Green Plains Inc.
Green Plains Inc. (Form: 10-K, Received: 02/14/2018 18:48:40)

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934



For the fiscal year ended December 31, 2017

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____ to _____



Commission file number 001-32924



Green Plains 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.)



 

1811 Aksarben Drive, Omaha, NE 68106

(402) 884-8700

(Address of principal executive offices, including zip code)

(Registrant’s telephone number, including area code)



Securities registered pursuant to Section 12(b) of the Act:  Common Stock, $.001 par value

Name of exchanges on which registered: Nasdaq Global Market



Securities registered pursuant to Section 12(g) of the Act:  None



Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes  No



Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes  No



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.  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).

Yes  No



Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  .  



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



 

Large accelerated filer      

Accelerated filer 



 

Non-accelerated filer      (Do not check if a smaller reporting company)



Smaller reporting company 

Emerging growth company 



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  No



The aggregate market value of the company’s voting common stock held by non-affiliates of the registrant as of June 30, 201 7 (the last business day of the second quarter), based on the last sale price of the common stock on that date of $ 20.55,   was   approximately $ 802 . 4 million. For purposes of this calculation, executive offic ers and direc tors are deemed to be affiliates of the registrant.



As of February 7 , 201 8 , there were 41 , 0 53 , 898 shares of the registrant’s common stock outstanding.



DOCUMENTS INCORPORATED BY REFERENCE



Portions of the registrant’s   definitive Proxy Statement for the 2018 Annual Meeting of Shareholders are incorporated by reference in Part III herein. The company intends to file such Proxy Statement with the Securities and Exchange Commission no later than 120 days after the end of the period covered by this report on Form 10-K.

 


 

 

 

 

       TABLE OF CONTENTS





 

 



 

Page

 Commonly Used Defined Terms

1



 



PART I

 



 

 

Item 1.

Business.

2



 

 

Item 1A.

Risk Factors.

13



 

 

Item 1B.

Unresolved Staff Comments.

2 7



 

 

Item 2.

Properties.

2 7



 

 

Item 3.

Legal Proceedings.

28



 

 

Item 4.

Mine Safety Disclosures.

28



 

 



PART II

 



 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

29



 

 

Item 6.

Selected Financial Data.

3 1



 

 

Item 7.

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

3 3



 

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk.

5 0



 

 

Item 8.

Financial Statements and Supplementary Data.

5 2



 

 

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

5 2



 

 

Item 9A.

Controls and Procedures.

5 2



 

 

Item 9B.

Other Information.

5 6



 

 



PART III

 



 

 

Item 10.

Directors, Executive Officers and Corporate Governance.

5 6



 

 

Item 11.

Executive Compensation.

5 6



 

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

5 6



 

 

Item 13.

Certain Relationships and Related Transactions, and Director Independence.

5 6



 

 

Item 14.

Principal Accounting Fees and Services.

5 6



 

 



PART IV

 



 

 

Item 15.

Exhibits, Financial Statement Schedules.

5 7



 

 

Item 16.

Form 10-K Summary.

 

6 6

 Signatures.

6 7

 

 


 

 

 

 





Commonly Used Defined Terms



Green Plains Inc. and Subsidiaries:





 

Green Plains; the company

Green Plains Inc. and its subsidiaries

BioProcess Algae

BioProcess Algae LLC

Fleischmann’s Vinegar

Fleischmann’s Vinegar Company, Inc.

Green Plains Cattle

Green Plains Cattle Company LLC

Green Plains Grain

Green Plains Grain Company LLC

Green Plains Partners; the partnership

Green Plains Partners LP and its subsidiaries

Green Plains Processing

Green Plains Processing LLC and its subsidiaries

Green Plains Trade

Green Plains Trade Group LLC

SCI Ingredients

SCI Ingredients Holdings, Inc.



Accounting Defined Terms:





 

the Act

Tax Cuts and Jobs Act of 2017

ASC

Accounting Standards Codification

EBITDA

Earnings before interest, income taxes, depreciation and amortization

EPS

Earnings per share

Exchange Act

Securities Exchange Act of 1934, as amended

GAAP

U.S. Generally Accepted Accounting Principles

IPO

Initial public offering of Green Plains Partners LP

LIBOR

London Interbank Offered Rate

LTIP

Green Plains Partners LP 2015 Long-Term Incentive Plan

Nasdaq

The Nasdaq Global Market

R&D Credits

Research and development tax credits

SEC

Securities and Exchange Commission

Securities Act

Securities Act of 1933, as amended



Industry Defined Terms:





 

Bgy

Billion gallons per year

BTU

British Thermal Units

CAFE

Corporate Average Fuel Economy

CARB

California Air Resources Board

CFTC

Commodity Futures Trading Commission

DOT

U.S. Department of Transportation

E15

Gasoline blended with up to 15% ethanol by volume

E85

Gasoline blended with up to 85% ethanol by volume

EIA

U.S. Energy Information Administration

EISA

Energy Independence and Security Act of 2007, as amended

EPA

U.S. Environmental Protection Agency

EU

European Union

FDA

U.S. Food and Drug Administration

FSMA

Food Safety Modernization Act of 2011

ILUC

Indirect land usage charge

LCFS

Low Carbon Fuel Standard

MMBTU

Million British Thermal Units

Mmg

Million gallons

Mmgy

Million gallons per year

MTBE

Methyl tertiary-butyl ether

NAFTA

North American Free Trade Agreement

RFS II

Renewable Fuels Standard II

RIN

Renewable identification number

RVO

Renewable volume obligation

SQF

Global Food and Safety Initiative program

TTB

Alcohol and Tobacco Tax and Trade Bureau

U.S.

United States

USDA

U.S. Department of Agriculture

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Cautionary Statement Regarding Forward-Looking Statements



The SEC encourages companies to disclose forward-looking information so investors can better understand future prospects and make informed investment decisions. As such, forward-looking statements are included in this report or incorporated by reference to other documents filed with the SEC.



Forward-looking statements are made in accordance with safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations which involve a number of risks and uncertainties and do not relate strictly to historical or current facts, but rather to plans and objectives for future operations. These statements include words such as “anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,” “outlook,” “plan,” “predict,” “may,” “could,” “should,” “will” and similar words and phrases as well as statements regarding future operating or financial performance or guidance, business strategy, environment, key trends and benefits of actual or planned acquisitions.



Factors that could cause actual results to differ from those expressed or implied are discussed in this report under “Risk Factors” or incorporated by reference. Specifically, we may experience fluctuations in future operating results due to a number of economic conditions, including: competition in the ethanol industry and other industries in which we operate; commodity market risks, including those that may result from weather conditions; financial market risks; counterparty risks; risks associated with changes to government policy or regulation , including changes to tax laws ; risks related to acquisitions and achieving anticipated results; risks associated with merchant trading, cattle feed ing oper ations, vinegar p roduction and other factors detailed in reports filed with the SEC. Additional risks related to Green Plains Partners LP include compliance with commercial contractual obligations, potential tax consequences related to our investment in the partnership and risks disclosed in the partnership’s SEC filings associated with the operation of the partnership as a separate, publicly traded entity.  



We believe our expectations regarding future events are based on reasonable assumptions; however, these assumptions may not be accurate or account for all risks and uncertainties. Consequently, forward-looking statements are not guaranteed. Actual results may vary materially from those expressed or implied in our forward-looking statements. In addition, we are not obligated and do not intend to update our forward-looking statements as a result of new information unless it is required by applicable securities laws. We caution investors not to place undue reliance on forward-looking statements, which represent management’s views as of the date of this report or documents incorporated by reference.



PART I



Item 1.  Business.



References to “we,” “us,” “our,” “Green Plains,” or the “company” refer to Green Plains Inc. and its subsidiaries.



Overview



Green Plains is an Iowa corporation ,   founded in June 2004 as an ethanol producer . We have grown through acquisitions of operationally efficient ethanol production facilities and adjacent commodity processing businesses. We are focused on generating stable operating margins through our diversified business segments and risk management strategy. We own and operate assets throughout the ethanol value chain: upstream, with grain handling and storage; through our ethanol production facilities; and downstream, with marketing and distribution services to mitigate commodity price volatility, which differentiates us from companies focused only on ethanol production. Our other businesses , including our partnership, cattle feed ing operations and vinegar production , leverage our supply chain, production platform and expertise.



We formed Green Plains Partners LP, a master limited partnership, to be our primary downstream storage and logistics provider since its assets are the principal method of storing and delivering the ethanol we produce. The partnership completed its IPO on July 1, 2015. We own a 62.5% limited partner interest, a 2.0% general partner interest and all of the partnership’s incentive distribution rights. The public owns the remaining 35.5% limited partner interest. The partnership is consolidated in our financial statements.



We group our business activities into the following four operating segments to manage performance:



·

Ethanol Production.  Our ethanol production segment includes the production of ethanol, distillers grains and corn oil at 17 ethanol plants in Illinois, Indiana, Iowa, Michigan, Minnesota, Nebraska, Tennessee, Texas and Virginia. At capacity, our facilities are capable of processing   approximately 518 million bushels of corn per year and

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producing approximately 1.5 billion gallons of ethanol, 4.1 million tons of distillers grains and 359 million pounds of industrial grade corn oil, making us the second largest consolidated owner of ethanol plants in North America.



·

Agribusiness and Energy Services.  Our agribusiness and energy services segment includes grain procurement, with approximately 59.6 million bushels of grain storage capacity, and our commodity marketing business, which markets, sells and distributes ethanol, distillers grains and corn oil produced at our ethanol plants. We also market ethanol for a third-party producer as well as buy and sell ethanol, distillers grains, corn oil, crude oil, grain, natural gas and other commodities in various markets.



·

Food and Ingredients.  Our food and ingredients segment in cludes   four cattle feeding operation s with the capacity to support approximately   258,000 head of cattle and grain storage capacity of approximately 9.6 million bushels ,   Fleischmann’s Vinegar, one of the world’s largest producers o f food-grade industrial vinegar , and our food- grade corn oil operations .



·

Partnership.  Our master limited partnership provides fuel storage and transportation services by owning, operating, developing and acquiring ethanol and fuel storage tanks, terminals, transportation assets and other related assets and businesses. The partnership’s assets include 39 ethanol storage facilities, eight fuel terminal facilities and approximately 3,500 leased railcars.


Risk Management and Hedging Activities  



Our profitability is highly dependent on commodity prices, particularly for ethanol, distillers grains, corn oil, corn, natural gas and cattle. Since market price fluctuations among these commodities are not always correlated, ethanol production or our cattle feeding operation s may be unprofitable at times. We use a variety of risk management tools and hedging strategies to monitor real-time operating price risk exposure at each of our operations to obtain favorable margins, when available, or temporarily reduce production levels during periods of compressed margins. Our multiple businesses and revenue streams also help to diversify our operations and improve profitability.



We use forward contracts to sell a portion of our ethanol, distillers grains, corn oil and vinegar production or buy some of the corn, natural gas, cattle, or ethanol we need to partially offset commodity price volatility. We also engage in other hedging transactions involving exchange-traded futures contracts for corn, natural gas, ethanol, cattle and other commodities. The financial impact of these activities depends on the price of the commodities involved and our ability to physically receive or deliver those commodities. We do not speculate on general price movements by taking significant unhedged positions on commodities.



Hedging arrangements expose us to risk of financial loss when the counterparty defaults on its contract or, in the case of exchange-traded contracts, when the expected differential between the price of the underlying commodity and physical commodity changes. Hedging activities can result in losses when a position is purchased in a declining market or sold in a rising market. Hedging losses may be offset by a de creased cash price for corn, natural gas and feeder cattle and an increased cash price for ethanol, distillers grains, corn oil and live cattle . Depending on the circumstance, w e vary the amount of hedging or other risk mitigation strategies we undertake and sometimes choose not to engage in hedging transactions at all.



Competitive Strengths



We are focused on managing commodity price risks, improving operational efficiencies and optimizing market opportunities to create an efficient platform with diversified income streams. Our competitive strengths include:



Disciplined Risk Management .  Risk management is our core competency and we use a variety of risk management tools and hedging strategies to maintain a disciplined approach. Our internally developed operating margin management system allows us to monitor commodity price risk exposure at each of our operations and lock in favorable margins or temporarily reduce production levels during periods of compressed margins.



Acquisition and Integration Capabilities We have a history of acquiring assets that create synergies and diversifying risks. Our balance sheet allows us to be opportunistic in that process. Since inception, we built or acquired 17 ethanol plants and installed corn oil extraction technology at each of our ethanol plants to generate incremental returns. In addition, we purchased or built a grain h andling and storage business, cattle feeding operation s , a vinegar production business, and terminal and distribution facilities. Successful integration of these operations has enhanced our overall returns.



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Operational Excellence .  Our facilities are staffed with experienced industry personnel who share operational knowledge and expertise. We focus on making incremental operational improvements to enhance performance using real-time production data and systems to monitor our operations and optimize performance. Our operational expertise provides us a cost advantage over most of our competitors and helps us improve the operating margins of acquired facilities.



Vertical Integration .  Our vertically integrated platform reduces commodity and operational risk and increases pricing visibility in key markets. Combined, our ethanol production, agribusiness an d energy services, food and ingredients, and partnership segments provide efficiencies, which extend both within and outside the ethanol value chain.



Proven Management Team .  Our senior management team averages approximately 25 years of commodity risk management and related industry experience. We have specific expertise across all of our businesses, including plant operations and management, commodity markets and risk management, and ethanol marketing and distribution. Our management team’s level of operational and financial expertise is essential to successfully executing our business strategies.



Business Strategy



We believe ethanol could become an increasingly larger portion of the global fuel supply driven by heightened environmental concerns and energy independence goals, supported by government policies and regulations. In the 1990’s, federal law required the use of oxygenates in reformulated gasoline to reduce vehicle emissions in cities with unhealthy levels of air pollution. Today, ethanol is the primary oxygenate used by the U.S. refining industry to meet various federal and state air emission standards. The high octane value of ethanol has also made it the primary additive used by refiners to increase octane value, which improves engine performance. Accordingly, ethanol has become a valuable blend component that comprises approximately 10% of the domestic gasoline supply with the potential to grow with higher blends and increased gasoline demand. Ethanol usage is further supported by federal government mandates under RFS , which assigns individual refiners, blenders and importers the volume of renewable fuels they are obligated to use based on their percentage of total fuel sales. Advances in domestic corn yields have helped the U.S. ethanol industry become the lowest-cost producer of ethanol, surpassing Brazil, creating demand for U.S. ethanol worldwide.



In light of the ethanol industry’s environment, we are focused on maintaining a low-cost ethanol production platform and driving costs out of the value chain through disintermediation. Owning grain storage at or near our ethanol plants allows us to develop relationships with local producers and originate corn more effectively at a lower average cost. We purchase approximately two-thirds of our corn volume directly from farmers and have 42 production days of storage capacity at or near our ethanol plants. We use our performance data to develop strategies that can be applied across our platform and embrace technological advances to improve operational efficiencies and yields, such as Selective Milling Technology™ and Enogen® corn enzyme technology, to lower our processing cost per gallon and increase production volumes.



We believe there is untapped value across our businesses and we intend to further develop and strengthen our business by pursuing the following growth strategies:



Grow Organically : We seek to identify expansion projects that maximize our production capabilities and lower existing costs at our production facilities.  We also seek to leverage our core competencies in adjacent businesses such as cattle feedlots, high protein animal feed, food ingredients and other commodity processing operations that maximize our operational and risk management expertise.



Acquire Strategic Assets : We intend to invest in downstream distribution services that take advantage of our master limited partnership structure, leverage our core competencies in adjacent markets or generate attractive margins or predictable revenue streams. We are disciplined throughout the business development process to ensure our investments generate favorable returns and are firmly committed to maintaining safe, reliable and environmentally compliant operations.



Recent Developments



The following is a summary of our significant developments during 201 7 . Additional information about these items can be found elsewhere in this report or in previous reports filed with the SEC.



On March 10 , 20 1 7, we acquired the assets of a cattle-feeding operation located approximately 20 miles from our Hereford, Texas ethanol facility. The operation has the capacity to support 30,000 head of cattle and is included in our food and ingredients segment.



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On April 28, 2017, Green Plains Cattle amended its senior secured asset-based revolving credit facility to finance the expanded working capital requirements for its cattle feeding operations. The amendment increased the maximum commitment from $100 .0 million to $200 .0 million until July 31, 2017, when it was increased again to $300 .0 million. The matu rity date was extended from October 31, 2017 to April 30, 2020.



On May 16, 2017, we completed the acquisition of two cattle-feeding operations from Cargill Cattle Feeders, LLC for $ 37.2 million, ex cluding working capital adjustments. The transaction included the feed yards located in Leoti, Kansas and Eckley , Colorado and added combined feedlot capacity of 155,000 head of cattle to our operations. The transaction was financed using cash on hand. As part of the transaction, we entered into a long-term cattle supply agreement with Cargill Meat Solutions Corporation. Under the cattle supply agreement, all cattle placed in the Leoti, Kansas,   Eckley , Colorado and Kismet, Kansas feedlots will be sold exclusively to Cargill Meat Solutions under an agreed upon production and pricing arrangement.



During the second quarter of 2017, we entered into several privately negotiated agreements with holders, on behalf of certain beneficial owners, of our 3.25% notes. Under these agreements, 2,783,725 shares of our common stock and approximately $8.5 million in cash plus accrued but unpaid interest on the 3.25% notes, were exchanged for approximately $56.3 million in aggregate principal amount of the 3.25% notes. Following the closing of the agreement, $63.7 million aggregate principal amount of the 3.25% notes remain s outstanding. We recorded a charge to interest expense in the consolidated financial statements for the loss on debt extinguishment of approximately $1.3 million during the three months ended June 30, 2017.



