RENEWABLE ENERGY GROUP, INC. The following discussion and analysis should be read in conjunction with our consolidated financial statements and notes thereto that appear elsewhere in this report. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. Actual results may differ materially from those discussed in these forward-looking statements due to a number of factors, including those set forth in the section entitled "Risk Factors" and elsewhere in this report. Overview We focus on providing cleaner, lower carbon transportation fuels. We areNorth America's largest producer of advanced biofuels. We utilize a nationwide production, distribution and logistics system as part of an integrated value chain model designed to convert natural fats, oils and greases into advanced biofuels. During 2019, we sold 700 million total gallons of fuel (including fuel purchased from third parties for resale) and generated revenues of$2.6 billion . We believe our fully integrated approach, which includes acquiring feedstock, managing biorefinery facility construction and upgrades, operating biorefineries, and distributing fuel through a network of terminals, positions us to serve the market for cleaner transportation fuels. InSeptember 2018 , we acquired Keck Energy and inJuly 2019 , we opened our first REG branded fueling station, adjacent to REG Seneca, a 60 mmgy biorefinery inSeneca, Illinois to serve a variety of customers from trucking fleets, local diesel vehicle owners and other customers as the initial part of our downstream strategy. We own and operate a network of 13 biorefineries. Eleven biorefineries are located inthe United States and two inGermany . Eleven biorefineries produce biodiesel, one produces renewable diesel ("RD"), and one is a fermentation facility. Our twelve biomass-based diesel production facilities have an aggregate nameplate production capacity of 505 million gallons per year ("mmgy"). InAugust 2019 , we closed ourNew Boston, Texas biorefinery, which had a nameplate capacity of 15 mmgy. We are a lower-cost, lower carbon biomass-based diesel producer. We primarily produce our biomass-based diesel from a wide variety of lower-cost, lower carbon feedstocks, including distillers corn oil, used cooking oil and inedible animal fat. We also produce biomass-based diesel from virgin vegetable oils, such as soybean oil or canola oil, which tend to be higher in price. We believe our ability to process a wide variety of feedstocks at most of our facilities provides us with a cost advantage over many biomass-based diesel producers, particularly those that rely primarily on higher cost virgin vegetable oils. We also sell petroleum-based heating oil and diesel fuel, which enables us to offer a variety of fuel products to a broader customer base. We sell heating oil and ultra-low sulfur diesel, or ULSD, at terminals throughout the northeasternU.S. , as well as BioHeat® blended heating fuel at one of these terminal locations. In 2018, we expanded our sales of biofuel blends to Midwest andWest Coast terminal locations and look to potentially expand in other areas acrossNorth America and internationally. InOctober 2018 , we began collaborating with Phillips 66 on the possible construction of a large-scale renewable diesel plant inWashington state . InJanuary 2020 , we announced the cessation of the joint project with Phillips 66 to construct a renewable diesel plant due to the anticipated delay in timing and costs associated with the permitting process. InMay 2019 , we sold the core assets ofREG Life Sciences that comprised our Renewable Chemicals segment. As a result, the former Renewable Chemicals segment and the operations of the Renewable Chemicals segment have been classified as discontinued operations for all periods covered by this report. 29 -------------------------------------------------------------------------------- Our businesses are organized into two reportable segments - the Biomass-based Diesel segment and the Services segment. Biomass-based Diesel Segment Our Biomass-based Diesel segment includes: • the operations of the following biomass-based diesel production
refineries as included in Item 2 of Part I of this document, except for
the fermentation facility in Okeechobee, Florida ;
• purchases and resales of biomass-based diesel, petroleum-based diesel,
RINs and LCFS credits, and raw material feedstocks acquired from third
parties;
• sales of biomass-based diesel produced under toll manufacturing
arrangements with third party facilities using our feedstocks; and
• incentives received from federal and state programs for renewable fuels.
We derive a small portion of our revenues from the sale of co-products of the biomass-based diesel production process. In 2019 and 2018, our revenues from the sale of co-products were less than five percent of our total Biomass-based diesel segment revenues. During 2019 and 2018, revenues from the sale of petroleum-based heating oil and diesel fuel acquired from third parties, along with the sale of these items further blended with biodiesel produced by our facilities or purchased from third parties, were both approximately 10% of our total revenues. In accordance with EPA regulations, we generate 1.5 to 1.7 RINS, for each gallon of biomass-based diesel we produce. RINs are used to track compliance with the RFS2, using the EPA moderated transaction system, or EMTS. RFS2 allows us to attach between zero and 2.5 RINs to any gallon of biomass-based diesel we sell. When we attach RINs to a sale of biomass-based diesel gallons, a portion of our selling price for a gallon of biomass-based diesel is generally attributable to RFS2 compliance, but no cost is allocated to the RINs generated by our biomass-based diesel production because RINs are a form of government incentive and not a result of the physical attributes of the biomass-based diesel production. In addition, RINs, once obtained through the production and sale of gallons of biomass-based diesel, may be separated by the acquirer and sold separately. We regularly obtain RINs from third parties for resale, and the value of these RINs is reflected in "Prepaid expenses and other assets" on our Consolidated Balance Sheet. At each balance sheet date, this RIN inventory is valued at the lower of cost or net realizable value and resulting adjustments are reflected in our cost of goods sold for the period. The cost of RINs obtained from third parties is determined using the average cost method. Because we do not allocate costs to RINs generated by our biomass-based diesel production, fluctuations in the value of our RIN inventory represent fluctuations in the value of RINs we have obtained from third parties. RINs significantly decreased in value during the first quarter of 2019 and have remained relatively low through the rest of the year, which we believe has been influenced by record level of Small Refiner Exemptions from RIN compliance requirements for 2016, 2017, and 2018. The table below summarizes our RINs balances available to be sold and the median closing price per RIN atDecember 31, 2019 and 2018 according to OPIS: Quantity
OPIS Median Closing Price per RIN
December 31, 2019 December 31, 2018 December 31, 2019 December 31, 2018
Biomass-based diesel RINs 7,196,022 12,561,167 $ 0.40 $ 0.55
Advanced biofuels RINs 2,008,689 3,907,803 $ 0.40 $ 0.51
We generate Low Carbon Fuel Standard credits for our low carbon fuels when our
qualified low carbon fuels are imported into states that have adopted an LCFS
program and sold for qualifying purposes. As a result, a portion of the selling
price for a gallon of biomass-based diesel sold into an LCFS market is also
attributable to LCFS compliance. Like RINs, LCFS credits that we generate are a
form of government incentive and not a result of the physical attributes of the
biomass-based diesel production. Therefore, no cost is allocated to the LCFS
credit when it is generated, regardless of whether the LCFS credit is
transferred with the biomass-based diesel produced or held by us. LCFS prices
increased throughout 2019 and was near all time high prices at year end, which
we believe was largely attributable to growing demand for LCFS credits.
The below table summarizes approximate amounts of our LCFS credits available to
be sold and the median closing price per LCFS credit at December 31, 2019 and
2018 according to OPIS:
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Quantity OPIS Median Closing Price per LCFS Credit
December 31, 2019 December 31, 2018 December 31, 2019 December 31, 2018
California LCFS 2,366 29,800 $ 205.50 $ 195.00
Oregon LCFS 4,073 25,900 $ 152.50 $ 137.50
Services Segment
Our Services segment, which primarily provides services to our Biomass-based
Diesel Segment, includes:
• biomass-based diesel facility management and operational services,
whereby we provide day-to-day management and operational services to
biomass-based diesel production facilities; and
• construction management services, whereby we act as the construction
management and general contractor for the upgrade or construction of
biomass-based diesel production facilities.
During recent years, we have utilized our construction management expertise
internally to upgrade our facilities including our facilities located in Seneca ,
Ralston , Albert Lea , Mason City and Newton . In March 2018 , we completed the
expansion project at our Ralston facility. In June 2017 , we completed the
acquisition of approximately 82 acres of land near our Geismar, Louisiana
biorefinery. The purchase included the acquisition of land we previously leased
for our Geismar operations and approximately 61 additional acres in parcels
adjacent to and near the facility. We plan to improve and utilize the new
acreage to support existing production capacity and for future expansion
opportunities.
Factors Influencing Our Results of Operations
The principal factors affecting our results of operations and financial
conditions are the market prices for biomass-based diesel and the feedstocks
used to produce biomass-based diesel, as well as governmental programs designed
to create incentives for the production and use of cleaner renewable fuels.
Governmental programs favoring biomass-based diesel production and use
Biomass-based diesel has historically been more expensive to produce than
petroleum-based diesel. The biomass-based diesel industry's growth has largely
been the result of federal and state programs that require or incentivize the
production and use of biomass-based diesel, which allows biomass-based diesel to
be price-competitive with petroleum-based diesel.
RFS2 was implemented in 2010, stipulating volume requirements for the amount of
biomass-based diesel and other advanced biofuels that must be utilized in the
United States each year. Under RFS2, Obligated Parties, including petroleum
refiners and fuel importers, must show compliance with these standards.
