-vested stock and non-vested stock unit awards to eligible employees, non-employee directors and consultants. The Company measures share-based compensation grants at fair value on the grant date, adjusted for estimated forfeitures. The Company records noncash compensation expense related to equity awards in its financial statements over the requisite service period on a straight-line basis. All of the Company’s existing share-based compensation awards have been determined to be equity awards.

A summary of stock option activity for the nine months ended September 30, 2011 is as follows:

 

     Shares     Weighted-
Average
Exercise
Price
     Weighted-
Average
Remaining
Contractual
     Aggregate
Intrinsic Value
(in thousands)
 

Outstanding at December 31, 2010

     1,170,500      $ 15.42         

Granted

     —          —           

Exercised

     (14,999     6.94          $ 73   

Forfeited

     (11,333     10.74         

Expired

     (7,251     17.41         
  

 

 

         

Outstanding at September 30, 2011

     1,136,917      $ 15.57         4.3       $ 1,310   
  

 

 

         

Exercisable at September 30, 2011

     939,084      $ 16.87         3.7       $ 960   

The Company’s option awards allow employees to exercise options through cash payment to the Company for the shares of common stock or through a simultaneous broker-assisted cashless exercise of a share option, through which the employee authorizes the exercise of an option and the immediate sale of the option shares in the open market. The Company uses newly-issued shares of common stock to satisfy its share-based payment obligations.

The following table summarizes non-vested stock award and DSU activity for the nine months ended September 30, 2011:

 

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     Weighted-
Average
Number of  Non-

vested Shares
and DSU’s
    Weighted-
Average
Grant-
Date Fair
Value
     Weighted-
Average
Remaining
Vesting Term (in
years)
 

Nonvested at December 31, 2010

     371,486      $ 10.15      

Granted

     392,056        12.01      

Forfeited

     (2,500     16.95      

Vested

     (236,507     10.41      
  

 

 

      

Nonvested at September 30, 2011

     524,535      $ 11.39         1.9   
  

 

 

      

Compensation costs expensed for share-based payment plans described above were approximately $0.9 million and $3.5 million during the three and nine months ended September 30, 2011. Compensation costs expensed for share-based payment plans described above were approximately $0.6 million and $2.3 million during the three and nine months ended September 30, 2010. At September 30, 2011, there were $4.9 million of unrecognized compensation costs from share-based compensation arrangements, which is related to non-vested awards. This compensation is expected to be recognized over a weighted-average period of approximately 1.9 years. The potential tax benefit realizable for the anticipated tax deductions of the exercise of share-based payment arrangements generally would approximate 36% of these expense amounts.

10. EARNINGS PER SHARE

Basic earnings per common shares (“EPS”) is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS is computed by dividing net income on an as-if-converted basis available to common stockholders by the weighted average number of common shares outstanding during the period, adjusted for the dilutive effect of any outstanding dilutive securities. The calculation of diluted earnings per share gives effect to common stock equivalents, if dilutive. The reconciliations of net income to net income on an as-if-converted basis and basic and diluted earnings per share are as follows (in thousands):

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2011     2010      2011     2010  

Net income attributable to Green Plains

   $ 12,429      $ 7,366       $ 25,152      $ 31,627   

Weighted average shares outstanding - basic

     35,624        31,369         36,075        29,769   

Income attributable to Green Plains stockholders - basic

   $ 0.35      $ 0.23       $ 0.70      $ 1.06   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income attributable to Green Plains

   $ 12,429      $ 7,366       $ 25,152      $ 31,627   

Interest on convertible debt

     1,294        —           3,881        —     

Amortization of debt issuance costs related to convertible debt

     151        —           447        —     

Tax effect of interest on convertible debt

     (520     —           (1,558     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income attributable to Green Plains on an as-if-converted basis

   $ 13,354      $ 7,366       $ 27,922      $ 31,627   
  

 

 

   

 

 

    

 

 

   

 

 

 

Weighted average shares outstanding - basic

     35,624        31,369         36,075        29,769   

Effect of dilutive convertible debt

     6,280        —           6,280        —     

Effect of dilutive stock options

     247        215         256        311   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total potential shares outstanding

     42,151        31,584         42,611        30,080   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income attributable to Green Plains stockholders - diluted

   $ 0.32      $ 0.23       $ 0.66      $ 1.05   

Excluded from the computations of diluted EPS were stock-based compensation awards totaling 0.7 million and 0.9 million shares for the three and nine months ended September 30, 2011, respectively, and awards totaling 1.0 million and 0.7 million shares for the three and nine months ended September 30, 2010, respectively, because the exercise prices or the grant-date fair value, as applicable, of the corresponding awards were greater than the average market price of the Company’s

 

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common stock during the respective periods. As consideration for the Global acquisition, the Company issued warrants for 700,000 shares of its restricted stock at a price of $14.00 per share. The warrants are excluded from the computations of diluted EPS as the exercise price is greater than the average market price of the Company’s common stock for the three and nine months ended September 30, 2011.

11. COMPREHENSIVE INCOME

Comprehensive income is as follows (in thousands):

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2011     2010      2011     2010  

Net income attributable to Green Plains

   $ 12,429      $ 7,366       $ 25,152      $ 31,627   

Unrealized gain (loss) on derivatives

     (1,856     523         (10,583     700   

Tax effect

     683        —           4,052        —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income attributable to Green Plains

   $ 11,256      $ 7,889       $ 18,621      $ 32,327   
  

 

 

   

 

 

    

 

 

   

 

 

 

12. TREASURY STOCK

On September 9, 2011, the Company repurchased 3.5 million shares of common stock at a price of $8.00 per share from a subsidiary of NTR plc, which is a principal shareholder of the Company. The Company paid 50% of the amount at the time of repurchase. The remaining balance and interest charges, if any, are due on December 15, 2011. The payment obligation is recorded on the balance sheet as a short-term note payable and the repurchased shares are recorded at cost as treasury stock at September 30, 2011.

Shares of common stock repurchased by the Company are recorded at cost as treasury stock and result in a reduction of stockholders’ equity in the accompanying consolidated balance sheets. When shares are reissued, the Company will use the weighted average cost method for determining the cost basis. The difference between the cost of the shares and the issuance price will be added or deducted from additional paid-in capital. The Company does not have a share repurchase program and does not intend to retire the repurchased shares.

13. STOCKHOLDERS’ EQUITY

Components of stockholders’ equity are as follows (in thousands):

 

     Common Stock      Additional
Paid-in
Capital
     Retained
Earnings
     Accum.
Other
Comp. Loss
    Treasury Stock     Total
Green Plains
Stockholders’
Equity
    Non-
controlling
Interest
    Total
Stockholders’
Equity
 
                   
                   
   Shares      Amount              Shares      Amount        

Balance, December 31, 2010

     35,793       $ 36       $ 431,289       $ 57,343       $ (420     —         $ —        $ 488,248      $ 9,394      $ 497,642   

Net income (loss)

     —           —           —           25,152         —          —           —          25,152        (200     24,952   

Unrealized loss on derivatives, net of tax

     —           —           —           —           (6,531     —           —          (6,531     —          (6,531
                     

 

 

   

 

 

   

 

 

 

Total comprehensive income

     —           —           —           —           —          —           —          18,621        (200     18,421   

Repurchase of common stock

     —           —           —           —           —          3,500         (28,201     (28,201     —          (28,201

Purchase of noncontrolling interest in Blendstar, net of tax

     —           —           5,572         —           —          —           —          5,572        (8,944     (3,372

Stock-based compensation

     607         —           2,743         —           —          —          

 

—  

—  

  

  

    2,743        —          2,743   

Stock options exercised

     15         —           104         —           —          —           —          104        —          104   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2011

     36,415       $ 36       $ 439,708       $ 82,495       $ (6,951     3,500       $ (28,201   $ 487,087      $ 250      $ 487,337   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

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14. INCOME TAXES

The Company records income tax expense during interim periods based on its best estimate of the annual effective tax rate. Certain items are given discrete period treatment and, as a result, the tax effects of such items are reported in full in the relevant interim period.

Income tax expense for the three and nine months ended September 30, 2011 was $7.0 million and $14.2 million, respectively. Income tax expense for the three and nine months ended September 30, 2010 was $3.1 million and $10.0 million, respectively. The effective tax rate (calculated as the ratio of income tax expense to income before income taxes) was approximately 36% and 24% for the first nine months of 2011 and 2010, respectively. The effective tax rates for each of these periods reflect the release of a portion of valuation allowances provided against certain of the Company’s deferred tax assets, primarily federal and state net operating losses and tax credits due to anticipated income in future periods.

The Company’s unrecognized tax benefits at September 30, 2011 were $0.1 million, compared to $1.1 million at December 31, 2010. The decrease was recorded as a result of a settlement reached with tax authorities regarding the timing of certain deductions in prior tax returns. There was no change in the Company’s liabilities related to unrecognized tax benefits during the first nine months of 2010.

The 2011 annual effective tax rate can be affected as a result of variances among the estimates and amounts of full-year sources of taxable income (among the various states), the realization of tax credits, adjustments that may arise from the resolution of tax matters under review, variances in the release of valuation allowances and the Company’s assessment of its liability for uncertain tax positions.

15. COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company leases certain facilities and parcels of land under agreements that expire at various dates. For accounting purposes, rent expense is based on a straight-line amortization of the total payments required over the lease term. The Company incurred lease expenses of $4.2 million and $11.8 million during the three and nine months ended September 30, 2011, respectively, and $6.8 million and $7.9 million during the three and nine months ended September 30, 2010, respectively. Aggregate minimum lease payments under these agreements for the remainder of 2011 and in future fiscal years are as follows (in thousands):

 

Year Ending December 31,

   Amount  

2011

   $ 4,568   

2012

     16,227   

2013

     14,284   

2014

     6,843   

2015

     5,575   

Thereafter

     7,740   
  

 

 

 

Total

   $ 55,237   
  

 

 

 

Commodities

As of September 30, 2011, the Company had contracted for future grain deliveries valued at approximately $293.2 million, natural gas deliveries valued at approximately $20.8 million, ethanol product deliveries valued at approximately $31.7 million and distillers grains product deliveries valued at approximately $7.4 million.

Legal

In April 2011, Aventine Renewable Energy, Inc. filed a complaint in the United States Bankruptcy Court for the District of Delaware in connection with its Chapter 11 bankruptcy naming as defendants Green Plains Renewable Energy, Inc., Green Plains Obion LLC, Green Plains Bluffton LLC, Green Plains VBV LLC and Green Plains Trade Group LLC. This action alleges $24.4 million of damages from preferential transfers or, in the alternative, $28.4 million of damages from fraudulent transfers under an ethanol marketing agreement and an unspecified amount of damages for a continuing breach of a termination agreement related to rail cars. The Company is unable to predict the outcome of these matters at this time, and any views formed as to the viability of these claims or the financial exposure which could result may change as the matters proceed through their course. The Company intends to defend these claims vigorously.

 

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16. RELATED PARTY TRANSACTIONS

Short-Term Note Payable

In September 2011, the Company repurchased 3.5 million shares from a subsidiary of NTR plc, which is a principal shareholder of the Company. The Company paid 50% of the repurchase amount at the time of repurchase, with the remaining balance to be repaid by December 15, 2011. At September 30, 2011, $14.0 million was outstanding on the related party note payable.

Sales and Financing Contracts

Three subsidiaries of the Company have executed separate financing agreements for equipment with AXIS Capital Inc. Gordon F. Glade, President and Chief Executive Officer of AXIS Capital is a member of our Board of Directors. A total of $0.6 million and $1.1 million were included in debt at September 30, 2011 and December 31, 2010, respectively, under these financing arrangements. Payments, including principal and interest, totaled $0.2 million and $0.5 million during the three and nine months ended September 30, 2011, respectively. Payments, including principal and interest, totaled $0.2 million and $0.5 million during the three and nine months ended September 30, 2010, respectively. The highest amount outstanding during the three months ended September 30, 2011 was $0.7 million, and the weighted average interest rate for all financing agreements with AXIS Capital was 7.3%.

The Company has entered into fixed-price ethanol purchase and sale agreements with Center Oil Company. Gary R. Parker, President and Chief Executive Officer of Center Oil, is a member of our Board of Directors. During the three and nine months ended September 30, 2011, cash receipts from Center Oil totaled $24.1 million and $89.4 million, respectively. Additional payments to Center Oil totaled $3.1 million and $5.2 million for the same periods, respectively, on these contracts. During the three and nine months ended September 30, 2010, cash receipts totaled $11.5 million and $55.4 million and payments totaled $0.7 million and $4.5 million, respectively, on these contracts. The Company had $1.8 million and $6.0 million included in accounts receivable from Center Oil at September 30, 2011 and December 31, 2010, respectively, $0.8 million in outstanding payables at September 30, 2011and no outstanding payables at December 31, 2010 under these purchase and sale agreements.

Aircraft Lease

The Company has entered into an agreement with Hoovestol Inc. for the lease of an aircraft. Wayne B. Hoovestol, President of Hoovestol Inc., is Chairman of our Board of Directors. The Company has agreed to pay $6,667 per month for use of up to 100 hours per year of the aircraft. Any flight time in excess of 100 hours per year will incur additional hourly-based charges. During the three and nine months ended September 30, 2011, payments related to this agreement totaled $33 thousand and $105 thousand, respectively. During the three and nine months ended September 30, 2010, payments related to this agreement totaled $25 thousand and $94 thousand, respectively. The Company did not have any outstanding receivables from Hoovestol Inc. and had an outstanding payable to Hoovestol Inc. of $3 thousand at September 30, 2011. The Company did not have any receivables from or payables to Hoovestol Inc. at December 31, 2010.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

General

The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of our consolidated financial condition and results of operations. This discussion should be read in conjunction with the consolidated financial statements included herewith and notes to the consolidated financial statements thereto and our annual report filed on Form 10-K for the year ended December 31, 2010, as amended, including the consolidated financial statements, accompanying notes and the risk factors contained therein.

