SOUTHWEST IOWA RENEWABLE ENERGY, LLC General
The following management discussion and analysis provides information which management believes is relevant to an assessment and understanding of our financial condition and results of operations. This discussion should be read in conjunction with the financial statements included herewith and notes to the financial statements and our Annual Report on Form 10-K for the year endedSeptember 30, 2021 ("Fiscal 2021"), including the financial statements, accompanying notes and the risk factors contained herein. CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS This quarterly report on Form 10-Q ofSouthwest Iowa Renewable Energy, LLC (the "Company," "SIRE," "we," or "us") contains historical information, as well as forward-looking statements that involve known and unknown risks and relate to future events, our future financial performance, or our expected future operations and actions. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "future," "intend," "could," "hope," "predict," "target," "potential," or "continue" or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions based on current information and involve numerous assumptions, risks and uncertainties. Our actual results or actions may differ materially from these forward-looking statements for many reasons, including the reasons described in this report. While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us include, without limitation:
• Changes in the availability and price of corn, natural gas, and steam;
• Negative impacts resulting from reductions in, or other modifications to, the
renewable fuel volume requirements under the Renewable Fuel Standard;
• Our inability to comply with our credit agreements required to continue our
operations;
• Negative impacts that our hedging activities may have on our operations;
• Decreases in the market prices of ethanol, distillers grains;
• Ethanol supply exceeding demand and corresponding ethanol price reductions;
• Changes in the environmental regulations that apply to our plant operations;
• Changes in plant production capacity or technical difficulties in operating
the plant;
• Changes in general economic conditions or the occurrence of certain events
causing an economic impact in the agriculture, oil or automobile industries;
• Changes in other federal or state laws and regulations relating to the
production and use of ethanol;
• Changes and advances in ethanol production technology;
• Competition from larger producers as well as competition from alternative fuel
additives;
• Changes in interest rates and lending conditions of our loan covenants;
• Volatile commodity and financial markets;
• Decreases in export demand due to the imposition of duties and tariffs by
foreign governments on ethanol and distiller grains produced in the United
States;
• Disruptions, failures or security breaches relating to our information
technology infrastructure;
• Trade actions by the
biofuels and agricultural sectors and related industries; and
• Disruption caused by health epidemics, such as the ongoing COVID-19 pandemic,
and the adverse impact of such epidemics on global economic and business
conditions.
These forward-looking statements are based on management's estimates,
projections and assumptions as of the date hereof and include various
assumptions that underlie such statements. Any expectations based on these
forward-looking statements are subject to risks and uncertainties and other
important factors, including those discussed in the management discussion and
analysis, in our Annual Report on Form 10-K for Fiscal 2021 under the section
entitled "Risk Factors" and in our other prior Securities and Exchange
Commission filings. These and many other factors could affect our future
financial condition and operating results and could cause actual results to
differ materially from expectations set forth in the forward-looking statements
made in this document or elsewhere by Company or on its behalf. We undertake no
obligation to revise or update any forward-looking statements. The
forward-looking statements contained in this quarterly report on Form 10-Q are
included in the safe harbor protection provided by Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended (the "Exchange Act").
16--------------------------------------------------------------------------------
Table of Contents
General Overview and Recent Developments
The Company is anIowa limited liability company, located inCouncil Bluffs, Iowa , formed inMarch 2005 . The Company is permitted to produce 140 million gallons of ethanol annually. We began producing ethanol inFebruary 2009 and sell our ethanol, distillers grains, distillers corn oil, corn condensed distillers solubles ("syrup") and carbon dioxide, in the continentalUnited States ,Mexico , and thePacific Rim . OnNovember 26, 2019 , theEnvironmental Protection Agency (the "EPA ") approved the Company's petition as an "Efficient Producer" to increase the D-6 RINs generated by our facility to 147 million gallons of ethanol produced annually, provided the non-grandfathered ethanol produced satisfies the 20% lifecycle GHG, or greenhouse gas impacts reduction requirements specified in the Clean Air Act for renewable fuel. The Company must comply with all registration provisions in order to register for the production of non-grandfathered ethanol, and the registration application must be accepted by theEPA before the facility is eligible to generate RIN's for non-grandfathered ethanol produced. The Company completed the registration process before the end of the second quarter in the fiscal year endingSeptember 30, 2022 ("Fiscal 2022"). OnFebruary 10, 2022 , our Board of Directors declared a distribution of$1,250 per unit to its members. The distribution was paid onFebruary 17, 2022 to members of record onFebruary 10, 2022 . With 8,975 shares outstanding at the time of the distribution declaration, the total cash paid for the distribution was$11.2 million .
