Green Plains Inc.
Green Plains Renewable Energy, Inc. (Form: 10-Q, Received: 11/01/2012 16:41:36)

 

 

 

 

 

                                                                                                                      

 

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 , 2012

 

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

(402) 884-8700

(Address of principal executive offices, including zip code)

(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.

 

S 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).

S 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 T      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   S No

 

The number of shares of common stock, par value $0.001 per share, outstanding as of October   30 ,   2012 was   29,678,413   shares.

 

 


 

 

TABLE OF CONTENTS

 

 

 

 

 

Page

PART I – FINANCIAL INFORMATION

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets  

2

 

 

 

 

Consolidated Statements of Operations

3

 

 

 

 

Consolidated Statements of Comprehensive Incom e

4

 

 

 

 

Consolidated Statements of Cash Flows  

5

 

 

 

 

Notes to Consolidated Financial Statements  

7

 

 

 

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

45

 

 

 

Item 3.

Defaults Upon Senior Securities

46

 

 

 

Item 4.

Mine Safety Disclosures

46

 

 

 

Item 5.

Other Information

46

 

 

 

Item 6.

Exhibits

47

 

 

 

Signatures  

48

 

 

 

 

1

 


 

 

GREEN PLAINS RENEWABLE ENERGY, INC. AND SUBSIDIARIES

 

  CONSOLIDATED BALANCE SHEETS

 

(in thousands, except share amounts)

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

2012

 

2011

 

(unaudited)

 

 

 

ASSETS

Current assets

 

 

 

 

 

Cash and cash equivalents

$

140,177 

 

$

174,988 

Restricted cash

 

19,573 

 

 

19,619 

Accounts receivable, net of allowances of $488 and $263, respectively

 

102,565 

 

 

106,198 

Inventories

 

241,230 

 

 

229,070 

Prepaid expenses and other

 

15,344 

 

 

14,289 

Deferred income taxes

 

23,030 

 

 

14,828 

Derivative financial instruments

 

42,759 

 

 

17,428 

Total current assets

 

584,678 

 

 

576,420 

Property and equipment, net of accumulated depreciation of

 

 

 

 

 

$165,132 and $125,798, respectively

 

761,276 

 

 

776,789 

Goodwill

 

40,877 

 

 

40,877 

Other assets

 

29,703 

 

 

26,742 

Total assets

$

1,416,534 

 

$

1,420,828 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities

 

 

 

 

 

Accounts payable

$

147,426 

 

$

172,328 

Accrued and other liabilities

 

33,508 

 

 

29,825 

Unearned revenue

 

4,302 

 

 

15,453 

Short-term notes payable and other borrowings

 

157,914 

 

 

69,599 

Current maturities of long-term debt

 

73,092 

 

 

73,760 

Total current liabilities

 

416,242 

 

 

360,965 

 

 

 

 

 

 

Long-term debt

 

457,991 

 

 

493,407 

Deferred income taxes

 

64,913 

 

 

55,970 

Other liabilities

 

5,069 

 

 

5,129 

Total liabilities

 

944,215 

 

 

915,471 

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

Common stock, $0.001 par value; 75,000,000 shares authorized;

 

 

 

 

 

36,854,628 and 36,413,611 shares issued, and 29,654,628

 

 

 

 

 

and 32,913,611 shares outstanding, respectively

 

37 

 

 

36 

Additional paid-in capital

 

443,746 

 

 

440,469 

Retained earnings

 

74,517 

 

 

95,761 

Accumulated other comprehensive income (loss)

 

19,595 

 

 

(2,953)

Treasury stock, 7,200,000 and 3,500,000 shares, respectively

 

(65,808)

 

 

(28,201)

Total Green Plains stockholders' equity

 

472,087 

 

 

505,112 

Noncontrolling interests

 

232 

 

 

245 

Total stockholders' equity

 

472,319 

 

 

505,357 

Total liabilities and stockholders' equity

$

1,416,534 

 

$

1,420,828 

 

See accompanying notes to the consolidated financial statements.

