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EX-32.2 - EX-32.2 - Granite Falls Energy, LLCc749-20170131ex322dfd743.htm
EX-32.1 - EX-32.1 - Granite Falls Energy, LLCc749-20170131ex321d8961a.htm
EX-31.2 - EX-31.2 - Granite Falls Energy, LLCc749-20170131ex312f4dc54.htm
EX-31.1 - EX-31.1 - Granite Falls Energy, LLCc749-20170131ex3112b0fd7.htm

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 January 31, 2017

 

OR

 

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

For the transition period from               to               .

 

COMMISSION FILE NUMBER 000-51277

 

GRANITE FALLS ENERGY, LLC

(Exact name of registrant as specified in its charter)

 

 

 

 

Minnesota

 

41-1997390

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

15045 Highway 23 SE, Granite Falls, MN 56241-0216

(Address of principal executive offices)

 

(320) 564-3100

(Registrant's telephone number, including area code)

 

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

☒Yes    No

 

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

☒Yes    No

 

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

 

 

 

Large Accelerated Filer 

Accelerated Filer  

Non-Accelerated Filer ☒

Smaller Reporting Company

 

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

Yes    ☒No

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

As of March 17, 2017 there were 30,606 membership units outstanding.

 


 

2


 

PART IFINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

GRANITE FALLS ENERGY, LLC AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

 

    

January 31, 2017

    

October 31, 2016

 

 ASSETS

    

(unaudited)

    

 

 

Current Assets

 

 

 

 

 

 

 

Cash

 

$

3,190,935

 

$

13,797,857

 

Accounts receivable

 

 

4,352,618

 

 

6,654,994

 

Inventory

 

 

18,612,499

 

 

18,341,413

 

Commodity derivative instruments

 

 

892,711

 

 

1,228,926

 

Prepaid expenses and other current assets

 

 

397,987

 

 

325,989

 

Total current assets

 

 

27,446,750

 

 

40,349,179

 

 

 

 

 

 

 

 

 

Property and Equipment, net

 

 

77,046,207

 

 

78,968,016

 

 

 

 

 

 

 

 

 

Goodwill

 

 

1,372,473

 

 

1,372,473

 

 

 

 

 

 

 

 

 

Investment Deposit

 

 

750,000

 

 

 —

 

 

 

 

 

 

 

 

 

Other Assets

 

 

771,717

 

 

781,254

 

 

 

 

 

 

 

 

 

Total Assets

 

$

107,387,147

 

$

121,470,922

 

 

 

 

 

 

 

 

 

LIABILITIES AND MEMBERS' EQUITY

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

Current maturities of long-term debt

 

$

462,086

 

$

490,057

 

Checks drawn in excess of bank balance

 

 

636,678

 

 

1,866,683

 

Accounts payable

 

 

3,523,335

 

 

5,624,840

 

Corn payable to FCE

 

 

29,790

 

 

5,358,111

 

Commodity derivative instruments

 

 

122,800

 

 

 —

 

Accrued expenses

 

 

1,161,856

 

 

997,319

 

Total current liabilities

 

 

5,936,545

 

 

14,337,010

 

 

 

 

 

 

 

 

 

Long-Term Debt, less current portion

 

 

1,292,753

 

 

1,393,669

 

 

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Members' Equity

 

 

 

 

 

 

 

Members' equity attributable to Granite Falls Energy, LLC consists of 30,606 units authorized,  issued, and outstanding at both January 31, 2017 and October 31, 2016

 

 

76,673,130

 

 

83,684,529

 

Non-controlling interest

 

 

23,484,719

 

 

22,055,714

 

Total members' equity

 

 

100,157,849

 

 

105,740,243

 

 

 

 

 

 

 

 

 

Total Liabilities and Members' Equity

 

$

107,387,147

 

$

121,470,922

 

 

Notes to Condensed Consolidated Unaudited Financial Statements are an integral part of this Statement.

 

3


 

GRANITE FALLS ENERGY, LLC AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended January 31, 

 

 

 

2017

 

2016

 

 

 

(unaudited)

 

(unaudited)

 

 

 

 

 

 

 

 

 

Revenues

 

$

54,576,064

 

$

51,001,654

 

 

 

 

 

 

 

 

 

Cost of Goods Sold

 

 

47,731,157

 

 

49,568,777

 

 

 

 

 

 

 

 

 

Gross Profit

 

 

6,844,907

 

 

1,432,877

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

1,607,221

 

 

1,400,846

 

 

 

 

 

 

 

 

 

Operating Income

 

 

5,237,686

 

 

32,031

 

 

 

 

 

 

 

 

 

Other Income (Expense):

 

 

 

 

 

 

 

Other income, net

 

 

392,265

 

 

67,679

 

Interest income

 

 

454

 

 

2,799

 

Interest expense

 

 

(41,609)

 

 

(75,964)

 

Total other income (expense), net

 

 

351,110

 

 

(5,486)

 

 

 

 

 

 

 

 

 

Net Income

 

$

5,588,796

 

$

26,545

 

 

 

 

 

 

 

 

 

Less: Net Income Attributable to Non-controlling Interest

 

 

(1,429,005)

 

 

(15,019)

 

 

 

 

 

 

 

 

 

Net Income Attributable to Granite Falls Energy, LLC

 

$

4,159,791

 

$

11,526

 

 

 

 

 

 

 

 

 

Weighted Average Units Outstanding - Basic and Diluted

 

 

30,606

 

 

30,606

 

 

 

 

 

 

 

 

 

Amounts attributable to Granite Falls Energy, LLC:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income Per Unit - Basic and Diluted

 

$

135.91

 

$

0.38

 

 

 

 

 

 

 

 

 

Distributions Per Unit

 

$

365.00

 

$

315.00

 

 

Notes to Condensed Consolidated Unaudited Financial Statements are an integral part of this Statement.

 

 

4


 

GRANITE FALLS ENERGY, LLC AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended January 31, 

 

 

 

2017

 

2016

 

 

 

(unaudited)

 

(unaudited)

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

Net income

 

$

5,588,796

 

$

26,545

 

Adjustments to reconcile net income to net cash provided by operations:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

2,492,791

 

 

2,408,849

 

Change in fair value of commodity derivative instruments

 

 

(383,860)

 

 

(306,912)

 

Gain on sale of asset

 

 

(45,000)

 

 

 —

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Restricted cash

 

 

 —

 

 

(411,790)

 

Commodity derivative instruments

 

 

842,875

 

 

811,134

 

Accounts recievable

 

 

2,302,376

 

 

4,383,728

 

Inventory

 

 

(271,086)

 

 

(213,974)

 

Prepaid expenses and other current assets

 

 

(71,998)

 

 

(1,661,945)

 

Accounts payable

 

 

(7,605,717)

 

 

(1,669,322)

 

Accrued expenses

 

 

164,537

 

 

39,135

 

Net Cash Provided by Operating Activities

 

 

3,013,714

 

 

3,405,448

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

Payment for investment deposit

 

 

(750,000)

 

 

 —

 

Payments for capital expenditures

 

 

(385,554)

 

 

(2,294,859)

 

Proceeds from sale of asset

 

 

45,000

 

 

 —

 

Net Cash Used in Investing Activities

 

 

(1,090,554)

 

 

(2,294,859)

 

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

Proceeds from long-term debt

 

 

 —

 

 

4,613,122

 

Payments on long-term debt

 

 

(128,887)

 

 

(3,721,574)

 

Proceeds (payments) from checks drawn in excess of bank balance

 

 

(1,230,005)

 

 

3,505,086

 

Distributions to non-controlling interests

 

 

 

 

(2,006,558)

 

Member distributions paid

 

 

(11,171,190)

 

 

(9,640,887)

 

Net Cash Used in Financing Activities

 

 

(12,530,082)

 

 

(7,250,811)

 

 

 

 

 

 

 

 

 

Net Decrease in Cash

 

 

(10,606,922)

 

 

(6,140,222)

 

 

 

 

 

 

 

 

 

Cash - Beginning of Period

 

 

13,797,857

 

 

12,696,536

 

 

 

 

 

 

 

 

 

Cash - End of Period

 

$

3,190,935

 

$

6,556,314

 

 

 

 

 

 

 

 

 

Supplemental Cash Flow Information

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

Interest expense

 

$

41,609

 

$

75,964

 

 

 

 

 

 

 

 

 

Supplemental Disclosure of Noncash Investing and Financing Activities

 

 

 

 

 

 

 

Capital expenditures and construction in process included in accounts payable

 

$

175,891

 

$

164,491

 

 

Notes to Condensed Consolidated Unaudited Financial Statements are an integral part of this Statement.

5


 

Table of Contents

Granite Falls Energy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

January 31, 2017

 

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Business

 

Granite Falls Energy, LLC (“GFE”) is a Minnesota limited liability company currently producing fuel-grade ethanol, distillers' grains, and crude corn oil near Granite Falls, Minnesota and sells these products, pursuant to marketing agreements, throughout the continental United States and on the international market. GFE's plant has an approximate annual production capacity of 60 million gallons, but is currently permitted to produce up to 70 million gallons of undenatured ethanol on a twelve month rolling sum basis.