Cautionary Information Regarding Forward-Looking Statements

This report contains forward-looking statements based on current expectations that involve a number of risks and uncertainties. Forward-looking statements generally do not relate strictly to historical or current facts, but rather to plans and objectives for future operations based upon management’s reasonable estimates of future results or trends, and include statements preceded by, followed by, or that include words such as “anticipates,” “believes,” “continue,” “estimates,” “expects,” “intends,” “outlook,” “plans,” “predicts,” “may,” “could,” “should,” “will,” and words and phrases of similar impact, and include, but are not limited to, statements regarding future operating or financial performance, business strategy, business environment, key trends, and benefits of actual or planned acquisitions. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The forward-looking statements are made pursuant to safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Although we believe that our expectations regarding future events are based on reasonable assumptions, any or all forward-looking statements in this report may turn out to be incorrect. They may be based on inaccurate assumptions or may not account for known or unknown risks and uncertainties. Consequently, no forward-looking statement is guaranteed, and actual future results may vary materially from the results expressed or implied in our forward-looking statements. The cautionary statements in this report expressly qualify all of our forward-looking statements. In addition, we are not obligated, and do not intend, to update any of our forward-looking statements at any time unless an update is required by applicable securities laws. Factors that could cause actual results to differ from those expressed or implied in the forward-looking statements include, but are not limited to, those discussed in Part I, Item 1A – Risk Factors of our annual report on Form 10-K for the year ended December 31, 2010, as amended, and in Item 1A of Part II of this Quarterly Report for the quarter ended September 30, 2011. Specifically, we may experience significant fluctuations in future operating results due to a number of economic conditions, including, but not limited to, competition in the ethanol and other industries in which we compete, commodity market risks, financial market risks, counter-party risks, risks associated with changes to federal policy or regulation, expected corn oil recovery rates and operating expenses, risks related to closing and achieving anticipated results from acquisitions, and other risk factors detailed in our reports filed with the SEC. Actual results may differ from projected results due, but not limited, to unforeseen developments.

In light of these assumptions, risks and uncertainties, the results and events discussed in the forward-looking statements contained in this report or in any document incorporated by reference might not occur. Investors are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this report or the date of the document incorporated by reference in this report. We are not under any obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

We were formed in June 2004, incurring development costs until our first two plants were completed. Our plant in Shenandoah, Iowa commenced operations in August 2007 and our plant in Superior, Iowa commenced operations in July 2008. To complement and enhance our ethanol production facilities, in April 2008, we acquired Great Lakes Cooperative, a full-service farm cooperative in northwestern Iowa and southwestern Minnesota. As a result of our October 2008 merger with VBV LLC, we acquired two additional ethanol plants, located in Bluffton, Indiana and Obion, Tennessee. Operations commenced at the Bluffton and Obion plants in September 2008 and November 2008, respectively. In January 2009, we acquired a majority interest in Blendstar, LLC, which operates blending and terminaling facilities in the south central U.S. In July 2009, we acquired two limited liability companies that owned ethanol plants in Central City and Ord, Nebraska. In April 2010, we acquired five grain elevators in western Tennessee. In October 2010, we acquired Global Ethanol, LLC, which had two operating ethanol plants. In March 2011, we acquired an ethanol plant near Fergus Falls, Minnesota, bringing our total expected ethanol production capacity to approximately 740 mmgy. In June 2011, Green Plains Grain Company acquired 2.0 million bushels of grain storage capacity located in Hopkins, Missouri, which is approximately 45 miles from our Shenandoah, Iowa ethanol plant. In July 2011, we acquired all noncontrolling interests in Blendstar.

 

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We are a leading, vertically-integrated producer, marketer and distributer of ethanol. We focus on generating stable operating margins through our diversified business segments and our risk management strategy. We believe that owning and operating assets throughout the ethanol value chain enables us to mitigate changes in commodity prices and differentiates us from companies focused only on ethanol production. Today, we have operations throughout the ethanol value chain, beginning upstream with our agronomy and grain handling operations, continuing through our approximately 740 mmgy of ethanol production capacity and our corn oil production, and ending downstream with our ethanol marketing, distribution and blending facilities.

Management reviews our operations in the following four separate operating segments:

 

   

Ethanol Production. At September 30, 2011, we operated a total of nine ethanol plants in Indiana, Iowa, Michigan, Minnesota, Nebraska and Tennessee, with approximately 740 mmgy of total ethanol production capacity. At capacity, these plants collectively will consume approximately 265 million bushels of corn and produce approximately 2.1 million tons of distillers grains annually.

 

   

Corn Oil Production. At September 30, 2011, we were operating corn oil extraction systems at all nine of our ethanol plants. We completed the installation of corn oil extraction technology at our recently-acquired Otter Tail ethanol plant during the third quarter of 2011. The corn oil systems are designed to extract non-edible corn oil from the whole stillage process immediately prior to production of distillers grains. Industrial uses for corn oil include feedstock for biodiesel, livestock feed additives, rubber substitutes, rust preventatives, inks, textiles, soaps and insecticides.

 

   

Agribusiness. We operate three lines of business within our agribusiness segment: bulk grain, agronomy and petroleum. In June 2011, we expanded our agribusiness operations by acquiring a grain elevator in Hopkins, Missouri with 2.0 million bushels of grain storage capacity. During the third quarter of 2011, we completed the construction of approximately 2.1 million and 1.0 million bushels of additional grain storage capacity at our Tennessee and Iowa grain elevators, respectively. In our bulk grain business, we own 14 grain elevators with approximately 37.2 million bushels of total storage capacity. We sell fertilizer and other agricultural inputs and provide application services to area producers, through our agronomy business. Additionally, we sell petroleum products including diesel, soydiesel, blended gasoline and propane, primarily to agricultural producers and consumers. We believe our bulk grain business provides synergies with our ethanol production segment as it supplies a portion of the feedstock for our ethanol plants.

 

   

Marketing and Distribution. Our in-house marketing business is responsible for the sale, marketing and distribution of all ethanol, distillers grains and corn oil produced at our nine ethanol plants. We also market and distribute ethanol for third-party ethanol producers. At September 30, 2011, expected production capacity of these third-party producers was approximately 260 mmgy. Additionally, we own Blendstar, LLC, which operates nine blending or terminaling facilities with approximately 495 mmgy of total throughput capacity in seven states in the south central United States.

In the second quarter of 2011, we redefined our operating segments to include corn oil production as a reportable segment. Corn oil production, which we initiated in October 2010, was previously reported as a component of our marketing and distribution segment. We added the corn oil production segment to reflect the way our executive management manages, allocates resources, and measures the performance of our businesses. All prior period segment results have been restated to reflect this change.

We intend to continue to take a disciplined approach in evaluating new opportunities related to potential acquisition of additional ethanol plants by considering whether the plants fit within the design, engineering and geographic criteria we have developed. In our marketing and distribution segment, our strategy is to renew existing marketing contracts, as well as enter new contracts with other ethanol producers. We also intend to pursue opportunities to develop or acquire additional grain elevators and agronomy businesses, specifically those located near our ethanol plants. We believe that owning additional agribusiness operations in close proximity to our ethanol plants enables us to strengthen relationships with local corn producers, allowing us to source corn more effectively and at a lower average cost. We also plan to continue to grow our downstream access to customers and are actively looking at new marketing opportunities with other ethanol producers.

 

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We continue our support of the BioProcess Algae joint venture, which is focused on developing technology to grow and harvest algae, which consume carbon dioxide, in commercially viable quantities. Construction of Phase II was completed and the Grower Harvesters™ bioreactors were successfully started up in January 2011. Phase II allows for verification of growth rates, energy balances and operating expenses, which are considered to be some of the key steps to commercialization. The cost of the Phase II project was shared by the joint venture partners. As part of the Phase II funding, we increased our ownership in BioProcess Algae to 35%. During the third quarter of 2011, BioProcess Algae constructed an outdoor Grower Harvester system next to our Shenandoah ethanol plant, which as of September 30, 2011 was successfully producing algae. BioProcess Algae successfully completed its first round of algae-based poultry feed trials, in conjunction with the University of Illinois. The algae strains produced by the Grower Harvester system for the feed trials demonstrated high energy and protein content that was readily available, similar to other high value feed products used in the feeding of poultry today. BioProcess Algae is planning to break ground on a five acre algae farm this fall at the same location. If we and BioProcess Algae determine that the venture can achieve the desired economic performance from the five acre farm, a build-out of 400 acres of Grower Harvester reactors near our Shenandoah ethanol plant will be considered. The cost of such a build-out is estimated at $40 million to $60 million and could take up to a year to complete. Funding for BioProcess Algae for such a project would come from a variety of sources including current partners, new equity investors, debt financing or a combination thereof. If a decision was made to replicate such a 400 acre algae farm at all of our ethanol plants, we estimate that the required investment could range from $300 million to $500 million. BioProcess Algae currently is exploring potential algae markets including animal feeds, nutraceuticals and biofuels.

In the third quarter of 2011, we repurchased 3.5 million shares of common stock at a price of $8.00 per share from a subsidiary of NTR plc. Prior to this transaction, this NTR subsidiary held approximately 11.2 million shares, or 30.8%, of our outstanding shares. We paid 50% of the repurchase amount on September 16, 2011. The remaining balance and interest charges, if any, are due on December 15, 2011. The repurchased shares are recorded at cost as treasury stock and resulted in a reduction of stockholders’ equity in the accompanying consolidated balance sheets. We do not have a share repurchase program and do not intend to retire the repurchased shares.

Industry Factors Affecting our Results of Operations

Variability of Commodity Prices. Our operations and our industry are highly dependent on commodity prices, especially prices for corn, ethanol, distillers grains and natural gas. Because the market prices of these commodities are not always correlated, at times ethanol production may be unprofitable. As commodity price volatility poses a significant threat to our margin structure, we have developed a risk management strategy focused on locking in favorable operating margins when available. We continually monitor market prices of corn, natural gas and other input costs relative to the prices for ethanol and distillers grains at each of our production facilities. We create offsetting positions by using a combination of derivative instruments, fixed-price purchases and sales contracts, or a combination of strategies within strict limits. Our primary focus is not to manage general price movements of individual commodities, for example to minimize the cost of corn consumed, but rather to lock in favorable profit margins whenever possible. By using a variety of risk management tools and hedging strategies, including our internally-developed real-time margin management system, we believe we are able to maintain a disciplined approach to price risks.

Reduced Availability of Capital. Some ethanol producers have faced financial distress over the past few years, culminating with bankruptcy filings by several companies. This, in combination with continued volatility in the capital markets has resulted in reduced availability of capital for the ethanol industry in general. In this market environment, we may experience limited access to incremental financing.

Legislation. Federal and state governments have enacted numerous policies, incentives and subsidies to encourage the usage of domestically-produced alternative fuels. Passed in 2007 as part of the Energy Independence and Security Act, a federal Renewable Fuels Standard, or RFS, has been and we expect will continue to be a driving factor in the growth of ethanol usage. The RFS Flexibility Act was introduced on October 5, 2011 to reduce or eliminate the volumes of renewable fuel use required by RFS based upon corn stocks-to-use ratios. We believe the RFS is a significant component of national energy policy that reduces dependence on foreign oil by the United States. As a result, we believe that the RFS Flexibility Act will not garner sufficient support to be enacted.

To further drive growth in the increased adoption of ethanol, Growth Energy, an ethanol industry trade association, and a number of ethanol producers requested a waiver from the EPA to increase the allowable amount of ethanol blended into gasoline from the current 10% level, or E10, to a 15% level, or E15. In October 2010, the EPA approved E15 for use in model year 2007 and newer model passenger vehicles, including cars, SUVs, and light pickup truck. In January 2011, the EPA ruled that E15 was also approved for use in model year 2001 to 2006 passenger vehicles.

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Reform Act, which, among other things, aims to improve transparency and accountability in derivative markets. While the Reform Act increases the regulatory authority of the Commodity Futures Trading Commission, or CFTC, regarding over-the-counter derivatives, there is uncertainty on several issues related to market clearing, definitions of market participants, reporting, and capital requirements. While many details remain to be addressed in CFTC rulemaking proceedings, at this time we do not anticipate any material impact to our risk management strategy.

 

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On June 16, 2011, a legislative proposal to end the volumetric ethanol tax credit, or VEETC (often referred to as the “blender’s credit”), was passed by the U.S. Senate. The blender’s credit, which is currently set to expire on December 31, 2011, allows gasoline distributors who blend ethanol with gasoline to receive a federal excise tax credit of $0.45 per gallon of ethanol used, or $0.045 per gallon for E10 and $0.3825 per gallon for E85. We expect the VEETC will be allowed to expire at December 31, 2011.

Merger and Acquisition Activity

In March 2011, we acquired an ethanol plant with an expected annual production capacity of 60 mmgy and certain other assets near Fergus Falls, Minnesota from Otter Tail Ag Enterprises, LLC, or Otter Tail, for consideration totaling $59.7 million, consisting of $5.9 million in cash and $54.2 million in debt, valued at $53.8 million. We are constructing additional grain storage capacity totaling 1.6 million bushels at the Otter Tail plant with completion expected in early 2012. The operating results of Otter Tail have been included in the Company’s consolidated financial statements since March 24, 2011.

In June 2011, we acquired 2.0 million bushels of grain storage capacity located in Hopkins, Missouri. The grain elevator is located approximately 45 miles from our Shenandoah, Iowa ethanol plant. The operating results of this grain elevator have been included in the Company’s consolidated financial statements since June 3, 2011.

In January 2009, we acquired a 51% ownership interest in Blendstar, LLC, which operates nine blending and terminaling facilities with approximately 495 mmgy of total throughput capacity in seven states in the south central U.S. On July 19, 2011, we acquired the remaining 49% of Blendstar from the noncontrolling holders.

Critical Accounting Policies and Estimates

This disclosure is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires that we make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and other assumptions that we believe are proper and reasonable under the circumstances. We continually evaluate the appropriateness of estimates and assumptions used in the preparation of our consolidated financial statements. Actual results could differ materially from those estimates. Key accounting policies, including but not limited to those relating to revenue recognition, property and equipment, impairment of long-lived assets and goodwill, derivative financial instruments, and accounting for income taxes, are impacted significantly by judgments, assumptions and estimates used in the preparation of the consolidated financial statements. See further discussion of our critical accounting policies and estimates, as well as significant accounting policies, in our annual report on Form 10-K for the year ended December 31, 2010, as amended.

Recent Accounting Pronouncements

Effective January 1, 2011, we adopted the second phase of the amended guidance in ASC Topic 820, Fair Value Measurements and Disclosures , which requires us to disclose information in the reconciliation of recurring Level 3 measurements regarding purchases, sales, issuances and settlements on a gross basis, with a separate reconciliation for assets and liabilities. We did not experience an impact from the additional disclosure requirements.

Effective January 1, 2012, we will be required to adopt the third phase of amended guidance in ASC Topic 820, Fair Value Measurements and Disclosures. The purpose of the amendment is to achieve common fair value measurement and disclosure requirements by improving comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with GAAP and those prepared in conformity with International Financial Reporting Standards, or IFRS. The amended guidance clarifies the application of existing fair value measurement requirements and requires additional disclosure for Level 3 measurements regarding the sensitivity of fair value to changes in unobservable inputs and any interrelationships between those inputs. We currently would not be impacted by the additional disclosure requirements as we do not have any recurring Level 3 measurements.