Currently, biodiesel and renewable diesel satisfy three categories of an
Obligated Party's annual renewable fuel required volume obligation, or
RVO-biomass-based diesel, advanced biofuel and renewable fuel. The final RVO
targets for the biomass-based diesel and advanced biofuels volumes for the years
2016 to 2021 as set by the EPA are as follows:
2016 2017 2018 2019 2020 2021
1.90 2.00 2.10 2.10 2.43 2.43
Biomass-based billion billion billion billion billion billion
Diesel gallons gallons gallons gallons gallons gallons
Total 3.61 4.28 4.29 4.92 5.04
Advanced billion billion billion billion billion
Biofuels RINs* RINs* RINs* RINs* RINs* N/A
*Ethanol equivalent gallons
The federal biodiesel mixture excise tax credit, or the BTC, has historically provided a$1.00 refundable tax credit per gallon to the first blender of biomass-based diesel with petroleum-based diesel fuel. The BTC became effectiveJanuary 1, 2005 , but sinceJanuary 1, 2010 it has been allowed to lapse and then been reinstated a number of times. The BTC was retroactively reinstated onFebruary 9, 2018 for the fiscal year 2017 and onDecember 20, 2019 for the fiscal years 2018 and 2019. The BTC was also extended throughDecember 31, 2022 . As a result of this history of retroactive reinstatement of the BTC, we and many other biomass-based diesel industry producers have adopted contractual arrangements with customers and vendors specifying the allocation and sharing of any retroactively reinstated incentive. The reinstatement of the 2017 BTC resulted in a$207 million net benefit to our net income for the year endedDecember 31, 2018 and Adjusted EBITDA for the year endedDecember 31, 2017 , with another$11 million related to products delivered and sales recognized in the first quarter of 2018. The reinstatement of the 2018 and 2019 BTC resulted in an$499 million net benefit to our net income for the year endedDecember 31, 2019 . The BTC net benefit was 31 -------------------------------------------------------------------------------- allocated to the corresponding quarterly Adjusted EBITDA when the business giving rise to the retroactive credit was conducted. For the years endedDecember 31, 2019 and 2018, the reinstatement of the 2018 and 2019 BTC resulted in a net benefit to our Adjusted EBITDA of$261 million and$238 million , respectively. Biomass-based diesel and feedstock price fluctuations Our operating results generally reflect the relationship between the price of biomass-based diesel, including credits and incentives and the price of feedstocks used to produce biomass-based diesel. Biomass-based diesel is a cleaner low carbon, renewable alternative to petroleum-based diesel fuel and is primarily sold to the end user after it has been blended with petroleum-based diesel fuel. Biomass-based diesel prices have historically been heavily influenced by petroleum-based diesel fuel prices. Accordingly, biomass-based diesel prices have generally been impacted by the same factors that affect petroleum prices, such as crude oil supply and demand balance, worldwide economic conditions, wars and other political events,OPEC production quotas, changes in refining capacity and natural disasters. Regulatory and legislative factors also influence the price of biomass-based diesel. Biomass-based diesel RIN pricing, a value component that was introduced via RFS2 inJuly 2010 , has had a significant impact on our biomass-based diesel pricing. The following table shows for 2017, 2018 and 2019 the high and low average monthly contributory value of RINs, as reported by OPIS, to the average B100 spot price of a gallon of biodiesel, as reported by The Jacobsen in terms of dollars per gallon. [[Image Removed: rinpricevsb100pricechart2019.jpg]] At the beginning of 2019, the value of RINs, as reported by OPIS, to the average B100 spot price of a gallon of biodiesel was$0.86 per gallon. The value of RINs to the average B100 spot price of a gallon of biodiesel dropped to$0.60 per gallon at the end ofDecember 2019 . It reached a high of$0.97 per gallon of biodiesel inNovember 2019 and a low of$0.48 per gallon inMay 2019 . We believe that the decrease in RIN value during 2019 and 2018 was heavily influenced by record levels of Small Refiner Exemptions ("SRE") from RIN compliance requirements for 2016, 2017, 2018 and the approach the EPA states it plans to use to grant the yearly SRE exemptions going forward. We enter into forward contracts to sell RINs and we use risk management position limits to manage RIN exposure. During 2019, feedstock expense accounted for 79% of our direct production cost, while methanol and chemical catalysts expense accounted for 4% and 3% of our costs of goods sold, respectively. 32 -------------------------------------------------------------------------------- Feedstocks for biomass-based diesel production, such as distillers corn oil, used cooking oil, inedible animal fat, canola oil and soybean oil are commodities and market prices for them will be affected by a wide range of factors unrelated to the price of biomass-based diesel and petroleum-based diesel. There are a number of factors that influence the supply and price of our feedstocks, such as the following: biomass-based diesel demand; export demand; government policies and subsidies; weather conditions; ethanol production; cooking habits and eating habits; number of restaurants near collection facilities; hog/beef/poultry supply and demand; palm oil supply; soybean meal demand and/or production, and crop production both in theU.S. andSouth America . During 2019 and 2018, 71% and 77% of the feedstocks used in our operations, respectively, were comprised of distillers corn oil, used cooking oil and inedible animal fats with the remainder coming from virgin vegetable oils. The graph below illustrates the spread between the cost of producing one gallon of biodiesel made from soybean oil to the cost of producing one gallon of biodiesel made from the specified lower-cost feedstock for the periodJanuary 2017 toDecember 2019 . The results were derived using assumed conversion factors for the yield of each feedstock and subtracting the cost of producing one gallon of biodiesel made from each respective lower-cost feedstock from the cost of producing one gallon of biodiesel made from soybean oil. [[Image Removed: graphsbospread2019.jpg]] (1) Used cooking oil prices ("UCO") are based on the monthly average of the daily low sales price ofMissouri River yellow grease as reported by The Jacobsen (based on 8.5 pounds per gallon).
(2) Distillers corn oil ("DCO") prices are reported as the monthly average of
the daily distillers' corn oil market values delivered to Illinois as
reported by The Jacobsen (based on 8.2 pounds per gallon).
(3) Choice white grease ("CWG") prices are based on the monthly average of the
daily low prices of
Jacobsen (based on 8.0 pounds per gallon).
(4) Soybean oil (crude) ("SBO") prices are based on the monthly average of the
daily closing sale price of the nearby soybean oil contract as reported by
CBOT (based on 7.5 pounds per gallons).
Our results of operations generally will benefit when the spread between biomass-based diesel prices and feedstock prices widens and will be harmed when this spread narrows. The following graph shows feedstock cost data for choice white grease and soybean oil on a per gallon basis compared to the per gallon sale price data for biodiesel, and the spread between biodiesel and each of soybean oil and choice white grease fromJanuary 2017 toDecember 2019 . 33 --------------------------------------------------------------------------------
[[Image Removed: graphspreadpricing2019v2.jpg]]
(1) Biodiesel prices are based on the monthly average of the midpoint of thehigh and low prices of B100 (Upper Midwest) as reported by The Jacobsen.
(2) Soybean oil (crude) prices are based on the monthly average of the daily
closing sale price of the nearby soybean oil contract as reported by CBOT
(based on 7.5 pounds per gallon).
(3) Choice white grease prices are based on the monthly average of the daily
low price of Missouri River choice white grease as reported by The
Jacobsen (based on 8.0 pounds per gallon).
(4) Spread between biodiesel price and choice white grease price.
(5) Spread between biodiesel price and soybean oil (crude) price.