 

Additionally, GFE owns a majority interest in Heron Lake BioEnergy, LLC (“HLBE”). HLBE is a Minnesota limited liability company currently producing fuel-grade ethanol, distillers' grains, and crude corn oil near Heron Lake, Minnesota and sells these products, pursuant to marketing agreements, throughout the continental United States. HLBE's plant has an approximate annual production capacity of 60 million gallons, but is permitted to produce approximately 72.3 million gallons of undenatured ethanol on a twelve month rolling sum basis. HLBE owns a majority interest in Agrinatural Gas, LLC (“Agrinatural”),  which operates a natural gas pipeline that provides natural gas to HLBE's ethanol production facility and other customers.

 

All references to “we”, “us”, “our”, and the “Company” collectively refer to GFE and its wholly-owned and majority-owned subsidiaries.

 

Basis of Presentation and Principles of Consolidation

 

The condensed consolidated unaudited financial statements as of January 31, 2017 consolidate the operating results and financial position of GFE, and its 50.6% owned subsidiary, HLBE (through GFE's 100% ownership of Project Viking, LLC). Given the Company’s control over the operations of HLBE and its majority voting interest, the Company consolidates the condensed consolidated unaudited financial statements of HLBE with GFE's condensed consolidated unaudited financial statements. The remaining 49.4% ownership of HLBE is included in the condensed consolidated unaudited financial statements as a non-controlling interest. HLBE, through its wholly owned subsidiary, HLBE Pipeline Company, LLC, owns 73% of Agrinatural. Given HLBE’s control over the operations of Agrinatural and its majority voting interest, HLBE consolidates the financial statements of Agrinatural with its consolidated unaudited financial statements, with the equity and earnings attributed to the remaining 27% noncontrolling interest. All significant intercompany balances and transactions are eliminated in consolidation. 

 

The accompanying condensed consolidated unaudited financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted as permitted by such rules and regulations. These financial statements and related notes should be read in conjunction with the financial statements and notes thereto included in the Company’s audited consolidated financial statements for the year ended October 31, 2016, contained in the Company’s annual report on Form 10-K.

 

In the opinion of management, the condensed consolidated unaudited financial statements reflect all adjustments consisting of normal recurring accruals that we consider necessary to present fairly the Company’s results of operations, financial position and cash flows. The results reported in these condensed consolidated unaudited financial statements should not be regarded as necessarily indicative of results that may be expected for any other fiscal period or for the fiscal year.

 

6


 

Table of Contents

Granite Falls Energy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

January 31, 2017

 

Reportable Operating Segments 

 

Accounting Standards Codification (“ASC”) 280, “Segment Reporting,” establishes the standards for reporting information about segments in financial statements. Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Therefore, in applying the criteria set forth in ASC 280, the Company determined that based on the nature of the products and production process and the expected financial results, the Company’s operations at GFE’s ethanol plant and HLBE’s plant, including the production and sale of ethanol and its co-products, are aggregated into one reporting segment.

 

Additionally, the Company also realizes relatively immaterial revenue from natural gas pipeline operations at Agrinatural, HLBE’s majority owned subsidiary. Before and after accounting for intercompany eliminations, these revenues from Agrinatural’s represent less than less than 1% of our consolidated revenues and have little to no impact on the overall performance of the Company.  Therefore, the Company does not separately review Agrinatural’s revenues, cost of sales or other operating performance information.  Rather, the Company reviews Agrinatural’s natural gas pipeline financial data on a consolidated basis with the Company’s ethanol production operating segment. The Company believes that the presentation of separate operating performance information for Agrinatural’s natural gas pipeline operations would not provide meaningful information to a reader of the Company’s consolidated financial statements and would not achieve the basic principles and objectives of ASC 280.

 

Accounting Estimates

 

Management uses estimates and assumptions in preparing these condensed consolidated unaudited financial statements in accordance with generally accepted accounting principles in the United States of America. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. The Company uses estimates and assumptions in accounting for the following significant matters, among others: economic lives of property and equipment, valuation of commodity derivatives, inventory, and inventory purchase and sale commitments, and the assumptions used in the impairment analysis of long-lived assets, which includes goodwill. Actual results may differ from previously estimated amounts, and such differences may be material to our condensed consolidated unaudited financial statements. The Company periodically reviews estimates and assumptions, and the effects of revisions are reflected in the period in which the revision is made.

 

Revenue Recognition

 

The Company generally sells ethanol and related products pursuant to marketing agreements. Revenues from the production of ethanol and the related products are recorded when the customer has taken title and assumed the risks and rewards of ownership, prices are fixed or determinable and collectability is reasonably assured. Ethanol and related products are generally shipped free on board (FOB) shipping point. The Company believes there are no ethanol sales, during any given month, which should be considered contingent and recorded as deferred revenue.

 

In accordance with the Company's agreements for the marketing and sale of ethanol and related products, marketing fees and commissions due to the marketers are deducted from the gross sales price as earned. These fees and commissions are recorded net of revenues, as they do not provide an identifiable benefit that is sufficiently separable from the sale of ethanol and related products. Shipping costs paid by the Company to the marketer in the sale of ethanol are not specifically identifiable and, as a result, are recorded based on the net selling price reported to the Company from the marketer. Shipping costs incurred by the Company in the sale of distillers' grains and corn oil are included in cost of goods sold.

 

Agrinatural recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee for the arrangement is fixed or determinable and collectability is reasonably assured.

 

7


 

Table of Contents

Granite Falls Energy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

January 31, 2017

 

Inventory

 

Inventory is stated at the lower of cost or net realizable value in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2015-11 issued in July 2015. Cost for all inventories is determined using the first in first out method (“FIFO”).  Net realizable value is the estimated selling prices in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation.  Inventory consists of raw materials, work in process, finished goods, and spare parts.  Corn is the primary raw material along with other raw materials.  Finished goods consist of ethanol, distillers' grains, and corn oil.

 

Derivative Instruments

 

From time to time the Company enters into derivative transactions to hedge its exposures to commodity price fluctuations. The Company is required to record these derivatives on the balance sheets at fair value.

 

In order for a derivative to qualify as a hedge, specific criteria must be met and appropriate documentation maintained. Gains and losses from derivatives that do not qualify as hedges, or are undesignated, must be recognized immediately in earnings. If the derivative does qualify as a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will be either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. Changes in the fair value of undesignated derivatives are recorded in earnings.

 

Additionally, the Company is required to evaluate its contracts to determine whether the contracts are derivatives. Certain contracts that literally meet the definition of a derivative may be exempted as “normal purchases or normal sales”.  Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business. Contracts that meet the requirements of normal purchases or sales are documented as normal and exempted from accounting and reporting requirements, and therefore, are not marked to market in our condensed consolidated unaudited financial statements.

 

In order to reduce the risks caused by market fluctuations, the Company occasionally hedges its anticipated corn, natural gas, and denaturant purchases and ethanol sales by entering into options and futures contracts. These contracts are used with the intention to fix the purchase price of anticipated requirements for corn in the Company's ethanol production activities and the related sales price of ethanol. The fair value of these contracts is based on quoted prices in active exchange-traded or over-the-counter market conditions. Although the Company believes its commodity derivative positions are economic hedges, none have been formally designated as a hedge for accounting purposes and derivative positions are recorded on the balance sheet at their fair market value, with changes in fair value recognized in current period earnings or losses. The Company does not enter into financial instruments for trading or speculative purposes.

 

The Company has adopted authoritative guidance related to “Derivatives and Hedging,” and has included the required enhanced quantitative and qualitative disclosure about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses from derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. See further discussion in Note 4.

 

Investment 

   

On  November 1, 2016, GFE subscribed to purchase 1,500 capital units of Ringneck Energy & Feed, LLC (“Ringneck”) at a price of $5,000 per unit for a total of $7,500,000.  GFE paid a down payment of $750,000 in connection with the subscription, and signed a promissory note for $6,750,000 for the remaining balance of the subscription. If Ringneck accepts GFE’s subscription, GFE will be required to pay Ringneck the entire amount due under the promissory note within 20 days of receiving notice from Ringneck that it is due. If GFE fails to pay the entire amount due, GFE will be charged 12% interest per year, and Ringneck may seek legal action to force GFE to pay. If Ringneck does not meet certain conditions of its offering or rejects GFE’s subscription, GFE expects that its promissory note will be cancelled and our down payment will be refunded to us.

   

8


 

Table of Contents

Granite Falls Energy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

January 31, 2017

 

Ringneck is a South Dakota limited liability company that intends to build an 80 million gallon per year ethanol manufacturing plant in outside of Onida, South Dakota in Sully County. If Ringneck accepts our subscription, our investment is sufficient to secure the Company the right to appoint one director to the board of directors of Ringneck.  

 

The investment is accounted for by the equity method, under which the Company’s share of the net income of the investee is recognized as income in the Company’s Consolidated Statement of Operations and added to the investment account, and distributions received from the affiliates are treated as a reduction of the investment.

 

 

2.   RISKS AND UNCERTAINTIES

 

The Company has certain risks and uncertainties that it experiences during volatile market conditions. These volatilities can have a severe impact on operations.  The Company's revenues are derived from the sale and distribution of ethanol, distillers' grains, corn oil, and natural gas to customers primarily located in the United States. Corn for the production process is supplied to our plant primarily from local agricultural producers and from purchases on the open market.  Ethanol sales typically average 75 - 90% of total revenues and corn costs typically average 65 - 85% of cost of goods sold.