Effective January 1, 2012, we will be required to adopt the amended guidance in ASC Topic 220, Comprehensive Income . This accounting standards update, which helps to facilitate the convergence of GAAP and IFRS, is aimed at increasing the prominence of other comprehensive income in the financial statements by eliminating the option to present other comprehensive income in the statement of stockholders’ equity, and rather requiring that net income and other comprehensive income be presented in either a single continuous statement or in two separate but consecutive statements. We have determined that the changes to the accounting standards will affect the presentation of consolidated financial information but will not have a material effect on the Company’s financial position or results of operations.

 

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Amended guidance in ASC Topic 350, Intangibles – Goodwill and Other , is effective for us beginning January 1, 2012, although early adoption is permitted. The amended guidance permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. We have determined that the changes to the accounting standards will not impact our disclosure or reporting requirements.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our consolidated financial condition, results of operations or liquidity.

Components of Revenues and Expenses

Revenues . In our ethanol production segment, our revenues are derived primarily from the sale of ethanol and distillers grains, which are co-products of the ethanol production process. In our corn oil production segment, revenues result from the sale of corn oil produced at our ethanol plants. In our agribusiness segment, the sale of grain, fertilizer and petroleum products are our primary sources of revenue. In our marketing and distribution segment, the sale of ethanol, distillers grains and corn oil that we market for our nine ethanol plants and the sale of ethanol we market for the ethanol plants owned by third parties represent our primary sources of revenue. Revenues also include net gains or losses from derivatives related to ethanol, distillers grains and corn oil.

Cost of Goods Sold. Cost of goods sold in our ethanol production segment includes costs for direct labor, materials and certain plant overhead costs. Direct labor includes all compensation and related benefits of non-management personnel involved in the operation of our ethanol plants. Plant overhead costs primarily consist of plant utilities, plant depreciation and outbound freight charges. Our cost of goods sold in the ethanol production segment is mainly affected by the cost of corn, natural gas and transportation. In this segment, corn is our most significant raw material cost. We purchase natural gas to power steam generation in our ethanol production process and to dry our distillers grains. Natural gas represents our second largest cost in this business segment. Cost of goods sold also includes net gains or losses from derivatives related to corn and natural gas.

Cost of goods sold in our corn oil production segment includes costs for direct materials, certain plant overhead costs and amounts reimbursed to the ethanol production segment for the reduction in distillers grains produced. Costs of corn oil production have become more significant as we have implemented corn oil extraction technology at all of our ethanol plants.

Grain, fertilizer and petroleum acquisition costs represent the primary components of cost of goods sold in our agribusiness segment. Grain inventories, forward purchase contracts and forward sale contracts are valued at market prices, where available, or other market quotes adjusted for differences, primarily transportation, between the exchange-traded market and the local markets on which the terms of the contracts are based. Changes in the market value of grain inventories, forward purchase and sale contracts, and exchange-traded futures and options contracts are recognized in earnings as a component of cost of goods sold.

In our marketing and distribution segment, purchases of ethanol, distillers grains and corn oil represent the largest components of cost of goods sold. Transportation expenses are also a major component of our cost of goods sold in this segment. Transportation expense includes rail car leases, freight and shipping of our ethanol and co-products, as well as costs incurred in storing ethanol at destination terminals.

Selling, General and Administrative Expenses. Selling, general and administrative expenses are recognized at the operating segment level, as well as at the corporate level. These expenses consist of employee salaries, incentives and benefits; office expenses; board fees; and professional fees for accounting, legal, consulting, and investor relations activities. Personnel costs, which include employee salaries, incentives and benefits, are the largest single category of expenditures in selling, general and administrative expenses. We refer to selling, general and administrative expenses that are not allocable to a segment as corporate activities.

Other Income (Expense). Other income (expense) includes interest earned, interest expense and other non-operating items.

 

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Results of Operations

Segment Results

Our operations fall within the following four segments: (1) production of ethanol and related distillers grains, collectively referred to as ethanol production, (2) corn oil production, (3) grain warehousing and marketing, as well as sales and related services of agronomy and petroleum products, collectively referred to as agribusiness, and (4) marketing and distribution of Company-produced and third-party ethanol, distillers grains and corn oil, collectively referred to as marketing and distribution. Selling, general and administrative expenses, primarily consisting of compensation of corporate employees, professional fees and overhead costs not directly related to a specific operating segment, are reflected in the table below as corporate activities. When our management evaluates segment performance, they review the information provided below, as well as segment earnings before interest, income taxes, noncontrolling interest, depreciation and amortization.

In the second quarter of 2011, we redefined our operating segments to include corn oil production as a reportable segment. Corn oil production, which we initiated in October 2010, was previously reported as a component of our marketing and distribution segment. We added the corn oil production segment to reflect the manner by which our executive management currently manages, allocates resources to, and measures the performance of our businesses. Prior period segment results have been reclassified to reflect this change.

During the normal course of business, our operating segments enter into transactions with one another. For example, our ethanol production segment sells ethanol to our marketing and distribution segment and our agribusiness segment sells grain to our ethanol production segment. These intersegment activities are recorded by each segment at prices approximating market and treated as if they are third-party transactions. Consequently, these transactions impact segment performance. However, intersegment revenues and corresponding costs are eliminated in consolidation and do not impact our consolidated results.

The table below reflects selected operating segment financial information for the periods indicated (in thousands):

 

     Three Months Ended
September 30,
    Nine Months Ended

September 30,
 
     2011     2010     2011     2010  

Revenues:

        

Ethanol production

        

Revenue from external customers

   $ 35,077      $ 11,168      $ 97,377      $ 43,298   

Intersegment revenue

     551,987        239,253        1,501,031        698,040   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total segment revenue

     587,064        250,421        1,598,408        741,338   

Corn oil production

        

Revenue from external customers

     393        —          1,464        —     

Intersegment revenue

     15,115        —          28,886        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total segment revenue

     15,508        —          30,350        —     

Agribusiness

        

Revenue from external customers

     95,065        65,309        233,959        128,610   

Intersegment revenue

     48,863        33,039        149,676        75,062   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total segment revenue

     143,928        98,348        383,635        203,672   

Marketing and distribution

        

Revenue from external customers

     826,483        419,672        2,298,121        1,204,591   

Intersegment revenue

     98        99        375        227   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total segment revenue

     826,581        419,771        2,298,496        1,204,818   

Revenue including intersegment activity

     1,573,081        768,540        4,310,889        2,149,828   

Intersegment eliminations

     (616,063     (272,391     (1,679,968     (773,329
  

 

 

   

 

 

   

 

 

   

 

 

 

Revenue as reported

   $ 957,018      $ 496,149      $ 2,630,921      $ 1,376,499   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  

Gross profit:

        

Ethanol production

   $ 24,846      $ 19,856      $ 63,880      $ 70,372   

Corn oil production

     9,642        —          18,098        —     

Agribusiness

     8,223        5,998        20,425        14,916   

Marketing and distribution

     5,069        6,227        17,332        15,646   

Intersegment eliminations

     (487     (123     444        (25
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 47,293      $ 31,958      $ 120,179      $ 100,909   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income:

        

Ethanol production

   $ 20,941      $ 17,215      $ 52,184      $ 62,480   

Corn oil production

     9,632        —          18,040        —     

Agribusiness

     2,151        421        3,934        1,313   

Marketing and distribution

     1,923        3,271        7,078        7,056   

Intersegment eliminations

     (481     (123     474        (26

Corporate activities

     (5,121     (3,842     (14,881     (11,494
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 29,045      $ 16,942      $ 66,829      $ 59,329   
  

 

 

   

 

 

   

 

 

   

 

 

 

Three Months Ended September 30, 2011 Compared to the Three Months Ended September 30, 2010

Consolidated Results

Revenues increased $460.9 million for the three months ended September 30, 2011 compared to the same period in 2010 primarily as a result of acquired operations and increases in commodity prices. We acquired our Lakota and Riga ethanol plants in October 2010 and our Otter Tail ethanol plant in March 2011. Gross profit increased $15.3 million for the three months ended September 30, 2011 compared to the same period in 2010 primarily as a result of corn oil production and ethanol production. Ethanol production increased during the three months ended September 30, 2011 compared to the same period in 2010 while operating margins per gallon produced decreased. Operating income increased $12.1 million in the 2011 period compared to 2010 as a result of the acquired operations and corn oil production. Selling, general and administrative expenses were $3.2 million higher for the three months ended September 30, 2011 compared to the same period in 2010 due to the expanded scope of our operations.

Income before taxes was affected by the factors above offset partially by an increase in interest expense of $2.9 million due to debt issued to finance the acquisitions and the $90.0 million convertible notes issued in November 2010. Income tax expense of $7.0 million and $3.1 million for the three-month periods ended September 30, 2011 and 2010, respectively, was favorably impacted by the release of a portion of valuation allowances against certain deferred tax assets, established in prior years due to the uncertainty of realization.

The following discussion of segment results provides greater detail on period-to-period results.

Ethanol Production Segment

The table below presents key operating data within our ethanol production segment for the periods indicated:

 

     Three Months Ended
September 30,
 
     2011      2010  

Ethanol sold
(thousands of gallons)

     184,619         128,924   

Distillers grains sold
(thousands of equivalent dried tons)

     534         370   

Corn consumed
(thousands of bushels)

     65,857         46,299   

 

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Revenues in the ethanol production segment increased by $336.6 million for the three months ended September 30, 2011 compared to the same period in 2010. Revenues for the three months ended September 30, 2011, included production from our Lakota and Riga ethanol plants, which were acquired in October 2010, as well as production from our Otter Tail ethanol plant, which was acquired in March 2011. The Lakota, Riga and Otter Tail plants contributed $169.2 million in combined revenues for the three months ended September 30, 2011. The remaining increase in revenues was due to increased volume from production efficiencies at our other ethanol plants and increases in ethanol and distillers grains prices.

Cost of goods sold in the ethanol production segment increased by $331.7 million for the three months ended September 30, 2011 compared to the same period in 2010. The increase was due primarily to the consumption of 19.6 million additional bushels of corn and an 80.0% increase in the average cost per bushel during the three months ended September 30, 2011 compared to the same period in 2010. The volume increase was due to the additional production from our Lakota, Riga and Otter Tail plants. Gross profit for the ethanol production segment increased by $5.0 million for the three months ended September 30, 2011 compared to the same period in 2010 due to the factors listed above.

Operating income in the ethanol production segment increased by $3.7 million for the three months ended September 30, 2011 compared to the same period in 2010 due in large part to the factors discussed above, partially offset by increased depreciation expense and lower operating margins per gallon in the current quarterly period. Depreciation and amortization expense for the ethanol production segment was $11.0 million during the three months ended September 30, 2011 compared to $7.8 million during the same period in 2010.

Corn Oil Production Segment

We initiated corn oil production in the fourth quarter of 2010. By September 30, 2011, we had deployed corn oil extraction technology at all nine of our ethanol plants with the last implementation at our recently-acquired Otter Tail plant completed during the third quarter. During the three months ended September 30, 2011, we sold 32.7 million pounds of corn oil.

Agribusiness Segment

The table below presents key operating data within our agribusiness segment for the periods indicated:

 

     Three Months Ended
September 30,
 
     2011      2010  

Grain sold
(thousands of bushels)

     24,320         18,966   

Fertilizer sold
(tons)

     790         385   

Our agribusiness segment had an increase of $45.6 million in revenues, an increase of $2.2 million in gross profit, and an increase in operating income of $1.7 million for the three months ended September 30, 2011 compared to the same period in 2010. Revenue and gross profit increased primarily due to additional volumes of grain and fertilizer sold and increases in average grain commodity prices. Total grain sold increased by 5.4 million bushels and total fertilizer sold increased by 405 tons between the two periods. The increase in operating income was primarily due to increased sales volumes partially offset by an increase in selling, general and administrative expenses due to the expanded scope of our operations. The agribusiness segment’s quarterly performance fluctuates on a seasonal basis with generally stronger results expected in the second and fourth quarters each year.

Marketing and Distribution Segment

Revenues in our marketing and distribution segment increased by $406.8 million for the three months ended September 30, 2011 compared to the same period in 2010. The increase in revenues was primarily due to an increase in commodity prices as well as quantities of ethanol and distillers grains marketed. Ethanol revenues and distillers grains revenues within the marketing and distribution segment increased by $350.8 million and $38.8 million, respectively. The remainder of the increase in revenue is attributable to sales of corn oil produced by our corn oil production segment. During the quarter ended September 30, 2011, we sold 32.7 million pounds of corn oil. We sold 252.5 million gallons of ethanol within the marketing and distribution segment during the quarter ended September 30, 2011 compared to 222.0 million gallons sold during the

 

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same period in 2010 and experienced an increase in revenue per gallon due to higher prices. The increase in ethanol volumes is due to the expanded production of our own plants as a result of efficiency improvements and production from the recently acquired plants partially offset by a decrease in marketing and distribution for third-party ethanol producers of 25.2 million gallons.

Gross profit and operating income for the marketing and distribution segment decreased $1.2 million and $1.3 million, respectively, for the three months ended September 30, 2011 compared to the same period in 2010. The decreases in gross profit and operating income were due primarily to lower profits realized from ethanol and distillers grains trading positions.

Intersegment Eliminations

Intersegment eliminations of revenues increased $343.7 million for the three months ended September 30, 2011 compared to the same period in 2010 due to increases of $277.0 million, $35.7 million and $15.1 million in ethanol, distillers grains and corn oil, respectively, sold from our ethanol production and corn oil segments to our marketing and distribution segment. In addition, corn sales from our agribusiness segment increased $15.7 million between the periods. These increases are a result of the expanded scope of our operations and higher commodity prices.

Corporate Activities

Operating income was impacted by an increase in operating expenses for corporate activities of $1.3 million for the three months ended September 30, 2011 compared to the same period in 2010, primarily due to an increase in general and administrative expenses and personnel costs related to expanded operations.

Income Taxes

We record income tax expense during interim periods based on our best estimate of the annual effective tax rate. Income tax expense for the three months ended September 30, 2011 and 2010 was $7.0 million and $3.1 million, respectively. The effective tax rate (calculated as the ratio of income tax expense to income before income taxes) was approximately 36% and 29% for the third quarter of 2011 and 2010, respectively. The effective tax rates for each period reflect the release of a portion of valuation allowances provided against certain of our deferred tax assets, primarily federal and state net operating losses and tax credits.

Nine Months Ended September 30, 2011 Compared to the Nine Months Ended September 30, 2010

Consolidated Results

Revenues increased $1.3 billion for the nine months ended September 30, 2011 compared to the same period in 2010 as a result of acquired operations and changes in commodity prices. We acquired agribusiness operations in western Tennessee in April 2010 and our Lakota and Riga ethanol plants in October 2010. Also, in the first quarter of 2011, we acquired the Otter Tail ethanol plant. Gross profit increased $19.3 million when comparing the nine months ended September 30, 2011 with the nine months ended September 30, 2010. Gross profit increases in the corn oil production, agribusiness and market and distribution segments were partially offset by a decrease in gross profit in the ethanol production segment. Operating income increased $7.5 million in the nine months ended September 30, 2011 compared to the same period in 2010. In addition to the factors identified above, selling, general and administrative expenses increased by $11.8 million for the nine months ended September 30, 2011 compared to the same period in 2010 due to the expanded scope of our operations.