During 2019, NY Harbor ULSD prices ranged from a low of$1.70 per gallon in early January to a high of$2.12 per gallon in May with an average price for the year of$1.94 per gallon. Energy prices increased sharply in January and increased slightly until early in the second quarter when trade talks between theU.S. andChina broke down. Prices rallied in June due to elevated tensions in theMiddle East . Early in the third quarter, prices declined due to further breakdowns in trade talks between theU.S. andChina , as well as expected global economic slowdowns and energy demand in 2020. Energy prices finished the year on the upper end of the 2019 trading range on positiveU.S. andChina trade developments combined with continued tension in theMiddle East .U.S. biodiesel prices based on Jacobsen Upper Midwest B100 prices traded in a range reaching a high of$3.00 in December and a low of$2.70 in May. Animal fat and soybean oil production have both increased in 2019, which contributed to lower feedstock prices during the year. CBOT soybean oil prices ranged from a high of$0.35 per pound in December to a low of$0.26 per pound in May with an average price for the year of$0.29 per pound. Soybeans saw weakness early in the year over concerns that farmers would switch planted acres from corn to beans due to unfavorable weather conditions. Further weather delays and the publishing of theUSDA's resurveyed acreage report raised concerns that planted soybean acres would be reduced. Soybean oil prices started to gain early in the third quarter as soybean stocks were lower year-over-year in anticipation of biofuels renewable volume obligation reform. Soybean oil reached multi year highs by the end of 2019, supported by palm oil experiencing a sharp increase in pricing along with the reinstatement of the Biodiesel Tax Credit. Choice white grease prices ranged from a low of$0.19 in November to a high of$0.28 per pound in August with an average price for the year of$0.23 per pound. Relatively strong demand for pork and beef has continued to lead to expansions in those industries. Both hog and cattle production numbers in 2019 were higher than the prior year resulting in lower prices for animal fats. 34 -------------------------------------------------------------------------------- Risk Management The profitability of producing biomass-based diesel largely depends on the spread between prices for feedstocks and biomass-based diesel, including incentives, each of which is subject to fluctuations due to market factors and each of which is not significantly correlated. Adverse price movements for these commodities directly affect our operating results. We attempt to protect cash margins for our own production and our third-party trading activity by entering into risk management contracts that mitigate the impact on our margins from price volatility in feedstocks and biomass-based diesel. We create offsetting positions by using a combination of forward fixed-price physical purchases and sales contracts on feedstock and biomass-based diesel and risk management futures contracts, swaps and options primarily on the New York Mercantile Exchange NY Harbor ULSD and CBOT Soybean Oil; however, the extent to which we engage in risk management activities varies substantially from time to time, and from feedstock to feedstock, depending on market conditions and other factors. In making risk management decisions, we utilize research conducted by outside firms to provide additional market information in addition to our internal research and analysis. Distillers corn oil, used cooking oil, inedible animal fat, canola oil and soybean oil are the primary feedstocks we used to produce biomass-based diesel in 2017, 2018 and 2019. We utilize several varieties of inedible animal fat, such as beef tallow, choice white grease and poultry fat derived from livestock. There is no established futures market for these lower-cost feedstocks. The purchase prices for lower-cost feedstocks are generally set on a negotiated flat price basis or spread to a prevailing market price reported by theUSDA price sheet or The Jacobsen. Our efforts to risk manage against changing prices for distillers corn oil, used cooking oil and inedible animal fat have involved entering into futures contracts, swaps or options on other commodity products, such as CBOT soybean oil and New York Mercantile Exchange NY Harbor ULSD. However, these products do not always experience the same price movements as lower-cost feedstocks, making risk management for these feedstocks challenging. We manage feedstock supply risks related to biomass-based diesel production in a number of ways, including, where available, through long-term supply contracts. The purchase price for soybean oil under these contracts may be indexed to prevailing CBOT soybean oil market prices with a negotiated market basis. We utilize futures contracts, swaps and options to risk manage, or lock in, the cost of portions of our future feedstock requirements generally for varying periods up to one year. Our ability to mitigate our risk of falling biomass-based diesel prices is limited. We have entered into forward contracts to supply biomass-based diesel. However, pricing under these forward sales contracts generally has been indexed to prevailing market prices, as fixed price contracts for long periods on acceptable terms have generally not been available. There is no established derivative market for biomass-based diesel inthe United States . Our efforts to hedge against falling biomass-based diesel prices generally involve entering into futures contracts, swaps and options on other commodity products, such as diesel fuel and New York Mercantile Exchange NY Harbor ULSD. However, price movements on these products are not highly correlated to price movements of biomass-based diesel. We generate 1.5 to 1.7 biomass-based diesel RINs for each gallon of biomass-based diesel we produce and sell. We also obtain RINs from third party transactions which we hold for resale. There is no effective established futures market for biomass-based diesel RINs, which severely limits the ability to risk manage the price of RINs. We enter into forward contracts to sell RINs, and we use risk management position limits to manage RIN exposure, however, pricing under those forward contracts generally has been indexed to prevailing market prices as fixed price contracts for long periods have generally not been available. As a result of our strategy, we frequently have gains or losses on derivative financial instruments that are conversely offset by losses or gains on forward fixed-price physical contracts on feedstocks and biomass-based diesel or inventories. Gains and losses on derivative financial instruments are recognized each period in operating results while corresponding gains and losses on physical contracts are generally not recognized until quantities are delivered or title transfers which may be in the same or later periods. Our results of operations are impacted when there is a period mismatch of recognized gains or losses associated with the change in fair value of derivative instruments used for risk management purposes at the end of the reporting period but the purchase or sale of feedstocks or biomass-based diesel has not yet occurred and thus the offsetting gain or loss will be recognized in a later accounting period. We had risk management losses of$28.9 million from our derivative financial instrument trading activity for the year endedDecember 31, 2019 , compared to risk management gains of$18.4 million for the year endedDecember 31, 2018 . Changes in the value of these futures or swap instruments are reflected in current income or loss, generally within our cost of goods sold. In 2019 and 2018, risk management gains and losses resulted mostly from the significant volatility in the energy market and accounted for a loss of$0.04 and a gain of$0.03 per gallon sold, respectively. In general, risk management gains and losses resulting from fluctuations in feedstock and energy prices are largely offset by an inverse gain or loss on physical product purchases and sales. 35 -------------------------------------------------------------------------------- Increasing importance of renewable diesel Renewable diesel is made from the same renewable resources as biodiesel but uses a different production process. The result is a renewable fuel that is chemically identical, and a drop-in replacement, to petroleum diesel. Renewable diesel is a relatively new fuel but has quickly become popular because it reduces emissions and delivers strong performance. Renewable diesel can also be blended with biodiesel. Our proprietary blend of renewable diesel and biodiesel which we call REG Ultra CleanTM Diesel captures the best properties of the two fuels. We have filed a patent application for the blending of biodiesel with renewable diesel. It is uncertain whether a patent will issue, but we believe we have discovered novel methods for the blending of biodiesel with renewable diesel which not only improves the quality of the fuel but also the value of the biodiesel component. Renewable diesel has become an increasingly significant part of our business. Renewable diesel carries a premium price to biodiesel as a result of a variety of factors including the ability to blend it with petroleum diesel seamlessly, better cold weather performance, and because it generates more RINs on a per gallon basis. We estimate that our renewable diesel production facility inGeismar, Louisiana generated a significant portion of our adjusted EBITDA in 2018 and in 2019. We experienced two fires at this facility in 2015 that each resulted in the plant being shut down for a lengthy period. If production at this facility were interrupted again due to a fire or for any other reason, it would have a disproportionately significant and material adverse impact on our results of operations and financial conditions. Seasonality Our operating results are influenced by seasonal fluctuations in the demand for biomass-based diesel. Our biodiesel sales tend to decrease during the winter season due to reduced blending concentrations to adjust for performance during colder weather. Colder seasonal temperatures can cause the higher cloud point biodiesel we make from inedible animal fats to become cloudy and eventually gel at a higher temperature than petroleum-based diesel, renewable diesel, or lower cloud point biodiesel made from soybean oil, canola oil or distillers corn oil. Such gelling can lead to plugged fuel filters and other fuel handling and performance problems for customers and suppliers. Reduced demand in the winter for our higher cloud point biodiesel can result in excess supply of such higher cloud point biodiesel and lower prices for such biodiesel. In addition, most of our biodiesel production facilities are located in colder Midwestern states in proximity to feedstock origination, and our costs of shipping can increase as more biodiesel is transported to warmer climate geographies during winter. To mitigate some of these seasonal fluctuations, we have upgraded ourNewton andDanville biorefineries to produce distilled biodiesel from low-cost feedstocks, which has improved cold-weather performance. RIN prices may also be subject to seasonal fluctuations. The RIN is dated for the calendar year in which it is generated, commonly referred to as the RIN vintage. Since 20% of the annual RVO of anObligated Party can be satisfied by prior year RINs, most RINs must come from biofuel produced or imported during the RVO year. As a result, RIN prices can be expected to decrease as the calendar year progresses if the RIN market is oversupplied compared to that year's RVO and increase if the market is undersupplied. See chart below for comparison between actual RIN generation and RVO level for advanced biofuel as set by the EPA. Estimated Advanced RIN Generation Finalized RVO level Biofuel RVO Exempted Year (Advanced Biofuel) for Advanced Biofuel due to SREs 2016 4.30 billion RINs 3.61 billion RINs* 0.16 billion RINs 2017 4.23 billion RINs 4.28 billion RINs* 0.40 billion RINs 2018 4.34 billion RINs 4.29 billion RINs* 0.32 billion RINs 2019 4.87 billion RINs 4.92 billion RINs* ** * Ethanol equivalent gallons ** Not yet determined Industry capacity, production and imports Our operating results are influenced by our industry's capacity and production, including in relation to RFS2 production requirements. Under RFS2, Obligated Parties are entitled to satisfy up to 20% of their annual requirement with prior year RINs. Biomass-based diesel production and/or imports, as reported by EMTS, were 2.50 billion gallons for 2017, 100 million gallons lower than 2016. The amount of biomass-based diesel produced and/or imported into theU.S. in 2018 was 2.50 billion gallons. In 2019, according to EMTS data, 2.65 billion gallons of biomass-based diesel were produced and/or imported into theU.S. The amount of imported biodiesel gallons qualifying under RFS2 has decreased from 572.6 million gallons in 2017 to approximately 333.4 million gallons in 2018. The amount of imported biodiesel was at 423.7 million gallons in 2019, slightly 36 -------------------------------------------------------------------------------- higher than 2018 according to the EIA. The decrease from 2017, is due to the anti-dumping and countervailing duty trade case mentioned previously, which eliminated the imports of biodiesel fromArgentina andIndonesia in 2018. Components of Revenues and Expenses Continuing Operations: We derive revenues in our Biomass-based Diesel segment from the following sources: • sales of biodiesel and renewable diesel produced at our facilities,
including RINs and LCFS credits, transportation, storage and insurance
costs to the extent paid for by our customers;
• resale of finished biomass-based diesel, renewable diesel, RINs andLCFS credits acquired from third parties, and raw material feedstocks
acquired from others;
• revenues from our sale of petroleum-based heating oil and ultra-low
sulfur diesel, or ULSD, acquired from third parties, along with the
sale of these petroleum-based products further blended with
biomass-based diesel;
• sales of glycerin, other co-products of the biomass-based diesel
production process; and
• incentive payments from federal and state governments, including the
BTC, and from the USDA Advanced Biofuel Program.
