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EX-32.2 - EX-32.2 - Granite Falls Energy, LLCc749-20180430ex32282917e.htm
EX-32.1 - EX-32.1 - Granite Falls Energy, LLCc749-20180430ex321fa219d.htm
EX-31.2 - EX-31.2 - Granite Falls Energy, LLCc749-20180430ex312a94c82.htm
EX-31.1 - EX-31.1 - Granite Falls Energy, LLCc749-20180430ex311768eef.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 April 30, 2018

 

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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

 

 

 

 

 

 

Large Accelerated Filer

Non-Accelerated Filer

Accelerated Filer

Smaller Reporting Company

 

 

Emerging Growth Company

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the 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 June 14, 2018, 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

 

 

 

 

 

 

 

 

 

 

  

April 30, 2018

  

October 31, 2017

 

ASSETS

  

(unaudited)

  

 

 

Current Assets

 

 

 

 

 

 

 

Cash

 

$

13,662,916

 

$

21,658,422

 

Restricted cash

 

 

1,355,872

 

 

75,189

 

Accounts receivable

 

 

4,509,095

 

 

7,622,601

 

Inventory

 

 

14,149,446

 

 

15,241,092

 

Commodity derivative instruments

 

 

292,170

 

 

244,294

 

Prepaid expenses and other current assets

 

 

596,944

 

 

361,340

 

Total current assets

 

 

34,566,443

 

 

45,202,938

 

 

 

 

 

 

 

 

 

Property and Equipment, net

 

 

68,465,842

 

 

72,271,013

 

 

 

 

 

 

 

 

 

Goodwill

 

 

1,372,473

 

 

1,372,473

 

 

 

 

 

 

 

 

 

Investment

 

 

7,500,000

 

 

7,500,000

 

 

 

 

 

 

 

 

 

Other Assets

 

 

724,032

 

 

743,106

 

 

 

 

 

 

 

 

 

Total Assets

 

$

112,628,790

 

$

127,089,530

 

 

 

 

 

 

 

 

 

LIABILITIES AND MEMBERS' EQUITY

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

Current maturities of long-term debt

 

$

322,468

 

$

432,183

 

Accounts payable

 

 

4,359,188

 

 

7,535,468

 

Commodity derivative instruments

 

 

786,338

 

 

40,379

 

Accrued expenses

 

 

1,468,778

 

 

972,043

 

Total current liabilities

 

 

6,936,772

 

 

8,980,073

 

 

 

 

 

 

 

 

 

Long-Term Debt, less current portion

 

 

8,453,325

 

 

8,465,502

 

 

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Members' Equity

 

 

 

 

 

 

 

Members' equity attributable to Granite Falls Energy, LLC consists of 30,606 units authorized,  issued, and outstanding at both April 30, 2018 and October 31, 2017

 

 

74,768,777

 

 

83,998,672

 

Non-controlling interest

 

 

22,469,916

 

 

25,645,283

 

Total members' equity

 

 

97,238,693

 

 

109,643,955

 

 

 

 

 

 

 

 

 

Total Liabilities and Members' Equity

 

$

112,628,790

 

$

127,089,530

 

 

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 April 30, 

 

Six Months Ended April 30, 

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

(unaudited)

 

(unaudited)

 

(unaudited)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

55,550,274

 

$

52,802,058

 

$

108,543,773

 

$

107,378,122

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of Goods Sold

 

 

51,734,835

 

 

48,845,558

 

 

101,723,342

 

 

96,576,715

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

 

3,815,439

 

 

3,956,500

 

 

6,820,431

 

 

10,801,407

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

1,648,003

 

 

1,584,534

 

 

3,328,146

 

 

3,191,755

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

 

2,167,436

 

 

2,371,966

 

 

3,492,285

 

 

7,609,652

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Income (Expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income, net

 

 

72,124

 

 

19,979

 

 

331,380

 

 

410,873

 

Interest income

 

 

23,380

 

 

5,060

 

 

69,853

 

 

6,885

 

Interest expense

 

 

(102,731)

 

 

(33,997)

 

 

(208,486)

 

 

(75,607)

 

Total other income (expense), net

 

 

(7,227)

 

 

(8,958)

 

 

192,747

 

 

342,151

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

2,160,209

 

$

2,363,008

 

$

3,685,032

 

$

7,951,803

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Net Income Attributable to Non-controlling Interest

 

 

(662,607)

 

 

(515,531)

 

 

(1,135,825)

 

 

(1,944,536)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income Attributable to Granite Falls Energy, LLC

 

$

1,497,602

 

$

1,847,477

 

$

2,549,207

 

$

6,007,267

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Units Outstanding - Basic and Diluted

 

 

30,606

 

 

30,606

 

 

30,606

 

 

30,606

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts attributable to Granite Falls Energy, LLC:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income Per Unit - Basic and Diluted

 

$

48.93

 

$

60.36

 

$

83.29

 

$

196.28

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions Per Unit

 

$

 —

 

$

 —

 

$

385.00

 

$

365.00

 

 

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

 

 

 

 

 

 

 

 

 

  

Six Months Ended April 30, 

 

 

2018

 

2017

 

 

(unaudited)

 

(unaudited)

Cash Flows from Operating Activities:

