extr
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 March 31,September 30, 2020
Commission File Number 001-37469
Green Plains PARTNERS LP
(Exact name of registrant as specified in its charter)
Delaware | 47-3822258 |
(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(s) | Name of each exchange on which registered |
Common Units, Representing Limited Partner Interests | GPP | 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 ¨ 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 o | Accelerated Filer x |
Non-Accelerated Filer ¨ | |
Smaller Reporting Company o | Emerging Growth Company x |
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. x
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 registrant had 23,160,55123,208,171 common units outstanding as of May 1,November 2, 2020.
TABLE OF CONTENTS
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PART I – FINANCIAL INFORMATION | ||
Commonly Used Defined Terms | 3 | |
Item 1. | 4 | |
4 | ||
5 | ||
6 | ||
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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 Partners LP, Subsidiaries, and Partners:
z | |
Green Plains Operating Company | Green Plains Operating Company LLC |
Green Plains Partners; the partnership | Green Plains Partners LP and its subsidiaries |
NLR | NLR Energy Logistics LLC |
Green Plains Inc. and Subsidiaries:
Green Plains; the parent or sponsor | Green Plains Inc. and its subsidiaries |
Green Plains Holdings, the general partner | Green Plains Holdings LLC |
Green Plains Trade | Green Plains Trade Group LLC |
Other Defined Terms:
2019 annual report | The partnership’s annual report on Form 10-K for the year ended December 31, 2019, filed February 20, 2020 |
ARO | Asset retirement obligation |
ASC | Accounting Standards Codification |
Bgy | Billion gallons per year |
CAFE | Corporate Average Fuel Economy |
CAMEX | Brazil Chamber of Foreign Trade |
Conflicts committee | The partnership’s committee responsible for reviewing situations involving certain transactions with affiliates or other potential conflicts of interest |
COVID-19 | Coronavirus Disease 2019 |
D.C. | District of Columbia |
DOE | Department of Energy |
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 |
EBITDA | Earnings before interest, taxes, depreciation and amortization |
EIA | U.S. Energy Information Administration |
EPA | U.S. Environmental Protection Agency |
Exchange Act | Securities Exchange Act of 1934, as amended |
FASB | Financial Accounting Standards Board |
GAAP | U.S. Generally Accepted Accounting Principles |
GATT | General Agreement on Tariffs and Trade |
LIBOR | London Interbank Offered Rate |
LTIP | Green Plains Partners LP 2015 Long-Term Incentive Plan |
Mmg | Million gallons |
MTBE | Methyl tertiary-butyl ether |
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Partnership agreement | First Amended and Restated Agreement of Limited Partnership of Green Plains Partners LP, dated as of July 1, 2015, between Green Plains Holdings LLC and Green Plains Inc. |
PCAOB | Public Company Accounting Oversight Board |
RFS II | Renewable Fuels Standard II |
RIN | Renewable identification number |
RVO | Renewable volume obligation |
SEC | Securities and Exchange Commission |
SRE | Small refinery exemption |
USDA | U.S. Department of Agriculture |
WTO | World Trade Organization |
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
GREEN PLAINS PARTNERS LP
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit amounts)
March 31, 2020 | December 31, 2019 | September 30, 2020 | December 31, 2019 | |||||||||
(unaudited) | (unaudited) | |||||||||||
ASSETS | ASSETS | ASSETS | ||||||||||
Current assets | ||||||||||||
Cash and cash equivalents | $ | 264 | $ | 261 | $ | 75 | $ | 261 | ||||
Accounts receivable | 652 | 985 | 156 | 985 | ||||||||
Accounts receivable from affiliates | 15,440 | 15,666 | 16,616 | 15,666 | ||||||||
Prepaid expenses and other | 473 | 517 | 1,098 | 517 | ||||||||
Total current assets | 16,829 | 17,429 | 17,945 | 17,429 | ||||||||
Property and equipment, net of accumulated depreciation and amortization of $32,937 and $31,976, respectively | 36,805 | 37,355 | ||||||||||
Property and equipment, net of accumulated depreciation and amortization of $34,751 and $31,976, respectively | 35,186 | 37,355 | ||||||||||
Operating lease right-of-use assets | 37,385 | 35,456 | 36,330 | 35,456 | ||||||||
Goodwill | 10,598 | 10,598 | 10,598 | 10,598 | ||||||||
Investment in equity method investee | 4,487 | 4,329 | 3,817 | 4,329 | ||||||||
Other assets | 304 | 486 | 15 | 486 | ||||||||
Total assets | $ | 106,408 | $ | 105,653 | $ | 103,891 | $ | 105,653 | ||||
LIABILITIES AND PARTNERS' DEFICIT | LIABILITIES AND PARTNERS' DEFICIT | LIABILITIES AND PARTNERS' DEFICIT | ||||||||||
Current liabilities | ||||||||||||
Accounts payable | $ | 6,846 | $ | 5,050 | $ | 4,512 | $ | 5,050 | ||||
Accounts payable to affiliates | 460 | 543 | 383 | 543 | ||||||||
Accrued and other liabilities | 3,801 | 4,461 | 3,759 | 4,461 | ||||||||
Asset retirement obligations | 819 | 565 | 932 | 565 | ||||||||
Operating lease current liabilities | 12,899 | 13,093 | 11,360 | 13,093 | ||||||||
Current maturities of long-term debt | 130,200 | 132,100 | 34,035 | 132,100 | ||||||||
Total current liabilities | 155,025 | 155,812 | 54,981 | 155,812 | ||||||||
Long-term debt | 81,356 | - | ||||||||||
Asset retirement obligations | 2,654 | 2,500 | 2,770 | 2,500 | ||||||||
Operating lease long-term liabilities | 25,308 | 23,088 | 26,384 | 23,088 | ||||||||
Total liabilities | 182,987 | 181,400 | 165,491 | 181,400 | ||||||||
Commitments and contingencies (Note 10) |
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Partners' deficit | ||||||||||||
Common unitholders - public (11,574,003 units issued and outstanding) | 113,665 | 114,006 | ||||||||||
Common unitholders - public (11,621,623 and 11,574,003 units issued and outstanding, respectively) | 121,087 | 114,006 | ||||||||||
Common unitholders - Green Plains (11,586,548 units issued and outstanding) | (188,724) | (188,304) | (181,470) | (188,304) | ||||||||
General partner interests | (1,520) | (1,449) | (1,217) | (1,449) | ||||||||
Total partners' deficit | (76,579) | (75,747) | (61,600) | (75,747) | ||||||||
Total liabilities and partners' deficit | $ | 106,408 | $ | 105,653 | $ | 103,891 | $ | 105,653 | ||||
See accompanying notes to the consolidated financial statements.
GREEN PLAINS PARTNERS LP
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in thousands, except per unit amounts)
Three Months Ended | Three Months Ended | Nine Months Ended | ||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2020 | 2019 | |||||||||||||
Revenues | ||||||||||||||||||
Affiliate | $ | 18,983 | $ | 18,782 | $ | 20,347 | $ | 18,836 | $ | 58,327 | $ | 56,751 | ||||||
Non-affiliate | 1,288 | 2,305 | 1,035 | 1,318 | 3,707 | 5,315 | ||||||||||||
Total revenues | 20,271 | 21,087 | 21,382 | 20,154 | 62,034 | 62,066 | ||||||||||||
Operating expenses | ||||||||||||||||||
Operations and maintenance (excluding depreciation and amortization reflected below) | 6,160 | 6,865 | 6,647 | 6,216 | 19,410 | 19,314 | ||||||||||||
General and administrative | 1,044 | 1,117 | 1,116 | 949 | 3,038 | 3,054 | ||||||||||||
Depreciation and amortization | 961 | 985 | 940 | 991 | 2,867 | 2,747 | ||||||||||||
Total operating expenses | 8,165 | 8,967 | 8,703 | 8,156 | 25,315 | 25,115 | ||||||||||||
Operating income | 12,106 | 12,120 | 12,679 | 11,998 | 36,719 | 36,951 | ||||||||||||
Other income (expense) | ||||||||||||||||||
Interest income | - | 20 | - | 21 | - | 61 | ||||||||||||
Interest expense | (1,864) | (2,055) | (2,498) | (2,103) | (6,182) | (6,324) | ||||||||||||
Other | - | 88 | - | 15 | ||||||||||||||
Total other expense | (1,864) | (2,035) | (2,498) | (1,994) | (6,182) | (6,248) | ||||||||||||
Income before income taxes and income from equity method investee | 10,242 | 10,085 | 10,181 | 10,004 | 30,537 | 30,703 | ||||||||||||
Income tax expense | (31) | (52) | (30) | (45) | (166) | (144) | ||||||||||||
Income from equity method investee | 158 | 215 | 155 | 173 | 488 | 530 | ||||||||||||
Net income | $ | 10,369 | $ | 10,248 | $ | 10,306 | $ | 10,132 | $ | 30,859 | $ | 31,089 | ||||||
Net income attributable to partners' ownership interests: | ||||||||||||||||||
General partner | $ | 207 | $ | 205 | $ | 206 | $ | 203 | $ | 617 | $ | 621 | ||||||
Limited partners - common unitholders | 10,162 | 10,043 | 10,100 | 9,929 | 30,242 | 30,468 | ||||||||||||
Earnings per limited partner unit (basic and diluted): | ||||||||||||||||||
Common units | $ | 0.44 | $ | 0.43 | $ | 0.44 | $ | 0.43 | $ | 1.31 | $ | 1.32 | ||||||
Weighted average limited partner units outstanding (basic and diluted): | ||||||||||||||||||
Common units | 23,138 | 23,119 | 23,161 | 23,138 | 23,145 | 23,125 | ||||||||||||
See accompanying notes to the consolidated financial statements.
GREEN PLAINS PARTNERS LP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
Three Months Ended | Nine Months Ended | |||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||
Cash flows from operating activities: | ||||||||||||
Net income | $ | 10,369 | $ | 10,248 | $ | 30,859 | $ | 31,089 | ||||
Adjustments to reconcile net income to net cash | ||||||||||||
Depreciation and amortization | 961 | 985 | 2,867 | 2,747 | ||||||||
Accretion | 62 | 59 | 195 | 178 | ||||||||
Amortization of debt issuance costs | 233 | 204 | 1,125 | 610 | ||||||||
Gain on the disposal of assets | - | (14) | ||||||||||
Unit-based compensation | 79 | 79 | 239 | 239 | ||||||||
Income from equity method investee | (158) | (215) | (488) | (530) | ||||||||
Distribution from equity method investee | 1,000 | - | ||||||||||
Other | - | (22) | 75 | (19) | ||||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts receivable | 333 | (817) | 829 | 763 | ||||||||
Accounts receivable from affiliates | 226 | (4,749) | (950) | (3,415) | ||||||||
Prepaid expenses and other assets | 44 | 23 | (581) | (31) | ||||||||
Accounts payable and accrued liabilities | 1,093 | 4,238 | (1,435) | 4,882 | ||||||||
Accounts payable to affiliates | (83) | (159) | (160) | (276) | ||||||||
Operating lease liabilities and right-of-use assets | 97 | 119 | 689 | (97) | ||||||||
Other | 5 | 11 | 13 | 33 | ||||||||
Net cash provided by operating activities | 13,261 | 10,004 | 34,277 | 36,159 | ||||||||
Cash flows from investing activities: | ||||||||||||
Purchases of property and equipment | (22) | - | (117) | (62) | ||||||||
Net cash used in investing activities | (22) | - | ||||||||||
Proceeds from the disposal of property and equipment | - | 136 | ||||||||||
Net cash provided by (used in) investing activities | (117) | 74 | ||||||||||
Cash flows from financing activities: | ||||||||||||
Payments of distributions | (11,280) | (11,269) | (16,958) | (33,818) | ||||||||
Proceeds from revolving credit facility | 22,200 | 30,600 | 43,100 | 65,100 | ||||||||
Payments on revolving credit facility | (24,100) | (29,600) | (47,500) | (67,100) | ||||||||
Proceeds from issuance of long-term debt | 3,000 | - | ||||||||||
Principal payments on long-term debt | (12,500) | - | ||||||||||
Payments of loan fees | (56) | - | (3,495) | - | ||||||||
Other | 7 | 6 | ||||||||||
Net cash used in financing activities | (13,236) | (10,269) | (34,346) | (35,812) | ||||||||
Net change in cash and cash equivalents | 3 | (265) | (186) | 421 | ||||||||
Cash and cash equivalents, beginning of period | 261 | 569 | 261 | 569 | ||||||||
Cash and cash equivalents, end of period | $ | 264 | $ | 304 | $ | 75 | $ | 990 | ||||
Supplemental disclosures of cash flow | ||||||||||||
Cash paid for income taxes | $ | 78 | $ | 126 | $ | 96 | $ | 203 | ||||
Cash paid for interest | $ | 1,537 | $ | 1,780 | $ | 4,780 | $ | 5,700 | ||||
Capital expenditures in accounts payable | $ | - | $ | 116 | ||||||||
See accompanying notes to the consolidated financial statements.