We derive revenues in our Services segment from the following sources - primarily internal: • fees received from operations management services that we provide for
biomass-based diesel production facilities, typically based on
production rates and profitability of the managed facility; and
• amounts received for services performed by us in our role as general
contractor and construction manager for upgrades and repairs to our
biomass-based diesel production facilities.
Cost of goods sold for our Biomass-based Diesel segment includes:
• with respect to our production facilities, expenses incurred for
feedstocks, catalysts and other chemicals used in the production
process, leases, utilities, depreciation, salaries and other indirect
expenses related to the production process, and, when required by our
customers, transportation, storage and insurance;
• with respect to fuel and RINs acquired from third parties, the purchase
price of biomass-based diesel and RINs on the spot market or undercontract, and related expenses for transportation, storage, insurance,
labor and other indirect expenses;
• adjustments made to reflect the lower of cost or market values of our
finished goods inventory, including RINs acquired from third parties;
• expenses from the purchase of petroleum-based heating oil and ULSD
acquired from third parties; and
• changes during the applicable accounting period in the market value ofderivative and hedging instruments, such as exchange traded contracts,
related to feedstocks and commodity fuel products.
Cost of goods sold for our Services segment includes: • with respect to our facility management and operations activities,
primarily salary expenses for the services of management employees for
each facility and others who provide procurement, marketing and various
administrative functions; and
• with respect to our construction management services activities,
primarily our payments to subcontractors constructing the production
facility and providing the biomass-based diesel processing equipment,
and, to a much lesser extent, salaries and related expenses for our
employees involved in the construction process.
Selling, general and administrative expense consists of expenses generally
involving corporate overhead functions and operations at our Ames, Iowa ,
international operations and regional offices and research and development
activities.
Impairment of property, plant and equipment represents non-cash impairment
charges of certain property, plant and equipment items.
Other income (expense), net is primarily comprised of the change in fair value
of contingent considerations, gain (loss) on debt extinguishment, changes in
fair value of convertible debt conversion liability, interest expense including
the accretion of convertible debt and amortization of deferred financing costs,
interest income and gain on involuntary conversion, which represents the amount
of insurance proceeds in excess of the net book value of the property damage
recorded by us related to the June 2017 fire at our Madison facility.
37
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Discontinued Operations:
Net loss from Discontinued Operations was attributable to the research and
development activities at and expenses incurred related to the sale of the REG
Life Sciences business, which was closed in May 2019 . After the sale of the
business, REG Life Sciences continued to incur costs that primarily relate to
certain pre-existing contractual agreements and legal and professional fees
related to the disposition and wind-down of operations. We do not expect future
costs to be material.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations
is based upon our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States . The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amount of assets, liabilities, equities,
revenues and expenses and related disclosure of contingent assets and
liabilities. We evaluate our estimates on an ongoing basis. We base our
estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis for judgments we make about the carrying values of assets and liabilities
that are not readily apparent from other sources. Because these estimates can
vary depending on the situation, actual results may differ from the estimates.
We believe the following critical accounting policies affect our more
significant judgments used in the preparation of our consolidated financial
statements:
Income Taxes
Our income tax provision, deferred income tax assets and liabilities, and
liabilities for unrecognized tax benefits represent the Company's best estimate
of current and future income taxes to be paid. Our annual effective tax rate is
based on income tax laws, statutory tax rates, taxable income levels and tax
planning opportunities available in various jurisdictions where we operate.
These tax laws are complex and require significant judgment to determine the
consolidated provision for income taxes. Changes in tax laws, statutory tax
rates, and estimates of our future taxable income levels could result in actual
realization of deferred taxes being materially different from amounts provided
for in the consolidated financial statements.
Deferred income taxes represent temporary differences between the tax and the
financial reporting basis of assets and liabilities, which will result in
taxable or deductible amounts in the future. Deferred tax assets also include
loss carryforwards and tax credits. These assets are regularly assessed for the
likelihood of recoverability from estimated future taxable income, reversal of
deferred tax liabilities and tax planning strategies. To the extent we determine
that it is more likely than not a deferred income tax asset will not be
realized, a valuation allowance is established. The recoverability analysis of
the deferred income tax assets and the related valuation allowances requires
significant judgment and relies on estimates.
On December 22, 2017 , President Donald Trump signed into law "H.R. 1", formerly
known as the "Tax Cuts and Jobs Act" (the "Tax Legislation"). The Tax
Legislation, which was effective on January 1, 2018 , significantly revises the
U.S. tax code by, among other things, lowering the corporate income tax rate
from 35% to 21%, and implementing a hybrid-territorial tax system imposing a
repatriation tax on deemed repatriated earnings of foreign subsidiaries
("transition tax"). We are required to recognize the effect of the tax law
changes in the period of enactment.
The indefinite reinvestment in the earnings of non-US subsidiaries assertion is
determined by management's judgment about and intentions concerning future
investment in operations. Management's judgment is that we are not indefinitely
reinvested in the undistributed earnings of our non-US subsidiaries at December
31, 2019 . The assertion regarding undistributed non-US earnings does not have a
material impact on our consolidated financial statements.
Revenue Recognition
Revenue is recognized when a customer obtains control of promised goods or
services in an amount that reflects the consideration the entity expects to
receive in exchange for those goods or services. We have generally a single
performance obligation in our arrangements with customers. We believe for most
of our contracts with customers, control is transferred at a point in time,
typically upon delivery to the customers. When we perform shipping and handling
activities after the transfer of control to the customers (e.g., when control
transfers prior to delivery), they are considered as fulfillment activities, and
accordingly, the costs are accrued for when the related revenue is recognized.
Taxes collected from customers relating to product sales and remitted to
governmental authorities are excluded from revenues. We generally expense sales
commissions when incurred. We record these costs within selling, general and
administrative expenses.
Revenues associated with governmental incentive programs are recognized when the
amount to be received is determinable, collectability is reasonably assured and
the sale of product giving rise to the incentive has been recognized. Our
revenue from governmental incentive programs is generally comprised of amounts
received from the USDA Advanced Biofuel
38
--------------------------------------------------------------------------------
Program, or the USDA Program, and the biodiesel tax credit. In connection with
the biodiesel tax credit, we file a claim with the Internal Revenue Service for
a refund of excise taxes each week for gallons we have blended to B99.9 and
sold. The biodiesel tax credit provided a $1.00 refundable tax credit per
gallon.