On
Ongoing Impact of the COVID-19 Pandemic on our Business
At present, municipalities, regulators, and other government actors continue to deal with the COVID-19 pandemic and its effects. The situation surrounding COVID-19 continues to evolve rapidly and the ultimate duration and impact of the pandemic, including the spread of variants, remains highly uncertain and subject to change. We continue to monitor the impact of COVID-19 on our business, including how it will impact our employees, customers, vendors and business partners. Although we continue to regularly monitor the financial health of companies in our supply chain, financial hardship on our suppliers or sub-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. 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 on 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. OnApril 14, 2020 andJanuary 28, 2021 , the Company received two$1.1 million loans under the PPP Loan legislation. These PPP loans were eligible for forgiveness based upon various factors, including, without limitation, our payroll cost over an eight-to-twenty-four-week period starting upon the receipt of the funds. As discussed in greater detail in Note 4 to our financial statements included herein, the Company applied for forgiveness of the PPP loans from the SBA and was notified onDecember 24, 2021 that the loans had been forgiven in full. Due to the PPP loans being forgiven in the first three months of Fiscal 2022, we recognized one-time income of$2.2 million , during the nine months endedJune 30, 2022 . .
Market Factors Impacting Operations
For the nine months endedJune 30, 2022 compared to the nine months endedJune 30, 2021 , the average price per gallon of ethanol sold increased by 50.6% due to reduced stocks and increasing demand. There have also been increased prices for crude oil and gasoline in the first nine months of Fiscal 2022 compared to the first nine months of 2021 due to reduced supply world-wide, and an increase in driving compared to the beginning of Fiscal 2021 when there were lockdown orders and restrictions on travel imposed by many authorities in response to the COVID pandemic. Corn prices increased 20.7% when comparing the first nine months of Fiscal 2022 to the first nine months of Fiscal 2021 which is a continuation of the high price of corn we experienced during the latter half of Fiscal 2021. Weather, world supply and demand, current and anticipated stocks, agricultural policy and other factors can contribute to volatility in corn prices. Such changes have a material effect on our cost of goods sold with corn being one of our primary inputs. Management anticipates that ethanol prices will continue to change in relation to changes in corn and energy prices. If corn, crude oil and gasoline prices remain high or further increase, that could have a significant impact on the market price of ethanol and our net income, particularly should ethanol stocks remain low. During Fiscal 2021, the Company faced significant challenges with respect to transportation and logistics. Like many companies, the ongoing impacts of the COVID-19 pandemic on coastal ports, the trucking industry and more recently, rail transportation, had a material effect on our ability to timely, economically, and consistently ship products both domestically and abroad. Management continues to explore various options to mitigate these challenges, but expects them to continue to be a factor through Fiscal 2022. Management does not know when these logistics challenges will dissipate. The average market price per ton of distillers grains sold in the first nine months of Fiscal 2022 increased by 26% compared to the average price per ton of distillers grains sold for the same period in Fiscal 2021. This increase in the market price of distillers grains is primarily due to higher corn and soybean meal prices which resulted in end users seeking out distillers grains as the lower cost alternative. Management anticipates that distillers grains prices will continue to be affected by the price of corn and soybean meal. An increase in supply as certain ethanol plants return to higher production levels as operating conditions improve could have a negative effect on distillers grains prices. 17
--------------------------------------------------------------------------------
Table of Contents Key Operating Measures The following table provides comparative data relating to certain operating measures during the three and nine months endedJune 30, 2022 , andJune 30, 2021 . Three Months Three Months Nine Months Nine Months Ended June Ended June Ended June Ended June Description 30, 2022 30, 2021 30, 2022 30, 2021 Production (Den gal) (in millions) 26.09 32.09 91.89 96.78 Ethanol Yield (den gal/bu) 2.96 2.95 2.96 2.94 Ethanol Price (per gal)$ 2.57 $ 2.06 $ 2.47 $ 1.64 Corn Price (per bu)$ 7.39 $ 5.88 $ 6.12 $ 5.07 Corn Oil Yield (lbs/bu) 1.12 0.96 1.10 0.93 BTU's/gallon 21,716 21,637 21,788 22,697 Steam/Nat Gas cost per MMBTU$ 3.56 $ 3.22 $ 3.81 $ 3.24 kWh/gallon 0.75 0.64 0.68 0.63 Chemical Cost ($/gal)$ 0.16 $ 0.09 $ 0.13 $ 0.09 As the table above indicates, during the three and nine months endedJune 30, 2022 our performance against the operating measures improved in some categories, but was met with challenges in other categories. The price per gallon of ethanol increased significantly over the same period last year due to supply shortages and increased demand for both gasoline and ethanol. The yield we obtained for both ethanol and distillers corn oil increased in the first nine months of Fiscal 2022, with distillers corn oil having a significant increase and impact on revenue. We continue to focus on operating the plant more efficiently, and that can be seen in our continued reduction of BTU's per gallon in the year-to-date total. The three months endedJune 30, 2022 BTU amount was impacted by the annual plant shutdown which decreased the amount of ethanol gallons produced. Inflation has impacted various components during the first nine months of Fiscal 2022, notably in the cost of chemicals. These changes directly increase our cost of goods sold, and we do not expect them to decrease in the near future.