GREEN PLAINS PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
References to “the partnership” in the consolidated financial statements and notes to the consolidated financial statements refer to Green Plains Partners LP and its subsidiaries.
Green Plains Holdings LLC, a wholly owned subsidiary of Green Plains Inc., serves as the general partner of the partnership. References to (i) “the general partner” and “Green Plains Holdings” refer to Green Plains Holdings LLC; (ii) “the parent,” “the sponsor” and “Green Plains” refer to Green Plains Inc.; and (iii) “Green Plains Trade” refers to Green Plains Trade Group LLC, a wholly owned subsidiary of Green Plains.
Consolidated Financial Statements
The consolidated financial statements include the accounts of the partnership and its controlled subsidiaries. All significant intercompany balances and transactions are eliminated on a consolidated basis for reporting purposes. Results for the interim periods presented are not necessarily indicative of the expected results for the entire year.
The accompanying unaudited consolidated financial statements are prepared in accordance with GAAP for interim financial information and instructions to Form 10-Q and Article 10 of Regulation S-X. Because they do not include all of the information and footnotes required by GAAP, the consolidated financial statements should be read in conjunction with the partnership’s 2019 annual report on Form 10-K for the year ended December 31, 2019, as filed with the SEC on February 20, 2020.
The partnership accounts for its interest in joint ventures using the equity method of accounting, with its investment recorded at the acquisition cost plus the partnership’s share of equity in undistributed earnings or losses and reduced by the partnership’s share of equity in undistributed losses and distributions received.
Use of Estimates in the Preparation of Consolidated Financial Statements
Preparation of the consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and revenues and expenses during the reporting period. The partnership bases its estimates on historical experience and assumptions it believes are proper and reasonable under the circumstances. The partnership regularly evaluates the appropriateness of these estimates and assumptions. Actual results could differ from those estimates. Key accounting policies, including, but not limited to, those related to revenue recognition, depreciation of property and equipment, asset retirement obligations, operating leases, and impairment of long-lived assets and goodwill, are impacted significantly by judgments, assumptions and estimates used to prepare the consolidated financial statements.
Description of Business
The partnership provides fuel storage and transportation services by owning, operating, developing and acquiring ethanol and fuel storage terminals, transportation assets and other related assets and businesses. The partnership is its parent’s primary downstream logistics provider to support the parent’s approximately 1.1 bgy ethanol marketing and distribution business since the partnership’s assets are the principal method of storing and delivering the ethanol its parent produces. The ethanol produced by the parent is predominantly fuel grade, made principally from starch extracted from corn, and is primarily used for blending with gasoline. Ethanol currently comprises approximately 10% of the U.S. gasoline market and is an economical source of octane and oxygenates for blending into the fuel supply. The partnership does not take ownership of, or receive any payments based on the value of the ethanol, other fuels or products it handles. As a result, the partnership does not have any direct exposure to fluctuations in commodity prices.
Revenue Recognition
The partnership recognizes revenue when obligations under the terms of a contract with a customer are satisfied. Generally, this occurs with the completion of services or the transfer of control of products to the customer or another specified third party. Operating lease revenue related to minimum volume commitments is recognized on a straight-line basis over the term of the lease. Under the terms of the storage and throughput agreement with Green Plains Trade, 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.
The partnership generates a substantial portion of its revenues under fee-based commercial agreements with Green Plains Trade. Please refer to Note 2 - Revenue to the consolidated financial statements for further details.
Operations and Maintenance Expenses
The partnership’s operations and maintenance expenses consist primarily of lease expenses related to the transportation assets, labor expenses, outside contractor expenses, insurance premiums, repairs and maintenance expenses, and utility costs. These expenses also include fees for certain management, maintenance and operational services to support the storage and terminal facilities, trucks, and leased railcar fleet allocated by Green Plains under the operational services and secondment agreement.
Concentrations of Credit Risk
In the normal course of business, the partnership is exposed to credit risk resulting from the possibility a loss may occur due to failure of another party to perform according to the terms of their contract. The partnership provides fuel storage and transportation services for various parties with a significant portion of its revenues earned from Green Plains Trade. The partnership continually monitors its credit risk exposure and concentrations. Please refer to Note 2 – Revenue and Note 11 – Related Party Transactions to the consolidated financial statements for additional information.
Segment Reporting
The partnership accounts for segment reporting in accordance with ASC 280, Segment Reporting, which establishes standards for entities reporting information about the operating segments and geographic areas in which they operate. Management evaluated how its chief operating decision maker has organized the partnership for purposes of making operating decisions and assessing performance, and concluded it has 1 reportable segment.
Asset Retirement Obligations
The partnership records an ARO for the fair value of the estimated costs to retire a tangible long-lived asset in the period incurred if it can be reasonably estimated, which is subsequently adjusted for accretion expense. Corresponding asset retirement costs are capitalized as a long-lived asset and depreciated on a straight-line basis over the asset’s remaining useful life. The expected present value technique used to calculate the fair value of the AROs includes assumptions about costs, settlement dates, interest accretion, and inflation. Changes in assumptions, such as the amount or timing of estimated cash flows, could increase or decrease the AROs. The partnership’s AROs are based on legal obligations to perform remedial activity related to land, machinery and equipment when certain operating leases expire. Please refer to Note 5 – Asset Retirement Obligations to the consolidated financial statements for additional information.
Recent Accounting Pronouncements
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 LIBOR and other interbank offered rates to alternative reference rates. The expedients and exceptions 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. 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 partnership’s consolidated financial statements.
2. REVENUE
Revenue Recognition
The partnership recognizes revenue when obligations under the terms of a contract with a customer are satisfied. Generally, this occurs with the completion of services or the transfer of control of products to the customer or another specified third party. Revenue is measured as the amount of consideration expected to be received in exchange for providing services.
Revenue by Source
The following table disaggregates our revenue by major source for the three months ended March 31, 2020 and 2019 (in thousands):
Three Months Ended | Three Months Ended | Nine Months Ended | ||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2020 | 2019 | |||||||||||||
Revenues | ||||||||||||||||||
Service revenues | ||||||||||||||||||
Terminal services | $ | 2,085 | $ | 2,566 | $ | 2,047 | $ | 2,150 | $ | 6,147 | $ | 7,045 | ||||||
Trucking and other | 1,168 | 895 | 1,162 | 1,171 | 3,420 | 3,188 | ||||||||||||
Total service revenues | 3,253 | 3,461 | 3,209 | 3,321 | 9,567 | 10,233 | ||||||||||||
Leasing revenues (1) | ||||||||||||||||||
Storage and throughput services | 11,785 | 11,785 | 12,520 | 11,785 | 36,090 | 35,355 | ||||||||||||
Railcar transportation services | 5,124 | 5,619 | 5,538 | 5,005 | 16,036 | 16,129 | ||||||||||||
Terminal services | 109 | 222 | 115 | 43 | 341 | 349 | ||||||||||||
Total leasing revenues | 17,018 | 17,626 | 18,173 | 16,833 | 52,467 | 51,833 | ||||||||||||
Total revenues | $ | 20,271 | $ | 21,087 | $ | 21,382 | $ | 20,154 | $ | 62,034 | $ | 62,066 | ||||||
(1) Leasing revenues do not represent revenues recognized from contracts with customers under ASC 606, Revenue from Contracts with Customers, and are accounted for under ASC 842, Leases.
Terminal Services Revenue
The partnership provides terminal services and logistics solutions to Green Plains Trade, and other customers, through its fuel terminal facilities under various terminal service agreements, some of which have minimum volume commitments. Revenue generated by these terminals is disaggregated between service revenue and leasing revenue. If Green Plains, or other customers, fail to meet their minimum volume commitments during the applicable term, a deficiency payment equal to the deficient volume multiplied by the applicable fee will be charged. Deficiency payments related to the partnership’s terminal services revenue may not be utilized as credits toward future volumes. At terminals where customers have shared use of terminal and tank storage assets, revenue is generated from contracts with customers and accounted for as service revenue. This service revenue is recognized at the point in time when product is withdrawn from tank storage.
At terminals where a customer is predominantly provided exclusive use of the terminal or tank storage assets, the partnership is considered a lessor as part of an operating lease agreement. Revenue is recognized over the term of the lease based on the minimum volume commitment or total actual throughput if in excess of the minimum volume commitment.
Trucking and Other Revenue
The partnership transports ethanol, natural gasoline, other refined fuels and feedstocks by truck from identified receipt points to various delivery points. Trucking revenue is recognized over time based on the percentage of total miles traveled, which is on average less than 100 miles.
Railcar Transportation Services Revenue
Under the rail transportation services agreement, Green Plains Trade is obligated to use the partnership to transport ethanol and other fuels from receipt points identified by Green Plains Trade to nominated delivery points. Green Plains Trade is required to pay the partnership fees for the minimum railcar volumetric capacity provided, regardless of utilization of that capacity. However, Green Plains Trade is not charged for railcar volumetric capacity that is not available for use due to inspections, upgrades or routine repairs and maintenance. Revenue associated with the rail transportation services fee is considered leasing revenue and is recognized over the term of the lease based on the actual average daily railcar volumetric capacity provided. The partnership may also charge Green Plains Trade a related services fee for logistical operations management of railcar volumetric capacity utilized by Green Plains Trade which is not provided by the partnership. Revenue associated with the related services fee is also considered leasing revenue and recognized over the term of the lease based on the average volumetric capacity for which services are provided.
Storage and Throughput Revenue
The partnership generates leasing revenue from its storage and throughput agreement with Green Plains Trade based on contractual rates charged for the handling, storage and throughput of ethanol. Under this agreement, Green Plains Trade is required to pay the partnership a fee for a minimum volume commitment regardless of the actual volume delivered. If Green Plains Trade fails to meet its minimum volume commitment during any quarter, the partnership will charge Green Plains Trade a deficiency payment equal to the deficient volume multiplied by the applicable fee. The deficiency payment may be applied as a credit toward volumes delivered by Green Plains Trade in excess of the minimum volume commitment during the following four quarters, after which time any unused credits will expire. Revenue is recognized over the term of the lease based on the minimum volume commitment or total actual throughput if in excess of the minimum volume commitment and no deficiency related credits are available for use.
Payment Terms
The partnership has standard payment terms, which vary depending on the nature of the services provided, with the majority of terms falling within 10 to 30 days after transfer of control or completion of services. Contracts generally do not include a significant financing component in instances where the timing of revenue recognition differs from the timing of invoicing.
Major Customers
Revenue from Green Plains Trade Group was $19.0$20.3 million and $18.8$58.3 million for the three and nine months ended March 31,September 30, 2020, respectively, and $18.8 million and $56.8 million for the three and nine months ended September 30, 2019, respectively, which exceeds 10% of the partnership'spartnership’s total revenue.
Contract Liabilities
The partnership 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 service 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, and is generally recognized in the subsequent quarter.
The following table reflects the changes in our unearned revenue from service agreements, which is recorded in accrued and other liabilities on the consolidated balance sheets, for the three and nine months ended March 31,September 30, 2020 (in thousands):
Amount | |||
Balance at January 1, 2020 | $ | 230 | |
Revenue recognized included in beginning balance | (230) | ||
Net additions | 225 | ||
Balance at March 31, 2020 | 225 | ||
Revenue recognized included in beginning balance | (225) | ||
Net additions | 251 | ||
Balance at June 30, 2020 | 251 | ||
Revenue recognized included in beginning balance | (251) | ||
Net additions | 166 | ||
Balance at September 30, 2020 | $ |
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The partnership expects to recognize all of the unearned revenue associated with service agreements from contracts with customers as of March 31,September 30, 2020, in the subsequent quarter when the product is withdrawn from tank storage.
3. GOODWILL
The partnership currently has 1 reporting unit, BlendStar, to which goodwill is assigned. TDuring the first half of 2020, ahe decline in the partnership’s stock price causedresulted in a declinedecrease in the partnership’s market capitalization during the three months ended March 31, 2020.capitalization. As such, the partnership determined a triggering event had occurred that required an interim impairment assessment for its Blendstar reporting unit as offor both the three months ended March 31, 2020 as well as the three months ended June 30, 2020. Significant assumptions inherent in the valuation methodologies for goodwill impairment testing were employed and include, but are not limited to, market capitalization, prospective financial information, growth rates, discount rates, inflationary factors, and cost of capital. Based on the partnership’s quantitative evaluation, it was determined that the fair value of the Blendstar reporting unit exceeded its carrying value. As a result,value, and the partnership concluded that the goodwill assigned to the Blendstar reporting unit was not impaired, but could be at risk of future impairment. The partnership continues to believe that its long-term financial goals will be achieved. As a result ofDuring the analysis,three months ended September 30, 2020, the partnership did 0t record a goodwillnot identify any triggering events, and as such, 0 impairment charge as of March 31, 2020.assessment was deemed necessary.