 

 

2

 


 

 

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,

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

$

947,413 

 

$

957,018 

 

$

2,593,163 

 

$

2,630,921 

Cost of goods sold

 

919,516 

 

 

909,725 

 

 

2,538,363 

 

 

2,510,742 

Gross profit

 

27,897 

 

 

47,293 

 

 

54,800 

 

 

120,179 

Selling, general and administrative expenses

 

19,273 

 

 

18,248 

 

 

58,350 

 

 

53,350 

Operating income (loss)

 

8,624 

 

 

29,045 

 

 

(3,550)

 

 

66,829 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

46 

 

 

59 

 

 

144 

 

 

222 

Interest expense

 

(9,832)

 

 

(9,440)

 

 

(28,741)

 

 

(27,438)

Other, net

 

(448)

 

 

(284)

 

 

(1,859)

 

 

(470)

Total other expense

 

(10,234)

 

 

(9,665)

 

 

(30,456)

 

 

(27,686)

Income (loss) before income taxes

 

(1,610)

 

 

19,380 

 

 

(34,006)

 

 

39,143 

Income tax expense (benefit)

 

(604)

 

 

6,979 

 

 

(12,749)

 

 

14,191 

Net income (loss)

 

(1,006)

 

 

12,401 

 

 

(21,257)

 

 

24,952 

Net loss attributable to noncontrolling interests

 

 

 

28 

 

 

13 

 

 

200 

Net income (loss) attributable to Green Plains

$

(1,002)

 

$

12,429 

 

$

(21,244)

 

$

25,152 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

Income (loss) attributable to Green Plains stockholders - basic

$

(0.03)

 

$

0.35 

 

$

(0.70)

 

$

0.70 

Income (loss) attributable to Green Plains stockholders - diluted

$

(0.03)

 

$

0.32 

 

$

(0.70)

 

$

0.66 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

29,655 

 

 

35,624 

 

 

30,499 

 

 

36,075 

Diluted

 

29,655 

 

 

42,151 

 

 

30,499 

 

 

42,611 

 

 

 

 

 

 

 

 

 

See accompanying notes to the consolidated financial statements.

3

 


 

 

GREEN PLAINS RENEWABLE ENERGY, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

(unaudited and in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

$

(1,006)

 

$

12,401 

 

$

(21,257)

 

$

24,952 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on derivatives arising during period

 

26,497 

 

 

(16,806)

 

 

45,538 

 

 

(33,031)

Reclassification of realized (gains) losses on derivatives

 

(11,297)

 

 

14,950 

 

 

(9,502)

 

 

22,448 

Income tax (expense) benefit related to other comprehensive income (loss)

 

(5,712)

 

 

683 

 

 

(13,488)

 

 

4,052 

Other comprehensive income (loss)

 

9,488 

 

 

(1,173)

 

 

22,548 

 

 

(6,531)

Comprehensive income

 

8,482 

 

 

11,228 

 

 

1,291 

 

 

18,421 

Comprehensive loss attributable to noncontrolling interests

 

 

 

28 

 

 

13 

 

 

200 

Comprehensive income attributable to Green Plains

$

8,486 

 

$

11,256 

 

$

1,304 

 

$

18,621 

 

 

See accompanying notes to the consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4

 


 

 

GREEN PLAINS RENEWABLE ENERGY, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(unaudited and in thousands)

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended
September 30,

 

2012

 

2011

Cash flows from operating activities:

 

 

 

 

 

Net income (loss)

$

(21,257)

 

$

24,952 

Adjustments to reconcile net income (loss) to net cash

 

 

 

 

 

provided (used) by operating activities:

 

 

 

 

 

Depreciation and amortization

 

39,922 

 

 

36,848 

Amortization of debt issuance costs

 

2,314 

 

 

1,703 

Deferred income taxes

 

741 

 

 

10,467 

Stock-based compensation expense

 

3,149 

 

 

2,743 

Undistributed equity in loss of affiliates

 

1,858 

 

 

470 

Allowance for doubtful accounts

 

225 

 

 

122 

Other

 

1,922 

 

 

 -

Changes in operating assets and liabilities before

 

 

 

 

 

effects of business combinations:

 

 

 

 

 

Accounts receivable

 

3,492 

 

 

(31,949)

Inventories

 

(11,297)

 

 

7,210 

Derivative financial instruments

 