Income before taxes was also affected by an increase in interest expense of $10.0 million due to debt issued to finance the acquisitions and the $90.0 million convertible notes issued in November 2010. Income tax expense of $14.2 million and $10.0 million for the nine months ended September 30, 2011 and 2010, respectively, was favorably impacted by the release of a portion of valuation allowances against certain deferred tax assets, established in prior years due to the uncertainty of realization.

The following discussion of segment results provides greater detail on period to period results.

 

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Ethanol Production Segment

The table below presents key operating data within our ethanol production segment for the periods indicated:

 

     Nine Months Ended
September 30,
 
     2011      2010  

Ethanol sold
(thousands of gallons)

     540,638         382,783   

Distillers grains sold
(thousands of equivalent dried tons)

     1,536         1,099   

Corn consumed
(thousands of bushels)

     191,032         137,358   

Revenues for the ethanol production segment increased $857.1 million for the nine months ended September 30, 2011 compared to the same period in 2010. Revenues for the nine months ended September 30, 2011, included production from our Lakota and Riga ethanol plants which were acquired in October 2010 as well as production from our Otter Tail ethanol plant, which was acquired in late March 2011. The Lakota, Riga and Otter Tail plants contributed $433.9 million in combined revenues for the nine months ended September 30, 2011. The remaining increase in revenues was due to increased volume from production efficiencies at our other ethanol plants and increases in ethanol and distillers grains prices.

Cost of goods sold in the ethanol production segment increased $863.6 million for the nine months ended September 30, 2011 compared to the same period in 2010. The increase was due primarily to the consumption of 53.7 million additional bushels of corn and a 70.8% increase in the average cost per bushel during the first nine months of 2011 compared to the same period in 2010. The volume increase was due to three full quarters of production at our Lakota and Riga plants and two quarters of production at our Otter Tail plant. Gross profit for the ethanol production segment decreased by $6.5 million for the nine months ended September 30, 2011 compared to the same period in 2010 due to the factors listed above.

Operating income for the segment, decreased $10.3 million for the nine months ended September 30, 2011 compared to the same period in 2010 due in large part to the factors discussed above. In addition, depreciation and amortization expense for the ethanol production segment was $32.0 million during the nine months ended September 30, 2011 compared to $23.0 million during the same period in 2010.

Corn Oil Production Segment

We initiated corn oil production in the fourth quarter of 2010. By September 30, 2011, we had deployed corn oil extraction technology at all nine of our ethanol plants with the last implementation at our recently-acquired Otter Tail plant completed during the third quarter of 2011. During the nine months ended September 30, 2011, we sold 64.3 million pounds of corn oil.

Agribusiness Segment

The table below presents key operating data within our agribusiness segment for the periods indicated:

 

     Nine Months Ended
September 30,
 
     2011      2010  

Grain sold
(thousands of bushels)

     51,639         36,715   

Fertilizer sold
(tons)

     33,801         33,607   

 

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Our agribusiness segment had an increase of $180.0 million in revenues, an increase of $5.5 million in gross profit, and an increased operating income of $2.6 million for the nine months ended September 30, 2011 compared to the same period in 2010. Revenue, gross profit and operating income increased primarily due to additional volumes from agribusiness locations in Iowa and the agribusiness operations acquired in western Tennessee in April 2010 and increases in average grain prices. Total grain sold increased by 14.9 million bushels and total fertilizer sold increased by 194 tons between the two periods. The Tennessee agribusiness operations contributed $194.4 million in revenue for the nine months ended September 30, 2011 compared with $64.6 million included in our operations for the nine months ended September 30, 2010. The agribusiness segment’s quarterly performance fluctuates on a seasonal basis with generally stronger results expected in the second and fourth quarters each year.

Marketing and Distribution Segment

Marketing and distribution revenues increased $1,093.7 million for the nine months ended September 30, 2011 compared to the same period in 2010. The increase in revenues was primarily due to an increase in ethanol revenues of $960.3 million and an increase in distillers grains revenues of $103.2 million. The remainder of the increase in revenue is attributable to sales of corn oil, which we began producing in October 2010. During the first nine months of 2011, we sold 64.3 million pounds of corn oil. We sold 786.1 million gallons of ethanol within the marketing and distribution segment during the nine months ended September 30, 2011 compared to 650.9 million gallons sold during the same period in 2010 and experienced an increase in revenue per gallon of ethanol due to higher prices. The increase in ethanol volumes is due to the expanded production of our own plants as a result of efficiency improvements and additional capacity from recently acquired operations. Marketing and distribution volumes from third-party ethanol producers decreased when comparing the nine months ended September 30, 2011 to the same period in 2010.

Gross profit and operating income for the marketing and distribution segment increased $1.7 million and $22 thousand, respectively, for the nine months ended September 30, 2011 compared to the same period in 2010. The increases in gross profit and operating income were due primarily to increased ethanol and distillers grains prices and volumes sold and the production of corn oil.

Intersegment Eliminations

Intersegment eliminations of revenues increased $906.6 million for the nine months ended September 30, 2011 compared to the same period in 2010 due to an increase of $715.4 million, $87.7 million and $28.9 million in ethanol, distillers grains and corn oil, respectively, sold from our ethanol production and corn oil segments to our marketing and distribution segment. In addition, corn sales from our agribusiness segment to our ethanol production segment increased $74.5 million between the periods.

Corporate Activities

Operating income was impacted by an increase in operating expenses for corporate activities of $3.4 million for the nine months ended September 30, 2011 compared to the same period in 2010, primarily due to an increase in general and administrative expenses and personnel costs related to expanded operations.

Income Taxes

We record income tax expense during interim periods based on our best estimate of the annual effective tax rate. Income tax expense for the nine-month periods ended September 30, 2011 and 2010 was $14.2 million and $10.0 million, respectively. The effective tax rate (calculated as the ratio of income tax expense to income before income taxes) was approximately 36% and 24% for the first nine months of 2011 and 2010, respectively. The effective tax rates for each period reflect the release of a portion of valuation allowances provided against certain of our deferred tax assets, primarily federal and state net operating losses and tax credits.

EBITDA

Management uses earnings before interest, income taxes, noncontrolling interests, depreciation and amortization, or EBITDA, to measure our financial performance and to internally manage our businesses. Management believes that EBITDA provides useful information to investors as a measure of comparison with peer and other companies. EBITDA should not be considered an alternative to, or more meaningful than, net income or cash flow as determined in accordance with generally accepted accounting principles. EBITDA calculations may vary from company to company. Accordingly, our computation of EBITDA may not be comparable with a similarly titled measure of another company. The following sets forth the reconciliation of net income to EBITDA for the periods indicated (in thousands):

 

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     Three Months Ended September 30,      Nine Months Ended September 30,  
     2011     2010      2011     2010  

Net income attributable to Green Plains

   $ 12,429      $ 7,366       $ 25,152      $ 31,627   

Net income (loss) attributable to noncontrolling interests

     (28     49         (200     163   

Interest expense

     9,440        6,544         27,438        17,452   

Income taxes

     6,979        3,082         14,191        9,989   

Depreciation and amortization

     12,811        9,103         36,848        26,383   
  

 

 

   

 

 

    

 

 

   

 

 

 

EBITDA

   $ 41,631      $ 26,144       $ 103,429      $ 85,614   
  

 

 

   

 

 

    

 

 

   

 

 

 

Liquidity and Capital Resources

On September 30, 2011, we had $154.4 million in cash and equivalents, comprised of $56.6 million held at our parent company and the remainder at our subsidiaries. We also had up to an additional $102.7 million available at our subsidiaries under revolving credit agreements, subject to borrowing base restrictions or other specified lending conditions at September 30, 2011. Funds held at our subsidiaries are generally required for their ongoing operational needs. Further, distributions from our subsidiaries are restricted pursuant to these loan agreements. At September 30, 2011, there were approximately $527.2 million of net assets at our subsidiaries that were not available to be transferred to the parent company in the form of dividends, loans or advances due to restrictions contained in the credit facilities of these subsidiaries.

We incurred capital expenditures of $35.5 million in the first nine months of 2011 primarily for the installation of corn oil extraction facilities and expansions of grain storage capacity. Capital spending for the remainder of 2011 is expected to be approximately $6.5 million, including construction of grain storage expansion at our Otter Tail ethanol plant, expected to be completed in early 2012. The remainder of our capital spending primarily relates to other recurring capital expenditures in the ordinary course of business. We believe available borrowings under our credit facilities and cash provided by operating activities will be sufficient to support our working capital, capital expenditures and debt service requirements for the foreseeable future.

On August 15, 2011, we entered into two short-term inventory financing arrangements with a financial institution. Under the terms of the financing agreements, we sold quantities of grain totaling $10.0 million, issued warehouse receipts to the financial institution and simultaneously entered into agreements to repurchase the grain in future periods. The agreements mature in January and February of 2012. We have accounted for the agreements as short-term notes rather than sales, and have recorded our repurchase obligation at fair value at the end of each period. At September 30, 2011, the grain inventory and short-term notes payable were valued at $8.8 million.

Net cash provided by operating activities was $15.9 million for the nine months ended September 30, 2011 compared to $20.6 million for the same period in 2010. Cash provided by operating activities for the nine months ended September 30, 2011 was affected by increases in accounts receivable and derivative financial instruments and decreases in accounts payable, accrued liabilities and amounts prepaid by customers, offset by a decrease in grain inventory held for sale. Net cash used by investing activities was $44.8 million for the nine months ended September 30, 2011, primarily due to the acquisitions of our Otter Tail ethanol plant and the additional grain storage under construction and purchases of property and equipment. Net cash used by financing activities was $86.5 million for the nine months ended September 30, 2011 due to the repayment of debt and $14.2 million in cash outflows for the repurchase of treasury stock in the third quarter of 2011. Green Plains Trade and Green Plains Grain utilize revolving credit facilities to finance working capital requirements. These facilities are frequently drawn upon and repaid resulting in significant cash movements that are reflected on a gross basis within financing activities as proceeds from and payments on short-term notes payable and other borrowings. In addition, we made scheduled principal payments and $13.1 million in free cash flow payments for a total of $160.7 million in debt reduction on our term debt facilities and long-term revolving credit facilities, offset by advances of $110.1 million from long-term revolving credit facilities, during the nine months ended September 30, 2011.

Our business is highly impacted by commodity prices, including prices for corn, ethanol, distillers grains and natural gas. We attempt to reduce the market risk associated with fluctuations in commodity prices through the use of derivative financial instruments. Sudden changes in commodity prices may require cash deposits with brokers, or margin calls. Depending on our open derivative positions, we may require significant liquidity with little advanced notice to meet margin calls. We continuously monitor our exposure to margin calls and believe that we will continue to maintain adequate liquidity to cover

 

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such margin calls from operating results and borrowings. Recent increases in grain and ethanol prices and our expanded grain handling capacity have led to more frequent and larger margin calls. Accordingly, in October 2011, Green Plains Grain entered into a new $195 million revolving credit facility and a new $30 million amortizing term loan that provide our agribusiness operations with additional working capital funding. The revolving credit facility includes an accordion feature whereby amounts available under the facility may be increased by up to $55.0 million of new lender commitments upon agent approval. Outstanding amounts under the prior $100 million revolving facilities and the $20 million term loan were repaid

We were in compliance with our debt covenants at September 30, 2011. Based upon our current forecasts, we believe we will maintain compliance at each of our subsidiaries for the upcoming twelve months, or if necessary have sufficient liquidity available on a consolidated basis to resolve a subsidiary’s noncompliance; however, no obligation exists to provide such liquidity for a subsidiary’s compliance. No assurance can be provided that actual operating results will approximate our forecasts or that we will inject the necessary capital into a subsidiary to maintain compliance with its respective covenants. In the event actual results differ significantly from our forecasts and a subsidiary is unable to comply with its respective debt covenants, the subsidiary’s lenders may determine that an event of default has occurred. Upon the occurrence of an event of default, and following notice, the lenders may terminate any commitment and declare the entire unpaid balance due and payable.

We believe that we have sufficient working capital for our existing operations. However, we can provide no assurance that we will be able to secure additional funding for our future operations. A sustained period of unprofitable operations may strain our liquidity and make it difficult to maintain compliance with our financing arrangements. While we may seek additional sources of working capital in response, we can provide no assurance that we will be able to secure this funding if necessary. We may sell additional equity or borrow additional amounts to improve or preserve our liquidity; expand our ethanol plants; build additional or acquire existing ethanol plants; or build additional or acquire existing agribusiness and ethanol distribution facilities. We can provide no assurance that we will be able to secure the funding necessary for these additional projects or for additional working capital needs at reasonable terms, if at all.

Debt

For additional information related to our debt, see Note 8 – Debt included herein as part of the Notes to Consolidated Financial Statements.

Ethanol Production Segment

Each of our ethanol production segment subsidiaries have credit facilities with lender groups that provide for term and revolving term loans to finance construction and operation of the production facilities.

The Green Plains Bluffton loan is comprised of a $70.0 million amortizing term loan and a $20.0 million revolving term loan. At September 30, 2011, $49.8 million related to the term loan was outstanding, along with the entire revolving term loan. The term loan requires monthly principal payments of approximately $0.6 million. The loans mature on November 19, 2013.

The Green Plains Central City loan is comprised of a $55.0 million amortizing term loan and a $30.5 million revolving term loan as well as a statused revolving credit supplement of up to $11.0 million. At September 30, 2011, $47.8 million related to the term loan was outstanding, along with $28.6 million on the revolving term loan and $10.1 million on the revolver. The term loan requires monthly payments of $0.6 million. The term loan and the revolving term loan mature on July 1, 2016 and the revolver matures on June 29, 2012 with an option to renew.

The Green Plains Holdings II loan is comprised of a $34.1 million amortizing term loan, a $42.6 million revolving term loan and a $15.0 million revolving line of credit loan. At September 30, 2011, $29.4 million was outstanding on the term loan, along with $38.4 million on the revolving term loan and $15.0 million on the revolving line of credit loan. The term loan requires quarterly principal payments of $1.5 million. The revolving term loan requires semi-annual principal payments of approximately $2.7 million. The amortizing term loan will mature on January 1, 2015. The revolving term loan will mature on April 1, 2016. The revolving line of credit will mature on April 30, 2013.

The Green Plains Obion loan is comprised of a $60.0 million amortizing term loan and a revolving term loan of $37.4 million. At September 30, 2011, $28.1 million related to the term loan and $36.2 million on the revolving term loan was outstanding. The term loan requires quarterly principal payments of $2.4 million. The term loan matures on August 20, 2014 and the revolving term loan matures on September 1, 2018.