 

 

 

 

 

 

Net income

 

$

 3,685,032

 

$

 7,951,803

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

 

 

 

 

 

 

Depreciation and amortization

 

 

 4,606,217

 

 

 5,003,751

Change in fair value of commodity derivative instruments

 

 

 819,089

 

 

 (132,392)

Gain on sale of assets

 

 

 (24,815)

 

 

 (45,000)

Changes in operating assets and liabilities:

 

 

 

 

 

 

Restricted cash

 

 

 (1,280,683)

 

 

 (178,766)

Commodity derivative instruments

 

 

 (121,006)

 

 

 1,011,695

Accounts receivable

 

 

 3,113,506

 

 

 6,045,360

Inventory

 

 

 1,091,646

 

 

 4,349,230

Prepaid expenses and other current assets

 

 

 (235,604)

 

 

 (258,875)

Accounts payable

 

 

 (2,961,045)

 

 

 (6,234,042)

Accrued expenses

 

 

 496,735

 

 

 448,356

Net Cash Provided by Operating Activities

 

 

 9,189,072

 

 

 17,961,120

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

Payment for investment

 

 

 —

 

 

 (750,000)

Payments for capital expenditures

 

 

 (997,207)

 

 

 (769,790)

Proceeds from disposal of assets

 

 

 24,815

 

 

 45,000

Net Cash Used in Investing Activities

 

 

 (972,392)

 

 

 (1,474,790)

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

Payments on long-term debt

 

 

 (121,892)

 

 

 (157,893)

Checks drawn in excess of bank balance

 

 

 —

 

 

 (1,866,683)

Purchase of subsidiary units attributable to non-controlling interest

 

 

 —

 

 

 (46,644)

Distributions to non-controlling interests

 

 

 (4,311,192)

 

 

 —

Member distributions paid

 

 

 (11,779,102)

 

 

 (11,171,190)

Net Cash Used in Financing Activities

 

 

 (16,212,186)

 

 

 (13,242,410)

 

 

 

 

 

 

 

Net Increase (Decrease) in Cash

 

 

 (7,995,506)

 

 

 3,243,920

 

 

 

 

 

 

 

Cash - Beginning of Period

 

 

 21,658,422

 

 

 13,797,857

 

 

 

 

 

 

 

Cash - End of Period

 

$

 13,662,916

 

$

 17,041,777

 

 

 

 

 

 

 

Supplemental Cash Flow Information

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

Interest expense

 

$

 208,486

 

$

 75,607

 

 

 

 

 

 

 

Supplemental Disclosure of Noncash Investing and Financing Activities

 

 

 

 

 

 

Capital expenditures and construction in process included in accounts payable

 

$

 —

 

$

 187,500

 

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

April 30, 2018

 

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 April 30, 2018 consolidate the operating results and financial position of GFE, and its approximately 50.7% 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 49.3% 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 approximately 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 approximately 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 (“SEC”). 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, 2017, 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

April 30, 2018

 

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, inventory purchase and sale commitments, evaluation of railcar damages contingency, 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

April 30, 2018

 

Inventory

 

Inventory is stated at the lower of cost or net realizable value. 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.  Ringneck is a South Dakota limited liability company that is currently constructing an 80 million gallon per year ethanol manufacturing plant in outside of Onida, South Dakota in Sully County. GFE’s investment is sufficient to secure the Company the right to appoint one director to the board of directors of Ringneck. GFE has appointed Steve Christensen, its CEO, to serve as its appointed director.

 

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. On August 2, 2017, following notice from Ringneck accepting GFE’s subscription and that payment of the balance of GFE’s subscription and promissory note was due, GFE borrowed $7.5 million under its credit facility with Project Hawkeye, LLC (“Project Hawkeye”) and paid $6,750,000 to Ringneck as payment for the remaining balance of GFE’s subscription.  Project Hawkeye is an affiliate of Fagen, Inc., which is a member of GFE.  See Note 6 below for the terms of GFE’s credit facility with Project Hawkeye.

8


 

Table of Contents

 

Granite Falls Energy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

April 30, 2018

 

The investment will be 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 Condensed Consolidated Statements 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. The Company’s 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 a risk management program used to protect against the price volatility of these commodities. Market fluctuations in the price of and demand for these products may have a significant adverse effect on the Company’s operations, profitability and the availability and adequacy of cash flow to meet the Company’s working capital requirements.

 

 

3.   INVENTORY

 

Inventories consist of the following:

 

 

 

 

 

 

 

 

 

 

  

April 30,  2018

  

October 31,  2017

 

 

 

(unaudited)

 

 

 

Raw materials

 

$

3,682,808

 

$

4,488,923

 

Supplies

 

 

2,924,487

 

 

2,929,385

 

Work in process

 

 

1,411,714

 

 

1,281,292

 

Finished goods

 

 

6,130,437

 

 

6,541,492

 

Totals

 

$

14,149,446

 

$

15,241,092

 

 

The Company performs a lower of cost or net realizable value analysis on inventory to determine if the net realizable 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, as a component of cost of goods sold, the Company recorded a loss on ethanol inventories, as a component of cost of goods sold, of approximately $82,000 and $0 for the six months ended April 30, 2018 and 2017, respectively.