(2,858)

 

 

(16,543)

Prepaid expenses and other assets

 

(971)

 

 

(2,324)

Accounts payable and accrued liabilities

 

(21,319)

 

 

(5,994)

Unearned revenues

 

(11,151)

 

 

(12,307)

Other

 

(270)

 

 

550 

Net cash provided (used) by operating activities

 

(15,500)

 

 

15,948 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property and equipment

 

(23,892)

 

 

(35,526)

Acquisition of businesses, net of cash acquired

 

(1,490)

 

 

(8,115)

Other

 

(6,513)

 

 

(1,124)

Net cash used by investing activities

 

(31,895)

 

 

(44,765)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from the issuance of long-term debt

 

53,200 

 

 

110,088 

Payments of principal on long-term debt

 

(87,690)

 

 

(160,732)

Proceeds from short-term borrowings

 

2,457,848 

 

 

2,640,404 

Payments on short-term borrowings

 

(2,400,211)

 

 

(2,648,963)

Payments for repurchase of common stock

 

(10,445)

 

 

(14,201)

Change in restricted cash

 

46 

 

 

(8,724)

Payments of loan fees

 

(306)

 

 

(1,702)

Other

 

142 

 

 

(2,630)

Net cash provided (used) by financing activities

 

12,584 

 

 

(86,460)

 

 

 

 

 

 

Net change in cash and cash equivalents

 

(34,811)

 

 

(115,277)

Cash and cash equivalents, beginning of period

 

174,988 

 

 

233,205 

Cash and cash equivalents, end of period

$

140,177 

 

$

117,928 

 

 

 

 

 

 

Continued on the following page

 

 

 

 

 

 

 

 

5

 


 

 

 

 

 

 

GREEN PLAINS RENEWABLE ENERGY, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(unaudited and in thousands)

 

 

 

 

 

 

 

 

 

 

Continued from the previous page

 

 

 

 

 

 

Nine Months Ended
September 30,

 

2012

 

2011

 

 

 

 

 

 

Supplemental disclosures of cash flow:

 

 

 

 

 

Cash paid for income taxes

$

495 

 

$

955 

Cash paid for interest

$

24,479 

 

$

26,078 

 

 

 

 

 

 

Supplemental noncash investing and financing activities:

 

 

 

 

 

Assets acquired in acquisitions and mergers

$

1,590 

 

$

62,686 

Less: liabilities assumed

 

(100)

 

 

(54,571)

Net assets acquired

$

1,490 

 

$

8,115 

 

 

 

 

 

 

Short-term note payable issued to repurchase common stock

$

27,162 

 

$

14,000 

 

 

 

See accompanying notes to the consolidated financial statements.

6

 


 

 

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 “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. All significant intercompany balances and transactions have been 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 on Form 10-K for the year ended December 31, 2011.

 

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.

 

Description of Business

 

Green Plains is North America’s fourth largest ethanol producer. The Company operates nine ethanol plants with approximately 740 million gallons per year, or mmgy, of total ethanol production capacity. The Company’s in-house marketing business is responsible for the sales, marketing and distribution of all ethanol, distillers grains and corn oil produced at its nine ethanol plants. The Company also markets and distributes ethanol for third-party ethanol producers .   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 625 mmgy of total throughput capacity. The Company is a partner in a joint venture that was formed to commercialize advanced photo-bioreactor technologies for growing and harvesting of algal biomass.

 

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 other commodities by the Company’s marketing business, revenue is recognized when title to the product and risk of loss transfer to an external customer. Revenues related to marketing operations for third parties are recorded on a gross basis as the Company takes title to the product and assumes risk of loss. Unearned revenue is reflected on the consolidated balance sheets 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 biofuel terminal operations, which include ethanol transload and splash blending services, are recognized as these services are rendered.

7

 


 

 

 

The Company routinely enters into fixed-price, physical-delivery ethanol sales agreements. In certain instances, the Company intends to settle the transaction by open market purchases of ethanol rather than by delivery from its own production. These transactions are reported net as a component of revenues. Revenues also include realized gains and losses on related 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. Revenues related to grain merchandising are presented gross in the statements of operations with amounts billed for shipping and handling included in revenues and also as a component of cost of goods sold.   Revenues from grain storage are recognized as services are rendered.