Results of Operations
Fiscal years ended December 31, 2019 and December 31, 2018
Set forth below is a summary of certain financial information (dollars in
thousands and gallons in millions except per gallon data) for the periods
indicated:
Twelve Months Ended
December 31,
2019 2018
Gallons sold 700.3 649.2
Average biomass-based diesel price per gallon (ASP
excluding BTC net benefit of
$ 3.65 $
3.43
Revenues from continuing operations$ 2,641,393 $
2,382,987
Costs of goods sold from continuing operations 2,111,324
1,962,996
Gross profit from continuing operations 530,069
419,991
Selling, general and administrative expenses 118,209
106,739
Impairment of property, plant and equipment 12,208 879 Income from operations 399,652 312,373 Other expense, net (10,491 ) (2,874 ) Income tax benefit (expense) 570 (5,871 ) Net income from continuing operations 389,731
303,628
Net loss from discontinued operations (9,667 ) (11,312 ) Net income 380,064
292,316
Effects of participating share-based awards on continuing operations (8,619 )
(7,824 ) Net income from continuing operations available to common stockholders
$ 381,112 $
295,804
Net loss from discontinued operations attributable to common stockholders$ (9,667 ) $ (11,312 ) Continuing Operations: Revenues. Our total revenues increased$258.4 million , or 11%, to$2,641.4 million for the year endedDecember 31, 2019 , from$2,383.0 million for the year endedDecember 31, 2018 . Due to the retroactive reinstatement of the BTC inDecember 2019 for the 2018-2019 periods, we recognized in the fourth quarter of 2019$506.7 million of BTC revenue,$237.4 million of which was attributable to sales in 2018 and$269.3 million of which was attributable to sales in 2019. Due to the retroactive reinstatement of the BTC inFebruary 2018 for the 2017 periods, we recognized in the first quarter of 2018$220.2 million of BTC revenue,$209.1 million of which was attributable to sales in 2017. These recognitions of BTC revenue attributable to operations from prior periods resulted in increased revenue for the period. The increase in total revenues was also driven by an increase in total gallons sold of 51.1 million gallons, or 8%, offset by a decrease in average selling price excluding the BTC of$0.28 , as well as a decrease in Separated RIN sales of$39.6 million . Biomass-based diesel revenues including government incentives increased$259.1 million , or 11%, to$2,639.8 million during the year endedDecember 31, 2019 , from$2,380.7 million for the year endedDecember 31, 2018 . The increase in revenues was mostly attributable to the recognition in the fourth quarter of 2019 of BTC revenue relating to operations in the 2018 period, which exceed the BTC revenue recognized in the 2018 period relating to our 2017 operations by$286.5 million . Gallons sold increased 51.1 million, or 8%, to 700.3 million during the year endedDecember 31, 2019 , compared to 649.2 million during the year endedDecember 31, 2018 . The increase in gallons sold for the year endedDecember 31, 2019 accounted for a revenue increase of$140.5 million using 2019 average sales pricing. Our average biomass-based diesel sales price per gallon including the BTC net benefits increased$0.22 , or 6%, to$3.65 during the year endedDecember 31, 2019 compared to$3.43 during the year endedDecember 31, 2018 . Excluding the BTC net benefits, our average biomass-based diesel sales price decreased$0.28 , or 9%, compared to$3.03 for 2018. This decrease was mainly due to the lower energy prices in 2019. The decrease in average sales price excluding the BTC net benefits from 2019 to 2018 contributed to a$181.8 million 39 -------------------------------------------------------------------------------- revenue decrease when applied to the number of gallons sold during 2018. Sales of separated RIN inventory were$98.3 million and$137.9 million for the years endedDecember 31, 2019 and 2018, respectively, reducing the overall increase in biomass-based diesel revenues in 2019. RIN prices, which we believe have been inversely correlated to the HOBO spread, decreased significantly in 2018 and declined almost 60% during the 2018-2019 period, with low prices persisting throughout 2019. Costs of goods sold. Our costs of goods sold increased$148.3 million , or 8%, to$2,111.3 million for the year endedDecember 31, 2019 , from$1,963.0 million for the year endedDecember 31, 2018 . Costs of goods sold as a percentage of revenues were 80% and 82% for the years endedDecember 31, 2019 and 2018, respectively. Biomass-based diesel costs of goods sold increased in 2019 mainly due to an 8% increase in gallons sold. Average lower cost feedstocks prices for the years endedDecember 31, 2019 andDecember 31, 2018 , were$0.26 per pound. Average soybean oil costs for the years endedDecember 31, 2019 andDecember 31, 2018 were$0.31 per pound. We recorded risk management losses of$28.9 million from our derivative financial instrument activity in 2019, compared to risk management gains of$18.4 million for 2018. Our risk management gains and losses are directly impacted by any volatility in the energy and commodities market. Costs of goods sold for separated RIN inventory sales were$39.2 million and$75.7 million for the years endingDecember 31, 2019 and 2018, respectively. Selling, general and administrative expenses. Our selling, general and administrative, or SG&A, expenses increased$11.5 million , or 11%, to$118.2 million for the year endedDecember 31, 2019 , compared to$106.7 million for the year endedDecember 31, 2018 . As a percentage of revenues, our SG&A expenses were 4.5% for both 2019 and 2018, respectively. The increase in 2019 year over year was driven largely by higher employee related compensation, arising from the Company's strong financial performance in 2019. Impairment of property, plant and equipment. We recorded a property, plant and equipment impairment in 2019 of approximately$12.2 million mainly due to the closure of theNew Boston refinery . During 2018, we recorded a$0.9 million property, plant and equipment impairment after we determined that the carrying amounts of certain assets were deemed not recoverable. Other income (expense), net. Other expense was$10.5 million for the year endedDecember 31, 2019 , compared to other expense of$2.9 million for the year endedDecember 31, 2018 . Other income (expense) is primarily comprised of change in fair value of contingent consideration, gain on debt extinguishment, gain on involuntary conversion, change in fair value of convertible debt conversion liability, interest expense, interest income and other non-operating items. In 2019, we had a$0.5 million gain on debt extinguishment and in 2018 we had a$6.3 million gain on debt extinguishment, a difference of$5.8 million . The$6.3 million net increase in other expense in 2019 was primarily due to this difference in gain on debt extinguishment between the periods. In addition, in 2018 we recorded gain from involuntary conversion related to a fire at ourMadison facility that offset higher interest expense for the year, resulting in lower total other expense compared to 2019. Income tax benefit (expense). Income tax benefit recorded during the year endedDecember 31, 2019 was$0.6 million , compared to income tax expense of$5.9 million for the year endedDecember 31, 2018 , with the decrease primarily resulting from additional tax expense incurred in connection with the repurchase of a significantly greater amount of our 2016 convertible debt in 2018 compared to repurchases in 2019. AtDecember 31, 2019 and 2018, we had net deferred income tax assets of approximately$343.5 million and$275.2 million , respectively, with a valuation allowance of$350.5 million and$283.6 million , respectively. As a result, our effective tax rate was 0.2% and 2.0% for the years endedDecember 31, 2019 and 2018, respectively. Effects of participating share-based awards. Effects of participating restricted stock units was$8.6 million and$7.8 million for the years endedDecember 31, 2019 and 2018, respectively. Discontinued Operations: Net loss from discontinued operations for the year endedDecember 31, 2019 of$9.7 million , primarily related to the research and development activities ofREG Life Sciences and expenses incurred related to the sale of the business. In 2019,REG Life Sciences continued to incur costs that primarily relate to certain pre-existing contractual agreements and legal and professional fees related to the disposition and wind-down of operations. We do not expect future costs to be material. For the year endedDecember 31, 2018 , the net loss was$11.3 million . This loss included an impairment loss, net of tax, of$11.2 million reflecting the fair value of the estimated proceeds from a sale, net of costs to sell. Net loss from discontinued operations for the year endedDecember 31, 2018 also included a loss of$14.0 million primarily related to the research and development activities ofREG Life Sciences , which was offset by a change in value of contingent consideration of$13.9 million . Fiscal years endedDecember 31, 2018 andDecember 31, 2017 40 -------------------------------------------------------------------------------- Set forth below is a summary of certain financial information (dollars in thousands and gallons in millions except per gallon data) for the periods indicated: Twelve Months Ended December 31, 2018 2017 Gallons sold 649.2 586.7
Average biomass-based diesel price per gallon (ASP
excluding BTC net benefit of
$ 3.43
Revenues from continuing operations$ 2,382,987 $ 2,154,655 Costs of goods sold from continuing operations 1,962,996
2,070,301
Gross profit from continuing operations 419,991
84,354
Selling, general and administrative expenses 106,739
95,843
Impairment of property, plant and equipment 879
49,873
Income (loss) from operations 312,373 (61,362 ) Other income (expense), net (2,874 ) (35,407 ) Income tax benefit (expense) (5,871 )
30,490
Net income (loss) from continuing operations 303,628 (66,279 ) Net loss from discontinued operations (11,312 ) (12,800 ) Net income (loss) 292,316
(79,079 )
Effects of participating share-based awards on continuing operations
(7,824 ) -
Net income (loss) from continuing operations available to common stockholders
$ 295,804 $ (66,279 ) Net loss from discontinued operations available to common stockholders$ (11,312 ) $ (12,800 ) Continuing Operations: Revenues. Our total revenues increased$228.3 million , or 11%, to$2,383.0 million for the year endedDecember 31, 2018 , from$2,154.7 million for the year endedDecember 31, 2017 . This increase was primarily due to the 2017 BTC that was earned during 2017 yet recognized in the first quarter of 2018 when it was retroactively reinstated, coupled with a 11% increase in gallons sold, offset by lower average selling price without the impact of the 2017 BTC. The increase in the total revenues was also negatively impacted by a significant reduction in revenues from sales of separated RINs. Biomass-based diesel revenues including government incentives increased$227.2 million , or 11%, to$2,380.7 million during the year endedDecember 31, 2018 , from$2,153.5 million for the year endedDecember 31, 2017 . Gallons sold increased 62.5 million, or 11%, to 649.2 million during the year endedDecember 31, 2018 , compared to 586.7 million during the year endedDecember 31, 2017 . The increase in gallons sold for the year endedDecember 31, 2018 accounted for a revenue increase of$189.4 million using 2018 average sales pricing. The increase in revenues was also attributable to a$338.8 million increase in government incentives revenues in 2018 as the 2017 BTC was not reinstated untilFebruary 9, 2018 and was recognized in revenues in the first quarter of 2018. Our average biomass-based diesel sales price per gallon including the 2017 BTC net benefit increased$0.37 , or 12%, to$3.43 during the year endedDecember 31, 2018 , but decreased$0.03 , or 1%, excluding the 2017 BTC net benefit, compared to$3.06 during the year endedDecember 31, 2017 . This decrease was mainly due to the lower energy prices in 2018. The decrease in average sales price excluding the 2017 BTC net benefit from 2017 to 2018 contributed to a$17.6 million revenue decrease when applied to the number of gallons sold during 2017. The net 2017 BTC benefits contributed to an increase in revenues of$206.5 million . Sales of separated RIN inventory were$137.9 million and$337.5 million for the years endedDecember 31, 2018 and 2017, respectively, reducing the overall increase in biomass-based diesel revenues in 2018. RIN