UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 20192020
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:
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common Stock, par value $0.001 per share | GPRE | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes o No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
x Yes o No
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 o | |
Smaller reporting company o | Emerging growth company o |
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes x No
The number of shares of common stock, par value $0.001 per share, outstanding as of August 2, 2019,July 30, 2020, was 38,186,13335,653,366 shares.
Page | ||
Commonly Used Defined Terms | 2 | |
PART I – FINANCIAL INFORMATION | ||
Item 1. | Financial Statements | |
Consolidated Balance Sheets | 3 | |
4 | ||
5 | ||
6 | ||
8 | ||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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PART II – OTHER INFORMATION | ||
Item 1. |
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Item 1A. |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
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Commonly Used Defined Terms
The abbreviations, acronyms and industry terminology used in this quarterly report are defined as follows:
Green Plains Inc., Subsidiaries, and Partners:
Green Plains; the company | Green Plains Inc. and its subsidiaries |
BioProcess Algae | BioProcess Algae LLC |
|
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Green Plains | Green Plains Cattle Company LLC |
Green Plains Grain | Green Plains Grain Company LLC |
Green Plains Partners; the partnership | Green Plains Partners LP |
Green Plains Trade | Green Plains Trade Group LLC |
Accounting Defined Terms:
ASC | Accounting Standards Codification |
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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 |
LIBOR | London Interbank Offered Rate |
LTIP | Long-Term Incentive Plan |
R&D Credits | Research and development tax credits |
SEC | Securities and Exchange Commission |
Industry and Other Defined Terms:
Bgy | Billion gallons per year |
CAFE | Corporate Average Fuel Economy |
the CARES Act | Coronavirus Aid, Relief, and Economic Security Act |
COVID-19 | Coronavirus Disease 2019 |
D.C. | District of Columbia |
E10 | Gasoline blended with up to 10% ethanol by volume |
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 |
EPA | U.S. Environmental Protection Agency |
GATT | General Agreement on Tariffs and Trade |
MmBtu | Million British Thermal Units |
Mmg | Million gallons |
MTBE | Methyl tertiary-butyl ether |
MVC | Minimum volume commitment |
RFS II | Renewable Fuels Standard II |
RIN | Renewable identification number |
RVO | Renewable volume obligation |
SRE | Small refinery exemption |
U.S. | United States |
USDA | U.S. Department of Agriculture |
WTO | World Trade Organization |
PART 1 – FINANCIAL INFORMATION
Item 1. Financial Statements.
GREEN PLAINS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
June 30, | December 31, | June 30, | December 31, | |||||||
(unaudited) | (unaudited) | |||||||||
ASSETS | ASSETS | ASSETS | ||||||||
Current assets | ||||||||||
Cash and cash equivalents | $ | 193,280 | $ | 251,683 | $ | 163,362 | $ | 245,977 | ||
Restricted cash | 40,628 | 66,512 | 20,234 | 23,919 | ||||||
Accounts receivable, net of allowances of $193 and $194, respectively | 108,700 | 100,361 | ||||||||
Accounts receivable, net of allowances of $218 and $166, respectively | 67,185 | 107,183 | ||||||||
Income taxes receivable | 12,879 | 12,418 | 57,714 | 6,216 | ||||||
Inventories | 658,506 | 734,883 | 173,121 | 252,992 | ||||||
Prepaid expenses and other | 11,993 | 14,470 | 15,465 | 13,685 | ||||||
Derivative financial instruments | 60,202 | 26,315 | 18,974 | 17,941 | ||||||
Total current assets | 1,086,188 | 1,206,642 | 516,055 | 667,913 | ||||||
Property and equipment, net of accumulated depreciation | 872,154 | 886,576 | ||||||||
Property and equipment, net of accumulated depreciation | 850,369 | 827,271 | ||||||||
Operating lease right-of-use assets | 58,092 | - | 50,408 | 52,476 | ||||||
Goodwill | 34,689 | 34,689 | ||||||||
Deferred income taxes | 3,582 | - | ||||||||
Investment in equity method investees | 113,763 | 68,998 | ||||||||
Other assets | 86,022 | 88,525 | 40,480 | 81,560 | ||||||
Total assets | $ | 2,140,727 | $ | 2,216,432 | $ | 1,571,075 | $ | 1,698,218 | ||
LIABILITIES AND STOCKHOLDERS' EQUITY | LIABILITIES AND STOCKHOLDERS' EQUITY | LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Current liabilities | ||||||||||
Accounts payable | $ | 105,802 | $ | 156,901 | $ | 93,566 | $ | 156,693 | ||
Accrued and other liabilities | 59,863 | 58,973 | 32,231 | 39,384 | ||||||
Derivative financial instruments | 9,670 | 24,776 | 15,459 | 8,721 | ||||||
Operating lease current liabilities | 16,667 | - | 14,684 | 16,626 | ||||||
Short-term notes payable and other borrowings | 523,529 | 538,243 | 131,425 | 187,812 | ||||||
Current maturities of long-term debt | 1,225 | 54,807 | 36,647 | 132,555 | ||||||
Total current liabilities | 716,756 | 833,700 | 324,012 | 541,791 | ||||||
Long-term debt | 370,880 | 298,190 | 341,219 | 243,990 | ||||||
Deferred income taxes | 5,478 | 10,123 | ||||||||
Operating lease long-term liabilities | 44,108 | - | 38,865 | 38,314 | ||||||
Other liabilities | 8,931 | 11,430 | 9,709 | 8,837 | ||||||
Total liabilities | 1,146,153 | 1,153,443 | 713,805 | 832,932 | ||||||
Commitments and contingencies (Note 13) |
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Commitments and contingencies (Note 14) |
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Stockholders' equity | ||||||||||
Common stock, $0.001 par value; 75,000,000 shares authorized; | 47 | 47 | ||||||||
Common stock, $0.001 par value; 75,000,000 shares authorized; | 47 | 47 | ||||||||
Additional paid-in capital | 726,068 | 696,222 | 736,688 | 734,580 | ||||||
Retained earnings | 226,869 | 324,728 | 123,491 | 148,150 | ||||||
Accumulated other comprehensive income (loss) | 24,177 | (16,016) | 12,840 | (11,064) | ||||||
Treasury stock, 8,732,851 and 5,535,574 shares, respectively | (98,032) | (58,162) | ||||||||
Treasury stock, 11,813,161 and 10,932,182 shares, respectively | (131,287) | (119,808) | ||||||||
Total Green Plains stockholders' equity | 879,129 | 946,819 | 741,779 | 751,905 | ||||||
Noncontrolling interests | 115,445 | 116,170 | 115,491 | 113,381 | ||||||
Total stockholders' equity | 994,574 | 1,062,989 | 857,270 | 865,286 | ||||||
Total liabilities and stockholders' equity | $ | 2,140,727 | $ | 2,216,432 | $ | 1,571,075 | $ | 1,698,218 | ||
See accompanying notes to the consolidated financial statements.
GREEN PLAINS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in thousands, except per share amounts)
Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||
Revenues | ||||||||||||||||||||||
Product revenues | $ | 894,161 | $ | 985,217 | $ | 1,534,171 | $ | 2,028,876 | $ | 416,605 | $ | 628,878 | $ | 1,048,186 | $ | 1,065,214 | ||||||
Service revenues | 1,692 | 1,620 | 3,997 | 3,248 | 1,384 | 1,692 | 2,672 | 3,997 | ||||||||||||||
Total revenues | 895,853 | 986,837 | 1,538,168 | 2,032,124 | 417,989 | 630,570 | 1,050,858 | 1,069,211 | ||||||||||||||
Costs and expenses | ||||||||||||||||||||||
Cost of goods sold (excluding depreciation and amortization expenses reflected below) | 888,257 | 910,625 | 1,523,832 | 1,898,960 | 390,861 | 633,960 | 1,008,089 | 1,068,351 | ||||||||||||||
Operations and maintenance expenses | 6,234 | 7,893 | 13,098 | 16,293 | 6,603 | 6,234 | 12,763 | 13,098 | ||||||||||||||
Selling, general and administrative expenses | 21,648 | 29,731 | 42,294 | 55,734 | 20,518 | 19,510 | 42,156 | 37,910 | ||||||||||||||
Goodwill impairment | - | - | 24,091 | - | ||||||||||||||||||
Depreciation and amortization expenses | 19,094 | 26,823 | 38,329 | 53,297 | 19,375 | 17,511 | 37,455 | 35,135 | ||||||||||||||
Total costs and expenses | 935,233 | 975,072 | 1,617,553 | 2,024,284 | 437,357 | 677,215 | 1,124,554 | 1,154,494 | ||||||||||||||
Operating income (loss) | (39,380) | 11,765 | (79,385) | 7,840 | ||||||||||||||||||
Operating loss from continuing operations | (19,368) | (46,645) | (73,696) | (85,283) | ||||||||||||||||||
Other income (expense) | ||||||||||||||||||||||
Interest income | 923 | 709 | 2,186 | 1,346 | 47 | 860 | 640 | 2,046 | ||||||||||||||
Interest expense | (15,969) | (22,021) | (30,396) | (44,149) | (9,670) | (11,249) | (19,367) | (20,980) | ||||||||||||||
Other, net | (406) | 2,545 | 432 | 2,479 | 14 | (370) | 850 | 542 | ||||||||||||||
Total other expense | (15,452) | (18,767) | (27,778) | (40,324) | (9,609) | (10,759) | (17,877) | (18,392) | ||||||||||||||
Loss before income taxes | (54,832) | (7,002) | (107,163) | (32,484) | ||||||||||||||||||
Loss from continuing operations before income taxes and income (loss) from equity method investees | (28,977) | (57,404) | (91,573) | (103,675) | ||||||||||||||||||
Income tax benefit | 14,653 | 10,753 | 29,113 | 16,780 | 11,458 | 15,322 | 55,741 | 28,265 | ||||||||||||||
Net income (loss) | (40,179) | 3,751 | (78,050) | (15,704) | ||||||||||||||||||
Income (loss) from equity method investees, net of income taxes | 12,045 | (36) | 20,011 | (110) | ||||||||||||||||||
Net loss from continuing operations including noncontrolling interest | (5,474) | (42,118) | (15,821) | (75,520) | ||||||||||||||||||
Net income (loss) from discontinued operations, net of income taxes | - | 1,939 | - | (2,530) | ||||||||||||||||||
Net loss | (5,474) | (40,179) | (15,821) | (78,050) | ||||||||||||||||||
Net income attributable to noncontrolling interests | 5,163 | 4,745 | 10,091 | 9,407 | 2,740 | 5,163 | 8,838 | 10,091 | ||||||||||||||
Net loss attributable to Green Plains | $ | (45,342) | $ | (994) | $ | (88,141) | $ | (25,111) | $ | (8,214) | $ | (45,342) | $ | (24,659) | $ | (88,141) | ||||||
Earnings per share: | ||||||||||||||||||||||
Net loss attributable to Green Plains - basic | $ | (1.13) | $ | (0.02) | $ | (2.19) | $ | (0.63) | ||||||||||||||
Net loss attributable to Green Plains - diluted | $ | (1.13) | $ | (0.02) | $ | (2.19) | $ | (0.63) | ||||||||||||||
Earnings per share - basic and diluted | ||||||||||||||||||||||
Net loss from continuing operations | $ | (0.24) | $ | (1.18) | $ | (0.71) | $ | (2.13) | ||||||||||||||
Net income (loss) from discontinued operations | - | 0.05 | - | (0.06) | ||||||||||||||||||
Net loss attributable to Green Plains | $ | (0.24) | $ | (1.13) | $ | (0.71) | $ | (2.19) | ||||||||||||||
Weighted average shares outstanding: | ||||||||||||||||||||||
Basic | 40,081 | 40,194 | 40,200 | 40,168 | 34,603 | 40,081 | 34,634 | 40,200 | ||||||||||||||
Diluted | 40,081 | 40,194 | 40,200 | 40,168 | 34,603 | 40,081 | 34,634 | 40,200 | ||||||||||||||
Cash dividend declared per share | $ | 0.12 | $ | 0.12 | $ | 0.24 | $ | 0.24 | ||||||||||||||
See accompanying notes to the consolidated financial statements.
GREEN PLAINS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited and in thousands)
Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||
Net income (loss) | $ | (40,179) | $ | 3,751 | $ | (78,050) | $ | (15,704) | ||||||||||||||
Net loss | $ | (5,474) | $ | (40,179) | $ | (15,821) | $ | (78,050) | ||||||||||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||||||||||
Unrealized gains (losses) on derivatives arising during the period, net of tax benefit (expense) of ($9,884), $1,145, ($7,804) and ($3,971), respectively | 33,260 | (4,277) | 26,377 | 12,873 | ||||||||||||||||||
Reclassification of realized losses (gains) on derivatives, net of tax benefit (expense) of ($947), $185, ($4,087) and $365, respectively | 3,440 | (581) | 13,816 | (1,184) | ||||||||||||||||||
Unrealized gains (losses) on derivatives arising during the period, net of tax benefit (expense) of $428, ($9,884), ($1,019) and ($7,804), respectively | (1,333) | 33,260 | 3,199 | 26,377 | ||||||||||||||||||
Reclassification of realized losses (gains) on derivatives, net of tax expense (benefit) of $1, ($947), $1,431 and ($4,087), respectively | (7) | 3,440 | (4,492) | 13,816 | ||||||||||||||||||
Other comprehensive income (loss), net of tax | (1,340) | 36,700 | (1,293) | 40,193 | ||||||||||||||||||
Share of equity method investees other comprehensive income arising during the period, net of tax benefit (expense) of $5,336, $0, ($8,023) and $0, respectively | (16,759) | - | 25,197 | - | ||||||||||||||||||
Total other comprehensive income (loss), net of tax | 36,700 | (4,858) | 40,193 | 11,689 | (18,099) | 36,700 | 23,904 | 40,193 | ||||||||||||||
Comprehensive loss | (3,479) | (1,107) | (37,857) | (4,015) | ||||||||||||||||||
Comprehensive income (loss) | (23,573) | (3,479) | 8,083 | (37,857) | ||||||||||||||||||
Comprehensive income attributable to noncontrolling interests | 5,163 | 4,745 | 10,091 | 9,407 | 2,740 | 5,163 | 8,838 | 10,091 | ||||||||||||||
Comprehensive loss attributable to Green Plains | $ | (8,642) | $ | (5,852) | $ | (47,948) | $ | (13,422) | $ | (26,313) | $ | (8,642) | $ | (755) | $ | (47,948) | ||||||
See accompanying notes to the consolidated financial statements.
GREEN PLAINS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
Six Months Ended | |||||
2019 | 2018 | ||||
Cash flows from operating activities: | |||||
Net loss | $ | (78,050) | $ | (15,704) | |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | |||||
Depreciation and amortization | 38,329 | 53,297 | |||
Amortization of debt issuance costs and debt discount | 10,306 | 7,515 | |||
Gain from insurance proceeds | - | (2,624) | |||
Deferred income taxes | (27,543) | (23,061) | |||
Stock-based compensation | 4,809 | 5,435 | |||
Undistributed equity loss of affiliates | 109 | 239 | |||
Other | 1,328 | - | |||
Changes in operating assets and liabilities before effects of business combinations and dispositions: | |||||
Accounts receivable | (11,312) | 14,054 | |||
Inventories | 76,791 | 88,450 | |||
Derivative financial instruments | 3,088 | 1,513 | |||
Prepaid expenses and other assets | 2,830 | 2,797 | |||
Accounts payable and accrued liabilities | (51,901) | (96,295) | |||
Current income taxes | (2,137) | 10,540 | |||
Other | 1,144 | (297) | |||
Net cash provided by (used in) operating activities | (32,209) | 45,859 | |||
Cash flows from investing activities: | |||||
Purchases of property and equipment, net | (23,467) | (14,640) | |||
Proceeds from the sale of assets, net | 3,155 | - | |||
Acquisition of businesses, net of cash acquired | - | (1,629) | |||
Investments in unconsolidated subsidiaries | - | (2,253) | |||
Other investing activities | - | 7,500 | |||
Net cash used in investing activities | (20,312) | (11,022) | |||
Cash flows from financing activities: | |||||
Proceeds from the issuance of long-term debt | 147,700 | 42,300 | |||
Payments of principal on long-term debt | (45,125) | (43,370) | |||
Proceeds from short-term borrowings | 1,444,516 | 2,089,208 | |||
Payments on short-term borrowings | (1,518,008) | (2,158,274) | |||
Payments for repurchase of common stock | (39,870) | - | |||
Payments of cash dividends and distributions | (20,692) | (20,580) | |||
Proceeds from disgorgement of shareholder short-swing profits | 6,699 | - | |||
Payments of loan fees | (4,892) | (2,622) | |||
Payments related to tax withholdings for stock-based compensation | (2,094) | (3,013) | |||
Proceeds from exercise of stock options | - | 150 | |||
Net cash used in financing activities | (31,766) | (96,201) | |||
Net change in cash, cash equivalents and restricted cash | (84,287) | (61,364) | |||
Cash, cash equivalents and restricted cash, beginning of period | 318,195 | 312,360 | |||
Cash, cash equivalents and restricted cash, end of period | $ | 233,908 | $ | 250,996 | |
Continued on the following page | |||||
Six Months Ended | |||||
2020 | 2019 | ||||
Cash flows from operating activities: | |||||
Net loss from continuing operations including noncontrolling interest | $ | (15,821) | $ | (75,520) | |
Net loss from discontinued operations, net of income taxes | - | (2,530) | |||
Net loss | (15,821) | (78,050) | |||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | |||||
Depreciation and amortization | 37,455 | 35,135 | |||
Amortization of debt issuance costs and debt discount | 10,373 | 9,691 | |||
Goodwill impairment | 24,091 | - | |||
Deferred income taxes | (18,132) | (27,543) | |||
Stock-based compensation | 3,555 | 4,809 | |||
Loss (income) from equity method investees, net of income taxes | (20,011) | 110 | |||
Distribution from equity method investment | 14,326 | - | |||
Other | (8) | 1,327 | |||
Changes in operating assets and liabilities before effects of business combinations and dispositions: | |||||
Accounts receivable | 39,960 | (9,971) | |||
Inventories | 79,841 | 80,681 | |||
Derivative financial instruments | 4,000 | 3,244 | |||
Prepaid expenses and other assets | 1,220 | 2,893 | |||
Accounts payable and accrued liabilities | (65,276) | (62,651) | |||
Current income taxes | (26,610) | (2,137) | |||
Other | (3,026) | (612) | |||
Net cash provided by (used in) operating activities - continuing operations | 65,937 | (43,074) | |||
Net cash provided by operating activities - discontinued operations | - | 10,865 | |||
Net cash provided by (used in) operating activities | 65,937 | (32,209) | |||
Cash flows from investing activities: | |||||
Purchases of property and equipment, net | (63,881) | (20,016) | |||
Proceeds from the sale of assets, net | - | 3,155 | |||
Other investing activities | (4,098) | - | |||
Net cash used in investing activities - continuing operations | (67,979) | (16,861) | |||
Net cash used in investing activities - discontinued operations | - | (3,451) | |||
Net cash used in investing activities | (67,979) | (20,312) | |||
Cash flows from financing activities: | |||||
Proceeds from the issuance of long-term debt | 3,000 | 147,700 | |||
Payments of principal on long-term debt | (316) | (45,125) | |||
Proceeds from short-term borrowings | 1,237,064 | 1,252,157 | |||
Payments on short-term borrowings | (1,301,154) | (1,285,856) | |||
Payments for repurchase of common stock | (11,479) | (39,870) | |||
Payments of cash dividends and distributions | (6,887) | (20,692) | |||
Proceeds from disgorgement of shareholder short-swing profits | - | 6,699 | |||
Payments of loan fees | (3,198) | (4,892) | |||
Payments related to tax withholdings for stock-based compensation | (1,288) | (2,094) | |||
Net cash provided by (used in) financing activities - continuing operations | (84,258) | 8,027 | |||
Net cash used in financing activities - discontinued operations | - | (39,793) | |||
Net cash used in financing activities | (84,258) | (31,766) | |||
Net change in cash, cash equivalents and restricted cash | (86,300) | (84,287) | |||
Cash, cash equivalents and restricted cash, beginning of period | 269,896 | 283,284 | |||
Discontinued operations cash activity included above: | |||||
Add: Cash balance included in current assets of discontinued operations at beginning of period | - | 34,911 | |||
Less: Cash balance included in current assets of discontinued operations at end of period | - | (2) | |||
Cash, cash equivalents and restricted cash, end of period | $ | 183,596 | $ | 233,906 | |
Continued on the following page | |||||
GREEN PLAINS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
Continued from the previous page | ||||||||||
Six Months Ended | Six Months Ended | |||||||||
2019 | 2018 | 2020 | 2019 | |||||||
Reconciliation of total cash, cash equivalents and restricted cash: | ||||||||||
Cash and cash equivalents | $ | 193,280 | $ | 235,133 | $ | 163,362 | $ | 193,280 | ||
Restricted cash | 40,628 | 15,863 | 20,234 | 40,628 | ||||||
Discontinued operations cash activity included above: | ||||||||||
Less: Cash, cash equivalents and restricted cash balance included in current assets of discontinued operations at end of period | - | (2) | ||||||||
Total cash, cash equivalents and restricted cash | $ | 233,908 | $ | 250,996 | $ | 183,596 | $ | 233,906 | ||
Non-cash financing activity: | ||||||||||
Exchange of common stock held in treasury stock for 3.25% | $ | - | $ | 1 | ||||||
Supplemental investing and financing activities: | ||||||||||
Assets acquired in acquisitions, net of cash | $ | - | $ | 1,629 | ||||||
Supplemental disclosures of cash flow: | ||||||||||
Cash paid (refunded) for income taxes | $ | 564 | $ | (3,163) | $ | (4,757) | $ | 564 | ||
Cash paid for interest | $ | 23,039 | $ | 36,923 | ||||||
Cash paid for interest of continuing operations | $ | 11,217 | $ | 14,269 | ||||||
Cash paid for interest of discontinued operations | $ | - | $ | 8,770 | ||||||
See accompanying notes to the consolidated financial statements.
GREEN PLAINS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
References to the Company
References to “Green Plains” or the “company” in the consolidated financial statements and in these notes to the consolidated financial statements refer to Green Plains Inc., an Iowa corporation, and its subsidiaries.
Consolidated Financial Statements
The consolidated financial statements include the company’s accounts and all significant intercompany balances and transactions are eliminated. Unconsolidated entities are included in the financial statements on an equity basis. The company owns a 49.1%49.0% limited partner interest and a 2.0% general partner interest in Green Plains Partners LP. Public investors own the remaining 48.9%49.0% limited partner interest in the partnership. The company determined that the limited partners in the partnership with equity at risk lack the power, through voting rights or similar rights, to direct the activities that most significantly impact partnership’s economic performance; therefore, the partnership is considered a variable interest entity. The company, through its ownership of the general partner interest in the partnership, has the power to direct the activities that most significantly affect economic performance and is obligated to absorb losses and has the right to receive benefits that could be significant to the partnership. Therefore, the company is considered the primary beneficiary and consolidates the partnership in the company’s financial statements. The assets of the partnership cannot be used by the company for general corporate purposes. The partnership’s consolidated total assets as of June 30, 20192020 and December 31, 2018,2019, excluding intercompany balances, are $103.2$89.1 million and $67.3$90.0 million, respectively, and primarily consist of property and equipment, operating lease right-of-use assets and goodwill. The partnership’s consolidated total liabilities as of June 30, 20192020 and December 31, 2018,2019, excluding intercompany balances, are $196.6$174.1 million and $152.9$180.9 million, respectively, which primarily consist of long-term debt as discussed in Note 89 – Debt and operating lease liabilities. The liabilities recognized as a result of consolidating the partnership do not represent additional claims on our general assets.
GPCC, a previously a wholly owned subsidiary of Green Plains, was disposed of during the third quarter of 2019. After closing, GPCC is no longer consolidated in the company’s consolidated financial statements and the GPCC investment is accounted for using the equity method of accounting. Additionally, the company concluded that the disposition of GPCC met the requirements under ASC 205-20 Presentation of Financial Statements – Discontinued Operations (“ASC 205-20”) to be presented as discontinued operations. As such, GPCC results prior to its disposition are classified as discontinued operations in prior period consolidated financial statements. See Note 3 - Dispositions and Discontinued Operations for further details.
The company also owns a 90.0% interest in BioProcess Algae, a joint venture formed in 2008, and consolidates their results in its consolidated financial statements.
The accompanying unaudited consolidated financial statements are prepared in accordance with GAAP for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Because they do not include all of the information and notes required by GAAP, the consolidated financial statements should be read in conjunction with the company’s annual report on Form 10-K for the year ended December 31, 2018,2019, as filed with the SEC on February 20, 2019.2020.
The unaudited financial information reflects adjustments, which are, in the opinion of management, necessary for a fair presentation of results of operations, financial position and cash flows for the periods presented. The adjustments are normal and recurring in nature, unless otherwise noted. Interim period results are not necessarily indicative of the results to be expected for the entire year.
Reclassifications
Certain prior year amounts relating to the discontinued operations of GPCC were reclassified to conform to the current year presentation. These reclassifications did not affectaffected certain balance sheet line items, total revenues, costs and expenses, net loss or stockholders’ equity.expenses.
Use of Estimates in the Preparation of Consolidated Financial Statements
The preparation of consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. The company bases its estimates on historical experience and assumptions it believes are proper and reasonable under the circumstances and regularly evaluates the appropriateness of its estimates and assumptions. Actual results could differ from those estimates. Key accounting policies, including but not limited to those relating to revenue recognition, depreciation of property and equipment, carrying value of intangible assets, operating leases, impairment of long-lived assets and goodwill, derivative financial instruments and accounting for income taxes, and assets acquired and
8
liabilities assumed in acquisitions, are impacted significantly by judgments, assumptions and estimates used in the preparation of the consolidated financial statements.
Description of Business
The company operates within four4 business segments: (1) ethanol production, which includes the production of ethanol, including industrial-grade alcohol, 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 and food-grade corn oil operations and included vinegar production until the sale of Fleischmann’s Vinegar during the fourth quarter of 2018 and (4) partnership, which includes fuel storage and transportation services.
Cash and Cash Equivalents
Cash and cash equivalents includes bank deposits as well as short-term, highly liquid investments with original maturities of three months or less.
Restricted Cash
The company has restricted cash, which can only be used for funding letters of credit or for payment towards a revolving credit agreement. Restricted cash also includes cash margins and securities pledged to commodity exchange clearinghouses and at times, funds in escrow related to acquisition and disposition activities. To the degree these segregated balances are cash and cash equivalents, they are considered restricted cash on the consolidated statements of cash flows.balance sheets.
Revenue Recognition
The company recognizes revenue when obligations under the terms of a contract with a customer are satisfied. Generally this occurs with the transfer of control of products or services. Revenue is measured as the amount of consideration expected to be received in exchange for transferring goods or providing services. Sales, value add, and other taxes the company collects concurrent with revenue-producing activities are excluded from revenue.
Sales of ethanol, distillers grains, corn oil, natural gas and other commodities by the company’s marketing business are recognized when obligations under the terms of a contract with a customer are satisfied. Generally, this occurs with the transfer of control of products or services. Revenues related to marketing for third parties are presented on a gross basis as the company controls the product prior to the sale to the end customer, takes title of the product and has inventory risk. Unearned revenue is recorded for goods in transit when the company has received payment but control has not yet been transferred to the customer. Revenues for receiving, storing, transferring and transporting ethanol and other fuels are recognized when the product is delivered to the customer.
The company routinely enters into physical-delivery energy commodity purchase and sale agreements. At times, the company settles 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. Revenues include net gains or losses from derivatives related to products sold while cost of goods sold includes net gains or losses from derivatives related to commodities purchased. Revenues also include realized gains and losses on related derivative financial instruments and reclassifications of realized gains and losses on cash flow hedges from accumulated other comprehensive income or loss.
Sales of products, including agricultural commodities, cattle and vinegar, are recognized when control of the product is transferred to the customer, which depends on the agreed upon shipment or delivery terms. 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 whenover time as the 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 upon transfer of control of product from its storage tanks and fuel terminals, when railcar volumetric capacity is provided, and as truck transportation services are performed. To the extent shortfalls associated with minimum volume commitments in the previous four quarters continue to exist, volumes in excess of the minimum volume commitment are applied to those shortfalls. Remaining excess volumes generating operating lease revenue are recognized as incurred.
9
Shipping and Handling Costs
The company accounts for shipping and handling activities related to contracts with customers as costs to fulfill its promise to transfer the associated products. Accordingly, the company records customer payments associated with shipping and handling costs as a component of revenue, and classifies such costs as a component of cost of goods sold.
Cost of Goods Sold
Cost of goods sold includes direct labor, materials, shipping and plant overhead costs. Direct labor includes all compensation and related benefits of non-management personnel involved in ethanol production cattle feeding operations and vinegar production until the sale of Fleischmann’s Vinegar during the fourth quarter of 2018.production. Grain purchasing and receiving costs, excluding labor costs for grain buyers and scale operators, are also included in cost of goods sold. Materials include the cost of corn feedstock, denaturant, and process chemicals, cattle and veterinary supplies.chemicals. Corn feedstock costs include gains and losses on related derivative financial instruments not designated as cash flow hedges, inbound freight charges, inspection costs and transfer costs, as well as reclassifications of gains and losses on cash flow hedges from accumulated other comprehensive income or loss. Plant overhead consists primarily of plant and feedlot utilities, repairs and maintenance feedlot expenses and outbound freight charges. Shipping costs incurred by the company, including railcar costs, are also reflected in cost of goods sold.
The company uses exchange-traded futures and options contracts and forward purchase and salessale contracts to attempt to minimize the effect of price changes on ethanol, grain and natural gas and cattle inventories.gas. Exchange-traded futures and options contracts are valued at quoted market prices and settled predominantly in cash. The company is exposed to loss when counterparties default on forward purchase and sale contracts. 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, primarily in transportation, between the exchange-traded market and local market where the terms of the contract is based. Changes in forward purchase contracts and exchange-traded futures and options contracts are recognized as a component of cost of goods sold.
Operations and Maintenance Expenses
In the partnership segment, transportation expenses represent the primary component of operations and maintenance expenses. Transportation expenses include railcar leases, freight and shipping of the company’s ethanol and co-products, as well as costs incurred storing ethanol at destination terminals.
Derivative Financial Instruments
The company uses various derivative financial instruments, including exchange-traded futures and exchange-traded and over-the-counter options contracts, to attempt to minimize risk and the effect of commodity price changes including but not limited to, corn, ethanol, cattle, natural gas and crude oil. The company monitors and manages this exposure as part of its 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, the company is exposed to credit and market risk. The company’s exposure to credit risk includes the counterparty’s failure to fulfill its performance obligations under the terms of the derivative contract. The company minimizes its credit risk by entering into transactions with high quality counterparties, limiting the amount of financial exposure it has with each counterparty and monitoring 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. The company manages market risk by incorporating parameters to monitor exposure within its risk management strategy, which limits the types of derivative instruments and strategies the company can use and the degree of market risk it can take using derivative instruments.