 

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 transfer costs. Corn feedstock costs also include realized gains and losses on related 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 its agribusiness segment’s grain inventories and forward purchase and sales contracts. Exchange-traded futures and options contracts are valued at quoted market prices. Grain 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 fair 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, ethanol and natural gas, 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 in which these hedging activities can themselves result in losses.

 

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 qualify for the normal purchases or normal sales exemption and are expected to be used or sold over a reasonable period in the normal course of

8

 


 

 

business. Any contracts that do not meet the normal purchase or 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 designated 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 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 current assets or other current liabilities at fair value.

 

At times, the Company hedges its exposures to changes in the value of inventor ies and designates certain qualifying derivatives as fair value hedges. The carrying amount of the hedged inventory is adjusted through current period results for changes in the fair value arising from changes in underlying prices. Any ineffectiveness is recognized in current period results to the extent that the change in the fair value of the inventory is not offset by the change in the fair value of the derivative.

 

Recent Accounting Pronouncements

 

Effective January 1, 2012, the Company adopted the third phase of amended guidance in ASC Topic 820, Fair Value Measurements and Disclosures. 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 is not impacted by the additional disclosure requirements as it does not have any recurring Level 3 measurements.

 

Effective January 1, 2012, the Company adopted the amended guidance in ASC Topic 220, Comprehensive Income . This accounting standards update 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. The Company has elected to present net income and other comprehensive income in two separate but consecutive statements. The updated presentation, which has been implemented retroactively for all comparable periods presented, did not impact the Company’s financial position or results of operations.

 

             Effective January 1, 2012, the Company adopted the amended guidance in ASC Topic 350, Intangibles – Goodwill and Other . 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 amended guidance did not impact the Company’s disclosure or reporting requirements.

 

2 .  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.

9

 


 

 

There have been no changes in valuation techniques and inputs used in measuring fair value. 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, 2012

 

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

$

140,177 

 

$

 -

 

$

 -

 

$

140,177 

Restricted cash

 

21,773 

 

 

 -

 

 

 -

 

 

21,773 

Margin deposits

 

16,924 

 

 

 -

 

 

(16,924)

 

 

 -

Inventories carried at market

 

 -

 

 

123,376 

 

 

 -

 

 

123,376 

Unrealized gains on derivatives

 

12,787 

 

 

22,027 

 

 

8,116 

 

 

42,930 

Total assets measured at fair value

$

191,661 

 

$

145,403 

 

$

(8,808)

 

$

328,256 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Unrealized losses on derivatives

$

8,875 

 

$

15,129 

 

$

(8,808)

 

$

15,196 

Inventory financing arrangements

 

 -

 

 

16,237 

 

 

 -

 

 

16,237 

Other

 

70 

 

 

 -

 

 

 -

 

 

70 

Total liabilities measured at fair value

$

8,945 

 

$

31,366 

 

$

(8,808)

 

$

31,503 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at December 31, 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

$

174,988 

 

$

 -

 

$

 -

 

$

174,988 

Restricted cash

 

21,820 

 

 

 -

 

 

 -

 

 

21,820 

Inventories carried at market

 

 -

 

 

112,948 

 

 

 -

 

 

112,948 

Unrealized gains on derivatives

 

15,710 

 

 

6,010 

 

 

(4,292)

 

 

17,428 

Total assets measured at fair value

$

212,518 

 

$

118,958 

 

$

(4,292)

 

$

327,184 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Unrealized losses on derivatives

$

2,828 

 

$

5,287 

 

$

(2,698)

 

$

5,417 

Margin deposits

 

1,594 

 

 

 -

 

 

(1,594)

 

 

 -

Inventory financing arrangements

 

 -

 

 

8,894 

 

 

 -

 

 

8,894 

Other

 

71 

 

 

 -

 

 

 -

 

 

71 

Total liabilities measured at fair value

$

4,493 

 

$

14,181 

 

$

(4,292)

 

$

14,382 

 

The Company believes the fair value s of its debt , accounts receivable and accounts payable approximate book value, which were  $ 689.0 million $ 102.6 million and $ 147.4 million, respectively, at September 30, 2012 and $ 636.8 million $ 106.2 million and $ 172.3 million, respectively, at December 31, 2011.