 

 

4.   DERIVATIVE INSTRUMENTS

 

As of April 30, 2018, the total notional amount of GFE’s outstanding corn derivative instruments was approximately 5,501,000 bushels, comprised of long corn positions on 760,000 bushels that were entered into to hedge forecasted ethanol sales through May 2019, and short corn positions on 4,741,000 bushels that were entered into to hedge forecasted corn purchases through December 2021. 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.

9


 

Table of Contents

 

Granite Falls Energy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

April 30, 2018

 

As of April 30, 2018, the total notional amount of HLBE’s outstanding corn derivative instruments was approximately 5,015,000 bushels, comprised of long corn positions on 700,000 bushels that were entered into to hedge forecasted ethanol sales through July 2018, and short corn positions on 4,315,000 bushels that were entered into to hedge forecasted corn purchases through December 2019. There may be offsetting positions that are not shown on a net basis that could lower the notional amount of positions outstanding.

 

As of April 30, 2018, GFE had approximately $746,000 of cash collateral (restricted cash) related to derivatives held by a broker and approximately $3,000 due to broker related to derivatives held by a broker, recorded as a component of accounts payable.

 

As of April 30, 2018, HLBE had approximately $610,000 of cash collateral (restricted cash) related to derivatives held by a broker and approximately $3,000 due to broker related to derivatives held by a broker, recorded as a component of accounts payable.

 

The following tables provide details regarding the Company's derivative instruments at April 30, 2018, none of which were designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

  

Consolidated Balance Sheet Location

  

Assets

  

Liabilities

 

Corn contracts - GFE

 

Commodity derivative instruments

 

$

3,568

 

$

486,250

 

Corn contracts - HLBE

 

Commodity derivative instruments

 

 

2,477

 

 

300,088

 

Ethanol contracts - GFE

 

Commodity derivative instruments

 

 

143,500

 

 

 —

 

Ethanol contracts - HLBE

 

Commodity derivative instruments

 

 

142,625

 

 

 —

 

Totals

 

 

 

$

292,170

 

$

786,338

 

 

As of October 31, 2017, the total notional amount of GFE’s outstanding corn derivative instruments was approximately 1,495,000 bushels, comprised of long corn positions on 200,000 bushels that were entered into to hedge forecasted ethanol sales through December 2017, and short corn positions on 1,295,000 bushels that were entered into to hedge forecasted corn purchases through December 2018. There may be offsetting positions that are not shown on a net basis that could lower the notional amount of positions outstanding.

 

As of October 31, 2017, the total notional amount of GFE’s outstanding ethanol derivative instruments was approximately 420,000 gallons that were entered into to hedge forecasted ethanol sales through November 2017.

 

As of October 31, 2017, GFE had approximately $75,000 cash collateral (restricted cash) and approximately $12,000 due to broker related to derivatives held by a broker, recorded as a component of accounts payable.

 

As of October 31, 2017, the total notional amount of HLBE’s outstanding corn derivative instruments was approximately 1,120,000 bushels, comprised of long corn positions on 215,000 bushels that were entered into to hedge forecasted ethanol sales through December 2017, and short corn positions on 905,000 bushels that were entered into to hedge forecasted corn purchases through July 2018. There may be offsetting positions that are not shown on a net basis that could lower the notional amount of positions outstanding.

 

As of October 31, 2017, HLBE had outstanding natural gas derivative instruments totaling 120,000 MMBTU entered into hedge forecasted natural gas purchases through February 2018.

 

As of October 31, 2017, the total notional amount of HLBE’s outstanding ethanol derivative instruments was approximately 420,000 gallons that were entered into to hedge forecasted ethanol sales through November 2017.

 

As of October 31, 2017, HLBE did not have any cash collateral (restricted cash) and approximately $12,000 due to broker related to derivatives held by a broker, recorded as a component of accounts payable.

 

10


 

Table of Contents

 

Granite Falls Energy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

April 30, 2018

 

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

 

 

 

 

 

 

 

 

 

 

 

 

  

Consolidated Balance Sheet Location

  

Assets

  

Liabilities

 

Corn contracts - GFE

 

Commodity derivative instruments

 

$

102,650

 

$

 —

 

Corn contracts - HLBE

 

Commodity derivative instruments

 

 

141,644

 

 

 —

 

Ethanol contracts - GFE

 

Commodity derivative instruments

 

 

 —

 

 

12,749

 

Ethanol contracts - HLBE

 

Commodity derivative instruments

 

 

 —

 

 

12,249

 

Natural gas contracts - HLBE

 

Commodity derivative instruments

 

 

 —

 

 

15,381

 

Totals

 

 

 

$

244,294

 

$

40,379

 

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statement

 

Three Months Ended  April 30, 

 

Six Months Ended April 30, 

 

  

 of Operations Location

  

2018

  

2017

 

2018

  

2017

Corn contracts

 

Cost of Goods Sold

 

$

(946,543)

 

$

602,490

 

$

(1,211,611)

 

$

545,862

Ethanol contracts

 

Revenues

 

 

254,623

 

 

(689,727)

 

 

394,120

 

 

(413,470)

Natural gas contracts

 

Cost of Goods Sold

 

 

(13,936)

 

 

 —

 