The company evaluates its 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 the company elects, cash flow hedge accounting treatment.
Certain qualifying derivatives related to ethanol production and agribusiness and energy services and food and ingredients segments are designated as cash flow hedges. The company evaluates the derivative instrument to ascertain its effectiveness
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prior to entering into cash flow hedges. Unrealized gains and losses are reflected in accumulated other comprehensive income or loss until the gain or loss from the underlying hedged transaction is realized.realized and the physical transaction is completed. 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.
At times, the company hedges its exposure to changes in inventory values and designates qualifying derivatives as fair value hedges. The carrying amount of the hedged inventory is adjusted in the current period for changes in fair value. Ineffectiveness of the hedges is recognized in the current period to the extent the change in fair value of the inventory is not offset by the change in fair value of the derivative.
Recent Accounting Pronouncements
Effective January 1,In December 2019, the company adopted theFASB issued amended guidance in ASC 842,740, Leases.Income Taxes - Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC 740. The amendments also improve consistent application of and simplify U.S. GAAP for other areas of ASC 740 Please referby clarifying and amending existing guidance. The amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption of the amendments is permitted. The company is evaluating the impact of this standard on its consolidated financial statements.
In March 2020, the FASB issued amended guidance in ASC 848, Reference Rate Reform - Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions to U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burden related to the expected market transition from the LIBOR and other interbank offered rates to alternative reference rates. Note 13 – CommitmentsThe expedients and Contingenciesexceptions provided by the amended guidance do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. for further details.The guidance is effective upon issuance and to be applied prospectively from any date beginning March 12, 2020 through December 31, 2022. The amended guidance is not expected to have a material impact on the company’s consolidated financial statements.
2. REVENUE
Revenue Recognition
Revenue is recognized when obligations under the terms of a contract with a customer are satisfied. Generally this occurs with the transfer of control of products or services. Revenue is measured as the amount of consideration expected to be received in exchange for transferring goods or providing services. Sales, value add, and other taxes the company collects concurrent with revenue-producing activities are excluded from revenue.
Revenue by Source
The following tables disaggregate revenue by major source for the three and six months ended June 30, 20192020 and 20182019 (in thousands):
Three Months Ended June 30, 2019 | |||||||||||||||||
Ethanol Production | Agribusiness & Energy Services | Food & Ingredients | Partnership | Eliminations | Total | ||||||||||||
Revenues: | |||||||||||||||||
Revenues from contracts with customers under ASC 606: | |||||||||||||||||
Ethanol | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | |||||
Distillers grains | 12,315 | - | - | - | - | 12,315 | |||||||||||
Cattle | - | - | 270,971 | - | - | 270,971 | |||||||||||
Service revenues | - | - | - | 1,608 | - | 1,608 | |||||||||||
Other | 1,773 | 442 | - | - | - | 2,215 | |||||||||||
Intersegment revenues | 1,435 | - | 38 | 1,843 | (3,316) | - | |||||||||||
Total revenues from contracts with customers | 15,523 | 442 | 271,009 | 3,451 | (3,316) | 287,109 | |||||||||||
Revenues from contracts accounted for as derivatives under ASC 815 (1): | |||||||||||||||||
Ethanol | 355,385 | 136,225 | - | - | - | 491,610 | |||||||||||
Distillers grains | 64,069 | 8,833 | - | - | - | 72,902 | |||||||||||
Corn oil | 12,993 | 10,463 | - | - | - | 23,456 | |||||||||||
Grain | - | 17,987 | - | - | - | 17,987 | |||||||||||
Cattle | - | - | (85) | - | - | (85) | |||||||||||
Other | 903 | 1,887 | - | - | - | 2,790 | |||||||||||
Intersegment revenues | 2,070 | 9,131 | - | - | (11,201) | - | |||||||||||
Total revenues from contracts accounted for as derivatives | 435,420 | 184,526 | (85) | - | (11,201) | 608,660 | |||||||||||
Leasing revenues under ASC 842 (2): | - | - | - | 17,374 | (17,290) | 84 | |||||||||||
Total Revenues | $ | 450,943 | $ | 184,968 | $ | 270,924 | $ | 20,825 | $ | (31,807) | $ | 895,853 | |||||
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Six Months Ended June 30, 2019 | Three Months Ended June 30, 2020 | |||||||||||||||||||||||||||||||||
Ethanol Production | Agribusiness & Energy Services | Food & Ingredients | Partnership | Eliminations | Total | Ethanol Production | Agribusiness & Energy Services | Food & Ingredients | Partnership | Eliminations | Total | |||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||||
Revenues from contracts with customers under ASC 606: | ||||||||||||||||||||||||||||||||||
Ethanol | $ | 620 | $ | - | $ | - | $ | - | $ | - | $ | 620 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
Distillers grains | 29,993 | - | - | - | - | 29,993 | 4,589 | - | - | - | - | 4,589 | ||||||||||||||||||||||
Cattle | - | - | 493,875 | - | - | 493,875 | ||||||||||||||||||||||||||||
Service revenues | - | - | - | 3,691 | - | 3,691 | - | - | - | 1,267 | - | 1,267 | ||||||||||||||||||||||
Other | 2,008 | 620 | - | - | - | 2,628 | 1,232 | 1,870 | - | - | - | 3,102 | ||||||||||||||||||||||
Intersegment revenues | 1,463 | - | 76 | 3,221 | (4,760) | - | 25 | - | - | 1,838 | (1,863) | - | ||||||||||||||||||||||
Total revenues from contracts with customers | 34,084 | 620 | 493,951 | 6,912 | (4,760) | 530,807 | 5,846 | 1,870 | - | 3,105 | (1,863) | 8,958 | ||||||||||||||||||||||
Revenues from contracts accounted for as derivatives under ASC 815 (1): | ||||||||||||||||||||||||||||||||||
Ethanol | 556,543 | 213,302 | - | - | - | 769,845 | 218,816 | 90,907 | - | - | - | 309,723 | ||||||||||||||||||||||
Distillers grains | 98,715 | 24,242 | - | - | - | 122,957 | 55,635 | 13,555 | - | - | - | 69,190 | ||||||||||||||||||||||
Corn oil | 21,607 | 17,434 | 1,451 | - | - | 40,492 | 9,504 | 12,146 | - | - | - | 21,650 | ||||||||||||||||||||||
Grain | - | 38,736 | - | - | - | 38,736 | - | 7,724 | - | - | - | 7,724 | ||||||||||||||||||||||
Cattle | - | - | (15,941) | - | - | (15,941) | ||||||||||||||||||||||||||||
Other | 6,668 | 44,298 | - | - | - | 50,966 | 741 | (114) | - | - | - | 627 | ||||||||||||||||||||||
Intersegment revenues | 4,159 | 15,544 | - | - | (19,703) | - | - | 4,368 | - | - | (4,368) | - | ||||||||||||||||||||||
Total revenues from contracts accounted for as derivatives | 687,692 | 353,556 | (14,490) | - | (19,703) | 1,007,055 | 284,696 | 128,586 | - | - | (4,368) | 408,914 | ||||||||||||||||||||||
Leasing revenues under ASC 842 (2): | - | - | - | 35,000 | (34,694) | 306 | - | - | - | 17,276 | (17,159) | 117 | ||||||||||||||||||||||
Total Revenues | $ | 721,776 | $ | 354,176 | $ | 479,461 | $ | 41,912 | $ | (59,157) | $ | 1,538,168 | $ | 290,542 | $ | 130,456 | $ | - | $ | 20,381 | $ | (23,390) | $ | 417,989 | ||||||||||
Three Months Ended June 30, 2018 | Six Months Ended June 30, 2020 | |||||||||||||||||||||||||||||||||
Ethanol Production | Agribusiness & Energy Services | Food & Ingredients | Partnership | Eliminations | Total | Ethanol Production | Agribusiness & Energy Services | Food & Ingredients | Partnership | Eliminations | Total | |||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||||
Revenues from contracts with customers under ASC 606: | ||||||||||||||||||||||||||||||||||
Ethanol | $ | 634 | $ | - | $ | - | $ | - | $ | - | $ | 634 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
Distillers grains | 62,657 | - | - | - | - | 62,657 | 21,064 | - | - | - | - | 21,064 | ||||||||||||||||||||||
Cattle and vinegar | - | - | 222,059 | - | - | 222,059 | ||||||||||||||||||||||||||||
Service revenues | - | - | - | 1,229 | - | 1,229 | - | - | - | 2,446 | - | 2,446 | ||||||||||||||||||||||
Other | 1,201 | 806 | - | - | - | 2,007 | 4,191 | 2,260 | - | - | - | 6,451 | ||||||||||||||||||||||
Intersegment revenues | 875 | - | 38 | - | (913) | - | 50 | - | - | 3,912 | (3,962) | - | ||||||||||||||||||||||
Total revenues from contracts with customers | 65,367 | 806 | 222,097 | 1,229 | (913) | 288,586 | 25,305 | 2,260 | - | 6,358 | (3,962) | 29,961 | ||||||||||||||||||||||
Revenues from contracts accounted for as derivatives under ASC 815 (1): | ||||||||||||||||||||||||||||||||||
Ethanol | 451,083 | 106,117 | - | - | - | 557,200 | 585,908 | 217,000 | - | - | - | 802,908 | ||||||||||||||||||||||
Distillers grains | 49,940 | 32,706 | - | - | - | 82,646 | 128,162 | 18,264 | - | - | - | 146,426 | ||||||||||||||||||||||
Corn oil | 19,132 | 3,488 | 5,350 | - | - | 27,970 | 24,188 | 17,876 | - | - | - | 42,064 | ||||||||||||||||||||||
Grain | 337 | 22,843 | - | - | - | 23,180 | 6 | 15,674 | - | - | - | 15,680 | ||||||||||||||||||||||
Cattle and vinegar | - | - | (1,522) | - | - | (1,522) | ||||||||||||||||||||||||||||
Other | 4,272 | 4,114 | - | - | - | 8,386 | 2,698 | 10,895 | - | - | - | 13,593 | ||||||||||||||||||||||
Intersegment revenues | 3,344 | 14,128 | - | 2,517 | (19,989) | - | - | 11,676 | - | - | (11,676) | - | ||||||||||||||||||||||
Total revenues from contracts accounted for as derivatives | 528,108 | 183,396 | 3,828 | 2,517 | (19,989) | 697,860 | 740,962 | 291,385 | - | - | (11,676) | 1,020,671 | ||||||||||||||||||||||
Leasing revenues under ASC 840 (2): | - | - | - | 22,094 | (21,703) | 391 | ||||||||||||||||||||||||||||
Leasing revenues under ASC 842 (2): | - | - | - | 34,294 | (34,068) | 226 | ||||||||||||||||||||||||||||
Total Revenues | $ | 593,475 | $ | 184,202 | $ | 225,925 | $ | 25,840 | $ | (42,605) | $ | 986,837 | $ | 766,267 | $ | 293,645 | $ | - | $ | 40,652 | $ | (49,706) | $ | 1,050,858 | ||||||||||
Six Months Ended June 30, 2018 | Three Months Ended June 30, 2019 (3) | |||||||||||||||||||||||||||||||||
Ethanol Production | Agribusiness & Energy Services | Food & Ingredients | Partnership | Eliminations | Total | Ethanol Production | Agribusiness & Energy Services | Food & Ingredients | Partnership | Eliminations | Total | |||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||||
Revenues from contracts with customers under ASC 606: | ||||||||||||||||||||||||||||||||||
Ethanol | $ | 3,100 | $ | - | $ | - | $ | - | $ | - | $ | 3,100 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
Distillers grains | 119,902 | - | - | - | - | 119,902 | 13,724 | - | - | - | - | 13,724 | ||||||||||||||||||||||
Cattle and vinegar | - | - | 489,475 | - | - | 489,475 | ||||||||||||||||||||||||||||
Service revenues | - | - | - | 2,447 | - | 2,447 | - | - | - | 1,608 | - | 1,608 | ||||||||||||||||||||||
Other | 1,332 | 1,483 | - | - | - | 2,815 | 1,773 | 442 | - | - | - | 2,215 | ||||||||||||||||||||||
Intersegment revenues | 1,537 | - | 80 | - | (1,617) | - | 26 | - | - | 1,829 | (1,855) | - | ||||||||||||||||||||||
Total revenues from contracts with customers | 125,871 | 1,483 | 489,555 | 2,447 | (1,617) | 617,739 | 15,523 | 442 | - | 3,437 | (1,855) | 17,547 | ||||||||||||||||||||||
Revenues from contracts accounted for as derivatives under ASC 815 (1): | ||||||||||||||||||||||||||||||||||
Ethanol | 893,656 | 228,658 | - | - | - | 1,122,314 | 355,385 | 136,225 | - | - | - | 491,610 | ||||||||||||||||||||||
Distillers grains | 90,401 | 53,918 | - | - | - | 144,319 | 66,139 | 9,629 | - | - | - | 75,768 | ||||||||||||||||||||||
Corn oil | 35,602 | 12,158 | 7,637 | - | - | 55,397 | 12,994 | 10,463 | - | - | - | 23,457 | ||||||||||||||||||||||
Grain | 470 | 37,129 | - | - | - | 37,599 | - | 19,229 | - | - | - | 19,229 | ||||||||||||||||||||||
Cattle and vinegar | - | - | 6,884 | - | - | 6,884 | ||||||||||||||||||||||||||||
Other | 8,556 | 38,515 | - | - | - | 47,071 | 902 | 1,973 | - | - | - | 2,875 | ||||||||||||||||||||||
Intersegment revenues | 4,635 | 25,557 | - | 4,689 | (34,881) | - | - | 7,007 | - | - | (7,007) | - | ||||||||||||||||||||||
Total revenues from contracts accounted for as derivatives | 1,033,320 | 395,935 | 14,521 | 4,689 | (34,881) | 1,413,584 | 435,420 | 184,526 | - | - | (7,007) | 612,939 | ||||||||||||||||||||||
Leasing revenues under ASC 840 (2): | - | - | - | 44,589 | (43,788) | 801 | ||||||||||||||||||||||||||||
Leasing revenues under ASC 842 (2): | - | - | - | 17,388 | (17,304) | 84 | ||||||||||||||||||||||||||||
Total Revenues | $ | 1,159,191 | $ | 397,418 | $ | 504,076 | $ | 51,725 | $ | (80,286) | $ | 2,032,124 | $ | 450,943 | $ | 184,968 | $ | - | $ | 20,825 | $ | (26,166) | $ | 630,570 | ||||||||||
Six Months Ended June 30, 2019 (3) | |||||||||||||||||
Ethanol Production | Agribusiness & Energy Services | Food & Ingredients | Partnership | Eliminations | Total | ||||||||||||
Revenues: | |||||||||||||||||
Revenues from contracts with customers under ASC 606: | |||||||||||||||||
Ethanol | $ | 620 | $ | - | $ | - | $ | - | $ | - | $ | 620 | |||||
Distillers grains | 31,405 | - | - | - | - | 31,405 | |||||||||||
Service revenues | - | - | - | 3,691 | - | 3,691 | |||||||||||
Other | 2,008 | 620 | - | - | - | 2,628 | |||||||||||
Intersegment revenues | 51 | - | - | 3,221 | (3,272) | - | |||||||||||
Total revenues from contracts with customers | 34,084 | 620 | - | 6,912 | (3,272) | 38,344 | |||||||||||
Revenues from contracts accounted for as derivatives under ASC 815 (1): | |||||||||||||||||
Ethanol | 556,543 | 213,302 | - | - | - | 769,845 | |||||||||||
Distillers grains | 102,738 | 26,088 | - | - | - | 128,826 | |||||||||||
Corn oil | 21,607 | 17,434 | 1,452 | - | - | 40,493 | |||||||||||
Grain | 136 | 40,084 | - | - | - | 40,220 | |||||||||||
Other | 6,668 | 44,509 | - | - | - | 51,177 | |||||||||||
Intersegment revenues | - | 12,139 | - | - | (12,139) | - | |||||||||||
Total revenues from contracts accounted for as derivatives | 687,692 | 353,556 | 1,452 | - | (12,139) | 1,030,561 | |||||||||||
Leasing revenues under ASC 840 (2): | - | - | - | 35,000 | (34,694) | 306 | |||||||||||
Total Revenues | $ | 721,776 | $ | 354,176 | $ | 1,452 | $ | 41,912 | $ | (50,105) | $ | 1,069,211 | |||||
(1)Revenues from contracts accounted for as derivatives represent physically settled derivative sales that are outside the scope of ASC 606,Revenue from Contracts with Customers (ASC 606), where the company recognizes revenue when control of the inventory is transferred within the meaning of ASC 606 as required by ASC 610-20, Gains and Losses from the Derecognition of Nonfinancial Assets.
(2)Leasing revenues do not represent revenues recognized from contracts with customers under ASC 606, and are accounted for under ASC 842, Leases.
(3)Revenues include certain items which were previously considered intercompany transactions prior to the disposition of GPCC and therefore eliminated upon consolidation. These revenue transactions are now presented on a gross basis in product revenues. These revenue transactions total $5.7 million and $9.1 million for 2019the three and ASC 840, Leases for 2018.six months ended June 30, 2019.
Payment TermsMajor Customers
The company has standard payment terms, which vary depending uponRevenue from Customer A represented 16% and 18% of total revenues for the naturethree and six months ended June 30, 2020, respectively, and 10% and 12% of total revenues for the services provided, with the majority falling within 10 to 30 days after transfer of control or completion of services. In instances where the timing of revenue recognition differs from the timing of invoicing, the company has determined that contracts generally do not include a significant financing component.
Contract Liabilities
The company records unearned revenue when consideration is received, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of servicethree and lease agreements. Unearned revenue from service agreements, which represents a contract liability, is recorded for fees that have been charged to the customer prior to the completion of performance obligations. Unearned revenue is generally recognized in the subsequent quarter and is not material to the company. The company expects to recognize all of the unearned revenue associated with service agreements as ofsix months ended June 30, 2019, respectively. Revenue from Customer B represented 11% of total revenues for the three ended June 30, 2019. Revenues from these customers are reported in the subsequent quarter when the inventory is withdrawn from the partnership’s tank storage.ethanol production segment.
3. ACQUISITIONS AND DISPOSITIONS
ACQUISITIONS
Acquisition of Cattle Feeding Operations – Bartlett Cattle Company, L.P.
On August 1, 2018, the company acquired two cattle-feeding operations from Bartlett Cattle Company, L.P. for $16.2 million, plus working capital of approximately $106.6 million primarily consisting of work-in-process inventory. The transaction included the feed yards located in Sublette, Kansas and Tulia, Texas, which added combined feedlot capacity of 97,000 head of cattle to the company’s operations. The transaction was financed using cash on hand and proceeds from the Green Plains Cattle senior secured asset-based revolving credit facility. There were no material acquisition costs recorded for the acquisition.
The following is a summary of the assets acquired and liabilities assumed (in thousands):
Amounts of Identifiable Assets Acquired and Liabilities Assumed | ||||
Accounts receivable | $ | 1,897 | ||
Inventory | 104,809 | |||
Property and equipment, net | 16,190 | |||
Current liabilities | (118) | |||
Total identifiable net assets | $ | 122,778 | ||
The amounts above reflect the final purchase price allocation, which included working capital true-up payments by the company of $0.9 million made during the third quarter of 2018.3. DISPOSITIONS AND DISCONTINUED OPERATIONS
DISPOSITIONS
Disposition of Fleischmann’s VinegarGreen Plains Cattle Company LLC
On November 27, 2018,September 1, 2019, the company, TGAM Agribusiness Fund Holdings-B LP (“TGAM”) and StepStone Atlantic Fund, L.P. (“StepStone”) formed a joint venture and entered into the LLC Agreement. GPCC was previously a wholly owned subsidiary of Green Plains. Green Plains II LLC,also entered into a Securities Purchase Agreement with TGAM and StepStone, whereby TGAM and StepStone purchased an indirect wholly-owned subsidiaryaggregate of 50% of the company, completed the salemembership interests of Fleischmann’s Vinegar Company, Inc.GPCC from Green Plains for approximately $76.9 million in cash. There was 0 gain or loss recorded as part of this transaction. The LLC Agreement contains certain earn-out or bonus provisions to Kerry Holding Co. (“Kerry”).be paid by or received from GPCC if certain EBITDA thresholds are met. The company will record any gain contingency amounts in the consolidated financial statements when the consideration is received, as net consideration from Kerry $353.7 millionwhich is anticipated to be in cashthe third quarter of 2020.
Under the LLC Agreement, Green Plains has certain rights and restricted cash,obligations, including net workingbut not limited to, the right or obligation: (i) to designate two Managers to the Board of Managers of GPCC (the “Board”), or in the event the size of the Board is increased, the number of Managers equal to two-fifths of the Board, rounded up, and (ii) to fund additional capital adjustments. The divested assets were reported withincontributions in accordance with their percentage interest upon mutual agreement by Green Plains, TGAM and StepStone. Additionally, TGAM and StepStone both have the company’s food and ingredients segment. The company recorded a pre-tax gainright or obligation to designate one Manager, or in the event the size of the Board is increased, the number of Managers equal to one-fifths of the Board, rounded up. Each Manager serving on the saleBoard shall have one vote and a majority of Fleischmann’s Vinegarthe Managers serving on the Board shall constitute a quorum for the transaction of $58.2 million, including offsetting related transaction costsbusiness of $7.4 million within the corporate segment.Board. Green Plains’ allocation under the LLC Agreement will be subject to certain adjustments.
The assets and liabilities of Fleischmann’s Vinegarthe GPCC at closing on November 27, 2018September 1, 2019 were as follows (in thousands):
Amounts of Identifiable Assets Disposed and Liabilities Relinquished | Amounts of Identifiable Assets Disposed and Liabilities Relinquished | Amounts of Identifiable Assets Disposed and Liabilities Relinquished | ||||||
Cash | Cash | $ | 2,107 | Cash | $ | 2 | ||
Accounts receivable, net | Accounts receivable, net | 15,935 | Accounts receivable, net | 17,920 | ||||
Inventory | Inventory | 15,167 | Inventory | 387,534 | ||||
Prepaid expenses and other | 853 | |||||||
Derivative financial instruments | Derivative financial instruments | 48,189 | ||||||
Property and equipment | Property and equipment | 64,552 | Property and equipment | 71,678 | ||||
Other assets | Other assets | 79,389 | Other assets | 2,291 | ||||
Current liabilities | Current liabilities | (8,587) | Current liabilities | (49,297) | ||||
Deferred tax liabilities | (26,617) | |||||||
Short-term notes payable and other borrowings | Short-term notes payable and other borrowings | (38) | ||||||
Current maturities of long-term debt | Current maturities of long-term debt | (324,028) | ||||||
Long-term debt | Long-term debt | (80) | ||||||
Other liabilities | Other liabilities | (403) | ||||||
Total identifiable net assets | 142,799 | Total identifiable net assets disposed | $ | 153,768 | ||||
Goodwill | 142,002 | |||||||
Net assets disposed | $ | 284,801 | ||||||
The amounts above reflect the preliminary working capital true-up payments made to and received from Kerry.DISCONTINUED OPERATIONS
DispositionAfter closing, GPCC is no longer consolidated in the company’s consolidated financial statements and the GPCC investment is accounted for using the equity method of Bluffton, Lakotaaccounting. Additionally, the company concluded that the disposition of GPCC met the requirements under ASC 205-20. As such, GPCC results prior to its disposition are classified as discontinued operations for all applicable periods. Financial results of GPCC were previously recorded within the food and Riga Ethanol Plantsingredients segment.
On November 15, 2018, the company completed the sale of three ethanol plants located in Bluffton, Indiana, Lakota, Iowa, and Riga, Michigan, and certain related assets from subsidiaries, to Valero Renewable Fuels Company, LLC (“Valero”) for the sale price of $323.2 million, including net working capital and other adjustments. Correspondingly, the partnership’s storage assets located adjacent to such plants were sold to Green Plains Inc. for $120.9 million. The company received as consideration from Valero approximately $323.2 million, while the partnership received as consideration from the company 8.7 million partnership units and a portion of the general partner interest equating to 0.2 million equivalent limited partner units to maintain the general partner’s 2% interest. In addition, the partnership also received additional consideration of approximately $2.7 million from Valero for the assignment of certain railcar operating leases. The divested assets were reported within the company’s ethanol production, agribusiness and energy services and partnership segments. The company recorded a pre-tax gain on the sale of the three ethanol plants of $92.2 million, of which $89.5 million was recorded within the corporate segment and $2.7 million was recorded within the partnership segment, including offsetting transaction costs of $4.2 million, of which $3.7 million were recorded within the corporate segment and $0.5 million were recorded within the partnership segment.
Summarized Results of Discontinued Operations
The assets and liabilitiesfollowing table presents the results of the Bluffton, Lakota and Riga ethanol plants are as followsour discontinued operations (in thousands):.
Amounts of Identifiable Assets Disposed and Liabilities Relinquished | ||||
Inventory | $ | 36,812 | ||
Prepaid expenses and other | 189 | |||
Property and equipment | 184,970 | |||
Other assets | 1,717 | |||
Current liabilities | (746) | |||
Other liabilities | (4,706) | |||
Total identifiable net assets | 218,236 | |||
Goodwill | 6,188 | |||
Net assets disposed | $ | 224,424 | ||
Three Months Ended June 30, 2019 (1) | Six Months Ended June 30, 2019 (1) | ||||
Product revenues | $ | 270,924 | $ | 478,009 | |
Costs and expenses | |||||
Cost of goods sold (excluding depreciation and amortization expenses reflected below) | 259,900 | 464,457 | |||
Selling, general and administrative expenses | 2,176 | 4,460 | |||
Depreciation and amortization expenses | 1,583 | 3,194 | |||
Total costs and expenses | 263,659 | 472,111 | |||
Operating income | 7,265 | 5,898 | |||
Other income (expense) | |||||
Interest income | 63 | 140 | |||
Interest expense | (4,720) | (9,416) | |||
Total other expense | (4,657) | (9,276) | |||
Income (loss) before income taxes | 2,608 | (3,378) | |||
Income tax benefit (expense) | (669) | 848 | |||
Net income (loss) | $ | 1,939 | $ | (2,530) | |
The amounts above reflect(1)Product revenues, costs of goods sold and selling, general and administrative expenses include certain revenue and expense items which were previously considered intercompany transactions prior to the final working capital true-up payments by Valerodisposition of $3.4GPCC and therefore eliminated upon consolidation. These revenue transactions total $5.7 million received duringand $9.1 million for the first quarterthree and six months ended June 30, 2019, respectively. These costs of 2019.
goods sold transactions total $5.6 million and $9.0 million for the three and six months ended June 30, 2019, respectively.
4. FAIR VALUE DISCLOSURES
The following methods, assumptions and valuation techniques were used in estimating the fair value of the company’s financial instruments:
Level 1 – unadjusted quoted prices in active markets for identical assets or liabilities the company can access at the measurement date.
Level 2 – directly or indirectly observable inputs such as quoted prices for similar assets or liabilities in active markets other than quoted prices included within Level 1, quoted prices for identical or similar assets in markets that are not active, and other inputs that are observable or can be substantially corroborated by observable market data through correlation or other means. Grain inventories held for sale in the agribusiness and energy services segment are valued at nearby futures values, plus or minus nearby basis.
Level 3 – unobservable inputs that are supported by little or no market activity and comprise a significant component of the fair value of the assets or liabilities. The company currently does not have any recurring Level 3 financial instruments.
Derivative contracts include exchange-traded commodity futures and options contracts and forward commodity purchase and sale contracts. Exchange-traded futures and options contracts are valued based on unadjusted quoted prices in active markets and are classified in Level 1. The majority of the company’s exchange-traded futures and options contracts are cash-settled on a daily basis.
There have been no changes in valuation techniques and inputs used in measuring fair value. The company’s assets and liabilities by level are as follows (in thousands):
Fair Value Measurements at June 30, 2019 | Fair Value Measurements at June 30, 2020 | |||||||||||||||
Quoted Prices in | Significant Other | Quoted Prices in | Significant Other | |||||||||||||
(Level 1) | (Level 2) | Total | (Level 1) | (Level 2) | Total | |||||||||||
Assets: | ||||||||||||||||
Cash and cash equivalents | $ | 193,280 | $ | - | $ | 193,280 | $ | 163,362 | $ | - | $ | 163,362 | ||||
Restricted cash | 40,628 | - | 40,628 | 20,234 | - | 20,234 | ||||||||||
Inventories carried at market | - | 36,459 | 36,459 | - | 26,572 | 26,572 | ||||||||||
Unrealized gains on derivatives | - | 15,924 | 15,924 | - | 18,714 | 18,714 | ||||||||||
Other assets | 113 | 1 | 114 | 112 | 3,002 | 3,114 | ||||||||||
Total assets measured at fair value | $ | 234,021 | $ | 52,384 | $ | 286,405 | $ | 183,708 | $ | 48,288 | $ | 231,996 | ||||
Liabilities: | ||||||||||||||||
Accounts payable (1) | $ | - | $ | 7,263 | $ | 7,263 | $ | - | $ | 25,347 | $ | 25,347 | ||||
Unrealized losses on derivatives | - | 9,670 | 9,670 | - | 11,463 | 11,463 | ||||||||||
Other | - | 13 | 13 | |||||||||||||
Total liabilities measured at fair value | $ | - | $ | 16,933 | $ | 16,933 | $ | - | $ | 36,823 | $ | 36,823 | ||||
Fair Value Measurements at December 31, 2018 | Fair Value Measurements at December 31, 2019 | |||||||||||||||
Quoted Prices in | Significant Other | Quoted Prices in | Significant Other | |||||||||||||
(Level 1) | (Level 2) | Total | (Level 1) | (Level 2) | Total | |||||||||||
Assets: | ||||||||||||||||
Cash and cash equivalents | $ | 251,683 | $ | - | $ | 251,683 | $ | 245,977 | $ | - | $ | 245,977 | ||||
Restricted cash | 66,512 | - | 66,512 | 23,919 | - | 23,919 | ||||||||||
Inventories carried at market | - | 111,960 | 111,960 | - | 73,318 | 73,318 | ||||||||||
Unrealized gains on derivatives | - | 9,976 | 9,976 | - | 14,515 | 14,515 | ||||||||||
Other assets | 114 | 1 | 115 | 113 | - | 113 | ||||||||||
Total assets measured at fair value | $ | 318,309 | $ | 121,937 | $ | 440,246 | $ | 270,009 | $ | 87,833 | $ | 357,842 | ||||
Liabilities: | ||||||||||||||||
Accounts payable (1) | $ | - | $ | 16,573 | $ | 16,573 | $ | - | $ | 37,294 | $ | 37,294 | ||||
Unrealized losses on derivatives | - | 7,852 | 7,852 | - | 7,771 | 7,771 | ||||||||||
Other liabilities | - | 2 | 2 | |||||||||||||
Total liabilities measured at fair value | $ | - | $ | 24,427 | $ | 24,427 | $ | - | $ | 45,065 | $ | 45,065 | ||||
(1)Accounts payable is generally stated at historical amounts with the exception of $7.3$25.3 million and $16.637.3 million at June 30, 20192020 and December 31, 2018,2019, respectively, related to certain delivered inventory for which the payable fluctuates based on changes in commodity prices. These payables are hybrid financial instruments for which the company has elected the fair value option.