4. DEBT
Revolving Credit Facility
Green Plains Operating Company 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 underThe credit facility was amended on June 4, 2020, decreasing the total amount available from $200.0 million to $135.0 million. The amended credit facility includes a $130.0 million term loan and a $5.0 million revolving credit facility maturing on December 31, 2021. The partnership made $12.5 million in principal payments on the term loan during the three and nine months ended September 30, 2020. Monthly principal payments of $2.5 million are required October 15, 2020 through April 15, 2021, with a step up to monthly payments of $3.2 million beginning May 15, 2021 through maturity.
In certain situations the partnership is required to make prepayments on the outstanding principal balance on the credit facility. If at any time subsequent to July 15, 2020, the partnership’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 excess cash. The partnership is 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. As of September 30, 2020, 0 prepayments on the term loan were required or paid.
The term loan balance, and any advances on the revolver, are subject to a floating interest rate based on a 1.00% Libor floor plus 4.50% to 5.25% dependent upon the preceding fiscal quarter’s consolidated leverage ratio. The unused portion of the revolver is subject to a commitment fee of 0.50%. The credit facility also allows for swing line loans subject to the revolver 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%3.50% to 2.00%, or LIBOR plus 2.25% to 3.00%. 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 September 30, 2020, the term loan had a balance of $117.5 million and an interest rate of 6.00%, and there was a swing line loan outstanding of $0.7 million at an interest rate of 7.25%.
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 restrictions 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 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 3.50x3.00x 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,1.10x, 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 is required to file a FormUnder the amended terms of Compliance Certificate attesting to its compliance under the revolving credit facility, each quarter by the earlier of 45 dayspartnership may make quarterly distribution payments in an aggregate amount not to exceed $0.12 per outstanding unit, so long as (i) no default has occurred and is continuing, or would result from the end of each such quarter or within 5 dayspayment of the SEC filing for such quarter ordistribution, and (ii) the partnership and its subsidiaries are in compliance with respect to each fiscal year, the earlier of 90 days from the end of such fiscal year or within 15 daysits financial covenants and remain in compliance after payment of the SEC filing for such fiscal year. As of March 31, 2020, the partnership was in full compliance with all covenants, and will report a consolidated leverage ratio of 2.47x and a consolidated interest coverage ratio of 6.49x.distribution.
The partnership had $130.2$118.2 million and $132.1 million of borrowings outstanding under the revolving credit facility as of March 31,September 30, 2020, and December 31, 2019, respectively. In addition, the partnership had $2.8 million of debt issuance costs recorded as a direct reduction of the carrying value of the partnership’s long-term debt as of September 30, 2020. The partnership believes the carrying amount of its debt approximated fair value at both March 31,September 30, 2020 and December 31, 2019.
The revolving credit facility, which is provided by a syndicate of financial institutions, will mature on July 1, 2020 unless extended by agreement of the lenders or replaced by another funding source. The partnership is currently working with its existing lender group to extend the credit facility. While the partnership has not formalized the credit facility or secured additional funding necessary to repay the loan, the partnership believes it is probable that it will source appropriate funding given the partnership’s consistent and stable fee-based cash flows, ongoing profitability, low debt leverage and history of obtaining financing on reasonable commercial terms. In the unlikely scenario that the partnership is unable to refinance its debt with the lenders, the partnership will consider other financing sources, including but not limited to, the restructuring or issuance of new debt with a different lending group, the issuance of additional common units, or other measures.
Covenant Compliance
The partnership, including all of its subsidiaries, was in compliance with its debt covenants as of March 31,September 30, 2020.
5. ASSET RETIREMENT OBLIGATIONS
Under various lease agreements, the partnership has AROs when certain machinery and equipment are disposed or operating leases expire. During the threenine months ended March 31,September 30, 2020, the partnership reassessed the estimated cost of AROs related to its railcar operating leases. The reassessment resulted in a change in estimated costs that has been reflected as an increase of $0.3 million to the AROsARO liabilities and corresponding long-lived assets on the consolidated balance sheet as of March 31,September 30, 2020.
The following table summarizes the change in the liability for the AROs during the three and nine months ended March 31,September 30, 2020 (in thousands):
Amount | |||
Balance at January 1, 2020 | $ | 3,065 | |
Additional asset retirement obligations incurred | 67 | ||
Liabilities settled | (44) | ||
Accretion expense | 62 | ||
Change in estimate | 323 | ||
Balance at March 31, 2020 |
| 3,473 | |
Additional asset retirement obligations incurred | 81 | ||
Liabilities settled | (9) | ||
Accretion expense | 65 | ||
Balance at June 30, 2020 | 3,610 | ||
Additional asset retirement obligations incurred | 110 | ||
Liabilities settled | (86) | ||
Accretion expense | 68 | ||
Balance at September 30, 2020 | $ | 3,702 | |
6. UNIT-BASED COMPENSATION
The partnership 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.
There was no change in the number ofThe non-vested unit-based awards duringactivity for the threenine months ended March 31, 2020.September 30, 2020, is as follows:
Non-Vested Units | Weighted-Average Grant-Date Fair Value | Weighted-Average Remaining Vesting Term | ||||
Non-vested at December 31, 2019 | 22,856 | $ | 14.00 | |||
Granted | 47,620 | 6.72 | ||||
Vested | (22,856) | 14.00 | ||||
Non-vested at September 30, 2020 | 47,620 | $ | 6.72 | 0.8 |
Compensation costs related to the unit-based awards of $79$81 thousand and $239 thousand were recognized during both the three and nine months ended March 31,September 30, 2020 and 2019.2019, respectively. As of March 31,September 30, 2020, there was $80$239 thousand of unrecognized compensation costs from unit-based compensation awards.
7. PARTNERS’ DEFICIT
Changes in partners’ deficit are as follows (in thousands):
Limited Partners | Limited Partners | |||||||||||||||||||||||
Common Units- | Common Units- | General Partner | Total | Common Units- | Common Units- | General Partner | Total | |||||||||||||||||
Balance, December 31, 2019 | $ | 114,006 | $ | (188,304) | $ | (1,449) | $ | (75,747) | $ | 114,006 | $ | (188,304) | $ | (1,449) | $ | (75,747) | ||||||||
Quarterly cash distributions to unitholders ($0.475 per unit) | (5,498) | (5,504) | (278) | (11,280) | (5,498) | (5,504) | (278) | (11,280) | ||||||||||||||||
Net income | 5,078 | 5,084 | 207 | 10,369 | 5,078 | 5,084 | 207 | 10,369 | ||||||||||||||||
Unit-based compensation, including general partner net contributions | 79 | - | - | 79 | 79 | - | - | 79 | ||||||||||||||||
Balance, March 31, 2020 | $ | 113,665 | $ | (188,724) | $ | (1,520) | $ | (76,579) | 113,665 | (188,724) | (1,520) | (76,579) | ||||||||||||
Quarterly cash distributions to unitholders ($0.12 per unit) | (1,389) | (1,390) | (57) | (2,836) | ||||||||||||||||||||
Net income | 4,987 | 4,993 | 204 | 10,184 | ||||||||||||||||||||
Unit-based compensation, including general partner net contributions | 79 | - | - | 79 | ||||||||||||||||||||
Balance, June 30, 2020 | 117,342 | (185,121) | (1,373) | (69,152) | ||||||||||||||||||||
Quarterly cash distributions to unitholders ($0.12 per unit) | (1,394) | (1,391) | (57) | (2,842) | ||||||||||||||||||||
Net income | 5,058 | 5,042 | 206 | 10,306 | ||||||||||||||||||||
Unit-based compensation, including general partner net contributions | 81 | - | 7 | 88 | ||||||||||||||||||||
Balance, September 30, 2020 | $ | 121,087 | $ | (181,470) | $ | (1,217) | $ | (61,600) | ||||||||||||||||
Limited Partners | Limited Partners | |||||||||||||||||||||||
Common Units- | Common Units- | General Partner | Total | Common Units- | Common Units- | General Partner | Total | |||||||||||||||||
Balance, December 31, 2018 | $ | 115,352 | $ | (186,635) | $ | (1,171) | $ | (72,454) | $ | 115,352 | $ | (186,635) | $ | (1,171) | $ | (72,454) | ||||||||
Quarterly cash distributions to unitholders ($0.475 per unit) | (5,487) | (5,504) | (278) | (11,269) | (5,487) | (5,504) | (278) | (11,269) | ||||||||||||||||
Net income | 5,014 | 5,029 | 205 | 10,248 | 5,014 | 5,029 | 205 | 10,248 | ||||||||||||||||
Unit-based compensation, including general partner net contributions | 79 | - | - | 79 | 79 | - | - | 79 | ||||||||||||||||
Balance, March 31, 2019 | $ | 114,958 | $ | (187,110) | $ | (1,244) | $ | (73,396) | 114,958 | (187,110) | (1,244) | (73,396) | ||||||||||||
Quarterly cash distributions to unitholders ($0.475 per unit) | (5,487) | (5,504) | (278) | (11,269) | ||||||||||||||||||||
Net income | 5,240 | 5,256 | 213 | 10,709 | ||||||||||||||||||||
Unit-based compensation, including general partner net contributions | 79 | - | - | 79 | ||||||||||||||||||||
Balance, June 30, 2019 | 114,790 | (187,358) | (1,309) | (73,877) | ||||||||||||||||||||
Quarterly cash distributions to unitholders ($0.475 per unit) | (5,497) | (5,504) | (279) | (11,280) | ||||||||||||||||||||
Net income | 4,961 | 4,968 | 203 | 10,132 | ||||||||||||||||||||
Unit-based compensation, including general partner net contributions | 81 | - | 6 | 87 | ||||||||||||||||||||
Balance, September 30, 2019 | $ | 114,335 | $ | (187,894) | $ | (1,379) | $ | (74,938) | ||||||||||||||||
There was 0 change inA roll forward of the number of common limited partner units outstanding during the three months ended March 31, 2020.is as follows:
Common Units- | Common Units- | |||||
Public | Green Plains | Total | ||||
Units, December 31, 2019 | 11,574,003 | 11,586,548 | 23,160,551 | |||
Units issued under the LTIP | 47,620 | - | 47,620 | |||
Units, September 30, 2020 | 11,621,623 | 11,586,548 | 23,208,171 |
Issuance of Additional Securities
The partnership agreement authorizes the partnership to issue unlimited additional partnership interests on the terms and conditions determined by the general partner without unitholder approval.
Cash Distribution Policy
Quarterly distributions are made from available cash within 45 days after the end of each calendar quarter, assuming the partnership has available cash.cash, up to an aggregate amount not to exceed $0.12 per outstanding unit, subject to the terms of the credit agreement which matures December 31, 2021. Available cash generally means all cash and cash equivalents on hand at the end of that quarter less cash reserves established by the 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.
The general partner also holds incentive distribution rights that entitles it to receive increasing percentages, up to 48%, of available cash distributed from operating surplus, as defined in the partnership agreement, in excess of $0.46 per unit per quarter. The maximum distribution of 48% does not include any distributions the general partner or its affiliates may receive on its general partner interest or common units.
On February 7, 2020, the partnership distributed $11.3 million to unitholders of record as of January 31, 2020, related to the quarterly cash distribution of $0.475 per unit that was declared on January 16, 2020, for the quarter ended December 31, 2019.
On May 8, 2020, the partnership distributed $2.8 million to unitholders of record as of May 1, 2020, related to the quarterly cash distribution of $0.12 per unit that was declared on April 16, 2020, for the quarter ended March 31, 2020.
On August 7, 2020, the partnership distributed $2.8 million to unitholders of record as of July 31, 2020, related to the quarterly cash distribution of $0.12 per unit that was declared on July 16, 2020, for the quarter ended June 30, 2020.
On October 15, 2020, the board of directors of the general partner declared a quarterly cash distribution of $0.12 per unit, or approximately $2.8 million, for the quarter ended March 31,September 30, 2020. The distribution is payable on May 8,November 13, 2020, to unitholders of record at the close of business on May 1,November 6, 2020.