 

             Although the Company currently does not have any Level 3 financial measurements, the fair values of the tangible assets and goodwill acquired in previous reporting periods 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.

 

 

10

 


 

 

3.  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 logistics services for Company-produced and third-party ethanol, distillers grains, corn oil and other commodities , and the operation of blending and terminaling facilities, 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.

 

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 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,

 

 

2012

 

2011

 

2012

 

2011

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Ethanol production:

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from external customers

 

$

52,982 

 

$

35,077 

 

$

149,115 

 

$

97,377 

Intersegment revenues

 

 

439,917 

 

 

551,987 

 

 

1,268,851 

 

 

1,501,031 

Total segment revenues

 

 

492,899 

 

 

587,064 

 

 

1,417,966 

 

 

1,598,408 

Corn oil production:

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from external customers

 

 

 

 

393 

 

 

518 

 

 

1,464 

Intersegment revenues

 

 

14,530 

 

 

15,115 

 

 

43,003 

 

 

28,886 

Total segment revenues

 

 

14,531 

 

 

15,508 

 

 

43,521 

 

 

30,350 

Agribusiness:

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from external customers

 

 

125,446 

 

 

95,065 

 

 

300,051 

 

 

233,959 

Intersegment revenues

 

 

50,254 

 

 

48,863 

 

 

134,725 

 

 

149,676 

Total segment revenues

 

 

175,700 

 

 

143,928 

 

 

434,776 

 

 

383,635 

Marketing and distribution:

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from external customers

 

 

768,984 

 

 

826,483 

 

 

2,143,479 

 

 

2,298,121 

Intersegment revenues

 

 

111 

 

 

98 

 

 

302 

 

 

375 

Total segment revenues

 

 

769,095 

 

 

826,581 

 

 

2,143,781 

 

 

2,298,496 

Revenues including intersegment activity

 

 

1,452,225 

 

 

1,573,081 

 

 

4,040,044 

 

 

4,310,889 

Intersegment eliminations

 

 

(504,812)

 

 

(616,063)

 

 

(1,446,881)

 

 

(1,679,968)

Revenues as reported

 

$

947,413 

 

$

957,018 

 

$

2,593,163 

 

$

2,630,921 

 

11

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

September 30,

 

Nine Months Ended

September 30,

 

 

2012

 

2011

 

2012

 

2011

Gross profit (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Ethanol production

 

$

(3,701)

 

$

24,846 

 

$

(20,610)

 

$

63,880 

Corn oil production

 

 

7,865 

 

 

9,642 

 

 

25,205 

 

 

18,098 

Agribusiness

 

 

12,513 

 

 

8,223 

 

 

27,357 

 

 

20,425 

Marketing and distribution

 

 

10,980 

 

 

5,069 

 

 

21,769 

 

 

17,332 

Intersegment eliminations

 

 

240 

 

 

(487)

 

 

1,079 

 

 

444 

 

 

$

27,897 

 

$

47,293 

 

$

54,800 

 

$

120,179 

Operating income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Ethanol production

 

$

(7,520)

 

$

20,941 

 

$

(32,435)

 

$

52,184 

Corn oil production

 

 

7,811 

 

 

9,632 

 

 

25,011 

 

 

18,040 

Agribusiness

 

 

5,849 

 

 

2,151 

 

 

8,916 

 

 

3,934 

Marketing and distribution

 

 

7,162 

 

 

1,923 

 

 

10,546 

 

 

7,078 

Intersegment eliminations

 

 

240 

 

 

(481)

 

 

1,113 

 

 

474 

Corporate activities

 

 

(4,918)

 

 

(5,121)

 

 

(16,701)

 

 

(14,881)

 

 

$

8,624 

 

$

29,045 

 

$

(3,550)

 

$

66,829 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

2012

 

2011

 

2012

 

2011

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Ethanol

 

$

672,177 

 

$

732,061 

 

$

1,887,376 

 

$

2,050,683 

Corn oil

 

 

15,255 

 

 

15,508 

 

 

44,041 

 