 

(1,598)

 

 

 —

Total gain (loss)

 

 

 

$

(705,856)

 

$

(87,237)

 

$

(819,089)

 

$

132,392

 

 

 

 

5.   FAIR VALUE

 

The following table sets forth, by level, the Company assets that were accounted for at fair value on a recurring basis at April 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurement Using

 

 

 

 

 

 

 

 

Quoted Prices

 

Significant Other

 

Significant

 

 

 

Carrying Amount in

 

 

 

 

in Active Markets

 

Observable Inputs

 

Unobservable Inputs

 

Financial Asset:

 

Consolidated Balance Sheet

 

Fair Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Commodity Derivative Instruments - Corn

 

$

6,045

 

$

6,045

 

$

 —

 

$

6,045

 

$

 —

 

Commodity Derivative Instruments - Ethanol

 

$

286,125

 

$

286,125

 

$

286,125

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity Derivative Instruments - Corn

 

$

786,338

 

$

786,338

 

$

786,338

 

$

 —

 

$

 —

 

 

The following table sets forth, by level, the Company assets that were accounted for at fair value on a recurring basis at October 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurement Using

 

 

 

 

 

 

 

 

Quoted Prices

 

Significant Other

 

Significant

 

 

 

Carrying Amount in

 

 

 

 

in Active Markets

 

Observable Inputs

 

Unobservable Inputs

 

Financial Asset:

 

Consolidated Balance Sheet

 

Fair Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Commodity Derivative Instruments - Corn

 

$

244,294

 

$

244,294

 

$

244,294

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity Derivative Instruments - Ethanol

 

$

24,998

 

$

24,998

 

$

36,500

 

$

(11,502)

 

$

 —

 

Commodity Derivative Instruments - Natural Gas

 

$

15,381

 

$

15,381

 

$

 —

 

$

15,381

 

$

 —

 

 

11


 

Table of Contents

 

Granite Falls Energy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

April 30, 2018

 

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, corn, and natural gas Level 2 instruments by model-based techniques in which all significant inputs are observable in the markets noted above.

 

 

6.  DEBT FACILITIES

 

Debt financing consists of the following:

 

 

 

 

 

 

 

 

 

 

 

April 30, 2018

 

October 31, 2017

 

 

 

(unaudited)

 

 

 

 

GRANITE FALLS ENERGY:

 

 

 

 

 

 

 

Seasonal loan, see terms below.

 

$

 —

 

$

 —

 

Term note payable to Project Hawkeye, see terms below.

 

 

7,500,000

 

 

7,500,000

 

 

 

 

 

 

 

 

 

HERON LAKE BIOENERGY:

 

 

 

 

 

 

 

Amended revolving term loan, see terms below.

 

 

 —

 

 

 

Seasonal loan, 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.

 

 

1,241,171

 

 

1,241,171

 

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.

 

 

34,622

 

 

56,514

 

Note payable to non-controlling interest member of Agrinatural.  Interest is at One Month LIBOR plus 4.0%, which was approximately 5.24% at October 31, 2017. The note was paid in full in January 2018.

 

 

 —

 

 

100,000

 

Totals

 

 

8,775,793

 

 

8,897,685

 

Less: amounts due within one year

 

 

322,468

 

 

432,183

 

Net long-term debt

 

$

8,453,325

 

$

8,465,502

 

 

Granite Falls Energy

 

Seasonal Revolving Loan

 

GFE has a credit facility with a lender that includes a seasonal revolving loan, under which GFE may borrow, repay, and re-borrow up to the aggregate principal commitment of $6,000,000 until maturity.  The seasonal revolving loan matures on October 1, 2018 unless a later date is agreed to by the administrative agent for the facility.  There was no outstanding balance on the seasonal revolving loan at April 30, 2018 and October 31, 2017. Therefore, the aggregate principal amount available for borrowing by GFE under this seasonal revolving loan at April 30, 2018 and October 31, 2017 was $6,000,000.

 

The interest rate on the seasonal revolving loan is based on the bank's One Month London Interbank Offered Rate (“LIBOR”) Index Rate, plus 2.75%, which equated to 4.66% and 3.99% at April 30, 2018 and October 31, 2017, respectively.

 

The credit facility also requires GFE to comply with certain financial covenants, at various times calculated monthly, quarterly, or annually, including maintenance of certain financial ratios including minimum working capital, a debt service coverage ratio as defined by the credit facility, as well as a restriction of the payment of distributions.    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.

 

12


 

Table of Contents

 

Granite Falls Energy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

April 30, 2018

 

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.

 

Project Hawkeye Loan

 

On August 2, 2017, GFE entered into a credit facility with Project Hawkeye to finance its investment in Ringneck. Pursuant to this credit facility, GFE borrowed $7.5 million from Project Hawkeye using the Ringneck investment as collateral.  The Project Hawkeye loan bears interest from date funds are first advanced on the loan through maturity, at a rate per annum equal to the sum of the One Month LIBOR Index Rate plus 3.05% per annum, with an interest rate floor of 3.55%, which equated to 4.96% and 4.29% at April 30, 2018 and October 31, 2017 respectively.