 

The Company's operating and financial performance is largely driven by the prices at which they sell ethanol and the net expense of corn. The price of ethanol is influenced by factors such as supply and demand, the weather, government policies and programs, and unleaded gasoline prices and the petroleum markets as a whole. Excess ethanol supply in the market, in particular, puts downward pressure on the price of ethanol. Our largest cost of production is corn.  The cost of corn is generally impacted by factors such as supply and demand, the weather, government policies and programs, and our risk management program used to protect against the price volatility of these commodities.

 

The supply and demand for ethanol are impacted by federal and state legislation and regulation, most significantly the Renewable Fuels Standard (“RFS”), and any changes in legislation or regulation could cause the demand for ethanol to decline or its supply to increase, which could have a material adverse effect on our business, results of operations and financial condition, and the ability to operate at a profit.

   

On November 23, 2016, the U.S. Environmental Protection Agency (the “EPA”) announced the final rule for 2017 Renewable Volume Obligation (“RVO”) requirements, which is set at 15.0 billion gallons for corn-based ethanol, which equates to the original requirements set by the RFS. Comparatively, the EPA established RVOs requirements for the RFS for calendar years 2014, 2015, and 2016 were below the original requirements set by the RFS. In January 2017, the Trump administration imposed a government-wide freeze on new and pending regulations, which included the 2017 RVOs that were originally intended to go into effect on February 10, 2017. Industry organizations such as the Renewable Fuels Association and Growth Energy believe this action is simply procedural with a new administration, and do not expect it to result in any substantive changes to the rule itself. Additionally, opponents of ethanol such as large oil companies will likely continue their efforts to repeal or reduce the RFS through lawsuits or lobbying of Congress. Successful reduction or repeal of the blending requirements of the RFS and/or continued political uncertainty under the new administration regarding the RFS could result in a significant decrease in ethanol demand. If demand for ethanol decreases, it could materially adversely affect our business, results of operations and financial condition.

 

Ethanol has historically traded at a discount to gasoline; however, due to a decline in oil prices, ethanol traded at a premium to gasoline during much of the three months ended January 31, 2017, causing a disincentive for discretionary blending of ethanol. However, in January 2017, the oil and gasoline prices rose resulting in ethanol trading at a discount to gasoline since January 2017, which may encourage discretionary blending of ethanol beyond the required blend rate. Management anticipates that ethanol prices will continue to change in relation to changes in corn and energy prices. If corn, crude oil and gasoline prices decrease, that could have a negative impact on ethanol pricing and demand, which could result in a material adverse effect on our business, results of operations and financial condition.

 

 

9


 

Table of Contents

Granite Falls Energy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

January 31, 2017

 

3.   INVENTORY

 

Inventories consist of the following:

 

 

 

 

 

 

 

 

 

 

    

January 31, 2017

    

October 31, 2016

 

 

 

(unaudited)

 

 

 

Raw materials

 

$

7,349,648

 

$

9,098,492

 

Supplies

 

 

2,625,071

 

 

2,755,958

 

Work in process

 

 

1,364,882

 

 

1,347,754

 

Finished goods

 

 

7,272,898

 

 

5,139,209

 

Totals

 

$

18,612,499

 

$

18,341,413

 

 

The Company performs a lower of cost or net realizable value analysis on inventory to determine if the market values of certain inventories are less than their carrying value, which is attributable primarily to decreases in market prices of corn and ethanol. Based on the lower of cost or net realizable value analysis, the Company recorded a loss on ethanol inventories, as a component of cost of goods sold, of approximately $207,000 and $353,000 for the three months ended January 31, 2017 and 2016, respectively.

 

 

4.   DERIVATIVE INSTRUMENTS

 

As of January 31, 2017, the total notional amount of GFE’s outstanding corn derivative instruments was approximately 2,975,000 bushels, comprised of long corn positions on 1,800,000 bushels that were entered into to hedge forecasted ethanol sales through March 2017, and short corn positions on 1,175,000 bushels that were entered into to hedge forecasted corn purchases through December 2017. There may be offsetting positions that are not shown on a net basis that could lower the notional amount of positions outstanding as disclosed above. 

 

As of January 31, 2017, the total notional amount of GFE’s outstanding ethanol derivative instruments was approximately 1,260,000 gallons that were entered into to hedge forecasted ethanol sales through March 2017.

 

As of January 31, 2017, GFE did not have any cash collateral (restricted cash) related to margin requirements for commodity derivative instrument positions held by a broker.

 

As of January 31, 2017, the total notional amount of HLBE’s outstanding corn derivative instruments was approximately 5,630,000 bushels, comprised of long corn positions on 3,250,000 bushels that were entered into to hedge forecasted ethanol sales through March 2017, and short corn positions on 2,380,000 bushels that were entered into to hedge forecasted corn purchases through December 2017. There may be offsetting positions that are not shown on a net basis that could lower the notional amount of positions outstanding.

 

As of January 31, 2017, the total notional amount of HLBE’s outstanding ethanol derivative instruments was approximately 1,260,000 gallons that were entered into to hedge forecasted ethanol sales through March 2017.

 

As of January 31, 2017, HLBE did not have any cash collateral (restricted cash) related to margin requirements for commodity derivative instrument positions held by a broker.

 

The following tables provide details regarding the Company's derivative instruments at January 31, 2017, none of which were designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

    

Balance Sheet location

    

Assets

    

Liabilities

 

Corn contracts - GFE

 

Commodity derivative instruments

 

$

 —

 

$

116,719

 

Corn contracts - HLBE

 

Commodity derivative instruments

 

 

 —

 

 

6,081

 

Ethanol contracts - GFE

 

Commodity derivative instruments

 

 

445,706

 

 

 —

 

Ethanol contracts - HLBE

 

Commodity derivative instruments

 

 

447,005

 

 

 —

 

Totals

 

 

 

$

892,711

 

$

122,800

 

 

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Table of Contents

Granite Falls Energy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

January 31, 2017

 

The following tables provide details regarding the Company's derivative instruments at October 31, 2016, none of which were designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

    

Balance Sheet location

    

Assets

    

Liabilities

 

Corn contracts - GFE

 

Commodity derivative instruments

 

$

63,050

 

$

 —

 

Corn contracts - HLBE

 

Commodity derivative instruments

 

 

388,525

 

 

 —

 

Ethanol Contracts - GFE

 

Commodity derivative instruments

 

 

503,538

 

 

 —

 

Ethanol Contracts - HLBE

 

Commodity derivative instruments

 

 

273,813

 

 

 —

 

Totals

 

 

 

$

1,228,926

 

$

 —

 

 

At October 31, 2016, the Company did not have any cash collateral (restricted cash) related to margin requirements for commodity derivative instrument positions held by a broker.

 

The following tables provide details regarding the gains (losses) from Company's derivative instruments in statements of operations, none of which are designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Statement of

 

Three Months Ended  January 31, 

 

 

    

Operations Location

    

2017

    

2016

 

Corn contracts

 

Cost of Goods Sold

 

$

(33,137)

 

$

195,998

 

Ethanol contracts

 

Revenues

 

 

416,997

 

 

78,556

 

Natural gas contracts

 

Cost of Goods Sold

 

 

 —

 

 

32,358

 

Total gain

 

 

 

$

383,860

 

$

306,912

 

 

 

 

5.   FAIR VALUE

 

The following table provides information on those derivative assets and liabilities measured at fair value on a recurring basis at January 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurement Using

 

 

 

Carrying Amount

 

 

 

 

Quoted Prices

 

Significant Other

 

Significant

 

 

 

in Balance Sheet

 

 

 

 

in Active Markets

 

Observable Inputs

 

Unobservable Inputs

 

Financial Asset:

 

January 31, 2017

 

Fair Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Commodity Derivative Instruments - Ethanol

 

$

892,711

 

$

892,711

 

$

511,825

 

$

380,886

 

$

 —

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity Derivative Instruments - Corn

 

$

122,800

 

 

122,800

 

$

122,800

 

$

 —

 

$

 —

 

 

The following table provides information on those derivative assets measured at fair value on a recurring basis at October 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurement Using

 

 

 

Carrying Amount

 

 

 

 

Quoted Prices

 

Significant Other

 

Significant

 

 

 

in Balance Sheet

 

 

 

 

in Active Markets

 

Observable Inputs

 

Unobservable Inputs

 

Financial Asset:

 

October 31, 2016

 

Fair Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Commodity Derivative Instruments - Corn

 

$

451,575

 

$

451,575

 

$

451,575

 

$

 —

 

$

 —

 

Commodity Derivative Instruments - Ethanol

 

$

777,351

 

$

777,351

 

$

777,351

 

$

 —

 

$

 —

 

 

The Company determines the fair value of commodity derivative instruments by obtaining fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes and live trading levels from the Chicago Board of Trade market and New York Mercantile Exchange. We determine the fair value of ethanol Level 2 instruments by model-based techniques in which all significant inputs are observable in the markets noted above.

 

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Table of Contents

Granite Falls Energy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

January 31, 2017

 

 

6.   DEBT FACILITIES

 

Debt financing consists of the following:

 

 

 

 

 

 

 

 

 

 

 

January 31, 2017

 

October 31, 2016

 

 

 

(unaudited)

 

 

 

 

GRANITE FALLS ENERGY:

 

 

 

 

 

 

 

Revolving term loan, see terms below.