On July 28, 2017, we amended our Green Plains Trade senior secured asset-based revolving credit facility, to increase the maximum commitment from $150.0 million to $300.0 million and extend the maturity date to July 28, 2022. The amended credit facility increases advance rates and modifies the eligible inventory definitions to include additional commodities and locations. Advances are subject to variable interest rates equal to a daily LIBOR rate plus 2.25% or the base rate plus 1.25%. The unused portion of the credit facility is also subject to a commitment fee of 0.375% per annum.



On August 29, 2017, the company entered into a $500.0 million term loan agreement which matures on August 29, 2023, to refinance approximately $405.0 million of total debt outstanding issued by Green Plains Processing a nd Fleischmann’s Vinegar , pay associated fees and expenses and for general corporate purposes. The term loan is guaranteed by the company and substantially all of its subsidiaries, but not Green Plains Partners and certain other entities, and secured by substantially all of the assets of the company, including 17 ethanol production facilities, vinegar production facilities and a second priority lien on the assets secured under the revolving credit facilities at Green Plains Trade, Green Plains Cattle and Green Plains Grain.



On September 11, 2017, John Neppl joined the company as chief financial officer of Green Plains and Green Plains Partners, replacing Jerry Peters, who retired. Mr. Peters continues as a member of the board of directors of Green Plains Holdings LLC, the general partner of Green Plains Partners. Mr. Neppl most recently served as chief financial officer of The Gavilon Group, LLC and brings extensive experience in commodity processing and trading businesses.



On October 27, 2017, the partnership upsized its revolving credit facility by $40.0 million, from $155.0 million to $195.0 million, accessing a portion of the $100.0 million accordion in place on the facility.



On November 16 , 2017, Green Plains Cattle entered into an   amendment of its senior secured asset-based revolving credit facility with a group of lenders led by Bank of the West and ING   Capital LLC. This amendment increased the revolving commitment under the credit facility by $1 25 .0 million, from $300.0   million to $4 25.0 million, with an additional $75.0 mil lion available accordion feature .   Additionally, the   amendment increased the swing-line sublimit from $15.0 million to $20.0 million.



During the fourth quarter of 2017, commercial development of the JGP Energy Partners intermodal export and import fuels terminal in Beaumont, Texas was completed, with storage capacity of 550 thousand barrels to support various export and domestic grades of ethanol. On December 4, 2017, the first ethanol shipment departed from the terminal. The company formed the 50/50 joint venture to construct the terminal in June 2016 with Jefferson Ethanol Holdings LLC, a subsidiary of Fortress Transportation and Infrastructure Investors LLC. Per the omnibus agreement between Green Plains and the partnership, Green Plains will offer its interest in the joint venture to the partnership no later than six months after the completion of construction.



During the year, the company repurchased 394,677 shares of common stock for $6.7 million.



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Operating Segments



Ethanol Production Segment



Industry Overview.  Ethanol, also known as ethyl alcohol or grain alcohol, is a colorless liquid produced by fermenting carbohydrates found in a number of different types of grains, such as corn, wheat and sorghum, and other cellulosic matter found in plants. Most of the ethanol produced in the United States is made from corn because it contains large quantities of carbohydrates that convert into glucose more easily than most other kinds of biomass, which can be handled efficiently and is in greater supply than other grains. According to the USDA, on average, one bushel, or 56 pounds, of corn, produces approximately 2.7 gallons of ethanol, 17.5 pounds of distillers grains and 0. 7 pounds of corn oil .   Outside of the United States, sugarcane is the primary feedstock used to produce ethanol.



Ethanol is a significant component of the biofuels industry, which includes all transportation fuels derived from renewable biological materials. Biofuels are an excellent oxygenate and source of octane. When added to petroleum-based transportation fuels, oxygenates reduce vehicle emissions. Ethanol is the most economical oxygenate and source of octanes available on the market and its production costs are competitive with gasoline.



Ethanol Plants.  We oper ate 17 dry mill ethanol production plants, located in nine states, that produce ethanol, distillers grains and corn oil:



 

 

 

Plant

Initial Operation or
Acquisition Date

Technology

Plant Production
Capacity (mmgy)

Atkinson, Nebraska

June 2013

Delta-T

55

Bluffton, Indiana (1)

Sept. 2008

ICM

120

Central City, Nebraska

July 2009

ICM

116

Fairmont, Minnesota

Nov. 2013

Delta-T

119

Hereford, Texas

Nov. 2015

ICM/Lurgi

100

Hopewell, Virginia

Oct. 2015

Katzen

60

Lakota, Iowa

Oct. 2010

ICM/Lurgi

124

Madison, Illinois

Sept. 2016

Vogelbusch

90

Mount Vernon, Indiana

Sept. 2016

Vogelbusch

90

Obion, Tennessee (1)

Nov. 2008

ICM

120

Ord, Nebraska

July 2009

ICM

65

Otter Tail, Minnesota

Mar. 2011

Delta-T

55

Riga, Michigan

Oct. 2010

Delta-T

60

Shenandoah, Iowa (1)

Aug. 2007

ICM

82

Superior, Iowa (1)

July 2008

Delta-T

60

Wood River, Nebraska

Nov. 2013

Delta-T

121

York, Nebraska

Sept. 2016

Vogelbusch

50

Total

 

 

1,487



(1)

We constructed these four plants; all other ethanol plants were acquired.



Our business is directly affected by the supply and demand for ethanol and other fuels in the markets served by our assets. Miles driven typically increases during the spring and summer months related to vacation travel, followed closely behind the fall season due to holiday travel.



The majority of our plants are equipped with industry-leading ICM or Delta-T ethanol processing technology. Our years of experience building, acquiring and operating these technologies provides us with a deep understanding of how to effectively and efficiently manage both platforms for maximum performance.



Corn Feedstock and Ethanol Production.  Our plants use corn as feedstock in a dry mill ethanol production process. Each of our plants requires approximately 17 million to 4 3 million bushels of corn annually, depending on its production capacity. The price and availability of corn are subject to significant fluctuations driven by a number of factors that affect commodity prices in general, including crop conditions, weather, governmental programs, freight costs and global demand. Ethanol producers are generally unable to pass increased corn costs to customers since ethanol competes with other fuels.



Our corn supply is obtained primarily from local markets. We use cash and forward purchase contracts with grain producers and elevators to buy corn. We maintain direct relationships with local farmers, grain elevators and cooperatives, which serve as our primary sources of grain feedstock, at 14 of our ethanol plants. Most farmers in close proximity of our plants store corn in their own storage facilities. This allows us to purchase much of the corn we need directly from farmers

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throughout the year. At three of our ethanol plants, we contract with a third-party grain originator to supply the corn necessary for ethanol production. These contracts terminate between August 2019 and November 2023. Each of our plants is also situated on rail lines or has other logistical solutions to access corn supplies from other regions of the country should local supplies become insufficient.



Corn is received at the plant by truck or rail then weighed and unloaded into a receiving buildi ng. Grain storage facilities are used to inventory grain that is passed through a scalper to remove rocks and debris prior to processing. The corn is then transported to a hammer mill where it is ground into coarse flour and conveyed into a slurry tank for enzymatic processing. Water, heat and enzymes are added to convert the complex starch molecules into simpler carbohydrates. The slurry is heated to reduce the potential of microbial contamination and pumped into a liquefaction tank where additional enzymes are added. Next, the grain slurry is pumped into fermenters, where yeast, enzymes, and nu trients are added and the fermentation process is started. A beer column, within the distillation system, separates the alcohol from the spent grain mash. The alcohol is dehydrated to 200-proof alcohol and either pumped into a holding tank and blended with approximately 2% denaturant as it is pumped into finished product storage tanks, or marketed as undenatured ethanol.



Distillers Grains.  The spent grain mash is pumped from the beer column into a decanter-type centrifuge for dewatering. The water, or thin stillage, is pumped from the centrifuge into an evaporator, where it is dried into a thick syrup. The solids, or wet cake, that exit the centrifuge are conveyed to the dryer system and dried at varying temperatures to produce distillers grains. Syrup may be reapplied to the wet cake prior to drying to provide additional nutrients. Distillers grains, the principal co-product of the ethanol production process, are used as high-protein, high-energy animal feed and marketed to the dairy, beef, swine and poultry industries.



We can produce three forms of distillers grains, depending on the number of times the solids are passed through the dryer system:

·

wet distillers grains, which contain approximately 65% to 70% moisture, have a shelf life of approximately three days and is therefore sold to dairies or feedlots within the immediate vicinity;

·

modified wet distillers grains, which is dried further to approximately 50% to 55% moisture, have a shelf life of approximately three weeks and are marketed to regional dairies and feedlots; and

·

dried distillers grains, which have been dried more extensively to approximately 10% to 12% moisture, have an almost indefinite shelf life and may be stored, sold and shipped to any market.



Corn Oil.  Corn oil systems extract non-edible corn oil from the thin stillage evaporation process immediately before the production of distillers grains. Corn oil is produced by processing the syrup and evaporated thin stillage through a decanter-style, or disk-stack, centrifuge. The centrifuges separate the relatively light corn oil from the heavier components of the syrup, eliminating the need for significant retention time. We extract approximately 0.7 pounds of corn oil per bushel of corn used to produce ethanol. Industrial uses for corn oil include feedstock for biodiesel, livestock feed additives, rubber substitutes, rust preventatives, inks, textiles, soaps and insecticides. The syrup is blended into wet, modified wet or dried distillers grains.



Natural Gas .  Depending on production parameters, our ethanol plants use approximately 20,000 to 40,000 BTUs of natural gas per gallon of production. We have service agreements to acquire the natural gas we need and transport the gas through pipelines to our plants.



Electricity .  Our plants require between 0.5 and 1.5 kilowatt hours of electricity per gallon of production. Local utilities supply the necessary electricity to all of our ethanol plants.



Water .  While some of our plants satisfy a majority of their water requirements from wells located on their respective properties, each plant also obtains drinkable water from local municipal water sources. Each facility either uses city water or operates a filtration system to purify the well water that is used for its operations. Local municipalities supply all of the necessary water for our plants that do not have onsite wells. Much of the water used in an ethanol plant is recycled in the production process.



Agribusiness and Energy Services Segment



Our agribusiness and energy services segment includes four grain elevators in four states with combined grain storage capacity of approximately 10.1 million bushels, and grain storage at our ethanol plants of approximately 49.5 million bushels, detailed in the following table:

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Facility Location

On-Site Grain Storage Capacity
(thousands of bushels)

Grain Elevators

 

Archer, Nebraska

1,246

Essex, Iowa

3,841

Hopkins, Missouri

2,713

Kismet, Kansas

2,328

Ethanol Plants

 

Atkinson, Nebraska

5,109

Bluffton, Indiana

4,789

Central City, Nebraska

1,400

Fairmont, Minnesota

1,611

Hereford, Texas

4,913

Hopewell, Virginia

1,043

Lakota, Iowa

5,402

Madison, Illinois

1,015

Mount Vernon, Indiana

1,034

Obion, Tennessee

8,168

Ord, Nebraska

2,321

Otter Tail, Minnesota

2,772

Riga, Michigan

2,432

Shenandoah, Iowa

886

Superior, Iowa

2,955

Wood River, Nebraska

3,293

York, Nebraska

347

Total

59,618



We buy bulk grain, primarily corn and soybeans, from area producers, and provide grain drying and storag e services to those producers. At certain locations, t he grain is used as feedstock for our ethanol plants or sold to grain processing companies and area livestock producers. Bulk grain commodities are traded on commodity exchanges. Inventory values are affected by changes in these markets and spreads. To mitigate risks related to market fluctuations from purchase and sale commitments of grain, as well as grain held in inventory, we enter into exchange-traded futures and options contracts that function as economic hedges at times.



Seasonality is present within our agribusiness operations. The fall harvest period typically results in higher handling margins and stronger financial results during the fourth quarter of each year.



Through Green Plains Trade, we market the ethanol we and a third party produce to local, regional, national and international customers. We also purchase ethanol from independent producers for pricing arbitrage. We sell to various markets under sales agreements with integrated energy companies; retailers, traders and resellers in the United States and buyers for export to Brazil, Canada, Europe and other international markets. Under these agreements, ethanol is priced under fixed and indexed pricing arrangements.



Also through Gre en Plains Trade, we market wet   and modified wet distillers grains to local markets and dried distillers grains to local, national and international markets. The bulk of our demand is delivered to geographic regions that do not have significant local corn or distillers grains production.



Our markets can be further segmented by geographic region and livestock industry. Most of our wet and modified wet distillers grains are sold to midwestern feedlot markets. A substantial amount of dried distillers grains are shipped by barge, containers and rail to regional and national markets, as well as international markets. Our dried distillers grains are shipped to feedlots and poultry markets, as well as Texas and West Coast rail markets. Some of our distillers grains are shipped by truck to dairy, beef, and poultry operations in the eastern United States. We also ship by railcar to eastern and southeastern feed mills, poultry and dairy operations, and domestic trade companies. We sell dried distillers grains directly to international markets and indirectly to exporters for shipment. In 201 7 , we exported approximately 9 % of our distillers grains production, with the largest export markets for distillers grains being Vietnam and Thailand. Access to diversified markets allows us to sell product to customers offering the highest net price.



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Our corn oil is sold pr imarily to biodiesel plants and , to a lesser extent, feedlot and poultry markets. We transport our corn oil by truck to locations in a close proximity to our ethanol plants primarily in the southeastern and midwestern regions of the United States. We also transport corn oil by rail and barges to national markets as well as to exporters for shipment on vessels to international markets.



Through Green Plains Trade, we provide marketing services of natural gas to our ethanol plants and to other third parties including the procurement of both the pipeline capacity and natural gas. We also enhance the value by aggregating volumes at various storage facilities which can be sold to either the plants or various intermediary markets and end markets.   



Our railcar fleet for the agribusiness and energy services segment consists of approximately 92 0 leased hopper cars to transport distillers grains and approximately 10 0 leased tank cars to transport corn oil and crude oil. The initial terms of the lease contracts are for periods up to ten years.



Food and Ingredients Segment



Ca t tle feeding operation s .   Our cattle feeding operatio n s ha ve the capacity to support approximately   258,000 head of cattle and 9.6 million bushels of grain storage capacity.





 

 

 

Facility Location

Initial Operation or
Acquisition Date

On-Site Cattle Capacity
(thousands of cattle)

On-Site Grain Storage Capacity
(thousands of bushels)

Kismet, Kansas

June 2014

73

2,193

Hereford, Texas

March 2017

30

-

Leoti, Kansas

May 2017

106

4,345

Eckley, Colorado

May 2017

49

3,070



We purchase feeder cattle from producers, order buyers and livestock auctions, the majority of which are from Kansas , Missouri, Oklahoma and Texas. Generally, our feeder cattle are purchased at weights between 650 and 950 pounds. We typically feed the feeder cattle for approximately 160 days prior to selling to large beef processors at prices determined by the market, adjusted for quality .   Bulk cattle commodities are traded on commodity exchanges. Inventory values are affected by changes in these markets and the spreads between feeder and live cattle futures . To mitigate risks related to market fluctuations from purchase and sale commitments of cattle and cattle held in inventory, we enter into exchange-traded futures and options contracts that function as economic hedges at times.



Vinegar operations.   Fleischmann’s Vinegar is a liquid, natural specialty ingredients company serving a range of markets and end-use applications, including food and beverage flavoring ingredients, meat preservatives, antimicrobials, bio-herbicides, and cleaning products across the food, beverage, agricultural, industrial and consumer markets. Vinegar is sold primarily to major food industry participants, including leading branded food companies, private label food manufacturers and companies serving the foodservice channel. Our products appeal to both food and non-food end market applications and are comprised of   white distilled vinegar and numerous specialty vinegars , including balsamic, red wine, white wine, cider and other varietals for retail and industrial uses. We have a dedicated research and development team, with extensive experience in food science and agriculture, that can develop innovative products and technology to meet the needs of customers for various specialized end-market s .



Our vinegar operation s include seven production facilities , which are located in Alabama, California, Illinois, Maryland, Missouri and New York , and three distribution warehouses , which are located i n California, Oregon and Texas. All of our production facilities use food-grade ethanol as the primary production input .  



Food-grade corn oil production .   Our food-grade corn oil operations focus on shipping corn oil from facilities across the Midwest by rail or barge to terminal facilities located in the southern United States. Once the corn oil arrives at the terminal facility, it is unloaded and consolidated into set volumes and prepared for shipment by vessel.   The corn oil is then shipped to independent refiners outside the United States for refining into a refined, b lea ched, dewaxed and d eodorized food- grade product . This finished product is then shipped by vessel or container to our various customers.   In addition, we also execute trade volumes of corn oil and soybean oil in both domestic and international markets.  



Partnership Segment



Our partnership segment provides fuel storage and transportation services through (i) 39   ethanol storage facilities located at or near our 17 ethanol production plants, (ii) eight   fuel terminal facilities located near major rail lines, and (iii) a leased railcar fleet and other transportation assets.

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Transportation and Delivery.  Most of our ethanol plants are situated near major highways or rail lines to ensure efficient movement. We are able to move product from our ethanol plants to bulk terminals via truck, railcar or barge. We also manage the logistics and transportation requirements of our customers to improve our fleet’s efficiency and reduce operating costs.



Deliveries within 150 miles of our plants and the partnership’s fuel terminal facilities are generally transported by truck. Deliveries to distant markets are shipped using major U.S. rail carriers that can switch cars to other major railroads, allowing our plants to ship product throughout the United States.