value decreased significantly in 2018 - RIN prices declined almost 60% year over year, and we believe RIN prices have been inversely correlated to the HOBO spread. Costs of goods sold. Our costs of goods sold decreased$107.3 million , or 5%, to$1,963.0 million for the year endedDecember 31, 2018 , from$2,070.3 million for the year endedDecember 31, 2017 . Costs of goods sold as a percentage of revenues were 82% and 96% for the years endedDecember 31, 2018 and 2017, respectively. The significant drop in costs of goods sold as a percentage of revenues is largely due to the recognition of the 2017 BTC in full as revenues in the first quarter 41 -------------------------------------------------------------------------------- of 2018 and lower feedstock costs as discussed below, coupled with risk management gains in 2018 as compared to losses in 2017. Biomass-based diesel costs of goods sold decreased in 2018 despite a 11% increase in gallons sold, largely driven by lower feedstock costs and gains from risk management activity. Average lower-cost feedstocks prices for the year endedDecember 31, 2018 were$0.26 per pound, compared to$0.28 per pound for the year endedDecember 31, 2017 . Average soybean oil costs for the years endedDecember 31, 2018 andDecember 31, 2017 were$0.31 and$0.34 per pound. We recorded risk management gains of$18.4 million from our derivative financial instrument activity in 2018, compared to risk management losses of$23.4 million for 2017. This fluctuation in risk management gains and losses was mainly due to the volatility in the energy and commodities market. Costs of goods sold for separated RIN inventory sales were$75.7 million and$264.8 million for the years endingDecember 31, 2018 and 2017, respectively. Selling, general and administrative expenses. Our selling, general and administrative, or SG&A, expenses were$106.7 million for the year endedDecember 31, 2018 , compared to$95.8 million for the year endedDecember 31, 2017 . SG&A expenses increased$10.9 million , or 11%, for the year endedDecember 31, 2018 as compared to the year endedDecember 31, 2017 . As a percentage of revenues, our SG&A expenses were 4.5% and 4.4% for 2018 and 2017, respectively. The increase in 2018 year over year was driven largely by higher employee related compensation, arising from the Company's strong financial performance in 2017. Impairment of property, plant and equipment. The amount of property, plant and equipment impairment recorded in 2018 was approximately$0.9 million mainly due to the impairment charges related to certain identified plant property, plant and equipment at our current facilities as the carrying amounts of those assets were deemed not recoverable. During the fourth quarter of 2017, we recorded impairment charges of$44.6 million against property, plant and equipment assets at our partially completed facility inNew Orleans, Louisiana . The impairment charge resulted from the probability that the project would not be completed in the near term as a result of other strategic investment priorities, such as potential expansion of our renewable diesel facility atGeismar , coupled with limited financing availability and construction cost requirements. In addition, during 2017, we recorded impairment charges of$5.3 million against certain identified plant property, plant and equipment at our other facilities as the carrying amounts of those assets were deemed not recoverable. Other income (expense), net. Other expense was$2.9 million for the year endedDecember 31, 2018 , compared to other income of$35.4 million for the year endedDecember 31, 2017 . Other income (expense) is primarily comprised of change in fair value of contingent consideration, gain on debt extinguishment, gain on involuntary conversion, change in fair value of convertible debt conversion liability, interest expense, interest income and other non-operating items. OnDecember 8, 2017 , at the special meeting of stockholders, we obtained approval from our stockholders to remove the common stock issuance restrictions in connection with conversions of the 2036 Convertible Senior Notes. Accordingly, the embedded conversion option was reclassified intoAdditional Paid-in Capital atDecember 8, 2017 , resulting in a$18.8 million expense in 2017 related to the fair value adjustment on the convertible debt conversion liability. There was no such expense in 2018. The other expense in 2018 was offset by debt extinguishment gains related to our buyback of the 2036 Convertible Senior Notes. Income tax benefit (expense). Income tax expense recorded during the year endedDecember 31, 2018 was$5.9 million , compared to an income tax benefit of$30.5 million for the year endedDecember 31, 2017 . The primary difference resulted from the enactment of the Tax Cuts and Jobs Act in the fourth quarter of 2017, which reduced theU.S. corporate income tax rate from 35% to 21%, causing a re-measurement of deferred tax liabilities, and the release of valuation allowance due to the reclassification of the 2036 Convertible Senior Notes toAdditional Paid-in Capital . AtDecember 31, 2018 and 2017, we had net deferred income tax assets of approximately$275.2 million and$257.2 million , respectively, with a valuation allowance of$283.6 million and$265.4 million , respectively. As a result, our effective tax rate was 2.0% and 27.8% for the years endedDecember 31, 2018 and 2017, respectively. Effects of participating share-based awards. Effects of participating restricted stock units was$7.8 million and$0.0 million for the years endedDecember 31, 2018 and 2017, respectively. Discontinued Operations: In the fourth quarter of 2018, our Board of Directors authorized us to pursue a plan to sell the core assets and business ofREG Life Sciences , the main component of our Renewable Chemicals segment. This represents a strategic shift in our business. As a result,REG Life Sciences business is classified as discontinued operations. Net loss from discontinued operations included an impairment loss, net of tax of$11.2 million reflecting the fair value of the estimated proceeds from a sale, net of costs to sell. Net loss from discontinued operations for the year endedDecember 31, 2018 also included a loss of$14.0 million primarily related to the research and development activities ofREG Life Sciences , which was offset by a change in value of contingent consideration of$13.9 million as a result of shortened duration to the final earnout determination date and reduced 42 -------------------------------------------------------------------------------- commercialization probability. For the year endedDecember 31, 2017 , the net loss was$12.8 million . The net loss in both years were related to research and development expenses to bring industrial biotechnology products to market. Non - GAAP Financial Measures Adjusted EBITDA Earnings before interest, taxes, depreciation and amortization ("EBITDA") and adjusted EBITDA are not measures of financial performance under GAAP. We use EBITDA and EBITDA adjusted for certain additional items, identified in the table below, or Adjusted EBITDA, as a supplemental performance measure. We present EBITDA and Adjusted EBITDA because we believe they assist investors in analyzing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. In addition, we use Adjusted EBITDA to evaluate, assess and benchmark our financial performance on a consistent and a comparable basis and as a factor in determining incentive compensation for our executives. Since the fourth quarter of 2018, the operations ofREG Life Sciences have been classified as discontinued operations. We have excluded the results from these discontinued operations from the calculation of Adjusted EBITDA. The corresponding prior period amounts have been reclassified to conform with the current period presentation. The following table provides our EBITDA and Adjusted EBITDA for the periods presented, as well as a reconciliation to net income (loss) from continuing operations: Year ended Year ended (In thousands) December 31, December 31, 1Q-2019 2Q-2019 3Q-2019 4Q-2019 2019 1Q-2018 2Q-2018 3Q-2018 4Q-2018 2018 Net income (loss) from continuing operations$ (41,387 ) $ (57,635 ) $ (13,753 ) $ 502,506 $ 389,731 $ 217,844 $ 29,042 $ 25,472 $ 31,270 $ 303,628 Adjustments:
Interest expense 4,219 3,737 2,866 1,354
12,176 4,651 4,925 4,003 3,955 17,534
Income tax
(benefit)
expense (430 ) (90 ) (629 ) 579 (570 ) (1,203 ) 3,835 854 2,385 5,871
Depreciation 9,099 9,142 9,107 8,950 36,298 8,739 9,004 8,977 9,604 36,324
Amortization of
intangible
assets 334 510 397 391 1,632 42 44 52 45 183
EBITDA (28,165 ) (44,336 ) (2,012 ) 513,780
439,267 230,073 46,850 39,358 47,259
363,540
Gain on involuntary conversion - - - - - (4,000 ) (454 ) - (3 ) (4,457 ) Gain on sale of assets - - - - - (990 ) - (13 ) (2 ) (1,005 ) Change in fair value of contingent consideration 304 398 (136 ) - 566 458 30 185 444
1,117
(Gain) loss on debt extinguishment 2 - - (490 ) (488 ) 232 (2,337 ) (788 ) (3,404 ) (6,297 ) Other expense, net (854 ) (691 ) (179 ) (39 ) (1,763 ) (225 ) (2,067 ) (486 ) (1,240 ) (4,018 ) Impairment of assets - 468 11,145 595 12,208 - - - 879
879
Straight-line
lease expense - - - - - (33 ) (3 ) (61 ) (31 ) (128 ) Executive severance - - - - - 165 50 - -
215
Non-cash stock compensation 1,353 1,824 1,804 1,726 6,707 1,794 2,203 1,227 1,188
6,412
Adjusted EBITDA excluding BTC allocation$ (27,360 ) $ (42,337 ) $ 10,622 $ 515,572 $
456,497
356,258
Biodiesel tax credit 2017(1) - - - - - (206,521 ) - - -
(206,521 )
Biodiesel tax credit 2018(2) - - - (238,564 )
(238,564 ) 42,847 66,499 71,140 58,078
238,564
Biodiesel tax credit 2019(2) 56,385 78,493 77,168 (212,046 ) - - - - - -
Adjusted EBITDA
217,933
388,301
(1) OnFebruary 9, 2018 , the Biodiesel Mixture Excise Tax Credit ("BTC") was retroactively reinstated for the 2017 calendar year. The retroactive credit for 2017 resulted in a net benefit to us that was recognized in the first quarter of 43 -------------------------------------------------------------------------------- 2018 for GAAP purposes. Because this credit relates to the 2017 full year operating performance and results, we removed the net benefit of the 2017 BTC from our 2018 results. (2) OnDecember 20, 2019 , the BTC was retroactively reinstated for the 2018 and 2019 calendar years. The retroactive credit for 2018 and 2019 resulted in a net benefit to us that was recognized in our GAAP financial statements for the quarter endingDecember 31, 2019 . However, because a portion of this credit relates to the 2018 operating performance, our presentation of Adjusted EBITDA reflects the allocation of the net benefit to each of the four quarters of 2018 based upon the portion of the BTC benefit that related to that quarter. The portion of the credit related to 2019 was allocated to each of the four quarters based upon the portion of the BTC benefit that related to that quarter. Adjusted EBITDA is a supplemental performance measure that is not required by, or presented in accordance with, generally accepted accounting principles, or GAAP. Adjusted EBITDA should not be considered as an alternative to net income or any other performance measure derived in accordance with GAAP, or as alternatives to cash flows from operating activities or a measure of our liquidity or profitability. Adjusted EBITDA has limitations as an analytical tool, and should not be considered in isolation, or as a substitute for any of our results as reported under GAAP. Some of these limitations are: • Adjusted EBITDA does not reflect our cash expenditures or the impact of
certain cash charges that we consider not to be an indication of our
ongoing operations;
• Adjusted EBITDA does not reflect changes in, or cash requirements for, our
working capital requirements;
• Adjusted EBITDA does not reflect the interest expense, or the cash
requirements necessary to service interest or principal payments, on our
indebtedness;
• although depreciation and amortization are non-cash charges, the assets
being depreciated and amortized will often have to be replaced in the
future, and Adjusted EBITDA does not reflect cash requirements for such
replacements;
• stock-based compensation expense is an important element of our long term
incentive compensation program, although we have excluded it as an expense
when evaluating our operating performance; and
• other companies, including other companies in our industry, may calculate
these measures differently than we do, limiting their usefulness as a
comparative measure.