 

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The Green Plains Ord loan is comprised of a $25.0 million amortizing term loan and a $13.0 million revolving term loan as well as a statused revolving credit supplement of up to $5.0 million. At September 30, 2011, $21.9 million related to the term loan was outstanding, $12.2 million on the revolving term loan, along with $3.3 million on the revolver. The term loan requires monthly payments of $0.3 million. The term loan and the revolving term loan mature on July 1, 2016 and the revolver matures on June 29, 2012 with an option to renew.

The Green Plains Otter Tail loan is comprised of a $30.3 million amortizing term loan, a $4.7 million revolver and a $19.2 million note payable. At September 30, 2011, $28.5 million related to the term loan, $4.7 million on the revolver and $18.9 million on the note payable were outstanding. The term loan requires monthly principal and interest payments of $0.5 million and the note payable requires monthly principal payments of $0.3 million beginning October 1, 2014. The term loan matures on September 1, 2018 and the revolver matures on March 23, 2012.

The Green Plains Shenandoah loan is comprised of a $30.0 million amortizing term loan and a $17.0 million revolving term loan. At September 30, 2011, $7.3 million related to the term loan was outstanding along with the entire $17.0 million on the revolving term loan. The term loan requires quarterly principal payments of $1.2 million. The term loan matures on May 20, 2014 and the revolving term loan matures on November 1, 2017.

The Green Plains Superior loan is comprised of a $40.0 million amortizing term loan and a $10.0 million revolving term loan. At September 30, 2011, $22.1 million related to the term loan was outstanding, along with the entire $10.0 million on the revolving term loan. The term loan requires quarterly principal payments of $1.375 million. The term loan matures on July 20, 2015 and the revolving term loan matures on July 1, 2017.

Each term loan, except for the Green Plains Holdings II and Green Plains Otter Tail agreements, has a provision that requires us to make annual special payments equal to a percentage ranging from 50% to 75% of the available free cash flow from the related entity’s operations (as defined in the respective loan agreements), subject to certain limitations. During the nine months ended September 30, 2011, $13.1 million was paid under these requirements.

With certain exceptions, the revolving term loans within this segment are generally available for advances throughout the life of the commitment. Interest-only payments are due each month on all revolving term facilities until the final maturity date, with the exception of the Green Plains Obion loan, which requires additional semi-annual payments of $4.675 million beginning March 1, 2015.

The term loans and revolving term loans bear interest at LIBOR plus 1.5% to 4.50% or lender-established prime rates. Some have established a floor on the underlying LIBOR index. In some cases, the lender may allow us to elect to pay interest at a fixed interest rate to be determined. As security for the loans, the lenders received a first-position lien on all personal property and real estate owned by the respective entity borrowing the funds, including an assignment of all contracts and rights pertinent to construction and on-going operations of the plant. Additionally, debt facilities within Green Plains Central City and Green Plains Ord are cross-collateralized. These borrowing entities are also required to maintain certain financial and non-financial covenants during the terms of the loans.

Green Plains Bluffton also received $22.0 million in Subordinate Solid Waste Disposal Facility Revenue Bond funds from the city of Bluffton, Indiana, of which $19.1 million remained outstanding at September 30, 2011. The revenue bond requires: semi-annual principal and interest payments of approximately $1.5 million during the period commencing on March 1, 2010 through March 1, 2019; and a final principal and interest payment of $3.745 million on September 1, 2019. The revenue bond bears interest at 7.50% per annum.

Agribusiness Segment

The Green Plains Grain loan, as amended on May 31, 2011, is comprised of a $20.0 million amortizing term loan, a $45.0 million revolving term loan, a $20.0 million seasonal revolver and a $35.0 million bulge seasonal revolver. The term loan expires on August 1, 2013 and the remainder of the bulge seasonal revolver, the revolving term loan and the seasonal revolver expire on November 1, 2011. Payments of $0.5 million under the term loan are due on the first business day of each calendar quarter, with any remaining amount payable at the expiration of the loan term. The loans bear interest at three-month LIBOR plus 4.25% on the term loan, LIBOR plus 3.5% on the revolving term loan, and one-month LIBOR plus 3.75% on the seasonal revolver, all subject to an interest rate floor of 4.5%. Loan proceeds are used primarily for working capital purposes. At September 30, 2011, $17.5 million on the term loan and $9.4 million on the various revolving loans were outstanding. As security for the loans, the lender received a first-position lien on real estate, equipment, inventory, and accounts receivable owned by Green Plains Grain. In October 2011, Green Plains Grain entered into a new $30.0 million amortizing term loan

 

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and a new $195.0 million revolving credit facility that provide our agribusiness operations with additional working capital funding. Outstanding amounts under the prior $20.0 million term loan and the $100.0 million revolving facilities were repaid.

On August 15, 2011, we entered into two short-term inventory financing arrangements with a financial institution. Under the terms of the financing agreements, we sold quantities of grain totaling $10.0 million, issued warehouse receipts to the financial institution and simultaneously entered into agreements to repurchase the grain in future periods. The agreements mature in January and February of 2012. We have accounted for the agreements as short-term notes, rather than sales, and have recorded our repurchase obligation at fair value at the end of each period. At September 30, 2011, grain inventory and the short-term note payable were valued at $8.8 million.

Marketing and Distribution Segment

The Green Plains Trade loan is comprised of a senior secured revolving credit facility of up to $70.0 million, subject to a borrowing base of 85% of eligible receivables. At September 30, 2011, $61.2 million on the revolving credit facility was outstanding. The revolving credit facility expires on March 31, 2014 and bears interest at the lender’s commercial floating rate plus 2.5% or LIBOR plus 3.5%. As security for the loan, the lender received a first-position lien on accounts receivable, inventory and other collateral owned by Green Plains Trade.

Corporate Activities

We also have $90.0 million of 5.75% Convertible Senior Notes due 2015. The Notes represent senior, unsecured obligations, with interest payable on May 1 and November 1 of each year. The Notes may be converted into shares of common stock and cash in lieu of fractional shares of the common stock based on a conversion rate initially equal to 69.7788 shares of the common stock per $1,000 principal amount of Notes, which is equal to an initial conversion price of $14.33 per share. The conversion rate is subject to adjustment upon the occurrence of specified events. We may redeem for cash all, but not less than all, of the Notes at any time on and after November 1, 2013, if the last reported sale price of our common stock equals or exceeds 140% of the applicable conversion price for a specified time period, at a redemption price equal to 100% of the principal amount of the Notes, plus accrued and unpaid interest.

On September 16, 2011, we signed a promissory note in the amount of $14.0 million to a subsidiary of NTR plc. The amount represents the remaining balance due on the Company’s repurchase of common stock. The balance and interest charges, if any, are due to December 15, 2011.

 

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Contractual Obligations

Our contractual obligations as of September 30, 2011 were as follows (in thousands):

 

     Payments Due By Period  

Contractual Obligations

   Total      Less than 1
year
     1-3 years      3-5 years      More than
5 years
 

Long-term debt obligations (1)

   $ 655,722       $  145,591       $  166,630       $  213,029       $  130,472   

Interest and fees on debt obligations (2)

     101,741         29,153         43,060         24,732         4,796   

Operating lease obligations (3)

     55,238         17,017         24,123         10,963         3,135   

Deferred tax liabilities

     47,726         —           —           —           47,726   

Purchase obligations

              

Forward grain purchase contracts (4)

     293,202         284,152         9,050         —           —     

Other commodity purchase contracts (5)

     39,100         39,100         —           —           —     

Other

     8,892         8,774         118         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   $ 1,201,621       $ 523,787       $ 242,981       $ 248,724       $ 186,129   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes the current portion of long-term debt and excludes the discount on long-term debt of $322 thousand.
(2) Interest amounts are calculated over the terms of the loans using current interest rates, assuming scheduled principle and interest amounts are paid pursuant to the debt agreements. Includes administrative and/or commitment fees on debt obligations.
(3) Operating lease costs are primarily for railcars and office space.
(4) Purchase contracts represent index-priced and fixed-price contracts. Index purchase contracts are valued at current quarter-end prices.
(5) Includes fixed-price ethanol, dried distillers grains and natural gas purchase contracts.

Ite m 3. Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to various market risks, including changes in commodity prices and interest rates. Market risk is the potential loss arising from adverse changes in market rates and prices. In the ordinary course of business, we enter into various types of transactions involving financial instruments to manage and reduce the impact of changes in commodity prices and interest rates. At this time, we do not expect to have exposure to foreign currency risk as we expect to conduct all of our business in U.S. dollars.

Interest Rate Risk

We are exposed to market risk from changes in interest rates. Exposure to interest rate risk results primarily from holding term and revolving loans that bear variable interest rates. Specifically, we had $678.2 million outstanding in debt as of September 30, 2011, $452.7 million of which was variable-rate in nature. Interest rates on our variable-rate debt are determined based upon the market interest rate of either the lender’s prime rate or LIBOR, as applicable. A 10% change in interest rates would affect our net income by approximately $1.9 million per year in the aggregate. Other details of our outstanding debt are discussed in the notes to the consolidated financial statements included as a part of this report.

Commodity Price Risk

We produce ethanol, distillers grains and corn oil from corn and our business is sensitive to changes in the prices of each of these commodities. The price of corn is subject to fluctuations due to unpredictable factors such as weather; corn planted and harvested acreage; changes in national and global supply and demand; and government programs and policies. We use natural gas in the ethanol production process and, as a result, our business is also sensitive to changes in the price of natural gas. The price of natural gas is influenced by such weather factors as extreme heat or cold in the summer and winter, or other natural events like hurricanes in the spring, summer and fall. Other natural gas price factors include North American exploration and production, and the amount of natural gas in underground storage during both the injection and withdrawal seasons. Ethanol prices are sensitive to world crude-oil supply and demand; crude-oil refining capacity and utilization; government regulation; and consumer demand for alternative fuels. Distillers grains prices are sensitive to various demand factors such as numbers of livestock on feed, prices for feed alternatives, and supply factors, primarily production by ethanol plants and other sources.

 

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We attempt to reduce the market risk associated with fluctuations in the price of corn, natural gas, distillers grains, corn oil and ethanol by employing a variety of risk management and economic hedging strategies. Strategies include the use of forward fixed-price physical contracts and derivative financial instruments, such as futures and options executed on the Chicago Board of Trade and/or the New York Mercantile Exchange.

We focus on locking in operating margins based on a model that continually monitors market prices of corn, natural gas and other input costs against prices for ethanol, distillers grains and corn oil at each of our production facilities. We create offsetting positions by using a combination of forward fixed-price physical purchases and sales contracts and derivative financial instruments. As a result of this approach, we frequently have gains on derivative financial instruments that are conversely offset by losses on forward fixed-price physical contracts or inventories and vice versa. In our ethanol production segment, gains and losses on derivative financial instruments are recognized each period in operating results while corresponding gains and losses on physical contracts are generally designated as normal purchases or normal sales contracts and are not recognized until quantities are delivered or utilized in production. For cash flow hedges, any ineffectiveness is recognized in current period results, while other unrealized gains and losses are reflected in accumulated other comprehensive income until gains and losses from the underlying hedged transaction are realized. In the event that it becomes probable that a forecasted transaction will not occur, we would discontinue cash flow hedge treatment, which would affect earnings. During the nine months ended September 30, 2011, revenues and cost of goods sold included a net loss and net gain from derivative financial instruments of $30.2 million and $22.4 million, respectively. To the extent the net gains or losses from settled derivative instruments are related to hedging current period production, they are generally offset by physical commodity purchases or sales resulting in the realization of the intended operating margins. However, our results of operations are impacted when there is a mismatch of gains or losses associated with the change in fair value of derivative instruments at the reporting period when the physical commodity purchase or sales has not yet occurred since they are designated as a normal purchase or normal sale.

In our agribusiness segment, inventory positions, physical purchase and sale contracts, and financial derivatives are marked to market with gains and losses included in results of operations. The market value of derivative financial instruments such as exchange-traded futures and options has a high, but not perfect, correlation to the underlying market value of grain inventories and related purchase and sale contracts.

Ethanol Production Segment

A sensitivity analysis has been prepared to estimate our ethanol production segment exposure to ethanol, corn, distillers grains and natural gas price risk. Market risk related to these factors is estimated as the potential change in net income resulting from hypothetical 10% changes in prices of our expected corn and natural gas requirements, and ethanol and distillers grains output for a one-year period from September 30, 2011. This analysis includes the impact of risk management activities that result from our use of fixed-price purchase and sale contracts and derivatives. The results of this analysis, which may differ from actual results, are as follows (in thousands):

 

Commodity

   Estimated Total
Volume
Requirements for
the Next 12 Months
   Unit of
Measure
   Net Income Effect
of Approximate
10% Change
in Price
 

Ethanol

   740,000    Gallons    $ 82,449   

Corn

   265,000    Bushels    $ 77,960   

Distillers grains

       2,100    Tons (1)    $ 20,022   

Natural gas

     20,513    MMBTU (2)    $ 4,024   

 

(1) Distillers grains quantities are stated on an equivalent dried ton basis.
(2) Millions of British Thermal Units

Corn Oil Production Segment

A sensitivity analysis has been prepared to estimate our corn oil production segment exposure to corn oil price risk. Market risk related to these factors is estimated as the potential change in net income resulting from hypothetical 10% changes in prices of our expected corn oil output for a one-year period from September 30, 2011. This analysis includes the impact of risk management activities that result from our use of fixed-price sale contracts. Market risk at September 30, 2011, based on the estimated net income effect resulting from a hypothetical 10% change in such prices, was approximately $2.1 million.

 

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Agribusiness Segment

The availability and price of agricultural commodities are subject to wide fluctuations due to unpredictable factors such as weather, plantings, foreign and domestic government farm programs and policies, changes in global demand created by population changes and changes in standards of living, and global production of similar and competitive crops. To reduce price risk caused by market fluctuations in purchase and sale commitments for grain and grain held in inventory, we enter into exchange-traded futures and options contracts that function as economic hedges. The market value of exchange-traded futures and options used for economic hedging has a high, but not perfect correlation, to the underlying market value of grain inventories and related purchase and sale contracts. The less correlated portion of inventory and purchase and sale contract market value, known as basis, is much less volatile than the overall market value of exchange-traded futures and tends to follow historical patterns. We manage this less volatile risk by constantly monitoring our position relative to the price changes in the market. In addition, inventory values are affected by the month-to-month spread relationships in the regulated futures markets, as we carry inventories over time. These spread relationships are also less volatile than the overall market value and tend to follow historical patterns, but also represent a risk that cannot be directly offset. Our accounting policy for our futures and options, as well as the underlying inventory positions and purchase and sale contracts, is to mark them to the market and include gains and losses in the consolidated statement of operations in sales and merchandising revenues.