The total cash distributions declared for the three and nine months ended March 31,September 30, 2020 and 2019, are as follows (in thousands):
Three Months Ended | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2020 | 2019 | |||||||||||||
General partner distributions | $ | 57 | $ | 225 | $ | 57 | $ | 226 | $ | 171 | $ | 677 | ||||||
Incentive distributions | - | 53 | - | 53 | - | 159 | ||||||||||||
Total distributions to general partner | 57 | 278 | 57 | 279 | 171 | 836 | ||||||||||||
Limited partner common units - public | 1,389 | 5,487 | 1,400 | 5,497 | 4,177 | 16,481 | ||||||||||||
Limited partner common units - Green Plains | 1,390 | 5,504 | 1,391 | 5,504 | 4,172 | 16,512 | ||||||||||||
Total distributions to limited partners | 2,779 | 10,991 | 2,791 | 11,001 | 8,349 | 32,993 | ||||||||||||
Total distributions declared | $ | 2,836 | $ | 11,269 | $ | 2,848 | $ | 11,280 | $ | 8,520 | $ | 33,829 | ||||||
8. EARNINGS PER UNIT
The partnership computes earnings per unit using the two-class method. Earnings per unit applicable to common units is calculated by dividing the respective limited partners’ interest in net income by the weighted average number of common units outstanding during the period, adjusted for the dilutive effect of any outstanding dilutive securities. Diluted earnings per limited partner unit was the same as basic earnings per limited partner unit as there were 0 potentially dilutive common units outstanding as of March 31,September 30, 2020. The following tables show the calculation of earnings per limited partner unit – basic and diluted (in thousands, except for per unit data):
Three Months Ended | Three Months Ended September 30, 2020 | |||||||||||||||
Limited Partner | General Partner | Total | Limited Partner Common Units | General Partner | Total | |||||||||||
Net income: | ||||||||||||||||
Distributions declared | $ | 2,779 | $ | 57 | $ | 2,836 | $ | 2,791 | $ | 57 | $ | 2,848 | ||||
Earnings in excess of distributions | 7,383 | 150 | 7,533 | 7,309 | 149 | 7,458 | ||||||||||
Total net income | $ | 10,162 | $ | 207 | $ | 10,369 | $ | 10,100 | $ | 206 | $ | 10,306 | ||||
Weighted-average units outstanding - basic and diluted | 23,138 | 23,161 | ||||||||||||||
Earnings per limited partner unit - basic and diluted | $ | 0.44 | $ | 0.44 | ||||||||||||
Three Months Ended | Nine Months Ended September 30, 2020 | |||||||||||||||
Limited Partner | General Partner | Total | Limited Partner Common Units | General Partner | Total | |||||||||||
Net income: | ||||||||||||||||
Distributions declared | $ | 10,991 | $ | 278 | $ | 11,269 | $ | 8,349 | $ | 171 | $ | 8,520 | ||||
Earnings less than distributions | (948) | (73) | (1,021) | |||||||||||||
Earnings in excess of distributions | 21,893 | 446 | 22,339 | |||||||||||||
Total net income | $ | 10,043 | $ | 205 | $ | 10,248 | $ | 30,242 | $ | 617 | $ | 30,859 | ||||
Weighted-average units outstanding - basic and diluted | 23,119 | 23,145 | ||||||||||||||
Earnings per limited partner unit - basic and diluted | $ | 0.43 | $ | 1.31 | ||||||||||||
Three Months Ended September 30, 2019 | ||||||||
Limited Partner Common Units | General Partner | Total | ||||||
Net income: | ||||||||
Distributions declared | $ | 11,001 | $ | 279 | $ | 11,280 | ||
Earnings less than distributions | (1,072) | (76) | (1,148) | |||||
Total net income | $ | 9,929 | $ | 203 | $ | 10,132 | ||
Weighted-average units outstanding - basic and diluted | 23,138 | |||||||
Earnings per limited partner unit - basic and diluted | $ | 0.43 | ||||||
Nine Months Ended September 30, 2019 | ||||||||
Limited Partner Common Units | General Partner | Total | ||||||
Net income: | ||||||||
Distributions declared | $ | 32,993 | $ | 836 | $ | 33,829 | ||
Earnings less than distributions | (2,525) | (215) | (2,740) | |||||
Total net income | $ | 30,468 | $ | 621 | $ | 31,089 | ||
Weighted-average units outstanding - basic and diluted | 23,125 | |||||||
Earnings per limited partner unit - basic and diluted | $ | 1.32 | ||||||
9. INCOME TAXES
The partnership is a limited partnership, which is not subject to federal income taxes. The general partner and the unitholders are responsible for paying federal and state income taxes on their share of the partnership’s taxable income. However, the partnership owns a subsidiary that is taxed as a corporation for federal and state income tax purposes. In addition, the partnership is subject to state income taxes in certain states. As a result, the financial statements reflect a provision or benefit for such income taxes.
The partnership recognizes uncertainties in income taxes based upon the technical merits of the position, and measures the maximum benefit and degree of likelihood to determine the tax liability in the financial statements.
10. COMMITMENTS AND CONTINGENCIES
Operating Lease Expense
The partnership leases certain facilities, parcels of land, and railcars with remaining terms ranging from less than one year to approximately 11.611.1 years, including renewal options reasonably certain to be exercised for the land and facility leases. Railcar agreement renewals are not considered reasonably certain to be exercised as they are typically subject to significant market dynamics which impact the underlying terms of the agreements.
The partnership may sublease certain of its railcars to third parties on a short-term basis. These subleases are classified as operating leases, with the associated sublease revenue recognized on a straight-line basis over the lease term.
The components of lease expense for the three and nine months ended September 30, 2020 and 2019, are as follows (in thousands):
Three Months Ended | Three Months Ended | Nine Months Ended | |||||||||||||||
2020 | 2019 | 2020 | 2019 | 2020 | 2019 | ||||||||||||
Lease expense | |||||||||||||||||
Operating lease expense | $ | 3,712 | $ | 4,209 | $ | 4,277 | $ | 3,618 | $ | 11,970 | $ | 11,903 | |||||
Variable lease (benefit) expense (1) | (150) | 122 | |||||||||||||||
Variable lease benefit (2) | (196) | (90) | (221) | (239) | |||||||||||||
Total lease expense | $ | 3,562 | $ | 4,331 | $ | 4,081 | $ | 3,528 | $ | 11,749 | $ | 11,664 | |||||
(1) Amount includes an additional $0.2 million of accelerated lease expense due to the early termination of leased railcar assets for the three and nine months ended September 30, 2020.
(2) Represents railcar lease abatements provided by the lessor when railcars are out of service during periods of maintenance or upgrade, offset by amounts incurred in excess of the minimum payments required for the handling and unloading of railcars for a certain lease, offset by railcar lease abatements provided by the lessor when railcars are out of service during periods of maintenance or upgrade.lease.
Supplemental cash flow information related to operating leases isfor the three and nine months ended September 30, 2020 and 2019, are as follows (in thousands):
Three Months Ended | Three Months Ended | Nine Months Ended | ||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2020 | 2019 | |||||||||||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||||||
Operating cash flows from operating leases | $ | 3,613 | $ | 4,091 | $ | 3,918 | $ | 3,502 | $ | 11,279 | $ | 11,988 | ||||||
Right-of-use assets obtained in exchange for lease obligations: | ||||||||||||||||||
Operating leases | 5,194 | - | 6,310 | 4,427 | 11,504 | 10,634 | ||||||||||||
Right-of-use assets and lease obligations derecognized due to lease modifications: | ||||||||||||||||||
Operating leases | 7 | 1,405 | 7 | 1,405 | ||||||||||||||
Supplemental balance sheet information related to operating leases is as follows:
March 31, 2020 | December 31, 2019 | September 30, 2020 | December 31, 2019 | |||||||||
Weighted average remaining lease term | 4.3 years | 4.2 years | 4.4 years | 4.2 years | ||||||||
Weighted average discount rate | 5.18% | 5.19% | 4.79% | 5.19% | ||||||||
Aggregate minimum lease payments under the operating lease agreements for the remainder of 2020 and in future years are as follows (in thousands):
Year Ending December 31, | Amount | Amount | ||||
2020 | $ | 11,473 | $ | 4,272 | ||
2021 | 9,997 | 11,297 | ||||
2022 | 8,456 | 9,763 | ||||
2023 | 5,278 | 6,593 | ||||
2024 | 3,453 | 4,768 | ||||
Thereafter | 4,181 | 5,277 | ||||
Total | $ | 42,838 | $ | 41,970 | ||
Less: Present value discount | (4,631) | (4,226) | ||||
Operating lease liabilities | $ | 38,207 | $ | 37,744 | ||
The partnership has additional railcar operating leases that will commence in the second halffourth quarter of 2020 and the first half of 2021 to replace expiring leases, with estimatedundiscounted future minimum lease commitmentspayments of approximately $26.6$24.5 million and lease terms of five to six years. The undiscountedThese amounts are not included in the tables above.
Lease Revenue
The components of lease revenue are as follows (in thousands):
Three Months Ended | Three Months Ended | Nine Months Ended | |||||||||||||||
2020 | 2019 | 2020 | 2019 | 2020 | 2019 | ||||||||||||
Lease revenue | |||||||||||||||||
Operating lease revenue | $ | 16,954 | $ | 17,334 | $ | 17,613 | $ | 16,981 | $ | 51,744 | $ | 51,751 | |||||
Variable lease revenue (1) | (13) | 68 | 544 | (259) | 571 | (457) | |||||||||||
Sublease revenue | 77 | 224 | 16 | 111 | 152 | 539 | |||||||||||
Total lease revenue | $ | 17,018 | $ | 17,626 | $ | 18,173 | $ | 16,833 | $ | 52,467 | $ | 51,833 | |||||
(1) Represents amounts charged to Green Plains Trade under the storage and throughput agreement in excess of the initial rate of $0.05 per gallon, amounts delivered by Green Plains Trade and other customers in excess of various minimum volume commitments, as well asand the difference between the contracted railcar volumetric capacity and the actual amount provided to Green Plains Trade during the period.
In accordance with the amended storage and throughput agreement, Green Plains Trade is obligated to deliver a minimum volume of 235.7 mmg per calendar quarter to the partnership’s storage facilities and pay $0.05 per gallon on all volume it throughputs associated with the agreement. While this agreement contains a provision stating that the rate could potentially increase above the $0.05through June 30, 2020, and $0.05312 per gallon on the sixth anniversary of the effective date, the potential increase would be based on a percentage change in the Bureau of Labor Producer Price Index, which cannot be predicted at this time.subsequent to June 30, 2020. The remaining lease term for this agreement is approximately 8.37.8 years, with automatic one year renewal periods, infor which either party has the right to terminate the contract. Due to the unilateral right to termination during the renewal period, the lease contract would no longer contain enforceable rights or obligations. Therefore, the lease term does not include the successive one year renewal periods. Anticipated minimum operating lease revenue under this agreement assuming a consistent rate of $0.05$0.05312 per gallon for the remainder of 2020 and in future years is as follows (in thousands):
Year Ending December 31, | Amount | Amount | ||||
2020 | $ | 35,355 | $ | 12,520 | ||
2021 | 47,140 | 50,082 | ||||
2022 | 47,140 | 50,082 | ||||
2023 | 47,140 | 50,082 | ||||
2024 | 47,140 | 50,082 | ||||
Thereafter | 164,990 | 175,284 | ||||
Total | $ | 388,905 | $ | 388,132 | ||
In accordance with the amended rail transportation services agreement with Green Plains Trade, Green Plains Trade is required to pay the rail transportation services fee for railcar volumetric capacity provided by the partnership. The remaining lease term for this agreement is approximately 5.34.8 years, with automatic one year renewal periods, infor which either party has the right to terminate the contract. Due to the unilateral right to termination during the renewal period, the lease contract would no longer contain enforceable rights or obligations. Therefore, the lease term does not include the successive one year
renewal periods. Under the terms of the agreement, Green Plains Trade is not required to pay for volumetric capacity that is not available due to inspections, upgrades, or routine repairs and maintenance. As a result, the actual volumetric capacity billed may be reduced based on the amount of volumetric capacity available for use during any applicable period. Anticipated minimum operating lease revenue under this agreement for the remainder of 2020 and in future years is as follows (in thousands):
Year Ending December 31, | Amount | Amount | ||||
2020 | $ | 15,806 | $ | 6,058 | ||
2021 | 14,047 | 18,054 | ||||
2022 | 11,839 | 15,858 | ||||
2023 | 6,097 | 10,126 | ||||
2024 | 3,538 | 7,589 | ||||
Thereafter | 608 | 4,199 | ||||
Total | $ | 51,935 | $ | 61,884 | ||
The partnership provides terminal services and logistics solutions to certain customers under various terminal service agreements, some of which have minimum volume commitments. At terminals where a customer is predominantly provided exclusive use of the terminal or tank storage assets, the partnership is considered a lessor as part of an operating lease agreement. Revenue is recognized over the term of the lease based on the minimum volume commitment, or total actual throughput if in excess of the minimum volume commitment. The partnership currently has one such agreement, with a remaining lease term of approximately 5.44.9 years, which includes renewal options reasonably certain to be exercised. Minimum operating lease revenue for this terminal for the remainder of 2020 and in future years is as follows (in thousands):
Year Ending December 31, | Amount | Amount | ||||
2020 | $ | 54 | $ | 18 | ||
2021 | 74 | 74 | ||||
2022 | 74 | 74 | ||||
2023 | 74 | 74 | ||||
2024 | 74 | 74 | ||||
Thereafter | 48 | 49 | ||||
Total | $ | 398 | $ | 363 | ||
Other Commitments and Contingencies
The partnership has agreements for contracted services with certain vendors that require the partnership to pay minimum monthly amounts, which expire on various dates. These agreements do not contain an identified asset and therefore are not considered operating leases. The partnership satisfied the minimum commitments under these agreements during the three and nine months ended March 31,September 30, 2020 and 2019. Aggregate minimum payments under these agreements for the remainder of 2020 and in future years are as follows (in thousands):
Year Ending December 31, | Amount | Amount | ||||
2020 | $ | 499 | $ | 168 | ||
2021 | 138 | 141 | ||||
2022 | 157 | 157 | ||||
2023 | - | - | ||||
2024 | - | - | ||||
Thereafter | - | - | ||||
Total | $ | 794 | $ | 466 | ||
Legal
The partnership may be involved in litigation that arises during the ordinary course of business. Currently, the partnership is not a party to any material litigation.