 

The Project Hawkeye loan requires annual interest payments only for the first two years of the loan and monthly principal and interest payments for years three through nine based on a seven-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 August 2, 2026. 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 entered into in connection with the Project Hawkeye 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 Project Hawkeye will be to foreclose and seize all of GFE’s right, title and interest in its investment in Ringneck.   

 

Heron Lake BioEnergy

 

Revolving Term Loan

 

HLBE had a revolving term note payable with a lender under which HLBE could borrow, repay and re-borrow in an amount up to the original aggregate principal commitment at any time prior to maturity at March 1, 2022.  The original aggregate principal commitment was $28,000,000, which reduced by $3,500,000 annually, starting March 1, 2015 and continuing each anniversary thereafter until maturity. In December 2017, HLBE and its lender orally agreed to reduce the aggregate principal commitment of the revolving term loan to $8,000,000.  On April 6, 2018, HLBE finalized loan agreements with an effective date of March 29, 2018 for an amended credit facility with its lender.

 

Amended Credit Facility

 

The amended credit facility includes an amended and restated revolving term loan with a $4,000,000 principal commitment and a revolving seasonal line of credit with a $4,000,000 principal commitment.  The loans are secured by substantially all of HLBE’s assets, including a subsidiary guarantee.  The amended credit facility contains customary covenants, including restrictions on the payment of dividends and loans and advances to Agrinatural, and 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 part of the amended credit facility closing, HLBE entered into an amended administrative agency agreement with CoBank, ACP (“CoBank”).  As a result, CoBank will continue act as the agent for the lender with respect to the amended credit facility.  HLBE agreed to pay CoBank an annual fee of $2,500 for its services as administrative agent.

 

Amended Revolving Term Loan

 

Under the terms of the amended revolving term loan, the Company may borrow, repay, and reborrow up to the aggregate principal commitment amount of $4,000,000.  Final payment of amounts borrowed under amended revolving term loan is due December 1, 2021.  Interest on the amended revolving term loan accrues at a variable weekly rate equal to 3.10% above the One-Month London Interbank Offered Rate (“LIBOR”) Index rate, which was 5.01% at April 30, 2018.

 

13


 

Table of Contents

 

Granite Falls Energy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

April 30, 2018

 

HLBE also agreed to pay an unused commitment fee on the unused available portion of the amended 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. 

 

At October 31, 2017, the aggregate principal amount available to the Company for borrowing under the revolving term loan was $17,500,000.  At April 30, 2018, the aggregate principal amount available to the Company for borrowing under the amended revolving term loan was $4,000,000.

 

Seasonal Revolving Loan

 

Under the terms of the seasonal revolving loan, HLBE may borrow, repay, and reborrow up to the aggregate principal commitment amount of $4,000,000 until its maturing on February 1, 2019.  Amounts borrowed under the seasonal revolving loan bear interest at a variable weekly rate equal to 2.850% above the One-Month LIBOR Index rate, which was 4.76% at April 30, 2018.  The aggregate principal amount available to the Company for borrowing under the seasonal revolving loan was $4,000,000 at April 30, 2018.

 

The Company also agreed to pay an unused commitment fee on the unused available portion of the seasonal revolving loan commitment at the rate of 0.250% per annum.

 

Estimated annual maturities of debt at April 30, 2018, are as follows based on the most recent debt agreements:

 

 

 

 

 

 

2019

  

$

322,468

 

2020

 

 

1,110,277

 

2021

 

 

1,398,227

 

2022

 

 

1,391,250

 

2023

 

 

1,071,429

 

Thereafter

 

 

3,482,142

 

Total debt

 

$

8,775,793

 

 

 

 

7.   MEMBERS' EQUITY

 

Granite Falls Energy

 

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 April 30, 2018 and October 31, 2017, GFE had 30,606 membership units authorized, issued, and outstanding.

 

In December 2017, the Board of Governors of GFE declared a cash distribution of $385 per unit or approximately $11,783,000, for unit holders of record as of December 21, 2017.  The distribution was paid in January 2018.

 

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.

 

Heron Lake BioEnergy

 

In December 2017, the Board of Governors of HLBE declared a cash distribution of $0.11 per unit, or approximately $8,573,000,  for unit holders of record as of December 21, 2017. The distribution was paid in January 2018.

 

At December 21, 2017, GFE owned 24,475,824 Class A membership units and 15,000,000 Class B units of HLBE, and received an aggregate distribution from HLBE of approximately $4,342,000.  The remaining $4,231,000 was distributed by HLBE to the non-controlling interest.

 

14


 

Table of Contents

 

Granite Falls Energy, LLC and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

April 30, 2018

 

8.  COMMITMENTS AND CONTINGENCIES

 

Corn Purchase Commitments

 

At April 30, 2018, GFE had cash and basis contracts for forward corn contracts for approximately 7,631,000 bushels for various delivery periods through December 2021.

 

At April 30, 2018, HLBE had cash and basis contracts for forward corn purchase commitments for approximately 7,495,000 bushels for various delivery periods through April 2019.

 

Corn Purchases - Members

GFE purchased corn from board members of approximately $1,648,000 and $0 for the three months ended April 30, 2018 and 2017, respectively, and approximately $2,085,000 and $0 for the six months ended April 30, 2018 and 2017.