To meet the challenge of marketing ethanol and distillers grains to diverse market segments, several of our plants are capable of simultaneously handling more than 150 railcars. Some of our locations have large loop tracks with unit train loading capabilities for both ethanol and dried distillers grains and spurs to connect the loop to the mainline or allow the movement and storage of railcars on site.



The partnership’s railcar fleet consists of approximately 3,500 leased tank cars for the transportation of ethanol. The initial terms of the lease contracts are for periods up to ten years.



To optimize the partnership’s railcar assets, we transport products other than ethanol depending on market opportunities and have used a portion of our railcar fleet to transport crude oil for third parties and to lease railcars to other users.



Terminal and Distribution Services.  Ethanol is transported from the partnership’s terminals to third-party terminal racks where it is blended with gasoline and transferred to the loading rack for delivery by truck to retail gas stations. The partnership owns and operates fuel holding tanks and terminals, and provide terminal services and logistics solutions to markets that do not have efficient access to renewable fuels. The partnership operates fuel terminals at one owned and seven leased locations in seven states with combined storage capacity of approximately 7.4 mmg and throughput capacity of approximately 822 mmgy. We also have 39 ethanol storage facilities located at or near our 17 ethanol production plants with a combined storage capacity of approximately 38.6 mmg to support current ethanol production capacity of approximately 1.5 bgy.





 

Facility Location

Storage Capacity
(thousands of gallons)

Fuel Terminals

 

Birmingham, Alabama - Unit Train Terminal

6,542

Birmingham, Alabama - Other

120

Bossier City, Louisiana

180

Collins, Mississippi

180

Little Rock, Arkansas

30

Louisville, Kentucky

60

Nashville, Tennessee

160

Oklahoma City, Oklahoma

150

Ethanol Plants

 

Atkinson, Nebraska (1)

2,074

Bluffton, Indiana

3,000

Central City, Nebraska

2,250

Fairmont, Minnesota

3,124

Hereford, Texas

4,406

Hopewell, Virginia

761

Lakota, Iowa

2,500

Madison, Illinois

2,855

Mount Vernon, Indiana

2,855

Obion, Tennessee

3,000

Ord, Nebraska

1,550

Otter Tail, Minnesota

2,000

Riga, Michigan

1,239

Shenandoah, Iowa

1,524

Superior, Iowa

1,238

Wood River, Nebraska

3,124

York, Nebraska

1,100

Total

46,022



(1)

The ethanol storage facilities are located approximately 16 miles from the ethanol plant .

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For more information about our segments , refer to Item 7 . - Management’s Discussion and Analysis of Financial Condition and Results of Operations   in this report.



Our Competition



Domestic Ethanol Competitors



We are the second largest consolidated owner of ethanol plants in the United States. We compete with other domestic ethanol producers in a relatively fragmented industry. Our competitors also include plants owned by farmers, oil refiners and retail fuel operators. These competitors may continue to operate their plants even when market conditions are not favorable due to the benefits realized from their other operations.



In 2017, t he top five producers operated 89 plants and   account ed for approximately 44 % of the domestic production capacity with production capacit ies ranging from 800 mmgy to 1,700 mmgy. Approximatel y half of the 212 plants in the United States are sta ndalone facilities and account ed for approximately 3 4 % of domestic production capacity.



Demand for corn from ethanol plants and other corn consumers exists in all areas and regions in which we operate. According to the Renewable Fuels Association, there were 133 operational plants in the states where we have production facilities, including Illinois, Indiana, Iowa, Michigan, Minnesota, Nebraska, Tennessee, Texas and Virginia, as of January 23 , 2018 .   The largest concentration of operational plants is located in Illinois, Iowa and Nebraska, where 51 % of all operational production capacity is located.



Foreign Ethanol Competitors



We also comp ete globally with production from other countries. Brazil is the second largest ethanol producer in the world after the United States. Brazil produces ethanol made from sugarcane, which may be less expensive to produce than ethanol made from corn depending on feedstock prices. Under RFS II, certain parties are obligated to meet an advanced biofuel standard. In recent years, sugarcane ethanol imported from Brazil has been one of the most economical means for obligated parties to meet this standard. Any significant additional ethanol production capacity could create excess supply in world markets, resulting in lower ethanol prices throughout the world, including the United States.



Other Competition



Alternative fuels, gasoline oxygenates and ethanol production methods are continually under development. Ethanol production technologies also continue to evolve. We expect changes to occur primarily in the area of cellulosic ethanol, which is made from biomass such as switch grass or fast-growing poplar trees. Since all of our plants are designed as single-feedstock facilities, adapting our plants for a different feedstock or process system would require additional ca pital investments and retooling which could be cost prohibitive.



In addition, we co mpete with other cattle feeding operations and vinegar producers in competitive markets.  Through our acquisition of Fleischmann ’s Vinegar in 2016, we now operate one of the world’s largest manufacturer s and marketer s of food-grade industrial vinegar.  Additionally, following the acquisitions of the Hereford, Texas; Leoti, Kansas and Eckley, Colorado cattle-feeding operations, we now operate one of the largest cattle-feeding operation s in the United States.



Regulatory Matters



Government Ethanol Programs and Policies



In the United States, the federal government mandates the use of renewable fuels under RFS II. The EPA assigns individual refiners, blenders and importers the volume of renewable fuels they are obligated to use based on their percentage of total fuel sales. The EPA has the authority to waive the mandates in whole or in part if there is inadequate domestic renewable fuel supply or the requirement severely harms the economy or environment.



RFS II has been a driving factor in the growth of ethanol usage in the United States. When RFS II was established in October 2010, the required volume of renewable fuel to be blended with gasoline was to increase each year until it reached 15.0 billion gallons in 2015, which left the EPA to address existing limitations in both supply (ethanol production) and demand (usage of ethanol blends in older vehicles). On November 30 , 201 7 , the EPA announced the final 201 8 renewable volume obligations for conventional ethanol, which met the 15.0-billion-gallon congressional target .



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According to RFS II, if mandatory renewable fuel volumes are reduced by at least 20% for two consecutive years, the EPA is required to modify, or reset, statutory volumes through 2022. While conventional ethanol maintained 15 billion gallons,  2018 is the first year the total proposed RVOs are more than 20% below statutory volumes levels.  Thus, the EPA Administrator directed his staff to initiate the required technical analysis to perform any future reset consistent with the reset rules. The reset will be triggered if the 2019 RVOs continue to be more than 20% below the statutory levels, and the EPA will be required to modify statutory volumes through 2022 within one year of the trigger event, based on the same factors used to set the RVOs post-2022.



Obligated parties use RINs to show compliance with RFS-mandated volumes. RINs are attached to renewable fuels by producers and detached when the renewable fuel is blended with transportation fuel or traded in the open market. The market price of detached RINs affects the price of ethanol in certain markets and influences the purchasing decisions by obligated parties. In Novemb er 2017 , the EPA denied a petition to change the point of obligation under RFS II to the parties that own the gasoline before it is sold.



For further discussion see   Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations .



Environmental and Other Regulation



Our ethanol production, agribusiness and energy services , and food and ingredients segment activities are subject to environmental and other regulations. We ob tain environmental permits to operate our plants and other facilities.



Ethanol production involves the emission of various airborne pollutants, including particulate, carbon dioxide, oxides of nitrogen, hazardous air pollutants and volatile organic compounds. In 2007, the U.S. Supreme Court classified carbon dioxide as an air pollutant under the Clean Air Act in a case seeking to require the EPA to regulate carbon dioxide in vehicle emissions, which the EPA later addressed in RFS II.



While some of our plants operate as grandfathered at their current authorized capacity under the RFS II mandate, expansion above these capacities will require a 20% reduction in greenhouse gas emissions from a 2005 baseline measurement. This may require us to obtain additional permits, achieve the EPA’s efficient producer status under the pathway petition program for our grandfathered plants, install advanced technology or reduce drying distillers grains.



CARB adopted LCFS requiring a 10% reduction in average carbon intensity of gasoline and diesel transportation fuels from 2010 to 2020. After a series of rulings that temporarily prevented CARB from enforcing these regulations, the State of California Office of Administrative Law approved the LCFS in November 2012, and revised LCFS regulations took effect in January 2013.



We employ maintenance and operations personnel at each of our plants. In addition to the attention we place on the health and safety of our employees, the operations of our facilities are regulated by the Occupational Safety and Health Administration.



For further discussion see Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations .



BioProcess Algae Joint Venture



We are the majority owner of the BioProcess Algae joint venture, which was formed in 2008. The joint venture is focused on growing algae in commercially viable quantities using feedstocks that are created as part of our ethanol production process. The joint venture continues to take steps towards commercialization. We are currently focused on human and animal nutrition, using proprietary technology to customize specific products, based on proven benefits, for relevant markets.



Employees



On December 31, 2017 , we had 1,427 full-time, part-time, temporary and seasonal employees, including 198 employees at our corporate office in Omaha, Nebraska.









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Available Information



Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports are available on our website at www.gpreinc.com   shortly after we file or furnish the information with the SEC. You can also find the charters of our audit, compensation and nominating committees, as well as our code of ethics in the corporate governance section of our website. The information found on our website is not part of this or any other report we file with or furnish to the SEC. For more information on our partnership, please visit www.greenplainspartners.com . Alternatively, investors may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549 or visit the SEC website at www.sec.gov to access our reports, proxy and information statements filed with the SEC.



Item 1A.  Risk F actors.



We operate in an industry that has numerous risks, many of which are beyond our control or are driven by factors that cannot always be predicted. Investors should carefully consider all of the risk factors in conjunction with the other information included in this report as our financial results and condition or market value could be adversely affected if any of these risks were to occur.



Risks Related to our Business and Industry



Our profitability   is dependent on managing the spread between the price of corn, natural gas, ethanol, distillers grains, corn oil, cattle and vinegar.



Our operating results are highly sensitive to commodity prices, including the spread between the corn, natural gas, cattle and ethanol we purchase, and the ethanol, distillers grains, corn oil and vinegar we sell. Price and supply are subject to various market forces, such as weather, domestic and global demand, shortages, export prices, crude oil prices, currency valuations and government policies in the United States and around the world, over which we have no control. Price volatility of these commodities may cause our operating results to fluctuate substantially. Increases in corn or natural gas prices or decreases in ethanol, distillers grains and corn oil prices may make it unprofitable to operate our ethanol plants. No assurance can be given that we will purchase corn and natural gas or sell ethanol, distillers grains, corn oil and cattle at or near current prices. Consequently, our results of operations and financial position may be adversely affected by increases in corn or natural gas prices or decreases in ethanol, distillers grains, corn oil and cattle prices.



We continuously monitor the profitability of our ethanol plants and cattle feeding operations using a variety of risk management tools and hedging strategies, when appropriate. In recent years, the spread between ethanol and corn prices has fluctuated widely and narrowed significantly. Fluctuations are likely to continue. A sustained narrow spread or further reduction in the spread between ethanol and corn prices as a result of increased corn prices or decreased ethanol prices, would adversely affect our results of operations and financial position. Should our combined revenue from ethanol, distillers grains and corn oil fall below our cost of production, we could decide to slow or suspend production at some or all of our ethanol plants.



The commodities we buy and sell are subject to price volatility and uncertainty.



Corn.  We are generally unable to pass increased corn costs to our customers since ethanol competes with other fuels. At certain corn prices, ethanol may be uneconomical to produce. Ethanol plants, livestock industries and other corn-consuming enterprises put significant price pressure on local corn markets. In addition, local corn supplies and prices could be adversely affected by prices for alternative crops, increasing input costs, changes in government policies, shifts in global markets or damaging growing conditions, such as plant disease or adverse weather, including drought.



Natural Gas.  The price and availability of natural gas are subject to volatile market conditions. These market conditions are often affected by factors beyond our control, such as weather, drilling economics, overall economic conditions and government regulations. Significant disruptions in natural gas supply could impair our ability to produce ethanol. Furthermore, increases in natural gas price or changes in our cost relative to our competitors cannot be passed on to our customers which may adversely affect our results of operations and financial position.



Ethanol.  Our revenues are dependent on market prices for ethanol which can be volatile as a result of a number of factors, including: the price and availability of competing fuels; the overall supply and demand for ethanol and corn; the price of gasoline, crude oil and corn; and government policies.



Ethanol is marketed as a fuel additive that reduces vehicle emissions, an economical source of octanes and, to a lesser

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extent, a gasoline substitute. Consequently, gasoline supply and demand affect the price of ethanol. Should gasoline prices or demand decrease significantly, our results of operations could be materially harmed.  



Ethanol imports also affect domestic supply and demand. Imported ethanol is not subject to an import tariff and, under RFS II, sugarcane ethanol from Brazil is one of the most economical means for obligated parties to meet the advanced biofuel standard.



Distillers Grains.  Increased U.S. dry mill ethanol production has resulted in increased distillers grains production. Should this trend continue, distillers grains prices could fall unless demand increases or other market sources are found. The price of distillers grains has historically been correlated with the price of corn. Occasionally, the price of distillers grains will lag behind fluctuations in corn or other feedstock prices, lowering our cost recovery percentage.  Additionally, exports of distiller grains could be impacted by the enactment of foreign policy.



Distillers grains compete with other protein-based animal feed products. Downward pressure on commodity prices, such as soybeans, will generally cause the price of competing animal feed products to decline, resulting in downward pressure on the price of distillers grains.



Corn Oil.  Industrial corn oil is generally marketed as a biodiesel feedstock; therefore, the price of corn oil is affected by demand for biodiesel. In general, corn oil prices follow the prices of heating oil and soybean oil. Decreases in the price of corn oil could have an unfavorable impact on our business.



Cattle . The price and availability of feeder cattle are subject to volatile market conditions. These market conditions are often affected by factors beyond our control, such as weather, overall economic conditions and government regulations. Significant disruptions in feeder cattle supply could impair our ability to produce consistent results. Furthermore, increases in spreads between feeder and live cattle futures or changes in our cost relative to our competitors may adversely affect our results of operations and financial position. In addition, a significant disruption in cattle processing capacity could impair our ability to market cattle at favorable prices which would affect our profitability.



Our risk management strategies could be ineffective and expose us to decreased liquidity.



As market conditions warrant, we use forward contracts to sell some of our ethanol, distillers grains, corn oil , cattle and vinegar production or buy some of the corn, natural gas, cattle or ethanol we need to partially offset commodity price volatility. We also engage in other hedging transactions involving exchange-traded futures contracts for corn, natural gas , cattle and ethanol. The financial impact of these activities depends on the price of the commodities involved and our ability to physically receive or deliver the commodities.



Hedging arrangements expose us to risk of financial loss when the counterparty defaults on its contract or, in the case of exchange-traded contracts, when the expected differential between the price of the underlying and physical commodity changes. Hedging activities can result in losses when a position is purchased in a declining market or sold in a rising market. Hedging losses may be offset by a decreased cash price for corn and natural gas and an increased cash price for ethanol, distillers grains and corn oil. We vary the amount of hedging and other risk mitigation strategies we undertake and sometimes choose not to engage in hedging transactions at all. We cannot provide assurance that our risk management strategies and decisions effectively offset commodity price volatility. If we fail to offset such volatility, our results of operations and financial position may be adversely affected.



The use of derivative financial instruments frequently involves cash deposits with brokers, or margin calls. Sudden changes in commodity prices may require additional cash deposits immediately. Depending on our open derivative positions, we may need additional liquidity with little advance notice to cover margin calls. While we continuously monitor our exposure to margin calls, we cannot guarantee we will be able to maintain adequate liquidity to cover margin calls in the future.



Government m andates affecting ethanol could change and impact the ethanol market.



Under the provisions of the EISA, Congress established a mandate setting the minimum volume of renewable fuels that must be blended with gasoline under the RFS II, which affects the domestic market for ethanol. The EPA has the authority to waive the requirements, in whole or in part, if there is inadequate domestic renewable fuel supply or the requirement severely harms the economy or the environment. After 2022, volumes shall be determined by the EPA in coordination with the Secretaries of Energy and Agriculture, taking into account such factors as impact on environment, energy security, future rates of production, cost to consumers, infrastructure, and other factors such as impact on commodity prices, job creation,

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rural economic development, or impact on food prices.



Our operations could be adversely impacted by legislation or EPA actions, as set forth below or otherwise, that may reduce the RFS II mandate. Similarly, should federal mandates regarding oxygenated gasoline be repealed, the market for domestic ethanol could be adversely impacted. Economic incentives to blend based on the relative value of gasoline versus ethanol, taking into consideration the octane value of ethanol, environmental requirements and the RFS II mandate, may affect future demand. A significant increase in supply beyond the RFS II mandate could have an adverse impact on ethanol prices. Moreover, changes to RFS II could negatively impact the price of ethanol or cause imported sugarcane ethanol to become more economical than domestic ethanol.



On July 5, 2017, the EPA proposed maintaining the RVOs for conventional ethanol at 15.0 billion gallons while lowering the volume obligations for advanced alternatives, reducing the overall biofuel target to 19.24 billion gallons for 2018. On September 26, 2017, the EPA issued a Notice of Data Availability for comment, proposing to further reduce the 2018 advanced biofuel volume requirement by 315 mmg, to 3.77 billion gallons, and the total renewable fuel requirement to 18.77 billion gallons, leaving conventional ethanol at 15.0 billion gallons. According to RFS II, if mandatory renewable fuel volumes are reduced by at least 20% for two consecutive years, the EPA is required to modify, or reset, statutory volumes through 2022. While conventional ethanol maintained 15 billion gallons, 2018 is the first year the total proposed RVOs are more than 20% below statutory volumes levels.  Thus, the EPA Administrator directed his staff to initiate the required technical analysis to perform any future reset consistent with the reset rules. The reset will be triggered if the 2019 RVOs continue to be more than 20% below the statutory levels, and the EPA will be required to modify statutory volumes through 2022 within one year of the trigger event, based on the same factors used to set the RVOs post-2022.