The company believes the fair value of itsthe company’s debt was approximately $520.7 million compared with a book value of $509.3 millionat June 30, 2020. The fair value of the company’s debt approximated book value, which was $895.6 million at June 30, 2019 and $891.2$564.4 million at December 31, 2018.2019. The company estimated the fair value of its outstanding debt using Level 2 inputs. The company believes the fair values of its accounts receivable approximated book value, which was $108.7$67.2 million and $100.4107.2 million at June 30, 20192020 and December 31, 2018,2019, respectively.
Although the company currently does not have any recurring Level 3 financial measurements, the fair values of tangible assets and goodwill acquired and the equity component of convertible debt represent Level 3 measurements which were derived using a combination of the income approach, market approach and cost approach for the specific assets or liabilities being valued.
5. SEGMENT INFORMATION
The company reports the financial and operating performance for the following four operating segments: (1) ethanol production, which includes the production of ethanol, including industrial-grade alcohol, 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 and food-grade corn oil operations and included vinegar production until the sale of Fleischmann’s Vinegar during the fourth quarter of 2018 and (4) partnership, which includes fuel storage and transportation services.
Corporate activities include selling, general and administrative expenses, consisting primarily of compensation, professional fees and overhead costs not directly related to a specific operating segment.
During the normal course of business, the operating segments conduct business with each other. For example, the agribusiness and energy services segment procures grain and natural gas and sells products, including ethanol, distillers grains and corn oil for the ethanol production segment. The partnership segment provides fuel storage and transportation services for the ethanol production 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 the company’s consolidated results since the revenues and corresponding costs are eliminated.
The following tables set forth certain financial data for the company’s operating segments (in thousands):
Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 (1) | 2020 | 2019 (1) | |||||||||||||||
Revenues: | ||||||||||||||||||||||
Ethanol production: | ||||||||||||||||||||||
Revenues from external customers | $ | 447,438 | $ | 589,256 | $ | 716,154 | $ | 1,153,019 | $ | 290,517 | $ | 450,917 | $ | 766,217 | $ | 721,725 | ||||||
Intersegment revenues | 3,505 | 4,219 | 5,622 | 6,172 | 25 | 26 | 50 | 51 | ||||||||||||||
Total segment revenues | 450,943 | 593,475 | 721,776 | 1,159,191 | 290,542 | 450,943 | 766,267 | 721,776 | ||||||||||||||
Agribusiness and energy services: | ||||||||||||||||||||||
Revenues from external customers | 175,837 | 170,074 | 338,632 | 371,861 | 126,088 | 177,961 | 281,969 | 342,037 | ||||||||||||||
Intersegment revenues | 9,131 | 14,128 | 15,544 | 25,557 | 4,368 | 7,007 | 11,676 | 12,139 | ||||||||||||||
Total segment revenues | 184,968 | 184,202 | 354,176 | 397,418 | 130,456 | 184,968 | 293,645 | 354,176 | ||||||||||||||
Food and ingredients: | ||||||||||||||||||||||
Revenues from external customers | 270,886 | 225,887 | 479,385 | 503,996 | - | - | - | 1,452 | ||||||||||||||
Intersegment revenues | 38 | 38 | 76 | 80 | - | - | - | - | ||||||||||||||
Total segment revenues | 270,924 | 225,925 | 479,461 | 504,076 | - | - | - | 1,452 | ||||||||||||||
Partnership: | ||||||||||||||||||||||
Revenues from external customers | 1,692 | 1,620 | 3,997 | 3,248 | 1,384 | 1,692 | 2,672 | 3,997 | ||||||||||||||
Intersegment revenues | 19,133 | 24,220 | 37,915 | 48,477 | 18,997 | 19,133 | 37,980 | 37,915 | ||||||||||||||
Total segment revenues | 20,825 | 25,840 | 41,912 | 51,725 | 20,381 | 20,825 | 40,652 | 41,912 | ||||||||||||||
Revenues including intersegment activity | 927,660 | 1,029,442 | 1,597,325 | 2,112,410 | 441,379 | 656,736 | 1,100,564 | 1,119,316 | ||||||||||||||
Intersegment eliminations | (31,807) | (42,605) | (59,157) | (80,286) | (23,390) | (26,166) | (49,706) | (50,105) | ||||||||||||||
Revenues as reported | $ | 895,853 | $ | 986,837 | $ | 1,538,168 | $ | 2,032,124 | $ | 417,989 | $ | 630,570 | $ | 1,050,858 | $ | 1,069,211 | ||||||
(1)Revenues include certain items which were previously considered intercompany transactions prior to the disposition of GPCC and therefore eliminated upon consolidation. These revenue transactions are now presented on a gross basis in product revenues. These revenue transactions total $5.7 million and $9.1 million for the three and six months ended June 30, 2019, respectively.
Refer to Note 2 - Revenue, for further disaggregation of revenue by operating segment.
Three Months Ended | Six Months Ended | ||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||
Cost of goods sold: | |||||||||||
Ethanol production | $ | 483,352 | $ | 581,613 | $ | 776,839 | $ | 1,146,172 | |||
Agribusiness and energy services | 176,214 | 165,174 | 335,840 | 366,886 | |||||||
Food and ingredients | 259,906 | 206,440 | 465,979 | 466,205 | |||||||
Partnership | - | - | - | - | |||||||
Intersegment eliminations | (31,215) | (42,602) | (54,826) | (80,303) | |||||||
$ | 888,257 | $ | 910,625 | $ | 1,523,832 | $ | 1,898,960 | ||||
Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 (1) | 2020 | 2019 (1) | |||||||||||||||
Operating income (loss): | ||||||||||||||||||||||
Cost of goods sold: | ||||||||||||||||||||||
Ethanol production | $ | (53,885) | $ | (17,214) | $ | (98,077) | $ | (44,743) | $ | 284,174 | $ | 483,352 | $ | 773,324 | $ | 776,839 | ||||||
Agribusiness and energy services | 4,341 | 12,166 | 9,645 | 19,230 | 125,768 | 176,214 | 282,270 | 335,840 | ||||||||||||||
Food and ingredients | 7,260 | 12,981 | 5,828 | 25,566 | - | 6 | - | 1,522 | ||||||||||||||
Partnership | 13,156 | 16,129 | 25,707 | 31,489 | ||||||||||||||||||
Intersegment eliminations | (528) | 144 | (4,205) | 212 | (19,081) | (25,612) | (47,505) | (45,850) | ||||||||||||||
Corporate activities | (9,724) | (12,441) | (18,283) | (23,914) | ||||||||||||||||||
$ | (39,380) | $ | 11,765 | $ | (79,385) | $ | 7,840 | $ | 390,861 | $ | 633,960 | $ | 1,008,089 | $ | 1,068,351 | |||||||
(1)Cost of goods sold include certain items which were previously considered intercompany transactions prior to the disposition of GPCC and therefore eliminated upon consolidation. These cost of goods sold transactions are now presented on a gross basis in cost of goods sold. These costs of goods sold transactions total $5.6 million and $9.0 million for the three and six months ended June 30, 2019, respectively.
Three Months Ended | Six Months Ended | ||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||
EBITDA: | |||||||||||
Ethanol production | $ | (38,737) | $ | 3,362 | $ | (67,240) | $ | (3,733) | |||
Agribusiness and energy services | 4,899 | 12,796 | 10,761 | 20,498 | |||||||
Food and ingredients | 8,906 | 19,044 | 9,163 | 35,041 | |||||||
Partnership | 14,017 | 17,138 | 27,788 | 33,761 | |||||||
Intersegment eliminations | (528) | 144 | (4,205) | 212 | |||||||
Corporate activities | (8,326) | (10,642) | (14,705) | (20,817) | |||||||
$ | (19,769) | $ | 41,842 | $ | (38,438) | $ | 64,962 | ||||
Three Months Ended | Six Months Ended | ||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||
Depreciation and amortization: | |||||||||||
Ethanol production | $ | 15,437 | $ | 20,559 | $ | 30,777 | $ | 40,995 | |||
Agribusiness and energy services | 552 | 618 | 1,101 | 1,248 | |||||||
Food and ingredients | 1,583 | 3,444 | 3,194 | 6,848 | |||||||
Partnership | 771 | 1,105 | 1,756 | 2,286 | |||||||
Corporate activities | 751 | 1,097 | 1,501 | 1,920 | |||||||
$ | 19,094 | $ | 26,823 | $ | 38,329 | $ | 53,297 | ||||
The following table reconciles net income (loss) to EBITDA (in thousands):
Three Months Ended | Six Months Ended | ||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||
Net income (loss) | $ | (40,179) | $ | 3,751 | $ | (78,050) | $ | (15,704) | |||
Interest expense | 15,969 | 22,021 | 30,396 | 44,149 | |||||||
Income tax benefit | (14,653) | (10,753) | (29,113) | (16,780) | |||||||
Depreciation and amortization (1) | 19,094 | 26,823 | 38,329 | 53,297 | |||||||
EBITDA | $ | (19,769) | $ | 41,842 | $ | (38,438) | $ | 64,962 | |||
Three Months Ended | Six Months Ended | ||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||
Operating income (loss): | |||||||||||
Ethanol production (1) | $ | (18,792) | $ | (53,885) | $ | (79,573) | $ | (98,077) | |||
Agribusiness and energy services | 351 | 4,341 | 2,911 | 9,645 | |||||||
Food and ingredients | - | (5) | - | (70) | |||||||
Partnership | 12,225 | 13,156 | 24,655 | 25,707 | |||||||
Intersegment eliminations | (4,283) | (528) | (2,150) | (4,205) | |||||||
Corporate activities | (8,869) | (9,724) | (19,539) | (18,283) | |||||||
$ | (19,368) | $ | (46,645) | $ | (73,696) | $ | (85,283) | ||||
(1)ExcludesOperating loss for ethanol production includes a goodwill impairment charge of $24.1 million for the amortization of operating lease right-of-use assets and amortization of debt issuance costs.six months ended June 30, 2020.
18
Three Months Ended | Six Months Ended | ||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||
Depreciation and amortization: | |||||||||||
Ethanol production | $ | 17,184 | $ | 15,437 | $ | 33,082 | $ | 30,777 | |||
Agribusiness and energy services | 556 | 552 | 1,109 | 1,101 | |||||||
Partnership | 966 | 771 | 1,927 | 1,756 | |||||||
Corporate activities | 669 | 751 | 1,337 | 1,501 | |||||||
$ | 19,375 | $ | 17,511 | $ | 37,455 | $ | 35,135 | ||||
The following table sets forth total assets by operating segment (in thousands):
June 30, | December 31, | June 30, 2020 | December 31, 2019 | |||||||
Total assets (1): | ||||||||||
Ethanol production | $ | 853,906 | $ | 872,845 | $ | 922,962 | $ | 884,293 | ||
Agribusiness and energy services | 390,846 | 399,633 | 271,296 | 410,400 | ||||||
Food and ingredients | 559,879 | 552,459 | ||||||||
Partnership | 103,210 | 67,297 | 89,072 | 90,011 | ||||||
Corporate assets | 247,751 | 334,236 | 298,100 | 324,280 | ||||||
Intersegment eliminations | (14,865) | (10,038) | (10,355) | (10,766) | ||||||
$ | 2,140,727 | $ | 2,216,432 | $ | 1,571,075 | $ | 1,698,218 | |||
(1)Asset balances by segment exclude intercompany balances.
6. INVENTORIES
Inventories are carried at the lower of cost or net realizable value, except grain held for sale and fair-value hedged inventories. Commodities held for sale are reported at market value. AsThere was 0 lower of cost or net realizable value inventory adjustment as of June 30, 2020. As of December 31, 2019, the company recorded a $3.2$6.6 million lower of cost or marketnet realized value inventory adjustment reflected in cost of goods sold within the ethanol production segment.
The components of inventories are as follows (in thousands):
June 30, | December 31, | June 30, 2020 | December 31, 2019 | |||||||
Finished goods | $ | 99,075 | $ | 99,765 | $ | 55,891 | $ | 85,975 | ||
Commodities held for sale | 31,744 | 62,980 | 18,700 | 42,836 | ||||||
Raw materials | 56,511 | 119,014 | 51,711 | 77,900 | ||||||
Work-in-process | 440,410 | 423,840 | 11,621 | 13,523 | ||||||
Supplies and parts | 30,766 | 29,284 | 35,198 | 32,758 | ||||||
$ | 658,506 | $ | 734,883 | $ | 173,121 | $ | 252,992 | |||
7. GOODWILL
The company had 2 reporting units, to which goodwill was assigned. We are required to perform impairment tests related to our goodwill annually, which we perform as of October 1, or sooner if an indicator of impairment occurs. Near term industry outlook due to the significant decrease in crude oil prices, lower gasoline demand, general uncertainty due to the COVID-19 outbreak and the subsequent decline in our stock price caused a decline in the company’s market capitalization during the three months ended March 31, 2020. As such, the company determined a triggering event had occurred that required an interim impairment assessment for its ethanol production reporting unit. Due to the impairment indicators noted as a result of these triggering events, we evaluated our goodwill as of March 31, 2020. Significant assumptions inherent in the valuation methodologies for goodwill were employed and included, but were not limited to, prospective financial information, growth rates, discount rates, inflationary factors, and cost of capital. Based on our quantitative evaluation, we determined that the fair value of the ethanol production reporting unit did not exceed its carrying value. As a result, we concluded that the goodwill assigned to the ethanol production reporting unit was impaired and recorded a non-cash impairment charge of $24.1 million.
Based on similar factors as noted above, the company determined a triggering event had occurred that required an interim impairment assessment for its partnership reporting unit. Due to the impairment indicators noted as a result of these triggering events, we evaluated goodwill as of June 30, 2020. Significant assumptions inherent in the valuation methodologies for goodwill are employed and include, but are not limited to, prospective financial information, growth rates, discount rates, inflationary factors, and cost of capital. Based on the company’s quantitative evaluation of the partnership’s goodwill as of June 30, 2020, it was determined that the fair value of the partnership reporting unit exceeded its carrying value. As a result, the company concluded that the goodwill assigned to the partnership reporting unit was not impaired, but could be at risk of future impairment.
Changes in the carrying amount of goodwill attributable to each business segment during the six months ended June 30, 2020 were as follows (in thousands):
Ethanol | ||||||||
Production | Partnership | Total | ||||||
Balance, December 31, 2019 | $ | 24,091 | $ | 10,598 | $ | 34,689 | ||
Impairment charge | (24,091) | - | (24,091) | |||||
Balance, June 30, 2020 | $ | - | $ | 10,598 | $ | 10,598 | ||
8. DERIVATIVE FINANCIAL INSTRUMENTS
At June 30, 2019,2020, the company’s consolidated balance sheet reflected unrealized gains of $24.2$12.8 million, net of tax, in accumulated other comprehensive income which primarily related to our share of equity method investees other comprehensive income. The company expects these gains will be reclassified as operating income from equity method investees, net of income taxes over the next 12 months as a result of hedged transactions that are forecasted to occur. The amount realized in operating income from equity method investees, net of income taxes will differ as commodity prices change.
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Fair Values of Derivative Instruments
The fair values of the company’s derivative financial instruments and the line items on the consolidated balance sheets where they are reported are as follows (in thousands):
Asset Derivatives' | Liability Derivatives' | Asset Derivatives' | Liability Derivatives' | ||||||||||||||||||||||
Fair Value | Fair Value | Fair Value | Fair Value | ||||||||||||||||||||||
June 30, | December 31, | June 30, | December 31, | June 30, | December 31, | June 30, | December 31, | ||||||||||||||||||
Derivative financial instruments | $ | 15,924 | (1) | $ | 9,976 | (2) | $ | 9,670 | $ | 7,852 | (3) | $ | 18,714 | (1) | $ | 14,515 | (2) | $ | 11,463 | (3) | $ | 7,771 | |||
Other assets | 1 | 1 | - | - | 2 | - | - | - | |||||||||||||||||
Other liabilities | - | - | - | 2 | - | - | 13 | - | |||||||||||||||||
Total | $ | 15,925 | $ | 9,977 | $ | 9,670 | $ | 7,854 | $ | 18,716 | $ | 14,515 | $ | 11,476 | $ | 7,771 | |||||||||
(1)At June 30, 2020, derivative financial instruments, as reflected on the balance sheet, includes net unrealized gains on exchange traded futures and options contracts of $0.3 million.
(2)At December 31, 2019, derivative financial instruments, as reflected on the balance sheet, includes net unrealized gains on exchange traded futures and options contracts of $44.3$3.4 million, which include $33.0$0.1 million of net unrealized gains on derivative financial instruments designated as cash flow hedging instruments.
(2)At December 31, 2018, derivative financial instruments, as reflected on the balance sheet, includes net unrealized gains on exchange traded futures and options contracts of $16.3 million.
(3)At December 31, 2018,June 30, 2020, derivative financial instruments, as reflected on the balance sheet, includes net unrealized losses on exchange traded futures and options contracts of $16.9$4.0 million which included $16.5 million of net unrealized losses on derivative financial instruments designated as cash flow hedging instruments..
Refer to Note 4 - Fair Value Disclosures, which contains fair value information related to derivative financial instruments.
Effect of Derivative Instruments on Consolidated Balance Sheets, Consolidated Statements of Operations and Consolidated Statements of Comprehensive Income
The gains or losses recognized in income and other comprehensive income related to the company’s derivative financial instruments and the line items on the consolidated financial statements where they are reported are as follows (in thousands):
Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income | Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income | |||||||||||||||||||||||
Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income | Three Months Ended | Six Months Ended | ||||||||||||||||||||||
into Income | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||||
Location of Gain (Loss) Reclassified from Accumulated Other | Three Months Ended | Six Months Ended | ||||||||||||||||||||||
Comprehensive Income into Income | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
Revenues | $ | (4,352) | $ | (313) | $ | (17,711) | $ | 1,448 | $ | 6 | $ | - | $ | 8,824 | $ | - | ||||||||
Cost of goods sold | (35) | 1,079 | (192) | 101 | - | - | (2,901) | - | ||||||||||||||||
Net income (loss) from discontinued operations, net of income taxes | - | (4,387) | - | (17,903) | ||||||||||||||||||||
Net gain (loss) recognized in loss before tax | $ | (4,387) | $ | 766 | $ | (17,903) | $ | 1,549 | $ | 6 | $ | (4,387) | $ | 5,923 | $ | (17,903) | ||||||||
Gain or (Loss) Recognized in Other Comprehensive Income on Derivatives | ||||||||||||
Gain (Loss) Recognized in Other | Three Months Ended | Six Months Ended | ||||||||||
Comprehensive Income on Derivatives | 2019 | 2018 | 2019 | 2018 | ||||||||
Commodity contracts | $ | 43,144 | $ | (5,422) | $ | 34,181 | $ | 16,844 | ||||
Amount of Gain or (Loss) | ||||||||||||||
Recognized in Income on Derivatives | ||||||||||||||
Derivatives Not Designated | Location of Gain or (Loss) Recognized in | Three Months Ended | Six Months Ended | |||||||||||
as Hedging Instruments | Income on Derivatives | 2019 | 2018 | 2019 | 2018 | |||||||||
Commodity contracts | Revenues | $ | (7,381) | $ | 7,027 | $ | (22,702) | $ | 7,963 | |||||
Commodity contracts | Costs of goods sold | (9,071) | 7,121 | (8,905) | 123 | |||||||||
Net gain (loss) recognized in loss before tax | $ | (16,452) | $ | 14,148 | $ | (31,607) | $ | 8,086 | ||||||
Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivatives | ||||||||||||
Gain (Loss) Recognized in Other Comprehensive Income on | Three Months Ended | Six Months Ended | ||||||||||
Derivatives | 2020 | 2019 | 2020 | 2019 | ||||||||
Commodity contracts | $ | (1,761) | $ | 43,144 | $ | 4,218 | $ | 34,181 | ||||
Amount of Gain (Loss) | ||||||||||||||
Recognized in Income on Derivatives | ||||||||||||||
Derivatives Not Designated | Location of Gain (Loss) | Three Months Ended | Six Months Ended | |||||||||||
as Hedging Instruments | on Derivatives | 2020 | 2019 | 2020 | 2019 | |||||||||
Commodity contracts | Revenues | $ | (15,598) | $ | (11,649) | $ | 29,809 | $ | (24,473) | |||||
Commodity contracts | Costs of goods sold | 9,173 | (10,359) | 6,494 | (6,949) | |||||||||
Commodity contracts | Net loss from discontinued operations, net of income taxes | - | 5,556 | - | (185) | |||||||||
Net gain (loss) recognized in loss before tax | $ | (6,425) | $ | (16,452) | $ | 36,303 | $ | (31,607) | ||||||
The following amounts were recorded on the consolidated balance sheets related to cumulative basis adjustments for the fair value hedged items (in thousands):
June 30, 2019 | December 31, 2018 | June 30, 2020 | December 31, 2019 | |||||||||||||||||||||
Line Item in the Consolidated Balance Sheet in Which the Hedged Item is Included | Carrying Amount of the Hedged Assets | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets | Carrying Amount of the Hedged Assets | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets | Carrying Amount of the Hedged Assets | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets | Carrying Amount of the Hedged Assets | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets | ||||||||||||||||
Inventories | $ | 22,010 | $ | (1,924) | $ | 89,188 | $ | 2,430 | $ | 19,342 | $ | (3,105) | $ | 55,021 | $ | (2,808) | ||||||||
Effect of Cash Flow and Fair Value Hedge Accounting on the Statements of Operations
The effect of cash flow and fair value hedges and the line items on the consolidated statements of operations where they are reported are as follows (in thousands):
Location and Amount of Gain or (Loss) Recognized in | Location and Amount of Gain or (Loss) Recognized in | |||||||||||||||||||||||||||
Income on Cash Flow and Fair Value Hedging Relationships | Income on Cash Flow and Fair Value Hedging Relationships | |||||||||||||||||||||||||||
for the Three Months Ended June 30, | for the Three Months Ended June 30, | |||||||||||||||||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||||||||||||||
Revenue | Cost of | Revenue | Cost of | Revenue | Cost of | Income (Loss) from Discontinued Operations, Net of Income Taxes | Revenue | Cost of | Income (Loss) from Discontinued Operations, Net of Income Taxes | |||||||||||||||||||
Gain (loss) on cash flow hedging relationships: | ||||||||||||||||||||||||||||
Commodity contracts: | ||||||||||||||||||||||||||||
Amount of gain (loss) reclassified from accumulated other comprehensive income into income | $ | (4,352) | $ | (35) | $ | (313) | $ | 1,079 | $ | 6 | $ | - | $ | - | $ | - | $ | - | $ | (4,387) | ||||||||
Gain (loss) on fair value hedging relationships: | ||||||||||||||||||||||||||||
Commodity contracts: | ||||||||||||||||||||||||||||
Hedged item | - | 723 | - | 1,103 | - | (335) | - | - | 723 | - | ||||||||||||||||||
Derivatives designated as hedging instruments | - | 571 | - | (446) | - | 486 | - | - | 571 | - | ||||||||||||||||||
Total amounts of income and expense line items presented in the statement of operations in which the effects of cash flow or fair value hedges are recorded | $ | (4,352) | $ | 1,259 | $ | (313) | $ | 1,736 | $ | 6 | $ | 151 | $ | - | $ | - | $ | 1,294 | $ | (4,387) | ||||||||
Location and Amount of Gain Recognized in | Location and Amount of Gain Recognized in | |||||||||||||||||||||||||||
Income on Cash Flow and Fair Value Hedging Relationships | Income on Cash Flow and Fair Value Hedging Relationships | |||||||||||||||||||||||||||
for the Six Months Ended June 30, | for the Six Months Ended June 30, | |||||||||||||||||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||||||||||||||
Revenue | Cost of | Revenue | Cost of | Revenue | Cost of | Income (Loss) from Discontinued Operations, Net of Income Taxes | Revenue | Cost of | Income (Loss) from Discontinued Operations, Net of Income Taxes | |||||||||||||||||||
Gain (loss) on cash flow hedging relationships: | ||||||||||||||||||||||||||||
Commodity contracts: | ||||||||||||||||||||||||||||
Amount of gain reclassified from accumulated other comprehensive income into income | $ | (17,711) | $ | (192) | $ | 1,448 | $ | 101 | ||||||||||||||||||||
Amount of gain (loss) reclassified from accumulated other comprehensive income into income | $ | 8,824 | $ | (2,901) | $ | - | $ | - | $ | - | $ | (17,903) | ||||||||||||||||
Gain (loss) on fair value hedging relationships: | ||||||||||||||||||||||||||||
Commodity contracts: | ||||||||||||||||||||||||||||
Hedged item | - | (831) | - | 10,496 | - | (7,929) | - | - | (831) | - | ||||||||||||||||||
Derivatives designated as hedging instruments | - | 4,431 | - | (8,878) | - | 8,600 | - | - | 4,431 | - | ||||||||||||||||||
Total amounts of income and expense line items presented in the statement of operations in which the effects of cash flow or fair value hedges are recorded | $ | (17,711) | $ | 3,408 | $ | 1,448 | $ | 1,719 | $ | 8,824 | $ | (2,230) | $ | - | $ | - | $ | 3,600 | $ | (17,903) | ||||||||
There were no0 gains or losses from discontinuing cash flow or fair value hedge treatment during the three and six months ended June 30, 20192020 and 2018.2019.
The open commodity derivative positions as of June 30, 2019,2020, are as follows (in thousands):
Exchange Traded (1) | Non-Exchange Traded (2) | Exchange Traded (1) | Non-Exchange Traded (2) | |||||||||||||||||
Derivative | Net Long & | Long | (Short) | Unit of | Commodity | Net Long & | Long | (Short) | Unit of | Commodity | ||||||||||
Futures | (46,875) | Bushels | Corn, Soybeans and Wheat | 4,925 | Bushels | Corn and Soybeans | ||||||||||||||
Futures | 2,445 | (3) | Bushels | Corn | (1,530) | (3) | Bushels | Corn | ||||||||||||
Futures | (1,310) | (4) | Bushels | Corn | (20,160) | Gallons | Ethanol | |||||||||||||
Futures | (41,805) | Gallons | Ethanol | (21,602) | MmBTU | Natural Gas | ||||||||||||||
Futures | 1,670 | MmBTU | Natural Gas | (6,965) | (3) | MmBTU | Natural Gas | |||||||||||||
Futures | (8,140) | (4) | MmBTU | Natural Gas | 25 | Tons | Soybean Meal | |||||||||||||
Futures | (8,400) | Pounds | Cattle | |||||||||||||||||
Futures | (411,440) | (3) | Pounds | Cattle | ||||||||||||||||
Options | 4,858 | Bushels | Corn and Soybeans | |||||||||||||||||
Options | (11,424) | Gallons | Ethanol | 39 | Tons | Soybean Meal | ||||||||||||||
Options | 2,349 | MmBTU | Natural Gas | 11,404 | Bushels | Corn | ||||||||||||||
Options | (35,023) | Pounds | Cattle | (6,019) | Gallons | Ethanol | ||||||||||||||
Options | 3 | Barrels | Crude Oil | 987 | MmBTU | Natural Gas | ||||||||||||||
Forwards | 49,542 | (1,086) | Bushels | Corn and Soybeans | 19,609 | (346) | Bushels | Corn and Soybeans | ||||||||||||
Forwards | 14,391 | (310,836) | Gallons | Ethanol | 11,109 | (212,783) | Gallons | Ethanol | ||||||||||||
Forwards | 148 | (453) | Tons | DDG | 117 | (348) | Tons | DDG | ||||||||||||
Forwards | 5,184 | (78,529) | Pounds | Corn Oil | 18,144 | (67,795) | Pounds | Corn Oil | ||||||||||||
Forwards | 14,616 | (5,525) | MmBTU | Natural Gas | 4,240 | (68) | MmBTU | Natural Gas | ||||||||||||
(1)Exchange traded futures and options are presented on a net long and (short) position basis. Options are presented on a delta-adjusted basis.
(2)Non-exchange traded forwards are presented on a gross long and (short) position basis including both fixed-price and basis contracts.
(3)Futures used for cash flow hedges.
(4)Futures or non-exchangeExchange traded forwardsfutures used for fair value hedges.value hedges.
Energy trading contracts that do not involve physical delivery are presented net in revenues on the consolidated statements of operations. Included in revenues are net losses on energy trading contracts of $0.1 million and net gains on energy trading contracts of $3.0 million for the three and six months ended June 30, 2020, respectively, and net gains on energy trading contracts of $0.8 million and $9.3 million for the three and six months ended June 30, 2019, respectively, and net gains on energy trading contracts of $4.1 million and $10.8 million for the three and six months ended June 30, 2018, respectively.
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8.9. DEBT
The components of long-term debt are as follows (in thousands):
June 30, | December 31, | ||||
Corporate: | |||||
3.25% convertible notes due 2019 | $ | - | $ | 53,457 | |
4.125% convertible notes due 2022 | 145,906 | 142,708 | |||
4.00% convertible notes due 2024 | 73,886 | - | |||
Green Plains Partners: | |||||
$200.0 million revolving credit facility | 132,200 | 134,000 | |||
$8.1 million promissory note | 8,100 | 8,100 | |||
Other | 17,251 | 17,922 | |||
Total face value of long-term debt | 377,343 | 356,187 | |||
Unamortized debt issuance costs | (5,238) | (3,190) | |||
Less: current portion of long-term debt | (1,225) | (54,807) | |||
Total long-term debt | $ | 370,880 | $ | 298,190 | |
June 30, 2020 | December 31, 2019 | ||||
Corporate: | |||||
$170.0 million convertible notes due 2022 (1) | $ | 152,765 | $ | 149,256 | |
$115.0 million convertible notes due 2024 (2) | 86,228 | 83,497 | |||
Green Plains Partners: | |||||
$135.0 million credit facility (3) | 130,000 | 132,100 | |||
Other | 16,152 | 16,512 | |||
Total book value of long-term debt | 385,145 | 381,365 | |||
Unamortized debt issuance costs | (7,279) | (4,820) | |||
Less: current maturities of long-term debt | (36,647) | (132,555) | |||
Total long-term debt | $ | 341,219 | $ | 243,990 | |
(1)Includes $1.7 million and $2.0 million of unamortized debt issuance costs as of June 30, 2020 and December 31, 2019, respectively.