 

30,350 

Distillers grains

 

 

111,432 

 

 

109,168 

 

 

310,962 

 

 

302,393 

Grain

 

 

113,567 

 

 

84,416 

 

 

252,490 

 

 

189,403 

Agronomy products

 

 

10,294 

 

 

9,027 

 

 

42,612 

 

 

40,174 

Other

 

 

24,688 

 

 

6,838 

 

 

55,682 

 

 

17,918 

 

 

$

947,413 

 

$

957,018 

 

$

2,593,163 

 

$

2,630,921 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

2012

 

2011

Total assets:

 

 

 

 

 

 

Ethanol production

 

$

842,505 

 

$

879,500 

Corn oil production

 

 

24,014 

 

 

24,601 

Agribusiness

 

 

236,010 

 

 

233,201 

Marketing and distribution

 

 

199,589 

 

 

181,466 

Corporate assets

 

 

142,467 

 

 

121,429 

Intersegment eliminations

 

 

(28,051)

 

 

(19,369)

 

 

$

1,416,534 

 

$

1,420,828 

 

 

 

 

 

 

 

12

 


 

 

4.  INVENTORIES

 

Inventories are carried at the lower of cost or market, except grain held for sale, which is valued at market value. During the nine months ended September 30, 2012, the Company recorded a $2.7 million lower of cost or market adjustment in cost of goods sold within the ethanol production segment. The components of inventories are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

2012

 

2011

Finished goods

$

51,622 

 

$

57,882 

Grain held for sale

 

123,376 

 

 

112,948 

Raw materials

 

28,623 

 

 

23,215 

Petroleum & agronomy products held for sale

 

16,252 

 

 

14,206 

Work-in-process

 

11,359 

 

 

11,418 

Supplies and parts

 

9,998 

 

 

9,401 

 

$

241,230 

 

$

229,070 

 

5.  GOODWILL

 

The Company did not have any changes in the total carrying amount of goodwill during the nine months ended September 30, 2012, which was $ 40.9 million. Goodwill of $ 30.3 million is attributable to the ethanol production segment and $ 10.6 million is attributable to the marketing and distribution segment.

 

The Company reviews goodwill for impairment at least annually, as of October 1, or more frequently whenever events or changes in circumstances indicate that impairment may have occurred. In 2012, ethanol production has experienced a compressed commodity margin environment which adversely affected the business climate in which the Company operates. Also, during 2012, the Company experienced a decline in market capitalization as its stock price reached a 52-week low in the third quarter. As a result of these two adverse factors , the Company performed an interim review of goodwill for potential impairment for its ethanol production reporting units as of September 30, 2012 . The Company performs a two-step impairment test to evaluate goodwill. Under the first step, the estimated fair value of the reporting unit is compared with its carrying value (including goodwill). If the estimated fair value of the reporting unit is less than its carrying value, the Company completes a second step to determine the amount of the goodwill impairment that should be recorded. The Company determined the fair value of the applicable ethanol production reporting units using a combination of the income approach (discounted cash flows of future benefit streams) and market approach (market prices from recent comparable sales transactions). Judgments and assumptions related to revenue, operating income, future short-term and long-term growth rates, weighted average cost of capital, interest, capital expenditures, cash flows, and market conditions are inherent in developing the discounted cash flow model. As a result of the interim review, the Company determined that the estimated fair value of its ethanol production reporting unit s substantially exceeded each of their respective carrying values and no goodwill impairment charge was deemed to be   required. The Company will update its goodwill impairment analysis during the fourth quarter of 2012 in connection with its annual impairment testing.

 

 

6.  DERIVATIVE FINANCIAL INSTRUMENTS

 

At September 30, 2012, the Company’s consolidated balance sheet reflects a   deferred gain, net of tax, of $ 19.6 million in accumulated other comprehensive income. The Company expects all of the deferred gains at September 30, 2012 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:

13

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset Derivatives'

 

Liability Derivatives'

 

Fair Value

 

Fair Value

 

September 30,

 

December 31,

 

September 30,

 

December 31,

 

2012

 

2011

 

2012

 

2011

Derivative financial instruments (1)

$

25,834 
(2)

$

19,022 
(3)

$

 -

 

$

 -

Other assets

 

172 

 

 

 

 

 

 

 

 

 

Accrued and other liabilities

 

 -

 

 

 -

 

 

15,007 

 

 

5,280 

Other liabilities

 

 -

 

 

 -

 

 

189 

 

 

137 

Total

$

26,006 

 

$

19,022 

 

$

15,196 

 

$

5,417 

 

( 1 )                Derivative financial instruments as reflected on the balance sheet include a margin deposit asset of $ 16.9 million and a margin deposit liability of $ 1.6 million at September 30, 2012 and December 31, 2011, respectively .