The U.S. Federal District Court for the D.C. Circuit ruled on July 28, 2017, in favor of the Americans for Clean Energy and its petitioners against the EPA related to its decision to lower the 2016 volume requirements. The Court concluded the EPA erred in how it interpreted the “inadequate domestic supply” waiver provision of RFS II, which authorizes the EPA to consider supply-side factors affecting the volume of renewable fuel available to refiners, blenders, and importers to meet the statutory volume requirements. The waiver provision does not allow the EPA to consider the volume of renewable fuel available to consumers or the demand-side constraints that affect the consumption of renewable fuel by consumers. As a result, the Court vacated the EPA’s decision to reduce the total renewable fuel volume requirements for 2016 through its waiver authority, which the EPA is expected to address. We believe this decision will benefit the industry overall, with the EPA's waiver analysis now limited to supply considerations only, and expect the primary impact will be on the RINs market.



On October 19, 2017, the EPA Administrator reiterated his commitment to the text and spirit of the RFS II. In a letter to seven Senators from the Midwestern states, among other topics, he stated the EPA is actively exploring its authority to issue an RVP waiver and will not be pursuing action on RINs involving ethanol exports. Moreover, on November 22, 2017, the EPA issued a Notice of Denial of Petitions for rulemaking to change the RFS point of obligation which resulted in the EPA confirming the point of obligation will not change.



Valero Energy and refining trade group American Fuel and Petrochemical Manufacturers (AFPM) have challenged the EPA’s handling of the U.S. biofuel mandate in separate actions on January 26, 2018. AFPM is asking the D.C. U.S. Court of Appeals to review the EPA’s November 2017 decision to reject proposed changes to the structure of the RFS, including moving the point of obligation from refiners and importers of fuel to fuel blenders. Valero filed two petitions with the same court, one seeking review of the annual Renewable Volume Obligation (RVO) rule set by EPA’s for 2018 and 2019, which dictates the volumes of renewable fuels to be blended in the coming years, and a second arguing against the EPA’s December 2017 assertion that the agency has fulfilled its duty to periodically review the RFS as directed by statute.



Future demand may be influenced by economic incentives to blend based on the relative value of gasoline versus ethanol, taking into consideration the octane value of ethanol, environmental requirements and the RFS II mandate. A significant increase in supply beyond the RFS II mandate could have an adverse impact on ethanol prices. Moreover, any changes to RFS II originating from issues associated with the market price of RINs could negatively impact the demand for ethanol, discretionary blending of ethanol and/or the price of ethanol.



Flexible-fuel vehicles, which are designed to run on a mixture of fuels such as E85, receive preferential treatment to meet corporate average fuel economy standards in the form of CAFE credits. Flexible-fuel vehicle credits have been decreasing since 2014 and will be completely phased out by 2020. Absent CAFE preferences, auto manufacturers may not be willing to build flexible-fuel vehicles, reducing the growth of E85 markets and resulting in lower ethanol prices.



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

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If the United States were to withdraw fr om or materially modify NAFTA or certain other international trade agreements, our business, financial condition and results of operations could be materially adversely affected.

 

Ethanol and other products that we produce are sold into Canada, Mexico and other countries with trade agreements with the United States. The current administration has expressed antipathy towards certain existing international trade agreements, including NAFTA , and made comments suggesting that t he y support significantly increasing tariffs on goods imported into the United States, which in turn may lead to retaliatory actions on US exports. As of the date of this Form 10-K, it remains unclear what the outcomes may be of NAFTA trade regulations, other international trade agreements and tariffs on various goods imported into the United States. If the United States were to withdraw from or materially modify NAFTA or other international trade agreements to which it is a party, or if tariffs were raised on the foreign-sourced goods that   lead to retaliatory actions, it could have material adverse effect on our business, financial condition and results of operations.



Future demand for ethanol is uncertain and changes in public perception, consumer acceptance and overall consumer demand for transportation fuel could affect demand.



While many trade groups, academics and government agencies support ethanol as a fuel additive that promotes a cleaner environment, others claim ethanol production consumes considerably more energy, emits more greenhouse gases than other biofuels and depletes water resources. Some studies suggest ethanol produced from corn is less efficient than ethanol produced from switch grass or wheat grain. Others claim corn-based ethanol negatively impacts consumers by causing the prices of dairy, meat and other food derived from corn-consuming livestock to increase. Ethanol critics also contend the industry redirects corn supplies from international food markets to domestic fuel markets.



There are limited markets for ethanol beyond the federal mandates. Further consumer acceptance of E15 and E85 fuels may be necessary before ethanol can achieve significant market share growth. Discretionary and E85 blending are important secondary markets. Discretionary blending is often determined by the price of ethanol relative to gasoline. When discretionary blending is financially unattractive, the demand for ethanol may be reduced.



Demand for ethanol is also affected by overall demand for transportation fuel, which is affected by cost, number of miles traveled and vehicle fuel economy. Consumer demand for gasoline may be impacted by emerging transportation trends, such as electric vehicles or ride sharing. Additionally, factors such as over-supply of product could negatively impact demand for ethanol. Reduced demand for ethanol may depress the value of our products, erode our margins, and reduce our ability to generate revenue or operate profitably.



Our business is directly affected by the supply and demand for ethanol and other fuels in the markets served by our assets. Miles traveled typically increases during the spring and summer months related to vacation travel, followed closely behind the fall season due to holiday travel. Additionally, r educed demand for ethanol may erode our margins and reduce our ability to generate revenue and operate profitably.



We may fail to realize the anticipated benefits of mergers, acquisitions, joint ventures or partnerships.



We have increased the size and diversity of our operations significantly through mergers and acquisitions and intend to continue exploring potential growth opportunities. Acquisitions involve numerous risks that could harm our business, including:

·

difficulties integrating the operations, technologies, products, existing contracts, accounting processes and personnel and realizing anticipated synergies of the combined business;

·

risks relating to environmental hazards on purchased sites;

·

risks relating to developing the necessary infrastructure for facilities or acquired sites, including access to rail networks;

·

difficulties supporting and transitioning customers;

·

diversion of financial and management resources from existing operations;

·

the purchase price exceeding the value realized;

·

risks of entering new markets or areas outside of our core competencies;

·

potential loss of key employees, customers and strategic alliances from our existing or acquired business;

·

unanticipated problems or underlying liabilities; and

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·

inability to generate sufficient revenue to offset acquisition and development costs.



The anticipated benefits of these transactions may not be fully realized or take longer to realize than expected.  



We may also pursue growth through joint ventures or partnerships, which typically involve restrictions on actions that the partnership or joint venture may take without the approval of the partners. These provisions could limit our ability to manage the partnership or joint venture in a manner that serves our best interests.



Future acquisitions may involve issuing equity as payment or to finance the business or assets, which could dilute your ownership interest. Furthermore, additional debt may be necessary to complete these transactions, which could have a material adverse effect on our financial condition. Failure to adequately address the risks associated with acquisitions or joint ventures could have a material adverse effect on our business, results of operations and financial condition.



Our debt exposes us to numerous risks that could have significant consequences to our shareholders.



Risks related to the level of debt we have include:

·

requiring a substantial portion of cash to be dedicated for debt service , reducing the availability of cash flow for working capital, capital expenditures , and other general business activities and limiting our ability to invest in new growth opportunities ;

·

limiting our ability to obtain additional financing for working capital, capital expenditures, acquisitions and other activities;

·

limiting our flexibility to plan for or react to changes in the businesses and industries in which we operate;

·

increasing our vulnerability to general and industry-specific adverse economic conditions;

·

being at a competitive disadvantage against less leveraged competitors;

·

being vulnerable to increases in prevailing interest rates;

·

subjecting all or substantially all of our assets to liens, which means there may be no assets left for shareholders in the event of a liquidation; and

·

limiting our ability to make operational decisions regarding our business, including limiting our ability to pay dividends, make capital improvements, sell or purchase assets or engage in transactions deemed appropriate and in our best interest.



Most of our debt bears interest at variable rates, which creates exposure to interest rate risk. If interest rates increase, our debt service obligations at variable rates would increase even though the amount borrowed remained the same, decreasing net income.



Our ability to make scheduled payments of principal and interest, to make additional payments required under financial covenants, or to refinance our debt depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not continue generating cash flow sufficient to service our debt. If we are unable to generate sufficient cash flows, we may be required to sell assets, restructure debt or obtain additional equity capital on terms that are onerous or highly dilutive. Our ability to refinance our debt will depend on capital markets and our financial condition at that time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in default on our debt obligations.  



We are required to comply with a number of covenants under our existing loan agreements that could hinder our growth.



The loan agreements governing our secured debt financing and our convertible senior notes contain a number of restrictive affirmative and negative covenants, which limit our ability to incur additional debt; exceed certain limits; pay dividends or distributions; or merge, consolidate or dispose of substantially all of our assets.



We are required to maintain specified financial ratios, including minimum cash flow coverage, term debt to term total capitalization, working capital and tangible net worth under certain loan agreements. Other agreements require us to use a portion of excess cash flow generated by our operations to prepay the respective term debt. A breach of these covenants could result in default, and if such default is not cured or waived, our lenders could accelerate our debt and declare it immediately due and payable. If this occurs, we may not be able to repay or borrow sufficient funds to refinance the debt. Even if financing is available, it may not be on acceptable terms. No assurance can be given that our future operating results will be

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sufficient to comply with these covenants or remedy default. We also have an incurrence test that may limit our ability to make certain restricted equity or debt payments, make acquisitions or investments and take on additional debt.



In the past, we have received waivers from our lenders for failure to meet certain financial covenants and amended our loan agreements to change these covenants. In the event we are unable to comply with these covenants in the future, we cannot provide assurance that we will be able to obtain the necessary waivers or amend our loan agreements to prevent default. Under our convertible senior notes, default on any loan in excess of $10.0 million could result in the notes being declared due and payable, which would have a material and adverse effect on our ability to operate.



We operate in a capital intensive business and rely on cash generated from operations and external financing, which could be limited.  



Some ethanol producers have faced financial distress, culminating to bankruptcy filings by several companies over the past seven years. This , combined with capital market volatility, has resulted in reduced available capital for the ethanol industry in general. Increased commodity prices could increase liquidity requirements. Our operating cash flow is dependent on overall commodity market conditions as well as our ability to operate profitably. In addition, we may need to raise additional financing to fund growth. In some market environments, we may have limited access to incremental financing, which could defer or cancel growth projects, reduce business activity or cause us to default on our existing debt agreements if we are unable to meet our payment schedules. These events could have an adverse effect on our operations and financial position.



Our ability to repay current and anticipated future debt will depend on our financial and operating performance and successful implementation of our business strategies. Our financial and operational performance will depend on numerous factors including prevailing economic conditions, commodity prices, and financial, business and other factors beyond our control. If we cannot repay, refinance or extend our current debt at scheduled maturity dates, we could be forced to reduce or delay capital expenditures, sell assets, restructure our debt or seek additional capital. If we are unable to restructure our debt or raise funds, our operations and growth plans could be harmed and the value of our stock could be significantly reduced.



Disruptions in the credit market or a downgrade in our credit rating could limit our access to capital.



We may need additional capital to fund our growth or other business activities in the future. If our credit rating is downgraded, the cost of capital under our existing or future financing arrangements could increase and affect our ability to trade with various commercial counterparties or cause our counterparties to require additional forms of credit support. If capital markets are disrupted, we may not be able to access capital at all or capital may only be available under less favorable terms.



Our ability to maintain the required regulatory permits or manage changes in environmental , safety and TTB regulations is essential to successfully operating our plants.



Our plants are subject to extensive air, water ,   environmental and TTB regulations. Our production facilities involve the emission of various airborne pollutants, including particulate, carbon dioxide, nitrogen oxides, hazardous air pollutants and volatile organic compounds, which requires numerous environmental permits to operate our plants. Governing state agencies could impose costly conditions or restrictions that are detrimental to our profitability and have a material adverse effect on our operations, cash flows and financial position.



Environmental laws and regulations at the federal and state level are subject to change .   These changes can also be made retroactively. It is possible that more stringent federal or state environmental rules or regulations could be adopted, which could increase our operating costs and expenses. Consequently, even though we currently have the proper permits, we may be required to invest or spend considerable resources in order to comply with future environmental regulations. Furthermore, ongoing plant operations, which are governed by the Occupational Safety and Health Administration, may change in a way that increases the cost of plant operations. Any of these events could have a material adverse effect on our operations, cash flows and financial position.



Part of our business is regulated by environmental laws and regulations governing the labeling, use, storage, discharge and disposal of hazardous materials. Since we handle and use hazardous substances, changes in environmental requirements or an unanticipated significant adverse environmental event could have a negative impact on our business. While we strive to comply with all environmental requirements, we cannot provide assurance that we have been in compliance at all times or will not incur material costs or liabilities in connection with these requirements. Private parties, including current and former employees, could bring personal injury or other claims against us due to the presence of hazardous substances. We are also exposed to residual risk by our land and facilities which may have environmental liabilities from prior use. Changes in

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environmental regulations may require us to modify existing plant and processing facilities, which could significantly increase our cost of operations.



TTB regulations apply when producing our undenatured ethanol.  These regulations carry substantial penalties for non-compliance and therefore any non-compliance may adversely affect our financial operations or adversely impact our ability to produce undenatured ethanol.



Any inability to generate or obtain RINs could adversely affect our operating margins.



Nearly all of our ethanol production is sold with RINs that are used by our customers to comply with the Renewable Fuel Standard. Should our production not meet the EPA’s requirements for RIN generation in the future, we would need to purchase RINs in the open market or sell our ethanol at lower prices to compensate for the absence of RINs. The price of RINs depends on a variety of factors, including the availability of qualifying biofuels and RINs for purchase, production levels of transportation fuel and percentage mix of ethanol with other fuels, and cannot be predicted. Failure to obtain sufficient RINs or reliance on invalid RINs could subject us to fines a nd penalties imposed by the EPA which could adversely affect our results of operations, cash flows and financial condition.



We trade ethanol acquired from third-parties. Should it be discovered the RINs associated with the ethanol we purchased are invalid, albeit unknowingly, we could be subject to substantial penalties if we are assessed the maximum amount allowed by law. Prior to 2013, the EPA assessed only modest penalties for RIN violations. However, based on EPA penalties assessed on RINS violations in the past few years, in the event of a violation, the EPA could assess penalties , which could have an adverse impact on our profitability.



Compliance with evolving environmental, health and safety laws and regulations, particularly those related to climate change, could be costly.  



Our plants emit carbon dioxide as a by-product of ethanol production. In February 2010, the EPA released its final regulations on RFS II, grandfathering our plants at their current authorized capacity.  While some of our plants have received efficient producer status and no longer rely on grandfathered status, for those still reliant upon it, expansion above these levels will require a 20% reduction in greenhouse gas emissions from the 2005 baseline measurement. Separately, CARB adopted a LCFS that took effect in January 2013, which requires a 10% reduction in the average carbon intensity of gasoline and diesel transportation fuels from 2010 to 2020. An ILUC component is included in the greenhouse gas emission calculation, which may have an adverse impact on the market for corn-based ethanol in California.



To expand our production capacity, federal and state regulations may require us to obtain additional permits, achieve EPA’s efficient producer status under the pathway petition program, install advanced technology or reduce drying distillers grains. Compliance with future laws or regulations to decrease carbon dioxide could be costly and may prevent us from operating our plants as profitably, which may have an adverse impact on our operations, cash flows and financial position.



Global competition could affect our profitability.

 

We compete with producers in the United States and abroad. Depending on feedstock, labor and other production costs, producers in other countries, such as Brazil, may be able to produce ethanol cheaper than we can. Under RFS II, certain parties are obligated to meet an advanced biofuel standard. In recent years, sugarcane ethanol imported from Brazil has been one of the most economical means for obligated parties to meet this standard. While transportation costs, infrastructure constraints and demand may temper the impact of ethanol imports, foreign competition remains a risk to our business. Moreover, significant additional foreign ethanol production could create excess supply, which could result in lower ethanol prices throughout the world, including the United States. Any penetration of ethanol imports into the domestic market may have a material adverse effect on our operations, cash flows and financial position.



International activities such as boycotts, embargoes, product rejection, trade policies and compliance matters, may have an adverse effect on our results of operations.



Government actions abroad can have a significant impact on our business. In 2017, we exported 13.5% of our ethanol production and 9% of our distillers grains production. In 2013, the EU imposed a five-year tariff of $83.33 per metric ton on U.S. ethanol to discourage foreign competition.   Effective January 1, 2017 , China indicated its intention to raise its 5% tariff on U.S. and Brazil fuel ethanol to 30% . Although the ethanol export markets are affected by competition from other ethanol exporters, particularly Brazil, and in spite of the actions by China, we believe exports will remain active in 201 8 .   On September 1, 2017, Brazil’s Chamber of Foreign Trade, or CAMEX, issued an official written resolution, imposing a 20% tariff on U.S. ethanol imports in excess of 150 million liters, or 39.6 million gallons per quarter. The ruling is valid for two

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years.  



In 2013, China began rejecting U.S. dried distillers grains because it contained genetically modified corn not yet approved for import. In early 2015, China lifted this ban and imported 6.3 million metric tons of U.S. distillers grains that year. In January 2016, China’s Ministry of Commerce once again initiated an anti-dumping investigation into U.S.-produced dried distillers grains exported to China. In January of 2017, the Ministry of Commerce of China announced it increased anti-dumping duties on U.S. distillers grains, ranging from 42.2% to 53.7%. According to the USDA, in 2017, approximately 29% of distillers grain produced in the United States was exported, down from 31% in 2016.  