The impact of inflation on chemical costs, the price of labor and other durable goods, indicate that maintaining the achievement generated in Fiscal 2021 will prove to be a significant challenge. Our management team continues to explore opportunities to reduce costs and more efficient and effective means of operating the Company.
Cost Per Gallon YTD 2022 FY 2021 FY 2020 FY 2019
Variable 0.270 0.217 0.207 0.244
Fixed 0.160 0.107 0.129 0.121
G&A 0.060 0.044 0.043 0.038
Total 0.490 0.368 0.379 0.403
Our management team also continues to evaluate opportunities to add value to our
production process by diversifying into high protein feed along with measures to
reduce the carbon index ("CI") of the ethanol we produce. We believe that
consolidation and innovation within the ethanol industry, coupled with our
location, good operating efficiencies and our solid team may provide new
opportunities for our plant.
18--------------------------------------------------------------------------------
Table of Contents Regulatory Developments Renewable Fuel Standard The ethanol industry receives support through theFederal Renewable Fuels Standard (the "RFS") which has been, and continues to be, a driving factor in the growth of ethanol usage. The RFS requires that each year a certain amount of renewable fuels must be used inthe United States . The RFS is a national program that allows refiners to use renewable fuel blends in those areas of the country where it is most cost-effective. TheEPA is responsible for revising and implementing regulations to ensure that transportation fuel sold inthe United States contains a minimum volume of renewable fuel. The RFS statutory volume requirement increases incrementally each year untilthe United States is statutorily required to use 36 billion gallons of renewable fuels by calendar year 2022. TheEPA has the authority, however, to waive the RFS statutory volume requirements, in whole or in part, provided that there is either inadequate domestic renewable fuel supply or the implementation of the requirement would severely harm the economy or environment of a state, region orthe United States . Annually, theEPA is required by statute to pass a rule that establishes the number of gallons of different types of renewable fuels that must be used inthe United States which is called the renewable volume obligation. For 2020, 2021, and 2022 the statutory volume requirements for renewable fuels were 30 billion gallons, 33 billion gallons, and 36 billion gallons, respectively. OnJune 3, 2022 , theEPA released the final rules for the renewable volume obligations ("RVOs") for 2020, 2021 and 2022 and set the RVOs at 17.13 billion gallons for 2020, 18.84 billion gallons for 2021 and 20.63 billion gallons for 2022. An additional 250 million supplemental gallons were added to the RVOs for 2022 in order to address the court-ordered remand of previously lowered RVOs for 2014-2016. Federal regulations supporting the use of renewable fuels like the RFS are a significant driver of ethanol demand in theU.S. Under the RFS, theEPA assigns individual refiners, blenders, and importers the volume of renewable fuels they are obligated to use based on their percentage of total domestic transportation fuel sales. The mechanism that provides accountability in RFS compliance is the Renewable Identification Number ("RIN"). RINs are a tradeable commodity given that if refiners (obligated parties) need additional RINs to be compliant, they have to purchase them from those that have excess. Thus, there is an economic incentive to use renewable fuels like ethanol, or in the alternative, buy RINs. Obligated parties use RINs to show compliance with RFS-regulated volumes. RINs are attached to renewable fuels by ethanol 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. Although renewable volume obligations establish the number of gallons of renewable fuel that must be blended into the nation's fuel supply, these obligations do not take into account waivers granted by theEPA to small refiners for "hardship." TheEPA can, in consultation with theDepartment of Energy , waive the obligation for individual smaller refineries that are suffering "disproportionate economic hardship" due to compliance with the RFS. To qualify for this "small refinery waiver," the refineries must be under total throughput of 75,000 barrels per day and state their case for an exemption in an application to theEPA each year. OnJune 3, 2022 , theEPA announced the denial of 69 petitions from small refineries seeking small refinery exemptions (SREs) from the RFS program for one or more of the compliance years between 2016 and 2021. Having a final conclusion to this issue that has been ongoing for many years will help provide more stability within the RIN's market. 19
--------------------------------------------------------------------------------
Table of Contents State Initiatives In 2006,Iowa passed legislation promoting the use of renewable fuels inIowa . One of the most significant provisions of theIowa renewable fuels legislation was a renewable fuels targeted set of tax credits encouraging an escalating percentage of the gasoline sold inIowa to consist of, be blended with, or be replaced by, renewable fuels. To receive the tax credit, retailers of gasoline are required to reach escalating annual targets of the percentage of their gasoline sales that consist of, are blended with, or are replaced by, renewable fuels. This renewable fuel tax credit originally required 10% of the gasoline that retailers sold to fall within the renewable fuels definitions to receive the credit and has increased incrementally to 25% as ofJanuary 1, 2020 . This tax credit automatically repealed itself onJanuary 1, 2021 for tax years beginning on or after that date.