(2)Includes $2.5 million and $2.8 million of unamortized debt issuance costs as of June 30, 2020 and December 31, 2019, respectively.
(3)The Green Plains Partners revolving credit facility was amended on June 4, 2020 and includes $3.1 million of unamortized debt issuance costs as of June 30, 2020. See below for further discussion.
The components of short-term notes payable and other borrowings are as follows:
June 30, | December 31, | June 30, 2020 | December 31, 2019 | |||||||
Green Plains Cattle: | ||||||||||
$500.0 million revolver | $ | 334,698 | $ | 374,492 | ||||||
Green Plains Trade: | ||||||||||
$300.0 million revolver | $ | 50,241 | $ | 138,204 | ||||||
Green Plains Grain: | ||||||||||
$100.0 million revolver | 42,000 | 41,000 | 60,800 | 40,000 | ||||||
$50.0 million inventory financing | - | - | 9,475 | - | ||||||
Green Plains Trade: | ||||||||||
$300.0 million revolver | 132,346 | 108,485 | ||||||||
Green Plains Commodity Management: | ||||||||||
$20.0 million hedge line | 14,485 | 14,266 | ||||||||
$30.0 million hedge line | 10,909 | 9,608 | ||||||||
$ | 523,529 | $ | 538,243 | $ | 131,425 | $ | 187,812 | |||
Corporate Activities
During the three months ended June 30, 2019, the company issued $105.0an aggregate $115.0 million of 4.00% convertible senior notes due in 2024, or the 4.00% notes. The company used approximately $57.8 million of the net proceeds to repurchase the $56.8 million outstanding principal amount of its 3.25% convertible senior notes due October 1, 2019 in cash, including accrued and unpaid interest, in privately negotiated transactions concurrently with this offering.
At issuance, the company separately accounted for the liability and equity components of the 3.25% convertible notes by bifurcating the gross proceeds between the indebtedness, or liability component, and the embedded conversion option, or equity component, by estimating an effective interest rate on the date of issuance for similar notes. The embedded conversion option was recorded in stockholders’ equity. Since the company did not exercise the embedded conversion option associated with the notes, pursuant to the guidance within ASC 470, Debt, the company recorded a loss upon extinguishment of $1.6 million, measured by the difference between the fair value and carrying value of the liability portion of the notes. As a result, the company recorded a charge to interest expense in the consolidated financial statements of approximately $1.6 million during the three months ended June 30, 2019. This charge included $0.1 million of unamortized debt issuance costs related to the principal balance extinguished. The remaining settlement consideration transferred was allocated to the reacquisition of the embedded conversion option and recognized as a reduction of additional paid-in capital.
The 4.00% notes are senior, unsecured obligations of the company, with interest payable on January 1 and July 1 of each year, beginning January 1, 2020, at a rate of 4.00% per annum. The 4.00% notes will mature on July 1, 2024, unless earlier converted, redeemed or repurchased. The 4.00% notes will be convertible, at the option of the holders, into consideration consisting of, at the company’s election, cash, shares of the company’s common stock, or a combination of cash and shares of the company’s common stock until the close of business on the scheduled trading day immediately
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preceding the maturity date. However, before January 1, 2024, the 4.00% notes will not be convertible unless certain conditions are satisfied. The initial conversion rate is 64.1540 shares of common stock per $1,000 of principal, which is equal to a conversion price of approximately $15.59 per share. The conversion rate will be subject to adjustment upon the occurrence of certain events. In addition, the company may be obligated to increase the conversion rate for any conversion that occurs in connection with certain corporate events, including the company’s calling the 4.00% notes for redemption.
On and after July 1, 2022, and prior to the maturity date, the company may redeem all, but not less than all, of the 4.00% notes for cash if the sale price of the company’s common stock equals or exceeds 140% of the applicable conversion price for a specified time period ending on the trading day immediately prior to the date the company delivers notice of the redemption. The redemption price will equal 100% of the principal amount of the 4.00% notes to be redeemed, plus any accrued and unpaid interest to, but excluding, the redemption date. In addition, upon the occurrence of a fundamental change, holders of the 4.00% notes will have the right, at their option, to require the company to repurchase the 4.00% notes in cash
at a price equal to 100% of the principal amount of the 4.00% notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
In August 2016, the company issued $170.0 million of 4.125% convertible senior notes due in 2022, or the 4.125% notes. The 4.125% notes are senior, unsecured obligations of the company, with interest payable on March 1 and September 1 of each year. The company may settle the 4.125% notes in cash, common stock or a combination of cash and common stock.
Prior to March 1, 2022, the 4.125% notes are not convertible unless certain conditions are satisfied. The initial conversion rate is 35.7143 shares of common stock per $1,000 of principal, which is equal to a conversion price of approximately $28.00 per share. The conversion rate is subject to adjustment upon the occurrence of certain events, including upon redemption of the 4.125% notes.
The company may redeem all, but not less than all, of the 4.125% notes at any time on or after September 1, 2020, if the company’s common stock equals or exceeds 140% of the applicable conversion price for a specified time period ending on the trading day immediately prior to the date the company delivers notice of the redemption. The redemption price will equal 100% of the principal plus any accrued and unpaid interest. Holders of the 4.125% notes have the option to require the company to repurchase the 4.125% notes in cash at a price equal to 100% of the principal plus accrued and unpaid interest when there is a fundamental change, such as change in control. If an event of default occurs, it could result in the 4.125% notes being declared due and payable.
Ethanol Production Segment
The company has small equipment financing loans, finance leases on equipment or facilities, and other forms of debt financing.
Agribusiness and Energy Services Segment
Green Plains Grain has a senior secured asset-based revolving credit facility, which was amended on June 28, 2019, to extend the existing maturity date from July 26, 2019 to June 28, 2022 and lower the maximum commitment from $125.0 million to $100.0 million. The credit facility finances working capital up to the maximum commitment based on eligible collateral equal to the sum of percentages of eligible cash, receivables and inventories, less miscellaneous adjustments. Advances are subject to an interest rate equal to LIBOR plus 3.00% or the lenders’ base rate plus 2.00%. The credit facility also includes an accordion feature that enables the facility to be increased by up to $75.0 million with agent approval. The credit facility can also be increased by up to $50.0 million for seasonal borrowings. Total commitments outstanding cannot exceed $225.0 million. The total unused portion of the $100.0 million revolving credit facility is also subject to a commitment fee ranging from 0.375% to 0.50% per annum depending on utilization.
Lenders receive a first priority lien on certain cash, inventory, accounts receivable and other assets owned by Green Plains Grain. The terms impose affirmative and negative covenants for Green Plains Grain, including maintaining minimum working capital to be the greater of (i) $18,000,000 and (ii) 18% of the sum of the then total commitment plus the aggregate seasonal line commitments. Minimum tangible net worth is required to be greater than 21% of the sum of the then total commitment plus the aggregate seasonal line commitments. The credit facility also requires the company to maintain a maximum annual leverage of 6.00 to 1.00. Capital expenditures are limited to $8.0 million per year under the credit facility, plus equity contributions from the company and unused amounts of up to $8.0 million from the previous year. In addition, if the company has long-term indebtedness on the date of calculation of greater than $10.0 million, the credit facility requires
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the company to maintain a minimum fixed charge coverage ratio of 1.25 to 1.00 and a maximum long term debt capitalization of 40%. As of June 30, 2019, Green Plains Grain had no long-term indebtedness.
Green Plains Trade has a $300.0 million senior secured asset-based revolving credit facility to finance working capital for marketing and distribution activities based on eligible collateral equal to the sum of percentages of eligible receivables and inventories, less miscellaneous adjustments. The credit facility matures on July 28, 2022 and consists of a $285 million credit facility and a $15 million first-in-last-out (FILO) credit facility, and includes an accordion feature that enables the credit facility to be increased by up to $70.0 million with agent approval. Advances are subject to variable interest rates equal to daily LIBOR plus 2.25% on the credit facility and daily LIBOR plus 3.25% on the FILO credit facility. The total unused portion of the revolving credit facility is also subject to a commitment fee of 0.375% per annum.
The terms impose affirmative and negative covenants for Green Plains Trade, including maintaining a minimum fixed charge coverage ratio of 1.15 to 1.00. Capital expenditures are limited to $1.5 million per year under the credit facility. The credit facility also restricts distributions related to capital stock, with an exception for distributions up to 50% of net income if, on a pro forma basis, (a) availability has been greater than $10.0 million for the last 30 days and (b) the borrower would be in compliance with the fixed charge coverage ratio on the distribution date.
Green Plains Grain has a $100.0 million senior secured asset-based revolving credit facility, which matures on June 28, 2022. The credit facility finances working capital up to the maximum commitment based on eligible collateral equal to the sum of percentages of eligible cash, receivables and inventories, less miscellaneous adjustments. Advances are subject to an interest rate equal to LIBOR plus 3.00% or the lenders’ base rate plus 2.00%. The credit facility also includes an accordion feature that enables the facility to be increased by up to $75.0 million with agent approval. The credit facility can also be increased by up to $50.0 million for seasonal borrowings. Total commitments outstanding cannot exceed $225.0 million. Depending on utilization, the total unused portion of the $100.0 million revolving credit facility is also subject to a commitment fee ranging from 0.375% to 0.50%.
Lenders receive a first priority lien on certain cash, inventory, accounts receivable and other assets owned by Green Plains Grain. The terms impose affirmative and negative covenants for Green Plains Grain, including maintaining minimum working capital to be the greater of (i) $18,000,000 and (ii) 18% of the sum of the then total commitment plus the aggregate seasonal line commitments. Minimum tangible net worth is required to be greater than 21% of the sum of the then total commitment plus the aggregate seasonal line commitments. The credit facility also requires the company to maintain a maximum annual leverage of 6.00 to 1.00. Capital expenditures are limited to $8.0 million per year under the credit facility, plus equity contributions from the company and unused amounts of up to $8.0 million from the previous year. In addition, if
the company has long-term indebtedness on the date of calculation of greater than $10.0 million, the credit facility requires the company to maintain a minimum fixed charge coverage ratio of 1.25 to 1.00 and a maximum long term debt capitalization of 40%.
Green Plains Grain has entered into short-term inventory financing agreements with a financial institution. At June 30, 2020, 2.3 million bushels of corn had been designated as collateral under these agreements at initial values totaling $9.0 million. The company has accounted for the agreements as short-term notes, rather than sales, and has elected the fair value option to offset fluctuations in market prices of the inventory. The company had noAt June 30, 2020, the short-term notes payable related to these inventory financing agreements as of June 30, 2019.were valued at $9.5 million and were measured using Level 2 inputs.
Green Plains Commodity Management has an uncommitted $20.0$30.0 million revolving credit facility which matures April 30, 2023 to finance margins related to its hedging programs. Advances are subject to variable interest rates equal to LIBOR plus 1.75%.
Food and IngredientsPartnership Segment
Green Plains CattlePartners has a $500.0$135.0 million senior secured asset-based revolving credit facility whichto fund working capital, capital expenditures and other general partnership purposes. The credit facility was amended on June 4, 2020, decreasing the amount available under the facility from $200.0 million to $135.0 million. The amended credit facility includes a $130.0 million term loan and a $5.0 million revolver, and matures on April 30,December 31, 2021. The term loan requires a principal payment of $7.5 million on July 15, 2020 to finance working capital for the cattle feeding operations and $2.5 million in monthly principal payments beginning August 15, 2020, with a step up to monthly payments of $3.2 million beginning May 15, 2021. In addition, if at any time subsequent to July 15, 2020, the maximum commitment based on eligible collateralpartnership’s cash balance exceeds $2.5 million for more than 5 consecutive business days, prepayments of outstanding principal are required in an amount equal to the sumexcess cash. The partnership is also required to prepay outstanding principal on the credit facility with 100% of percentagesnet cash proceeds from any asset disposition or recovery event. Any prepayments on the term loan are applied to the remaining principal balance in inverse order of eligible receivablmaturity, including the final payment.
The term loan balance, and any advances on the revolver, are es, inventories and other current assets, less miscellaneous adjustments. Advances are subject to variablea floating interest rates equalrate based on a 1.0% LIBOR floor plus 4.50% to LIBOR plus 2.00% to 3.00%, or the base rate plus 1.00% to 2.00%, depending5.25% dependent upon the preceding three months’ excess borrowing availability. The credit facility also includes an accordion feature that enables the credit facility to be increased by up to $100.0 million with agent approval.fiscal quarter’s consolidated leverage ratio. The unused portion of the credit facilityrevolver is also subject to a commitment fee of 0.20% to 0.30% per annum, depending on0.50%. As of June 30, 2020, the preceding three months’ excess borrowing availability.term loan had a balance of $130.0 million and an interest rate of 6.25% and the revolver was unused.
Lenders receive a first priority lien on certain cash, inventory, accounts receivable, property and equipment and other assets owned by Green Plains Cattle.The terms impose affirmative and negative covenants, including maintaining a minimum working capital of 15% of the commitment amount, minimum tangible net worth of 20% of the commitment amount, plus 50% of net profit from the previous year, and a maximum total debt to tangible net worth ratio of 3.50 to 1.00. Capital expenditures are limited to $10.0 million per year under the credit facility plus $10.0 million per year if funded by a contribution from parent, plus any unused amounts fromalso allows for swing line loans subject to the previous year.
Partnership Segment
Green Plains Partners, through a wholly owned subsidiary, has a $200.0 million revolving credit facility, which matures on July 1, 2020, to fund working capital, acquisitions, distributions, capital expenditures and other general partnership purposes. Advances under the credit facilityrevolver availability. Swing line loans are subject to a floating interest rate based on the preceding fiscal quarter’s consolidated leverage ratio at a base ratePrime Rate plus 1.25%3.5% to 2.00% or LIBOR plus 2.25% to 3.00%. The credit facility can be increased by an additional $20.0 million without the consent of the lenders. The unused portion of the credit facility is also subject to a commitment fee of 0.35% to 0.50%, depending on4.25% dependent upon the preceding fiscal quarter’s consolidated leverage ratio. As of June 30, 2020, there were 0 outstanding swing line loans.
The partnership’s obligations under the credit facility are secured by a first priority lien on (i) the capital stockequity interests of the partnership’s present and future subsidiaries, (ii) all of the partnership’s present and future personal property, such as investment property, general intangibles and contract rights, including rights under any agreements with Green Plains Trade, and (iii) all proceeds and products of the equity interests of the partnership’s present and future subsidiaries and its personal property and (iv) substantially all of the partnership’s real property and material leases of real property. The terms impose affirmative and negative covenants, including restrictingrestrictions on the partnership’s ability to incur additional debt, acquire and sell assets, create liens, invest capital, pay distributions and materially amend the partnership’s
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commercial agreements with Green Plains Trade. The credit facility also requires the partnership to maintain a maximum consolidated net leverage ratio, as of the end of any fiscal quarter, of no more than 3.50x3.0x that decreases 0.25x each quarter to 1.50x by December 31, 2021, and a minimum consolidated interestdebt service coverage ratio of no less than 2.75x,1.1x, each of which is calculated on a pro forma basis with respect to acquisitions and divestitures occurring during the applicable period. The consolidated leverage ratio is calculated by dividing total funded indebtedness minus the lesser of cash in excess of $5.0 million or $30.0 million by the sum of the four preceding fiscal quarters’ consolidated EBITDA. The consolidated interestdebt service coverage ratio is calculated by dividingtaking the sum of the four preceding fiscal quarters’ consolidated EBITDA minus income taxes and consolidated capital expenditures for such period divided by the sum of the four preceding fiscal quarters’ consolidated interest charges.charges plus consolidated scheduled funded debt payments for such period.
The partnership, through a wholly owned subsidiary, has promissory notes payable of $8.1 million, which is recorded in long-term debt, and a note receivable of $8.1 million, which is recorded in other assets, to execute a New Markets Tax Credit transaction related toUnder the Birmingham, Alabama terminal. Beginning in March 2020, the promissory notes and note receivable each require quarterly principal and interest payments of approximately $0.2 million. The partnership retains the right to call $8.1 millionamended terms of the promissory notescredit facility, the partnership may make quarterly distribution payments in 2020. The promissory notes payablean aggregate amount not to exceed $0.12 per outstanding unit, so long as (i) no default has occurred and note receivable will be fully amortized upon maturity in September 2031. Income tax credits were generated for the lender, which the company has guaranteed over their statutory life of seven years in the event the credits are recapturedis continuing, or reduced. At the timewould result from payment of the transaction,distribution, and (ii) the income tax credits were valued at $5.0 million. The partnership has not established a liabilityand its subsidiaries are in connectioncompliance with its financial covenants and remain in compliance after payment of the guarantee because it believes the likelihooddistribution.
Covenant Compliance
The company was in compliance with its debt covenants as of June 30, 2019.2020.
Restricted Net Assets
At June 30, 2019,2020, there were approximately $174.8$66.4 million of net assets at the company’s subsidiaries that could not be transferred to the parent company in the form of dividends, loans or advances due to restrictions contained in the credit facilities of these subsidiaries.
9.10. STOCK-BASED COMPENSATION
The company has an equity incentive plan that reserves 4,110,000had a 2009 Equity Incentive Plan which reserved a total of 4.1 million shares of common stock for issuance pursuant to its directors and employees. The plan providesthe plan. On May 6, 2020, the shareholders of the company approved the 2019 Equity Incentive Plan which granted an additional 1.6 million shares for shares,stock-based compensation, including options to purchase shares of common stock, stock appreciation rights tied to the value of common stock, restricted stock, performance shares, and restricted and deferred stock unit awards to be grantedand performance share awards to eligible employees, non-employee directors and consultants. All shares remaining under the 2009 Equity Incentive Plan rolled into the 2019 Equity Incentive Plan effective May 6, 2020.The company measures stock-based compensation at fair value on the grant date, with no adjustments for estimated forfeitures. The company records noncash compensation expense related to equity awards in its consolidated financial statements over the requisite period on a straight-line basis.
Restricted Stock Awards and Deferred Stock Units
The non-vested stock award and deferred stock unit activity for the six months ended June 30, 2019,2020, is as follows:
Non-Vested | Weighted- | Weighted-Average | Non-Vested | Weighted- | Weighted-Average | |||||||
Non-Vested at December 31, 2018 | 882,288 | $ | 19.12 | |||||||||
Non-Vested at December 31, 2019 | 751,315 | $ | 17.48 | |||||||||
Granted | 497,118 | 15.40 | 645,827 | 9.75 | ||||||||
Forfeited | (80,521) | 17.60 | (20,301) | 16.26 | ||||||||
Vested | (440,891) | 18.28 | (352,080) | 18.83 | ||||||||
Non-Vested at June 30, 2019 | 857,994 | $ | 17.54 | 1.9 | ||||||||
Non-Vested at June 30, 2020 | 1,024,761 | $ | 12.17 | 2.0 | ||||||||
Performance Shares
On March 18, 2020, the board of directors granted performance shares to be awarded in the form of common stock to certain participants of the plan. These performance shares vest based on the level of achievement of certain performance goals, including the incremental value achieved from the company’s high-protein initiatives, annual production levels and return on investment (ROI). The performance shares were granted at a target of 100%, but each performance share will reduce or increase depending on results for the performance period. If the company achieves the maximum performance goals, the maximum amount of shares available to be issued pursuant to the 2020 awards are 641,823 performance shares which represents approximately 276% of the 232,566 performance shares which remain outstanding. The actual number of performance shares that will ultimately vest is based on the actual performance targets achieved at the end of the performance period.
On February 19, 2019 and March 19, 2018, the board of directors granted performance shares to be awarded in the form of common stock to certain participants of the plan. PerformanceThese performance shares vest based on the company’s average return on net assets (RONA) and the company’s total shareholder return (TSR), as further described herein. The performance shares vest on the third anniversary of the grant, if the RONA and TSR criteria are achieved and the participant is then employed by the company. FiftyNaN percent of the performance shares vest based upon the company’s ability to achieve a predetermined RONA
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during the three year performance period. The remaining fifty50 percent of the performance shares vest based upon the company’s total TSR during the three year performance period relative to that of the company’s performance peer group.
The performance shares were granted at a target of 100%, but each performance share will reduce or increase depending on results for the performance period for the company's RONA, and the company’s TSR relative to that of the performance peer group. If the company’s RONA and TSR achieve the maximum goals, the maximum amount of shares available to be
issued pursuant to the 2018 and 2019 awards are 482,234428,104 performance shares or 150% of the 321,489285,403 performance shares which remain outstanding. The actual number of performance shares that will ultimately vest is based on the actual percentile ranking of the company’s RONA, and the company’s TSR compared to the peer performance at the end of the performance period.
The company used the Monte Carlo valuation model to estimate the fair value of the performance shares on the date of the grant. The weighted average assumptions used by the company in applying the Monte Carlo valuation model for performance share grants are illustrated in the following table:
FY 2019 Performance Awards | FY 2018 Performance Awards | ||||||
Risk-free interest rate | 2.45 | % | 2.44 | % | |||
Dividend yield | 3.13 | % | 2.64 | % | |||
Expected volatility | 41.69 | % | 45.11 | % | |||
Monte Carlo valuation | 99.62 | % | 97.39 | % | |||
Closing stock price on the date of grant | $ | 15.34 | $ | 18.15 | |||
The non-vested performance share award activity for the six months ended June 30, 2019,2020, is as follows:
Performance | Weighted- | Weighted-Average | ||||
Non-Vested at December 31, 2018 | 134,022 | $ | 17.92 | |||
Granted | 216,703 | 15.43 | ||||
Forfeited | (29,236) | 16.23 | ||||
Non-Vested at June 30, 2019 | 321,489 | $ | 16.39 | 2.3 | ||
Performance | Weighted- | Weighted-Average | ||||
Non-Vested at December 31, 2019 | 285,403 | $ | 16.38 | |||
Granted | 232,566 | 10.64 | ||||
Non-Vested at June 30, 2020 | 517,969 | $ | 13.80 | 2.2 | ||
Stock Options
There remains 128,750 exercisableThe fair value of the stock options outstanding atis estimated on the date of the grant using the Black-Scholes option-pricing model, a pricing model acceptable under GAAP. The expected life of the options is the period of time the options are expected to be outstanding. The company did 0t grant any stock option awards during the six months ended June 30, 2019, with a weighted-average exercise price of $12.72. The weighted average exercise price for options exercisable at June 30, 2019 was above the company’s stock price at June 30, 2019. The weighted-average remaining contractual term of exercisable options was 0.5 years at June 30,2020 and 2019.
Option awards allow employeesThe activity related to exercisethe exercisable stock options through cash payment for the shares of common stock or simultaneous broker-assisted transactions in which the employee authorizes the exercise and immediate sale of the shares in the open market. The company uses newly issued shares of common stock to satisfy its stock-based payment obligations.six months ended June 30, 2020, is as follows:
Shares | Weighted-Average | Weighted-Average | Aggregate Intrinsic Value | ||||||
Outstanding at December 31, 2019 | 10,000 | $ | 16.95 | 0.2 | $ | - | |||
Expired | (10,000) | 16.95 | - | - | |||||
Outstanding at June 30, 2020 | - | $ | - | - | $ | - | |||
Exercisable at June 30, 2020 | - | $ | - | - | $ | - | |||
Green Plains Partners
Green Plains Partners has a long-term incentive plan (LTIP) intended to promote the interests of the partnership, its general partner and affiliates by providing unit-based incentive compensation awards to employees, consultants and directors to encourage superior performance. The LTIP reserves 2,500,000 common limited partner units for issuance in the form of options, restricted units, phantom units, distribution equivalent rights, substitute awards, unit appreciation rights, unit awards, profit interest units or other unit-based awards. The partnership measures unit-based compensation at fair value on the grant date, with no adjustments for estimated forfeitures. The partnership records noncash compensation expense related to the awards over the requisite service period on a straight-line basis.
The non-vested unit-based awards activity for the six months ended June 30, 2019,2020, is as follows:
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Non-Vested | Weighted- | Weighted-Average | ||||
Non-Vested at December 31, 2018 | 18,582 | $ | 16.96 | |||
Vested | (18,582) | 16.96 | ||||
Non-Vested at June 30, 2019 | - | $ | - | 0.0 | ||
Non-Vested | Weighted- | Weighted-Average | ||||
Non-Vested at December 31, 2019 | 22,856 | $ | 14.00 | |||
Vested | (22,856) | 14.00 | ||||
Non-Vested at June 30, 2020 | - | $ | - | 0.0 | ||
Stock-Based and Unit-BasedUnit Based Compensation Expense
Compensation costs for stock-based and unit-based payment plans duringwere $2.3 million and $3.6 million for the three and six months ended June 30, 2019 were approximately2020, respectively, and $2.3 million and $4.8 million respectively, and $3.0 million and $5.4 million duringfor the three and six months ended June 30, 2018.2019. At June 30, 2019,2020, there was $15.9$13.6 million of unrecognized compensation costs from stock-based and unit-based compensation related to non-vested awards. This compensation is expected to be recognized over a weighted-average period of approximately 2.0 years. The potential tax benefit related to stock-based payment is approximately 25.0%24.2% of these expenses.
10.11. EARNINGS PER SHARE
Basic earnings per share, or EPS, is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period.
The company computed diluted EPS by dividing net income on an if-converted basis, adjusted to add back net interest expense related to the convertible debt instruments, by the weighted average number of common shares outstanding during the period, adjusted to include the shares that would be issued if the convertible debt instruments were converted to common shares and the effect of any outstanding dilutive securities. In addition, due to the presentation of GPCC as discontinued operations, the company has presented basic and diluted earnings per share from both continuing operations and from discontinued operations.
The basic and diluted EPS are calculated as follows (in thousands)thousands, except per share amounts):
Three Months Ended | Six Months Ended | ||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||
Basic EPS: | |||||||||||
Net loss attributable to Green Plains | $ | (45,342) | $ | (994) | $ | (88,141) | $ | (25,111) | |||
Weighted average shares outstanding - basic | 40,081 | 40,194 | 40,200 | 40,168 | |||||||
EPS - basic | $ | (1.13) | $ | (0.02) | $ | (2.19) | $ | (0.63) | |||
EPS - diluted | $ | (1.13) | $ | (0.02) | $ | (2.19) | $ | (0.63) | |||
Three Months Ended | Six Months Ended | ||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||
Numerator: | |||||||||||
Net loss from continuing operations (1) | $ | (8,214) | $ | (47,281) | $ | (24,659) | $ | (85,611) | |||
Net income (loss) from discontinued operations | - | 1,939 | - | (2,530) | |||||||
Net loss attributable to Green Plains | $ | (8,214) | $ | (45,342) | $ | (24,659) | $ | (88,141) | |||
Denominator: | |||||||||||
Weighted-average shares outstanding - basic | 34,603 | 40,081 | 34,634 | 40,200 | |||||||
Dilutive effect of convertible debt and stock-based compensation (2) | - | - | - | - | |||||||
Weighted-average shares outstanding - diluted | 34,603 | 40,081 | 34,634 | 40,200 | |||||||
EPS - basic and diluted: | |||||||||||
EPS from continuing operations | $ | (0.24) | $ | (1.18) | $ | (0.71) | $ | (2.13) | |||
EPS from discontinued operations | - | 0.05 | - | (0.06) | |||||||
EPS | $ | (0.24) | $ | (1.13) | $ | (0.71) | $ | (2.19) | |||
Anti-dilutive weighted-average convertible debt and stock-based compensation (2) | 14,074 | 7,404 | 13,994 | 7,041 | |||||||
(1)Net loss from continuing operations can be recalculated from our consolidated statements of operations by taking the net loss from continuing operations including noncontrolling interest less net income attributable to noncontrolling interests.
(2)The anti-dilutive effect of 7.4 million and 7.0 million shares related to the company’s convertible debt and stock-based compensation awards have been excluded from diluted EPS for the three and six months ended June 30, 2019, respectively and 10.2 million and 10.1 million sharesfor the three and six months ended June 30, 2018, respectively,periods presented as the inclusion of these shares would have been antidilutive.