11. RELATED PARTY TRANSACTIONS
The partnership engages in various related party transactions with Green Plains and subsidiaries of Green Plains. Green Plains provides a variety of shared services to the partnership, including general management, accounting and finance, payroll and human resources, information technology, legal, communications and treasury activities. These costs are proportionally allocated by Green Plains to its subsidiaries based on common financial metrics management believes are reasonable. The partnership recorded expenses related to these shared services of $0.8 million and $0.9$2.5 million for the three and nine months ended March 31,September 30, 2020, respectively, and $0.8 million and $2.6 million for the three and nine months ended September 30, 2019, respectively. In addition, the partnership reimburses Green Plains for wages and benefit costs of employees directly performing services on its behalf. Green Plains may also pay certain direct costs on behalf of the partnership, which are reimbursed by the partnership. The partnership believes the consolidated financial statements reflect all material costs of doing business related to its operations, including expenses incurred by other entities on its behalf.
Omnibus Agreement
The partnership has entered into an omnibus agreement, as amended, with Green Plains and its affiliates which, among other terms and conditions, addresses the partnership’s obligation to reimburse Green Plains for direct or allocated costs and expenses incurred by Green Plains for general and administrative services; the prohibition of Green Plains and its subsidiaries from owning, operating or investing in any business that owns or operates fuel terminals or fuel transportation assets; the partnership’s right of first offer to acquire assets if Green Plains decides to sell them; a nontransferable, nonexclusive, royalty-free license to use the Green Plains trademark and name; the allocation of taxes among the parent, the partnership and its affiliates and the parent’s preparation and filing of tax returns; and an indemnity by Green Plains for certain environmental and other liabilities.
If Green Plains or its affiliates cease to control the general partner, then either Green Plains or the partnership may terminate the omnibus agreement, provided that (i) the indemnification obligations of the parties survive according to their respective terms; and (ii) Green Plains’ obligation to reimburse the partnership for operational failures survives according to its terms.
Operating Services and Secondment Agreement
The general partner has entered into an operational services and secondment agreement, as amended, with Green Plains. Under the terms of the agreement, Green Plains seconds employees to the general partner to provide management, maintenance and operational functions for the partnership, including regulatory matters, health, environment, safety and security programs, operational services, emergency response, employee training, finance and administration, human resources, business operations and planning. The seconded personnel are under the direct management and supervision of the general partner who reimburses the parent for the cost of the seconded employees, including wages and benefits. If a seconded employee does not devote 100% of his or her time providing services to the general partner, the general partner reimburses the parent for a prorated portion of the employee’s overall wages and benefits based on the percentage of time the employee spent working for the general partner.
Under the operational services and secondment agreement, Green Plains will indemnify the partnership from any claims, losses or liabilities incurred by the partnership, including third-party claims, arising from their performance of the operational services secondment agreement; provided, however, that Green Plains will not be obligated to indemnify the partnership for any claims, losses or liabilities arising out of the partnership’s gross negligence, willful misconduct or bad faith with respect to any services provided under the operational services and secondment agreement.
Commercial Agreements
The partnership has various fee-based commercial agreements with Green Plains Trade, including:
10-year storageStorage and throughput agreement, expiring on June 30, 2028;
10-year railRail transportation services agreement, expiring on June 30, 2025;
1-year truckingTrucking transportation agreement, initially expiring on May 31, 2020, extended through May 31, 2021 through an automatic renewal;2021;
Terminal services agreement for the Birmingham, Alabama unit train terminal, expiring on December 31, 2022; and
Various other terminal services agreements for other fuel terminal facilities, each with Green Plains Trade.
The storage and throughput, rail transportation services, and trucking transportation agreements have various automatic renewal terms if not cancelled by either party within specified timeframes. Please refer to Item 15 – Exhibits, Financial Statement Schedule in our 2019 annual report for further details.
The storage and throughput agreement and terminal services agreements are supported by minimum volume commitments. The rail transportation services agreement is supported by minimum take-or-pay volumetric capacity commitments.
Under the storage and throughput agreement, as amended, Green Plains Trade is obligated to deliver a minimum volume of 235.7 mmg of product per calendar quarter to the partnership’s storage facilities and pay $0.05 per gallon on all volume it throughputs.throughputs through June 30, 2020, and $0.05312 per gallon subsequent to June 30, 2020. If Green Plains Trade fails to meet its minimum volume commitment during any quarter, Green Plains Trade will pay the partnership a deficiency payment equal to the deficient volume multiplied by the applicable fee. The deficiency payment may be applied as a credit toward payments due on future volumes delivered by Green Plains Trade in excess of the minimum volume commitment during the following four quarters, after which time this option will expire.
For the three months ended March 31,September 30, 2020, the partnership charged Green Plains Trade exceeded its$2.4 million related to the minimum volume commitment and receiveddeficiency for the quarter, resulting in a credit of $0.3 million, which wasto be applied to the $4.0 million volume deficiency credit related to the three months ended March 31, 2019. The remaining balance of this credit of $3.7 million expired as of March 31, 2020.against excess volumes in future periods. The cumulative minimum volume deficiency credits available to Green Plains Trade as of March 31,September 30, 2020 totaled $0.5$6.7 million. If these credits are unused by Green Plains Trade, $4.3 million which will expire if unused byon June 30, 2020. 2021 and $2.4 million will expire on September 30, 2021. These credits have been previously recognized asin revenue by the partnership, and as such, future volumes throughput by Green Plains Trade in excess of the quarterly minimum volume commitment, up to the amount of these credits, will not be recognized in revenue in future periods.periods prior to expiration.
Under the rail transportation services agreement, Green Plains Trade is obligated to use the partnership to transport ethanol and other fuels from receipt points identified by Green Plains Trade to nominated delivery points. TheDuring the three and nine months ended September 30, 2020, the average daily railcar volumetric capacity provided by the partnership was 78.881.5 mmg and 83.480.4 mmg, respectively, and the associated monthly fee was approximately $0.0214$0.0226 and $0.0216$0.0220 per gallon, respectively, duringrespectively. During the three and nine months ended March 31, 2020September 30, 2019, the average daily railcar volumetric capacity provided by the partnership was 77.0 mmg and 2019.80.5 mmg, respectively, and the associated monthly fee was approximately $0.0212 and $0.0215 per gallon, respectively. The partnership’s leased railcar fleet consisted of approximately 2,7502,820 and 2,8402,690 railcars as of March 31,September 30, 2020 and 2019, respectively.
Green Plains Trade is also obligated to use the partnership for logistical operations management and other services related to average daily railcar volumetric capacity provided by Green Plains Trade, which was approximately 3.50.7 mmg and 3.62.0 mmg for the three and nine months ended March 31,September 30, 2020, and 2019, respectively. Green Plains Trade is obligated to pay a monthly fee of approximately $0.0013 per gallon for these services. In addition, Green Plains Trade reimburses the partnership for costs related to: (1) railcar switching and unloading fees; (2) increased costs related to changes in law or governmental regulation related to the specification, operation or maintenance of railcars; (3) demurrage charges, except when the charges are due to the partnership’s gross negligence or willful misconduct; and (4) fees related to rail transportation services under transportation contracts with third-party common carriers. As needed, Green Plains Trade contracts with the partnership for additional railcar volumetric capacity during the normal course of business at comparable margins.
Under the trucking transportation agreement, Green Plains Trade pays the partnership to transport ethanol and other fuels by truck from identified receipt points to various delivery points. Green Plains Trade is obligated to pay a monthly trucking transportation services fee equal to the aggregate volume transported in a calendar month by the partnership’s trucks, multiplied by the applicable rate for each truck lane. A truck lane is defined as a specific and routine route of travel between a point of origin and point of destination. Rates for each truck lane are negotiated based on product, location, mileage and other factors. Green Plains Trade reimburses the partnership for costs related to: (1) truck switching and unloading fees; (2) increased costs related to changes in law or governmental regulation related to the specification, operation and maintenance of trucks; and (3) fees related to trucking transportation services under transportation contracts with third-party common carriers.
Under the existing Birmingham terminal services agreement, effective through December 31, 2022, Green Plains Trade is obligated to throughput a minimum volume commitment of approximately 8.3 mmg per month and pay associated throughput fees, as well as fees for ancillary services.
The partnership recorded revenues from Green Plains Trade under the storage and throughput agreement and rail transportation services agreement of $16.8$18.1 million and $17.2$52.0 million for the three and nine months ended March 31,September 30, 2020 and $16.6 million and $50.9 million for the three and nine months ended September 30, 2019, respectively. The partnership recorded revenues from Green Plains Trade and other Green Plains subsidiaries related to trucking and terminal services of $2.2 million and $1.6$6.3 million for the three and nine months ended March 31,September 30, 2020 and $2.2 million and $5.8 million for the nine months ended September 30, 2019, respectively.
Cash Distributions
The partnership distributed $5.8$1.5 million and $8.7 million to Green Plains related to the quarterly cash distribution paid for both the three and nine months ended March 31,September 30, 2020, respectively, and 2019.$5.7 million and $17.3 million for the three and nine months ended September 30, 2019, respectively.
Equity Method Investment
The partnership recordedreceived a distribution from NLR in the amount of $1.0 million during the nine months ended September 30, 2020. In addition, the partnership had an outstanding receivable of $25 thousand and $23 thousand due from NLR for various reimbursable expenses to be reimbursed by NLR as of both March 31,September 30, 2020 and December 31, 2019.2019, respectively.
12. EQUITY METHOD INVESTMENT
NLR Energy Logistics LLC
The partnership and Delek Renewables LLC have a 50/50 joint venture, NLR Energy Logistics LLC, which operates a unit train terminal in the Little Rock, Arkansas area with capacity to unload 110-car unit trains and provide approximately 100,000 barrels of storage. As of March 31,September 30, 2020, the partnership'spartnership’s investment balance in the joint venture was $4.5$3.8 million.
The partnership does not consolidate any part of the assets or liabilities or operating results of its equity method investee. The partnership’s share of net income or loss in the investee increases or decreases, as applicable, the carrying value of the investment. With respect to NLR, the partnership determined that this entity does not represent a variable interest entity and consolidation is not required. In addition, although the partnership 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 investor without regard to economic interest.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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 our unaudited consolidated financial statements and accompanying notes contained in this report together with our 2019 annual report. The results of operations for the three and nine months ended March 31,September 30, 2020, are not necessarily indicative of the results we expect for the full year.
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 those discussed in Part I, Item 1A, “Risk Factors,” of our 2019 annual report and in Part II, Item 1A, “Risk Factors,” in this report, or incorporated by reference. Specifically, we may experience fluctuations in future operating results due to disruption caused by health epidemics, such as the coronavirus (COVID-19)COVID-19 outbreak; changes in general economic, market or business conditions; foreign imports of ethanol; fluctuations in demand for ethanol and other fuels; risks of accidents or other unscheduled shutdowns affecting our assets, including mechanical breakdown of equipment or infrastructure; risks associated with changes to federal policy or regulation; ability to comply with changing government usage mandates and regulations affecting the ethanol industry; price, availability and acceptance of alternative fuels and alternative fuel vehicles, and laws mandating such fuels or vehicles; changes in operational costs at our facilities and for our railcars; failure to realize the benefits projected for capital projects; competition; inability to successfully implement growth strategies; the supply of corn and other feedstocks; unusual or severe weather conditions and natural disasters; ability and willingness of parties with whom we have material relationships, including Green Plains Trade, to fulfill their obligations; labor and material shortages; changes in the availability of unsecured credit and changes affecting the credit markets in general; risks related to acquisition and disposition activities; and other risk factors detailed in our reports filed with the SEC.
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 nor do we 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 Partners provides fuel storage and transportation services by owning, operating, developing and acquiring ethanol and fuel storage facilities, terminals, transportation assets and other related assets and businesses. We are Green Plains’ primary downstream logistics provider and generate a substantial portion of our revenues under fee-based commercial agreements with Green Plains Trade for receiving, storing, transferring and transporting ethanol and other fuels, which are supported by minimum volume or take-or-pay capacity commitments.