 

$

 

$

 

Term note payable to Fagen Energy, see terms below.

 

 

 —

 

 

 —

 

 

 

 

 

 

 

 

 

HERON LAKE BIOENERGY:

 

 

 

 

 

 

 

Revolving term note payable to lending institution, see terms below.

 

 

 —

 

 

 —

 

Assessment payable as part of water treatment agreement, due in semi-annual installments of $189,393 with interest at 6.55%, enforceable by statutory lien, with the final payment due in 2021. HLBE made deposits for one years' worth of debt service payments of approximately $364,000, which is included with other assets that are held on deposit to be applied with the final payments of the assessment.

 

 

1,516,977

 

 

1,517,046

 

Assessment payable as part of water supply agreement, due in monthly installments of $3,942 with interest at 8.73%, enforceable by statutory lien, with the final payment due in 2019.

 

 

87,862

 

 

97,930

 

Note payable to electrical company with monthly payments of $6,250 with interest at 0.00% and a 1.00% maintenance fee due each October, due September 2017. The electrical company is a member of HLBE.

 

 

50,000

 

 

68,750

 

Note payable to non-controlling interest member of Agrinatural.  Interest is at One Month LIBOR plus 4.0%, which was approximately 4.78% and 4.53% at January 31, 2017 and October 31, 2016, respectively.  The note is considered due on demand with payments due at Agrinatural's Board of Managers' discretion.

 

 

100,000

 

 

200,000

 

Totals

 

 

1,754,839

 

 

1,883,726

 

Less: amounts due within one year

 

 

462,086

 

 

490,057

 

Net long-term debt

 

$

1,292,753

 

$

1,393,669

 

 

Granite Falls Energy:

 

GFE has a revolving term loan facility, under which GFE could initially borrow, repay, and re-borrow in an amount up to $18,000,000.  However,  the amount available for borrowing by GFE under this facility reduces by $2,000,000 semi-annually, beginning September 1, 2014, with final payment due March 1, 2018. GFE had no outstanding balance on the revolving term loan at January 31, 2017 and October 31, 2016. Therefore, the aggregate amount available for borrowing by GFE on this facility was $10,000,000 at January 31, 2017 and October 31, 2016.  The amount available for borrowing under this facility was further reduced at March 1, 2017 to $8,000,000.

 

The interest rate is based on the bank's “One Month LIBOR Index Rate”, plus 3.05%, which equated to 3.83% and 3.25% at January 31, 2017 and October 31, 2016, respectively.

 

The credit facility also requires GFE to comply with certain financial covenants, including including restriction of the payment of dividends and maintenance of certain financial ratios including minimum working capital and a debt service coverage ratio as defined by the credit facility.  As of January 31, 2017 and October 31, 2016, GFE was in compliance with these financial covenants and expects to be in compliance throughout fiscal 2017. 

 

The credit facility is secured by substantially all assets of GFE. There are no savings account balance collateral requirements as part of this credit facility.

 

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Table of Contents

Granite Falls Energy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

January 31, 2017

 

In connection with GFE’s subscription for investment in Ringneck in November 2016, GFE entered into a credit facility with Fagen Energy which allows GFE to borrow up to $7.5 million of variable-rate, amortizing non-recourse debt from Fagen Energy using the Ringneck investment as collateral. The Fagen Energy loan bears interest from date funds are first advanced on the loan through maturity, at a rate per annum equal to the sum of (x) the One Month LIBOR Index Rate plus (y) 3.05% per annum, with an interest rate floor of 3.55%. 

 

The Fagen Energy loan  requires annual interest payments only for the first two years of the loan and monthly principal and interest payments for years 3 through 9 based on a 7-year amortization period.  The monthly amortized payments will be re-amortized following any change in interest rate. The entire outstanding principal balance of the loan, plus any accrued and unpaid interest thereon, is due and payable in full on November 1, 2025. GFE is permitted to voluntarily prepay all or any portion of the outstanding balance of this loan at any time without premium or penalty.

 

Pursuant to a pledge agreement and commercial security agreement entered into in connection with the Fagen Energy loan, GFE’s obligations are secured by all of its right, title, and interest in its investment in Ringneck, including the 1,500 units subscribed for by GFE. The loan is non-recourse to all of GFE’s other assets, meaning that in the event of default, the only remedy available to Fagen Energy will be to foreclose and seize all of GFE’s right, title and interest in its investment in Ringneck. GFE expects to use the proceeds of the loan to finance its balance of its investment in Ringneck.  As of January 31, 2017, there were no amounts outstanding under this credit facility.

 

Heron Lake BioEnergy:

 

HLBE has a revolving term note payable with a lender, under which HLBE could initially borrow, repay, and re-borrow in an amount up to $28,000,000 at any time prior to the March 1, 2022 maturity date. However, the amount available for borrowing by HLBE under this facility reduces by by $3,500,000 annually, beginning March 1, 2015 and continuing each anniversary thereafter until maturity.  HLBE had no outstanding balance on the revolving term note payable at January 31, 2017, and October 31, 2016.  Therefore, the aggregate principal amount available for borrowing by HLBE on this facility was $21,000,000 at January 31, 2017 and October 31, 2016. The amount available for borrowing under this facility was further reduced at March 1, 2017 to $17,500,000.

 

Interest on the revolving term loan accrues at a variable rate equal to 3.25% above the One-Month London Interbank Offered Rate ("LIBOR") Index rate, which was 4.03% and 3.45% at January 31, 2017, and October 31, 2016, respectively. HLBE may elect to enter into a fixed interest rate on this loan at various times throughout the term of the loan as provided in the loan agreements.

 

HLBE also agreed to pay an unused commitment fee on the unused portion of the revolving term loan commitment at the rate of 0.50% per annum. The loan is secured by substantially all of HLBE's assets including a subsidiary guarantee. 

 

During the term of the revolving term loan, HLBE is subject to certain financial covenants, including restriction of the payment of dividends, restrictions on loans and advances to Agrinatural and the maintenance of certain financial ratios including minimum working capital, minimum net worth and a debt service coverage ratio as defined by the credit facility. Failure to comply with the protective loan covenants or maintain the required financial ratios may cause acceleration of the outstanding principal balances on the revolving term loan and/or the imposition of fees, charges or penalties. As of  January 31, 2017 and October 31, 2016, HLBE was in compliance with these financial covenants and expects to be in compliance throughout fiscal 2017.

 

As part of the credit facility closing, HLBE entered into an Administrative Agency Agreement with CoBank, ACP (“CoBank”).  CoBank purchased a participation interest in the AgStar loans and was appointed the administrative agent for the purpose of servicing the loans.  As a result, CoBank will act as the agent for AgStar with respect to the credit facility. HLBE agreed to pay CoBank an annual fee of $2,500 as the agent for AgStar.

 

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Table of Contents

Granite Falls Energy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

January 31, 2017

 

In October 2003, HLBE entered into an industrial water supply development and distribution agreement with the City of Heron Lake, Jackson County, and Minnesota Soybean Processors. In consideration of this agreement, HLBE and Minnesota Soybean Processors are allocated equally the debt service on $735,000 in water revenue bonds that were issued by the City to support this project that mature in February 2019. The parties have agreed that, prior to the scheduled expiration of the agreement, they will negotiate in good faith to replace the agreement with a further agreement regarding the wells and related facilities.

 

In May 2006, HLBE entered into an industrial water supply treatment agreement with the City of Heron Lake and Jackson County. Under this agreement, HLBE pays monthly installments over 24 months starting January 1, 2007 equal to one years' debt service on approximately $3.6 million in water revenue bonds, which will be returned to HLBE if any funds remain after final payment in full on the bonds and assuming HLBE complies with all payment obligations under the agreement.

 

As of January 31, 2017 and October 31, 2016, there were a total of approximately $1,605,000 and $1,615,000, respectively, in outstanding water revenue bonds. HLBE classifies its obligations under these bonds as assessments payable. The interest rates on the bonds range from 0.50% to 8.73%.

 

Estimated annual maturities of debt at January 31, 2017, are as follows based on the most recent debt agreements:

 

 

 

 

 

 

2018

    

$

462,086

 

2019

 

 

333,015

 

2020

 

 

307,467

 

2021

 

 

326,798

 

2022

 

 

325,473

 

Total debt

 

$

1,754,839

 

 

 

 

7.   LEASES

 

GFE leases equipment, primarily rail cars, under operating leases through December 2026. Rent expense for these leases was approximately $878,000 and $894,000 for the three months ended January 31, 2017 and 2016, respectively.

 

HLBE leases equipment, primarily rail cars, under operating leases through January 2027.  Rent expense for these leases was approximately $540,000 and $533,000 for the three months ended January 31, 2017 and 2016, respectively.

 

 

8.   MEMBERS' EQUITY

 

GFE has one class of membership units.   The units have no par value and have identical rights, obligations and privileges.  Income and losses are allocated to all members based upon their respective percentage of units held. As of January 31, 2017 and October 31, 2016, GFE had 30,606 membership units authorized, issued, and outstanding.

 

In December 2016, the Board of Governors of GFE declared a cash distribution of $365 per unit or approximately $11,171,000, for unit holders of record as of December 22, 2016.  The distribution was paid in January 2017.

 

In December 2015, the Board of Governors of GFE declared a cash distribution of $315 per unit, or approximately $9,641,000, for unit holders of record as of December 17, 2015. The distribution was paid in January 2016.