11.12. STOCKHOLDERS’ EQUITY
Components of stockholders’ equity for the three and six months ended June 30, 20192020 and 20182019 are as follows (in thousands):
Accum. | Total | |||||||||||||||||||||||||||||||||||
Accum. | Total | Additional | Other | Green Plains | Non- | Total | ||||||||||||||||||||||||||||||
Additional | Other | Green Plains | Non- | Total | Common Stock | Paid-in | Retained | Comp. | Treasury Stock | Stockholders' | Controlling | Stockholders' | ||||||||||||||||||||||||
Common Stock | Paid-in | Retained | Comp. | Treasury Stock | Stockholders' | Controlling | Stockholders' | Shares | Amount | Capital | Earnings | Income | Shares | Amount | Equity | Interests | Equity | |||||||||||||||||||
Shares | Amount | Capital | Earnings | Income | Shares | Amount | Equity | Interests | Equity | |||||||||||||||||||||||||||
Balance, January 1, 2019 | 46,638 | $ | 47 | $ | 696,222 | $ | 324,728 | $ | (16,016) | 5,536 | $ | (58,162) | $ | 946,819 | $ | 116,170 | $ | 1,062,989 | ||||||||||||||||||
Balance, January 1, 2020 | 46,964 | $ | 47 | $ | 734,580 | $ | 148,150 | $ | (11,064) | 10,932 | $ | (119,808) | $ | 751,905 | $ | 113,381 | $ | 865,286 | ||||||||||||||||||
Net income (loss) | - | - | - | (42,799) | - | - | - | (42,799) | 4,928 | (37,871) | - | - | - | (16,445) | - | - | - | (16,445) | 6,098 | (10,347) | ||||||||||||||||
Cash dividends and | - | - | - | (4,847) | - | - | - | (4,847) | (5,487) | (10,334) | ||||||||||||||||||||||||||
Distributions declared | - | - | - | - | - | - | - | - | (5,498) | (5,498) | ||||||||||||||||||||||||||
Other comprehensive loss | - | - | - | - | (6,883) | - | - | (6,883) | - | (6,883) | - | - | - | - | 4,532 | - | - | 4,532 | - | 4,532 | ||||||||||||||||
Amounts reclassified from | - | - | - | - | 10,376 | - | - | 10,376 | - | 10,376 | - | - | - | - | (4,485) | - | - | (4,485) | - | (4,485) | ||||||||||||||||
Other comprehensive income, | - | - | - | - | 3,493 | - | - | 3,493 | - | 3,493 | - | - | - | - | 47 | - | - | 47 | - | 47 | ||||||||||||||||
Proceeds from disgorgement of shareholders short-swing profits, net (1) | - | - | 5,023 | - | - | - | - | 5,023 | - | 5,023 | ||||||||||||||||||||||||||
Share of equity method investees other comprehensive loss arising during the period, net of tax | - | - | - | - | 41,956 | - | - | 41,956 | - | 41,956 | ||||||||||||||||||||||||||
Repurchase of common stock | - | - | - | - | - | 881 | (11,479) | (11,479) | - | (11,479) | ||||||||||||||||||||||||||
Stock-based compensation | 284 | - | 428 | - | - | - | - | 428 | 79 | 507 | 343 | - | 36 | - | - | - | - | 36 | 79 | 115 | ||||||||||||||||
Balance, March 31, 2019 | 46,922 | 47 | 701,673 | 277,082 | (12,523) | 5,536 | (58,162) | 908,117 | 115,690 | 1,023,807 | ||||||||||||||||||||||||||
Balance, March 31, 2020 | 47,307 | $ | 47 | $ | 734,616 | $ | 131,705 | $ | 30,939 | 11,813 | $ | (131,287) | $ | 766,020 | $ | 114,060 | $ | 880,080 | ||||||||||||||||||
Net income (loss) | - | - | - | (45,342) | - | - | - | (45,342) | 5,163 | (40,179) | - | - | - | (8,214) | - | - | - | (8,214) | 2,740 | (5,474) | ||||||||||||||||
Cash dividends and | - | - | - | (4,871) | - | - | - | (4,871) | (5,487) | (10,358) | ||||||||||||||||||||||||||
Distributions declared | - | - | - | - | - | - | - | - | (1,389) | (1,389) | ||||||||||||||||||||||||||
Other comprehensive loss | - | - | - | - | 33,260 | - | - | 33,260 | - | 33,260 | - | - | - | - | (1,333) | - | - | (1,333) | - | (1,333) | ||||||||||||||||
Amounts reclassified from | - | - | - | - | 3,440 | - | - | 3,440 | - | 3,440 | - | - | - | - | (7) | - | - | (7) | - | (7) | ||||||||||||||||
Other comprehensive income, | - | - | - | - | 36,700 | - | - | 36,700 | - | 36,700 | - | - | - | - | (1,340) | - | - | (1,340) | - | (1,340) | ||||||||||||||||
Issuance of 4.00% convertible notes due 2024, net of tax | - | - | 22,537 | - | - | - | - | 22,537 | - | 22,537 | ||||||||||||||||||||||||||
Settlement of 3.25% convertible | - | - | (271) | - | - | - | - | (271) | - | (271) | ||||||||||||||||||||||||||
Repurchase of common stock | - | - | - | - | - | 3,197 | (39,870) | (39,870) | - | (39,870) | ||||||||||||||||||||||||||
Share of equity method investees other comprehensive loss arising during the period, net of tax | - | - | - | - | (16,759) | - | - | (16,759) | - | (16,759) | ||||||||||||||||||||||||||
Stock-based compensation | (3) | - | 2,129 | - | - | - | - | 2,129 | 79 | 2,208 | 160 | - | 2,072 | - | - | - | - | 2,072 | 80 | 2,152 | ||||||||||||||||
Balance, June 30, 2019 | 46,919 | $ | 47 | $ | 726,068 | $ | 226,869 | $ | 24,177 | 8,733 | $ | (98,032) | $ | 879,129 | $ | 115,445 | $ | 994,574 | ||||||||||||||||||
Balance, June 30, 2020 | 47,467 | $ | 47 | $ | 736,688 | $ | 123,491 | $ | 12,840 | 11,813 | $ | (131,287) | $ | 741,779 | $ | 115,491 | $ | 857,270 | ||||||||||||||||||
Accum. | Total | |||||||||||||||||
Additional | Other | Green Plains | Non- | Total | ||||||||||||||
Common Stock | Paid-in | Retained | Comp. | Treasury Stock | Stockholders' | Controlling | Stockholders' | |||||||||||
Shares | Amount | Capital | Earnings | Income | Shares | Amount | Equity | Interests | Equity | |||||||||
Balance, December 31, 2017 | 46,410 | $ | 46 | $ | 685,019 | $ | 325,411 | $ | (13,110) | 5,326 | $ | (55,184) | $ | 942,182 | $ | 116,954 | $ | 1,059,136 |
Reclassification of certain | - | - | - | 2,787 | (2,787) | - | - | - | - | - | ||||||||
Balance, January 1, 2018 | 46,410 | 46 | 685,019 | 328,198 | (15,897) | 5,326 | (55,184) | 942,182 | 116,954 | 1,059,136 | ||||||||
Net income (loss) | - | - | - | (24,117) | - | - | - | (24,117) | 4,662 | (19,455) | ||||||||
Cash dividends and | - | - | - | (4,831) | - | - | - | (4,831) | (5,420) | (10,251) | ||||||||
Other comprehensive income | - | - | - | - | 17,150 | - | - | 17,150 | - | 17,150 | ||||||||
Amounts reclassified from | - | - | - | - | (603) | - | - | (603) | - | (603) | ||||||||
Other comprehensive income | - | - | - | - | 16,547 | - | - | 16,547 | - | 16,547 | ||||||||
Stock-based compensation | 284 | 1 | (512) | - | - | - | - | (511) | 60 | (451) | ||||||||
Stock options exercised | 5 | - | 50 | - | - | - | - | 50 | - | 50 | ||||||||
Balance, March 31, 2018 | 46,699 | $ | 47 | $ | 684,557 | $ | 299,250 | $ | 650 | 5,326 | $ | (55,184) | $ | 929,320 | $ | 116,256 | $ | 1,045,576 |
Net income (loss) | - | - | - | (994) | - | - | - | (994) | 4,745 | 3,751 | ||||||||
Cash dividends and | - | - | - | (4,851) | - | - | - | (4,851) | (5,478) | (10,329) | ||||||||
Other comprehensive income | - | - | - | - | (4,277) | - | - | (4,277) | - | (4,277) | ||||||||
Amounts reclassified from | - | - | - | - | (581) | - | - | (581) | - | (581) | ||||||||
Other comprehensive income | - | - | - | - | (4,858) | - | - | (4,858) | - | (4,858) | ||||||||
Exchange of 3.25% convertible | - | - | - | - | - | - | 1 | 1 | - | 1 | ||||||||
Stock-based compensation | 52 | - | 2,812 | - | - | - | - | 2,812 | 60 | 2,872 | ||||||||
Stock options exercised | 10 | - | 100 | - | - | - | - | 100 | - | 100 | ||||||||
Balance, June 30, 2018 | 46,761 | $ | 47 | $ | 687,469 | $ | 293,405 | $ | (4,208) | 5,326 | $ | (55,183) | $ | 921,530 | $ | 115,583 | $ | 1,037,113 |
Accum. | Total | |||||||||||||||||
Additional | Other | Green Plains | Non- | Total | ||||||||||||||
Common Stock | Paid-in | Retained | Comp. | Treasury Stock | Stockholders' | Controlling | Stockholders' | |||||||||||
Shares | Amount | Capital | Earnings | Income | Shares | Amount | Equity | Interests | Equity | |||||||||
Balance, January 1, 2019 | 46,638 | $ | 47 | $ | 696,222 | $ | 324,728 | $ | (16,016) | 5,536 | $ | (58,162) | $ | 946,819 | $ | 116,170 | $ | 1,062,989 |
Net income (loss) | - | - | - | (42,799) | - | - | - | (42,799) | 4,928 | (37,871) | ||||||||
Cash dividends and | - | - | - | (4,847) | - | - | - | (4,847) | (5,487) | (10,334) | ||||||||
Other comprehensive loss | - | - | - | - | (6,883) | - | - | (6,883) | - | (6,883) | ||||||||
Amounts reclassified from | - | - | - | - | 10,376 | - | - | 10,376 | - | 10,376 | ||||||||
Other comprehensive income, | - | - | - | - | 3,493 | - | - | 3,493 | - | 3,493 | ||||||||
Proceeds from disgorgement of shareholders short-swing profits, net (1) | - | - | 5,023 | - | - | - | - | 5,023 | - | 5,023 | ||||||||
Stock-based compensation | 284 | - | 428 | - | - | - | - | 428 | 79 | 507 | ||||||||
Balance, March 31, 2019 | 46,922 | $ | 47 | $ | 701,673 | $ | 277,082 | $ | (12,523) | 5,536 | $ | (58,162) | $ | 908,117 | $ | 115,690 | $ | 1,023,807 |
Net income (loss) | - | - | - | (45,342) | - | - | - | (45,342) | 5,163 | (40,179) | ||||||||
Cash dividends and | - | - | - | (4,871) | - | - | - | (4,871) | (5,487) | (10,358) | ||||||||
Other comprehensive loss | - | - | - | - | 33,260 | - | - | 33,260 | - | 33,260 | ||||||||
Amounts reclassified from | - | - | - | - | 3,440 | - | - | 3,440 | - | 3,440 | ||||||||
Other comprehensive income, | - | - | - | - | 36,700 | - | - | 36,700 | - | 36,700 | ||||||||
Issuance of 4.00% convertible notes due 2024, net of tax | - | - | 22,537 | - | - | - | - | 22,537 | - | 22,537 | ||||||||
Settlement of 3.25% convertible | - | - | (271) | - | - | - | - | (271) | - | (271) | ||||||||
Repurchase of common stock | - | - | - | - | - | 3,197 | (39,870) | (39,870) | - | (39,870) | ||||||||
Stock-based compensation | (3) | - | 2,129 | - | - | - | - | 2,129 | 79 | 2,208 | ||||||||
Balance, June 30, 2019 | 46,919 | $ | 47 | $ | 726,068 | $ | 226,869 | $ | 24,177 | 8,733 | $ | (98,032) | $ | 879,129 | $ | 115,445 | $ | 994,574 |
(1)During the three months ended March 31, 2019, the company received $6.7 million from a shareholder of the company for disgorgement of shareholder short-swing profits under Section 16(b) under the Exchange Act. The amount was recorded as an increase to additional paid-in capital, net of tax.
(2)
Effective January 1, 2018, the company early adopted the amended guidance in ASC 220, Income Statement – Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The amendment eliminates the stranded tax effects resulting from the Tax Cuts and Jobs Act and is intended to improve the usefulness of information reported. As a result, the company recorded a $2.8 million reclassification from accumulated other comprehensive income to retained earnings during the first quarter of 2018.
Amounts reclassified from accumulated other comprehensive income are as follows (in thousands):
Three Months Ended | Six Months Ended | Statements of | Three Months Ended | Six Months Ended | Statements of | |||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | Classification | 2020 | 2019 | 2020 | 2019 | Classification | |||||||||||||||||
Gains (losses) on cash flow hedges: | ||||||||||||||||||||||||||
Commodity derivatives | $ | (4,352) | $ | (313) | $ | (17,711) | $ | 1,448 | Revenues | $ | 6 | $ | - | $ | 8,824 | $ | - | (1) | ||||||||
Commodity derivatives | (35) | 1,079 | (192) | 101 | Cost of goods sold | - | - | (2,901) | - | (2) | ||||||||||||||||
Total | (4,387) | 766 | (17,903) | 1,549 | Loss before income taxes | |||||||||||||||||||||
Income tax expense (benefit) | (947) | 185 | (4,087) | 365 | Income tax benefit | |||||||||||||||||||||
Amounts reclassified from accumulated | $ | (3,440) | $ | 581 | $ | (13,816) | $ | 1,184 | ||||||||||||||||||
Total gains on cash flow hedges from continuing operations | 6 | - | 5,923 | - | (3) | |||||||||||||||||||||
Income (losses) on cash flow hedges from discontinued operations | - | (4,387) | - | (17,903) | (4) | |||||||||||||||||||||
Income tax benefit (expense) | 1 | - | (1,431) | - | (5) | |||||||||||||||||||||
Amounts reclassified from accumulated other comprehensive income (loss) | $ | 7 | $ | (4,387) | $ | 4,492 | $ | (17,903) | ||||||||||||||||||
(1)Revenues
(2)Costs of goods sold
(3)Loss from continuing operations before income taxes and income (loss) from equity method investees
(4)Net income (loss) from discontinued operations, net of income taxes
(5)Income tax benefit
12.13. INCOME TAXES
The company records actual income tax expense or benefit during interim periods rather than on an annual effective tax rate method. Certain items are given discrete period treatment and the tax effect of those items are reported in full in the relevant interim period. Green Plains Partners is a limited partnership, which is treated as a flow-through entity for federal
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income tax purposes and is not subject to federal income taxes. As a result, the consolidated financial statements do not reflect income taxes on pre-tax income or loss attributable to the noncontrolling interest in the partnership.
The CARES Act was signed into law on March 27, 2020. The CARES Act includes several significant business tax provisions including elimination of the taxable limit for certain net operating losses (“NOL”), allowing businesses to carry back NOLs arising in 2018, 2019 and 2020 to the five prior tax years, accelerating refunds of previously generated corporate AMT credits, and loosening the business interest limitation under §163(j) from 30% to 50%. The CARES Act also contains an employee retention credit to encourage employers to maintain headcounts even if employees cannot report to work because of issues related to the COVID-19. In the second quarter, the company filed its preliminary 2019 federal income tax return, as well as a refund claim with the IRS to carry back our 2019 NOL to prior years. The company recorded an additional income tax benefit of approximately $5.5 million during the second quarter related to the CARES Act in addition to adjustments to certain valuation allowances. In the first quarter the company recorded an income tax benefit related to the expected NOL carry back claim of $28.4 million which was an estimate based on the amount of NOL rated to the 2019 year-end tax provision.
The company recorded income tax benefit of $14.7$11.5 million and $29.1$55.7 million for the three and six months ended June 30, 2019,2020, compared with $10.8$15.3 million and $16.8$28.3 million for the same periods in 2018.2019.The decrease in the amount of income tax benefit recorded for the three months ended June 30, 2020 as compared to the same period in 2019 was primarily due to an increase in pretax income offset by the tax benefit for the utilization of previously recorded tax NOLs in the three month period ended June 30, 2020 as allowed under the provisions of the recently enacted CARES Act. The increase in the amount of the tax benefit recorded for the six months ended June 30, 2020 compared to the same period in 2019 was to record the tax benefit associated with the carry back of the tax NOL generated in 2019 to the 2014 tax year under the newly enacted CARES Act, as well as the release of a previously recorded valuation allowance against the 2019 NOL and other deferred tax assets. The amount of unrecognized tax benefits for uncertain tax positions was $51.6 million as of June 30, 20192020 and December 31, 2018.2019.
The 20192020 effective tax rate can be affected by variances in the estimates and amounts of taxable income among the various states, entities and activity types, realization of tax credits, adjustments from resolution of tax matters under review, valuation allowances and the company’s assessment of its liability for uncertain tax positions.
13. COMMITMENTS AND CONTINGENCIES
Adoption of ASC 842
On January 1, 2019, the company adopted the amended guidance in ASC 842, Leases, and all related amendments (“new lease standard”) and applied it to all leases using the optional transition method which requires the amended guidance to be applied at the date of adoption. The standard does not require the guidance to be applied to the earliest comparative period presented in the financial statements. As such, comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The new lease standard had a material impact on the company’s consolidated balance sheets, increasing total assets and total liabilities by $60.9 million upon adoption. It did not have an impact on the consolidated statement of operations for the six months ended June 30, 2019.
The impact on the consolidated balance sheet as of December 31, 2018 for the adoption of the new lease standard was as follows (in thousands):
Balance at | Adjustments | Balance at | |||||||
December 31, | Due to | January 1, | |||||||
2018 | ASC 842 | 2019 | |||||||
(audited) | |||||||||
Assets | |||||||||
Operating lease right-of-use assets | $ | - | $ | 61,268 | $ | 61,268 | |||
Other assets | 365 | (365) | - | ||||||
Liabilities | |||||||||
Accounts payable | 196 | (196) | - | ||||||
Operating lease current liabilities | - | 18,315 | 18,315 | ||||||
Operating lease long-term liabilities | - | 46,024 | 46,024 | ||||||
Other liabilities | 3,240 | (3,240) | - | ||||||
The company’s leases do not specify an implicit interest rate. Therefore, the incremental borrowing rate was used based on information available at commencement date to determine the present value of future payments.
Practical Expedients
Under the new lease standard, companies may elect various practical expedients upon adoption. The company elected the package of practical expedients related to transition, which states that an entity need not reassess initial direct costs for existing leases, the lease classification for any expired or existing leases, and whether any expired or existing contracts are or contain leases.
The company elected to utilize a portfolio approach for lease classification, which allows for an entity to group together leases with similar characteristics provided that its application does not create a material difference when compared to accounting for the leases at a contract level. For railcar leases, the company elected to combine the railcars within each rider and account for each rider as an individual lease.
The company also elected the practical expedient for lessees to include both the lease and non-lease components as a single component and account for them as a lease. Certain of the company’s railcar agreements provide for maintenance costs to be the responsibility of the company as incurred or charged by the lessor. This maintenance cost is a non-lease component that the company elected to combine with the monthly rental payment and account for the total cost as operating lease
expense. In addition, the company has a land lease that contains a non-lease component for the handling and unloading services the landlord provides. The company elected to combine the cost of services with the land lease cost and account for the total as operating lease expense.
A lessee may elect not to apply the recognition requirements in the new lease standard for short-term leases. Instead, the lease payments may be recognized into profit or loss on a straight-line basis over the lease term. The company has elected to use this short-term lease exemption, and therefore will not record a lease liability or right-of-use asset for leases with a term of one year or less. The company did not incur any short-term lease expense for the three and six months ended June 30, 2019.14. COMMITMENTS AND CONTINGENCIES
Lease Expense
The company leases certain facilities, parcels of land, and equipment, with remaining terms ranging from less than one year to 18.317.4 years. The land and facility leases include renewal options. The renewal options are included in the lease term only for those sites or locations in which they are reasonably certain to be renewed. Equipment renewals are not considered reasonably certain to be exercised as they typically renew with significantly different underlying terms.
The company may sublease certain of its railcars to third parties on a short-term basis. The subleases are classified as operating leases, with the associated sublease income being recognized on a straight-line basis over the lease term.
The components of lease expense are as follows (in thousands):
Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||
June 30, 2019 | June 30, 2019 | 2020 | 2019 | 2020 | 2019 | |||||||||||||
Lease expense | ||||||||||||||||||
Operating lease expense | $ | 5,406 | $ | 10,955 | $ | 5,255 | $ | 5,356 | $ | 10,200 | $ | 10,838 | ||||||
Variable lease expense (1) | 242 | 393 | 630 | 369 | 899 | 493 | ||||||||||||
Total lease expense | $ | 5,648 | $ | 11,348 | $ | 5,885 | $ | 5,725 | $ | 11,099 | $ | 11,331 | ||||||
(1)Represents amounts incurred in excess of the minimum payments required for the handling and unloading of railcars for a certain land lease, offset by railcar lease abatements provided by the lessor when railcars are out of service during periods of maintenance or upgrade.
Supplemental cash flow information related to operating leases is as follows (in thousands):
Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||
June 30, 2019 | June 30, 2019 | 2020 | 2019 | 2020 | 2019 | |||||||||||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||||||
Operating cash flows from operating leases | $ | 5,386 | $ | 10,936 | $ | 5,019 | $ | 5,319 | $ | 9,868 | $ | 10,803 | ||||||
Right-of-use assets obtained in exchange for lease obligations: | ||||||||||||||||||
Operating leases | $ | 6,207 | $ | 6,207 | 1,204 | 6,207 | 6,879 | 6,207 | ||||||||||
Supplemental balance sheet information related to operating leases is as follows:
| |||
|
| ||
|
| ||
June 30, 2020 | December 31, 2019 | |||||
Weighted average remaining lease term | 6.6 years | 6.6 years | ||||
Weighted average discount rate | 5.46% | 5.46% | ||||
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Aggregate minimum lease payments under the operating lease agreements for the remainder of 20192020 and in future years are as follows (in thousands):
Year Ending December 31, | Amount | Amount | ||||
2019 | $ | 10,143 | ||||
2020 | 18,297 | $ | 10,837 | |||
2021 | 10,349 | 14,096 | ||||
2022 | 8,324 | 11,907 | ||||
2023 | 4,747 | 8,390 | ||||
2024 | 6,507 | |||||
Thereafter | 22,024 | 24,932 | ||||
Total | 73,884 | 76,669 | ||||
Less: Present value discount | (13,109) | (23,120) | ||||
Lease liabilities | $ | 60,775 | $ | 53,549 | ||
AggregateThe partnership has additional railcar operating leases that will commence in the second half of 2020 and first half of 2021 to replace expiring leases, with estimated future minimum lease payments remaining undercommitments of approximately $26.6 million and lease terms of five years. The undiscounted amounts are not included in the operating lease agreements under ASC 840, Leases as of December 31, 2018 are as follows (in thousands):tables above.
Year Ending December 31, | Amount | ||
2019 | $ | 23,552 | |
2020 | 17,473 | ||
2021 | 9,812 | ||
2022 | 7,325 | ||
2023 | 3,594 | ||
Thereafter | 28,542 | ||
Total | $ | 90,298 | |
Lease Revenue
As described in Note 2 – Revenue, the majority of the partnership’s segment revenue is generated though their storage and throughput services and rail transportation services agreements with Green Plains Trade and are accounted for as lease revenue. Leasing revenues do not represent revenues recognized from contracts with customers under ASC 606, and are accounted for under ASC 842, Leases. Lease revenue associated with agreements with Green Plains Trade are eliminated upon consolidation. The remaining lease revenue is not material to the company.
Refer to Note 2 – Revenue for further discussion on lease revenue.
Commodities
As of June 30, 2019,2020, the company had contracted future purchases of grain, corn oil, natural gas, crude oil, ethanol and distillers grains, and cattle, valued at approximately $433.9$158.4 million.
Legal
The company is currently involved in litigation that has arisen during the ordinary course of business, but does not believe any pending litigation will have a material adverse effect on its financial position, results of operations or cash flows.
14.15. RELATED PARTY TRANSACTIONS
Green Plains Cattle Company LLC
The company engages in certain related party transactions with GPCC. The company provides a variety of shared services to GPCC, including accounting and finance, payroll and human resources, information technology, legal, communications and treasury activities. The shared services provided by the company and billed to GPCC were $0.4 million and $0.8 million for the three and six months ended June 30, 2020, respectively. The company had $1.4 million and $2.2 million outstanding receivables related to the shared service agreement and expenses paid on behalf of GPCC as of June 30, 2020 and December 31, 2019, respectively.
Green Plains Trade Group, a subsidiary of the company, enters into certain sale contracts with GPCC during the normal course of business. Revenues were $3.1 million and $6.0 million for the three and six months ended June 30, 2020, respectively.
Mr. Ejnar Knudsen, a member of the company’s board of directors, has an indirect ownership interest in GPCC of 0.0736% by reason of his ownership in TGAM Agribusiness Fund LP. Based on the purchase price, the value of that ownership interest is approximately $0.1 million. Mr. Knudsen also is the CEO and partial owner of AGR Partners LLC which provides investment advisory services to TGAM Agribusiness Fund LP pursuant to a sub-advisory agreement between AGR Partners LLC and Nuveen Alternative Advisors LLC, which is the investment manager for TGAM Agribusiness Fund LP.
Aircraft Leases
Effective January 1, 2015, the company entered into two2 agreements with an entity controlled by Wayne Hoovestol for the lease of two2 aircrafts. Mr. Hoovestol is chairman of the company’s board of directors. The company agreed to pay $9,766 per month for the combined use of up to 125 hours per year of the aircrafts. Flight time in excess of 125 hours per year will incur additional hourly charges. Payments related to these leases totaled $0 and $24 thousand during the three and six months ended June 30, 2020, respectively, and $35 thousand and $69 thousand during the three and six months ended June 30, 2019,, respectively, and $30 thousand and $87 thousand during the three and six months ended June 30, 2018, respectively. The company had $2 thousand$0 in outstanding payables related to these agreements as of June 30, 20192020 and no$17 thousand in outstanding payables related to these agreements as of December 31, 2018.2019.
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15. SUBSEQUENT EVENTS
On July 19, 2019, the company closed on the issuance of the additional $10.0 million aggregate principal amount of the 4.00% convertible notes due in 2024 under the previously announced private offering which closed on June 21, 2019 (the “Option Notes”) to the initial purchasers. The Option Notes resulted in net proceeds to the company, after deducting commissions and the company’s offering expenses, of approximately $9.5 million. The company intends to use the additional proceeds for general corporate purposes. After the issuance of the Option Notes, total aggregate principal of the 4.00% notes was $115.0 million.
The Option Notes will have the same terms as the 4.00% notes issued on June 21, 2019, and will be issued under the same Indenture dated as of June 21, 2019 between the company and Wilmington Trust, National Association, as trustee. For additional information related to the 4.00% notes, see Note 8 – Debt included as part of the notes to consolidated financial statements.
16. EQUITY METHOD INVESTMENTS
Green Plains Cattle Company LLC
On September 9, 2019, Green Plains, TGAM and StepStone announced the formation of a joint venture. Such parties entered into the Second Amended and Restated Limited Liability Company Agreement of GPCC effective as of September 1, 2019. GPCC was previously a wholly owned subsidiary of Green Plains. Green Plains also entered into a Securities Purchase Agreement with TGAM and StepStone, whereby TGAM and StepStone purchased an aggregate of 50% of the membership interests of GPCC from Green Plains. After closing, GPCC is no longer consolidated in the company’s consolidated financial statements and the GPCC investment is accounted for using the equity method of accounting. GPCC results prior to its disposition are classified as discontinued operations in our current and prior period financials.
The GPCC investment is accounted for using the equity method of accounting. GPCC conducts the business of the joint venture, including (i) owning and operating the cattle feeding operations (as defined below), and (ii) any other activities approved by GPCC’s board of managers. GPCC continues to have the capacity to support 355,000 head of cattle and has approximately 11.7 million bushels of grain storage capacity. Historical GPCC operational results prior to its disposition are recorded as discontinued operations in the consolidated statement of operations.
The company does not consolidate any part of the assets or liabilities or operating results of its equity method investee. The company’s share of net income or loss in the investee increases or decreases, as applicable, the carrying value of the investment. With respect to GPCC, the company determined that this entity does not represent a variable interest entity and consolidation is not required. In addition, although the company has the ability to exercise significant influence over the joint venture through board representation and voting rights, all significant decisions require the consent of the other investors without regard to economic interest.
Summarized Financial Information
Our equity method investments are summarized in the following table (in thousands):
Ownership as of June 30, 2020 | June 30, 2020 | December 31, 2019 | ||||||
Green Plains Cattle Company LLC (1) | 50% | $ | 110,101 | $ | 64,161 | |||
Other | Various | 3,662 | 4,837 | |||||
Total | $ | 113,763 | $ | 68,998 | ||||
(1)The equity method investment in GPCC is impacted by the effect of deferred gains or losses on cattle sale contracts designated in a cash flow hedge relationship. Pre-tax accumulated other comprehensive loss for GPCC was $17.1 million as of June 30, 2020 compared to pre-tax accumulated other comprehensive loss of $16.2 million as of December 31, 2019.
Earnings from equity method investments were as follows:
Three Months Ended | Six Months Ended | |||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||
Green Plains Cattle Company LLC (1) | $ | 11,870 | $ | - | $ | 19,756 | $ | - | ||||
All others | 175 | (36) | 255 | (110) | ||||||||
Total income (loss) from equity method investments, net of income taxes | $ | 12,045 | $ | (36) | $ | 20,011 | $ | (110) | ||||
Distributions from equity method investments | $ | 11,079 | $ | - | $ | 14,326 | $ | - | ||||
Income (loss) from equity method investments, net of distributions | $ | 966 | $ | (36) | $ | 5,685 | $ | (110) | ||||
(1)Pre-tax equity method earnings of GPCC were $15.6 million and $26.0 million for the three and six months ended June 30, 2020.
The company reports its proportional share of equity method investment income (loss) in the consolidated statements of operations. The company’s share of equity method investees other comprehensive income arising during the period is included in accumulated other comprehensive income (loss) in the accompanying balance sheet.
The following table present summarized information of GPCC.
Three Months Ended June 30, 2020 | Six Months Ended June 30, 2020 | |||||
Total revenues | $ | 256,472 | $ | 490,532 | ||
Total operating expenses | 225,174 | 438,438 | ||||
Net income | $ | 31,298 | $ | 52,094 | ||
June 30, 2020 | December 31, 2019 | |||||
Balance sheet: | ||||||
Current assets | $ | 467,318 | $ | 516,324 | ||
Noncurrent assets | 71,253 | 73,922 | ||||
Current liabilities | 318,003 | 461,534 | ||||
Noncurrent liabilities | 366 | 390 | ||||
Net assets | $ | 220,202 | $ | 128,322 | ||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
General
The following discussion and analysis provides information we believe is relevant to understand our consolidated financial condition and results of operations. This discussion should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements contained in this report together with our annual report on Form 10-K for the year ended December 31, 2018.2019.
Cautionary Information Regarding Forward-Looking Statements
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 that 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 may be identified by words such as “anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,” “outlook,” “plan,” “predict,” “may,” “could,” “should,” “will” and similar expressions, 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 in the forward-looking statements include, but are not limited to, those discussed in Part I, Item 1A – Risk Factors of our annual report on Form 10-K for the year ended December 31, 2018,2019, Part II, Item 1A – Risk Factors in this report, or incorporated by reference. Specifically, we may experience fluctuations in future operating results due to a number of economic conditions, including: disruption caused by health epidemics, such as the COVID-19 outbreak; 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 acquisition and disposition activities and achieving anticipated results; risks associated with merchant trading, cattle feeding operationstrading; risks related to our equity method investees 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.
Overview
Green Plains is a diversified commodity-processing business with operations related to ethanol production,that include corn processing, grain handling and storage cattle feedlots, food ingredients, and commodity marketing and logistics services. The company is one of the leading corn processors in the world and, through its adjacent businesses, is focused on the production of high-protein feed ingredients and export growth opportunities. We are also focused on generating stable operating margins through our diversified business segments and risk management strategy. Green Plains Partners LP is our primary downstream logistics provider, storing and delivering the ethanol we produce. We own a 49.1%49.0% limited partner interest, a 2.0% general partner interest and all of the partnership’s incentive distribution rights. The public owns the remaining 48.9%49.0% limited partner interest. The partnership is consolidated in our financial statements. In addition, Green Plains owns a 50% interest in Green Plains Cattle Company LLC.
We are currently undergoing a number of project initiatives to improve margins. Through our Project 24 initiative, we anticipate reductions in operating expense per gallon across our non-ICM plants as a result of these investments. In addition, through our high-protein initiative, we expect to achieve increased margins per gallon as a result of the ability to produce various high protein animal feed products. The first high-protein installation is expected to bewas completed at our Shenandoah plant byduring the endfirst quarter of 2019,2020 with shipments of dried product beginning in April 2020. We anticipate the remaining locations beingwill be completed over the course of the next threeseveral years.