A sensitivity analysis has been prepared to estimate agribusiness segment exposure to market risk of our commodity position (exclusive of basis risk). Our daily net commodity position consists of inventories related to purchase and sale contracts and exchange-traded contracts. The fair value of our position, which is a summation of the fair values calculated for each commodity by valuing each net position at quoted futures market prices, is approximately $83.0 thousand at September 30, 2011. Market risk at that date, based on the estimated net income effect resulting from a hypothetical 10% change in such prices, was approximately $11.3 thousand.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, or Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial disclosure.

As of the end of the period covered by this report, our management carried out an evaluation, under the supervision of and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. These disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial disclosure. Based upon that evaluation, our management, including our Chief Executive Officer and the Chief Financial Officer, concluded that our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining effective internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our consolidated financial statements for external purposes in accordance with generally accepted accounting principles. In the third quarter of 2011, we finalized the implementation of process and information system enhancements in our Iowa grain operations that are reported as part of the agribusiness segment. These process and information systems enhancements resulted in modifications to internal controls over the sales, customer service, inventory management and accounts payable processes related to grain handling. There were no other material changes in our internal control over financial reporting that occurred during the period covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

In April 2011, Aventine Renewable Energy, Inc. filed a complaint in the United States Bankruptcy Court for the District of Delaware in connection with its Chapter 11 bankruptcy naming as defendants Green Plains Renewable Energy, Inc., Green Plains Obion LLC, Green Plains Bluffton LLC, Green Plains VBV LLC and Green Plains Trade Group LLC. This action alleges $24.4 million of damages from preferential transfers or, in the alternative, $28.4 million of damages from fraudulent transfers under an ethanol marketing agreement and an unspecified amount of damages for a continuing breach of a termination agreement related to rail cars. We are unable to predict the outcome of these matters at this time, and any views formed as to the viability of these claims or the financial exposure which could result may change as the matters proceed through their course. We intend to defend these claims vigorously.

Item 1A. Risk Factors.

Our investors should consider the risks that could affect us and our business as set forth in Part I, Item 1A, “Risk Factors” of our annual report on Form 10-K for the year ended December 31, 2010, as amended. Although we have attempted to discuss key factors, our investors need to be aware that other risks may prove to be important in the future. New risks may emerge at any time and we cannot predict such risks or estimate the extent to which they may affect our financial performance. Investors should also consider the discussion of risks and the other information included in this quarterly report on Form 10-Q, including Cautionary Information Regarding Forward-Looking Information, which is included in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The following risk factor should be considered in conjunction with the other information included in, or incorporated by reference in, this quarterly report on Form 10-Q.

We may fail to realize the anticipated benefits of our joint venture to commercialize algae production.

We have 35% ownership in a joint venture that is focused on developing technology to grow and harvest algae, which consume carbon dioxide, in commercially viable quantities. The algae produced have the potential to be used for advanced bio-fuel production, high quality animal feed, or as biomass for energy production, but our current primary focus is on efficiently growing, and developing primary markets for, algae on a large scale. We believe this technology has specific applications with facilities, including ethanol plants that emit carbon dioxide. We may fail to realize the expected benefits of capturing carbon dioxide to grow and harvest algae as acceptable production rates, operating costs, capital requirements and product market prices may not be achieved.

The following risk factor, which modifies a previously-filed risk factor, should be considered in conjunction with the other information included in, or incorporated by reference in, this quarterly report on Form 10-Q.

The ethanol industry is highly dependent on government usage mandates affecting ethanol production and favorable tax benefits for ethanol blending and any changes to such regulation could adversely affect the market for ethanol and our results of operations.

The domestic market for ethanol is largely dictated by federal mandates for blending ethanol with gasoline. The RFS mandate level for 2011 of 12.6 billion gallons approximates current domestic production levels. Future demand will be largely dependent upon the economic incentives to blend based upon the relative value of gasoline versus ethanol, taking into consideration the blender’s credit and the RFS. Any significant increase in production capacity beyond the RFS level might have an adverse impact on ethanol prices. Additionally, the RFS mandate with respect to ethanol derived from corn could be reduced or waived entirely. A reduction or waiver of the RFS mandate could adversely affect the prices of ethanol and our future performance. The RFS Flexibility Act was introduced on October 5, 2011 to reduce or eliminate the volumes of renewable fuel use required by RFS based upon corn stocks-to-use ratios. We believe the RFS is a significant component of national energy policy that reduces dependence on foreign oil by the United States. As a result, we believe that the RFS Flexibility Act will not garner sufficient support to be enacted.

The volumetric ethanol excise tax credit, or VEETC, is currently set to expire on December 31, 2011. Referred to as the blender’s credit, VEETC provides companies with a tax credit to blend ethanol with gasoline. The Food, Conservation and Energy Act of 2008, or the 2008 Farm Bill, amended the amount of tax credit provided under VEETC to 45 cents per gallon of pure ethanol and 38 cents per gallon for E85, a blended motor fuel containing 85% ethanol and 15% gasoline. On June 16,

 

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2011, a legislative proposal to end the VEETC was passed by the U.S. Senate. We expect the VEETC will be allowed to expire at December 31, 2011.

Federal law mandates the use of oxygenated gasoline. If these mandates are repealed, the market for domestic ethanol would be diminished significantly. Additionally, flexible-fuel vehicles receive preferential treatment in meeting corporate average fuel economy, or CAFE, standards. However, high blend ethanol fuels such as E85 result in lower fuel efficiencies. Absent the CAFE preferences, it may be unlikely that auto manufacturers would build flexible-fuel vehicles. Any change in these CAFE preferences could reduce the growth of E85 markets and result in lower ethanol prices.

To the extent that such federal or state laws are modified, the demand for ethanol may be reduced, which could negatively and materially affect our ability to operate profitably.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Employees surrender shares upon the vesting of restricted stock grants to satisfy payroll tax withholding obligations. No restricted stock vested during the third quarter of 2011 and therefore no shares were surrendered. On September 9, 2011, we repurchased 3.5 million shares of common stock at a price of $8.00 per share from a subsidiary of NTR plc, which is a principal shareholder. We do not have a share repurchase program and do not intend to retire the repurchased shares.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. (Removed and Reserved).

Item 5. Other Information.

None.

 

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Item 6. Exhibits.

EXHIBIT INDEX

 

Exhibit
No.

  

Description

10.1    Fifth Amendment dated July 28, 2011 to Second Amended and Restated Credit Agreement dated April 19, 2010 by and among Green Plains Grain Company LLC, Green Plains Grain Company TN LLC, and First National Bank of Omaha (Incorporated by reference to Exhibit 10.4 of the Company’s Quarterly Report on Form 10-Q, filed August 3, 2011)
10.2    Stock Repurchase Agreement between Greenstar North America Holdings Inc. and Green Plains Renewable Energy, Inc. (Incorporated by reference to Exhibit 10.1 if the Company’s Current Report on Form 8-K, filed September 14, 2011)
10.3    Master Loan Agreement, dated September 28, 2011, by and among Green Plains Shenandoah LLC and Farm Credit Services of America, FLCA
10.4    Revolving Term Loan Supplement, dated September 28, 2011, by and among Green Plains Shenandoah LLC and Farm Credit Services of America, FLCA
10.5    Multiple Advance Term Loan Supplement, dated September 28, 2011, by and among Green Plains Shenandoah LLC and Farm Credit Services of America, FLCA
10.6    Amended and Restated Master Loan Agreement, dated September 30, 2011, by and among Green Plains Bluffton LLC and AgStar Financial Services, PCA
31.1    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002
31.2    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002
32.1    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101    The following information from Green Plains Renewable Energy, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2011, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheet, (ii) the Consolidated Statement of Operations, (iii) the Consolidated Statement of Cash Flows, and (iv) the Notes to Consolidated Financial Statements (tagged as blocks of text).

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

   

GREEN PLAINS RENEWABLE ENERGY, INC.

(Registrant)

Date: November 1, 2011     By:  

  /s/ Todd A. Becker        

      Todd A. Becker
      President and Chief Executive Officer
      (Principal Executive Officer)

Date: November 1, 2011

    By:  

  /s/ Jerry L. Peters         

      Jerry L. Peters
      Chief Financial Officer
      (Principal Financial Officer)

 

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Exhibit 10.3

MASTER LOAN AGREEMENT

THIS MASTER LOAN AGREEMENT is entered into as of September 28, 2011, between FARM CREDIT SERVICES OF AMERICA, FLCA (“Farm Credit”) and GREEN PLAINS SHENANDOAH LLC , Shenandoah, Iowa (the “Company”).

BACKGROUND

Farm Credit and the Company are parties to a Master Loan Agreement dated August 26, 2010 (the “Existing Agreement”). Pursuant to the terms of the Existing Agreement, the parties entered into one or more Supplements thereto. Farm Credit and the Company now desire to amend and restate the Existing Agreement and to apply such new agreement to the existing Supplements, as well as any new Supplements that may be issued thereunder. For that reason and for valuable consideration (the receipt and sufficiency of which are hereby acknowledged), Farm Credit and the Company hereby agree that the Existing Agreement shall be amended and restated to read as follows:

SECTION 1. Supplements. In the event the Company desires to borrow from Farm Credit and Farm Credit is willing to lend to the Company, or in the event Farm Credit and the Company desire to consolidate any existing loans hereunder, the parties will enter into a Supplement to this agreement (a “Supplement”). Each Supplement will set forth the amount of the loan, the purpose of the loan, the interest rate or rate options applicable to that loan, the repayment terms of the loan, and any other terms and conditions applicable to that particular loan. Each loan will be governed by the terms and conditions contained in this agreement and in the Supplement relating to the loan. As of the date hereof, the following Supplements are outstanding hereunder and shall be governed by the terms and conditions hereof: (A) the Multiple Advance Term Loan Supplement dated September 28, 2011 and numbered RI0355T01D; and (B) the Revolving Term Loan Supplement dated September 28, 2011 and numbered RI0355T02C.

SECTION 2. Sale of Participation Interests and Appointment of Administrative Agent. The Company acknowledges that concurrent with the execution of this Master Loan Agreement and related Supplements, Farm Credit is selling a participation interest in this Master Loan Agreement and Supplements executed concurrently herewith to CoBank, ACB (“CoBank”) (up to a 100% interest). Pursuant to an Administrative Agency Agreement dated January 30, 2006, (the “Agency Agreement”), Farm Credit and CoBank appointed CoBank to act as Administrative Agent (“Agent”) to act in place of Farm Credit hereunder and under the Supplements and any security documents to be executed thereunder. All funds to be advanced hereunder shall be made by Agent, all repayments by the Company hereunder shall be made to Agent, and all notices to be made to Farm Credit hereunder shall be made to Agent. Agent shall be solely responsible for the administration of this agreement, the Supplements and the security documents to be executed by the Company thereunder and the enforcement of all rights and remedies of Farm Credit hereunder and thereunder. Company acknowledges the appointment of the Agent and consents to such appointment.

SECTION 3. Availability. Loans will be made available on any day on which Agent and the Federal Reserve Banks are open for business upon the telephonic or written request of the Company. Requests for loans must be received no later than 12:00 Noon Company’s local time on the date the loan is desired. Loans will be made available by wire transfer of immediately available funds to such account or accounts as may be authorized by the Company. The Company shall furnish to Agent a duly completed and executed copy of a CoBank Delegation and Wire and Electronic Transfer Authorization Form, and Agent shall be entitled to rely on (and shall incur no liability to the Company in acting on) any request or direction furnished in accordance with the terms thereof.


SECTION 4. Repayment. The Company’s obligation to repay each loan shall be evidenced by the promissory note set forth in the Supplement relating to that loan or by such replacement note as Agent shall require. Agent shall maintain a record of all loans, the interest accrued thereon, and all payments made with respect thereto, and such record shall, absent proof of manifest error, be conclusive evidence of the outstanding principal and interest on the loans. All payments shall be made by wire transfer of immediately available funds, by check, or by automated clearing house or other similar cash handling processes as specified by separate agreement between the Company and Agent. Wire transfers shall be made to ABA No. 307088754 for advice to and credit of Agent (or to such other account as Agent may direct by notice). The Company shall give Agent telephonic notice no later than 12:00 Noon Company’s local time of its intent to pay by wire and funds received after 3:00 p.m. Company’s local time shall be credited on the next business day. Checks shall be mailed to CoBank, Department 167, Denver, Colorado 80291-0167 (or to such other place as Agent may direct by notice). Credit for payment by check will not be given until the later of: (A) the day on which Agent receives immediately available funds; or (B) the next business day after receipt of the check.

SECTION 5. Capitalization. The Company agrees to purchase voting (Class D) or non-voting (Class E) stock in Farm Credit Services of America, ACA (currently a minimum of $1,000.00 worth of stock consisting of at least 200 shares of $5.00 par value stock) as required under the policy of Farm Credit at the time of acquisition. Farm Credit policy may change from time to time. Farm Credit shall have a first lien on the stock for payment of any liability of the Company to Farm Credit. Said stock shall be owned as follows:

Owner Name: Green Plains Shenandoah LLC                     SSN/TIN: 26-1905438

The Company authorizes and appoints the following to act on behalf of all owners, to vote the Class D stock, and to accept, receive and receipt for any dividends declared on the stock:

Jerry Peters, voter

SECTION 6. Security. The Company’s obligations under this agreement, all Supplements (whenever executed), and all instruments and documents contemplated hereby or thereby, shall be secured by a statutory first lien on all equity which the Company may now own or hereafter acquire in Farm Credit. In addition, the Company’s obligations under each Supplement (whenever executed) and this agreement shall be secured by a first lien (subject only to exceptions approved in writing by Agent) pursuant to all security agreements, mortgages, and deeds of trust executed by the Company in favor of Farm Credit, whether now existing or hereafter entered into. As additional security for those obligations: (A) the Company agrees to grant to Farm Credit, by means of such instruments and documents as Agent shall reasonably require a first priority lien on such of its other assets, whether now existing or hereafter acquired, as Agent may from time to time require; and (B) the Company agrees to grant to Farm Credit, by means of such instruments and documents as Agent shall reasonably require, a first priority lien on all realty which the Company may from time to time acquire after the date hereof. Farm Credit may at its discretion assign collateral to the Agent under the Agency Agreement.

SECTION 7. Conditions Precedent.

(A) Conditions to Initial Supplement. Farm Credit’s obligation to extend credit under the initial Supplement hereto is subject to the conditions precedent that Agent receive, in form and content satisfactory to Agent, each of the following:


This Agreement, Etc. A duly executed copy of this agreement and all instruments and documents contemplated hereby.

(B) Conditions to Each Supplement. Farm Credit’s obligation to extend credit under each Supplement, including the initial Supplement, is subject to the conditions precedent that Agent receive, in form and content satisfactory to Agent, each of the following:

(1) Supplement. A duly executed copy of the Supplement and all instruments and documents contemplated thereby.