( 2 )                Balance at September 30, 2012, includes $ 8.6 million of net unrealized gains on derivative financial instruments designated as cash flow hedging instruments.

( 3 )      Balance at December 31, 2011, includes $ 12.2 million of net unrealized gains on derivative financial instruments designated as cash flow hedging instruments.

 

 

Refer to Note 2 - 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

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

Designated in a Hedging Relationship

 

2012

 

2011

 

2012

 

2011

Revenue

 

$

(10,190)

 

$

1,535 

 

$

(11,469)

 

$

617 

Cost of goods sold

 

 

(6,255)

 

 

(9,718)

 

 

(10,580)

 

 

(29,831)

Net decrease recognized in earnings before tax

 

$

(16,445)

 

$

(8,183)

 

$

(22,049)

 

$

(29,214)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain (Loss) Due to Ineffectiveness

 

Three Months Ended

September 30,

 

Nine Months Ended

September 30,

of Cash Flow Hedges

 

2012

 

2011

 

2012

 

2011

Revenue

 

$

(22)

 

$

340 

 

$

(10)

 

$

320 

Cost of goods sold

 

 

(405)

 

 

(576)

 

 

(29)

 

 

(1,231)

Net decrease recognized in earnings before tax

 

$

(427)

 

$

(236)

 

$

(39)

 

$

(911)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains (Losses) Reclassified from Accumulated

Other Comprehensive Income (Loss)

 

Three Months Ended September 30,

 

Nine Months Ended

September 30,

into Net Income (Loss)

 

2012

 

2011

 

2012

 

2011

Revenue

 

$

(1,994)

 

$

(9,608)

 

$

1,563 

 

$

(31,097)

Cost of goods sold

 

 

13,291 

 

 

(5,342)

 

 

7,939 

 

 

8,649 

Net increase (decrease) recognized in earnings before tax

 

$

11,297 

 

$

(14,950)

 

$

9,502 

 

$

(22,448)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effective Portion of Cash Flow Hedges Recognized in

 

Three Months Ended

September 30,

 

Nine Months Ended

September 30,

Other Comprehensive Income (Loss)

 

2012

 

2011

 

2012

 

2011

Commodity Contracts

 

$

26,497 

 

$

(16,806)

 

$

45,538 

 

$

(33,031)

 

 

 

 

 

There were no gains or losses due to the discontinuance of cash flow hedge treatment or fair value hedge exposure during the three and nine months ended September 30, 2012.  

14

 


 

 

The following table summarizes the volumes of open commodity derivative positions as of September 30, 2012 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2012

 

 

Exchange Traded

 

Non-Exchange Traded

 

 

 

 

Derivative Instruments

 

Net Long & (Short) (1)

 

Long (2)

 

(Short) (2)

 

Unit of Measure

 

Commodity

Futures

 

(22,281)

 

 

 

 

 

Bushels

 

Corn, Soybeans and Wheat

Futures

 

25,830 

(3)

 

 

 

 

Bushels

 

Corn

Futures

 

(14,520)

 

 

 

 

 

Gallons

 

Ethanol

Futures

 

(123,858)

(3)

 

 

 

 

Gallons

 

Ethanol

Options

 

(377)

 

 

 

 

 

Bushels

 

Corn and Soybeans

Options

 

(1,100)

 

 

 

 

 

Gallons

 

Ethanol

Options

 

161 

 

 

 

 

 

mmBTU

 

Natural Gas

Forwards

 

 

 

23,212 

 

(5,406)

 

Bushels

 

Corn, Soybeans, Wheat and Milo

Forwards