Recent Developments
4.00% Convertible Notes due in 2024
On June 21, 2019, we issued $105.0 millionApproval of 4.00% convertible senior notes due in 2024, or the 4.00% notes. We used approximately $57.8 million of the net proceeds to repurchase the $56.8 million outstanding principal amount of our 3.25%
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convertible senior notes due October 1, 2019, including accrued and unpaid interest, in privately negotiated transactions concurrently with the offering.
The 4.00% notes are senior, unsecured obligations, with interest payable on January 1 and July 1 of each year, beginning January 1, 2020, at a rate of 4.00% per annum. The initial conversion rate is 64.1540 shares of common stock per $1,000 of principal, which is equal to a conversion price of approximately $15.59 per share. The conversion rate will be subject to adjustment upon the occurrence of certain events. In addition, we may be obligated to increase the conversion rateDefinitive Term Sheet for any conversion that occurs in connection with certain corporate events, including the calling of the 4.00% notes for redemption. We may settle the 4.00% notes in cash, common stock or a combination of cash and common stock. At June 30, 2019, the outstanding principal balance was $73.9 million on the 4.00% notes. For additional information related to the 4.00% notes, see Note 8 – Debt included as part of the notes to consolidated financial statements.$75.0 Million Loan Facility
On July 19, 2019,29, 2020, we closed onannounced the issuanceapproval of a definitive term sheet for a $75.0 million loan facility, which will support the execution of our protein strategy. Upon closing, the loan facility is expected to have a 15-year term and an interest rate with a 5% floor that can be either a fixed rate of 15-year indicative Treasury yield plus 4.00%, or a floating rate of one-month LIBOR plus 4.50%, and will require principal payments of $1.5 million per year beginning 24 months from the closing date. Closing of the additional $10.0 million aggregate principal amountloan facility is expected to occur during the third quarter. The loan will be secured by the assets of the 4.00% notes to the initial purchasers. The Option Notes provided us with net proceeds, after deducting commissionsGreen Plains Shenandoah LLC and the company’s offering expenses, of approximately $9.5 million. The Option Notes have the same terms as the 4.00% notes issued on June 21, 2019, and were issued under the same Indenture dated as of June 21, 2019. After the issuance of the Option Notes, total aggregate principal of the 4.00% notes was $115.0 million.Green Plains Wood River LLC.
ExtensionImpact of Offer Period – JGP Energy PartnersCOVID-19 and Decline in Oil Demand
EffectiveWe continue to closely monitor the impact of COVID-19 on all aspects of our business, including how it will impact our employees, customers, vendors, and business partners. Although we did not incur significant disruptions during the three and six months ended June 30, 2019,2020 from COVID-19, we agreed withare unable to predict the partnershipimpact that COVID-19 will have on our future financial position and operating results due to extend the offer period related to the potential purchase of the Green Plains interest in the JGP Energy Partners Beaumont, Texas terminal until September 30, 2019.numerous uncertainties.
Ninth AmendmentThe COVID-19 pandemic and related economic repercussions have created significant volatility, uncertainty, and turmoil in the energy industry. The situation surrounding COVID-19 continues to Credit Agreement – Green Plains Grain Company LLCevolve rapidly and the ultimate duration and impact of the outbreak as well as the continued decline in oil demand remains highly uncertain and subject to change.
On June 28, 2019,While we entered into an amendment ofhave instituted work from home arrangements for certain staff members, there has been no adverse effect on our senior secured asset-based revolving credit facility. This Ninth Amendmentability to the Credit Agreement was completedmaintain operations, including our financial reporting systems, our internal controls over financial reporting or our disclosure controls and procedures. In addition, to renew and extend the existing maturity date from July 26, 2019 to June 28, 2022 and lowered the senior secured asset-based revolving credit facility from $125.0 million to $100.0 million.we have not incurred any material COVID-19 related contingencies.
SuspensionFor further information regarding the impact of Quarterly Cash Dividend
On June 18, 2019, we announced that our board of directors has decided to suspend our quarterly cash dividendCOVID-19 and the decline in order to retain and redirect cash flow to our Project 24 operating expense equalization plan,oil demand on the deployment of high-protein technology and our stock repurchase program.company, please see Part II, Item 1A, “Risk Factors,” in this report, which is incorporated herein by reference.
Results of Operations
During the second quarter of 2019,2020, we continued to experience a weak ethanol margin environment. Our operating strategy, including the operating cost savings initiative, is to increase utilization rates and efficiency while reducing operating expenses to achieve improved margins in the current environment. As a result, capacity utilization increased fromWe maintained an average utilization rate of 56.0%approximately 53.5% of capacity, resulting in the first quarter to 80.0%ethanol production of capacity in the second quarter. Ethanol production was 224.0149.9 mmg for the second quarter of 2019,2020, compared with 296.3224.0 mmg, or 80.0% of capacity, for the same quarter last year. We expectThe reduction in the average utilization rate was primarily due to continuepoor margins driven in part by a significant reduction in motor fuel demand as a result of the COVID-19 pandemic. Our operating strategy is to runreduce operating expenses, energy usage and water consumption through our Project 24 initiative while running at higher average utilization rates in order to achieve improved margins. However, in the cost savings anticipated. Additionally, overall performance at our ethanol plantscurrent environment, given the significant drop in driving and cattle feeding operations were negatively impacted by severe weathergasoline demand experienced in the second quarter, we may exercise operational discretion that results in reductions in production. It is possible that production could be below minimum volume commitments in the future, depending on various factors that drive each bio-refineries variable contribution margin, including future driving and associated flooding in areas where we transport products duringgasoline demand for the first half of 2019. The weather also drove corn prices up, negatively impacting margins.industry.
U.S. Ethanol Supply and Demand
According to the EIA, domestic ethanol production averaged 1.050.71 million barrels per day during the second quarter of 2019,2020, which was 1% higher33% lower than the 1.041.05 million barrels per day for the secondsame quarter of last year. Refiner and blender input volume increased 1%decreased 29% to 938 thousand0.67 million barrels per day for the second quarter of 2019,2020, compared with 930 thousand0.94 million barrels per day for the same quarter last year. Gasoline demand for the firstsecond quarter of 2019 increased slightly by 11 thousand2020 decreased 2.6 million barrels per day, or 0.1%27% compared to the same quarter last year. U.S. domestic ethanol ending stocks increaseddecreased by approximately 0.92.7 million barrels, or 4%12%, to 22.820.2 million barrels for the second quarter of 2019.2020. At the end of May 2019, the EPA finalized regulatory changes to applyregulations applying the 1one pound per square inch Reid Vapor Pressure (RVP) waiver that currently appliesapplied to E10 during the summer months so that it appliesto apply to E15 as well. This removesremoved a significant barrier to wider sales of E15 in the summer months, thus expanding the market for ethanol in transportation fuel. As of July 12, 2019,June 30, 2020, there were approximately 1,8262,194 retail stations selling E15 in 3130 states, up from 1,7002,080 at the beginning of the year, accordingaccording to Growth Energy.
In March 2020, members of the Organization of Petroleum Exporting Countries and their allies (collectively, OPEC+) failed to reach an agreement on production levels which led to a substantial decrease in oil prices and an increasingly volatile market. While OPEC+ agreed in April to cut production, downward pressure on prices has continued and could continue for
the foreseeable future. In addition, with the widespread shutdowns and “shelter in place” orders across the United States also beginning in March 2020 related to the COVID-19 pandemic, driving miles and fuel consumption have been reduced significantly. This has had a similar impact on ethanol demand resulting in the shutdown of approximately 50% of total industry production capacity.
During the quarter, as economies began to open up from the COVID-19 pandemic, driving demand began to recover and was approximately 90% of prior year levels for the month of July.
Global Ethanol Supply and Demand
According to the USDA Foreign Agriculture Service, domestic ethanol exports for the first five months of 2019through May 31, 2020 were approximately 631.5 mmgy, down 19%0.65 bgy, up 1.6% from 776.2 mmgy0.64 bgy for the same period of 2018.2019. Brazil remained the largest export destination for U.S. ethanol, which accounted for 30%27% of domestic ethanol export volume despite the 20% tariff on U.S. ethanol imports in excess of 150 million liters, or 39.6 million gallons per quarter, imposed in September 2017 by Brazil’s Chamber of Foreign Trade, or CAMEX. In a resolution published August 31, 2019, Brazil raised the annual import quota to 750 million duty free liters distributed on a quarterly basis as follows: September to November 100 million liters, December to February 100 million liters, March to May 275 million liters and June to August 275 million liters. In addition, India, Canada, India and South Korea accounted for 18%17%, 15%16%, and 7%8%, respectively, of U.S. ethanol exports.
On April 1, 2018, China announced it would add an additional 15% tariff to the existing 30% tariff it had earlier imposed on ethanol imports from the United States and Brazil. China later raised the tariff further to 70% as the trade war escalated. There continuesIn January 2020, China and the United States agreed to certain trade agreements, the impact of which on ethanol are yet to be negotiations between the U.S. and China with no certainty of when a trade agreement may be reached.determined.
The cost to produce the equivalent amount of starch found in sugar from $3.50-per-bushel corn is 7 cents per pound. The average price of sugar remained atwas approximately 1310.9 cents per pound during the second quarter of 2019.2020. We currently estimate that net ethanol exports will reach between 1.4range from 1.1 billion gallons andto 1.5 billion gallons in 20192020, excluding any potential exports to China, based on historical demand from a variety of countries and certain countries who seek to improve their air quality and eliminate MTBE from their own fuel supplies.
Co-Product Supply and Demand
During the second quarter of 2019, the market sentiment for cattle feeding remained positive on strong forward margins, while worries around feed cost have tempered some expectations due to the late planting of the domestic corn crop. Feeder supplies remain robust as a wet winter and spring have allowed stocker operations to expand. Domestic beef consumption per capita in 2019 is projected to increase 0.4 pounds to 57.6 pounds compared with 2018. Export demand for beef is forecasted to decrease approximately 0.3% in 2019 compared with 2018 according to the USDA.
Cow-calf operations continue to be profitable, which has supported a period of expansion. Excellent pasture conditions after a wet winter and spring will help to promote herd expansion, but supplemental feed cost could be a headwind in the near future. Year-to-date domestic cattle on feed increased 1.6% to 11.74 million head through June 1, 2019, compared to the same period last year.
Packer demand was driven by strong margins during the second quarter of 2019. Total fed cattle marketings through the end of May 2019 increased 0.8% compared with the first five months of 2018. Slaughter capacity constraints, primarily due to labor shortages, have limited the packers’ ability to increase slaughter rates at the same pace as cattle on feed inventories, resulting in higher packer margins. However, these higher margins should incentivize the packers to increase slaughter capacity, which will be crucial for cattle feeding margins moving forward.
The U.S. looks poised to grow its global market share for animal protein while Australia continues to struggle with drought conditions, and African Swine Fever (“ASF”) issues in China should result in larger world export demand for animal protein from the U.S.
Year-to-date U.S. distillers grains exports through May 31, 2019,2020, were 4.44.1 million metric tons, or 5.3%6.6% lower than the same period last year, according to the USDA Foreign Agriculture Service. Mexico, South Korea, Vietnam, Indonesia, Turkey, CanadaThailand, and Japan, accounted for approximately 69%65.6% of total U.S. distillers export volumes.
While ASF may have a positive impact on animal protein demand from the U.S., it may have a negative impact on distillers grains exports and domestic usage. ASF may depress soybean meal demand in China which could make the animal feed more price competitive to distillers grains and allow for substitution of high-protein soybean meal worldwide.
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. Various bills have been discussed in the House and Senate which would eliminate the RFS II entirely, eliminate the corn based ethanol portion of the mandate, or make it more
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difficult to sell fuel blends with higher levels of ethanol. However, weWe believe it is unlikely that any of these bills will be passedbecome law in the current Congress. In addition, the manner in which the EPA administers the RFS II can have a divided Congress.significant impact on the actual amount of ethanol blended into the domestic fuel supply.
Federal mandates and state-level clean fuel programs supporting the use of renewable fuels are a significant driver of ethanol demand in the U.S. Ethanol policies are influenced by environmental concerns for the environment, diversifying our fuel supply, and an interest in reducing the country’s dependence on foreign oil. Consumer acceptance of flex-fuel vehicles and higher ethanol blends of ethanol in non-flex-fuel vehicles may be necessary before ethanol can achieve further growth in U.S. market share.
Congress first enacted Corporate Average Fuel Economy (CAFE)CAFE in 1975 to reduce energy consumption by increasing the fuel economy of cars and light trucks. It providesFlexible-fuel vehicles (FFVs), which are designed to run on a 54% efficiency bonusmixture of fuels, including higher blends of ethanol such as E85, receive preferential treatment in the form of CAFE credits. There are approximately 21 million FFVs on the road in the U.S. today, 16 million of which are light duty trucks. FFV credits have been decreasing since 2014 and will be completely phased out in 2020. Absent CAFE preferences, auto manufacturers may not be willing to build flexible-fuel vehicles, which can operate on ethanol blends uphas the potential to E85.slow the growth of E85 markets. However, California’s Low Carbon Fuel Standard program (LCFS) has driven growth in E85 usage, and other state/regional LCFS programs have the potential to do the same.
Another important factor is a waiver in the Clean Air Act, known as theThe One-Pound Waiver which allows E10that was extended in May 2019 to allow E15 to be sold year-round even though it exceeds the Reid Vapor Pressure limitation of nine pounds per square inch. At the end of May 2019, the EPA finalized a rule which extended the One-Pound Waiver to E15 expanding it beyond flex-fuelall vehicles during the June 1 to September 15 summer driving season. This rulemodel year 2001 and newer is being challenged in an action filed in Federal District Court for the DC Circuit. However, the One-Pound Waiver isremains in effect, and E15 is being sold during the summer driving season.effect.
The RFS II has been a driving factor in the growth of ethanol usage in the United States. When the RFS II was passedestablished in 2007 and rulemaking finalized in October 2010, the required volume of conventional renewable fuel“conventional” or corn-based ethanol to be blended with gasoline was to increase each year until it reached 15.0 billion gallons in 2015. In November 2018,2015, which left the EPA to address existing limitations in both supply (ethanol production) and demand (usage of ethanol blends in older vehicles). On December 19, 2019, the EPA announced it would maintain the 15.0 billion gallon mandatefinal 2020 RVO for conventional ethanol, which met the 15.0-billion-gallon congressional target. The EPA has not yet released a draft RVO rule for the 2021volumes, though it typically does so in 2019. OnJune or July, 5, 2019,and aims to finalize the EPA released an annual proposal for RFS volumes, which included 15.0 billion gallons for conventional renewable fuel in 2020.rule by November 30 each year.
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 the 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 2022.2022 – the year through which the statutorily prescribed volumes run. While conventional ethanol maintained 15 billion gallons, 2019 iswas the second consecutive year that the total proposed RVOs areRVO was more than 20% below statutory volumes levels. Thus, the EPA Administrator has directed his staffwas expected to initiate a reset rulemaking, wherein the EPA willand modify statutory volumes through 2022, and do so based on the same factors usedthey are to setuse in setting the RVOs post-2022. These factors include environmental impact, domestic energy security, expected production, infrastructure impact, consumer costs, job creation, price of agricultural commodities, food prices, and rural economic development. However, on December 19, 2019, the EPA announced it would not be moving forward with a reset rulemaking in 2020.
The EPA assigns individual refiners, blenders, and importers the volume of renewable fuels they are obligated to use based on their percentage of total domestic transportation fuel sales. Obligated parties use RINs to show compliance with RFS-mandatedthe RFS II mandated volumes. Ethanol producers assign RINs to renewable fuels and the RINs are detached when the renewable fuel is blended with transportation fuel domestically. Market participants can trade the detached RINs in the open market. The market price of detached RINs affects the price of ethanol in certain markets and influences thecan influence purchasing decisions by obligated parties.
On April 15, 2020, five Governors sent a letter to the EPA requesting a general waiver from the RFS due to the drop in demand caused by COVID-19 travel restrictions. They contend that the compliance costs – i.e. cost to purchase RINs – is onerous and could put some refineries out of business. The EPA has 90 days to respond, and as of this filing had indicated only that they are “watching the situation closely, and reviewing the governors’ letter.”
Under the RFS II, a small refinery is defined as one that processes fewer than 75,000 barrels of petroleum per day. Small refineries can inpetition the EPA for a SRE which, if approved, waives their portion of the annual RVO requirements. The EPA, through consultation with the Department of Energy waiveand the obligationDepartment of Agriculture, can grant them a full or partial waiver, or deny it outright within 90 days of submittal. The EPA granted significantly more of these waivers for individual refineries that are suffering “disproportionate economic hardship” due to compliance with2016, 2017 and 2018 than they had in the RFS. To qualify, the refineries must be under total throughput of 75,000 barrels per day and state their case for an exemption in an application to the EPA each year.
The Trump administration waived the obligation for 19 of 20 applicants for compliance year 2016,past, totaling 790 million gallons and 35 of 37waived requirements for the 2016 compliance year, 2017, totaling 1.82 billion gallons. These waivers effectively reduce the annual RVO by that amount, sincegallons for 2017 and 1.43 billion gallons for 2018. In doing so, the EPA does not reallocateeffectively reduced the waived gallons to other obligated parties. The resulting surplus of RINs in the market has brought values down significantly to under $0.20. Since higherRFS II mandated volumes for those compliance years by those amounts respectively, and as a result, RIN values help to make higher blends of ethanol more cost competitive, lower RIN values could hinder or at least slow retailer and consumer adoption of E15 and higher blends. We believe there are 38 waiver applications pending for compliance year 2018, which could represent approximately 2 billion gallons of renewable fuel obligations.have declined significantly.
Biofuels groups and biofuels opposition groups each have filed lawsuits related to RFS II. In addition to the E15 litigation discussed previously, biofuels groups have fileda lawsuit in the U.S. Federal District Court of Appeals for the D.C. Circuit, challenging the 2019 RVO rule over the EPA’s failure to address small refinery exemptions in the rulemaking. Biofuel oppositionThis was the first RFS II rulemaking since the expanded use of the exemptions came to light; however, the EPA had declined to cap the number of waivers it grants, and until late 2019, had declined to alter how it accounts for the retroactive waivers in its annual volume calculations. The EPA has a statutory mandate to ensure the volume requirements are met, which are achieved by setting the percentage standards for obligated parties. The EPA’s recent approach accomplished the opposite. Even if all the obligated parties complied with their respective percentage obligations for 2019, the nation’s overall supply of renewable fuel would not meet the total volume requirements set by the EPA. This undermines Congressional intent to increase the consumption of renewable fuels in the domestic transportation fuel supply. Biofuels groups have filed alsoargued the EPA must therefore adjust its percentage standard calculations to make up for past retroactive waivers and adjust the standards to account for any waivers it reasonably expects to grant in the DC Circuit, with such action consolidated with similar cases,future.
In a supplemental rulemaking to review the EPA’s 20182020 RVO rulemaking. Biofuel groups have filed an action inrule, the DC Circuit to compel EPA to produce information underchanged their approach, and for the Freedom of Information Act relatedfirst time accounted for the gallons that they anticipate they will be waiving from the blending requirements due to small refinery exemptions. Certain biofuel groups have further filed suitTo accomplish this, they are adding in the Tenth Circuit Courttrailing three year average of Appeals challenging small refinery exemption. Numerous other suits on related RFS II matters are also pending, namely involving RVOs and small refinerygallons the Department of Energy recommended be waived, in effect raising the blending volumes across the board in anticipation of waiving the obligations in whole or in part for certain refineries that qualify for the exemptions.
Though the EPA has often disregarded the recommendations of the Department of Energy in years past, they stated in the rule their intent to adhere to these recommendations going forward, including granting partial waivers rather than an all or nothing approach. The EPA will be adjudicating the 2020 compliance
year small refinery exemption applications in early 2021, but have indicated they will adhere to Department of Energy recommendations for the 2019 compliance year applications as well, which should be adjudicated in 2020. There were 26 applications pending as of this filing.
On January 24, 2020, the U.S. Court of Appeals for the 10th Circuit ruled on RFA et. al. vs. EPA in favor of biofuels interests, overturning EPA’s granting of refinery exemptions to three refineries on two separate grounds. The Court agreed that, under the Clean Air Act, refineries are eligible for SREs for a given RVO year only if such exemptions are extensions of exemptions granted in previous RVO years. In this case, the three refineries at issue did not qualify for SREs in the year prior to the year that EPA granted them. They were thus ineligible for additional SRE relief because there were no immediately prior SREs to extend. In addition, the Court agreed that the disproportionate economic hardship prong of SRE eligibility should be determined solely by reference to whether compliance with the RFS II creates such hardship, not whether compliance plus other issues create disproportionate economic hardship. The Court thus vacated EPA's grant of SREs for certain years and remanded the grants back to EPA. The refiners appealed for a rehearing which was denied. It is possible the decision will be appealed to the U.S. Supreme Court. If the decision against the EPA is upheld by the Supreme Court, it is uncertain how the EPA will propose to remedy the situation.
In October 2019, the White House directed the USDA and EPA to move forward with rulemaking to expand access to higher blends of biofuels. This includes funding for infrastructure, labeling changes and allowing E15 to be sold through E10 infrastructure.
In 2017, the D.C. Circuit ruled in favor of biofuel groups against the EPA related to its decision to lower the 2016 volume requirements by 500 million gallons. As a result, the Court remanded to the EPA to make up for the 500 million gallons. Despite this, in the proposed 2020 RVO rulemaking released in July 2019, proposed RVO rulemaking, the EPA stated it does not intend to make up the 500 million gallons as the court directed, citing potential burden on obligated parties. ItThe EPA has indicated that it plans to address this court ordered remand in conjunction with the 2021 RVO rulemaking.
To respond to the COVID-19 health crisis and attempt to offset the subsequent economic damage, Congress passed multiple relief measures, most notably the Coronavirus Aid, Relief and Economic Security Act (CARES Act) in March 2020, which created and funded multiple programs that have impacted or could impact our industry. The USDA was given additional resources for the Commodity Credit Corporation (CCC) and they are using those funds to provide direct payments to farmers, including corn farmers from whom we purchase most of our feedstock for ethanol production. Similar to the trade aid payments made by the USDA over the past two years, this cash injection for farmers could cause them to delay marketing decisions and increase the price we have to pay to purchase the corn. The USDA did not include any CCC funds for ethanol plants as of this filing.
The CARES Act provided for the Small Business Administration (SBA) to assist companies with fewer than 500 employees, and for some North American Industry Classification System (NAICS) codes, 1,000 employees, and keep them from laying off workers. The Paycheck Protection Program (PPP) was created and made payments to many farmers and ethanol plants with fewer than 1,000 employees. This could create a competitive imbalance in the marketplace, and for farmers, like the CCC funds, incentivize them to delay marketing corn. The PPP had its authorization increased by $321 billion in April.
The CARES Act also directed the Treasury Department to create programs to support medium-sized businesses, with fewer than 10,000 employees. The “Main Street” programs provide low interest loans to qualifying companies, though we do not qualify according to the most recent guidance from the Treasury Department.
Industrial grade ethanol is anticipated that litigation will ensue from this matter.the primary ingredient in hand sanitizer. The CARES Act provided a tax exclusion on the shipment of un-denatured ethanol for use in manufacturing hand sanitizer. The FDA has provided expanded guidance to allow for more denaturants to be used in ethanol intended for hand sanitizer production, and has expanded the grades of ethanol allowed for the duration of the public health crisis which on July 25, 2020 was extended another 90 days by the U.S. Secretary of Health and Human Services.
Government actions abroad can significantly impact the demand for U.S. ethanol. In September 2017, China’s National Development and Reform Commission, the National Energy BoardAgency 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 fiscal year 2018 and 2019 due to a 30% tariff on U.S. ethanol, which increased to 70% in early 2018. There is no assurance that China’s joint plan to expand blending to 10% will be carried to fruition, nor that it will lead to increased imports of U.S. ethanol in the near term. Our exports also face tariffs, rate quotas, countervailing duties,Ethanol is included as an agricultural commodity under
the “Phase I” agreement with China, wherein they are to purchase upwards of $40 billion in agricultural commodities from the U.S. in both 2020 and other hurdles2021. To date in Brazil, the European Union, India, Peru, and elsewhere, which limits our ability to compete in some markets.2020, there have been no meaningful purchases of U.S. ethanol by China.
In Brazil, the Secretary of Foreign Trade 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 initial ruling iswas valid for two years, and is set to expireyears; however, it was extended at the end of August 2019. It remains unclear if2019 for an additional year. On an annual basis, Brazil will applynow allow into the 20% tariff to all gallons after that date, if they will expand the gallons they allow incountry 750 million duty free liters distributed on a quarterly basis as follows: September to November 100 million liters, December to February 100 million liters, March to May 275 million liters and June to August 275 million liters.
Our exports also face tariffs, rate quotas, countervailing duties, and other hurdles in the European Union, India, Peru, Columbia and elsewhere, which limits the ability to compete in some markets. Some countries are using the COVID-19 crisis as justification for raising duties on imports of U.S. ethanol, or if they will reduce the tariff for all gallons.blocking our imports entirely.
In June 2017, the Energy Regulatory Commission of Mexico (CRE) approved the use of 10% ethanol blends, which was challenged by ten lawsuits. Four casesmultiple lawsuits, of which several were dismissed. The six remaining four cases follow one of two tracks: 1) to determine the constitutionality of the CRE regulation, or 2) to determine the benefits, or lack thereof, of introducing E10 to Mexico. An injunction was granted in October 2017, preventing the blending and selling of E10, but was overturned by a higher court in June 2018 making it legal to blend and sell E10 by PEMEX throughout Mexico except for its three largest metropolitan areas. On January 15, 2020, the Mexican Supreme Court ruled that the expedited process for the CRE regulation was unconstitutional, and that after a 180 day period the maximum ethanol blend allowed in the country would revert to 5.8%. There is an effort underway to go through the full regulatory process to allow for 10% blends countrywide, including in the three major metropolitan areas. U.S. ethanol exports to Mexico totaled 29.431.2 mmg in 2018.2019.
On January 29, 2020, the President signed into law the updated North American Free Trade Agreement, known as the United States Mexico Canada Agreement or USMCA. The pact maintains the duty free access of U.S. agricultural commodities, including ethanol, into Canada and Mexico. The USMCA went into effect on July 1, 2020.
Colombia banned imports of U.S. fuel ethanol for two months, and on June 30th extended the ban one additional month. The Columbian President ordered this emergency decree citing COVID-19 as the rationale. This action is WTO compliant under Article 20 of the GATT. In 2019, the U.S. shipped Columbia 80.2 million gallons of ethanol.
Comparability of our Financial Results
We report the financial and operating performance for the following four operating segments: (1) ethanol production, which includes the production of ethanol, andincluding industrial-grade alcohol, distillers grains and recovery of 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 and food-grade corn oil operations and included vinegar production until the sale of Fleischmann’s Vinegar during the fourth quarter of 2018 and (4) partnership, which includes fuel storage and transportation services.
The threeWe sold an aggregate 50% membership interest in GPCC to TGAM and six months ended June 30, 2019 do not include operations of the Bluffton, Lakota, Hopewell and Riga ethanol plants which were either permanently closed or soldStepStone during the fourththird quarter of 2018. Additionally,2019. After closing, GPCC is no longer consolidated in the company’s consolidated financial statements and the GPCC investment is accounted for using the equity method of accounting. The company concluded that the disposition of GPCC met the requirements under ASC 205-20. Therefore,GPCC results for the three and six months ended June 30, 2019 do not include Fleischmann’s Vinegar operations, which was also sold in the fourth quarter of 2018.are classified as discontinued operations.
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 include 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 segment information as well as earnings before interest, income taxes, depreciation and amortization, excluding amortization of operating lease right-of-use assets and amortization of debt issuance costs, or EBITDA.
The company also owns a 90.0% interest in BioProcess Algae, a joint venture formed in 2008. Beginning April 1, 2016, weWe consolidate the financial results of BioProcess Algae, and record a noncontrolling interest for the economic interest in the joint venture held by others.
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As of June 30, 2019,2020, we, together with our subsidiaries, own a 49.1%49.0% limited partner interest and a 2.0% general partner interest in the partnership and own all of the partnership’s incentive distribution rights, with the remaining 48.9%49.0% limited partner interest owned by public common unitholders. We consolidate the financial results of the partnership, and record a noncontrolling interest for the economic interest in the partnership held by the public common unitholders.
Segment Results
The selected operating segment financial information are as follows (in thousands):
Three Months Ended | % | Six Months Ended | % | Three Months Ended | % | Six Months Ended | % | |||||||||||||||||||||||
2019 | 2018 | Variance | 2019 | 2018 | Variance | 2020 | 2019 (1) | Variance | 2020 | 2019 (1) | Variance | |||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||
Ethanol production: | ||||||||||||||||||||||||||||||
Revenues from external customers | $ | 447,438 | $ | 589,256 | (24.1%) | $ | 716,154 | $ | 1,153,019 | (37.9%) | $ | 290,517 | $ | 450,917 | (35.6%) | $ | 766,217 | $ | 721,725 | 6.2% | ||||||||||
Intersegment revenues | 3,505 | 4,219 | (16.9) | 5,622 | 6,172 | (8.9) | 25 | 26 | (3.8) | 50 | 51 | (2.0) | ||||||||||||||||||
Total segment revenues | 450,943 | 593,475 | (24.0) | 721,776 | 1,159,191 | (37.7) | 290,542 | 450,943 | (35.6) | 766,267 | 721,776 | 6.2 | ||||||||||||||||||
Agribusiness and energy services: | ||||||||||||||||||||||||||||||
Revenues from external customers | 175,837 | 170,074 | 3.4 | 338,632 | 371,861 | (8.9) | 126,088 | 177,961 | (29.1) | 281,969 | 342,037 | (17.6) | ||||||||||||||||||
Intersegment revenues | 9,131 | 14,128 | (35.4) | 15,544 | 25,557 | (39.2) | 4,368 | 7,007 | (37.7) | 11,676 | 12,139 | (3.8) | ||||||||||||||||||
Total segment revenues | 184,968 | 184,202 | 0.4 | 354,176 | 397,418 | (10.9) | 130,456 | 184,968 | (29.5) | 293,645 | 354,176 | (17.1) | ||||||||||||||||||
Food and ingredients: | ||||||||||||||||||||||||||||||
Revenues from external customers | 270,886 | 225,887 | 19.9 | 479,385 | 503,996 | (4.9) | - | - | - | - | 1,452 | * | ||||||||||||||||||
Intersegment revenues | 38 | 38 | 0.0 | 76 | 80 | (5.0) | - | - | - | - | - | - | ||||||||||||||||||
Total segment revenues | 270,924 | 225,925 | 19.9 | 479,461 | 504,076 | (4.9) | - | - | - | - | 1,452 | * | ||||||||||||||||||
Partnership: | ||||||||||||||||||||||||||||||
Revenues from external customers | 1,692 | 1,620 | 4.4 | 3,997 | 3,248 | 23.1 | 1,384 | 1,692 | (18.2) | 2,672 | 3,997 | (33.1) | ||||||||||||||||||
Intersegment revenues | 19,133 | 24,220 | (21.0) | 37,915 | 48,477 | (21.8) | 18,997 | 19,133 | (0.7) | 37,980 | 37,915 | 0.2 | ||||||||||||||||||
Total segment revenues | 20,825 | 25,840 | (19.4) | 41,912 | 51,725 | (19.0) | 20,381 | 20,825 | (2.1) | 40,652 | 41,912 | (3.0) | ||||||||||||||||||
Revenues including intersegment activity | 927,660 | 1,029,442 | (9.9) | 1,597,325 | 2,112,410 | (24.4) | 441,379 | 656,736 | (32.8) | 1,100,564 | 1,119,316 | (1.7) | ||||||||||||||||||
Intersegment eliminations | (31,807) | (42,605) | (25.3) | (59,157) | (80,286) | (26.3) | (23,390) | (26,166) | (10.6) | (49,706) | (50,105) | (0.8) | ||||||||||||||||||
Revenues as reported | $ | 895,853 | $ | 986,837 | (9.2%) | $ | 1,538,168 | $ | 2,032,124 | (24.3%) | $ | 417,989 | $ | 630,570 | (33.7%) | $ | 1,050,858 | $ | 1,069,211 | (1.7%) | ||||||||||
(1)Revenues include certain items which were previously considered intercompany transactions prior to the disposition of GPCC and therefore eliminated upon consolidation. These revenue transactions are now presented on a gross basis in product revenues. These revenue transactions total $5.7 million and $9.1 million for the three and six months ended June 30, 2019, respectively.
