GRANITE FALLS ENERGY, LLC We prepared the following discussion and analysis to help readers better
understand our financial condition, changes in our financial condition, and
results of operations for the three months ended
This section should be read in conjunction with the condensed consolidated
unaudited financial statements and related notes in PART I - Item 1 of this
report and the information contained in the Company's annual report on Form 10-K
for the fiscal year ended
Disclosure Regarding Forward-Looking Statements
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
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
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;
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? 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;
? Our reliance on key management personnel; and
A slowdown in global and regional economic activity, demand for our products
? and the potential for labor shortages and shipping disruptions resulting from
COVID-19.
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
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
Although we believe our third-party sources are reliable, we have not independently verified the information.
Overview
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
GFE's ethanol plant has an approximate annual production capacity of 60 million
gallons of denatured ethanol, but has obtained
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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
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.
HLBE was out of compliance with certain debt covenants on
Plan of Operations for the Next Twelve Months
The Company, and the ethanol industry as a whole, experienced significant adverse conditions throughout most of 2020 and so far in 2021 as a result of industry-wide record low ethanol prices due to reduced demand and high industry inventory levels, exacerbated by the COVID-19 pandemic. These factors resulted and continue to result in prolonged negative operating margins, lower cash flow from operations and substantial net losses. We expect to have sufficient cash generated by continuing operations, availability on our credit facility, and additional debt with the Company's current lenders to fund our operations.
However, should unfavorable operating conditions continue or worsen in the ethanol industry that prevent us from profitably operating our plant, we may need to seek additional funding or further idle ethanol production altogether.
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. 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 from our revolving term loans 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 1A. Risk Factors" of our annual
report on Form 10-K for the fiscal year ended
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
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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.
Management believes that the ethanol outlook in the fiscal year 2021 will remain
relatively consistent with this quarter and our margins will remain tight due to
higher corn prices and depressed gasoline demand. While the distribution of
COVID-19 vaccinations and the increase in business re-openings have improved the
overall economic outlook , the negative market effects of the COVID-19 pandemic
will likely continue to impact our profitability. Additionally, continued large
corn supplies and ethanol production capacity increases could have a negative
impact on the market price of ethanol which could adversely impact our
profitability. This negative impact could worsen if domestic ethanol inventories
remain high or grow, or if
Additionally, while ethanol continues trading at a significant discount to
gasoline, which has improved export demand somewhat, the continued issuances of
waivers of small refiner RVOs by the
Changes 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. According to the EIA
Continued ethanol production capacity increases could also 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
Corn oil prices increased during the three months ending
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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.
Impact of COVID-19 on the Company
Operations
The Company, and the ethanol industry as a whole, experienced significant
adverse conditions throughout 2020, as the COVID-19 pandemic greatly reduced
travel and thereby reduced demand for fuel, including the ethanol we produce.
Reduced demand and high industry inventory levels resulted in record low ethanol
prices in the second and third fiscal quarters of 2020. As a result, we
experienced negative operating margins, significantly lower cash flow from
operations and substantial net losses. In response to these adverse market
conditions, HLBE idled its ethanol production from on or about
Employees
The Company has enacted appropriate safety measures to protect the health and safety of our employees, customers, partners and suppliers, and we may take further actions as government authorities require or recommend or as we determine to be in the best interests of our employees, customers, partners and suppliers.
Supply and Demand
Although we continue to regularly monitor the financial health of companies in our supply chain, financial hardship on our suppliers caused by the COVID-19 pandemic could cause a disruption in our ability to obtain raw materials or components required to produce our products, adversely affecting our operations, even when operating at reduced production levels. Additionally, restrictions or disruptions of transportation, such as reduced availability of truck, rail or air transport, port closures and increased border controls or closures, may result in higher costs and delays, both with respect to obtaining raw materials and shipping finished products to customers, which could harm our profitability, make our products less competitive, or cause our customers to seek alternative suppliers. Additionally, the COVID-19 pandemic has significantly increased economic and demand uncertainty. The pandemic has caused a global economic slowdown, and it is possible that it could cause a global recession. In the event of a recession, demand for our products would decline further and our business would be further adversely affected.
PPP Loans
On
GFE received a second Paycheck Protection Program loan in
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HLBE received a second Paycheck Protection Program loan in
Outlook
The adverse conditions created by the COVID-19 pandemic caused the Company to experience negative operating margins, significantly lower cash flow from operations and substantial net losses. Although there is uncertainty related to the ongoing impact of the COVID-19 pandemic on our future results, we believe our current cash reserves, cash generated from our operations, our Paycheck Protection Program loans and the available cash under our revolving loans leave us well-positioned to manage our business through this crisis. However, the impacts of the COVID-19 pandemic are broad-reaching, and the financial impacts associated with the COVID-19 pandemic include, but are not limited to, reduced production levels, lower net sales and potential incremental costs associated with mitigating the effects of the pandemic, including storage and logistics costs and other expenses. As a result, although GFE was in compliance with our financial covenants set forth in GFE's Term Revolving Loan, the impact the COVID-19 pandemic could have an adverse impact on our operating results which could result in our inability to comply with certain of these financial covenants and require our lenders to waive compliance with, or agree to amend, any such covenant to avoid a default.
Additionally, due to the negative financial impacts of the COVID-19 pandemic,
HLBE experienced instances of noncompliance with certain loan covenants related
to its working capital and net worth ratio, and HLBE is projected to experience
additional instances of noncompliance with these loan covenants in the next
twelve months. These conditions result in the classification of approximately
While the business re-openings and distribution of COVID-19 vaccines have improved the overall economic outlook, the pandemic is ongoing, and its dynamic nature makes it difficult to forecast the long-term effects on our industry as a whole and our Company specifically. New variants of the virus that causes COVID-19 may prolong the pandemic, create additional waves of infections, or impose other unforeseen challenges. It is possible that even after the pandemic has subsided, there will be permanent changes to social and economic patterns, such as increased use of video-teleconferencing technology and remote working, that will limit travel and thereby suppress demand for fuel, including the ethanol we produce.
Despite the economic uncertainty resulting from the COVID-19 pandemic, we intend to continue to focus on strategic initiatives designed to improve on our operational efficiencies, which is critical in order to drive positive results in a low-margin environment.
We continue to monitor the rapidly evolving situation and guidance from international and domestic authorities, including federal, state and local public health authorities and may take additional actions based on their recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our operating plan. As such, given the dynamic nature of this situation, we cannot reasonably estimate the impacts of the COVID-19 pandemic on our financial condition, results of operations or cash flows in the future.
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 federal Renewable Fuels Standard ("RFS"). The RFS has been, and we expect will continue to be, a significant factor impacting ethanol usage. Opponents of the RFS have sought to restrict or eliminate the standard through various
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litigation and legislative actions. Any adverse ruling on, or legislation affecting, the RFS could have an adverse impact on ethanol prices and our financial performance in the future.
The Biden administration has indicated support for RFS blending rules and energy
policies that could be beneficial to the ethanol industry and our business.
Specifically, the
Additional legal actions related to the RFS are underway. These include lawsuits
challenging fuel volume waivers based on "inadequate domestic supply,"
challenging the
COVID-19 Legislation
In response to the COVID-19 pandemic,
The CARES Act also provided for the
On
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Results of Operations for the Three Months Ended
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
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