With more tariffs and reduced exports, the value of our distillers grains may be affected, which could have a negative impact on our profitability. Additionally, tariffs on U.S. ethanol may lead to further industry over-supply and reduce our profitability. Moreover, the America First trade position has caused more countries to toughen their positions on U.S. imports.



Increased ethanol industry penetration by oil and other multinational companies could impact our margins.



We operate in a very competitive environment and compete with other domestic ethanol producers in a relatively fragmented industry. The top five producers account for approximately 44% of the domestic production capacity with production capacity rangi ng from 800 mmgy to 1,700 mmgy. The remaining ethanol producers consist of smaller entities engaged exclusively in ethanol production and large integrated grain companies that produce ethanol in addition to their base grain businesses. We compete for capital, labor, corn and other resources with these companies.



Until recently, oil companies, petrochemical refiners and gasoline retailers were not engaged in ethanol production even though they form the primary distribution network for ethanol blended with gasoline. During the past five years, several oil refiners have acquired ethanol production plants. If these companies increase their ethanol plant ownership or additional companies commence production, the need to purchase ethanol from independent producers like us could diminish and adversely effect on our operations, cash flows and financial position.



Sales of distillers grains depend on its continued market acceptance as livestock feed.



Antibiotics may be used during the fermentation process to control bacterial contamination; therefore, it is possible for antibiotics to be present in small quantities in our distillers grains, which is a co-product of the fermentation process and marketed as an animal feed. Should the FDA introduce regulations limiting the sale of such distillers grains in domestic or international markets, the market value of our distillers grains could be diminished, which would negatively impact our profitability.



Independently, if public perception regarding distillers grains as an acceptable animal feed were to change or if the public became concerned about the impact of distillers grains in the food supply, the market for distillers grains could be negatively impacted, which would adversely affect our profitability.



We extract industrial grade corn oil from the whole stillage process before producing distillers grains. Several universities are trying to determine how corn oil extraction affects nutritional energy values of the resulting distillers grains. If it is determined that corn oil extraction adversely affects the digestible energy content of distillers grains, the value of our distillers grains may be affected, which could have a negative impact on our profitability.



Our agribusiness operations are subject to significant government regulations.



Our agribusiness operations are regulated by various government entities that can impose significant costs on our business. Failure to comply could result in additional expenditures, fines or criminal action. Our production levels, markets and grains we merchandise are affected by federal government programs, which include USDA acreage control and price support programs. Government policies such as tariffs, duties, subsidies, import and export restrictions and embargos can also impact our business. Changes in government policies and producer support could impact the type and amount of grains planted, which could affect our ability to buy grain. Export restrictions or tariffs could limit sales opportunities outside of the United States.



Commodities futures trading is subject to extensive regulations.



The futures industry is subject to extensive regulation. Since we use exchange-traded futures contracts as part of our business, we are required to comply with a wide range of requirements imposed by the CFTC, National Futures Association and the exchanges on which we trade. These regulatory bodies are responsible for safeguarding the integrity of the futures

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markets and protecting the interests of market participants. As a market participant, we are subject to regulation concerning trade practices, business conduct, reporting, position limits, record retention, the conduct of our officers and employees, and other matters.



Failure to comply with the laws, rules or regulations applicable to futures trading could have adverse consequences. Such claims could result in fines, settlements or suspended trading privileges, which could have a material adverse impact on our business, financial condition or operating results.



Owning and operating cattle feeding operation s involves numerous external factors that are outside of our control.



Our cattle feeding operation s involve numerous risks that could lead to increased costs or decreased demand for beef products, which could have an adverse effect on our results of operations and financial condition, including:

·

constantly changing and potentially volatile supply and demand, which affect the cost of livestock and feed ingredients and the sales price of our cattle;

·

outbreak of disease in our or other cattle feeding operations or public perception that an outbreak has occurred, which could lead to inadequate supply, reduced consumer confidence in the safety and quality of beef products, adverse publicity, cancellation of orders and import or export restrictions;

·

liabilities in excess of our insurance policy limits or related uninsurable risks if outbreaks of disease or other conditions result in significant losses;

·

extended periods of bad weather, including the combination of cold temperatures and precipitation, as well as blizzards or tornados;

·

diminished access to international markets, including import trade restrictions due to disease or other perceived health or food safety issues, or changes in political or economic conditions;

·

reduced red meat consumption due to dietary changes or other issues, leading to depressed cattle prices;

·

the closure or extended shutdown of a major cattle packing plant, leading to depressed cattle prices;

·

increased water costs due to water use restrictions, including those related to diminishing water table levels;

·

operational restrictions resulting from government regulations; and

·

risks relating to environmental hazards.



Owning and operating a vinegar production business involves numerous external factors that are outside of our control.



Our Fleischmann’s Vinegar operations involve numerous risks that could lead to increased costs or decreased demand for products, which could have an adverse effect on our results of operations and financial condition, including:

·

we use many different products in the production of vinegar, which are subject to price volatility caused by market fluctuations, and potentially volatile supply and demand. Commodity price increases may increase raw material, packaging, energy and operating costs. We may not be able to increase our product prices to fully offset these increased costs, which may result in reduced sales volume, margins and profitability;

·

changes in our relationships with significant customers or suppliers could adversely affect us, as the loss of a significant customer or a material reduction in sales to a significant customer could materially and adversely affect our product sales and results of operations;

·

our ability to manufacture, transport and sell our products is critical to our success and any disruptions in our supply chain could have an adverse impact on our business and results of operations;

·

the food ingredients industry is highly competitive and further consolidation in the industry would likely increase competition;

·

our customers have continued to consolidate, resulting in fewer customers upon which we can rely for business. These consolidations have produced large sophisticated customers with increased buying power and negotiating strength, which could have a negative impact on profits;

·

consumer preferences evolve over time and the success of our products depends on our ability to identify the tastes of consumers and work with manufacturers to develop products that appeal to those preferences;

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·

food ingredients used in products for human consumption may be subject to product liability claims and product recalls which could negatively impact our profitability;

·

our facilities and products are subject to many laws and regulations administered by various federal, state and local government agencies as well as SQF, a Global Food and Safety Initiative program related to processing, packaging, storage, distribution, supply chains, quality and safety of food products, the health and safety of our employees and the protection of the environment.  Failure to comply with applicable laws and regulations could subject us to lawsuits, administrative penalties and civil remedies including fines, injunctions and recalls of our products; and

·

A portion of our workforce is unionized and we may face labor disruptions that may interfere with our operations.



Our success depends on our ability to manage our growing and changing operations.



Since our formation in 2004, our business has grown significantly in size, products and complexity. This growth places substantial demands on our management, systems, internal controls, and financial and physical resources. If we acquire additional operations, we may need to further develop our financial and managerial controls and reporting systems, and could incur expenses related to hiring additional qualified personnel and expanding our information technology infrastructure. Our ability to manage growth effectively could impact our results of operations, financial position and cash flows.



Replacement technologies could make corn-based ethanol or our process technology obsolete.



Ethanol is used primarily as an octane additive and oxygenate blended with gasoline. Critics of ethanol blends argue that it decreases fuel economy, causes corrosion and damages fuel pumps. Prior to federal restrictions and ethanol mandates, methyl tertiary-butyl ether, or MTBE, was the leading oxygenate. Other ether products could enter the market and prove to be environmentally or economically superior to ethanol. Alternative biofuel alcohols, such as methanol and butanol, could evolve and replace ethanol.



Research is currently underway to develop products and processes that have advantages over ethanol, such as: lower vapor pressure, making it easier to add to gasoline; similar energy content as gasoline, reducing any decrease in fuel economy caused by blending with gasoline; ability to blend at higher concentration levels in standard vehicles; and reduced susceptibility to separation when water is present. Products offering a competitive advantage over ethanol could reduce our ability to generate revenue and profits from ethanol production.



New ethanol process technologies could emerge that require less energy per gallon to produce and result in lower production costs. Our process technologies could become obsolete and place us at a competitive disadvantage, which could have a material adverse effect on our operations, cash flows and financial position.



We may be required to provide remedies for ethanol, distillers grains or corn oil that does not meet the specifications defined in our sales contracts.



If we produce or purchase ethanol, distillers grains or corn oil that does not meet the specifications defined in our sales contracts, we may be subject to quality claims. We could be required to refund the purchase price of any non-conforming product or replace the non-conforming product at our expense. Ethanol, distillers grains or corn oil that we purchase or market and subsequently sell to others could result in similar claims if the product does not meet applicable contract specifications, which could have an adverse impact on our profitability.



Business disruptions due to unforeseen operational failures or factors outside of our control could impact our ability to fulfill contractual obligations.



Natural disasters, significant track damage resulting from a train derailment or strikes by our transportation providers could delay shipments of raw materials to our plants or deliveries of ethanol, distillers grains, corn oil, cattle and vinegar to our customers. If we are unable to meet customer demand or contract delivery requirements due to stalled operations caused by business disruptions, we could potentially lose customers.



Adverse weather conditions, such as inadequate or excessive amounts of rain during the growing season, overly wet conditions, an early freeze or snowy weather during harvest could impact the supply of corn that is needed to produce ethanol. Corn stored in an open pile may be damaged by rain or warm weather before the corn is dried, shipped or moved into a storage structure.



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Our ethanol-related assets may be at greater risk of terrorist attacks, threats of war or actual war, than other possible targets.



Terrorist attacks in the United States, including threats of war or actual war, may adversely affect our operations. A direct attack on our ethanol production plants, or our partnership’s storage facilities, fuel terminals and railcars could have a material adverse effect on our financial condition, results of operations and cash flows. Furthermore, a terrorist attack could have an adverse impact on ethanol prices. Disruption or significant increases in ethanol prices could result in government-imposed price controls.



Our network infrastructure, enterprise applications and internal technology systems could be damaged or otherwise fail and disrupt business activities.



Our network infrastructure, enterprise applications and internal technology systems are instrumental to the day-to-day operations of our business. Numerous factors outside of our control, including earthquakes, floods, lightning, tornados, fire, power loss, telecommunication failures, computer viruses, physical or electronic vandalism or similar disruptions could result in system failures, interruptions or loss of critical data and prevent us from fulfilling customer orders. We cannot provide assurance that our backup systems are sufficient to mitigate hardware or software failures, which could result in business disruptions that negatively impact our operating results and damage our reputation.



We could be adversely affected by cyber-attacks, data security breaches and significant information technology systems interruptions.



Information security risks have generally increased in recent years as a result of the proliferation of new technologies and the increased sophistication and frequency of cyber-attacks and data security breaches. To manage the risk associated with potential technology security breaches, we have implemented security measures to protect us against cyber-based attacks and disaster recovery plans for our critical systems. However, our information technology systems and network infrastructure may be subject to unauthorized access or attack at any time and there can be no assurances that our infrastructure protection technologies and disaster recovery plans are sufficient to prevent a technology systems breach, systems failure, business interruption or loss of sensitive data. The potential impact of any of these incidents, should they occur, could be material and have an adverse impact to our revenues, operating results, financial condition or damage our reputation.



We may not be able to hire and retain qualified personnel to operate our facilities.



Our success depends, in part, on our ability to attract and retain competent employees. Qualified managers, engineers, merchandisers and other personnel must be hired for each of our locations. If we are unable to hire and retain productive, skilled personnel, we may not be able to maximize production, optimize plant operations or execute our business strategy.



In the past, we have had operating losses and could incur future operating losses.  



In the last five years, we incurred operating losses during certain quarters and could incur operating losses in the future that are substantial. Although we have had periods of sustained profitability, we may not be able to maintain or increase profitability on a quarterly or annual basis, which could impact the market price of our common stock and the value of your investment.



Compliance with and changes in tax laws could adversely affect our performance.



We are subject to extensive tax liabilities imposed by multiple jurisdictions, including income taxes, indirect taxes (excise/duty, sales/use, gross receipts, and value-added taxes), payroll taxes, franchise taxes, withholding taxes, and ad valorem taxes. New tax laws and regulations and changes in existing tax laws and regulations are continuously being enacted or proposed that could result in increased expenditures for tax liabilities in the future. Many of these liabilities are subject to periodic audits by the respective taxing authority. Subsequent changes to our tax liabilities as a result of these audits may subject us to interest and penalties.



Federal, state and local jurisdictions may challenge our tax return positions.



The positions taken in our federal and state tax return filings require significant judgments, use of estimates and the interpretation and application of complex tax laws. Significant judgment is also required in assessing the timing and amounts of deductible and taxable items. Despite management’s belief that our tax return positions are fully supportable, certain positions may be successfully challenged by federal, state and local jurisdictions.



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There have been substantial changes to the Internal Revenue Code, some of which could have an adverse effect on our shareholders.



The Tax Cuts and Jobs Act was enacted on December 22, 2017 and is effective January 1, 2018 making significant changes to the Internal Revenue Code.  The U.S. Department of Treasury has broad authority to issue regulations and interpretative guidance that may significantly impact how we will apply the law and impact our results of operations in the period issued.  Among other provisions, the Act reduces the Federal statutory corporate income tax rate from 35% to 21%.  Due to the reduction in the federal tax rate to 21%, the Company revalued its deferred liabilities at the new rate at year-end. The company has not yet evaluated the full impact of the Act as it relates 2018 income, however certain components of the Act, such as the limits on deductibility of interest expense, may negatively impact us. 



We are exposed to credit risk that could result in losses or affect our ability to make payments should a counterparty fail to perform according to the terms of our agreement.



We are exposed to credit risk from a variety of customers, including major integrated oil companies, large independent refiners, petroleum wholesalers, cattle packers, food companies and other ethanol plants. We are also exposed to credit risk with major suppliers of petroleum products and agricultural inputs when we make payments for undelivered inventories. Our fixed-price forward contracts are subject to credit risk when prices change significantly prior to delivery. The inability by a third party to pay us for our sales, provide product that was paid for in advance or deliver on a fixed-price contract could result in a loss and adversely impact our liquidity and ability to make our own payments when due.



We have limitations, as a holding company, in our ability to receive distributions from a small number of our subsidiaries.



We conduct most of our operations through our subsidiaries and rely on dividends or intercompany transfers of funds to generate free cash flow. Some of our subsidiaries are currently, or are expected to be, limited in their ability to pay dividends or make distributions under the terms of their financing agreements. Consequently, we cannot fully rely on the cash flow from one subsidiary to satisfy the loan obligations of another subsidiary. As a result, if a subsidiary is unable to satisfy its loan obligations, we may not be able to prevent default by providing additional cash to that subsidiary, even if sufficient cash exists elsewhere within our organization.



Increased federal support of cellulosic ethanol could result in increased competition to corn-based ethanol producers.



Legislation, including the American Recovery and Reinvestment Act of 2009 and EISA, provides numerous funding opportunities supporting cellulosic ethanol production. In addition, RFS II mandates an increasing level of biofuel production that is not derived from corn. Federal policies suggest a long-term political preference for cellulosic processing using feedstocks such as switch grass, silage, wood chips or other forms of biomass. Cellulosic ethanol may be viewed more favorably since the feedstock is not diverted from food production. In addition, cellulosic ethanol may have a smaller carbon footprint because the feedstock does not require energy-intensive fertilizers or industrial production processes. Several cellulosic ethanol plants are currently under development. While these have had limited success to date, as research and development programs persist, there is risk that cellulosic ethanol could displace corn ethanol.



Any changes in federal mandates from corn-based to cellulosic-based ethanol production may reduce our profitability. Our plants are designed as single-feedstock facilities and would require significant additional investments to convert production to cellulosic ethanol. Furthermore, our plants are strategically located in high-yield, low-cost corn production areas. At present, there is limited supply of alternative feedstocks near our facilities. As a result, the adoption of cellulosic ethanol and its use as the preferred form of ethanol could have a significant adverse impact on our business.



We may not have adequate insurance to cover losses from certain events.



Losses related to risks that are not covered by insurance or available under acceptable terms such as war, riots or terrorism could have a material adverse effect on our operations, cash flows and financial position.



Certain of our ethanol production plants, fuel terminals and vinegar operations are located within recognized seismic and flood zones. We modified our facilities to comply with regional structural requirements for those regions of the country and obtained additional insurance coverage specific to earthquake and flood risks for the applicable plants and fuel terminals. We cannot provide assurance that these facilities would remain in operation should a seismic or flood event occur, which would adversely affect our operations.







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Risks Related to the Partnership



We depend on the partnership to provide fuel storage and transportation services.



The partnership’s operations are subject to all of the risks and hazards inherent in the storage and transportation of fuel, including: damages to storage facilities, railcars and surrounding properties caused by floods, fires, severe weather, explosions, natural disasters or acts of terrorism; mechanical or structural failures at the partnership’s facilities or at third-party facilities at which its operations are dependent; curtailments of operations relative to severe weather; and other hazards, resulting in severe damage or destruction of the partnership’s assets or temporary or permanent shut-down of the partnership’s facilities. If the partnership is unable to serve our storage and transportation needs, our ability to operate our business could be adversely impacted, which could adversely affect our financial condition and results of operations. The inability of the partnership to continue operations, for any reason, could also impact the value of our investment in the partnership and, because the partnership is a consolidated entity, our business, financial condition and results of operations.



The partnership may not have sufficient available cash to pay quarterly distributions on its units.



The amount of cash the partnership can distribute depends on how much cash is generated from operations, which can fluctuate from quarter to quarter based on ethanol and other fuel volumes, handling fees, payments associated with minimum volume commitments, timely payments by subsidiaries and other third parties, and prevailing economic conditions. The amount of cash available for distribution also depends on the partnership’s operating and general and administrative expenses, capital expenditures, acquisitions and organic growth projects, debt service requirements, working capital needs, ability to borrow funds and access capital markets, revolving credit facility restrictions, cash reserves and other risks affecting cash levels. Increasing the partnership’s borrowings or other debt to finance its growth strategy could increase interest expense, which could impact the amount of cash available for distributions.