Industry Factors Affecting our Results of Operations
Ethanol prices increased 50.6% during the nine months endedJune 30, 2022 , as compared to the same period in the previous fiscal year. This increase was partially offset by a decrease of 17.1% in ethanol shipments during the nine months endedJune 30, 2022 , as compared to the prior year. The reduction in shipments was due to our increased shipments of undenatured ethanol. Management believes the volume of undenatured ethanol sales will continue at similar rates in the future. The latest outlook of supply and demand provided by theUnited States Department of Agriculture (the "USDA") estimate forUnited States 2021/22 corn production is 15.115 billion bushels. The yield projection is 177 bushels per acre. Both were unchanged from the previous report. The projection for the 2022/23 crop year is 14.46 billion bushels and a 177 yield projection. TheUSDA did increase the corn used for ethanol for the 2021/2022 crop year to 5.375 billion bushels. Their previous estimate was 5.35 billion bushels. For the 2022/23 crop year, the estimated usage for ethanol is 5.375 billion bushels. TheUSDA increased their corn price estimates for fiscal 2022 to$5.95 per bushel, up from the previous estimate of$5.80 . For the 2022/23 crop year, theUSDA is anticipating the average corn price to be$6.75 . TheUSDA estimated in their July World Agricultural Supply and Demand Estimates (WASDE) report that in 2021/22 there were 93.4 million acres of corn planted which is up slightly from their original projection of 90.7 million acres, but is unchanged from their April report. TheUSDA is estimating for 2022/23 there will be 89.5 million corn acres planted. Export projections have decreased from 2.5 million bushels to 2.45 million bushels for the 2021/22 crop year and is estimated to be 2.4 million bushels for the 2022/23 crop year.The US Energy Information Administration ("EIA") released its Short-Term Energy Outlook report inJuly 2022 and indicated that US ethanol production increased in 2021 from 2020, but still remained lower than 2019. Ethanol production was 8% higher in 2021 compared to 2020. The EIA estimates an increase of 4% over 2021 levels in 2022 and 2% in 2023. Ethanol consumption increased 10% in 2021 compared to 2020, and the EIA anticipates ethanol consumption will rise 1% in 2022 and 1.4% in 2023 compared to 2021. We currently believe that our margins will decrease to more normal levels after reaching historic highs during the first three months of Fiscal 2022. As discussed in greater depth above, in December, 2021, theEPA issued a long-awaited biofuel blending proposal that cut the RVOs for 2020 and 2021, but restored 2022's RVO, allowing it to be satisfied with up to 15 billion gallons of ethanol and an additional 5.77 billion gallons of other advanced biofuels. InJanuary 2022 , rumors circulated in the market that this 15 billion gallon number for 2022 may be rolled back in the final rule. This market speculation reduced RIN prices after the rebound RIN prices experienced in response to the DecemberEPA announcement. Uncertainty with biofuel regulations will continue to cause fluctuations in our margins. Lower supply and challenges with transportation and logistics resulting from the long-term impact of the COVID pandemic will also have a direct impact on our margins as we continue to face challenges with delays in shipment of our products to both domestic and international markets. Our distiller grain margins have been impacted positively in the short term due to the current high corn prices which has resulted in increased demand for our dried distiller grains ("DDG") and wet distiller grains ("WDG"). We experienced a price increase of 26% for the nine months endedJune 30, 2022 , as compared to the nine months endedJune 30, 2021 on a 1.2% decrease in tons sold for those same periods. In 2019, theU.S. implemented tariffs on a cross section of Chinese products, andChina did not order products from theU.S. , including DDG. InJanuary 2020 , theU.S. andChina signed a "Phase One Agreement" where theU.S. lowered tariffs in exchange forChina reinstating orders forU.S. products, including agriculture products. We cannot forecast how much demand fromChina will come back into the marketplace, or if additional demand can be created from other foreign markets or domestically. In 2020,China re-entered the DDG import market, but did not reach the levels necessary to be included in the top 10 countries of DDG imports. OnDecember 18, 2019 ,Congress extended the biodiesel tax credit through 2022 with retroactive application toJanuary 1, 2018 . The extension of the tax credit has increased demand for distillers corn oil, which is a feedstock for renewable diesel, and could continue to have a positive impact on distillers corn oil prices for the remainder of Fiscal 2022 OnJuly 27, 2022 the Inflation Reduction Act of 2022 (the "IRA") was introduced in theU.S. Senate . Although we are still evaluating the IRA, if enacted as proposed, it could have several potential impacts on our business operations. The proposed legislation includes tax incentives that support biofuel production and infrastructure as well as an extension of the biodiesel tax credit which could result in continued positive impact on the value of our distillers corn oil. 20