(2) Evidence of Authority. Such certified board resolutions, certificates of incumbency, and other evidence that Agent may require that the Supplement, all instruments and documents executed in connection therewith, and, in the case of initial Supplement hereto, this agreement and all instruments and documents executed in connection herewith, have been duly authorized and executed.

(3) Fees and Other Charges. All fees and other charges provided for herein or in the Supplement.

(4) Evidence of Perfection, Etc. Such evidence as Agent may require that Farm Credit has a duly perfected first priority lien on all security for the Company’s obligations, and that the Company is in compliance with Section 9(D) hereof.

(C) Conditions to Each Loan. Farm Credit’s obligation under each Supplement to make any loan to the Company thereunder is subject to the condition that no “Event of Default” (as defined in Section 12 hereof) or event which with the giving of notice and/or the passage of time would become an Event of Default hereunder (a “Potential Default”), shall have occurred and be continuing.

SECTION 8. Representations and Warranties.

(A) This Agreement. The Company represents and warrants to Farm Credit and Agent that as of the date of this agreement:

(1) Compliance. The Company and, to the extent contemplated hereunder, each “Subsidiary” (as defined below), is in compliance with all of the terms of this agreement, and no Event of Default or Potential Default exists hereunder.

(2) Subsidiaries. The Company has no “Subsidiary(ies)” (as defined below). For purposes hereof, a “Subsidiary” shall mean a corporation of which shares of stock having ordinary voting power to elect a majority of the board of directors or other managers of such corporation are owned, directly or indirectly, by the Company.

(B) Each Supplement. The execution by the Company of each Supplement hereto shall constitute a representation and warranty to Agent that:

(1) Applications. Each representation and warranty and all information set forth in any application or other documents submitted in connection with, or to induce Farm Credit to enter into, such Supplement, is correct in all material respects as of the date of the Supplement.


(2) Conflicting Agreements, Etc. This agreement, the Supplements, and all security and other instruments and documents relating hereto and thereto (collectively, at any time, the “Loan Documents”), do not conflict with, or require the consent of any party to, any other agreement to which the Company is a party or by which it or its property may be bound or affected, and do not conflict with any provision of the Company’s bylaws, articles of incorporation, or other organizational documents.

(3) Compliance. The Company and, to the extent contemplated hereunder, each Subsidiary, is in compliance with all of the terms of the Loan Documents (including, without limitation, Section 9(A) of this agreement on eligibility to borrow from Farm Credit).

(4) Binding Agreement. The Loan Documents create legal, valid, and binding obligations of the Company which are enforceable in accordance with their terms, except to the extent that enforcement may be limited by applicable bankruptcy, insolvency, or similar laws affecting creditors’ rights generally.

SECTION 9. Affirmative Covenants. Unless otherwise agreed to in writing by Agent while this agreement is in effect, the Company agrees to and with respect to Subsections 9(B) through 9(G) hereof, agrees to cause each Subsidiary to:

(A) Eligibility. Maintain its status as an entity eligible to borrow from Farm Credit pursuant to the terms of the Farm Credit Act of 1971, as amended, 12 USC 2001, et seq.

(B) Corporate Existence, Licenses, Etc. (1) Preserve and keep in full force and effect its existence and good standing in the jurisdiction of its incorporation or formation; (2) qualify and remain qualified to transact business in all jurisdictions where such qualification is required; and (3) obtain and maintain all licenses, certificates, permits, authorizations, approvals, and the like which are material to the conduct of its business or required by law, rule, regulation, ordinance, code, order, and the like (collectively, “Laws”).

(C) Compliance with Laws. Comply in all material respects with all applicable Laws, including, without limitation, all Laws relating to environmental protection and any patron or member investment program that it may have. In addition, the Company agrees to cause all persons occupying or present on any of its properties, and to cause each Subsidiary to cause all persons occupying or present on any of its properties, to comply in all material respects with all environmental protection Laws.

(D) Insurance. Maintain insurance with insurance companies or associations acceptable to Agent in such amounts and covering such risks as are usually carried by companies engaged in the same or similar business and similarly situated, and make such increases in the type or amount of coverage as Agent may request. All such policies insuring any collateral for the Company’s obligations to Farm Credit shall have mortgagee or lender loss payable clauses or endorsements in form and content acceptable to Agent. At Agent’s request, all policies (or such other proof of compliance with this Subsection as may be satisfactory to Agent) shall be delivered to Agent.

(E) Property Maintenance. Maintain all of its property that is necessary to or useful in the proper conduct of its business in good working condition, ordinary wear and tear excepted.

(F) Books and Records. Keep adequate records and books of account in which complete entries will be made in accordance with generally accepted accounting principles (“GAAP”) consistently applied.

(G) Inspection. Permit Agent or its agents, upon reasonable notice and during normal business hours or at such other times as the parties may agree, to examine its properties, books, and records, and to discuss its affairs, finances, and accounts, with its respective officers, directors, employees, and independent certified public accountants.


(H) Reports and Notices. Furnish to Agent:

(1) Annual Financial Statements. As soon as available, but in no event more than 90 days after the end of each fiscal year of Green Plains Renewable Energy, Inc. (“Green Plains”) occurring during the term hereof, annual consolidated and consolidating financial statements of Green Plains and its consolidated Subsidiaries, including Green Plains Shenandoah LLC, prepared in accordance with GAAP consistently applied. Such financial statements shall: (a) be audited by independent certified public accountants selected by the Company and acceptable to Agent; (b) be accompanied by a report of such accountants containing an opinion thereon acceptable to Agent; (c) be prepared in reasonable detail and in comparative form; and (d) include a balance sheet, a statement of income, a statement of retained earnings, a statement of cash flows, and all notes and schedules relating thereto, and be accompanied by written communication from the auditor identifying passed audit adjustments and material deficiencies pertaining to the Company, as may reasonably be requested by Agent.

(2) Interim Financial Statements. As soon as available, but in no event more than 30 days after the end of each month, a consolidated balance sheet of the Company and its consolidated Subsidiaries, if any, as of the end of such month, a consolidated statement of income for the Company and its consolidated Subsidiaries, if any, for such period and for the period year to date, and such other interim statements as Agent may reasonably request, all prepared in reasonable detail and in comparative form in accordance with GAAP consistently applied and, if required by written notice from Agent, certified by an authorized officer or employee of the Company acceptable to Agent.

(3) Notice of Default. Promptly after becoming aware thereof, notice of the occurrence of an Event of Default or a Potential Default.

(4) Notice of Non-Environmental Litigation. Promptly after the commencement thereof, notice of the commencement of all actions, suits, or proceedings before any court, arbitrator, or governmental department, commission, board, bureau, agency, or instrumentality affecting the Company or any Subsidiary which, if determined adversely to the Company or any such Subsidiary, could have a material adverse effect on the financial condition, properties, profits, or operations of the Company or any such Subsidiary.

(5) Notice of Environmental Litigation, Etc. Promptly after receipt thereof, notice of the receipt of all pleadings, orders, complaints, indictments, or any other communication alleging a condition that may require the Company or any Subsidiary to undertake or to contribute to a cleanup or other response under environmental Laws, or which seek penalties, damages, injunctive relief, or criminal sanctions related to alleged violations of such Laws, or which claim personal injury or property damage to any person as a result of environmental factors or conditions.

(6) Formation Documents. Intentionally Omitted.

(7) Budgets. As soon as available, but in no event more than 90 days after the end of any fiscal year of the Company occurring during the term hereof, copies of the Company’s board-approved annual budgets and forecasts of operations and capital expenditures.

(8) Compliance Certificates. As soon as available, but in no event more than 30 days after the end of each fiscal quarter of the Company, a certificate of an officer or employee of the Company acceptable to Agent setting forth calculations showing compliance with each of the financial covenants that require compliance at the end of the period for which the statements are being furnished.


(9) Other Information. Such other information regarding the condition or operations, financial or otherwise, of the Company or any Subsidiary as Agent may from time to time reasonably request, including but not limited to copies of all pleadings, notices, and communications referred to in Subsections 9(H)(4) and (5) above.

SECTION 10. Negative Covenants. Unless otherwise agreed to in writing by Agent, while this agreement is in effect the Company will not:

(A) Borrowings. Create, incur, assume, or allow to exist, directly or indirectly, any indebtedness or liability for borrowed money (including trade or bankers’ acceptances), letters of credit, or the deferred purchase price of property or services (including capitalized leases), except for: (1) debt to Farm Credit; (2) accounts payable to trade creditors incurred in the ordinary course of business; (3) current operating liabilities (other than for borrowed money) incurred in the ordinary course of business; (4) debt of the Company to miscellaneous creditors in an amount not to exceed $1,600,000.00, on terms and conditions satisfactory to Agent; and (5) unsecured indebtedness of the Company to Green Plains in an amount not to exceed $10,000,000.00, and all extensions, renewals, and refinancings thereof, provided that such indebtedness is documented with terms and conditions satisfactory to Agent.

(B) Liens. Create, incur, assume, or allow to exist any mortgage, deed of trust, pledge, lien (including the lien of an attachment, judgment, or execution), security interest, or other encumbrance of any kind upon any of its property, real or personal (collectively, “Liens”). The forgoing restrictions shall not apply to: (1) Liens in favor of Farm Credit; (2) Liens for taxes, assessments, or governmental charges that are not past due; (3) Liens and deposits under workers’ compensation, unemployment insurance, and social security Laws; (4) Liens and deposits to secure the performance of bids, tenders, contracts (other than contracts for the payment of money), and like obligations arising in the ordinary course of business as conducted on the date hereof; (5) Liens imposed by Law in favor of mechanics, materialmen, warehousemen, and like persons that secure obligations that are not past due; (6) easements, rights-of-way, restrictions, and other similar encumbrances which, in the aggregate, do not materially interfere with the occupation, use, and enjoyment of the property or assets encumbered thereby in the normal course of its business or materially impair the value of the property subject thereto; (7) Liens in favor of miscellaneous creditors to secure indebtedness permitted hereunder, with priority of such Liens acceptable to Agent; and (8) purchase money security interests in favor of Danisco US Inc.

(C) Mergers, Acquisitions, Etc. Merge or consolidate with any other entity or acquire all or a material part of the assets of any person or entity, or form or create any new Subsidiary or affiliate, or commence operations under any other name, organization, or entity, including any joint venture.

(D) Transfer of Assets. Sell, transfer, lease, or otherwise dispose of any of its assets, except in the ordinary course of business.

(E) Loans and Investments. Make any loan or advance to any person or entity, or purchase any capital stock, obligations or other securities of, make any capital contribution to, or otherwise invest in any person or entity, or form or create any partnerships or joint ventures except trade credit extended in the ordinary course of business.

(F) Contingent Liabilities. Assume, guarantee, become liable as a surety, endorse, contingently agree to purchase, or otherwise be or become liable, directly or indirectly (including, but not limited to, by means of a maintenance agreement, an asset or stock purchase agreement, or any other agreement designed to ensure any creditor against loss), for or on account of the obligation of any person or entity, except by the endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of the Company’s business.


(G) Change in Business. Engage in any business activities or operations substantially different from or unrelated to the Company’s present business activities or operations.

(H) Dividends, Etc. Declare or pay any dividends, or make any distribution of assets to the member/owners, or purchase, redeem, retire or otherwise acquire for value any of its equity, or allocate or otherwise set apart any sum for any of the foregoing, except that a distribution may be accrued to the Company’s members/owners of up to 40% of the year-to-date net profit before taxes (according to GAAP) and payment of this accrued amount may be made after the end of each fiscal quarter, provided that the Company has been and will remain in compliance with all loan covenants, terms and conditions. Furthermore, after receipt of the audited financial statements for the pertinent fiscal year, and provided that the required “Free Cash Flow” payment has been made to the Agent for such fiscal year as provided in the Multiple Advance Term Loan Supplement dated September 28, 2011 and numbered RI0355T01D and any renewals, restatements and amendments thereof, additional distributions may be made in excess of the quarterly distribution(s) so long as aggregate distributions do not exceed 100% of the net profit before taxes for such fiscal year, and the Company will remain in compliance with all other loan covenant, terms and conditions.

(I) Capital Expenditures. During any fiscal year of the Company, expend, in the aggregate, more than $1,250,000.00 for the acquisition of fixed or capital assets (including all obligations under capitalized leases authorized under the terms of this agreement, but excluding obligations under operating leases). Notwithstanding the foregoing, additional expenditures over $1,250,000.00 are allowed so long as they are 100% financed by certified cash injections of equity capital.

(J) Leases. Create, incur, assume, or permit to exist any obligation as lessee under operating leases or leases which should be capitalized in accordance with GAAP for the rental or hire of any real or personal property except railcar leases with a lease term of not more than five years for up to and including 100 railroad cars, under terms and conditions acceptable to Agent, and except leases which do not in the aggregate require the Company to make scheduled payments to the lessors in any fiscal year of the Company in excess of $100,000.00.

(K) Changes to Operating Agreements, Etc. Amend or otherwise make any material changes to the Company’s Articles of Organization, Operating Agreement, management contracts and ethanol and/or distillers grain marketing contracts.

SECTION 11. Financial Covenants. Unless otherwise agreed to in writing, while this agreement is in effect:

(A) Working Capital. The Company will have at the end of each period for which financial statements are required to be furnished pursuant to Section 9(H) hereof an excess of current assets over current liabilities (both as determined in accordance with GAAP consistently applied) of not less than $6,000,000.00, except that in determining current assets, any amount available under the Revolving Term Loan Supplement (less the amount that would be considered a current liability under GAAP if fully advanced) hereto may be included.

(B) Net Worth. The Company will have at the end of each period for which financial statements are required to be furnished pursuant to Section 9(H) hereof an excess of total assets over total liabilities (both as determined in accordance with GAAP consistently applied) of not less than $54,000,000.00.


(C) Debt Service Coverage Ratio. The Company will have at the end of each fiscal year of the Company a “Debt Service Coverage Ratio” (as defined below) for such year of not less than 1.25 to 1.00. For purposes hereof, the term “Debt Service Coverage Ratio” shall mean the following (all as calculated for the most current year end in accordance with GAAP consistently applied): (1) net income (before taxes), plus depreciation and amortization; plus new equity injection(s) (except equity used to fund capital expenditures); divided by $4,800,000.00.

SECTION 12. Events of Default. Each of the following shall constitute an “Event of Default” under this agreement:

(A) Payment Default. The Company should fail to make any payment to Agent, or to purchase any equity in, Farm Credit within ten (10) days of when due.

(B) Representations and Warranties. Any representation or warranty made or deemed made by the Company herein or in any Supplement, application, agreement, certificate, or other document related to or furnished in connection with this agreement or any Supplement, shall prove to have been false or misleading in any material respect on or as of the date made or deemed made.