There are no limitations in the partnership agreement regarding its ability to issue additional units. Should the partnership issue additional units in connection with an acquisition or expansion, the distributions on the incremental units will increase the risk that the partnership will be unable to maintain or increase distributions on a per unit basis.



Increases in interest rates could adversely impact the partnership’s unit price, ability to issue equity or incur debt, and pay cash distributions at intended levels.



The partnership’s cash distributions and implied distribution yield affect its unit price. Distributions are often used by investors to compare and rank yield-oriented securities when making investment decisions. A rising interest rate environment could have an adverse impact on the partnership’s unit price, ability to issue equity or incur debt or pay cash distributions at intended levels, which could adversely impact the value of our investment in the partnership.



We may be required to pay taxes on our share of the partnership’s income that are greater than the cash distributions we receive from the partnership.



The unitholders of the partnership generally include, for purposes of calculating their U.S. federal, state and local income taxes, their share of the partnership’s taxable income, whether they have received cash distributions from the partnership. We ultimately may not receive cash distributions from the partnership equal to our share of taxable income or the taxes that are due with respect to that income, which could negatively impact our liquidity.



A majority of the executive officers and directors of the partnership are also officers of our company, which could result in conflicts of interest.



We indirectly own and control the partnership and appoint all of its officers and directors. A majority of the executive officers and directors of the partnership are also officers or directors of our company. Although our directors and officers have a fiduciary responsibility to manage the company in a manner that is beneficial to us, as directors and officers of the partnership, they also have certain duties to the partnership and its unitholders. Conflicts of interest may arise between us and our affiliates, and the partnership and its unitholders, and in resolving these conflicts, the partnership may favor its own interests over the company’s interests. In certain circumstances, the partnership may refer conflicts of interest or potential conflicts of interest to its conflicts committee, which must consist entirely of independent directors, for resolution. The conflicts committee must act in the best interests of the public unitholders of the partnership. As a result, the partnership may manage its business in a manner that differs from the best interests of the company or our stockholders, which could adversely affect our profitability.



25

 


 

 

 

 

Cash available for distributions could be reduced and likely cause a substantial reduction in unit value if the partnership became subject to entity-level taxation for federal income tax purposes.



The present federal income tax treatment of publicly traded partnerships or investments in its units could be modified, at any time, by administrative, legislative or judicial changes and interpretations. From time to time, members of Congress propose and consider substantive changes to the existing federal income tax laws that affect publicly traded partnerships. Should any legislative proposal eliminate the qualifying income exception, all publicly traded partnerships would be treated as corporations for federal income tax purposes. The partnership would be required to pay federal income tax on its taxable income at the corporate tax rate and likely state and local income taxes at varying rates as well. Distributions to unitholders would be taxed as corporate distributions. The partnership’s cash available for distributions and the value of the units would be substantially reduced.



Risks Related to our Common Stock



The price of our common stock may be highly volatile and subject to factors beyond our control.



Some of the many factors that can influence the price of our common stock include:



·

our results of operations and the performance of our competitors;

·

public’s reaction to our press releases, public announcements and filings with the SEC;

·

changes in earnings estimates or recommendations by equity research analysts who follow us or other companies in our industry;

·

changes in general economic conditions;

·

changes in market prices for our products or raw materials and related substitutes;

·

sales of common stock by our directors, executive officers and significant shareholders;

·

actions by institutional investors trading in our stock;

·

disruptions in our operations;

·

changes in our management team;

·

other developments affecting us, our industry or our competitors; and

·

U.S. and international economic, legal and regulatory factors unrelated to our performance.



In recent years the stock market has experienced significant price and volume fluctuations, which are sometimes unrelated to the operating performance of any particular company. These broad market fluctuations could materially reduce the price of our common stock price based on factors that have little or nothing to do with our company or its performance.



Anti-takeover provisions could make it difficult for a third party to acquire us.



Our restated articles of incorporation, restated bylaws and Iowa’s law contain anti-takeover provisions that could delay or prevent change in control of us or our management. These provisions discourage proxy contests, making it difficult for our shareholders to elect directors or take other corporate actions without the consent of our board of directors, which include:



·

board members have three-year staggered terms;

·

board members can only be removed for cause with an affirmative vote of no less than two-thirds of the outstanding shares;

·

shareholder action can only be taken at a special or annual meeting, not by written consent except where required by Iowa law;

·

shareholders are restricted from making proposals at shareholder meetings; and

·

the board of directors can issue authorized or unissued shares of stock.



We are subject to the provisions of the Iowa Business Corporations Act, which prohibits combinations between an Iowa corporation whose stock is publicly traded or held by more than 2,000 shareholders and an interested shareholder for three years unless certain exemption requirements are met.

26

 


 

 

 

 



Provisions in the convertible notes could also make it more difficult or too expensive for a third party to acquire us. If a takeover constitutes a fundamental change, holders of the notes have the right to require us to repurchase their notes in cash. If a takeover constitutes a make-whole fundamental change, we may be required to increase the conversion rate for holders who convert their notes. In either case, the obligation under the notes could increase the acquisition cost and discourage a third party from acquiring us.



These items discourage transactions that could otherwise command a premium over prevailing market prices and may limit the price investors are willing to pay for our stock.



Non-U.S. shareholders may be subject to U.S. income tax on gains related to the sale of their common stock.

 

If we are a U.S. real property holding corporation during the shorter of the five-year period before the stock was sold or the period the stock was held by a non-U.S. shareholder, the non-U.S. shareholder could be subject to U.S federal income tax on gains related to the sale of their common stock. Whether we are a U.S. real property holding corporation depends on the fair market value of our U.S. real property interests relative to our other trade or business assets and non-U.S. real property interests. We cannot provide assurance that we are not a U.S. real property holding corporation or will not become one in the future.



Item 1B.  U nresolved Staff Comments.



None.



Item 2.  Prope rties.



We believe the property owned and leased at our locations is sufficient to accommodate our current needs, as well as potential expansion.



A substantial portion of our owned real property is used to secure our loans. See Note 11 – Debt included as part of the notes to consolidated financial statements for information about our loan agreements.



Corporate



We lease approximately 54,000 square feet of office space at 1811 Aksarben Drive in Omaha, Nebraska for our corporate headquarters, which houses our corporate administrative functions and commodity trading operations.



Ethanol Production Segment



We own approximately 2,800 acres of land and lease approximately 78 acres of land at and around our ethanol production facilities. As detailed in our discussion of the ethanol production segment in Item 1 – Business , our ethanol plants have the capacity to produce approximately 1.5 billion gallons of ethanol per year.



Agribusiness and Energy Services Segment



We own approximately 54 acres of land at our four grain elevators. As detailed in our discussion in Item 1 – Business , our agribusiness and energy services segment facilities include four grain elevators with combined grain storage capacity of approximately 10.1 million bushels, and grain storage capacity at our ethanol plants of approximately 49.5 million bushels.



Our marketing operations are conducted primarily at our corporate office, in Omaha, Nebraska.



Fo od and Ingredients Segment



We own approximately 6,576 acres of land at our four   cattle feeding operation s . We also own approximately 67 acres of land and lease approximately three acres of land at our vinegar operation . We also lease office space for our vinegar operation in Cerritos, California and Montreal , Canada. As detailed in our discussion of the food and ingredients segment in Item 1 – Business , our cattle feeding operation s have the capacity to support approximately   258,000 head of cattle and 9.6 million bushels of grain storage capacity, and our vinegar operation has seven production facilities and three distribution warehouses .  





27

 


 

 

 

 

Partnership Segment



Our partnership owns approximately five acres of land and leases approximately 19 acres of land at eight   locations in seven states , as disclosed in Item 1 – Business , where its fuel terminals are located and owns approximately 59   acres of land and leases approximately two acres of land where its storage facilities are located at our ethanol production facilities.



Item 3.  Legal Proc eedings.



We are currently involved in litigation that has occurred in the ordinary course of doing business. We do not believe this will have a material adverse effect on our financial position, results of operations or cash flows.





Item 4.  Mine Safety Disclosures.



Not applicable.

28

 


 

 

 

 

PART II



Item 5.  Market fo r Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.



Our common stock trades under the symbol “GPRE” on Nasdaq. The following table lists the common stock’s highest and lowest price and quarterly cash dividends per share for the periods indicated:







 

 

 

 

 

 

 

 

 

Year Ended December 31, 2017

 

High

 

Low

 

Quarterly

Cash Dividend

Per Share

Three months ended December 31, 2017 (1)

 

$

20.90 

 

$

15.60 

 

$

0.12 

Three months ended September 30, 2017

 

 

21.00 

 

 

16.35 

 

 

0.12 

Three months ended June 30, 2017

 

 

26.05 

 

 

18.98 

 

 

0.12 

Three months ended March 31, 2017

 

 

28.15 

 

 

21.52 

 

 

0.12 



 

 

 

 

 

 

 

 

 

Year Ended December 31, 2016

 

High

 

Low

 

Quarterly

Cash Dividend

Per Share

Three months ended December 31, 2016

 

$

29.85 

 

$

22.40 

 

$

0.12 

Three months ended September 30, 2016

 

 

26.82 

 

 

19.73 

 

 

0.12 

Three months ended June 30, 2016

 

 

20.86 

 

 

14.46 

 

 

0.12 

Three months ended March 31, 2016

 

 

23.26 

 

 

12.39 

 

 

0.12 

(1)

The closing price of our common stock on December 29 , 201 7   was $16.85 .



Holders of Record



We had 2,085 holders of record of our common stock, not including beneficial holders whose shares are held in names other than their own, on February 7, 2018 . This figure does not include approximately 37.9 million shares   held in depository trusts.



Dividend Policy



In August 2013, our board of directors initiated a quarterly cash dividend, which we have paid every quarter since and anticipate paying in future quarters. On February 7, 2018 , our board of directors declared a quarterly cash dividend of $0.12 per share. The divi dend is payable on March 15 , 2018 , to shareholders of record at the close of business on February 23 , 201 8 . Future declarations are subject to board approval and may be adjusted as our cash position, business needs or market conditions change.



Issuer Purchases of Equity Securities



Employees surrender shares when restricted stock grants are vested to satisfy statutory minimum required payro ll tax withholding obligations.



The following table lists the shares that were surrendered during the fourth quarter of 2017 .







 

 

 

 

 

Month

 

Total Number of Shares Withheld

 

Average Price Paid per Share

October 1 - October 31

 

4,462 

 

$

20.59 

November 1 - November 30

 

 -

 

 

 -

December 1 - December 31

 

17,883 

 

 

16.85 

Total

 

22,345 

 

$

17.60 



In August 2014, we announced a share repurchase program of up to $100 million of our common stock. Under this program, we may repurchase shares in open market transactions, privately negotiated transactions, accelerated buyback programs, tender offers or by other means. The timing and amount of the transactions are determined by management based on its evaluation of market conditions, share price, legal requirements and other factors. The program may be suspended, modified or discontinued at any time, without prior notice.



29

 


 

 

 

 

The following table lists the shares repurchased under the share repurchase program during the fourth quarter of 2017.







 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

Month

 

Number of Shares Repurchased

 

Average Price Paid per Share

 

Total Number of Shares Repurchased as Part of Repurchase Program

 

Approximate Dollar Value of Shares that may yet be Repurchased under the Program (in thousands)

October 1 - October 31

 

 -

 

$

 -

 

850,839 

 

$

84,260 

November 1 - November 30

 

 -

 

 

 -

 

850,839 

 

 

84,260 

December 1 - December 31

 

58,828 

 

 

16.84 

 

909,667 

 

 

83,268 

Total

 

58,828 

 

$

16.84 

 

909,667 

 

$

83,268 





Since inception, the company has repurchased 909,667 shares of common stock for approximately $16.7 million under the program.



Recent Sales of Unregistered Securities



None.



Equity Compensation Plans



Refer to Item 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters for information regarding shares authorized for issuance under equity compensation plans. 

30

 


 

 

 

 



Performance Graph



The following graph compares our cumulative total return with the S&P SmallC ap 600 Index and the Nasdaq Clean Edge Green Energy Index (CELS) for each of the five years ended December 31, 201 7 . The graph assumes a $100 investment in our common stock and each index at December 31, 2012, and that all dividends were reinvested.



PICTURE 1







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

12/12

 

12/13

 

12/14

 

12/15

 

12/16

 

12/17

Green Plains Inc.

 

$

100.00 

 

$

246.18 

 

$

317.03 

 

$

298.26 

 

$

371.61 

 

$

230.50 

S&P SmallCap 600

 

 

100.00 

 

 

141.31 

 

 

149.45 

 

 

146.50 

 

 

185.40 

 

 

209.94 

Nasdaq Clean Edge Green Energy

 

 

100.00 

 

 

196.27 

 

 

208.69 

 

 

232.98 

 

 

222.42 

 

 

295.91 



The information in the graph will not be considered solicitation material, nor will it be filed with the SEC or incorporated by reference into any future filing under the Securities Act or the Exchange Act, unless we specifically incorporate it by reference into our filing .



Item 6.  S elected Financial Data.



The statement of income data for the years ended December 31, 2017 ,   2016 and 2015   and the balance sheet data as of December 31, 2017 and 2016 are derived from our audited consolidated financial statements and should be read together with the accompanying notes included elsewhere in this report.



31

 


 

 

 

 

The statement of income data for t he years ended December 31, 2014 and 2013 and the balance sh eet data as of December 31, 2015, 2014 and 2013 are derived from our audited consolidated financial statements that are not included in this report, which describe a number of matters that materially affect the comparability of the periods presented.



The following selected financial data should be read together with Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations of this report. The financial information below is not necessarily indicative of results to be expected for any future period. Future results could differ materially from historical results due to numerous factors, including those discussed in Item 1A – Risk Factors of this report.











 

 

 

 

 

 

 

 

 

 

 

 

 

 



Year Ended December 31,



2017

 

2016

 

2015

 

2014

 

2013

Statement of Income Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands, except per share information)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

$

3,596,166 

 

$

3,410,881 

 

$

2,965,589 

 

$

3,235,611 

 

$

3,041,011 

Costs and expenses

 

3,554,420 

 

 

3,319,193 

 

 

2,904,512 

 

 

2,949,337 

 

 

2,933,160 

Operating income

 

41,746 

 

 

91,688 

 

 

61,077 

 

 

286,274 

 

 

107,851 

Total other expense

 

84,897 

 

 

53,337 

 

 

39,612 

 

 

35,844 

 

 

35,570 

Net income

 

81,631 

 

 

30,491 

 

 

15,228 

 

 

159,504 

 

 

43,391 

Net income attributable to Green Plains

 

61,061 

 

 

10,663 

 

 

7,064 

 

 

159,504 

 

 

43,391 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to Green Plains:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

1.56 

 

$

0.28 

 

$

0.19 

 

$

4.37 

 

$

1.44 

Diluted

$

1.47 

 

$

0.28 

 

$

0.18 

 

$

3.96 

 

$

1.26 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Data: (Non-GAAP)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EBITDA (unaudited and in thousands)

$

154,370 

 

$

174,428 

 

$

127,781 

 

$

352,477 

 

$

156,492 







 

 

 

 

 

 

 

 

 

 

 

 

 

 



December 31,



2017

 

2016

 

2015

 

2014

 

2013

Balance Sheet Data (in thousands) :

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

266,651 

 

$

304,211 

 

$

384,867 

 

$

425,510 

 

$

272,027 

Current assets

 

1,206,471 

 

 

1,000,576 

 

 

912,577 

 

 

903,415 

 

 

633,305 

Total assets

 

2,784,650 

 

 

2,506,492 

 

 

1,917,920 

 

 

1,821,062 

 

 

1,532,045 

Current liabilities

 

886,261 

 

 

594,946 

 

 

438,669 

 

 

511,540 

 

 

409,197 

Long-term debt

 

767,396 

 

 

782,610 

 

 

432,139 

 

 

399,440 

 

 

480,746 

Total liabilities

 

1,725,514 

 

 

1,527,301 

 

 

959,011 

 

 

1,023,613 

 

 

986,687 

Stockholders' equity

 

1,059,136 

 

 

979,191 

 

 

958,909 

 

 

797,449 

 

 

545,358 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



Management uses earnings before interest, income taxes, depreciation and amortization, or EBITDA, to compare the financial performance of our business segments and manage those segments. Management believes EBITDA is a useful measure to compare our performance against other companies. EBITDA should not be considered an alternative to, or more meaningful than, net income or cash flow, which are determined in accordance with GAAP. 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 table reconciles net income to EBITDA for the periods indicated (in thousands):







 

 

 

 

 

 

 

 

 

 

 

 

 

 



Year Ended December 31,



2017

 

2016

 

2015

 

2014

 

2013

Net income

$

81,631 

 

$

30,491 

 

$

15,228 

 

$

159,504 

 

$

43,391 

Interest expense

 

90,160 

 

 

51,851 

 

 

40,366 

 

 

39,908 

 

 

33,357 

Income tax expense (benefit)

 

(124,782)

 

 

7,860 

 

 

6,237 

 

 

90,926 

 

 

28,890 

Depreciation and amortization

 

107,361 

 

 

84,226 

 

 

65,950 

 

 

62,139 

 

 

50,854 

EBITDA (unaudited)

$

154,370 

 

$

174,428 

 

$

127,781 

 

$

352,477 

 

$

156,492 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



32

 


 

 

 

 









Item 7.  Managem ent’s Discussion and Analysis of Financial Condition and Results of Operations.