Recent Developments
Impact of COVID-19 and Decline in Oil Demand
The 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 evolve rapidly and the ultimate duration and impact of the outbreak remains highly uncertain and subject to change.
We arecontinue to closely monitoringmonitor the impact of COVID-19 on all aspects of our business, including how it will impact our employees, customers, vendors, and business partners. For the three and nine months ended September 30, 2020, there has been no adverse effect due to COVID-19 on our ability to maintain operations, including our financial reporting systems, our internal controls over financial reporting or our disclosure controls and procedures. In addition, to date we have not incurred any material COVID-19 related contingencies. Although we did not incur significant disruptions, during the three months ended March 31, 2020 from COVID-19, we are unable to predict the impact that COVID-19 will have on our future financial position and operating results, or that of our parent from which we obtain a significant portion of our revenues, due to numerous uncertainties.
The COVID-19 pandemic and related economic repercussions have created significant volatility, uncertainty, and turmoil in the energy industry. In early March, the Organization of Petroleum Exporting Countries and their allies (collectively, OPEC+) failed to reach an agreement on production levels for crude oil. This was quickly followed by a
widespread slowdown in the U.S. and global economy in an effort to slow the COVID-19 pandemic. While OPEC+ agreed in April to cut production, downward pressure on prices has continued and could continue for the foreseeable future. A combination of these events has significantly deteriorated both prices and demand for various energy commodities and motor fuels, including ethanol, which could negatively impact our business and that of our parent. The situation surrounding COVID-19 continues to evolve 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.
While we have instituted work from home arrangements for certain staff members, there has been no adverse effect on our ability to maintain operations, including our financial reporting systems, our internal controls over financial reporting or our disclosure controls and procedures. In addition, to date we have not incurred any material COVID-19 related contingencies.
For further information regarding the impact of COVID-19 and the decline in oil demand on the partnership, please see Industry Factors Affecting our Results of Operations as well as Part II, Item 1A, “Risk Factors,” in this report, which is incorporated herein by reference.
Results of Operations
During the firstthird quarter of 2020, our parent’sparent continued to experience a weak ethanol margin environment, maintaining an average utilization rate of approximately 66.8% of capacity. Ethanol throughput was approximately 85.9% of capacity, resulting in ethanol production of 240.5189.6 mmg, compared with the contracted minimum volume commitment of 235.7 mmg per quarter. As a result, the partnership charged Green Plains Trade received a credit of $0.3$2.4 million which was applied to the $4.0 million volume deficiency credit related to the three months ended March 31, 2019. The remaining balance of thisminimum volume commitment deficiency for the quarter, resulting in a credit of $3.7 million expired as of March 31, 2020.to be applied against excess volumes in future periods. The cumulative minimum volume deficiency credits available to Green Plains Trade as of March 31,September 30, 2020 totaled $0.5$6.7 million. If these credits are unused by Green Plains Trade, $4.3 million which will expire if unused byon June 30, 2020. 2021 and $2.4 million will expire on September 30, 2021. These credits have been previously recognized asin revenue by the partnership, and as such, future volumes throughput by Green Plains Trade in excess of the quarterly minimum volume commitment, up to the amount of these credits, will not be recognized in revenue in future periods.periods prior to expiration.
Our parent’s operating strategy is to reduce operating expenses, energy usage, and water consumption while running at higher utilization rates in order to achieve improved margins. However, in the current environment, given the significant drop in driving and gasoline demand, our parent willmay exercise operational discretion potentially resultingthat results in reductions in production acrossproduction. Additionally, our parent may experience lower run rates due to the platform,construction of various projects as well as delays in orderreceiving the necessary permits required to maximize cash liquidity. As such, itoperate our facilities. It is possible that future production could be below the quarterly minimum volume commitments in the future, depending on various factors that drive each bio refineriesbio-refineries variable contribution margin, including future driving and gasoline demand for the industry. At the same time, our parent is also focused on the deployment of high protein technology at each of its facilities, which could lead to our parent having more consistent margins and operating throughput rates over time.
Adjusted EBITDA and Distributable Cash Flow
Adjusted EBITDA is defined as earnings before interest expense, income tax expense, depreciation and amortization excluding the amortization of right-of-use assets, plus adjustments for transaction costs related to acquisitions or financing transactions, unit-based compensation expense, net gains or losses on asset sales, and our proportional share of EBITDA adjustments of our equity method investee.
Distributable cash flow is defined as adjusted EBITDA less interest paid or payable, income taxes paid or payable, maintenance capital expenditures, which are defined under our partnership agreement as cash expenditures (including expenditures for the construction or development of new capital assets or the replacement, improvement or expansion of existing capital assets) made to maintain our operating capacity or operating income, and our proportional share of distributable cash flow adjustments of our equity method investee.
Adjusted EBITDA and distributable cash flow are supplemental financial measures that we use to assess our financial performance. We believe their presentation provides useful information to investors in assessing our financial condition and results of operations. However, these presentations are not made in accordance with GAAP. The GAAP measure most directly comparable to adjusted EBITDA and distributable cash flow is net income. Since adjusted EBITDA and distributable cash flow may be defined differently by other companies in our industry, our definitions of adjusted EBITDA and distributable cash flow may not be comparable to similarly titled measures of other companies, diminishing their utility. Adjusted EBITDA and distributable cash flow should not be considered in isolation or as alternatives to net income or any other measure of financial performance presented in accordance with GAAP to analyze our financial performance and operating results.
The following table presents reconciliations of net income to adjusted EBITDA and to distributable cash flow, for the three and nine months ended March 31,September 30, 2020 and 2019 (unaudited, dollars in thousands):
Three Months Ended | Three Months Ended | Nine Months Ended | ||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2020 | 2019 | |||||||||||||
Reconciliations to Non-GAAP Financial Measures: | ||||||||||||||||||
Net income | $ | 10,369 | $ | 10,248 | $ | 10,306 | $ | 10,132 | $ | 30,859 | $ | 31,089 | ||||||
Interest expense | 1,864 | 2,055 | 2,498 | 2,103 | 6,182 | 6,324 | ||||||||||||
Income tax expense | 31 | 52 | 30 | 45 | 166 | 144 | ||||||||||||
Depreciation and amortization | 961 | 985 | 940 | 991 | 2,867 | 2,747 | ||||||||||||
Unit-based compensation expense | 79 | 79 | 81 | 81 | 239 | 239 | ||||||||||||
Gain on the disposal of assets | - | (87) | - | (14) | ||||||||||||||
Proportional share of EBITDA adjustments of equity method investee (1) | 50 | 66 | 43 | 44 | 137 | 153 | ||||||||||||
Adjusted EBITDA | 13,354 | 13,485 | 13,898 | 13,309 | 40,450 | 40,682 | ||||||||||||
Interest paid or payable | (1,864) | (2,055) | (2,498) | (2,103) | (6,182) | (6,324) | ||||||||||||
Income taxes paid or payable | (31) | (53) | (30) | (45) | (91) | (141) | ||||||||||||
Maintenance capital expenditures | (22) | - | (62) | (62) | (116) | (62) | ||||||||||||
Distributable cash flow | $ | 11,437 | $ | 11,377 | ||||||||||||||
Distributable cash flow (2) | $ | 11,308 | $ | 11,099 | $ | 34,061 | $ | 34,155 | ||||||||||
Distributions declared (2) | $ | 2,836 | $ | 11,269 | ||||||||||||||
Distributions declared (3) | $ | 2,848 | $ | 11,280 | $ | 8,520 | $ | 33,829 | ||||||||||
Coverage ratio | 4.03x | 1.01x | 3.97x | 0.98x | 4.00x | 1.01x | ||||||||||||
(1) Represents our proportional share of depreciation and amortization of our equity method investee.
(2) Distributable cash flow does not include adjustments for the required principal payments on the term loan of $12.5 million for the three and nine months ended September 30, 2020.
(3) Distributions declared for the applicable period and paid in the subsequent quarter.
Selected Financial Information and Operating Data
The following discussion reflects the results of the partnership for the three and nine months ended March 31,September 30, 2020 and 2019.
Selected financial information for the three and nine months ended March 31,September 30, 2020 and 2019, is as follows (unaudited, in thousands):
Three Months Ended | Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
2020 | 2019 | % Var. | 2020 | 2019 | % Var. | 2020 | 2019 | % Var. | |||||||||||||||||||
Revenues | |||||||||||||||||||||||||||
Storage and throughput services | $ | 11,785 | $ | 11,785 | - | % | $ | 12,520 | $ | 11,785 | 6.2 | % | $ | 36,090 | $ | 35,355 | 2.1 | % | |||||||||
Railcar transportation services | 5,124 | 5,619 | (8.8) | 5,538 | 5,005 | 10.6 | 16,036 | 16,129 | (0.6) | ||||||||||||||||||
Terminal services | 2,194 | 2,788 | (21.3) | 2,162 | 2,193 | (1.4) | 6,488 | 7,394 | (12.3) | ||||||||||||||||||
Trucking and other | 1,168 | 895 | 30.5 | 1,162 | 1,171 | (0.8) | 3,420 | 3,188 | 7.3 | ||||||||||||||||||
Total revenues | 20,271 | 21,087 | (3.9) | 21,382 | 20,154 | 6.1 | 62,034 | 62,066 | (0.1) | ||||||||||||||||||
Operating expenses | |||||||||||||||||||||||||||
Operations and maintenance (excluding depreciation and amortization reflected below) | 6,160 | 6,865 | (10.3) | 6,647 | 6,216 | 6.9 | 19,410 | 19,314 | 0.5 | ||||||||||||||||||
General and administrative | 1,044 | 1,117 | (6.5) | 1,116 | 949 | 17.6 | 3,038 | 3,054 | (0.5) | ||||||||||||||||||
Depreciation and amortization | 961 | 985 | (2.4) | 940 | 991 | (5.1) | 2,867 | 2,747 | 4.4 | ||||||||||||||||||
Total operating expenses | 8,165 | 8,967 | (8.9) | 8,703 | 8,156 | 6.7 | 25,315 | 25,115 | 0.8 | ||||||||||||||||||
Operating income | $ | 12,106 | $ | 12,120 | (0.1) | % | $ | 12,679 | $ | 11,998 | 5.7 | % | $ | 36,719 | $ | 36,951 | (0.6) | % | |||||||||
Selected operating data for the three and nine months ended March 31,September 30, 2020 and 2019, is as follows (unaudited):
Three Months Ended | Three Months Ended | Nine Months Ended | |||||||||||||||||||
2020 | 2019 | % Var. | 2020 | 2019 | % Var. | 2020 | 2019 | % Var. | |||||||||||||
Product volumes (mmg) | |||||||||||||||||||||
Storage and throughput services | 241.6 | 155.7 | 55.2 | % | 189.6 | 238.9 | (20.6) | % | 581.3 | 619.7 | (6.2) | % | |||||||||
Terminal services: | |||||||||||||||||||||
Affiliate | 32.5 | 24.8 | 31.0 | 24.5 | 31.8 | (23.0) | 79.3 | 86.4 | (8.2) | ||||||||||||
Non-affiliate | 26.5 | 25.6 | 3.5 | 27.7 | 26.3 | 5.3 | 78.3 | 79.1 | (1.0) | ||||||||||||
59.0 | 50.4 | 17.1 | 52.2 | 58.1 | (10.2) | 157.6 | 165.5 | (4.8) | |||||||||||||
Railcar capacity billed (daily avg.) | 78.8 | 83.4 | (5.5) | 81.5 | 77.0 | 5.8 | 80.4 | 80.5 | (0.1) | ||||||||||||
Three Months Ended March 31,September 30, 2020, Compared with the Three Months Ended March 31,September 30, 2019
Consolidated revenues decreased $0.8increased $1.2 million for the three months ended March 31,September 30, 2020, compared with the same period for 2019. TerminalStorage and throughput services revenue decreased $0.6increased $0.7 million as a result of a $0.9 million decreasedue to an increase in MVC charges, partially offset by a $0.3 million increase associated with higher throughput volumes. Revenues generated from railthe rate per gallon charged to Green Plains Trade beginning on July 1, 2020. Railcar transportation services decreasedrevenue increased $0.5 million primarily due to a reductionan increase in average volumetric capacity provided and the average capacity fee charged.
Operations and maintenance expenses increased $0.4 million for the three months ended September 30, 2020, compared with the same period for 2019, primarily due to an increase in railcar lease expense. This increase was due to the acceleration of operating lease expense caused by the early termination of leased railcar assets as well as lower sublease revenue. These decreases were partially offset by an increase of $0.3in the average railcar lease rates.
General and administrative expenses increased $0.2 million for the three months ended September 30, 2020, compared with the same period for 2019, primarily due to increased expenses for insurance and property taxes.
Distributable cash flow increased $0.2 million for the three months ended September 30, 2020, compared with the same period for 2019, primarily due to an increase in truckingincome from operations.