 

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Table of Contents

Granite Falls Energy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

January 31, 2017

 

In December 2015, the Board of Governors of HLBE declared a cash distribution of $0.05 per unit, or approximately $3,897,000, for unit holders of record as of December 17, 2015, of which approximately $2,007,000 was made to the noncontrolling interest members of HLBE. The distribution was paid in January 2016. At December 17, 2015, GFE owned 39,420,949 Class A membership units and 15,000,000 Class B units of HLBE, and received an aggregate distribution from HLBE of $1,971,000.  The remaining $1,926,000 was distributed by HLBE to the non-controlling interest.

 

 

9.   COMMITMENTS AND CONTINGENCIES

 

Corn Storage and Grain Handling Agreement and Purchase Commitments

 

GFE has a corn storage and grain handling agreement with Farmers Cooperative Elevator Company (FCE), a member. Under the agreement, GFE agrees to purchase all of the corn needed for the operation of the plant from FCE. The price of the corn purchased will be the bid price the member establishes for the plant plus a set fee per bushel. 

 

On February 27, 2017, GFE and FCE executed an amendment to the corn storage and grain handling agreement with an effective date of February 21, 2017.  Pursuant to the terms of the amendment, the parties agreed to amend their corn storage and grain handling agreement to accelerate the termination date of the agreement to midnight August 31, 2017.  Additionally, GFE may begin posting bids for the purchase of corn beginning June 1, 2017 and thereafter, but may not accept delivery of corn at its Granite Falls, Minnesota plant until September 1, 2017.  In exchange for the early termination, GFE agreed to pay an early termination fee to FCE of approximately $255,000 on or before August 31, 2017. Prior to the amendment, the termination date of the corn storage and grain handling agreement was set to expire on November 2017.

 

At January 31, 2017, GFE had approximately 1,217,000 bushels of stored corn totaling approximately $3,898,000 with FCE, a related party, that is included in inventory.

 

At January 31, 2017, HBLE had cash and basis contracts for forward corn purchase contracts for approximately 7,740,000 bushels for delivery periods through October 2017.

 

Ethanol Contracts

 

At January 31, 2017, GFE had fixed and basis contracts to sell approximately $13,040,000 of ethanol for various delivery periods through March 2017.  

 

At January 31, 2017, HLBE had fixed and basis contracts to sell approximately $12,779,000 of ethanol for various delivery periods through March 2017.  

 

Distillers' Grain Contracts

 

At January 31, 2017, GFE had forward contracts to sell approximately $1,944,000 of distillers' grain for deliveries through March 2017.

 

At January 31, 2017, HLBE had forward contracts to sell approximately $1,255,000 of distillers' grains for delivery through March 2017.

 

Corn Oil

 

At January 31, 2017, GFE had forward contracts to sell approximately $295,000 of corn oil for delivery through February 2017.

 

At January 31, 2017, HLBE had forward contracts to sell approximately $304,000 of corn oil for delivery through February 2017.

 

 

15


 

 

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

 

We prepared the following discussion and analysis to help you better understand our financial condition, changes in our financial condition, and results of operations for the three months ended January 31, 2017 and 2016. This discussion should be read in conjunction with the condensed consolidated unaudited financial statements and related notes in Item 1 of this report and the information contained in the Company's annual report on Form 10-K for the fiscal year ended October 31, 2016.

 

Disclosure Regarding Forward-Looking Statements

 

The SEC encourages companies to disclose forward-looking information so investors can better understand future prospects and make informed investment decisions. As such, we have historical information, as well as forward-looking statements regarding our business, financial condition, results of operations, performance and prospects in this report.  All statements that are not historical or current facts are forward-looking statements. In some cases,  you can identify forward-looking statements by terms such as “anticipates”, “believes”, “could”, “estimates”, “expects”, “intends”, “may”, “plans”, “potential”, “predicts”, “projects”, “should”, “will”, “would”, and similar expressions. 

 

Forward-looking statements are subject to a number of known and unknown risks, uncertainties and other factors, many of which may be beyond our control, and may cause actual results, performance or achievements to differ materially from those projected in, expressed or implied by forward-looking statements. While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us are described more particularly in the “Risk Factors” section of our annual report on Form 10-K for the year ended October 31, 2016 and of this report on Form 10-Q. These risks and uncertainties include, but are not limited to, the following:

·

Fluctuations in the price of ethanol as a result of a number of factors, including: the price and availability of competing fuels; the overall supply and demand for ethanol and corn; the price of gasoline, crude oil and corn; and government policies;

·

Fluctuations in the price of crude oil and gasoline and the impact of lower oil and gasoline prices on ethanol prices and demand;

·

Fluctuations in the availability and price of corn, resulting from factors such as domestic stocks, demand from corn-consuming industries, such as the ethanol industry, prices for alternative crops, increasing input costs, changes in government policies, shifts in global markets or damaging growing conditions, such as plant disease or adverse weather, including drought;

·

Fluctuations in the availability and price of natural gas, which is may be affected by by factors such as weather, drilling economics, overall economic conditions and government regulations;

·

Negative operating margins which may result from lower ethanol and/or high corn prices;

·

Changes in general economic conditions or the occurrence of certain events causing an economic impact in the agriculture, oil or automobile industries;

·

Overcapacity and oversupply in the ethanol industry;

·

Ethanol may trading at a premium to gasoline at times, resulting in a disincentive for discretionary blending of ethanol beyond the requirements of the Renewable Fuels Standard (“RFS”) and consequently negatively impacting ethanol prices and demand;

·

Changes in federal and/or state laws and environmental regulations including elimination, waiver or reduction of the corn-based ethanol use requirement in the RFS and legislative acts taken by state governments such as California related to low-carbon fuels, may have an adverse effect on our business; 

·

Any impairment of the transportation, storage and blending infrastructure that prevents ethanol from reaching markets;

·

Any effect on prices and demand for our products resulting from actions in international markets, particularly the Chinese government’s imposition of increased tariffs on ethanol exported to China and anti-dumping and countervailing duties on U.S. distillers’ grains exported to China;

·

Changes in our business strategy, capital improvements or development plans;

·

Effect of our risk mitigation strategies and hedging activities on our financial performance and cash flows;

·

Competition from alternative fuels and alternative fuel additives;

·

Changes or advances in plant production capacity or technical difficulties in operating the plant; and

·

Our reliance on key management personnel.

16


 

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

 

Available Information

 

Our website address is www.granitefallsenergy.com.  Our annual report on Form 10-K, periodic reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are available, free of charge, on our website under the link “SEC Compliance”, as soon as reasonably practicable after we electronically file such materials with, or furnish such materials to, the Securities and Exchange Commission. The contents of our website are not incorporated by reference in this report on Form 10-Q.

 

Industry and Market Data

 

Much of the information in this report regarding the ethanol industry, including government regulation relevant to the industry is from information published by the Renewable Fuels Association (“RFA”), a national trade association for the United States (“U.S.”) ethanol industry, and information about the market for our products and competition is derived from publicly available information from governmental agencies or publications and other published independent sources.  Although we believe our third-party sources are reliable, we have not independently verified the information.

 

Overview

 

Granite Falls Energy, LLC (“Granite Falls Energy” or “GFE”) is a Minnesota limited liability company that owns and operates a dry mill cornbased, natural gas fired ethanol plant.  Additionally, through a wholly owned subsidiary, Project Viking, L.L.C. (“Project Viking”), GFE owns a majority interest of Heron Lake BioEnergy, LLC (“Heron Lake BioEnergy” or “HLBE”), a Minnesota limited liability company that also owns and operates a dry mill cornbased, natural gas fired ethanol plant. As of January 31, 2017, we control approximately 50.6% of HLBE's outstanding membership units through Project Viking.  Additionally, through a wholly owned subsidiary, HLBE Pipeline Company, LLC (“HLBE Pipeline Company”), HLBE owns a majority interest of Agrinatural Gas, LLC (“Agrinatural”), which operates a natural gas pipeline. Unless the context otherwise requires, references to “we”, “us”, “our”, and the “Company” refer to Granite Falls Energy and its wholly-owned and majority-owned subsidiaries.

 

Our business consists primarily of the production and sale of ethanol and its co-products (wet, modified wet and dried distillers’ grains, corn oil and corn syrup) locally, and throughout the continental U.S.    Our production operations are carried out at GFE’s ethanol plant located in Granite Falls, Minnesota and at HLBE’s ethanol plant near Heron Lake, Minnesota.    

 

The GFE ethanol plant has an approximate annual production capacity of 60 million gallons of denatured ethanol, but is currently permitted to produce up to 70 million gallons of undenatured ethanol on a twelve month rolling sum basis. The HLBE plant has an approximate annual production capacity of 60 million gallons of denatured ethanol, but is currently permitted to produce up to 72 million gallons of undenatured ethanol on a twelve month rolling sum basis.  We intend to continue working toward increasing production at both the GFE and HLBE plants to take advantage of the additional production allowed pursuant to our permits so long as we believe it is profitable to do so.

 

We market and sell the products produced at the GFE and HLBE plants primarily using third party marketers. The markets in which our products are sold may be local, regional, national, and international and depend primarily upon the efforts of third party marketers. We have contracted with Eco-Energy, LLC to market all of the ethanol produced at our ethanol plants.  We also independently market a small portion of the ethanol production at the GFE plant as E-85 to local retailers. 