General



The following discussion and analysis includes information management believes is relevant to understand and assess our consolidated financial condition and results of operations. This section should be read in conjunction with our consolidated financial statements, accompanying notes and the risk factors contained in this report.





Overview



Green Plains is an Iowa corporation, founded in June 2004 as an ethanol producer. We have grown through acquisitions of operationally efficient ethanol production facilities and adjacent commodity processing businesses, and are focused on generating stable operating margins through our diversified business segments and risk management strategy. We own and operate assets throughout the ethanol value chain: upstream, with grain handling and storage; through our ethanol production facilities; and downstream, with marketing and distribution services, to mitigate commodity price volatility, which differentiates us from companies focused only on ethanol production. Our other businesses, including our partnership, cattle feeding operations and vinegar production, leverage our supply chain, production platform and expertise.



Our profitability is highly dependent on commodity prices, particularly for ethanol, distillers grains, corn oil, corn, natural gas and cattle. Since market price fluctuations of these commodities are not always correlated, our operations may be unprofitable at times. We use a variety of risk management tools and hedging strategies to monitor price risk exposure at each of our plants and lock in favorable margins or reduce production when margins are compressed. Our adjacent businesses integrate complementary but more predictable revenue streams that diversify our operations and profitability.



More information about our business, properties and strategy can be found under Item 1 – Business and a description of our risk factors can be found under Item 1A – Risk Factors .



Industry Factors Affecting our Results of Operations



U.S. Ethanol Supply and Demand



Daily ethanol production increased 4% on average to 1.03 million barrels per day in 2017 compared with 0.99 million barrels per day in 2016 due to incremental expansion by existing facilities to optimize production. Weekly refiner and blender input volume, which is linked to consumer gasoline demand, increased 1% year-over-year, helped by the growing number of retail stations offering higher ethanol blends. Increased export volumes only partially offset the difference between increased production and consistent blending volumes year-over-year. As a result, domestic ethanol inventory rose by 3.9 million barrels to 22.6 million barrels at December 31, 2017, compared with the same time last year.



Total domestic ethanol production increased approximately 500 million gallons to 15.8 billion gallons in 2017, from 15.3 billion gallons in 2016, according to the EIA. There were 212 ethanol plants with production capacity of 16.1 bgy as of January 23, 2018, compared with 213 ethanol plants with production capacity of 15.8 bgy one year ago, according to the Renewable Fuels Association.



Ethanol consumption is correlated with consumer gasoline demand, which is projected to increase slightly from the ten-year high of 143.2 billion gallons in 2016, to an estimated 143.3 billion gallons in 2017. Ethanol is used by oil refiners, integrated oil companies and gasoline retailers to reduce vehicle emissions and increase octane levels. Ethanol continues to account for approximately 10% of the U.S. gasoline market in 2017, or an estimated 14.3 billion gallons, up from 14.2 billion gallons in 2016. In 2017, ethanol futures traded at an average discount of $0.14 per gallon to gasoline, positioning ethanol as the most affordable source of octane over Gulf Coast 93 and toluene substitutes.



Increased automaker approval, consumer acceptance and availability of higher ethanol blends continue to support domestic demand. Automakers have explicitly approved the use of E15 in nearly 90% of 2018 model year vehicles sold in the United States. In addition, the number of retail stations selling higher ethanol blends tripled in 2017 due to investments in the retail gasoline infrastructure provided by private and public funding.







33

 


 

 

 

 

Global Ethanol Supply and Demand



The United States and Brazil produce 86% of the world’s ethanol supply, according to the USDA Foreign Agriculture Service. Global production increased slightly to 26.7 billion gallons in 2017 from approximately 26.6 billion gallons in 2016 due to increased U.S. production, which made up for reduced volumes from Brazil, according to the EIA. The United States has been the world’s largest producer and consumer of ethanol since 2010. In 2017, approximately 8% of the ethanol produced domestically competed globally with other sources of octane and oxygenates and was marketed and sold worldwide. Global production is expected to increase 10% in the next five years.



Demand for cleaner, more sustainable transportation fuel is growing worldwide. Ethanol has become a crucial component of the global fuel supply as an economical oxygenate and source of octanes. According to the Global Renewable Fuels Alliance , 35 countries , including the EU which is regulated by a single policy with specific national targets for each country, have mandates or planned targets in place for blending ethanol and biodiesel with transportation fuels to reduce harmful emissions. As countries establish mandates or raise their required blend percentages, new export opportunities for U.S. producers are likely to emerge.



Overall, the U.S. ethanol industry is producing at levels to meet current domestic and export demand. According to the EIA, U.S. exports were approximately 1.4 billion gallons in 2017, up 31% from 1. 0 billion gallons last year. Brazil and Canada remained the two largest export destinations for U.S. ethanol, which accounted for 33% and 24%, respectively, of domestic ethanol export volume. India, the Philippines and South Korea accounted for 13%, 5% and 3%, respectively , of U.S. ethanol exports.



Co-Product Supply and Demand



According to the USDA, the United States produced approximately 50 million tons of distillers grains resulting from ethanol production in 2017, of which approximately 11 million tons were exported. The 3% reduction, year over year in exports was due in part to a suspension by the Minister of Agriculture and Rural Development of Vietnam, which blocked imports of U.S. dried distillers grains from January 2017 to September 2017. Mexico, Turkey, South Korea, China, Thailand and Canada accounted for 61% of total U.S. distillers export volumes, according to the USDA.  



World demand for U.S. beef has risen as diets continue to improve worldwide to include increased animal protein. In June of 2017, the U.S. resumed exporting beef to China, following a 13-year ban the Trump Administration lifted as part of a new bilateral agreement between the countries.



Legislation and Regulation



We are sensitive to government programs and policies that affect the supply and demand for ethanol and other fuels, which in turn may impact the volume of ethanol and other fuels we handle. Federal mandates supporting the use of renewable fuels are a significant driver of ethanol demand in the United States. Ethanol policies are influenced by environmental concerns and an interest in reducing the country’s dependence on foreign oil. When RFS II was established in October 2010, the required volume of conventional renewable fuel to be blended with gasoline was to increase each year until it reached 15.0 billion gallons in 2015, which left the EPA to address existing limitations in ethanol production and usage of ethanol blends in older vehicles. The EPA met the congressional target for the first time in November 2016 when it set the renewable volume obligations for conventional ethanol at 15.0 billion gallons for 2017. In November 2017, the EPA announced it would maintain the 15.0 billion gallon mandate for conventional ethanol in 2018.



The EPA has the authority to waive the mandates in whole or in part if there is inadequate domestic renewable fuel supply or the requirement severely harms the economy or environment. According to RFS II, if mandatory renewable fuel volumes are reduced by at least 20% for two consecutive years, the EPA is required to modify, or reset, statutory volumes through 2022. While conventional ethanol maintained 15 billion gallons, 2018 is the first year the total proposed RVOs are more than 20% below statutory volumes levels.  Thus, the EPA Administrator directed his staff to initiate the required technical analysis to perform any future reset consistent with the reset rules. The reset will be triggered if the 2019 RVOs continue to be more than 20% below the statutory levels, and the EPA will be required to modify statutory volumes through 2022 within one year of the trigger event, based on the same factors used to set the RVOs post-2022.



The EPA assigns individual refiners, blenders and importers the volume of renewable fuels they are obligated to use based on their percentage of total fuel sales. Obligated parties use RINs to show compliance with RFS-mandated volumes. RINs are attached to renewable fuels by producers and detached when the renewable fuel is blended with transportation fuel or traded in the open market. The market price of detached RINs affects the price of ethanol in certain markets and influences

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the purchasing decisions by obligated parties. In November 2017, the EPA denied a petition to change the point of obligation under RFS II to the parties that own the gasoline before it is sold.



Consumer acceptance of flex-fuel vehicles and higher ethanol blends are factors that may be necessary before ethanol can achieve significant growth in U.S. market share. CAFE, which was first enacted by Congress in 1975 to reduce energy consumption by increasing the fuel economy of cars and light trucks, provides a 54% efficiency bonus to flexible-fuel vehicles running on E85, which is sold at more than 3,400 fuel stations in 45 states. According to IHS Automotive, there are nearly 20 million flexible fuel vehicles on U.S. roads today. The number of retail stations selling E15 has tripled during the year to more than 1,300 stations on January 31, 2018, up from 431 stations on December 31, 2016, according to Growth Energy. Another important factor is a waiver in the Clean Air Act, known as the One-Pound Waiver, which allows E10 to be sold between June and September, even though it exceeds the Reid vapor pressure limitation of nine pounds per square inch. The One-Pound Waiver does not apply to E15, even though it has similar physical properties to E10. Industry groups are focused on securing the One-Pound Waiver for E15 through the legislative process.



On January 18, 2017, Valero Energy Corporation filed an action against the EPA regarding certain non-discretionary duties required by the RFS program under the Clean Air Act. Within the filed action, Valero claimed the EPA failed to periodically review the feasibility of RFS compliance and the impact of the requirements on individuals and entities regulated under the program, i.e., the point of obligation, since 2010. The EPA moved to dismiss this suit, which the court granted on November 28, 2017.



On July 28, 2017, the U.S. Federal District Court for the D.C. Circuit ruled in favor of the Americans for Clean Energy and its petitioners against the EPA related to its decision to lower the 2016 volume requirements. The Court concluded the EPA erred in how it interpreted the “inadequate domestic supply” waiver provision of RFS II, which authorizes the EPA to consider supply-side factors affecting the volume of renewable fuel available to refiners, blenders and importers to meet statutory volume requirements. The waiver provision does not allow the EPA to consider the volume of renewable fuel available to consumers or the demand-side constraints that affect the consumption of renewable fuel by consumers. As a result, the Court vacated the EPA’s decision to reduce the total renewable fuel volume requirements for 2016 through its waiver authority, which the EPA is expected to address. We believe this decision to confine the EPA’s waiver analysis to supply considerations benefits the industry overall and expect the primary impact will be on the RINs market.



On October 19, 2017, the EPA Administrator reiterated his commitment to the text and spirit of the RFS II. In a letter to seven senators from the Midwestern states, he stated the EPA is actively exploring its authority to issue an RVP waiver and will not pursue action on RINs involving ethanol exports. Moreover, on November 22, 2017, the EPA issued a Notice of Denial of Petitions for rulemaking to change the RFS point of obligation, confirming the point of obligation will not change.



Valero Energy and refining trade group American Fuel and Petrochemical Manufacturers (AFPM) have challenged the EPA’s handling of the U.S. biofuel mandate in separate actions on January 26, 2018. AFPM is asking the D.C. U.S. Court of Appeals to review the EPA’s November 2017 decision to reject proposed changes to the structure of the RFS, including moving the point of obligation from refiners and importers of fuel to fuel blenders. Valero filed two petitions with the same court, one seeking review of the annual Renewable Volume Obligation (RVO) rule set by EPA’s for 2018 and 2019, which dictates the volumes of renewable fuels to be blended in the coming years, and a second arguing against the EPA’s December 2017 assertion that the agency has fulfilled its duty to periodically review the RFS as directed by statute.



Government actions abroad can significantly impact the ethanol industry. In September 2017, China’s National Development and Reform Commission, the National Energy Board and 15 other state departments issued a joint plan to expand the use and production of biofuels containing up to 10% ethanol by 2020. China, the number three importer of U.S. ethanol in 2016, imported negligible volumes during the year due to a 30% tariff imposed on U.S. and Brazil fuel ethanol, which took effect in January 2017. There is no assurance the recently issued joint plan will lead to increased imports of U.S. ethanol. Brazil’s Chamber of Foreign Trade, or CAMEX, issued an official written resolution, imposing a 20% tariff on U.S. ethanol imports in excess of 150 million liters, or 39.6 million gallons per quarter in September 2017. The ruling is valid for two years. In Mexico, four lawsuits challenging the June 2017 decision by the Energy Regulatory Commission of Mexico (CRE) to approve the use of 10% ethanol blends were dismissed. A fifth lawsuit was allowed to proceed for judicial review, despite precedent set by the Mexico Supreme Court for dismissal. The CRE is expected to defend its position before the judge makes a final decision. Should the judge rule in favor of the plaintiff, the case will go to the Supreme Court. U.S. ethanol exports to Mexico totaled 30 mmg in 2017. In December 2017, the USDA Foreign Agricultural Service announced that Japan is expected to allow the use of corn-based ethanol in 2018.



The Tax Cuts and Jobs Act was enacted on December 22, 2017 and is effective January 1, 2018.  Among other provisions, the Act reduces the Federal statutory corporate income tax rate from 35% to 21%.  Due to the reduction in the

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federal tax rate to 21%, the Company revalued its deferred liabilities at the new rate at year-end. An unintended consequence of the Act under section 199A allows cooperative associations with a potential marketplace advantage versus other agribusiness companies related to how sales from farmers to such entities are treated for purposes of farmers’ income. While we believe that Congress intends to correct these provisions, we have established a cooperative entity and are currently evaluating the use of such structure for grain origination for our ethanol plants should Congress not provide a timely fix for this issue. 



Environmental and Other Regulation



Our ethanol production, agribusiness and energy services, and food and ingredients segment activities are also subject to environmental and other regulations. We obtain environmental permits to construct and operate our ethanol plants and other facilities. Parts of our business are regulated by environmental laws and regulations governing the labeling, use, storage, discharge and disposal of hazardous materials or conformity with official grade standards. Our business may also be impacted by government policies, such as tariffs, duties, subsidies, import and export restrictions and outright embargos. We employ maintenance and operations personnel at each of our plants. In addition, to the attention we place on the health and safety of our employees, the operations of our facilities are regulated by the Occupational Safety and Health Administration.



In 2007, the U.S. Supreme Court classified carbon dioxide as an air pollutant under the Clean Air Act in a case seeking to require the EPA to regulate carbon dioxide in vehicle emissions, which the EPA later addressed in RFS II. Ethanol production involves the emission of various airborne pollutants, including particulate, carbon dioxide, oxides of nitrogen, hazardous air pollutants and volatile organic compounds. While some of our plants are grandfathered at authorized capacities under the RFS II mandate, expansion may require us to obtain additional permits, achieve the EPA’s efficient producer status under the pathway petition program for our grandfathered plants, install advanced technology or reduce drying distillers grains to achieve a 20% reduction in greenhouse gas emissions from the 2005 baseline measurement. In January 2017, the USDA released a report providing evidence that greenhouse gas emissions associated with corn-based ethanol are 43% lower than gasoline. Numerous factors have led to improvements over the past ten years, including conservation practices by farmers, higher corn yields and advances in production technologies, which are expected to continue and have the potential to further reduce greenhouse gas emissions up to 76% compared with gasoline.



The U.S. ethanol industry relies heavily on tank cars to deliver its product to market. On May 1, 2015, the DOT finalized the Enhanced Tank Car Standard and Operational Controls for High-Hazard and Flammable Trains, or DOT specification 117, which established a schedule to retrofit or replace older tank cars that carry crude oil and ethanol, braking standards intended to reduce the severity of accidents and new operational protocols.  The deadline for compliance with DOT specification 117 is May   1, 2023. The rule may increase our lease costs for railcars over the long term. Additionally, existing railcars may be out of service for a period of time while upgrades are made, tightening supply in an industry that is highly dependent on railcars to transport product. We intend to strategically manage our leased railcar fleet to comply with the new regulations and have commenced transition of our fleet to DOT 117 compliant railcars. We anticipate approximately 20% of our railcar fleet will be DOT 117 compliant by the end of 2018.



In September 2015, the FDA issued rules for Current Good Manufacturing Practice, Hazard Analysis and Risk-Based Preventative Controls for food for animals in response to FSMA. The rules require FDA-registered food facilities to address safety concerns for sourcing, manufacturing and shipping food products and food for animals through food safety programs that include conducting hazard analyses, developing risk-based preventative controls and monitoring, and addressing intentional adulteration, recalls, sanitary transportation and supplier verification. We believe we have taken sufficient measures to comply with these regulations.



On January 1, 2017, all medically important antimicrobials intended for use in animal feed that were once available over-the-counter became veterinary feed directive drugs, requiring written orders from a licensed veterinarian to purchase and use in livestock feed under the October 2015 revised Veterinary Feed Directive rule. Our cattle feeding operations obtained all necessary prescriptions from a licensed veterinarian to use certain veterinary feed directive drugs, as appropriate.



Variability of Commodity Prices



Our business is highly sensitive to commodity price fluctuations, particularly for corn, ethanol, corn oil, distillers grains, natural gas and cattle, which are impacted by factors that are outside of our control, including weather conditions, corn yield, changes in domestic and global ethanol supply and demand, government programs and policies and the price of crude oil, gasoline and substitute fuels. We use various financial instruments to manage and reduce our exposure to price variability. For more information about our commodity price risk, refer to Item 7A. - Qualitative and Quantitative Disclosures About Market Risk, Commodity Price Risk in this report.  



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During periods of commodity price variability or compressed margins, we may reduce or cease operations at certain ethanol plants. Slowing down production increases the ethanol yield per bushel of corn, optimizing cash flow in lower margin environments. In 2017, our ethanol facilities ran at approximately 85.0% of our daily average capacity, largely due to the low margin environment during the first half of the year driven by historically low crude oil prices resulting from record world supply.



Critical Accounting Policies and Estimates  



The preparation of our consolidated financial statements requires that we use estimates that affect the reported assets, liabilities, revenue and expense and related disclosures for contingent assets and liabilities. We base our estimates on experience and assumptions we believe are proper and reasonable. While we regularly evaluate the appropriateness of these estimates, actual results could differ materially from our estimates. The following accounting policies, in particular, may be impacted by judgments, assumptions and estimates used in the preparation of our consolidated financial statements.