Three Months Ended | % | Six Months Ended | % | Three Months Ended | % | Six Months Ended | % | |||||||||||||||||||||||
2019 | 2018 | Variance | 2019 | 2018 | Variance | 2020 | 2019 (1) | Variance | 2020 | 2019 (1) | Variance | |||||||||||||||||||
Cost of goods sold: | ||||||||||||||||||||||||||||||
Ethanol production | $ | 483,352 | $ | 581,613 | (16.9%) | $ | 776,839 | $ | 1,146,172 | (32.2%) | $ | 284,174 | $ | 483,352 | (41.2%) | $ | 773,324 | $ | 776,839 | (0.5%) | ||||||||||
Agribusiness and energy services | 176,214 | 165,174 | 6.7 | 335,840 | 366,886 | (8.5) | 125,768 | 176,214 | (28.6) | 282,270 | 335,840 | (16.0) | ||||||||||||||||||
Food and ingredients | 259,906 | 206,440 | 25.9 | 465,979 | 466,205 | (0.0) | - | 6 | * | - | 1,522 | * | ||||||||||||||||||
Partnership | - | - | * | - | - | * | ||||||||||||||||||||||||
Intersegment eliminations | (31,215) | (42,602) | (26.7) | (54,826) | (80,303) | (31.7) | (19,081) | (25,612) | (25.5) | (47,505) | (45,850) | 3.6 | ||||||||||||||||||
$ | 888,257 | $ | 910,625 | (2.5%) | $ | 1,523,832 | $ | 1,898,960 | (19.8%) | $ | 390,861 | $ | 633,960 | (38.3%) | $ | 1,008,089 | $ | 1,068,351 | (5.6%) | |||||||||||
(1)Cost of goods sold include certain items which were previously considered intercompany transactions prior to the disposition of GPCC and therefore eliminated upon consolidation. These cost of goods sold transactions are now presented on a gross basis in cost of goods sold. These costs of goods sold transactions total $5.6 million and $9.0 million for the three and six months ended June 30, 2019, respectively.
Three Months Ended | % | Six Months Ended | % | Three Months Ended | % | Six Months Ended | % | |||||||||||||||||||||||
2019 | 2018 | Variance | 2019 | 2018 | Variance | 2020 | 2019 | Variance | 2020 | 2019 | Variance | |||||||||||||||||||
Operating income (loss): | ||||||||||||||||||||||||||||||
Ethanol production | $ | (53,885) | $ | (17,214) | (213.0%) | $ | (98,077) | $ | (44,743) | (119.2%) | $ | (18,792) | $ | (53,885) | (65.1%) | $ | (79,573) | $ | (98,077) | (18.9%) | ||||||||||
Agribusiness and energy services | 4,341 | 12,166 | (64.3) | 9,645 | 19,230 | (49.8) | 351 | 4,341 | (91.9) | 2,911 | 9,645 | (69.8) | ||||||||||||||||||
Food and ingredients | 7,260 | 12,981 | (44.1) | 5,828 | 25,566 | (77.2) | - | (5) | * | - | (70) | * | ||||||||||||||||||
Partnership | 13,156 | 16,129 | (18.4) | 25,707 | 31,489 | (18.4) | 12,225 | 13,156 | (7.1) | 24,655 | 25,707 | (4.1) | ||||||||||||||||||
Intersegment eliminations | (528) | 144 | * | (4,205) | 212 | * | (4,283) | (528) | * | (2,150) | (4,205) | (48.9) | ||||||||||||||||||
Corporate activities | (9,724) | (12,441) | 21.8 | (18,283) | (23,914) | 23.5 | (8,869) | (9,724) | (8.8) | (19,539) | (18,283) | 6.9 | ||||||||||||||||||
$ | (39,380) | $ | 11,765 | * | $ | (79,385) | $ | 7,840 | * | $ | (19,368) | $ | (46,645) | (58.5%) | $ | (73,696) | $ | (85,283) | (13.6%) | |||||||||||
(1)Operating loss for ethanol production includes a goodwill impairment charge of $24.1 million for the six months ended June 30, 2020.
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Three Months Ended | % | Six Months Ended | % | |||||||||||||||||||||||||||
2019 | 2018 | Variance | 2019 | 2018 | Variance | Three Months Ended | % | Six Months Ended | % | |||||||||||||||||||||
EBITDA: | ||||||||||||||||||||||||||||||
2020 | 2019 | Variance | 2020 | 2019 | Variance | |||||||||||||||||||||||||
Depreciation and amortization: | ||||||||||||||||||||||||||||||
Ethanol production | $ | (38,737) | $ | 3,362 | * | $ | (67,240) | $ | (3,733) | * | $ | 17,184 | $ | 15,437 | 11.3% | $ | 33,082 | $ | 30,777 | 7.5% | ||||||||||
Agribusiness and energy services | 4,899 | 12,796 | (61.7) | 10,761 | 20,498 | (47.5) | 556 | 552 | 0.7 | 1,109 | 1,101 | 0.7 | ||||||||||||||||||
Food and ingredients | 8,906 | 19,044 | (53.2) | 9,163 | 35,041 | (73.9) | ||||||||||||||||||||||||
Partnership | 14,017 | 17,138 | (18.2) | 27,788 | 33,761 | (17.7) | 966 | 771 | 25.3 | 1,927 | 1,756 | 9.7 | ||||||||||||||||||
Intersegment eliminations | (528) | 144 | * | (4,205) | 212 | * | ||||||||||||||||||||||||
Corporate activities | (8,326) | (10,642) | 21.8 | (14,705) | (20,817) | 29.4 | 669 | 751 | (10.9) | 1,337 | 1,501 | (10.9) | ||||||||||||||||||
$ | (19,769) | $ | 41,842 | * | $ | (38,438) | $ | 64,962 | * | $ | 19,375 | $ | 17,511 | 10.6% | $ | 37,455 | $ | 35,135 | 6.6% | |||||||||||
* Percentage variance not considered meaningful.
We use EBITDA and adjusted EBITDA as a segment measuremeasures of profitability to compare the financial performance of our reportable segments and manage those segments. EBITDA is defined as earnings before interest expense, income tax expense, including related tax expense of equity method investments, depreciation and amortization excluding the change in right-of-use assets and debt issuance costs. Adjusted EBITDA includes adjustments related to operational results of GPCC prior to its disposition which are recorded as discontinued operations, our proportional share of EBITDA adjustments of our equity method investees and noncash goodwill impairment. We believe EBITDA is aand adjusted EBITDA are useful measuremeasures to compare our performance against other companies. EBITDA and adjusted EBITDA should not be considered an alternative to, or more meaningful than, net income, which is prepared in accordance with GAAP. EBITDA and adjusted EBITDA calculations may vary from company to company. Accordingly, our computation of EBITDA and adjusted EBITDA may not be comparable with a similarly titled measure of other companies.
The following table reconciles net income (loss)loss from continuing operations including noncontrolling interest to adjusted EBITDA (in thousands):
Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||
Net income (loss) | $ | (40,179) | $ | 3,751 | $ | (78,050) | $ | (15,704) | ||||||||||||||
Net loss from continuing operations including noncontrolling interest | $ | (5,474) | $ | (42,118) | $ | (15,821) | $ | (75,520) | ||||||||||||||
Interest expense | 15,969 | 22,021 | 30,396 | 44,149 | 9,670 | 11,249 | 19,367 | 20,980 | ||||||||||||||
Income tax benefit | (14,653) | (10,753) | (29,113) | (16,780) | ||||||||||||||||||
Income tax benefit, net of equity method income tax expense | (7,677) | (15,322) | (49,475) | (28,265) | ||||||||||||||||||
Depreciation and amortization (1) | 19,094 | 26,823 | 38,329 | 53,297 | 19,375 | 17,511 | 37,455 | 35,135 | ||||||||||||||
EBITDA | $ | (19,769) | $ | 41,842 | $ | (38,438) | $ | 64,962 | 15,894 | (28,680) | (8,474) | (47,670) | ||||||||||
EBITDA adjustments related to discontinued operations | - | 8,911 | - | 9,232 | ||||||||||||||||||
Proportional share of EBITDA adjustments to equity method investees | 2,041 | 310 | 4,978 | 641 | ||||||||||||||||||
Noncash goodwill impairment | - | - | 24,091 | - | ||||||||||||||||||
Adjusted EBITDA | $ | 17,935 | $ | (19,459) | $ | 20,595 | $ | (37,797) | ||||||||||||||
(1)Excludes the amortization ofchange in operating lease right-of-use assets and amortization of debt issuance costs.
The following table reconciles segment EBITDA to consolidated adjusted EBITDA (in thousands):
Three Months Ended | % | Six Months Ended | % | ||||||||||||
2020 | 2019 | Variance | 2020 | 2019 | Variance | ||||||||||
Adjusted EBITDA: | |||||||||||||||
Ethanol production | $ | (1,607) | $ | (38,737) | 95.9% | $ | (45,732) | $ | (67,240) | 32.0% | |||||
Agribusiness and energy services | 1,037 | 4,899 | (78.8) | 4,165 | 10,761 | (61.3) | |||||||||
Food and ingredients | - | (5) | * | - | (69) | * | |||||||||
Partnership | 13,366 | 14,017 | (4.6) | 26,914 | 27,788 | (3.1) | |||||||||
Intersegment eliminations | (4,283) | (528) | * | (2,150) | (4,205) | 48.9 | |||||||||
Corporate activities (1) | 7,381 | (8,326) | 188.7 | 8,329 | (14,705) | 156.6 | |||||||||
EBITDA | 15,894 | (28,680) | 155.4 | (8,474) | (47,670) | 82.2 | |||||||||
EBITDA adjustments related to discontinued operations | - | 8,911 | * | - | 9,232 | * | |||||||||
Proportional share of EBITDA adjustments to equity method investees | 2,041 | 310 | * | 4,978 | 641 | * | |||||||||
Noncash goodwill impairment | - | - | * | 24,091 | - | * | |||||||||
Adjusted EBITDA | $ | 17,935 | $ | (19,459) | 192.2% | $ | 20,595 | $ | (37,797) | 154.5% | |||||
(1)Includes corporate expenses, offset by earnings from equity method investments of $12.0 million and $19.8 million for the three and six months ended June 30, 2020, respectively.
* Percentage variance not considered meaningful.
Three Months Ended June 30, 20192020 Compared with the Three Months Ended June 30, 20182019
Consolidated Results
Consolidated revenues decreased $91.0$212.6 million for the three months ended June 30, 20192020 compared with the same period in 20182019 primarily due to the dispositionlower production volumes of three ethanol, plantsdistillers grains and the sale of Fleischmann’s Vinegar during the fourth quarter of 2018, offset by increased cattle volumes due to the acquisition of two cattle feed lots in the third quarter of 2018.corn oil.
Operating incomeloss decreased $51.1$27.3 million and adjusted EBITDA decreased $61.6increased $37.4 million for the three months ended June 30, 20192020 compared with the same period last year primarily due to decreasedimproved margins on ethanol production as well as equity earnings from the disposition of Fleischmann’s Vinegar during the fourth quarter of 2018.GPCC joint venture. Interest expense decreased $6.1$1.6 million for the three months ended June 30, 2019,2020 compared with the same period in 2018, primarily due to the repayment of the $500 million senior secured term loan during the fourth quarter of 2018.2019. Income tax benefit was $14.7$11.5 million for the three months ended June 30, 20192020 compared with $10.8$15.3 million for the same period in 2018.2019. The decrease in the income tax benefit was primarily due to a decrease in pre-tax loss for the three months ended June 30, 2020 as compared to the same period in 2019 offset by the tax benefit for the utilization of previously recorded tax NOLs in the three month period ended June 30, 2020 as allowed under the provisions of the recently enacted CARES Act.
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The following discussion provides greater detail about our second quarter segment performance.
Ethanol Production Segment
Key operating data for our ethanol production segment is as follows:
Three Months Ended | Three Months Ended | |||||||||||
2019 | 2018 | % Variance | 2020 | 2019 | % Variance | |||||||
Ethanol sold | ||||||||||||
(thousands of gallons) | 224,023 | 296,282 | (24.4) | 149,872 | 224,023 | (33.1) | ||||||
Distillers grains sold | ||||||||||||
(thousands of equivalent dried tons) | 586 | 739 | (20.7) | 383 | 586 | (34.6) | ||||||
Corn oil sold | ||||||||||||
(thousands of pounds) | 53,040 | 75,556 | (29.8) | 39,496 | 53,040 | (25.5) | ||||||
Corn consumed | ||||||||||||
(thousands of bushels) | 77,963 | 103,147 | (24.4) | 51,908 | 77,963 | (33.4) | ||||||
Revenues in our ethanol production segment decreased $142.5$160.4 million for the three months ended June 30, 20192020 compared with the same period in 20182019 primarily due to the dispositionlower production volumes of three ethanol, plants during the fourth quarter of 2018 as well as lower average realized prices for ethanoldistillers grains and distillers grains.corn oil.
Cost of goods sold for our ethanol production segment decreased $98.3$199.2 million for the three months ended June 30, 20192020 compared with the same period last year primarily due to the disposition of three ethanol plants. As a result of the factors identified above, operating incomelower production volumes. Operating loss decreased $36.7$35.1 million and EBITDA decreased $42.1increased $37.1 million for the three months ended June 30, 20192020 compared with the same period in 2018.2019 primarily due to improved margins on ethanol production, specifically related to the sale of high protein animal feed products and industrial-grade alcohol. Depreciation and amortization expense for the ethanol production segment was $15.4$17.2 million for the three months ended June 30, 20192020 compared with $20.6$15.4 million for the same period last year, primarily due to the disposition of three ethanol plants during the fourth quarter of 2018.year.
Agribusiness and Energy Services Segment
Revenues in our agribusiness and energy services segment increased $0.8decreased $54.5 million while operating income decreased by $7.8$4.0 million and EBITDA decreased by $7.9$3.9 million for the three months ended June 30, 20192020 compared with the same period in 2018.2019. The increasedecrease in revenues was primarily due to an increasea decrease in ethanol, distillers grain and corn oil trading activity offsetdriven by a decrease in distillers grain and grain trading activity andlower production volumes, as well as lower average realized prices for ethanol. Operating income and EBITDA decreased primarily as a result of decreasedlower margins.
Food and Ingredients Segment
Revenues in ourThe food and ingredients segment, increased $45.0 million for the three months ended June 30, 2019 compared with the same period in 2018. The increase in revenues was primarily due to the Bartlett acquisition which increased the number of cattle volumes soldnow represents food-grade corn oil production had no activity during the three months ended June 30, 2019 partially offset by the sale of Fleischmann’s Vinegar during the fourth quarter of 2018. Cattle head sold for the three months ended June 30, 2019 and 2018 was approximately 164,000 and 118,000, respectively.
Operating income decreased by $5.7 million and EBITDA decreased $10.1 million for the three months ended June 30, 2019 compared with the same period in 2018 primarily due to the sale of Fleischmann’s Vinegar during the fourth quarter of 2018 as well as decreased margins in our cattle feeding operations during the second quarter of 2019.2020.
Partnership Segment
Revenues generated by our partnership segment decreased $5.0$0.4 million for the three months ended June 30, 20192020, compared towith the same period for 2019. Terminal services revenue decreased $0.3 million primarily as result of 2018,a decrease in fees associated with minimum volume commitments. Revenues generated from railcar transportation services decreased $0.1 million primarily due to lower storage and throughput volumes due to disposition of three ethanol plants during the fourth quarter of 2018 as well as lower revenues generated from rail transportation services due to the assignment of various railcar operating leases as part of the disposition.sublease revenue. Operating income decreased $3.0$0.9 million and EBITDA decreased $3.1$0.7 million for the three months ended June 30, 20192020 compared with the same period in 2018 primarily due to the factors described above.2019.
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Intersegment Eliminations
Intersegment eliminations of revenues decreased by $10.8$2.8 million for the three months ended June 30, 20192020 compared with the same period in 20182019 due to a decrease in storagedecreased marketing and throughput fees paid to the partnership segment due to the disposition of the three ethanol plants during the further quarter of 2018 as well as decreased intersegment corn purchases and marketingorigination fees within the agribusiness and energy services segment.
Corporate Activities
Operating income was impacted by a decrease in operating expenses for corporate activities, primarily related to travel and entertainment, of $2.7$0.9 million for the three months ended June 30, 20192020 compared with the same period in 2018 primarily as a result of a workforce reduction which occurred as part of our portfolio optimization program in the last half of 2018.2019.
Income Taxes
We recorded income tax benefit of $14.7$11.5 million for the three months ended June 30, 2019,2020, compared with $10.8$15.3 million for the same period in 2018. 2019. The changedecrease in incomethe amount of tax benefit recorded for the three months ended June 30, 2020 compared to the same period in 2019 was due to a higherdecrease in pre-tax loss before income taxesfor the three months ended June 30, 2020 as compared to the same period in 2019 offset by the tax benefit associated with the carry back of the tax NOL generated in 2019 to the 2014 tax year under the CARES Act, as well as the release of a previously recorded valuation allowance against the 2019 NOL and other deferred tax assets.
Income from Equity Method Investees
Income from equity method investees increased $12.1 million for the three months ended June 30, 2020 compared with the same period last year due to earnings from our GPCC joint venture during the current period. Prior to its disposition during the third quarter of 2019, GPCC was a consolidated entity.
Net Income from Discontinued Operations
As previously discussed, we sold an aggregate 50% membership interest in GPCC to TGAM and StepStone during the third quarter of 2019. After closing, GPCC is no longer consolidated in the company’s consolidated financial statements and the GPCC investment is accounted for using the equity method of accounting. GPCC results for the three months ended June 30, 2019 and R&D credits recorded duringare classified as discontinued operations. Net income from discontinued operations was $1.9 million for the same period in 2018.three months ended June 30, 2019.
Six Months Ended June 30, 20192020 Compared with the Six Months Ended June 30, 20182019
Consolidated Results
Consolidated revenues decreased $494.0$18.4 million for the six months ended June 30, 20192020 compared with the same period in 20182019 primarily due to the disposition of three ethanol plantsdecreased trading revenues within our agribusiness and the sale of Fleischmann’s Vinegar during the fourth quarter of 2018 as well as lowerenergy services segment, offset slightly by higher production volumes atof ethanol, distillers grains and corn oil in our remaining plants.ethanol production segment.
Operating incomeloss decreased $87.2 million and EBITDA decreased $103.4$11.6 million for the six months ended June 30, 20192020 compared with the same period last year primarily due to lower volumethe sale of industrial-grade alcohol and decreased margins onhigh protein animal feed products, offset by the pre-tax write-off of the goodwill in the ethanol production segment. Adjusted EBITDA increased $58.4 million due to higher earnings from our ethanol production segment, excluding the goodwill impairment, driven by the sale of industrial-grade alcohol and cattlehigh protein animal feed products as well as equity earnings from the disposition of Fleischmann’s Vinegar during the fourth quarter of 2018.GPCC joint venture. Interest expense decreased $13.8$1.6 million for the three months ended June 30, 2020 compared with the same period in 2019. Income tax benefit was $55.7 million for the six months ended June 30, 20192020 compared with the same period in 2018, primarily due to the repayment of the $500 million senior secured term loan during the fourth quarter of 2018. Income tax benefit was $29.1 million for the six months ended June 30, 2019 compared with $16.8$28.3 million for the same period in 2018.2019. The increase in income tax benefit was primarily due to the utilization of previously recorded tax NOLS during the six month period ended June 30, 2020 as allowed under the provisions of the recently enacted CARES Act.
The following discussion provides greater detail about our year-to-date segment performance.
Ethanol Production Segment
Key operating data for our ethanol production segment is as follows:
Six Months Ended | Six Months Ended | |||||||||||
2019 | 2018 | % Variance | 2020 | 2019 | % Variance | |||||||
Ethanol produced | ||||||||||||
Ethanol sold | ||||||||||||
(thousands of gallons) | 379,063 | 576,692 | (34.3) | 390,338 | 379,063 | 3.0 | ||||||
Distillers grains produced | ||||||||||||
Distillers grains sold | ||||||||||||
(thousands of equivalent dried tons) | 984 | 1,468 | (33.0) | 1,025 | 984 | 4.2 | ||||||
Corn oil produced | ||||||||||||
Corn oil sold | ||||||||||||
(thousands of pounds) | 88,023 | 144,690 | (39.2) | 102,048 | 88,023 | 15.9 | ||||||
Corn consumed | ||||||||||||
(thousands of bushels) | 132,004 | 200,430 | (34.1) | 135,791 | 132,004 | 2.9 | ||||||
Revenues in our ethanol production segment decreased $437.4increased $44.5 million for the six months ended June 30, 20192020 compared with the same period in 20182019 primarily due to the disposition of three ethanol plants during the fourth quarter of 2018 as well as lowerhigher production volumes of ethanol, distillers grains and corn oil due to the depressed margin environment and lower average realized prices for ethanol and distillers grains.oil.
Cost of goods sold for our ethanol production segment decreased $369.3$3.5 million for the six months ended June 30, 20192020 compared with the same period last year primarily due to the disposition of three ethanol plants in addition to lower
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costs on high protein animal feed products and industrial-grade alcohol, offset by higher production volumes. As a result of the factors identified above, operating incomeOperating loss decreased $53.3$18.5 million and EBITDA decreased $63.5increased $21.5 million for the six months ended June 30, 20192020 compared with the same period in 2018.2019 primarily due to the sale of high protein animal feed products and industrial-grade alcohol, offset by the goodwill impairment charge recognized in the first quarter of 2020. Depreciation and amortization expense for the ethanol production segment was $30.8$33.1 million for the threesix months ended March 31, 2019June 30, 2020 compared with $41.0$30.8 million for the same period last year, primarily due to the dispositionyear.
Agribusiness and Energy Services Segment
Revenues in our agribusiness and energy services segment decreased $43.2$60.5 million while operating income decreased by $9.6$6.7 million and EBITDA decreased by $9.7$6.6 million for the six months ended June 30, 20192020 compared with the same period in 2018.2019. The decrease in revenues was primarily due to a decrease in ethanol, distillers grain and corn oil production and trading activity, as well as lower average realized prices for ethanol. Operating income and EBITDA decreased primarily as a result of decreased margins.
Food and Ingredients Segment
Revenues in ourThe food and ingredients segment, decreased $24.6 million for the six months ended June 30, 2019 compared with the same period in 2018. The decrease in revenues was primarily due to the sale of Fleischmann’s Vinegar during the fourth quarter of 2018, partially offset by an increase in cattle volumes soldwhich now represents food-grade corn oil production had no activity during the six months ended June 30, 2019. Cattle head sold for the six months ended June 30, 2019 and 2018 was approximately 291,000 and 255,000 respectively.
Operating income decreased by $19.7 million and EBITDA decreased $25.9 million for the six months ended June 30, 2019 compared with the same period in 2018 primarily due to the sale of Fleischmann’s Vinegar during the fourth quarter of 2018, as well as overall performance at our cattle feeding operations, which was negatively impacted by severe winter weather and an abnormally negative basis during the first quarter of 2019.2020.
Partnership Segment
Revenues generated by our partnership segment decreased $9.8$1.3 million for the six months ended June 30, 20192020, compared towith the same period for 2019. Terminal services revenue decreased $0.9 million primarily as result of 2018, primarilya decrease in fees associated with minimum volume commitments. Revenues generated from railcar transportation services decreased $0.6 million due to lower storage and throughput volumes due to disposition of three ethanol plants during the fourth quarter of 2018a reduction in average volumetric capacity provided, as well as lower production at our remaining plantssublease revenue. These decreases were partially offset by an increase of $0.2 million in trucking and lower revenues generated from rail transportation services due to the assignment of various railcar operating leases as part of the disposition.other revenue associated with an increase in volumes transported for Green Plains Trade. Operating income decreased $5.8$1.1 million and EBITDA decreased $6.0$0.9 million for the six months ended June 30, 20192020 compared with the same period in 2018 primarily due to the factors described above.2019.
Intersegment Eliminations
Intersegment eliminations of revenues decreased by $21.1$0.4 million for the six months ended June 30, 20192020 compared with the same period in 2018 due to a decrease in storage and throughput fees paid to the partnership segment as well as decreased intersegment corn purchases and marketing fees within the agribusiness and energy services segment.2019.
Corporate Activities
Operating income was impacted by a decreasean increase in operating expenses for corporate activities of $5.6$1.3 million for the six months ended June 30, 20192020 compared with the same period in 20182019 due to increased selling, general and administrative expenses primarily as a result of a workforce reduction which occurred as part of our portfolio optimization program in the last half of 2018.personnel costs.
Income Taxes
We recorded income tax benefit of $29.1$55.7 million for the six months ended June 30, 2020, compared with $28.3 million for the same period in 2019. The increase in the amount of tax benefit recorded for the six months ended June 30, 2020 compared to the same period in 2019 was due to the tax benefit associated with the carry back of the tax NOL generated in 2019 to the 2014 tax year under the newly enacted CARES Act, as well as the release of a previously recorded valuation allowance against the 2019 NOL and other deferred tax assets.
Income from Equity Method Investees
Income from equity method investees increased $20.1 million for the six months ended June 30, 2020 compared with the same period last year due to earnings from our GPCC joint venture during the current period. Prior to its disposition during the third quarter of 2019, GPCC was a consolidated entity.
Net Income from Discontinued Operations
As previously discussed, we sold an aggregate 50% membership interest in GPCC to TGAM and StepStone during the third quarter of 2019. After closing, GPCC is no longer consolidated in the company’s consolidated financial statements and the GPCC investment is accounted for using the equity method of accounting. GPCC results for the six months ended June 30, 2019 are classified as discontinued operations. Net loss from discontinued operations was $2.5 million for the six months ended June 30, 2019 compared with $16.8 million for the same period in 2018. The change in income tax benefit wasprimarily due to a higher loss before income taxes for the six months ended June 30, 2019,severe winter weather and R&D credits recordedabnormally negative basis during the same period in 2018.first quarter of 2019.
Liquidity and Capital Resources
Our principal sources of liquidity include cash generated from operating activities and bank credit facilities. We fund our operating expenses and service debt primarily with operating cash flows. Capital resources for maintenance and growth expenditures are funded by a variety of sources, including cash generated from operating activities, borrowings under bank credit facilities, or issuance of senior notes or equity. Our ability to access capital markets for debt under reasonable terms depends on our financial condition, credit ratings and market conditions. We believe that our ability to obtain financing at
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reasonable rates and history of consistent cash flow from operating activities provide a solid foundation to meet our future liquidity and capital resource requirements.
On June 30, 2019,2020, we had $193.3$163.4 million in cash and equivalents, excluding restricted cash, consisting of $133.6$72.1 million held at our parent company and the remainder held at our subsidiaries. Additionally, we had $40.6$20.2 million in restricted cash at June 30, 2019.2020. We also had $458.8$294.0 million available under our committed revolving credit agreements, including $5.0 million available under the partnership’s revolving credit facility, some of which were subject to restrictions or other lending conditions. Funds at certain subsidiaries are generally required for their ongoing operational needs and restricted from distribution. At June 30, 2019,2020, our subsidiaries had approximately $174.8$66.4 million of net assets that were not available to us in the form of dividends, loans or advances due to restrictions contained in their credit facilities.
Net cash used inprovided by operating activities for continuing operations was $32.2$65.9 million for the six months ended June 30, 20192020 compared with net cash provided byused in operating activities $45.9for continuing operations of $43.1 million for the same period in 2018.2019. Operating activities compared to the prior year were primarily affected by a decrease in the operating loss, goodwill impairment and changes in working capital as well as decreases in operating income when compared to the same period of the prior year. Net cash used in investing activities for continuing operations was $20.3$68.0 million for the six months ended June 30, 20192020 compared with $11.2net cash used in investing activities for continuing operations of $16.9 million for the same period in 2018,2019, due primarily to increasedan increase capital expenditures at our existing ethanol plants partially offset by cash received from other investing activities in 2018.during 2020. Net cash used in financing activities for continuing operations was $31.8$84.3 million for the six months ended June 30, 20192020 compared with $96.2net cash provided by financing activities for continuing operations of $8.0 million for the same period in 2018, with the2019, primarily due to changes in borrowing activity, a decrease in share repurchases and a decrease in cash used resulting from an increase in net borrowings offset by payments for the repurchase of common stock.dividends and distributions during 2020.
Additionally, Green Plains Trade Green Plains Cattle and Green Plains Grain use revolving credit facilities to finance working capital requirements. We frequently draw from and repay these facilities which results in significant cash movements reflected on a gross basis within financing activities as proceeds from and payments on short-term borrowings.
We incurred capital expenditures of $23.5$64.6 million in the first half of 20192020 primarily for aProject 24 operating expense reduction and high-protein expansion projectprojects at one of ourvarious ethanol plants, and for various maintenance projects. Capital spending for the remainder of 20192020 is expected to be between approximately $55.0$40.0 million and $65.0$55.0 million for various projects, including the high-protein expansion at Wood River, which are expected to be financed with available borrowings under our credit facilities and cash provided by operating activities.activities, as well as borrowings under our recently secured project based financing of $75.0 million.