 

17

 


 

We have contracted with Renewable Products Marketing Group, LLC (“RPMG”) to market the distillers’ grains produced at the GFE plant and with Gavilon Ingredients, LLC to market distillers’ grains produced at the HLBE plant. We have contracted with RPMG to market all of corn oil produced at our ethanol plants. HLBE also occasionally independently markets and sells excess corn syrup from the distillation process at the Heron Lake plant to local livestock feeders.

 

Our cost of goods sold consists primarily of costs relating to the corn and natural gas supplies necessary to produce ethanol and distillers' grains for sale at our ethanol plants. Pursuant to a corn storage and grain handling agreement, Farmers Cooperative Elevator (“FCE”) is the exclusive supplier of corn to the GFE plant. However, on February 27, 2017, GFE and FCE executed an amendment to corn storage and grain handling agreement pursuant to which, the parties agreed to amend the agreement to accelerate the termination date of the agreement to midnight August 31, 2017.  Prior to the amendment, the termination date of the corn storage and grain handling agreement was set to expire on November 2017. Under the terms of the amendment, GFE may begin posting bids for the purchase of corn beginning June 1, 2017 and thereafter, but may not accept delivery of corn at its Granite Falls, Minnesota plant until September 1, 2017.  In exchange for the early termination, GFE agreed to pay an early termination fee to FCE of approximately $255,000 on or before August 31, 2017. 

 

HLBE generally does not have long-term, fixed price contracts for the purchase of corn. Typically, HLBE purchases its corn directly from grain elevators, farmers, and local dealers within approximately 80 miles of Heron Lake, Minnesota.

 

At the GFE plant, we pay Center Point Energy/Minnegasco a per unit fee to move the natural gas through the pipeline, and we have guaranteed to move a minimum of 1,500,000 MMBTUs annually through December 31, 2025, which is the ending date of the agreement.  We also have an agreement with U.S. Energy Services, Inc. to procure contracts with various natural gas vendors on our behalf to supply the natural gas necessary to operate the Granite Falls plant.

 

HLBE has a facilities agreement with Northern Border Pipeline Company, which allows HLBE to access an existing interstate natural gas pipeline located approximately 16 miles north of its plant.  HLBE has entered into a firm natural gas transportation agreement with its majority owned subsidiary, Agrinatural.  HLBE also has an agreement with Constellation NewEnergy—Gas Division, LLC to supply the natural gas necessary to operate the Heron Lake plant.

 

We have entered into a management services agreement with HLBE pursuant to which our chief executive officer, chief financial officer, and commodity risk manager also hold those same offices with HLBE.  The management services agreement automatically renews for successive one-year terms unless either HLBE or GFE gives the other party written notice of termination prior to expiration of the then current term. The management services agreement may also be terminated by either party for cause under certain circumstances.

 

HLBE also owns a controlling 73% interest in Agrinatural, which is a natural gas distribution and sales company located in Heron Lake, Minnesota that owns approximately 187 miles of natural gas pipeline and provides natural gas to HLBE’s ethanol plant and other commercial, agricultural and residential customers through a connection with the natural gas pipeline facilities of Northern Border Pipeline Company.  Agrinatural's revenues are generated through natural gas distribution fees and sales.

 

On November 1, 2016, we subscribed to purchase 1,500 capital units of Ringneck Energy & Feed, LLC (“Ringneck”) at a price of $5,000 per unit for a total of $7,500,000.  If Ringneck accepts our subscription, our investment is sufficient to secure the Company the right to appoint one director to the board of directors of Ringneck. Details regarding our subscription for investment in Ringneck are provided below in the section below titled “Investments.”

 

In connection with our subscription, we entered into a credit facility with Fagen Energy, LLC (“Fagen Energy”), which allows GFE to borrow up to $7.5 million of variable-rate, amortizing non-recourse debt using the Ringneck investment as collateral. Details of the Fagen Energy credit facility are provided below in the section below entitled “Indebtedness - Granite Falls Energy - Credit Facility with Fagen Energy”.

 

18

 


 

Reportable Operating Segments

 

Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Our revenues from operations come from three primary sources: sales of fuel ethanol, sales of distillers' grains and sales of corn oil at GFE's ethanol plant and HLBE's ethanol plant.  Therefore, we have determined that based on the nature of the products and production process and the expected financial results, the Company’s operations at its ethanol plant and HLBE's plant, including the production and sale of ethanol and its co-products, are aggregated into one reporting segment.

 

Additionally, we also realize relatively immaterial revenue from natural gas pipeline operations at Agrinatural, HLBE's majority owned subsidiary.  The intercompany transactions between HLBE and Agrinatural resulting from the firm natural gas transportation agreement between the two companies are eliminated in consolidation. After intercompany eliminations, revenues from Agrinatural represent less than less than 1% of our consolidated revenues and have little to no impact on the overall performance of the Company.  Therefore, our management does not separately review Agrinatural's operating performance information.  Rather, management reviews Agrinatural's natural gas pipeline financial data on a consolidated basis with our ethanol production operations segment. Additionally, management believes that the presentation of separate operating performance information for Agrinatural's natural gas pipeline operations would not provide meaningful information to a reader of the Company’s condensed consolidated unaudited financial statements.

 

We currently do not have or anticipate that we will have any other lines of business or other significant sources of revenue other than the sale of ethanol and its co-products, which include distillers' grains and non-edible corn oil.

 

Plan of Operations for the Next Twelve Months

 

Over the next twelve months, we will continue our focus on operational improvements at our ethanol plant. These operational improvements include exploring methods to improve ethanol yield per bushel and increasing production output at our plants to take full advantage of our permitted production capacities, reducing our operating costs, and optimizing our margin opportunities through prudent risk-management policies.

 

We expect to have sufficient cash generated by continuing operations and availability on current credit facilities to fund our operations.  However, should we experience unfavorable operating conditions in the ethanol industry that prevent us from profitably operating the ethanol plants, we may need to seek additional funding.

 

Additionally, we expect to continue to conduct routine maintenance and repair activities at our ethanol plants. We anticipate using cash we generate from our operations and our revolving term loan to finance these plant upgrade projects.

 

Trends and Uncertainties Impacting Our Operations

 

The principal factors affecting our results of operations and financial conditions are the market prices for corn, ethanol, distillers’ grains and natural gas, as well as governmental programs designed to create incentives for the use of corn-based ethanol.  Other factors that may affect our future results of operation include those risks discussed below and in “PART II - Item 1A. Risk Factors” of this report and “PART I - Item 1. Business” and “PART I - Item 1A. Risk Factors” of our annual report on Form 10-K for the fiscal year ended October 31, 2016.

 

Our operations are highly dependent on commodity prices, especially prices for corn, ethanol, distillers’ grains

and natural gas. As a result, our operating results can fluctuate substantially due to volatility in these commodity markets. The price and availability of corn is subject to significant fluctuations depending upon a number of factors that affect commodity prices in general, including crop conditions, yields, domestic and global stocks, weather, federal policy and foreign trade. Natural gas prices are influenced by severe weather in the summer and winter and hurricanes in the spring, summer and fall. Other factors include North American exploration and production, and the amount of natural gas in underground storage during injection and withdrawal seasons.

 

19

 


 

Ethanol prices are sensitive to world crude oil supply and demand, domestic gasoline supply and demand, the price of crude oil, gasoline and corn, the price of  substitute fuels and octane enhancers, refining capacity and utilization, government regulation and incentives and consumer demand for alternative fuels. Distillers’ grains prices are impacted by livestock numbers on feed, prices for feed alternatives and supply, which is associated with ethanol plant production.

 

Because the market price of ethanol is not always directly related to corn, at times ethanol prices may lag price movements in corn prices and corn-ethanol price spread may be tightly compressed or negative. If the corn-ethanol spread is compressed or negative for sustained period, it is possible that our operating margins will decline or become negative and our ethanol plant may not generate adequate cash flow for operations. In such cases, we may reduce or cease production at our ethanol plant in order to minimize our variable costs and optimize cash flow.

 

The Renewable Fuels Standard

 

The RFS has been, and we expect will continue to be, a significant factor impacting ethanol usage. Under the provisions of the RFS, the Environmental Protection Agency (“EPA”) must publish an annual rule that establishes the number of gallons of different types of renewable fuels, including corn-based ethanol, that must be blended with gasoline in the U.S. by refineries, blenders, distributors and importers, which affects the domestic market for ethanol. The EPA assigns individual refiners, blenders and importers the renewable volume obligations (“RVOs”) they are obligated to use based on their percentage of total fuel sales. The EPA has the authority to waive the RVO requirements, in whole or in part, if there is inadequate domestic renewable fuel supply or the requirement severely harms the economy or the environment.

 

On November 23, 2016, the EPA announced the final rule for 2017 RVOs, which is set at 15.0 billion gallons for corn-based ethanol. This rule is set at 100% of the original statutory requirement for conventional ethanol, and is considered a favorable outcome by the industry.

 

In January 2017, the Trump administration imposed a government-wide freeze on new and pending regulations, which included the 2017 RVOs that were originally intended to go into effect on February 10, 2017. Industry organizations such as the Renewable Fuels Association and Growth Energy believe this action is simply procedural with a new administration, and do not expect it to result in any substantive changes to the rule itself. However, to the extent federal laws or regulations are modified, the demand for ethanol may be reduced, which could negatively and materially affect our ability to operate profitably.