(C) Certain Affirmative Covenants. The Company or, to the extent required hereunder, any Subsidiary should fail to perform or comply with Sections 9(A) through 9(H)(2), 9(H)(7) through 9(H)(8) or any reporting covenant set forth in any Supplement hereto, and such failure continues for 15 days after written notice thereof shall have been delivered by Agent to the Company.

(D) Other Covenants and Agreements. The Company or, to the extent required hereunder, any Subsidiary should fail to perform or comply with any other covenant or agreement contained herein or in any other Loan Document or shall use the proceeds of any loan for an unauthorized purpose, provided, however, that the Company shall have thirty (30) days after the date of any required financial statement issued under Section 9(H)(1) or 9(H)(2) above that is timely received by the Agent to cure any shortfall under a Financial Covenant set forth in Section 11 above.

(E) Cross-Default. The Company should, after any applicable grace period, breach or be in default under the terms of any other agreement between the Company and Farm Credit, or between the Company and any affiliate of Farm Credit, including without limitation Farm Credit Leasing Services Corporation.

(F) Other Indebtedness. The Company or any Subsidiary should fail to pay when due any indebtedness to any other person or entity for borrowed money or any long-term obligation for the deferred purchase price of property (including any capitalized lease), or any other event occurs which, under any agreement or instrument relating to such indebtedness or obligation, has the effect of accelerating or permitting the acceleration of such indebtedness or obligation, whether or not such indebtedness or obligation is actually accelerated or the right to accelerate is conditioned on the giving of notice, the passage of time, or otherwise.

(G) Judgments. A judgment, decree, or order for the payment of money shall be rendered against the Company or any Subsidiary and either: (1) enforcement proceedings shall have been commenced; (2) a Lien prohibited under Section 10(B) hereof shall have been obtained; or (3) such judgment, decree, or order shall continue unsatisfied and in effect for a period of 20 consecutive days without being vacated, discharged, satisfied, or stayed pending appeal.


(H) Insolvency, Etc. The Company or any Subsidiary shall: (1) become insolvent or shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they come due; or (2) suspend its business operations or a material part thereof or make an assignment for the benefit of creditors; or (3) apply for, consent to, or acquiesce in the appointment of a trustee, receiver, or other custodian for it or any of its property or, in the absence of such application, consent, or acquiescence, a trustee, receiver, or other custodian is so appointed; or (4) commence or have commenced against it any proceeding under any bankruptcy, reorganization, arrangement, readjustment of debt, dissolution, or liquidation Law of any jurisdiction.

(I) Material Adverse Change. Any material adverse change occurs, as reasonably determined by Agent, in the Company’s financial condition, results of operation, or ability to perform its obligations hereunder or under any instrument or document contemplated hereby.

(J) Revocation of Guaranty. Any guaranty, suretyship, subordination agreement, maintenance agreement, or other agreement furnished in connection with the Company’s obligations hereunder and under any Supplement shall, at any time, cease to be in full force and effect, or shall be revoked or declared null and void, or the validity or enforceability thereof shall be contested by the guarantor, surety or other maker thereof (the “Guarantor”), or the Guarantor shall deny any further liability or obligation thereunder, or shall fail to perform its obligations thereunder, or any representation or warranty set forth therein shall be breached, or the Guarantor shall breach or be in default under the terms of any other agreement with Agent (including any loan agreement or security agreement), or a default set forth in Subsections (F) through (H) hereof shall occur with respect to the Guarantor.

SECTION 13. Remedies. Upon the occurrence and during the continuance of an Event of Default or any Potential Default, Farm Credit shall have no obligation to continue to extend credit to the Company and may discontinue doing so at any time without prior notice. For all purposes hereof, the term “Potential Default” means the occurrence of any event which, with the passage of time or the giving of notice or both would become an Event of Default. In addition, upon the occurrence and during the continuance of any Event of Default, Farm Credit or Agent may, upon notice to the Company, terminate any commitment and declare the entire unpaid principal balance of the loans, all accrued interest thereon, and all other amounts payable under this agreement, all Supplements, and the other Loan Documents to be immediately due and payable. Upon such a declaration, the unpaid principal balance of the loans and all such other amounts shall become immediately due and payable, without protest, presentment, demand, or further notice of any kind, all of which are hereby expressly waived by the Company. In addition, upon such an acceleration:

(A) Enforcement. Farm Credit or Agent may proceed to protect, exercise, and enforce such rights and remedies as may be provided by this agreement, any other Loan Document or under Law. Each and every one of such rights and remedies shall be cumulative and may be exercised from time to time, and no failure on the part of Farm Credit or Agent to exercise, and no delay in exercising, any right or remedy shall operate as a waiver thereof, and no single or partial exercise of any right or remedy shall preclude any other or future exercise thereof, or the exercise of any other right. Without limiting the foregoing, Agent may, upon the occurrence and during the continuance of any Event of Default, hold and/or set off and apply against the Company’s obligation to Farm Credit the proceeds of any equity in Farm Credit or Agent, any cash collateral held by Farm Credit or Agent, or any balances held by Farm Credit or Agent for the Company’s account (whether or not such balances are then due).

(B) Application of Funds. Agent may apply all payments received by it to the Company’s obligations to Farm Credit in such order and manner as Agent may elect in its sole discretion.


In addition to the rights and remedies set forth above: (1) upon the occurrence and during the continuance of an Event of Default, then at Agent’s option in each instance, the entire indebtedness outstanding hereunder and under all Supplements shall bear interest from the date of such Event of Default until such Event of Default shall have been waived or cured in a manner satisfactory to Agent at 4.00% per annum in excess of the rate(s) of interest that would otherwise be in effect on that loan; and (2) after the maturity of any loan (whether as a result of acceleration or otherwise), the unpaid principal balance of such loan (including without limitation, principal, interest, fees and expenses) shall automatically bear interest at 4.00% per annum in excess of the rate(s) of interest that would otherwise be in effect on that loan. All interest provided for herein shall be payable on demand and shall be calculated on the basis of a year consisting of 360 days.

SECTION 14. Broken Funding Surcharge. Notwithstanding any provision contained in any Supplement giving the Company the right to repay any loan prior to the date it would otherwise be due and payable, the Company agrees to provide three Business Days’ prior written notice for any prepayment of a fixed rate balance and that in the event it repays any fixed rate balance prior to its scheduled due date or prior to the last day of the fixed rate period applicable thereto (whether such payment is made voluntarily, as a result of an acceleration, or otherwise), the Company will pay to Agent a surcharge in an amount equal to the greater of: (A) an amount which would result in Farm Credit, Agent, and all subparticipants being made whole (on a present value basis) for the actual or imputed funding losses incurred by Farm Credit, Agent, and all subparticipants as a result thereof; or (B) $300.00. Notwithstanding the foregoing, in the event any fixed rate balance is repaid as a result of the Company refinancing the loan with another lender or by other means, then in lieu of the foregoing, the Company shall pay to Agent a surcharge in an amount sufficient (on a present value basis) to enable Farm Credit, Agent, and all subparticipants to maintain the yield they would have earned during the fixed rate period on the amount repaid. Such surcharges will be calculated in accordance with methodology established by Farm Credit, Agent, and all subparticipants (a copy of which will be made available to the Company upon request).

SECTION 15. Complete Agreement, Amendments. This agreement, all Supplements, and all other instruments and documents contemplated hereby and thereby, are intended by the parties to be a complete and final expression of their agreement. No amendment, modification, or waiver of any provision hereof or thereof, and no consent to any departure by the Company herefrom or therefrom, shall be effective unless approved by Agent and contained in a writing signed by or on behalf of Agent, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. In the event this agreement is amended or restated, each such amendment or restatement shall be applicable to all Supplements hereto.

SECTION 16. Other Types of Credit. From time to time, Farm Credit may issue letters of credit or extend other types of credit to or for the account of the Company. In the event the parties desire to do so under the terms of this agreement, such extensions of credit may be set forth in any Supplement hereto and this agreement shall be applicable thereto.

SECTION 17. Applicable Law. Without giving effect to the principles of conflict of laws and except to the extent governed by federal law, the Laws of the State of Colorado, without reference to choice of law doctrine, shall govern this agreement, each Supplement and any other Loan Documents for which Colorado is specified as the applicable law, and all disputes and matters between the parties to this agreement, including all disputes and matters whatsoever arising under, in connection with or incident to the lending and/or leasing or other business relationship between the parties, and the rights and obligations of the parties to this agreement or any other Loan Documents by and between the parties for which Colorado is specified as the applicable law.


SECTION 18. Notices. All notices hereunder shall be in writing and shall be deemed to be duly given upon delivery if personally delivered or sent by telegram or facsimile transmission, or three days after mailing if sent by express, certified or registered mail, to the parties at the following addresses (or such other address for a party as shall be specified by like notice):

(Continued on next page)

 

If to Agent, as follows:

 

For general correspondence purposes:

CoBank, ACB

P.O. Box 5110

Denver, Colorado 80217-5110

 

For direct delivery purposes, when desired:

CoBank, ACB

5500 South Quebec Street

Greenwood Village, Colorado 80111-1914

 

Attention: Credit Information Services

Fax No.: (303) 224-6101

 

If to the Company, as follows:

 

Green Plains Shenandoah LLC

450 Regency Parkway

Omaha, Nebraska 68114

 

Attention: Executive Vice President & Treasurer

Fax No.: (402) 884-8776

 

With copy to:

 

Green Plains Shenandoah LLC

450 Regency Parkway

Omaha, Nebraska 68114

 

Attention: General Counsel

SECTION 19. Taxes and Expenses. To the extent allowed by law, the Company agrees to pay all reasonable out-of-pocket costs and expenses (including the fees and expenses of counsel retained or employed by Agent, including expenses of in-house counsel of Agent) incurred by Agent and any participants from Farm Credit in connection with the origination, administration, collection, and enforcement of this agreement and the other Loan Documents, including, without limitation, all costs and expenses incurred in perfecting, maintaining, determining the priority of, and releasing any security for the Company’s obligations to Farm Credit, and any stamp, intangible, transfer, or like tax payable in connection with this agreement or any other Loan Document.

SECTION 20. Effectiveness and Severability. This agreement shall continue in effect until: (A) all indebtedness and obligations of the Company under this agreement, all Supplements, and all other Loan Documents shall have been paid or satisfied; (B) Farm Credit has no commitment to extend credit to or for the account of the Company under any Supplement; and (C) either party sends written notice to the other terminating this agreement. Any provision of this agreement or any other Loan Document which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or thereof.

SECTION 21. Successors and Assigns. This agreement, each Supplement, and the other Loan Documents shall be binding upon and inure to the benefit of the Company and Farm Credit and their respective successors and assigns, except that the Company may not assign or transfer its rights or obligations under this agreement, any Supplement or any other Loan Document without the prior written consent of Agent.

SECTION 22. Participations, Etc. From time to time, Farm Credit may sell to one or more banks, financial institutions, or other lenders a participation in one or more of the loans or other extensions of credit made pursuant to this agreement. However, no such participation shall relieve Farm Credit of any commitment made to the Company hereunder. In connection with the foregoing, Farm Credit may disclose information concerning the Company and its Subsidiaries, if any, to any participant


or prospective participant, provided that such participant or prospective participant agrees to keep such information confidential. Farm Credit agrees that all Loans that are made by Farm Credit and that are retained for its own account or repurchased may be entitled to patronage distributions in accordance with the bylaws of Farm Credit and its practices and procedures related to patronage distribution. Accordingly, all Loans that are included in a sale of participation interest and not retained or repurchased shall not be entitled to patronage distributions from Farm Credit. A sale of a participation interest may include certain voting rights of the participants regarding the loans hereunder (including without limitation the administration, servicing, and enforcement thereof). Farm Credit agrees to give written notification to the Company of any sale of a participation interest.

SECTION 23. Administrative Fee. The Company agrees to pay to Agent on each November 20, for as long as the Company has commitments from Farm Credit, an administrative fee in the amount of $25,000.00.

SECTION 24. Counterpart Signatures. This agreement, each Supplement and any other Loan Document may be executed in any number of counterparts and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original and shall be binding upon all parties and their respective permitted successors and assigns, and all of which taken together shall constitute one and the same agreement.

IN WITNESS WHEREOF, the parties have caused this agreement to be executed by their duly authorized officers as of the date shown above.

 

FARM CREDIT SERVICES OF AMERICA, FLCA     GREEN PLAINS SHENANDOAH LLC
By:   /s/ Kathryn J. Frahm             By:   /s/ Ron B. Gillis

Title:

  VP - Commercial Lender     Title:   EVP Finance, Treasurer

Exhibit 10.4

REVOLVING TERM LOAN SUPPLEMENT

THIS SUPPLEMENT to the Master Loan Agreement dated September 28, 2011 (the “MLA”), is entered into as of September 28, 2011 between FARM CREDIT SERVICES OF AMERICA, FLCA (“Farm Credit”) and GREEN PLAINS SHENANDOAH LLC, Shenandoah, Iowa (the “Company”), and amends and restates the Supplement dated January 30, 2006 and numbered RI0355T02, as previously amended.

SECTION 1. The Revolving Term Loan Commitment. On the terms and conditions set forth in the MLA and this Supplement, Farm Credit agrees to make loans to the Company from the date hereof, up to and including November 1, 2016, in an aggregate principal amount not to exceed, at any one time outstanding, $17,000,000.00 less the amounts scheduled to be repaid during the period set forth below in Section 5 (the “Commitment”). Within the limits of the Commitment, the Company may borrow, repay, and reborrow.

SECTION 2. Purpose. The purpose of the Commitment is to provide working capital to the Company.

SECTION 3. Term. Intentionally Omitted.

SECTION 4. Interest. The Company agrees to pay interest on the unpaid balance of the loan(s) in accordance with one or more of the following interest rate options, as selected by the Company:

(A) One-Month LIBOR Index Rate. At a rate (rounded upward to the nearest 1/100th and adjusted for reserves required on “Eurocurrency Liabilities” [as hereinafter defined] for banks subject to “FRB Regulation D” [as hereinafter defined] or required by any other federal law or regulation) per annum equal at all times to 3.10% above the rate quoted by the British Bankers Association (the “BBA”) at 11:00 a.m. London time for the offering of one (1)-month U.S. dollars deposits, as published by Bloomberg or another major information vendor listed on BBA’s official website on the first “U.S. Banking Day” (as hereinafter defined) in each week, with such rate to change weekly on such day. The rate shall be reset automatically, without the necessity of notice being provided to the Company or any other party, on the first “U.S. Banking Day” of each succeeding week, and each change in the rate shall be applicable to all balances subject to this option. Information about the then-current rate shall be made available upon telephonic request. For purposes hereof: (1) “U.S. Banking Day” shall mean a day on which Agent (as that term is defined in the MLA) is open for business and banks are open for business in New York, New York; (2) “Eurocurrency Liabilities” shall have the me