--------------------------------------------------------------------------------
Table of Contents Results of Operations
The following table shows our results of operations, stated as a percentage of
revenue for the three months ended
Three Months Ended June 30, 2022 Three Months Ended June 30, 2021
Amounts % of Revenues Amounts % of Revenues
in 000's in 000's
Income Statement Data
Revenues $ 87,530 100.0 % $ 87,869 100.0 %
Cost of Goods Sold
Material Costs 61,738 70.5 % 65,268 74.3 %
Variable Production Expense 8,985 10.3 % 6,592 7.5 %
Fixed Production Expense 7,178 8.2 % 7,441 8.5 %
Gross Margin 9,629 11.00 % 8,568 9.8 %
General and Administrative Expenses 1,765 2.02 % 1,305 1.5 %
Interest and other (income) expense, net (2,648 ) (3.03 )% 509 0.6 %
Net Income (Loss) $ 10,512 12.01 % $ 6,754 7.7 %
The following table shows our results of operations, stated as a percentage of
revenue for the nine months ended
Nine Months Ended June 30, 2022 Nine Months Ended June 30, 2021
Amounts % of Revenues Amounts % of Revenues
in 000's in 000's
Income Statement Data
Revenues $ 285,132 100 % 213,280 100.0 %
Cost of Goods Sold
Material Costs 201,825 70.8 % 164,699 77.2 %
Variable Production Expense 16,087 5.6 % 19,958 9.4 %
Fixed Production Expense 13,516 4.7 % 19,462 9.1 %
Gross Margin 53,704 18.8 % 9,161 4.3 %
General and Administrative Expenses 5,206 1.8 % 3,940 1.8 %
Interest and other (income) expense, net (4,504 ) (1.6 )% 502 0.2 %
Net Income (Loss) $ 53,002 18.6 % $ 4,719 2.2 %
Revenues
Our revenue from operations is derived from three primary sources: sales of
ethanol, distillers grains, and distillers corn oil. The chart below displays
statistical information regarding our revenues. During the three months ended
June 30, 2022 , the average price per gallon of ethanol increased by 24.8% as
compared to the same period in 2021, offset by a 35.9% decrease in gallons of
ethanol sold, primarily due an extended annual shutdown timeframe. The net
effect was a 5.6% decrease in ethanol revenue for the three months ended June
30, 2022 .
An increase in the average price per ton of distillers grains of approximately
22% which was partially offset by a 5% decrease in volume sold resulted in an
increase of 2.8% in revenue for this category in the three months ended June 30,
2022 as compared to the same three month period in Fiscal 2021.
Distillers corn oil revenue increased 56.1% in the three months ended June 30,
2022 , compared to the three months ended June 30, 2021 with a 57.5% increase in
price, offset by a lower volume of 0.3%. Distillers corn oil prices increased
principally as a result of increased biodiesel production. Our market for
distillers corn oil is primarily local middlemen that compete for our available
supply.
21--------------------------------------------------------------------------------
Table of Contents
Three Months Ended June 30, 2022 Three Months Ended June 30, 2021
Amounts in Amounts in
000's % of Revenues 000's % of Revenues
Product Revenue Information
Denatured and Undenatured Ethanol $ 63,858 73 % $ 67,645 77.0 %
Distillers Grains 15,031 17.2 % 14,615 16.6 %
Distillers Corn Oil 8,284 9.5 % 5,307 6.0 %
Other 357 0.4 % 302 0.3 %
Nine Months Ended June 30, 2022 Nine Months Ended June 30, 2021
Amounts in Amounts in
000's % of Revenues 000's % of Revenues
Product Revenue Information
Denatured and Undenatured Ethanol $ 212,977 74.7 % $ 159,507 74.8 %
Distillers Grains 47,030 16.5 % 40,452 19.0 %
Distillers Corn Oil 23,698 8.3 % 12,431 5.8 %
Other 1,427 0.5 % 890 0.4 %
Cost of Goods Sold
Our cost of goods sold as a percentage of our revenues was 89.0% and 90.2% for
the three months ended June 30, 2022 , and 2021, respectively. Our two primary
costs of producing ethanol and distillers grains are corn and energy, with steam
and natural gas as our primary energy sources. Cost of goods sold also includes
net (gains) or losses from derivatives and hedging relating to corn. The
average price of corn used in ethanol production per bushel increased 25.7% in
the three months ended June 30, 2022 , compared to the three months ended June
30, 2021 . Due to operational challenges, the volume of ethanol produced
decreased by 18.7% for the three months ended June 30, 2022 , as compared to the
same period in Fiscal 2021.