 

HLBE purchased corn from board members of approximately $2,642,000 and $2,569,000 for the three months ended April 30, 2018 and 2017, respectively, and approximately $7,097,000 and $5,594,000 for the six months ended April 30, 2018 and 2017, respectively. Of this total, approximately $67,000 and $602,000 was included in accounts payable at April 30, 2018 and October 31, 2017, respectively.

 

Ethanol Contracts

 

At April 30, 2018, GFE had fixed and basis contracts to sell approximately $12,570,000 of ethanol for various delivery periods through June 2018.

 

At April 30, 2018, HLBE had fixed and basis contracts to sell approximately $12,431,000 of ethanol for various delivery periods through June 2018.

 

Distillers' Grain Contracts

 

At April 30, 2018, GFE had forward contracts to sell approximately $2,514,000 of distillers' grain for various delivery periods through June 2018.

 

At April 30, 2018, HLBE had forward contracts to sell approximately $1,324,000 of distillers' grains for various delivery periods through June 2018.

 

Corn Oil

 

At April 30, 2018, GFE had forward contracts to sell approximately $1,034,000 of corn oil for various delivery periods through December 2018.

 

At April 30, 2018, HLBE had forward contracts to sell approximately $1,225,000 of corn oil for various delivery periods through December 2018.

 

Railcar Damages

 

In accordance with certain railcar lease agreements, at expiration, the Company is required to return the railcars in good condition, less normal wear and tear.  Primarily due to the ongoing maintenance and repair activities performed on its railcars, the Company has determined that no accrual for leased railcars is necessary and an estimate of the possible range of loss cannot be made.

 

Leases

 

In February 2018, GFE entered into a sublease arrangement for 16 railcars for the transportation of GFE’s ethanol.  The sublease matures in January 2021 with minimum future lease payments of approximately $144,000 per year.

 

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 and six months ended April 30, 2018 and 2017. 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, 2017.

 

Disclosure Regarding Forward-Looking Statements

 

The Securities and Exchange Commission (“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, 2017 and 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 may be affected 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 trading at a premium to gasoline at times, which may act as a disincentive for discretionary blending of ethanol beyond RFS requirements and consequently negatively impacting ethanol prices and demand;

·

Changes in federal and/or state laws and environmental regulations including elimination, waiver or reduction of corn-based ethanol volume obligations under 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 imposition of tariffs;

·

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 corn-based, natural gas fired ethanol plant in Granite Falls, Minnesota.  Additionally, through Project Viking, L.L.C., a wholly owned subsidiary (“Project Viking”), GFE owns an approximately 50.7% controlling interest of Heron Lake BioEnergy, LLC (“Heron Lake BioEnergy” or “HLBE”).  HLBE is a Minnesota limited liability company that owns and operates a dry mill corn-based, natural gas fired ethanol plant near Heron Lake, Minnesota.    Additionally, through its a wholly owned subsidiary, HLBE Pipeline Company, LLC (“HLBE Pipeline Company”), HLBE owns a 73% controlling interest of Agrinatural Gas, LLC (“Agrinatural”), which operates a natural gas pipeline. 

 

When we use the terms “Heron Lake BioEnergy”, “Heron Lake”, or “HLBE” or similar words, unless the context otherwise requires, we are referring to Heron Lake BioEnergy and its wholly owned subsidiary, HLBE Pipeline Company, LLC, and its majority-owned subsidiary Agrinatural. When we use the terms “Granite Falls Energy” or “GFE” or similar words, unless the context otherwise requires, we are referring to Granite Falls Energy, LLC and our operations at our ethanol production facility located in Granite Falls, Minnesota. When we use the terms the “Company”, “we”, “us”, “our” or similar, unless the context otherwise requires, we are referring to Granite Falls Energy, LLC and our consolidated wholly- 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.    

 

GFE’s ethanol plant has an approximate annual production capacity of 60 million gallons of denatured ethanol, but has obtained EPA pathway approval and permits from the Minnesota Pollution Control Authority (“MPCA”) to increase its production capacity to approximately 70 million gallons of undenatured ethanol on a twelve month rolling sum basis. HLBE’s plant has an approximate annual production capacity of 60 million gallons of denatured ethanol, but has obtained EPA pathway approval and permits from the MPCA to increase its production capacity to approximately 72 million gallons of undenatured ethanol on a twelve month rolling sum basis.  We intend to continue working toward increasing production at plants to take advantage of the additional production allowed pursuant to their respective permits so long as we believe it is profitable to do so.

 

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We market and sell the products produced at our 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.  GFE also independently markets a small portion of the ethanol production at its plant as E-85 to local retailers. 

 

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.

 

We do not have any long-term, fixed price exclusive supply contracts for the purchase of corn for either the GFE or HLBE plants. Both GFE and HLBE purchase the corn necessary for operating directly from grain elevators, farmers, and local dealers within approximately 80 miles of their respective plants. Neither GFE’s nor HLBE’s members are obligated to deliver corn to our plants.