Liquidity and Capital Resources Sources of liquidity. AtDecember 31, 2019 and 2018, the total of our cash and cash equivalents and marketable securities was$50.4 million and$174.5 million , respectively. AtDecember 31, 2019 , we had total assets of$1,785.3 million , compared to$1,107.1 million atDecember 31, 2018 . AtDecember 31, 2019 , we had term debt before debt issuance costs of$106.0 million , compared to term debt before debt issuance costs of$185.8 million atDecember 31, 2018 . Our debt is subject to various financial covenants. We were in compliance with all financial covenants associated with the borrowings as ofDecember 31, 2019 . Our term debt (in thousands) is as follows: December
31,
2019 2018
2.75% Convertible Senior Notes, matured and paid in
$ - $ 66,361
4.00% Convertible Senior Notes,
69,668 75,477
REG Danville term loan, secured, variable interest rate of
LIBOR plus 4%, due in
6,468 8,964
REG Ralston term loan, variable interest rate of LIBOR
plus 2.25%, due in
15,980 18,948
6,966 8,828
6,929 7,185
Other 33
54
Total debt before debt issuance costs$ 106,044 $ 185,817 44
--------------------------------------------------------------------------------
In addition, we had revolving debt (in thousands) as follows:
December 31,
2019 2018
Amount outstanding under lines of credit $ 76,990 $ 14,250
Maximum available to be borrowed under lines of credit
2019 Convertible Senior Notes InJune 2014 , we issued$143.8 million in convertible senior notes (the "2019 Convertible Senior Notes") with a maturity date ofJune 15, 2019 , unless earlier converted or repurchased. The 2019 Convertible Senior Notes bear interest at a rate of 2.75% per annum, payable semi-annually in arrears, beginningDecember 15, 2014 . The initial conversion rate is 75.3963 shares of Common Stock per$1,000 principal amount of 2019 Convertible Senior Notes, which represents an initial conversion price of approximately$13.26 per share. In accordance with the indenture governing the 2019 Convertible Senior Notes, we elected to settle all conversions of each$1,000 principal amount of such Notes being converted on or afterOctober 23, 2018 , with$1,000 in cash and any conversion value in excess of that amount in shares of our common stock. OnJune 15, 2019 , the 2019 Convertible Senior Notes matured. We paid$67.4 million in cash to settle the outstanding principal amount and issued 1,902,781 treasury shares to settle the conversion value that was in excess of the principal. 2036 Convertible Senior Notes InJune 2016 , we issued$152.0 million aggregate principal amount of 4.00% Convertible Senior Notes due 2036 (the "2036 Convertible Senior Notes") in a private offering to qualified institutional buyers. The 2036 Convertible Senior Notes bear interest at a rate of 4.00% per year payable semi-annually in arrears onJune 15 andDecember 15 of each year, beginningDecember 15, 2016 . The notes will mature onJune 15, 2036 , unless repurchased, redeemed or converted in accordance with their terms prior to such date. The initial conversion rate is 92.8074 common shares per$1,000 principal amount of 2036 Convertible Senior Notes (equivalent to an initial conversion price of approximately$10.78 per common share). We may not redeem the 2036 Convertible Senior Notes prior toJune 15, 2021 . Holders of the 2036 Convertible Senior Notes will have the right to require us to repurchase for cash all or some of their notes at 100% of their principal, plus any accrued and unpaid interest on each ofJune 15, 2021 ,June 15, 2026 andJune 15, 2031 . Holders of the 2036 Convertible Senior Notes will have the right to require us to repurchase for cash all or some of their notes at 100% of their principal, plus any accrued and unpaid interest upon the occurrence of certain fundamental changes. The 2036 Convertible Senior Notes will become convertible in the subsequent quarter if the closing price of our common stock exceeds$14.01 , 130% of the Convertible Senior Notes' initial conversion price, for at least 20 trading days during the 30 consecutive trading days prior to each quarter-end date. If the 2036 Convertible Senior Notes become convertible and should the holders elect to convert, our current intent and policy is to settle the principal amount the 2036 Convertible Senior Notes in cash, with the remaining value satisfied at our option in cash, stock or a combination of cash and stock. As ofDecember 31, 2019 andDecember 31, 2018 , the early conversion event was met based on our stock price and as a result, the 2036 Convertible Senior Notes have been classified as a current liability on our Consolidated Balance Sheets atDecember 31, 2019 andDecember 31, 2018 . During 2018, we used$110.8 million under the 2017 and 2018 Programs to buy back$55.7 million of principal of the 2036 Convertible Senior Notes, reflecting the conversion premium, after tax impact, of$70.0 million and gains on debt extinguishment of$6.4 million . During 2019, we used the remaining$7.4 million under the 2018 Program to repurchase$3.9 million principal amount and approximately$7.2 million under the 2019 Program to repurchase$2.8 million principal amount of the 2036 Convertible Senior Notes, reflecting the conversion premium, after tax impact, of$9.7 million and gains on debt extinguishment of$0.5 million .
Other term debt
In
Lines of credit
45
--------------------------------------------------------------------------------
On November 4, 2019 , the M&L and Services Revolver was amended to allow through
April 30, 2020 the maximum aggregate amount of the revolving commitments to be
increased at the Company's option to $175.0 million or $200.0 million if the BTC
was retroactively reinstated for 2018 and/or 2019 and/or 2020. In December 2019 ,
following the reinstatement of the BTC, we exercised this right and increased
the maximum aggregate amount of revolving credit commitments to $200.0 million .
After April 30, 2020 , the maximum aggregate principal amount of revolver
commitments will automatically reduce to $150.0 million .
On March 3, 2020 the M&L and Services Revolver was amended to allow the
borrowing base related to the BTC to increase from $50.0 million to $75.0
million . The amendment also allows the fixed charge coverage ratio testing
threshold to be reduced from 10% to 5% until April 30, 2020 .