Realized and unrealized gains (losses) related to our derivatives and hedging
related to corn resulted in a $1.05 million increase to our cost of goods sold
for the three months ended June 30, 2022 , compared to a decrease of 0.8 million
for the three months ended June 30, 2021 . We recognize the gains or losses that
result from the changes in the value of our derivative instruments related to
corn in cost of goods sold as the changes occur. As corn prices fluctuate, the
value of our derivative instruments is impacted, which affects our financial
performance. We anticipate continued volatility in our cost of goods sold due
to the timing of the changes in value of the derivative instruments relative to
the cost and use of the commodity being hedged.
Variable production expenses increased 36.3% when comparing the three months
ended June 30, 2022 , to the three months ended June 30 , 2021due to an increase
in the cost of chemicals and utilities.
Fixed production expenses decreased 3.5% for the three months ended June 30,
2022 , compared to the three months ended June 30 , 2021,due to a decrease in our
rail car maintenance expense year over year and ability to capitalize plant
maintenance expenses incurred during the third quarter of Fiscal 2022 based on
the nature of the repairs.
General and administrative expenses include salaries and benefits of
administrative employees, professional fees and other general administrative
costs. Our general and administrative expenses for the three months ended June
30, 2022 , increased 35.2% compared to the three months ended June 30 ,
2021,primarily due to increased payroll expenses, insurance expenses and legal
and accounting fees associated with being registered with the Securities and
Exchange Commission .
Interest and Other (Income) Expense, Net
Our interest and other (income) expenses, net, were$ (2.6) million for three months endedJune 30, 2022 , and$509 thousand for the three months endedJune 30, 2021 . The difference was the receipt of the USDA Biofuels Producer grant received in May of 2022. 22
--------------------------------------------------------------------------------
Table of Contents Selected Financial Data Modified EBITDA is defined as net income plus interest expense net of interest income, plus depreciation and amortization, or EBITDA, as adjusted for unrealized hedging (gains) losses. Modified EBITDA is not required by or presented in accordance with generally accepted accounting principles inthe United States of America ("GAAP") and should not be considered as an alternative to net income, operating income or any other performance measure derived in accordance with GAAP, or as an alternative to cash flow from operating activities or as a measure of our liquidity.
We present modified EBITDA because we consider it to be an important supplemental measure of our operating performance and it is considered by our management and Board of Directors as an important operating metric in their assessment of our performance.
We believe modified EBITDA allows us to better compare our current operating results with corresponding historical periods and with the operational performance of other companies in our industry because it does not give effect to potential differences caused by variations in capital structures (affecting relative interest expense, including the impact of write-offs of deferred financing costs when companies refinance their indebtedness), the amortization of intangibles (affecting relative amortization expense), unrealized hedging (gains) losses and other items that are unrelated to underlying operating performance. We also present modified EBITDA because we believe it is frequently used by securities analysts and investors as a measure of performance. There are a number of material limitations to the use of modified EBITDA as an analytical tool, including the following:
• Modified EBITDA does not reflect our interest expense or the cash requirements
to pay our principal and interest. Because we have borrowed money to finance
our operations, interest expense is a necessary element of our costs and our
ability to generate profits and cash flows. Therefore, any measure that
excludes interest expense may have limitations.
• Although depreciation and amortization are non-cash expenses in the period
recorded, the assets being depreciated and amortized may have to be replaced
in the future, and modified EBITDA does not reflect the cash requirements for
such replacement. Because we use capital assets, depreciation and
amortization expense is a necessary element of our costs and ability to
generate profits. Therefore, any measure that excludes depreciation and
amortization expense may have limitations.