Nine Months Ended September 30, 2020, Compared with the Nine Months Ended September 30, 2019
Consolidated revenues for the nine months ended September 30, 2020, were comparable to the same period for 2019. Storage and throughput services revenue increased $0.7 million due to an increase in the rate per gallon charged to Green Plains Trade beginning on July 1, 2020. Trucking and other revenue increased $0.2 million due to an increase in volumes transported for Green Plains Trade. Terminal services revenue decreased $0.9 million primarily as a result of a decrease in fees associated with minimum volume commitments. Revenues generated from railcar transportation services decreased $0.1 million primarily due to lower sublease revenue, partially offset by an increase in the average capacity fee charged.
Operations and maintenance expenses decreased $0.7increased $0.1 million for the threenine months ended March 31,September 30, 2020, compared with the same period for 2019, primarily due to lower railcar lease expense.an increase in repair and maintenance expenses as well as expenses allocated by our parent under the secondment agreement, partially offset by a decrease in unloading fees.
General and administrative expenses for the nine months ended September 30, 2020, were comparable to the same period for 2019.
Distributable cash flow decreased $0.1 million for the threenine months ended March 31,September 30, 2020, compared with the same period for 2019, primarily due to a reductiondecrease in expenses allocated by our parent under the secondment agreement.income from operations.
Distributable cash flow for the three months ended March 31, 2020 was comparable to the same period for 2019.
Industry Factors Affecting our Results of Operations
U.S. Ethanol Supply and Demand
According to the EIA, domestic ethanol production averaged 1.030.92 million barrels per day during the firstthird quarter of 2020, which was 2% higher10% lower than the 1.011.02 million barrels per day for the firstsame quarter of last year. Refiner and blender input volume decreased 3%10% to 858 thousand0.85 million barrels per day for the firstthird quarter of 2020, compared with 886 thousand0.94 million barrels per day for the same quarter last year. Gasoline demand for the firstthird quarter of 2020 decreased 348 thousand0.87 million barrels per day, or 4%9% compared to the same quarter last year. U.S. domestic ethanol ending stocks increaseddecreased by approximately 1.73.5 million barrels, or 7%15%, to 25.719.7 million barrels for the firstthird quarter of 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 applieswhich applied 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 March 17,September 30, 2020, according to Prime the Pump, there were approximately 2,1402,250 retail stations selling E15 in 30 states, up from 2,080 at the beginning of the year, accordingas well as 203 pipeline terminal locations now offering E15 to Growth Energy.wholesale customers.
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.
Global Ethanol Supply and Demand
According to the USDA Foreign Agriculture Service, domestic ethanol exports through February 29,August 31, 2020 were approximately 0.350.9 bgy, up 43%down 10% from 0.241.00 bgy for the same period of 2019. Canada moved ahead of Brazil remainedas the largest export destination for U.S. ethanol, which accounted for 33%22% 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,volume. 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 litersIndia, and June to August 275 million liters. In addition, India, Canada, South Korea and the Netherlands accounted for 18%20%, 16%, 7%, 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. In January 2020, China and the United States agreed to certainstruck a “Phase I” trade agreements,agreement, which included commitments on agricultural commodity purchases. Ethanol, corn, and distillers grains were included as potential purchases in the impactagreement. China has been purchasing large quantities of corn, which onhas raised domestic prices of this feedstock for our parent’s ethanol are yet to be determined.production process. China has started purchasing more distillers grains than last year, and in October 2020, it was announced that China had purchased a shipment of U.S. ethanol for the first time since March 2018.
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 was approximately 13.612.4 cents per pound during the firstthird quarter of 2020. We currently estimate that net ethanol exports will range from 1.11.2 billion to 1.51.4 billion gallons in 2020, excluding any potentialsignificant 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.
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 and amendments have been discussedproposed in the House and Senate which would eliminate the RFS II entirely, eliminate the corn based ethanol portion of the mandate, orand make it more difficult to sell fuel blends with higher levels of ethanol. We believe it is unlikely that any of these bills will become law in the current Congress. In addition, the manner in which the EPA administers the RFS II and related regulations can have a 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 concerns for the environment, diversifying our fuel supply, and 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. In addition, expansion of clean fuel programs in other states, or a national low carbon fuel standard could increase the demand for ethanol, depending on how it is structured.
Congress first enacted CAFE in 1975 to reduce energy consumption by increasing the fuel economy of cars and light trucks. Flexible-fuel vehicles (FFVs), which are designed to run on a mixture 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 has the potential to 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. This allows E15 to be sold year round to all vehicles model year 2001 and newer. This rulenewer is being challenged in an action filed in Federal District Court for the DCD.C. Circuit. However, the One-Pound Waiver isremains in effect, and for the first time ever, E15 was legallyis sold to all vehicles model year 2001 and newer during the summer driving seasonround in a number of June 1 to September 15, 2019.states.
The RFS II has been a driving factor in the growth of ethanol usage in the United States. When the RFS II was established in 2010, the required volume of “conventional” or corn-based ethanol to be blended with gasoline was to increase each year until it reached 15.0 billion gallons in 2015, which left the EPA to address existing limitations in both supply (ethanol production) and demand (usage of ethanol blends in older vehicles). On December 19, 2019, the EPA announced the final 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 2021 volumes. They typically do so in June or July, and aim to finalize the rule by November 30 each year. It is unclear when they will release the RVO for 2021, if at all.
The EPA has the authority to waive the mandates,biofuel mandate, in whole or in part, if there is inadequate domestic renewable fuel supply or the requirement severely harms the domestic 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 – the year through which the statutorily prescribed volumes run. While conventional ethanol maintained 15 billion gallons, 2019 was the second consecutive year that the total proposed RVO was more than 20% below the statutory volumes levels. Thus, the EPA was expected to initiate a reset rulemaking, and modify statutory volumes through 2022, and do so based on the same factors they are to use 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. It is unclear when or if they will propose a reset rulemaking.
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 the 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 Governorsgovernors 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.”
On October 21, 2020, fifteen Senate Republicans sent a letter to the EPA requesting a general waiver from the RFS to reduce the 2021 RVO, which has not yet been proposed, citing the reduced demand for fuels due to COVID-19. The letter also asked that the 500 million gallon court-ordered remand be ignored, and that any gallons previously exempted through small refineries exemptions not be reallocated among obligated parties.
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 petition the EPA for a SRE which, if approved, waives their portion of the annual RVO requirements. The EPA, through consultation with the Department of EnergyDOE and the Department of Agriculture,USDA, 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 2016, 2017 and 2018 than they had in the past, totaling 790 million gallonsmmg of waived requirements for the 2016 compliance year, 1.82 billion gallons for 2017 and 1.43 billion gallons for 2018. In doing so, the EPA effectively reduced the RFS II mandated volumes for those compliance years by those amounts respectively, and as a result, RIN values have declined significantly.
Biofuels groups have filed a lawsuit in the 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. This 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 argued 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 future.
In a supplemental rulemaking to the 2020 RVO rule, the EPA changed their approach, and for the first time accounted for the gallons that they anticipate they will be waiving from the blending requirements due to small refinery exemptions. To accomplish this, they are adding in the trailing three year average of gallons the Department of EnergyDOE 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 EnergyDOE 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 Energythe DOE 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 possibleTwo of the refiners appealed 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.
TheIn light of the 10th Circuit ruling, a number of refineries have applied for “gap year” SREs in an effort to establish a continuous string of relief and to ensure they are able to qualify for SREs going forward. A total of 64 gap year requests were filed with the EPA and reviewed by the DOE. On September 14, 2020 the EPA announced that they were denying 54 of the gap year requests that had been scored and returned by the DOE, regardless of how they had been scored. We believe that they will apply the same standard and deny the remaining ten gap year requests. Without a string of continuous SRE approvals, almost every small refinery would no longer be able to apply for hardship relief in this manner, unless the Supreme Court takes up and overturns the 10th Circuit ruling, which we believe is unlikely.
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. The USDA rolled out the Higher Blend Infrastructure Incentive Program in the summer of 2020, providing competitive grants to fuel terminals and retailers for installing equipment for dispensing higher blends of ethanol and biodiesel. The EPA has indicated it could soon move forward with notice of proposed rulemaking on E15 labeling reforms. On September 12, 2020, President Trump announced his support for amending federal regulations to allow for E15 to be sold through E10 pumps, however federal agencies have yet to take formal action on this directive.
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.mmg. As a result, the Court remanded to the EPA to make up for the 500 million gallons.mmg. Despite this, in the proposed 2020 RVO rulemaking released in July 2019, the EPA stated it does not intend to make up the 500 million gallonsmmg as the court directed, citing potential burden on obligated parties. The EPA hashad indicated that it plans to address this court ordered remand in 2020.conjunction with the 2021 RVO rulemaking, however that rulemaking has been delayed indefinitely for political reasons.
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 late March 2020. It2020, 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 our parent buyswe purchase most of itsour 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 our parent haswe have to pay to purchase the corn. The USDA did not include any CCC program funds for supporting ethanol plants as of this filing.
The CARES Act also 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 quickly paid out all of the funds appropriated, including somemade payments to many farmers and to 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 1,000 employees in the case of our parent, however neither we nor our parent qualified for these PPP funds from the SBA.10,000 employees. The “Main Street” programs provide low interest loans to qualifying companies, andthough we are awaitingdo not qualify according to the most recent guidance from the Treasury Department final guidelines to determine if we or our parent qualify.Department.
EthanolIndustrial grade ethanol is the primary ingredient in hand sanitizer. The CARES Act also 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.crisis which on July 25, 2020 was extended another 90 days by the U.S. Secretary of Health and Human Services. We believe it is likely the public health crisis declaration will be extended again.
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 Agency 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 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. 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 2021. To date in 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 rate quota on U.S. ethanol imports in excess of 150 million liters, or 39.6 million gallonsmmg per quarter in September 2017. The initial ruling was valid for two years; however, it was extended at the end of August 2019 for an additional year. On an annual basis, Brazil will now allow into the country 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. After briefly expiring on September 1, 2020, the tariff rate quota was extended for 90 days on September 14, 2020.
Our parent’s 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 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 multiple lawsuits, of which several were dismissed. The 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. The 180 day window was extended due to COVID-19, and the new deadline is March 26, 2021. U.S. ethanol exports to Mexico totaled 31.2 mmg in 2019.
On January 29, 2020, the President Trump 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 will takewent into effect on July 1, 2020.
Colombia has banned imports of U.S. fuel ethanol for two months, with the possibility of extendingand on June 30, 2020, 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 gallonsmmg of ethanol.
Liquidity and Capital Resources
Our principal sources of liquidity include cash generated from operating activities and borrowings under our revolvingamended credit facility. We consider opportunities to repay redeem, repurchase or refinance our debt, depending on market conditions, as part of our normal course of doing business. Our ability to meet our debt service obligations and other capital requirements depends on our future operating performance, which is subject to general economic, financial, business, competitive, legislative, regulatory and other conditions, many of which are beyond our control. We expect operating cash flows will be sufficient to meet our liquidity needs, and plan to fund future expansion capital expenditures primarily from external sources, including borrowings under our revolving credit facilityutilize a combination of operating cash, refinancing and issuances ofother strategic actions to repay debt and equity securities. In the event that existing liquidity sources are no longer sufficient for our capital requirements, we would explore additional external financing sources. However, there can be no assurance that such sources would be available on terms acceptable to us, if at all.obligations as they come due.
At March 31,September 30, 2020, we had $0.3$0.1 million of cash and cash equivalents and $69.8$4.3 million available under the revolving portion of our revolvingamended credit facility.
Net cash provided by operating activities was $13.3$34.3 million for the threenine months ended March 31,September 30, 2020, compared with $10.0$36.2 million for the threenine months ended March 31,September 30, 2019. The increasedecrease in cash flows from operating activities resulted primarily from an increase in net working capital.capital, partially offset by the distribution received from NLR. Net cash used in investing activities was $0.1 million for the threenine months ended March 31,September 30, 2020, was comparablecompared with net cash provided by investing activities of $0.1 million for the nine months ended September 30, 2019, due to higher capital expenditures in the same period for 2019.current year. Net cash used in financing activities was $13.2$34.3 million for the threenine months ended March 31,September 30, 2020, compared with $10.3$35.8 million for the threenine months ended March 31,September 30, 2019. The increase in cash used in financing activitiesThis decrease was primarily due to a $2.9 millionthe decrease in net borrowings.our quarterly distributions paid, partially offset by principal payments on our term loan and the payment of loan fees associated with amending our credit facility during the second quarter of 2020.
We incurred capital expenditures of $22 thousand$0.1 million for the threenine months ended March 31,September 30, 2020. We do not anticipate significant capital spending for the remainder of 2020.