 

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 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 owns a controlling 73% interest in Agrinatural, a natural gas distribution and sales company located in Heron Lake, Minnesota.  Agrinatural owns approximately 190 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 August 2, 2017, GFE made a $7.5 million investment in Ringneck Energy & Feed, LLC (“Ringneck”). Ringneck is constructing an ethanol plant in Onida, South Dakota. GFE borrowed $7.5 million under its credit facility with Project Hawkeye, LLC (“Project Hawkeye”), an affiliate of Fagen, Inc., which is a member of GFE, to finance its investment in Ringneck. Details regarding our investment in Ringneck are provided below in the section below titled “Investments.”  Details of the Project Hawkeye credit facility are provided below in the section below entitled “Indebtedness - Granite Falls Energy - GFE’s Other Credit Arrangement”.

 

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.

 

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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 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 plants. 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 to maintain current plant infrastructure, as well as small capital projects to improve operating efficiency. 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, PART II - Item 1A. Risk Factors” of our quarterly report on Form 10-Q for the three months ended January 31, 2018, and “PART I - Item 1A. Risk Factors” of our annual report on Form 10-K for the fiscal year ended October 31, 2017.

 

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.

 

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 plants may not generate adequate cash flow for operations. In such cases, we may reduce or cease production at our plants to minimize our variable costs and optimize cash flow.

 

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Ethanol continues trading at a discount to gasoline which has improved domestic and export demand somewhat. However, management currently believes that our margins will remain tight during the remainder of fiscal year 2018, due to uncertainty regarding the Trump Administration’s support for the Renewable Fuels Standard (“RFS”) and increased waivers of small refiner renewable volume obligations (“RVOs”) by the US Environmental Protection Agency (“EPA”).  The adjustments in the RVOs and small refiner waivers granted by the EPA also may result in an oversupply of renewable fuel credits which could decrease demand for corn-based ethanol, unless additional demand can be found in foreign or domestic markets.

 

Increases in the price for crude oil and unleaded gasoline could have a negative impact on the demand for gasoline and impact the market price of ethanol, which could adversely impact our profitability.  Continued large corn supplies and ethanol production capacity increases also could have a negative impact on the market price of ethanol, which could be further exacerbated if domestic ethanol inventories remain high or grow, or if U.S. exports of ethanol decline.  The ethanol industry is currently experiencing growth in production capacity principally through plant optimization and some new construction.  The US Energy Information Administration(“EIA”) has reported that during 2017, increasing ethanol production rates have outpaced domestic E10 gasoline demand and export growth, leading to elevated ethanol inventory levels. 

 

In recent years, the ethanol industry in the U.S. has increased exports of ethanol and distillers’ grains.  However, export demand for ethanol is less consistent compared to domestic demand which can lead to ethanol price volatility. Global demand for US ethanol, as reported by the EIA, continues to increase with increased exports to various foreign markets, including China, Canada and Mexico, in response to higher blending mandates and octane demand within the foreign countries and lower domestic ethanol prices.  Despite its imposition tariffs, China resumed imports of US ethanol during late 2017 and had been one of the top importers of US ethanol during the first three months of 2018. However, in April 2018, in response to the tariffs imposed by the Trump administration, China announced an additional retaliatory tariff on ethanol imports of 15%, bringing the total tariff up to 45%.  Brazilian demand from the US ethanol has remained relatively steady, despite a tariff imposed in 2017, due to the price of corn relative to sugar cane as a feedstock and high gasoline prices within Brazil.  Any decrease in U.S. ethanol exports could adversely impact the market price of ethanol unless domestic demand increases or foreign markets are developed.

 

Our margins have also been, and could continue to be, negatively impacted due to lower market prices for distillers’ grains due to lower export demand, largely due to Chinese tariffs, and oversupply in the domestic market, along with increased corn and soybean availability. During the three months ended April 30, 2018, distillers’ grains prices were buoyed by improved domestic demand in response to the continued rise in soybean meal prices and increased export demand by Mexico, Canada, South Korea, Argentina and Vietnam. Demand and prices for distillers’ grains had experienced significant decline due to decreased exports to China as a result of the substantial tariffs and duties imposed on imports into China of distillers’ grains produced in the U.S. imposed in January 2017.  Management currently believes that the impact of the current Chinese imposition of antidumping and countervailing duties on distillers’ grains produced in the U.S. has been absorbed into the market. However, recent trade disputes with China, Mexico and Canada could result in the imposition of additional tariffs on distillers’ grains produced in the US, which could lead to an oversupply of distillers’ grains domestically and negatively impact distillers’ grains prices. 

 

Corn oil prices have been adversely impacted by oversupply of corn oil due to the substantial increase in ethanol production during the last few years.  Additionally, corn oil prices have been impacted by oversupply of soybeans and the resulting lower price of soybean oil which competes with corn oil for biodiesel production. The impact of lower soybean oil prices and the current oversupply of corn oil due to the substantial increase in corn oil production during the last few years will likely continue to impact corn oil prices.

 

In February 2018, legislation was signed retroactively extending the $1.00-per-gallon biodiesel blender tax credit retroactively to January 1, 2017.  However, management cannot predict whether additional legislation further extending the biodiesel tax credit will be passed by Congress.  Corn oil prices may decrease if biodiesel producers reduce production and/or demand for corn oil to reduce without extension of the biodiesel blenders tax credit.