We compensate for these limitations by relying heavily on our GAAP financial
measures and by using modified EBITDA as supplemental information. We believe
that consideration of modified EBITDA, together with a careful review of our
GAAP financial measures, is the most informed method of analyzing our
operations. Because modified EBITDA is not a measurement determined in
accordance with GAAP and is susceptible to varying calculations, modified
EBITDA, as presented, may not be comparable to other similarly titled measures
of other companies. The following table provides a reconciliation of modified
EBITDA to net income (in thousands except per unit data):
Three Nine Nine
Months Months Months
Three Months Ended Ended Ended Ended
June 30, June 30, June 30,
June 30, 2022 2021 2022 2021
EBITDA
Net Income (Loss) $ 10,512 $ 6,754 $ 53,002 $ 4,719
Interest Expense 415 524 1,194 1,522
Depreciation 2,842 2,764 8,521 8,290
EBITDA 13,769 10,042 62,717 14,531
Unrealized Hedging (Gain) Loss 2,826 (1,578 ) (1,754 ) (1,302 )
Modified EBITDA $ 16,595 $ 8,464 $ 60,963 $ 13,229
23--------------------------------------------------------------------------------
Table of Contents
Liquidity and Capital Resources
The Company has certain loan agreements withFarm Credit Services of America , FLCA, ("FLCA"),Farm Credit Services of America , PCA ("PCA") and CoBank, ACB ("CoBank") (collectively, the "FCSA Credit Facility"), which provide the Company with a term loan in the amount of$30 million (the "Term Loan"), a revolving term loan in the amount of$40 million (the "Revolving Term Loan") and a$10 million revolving line of credit (the "Revolving Credit Loan"). The FCSA Credit Facility is secured by a security interest on all of the Company's assets. The Term Loan provides for semi-annual payments by the Company to FCSA of$3.75 million , onMarch 1 andSeptember 1 , beginningSeptember 1, 2020 . The Term Loan was amended inFebruary 2021 to only require a single principal payment of$3.75 during 2021. All remaining amounts due under the Term Note are due and payable on the maturity date ofNovember 15, 2024 . As ofJune 30, 2022 , there was an outstanding balance of$18.75 million on the Term Loan. As ofJune 30, 2022 , there was an outstanding balance of$12.6 million on the Revolving Term Loan. Any outstanding amounts due under the Revolving Term Loan are due and payable on the maturity date ofNovember 15, 2024 . As ofJune 30, 2022 , there was no outstanding balance under the Revolving Credit Loan. EffectiveFebruary 25, 2022 , we amended the terms of the Revolving Credit Loan to extend the maturity date fromMarch 1, 2022 toFebruary 1, 2023 . Under the FCSA Credit Facility, the interest rates utilize the
Daily
Simple SOFR Rate with a Daily Simple SOFR Rate Spread of 3.45% per annum. The interest rate atJune 30, 2022 applicable to each of the loans under the FSCA Credit Facility was 5.06%.
As of
As stated in Note 4 to the financial statements, the loan agreements were
amended as of
Primary Working Capital Needs During the fourth quarter of Fiscal 2022, we estimate that we will require cash of approximately$68 million for our primary input of corn and$4 million for our energy sources of electricity, steam, and natural gas. Capital expenditure requirements for the fourth quarter are expected to be$2 million . Although there is uncertainty related to the impact of the COVID-19 pandemic on our future results, management believes that the Company has sufficient cash available to fund operations for the next twelve months generated by cash from our continuing operations and available cash under our Revolving Term Loan. We cannot estimate the availability of funds for hedging in the future. Commodity Price Risk Our operations are highly dependent on commodity prices, especially prices for corn, ethanol and distillers grains and the spread between them (the "crush margin"). As a result of price volatility for these commodities, our operating results may fluctuate substantially. The price and availability of corn are subject to significant fluctuations depending upon a number of factors that affect commodity prices in general, including crop conditions, weather, governmental programs and foreign purchases. We may experience increasing costs for corn and natural gas and decreasing prices for ethanol and distillers grains which could significantly impact our operating results. Because the market price of ethanol is not directly related to corn prices, ethanol producers are generally not able to compensate for increases in the cost of corn through adjustments in prices for ethanol. We continue to monitor corn and ethanol prices and manage the "crush margin" to affect our longer-term profitability. We enter into various derivative contracts with the primary objective of managing our exposure to adverse price movements in the commodities used for, and produced in, our business operations and, to the extent we have working capital available and available market conditions are appropriate, we engage in hedging transactions which involve risks that could harm our business. We measure and review our net commodity positions on a daily basis. Our daily net agricultural commodity position consists of inventory, forward purchase and sale contracts, over-the-counter and exchange traded derivative instruments. The effectiveness of our hedging strategies is dependent upon the cost of commodities and our ability to sell sufficient products to use all of the commodities for which we have futures contracts. Although we actively manage our risk and adjust hedging strategies as appropriate, there is no assurance that our hedging activities will successfully reduce the risk caused by market volatility which may leave us vulnerable to high commodity prices. Alternatively, we may choose not to engage in hedging transactions in the future. As a result, our future results of operations and financial conditions may also be adversely affected during periods in which price changes in corn, ethanol and distillers grain do not work in our favor. In addition, as described above, hedging transactions expose us to the risk of counterparty non-performance where the counterparty to the hedging contract defaults on its contract or, in the case of over-the-counter or exchange-traded contracts, where there is a change in the expected differential between the price of the commodity underlying the hedging agreement and the actual prices paid or received by us for the physical commodity bought or sold. We have, from time to time, experienced instances of counterparty non-performance but losses incurred in these situations were not significant. 24