Cash flow. The following table presents information regarding our cash flows and
cash, cash equivalents and restricted cash for the years ended December 31,
2019 , 2018 and 2017:
Year Ended
December 31,
2019 2018 2017
(in thousands)
Cash provided from (used in) operations $ (46,708 ) $ 365,534 $ 29,796
Cash provided from (used in) investing
activities 5,670 (97,197 ) (63,869 )
Cash used in financing activities (32,052 ) (219,205 ) (10,158 )
Net change in cash, cash equivalents and
restricted cash (73,090 ) 49,132 (44,231 )
Cash, cash equivalents and restricted cash end
of period $ 53,436 $
126,575
In 2019, we used$46.7 million of cash in operating activities, compared to$365.5 million provided from operations in 2018 and$29.8 million provided from 2017. Cash used in operating activities for 2019 was mainly due to the buildup of accounts receivables of$786.2 million , largely due to the recognition of two years of BTC benefit in the fourth quarter of the year, offset by a significant increase in accounts payable related to the reinstatement of the BTC of$255.2 million due to customers and vendor. In 2018, we generated$365.5 million of cash from operating activities, a significant increase from 2017, mainly driven by the net income of$292.3 million , compared to net loss of$79.1 million in 2017. During 2018, we received approximately$381.8 million related to the reinstatement of the 2017 BTC related to continuing operations. Of this amount received, we paid$150.8 million to our vendors and customers. The increase in net cash flows provided in investing activity was primarily impacted by the net maturities in marketable securities of$51.1 million , compared to the net investments in marketable securities in 2018 of$50.7 million and no investments in 2017. This increase was partially offset by a reduction in cash paid for property, plant and equipment of$42.5 million , compared to$46.5 million and$67.6 million in 2018 and 2017, respectively. The primary change in financing activities for 2019 included the payment of$67.4 million upon maturity of the 2019 Convertible Senior Notes and payments made for contingent consideration settlements. In 2018, financing activities included$25.0 million used to buy back shares of our common stock,$6.7 million used to buy back$6.3 million principal amount of the 2019 Convertible Senior Notes and$110.8 million used to buy back$55.7 million principal amount of the 2036 Convertible Senior Notes. Also impacting financing activities were net borrowings on revolving lines of credit of$70.1 million for the year endedDecember 31, 2019 , compared to net repayments of$51.0 million in 2018 and net borrowings of$8.0 million in 2017. Capital expenditures: During 2019, our capital expenditures were$42.5 million involving various projects, the majority of which were at theHouston ,Seneca andGeismar facilities. During 2018, our capital expenditures were$46.5 million involving various projects, the majority of which were at theMadison ,Ralston , Grays Harbor andGeismar facilities. During 2017, our capital expenditures were$67.6 million involving various projects, the majority of which were upgrades to our facilities inNew Boston ,Madison ,Seneca ,Geismar ,Germany andRalston facilities. InJune 2017 , we completed an acquisition for$20 million of approximately 82 acres of land inGeismar, Louisiana , which includes the land ourGeismar biorefinery previously leased for its operations, as well as more than 61 adjacent acres, which we plan to improve and utilize to support existing production capacity and future expansion opportunities. Our budgeted capital expenditures for 2020 are approximately$60.0 million , which includes investments in low cost, high return projects, environmental, health and safety projects and growth projects. Contractual Obligations: The following table describes our commitments to settle contractual obligations in cash as ofDecember 31, 2019 : 46 --------------------------------------------------------------------------------
Payments Due by Period
Less Than Years More Than
Total 1 Year Years 1-3 4-5 5 Years
(In thousands)
Long-Term Debt (1) $ 127,265 $ 78,505 $ 16,056 $ 9,918 $ 22,786
Operating Lease Obligations (2) 53,087 17,252 18,620 5,607 11,608
Purchase Obligations (3) 13,089 3,298 5,952 3,839 -
$ 193,441 $ 99,055 $ 40,628 $ 19,364 $ 34,394
(1) See Note 11 of Item 8 for additional detail. Includes fixed interest
associated with these obligations. The 2036 convertible senior notes,
although not contractually mature in 2020 are convertible at the option of
the holder and therefore represented as a contractual obligation in 2020.
The amounts included in the "Less than 1 Year" and "Years 1-3", related to
the debt held by REG Danville that was subsequently repaid in
was
column includes the term debt and related interest at REG Danville and REG
Grays Harbor amounting to $6,468 and $7,526 , respectively, that was fully
repaid in January 2020 .
(2) Operating lease obligations consist of leases of distribution terminals,
biomass-based diesel storage facilities, railcars, vehicles, office
buildings, and office equipment.
(3) Purchase obligations for our production facilities.
Off-Balance Sheet Arrangements We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. Recent Accounting Pronouncements For a discussion of new accounting pronouncements affecting us, refer to "Note 2 - Summary of Significant Accounting Policies" to our consolidated financial statements. ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk The primary objectives of our investment activity are to preserve principal, provide liquidity and maximize income without significantly increasing risk. Some of the securities we invest in are subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. To minimize this risk, we maintain a portfolio of cash equivalents in short-term investments in money market funds. Commodity Price Risk Over the period fromJanuary 2017 throughDecember 2019 , average diesel prices based on Platts reported pricing for Group 3 (Midwest) have ranged from a high of approximately$2.47 per gallon reported inOctober 2018 to a low of approximately$1.31 per gallon inJune 2017 , with prices averaging$1.88 per gallon during this period. Over the periodJanuary 2017 toDecember 2019 , soybean oil prices (based on daily closing nearby futures prices on theChicago Board Of Trade for crude soybean oil) have ranged from a high of$0.36 per pound, or$2.69 per gallon of biodiesel, inJanuary 2017 to a low of$0.26 per pound, or$1.98 per gallon of biodiesel, inMay 2019 assuming 7.5 pounds of soybean oil yields one gallon of biodiesel with closing sales prices averaging$0.31 per pound, or$2.31 per gallon. Over the period fromJanuary 2017 throughDecember 2019 , animal fat prices (based on prices fromThe Jacobsen Missouri River , for choice white grease) have ranged from a high of$0.28 per pound inAugust 2017 to a low of$0.16 per pound inMarch 2018 , with sales prices averaging$0.22 per pound during this period. Over the period fromJanuary 2017 throughDecember 2019 , RIN prices (based on prices from OPIS) have ranged from a high of$1.17 inAugust 2017 to a low of$0.31 inOctober 2018 , with sales prices averaging$0.67 during this period. Adverse fluctuations in feedstock prices as compared to biomass-based diesel prices result in lower profit margins and, therefore, represent unfavorable market conditions. The availability and price of feedstocks are subject to wide fluctuations due to unpredictable factors such as weather conditions during the growing season, rendering volumes, carry-over from the previous crop year and current crop year yield, governmental policies with respect to agriculture and supply and demand. We have prepared a sensitivity analysis to estimate our exposure to market risk with respect to our sales contracts, lower-cost feedstock requirements, soybean oil requirements and the related exchange-traded contracts for 2019. Market risk is estimated as the potential loss in fair value, resulting from a hypothetical 10% adverse change in the fair value of our lower- 47 -------------------------------------------------------------------------------- cost feedstock and soybean oil requirements and biomass-based diesel sales. The results of this analysis, which may differ from actual results, are as follows: Hypothetical Impact on Annual Percentage 2019 Adverse Gross Change in Volume Change in Profit (in Gross (in millions) Units Price millions) Profit
Total Biomass-based Diesel 700.3 gallons 10% $
(255.6 ) (48.2 )%
Total Lower-Cost Feedstocks 2,804.2 pounds 10% $ (74.3 ) (14.0 )%
Total Canola Oil 573.5 pounds 10% $ (18.7 ) (3.5 )%
Total Soy Oil 573.3 pounds 10% $ (17.8 ) (3.4 )%
We attempt to protect operating margins by entering into risk management
contracts that reduce the risk of price volatility related to anticipated
purchases of feedstocks and energy prices. We create offsetting positions by
using a combination of forward physical purchases and sales contracts on
feedstock and biomass-based diesel, including risk management futures contracts,
swaps and options primarily on NYMEX NY Harbor ULSD and CBOT Soybean Oil. The
extent to which we engage in risk management activities depends on market
conditions and other factors and varies substantially from time to time and from
feedstock to feedstock. A 10% adverse change in the prices of NYMEX NY Harbor
ULSD would have a positive effect of $11.0 million on the fair value of these
instruments at December 31, 2019 . A 10% adverse change in the price of CBOT
Soybean Oil would have had a negative effect of $4.2 million on the fair value
of these instruments December 31, 2019 . A 10% adverse change in the price of
NYMEX Natural Gas would have had an immaterial impact on our gross margin at
December 31, 2019 .
Interest Rate Risk
Our weighted average interest rate on variable rate debt balances during 2019
was 3.77% and a hypothetical increase in interest rate of 10% would not have a
material effect on our annual interest expenses or consolidated financial
statements.
Inflation
To date, inflation has not significantly affected our operating results, though
costs for petroleum-based diesel fuel, feedstocks, construction, labor, taxes,
repairs, maintenance and insurance are all subject to inflationary pressures.
Inflationary pressure in the future could affect our ability to sell the
biomass-based diesel we produce, maintain our production facilities adequately,
build new biomass-based diesel production facilities and expand our existing
facilities as well as the demand for our facility construction management and
operations management services.
Renewable Identification Numbers
We are exposed to market risks related to the volatility in the price of credits
needed to comply with governmental programs. For the past several years there
has been significant volatility in RIN prices. Reductions in RIN values, such as
those experienced in prior years, may have a material adverse effect on our
revenues and profits as they directly reduce the value that we are able to
capture for our biomass-based diesel.
Foreign Currency Risk
We have minimal exposure to foreign currency risk and as such the cost of
hedging this risk is viewed to be in excess of the benefit of further reductions
in our exposure to foreign currency exchange rate fluctuations.
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