 

Given the inherent volatility in ethanol, distillers’ grains, non-food grade corn oil, grain and natural gas prices, we cannot predict the likelihood that the spread between ethanol, distillers’ grains, non-food grade corn oil, and grain prices in future periods will be consistent compared to historical periods.

 

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Government Supports and Regulation

 

The Renewable Fuels Standard

 

The ethanol industry is dependent on several economic incentives to produce ethanol, the most significant of which is the RFS.  The RFS has been, and we expect will continue to be, a significant factor impacting ethanol usage.  Any adverse ruling on, or legislation affecting, the RFS could have an adverse impact on short-term ethanol prices and our financial performance in the future.

 

Under the provisions of the RFS, the 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.  In November 2017, the EPA announced it would maintain the 15 billion gallon mandate for conventional ethanol in 2018.

 

The EPA assigns individual refiners, blenders, and importers the RVOs they are obligated to use based on their percentage of total fuel sales.  Obligated parties use renewable identification numbers (“RINs”) to show compliance with RVOs.  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. 

 

 The EPA has recently granted a number of small refiner exemptions, whereby such refiners were alleviated of their responsibility to supply RINS for their obligated volumes based upon the grounds of economic hardship. Similarly, the US Bankruptcy Court in Delaware recently alleviated significant RIN obligations a refiner as part of bankruptcy proceedings.  Additionally, the EPA has announced that it is reviewing RFS waivers denied to small refiners by the Obama administration and has retroactively awarded biofuels credits to at least two refiners to alleviate their 2018 obligations. 

 

Several legal challenges to the recent spate of small refiners waivers are underway.  On May 1, 2018, the Advanced Biofuel Association submitted a petition with the U.S. Court of Appeals for the D.C. Circuit challenging EPA’s process for granting exemptions from compliance under the RFS to small refineries. The Advanced Biofuel Association petition asks the court to review the EPA’s decision to modify criteria to lower the threshold by which the agency determines whether to grant small refineries an exemption for the RFS for reasons of disproportionate economic hardship. 

 

Additionally, on May 29, 2018, the National Corn Growers Association, National Farmers Union and the Renewable Fuels Association filed a petition with  the U.S. Court of Appeals for the 10th Circuit challenging the EPA’s grant of waivers to three specific refineries.  The petitioners are asking the U.S. Court of Appeals for the 10th Circuit to reject the waivers granted to three refineries located in Wynnewood, Oklahoma, Cheyenne, Wyoming, and Woods Cross, Utah as an abuse of EPA authority.  These waived gallons are not redistributed to obligated parties, and in effect, reduce the aggregate RVOs under the RFS. If the specific waivers granted by the EPA and/or its lower criteria for granting small refinery waivers under the RFS are allowed to stand, or if the volume requirements are further reduced, it could have an adverse effect on the market price and demand for ethanol which would negatively impact our financial performance.

 

Related to the recent lawsuits, the Renewable Fuels Association, American Coalition for Ethanol, Growth Energy, National Biodiesel Board, National Corn Growers Association, Biotechnology Industry Organization, and National Farmers Union petitioned the EPA on June 4, 2018 to change its regulations to account for lost volumes of renewable fuel resulting from the retroactive small refinery exemptions. This petition to EPA seeks a broader, forward-looking remedy to account for the collective lost volumes caused by the recent increase in retroactive small refinery RVO exemptions. It is unclear what regulatory changes, if any, will emerge from the petition to the EPA. 

 

On April 12, 2018, following a series of meetings involving President Trump, Senators, key federal agency leaders and the industry, President Trump indicated that the EPA would be moving forward to authorize year-round sales of E15 by rulemaking designed to address the One-Pound Waiver that currently inhibits sales of E15 in certain markets during summer driving months. President Trump further suggested he may consider relief for petroleum refiners, which could involve modifications to how RINs are generated, priced, and/or traded. The EPA is considering a letter of no action assurance which could allow retailers to avoid relabeling their E15 pumps as flex fuel only.

 

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Tax Cuts and Job Act

 

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Reform Act”) was signed into law.  The Tax Reform Act includes significant changes to the taxation of partnership entities.  The Company continues to evaluate the impact of the Tax Reform Act with its professional advisors.  The full impact of the Tax Reform Act on the Company in future periods cannot be predicted at this time.

 

The Tax Reform Act also included an unintended consequence under section 199A, which provided certain tax benefits to producers selling grain to cooperative associations and enabled a potential marketplace advantage over other agribusiness companies.  On March 23, 2018, Congress rescinded this provision under section 199A.

 

Results of Operations for the Three Months Ended April 30, 2018 and 2017

 

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 April 30, 2018 and 2017 (amounts in thousands).  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended  April 30, 

 

 

2018

 

2017

 

 

 

(unaudited)

 

(unaudited)

 

Statement of Operations Data

 

Amount

    

%  

 

Amount

    

%  

 

Revenues

 

$

55,550

 

100.0

%

 

$

52,802

 

100.0

%

 

Cost of Goods Sold

 

 

51,735

 

93.1

%

 

 

48,845

 

92.5

%

 

Gross Profit

 

 

3,815

 

6.9

%

 

 

3,957

 

7.5

%

 

Operating Expenses

 

 

1,648

 

3.0

%

 

 

1,585

 

3.0

%

 

Operating Income

 

 

2,167