--------------------------------------------------------------------------------
Table of Contents Although we believe our hedge positions accomplish an economic hedge against our future purchases and sales, management has chosen not to use hedge accounting, which would match any gain or loss on our hedge positions to the specific commodity purchase being hedged. We are using fair value accounting for our hedge positions, which means as the current market price of our hedge positions changes, the realized or unrealized gains and losses are immediately recognized in the current period (commonly referred to as the "mark to market" method). The immediate recognition of hedging gains and losses under fair value accounting can cause net income to be volatile from quarter to quarter due to the timing of the change in the value of the derivative instruments relative to the cost and use of the commodity being hedged. As corn prices move in reaction to market trends and information, our income statement will be affected depending on the impact such market movements have on the value of our derivative instruments. Depending on market movements, crop prospects and weather, our hedging strategies may cause immediate adverse effects, but are expected to produce long-term positive impact. In the event we do not have sufficient working capital to enter into hedging strategies to manage our commodities price risk, we may be forced to purchase our corn and market our ethanol at spot prices and as a result, we could be further exposed to market volatility and risk. However, during the past year, the spot market has been advantageous. Credit and Counterparty Risks Through our normal business activities, we are subject to significant credit and counterparty risks that arise through normal commercial sales and purchases, including forward commitments to buy and sell, and through various other over-the-counter (OTC) derivative instruments that we utilize to manage risks inherent in our business activities. We define credit and counterparty risk as a potential financial loss due to the failure of a counterparty to honor its obligations. The exposure is measured based upon several factors, including unpaid accounts receivable from counterparties and unrealized gains (losses) from OTC derivative instruments (including forward purchase and sale contracts). We actively monitor credit and counterparty risk through credit analysis (by our marketing agent).
Impact of Hedging Transactions on Liquidity
Our operations and cash flows are highly impacted by commodity prices, including prices for corn, ethanol, distillers grains and natural gas. We attempt to reduce the market risk associated with fluctuations in commodity prices through the use of derivative instruments, including forward corn contracts and over-the-counter exchange-traded futures and option contracts. Our liquidity position may be positively or negatively affected by changes in the underlying value of our derivative instruments. When the value of our open derivative positions decrease, we may be required to post margin deposits with our brokers to cover a portion of the decrease or we may require significant liquidity with little advanced notice to meet margin calls. Conversely, when the value of our open derivative positions increase, our brokers may be required to deliver margin deposits to us for a portion of the increase. We continuously monitor and manage our derivative instruments portfolio and our exposure to margin calls and while we believe we will continue to maintain adequate liquidity to cover such margin calls from operating results and borrowings, we cannot estimate the actual availability of funds from operations or borrowings for hedging transactions in the future. The effects, positive or negative, on liquidity resulting from our hedging activities tend to be mitigated by offsetting changes in cash prices in our business. For example, in a period of rising corn prices, gains resulting from long grain derivative positions would generally be offset by higher cash prices paid to farmers and other suppliers in local corn markets. These offsetting changes do not always occur, however, in the same amounts or in the same period. We expect that a$1.00 per bushel fluctuation in market prices for corn would impact our cost of goods sold by approximately$45 million , or$0.34 per gallon, assuming our plant operates at 100% of our capacity. We expect the annual impact to our results of operations due to a$0.50 decrease in ethanol prices will result in approximately a$65 million decrease in revenue.
Critical Accounting Estimates
For a discussion of the Critical Accounting Estimates material to an understanding of our business and financial results, members should carefully review the discussion of such estimates in our annual report on Form 10-K for the year endedSeptember 30, 2021 , in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," under "Summary of Critical Accounting Policies and Estimates." At this time, there have been no material changes to the estimates disclosed in our annual report on Form 10-K for the year endedSeptember 30, 2021 , nor have the material facts underlying those estimates changed in any manner.
© Edgar Online, source