Revenue Recognition



We recognize revenue when the following criteria are satisfied: persuasive evidence that an arrangement exists, title of product and risk of loss are transferred to the customer, price is fixed and determinable and collectability is reasonably assured.



Sales of ethanol, distillers grains, corn oil, natural gas and other commodities are recognized when title of product and risk of loss are transferred to an external customer. Revenues related to marketing for third parties are presented on a gross basis when the company takes title of the product and assumes risk of loss. Unearned revenue is recorded for goods in transit when we have received payment but the title has not yet been transferred to the customer. Revenues related to ethanol, distillers grains, corn oil, natural gas and other commodities are presented gross and include shipping and handling, which is also a component of cost of goods sold.  Revenues for receiving, storing, transferring and transporting ethanol and other fuels are recognized when the product is delivered to the customer.



We routinely enter into fixed-price, physical-delivery commodity purchase and sale agreements. At times, we settle these transactions by transferring its obligations to other counterparties rather than delivering the physical commodity. Energy trading transactions are reported net as a component of revenue.  All other transactions are reported net as either a component of revenue or cost of goods sold, depending on their position as a gain or loss. Revenues also include realized gains and losses on related derivative financial instruments and reclassifications of realized gains and losses on effective cash flow hedges from accumulated other comprehensive income or loss.



Sales of products, including agricultural commodities, cattle and vinegar, are recognized when title of product and risk of loss are transferred to the customer, which depends on the agreed upon terms. The sales terms provide passage of title when shipment is made or the commodity is delivered. Revenues related to grain merchandising are presented gross and include shipping and handling, which is also a component of cost of goods sold. Revenues from grain storage are recognized when services are rendered.



A substantial portion of the partnership revenues are derived from fixed-fee commercial agreements for storage, terminal or transportation services. The partnership recognizes revenue when there is persuasive evidence that an arrangement exists, title of product and risk of loss are transferred to the customer, price is fixed and determinable and collectability is reasonably assured. Revenues from base storage, terminal or transportation services are recognized once these services are performed, which occurs when the product is delivered to the customer.



Intercompany revenues are eliminated on a consolidated basis for reporting purposes.



Depreciation of Property and Equipment  



Property and equipment are stated at cost less accumulated depreciation. Depreciation on our ethanol production and grain storage facilities, railroad tracks, computer equipment and software, office furniture and equipment, vehicles, and other fixed assets is provided using the straight-line method over the estimated useful life of the asset, which cu rrently ranges from 3 to 5 0 years.



Land improvements are capitalized and depreciated. Expenditures for property betterments and renewals are capitalized. Costs of repairs and maintenance are charged to expense when incurred.



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We periodically evaluate whether events and circumstances have occurred that warrant a revision of the estimated useful life of the asset, which is accounted for prospectively.



Carrying Value of Intangible Assets  



Our intangible assets consist of trademarks, customer relationships, research and development technology and licenses acquired through acquisitions. These assets were capitalized at their fair value at the date of the acquisition and are being amortized over their estimated useful lives.



Impairment of Long-Lived Assets and Goodwill



Our long-lived assets consist of property and equipment and intangible assets. We review long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. We measure recoverability by comparing the carrying amount of the asset with the estimated undiscounted future cash flows the asset is expected to generate. If the carrying amount of the asset exceeds its estimated future cash flows, we record an impairment charge for the amount in excess of the fai r value. There were no material impairment charges recorded for the periods reported.



Our goodwill is related to certain acquisitions within our et hanol production, food and ingredient s and partnership segments. We review goodwill at the segment level for impairment at least annually or more frequently whenever events or changes in circumstances indicate that an impairment may have occurred.



We assess the qualitative factors of goodwill to determine whether it is necessary to perform a two-step goodwill impairment test. Under the first step, we compare the estimated fair value of the reporting unit with its carrying value including goodwill. If the estimated fair value is less than the carrying value, we complete a second step to determine the amount of the goodwill impairment that we should record. In the second step, we allocate the reporting unit’s fair value to all of its assets and liabilities other than goodwill to determine an implied fair value. We compare the result with the carrying amount and record an impairment charge for the difference.



We estimate the amount and timing of projected cash flows that will be generated by an asset over an extended period of time when we review our long-lived assets and goodwill. Circumstances that may indicate impairment include: a decline in future projected cash flows, a decision to suspend plant operations for an extended period of time, a sustained decline in our market capitalization, a sustained decline in market prices for similar assets or businesses or a significant adverse change in legal or regulatory matters, or business climate. Significant management judgment is required to determine the fair value of our long-lived assets and goodwill and measure impairment, including projected cash flows. Fair value is determined through various valuation techniques, including discounted cash flow models utilizing assumed margins, cost of capital, inflation and other inputs , sales of comparable properties and third-party independent appraisals. Changes in estimated fair value as a result of declining ethanol margins, loss of significant customers or other factors could result in a write-down of the asset.



Derivative Financial Instruments  



We use various derivative financial instruments, including exchange-traded futures and exchange-traded and over-the-counter options contracts, to minimize risk and the effect of price changes related to corn, ethanol, cattle, natural gas and crude oil. We monitor and manage this exposure as part of our overall risk management policy to reduce the adverse effect market volatility may have on its operating results. The company may hedge these commodities as one way to mitigate risk, however, there may be situations when these hedging activities themselves result in losses.



By using derivatives to hedge exposures to changes in commodity prices, we are exposed to credit and market risk. Our exposure to credit risk includes the counterparty’s failure to fulfill its performance obligations under the terms of the derivative contract. We minimize our credit risk by entering into transactions with high quality counterparties, limiting the amount of financial exposure it has with each counterparty and monitoring their financial condition. 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. We manage market risk by incorporating parameters to monitor exposure within our risk management strategy, which limits the types of derivative instruments and strategies we can use and the degree of market risk we can take using derivative instruments.



We evaluate our physical delivery contracts to determine if they qualify for normal purchase or sale exemptions which are expected to be used or sold over a reasonable period in the normal course of business. Contracts that do not meet the normal purchase or sale criteria are recorded at fair value. Changes in fair value are recorded in operating income unless the contracts qualify for, and we elect, hedge accounting treatment.

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Certain qualifying derivatives related to ethanol production, agribusiness and energy services and food and ingredients segments are designated as cash flow hedges. We evaluate the derivative instrument to ascertain its effectiveness prior to entering into cash flow hedges. Unrealized gains and losses are reflected in accumulated other comprehensive income until the gain or loss from the underlying hedged transaction is realized. When it becomes probable a forecasted transaction will not occur, the cash flow hedge treatment is discontinued, which affects earnings. These derivative financial instruments are recognized in current assets or other current liabilities at fair value.



Accounting for Income Taxes  



Income taxes are accounted for under the asset and liability method in accordance with GAAP. Deferred tax assets and liabilities are recognized for future tax consequences between existing assets and liabilities and their respective tax basis, and for net operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in years temporary differences are expected to be recovered or settled. The effect of a tax rate change is recognized in the period that includes the enactment date. The realization of deferred tax assets depends on the generation of future taxable income during the periods in which temporary differences become deductible. Management considers scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies to make this assessment. Management considers the positive and negative evidence to support the need for, or reversal of, a valuation allowance. The weight given to the potential effects of positive and negative evidence is based on the extent it can be objectively verified.  



To account for uncertainty in income taxes, we gauge the likelihood of a tax position based on the technical merits of the position, perform a subsequent measurement related to the maximum benefit and degree of likelihood, and determine the benefit to be recognized in the financial statements, if any.



Recently Issued Accounting Pronouncements



For information related to recent accounting pronouncements, see Note 2 – Summary of Significant Accounting Policies included as part of the notes to consolidated financial statements in this report.



Off-Balance Sheet Arrangements



We do not have any off-balance sheet arrangements other than the operating leases, which are entered into during the ordinary course of business and disclosed in the Contractual Obligations section below.



Components of Revenues and Expenses



Revenues For our ethanol production segment, our revenues are derived primarily from the sale of ethanol, distillers grains and corn oil. For our agribusiness and energy services segment, sales of ethanol, distillers grains and corn oil that we market for our ethanol plants , and earn a marketing fee , sales of ethanol we market for a third-party and sales of grain and other commodities purchased in the open market represent our primary sources of revenue. Revenues include net gains or losses from derivatives related to the products sold. For our food and ingredients segment, the sale of cattle and vinegar are our primary sources of revenue. For our partnership segment, our revenues consist primarily of fees for receiving, storing, transferring and transporting ethanol and other fuels.



Cost of Goods Sold.     For our ethanol production segment, cost of goods sold includes direct labor, materials and plant overhead costs. Direct labor includes compensation and related benefits of non-management personnel involved in ethanol plant operations. Plant overhead consists primarily of plant utilities and outbound freight charges. Corn is the most significant raw material cost followed by natural gas, which is used to power steam generation in the ethanol production process and dry distillers grains. Cost of goods sold also includes net gains or losses from derivatives related to commodities purchased.



For our agribusiness and energy services segment, purchases of ethanol, distillers grains, corn oil and grain are the primary component of cost of goods sold. Grain inventories held for sale and forward purchase and sale contracts are valued at market prices when available or other market quotes adjusted for differences, such as transportation, between the exchange-traded market and local markets where 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 as a component of cost of goods sold.



For our food and ingredients segment, the cattle feed ing operation s includes costs of cattle, feed and veterinary supplies, direct labor and feedlot overhead, which are accumulated as inventory and included as a component of cost of goods sold

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when the cattle are sold. Direct labor includes compensation and related benefits of non-management personnel involved in the feedlot operation s . Feedlot overhead costs include feedlot utilities, repairs and maintenance and yard expenses. For the vinegar operation, cost of goods sold includes direct labor, materials and plant overhead costs. Direct labor includes compensation and related benefits of non-management personnel involved in vinegar operations. Overhead consists primarily of plant utilities and outbound freight charges. Food-grade ethanol is the most significant raw material cost.



Operations and Maintenance Expense.  For our partnership segment, transportation expense is the primary component of operations and maintenance expense. Transportation expense includes rail car leases, shipping and freight and costs incurred for storing ethanol at destination terminals.



Selling, General and Administrative Expense.   Selling, general and administrative expenses are recognized at the operating segment and corporate level. These expenses consist of employee salaries, incentives and benefits; office expenses; director fees; and professional fees for accounting, legal, consulting and investor relations services. Personnel costs, which include employee salaries, incentives and benefits, are the largest expenditure. Selling, general and administrative expenses that cannot be allocated to an operating segment are referred to as corporate activities.



Other Income (Expense).     Other income (expense) includes interest earned, interest expense, equity earnings in nonconsolidated subsidiaries and other non-operating items.



Results of Operations



Comparability



The following summarizes various events that affect the comparability of our operating results for the past three years:





 

    July 2015

Green Plains Partners completed its IPO

    October 2015

Hopewell, Virginia ethanol plant was acquired

    November 2015

Hereford, Texas ethanol plant was acquired

    January 2016

Partnership acquired certain storage and transportation assets of the Hereford and  H opewell ethanol plants

    April 2016

Increased ownership of BioProcess Algae and began consolidating within our consolidated financial statements

    September 2016

Madison, Illinois, Mount Vernon, Indiana, and York, Nebraska ethanol plants were acquired and the partnership acquired certain storage assets of the these plants

    October 2016

Fleischmann’s Vinegar was acquired

    March 2017

Hereford, Texas cattle feeding operation was acquired

    May 2017

Leoti, Kansas and Eckley, Colorado cattle feeding operations were acquired



The year ended December 31, 2015, includes approximately two months of operations at our Hereford ethanol plant. Our Hopewell plant, which was not operational at the time of its acquisition, resumed ethanol production on February 8, 2016. The year ended December 31, 2016, includes approximately nine months of consolidated operations of BioProcess Algae, and approximately three months of operations at the Madison, Mount Vernon, and York ethanol plants a nd Fleischmann’s Vinegar . The year ended December 31, 2017, includes approximately nine months of operations at our Texas cattle feeding business and six months of operations at our Kansas and Colorado cattle feeding businesses.



Segment Results



We report the financial and operating performance for the following four operating segments: (1) ethanol production, which includes the production of ethanol, distillers grains and corn oil, (2) agribusiness and energy services, which includes grain handling and storage , commodity marketing and merchant trading for company-produced and third-party ethanol, distillers grains, corn oil, natural gas and other commodities, (3) food and ingredients, which includes cattle feeding, vinegar production and food-grade corn oil operations and (4) partnership, which includes fuel storage and transportation services.



Under GAAP, when transferring assets between entities under common control, the entity receiving the net assets initially recognizes the carrying amounts of the assets and liabilities at the date of transfer. The transferee’s prior period financial statements are restated for all periods its operations were part of the parent’s consolidated financial statements. On July 1, 2015, Green Plains Partners received ethanol storage and railcar assets and liabilities in a transfer between entities under common control. Effective January 1, 2016, the partnership acquired the storage and transportation assets of the Hereford and Hopewell production facilities in a transfer between entities under common control and entered into

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amendments to the related commercial agreements with Green Plains Trade. The transferred assets and liabilities are recognized at our historical cost and reflected retroactively in the segment information of the consolidated financial statements presented in this Form 10-K. The partnership’s assets were previously included in the ethanol production and agribusiness and energy services segments. Expenses related to the ethanol storage and railcar assets, such as depreciation, amortization and railcar lease expenses, are also reflected retroactively in the following segment information. There are no revenues related to the operation of the ethanol storage and railcar assets in the partnership segment prior to their respective transfers to the partnership, when the related commercial agreements with Green Plains Trade became effective.



During the normal course of business, our operating segments do business with each other. For example, our agribusiness and energy services segment procures grain and natural gas and sells products, including ethanol, distillers grains and corn oil of our ethanol production segment. Our partnership segment provides fuel storage and transportation services for our agribusiness and energy services segment. These intersegment activities are treated like third-party transactions with origination, marketing and storage fees charged at estimated market values. Consequently, these transactions affect segment performance; however, they do not impact our consolidated results since the revenues and corresponding costs are eliminated.



Corporate activities incudes selling, general and administrative expenses, consisting primarily of compensation, professional fees and overhead costs not directly related to a specific operating segment. When we evaluate segment performance, we review the following operating segment information as well as earnings before interest, income taxes, depreciation and amortization, or EBITDA.



The selected operating segment financial information are as follows (in thousands):









 

 

 

 

 

 

 

 

 



 

Year Ended December 31,



 

2017

 

2016

 

2015

Revenues:

 

 

 

 

 

 

 

 

 

Ethanol production:

 

 

 

 

 

 

 

 

 

Revenues from external customers (1)

 

$

2,497,360 

 

$

2,409,102 

 

$

2,063,172 

Intersegment revenues

 

 

10,313 

 

 

 -

 

 

 -

Total segment revenues

 

 

2,507,673 

 

 

2,409,102 

 

 

2,063,172 

Agribusiness and energy services:

 

 

 

 

 

 

 

 

 

Revenues from external customers (1)

 

 

621,223 

 

 

675,446 

 

 

674,719 

Intersegment revenues

 

 

47,538 

 

 

34,461 

 

 

24,114 

Total segment revenues

 

 

668,761 

 

 

709,907 

 

 

698,833 

Food and ingredients:

 

 

 

 

 

 

 

 

 

Revenues from external customers (1)

 

 

471,398 

 

 

318,031 

 

 

219,310 

Intersegment revenues

 

 

383 

 

 

150 

 

 

75 

Total segment revenues

 

 

471,781 

 

 

318,181 

 

 

219,385 

Partnership:

 

 

 

 

 

 

 

 

 

Revenues from external customers

 

 

6,185 

 

 

8,302 

 

 

8,388 

Intersegment revenues

 

 

100,808 

 

 

95,470 

 

 

42,549 

Total segment revenues

 

 

106,993 

 

 

103,772 

 

 

50,937 

Revenues including intersegment activity

 

 

3,755,208 

 

 

3,540,962 

 

 

3,032,327 

Intersegment eliminations

 

 

(159,042)

 

 

(130,081)

 

 

(66,738)

Revenues as reported

 

$

3,596,166 

 

$

3,410,881 

 

$

2,965,589 



(1)

Revenues from external customers include realized gains and losses from derivative financial instruments.

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Year Ended December 31,



 

2017

 

2016

 

2015

Cost of goods sold:

 

 

 

 

 

 

 

 

 

Ethanol production

 

$

2,434,001 

 

$

2,280,906 

 

$

1,939,824 

Agribusiness and energy services

 

 

614,582 

 

 

650,538 

 

 

639,470 

Food and ingredients

 

 

411,781 

 

 

294,396 

 

 

216,661 

Partnership

 

 

 -

 

 

 -

 

 

 -

Intersegment eliminations

 

 

(158,777)

 

 

(129,761)

 

 

(66,588)



 

$

3,301,587 

 

$

3,096,079 

 

$

2,729,367 



 

 

 

 

 

 

 

 

 



 

Year Ended December 31,



 

2017

 

2016

 

2015

Operating income (loss):

 

 

 

 

 

 

 

 

 

Ethanol production

 

$

(45,074)

 

$

28,125 

 

$

43,266 

Agribusiness and energy services

 

 

30,443 

 

 

34,039 

 

 

37,253 

Food and ingredients

 

 

35,961 

 

 

16,436 

 

 

(952)

Partnership

 

 

65,709 

 

 

60,903 

 

 

12,990 

Intersegment eliminations

 

 

(61)

 

 

(170)

 

 

 -

Corporate activities

 

 

(45,232)

 

 

(47,645)

 

 

(31,480)



 

$

41,746 

 

$

91,688 

 

$

61,077