 

Obligated parties use RINs to show compliance with RFS-mandated volumes. RINs are attached to renewable fuels by producers and detached when the renewable fuel is blended with transportation fuel or traded in the open market. The market price of detached RINs affects the price of ethanol in certain markets and influences the purchasing decisions by obligated parties. In November 2016, the EPA also proposed denying a petition to change the point of obligation under the RFS to the parties that own the gasoline before it is sold. In December 2016, the EPA extended the comment period to February 22, 2017. Comments submitted are now under review by the EPA.

 

The point of obligation does not directly impact ethanol producers; however, moving the point of obligation could indirectly affect ethanol producers. On February 28, 2017, the RFA reported that the Trump administration was reportedly considering an executive order to direct the EPA to move the point of obligation. On March 1, 2017, the Trump Administration announced that an executive order to change the point of obligation under the RFS was not imminent.  However, the chaotic nature of the news on shifting the point of obligation and the White House response resulted in significant short-term fluctuations in the corn, ethanol and RIN markets.

 

Current ethanol production capacity exceeds the EPA’s 2017 RVO mandates which can be satisfied by corn based ethanol. Future demand will be influenced by economic incentives to blend based on the relative value of gasoline versus ethanol, taking into consideration the octane value of ethanol, environmental requirements and the RFS RVO requirements. A significant increase in supply beyond the RFS RVO mandates could have an adverse impact on ethanol prices. Moreover, beyond the federal mandates, there are limited markets for ethanol. Further, opponents of ethanol such as large oil companies will likely continue their efforts to repeal or reduce the RFS through lawsuits or lobbying of Congress. If such efforts are successful in further reducing or repealing the blending requirements of the RFS, a significant decrease in ethanol demand may result and could have a material adverse effect on our results of operations, cash flows and financial condition, unless additional demand from exports or discretionary blending develops.

20

 


 

Results of Operations for the Three Months Ended January 31, 2017 and 2016 

 

The following table shows summary information from the results of our operations and the approximate percentage of revenues, costs of goods sold, operating expenses and other items to total revenues in our unaudited condensed consolidated statements of operations for the three months ended January 31, 2017 and 2016 (amounts in thousands).  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended  January 31, 

 

 

2017

 

2016

 

 

 

(unaudited)

 

(unaudited)

 

Income Statement Data

 

Amount

    

%  

 

Amount

    

%  

 

Revenue

 

$

54,576

 

100.0

%

 

$

51,002

 

100.0

%

 

Cost of Goods Sold

 

 

47,731

 

87.5

%

 

 

49,569

 

97.2

%

 

Gross Profit

 

 

6,845

 

12.5

%

 

 

1,433

 

2.8

%

 

Operating Expenses

 

 

1,607

 

2.9

%

 

 

1,401

 

2.7

%

 

Operating Income

 

 

5,238

 

9.6

%

 

 

32

 

0.1

%

 

Other Income (Expense), net

 

 

351

 

0.6

%

 

 

(5)

 

(0.0)

%

 

Net Income

 

 

5,589

 

10.2

%

 

 

27

 

0.1

%

 

Less: Net Income Attributable to Non-controlling Interest

 

 

(1,429)

 

(2.6)

%

 

 

(15)

 

(0.0)

%

 

Net Income Attributable to Granite Falls Energy, LLC

 

$

4,160

 

7.6

%

 

$

12

 

0.1

%

 

 

Revenues

 

Our consolidated revenue is derived principally from sales of our three primary products: ethanol, distillers’ grains and corn oil. Revenues from these products represented approximately 98.9% of our total revenues for the three months ended January 31, 2017 and 2016.  The remaining approximately 1.1% attributable to miscellaneous other revenue for the three months ended January 31, 2017 and 2016 is made up of incidental sales of corn syrup at HLBE's plant and revenues from natural gas pipeline operations at Agrinatural, net of intercompany eliminations for distribution fees paid by HLBE to Agrinatural for natural gas transportation services.  

 

The following table shows the sources of our consolidated revenue and the approximate percentage of revenues from those sources to total revenues in our unaudited condensed consolidated statements of operations for the three months ended January 31, 2017:

 

 

 

 

 

 

 

 

 

    

Three Months Ended  January 31, 2017

 

 

Sales Revenue

    

% of Total Revenues

Revenue Sources

 

(in thousands)

 

 

 

Ethanol sales

 

$

43,921

 

80.5

%

Distillers' grains sales

 

 

7,648

 

14.0

%

Corn oil sales

 

 

2,419

 

4.4

%

Miscellaneous other

 

 

588

 

1.1

%

Total Revenues

 

$

54,576

 

100.0

%

 

The following table shows the sources of our consolidated revenue and the approximate percentage of revenues from those sources to total revenues in our condensed consolidated unaudited statements of operations for the three months ended January 31, 2016:

 

 

 

 

 

 

 

 

 

    

Three Months Ended  January 31, 2016

 

 

Sales Revenue

    

% of Total Revenues

Revenue Sources

 

(in thousands)

 

 

 

Ethanol sales

 

$

40,118

 

78.7

%

Distillers' grains sales

 

 

8,531

 

16.7

%

Corn oil sales

 

 

1,815

 

3.5

%

Miscellaneous other

 

 

538

 

1.1

%

Total Revenues

 

$

51,002

 

100.0

%

 

21

 


 

Our total consolidated revenues increased by approximately 7.0% for the three months ended January 31, 2017, as compared to the three months ended January 31, 2016 due primarily to increases in the average price received for our ethanol and corn oil.  The following table reflects quantities of our three primary products sold and the average net prices received for the three months ended January 31, 2017 and 2016: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended  January 31, 2017

 

Three Months Ended  January 31, 2016

 

 

Quantity Sold

 

Avg. Net Price

 

Quantity Sold

 

Avg. Net Price

Product

 

(in thousands)

 

 

 

 

(in thousands)

 

 

 

Ethanol (gallons)

 

30,828

 

$

1.42

 

30,573

 

$

1.31

Distillers' grains (tons)

 

80

 

$

95.89

 

77

 

$

110.19

Corn oil (pounds)

 

8,889

 

$

0.27

 

8,110

 

$

0.22

 

Ethanol

 

Total revenues from sales of ethanol increased by approximately 9.5% for the three months ended January 31, 2017 compared to the three months ended January 31, 2016 due to an increase of approximately 8.6% in the average price per gallon we received for our ethanol, coupled with an slight increase of approximately 0.8% in the volumes sold. This increase in the number of gallons sold during the 2017 period is attributable to an approximately 5.7% increase in the number of gallons sold at the GFE plant during the three months ended January 31, 2017 as compared to the three months ended January 31, 2016the timing of ethanol shipments and an increase in ethanol production at the GFE plant. This increase was mitigated by a 3.7% decrease in the number of gallons of ethanol sold at the HLBE plant during the three months ended January 31, 2017 as compared to the three months ended January 31, 2016. We are currently operating our plants above their nameplate capacities. Management anticipates relatively stable ethanol production and sales during our 2017 fiscal year.

 

The increase in average market price for the three months ended January 31, 2017 as compared to the same period of 2016 is due to several factors. Strong domestic demand and export demand, as well as higher market prices for crude oil and gasoline, put upward pressure on ethanol prices. In comparison, for the three months ended January 31, 2016, lower crude oil and gasoline prices and the reduction of the volume obligations set forth in the RFS by the EPA in November 2015 had a negative effect on ethanol prices.

 

Ethanol exports have provided support for ethanol prices, especially as domestic ethanol stocks have grown. A decrease in U.S. ethanol exports could contribute to higher ethanol stocks and additional decrease in domestic ethanol prices unless additional domestic demand due to discretionary blending develop. In January 2017, China increased its tariff on ethanol imported from the U.S to 30% as of January 1, 2017, up from a 5% tariff in 2016. U.S. exports of ethanol to China were at a historical high in 2016, as China was one of the top buyers of U.S. ethanol. Management cannot estimate the effect this tariff will have on the domestic ethanol market. While ethanol exports to China continue, if ethanol prices increase, these exports to China may cease. Further, ethanol exports could potentially be higher without the higher Chinese tariff. However, it is possible that declines in domestic ethanol prices could result if export demand for U.S. ethanol by China decreases due to the higher tariff unless additional demand from domestic discretionary blending or other foreign markets develop.

 

Management anticipates that ethanol prices will continue to change in relation to changes in corn and energy prices. Declines in the price of corn or crude oil and wholesale gasoline markets could have a significant negative impact on the market price of ethanol and our profitability particularly if domestic ethanol stocks continue to build. The ethanol industry is currently experiencing growth in production capacity, predominantly through plant optimization and expansions versus new construction projects, which may result in oversupply that could negatively affecting prices unless additional domestic or export demand can be created.

 

From time to time, we engage in hedging activities with respect to our ethanol sales. At  January 31, 2017, we had approximately 2.5 million gallons of fixed and basis contracts for forward ethanol sales, comprised of approximately 1.3 million gallons of positions held by each of GFE and HLBE, for delivery periods through March 2017 .

 

Separately, ethanol derivative instruments resulted in gains of approximately $417,000 and $78,000 during the three months ended January 31, 2017 and 2016, respectively. 