Our business is highly sensitive to the price of commodities, particularly for corn, ethanol, distillers grains, corn oil and natural gas and cattle.gas. We use derivative financial instruments to reduce the market risk associated with fluctuations in commodity prices. Sudden changes in commodity prices may require cash deposits with brokers for margin calls or significant liquidity with little advanced notice to meet margin calls, depending on our open derivative positions. We continuously monitor our exposure to margin calls and believe we will continue to maintain adequate liquidity to cover margin calls from our operating results and borrowings.
On May 8, 2019, our board of directors declared a quarterly cash dividend of $0.12 per share. The dividend was paid on June 14, 2019, to shareholders of record at the close of business on May 24, 2019. On June 18, 2019, the company announced that its board of directors has decided to suspend its future quarterly cash dividend following the June 14, 2019 dividend payment, in order to retain and redirect cash flow to the company’s Project 24 operating expense equalization plan, the deployment of high-protein technology and its stock repurchase program.
For each calendar quarter commencing with the quarter ended September 30, 2015, the partnership agreement requires the partnership to distribute all available cash, as defined, to its partners, including us, within 45 days after the end of each calendar quarter. Available cash generally means all cash and cash equivalents on hand at the end of that quarter less cash reserves established by ourthe general partner, including those for future capital expenditures, future acquisitions and anticipated future debt service requirements, plus all or any portion of the cash on hand resulting from working capital borrowings made subsequent to the end of that quarter. On July 18, 2019,16, 2020, the board of directors of the general partner of the partnership declared a cash distribution of $0.475$0.12 per unit on outstanding common and subordinated units. The distribution is payable on August 9, 2019,7, 2020, to unitholders of record at the close of business on August 2, 2019.July 31, 2020.
In August 2014, we announced
Our board of directors authorized a share repurchase program of up to $100 $200 million of our common stock. Under the program, we may repurchase shares in open market transactions, privately negotiated transactions, accelerated share buyback programs, tender offers or by other means. The timing and amount of repurchase transactions are determined by our management based on market conditions, share price, legal requirements and other factors. The program may be suspended, modified or discontinued at any time without prior notice. DuringWe did not repurchase any shares during the three months ended June 30, 2019, we purchased a totalsecond quarter of 3,197,277 shares of our common stock for approximately $39.9 million.2020. To date, we have repurchased 4,316,6267,396,936 of common stock for approximately $59.6$92.8 million under the program.
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We believe we have sufficient working capital for our existing operations. Furthermore, our liquidity position was improved as a result of the sale of three of our ethanol plants as well as the sale of Fleischmann’s Vinegar during the fourth quarter of 2018. The majority of net cash proceeds from the sales, net of fees and taxes, was used to pay off the outstanding term loan balance. A continued sustained period of unprofitable operations, however, may strain our liquidity making it difficult to maintain compliance with our financing arrangements.liquidity. We may sell additional assets or equity or borrow capital to improve or preserve our liquidity, expand our business or acquire existing businesses. We cannot provide assurance that we will be able to secure funding necessary for additional working capital or these projects at reasonable terms, if at all.
Debt
For additional information related to our debt, see Note 89 – Debt included as part of the notes to consolidated financial statements and Note 12 – Debt included as part of the notes to consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2018.2019.
We were in compliance with our debt covenants at June 30, 2019.2020. Based on our forecasts, we believe we will maintain compliance at each of our subsidiaries for the next twelve months or have sufficient liquidity available on a consolidated basis to resolve noncompliance. We cannot provide assurance that actual results will approximate our forecasts or that we will inject the necessary capital into a subsidiary to maintain compliance with its respective covenants. In the event a subsidiary is unable to comply with its debt covenants, the subsidiary’s lenders may determine that an event of default has occurred, and following notice, the lenders may terminate the commitment and declare the unpaid balance due and payable.
As outlined in Note 89 - Debt, we use LIBOR as a reference rate for certain revolving credit facilities. LIBOR is currently set to be phased out at the end of 2021. At this time, it is not possible to predict the effect of this change or the alternative reference rate to be used. We will need to renegotiate certain credit facilities to determine the interest rate to replace LIBOR with the new standard that is established. As such, the potential effect of any such event on interest expense cannot yet be determined.
Corporate Activities
On June 21,In 2019, we issued $105.0$115.0 million of 4.00% convertible senior notes due in 2024, or the 4.00% notes. We used approximately $57.8 million of the net proceeds to repurchase the outstanding $56.8 million outstanding principal amount of our 3.25% convertible senior notes due October 1, 2019, including accrued and unpaid interest, in privately negotiated transactions concurrently with this offering. We used approximately $39.9 million of the net proceeds from the offering to repurchase approximately 3.2 million shares of common stock concurrently with the offering in privately negotiated transactions. The remaining proceeds will be used for general corporate purposes.
The 4.00% notes are senior, unsecured obligations, with interest payable on January 1 and July 1 of each year, beginning January 1, 2020, at a rate of 4.00% per annum. The initial conversion rate will be 64.1540 shares of our common stock per $1,000 principal amount of the 4.00% notes, which is equivalent to an initial conversion price of approximately $15.59 per share of our common stock. The conversion rate will be subject to adjustment upon the occurrence of certain events. In addition, we may be obligated to increase the conversion rate for any conversion that occurs in connection with certain corporate events, including our calling the 4.00% notes for redemption. We may settle the 4.00% notes in cash, common stock or a combination of cash and common stock. At June 30, 2019,2020, the outstanding principal balance was $73.9$86.2 million on the 4.00% notes.
On July 19, 2019, we closed on the issuance of the additional $10.0 million aggregate principal amount of the 4.00% notes to the initial purchasers. The Option Notes provided us with net proceeds, after deducting commissions and our offering expenses, of approximately $9.5 million. The Option Notes will have the same terms as the 4.00% notes issued on June 21, 2019, and will be issued under the same Indenture dated as of June 21, 2019. After the issuance of the Option Notes, total aggregate principal of the 4.00% notes was $115.0 million.
In August 2016, we issued $170.0 million of 4.125% convertible senior notes due in 2022, or 4.125% notes, which are senior, unsecured obligations with interest payable on March 1 and September 1 of each year. Prior to March 1, 2022, the 4.125% notes are not convertible unless certain conditions are satisfied. The initial conversion rate is 35.7143 shares of common stock per $1,000 of principal which is equal to a conversion price of approximately $28.00 per share. The conversion rate is subject to adjustment upon the occurrence of certain events, including when the quarterly cash dividend exceeds $0.12 per share. We may settle the 4.125% notes in cash, common stock or a combination of cash and common stock. At June 30, 2019,2020, the outstanding principal balance was $145.9$152.8 million on the 4.125% notes.
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Ethanol Production Segment
We have small equipment financing loans, finance leases on equipment or facilities, and other forms of debt financing.
Agribusiness and Energy Services Segment
Green Plains Grain has a $100.0 million senior secured asset-based revolving credit facility to finance working capital up to the maximum commitment based on eligible collateral, which matures in June of 2022. This facility can be increased by up to $75.0 million with agent approval and up to $50.0 million for seasonal borrowings. Total commitments outstanding under the facility cannot exceed $225.0 million. On June 28, 2019, the company amended the credit facility to extend the existing maturity date from July 26, 2019 to June 28, 2022 and lower the maximum commitment from $125.0 million to $100.0 million. At June 30, 2019, the outstanding principal balance was $42.0 million on the facility and the interest rate was 6.76%.
Green Plains Grain has entered into short-term inventory financing agreements with a financial institution. The company has accounted for the agreements as short-term notes, rather than sales, and has elected the fair value option to offset fluctuations in market prices of the inventory. The company had no short-term notes payable related to these inventory financing agreements as of June 30, 2019.
Green Plains Trade has a $300.0 million senior secured asset-based revolving credit facility to finance working capital up to the maximum commitment based on eligible collateral, which matures in July of 2022. This facility can be increased by up to $70.0 million with agent approval. 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. At June 30, 2019,2020, the outstanding principal balance was $132.3$50.2 million on the facility and the interest rate was 4.69%2.42%.
Green Plains Grain has a $100.0 million senior secured asset-based revolving credit facility to finance working capital up to the maximum commitment based on eligible collateral, which matures in June of 2022. This facility can be increased by up to $75.0 million with agent approval and up to $50.0 million for seasonal borrowings. Total commitments outstanding under the facility cannot exceed $225.0 million. At June 30, 2020, the outstanding principal balance was $60.8 million on the facility and the interest rate was 3.31%.
Green Plains Grain has entered into short-term inventory financing agreements with a financial institution. At June 30, 2020, 2.3 million bushels of corn had been designated as collateral under these agreements at initial values totaling $9.0 million. The company has accounted for the agreements as short-term notes, rather than sales, and has elected the fair value option to offset fluctuations in market prices of the inventory. At June 30, 2020, the short-term notes payable were valued at $9.5 million and our interest rate was 3.04%.
Green Plains Commodity Management has an uncommitted $20.0$30.0 million revolving credit facility which matures April 30, 2023 to finance margins related to its hedging programs. Advances are subject to variable interest rates equal to LIBOR plus 1.75%. At June 30, 2019,2020, the outstanding principal balance was $14.5$10.9 million on the facility and the interest rate was 4.12%1.85%.
Food and Ingredients Segment
Green Plains Cattle has a $500.0 million senior secured asset-based revolving credit facility to finance working capital up to the maximum commitment based on eligible collateral, which matures in April of 2020. This facility can be increased by up to $100.0 million with agent approval and includes a swing-line sublimit of $20.0 million. At June 30, 2019, the outstanding principal balance was $334.7 million on the facility and our interest rate was 4.91%.
Advances under the revolving credit facility are subject to variable interest rates equal to LIBOR plus 2.0% to 3.0% or the base rate plus 1.0% to 2.0%, depending on the preceding three months’ excess borrowing availability. The unused portion of the credit facility is also subject to a commitment fee of 0.20% to 0.30% per annum, depending on the preceding three months’ excess borrowing availability. Interest is payable as required, but not less than quarterly in arrears and principal is due upon maturity.
Partnership Segment
Green Plains Partners, through a wholly owned subsidiary, has a $200.0$135.0 million credit facility comprised of a $130.0 million term loan and a $5.0 million revolving credit facility which matures on July 1, 2020, to fund working capital, acquisitions, distributions, capital expenditures and other general partnership purposes. The credit facility can be increased by an additional $20.0was amended on June 4, 2020, decreasing the total amount available from $200.0 million without the consent of the lenders.to $135.0 million. The amended credit facility matures on December 31, 2021. At June 30, 2019,2020, the outstanding principal balance of the facility was $132.2$130.0 million, with $5.0 million available on the revolver, and ouran interest rate was 5.41%6.25%.
In certain situations we are required to make prepayments on the outstanding principal balance on the credit facility. If at any time our cash balance exceeds $2.5 million for more than five consecutive business days, prepayments of outstanding principal are required in an amount equal to the excess cash. We are also required to prepay outstanding principal on the credit facility with 100% of net cash proceeds from any asset disposition or recovery event. Any prepayments on the term loan are applied to the remaining principal balance in inverse order of maturity, including the final payment.
We use LIBOR as a reference rate for our credit facility. LIBOR is set to be phased out at the end of 2021. It is unclear if LIBOR will cease to exist at that time or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. We may need to amend our credit facility to determine the interest rate to replace LIBOR with the new standard that is established. The potential effect of any such event on interest expense cannot yet be determined.
Contractual Obligations
Contractual obligations as of June 30, 2019,2020 were as follows (in thousands):
Payments Due By Period | Payments Due By Period | |||||||||||||||||||||||||||
Contractual Obligations | Total | Less Than | 1-3 Years | 3-5 Years | More Than | Total | Less Than | 1-3 Years | 3-5 Years | More Than | ||||||||||||||||||
Long-term and short-term debt obligations (1) | $ | 956,081 | $ | 524,754 | $ | 134,285 | $ | 171,997 | $ | 125,045 | $ | 562,577 | $ | 168,072 | $ | 264,347 | $ | 115,653 | $ | 14,505 | ||||||||
Interest and fees on debt obligations (2) | 90,326 | 45,965 | 24,776 | 11,820 | 7,765 | 58,718 | 23,125 | 22,411 | 6,687 | 6,495 | ||||||||||||||||||
Operating lease obligations (3) | 73,884 | 19,224 | 23,495 | 10,675 | 20,490 | 76,669 | 17,885 | 22,857 | 12,440 | 23,487 | ||||||||||||||||||
Other | 20,799 | 2,849 | 7,251 | 2,351 | 8,348 | 10,618 | 2,232 | 6,631 | 604 | 1,151 | ||||||||||||||||||
Purchase obligations: | ||||||||||||||||||||||||||||
Forward grain purchase contracts (4) | 291,754 | 288,150 | 2,187 | 1,417 | - | 72,555 | 70,160 | 2,000 | 395 | - | ||||||||||||||||||
Other commodity purchase contracts (5) | 142,160 | 132,752 | 8,348 | 1,060 | - | 85,814 | 67,302 | 18,397 | 115 | - | ||||||||||||||||||
Other | 41 | 41 | - | - | - | 391 | 199 | 192 | - | - | ||||||||||||||||||
Total contractual obligations | $ | 1,575,045 | $ | 1,013,735 | $ | 200,342 | $ | 199,320 | $ | 161,648 | $ | 867,342 | $ | 348,975 | $ | 336,835 | $ | 135,894 | $ | 45,638 | ||||||||
(1)Includes the current portion of long-term debt and future finance lease obligations and excludes the effect of any debt discounts and issuance costs.
(2)Interest amounts are calculated over the terms of the loans using current interest rates, assuming scheduled principal and interest amounts are paid pursuant to the debt agreements. Includes administrative and/or commitment fees on debt obligations.
(3)Operating lease costs are primarily for railcars and office space.
(4)Purchase contracts represent index-priced and fixed-price contracts. Index purchase contracts are valued at current quarter-end prices.
(5)Includes fixed-price ethanol, dried distillers grains and natural gas purchase contracts.
Critical Accounting Policies and Estimates
Key accounting policies, including those relating to revenue recognition, depreciation of property and equipment, carrying value of intangible assets, impairment of long-lived assets and goodwill, derivative financial instruments, and accounting for income taxes, are impacted significantly by judgments, assumptions and estimates used in the preparation of the consolidated financial statements. Information about our critical accounting policies and estimates are included in our annual report on Form 10-K for the year ended December 31, 2018.2019.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We use various financial instruments to manage and reduce our exposure to various market risks, including changes in commodity prices and interest rates. We conduct all of our business in U.S. dollars and are not currently exposed to foreign currency risk.
Interest Rate Risk
We are exposed to interest rate risk through our loans which bear interest at variable rates. Interest rates on our variable-rate debt are based on the market rate for the lender’s prime rate or LIBOR. A 10% increase in interest rates would affect our interest cost by approximately $3.3$1.0 million per year. At June 30, 2019,2020, we had $895.6$509.3 million in debt, $655.7$258.3 million of which had variable interest rates.
For additional information related to our debt, see Note 89 – Debt included as part of the notes to consolidated financial statements and Note 12 – Debt included as part of the notes to consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2018.2019.
Commodity Price Risk
Our business is highly sensitive to commodity price risk, particularly for ethanol, corn, distillers grains, corn oil and natural gas, and cattle.gas. Ethanol prices are sensitive to world crude oil supply and demand, the price of crude oil, gasoline and corn,
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the price of substitute fuels, refining capacity and utilization, government regulation and consumer demand for alternative fuels. Corn prices are affected by weather conditions, yield, changes in domestic and global supply and demand, and government
programs and policies. Distillers grains prices are impacted by livestock numbers on feed, prices for feed alternatives and supply, which is associated with ethanol plant production. Natural gas prices are influenced by severe weather in the summer and winter and hurricanes in the spring, summer and fall. Other factors include North American energy exploration and production, and the amount of natural gas in underground storage during injection and withdrawal seasons. Cattle prices are impacted by weather conditions, overall economic conditions and government regulations and packer processing disruptions.
To reduce the risk associated with fluctuations in the price of ethanol, corn, distillers grains, corn oil, and natural gas, and cattle, at times we use forward fixed-price physical contracts and derivative financial instruments, such as futures and options executed on the Chicago Board of Trade, the New York Mercantile Exchange and the Chicago Mercantile Exchange. We focus on locking in favorable operating margins, when available, using a model that continually monitors market prices for corn, natural gas and other inputs relative to the price for ethanol and distillers grains at each of our production facilities. We create offsetting positions using a combination of forward fixed-price purchases, sales contracts and derivative financial instruments. As a result, we frequently have gains on derivative financial instruments that are offset by losses on forward fixed-price physical contracts or inventories and vice versa. Our results are impacted by a mismatch of gains or losses associated with the derivative instrument during a reporting period when the physical commodity purchases or sale has not yet occurred. During the three and six months ended June 30, 2019,2020, revenues included net losses of $11.7$15.6 million and $40.4net gains $38.6 million, respectively, and cost of goods sold included net lossesgains of $8.5$9.7 million and $4.7$12.2 million, respectively, associated with derivative financial instruments.
Ethanol Production Segment
In the ethanol production segment, net gains and losses from settled derivative instruments are offset by physical commodity purchases or sales to achieve the intended operating margins. To reduce commodity price risk caused by market fluctuations, we enter into exchange-traded futures and options contracts that serve as economic hedges.
Our exposure to market risk, which includes the impact of our risk management activities resulting from our fixed-price purchase and sale contracts and derivatives, is based on the estimated net income effect resulting from a hypothetical 10% change in price for the next 12 months starting on June 30, 2019,2020, which is as follows (in thousands):
Commodity | Estimated Total Volume | Unit of | Net Income Effect of | Estimated Total Volume | Unit of | Net Income Effect of | ||||||||
Ethanol | 1,123,000 | Gallons | $ | 129,109 | 1,123,000 | Gallons | $ | 101,107 | ||||||
Corn | 387,000 | Bushels | $ | 129,632 | 387,000 | Bushels | $ | 95,200 | ||||||
Distillers grains | 2,900 | Tons (2) | $ | 29,573 | 2,900 | Tons (2) | $ | 25,902 | ||||||
Corn oil | 292,000 | Pounds | $ | 5,117 | 292,000 | Pounds | $ | 5,628 | ||||||
Natural gas | 31,200 | MmBTU | $ | 4,341 | 31,200 | MmBTU | $ | 5,051 | ||||||
(1) Estimated volumes assume production at full capacity.
(2) Distillers grains quantities are stated on an equivalent dried ton basis.
Agribusiness and Energy Services Segment
In the agribusiness and energy services segment, our inventories, physical purchase and sale contracts and derivatives are marked to market. To reduce commodity price risk caused by market fluctuations for purchase and sale commitments of grain and grain held in inventory, we enter into exchange-traded futures and options contracts that serve as economic hedges.
The market value of exchange-traded futures and options used for hedging are highly correlated with the underlying market value of grain inventories and related purchase and sale contracts for grain. The less correlated portion of inventory and purchase and sale contract market values, known as basis, is much less volatile than the overall market value of exchange-traded futures and tends to follow historical patterns. We manage this less volatile risk by constantly monitoring our position relative to the price changes in the market. Inventory values are affected by the month-to-month spread in the futures markets. These spreads are also less volatile than overall market value of our inventory and tend to follow historical patterns, but cannot be mitigated directly. Our accounting policy for futures and options, as well as the underlying inventory
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held for sale and purchase and sale contracts, is to reflect their current market values and include gains and losses in the consolidated statement of operations.
Our daily net commodity position consists of inventories related to purchase and sale contracts and exchange-traded contracts. The fair value of our position was approximately $0.7 million for grain at June 30, 2019. Our market risk at that date, based on the estimated net income effect resulting from a hypothetical 10% change in price, was approximately $50 thousand.
Food and Ingredients SegmentTable of Contents
In the food and ingredients segment, our physical cattle purchase and sale contracts and derivatives are marked to market. To reduce commodity price risk caused by market fluctuations for purchase and sale commitments of cattle, we enter into exchange-traded futures and options contracts that serve as hedges.
The market value of exchange-traded futures and options used for hedging are highly correlated with the underlying market value of purchase and sale contracts for cattle. The less correlated portion of inventory and purchase and sale contract market values, known as basis, is much less volatile than the overall market value of exchange-traded futures and tends to follow historical patterns. We manage this less volatile risk by constantly monitoring our position relative to the price changes in the market. Inventory values are affected by the month-to-month spread in the futures markets. These spreads are also less volatile than overall market value of our inventory and tend to follow historical patterns, but cannot be mitigated directly. Our accounting policy for futures and options, as well as the underlying inventory held for sale and purchase and sale contracts, is to reflect their current market values and include gains and losses in the consolidated statement of operations.
Our daily net commodity position consists of inventories related to purchase and sale contracts and exchange-traded contracts. The fair value of our position was approximately $6.7$0.5 million for cattlegrain at June 30, 2019.2020. Our market risk at that date, based on the estimatedestimated net income effect resulting from a hypothetical 10% change in price, was approximately $0.5 million.
Our daily net commodity position consists of inventories related to purchase and sale contracts and exchange-traded contracts. The fair value of our position was approximately $13.3 million for grain and other cattle feed at June 30, 2019. Our market risk at that date, based on the estimated net income effect resulting from a hypothetical 10% change in price, was approximately $1.0 million.$37 thousand.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure information that must be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, as appropriate, to allow timely decisions regarding required financial disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Under the supervision and participation of our chief executive officer and chief financial officer, management carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2019,2020 as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act and concluded that our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
Management is responsible for establishing and maintaining effective internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our consolidated financial statements for external purposes in accordance with U.S. generally accepted accounting principles. There were no material changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
We are currently involved in litigation that has arisen during the ordinary course of business. We do not believe this litigation will have a material adverse effect on our financial position, results of operations or cash flows.
Item 1A. Risk Factors.
Investors should carefully consider the discussion of risks and the other information in our annual report on Form 10-K for the year ended December 31, 2018,2019, in Part I, Item 1A, “Risk Factors,” and the discussion of risks and other information in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under “Cautionary Information Regarding Forward-Looking Statements,” of this report. Investors should also carefully consider the discussion of risks with the partnership under the heading “Risk Factors” and other information in their annual report on Form 10-K for the year ended December 31, 2018.2019. Although we have attempted to discuss key factors, our investors need to be aware that other risks may prove to be important in the future. New risks may emerge at any time and we cannot predict such risks or estimate the extent to which they may affect our financial performance. The following risk factors supplement and/or updatesupdate risk factors previously disclosed and should be considered in conjunction with the other information included in, or incorporated by reference in, this quarterly report on Form 10-Q.
Our risk management and commodity trading 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, and live cattle or buy some of the corn, natural gas, or feeder cattle we need to partially offset commodity price volatility. We also engage in other hedging transactions and other commodity trading involving exchange-traded futures contracts for corn, natural gas, cattle and ethanol and other agricultural commodities. The financial impact of these activities depends on the price of the commodities involved and/or 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, natural gas and feeder cattle and an increased cash price for ethanol, distillers grains, live cattle 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 and commodity trading strategies and decisions will be profitable or effectively offset commodity price volatility. If they are not our results of operations and financial positionbusiness 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 inimpacted by the future.recent COVID-19 outbreak.
The interest rates under our revolving credit facility may be impactedoutbreak of the coronavirus, or COVID-19, which has been declared by the phase-outWorld Health Organization to be a pandemic, has spread across the globe and continues to impact worldwide economic activity. COVID-19 poses a risk on all aspects of LIBOR.our business, including how it will impact our employees, customers, vendors, and business partners. We are unable to predict the impact that COVID-19 will have on our future financial position and operating results, due to numerous uncertainties. These uncertainties include, but are not limited to:
the severity of the virus;
the duration of the outbreak;
federal, state or local governmental regulations or other actions which could include limitations on our operations;
the effect on customer demand resulting in a decline in the demand for our products;
impacts on our supply chain and potential limitations of supply of our feedstocks;
interruptions of our distribution systems and delays in the delivery of our products;
the closure or extended shutdown of one or more major cattle packing plants, leading to depressed cattle prices or the inability in extreme cases to process such cattle;
the health of our workforce, and our ability to meet staffing needs which is vital to our operations; and
volatility in the credit and financial markets.
LIBOR isThe COVID-19 pandemic and related economic repercussions have created significant volatility, uncertainty, and turmoil in the basic rate of interest widely usedenergy industry. We are unable to predict the overall impact these events will have on our future financial position and operations.
We continue to actively manage our response in collaboration with customers, government officials, team members and business partners and assessing potential impacts to our future financial position and operating results, as a reference for setting the interest rates on loans globally. We use LIBORwell as a reference rate foradverse developments in our revolving credit facilities. In 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021.business. It is unclear if LIBOR will cease to exist at that time or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S. dollar LIBOR with a new index, the Secured Overnight Financing Rate (“SOFR”), calculated using short-term repurchase agreements backed by Treasury securities. We are evaluating the potential impact of the eventual replacement of the LIBOR benchmark interest rate, however, we are not ablepossible for us to predict whether LIBORthere will ceasebe additional government-mandated shelter-in-place and similar government orders that could affect our business, how long the existing orders will remain in place, and how these measures will impact our operations.
The ability or willingness of OPEC and other oil exporting nations to set and maintain production levels has a significant impact on oil and natural gas commodity prices.
The Organization of Petroleum Exporting Countries and their allies (collectively, OPEC+), is an intergovernmental organization that seeks to manage the price and supply of oil on the global energy market. Actions taken by OPEC+ members, including those taken alongside other oil exporting nations, have a significant impact on global oil supply and pricing. For example, OPEC+ and certain other oil exporting nations have previously agreed to take measures, including production cuts, to support crude oil prices. In March 2020, members of OPEC+ considered extending and potentially increasing these oil production cuts, however these negotiations were unsuccessful. As a result, Saudi Arabia announced an immediate reduction in export prices and Russia announced that all previously agreed oil production cuts will expire on April 1, 2020. These actions led to an immediate and steep decrease in oil prices. There can be no assurance that OPEC+ members and other oil exporting nations will agree to future production cuts or other actions to support and stabilize oil prices, nor can there be any assurance that they will not further reduce oil prices or increase production. Uncertainty regarding future actions to be available after 2021, whether SOFR will become a widely accepted benchmarktaken by OPEC+ members or other oil exporting countries could lead to increased volatility in placethe price of LIBOR, or what the impact of such a possible transition to SOFR may be onoil, which could adversely affect our business, future financial condition and results of operations.
Future demand for ethanol is uncertain and changes in federal mandates, 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 fuels and depletes water resources. While we do not agree, 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 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, and contributes to land use change domestically and abroad.
There are limited markets for ethanol beyond the federal mandates. We believe 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, and availability to consumers. 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. Miles traveled typically increases during the spring and summer months related to vacation travel, followed closely behind the fall season due to holiday travel. Global events, such as COVID-19, have greatly decreased miles traveled and in turn, the demand for ethanol. 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 ethanol, which has been the case for some time, could continue to negatively impact our business. Reduced demand for ethanol may depress the value of our products, erode its margins, and reduce our ability to generate revenue or operate profitably.
Our insurance policies do not cover all losses, costs or liabilities that we may experience, and insurance companies that currently insure companies in the energy industry may cease to do so or substantially increase premiums.
We are insured under property, liability and business interruption policies, subject to the deductibles and limits under those policies. We have acquired insurance that we believe to be adequate to prevent loss from material foreseeable risks. However, events may occur for which no insurance is available or for which insurance is not available on terms that are acceptable. Loss from an event, such as, but not limited to war, riots, pandemics, terrorism or other risks, may not be insured and such a loss may have a material adverse effect on our operations, cash flows and financial position.
Certain of our ethanol production plants and our related storage tanks, as well as certain of our fuel terminal facilities are located within recognized seismic and flood zones. We believe that the design of these facilities have been modified to fortify them to meet structural requirements for those regions of the country. We have also obtained additional insurance coverage specific to earthquake and flood risks for the applicable plants and fuel terminals. However, there is no assurance that any such facility would remain in operation if a seismic or flood event were to occur.
Additionally, our ability to obtain and maintain adequate insurance may be adversely affected by conditions in the insurance market over which we have no control. In addition, if we experience insurable events, our annual premiums could increase further or insurance may not be available at all. If significant changes in the number or financial solvency of insurance underwriters for the ethanol industry occur, we may be unable to obtain and maintain adequate insurance at a
reasonable cost. We cannot assure our unitholders that we will be able to renew our insurance coverage on acceptable terms, if at all, or that we will be able to arrange for adequate alternative coverage in the event of non-renewal. The occurrence of an event that is not fully covered by insurance, the failure by one or more insurers to honor its commitments for an insured event or the loss of insurance coverage could have a material adverse effect on our financial condition, results of operations, cash flows and ability of the partnership to make distributions to its unitholders.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Employees surrender shares when restricted stock grants are vested to satisfy statutory minimum required payroll tax withholding obligations.
The following table lists the shares that were surrendered during the second quarter of 2019:2020:
Period | Total Number of | Average Price | Total Number of | Average Price | ||||||
April 1 - April 30 | - | $ | - | - | $ | - | ||||
May 1 - May 31 | 6,750 | 16.17 | 9,523 | 7.13 | ||||||
June 1 - June 30 | - | - | - | - | ||||||
Total | 6,750 | $ | 16.17 | 9,523 | $ | 7.13 | ||||
In August 2014, we announcedOur board of directors authorized a share repurchase program of up to $100$200 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.
The following table lists the We did not repurchase any shares repurchased under the share repurchase program during the second quarter of 2019.
Period | Number of | Average Price | Total Number of Shares | Approximate Dollar Value of | ||||||
April 1 - April 30 | - | $ | - | 1,119,349 | $ | 80,290 | ||||
May 1 - May 31 | - | - | 1,119,349 | 80,290 | ||||||
June 1 - June 30 | 3,197,277 | 12.47 | 4,316,626 | 40,420 | ||||||
Total | 3,197,277 | $ | 12.47 | 4,316,626 | $ | 40,420 | ||||
2020. Since inception, the company has repurchased 4,316,6267,396,936 shares of common stock for approximately $59.6$92.8 million under the program.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
Exhibit Index
Exhibit No. | Description of Exhibit |
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31.1 | |
31.2 | |
32.1 | |
32.2 | |
101 | The following information from Green Plains Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, |
104 | The cover page from Green Plains Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| GREEN PLAINS INC. (Registrant) By: /s/ Todd A. Becker _ Todd A. Becker (Principal Executive Officer) |
| By: /s/ G. Patrich Simpkins Jr. _ G. Patrich Simpkins Jr. (Principal Financial Officer) |