During the nine months ended September 30, 2020 we received a distribution of $1.0 million from our NLR joint venture. We did not make any equity method investee contributions related to the NLR joint venture for the three months ended March 31, 2020,during this period and we do not anticipate making significant equity contributions to NLR for the remainder of 2020. We expect to receive future distributions from NLR as excess cash becomes available.
Revolving Credit Facility
Green Plains Operating Company has a $200.0 million secured revolving credit facility which matures on July 1, 2020, to fund working capital, acquisitions, distributions, capital expenditures and other general partnership purposes. We intendThe credit facility was amended on June 4, 2020, decreasing the total amount available from $200.0 million to renew the$135.0 million. The amended credit facility includes a $130.0 million term loan and a $5.0 million revolving credit facility, or replace itmaturing on December 31, 2021. Principal payments of $12.5 million were made on the term loan during the three and nine months ended September 30, 2020. Monthly principal payments of $2.5 million are required October 15, 2020 through April 15, 2021, with anothera step up to monthly payments of $3.2 million beginning May 15, 2021 through maturity. As of September 30, 2020, the term loan had a balance of $117.5 million and an interest rate of 6.00%, and there was a swing line loan outstanding of credit$0.7 million at an interest rate of 7.25%.
In certain situations we are required to make prepayments on or before the expiration date. At March 31, 2020, the outstanding principal balance was $130.2on the credit facility. If at any time subsequent to July 15, 2020, 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 an average interest rate100% of 3.95%.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. As of September 30, 2020, no prepayments on the term loan were required or paid.
The revolving credit facility, which is provided by a syndicate of financial institutions, will mature on July 1, 2020 unless extended by agreement of the lenders or replaced by another funding source. We are currently working with the existing lender group to extend the credit facility. While we have not yet formalized the credit facility or secured additional funding necessary to repay the loan, we believe it is probable that we will source appropriate funding given our consistent and stable fee-based cash flows, ongoing profitability, low debt leverage and history of obtaining financing on reasonable commercial terms. In the unlikely scenario that we are unable to refinance our debt with the lenders, we will consider other financing sources, including but not limited to, the restructuring or issuance of new debt with a different lending group, the issuance of additional partnership units, or other measures.
We use LIBOR as a reference rate for our revolving 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 willmay need to renegotiateamend 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.
For more information related to our debt, see Note 4 – Debt to the consolidated financial statements in this report.
Distributions to Unitholders
On February 7, 2020, the partnership distributed $11.3 million to unitholders of record as of January 31, 2020, related to the quarterly cash distribution of $0.475 per unit that was declared on January 16, 2020, for the quarter ended December 31, 2019.
On May 8, 2020, the partnership distributed $2.8 million to unitholders of record as of May 1, 2020, related to the quarterly cash distribution of $0.12 per unit that was declared on April 16, 2020 for the quarter ended March 31, 2020.
On August 7, 2020, the partnership distributed $2.8 million to unitholders of record as of July 31, 2020, related to the quarterly cash distribution of $0.12 per unit that was declared on July 16, 2020, for the quarter ended June 30, 2020.
On October 15, 2020, the board of directors of the general partner reduced thedeclared a quarterly cash distribution by 75% toof $0.12 per unit, or approximately $2.8 million, for the quarter ended March 31,September 30, 2020. This reduction will free up approximately $33.8 million annually, which we intend to use to amortize debt. The distribution is payable on May 8,November 13, 2020, to unitholders of record at the close of business on May 1,November 6, 2020.
Contractual Obligations
Our contractual obligations as of March 31,September 30, 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 debt obligations (1) | $ | 130,200 | $ | 130,200 | $ | - | $ | - | $ | - | $ | 118,200 | $ | 34,035 | $ | 84,165 | $ | - | $ | - | ||||||||||
Interest and fees on debt obligations (2) | 1,376 | 1,376 | - | - | - | 8,008 | 6,523 | 1,485 | - | - | ||||||||||||||||||||
Operating leases (3) | 42,838 | 14,213 | 17,317 | 7,480 | 3,828 | 41,970 | 12,617 | 17,474 | 8,300 | 3,579 | ||||||||||||||||||||
Service agreements (4) | 794 | 637 | 157 | - | - | 466 | 309 | 157 | - | - | ||||||||||||||||||||
Other (5) | 4,719 | 905 | 1,782 | 949 | 1,083 | 4,953 | 1,082 | 1,952 | 604 | 1,315 | ||||||||||||||||||||
Total contractual obligations | $ | 179,927 | $ | 147,331 | $ | 19,256 | $ | 8,429 | $ | 4,911 | $ | 173,597 | $ | 54,566 | $ | 105,233 | $ | 8,904 | $ | 4,894 | ||||||||||
(1) Includes the current portion of long-term debt and excludes the effect of any debt discounts.
(2) Interest amounts are calculated overbased on the terms of the loans using current interest rates, assuming scheduled principal and interest amounts are paid pursuant to the debt agreements.credit agreement. Includes administrative and/or commitment fees on debt obligations.
(3) Operating lease costs are primarily for property and railcar leases.leases and exclude leases not yet commenced with undiscounted future lease payments of approximately $24.5 million.
(4) Service agreements are primarily related to minimum commitments on railcar unloading contracts at our fuel terminals.
(5) Includes asset retirement obligations to return property and equipment to its original condition at the termination of lease agreements.
Critical Accounting Policies and Estimates
Key accounting policies, including those relating to revenue recognition, leases, asset retirement obligations, and impairment of long-lived assets and goodwill are impacted significantly by judgments, assumptions and estimates used to prepare our consolidated financial statements. Information about our critical accounting policies and estimates is included in our 2019 annual report.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market risk is the risk of loss arising from adverse changes in market rates and prices. At this time, we conduct all of our business in U.S. dollars and are not exposed to foreign currency risk.
Interest Rate Risk
We are exposed to interest rate risk through our revolving credit facility, which bears interest at variable rates. At March 31,September 30, 2020, we had $130.2$118.2 million outstanding under our revolvingthe credit facility. A 10% change in interest rates would affect our interest expense by approximately $514 thousand$0.7 million per year, assuming no changes in the amount outstanding or other variables under our revolving credit facility.variables.
Other details about our outstanding debt are discussed in the notes to the consolidated financial statements included in this report and in our 2019 annual report.
Commodity Price Risk
We do not have any direct exposure to risks associated with fluctuating commodity prices because we do not own the ethanol and other fuels that are stored at our facilities or transported by our railcars and trucks.
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 March 31,September 30, 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 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.
Emerging Growth Company Status
As an emerging growth company, we arewere not required to provide an auditor’s attestation report on the effectiveness of our system of internal control over financial reporting, adopt new or revised financial accounting standards until they apply to private companies, comply with any new requirements adopted by the PCAOB to rotate audit firms or supplement the auditor’s report with additional information about the audit and financial statements of the issuer, or disclose the same level of information about executive compensation required of larger public companies.
We have elected to take advantage of these provisions except for the exemption that allowsallowed us to extend the transition period for compliance with new or revised financial accounting standards. This election is irrevocable.
WeEffective December 31, 2020, we will no longer be an emerging growth company and will be required to provide an independent auditor’s attestation report on the earliesteffectiveness of (i)our system of control over financial reporting as of December 31, 2020. In addition, management will continue to be required to report on the last daydesign and operating effectiveness of the fiscal year endingour internal control over financial reporting as of December 31, 2020, (ii)based on the last dayInternal Control – Integrated Framework (2013) issued by the Committee on Sponsoring Organizations of the fiscal year in which we have more than $1.0 billion in annual revenues, (iii) the date on which the market value of our common units held by non-affiliates exceeds $700.0 million, or (iv) the date on which we have issued more than $1.0 billion of non-convertible debt over a three-year period.Treadway Commission.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
We may be involved in litigation that arises during the ordinary course of business. We are not, however, involved in any material litigation at this time.
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, 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. 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 update 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 business maycontinues to be adversely impacted by the recent COVID-19 outbreak in addition to a decrease in energy demand.outbreak.
The recent outbreak of the coronavirus, or COVID-19, which has been declared by the World Health Organization to be a pandemic, has spread across the globe and is impactingcontinues to impact worldwide economic activity. COVID-19 poses a risk on all aspects of 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, or that of our parent from which we obtain a significant portion of our revenues, 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 parent’s products;
impacts on our supply chain and potential limitations of supply of our parent’s feedstocks;
interruptions of our distribution systems and delays in the delivery of product;
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.
The COVID-19 pandemic and related economic repercussions have created significant volatility, uncertainty, and turmoil in the energy industry. In addition to COVID-19, in early March, the Organization of Petroleum Exporting Countries and their allies (collectively, OPEC+) failed to reach an agreement on production levels for crude oil. This was quickly followed by a widespread slowdown in the U.S. and global economy in an effort to slow the COVID-19 pandemic. While OPEC+ agreed in April to cut production, downward pressure on prices has continued and could continue for the foreseeable future. A combination of these events has significantly deteriorated both prices and demand for various energy commodities and motor fuels, including ethanol, which could negatively impact our business and that of our parent. We are unable to predict the overall impact these events will have on our future financial position and operations, including those of our parent.
We arecontinue to actively managingmanage 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 well as adverse developments in our business. It is not possible for us to predict whether there will be 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.operations or those of our parent.
Our revolving credit facility includes restrictions that may limit our ability to finance future operations, meet our capital needs or expand our business. In addition, our revolving credit facility matures on July 1, 2020 and we may not be able to renew, extend or replace the expiring facility. If we fail to comply with covenants in our revolving credit facility or if the facility is terminated, we may be required to repay our indebtedness thereunder, which may have an adverse effect on our liquidity.
We are dependent upon the earnings and cash flow generated by our operations in order to meet our debt service obligations and to allow us to pay cash distributions to our unitholders. The operating and financial restrictions and covenants in our revolving credit facility or in any future financing agreements could restrict our ability to finance future operations or capital needs or to expand or pursue our business activities, which may, in turn, limit our ability to pay cash distributions to our unitholders. For example, our revolving credit facility restricts our ability to, among other things:
make certain cash distributions;
incur certain indebtedness;
create certain liens;
make certain investments;
merge or sell certain of our assets; and
expand the nature of our business.
Furthermore, our revolving credit facility contains covenants requiring us to maintain certain financial ratios.
The provisions of our revolving credit facility may affect our ability to obtain future financing and pursue attractive business opportunities and our flexibility in planning for, and reacting to, changes in business conditions. In addition, a failure to comply with the provisions of our revolving credit facility could result in an event of default that could enable our lenders, subject to the terms and conditions of our revolving credit facility, to declare the outstanding principal of that debt, together with accrued interest, to be immediately due and payable and/or to proceed against the collateral granted to them to secure such debt. If there is a default or event of default under our debt the payment of our debt is accelerated, defaults under our other debt instruments, if any, may be triggered, and our assets may be insufficient to repay such debt in full. Therefore, the holders of our units could experience a partial or total loss of their investment.
The revolving credit facility matures on July 1, 2020, and any outstanding balance is due in full on that date. As of March 31, 2020, we had an outstanding principal balance of $130.2 million under the credit facility. The ability to renew the credit facility, refinance the debt or otherwise repay the outstanding debt prior to maturity is dependent upon capital/credit market conditions as well as our financial condition, operating results and cash flows, all of which are subject to prevailing economic and competitive conditions in addition to financial, business, legislative, governmental, political, regulatory and other factors beyond our control. Therefore, we can give no assurance that we will be able to renew the credit facility or refinance the debt on terms favorable to us, or at all, or that we will otherwise be able repay the credit facility obligations in full by the maturity date. In such event, we could face substantial liquidity problems, which could cause a materially adverse impact on our results of operations, cash flows and ability to make distributions to our unitholders.
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 parent’s business. Reduced demand for ethanol may depress the value of our parent’s products, erode its margins, and reduce our parent’s, and consequently 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 the property, liability and business interruption policies of our parent, subject to the deductibles and limits under those policies. Our parent has acquired insurance that we and our parent 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 to our parent. 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 and our parent’s operations, cash flows and financial position.
Certain of our parent’s 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 havehas been modified to fortify them to meet structural requirements for those regions of the country. Our parent has 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 to make distributions to our unitholders.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
Exhibit No. | Description of Exhibit |
31.1 | |
31.2 | |
32.1 | |
32.2 | |
101 | The following information from Green Plains Partners LP Quarterly Report on Form 10-Q for the quarterly period ended |
104 | The cover page from Green Plains Partners LP Quarterly Report on Form 10-Q for the quarterly period ended |
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, thereunto duly authorized.
GREEN PLAINS PARTNERS LP | ||
(Registrant) | ||
By: | Green Plains Holdings LLC, its general partner | |
Date: | By: | /s/ Todd A. Becker |
Todd A. Becker | ||
President and Chief Executive Officer | ||
(Principal Executive Officer) | ||
Date: | By: | /s/ G. Patrich Simpkins Jr. |
G. Patrich Simpkins Jr. | ||
Chief Financial Officer | ||
(Principal Financial Officer) |