22

 


 

Distillers' Grains

 

Total revenues from sales of distillers’ grains decreased by approximately 10.4% for the three months ended January 31, 2017 compared to the three months ended January 31, 2016, due to an approximately 13.0% decline in the average price per ton we received for our distillers’ grains, which was offset by an approximately 3.0% increase in the volumes sold from period to period. The increase in total tons of distillers’ grains sold during the three months ended January 31, 2017 compared to the same period of 2016 was due to an increase in the amount of wet distillers’ grains produced and sold at the HLBE plant and increase in the amount of dried distillers’ grains produced and sold at the GFE plant.  Management anticipates relatively stable distillers’ grains production going forward.

 

Management believes the decline in the selling price results primarily from weaker imports of domestic dried distillers’ grains by China, a significant buyer of domestic distillers’ grains, as well as the increased grain supplies for corn and soybeans, resulting in lower market grain prices during the three months ended January 31, 2017. The Chinese government commenced an anti-dumping investigation in January 2016 into distillers’ grains produced in the U.S. culminating in the imposition by China of anti-dumping and anti-subsidy duties on U.S. imports which has had a negative effect on export demand from China. Last fall, China issued a preliminary ruling imposing immediate anti-dumping and anti-subsidy duties on distillers grains that are produced in the United States. On January 10, 2017, China then announced a final ruling increasing anti-dumping and anti-subsidy duties, which were significantly higher than the anti-dumping duties and anti-subsidy tariffs imposed in its preliminary ruling. The imposition of these duties are expected to result in a further decline in demand from this top importer and distillers’ grains prices could remain low unless additional demand can be created from other foreign markets or domestically.

 

At January 31, 2017, GFE had forward distillers’ grains sales contracts valued at $1.9 million at for various delivery periods through March 2017 and HLBE had forward distillers’ grains sales contracts valued at $1.3 million at for various delivery periods through March 2017.

 

Corn Oil

 

Total revenues from sales of corn oil increased by approximately 33.3% for the three months ended January 31, 2017 compared to the three months ended January 31, 2016 due to an approximately 9.6% increase in pounds sold, which coupled with an approximately 21.6% higher average price per pound received for our corn oil from period to period.

 

The increase in pounds sold from period to period was attributable to an approximately 31.9%  increase in the volume sold at the GFE plant for the three months ended January 31, 2017 compared to the same period of 2016, offset by a 7.0% decrease in the volume sold at the HLBE plant.  The decrease in pounds sold at the HLBE plant was due primarily to due reduced ethanol production at the HLBE plant and decreased oil extraction rates per bushel of corn from period to period. The increase in pounds sold at the GFE plant was due primarily to due increased ethanol production and improved oil extraction rates per bushel of corn from period to period.  Management anticipates that the corn oil production our ethanol plants will be relatively stable going forward.

 

Management attributes the increase in the corn oil prices we experienced in the three months ended January 31, 2017 due to increased demand from the biodiesel industry in November and December 2016, as well as increased demand from the corn oil feed market throughout period. Management anticipates that corn oil demand due to biodiesel production will decrease as the biodiesel blenders' tax credit expired on December 31, 2016.

 

Management expects corn oil prices will remain relatively steady in the near term. However, corn oil prices may also decrease if biodiesel plants switch to lower priced alternatives such as soybean oil. The production capacity increase that is occurring throughout the ethanol industry may also result in oversupply that may negatively affecting prices unless plants curtail corn oil production or additional demand can be created. Management expects our corn oil production will be relatively stable going forward.

 

At January 31, 2017, GFE and HLBE had forward corn oil sales contracts valued at $295,000 and $304,000, respectively, at for various delivery periods through February 2017.

 

23

 


 

Cost of Goods Sold

 

Our cost of goods sold decreased by approximately 3.7% for the three months ended January 31, 2017, as compared to the three months ended January 31, 2016. As a percentage of revenues, our cost of goods sold also decreased to approximately 87.5% for the three months ended January 31, 2017, as compared to approximately 97.2% for the same period in 2016 due to the expansion of the margin between the price of ethanol and the price of corn. The cost of goods sold per gallon of ethanol sold for the three months ended January 31, 2017 was approximately $1.39 per gallon of ethanol sold compared to approximately $1.46 per gallon of ethanol produced for the three months ended January 31, 2016. 

 

The following table shows the costs of corn and natural gas (our two largest single components of costs of goods sold), as well as all other components of cost of goods sold, which includes processing ingredients, electricity, and wages, salaries and benefits of production personnel, and the approximate percentage of costs of those components to total costs of goods sold in our unaudited condensed consolidated statements of operations for the three months ended January 31, 2017:

 

 

 

 

 

 

 

 

 

 

Three Months Ended  January 31, 2017

 

 

Cost

    

% of Cost of Goods Sold

 

 

(in thousands)

 

 

 

Corn costs

 

$

35,816

 

75.0

%

Natural gas costs

 

 

3,433

 

7.2

%

All other components of costs of goods sold

 

 

8,482

 

17.8

%

Total Cost of Goods Sold

 

$

47,731

 

100.0

%

 

The following table shows the costs of corn, natural gas and all other components of cost of goods sold and the approximate percentage of costs of those components to total costs of goods sold in our unaudited condensed consolidated statements of operations for the three months ended January 31, 2016:

 

 

 

 

 

 

 

 

 

 

Three Months Ended  January 31, 2016

 

 

Cost

    

% of Cost of Goods Sold

 

 

(in thousands)

 

 

 

Corn costs

 

$

38,978

 

78.6

%

Natural gas costs

 

 

2,647

 

5.3

%

All other components of costs of goods sold

 

 

7,944

 

16.1

%

Total Cost of Goods Sold

 

$

49,569

 

100.0

%

 

Corn

 

Our aggregate cost of corn was approximately 8.1%  less for the three months ended January 31, 2017 compared to the same period of 2016,  due to an approximately 7.9% decrease in the average price per bushel paid for corn coupled with a slight decrease of 0.2% in the number of bushels of corn processed from period to period.  The corn-ethanol price spread (the difference between the price per gallon of ethanol and the price per bushel of grain divided by 2.8) for the three months ended January 31, 2017 was approximately $0.14 greater than the corn-ethanol price spread we experienced for same period of 2016. 

 

The decrease in corn prices was primarily due to lower market prices as a result of the strong 2016 harvest and the expected 2016 carryout. Corn supplies have been sufficient locally and we have had no difficulty sourcing corn during our first fiscal quarter. Management anticipates that corn supplies will remain favorable during our 2017 fiscal year which should result in relatively stable corn prices. However, lower corn prices could impact the amount of corn which is planted during 2017 which could result in higher corn prices as our 2017 fiscal year progresses. Additionally, corn prices and availability may be volatile in the future due to weather conditions, domestic and world supply and demand, current and anticipated stocks, agricultural policy and and other factors and could significantly impact our costs of production. If corn prices rise, it will have a negative effect on our operating margins unless the price of ethanol and distillers’ grains out paces rising corn prices.

 

24

 


 

From time to time we enter into forward purchase contracts for our commodity purchases and sales. At January 31, 2017,  GFE had approximately 1.2 million bushels of stored corn with FCE totaling approximately $3.9 million. At January 31, 2017, HLBE had approximately 7.7 million bushels of cash and basis contracts for forward corn purchase commitments for delivery periods through October 2017.  

 

Our corn derivative positions resulted in a loss of approximately $33,000 for the three months ended January 31, 2017, which increased cost of goods sold, compared to gains of approximately $196,000 related to corn derivative instruments for the same period of 2016. We recognize the gains or losses that result from the changes in the value of our derivative instruments from corn in cost of goods sold as the changes occur. As corn prices fluctuate, the value of our derivative instruments are impacted, which affects our financial performance. We anticipate continued volatility in our cost of goods sold due to the timing of the changes in value of the derivative instruments relative to the cost and use of the commodity being hedged.

 

Natural Gas

 

Our cost of goods sold related to natural gas costs increased approximately 29.7% for the three months ended January 31, 2017, as compared to the three months ended January 31, 2016.  This increase in cost of natural gas for the three months ended January 31, 2017 as compared to the same period in 2016 was primarily the result of an increase in the average price per MMBTU of natural gas due to increased demand and lower production which have used up natural gas stocks that built up in 2015. 

 

Management anticipates that natural gas prices may increase in the future if natural gas procedures continue to decrease production or shut down wells.  Natural gas prices will continue to be dependent upon major supply disruptions due to production problems or catastrophic weather events.

 

We had no gain or loss on natural gas derivative instruments during the three months ended January 31, 2017 for the three months ended January 31, 2016.

 

Operating Expenses

 

Operating expenses include wages, salaries and benefits of administrative employees at the plant, insurance, professional fees and similar costs. Our operating expenses increased by 14.7% for the three months ended January 31, 2017 compared to the same period ended 2016.  This increase was primarily due to an increase in our property taxes which was a result of the expiration of the State of Minnesota’s JOBZ program, which expired on December 31, 2015. Under the JOBZ program, our plants were exempt from property tax. Our efforts to optimize efficiencies and maximize production may result in a decrease in our operating expenses on a per gallon basis. However, because these expenses generally do not vary with the level of production at the plant, we expect our operating expenses to remain relatively steady throughout the remainder of the 2017 fiscal year.

 

Operating Income